UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

[ ]**TRANSITION REPORTUNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from _______ to ________
**Commission file number 0-27736**
POINT WEST CAPITAL CORPORATION(Name of small business issuer in its charter)
**Delaware**(State or other jurisdiction of     incorporation or organization)**94-3165263(I.R.S. Employer    Identification No.)**1700**Montgomery    Street, Suite 250    San Francisco, California**(Address of principal executive offices)
**94111**    (Zip Code)**Issuer’s telephone number: (415) 394-9467

Securities registered under Section 12(b) of the Exchange Act: None
**Securities registered under Section 12(g) of the Exchange Act:**
Common Stock, $0.01 par value(Title of class)

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements for the past 90days. [X] Yes [ ] No

Check if there is no disclosure of delinquent filers inresponse to Item 405 of Regulation S-B in this form, and no disclosure will be contained,to the best of registrant’s knowledge, in definitive proxy or any amendment to thisForm 10-KSB. [X]

Issuer’s revenues for its most recent fiscal year:($4,320,351).

Aggregate market value of the voting and non-votingcommon equity held by non-affiliates as of February 28, 2002: $64,122.

Number of shares outstanding of the issuer’s commonequity outstanding as of February 28, 2002: 3,352,624.
**Documents Incorporated by Reference: None

Transitional Small Business Disclosure Format (checkone): Yes [ ] No [X]
 

 

POINT WEST CAPITAL CORPORATION

Form 10-KSB Annual Report

For the Fiscal Year Ended December 31, 2001

Table of Contents
PART IPage
Item 1.Description of Business    ...................................................................
1
Item 2.Description of Property    ....................................................................
4
Item 3.Legal Proceedings    .........................................................................
5
Item 4.Submission of Matters to a Vote of Security    Holders .................................
6PART II
Item 5.Market for Common Equity and Related    Stockholder Matters .......................
6
Item 6.Management’s Discussion and Analysis or    Plan of Operation .......................
6
Item 7.Financial Statements    .......................................................................
19
Item 8.Changes in and Disagreements With Accountants    on Accounting           and Financial Disclosure    .............................
19PART III
Item 9.Directors, Executive Officers,    Promoters and Control Persons .....................
43
Item 10.Executive Compensation    ..................................................................
44
Item 11.Security Ownership of Certain    Beneficial Owners and Management ...............
48
Item 12.Certain Relationships and Related    Transactions .......................................
48PART IV
Item 13.Exhibits and Reports on Form 8-K    ......................................    ................
49
Signatures................................................................................................
54
 

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*Unless the context otherwise requires, all references to "PointWest Capital" refer to Point West Capital Corporation and all references to the"Company" refer to Point West Capital Corporation and its consolidated entities.*
 
**PART I

ITEM 1-- DESCRIPTION OF BUSINESS

Overview

                   The Company is a specialty financial services company with historic operations in fourbusiness segments: (i) loans to funeral homes and cemeteries through Allegiance Capital,LLC ("Allegiance Capital"), Allegiance Funding I, LLC ("AllegianceFunding"), Allegiance Capital Trust I ("Allegiance Trust I") and AllegianceManagement Corp. ("Allegiance Management"), (ii) viatical settlements throughDignity Partners Funding Corp. I ("DPFC"), (iii) small business loans andinvestments through Point West Venture Management, LLC ("Point West Management")and Point West Ventures, LP ("Point West Ventures") and (iv) other activitiesthrough Point West Capital, SocietyPool.com, LLC, ("SocietyPool") and Point WestSecurities, LLC ("PWS"). References herein to Ventures include Point WestManagement and Point West Ventures. References herein to Allegiance include AllegianceCapital, Allegiance Funding, Allegiance Trust I and Allegiance Management. 
**Going Concern**
                   As described herein, the Company has been engaged only in limited operations during thelast fiscal year. The Company’s current business plan for 2002 reflects continuedinitiatives to increase revenue, reduce overhead, and realize the benefit of recentreductions in employee headcount and occupancy costs. The Company’s ability tocontinue as a going concern is dependent upon, among other things, the Company’sability to terminate its present lease on satisfactory terms and relocate to lessexpensive office space, raise additional capital through equity or debt financings and orsuccessfully implement a business plan that restores the Company to profitability andpositive cash flows. There is no assurance that the Company will be able to terminate itspresent lease on satisfactory terms or at all, that additional funding will be availableto the Company on acceptable terms, if at all, or that the Company will succeed inimplementing a business plan that will allow it continue as a going concern.
**Historical Development**
                   Point West Capital was incorporated in the State of Delaware as Dignity Partners, Inc. inSeptember 1992 and commenced operations on January 2, 1993. Effective August 1, 1997, itsname was changed to Point West Capital Corporation. The Company’s principal executiveoffices are located at 1700 Montgomery Street, Suite 250, San Francisco, California 94111,and its telephone number is (415) 394-9467. 

                   The principal business activity of the Company through February 1997 was to provideviatical settlements for terminally ill persons. A**viatical settlement is thepayment of cash in return for an ownership interest in, and right to receive the deathbenefit (face value) of, a life insurance policy. In connection with a viaticalsettlement, the policyholder assigned his or her policy to the Company, which became theholder, owner or certificate holder of the policy and the beneficiary thereunder with theright to receive from the insurance company the face value payable under the policyfollowing the death of the insured. The Company has sold substantially all of its lifeinsurance policies other than the policies held by DPFC and no longer purchases lifeinsurance policies. The Company, through its wholly owned 

1

special purpose subsidiary, DPFC, continues to hold policies, which arepledged as security for the Securitized Notes (defined herein). Point West Capitalcontinues to service the life insurance policies held by DPFC. 

                   During 1997, the Company expanded its financial services business through the operationsof Ventures and Allegiance. During 1998, the Company formed PWS, a broker-dealer licensedby the National Association of Securities Dealers, Inc. ("NASD"). During 2000,the Company formed SocietyPool. 

                   Beginning in the latter half of 2000, the Company engaged in substantially lessrevenue-generating activity and began reducing costs significantly. The Company iscurrently focusing on continuing servicing activities in connection with Allegiance andDPFC, the resolution of non-performing loans made by Allegiance, actions relating to theliquidation of Point West Ventures and assessing its future alternatives as describedbelow.

                   As a result of loans made by Allegiance which became non-performing, Allegiance was unableto access further debt under the Allegiance Financing (as defined herein) beginning onOctober 30, 2000. The Allegiance Financing expired in December 2000. Allegiance has nosource of funding available to make additional loans. Consequently, Allegiance beganreducing costs through employee layoffs during December 2000. In addition, Allegiance wasunable to convert to term certificates or otherwise repay $9.1 million ($8.8 million as ofDecember 31, 2001) of revolving certificates issued under the Allegiance Financing. As aresult, the interest payable under the revolving certificates increased by 1% per annum,effective February 15, 2001. 

                   In November 2001, Allegiance and the Investors (as defined herein) executed an amendmentand waiver agreement providing Allegiance until February 15, 2002 to resolve thenon-performing loans and retire the revolving debt. Allegiance has made progress towardresolving the non-performing loans and retiring the revolving debt, but was not able to doso by February 15, 2002. Therefore, the Investors could declare an event of default underthe Allegiance Financing at any time. If the Investors were to declare an event ofdefault, Point West Capital and Allegiance Capital could be terminated as servicers andthe Investors could liquidate the collateral and apply the proceeds to retire amountsoutstanding under the Allegiance Financing. Allegiance is seeking waivers from theInvestors, which would provide additional time to resolve the non-performing loans, retirethe revolving debt and resolve other defaults. There can be no assurance that theInvestors will waive any defaults or not declare an event of default. 

                   Since 2000, Point West Ventures reduced significantly its number of new investments as aresult of volatility and uncertainty in the financial markets. Point West Ventures made noinvestments during 2001. In addition, as a result of Point West Ventures’ failure tocomply with applicable Small Business Administration ("SBA") capital ratiorequirements, in August 2001, the SBA accelerated Point West Ventures’ indebtednessto the SBA, effectively terminating Point West Ventures’ ability to make furtherinvestments or Point West Ventures’ ability to engage in further business activities.In December 2001, the SBA and Point West Ventures agreed to place Point West Ventures intoreceivership with the SBA, and in February 2002, the United States District for theNorthern District of California issued an order to that effect. Consequently, the SBA hasbeen appointed permanent receiver of Point West Ventures and the SBA has taken possessionand control of all of Point West Ventures’ assets for the purpose of liquidatingPoint West Ventures’ assets, satisfying claims of Point West Ventures’ creditorsand pursuing causes of action available to Point West Ventures.

                   In March 2002, Point West Capital entered into a settlement agreement related tolitigation and arbitration proceedings involving and related to SocietyPool. Under theterms of the settlement agreement, Point West Capital will no longer have any ownership inor any future involvement with 

2

SocietyPool. The Company’s financial statements as of December 31,2001 do not include the assets, liabilities or operations of SocietyPool. See "Item3--Legal Proceedings--SocietyPool." 

                   The operations of PWS have not been material to the Company. The Company has entered intoan agreement to sell PWS. The agreement would provide Point West Capital with net proceedsof approximately $20,000. The Company expects the sale to close in the second quarter of2002.

                   The Company continues to assess the viability of its businesses. Although the Company ispursuing potential future operations and growth of Allegiance, the current status ofAllegiance’s loans, its current defaults under the Allegiance Financing and its lackof funding raise serious doubts as to its continued viability. In addition, the Companyintends to continue its monitoring and servicing activities for DPFC until at least June30, 2002. However, the future of these activities is also uncertain. See"Management’s Discussion and Analysis or Plan of Operation--Results ofOperations by Segment--Viatical Settlements--Recent Developments." The Company doesnot plan on making any additional small business loans or investments, through Ventures orotherwise, or engaging in any additional broker-dealer activities. 

                   The Company may also pursue alternatives to continuing its operations. These alternativesmay include, among others, a sale of Allegiance’s loan portfolio, a partial orcomplete liquidation of the Company, the dissolution of the Company or another significanttransaction. There can be no assurance that the Company will be able to execute, on termsacceptable to the Company or at all, any of these alternatives. The Company intends topursue alternatives outside of bankruptcy; however, there is no assurance that it will beable to do so.
**Allegiance (Loans to Funeral Homes and**Cemeteries)*Structure

                   Allegiance Capital is a limited liability company formed in September 1997 as a specialtyfinance company to provide senior secured loans to owners of funeral homes and cemeteries.Allegiance commenced operations in December 1997. Point West Capital has a 65% ownershipinterest in, and a 95% voting control of, Allegiance Capital and serves as the managingmember. The former president and the former vice president of marketing retain the balanceof membership interests in Allegiance Capital. Allegiance Capital owns 100% of AllegianceFunding, which is a special purpose subsidiary formed to acquire and securitize loansoriginated by Allegiance Capital. Pursuant to a Trust Agreement dated August 1, 1998 (the"Allegiance Trust Agreement"), Allegiance Funding formed a trust, AllegianceTrust I, to consummate a structured financing (the "Allegiance Financing")which, through December 15, 2000, provided $33 million of debt to supportAllegiance’s lending activities. The Allegiance Financing expired in December 2000and Allegiance does not currently have a source of funding. See "Management’sDiscussion and Analysis or Plan of Operation--Results of Operations bySegment--Allegiance--Recent Developments." Allegiance Funding owns approximately 13%of Allegiance Trust I. Allegiance Capital owns 100% of Allegiance Management, which is aspecial purpose subsidiary formed to manage Allegiance Funding. 
***Overview

                   Allegiance provided long-term debt to experienced owners of established funeral home andcemetery businesses on a senior secured basis. Allegiance generally sought to financefuneral home and cemetery businesses that were well established by virtue of years ofservice in the communities they serve and which were operated by owners with substantialexperience and expertise in operating such 

3

businesses. Allegiance’s current business activities relate toservicing activities and resolving its non-performing loans. 
***Servicing***
                   Point West Capital continues to perform certain basic loan servicing functions related toloans previously made by Allegiance. These functions include (1) sending monthly billingstatements and other notices, (2) tracking and posting loan payments, (3) directing thetransfer of loan payments to the appropriate accounts and (4) maintaining loan files. 

                   In addition to the functions performed by Point West Capital, Allegiance performs loanportfolio surveillance functions in order to monitor credit quality. Borrowers providecertain information periodically, including quarterly and annual financial statements aswell as supplemental business activity information. Allegiance uses this information tomonitor periodically covenant compliance and the credit quality of the borrowers’underlying businesses. Allegiance Capital is also responsible for managing anydelinquencies, defaults and liquidations. As a senior secured lender, in the event ofdefault Allegiance is in a relatively strong position to control any disposition of thebusinesses it finances. However, there can be no assurance that Allegiance would be ableto realize sufficient proceeds from any disposition to cover its loans and relatedexpenses. The monitoring process is intended to help borrowers identify and addressproblems to avoid defaults. 
**Viatical Settlement Business**
                   Currently, the Company’s only activities in the viatical settlement business aremonitoring and collection activities. See "Management’s Discussion and Analysisor Plan of Operation-- Results of Operations by Segment-- Viatical Settlements-- CertainAccounting Implications for DPFC."
**Ventures (Small Business Loans and Investments)**
                   In the past, Point West Ventures provided loans, debt and equity capital to smallcompanies as defined by regulations of the SBA. Historically, Point West Ventures focusedon creating a diversified portfolio of debt and equity investments in later-stage growthand expansion companies. Point West Ventures focused on equity investments in businessesin the area of e-commerce, Internet and telecommunications. Point West Ventures’investments were structured in a variety of ways, including loans, debt investments suchas subordinated debt with equity participation through warrants or conversion rights, andinvestments in preferred and common stock. 

                   Point West Ventures is currently in receivership. Upon conclusion of the receivership,Point West Ventures’ Small Business Investment Company ("SBIC") licensewill be terminated. Point West Ventures does not anticipate resuming operations, and PointWest Capital has written off its equity investment in Point West Ventures. See"Historical Development" above. 
**Employees**
                   As of December 31, 2001, the Company employed 9 individuals on a full-time basis. 
**ITEM 2-- DESCRIPTION OF PROPERTY**
                   The Company currently leases approximately 6,150 square feet of office space in SanFrancisco. Because the Company’s space substantially exceeded its needs, in order toreduce unnecessary costs, the Company entered into an agreement dated March 23, 2001 tosublease 3,690 square feet of its space to an

4

unrelated party. The sublease payments substantially cover the rentexpense for the 6,150 square foot office. The sublease expires on September 21, 2002. Thesublessee has an option to extend the sublease to May 31, 2004, which coincides with thetermination of the Company’s lease for the office space. 

                   The Company generally does not invest in real estate, mortgages or entities primarilyengaged in real estate activities. Allegiance holds mortgages as collateral for all of theloans it has made. Allegiance does not acquire these mortgages for possible capital gainor for income. They merely serve as collateral. There are no limitations on the percentageof assets, which may be invested in any one investment, or type of investment, made by theCompany. 
**ITEM 3-- LEGAL PROCEEDINGS

General**
                   From time to time, the Company is involved in routine legal proceedings incidental to itsbusiness, including litigation in connection with loans and investments made by Point WestVentures and Allegiance and the collection of amounts owed under life insurance policiesby insurance company obligors. Except as disclosed below, the Company does not expect thatthese proceedings, individually or in the aggregate, will have a material adverse effecton the Company’s financial position, liquidity or results of operations.
**SocietyPool**
                   Since July 2000, the Company and its executive officers have been involved in litigationand arbitration proceedings with the two other Voting Interest Members of SocietyPool. Forfurther information regarding the history of these proceedings, see the Company’sForm 10-QSB for the quarter ended September 30, 2001. In March 2002, SocietyPool, PointWest Capital, each of its executive officers and the other two Voting Interest Membersentered into a settlement agreement. Under the terms of the settlement agreement, PointWest Capital resigned as Manager of SocietyPool and relinquished its Membership interestand received $225,000. All parties released each other from all present and future claimsregarding SocietyPool. Each party denied any wrongdoing or liability. Point West Capitalwill have no future involvement with SocietyPool. 
**Point West Ventures**
                   In February 2000, Point West Ventures brought an action in Santa Clara County againstUniversal Access, Inc., certain of its directors and other parties seeking to collect fordamages for breach of contract, breach of fiduciary duty including breach of contract,misappropriation of trade secret, unjust enrichment, tortious interference, conspiracy andunfair competition. The action was related to an aborted purchase by Universal Access,Inc. of a company in which Point West Ventures had invested. On July 17, 2000, the courtruled that all claims were subject to arbitration. In December 2000, Point West Venturesfiled a demand for arbitration. 

                   In June 2001, Point West Ventures filed an action for fraud against Home Director, Inc.and Spencer Trask Ventures, Inc. seeking rescission of an agreement pursuant to whichPoint West Ventures purchased $500,000 of stock in Home Director, Inc. through SpencerTrask Ventures, Inc. In July 2001, the defendants filed a motion to dismiss the action. InJanuary 2002, the motion to dismiss was denied.

                   The order placing Point West Ventures into receivership stays all current litigation ofPoint West Ventures, which includes these two cases. Because Point West Ventures is inreceivership, the continued prosecution of these claims will be in the control of thereceiver, the SBA. The SBA has indicated a 

5

desire to continue prosecuting these claims, however, until a finaldecision is made and the stay lifted, no further action will result. See "Item1--Description of Business--Historical Development." 
**ITEM 4-- SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**
                   No matters were submitted to a vote of the Company’s stockholders during the fourthquarter of 2001.
**PART II****ITEM 5-- MARKET FOR      COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS**
                   Prior to April 11, 2001, the Company’s stock was traded on the National Market Systemof the Nasdaq Stock Market("NMS") under the symbol"PWCC." As a result of the Company’s failure to maintain a $5 millionminimum market value of public float and a $1.00 per share minimum bid price, theCompany’s stock was delisted from the NMS, effective April 11, 2001. Point WestCapital’s Common Stock currently trades on the Nasdaq OTC Bulletin Board("OTC BB") under the symbol "PWCC.OB." As ofMarch 7, 2002, there were 129 holders of record of Common Stock, including banks,brokerage firms and other nominees. A substantial portion of the publicly held shares ofCommon Stock is held in book-entry form. 

                   The following table sets forth, for the fiscal quarters indicated, the high and low salesprices for the Company’s Common Stock on The Nasdaq Stock Marketand,subsequent to April 11, 2001, on the OTC BB.
**2001**High**Low
First    Quarter ........................
$0.938
$0.125
Second    Quarter (1)....................0.3440.100
Third    Quarter (1)........................0.4000.100
Fourth    Quarter (1)...................0.1000.020**2000**High**Low
First Quarter    ......................
$14.438
$6.625
Second Quarter    .................7.4383.125
Third Quarter    ..................4.2192.281
Fourth Quarter    ..................2.7500.188
 

(1) The quotations related to April 12, 2001 and      thereafter reflect inter-dealer prices, without retail mark-up, mark-down or commission      and may not represent actual transactions.

                   The Company has never declared or paid any cash dividends on its capital stock, and theCompany does not anticipate paying cash dividends on the Common Stock in the future.
**ITEM 6-- MANAGEMENT’S DISCUSSION AND      ANALYSIS OR PLAN OF OPERATION**
                   The following is a discussion and analysis of the consolidated financial condition of theCompany at December 31, 2001 and results of operations for the Company for the two yearsended December 31, 2001, and of certain factors that may affect the Company’sprospective financial condition and results of operations. The following should be read inconjunction with the consolidated financial statements and related notes appearingelsewhere herein.
**6

**Overview**
                   The Company is a specialty financial services company. The Company’s financialstatements consolidate the assets, liabilities and operations of Allegiance, DPFC,Ventures and PWS. The principal business activity of the Company through February 1997 wasto provide viatical settlements for terminally ill persons. Subsequent to February 1997,the Company became a more broadly-based specialty financial services company. 

                   As described herein, the Company has been engaged only in limited operations during thelast fiscal year. The Company’s current business plan for 2002 reflects continuedinitiatives to increase revenue, reduce overhead, and realize the benefit of recentreductions in employee headcount and occupancy costs. The Company’s ability tocontinue as a going concern is dependent upon, among other things, the Company’sability to terminate its present lease on satisfactory terms and relocate to lessexpensive office space, raise additional capital through equity or debt financings and orsuccessfully implement a business plan that restores the Company to profitability andpositive cash flows. There is no assurance that the Company will be able to terminate itspresent lease on satisfactory terms or at all, that additional funding will be availableto the Company on acceptable terms, if at all, or that the Company will succeed inimplementing a business plan that will allow it continue as a going concern.

                   Beginning in the latter half of 2000, the Company engaged in substantially lessrevenue-generating activity and began reducing costs significantly. The Company iscurrently focusing on continuing servicing activities in connection with Allegiance andDPFC, the resolution of non-performing loans made by Allegiance, actions relating to theliquidation of Point West Ventures and assessing its future alternatives.

                   See "Item 1--Description of Business--Historical Development."
**Critical Accounting Policies**
                   Management believes that judgments and estimates related to the Company’s allowancefor loan losses and its valuation of assets held for sale could materially affect itsconsolidated financial statements. Determination of the allowance and valuation of assetsheld for sale are inherently subjective as they require significant estimates, includingthe amounts and timing of expected future cash flows on impaired loans, estimated losseson the pool of loans based on historical loss experience and consideration of currenteconomic trends, all of which may be susceptible to significant change. 

                   Loans are generally placed on non-accrual status when payment in full is in doubt or theloan is 90 days or more past due as to principal or interest. Loans are returned toaccrual status once the above noted factors are no longer present and the loan is current.As of December 31, 2001, Allegiance had four loans on non-accrual status. During 2001,Allegiance acquired the assets of two of these non-performing borrowers for a nominalamount. As a result, as of December 31, 2001,  these funeral home assets are includedin assets held for sale at the lower of cost or estimated fair value less cost to sell,  in accordance with accounting principles generally accepted in the United States("GAAP"). Management has estimated fair value based on bids for and appraisalsof the funeral home businesses that secured the loans and assessment of the financialcondition and cash flows of the funeral homes’ operations. In connection with theremaining two non-performing loans, based on management’s assessment of the currentportfolio, management believes that Allegiance’s allowance for loan losses isadequate. In addition, early in 2002, Allegiance acquired the assets of another borrowervia foreclosure. The assets of such borrower are included in assets held for sale atDecember 31, 2001 at estimated fair value. In the event other loans become non-performing,or changes occur to other factors affecting management’s estimates, such as

7

general economic conditions, the Company may need to increase theallowance or decrease the valuation, which could materially impact the results ofoperations or financial condition. 
**Results of Operations for the Company*****Year Ended December 31, 2001 Compared to Year Ended December 31,  2000****                   Total Revenue. Total revenue was negative $4.3 million in 2001 compared to negative$5.6 million in 2000. The Company reported an $8.2 million loss on securities in 2001,compared to a $10.7 million loss on securities for 2000. See "Results of Operationsby Segment--Ventures--Net Loss on Securities." Offsetting this decrease was a $1.4million decrease in interest income for 2001. Interest income for 2000 included $1.1million recognized from a warrant (valued using the Black-Scholes option-pricing model)received in connection with one of Ventures’ debt investments. No such income wasrecognized during 2001. 
*                   Total Expenses. Total expenses decreased to $10.2 million in 2001 from $10.6 millionin 2000. This decrease was primarily due to (i) a $1.3 million reduction in compensationand benefits as a result of scaled back activities for Allegiance and Ventures, (ii) a$1.3 million loss during 2000 on a loan held by Allegiance, whereas no such loss wasincurred during 2001, (iii) a $722,000 reduction in total expenses reported by DPFC, as aresult of the DPFC Agreement (see "Results of Operations by Segment--ViaticalSettlements--Certain Accounting Implications for DPFC,") and (iv) a $544,000reduction in royalty fees and organizational and research expenses for SocietyPool.Offsetting this decrease was a $1.8 million loss in connection with the SocietyPoolsettlement (see "Item 3--Legal Proceedings--SocietyPool"), a $1.1 millionimpairment expense recognized in connection with the assets of two of the non-performingloans acquired by Allegiance and the assets of another borrower acquired by Allegiance viaforeclosure (see "Critical Accounting Policies" above) and a $402,000 increasein amortization expense resulting from the write-off of deferred financing costs relatingto the Allegiance Financing, for which Allegiance was unable to resolve certain defaultsby February 15, 2002. 
*                   Income Taxes. The Company reported $73,000 of income tax benefit for 2001, compared to$610,000 of income tax expense for 2000. Income tax benefit for 2001 reflects the portionof the provision for taxes related to FAS 115 losses. The income tax expense of $610,000recorded in 2000 is primarily related to the re-establishment of a valuation allowanceagainst the Company’s deferred tax assets. A valuation allowance is required when itis unlikely that the Company will generate sufficient future taxable income to allow it toutilize net operating losses ("NOLs") and other deferred tax assets to offsetfuture taxable gains. See Note 10 of the Notes to Consolidated Financial Statements.
*                   Extraordinary Gain. The Company recognized an extraordinary gain on a troubled debtrestructuring in the amount of $1.2 million, net of income taxes of $822,000, in March2000 in connection with the DPFC Agreement described below under "Results ofOperations by Segment--Viatical Settlements--Certain Accounting Implications forDPFC" and in Notes 1d and 8 of the Notes to Consolidated Financial Statements. As aresult of the DPFC Agreement, the Company reduced the outstanding principal amount of theSecuritized Notes in the consolidated balance sheet as of March 31, 2000 by $2.1 millionto $36.4 million (which equaled the face value of the life insurance policies andrestricted cash held by DPFC as of that date) and recognized income in a like amount. 
**8** 

 

Results of Operations by Segment*****Allegiance****                   Recent Developments*
                   At December 31, 2000, two loans made by Allegiance were on non-accrual status and atDecember 31, 2001, four loans, two of which were included in assets held for sale, were onnon-accrual status. See "Critical Accounting Policies" above.

                   As a result of the non-accrual status loans, Allegiance was unable to access further debtunder the Allegiance Financing beginning on October 30, 2000. The Allegiance Financingexpired in December 2000. Allegiance has no source of funding available to make additionalloans. Consequently, Allegiance began reducing costs through employee layoffs duringDecember 2000. At December 31, 2001, Allegiance had no employees. In addition, Allegiancewas unable to convert to term certificates or otherwise repay $9.1 million ($8.8 millionas of December 31, 2001) of revolving certificates issued under the Allegiance Financing.As a result, the interest payable under the revolving certificates increased by 1% perannum, effective February 15, 2001. 

                   In November 2001, Allegiance and the Investors executed an amendment and waiver agreementproviding Allegiance until February 15, 2002 to resolve the non-performing loans andretire the revolving debt. Allegiance has made progress toward resolving thenon-performing loans and retiring the revolving debt, but was not able to do so byFebruary 15, 2002. Therefore, the Investors could declare an event of default under theAllegiance Financing at any time. If the Investors were to declare an event of default,Point West Capital and Allegiance Capital could be terminated as servicers and theInvestors could liquidate the collateral and apply the proceeds to retire amountsoutstanding under the Allegiance Financing. Allegiance is seeking waivers from theInvestors, which would provide additional time to resolve the non-performing loans, retirethe revolving debt and resolve other defaults. There can be no assurance that theInvestors will waive any defaults or not declare an event of default. 

                   Repayment of the debt outstanding under the Allegiance Financing is an obligation solelyof Allegiance Trust I. Neither Point West Capital, Allegiance Capital, Allegiance Fundingnor Allegiance Management guaranteed repayment of the revolving or term certificates andnone is required to fund any principal or interest deficiencies which may arisethereunder.

                   Also as a result of the non-performing loans, monthly cash flow payments to Point WestCapital (for servicing fees) and to Allegiance (for servicing fees and interest owed ondebt certificates held by Allegiance) ceased in November 2000. Between January and October2000, such payments averaged $42,000 a month. As a result of, among other things, certainamendment and waiver agreements, monthly cash flow payments to Point West Capital andAllegiance resumed in May 2001. From May through December 2001, these payments, which aresubordinate to other payments under the Allegiance Financing, averaged $10,000 per month.As a result of defaults under the Allegiance Financing, the Investors could stop thesepayments at any time. Assuming that the Investors waive all defaults and permit thesepayments to continue beyond February 15, 2002, payments in future months could increase,decrease or cease subject to the performance of the underlying loans, the relative spreadbetween LIBOR and interest rates on treasury securities and resulting cash flow from theloans and continued compliance with other provisions of the Allegiance Financing.

                   If the Investors declare an event of default under the Allegiance Financing or do notpermit cash flow payments to continue under the current arrangement, Point WestCapital’s ability to continue future operations is highly questionable.

9

 

In the first quarter of 2002, Allegiance Capital entered into anagreement to sell a funeral home it had acquired in connection with a defaulted loan. Thesale closed on March 28, 2002. See "Liquidity and Capital Resources." 
*                   Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 

                   Interest Income. Interest income increased to $3.4 million in 2001 from $3.2 millionin 2000. Allegiance had 26 and 27 loans outstanding at December 31, 2001 and 2000,respectively. The loans outstanding include two loans on non-accrual status, which arecarried in assets held for sale at the lower of cost or estimated fair value less cost tosell. Loans receivable were outstanding in the aggregate amount of $36.3 million and $37.8million at December 31, 2001 and 2000, respectively.   The weighted-average interestrates on the loans outstanding were 8.9% and 8.7% in 2001 and 2000, respectively, and theweighted-average principal amounts outstanding were $37.1 million and $35.3 million in2001 and 2000, respectively.   The increase in weighted average principal amountoutstanding from 2000 to 2001 primarily reflects loans made by Allegiance from Julythrough October 2000. For purposes of the weighted average interest rate and weightedaverage principal outstanding calculations for 2001, four non-performing loans (includingtwo which are included in assets held for sale) in the aggregate principal amounts of $5.3million have been included in the calculations to the extent they were performing during2001. For purposes of the weighted average interest rate and weighted average principaloutstanding calculations for 2000, two non-performing loans in the aggregate principalamounts of $3.9 million have been included to the extent they were performing during 2000.  Allegiance cannot predict at this time whether the loans will remain on non-accrualstatus. To the extent that the loans remain on non-accrual status, Allegiance Capital doesnot anticipate receiving all interest and servicing income it would have received if theloans were performing.   See “ Recent Developments” for more informationregarding servicing income and the other consequences of these non-performing loans.  Allegiance is attempting to work out its non-performing loans.   Allegiance isnot currently originating loans and principal payments are occurring on outstanding loans.  Therefore, Allegiance expects interest income to decrease in future periods.
*                   Interest Expense. Interest expense increased to $2.7 million in 2001 from $2.5 millionin 2000 primarily as a result of increased borrowings under the Allegiance Financingduring 2000. During 2001, the weighted-average interest rate under the AllegianceFinancing was 8.4% and the weighted-average borrowings were $32.5 million compared to aweighted-average interest rate of 8.5% and weighted-average borrowings of $30.0 millionfor 2000. The Allegiance Financing terminated in December 2000. However, amounts borrowedunder the Allegiance Financing remain outstanding and are currently in default. See"--Recent Developments" above.
*                   Compensation and Benefits. Compensation and benefits decreasedto $311,000 in 2001 from $360,000 in 2000. Thisdecrease was due to layoffs made by Allegiance during the fourth quarter of 2000. However,the reduction in compensation and benefits, as a result of the layoffs, was partiallyoffset by an intercompany charge for services performed by employees of Point West Capitalon behalf of Allegiance Capital. *                   Other General and Administrative Expenses. Other general and administrative expensesdecreased to $1.4 million in 2001 from $2.2 million in 2000. This decrease was primarilydue to a $1.3 million write-off of a delinquent loan during 2000. No such loss wasreported during 2001. In addition, this decrease was partly attributable to a $486,000reduction in legal expenses primarily related to litigation involving the delinquent loanthat was written off. This decrease was partially offset somewhat by a $1.1 millionimpairment expense recognized in connection with the assets of two of the non-performingloans acquired by Allegiance and the assets of another borrower acquired by Allegiance viaforeclosure (see "Critical Accounting Policies" above). It is likely thatadditional general and 

10

administrative expenses will be incurred in connection with the workout of those loans. Allegiance cannot, however, predict the overall level of other generaland administrative expenses in 2002 relative to 2001.
***Viatical Settlements

                   The Viatical Settlements segment includes results of operations in connection withviatical settlements for DPFC and Point West Capital.
*                   Recent Developments   *
                   In November 2001, Bradley N. Rotter took a leave of absence and in March 2002 ceased to beemployed by the Company. He remains a director and Chairman of the Board. It is currentlyanticipated that, prior to the expiration of the DPFC Agreement (as defined herein) onJune 30, 2002, an additional executive officer will cease to be employed by the Company.If this occurs, a default will occur under the DPFC Agreement. See "Description ofSecuritized Notes." If the Noteholders (as defined herein) declare an event ofdefault, Point West Capital could be terminated as servicer and the Noteholders couldforeclose on the collateral. If Point West Capital is terminated as servicer, or theNoteholders do not extend servicing beyond June 30, 2002, Point West Capital’sability to continue future operations is highly questionable. Point West Capital and theNoteholders have been in discussions regarding this matter and extending the servicingbeyond June 30, 2002. No assurance, however, can be given that servicing will be extendedor that the Noteholders will not declare an event of default prior to June 30, 2002. 
*Certain Accounting Implications for DPFC

                   From June 30, 1996 through February 29, 2000, the Company recognized income (earneddiscounts) with respect to its viatical settlement business upon receipt of proceeds onpolicies (either pursuant to sale of the policy or the death of the insured). Incomerecognized was equal to the difference between such proceeds and the carrying value ofsuch policies after giving effect to any reserve for loss on the sale of such policies.

                   As a result of the imminent default of DPFC under the terms of the Senior ViaticalSettlement Notes, Series 1995-A, Stated Maturity March 10, 2005 (the "SecuritizedNotes"), Point West Capital and the holders of the Securitized Notes (the"Noteholders") entered into an agreement in March 2000 (the "DPFCAgreement") that amended certain of the terms of the Securitized Notes. Pursuant tothe DPFC Agreement, the Noteholders are required to provide funds through June 30, 2002 topay servicing fees, premiums and certain other costs of DPFC in the event policycollections are insufficient. Under the DPFC Agreement, Point West Capital continues toact as servicer for a fee of $18,000 per month for the period March 2000 through June2002. The DPFC Agreement also provides the Noteholders with an option to purchase fromPoint West Capital the DPFC outstanding stock for a nominal amount on June 30, 2002. Ifthe Noteholders do not exercise such option, Point West Capital may liquidate DPFC. See"Results of Operations for the Company-- ExtraordinaryGain." The Company and the Noteholders are discussing possibly extending the date ofthis option.

                   As a result of the DPFC Agreement, the Company will not recognize any future gain or lossrelated to DPFC until the Noteholders purchase the DPFC stock or DPFC is liquidatedpursuant to the DPFC Agreement. The Company expects to recognize a pre-tax gain in anamount approximately equal to the $4.6 million accumulated deficit of DPFC upon theoccurrence of either of these events. Additionally, when the DPFC stock is purchased orDPFC is liquidated, the Company may have income tax liability associated with the gainfrom debt forgiveness. The Company may be able to use 

11

carryforward losses to offset such liability, unless the carryforwardlosses have been previously utilized. Since March 2000 the Company has recognized the$18,000 monthly servicing fee ($54,000 per quarter) paid to Point West Capital as otherincome in the consolidated statement of operations.

                   Also as a result of the DPFC Agreement, DPFC has not recognized any interest expenserelated to the Securitized Notes nor any general and administrative expenses subsequent toFebruary 29, 2000 and will not recognize these expenses in future periods. 

                   The Securitized Notes represent the obligations solely of DPFC. Point West Capital did notguarantee repayment of the Securitized Notes and is not required to fund any principal orinterest deficiencies thereunder.
***Ventures
*                   Recent Developments*
                   Since 2000, Point West Ventures reduced significantly its number of new investments as aresult of volatility and uncertainty in the financial markets. Point West Ventures made noinvestments during 2001. Additionally, in August 2001, the SBA accelerated Point WestVentures’ indebtedness to the SBA, effectively terminating Point West Ventures’ability to make further investments or Point West Venture’s ability to engage infurther business activities. In February 2002, the SBA was appointed permanent receiver ofPoint West Ventures. The SBA has taken possession and control of all of Point WestVentures’ assets for the purpose of liquidating Point West Ventures’ assets,satisfying claims of Point West Ventures’ creditors and pursuing causes of actionavailable to Point West Ventures. Upon conclusion of the receivership, Point WestVentures’ SBIC license will be terminated. See "Item 1--Description ofBusiness--Historical Development." 
*                   Certain Accounting Implications for Ventures*
                   The Company expects the SBA to liquidate in an orderly manner the assets of Point WestVentures. Point West Ventures’ assets are carried at estimated fair value at December31, 2001. The Company does not anticipate any future changes to the carrying values atDecember 31, 2001 unless the SBA liquidates some assets or the Company learns that theassets should be written down further. If assets are liquidated or the Company receivesinformation from the SBA indicating further write-downs are necessary, the Company willrecord any subsequent decrease in liquidation value in the consolidated balance sheet andstatement of operations in the appropriate period. Future revenues and expenses associatedwith Point West Ventures (including gains and losses in respect of liquidated assets,accrued interest and fees) will continue to be recognized in the consolidated statement ofoperations until the receivership is terminated and Point West Ventures is dissolved. 

                   The debentures will continue to be reflected in the Company’s consolidated balancesheet until Point West Ventures is legally released from its obligations under thedebentures. The Company cannot predict whether or at what time Point West Ventures will belegally released from its obligations under the debentures. Dispositions of Point WestVentures’ portfolio securities by a receiver may occur at times or on terms thatwould not maximize the value of those assets. It is virtually certain that proceeds fromany asset dispositions would be insufficient to repay all amounts owed to the SBA by PointWest Ventures under the debentures. If and when the debt is finally discharged, theCompany would then recognize a gain on debt forgiveness in an amount equal to any unpaiddebt that is discharged, net of any tax effect.

12
*Year Ended December 31, 2001 Compared to Year Ended December 31,    2000**                   Interest Income. Interest income decreased to $25,000 in 2001 from $1.5 million in2000. This decrease was primarily due to $1.1 million of interest income recognized in2000 as a result of warrants (valued using the Black-Scholes option-pricing model)received in connection with one of Ventures’ debt securities. No such interest wasreported in 2001. Additionally, an overall decrease in cash balances and yieldscontributed to the decrease in interest income. 
*                   Net Loss on Securities. Ventures recognized a net loss on securities of $7.2 millionin 2001, compared to a net loss on securities of $10.4 million in 2000. These net losseswere primarily the result of the write-down or write-off of impaired investments. Thewrite-downs or write-offs were a result of continued deterioration of the financialcondition of some companies and the uncertainty that some companies would be able to raiseadditional capital and continue in business in light of the market downturn related toInternet and other technology stocks and the continued depression of the domestic stockmarkets. Offsetting these write-downs and write-offs during the 2000 period was $1.8million in gain on securities sold during the first half of 2000. The Company does notwrite-down or write-off, through the consolidated statement of operations, any investmentsit considers to be temporarily impaired. The Company may recognize losses on securities infuture periods when the SBA liquidates the remaining investments. See "-- Certain Accounting Implications for Ventures" above.
*                   Interest Expense. Interest expense increased to $504,000 in 2001 from $389,000 in 2000due to an increase in funds borrowed from the SBA in May 2000. During 2001, theweighted-average interest rate on funds borrowed from the SBA was 7.8% and theweighted-average borrowings were $6.5 million compared to the weighted-average interestrate of 7.7% and weighted average borrowings of $5.8 million in 2000. All amountsoutstanding under the debentures have been accelerated. Interest will continue to accrueon these amounts until the debentures are finally discharged. See "--CertainAccounting Implications for Ventures" above.
*                   Amortization. As a result of Point West Ventures’ default under the debenturesissued to the SBA, the unamortized commitment and leverage fees paid to the SBA werewritten-off during 2001. Consequently, amortization expense increased to $190,000 for 2001from $52,000 for 2000. There will be no amortization expense for Ventures in futureperiods. 
***Other***
                   The Other segment includes results attributable to Point West Capital, SocietyPool andPWS. Except for compensation and benefit expenses clearly attributable to Allegiance,corporate overhead is included in the "Other" segment and has not beenallocated. As of December 31, 2001, SocietyPool was no longer included in theCompany’s consolidated financial statements. SocietyPool’s operations have beenreflected in the Statement of Operations through December 31, 2001. For more informationabout SocietyPool, see "Item 3-- Legal Proceedings-- SocietyPool." Activities for PWS were immaterial during 2001and 2000. The Company has entered into an agreement to sell PWS. The Company expects thesale to close in the second quarter of 2002. 
*Year Ended December 31, 2001 Compared to Year Ended December 31,    2000**                   Interest Income. Interest income declined to $116,000 in 2001 from $195,000 in 2000.The decline in 2001 was due to decreases in cash balances and yields. 
*                   Loss on Securities. During the first quarter of 2001, Point West Capital determinedthat a $939,000 investment in one company was impaired and therefore wrote-off the entirecarrying value 

13

during that period. This write-off was a result of deterioration in thefinancial condition of the investee. That company is presently being liquidated and noamounts will be paid to any shareholders. This investment was made by Point West Capitalprior to the inception of Ventures, and was the only investment in Point WestCapital’s portfolio. During 2000, the company recorded a $304,000 loss on the sale ofa bond held by Point West Capital.
*                   Compensation and Benefits. Compensation and benefits decreased to $950,000 in 2001from $2.2 million in 2000. This decrease was due to a 57% reduction in the salaries of theexecutive officers, an elimination of profit sharing and bonuses for all employees during2001 and employee layoffs and attrition, which began in late 2000. 
*                   Loss on Disposal of Subsidiary. As a result of the settlement of the variousproceedings related to SocietyPool described in "Item 3--LegalProceedings--SocietyPool," in 2001 the Company recorded a $1.8 million losscorresponding to its remaining ownership interest in SocietyPool. 
*                   Other General and Administrative Expenses. Other general and administrative expenseswere $1.6 millionin 2001,compared to $2.0 million in 2000. The Company established a cost-reduction program in thelatter half of 2000; however, the benefit of these cost reductions has been partiallyoffset by an increase in legal expenses related to the various litigation and arbitrationproceedings related to SocietyPool. In addition to the cost-reduction program, thedecrease in other general and administrative expenses was due to a $544,000 decrease inroyalty fees and organizational and research expenses related to SocietyPool incurredduring 2000. Offsetting such decrease was a $686,000 increase in legal expenses relatingto the SocietyPool litigation and arbitration proceedings. See "Item 3--LegalProceedings--SocietyPool." The Company is currently unable to predict the overalllevel of other general and administrative expenses for 2002 relative to 2001.**Liquidity and Capital Resources**
                   At December 31, 2001 the Company had $597,000 of cash and cash equivalents, $14,000 ofinvestment securities and $2.1 million of non-marketable securities, compared to $3.0million of cash and cash equivalents, $116,000 of investment securities and $10.4 millionof non-marketable securities at December 31, 2000. For the year ended December 31, 2001,the Company incurred a loss of $14.5 million, which resulted in a stockholders’deficit of $4.6 million and increased accumulated deficit to $31.8 million. The Companyexpects to incur losses for at least the next year. The Company has also experiencedcontinuing negative cash flows from operations. Cash flows used in operating activitiesfor the years ended December 31, 2001 and 2000 were $871,000 and $4.4 million,respectively. As a result of these negative cash flows and the Company's recurring losses,the Company's independent certified accountants have stated in their report included inthis Form 10-KSB, that these conditions raise substantial doubt about the Company'sability to continue as a going concern.  However, the Company’s consolidatedfinancial statements included herein have been prepared assuming that the Company willcontinue as a going concern. See Note 2 of the Notes to Consolidated Financial Statements.

                   The Company’s current business plan for 2002 reflects continued initiatives toincrease revenue, reduce overhead, and realize the benefit of recent reductions inemployee headcount and occupancy costs. The Company’s ability to continue as a goingconcern is dependent upon, among other things, the Company’s ability to terminate itspresent lease on satisfactory terms and relocate into less expensive office space, raiseadditional capital through equity or debt financings or successfully implement a businessplan that restores the Company to profitability and positive cash flows. There is noassurance that the Company will be able to terminate its present lease on satisfactoryterms or at all, that additional funding will be available to the Company on acceptableterms, if at all, or that the Company will succeed in implementing a business plan thatwill allow it continue as a going concern. Assuming that the 

14

Company is able to terminate its present lease on satisfactory termsand relocate into less expensive office space, the Company currently anticipates havingsufficient liquidity to meet its working capital and operating needs at least throughDecember 31, 2002.

                   The Company is currently unable to predict its liquidity beyond December 31, 2002, whichwill be dependent on (i) the Company’s level of operations and its cash flows fromservicing activities, (ii) the Investors’ willingness to permit the continuation ofmonthly cash flow payments to Point West Capital and Allegiance Capital under theAllegiance Financing, (iii) Allegiance’s ability to resolve the non-performing loansand (iv) the Noteholders’ willingness to extend the DPFC Agreement beyond June 30,2002. 

                   The Company continues to assess the viability of its businesses. See "Item1--Description of Business--Historical Development." Were the Company to beliquidated it is uncertain whether any funds would be available to stockholders. Theamount, if any, of funds available for stockholders would be dependent primarily on thevalue of the residual ownership in Allegiance upon any such liquidation. 
*        Point West Capital*
                   At present, Point West Capital has no external funding source from which to fund itsworking capital and general corporate needs. During 2001, the Company supported theoperations of Point West Capital primarily from existing cash balances. At December 31,2001, Point West Capital’s cash and cash equivalents was $407,000, and at March 25,2002, Point West Capital’s cash and cash equivalents was $217,000. Since that date,Point West Capital has received $225,000 in connection with the settlement of theSocietyPool proceedings. Point West Capital expects to use a substantial portion of theseproceeds to pay related legal expenses. In addition, on March 28, 2002, Allegiancereceived $441,000 from the sale of a funeral home held by Allegiance. Point West Capitalexpects those funds to be available to it. 
*        Allegiance*
                   The Allegiance Financing expired in December 2000 and, as a result, Allegiance has nocurrent ability to continue to make new loans or to grow its business. See "Item1--Description of Business--Historical Development" and "Results of Operationsby Segment--Allegiance--Recent Developments" above. As of December 31, 2001,Allegiance had cash and cash equivalents of $672,000, of which $513,000 is restrictedunder the Allegiance Financing. The Company is pursuing potential future operations andgrowth of Allegiance. However, the current status of Allegiance’s loans, its currentdefaults under the Allegiance Financing and its lack of funding raise serious doubts as toits continued viability. 
*DPFC

                   DPFC operations are in run-off. Point West Capital, as servicer under the SecuritizedNotes, performs monitoring and collection activities for DPFC and incurs administrativecosts associated with these activities. See "Results of Operations bySegment--Viatical Settlements--Recent Developments." Point West Capital is reimbursedfor these costs subject to priority provisions contained in the Indenture. Principal,interest payments and other costs related to the Securitized Notes are payable solely fromcollections on policies pledged to secure the payment thereof and, with respect to costs,amounts provided by the Noteholders.

 

15

 
*        Ventures

                   Ventures’ expenses during 2001 were supported primarily through existing cashbalances and 

$340,000 of proceeds from the sale of one investment. As of December31, 2001, Ventures had identifiable assets of $2.2 million, including investmentsecurities with an estimated fair value of $14,000, non-marketable securities with anestimated fair value of $2.1 million, $75,000 of accounts receivable and $13,000 of cash.In February 2002, the SBA was appointed permanent receiver of Point West Ventures. The SBAhas taken possession and control of all of Point West Ventures’ assets for thepurpose of liquidating Point West Ventures’ assets, satisfying claims of Point WestVentures’ creditors and pursuing causes of action available to Point West Ventures.See "Results of Operation by Segment--Ventures--Recent Developments" above forfurther information, including a discussion of the accounting implications of such areceivership. 

                   Point West Ventures does not currently have sufficient cash to repay the SBA debentures.As of December 31, 2001, Point West Ventures’ identifiable assets were significantlyless than the amounts owed under the SBA debentures, and it is virtually certain thatproceeds from any asset disposition would be insufficient to repay all amounts owed to theSBA by Point West Ventures under the debentures. Any asset disposition proceeds will beused to satisfy amounts owed to the SBA under the debentures and to pay the costs of thereceivership. 
**Description of Revolving and Term Certificates**
                   Pursuant to the Allegiance Financing, a consortium of insurance companies (the"Investors") provided funding to Allegiance from November 1998 to October 2000. 

                   Under the Allegiance Financing, various classes of revolving and term certificates ofAllegiance Trust I have been issued. At December 31, 2001, revolving certificates held bythird parties were outstanding in the aggregate principal amount of $8.8 million. AtDecember 31, 2001, such certificates bore interest at fixed and variable rates based onthe one-year U.S. Treasury yield and one-month LIBOR plus a weighted-average spread of4.3%. The weighted-average annual interest rate of the revolving certificates held bythird parties at December 31, 2001 was 8.0%. Allegiance funded and retained an unratedrevolving certificate in the principal amount of $2.2 million. The unrated certificaterepresents the right to receive all excess cash flow from Allegiance Trust I related tothe revolving certificates. The revolving certificates held by third parties have ratingsfrom Fitch, Inc. ranging from A to B. At December 31, 2001, the term certificates held bythird parties were outstanding in the aggregate principal amount of $23.2 million. Theweighted-average annual fixed interest rate of the term certificates held by third partieswas 8.1%. Allegiance fundedand retained an unrated term certificate that represents the right to receive a 17.5%coupon subject to other priority payments, including payments on the senior certificates.At December 31, 2001, the outstanding principal balance of the unrated term certificatewas $2.6 million. Allegiance retained an additional unrated term certificate thatrepresents the right to receive 90% of the excess cash flow from Allegiance Trust Irelated to the term certificates. This term certificate does not have a principal balance.The term certificates held by third parties have ratings from Fitch, Inc. ranging from AAto B.
                   See "Item 1--Description of Business--Historical Development" for a descriptionof defaults under the Allegiance Financing and the related consequences. 

                   Under the Allegiance Financing, a liquidity account (the "Reserve Account") isrequired to be maintained, generally at 1% of the aggregate balance of loans underlyingthe revolving and term certificates, subject to a minimum of $250,000. The required amountcan increase by a formula amount upon the incurrence of, and based on a fraction of thedollar amount of, any delinquent, defaulted or non-

16

performing loans. As a result of defaulted loans, as of March 12, 2002the Reserve Account balance was required to be $705,000, but the balance was $513,000.Therefore, cash not needed to make payments to third party certificate holders, and whichwould otherwise be paid to Allegiance and Point West Capital as described above, isgenerally being deposited in the Reserve Account. Pursuant to amendments executed by theCompany and the Investors, certain expenses being incurred in connection with thenon-performing loans are being permitted to be paid from funds held in the ReserveAccount. 

                   Point West Capital acts as servicer and Allegiance Capital acts as special servicerpursuant to a Servicing Agreement (the "Allegiance Servicing Agreement"). Asservicer, Point West Capital is required to provide monthly reports to the trusteeregarding loan collections, to maintain the loan payment records and to provide relatedmonitoring services. Point West Capital receives a fee of 0.20% per annum on theoutstanding balance of the loan pool underlying the revolving and term certificates, andbears 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 collateralperformance and is responsible for managing any delinquencies, defaults or liquidations.An unaffiliated third party provides additional services with respect to loan collateralmonitoring as servicing advisor. Allegiance Capital receives a fee of 0.20% per annum onthe outstanding balance of the loan pool underlying the revolving and term certificates,and bears all expenses related to its duties, as well as the servicing advisor’sfees. As a result of the non-performing loans, such payments to Point West Capital andAllegiance ceased in November 2000. As a result of, among other things, certain amendmentand waiver agreements, a portion of such payments to Point West Capital and Allegianceresumed in May 2001. See "Results of Operations by Segment--Allegiance--RecentDevelopments." Point West Capital, Allegiance Capital and the servicing advisor areentitled to receive reimbursement from loan collections for certain expenses which may beincurred with respect to loan defaults, work-outs or dispositions. All amounts owed toPoint West Capital and Allegiance Capital are subject to availability of cash afterpayment of certain other priority amounts pursuant to the Allegiance Trust Agreement. Anevent of default under the Allegiance Servicing Agreement will occur upon, among otherthings, (i) failure by the servicer, special servicer or servicing advisor to remit anyloan collections received by them, (ii) failure by the servicer, special servicer orservicing advisor to deliver the reports required to be delivered by them or (iii) theoccurrence of certain events of bankruptcy, insolvency or reorganization with respect tothe servicer, special servicer or servicing advisor. If an event of default occurs and isnot remedied, the offending party, servicer, special servicer, or servicing advisor, maybe replaced at the request of the Investors and replaced by a nominee of AllegianceFunding, 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 amountof the Securitized Notes to be repaid in any month is equal to proceeds of policiescollected during the preceding month less certain required monthly payments (such asinterest and servicing and trustee fees) to be paid on such date. The ownership interestin policies purchased by DPFC is nominally held by an unaffiliated third party trusteeunder the Indenture but the policies are beneficially owned by DPFC. 

                   The Indenture contains certain covenants restricting the activities of DPFC. Events ofdefault under the Indenture include (i) a default in payment of principal or interest onthe Securitized Notes when due, (ii) a default by DPFC in the performance of any materialcovenant or a material breach of a representation or warranty of DPFC which is not curedwithin 30 days and (iii) certain events of bankruptcy, insolvency and reorganizationinvolving DPFC.

                   Point West Capital acts as servicer under the Indenture pursuant to a Contribution, Saleand Servicing Agreement (the "DPFC Servicing Agreement") and receives a monthlyfee of $18,000 from March 2000 through June 2002. See "Results of Operations bySegment--Viatical Settlements--Recent 

17

Developments." Point West Capital is required under the DPFCServicing Agreement to monitor each policy and to cause the collection and remittance tothe trustee of the face value of matured policies. Point West Capital pays all expensesrelated to such monitoring and collection services, including paying premiums, and isreimbursed for certain expenses. To the extent that cash available under the Indenturethrough collection activities is insufficient to reimburse Point West Capital, theNoteholders pursuant to the DPFC Agreement are required to deposit monies sufficient tomake such payments. For further discussion see "Results of Operations by Segment -- Viatical Settlements -- CertainAccounting Implications for DPFC." The DPFC Servicing Agreement contains certaincovenants restricting Point West Capital’s activities, including (i) restrictions onmergers, (ii) provisions related to respecting the separate legal status of DPFC, (iii) arequirement that no person will own a greater percentage of the aggregate voting power ofequity securities of Point West Capital entitled to vote in the election of directors thanthe percentage collectively beneficially owned by Point West Capital’s executiveofficers and no person other than Point West Capital’s executive officers will ownmore than 20% of such aggregate voting power, (iv) a requirement that Point WestCapital’s executive officers constitute a majority of the Board and (v) a requirementthat Point West Capital employ at least two of Point West Capital’s executiveofficers (or such other personnel reasonably acceptable to the Noteholders) in theirrespective capacities as of the DPFC Agreement date. An event of default will occur underthe DPFC Servicing Agreement if, among other things, (i) an event of default occurs underthe Indenture, or (ii) certain events of bankruptcy, insolvency or reorganization occurwith respect to Point West Capital. If an event of default occurs under the DPFC ServicingAgreement, Point West Capital can be replaced as servicer under the Indenture. The back-upservicer is the trustee under the Indenture. See "Viatical Settlements--RecentDevelopments" for a discussion of a potential default under the DPFC Agreement.
**Income Taxes**
                   The Company has significant NOLs for tax purposes. The Company believes that a substantialportion of its NOLs will not be utilized due to its inability to generate taxableearnings. As a result, during 2000 the Company re-established valuation allowances whichreduced the deferred tax asset to zero, and the Company continued to use a valuationallowance through 2001.
**Forward Looking Statements**
                   This report includes forward looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. All statements made herein which are not basedon historical facts are forward looking and, accordingly, involve risks and uncertaintiesthat could cause actual results to differ materially from those discussed. Such forwardlooking statements include those under "Management’s Discussion and Analysis ofFinancial Condition or Plan of Operation" relating to (1) the amount of any lossexperienced in connection with loans made by Allegiance that are in default, (2) thecontinuation of payments to Point West Capital and Allegiance Capital for servicingactivities provided to Allegiance and to Allegiance Capital under revolving and termcertificates issued to Allegiance Capital under the Allegiance Financing, (3) sufficiencyof the Company’s liquidity and capital resources (see "Liquidity and CapitalResources"), (4) the amount of gain to be recognized on the purchase of DPFC stock orits liquidation, (5) the consequences of Point West Ventures’ default under its SBAborrowings and the receivership and (6) anticipated levels of income and expenses for2002. Such statements are based on management’s belief, judgment and analysis as wellas assumptions made by and information available to management at the date hereof. Inaddition to any assumptions and cautionary factors referred to specifically in this reportin connection with such forward looking statements, factors that could cause actualresults to differ materially from those contemplated by the forward looking statementsinclude (1) Allegiance’s ability to foreclose on the collateral and realize an amounton foreclosure at least equal to the carrying value of the Allegiance loans which arecurrently in default, (2) the continuing ability of borrowers to perform under loanspreviously made by Allegiance and factors such as general economic

18

conditions that would affect such ability, (3) Allegiance’sability to resolve the currently non-performing loans to the satisfaction of theInvestors, (4) Allegiance’s ability to obtain additional time to resolve thenon-performing loans and retire the revolving debt, (5) actions taken by the Investorswith respect to the current or any future default under the Allegiance Financing, (6)actions taken by the Noteholders with respect to any future default under the DPFCAgreement, (7)****the results of the Company’s consideration of strategic optionsand any costs associated with a chosen option, (8) higher than anticipated costs relatedto recently settled arbitration and litigation proceedings, or the commencement of anyadditional arbitration or litigation proceedings by or against the Company, (9)availability and cost of capital, (10) actions taken by the Noteholders with respect tothe purchase or liquidation of DPFC, including discussions regarding possibly extendingPoint West Capital’s servicing beyond June 2002, (11) actions taken by the SBA withrespect to Point West Ventures, including any manner of liquidation, (12) prevailingmarket conditions affecting the fair market value and orderly liquidation value of PointWest Ventures’ assets and the ability to realize proceeds from any sale of suchassets, (13) litigation expenses arising from recently settled or future legal proceedingsrelated to the Company’s businesses, including non-performing loans or investmentsand (14) higher than anticipated compensation and benefits expenses for Point WestCapital.
**ITEM 7-- FINANCIAL STATEMENTS**
See pages 20 through 42.
**ITEM 8-- CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**
None. 

 

19
 

Report of Ernst & Young LLP, Independent Auditors

 

The Board of Directors and Stockholders of Point West Capital Corporation:

We have audited the accompanying consolidated balance sheet of PointWest Capital Corporation and Subsidiaries as of December 31, 2001, and the relatedconsolidated statements of operations, changes in stockholders’ equity (deficit), andcash flows for each of the two years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and perform the auditsto obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Point West CapitalCorporation and Subsidiaries as of December 31, 2001 and the results of their consolidatedoperations and their consolidated cash flows for each of the two years then ended, inconformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been preparedon a going concern basis of accounting. As discussed in Note 2 to the consolidatedfinancial statements, the Company's recurring losses from operations and net capitaldeficiency raise substantial doubt about its ability to continue as a going concern.Management's plans as to these matters are also described in Note 2. The consolidatedfinancial statements do not include any adjustments that might result from the outcome ofthis uncertainty.

 

**Ernst & Young LLP**
** ******
San Francisco, CaliforniaMarch, 22, 2002

20

 

POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOIDATED    BALANCE  SHEET
December 31,
ASSETS
2001Cash and cash equivalents$578,231Restricted cash556,683Investment securities:     Available- for- sale13,955Matured policies receivable71,500Loans receivable, net of unearned income of    $495,093        and an allowance for loan losses of $258,52431,652,687Purchased life insurance policies28,945,235Non-marketable securities2,131,101Furniture and equipment,  net of    accumulated     depreciation of    $62,69449,068Assets held for sale3,804,237Other assets719,415                                                Total assets$68,522,112
LIABILITIES AND STOCKHOLDERS'    DEFICITAccrued interst expense$304,616Accounts payable456,324Accrued compensation payable204,869Revolving certificates8,823,996Term certificates23,158,402Securitized notes payable33,661,576Debenture payable6,500,000                                              Total liabilities73,109,783Stockholders' deficit:     Common stock, $0.01 par    value; 15,000,000 authorized shares,             4,391,124 shares issued and 3,352,624 shares outstanding43,911Additional paid-in-capital30,091,689Accumulated deficit(31,849,239)Treasury stock, 1,038,500 shares(2,874,032)                                           Total stockholders' deficit(4,587,671)                                           Total liabilities and stockholders' deficit$68,522,112
See accompanying  notes to consolidated financial statements.
21
 

POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED    STATEMENTS OF OPERATIONSFor the Years EndedDecember 3120012000Revenues:     Interest income$3,535,414,$4,888,832     Net loss on securities(8,161,673)(10,714,267)     Other305,908236,544                                         Total revenues(4,320,351)(5,588,891)Expenses:     Interest expense3,226,1063,485,649     Compensation and    benefits1,260,9602,541,750     Loss on disposal of    subsidiary1,829,450--     Other general and    administrative expenses3,153,9384,382,950     Amortization720,063179,492     Depreciation30,22619,492                                Total expenses10,220,74310,609,483                     Loss before income taxes                        and extraordinary gain  (14,541,094)(16,198,374)Income tax  benefit (expense) 73,138(609,927)                     Loss before extraordinary gain(14,467,956)(16,808,301)Extraordinary gain, net of income taxes of    $822,154--1,242,003                     Net loss$(14,467,956)$(15,566,298)Earnings per share - Basic and diluted:     Loss before    extraordinary gain$(4.32)$(5.01)     Extraordinary gain--0.37     Net loss$(4.32)$(4.64)Weighted-average    number of shares of common stock     outstanding3,352,6243,352,534Weighted-average number of shares of common    stock     and common stock    equivalents outstanding3,352,6243,352,534
See accompanying      notes to consolidated financial statements.
22
 

POINT WEST CAPITAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)For the years ended December 31, 2001 and 2000
 

Common StockAccumualtedAdditionalComprehensiveAccumulated
Shares
AmountPaid-in-CapitalIncome (Loss)Deficit
Treasury Stock
TotalBalances at January 1, 20004,390,12443,90130,088,9492,098,960(1,814,985)(2,874,032)27,542,793Comprehensive income:  Net loss--------(15,566,298)--(15,566,298)  Other comprehensive loss, net of    income tax:    Reclassification adjustment    for          realized investment gains          included in net loss------(1,168,810)----(1,168,810)    Unrealized investment losses------(2,513,916)--(2,513,916)    Tax effect------1,474,244)--1,474,244)Net unrealized investment losses(2,208,482)(2,208,482)
Comprehensive loss
------------(17,774,780)Issuances of common stock  (options exercised, including tax effect)1,000102,740------2,750Balances at December 31, 20004,391,12443,91130,091,689(109,522)(17,381,283)(2,874,032)9,770,763Comprehensive income:  Net loss--------(14,467,956)--(14,467,956)  Other comprehensive gain, net of    income tax:     Reclassification    adjustment for           realized investment losses            included in net loss------191,605----191,605    Tax effect------(82,083)----(82,083)     Net unrealized    investment gains------109,522----109,522
Comprehensive loss
------------(14,358,434)Balances at December 31, 20014,391,12443,91130,091,689--(31,849,239)(2,874,032)(4,587,671)
See accompanying      notes to consolidated financial statements.
23
 

POINT WEST CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year    Ended December 31,
2001
2000Cash    flows from operating activities:        Net loss$(14,467,956)$(15,566,298)        Adjustments to reconcile net loss to net cash             used in operating activities:                  Depreciation and amortization750,289199,134                   Provision for loan losses1,204,2231,239,964                  Net loss on securities8,161,67310,714,267
  Loss on disposal of subsidiary
1,829,450--                  Interest income received as warrants--(1,101,532)                  Deferred tax (benefit ) expense(82,083)371,069                  Extraordinary gain--(1,242,003)                  Changes in operating assets and liabilities:                        Collections on matured life insurance policies1,631,5161,191,412                        Other assets214,314186,118                        Taxes receivable 196,094(337,194)                        Unearned income(218,427)--                        Accrued interest expense41,079(82,946)                        Accounts payable81,209136,789                        Accrued compensation payable(212,022)(126,509)                                                                     Net cash used in operating activities(870,641)(4,417,729)Cash    flows from investing activities:        Purchase of furniture and equipment(8,513)(55,357)        Decrease in restricted cash(156,000)631,742        Proceeds from maturity of held-to-maturity securities--2,504,610        Purchase of investment and non-marketable securities--(14,288,678)        Proceeds from sale of investment and non-marketable securities444,1312,886,852        Additions to loans receivable--(7,013,553)        Principal payments on loans receivable844,4953,500,923                                                                                        Net cash provided by (used in) investing activities1,124,113(11,833,461)Cash    flows from financing activities:        Principal payments on securitized notes payable(1,614,793)(1,188,388)        Proceeds from SBA debenture--3,500,000        Proceeds from revolving certificates--5,098,000        Principal payments on revolving certificates(309,291)(164,713)        Principal payments on term certificates(738,843)(601,570)        Increase in deferred financing costs--(243,328)        Proceeds from options excercised--2,750                                Net cash (used in) provided by financing activities(2,662,927)6,402,751                                Net decrease in cash and cash equivalents(2,409,455)(9,848,439)                                     Cash    and cash equivalents, beginning of period2,987,68612,836,125Cash    and cash equivalents, end of period$578,231$2,987,686Supplemental    disclosures:Supplemental    disclosure of non-cash activities:        Unrealized gain (loss) on securities available for sale, net of tax$109,522$(2,208,482)        Receipt of warrants$--$1,101,532        Reduction in securitized notes payable in             connection with extraordinary gain$--$2,064,157        Accrued litigation settlement offset against other assets$--$2,205,000         Increase in other assets offset by reduction in loans receivable--850,000Supplemental    disclosure of cash flow information:        Taxes paid$55,820$610,790        Tax refund191,894--        Cash paid for interest$3,175,953$3,378,086
See accompanying      notes to consolidated financial statements.
24
 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

Years Ended December 31, 2001 and 2000

 

 
**1. Summary of Significant Accounting Policies***a**.**General Description*
                   Point West Capital Corporation ("Point West Capital"), including itsconsolidated entities (collectively the "Company"), is a specialty financialservices company with historic operations in four business segments: (i) loans to funeralhomes and cemeteries through Allegiance Capital, LLC ("Allegiance Capital"),Allegiance Funding I, LLC ("Allegiance Funding"), Allegiance Capital Trust I("Allegiance Trust I") and Allegiance Management Corp. ("AllegianceManagement"), (ii) viatical settlements through Dignity Partners Funding Corp. I("DPFC"), (iii) small business loans and investments through Point West VentureManagement, LLC ("Point West Management") and Point West Ventures, LP("Point West Ventures") and (iv) other activities through Point West Capital,SocietyPool.com, LLC, ("SocietyPool") and Point West Securities, LLC("PWS"). References herein to Ventures include Point West Management and PointWest Ventures. References herein to Allegiance include Allegiance Capital, AllegianceFunding, Allegiance Trust I and Allegiance Management. 

                   The principal business activity of the Company through February 1997 was to provideviatical settlements for terminally ill persons. A**viatical settlement is thepayment of cash in return for an ownership interest in, and right to receive the deathbenefit (face value) of, a life insurance policy. The Company has sold substantially allof its life insurance policies other than the policies held by DPFC and no longerpurchases life insurance policies. The Company, through its wholly owned special purposesubsidiary, DPFC, continues to hold policies, which are pledged as security for theSecuritized Notes (as defined in Note 8). Point West Capital continues to service the lifeinsurance policies held by DPFC.

                   During 1997, the Company expanded its financial services business through the operationsof Ventures and Allegiance. During 1998, the Company formed PWS, a broker-dealer licensedby the National Association of Securities Dealers, Inc. ("NASD"). During 2000,the Company formed SocietyPool. See Note 13. The activities of Ventures and Allegiancechanged substantially in 2000. See Note 2.

                   SocietyPool has never engaged in operations and Point West Capital will have no furtherownership in or involvement with SocietyPool. The Company’s consolidated financialstatements as of December 31, 2001 do not include the assets, liabilities or operations ofSocietyPool. See Note 13. The operations of PWS have not been material to the Company. TheCompany has entered into an agreement to sell PWS. The agreement would provide Point WestCapital with net proceeds of approximately $20,000. The Company expects the sale to closein the second quarter of 2002.

                   Point West Capital was incorporated in the State of Delaware as Dignity Partners, Inc. inSeptember 1992 and commenced operations on January 2, 1993. Effective August 1, 1997, itsname was changed to Point West Capital Corporation.
*b. Principles of Consolidation*
                   The consolidated financial statements include the accounts of Point West Capital and itsmajority owned subsidiaries described below. The revenues, expenses, assets andliabilities of the subsidiaries are included in the respective line items in theconsolidated financial statements after the elimination of inter-company accounts andtransactions.

25

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

                   The Company consolidates the assets, liabilities and operations of Point West Management,a wholly owned limited liability company, and Point West Ventures, a related limitedpartnership, both formed in June 1997. Point West Ventures received its small businessinvestment company ("SBIC") license from the Small Business Administration("SBA") effective September 1997. Point West Management is the sole generalpartner of Point West Ventures and owns 99.981% of the partnership interests. Point WestCapital is one of the two limited partners of Point West Ventures and owns 0.017% of thepartnership interests. One unaffiliated limited partner owns the remaining 0.002% of thepartnership interests. Point West Ventures has provided loans, debt and equity capital tosmall companies as defined by the SBA. 

                   The Company consolidates the assets, liabilities and operations of Allegiance Capital,Allegiance Funding, Allegiance Trust I and Allegiance Management. In September 1997, theCompany formed Allegiance Capital, a limited liability company, to provide senior securedloans to owners of funeral homes and cemeteries. Point West Capital has a 65% ownershipinterest in, and 95% voting control of, Allegiance Capital and serves as the managingmember. The former president and the former vice president of marketing retain the balanceof membership interests owned. Point West Capital made the only capital contributions toAllegiance Capital in the aggregate amount of $8.0 million. During 1998, Point WestCapital was allocated 99.5% of the interest on loans through November 20, 1998, which wasthe initial funding date for the Allegiance Financing (as defined herein). Subsequent toNovember 20, 1998, Point West Capital was allocated a preferred return (based on theweighted-average interest rate of all loans outstanding) to the extent that Point WestCapital’s capital investment in Allegiance exceeds $3.0 million. In addition, netprofits of Allegiance Capital for each calendar year are allocated to Point West Capitalin an amount equal to a return of 10% per annum, compounded monthly, on the amount of itscapital contribution, but not in excess of such net profits. Any shortfall is to becarried forward indefinitely to the next calendar year or years in which net profits aresufficient to make such allocation. An additional 5% return for each calendar year will beallocated first to Point West Capital to the extent that in each year sufficient profitsare available with no carry forward provided. To date, net profits have not beensufficient to make such allocations. As a result, a shortfall of approximately $6.6million is being carried over indefinitely. Allegiance Capital owns 100% of AllegianceFunding, which is a special purpose subsidiary formed to acquire and securitize loansoriginated by Allegiance Capital, and Allegiance Management, which is a special purposesubsidiary formed to manage Allegiance Funding. Pursuant to a Trust Agreement dated August1, 1998 (the "Allegiance Trust Agreement"), Allegiance Funding formed a trust,Allegiance Trust I, to consummate a structured financing which provided $33 million ofdebt to support Allegiance’s lending activities (the "AllegianceFinancing"). See Note 7.

                   The Company consolidates the assets, liabilities and operations of its wholly ownedspecial purpose subsidiary, DPFC.

                   The Company consolidates the assets, liabilities and operations of PWS, a wholly ownedlimited liability company, formed in July 1998. The Company has entered into an agreementto sell PWS. The Company will not consolidate the assets, liabilities and operations ofPWS after the sale is completed. 
*c. *Loans Receivable and Allowance for Loan Losses*
                   Loans receivable at December 31, 2001 includes loans made to unaffiliated third partiesthrough Allegiance. Such loans are reported at the principal amount outstanding, net ofunearned income and the allowance for loan losses. Unearned income represents fees paid byborrowers to Allegiance Capital net of direct expenses. The allowance for loan losses isestimated by management based on a review of the loans and factors that inmanagement’s judgment indicate impairment inherent in the portfolio on the balancesheet date. At December 31, 2001 the allowance for loan losses was $259,000. Althoughmanagement uses all available information to recognize losses on loans at the time theallowance is 

26

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

 

established, future additions to the allowance may be necessary. Loansare generally placed on non-accrual status when payment in full is in doubt or the loan is90 days or more past due as to principal or interest. Loans are returned to accrual statusonce the above noted factors are no longer present and the loan is current. See Note 4.
*d. *Purchased Life Insurance Policies*
                   From January 1, 2000 through February 29, 2000, the Company recognized income (earneddiscounts) with respect to its viatical settlement business (i.e. purchased life insurancepolicies) upon receipt of proceeds on policies (either pursuant to sale of the policy orthe death of the insured). Income recognized was equal to the difference between suchproceeds and the carrying value of such policies after giving effect to any reserve forloss on the sale of such policies. The carrying value for each policy consists of thepurchase price, other capitalized costs and amounts accreted under the level yield method.Matured policies receivable represents policies for which the Company has receivednotification that the insured has died and for which the Company is awaiting collection ofthe face value. See Note 8.

                   Purchased life insurance policies consist only of those policies held by DPFC. Thepolicies held by DPFC are pledged as security for the Securitized Notes. As a result ofthe imminent default of DPFC under the terms of the Securitized Notes, Point West Capitaland the holders of the Securitized Notes (the "Noteholders") entered into anagreement in March 2000 (the "DPFC Agreement") that amended certain of the termsof the Securitized Notes. Pursuant to the DPFC Agreement, the Noteholders are required toprovide funds through June 2002 to pay servicing fees, premiums and certain other costs ofDPFC in the event policy collections are insufficient. Under the DPFC Agreement, PointWest Capital continues to act as servicer for a fee of $18,000 per month for the periodMarch 2000 through June 2002. The DPFC Agreement also provides the Noteholders with anoption to purchase from Point West Capital the DPFC outstanding stock for a nominal amounton June 30, 2002. If the Noteholders do not exercise such option, Point West Capital mayliquidate DPFC. See Note 8.
*e. *Furniture and Equipment*
                   Furniture and equipment are stated at cost net of accumulated depreciation. Depreciationis provided on a straight-line basis over the estimated useful lives of the assets, whichis generally five years.
*f. Income Taxes

                   The Company accounts for income taxes using the asset and liability method. Under thismethod, deferred tax assets and liabilities are recognized for the estimated future taxconsequences attributable to differences between the financial statement carrying amountsof existing assets and liabilities and their respective tax basis (temporary differences).Deferred tax assets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date of the taxchange.

                   Deferred tax assets are recognized for deductible temporary differences and operating lossand tax credit carryforwards, and a valuation allowance is established, if necessary, toreduce the deferred tax asset if it is more likely than not that the related tax benefitswill not be realized in future years. See Note 10.

27

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

 
*g. Cash and Cash Equivalents

                   The Company considers all highly liquid investments purchased within three months of theirmaturity date to be cash and cash equivalents.
*h. *Restricted Cash*
                   Restricted cash as of December 31, 2001 is comprised of funds held by Allegiance CapitalTrust and DPFC. 
*i. Earnings Per Share

                   Earnings per share has been computed according to Statement of Financial AccountingStandards No. 128, *Earnings per Share*("SFAS 128")*,*which requiresdisclosure of basic and diluted earnings per share. Under SFAS 128, basic loss per commonshare is calculated by dividing net loss by the weighted-average number of common sharesoutstanding during the reporting period and excludes any dilutive effects of options andwarrants. Diluted loss per common share reflects the potential dilutive effect, determinedby the treasury stock method, of additional common shares that are issuable upon exerciseof outstanding stock options and warrants. See Note 11.
*j. *Use of Estimates*
                   Management of the Company has made a number of estimates and assumptions relating to thereporting of assets and liabilities and the disclosure of contingent assets andliabilities to prepare these financial statements in conformity with accounting principlesgenerally accepted in the United States. Actual results could differ from those estimates.
*k. Stock-Based Compensation*
                   The Company accounts for grants of stock options to employees and directors according toAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*and related Interpretations ("APB No. 25"). Pro forma net loss information, asrequired by Statement of Financial Accounting Standards No. 123, *Accounting forStock-Based Compensation* ("SFAS 123"), is included in Note 15. Optionsgranted to consultants are accounted for in accordance with Emerging Issues Task ForceConsensus No. 96-18, *Accounting for Equity Investments That Are Issued to Other ThanEmployees for Acquiring, or In Conjunction with Selling, Goods or Service* and arevalued using the Black-Scholes method prescribed by SFAS 123.
*l. Recent Accounting Developments

                   In July 2001, the Financial Accounting Standards Board ("FASB") issued Statementof Financial Accounting Standards No. 141, *Business Combinations*("SFAS141"), which supersedes Accounting Principals Board Opinion No. 16, *BusinessCombinations.*SFAS 141 eliminates the pooling-of-interests method of accounting forbusiness combinations except for qualifying business combinations that were initiatedprior to July 1, 2001. SFAS 141 also changes the criteria for recognizing intangibleassets apart from goodwill. The FASB also issued Statement of Financial AccountingStandards No. 142, *Goodwill and Other Intangible Assets*("SFAS 142"),which supersedes Accounting Principals Board Opinion No. 17, *Intangible Assets.*Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortizedbut are reviewed annually, or more frequently if impairment indicators arise, forimpairment. Separable intangible assets that have finite lives will continue to beamortized over their useful lives, for which SFAS 142 does not impose a limit. Withrespect to goodwill and intangible assets acquired prior 

28

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

to July 1, 2001, companies are required to adopt SFAS 141 in theirfiscal year beginning after January 1, 2002. Management does not believe thatimplementation of SFAS 141 or SFAS 142 will have a material impact on the Company’sconsolidated financial statements.

                   In August 2001, the FASB issued *Accounting for the Impairment or Disposal of Long-LivedAssets*("SFAS 144"), which addresses financial accounting and reporting forthe impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and theaccounting and reporting provisions of Accounting Principals Board Opinion No. 30, *Reportingthe Results of Operations Reporting the Effects of Disposal of a Segment of a Business,and Extraordinary, Unusual and Infrequently Occurring Events and Transactions*, for thedisposal of a segment of a business (as previously defined in that Opinion). SFAS 144 alsoamends Accounting Research Bulletin No. 51, *Consolidated Financial Statements*, toeliminate the exception to consolidation for a subsidiary for which control is likely tobe temporary. SFAS 144 is required to be applied starting with fiscal years beginningafter December 15, 2001, with certain early adoption permitted. Management does notbelieve that implementation of SFAS 144 will have a material impact on the Company’sconsolidated financial statements.
**2. Going Concern 

                   The accompanying consolidated financial statements have been prepared on the going concernbasis, which assumes the realization of assets and liquidity of liabilities andcommitments in the normal course of business. For the year ended December 31, 2001, theCompany incurred a loss of $14.5 million, which resulted in a stockholders’ deficitof $4.6 million and increased accumulated deficit to $31.8 million. The Company has alsoexperienced continuing negative cash flows from operations. Cash flows used in operatingactivities for the years ended December 31, 2001 and 2000 were $871,000 and $4.4 million,respectively.

                   As a result of Point West Ventures’ failure to comply with applicable SBA capitalratio requirements, in August 2001, the SBA accelerated Point West Ventures’indebtedness to the SBA, effectively terminating Point West Ventures’ ability to makefurther investments or Point West Venture’s ability to engage in further businessactivities. In February 2002, the SBA was appointed receiver of Point West Ventures andtook possession and control of all of Point West Ventures’ assets for the purpose ofliquidating Point West Ventures’ assets, satisfying claims of Point WestVentures’ creditors and pursuing causes of action available to Point West Ventures.In addition, upon conclusion of the receivership, Point West Ventures’ SBIC licensewill be terminated. See Note 9. The Company expects the SBA to liquidate in an orderlymanner the assets of Point West Ventures. Point West Ventures’ assets are carried atestimated fair value as of December 31, 2001. The Company does not anticipate any futurechanges to the carrying values as of December 31, 2001 unless the SBA liquidates someassets or the Company learns that the assets should be written down further. If assets areliquidated or the Company receives information from the SBA indicating further write-downsare necessary, the Company will record any subsequent decrease in liquidation value in theconsolidated balance sheet and statement of operations in the appropriate period. Futurerevenues and expenses associated with Point West Ventures (including gains and losses inrespect of liquidated assets, accrued interest and fees) will continue to be recognized inthe consolidated statement of operations until the receivership is terminated and PointWest Ventures is dissolved. 

                   The debentures will continue to be reflected in the Company’s consolidated balancesheet until Point West Ventures is legally released from its obligations under thedebentures. The Company cannot predict whether or at what time Point West Ventures will belegally released from its obligations under the debentures. Dispositions of Point WestVentures’ portfolio securities by a receiver may occur at times or on terms thatwould not maximize the value of those assets. It is likely that proceeds from any assetdispositions will be insufficient to repay all amounts owed to the SBA by Point WestVentures under the 

29

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

debentures. If and when the debt is finally discharged, the Companywould then recognize a gain on debt forgiveness in an amount equal to any unpaid debt thatis discharged, net of any tax effect.

                   Additionally, during October 2000, Allegiance’s ability to access further debt underthe Allegiance Financing was suspended as a result of two non-performing loans. OnDecember 15, 2000, the Allegiance Financing expired. Allegiance has no source of fundingavailable to make additional loans. Consequently, Allegiance suspended its loanorigination activities, and began reducing costs through employee layoffs during December2000. In addition, Allegiance was unable to convert to term certificates or otherwiserepay $9.1 million ($8.8 million as of December 31, 2001) of revolving certificates issuedunder the Allegiance Financing. As a result, the interest payable under the revolvingcertificates increased by 1% per annum. In November 2001, Allegiance and the Investors (asdefined in Note 7) executed an amendment and waiver agreement providing Allegiance untilFebruary 15, 2002 to resolve the non-performing loans and retire the revolving debt.Allegiance was unable to do so. As a result, the Investors could declare an event ofdefault under the Allegiance Financing. If the Investors were to declare an event ofdefault, all amounts owed under the Allegiance Financing could be accelerated. 

                   In addition, since July 2000, the Company and its executive officers have been involved inlitigation and arbitration proceedings with the two other Voting Interest Members ofSocietyPool. In March 2002, SocietyPool, Point West Capital, each of its executiveofficers and the other two Voting Interest Members entered into a settlement agreement.Under the terms of the settlement agreement, Point West Capital resigned as Manager ofSocietyPool and relinquished its Membership interest and received $225,000. All partiesreleased each other from all present and future claims regarding SocietyPool. Each partydenied any wrongdoing or liability. Point West Capital will have no future involvementwith SocietyPool. As a result, the Company reported a $1.8 million loss on its remainingownership interest in SocietyPool.

                   The consolidated financial statements have been prepared on a going concern basis. TheCompany has experienced operating losses since 2000 and had a net capital deficit atDecember 31, 2001. The Company expects to incur losses for at least the next year and hasinsufficient cash to continue its operations through December 31, 2002 at its projectedlevel of operations. The Company’s current business plan for 2002 reflects continuedinitiatives to increase revenue, reduce overhead, and realize the benefit of recentreductions in employee headcount and occupancy costs. The Company’s ability tocontinue as a going concern is dependent upon, among other things, the Company’sability to terminate its present lease on satisfactory terms and relocate to lessexpensive office space, raise additional capital through equity or debt financings orsuccessfully implement a business plan that restores the Company to profitability andpositive cash flows. There is no assurance that additional funding will be available tothe Company on acceptable terms, if at all or that the Company will succeed inimplementing a business plan that will allow it to continue as a going concern. Theaccompanying financial statements have been prepared assuming the Company will continue asa going concern and do not include any adjustments that might result from the outcome ofthis uncertainty.
**3. Investment Securities**
                   The Company accounts for marketable debt and equity securities in accordance withStatement of Financial Accounting Standards No. 115*, Accounting for Certain Investmentsin Debt and Equity Securities*. All of the Company’s marketable securities areheld by Point West Ventures. Securities classified as available-for-sale are reported inthe consolidated balance sheets at fair value with any cumulative unrealized gains andlosses, net of any tax effect, included in comprehensive income and reported as a separatecomponent of stockholders’ equity. Management estimates fair value, consideringfactors such as sales restrictions, the bid and offer prices of securities and volume. Anyrealized gains and losses, interest and dividends and unrealized losses on securitiesjudged to be other-than-temporary are 

30

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

 

reported in the consolidated statements of operations in the period inwhich the security is considered impaired. During 2001, Ventures determined that anaggregate $136,000 of marketable equity securities of 3 companies was impaired andtherefore wrote-down the $136,000 carrying value of such securities, which was reflectedin the consolidated statements of operations for the year ended December 31, 2001. During2000, Ventures determined that an aggregate of $2.5 million of marketable equitysecurities of 5 companies was impaired and therefore wrote-down $2.5 million carryingvalues of such securities, which was reflected in the consolidated statements ofoperations for the year ended December 31, 2000. These write-downs were a result ofdeterioration of growth prospects for some companies and the uncertainty that suchcompanies would be able to raise additional capital in light of the market downturnrelated to Internet and other technology stocks. The carrying value and estimated fairvalue of investment securities reflected in the consolidated balance sheet as of December31, 2001 was $14,000. 
**4.               Loans Receivable**
                   Loans receivable at December 31, 2001 consisted of 24 loans outstanding with an aggregateprincipal amount of $32.4 million, which bore a weighted-average fixed interest rate perannum of 9.5%. Principal and interest payments are due monthly on such loans, and suchloans mature, subject to permitted prepayments, approximately fifteen years from theinitial loan date. At December 31, 2001, two loans in the aggregate amount of $1.4 millionwere on non-accrual status (see Note 1c). At December 31, 2001, the allowance for losseson loans was $259,000. 

                   The following table represents the activity in the allowance for loan losses for the yearsended December 31, 2001 and 2000.

 

2001
2000
Beginning balance
$ 190,000
$ 155,000
Provision for loan losses
1,204,223
1,239,964
Charge-offs
(1,135,699)
(1,204,964)
Ending Balance
$ 258,524
$ 190,000**5. Non-Marketable Securities**
                   As of December 31, 2001, non-marketable securities include investments in non-marketabledebt and equity securities held by Ventures. The Company accounts for such non-marketablesecurities using the cost method.

                   The Company recognized a net loss on non-marketable securities of $8.0 million in 2001primarily in connection with thewrite-down or write-off of impaired investments. During 2001, Ventures determined that anaggregate of $7.0 million of non-marketable equity securities of 11 companies was impairedand wrote-down or wrote-off $7.0 million carrying values of such securities. Also during2001, Point West Capital determined that an investment in the non-marketable securities ofone company was also impaired and wrote-off the carrying value of $939,000. Thisinvestment was made by Point West Capital and not by Ventures, and was the only suchinvestment in Point West Capital’s portfolio. During 2000, Ventures determined thatan aggregate of $9.8 million of non-marketable debt and equity securities of 11 companieswas impaired and wrote-down or wrote-off $9.8 million carrying values of such securities.The write-downs or write-offs were a result of deterioration of growth prospects for somecompanies and the uncertainty that such companies would be able to raise additionalcapital in light of the market downturn related to Internet and other technology stocks. 
 

31

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements
**6. Assets Held for Sale**
                   Assets held for sale are carried at the lower of cost or estimated fair value less cost tosell. Included in assets held for sale is $2.9 million representing the estimated fairvalue of funeral home assets acquired from two Allegiance borrowers in accordance with apurchase agreement in which Allegiance purchased, for a nominal amount, the assets of thefuneral homes subject to the mortgages. Also included in assets held for sale is $642,000representing the estimated fair value of an additional funeral home that Allegianceacquired via foreclosure and $450,000 representing the estimated fair value of anadditional funeral home that Allegiance sold on March 28, 2002. Management has estimatedfair value based on bids for and appraisals of the funeral home businesses that securedthe loans and assessment of the financial condition and cash flows of the funeralhomes’ operations. Allegiance intends to sell these funeral homes and is activelyseeking buyers for them. 
**7. Revolving and Term Certificates**
                   Through December 2000, Allegiance financed its loans receivable under a structuredfinancing arrangement established in August 1998. Under the Allegiance Financing, variousclasses of revolving and term certificates of Allegiance Trust I have been issued. AtDecember 31, 2001, revolving certificates held by third parties were outstanding in theaggregate principal amount of $8.8 million. At December 31, 2001, such certificates boreinterest at fixed and variable rates based on the one-year U.S. Treasury yield andone-month LIBOR plus a weighted-average spread of 4.3%. The weighted-average annual interest rate of the revolving certificates heldby third parties at December 31, 2001 was 8.0%. Allegiance funded and retained an unratedrevolving certificate in the principal amount of $2.2 million. The unrated certificaterepresents the right to receive all excess cash flow from Allegiance Trust I related tothe revolving certificates. 
                   At December 31, 2001, the term certificates held by third parties were outstanding in theaggregate principal amount of $23.2 million. The weighted-average annual fixed interest rate of the termcertificates held by third parties was 8.1%. Allegiance funded and retained an unrated term certificate that represents theright to receive a 17.5% coupon subject to other priority payments, including payments onthe senior certificates. At December 31, 2001, the outstanding principal balance of theunrated term certificate was $2.6 million. Allegiance retained an additional unrated termcertificate that represents the right to receive 90% of the excess cash flow fromAllegiance Trust I related to the term certificates. This term certificate does not have aprincipal balance. 
                   As a result of loans made by Allegiance which became non-performing, Allegiance was unableto access further debt under the Allegiance Financing beginning on October 30, 2000. TheAllegiance Financing expired in December 2000. Allegiance has no source of fundingavailable to make additional loans. Consequently, Allegiance began reducing costs throughemployee layoffs during December 2000. In addition, Allegiance was unable to convert toterm certificates or otherwise repay $9.1 million ($8.8 million as of December 31, 2001)of revolving certificates issued under the Allegiance Financing. As a result, the interestpayable under the revolving certificates increased by 1% per annum, effective February 15,2001. 

                   In November 2001, Allegiance and the Investors executed an amendment and waiver agreementproviding Allegiance until February 15, 2002 to resolve the non-performing loans andretire the revolving debt, however, Allegiance was not able to do so by February 15, 2002.Therefore, the Investors could declare an event of default under the Allegiance Financingat any time. If the Investors were to declare an event of default, Point West Capital andAllegiance Capital could be terminated as servicers and the nvestors could liquidate thecollateral and apply the proceeds to retire amounts outstanding under the AllegianceFinancing. Allegiance is seeking waivers from the Investors, which would provideadditional

32

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

time to resolve the non-performing loans, retire the revolving debt andresolve other defaults. There can be no assurance that the Investors will waive anydefaults. 

                   The Allegiance Financing is accounted for as a debt financing and not as a sale of assets,which is in accordance with the accounting literature in effect for bankruptcy remoteentities with non-recourse debt.

                   Repayment of the debt outstanding under the Allegiance Financing is an obligation solelyof Allegiance Trust I. Neither Point West Capital, Allegiance Capital, Allegiance Fundingnor Allegiance Management guaranteed repayment of the revolving or term certificates andnone is required to fund any principal or interest deficiencies which may arisethereunder.

                   Also as a result of the non-performing loans, monthly cash flow payments to Point WestCapital (for servicing fees) and to Allegiance (for servicing fees and interest owed ondebt certificates held by Allegiance) ceased in November 2000. As a result of, among otherthings, certain amendment and waiver agreements, monthly cash flow payments to Point WestCapital and Allegiance resumed in May 2001. As a result of defaults under the AllegianceFinancing, the Investors could stop these payments. 

                   In connection with the Allegiance Financing and the extensions thereunder, AllegianceCapital paid an aggregate of $375,000 in commitment fees when funds were initiallyborrowed. Of such commitment fees, $125,000 has been amortized over the expected life ofthe initial revolving certificates. The remaining $250,000 was to be amortized over theexpected life of the term certificates (15 years). However, because Allegiance was notable to resolve the defaults under the Allegiance Financing by February 15, 2002, theunamortized portion of these commitment fees was written off during 2001. 
**8.     Securitized Notes Payable**
                   In 1995, DPFC issued its Senior Viatical Settlement Notes, Series 1995-A with a statedmaturity of March 10, 2005 (the "Securitized Notes"). Principal and interestpayments on and other costs of the Securitized Notes are payable solely from collectionson pledged policies, deposited funds and funds provided by the Noteholders. TheSecuritized Notes bear a fixed interest rate of 9.17% per annum. Point West Capital is theservicer of the policies pledged under the Indenture pursuant to which the SecuritizedNotes were issued and incurs servicing expenses and receives servicing income. See Note 1dfor further information regarding the servicing of DPFC.

                   The Securitized Notes are accounted for as a debt financing and not as a sale of assets,which is in accordance with the accounting literature in effect for bankruptcy remoteentities with non-recourse debt.

                   The DPFC Agreement discussed in Note 1d was negotiated due to the imminent default of DPFCunder the terms of the Securitized Notes and, accordingly, has been accounted for as atroubled debt restructuring. As such, during the first quarter of 2000, an extraordinarygain of $1.2 million, net of taxes of $822,000, was recorded and the stated amount of theSecuritized Notes of $38.5 million was reduced to $36.4 million, reflecting the maximumfuture cash payments the Noteholders could receive under the DPFC Agreement. The $36.4million equaled the face value of the life insurance policies and restricted cash held byDPFC as of March 31, 2000.

                   The Securitized Notes represent the obligations solely of DPFC. The Company’sconsolidated financial statements include the assets, liabilities and operations of DPFC;however, the assets of DPFC are not available to pay creditors of Point West Capital. Theassets of DPFC are the beneficial ownership interests in the life insurance policies andfunds that secure the Securitized Notes.

33

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

 
**9.     Debenture Payable**
                   Point West Ventures has issued two debentures payable to the SBA totaling $6.5 million inprincipal amount. Point West Ventures paid a fee of $227,500 (3.5% of the totalborrowings) to the SBA to borrow such money. Because the SBA notified Point West Venturesthat it was in default under the debentures, the unamortized portion of this fee waswritten-off during the second quarter of 2001. Proceeds from the debentures were used tomake debt and equity investments in businesses. 

                   On June 14, 2001, the SBA notified Point West Ventures that it was in default under thedebentures as a result of its failure to comply with required capital ratios and providedPoint West Ventures until June 29, 2001 to remedy the default. Point West Ventures wasunable to remedy the default. Therefore, on August 1, 2001, the SBA accelerated theindebtedness under the debentures and demanded payment of $6.7 million (includingoutstanding principal, accrued interest and fees) by August 15, 2001. Point West Venturesdid not have sufficient cash to repay the SBA debentures on August 15, 2001. 

                   In February 2002, the SBA was appointed permanent receiver of Point West Ventures. The SBAhas taken possession and control of all of Point West Ventures’ assets for thepurpose of liquidating Point West Ventures’ assets, satisfying claims of Point WestVentures’ creditors and pursuing causes of action available to Point West Ventures.Upon conclusion of the receivership, Point West Ventures’ SBIC license will beterminated.

                   The Company expects the SBA to liquidate in an orderly manner the assets of Point WestVentures. Point West Ventures’ assets are carried at estimated fair value as ofDecember 31, 2001. The Company does not anticipate any future changes to the carryingvalues at December 31, 2001 unless the SBA liquidates some assets or the Company learnsthat the assets should be written down further. If assets are liquidated or the Companyreceives information from the SBA indicating further write-downs are necessary, theCompany will record any subsequent decrease in liquidation value in the consolidatedbalance sheet and statement of operations in the appropriate period. Future revenues andexpenses associated with Point West Ventures (including gains and losses in respect ofliquidated assets, accrued interest and fees) will continue to be recognized in theconsolidated statement of operations until the receivership is terminated and Point WestVentures is dissolved. 

                   The debentures will continue to be reflected in the Company’s consolidated balancesheet until Point West Ventures is legally released from its obligations under thedebentures. The Company cannot predict whether or at what time Point West Ventures will belegally released from its obligations under the debentures. Dispositions of Point WestVentures’ portfolio securities by a receiver may occur at times or on terms thatwould not maximize the value of those assets. If and when the debt is finally discharged,the Company would then recognize a gain on debt forgiveness in an amount equal to anyunpaid debt that is discharged, net of any tax effect.
**34** 

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

**10. Income Taxes**

                   Point West Capital and its subsidiaries file a consolidated tax return. The components ofthe provision for income tax benefit (expense) included in the statements of operationsfor the years ended December 31, before extraordinary gain, are as follows:

 
  2001   2000Federal:    Current          benefit............................$--
$408,386    Deferred benefit          (expense)..........65,146(985,583)State:    Current (expense)          benefit............(8,946)92,828    Deferred benefit          (expense)..........16,938(125,558)Income tax benefit (expense) (1)....$73,138
$(609,927) 
(1)     Excludes $822,154 of tax        expense recognized in 2000 on extraordinary gain of $2,064,157. See Note 8.

 

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.
20012000Deferred tax assets:    Revenue and expenses recognized on the          cash                   basis for tax purposes          ........................................$--$53,393    Depreciation, amortization and          other........................196,352287,577    Provision for assets held for          sale.............................--536,737    Allowance for loss on non-marketable          securities........4,341,3104,696,533    Allowance for loan          losses..................................................481,68975,685    Unrealized loss on securities available          for sale--82,083    Net operating loss carryforwards          .............................8,866,7783,666,15613,886,1299,398,164    Valuation allowance          .................................................(12,045,618)(6,702,387)    Deferred tax assets net of valuation          allowance..............1,840,5112,695,777Deferred tax liabilities:    Extraordinary gain taxable in future          period (1)...............$ 1,840,511$ 2,064,157    Accretion recognized on a cash basis for          tax purposes ...--631,6201,840,5112,695,777Net deferred tax liability$--$--
(1)    See      Note 8.

 

 

35

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

 

                   A reconciliation of the difference between the amount of income tax (expense) benefitrecorded and the amount calculated using the federal rate of 34%, before extraordinarygain, is as follows:
20012000Tax benefit at statutory rate (34%)              (1)................................................$
4,943,972$5,507,447 State tax benefit, net of federal benefits872,466828,316      (1)................................................Change in valuation allowance (2)..........(5,343,231)(6,620,305)Other.........................................(400,069)(325,385)
Income tax benefit (expense) ......
$73,138$(609,927)(1)Excludes $822,154 of tax expense recognized in 2000 on        extraordinary gain of $2,064,157. See Note 8.(2) $82,083 of the change in deferred tax asset valuation        allowance for 2000 has been reflected in the statement of changes in stockholders’        equity in connection with the unrealized loss on securities available-for-sale.
                   As of December 31, 2001, the Company has estimated federal tax net operating losscarryforwards of $24 million that expire in the years 2012 through 2021 and estimatedCalifornia tax net operating loss carryforwards of $12 million that expire in the years2002 through 2006.
**11. Earnings Per Share**
                   The weighted-average number of common stock shares and additional common stock equivalentshares used in computing loss per share for the years ended December 31, 2001 and 2000 areset forth below. The following is a reconciliation of the numerator and denominator ofbasic and diluted net loss per share:

2001
2000Numerator:    Loss before extraordinary gain    .........$(14,467,956)$(16,808,301)    Extraordinary gain, net of income    tax.....--1,242,003    Net    loss..........................$(14,467,956)$(15,566,298)Denominator:    Weighted-average shares    ..............3,352,6243,352,534Loss per share:    Basic and diluted        Loss before    extraordinary gain ...$(4.32) $(5.01)        Extraordinary    gain ..... .............--0.37                Net loss    .............................(4.32)(4.64)
                   As a result of the net loss for all periods presented, outstanding options and warrantswere not included in the computation of diluted loss per share because their inclusionwould be anti-dilutive.
**12. Commitments**
                   The Company has a lease obligation for its California office space, which expires on May31, 2004. The monthly rent through May 31, 2002 is $21,499. The monthly rent from June 1,2002 through May 31, 2004 is $22,011. The Echelon Group of Companies, LLC, which is ownedby Point West Capital Corporation’s executive officers, had sub-leased approximately20% of the Company’s office space through December 31, 2000. The Company is currentlysubleasing approximately 60% of its 

36

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

current office space to an unrelated party. The sublease paymentssubstantially cover the Company’s lease obligation. The sublease expires September21, 2002. Future minimum rental income under the non-cancelable sublease is $188,000. Thesublessee has an option to extend the sublease to May 31, 2004.

                   Rent expense amounted to $62,000 and $176,000, net of sublease income of $125,000 and $0,for the years ended December 31, 2001 and 2000, respectively. Future minimum rentalpayments at December 31, 2001, under non-cancelable operating leases with an initial termof one year or more, are as follows:

Year ending December 31,
2002..........$261,575
2003..........264,1382004..........110,057Total..........$635,770**13. Litigation 

General**
                   From time to time, the Company is involved in routine legal proceedings incidental to itsbusiness, including litigation in connection with loans and investments made by Point WestVentures and Allegiance and the collection of amounts owed under life insurance policiesby insurance company obligors. Except as disclosed below, the Company does not expect thatthese proceedings, individually or in the aggregate, will have a material adverse effecton the Company’s financial position, liquidity or results of operations.
**SocietyPool**
                   Since July 2000, the Company and its executive officers have been involved in litigationand arbitration proceedings with the two other Voting Interest Members of SocietyPool. Forfurther information regarding the history of these proceedings, see the Company’sForm 10-QSB for the quarter ended September 30, 2001. In March 2002, SocietyPool, PointWest Capital, each of its executive officers and the other two Voting Interest Membersentered into a settlement agreement. Under the terms of the settlement agreement, PointWest Capital resigned as Manager of SocietyPool and relinquished its Membership interest,and received $225,000. All parties released each other from all present and future claimsregarding SocietyPool. Each party denied any wrongdoing or liability. Point West Capitalwill have no future involvement with SocietyPool. 
**Point West Ventures**
                   In February 2000, Point West Ventures brought an action in Santa Clara County againstUniversal Access, Inc., certain of its directors and other parties seeking to collect fordamages for breach of contract, breach of fiduciary duty including breach of contract,misappropriation of trade secret, unjust enrichment, tortious interference, conspiracy andunfair competition. The action was related to an aborted purchase by Universal Access,Inc. of a company in which Point West Ventures had invested. On July 17, 2000, the courtruled that all claims were subject to arbitration. In December 2000, Point West Venturesfiled a demand for arbitration. 

                   In June 2001, Point West Ventures filed an action for fraud against Home Director, Inc.and Spencer Trask Ventures, Inc. seeking rescission of an agreement pursuant to whichPoint West Ventures 

37

 

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

purchased $500,000 of stock in Home Director, Inc. through SpencerTrask Ventures, Inc. In July 2001, the defendants filed a motion to dismiss the action. InJanuary 2002, the motion to dismiss was denied.

                   The order placing Point West Ventures into receivership stays all current litigation ofPoint West Ventures, which includes these two cases. Because Point West Ventures is inreceivership, the continued prosecution of these claims will be in the control of thereceiver, the SBA. The SBA has indicated a desire to continue prosecuting these claims,however, until a final decision is made and the stay lifted, no further action willresult. 
**14. Fair Value of Financial Instruments**
                   The following methods and assumptions were used to estimate the fair value of each classof financial instruments:

                   Cash and cash equivalents, restricted cash and matured policies receivable are stated atapproximate fair value because of the short maturity of these instruments. All balanceshave maturities within 90 days of the balance sheet date.

                   Investment securities are stated at fair value based on quoted market prices withadjustments for liquidity constraints.

                   Loans receivable are stated at cost, which approximates fair value, as underlying ratesapproximate current market rates.

                   The portfolio of purchased life insurance policies is stated at cost plus accretionthrough June 1996. Fair value is not readily determinable.

                   The revolving and term certificates, securitized notes payable and debenture payable areall stated at cost which approximates fair value, as underlying rates described belowapproximate current market rates. The revolving certificates outstanding at December 31,2001 bear interest at fixed and variable rates based on the one-year U.S. Treasury yieldand one-month LIBOR plus a weighted-average spread of 4.3% per annum. The termcertificates bear a fixed weighted-average interest rate of 8.1% per annum. Thesecuritized notes payable bear a fixed interest rate of 9.2%. The debentures bear a fixedweighted-average interest rate of 7.8% per annum.
**15. Stock-Based Compensation**
                   The Company has two stock option plans. Under the Amended and Restated 1995 Stock OptionPlan ("1995 Plan"), Point West Capital may grant options to employees,consultants and directors of Point West Capital and its subsidiaries for up to 1,070,000shares of common stock. Under the Stock Option Plan For Non-Employee Directors("Director Plan"), options for up to 150,000 shares of common stock are grantedautomatically to non-employee directors of Point West Capital. The exercise price of eachgranted 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 1995 Plan, eachgranted option generally vests 20% per year over five years. Some incentive stock optionsgranted to executive officers under the 1995 Plan have different terms than generallydescribed above. These options have an exercise price equal to 110% of market value on thedate of grant, vest 25% per year over 4 years and expire 5 years after the date of grant.Under the Director Plan, initially, each new non-employee director, when joining theboard, is granted 10,000 options that vest 34%, 33% and 33% at the next three annualmeetings following the grant date. At each annual meeting, each non-employee director isgranted 5,000 options that vest at the next annual meeting. There are currently nonon-employee directors.

38

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

                   A summary of the Company’s stock option activity during 2001 and 2000 follows:

2001
2002
Weighted    Average    Exercise    Price Per
Weighted    Average    Exercise    Price Per
Options
Option
Options
OptionOutstanding at      Beginning of year
893,700$
3.97578,700$5.31Granted356,503$0.18527,000$4.05Exercised--$--(1,000)$2.75Forfeited(313,500)$4.31(196,000)$7.55Canceled--$--(15,000)$10.58Outstanding at end      of  year936,703$2.41893,700$3.97Options exercisable      at year-end280,000$3.60219,200$5.48
 

The weighted-average fair value of options granted during 2001 and 2000were $0.14 and $2.62, respectively.

The following table summarizes information about stock optionsoutstanding at December 31, 2001:

Options Outstanding Options Exercisable

Options Outstanding
Options Excercisable
Range of    Exercisable    PricesNumber    Outstanding    as 12/31/01Weighted-    Average    Remaining    Contractual LifeWeighted-    Average    Exercise PriceNumber     Exercisable    a 12/31/01Weighted-    Average    Exercise Price$0.10 - $1.38331,3035.79$ 0.2434,800$ 1.38$2.13 - $2.75346,0004.77$ 2.24106,100$ 2.28$3.44 - $3.5654,9005.93$ 3.4443,300$ 3.44$5.44 - $7.16204,5004.16$ 5.9695,800$ 5.95$0.10 - $7.16936,7035.07$ 2.41
280,000$3.60
 

                   The Company has elected to follow APB No. 25 in accounting for its employee and directorstock options because, as discussed below, the alternative fair value accounting providedfor under SFAS 123 requires use of option valuation models that were not developed for usein valuing employee stock options. Under APB No. 25, the Company does not recognizecompensation expense with respect to awards if the exercise price equals or exceeds thefair value of the underlying security on the date of grant and other terms are fixed.

                   Pro forma income per share information is required by SFAS 123, which also requires thatthe information be determined as if the Company had accounted for its employee stockoptions under the fair value method. This method was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fully transferable.In addition, option valuation method models require the input of highly selectiveassumptions, including the expected life of the options. Because the Company’sstock-based awards have characteristics significantly different from those traded optionsand because changes in the subjective input assumptions can materially affect the fairvalue estimate, in management’s 

39

 

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

opinion, the existing models do not necessarily provide a reliablesingle measure of the fair value of its stock-based awards.

                   Had compensation cost for the Company’s two stock-based compensation plans beendetermined consistent with SFAS 123, the Company’s pro forma net loss and loss pershare would have been as follows:

 
20012000Net lossAs reported
$  (14,467,956)
$  (15,566,298)Pro forma
$  (14,802,968)
$  (16,013,628)As reported$ (4.32)$ (4.64)Basic and diluted loss per sharePro forma$ (4.42)$ (4.78)
 

                   For purposes of the Company’s pro forma disclosure, the fair value of each option isestimated on the date of grant using the Black-Scholes option-pricing model. The followingweighted-average assumptions were used for grants:
20012000Expected volatility
111%
75%1995 Plan:Risk-free interest rate5.3%5.6%Expected life4 years6 yearsDirector Plan:Risk-free interest rate--5.6%Expected life--2 years
 
**16. Profit Sharing Plan**
                   Point West Capital 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 thePlan. The Plan provides for discretionary annual contributions by Point West Capital forthe 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. Thecontribution is allocated among participants based on their compensation under anallocation formula integrated with Social Security. Participants vest 20% in their Planaccounts after two years of service and an additional 20% after each of the next fouryears of service. Upon termination following permanent disability or on retirement at age65, all amounts credited to a participant’s account are distributed, in a lump sum orin installments, as directed by the participant. Upon death, all amounts credited to aparticipant’s account become fully vested and are distributed to theparticipant’s surviving spouse or designated beneficiary. Each year, profit sharingcontributions, if any, are determined by the Compensation Committee of the Board. The Plancontribution expenses which are included in compensation and benefits during 2001 and 2000were $0 and $161,000, respectively.

 

40

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements
**17. Segment Reporting**
                   Statement of Financial Accounting Standards No. 131, *Disclosures about Segments of anEnterprise and Related Information*, establishes standards for reporting informationabout operating segments in annual financial statements and requires selected informationabout operating segments in interim financial reports. Operating segments are defined ascomponents of an enterprise about which separate financial information is available thatis evaluated regularly by the chief operating decision maker, or decision making group, indeciding how to allocate resources and in assessing performance. Point West Capital’schief operating decision-making group is comprised of its Board of Directors.

                   The Company’s reportable operating segments include Ventures, Allegiance and ViaticalSettlements. The activities of each operating segment are described in Note 1b. The Othersegment includes Point West Capital and PWS. The accounting policies of the operatingsegments are the same as those described in the summary of significant accountingpolicies. 

 

41

 

Point West Capital Corporation and Subsidiaries

Notes to Consolidated Statements

 

                   The following tables represent the Company’s results from segments for 2001 and 2000.

2001
Allegiance
Viatical    Settlements (1)
Ventures
Other
Total
Interest    income...............$3,394,690$--$ 24,677$116,047$3,535,414Net loss on          securities ...........----(7,222,643)(939,030)(8,161,673)
Other income    .........102,797219,083(30,972)15,000305,908
Total revenues3,497,487219,083(7,228,938)(807,983)(4,320,351)
Interest    expense ......2,722,086--504,020--3,226,106Depreciation and          amortization .......529,980--190,08330,226750,289Income tax (expense)         benefit      (2)........(2,346)--(800)76,28473,138Contributed net (loss)          income (2)....$(1,514,200)$219,083$(8,021,780)$(5,151,059)$(14,467,956)
Identifiable    assets ...$
36,424,685$
29,091,070$
2,232,795$
773,562$
68,522,112
2000
Allegiance
Viatical    Settlements (1)
Ventures
Other
Total
Interest    income...............$3,219,782$6,818$ 1,466,862$195,370$4,888,832Net loss on          securities ...........----(10,410,288)(303,979)(10,714,267)
Other income    .........11,698205,2422,09317,511236,544
Total revenues.3,231,480212,060(8,941,333)(91,098)(5,588,891)
Interest    expense ......2,508,160588,850388,639--3,485,649Depreciation and          amortization .......127,975--51,66719,492199,134Income tax  (expense)         (2)....................(4,658)--(800)(604,469)(609,927)Contributed net (loss)          income (2)....$
(2,004,295)$
731,774$
(9,409,495)$
(4,884,282)$
(15,566,298)
Identifiable    assets ...$
39,053,635$
30,705,503$
10,825,250$
5,048,819$
85,633,207(1)The Viatical Settlements segment includes results of    operations in connection with viatical settlements for DPFC and Point West. (2)Corporate overhead and income tax expense are not generally    allocated between segments and are included in the Other segment.**42
**PART III

ITEM 9-- DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS**
The name, age and current position(s) of each of the Company’sdirectors, executive officers and control persons are as follows:
**Name****Age****Positions and Offices with the Company**John Ward Rotter (1)44Director and Chief Executive Officer Bradley N. Rotter (1)46Director and Chairman of the Board of DirectorsAlan B. Perper 43Director and PresidentJoanna L. Zesiger32Chief Financial Officer 
_______________

(1) John Ward Rotter and Bradley N. Rotter are brothers.
*                   John Ward Rotterhas served as a directorand an executive officer since the Company’s formation in September 1992. He hasserved as Chief Executive Officer since January 2001 and as Chief Financial Officer fromSeptember 1995 through April 2001. He also served as Executive Vice President from 1994 toJanuary 2001. *                   Bradley N. Rotter has served as a director and as Chairman of the Board of Directorssince the Company’s formation. 
*                   Alan B. Perper has served as a director and as President since the Company’sformation. 
*                   Joanna L. Zesiger has served as the Company’s Chief Financial Officer since May2001, and as the Company’s Controller from June 1994 through April 2001. She has alsoserved as the Company’s Treasurer since 1999.

                   The Board of Directors, which presently consists of three members, is divided into threeclasses (designated Class 1, Class 2 and Class 3) as nearly equal in number as possible.Bradley N. Rotter, the director in Class 1, will serve until the annual stockholders’meeting to be held in 2002. Alan B. Perper, the director in Class 2, will serve until theannual stockholders’ meeting to be held in 2003. John Ward Rotter, the director inClass 3, will serve until the annual stockholders’ meeting to be held in 2004. Ateach annual stockholders’ meeting, directors nominated to the class of directorswhose term is expiring at that annual meeting are elected for a term of three years, andthe remaining directors continue in office until their respective terms expire.Accordingly, approximately one-third of the Company’s directors is elected at eachannual stockholders’ meeting and generally a director will stand for election onlyonce every three years. 

                   The Board of Directors elects executive officers annually. Officers serve at thediscretion of the Board of Directors.
**SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE**
                   Based upon a review of Forms 4 and 5 furnished to the Company its directors and executiveofficers and by persons known to beneficially own 10% or more of the Company’soutstanding common stock, all such persons timely filed reports required to be filed underSection 16 with respect to 2001.

 

43
**ITEM 10-- EXECUTIVE COMPENSATION

Compensation of Directors**
                   Effective April 26, 2001, the Company’s two non-employee directors resigned fromtheir positions as board members. The Company does not currently have any non-employeedirectors. 

                   The Company paid each non-employee director an annual retainer of $15,000 and a fee of$750 for each board or committee meeting attended. During 2001, each non-employeedirectors received a pro-rated retainer of $3,750. All directors are reimbursed forexpenses incurred to attend meetings of the Board of Directors or its committees.

                   In addition, the Stock Option Plan for Non-Employee Directors (the "DirectorPlan") provides for the automatic grant of options to non-employee directors. Anyperson who becomes a non-employee director automatically receives, at the time of electionor appointment as director, a non-qualified option to purchase 10,000 shares of commonstock at an exercise price equal to the fair market value on the date of becoming adirector. These options vest 34%, 33% and 33% at the first, second and third annualstockholders’ meeting, respectively, following the date of grant if the non-employeedirector serves as such through that meeting. The Director Plan also provides that at eachannual stockholders’ meeting, each non-employee director elected at or continuing histerm after that meeting receives automatically a non-qualified option to purchase 5,000shares of common stock at an exercise price equal to the fair market value on the date ofthe stockholders’ meeting. These options vest 100% after the non-employee directorhas served as such until the next annual stockholders’ meeting. All options vestimmediately (to the extent they would have vested at the next annual stockholders’meeting) upon a Change of Control (as defined in the Director Plan). Each option expiresafter ten years or earlier upon certain events. The non-employee directors were not issuedoptions during 2001 since they both resigned on the day of the annual stockholders’meeting.

                   In addition, the 1995 Option Plan permits discretionary grants of stock options tonon-employee directors. No options under the 1995 Option Plan were granted to theCompany’s non-employee directors during 2001.

44

 
** 

Summary Compensation Table**
                   The table below provides information relating to compensation for the years ended December31, 2001, 2000 and 1999, for each of the Company’s executive officers. In January2001, the Compensation Committee reduced the salaries of the executive officers from$250,000 to $108,500. To compensate the executive officers for those salary reductions,the Compensation Committee in January 2001 awarded each executive officer a payment inrespect to the salary reduction based on the same formula the Company was utilizing at thetime for calculating severance payments of staff that were being laid off in connectionwith the Company’s downsizing. The formula utilized at that time was two weeks ofseverance for every year of service to the Company. The amounts shown below reflect allcompensation earned with respect to the respective year by the executive officers. Theone-time payments to the executive officers were accrued in 2001 and paid in 2002. 
**Long-Term****Compensation****  Annual Compensation****Awards****Securities****All Other**Name and****Underlying**
**Compensation****Principal Position****Year**
**Salary ($)****Bonus ($)****Options/SARs (#)**
**($)(1)**Bradley N. Rotter 2001128,692--66,842--Chairman of the Board (2)2000250,00035,00075,00027,4141999175,00087,50050,00026,165John Ward Rotter2001175,373--66,842--Chief Executive Officer2000250,00035,00075,00027,4141999175,00087,50050,00026,165Alan B. Perper2001158,137--66,842--President2000250,00035,00075,00027,4141999175,00087,50050,00026,165Joanna L. Zesiger200190,000--21,205--Chief Financial Officer (3)
_______________
(1)Represents contributions to the Company’s profit    sharing plan related to compensation earned during the indicated year. See Note 16 of the    Notes to Consolidated Financial Statements.(2)Effective November 1, 2001, Mr. Bradley Rotter ceased to be    an employee of the Company. He continues to serve as a director and retains his title as    Chairman of the Board.(3) Ms. Zesiger was appointed Chief Financial Officer in May    2001.**45

 

**Options**

                   The 1995 Option Plan authorizes the granting of options to purchase shares of common stockto employees (including officers), consultants and non-employee directors of the companyand its subsidiaries. Subject to limitations set forth in the 1995 Option Plan, the Boardof Directors is authorized to grant options with terms, including price, vesting,termination and other, that they deem appropriate.

                   The following tables provide information relating to stock options granted to theCompany’s executive officers during 2001 under the 1995 Option Plan and options heldby the Company’s executive officers at the end of 2001. None of the Company’sexecutive officers exercised a stock option during 2001. No SARs have been granted to theCompany’s executive officers.

 

**Option/SAR Grants in        Last Fiscal Year**
**Individual Grants (1)**
**Name**
**Number of        Securities        Underlying        Options/        SARs        Granted**
**Percent of        Total        Options/SARs        Granted to        Employees in        Fiscal Year**
**Exercise        or Base        Price (2)**
**Expiration        Date**Bradley N. Rotter (1)66,84223.0%$0.114/26/06Alan B. Perper (1)66,84223.0%$0.114/26/06John Ward Rotter (1)66,84223.0%$0.114/26/06Joanna L. Zesiger (3)21,2057.3%$0.104/26/11
______________
(1)
Options are incentive stock options.    Options vest with respect to 25% of the shares covered thereby on each of the first    through fourth anniversaries of the date of grant. Options will vest in full upon a Change    of Control (as defined in the agreements evidencing the options).(2)
Except for options granted to Ms.    Zesiger, represents 110% of the fair market value on the date of grant. Options granted to    Ms. Zesiger represent 100% of the fair market value on the date of grant.(3)Options vest with respect to 20% of the shares covered    thereby on each of the first through fifth anniversaries of the date of grant.
46

 

**Aggregated Option/SAR    Excercies in Last Fiscal Year**
**and Fiscal-year End    Option/SAR Values**
**Name**

**Number of    Securities    Underlying Unexercised    Options/SARs at Fiscal    Year-End (#)    Exercisable/Unexercisable**

**Value of    Unexercised    In-The-Money    Options/SARs at fiscal    Year-End ($)    Exercisable/Unexercisable (1)**
Bradley N. Rotter (1)59,250 / 152,592$0 / $0Alan B. Perper (1)59,250 / 152,592$0 / $0John Ward Rotter (1)59,250 / 152,592$0 / $0Joanna L. Zesiger (3)25,500 / 41,705$0 / $0(1)Value is calculated by multiplying the number of shares of    common stock underlying the stock option by the difference between the closing price of a    share of the Company’s common stock on December 31, 2001 as reported by The Nasdaq    Stock Market ($0.04) and the exercise price of the stock option. As of December 31, 2001,    the exercise price of all stock options held by the Company’s executive officers    exceeded that closing price.**47

** ****ITEM 11-- SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**
                   The following table sets forth, as of March 15, 2002, information with respect to thebeneficial ownership of the Company’s common stock by: (a) each person owning ofrecord or known by the Company to own beneficially more than five percent of theCompany’s outstanding shares of common stock; (b) each director; (c) each executiveofficer and (d) all of executive officers and directors as a group. All beneficialownership information has been furnished by the director, executive officer orstockholder, as the case may be, or has been derived from documents filed with theSecurities and Exchange Commission. See "Directors Executive Officers, Promoters andControl Persons." 
**Name**Number of Shares (1)**Percent of    Shares (1)
Bradley N. Rotter (2) ....................................
810,864
23.65
John Ward Rotter (2) (3) ................................
351,309
10.12
Alan B. Perper (2)    (4) ....................................
323,998
9.45
Perper/Raiche Revocable Trust (5)................
248,038
7.40
Janet G. Raiche (4)(5)...................................
248,038
7.40
Joanna L. Zesiger (6).............................
29,741
*
All directors and executive    officers as a group (4 individuals) (7)
1,515,912
41.49
___________________

* Less than 1%
**(1)Beneficial ownership was determined in    accordance with Rule 13d-3 under the Securities Exchange Act of 1934.**(2)Includes 75,961 shares subject to stock options    granted to each of Bradley N. Rotter, Alan B. Perper and John Ward Rotter and exercisable    within 60 days of March 15, 2002. The business address for Bradley N. Rotter, John Ward    Rotter and Alan B. Perper is 1700 Montgomery Street, Suite 250, San Francisco, California    94111. **(3)Includes 43,051 shares of common stock subject    to stock options granted to Mr. Rotter's wife and excersisable within 60 days of March 15,    2002.  Mr. Rotter    disclaims beneficial ownership of these shares.**(4)Includes 248,038 shares held by the    Perper/Raiche Revocable Trust (the "Perper/Raiche Trust"). Alan B. Perper and    Janet G. Raiche, as trustees of the Perper/Raiche Trust, may be deemed to be the    beneficial owners of the shares of common stock held of record by the Perper/Raiche Trust,    but each of them disclaims beneficial ownership of such shares, except to the extent of    their respective beneficial interests under the Perper/Raiche Trust. Mr. Perper also holds    stock options. See note (2) above. **(5)The address for the Perper/Raiche Trust and    Janet G. Raiche is 17 Reed Ranch Road, Tiburon, California 94920**(6)Includes 29,741 shares subject to stock options    granted and exercisable within 60 days of March 15, 2002. The business address for Joanna    L. Zesiger is 1700 Montgomery Street, Suite 250, San Francisco, California 94111.**(7)See footnotes (2), (3), (4) and (6) above.**ITEM 12-- CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

Allocation and Accrual of Expenses**
                   The Echelon Group of Companies, LLC ("Echelon"), which is controlled by BradleyN. Rotter, John Ward Rotter and Alan B. Perper, previously shared office space and otherexpenses with the Company. In February 1996, the Company executed an agreement withEchelon, which governed the allocation of shared expenses. The agreement terminatedeffective December 31, 2000. The agreement provided that, so long as Echelon used aportion of the space leased by the Company in San Francisco, Echelon would pay an amountequal to 20% of the amount of rent and required liability insurance premiums paid by theCompany in connection with that space. The agreement also acknowledged that the Companyemployed individuals who regularly performed functions on behalf of both the Company andEchelon. Pursuant to the agreement, Echelon (1) paid directly to (or on behalf of) eachshared employee a designated percentage of the shared employee’s salary and anycontributions to defined benefit plans, and (2) reimbursed the Company a specifiedpercentage of its costs of all other benefits paid 

48

to (or on behalf of) the shared employee. The percentage was determinedby reference to the percentage of time the shared employee devoted to each entity. Underthe agreement, each party was responsible for providing, at its sole cost and expense, allsupplies it would need. During 2000, pursuant to this agreement, Echelon paid directly orreimbursed the Company for rent and insurance in the amount of $44,567 and forcompensation for shared employees in the amount of $91,780.
**Indemnification**
                   On December 19, 1996, a complaint was filed in the United States District Court, NorthernDistrict of California (Docket No. C96-4558) against Dignity Partners, Inc. (now PointWest Capital Corporation) and each of its directors and on February 13, 1997, a complaintwas filed in the Superior Court of California, City and County of San Francisco (DocketNo. 984643) against Dignity Partners, Inc., and each of its executive officers andEchelon. In 1999, a settlement in principle was reached and on February 25, 2000 theDistrict Court approved a settlement agreement. Under the settlement agreement, all claimsagainst all defendants were dismissed and $3.15 million was paid to the plaintiffs. Ourinsurer paid 70% of the settlement amount in accordance with our directors and officersinsurance policy.

                   In accordance with the Company’s Second Amended and Restated Certificate ofIncorporation and Delaware law, the Company paid expenses (including attorneys’ fees)incurred by each executive officer and director in defending these cases in advance of thefinal disposition of these cases on the condition that each of these individuals willrepay the amounts advanced if it is ultimately determined that they are not entitled to beindemnified by the Company.
**PART IV

ITEM 13-- EXHIBITS AND REPORTS ON FORM 8-K**
(a) Exhibits

Exhibit      Number Description of Document

All references to documents filed pursuant to the Securities Exchange      Act of 1934, including Forms 10-K, 10-Q, 10-QSB and 8-K, were filed by Point West Capital      Corporation, File No. 0-27736. 

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 Issuer’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
3.2
Composite of Second Amended and Restated By-laws as                amended through January 11, 2001 (Incorporated by reference to Exhibit 3.2 of the                Issuer’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000).
4.1   
Amended and Restated Indenture dated as of March 31,                2000, among Point West Capital Corporation, Dignity Partners Funding Corp. I and Bankers                Trust Company (Incorporated by reference to Exhibit 99.2 of the Registrant’s Form 8-K                filed on April 19, 2000).
10.1*
Point West Capital Corporation Amended and Restated                1995 Stock Option Plan (Incorporated by reference to Exhibit 10 of the Registrant’s 
 

49
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.2*
Amendment No. 1 to Point West Capital                Corporation’s Amended and Restated 1995 Stock Option Plan (Incorporated by reference                to Exhibit 10.1 of the Issuer’s Quarterly Report on Form 10-Q for the quarter ended                June 30, 2000).
10.3*
Stock Option Plan for Non-Employee Directors                (Incorporated by reference to Exhibit 10.2 of the Registration Statement).10.4* Amendment No. 1 to Point West Capital Corporation’s Stock Option Plan                for Non-Employee Directors (Incorporated by reference to Exhibit 10.2 of the Issuer’s                Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.5*
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 Issuer’s Annual Report on Form 10-K for the fiscal                year ended December 31, 1997).
10.6*
Form of option agreement dated November 25, 1998                granted to each of Bradley N. Rotter, Alan B. Perper and John Ward Rotter (Incorporated by                reference to Exhibit 10.4 of the Issuer’s Annual Report on Form 10-K for the fiscal                year ended December 31, 1998). 
10.7*
Form of option agreement dated November 11, 1999                granted to each of Bradley N. Rotter, Alan B. Perper and John Ward Rotter (Incorporated by                reference to Exhibit 10.5 of the Issuer’s Annual Report on Form 10-K for the fiscal                year ended December 31, 1999). 10.8*Form of option agreement dated November 7, 2000 granted to each of Bradley                N. Rotter, Alan B. Perper and John Ward Rotter (Incorporated by reference to Exhibit 10.8                of the Issuer’s Annual Report on Form 10-K for the fiscal year ended December 31,                2000). 
10.9*
Form of option agreement dated April 26, 2001 granted                to each of Bradley N. Rotter, Alan B. Perper and John Ward Rotter.
10.10*
Form of option agreement dated April 26, 2001 granted                to Joanna L. Zesiger.
10.11*
Profit Sharing Plan (Incorporated by reference to                Exhibit 10.5 of the Registration Statement).
10.12
Amended and Restated Contribution, Sale and Servicing                Agreement, dated as of March 31, 2000, among Point West Capital Corporation, Dignity                Partners Funding Corp. I and Bankers Trust Company (Incorporated by reference to Exhibit                99.3 of the Registrant’s Form 8-K filed on April 19, 2000).
10.13
Indemnification Agreement dated September 30, 1995,                between Point West Capital (as successor to The Echelon Group) and Echelon (Incorporated                by reference to Exhibit 10.18 of the Registration Statement).
10.14   
Amended and Restated Limited Liability Company                Agreement of Allegiance Capital, LLC (Incorporated by reference to Exhibit 10.5 of the                Issuer’s Quarterly 
50
Report on Form 10-Q for the quarter ended September 30, 1998).
10.15
First Amendment to Amended and Restated Limited                Liability Company Agreement of Allegiance Capital, LLC, dated as of May 22, 2000, among                Point West Capital Corporation, Michael W. McDermitt and Daniel M. Isard (Incorporated by                reference to Exhibit 10.5 of the Issuer’s Quarterly Report on Form 10-Q for the                quarter ended June 30, 2000).
10.16   
Fourteen Hill Capital, L.P. Agreement of Limited                Partnership (Incorporated by reference to Exhibit 10.2 of the Issuer’s Quarterly                Report on Form 10-Q for the quarter ended September 30, 1997).
10.17   
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 Issuer’s Quarterly Report on Form 10-Q for the                quarter ended September 30, 1997).
10.18
Trust Agreement, dated as of August 1, 1998, among                Allegiance Funding Corp. I, Manufacturers and Traders Trust Company and Point West Capital                Corporation
10.19
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.
10.20
Loan Acquisition Agreement, dated as of August 1, 1998,                between Allegiance Capital, LLC and Allegiance Funding Corp. I.
10.21
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.
10.22   
Point West Securities LLC Operating Agreement by Point                West Capital Corporation and Point West Securities, LLC as of July 8, 1998 (Incorporated                by reference to Exhibit 10.26 of the Issuer’s Annual Report on Form 10-K for the                fiscal year ended December 31, 1998).
10.23   
Amended and Restated Supplement to Trust Agreement for                Revolving Series 1998-1, dated as of September 1, 1999, among Allegiance Funding I, LLC,                Manufacturers and Traders Trust Company and Point West Capital Corporation. 
10.24   
Second Amended and Restated Supplement to Trust                Agreement for Revolving Series 1998-1, dated as of September 15, 1999, among Allegiance                Funding I, LLC, Manufacturers and Traders Trust Company and Point West Capital                Corporation. 
10.25
Supplement to Trust Agreement for Term Series 1999-1,                dated as of September 15, 1999, among Allegiance Funding I, LLC, Manufacturers and Traders                Trust Company and Point West Capital Corporation. 
10.26
Third Amended and Restated Supplement to Trust                Agreement for Revolving 
51
Series 1998-1, dated as of April 14, 2000, among Allegiance Funding I,                LLC, Manufacturers and Traders Trust Company and Point West Capital Corporation.
10.27
Amended and Restated Supplement to Trust Agreement for                Term Series 1999-1, dated as of April 14, 2000, among Allegiance Funding I, LLC,                Manufacturers and Traders Trust Company and Point West Capital Corporation.
10.28
Master Agreement dated as of March 31, 2000, among                Point West Capital Corporation, Dignity Partners Funding Corp. I, Bankers Trust Company                and other parties thereto (Incorporated by reference to Exhibit 99.4 of the Issuer’s                Form 8-K filed on April 19, 2000).
10.29
Limited Liability Company Agreement of SocietyPool.com,                LLC, dated as of May 10, 2000, among Point West Capital Corporation, Robert M. Janes, Paul                G. Kahn and Michael D. London (Incorporated by reference to Exhibit 10.6 of the                Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
10.30
First Amendment to Limited Liability Company Agreement                of SocietyPool.com, LLC, dated as of June 26, 2000, among Point West Capital Corporation,                Robert M. Janes, Paul G. Kahn and Michael D. London (Incorporated by reference to Exhibit                10.7 of the Issuer’s Quarterly Report on Form 10-Q for the quarter ended June 30,                2000).
10.31
Amendment and Waiver Agreement dated as of December 15,                2000, among Allegiance Funding I, LLC, Manufacturers and Traders Trust Company, Point West                Capital Corporation and as consented to by the Certificate Holders. (Incorporated by                reference to Exhibit 10.39 of the Issuer’s Annual Report on Form 10-K for the year                ended December 31, 2000).
10.32
Amended and Restated Amendment and Waiver Agreement                dated April 15, 2001, among Allegiance Funding I, LLC, Manufacturers and Traders Trust                Company, Point West Capital Corporation and as consented to by the Certificate Holders.                (Incorporated by reference to Exhibit 10.1 of the Issuer’s Quarterly Report on Form                10-QSB for the quarter ended March 31, 2001).
10.33
Second Amended and Restated Amendment and Waiver                Agreement dated July 16, 2001, among Allegiance Funding I, LLC, Manufacturers and Traders                Trust Company, Point West Capital Corporation and as consented to by the Certificate                Holders. (Incorporated by reference to Exhibit 10.1 of the Issuer’s Quarterly Report                on Form 10-QSB for the quarter ended June 30, 2001).
10.34
Third Amended and Restated Amendment and Waiver                Agreement dated November 15, 2001, among Allegiance Funding I, LLC, Manufacturers and                Traders Trust Company, Point West Capital Corporation and as consented to by the                Certificate Holders.
52

10.35
Purchase Agreement dated as of December 31, 2001, among                Point West Capital Corporation, Kildare Capital, Inc. and Broker Dealer Market, Inc.                regarding the sale and purchase of one hundred percent of the equity ownership of Point                West Securities, LLC.
10.36   
Amendment to Purchase Agreement dated as of March 26,                2002, among Point West Capital Corporation, Kildare Capital, Inc. and Broker Dealer                Market, Inc. regarding the sale and purchase of one hundred percent of the equity                ownership of Point West Securities, LLC.
21.1*************************************************************************************************************