SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3165263
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
---------------------------------
San Francisco, California 94111
------------------------- ---------
(Address of principal executive offices) (Zip Code)
(415) 394-9467
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At October 31, 2000, there were 3,352,624 shares of the registrant's Common
Stock outstanding.
<PAGE>
POINT WEST CAPITAL CORPORATION
------------------------------
INDEX
-----
Page
----
Part I Financial Information
------
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 1
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 3
Condensed Notes to Consolidated Financial Statements 4-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 26
Part II Other Information
-------
Item 1. Legal Proceedings 27
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 6,752,192 $ 12,836,125
Restricted cash 572,335 3,074,057
Investment securities:
Held-to-maturity - 2,504,610
Available-for-sale 467,759 6,519,821
Matured policies receivable 260,000 -
Taxes receivable 195,094 -
Loans receivable, net of unearned income of $541,624 and
$540,867, respectively, and net of an allowance for
loan losses of $175,000 and $155,000, respectively 32,863,906 35,467,079
Purchased life insurance policies 30,653,603 31,727,966
Non-marketable securities 14,089,851 5,933,133
Deferred financing costs, net of accumulated amortization
of $1,519,002 and $1,378,623, respectively 749,885 656,376
Furniture and equipment, net of accumulated depreciation of
$26,484 and $12,976, respectively 74,421 34,917
Deferred tax asset 2,515,941 -
Other assets 1,307,819 2,771,767
------------------- -------------------
Total assets $ $
90,502,806 101,525,851
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest expense $ 121,548 $ 346,483
Accounts payable 434,593 238,326
Accrued compensation payable 370,414 543,400
Accrued litigation settlement - 2,205,000
Taxes payable - 141,100
Revolving certificates 4,900,607 4,200,000
Term certificates 24,066,213 24,498,815
Securitized notes payable 35,749,202 38,528,914
Debenture payable 6,500,000 3,000,000
Deferred income taxes - 281,020
------------------- -------------------
Total liabilities 72,142,577 73,983,058
------------------- -------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,391,124 and 4,390,124 shares, respectively, issued
3,352,624 and 3,351,624 shares, respectively, outstanding 43,911 43,901
Additional paid-in-capital 30,091,689 30,088,949
Accumulated comprehensive (loss) income, net of tax (177,497) 2,098,960
Accumulated deficit (8,723,842) (1,814,985)
Treasury stock, 1,038,500 shares (2,874,032) (2,874,032)
------------------- -------------------
Total stockholders' equity 18,360,229 27,542,793
------------------- -------------------
Total liabilities and stockholders' equity $ 90,502,806 $ 101,525,851
=================== ===================
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------- ---------------- ---------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income:
Interest income $ $ $ $
791,153 1,074,238 3,961,426 2,144,709
Net (loss) gain on securities (2,692,496) 5,946,723 (5,525,865) 11,171,942
Other 60,064 41,985 175,499 360,325
Earned discounts on matured policies - 76,201 - 187,202
---------------- ---------------- ---------------- -----------------
Total (loss) income (1,841,279) 7,139,147 (1,388,940) 13,864,178
---------------- ---------------- ---------------- -----------------
Expenses:
Interest expense 741,774 1,313,165 2,685,625 3,520,312
Compensation and benefits 651,794 585,117 1,942,761 1,368,897
Other general and administrative expenses 1,449,882 394,097 3,850,197 2,597,382
Amortization 33,608 134,039 140,379 386,010
Depreciation 5,808 2,258 13,508 5,934
---------------- ---------------- ---------------- -----------------
Total expenses 2,882,866 2,428,676 8,632,470 7,878,535
---------------- ---------------- ---------------- -----------------
(Loss) gain before income taxes
and extraordinary gain (4,724,145) 4,710,471 (10,021,410) 5,985,643
Income tax benefit (expense) - (547,265) 1,870,550 (564,765)
---------------- ---------------- ---------------- -----------------
(Loss) gain before extraordinary gain (4,724,145) 4,163,206 (8,150,860) 5,420,878
---------------- ---------------- ---------------- -----------------
Extraordinary gain, net of income taxes of $822,154 - - 1,242,003 -
---------------- ---------------- ---------------- -----------------
Net (loss) income $ (4,724,145) $ 4,163,206 $ (6,908,857) $ 5,420,878
================ ================ ================ =================
(Loss) income per share before extraordinary gain:
Basic $ (1.41) $ 1.24 $ (2.43) $ 1.63
================ ================ ================ =================
Diluted (1.41) 1.17 (2.43) 1.49
================ ================ ================ =================
Net (loss) income per share:
Basic $ (1.41) $ 1.24 $ (2.06) $ 1.63
================ ================ ================ =================
Diluted (1.41) 1.17 (2.06) 1.49
================ ================ ================ =================
Weighted-average number of shares of common stock
outstanding 3,352,624 3,350,624 3,352,504 3,321,888
Weighted-average number of shares of common stock
and common stock equivalents outstanding 3,352,624 3,549,536 3,352,504 3,648,029
</TABLE>
See accompanying condensed notes to consolidated financial statements.
2
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
2000 1999
---------------- ----------------
<S> <C> <C>
(unaudited)
Cash flows from operating activities:
Net (loss) income $ (6,908,857) $ 5,420,878
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 153,887 391,944
Loss on loan receivable 1,204,964 140,000
Provision for loan losses 20,000 85,000
Net loss (gain) on securities 5,525,865 (11,171,942)
Interest income received as warrants (1,101,532) (624,918)
Earned discounts on matured policies - (187,202)
Deferred tax (asset) liability (2,109,408) 516,885
Extraordinary gain (1,242,003) -
Changes in operating assets and liabilities:
Collections on matured life insurance policies 830,831 1,943,112
Other assets 92,546 (121,265)
Taxes receivable (336,194) -
Accrued interest expense (224,935) 25,176
Accounts payable 196,267 145,284
Accrued compensation payable (172,986) 201,164
Accrued litigation settlement - 945,000
---------------- ----------------
Net cash used in operating activities (4,071,555) (2,290,884)
---------------- ----------------
Cash flows from investing activities:
Proceeds from sale of other assets - 27,126
Purchase of furniture and equipment (53,012) (14,279)
Decrease in restricted cash 2,501,722 1,465,322
Proceeds from maturity of held-to-maturity securities 2,504,610 -
Purchase of investment and non-marketable securities (12,982,428) (11,699,821)
Proceeds from sale of investment and non-marketable securities 2,667,208 14,755,627
Additions to loans receivable (2,733,267) (19,631,409)
Principal payments on loans receivable 3,261,476 483,553
---------------- ----------------
Net cash used in investing activities (4,833,691) (14,613,881)
---------------- ----------------
Cash flows from financing activities:
Principal payments on securitized notes payable (715,555) -
Proceeds from SBA debenture 3,500,000 -
Proceeds from revolving certificates 820,000 19,708,039
Principal payments on revolving certificates (119,393) (25,108,084)
Proceeds from term certificates - 24,635,000
Principal payments on term certificates (432,602) -
Increase in deferred financing costs (233,887) (293,282)
Proceeds from options exercised 2,750 252,686
---------------- ----------------
Net cash provided by financing activities 2,821,313 19,194,359
---------------- ----------------
Net (decrease) increase in cash and cash
equivalents (6,083,933) 2,289,594
Cash and cash equivalents, beginning of period 12,836,125 6,668,126
---------------- ----------------
Cash and cash equivalents, end of period $ 6,752,192 $ 8,957,720
================ ================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized (loss) gain on securities available for sale, net
of tax $ (2,276,457) $ 3,398,142
Receipt of warrants $ 1,101,532 $ 624,918
Reduction in securitized notes payable in
connection with extraordinary gain $ 2,064,157 $ -
Establishment of receivable from insurance company $ - $ 2,205,000
Accrued litigation settlement $ - $ 3,150,000
Accrued litigation settlement offset against other assets $ 2,205,000 $ -
Increase in other assets offset by reduction in loans
receivable $ 850,000 $ -
Supplemental disclosure of cash flow information:
Taxes paid $ 605,619 $ 60,736
Cash paid for interest $ 2,615,095 $ 3,495,136
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
POINT WEST CAPITAL CORPORATION
------------------------------
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General Description
-- -------------------
The unaudited consolidated financial statements of Point West Capital
Corporation ("Point West Capital") and its consolidated entities (the "Company")
as of September 30, 2000 and for the three and nine month periods ended
September 30, 2000 and 1999 have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") for interim
financial information, in accordance with Rule 10-01 of Regulation S-X.
Accordingly, such statements do not include all of the information and notes
thereto that are included in the annual consolidated financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000. The consolidated
balance sheet as of December 31, 1999 has been derived from the audited
consolidated financial statements of the Company. These statements and notes
thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999 (the "Form 10-K").
Point West Capital is a specialty financial services company. The
Company's financial statements consolidate the assets, liabilities and
operations of Point West Venture Management, LLC ("Point West Management"),
Point West Ventures, L.P. ("Point West Ventures"), Allegiance Capital, LLC
("Allegiance Capital"), Allegiance Funding I, LLC ("Allegiance Funding"),
Allegiance Capital Trust I ("Allegiance Trust I"), Allegiance Management Corp.
("Allegiance Management"), Dignity Partners Funding Corp. I ("DPFC"),
SocietyPool.com, LLC ("SocietyPool") and Point West Securities, LLC ("PWS").
Point West Capital is currently involved in litigation with two other members
and former employees of SocietyPool involving, among other things, the control
and ownership of SocietyPool. See Note 12 and "Other Information--Legal
Proceedings." In the event that it is ultimately determined that Point West
Capital no longer controls SocietyPool, the assets, liabilities and operations
of SocietyPool would no longer be consolidated with those of Point West Capital
and its other consolidated entities. Management of the Company believes that it
owns 51% and is the manager of SocietyPool and intends to vigorously contest the
claims made by two other members of SocietyPool. To date, the Company's
consolidated financial statements reflect approximately $2 million of cash held
by SocietyPool representing contributions by Point West Capital of $2.8 million
less expenses incurred by SocietyPool of $800,000. References herein to Ventures
include Point West Management and Point West Ventures. References herein to
Allegiance include Allegiance Capital, Allegiance Funding, Allegiance Trust I
and Allegiance Management.
During 1997, the Company expanded its financial services business
through the operations of Ventures, which makes loans to and invests in small
businesses that are generally focused in the areas of e-commerce, Internet and
telecommunications; and Allegiance, which lends to funeral home and cemetery
owners. During 1998, the Company formed PWS, a broker-dealer licensed by the
National Association of Securities Dealers, Inc ("NASD"). On May 8, 2000, the
Company formed SocietyPool. SocietyPool was formed to develop and pursue a new
financial product. It is still in the development stage. In connection with the
principal business activity of the Company through February 1997 (which was to
provide viatical settlements for terminally ill persons), Point West Capital
continues to service the life insurance policies held by its wholly-owned
special purpose subsidiary, DPFC. The Company continually evaluates new business
opportunities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview."
4
<PAGE>
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes new accounting
and reporting standards for derivative instruments. In June 1999, the FASB
issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, and in
June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities--An Amendment of FASB Statement No.
133.
These rules require that all derivative instruments be reported in the
consolidated financial statements at fair value. Changes in the fair value of
derivatives are to be recorded each period in earnings or other comprehensive
income, depending on whether the derivative is designated and effective as part
of a hedged transaction, and on the type of hedged transaction. Gains or losses
on derivative instruments reported in other comprehensive income must be
reclassified as earnings in the period in which earnings are affected by the
underlying hedged item, and the portion of all hedges not effective must be
recognized in earnings in the current period. These new standards may result in
additional volatility in reported earnings, other comprehensive income and
accumulated other comprehensive income.
These rules become effective for the Company on January 1, 2001. The
Company will record the effect of the transition to these new accounting
requirements as a change in accounting in the first quarter of 2001. The effect
of this change in accounting is not expected to be material to the Company's
results of operations and financial position.
2. Cash and Cash Equivalents
-- -------------------------
The Company considers all highly liquid investments purchased within
three months of their maturity date to be cash and cash equivalents. Cash and
cash equivalents included U.S. Treasury bills with maturities less than three
months of $3.7 million and $8.3 million at September 30, 2000 and December 31,
1999, respectively. Cash and cash equivalents as of September 30, 2000 also
includes $2 million held by SocietyPool that is the subject of a bankruptcy
petition. While the petition is pending, the Company will not have access to
SocietyPool's assets. See Note 12, "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Other Information--Legal Proceedings."
3. Taxes Receivable
-- ----------------
Taxes receivable reflects an overpayment of income taxes for 1999
and estimated income taxes paid in the first quarter of 2000.
4. Investment Securities
-- ---------------------
Investment securities consist of marketable debt and equity securities.
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities, requires marketable debt and equity
securities to be classified into held-to-maturity, available-for-sale and
trading categories. Securities classified as available-for-sale are reported in
the consolidated balance sheets at fair value with any cumulative unrealized
gains and losses, net of any tax effect, included in comprehensive income and
reported as a separate component of stockholders' equity. Management estimates
fair value, considering factors such as sales restrictions, the bid and offer
prices of securities and volume. Securities classified as held-to-maturity
included U.S. Treasury bills reported at fair value with original maturities
greater than three months, but less than one year. Any realized gains and
losses,
5
<PAGE>
interest and dividends and unrealized losses on securities judged to be
other-than-temporary are reported in the consolidated statements of operations.
The cost and estimated fair value of investment securities reflected
in the consolidated balance sheets as of September 30, 2000 and December 31,
1999 are as follows:
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
Corporate bonds................. $ 350,000 $ --- $ (295,044) $ 54,956
Common stock................... 412,803 --- --- 412,803
------------------ ------------------ ------------------ ------------------
Total available-for-sale $ 762,803 $ --- $ (295,044) $ 467,759
================= ================= ================= =================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury bills .............. $ 2,504,610 $ --- $ --- $ 2,504,610
----------------- ----------------- ------------------ -----------------
Total held-to-maturity $ 2,504,610 $ --- $ --- $ 2,504,610
================= ================= ================== =================
Available-for-sale:
Corporate bonds................. $ 350,000 $ --- $ (297,500) $ 52,500
Common stock................... 2,678,633 4,201,560 (412,872) 6,467,321
------------------ ------------------ ------------------ ------------------
Total available-for-sale $ 3,028,633 $ 4,201,560 $ (710,372) $ 6,519,821
================= ================= ================= =================
</TABLE>
Cumulative net unrealized (losses) gains on available-for-sale
securities (representing differences between estimated fair value and cost) were
($295,000) and $3.5 million at September 30, 2000 and December 31, 1999,
respectively. These cumulative net unrealized (losses) gains, net of applicable
taxes, are included in accumulated comprehensive (loss) income, a separate
balance sheet component of stockholders' equity. See Note 10.
5. Loans Receivable
-- ----------------
Loans receivable includes loans made to unaffiliated third parties
through Allegiance and Ventures. Such loans are reported at the principal amount
outstanding, net of unearned income, hedging gains and losses and the allowance
for loan losses. Loan origination fees and direct loan origination costs are
netted and capitalized and recognized over the life of the related loan as an
adjustment of yield (interest income) in accordance with Statement of Financial
Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.
Allegiance had 23 loans outstanding at September 30, 2000 in an
aggregate principal amount of $33.8 million, which bore a weighted-average fixed
interest rate per annum of 8.6%. Allegiance had 21 loans outstanding at December
31, 1999 in an aggregate principal amount of $33.8 million, which bore a
weighted-average fixed interest rate per annum of 9.8%. Principal and interest
payments are due monthly
6
<PAGE>
on such loans, and such loans mature, subject to permitted prepayments,
approximately fifteen years from the initial loan date. At September 30, 2000,
two loans were in default and on non-accrual status. Based on collateral
securing the defaulted loans, management believes that Allegiance will not incur
a material loss in connection with such loans.
At December 31, 1999, one loan was in default and on non-accrual
status. In October 1999, Allegiance brought an action seeking to collect on this
loan and the defendants counterclaimed. In September 2000, Allegiance settled
this litigation. Allegiance incurred total losses of $1.3 million which are
reflected in other general and administrative expenses in the consolidated
statement of operations for the nine month period ended September 30, 2000.
Also, other assets in the consolidated balance sheet as of September 30, 2000
includes funeral homes valued at $850,000 which Allegiance now owns as a result
of the settlement. See Note 12 and "Other Information--Legal Proceedings" for a
further description of this litigation and settlement.
From time to time, Allegiance uses futures contracts to hedge certain
interest rate exposure between the time of loan origination and the expected
issuance of term certificates. See Note 7. The futures contracts are intended to
protect a portion of the net interest margins expected to be earned on the
loans. Any realized gain or loss related to these hedges is deferred and
recognized by Allegiance over the life of the related loan as an adjustment of
interest income. Pursuant to Statement of Financial Accounting Standards No. 80,
Accounting for Futures Contracts, all such deferred amounts are reflected in the
consolidated balance sheets as an increase (in the case of a hedging loss) or
decrease (in the case of a hedging gain) in the carrying value of loans
receivable. As of September 30, 2000, Allegiance had cumulative net realized
gains on its hedging activities of $152,000, which reduced loans receivable in a
like amount. As of December 31, 1999, Allegiance had cumulative net realized
gains on its hedging activities of $215,000, which reduced loans receivable in a
like amount. In addition, Allegiance had net unrealized losses from open hedging
positions of $14,000 as of September 30, 2000. As of December 31, 1999,
Allegiance had no open hedges, and has none at present.
Ventures had no loans outstanding at September 30, 2000. Ventures had
two loans outstanding at December 31, 1999 in an aggregate principal amount of
$2.6 million, one of which was originated in January 1998 and bore interest at a
fixed interest rate per annum of 15% and the other of which was originated in
November 1999 and bore interest at a variable rate based on the prime rate plus
4% (at December 31, 1999 the prime rate was 8.5%).
6. Purchased Life Insurance Policies
-- ---------------------------------
Purchased life insurance policies consist only of those policies held
by DPFC. The policies held by DPFC are pledged as security for the Securitized
Notes (as defined in Note 8). As a result of the imminent default of DPFC under
the terms of the Securitized Notes, Point West Capital and the holders of the
Securitized Notes (the "Noteholders") entered into an agreement (the "DPFC
Agreement") that amended certain of the terms of the Securitized Notes. Pursuant
to the DPFC Agreement, which is effective from March 2000 through June 2002, the
Noteholders will provide funds to pay servicing fees, premiums and certain other
costs of DPFC in the event policy collections are insufficient. Under the DPFC
Agreement, Point West Capital will continue to act as servicer for a fee of
$18,000 per month for the period March 2000 through June 2002. The DPFC
Agreement also provides the Noteholders with an option to purchase DPFC's
outstanding stock from Point West Capital for a nominal amount on June 30, 2002.
If the Noteholders do not exercise such option, Point West Capital may liquidate
DPFC. See Note 8.
7
<PAGE>
7. Revolving and Term Certificates
-- -------------------------------
Allegiance finances its loans receivable under a structured financing
arrangement established in August 1998 (the "Allegiance Financing"). Under the
Allegiance Financing, various classes of revolving and term certificates of
Allegiance Trust I have been issued. At September 30, 2000, revolving
certificates held by third parties were outstanding in the aggregate principal
amount of $4.9 million. At September 30, 2000, such certificates bore interest
at fixed and variable rates based on the one-year U.S. Treasury yield plus a
weighted-average spread of 4.3%. The weighted-average interest rate of the
revolving certificates held by third parties at September 30, 2000 was 10.2%.
Allegiance funded and retained an unrated revolving certificate in the principal
amount of $2.2 million. The unrated certificate represents the right to receive
all excess cash flow from Allegiance Trust I related to the revolving
certificates. The revolving certificates held by third parties have ratings from
Fitch, Inc. ranging from A to B. At September 30, 2000, the term certificates
held by third parties were outstanding in the aggregate principal amount of
$24.1 million. The weighted-average fixed interest rate of the term certificates
held by third parties was 8.1%. Allegiance funded and retained an unrated term
certificate that represents the right to receive a 17.5% coupon subject to other
priority payments on the senior certificates. At September 30, 2000, the
outstanding principal balance of the unrated term certificate was $2.6 million.
Allegiance retained an additional unrated term certificate that represents the
right to receive 90% of the excess cash flow from Allegiance Trust I related 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 AA to B.
In April 2000, the Company and a consortium of insurance companies (the
"Investors") executed amendments that extended the Allegiance Financing through
December 15, 2000. The Investors agreed to continue to provide revolving debt,
subject to certain limitations, through November 30, 2000, on terms similar to
those under the original Allegiance Financing revolving certificates. In
addition, the Investors agreed to provide up to approximately $20.0 million of
additional term financing, subject to certain limitations, through December 15,
2000, on terms similar to those under the original Allegiance Financing term
certificates. Because two loans held by Allegiance are currently in default,
Allegiance may not be able to issue term certificates or issue term certificates
on terms satisfactory to Allegiance. As a result of these defaulted loans, cash
flow payable to Allegiance (for servicing fees and interest on the certificates
it holds) will be accrued until approximately an additional $400,000 is
deposited in Allegiance Trust I. Such cash flow has been approximately $11,000
per month in 2000. In the event that any revolving debt in the consolidated
balance sheet as of December 15, 2000 is not repaid through the issuance of term
certificates or otherwise by February 15, 2001, the interest rate on such debt
will increase by 1.00%. A failure to retire the revolving debt could also result
in a default, giving the Investors the right to terminate Point West Capital as
the servicer and liquidate the collateral. The fixed interest on any additional
term certificates will be based on the ten-year U.S. Treasury yield plus a
spread ranging from 2.05% to 8.5%.
The Allegiance Financing does not qualify for sale treatment under
Statement of Financial Accounting Standards No. 125, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, because
its terms entitle Allegiance Funding to repurchase loans prior to the point at
which the cost of servicing them becomes burdensome. As such, the loans and
borrowings under the Allegiance Financing are reflected in the consolidated
balance sheets.
In connection with the Allegiance Financing and the extensions
thereunder, Allegiance Capital paid an aggregate of $375,000 in commitment fees
when funds were initially borrowed. Of such commitment fees, $100,000 was
amortized over the expected life of the initial revolving certificates, $25,000
is being amortized over the expected life of the revolving certificates
currently outstanding (8 months) and $250,000 is being amortized over the
expected life of the term certificates (15 years). These
8
<PAGE>
allocations were based on an estimate of the portion of the commitment fee
attributable to the revolving certificates and the term certificates. In the
event that a default occurs and the Investors liquidate the collateral, any
remaining unamortized commitment fees will be expensed.
In connection with the extension of the Allegiance Financing,
Allegiance agreed to pay a non-usage fee ranging from zero to $100,000,
depending upon the amount of term debt issued between March 31, 2000 and
December 15, 2000.
8. Securitized Notes Payable
-- -------------------------
In 1995, DPFC issued its Senior Viatical Settlement Notes, Series
1995-A with a stated maturity of March 10, 2005 (the "Securitized Notes").
Principal and interest payments on and other costs of the Securitized Notes are
payable solely from collections on pledged policies, deposited funds and funds
provided by the Noteholders. The Securitized Notes bear a fixed interest rate of
9.17% per annum. Point West Capital is the servicer of the policies pledged
under the Indenture pursuant to which the Securitized Notes were issued and
incurs servicing expenses and receives servicing income. See Note 6 for further
information regarding the servicing of DPFC.
The DPFC Agreement discussed in Note 6, was negotiated due to the
imminent default of DPFC under the terms of the Securitized Notes and,
accordingly, has been accounted for as a troubled debt restructuring. As such,
during the first quarter of 2000, an extraordinary gain of $1.2 million, net of
taxes of $822,000, was recorded and the stated amount of the Securitized Notes
of $38.5 million was reduced to $36.4 million, reflecting the maximum future
cash payments the Noteholders could receive under the DPFC Agreement. The $36.4
million equaled the face value of the life insurance policies and restricted
cash held by DPFC as of March 31, 2000.
The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include the assets, liabilities and
operations of DPFC; however, the assets of DPFC are not available to pay
creditors of Point West Capital. The assets of DPFC are the beneficial ownership
interests in the life insurance policies and funds that secure the Securitized
Notes.
9. Debenture Payable
-- -----------------
Ventures has issued two debentures payable to the Small Business
Administration ("SBA") in the principal amount of $6.5 million. One debenture
was issued in July 1998 in the principal amount of $3.0 million with semi-annual
interest only payments at a fixed rate of 5.9% (plus a 1% annual fee) and a
scheduled maturity date of September 1, 2008. The debenture is subject to a
prepayment penalty if repaid prior to September 1, 2003. The other debenture was
issued on May 24, 2000 in the principal amount of $3.5 million with semi-annual
interest only payments at a fixed rate of 7.5% (plus a 1% annual fee) and a
scheduled maturity date of September 1, 2010. The debenture is subject to a
prepayment penalty if repaid prior to September 1, 2005. In addition, Ventures
paid a fee of $227,500 (3.5% of the total borrowings) to the SBA to borrow such
money. Proceeds from the debentures are used to make debt and equity investments
in businesses permitted under applicable SBA codes and regulations.
At present, Ventures has no material debt investments outstanding and
since inception of the SBA borrowings has made relatively few debt investments.
As a result, the SBA could prevent further borrowings by Ventures and could also
accelerate the payment of outstanding debentures because of a failure to comply
with applicable SBA debt/equity requirements, although the SBA has not indicated
an intention to do so.
9
<PAGE>
10. Stockholders' Equity
--- --------------------
<TABLE>
<CAPTION>
Changes in stockholders' equity during the first nine months of 2000
reflected the following:
<S> <C>
Stockholders' equity, beginning of period .................. $27,542,793
Comprehensive income:
Net loss........................................................ (6,908,857)
Other comprehensive loss:.......................................
Net unrealized investment losses, net of tax benefit
of $1.5 million ............................................. (2,276,457)
-----------
Comprehensive loss.......................................... (9,185,314)
Common stock -- options exercised ............................... 10
Additional paid-in-capital -- options exercised ................. 2,740
-----------
Stockholders' equity, end of period............................... $18,360,229
===========
</TABLE>
<TABLE>
<CAPTION>
Changes in stockholders' equity during the first nine months of 1999
reflected the following:
<S> <C>
Stockholders' equity, beginning of period .................. $ 14,829,561
Comprehensive income:
Net Income ....................................................... 5,420,878
Other comprehensive income: ....................................
Net unrealized investment gains, net of tax
of $291,000.... ............................................. 3,398,142
---------
Comprehensive income ....................................... 8,819,020
Common stock -- options exercised ............................... 973
Additional paid-in-capital -- options exercised ................. 326,783
----------
Stockholders' equity, end of period............................... $ 23,976,337
==========
</TABLE>
10
<PAGE>
11. Earnings Per Share
-- ------------------
The weighted-average number of common stock shares and additional
common stock equivalent shares used in computing (loss) income per share for the
three and nine months ended September 30, 2000 and 1999 are set forth below. The
following is a reconciliation of the numerator and denominator of basic and
diluted net (loss) income per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
(Loss) gain before extraordinary
gain.................................... $ (4,724,145) $ 4,163,206 $ (8,150,860) $ 5,420,878
Extraordinary gain ....................... -- -- 1,242,003 --
------------- ------------- ------------- -------------
Net (loss) income....................... $ (4,724,145) $ 4,163,206 $ (6,908,857) $ 5,420,878
============= ============= ============= =============
Denominator:
Weighted-average shares.............. 3,352,624 3,350,624 3,352,504 3,321,888
------------- ------------- ------------- -------------
Denominator for basic net (loss),
income, basic and diluted loss before
extraordinary gain and diluted net loss
calculation......... 3,352,624 3,350,624 3,352,504 3,321,888
Weighted-average effect of dilutive
securities:
Employee stock options............ -- 141,827 -- 197,673
Warrants.............................. -- 57,085 -- 128,468
------------- ------------- ------------- -------------
Denominator for diluted net income 3,352,624 3,549,536 3,352,504 3,648,029
============= ============= ============= =============
(Loss) income per share:
Basic
(Loss)gain before extraordinary
gain............................. $ (1.41) $ 1.24 $ (2.43) $ 1.63
Extraordinary gain .................. -- -- 0.37 --
------------- ------------- ------------- -------------
Net (loss) income.................... $ (1.41) $ 1.24 $ (2.06) $ 1.63
============= ============= ============= =============
Diluted
(Loss) gain before extraordinary
gain............................. $ (1.41) $ 1.17 $ (2.43) $ 1.49
Extraordinary gain.................. -- -- 0.37 --
------------- ------------- ------------- -------------
Net (loss) income.................... $ (1.41) $ 1.17 $ (2.06) $ 1.49
============= ============= ============= =============
</TABLE>
Options outstanding during the three and nine months ended September
30, 1999 to purchase approximately 58,196 and 51,758 shares, respectively, of
common stock were not included in the computation of diluted income per share
because the exercise price of the options was greater than the average market
price of the common stock during the period and, therefore, would be
anti-dilutive. As a result of the net loss for the three and nine months ended
September 30, 2000, options and warrants outstanding during this period were not
included in the computation of diluted loss per share because their inclusion
would be anti-dilutive.
11
<PAGE>
12. Litigation
-- ----------
The Company is engaged in various matters of litigation and has
unresolved claims pending. While the amounts claimed are substantial and the
ultimate outcome cannot be determined at this time, management believes that any
damages payable by Point West Capital could be material to its operations and
liquidity but not to its financial position. See "Other Information--Legal
Proceedings."
One such matter of litigation involves SocietyPool and a dispute
between Point West Capital and two other members of SocietyPool. See "Other
Information--Legal Proceedings." In connection with the SocietyPool litigation,
the Company does not believe that two of the other members of SocietyPool are
entitled to the requested relief. Nevertheless, Point West Capital cannot
predict whether or to what extent this matter will affect Point West Capital's
decision to invest additional funds in SocietyPool, Point West Capital's role or
ownership percentage in SocietyPool, the control of SocietyPool and its assets,
SocietyPool's financial condition, or the continuing consolidation of
SocietyPool's assets and liabilities with those of Point West Capital and its
other consolidated entities.
13. Segment Reporting
--- -----------------
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, establishes standards for
reporting information about operating segments in annual financial statements
and requires selected information about operating segments in interim financial
reports. Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance. Point West Capital's chief
operating decision making group is comprised of the Chairman of the Board, the
President and the Chief Financial Officer.
The Company's reportable operating segments include Ventures,
Allegiance and Viatical Settlements. The Other segment includes Point West
Capital, PWS and SocietyPool. The accounting policies of the operating segments
are the same as those described in the summary of significant accounting
policies in the Form 10-K.
12
<PAGE>
The following tables present summary results from segments for and
financial positions as of the three months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Viatical
--------
Ventures Allegiance Settlements(1) Other Total
--------- ----------- ------------- ----- -----
Interest income...... $ 48,360 $ 710,507 $ -- $ 32,286 $ 791,153
Net loss on
securities ........ (2,692,496) -- -- -- (2,692,496)
Other income ......... -- 6,010 54,000 54 60,064
------------ ------------ ------------ ------------ ------------
Total (loss) income . (2,644,136) 716,517 54,000 32,340 (1,841,279)
Interest expense...... 127,575 614,199 -- -- 741,774
Depreciation and
amortization....... 14,375 19,233 -- 5,808 39,416
Contributed net
(loss) income (2).... $ (2,788,683) $ (867,713) $ 54,000 $ (1,121,749) $ (4,724,145)
============= ============= ============= ============= =============
Identifiable assets... $ 16,936,901 $ 35,029,759 $ 31,186,075 $ 7,350,071 $ 90,502,806
============= ============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Viatical
--------
Ventures Allegiance Settlements(1) Other Total
--------- ----------- ------------- ----- -----
Interest income...... $ 475,996 $ 517,361 $ 19,488 $ 61,393 $ 1,074,238
Net gain on
securities ........ 3,499,686 -- -- 2,447,037 5,946,723
Other income (3)...... -- 10,000 99,052 9,134 118,186
------------ ------------ ------------ ------------ ------------
Total income.......... 3,975,682 527,361 118,540 2,517,564 7,139,147
Interest expense...... 52,478 381,036 879,651 -- 1,313,165
Depreciation and
amortization....... 7,500 67,819 58,720 2,258 136,297
Income tax expense
(2) ................. -- (30,380) -- (516,885) (547,265)
Contributed net
income (loss) (2).... $ 3,912,443 $ (156,166) $ (884,027) $ 1,290,956 $ 4,163,206
============= ============= ============= ============= =============
Identifiable assets... $ 20,791,042 $ 29,915,252 $ 33,962,584 $ 10,410,243 $ 95,079,121
============= ============= ============= ============= =============
</TABLE>
13
<PAGE>
The following tables present summary results from segments for and
financial positions as of the nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Viatical
Ventures Allegiance Settlements (1) Other Total
--------- ---------- --------------- ----- -----
Interest income...... $ 1,420,214 $ 2,388,887 $ 6,818 $ 145,507 $ 3,961,426
Net loss on securities
........... (5,525,865) -- -- -- (5,525,865)
Other income ......... 2,093 9,198 151,242 12,966 175,499
------------ ------------ ------------ ------------ ------------
Total (loss) income.. (4,103,558) 2,398,085 158,060 158,473 (1,388,940)
Interest expense...... 261,599 1,835,176 588,850 -- 2,685,625
Depreciation and
amortization....... 37,292 103,087 -- 13,508 153,887
Income tax
(expense) benefit
(2)....................... (800) (4,585) -- 1,875,935 1,870,550
Extraordinary gain .. -- -- 1,242,003 -- 1,242,003
Contributed net (loss)
income (2).... $ (4,429,057) $ (1,896,265) $ 677,774 $(1,261,309) $ (6,908,857)
=========== =========== =========== =========== ===========
Identifiable assets.... $ 6,936,901 $ 35,029,759 $ 31,186,075 $ 7,350,071 $ 90,502,806
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Viatical
Ventures Allegiance Settlements (1) Other Total
-------- ---------- --------------- ----- -----
Interest income...... $ 795,579 $ 1,109,725 $ 65,178 $ 174,227 $ 2,144,709
Net gain on
securities ........... 8,407,455 -- -- 2,764,487 11,171,942
Other income (3)...... 46,458 10,000 262,578 228,491 547,527
------------ ------------ ------------ ------------ -----------
Total income ......... 9,249,492 1,119,725 327,756 3,167,205 13,864,178
Interest expense...... 155,722 730,459 2,634,131 -- 3,520,312
Depreciation and
amortization....... 22,500 187,350 176,160 5,934 391,944
Income tax expense
(2)........................ (800) (43,880) (800) (519,285) (564,765)
Contributed net income
(loss) (2).... $19,061,763 $ (346,432) $ (2,765,830) $ (528,623) $ 5,420,878
=========== =========== =========== =========== ===========
Identifiable assets.... $20,791,042 $ 29,915,252 $ 33,962,584 $ 10,410,243 $ 95,079,121
============ =========== ============ =========== ============
<FN>
(1) The Viatical Settlements segment includes results of operations in
connection with viatical settlements for DPFC and Point West Capital.
(2) Corporate overhead and income tax (expense) benefit are not generally
allocated between segments and are included in the Other segment.
(3) Reflects "Other" and "Earned discounts on matured policies."
</FN>
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
------------------------------------
The following is a discussion and analysis of the consolidated
financial condition of the Company as of September 30, 2000, and of the results
of operations for the Company for the three and nine months ended September 30,
2000 and 1999, and of certain factors that may affect the Company's prospective
financial condition and results of operations. The following should be read in
conjunction with the unaudited consolidated financial statements and related
notes appearing elsewhere herein.
Overview
--------
Point West Capital is a specialty financial services company. The
Company's financial statements consolidate the assets, liabilities and
operations of Ventures, Allegiance, DPFC, SocietyPool and PWS. Point West
Capital is currently involved in litigation with two other members of
SocietyPool that may result in Point West Capital no longer consolidating the
assets, liabilities, and operations of SocietyPool. If Point West Capital were
required to discontinue consolidation of SocietyPool, the Company would show an
investment in SocietyPool at lower of cost or market and would not show expenses
of SocietyPool. See Note 12 of the Condensed Notes to Consolidated Financial
Statements and "Other Information--Legal Proceedings." See the Form 10-K and
Condensed Notes to Consolidated Financial Statements (contained herein) for
further information regarding these entities.
During 1997, the Company expanded its financial services business
through the operations of Ventures, which makes loans to and invests in small
businesses that are generally focused in the areas of e-commerce, Internet and
telecommunications; and Allegiance, which lends to funeral home and cemetery
owners. During 1998, the Company formed PWS, a broker-dealer licensed by the
NASD. On May 8, 2000, the Company formed SocietyPool. SocietyPool was formed to
develop and pursue a new financial product. It is still in the development
stage. In connection with the principal business activity of the Company through
February 1997 (which was to provide viatical settlements for terminally ill
persons), Point West Capital continues to service the life insurance policies
held by its wholly-owned special purpose subsidiary, DPFC. See Note 6 of the
Condensed Notes to Consolidated Financial Statements. See the Form 10-K for
further information regarding the Company's former principal business activity.
At present, Allegiance's credit facility expires December 15, 2000. See
"Liquidity and Capital Resources." Allegiance is evaluating plans to continue to
grow its commercial lending business, but it appears that at least in the short
run it will cease originating loans. In addition, Ventures may be unable to
continue to grow its business. See Note 9 of the Condensed Notes to Consolidated
Financial Statements and "Liquidity and Capital Resources."
Information regarding the revenues, contributed income (loss) and
identifiable assets for each of the Company's business segments is contained in
Note 13 of the Condensed Notes to Consolidated Financial Statements.
The Company continually evaluates new business opportunities. In May
2000, Point West Capital provided $1.8 million to fund SocietyPool's proposed
new product and business plan. On August 19, 2000, Point West Capital
contributed an additional $1 million to SocietyPool. A dispute involving Point
West Capital and two of the other members of SocietyPool is currently the
subject of litigation. See Note 12 of the Condensed Notes to Consolidated
Financial Statements and "Other Information--Legal Proceedings." This proceeding
may affect the Company's decisions concerning the additional funding of
SocietyPool and, thus, its ownership percentage, and may also affect
SocietyPool's financial condition. Ventures, Allegiance and PWS, whose business
activities are described below, may or may not be
15
<PAGE>
indicative of the types of business opportunities the Company will continue to
pursue. No assurance can be given that the Company will be successful in
becoming a broad-based specialty financial services company or that any such
enterprise will be successful. The Company is seeking advice from financial
advisors to assist it in its strategy of developing or acquiring new operating
businesses. See "Considerations Under the Investment Company Act of 1940."
Results of Operations for the Company
-------------------------------------
Total (Loss) Income. Total loss was $1.8 million during the three
months ended September 30, 2000 compared to total income of $7.1 million during
the three months ended September 30, 1999. The total loss during the three
months ended September 30, 2000 was primarily due to a $2.7 million net loss on
securities related to Ventures. In addition, total income decreased in the third
quarter of 2000 due to a $428,000 decrease in interest income related to
Ventures as a result of Ventures having fewer debt securities for which it
received warrants in the third quarter of 2000 compared to the third quarter of
1999. See "Results of Operations by Segment--Ventures--Three and Nine Months
Ended September 30, 2000 Compared to the Three and Nine Months Ended September
30, 1999--Net (Loss) Gain on Securities." Total loss was $1.4 million during the
nine months ended September 30, 2000 compared to total income of $13.9 million
during the nine months ended September 30, 1999. The total loss during the nine
months ended September 30, 2000 was primarily due to a $5.5 million net loss on
securities related to Ventures. Offsetting the decrease during the nine months
ended September 30, 2000 was a $1.8 million increase in interest income
primarily related to an increase in loans held by Allegiance and a warrant
received in connection with one of Ventures' debt securities.
Total Expenses. Total expenses increased 20.8% to $2.9 million during
the three months ended September 30, 2000 from $2.4 million during the three
months ended September 30, 1999. This increase was primarily due to a $1.1
million increase in general and administrative expenses (attributable to a
$700,000 loss incurred in connection with a loan previously held by Allegiance
described below, and $304,000 in organizational and research expenses related to
SocietyPool). In addition, total expenses increased due to a $233,000 increase
in interest expense related to borrowings by Allegiance. Offsetting the increase
during the three months ended September 30, 2000 was an $880,000 decrease in
interest expense related to DPFC. See "Results of Operations by
Segment--Viatical Settlements--Certain Accounting Implications for DPFC." Total
expenses increased 8.9% to $8.6 million during the nine months ended September
30, 2000 from $7.9 million during the nine months ended September 30, 1999. This
increase was primarily due to a $1.3 million increase in general and
administrative expenses (attributable to a $1.3 million loss incurred in
connection with a loan previously held by Allegiance, which was the subject of
litigation and settled in the third quarter of 2000 (see Note 12 of the
Condensed Notes to Consolidated Financial Statements and "Other
Information--Legal Proceedings") and $783,000 in royalty fees and organizational
and research expenses related to SocietyPool). An additional $1.1 million of
interest expense related to borrowings by Allegiance, and a $574,000 increase in
compensation and benefits due primarily to additional employees and secondarily
to salary increases also contributed to the increase in total expenses.
Offsetting the increase in total expenses during the nine months ended September
30, 2000 was a $2.0 million decrease in interest expense related to DPFC and
$945,000 of litigation expense recorded in the second quarter of 1999 reflecting
the amount of the then proposed settlement arrangement of the federal class
action and state alleged class action lawsuits not covered by insurance. The
court approved the settlement of these lawsuits in February 2000.
Extraordinary Gain. In accordance with Statement of Financial
Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled
Debt Restructurings, the Company recognized an extraordinary gain on a troubled
debt restructuring in the amount of $1.2 million, net of income taxes of
$822,000, in March 2000 in connection with the DPFC Agreement described in Notes
6 and 8 of the Condensed Notes to Consolidated Financial Statements. As a result
of the DPFC Agreement, the
16
<PAGE>
Company reduced the outstanding principal amount of the Securitized Notes in the
consolidated balance sheet as of March 31, 2000 by $2.1 million to $36.4 million
(which equaled the face value of the life insurance policies and restricted cash
held by DPFC as of that date) and recognized income in a like amount. See
"Results of Operations by Segment--Viatical Settlements--Certain Accounting
Implications for DPFC."
Results of Operations by Segment
--------------------------------
Ventures
--------
Accounting Considerations
Beginning in 1999, because of the volatility of Internet and Internet
related stocks, Point West Capital shorted stocks of certain competitors of one
of the investments held by Ventures. The effect of those hedging activities was
reflected in the Company's consolidated statement of operations during the three
months ended March 31, 1999. During 2000, no such hedges were in place. The
Company recognized a $317,000 gain in connection with such hedging activities
during the first quarter of 1999. See "Item 3 -- Quantitative and Qualitative
Disclosures About Market Risk."
Three and Nine Months Ended September 30, 2000 Compared to the Three
and Nine Months Ended September 30, 1999
Interest Income. Interest income decreased to $48,000 during the three
months ended September 30, 2000 from $476,000 during the three months ended
September 30, 1999. This decrease was primarily due to $383,000 of interest
income recognized during the three months ended September 30, 1999 as a result
of a warrant (valued using the Black-Scholes option-pricing model) received in
connection with one of Ventures' loans. Interest income increased to $1.4
million during the nine months ended September 30, 2000 from $796,000 during the
nine months ended September 30, 1999. This $604,000 increase was primarily due
to a $475,000 increase in interest income recognized during the nine months
ended September 30, 2000 as a result of a warrant (valued using the
Black-Scholes option-pricing model) received in connection with one of Ventures'
debt securities, and secondarily due to higher cash balances held by Ventures.
Net (Loss) Gain on Securities. Net loss on securities was $2.7 million
during the three months ended September 30, 2000 compared to a net gain on
securities of $3.5 million during the three months ended September 30, 1999. Net
loss on securities was $5.5 million during the nine months ended September 30,
2000 compared to a net gain on securities of $8.4 million during the nine months
ended September 30, 1999. The net loss on securities during the three and nine
months ended September 30, 2000 was primarily the result of the write-down or
write-off of impaired investments. The write-downs or write-offs were a result
of deterioration of growth prospects for some companies and the uncertainty that
such companies will be able to raise additional capital in light of the market
downturn related to Internet and other technology stocks. Ventures determined
that an aggregate $2.7 million investment in the securities of seven different
companies was impaired at September 30, 2000, and therefore wrote-down the cost
of such investments during the three months ended September 30, 2000. Ventures
determined that an aggregate $3.9 million investment in the securities of four
different companies was impaired at June 30, 2000, and therefore wrote-down the
cost of such investments during the three months ended June 30, 2000. Ventures
determined that a $750,000 investment in non-marketable securities of one
company was impaired at March 31, 2000, and therefore wrote-off the entire
$750,000 carrying value of that investment during the three months ended March
31, 2000. Such write-downs or write-offs were substantially larger than those in
1999. During the nine months ended September 30, 1999, a $535,000 investment in
the security of one company was written-off. The Company does not write-down or
write-
17
<PAGE>
off, through the consolidated statement of operations, any investments it
considers to be temporarily impaired.
Interest Expense. Interest expense increased to $128,000 during the
three months ended September 30, 2000 from $52,000 during the three months ended
September 30, 1999 and to $262,000 during the nine months ended September 30,
2000 from $156,000 during the nine months ended September 30, 1999 due to an
increase in funds borrowed from the SBA in May 2000. During the three and nine
months ended September 30, 2000, the weighted-average interest rate on the funds
borrowed from the SBA was 7.8% and 7.5%, respectively, and the weighted-average
borrowings were $6.5 million and $4.6 million, respectively, compared to the
weighted-average interest rate of 6.9% and weighted-average borrowings of $3.0
million during the three and nine months ended September 30, 1999.
Allegiance
-----------
Accounting Considerations
In connection with the Allegiance Financing, Point West Capital agreed
to provide additional cash to Allegiance Trust I in the event that monthly LIBOR
interest rates exceed 6.16%. To date, Point West Capital has been required to
make immaterial payments. The amount of additional cash, if any, to be provided
is a function of several variables including the monthly LIBOR interest rate and
the outstanding balance of one of the Allegiance Financing revolving
certificates.
At December 31, 1999 one loan was in default and on non-accrual status.
In October 1999, Allegiance brought an action seeking to collect on this loan
and the defendants counterclaimed. In September 2000, Allegiance settled this
litigation. Allegiance incurred total losses of $1.3 million which are reflected
in other general and administrative expenses in the consolidated statement of
operations for the nine month period ended September 30, 2000. Allegiance also
owns two funeral homes valued at $850,000 as a result of this settlement.
Allegiance is now operating these two funeral homes and is in the process of
attempting to sell its ownership interest in them. See Note 12 of the Condensed
Notes to Consolidated Financial Statements and "Other Information--Legal
Proceedings" for a further explanation of this litigation and settlement. At
September 30, 2000, two other loans held by Allegiance were in default and on
non-accrual status. Based on appraisals of the collateral securing these loans
and on bids for the funeral homes Allegiance is in the process of attempting to
sell, management believes that Allegiance will not incur further material losses
in connection with such loans and funeral homes.
For information regarding accounting for the loans held by Allegiance
and the Allegiance Financing and loan levels, see Notes 5 and 7 of the Condensed
Notes to Consolidated Financial Statements.
Three and Nine Months Ended September 30, 2000 Compared to the Three
and Nine Months Ended September 30, 1999
Interest Income. Interest income increased to $711,000 during the three
months ended September 30, 2000 from $517,000 during the three months ended
September 30, 1999 and to $2.4 million during the nine months ended September
30, 2000 from $1.1 million during the nine months ended September 30, 1999, due
primarily to increased lending activity by Allegiance. During the three and nine
months ended September 30, 2000, the weighted-average interest rate earned on
the loans was 8.1% and 8.6% and the weighted-average principal amounts
outstanding were $36.0 million and $35.3 million, respectively, compared to the
weighted-average interest rate of 8.8% and the weighted-average principal
amounts outstanding of $22.6 million and $16.1 million, respectively, during the
three and nine months ended September 30, 1999. The weighted-average interest
rate calculations for the three and nine months ended
18
<PAGE>
September 30, 2000 include the effect of two loans in the aggregate principal
amount of $3.9 million, which were in default and on non-accrual status. At
present, Allegiance's credit facility expires December 15, 2000. If Allegiance
is not able to replace or extend the current facility, Allegiance will not be
able to grow its business. This inability would adversely affect interest income
levels in future periods. See "Liquidity and Capital Resources."
Interest Expense. Interest expense increased to $614,000 during the
three months ended September 30, 2000 from $381,000 during the three months
ended September 30, 1999 and to $1.8 million during the nine months ended
September 30, 2000 from $730,000 during the nine months ended September 30, 1999
as a result of increased borrowings under the Allegiance Financing. During the
three and nine months ended September 30, 2000, the weighted-average interest
rate under the Allegiance Financing was 8.5% and the weighted-average borrowings
were $29.1 million and $28.9 million, respectively, compared to the
weighted-average interest rate of 7.6% and weighted-average borrowings of $16.5
million and $11.5 million, respectively, during the three and nine months ended
September 30, 1999. At present, Allegiance's credit facility expires December
15, 2000. If Allegiance is not able to replace or extend the current facility,
interest expense is not expected to increase in future periods.
Compensation and Benefits. Compensation and benefits increased $16,000
to $82,000 during the three months ended September 30, 2000 from $66,000 during
the three months ended September 30, 1999 and $103,000 to $284,000 during the
nine months ended September 30, 2000 from $181,000 during the nine months ended
September 30, 1999. This increase resulted from the hiring of additional
employees in the second half of 1999 to support Allegiance's lending activities.
Other General and Administrative Expenses. Other general and
administrative expenses increased $731,000 to $869,000 during the three months
ended September 30, 2000 from $138,000 during the three months ended September
30, 1999 and $1.8 million to $2.1 million during the nine months ended September
30, 2000 from $323,000 during the nine months ended September 30, 1999. This
increase was due primarily to a $1.3 million loss incurred during the nine
months ended September 30, 2000 ($700,000 of which was incurred during the three
months ended September 30, 2000) in connection with a defaulted loan previously
held by Allegiance, which was the subject of litigation and settled in the third
quarter of 2000. See "Allegiance--Accounting Considerations," Note 12 of the
Condensed Notes to Consolidated Financial Statements and "Other
Information--Legal Proceedings."
Viatical Settlements
--------------------
The Viatical Settlements segment includes results of operations in
connection with viatical settlements for DPFC and Point West Capital.
Certain Accounting Implications for DPFC
From June 30, 1996 through the effective date of the DPFC Agreement,
the Company recognized income (earned discounts) with respect to its viatical
settlement business upon receipt of proceeds on policies (either pursuant to
sale of the policy or the death of the insured). Income recognized was equal to
the difference between such proceeds (less any back-end sourcing fees) and the
carrying value of such policies after giving effect to any reserve for loss on
the sale of such policies.
In March 2000, the Company and the Noteholders entered into the DPFC
Agreement pursuant to which the Noteholders will provide funds through June 30,
2002 to pay servicing fees, premiums and certain other costs of DPFC in the
event policy collections are insufficient. Under the DPFC Agreement, Point West
Capital will continue to act as servicer for a fee of $18,000 per month for the
period March 2000 through June 2002. The DPFC Agreement also provides the
Noteholders with an option to purchase
19
<PAGE>
from Point West Capital the DPFC outstanding stock for a nominal amount on June
30, 2002. If the Noteholders do not exercise such option, Point West Capital may
liquidate DPFC. See "Results of Operations for the Company--Extraordinary Gain."
As a result of the DPFC Agreement, the Company will not recognize any
future gain or loss related to DPFC until the Noteholders purchase the DPFC
stock or DPFC is liquidated pursuant to the DPFC Agreement. The Company expects
to recognize a pre-tax gain in an amount approximately equal to the $4.6 million
accumulated deficit of DPFC upon the occurrence of either of these events.
Additionally, when the DPFC stock is purchased or DPFC is liquidated, the
Company will have income tax liability associated with the gain from debt
forgiveness. The Company will be able to use the carryforward losses from DPFC
to offset such liability, unless the carryforward losses have been previously
utilized. Since March 2000 the Company has been and through June 2002 will
continue to recognize the $18,000 monthly servicing fee paid to Point West
Capital as other income in the consolidated statement of operations.
The Securitized Notes represent the obligations solely of DPFC. Point
West Capital did not guarantee repayment of the Securitized Notes and is not
required to fund any cash flow deficiencies thereunder.
Three and Nine Months Ended September 30, 2000 Compared to the Three
and Nine Months Ended September 30, 1999
Interest Income. DPFC did not recognize any interest income during the
three months ended September 30, 2000 and will not recognize any interest income
in any future period. See "Certain Accounting Implications for DPFC." DPFC
recognized interest income in the amount of $19,000 for the three months ended
September 30, 1999. Interest income declined to $7,000 during the nine months
ended September 30, 2000 from $65,000 during the nine months ended September 30,
1999, as a result of the DPFC Agreement.
Earned Discounts on Matured Policies. DPFC did not recognize any earned
discounts on matured policies during 2000 and will not recognize any earned
discounts in any future period. See "Certain Accounting Implications for DPFC."
Earned discounts on matured polices was $76,000 and $187,000 during the three
and nine months ended September 30, 1999, respectively. During the three months
ended September 30, 2000, four policies matured with a face value of $389,000,
compared to eleven policies with a face value of $783,000 during the three
months ended September 30, 1999. During the nine months ended September 30,
2000, 24 policies matured with a face value of $1.2 million, compared to 35
policies with a face value of $2.2 million during the nine months ended
September 30, 1999. As of September 30, 2000, the Company held 440 policies with
an aggregate carrying value of $30.9 million (comprised of "matured policies
receivable," "purchased life insurance policies" and a portion of "other
assets") and an aggregate face value of $35.9 million. All of the "matured
policies receivable" and "purchased life insurance policies" are pledged as
security for the Securitized Notes.
Interest Expense. As a result of the DPFC Agreement, DPFC has not
recognized any interest expense related to the Securitized Notes subsequent to
February 28, 2000 and will not recognize interest expense related to the
Securitized Notes in future periods. DPFC did not recognize any interest expense
for the three months ended September 30, 2000 compared to $880,000 for the three
months ended September 30, 1999. See "Certain Accounting Implications for DPFC."
Interest expense declined to $589,000 during the nine months ended September 30,
2000 (attributable to January and February 2000) from $2.6 million during the
nine months ended September 30, 1999.
20
<PAGE>
Other General and Administrative Expenses. DPFC did not recognize any
general and administrative expenses for the three months ended September 30,
2000 and will not recognize any general and administrative expenses in any
future period. See "Certain Accounting Implications for DPFC." DPFC recognized
other general and administrative expense in the amount of $64,000 for the three
months ended September 30, 1999. Other general and administrative expenses
declined to $133,000 during the nine months ended September 30, 2000 from
$283,000 during the nine months ended September 30, 1999 as a result of the DPFC
Agreement.
Other
-----
The Other segment includes operating results for Point West Capital,
SocietyPool and PWS. Except for compensation and benefit expenses clearly
attributable to Allegiance, corporate overhead is included in the Other segment
and has not been allocated. Activities for PWS were immaterial during the three
and nine months ended September 30, 2000 and 1999.
Three and Nine Months Ended September 30, 2000 Compared to the Three
and Nine Months Ended September 30, 1999
Interest Income. Interest income decreased to $32,000 during the three
months ended September 30, 2000 from $61,000 during the three months ended
September 30, 1999 and to $146,000 during the nine months ended September 30,
2000 from $174,000 during the nine months ended September 30, 1999, primarily
due to a decrease in cash balances.
Net (Loss) Gain on Securities. Point West Capital recognized a $2.4
million gain in the third quarter of 1999 in connection with the sale of one of
its investments. Point West Capital did not realize any gains or losses on the
sale of investments during the three and nine months ended September 30, 2000.
In addition, Point West Capital recognized a $317,000 gain in the first quarter
of 1999 in connection with hedging activities of Internet related stocks. See
"Item 3--Quantitative and Qualitative Disclosures About Market Risk." There were
no hedging activities during the nine months ended September 30, 2000.
Other Income. Other income was immaterial for the three months ended
September 30, 2000 and 1999, and declined 94.3% to $13,000 during the nine
months ended September 30, 2000 from $228,000 during the nine months ended
September 30, 1999, as a result of a decline in fees received by PWS for
investment banking services. The amount and timing of these services in future
periods cannot be predicted because of the limited operations of PWS.
Compensation and Benefits. Compensation and benefits increased 9.8% to
$570,000 during the three months ended September 30, 2000 from $519,000 during
the three months ended September 30, 1999 due primarily to the hiring of
additional employees in 2000 to support SocietyPool's development and
investigation of a new financial product. Compensation and benefits increased
41.7% to $1.7 million during the nine months ended September 30, 2000 from $1.2
million during the nine months ended September 30, 1999. This increase was due
primarily to the hiring of additional employees in 2000 to support SocietyPool's
development and investigation of a new financial product and secondarily to an
increase in salaries for existing Point West Capital employees in 2000. At
present, Society Pool has no employees. As a result, compensation and benefits
should decrease in the fourth quarter of 2000.
Other General and Administrative Expenses. Other general and
administrative expenses increased to $578,000 during the three months ended
September 30, 2000 from $188,000 during the three months ended September 30,
1999. This increase was primarily due to $304,000 in organizational, research
and legal expenses related to SocietyPool. Other general and administrative
expenses decreased
21
<PAGE>
20.0% to $1.6 million during the nine months ended September 30, 2000 from $2.0
million during the nine months ended September 30, 1999 primarily due to the
$945,000 of litigation expense recorded in the second quarter of 1999 reflecting
the amount of the then proposed settlement arrangement of the federal class
action and state alleged class action lawsuits not covered by insurance. The
court approved the settlement of these lawsuits in February 2000. In addition,
other general and administrative expenses decreased during the nine months ended
September 30, 2000 due to a $140,000 write-off of a loan during the second
quarter of 1999. Offsetting such decrease was $783,000 in expenses related to
SocietyPool. At present, Point West Capital is involved in litigation with two
other members and former employees of SocietyPool. Other general and
administrative expenses may increase in future periods as a result of increased
legal expenses in connection with such litigation. See Note 12 of the Condensed
Notes to Consolidated Financial Statements and "Other Information--Legal
Proceedings."
Liquidity and Capital Resources
-------------------------------
Point West Capital, SocietyPool and PWS
At present, neither Point West Capital, SocietyPool nor PWS has an
external funding source from which to fund its working capital and general
corporate needs. During the nine months ended September 30, 2000, the Company
supported the operations of Point West Capital, SocietyPool and PWS primarily
from existing cash balances. In prior periods, the Company generated cash
primarily from sales proceeds of investment securities and life insurance
policies. The Company used the cash to grow its businesses. At September 30,
2000, Point West Capital, SocietyPool and PWS' cash and cash equivalents were
$3.3 million. Cash and cash equivalents as of September 30, 2000 include $2
million held by SocietyPool. SocietyPool is the subject of a bankruptcy
petition. While the petition is pending, the Company will not have access to
SocietyPool's assets. See Note 12 of the Condensed Notes to Consolidated
Financial Statements and "Other Information--Legal Proceedings." The Company
continues to analyze its current and future needs for financing, which will be
dependent on its ability to develop the businesses of Ventures, Allegiance,
SocietyPool and PWS, and any other business opportunities the Company pursues.
See "Considerations Under the Investment Company Act of 1940." Assuming the
Company determines additional funds are needed, there can be no assurance that
it will be successful in obtaining external financing on satisfactory terms or
at all. The Company at present anticipates having sufficient liquidity to meet
the working capital and operational needs of Point West Capital, SocietyPool and
PWS through June 30, 2001, using current cash and cash equivalents, proceeds
from sales of investment securities and distributions from Ventures.
Ventures
Ventures' activities have generally been supported by capital
contributions from Point West Capital, by the sale of investments, by loans from
the SBA and the repayment by obligors of loans. Point West Capital has
contributed $5.8 million to Ventures since inception, and during 2000 Ventures
distributed $4 million to Point West Capital. During 1999, Ventures generated
$21.3 million of cash proceeds (net of commissions) from the sale of securities
and repayment of loans. During the nine months ended September 30, 2000,
Ventures generated $5.3 million of cash proceeds (net of commissions) from the
sale of securities and repayment of loans. At September 30, 2000, Ventures' cash
and cash equivalents were $3.2 million.
Ventures has an SBA debenture license and, therefore, may be permitted,
based on capital contributions by Point West Capital and realized gains on the
sale of securities, to borrow up to $16.6 million from the SBA, subject to
complying with SBA requirements. As of September 30, 2000, Ventures had
outstanding commitments from the SBA to borrow an additional $6.0 million. Any
borrowings bear interest at the rate for ten years debentures issued by Small
Business Investment
22
<PAGE>
Companies and funded through public certificates bearing the SBA's guarantee.
Interest is payable semi-annually. In addition, there is a leverage and
underwriting fee of 3.5% and a fee of 1% per annum on the outstanding amount of
debt. In July 1998, Ventures borrowed $3.0 million from the SBA and on May 24,
2000, Ventures borrowed an additional $3.5 million.
Ventures may not have sufficient liquidity, at least in the short term,
to grow its business. Ventures may not be able to access additional debt from
the SBA as a result of Venture's failure to originate a sufficient amount of
debt investments. At present, Ventures has no material debt investments
outstanding and, since inception of the SBA borrowings, has made relatively few
debt investments. As a result, the SBA could prevent further borrowings by
Ventures and could also accelerate the payment of the outstanding debentures
because of a failure to comply with applicable SBA debt/equity requirements,
although the SBA has not indicated any intention to do so. In addition, because
of laws and regulations regarding the Investment Company Act of 1940 (the "1940
Act"), the Company may be required to restrict Ventures' growth or dispose of
investments in order to avoid registration under the 1940 Act at some time in
the future. See "Considerations Under the Investment Company Act of 1940."
Allegiance
As of September 30, 2000, Point West Capital had invested $8.0 million
in Allegiance Capital. In August 1998, Allegiance arranged the Allegiance
Financing. The Allegiance Financing expires December 15, 2000. Allegiance has no
current source of funding available to make additional loans after December 15,
2000 and, as a result, no current ability to continue to grow its business. See
Note 7 to the Condensed Notes to Consolidated Financial Statements. Allegiance
is evaluating its future plans and is unable to determine its operations in
future periods.
DPFC
DPFC operations are in run-off. Point West Capital, as servicer under
the Securitized Notes, performs monitoring and collection activities for DPFC
and incurs administrative costs associated with these activities. Point West
Capital is reimbursed for these costs subject to priority provisions contained
in the Indenture. Principal, interest payments and other costs on the
Securitized Notes are payable solely from collections on policies pledged to
secure the payment thereof and do not require Point West Capital to expend cash
or obtain financing to satisfy such obligations.
Considerations Under the Investment Company Act of 1940
--------------------------------------------------------
The 1940 Act creates a comprehensive regulatory framework applicable
generally to investment companies (i.e., companies engaged primarily in the
business of investing, reinvesting or trading in securities within the meaning
of the 1940 Act, whether or not those companies intend to be engaged primarily
in such business). Companies that are subject to the 1940 Act must register with
the SEC as investment companies and upon registration become subject to
extensive regulation. The Company believes, based on its current activities and
the nature of its assets, that it should not be deemed to be an investment
company because it is not engaged primarily in the business of investing,
reinvesting or trading in securities within the meaning of the 1940 Act, and the
rules of the SEC promulgated thereunder, and does not hold itself out as an
investment company.
There are also various percentages of assets and income tests and other
subjective tests under the 1940 Act and related rules that are relevant in
considering whether a company is deemed to be an investment company.
23
<PAGE>
Although the Company believes that it should not be deemed to be an
investment company, it is possible that it could be deemed one in the near
future as a result of the following:
* A decline in the Company's non-investment activities,
including a decrease in Allegiance's loan origination
activities and DPFC's future servicing activities;
* The Company has been unable to commence or acquire other
complementary financial services businesses as rapidly as it
had hoped;
* The success of Ventures, which holds a number of investment
securities; and
* The success of other investments by the Company.
The majority of investment securities held by the Company have been
acquired since January 1998. As those investment securities increased
substantially in value, beginning in 1999, Ventures sold some of its investments
in part to address issues under the 1940 Act. The Company has realized
substantial gains in connection with the sales of some of these investments. The
proceeds of these sales have been invested in U.S. government securities pending
final use, which has included further investments by Ventures.
The Company intends to pursue an aggressive strategy to ensure that it
is not deemed to be an investment company. Some elements of this strategy,
however, may at least in the short term materially adversely affect the
Company's financial condition or results of operations, or both. The elements of
this strategy, which are subject to the risks described below involve:
* Pursuing the growth of new operating businesses, by acquisition or
internal development;
* Continuing to expand Allegiance's commercial lending business; and
* Continuing to dispose of investment securities and/or restricting
the growth of Ventures' business. Although the Company intends to
continue Ventures' investment activities, the Company does not
intend to contribute more capital to Ventures.
Growth of New Operating Businesses
The Company continues to seek advice from financial advisors to assist
it in its strategy of developing or acquiring new operating businesses that do
not involve investment securities. Although the Company intends to pursue
businesses that are complementary to the Company's current businesses, these
businesses may not necessarily involve financial services. These businesses will
be operating entities that do not own, trade or hold any significant amount of
investment securities. The Company may not find any suitable businesses to
acquire or develop on terms acceptable to the Company. In addition, the Company
may not be able to successfully integrate the operations of any new businesses.
Finally, any new businesses may not contribute positively to the Company's
financial condition or results of operations.
Continuing the Growth of Allegiance
The Company is evaluating its plans to continue to grow the commercial
lending business of Allegiance. However, the growth of Allegiance is dependent
on the market's acceptance of the product offerings and services of Allegiance,
Allegiance's continued ability to raise financing for its activities,
24
<PAGE>
Allegiance's ability to find suitable creditworthy borrowers and competitive
pressures in the lending industry.
Disposing of Investment Securities/Limiting Growth of Ventures
The Company may determine that it must dispose of additional investment
securities to avoid being deemed to be an investment company. The dispositions
may occur at times and on terms that would not maximize the value of these
investments. Given the volatile nature of the market, and, in some cases, lack
of a market, for some of these investments, sales could occur at severely
depressed prices. In addition, the dispositions may result in disadvantageous
tax consequences. The Company intends to use any proceeds of any additional sale
to support its working capital (including further investments by Ventures).
Pending final use, proceeds of any additional sale will likely be invested in
U.S. government securities.
The Company also currently intends to limit the growth of Ventures'
business. Although Ventures intends to continue investing in investment
securities, the Company does not intend to contribute more capital to Ventures.
Limiting Ventures' growth may materially adversely affect the Company's future
financial condition and results of operations.
Forward Looking Statements
--------------------------
This report includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical facts are forward looking and, accordingly,
involve risks and uncertainties that could cause actual results to differ
materially from those discussed. Such forward looking statements include those
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" relating to (1) the amount derived from the sale of two funeral
homes now owned by Allegiance as a result of a litigation settlement reached in
the third quarter of 2000, (2) the amount of any loss experienced in connection
with two loans made by Allegiance that are in default, (3) sufficiency of the
Company's liquidity and capital resources (see "Liquidity and Capital
Resources"), (4) the Company's ability to continue not being subject to
registration and regulation under the 1940 Act (see "Considerations Under the
Investment Company Act of 1940"), (5) amounts of additional cash to be
contributed to Allegiance Trust I, (6) Ventures' ability to borrow funds from
the SBA (see "Liquidity and Capital Resources"), (7) SocietyPool's development
and offering of a new type of financial product and (8) management's belief that
the Former CEO or the Former Special Consultant is not entitled to the relief
requested in its action against Point West Capital (see "Other
Information--Legal Proceedings"). Such statements are based on management's
belief, judgment and analysis as well as assumptions made by and information
available to management at the date hereof. In addition to any assumptions and
cautionary factors referred to specifically in this report in connection with
such forward looking statements, factors that could cause actual results to
differ materially from those contemplated by the forward looking statements
include (1) Allegiance's ability to realize upon liquidation the value
attributed to the two funeral homes now owned by Allegiance, (2) Allegiance's
ability to foreclose on the collateral and realize an amount on foreclosure at
least equal to the carrying value of two Allegiance loans which are currently in
default, (3) the results of the Company's consideration of strategic options and
any costs associated with a chosen option, (4) availability and cost of capital,
(5) the factors described under "Considerations Under the Investment Company Act
of 1940," (6) increases in the LIBOR rate and future amounts outstanding under
the Class A-R revolving certificates, (7) Ventures' ability to access more SBA
debt, (8) Ventures' ability to originate a sufficient amount of investments that
qualify for financing under the SBA regulations and (9) the outcome of the
litigation relating to SocietyPool and the viability of and the market's
acceptance of SocietyPool's new financial product.
25
<PAGE>
ITEM 3--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
Market risk refers to the risk that a change in the level of one or
more market prices, interest rates, or other market factors, such as liquidity,
will result in losses for a specified position or portfolio. The Company's
exposure to market risk arises primarily from the Company's investments in the
stock of public and private companies, fixed rate loans and debt investments
made by Allegiance and Ventures and Allegiance's variable rate debt. The
Company's management believes the Company's risk management and hedging
practices result in carefully managed market exposure.
The Company has investment holdings in various companies. Due to the
varying nature of these investments, it is difficult to correlate the effects of
the market to a particular market index. The effects of the market are reviewed
by management on an individual investment-by-investment basis.
During 1999, the Company hedged a position it held in an Internet
service provider and realized a $317,000 gain in connection with such hedging
activity. At September 30, 2000 no hedges were in place. However, the Company
may hedge certain positions in the future.
The table below represents principal cash flows and weighted-average
interest rates for the Allegiance loans outstanding at September 30, 2000:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter
---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed rate loans (1)(2) $ 158,530 $ 825,846 $ 909,704 $1,002,103 $1,103,917 $25,862,041
Average interest
rates (1) 9.7% 9.7% 9.7% 9.7% 9.7% 9.7%
<FN>
(1) The principal cash flows for fixed rate loans and average interest rates do
not include two defaulted loans.
(2) The Company hedges its interest rate exposure related to the loans made by
Allegiance because the interest rate at which Allegiance anticipates issuing
term certificates in connection with the extension of the Allegiance
Financing will be set in the future at some point. Allegiance utilizes
futures contracts to hedge certain interest rate exposure between the time
of origination of the loans and the expected issuance of such term
certificates. At present, Allegiance has no open hedges.
</FN>
</TABLE>
In connection with the Allegiance Financing, Point West Capital agreed
to provide additional cash to Allegiance Trust I in the event that monthly LIBOR
interest rates exceed 6.16%. To date Point West Capital has been required to
make immaterial payments. The amount of additional cash, if any, to be provided
is a function of several variables including the monthly LIBOR interest rate and
the outstanding balance of one of the Allegiance Financing revolving
certificates.
26
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-------------------------
(a) SocietyPool Matters
-----------------------
In May 2000, Point West Capital and three individuals formed
SocietyPool. SocietyPool was formed to develop and pursue a new
financial product. It has not commenced any operations, as such. Point
West Capital is a member and manager of SocietyPool with 51% voting and
economic interests. There are three other members. One is the former
chief executive officer (the "Former CEO") of SocietyPool with a 15.67%
voting interest and a 15.44% economic interest. Another is a former
special consultant (the "Former Special Consultant") of SocietyPool and
owns 33.33% voting interest and a 28.66% economic interest. The third
has a 4.90% economic interest and no voting interest.
Point West Capital provided $1.8 million in May 2000 to fund
SocietyPool's proposed new product and business plan. In July 2000, the
Former Special Consultant filed a claim with the American Arbitration
Association seeking arbitration of a dispute with Point West Capital.
The claim sought emergency relief on issues relating to the control and
management of SocietyPool and its assets. The emergency relief was
denied. In July 2000, the Former CEO resigned as such claiming that
certain actions of Point West Capital which are at issue in the
arbitration constituted constructive termination of his employment. In
August 2000, the Former CEO filed an action in arbitration seeking a
declaration that he was constructively terminated. Also in August 2000,
SocietyPool terminated the Former Special Consultant for cause and
Point West Capital filed an answer, affirmative defenses and
counterclaim against the Former Special Consultant and Former CEO and a
third-party complaint against the Former CEO.
In August 2000, the Former CEO and the Former Special Consultant
delivered a "management report" to Point West Capital which they
contend triggered Point West Capital's option under SocietyPool's
Operating Agreement to contribute an additional $1 million to
SocietyPool. Although Point West Capital believes that the "management
report" was prepared and submitted in bad faith, in order to protect
its and SocietyPool's rights and interests, Point West Capital
contributed $1 million in August 2000 to SocietyPool as a contribution
pursuant to SocietyPool's Operating Agreement. The Former CEO and
Former Special Consultant have asserted that the contribution did not
comply with the Operating Agreement and further alleged that, as a
result, Point West Capital ceased being the manager of SocietyPool and
that Point West Capital's voting and economic interests in SocietyPool
were reduced to 15.67%. They have further alleged that they are the
majority owners of SocietyPool and that one is the manager of
SocietyPool. They then filed a petition in bankruptcy court (In Re:
SocietyPool.com, LLC, No. 11-00-14735 MA) on behalf of SocietyPool in
September 2000. Point West Capital filed a motion to dismiss the
bankruptcy petition, which is scheduled to be heard in November 2000.
Management of Point West Capital believes that the claims of the other
two members of SocietyPool are without merit and that the bankruptcy
petition was fraudulently filed. Pending resolution of the bankruptcy
action, the actions in arbitration have been stayed.
The outcome of these matters cannot be determined at this time;
however, the Company does not believe that the Former CEO or the Former
Special Consultant is entitled to the requested relief in arbitration
or to have filed the bankruptcy petition. Point West Capital cannot
predict whether or to what extent this matter will affect Point West
Capital's decision to invest additional funds in SocietyPool, Point
West Capital's role or ownership percentage in SocietyPool, the control
of SocietyPool and its assets, SocietyPool's financial condition, or
the continuing consolidation of
27
<PAGE>
SocietyPool's assets and liabilities with those of Point West Capital
and its other consolidated entities.
(b) Allegiance Matters
-----------------------
In October 1999, Allegiance brought an action in the District Court of
Webb County, Texas seeking to collect on a defaulted loan with an
outstanding principal balance of $2.1 million. In response to the
lawsuit, on October 29, 1999, the defendant borrowers filed a
counterclaim against Allegiance and a third-party petition against an
individual who is an officer of Allegiance. The counterclaim and the
third-party petition alleged that Allegiance and the Allegiance officer
committed fraud, conversion, deceptive trade practices, negligence,
breach of fiduciary duty, negligent misrepresentation, conspiracy and
other wrongful acts, and sought, among other things, compensatory and
punitive damages (or cancellation of indebtedness), interest, fees and
costs. The defendants had owned one funeral home and retained a
consulting firm owned by the Allegiance officer to consult in the
acquisition of two funeral homes and to assist in financing the
acquisition. In the counterclaim and third-party petition, the
defendants alleged, among other things, that (1) the Allegiance officer
provided erroneous advice to the defendants, (2) the Allegiance officer
failed to disclose his relationship with Allegiance and (3) Allegiance
wrongfully exercised its rights in the collateral securing the
defaulted loan. In September 2000, Allegiance, the Allegiance officer
and the defendants settled the actions. Under the settlement agreement,
Allegiance paid the defendants $150,000 and released its security
interest in the defendants original funeral home, one of the three
funeral homes securing the $2.1 million loan; the Allegiance officer
made a cash payment to Allegiance of $50,000 and agreed to pay
Allegiance $50,000 over three years; Allegiance acquired the ownership
of the two additional funeral homes acquired with its loan proceeds;
and all claims against all parties were dismissed. Allegiance is now
operating those two funeral homes and is in the process of attempting
to sell its ownership interest in those two funeral homes.
28
<PAGE>
Item 5. Other Information
-------------------------
(a) NASDAQ Stock MarketSM ("NASDAQ")
On November 13, 2000, the Company received a notice from
NASDAQ which indicated that, because of the recent decline in
the price of the Company's Common Stock, the Company failed to
meet one of the listing requirements of the NASDAQ National
Market(R) ("NMS") to maintain a public float having a market
value equal to at least $5 million. NASDAQ indicated that, if
the Company did not satisfy such requirement by February 12,
2001, NASDAQ would issue a formal notice. At present the
Company has approximately 2.1 million shares in the public
float and does not know if it will satisfy such requirement.
At present, the Company's desire is to maintain a listing for
its Common Stock on the NMS, but it is possible that, not
withstanding such desire, the Company's Common Stock will be
delisted from the NMS. The Company believes that its Common
Stock satisfies the listing requirements for the NASDAQ
SmallCap Market(R) and may pursue such listing if the Common
Stock is delisted from the NMS. Another alternative is for the
Company's Common Stock to be traded on the NASDAQ OTC Bulletin
Board(R) or delisted entirely.
(b) Annual Stockholders' Meeting
The Company has established May 8, 2001 as the date on which
the Company's 2001 annual stockholders meeting ("The 2001
Meeting") will be held. Pursuant to the Company's Amended and
Restated By-Laws, as amended on May 16, 2000 and described in
our Quarterly Report on Form 10-Q for the quarter ended June
30, 2000, the Company must receive by December 15, 2000 any
proposal of a stockholder intended to be presented at the 2001
Meeting and to be included in the Company's proxy, notice of
meeting and proxy statement related to the Meeting pursuant to
Rule 14a-8 under the Securities Act of 1934 ("The Exchange
Act"). Proposals of stockholders submitted outside the process
of Rule 14a-8 under the Exchange Act in connection with the
2001 Meeting ("Non-Rule 14a-8 Proposals") must be received by
the Company by February 13, 2001 or such proposals will be
considered untimely under the advance notice provisions of the
Company's Second Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws, each as
amended (the "Charter Documents"). The Company's proxy related
to the 2001 Meeting will give discretionary authority to the
proxy holders to vote with respect to all Non-Rule 14a-8
Proposals received by the Company after February 13, 2001. Any
stockholder wishing to submit a proposal at the 2001 Meeting
must also comply with certain other provisions of the Charter
Documents. Notices of stockholder proposals should be directed
to, and any request for a copy of the Charter Documents (which
will be provided at no charge to any holder of the Company's
Common Stock), should be directed to: Secretary, Point West
Capital Corporation, 1700 Montgomery Street, Suite 250, San
Francisco, California, 94111.
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits:
Number Description
--------- -----------
27.1 Financial Data Schedule.
99.1 Press Release for Point West Ventures, L.P.
(b) Reports on Form 8-K filed during the quarter ended September
30, 2000:
Date Item Reported Matter Reported
---- ------------- ---------------
August 14, 2000 5 The Company issued a
press release regarding
its results of operations
for the second quarter of
2000.
30
<PAGE>
SIGNATURES
==========
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POINT WEST CAPITAL CORPORATION
Dated: November 16, 2000 /s/ ALAN B. PERPER
--------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
Dated: November 16, 2000 /s/ JOHN WARD ROTTER
--------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
