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 March 31, 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 April 30, 2000, there were 3,352,624 shares of the registrant's Common
Stock outstanding.
POINT WEST CAPITAL CORPORATION
------------------------------
INDEX
-----
Part I Financial Information Page #
- ------ ------
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 2000 and 1999 2
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 3
Condensed Notes to Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Part II Other Information
- -------
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
(i)
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 2000 1999
------------------- -------------------
(unaudited)
Cash and cash equivalents $ 6,829,405 $ 12,836,125
Restricted cash 1,402,306 3,074,057
Investment securities:
Held-to-maturity -- 2,504,610
Available-for-sale 6,332,746 6,519,821
Matured policies receivable 19,155 --
Loans receivable, net of unearned income of $541,968 and
$540,867, respectively, and net of an allowance for
loan losses of $175,000 and $155,000, respectively 33,910,283 35,467,079
Purchased life insurance policies 31,525,162 31,727,966
Non-marketable securities 16,183,213 5,933,133
Deferred financing costs, net of accumulated amortization
of $1,440,851 and $1,378,623, respectively 659,078 656,376
Furniture and equipment, net of accumulated depreciation of
$16,065 and $12,976, respectively 47,655 34,917
Other assets 609,974 2,771,767
------------------- -------------------
Total assets $ 97,518,977 $ 101,525,851
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued interest expense $ 118,037 $ 346,483
Accounts payable 444,551 238,326
Accrued compensation payable 350,581 543,400
Accrued litigation settlement -- 2,205,000
Taxes payable 3,188 141,100
Revolving certificates 4,164,978 4,200,000
Term certificates 24,364,690 24,498,815
Securitized notes payable 36,363,824 38,528,914
Debenture payable 3,000,000 3,000,000
Deferred income taxes 442,691 281,020
------------------- -------------------
Total liabilities 69,252,540 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 income, net of tax 1,661,526 2,098,960
Retained deficit (656,657) (1,814,985)
Treasury stock, 1,038,500 shares (2,874,032) (2,874,032)
------------------- -------------------
Total stockholders' equity 28,266,437 27,542,793
------------------- -------------------
Total liabilities and stockholders' equity $ 97,518,977 $ 101,525,851
=================== ===================
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
1
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
2000 1999
------------------- --------------------
(unaudited)
Income:
Interest income $ 2,215,184 $ 490,992
Net gain on securities 418,271 968,348
Other 32,965 82,021
Earned discounts on matured policies -- 60,734
------------------- --------------------
Total income 2,666,420 1,602,095
------------------- --------------------
Expenses:
Interest expense 1,248,110 1,043,033
Compensation and benefits 619,457 347,334
Other general and administrative expenses 869,860 581,471
Amortization 62,228 123,683
Depreciation 3,089 1,798
------------------- --------------------
Total expenses 2,802,744 2,097,319
------------------- --------------------
Loss before income taxes
and extraordinary gain (136,324) (495,224)
Income tax benefit (expense) 52,649 (4,800)
Loss before extraorinary gain (83,675) (500,024)
Extraordinary gain, net of income taxes of $822,154 1,242,003 --
------------------- --------------------
Net income (loss) $ 1,158,328 $ (500,024)
=================== ====================
Loss per share before extraordinary gain:
Basic $ (0.02)$ (0.15)
=================== ====================
Diluted $ (0.02)$ (0.15)
=================== ====================
Net income (loss) per share:
Basic $ 0.35 (0.15)
=================== ====================
Diluted $ 0.31 (0.15)
=================== ====================
Weighted-average number of shares of common stock
outstanding 3,352,261 3,273,628
Weighted-average number of shares of common stock
and common stock equivalents outstanding 3,751,463 3,273,628
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
2
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
2000 1999
------------------- -------------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 1,158,328 $ (500,024)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 65,317 125,481
Provision for loan losses 20,000 25,000
Net gain on securities (418,271) (968,348)
Interest income received as warrants (1,101,532) (148,840)
Earned discounts on policies -- (60,734)
Increase in deferred tax asset (368,386) --
Extraordinary gain (1,242,003) --
Changes in operating assets and liabilities:
Collections on matured life insurance policies 183,648 540,458
Increase in other assets (43,193) (77,354)
Decrease in accrued interest expense (228,446) (36,182)
Increase in accounts payable 206,225 89,565
Decrease in accrued compensation payable (192,819) (81,044)
Decrease in taxes payable (137,912) --
------------------- -------------------
Net cash used in operating activities (2,099,044) (1,092,022)
------------------- -------------------
Cash flows from investing activities:
Purchase of furniture and equipment (15,827) (2,909)
Decrease in restricted cash 1,671,751 1,038,897
Proceeds from maturity of held-to-maturity securities 2,504,610 --
Purchase of investment and non-marketable securities (10,932,427) (1,500,000)
Proceeds from sale of investment and non-marketable securities 1,659,681 1,307,148
Additions to loans receivable (1,006,723) (6,071,387)
Principal payments on loans receivable 2,543,519 298,947
------------------- -------------------
Net cash used in investing activities (3,575,416) (4,929,304)
------------------- -------------------
Cash flows from financing activities:
Principal payments on securitized notes payable (100,933) --
Proceeds from revolving certificates -- 6,460,000
Principal payments on revolving certificates (35,022) (62,773)
Principal payments on term certificates (134,125) --
Increase in deferred financing costs (64,930) (6,460)
Proceeds from options exercised 2,750 206,060
------------------- -------------------
Net cash (used in) provided by financing activities (332,260) 6,596,827
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (6,006,720) 575,501
Cash and cash equivalents, beginning of period 12,836,125 6,668,126
------------------- -------------------
Cash and cash equivalents, end of period $ 6,829,405 $ 7,243,627
=================== ===================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized (loss) gain on securities available for sale, net of tax $ (437,434) $ 21,587,971
Receipt of warrants $ 1,101,532 $ 148,840
Reduction in securitized notes payable in
connection with extraordinary gain $ 2,064,157 $ --
Accrued litigation settlement offset against other assets $ 2,205,000 $ --
Supplemental disclosure of cash flow information:
Taxes paid $ 458,860 $ 6,966
Cash paid for interest $ 1,580,471 $ 1,039,857
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
3
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 March 31, 2000 and for the three month periods ended March 31, 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 month period ended March 31, 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") and Point
West Securities, LLC ("PWS"). 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 which are generally focused in the areas of e-commerce, Internet and
telecommunications; and Allegiance, which lends funds 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"). In addition, in
connection with the principal business activity of the Company through February
1997 (which was to provide viatical settlements for terminally ill persons), the
Company 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."
2. 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. Fair value is
estimated by management based on the average closing bid prices of the
securities for the last three trading days of the reporting period, adjusted for
liquidity constraints. Securities classified as held-to-maturity included U.S.
Treasury bills reported at cost with original maturities greater than three
months,
4
but less than one year. Cash and cash equivalents included U.S. Treasury bills
with maturities less than three months of $5.6 million and $8.3 million at March
31, 2000 and December 31, 1999, respectively. Any realized gains and losses,
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 March 31, 2000 and December 31, 1999 are
as follows:
March 31, 2000
- ----------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available-for-sale:
Corporate bonds................. $ 350,000 $ --- $ (292,500) $ 57,500
Common stock................... 3,221,103 3,301,531 (247,388) 6,275,246
------------------ ------------------ ------------------ ------------------
Total available-for-sale $ 3,571,103 $ 3,301,531 $ (539,888) $ 6,332,746
================= ================= ================= =================
December 31, 1999
- ----------------------------------------------------------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
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
================= ================= ================= =================
Cumulative net unrealized gains on available-for-sale securities
(representing differences between estimated fair value and cost) were $2.8
million and $3.5 million at March 31, 2000 and December 31, 1999, respectively
These cumulative net unrealized gains, net of applicable taxes, are included in
accumulated comprehensive income, a separate balance sheet component of
stockholders' equity. See Note 7.
3. 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 22 loans outstanding at March 31, 2000 in the aggregate
principal amount of $34.5 million, which bore a weighted-average fixed interest
rate per annum of 9.8%. Allegiance had 21
5
loans outstanding at December 31, 1999 in the 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 on such loans, and such
loans mature, subject to permitted prepayments, approximately fifteen years from
the initial loan date. At March 31, 2000 and December 31, 1999, one loan was in
default and on non-accrual status. Management continues to believe that
Allegiance will not incur any loss in connection with the $2.1 million principal
amount of such loan and therefore, has not recorded a reserve in connection
therewith.
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 5. The futures contracts are intended to
protect a portion of the net interest margins earned on the loans. Any realized
gain or loss related to these hedges are 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 March 31,
2000 and December 31, 1999, Allegiance had cumulative net realized gains on its
hedging activities of $215,000 which reduced loans receivable in a like amount.
As of March 31, 2000 and December 31, 1999, Allegiance had no open hedges.
Ventures had one loan outstanding at March 31, 2000 in the aggregate
principal amount of $314,000, which was originated in November 1999. The loan,
which matured and was repaid on April 30, 2000, bore interest at the prime rate
plus 4% (at March 31, 2000 the prime rate was 9.0%). Ventures had two loans
outstanding at December 31, 1999 in the aggregate principal amount of $2.6
million, one of which was originated in January 1998. This loan bore interest at
a fixed interest rate of 15% and was repaid in January 2000. The other loan
matured and was repaid on April 30, 2000.
4. 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 6). As a result of collection delays on the policies,
Point West Capital and the holders of the Securitized Notes (the "Noteholders")
entered into an agreement (the "DPFC Agreement") which amends 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 reduced 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 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 Note 6.
5. 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 March 31, 2000, revolving certificates
were outstanding in the aggregate principal amount of $4.2 million. Such
certificates bear interest at a fixed rate based on the one-year U.S. Treasury
yield plus a weighted-average spread of 4.7%. The weighted-average interest rate
of the revolving certificates held by third parties at March 31, 2000 was 10.4%.
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
6
I related to the revolving certificates. The other revolving certificates
received ratings from Duff & Phelps Credit Rating Co. ranging from A to B. At
March 31, 2000, the term certificates were outstanding in the aggregate
principal amount of $24.4 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 which represents the right to receive a
17.5% coupon subject to other priority payments on the senior certificates. At
March 31, 2000, the outstanding principal balance of the unrated term
certificate was $2.6 million. Allegiance retained an additional unrated term
certificate which 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 other term certificates received ratings
from Duff & Phelps Credit Rating Co. 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 December 15, 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. The fixed interest on the 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 ("SFAS
125"), 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 allocations were based
on an estimate of the portion of the commitment fee attributable to the
revolving certificates and the term certificates.
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.
6. 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 4 for further
information regarding the servicing of DPFC.
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
7
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
which secure the Securitized Notes.
The DPFC Agreement 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 pursuant to GAAP. As such, 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 is equal to the face value of the life
insurance policies and restricted cash held by DPFC as of March 31, 2000.
7. Stockholders' Equity
- -- --------------------
Changes in stockholders' equity during the first three months of 2000
reflected the following:
Stockholders' equity, beginning of period .................. $27,542,793
Comprehensive income:
Net income...................................................... 1,158,328
Other comprehensive loss:.......................................
Net unrealized investment losses, net of tax
of $1.1 million ............................................. (437,434)
-----------
Comprehensive income........................................ 720,894
Common stock -- options exercised ............................... 10
Additional paid-in-capital -- options exercised ................. 2,740
-----------
Stockholders' equity, end of period............................... $28,266,437
===========
Changes in stockholders' equity during the first three months of 1999
reflected the following:
Stockholders' equity, beginning of period .................. $14,829,561
Comprehensive income:
Net loss ....................................................... (500,024)
Other comprehensive income: ....................................
Net unrealized investment gains, net of tax
of $6.9 million ............................................. 21,587,971
Comprehensive income ....................................... 21,087,947
Common stock -- options exercised ............................... 733
Additional paid-in-capital -- options exercised ................. 516,450
-----------
Stockholders' equity, end of period............................... $36,434,691
===========
8
8. Earnings Per Share
- -- ------------------
The weighted-average number of common stock shares and additional
common stock equivalent shares used in computing income (loss) per share for the
three months ended March 31, 2000 and 1999 are set forth below. The following is
a reconciliation of the numerator and denominator of basic and diluted net
income (loss) per share:
Three Months Ended March 31,
2000 1999
---- ----
Numerator:
Loss before extraordinary gain ....................... $ (83,675) $ (500,024)
Extraordinary gain ................................... 1,242,003 ---
---------- -----------
Net income (loss)..................................... $1,158,328 $ (500,024)
========== ===========
Denominator:
Weighted-average shares .............................. 3,352,261 3,273,628
---------- -----------
Denominator for basic net income (loss) and basic
and diluted loss before extraordinary
gain calculation..................................... 3,352,261 3,273,628
Weighted-average effect of dilutive securities:
Employee stock options........................... 280,861 ---
Warrants......................................... 118,341 ---
---------- -----------
Denominator for diluted net income and
extraordinary gain calculation....................... 3,751,463 3,273,628
========== ===========
Income (loss) per share:
Basic ................................................
Loss before extraordinary gain................... $ (0.02) $ (0.15)
Extraordinary gain ............................... 0.37 ---
---------- -----------
Net income (loss)................................ $ 0.35 $ (0.15)
========== ===========
Diluted...............................................
Loss before extraordinary gain................... $ (0.02) $ (0.15)
Extraordinary gain............................... 0.33 ---
---------- -----------
Net income (loss) ............................... $ 0.31 $ (0.15)
========== ===========
Options outstanding during the first quarter of 2000 to purchase
approximately 40,000 shares 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 quarter
and, therefore, would be anti-dilutive. As a result of the net loss for the
three months ended March 31, 1999, options and warrants outstanding during this
quarter were not included in the computation of diluted loss per share because
of the anti-dilutive effect.
9. 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.
9
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 and PWS. 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.
The following tables represent the Company's results from segments for
the three months ended March 31, 2000 and 1999.
Three Months Ended March 31, 2000
----------------------------------------------------------------------------------------
Viatical
--------
Ventures Allegiance Settlements(1) Other Total
--------- ----------- ------------- ----- -----
Interest income...... $ 1,303,135 $ 822,762 $ 6,818 $ 82,469 $ 2,215,184
Net gain on
securities ......... 418,271 -- -- -- 418,271
Other income ......... (1,701) 3,188 18,836 12,642 32,965
----------- ------------ ------------- ----------- ------------
Total income ......... 1,719,705 825,950 25,654 95,111 2,666,420
Interest expense...... 51,907 607,353 588,850 -- 1,248,110
Depreciation &
amortization....... 10,000 52,228 -- 3,089 65,317
Income tax benefit
(expense) (2)...... -- (570) -- 53,219 52,649
Extraordinary gain.... -- -- 1,242,003 -- 1,242,003
Contributed net income
(loss) (2)......... 1,657,564 (312,807) 545,368 (731,797) 1,158,328
Identifiable assets... 26,583,112 35,716,699 31,794,138 3,425,028 97,518,977
Three Months Ended March 31, 1999
----------------------------------------------------------------------------------------
Viatical
--------
Ventures Allegiance Settlements(1) Other Total
--------- ----------- ------------- ----- -----
Interest income...... $ 187,400 $ 221,422 $ 27,603 $ 54,567 $ 490,992
Net gain on
securities ......... 650,898 -- -- 317,450 968,348
Other income ......... -- -- 69,589 73,166 142,755
----------- ------------ ------------- ----------- ------------
Total income ......... 838,298 221,422 97,192 445,183 1,602,095
Interest expense...... 51,337 108,421 883,275 -- 1,043,033
Depreciation &
amortization....... 7,500 57,463 58,720 1,798 125,481
Income tax expense
(2)...... -- (4,800) -- -- (4,800)
Contributed net income
(loss) (2)......... 779,389 (103,632) (997,127) (178,654) (500,024)
Identifiable assets... 37,225,397 17,571,849 35,968,455 6,244,270 97,009,971
<FN>
- --
(1) The Viatical Settlements segment includes results of operations in
connection with viatical settlements for DPFC and Point West.
(2) Corporate overhead and income tax expense are not generally allocated
between segments and are included in the Other segment.
</FN>
10
10. Subsequent Event
- --- ----------------
In May 2000, the Company agreed to provide up to $1.8 million to fund
exploratory research and test marketing for a newly formed entity which will be
51% owned by the Company and plans to offer a new type of financial product. The
Company has the option to provide up to an additional $4.4 million of funding.
If the Company does not provide the additional funding, its equity will be
reduced to 16% to 25%, depending upon the amount, if any, of capital the Company
provides in addition to the $1.8 million.
11
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 March 31, 2000, and of the results of
operations for the Company for the three months ended March 31, 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 and PWS. 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 which are generally focused in the areas of e-commerce, Internet and
telecommunications; and Allegiance, which lends funds to funeral home and
cemetery owners. During 1998, the Company formed PWS, a broker-dealer licensed
by the NASD. In addition, in connection with the principal business activity of
the Company through February 1997 (which was to provide viatical settlements for
terminally ill persons), the Company continues to service the life insurance
policies held by its wholly-owned special purpose subsidiary, DPFC. See Note 4
of the Condensed Notes to Consolidated Financial Statements. See the Form 10-K
for further information regarding the Company's former principal business
activity.
Information regarding the revenues, contributed income (loss) and
identifiable assets for each of the Company's business segments is contained in
Note 9 of the Condensed Notes to Consolidated Financial Statements.
The Company continues to evaluate new business opportunities. In May
2000, the Company agreed to provide up to $1.8 million to fund exploratory
research and test marketing for a newly formed entity which will be 51% owned by
the Company and plans to offer a new type of financial product. The Company has
the option to provide up to an additional $4.4 million of funding. If the
Company does not provide the additional funding, its equity will be reduced to
16% to 25%, depending upon the amount, if any, of capital the Company provides
in addition to the $1.8 million. Ventures, Allegiance and PWS, whose business
activities are described below, may or may not be 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 Income. Total income increased 68.8% to $2.7 million during the
three months ended March 31, 2000 from $1.6 million during the three months
ended March 31, 1999, primarily due to a $1.7 million increase in interest
income related to an increase in loans held by Allegiance and debt securities
held by Ventures. Offsetting the increase during the three months ended March
31, 2000 were a $550,000 decline in net gain on securities and a $71,000 decline
in income related to the Viatical Settlement segment. See "Results of Operations
by Segment -- Viatical Settlements -- Certain Accounting
12
Implications for DPFC." Also, the three months ended March 31, 1999, included
$66,000 of investment banking fees related to PWS. There were no investment
banking fees in the 2000 period.
Total Expenses. Total expenses increased 33.3% to $2.8 million during
the three months ended March 31, 2000 from $2.1 million during the three months
ended March 31, 1999. This increase was primarily due to (i) a $288,000 increase
in other general and administrative expenses primarily related to Allegiance,
(ii) a $272,000 increase in compensation and benefits due primarily to salary
increases and secondarily to additional employees and (iii) a $205,000 increase
in interest expense related to borrowings by Allegiance.
Extraordinary Gain. Under GAAP, a gain on a troubled debt restructuring
is an extraordinary item. The Company recognized an extraordinary gain in the
amount of $1.2 million, net of income taxes in the amount of $822,000, during
the three months ended March 31, 2000 in connection with the DPFC Agreement
described in Notes 4 and 6 of the Condensed Notes to Consolidated Financial
Statements. As a result of the DPFC Agreement, the Company reduced the
outstanding principal amount of the Securitized Notes on the consolidated
balance sheet as of March 31, 2000 by $2.1 million to $36.4 million (which is
equal to 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
FlashNet (one of the investments held by Ventures), so as to partially hedge
Ventures' holdings in FlashNet. The effect of those hedging activities are
reflected in the Company's consolidated statement of operations during the three
months ended March 31, 1999. At March 31, 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."
At March 31, 2000 and December 31, 1999, the Company evaluated
Ventures' outstanding loans and determined that an allowance for loan losses was
not necessary. As Ventures' loan portfolio grows or upon subsequent evaluation,
the Company will provide for allowances for loan losses to the extent considered
necessary. See Note 3 of the Condensed Notes to Consolidated Financial
Statements.
Three Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999
Interest Income. Interest income increased to $1.3 million during the
three months ended March 31, 2000 from $187,000 during the three months ended
March 31, 1999. This increase was primarily due to $1.1 million of interest
income recognized in the first quarter of 2000 as a result of a warrant (valued
using the Black-Scholes option-pricing model) received in connection with one of
Ventures' debt securities.
Net Gain on Securities. Net gain on securities declined 35.8% to
$418,000 during the three months ended March 31, 2000 from $651,000 during the
three months ended March 31, 1999, due to the write-off of one of Ventures'
investments. 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
13
$750,000 carrying value of such investment during the three months ended March
31, 2000. Offsetting this decline was an aggregate $517,000 increase in gain on
securities sold.
Allegiance
----------
Lending Activity
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 not been required to
make any such payments. The amount of cash, if any, to be provided will be a
function of several variables including the monthly LIBOR interest rate and the
outstanding balance of one of the Allegiance Financing revolving certificates.
For information regarding accounting for the loans held by Allegiance
and the Allegiance Financing and loan levels, see Notes 3 and 5 of the Condensed
Notes to Consolidated Financial Statements.
Three Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999
Interest Income. Interest income increased to $823,000 during the three
months ended March 31, 2000 from $221,000 during the three months ended March
31, 1999 due to increased lending activity by Allegiance. The weighted-average
interest rate earned on the loans outstanding during the three months ended
March 31, 2000 was 9.2% compared to 9.3% during the three months ended March 31,
1999. The weighted-average interest rate for the 2000 period was lower because
one loan in the amount of $2.1 million was delinquent and on non-accrual status.
If this delinquent loan were excluded from the calculation, the weighted-average
interest rate for the 2000 period would have been 9.8%. Management continues to
believe that Allegiance will not incur any loss in connection with the $2.1
million principal amount of such loan and therefore, has not recorded a reserve
in connection therewith.
Interest Expense. Interest expense increased to $607,000 during the
three months ended March 31, 2000 from $108,000 during the three months ended
March 31, 1999 as a result of increased borrowings under the Allegiance
Financing. During the three months ended March 31, 2000, the weighted-average
interest rate under the Allegiance Financing was 8.4% and the weighted-average
borrowings were $28.6 million compared to the weighted-average interest rate of
8.2% and weighted-average borrowings of $5.4 million during the three months
ended March 31, 1999.
Compensation and Benefits. Compensation and benefits increased $68,000
to $123,000 during the three months ended March 31, 2000 from $55,000 during the
three months ended March 31, 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 $256,000 to $355,000 during the three months
ended March 31, 2000 from $99,000 during the three months ended March 31, 1999.
This increase was due primarily to (i) a $124,000 increase in general legal
expense, (ii) $57,000 in professional fees related to the delinquent loan and
(iii) $40,000 in fees related to due diligence for a potential loan portfolio
acquisition.
Amortization. Amortization costs declined slightly during the three
months ended March 31, 2000. The three months ended March 31, 1999 reflect
financing costs associated with the original revolving certificates under the
Allegiance Financing which were fully amortized by September 1999.
14
Viatical Settlements
--------------------
The Viatical Settlements segment includes results of operations in
connection with viatical settlements for DPFC and Point West Capital.
As a result of the Company's decision in 1996 to sell all or
substantially all of its assets, the Company established a reserve for loss on
sale of assets during 1996. This reserve is reevaluated quarterly. The reserve
for loss on sale of assets was $132,000 as of March 31, 2000 and December 31,
1999. From June 30, 1996 through the effective date of the DPFC Agreement, the
Company recognized income with respect to its viatical settlement business upon
receipt of proceeds on policies (either pursuant to sale of the policy or the
death of the insured). The income is equal to the difference between 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.
Certain Accounting Implications for DPFC
In March 2000, the Company and the Noteholders entered into the DPFC
Agreement pursuant to which the Noteholders, through June 30, 2002, 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 reduced 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 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, pursuant to GAAP, 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 may be able to utilize the carryforward
losses from DPFC to offset such liability, unless the carryforward losses have
been previously utilized. The Company will recognize the $18,000 monthly
servicing fee paid to Point West Capital as other income in the consolidated
statement of operations from March 2000 through June 2002.
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 Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999
Interest Income. Interest income declined 75.0% to $7,000 during the
three months ended March 31, 2000 from $28,000 during the three months ended
March 31, 1999, as a result of lower cash balances attributable to DPFC and the
DPFC Agreement. DPFC did not recognize any interest income for the month of
March 2000 and will not recognize any interest income in any future period. See
"Certain Accounting Implications for DPFC."
Earned Discounts on Matured Policies. DPFC did not recognize any earned
discounts on matured policies for the three months ended March 31, 2000 and will
not recognize any earned discounts in any future period. See "Certain Accounting
Implications for DPFC." Earned discounts on matured
15
polices was $61,000 during the three months ended March 31, 1999. During the
three months ended March 31, 2000, nine policies matured with a face value of
$204,000, compared to 12 policies with a face value of $834,000 during the three
months ended March 31, 1999. As of March 31, 2000, the Company held 456 policies
with an aggregate carrying value of $31.6 million (comprised of "matured
policies receivable," "purchased life insurance policies" and a portion of
"other assets") and an aggregate face value of $36.8 million. All of the
"matured policies receivable" and "purchased life insurance policies" are
pledged as security for the Securitized Notes.
Interest Expense. Interest expense declined 33.3% to $589,000 during
the three months ended March 31, 2000 from $883,000 during the three months
ended March 31, 1999 because DPFC did not recognize any interest for the month
of March 2000. As a result of the DPFC Agreement, pursuant to GAAP, DPFC will
not recognize any interest related to the Securitized Notes in any future period
(approximately $900,000 per quarter). See "Certain Accounting Implications for
DPFC."
Other General and Administrative Expenses. Other general and
administrative expenses declined 12.5% to $133,000 during the three months ended
March 31, 2000 from $152,000 during the three months ended March 31, 1999 as a
result of the DPFC Agreement. DPFC did not recognize any general and
administrative expenses for the month of March 2000 and will not recognize any
general and administrative expenses in any future period. See "Certain
Accounting Implications for DPFC."
Amortization. There was no amortization expense for the three months
ended March 31, 2000 because the financing costs related to the Securitized
Notes were fully amortized by December 31, 1999. The amortization expense for
the three months ended March 31, 1999 was $59,000.
Other
-----
The Other segment includes operating results for Point West Capital 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 months ended
March 31, 2000 and 1999.
Three Months Ended March 31, 2000 Compared to the Three Months Ended
March 31, 1999
Interest Income. Interest income increased to $82,000 during the three
months ended March 31, 2000 from $55,000 during the three months ended March 31,
1999, primarily due to an increase in interest earned on cash balances.
Net Gain on Securities. Point West Capital recognized a $317,000 gain
during the three months ended March 31, 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 three months ended March 31, 2000.
Other Income. Other income declined to $13,000 during the three months
ended March 31, 2000 from $73,000 during the three months ended March 31, 1999.
The three months ended March 31, 1999 included $66,000 in investment banking
fees received by PWS. The amount and timing of these services in future periods
cannot be predicted because of the limited operating history of PWS.
Compensation and Benefits. Compensation and benefits increased 69.9% to
$496,000 during the three months ended March 31, 2000 from $292,000 during the
three months ended March 31, 1999. This increase was due primarily to an
increase in salaries for existing employees in 2000. In addition, this increase
resulted from the hiring of additional employees in the second half of 1999.
16
Other General and Administrative Expenses. Other general and
administrative expenses increased 15.5% to $381,000 during the three months
ended March 31, 2000 from $330,000 during the three months ended March 31, 1999.
This increase was due to (i) a $82,000 increase in general legal expenses, (ii)
$70,000 in professional fees related to the analysis of a new business
opportunity and (iii) a $22,000 increase in rent expense. Offsetting the
increase during the three months ended March 31, 2000 was a $135,000 decline in
litigation expense. The federal class action and state alleged class action
lawsuits were settled in the first quarter of 2000, and, as a result, the
Company expects legal expenses to decline substantially in 2000 relative to
1999. During the second quarter of 1999, the Company renewed the lease on its
current space. The Company's monthly rent increased from $5,240 per month to
approximately $15,000 per month.
Liquidity and Capital Resources
- -------------------------------
Point West Capital and PWS
At present, neither Point West Capital nor PWS has an external funding
source from which to fund its working capital and general corporate needs.
During the three months ended March 31, 2000, the Company supported the
operations of Point West Capital 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 March 31, 2000, Point West Capital and PWS' cash and
cash equivalents were $2.0 million. The Company continues to analyze its current
and future needs for financing, which will be dependent on its ability to
develop the businesses of Ventures, Allegiance 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 Point West Capital or PWS will be
successful in obtaining external financing on satisfactory terms. The Company at
present anticipates having sufficient liquidity to meet the working capital and
operational needs of Point West Capital and PWS through December 31, 2000, 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 a loan
from the SBA and the repayment by obligors of loans. Point West Capital has
contributed $5.8 million to Ventures since inception. During 1999, Ventures
generated $21.3 million of cash proceeds (net of commissions) from the sale of
securities and repayment of loans. During the three months ended March 31, 2000,
Ventures generated $4.0 million of cash proceeds (net of commissions) from the
sale of securities and repayment of loans. At March 31, 2000, Ventures' cash and
cash equivalents were $4.6 million.
Point West 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. Any borrowings bear interest at the
rate for ten year debentures issued by Small Business Investment 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,
Point West Ventures borrowed $3.0 million from the SBA and during the second
quarter of 2000 expects to borrow at least an additional $3.5 million.
Ventures may not have sufficient liquidity, at least in the short term,
to grow its business. In addition, because of substantial appreciation in
investments, the Company may be required to restrict
17
Ventures' growth or dispose of investments in order to avoid registration under
the Investment Company Act of 1940 at some time in the future. See
"Considerations Under the Investment Company Act of 1940."
Allegiance
As of March 31, 2000, Point West Capital had invested $7.5 million in
Allegiance Capital. In August 1998, Allegiance arranged the Allegiance
Financing. The Company expects that the Allegiance Financing will provide
sufficient funds to support Allegiance's current level of lending activities
through December 15, 2000. See Note 5 of the Condensed Notes to Consolidated
Financial Statements. Allegiance is attempting to acquire a portfolio of loans
with an outstanding principal amount in excess of $125 million. The acquisition
is dependent on Allegiance obtaining an external financing source.
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 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 percentage 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.
18
Although the Company believes that it should not be deemed to be an
investment company, it is possible that it could become one in the near future
as a result of the following:
* Allegiance has not grown its commercial lending business as
quickly as the Company had expected;
* The Company has been unable to commence or acquire other
complementary financial services businesses as rapidly as it
had hoped;
* The success of Ventures, which holds a number of
investment securities, has exceeded expectations; and
* The success of other investments by the Company has exceeded
expectations.
The majority of investment securities held by the Company have been
acquired since January 1998. The aggregate value of these investments has
increased substantially since the purchase dates and the Company has realized
substantial gains in connection with the sales of some of these investments.
During 1999, Ventures sold some of its investments in part to address these
issues. 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 develop 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 which are complementary to the Company's current businesses, these
businesses may not necessarily involve financial services. These businesses will
be operating entities which do not own, trade or hold any significant amount of
investment securities. The Company may not find any suitable businesses to
acquire or develop on terms acceptable to the Company. In addition, the Company
may not be able to successfully integrate the operations of any new businesses.
Finally, any new businesses may not contribute positively to the Company's
financial condition or results of operations.
Continuing the Growth of Allegiance
The Company will use all reasonable efforts 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
19
offerings and services of Allegiance, Allegiance's continued ability to raise
financing for its activities, Allegiance's ability to find suitable creditworthy
borrowers and competitive pressures in the lending industry.
Disposing of Investment Securities/Limiting Growth of 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 (i) the ability of Allegiance to avail itself of the
benefits of the extension of the Allegiance Financing, (ii) no incurrence of any
loss and potential foreclosure and liquidation of one of the loans made by
Allegiance, (iii) sufficiency of the Company's liquidity and capital resources
(see "Liquidity and Capital Resources"), (iv) 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"), (v) amounts of
additional cash to be contributed to Allegiance Trust I and (vi) the ability of
Point West Ventures to borrow funds from the SBA. Such statements are based on
management's belief, judgment and analysis as well as assumptions made by and
information available to management at the date hereof. In addition to any
assumptions and cautionary factors referred to specifically in this report in
connection with such forward looking statements, factors that could cause actual
results to differ materially from those contemplated by the forward looking
statements include (i) Allegiance's ability to originate a sufficient number and
amount of loans that qualify for securitization under the Allegiance Financing,
(ii) Allegiance's ability to foreclose on the collateral at a price at least
equal to the amount of debt (including foreclosure fees and expenses) of such
loan and the outcome of the pending counterclaim filed in connection with the
foreclosure action, (iii) the results of the Company's consideration of
strategic options and any costs associated with a chosen option, (iv)
availability and cost of capital, (v) the factors described under
"Considerations Under the Investment Company Act of 1940," (vi) increases in the
LIBOR rate and future amounts outstanding under the Class A-R revolving
certificates and (vii) Point West Venture's ability to originate a sufficient
amount of investments that qualify for financing under the SBA regulations.
20
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 March 31, 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 March 31, 2000:
2000 2001 2002 2003 2004 Thereafter
---- ---- ---- ---- ---- ----------
Fixed rate loans (1)(2) $ 572,925 $ 878,004 $ 967,541 $1,066,238 $1,175,035 $27,812,316
Average interest
rates (1) 9.8% 9.8% 9.8% 9.8% 9.8% 9.8%
<FN>
- --
(1) The principal cash flows for fixed rate loans and average interest rates
do not include one delinquent
loan.
(2) The Company intends to hedge its interest rate exposure related to the
future 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 intends to utilize futures contracts to hedge certain
interest rate exposure between the time of origination of the loans and the
expected issuance of such term certificates.
</FN>
In connection with the extension of 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 not been required to make any such payments. The amount of cash, if any, to
be provided will be a function of several variables including the monthly LIBOR
interest rate and the outstanding balance of one of the Allegiance Financing
revolving certificates.
21
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
There have been no new material developments in connection with legal
proceedings. See the Form 10-K for further information regarding legal
proceedings.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits:
Number Description
------ ------------
10.1 Amended and Restated Indenture, dated as of
March 31, 2000, among Point West Capital
Corporation, Dignity Partners Funding Corp. I
and Bankers Trust Company (Incorporated by
reference to Exhibit 99.2 of the Company's Form
8-K filed on April 19, 2000).
10.2 Amended and Restated Contribution, Sale and
Servicing Agreement, dated as of March 31,
2000, among Point West Capital Corporation,
Dignity Partners Funding Corp. I and Bankers
Trust Company (Incorporated by reference to
Exhibit 99.3 of the Company's Form 8-K filed on
April 19, 2000).
10.3 Master Agreement, dated as of March 31, 2000,
among Point West Capital Corporation, Dignity
Partners Funding Corp. I, Bankers Trust
Company, and other parties thereto
(Incorporated by reference to Exhibit 99.4 of
the Company's Form 8-K filed on April 19,
2000).
27 Financial Data Schedule.
99.1 Press Release for Point West Ventures, L.P.
(b) Reports on Form 8-K filed during the quarter ended March 31,
2000:
Date Item Reported Matter Reported
---- ------------- ---------------
March 7, 2000 5 The Company issued a
press release
regarding its results
of operations for
1999.
April 12, 2000 5 The Company issued a
press release
regarding the
resolution with the
Noteholders of Dignity
Partners Funding Corp.
22
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: May 12, 2000 /s/ ALAN B. PERPER
--------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
Dated: May 12, 2000 /s/ JOHN WARD ROTTER
--------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23