SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-3165263
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
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San Francisco, California 94111
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(Address of principal executive offices) (Zip Code)
(415) 394-9467
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(Registrant's telephone number, including area code)
DIGNITY PARTNERS, INC.
----------------------
(Former name, if changed since last report)
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 July 31, 1997, there were 3,253,324 shares of the registrant's Common Stock
outstanding.
POINT WEST CAPITAL CORPORATION
-------------------------------
(Formerly known as Dignity Partners, Inc.)
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INDEX
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Page #
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Part I
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Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the
Three Months and Six Months Ended
June 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 3
Condensed Notes to Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Part II
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16-17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
- ---------- 18
(i)
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
June 30, December 31,
ASSETS 1997 1996
-------------------- --------------------
Cash and cash equivalents $ 14,762,007 $ 6,586,447
Restricted cash (note 6) 4,130,519 4,625,663
Investment securities (fair value: $2,281,250) (note 2) 2,275,551 -
Matured policies receivable (note 6) 577,702 1,181,513
Assets held for sale (note 3) 1,258,451 11,520,103
Purchased life insurance policies (note 4) 37,915,436 41,246,239
Investment in convertible preferred shares (note 5) 1,678,478 3,000,000
Deferred financing costs, net of accumulated amortization of
$498,836 and $381,690, respectively (note 4 and 6) 569,764 681,910
Other assets 203,602 102,598
-------------------- --------------------
Total assets $ 63,371,510 $ 68,944,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 188,268 $ 190,894
Accounts payable 883,858 320,577
Accrued compensation payable 99,971 186,390
Payable for policies purchased - 427,553
Reserve for equity interest in wholly owned financing
subsidiary (note 4) 4,306,880 6,452,589
Long term notes payable (note 6) 38,900,690 41,218,205
Deferred income taxes (note 7) 6,000 6,000
------------------- --------------------
Total liabilities 44,385,667 48,802,208
-------------------- --------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 and 4,291,824 shares, respectively, issued,
3,253,324 and 4,146,824 shares, respectively, outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Retained earnings (deficit) (7,679,763) (9,007,373)
Treasury stock, 1,038,500 and 145,000 shares,
respectively (note 8) (2,874,032) (390,000)
-------------------- --------------------
Total stockholders' equity 18,985,843 20,142,265
-------------------- --------------------
Total liabilities and stockholders' equity $ 63,371,510 $ 68,944,473
==================== ====================
<FN>
See accompanying condensed notes to Consolidated financial statements
</FN>
1
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 1997 and 1996
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
------------- ------------- ------------- -------------
Income:
Earned discounts on life insurance policies (note 9) - 1,884,431 - 3,697,032
Earned discounts on matured policies (note 9) 101,691 - 285,977 -
Interest income 337,574 281,919 545,210 456,913
Gain on sale of convertible preferred shares (note 5) - - 699,665 -
Net gain on assets sold (note 3) 492,217 - 1,362,858 -
Other 38,681 35,924 69,875 166,650
------------- ------------- ------------- -------------
Total income 970,163 2,202,274 2,963,585 4,320,595
Expenses:
Interest expense 885,789 967,185 1,824,259 1,974,938
Compensation and benefits 283,825 305,618 554,108 624,653
Other general and administrative expenses 459,377 446,417 1,025,113 666,793
Amortization 58,720 91,773 117,146 179,566
Depreciation - 10,018 - 19,967
------------- ------------- ------------- -------------
Total expenses 1,687,711 1,821,011 3,520,626 3,465,917
------------- ------------- ------------- -------------
Income (loss) before income taxes and net loss in
wholly owned financing subsidiary charged to
reserve for equity interest (717,548) 381,263 (557,041) 854,678
Income tax expense (note 7) - (187,614) - (367,512)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 4) 949,958 - 1,884,651 -
------------- ------------- -------------- ---------------
Net income $ 232,410 $ 193,649 $ 1,327,610 $ 487,166
============= ============= ============= =============
Net income per share (note 8) 0.06 0.05 0.34 0.13
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 8) 3,597,732 4,291,824 3,848,254 3,686,686
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
2
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
Six Months Ended
June 30,
1997 1996
--------------------- ---------------------
Cash flows for operating activities:
Net income $ 1,327,610 $ 487,166
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 117,146 199,533
Write-off of furniture and equipment - 12,303
Net gain on assets sold (1,362,858) -
Gain on sale of convertible preferred shares (699,665) -
Earned discounts on policies (285,977) (3,697,032)
Purchase of life insurance policies (915,272) (19,072,306)
Collections on matured life insurance policies 4,215,074 8,730,316
Increase in unearned income - 86,588
Increase in other assets (101,004) (160,345)
Increase in deferred taxes - 367,512
Decrease in accrued expenses (2,626) (96,120)
Increase (decrease) in accounts payable 563,281 (109,514)
Decrease in IPO financing costs payable - (306,900)
Decrease in payable to related party - (1,482,170)
Decrease in accrued compensation payable (86,419) (737,959)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (1,884,651) -
--------------------- --------------------
Net cash provided by (used in) operating activities 884,639 (15,778,928)
--------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 11,856,688 -
Purchase of furniture and equipment - (6,776)
Decrease (increase) in restricted cash 495,144 (807,396)
Increase in marketable securities (2,275,551) (4,107,502)
Proceeds from sale of convertible preferred shares 2,021,187 -
--------------------- ---------------------
Net cash provided by (used in) investing activities 12,097,468 (4,921,674)
--------------------- ---------------------
Cash flows from financing activities:
Proceeds from long term notes payable - 6,375,000
Principal payments on long term notes payable (2,317,515) -
Proceeds from other long term debt - 4,275,024
Principal payments on other long term debt - (3,609,521)
Distribution to limited partners - (783,313)
Purchase of limited partners' interest in investment partnership - (4,887,283)
Principal payment on loan from stockholder - (1,162,170)
Proceeds from issuances of common stock - 25,273,968
Purchase of treasury stock (2,484,032) -
Increase in financing costs (5,000) (88,000)
Reimbursement of IPO financing costs - 750,000
--------------------- --------------------
Net cash provided by (used in) financing activities (4,806,547) 26,143,705
--------------------- ---------------------
Net increase in cash and cash equivalents 8,175,560 5,443,103
Cash and cash equivalents, beginning of period 6,586,447 1,056,611
--------------------- ---------------------
Cash and cash equivalents, end of period $ 14,762,007 $ 6,499,714
===================== =====================
Supplemental disclosure of cash flow information:
State taxes paid $ 31,456 $ 5,693
===================== =====================
Cash paid for interest $ 1,826,885 $ 2,071,058
===================== =====================
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
3
POINT WEST CAPITAL CORPORATION
-------------------------------
(Formerly known as Dignity Partners, Inc.)
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. General Description
- -- --------------------
The unaudited consolidated financial statements of Point West Capital
Corporation (formerly known as Dignity Partners, Inc.) and its consolidated
entities ("Point West"or the "Company") as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 have been prepared in
accordance with generally accepted accounting principles 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 six month periods ended June
30, 1997 are not indicative of the results that may be expected for the entire
1997 fiscal year. The balance sheet as of December 31, 1996 has been derived
from the audited financial statements of the Company. The statements included
herein should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996 (the "Form 10-K").
Point West is a specialty financial services company. Until February 1997
the Company provided viatical settlements for terminally ill persons. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Cessation of Viatical Settlement Business; Sale of Assets."On
June 3, 1997 the Company formed a limited partnership called Fourteen Hill
Capital, L.P. ("Fourteen Hill Capital") and a wholly-owned limited liability
company called Fourteen Hill Management, LLC ("Fourteen Hill Management").
Fourteen Hill Management is the general partner of Fourteen Hill Capital and, at
present, Point West is the only limited partner. Fourteen Hill Capital has filed
an application with the Small Business Administration to become a small business
investment company. The Company also continues to analyze other strategic
options and to explore its overall strategic direction.
2. Investment Securities
- -- ----------------------
The Company classifies securities for which it has the positive intent and
ability to hold to maturity as held-to-maturity securities. Such securities are
reported at amortized cost. As of June 30, 1997 all investment securities were
classified as held-to-maturity securities.
4
3. Assets Held for Sale and Related Sale Agreements
- -- -------------------------------------------------
As a result of the Company's decision in 1996 to sell all or substantially
all of its assets, it reclassified all assets owned as of such date, other than
the assets of its wholly-owned special purpose subsidiary, Dignity Partners
Funding Corp. I ("DPFC"), to a "held-for-sale" category. Accordingly, such
assets are recorded on the balance sheet as of June 30, 1997 and December 31,
1996 at the lower of carrying value or fair value less estimated cost to sell.
In connection with the decision to sell assets, during 1996 the Company
established a reserve for loss on sale of assets. Assets held for sale consist
of:
Assets Held for Sale
=====================
June 30, 1997 December 31, 1996
------------- -----------------
Capitalized costs $ 1,547,549 14,089,124
Earned discounts on life insurance policies 59,977 380,692
Reserve for loss on sale (349,075) (2,949,713)
--------------- ------------
Assets held for sale $ 1,258,451 11,520,103
================ =============
The calculation of reserve for loss on sale of assets for life insurance
policies held for sale was calculated based on the life expectancies of the
insureds under the policies in relation to prices obtained by the Company in
connection with other sales. Any gain or loss due to the difference between
actual proceeds (less any back end sourcing fees) and the carrying value after
giving effect to the reserve for loss on sale of assets will be reported as a
realized gain or loss on assets sold at the time sale proceeds are received.
On September 27, 1996, the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 197 policies with an aggregate
face value of $14.2 million for an aggregate consideration of approximately $8.7
million. The Company established a reserve in the third quarter of 1996 of
$1,792,087 in connection with policies covered by the sale agreement. Through
June 30, 1997, 186 policies with an aggregate face value of $13.5 million had
been sold, of which 46 policies with an aggregate face value of $1.9 million
were sold in the fourth quarter of 1996 (resulting in a realized gain of
$120,000), 136 policies with an aggregate face value of $11.4 million were sold
in the first quarter of 1997 (resulting in a realized gain of $426,000) and 4
policies with an aggregate face value of $175,000 were sold in the second
quarter of 1997 (resulting in a realized loss of $5,000). Seven policies covered
by the sale agreement were not sold because the insured died prior to the
issuing insurance company's acknowledgment of transfer of ownership of the
policy and the Company collected the death benefit instead of selling those
policies. As of June 30, 1997, the remaining four policies (with a face value of
$245,000) were pending acknowledgment of transfer of ownership.
On January 16, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 18 policies with an aggregate
face value of $1.0 million for approximately $710,000. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $590,000
after giving effect to the reserve for loss on sale of assets. In the first
quarter of 1997, the Company completed the sale of 17 policies with an aggregate
face value of $990,000 and realized a gain of $121,000 associated with these
policies. As of June 30, 1997, the remaining policy with a face value of $25,000
was pending acknowledgment of transfer of ownership.
On February 10, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 67 policies with an aggregate
face value of $4.5 million for approximately $3.0 million. Such policies were
carried on the balance sheet at December 31, 1996 at approximately
5
$2.2 million after giving effect to the reserve for loss on sale of assets.
Through June 30, 1997, 60 policies with an aggregate face value of $3.8 million
had been sold, of which 35 policies with an aggregate face value of $1.7 million
were sold in the first quarter of 1997 (resulting in a realized gain of
$295,000) and 25 policies with an aggregate face value of $2.1 million were sold
in the second quarter of 1997 (resulting in a realized gain of $343,000). As of
June 30, 1997, the remaining 7 policies with a face value of $684,000 were
pending acknowledgment of transfer of ownership.
On March 24, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 31 policies with a face value
of $2.9 million for approximately $1.7 million. Such policies were carried on
the balance sheet at March 31, 1997 at approximately $1.5 million after giving
effect to the reserve for loss on sale of assets. In the second quarter of 1997,
the Company completed the sale of 22 policies with an aggregate face value of
$2.1 million and realized a gain of $133,000 associated with these policies. One
policy covered by the sale agreement was not sold because the insured died prior
to the issuing insurance company's acknowledgment of transfer of ownership of
the policy and the Company collected the death benefit instead of selling this
policy. As of June 30, 1997, the remaining 8 policies with a face value of
$861,000 were pending acknowledgment of transfer of ownership.
The policies representing "assets held for sale" consist of the policies
under the aforementioned sales agreements for which the Company is awaiting the
acknowledgment of transfer of ownership by the applicable insurance company and
the payment therefor by the applicable purchaser. The Company is experiencing
delays or difficulties in transferring the ownership of certain policies and, if
it is unsuccessful in transferring the ownership of such policies, due to
contractual provisions in the related sales agreements the sales will not be
consummated.
4. Purchased Life Insurance Policies
- -- ----------------------------------
Effective July 1996, purchased life insurance policies consisted only of
those policies held by DPFC. The sale of policies held by DPFC, all of which are
pledged under the indenture pursuant to which the Securitized Notes (as defined
in Note 6) were issued, requires the consent of all of the holders of the
Securitized Notes ("Noteholders") and the Company. The Company has discussed
potential sales of DPFC policies with the Noteholders; however, the Company
cannot determine whether the Noteholders and the Company will decide to sell
such policies or whether such a sale is feasible. A reserve was recorded in the
third quarter of 1996 to reflect the estimated loss of the Company's equity
interest in DPFC. As of June 30, 1997 the reserve was $4.3 million. The reserve
provides for the write-off of deferred financing costs and the unrealized
residual value associated with DPFC.
5. Investment In Convertible Preferred Shares
- -- -------------------------------------------
On November 4, 1996, the Company purchased 21,517,100 convertible preferred
shares for $3.0 million (representing approximately 30% of the fully converted
common equity interest) in American Information Company, Inc. ("American
Information"), a privately held company which, among other things, provides
information services to individuals owning or purchasing automobiles. The
Company has an option, through September 1997, to purchase for approximately
$1.1 million 8.2 million additional shares of common stock of American
Information. On March 18, 1997, the Company, following conversion of 8.2 million
shares of convertible preferred stock into 8.2 million shares of common stock of
American Information, sold such shares (approximately 38% of the Company's 30%
equity investment in American Information) to an unaffiliated third party for
$1.83 million. The Company recognized a $700,000 pre-tax gain on this
transaction in the first quarter of 1997. At June 30, 1997 the Company owned
approximately 13.2% of the equity of American Information and the shares which
the Company is entitled to purchase under the option represented
6
approximately 8.0% of the equity of American Information. The Company
accounts for its investment using the cost method. If the equity method had been
applied Dignity Partners would have recorded a loss associated with the
investment in the first half of 1997 of $490,000 which is equivalent to the
Company's pro rata share on an as if converted basis in American Information's
loss for the first half of 1997.
6. Long Term Notes Payable
- -- ------------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity March
10, 2005 (the "Securitized Notes") issued by DPFC initially provided for a
maximum lending commitment of $50 million. As a result of an early amortization
event in June 1996, the maximum lending commitment was reduced to the then
outstanding principal amount ($45.5 million) and principal payments on the
Securitized Notes began in July 1996. Principal and interest payments on the
Securitized Notes are payable solely from collections on pledged policies and
deposited funds. The Securitized Notes are reported on the balance sheet as long
term notes payable. The Securitized Notes bear a fixed interest rate of 9.17%
per annum.
The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include the assets, liabilities and
operations of DPFC; however, the assets of DPFC are not available to pay
creditors of Point West Capital Corporation. The assets of DPFC are the
beneficial ownership interests in the life insurance policies and funds which
secure the Securitized Notes. To the extent that the book value of assets of
DPFC become less than the outstanding balance of the Securitized Notes,
generally accepted accounting principles nonetheless would require a loss to be
recorded. Upon the retirement or maturity of the Securitized Notes, under
generally accepted accounting principles the Company would recognize a gain
equal to any such losses previously recognized. At June 30, 1997, the carrying
value of the assets of DPFC were $42.4 million (consisting of $37.9 million in
purchased life insurance policies, $4.0 million in restricted cash on deposit
with a trustee for the benefit of the Noteholders and $527,000 in matured
policies receivable).
Point West is the servicer of the policies pledged under the indenture
pursuant to which the Securitized Notes were issued and incurs servicing
expenses (which are reimbursed, subject to certain priority payments) in
connection therewith.
7. Deferred Income Taxes
- -- ----------------------
Prior to September 30, 1996, the Company had provided for deferred income
taxes related to income accrued on purchased life insurance policies. Because
these policies have been sold, or are anticipated to be sold, at a loss, the
Company determined that the deferred tax liability associated with these
policies is not required. The Company has provided for miscellaneous state
income tax liabilities expected to be incurred. For the year ended December 31,
1996, the Company had a deferred tax asset resulting primarily from tax net
operating loss carryforwards. A valuation allowance was established to reduce
the amount of the gross deferred tax asset to that amount deemed more likely
than not to be utilized.
In the first half of 1997, the Company's provision for income taxes was
offset by a reduction in the valuation allowance previously established. The
valuation allowance has been reduced to reflect that portion of the deferred tax
asset which will more likely than not be utilized based on anticipated earnings
for the year ending December 31, 1997.
7
8. Common Stock
- -- ------------
Changes in stockholders' equity during the first six months of 1997
reflected the following:
Stockholders' equity, beginning of period $ 20,142,265
Net income 1,327,610
Treasury stock (2,484,032)
--------------
Stockholders' equity, end of period $ 18,985,843
---------------
In October 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company was authorized to purchase from
time to time up to 1 million shares of Common Stock at prevailing market prices.
In June 1997 such authority was increased to 1.04 million shares of Common
Stock. In June 1997, the Company completed the share repurchase program, having
repurchased an aggregate of 1.04 million shares at a weighted average price of
$2.77 per share.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share ("Statement 128", which will
be effective for interim and annual financial statements issued for periods
ending after December 15, 1997. Statement 128 simplifies the previous standards
for computing earnings per share ("EPS"), replacing the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures, which applies to the Company.
9. Earned Discounts
- -- -----------------
Earned discounts on life insurance policies reflects the amount of
accretion recorded in the first half of 1996. As a result of the decision to
sell all or substantially all of the Company's assets, any income since the
third quarter of 1996 have been recorded as earned discounts for matured
policies only and recorded upon receipt of proceeds of policies (pursuant to the
death of the insured). Earned discounts for matured policies reflects the income
during the relevant period in 1997 on policies on which the Company collected
the proceeds (pursuant to the death of the insured).
10. Events Subsequent to the Balance Sheet Date
- -- --------------------------------------------
a. Name Change Amendment
Since the Company no longer engages in the viatical settlement business,
the Board of Directors determined that a change in the Company's name would be
appropriate. The Company sought and received in June 1997 stockholder approval
to amend the Company's certificate of incorporation to change its name from
Dignity Partners, Inc. to Point West Capital Corporation. The name change was
effective August 1, 1997.
b. Litigation
On December 19, 1996, a complaint was filed in the United States District
Court, Northern District of California (the "Court") (Docket No. C96-4558)
against Dignity Partners, Inc. and each of its directors by three individuals
purporting to act on behalf of themselves and an alleged class consisting of all
purchasers of the Company's common stock during the period February 14, 1996 to
July 16, 1996. The complaint alleged that the defendants violated Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section 11
of the Securities Act of 1933 and seeks, among other things, compensatory
damages, interest, fees and costs. The allegations were based on alleged
misrepresentations in and omissions from the Company's registration statement
and
8
prospectus related to its initial public offering and certain documents
filed by the Company under the Exchange Act. On July 18, 1997, the Court granted
the defendants' motion to dismiss the complaint. However, the Court gave the
plaintiffs permission to file an amended complaint. Such amended complaint will
need to be filed by September 8, 1997 or such later date as the Court permits.
The Company and each of the defendants intend to continue to defend the action
vigorously.
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco (Docket No. 984643) against Dignity
Partners, Inc., and each of its executive officers and New Echelon by an
individual purporting to act on behalf of himself and an alleged class
consisting of all purchasers of the Company's common stock during the period
February 14, 1996 to July 16, 1996. The complaint alleges that the defendants
violated section 25400 of the California Corporate Code and seeks to recover
damages. The allegations are based on alleged misstatements, concealment and/or
misrepresentations and omissions of allegedly material information in connection
with the Company's initial public offering and subsequent disclosures. The
Company and each of the defendants intend to defend the action vigorously.
9
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 June 30, 1997 and of the results of operations
for the Company for the three and six months ended June 30, 1997 and 1996, 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. For the reasons set forth below (including the
reclassification into "assets held for sale" of a substantial portion of the
Company's assets in 1996 and related accounting consequences), the Company's
results of operations and cash flows for the three and six months ended June 30,
1997 are not comparable to those for the three and six months ended June 30,
1996.
Overview
- ---------
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of DPFC,
the Company's wholly-owned special purpose subsidiary through which the Company
issued the Securitized Notes. See the Form 10-K and Notes 4 and 6 of the
Condensed Notes to Consolidated Financial Statements (contained herein) for
further information regarding DPFC.
Until February 1997 the Company provided viatical settlements for
terminally ill persons. See "Cessation of Viatical Settlement Business; Sale of
Assets." On June 3, 1997 the Company formed a limited partnership called
Fourteen Hill Capital, L.P. ("Fourteen Hill Capital") and a wholly-owned limited
liability company called Fourteen Hill Management, LLC ("Fourteen Hill
Management"). Fourteen Hill Management is the general partner of Fourteen Hill
Capital and, at present, Point West is the only limited partner. Fourteen Hill
Capital has filed an application with the Small Business Administration to
become a small business investment company. The Company also continues to
analyze other strategic options and to explore its overall strategic direction.
Cessation of Viatical Settlement Business; Sale of Assets
- ----------------------------------------------------------
The principal business activity of the Company through February 1997 was to
provide viatical settlements for terminally ill persons. A viatical settlement
is the payment of cash in return for an ownership interest in, and right to
receive the death benefit (face value) from, a life insurance policy.
On July 16, 1996 the Company announced that, in light of the data regarding
new treatments involving combinations of various drugs presented at the
International AIDS Conference held in Vancouver, British Columbia in July 1996
(the "AIDS Conference"), the Company was temporarily ceasing processing new
applications for policies insuring individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic options. See the Form 10-K for further information regarding the AIDS
Conference.
The Company decided in the third quarter of 1996 to sell all or
substantially all of its assets. As a result of such decision, the Company
reclassified all of its assets (other than the policies held by DPFC) to a
"held-for-sale" category during the third quarter of 1996. Accordingly, such
assets are accounted for at the lower of carrying value or fair value less cost
to sell.
The Company sought and received in December 1996 stockholder approval to
sell all or substantially all of its assets.
10
Based on the Company's evaluation of the effects of the research results
reported at the AIDS Conference and subsequent reports and other information,
the Board of Directors in February 1997 approved the cessation of the viatical
settlement business and the sale by the Company of its non-AIDS policies,
consisting of approximately 31 policies with a face value of $2.9 million.
Through June 30, 1997 the Company had sold or entered into agreements to
sell 373 policies, representing $29.2 million in aggregate face value, for an
aggregate purchase price of $19.5 million. As a result of these sales, the
Company reported a pre-tax loss of $180,000 in 1996 and a pre-tax gain of $1.4
million in the first six months of 1997 (see "Results of Operations -- Three and
Six Months Ended June 30, 1997 Compared to Three and Six Months Ended June 30,
1996 -- Net gain on assets sold"). Although the Company previously reported an
expectation to report a $638,000 pre-tax gain for the three months ended June
30, 1997 ($1.5 million pre-tax gain for the six months ended June 30, 1997), the
Company has experienced delays or difficulties in transferring the ownership of
certain policies. The Company believes that policies with an aggregate face
value ranging from $803,000 to $1.0 million are unlikely to be transferred and
sold because of such difficulties. If the Company is unsuccessful in
transferring the ownership on such policies, due to contractual provisions in
the related sales agreements the sales will not be consummated. The Company
believes, taking into consideration the policies for which the ownership is not
likely to be transferred, that its pre-tax gain from the sale of policies in the
third quarter of 1997 will likely range from $16,000 to $43,000 and that the
Company will at the end of such quarter continue to own policies with a face
value ranging from $803,000 to $1.0 million and a carrying value ranging from
$410,000 to $536,000.
Name Change Amendment
- ----------------------
Since the Company no longer engages in the viatical settlement business,
the Board of Directors determined that a change in the Company's name would be
appropriate. The Company sought and received in June 1997 stockholder approval
to amend the Company's certificate of incorporation to change its name from
Dignity Partners, Inc. to Point West Capital Corporation. The name change was
effective August 1, 1997.
Method of Accounting
- ---------------------
Through June 30, 1996, the Company recognized income ("earned discount") on
each purchased policy by accruing, over the period between the acquisition date
of the policy and the Company's estimated date of collection of the policy's
face value (the "Accrual Period"), the difference (the "unearned discount")
between (a) the face value of the policy less the amount of fees, if any,
payable to a referral source upon collection of the face value, and (b) the
carrying value of the policy. The carrying value for each policy was reflected
on the Company's consolidated balance sheet under "purchased life insurance
policies" and consisted of the purchase price, other capitalized costs and the
earned discount on the policy accrued to the balance sheet date. See the Form
10-K for further information regarding capitalized costs of policies,
determination of Accrual Periods and changes thereto over time.
As a result of the Company's decision to sell all or substantially all of
its assets, the Company established a reserve in 1996 for loss on sale of
assets. The Company also established a reserve for loss of the Company's equity
interest in DPFC during 1996 because of the uncertainties created by the data
presented at the AIDS Conference and subsequent reports of the efficacy of new
treatments for AIDS/HIV. As of June 30, 1997, such reserves were $349,000 and
$4.3 million, respectively. In addition, beginning in the third quarter of 1996,
the Company began generally recognizing income on
11
policies only upon receipt of proceeds on policies (either pursuant to sale
or the death of the insured). Such income is equal to the difference between
such proceeds (less any back-end sourcing fees) and the carrying value of such
policies after giving effect to any reserve for loss on the sale of such
policies or any reserve for loss of the Company's equity interest in DPFC. See
the Form 10-K and Note 4 and 6 of the Condensed Notes to Consolidated Financial
Statements for further information regarding the reserve for loss on sale of
assets.
Certain Accounting Implications for DPFC
- -----------------------------------------
Under generally accepted accounting principles, to the extent that the
carrying value of the assets of DPFC are less than the carrying value of its
liabilities, the Company would be required to recognize a loss equal to the
amount of such difference, notwithstanding the non-recourse nature of the
Securitized Notes. At June 30, 1997, the carrying value of the assets of DPFC
were $42.4 million (consisting of purchased life insurance policies, restricted
cash and a portion of matured policies receivable) and its liabilities were
$38.9 million (consisting of long term notes payable, i.e. the Securitized
Notes).
Although the Securitized Notes had an expected life of 2.1 years when the
aggregate maximum principal amount of the Securitized Notes was increased from
$35 million to $50 million in September 1995, the Company does not believe that
the Securitized Notes will be retired through collections by October 1997. The
Company believes that, if the Securitized Notes are not retired by late 2001,
the assets of DPFC will become less than its liabilities because the costs of
carrying the Securitized Notes, including interest and servicing and trustee
fees, will deplete collections available to repay principal. The Company
reported in its Form 10-Q for the quarterly period ended March 31, 1997, that in
the event that the collection experience for DPFC policies is substantially
delayed, the assets of DPFC may become less than its liabilities before late
2001. Because of recent delays and variability in collections, the Company
cannot predict at what point in time the assets of DPFC may become less than the
liabilities.
Additionally, if the collection experience for the DPFC policies is
substantially delayed, the value of the assets of DPFC may erode further for
some of the following reasons. First, a decision to discontinue paying premiums
on some policies may be made because the present value of the expected death
benefit on some policies may be less than expected future premiums to be paid on
such policies. Second, the face value of certain policies (especially group
term) may begin to decrease as the people whose lives are insured thereunder
reach specified age levels (often 65). Finally, policies for which the insurance
was continued under a disability provision may be uneconomical to convert given
the insured's age and life expectancy if such insured person is no longer
considered disabled. The Company cannot determine at present how many, if any,
policies held by DPFC would be so affected.
In light of the foregoing, the Company believes that it is possible that
the Company may in the future under generally accepted accounting principles be
required to recognize a further loss to the extent that the carrying value of
the assets of DPFC is less than its liabilities. However, when the Securitized
Notes are finally discharged or mature, the Company under generally accepted
accounting principles would recognize a gain in an amount equal to the aggregate
amount of any such losses recognized. The Securitized Notes represent the
obligations solely of DPFC. The Company did not guarantee repayment of the
Securitized Notes and is not required to fund any principal or interest
deficiencies thereunder.
Share Repurchase Program
- ------------------------
In October 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company was authorized to purchase from
time to time up to 1 million shares of Common Stock at prevailing market prices.
In June 1997 such authority was increased to 1.04 million
12
shares of Common Stock. In June 1997, the Company completed the share
repurchase program, having repurchased an aggregate of 1.04 million shares at a
weighted average price of $2.77 per share.
Results of Operations
- ---------------------
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months
- ---------------------------------------------------------------------------
Ended June 30, 1996
- -------------------
Earned Discounts. The Company currently recognizes earned discount only
upon receipt of proceeds on policies (pursuant to the death of the insured).
Consequently, the Company did not recognize any earned discounts on life
insurance policies during the first half of 1997, but instead recognized
$102,000 and $286,000 of earned discounts on matured policies for the three and
six months ended June 30, 1997, respectively. Such income is equal to the
difference between the proceeds the Company received on the policies (less any
back end sourcing fees) and the carrying value of such policies after giving
effect to any reserve for loss on sale of such policies. See "Method of
Accounting."
In the first half of 1996 the Company recognized earned discount on each
purchased policy by accruing, over the Accrual Period, the difference between
(a)~the face value of the policy less the amount of fees, if any, payable to a
referral source upon collection of the face value, and (b)~the carrying value of
the policy. Earned discounts on life insurance policies was $1.9 million and
$3.7 million for the three and six months ended June 30, 1996. See "Method of
Accounting."
The Company purchased only four policies (outstanding commitments as of
December 31, 1996) with an aggregate face value of $155,000 during the first
half of 1997 compared to the purchase of 342 policies with an aggregate face
value of $24.9 million during the first half of 1996. See "Cessation of Viatical
Settlement Business; Sales of Assets."
Interest Income. Interest income increased 19.7% in the second quarter of
1997 over the second quarter of 1996 and 19.3% in the first half of 1997 over
the first half of 1996 as a result of the investment of the proceeds from the
sale of policies in short term securities and marketable securities. Interest
income generated in the first half of 1996 was essentially the result of the
investment of the initial public offering proceeds.
Gain on sale of convertible preferred shares. In the first quarter of 1997
the Company recognized a $700,000 gain on the sale of a portion of its
investment in American Information. In March 1997 the Company converted 8.2
million shares of convertible preferred stock into 8.2 million shares of common
stock of American Information and sold such shares to an unaffiliated third
party for $1.83 million. The carrying value of such shares was $1.1 million. See
Note 5 of the Condensed Notes to Consolidated Financial Statements.
Net gain on assets sold. The Company collected the sales proceeds on 51
policies during the second quarter of 1997 and 239 policies during the first
half of 1997. See Note 3 of the Condensed Notes to Consolidated Financial
Statements. The total net gain recorded in the second quarter and first half of
1997 in connection with these sales was $492,000 and $1.4 million, respectively.
The realized gain was calculated based on the difference between the sale
proceeds and the carrying value after giving effect to the reserve for loss on
sale of assets. See "Cessation of Viatical Settlement Business; Sale of Assets.
Other Income. Components of other income include collections on policies of
dividends, interest, paid-up cash values, increases in face value of matured
policies, refunds of premiums on matured policies and capital gains on
investments securities. Other income increased 7.7% in the second
13
quarter of 1997 over the second quarter of 1996 due to gains on investment
securities. Other income decreased 58.1% during the first half of 1997 compared
to the first half of 1996 due to the sale of policies and a decrease in the
number of matured policies. A $50,000 increase in face value on one policy was
also recorded during the first quarter of 1996.
Interest Expense. Interest expense decreased 8.4% in the second quarter of
1997 over the second quarter of 1996 and 7.6% in the first half of 1997 over the
first half of 1996 due mainly to the repayment of the Company's revolving credit
facility in the second half of 1996. Average borrowings under the Company's
revolving credit facility was $0.7 million in the first half of 1996. Average
borrowings under the Securitized Notes were $39.6 million in the first six
months of 1997 compared to $42.6 million in the first six months of 1996. The
interest rate on the Securitized Notes was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits decreased 7.1% in the
second quarter of 1997 compared to the second quarter of 1996 and 11.3% in the
first half of 1997 compared to the first half of 1996. This decrease was due
mainly to the reduction in staff from 25 to 14 with the cessation of application
processing of new policies. Partially offsetting the staff reduction was the
increase in compensation and benefits for remaining employees (including
executive officers) in early 1997.
Other General and Administrative Expenses. Other general and administrative
expenses increased 2.9% in the second quarter of 1997 compared to the second
quarter of 1996 and 53.7% in the first half of 1997 compared to the first half
of 1996. The increase in the first half of 1997 is primarily the result of a
$357,000 legal reserve recorded in the first half of 1997 in connection with
federal and state class action lawsuits filed against the Company and its
officers and directors. The first six months of 1997 also includes a $150,000
aggregate increase in expenses for professional fees to support the analysis of
strategic options.
Income Tax Expense. In the first half of 1997 the Company did not record an
income tax expense on the income statement because the deferred tax asset of
$3,225,130 was available to offset any tax liability. The Company adjusted its
deferred tax asset, liability and related allowance to reflect the tax effect on
the earnings for the six months ended June 30, 1997.
Net loss in wholly owned financing subsidiary charged to reserve for equity
interest. At December 31, 1996 the reserve to reflect the estimated loss of the
Company's entire equity interest in DPFC was $6.5 million. The DPFC net loss of
950,000 and $1.9 million recorded in the three and six months ended June 30,
1997, respectively, was included in the Company' net loss before income taxes
and net loss in wholly owned financing subsidiary charged to reserve for equity
interest. This loss was charged against the reserve for equity interest in
wholly owned financing subsidiary.
Liquidity and Capital Resources
- -------------------------------
The Company does not currently have an external funding source. The
Securitized Notes do not provide funds with which to fund operations. At June
30, 1997, cash and cash equivalents was $14.8 million and investment securities
was $2.3 million. The Company is analyzing its current and future needs for
financing, which will be dependent on its strategic direction. There can be no
assurance that the Company will be successful in obtaining external financing on
satisfactory terms assuming it determines it needs additional funds. However,
the Company at present anticipates having sufficient liquidity to meet its
working capital and operational needs through 1997, using current cash and cash
14
equivalents and investment securities and any additional cash generated by
the sale of policies. Such needs may change significantly depending on strategic
options selected.
As of June 30, 1997, the outstanding principal amount of the Securitized
Notes was $38.9 million. Principal repayments on the Securitized Notes began in
July 1996. Principal and interest payments on the Securitized Notes are payable
solely from collections on policies pledged to secure the payment thereof and do
not require the Company to expend cash or obtain financing to satisfy such
principal and interest obligations.
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) expected gains to be reported in the third
quarter of 1997 on policies subject to sales agreements and expected face and
carrying values of policies expected to be owned by the Company at September 30,
1997 (see the last paragraph under "Cessation of Viatical Settlements Business;
Sale of Assets"), (ii) expectations regarding whether and the time at which the
carrying value of the assets of DPFC will be less than the carrying value of its
liabilities (see "Certain Accounting Implications for DPFC"), and (iii)
sufficiency of the Company's liquidity and capital resources (see "Liquidity and
Capital Resources"). Such statements are based on management's belief, judgment
and analysis as well as assumptions made by and information available to
management at the date hereof. In addition to any assumptions and cautionary
factors referred to specifically in this report in connection with such forward
looking statements, factors that could cause actual results to differ materially
from those contemplated by the forward looking statements include (i) the
ability of the Company to transfer ownership of policies; (ii) the amount and
timing of actual collections of sales proceeds, (iii) the amount and timing of
actual collections of DPFC policies following the death of the insured, (iv) the
results of the Company's consideration of strategic options and any costs
associated with a chosen option, and (v) availability and cost of capital.
15
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings
- --------------------------
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (the "Court" (Docket
No. C96-4558) against Dignity Partners, Inc. and each of its directors
by three individuals purporting to act on behalf of themselves and an
alleged class consisting of all purchasers of the Company's common
stock during the period February 14, 1996 to July 16, 1996. The
complaint alleged that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section
11 of the Securities Act of 1933 and seeks, among other things,
compensatory damages, interest, fees and costs. The allegations were
based on alleged misrepresentations in and omissions from the
Company's registration statement and prospectus related to its initial
public offering and certain documents filed by the Company under the
Exchange Act. On July 18, 1997, the Court granted the defendants'
motion to dismiss the complaint. However, the Court gave the
plaintiffs permission to file an amended complaint. Such amended
complaint will need to be filed by September 8, 1997 or such later
date as the Court permits. The Company and each of the defendants
intend to continue to defend the action vigorously.
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco(Docket No. 984643)against
Dignity Partners, Inc., and each of its executive officers and New
Echelon by an individual purporting to act on behalf of himself
and an alleged class consisting of all purchasers of the Company's
common stock during the period February 14, 1996 to July 16, 1996.
The complaint alleges that the defendants violated section 25400
of the California Corporate Code and seeks to recover damages. The
allegations are based on alleged misstatements, concealment and/or
misrepresentations and omissions of allegedly material information
in connection with the Company's initial public offering and
subsequent disclosures. The Company and each of the defendants intend
to defend the action vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
On June 9, 1997, the Company held an Annual Meeting of its
stockholders. The election of two directors and the name change
amendment as set forth in the proxy statements were presented.
Alan B. Perper and Paul A. Volberding were re-elected to the Board of
Directors for terms expiring in 2000. The voting tallies were:
Director Votes For Votes Withheld
-------- ---------- ---------------
Alan B. Perper 2,608,172 17,800
Paul A. Volberding 2,608,172 17,800
The other directors whose term of office continued after the meeting
are: John Ward Rotter (term expiring in 1998), Bradley N. Rotter
(term expiring in 1999) and Stephen T. Bow (term expiring in 1999).
16
The name change amendment was also approved. The Company' new name,
effective August 1, 1997, is Point West Capital Corporation. The
voting tallies were:
Broker
Votes For Votes Against Votes Abstain Non-Votes
--------- ------------- ------------- ---------
Name Change Amendment 2,609,622 16,350 0 0
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits.
Number Description
------- -----------
3 Composite of Second Amended and Restated Certificate
of Incorporation, as amended through August 1, 1997
10 Amendment No. 3 to the Indenture, dated as of
February 1, 1995 among the Company, as Servicer, DPFC
as Issuer and Bankers Trust Company as Indenture
Trustee
27 Financial Data Schedule
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
5/5/97 5 The Company issued a press release regarding
its results of operations for the first
quarter of 1997.
6/9/97 5 The Company issued a press release
announcing completion of stock repurchase
program, re-election of two directors, name
change and NASDAQ trading symbol change.
6/27/97 5 The Company issued a press release
announcing the effective date of the name
change and NASDAQ trading symbol change.
17
SIGNATURES
===========
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POINT WEST CAPITAL CORPORATION
(Formerly known as Dignity Partners, Inc.)
DATED: August 7, 1997 /S/ ALAN B. PERPER
--------------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: August 7, 1997 /S/ JOHN WARD ROTTER
--------------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
18