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 September 30, 1997
--------------------------------
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
---------------------------------
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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At October 31, 1997, there were 3,253,324 shares of the registrant's Common
Stock outstanding.
21
POINT WEST CAPITAL CORPORATION
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INDEX
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Page #
Part I ------
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Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 3
Condensed Notes to Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Part II
- -------
Item 1. Legal Proceedings 20
Item 2. Change in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 21
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(i)
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
September 30, December 31,
ASSETS 1997 1996
-------------------- --------------------
Cash and cash equivalents $ 14,126,590 $ 6,586,447
Restricted cash (note 6) 4,120,847 4,625,663
Investment securities (note 2)
Held-to-maturity 2,477,500 --
Available-for-sale 1,614,530 --
Matured policies receivable (note 6) 146,000 1,181,513
Assets held for sale (note 3) 170,921 11,520,103
Purchased life insurance policies (note 4) 37,415,435 41,246,239
Investment in convertible preferred shares (note 5) 1,658,478 3,000,000
Deferred financing costs, net of accumulated amortization of
$559,228 and $381,690, respectively (note 4 and 6) 584,964 681,910
Other assets 139,890 102,598
-------------------- --------------------
Total assets $ 62,455,155 $ 68,944,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 194,277 $ 190,894
Accounts payable 470,225 320,577
Accrued compensation payable 134,000 186,390
Payable for policies purchased -- 427,553
Reserve for equity interest in wholly owned financing
subsidiary (note 4) 3,363,936 6,452,589
Long term notes payable (note 6) 38,804,107 41,218,205
Deferred income taxes (note 7) 264,097 6,000
-------------------- --------------------
Total 43,230,642 48,802,208
liabilities
-------------------- --------------------
Minority interest (note 1) 112 --
-------------------- --------------------
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
Net unrealized investment gains (note 2 and 8) 356,421 --
-
Retained deficit (7,797,626) (9,007,373)
Treasury stock, 1,038,500 and 145,000 shares,
respectively (note 8) (2,874,032) (390,000)
-------------------- --------------------
Total stockholders' equity 19,224,401 20,142,265
-------------------- --------------------
Total liabilities and stockholders' equity $ 62,455,155 $ 68,944,473
==================== ====================
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
1
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1997 and 1996
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------------- -------------- -------------- -------------
Income:
Earned discounts on life insurance policies (note 9) $ -- $ -- $ -- $ 3,697,032
Earned discounts on prior maturities (note 9) -- 802,471 -- 802,471
Earned discounts on matured policies (note 9) 91,473 355,519 377,450 355,519
Interest income 338,191 181,670 883,401 638,583
Net gain (loss) on sale of convertible
preferred shares (note 5) (20,000) -- 679,665 --
Net gain (loss) on assets sold (note 3) 98,128 (299,718) 1,460,986 (299,718)
Other 18,168 115,078 88,043 281,728
-------------- -------------- -------------- ---------
Total income 525,960 1,155,020 3,489,545 5,475,615
Expenses:
Interest expense 896,771 1,065,486 2,721,030 3,040,424
Compensation and benefits 289,244 318,976 843,352 943,629
Other general and administrative expenses 12,123 231,244 1,037,236 898,037
Amortization 60,392 211,786 177,538 391,352
Depreciation -- -- -- 19,967
Provision for loss on assets held for sale (note 3) 328,236 3,314,498 328,236 3,314,498
Loss on investment in wholly owned financing
subsidiary (note 4) -- 6,940,189 -- 6,940,189
-------------- -------------- -------------- -------------
Total expenses 1,586,766 12,082,179 5,107,392 15,548,096
-------------- -------------- -------------- -------------
Loss before income taxes and net loss in
wholly owned financing subsidiary charged
to reserve for equity interest (1,060,806) (10,927,159) (1,617,847) (10,072,481)
Income tax expense (note 7) -- 893,223 -- 525,711
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 4) 942,943 -- 2,827,594 --
-------------- -------------- -------------- -------------
Net income (loss) $ (117,863) $ (10,033,936) $ 1,209,747 $ (9,546,770)
============== ============== ============== =============
Net income (loss) per share (note 8) (0.04) (2.34) 0.33 (2.49)
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 8) 3,324,449 4,291,824 3,671,700 3,838,548
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
2
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30, 1997 and 1996
Nine Months Ended
September 30,
1997 1996
-------------------- --------------------
Cash flows for operating activities:
Net income (loss) $ 1,209,747 $ (9,546,770)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 177,538 411,319
Write-off of furniture and equipment -- 12,303
Net gain on assets sold (1,460,986) --
Net gain on sale of convertible preferred shares (679,665) --
Provisions for loss on sale of assets 328,236 3,614,217
Valuation provision for purchased life insurance policies -- 6,940,189
Earned discounts on policies (377,450) (4,855,023)
Purchase of life insurance policies (966,275) (23,914,937)
Collections on matured life insurance policies 5,317,170 13,478,494
Increase in unearned income -- (715,883)
Increase in other assets (37,292) (53,205)
Decrease in deferred taxes -- (525,711)
Increase (decrease) in accrued expenses 3,383 (121,556)
Increase (decrease) in accounts payable 149,648 (134,627)
Decrease in IPO financing costs payable -- (306,900)
Decrease in payable to related party -- (1,482,170)
Decrease in accrued compensation payable (52,390) (684,948)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (2,827,594) --
Increase in minority interest 100 --
-------------------- --------------------
Net cash provided by (used in) operating activities 784,170 (17,885,208)
-------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 12,686,192 4,266,249
Purchase of furniture and equipment -- (6,776)
Decrease (increase) in restricted cash 504,816 (193,799)
Increase in investment securities (3,477,500) (2,090,871)
Proceeds from sale of convertible preferred shares 2,021,187 --
-------------------- --------------------
Net cash provided by investing activities 11,734,695 1,974,803
-------------------- --------------------
Cash flows from financing activities:
Proceeds from long term notes payable -- 6,375,000
Principal payments on long term notes payable (2,414,098) (3,083,919)
Proceeds from other long term debt -- 5,540,132
Principal payments on other long term debt -- (6,984,402)
Distribution to limited partners -- (783,313)
Purchase of limited partners' interest in investment partnership -- (5,081,184)
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 (80,592) (88,000)
Reimbursement of IPO financing costs -- 750,000
-------------------- --------------------
Net cash provided by (used in) financing activities (4,978,722) 20,756,112
-------------------- --------------------
Net increase in cash and cash equivalents 7,540,143 4,845,707
Cash and cash equivalents, beginning of period 6,586,447 1,056,611
-------------------- --------------------
Cash and cash equivalents, end of period $ 14,126,590 $ 5,902,318
==================== ====================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized gain (loss) on securities available for sale, net of taxes $ 356,421 $ --
==================== ====================
Supplemental disclosure of cash flow information:
State taxes paid $ 35,823 $ 6,066
==================== ====================
Cash paid for interest $ 2,717,647 $ 3,161,981
<FN>
==================== ====================
See accompanying condensed notes to consolidated financial statements.
</FN>
3
POINT WEST CAPITAL CORPORATION
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
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 September 30, 1997 and for the
three and nine month periods ended September 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 nine month
periods ended September 30, 1997 are not indicative of the results that may be
expected for the year ending December 31, 1997. The balance sheet as of December
31, 1996 has been derived from the audited consolidated financial statements of
the Company. The statements included herein 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, 1996 (the
"Form 10-K").
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of
Dignity Partners Funding Corp. I ("DPFC"), Fourteen Hill Management, LLC
("Fourteen Hill Management"), Fourteen Hill Capital, L.P. ("Fourteen Hill
Capital") and Allegiance Capital, LLC ("Allegiance").
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." Subsequently, the Company has sought to become a
broad-based specialty financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other entities, including Fourteen Hill Management, Fourteen Hill Capital and
Allegiance. The Company is currently evaluating other strategic business
opportunities. Fourteen Hill Capital and Allegiance, whose planned business
activities are described below, are indicative of the types of business
opportunities the Company intends to pursue.
The Company continues to service the policies held by its wholly-owned
special purpose subsidiary, DPFC. See Notes 4 and 6.
On June 3, 1997 the Company formed a limited partnership called
Fourteen Hill Capital and a wholly-owned limited liability company called
Fourteen Hill Management. Fourteen Hill Capital commenced operations in August
1997 by consummating two financings with unaffiliated entities in the aggregate
principal amount of $1.25 million. Fourteen Hill Management is the general
partner of Fourteen Hill Capital and owns 99.978% of the partnership interests.
Point West is one of two limited partners of Fourteen Hill Capital and owns
0.02% of the partnership interests. Fourteen Hill Management has invested $5
million in initial capital in Fourteen Hill Capital. Fourteen Hill Capital
received a license from the Small Business Administration (the "SBA") to become
a small business investment company effective September 26, 1997. Minority
interest on the balance sheet represents the interest in the assets of Fourteen
Hill Capital of the one unaffiliated limited partner. At present, Fourteen Hill
Capital does not have any outstanding debt from the SBA.
4
On September 5, 1997 the Company formed a limited liability company
called Allegiance to provide senior secured loans to funeral home and cemetery
owners. Allegiance commenced operations on October 13, 1997 by issuing a
commitment letter to make a senior secured loan to an unaffiliated entity for
$2.1 million. Point West has a 51% equity interest and 95% voting control in
Allegiance and will serve as the managing member of Allegiance. The President
and Vice President of Marketing, each of whom Allegiance hired in September
1997, have the balance of such interests. Net profits of Allegiance for each
calendar year will be allocated first to Point West in an amount equal to a
return of 10% per annum, compounded monthly, on the amount of its capital
contribution, but not in excess of such net profits. Any shortfall will be
carried forward indefinitely to the next calendar year or years in which net
profits are sufficient to make such allocation. An additional 5% return for each
calendar year will be allocated first to Point West to the extent that in each
year sufficient profits are available with no carry forward provided. See Note
10 for further information regarding Allegiance.
Recent Accounting Developments
During the middle of 1997 the FASB issued Financial Accounting Standard
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 is effective with
the year-end 1998 financial statements; however, the total comprehensive income
is required in the financial statements for interim periods beginning in 1998.
FASB also issued Financial Accounting Standard No. 131, "Disclosure About
Segments of An Enterprise and Related Information." SFAS 131 is effective with
the year-end 1998 financial statements. Management believes that the adoption of
these standards will not have a material impact on the Company's financial
statements.
2. Investment Securities
- -- ---------------------
In compliance with the Statement of Financial Accounting Standards No.
115 (FAS No. 115), "Accounting for Certain Instruments in Debt and Equity
Securities," the Company classifies marketable debt and equities into
held-to-maturity and available-for-sale categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at fair market value with unrealized gains and losses
included in stockholders' equity. Any realized gains and losses, declines in
value of securities judged to be other-than-temporary and accrued interest and
dividends on all securities will be reported in interest income and other income
as recognized.
The amortized costs and estimated fair value of investment securities
as of September 30, 1997 are as follows:
Gross Unrealized Gross
Amortized Gain Unrealized
Cost Loss Fair Value
Held-to-maturity
Corporate bonds $2,227,500 $ 62,500 $ (625) $2,289,375
Other corporate debt $ 250,000 $ -- $ -- $ 250,000
----------- ------------ ------------- -----------
Total held-to-maturity $2,477,500 $ 62,500 $ (625) $2,539,375
Available-for-sale
Common stock $ 903,181 $ 355,153 $ -- $1,258,334
Warrants $ 96,819 $ 259,377 $ -- $ 356,196
------------ ----------- ------------- -----------
Total available-for-sale $ 1,000,000 $ 614,530 $ -- $1,614,530
The Company classifies debt securities for which it has the positive
intent and ability to hold to maturity as held-to-maturity. All investments in
bond and debt securities classified as held-to-maturity
5
at September 30, 1997 have maturity dates ranging from one to five years.
Warrants classified as available-for-sale also have expiration dates ranging
from one to five years.
Unrealized gains on available-for-sale securities (representing
differences between cost and market of $615,000 less deferred taxes of $258,000
and minority interest of $12) were credited to a separate component of
stockholders' equity called "Net Unrealized Investment Gains."
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 DPFC, to a "held-for-sale" category. Accordingly,
such assets are recorded on the balance sheet as of September 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, the Company
established a reserve for loss on sale of assets in September 1996 and
reevaluates such reserve each quarter. During the third quarter of 1997, the
Company recorded an additional reserve in the amount of $328,000 as a result of
difficulties encountered with insurance companies as described below in
transferring the ownership of policies remaining unsold. Assets held for sale
consist of:
Assets Held for Sale
====================
September 30, 1997 December 31, 1996
------------------ -----------------
Capitalized costs on life insurance policies $ 593,947 14,089,124
Earned discounts on life insurance policies 3,000 380,692
Reserve for loss on sale (426,026) (2,949,713)
------------------ --------------
Assets held for sale $ 170,921 11,520,103
================= ==============
The calculation of reserve for loss on sale was calculated based on the
life expectancy of the insured under each policy in relation to prices obtained
by the Company in connection with other sales, management's estimate of the
current saleability of such policy, the type of policy (e.g., term or whole
life), the age of the insured and the premiums on such policy. 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. Such policies, which were not sold in 1996, were carried on the balance
sheet at December 31, 1996 at approximately $6.9 million after giving effect to
the reserve for loss on sale of assets. 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 September 30, 1997, 187 policies with an aggregate face
value of $13.6 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), 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) and 1 policy
with an aggregate face value of $58,000 was sold in the third quarter of 1997
(resulting in no realized gain or loss). 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
6
collected the death benefit instead of selling those policies. As of September
30, 1997, the remaining three policies (with a face value of $187,000) 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 September 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 $2.2 million
after giving effect to the reserve for loss on sale of assets. Through September
30, 1997, 62 policies with an aggregate face value of $4.1 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), 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) and 2 policies with
an aggregate face value of $270,000 were sold in the third quarter of 1997
(resulting in a realized gain of $33,000). As of September 30, 1997, the
remaining 5 policies with a face value of $414,000 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. Through September 30, 1997, 23
policies with an aggregate face value of $2.3 million had been sold, of which 22
policies with an aggregate face value of $2.1 million were sold in the second
quarter of 1997 (resulting in a realized gain of $133,000) and 1 policy with an
aggregate face value of $213,000 was sold in the third quarter of 1997
(resulting in a realized loss of $5,950). Two 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 these policies. As of September
30, 1997, 4 policies with a face value of $247,000 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 believes that it will not be successful in transferring the
ownership of such policies. In such event, due to contractual provisions in the
related sales agreements the sales will not be consummated. However, the Company
continues its efforts to sell such policies.
4. Purchased Life Insurance Policies
- -- ---------------------------------
Effective July 1996, purchased life insurance policies consisted only
of those policies held by DPFC. Any 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
7
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
September 30, 1997 the reserve was $3.4 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.
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. The Company had an option that expired on October 26,
1997 to purchase for approximately $1.1 million 8.2 million additional shares of
common stock of American Information. Since the Company did not exercise this
option, a $20,000 pre-tax loss was recognized in the third quarter of 1997. At
September 30, 1997 the Company owned approximately 13.2% of the equity of
American Information. The Company accounts for its investment using the cost
method. If the equity method had been applied Point West would have recorded a
loss associated with the investment in the nine months ended September 30, 1997
of $722,000, which is equivalent to the Company's pro rata share on an as if
converted basis in American Information's loss for the nine months ended
September 30, 1997. At September 30, 1997 the Company held 12.0 million shares
of American Information with a cost of $0.14 per share. The Company sold 8.2
million shares to an unaffiliated third party for $0.22 per share in the March
18, 1997 sale mentioned above. On the same date, American Information sold
convertible preferred shares and warrants to such unaffiliated third party for
$7.5 million. If such shares were converted and such warrants exercised they
would represent approximately 25.8 million shares of common stock with a cost of
$0.29 per share. In light of such sale by American Information, notwithstanding
the extent of losses experienced by American Information, management of the
Company does not believe that the investment is permanently impaired at
September 30, 1997. However, management will continue to monitor the carrying
value.
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 becomes less than the outstanding balance of the Securitized Notes,
generally accepted accounting principles nonetheless would require a loss to
8
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 September 30, 1997, the
carrying value of the assets of DPFC were $41.5 million (consisting of $37.4
million in purchased life insurance policies, $4.0 million in restricted cash on
deposit with a trustee for the benefit of the Noteholders and $146,000 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 nine months of 1997, the Company's provision for income
taxes for Point West Capital Corporation and DPFC were 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.
A deferred tax liability has been recorded as of September 30, 1997 in
connection with the unrealized investment gains in the third quarter of 1997.
Using a combined state and federal tax rate of 42%, a deferred tax liability of
$258,000 has been estimated on unrealized gains of $615,000. See Note 2.
8. Common Stock
- -- ------------
Changes in stockholders' equity during the first nine months of 1997
reflected the following:
Stockholders' equity, beginning of period $ 20,142,265
Net unrealized investment gains 356,421
Net income 1,209,747
Treasury stock (2,484,032)
-----------
Stockholders' equity, end of period $ 19,224,401
Net unrealized investment gains represent the net increase in the
Company's investment securities in common stock and warrants classified as
available-for-sale and represent differences between cost and estimated market
of $615,000 less deferred taxes of $258,000 and minority interest of $12.
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
9
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. For the three and nine
months ended September 30, 1997 and 1996, the effect of applying this statement
would not have been material.
9. Earned Discounts
- -- ----------------
Earned discounts on life insurance policies reflect the amount of
accretion recorded in the first half of 1996. With the decision to sell all or
substantially all of the Company's assets, unearned income recorded on the
balance sheet at June 30, 1996 relating to early maturities on or before June
30, 1996 has now been recorded as earned discounts on prior maturities. Any
income since the third quarter of 1996 has been recorded as earned discounts on
matured policies only and recorded upon receipt of proceeds of policies
(pursuant to the death of the insured).
10. Commitments
- -- -----------
Allegiance is a limited liability company formed on September 5, 1997
as a specialty finance company to operate a securitization-based loan program
targeted to funeral home and cemetery owners.Allegiance commenced operations on
October 13, 1997 by issuing a commitment letter to make a senior secured loan to
an unaffiliated entity for $2.1 million. Point West has a 51% equity interest
and 95% voting control in the new entity and will serve as the managing member
of Allegiance. The President and Vice President of Marketing, each of whom
Allegiance hired in September 1997, have the balance of such interests. The
Company invested $50,000 at the formation of Allegiance and agreed from time to
time thereafter, as needed, to contribute up to an additional $450,000 to be
used as working capital. The Company has also agreed to provide approximately
$1.5 million to support warehousing and equity components of the loans to be
funded in connection with an initial securitization. At the Company's
discretion, after the completion of an initial securitization, an additional
commitment up to approximately $1.5 million may be made to support warehousing
and equity components of a second securitization.
11. 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 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. The
plaintiffs filed an
10
amended complaint on September 8, 1997 and on October 8, 1997 the Company and
other defendants filed a motion to dismiss the complaint. A hearing on the
motion to dismiss is scheduled for December 5, 1997. 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.
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 September 30, 1997 and of the results
of operations for the Company for the three and nine months ended September 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 nine months ended
September 30, 1997 are not comparable to those for the three and nine months
ended September 30, 1996.
Overview
- --------
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of
Dignity Partners Funding Corp. I ("DPFC"), Fourteen Hill Management, LLC
("Fourteen Hill Management"), Fourteen Hill Capital, L.P. ("Fourteen Hill
Capital") and Allegiance Capital, LLC ("Allegiance"). See the Form 10-K and
Notes 1, 4, 6 and 10 of the Condensed Notes to Consolidated Financial Statements
(contained herein) for further information regarding these entities.
Until February 1997 the Company provided viatical settlements for
terminally ill persons. See "Cessation of Viatical Settlement Business; Sale of
Assets." Subsequently, the Company has sought to become a broad-based specialty
financial services company. To that end, the Company has expanded its financial
services business through the formation and investment in other entities,
including Fourteen Hill Management, Fourteen Hill Capital and Allegiance. The
Company is currently evaluating other strategic business opportunities. Fourteen
Hill Capital and Allegiance, whose planned business activities are described
below, are indicative of the types of business opportunities the Company intends
to pursue. See "Fourteen Hill Management," "Fourteen Hill Capital" and
"Allegiance." However, no assurance can be given that the Company will be
successful in becoming a broad-based specialty financial services company or
that such company will be successful.
Fourteen Hill Management
- ------------------------
Fourteen Hill Management, LLC is a wholly-owned limited liability
company of Point West formed on June 3, 1997 solely for the purpose of serving
as the general partner of one or more small business investment companies.
Fourteen Hill Management is the sole general partner of Fourteen Hill Capital
owning 99.978% of the partnership interests and has invested $5 million of
initial capital in this partnership. Fourteen Hill Management receives a
management fee for its services on behalf of Fourteen Hill Capital.
Fourteen Hill Capital
- ---------------------
Fourteen Hill Capital, L.P. is a limited partnership formed on June 3,
1997 solely for the purpose of operating as a small business investment company
("SBIC"). Fourteen Hill Capital commenced operations in August 1997 by
consummating two financings with unaffiliated entities in the
12
aggregate principal amount of $1.25 million. Point West is one of the two
limited partners of Fourteen Hill Capital, with a 0.02% partnership interest.
Fourteen Hill Capital received its SBIC license from the Small Business
Administration effective September 26, 1997. Fourteen Hill Capital will provide
debt and/or equity capital to small companies (i.e., companies with a net worth
less than $18 million and average net income less than $6 million for the last
two years). See Note 1 of the Condensed Notes to Consolidated Financial
Statements (contained herein) for further information regarding Fourteen Hill
Capital.
Allegiance
- ----------
Allegiance Capital, LLC is a limited liability company formed on
September 5, 1997 as a specialty finance company to operate a
securitization-based loan program targeted to the nation's funeral home and
cemetery owners. Allegiance commenced operations on October 13, 1997 by issuing
a commitment letter to make a senior secured loan to an unaffiliated entity for
$2.1 million. Point West has a 51% equity interest and 95% voting control in
Allegiance and will serve as the managing member of Allegiance. The President
and Vice President of Marketing, each of whom Allegiance hired in September
1997, have the balance of such interests. Net profits of Allegiance for each
calendar year will be allocated first to Point West in an amount equal to a
return of 10% per annum, compounded monthly, on the amount of its capital
contribution, but not in excess of such net profits. Any shortfall will be
carried forward indefinitely to the next calendar year or years in which net
profits are sufficient to make such allocation. An additional 5% return for each
calendar year will be allocated first to Point West to the extent that in each
year sufficient profits are available with no carry forward provided. See Note
10 of the Condensed Notes to Consolidated Financial Statements (contained
herein) for further information regarding Allegiance.
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.
13
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 September 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 $1.5 million in the first nine months of 1997 (see "Results of
Operations -- Three and Nine Months Ended September 30, 1997 Compared to Three
and Nine Months Ended September 30, 1996 -- Net Gain (Loss) on Assets Sold").
The Company has experienced delays or difficulties in transferring the ownership
of certain policies. As of September 30, 1997 the Company retained ownership of
17 policies with an aggregate face value of $1.0 million that are the subject of
sales agreements. The Company continues to pursue other options for the sale of
these remaining policies, however, due to the limited market the Company has
reevaluated the fair value of these policies and has therefore recorded in the
third quarter of 1997 an additional reserve of $328,000 on the loss on sale of
these assets. The fair value is based on management's best estimate in light of
the limited market and in relation to current prices recorded by the Company in
connection with alternative bids. As of September 30, 1997 the carrying value of
the remaining policies was $171,000. See Note 3 of the Condensed Notes to
Consolidated Financial Statements.
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
was 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. This reserve was reevaluated and increased in the third quarter of 1997.
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 September 30, 1997, such reserves were $426,000 and $3.4
million, respectively. In addition, beginning in the
14
third quarter of 1996, the Company began generally recognizing income on
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 Notes 4 and 6 of the Condensed Notes to Consolidated Financial
Statements for further information regarding the reserve for loss on sale of
assets.
In accordance with the Statement of Financial Accounting Standards No.
115 (FAS No. 115), "Accounting for Certain Instruments in Debt and Equity
Securities," the Company classifies marketable debt and equities into
held-to-maturity and available-for-sale categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at estimated fair market value with unrealized gains and
losses included in Stockholders' Equity. Any realized gains and losses, declines
in value of securities judged to be other-than-temporary and accrued interest
and dividends on all securities will be reported in interest income and other
income as recognized. See Note 2 of the Condensed Notes to Consolidated
Financial Statements.
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 September 30, 1997, the carrying value of the assets of
DPFC were $41.5 million (consisting of purchased life insurance policies,
restricted cash and a portion of matured policies receivable) and its
liabilities were $38.8 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 Securitized Notes were
not retired through collections by October 1997. 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 its 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. 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 further losses 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
15
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 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 Nine Months Ended September 30, 1997 Compared to Three and Nine Months
- -------------------------------------------------------------------------------
Ended September 30, 1996
- -----------------------
Earned Discounts.The Company currently recognizes earned discounts 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 nine months of 1997, but instead recognized
$91,500 and $377,000 of earned discounts on matured policies for the three and
nine months ended September 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 six months 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
$3.7 million for the six months ended June 30, 1996. In the third quarter of
1996 the Company began recognizing earned discounts only upon receipt of
proceeds on policies (pursuant to the death of the insured). The Company
recognized $356,000 of earned discounts on matured policies in the three months
ended September 30, 1996. In addition, the Company recognized $802,000 of earned
discounts on prior maturities. Such earned discounts were carried on the balance
sheet at June 30, 1996 as unearned income which related to policies for which
the Company had collected the proceeds prior to the expected collection date.
The Company will not have any earned discounts on prior maturities in any other
period. 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
nine months of 1997 compared to the purchase of 460 policies with an aggregate
face value of $31.9 million during the first nine months of 1996. See "Cessation
of Viatical Settlement Business; Sales of Assets."
Interest Income. Interest income increased 86.2% in the third quarter
of 1997 over the third quarter of 1996 and 38.3% in the first nine months of
1997 over the first nine months 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 nine months of 1996 was
primarily the result of the investment of the Company's initial public offering
proceeds.
16
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 $1.8 million. The carrying value of such shares was $1.1 million. In
addition, the Company had an option that expired on October 26, 1997 to purchase
for approximately $1.1 million 8.2 million additional shares of common stock of
American Information. Since the Company did not exercise this option, a $20,000
pre-tax loss was recognized in the third quarter of 1997. See Note 5 of the
Condensed Notes to Consolidated Financial Statements.
Net Gain (Loss) on Assets Sold. The Company collected the sales
proceeds on 6 policies during the third quarter of 1997 and 245 policies during
the first nine months of 1997. See Note 3 of the Condensed Notes to Consolidated
Financial Statements. The total net gain recorded in the third quarter and first
nine months of 1997 in connection with these sales was $98,000 and $1.5 million,
respectively. The total net loss recorded in the third quarter and first nine
months of 1996 was $300,000 in both periods as a result of the sale on August 2,
1996 of 60 policies to an unaffiliated third party. The realized gain (loss) 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 realized capital
gains on investments securities. Other income decreased 84.2% in the third
quarter of 1997 over the third quarter of 1996 and 68.7% during the first nine
months of 1997 compared to the first nine months of 1996 due primarily to a
decrease in the number of matured policies. Other income was also relatively
high in 1996 due to an $80,000 aggregate increase in face value on two policies
which was recorded during the first nine months of 1996.
Interest Expense. Interest expense decreased 15.8% in the third quarter
of 1997 compared to the third quarter of 1996 and 10.5% in the first nine months
of 1997 compared to the first nine months of 1996 due mainly to the repayment of
indebtedness. There were no borrowings under the Company's revolving credit
facility in the first nine months of 1997 compared to average borrowings of $1.1
million in the first nine months of 1996. The revolving credit facility was
repaid and terminated in August 1996. Average borrowings under the Securitized
Notes were $39.3 million in the first nine months of 1997 compared to $43.0
million in the first nine months of 1996. The interest rate on the Securitized
Notes was 9.17% in all periods.
Compensation and Benefits. Compensation and benefits decreased 9.3% in
the third quarter of 1997 compared to the third quarter of 1996 and 10.6% in the
first nine months of 1997 compared to the first nine months of 1996. This
decrease was due mainly to the reduction in staff from 17 on September 30, 1996
to 12 on September 30, 1997 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 1997.
Other General and Administrative Expenses. Other general and
administrative expenses decreased 94.8% in the third quarter of 1997 compared to
the third quarter of 1996. This decrease is the result of the reduction of
professional fees in the amount of $75,000 due to the expiration of a consulting
contract and the reduction of estimated legal expenses based on actual cost
incurred. Other general and administrative expenses increased 15.5% in the first
nine months of 1997 compared to the
17
first nine months of 1996. The increase in the first nine months of 1997 is
primarily the result of a $361,000 legal reserve recorded in the first nine
months of 1997 in connection with federal and state alleged class action
lawsuits filed against the Company and its officers and directors.
Amortization. Because the Company prepaid its revolving credit facility
in August 1996, the Company incurred a charge in the third quarter of 1996 of
$130,000 as a result of the Company's writing off the unamortized financing
charges related to that facility. All periods include the amortization of
deferred financing costs for DPFC.
Provision for Loss on Assets Held for Sale. The Company recorded in the
third quarter of 1996 a provision for loss on sale of assets totaling $3.3
million based on management's estimate of proceeds from the sale of policies.
The provision equaled the difference between the carrying value of policies and
those estimates. The estimates were based on the life expectancies of the
insureds covered by the policies, the estimated sale period and the prices
obtained by the Company in connection with other sales of policies. For the
quarter ended September 30, 1997, the Company recorded an additional provision
in the amount of $328,000 in connection with the remaining policies not yet
sold, based on management's revised best estimate of proceeds from the sale of
such policies.
Loss on Investment in Wholly Owned Financing Subsidiary. A reserve was
recorded in the third quarter of 1996 in the amount of $6.9 million to reflect
the estimated loss of the Company's entire equity interest in DPFC. The Company
had an initial capital investment in DPFC of $2.9 million and, through
consolidation, an additional $3.3 million of increased equity attributable to
the earnings of DPFC. This reserve includes the write-off of deferred financing
costs in an amount equal to approximately $740,000. See "-- Certain Accounting
Implications for DPFC."
Income Tax Expense. In the first nine months 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 nine months ended September 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 $943,000 and $2.8 million recorded in the three and nine months ended
September 30, 1997, respectively, was included in the Company's 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
- -------------------------------
Other than debt that may be available to Fourteen Hill Capital through
the SBIC program, the Company does not currently have an external funding
source. The Securitized Notes do not provide funds with which to fund
operations. At September 30, 1997, cash and cash equivalents was $14.1 million
and investment securities was $4.1 million. The Company continues to analyze 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 capital commitments and working capital and
operational needs through the first half of 1998, using current cash and cash
equivalents and investment securities and any additional cash generated by the
sale of policies. Such needs may change significantly depending on strategic
options
18
selected. The Company has agreed to provide to Allegiance $500,000 of working
capital and approximately $1.5 million to support warehousing and equity
components of the loans to be funded in connection with an initial
securitization. In addition, at the Company's discretion, after the completion
of an initial securitization, an additional commitment up to approximately $1.5
million may be made to support warehousing and equity components of a second
securitization. Allegiance is in the process of securing an external warehousing
facility to support its loan activity prior to securitization. No assurance can
be given that Allegiance will be successful in obtaining external financing on
satisfactory terms. Allegiance issued a commitment letter to make a senior
secured loan for $2.1 million to an unaffiliated entity on October 13, 1997.
As of September 30, 1997, the outstanding principal amount of the
Securitized Notes was $38.8 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. See Notes 4 and 6
of the Condensed Notes to Consolidated Financial Statements.
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) face and carrying values of policies expected to
continue to be owned by the Company, (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 DPFC policies
following the death of the insured, (iii) the results of the Company's
consideration of strategic options and any costs associated with a chosen
option, and (iv) availability and cost of capital.
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PART II. OTHER INFORMATION
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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. The plaintiffs filed an
amended complaint on September 8, 1997 and on October 8, 1997 the
Company and the other defendants filed a motion to dismiss. A hearing
on the motion to dismiss is scheduled for December 5, 1997. 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 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
Effective August 1, 1997, the Company's Second Amended and Restated
Certificate of Incorporation was amended to change the Company's name
to Point West Capital Corporation from Dignity Partners, Inc.
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits.
Number Description
----- ------------
10.1 Limited Liability Company Agreement of Allegiance
Capital, LLC
10.2 Fourteen Hill Capital, L.P. Agreement of Limited
Partnership
10.3 Fourteen Hill Management, LLC Operating Agreement by
Point West Capital Corporation and Fourteen Hill
Management, LLC as of June 9, 1997
27 Financial Data Schedule
20
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
8/7/97 5 The Company issued a press release
regarding its results of operations for
the second quarter of 1997.
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
DATED: November 13, 1997 /S/ ALAN B. PERPER
-------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: November 13, 1997 /S/ JOHN WARD ROTTER
------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21