SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3165263
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
---------------------------------
San Francisco, California 94111
------------------------- ---------
(Address of principal executive offices) (Zip Code)
(415) 394-9467
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At April 30, 1998, there were 3,253,324 shares of the registrant's Common Stock
outstanding.
POINT WEST CAPITAL CORPORATION
INDEX
Page #
------
Part I
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 1
Consolidated Statements of Operations
and Comprehensive Income for the 2
Three Months Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1998 and 1997 3
Condensed Notes to Consolidated Financial Statements 4-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 17
Part II
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
- ----------
(i)
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
March 31, December 31,
ASSETS 1998 1997
==================== ====================
Cash and cash equivalents $ 4,841,069 $ 10,039,560
Restricted cash 3,698,306 3,756,714
Investment securities (note 2)
Held-to-maturity 2,220,000 2,220,000
Available-for-sale 9,386,231 3,597,343
Matured policies receivable 706,969 305,435
Loans receivable, net of unearned income of $89,334
and $59,884, respectively (note 3) 6,637,093 4,015,716
Assets held for sale (note 4) 81,170 129,334
Purchased life insurance policies (note 5) 35,124,848 36,586,788
Investment in convertible preferred shares at cost 1,658,478 1,658,478
Deferred financing and organizational costs, net of
accumulated amortization of $684,540 and
$621,884, respectively 462,777 525,433
Furniture and equipment, net of accumulated depreciation of
$759 and $341, respectively 8,180 6,862
Other assets 219,270 127,590
-------------------- --------------------
Total assets $ 65,044,391 $ 62,969,253
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 197,685 $ 183,150
Accounts payable 161,830 216,851
Accrued compensation payable 50,000 193,000
Reserve for equity interest in wholly owned financing
subsidiary (note 5) 1,499,361 2,300,037
Long term notes payable (note 6) 38,804,107 38,804,107
Deferred income taxes 6,000 6,000
-------------------- --------------------
Total 40,718,983 41,703,145
liabilities
-------------------- --------------------
Stockholders' equity:
Preferred stock, $0.01 par value; 2,000,000 authorized shares:
Convertible Preferred Stock, 135,000 authorized shares,
0 shares issued and outstanding -- --
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 shares issued
3,253,324 shares outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Comprehensive income-- net unrealized
investment gains (note 2 and 7) 5,736,111 2,597,239
Retained deficit (8,076,309) (7,996,737)
Treasury stock, 1,038,500 shares (2,874,032) (2,874,032)
-------------------- --------------------
Total stockholders' equity 24,325,408 21,266,108
-------------------- --------------------
Total liabilities and stockholders' equity $ 65,044,391 $ 62,969,253
==================== ====================
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
1
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the Three Months Ended March 31, 1998 and 1997
Three Months Ended
March 31,
1998 1997
-------------- --------------
Income:
Earned discounts on matured policies (note 8) $ 316,133 $ 184,286
Interest income 351,307 207,636
Gain on sale of convertible
preferred shares -- 699,665
Gain on assets sold (note 4) 138,837 870,641
Other 63,485 31,194
-------------- --------------
Total income 869,762 1,993,422
Expenses:
Interest expense 904,120 938,470
Compensation and benefits 349,559 270,283
Other general and administrative expenses 433,257 565,736
Amortization 62,656 58,426
Depreciation 418 --
-------------- --------------
Total expenses 1,750,010 1,832,915
-------------- --------------
Income (loss) before net loss in wholly
owned financing subsidiary charged
to reserve for equity interest (880,248) 160,507
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 5) 800,676 934,693
-------------- --------------
Net income (loss) $ (79,572) $ 1,095,200
============== ==============
Comprehensive income-- net unrealized
investment gains (note 7) 3,138,872 --
Total comprehensive income (note 7) 3,059,300 --
Basic earnings (loss) per share (note 9) (0.02) 0.27
Diluted earnings (loss) per share (note 9) (0.02) 0.27
Weighted average number of shares of common stock
outstanding (note 9) 3,253,324 4,053,774
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 9) 3,253,324 4,122,160
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
2
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
Three Months Ended
March 31,
1998 1997
--------------------- ---------------------
Cash flows for operating activities:
Net income (loss) $ (79,572) $ 1,095,200
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 63,074 58,426
Gain on assets (138,837) (870,641)
Gain on sale of convertible preferred shares -- (699,665)
Earned discounts on policies (316,133) (184,286)
Purchase of life insurance policies -- (666,217)
Expense of premiums previously capitalized 57,738 --
Collections on matured life insurance policies 1,318,280 3,217,810
Increase in other assets (91,696) (108,723)
Increase in accrued expenses 14,535 4,784
Increase (decrease) in accounts payable (55,021) 357,481
Decrease in accrued compensation payable (143,000) (121,419)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (800,676) (934,693)
--------------------- ---------------------
Net cash (used in) provided by operating activities (171,308) 1,148,057
--------------------- ---------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 187,522 9,073,644
Purchase of furniture and equipment (1,736) --
Decrease in restricted cash 58,408 290,486
Increase in investment securities (2,650,000) (2,275,583)
Increase in loans receivable (2,645,550) --
Principal payments on loans receivable 24,173 --
Sale of investment in convertible preferred stock -- 1,835,537
--------------------- ---------------------
Net cash (used in) provided by investing activities (5,027,183) 8,924,084
--------------------- ---------------------
Cash flows from financing activities:
Principal payments on long term notes payable -- (2,134,194)
Purchase of treasury stock -- (337,313)
Increase in financing costs -- (5,000)
---------------------
---------------------
Net cash used in financing activities -- (2,476,507)
--------------------- ---------------------
Net (decrease) increase in cash and cash equivalents (5,198,491) 7,595,634
Cash and cash equivalents, beginning of period 10,039,560 6,586,447
--------------------- ---------------------
Cash and cash equivalents, end of period $ 4,841,069 $ 14,182,081
===================== =====================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized gain on securities available for sale $ 5,736,111 $ --
===================== =====================
Supplemental disclosure of cash flow information:
State taxes paid $ 1,930 $ 23,136
===================== =====================
Cash paid for interest $ 889,584 $ 933,686
===================== =====================
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
3
POINT WEST CAPITAL CORPORATION
-------------------------------
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
1. General Description
- -- -------------------
The unaudited consolidated financial statements of Point West Capital
Corporation ("Point West") and its consolidated entities (the "Company") as of
March 31, 1998 and for the three month periods ended March 31, 1998 and 1997
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 month period
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. The balance sheet as of December
31, 1997 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, 1997 (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 ("Fourteen Hill Capital"),
Allegiance Capital, LLC ("Allegiance") and Allegiance Funding Corp. I
("Allegiance Funding").
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 -- Overview." 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 of Fourteen Hill Management and Fourteen Hill Capital, which invest in
small businesses, and Allegiance and Allegiance Funding, which loan funds to
funeral home and cemetery owners. The Company continues to service the life
insurance policies held by its wholly owned special purpose subsidiary, DPFC,
and to evaluate other strategic business opportunities. Fourteen Hill Capital
and Allegiance are indicative of the types of business opportunities the Company
intends to pursue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Fourteen Hill Management and Fourteen
Hill Capital" and "-- Allegiance and Allegiance Funding."
During 1997, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 131 ("SFAS 131"), Disclosure About Segments of
An Enterprise and Related Information. SFAS 131 is effective with the year-end
1998 financial statements. The Company will comply with the disclosure
requirements.
4
2. Investment Securities
-- ---------------------
Statement of Financial Accounting Standards No. 115 ("SFAS 115"),
Accounting for Certain Instruments in Debt and Equity Securities, requires
marketable debt and equity securities to be classified into held-to-maturity,
available-for-sale and trading categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at fair market value with unrealized gains and losses
(net of applicable taxes) as a separate component of stockholders' equity. Many
of the equity securities classified as available-for-sale are securities or
convertible into securities traded in the Over-the-Counter ("OTC") Market. Fair
market value is estimated by the Company based on the average closing bid of the
stock for the last three trading days of the reporting period, and adjusted to
reflect management's estimate of liquidity constraints. The Company had no
trading securities at March 31, 1998 or December 31, 1997. 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 the
income statement as recognized.
The amortized costs and estimated fair value of investment securities
as of March 31, 1998 and December 31, 1997 are as follows:
March 31, 1998
- ------------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Loss
Fair Value
Held-to-maturity
Corporate bonds $ 2,220,000 $ 125,000 $ (2,500) $ 2,342,500
-------------- --------------- ----------------- --------------
Total held-to-maturity $ 2,220,000 $ 125,000 $ (2,500) $ 2,342,500
Available-for-sale
Common stock $ 3,650,000 $ 5,736,231 $ -- $ 9,386,231
Warrants $ 0 $ 0 $ -- $ 0
------------------ ----------------- ------------------ ------------------
Total available-for-sale $ 3,650,000 $ 5,736,231 $ -- $ 9,386,231
December 31, 1997
- -------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Loss
Fair Value
Held-to-maturity
Corporate bonds $ 2,220,000 $ 75,000 $ (5,000) $ 2,290,000
-------------- ---------------- ----------------- --------------
Total held-to-maturity $ 2,220,000 $ 75,000 $ (5,000) $ 2,290,000
Available-for-sale
Common stock $ 903,181 $ 1,355,153 $ -- $ 2,258,334
Warrants $ 96,819 $ 1,242,190 $ -- $ 1,339,009
-------------- ----------------- --------------- --------------
Total available-for-sale $ 1,000,000 $ 2,597,343 $ -- $ 3,597,343
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
debt securities classified as held-to-maturity at March 31, 1998 and December
31, 1997 have maturity dates ranging from one to six years. Warrants classified
as available-for-sale have expiration dates ranging from one to five years. The
value of the
5
warrants was determined using the Black-Scholes Model. The warrants held by the
Company at March 31, 1998 had no cost or market value. One of the small business
entities in which Fourteen Hill Capital had invested as of December 31, 1997,
issued a redemption notice to call a warrant. On January 26, 1998, Fourteen Hill
Capital exercised this warrant for $1 million.
Unrealized gains on available-for-sale securities (representing
differences between estimated fair value and cost) of $5.7 million and $2.6
million at March 31, 1998 and December 31, 1997, respectively, were credited
(net of applicable taxes) to a separate component of stockholders' equity called
"Comprehensive Income -- Net Unrealized Investment Gains."
3. Loans Receivable
- -- ----------------
Loans receivable includes loans made to unaffiliated third parties
through Allegiance and Fourteen Hill Capital. Such loans are reported at
amortized cost, and interest is accrued as earned. All loans at March 31, 1998
and December 31, 1997 were current, and no reserves were considered necessary as
of such dates.
Allegiance provides senior secured loans to funeral homes and cemetery
owners. Two loans were outstanding at March 31, 1998 in the aggregate principal
amount of $5.9 million, one of which bears interest at a fixed interest rate per
annum of 9.4% and the other of which bears interest at a fixed interest rate per
annum of 9.8%. Such loans mature, subject to permitted prepayments, in
approximately fifteen years with monthly principal payments.
Fourteen Hill Capital provides financing to small businesses. The one
loan outstanding at March 31, 1998 in the principal amount of $795,000 bears a
fixed interest rate per annum of 15% and matures, subject to permitted
prepayments, in approximately 5 years. The only loan made by Fourteen Hill
Capital in 1997 in the amount of $250,000 was paid in full on January 20, 1998.
4. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." Accordingly, such assets are recorded on the balance
sheet as of March 31, 1998 and December 31, 1997 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
1996 and reevaluates such reserve each quarter. Assets held for sale consist of:
March 31, 1998 December 31, 1997
-------------- -----------------
Capitalized costs $ 290,262 $ 525,697
Earned discounts on life insurance policies 1,704 2,482
Reserve for loss on sale (210,796) (398,845)
------------------ ----------------
Assets held for sale $ 81,170 $ 129,334
------------------ ----------------
The calculation of reserve for loss on sale was calculated based on the
life expectancy of the insured under each life insurance 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
6
(e.g., term or whole life), the age of the insured and 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 is reported as a realized gain or loss on assets sold at
the time any sale proceeds are received.
Through December 31, 1997, the Company entered into several agreements
to sell portions of its portfolio of policies. None of the purchasers thereunder
is affiliated with the Company or any of its directors or officers. The sale
agreements provided for the sale, upon the issuing insurance company's
acknowledgment of transfer of ownership, of an aggregate of 373 policies having
an aggregate face value of $29.2 million. Through March 31, 1998, the sale of
352 policies with an aggregate face value of $28.8 million had been consummated.
Eleven policies covered by the sales agreements 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. The remaining 10 policies (representing approximately
$534,000 in face amount) were carried on the balance sheet at March 31, 1998 at
$81,000 after giving effect to the reserve for loss on assets held for sale.
The policies representing "assets held for sale" consist of the
policies under the aforementioned sales agreements. The Company experienced
delays or difficulties in transferring the ownership of the remaining 10
policies described above and, due to contractual provisions in the related sales
agreements, the sales of these policies have not been consummated. However, the
Company is pursuing other alternatives for the sale of these policies.
5. 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 as security for the Securitized Notes (as defined in Note 6), will
require the consent of the Company and the Noteholders. The Company has
discussed potential sales of DPFC policies with the Noteholders; however, the
Company has not determined whether it will decide to sell such policies and
cannot determine whether the Noteholders will consent to such a sale or whether
such a sale is feasible. A reserve was recorded in 1996 in the amount of $6.9
million to reflect the estimated loss of Point West's equity interest in DPFC.
As of March 31, 1998 and December 31, 1997, the reserve was $1.5 million and
$2.3 million, respectively. The reserve provides for the write-off of the
unrealized residual value associated with DPFC.
6. Long Term Notes Payable
- -- -----------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") issued by DPFC previously 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.
7
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. The assets of DPFC are the beneficial ownership
interests in the life insurance policies and funds which secure the Securitized
Notes. However, to the extent that the losses of DPFC exceed its equity
(creating a deficit), the deficit would be recorded by the Company as a loss.
Upon the retirement of the Securitized Notes at less than book value, the
Company would recognize a gain for the difference, which is expected to
approximate the deficit of DPFC. At March 31, 1998, the equity of DPFC was $1.5
million.
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. Stockholders' Equity
- -- --------------------
Changes in stockholders' equity during the first three months of 1998
reflected the following:
Stockholders' equity, beginning of period $ 21,266,108
Comprehensive income -- net unrealized
investment gains 3,138,872
-------------
Net loss (79,572)
-------------
Stockholders' equity, end of period $ 24,325,408
During 1997, FASB issued Financial Accounting Standard No. 130 ("SFAS
130"), Reporting Comprehensive Income. SFAS 130 is effective for interim and
annual periods beginning after December 15, 1997. At March 31, 1998, the
Company's total comprehensive income includes net unrealized investment gains
which represents the increase in the Company's investment securities in common
stock classified as available-for-sale, net of applicable taxes.
8. Earned Discounts
- -- ----------------
With the decision to sell all or substantially all of the Company's
assets, any income on matured policies since the third quarter of 1996 has been
recorded as earned discounts on matured policies and recorded upon the
notification of death of the insured. 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.
9. Earnings per Share
- -- ------------------
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings per Share, was issued in February 1997 and is effective for years
ending after December 15, 1997. Under SFAS 128, earnings per share ("EPS") is
reported as two separate calculations: Basic EPS, similar to the previous
primary EPS excluding stock equivalents; and, Diluted EPS, similar to the
previous fully diluted EPS.
8
The weighted average number of common stock shares and additional
common stock equivalent shares used in computing EPS are set forth below for the
periods indicated.
March 31, 1998 March 31, 1997
============== ===============
Weighted average number of shares of common stock
outstanding....................................... 3,253,324 4,053,774
Additional common stock equivalents .............. -- 68,386
--------------- ---------------
Weighted average number of shares of common stock
and common stock equivalents outstanding ........ 3,253,324 4,122,160
Diluted EPS for the three months ended March 31, 1998 do not include
common stock equivalents due to their anti-dilutive effect. Common Stock
equivalents for the three months ended March 31, 1997 include, to the extent
they do not have an anti-dilutive effect, employee stock options, non-employee
director stock options and warrants issued to Jefferies & Company, Inc., the
investment banking firm which advised the Company in connection with strategic
options.
10. 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. (now Point West Capital Corporation)
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 April 24, 1998, the Court granted the Company's and other defendants'
motion to dismiss as it related to the Section 11 claims with prejudice but
denied the motion to dismiss the claims under Section 10(b) and Rule 10b-5 as to
all defendants other than Mr. Bow, one of Point West's directors. The Company
and each of the remaining 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 LLC 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. Events Subsequent to the Balance Sheet Date
- --- -------------------------------------------
On May 7, 1998, Fourteen Hill Capital invested $1,000,000 in
convertible preferred stock of a small business entity.
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 March 31, 1998, and of the results of
operations for the Company for the three months ended March 31, 1998 and 1997,
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 and the inception
of two businesses in the second half of 1997) the Company's results of
operations and cash flows for the three months ended March 31, 1998 are not
comparable to those for the three months ended March 31, 1997.
Overview
The Company is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of DPFC,
Fourteen Hill Management, Fourteen Hill Capital, Allegiance and Allegiance
Funding. See the Form 10-K and Condensed Notes to Consolidated Financial
Statements (contained herein) for further information regarding these entities.
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) of, a life insurance policy. In
February 1997, Point West's Board of Directors (the "Board") decided to cease
the Company's viatical settlement business. The Board's decision resulted from
(i) accounts of research results reported at the International AIDS Conference
held in Vancouver, British Columbia in July 1996 (the "AIDS Conference"), (ii)
the Board's belief regarding increased risks of purchasing and holding policies
insuring the lives of individuals diagnosed with HIV or AIDS, (iii) accounts of
subsequent research results which appeared to confirm the reports from the AIDS
Conference, and (iv) a determination by the Board that it was not viable for the
Company to continue to operate a viatical settlement business solely for
non-AIDS policies. Also as a result of the accounts of research results reported
at the AIDS Conference, the Company decided in the third quarter of 1996 to sell
all or substantially all of its assets. Through December 31, 1997, the Company
had entered into agreements to sell 373 policies with an aggregate face value of
$29.2 million and had consummated the sale of all but 10 of such policies
(having an aggregate face value of $534,000) at March 31, 1998. See "Results of
Operations -- Three Months Ended March 31, 1998 Compared to Three Months Ended
March 31, 1997 -- Gain on Assets Sold" and Note 4 of the Condensed Notes to
Consolidated Financial Statements (contained herein) for further information
regarding assets held for sale.
Subsequent to February 1997, 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 of Fourteen Hill
Management and Fourteen Hill Capital, which invest in small businesses, and
Allegiance and Allegiance Funding, which loan funds to funeral home and cemetery
owners. The Company continues to service the life insurance policies held by its
wholly owned special purpose subsidiary, DPFC, and to evaluate other strategic
business opportunities. Fourteen Hill
10
Capital and Allegiance, whose business activities are described below, are
indicative of the types of business opportunities the Company intends to pursue.
Fourteen Hill Management and Fourteen Hill Capital
- --------------------------------------------------
On June 3, 1997, the Company formed Fourteen Hill Management and
Fourteen Hill Capital. Fourteen Hill Management is a wholly owned limited
liability company of Point West formed solely for the purpose of serving as the
general partner of one or more small business investment companies ("SBIC").
Fourteen Hill Capital is a limited partnership formed solely for the purpose of
operating as an SBIC. Fourteen Hill Capital received its SBIC license from the
Small Business Administration ("SBA") effective September 26, 1997. Fourteen
Hill Management is the sole general partner of Fourteen Hill Capital, and owns
99.976% of the partnership interests. Point West is one of the two limited
partners of Fourteen Hill Capital and owns 0.022% of the partnership interests.
The remaining 0.002% of the partnership interest is owned by one unaffiliated
limited partner. Point West capitalized Fourteen Hill Management with $5.0
million. To the extent that Fourteen Hill Management contributes additional
capital to Fourteen Hill Capital, Fourteen Hill Management's equity interest
will increase.
Fourteen Hill Capital provides loans, debt and equity capital to small
companies (i.e., generally companies with a net worth less than $18 million and
average net income less than $6 million for the last two years). Fourteen Hill
Capital commenced operations in August 1997. At March 31, 1998, Fourteen Hill
Capital had one loan and three equity investments outstanding for which it had
originally provided funds in the aggregate amount of $4.4 million. At March 31,
1998, such loans and investments were carried on the balance sheet at $10.1
million. The difference between such carrying value and the original funds
provided is reflected as "Comprehensive Income -- Net Unrealized Investment
Gains" in stockholders' equity. Many of the equity securities classified as
available-for-sale are securities traded in the Over-the-Counter ("OTC") Market.
Fair market value is estimated by the Company and is based on the average
closing bid of the stock for the last three trading days of the reporting period
and decreased to reflect management's estimate of liquidity constraints.
At present, Fourteen Hill Capital does not have any outstanding debt
from the SBA, and the Company believes that, until Fourteen Hill Capital
liquidates a portion of one of its investments or increases its regulatory
capital, Fourteen Hill Capital may not be able to access all such debt from the
SBA. See the Form 10-K and Notes 2, 3 and 11 of the Condensed Notes to
Consolidated Financial Statements (contained herein) for further information
regarding Fourteen Hill Management and Fourteen Hill Capital.
Allegiance and Allegiance Funding
- ---------------------------------
Allegiance is a limited liability company formed on September 5, 1997
as a specialty finance company to provide senior secured loans to funeral homes
and cemetery owners. Through March 31, 1998, Allegiance had funded two loans in
the aggregate principal amount of $5.9 million. Point West provided the capital
to Allegiance for such loans. Point West has a 54% equity interest and 95%
voting control in Allegiance and serves as the managing member of Allegiance.
Allegiance's president and its vice president of marketing, each of whom was
hired in September 1997, have the balance of such interests. Allegiance owns
100% of Allegiance Funding, which is a special purpose subsidiary formed to
facilitate the potential securitization of loans consummated by Allegiance. 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
11
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 the Form 10-K and Note 3 of
the Notes to Consolidated Financial Statements (contained herein) for further
information regarding Allegiance and Allegiance Funding.
Method of Accounting
- --------------------
As a result of the Company's decision to sell all or substantially all
of its assets, the Company established a reserve for loss on sale of assets
during 1996 and reevaluates this reserve quarterly. The Company also established
a reserve for loss of Point West'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. The reserve
for loss on sale of assets was $211,000 and $399,000 as of March 31, 1998 and
December 31, 1997, respectively. The reserve for loss of Point West's equity
interest in DPFC was $1.5 million and $2.3 million as of March 31, 1998 and
December 31, 1997, respectively. In addition, beginning in 1996, the Company
began generally recognizing income with respect to its viatical settlement
business upon receipt of proceeds on policies (either pursuant to sale of the
policy or the death of the insured). 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. See the Form 10-K and Notes 4 and 5 of the Condensed Notes to
Consolidated Financial Statements (contained herein) for further information
regarding the reserve for loss on sale of assets and the reserve for loss of
Point West's equity interest in DPFC.
SFAS 115 requires marketable debt and equity securities (including
those held by Fourteen Hill Capital) to be classified into held-to-maturity,
available-for-sale and trading 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
(net of applicable taxes) as a separate component of stockholders' equity. The
Company had no trading securities at March 31, 1998 or December 31, 1997. 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 the income statement as recognized. See Note 2 of the Condensed
Notes to Consolidated Financial Statements (contained herein).
The Company accounts for loans advanced by Fourteen Hill Capital and
Allegiance by accruing interest on outstanding balances. Since only three loans
were outstanding at March 31, 1998 and December 31, 1997, the Company evaluated
the loans and determined that a specific reserve was not necessary. As the loan
portfolio grows, general reserves will be added to the extent considered
necessary. See Note 3 of the Condensed Notes to Consolidated Financial
Statements (contained herein).
Certain Accounting Implications for DPFC
- -----------------------------------------
Although the Securitized Notes had an expected life of 2.1 years in
September 1995, the Securitized Notes were not retired through collections by
October 1997. At March 31, 1998, $38.8 million was outstanding under the
Securitized Notes. In the event that the collection experience for DPFC policies
is substantially delayed, the equity of DPFC may become negative. Based on the
recent
12
collection experience, the Company believes the equity of DPFC will become
negative in the third quarter of 1998.
Additionally, if the collection experience for the DPFC policies is
substantially delayed, the value of the equity of DPFC may erode further for any
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 the extent to which
policies held by DPFC will be so affected.
In light of the foregoing, to the extent that the losses of DPFC exceed
its equity (creating a deficit), the deficit would be recorded by the Company as
a loss. Upon the retirement of the Securitized Notes at less than book value,
the Company would recognize a gain for the difference, which is expected to
approximate the deficit of DPFC. At March 31, 1998, the equity of DPFC was $1.5
million. 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.
Results of Operations
- ---------------------
Three Months Ended March 31, 1998 Compared to the Three Months Ended
- --------------------------------------------------------------------
March 31, 1997
- --------------
Earned Discounts. Earned discounts on matured polices increased 71.5%
in the first quarter of 1998 compared to the first quarter of 1997. During the
first quarter of 1998, the Company had earned discounts on 24 policies with a
face value of $1.7 million, compared to 37 policies with a face value of $2.2
million during the first quarter of 1997. This increase is due primarily to the
collection in the first quarter of 1998 of two above-average size policies with
relatively low carrying values. See "Method of Accounting."
Interest Income. Interest income increased 69.2% in the first quarter
of 1998 compared to the first quarter of 1997. This increase is due primarily to
the interest earned on loans made by Fourteen Hill Capital and Allegiance.
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 Point
West's investment in American Information Company, Inc. ("American
Information"). Point West converted 8.2 million shares of convertible preferred
stock into 8.2 million shares of common stock of American Information and sold
such shares (approximately 38% of Point West's equity investment in American
Information) to an unaffiliated third party for $1.8 million. The carrying value
of such shares was $1.1 million. The Company accounts for this investment using
the cost method.
Gain on Assets Sold. The gain on assets sold decreased 84.0% in the
first quarter of 1998 compared to the first quarter of 1997 because a large
portion of the sale proceeds from life insurance policies was collected during
the first quarter of 1997. The Company collected the sale proceeds on 4 policies
resulting in a realized gain of $139,000 in the first quarter of 1998, compared
to 188 policies
13
resulting in a realized gain of $871,000 in the first quarter of 1997. The
realized gain was calculated based on the difference between the sale proceeds
and the carrying value of such policies after giving effect to the reserve for
loss on sale of assets. See Note 4 of the Condensed Notes to Consolidated
Financial Statements (contained herein).
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 increased 103.5% during the first
quarter of 1998 compared to the first quarter of 1997, due to an aggregate of
$43,000 in paid-up cash values on two policies offset by a decrease associated
with a smaller number of matured policies.
Interest Expense. Interest expense decreased 3.7% in the first quarter
of 1998 compared to the first quarter of 1997. Average borrowings under the
Securitized Notes were $38.8 million in the first quarter of 1998 compared to
$40.7 million in the first quarter of 1997. The interest rate on the Securitized
Notes was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits increased 29.3% in
the first quarter of 1998 compared to the first quarter of 1997. This increase
was due to two new employees hired in September 1997 to support Allegiance's
lending activities and an increase in compensation and benefits for employees in
1998.
Other General and Administrative Expenses. Other general and
administrative expenses decreased 23.4% in the first quarter of 1998 compared to
the first quarter of 1997. This decrease is primarily the result of $250,000 in
legal expenses recorded in the first quarter of 1997 in connection with federal
and state alleged class action lawsuits filed against the Company and its
officers and directors. Partially offsetting the decrease was an increase in
life insurance policy premium costs of $150,000 (including approximately $58,000
of premiums that were previously capitalized) recorded in the first quarter of
1998. Notwithstanding the increase in premium costs, such premium costs were
reflected in the reduction of the reserve for loss on investment in wholly owned
financing subsidiary. As a result, such increased premium costs did not impact
net income.
Net Loss in Wholly Owned Financing Subsidiary Charged to Reserve for
Equity Interest. At March 31, 1998 and December 31, 1997 the reserve to reflect
the estimated loss of Point West's entire equity interest in DPFC was $1.5
million and $2.3 million, respectively. The DPFC net loss of $801,000 and
$935,000 recorded in the first quarter of 1998 and 1997, respectively, was
included in the Company's net loss before 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 any debt borrowings that may be available to Fourteen Hill
Capital through the SBA, the Company does not currently have an external funding
source. Although Fourteen Hill Capital's SBIC license permits it, subject to
certain conditions, to obtain debt from the federal government, because one of
Fourteen Hill Capital's investments represents an amount greater than 20% of its
regulatory capital (at May 20, 1998 this investment constituted 40% of
regulatory capital), Fourteen Hill Capital may not be able to access such debt
until it liquidates a portion of such
14
investment or increases its regulatory capital. The Securitized Notes do not
provide funds with which to fund operations. Allegiance is in the process of
negotiating an external funding facility to support its loan activity. There can
be no assurance that Allegiance will be able to obtain external funding or that
any such funding will be on terms acceptable to the Company.
At March 31, 1998, cash and cash equivalents was $4.8 million. The
Company continues to analyze its current and future needs for financing, which
will be dependent on its ability to develop the businesses of Fourteen Hill
Capital and Allegiance and any other business opportunities the Company pursues.
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. Point West at present anticipates having sufficient liquidity
to meet its capital commitments and working capital and operational needs
through 1998, using current cash and cash equivalents. However, the Company does
not have sufficient liquidity to fund the growth of the businesses of Allegiance
or Fourteen Hill Capital.
As of March 31, 1998, 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 Note 6 of the
Condensed Notes to Consolidated Financial Statements (contained herein).
Considerations Under the Investment Company Act of 1940
- ------------------------------------------------------
The Investment Company Act of 1940 (the "1940 Act") creates a
comprehensive regulatory framework applicable generally to investment companies
(i.e., companies engaged primarily in the business of investing, reinvesting,
holding or trading in securities within the meaning of the 1940 Act, whether or
not those companies intend to be engaged primarily in such business). There are
various percentage of assets and income tests under the 1940 Act (the
"Percentage Tests") that are relevant in considering whether a company is deemed
to be an investment company. Companies that are subject to the 1940 Act must
register with the Securities and Exchange Commission (the "Commission") as
investment companies and upon registration become subject to extensive
regulation.
The Company does not believe it is engaged primarily in the business of
investing, reinvesting, holding or trading in securities within the meaning of
the 1940 Act and the rules of the Commission promulgated thereunder and does not
believe that it should be deemed to be an investment company under the
Percentage Tests. It is possible, however, that the Company could, in the
future, be deemed to be an investment company under the Percentage Tests or
otherwise and, thus, be required to register and be regulated under the 1940
Act, which could significantly and adversely affect the Company's business and
the market price of its Common Stock.
In particular, through Fourteen Hill Capital the Company holds
investments in securities. These investments have been made primarily since
January 1998. The value of these and certain of the Company's other investments
have increased rapidly in the past two months, increasing the likelihood that
the Company will, in the future, exceed one or more of the Percentage Tests,
unless the Company's other businesses grow more rapidly than currently
anticipated.
Although, the Company intends to conduct its business so as to not
become subject to regulation under the 1940 Act, the Company's ability to
continue not being subject to registration and
15
regulation under the 1940 Act will be subject to many factors, some of which may
be outside the Company's control. Such factors include, among others, the
successful and timely implementation of the Company's business plan, the
relative values of the various assets which are held by the Company and the
sources of the Company's income which, in turn, will be significantly affected
by increases or decreases in the market value of assets held by Fourteen Hill
Capital. In view of the foregoing, no assurance can be given that the Company
may not, in the future, be required to register as an investment company under
the 1940 Act or take steps to avoid being required to register. Such steps may
include (i) disposing of certain assets at a time or in a manner which would
not maximize potential returns, (ii) restricting additional investments by
Fourteen Hill Capital (or otherwise) even if the capital to make additional
investments is available, and (iii) initiating other businesses which may be
different from the Company's other business activities.
Other
- -----
Based on a preliminary study, the Company expects to spend
approximately $50,000 to $100,000 from 1998 to 1999 to modify its computer
information systems enabling proper processing of transactions relating to the
year 2000 and beyond ("Year 2000 Compliant"). The Company continues to evaluate
appropriate courses of corrective action, including replacement of certain
systems whose associated costs would be recorded as assets and depreciated. The
Company does not expect the amounts required to be expensed over the next two
years to have a material effect on its financial position or results of
operations. The Company is also in the process of reviewing whether or not its
suppliers and vendors are Year 2000 Compliant.
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) expectations regarding when the equity of DPFC
will become negative (See "Certain Accounting Implications for DPFC"), (ii)
sufficiency of the Company's liquidity and capital resources (See "Liquidity and
Capital Resources"), (iii) the Company's ability to continue not being subject
to registration and regulation under the 1940 Act (See "Considerations Under the
Investment Company Act of 1940"), and (iv) expected expenses to make the
Company's computer operations Year 2000 Compliant. 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 amount and timing of actual collections of DPFC
policies following the death of the insured, (ii) the results of the Company's
consideration of strategic options and any costs associated with a chosen
option, (iii) availability and cost of capital, (iv) the factors described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Considerations Under the Investment Company Act of 1940," and (v)
the ability of the Company's suppliers and vendors to become Year 2000
compliant.
16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
- --------------------------------------------------------------------
Not required.
17
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. (now Point West Capital
Corporation) 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 April 24, 1998, the Court
granted the Company's and other defendants' motion to dismiss as it
related to the Section 11 claims with prejudice but denied the motion
to dismiss the claims under Section 10(b) and Rule 10b-5 as to all
defendants other than Mr. Bow, one of Point West's directors. The
Company and each of the remaining 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 LLC 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 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule
99 Press Release For Fourteen Hill Capital,
L.P.
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
March 26, 1998 5 The Company issued a press
release regarding its results
of operations for 1997.
18
SIGNATURES
==========
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POINT WEST CAPITAL CORPORATION
DATED: May 20 1998 /S/ ALAN B. PERPER
--------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: May 20 1998 /S/ JOHN WARD ROTTER
--------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
19