SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 94-3165263
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
---------------------------------
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 July 22, 1998, there were 3,253,324 shares of the registrant's Common Stock
outstanding.
POINT WEST CAPITAL CORPORATION
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INDEX
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Page #
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Part I
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 1
Consolidated Statements of Operations
and Comprehensive Income for the
Three and Six Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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 4. Submission of Matters to a Vote of Securitiy Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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(i)
POINT WEST CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
June 30, December 31,
ASSETS 1998 1997
-------------- --------------
Cash and cash equivalents $ 2,354,067 $ 10,039,560
Restricted cash 3,700,148 3,756,714
Investment securities (note 2)
Held-to-maturity 2,220,000 2,220,000
Available-for-sale 12,626,483 3,597,343
Matured policies receivable 325,225 305,435
Loans receivable, net of unearned income of $117,650
and $59,884, respectively (note 3) 6,575,908 4,015,716
Assets held for sale (note 4) 74,812 129,334
Purchased life insurance policies (note 5) 34,539,544 36,586,788
Non-marketable securities (note 6) 3,732,148 1,658,478
Deferred financing and organizational costs, net of
accumulated amortization of $747,196 and
$621,884, respectively 450,122 525,433
Furniture and equipment, net of accumulated depreciation of
$1,544 and $341, respectively 17,542 6,862
Other assets 264,111 127,590
-------------- --------------
Total assets $ 66,880,110 $ 62,969,253
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 178,439 $ 183,150
Accounts payable 179,081 216,851
Accrued compensation payable 100,000 193,000
Reserve for equity interest in wholly owned financing
subsidiary (note 5) 407,324 2,300,037
Long term notes payable (note 7) 38,528,914 38,804,107
Deferred income taxes 706,000 6,000
-------------- --------------
Total liabilities 40,099,758 41,703,145
-------------- --------------
Stockholders' equity:
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 8) 8,276,263 2,597,239
Retained deficit (8,161,517) (7,996,737)
Treasury stock, 1,038,500 shares (2,874,032) (2,874,032)
-------------- --------------
Total stockholders' equity 26,780,352 21,266,108
Total liabilities and stockholders' equity $ 66,880,110 $ 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 and Six Months Ended June 30, 1998 and 1997
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
Income:
Earned discounts on matured policies (note 9) $ 49,519 $ 101,691 365,652 $ 285,977
Interest income 347,848 337,574 699,155 545,210
Gain on sale of convertible
preferred shares -- -- -- 699,665
Gain on assets sold (note 4) 11,689 492,217 150,526 1,362,858
Other 105,403 38,681 168,888 69,875
-------------- -------------- -------------- --------------
Total income 514,459 970,163 1,384,221 2,963,585
Expenses:
Interest expense 867,922 885,789 1,772,042 1,824,259
Compensation and benefits 345,779 283,825 695,338 554,108
Other general and administrative expenses 414,562 459,377 847,819 1,025,113
Amortization 62,656 58,720 125,312 117,146
Depreciation 785 -- 1,203 --
-------------- -------------- -------------- --------------
Total expenses 1,691,704 1,687,711 3,441,714 3,520,626
-------------- -------------- -------------- --------------
Loss before net loss in wholly
owned financing subsidiary
charged to reserve for equity interest (1,177,245) (717,548) (2,057,493) (557,041)
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 5) 1,092,037 949,958 1,892,713 1,884,651
------------- -------------- -------------- --------------
Net income (loss) $ (85,208) $ 232,410 (164,780) $ 1,327,610
============== ============== ============== ==============
Comprehensive income -- net unrealized
investment gains (note 8) 2,540,152 -- 5,679,024 --
Total comprehensive income (note 8) 2,454,944 5,514,244
Basic earnings (loss) per share (note 10) (0.03) 0.07 (0.05) 0.35
Diluted earnings (loss) per share (note 10) (0.03) 0.06 (0.05) 0.34
Weighted average number of shares of common stock
outstanding (note 10) 3,253,324 3,538,269 3,253,324 3,794,597
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 10) 3,253,324 3,620,246 3,253,324 3,870,388
<FN>
See accompanying condensed notes to consolidated financial statements
</FN>
2
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
Six Months Ended
June 30,
1998 1997
-------------------- -------------------
Cash flows for operating activities:
Net income (loss) $ (164,780)$ 1,327,610
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 126,515 117,146
Gain on assets (150,526) (1,362,858)
Gain on sale of convertible preferred shares -- (699,665)
Earned discounts on policies (365,652) (285,977)
Purchase of life insurance policies -- (915,272)
Collections on matured life insurance policies 2,275,514 4,215,074
Increase in other assets (136,637) (101,004)
Increase in accrued expenses (4,711) (2,626)
Increase (decrease) in accounts payable (37,771) 563,281
Decrease in accrued compensation payable (93,000) (86,419)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (1,775,769) (1,884,651)
-------------------- -------------------
Net cash (used in) provided by operating activities (326,817) 884,639
-------------------- -------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 205,696 11,856,688
Purchase of furniture and equipment (11,883) --
Return of restricted cash 56,566 495,144
Purchase of investment and non-marketable securities (4,723,670) (2,275,551)
Additions to loans receivable (2,617,234) --
Principal payments on loans receivable 57,042 --
Sale of investment in convertible preferred stock -- 2,021,187
-------------------- -------------------
Net cash (used in) provided by investing activities (7,033,483) 12,097,468
-------------------- -------------------
Cash flows from financing activities:
Principal payments on long term notes payable (275,193) (2,317,515)
Purchase of treasury stock -- (2,484,032)
Increase in financing costs (50,000) (5,000)
-------------------- -------------------
Net cash used in financing activities (325,193) (4,806,547)
-------------------- -------------------
Net (decrease) increase in cash and cash equivalents (7,685,493) 8,175,560
Cash and cash equivalents, beginning of period 10,039,560 6,586,447
-------------------- -------------------
Cash and cash equivalents, end of period $ 2,354,067 $ 14,762,007
==================== ===================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized gain on securities available for sale (net of taxes) $ 8,276,263 $ --
==================== ===================
Supplemental disclosure of cash flow information:
State taxes paid $ 8,530 $ 31,456
==================== ===================
Cash paid for interest $ 1,776,753 $ 1,826,885
==================== ===================
<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 ("Point West") and its consolidated entities (the "Company") as of
June 30, 1998 and for the three and six month periods ended June 30, 1998 have
been prepared in accordance with generally accepted accounting principles for
interim financial information, in accordance with Rule 10-01 of Regulation S-X.
Accordingly, such statements do not include all of the information and notes
thereto that are included in the annual consolidated financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 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 and notes thereto 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, L.P. ("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 lend 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
Capital" and "-- Allegiance and Allegiance Funding."
During 1997, the Financial Accounting Standard 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.
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.
4
Many of the equity securities classified as available-for-sale are securities
(or are 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 securities for the last three trading days of the reporting
period and is adjusted to reflect management's estimate of liquidity
constraints. The Company had no trading securities at June 30, 1998 or December
31, 1997. Any unrealized 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 when realized.
The amortized costs and estimated fair value of investment securities
as of June 30, 1998 and December 31, 1997 are as follows:
June 30, 1998
- ------------------------------------------------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Gains Loss
Fair Value
Held-to-maturity
Corporate bonds $ 2,220,000 $ 130,000 $ (17,500) $ 2,332,500
-------------- --------------- ----------------- --------------
Total held-to-maturity $ 2,220,000 $ 130,000 $ (17,500) $ 2,332,500
Available-for-sale
Common stock $ 3,650,000 $ 8,975,856 $ -- $ 12,625,856
Warrants $ 0 $ 627 $ -- $ 627
------------------ ----------------- ------------------ ------------------
Total available-for-sale $ 3,650,000 $ 8,976,483 $ -- $ 12,626,483
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 June 30, 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. Certain
warrants outstanding at December 31, 1997 were exercised during the first
quarter of 1998 and the securities purchased upon such conversion are reflected
as available-for-sale.
Unrealized gains on available-for-sale securities (representing
differences between estimated fair value and cost) of $9.0 million and $2.6
million at June 30, 1998 and December 31, 1997, respectively,
5
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 June 30, 1998
and December 31, 1997 were current, and no reserves were considered necessary as
of either date.
Allegiance had two loans outstanding at June 30, 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%. Principal payments are due monthly on such
loans, and such loans mature, subject to permitted prepayments, in approximately
fifteen years. Allegiance intends to aggregate and sell these loans and
therefore hedges its interim interest rate exposure. Any gain or loss related to
these hedges are deferred and recognized by the Company when the loans are sold.
Until such time, any realized gains or losses on hedges are reflected on the
balance sheet as an increase or decrease, as appropriate, in the carrying value
of loans receivable. For the quarter ended June 30, 1998, the Company had
realized gains on its hedging activities of $28,000 which decreased loans
receivable in a like amount and unrealized net losses from its hedging
activities of $70,000 which are not reflected on the balance sheet and which
management believes are offset by increases in the market value of the loans.
Fourteen Hill Capital had one loan outstanding at June 30, 1998 in the
principal amount of $795,000. Such loan bears a fixed interest rate per annum of
15% and matures, subject to permitted prepayments, in approximately 5 years.
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 June 30, 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:
June 30 , 1998 December 31, 1997
-------------- -----------------
Capitalized costs $ 264,934 $ 525,697
Earned discounts on life insurance policies 1,084 2,482
Reserve for loss on sale (191,211) (398,845)
------------------ ----------------
Assets held for sale $ 74,812 $ 129,334
================== ==================
The 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 (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.
6
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 June 30, 1998, the sale of 354
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 8 policies (representing approximately
$493,000 in face amount) were carried on the balance sheet at June 30, 1998 at
$74,812 after giving effect to the reserve for loss on assets held for sale.
The policies representing "assets held for sale" consist of the 8
policies under the aforementioned sales agreements. The Company experienced
delays or difficulties in transferring the ownership of the remaining 8 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 7),
requires 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 June 30, 1998 and December 31, 1997, the reserve was $407,000 and $2.3
million, respectively. The reserve provides for the write-off of the unrealized
residual value associated with DPFC. See Note 7.
6. Non-Marketable Securities
- -- -------------------------
Non-marketable securities include investments in non-marketable debt
and equity securities through Point West and Fourteen Hill Capital. The Company
accounts for such non-marketable securities using the cost method.
In 1996, Point West purchased convertible preferred shares in American
Information Company, Inc. ("American Information"). As of June 30, 1998, the
carrying value of such non-marketable preferred shares was $1.7 million. See the
Form 10-K for further information regarding American Information.
In the second quarter of 1998, Fourteen Hill Capital invested $1
million in the convertible preferred shares (convertible into common shares) of
one unaffiliated small business entity and invested $1 million in the debt
securities (which are convertible into preferred shares, which in turn are
convertible into common shares) of another unaffiliated small business entity.
The investment in the convertible debt bears a fixed interest rate per annum of
6.4%. Such interest is payable semi-annually (at the option of the holder) in
cash or in preferred shares of the small business entity.
7
7. Long Term Notes Payable
- -- -----------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") were issued by DPFC. 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. 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 June 30, 1998, the equity of DPFC was
$407,000.
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.
8. Stockholders' Equity
- -- --------------------
Changes in stockholders' equity during the first six months of 1998
reflected the following:
Stockholders' equity, beginning of period $ 21,266,108
Comprehensive income -- net unrealized investment gains 5,679,024
Net loss (164,780)
-----------------
Stockholders' equity, end of period $ 26,780,352
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 June 30, 1998, the
Company's total comprehensive income includes net unrealized investment gains
which represents the increase in the Company's investment securities classified
as available-for-sale, net of applicable taxes.
9. Earned Discount
- -- ---------------
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.
10. 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.
For the three months For the six months
ended June 30, ended June 30,
================ ===============
1998 1997 1998 1997
Weighted average number of shares of common
Stock outstanding....................................... 3,253,324 3,538,269 3,253,324 3,794,597
Additional common stock equivalents .............. -- 81,977 -- 75,791
--------- --------- --------- ---------
Weighted average number of shares of common stock
and common stock equivalents outstanding ........ 3,253,324 3,620,246 3,253,324 3,870,388
========= ========= ========= =========
Diluted EPS for the three and six months ended June 30, 1998 do not
include any common stock equivalents due to their anti-dilutive effect. Common
Stock equivalents for the three and six months ended June 30, 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.
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. (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 case is
currently in discovery. 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 case
has been stayed pending resolution of the case described in the immediately
preceding paragraph. The Company and each of the defendants intend to defend the
action vigorously.
12. Subsequent Events
- -- -----------------
On July 16, 1998, Fourteen Hill Capital borrowed $3 million from the
Small Business Administration ("SBA").
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following is a discussion and analysis of the consolidated
financial condition of the Company as of June 30, 1998, and of the results of
operations for the Company for the three and six months ended June 30, 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 starting of
two new businesses in the second half of 1997) the Company's results of
operations and cash flows for the three and six months ended June 30, 1998 are
not comparable to those for the three and six months ended June 30, 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 8 of such policies (having
an aggregate face value of $493,000) at June 30, 1998. See "Results of
Operations -- Three and Six Months Ended June 30, 1998 Compared to Three and Six
Months Ended June 30, 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 lend 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, whose business
activities are described below, are indicative of the types of business
opportunities the Company intends to pursue.
10
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
SBA effective September 26, 1997. Fourteen Hill Management is the sole general
partner of Fourteen Hill Capital, and owns 99.978% of the partnership interests.
Point West is one of the two limited partners of Fourteen Hill Capital and owns
0.02% 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.
Fourteen Hill Capital provides loans, debt and equity capital to small
companies (i.e., generally companies with a net worth less than $l8 million and
average net income less than $6 million for the last two years). Fourteen Hill
Capital commenced operations in August 1997. At June 30, 1998, Fourteen Hill
Capital had one loan, one debt with equity features and four equity investments
outstanding for which it had originally provided funds in the aggregate amount
of $6.4 million. At June 30, 1998, such loans and investments were carried on
the balance sheet at $15.4 million. The difference between such carrying value
(net of applicable taxes) and the original funds provided is reflected as
"Comprehensive Income -- Net Unrealized Investment Gains" in stockholders'
equity. Many of the equity securities, which are held, by Fourteen Hill Capital
and which are classified as available-for-sale, are securities traded in the 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.
As of July 16, 1998, Fourteen Hill Capital had borrowed $3 million from
the SBA. See "Liquidity and Capital Resources." 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
borrow additional funds from the SBA. See the Form 10-K and Notes 2 and 3 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 home
and cemetery owners. Through June 30, 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 65% ownership 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 and have an option
to acquire 5% of the equity interests if certain events occur. 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 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.
11
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 $191,000 and $399,000 as of June 30, 1998 and
December 31, 1997, respectively. The reserve for loss of Point West's equity
interest in DPFC was $407,000 and $2.3 million as of June 30, 1998 and December
31, 1997, respectively. In addition, beginning in 1996, the Company began
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 June 30, 1998 or December 31, 1997. Any
unrealized 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 realized. 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 June 30, 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).
The Company uses the cost method to account for non-marketable
securities.
Allegiance intends to aggregate and sell the loans that it holds and
therefore hedges its interim interest rate exposure. There is no assurance that
Allegiance will be able to sell these loans. Any gain or loss related to these
hedges are deferred and recognized by the Company when the loans are sold. Until
such time, any realized gains or losses on hedges are reflected on the balance
sheet as an increase or decrease, as appropriate, in the carrying value of loans
receivable. For the quarter ended June 30, 1998, the Company had realized gains
on its hedging activities of $28,000 which decreased loans receivable in a like
amount and unrealized net losses from its hedging activities of $70,000 which
are not reflected on the balance sheet and which management believes are offset
by increases in the market value of the loans.
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 June 30, 1998, $38.5 million was outstanding under the
Securitized Notes. In the event that the collection experience for DPFC policies
continues to be substantially delayed, the equity of DPFC may become negative.
Based on the recent collection experience, the Company believes the equity of
DPFC will become negative in the third quarter of 1998.
12
Additionally, if the collection experience for the DPFC policies
continues to be 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 June 30, 1998, the equity of DPFC was
$407,000. 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 and Six Months Ended June 30, 1998 Compared to the Three and Six Months
- -----------------------------------------------------------------------------
Ended June 30, 1997
- -------------------
Earned Discounts. Earned discounts on matured polices decreased 51.3%
in the second quarter of 1998 compared to the second quarter of 1997 due to the
decrease in the number and face amount of matured policies. During the second
quarter of 1998, the Company had earned discounts on 14 policies with a face
value of $590,000, compared to 17 policies with a face value of $1.3 million
during the second quarter of 1997. Earned discounts on matured polices increased
27.9% in the first half of 1998 compared to the first half of 1997. During the
first half of 1998, the Company had earned discounts on 38 policies with a face
value of $2.3 million, compared to 54 policies with a face value of $3.5 million
during the first half of 1997. Although the Company had earned discounts on
fewer policies during the first half of 1998 compared to the first half of 1997,
the earned discounts increased over this period due primarily to the collection
in the first quarter of 1998 of two policies with above-average face values and
relatively low carrying values. See "Method of Accounting."
Interest Income. Interest income increased 3.0% in the second quarter
of 1998 compared to the second quarter of 1997 and 28.2% in the first half of
1998 over the first half of 1997. This increase is due primarily to the interest
earned on loans made by Fourteen Hill Capital (which was formed in June 1997)
and Allegiance (which was formed in September 1997). See "Method of Accounting."
Partially offsetting this increase is the decrease in interest earned on the
proceeds from the sale of policies which were invested in short term securities
and marketable securities in the first half of 1997.
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"). See the Form 10-K. The Company accounts for this investment using
the cost method.
Gain on Assets Sold. The gain on assets sold decreased 97.6% in the
second quarter of 1998 compared to the second quarter of 1997 and 89.0% in the
first half of 1998 compared to the first half of 1997 because a large portion of
the sale proceeds from life insurance policies was collected during the first
half of 1997. The Company collected the sale proceeds on 2 policies resulting in
a realized gain of
13
$12,000 in the second quarter of 1998, compared to 51 policies resulting in a
realized gain of $492,000 in the second quarter of 1997. The Company collected
the sale proceeds on 6 policies resulting in a realized gain of $151,000 in the
first half of 1998, compared to 239 policies resulting in a realized gain of
$1.4 million in the second 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 placement fees,
collections on policies of dividends, interest and 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 172.5% during the second quarter of 1998 compared to the second
quarter of 1997 and 141.7% during the first half of 1998 compared to the first
half of 1997. This increase is primarily a result of a $70,000 placement fee
received by Point West in the form of convertible preferred shares in connection
with an investment made by co-investors of Fourteen Hill Capital in an
unaffiliated small business entity.
Interest Expense. Interest expense decreased 2.0% in the second quarter
of 1998 compared to the second quarter of 1997 and 2.9% in the first half of
1998 compared to the first half of 1997. Average borrowings under the
Securitized Notes were $38.7 million in the first half of 1998 compared to $39.6
million in the first half of 1997. The interest rate on the Securitized Notes
was 9.17% in both periods.
Compensation and Benefits. Compensation and benefits increased 21.8% in
the second quarter of 1998 compared to the second quarter of 1997 and 25.5% in
the first half of 1998 compared to the first half 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 other employees
(including executive officers) for 1998.
Other General and Administrative Expenses. Other general and
administrative expenses decreased 9.8% in the second quarter of 1998 compared to
the second quarter of 1997 and 17.3% in the first half of 1998 compared to the
first half of 1997. This decrease is partially the result of a decrease in the
expense for professional fees incurred to support the analysis of strategic
options ($75,000 and $150,000, respectively, for the second quarter of 1998 and
the first half of 1998). Such decrease is also due to a decrease in legal
expenses incurred in connection with federal and state alleged class action
lawsuits filed against the Company and its officers and directors ($70,000 and
$290,000, respectively, for the second quarter of 1998 and for the first half of
1998).
Partially offsetting the decrease was an increase in life insurance
policy premium costs ($125,000 and $274,000, respectively, for the second
quarter and the first half of 1998). Prior to October 1997, policy premium
expenses were capitalized. 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 June 30, 1998 and December 31, 1997 the reserve to reflect
the estimated loss of Point West's entire equity interest in DPFC was $407,000
and $2.3 million, respectively. The DPFC net loss of $1.1 million and $1.9
million recorded in the three and six months ended June 30, 1998, respectively,
and $950,000 and $1.9 million recorded in the three and six moths ended June 30,
1997, respectively, were 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.
14
Liquidity and Capital Resources
- -------------------------------
As of July 16, 1998, Fourteen Hill Capital had borrowed $3 million from
the SBA. Other than any other 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 July 22, 1998 this investment constituted
40% of regulatory capital), Fourteen Hill Capital may not be able to access
additional debt from the SBA until it liquidates a portion of such 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 June 30, 1998, cash and cash equivalents was $2.4 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 business of Allegiance
or Fourteen Hill Capital.
As of June 30, 1998, the outstanding principal amount of the
Securitized Notes was $38.5 million. 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 7
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 substantially in the past several months, increasing the
15
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 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
- -----
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 is in the process of replacing certain systems, a
portion of the cost of which may be capitalized. Through June 30, 1998, the
Company had incurred Year 2000 Ccompliant costs of approximately $24,000 of
which $19,000 has been capitalized. The Company continues to evaluate additional
courses of corrective action, including replacement of other systems whose
associated costs may be capitalized. 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 Statement
- -------------------------
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)
Allegiance's ability to sell the loans that it holds, (iii) sufficiency of the
Company's liquidity and capital resources (See "Liquidity and Capital
Resources"), (iv) the Company's ability to continue not being subject to
registration and regulation under the 1940 Act (See "Considerations Under the
Investment Company Act of 1940"), and (v) 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 market's acceptance of the
asset class consisting of the loans held by Allegiance and Allegiance's ability
to consummate the sale of the loans on terms acceptable to the market and
Allegiance, (iii) the results of the Company's consideration of strategic
options and any costs associated with a chosen option, (iv) availability and
cost of capital, (v) the factors described under "Management's Discussion and
Analysis of Financial Condition and Results of
16
Operations -- Considerations Under the Investment Company Act of 1940," and (vi)
the ability of the Company's suppliers and vendors to become Year 2000
compliant.
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 case
is currently in discovery. 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 case has been stayed pending resolution of the case
described in the immediately preceding paragraph. The Company and each
of the defendants intend to defend the action vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
On May 11, 1998, the Company held an Annual Meeting of its
stockholders. The election of one director and the proposal to amend
and restate the Company's 1995 Stock Option Plan as set forth in the
proxy statement were presented. John Ward Rotter was re-elected to the
Board of Directors for a term expiring in 2001. The voting tallies
were:
Director Votes For Votes Withheld
-------- --------- --------------
John Ward Rotter 2,553,722 1,515
The other directors whose term of office continued after the meeting
are: Bradley N. Rotter (term expiring in 1999), Stephen T. Bow (term
expiring in 1999), Alan B. Perper (term expiring in 2000) and Paul A.
Volberding (term expiring in 2000).
18
The proposal to amend and restate the Company's 1995 Stock Option Plan
was also approved. The voting tallies were:
Votes For Votes Against Votes Abstain Broker Non-Votes
--------- ------------- ------------- ----------------
Proposal to amend and
restate the Company's
1995 Stock Option Plan 2,536,112 19,115 10 0
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits.
Number Description
------ -----------
10 Point West Capital Corporation Amended and Restated
1995 Stock Option Plan
27 Financial Data Schedule
99 Press Release for Fourteen Hill Capital, L.P.
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
May 20, 1998 5 May 20, 1998 5 The Company issued
a press release regarding its
results of operations for the
first quarter of 1998.
19
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: July 22, 1998 /S/ ALAN B. PERPER
--------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: July 22, 1998 /S/ JOHN WARD ROTTER
--------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20