SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

 

FORM 10-QSB

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001 

OR

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE EXCHANGE ACT

For the transition period from ______to _____
 

Commission file number 0-27736

 

POINT WEST CAPITAL CORPORATION(Exact name of small business issuer as specified in its charter)

 
**Delaware(State or other jurisdiction of    incorporation or organization)**94-3165263(I.R.S. Employer    Identification Number)**1700 Montgomery Street, Suite 250    San Francisco, California 94111     (Address of principal executive offices)**(415) 394-9467     (Issuer's telephone number, including area code)
 

Check whether the issuer: (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the issuer was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes [X] No [ ]

At April 30, 2001, there were 3,352,624 shares of the issuer’sCommon Stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes [ ] No[X]

 

 
**POINT WEST CAPITAL CORPORATION**
 
**INDEX

 **
Part I
Financial Information
Page 
Item 1.
Consolidated Financial Statements    (Unaudited):
Consolidated Balance Sheet    March 31, 2001 
1
Consolidated Statements of Operations for    the    Three Months Ended March 31, 2001 and 2000
2
Consolidated Statements of Cash Flows for    the     Three Months Ended March 31, 2001 and 2000
3
Condensed Notes to Consolidated Financial    Statements
4-11
Item 2.
Management’s Discussion and Analysis    of Financial    Condition and Results of Operations
12-21
 

Part II
 

Other Information
Item 1.
Legal Proceedings
22
Item 5.
Other Information
23
Item 6.
Exhibits and Reports on Form 8-K
23
Signatures
24
POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED    BALANCE SHEET
March 31,
2001
ASSETS
(unaudited)Cash and cash equivalents$2,494,600Restricted cash2,547,494Investment securities:
Available-for-sale
75,053Matured policies receiveable686,885Taxes receivable196,094Loans receivable, net of unearned income of    $599,000
and an allowance for loan losses of $190,000
36,833,131Purchased life insurance policies29,448,620Non-marketable securities6,695,788Deferred financing costs, net of accumulated
amortization of $513,815
695,913furniture and equipment, net of accumulated
depreciation of $38,492
64,758Other assets1,256,794
Total assets
$80,995,130
LIABILITIES AND STOCKHOLDERS'    EQUITYAccrued interest expense$158,735Accounts payable474,693Accrued compensation payable323,938Revolving certificates9,059,966Term certificates23,711,908Securitized notes payable35,096,982Debenture payable6,500,000
Total liabilities
75,326,222Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,

   4,391,124 shares issued and 3,352,624 shares outstanding
43,911
Additional paid-in-capital
30,091,689
Accumulated comprehensive loss, net of tax benefit
(132,697)
Accumulated deficit
(21,459,963)
Treasury stock, 1,038,500 shares
(2,874,032),
Total stockholders' equity
5,668,908
Total liabilities and stockholders' equity
$80,995,130
See accompanying    condensed notes to consolidated financial statements.
1** **
POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED    STATEMENTS OF OPERATIONS
For the Three    Months Ended , 
March 31,
2001
2000
(unaudited)Revenues:
Interest income
$975,536$2,215,184
Net (loss) gain on securities
(3,407,865)418,271
Other
149,36332,965
Total revenues
(2,282,966)2,666,420Expenses:
Interest expense
823,5961,248,110
Compensation and benefits
381,126619,457
Other general and administrative expenses
542,648869,860
Amortization
24,15062,228
Depreciation
6,0243,089
Total expenses
1,777,5442,802,744
Loss before income taxes

and extraordinary gain
(4,060,510)(136,324)Income tax (expense) benefit(18,170)52,649
Loss before extraordinary gain
(4,078,680)(83,675)Extraordinary gain, net of income taxes of    $822,154-1,242,003
Net (loss) income
$(4,078,680)$1,158,328Earnings per share - Basic:
Loss before extraordinary gain
$(1.22)$(0.02)
Extraordinary gain
-0.37
Net (loss) income
$(1.22)$0.35Earnings per share-Diluted:
Loss before extraordinary gain
$(1.22)$(0.02)
Extraordinary gain
-0.33
Net (loss) income
$(1.22)$0.31Weighted-average number of shares of common    stock
outstanding
3,352,6243,352,261Weighted-average number of shares of common    stock
and common stock equivalents outstanding
3,352,6243,751,463
See accompanying    condensed notes to consolidated financial statements.
2
 

POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED    STATEMENTS OF CASH FLOWS
For the Three    Months Ended March 31, 
2001
2000
(unaudited)Cash flows from operating activities:$
(4,078,680)$1,158,328 
Net (loss) income

Adjustments to reconcile net (loss) income to net cash

   used in operating activities:

Depreciation and amortization
30,17465,317 
Provision for loan losses
-20,000 
Net loss (gain) on securities
3,407,865(418,271)
Interest income received as warrants
-(1,101,532)
Deferred tax provision (benefit)
17,370(368,386)
Extraordinary gain
-(1,242,003)
Changes in operating assets and liabilities:

Collections on matured life insurance policies
513,498183,648 
Other assets
(138,526)(43,193)
Taxes receivable
-(137,912)
Unearned income
(114,358)(14,787)
Accrued interest expense
(104,802)(228,446)
Accounts payable
99,578 206,225 
Accrued compensation payable
(92,953)(192,819)
Net cash used in operating activities
(460,834)(2,113,831)Cash flows from investing activities
Purchase of furniture and equipment
-(15,827)
Decrease in restricted cash
(105,179)1,671,751 
Proceeds from maturity of held-to-maturity securities
-2,504,610 
Purchase of investment and non-marketable securities
-(10,932,427)
Proceeds from sale of investment and non-marketable securities
340,000 1,659,681 
Additions to loans receivable
-(991,936)
Principal payments on loans receivable
170,972 2,543,519 
Net cash provided by (used in) investing activities
405,793 (3,560,629)Cash flows from financing activities:
Principal payments on securitized notes payable
(179,387)(100,933)
Principal payments on revolving certificates
(73,321)(35,022)
Principal payments on term certificates
(185,337)(134,125)
Increase in deferred financing costs
-(64,930)
Proceeds from options exercised
-2,750 
Net cash used in financing activities
(438,045)(332,260)
Net decrease in cash and cash equivalents
(493,086)(6,006,720)Cash and cash equivalents, beginning of period2,987,686 12,836,125 Cash and cash equivalents, end of period2,494,600 6,829,405 Supplemental disclosures:Supplemental disclosure of non-cash activities:
Unrealized loss on securities available for sale, net of tax 
$(23,175)$(437,434)
Receipt of warrants
$-$1,101,532 
Reduction in securitized notes payable in

   connection with extraordinary gain
$-$2,064,157 
Accrued litigation settlement offset against other assets
$-$2,205,000 Supplemental disclosure of cash flow    information:
Taxes paid
$10,555 $458,860 
Cash paid for interest
$928,398 $1,580,471 
See accompanying    condensed notes to consolidated financial statements.
3
                   

 
**POINT WEST CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**
 

**1.                General Description**

                   The unaudited consolidated financial statements of Point West Capital Corporation("Point West Capital"), including its consolidated entities (collectively the"Company"), as of March 31, 2001 and for the three month periods ended March 31,2001 and 2000 have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information, in accordance with Item310(b) of Regulation S-B. Accordingly, such statements do not include all of theinformation and notes thereto that are included in the annual consolidated financialstatements. In the opinion of management, all adjustments considered necessary for a fairpresentation have been included. Operating results for the three month period ended March31, 2001 are not necessarily indicative of the results that may be expected for the yearending December 31, 2001. These statements and notes thereto should be read in conjunctionwith the audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the year ended December 31, 2000 (the"Form 10-K").

                   The Company is a specialty financial services company with historic operations in fourbusiness segments: (i) small business loans and investments through Point West VentureManagement, LLC ("Point West Management") and Point West Ventures, LP("Point West Ventures"), (ii) loans to funeral homes and cemeteries throughAllegiance Capital, LLC ("Allegiance Capital"), Allegiance Funding I, LLC("Allegiance Funding"), Allegiance Capital Trust I ("Allegiance TrustI") and Allegiance Management Corp. ("Allegiance Management"), (iii)viatical settlements through Dignity Partners Funding Corp. I ("DPFC") and (iv)other activities through Point West Capital, SocietyPool.com, LLC("SocietyPool") and Point West Securities, LLC ("PWS"). Referencesherein to Ventures include Point West Management and Point West Ventures. Referencesherein to Allegiance include Allegiance Capital, Allegiance Funding, Allegiance Trust Iand Allegiance Management. The activities of Ventures and Allegiance changed substantiallyin 2000 and in the first quarter of 2001. See the Company’s Form 10-K and"Management’s Discussion and Analysis of Financial Condition and Results ofOperations--Recent Developments" herein for further information. 

                   Subsequent to February 1997, the Company expanded its financial services business throughthe operations of Ventures and Allegiance. During 1998, the Company formed PWS, abroker-dealer licensed by the National Association of Securities Dealers, Inc. To date,the operations of PWS have not been material to the Company. During 2000 the Companyformed SocietyPool. SocietyPool was formed to develop and pursue a new financial product.It is still in the development stage. To date, SocietyPool has conducted limited marketresearch, but has not engaged in operations. In connection with the principal businessactivity of the Company through February 1997 (which was to provide viatical settlementsfor terminally ill persons), Point West Capital continues to service the life insurancepolicies held by its wholly owned special purpose subsidiary, DPFC. 
**2.                Restricted Cash**
                   Restricted cash as of March 31, 2001 includes $2.1 million for SocietyPool. The balance ofrestricted cash is comprised of funds held by Allegiance Capital Trust and DPFC. Prior tothe dismissal of the bankruptcy action involving SocietyPool, the bankruptcy court hadentered a separate order freezing SocietyPool’s funds. Pursuant to this freeze order,access to SocietyPool’s funds by SocietyPool’s management or by any creditor ormember of SocietyPool has been prohibited. As a result of the Court’s having grantedPoint West Capital’s motion to dismiss the bankruptcy action, the Company 

 

4

 

believes that the freeze order automatically expired. However, the bankholding SocietyPool’s funds has continued to prohibit all access to such funds unlessand until the bankruptcy court specifically vacates the freeze order. The Company intendsto request the bankruptcy court to vacate the freeze order. See Note 7. 
**3.                Investment Securities**
                   The Company accounts for marketable debt and equity securities in accordance withStatement of Financial Accounting Standards No. 115*, Accounting for Certain Investmentsin Debt and Equity Securities.*The cost and estimated fair value of investmentsecurities reflected in the consolidated balance sheet as of March 31, 2001 were $307,000and $75,000, respectively. Cumulative net unrealized losses on available-for-salesecurities (representing differences between estimated fair value and cost) were($232,000) at March 31, 2001. These cumulative net unrealized losses, net of applicabletax benefits, are included in accumulated comprehensive loss, a separate balance sheetcomponent of stockholders’ equity. See Note 5.
**4.                Revolving and Term Certificates**
                   Through December 2000, Allegiance financed its loans receivable under a structuredfinancing arrangement established in August 1998 (the "Allegiance Financing").Under the Allegiance Financing, various classes of revolving and term certificates ofAllegiance Trust I have been issued. 

                   As a result of loans made by Allegiance which became non-performing, Allegiance was unableto access further debt under the Allegiance Financing since October 30, 2000. TheAllegiance Financing expired in December 2000. Allegiance has no source of fundingavailable to make additional loans. Consequently, Allegiance began reducing costs throughemployee layoffs during December 2000. In addition, Allegiance was unable to convert toterm certificates or otherwise repay $9.1 million of revolving certificates issued underthe Allegiance Financing. As a result, the interest payable under the revolving loancertificates increased by 1% per annum, effective February 15, 2001. The revolvingcertificates bear interest at fixed and variable rates based on the one-year U.S. Treasuryyield and one-month LIBOR. At May 1, 2001, the weighted-average interest rate on therevolving certificates was 9.6%. In May 2001, Allegiance and a consortium of insurancecompanies holding certificates issued under the Allegiance Financing (the"Investors") executed an amendment and waiver providing Allegiance until July16, 2001 to resolve the non-performing loans and retire the revolving debt. 

                   As a result of the amendment and waiver, the Company expects that at least some of themonthly payments to Point West Capital and Allegiance Capital for servicing activities andto Allegiance Capital under the debt certificates issued to Allegiance Capital will resumebeginning in May 2001. Such payments have averaged approximately $42,000 per month andcould increase or decrease in future months subject to the cash flow on the underlyingloans and continued compliance with other provisions of the Allegiance Financing. If thenon-performing loans are worked out to the satisfaction of Allegiance and the Investorsand the revolving debt is retired by July 16, 2001, the Company expects that such paymentswill continue. Additionally, if another amendment providing time beyond July 16, 2001 isexecuted, the Company is hopeful that such payments will continue. However, if Allegianceis not able to work out the non-performing loans and retire the revolving debt by July 16,2001 and if the Investors do not provide additional time beyond July 16, 2001 to do so,the Investors could, after July 16, 2001, declare an event of default under the AllegianceFinancing at any time. If the Investors were to declare an event of default, Point WestCapital and Allegiance Capital could be terminated as servicers and the Investors couldliquidate the collateral and apply the proceeds to retire all amounts outstanding underthe Allegiance Financing.

 

5

                   Repayment of the debt outstanding under the Allegiance Financing is an obligation solelyof Allegiance. Point West Capital did not guarantee repayment of the revolving or termcertificates and is not required to fund any principal or interest deficienciesthereunder.

 
**5.                  Stockholders’ Equity

Changes in stockholders’ equity during the first three months of 2001 
reflected the following:
Stockholders' equity, beginning of period....................

$  9,770,763
Comprehensive loss: 

   Net loss.................................................................

(4,078,680)
   Other comprehensive loss:

       Net unrealized investment losses, net of tax

benefit of $99,000..........................................

(23,175)
  Comprehensive loss ...............................

(4,101,855)
Stockholders' equity, end of period..........................

$  5,668,908
Changes in stockholders’ equity during the first three months of 2000 
reflected the following:
Stockholders' equity, beginning of period.......................
$27,542,793
Comprehensive income:

   Net          income.................................................................
1,158,328
   Other comprehensive loss:

       Net unrealized investment losses, net of tax

benefit of $1,100,000...................................
(437,434
  Comprehensive income:..............................
720,894
Common stock-options exercised...................................
10
Additional paid-in-capital--options excercised...................
2,740               Stockholders'equity, end of period......................................$28,266,437**6

**6.**                **Earnings Per Share**                   

                   The weighted-average number of common stock shares and additional common stock equivalentshares used in computing (loss) income per share for the three months ended March 31, 2001and 2000 are set forth below. The following is a reconciliation of the numerator anddenominator of basic and diluted net (loss) income per share:

 

**Three Months ended**
**March 31,**
**2001**
**2000**Numerator:
Loss before extraordinary gain..........................
$(4,078,680)$(83,675)
Extraordinary gain, net of income

tax.........................................
-1,242,003
Net (loss) income...............................
$(4,078,680)$1,158,328Denominator:
Weighted-average shares................................
3,352,6243,352,261
Denominator for basic net (loss)

income, basic and diluted loss

before extraordinary gain

extraordinary gain, and diluted net

loss calculation...........................
3,352,6243,352,261
Weighted-average effect of dilutive

securities:

Employee stock options................
-280,861
Warrants...........................................
-118,341Denominator for diluted net income3,352,6243,751,463Earnings per share:
Basic

Loss before extraordinary gain......
$(1.22)$(0.02)
Extraordinary gain........................
-0.37
Net (loss) income.......................
$(1.22)$0.35
Diluted

Loss before extraordinary gain......
$(1.22)$(0.02)
Extraordinary gain.......................
-0.33
Net (loss) income.......................
$(1.22)$0.31
 

                   Options outstanding during the three months ended March 31, 2000 to purchase approximately40,000 shares of common stock were not included in the computation of diluted income pershare because the exercise price of the options was greater than the average market priceof the common stock during the period and, therefore, would be anti-dilutive. As a resultof the net loss for the three months ended March 31, 2001, options and warrantsoutstanding during this period were not included in the computation of diluted loss pershare because their inclusion would be anti-dilutive.
**7.                Litigation**
                   From time to time, the Company is involved in routine legal proceedings incidental to itsbusiness, including litigation in connection with loans and investments made by Point WestVentures and Allegiance and the collection of amounts owed under life insurance policiesby insurance company obligors. Except as disclosed below, the Company does not expect thatthese proceedings, individually or 

7

 

in the aggregate, will have a material adverse effect on theCompany’s financial position, liquidity or results of operations.
**SocietyPool**
                   In May 2000, Point West Capital and three individuals formed SocietyPool. SocietyPool wasformed to develop and pursue a new financial product. To date, SocietyPool has conductedlimited market research but has not commenced any operations. Point West Capital is aMember and the Manager of SocietyPool with 51% Voting and Economic Interests. There arethree other Members. One is the former chief executive officer (the "FormerCEO") of SocietyPool with a 15.67% Voting Interest and a 15.44% Economic Interest.Another is a former special consultant (the "Former Special Consultant") ofSocietyPool and owns a 33.33% Voting Interest and a 28.66% Economic Interest. The thirdhas a 4.90% Economic Interest and no Voting Interest. 

                   Point West Capital provided $1.8 million in May 2000 to fund SocietyPool’s researchand start-up costs. In July 2000, the Former Special Consultant filed a claim with theAmerican Arbitration Association seeking arbitration of a dispute with Point West Capital.The claim seeks a declaratory judgment on an issue relating to the control and managementof SocietyPool and its assets. The American Arbitration Association denied the FormerSpecial Consultant’s request that this dispute be resolved on an emergency basis andruled that the dispute would be resolved under standard arbitration procedures. In July2000, the Former CEO resigned, claiming that certain actions of Point West Capital, whichare at issue in the arbitration constituted constructive termination of his employment. InAugust 2000, the Former CEO filed an action in arbitration seeking a declaration that hewas constructively terminated. Also in August 2000, SocietyPool terminated the FormerSpecial Consultant for cause and, in the arbitration proceedings Point West Capital filedan answer, affirmative defenses and counterclaim against the Former Special Consultant andFormer CEO and a third-party complaint against the Former CEO. 

                   In August 2000, the Former CEO and the Former Special Consultant delivered a so-called"Management Report" to Point West Capital which they contend triggered PointWest Capital’s option under SocietyPool’s Operating Agreement to contribute anadditional $1 million to SocietyPool. Although Point West Capital believes that the"Management Report" did not trigger Point West Capital’s option tocontribute an additional $1 million, in order to protect its and SocietyPool’s rightsand interests, Point West Capital contributed $1 million in August 2000 to SocietyPoolpursuant to SocietyPool’s Operating Agreement. The Former CEO and Former SpecialConsultant asserted that the contribution did not comply with the Operating Agreement andfurther alleged that, as a result, Point West Capital ceased being the Manager ofSocietyPool and that Point West Capital’s Voting and Economic Interests inSocietyPool were reduced to 15.67%. They further alleged that they became the majorityowners of SocietyPool and that one became the Manager of SocietyPool. On September 5,2000, they filed a petition in federal bankruptcy court in New Mexico (In Re:SocietyPool.com, LLC, No. 11-00-14735 MA) on behalf of SocietyPool. On September 11, 2000,Point West Capital filed a motion to dismiss the bankruptcy action, alleging that (i) theFormer CEO and the Former Special Consultant lacked the requisite authority to file forbankruptcy on SocietyPool’s behalf and (ii) SocietyPool is not insolvent or otherwisein need of bankruptcy protection. On March 13, 2001, the Court granted Point WestCapital’s motion to dismiss the bankruptcy petition finding that the former CEO andFormer Special Consultant lacked the requisite authority to file for bankruptcy onSocietyPool’s behalf. On April 13, 2001, the Court entered an order reflecting thatruling and dismissing the bankruptcy action.

                   On April 3, 2001, the Former Special Consultant filed an action in the Second JudicialDistrict Court, County of San Bernalillo, State of New Mexico, against Point West and itsexecutive officers for tortious interference with contract, defamation and civilconspiracy, seeking unspecified damages. The Former Special Consultant alleges that PointWest and its executive officers tortiously interfered with his employment contract withSocietyPool when Point West, as Manager of SocietyPool, terminated the 

8

 

Former Special Consultant; that Point West defamed him by disclosing hewas terminated for cause in its reports filed with the SEC under the Securities andExchange Act of 1934; and that Point West and its executive officers conspired to carryout a plan to deprive him of the benefits of his employment contract. 

                   The outcome of the arbitration actions and New Mexico state court proceeding cannot bedetermined at this time; however, the Company believes that neither the Former CEO nor theFormer Special Consultant is entitled to any requested relief and that the claims of theFormer CEO and Former Special Consultant are without merit. Point West Capital cannotpredict whether or to what extent these matters will affect Point West Capital’sdecision to invest additional funds in SocietyPool or SocietyPool’s financialcondition or prospects.
**Point West Ventures**
                   See the Form 10-K for information regarding the demand for arbitration that Point WestVentures filed in December 2000 against Universal Access, Inc., certain of its directorsand other parties.
**8.                Segment Reporting**
                   Statement of Financial Accounting Standards No. 131, *Disclosures about Segments of anEnterprise and Related Information*, establishes standards for reporting informationabout operating segments in annual financial statements and requires selected informationabout operating segments in interim financial reports. Operating segments are defined ascomponents of an enterprise about which separate financial information is available thatis evaluated regularly by the chief operating decision maker, or decision making group, indeciding how to allocate resources and in assessing performance. Point West Capital’schief operating decision-making group is comprised of the Chairman of the Board, the ChiefExecutive Officer and the President.

                   The Company’s reportable operating segments include Ventures, Allegiance and ViaticalSettlements. The Other segment includes Point West Capital, SocietyPool and PWS. Theaccounting policies of the operating segments are the same as those described in thesummary of significant accounting policies in the Form 10-K. 

9

The following tables represent the Company’s results from segmentsfor and financial positions as of the three months ended March 31, 2001 and 2000.

 

Three Months Ended March 31, 2001
ViaticalVenturesAllegianceSettlementsOtherTotalInterest income....................$15,289$909,489$-$50,758$975,536Loss on securities................(2,468,835)--(939,030)(3,407,865)Other income......................-95,36354,000-149,363Total revenues....................(2,453,546)1,004,85254,000(888,272)(2,282,966)Interest expense..................124,279699,317--823,596Depreciation and  amortization......................14,3759,775-6,02430,174Income tax expense (2).......-(800)-(17,370)(18,170)Contributed net (loss)  income (2)........................$(2,592,200)$131,357$54,000$(1,671,837)$(4,078,680)Identifiable assets...............$7,849,219$39,026,903$30,529,856$3,589,152$80,995,130
Three Months Ended March 31, 2000
ViaticalVenturesAllegianceSettlementsOtherTotalInterest income..................$1,303,135$822,762$6,818$82,469$2,215,184Net gain on securities.........418,271---418,271Other (loss) income...........(1,701)3,18818,83612,64232,965Total revenues...................1,719,705825,95025,65495,1112,666,420Interest expense...............51,907607,353588,850-1,248,110Depreciation and   amortization.....................10,00052,228-3,08965,317Income tax (expense)  benefit (2)........................-(570)-53,21952,649Extraordinary gain..............--1,242,003-1,242,003Contributed net income  (loss) (2)...........................$1,657,564$(312,807)$545,368$(731,797)$1,158,328Identifiable assets.................$26,583,112$35,716,699$31,794,138$3,425,028$97,518,977(1) The Viatical Settlements segment includes results of    operations in connection with viatical settlements for DPFC and Point West Capital. (2) Corporate overhead and income tax (expense) benefit are not    generally allocated between segments and are included in the Other segment.
 

**9.                Adoption of New Accounting Standard**

                   In June 1998, the Financial Accounting Standards Board ("FASB") issued Statementof Financial Accounting Standards ("SFAS") No. 133, *Accounting for DerivativeInstruments and Hedging Activities* ("SFAS No. 133"), which establishes newaccounting and reporting standards for derivative instruments. In June 1999, the FASBissued SFAS No. 137, *Accounting for Derivative Instruments and Hedging Activities-- Deferral of the Effective Date of FASB Statement No. 133*, andin June 2000, the FASB issued SFAS No. 138, *Accounting for Certain DerivativeInstruments and Certain Hedging Activities-- An Amendment ofFASB Statement No. 133*.

 

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                   These rules require that all derivative instruments be reported in the consolidatedfinancial statements at fair value. Changes in the fair value of derivatives are to berecorded each period in earnings or other comprehensive income, depending on whether thederivative is designated and effective as part of a hedged transaction, and on the type ofhedged transaction. Gains or losses on derivative instruments reported in othercomprehensive income must be reclassified as earnings in the period in which earnings areaffected by the underlying hedged item, and the portion of all hedges not effective mustbe recognized in earnings in the current period. The Company adopted SFAS 133 on January1, 2001 and the impact of adoption was not material to the consolidated financialstatements. 

 

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** 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**
                   The following is a discussion and analysis of the consolidated financial condition of theCompany at March 31, 2001, and results of operations for the Company for the three monthsended March 31, 2001 and 2000, and of certain factors that may affect the Company’sprospective financial condition and results of operations. The following should be read inconjunction with the Form 10-K and the unaudited consolidated financial statements andrelated notes appearing elsewhere herein.
**Overview**
                   Beginning in the latter half of 2000, the Company’s business segments engaged insubstantially less revenue-generating activity and began reducing costs significantly. See"--Recent Developments." The Company is assessing its current businesses and itsfuture operations. 

                   The Company is a specialty financial services company. The Company’s financialstatements consolidate the assets, liabilities and operations of Ventures, Allegiance,DPFC, SocietyPool and PWS. The principal business activity of the Company through February1997 was to provide viatical settlements for terminally ill persons. Subsequent toFebruary 1997, the Company became a more broadly-based specialty financial servicescompany. See the Form 10-K for further information regarding historical development. 

                   Information regarding the revenues, contributed net income (loss) and identifiable assetsfor each of the Company’s business segments is contained in Note 8 of the CondensedNotes to Consolidated Financial Statements.
**Recent Developments

                   Beginning in the latter half of 2000, the Company’s business segments engaged insubstantially less new business activity and began reducing costs considerably. Venturesreduced significantly its number of new investments in the second half of 2000 and thefirst quarter of 2001 as a result of volatility and uncertainty in the financial markets.In the first quarter of 2001, Ventures made no investments. See "--Liquidity andCapital Resources." While this volatility and uncertainty in the financial marketscontinue, Ventures is assessing its future level of activities. 

                   As a result of loans made by Allegiance which became non-performing, Allegiance was unableto access further debt under the Allegiance Financing since October 30, 2000. TheAllegiance Financing expired in December 2000. Allegiance has no source of fundingavailable to make additional loans. Consequently, Allegiance began reducing costs throughemployee layoffs during December 2000. In addition, Allegiance was unable to convert toterm certificates or otherwise repay $9.1 million of revolving certificates issued underthe Allegiance Financing. As a result, the interest payable under the revolving loancertificates increased by 1% per annum, effective February 15, 2001. The revolvingcertificates bear interest at fixed and variable rates based on the one-year U.S. Treasuryyield and one-month LIBOR. At May 1, 2001, the weighted-average interest rate on therevolving certificates was 9.6%. In May 2001, Allegiance and the Investors executed anamendment and waiver providing Allegiance until July 16, 2001 to resolve thenon-performing loans and retire the revolving debt. 

                   Allegiance believes it will make progress toward resolving the non-performing loans andretiring the revolving debt but that it will need additional time beyond July 16, 2001.There can be no assurance that Allegiance will be able to resolve these issues or that itwill be given additional time beyond July 16, 2001 to do so. In addition, Allegiance isexploring possible alternative funding sources to repay the revolving certificates by July16, 2001 and to finance further lending activities. However, there can be no 

12

assurance that Allegiance will be able to locate a funding source byJuly 16, 2001 or that, if a funding source is found, it will be available on economicallyfeasible terms. 

                   As a result of the amendment and waiver, the Company expects that at least some of themonthly payments to Point West Capital and Allegiance Capital for servicing activities andto Allegiance Capital under the debt certificates issued to Allegiance Capital will resumebeginning in May 2001. Such payments have averaged approximately $42,000 per month andcould increase or decrease in future months subject to the cash flow on the underlyingloans and continued compliance with other provisions of the Allegiance Financing. If thenon-performing loans are worked out to the satisfaction of Allegiance and the Investorsand the revolving debt is retired by July 16, 2001, the Company expects that such paymentswill continue. Additionally, if another amendment providing time beyond July 16, 2001 isexecuted, the Company is hopeful that such payments will continue. However, if Allegianceis not able to work out the non-performing loans and retire the revolving debt by July 16,2001 and if the Investors do not provide additional time beyond July 16, 2001 to do so,the Investors could, after July 16, 2001, declare an event of default under the AllegianceFinancing at any time. If the Investors were to declare an event of default, Point WestCapital and Allegiance Capital could be terminated as servicers and the Investors couldliquidate the collateral and apply the proceeds to retire all amounts outstanding underthe Allegiance Financing.

                   Repayment of the debt outstanding under the Allegiance Financing is an obligation solelyof Allegiance. Point West Capital did not guarantee repayment of the revolving or termcertificates and is not required to fund any principal or interest deficienciesthereunder.

                   SocietyPool has not commenced operations and it is unclear whether SocietyPool will evercommence operations. "See Other Information--Legal Proceedings."

                   To date, the operations of PWS have not been material to the Company. The Company does notcurrently intend to expand PWS’ operations. Therefore, the Company does not believethat PWS’ operations will become material in the future.

                   The Company continues to assess its current businesses and its future operations. 
**Results of Operations for the Company***                   Total Revenues. Total revenues declined $5.0 million to negative $2.3 million duringthe three months ended March 31, 2001 compared to positive total revenues of $2.7 millionduring the same period in 2000. Total revenues decreased primarily because the Companyreported a $3.4 million loss on securities for the period ended March 31, 2001, comparedto a $418,000 net gain for the same period in 2000. See "Results of Operations bySegment-- Ventures-- Three MonthsEnded March 31, 2001 Compared to the Three Months Ended March 31, 2000--Net (Loss) Gain on Securities" and "Results of Operations by Segment-- Other-- Three Months Ended March 31,2001 Compared to the Three Months Ended March 31, 2000-- Losson Securities." Also contributing to the decrease was $1.1 million of interest incomerecognized from a warrant (valued using the Black-Scholes option-pricing model) receivedin connection with one of Ventures’ debt securities during the first quarter of 2000.No such income was recognized during the first quarter of 2001.
*                   Total Expenses. Total expenses were $1.8 million and $2.8 million for the three monthsended March 31, 2001 and 2000, respectively. Total expenses decreased primarily due to theDPFC Agreement (as defined herein) discussed below. As a result of the DPFC Agreement, theCompany did not recognize any income or expenses in connection with its viaticalsettlements business during the first quarter of 2001, compared to $722,000 in totalexpenses for the same period in 2000. See "Results of Operations by 

13

Segment-- Viatical Settlements-- Certain Accounting Implications for DPFC" below. The decreasein total expenses was also due to a reduction in compensation and benefits and othergeneral and administrative expenses as a result of scaled-back activities for Allegianceand Ventures. 
*                   Income Tax (Expense) Benefit. Income tax expense increased $71,000 to $18,000 duringthe three months ended March 31, 2001 compared to income tax benefit of $53,000 during thesame period in 2000. This change resulted primarily from a re-establishment of a valuationallowance during 2000, which reduced the deferred tax asset to zero. 
*                   Extraordinary Gain. The Company recognized an extraordinary gain on a troubled debtrestructuring in the amount of $1.2 million, net of income taxes of $822,000, in March2000 in connection with the DPFC Agreement described in "Results of Operations bySegment-- Viatical Settlements--Certain Accounting Implications for DPFC" below. As a result of the DPFC Agreement,the Company reduced the outstanding principal amount of the Securitized Notes in theconsolidated balance sheet as of March 31, 2000 by $2.1 million to $36.4 million (whichequaled the face value of the life insurance policies and restricted cash held by DPFC asof that date) and recognized income, net of income taxes, of $1.2 million. 
**Results of Operations by Segment*****Ventures**Three Months Ended March 31, 2001 Compared to the Three Months    Ended March 31, 2000**                   Interest Income. Interest income decreased to $15,000 for the three months ended March31, 2001 from $1.3 million for the same period in 2000. During the first quarter of 2000,the Company recognized $1.1 million of interest income from a warrant (valued using theBlack-Scholes option-pricing model) received in connection with one of Ventures’ debtsecurities. No such income was recognized during the first quarter of 2001. Additionally,an overall decrease in cash balances contributed to the decrease in interest income. 
*                   Net (Loss) Gain on Securities. Loss on securities was $2.5 million during the threemonths ended March 31, 2001 compared to a net gain on securities of $418,000 during thesame period in 2000. The loss on securities during the period ended March 31, 2001 wasprimarily due to the write-down or write-off of impaired investments. The write-downs orwrite-offs were a result of further deterioration of growth prospects for some companiesand the uncertainty that such companies will be able to raise additional capital in lightof the market downturn related to Internet and other technology stocks. In the firstquarter of 2001, Ventures determined that an aggregate $2.5 million of investments in thesecurities of six different companies was impaired and therefore wrote-down or wrote-offthe carrying values of such investments during that period. During the first quarter of2000 Ventures determined that a $750,000 investment in non-marketable securities of onecompany was impaired and therefore wrote-off the entire $750,000 carrying value of suchinvestment during that period. However, offsetting this write-off during the first quarterof 2000 was $1.2 million in gain on securities sold. The Company does not write-down orwrite-off, through the consolidated statement of operations, any investments it considersto be temporarily impaired.
*                   Interest Expense. Interest expense increased to $124,000 during the three months endedMarch 31, 2001 from $52,000 during the three months ended March 31, 2000 primarily due toan increase in funds borrowed from the Small Business Administration ("SBA")during the second quarter of 2000. During the three months ended March 31, 2001 and 2000,the weighted-average interest rate on the funds borrowed from the SBA was 7.8% and 6.9%,respectively, and the weighted-average borrowings were $6.5 million and $3.0 million,respectively.

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***Allegiance**
Three Months Ended March 31, 2001 Compared to the Three Months Ended    March 31, 2000
*                   Interest Income. Interest income increased to $909,000 during the three months endedMarch 31, 2001 from $823,000 during the same period in 2000, primarily due to an increaseof $3.9 million in the weighted-average principal amount of loans outstanding during thefirst quarter of 2001 compared to the first quarter of 2000. The increase in weightedaverage principal amount outstanding reflects loans made by Allegiance from Januarythrough October 2000. Offsetting this increase were two loans in the aggregate principalamount of $3.9 million, which were in default and on non-accrual status. During the threemonths ended March 31, 2001 and 2000, the weighted-average interest rates earned on theloans were 8.9% and 9.2% and the weighted-average principal amounts outstanding were $37.8million and $33.9 million, respectively. The weighted-average interest rate calculationsfor the three months ended March 31, 2001 excludes the two defaulted loans discussedabove. The weighted-average interest rate for the three months ended March 31, 2000excludes one loan in the amount of $2.1 million, which was delinquent and on non-accrualstatus. Allegiance cannot predict at this time whether the loans on non-accrual statusduring the first quarter of 2001 will remain on non-accrual status. To the extent that theloans remain on non-accrual status, Allegiance Capital does not anticipate receivinginterest and servicing income of approximately $42,000 per month from such loans.Allegiance is attempting to work out these two loans. Based on appraisals of thecollateral securing these loans, management believes that Allegiance will not incurmaterial losses in connection with such loans. See "--Recent Developments."Allegiance is not currently originating loans. Therefore, although interest income for theremainder of 2001 is expected to be moderately higher than interest income for comparableperiods in 2000 as a result of earning a full year of interest on loans made during 2000,Allegiance does not expect material increases in interest income in future periods.
*                   Other Income. Other income was $95,000 during the three months ended March 31, 2001and resulted primarily from the recognition of previously deferred net hedging gainsrelated to the Allegiance loans upon adoption of SFAS No. 133 on January 1, 2001. At March31, 2001, Allegiance had no hedging relationships. Other income was immaterial during thethree months ended March 31, 2000. 
*                   Interest Expense. Interest expense increased to $699,000 during the three months endedMarch 31, 2001 from $607,000 during the three months ended March 31, 2000 primarily as aresult of increased borrowings under the Allegiance Financing. During the three monthsended March 31, 2001 and 2000, the weighted-average interest rates under the AllegianceFinancing were 8.5% and 8.4% and the weighted-average borrowings were $32.9 million and$28.6 million, respectively. The Allegiance Financing terminated in December 2000.However, as discussed above in "--Recent Developments," amounts borrowed underthe Allegiance Financing remain outstanding. Allegiance has been granted an extensionthrough July 16, 2001 to resolve its non-performing loans and retire the revolving debt. 
*                   Compensation and Benefits. Compensation and benefits decreased to $58,000 during thethree months ended March 31, 2001 from $123,000 during the same period in 2000, due tolayoffs resulting from a suspension of Allegiance’s lending activities during thefourth quarter of 2000. As a result, compensation and benefits for the 2001 fiscal year iscurrently expected to be approximately $230,000.
*                   Other General and Administrative Expenses. Other general and administrative expensesdecreased to $105,000 during the three months ended March 31, 2001 from $355,000 duringthe same period in 2000, due primarily to a reduction in legal expenses related to adelinquent loan that was written off in 2000. Also contributing to the decrease was asignificant reduction in general and administrative expenses resulting fromAllegiance’s suspended lending activities. Because two non-performing loans arecurrently in default, it is likely that additional general and administrative expenseswill be incurred in connection with the work out of those loans. Allegiance cannot,however, predict the overall level of 

15

other general and administrative expenses for the year ended December31, 2001 relative to the year ended December 31, 2000.
***Viatical Settlements***
                   The Viatical Settlements segment includes results of operations in connection withviatical settlements for DPFC and Point West Capital.
*Certain Accounting Implications for DPFC*
                   From June 30, 1996 through February 29, 2000, the Company recognized income (earneddiscounts) with respect to its viatical settlement business upon receipt of proceeds onpolicies (either pursuant to sale of the policy or the death of the insured). Incomerecognized was equal to the difference between such proceeds (less any back-end sourcingfees) and the carrying value of such policies after giving effect to any reserve for losson the sale of such policies.

                   As a result of the imminent default of DPFC under the terms of the Senior ViaticalSettlement Notes, Series 1995-A, Stated Maturity March 10, 2005 (the "SecuritizedNotes"), Point West Capital and the holders of the Securitized Notes (the"Noteholders") entered into an agreement in March 2000 (the "DPFCAgreement") that amended certain of the terms of the Securitized Notes. Pursuant tothe DPFC Agreement, the Noteholders are required to provide funds through June 30, 2002 topay servicing fees, premiums and certain other costs of DPFC in the event policycollections are insufficient. Under the DPFC Agreement, Point West Capital continues toact as servicer for a fee of $18,000 per month to cover these fees and expenses for theperiod March 2000 through June 2002. The DPFC Agreement also provides the Noteholders withan option to purchase from Point West Capital the DPFC outstanding stock for a nominalamount on June 30, 2002. If the Noteholders do not exercise such option, Point WestCapital may liquidate DPFC. See "Results of Operations for the Company-- Extraordinary Gain."

                   As a result of the DPFC Agreement, the Company will not recognize any future gain or lossrelated to DPFC until the Noteholders purchase the DPFC stock or DPFC is liquidatedpursuant to the DPFC Agreement. The Company expects to recognize a pre-tax gain in anamount approximately equal to the $4.6 million accumulated deficit of DPFC upon theoccurrence of either of these events. Additionally, when the DPFC stock is purchased orDPFC is liquidated, the Company may have income tax liability associated with the gainfrom debt forgiveness. The Company may be able to use the carryforward losses from DPFC tooffset such liability, unless the carryforward losses have been previously utilized. SinceMarch 2000 the Company has recognized, and through June 2002 will continue to recognize,the $18,000 monthly servicing fee ($54,000 per quarter) paid to Point West Capital asother income in the consolidated statement of operations.

                   Also as a result of the DPFC Agreement, DPFC has not recognized any interest expenserelated to the Securitized Notes nor any general and administrative expenses subsequent toFebruary 28, 2000 and will not recognize these expenses in future periods. 

                   The Securitized Notes represent the obligations solely of DPFC. Point West Capital did notguarantee repayment of the Securitized Notes and is not required to fund any principal orinterest deficiencies thereunder.
***Other***
                   The Other segment includes operating results for Point West Capital, SocietyPool and PWS.Except for compensation and benefit expenses clearly attributable to Allegiance, corporateoverhead is included in the "Other" segment and has not been allocated.Activities for PWS were immaterial during 

16

the three months ended March 31, 2001 and 2000 and are not expected tobe material in the foreseeable future. SocietyPool has not commenced operations and it isunclear whether SocietyPool will ever commence operations.
*Three Months Ended March 31, 2001 Compared to the Three Months Ended    March 31, 2000**                   Interest Income. Interest income decreased to $51,000 during the three months endedMarch 31, 2001 from $82,000 during the three months ended March 31, 2000, due to adecrease in cash balances. 
*                   Loss on Securities. In the first quarter of 2001, Point West Capital determined that a$939,000 investment in one company was impaired and therefore wrote-off the company’sentire carrying value during that period. This write-off was a result of deterioration ofthe company’s growth prospects and the uncertainty that it would be able to raiseadditional capital in light of the market downturn related to Internet and othertechnology stocks. This investment was made by Point West Capital instead of throughVentures, and was the only investment in Point West Capital’s portfolio. 
*                   Compensation and Benefits. Compensation and benefits decreased to $323,000 during thethree months ended March 31, 2001 from $496,000 during the same period in 2000 due to a57% reduction in the salaries of the executive officers, a decrease in the level ofaccrued profit sharing and bonuses for all employees for the first quarter of 2001 andemployee layoffs and attrition which began in late 2000. As a result, compensation andbenefits for the 2001 fiscal year are expected to be approximately $1 million less thanthe 2000 amount. 
*                   Other General and Administrative Expenses. Other general and administrative expensesincreased to $437,000 during the three months ended March 31, 2001 from $381,000 duringthe three months ended March 31, 2000. The Company established a cost-reduction program inthe latter half of 2000; however, the decrease in operating expenses has been offset by anincrease in legal expenses related to the SocietyPool litigation. As a result of theSocietyPool litigation, including a new lawsuit filed during the first quarter of 2001, itis likely that additional legal expenses will be incurred. The Company, however, iscurrently unable to predict the overall level of other general and administrative expensesfor the remainder of 2001 relative to comparable periods in 2000. See "OtherInformation--Legal Proceedings." 
**Liquidity and Capital Resources

                   The Company’s unaudited consolidated financial statements included herein have beenprepared assuming that the Company will continue as a going concern. See Note 2 of theNotes to Consolidated Financial Statements included in the Form 10-K.
***Point West Capital, SocietyPool and PWS*
                   At present, Point West Capital, SocietyPool and PWS have no external funding source fromwhich to fund their working capital and general corporate needs. During 2000 and the firstquarter of 2001, the Company supported the operations of Point West Capital, SocietyPooland PWS primarily from existing cash balances. In prior periods, the Company generatedcash primarily from sales proceeds of investment securities and life insurance policiesand used the cash to grow its businesses. At March 31, 2001, Point West Capital andPWS’ cash and cash equivalents were $1.1 million. The Company continues to analyzeits current and future needs for financing, which will be dependent on its ability todevelop its existing businesses and any other business opportunities the Company pursues.See "Considerations Under the Investment Company Act of 1940." 

17

                   The Company currently anticipates having sufficient liquidity to meet the working capitaland operational needs of Point West Capital and PWS at least through December 31, 2001using current cash and cash equivalents, payments from Allegiance and servicing andmanagement fees. Assuming the Company determines additional funds are needed, there can beno assurance that it will be successful in obtaining external financing on satisfactoryterms or at all. 

                   Restricted cash as of March 31, 2001 includes $2.1 million for SocietyPool. Prior to thedismissal of the bankruptcy action involving SocietyPool, the bankruptcy court had entereda separate order freezing SocietyPool’s funds. Pursuant to this freeze order, accessto SocietyPool’s funds by SocietyPool’s management or by any creditor or memberof SocietyPool has been prohibited. As a result of the Court’s having granted PointWest Capital’s motion to dismiss the bankruptcy action, the Company believes that thefreeze order automatically expired. However, the bank holding SocietyPool’s funds hascontinued to prohibit all access to such funds unless and until the bankruptcy courtspecifically vacates the freeze order. The Company intends to request the bankruptcy courtto vacate the freeze order. The Company is not able to predict what the working capitaland operational needs of SocietyPool will be and whether it will have sufficient capitalfor those needs. See "Other Information--Legal Proceedings."
*Ventures*
                   Ventures’ expenses during the first quarter of 2001 were primarily supported throughexisting cash balances and proceeds of $340,000 from the liquidation of one investment.Ventures’ activities during 2000 were primarily supported through existing cashbalances and the sale of investments. During 2000 Ventures generated $5.5 million of netproceeds from the sales of securities and repayments on loans. In addition, Venturesactivities have been supported through capital contributions from Point West Capital andloans from the SBA. To date, Point West Capital contributed $5.8 million to Ventures.During 2000, Ventures also borrowed $3.5 million from the SBA. At March 31, 2001 Ventureshad $903,000 of cash and cash equivalents.

                   During 2000, funds generated by Ventures also supported, in part, the activities of theCompany’s other businesses. During 2000, Ventures distributed $4.0 million to PointWest Capital. Ventures has not made any distributions to Point West Capital in 2001. 

                   Ventures has an SBA debenture license and, therefore, may be permitted, based on capitalcontributions by Point West Capital and realized gains on the sale of securities, toborrow up to $16.6 million from the SBA, subject to compliance with SBA requirements. Asof March 31, 2001, Ventures had borrowed $6.5 million and had outstanding commitments fromthe SBA to borrow an additional $6.0 million (for which Ventures has paid the 1%non-refundable leverage fee described below.) Any borrowings bear interest at the rate forten-year debentures issued by Small Business Investment Companies and funded throughpublic certificates bearing the SBA’s guarantee. Interest is payable semi-annually.In addition, there is a leverage and underwriting fee of 3.5% and a fee of 1% per annum onthe outstanding amount of debt. 

                   Ventures does not have sufficient liquidity, at least in the short term, to grow itsbusiness. It is unlikely that Ventures will be able to access additional debt from the SBAbecause (i) at March 31, 2001, Ventures had a condition of Capital Impairment (as definedby the SBA regulations) and (ii) Ventures failed to originate a sufficient amount of debtinvestments. At present, Ventures has one debt investment outstanding and, since inceptionof the SBA borrowings, has made relatively few debt investments. As a result, the SBA islikely to prevent further borrowings by Ventures, and could declare an event of default,accelerate the payment of the outstanding debentures and appoint the SBA or its nominee asa receiver. If the SBA were to accelerate the outstanding debt, Ventures does not havesufficient cash to repay the debt and might have to dispose of investment securities torepay the debt. The dispositions may occur at times and on terms that would not maximizethe value of those investments and the proceeds of any dispositions 

18

 

may not be sufficient to repay the debt. In addition, because of lawsand regulations regarding the Investment Company Act of 1940 (the "1940 Act"),the Company may be required to restrict Ventures’ growth or dispose of investments inorder to avoid registration under the 1940 Act at some time in the future. See"Considerations Under the Investment Company Act of 1940."
*Allegiance

                   The Allegiance Financing expired in December 2000 and, as a result, Allegiance has nocurrent ability to continue to make new loans or to grow its business. See "--RecentDevelopments" above. In connection with the settlement by Allegiance of a lawsuitwith a Texas borrower, Allegiance acquired, in September 2000, two funeral homes locatedin Texas. One such funeral home is subject to a sale agreement, which is expected to closein June 2001. Allegiance expects the sale to generate approximately $370,000 of cash and a$90,000 note receivable. Upon receipt of such sales proceeds, Allegiance anticipatestransferring such proceeds to Point West Capital.
***DPFC*
                   DPFC operations are in run-off. Point West Capital, as servicer under the SecuritizedNotes, performs monitoring and collection activities for DPFC and incurs administrativecosts associated with these activities. Point West Capital is reimbursed for these costssubject to priority provisions contained in the Indenture. Principal, interest paymentsand other costs related to the Securitized Notes are payable solely from collections onpolicies pledged to secure the payment thereof.
**Considerations Under the Investment Company Act of 1940**
                   The 1940 Act creates a comprehensive regulatory framework applicable generally toinvestment companies (i.e., companies engaged primarily in the business of investing,reinvesting or trading in securities within the meaning of the 1940 Act, whether or notthose companies intend to be engaged primarily in such business). Companies that aresubject to the 1940 Act must register with the SEC as investment companies and uponregistration become subject to extensive regulation. The Company believes, based on itscurrent activities and the nature of its assets, that it should not be deemed to be aninvestment company because it is not engaged primarily in the business of investing,reinvesting or trading in securities within the meaning of the 1940 Act and the rules ofthe SEC promulgated thereunder, and does not hold itself out as an investment company.

                   There are also various percentages of assets and income tests and other subjective testsunder the 1940 Act and related rules that are relevant in considering whether a company isdeemed to be an investment company.

                   Although the Company believes that it should not be deemed to be an investment company, itis possible that it could be deemed one in the near future as a result of the following: 
-  
A decline in the Company’s non-investment activities, including a    decrease in Allegiance’s loan origination activities and DPFC’s future servicing    activities;-  

The Company’s inability to commence or acquire    other complementary financial services businesses as rapidly as it had hoped; and-  
The success of Ventures, which holds a number of investment securities.
                   The majority of investment securities held by the Company have been acquired since January1998. As those investment securities increased substantially in value, beginning in 1999,Ventures sold 

19

some of its investments in part to address issues under the 1940 Act.The Company has realized substantial gains in prior periods in connection with the salesof some of these investments. The proceeds of these sales have been invested in U.S.government securities pending final use, which has included further investments byVentures.

                   The Company is assessing its long-term strategy, including its strategy to ensure that itis not deemed to be an investment company. However, some elements of this strategy may, atleast in the short term, materially and adversely affect the Company’s financialcondition or results of operations, or both. The elements of this strategy, which aresubject to the risks described below may involve:
-  
Pursuing the growth of new operating businesses, by acquisition or    internal development;-  
Attempting to resume Allegiance’s loan origination activities; and-  
Continuing to dispose of investment securities and/or restricting the    growth of Ventures’ business. *Growth of New Operating Businesses*
                   The Company continues to seek advice from financial advisors to assist it in itsassessment of its long-term strategy. Such strategy may entail developing or acquiring newoperating businesses that do not involve investment securities. Although the Company maypursue businesses that are complementary to the Company’s current businesses, thesebusinesses may not necessarily involve financial services. These businesses would beoperating entities that do not own, trade or hold any significant amount of investmentsecurities. The Company has been unable to develop or acquire new suitable operatingbusinesses on terms acceptable to the Company. Additionally, the Company may not find anysuitable businesses to acquire or develop on terms acceptable to the Company. In addition,the Company may not have sufficient capital or access to outside funding to finance thedevelopment or acquisition of complimentary businesses. Furthermore, the Company may notbe able to successfully integrate the operations of any new businesses. Finally, any newbusinesses may not contribute positively to the Company’s financial condition orresults of operations.
*Resuming Allegiance’s Loan Origination Activities*
                   The Company is evaluating its plans to resume and grow Allegiance’s commercial loanactivities. However, these plans are dependent on Allegiance’s ability to obtain anexternal funding source to repay the revolving certificates under the Allegiance Financingand support further loan origination activities. No assurance can be given that Allegiancewill be able to locate a funding source or that, if a funding source is found, that itwill be available on economically feasible terms. Assuming that Allegiance obtains anexternal funding source, its activities will depend on the market’s acceptance of itsproduct offerings and services, Allegiance’s ability to find suitable creditworthyborrowers and competitive pressures in the lending industry.
*Disposing of Investment Securities/Limiting Growth of Ventures*
                   The Company may determine that it must dispose of additional investment securities toavoid being deemed an investment company or to fund the Company’s current operationsor the growth of its other businesses. The dispositions may occur at times and on termsthat would not maximize the value of these investments. Given the volatile nature of themarket, and in some cases, lack of a market, for some of these investments, sales couldoccur at severely depressed prices. In addition, the dispositions may result indisadvantageous tax consequences. The Company intends to use any proceeds of anyadditional 

20

sale to support its working capital (including further investments byVentures). Pending final use, proceeds of any additional sale will likely be invested inU.S. government securities.

                   The Company also currently intends to limit the growth of Ventures’ business.Although Ventures may invest in investment securities, the Company does not intend tocontribute more capital to Ventures. Limiting Ventures’ growth may materiallyadversely affect the Company’s future financial condition and results of operations.
**Forward Looking Statements**
                   This report includes forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. All statements made herein which are not basedon historical facts are forward looking and, accordingly, involve risks and uncertaintiesthat could cause actual results to differ materially from those discussed. Such forwardlooking statements include those under "Management’s Discussion and Analysis ofFinancial Condition and Results of Operations" and "Part II-- OtherInformation--Item 1--Legal Proceedings" relating to (1) the amount of any lossexperienced in connection with two loans made by Allegiance that are in default, (2) theamount of gain to be recognized on the purchase of DPFC stock or its liquidation, (3) theresumption of payments to Point West Capital and Allegiance Capital for servicingactivities provided to Allegiance and to Allegiance Capital under revolving and termcertificates issued to Allegiance Capital under the Allegiance Financing, (4) sufficiencyof the Company’s liquidity and capital resources (see "Liquidity and CapitalResources"), (5) the Company’s ability to avoid being subject to registrationand regulation under the 1940 Act (see "Considerations Under the Investment CompanyAct of 1940"), (6) Ventures’ ability to borrow funds from the SBA (see"Liquidity and Capital Resources"), (7) SocietyPool’s development andoffering of a new type of financial product, (8) management’s belief that the FormerCEO or the Former Special Consultant is not entitled to the relief requested in its actionagainst Point West Capital (see "Other Information--Legal Proceedings") (9)whether the bankruptcy court will vacate the freeze order and grant access toSocietyPool’s funds (see "Liquidity and Capital Resources--Point West Capital,SocietyPool and PWS") and (10) levels of compensation and benefits expenses and othergeneral and administrative expenses. Such statements are based on management’sbelief, judgment and analysis as well as assumptions made by and information available tomanagement at the date hereof. In addition to any assumptions and cautionary factorsreferred to specifically in this report in connection with such forward lookingstatements, factors that could cause actual results to differ materially from thosecontemplated by the forward looking statements include (1) Allegiance’s ability toforeclose on the collateral and realize an amount on foreclosure at least equal to thecarrying value of two Allegiance loans which are currently in default, (2) the continuingability of borrowers to perform under loans previously made by Allegiance and factors suchas general economic conditions that would affect such ability, (3) Allegiance’sability to resolve the two currently non-performing loans to the satisfaction of theInvestors, (4) actions taken by the Investors with respect to the current or any futuredefault under the Allegiance Financing, (5) litigation expenses arising from current andfuture legal proceedings related to the Company’s businesses, includingnon-performing loans or investments and SocietyPool, (6)****the results of theCompany’s consideration of strategic options and any costs associated with a chosenoption, (7) availability and cost of capital, (8) the factors described under"Considerations Under the Investment Company Act of 1940," (9) Ventures’ability to cure its Capital Impairment, (10) Ventures’ ability or inability tooriginate a sufficient amount of debt investments that qualify for financing under the SBAregulations, (11) actions taken by the SBA with respect to the current or any futuredefault under Ventures’ SBA borrowings, (12) the outcome of the litigation relatingto SocietyPool and the viability of and the market’s acceptance of SocietyPool’snew financial product, (13) actions taken by the Noteholders with respect to the purchaseor liquidation of DPFC and (14) compensation and benefits expenses for Point West Capitalor Allegiance differ from current expectations, depending on the strategy ultimatelydetermined by the Company. 

21
** **
**PART II. OTHER INFORMATION**

Item 1. Legal Proceedings

                   In May 2000, Point West Capital and three individuals formed SocietyPool. SocietyPool wasformed to develop and pursue a new financial product. To date, SocietyPool has conductedlimited market research but has not commenced any operations. Point West Capital is aMember and the Manager of SocietyPool with 51% Voting and Economic Interests. There arethree other Members. One is the former chief executive officer (the "FormerCEO") of SocietyPool with a 15.67% Voting Interest and a 15.44% Economic Interest.Another is a former special consultant (the "Former Special Consultant") ofSocietyPool and owns a 33.33% Voting Interest and a 28.66% Economic Interest. The thirdhas a 4.90% Economic Interest and no Voting Interest. 

                   Point West Capital provided $1.8 million in May 2000 to fund SocietyPool’s researchand start-up costs. In July 2000, the Former Special Consultant filed a claim with theAmerican Arbitration Association seeking arbitration of a dispute with Point West Capital.The claim seeks a declaratory judgment on an issue relating to the control and managementof SocietyPool and its assets. The American Arbitration Association denied the FormerSpecial Consultant’s request that this dispute be resolved on an emergency basis andruled that the dispute would be resolved under standard arbitration procedures. In July2000, the Former CEO resigned, claiming that certain actions of Point West Capital, whichare at issue in the arbitration constituted constructive termination of his employment. InAugust 2000, the Former CEO filed an action in arbitration seeking a declaration that hewas constructively terminated. Also in August 2000, SocietyPool terminated the FormerSpecial Consultant for cause and, in the arbitration proceedings Point West Capital filedan answer, affirmative defenses and counterclaim against the Former Special Consultant andFormer CEO and a third-party complaint against the Former CEO. 

                   In August 2000, the Former CEO and the Former Special Consultant delivered a so-called"Management Report" to Point West Capital which they contend triggered PointWest Capital’s option under SocietyPool’s Operating Agreement to contribute anadditional $1 million to SocietyPool. Although Point West Capital believes that the"Management Report" did not trigger Point West Capital’s option tocontribute an additional $1 million, in order to protect its and SocietyPool’s rightsand interests, Point West Capital contributed $1 million in August 2000 to SocietyPoolpursuant to SocietyPool’s Operating Agreement. The Former CEO and Former SpecialConsultant asserted that the contribution did not comply with the Operating Agreement andfurther alleged that, as a result, Point West Capital ceased being the Manager ofSocietyPool and that Point West Capital’s Voting and Economic Interests inSocietyPool were reduced to 15.67%. They further alleged that they became the majorityowners of SocietyPool and that one became the Manager of SocietyPool. On September 5,2000, they filed a petition in federal bankruptcy court in New Mexico (In Re:SocietyPool.com, LLC, No. 11-00-14735 MA) on behalf of SocietyPool. On September 11, 2000,Point West Capital filed a motion to dismiss the bankruptcy action, alleging that (i) theFormer CEO and the Former Special Consultant lacked the requisite authority to file forbankruptcy on SocietyPool’s behalf and (ii) SocietyPool is not insolvent or otherwisein need of bankruptcy protection. On March 13, 2001, the Court granted Point WestCapital’s motion to dismiss the bankruptcy petition finding that the former CEO andFormer Special Consultant lacked the requisite authority to file for bankruptcy onSocietyPool’s behalf. On April 13, 2001, the Court entered an order reflecting thatruling and dismissing the bankruptcy action.

                   On April 3, 2001, the Former Special Consultant filed an action in the Second JudicialDistrict Court, County of San Bernalillo, State of New Mexico, against Point West and itsexecutive officers for tortious interference with contract, defamation and civilconspiracy, seeking unspecified damages. The Former Special Consultant alleges that PointWest and its executive officers tortiously interfered with his employment contract withSocietyPool when Point West, as Manager of SocietyPool, terminated the Former SpecialConsultant; that Point West defamed him by disclosing he was terminated for cause in its 

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reports filed with the SEC under the Securities and Exchange Act of1934; and that Point West and its executive officers conspired to carry out a plan todeprive him of the benefits of his employment contract. 

                   The outcome of the arbitration actions and New Mexico state court proceeding cannot bedetermined at this time; however, the Company believes that neither the Former CEO nor theFormer Special Consultant is entitled to any requested relief and that the claims of theFormer CEO and Former Special Consultant are without merit. Point West Capital cannotpredict whether or to what extent these matters will affect Point West Capital’sdecision to invest additional funds in SocietyPool or SocietyPool’s financialcondition or prospects. 

Item 5. Other Information

                   As previously disclosed, on April 10, 2001, The Nasdaq Stock Market(R)notified the Company that its Common Stock would be de-listed from the National MarketSystem of the Nasdaq Stock Market, effective on the open of business on April 11, 2001 forfailure to maintain a $5 million minimum market value of public float and a $1.00 pershare minimum bid price. For further information, see Item 5 of the Form 10-K and theCompany’s Form 8-K dated April 10, 2001. Since April 11, 2001, the Company’sCommon Stock has been quoted on the Nasdaq OTC Bulletin Board(R).

Item 6. Exhibits and Reports on Form 8-K
Exhibits:DescriptionNumber(a)10.1Amended and Restated Amendment and Waiver Agreement dated April 15, 2001,    among Allegiance Funding I,  LLC, Manufacturers and Traders Trust Company, Point West    Capital Corporation and as consented to by the Certificate Holders.99.1Press Release for Point West Ventures, L.P.
(b)                Reports on Form 8-K filed during the quarter ended March 31, 2001:

 

Date
Item Reported
Matter Reported
March 21, 2001
5
The Company issued a press    release regarding its results of operations for 2000.
February 13, 2001
5
The Company issued a press    release regarding its filing with Nasdaq of a request for an appeal.
February 6, 2001
5
The Company issued a press    release announcing significant cost reductions. 
January 24, 2001
5
The Company issued a press    release announcing the appointment of a new Chief Executive Officer.
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**SIGNATURES**

In accordance with the requirements of the Exchange Act, the Registrantcaused this report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 

POINT WEST CAPITAL CORPORATION
Dated:    May 11,  2001
/s/ John Ward RotterChief Executive Officer
(Authorized Officer)
Dated:     May 11,  2001
/s/ Joanna L. ZesigerChief Financial Officer(Prinicpal Financial and Accounting Officer)
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