SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, 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 June 30, 2001 
OR[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)OF THE EXCHANGE ACTFor 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(Registrant’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 July 31, 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 AND SUBSIDIARIES

INDEX**
Part I
Financial Information
Page 
Item 1.
Consolidated Financial    Statements (Unaudited):
Consolidated Balance Sheet       June 30, 2001 
1
Consolidated Statements of    Operations for the       Three and Six Months Ended June 30, 2001 and 2000
2
Consolidated Statements of    Cash Flows for the        Six Months Ended June 30, 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
21
Item 3.
Defaults Upon Senior    Securities 
23
Item 4.
Submission of Matters to a    Vote of Security Holders
23
Item 6.
Exhibits and Reports on    Form 8-K
24
Signatures
25
 

POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOIDATED    BALANCE  SHEET
June 30,
ASSETS
2001
(unaudited)Cash and cash equivalents$1,838,184Restricted cash2,572,385Investment securities:     Available- for- sale126,794Matured policies receivable624,130Taxes receivable196,094Loans receivable, net of unearned income of    $591,847        and an allowance for loan losses of $190,00036,614,135Purchased life insurance policies28,807,889Non-marketable securities6,006,221Deferred financing costs, net of accumulated     amortization of    $411,797510,430Furniture and equipment,  net of    accumulated     depreciation of    $44,51558,734Other assets1,055,601                                                Total assets$78,410,597
LIABILITIES AND STOCKHOLDERS'    EQUITYAccrued interst expense$281,185Accounts payable455,846Accrued compensation payable80,653Revolving certificates8,982,346Term certificates23,532,229Securitized notes payable34,341,464Debenture payable6,500,000                                              Total liabilities74,173,723Stockholders' equity:     Common stock, $0.01 par    value; 15,000,000 authorized shares,             4,391,124 shares issued and 3,352,624 shares outstanding43,911Additional paid-in-capital30,091,689Accumulated comprehensive loss, net of tax(80,774)Accumulated deficit(22,943,920)Treasury stock, 1,038,500 shares(2,874,032)                                           Total stockholders' equity4,236,874                                           Total liabilities and stockholders' equity$78,410,597
See accompanying condensed notes to consolidated financial statements.
1
 

POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED    STATEMENTS OF OPERATIONSFor the Three Months EndedFor the Six Months    EndedJune 30,June 30,2001200020012000
(unaudited)
(unaudited)Revenues:     Interest income$882,724$955,0891,858,260$3,170,273     Net loss on securities(728,665)(3,251,640)(4,136,530)(2,833,369)     Other27,28582,470176,648115,435                                         Total revenues181,344(2,214,081)(2,101,622)452,339Expenses:     Interest expense816,632695,7411,640,2281,943,851     Compensation and    benefits286,231671,510667,3571,290,967     Other general and    administrative expenses405,0461,530,455947,6942,400,315     Amortization185,48344,543209,633106,771     Depreciation6,0244,61112,0487,700                                Total expenses1,699,4162,946,8603,476,9605,749,604                     Loss before income taxes                        and extraordinary gain  (1,518,072)(5,160,941)(5,578,582)(5,297,265)Income tax benefit34,1151,817,90115,9451,870,550                     Loss before extraordinary gain(1,483,957)(3,343,040)(5,562,637)(3,426,715)Extraordinary gain, net of income taxes of    $822,154------1,242,003                     Net loss$(1,483,957)$(3,343,040)$(5,562,637)$(2,184,712)Earnings per share - Basic:     Loss before    extraordinary gain$(0.44)$(1.00)$(1.66)$(1.02)     Extraordinary gain------0.37     Net loss$(0.44)$(1.00)$(1.66)$(0.65)Earnings per share-Diluted:     Loss before    extraordinary gain$(0.44)$(1.00)$(1.66)$(1.02)     Extraordinary gain------0.37     Net loss$(0.44)$(1.00)$(1.66)$(0.65)Weighted-average    number of shares of common stock     outstanding3,352,6243,352,6243,352,6243,352,443Weighted-average number of shares of common    stock     and common stock    equivalents outstanding3,352,6243,352,6243,352,6243,352,443
See accompanying    condensed notes to consolidated financial statements.
2
 

POINT WEST CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six    Months Ended June 30,
2001
2000
(unaudited)Cash    flows from operating activities:        Net loss$(5,562,637)$(2,184,712)        Adjustments to reconcile net loss to net cash             used in operating activities:                  Depreciation and amortization221,681114,471                  Provision for loan losses--579,964                  Net loss on securities4,136,5302,833,369                  Interest income received as warrants--(1,101,532)                  Deferred tax benefit(21,545)(1,922,784)                  Extraordinary gain--(1,242,003)                  Changes in operating assets and liabilities:                        Collections on matured life insurance policies1,216,699441,286                        Other assets62,95068,099                        Taxes receivable --(522,745)                        Unearned income(121,673)16,576                        Accrued interest expense17,648(143,993)                        Accounts payable80,731150,634                        Accrued compensation payable(336,238)(217,271)                                                                     Net cash used in operating activities(305,854)(3,130,641)Cash    flows from investing activities:        Purchase of furniture and equipment--(50,047)        Decrease in restricted cash(130,070)2,431,699        Proceeds from maturity of held-to-maturity securities--2,504,610        Purchase of investment and non-marketable securities--(11,932,428)        Proceeds from sale of investment and non-marketable securities340,0002,620,215        Additions to loans receivable--(2,681,936)        Principal payments on loans receivable397,2843,054,210                                                                                        Net cash provided by (used in) investing activities607,214(4,053,677)Cash    flows from financing activities:        Principal payments on securitized notes payable(934,905)(257,894)        Proceeds from SBA debenture--3,500,000        Proceeds from revolving certificates--820,000        Principal payments on revolving certificates(150,941)(74,841)        Principal payments on term certificates(365,016)(280,171)        Increase in deferred financing costs--(229,012)        Proceeds from options excercised--2,750                                Net cash (used in) provided by financing activities(1,450,862)3,480,832                                Net decrease in cash and cash equivalents(1,149,502)(3,703,486)                                     Cash    and cash equivalents, beginning of period2,987,68612,836,125Cash    and cash equivalents, end of period$1,838,184$9,132,639Supplemental    disclosures:Supplemental    disclosure of non-cash activities:        Unrealized gain (loss) on securities available for sale, net of tax$28,748$(2,409,667)        Receipt of warrants$--$1,101,532        Reduction in securitized notes payable in             connection with extraordinary gain$--$2,064,157        Accrued litigation settlement offset against other assets$--$2,205,000Supplemental    disclosure of cash flow information:        Taxes paid$22,974$587,099        Cash paid for interest$1,619,156$2,368,232
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 consolidatedfinancial statements of Point West Capital Corporation ("Point West Capital"),including its consolidated entities (collectively the "Company"), as of June 30,2001 and for the six month periods ended June 30, 2001 and 2000 have been prepared inaccordance with accounting principles generally accepted in the United States for interimfinancial information, in accordance with Item 310(b) of Regulation S-B. Accordingly, suchstatements do not include all of the information and notes thereto that are included inthe annual consolidated financial statements. In the opinion of management, alladjustments considered necessary for a fair presentation have been included. Operatingresults for the six month period ended June 30, 2001 are not necessarily indicative of theresults that may be expected for the year ending December 31, 2001. These statements andnotes thereto should be read in conjunction with the audited consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2000 (the "Form 10-K").

       The Company is a specialtyfinancial services company with historic operations in four business segments: (i) smallbusiness loans and investments through Point West Venture Management, LLC ("PointWest Management") and Point West Ventures, LP ("Point West Ventures"), (ii)loans to funeral homes and cemeteries through Allegiance Capital, LLC ("AllegianceCapital"), Allegiance Funding I, LLC ("Allegiance Funding"), AllegianceCapital Trust I ("Allegiance Trust I") and Allegiance Management Corp.("Allegiance Management"), (iii) viatical settlements through Dignity PartnersFunding Corp. I ("DPFC") and (iv) other activities through Point West Capital,SocietyPool.com, LLC ("SocietyPool") and Point West Securities, LLC("PWS"). References herein to Ventures include Point West Management and PointWest Ventures. References herein to Allegiance include Allegiance Capital, AllegianceFunding, Allegiance Trust I and Allegiance Management. 

       The activities of Ventures andAllegiance changed substantially in late 2000 and in the first half of 2001. See theCompany’s Form 10-K and "Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Recent Developments" herein for furtherinformation. To date, the operations of PWS have not been material to the Company and arenot expected to be material. SocietyPool never commenced operations and, in July 2001,Point West Capital rescinded the SocietyPool operating agreement. The rescission is beingchallenged by the Former CEO and the Former Special Consultant. See Note 8. 
**2.    Restricted Cash**
       Restricted cash as of June 30,2001 included $2.1 million for SocietyPool. See Note 8. The balance of restricted cash iscomprised of funds held by Allegiance Trust I and DPFC. 
**3.    Investment Securities**
       The Company accounts formarketable debt and equity securities in accordance with Statement of Financial AccountingStandards No. 115*, Accounting for Certain Investments in Debt and Equity Securities.*Thecost and estimated fair value of investment securities reflected in the consolidatedbalance sheet as of June 30, 2001 were $268,000 and $127,000, respectively. Cumulative netunrealized losses on available-for-sale securities (representing differences betweenestimated fair value and cost) were ($141,000) at June 30, 2001. These cumulative netunrealized losses, net of applicable tax benefits, are 

4

included in accumulated comprehensive loss, a separate balance sheetcomponent of stockholders’ equity. See Note 6.
**4.    Revolving and Term Certificates**
       Through December 2000, Allegiancefinanced its loans receivable under a structured financing arrangement established inAugust 1998 (the "Allegiance Financing"). Under the Allegiance Financing,various classes of revolving and term certificates of Allegiance Trust I have been issued.

       As a result of loans made byAllegiance which became non-performing, Allegiance was unable to access further debt underthe Allegiance Financing beginning on October 30, 2000. The Allegiance Financing expiredin December 2000. Allegiance has no source of funding available to make additional loans.Consequently, Allegiance began reducing costs through employee layoffs during December2000. In addition, Allegiance was unable to convert to term certificates or otherwiserepay $9.1 million of revolving certificates issued under the Allegiance Financing. As aresult, the interest payable under the revolving loan certificates increased by 1% perannum, effective February 15, 2001. The revolving certificates bear interest at fixed andvariable rates based on the one-year U.S. Treasury yield and one-month LIBOR. At June 30,2001, the weighted-average interest rate on the revolving certificates was 9.0%. 

       In July 2001, Allegiance and aconsortium of insurance companies holding certificates issued under the AllegianceFinancing (the "Investors") executed an amendment and waiver agreement providingAllegiance until November 15, 2001 to resolve the non-performing loans and retire therevolving debt. If Allegiance is not able to work out the non-performing loans and retirethe revolving debt by November 15, 2001 and if the Investors do not provide additionaltime beyond November 15, 2001 to do so, the Investors could declare an event of defaultunder the Allegiance Financing at any time after November 15, 2001. If the Investors wereto declare an event of default, Point West Capital and Allegiance Capital could beterminated as servicers and the Investors could liquidate the collateral and apply theproceeds to retire amounts outstanding under the Allegiance Financing.

       Repayment of the debt outstandingunder the Allegiance Financing is an obligation solely of Allegiance Trust I. NeitherPoint West Capital, Allegiance Capital, Allegiance Funding nor Allegiance Managementguaranteed repayment of the revolving or term certificates and none is required to fundany principal or interest deficiencies which may arise thereunder.

      Also as a result of the non-performingloans, monthly cash flow payments to Point West Capital (for servicing fees) and toAllegiance (for servicing fees and interest owed on debt certificates held by Allegiance)ceased in November 2000. Between January and October 2000, such payments averaged $42,000a month. As a result of, among other things, the amendment and waiver agreement, monthlycash flow payments to Point West Capital and Allegiance resumed in May 2001 and willcontinue until November 15, 2001. In May, June and July 2001, these payments, which aresubordinate to other payments under the Allegiance Financing, averaged $14,000 per month.Payments in future months could increase, decrease or cease subject to the performance ofthe underlying loans and resulting cash flow from the loans and continued compliance withother provisions of the Allegiance Financing.        

**5.    Debenture Payable**

       Ventures has issued two debenturespayable to the Small Business Administration ("SBA") totaling $6.5 million inprincipal amount. One debenture was issued in July 1998 in the principal amount of $3.0million with semi-annual interest only payments at a fixed rate of 5.9% per annum (plus a1% annual fee) and a scheduled maturity date of September 1, 2008. The debenture issubject to a

5

prepayment penalty if repaid prior to September 1, 2003. The otherdebenture was issued on May 24, 2000 in the principal amount of $3.5 million withsemi-annual interest only payments at a fixed rate of 7.5% per annum (plus a 1% annualfee) and a scheduled maturity date of September 1, 2010. Thedebenture is subject to a prepayment penalty if repaid prior to September 1, 2005. Inaddition, Ventures paid a fee of $227,500 (3.5% of the total borrowings) to the SBA toborrow such money. Proceeds from the debentures were used to make debt and equityinvestments in businesses permitted under applicable SBA codes and regulations. 

       On June 14, 2001, the SBA notifiedVentures that it was in default under the debentures as a result of its failure to complywith required capital ratios and provided Ventures until June 29, 2001 to remedy thedefault. Ventures was unable to remedy the default by June 29, 2001. Therefore, on August1, 2001, the SBA accelerated the indebtedness under the debentures and demanded payment of$6.7 million (including outstanding principal, accrued interest and fees) by August 15,2001. Ventures does not currently have sufficient cash to repay the SBA debentures and isunlikely to have sufficient cash to repay the SBA debentures by August 15, 2001. The SBAhas notified Ventures that it will commence appropriate legal action for the collection ofVentures’ indebtedness. Such legal actions may include the appointment of a permanentreceiver of Ventures. 

       See "Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RecentDevelopments" and "—Liquidity and Capital Resources—Ventures."

 
**6.    Stockholders’ Equity**
       Changes in stockholders’ equityduring the first six months of 2001 reflected the following:

Stockholders’ equity, beginning of    period .........
$ 9,770,763
Comprehensive loss:
   Net loss    ...............................................
(5,562,637)
   Other comprehensive loss:    ........................
       Net    unrealized investment gains, net of             taxes of    $22,000......................................
28,748
            Comprehensive loss .......................
(5,533,889)
Stockholders’ equity, end of period    ............
$ 4,236,874 
       Changes in stockholders’ equityduring the first six months of 2000 reflected the following:

Stockholders’ equity, beginning of    period ...
$27,542,793Comprehensive income:
   Net loss    .......................................
(2,184,712)
   Other comprehensive loss:    ...................
      Net unrealized    investment losses, net of tax               benefit of $1,600,000........
(2,409,667)
             Comprehensive loss ...........................
(4,594,379)Common stock --  options exercised .........
10
Additional paid-in-capital -- options    exercised ..
2,740
Stockholders’ equity, end of period    ..............
$22,951,164 **6**7.    Earnings Per Share**
       The weighted-average number ofcommon stock shares and additional common stock equivalent shares used in computing lossper share for the three and six months ended June 30, 2001 and 2000 are set forth below.The following is a reconciliation of the numerator and denominator of basic and dilutednet loss per share:

 
**Three Months Ended**Six Months Ended**June 30,**June 30,**2001**2000**2001**2000
Numerator:
Loss before extraordinary gain....
$    
(1,483,957) $
(3,343,040) $ 
(5,562,637) $
(3,426,715) 
Extraordinary gain..........

--------
1,242,003
Net loss......................
$
(1,483,957)$
(3,343,040)$
(5,562,637)$
(2,184,712)
Denominator:
Weighted-average shares ..............

3,352,624
3,352,624
3,352,624
3,352,443
Loss per share:
Basic

Loss before extraordinary gain.....
$
(0.44) $
(1.00) $(1.66)    $
(1.02) 
Extraordinary gain.........

--
--
--
0.37 
Net loss.................
$
(0.44) $
(1.00) $
(1.66) $
(0.65) 
Diluted
Loss before extraordinary gain ...
$
(0.44) $
(1.00) $
(1.66) $
(1.02) 
Extraordinary gain..........

--
--
--
0.37 
Net loss........................
$
(0.44) $
(1.00) $
(1.66) $
(0.65) 
       As a result of the net loss forthe three and six months ended June 30, 2001 and 2000, options and warrants outstandingduring this period were not included in the computation of diluted loss per share becausetheir inclusion would be anti-dilutive.
**8.    Litigation**
       From time to time, the Company isinvolved in routine legal proceedings incidental to its business, including litigation inconnection with loans and investments made by Point West Ventures and Allegiance and thecollection of amounts owed under life insurance policies by insurance company obligors.Except as disclosed below, the Company does not expect that these proceedings,individually or 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 Capitaland three individuals formed SocietyPool to develop and pursue a new financial product.During 2000, Point West Capital contributed $2.8 million to fund SocietyPool's researchand start-up costs in exchange for a 51% Voting and Economic Interest in SocietyPool. Inaddition, Point West Capital was the Manager of SocietyPool. The other members ofSocietyPool, the former special consultant of SocietyPool (the "Former SpecialConsultant") and the former chief executive officer of SocietyPool (the "FormerCEO"), contributed to SocietyPool all of their rights and interests under a productlicense agreement (the "Business License Agreement").

7

       Between May 2000 and July 2001,SocietyPool conducted limited market research but did not commence any operations. In July2000, the Former CEO resigned. In August 2000, SocietyPool terminated the Former SpecialConsultant for cause.

       In July 2000, the Former SpecialConsultant filed a claim with the American Arbitration Association seeking arbitration ofa dispute with Point West Capital. The initial claim was for a declaratory judgment on anissue relating to the control and management of SocietyPool and its assets. The FormerSpecial Consultant has since amended his complaint to assert additional claims againstPoint West Capital as well as a claim against SocietyPool and requesting damages in anunspecified amount. In August 2000, the Former CEO filed an action in arbitration againstSocietyPool claiming he was constructively terminated under his Employment Agreement withSocietyPool and requesting damages in an unspecified amount. In response to these actions,Point West Capital and SocietyPool filed an answer, affirmative defenses, counterclaimsand third party claims against the Former Special Consultant and Former CEO, which PointWest Capital subsequently amended. The arbitration proceedings were stayed during thependency of the bankruptcy proceedings described below, which were dismissed in April2001.

       On September 5, 2000, the FormerSpecial Consultant and the Former CEO filed Chapter 11 proceedings in federal bankruptcycourt in New Mexico (In Re: SocietyPool.com, LLC, No. 11-00-14735 MA) on behalf ofSocietyPool. On April 13, 2001, on Point West Capital's motion, the Court dismissed thebankruptcy petition on the ground that the Former Special Consultant and the Former CEOlacked the requisite authority to file for bankruptcy on SocietyPool's behalf. Point WestCapital's motion for attorneys' fees in the proceeding is still pending.

       On April 3, 2001, the FormerSpecial Consultant filed an action in the Second Judicial District Court, County of SanBernalillo, State of New Mexico, against Point West Capital and its executive officers fortortious interference with contract, defamation and civil conspiracy, seeking unspecifieddamages. In May 2001, defendants removed the action to the United States District Courtfor the District of New Mexico and thereafter moved to dismiss the case in its entirety.On August 6, 2001, the district court ruled that the Former Special Consultant’sactions were subject to arbitration and granted defendants' motion to dismiss the actionwith prejudice.

       On June 29, 2001, the licensorunder the Business License Agreement terminated the Business License Agreement on theground that SocietyPool had ceased operations in September 2000. On July 9, 2001, PointWest rescinded the SocietyPool operating agreement on the grounds that the Former SpecialConsultant and the Former CEO, through their illicit conduct, had repudiated theSocietyPool operating agreement and caused a failure of the consideration supporting theoperating agreement -- the Business License Agreement. In connection with the rescission,Point West Capital reclaimed what was left of the money that it had contributed toSocietyPool, which totaled approximately $2.1 million, and amended its arbitration claimsto seek a declaratory judgment that its rescission was proper and restitution from theFormer Special Consultant and the Former CEO.

       On July 9, 2001, the Former CEOfiled an action against Point West Capital in the Superior Court, County of San Francisco,State of California, alleging breach of SocietyPool's operating agreement as a consequenceof Point West Capital's rescission of the operating agreement. On the same day, the FormerCEO sought a temporary restraining order requiring Point West Capital to return the fundsit reclaimed pursuant to the rescission. On July 10, 2001, the Court denied the FormerCEO's request for a temporary restraining order. Thereafter, Point West Capital filed amotion for summary judgment, seeking dismissal of the Former CEO's entire complaint, whichis scheduled to be heard on September 13, 2001.

8

       On July 26, 2001, in thearbitration proceedings, the Former Special Consultant filed a motion for a preliminaryinjunction requiring Point West Capital to return the funds it had reclaimed pursuant toits rescission and freezing the funds pending resolution of the arbitration proceedings.On August 8, 2001, the arbitrator ordered Point West Capital to deposit the funds it hadreclaimed pursuant to the rescission into a SocietyPool account, which is to remain frozenuntil the arbitration proceedings are resolved. On August 10, 2001, Point West Capitalfiled a motion for reconsideration of the order.

       The outcome of the arbitrationactions and the various state court proceedings cannot be determined at this time;however, the Company believes that neither the Former CEO nor the Former SpecialConsultant is entitled to any requested relief and that the claims of the Former CEO andFormer Special Consultant are without merit. Point West Capital’s future involvementwith SocietyPool will be dependent upon the outcome of the proceedings described above. 
**Point West Ventures**
       See the Form 10-K for informationregarding the demand for arbitration that Point West Ventures filed in December 2000against Universal Access, Inc., certain of its directors and other parties.

       In June 2001, Point West Venturesfiled an action for fraud against Home Director, Inc. and Spencer Trask Ventures, Inc.seeking rescission of an agreement pursuant to which Point West Ventures purchased$500,000 of stock in Home Director, Inc. through Spencer Trask Ventures, Inc. In July2001, the defendants filed a motion to dismiss the action.
**9.    Segment Reporting**
       Statement of Financial AccountingStandards No. 131, *Disclosures about Segments of an Enterprise and Related Information*,establishes standards for reporting information about operating segments in annualfinancial statements and requires selected information about operating segments in interimfinancial reports. Operating segments are defined as components of an enterprise aboutwhich separate financial information is available that is evaluated regularly by the chiefoperating decision maker, or decision making group, in deciding how to allocate resourcesand in assessing performance. Point West Capital’s chief operating decision-makinggroup is comprised of the Chairman of the Board, the Chief Executive Officer and thePresident.

       The Company’s reportableoperating segments include Ventures, Allegiance and Viatical Settlements. The Othersegment includes Point West Capital, SocietyPool and PWS. In July 2001, Point West Capitalrescinded the SocietyPool operating agreement. See Note 8. The accounting policies of theoperating segments are the same as those described in the summary of significantaccounting policies in the Form 10-K. 

9

       The following tables represent theCompany’s results from segments for and financial positions as of the three monthsended June 30, 2001 and 2000.

 

Three Months Ended June 30, 2001
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest income.............$ 
6,716$
853,979$
--$
22,029$
882,724Net loss on             securities..............
(728,665)
--
--
--
(728,665)
Other income................
(30,972)
1,174
57,083
--
27,285
Total revenues.............
(752,921)
855,153
57,083
22,029
181,344
Interest expense ..........
125,660
690,972
--
--
816,632Depreciation    and           amortization .......
175,708
9,775
--
6,024
191,507Income tax         (expense) benefit         (2) ........................
 

(800)
 

(2,400)
 

--
 

37,315
 

34,115Contributed    net         (loss) income (2)......$ 
(1,116,839)$ 
40,441$    
57,083$ 
(464,642)$ 
(1,483,957)
Identifiable assets.........$ 
6,888,582$ 
38,851,589$    
29,770,621$ 
2,899,805$ 
78,410,597
Three Months Ended June 30, 2000
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest income.............$ 
68,719$
855,618$
--$
30,752$
955,089Net loss on             securities..............
(3,251,640)
--
--
--
(3,251,640)
Other income................
3,794
--
78,406
270
82,470
Total revenues.......
(3,179,127)
855,618
78,406
31,022
(2,214,081)
Interest expense ..........
82,117
613,624
--
--
695,741Depreciation    and           amortization .......
12,917
31,626
--
4,611
49,154Income tax         (expense) benefit         (2) ........................
 

(800)
 

(4,015)
 

--1,822,716
 

1,817,901Contributed    net         (loss) income (2)......$ 
(3,297,938)$ 
(715,745)$ 
78,406$ 
592,237$ 
(3,343,040)
Identifiable assets.........$ 
21,584,916$ 
35,784,138$ 
31,634,428$ 
6,735,927$ 
95,739,409
10

       The following tables represent the Company’sresults from segments for and financial positions as of the six months ended June 30, 2001and 2000.

 

Six Months    Ended June 30, 2001
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest    income...............$
22,005$
1,763,468$ 
--$
72,787$
1,858,260Net loss on          securities ...........
(3,197,500)
--
--
(939,030)
(4,136,530)
Other income    .........
(30,972)
96,537
111,083
--
176,648
Total revenues
(3,206,467)
1,860,005
111,083
(866,243)
(2,101,622)
Interest    expense ......
249,939
1,390,289
--
--
1,640,228Depreciation and          amortization .......
190,083
19,550
--
12,048
221,681Income tax          (expense) benefit          (2)........
(800)
(3,200)
--
19,945
15,945Contributed net          (loss) income (2)....$
(3,709,039)$
171,798$
111,083$
(2,136,479)$
(5,562,637)
Identifiable assets ...$
6,888,582$
38,851,589$
29,770,621$
2,899,805$
78,410,597
Six Months    Ended June 30, 2000
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest    income...............$
1,371,854$
1,678,380$ 
6,818$
113,221$
3,170,273Net loss on          securities ...........
(2,833,369)
--
--
--
(2,833,369)
Other income    .........
2,093
3,188
97,242
12,912
115,435
Total revenues.
(1,459,422)
1,681,568
104,060
126,133
452,339
Interest    expense ......
134,024
1,220,977
588,850
--
1,943,851Depreciation and          amortization .......
22,917
83,854
--
7,700
114,471Income tax          (expense) benefit          (2)........
(800)
(4,585)
--
1,875,935
1,870,550Extraordinary gain.....--1,242,003-1,242,003Contributed net          (loss) income (2)....$
(1,640,374)$
(1,028,552)$
623,774$
(139,560)$
(2,184,712)
Identifiable assets ...$
21,584,916$
35,784,138$
31,634,428$
6,735,927$
95,739,409
---
**(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.**11

** 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**
       The following is a discussion andanalysis of the consolidated financial condition of the Company at June 30, 2001, andresults of operations for the Company for the three and six months ended June 30, 2001 and2000, and of certain factors that may affect the Company’s prospective financialcondition and results of operations. The following should be read in conjunction with theForm 10-K and the unaudited consolidated financial statements and related notes appearingelsewhere herein.
**Overview**
       Beginning in the latter half of2000, the Company engaged in substantially less revenue-generating activity and beganreducing costs significantly. See "---Recent Developments." The Companycontinues to assess its current businesses and its future operations. 

       The Company is a specialtyfinancial services company. The Company’s financial statements consolidate theassets, liabilities and operations of Ventures, Allegiance, DPFC, SocietyPool and PWS. Theprincipal business activity of the Company through February 1997 was to provide viaticalsettlements for terminally ill persons. Subsequent to February 1997, the Company engagedin other specialty financial services businesses. See the Form 10-K for furtherinformation regarding historical development. 

       Information regarding therevenues, contributed net income (loss) and identifiable assets for each of theCompany’s business segments is contained in Note 9 of the Condensed Notes toConsolidated Financial Statements.
**Recent Developments**
       Beginning in the latter half of2000, the Company engaged in substantially less revenue-generating business activity andbegan reducing costs significantly. Ventures reduced significantly its number of newinvestments in the second half of 2000 and the first half of 2001 as a result ofvolatility and uncertainty in the financial markets. In the first half of 2001, Venturesmade no investments. Additionally, in August 2001, the SBA accelerated Ventures’indebtedness to the SBA, effectively terminating Ventures' ability to make furtherinvestments or engage in further business activities. See "---Liquidity and Capital Resources--- Ventures." 

       As a result of loans made byAllegiance which became non-performing, Allegiance was unable to access further debt underthe Allegiance Financing beginning on October 30, 2000. The Allegiance Financing expiredin December 2000. Allegiance has no source of funding available to make additional loans.Consequently, Allegiance began reducing costs through employee layoffs during December2000. In addition, Allegiance was unable to convert to term certificates or otherwiserepay $9.1 million of revolving certificates issued under the Allegiance Financing. As aresult, the interest payable under the revolving loan certificates increased by 1% perannum, effective February 15, 2001. See Note 4 of the Condensed Notes to ConsolidatedFinancial Statements. 

       In July 2001, Allegiance and theInvestors executed an amendment and waiver agreement providing Allegiance until November15, 2001 to resolve the non-performing loans and retire the revolving debt. If Allegianceis not able to work out the non-performing loans and retire the revolving debt by November15, 2001 and if the Investors do not provide additional time beyond November 15, 2001 todo so, the Investors could declare an event of default under the Allegiance Financing atany time after November 15, 2001. If the Investors were to declare an event of default,Point West Capital and 

12

Allegiance Capital could be terminated as servicers and the Investors could liquidatethe collateral and apply the proceeds to retire amounts outstanding under the AllegianceFinancing. 

       Repayment of the debt outstandingunder the Allegiance Financing is an obligation solely of Allegiance Trust I. NeitherPoint West Capital, Allegiance Capital, Allegiance Funding nor Allegiance Managementguaranteed repayment of the revolving or term certificates and none is required to fundany principal or interest deficiencies which may arise thereunder.

       Allegiance believes it will makeprogress toward resolving the non-performing loans and retiring the revolving debt, butthat it will need additional time beyond November 15, 2001. There can be no assurance thatAllegiance will be able to resolve these issues or that it will be given additional timebeyond November 15, 2001 to do so. In addition, Allegiance is exploring possiblealternative funding sources to repay the revolving certificates by November 15, 2001 andto finance further lending activities. However, there can be no assurance that Allegiancewill be able to locate a funding source by November 15, 2001 or that, if a funding sourceis found, it will be available on economically feasible terms. 

       Also as a result of thenon-performing loans, monthly cash flow payments to Point West Capital (for servicingfees) and to Allegiance (for servicing fees and interest owed on debt certificates held byAllegiance) ceased in November 2000. Between January and October 2000, such paymentsaveraged $42,000 a month. As a result of, among other things, the amendment and waiveragreement, monthly cash flow payments to Point West Capital and Allegiance resumed in May2001 and will continue until November 15, 2001. In May, June and July 2001, thesepayments, which are subordinate to other payments under the Allegiance Financing, averaged$14,000 per month. Payments in future months could increase, decrease or cease subject tothe performance of the underlying loans and resulting cash flow from the loans andcontinued 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 November 15, 2001, the Company expects that suchpayments will continue. Additionally, if another amendment providing time beyond November15, 2001 is executed, the Company is hopeful that such payments will continue.

       In July 2001, Point West Capitalrescinded the SocietyPool operating agreement. Point West Capital continues to be involvedin litigation involving SocietyPool, including challenges to the rescission. Point WestCapital’s future involvement with SocietyPool will be dependent upon the outcome ofthe proceedings described in "Other Information---Legal Proceedings---SocietyPool."

       To date, the operations of PWShave not been material to the Company. The Company does not currently intend to expandPWS’ operations. Therefore, the Company does not believe that PWS’ operationswill become material in the future.

       The Company continues to assessits current businesses and its future operations. 
**Results of Operations for the Company***       Total Revenues.    Total revenues were $181,000 during the three months ended June 30,2001 compared to negative total revenues of $2.2 million during the same period in 2000.The Company reported a $729,000 loss on securities for the period ended June 30, 2001,compared to a $3.3 million loss on securities for the same period in 2000. See"Results of Operations by Segment---Ventures--- Three andSix Months Ended June 30, 2001 Compared to the Three and Six Months Ended June 30, 2000--- Net Loss on Securities." Total revenues were negative $2.1million during the six months ended June 30, 2001 compared to positive total revenues of$452,000 during the same period in 2000. The Company reported a $4.1 million loss onsecurities for the six months ended June 30, 2001, compared to a $2.8 

13

million loss on securities for the same period in 2000. In addition,the 2000 period included $1.1 million of interest income recognized from a warrant (valuedusing the Black-Scholes option-pricing model) received in connection with one ofVentures’ debt investments during the first quarter of 2000. No such income wasrecognized during 2001.
*       Total Expenses.    Total expenses decreased to $1.7 million during the three months endedJune 30, 2001 from $2.9 million during the three months ended June 30, 2000. This decreasewas primarily due to the following other general and administrative expenses that occurredin the three months ended June 30, 2000: (i) a $555,000 loss on a delinquent loanrecognized by Allegiance and (ii) $479,000 in royalty fees and organizational and researchexpenses for SocietyPool. Total expenses decreased to $3.5 million during the six monthsended June 30, 2001 from $5.7 million during the six months ended June 30, 2000. Thisdecrease was primarily due to (i) a $722,000 decrease in expenses related to the viaticalsettlements business as a result of the DPFC Agreement (see "Results of Operations bySegment---Viatical Settlements---Certain Accounting Implications for DPFC"), (ii) theloss on the delinquent loan described above and (iii) the research and startup expensesfor SocietyPool referred to above. In addition, the decrease in total expenses during bothperiods resulted from a reduction in compensation and benefits, including salaryreductions for the executive officers, and other general and administrative expenses as aresult of scaled-back activities. 
*       Income Tax Benefit.    Income tax benefit decreased to $34,000 during the three monthsended June 30, 2001 compared to $1.8 million during the same period in 2000 and decreasedto $16,000 during the six months ended June 30, 2001 compared to $1.9 million 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 debt restructuring in theamount of $1.2 million, net of income taxes of $822,000, in March 2000 in connection withthe DPFC Agreement described in "Results of Operations by Segment---Viatical Settlements--- Certain Accounting Implications forDPFC" below. As a result of the DPFC Agreement, the Company reduced the outstandingprincipal amount of the Securitized Notes in the consolidated balance sheet as of March31, 2000 by $2.1 million to $36.4 million (which equaled the face value of the lifeinsurance policies and restricted cash held by DPFC as of that date) and recognizedincome, net of income taxes, of $1.2 million. 

***Results of Operations by Segment***

***Ventures***

*     Three and Six Months Ended June 30, 2001Compared to the Three and Six Months Ended June 30, 2000*

*       Interest Income*.    Interest income decreased to $7,000 during the three months ended June30, 2001 from $69,000 during the three months ended June 30, 2000. Interest income for thethree months ended June 30, 2001 reflected lower cash balances held by Ventures and loweryields. Interest income decreased to $22,000 during the six months ended June 30, 2001from $1.4 million during the six months ended June 30, 2000. During the first half of2000, the Company recognized $1.1 million of interest income from a warrant (valued usingthe Black-Scholes option-pricing model) received in connection with one of Ventures’debt investments. No such income was recognized during the first half of 2001.Additionally, an overall decrease in cash balances and yields contributed to the decreasein interest income. 

14
*       Net Loss on Securities.    Net loss on securities was $729,000 during the three months ended June30, 2001 compared to a net loss on securities of $3.3 million during the three monthsended June 30, 2000. Net loss on securities was $3.2 million during the six months endedJune 30, 2001 compared to a net loss on securities of $2.8 million during the six monthsended June 30, 2000. These net losses were primarily the result of the write-down orwrite-off of impaired investments. The write-downs or write-offs were a result ofcontinued deterioration of the financial condition of some companies and the uncertaintythat some companies will be able to raise additional capital and continue in business inlight of the market downturn related to Internet and other technology stocks. Offsettingthese write-downs and write-offs during the 2000 periods was $1.8 million in gain onsecurities sold during the first half of 2000. 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 $126,000 during the three months endedJune 30, 2001 from $82,000 during the three months ended June 30, 2000 and to $250,000during the six months ended June 30, 2001 from $134,000 during the six months ended June30, 2000 due to an increase in funds borrowed from the SBA in May 2000. During the threeand six months ended June 30, 2001, the weighted-average interest rate on the fundsborrowed from the SBA was 7.8% and the weighted-average borrowings were $6.5 million,compared to the weighted-average interest rate of 7.4% and 7.2% and weighted-averageborrowings of $4.4 and $3.7 million during the three and six months ended June 30, 2000.
*       Amortization. As a result ofVentures’ default under the debentures issued to the SBA, the unamortized commitmentand leverage fees paid to the SBA were written-off during the three months ended June 30,2001. Consequently, amortization expense increased to $176,000 for the three months endedJune 30, 2001 from $13,000 for the three months ended June 30, 2000 and to $190,000 forthe six months ended June 30, 2001 from $23,000 for the six months ended June 30, 2000.There will be no amortization expense for Ventures in future periods. See "--- Liquidity and Capital Resources." 
***   Allegiance**
       Three and Six Months Ended June30, 2001 Compared to the Three and Six Months Ended June 30, 2000

       Interest Income.    Interest income decreased to $854,000 during the three months endedJune 30, 2001 from $856,000 during the three months ended June 30, 2000 and increased to$1.8 million during the six months ended June 30, 2001 from $1.7 million during the sixmonths ended June 30, 2000. During the three and six months ended June 30, 2001, theweighted-average interest rate earned on the loans was 8.9% and the weighted-averageprincipal amounts outstanding were $37.6 million and $37.7 million, respectively, comparedto the weighted-average interest rate of 9.2% and the weighted-average principal amountsoutstanding of $35.9 million and $34.9 million, respectively, during the three and sixmonths ended June 30, 2000. The increase in weighted average principal amount outstandingin the 2001 periods compared to the 2000 periods primarily reflects loans made byAllegiance from July through October 2000. Offsetting this increase were two loans in theaggregate principal amount of $3.9 million, which have been in default and on non-accrualstatus since the fourth quarter of 2000. The weighted-average interest rate calculationsfor the three and six months ended June 30, 2001 exclude those two loans. Theweighted-average interest rate for the three and six months ended June 30, 2000 excludesone loan in the amount of $2.1 million, which was delinquent and on non-accrual status.Allegiance cannot predict at this time whether the loans on non-accrual status during thefirst half of 2001 will remain on non-accrual status. To the extent that the loans remainon non-accrual status, Allegiance Capital does not anticipate receiving all interest andservicing income it would have received if the loans were performing. See "--- Recent Developments" for more information regardingservicing income and the other 

15

consequences of these defaulted loans. Allegiance is attempting to workout these two loans. Based on appraisals of the collateral securing these loans,management believes that Allegiance will not incur material losses in connection with suchloans. Allegiance is not currently originating loans. Therefore, Allegiance does notexpect material increases in interest income in future periods.
*       Interest Expense.    Interest expense increased to $691,000 during the three months endedJune 30, 2001 from $614,000 during the three months ended June 30, 2000 and $1.4 millionduring the six months ended June 30, 2001 from $1.2 million during the six months endedJune 30, 2000 as a result of increased borrowings and interest rates under the AllegianceFinancing. During the three and six months ended June 30, 2001, the weighted-averageinterest rate under the Allegiance Financing was 8.5%, compared to 8.4% during the threeand six months ended June 30, 2000. During the three and six months ended June 30, 2000,the weighted-average borrowings were $32.6 million and $32.8 million, respectively,compared to the weighted-average borrowings of $29.1 million and $28.8 million,respectively, during the three and six months ended June 30, 2000. The AllegianceFinancing terminated in December 2000. However, as discussed above in "---RecentDevelopments," amounts borrowed under the Allegiance Financing remain outstanding.Allegiance has been granted an extension through November 15, 2001 to resolve itsnon-performing loans and retire the revolving debt. 
*       Compensation and Benefits.Compensation and benefits decreased to $55,000 during the three months ended June 30, 2001from $79,000 during the three months ended June 30, 2000 and decreased to $113,000 duringthe six months ended June 30, 2001 from $202,000 during the six months ended June 30,2000. This decrease was due to layoffs resulting from a suspension of Allegiance’slending activities during the fourth quarter of 2000. As a result, compensation andbenefits for Allegiance for the 2001 fiscal year is currently expected to be approximately$230,000.
*       Other General and AdministrativeExpenses. Other general and administrative expenses decreased to $57,000 during thethree months ended June 30, 2001 from $843,000 during the three months ended June 30, 2000and decreased to $162,000 during the six months ended June 30, 2001 from $1.2 millionduring the six months ended June 30, 2000. This decrease was due primarily to a $555,000loss on a delinquent loan recognized by Allegiance during the three months ended June 30,2000. No such loss was reported during 2001. In addition, other general and administrativeexpenses decreased due to a reduction in legal expenses related to the delinquent loandiscussed above, which was written-off in 2000, and due to a significant reduction ingeneral and administrative expenses resulting from Allegiance’s suspended lendingactivities. Because two non-performing loans are currently in default, it is likely thatadditional general and administrative expenses will be incurred in connection with thework out of those loans. Allegiance cannot, however, predict the overall level of othergeneral and administrative expenses for the year ended December 31, 2001 relative to theyear ended December 31, 2000.
***   Viatical Settlements***
       The Viatical Settlements segmentincludes results of operations in connection with viatical settlements for DPFC and PointWest Capital.
*       Certain Accounting Implicationsfor DPFC*
       From June 30, 1996 throughFebruary 29, 2000, the Company recognized income (earned discounts) with respect to itsviatical settlement business upon receipt of proceeds on policies (either pursuant to saleof the policy or the death of the insured). Income recognized was equal to the differencebetween such proceeds (less any back-end sourcing fees) and the carrying value of suchpolicies after giving effect to any reserve for loss on the sale of such policies.

16

       As a result of the imminentdefault of DPFC under the terms of the Senior Viatical Settlement Notes, Series 1995-A,Stated Maturity March 10, 2005 (the "Securitized Notes"), Point West Capital andthe holders of the Securitized Notes (the "Noteholders") entered into anagreement in March 2000 (the "DPFC Agreement") that amended certain of the termsof the Securitized Notes. Pursuant to the DPFC Agreement, the Noteholders are required toprovide funds through June 30, 2002 to pay servicing fees, premiums and certain othercosts of DPFC in the event policy collections are insufficient. Under the DPFC Agreement,Point West Capital continues to act as servicer for a fee of $18,000 per month 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 Operationsfor the Company--- Extraordinary Gain."

       As a result of the DPFC Agreement,the Company will not recognize any future gain or loss related to DPFC until theNoteholders purchase the DPFC stock or DPFC is liquidated pursuant to the DPFC Agreement.The Company expects to recognize a pre-tax gain in an amount approximately equal to the$4.6 million accumulated deficit of DPFC upon the occurrence of either of these events.Additionally, when the DPFC stock is purchased or DPFC is liquidated, the Company may haveincome tax liability associated with the gain from debt forgiveness. The Company may beable to use the carryforward losses from DPFC to offset such liability, unless thecarryforward losses have been previously utilized. Since March 2000 the Company hasrecognized, and through June 2002 will continue to recognize, the $18,000 monthlyservicing fee ($54,000 per quarter) paid to Point West Capital as other income in theconsolidated statement of operations.

       Also as a result of the DPFCAgreement, DPFC has not recognized any interest expense related to the Securitized Notesnor any general and administrative expenses subsequent to February 28, 2000 and will notrecognize these expenses in future periods. 

       The Securitized Notes representthe obligations solely of DPFC. Point West Capital did not guarantee repayment of theSecuritized Notes and is not required to fund any principal or interest deficienciesthereunder.
***   Other***
       The Other segment includes resultsattributable to Point West Capital, SocietyPool and PWS. Except for compensation andbenefit expenses clearly attributable to Allegiance, corporate overhead is included in the"Other" segment and has not been allocated. In July 2001, Point West Capitalrescinded the SocietyPool operating agreement. The rescission is being challenged by theFormer CEO and the Former Special Consultant. See "---Recent Developments" and "Other Information---Legal Proceedings--- SocietyPool." Activities for PWS were immaterial during thesix months ended June 30, 2001 and 2000 and are not expected to be material in theforeseeable future. 
*       Three and Six Months Ended June30, 2001 Compared to the Three and Six Months Ended June 30, 2000

       Interest Income.    Interest income decreased to $22,000 during the three months ended June30, 2001 from $31,000 during the three months ended June 30, 2000, and decreased to$73,000 during the six months ended June 30, 2001 from $113,000 for the six months endedJune 30, 2000, due to a decrease 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 

17

during that period. This write-off was a result of deterioration of thecompany’s financial condition and the uncertainty that it would be able to raiseadditional capital and continue in business in light of the market downturn related toInternet and other technology stocks. This investment was made by Point West Capital priorto the inception of Ventures, and was the only investment in Point West Capital’sportfolio. No such write-offs were made during the first half of 2000. 
*       Compensation and Benefits.    Compensation and benefits decreased to $232,000 during the three monthsended June 30, 2001 from $592,000 during the three months ended June 30, 2000 and to$555,000 during the six months ended June 30, 2001 from $1.1 million during the six monthsended June 30, 2000. This decrease was due to a 57% reduction in the salaries of theexecutive officers, a decrease in the level of accrued profit sharing and bonuses for allemployees for the first half of 2001 and employee layoffs and attrition, which began inlate 2000. As a result, compensation and benefits for the Other segment for the 2001fiscal year are expected to be approximately $1 million less than the 2000 amount.
*       Other General and AdministrativeExpenses.    Other general and administrative expenses decreased to$286,000 during the three months ended June 30, 2001 from $665,000 during the three monthsended June 30, 2000, and to $724,000 during the six months ended June 30, 2001 from $1.0million during the six months ended June 30, 2000, primarily due to $479,000 in royaltyfees and organizational and research expenses related to SocietyPool incurred during thefirst half of 2000. Offsetting this decrease was an increase in legal expenses relating tothe SocietyPool litigation. As a result of the various litigation and arbitrationproceedings related to SocietyPool, including new lawsuits filed during the first half of2001, it is likely that additional legal expenses will be incurred. Point West Capital hasfiled a motion in bankruptcy court to recover legal fees from the parties who improperlyfiled the bankruptcy proceedings and intends to seek legal fees in connection with theother pending litigation. The Company, however, is currently unable to predict the overalllevel of other general and administrative expenses for the remainder of 2001 relative tocomparable periods in 2000. The Company established a cost-reduction program in the latterhalf of 2000; however, the decrease in operating expenses has been offset by an increasein legal expenses related to the various litigation and arbitration proceedings related toSocietyPool. See "Other Information---Legal Proceedings." 
**Liquidity and Capital Resources**
       The Company’s unauditedconsolidated financial statements included herein have been prepared assuming that theCompany will continue as a going concern. See Note 2 of the Notes to ConsolidatedFinancial Statements included in the Form 10-K.
*   Point West Capital, SocietyPool and PWS*
       At present, Point West Capital andPWS have no external funding source from which to fund their working capital and generalcorporate needs. During the first half of 2001, the Company supported the operations ofPoint West Capital and PWS primarily from existing cash balances. At June 30, 2001, PointWest Capital and PWS’ cash and cash equivalents were $412,000. The Company continuesto analyze its current and future needs for financing, which will be dependent on itsability to develop its existing businesses and any other business opportunities theCompany pursues. See "Considerations Under the Investment Company Act of 1940." 

       Point West Capital currentlyanticipates having sufficient liquidity to meet the working capital and operational needsof Point West Capital and PWS at least through December 31, 2001 using current cash andcash equivalents, payments on debt certificates and servicing and management fees. TheCompany is currently unable to predict its liquidity beyond December 31, 2001, which willbe dependent on (i) the Company's level of operations and its cash flows from servicingactivities, (ii) Allegiance's 

18

ability to resolve the non-performing loans and (iii) the outcome,timing and cost of the pending arbitration and litigation proceedings related toSocietyPool and of any additional proceedings instituted by or against the Company.Assuming Point West Capital determines additional funds are needed, there can be noassurance that it will be successful in obtaining external financing on satisfactory termsor at all. 

       Restricted cash as of June 30,2001 includes $2.1 million for SocietyPool. In July 2001, Point West Capital rescinded theSocietyPool operating agreement. The rescission is being challenged by the Former CEO andthe Former Special Consultant. See "Other Information---Legal Proceedings." 
*   Ventures*
       Ventures’ expenses during thefirst half of 2001 were supported primarily through existing cash balances and $340,000 ofproceeds from the sale of one investment. As of June 30, 2001, Ventures had identifiableassets of $6.9 million, including investment securities with an estimated fair value of$127,000, non-marketable securities with an estimated fair value of $6 million, $85,000 ofaccounts receivable and $667,000 of cash. 

       In prior periods, Venturesborrowed funds from the SBA through the issuance of debentures in an aggregate principalamount of $6.5 million. On June 14, 2001, the SBA notified Ventures that it was in defaultunder the debentures as a result of its failure to comply with required capital ratios andprovided Ventures until June 29, 2001 to remedy the default. Ventures was unable to remedythe default by June 29, 2001. Therefore, on August 1, 2001, the SBA accelerated theindebtedness under the debentures and demanded payment of $6.7 million (includingoutstanding principal, accrued interest and fees) by August 15, 2001.

       Ventures does not currently havesufficient cash to repay the SBA debentures and is unlikely to have sufficient cash torepay the SBA debentures by August 15, 2001. The SBA has notified Ventures that it willcommence appropriate legal action for the collection of Ventures’ indebtedness. Suchlegal actions may include the appointment of a permanent receiver of Ventures. 

       If a receiver is appointed toliquidate Venture’s assets, its investment portfolio will be valued based on itsliquidation value. The Company cannot determine at this time what that liquidation valuewould be. However, liquidation value is likely to be significantly lower than theestimated fair value reflected in the Company’s consolidated balance sheet. TheCompany also cannot determine at this time what legal actions the SBA will take or whatrights with respect to Ventures’ assets that any permanent receiver may have.Dispositions of Ventures’ portfolio securities by Ventures or by a receiver appointedby the SBA may occur at times or on terms that would not maximize the value of thoseassets. It is likely that proceeds of any asset dispositions would be insufficient torepay all amounts owed to the SBA by Ventures under the debentures. In such case, theCompany would recognize a loss on securities even if the debt exceeds the value of thesecurities (including any disposition proceeds). If and when the debt is finallydischarged, the Company would then recognize a gain on debt forgiveness in an amount equalto the accumulated deficit of Point West Ventures net of any tax effect. 
*   Allegiance*
       The Allegiance Financing expiredin December 2000 and, as a result, Allegiance has no current ability to continue to makenew loans or to grow its business. See "—Recent Developments" above. As ofJune 30, 2001, Allegiance had cash and cash equivalents of $935,000, of which $463,000 isrestricted under the Allegiance Financing. The available cash was primarily the result of$278,000 of cash proceeds 

19

from the sale, in the second quarter of 2001, of a funeral homeacquired by Allegiance in connection with the settlement of a lawsuit with a Texasborrower. 
*   DPFC*
       DPFC operations are in run-off.Point West Capital, as servicer under the Securitized Notes, performs monitoring andcollection activities for DPFC and incurs administrative costs associated with theseactivities. Point West Capital is reimbursed for these costs subject to priorityprovisions contained in the Indenture. Principal, interest payments and other costsrelated to the Securitized Notes are payable solely from collections on policies pledgedto secure the payment thereof and, with respect to costs, amounts provided by theNoteholders.
**Considerations Under the Investment Company Act of 1940**
       The 1940 Act creates acomprehensive regulatory framework applicable generally to investment companies (i.e.,companies engaged primarily in the business of investing, reinvesting or trading insecurities within the meaning of the 1940 Act, whether or not those companies intend to beengaged primarily in such business). Companies that are subject to the 1940 Act mustregister with the SEC as investment companies and upon registration become subject toextensive regulation. The Company believes, based on its current activities and the natureof its assets, that it should not be deemed to be an investment company because it is notengaged primarily in the business of investing, reinvesting or trading in securitieswithin the meaning of the 1940 Act and the rules of the SEC promulgated thereunder, anddoes not hold itself out as an investment company. For further information regarding the1940 Act and potential issues facing the Company, see the Company’s Form 10-QSB forthe quarter ended March 31, 2001.
**Forward Looking Statements**
       This report includes forwardlooking statements within the meaning of the Private Securities Litigation Reform Act of1995. All statements made herein which are not based on historical facts are forwardlooking and, accordingly, involve risks and uncertainties that could cause actual resultsto differ materially from those discussed. Such forward looking statements include thoseunder "Management’s Discussion and Analysis of Financial Condition and Resultsof Operations" and "Part II---Other Information---Legal Proceedings"relating to (1) the amount of any loss experienced in connection with two loans made byAllegiance that are in default, (2) the continuation of payments to Point West Capital andAllegiance Capital for servicing activities provided to Allegiance and to AllegianceCapital under revolving and term certificates issued to Allegiance Capital under theAllegiance Financing, (3) sufficiency of the Company’s liquidity and capitalresources (see "Liquidity and Capital Resources"), (4) the Company’sability to avoid being subject to registration and regulation under the 1940 Act (see"Considerations Under the Investment Company Act of 1940"), (5)management’s belief that neither the Former CEO nor the Former Special Consultant isentitled to the relief requested in actions filed (see "Other Information---LegalProceedings"), (6) the amount of gain to be recognized on the purchase of DPFC stockor its liquidation, (7) the potential consequences of Ventures’ default under its SBAborrowings and (8) anticipated 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 

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made by Allegiance and factors such as general economic conditions thatwould affect such ability, (3) Allegiance’s ability to resolve the two currentlynon-performing loans to the satisfaction of the Investors, (4) actions taken by theInvestors with respect to the current or any future default under the AllegianceFinancing, (5)****the results of the Company’s consideration of strategic optionsand any costs associated with a chosen option, (6) the Company's costs related to pendingarbitration or litigation proceedings are higher than currently anticipated, or anyadditional arbitration or lititgation proceedings are instituted by or against theCompany, (7) the Company takes actions with respect to its existing businesses whichrequire further investment in the businesses,  (8) the outcome of the litigationrelating to SocietyPool, (9) availability and cost of capital, (10) actions taken by theNoteholders with respect to the purchase or liquidation of DPFC, (11) actions taken by theSBA with respect to the current or any future default under Ventures’ SBA borrowings,(12) litigation expenses arising from current and future legal proceedings related to theCompany’s businesses, including non-performing loans or investments and SocietyPooland (13) compensation and benefits expenses for Point West Capital or Allegiance differfrom current expectations, depending on the strategy ultimately determined by the Company.
**PART II. OTHER INFORMATION**
Item 1. Legal Proceedings
**SocietyPool**
       In May 2000, Point West Capitaland three individuals formed SocietyPool to develop and pursue a new financial product.During 2000, Point West Capital contributed $2.8 million to fund SocietyPool's researchand start-up costs in exchange for a 51% Voting and Economic Interest in SocietyPool. Inaddition, Point West Capital was the Manager of SocietyPool. The other members ofSocietyPool, the Former Special Consultant and the Former CEO, contributed to SocietyPoolall of their rights and interests under the Business License Agreement.

       Between May 2000 and July 2001,SocietyPool conducted limited market research but did not commence any operations. In July2000, the Former CEO resigned. In August 2000, SocietyPool terminated the Former SpecialConsultant for cause.

        In July 2000, the FormerSpecial Consultant filed a claim with the American Arbitration Association seekingarbitration of a dispute with Point West Capital. The initial claim was for a declaratoryjudgment on an issue relating to the control and management of SocietyPool and its assets.The Former Special Consultant has since amended his complaint to assert additional claimsagainst Point West Capital as well as a claim against SocietyPool and requesting damagesin an unspecified amount. In August 2000, the Former CEO filed an action in arbitrationagainst SocietyPool claiming he was constructively terminated under his EmploymentAgreement with SocietyPool and requesting damages in an unspecified amount. In response tothese actions, Point West Capital and SocietyPool filed an answer, affirmative defenses,counterclaims and third party claims against the Former Special Consultant and Former CEO,which Point West Capital subsequently amended. The arbitration proceedings were stayedduring the pendency of the bankruptcy proceedings described below, which were dismissed inApril 2001.

       On September 5, 2000, the FormerSpecial Consultant and the Former CEO filed Chapter 11 proceedings in federal bankruptcycourt in New Mexico (In Re: SocietyPool.com, LLC, No. 11-00-14735 MA) on behalf ofSocietyPool. On April 13, 2001, on Point West Capital's motion, the Court dismissed thebankruptcy petition on the ground that the Former Special Consultant and the Former CEOlacked the requisite authority to file for bankruptcy on SocietyPool's behalf. Point WestCapital's motion for attorneys' fees in the proceeding is still pending.

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       On April 3, 2001, the FormerSpecial Consultant filed an action in the Second Judicial District Court, County of SanBernalillo, State of New Mexico, against Point West Capital and its executive officers fortortious interference with contract, defamation and civil conspiracy, seeking unspecifieddamages. In May 2001, defendants removed the action to the United States District Courtfor the District of New Mexico and thereafter moved to dismiss the case in its entirety.On August 6, 2001, the district court ruled that the Former Special Consultant’sactions were subject to arbitration and granted defendants' motion to dismiss the actionwith prejudice.

       On June 29, 2001, the licensorunder the Business License Agreement terminated the Business License Agreement on theground that SocietyPool had ceased operations in September 2000. On July 9, 2001, PointWest rescinded the SocietyPool operating agreement on the grounds that the Former SpecialConsultant and the Former CEO, through their illicit conduct, had repudiated theSocietyPool operating agreement and caused a failure of the consideration supporting theoperating agreement -- the Business License Agreement. In connection with the rescission,Point West Capital reclaimed what was left of the money that it had contributed toSocietyPool, which totaled approximately $2.1 million, and amended its arbitration claimsto seek a declaratory judgment that its rescission was proper and restitution from theFormer Special Consultant and the Former CEO.

       On July 9, 2001, the Former CEOfiled an action against Point West Capital in the Superior Court, County of San Francisco,State of California, alleging breach of SocietyPool's operating agreement as a consequenceof Point West Capital's rescission of the operating agreement. On the same day, the FormerCEO sought a temporary restraining order requiring Point West Capital to return the fundsit reclaimed pursuant to the rescission. On July 10, 2001, the Court denied the FormerCEO's request for a temporary restraining order. Thereafter, Point West Capital filed amotion for summary judgment, seeking dismissal of the Former CEO's entire complaint, whichis scheduled to be heard on September 13, 2001.

       On July 26, 2001, in thearbitration proceedings, the Former Special Consultant filed a motion for a preliminaryinjunction requiring Point West Capital to return the funds it had reclaimed pursuant toits rescission and freezing the funds pending resolution of the arbitration proceedings.On August 8, 2001, the arbitrator ordered Point West Capital to deposit the funds it hadreclaimed pursuant to the rescission in a separate account, which will remain frozen untilthe arbitration proceedings are resolved. On August 10, 2001, Point West Capital filed amotion for reconsideration of the order.

       The outcome of the arbitrationactions and the various state court proceedings cannot be determined at this time;however, the Company believes that neither the Former CEO nor the Former SpecialConsultant is entitled to any requested relief and that the claims of the Former CEO andFormer Special Consultant are without merit. Point West Capital’s future involvementwith SocietyPool will be dependent upon the outcome of the proceedings described above. 
**Point West Ventures**
       See the Form 10-K for informationregarding the demand for arbitration that Point West Ventures filed in December 2000against Universal Access, Inc., certain of its directors and other parties.

       In June 2001, Point West Venturesfiled an action for fraud against Home Director, Inc. and Spencer Trask Ventures, Inc.seeking rescission of an agreement pursuant to which Point West Ventures purchased$500,000 of stock in Home Director, Inc. through Spencer Trask Ventures, Inc. In July2001, the defendants filed a motion to dismiss the action.

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Item 3. Defaults Upon Senior Securities

       See "Management’sDiscussion and Analysis of Financial Condition and Results of Operations--- Liquidity and Capital Resources---Ventures."

Item 4. Submission of Matters to a Vote of Security Holders

       On April 26, 2001, Point WestCapital held an annual meeting of its stockholders. The election of one director and theproposal to amend Point West Capital’s Second Amended and Restated Certificate ofIncorporation as set forth in the proxy statement were presented. John Ward Rotter wasre-elected to the Board of Directors for a term expiring in 2004. The voting tallies were:

Director

Votes For
Votes Withheld
John Ward Rotter
3,045,513
67,904
       The other directors whose term ofoffice continued after the meeting are: Alan B. Perper (term expiring in 2003), Conrad W.Hewitt (term expiring in 2003), Bradley N. Rotter (term expiring in 2002) and Stephen T.Bow (term expiring in 2002). Effective April 27, 2001, Mr. Hewitt and Mr. Bow resignedfrom their positions as directors.

       The proposal to amend Point WestCapital’s Second Amended and Restated Certificate of Incorporation to effect areverse stock split whereby Point West Capital would (i) issue one new share of commonstock in exchange for not less than three nor more than four outstanding shares of commonstock and (ii) reduce the authorized common stock from 15 million shares to 3 millionshares as set forth in the proxy statement was also approved. The voting tallies were:

Votes For
Votes Against
Votes AbstainProposal to amend the Company’s Second      Amended and Restated Certificate of Incorporation
2,950,731
159,886
2,800
       The Board of Directors has not yetdecided whether to effect or abandon the approved amendment.

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Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits: NumberDescription
10.1
Second Amended      and Restated Amendment and Waiver Agreement dated July 16, 2001, among Allegiance Funding      I, LLC, Manufacturers and Traders Trust Company, Point West Capital Corporation and as      consented to by the Certificate Holders.(b)    Reports      on Form 8-K filed during the quarter ended June 30, 2001:
Date
Item Reported***********************************************