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 September 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 October 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      September 30, 2001 
1
Consolidated Statements of    Operations for the       Three and Nine Months Ended September 30, 2001 and 2000
2
Consolidated Statements of    Cash Flows for the        Nine Months Ended September 30, 2001 and 2000
3
Condensed Notes to    Consolidated Financial Statements
4-12
Item 2.
Management’s    Discussion and Analysis of Financial       Condition and Results of Operations
13-23
 

Part II
 

Other Information
Item 1.
Legal Proceedings
23
Item 3.
Defaults Upon Senior    Securities 
25
Item 6.
Exhibits and Reports on    Form 8-K
25
Signatures
26
(i)
 

POINT WEST    CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED    BALANCE  SHEET
September  30,
ASSETS
2001
(unaudited)Cash and cash equivalents$1,041,815Restricted cash2,631,246Investment securities:     Available- for- sale69,873Matured policies receivable13,045Taxes receivable196,094Loans receivable, net of unearned income of    $575,130        and an allowance for loan losses of $185,88436,415,434Purchased life insurance policies28,894,657Non-marketable securities3,336,113Deferred financing costs, net of accumulated     amortization of    $421,571500,655Furniture and equipment,  net of    accumulated     depreciation of    $53,14481,899Other assets1,035,517                                                Total assets$74,216,348
LIABILITIES AND STOCKHOLDERS'    EQUITYAccrued interst expense$181,459Accounts payable586,612Accrued compensation payable106,410Revolving certificates8,903,745Term certificates23,346,391Securitized notes payable33,653,767Debenture payable6,500,000                                              Total liabilities73,278,384Stockholders' 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(113,310)Accumulated deficit(26,210,294)Treasury stock, 1,038,500 shares(2,874,032)                                           Total stockholders' equity937,964                                           Total liabilities and stockholders' equity$74,216,348
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    EndedSeptember  30,September  30,2001200020012000
(unaudited)
(unaudited)Revenues:     Interest income$876,914$791,153$2,735,174$3,961,426     Net loss on securities(2,664,369)(2,692,496)(6,800,899)(5,525,865)     Other69,51060,064246,158175,499                                         Total revenues(1,717,945)(1,841,279)(3,819,567)(1,388,940)Expenses:     Interest expense803,012741,7742,443,2402,685,625     Compensation and    benefits291,490651,794958,8471,942,761     Other general and    administrative expenses411,6541,449,8821,359,3483,850,197     Amortization9,77533,608219,408140,379     Depreciation8,6285,80820,67613,508                                Total expenses1,524,5592,882,8665,001,5198,632,470                     Loss before income taxes                        and extraordinary gain  (3,242,504)(4,724,145)(8,821,086)(10,021,410)Income tax  (expense) benefit(23,870)--(7,925)1,870,550                     Loss before extraordinary gain(3,266,374)(4,724,145)(8,829,011)(8,150,860)Extraordinary gain, net of income taxes of    $822,154------1,242,003                     Net loss$(3,266,374)$(4,724,145)$(8,829,011)$(6,908,857)Earnings per share - Basic:     Loss before    extraordinary gain$(0.97)$(1.41)$(2.63)$(2.43)     Extraordinary gain------0.37     Net loss$(0.97)$(1.41)$(2.63)$(2.06)Earnings per share-Diluted:     Loss before    extraordinary gain$(0.97)$(1.41)$(2.63)$(2.43)     Extraordinary gain------0.37     Net loss$(0.97)$(1.41)$(2.63)$(2.06)Weighted-average    number of shares of common stock     outstanding3,352,6243,352,6243,352,6243,352,504Weighted-average number of shares of common    stock     and common stock    equivalents outstanding3,352,6243,352,6243,352,6243,352,504
See accompanying    condensed notes to consolidated financial statements.
2
 

POINT WEST CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine    Months Ended September  30,
2001
2000
(unaudited)Cash    flows from operating activities:        Net loss$(8,829,011)$(6,908,857)        Adjustments to reconcile net loss to net cash             used in operating activities:                  Depreciation and amortization240,084153,887
  Loss on loan receivable
--1,204,964                  (Decrease) increase in provision for loan losses(4,116)20,000                  Net loss on securities6,800,8995,525,865                  Interest income received as warrants--(1,101,532)                  Decrease (increase) in deferred tax benefit2,840(2,109,408)                  Extraordinary gain--(1,242,003)                  Changes in operating assets and liabilities:                        Collections on matured life insurance policies1,741,017830,831                        Other assets88,77492,546                        Taxes receivable --(336,194)                        Unearned income(138,390)--                        Accrued interest expense(82,078)(224,935)                        Accounts payable211,497196,267                        Accrued compensation payable(310,481)(172,986)                                                                     Net cash used in operating activities(278,965)(4,071,555)Cash    flows from investing activities:        Purchase of furniture and equipment(31,794)(53,012)        (Increase) decrease in restricted cash(188,931)2,501,722        Proceeds from maturity of held-to-maturity securities--2,504,610        Purchase of investment and non-marketable securities--(12,982,428)        Proceeds from sale of investment and non-marketable securities340,0002,667,208        Additions to loans receivable--(2,733,267)        Principal payments on loans receivable616,8173,261,476                                                                                        Net cash provided by (used in) investing activities736,092(4,833,691)Cash    flows from financing activities:        Principal payments on securitized notes payable(1,622,602)(715,555)        Proceeds from SBA debenture--3,500,000        Proceeds from revolving certificates--820,000        Principal payments on revolving certificates(229,542)(119,393)        Principal payments on term certificates(550,854)(432,602)        Increase in deferred financing costs--(233,887)        Proceeds from options excercised--2,750                                Net cash (used in) provided by financing activities(2,402,998)2,821,313                                Net decrease in cash and cash equivalents(1,945,871)(6,083,933)                                     Cash    and cash equivalents, beginning of period2,987,68612,836,125Cash    and cash equivalents, end of period$1,041,815$6,752,192Supplemental    disclosures:Supplemental    disclosure of non-cash activities:        Unrealized loss on securities available for sale, net of tax$(3,788)$(2,276,457)        Receipt of warrants$--$1,101,532        Reduction in securitized notes payable in             connection with extraordinary gain$--$2,064,157        Accrued litigation settlement offset against other assets$--$2,205,000         Increase in other assets offset by reduction in loans receivable--850,000Supplemental    disclosure of cash flow information:        Taxes paid$26,040$605,619        Cash paid for interest$2,520,127$2,615,095
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 September 30, 2001 and for the three and nine month periodsended September 30, 2001 and 2000 have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financial information, inaccordance with Item 310(b) of Regulation S-B. Accordingly, such statements do not includeall of the information and notes thereto that are included in the annual consolidatedfinancial statements. In the opinion of management, all adjustments considered necessaryfor a fair presentation have been included. Operating results for the three and nine monthperiods ended September 30, 2001 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2001. These statements and notes thereto shouldbe read in conjunction with the audited consolidated financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the year endedDecember 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 substantially beginning in the latterhalf of 2000. See the Company’s Form 10-K and "Management’s Discussion andAnalysis of Financial Condition and Results of Operations--Recent Developments"herein for further information. Point West Ventures holds a license from the SmallBusiness Administration (the "SBA") to operate as a small business investmentcompany ("SBIC"). As described in Note 5, Point West Ventures and the SBA are indiscussions involving the appointment of the SBA as a permanent receiver of Point WestVentures as a result of Point West Ventures’ default under the debentures payable tothe SBA. See Note 5 for additional information. 

                   To date, the operations of PWS have not been material to the Company and are not expectedto be material. SocietyPool never commenced operations and, in July 2001, Point WestCapital rescinded the SocietyPool operating agreement. The rescission is being challenged.See Note 8. 
**2.                Restricted Cash**
                   Restricted cash as of September 30, 2001 included $2.1 million for SocietyPool. See Note8. The balance of restricted cash is comprised of funds held by Allegiance Trust I andDPFC. 

4

 
**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*. All of the Company’s marketable securities areheld by Point West Ventures. See Note 5. The cost and estimated fair value of investmentsecurities reflected in the consolidated balance sheet as of September 30, 2001 were$268,000 and $70,000, respectively. Cumulative net unrealized losses on available-for-salesecurities (representing differences between estimated fair value and cost) were($198,000) at September 30, 2001. These cumulative net unrealized losses, net ofapplicable tax benefits, are included in accumulated comprehensive loss, a separatebalance sheet component of stockholders’ equity. See Note 6.
**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 beginning on October 30, 2000. TheAllegiance Financing expired in December 2000. Allegiance has no source of fundingavailable to make additional loans. In addition, Allegiance was unable to convert to termcertificates or otherwise repay $9.1 million (currently $8.9 million) of revolvingcertificates issued under the Allegiance Financing. As a result, the interest payableunder the revolving loan certificates increased by 1% per annum, effective February 15,2001. The revolving certificates bear interest at fixed and variable rates based on theone-year U.S. Treasury yield and one-month LIBOR. At September 30, 2001, theweighted-average interest rate on the revolving certificates was 8.8%. 

                   In July 2001, Allegiance and a consortium of insurance companies holding certificatesissued under the Allegiance Financing (the "Investors") executed an amendmentand waiver agreement providing Allegiance until November 15, 2001 to resolve thenon-performing loans and retire the revolving debt. Allegiance will not be able to workout the non-performing loans and retire the revolving debt by November 15, 2001.Allegiance and the Investors are in discussions seeking waivers by the Investors, whichwould provide additional time beyond November 15, 2001 to resolve the non-performingloans, retire the revolving debt and resolve other defaults. There can be no assurancethat the Investors will waive any defaults beyond November 15, 2001. If the Investors donot waive the defaults, the Investors could declare an event of default under theAllegiance Financing at any time. If the Investors were to declare an event of default,Point West Capital and Allegiance Capital could be terminated as servicers and theInvestors could liquidate the collateral and apply the proceeds to retire amountsoutstanding under the Allegiance Financing. 

                   Repayment of the debt outstanding under the Allegiance Financing is an obligation solelyof Allegiance Trust I. Neither Point West Capital, Allegiance Capital, Allegiance Fundingnor Allegiance Management guaranteed repayment of the revolving or term certificates andnone is required to fund any principal or interest deficiencies which may arisethereunder.

                   Also as a result of the non-performing loans, monthly cash flow payments to Point WestCapital (for servicing fees) and to Allegiance (for servicing fees and interest owed ondebt certificates held by Allegiance) ceased in November 2000. Between January and October2000, such payments averaged $42,000 a month. As a result of, among other things, the July2001 amendment and waiver agreement, monthly cash flow payments to Point West Capital andAllegiance resumed in May 2001 and will 

5

 

continue until November 15, 2001. From May through October 2001, thesepayments, which are subordinate to other payments under the Allegiance Financing, averaged$11,000 per month. Assuming that the Investors waive all defaults and permit thesepayments to continue beyond November 15, 2001, payments in future months could increase,decrease or cease subject to the performance of the underlying loans and resulting cashflow from the loans and continued compliance with other provisions of the AllegianceFinancing. 
**5.                Debenture Payable**
                   Point West Ventures has issued two debentures payable to the SBA totaling $6.5 million inprincipal amount. Point West Ventures paid a fee of $227,500 (3.5% of the totalborrowings) to the SBA to borrow such money. The unamortized portion of this fee waswritten-off during the second quarter of 2001. Proceeds from the debentures were used tomake debt and equity investments in businesses. 

                   On June 14, 2001, the SBA notified Point West Ventures that it was in default under thedebentures as a result of its failure to comply with required capital ratios and providedPoint West Ventures until June 29, 2001 to remedy the default. Point West Ventures wasunable to remedy the default. 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. Point West Venturesdid not have sufficient cash to repay the SBA debentures on August 15, 2001. 

                   The SBA and Point West Ventures are in discussions involving the appointment of the SBA asa permanent receiver of Point West Ventures. If the SBA is appointed receiver of PointWest Ventures, the SBA will take possession and control of all of Point WestVentures’ assets for the purpose of liquidating Point West Ventures’ assets,satisfying claims of Point West Ventures’ creditors and pursuing causes of actionavailable to Point West Ventures. Upon conclusion of the receivership, Point WestVentures’ SBIC license will be terminated.

                   If the SBA is appointed receiver of Point West Ventures, the Company expects the SBA toliquidate in an orderly manner the assets of Point West Ventures. Therefore, if and whenthe SBA is appointed receiver, Point West Ventures’ assets will be valued based onthe best estimate of their orderly liquidation value. The Company cannot determine at thistime what that liquidation value would be. However, orderly liquidation value is likely tobe lower than the estimated fair value reflected on the Company’s consolidatedbalance sheet. The Company will record any subsequent decrease in liquidation value in theconsolidated balance sheet and statement of operations in the appropriate period. Futurerevenues and expenses associated with Point West Ventures (including gains and losses inrespect of liquidated assets, accrued interest and fees) will continue to be recognized inthe consolidated statement of operations until the receivership is terminated and PointWest Ventures is dissolved. 

                   The debentures will continue to be reflected in the Company’s consolidated balancesheet until Point West Ventures is legally released from its obligations under thedebentures. The Company cannot predict whether or at what time Point West Ventures will belegally released from its obligations under the debentures. Dispositions of Point WestVentures’ portfolio securities by a receiver may occur at times or on terms thatwould not maximize the value of those assets. It is virtually certain that proceeds of anyasset dispositions would be insufficient to repay all amounts owed to the SBA by PointWest Ventures under the debentures. If and when the debt is finally discharged, theCompany would then recognize a gain on debt forgiveness in an amount equal to any unpaiddebt that is discharged, net of any tax effect.

6
** 

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

Stockholders’ equity, beginning of    period .........
$ 9,770,763
Comprehensive loss:
   Net loss    ...............................................
(8,829,011)
   Other comprehensive loss:    .................
        Net    unrealized investment losses, net of tax               benefit of $2,840........
(3,788)
              Comprehensive loss .......................
(8,832,799)
Stockholders’ equity, end of period    ............
$ 937,964 
       Changes in stockholders’ equityduring the first nine months of 2000 reflected the following:

Stockholders’ equity, beginning of    period ...
$27,542,793Comprehensive income:
   Net loss    .......................................
(6,908,857)
   Other comprehensive loss:    ...................
      Net unrealized    investment losses, net of tax               benefit of $1.5 million........
(2,276,457)
             Comprehensive loss ...........................
(9,185,314)Common stock --  options exercised .........
10
Additional paid-in-capital -- options    exercised ..
2,740
Stockholders’ equity, end of period    ..............
$18,360,229 **7** 

7.                Earnings Per Share**
                   The weighted-average number of common stock shares and additional common stock equivalentshares used in computing loss per share for the three and nine months ended September 30,2001 and 2000 are set forth below. The following is a reconciliation of the numerator anddenominator of basic and diluted net loss per share:
**Three Months Ended**Nine Months Ended**September  30,**September 30,**2001**2000**2001**2000
Numerator:
Loss before extraordinary gain..
$    
(3,266,374) $
(4,724,145)$ 
(8,829,011)$
(8,150,860)
Extraordinary gain......

--------
1,242,003
Net loss......................
$
(3,266,374)$
(4,724,145)$
(8,829,011)$
(6,908,857)
Denominator:
Weighted-average shares ....

3,352,624
3,352,624
3,352,624
3,352,504
Loss per share:
Basic
Loss before extraordinary gain..
$
(0.97) $
(1.41) $(2.63)    $
(2.43)
Extraordinary gain.....

--
--
--
0.37 
Net loss...........
$
(0.97) $
(1.41) $
(2.63) $
(2.06) 
Diluted
Loss before extraordinary gain 
$
(0.97) $
(1.41) $
(2.63) $
(2.43) 
Extraordinary gain......

--
--
--
0.37 
Net loss.................
$
(0.97) $
(1.41) $
(2.63) $
(2.06) 
 

                   As a result of the net loss for all periods presented, outstanding options and warrantswere not included in the computation of diluted loss per share because their inclusionwould be anti-dilutive.
**8.                 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 in the aggregate, will have a material adverse effecton the Company’s financial position, liquidity or results of operations.
**SocietyPool**
                   In May 2000, Point West Capital and three individuals formed SocietyPool to develop andpursue a new financial product. During 2000, Point West Capital contributed $2.8 millionto fund SocietyPool’s research and start-up costs in exchange for a 51% Voting andEconomic Interest in SocietyPool. In addition, Point West Capital was the Manager ofSocietyPool. The other members of SocietyPool, the former special consultant ofSocietyPool (the "Former Special Consultant") and the former chief executiveofficer of SocietyPool (the "Former CEO"), contributed to SocietyPool all oftheir rights and interests under a product license agreement (the "Business LicenseAgreement").

8

 

                   Between May and July 2000, SocietyPool conducted limited market research but did notcommence any operations. In July 2000, the Former CEO resigned. In August 2000,SocietyPool terminated the Former Special Consultant for cause.

                   In July 2000, the Former Special Consultant filed a claim with the American ArbitrationAssociation seeking arbitration of a dispute with Point West Capital. The initial claimwas for a declaratory judgment on an issue relating to the control and management ofSocietyPool and its assets. The Former Special Consultant has since amended his complaintto assert additional claims against Point West Capital as well as a claim againstSocietyPool and requesting damages in an unspecified amount. In August 2000, the FormerCEO filed an action in arbitration against SocietyPool claiming he was constructivelyterminated under his Employment Agreement with SocietyPool and requesting damages in anunspecified amount. The Former CEO has since amended his complaint to assert claimsagainst Point West Capital as well. In response to these actions, Point West Capital andSocietyPool filed an answer, affirmative defenses, counterclaims and third party claimsagainst the Former Special Consultant and Former CEO, which Point West Capitalsubsequently amended. The arbitration proceedings were stayed during the pendency of thebankruptcy proceedings described below, which were dismissed in April 2001. 

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

                   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 Capitaland its executive officers for tortious interference with contract, defamation and civilconspiracy, seeking unspecified damages. In May 2001, defendants removed the action to theUnited States District Court for the District of New Mexico and thereafter moved todismiss the case in its entirety. On August 6, 2001, the district court ruled that theFormer Special Consultant’s claims were subject to arbitration and granteddefendants’ motion to dismiss the action with prejudice.

                   On June 29, 2001, the licensor under the Business License Agreement terminated theBusiness License Agreement on the ground that SocietyPool had ceased operations inSeptember 2000. On July 9, 2001, Point West Capital rescinded the SocietyPool operatingagreement on the grounds that the Former Special Consultant and the Former CEO, throughtheir illicit conduct, had repudiated the SocietyPool operating agreement and caused afailure of the consideration supporting the operating agreement -- the Business LicenseAgreement. In connection with the rescission, Point West Capital reclaimed what was leftof the money that it had contributed to SocietyPool, which totaled approximately $2.1million, and amended its arbitration claims to seek a declaratory judgment that itsrescission was proper and restitution from the Former Special Consultant and the FormerCEO.

                   On July 9, 2001, the Former CEO filed an action against Point West Capital in the SuperiorCourt, County of San Francisco, State of California, alleging breach of SocietyPool’soperating agreement as a consequence of Point West Capital’s rescission of theoperating agreement. On the same day, the Former CEO sought a temporary restraining orderrequiring Point West Capital to return the funds it reclaimed pursuant to the rescission.On July 10, 2001, the Court denied the Former CEO’s request for a temporaryrestraining order. Thereafter, Point West Capital filed a motion for summary judgment,seeking dismissal of the Former CEO’s entire complaint, but the former CEOvoluntarily dismissed the action before his response to that motion was due.

9

 

                   On July 26, 2001, in the arbitration proceedings commenced by the Former CEO, the FormerSpecial Consultant filed a motion for a preliminary injunction requiring Point WestCapital to return the funds it had reclaimed pursuant to its rescission and freezing thefunds pending resolution of Point West Capital’s entitlement to the funds. On August8, 2001, the arbitrator ordered Point West Capital to deposit the funds it had reclaimedpursuant to the rescission into a SocietyPool account, which is to remain frozen untilPoint West Capital’s entitlement to the funds is resolved. On August 10, 2001, PointWest Capital filed a motion for reconsideration of the order, which was denied on August23, 2001.

                   In September 2001, Point West Capital filed a petition in Nevada state court seeking tovacate the arbitrator’s August 23, 2001 order. The Former CEO and the Former SpecialConsultant removed the actions to the United States District Court for the District ofNevada and thereafter moved to dismiss the action in its entirety. The action is pending. 

                   On October 8, 2001, in the arbitration proceedings commenced by the Former SpecialConsultant, Point West Capital moved for summary judgment on the validity of itsrescission of the Operating Agreement and the Former Special Consultant’s claims oftortious interference and defamation. These motions are fully briefed and awaiting aruling by the arbitrator.

                   On November 2, 2001, in the arbitration proceedings commenced by the Former CEO, theparties filed various motions for the summary judgment on various claims pending in thatarbitration. Those motions are scheduled to be heard by the arbitrator on November 20,2001. A trial in the matter, if necessary, has been scheduled for the week of December 3,2001.

                   The outcome of the arbitration actions and the proceedings pending in Nevada cannot bedetermined at this time; however, the Company believes that its claims are meritorious,that neither the Former CEO nor the Former Special Consultant is entitled to any requestedrelief and that the claims of the Former CEO and Former Special Consultant are withoutmerit. Point West Capital’s future involvement with SocietyPool will be dependentupon the outcome of the proceedings described above. 
**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.

                   In June 2001, Point West Ventures filed an action for fraud against Home Director, Inc.and Spencer Trask Ventures, Inc. seeking rescission of an agreement pursuant to whichPoint West Ventures purchased $500,000 of stock in Home Director, Inc. through SpencerTrask Ventures, Inc. In July 2001, the defendants filed a motion to dismiss the action.
**9.                 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.

10

 

                   The Company’s reportable operating segments include Ventures, Allegiance and ViaticalSettlements. See Note 5. The Other segment includes Point West Capital, SocietyPool andPWS. In July 2001, Point West Capital rescinded the SocietyPool operating agreement. SeeNote 8. The accounting policies of the operating segments are the same as those describedin the summary of significant accounting policies in the Form 10-K. 

                   The following tables represent the Company’s results from segments for and financialpositions as of the three months ended September 30, 2001 and 2000.

 

Three Months Ended September 30, 2001
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest income.............$ 
2,458$
845,530$
--$
28,926$
876,914Net loss on             securities..............
(2,664,369)
--
--
--
(2,664,369)
Other income................
--
510
54,000
15,000
69,510
Total revenues.............
(2,661,911)
846,040
54,000
43,926
(1,717,945)
Interest expense ..........
127,040
675,972
--
--
803,012Depreciation    and           amortization .......
--
9,775
--
8,628
18,403Income tax    benefit         (expense)  (2) ......
--
514
--
(24,384)
(23,870)Contributed    net         (loss) income (2)......$ 
(2,811,390)$ 
41,282$    
54,000$ 
(550,266)$ 
(3,266,374)
Identifiable assets.........$ 
3,516,314$ 
38,375,399$    
29,090,135$ 
3,234,500$ 
74,216,348
Three Months Ended September  30, 2000
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest income.............$ 
48,360$
710,507$
--$
32,286$
791,153Net loss on             securities..............
(2,692,496)
--
--
--
(2,692,496)
Other income................
--
6,010
54,000
54
60,064
Total revenues.......
(2,644,136)
716,517
54,000
32,340
(1,841,279)
Interest expense ..........
127,525
614,199
--
--
741,774Depreciation    and           amortization .......
14,375
19,233
--
5,808
39,416Contributed    net         (loss) income (2)......$ 
(2,788,683)$ 
(867,713)$ 
54,000$ 
(1,121,749)$ 
(4,724,145)
Identifiable assets.........$ 
16,936,901$ 
35,029,759$ 
31,186,075$ 
7,350,071$ 
90,502,806
11

 

 

                   The following tables represent the Company’s results from segments for and financialpositions as of the nine months ended September 30, 2001 and 2000.

 

Nine Months    Ended September  30, 2001
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest    income...............$
24,463$
2,608,998$ 
--$
101,713$
2,735,174Net loss on          securities ...........
(5,861,869)
--
--
(939,030)
(6,800,899)
Other income    .........
(30,972)
97,047
165,083
15,000
246,158
Total revenues
(5,868,378)
2,706,045
165,083
(822,317)
(3,819,567)
Interest    expense ......
376,979
2,066,261
--
--
2,443,240Depreciation and          amortization .......
190,083
29,325
--
20,676
240,084Income tax          expense      (2)........
(800)
(2,686)
--
(4,439)
(7,925)Contributed net          (loss) income (2)....$
(6,520,429)$
213,080$
165,083$
(2,686,745)$
(8,829,011)
Identifiable assets ...$
3,516,314$
38,375,399$
29,090,135$
3,234,500$
74,216,348
Nine Months    Ended September 30, 2000
Ventures 
Allegiance
Viatical    Settlements (1)
Other
Total
Interest    income...............$
1,420,214$
2,388,887$ 
6,818$
145,507$
3,961,426Net loss on          securities ...........
(5,525,865)
--
--
--
(5,525,865)
Other income    .........
2,093
9,198
151,242
12,966
175,499
Total revenues.
(4,103,558)
2,398,085
158,060
158,473
(1,388,940)
Interest    expense ......
261,599
1,835,176
588,850
--
2,685,625Depreciation and          amortization .......
37,292
103,087
--
13,508
153,887Income tax          (expense) benefit          (2)........
(800)
(4,585)
--
1,875,935
1,870,550Extraordinary gain.....--1,242,003-1,242,003Contributed net          (loss) income (2)....$
(4,429,057)$
(1,896,265)$
677,774$
(1,261,309)$
(6,908,857)
Identifiable assets ...$
16,936,901$
35,029,759$
31,186,075$
7,350,071$
90,502,806
--
(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.** 

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 September 30, 2001, and results of operations for the Company for the three andnine months ended September 30, 2001 and 2000, and of certain factors that may affect theCompany’s prospective financial condition and results of operations. The followingshould be read in conjunction with the Form 10-K and the unaudited consolidated financialstatements and related notes appearing elsewhere herein.
**Overview**
                   Beginning in the latter half of 2000, the Company engaged in substantially lessrevenue-generating activity and began reducing costs significantly. See "--RecentDevelopments." The Company is focusing on servicing activities in connection withDPFC and Allegiance, the resolution of non-performing loans made by Allegiance, litigationand arbitration proceedings involving SocietyPool and, most recently, actions relating tothe liquidation of Point West Ventures as described under "--RecentDevelopments" below.

                   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 engaged in other specialty financial services businesses. Seethe 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 9 of the CondensedNotes to Consolidated Financial Statements.
**Recent Developments**
                   Beginning in the latter half of 2000, the Company engaged in substantially lessrevenue-generating business activity and began reducing costs significantly. Since 2000,Ventures reduced significantly its number of new investments as a result of volatility anduncertainty in the financial markets. Ventures has made no investments during 2001.Additionally, in August 2001, the SBA accelerated Point West Ventures’ indebtednessto the SBA, effectively terminating Point West Ventures’ ability to make furtherinvestments or Venture’s ability to engage in further business activities. The SBAand Point West Ventures are in discussions involving the appointment of the SBA as apermanent receiver of Point West Ventures. If the SBA is appointed receiver of Point WestVentures, the SBA will take possession and control of all of Point West Ventures’assets for the purpose of liquidating Point West Ventures’ assets, satisfying claimsof Point West Ventures’ creditors and pursuing causes of action available to PointWest Ventures. Upon conclusion of the receivership, Point West Ventures’ SBIC licensewill be terminated.

                   If the SBA is appointed receiver of Point West Ventures, the Company expects the SBA toliquidate in an orderly manner the assets of Point West Ventures. Therefore, if and whenthe SBA is appointed receiver, Point West Ventures’ assets will be valued based onthe best estimate of their orderly liquidation value. The Company cannot determine at thistime what that liquidation value would be. However, orderly liquidation value is likely tobe lower than the estimated fair value reflected on the Company’s consolidatedbalance sheet. The Company will record any subsequent decrease in liquidation value in theconsolidated balance sheet and statement of operations in the appropriate period. Future 

13

revenues and expenses associated with Point West Ventures (includinggains and losses in respect of liquidated assets, accrued interest and fees) will continueto be recognized in the consolidated statement of operations until the receivership isterminated and Point West Ventures is dissolved. 

                   The debentures will continue to be reflected in the Company’s consolidated balancesheet until Point West Ventures is legally released from its obligations under thedebentures. The Company cannot predict whether or at what time Point West Ventures will belegally released from its obligations under the debentures. Dispositions of Point WestVentures’ portfolio securities by a receiver may occur at times or on terms thatwould not maximize the value of those assets. It is virtually certain that proceeds of anyasset dispositions would be insufficient to repay all amounts owed to the SBA by PointWest Ventures under the debentures. If and when the debt is finally discharged, theCompany would then recognize a gain on debt forgiveness in an amount equal to any unpaiddebt that is discharged, net of any tax effect.

                   As a result of loans made by Allegiance which became non-performing, Allegiance was unableto access further debt under the Allegiance Financing beginning on 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 (currently $8.9 million) of revolvingcertificates issued under the Allegiance Financing. As a result, the interest payableunder the revolving loan certificates increased by 1% per annum, effective February 15,2001. See Note 4 of the Condensed Notes to Consolidated Financial Statements. 

                   In July 2001, Allegiance and the Investors executed an amendment and waiver agreementproviding Allegiance until November 15, 2001 to resolve the non-performing loans andretire the revolving debt. Allegiance has made progress toward resolving thenon-performing loans and retiring the revolving debt. However, Allegiance will not be ableto work out the non-performing loans and retire the revolving debt by November 15, 2001.Allegiance and the Investors are in discussions seeking waivers by the Investors, whichwould provide additional time beyond November 15, 2001 to resolve the non-performingloans, retire the revolving debt and resolve other defaults. There can be no assurancethat the Investors will waive any defaults beyond November15, 2001. If the Investors donot waive the defaults, the Investors could declare an event of default under theAllegiance Financing at any time. If the Investors were to declare an event of default,Point West Capital and Allegiance Capital could be terminated as servicers and theInvestors could liquidate the collateral and apply the proceeds to retire amountsoutstanding under the Allegiance Financing. 

                   Repayment of the debt outstanding under the Allegiance Financing is an obligation solelyof Allegiance Trust I. Neither Point West Capital, Allegiance Capital, Allegiance Fundingnor Allegiance Management guaranteed repayment of the revolving or term certificates andnone is required to fund any principal or interest deficiencies which may arisethereunder.

                   Also as a result of the non-performing loans, monthly cash flow payments to Point WestCapital (for servicing fees) and to Allegiance (for servicing fees and interest owed ondebt certificates held by Allegiance) ceased in November 2000. Between January and October2000, such payments averaged $42,000 a month. As a result of, among other things, the July2001 amendment and waiver agreement, monthly cash flow payments to Point West Capital andAllegiance resumed in May 2001 and will continue until November 15, 2001. From May throughOctober 2001, these payments, which are subordinate to other payments under the AllegianceFinancing, averaged $11,000 per month. Assuming that the Investors waive all defaults andpermit these payments to continue beyond November 15, 2001, payments in future monthscould increase, decrease or cease subject to the performance of the underlying loans andresulting cash flow from the loans and continued compliance with other provisions of theAllegiance Financing. 

14

                   In July 2001, Point West Capital rescinded the SocietyPool operating agreement. Point WestCapital continues to be involved in litigation involving SocietyPool, including challengesto the rescission. Point West Capital’s future involvement with SocietyPool will bedependent upon the outcome of the proceedings described in "Other Information--LegalProceedings--SocietyPool."

                   To date, the operations of PWS have not been material to the Company and the Company doesnot believe that PWS’ operations will become material in the future.
**Results of Operations for the Company***                   Total Revenues.    Total revenues were negative $1.7 million during thethree months ended September 30, 2001 compared to negative total revenues of $1.8 millionduring the same period in 2000. The Company reported a $2.7 million loss on securities foreach of the three month periods ended September 30, 2001 and 2000. See "Results ofOperations by Segment--Ventures--Three and Nine Months Ended September 30, 2001 Comparedto the Three and Nine Months Ended September 30, 2000--Net Loss on Securities." Totalrevenues were negative $3.8 million during the nine months ended September 30, 2001compared to negative total revenues of $1.4 million during the same period in 2000. TheCompany reported a $6.8 million loss on securities for the nine months ended September 30,2001, compared to a $5.5 million loss on securities for the same period in 2000. Inaddition, the 2000 period included $1.1 million of interest income recognized from awarrant (valued using the Black-Scholes option-pricing model) received in connection withone of Ventures’ debt investments during the first quarter of 2000. No such incomewas recognized during 2001.
*                   Total Expenses.    Total expenses decreased to $1.5 million during thethree months ended September 30, 2001 from $2.9 million during the three months endedSeptember 30, 2000. This decrease was primarily due to a $700,000 loss on a delinquentloan recognized by Allegiance and $304,000 in organizational and research expenses forSocietyPool in 2000. There were no such expenses during the three months ended September30, 2001. In addition, a $360,000 reduction in compensation and benefits, resulting fromscaled back activities for Allegiance and Ventures, contributed to the decrease in totalexpenses. Total expenses decreased to $5.0 million during the nine months ended September30, 2001 from $8.6 million during the nine months ended September 30, 2000. This decreasewas primarily due to, (i) a $1.3 million loss on the delinquent loan described above, (ii)a $984,000 reduction in compensation and benefits as a result of scaled back activitiesfor Allegiance and Ventures, (iii) $783,000 in royalty fees and organizational andresearch expenses for SocietyPool in 2000 and (iv) a $722,000 decrease in expenses relatedto the viatical settlements business as a result of the DPFC Agreement (see "Resultsof Operations by Segment--Viatical Settlements--Certain Accounting Implications forDPFC"). In addition, the decrease in total expenses during both periods resulted froma reduction in other general and administrative expenses as a result of scaled-backactivities. 
*                   Income Tax (Expense) Benefit.    Income tax expense amounted to $24,000during the three months ended September 30, 2001. During the three months ended September30, 2000, the Company reported no income tax expense or benefit. Income tax expense was$8,000 during the nine months ended September 30, 2001 compared to a $1.9 million incometax benefit during the same period in 2000. This change resulted primarily from are-establishment of a valuation allowance during the fourth quarter of 2000, which reducedthe deferred tax asset to zero.
*                   Extraordinary Gain.    The Company recognized an extraordinary gain on atroubled debt restructuring in the amount of $1.2 million, net of income taxes of$822,000, in March 2000 in connection with the DPFC Agreement described in "Resultsof Operations by Segment--Viatical Settlements--Certain Accounting Implications forDPFC" below. As a result of the DPFC Agreement, 

15

the Company reduced the outstanding principal amount of the SecuritizedNotes in the consolidated balance sheet as of March 31, 2000 by $2.1 million to $36.4million (which equaled the face value of the life insurance policies and restricted cashheld by DPFC as of that date) and recognized income, net of income taxes, of $1.2 million.
**Results of Operations by Segment*****Ventures

                   As described above in "--Recent Developments," the SBA and Point West Venturesare in discussions involving the appointment of the SBA as a permanent receiver of PointWest Ventures. Point West Ventures will not be involved in any future business activityother than the liquidation of its assets, the repayment of its creditors and the pursuitof any causes of action available to it. If the SBA is appointed receiver, the SBA willtake over these business functions. However, the Company will continue to reflect anyincome and expenses associated with Point West Ventures (including gains and losses inrespect of liquidated assets, accrued interest and fees) in the consolidated statement ofoperations until the receivership is terminated and Point West Ventures is dissolved.
***Three and Nine Months Ended September 30, 2001 Compared to the    Three and Nine Months Ended September 30, 2000**                   Interest Income.    Interest income decreased to $2,000 during thethree months ended September 30, 2001 from $48,000 during the three months ended September30, 2000. Interest income for the three months ended September 30, 2001 reflected lowercash balances held by Ventures and lower yields. Interest income decreased to $24,000during the nine months ended September 30, 2001 from $1.4 million during the nine monthsended September 30, 2000. During 2000, the Company recognized $1.1 million of interestincome from a warrant (valued using the Black-Scholes option-pricing model) received inconnection with one of Ventures’ debt investments. No such income was recognizedduring 2001. Additionally, an overall decrease in cash balances and yields contributed tothe decrease in interest income.
*                   Net Loss on Securities.    Net loss on securities was $2.7 millionduring the three months ended September 30, 2001 and 2000. Net loss on securities was $5.9million during the nine months ended September 30, 2001 compared to a net loss onsecurities of $5.5 million during the nine months ended September 30, 2000. These netlosses were primarily the result of the write-down or write-off of impaired investments.The write-downs or write-offs were a result of continued deterioration of the financialcondition of some companies and the uncertainty that some companies will be able to raiseadditional capital and continue in business in light of the market downturn related toInternet and other technology stocks. Offsetting these write-downs and write-offs duringthe 2000 periods was $1.8 million in gain on securities sold during the first half of2000. The Company does not write-down or write-off, through the consolidated statement ofoperations, any investments it considers to be temporarily impaired. The Company mayrecognize losses on securities in future periods if the SBA is appointed receiver of PointWest Ventures. See "--Recent Developments" above. 
*                   Interest Expense.    Interest expense did not change significantlyduring the three months ended September 30, 2001 from the three months ended September 30,2000. Interest expense increased to $377,000 during the nine months ended September 30,2001 from $262,000 during the nine months ended September 30, 2000 due to an increase infunds borrowed from the SBA in May 2000. During the three and nine months ended September30, 2001, the weighted-average interest rate on the funds borrowed from the SBA was 7.8%and the weighted-average borrowings were $6.5 million, compared to the weighted-averageinterest rate of 7.8% and 7.5% and weighted-average borrowings of $6.5 and $4.6 

16

 

million, respectively, during the three and nine months ended September30, 2000. All amounts outstanding under the debentures have been accelerated. Interestwill continue to accrue on these amounts until the debentures are finally discharged. See"--Recent Developments" above.
*                   Amortization.     As a result of Point West Ventures’ defaultunder the debentures issued to the SBA, the unamortized commitment and leverage fees paidto the SBA were written-off during the second quarter of 2001. Consequently, amortizationexpense increased to $190,000 for the nine months ended September 30, 2001 from $37,000for the nine months ended September 30, 2000. There was no amortization reported for thethree months ended September 30, 2001 and there will be no amortization expense forVentures in future periods. See "--Liquidity and Capital Resources." 
***Allegiance****Three and Nine Months Ended September 30, 2001 Compared to the Three    and Nine Months Ended September 30, 2000**                   Interest Income.    Interest income increased to $846,000 during thethree months ended September 30, 2001 from $711,000 during the three months endedSeptember 30, 2000 and increased to $2.6 million during the nine months ended September30, 2001 from $2.4 million during the nine months ended September 30, 2000. During thethree and nine months ended September 30, 2001, the weighted-average interest rate earnedon the loans was 8.9% and the weighted-average principal amounts outstanding were $37.3million and $37.5 million, respectively, compared to the weighted-average interest rate of8.1% and 8.6% and the weighted-average principal amounts outstanding of $36.0 million and$35.3 million, respectively, during the three and nine months ended September 30, 2000.The increase in weighted average principal amount outstanding in the 2001 periods comparedto the 2000 periods primarily reflects loans made by Allegiance from July through October2000. Offsetting this increase were two loans in the aggregate principal amount of $3.9million, which have been in default and on non-accrual status since the fourth quarter of2000. The weighted-average interest rate calculations for the three and six months endedSeptember 30, 2001 exclude those two loans. The weighted-average interest rate for thethree and nine months ended September 30, 2000 excludes one loan in the amount of $2.1million, which was delinquent and on non-accrual status. Allegiance cannot predict at thistime whether the loans on non-accrual status during the nine months ended September 30,2001 will remain on non-accrual status. To the extent that the loans remain on non-accrualstatus, Allegiance Capital does not anticipate receiving all interest and servicing incomeit would have received if the loans were performing. See "--Recent Developments"for more information regarding servicing income and the other consequences of thesedefaulted loans. Allegiance is attempting to work out these two loans. Based on appraisalsof the collateral securing these loans, management believes that Allegiance will not incurmaterial losses in connection with such loans. Allegiance is not currently originatingloans and principal payments are occurring on outstanding loans. Therefore, Allegianceexpects interest income to decrease in future periods.
*                   Interest Expense.    Interest expense increased to $676,000 during thethree months ended September 30, 2001 from $614,000 during the three months endedSeptember 30, 2000 and increased to $2.1 million during the nine months ended September30, 2001 from $1.8 million during the nine months ended September 30, 2000 as a result ofincreased borrowings under the Allegiance Financing. During the three and nine monthsended September 30, 2001, the weighted-average interest rate under the AllegianceFinancing was 8.4% compared to 8.5% during the three and nine months ended September 30,2000. During the three and nine months ended September 30, 2001, the weighted-averageborrowings were $32.4 million and $32.7 million, respectively, compared to theweighted-average borrowings of $29.1 million and $28.9 million, respectively, during thethree and nine months ended September 30, 2000. The Allegiance Financing terminated inDecember 2000. However, as discussed above in "--

17

Recent Developments," amounts borrowed under the AllegianceFinancing remain outstanding. Allegiance has been granted an extension only throughNovember 15, 2001 to resolve its non-performing loans and retire the revolving debt.Allegiance will need additional time to accomplish this. See "--RecentDevelopments" above. 
*                   Compensation and Benefits.    Compensation and benefits increased to$92,000 during the three months ended September 30, 2001 from $82,000 during the threemonths ended September 30, 2000. This increase was due to the timing of an accrual of anexpense to Point West Capital for services performed by Point West Capital’semployees on behalf of Allegiance Capital which was partially offset by a reduction incompensation and benefits due to layoffs and attrition resulting from a suspension ofAllegiance’s lending activities during the fourth quarter of 2000. Compensation andbenefits decreased to $205,000 during the nine months ended September 30, 2001 from$284,000 during the nine months ended September 30, 2000, due to the layoffs and attritiondescribed above. As a result, compensation and benefits for Allegiance for the 2001 fiscalyear is currently expected to be approximately $273,000.
*                   Other General and Administrative Expenses.    Other general andadministrative expenses decreased to $28,000 during the three months ended September 30,2001 from $869,000 during the three months ended September 30, 2000. This decrease was dueprimarily to a $700,000 loss on a delinquent loan recognized by Allegiance during thethree months ended September 30, 2000. Other general and administrative expenses decreasedto $190,000 during the nine months ended September 30, 2001 from $2.1 million during thenine months ended September 30, 2000. This decrease was due primarily to a $1.3 millionloss on the delinquent loan referred to above. No such loss was reported during 2001. Inaddition, other general and administrative expenses decreased due to a reduction in legalexpenses related to the delinquent loan discussed above, which was written-off in 2000,and due to a significant 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 other general and administrative expenses for theyear ended December 31, 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 for the period March 2000 through June2002. The DPFC Agreement also provides the Noteholders with an 

18

option to purchase from Point West Capital the DPFC outstanding stockfor a nominal amount on June 30, 2002. If the Noteholders do not exercise such option,Point West Capital may liquidate DPFC. See "--Results of Operations for theCompany--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 results attributable to Point West Capital, SocietyPool andPWS. Except for compensation and benefit expenses clearly attributable to Allegiance,corporate overhead is included in the "Other" segment and has not beenallocated. In July 2001, Point West Capital rescinded the SocietyPool operating agreement.The rescission is being challenged by the Former CEO and the Former Special Consultant.See "Other Information--Legal Proceedings--SocietyPool." Activities for PWS wereimmaterial during the nine months ended September 30, 2001 and 2000 and are not expectedto be material in the foreseeable future. 
*Three and Nine Months Ended September 30, 2001 Compared to the Three    and Nine Months Ended September 30, 2000

                   Interest Income.    Interest income decreased to $29,000 during thethree months ended September 30, 2001 from $32,000 during the three months ended September30, 2000, and decreased to $102,000 during the nine months ended September 30, 2001 from$146,000 for the nine months ended September 30, 2000, due to a decrease in cash balancesand yields.
*                   Loss on Securities.    In the first quarter of 2001, Point West Capitaldetermined that a $939,000 investment in one company was impaired and therefore wrote-offthe entire carrying value during that period. This write-off was a result of deteriorationof the financial condition and the uncertainty that it would be able to raise additionalcapital and continue in business in light of the market downturn related to Internet andother technology stocks. This investment was made by Point West Capital prior to theinception of Ventures, and was the only investment in Point West Capital’s portfolio.No such write-offs were made during 2000. 
*                   Compensation and Benefits.    Compensation and benefits decreased to$200,000 during the three months ended September 30, 2001 from $570,000 during the threemonths ended September 30, 2000 and 

19

to $754,000 during the nine months ended September 30, 2001 from $1.7million during the nine months ended September 30, 2000. This decrease was due to a 57%reduction in the salaries of the executive officers, a decrease in the level of accruedprofit sharing and bonuses for all employees during 2001 and employee layoffs andattrition, which began in late 2000. As a result, compensation and benefits for the Othersegment for the 2001 fiscal year are expected to be approximately $1 million less than the2000 amount.
*                   Other General and Administrative Expenses.    Other general andadministrative expenses decreased to $361,000 during the three months ended September 30,2001 from $578,000 during the three months ended September 30, 2000, and to $1.1 millionduring the nine months ended September 30, 2001 from $1.6 million during the nine monthsended September 30, 2000, primarily due to $783,000 in royalty fees and organizational andresearch expenses related to SocietyPool incurred during the first nine months of 2000.Offsetting this decrease was an increase in legal expenses relating to the SocietyPoollitigation. As a result of the various litigation and arbitration proceedings related toSocietyPool, including new lawsuits filed during 2001, it is likely that additional legalexpenses will be incurred. Point West Capital has filed a motion in bankruptcy court torecover legal fees from the parties who improperly filed the bankruptcy proceedings andintends to seek legal fees in connection with the other pending litigation. The Company,however, is currently unable to predict the overall level of other general andadministrative expenses for the remainder of 2001 relative to comparable periods in 2000.The Company established a cost-reduction program in the latter half of 2000; however, thebenefit of these cost reductions has been partially offset by an increase in legalexpenses related to the various litigation and arbitration proceedings related toSocietyPool. See "Other Information--Legal Proceedings--SocietyPool." 
**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 and PWS have no external funding source from which to fundtheir working capital and general corporate needs. During 2001, the Company supported theoperations of Point West Capital and PWS primarily from existing cash balances. AtSeptember 30, 2001, Point West Capital and PWS’ cash and cash equivalents were$742,000. The Company continues to analyze its current and future needs for financing. 

                   Point West Capital currently anticipates having sufficient liquidity to meet the workingcapital and operational needs of Point West Capital and PWS at least through December 31,2001 using current cash and cash equivalents and servicing and management fees related toDPFC. The Company hopes to generate cash proceeds from the anticipated disposition of afuneral home acquired by Allegiance in connection with a settlement in 2000 of a lawsuitwith an Allegiance borrower. The Company is currently unable to predict its liquiditybeyond December 31, 2001, which will be dependent on (i) the Company’s level ofoperations and its cash flows from servicing activities, (ii) the Investors’willingness to permit the continuation, beyond November 15, 2001, of monthly cash flowpayments to Point West Capital and Allegiance under the Allegiance Financing, (iii)Allegiance’s ability to resolve the non-performing loans, (iv) the amount, if any,realized upon the anticipated sale of the funeral home acquired by Allegiance and thetiming of any such sale and (v) the outcome, timing and cost of the pending arbitrationand litigation proceedings related to SocietyPool and of any additional proceedingsinstituted by or against the Company. Assuming Point West Capital determines additionalfunds are needed, there 

20

can be no assurance that it will be successful in obtaining externalfinancing on satisfactory terms or at all. 

                   Restricted cash as of June 30, 2001 includes $2.1 million for SocietyPool. 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 "OtherInformation--Legal Proceedings--SocietyPool." 
*Ventures*
                   Ventures’ expenses during 2001 were supported primarily through existing cashbalances and $340,000 of proceeds from the sale of one investment. As of September 30,2001, Ventures had identifiable assets of $3.5 million, including investment securitieswith an estimated fair value of $70,000, non-marketable securities with an estimated fairvalue of $3.3 million, $70,000 of accounts receivable and $36,000 of cash. 

                   In prior periods, Point West Ventures borrowed funds from the SBA through the issuance ofdebentures in an aggregate principal amount of $6.5 million. On June 14, 2001, the SBAnotified Point West Ventures that it was in default under the debentures as a result ofits failure to comply with required capital ratios and provided Point West Ventures untilJune 29, 2001 to remedy the default. Point West Ventures was unable to remedy the default.Therefore, on August 1, 2001, the SBA accelerated the indebtedness under the debenturesand demanded payment of $6.7 million (including outstanding principal, accrued interestand fees) by August 15, 2001. Point West Ventures did not have sufficient cash to repaythe SBA debentures on August 15, 2001. 

                   The SBA and Point West Ventures are in discussions involving the appointment of the SBA asa permanent receiver of Point West Ventures, and the Company expects that the SBA will beappointed as permanent receiver. If the SBA is appointed receiver of Point West Ventures,the SBA will take possession and control of all of Point West Ventures’ assets forthe purpose of liquidating Point West Ventures’ assets, satisfying claims of PointWest Ventures’ creditors and pursuing causes of action available to Point WestVentures. See "--Recent Developments" above for further information, including adiscussion of the accounting implications of such a receivership. 

                   Point West Ventures does not currently have sufficient cash to repay the SBA debentures.As of September 30, 2001, Point West Ventures’ identifiable assets were significantlyless than the amounts owed under the SBA debentures, and it is virtually certain thatproceeds from any asset disposition would be insufficient to repay all amounts owed to theSBA by Point West Ventures under the debentures. Any asset disposition proceeds will beused to satisfy amounts owed to the SBA under the debentures and to pay the costs of thereceivership. Upon conclusion of the receivership, Point West Ventures’ SBIC licensewill be terminated. 
*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. As of September 30, 2001, Allegiance had cash and cashequivalents of $649,000, of which $509,000 is restricted under the Allegiance Financing. 
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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 and, with respect to costs, amountsprovided by the Noteholders.
**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. Forfurther information regarding the 1940 Act and potential issues facing the Company, seethe Company’s Form 10-QSB for the quarter ended March 31, 2001.
**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--Legal Proceedings" relating to (1) the amount of any loss experienced inconnection with two loans made by Allegiance that are in default, (2) the continuation ofpayments to Point West Capital and Allegiance Capital for servicing activities provided toAllegiance and to Allegiance Capital under revolving and term certificates issued toAllegiance Capital under the Allegiance Financing, (3) Allegiance’s ability to sell,and the amount realized in connection with the sale of, the funeral home it acquired inconnection with a settlement in 2000 of a lawsuit with an Allegiance borrower, (4)sufficiency of the Company’s liquidity and capital resources (see "Liquidity andCapital Resources"), (5) management’s belief that neither the Former CEO nor theFormer Special Consultant is entitled to the relief requested in actions filed (see"Other Information--Legal Proceedings--SocietyPool"), (6) the amount of gain tobe recognized on the purchase of DPFC stock or its liquidation, (7) the consequences ofPoint West Ventures’ default under its SBA borrowings and its likely liquidation and(8) anticipated levels of income and expenses for 2001. Such statements are based onmanagement’s belief, judgment and analysis as well as assumptions made by andinformation available to management at the date hereof. In addition to any assumptions andcautionary factors referred to specifically in this report in connection with such forwardlooking statements, factors that could cause actual results to differ materially fromthose contemplated by the forward looking statements include (1) Allegiance’s abilityto foreclose 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) Allegiance’s ability to obtain additional time beyond November 15,2001 to resolve the non-

22

 

performing loans and retire the revolving debt, (5) actions taken bythe Investors with respect to the current or any future default under the AllegianceFinancing, (6) Allegiance’s ability to find a buyer for the funeral home it acquiredin connection with a settlement in 2000 of a lawsuit with an Allegiance borrower, (7)****theresults of the Company’s consideration of strategic options and any costs associatedwith a chosen option, (8) higher than anticipated costs related to pending arbitration andlitigation proceedings, or the commencement of any additional arbitration or litigationproceedings by or against the Company, (9) the outcome of the litigation relating toSocietyPool, (10) availability and cost of capital, (11) actions taken by the Noteholderswith respect to the purchase or liquidation of DPFC, (12) actions taken by the SBA withrespect to Point West Ventures, including any manner of liquidation, (13) prevailingmarket conditions affecting the fair market value and orderly liquidation value of PointWest Ventures’ assets and the ability to realize proceeds from any sale of suchassets, (14) litigation expenses arising from current and future legal proceedings relatedto the Company’s businesses, including non-performing loans or investments andSocietyPool and (15) higher than anticipated compensation and benefits expenses for PointWest Capital or Allegiance Capital. 
**PART II. OTHER INFORMATION**
Item 1. Legal Proceedings
**SocietyPool**
                   In May 2000, Point West Capital and three individuals formed SocietyPool to develop andpursue a new financial product. During 2000, Point West Capital contributed $2.8 millionto fund SocietyPool's research and start-up costs in exchange for a 51% Voting andEconomic Interest in SocietyPool. In addition, Point West Capital was the Manager ofSocietyPool. The other members of SocietyPool, the Former Special Consultant and theFormer CEO, contributed to SocietyPool all of their rights and interests under theBusiness License Agreement.

                   Between May 2000 and July 2000, SocietyPool conducted limited market research but did notcommence any operations. In July 2000, the Former CEO resigned. In August 2000,SocietyPool terminated the Former Special Consultant for cause.

                   In July 2000, the Former Special Consultant filed a claim with the American ArbitrationAssociation seeking arbitration of a dispute with Point West Capital. The initial claimwas for a declaratory judgment on an issue relating to the control and management ofSocietyPool and its assets. The Former Special Consultant has since amended his complaintto assert additional claims against Point West Capital as well as a claim againstSocietyPool and requesting damages in an unspecified amount. In August 2000, the FormerCEO filed an action in arbitration against SocietyPool claiming he was constructivelyterminated under his Employment Agreement with SocietyPool and requesting damages in anunspecified amount. The Former CEO has since amended his complaint to assert claimsagainst Point West Capital as well. In response to these actions, Point West Capital andSocietyPool filed an answer, affirmative defenses, counterclaims and third party claimsagainst the Former Special Consultant and Former CEO, which Point West Capitalsubsequently amended. The arbitration proceedings were stayed during the pendency of thebankruptcy proceedings described below, which were dismissed in April 2001.

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

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                   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 Capitaland its executive officers for tortious interference with contract, defamation and civilconspiracy, seeking unspecified damages. In May 2001, defendants removed the action to theUnited States District Court for the District of New Mexico and thereafter moved todismiss the case in its entirety. On August 6, 2001, the district court ruled that theFormer Special Consultant’s claims were subject to arbitration and granteddefendants’ motion to dismiss the action with prejudice.

                   On June 29, 2001, the licensor under the Business License Agreement terminated theBusiness License Agreement on the ground that SocietyPool had ceased operations inSeptember 2000. On July 9, 2001, Point West Capital rescinded the SocietyPool operatingagreement on the grounds that the Former Special Consultant and the Former CEO, throughtheir illicit conduct, had repudiated the SocietyPool operating agreement and caused afailure of the consideration supporting the operating agreement -- the Business LicenseAgreement. In connection with the rescission, Point West Capital reclaimed what was leftof the money that it had contributed to SocietyPool, which totaled approximately $2.1million, and amended its arbitration claims to seek a declaratory judgment that itsrescission was proper and restitution from the Former Special Consultant and the FormerCEO.

                   On July 9, 2001, the Former CEO filed an action against Point West Capital in the SuperiorCourt, County of San Francisco, State of California, alleging breach of SocietyPool’soperating agreement as a consequence of Point West Capital’s rescission of theoperating agreement. On the same day, the Former CEO sought a temporary restraining orderrequiring Point West Capital to return the funds it reclaimed pursuant to the rescission.On July 10, 2001, the Court denied the Former CEO’s request for a temporaryrestraining order. Thereafter, Point West Capital filed a motion for summary judgment,seeking dismissal of the Former CEO’s entire complaint, but the former CEOvoluntarily dismissed the action before his response to that motion was due.

                   On July 26, 2001, in the arbitration proceedings commenced by the Former CEO, the FormerSpecial Consultant filed a motion for a preliminary injunction requiring Point WestCapital to return the funds it had reclaimed pursuant to its rescission and freezing thefunds pending resolution of Point West Capital’s entitlement to the funds. On August8, 2001, the arbitrator ordered Point West Capital to deposit the funds it had reclaimedpursuant to the rescission into a SocietyPool account, which is to remain frozen untilPoint West Capital’s entitlement to the funds is resolved. On August 10, 2001, PointWest Capital filed a motion for reconsideration of the order, which was denied on August23, 2001.

                   In September 2001, Point West Capital filed a petition in Nevada state court seeking tovacate the arbitrator’s August 23, 2001 order. The Former CEO and the Former SpecialConsultant removed the actions to the United States District Court for the District ofNevada and thereafter moved to dismiss the action in its entirety. The action is pending. 

                   On October 8, 2001, in the arbitration proceedings commenced by the Former SpecialConsultant, Point West Capital moved for summary judgment on the validity of itsrescission of the Operating Agreement and the Former Special Consultant’s claims oftortious interference and defamation. These motions are fully briefed and awaiting aruling by the arbitrator.

                   On November 2, 2001, in the arbitration proceedings commenced by the Former CEO, theparties filed various motions for the summary judgment on various claims pending in thatarbitration. Those motions are scheduled to be heard by the arbitrator on November 20,2001. A trial in the matter, if necessary, has been scheduled for the week of December 3,2001.

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                   The outcome of the arbitration actions and the proceedings pending in Nevada cannot bedetermined at this time; however, the Company believes that its claims are meritorious,that neither the Former CEO nor the Former Special Consultant is entitled to any requestedrelief and that the claims of the Former CEO and Former Special Consultant are withoutmerit. Point West Capital’s future involvement with SocietyPool will be dependentupon the outcome of the proceedings described above. 
**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.

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

Item 3. Defaults Upon Senior Securities

                   See "Management’s Discussion and Analysis of Financial Condition and Results ofOperations--Liquidity and Capital Resources--Ventures."

Item 6. Exhibits and Reports on Form 8-K

                   (a)         Exhibits: None

                   (b)        Reports on Form 8-K filed during the quarterended September 30, 2001:

Date
Item          Reported
Matter          Reported
August 15,          2001
5
The Company          issued a press release regarding its second quarter results and financial condition.
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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:    November 14, 2001
/s/ John Ward RotterJohn Ward Rotter
Chief Executive Officer
(Authorized Officer)
Dated:     November 14, 2001
/s/ Joanna L. ZesigerJoanna L. ZesigerChief Financial Officer(Prinicpal Financial and Accounting Officer)
 

 

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