<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1996 or
---------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act For
the transition period from ____________________ to ___________________
Commission file number 0-26072
------------------------------------
Walnut Financial Services, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Utah 87-0415597
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
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(Address of Principal Executive Offices) (Zip Code)
(703) 448-3771
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No (The registrant has been subject to such
---- ---- filing requirements only since July 12,1995.)
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 8, 1996, the registrant had 14,619,173 shares of Common
Stock issued and outstanding.
<PAGE> 2
Walnut Financial Services, Inc. and Subsidiaries
Index To Form 10-Q
June 30, 1996
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Part I - Financial Information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the six months and three months
ended June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995 5
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the six months ended June 30, 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II - Other Information
Item 1 - Legal Proceedings 14
Item 6 - Exhibits Required by Item 601 and Reports on Form 8-K 14
Signatures 15
</TABLE>
Page 2 of 17
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------- -----------------------
<S> <C> <C>
ASSETS
Portfolio securities:
Marketable equity securities $ 28,490,338 $ 26,622,030
Non-marketable securities 4,576,388 4,486,237
Non-marketable debt securities 1,319,039 845,694
------------------- -----------------------
Total portfolio securities 34,385,765 31,954,961
Current assets:
Cash and cash equivalents 2,058,442 396,440
Accounts receivable (net of allowance) 667,188 630,092
Interest receivable (net of allowance) 26,325 27,549
Unbilled receivables 447,385 501,332
Other current assets 269,013 76,420
------------------- -----------------------
Total current assets 3,468,353 1,631,833
Fixed assets, net of accumulated depreciation 49,250 54,935
Long term assets 215,593 355,283
Intangible assets 2,036,294 2,066,492
------------------- -----------------------
TOTAL ASSETS $ 40,155,255 $ 36,063,504
=================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers $ 5,483,807 $ 5,131,783
Notes payable to banks 4,358,991 4,933,791
Notes payable to related parties 0 270,000
Accounts payable, accrued expenses and other current liabilities 1,178,956 1,003,088
Current portion of long term debt 49,162 47,953
------------------- -----------------------
Total current liabilities 11,070,916 11,386,615
Long-term debt, net of current portion 8,012,729 8,013,285
Non-current deferred tax liability 2,143,389 1,247,967
Deferred rent, net of amortization 23,335 16,311
Minority Interest 394,424 0
------------------- -----------------------
Total liabilities 21,644,793 20,664,178
------------------- -----------------------
Shareholders' equity:
Preferred stock, no stated value, 1,000,000 shares authorized, no shares
issued
Common stock, $.01 stated value, 50,000,000 shares authorized, 14,616,687
issued in 1996 and 13,800,713 issued in 1995 146,167 138,007
Additional paid in capital 14,909,089 13,085,428
Retained earnings 3,455,206 2,175,891
------------------- -----------------------
Total shareholders' equity 18,510,462 15,399,326
------------------- -----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 40,155,255 $ 36,063,504
=================== =======================
</TABLE>
Attention is directed to the accompanying notes to these financial statements
Page 3 of 17
<PAGE> 4
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
--------------------------------------------------------------------------
June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Recovery services $ 535,285 $ 195,573 $ 315,890 $ 94,731
Operational support 332,749 1,207,070 113,582 857,917
Investment and other income 31,882 73,061 26,244 45,062
------------------ ------------------ ------------------ -----------------
899,916 1,475,704 455,716 997,710
------------------ ------------------ ------------------ -----------------
Costs and Expenses:
Cost of services 858,960 925,466 464,433 663,410
General and administrative 853,174 934,520 440,386 591,457
------------------ ------------------ ------------------ -----------------
1,712,134 1,859,986 904,819 1,254,867
------------------ ------------------ ------------------ -----------------
Operating loss (812,218) (384,282) (449,103) (257,157)
Interest and other financial costs 921,169 870,723 439,231 543,879
------------------ ------------------ ------------------ -----------------
Loss before taxes and realized and (1,733,387) (1,255,005) (888,334) (801,036)
unrealized gain and loss
Income tax benefit 693,706 501,000 356,915 321,000
Realized gain/(loss) on sale of
securities, net of tax 788,375 636,673 345,443 390,675
------------------ ------------------ ------------------ -----------------
Gain/(loss) before unrealized loss (251,306) (117,332) (185,976) (89,361)
Unrealized gain on investments, net of tax 1,530,621 (2,483,536) (158,882) (1,517,808)
------------------ ------------------ ------------------ -----------------
Net Income/(Loss) $ 1,279,315 $ (2,600,868) $ (344,858) $ (1,607,169)
------------------ ------------------ ------------------ -----------------
Income/(Loss) per share $ 0.09 $ (0.22) $ (0.02) $ (0.12)
------------------ ------------------ ------------------ -----------------
Weighted average shares outstanding 14,298,173 11,753,409 13,930,554 13,162,029
------------------ ------------------ ------------------ -----------------
</TABLE>
Attention is directed to the accompanying notes to these financial statements
Page 4 of 17
<PAGE> 5
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
For the Six Months ended June 30,
-------------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
Operating activities:
Net increase/(decrease) in net assets resulting from operations $ 1,279,315 $ (2,600,868)
Adjustments to reconcile net income/(loss) to net cash provided by
(used in) operating activities:
Depreciation/amortization 73,438 42,973
Net unrealized appreciation/(depreciation) (2,551,036) 4,138,536
Realized gains (1,358,106) (1,061,122)
Other 0 (2,737)
Changes in operating assets and liabilities 1,003,651 (2,749,572)
-------------- ---------------
Net cash provided by/(used in) operating activities (1,552,740) (2,232,790)
-------------- ---------------
Investing activities:
Costs in connection with the acquisition of NFS 0 (222,650)
Additions to property and equipment (5,087) (3,671)
Purchases of investments (334,811) (2,486,294)
Proceeds from sale of investments 3,436,676 2,094,395
Cash acquired at Universal Partners 575,740 0
-------------- ---------------
Net cash provided by investing activities 3,672,518 (618,220)
-------------- ---------------
Financing activities:
Net proceeds from sale of common stock 35,000 1,962,490
Borrowings/(repayments) of short term debt (844,800) (300,030)
Increase/(decrease) in margin accounts (352,024) (3,554)
-------------- ---------------
Net cash provided/(used in) by financing activities (457,776) 1,658,906
-------------- ---------------
Net increase/(decrease) in cash and cash equivalents 1,662,002 (1,192,104)
Cash and cash equivalents, at the beginning of the year 396,440 546,535
-------------- ---------------
Cash and cash equivalents, at the end of the year 2,058,442 (645,569)
============== ===============
Supplemental Information:
Cash paid for interest $ 865,870 $ 713,848
============== ===============
Issuance of units for equity securities $ 0 $ 1,018,200
============== ===============
Issuance of common stock for acquisition of Universal Partners $ 1,796,821 $ 0
============== ===============
</TABLE>
Attention is directed to the accompanying notes to these financial statements
Page 5 of 17
<PAGE> 6
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
--------------------------
Additional
Par Value Paid In Retained
Shares at $0.01 Capital Earnings Total
----------- ------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 13,800,713 $ 138,007 $ 13,085,428 $ 2,175,891 $ 15,399,326
Net Income 1,279,315 1,279,315
Issuance of common stock for legal fees 14,000 140 34,860 35,000
Issuance of common stock for Universal Partners 801,974 8,020 1,788,801 1,796,821
acquisition
---------- ------------ ------------- ---------------- ---------------
Balance, June 30, 1996 14,616,687 $ 146,167 $ 14,909,089 $ 3,455,206 $ 18,510,462
========== ============ ============= ================ ===============
</TABLE>
Attention is directed to the accompanying notes to these financial statements
Page 6 of 17
<PAGE> 7
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION.
The accompanying consolidated financial statements as of June 30, 1996
and for the three-month and six-month periods ended June 30, 1996 are
unaudited; however, in the opinion of the management of Walnut Financial
Services, Inc., a Utah corporation (the "Company"), such statements include all
adjustments (consisting of normal recurring accruals) necessary to present a
fair statement of the information presented therein. The balance sheet at
December 31, 1995 was derived from the audited financial statements at such
date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for audited financial statements.
Accordingly, these statements should be read in conjunction with the Company's
most recent audited financial statements included in its Form 10-K for the
fiscal year ended December 31, 1995.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for fiscal years.
2. ORGANIZATION.
The Company currently has three primary business focuses: (i)
investing in start-up and early stage development companies, (ii) providing
diversified consulting and asset recovery services (recovery of financial
assets, e.g., cash and securities, which had not been accounted for by its
clients) to securities firms, banks and others, and (iii) an investment vehicle
that specializes in bridge financing and private placements for small to medium
sized companies. The Company engages in the investment business through its
wholly-owned subsidiary Walnut Capital Corp., a Delaware corporation
("Walnut"). Walnut was formed for the purpose of operating as a Small Business
Investment Company (a "SBIC") under the Small Business Investment Act of 1958
(as amended, the "Act"), and is subject to regulations promulgated by the Small
Business Administration (the "SBA") pursuant to the provisions of the Act. The
Company engages in the consulting and asset recovery business through its
wholly-owned subsidiary, NFS Services, Inc., a New York corporation ("NFS").
NFS conducts its operation both directly and through its subsidiaries: (i)
Asset Recovery Services, Inc., a New York corporation ("ARS"), and (ii) NFS
Collection Services, Inc., a New York corporation ("NFS Collection"). The
Company pursues its bridge financing and private placements through its
wholly-owned subsidiary, Universal Bridge Fund, Inc., a Delaware corporation
("Universal Bridge"). Universal Bridge owns 50% of the outstanding general
partnership interests and 83% of the limited partnership interests of Universal
Partners, L.P., an Illinois limited partnership ("UPLP").
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PRINCIPLES OF CONSOLIDATION. The financial statements of the Company
include the accounts of Walnut, NFS and NFS' wholly-owned subsidiaries, ARS and
NFS Collection, and Universal Bridge. Intercompany transactions and balances
have been eliminated in consolidation.
Page 7 of 17
<PAGE> 8
REVERSE STOCK SPLIT AND BUSINESS COMBINATION. In January 1994, the
Company effected a one-for-five reverse stock split. In February 1995, the
Company effected a one-for-two stock split. All references to the number of
common shares and per common share amounts have been restated to reflect the
reverse stock splits. The accompanying financial statements also reflect, as
outstanding for all periods presented, the common stock of Walnut as adjusted
for the exchange ratio (111.327 shares for each share of Walnut) applicable to
the business combination between Walnut and the Company (the "Business
Combination"), whereby the shareholders of Walnut exchanged their stock in
Walnut for shares of Common Stock of the Company and, as a result, Walnut
ultimately became a wholly-owned subsidiary of the Company.
On June 17, 1996, the Company issued 801,974 shares of Common Stock in
connection with Universal Bridge's purchase of approximately 83% of the limited
partnership interests and 50% of the general partnership interests of UPLP.
Had the acquisition of the UPLP partnership interests occurred as of January 1,
1996, the earnings for the Company for the six-month period ended June 30, 1996
would have been $1,311,127 or $0.09 per share. This has been accounted for as
a purchase according to APB16. The investment assets of UPLP at the time of
acquisition were $1,251,000, net debt securities were $423,000, total assets
were $2,266,000 and liabilities were $75,000.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed
based on the weighted average number of shares outstanding for each period.
Common stock equivalents have been considered only where they are dilutive.
4. SECURITIES.
Securities as of June 30, 1996 consisted of the following:
Page 8 of 17
<PAGE> 9
<TABLE>
<CAPTION>
Market/Fair Value Cost
----------------------- --------------------------
<S> <C> <C>
Equity:
Biotech $ 238,178 $ 183,747
Construction 58,122 2,148
Communications 1,951,136 4,135,637
Consumer products 1,644,759 1,656,228
Entertainment 116,357 111,992
Healthcare 27,193,997 8,020,316
High technology 1,033,876 1,065,626
Other 579,694 2,990,406
Recreation 0 0
Services 78,910 310
Gold 20,707 68,000
------------------------- --------------------------
Total equity $ 33,066,726 $ 18,410,097
========================= ==========================
Debt:
Communication 25,000 25,000
Construction 50,000 50,000
Consumer products 42,630 167,630
Entertainment 100,000 100,000
Environmental 24,875 322,000
Healthcare 50,000 55,460
Other 652,314 790,392
Recreation 40,000 75,000
Services 334,220 362,190
Total debt 1,319,039 1,947,672
------------------------- --------------------------
Total securities $ 34,385,765 $ 20,357,769
========================== ==========================
</TABLE>
Page 9 of 17
<PAGE> 10
5. RELATED PARTY TRANSACTION.
The Company and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $36,000 were paid to such firm by the
Company for reimbursement of expenses and legal services incurred during the
six months ended June 30, 1996. Such expenses and fees were incurred in
connection with normal business activities. In addition, the Company issued
14,000 shares of Common Stock in lieu of $35,000 of additional legal fees.
In November 1995, the Company received two unsecured loans from a
related party in an aggregate amount of $270,000. The loans bore interest at
8.75% and were repaid in April 1996.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL THREE AND SIX MONTHS ENDED JUNE
30, 1996 AND 1995
Since the Business Combination occurred on February 27, 1995, the
results of the six-month period ended June 30, 1995 are not necessarily
comparable to the results for the six-month period ended June 30, 1996. In
addition, the operations of UPLP, which was acquired in June 1996, were not
material to the Company's results of operations for the six-month period ended
June 30, 1996.
RESULTS OF WALNUT OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE
30, 1996 AND 1995. Walnut had realized gains of $656,000, net of tax, for the
six-month period ended June 30, 1996, compared to a gain of $1,061,000 for the
same period in 1995. The 1996 gains are primarily attributable to sales of
HealthCare COMPARE Corp. The 1995 gains were due primarily to sales of Orbital
Sciences Corp. Realized gains for the quarter ended June 30, 1996 were
$250,000, net of tax, compared to $391,000 for the same period last year. The
gains in 1996 are attributable to sales of HealthCare COMPARE Corp., while
those in 1995 are primarily attributable to sales of Orbital Sciences Corp.
Unrealized gains for the six-month period ended June 30, 1996 were
$1,330,000, net of tax. This compares with a loss of $2,907,000 for same
period in 1995. The gains in 1996 resulted primarily from an increase in
various healthcare portfolio stocks, most notably HealthCare COMPARE Corp. The
loss in 1995 was due to market fluctuations with respect to several large
holdings. For the quarter ended June 30, 1996, unrealized losses were $19,000,
net of tax, which reflected a stable market value over the quarter of Walnut's
largest portfolio holdings. This compares with a loss of $1,518,000 for the
same period in 1995 which represented negative market fluctuations on Walnut's
portfolio.
Interest expense increased for Walnut and the Company (excluding NFS)
to $829,000 for the six-month period ended June 30, 1996. This compares to
$822,000 for the same period in 1995. Interest expense consists of three major
components: (i) interest paid to the SBA with respect to $8 million of
debentures issued by Walnut to the SBA (the "Walnut Debentures"), (ii) interest
paid on margin accounts and bank lines, and (iii) interest payable on a
$270,000 note to a related party, which was repaid in April 1996. Interest
expense for the quarter ended June 30, 1996 for Walnut and the Company
(excluding NFS) was $394,000 compared to $504,000 for the same period in 1995.
The decrease was primarily due to a reduction in the principal owed on bank
loans, and also reflects the repayment of the $270,000 related party note in
April 1996.
Page 10 of 17
<PAGE> 11
General and administrative expenses for the six-month period ended
June 30, 1996 for Walnut decreased $50,000 to $336,000, and, for the quarter
ended June 30, 1996, decreased approximately $14,000 to $149,000. This
decrease was due in part to a transfer of certain of the general and
administrative expenses to the Company.
RESULTS OF NFS OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
1996 AND 1995. During the six months ended June 30, 1996, revenue for NFS was
$874,000. Revenue for such period was derived from operational support
($535,000), recovery services ($333,000) and other ($6,000). For the period
commencing February 27, 1995 (the date of the Business Combination) to June 30,
1995, revenue for NFS was $1,428,000. Revenue for such period was derived from
operational support ($1,207,000), recovery services ($196,000) and other
($25,000). During the three months ended June 30, 1996, revenue for NFS was
$433,000. Revenue for such period was derived from operational support
($316,000), recovery services ($114,000) and other ($3,000). During the three
months ended June 30, 1995, revenue for NFS was $966,000. Revenue for such
period was derived from operational support ($858,000), recovery services
($95,000) and other ($13,000).
For the six months ended June 30, 1996, 91% of the revenue from
operational support came from three clients: Citibank, N.A. ($188,000 or 35%),
Key Investments ($142,000 or 27%) and Chase Manhattan ($155,000 or 29%). For
the same six-month period, 40% of revenue from recovery services came from two
clients: DBL Liquidating Trust ($90,000 or 27%) and Merrill Lynch ($42,000 or
13%). For the three months ended June 30, 1996, cost of services was $464,000,
or 107% of revenues, and general and administrative expenses were $37,000, as
compared to $730,000 for cost of services and $243,000 for general and
administrative expenses reported for the same period in 1995.
Working capital was $208,000 at June 30, 1996 and $1,445,000 at June
30, 1995.
RESULTS OF COMPANY OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996.
The Company had general and administrative expenses of $389,000 for the six
months ended June 30, 1996, representing an increase of $254,000 from the same
period in 1995. Such increase reflects six months of consolidated operations,
as compared to four months of consolidated operations for the six-month period
ended June 30, 1995, as well as higher personnel costs. General and
administrative expenses for the Company for the three months ended June 30,
1996 were $251,000, representing an increase of $133,000 from the same period
in 1995. This increase reflects higher personnel costs at the Company.
Consolidated net income for the Company was $1,279,000 compared with a loss of
$2,585,000 for the same period in 1995. The Company had realized and
unrealized gains of $339,000, net of tax, in addition to those recorded at
Walnut. These were due to an increase in the value of HealthCare COMPARE Corp.
LIQUIDITY AND CAPITAL RESOURCES.
LIQUIDITY AND CAPITAL RESOURCES OF WALNUT. As part of the SBIC
program, Walnut has, from time to time, issued $12 million of debentures to the
SBA. On September 1, 1995, debentures in the principal amount of $4 million
had been repaid and the Walnut Debentures in the principal amount of $8 million
are currently outstanding. The amounts, maturities and interest rates of the
Walnut Debentures are set forth below:
Page 11 of 17
<PAGE> 12
<TABLE>
<CAPTION>
Principal Balance Date Issued Maturity Interest Rate
----------------- ----------- -------- -------------
<S> <C> <C> <C>
$4,000,000 04/29/87 04/01/97 8.95%
2,000,000 06/08/88 06/01/98 9.80%
2,000,000 09/27/89 09/01/99 8.80%
</TABLE>
Interest on the Walnut Debentures is paid semi-annually, and principal
is due at maturity. Walnut has been current in all of its interest payments to
SBA. The Walnut Debentures prohibit the distribution of earnings or other
assets of Walnut to the Company, except for distributions made out of
undistributed realized earnings computed in accordance with SBA regulations.
For so long as any indebtedness under the Walnut Debentures remains
outstanding, Walnut is prohibited from repurchasing or converting any of its
equity (but not debt) securities or paying dividends (including dividends to
the Company) without the consent of the SBA. In addition, Walnut is prohibited
from incurring any secured indebtedness, except for the $5,765,000 of secured
indebtedness that was outstanding at April 8, 1994. There are no limitations
on the amount of unsecured indebtedness Walnut can incur. The Walnut
Debentures cannot be prepaid without payment of a substantial prepayment
penalty related to the time of such prepayment.
During its normal examination process, the SBA has made a number of
findings regarding Walnut's compliance with certain regulations promulgated
under the Act. Walnut is in the process of resolving such findings with the
SBA. If it is ultimately determined that Walnut has violated the Act, the SBA
has the authority, upon written notice and expiration of applicable cure
periods, to declare the Walnut Debentures immediately due and payable. In the
case, Walnut would likely be forced to sell some of its portfolio securities to
repay the Walnut Debentures. In such an event, Walnut would realize gains and
reduce it liabilities in a corresponding amount. As a result, management
believes that the net worth of Walnut calculated in accordance with generally
accepted accounting principles would not significantly change. Walnut,
however, would lose the opportunity to obtain further gains, if any, on the
portfolio securities so sold.
One of the findings of the SBA relates to Walnut's capital impairment.
Section 107.203(d) of Part 13 of the Code of Federal Regulations defines
capital impairment as a realized earnings deficit in excess of 50% of private
capital. By letters dated November 9, 1995 and April 19, 1996, the SBA
determined that it would not take any action with regard to the capital
impairment issue under certain circumstances. Specifically, the SBA stated
that the SBA "would refrain from any action (against Walnut) if: (1) the market
value of WCC's [Walnut] holding of Healthcare COMPARE and GranCare in the
aggregate exceeds by $10 million the total of all secured and unsecured third
party debt, and (2) the balance in the Undistributed Net Realized Account does
not become negative in an amount greater than $9,000,000." As of the quarter
ended June 30, 1996, Walnut's holdings of HealthCare COMPARE Corp. and
GranCare, Inc. in the aggregate exceeded the total of all secured and unsecured
third party debt by more than $15 million, and the "Undistributed Net Realized
Earnings Account" equaled approximately negative $6 million. Accordingly,
management believes that, by terms of its own statements, the SBA will not take
any adverse actions against Walnut with respect to the capital impairment
issue. Management also believes that the SBA's new position with respect to
the capital impairment issue is a favorable resolution for the Company.
LIQUIDITY AND CAPITAL RESOURCES OF NFS. NFS derives its revenues from
consulting and financial asset recovery services. These services involve the
research and analysis of books, records and
Page 12 of 17
<PAGE> 13
transaction documents of financial institutions for the purpose of locating and
recovering uncollected or wrongfully delivered financial assets, many of which
have been improperly accounted for and written off. Historically, NFS has been
compensated for its consulting services and financial asset recovery services
by the reimbursement of the actual costs incurred plus a premium ("cost-plus"
method). Over the past three years, NFS has negotiated, where possible,
arrangements whereby NFS absorbs the costs of providing the financial asset
recovery services, and receives a percentage of any recoveries obtained through
its efforts ("percentage-of-recovery" method).
Under the percentage-of-recovery agreements, NFS receives from a
client a percentage of the amounts identified and/or recovered for the clients
depending on the size and nature of each item. This method of doing business
requires a significant initial investment in working capital. This working
capital is needed primarily to compensate, on a bi- weekly basis, NFS's
consultants who provide the services. The initial revenues generated by these
consultants are from a specific pool of assets and are typically generated more
than ninety days after commencing the project. As NFS expands its
percentage-of-recovery business, its working capital requirements will increase
commensurately. NFS has historically supported its working capital
requirements through debt financing and cash flows from operations. Working
capital of NFS was $208,000 at June 30, 1996.
As of June 30, 1996, NFS owed taxes, penalties and interest of
approximately $120,000 to the State of New York Department of Taxation and
Finance, approximately $3,700 to the State of New York Department of Labor, and
approximately $1,000 to the State of New Jersey, Unemployment Insurance. NFS
has entered into written payment plan agreements with the State of New York,
Withholding Tax, State of New York, Department of Labor, and State of New
Jersey, Unemployment Insurance, providing for aggregate monthly payments of
$8,851.58 (March 1996 to August 1997). NFS intends to pay the balances due to
the State of New York Department of Labor and the State of New Jersey,
Unemployment Insurance in the third quarter of 1996. Upon such termination,
all accrued taxes, penalties and interest currently owing by NFS will be paid
in full. NFS is current in it obligations under each of the tax payment plans.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY. Through June 1995,
the Company sold 1,015,625 shares of Common Stock in a private placement at an
offering price of $2.00 per share. The proceeds of such private placement were
used primarily to (i) repay indebtedness, (ii) pay accrued federal, state and
city taxes, interest and penalties, and (iii) increase working capital.
On August 31, 1995, the Company established a $4 million line of
credit with American National Bank and Trust Company of Chicago ("ANB"). The
line of credit requires interest only payments due monthly at the ANB's base
rate plus 2% (10.25% at June 30, 1996). The Company is obligated to make
quarterly principal payments of $575,000, with all remaining principal due June
30, 1997. The quarterly payment which was due December 31, 1995 was extended
in part until March 31, 1996 and in part until May 31, 1996. This payment was
made as well as the normal quarterly payment of $575,000 due June 30, 1996.
The outstanding principal of such line of credit as of June 30, 1996 was
$3,425,000 and, as of August 9, 1996 was $2,850,000.
Page 13 of 17
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, to which the
Company or any of the subsidiaries is a party or of which any of their property
is subject.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 11 - Statement re: Computation of Per Share Earnings
(b) Exhibit 27 - Financial Data Schedule
(c) No reports on Form 8-K have been filed during the quarter for
which the report is filed.
Page 14 of 17
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
<TABLE>
<S> <C>
WALNUT FINANCIAL SERVICES, INC.
(Registrant)
Date: August 13, 1996 /s/Joel S. Kanter
------------------------------------------------------------------------------
Joel S. Kanter
President (Chief Executive Officer)
Date: August 13, 1996 /s/Robert F. Mauer
------------------------------------------------------------------------------
Robert F. Mauer
Treasurer (Chief Accounting Officer)
</TABLE>
Page 15 of 17
<PAGE> 1
EXHIBIT 11
Statement re: Calculation of Per Share Earnings
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
1995 1996 1995 1996
----------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (2,584,770) $ 1,279,315 $ (1,607,169) $ (344,858)
Shares:
Weighted average number of common shares
outstanding 11,753,409 13,871,385 13,162,029 13,930,554
Shares issuable upon exercise of dilutive
options and warrants 0 426,788 0 410,848
------------------ ----------------- ------------------- ----------------
Total 11,753,409 14,298,173 13,162,029 14,341,402 (1)
================== ================= =================== ================
Income (loss) per common share $ (0.22) $ 0.09 $ (0.12) $ (0.02)
================== ================= =================== ================
</TABLE>
(1) The results of this calculation for the three-month period
ending June 30, 1996 are antidilutive and, as such, are not
presented on the Condensed Consolidated Statements of
Operations. The weighted average number of common shares
outstanding used in the calculation for per share earnings for
the three months ended June 30, 1996 are 13,930,554.
Page 16 of 17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,058,442
<SECURITIES> 0
<RECEIVABLES> 972,462
<ALLOWANCES> 305,274
<INVENTORY> 0
<CURRENT-ASSETS> 3,468,353
<PP&E> 188,151
<DEPRECIATION> 138,901
<TOTAL-ASSETS> 40,155,255
<CURRENT-LIABILITIES> 11,070,916
<BONDS> 8,012,729
<COMMON> 146,167
0
0
<OTHER-SE> 18,364,295
<TOTAL-LIABILITY-AND-EQUITY> 40,155,255
<SALES> 858,034
<TOTAL-REVENUES> 899,916
<CGS> 858,960
<TOTAL-COSTS> 986,944
<OTHER-EXPENSES> 787,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 858,503
<INCOME-PRETAX> 2,131,633
<INCOME-TAX> 852,318
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,279,315
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
