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 March 31, 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
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
(Address of Principal Executive Offices) (Zip Code)
(703) 448-3771
(Registrant's Telephone Number, Including Area Code)
N/A
(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 May 10, 1996 the registrant had 13,817,200 shares of Common Stock
issued and outstanding.
Walnut Financial Services, Inc. and Subsidiaries
Index To Form 10-Q
March 31, 1996
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Page
Number
Part I - Financial Information
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Item 1 - Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1996 and 1995 5
Condensed Consolidated Statement of Changes in Stockholders' Equity for
the three months ended March 31, 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 16
Item 6 - Exhibits Required by Item 601 and Reports on Form 8-K 16
Signatures 17
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PART 1 - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
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WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996 December 31, 1995
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ASSETS
Portfolio securities:
Marketable equity securities $28,839,770 $26,622,030
Non-marketable securities 4,317,652 4,486,237
Non-marketable debt securities 846,694 845,694
----------- -----------
Total portfolio securities 34,004,116 31,954,961
Current assets:
Cash and cash equivalents 752,095 396,440
Accounts receivable (net of allowance) 779,509 630,092
Interest receivable (net of allowance) 24,251 27,549
Unbilled receivables 440,590 501,332
Other current assets 65,605 76,420
----------- -----------
Total current assets 2,062,050 1,631,833
Fixed assets, net of accumulated depreciation 52,762 54,935
Long term assets 212,168 355,283
Intangible assets 2,035,125 2,066,492
----------- -----------
TOTAL ASSETS $38,366,221 $36,063,504
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers $ 4,930,150 5,131,783
Notes payable to banks 4,736,994 4,933,791
Notes payable to related parties 270,000 270,000
Accounts payable, accrued expenses
and other current liabilities 1,042,519 1,003,088
Current portion of long term debt 49,144 47,953
----------- -----------
Total current liabilities 11,028,807 11,386,615
Long-term debt, net of current portion 8,011,988 8,013,285
Non-current deferred tax liability 2,241,750 1,247,967
Deferred rent, net of amortization 25,177 16,311
----------- -----------
Total liabilities 21,307,722 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, 13,814,713 issued in 1996
and 13,800,713 issued in 1995 138,147 138,007
Additional paid in capital 13,120,288 13,085,428
Retained earnings 3,800,064 2,175,891
----------- -----------
Total shareholders' equity 17,058,499 15,399,326
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $38,366,221 $36,063,504
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Attention is directed to the accompanying notes to these financial statements
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WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
------------ ------------
March 31, 1996 March 31, 1995
------------ ------------
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Revenue:
Recovery services $ 219,395 $ 100,841
Operational support 219,167 349,154
Investment and other income 5,638 27,999
------------ ------------
444,200 477,994
------------ ------------
Costs and Expenses:
Cost of services 394,527 262,056
General and administrative 412,788 343,063
------------ ------------
807,315 605,119
------------ ------------
Operating loss (363,115) (127,125)
Interest and other financial costs 481,938 326,844
------------ ------------
Loss before taxes and realized and (845,053) (453,969)
unrealized gain and loss
Income tax benefit 336,791 180,000
Realized gain/(loss) on sale of
securities, net of tax 442,932 245,998
------------ ------------
(Loss)/Income before unrealized loss (65,330) (27,971)
Unrealized gain on investments, net of tax 1,689,503 (965,728)
------------ ------------
Net Income(Loss) $ 1,624,173 $ (993,699)
------------ ------------
Income(Loss) per share $ 0.11 $ (0.10)
------------ ------------
Weighted average shares outstanding 14,239,578 10,237,726
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Attention is directed to the accompanying notes to these financial statements
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WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three Months ended
March 31
----------------------------
1996 1995
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Operating activities:
Net increase/(decrease) in net assets
resulting from operations $ 1,624,173 $ (993,699)
Adjustments to reconcile net income(loss) to
net cash provided by (used in)
operating activities:
Depreciation/amortization 37,096 11,551
Net unrealized appreciation/(depreciation) (2,815,839) 1,575,728
Realized gains (738,220) 245,998
Other 0 2,190
Net cash provided by/(used in) operating activities (787,713) (683,734)
Investing activities:
Costs in connection with the acquisition of NFS 0 (212,737)
Additions to property and equipment 3,084 0
Purchases of investments (193,741) (772,627)
Proceeds from sale of investments 1,698,646 621,472
Net cash provided by investing activities 1,507,989 (363,892)
Financing activities:
Net proceeds from sale of common stock 35,000 1,736,890
Borrowings/(repayments) of short term debt (197,988) (230,635)
Increase/(decrease) in margin accounts (201,633) (13,446)
Net cash provided/(used in) by financing activities (364,621) 1,492,809
Net increase/(decrease) in cash and cash equivalents 355,655 445,183
Cash and cash equivalents, at the beginning of the year 396,440 546,535
Cash and cash equivalents at the end of the year 752,095 991,718
Supplemental Information:
Cash paid for interest $ 303,490 $ 309,485
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Attention is directed to the accompanying notes to these financial statements
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WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Stock
-----------------------
Shares Par Value Additional
at $0.01 Paid In Retained
Capital Earnings Total
---------- ------- ---------- --------- ----------
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Balance, December 31, 1995 13,800,713 138,007 13,085,428 2,175,891 15,399,326
Net Income 1,624,173 1,624,173
Issuance of common stock for legal fees 14,000 140 34,860 35,000
---------- ---------- ---------- ----------
Balance, March 31, 1996 13,814,713 138,147 13,120,228 3,800,064 17,058,499
========== ========== ========== ========== ==========
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Attention is directed to the accompanying notes to these financial statements
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION.
The accompanying consolidated financial statements as of March 31, 1996 and
three month period ended March 31, 1996 and 1995, 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.
Results of operations for interim periods are not necessarily indicative of
those to be achieved for fiscal years.
2. ORGANIZATION.
The Company currently has two primary business focuses: (i) investing in
start-up and early stage development companies, and (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. 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 subsidiaries: (i) Asset Recovery Services, Inc., a New York
corporation ("ARS"), and (ii) NFS Collection Services, Inc., a New York
corporation ("NFS Collection"). NFS conducts its operations both directly and
through its subsidiaries.
In 1995, the Company issued 8,826,009 shares of its common stock (including
333,981 shares issued in August 1995 in connection with the settlement of an
appraisal action brought by two dissenting shareholders) in exchange for all of
the issued and outstanding common stock of Walnut. Such transaction is referred
to herein as the "Business Combination." In connection with the Business
Combination, as of June 30, 1995, the Company sold 1,015,625 shares of common
stock for net proceeds of $1,962,490 in a private placement (the "Common Stock
Private Placement"). In addition, the Company issued 45,270 shares of Common
Stock in lieu of the payment of cash commissions in connection with the Common
Stock Private Placement.
For financial accounting purposes, in accordance with applicable accounting
standards, the Business Combination has been accounted for as a reverse
acquisition of the Company by the stockholders of Walnut. Immediately after the
consummation of the Business Combination and without taking into account any
sales in the Common Stock Private Placement, the stockholders of Walnut owned
approximately 73% of the Company. In connection with the Business Combination,
the Company recorded goodwill of approximately $2,200,000. As a result, on
February 27, 1995, Walnut was deemed to have acquired the Company in exchange
for approximately 3,200,000 shares of Common Stock and incurred acquisition
costs of approximately $700,000. The net assets of the Company were valued at
approximately $100,000. If the acquisition of NFS had taken place on January 1,
1995, pro forma revenue, net loss, and loss per share would have been $2,366,000
($514,572), and ($.04), respectively.
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. Intercompany transactions and balances have been eliminated in
consolidation.
REVERSE STOCK SPLIT AND BUSINESS COMBINATIONS. In January 1994, the Company
effected a one-forfive reverse stock split. In February 1995, the Company
effected a one-for-two reverse 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 1 share of Walnut) applicable to the
Business Combination.
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 March 31, 1996 consisted of the following:
Market/Fair Value Cost
---------------------- ----------------
Equity:
Health care $ 28,156,352 $ 8,920,866
Other 1,959,289 4,390,394
Communications 1,763,683 4,060,639
High technology 1,033,876 1,065,626
Biotechnology 204,377 150,000
Environmental 39,844 25,188
Gold 1 18,000
---------------------- ----------------
Total equity 33,157,422 18,630,713
---------------------- ----------------
Debt:
Health care -- 5,460
Other 552,314 690,392
Service 294,380 312,350
Environmental -- 222,500
---------------------- ----------------
Total debt 846,694 1,230,702
---------------------- ----------------
Total securities $ 34,004,116 $ 19,861,415
====================== ================
5. RELATED PARTY TRANSACTIONS.
The Company and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $54,800 were paid to the firm by the Company
to the firm for reimbursement of expenses and legal services incurred during the
three months ended March 31, 1996. Such expenses and fees were incurred during
the three months ended March 31, 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 legal fees.
In November 1995, the Company received two unsecured loans from a related
party for an aggregate amount of $270,000. The loans bear interest at 8.75% and
mature through April 1996. Outstanding principal and interest was $270,000 and
$8,029 respectively, as of March 31, 1996.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL QUARTERS ENDED MARCH 31, 1996
AND 1995.
Since the Business Combination occurred on February 27, 1995, the results of
the three month period ended March 31, 1995 are not necessarily comparable to
the results for the three month period ended March 31, 1996.
RESULTS OF WALNUT OPERATIONS FOR THE FISCAL QUARTER ENDED MARCH 31, 1996 AND
1995. Walnut had realized gains of $374,000, net of tax, for the quarter ended
March 31, 1996, compared to a gain of $246,000 for the same period in 1995. The
gain was due to sales of shares in two health care portfolio companies.
Unrealized gains for the quarter were $1,351,000, net of tax. This compares
with a loss of $966,000 for the first quarter of 1995. The gains in 1996
resulted primarily from an increase in various health care portfolio shares,
most notably HealthCare Compare. Last year's quarterly loss was primarily due to
approximately a 1 point decline in HealthCare Compare.
Interest expense increased at Walnut and the company to $421,000 for the
quarter. This is comparable to $326,000 for the same period last year. Interest
expense consists of three major components, (i) interest paid to the SBA with
respect to the Walnut Debentures, (ii) interest paid on margin accounts and
banks lines, and (iii) interest payable on a $270,000 note to a related party.
General and administrative expense at Walnut and the Company increased
$84,000 compared to Walnut operations compared to the same period a year ago.
Walnut operations alone had a decrease of $36,000, which was offset by the
inclusion of a full quarter of activity at the Company, compared to one month's
activity a year ago.
RESULTS OF NFS OPERATIONS FOR THE FISCAL QUARTER ENDED MARCH 31, 1996 AND
1995. During the fiscal quarter ended March 31, 1996, revenue for NFS was
$441,087. Revenue was derived from recovery services ($219,395), operational
support ($219,167) and other ($2,525).
For the quarter, revenue from recovery services from two clients, the DBL
liquidating trust, $90,081, or 41% and Nationsbank, $24,520 or 11%. Ninety-four
percent of operational support revenue was derived from two clients (Citibank,
N.A., $132,438, or 60% and Key Investments, $74,506 or 34%.
For the quarter, cost of services was $394,527, or 89% of revenue. General
and administrative expenses were $88,053 for this period.
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL QUARTER ENDED MARCH 31, 1996.
During the fiscal quarter ended March 31, 1996, the Company had general and
administrative expenses of $137,521. Consolidated net income for the Company was
$1.6 million for the three months ended March 31, 1996 compared to a loss of
$994,000 for the three months ended March 31, 1995. The Company had realized and
unrealized gains of $376,000, 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 debentures in the principal amount of $8 million are currently
outstanding. The amounts, maturities and interest rates of such Walnut
Debentures are set forth below:
Principal Balance Date Issued Maturity Interest Rate
- - ----------------------- ---------------- ----------------- ---------------
$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%
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. Although Walnut has no future plans to issue additional debentures
to the SBA, Walnut is not currently eligible to borrow additional funds under
the SBIC program due to Walnut's capital impairment. Management believes that
even if Walnut were eligible for additional loans, the SBA may be unwilling or
unable to provide additional loans to Walnut due tot he SBA's budgetary
restraints.
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 that 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.
In September 1994, Walnut completed a private placement of 6,000 shares of
Walnut common stock at $125.00 per share and received gross proceeds of $750,000
in connection therewith. Such proceeds were used to partially satisfy Walnut's
capital contribution obligations pursuant to the SBA Agreement.
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 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-ofrecovery 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 was $248,330 at March 31, 1996.
On September 7, 1995, NFS repaid its $250,000 outstanding revolving line of
credit which matured on May 31, 1995. NFS replaced that credit facility with a
new $350,000 credit facility.
As of March 31, 1996, NFS owes taxes, penalties and interest of
approximately $143,000 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 $5,000 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 the State of New
Jersey, Unemployment Insurance, providing for monthly payments of $8,851.58
(March 1996 to August 1997), $2,000 (to April 1996), and$7,000 (to March 1996),
respectively. Upon such termination, all accrued taxes, penalties and interest
currently owing by NFS will be paid in full. NFS is current in its obligations
under each of the three tax payment plans.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY. Through June 1995, the
Company sold 1,015,625 shares of Common Stock in the Private Placement at an
offering price of $2.00 per share. The proceeds of the 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. The line of credit requires
interest only payments due monthly at the bank's base rate plus 2% (10.25 at
March 31, 1996). Quarterly principal payments of $575,000 are due beginning
December 31, 1995, with all remaining principal due June 30, 1996. The Company
used these funds to provide an unsecured loan to Walnut to allow Walnut to repay
the September debentures. The quarterly payment due December 31, 1995, was
extended in part until March 31, 1996 and in part until May 31, 1996.
All principal and interest payments due pursuant to the Walnut Debentures
and the September Debentures have been paid as required. Payment of the Walnut
Debentures is guaranteed by the SBA. Under the terms of the Walnut Debentures,
Walnut may not, without prior permission of the SBA, repurchase or retire any of
its common stock or make any distribution to the Company, except from
undistributed realized earnings computed in accordance with SBA regulations.
The SBA has communicated with Walnut regarding 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.
On July 29, 1994, Walnut entered into an agreement with the SBA (as amended,
the "SBA Agreement") whereby, subject to certain conditions,t he SBA would
refrain until June 30, 1995 from declaring an event of default under Section
107.203(d) of Part 13 of the Code of Federal Regulations with regard to Walnut's
capital impairment. Principal conditions of the agreement were: (a) Walnut would
limit annual management expenses to $609,295 per year, and (b) Walnut would
realize gains of, or would increase paid-in capital by contributions of cash or
marketable securities, in the aggregate of $4 million (in equal quarterly
amounts of $1 million for the quarters ended September 30, 1994, December 31,
1994, March 31, 1995 and June 30, 1995). Pursuant to an amendment dated
September 27, 1994, amounts in excess of $1 million each quarter could be
applied by Walnut to future quarterly requirements, and the annual management
expense limit was increased to $659,295.
Effective as of June 30, 1995, the Company entered into a transaction with
Windy City, Inc. ("WCI") pursuant to which WCI subscribed to purchase 452,533
units valued at $2.25 per unit, each unit consisting of one share of Common
Stock and one three-year common stock purchase warrant entitling the holder
thereof to purchase one share of Common Stock at $3.00 per share. WCI made
payment for said subscription by delivering tot he Company 45,000 shares of
Logic Devices Incorporated common stock (Nasdaq - LOGC) and 500,000 shares of
Consolidated Technology Group, Inc. common stock (Nasdaq - COTG). Immediately
thereafter, the Company contributed these securities to Walnut as additional
paid-in-capital in order to satisfy Walnut's June 30, 1995 obligation pursuant
to the SBA Agreement.
As of June 30, 1995, Walnut had realized gains and increased paid-in capital
by an amount in excess of $4,000,000 and had otherwise fully complied with the
terms of the SBA Agreement. The SBA Agreement expired, by its terms, on that
date.
The Office of Examination of the SBA reported its most recent findings
regarding Walnut to Walnut on July 24, 1994 for the examination period July 1,
1992 through December 31, 1993.
The Office of Examination of the SBA has issued its finding that Walnut has
violated Sections 107.903(b)(1), (4) and (5) of Part 13 of the Code of Federal
Regulations by indirectly purchasing a 50% interest in an investment from an
associate. Walnut believes that no such violation has occurred and is in the
process of resolving the issue with the SBA and, if necessary, intends to bring
the matter to litigation.
The Office of Examinations of the SBA has issued its finding that Walnut
has violated Sections 107.801(a) and (b)2 of Part 13 of the Code of Federal
Regulations by having presumed control over a small concern and that, in
connection with this concern, Walnut exceeds it financing limit as defined in
Section 107.303(a) of Part 13 of the Code of Federal Regulations. Walnut does
not believe that a violation of Section 107.303(a) occurred with respect to this
concern and believes that the concern's subsequent merger with another company
has reduced Walnut's percentage ownership below the regulatory threshold of
presumed control.
In addition, the Office of Examinations of the SBA has issued its finding
that Walnut has exceeded its financing limit with respect to another small
concern. Walnut believes this finding has been resolved.
To date, the SBA has not determined any such findings to be violations of
the Act or the regulations promulgated thereunder. If it is ultimately
determined that Walnut has violated any of the indicated Sections, the SBA has
the authority, upon written notice, to declare the Walnut Debentures immediately
due and payable. In that case, Walnut would likely be forced to sell
approximately $8,000,000 of its portfolio securities to repay the Walnut
Debentures.
Notes to Others
NFS has a note payable outstanding to an individual in the amount of
$43,625. This note is due in monthly installments of $2,000 with interest at
11%, and is personally guaranteed by certain officers of NFS. No payments have
been made pursuant to this note since August 1994.
NFS has payments due on capital leases in monthly installments through
September 2000. The leases bear interest at 12%. The balance outstanding at
March 31, 1996 was $15,046.
Amount
---------------
Debentures payable to the SBA $ 8,000,000
Installment note payable 46,086
Capital leases 15,046
---------------
TOTAL 8,061,132
Less: current portion 49,144
---------------
Long-term portion $ 8,011,988
Notes to Banks
On August 31, 1995, the Company established a $4 million line of credit with
American National Bank and Trust Company of Chicago. the line of credit bears
interest at the bank's base rate plus 2% (10.25% at March 31, 1996). Quarterly
principal payments of $575,000 plus accrued interest are due beginning December
31, 1995, with all remaining principal due June 30, 1996. The Company used the
proceeds of the line of credit to provide an unsecured loan to Walnut to allow
Walnut to repay the September Debentures. The quarterly payment due December 31,
1995 was extended until April 1, 1996.
As of March 31, 1996, the aggregate principal maturities of long-term debt
are as follows:
Amount
-----------------
1996 $ 47,847
1997 4,003,248
1998 2,003,660
1999 2,004,129
2000 2,248
-----------------
$ 8,061,132
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
In connection with the merger of Walnut and FAO Corp. immediately after the
Business Combination, two former shareholders of Walnut indicated their
intention to commence appraisal proceedings to determine the fair value of their
Walnut common stock pursuant to Section 262 of the Delaware General Corporation
Law. Civil Action No. 14391, entitled The Lee and Rose Warner Foundation and
Space Center, Inc. v. Walnut Capital Corporation was filed in the Court of
Chancery of the State of Delaware in and for New Castle County on June 30, 1995.
Walnut filed an answer to this action on July 26, 1995. The parties have reached
an agreement in principle to settle this matter which provides that the Company
will issue 333,981 shares of Common Stock in the aggregate to the plaintiffs.
There are no other 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 the 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.
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.
WALNUT FINANCIAL SERVICES, INC.
(Registrant)
Date: May 13, 1996 /s/ Joel S. Kanter
------------------
Joel S. Kanter
President (Chief Executive Officer)
Date: May 13, 1996 /s/ Robert E. Mauer
------------------
Robert E. Mauer
Treasurer (Chief Accounting Officer)
Exhibit 11
WALNUT FINANCIAL SERVICES, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three months ended March 31,
----------------------------
1995 1996
Net income (loss) $ (993,699) $ 1,624,173
Shares:
Weighted average number of
common shares outstanding 10,237,726 13,814,713
Shares issuable upon exercise
of dilutive options and
warrants 0 438,865
----------- -----------
Total 10,237,726 14,253,578
=========== ===========
Income (loss) per
common share (0.10) 0.11
=========== ===========
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 188,117
<SECURITIES> 563,978
<RECEIVABLES> 1,084,783
<ALLOWANCES> 305,274
<INVENTORY> 0
<CURRENT-ASSETS> 2,062,050
<PP&E> 181,402
<DEPRECIATION> 128,640
<TOTAL-ASSETS> 38,366,221
<CURRENT-LIABILITIES> 11,028,807
<BONDS> 8,011,988
0
0
<COMMON> 138,147
<OTHER-SE> 16,920,352
<TOTAL-LIABILITY-AND-EQUITY> 38,366,221
<SALES> 438,562
<TOTAL-REVENUES> 444,200
<CGS> 394,527
<TOTAL-COSTS> 482,580
<OTHER-EXPENSES> 361,831
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444,842
<INCOME-PRETAX> 2,709,005
<INCOME-TAX> 1,084,832
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,624,173
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
