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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Number)
8000 Towers Crescent Drive
Suite 1070, Vienna, Virginia 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 448-3771
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
---------------------- --------------------------
NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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As of March 17, 1997, the Registrant had issued and outstanding 14,619,172
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant as of March 17, 1997, was
$12,541,947.*
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Registrant's
definitive proxy statement to be filed with respect to the Annual Meeting of
Stockholders anticipated to be held on June 24, 1997.
* Based on the last reported price of an actual transaction in Registrant's
common stock on March 17, 1997 ($1 1/32), and reports of beneficial ownership
filed by directors and executive officers of Registrant and by beneficial
owners of more than 5% of the outstanding shares of Common Stock of Registrant;
however, such determination of shares owned by affiliates does not constitute
an admission of affiliate status or beneficial interest in shares of
Registrant's Common Stock.
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PART I
ITEM 1. BUSINESS
GENERAL. 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) operating an
investment vehicle that specializes in bridge financing to 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"),
and NFS' 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 has been in the consulting and asset
recovery business since 1992. NFS conducts its operations both directly and
through its subsidiaries. The Company is in the process of re-evaluating the
asset recovery business of NFS and its subsidiaries, and as a result thereof,
the Company has written down NFS' goodwill. The Company pursues its bridge
financings 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 approximately 83% of the limited
partnership interests of Universal Partners, L.P., an Illinois limited
partnership ("UPLP"). Certain financial information with respect to the
Company's industry segments for each of the Company's last three fiscal years
is contained in footnote 15 of the audited financial statements which are
contained in this Report on Form 10-K.
BACKGROUND PRIOR TO THE BUSINESS COMBINATION. The Company was organized
under the laws of the State of Utah on June 26, 1984 under the name DNE
Corporation. For the period 1984 through 1988, the Company engaged in
manufacturing operations. After December 1988, the Company ceased all
operations and converted its assets to cash and cash equivalents. During the
period December 1988 to March 1992, the Company did not engage in operations.
In March 1992, the Company acquired NFS through a merger of its
wholly-owned subsidiary created for such purpose with and into NFS. As a
result of such merger, NFS became a wholly-owned subsidiary of the Company. On
January 6, 1994, the stockholders of the Company approved the change of the
name of the Company from DNE Corporation to NFS Services, Inc. (Utah).
THE BUSINESS COMBINATION. The Company and Walnut entered into a business
combination (the "Business Combination") pursuant to a certain Agreement and
Plan of Reorganization dated November 8, 1994 (the "Reorganization Agreement").
Prior to such time, the Company had no ownership interest in Walnut. Pursuant
to the Reorganization Agreement, the holders of shares of Walnut $.10 par value
common stock ("Walnut Common Stock") exchanged each share of Walnut Common
Stock for 111.327 shares of the Company's Common Stock, on a post-reverse stock
split basis as discussed below. The Business Combination was consummated on
February 27, 1995. As a result of the Business Combination, the Company issued
8,826,009 shares of 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 outstanding Walnut Common
Stock.
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The following is a diagram depicting the corporate organizational
structure of the Company and its subsidiaries immediately after the Business
Combination.
WALNUT FINANCIAL SERVICES, INC.
(formerly known as NFS Services, Inc. (Utah), formerly known
as DNE Corporation)
----------------------------------------------------------------
100% | 100% |
| |
NFS SERVICES, INC. WALNUT CAPITAL CORP.
----------------------- --------------------
100% | 100% |
| |
ASSET RECOVERY NFS COLLECTION
SERVICES, INC. SERVICES, INC.
The Business Combination was intended to expand and diversify the
Company's business operations and improve its access to clients. In addition,
the Company gained access to the management expertise of the existing Walnut
management, board of directors and stockholders.
In order to complete the Business Combination, the Company obtained the
approval of the holders of at least 51% of the then outstanding Common Stock,
at a special stockholders meeting on December 7, 1994 (the "Stockholders
Meeting"), to take the following actions: (i) consummate the Business
Combination, and (ii) amend the Company's Articles to (a) increase the number
of its authorized shares of Common Stock from 10,000,000 to 50,000,000, (b)
change the Company's name from NFS Services, Inc. (Utah) to Walnut Financial
Services, Inc., (c) incorporate certain restrictions regarding the transfer of
the Company's securities in order to retain the use of Walnut's net operating
losses pursuant to Section 382 of the Internal Revenue Code of 1986, as amended
(the "Code"), (d) provide for indemnification of officers and directors of the
Company, and (e) effect a one-for-two reverse stock split (the "Reverse Stock
Split"). Unless otherwise indicated, all references herein to shares of Common
Stock reflect the effect of the Reverse Stock Split. Such amendment was filed
and became effective on February 27, 1995. Also at the Stockholders Meeting,
the Company obtained approval of the holders of at least 51% of the then
outstanding Common Stock present at the Stockholders Meeting and entitled to
vote, in person or by proxy, to take the following actions: (x) amend the NFS
Services, Inc. 1989 Incentive Stock Plan (the "1989 Plan"); (y) adopt the NFS
Services, Inc. (Utah) 1994 Incentive Stock Option Plan (the "1994 Plan") which
provides for the issuance of options and other derivative securities entitling
the holders thereof to acquire up to 500,000 shares of Common Stock; and (z)
assume the obligations of Walnut under the Walnut Capital Corporation 1987
Stock Option Plan (the "1987 Plan").
As a condition precedent to consummating the Business Combination, the
Company initiated a private placement of its Common Stock which was completed
in June 1995 (the "Common Stock Private Placement"). The Company sold
1,015,625 shares of Common Stock to investors in the Common Stock Private
Placement for gross proceeds of $2,031,250. In addition, the Company issued
125,000 shares of Common Stock as finders' fees in connection with the Business
Combination and 45,270 shares of Common Stock as sales commissions in
connection with the Common Stock Private Placement.
On June 17, 1996, the Company issued 801,974 shares of Common Stock,
together with five-year warrants to purchase an additional 697,391 shares of
Common Stock at an exercise price of $3.00, in
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connection with Universal Bridge's purchase of approximately 83% of the
limited partnership interests and 50% of the general partnership interests of
UPLP. The following is a diagram describing the relationship of the Company
and its subsidiaries after the Universal Acquisition.
WALNUT FINANCIAL SERVICES, INC.
(formerly known as NFS Services, Inc.(Utah), formerly known as DNE Corporation)
- -------------------------------------------------------------------------------
100% | 100% | 100% |
WALNUT UNIVERSAL
NFS SERVICES, INC. CAPITAL BRIDGE FUND,
CORP. INC.
------------------ -------------------------
100% | 100% | 83% | 50% |
| | limited | general |
| | partner | partner |
ASSET NFS | |
RECOVERY COLLECTION UNIVERSAL
SERVICES, INC. SERVICES, INC. PARTNERS, L.P.
WALNUT--GENERAL. Walnut was incorporated on September 18, 1980 and
maintains offices in Chicago, Illinois and Vienna, Virginia. Since 1984,
Walnut has invested in more than 100 start-up and early stage development
companies (collectively, the "portfolio companies", individually, a "portfolio
company"). Once an investment is made, Walnut's principal objective is to
assist the management of the portfolio company by utilizing the extensive
experience and breadth of professional contacts of Walnut's officers,
directors, consultants and stockholders. Walnut takes an active approach
toward assisting a portfolio company's management to meet and exceed business
objectives in order to enhance the potential return on Walnut's investment.
Walnut's officers, directors, consultants and stockholders maintain contacts
throughout the U.S. and international business and financial communities and
are dedicated to introducing the management of portfolio companies to
additional business contacts and sources of financing. Walnut's officers,
directors, consultants and stockholders provide extensive technical,
operational and managerial assistance in a wide variety of industries, and
maintain an array of sales and marketing contacts in the domestic and
international business communities.
Walnut does not maintain a specific investment policy to guide its
investment choices. Rather, each of Walnut's officers reviews investment
opportunities and, in collaborative fashion, seeks to identify and select the
best among them. In general, Walnut seeks to maintain a diversified portfolio
of companies from various industries and various geographic locations. Walnut
also seeks to invest in companies with original or exclusive technology or
expertise, and in companies that have the potential for revenue and earnings
growth sufficient to become a candidate for a public offering within five
years. Accordingly, Walnut's portfolio companies are located throughout the
United States and in numerous industries. Initial investment amounts range
from $50,000 to $500,000, and may take the form of debt, equity or some
combination thereof. The amount currently invested in each such company ranges
from $25,000 to approximately $2,000,000 and takes the form of debt, equity or
some combination thereof as indicated below. Walnut has the contractual right
to appoint a member of, or an observer to, the boards of directors of a number
of such companies. In addition, Walnut currently has a representative on the
board of directors of an additional number of such companies although Walnut
has no contractual
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right to continue such representation. Walnut's representative on the
board of directors of a portfolio company may receive options to purchase
securities of the portfolio company if such options are provided pursuant to a
plan covering all directors. There can be no assurance that Walnut's
representative to the board of directors of such companies can influence or
affect policy with respect to such companies or that said representative will
continue to be elected to the boards of directors of such companies. As of
December 31, 1996, Walnut had a fair market value of $24.8 million in equity
securities, with a cost basis of $15.4 million. As of December 31, 1996,
Walnut's debt securities were valued at $0.9 million, with a cost basis of $1.4
million. Below is a list of certain of Walnut's investments, divided into
business categories, which in the aggregate constitute the principal
investments of Walnut as of December 31, 1996:
I. BIO-TECHNOLOGY COMPANIES
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Cell Therapeutics, Inc.(3)
Titan Pharmaceuticals, Inc.(3)
II. COMPUTER AND HIGH-TECH COMPANIES
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Nhancement Technology Corp.(2)(5)
J.L. Wickham Co., Inc.(2)(3)
Logic Devices Incorporated (1)(2)(3)
Multimedia Games, Inc.(1)(3)
SoftKat, Inc. (2)(5)
III. HEALTH CARE COMPANIES
-------------------------------------
American HealthChoice, Inc.(3)
American Psych Systems, Inc.(3)
GranCare, Inc.(1)(2)(3)
HealthCare COMPARE Corp.(1)(2)(3)
Ivonyx Group Services, Inc.(3)
Mental Health Management, Inc.(1)(3)
IV. MEDICAL AND HEALTH PRODUCTS COMPANIES
-------------------------------------
I-Flow Corporation(1)(2)(3)
Med Images, Inc.(2)(3)
Optiva Corporation(3)
Osteoimplant Technology, Inc. (1)(2)(3)
V. SERVICE-RELATED AND LOW-TECH
COMPANIES AND OTHER INVESTMENTS
-------------------------------
Clean America Corporation(1)(5)
Consolidated Technology Group, Inc. (1)(3)
Concept Technologies Group, Inc.(1)(2)(3)
Foster & Gallagher, Inc.(5)(6)
Jenna Lane, Inc. (3)
Knox International(5)
TCOM Services, Inc.(5)
Vision III Imaging, Inc. (2)(3)
____________________
(1) Publicly traded.
(2) Walnut representative on the board of directors.
(3) Investment in the form of equity only.
(4) Investment in the form of debt only.
(5) Investment in the form of a combination of equity and debt.
(6) Held through an interest in Knox Liquidating Partnership, L.P.
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WALNUT--REGULATION BY THE SBA. Walnut is licensed to operate as a small
business investment company ("SBIC") under the Small Business Investment Act of
1958, as amended (the "SBA Act"), and is subject to regulation by the Small
Business Administration ("SBA"). A number of the regulations are discussed
below and reference is made to Part 13 of the Code of Federal Regulations
("CFR") for the full text of the regulations promulgated under the SBIA. SBICs
are subject to periodic examination by the SBA staff for purposes of
determining compliance with the SBA regulations. As an SBIC, Walnut has
received financial assistance from the SBA through the SBA's purchase of
certain debentures from Walnut.
Under the SBIC program, Walnut generally is permitted to make loans only
to, or purchase securities only of, those small businesses which qualify as
"Small Concerns". A "Small Concern", as defined in the SBA Act and the SBA
regulations, is a business concern that is independently owned and operated and
which is not dominant in its field of operation. In addition, a small business
will qualify as a Small Concern only if, at the time of Walnut's investment,
either (1) it has a net worth, together with any affiliates, of $18 million or
less and an average net income after Federal income taxes for the preceding two
years of $6 million or less (average net income to be computed without benefit
of any carryover loss), or (ii) it satisfies alternative criteria under the SBA
regulations that focus on the industry in which the business is engaged and the
number of persons employed by the business or its gross revenue. The SBA
regulations prohibit an SBIC from providing funds to a Small Concern for
certain purposes, such as for certain purchases of securities and real estate.
Under the SBA regulations, loans to Small Concerns under the SBIC program
generally must have a minimum maturity of five years. Short-term financing is
permissible if the financing is (a) in contemplation of long-term financing of
the Small Concern by Walnut or a group including Walnut equal to at least the
amount of the short-term financing and the term for such short-term financing
is no more than one year, (b) to protect prior investments by Walnut, or (c) to
finance certain ownership changes.
The aggregate annual interest rate and other financing costs Walnut may
charge Small Concerns under the SBIC program is limited by the SBA regulations.
Under these regulations, the maximum annual financing costs (including
interest and commissions, but not management services) of loans to Small
Concerns may not exceed the greater of 15% or seven percentage points above the
"Debenture Rate". As defined in the SBA regulations, the "Debenture Rate" is
the interest rate announced, from time to time, by the SBA for SBA debentures.
With respect to each loan, the maximum annual financing costs are determined by
reference to the Debenture Rate in effect at the time the loan is made. This
limitation is applicable to all loans made by Walnut, including loans which are
not funded through the issuance of SBA debentures. As of December 31, 1996,
the maximum rate relating to annual financing costs allowable under the SBA
regulations was 15% for straight loans and 14% for loans containing an equity
component. As an alternative interest rate ceiling, an SBIC is permitted to
apply a cap on the maximum interest rate which an SBIC can charge on its loans
to Small Concerns based upon the interest rate paid by the SBIC on its own
outstanding SBA debentures rather than the announced Debenture Rate.
In addition to providing funds to a Small Concern in the form of debt, an
SBIC can provide equity funding to a Small Concern. An SBIC can also acquire
options or warrants to purchase equity securities as long as such instruments
do not expire later than six years from the termination of the SBIC's financing
of the Small Concern by prepayment or maturity. Redemption of such equity
securities, options or warrants can be required only after the first five years
and only pursuant to a formula based on book value and/or earnings and not a
redemption price which is a fixed dollar amount. Any equity financing
redeemable in a manner
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other than as described in the foregoing sentence will be deemed to be a loan
rather than an equity investment and, therefore, will be subject to the
various limitations mentioned in the preceding paragraphs.
The SBA regulations restrict the amount of control an SBIC can exercise in
connection with a Small Concern. A presumption of control exists whenever an
SBIC and its associates (as defined in the SBA regulations), or two or more
SBICs, control, (i) in the case of a Small Concern with fewer than 50
shareholders, 50% or more of the outstanding voting securities and, (ii) in the
case of a Small Concern with 50 or more shareholders, more than 25% or a block
of 20% or more which is as large or larger than the largest other outstanding
block of voting securities. Temporary control is permitted whenever such
control is reasonably necessary for the protection of the SBIC's investment.
However, a plan to relinquish such control within a reasonable period (not to
exceed seven years) must be submitted to the SBA, and any extension of such
period must have prior SBA approval.
The SBA regulations limit the dollar amount of Walnut's investments in and
loans to any single Small Concern and the affiliates of the Small Concern to
20% of Walnut's common stock and additional paid-in capital ("Private
Capital").
The SBA regulations require that financing by certain entities deemed to
be affiliates of Walnut cannot be on terms more favorable than the terms on
which Walnut has participated in the financing of a Small Concern. The burden
is on Walnut to show that its terms are at least as favorable as those extended
to the affiliate, and the transactions which are subject to this burden of
proof are those extended contemporaneously with Walnut's financing or within
six months before or after the financing extended by Walnut.
Walnut follows the SBA-prescribed practice and values its portfolio of
loans and securities owned at fair value based on an SBA-promulgated valuation
policy. Loans are currently valued based on the value of the collateral, the
borrower's ability to make payments, the borrower's capitalization and
profitability, and other pertinent factors. Generally, the fair values
assigned are amounts that are currently expected to be realized in the ordinary
course of business assuming that the loans will be held to maturity. Therefore
the fair value of loans, as determined in good faith by the Board of Directors
of Walnut, correspond to cost unless adverse factors lead to a determination of
fair value at a lower amount, in which case the fair value assigned is based on
the anticipated liquidation value of the collateral. The fair value of
securities owned, as determined in good faith by the Board of Directors of
Walnut, is based on the liquidity of, existing market price for, and the
anticipated sale price of, the securities, taking into account standard
discounts relating to restricted securities and available trading volumes, as
applicable. In determining market price, the Board of Directors of Walnut
refers either to the most recent bid price at which such securities were traded
on a national exchange or automated quotation system or, in the case of
privately-held companies, the price at which such securities were most recently
sold by the issuer in its last round of equity financing. The reduction in
fair value, if any, resulting from an assessment of the loans and securities
owned by Walnut is reflected in Walnut's reserve for unrealized losses.
The SBA regulations require that SBICs maintain a ratio of undistributed
realized earnings (as defined by the SBA regulations to exclude unrealized
gains and losses) to capital stock and surplus of not more than 50%. An
increase over 50% causes an SBIC to be in a position of "capital impairment".
Commencing in August 1990, the SBA began to notify Walnut that Walnut's
financial statements showed a trend toward capital impairment. In May 1992,
the SBA notified Walnut that the SBA had determined
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that Walnut was, as of December 31, 1991, in a condition of capital impairment.
In connection with regularly scheduled audits of Walnut conducted by the SBA
Office of Examinations, the SBA issued a series of findings in July 1994
relating to Walnut's non-conformance with certain of the regulations
promulgated by the SBA. On July 29, 1994, Walnut entered into an agreement
with the SBA (as amended, the "SBA Agreement") whereby, subject to certain
conditions, the SBA would refrain until June 30, 1995 from declaring an event
of default under 13 CFR 107.203(d) 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 to the agreement
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 was increased to $659,295. Walnut has fully satisfied the terms of the
SBA Agreement through a combination of realized gains and contributions of
capital and the required limitation on management expenses. By its terms, the
SBA Agreement expired on June 30, 1995.
Pursuant to an examination by the SBA, the SBA issued a finding related 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 [Walnut's] holdings 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 year ended December 31, 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
approximately $12 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.
The SBA has issued a finding that the Company has violated Section
107.903(b)(1) and (d) by financing an Associate and paying fees to an
Associate. The Company has provided information to the SBA to show that such
findings are inaccurate. Additionally, the SBA has issued a finding that the
Company has violated Section 107.501(b)(1), (3) and (4) by not seeking prior
approval of the SBA for management services provided by Associates. The Company
believes that such findings are inaccurate and current SBA regulations no
longer require prior approval in such circumstances.
The last examination report issued to Walnut by the SBA is dated May 14,
1996 and covered the 14-month period ended February 28, 1995. To date, the SBA
has not declared or threatened to declare a default with respect to any of its
findings; however, there can be no assurance that the SBA will be
willing to further refrain from declaring an event of default under the SBA Act
and it is likely that the SBA will continue to deem these issues to be open
until fully resolved to the SBA's satisfaction, irrespective of any continuing
discussions with respect thereto between the SBA and Walnut's management. If
such a default were to be declared and Walnut failed to cure the same, the SBA
would have the right to accelerate the maturity of the $8 million debentures
issued by Walnut to the SBIC Funding Corp. pursuant to the SBA Act (the "Walnut
Debentures") currently outstanding. Management believes that Walnut could
immediately remedy fully
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the capital impairment issue through the sale of certain of Walnut's portfolio
securities.
NFS--GENERAL. Since 1971, NFS or its predecessors have offered financial
asset recovery services to securities firms, banks, bankruptcy trustees and
other financial institutions. Through research and investigation of a client's
records, NFS attempts to recover cash, securities and other property which have
not been properly or fully accounted for by the client. Clients' needs for
financial asset recovery services arise because financial institutions,
including some of the largest financial institutions, often disregard certain
discrepancies, shortages and uncollected funds and securities in their
day-to-day operations due to time constraints. Although institutions generally
plan to assign personnel to properly reconcile and rectify those items,
experience has demonstrated that other priorities frequently intervene and the
problem items ultimately are written-off. Such items are often significant in
the aggregate.
NFS has developed the expertise to research such financial asset
transactions and to recover uncollected funds and/or securities for its
clients. Historically, NFS has billed its clients on an hourly fee or
cost-plus basis for these services. However, over the past four years, NFS has
altered its business and operational strategy and is primarily billing its
clients for these services on a percentage-of-recovery basis. As a result, NFS
has entered into agreements with a number of large financial institutions to
provide these services for compensation on a percentage-of-recovery basis. As
of December 31, 1996, NFS had contractual agreements with 15 such financial
institutions. Such contracts generally provide that they are terminable at
will by either party upon 30 days' prior notice. For the fiscal year ended
December 31, 1996, NFS received 12.0% of its revenue from Key Investments,
33.0% of its revenue from Chase Manhattan and 15.0% of its revenue from
Citibank. The loss of any of these financial institutions as clients of NFS
would have a material adverse impact on NFS.
Under the percentage-of-recovery agreements, NFS receives from the client
a percentage of the amounts recovered for the client depending on the size and
nature of each item, generally ranging from 10% to 40% and currently averaging
approximately 25%. This method of doing business requires a significant
initial investment in working capital. NFS incurs start-up costs associated
with payroll and other expenses advanced in connection with these projects.
These projects incur the bulk of their expenses within the first nine months of
the engagement. Even if successful, these financial asset recovery projects
may not attain positive cash flow for up to nine months or more following the
initial engagement of NFS. However, the profit potential increases
dramatically as the start-up costs are recouped and a substantial portion of
the identified pool of assets are recovered.
The Company is re-evaluating the asset recovery business of NFS. As a
result, in accordance with the rules of FAS 121, a write-down of NFS's goodwill
of $1.1 million was recorded in 1996.
Since 1971, NFS, through its predecessors, has also acted as a consultant
to various firms in the securities operations, financial systems, and related
management areas, primarily concerned with "back-office" operating procedures.
NFS executive officers work with the clients' management to assess their
back-office needs and thereafter make available the services of specialized
consultants on a temporary basis to assist in such back-office areas. NFS pays
the consultants an hourly wage and bills the client
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at a higher negotiated hourly or per diem rate. These services are marketed
primarily by personal contact of NFS management with firms requiring these
services.
NFS provides trained professionals who may assist in the normal daily
back-office operations, particularly during periods of high market activity, or
who render specialized consulting services to brokerage firms with operational,
financial, or regulatory difficulties. The nature and extent of services
provided vary with the circumstances, but may include analysis of existing
operations, finances, compliance, and management; assignment of NFS consultants
to perform operational functions for which the client lacks trained or adequate
staff, or which the client's own staff has been unable to complete; or the
assumption (from the client's staff) of certain operations or accounting
functions. NFS' employees and consultants must comply with the rules and
regulations applicable to the customer. For example, if NFS is providing such
services to banks, then its employees and consultants must comply with
applicable banking regulations. In addition, NFS' employees and consultants
are often subject to policies regarding confidential information imposed by the
customer.
NFS--SUBSIDIARIES. NFS engages in businesses related to asset recovery
through its two wholly-owned subsidiaries. ARS owns the rights to the residual
assets of approximately sixty defunct entities, all of which were securities
firms, their predecessors and affiliates. ARS typically purchases such rights
in a bankruptcy or liquidation proceeding relating to the defunct entity. The
residual assets consist generally of securities (or, in the case of lost
certificates, the right to obtain replacements and the proceeds thereof); sales
or redemption proceeds, dividends, interest, principal, and/or royalty payments
arising from such securities or from other assets (including petroleum
production partnerships and a realty development company), and judgments
against persons indebted to brokerage firms. ARS pursues the rights of such
defunct entities to realize on the residual assets. Although the recovery
process begins immediately, in many cases ARS continues to pursue the
realization of such assets for more than 20 years.
On November 6, 1992, NFS incorporated its subsidiary, NFS Collection,
which is licensed by the Department of Consumer Affairs of the State of New
York and is a member of the American Collectors Association, Inc. NFS
Collection operates as a collection agency dealing with the recovery of cash
and securities for individual and corporate clients.
UNIVERSAL BRIDGE. Universal Bridge owns 50% of the outstanding general
partnership interests and approximately 83% of the limited partnership
interests of UPLP. UPLP is an investment vehicle that specializes in bridge
financing to small to medium-sized companies. UPLP targets investments that
will provide significant return of capital from a known repayment source (such
as a proposed initial public offering) within a six to eighteen month time
frame.
As of December 31, 1996, UPLP had a fair market value of $1.2 million in
equity securities with a cost basis of $0.9 million. UPLP's debt securities
are valued at $0.6 million with a cost basis of $0.9 million. Below is a list
of certain of UPLP's investments, divided into business categories, which in
the aggregate constitute the principal investments of UPLP as of December 31,
1996:
I. BIO-TECHNOLOGY COMPANIES
Cellegy Pharmaceuticals, Inc.(1)(2)
Innapharma, Inc. (3)
SunPharm Corporation(1)(2)
II. COMMUNICATIONS AND MEDIA COMPANIES
Amplidyne, Inc.(4)
Page 11 of 55
<PAGE> 12
Kideo Productions, Inc.(1)(2)
Touch Tone America, Inc.(1)(2)
III. COMPUTER AND HIGH-TECH COMPANIES
Allegro New Media(1)(2)
Daleen Technologies, Inc.(3)
Javelin Systems(1)(2)
Multimedia Games, Inc.(1)(2)
Palomar Electronics(3)
ThermoLyte Corporation(2)
VictorMaxx Technologies, Inc.(1)(2)
IV. HEALTH CARE COMPANIES
American HealthChoice, Inc.(1)(4)
Complete Wellness Centers, Inc.(4)
V. MEDICAL AND HEALTH PRODUCTS COMPANIES
Osteoimplant Technology, Inc. (1)(2)
Thermo BioAnalysis Corporation(1)(2)
Thermedics Corporation, Inc.(2)
VI. SERVICE-RELATED AND
LOW-TECH COMPANIES AND OTHER
INVESTMENTS
Country Star Restaurants(1)(2)
Golf Reservations(3)
IDF International, Inc.(1)(4)
Jenna Lane, Inc. (2)
Kat-Man-Du Entertainment(3)
Kaye Kotts Associates, Inc.(1)(2)
Ragar Corporation(1)(2)
Vintage Group(3)
Weitzer Homebuilders, Inc.(1)(4)
VII. BASIC INDUSTRY
Clean America Corporation(1)(4)
Delta-Omega Technologies, Inc.(1)(2)
Industrial Flexible Materials, Inc.(1)(2)
Nuecol Corporation(2)
Smith-Midland Corporation(1)(2)
Thermo Euro Tech, N.V. (2)
Page 12 of 55
<PAGE> 13
___________________
(1) Publicly traded.
(2) Investment in form of equity only.
(3) Investment in form of debt only.
(4) Investment in form of a combination of equity and debt.
COMPETITION. Both Walnut and UPLP engage in the business of investing in
companies through debt and equity participation. Consequently, each of Walnut
and UPLP competes for investment opportunities with other venture capital
companies, banks and other lenders and private investors. However, typically
Walnut and/or UPLP works directly with management of the investee companies and
experiences no direct competition.
Generally NFS is engaged by its clients on a non-exclusive,
project-by-project basis. NFS may in the future compete with numerous
organizations, which may be larger and have greater financial strength and
resources than NFS. In addition, NFS clients may deem it advisable to
eliminate the need for services of the type offered by NFS by developing their
own internal staffs to perform the services presently provided by NFS. To the
extent that NFS attempts to offer specialized services such as bankruptcy and
reorganization services and its various consulting services, it competes with
numerous companies, including many well-known and better financed companies, as
well as individuals offering similar services. There may be other firms
engaged in similar asset recovery services, although management is unaware of
any significant competitors that perform asset recovery services similar to
NFS.
OFFICERS AND DIRECTORS. As of December 31, 1996, the executive officers
and Directors of the Company were:
<TABLE>
<S> <C> <C>
Name Age
- ------------------- ---- -------------------------------
Burton W. Kanter 66 Director (Chairman) and
Chief Executive Officer of
Walnut
Joel S. Kanter 40 President and Director and
President of Walnut
Eugene N. Scalercio 56 Director and Chief Executive
Officer of NFS
William F. Burge, III 54 Director
Gene E. Burleson 56 Director
Solomon A. Weisgal 70 Director
Joshua S. Kanter 34 General Counsel and Secretary
Robert F. Mauer 42 Treasurer
</TABLE>
EMPLOYEES. As of December 31, 1996, Walnut employed three people. As of
December 31, 1996, NFS employed 12 persons and also engaged 18 independent
consultants to the clients of NFS, who are compensated on an hourly basis.
None of the employees of Walnut or NFS are represented by any
Page 13 of 55
<PAGE> 14
collective bargaining agreements and the Company believes that the
relationship of Walnut and NFS with their respective employees is good. The
Company has one employee, Joel S. Kanter, President and CEO. The Company
receives any additional required services primarily from Walnut's employees.
INVESTMENT COMPANY ACT OF 1940. The Investment Company Act of 1940 (as
amended, the "Investment Company Act"), imposes various registration, filing
and operating requirements on companies which are deemed to be investment
companies thereunder. Pursuant to Section 3(a)(3) of the Investment Company
Act, the Company may be deemed to be an investment company. Section 3(a)(3) of
the Investment Company Act generally provides that an issuer will be deemed to
be an investment company if it is engaged in the business of investing,
reinvesting, owning, holding or trading in securities and the issuer owns or
proposes to acquire investment securities having a value exceeding 40% of the
value of the issuer's total assets. The Company is relying upon an exemption
from the registration, filing and operating requirements imposed by the
Investment Company Act provided by Rule 3a-2 promulgated by Securities and
Exchange Commission (the "SEC") under the Investment Company Act. Rule 3a-2
generally provides that an issuer is deemed not to be engaged in the business
of investing, reinvesting, owning, holding or trading in securities for a one
year period provided that the issuer has a bona fide intent to be engaged in a
business other than that of investing, reinvesting, owning, holding or trading
in securities, such intent to be evidenced by the issuer's business activities
and an appropriate resolution of the issuer's board of directors. The one-year
period has expired, and the Company may be deemed an unregistered investment
company. The Company believes that other exemptions to the registration
requirements of the Investment Company Act may be available to the Company.
The Board has resolved that the Company's business purpose is to be an
operating company through its subsidiaries and not to be engaged in activities
which would require the Company to register as an investment company and
further resolved that the Company actively seek the acquisition or development
of additional operating assets in furtherance of such purpose. Should the
Company fail to acquire or develop such assets or otherwise avail itself of an
exemption, the Company may be required to meet the registration, filing and
operating requirements of the Investment Company Act.
In the event that the SEC determines that either the Company or Walnut is
an investment company and that no exemption from the Investment Company Act is
applicable, the Company may incur substantial costs in connection with the
registration of itself or Walnut as an investment company and otherwise
complying with the provisions of the Investment Company Act. Specifically, if
the Company or Walnut were to register as an investment company under the
Investment Company Act, the Company and/or Walnut would be subject to, among
other things, certain limitations with respect to (i) capital structure and the
ability to buy or issue securities; (ii) the ownership of securities issued by
other investment companies, insurance companies and organizations engaged in
investment advisory, underwriting and brokerage businesses; and (iii) the
ability to engage in transactions involving persons who are "affiliates" of the
Company or Walnut, or "affiliates" of such persons. The Company and/or Walnut
would also be subject to certain other operational restrictions and reporting
requirements. Such limitations might significantly increase the operating
expenses of the Company and limit the Company's ability to, among other things,
repurchase shares of the Common Stock. The Company may also be required to
discontinue certain of its executive compensation plans, if any are in place.
In addition, certain investments and other actions of the Company or Walnut may
require prior approval of the SEC.
Page 14 of 55
<PAGE> 15
ITEM 2. PROPERTIES
As of October 13, 1995, NFS entered into an agreement (the "Release
Agreement") with The Bank of New York ("BONY") to terminate its existing
sublease agreement relating to approximately 9,519 square feet, at rent of
approximately $17,250 per month, which otherwise was due to expire on August
30, 1999. Pursuant to the Release Agreement, NFS agreed to vacate the premises
on October 15, 1995, pay all rent obligations through to October 15, 1995, and
pay an additional $20,000 to BONY (which amounts have been paid). In addition,
NFS agreed to pay BONY an amount not to exceed $200,000, contingent on certain
events, and payable as follows: $25,000 in each year NFS has net income plus
interest and tax expense equal to or exceeding $600,000, and an additional
$20,000 in each year NFS has net income plus interest and tax expense equal to
or exceeding $850,000, during the tax years 1995-2005. BONY, therefore, will
not receive any additional sums from NFS if its net income plus interest and
tax expense does not exceed $600,000 per year. As of March 15, 1997, NFS has
not made any of such payments to BONY.
As of October 13, 1995, NFS entered into a Sub-sublease Agreement for new
offices at 90 Washington Street, New York, 10006, for approximately 5,354
square feet, at a rent of approximately $8,365 per month, expiring August 29,
1999. Pursuant to the Sub-sublease Agreement, the sublessor granted a four
month abatement of rent, and NFS agreed to perform all the material non-rent
obligations of the sublessor under the sublessor's sublease with BONY which is
the master lessor of the property.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved as plaintiff or defendant in any
legal actions; however, NFS is a defendant in an action to recover management
fees and commissions alleged to be owing by NFS in connection with the Business
Combination and the Common Stock Private Placement. See Footnote 9 to the
financial statements included elsewhere in this Report on Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK. As of March 17, 1997, there were 14,619,172
shares of Common Stock outstanding, held by approximately 694 holders of
record.
Prior to the Business Combination, the Common Stock was quoted in the
National Quotation Bureau's interdealer system through the Nasdaq "Bulletin
Board" under the symbol NFSS. From February 27, 1995 until August 21, 1995,
the Common Stock has been quoted in the National Quotation Bureau's interdealer
system through the Nasdaq "Bulletin Board" under the symbol WNUT. From and
Page 15 of 55
<PAGE> 16
after August 22, 1995, the Common Stock has been listed on the Nasdaq National
Market System under the symbol WNUT. The following table shows the high and
low quotations for Common Stock for each quarter for the period January 1, 1994
through June 30, 1995 and high and low trade prices for each quarter thereafter
until December 31, 1995 based upon information received from the National
Quotation Bureau or the Nasdaq Stock Market, Inc., as applicable. Such
quotations represent prices between dealers and may not necessarily include
retail markups, markdowns or commissions, and may not represent actual
transactions. Prices reflect the one-for-five reverse stock split which
occurred in January 1994 and the Reverse Stock Split which occurred on February
27, 1995.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
<S> <C> <C>
March 31, 1995 $ 3 1/4 $ 2 3/8
June 30, 1995 3 1/8 2 1/2
September 30, 1995 3 5/8 2
December 31, 1995 3 1/2 2
March 31, 1996 $ 3 3/16 $ 2 1/4
June 30, 1996 2 7/8 2 11/32
September 30, 1996 2 7/8 1 1/2
December 31, 1996 2 1/16 1 1/8
</TABLE>
DIVIDENDS. The Company has paid no cash dividends since its inception and
it is unlikely that any cash dividend will be paid in the future. The
declaration in the future of any cash or stock dividends will be at the
discretion of the Board depending upon the earnings, capital requirements and
financial position of the Company, general economic conditions and other
pertinent factors. Unless otherwise approved by the SBA, Walnut is prohibited
from making any dividend or other cash advance to the Company.
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial data for the Company for the five-year
period ended December 31, 1996 is presented below. The information for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 is derived from the
audited financial statements of the Company as of and for the five years then
ended. The data should be read in conjunction with the financial statements,
related notes and other financial information of the Company for such periods
included elsewhere in this Report on Form 10-K.
Page 16 of 55
<PAGE> 17
WALNUT FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994* 1993* 1992*
<S> <C> <C> <C> <C> <C>
Income Statement Data
(in thousands):
Income from recovery
services and operational
support $ 2,044 $ 2,034 $ 0 $ 0 $ 0
Investment income 96 500 186 265 502
Other income 0 0 257 0 0
------------------------------------------------------------------------------
Operating income 2,140 2,534 443 265 502
------------------------------------------------------------------------------
Operating expenses(1) 4,779 4,342 722 751 721
Interest expense 2,003 1,840 1,594 1,500 1,349
------------------------------------------------------------------------------
Loss before taxes and
realized and unrealized
gains/(losses) (4,642) (3,648) (1,873) (1,986) (1,568)
Income tax benefit 1,413 1,438 725 729 576
Realized gain/(loss) on
sale of securities, net
of
tax 1,791 2,845 637 (181) 886
------------------------------------------------------------------------------
Income/(loss) before
unrealized gains (1,438) 635 (511) (1,438) (106)
Unrealized gain/(loss)
on
investments, net of tax (1,527) (2,602) 2,811 (3,583) (4,674)
------------------------------------------------------------------------------
Net Income/(loss) (2,965) (1,967) 2,300 (5,021) (4,780)
==============================================================================
Earnings/(loss) per
Share ($.21) ($.15) $.28 ($.62)
Weighted average shares
outstanding 14,247,099 12,747,656 8,353,860 8,130,213
Balance Sheet Data (in
thousands except share
data):
Total assets $ 33,198 $ 36,064 $ 33,132 $ 28,458 $ 35,184
==============================================================================
Current liabilities 14,353 11,387 10,187 6,137 4,499
Long-term liabilities(2) 4,070 9,278 10,680 13,107 16,500
Minority Interest 387
Shareholders' equity 14,388 15,399 12,265 9,124 14,185
------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 33,198 $ 36,064 $ 33,132 $ 28,458 $ 35,184
==============================================================================
</TABLE>
Page 17 of 55
<PAGE> 18
(1) Includes provision for credit losses and write off of subsidiary goodwill
(2) Includes non-current deferred tax liability
* Includes the results of operations of Walnut only (see Footnotes 1 and 2
to the financial statements included elsewhere herein).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1996 AND
1995.
Results of Walnut Operations for the Fiscal Years Ended December 31, 1996
and 1995. Walnut had realized gain income of $1,561,000 net of tax, for the
year ended December 31, 1996, compared to $2,845,000, net of tax, for the year
ended December 31, 1995. The realized gains result predominately from the sale
of shares of HealthCare COMPARE Corp. which produced approximately $2.2 million
of realized gains in the current period.
Interest expense decreased $478,000 to $1,217,466 during the year ended
December 31, 1996, representing a 28% decrease under interest expense during
the year ended December 31, 1995. Interest expense consists of two components:
(1) interest paid to the SBA with respect to the Walnut Debentures ($731,000 and
$1,027,000 for 1996 and 1995, respectively), and (ii) interest paid on margin
accounts and bank lines ($483,000 and $665,000 for 1996 and 1995,
respectively). The decrease in SBA interest expense was the result of
repayment to the SBA of a $4 million debenture on September 1, 1995.
General and administrative expense increased $64,000 to $770,000 during
the year ended December 31, 1996, representing a 9% increase over operating
expense during the year ended December 31, 1995.
Unrealized losses, net of unrealized gains, for the year ended December
31, 1996 were approximately $1.4 million, net of tax, as compared to unrealized
losses for the year ended December 31, 1995 of approximately $2.6 million, net
of tax. The change is due to a lesser decline in market value of several of
Walnut's larger holdings in 1996 as compared to 1995.
Results of NFS Operations for the Fiscal Year Ended December 31, 1996 and
the Period from February 28, 1995 to December 31, 1995. During the period from
January 1, 1996 to December 31, 1996, revenues for NFS were $2,122,000.
Revenue was derived from recovery services ($887,000), operational support
($1,157,000) and other ($78,000).
For such 12 month period, revenue from recoveries was $887,000 of which
56% was derived from three clients (Chemical Bank, $188,000, or 21%, DBL,
$167,000, or 19%, and Merrill Lynch, $145,000, or 16%). Operational support
revenue was $1,157,000 of which 84% was derived from three clients (Chase Bank
$512,000, or 44%, Citibank, N.A., $210,000, or 18%, and Key Investments,
$255,000, or 22%).
For the ten month period ended December 31, 1995, cost of services was
$2,450,000. This amount included an increase in reserve for non-realization of
two products recorded as Work in Progress. This reserve was due to a change
in the status of the customers' expectations of the completion of projects.
NFS management will continue to pursue the collection of these items valued at
$815,000, even though their ultimate collectibility cannot be assured. General
and administrative expenses were $610,000 for the period.
NFS incurred a charge to operations of $1,100,000 in 1996 representing
a write-down of NFS's goodwill, which resulted from the Company's continuing
re-evaluation of the asset recovery business of NFS. Such write-down was made
in accordance with FAS 121.
Results of Company Operations for the Fiscal Year ended December 31,
1996 and the Period from February 28, 1995 through December 31, 1995. The
Company had interest income of $37,000 and general and administrative cost of
$881,000 for the year ended December 31, 1996 as compared to $8,000 and
$575,000, respectively, in the ten month period ended December 31, 1995.
Consolidated net loss for
Page 18 of 55
<PAGE> 19
the Company was $2.96 million for the year ended December 31, 1996 as
compared to net loss of $1.97 million in the ten month period ended December 31,
1995.
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995 AND
1994.
Results of Walnut Operations for the Fiscal Years Ended December 31, 1995
and 1994. Walnut had realized gain income of $2,895,000, net of tax, for the
twelve months ended December 31, 1995, compared to $636,000, net of tax, for
the twelve months ended December 31, 1994. The increase in realized gains
results predominately from the sale of shares of HealthCare COMPARE Corp. which
produced approximately $5.3 million of realized gains in the current period.
Investment and other income increased $2,000 to $445,000 for the twelve
months ended December 31, 1995. The results for 1995 included realization of
interest income from prior years on debt securities which was simultaneously
converted to an equity position. The results for 1994 included conversion to
equity securities of an income producing partnership investment.
Interest expense decreased $64,000 to $1,529,000 during the twelve months
ended December 31, 1995, representing a 4% decrease under interest expense
during the twelve months ended December 30, 1994. Interest expense consists of
two components: (1) interest paid to the SBA with respect to the Walnut
Debentures ($1,529,000 and $1,593,000 for 1995 and 1994, respectively), and
(ii) interest paid on margin accounts and bank lines ($504,000 and $424,000 for
1995 and 1994, respectively). The decrease in SBA interest expense was the
result of repayment of a $4 million debenture on September 1, 1995, while the
increase in margin and bank line interest was due to a rise in interest rates.
General and administrative expense decreased $16,000 to $706,000 during
the twelve months ended December 31, 1995, representing a 2% decrease under
operating expense during the twelve months ended December 31, 1994.
Unrealized losses for the twelve months ended December 31, 1995 were
approximately $2.65 million, net of tax, versus unrealized gains for the twelve
months ended December 31, 1994 of approximately $2.8 million, net of tax. The
change is due to the decline in market value of several of Walnut's larger
holdings.
Results of NFS Operations for the Period from February 28, 1995 to
December 31, 1995. During the period from February 28, 1995 to December 31,
1995, revenues for NFS were $2,081,439. Revenue was derived from recovery
services ($312,581), operational support ($1,763,319) and other ($5,539).
For such ten month period, revenue from recovery services was $312,581 of
which 54% was generated from predominately two clients (Chemical Bank,
$117,990, or 38%, and Citibank, N.A., $51,525, or 16%). Operational support
revenue was $1,763,319 of which 90% was derived from three clients (Citibank,
N.A., $1,120,847, or 64%, Chemical Bank, $246,789, or 14%, and Key Investments,
$215,214, or 12%).
For such ten month period, cost of services was $2,450,000. This amount
included an increase in reserve for non-realization of two products recorded as
Work in Progress. This reserve was due to a change in the status of the
customers' expectations of the completion of projects. NFS management will
continue to pursue the collection of these items valued at $815,000, even
though their ultimate collectibility cannot be assured. General and
administrative expenses were $610,034 for the period.
Page 19 of 55
<PAGE> 20
Results of Company Operations for the Period from February 28, 1995 to
December 31, 1995. During the ten months from February 28, 1995 to December
31, 1995, the Company had interest income of approximately $7,845 and general
and administrative expenses of approximately $575,483. Consolidated net loss
for the Company was $1.9 million for the twelve months ended December 31, 1995
compared to net income of $2.3 million for the twelve months ended December 31,
1994.
Page 20 of 55
<PAGE> 21
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:
<TABLE>
<S> <C> <C> <C>
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%
</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 the
SBA. Walnut intends to sell certain of its portfolio securities in order to
repay the $4 million of Walnut Debentures which mature on April 1, 1997.
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 to the 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 SBA 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 its 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.
Page 21 of 55
<PAGE> 22
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 [Walnut's] holdings 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 December 31,
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
approximately $12 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.
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-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 was $206,000 at
December 31, 1996.
As of December 31, 1996, NFS owed taxes, penalties and interest of
approximately $89,000 to the State of New York Department of Taxation and
Finance. On January 27, 1997, NFS paid the State of New York Department of
Taxation and Finance its outstanding obligation in full. This payment was made
under New York State's tax amnesty program, as such, NFS has no further
past-due obligations to the State of New York Department of taxation and
Finance.
Liquidity and Capital Resources of the Company. Through June 1995, the
Company sold 1,015,625 shares of Common Stock in the Common Stock Private
Placement at an offering price of $2.00 per share. The proceeds of the Common
Stock Private Placement were used primarily to (i) repay indebtedness of the
Company, (ii) advance funds to NFS to allow NFS to pay indebtedness and accrued
federal, state and city taxes, interest and penalties, and (iii) increase
working capital of the Company.
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%
(10.5% at December 31, 1996). Quarterly principal payments of
Page 22 of 55
<PAGE> 23
$575,000 are due beginning December 31, 1995, with all remaining principal
due June 30, 1996. The Company extended the maturity date to June 30, 1997.
As of December 31, 1996, the outstanding principal under the line of credit was
$2,850,000.
As of December 31, 1996, the Company had outstanding a promissory note to
a third party representing principal owed of $875,000. The note was issued in
connection with an acquisition by the Company of a limited partnership interest
in Knox Liquidating Partnership, L.P., which, in turn, has an ownership
interest in a catalog company known as Foster & Gallagher, Inc. Such note
accrues interest at 8% per annum. Principal is payable in two installments,
$175,000 on January 31, 1997 (which amount was timely paid) and the remaining
$700,000 on July 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
--------------------------------------------------------------- ----
<S> <C>
Report of Independent Auditors 24
Consolidated Balance Sheets, December 31, 1996 and 1995 27
Consolidated Statements of Operations,
years ended December 31, 1996, 1995 and 1994 28
Consolidated Statements of Changes in Shareholders' Equity,
years ended December 31, 1996, 1995 and 1994 29
Consolidated Statements of Cash Flows,
years ended December 31, 1996, 1995 and 1994 30
Notes to Consolidated Financial Statements 31
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant 51
Schedule II - Valuation and Qualifying Accounts and Reserves 53
</TABLE>
Page 23 of 55
<PAGE> 24
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Walnut Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of Walnut
Financial Services, Inc. and subsidiaries (the "Company") as at December 31,
1996 and December 31, 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included verification of investments owned at December 31, 1996 and
December 31, 1995, by correspondence with the custodian and by physical
examination. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1996 and December 31, 1995, and the consolidated results of its
operations and its consolidated cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company may have Investment Company Act of
1940 (the "Act") considerations. The Act imposes certain registration, filing
and operating requirements on subject companies.
<PAGE> 25
As discussed in Note 5, the U.S. Small Business Administration (the "SBA")
has issued its finding that a subsidiary, Walnut Capital Corporation ("Walnut
Capital") has violated Section 107.903(b)(1) and (d) of Part 13 of the Code of
Federal Regulations by financing an associate and paying fees to an associate.
The Company believes that no such violation occurred and the matter is being
discussed with the SBA.
In addition, the SBA has issued a finding that Walnut Capital has violated
Section 107.501(b)(1), (3) and (4) by not seeking prior approval of the SBA for
management services provided by associates. The Company believes that no such
violation occurred and the matter is being discussed with the SBA.
Further, the SBA has issued a finding that Walnut Capital has violated
Section 107.203(d) relating to capital impairment. The SBA has indicated that
under certain circumstances it would refrain from any action against the
Company with regard to capital impairment.
As explained in Note 2, the consolidated financial statements include
securities, valued at $5,981,000 (18% of total assets), whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. We have reviewed the procedures used by the Board of Directors
in arriving at its estimate of value of such securities and have inspected
underlying documentation and, under the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However, because
of the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the securities existed, and the differences could be material, either
reflecting a lower or a higher valuation.
Richard A. Eisner & Company, LLP
New York, New York
January 24, 1997
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS WITH
RESPECT TO SUPPLEMENTARY SCHEDULES
Board of Directors and Shareholders
The audits referred to in our report dated January 24, 1997 includes
Schedule I for the year ended December 31, 1996 and Schedule II for each of
the years in the two-year period ended December 31, 1996. In our opinion, the
schedules referred to above present fairly the information set forth therein,
in conformity with the applicable accounting regulation of the Securities and
Exchange Commission.
Richard A. Eisner & Company, LLP
New York, New York
January 24, 1997
<PAGE> 27
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, 1995
1996
<S> <C> <C>
ASSETS
Portfolio securities:
Marketable equity securities (cost of $11,864,004
in 1996 and $12,564,401 in 1995 ) 23,842,962 26,622,030
Non-marketable equity securities (cost of $6,760,208
in 1996 and $6,832,836 in 1995) 4,468,692 4,486,237
Non-marketable debt securities (less reserve of $806,711
in 1996 and $384,008 in 1995) $ 1,512,081 $ 846,694
--------------- ----------------
Total portfolio securities 29,823,735 31,954,961
--------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 840,225 396,440
Accounts receivable (net of allowance for doubtful
accounts $547,074 in 1996 and $305,273 in 1995) 420,612 630,092
Interest receivable (net of allowance for doubtful
accounts $14,030 in 1996 and $14,030 in 1995) 26,603 27,549
Unbilled receivables 770,754 501,332
Other current assets 208,078 76,420
--------------- ----------------
Total current assets 2,266,272 1,631,833
--------------- ----------------
Fixed assets (net of accumulated depreciation of
$149,604 in 1996 and $123,382 in 1995) 43,431 54,935
--------------- ----------------
Other assets 208,489 355,283
--------------- ----------------
Intangible assets, net of accumulated amortization 856,548 2,066,492
--------------- ----------------
TOTAL ASSETS $ 33,198,475 $ 36,063,504
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers 5,459,118 5,131,783
Notes payable to banks 2,850,000 4,933,791
Notes payable to other 875,000 270,000
Accounts payable, accrued expenses, and
other current liabilities 1,119,785 1,003,088
Current portion of long-term debt $ 4,049,500 $ 47,953
--------------- ----------------
Total current liabilities 14,353,403 11,386,615
Long-term debt, net of current portion 4,013,321 8,013,285
Non-current deferred tax liability 37,689 1,247,967
Deferred rent, net of amortization 19,651 16,311
--------------- ----------------
Total liabilities 18,424,064 20,664,178
--------------- ----------------
Minority Interest 386,750 0
--------------- ----------------
Commitments and contingencies
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 15,030,269 13,085,428
Retained earnings (deficit) (788,775) 2,175,891
--------------- ----------------
Total shareholders' equity 14,387,661 15,399,326
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,198,475 $ 36,063,504
=============== ================
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
Page 27 of 55
<PAGE> 28
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended
12/31/96 12/31/95 12/31/94*
<S> <C> <C> <C>
Revenues:
Recovery services 886,800 270,716 --
Operational support 1,157,210 1,763,320 --
Investment and other income $ 96,162 $ 500,011 $ 443,354
--------------------- -------------- --------------
2,140,172 2,534,047 443,354
--------------------- -------------- --------------
Costs and expenses:
Cost of services 1,663,663 2,450,364 --
General and administrative expenses 3,115,424 1,892,080 722,250
--------------------- -------------- --------------
4,779,087 4,342,444 722,250
--------------------- -------------- --------------
Operating (loss) (2,638,915) (1,808,397) (278,896)
Interest and other financial costs 2,003,189 1,839,649 1,593,419
--------------------- -------------- --------------
(Loss) before taxes and realized gain and
unrealized gain/(loss) (4,642,104) (3,648,046) (1,872,315)
Income tax benefit 1,413,456 1,438,252 725,000
Realized gain/(loss) on sale of securities, net
of tax 1,791,169 2,845,417 636,932
--------------------- -------------- --------------
Income (Loss) before unrealized gain/(loss) (1,437,479) 635,623 (510,383)
Unrealized (loss)/gain on investments, net of tax (1,527,187) (2,602,589) 2,810,823
--------------------- -------------- --------------
NET (LOSS)/INCOME $ (2,964,666) $ (1,966,966) $ 2,300,440
==================== ============= ==============
(Loss)/Income per share $ (0.21) $ (0.15) $ 0.28
==================== ============= ==============
Weighted average shares outstanding 14,247,099 12,747,656 $ 8,353,860
==================== ============= ==============
</TABLE>
* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
Page 28 of 55
<PAGE> 29
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
Additional
Par Value Paid in Retained
Shares at $.01 Capital Earnings (Deficit)
<S> <C> <C> <C> <C>
Balance, December 31, 1993* 8,158,047 $ 81,580 $ 7,290,220 $ 1,842,417
Net income -- -- -- 2,300,440
Issuance of common stock 667,962 6,680 743,320 --
--------- -------- ---------- -----------
Balance, December 31, 1994* 8,826,009 88,260 8,033,540 4,142,857
Net loss -- -- -- (1,966,966)
Exchange of shares for business combination 3,190,504 31,905 1,591,000 --
Treasury stock at business combination -- -- -- --
Sale of treasury stock -- -- (105) --
Issuance of common stock and warrants in
exchange for marketable securities 452,533 4,525 1,013,675 --
Issuance of common stock for legal fees 69,000 690 127,310 --
Issuance of common stock for finders' fees 125,000 1,250 248,750 --
Issuance of common stock for litigation
settlement 22,500 225 44,775 --
Issuance of common stock, net of
commissions 1,060,895 10,609 1,951,881 --
Exercise of stock options 54,272 543 74,602 --
--------- -------- ---------- -----------
Balance, December 31, 1995 13,800,713 138,007 13,085,428 2,175,891
Net loss (2,964,666)
Issuance of common stock for legal fees 14,000 140 34,860
Issuance of compensatory warrants for
consulting 125,000
Issuance of common stock for Universal
acquisition 801,974 8,020 1,784,981
--------- -------- ---------- -----------
Balance, December 31, 1996 14,616,687 $146,167 $15,030,269 $ (788,775)
========== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Shares Value Total
<S> <C> <C> <C>
Balance, December 31, 1993* -- -- $ 9,214,217
Net loss -- -- 2,300,440
Issuance of common stock -- -- 750,000
------- ----------- -----------
Balance, December 31, 1994* -- -- 12,264,657
Net Loss -- -- (1,966,966)
Exchange of shares for business combination -- -- 1,622,905
Treasury stock at business combination 50,000 $ (100,000) (100,000)
Sale of treasury stock (50,000) 100,000 99,895
Issuance of common stock and warrants in
exchange for marketable securities -- -- 1,018,200
Issuance of common stock for legal fees -- -- 128,000
Issuance of common stock for finders' fees -- -- 250,000
Issuance of common stock for litigation
settlement -- -- 45,000
Issuance of common stock, net of
commissions -- -- 1,962,490
Exercise of stock options -- -- 75,145
------- ----------- -----------
Balance, December 31, 1995 0 0 15,399,326
Net loss (2,964,666)
Issuance of common stock for legal fees 35,000
Issuance of compensatory warrants for
consulting 125,000
Issuance of common stock for Universal
acquisition 1,793,001
------- ----------- -----------
Balance, December 31, 1996 0 $ 0 14,387,661
======= =========== ===========
</TABLE>
* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
Page 29 of 55
<PAGE> 30
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
1996 1995 1994*
<S> <C> <C> <C>
Operating activities:
Net (loss)/income $ (2,964,666) $ (1,966,966) $ 2,300,440
Adjustments to reconcile net income/(loss) to net cash (used
in) operating activities:
Depreciation/amortization 141,510 152,873 1,685
Issuance of stock as litigation settlement 45,000
Provision for loss of receivables 45,099 39,046
Unrealized gain/(loss) 2,545,313 4,321,192 (4,633,835)
Realized gains (2,985,283) (5,596,760) (1,766,329)
Write off of investments 879,714 825,305
Write off of NFS Goodwill 1,100,000
Issuance of compensatory warrants 125,000
Receipt of securities in lieu of interest (437,287)
Provision for loss in unbilled receivables 814,474
Write off of deferred rent (180,466)
Effect on Minority Interest from Net Income in Subsidiaries (7,673)
Changes in operating assets and liabilities:
Decrease in interest and accounts receivable 212,137 322,626 2,596
Decrease in deposits and other assets 19,296 49,112 37,754
Decrease in interest payable (2,740) (140,168)
Increase/(decrease) in accounts payable 123,744 (1,075,715) 39,805
Increase in deferred rent 3,340 15,844
Increase/(decrease) in net deferred tax liability (1,253,383) (1,285,142) 1,498,000
(Increase)/decrease in unbilled receivables (269,422) 82,922
----------- ----------- ------------
Net cash (used in) operating activities (3,212,827) (3,953,648) (1,655,533)
----------- ----------- ------------
Investing activities:
Costs in connection with the acquisition of NFS (291,739)
Additions to property and equipment (9,393) (3,356) (1,491)
Purchases of investments (2,027,940) (7,694,007) (1,250,718)
Proceeds from sale of investments 6,269,661 9,672,259 2,669,514
Advances to officers (23,076)
Cash Acquired in Universal Acquisition 575,740
----------- ----------- ------------
Net cash provided by investing activities 4,808,068 1,660,081 1,417,305
----------- ----------- ------------
Financing activities:
Deferred private placement costs (15,000)
Net proceeds from sale of common stock 1,962,490 750,000
Borrowings/(repayments) of short term debt (1,478,791) 209,569 (1)
Increase/(decrease) in margin accounts 327,335 (88,733) 11,058
Exercise of stock options 75,146
----------- ----------- ------------
Net cash provided by/(used in) financing activities (1,151,456) 2,143,472 761,057
----------- ----------- ------------
Net increase/(decrease) in cash and cash equivalents 443,785 (150,095) 522,829
Cash and cash equivalents, at the beginning of the year 396,440 546,535 23,706
----------- ----------- ------------
Cash and cash equivalents at the end of the year $ 840,225 $ 396,440 $ 546,535
============ ============== ==============
Supplemental Information:
Cash paid for Interest $ 1,626,419 $ 1,675,965 $ 1,287,339
============ ============== ==============
Receipt of equity securities in lieu of cash interest $ 437,287 $ 119,565
============ ============== ==============
Receipt of equity securities in lieu of cash $ 221,547
------------ -------------- ==============
Exchange of debt securities for equity securities $ 624,438
------------ -------------- ==============
Issuance of common stock and warrants for marketable securities $ 1,018,200
============ ==============
Issuance of common stock and warrants for Universal Acquisition $ 1,793,001
============
</TABLE>
* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements
Page 30 of 55
<PAGE> 31
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Walnut Financial Services, Inc., a Utah corporation (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) operating an investment vehicle that
specializes in bridge financing to 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 (an "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 currently has two
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. The Company pursues its bridge financings 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 approximately 83% of the limited partnership
interests of Universal Partners, L.P., an Illinois limited partnership
("UPLP").
The Company has relied on an exemption from the registration, filing and
operating requirements Imposed by the Investment Company Act of 1940 (as
amended, the "Investment Company Act") provided by Rule 3a-2 promulgated by
Securities and Exchange Commission (the "SEC") under the Investment Company
Act. The Company's one-year exemption period has expired, and the Company may
be deemed an unregistered investment company. The Board of Directors of the
Company (the "Board") has resolved that the Company's business purpose is to be
an operating company through its subsidiaries and not to be engaged in
activities which would require the Company to register as an investment
company. The Company believes that other exemptions to the registration
requirements of the Investment Company Act may be available to the Company.
Should the Company fail to acquire or develop such assets or otherwise avail
itself on an exemption, the Company may be required to meet the registration,
filing and operating requirements of the Investment Company Act.
In the event that the SEC determines that either the Company or Walnut is
an investment company and that no exemption from the Investment Company Act is
applicable, the Company may incur substantial costs in connection with the
registration of itself or Walnut as an investment company and otherwise
complying with the provisions of the Investment Company Act. Specifically, if
the Company or Walnut were to register as an investment company under the
Investment Company Act, the Company and/or Walnut would be subject to, among
other things, certain limitations with respect to (i) capital structure and the
ability to buy or issue securities; (ii) the ownership of securities issued by
other investment companies, insurance companies and organizations engaged in
investment advisory, underwriting and brokerage businesses; and (iii) the
ability to engage in transactions involving persons who are "affiliates" of the
Company or Walnut, or "affiliates" of such persons. The Company and/or Walnut
would also be subject to certain other operational restrictions and reporting
requirements.
Page 31 of 55
<PAGE> 32
On February 27, 1995, the Company issued 8,826,009 shares of its Common
Stock (including 333,981 shares issued in August 1995 in settlement of an
appraisal action brought by two dissenting shareholders) in exchange for all of
the outstanding common stock of Walnut (such transaction is referred to herein
as the "Business Combination.") The Company also issued 125,000 shares of
Common Stock as finders' fees in connection with the Business Combination.
In connection with the Business Combination, the Company engaged in a
private placement (completed in June 1995) of its Common Stock for net proceeds
of $1,962,490 (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 3,190,504 shares of Common Stock and incurred acquisition costs of
approximately $700,000. The net assets of the Company, exclusive of goodwill,
were valued at approximately $100,000. If the acquisition of the Company had
taken place on January 1, 1995, pro forma revenues, net loss, and loss per
share would have been approximately $2,975,000, ($2,200,000), and ($.18),
respectively. Goodwill is being amortized, using the straight-line method,
over 20 years. Proforma revenues, net income and income per share for 1994
would have been approximately $6,222,000, $1,495,000 and $0.12, respectively.
On June 17, 1996, the Company issued 801,974 shares of Common Stock,
together with five-year warrants to purchase an additional 697,391 shares of
Common Stock at an exercise price of $3.00, 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 interest occurred as of January 1, 1996, the results for the
Company for the twelve month period ended December 31, 1996 would have been a
loss of ($2,434,703) or ($0.17) per share. Universal Bridge's purchase of
interests in UPLP has been accounted for as a purchase according to Accounting
Principles Board Opinion 16. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The financial statements include the
accounts of the Company, Walnut, Universal Bridge (from date of acquisition)
and its subsidiary, UPLP, NFS and its wholly-owned subsidiaries, ARS and NFS
Collection. Intercompany transactions and balances have been eliminated in
consolidation. Th Company accounts for its controlling partnership's interest
in UPLP on a consolidated basis.
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 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.
Page 32 of 55
<PAGE> 33
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 where they are not anti-dilutive.
GENERAL. Walnut is an SBIC licensee. In the accompanying financial
statements, the financial information of Walnut has been prepared on a basis
appropriate for SBICs as indicated in the the American Institute of Certified
Public Accountants in the Audits of Investment Companies .
INVESTMENT VALUATION. The non-marketable investments are stated at fair
value as determined by the Board at December 31, 1996. The Board takes into
account developments since the acquisition of the investments, and other
factors pertinent to the valuation of investments. The Board, in making its
valuation, has in many instances relied on financial data and on estimates by
the investee companies and professional advisors as to the effect of future
developments. The marketable investments and/or their derivatives are carried
at market value. Market values are determined based on the average of the
closing quotations as of December 31, 1996 and the preceding two trade days,
recognizing a percentage reduction when applicable.
Debt securities are valued at their face principal amount and bear
interest from 7% to 12%. The debt may be issued together with stock or
warrants whose initial value is nominal. The Company does not obtain
collateral upon the extension of credit for most debt securities. In the event
that a debt security is in default with respect to principal or interest, the
Company establishes a reserve against the face value and does not accrue
additional interest. A reserve may be established for the full amount due to
the Company if the Board determines that the issuer will be unable to fulfill
its obligation to the Company.
Realized gains and losses on securities are determined on the specific
identification method by subtracting the cost, plus any transaction fees, from
the sales prices, less any transaction fees. Unrealized gains and losses are
determined by subtracting the carrying value (market/fair value) at the end of
the period from the carrying value at the beginning of the period.
INTEREST INCOME. The Company records interest on debt securities when the
indebtedness is current, in accordance with the terms of the agreements made
with investee debtors. A reserve for loss is established to the extent there
is doubt as to the collectibility of current amounts recorded. The Company
generally recognizes interest earned on debt securities which are six months or
more delinquent only when collectibility is assured.
REVENUES AND COSTS. Under its asset recovery agreements, the Company
charges its customers an agreed-upon percentage of the customers' recoverable
amounts. The Company records, as unbilled receivables, amounts representing
its share of customers' recoverable amounts when the recovery process is
substantially complete and the realization of the amounts is reasonably
assured. The recovery process is substantially complete when the Company
receives third party acknowledgement of pending recoveries. Revenues from
operational support are recognized when billed. Accounts receivable represent
amounts actually billed to customers. Allowances are provided for amounts not
expected to be realized.
Costs of services include salaries, commissions, employee benefits and
payroll taxes and are charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair value
of investments are disclosed in Note 4.
Short-term payables -- the carrying amount approximates fair value due to
the short-term maturities of these instruments.
Long-term debt approximates fair value based on borrowing rates currently
offered to the Company.
Page 33 of 55
<PAGE> 34
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES. Deferred tax liabilities are recognized for the estimated
future tax consequences of temporary differences and net operating loss
carryforwards. Temporary differences are primarily the result of the
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Deferred tax liabilities are measured by applying enacted
statutory tax rates, applicable to the future years, in which deferred tax
liabilities are expected to be settled or realized. (Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.) Income tax expense consists of the taxes payable for the
current period and the change in deferred tax assets and liabilities during the
period.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents for purposes of the statement of cash flows. Cash and cash
equivalents which potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments with commercial banks.
The Company had approximately $693,500 of temporary cash on deposit in excess
of insured amounts as of December 31, 1996.
MARGIN ACCOUNTS. The Company uses margin accounts established at several
brokerage houses for operations. Interest accrues at the brokers' call rate
plus 1% and is charged monthly on the margin balance.
FIXED ASSETS. Fixed assets are recorded at cost. Depreciation is
computed on the straightline method over the estimated economic lives of the
assets, which range from 5 to 7 years.
DEFERRED FINANCING COSTS. Deferred financing costs are being amortized by
the straight-line method over the five year term of the related debt.
USE OF ESTIMATES. The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION. During 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The provisions of SFAS No. 123 allow companies
to either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) had the fair value of the options
been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans. See the notes to the
financial statements for further information.
Page 34 of 55
<PAGE> 35
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FIXED ASSETS
Fixed assets as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Office furniture & equipment $193,035 $178,317
Less: accumulated depreciation (149,604) (123,382)
-------------- --------------
$43,431 $54,935
============== ==============
</TABLE>
Page 35 of 55
<PAGE> 36
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SECURITIES. Securities as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
Market/ Market/
Fair Value Cost Fair Value Cost
<S> <C> <C> <C> <C>
Equity: Healthcare $ 21,549,896 $ 6,613,021 $ 25,941,009 $ 9,648,427
Other 2,728,738 4,034,952 1,600,523 3,740,782
Communications 1,630,703 4,013,187 1,963,396 4,060,639
High technology 1,746,317 2,971,548 1,471,439 1,754,201
Biotechnology 607,132 922,656 131,100 150,000
Environmental 48,867 50,848 0 25,188
Gold 1 18,000 800 18,000
----------- ---------- ---------- ----------
Total equity 28,311,654 18,624,212 31,108,267 19,397,237
----------- ---------- ---------- ----------
Debt: Healthcare 150,000 155,546 -- 5,460
Other 953,486 1,447,526 552,314 690,392
Service 329,970 339,970 294,380 312,350
Environmental 53,625 350,750 -- 222,500
Communication 25,000 25,000 -- --
Gold -- -- -- --
----------- ---------- ---------- ----------
Total debt 1,512,081 2,318,792 846,694 1,230,702
----------- ---------- ---------- ----------
Total securities $ 29,823,735 $ 20,943,004 $ 31,954,961 $ 20,627,939
=========== ========== ========== ==========
</TABLE>
5. LONG-TERM DEBT.
A) SBA DEBENTURES
Total debentures payable were $8,000,000 at December 31, 1996 (the "Walnut
Debentures"). One Walnut Debenture with a principal balance of $4,000,000 is
payable to SBIC Funding Corp. or its designee on April 1, 1997 and bears
interest at 8.95%, payable semiannually on April 1 and October 1 of each year.
One Walnut Debenture with a principal balance of $2,000,000 is payable to SBIC
Funding Corp.
Page 36 of 55
<PAGE> 37
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or its designee on June 1, 1998 and bears interest at 9.80%, payable
semiannually on June 1 and December 1 of each year. One Walnut Debenture with
a principal balance of $2,000,000 is payable to SBIC Funding Corp. or its
designee on September 1, 1999 and bears interest at 8.8%, payable semiannually
on March 1 and September 1 of each year. Additionally, eight debentures with
an aggregate principal balance of $4,000,000 were due to the SBA, as agent for
the holders, on September 1, 1995, and were so repaid in accordance with their
terms (the "September Debentures").
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.
Pursuant to an examination by the SBA, the SBA issued a finding related 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. On July 29, 1994, Walnut entered
into an agreement with the SBA (as amended, the "SBA Agreement") whereby,
subject to certain conditions, the SBA would refrain until June 30, 1995 from
declaring an event of default under 13 CFR 107.203(d) 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 to the agreement 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 was increased to $659,295.
Effective as of June 30, 1995, the Company entered into a transaction with
Windy City, Inc. ("WCI"), an affiliate, 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 to the Company
45,000 shares of Logic Devices Incorporated common stock (Nasdaq - LOGC) and
500,000 shares of Consolidated Technology Group, Inc. common stock (Nasdaq -
TGSI), having an aggregate market value of approximately $1,018,000 as of said
date. Immediately thereafter, the Company contributed these securities to
Walnut 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 June 30, 1995.
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 [Walnut's] holdings 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 year
ended
Page 37 of 55
<PAGE> 38
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 approximately $12 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.
The SBA has issued a finding that the Company has violated Section
107.903(b)(1) and (d) by financing an Associate and paying fees to an
Associate. The Company has provided information to the SBA to show that such
findings are inaccurate. Additionally, the SBA has issued a finding that the
Company has violated Section 107.501(b)(1), (3) and (4) by not seeking prior
approval of the SBA for management services provided by Associates. The Company
believes that such findings are inaccurate and current SBA regulations no
longer require prior approval in such circumstances.
The last examination report issued to Walnut by the SBA is dated May
14, 1996 and covered the 14-month period ended February 28, 1995. To date, the
SBA has not declared or threatened to declare a default with respect to any of
its findings; however, there can be no assurance that the SBA will be willing
to further refrain from declaring an event of default under the SBA Act and it
is likely that the SBA will continue to deem these issues to be open until
fully resolved to the SBA's satisfaction, irrespective of any continuing
discussions with respect thereto between the SBA and Walnut's management. If
such a default were to be declared and Walnut failed to cure the same, the SBA
would have the right to accelerate the maturity of the $8 million debentures
issued by Walnut to the SBIC Funding Corp. pursuant to the SBA Act (the "Walnut
Debentures") currently outstanding. Management believes that Walnut could
immediately remedy fully the capital impairment issue through the sale of
certain of Walnut's portfolio securities.
B) NOTES TO OTHERS
NFS has a note payable outstanding to an individual in the amount of
$50,050. This note is due in monthly installments of $2,000 with interest at
11%. No payments have been made pursuant to this note since August 1994.
NFS has payments due on capital leases in monthly installments through May
2000. The leases bear interest at 12%. The balance outstanding at December
31, 1996 was $12,771.
As of December 31, 1996, the Company had outstanding a promissory note to
a third party representing principal owed of $875,000. The note was issued in
connection with an acquisition by the Company of a limited partnership interest
in Knox Liquidating Partnership, L.P., which, in turn, has an ownership
interest in a catalog company known as Foster & Gallagher, Inc. Such note
accrues interest at 8% per annum. Principal is payable in two installments,
$175,000 on January 31, 1997 (which amount was timely paid) and the remaining
$700,000 on July 31, 1997.
Page 38 of 55
<PAGE> 39
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C> <C>
Debentures payable to the SBA $ 8,000,000 $ 8,000,000
Installment note payable 50,050 44,845
Capital leases 12,771 16,393
------------ ------------
TOTAL 8,062,821 8,061,238
Less: current portion 4,049,500 47,953
------------ ------------
Long-term portion $ 4,013,321 $ 8,013,285
============ ============
</TABLE>
As of December 31, 1996, the aggregate principal maturities of long-term
debt are as follows:
<TABLE>
<S> <C> <C>
Amount
1997 $ 4,049,500
1998 2,005,660
1999 2,006,129
2000 1,532
---------
$ 8,062,821
=========
</TABLE>
C) NOTES PAYABLE TO BANKS
On August 31, 1995 the Company established a $4 million line of credit
with American National Bank and Trust Company of Chicago ("ANB"). This credit
line was replaced as of September 8, 1996 with a term loan of $2,850,000. This
loan required interest only payments as of September 30, 1996 and December 31,
1996. A principal payment of $575,000 is due on March 31, 1997, with the
balance due on June 30, 1997. The interest rate associated with this loan is
ANB's base rate plus 2% (10.25% as of December 31, 1996). This loan is
personally guaranteed by two Directors of the Company.
On December 31, 1993, Walnut entered into a $600,000 revolving credit
agreement with ANB, which accrued interest at ANB's base rate plus 2% (10.25%
at December 31, 1996). Interest is payable monthly, with the principal balance
due on July 31, 1996. The line is collateralized by a variety of securities
having a fair market value in excess of $600,000. The balance of this note was
$585,000 at December 31, 1995 and was repaid in full as of December 31, 1996.
Page 39 of 55
<PAGE> 40
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 7, 1995, NFS established a $350,000 line of credit with ANB.
The line of credit accrued interest at ANB's base rate plus 2% (10.25% at
December 31, 1996). The amount borrowed was due on July 31, 1996. The balance
of this note was $348,791 at December 31, 1995 and was repaid in full as of
December 31, 1996.
D) NOTES PAYABLE TO RELATED PARTIES
In November 1995, the Company received two unsecured loans from a related
party for an aggregate amount of $270,000. The loans accrued interest at 8.75%
and mature through April 1996. The aggregate balance of these notes was
$270,000 at December 31, 1995; these notes were repaid upon maturity in April
1996.
6. MARGIN BROKERAGE ACCOUNTS
Brokerage margin payable to one investment banker consists of advances of
$2,586,362 under a line of credit as of December 31, 1996. The brokerage
account accrues interest on a monthly basis at the brokers' call rate plus 1%
(7.75% at December 31, 1996) and was collateralized by 182,500 shares of
HealthCare COMPARE Corp. common stock, having a fair market value of
approximately $7,733,000 at December 31, 1996, and 15,000 shares of GranCare,
Inc. common stock, having a fair market value of approximately $268,000 at
December 31, 1996.
Brokerage margin payable to a second investment banker consists of
advances of $2,872,756 under a line of credit as of December 31, 1996.
Advances under this line cannot exceed 40% of the quoted market bid for shares
accepted by the investment banker, and this amount is calculated on an ongoing
basis to reflect market changes. The brokerage account accrues interest on a
monthly basis at the brokers' call rate plus 1% (7.75% at December 31, 1996)
and is collateralized by 170,000 shares of HealthCare COMPARE Corp. common
stock, having a fair market value of approximately $7,204,000 at December 31,
1996, and 91,916 shares of GranCare, Inc. common stock, having a fair market
value of approximately $1,643,000 at December 31, 1996.
Page 40 of 55
<PAGE> 41
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities as at
December 31 consisted of the following :
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C> <C> <C>
Accounts payable $ 324,581 $ 364,073
Accrued interest 163,118 165,858
Accrued payroll taxes(1) 144,302 211,705
Accrued taxes payable 113,692 157,835
Accrued professional fees 148,237 55,153
Accrued payroll 146,640 31,224
Other accrued expenses 79,215 17,240
------------ ------------
Total $ 1,119,785 $ 1,003,088
============ ============
</TABLE>
(1) NFS had a tentative deferred payment agreement with the State of New York
Department of Taxation and Finance for delinquent payroll taxes, and the
related interest and penalties. The agreement called for monthly installments
of $33,465 with interest at 7.3%. NFS has been current with the terms of this
tentative agreement since November 1994. On February 20, 1996 NFS signed an
installment agreement with the State of New York Department of Taxation and
Finance for 18 monthly payments of $8,851.58 effective March 15, 1996.
8. INCOME TAXES
As at December 31 the components of the Company's net
deferred tax asset and liability were as follows:
<TABLE>
1996 1995
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains $ 3, 680,832 $ 4,518,621
Deferred tax asset:
Net operating loss benefit (3,060,400) (2,942,400)
Allowance for doubtful accounts (224,442) (127,721)
Accounts receivable and other (358,301) (200,533)
-------------- --------------
Deferred tax liability $ 37,689 $ 1,247,967
============== ==============
</TABLE>
The difference between book and tax accounting for investments and
allowances is the primary source of the non-current deferred tax liability.
For financial statement purposes, investments are carried at market and for
Page 41 of 55
<PAGE> 42
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
income tax purposes, investments are carried at cost. This resulted in
unrealized gains that are treated as temporary differences under standards for
accounting for income taxes.
The components of the deferred income taxes for the years ended December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax (benefit) on income:
Federal (1,201,438) (1,177,608) (594,000)
State $ (212,018) $ (260,644) $ (131,000)
-------------- ------------- -----------
Total $ (1,413,456) $ (1,438,252) $ (725,000)
============== ============= ============
Tax expense on realized gain:
Federal 1,014,996 1,491,524 328,000
State $ 179,711 $ 330,192 $ 72,000
-------------- ------------- -----------
Total $ 1,194,707 $ 1,821,716 $ 400,000
============== ============= ============
Tax expense (benefit) on unrealized
loss:
Federal (865,406) (1,366,361) 1,493,000
State $ (152,719) $ (302,483) $ 330,000
-------------- ------------- -----------
Total $ (1,018,125) $ (1,668,844) $ 1,823,000
============== ============= ============
</TABLE>
In 1996, current tax expense approximated $27,000.
The Company's effective federal tax rate was 24% in 1996, compared to an
overall statutory rate of 34%. This difference was primarily due to the
reserve for write-off of goodwill at NFS.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1996 1995 1994
Pre-tax (loss)/gain $ (4,202,000) $ (3,252,000) $ 2,988,000
Federal tax ============= ============= ============
expense/(benefit)at
statutory rate of 34% (1,428,000) (1,106,000) 1,019,000
Federal tax effect of
write-off of goodwill 374,000 0 0
------------- ------------- ------------
(1,054,000) (1,106,000) 1,019,000
Other - net 3,000 54,000 64,000
------------- ------------- ------------
Tax (benefit)/expense $ (1,051,000) $ (1,052,000) $ 1,083,000
============= ============= ============
</TABLE>
Page 42 of 55
<PAGE> 43
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes as follows:
<TABLE>
<S> <C> <C>
Expiration
2006 $ 2,192,000
2007 2,588,000
2008 1,933,000
2009 643,000
2011 295,000
------------
$ 7,651,000
============
</TABLE>
In addition, NFS has net operating loss carryforwards of approximately
$3,700,000 at December 31, 1996 for federal income tax purposes which may only
be used to offset income earned by NFS. Such net operating loss carryforwards
are subject to limitation under Section 382 of the Internal Revenue Code of
1986 (the "Code"), as amended and expire in various amounts from the years
2002 to 2009. NFS has a deferred tax asset of approximately $1,000,000 which
has been fully reserved due to uncertainty about future operating results.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
A. LEASE
The Company leases office facilities for NFS, ARS and NFS Collection under
an operating lease expiring in August 1999. The annual minimum rentals under
noncancelable operating leases at December 31, 1996 were as follows:
<TABLE>
<S> <C> <C>
Year ending
December 31,
1997 $ 85,664
1998 85,664
1999 57,109
</TABLE>
The Company leases office space and services for Walnut from an affiliate
at $4,550 per month as of December 31, 1996. The lease is renewable annually
at the discretion of the parties. The Company
Page 43 of 55
<PAGE> 44
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
paid $56,544, $51,482, and $49,020 for rent for the years ended December
31, 1996, 1995, and 1994, respectively, and $8,505, $70,051, and $43,626 for
services for the years ended December 31, 1996, 1995 and 1994, respectively.
B. LITIGATION
NFS is the defendant in an action entitled Josephberg Grosz & Co., Inc. v.
NFS Services, Inc. which was filed on September 19, 1996 in the Supreme Court
of the New York, County of New York, Index No. 604744/96 (the "Action"). In
the Action, Josephberg Grosz & Co. ("JGC") asserts, among other things, that,
pursuant to the terms of a 1990 agreement between JGC and NFS Services (as
amended, the "JGC Agreement"), JGC was entitled to manage, and be compensated
in connection with the Business Combination and the Common Stock Private
Placement. In the Action, JGC claims potential damages of $600,000 to
$1,000,000.
On or about November 15, 1996, NFS filed a Memorandum in Support of NFS
Services' Motion to Dismiss (the "Motion to Dismiss"). Pursuant to the Motion
to Dismiss, NFS asserted, among other things, that JGC was not entitled to
manage, or receive compensation in connection with, either the Business
Combination or the Private Placement. In particular, in the Motion to Dismiss,
NFS asserted that NFS was not a party to either the Business Combination or the
Private Placement and that NFS did not, and could not, bind the Company as a
party to the Business Combination and the issuer pursuant to the Common Stock
Private Placement, to the terms of the JGC Agreement.
The Motion to Dismiss was denied on February 18, 1997, and NFS will be
required to file an answer to JGC's original complaint and substantive
discovery will commence. The Action is in the preliminary stages and the
outcome cannot be determined at this time.
In March 1994, a former employee commenced an action against NFS for
failure to pay bonuses (No. 94 CIV 1503, William D. Riley v. NFS Services,
Inc., United States District Court for the Southern District of New York) The
complaint sought damages in excess of $400,000 plus an additional 25% for wages
and legal fees. The claim was settled for a cash payment of $10,000 and the
issuance of 22,500 shares of the Company's Common Stock having a fair value of
$45,000 at the time of issuance in 1995.
In connection with the merger of Walnut and FAO Corp. immediately after
the Business Combination, two former shareholders of Walnut commenced appraisal
proceedings on June 30, 1995 to determine the fair value of their Walnut common
stock pursuant to Section 262 of the Delaware General Corporation Law. (Civil
Action No. 14391, The Lee and Rose Warner Foundation and Space Center, Inc. v.
Walnut Capital, Court of Chancery of the State of Delaware in and for New
Castle County.) The parties settled this matter. The Company issued 333,981
shares of Common Stock in the aggregate to the plaintiffs in connection with
such settlement (the same number of shares of Common Stock the plaintiffs would
have received in connection with the Business Combination).
C. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Burton W. Kanter
and Joel S. Kanter. In addition, Walnut had entered into an employment
agreement with Michael Faber. Effective December
Page 44 of 55
<PAGE> 45
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31, 1996, Michael A. Faber resigned from Walnut and Walnut has no further
contractual obligations to him. Mr. Burton Kanter's employment agreement
provides that he is entitled to a minimum base salary of $100,000 per annum
(which is paid in part to Mr. Kanter individually and in part to his sole
proprietorship doing business as BK Consultants; see Footnote 10 - Related
Party Transactions.) He is also entitled to a bonus as determined by the Board
of Directors from time to time in its absolute and sole discretion. The
agreement expires in February 1998, unless terminated at an earlier date
pursuant to terms and conditions of the agreement. Amounts due under Mr.
Burton Kanter's employment agreement were not currently paid in 1996 and are
being accrued by the Company. The terms and conditions of the employment
agreement of Mr. Joel Kanter is generally identical to that of Burton Kanter
except that Joel Kanter is entitled to a minimum base salary of $70,000 per
annum; however, the Board of Directors determined to increase such base salary
to $200,000 for fiscal 1996 (see Footnote 10 - Related Party Transactions).
Joel Kanter's agreement also differs in that Joel Kanter has agreed not to
compete with the Company or NFS (but not Walnut) for a period of three years
after his termination of employment with Walnut. In the event of termination
of any of the agreements without cause, Messrs. Kanter would be entitled to one
year's salary.
Eugene N. Scalercio has entered into a noncompetition agreement with NFS,
which provide that Mr. Scalercio will not compete with the Company, or its
subsidiaries (other than Walnut), for a period of three years after termination
of his employment with the Company. Neither the Company nor NFS has entered
into any employment agreement with Mr. Scalercio.
D. MAJOR CUSTOMERS.
Approximately 60% and 73% of the Company's revenues were derived from three
customers for the year ended December 31, 1996 and 1995, respectively.
Accounts receivable from such customers were approximately $131,000 and
$181,000 in the aggregate at December 31, 1996 and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries retain a law firm at which an officer has
been of counsel since 1993. Expenses of $165,692 and $165,127 were incurred by
the Company for reimbursement of expenses and legal services for the years
ended December 31, 1996 and 1995, respectively.
The Company and its subsidiaries retained an additional law firm at which
another officer is of counsel. Expenses of $34,759, were incurred by the
Company for reimbursement of expenses and legal services incurred during the
year ended December 31, 1995. No such expenses were incurred in 1996.
At December 31, 1996 and 1995, approximately $128,000 and $116,000,
respectively, were due to the law firms and are included in accounts payable,
accrued expenses and other current liabilities in the accompanying financial
statements.
As described above at Footnote 9.c., the Company retains Mr. Burton W.
Kanter and his sole proprietorship doing business as BK Consultants to render
services regarding the Company's operations and investment matters. Salary to
Mr. Kanter and fee payments to such sole proprietorship of $15,000 and
$135,000, respectively, were paid for the years ended December 31, 1995 and
1994. There were no payments in 1996, but $100,000 in salary was accrued by
the Company for fiscal 1996.
Periodically an officer of Walnut, or a designee of Walnut, serves in the
capacity of director or observer to the board of directors of investee
companies.
Page 45 of 55
<PAGE> 46
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to March 1, 1995, Walnut retained Mr. Joel S. Kanter on a consulting
basis to perform due diligence and monitor certain investment matters. Fees
paid to Mr. Kanter for professional services performed for the period from
January 1, 1995 through February 28, 1995 were $20,059. As of March 1, 1995,
Mr. Kanter became an officer of Walnut and received salary payments of $49,941
for the period March 1, 1995 through December 31, 1995. (See Footnote 9.c. -
Employment Agreements.)
11. GUARANTY OF LOANS
The Company has guaranteed $318,000 of a secured loan obtained by an
investee company as of December 31, 1996.
12. CONCENTRATION OF CREDIT RISK
The Company has significant holdings of investments in the health care
industry. Total investments in debt and equity were approximately $21,700,000
as of December 31, 1996 (including unrealized appreciation of approximately
$14,931,000 as of December 31, 1996).
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company from time to time makes commitments to provide financing in
the form of loans, debt securities and equity investments. The Company's
maximum exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notational amount of these instruments. As of
December 31, 1996, no commitments were outstanding.
The Company evaluates each portfolio investee's credit worthiness on a
case-by-case basis. Generally, collateral is not obtained by the Company upon
the extension of credit.
14. SHAREHOLDERS' EQUITY
a. Preferred Stock.
The Company is authorized to issue up to 1,000,000 of its preferred
stock in one or more series. As of December 31, 1996, no shares of
preferred stock were outstanding.
b. Common Stock Options and Warrants.
(1) In 1989, the Company adopted the NFS Services, Inc. 1989 Incentive
Stock Option Plan (as amended, the "1989 Plan"). The 1989 Plan is
administered by a stock incentive plan administrative committee appointed
by the Company's Board of Directors (the "1989 Plan Committee"). The
1989 Plan Committee has the authority, subject to approval by the
Company's Board of Directors and the terms of the 1989 Plan, to select
the persons to whom awards may be granted, to determine the terms of each
award, to interpret the provisions of the 1989 Plan and to make all other
determinations that it may deem necessary or advisable for the
administration of the 1989 Plan. The 1989 Plan provides for the grant of
"incentive stock options," as defined under
Page 46 of 55
<PAGE> 47
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Section 422(b) of the Internal Revenue Code ("incentive options"),
and options that do not so qualify ("nonstatutory options"), as
determined in each individual case by the 1989 Plan Committee. The
Company's Board of Directors has reserved 33,700 shares of Common Stock
for issuance under the 1989 Plan. Awards of stock options to purchase
33,700 shares of Common Stock have been granted pursuant to the 1989 Plan
to various officers, employees and consultants of the Company, or its
subsidiaries. All of said options are fully vested and presently
exercisable into shares of Common Stock and expire on November 23, 1998.
The exercise price of the options granted pursuant to the 1989 Plan is
$2.50 per share of Common Stock. As a result of the Business
Combination, no further awards will be granted under the 1989 Plan.
(2) In 1994, the Company adopted the NFS Services, Inc. (Utah) 1994
Incentive Stock Option Plan (the "1994 Plan"). The 1994 Plan is
administered by a stock incentive plan administrative committee appointed
by the Company's Board of Directors (the "1994 Plan Committee"). The
1994 Plan Committee has the authority, subject to approval by the
Company's Board of Directors and the terms of the 1994 Plan, to select
the persons to whom awards may be granted, to determine the terms of each
award, to interpret the provisions of the 1994 Plan and to make all other
determinations that it may deem necessary or advisable for the
administration of the 1994 Plan. The 1994 Plan provides for the grant of
incentive stock options, nonstatutory options, and restricted stock and
stock appreciation rights ("SARs"), as determined in each individual case
by the 1994 Plan Committee. The Company's Board of Directors has
reserved 500,000 shares of Common Stock for issuance under the 1994 Plan.
The Company has granted options under the 1994 Plan as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
Outstanding at January 1 119,500 $2.76
Granted 134,000 2.36 119,500 $2.76
------- -------
Outstanding at December 31 253,500 2.55 119,500 2.76
======= =======
Exercisable 129,500 2.76 35,000 2.79
======= =======
</TABLE>
(3) In connection with the Business Combination, the Company assumed the
Walnut Capital Corporation 1987 Stock Option Plan (as amended, the "1987
Plan"). The 1987 Plan is administered by a stock option plan administrative
committee appointed by the Board of Directors (the "1987 Plan
Page 47 of 55
<PAGE> 48
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Committee"). The 1987 Plan Committee has the authority, subject to
approval by the Company's Board of Directors and the terms of the 1987 Plan, to
select the persons to whom awards may be granted, to determine the terms of
each award, to interpret the provisions of the 1987 Plan and to make all other
determinations that it may deem necessary or advisable for the administration
of the 1987 Plan. The 1987 Plan provides for the grant of incentive stock
options or nonstatutory options, as determined in each individual case by the
1987 Plan Committee. There are 806,930 shares of Common Stock reserved for
issuance under the 1987 Plan. Awards of incentive stock options to purchase up
to 149,958 shares of Common Stock, and awards of nonstatutory options to
purchase 656,972 shares of Common Stock, have been granted pursuant to the 1987
Plan to various officers, directors, employees, and consultants of Walnut. All
of said options are subject to a variety of vesting requirements and at
December 31, 1996, 665,238 shares were exercisable. The exercise price of the
options granted pursuant to the 1987 Plan ranges from $.90 to $1.80 per share
of Common Stock. The average exercise price of options outstanding under the
1987 Plan was $1.63. As a result of the Business Combination between the
Company and Walnut, no further awards will be granted under the 1987 Plan.
During the year ended December 31, 1996, no options to acquire Common Stock were
exercised.
(4) In addition to the options granted pursuant to the 1989 Plan, the 1994
Plan and the 1987 Plan, the Company has issued certain options and warrants to
purchase (i) 95,000 shares of Common Stock at $2.00 per share, which options
expire on July 14, 1998, (ii) 225,269 shares of Common Stock at $1.81 per share
which warrants expired on March 13, 1997, (iii) 452,533 shares of Common Stock
at $3.00 per share which options expire June 30, 1998, (iv) 100,000 shares of
Common Stock at $2.50 per share which options expire August 31, 2001, (v)
50,000 shares of Common Stock at $3.00 per share which options expire June 30,
2001, and (vi) 697,391 shares of Common Stock at $3.00 per share which warrants
expire June 17, 2001.
15. SEGMENT INFORMATION
The Company is engaged primarily in two segments: (1) investment
activities; and (2) providing consulting and asset recovery services through
NFS. The following table shows certain operating information for each segment
for the years ended December 31, 1996 and 1995.
.
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
Consulting and
Corporate Investing Asset Recovery Total
<S> <C> <C> <C> <C>
Revenues $ 3,636 $ 79,115 $ 2,057,421 $ 2,140,172
Operating (loss) (877,235) (750,036) (1,011,644) (2,638,915)
Identifiable Assets 2,405,224 28,530,591 2,262,660 33,198,475
Depreciation -- 2,008 18,889 20,897
</TABLE>
Page 48 of 55
<PAGE> 49
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------
Consulting and
Corporate Investing Asset Recovery Total
<S> <C> <C> <C> <C>
Revenues $ 7,845 $ 444,762 $ 2,081,440 $ 2,534,047
Operating (loss) (567,639) (261,800) (978,958) (1,808,397)
Identifiable Assets 4,132,014 28,526,894 3,404,596 36,063,504
Depreciation -- 1,910 22,146 24,056
</TABLE>
Prior to the acquisition of NFS in February 1995, the Company was in one
line of business and therefore no segment information is provided for those
years.
16. STOCK OPTIONS
The Company applies APB 25 in accounting for its stock option plans and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant exercise price of the
option at the date of grant. The effect of applying SFAS No. 123 on 1995 and
1996 pro forma net loss as stated above is not necessarily representative of
the effects on reported net loss for future years due to, among other things,
(1) the vesting period of the stock options and (2) the fair value of
additional stock options in future years. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under the plans consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss in 1996 and 1995 would
have been approximately $3,226,041 and $2,105,544, or $(.23) per share and
$(.17) per share, respectively. The fair value of the options granted during
1996 and 1995 are estimated at $1.16 and $1.95, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 67% for 1996 and 62% for 1995,
risk-free interest rate of 5.9% - 7.9% for 1996 and 5.3% - 6.6% for 1995, and
expected life of 5 years.
17. LONG-TERM ASSETS
The Company is re-evaluating the asset recovery business at NFS. As a
result of the calculations required under FAS 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed of,"
NFS recorded an expense of $1,100,000 representing a write-down of its
goodwill. Management believes that the remaining NFS goodwill of
approximately $800,000 is consistent with the accounting requirements of
FAS 121.
Page 49 of 55
<PAGE> 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
In February 1995, Walnut dismissed Coopers & Lybrand, L.L.P. as its
principal accountant, in favor of Richard A. Eisner LLP which had been the
principal accountant for the Company and NFS since March 1993. Management made
this change in order to consolidate the accounting and auditing functions for
the Company and each of its subsidiaries with one independent accountant. The
Walnut Board of Directors approved such dismissal. During the Company's three
most recent fiscal years, no report issued by Coopers & Lybrand, L.L.P. to
Walnut contained an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years, Walnut and Coopers &
Lybrand, L.L.P. have had no disagreements on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
PART III
As permitted by General Instruction G to Form 10-K, the information
required by Part III of Form 10-K will be included in the Company's definitive
proxy statement relating to its 1997 annual meeting of stockholders, which the
Company anticipates will be filed no later than April 30, 1997, and thus is
incorporated herein by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K
(a)(1) Financial Statements:
The Company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements appear at pages 27 to 49, inclusive, of this Report; see
Index to Consolidated Financial Statements at page 23 of this Report.
(a)(2) Financial Statement Schedules:
Schedules I and II appear at pages 51 and 53 of this Report; see Index
to Consolidated Financial Statement Schedules at page 23 of this Report. All
other financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits:
The exhibits required by Item 601 of Regulation S-K are included with this
Form 10-K and are listed on the "Index to Exhibits" immediately following the
signature page.
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period ended
December 31, 1996.
Page 50 of 55
<PAGE> 51
WALNUT FINANCIAL SERVICES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1996
BALANCE SHEET
<TABLE>
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,105
Other current assets 71,435
-------------
Total current assets 82,540
Due from subsidiaries 875,831
Investment in subsidiaries 14,292,513
Investment in securities 2,358,125
Non-current deferred tax liability 1,064,266
-------------
18,590,735
TOTAL ASSETS $ 18,673,275
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Margin payable to brokers 204,169
Notes payable 3,725,000
Accounts payable 356,445
-------------
4,285,614
-------------
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 146,167
Additional paid in capital 15,030,269
Retained earnings (788,775)
Total shareholders' equity 14,387,661
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 18,673,275
=============
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements included elsewhere in this
Report on Form 10-K.
Page 51 of 55
<PAGE> 52
WALNUT FINANCIAL SERVICES, INC.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1996
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-----------------------------
<S> <C>
Income $ 37,626
----------------------
Costs and Expenses
General and administrative 880,871
Interest 379,623
Unrealized gain on investments 53,435
Realized loss on investments (301,320)
----------------------
Loss before equity in net loss of subsidiaries (974,983)
Equity in net loss of subsidiaries (2,379,676)
Income tax benefit 389,993
----------------------
Net loss $ (2,964,666)
======================
</TABLE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
<S> <C>
Net cash provided (used in) by operating activities $ (695,844)
Cash flows from financing activities
Issuance of compensatory warrants 125,000
Net proceeds from sale of common stock for cash 35,000
Borrowings of short term bank debt (275,000)
Increase in margin accounts (909,600)
--------------------------
(1,720,444)
--------------------------
Cash flows from investing activities
Costs in connection with acquisition of NFS 0
Additional investments in subsidiaries 0
Net advances to subsidiaries 320,397
Purchases of investments (875,000)
Proceeds from sales of investments 2,766,760
--------------------------
Deferred private placement costs 0
--------------------------
1,617,160
--------------------------
Net increase/(decrease) in cash (103,284)
Cash and cash equivalents at beginning of period 114,389
--------------------------
Cash and cash equivalents at end of period $ 11,105
--------------------------
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements included elsewhere in this
Report on Form 10-K.
Page 52 of 55
<PAGE> 53
WALNUT FINANCIAL SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
- ---------------------------------------------------------------------------------------------------------------
(1) (2)
Balance at --------------------------------
Beginning of Charged to Costs Charged to Balance at
Description Period and Expenses Other Accounts Deductions End of Period
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,1996:
Allowances for doubtful receivables $ 703,310 $421,337 $243,168 $1,367,815
========== ==========
Year ended December 31, 1995:
Allowances for doubtful receivables $1,431,188 $462,689 $ 235,163(c) $879,710(a) $703,310
========== 546,020(b) ========
</TABLE>
- --------------------------
(a) Write offs.
(b) Conversion of debt securities to equity securities.
(c) Opening valuation balance of acquired company (see Note 1 to consolidated
financial statements).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements included elsewhere in this
Report on Form 10-K.
Page 53 of 55
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 27, 1997 By:/s/ Joel S. Kanter
-----------------------------
Joel S. Kanter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/Joel S. Kanter President and Director
------------------ (Principal Executive Officer) March 27, 1997
Joel S. Kanter
/s/Robert F. Mauer Treasurer
------------------ (Principal Financial and
Robert F. Mauer Accounting Officer) March 28, 1997
/s/Burton W. Kanter Director March 27, 1997
------------------------
Burton W. Kanter
/s/Solomon A. Weisgal Director March 27, 1997
------------------------
Solomon A. Weisgal
/s/William F. Burge, III Director March 27, 1997
------------------------
William F. Burge, III
/s/Eugene N. Scalercio Director March 27, 1997
------------------------
Eugene N. Scalercio
/s/Gene E. Burleson Director March 27, 1997
------------------------
Gene E. Burleson
Page 54 of 55
<PAGE> 55
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization dated November 8, 1994 by and
between NFS Services, Inc. (Utah) and Walnut Capital Corp.*
3.1 Articles of Incorporation of Walnut Financial Services, Inc., as
amended.*
3.2 Bylaws of Walnut Financial Services, Inc.*
10.1 Agreement dated July 29, 1994 between Walnut Capital Corp. and U.S.
Small Business Administration.*
10.2 Employment Agreement dated January 1, 1996 between Walnut Financial
Services, Inc. and Burton W. Kanter.
10.3 Employment Agreement dated February 27, 1995 between Walnut Financial
Services, Inc. and Joel S. Kanter.
10.5 Noncompetition Agreement dated February 27, 1995 between NFS
Services, Inc. and Eugene N. Scalercio.*
10.6 The Walnut Capital Corporation 1987 Stock Option Plan.*
10.7 The NFS Services, Inc. 1989 Incentive Stock Option Plan.*
10.8 The NFS Services, Inc. (Utah) 1994 Incentive Stock Option Plan.*
21 Subsidiaries of Walnut Financial Services, Inc.
23.1 Consent Letter of Richard A. Eisner LLP.
27 Financial Data Schedule
__________________________
* Previously filed as an Exhibit (with the same Exhibit reference number as
contained herein) to the initial filing of the Registrant's Registration
Statement on Form 10 dated May 10, 1995 as filed with the Securities and
Exchange Commission on May 11, 1995.
Page 55 of 55
<PAGE> 1
EMPLOYMENT AND NON-COMPETITION AGREEMENT
OF BURTON W. KANTER
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of this 1st day of
January, 1996, by and between WALNUT FINANCIAL SERVICES, INC., a Utah
corporation ("Employer"), and BURTON W. KANTER, an individual ("Employee").
RECITALS
WHEREAS, Employee had been previously employed by Walnut Capital Corp.
("WCC"), a Delaware corporation and wholly-owned subsidiary of Employer,
pursuant to an Employment and Non-Competition Agreement of Burton W. Kanter
dated as of February 27, 1995 (the "WCC Contract"); and
WHEREAS, Employee and WCC mutually agree to terminate the WCC Contract and
agree that no amounts will be owing to Employee as a result of such
termination; and
WHEREAS, Employer desires to employ Employee on the terms and conditions
herein set forth; and
WHEREAS, Employee desires to be employed by Employer on the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT. Employer hereby agrees to employ Employee as Chief
Executive Officer with the duties and responsibilities set forth herein,
and in such other executive capacities as the Board of Directors of
Employer's or a duly authorized committee thereof (the "Board") may from
time to time determine, and Employee hereby agrees to become and to
remain employed by Employer, for the Term (as hereinafter defined) and
upon the other terms and conditions hereinafter set forth.
2. TERM. The commencement date of this Agreement shall be the date
hereof, and its term shall continue until February 27, 1998, as extended
pursuant to Section 11.4 hereof, unless sooner terminated pursuant to the
terms and conditions hereof (the "Term").
3. BASE SALARY. For faithful performance of Employee's duties and
responsibilities, Employee shall receive a base salary of One Hundred
Thousand and No/100 Dollars ($100,000.00) per
<PAGE> 2
year through the end of the Term. Employee's base salary shall be
payable in accordance with Employer's usual practices, including, without
limitation, the withholding of all applicable federal, state and local
taxes, and shall be paid only for that portion of each calendar year
during which Employee was actually employed.
4. FRINGE BENEFITS.
4.1. Benefit Plans. During the Term, Employee shall be entitled
to participate in all stock option plans, employee benefit plans or
programs of Employer and Employer's subsidiaries to the extent that
his position, title, tenure, salary, age, health and other
qualifications make him eligible to participate. Employer does not
guaranty the adoption or continuance of any particular stock option
plan, employee benefit plan or program during the Term, and
Employee's participation in any such plans or programs shall be
subject to the provisions, rules and regulations applicable thereto.
4.2. Vacations. During the Term, Employee shall be entitled to
vacation days with pay in accordance with Employer's policies in
effect from time to time.
5. EXPENSES. Employer shall pay or reimburse Employee for all reasonable
and necessary out-of-pocket expenses incurred by him for the benefit of
Employer and in the performance of his duties and responsibilities under
this Agreement, subject to the presentation of appropriate receipts and
vouchers in accordance with Employer's policies for expense verification.
In addition, Employee will comply with all policies and procedures
adopted by Employer from time to time applicable to its executive
employees and relating to or regulating the nature and extent of
reimbursable expenses, the manner of accounting therefor and the manner
of reimbursement of same, including, without limitation, any limit
imposed by Employer on the total amount of said expenses relative to the
amount budgeted therefor in Employer's annual budget as approved by the
Board (the "Budget").
6. BONUS. In addition to the base salary and other benefits set forth
above, Employee shall be entitled to such bonus, if any, as the Board
determines from time to time, in its sole and absolute discretion.
7. DUTIES AND RESPONSIBILITIES.
7.1. Nature of Employee's Duties. Subject to the control of the
Board and the terms and conditions of this Agreement, Employee shall
perform such executive, administrative and supervisory duties as are
called for in connection with (a) the marketing and sales of
Employer's services, (b) the development of new services for
Employer, (c) general public relations for Employer, and (d) the
delivery to each of the Board detailed monthly written reports
regarding the operations of Employer in form and substance
acceptable to the Board in its reasonable discretion. Employee
shall also perform
2
<PAGE> 3
such other duties commensurate with Employee's position as the
Board may reasonably request from time to time, including, without
limitation, the performance of any such duties on behalf of
Employer or any subsidiary of Employer, or any subsidiary of any of
them (all of the foregoing entities are referred to collectively
herein as the "Employer Group").
7.2. Compliance with Rules. From and after the date Employee is
notified of same, Employee shall comply with such reasonable rules,
regulations, policies and orders as may be issued by Employer, which
shall have the same force and effect as though written into this
Agreement (and they are hereby incorporated herein and made a part
hereof).
7.3. Hiring and Firing Other Employees. Employee agrees that all
decisions involving the selection and termination of all key
employees reporting directly to Employee will not be implemented
without the prior written consent of the Board, which approval may
be granted or withheld in the sole and absolute discretion of the
Board.
7.4. Expenditures. Employee shall obtain the express written
approval of the Board, which may be granted or withheld in the sole
and absolute discretion of the Board, before entering into any
contract whatsoever, oral or in writing, whether in Employee's name
or in the name of Employer, requiring the expenditure of money or
the assumption of any obligation not specifically set forth in the
Budget in excess of Ten Thousand and no/100 Dollars ($10,000.00).
8. FAITHFUL PERFORMANCE. During the Term, Employee shall faithfully
perform his duties and responsibilities to the best of his ability and
devote his full time, attention and efforts to the business and affairs
of Employer and the overall development and growth of Employer's
business, or as otherwise reasonably requested by the Board. In this
regard, Employee additionally agrees as follows:
8.1. Other Business Interests. Employee shall not expend time
engaged in the actual operation and management of any business which
competes directly with the business of any of the entities in the
Employer Group, unless Employee has previously provided Employer
with a reasonably detailed written description of any such proposed
activities and obtained the prior written consent of the Board,
which may be granted or withheld in the sole and absolute discretion
of the Board.
8.2. Investments. Employee, his spouse and minor children living
at home shall not have a financial interest in excess of five
percent (5%), either directly or indirectly, alone or in
partnership, through a trust or as a shareholder, in any firm,
corporation or other entity which does business with any entity in
the Employer Group or competes with the business of any of the
entities in the Employer Group without the prior
3
<PAGE> 4
written approval of the Board, which may be granted or withheld in
the sole and absolute discretion of the Board. Should the status
of either the business of any of the entities in the Employer Group
or Employee's financial interest in any other business change so as
to result in a breach of the foregoing provision, Employee shall
immediately disclose such breach to the Board.
8.3. No Inconsistent Obligations. Employee hereby confirms that
he is under no contractual commitments inconsistent with his
obligations set forth in this Agreement and that he will not render
or perform services for any other person, firm, corporation or other
entity which are inconsistent with the provisions of this Agreement.
8.4. No Finder's Fees. If, during the Term, Employee is engaged
in or associated with the planning or implementation of any project,
program or venture involving any of the entities in the Employer
Group and a third party or parties, all rights in such project,
program or venture shall belong to such entity. Employee shall not
be entitled to any interest in such project, program or venture or
to any commission, finder's fee or other compensation in connection
therewith other than the compensation to be paid to Employee
pursuant to the terms and conditions of this Agreement.
9. CONFIDENTIAL INFORMATION. The Employer Group is primarily engaged in
the business actively investing in early stage development companies,
providing bridge financing to small to medium-sized companies and
providing financial asset recovery services and consulting services to
securities firms, banks and other financial institutions, fiduciaries,
bankruptcy trustees and other businesses. Employee acknowledges that
certain information, described as follows, to which Employee will have
access by virtue of his employment with Employer is highly confidential,
proprietary and trade secret information:
9.1. Proprietary Information. Any and all information pertaining
to or described as (a) any unique attributes of an entity in the
Employer Group's services or products, (b) the identity of an entity
in the Employer Group's suppliers and supplier lists; brokers and
broker lists, and customers and customer lists, (c) marketing
literature and marketing and promotional schedules and plans, (d)
documents and information regarding an entity in the Employer
Group's methods of operation and/or formulation of services, (e)
information concerning sales volumes, profits, operating percentages
and ratios, pricing and costs, including, without limitation,
employee compensation and (f) any and all other highly confidential,
proprietary or trade secret information of such entity.
9.2. Records. All books, records, memos, diaries, appointment
schedules, software, data processing information (whether
transcribed or not), computer processes, as well as any other
information or records pertaining to the business of any of the
entities in the Employer Group as may come within the knowledge
and/or control of Employee.
4
<PAGE> 5
9.3. Inventions. Any invention, improvement, discovery, recipe,
formula, idea or concept (whether patentable or not, including,
without limitation, those which are or may be subject to patent,
copyright or trademark protection) (a) relating to the existing or
reasonably foreseeable business interests of an entity in the
Employer Group, or (b) which relate to an entity in the Employer
Group's actual or demonstrably anticipated research or development,
or (c) which result from work performed by Employee for Employer, or
(d) for which equipment, supplies, facilities or trade secret
information of an entity in the Employer Group are used, or (e)
which are developed on Employer's time.
For purposes of this Agreement, the proprietary information, records and
inventions identified above shall be referred to collectively herein as
"Confidential Information", except to the extent any of same becomes
public knowledge through no breach of this Agreement.
10. OWNERSHIP AND PROTECTION OF CONFIDENTIAL INFORMATION. All
Confidential Information shall be the exclusive property of the
appropriate entity in the Employer Group and shall not be removed from
Employer's or the Employer Group's places of business, reproduced or
otherwise used by Employee without the Board's express prior written
consent, which may be granted or withheld in the sole and absolute
discretion of the Board; Employee hereby assigns and transfers to
Employer any right, title or interest Employee may have in any
Confidential Information, which assignment and transfer is hereby
accepted by Employer on behalf of the appropriate entity in the Employer
Group. Employee shall not, at any time during the period commencing on
the date hereof and ending on that date which is ten (10) years after the
date of termination of Employee's employment in any capacity with
Employer, disclose or use any Confidential Information, except to the
extent expressly allowed by this Agreement. Employee agrees not to
disclose, divulge or communicate any Confidential Information to any
person, firm, corporation or other entity, except (a) to persons who are
employed or engaged by Employer or an entity in the Employer Group and
need to know, (b) as to marketing materials, to existing or potential
suppliers and/or customers, (c) as required by law, court order or
governmental demand, provided that Employee has given Employer prompt
written notice that he believes he is required to disclose same so that
the appropriate entity in the Employer Group has had reasonable
opportunity to seek a protective order or other appropriate remedy, and
(d) as to any part of Employee's compensation, to Employee's family or as
required for tax, banking, credit, financing, insurance or other purposes
involving credit or services being sought or maintained by Employee. The
parties hereto stipulate that all Confidential Information has been or
will be acquired or developed by an entity in the Employer Group at great
expense and substantial effort and is and will be important and material
and does and will contribute significantly to the successful conduct of
its business and its goodwill.
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<PAGE> 6
11. TERMINATION. This Agreement may be terminated prior to the
expiration of the Term by Employer upon the occurrence of grounds
justifying "discharge for cause," or by voluntary election by either
Employer or Employee upon prior written notice, all as further described
hereinbelow:
11.1. Discharge for Cause. Employer shall have the right to
immediately (after the expiration of any applicable cure periods)
terminate this Agreement in the event of (a) Employee's death or any
disability which causes Employee to be unable to perform or engage
in his substantial and material duties as contemplated by this
Agreement for a total of ninety (90) days during any twelve (12)
month period, (b) any material failure by Employee to perform his
duties and responsibilities as described herein, (c) any material
dishonesty by Employee, (d) Employee being under the influence of
alcohol at any of Employer's or any of the Employer Group's places
of business or while conducting Employer's business, (e) Employee
being under the influence of non-prescriptive, hallucinogenic drugs
at any of Employer's or any of the Employer Group's places of
business or while conducting Employer's business, (f) Employee being
convicted of a felony, (g) any action by Employee involving serious
moral turpitude, (h) any material breach by Employee of any material
covenant or condition of this Agreement, (i) any material breach of
any representation or warranty by WCC under that certain Agreement
and Plan of Reorganization dated as of November 8, 1994 by and
between WCC and Employer caused, in whole or in part, directly or
indirectly, by any act or omission of Employee, or (j) Employee
engaging in any other misconduct reasonably likely to materially
adversely affect the business and/or reputation of Employer or any
entity in the Employer Group.
11.1.1. Determination by the Board. The existence or
nonexistence of any of the foregoing causes as grounds for
termination shall be determined in good faith by the Board.
11.1.2. Notice and Cure. In the event the Board's
determination of the existence of any such cause is based on
clauses (b), (g) or (h) above, then, prior to any termination
under this Section 11.1, the Board shall notify Employee of
such cause in writing and Employee shall thereafter have
fifteen (15) days to cure such cause before Employer may
terminate him hereunder based on a failure to timely effect a
cure. As to any other cause described above, the Board will
determine in its reasonable judgment whether the applicable
cause can be cured. If the Board determines that it can be
cured, Employee will be notified in writing of the cause and
given fifteen (15) days to cure such cause before Employer
may terminate him hereunder based on a failure to timely
effect a cure. In the event Employee's acts and/or
omissions give rise to more than one of such causes for
termination, then Employer may nevertheless
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<PAGE> 7
terminate Employee based on any single cause provided
Employer has complied with any applicable requirements under
this Section 11.1.2 with regard to such specific cause.
11.1.3.Compensation. Upon a termination by Employer for any of the
foregoing causes, which shall be deemed a "discharge for
cause," Employee shall be entitled to receive as
compensation through the date of termination only his
accrued but unpaid base salary, an amount equivalent to his
earned but unused vacation pay and an amount equivalent to
any other accrued but unpaid benefits, but no bonus. In
addition, in the event Employer terminates Employee for
cause based solely on a disability, as referenced in clause
(a) above, which caused Employee to be unable to perform as
described in said clause (a) for a total of ninety (90) days
during any twelve (12) month period, but not for ninety (90)
consecutive days, then Employer shall continue to pay any
premiums necessary to keep any disability policy relating to
Employee in place for ninety (90) days after the date of
termination.
11.2. Early Termination by Employee. Employee may voluntarily
elect to terminate this Agreement upon ninety (90) days prior
written notice to Employer. In such event, Employee shall be
entitled to receive as compensation through the date of termination
only his accrued but unpaid base salary, an amount equivalent to his
earned but unused vacation pay, an amount equivalent to any other
accrued but unpaid benefits, and such bonus as the Board determines
to pay Employee in its sole and absolute discretion.
11.3. Early Termination by Employer. Employer may voluntarily
elect to terminate this Agreement (other than in accordance with the
provisions of Section 11.1 above) upon ninety (90) days prior
written notice to Employee. In such event, Employee shall be
entitled to continue to receive, during the period beginning on the
date of termination and ending on that date which is twelve (12)
months after the date of termination (the "Continuation Period"),
Employee's base salary at the rate applicable as of the date of
termination plus an amount equal to what Employer's cost, as
reasonably determined by Employer, for Employee's fringe benefits
(including, without limitation, retirement, health and medical
insurance, life insurance and auto allowance) at their then-current
levels would have been during the Continuation Period (by accepting
such payment, Employee shall not be deemed to have waived, and shall
still be entitled to exercise, all rights available to him with
regard to health care benefits under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, but only until he obtains
employment with another employer). Payment of the foregoing amounts
shall be made by Employer on a monthly basis. In addition, included
along with such monthly payments shall be a monthly installment of a
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<PAGE> 8
prorated bonus relating to Employee's period of employment earned
in connection with Employer's bonus plan, if any, in place on the
date of termination.
11.4. Renewals. Beginning on that date which is thirteen (13)
months prior to the end of the Term and until that date which is
fifteen (15) days after said beginning date (a "Renewal Request
Period"), Employee may inquire of Employer in writing (a "Renewal
Request") whether Employer desires to extend the Term for another
twelve (12) months beyond the then current end of the Term. In the
event Employer receives a Renewal Request during a Renewal Request
Period, Employer shall determine whether to extend the Term by
twelve (12) months and deliver written notice (a "Renewal Response")
to Employee of its determination on or before that date which is
twelve (12) months prior to the then current end of the Term. In
the event Employer timely delivers a Renewal Response which states
that Employer desires to so extend the Term, the Term shall then be
deemed so extended. In the event Employer timely delivers a Renewal
Response which states that Employer does not desire to so extend the
Term, or in the event Employer does not timely deliver a Renewal
Response, then the Term shall not be deemed extended and shall
terminate at the then current end of the Term. Furthermore, also in
the event Employee fails to timely deliver a Renewal Request, the
Term shall not be deemed extended. Notwithstanding any of the
foregoing to the contrary, the end of the Term shall in all
instances be subject to earlier termination pursuant to the other
terms and conditions of this Agreement.
11.5. Method of Payment of Compensation. Except as otherwise
provided above, all amounts to be paid by Employer to Employee in
connection with a termination shall be paid in accordance with
Employer's applicable practices. Furthermore, Employee authorizes
Employer to withhold or deduct from the compensation to be paid to
Employee upon termination (a) all applicable taxes, (b) an amount
equal to any balances remaining from advances against salary given
to Employee during the term of his employment, provided that
Employer complies with any and all applicable requirements of
federal, state and local law, and (c) an amount sufficient to cover
any damages suffered by Employer on account of Employee's discharge
for cause or an early termination by Employee without at least
ninety (90) days' prior written notice as required by Section 11.2
hereof.
11.6. Return of Business Records. Concurrently with Employee's
termination, and whether said termination is voluntary or for cause,
Employee shall turn over to Employer all Confidential Information,
including, without limitation, any and all books, records, memos,
diaries, supplier lists, distributor lists, broker lists, customer
lists, product formulations, appointment schedules, software, data
processing information, computer processes and all other business
records and information pertaining to Employer's business or the
business of any of the entities in the Employer Group without
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<PAGE> 9
reproducing same, together with all other property, in good
condition, normal wear and tear excepted.
12. EMPLOYER'S EQUITABLE REMEDIES. Employee hereby expressly agrees that
the restrictions on Employee contained in Sections 9 and 10 hereof
(collectively, the "Restrictive Covenants") are reasonable in scope and
duration and necessary to protect the businesses and goodwill of Employer
and the entities in the Employer Group. A breach of any of the
Restrictive Covenants by Employee will cause substantial irreparable and
continuing damages to Employer which cannot be precisely determined and
for which there may be no adequate remedy at law. Accordingly, in
addition to, and not in limitation of, any other rights available to
Employer, Employer shall be entitled to injunctive relief (preliminarily
and permanently) for any breach of the provisions of any of the
Restrictive Covenants, without posting a bond. The existence of any
claim or cause of action of Employee against Employer, whether predicated
on this Agreement, or otherwise, shall not constitute a defense to the
enforcement by Employer of any of the Restrictive Covenants. The
Restrictive Covenants are essential elements of this Agreement as, but
for the agreement of Employee to comply with such Restrictive Covenants,
Employer would not have agreed to enter into this Agreement. Each
Restrictive Covenant shall be construed as an agreement independent of
any other provision in this Agreement.
13. UNFUNDED AGREEMENT. Employer's obligations under this Agreement
shall be unfunded, but Employer reserves the right (but has no
obligation) to provide for its liability under this Agreement in any
manner it deems advisable, including, without limitation, the purchasing
of such assets (such as an insurance policy or policies on Employee's
life) as it may deem necessary or proper; provided, however, that
Employee's insurability or noninsurability shall in no way affect
Employer's obligations pursuant to this Agreement. Employee, his wife or
his widow after his death, or his designated beneficiaries, personal
representatives, heirs, successors and assigns, shall have no claim or
rights with respect to, and shall have no property or equitable interest
whatsoever in, any specific funds or assets of Employer and shall only
have the status of a general unsecured creditor with respect to Employer
hereunder.
14. OTHER ENTITIES NOT OBLIGATED. Employee hereby expressly acknowledges
and agrees that none of the other entities in the Employer Group shall be
deemed to have any obligations or liabilities to Employee arising out of
Employer's obligations under this Agreement.
15. SURVIVAL. The obligations contained in Sections 9, 10 and 11 hereof
shall survive the termination of this Agreement. In addition, the
termination of this Agreement shall not affect any of the rights or
obligations of either party arising prior to or at the time of the
termination of this Agreement or which may arise by any event causing the
termination of this Agreement.
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<PAGE> 10
16. RESERVATION OF RIGHTS. Employer hereby reserves the right, in its
sole and absolute discretion, (a) upon notice to Employee, to change,
interpret, withdraw or add to any of the policies or terms and conditions
of employment, and to increase, decrease or eliminate entirely any
benefits, and (b) to do so without prior notice to or consultation with
Employee, so long as such policies, terms and conditions or benefits do
not constitute a reduction in the compensation or economic benefits of
Employee as provided in this Agreement.
17. MISCELLANEOUS.
17.1 Notices. Any notice required or permitted to be given
hereunder shall be in writing, and shall be either (a) personally
delivered, (b) sent by U.S. certified or registered mail, return
receipt requested, postage prepaid, or (c) sent by Federal Express
or other reputable common carrier guaranteeing next business day
delivery, to the respective addresses of the parties set forth
below, or to such other place as any party hereto may by notice
given as provided herein designate for receipt of notices hereunder.
Any such notice shall be deemed given and effective upon receipt or
refusal of receipt thereof by the primary party to whom it is to be
sent.
To Employer: Walnut Financial Services, Inc.
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
Attn: Mr. Joel S. Kanter
with a copy to: Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 W. Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attn: Joshua S. Kanter, Esq.
To Employee: Burton W. Kanter, Esq.
65 Vine Street
Highland Park, Illinois 60035
17.2. Captions. The captions used herein are for convenience and
ease of reference only, and constitute no part of the agreement or
understanding of the parties hereto.
17.3. Entire Agreement; Amendments. This Agreement contains the
entire agreement between the parties with respect to the matters
described herein and supersedes all prior agreements and
understandings relating to the subject matter hereof. This
Agreement can be altered or amended only by an instrument in writing
signed by each of the parties hereto.
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<PAGE> 11
17.4. Applicable Law. This Agreement has been negotiated and
delivered at Chicago, Illinois and shall be governed by and
construed in accordance with the internal laws of the State of
Illinois without reference to (a) its judicially or statutorily
pronounced rules regarding conflict of laws or choice of law; (b)
where any instrument is executed or delivered; (c) where any payment
or other performance required by any such instrument is made or
required to be made; (d) where any breach of any provision of any
such instrument occurs, or any cause of action otherwise accrues;
(e) where any action or other proceeding is instituted or pending;
(f) the nationality, citizenship, domicile, principal place of
business, or jurisdiction or organization or domestication of any
party; (g) whether the laws of the forum jurisdiction otherwise
would apply the laws of a jurisdiction other than the State of
Illinois; or (h) any combination of the foregoing.
17.5. Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective successors and assigns. This Agreement may not be
assigned by either party without the prior written consent of the
other party.
17.6. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective
and valid under applicable law. If, however, any provision of this
Agreement shall be determined by a court of competent jurisdiction
to be invalid or unenforceable, such provisions shall be ineffective
to the extent of such invalidity or unenforceability, without
invalidating the remainder of such provision or the remaining
provisions of this Agreement.
17.7. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
Agreement.
18. PREVAILING PARTY. If either party hereto shall bring an action
against the other by reason of the breach or alleged violation of any
covenant, term or obligation hereof or for the enforcement of any
provision, or otherwise arising out of this Agreement, the prevailing
party in such suit shall be entitled to its costs of suit and reasonable
attorneys' fees and expenses, which shall be payable whether or not such
action is prosecuted to judgment. As used herein, the term "prevailing
party" shall include, without limitation, a party who dismissed an action
for recovery hereunder in exchange for payment of the sums allegedly due,
performance of covenants allegedly breached, or considerations
substantially equal to the relief sought in the action.
19. EMPLOYEE ACKNOWLEDGEMENTS. Employee hereby expressly acknowledges
that (a) he has read this Agreement fully and completely, (b) he was
given adequate opportunity to consult with legal counsel and is fully
aware of the legal effect of each of the terms and conditions hereof, (c)
the terms and conditions contained herein are reasonable and, to
Employee's knowledge,
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enforceable, (d) said terms and conditions contain the sole
consideration for this Agreement, and (e) Employee enters into this
Agreement freely, without coercion and based upon Employee's own judgment
and not in reliance upon any representation other than those set forth in
this Agreement.
20. Incorporation of Recitals. The recitals set forth above are
incorporated herein by this reference.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
EMPLOYER: WALNUT FINANCIAL SERVICES, INC.,
a Utah corporation
By:/s/ Joel S. Kanter
--------------------------------
Its:President
--------------------------------
EMPLOYEE: /s/ Burton W. Kanter
--------------------------------
BURTON W. KANTER
Joinder
For purposes of the Recitals and Section 20 of the foregoing Employment
and Non-Competition Agreement of Burton W. Kanter, the undersigned executes
this joinder to evidence its agreement therewith and intention to be bound by
such provisions.
WALNUT CAPITAL CORP., a Delaware
corporation
By:
Its:
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<PAGE> 1
EMPLOYMENT AND NON-COMPETITION AGREEMENT
OF JOEL S. KANTER
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of this 1st day of
January, 1996, by and between WALNUT FINANCIAL SERVICES, INC., a Utah
corporation ("Employer"), and JOEL S. KANTER, an individual ("Employee").
RECITALS
WHEREAS, Employee had been previously employed by Walnut Capital Corp.
("WCC"), a Delaware corporation and wholly-owned subsidiary of Employer,
pursuant to an Employment and Non-Competition Agreement of Joel S. Kanter dated
as of February 27, 1995 (the "WCC Contract"); and
WHEREAS, Employee and WCC mutually agree to terminate the WCC Contract and
agree that no amounts will be owing to Employee as a result of such
termination; and
WHEREAS, Employer desires to employ Employee on the terms and conditions
herein set forth; and
WHEREAS, Employee desires to be employed by Employer on the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. EMPLOYMENT. Employer hereby agrees to employ Employee as President
with the duties and responsibilities set forth herein, and in such other
executive capacities as the Board of Directors of Employer's or a duly
authorized committee thereof (the "Board") may from time to time
determine, and Employee hereby agrees to become and to remain employed by
Employer, for the Term (as hereinafter defined) and upon the other terms
and conditions hereinafter set forth.
2. TERM. The commencement date of this Agreement shall be the date
hereof, and its term shall continue until February 27, 1998, as extended
pursuant to Section 12.4 hereof, unless sooner terminated pursuant to the
terms and conditions hereof (the "Term").
3. BASE SALARY. For faithful performance of Employee's duties and
responsibilities, Employee shall receive a minimum base salary of Seventy
Thousand and No/100 Dollars ($70,000.00)
<PAGE> 2
per year through the end of the Term. The Board shall make an
annual determination as to any increases in the base salary. Employee's
base salary shall be payable in accordance with Employer's usual
practices, including, without limitation, the withholding of all
applicable federal, state and local taxes, and shall be paid only for
that portion of each calendar year during which Employee was actually
employed.
4. FRINGE BENEFITS.
4.1 Benefit Plans. During the Term, Employee shall be entitled
to participate in all stock option plans, employee benefit plans or
programs of Employer and Employer's subsidiaries to the extent that
his position, title, tenure, salary, age, health and other
qualifications make him eligible to participate. Employer does not
guaranty the adoption or continuance of any particular stock option
plan, employee benefit plan or program during the Term, and
Employee's participation in any such plans or programs shall be
subject to the provisions, rules and regulations applicable thereto.
4.2 Vacations. During the Term, Employee shall be entitled to
vacation days with pay in accordance with Employer's policies in
effect from time to time.
5. EXPENSES. Employer shall pay or reimburse Employee for all reasonable
and necessary out-of-pocket expenses incurred by him for the benefit of
Employer and in the performance of his duties and responsibilities under
this Agreement, subject to the presentation of appropriate receipts and
vouchers in accordance with Employer's policies for expense verification.
In addition, Employee will comply with all policies and procedures
adopted by Employer from time to time applicable to its executive
employees and relating to or regulating the nature and extent of
reimbursable expenses, the manner of accounting therefor and the manner
of reimbursement of same, including, without limitation, any limit
imposed by Employer on the total amount of said expenses relative to the
amount budgeted therefor in Employer's annual budget as approved by the
Board (the "Budget").
6. BONUS. In addition to the base salary and other benefits set forth
above, Employee shall be entitled to such bonus, if any, as the Board
determines from time to time, in its sole and absolute discretion.
7. DUTIES AND RESPONSIBILITIES.
7.1. Nature of Employee's Duties. Subject to the control of the
Board and the terms and conditions of this Agreement, Employee shall
perform such executive, administrative and supervisory duties as are
called for in connection with (a) the marketing and sales of
Employer's services, (b) the development of new services for
Employer, (c) general public relations for Employer, and (d) the
delivery to each of the Board detailed monthly written reports
regarding the operations of Employer in form and substance
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acceptable to the Board in its reasonable discretion. Employee
shall also perform such other duties commensurate with Employee's
position as the Board may reasonably request from time to time,
including, without limitation, the performance of any such duties
on behalf of Employer or any subsidiary of Employer, or any
subsidiary of any of them (all of the foregoing entities are
referred to collectively herein as the "Employer Group").
7.2. Compliance with Rules. From and after the date Employee is
notified of same, Employee shall comply with such reasonable rules,
regulations, policies and orders as may be issued by Employer, which
shall have the same force and effect as though written into this
Agreement (and they are hereby incorporated herein and made a part
hereof).
7.3. Hiring and Firing Other Employees. Employee agrees that all
decisions involving the selection and termination of all key
employees reporting directly to Employee will not be implemented
without the prior written consent of the Board, which approval may
be granted or withheld in the sole and absolute discretion of the
Board.
7.4. Expenditures. Employee shall obtain the express written
approval of the Board, which may be granted or withheld in the sole
and absolute discretion of the Board, before entering into any
contract whatsoever, oral or in writing, whether in Employee's name
or in the name of Employer, requiring the expenditure of money or
the assumption of any obligation not specifically set forth in the
Budget in excess of Ten Thousand and no/100 Dollars ($10,000.00).
8. FAITHFUL PERFORMANCE. During the Term, Employee shall faithfully
perform his duties and responsibilities to the best of his ability and
devote his full time, attention and efforts to the business and affairs
of Employer and the overall development and growth of Employer's
business, or as otherwise reasonably requested by the Board. In this
regard, Employee additionally agrees as follows:
8.1. Other Business Interests. Employee shall not expend time
engaged in the actual operation and management of any business which
competes directly with the business of any of the entities in the
Employer Group, unless Employee has previously provided Employer
with a reasonably detailed written description of any such proposed
activities and obtained the prior written consent of the Board,
which may be granted or withheld in the sole and absolute discretion
of the Board.
8.2. Investments. Employee, his spouse and minor children living
at home shall not have a financial interest in excess of five
percent (5%), either directly or indirectly, alone or in
partnership, through a trust or as a shareholder, in any firm,
corporation or other entity which does business with any entity in
the Employer Group or competes
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<PAGE> 4
with the business of any of the entities in the Employer Group
without the prior written approval of the Board, which may be
granted or withheld in the sole and absolute discretion of the
Board. Should the status of either the business of any of the
entities in the Employer Group or Employee's financial interest in
any other business change so as to result in a breach of the
foregoing provision, Employee shall immediately disclose such
breach to the Board.
8.3. No Inconsistent Obligations. Employee hereby confirms that
he is under no contractual commitments inconsistent with his
obligations set forth in this Agreement and that he will not render
or perform services for any other person, firm, corporation or other
entity which are inconsistent with the provisions of this Agreement.
8.4. No Finder's Fees. If, during the Term, Employee is engaged
in or associated with the planning or implementation of any project,
program or venture involving any of the entities in the Employer
Group and a third party or parties, all rights in such project,
program or venture shall belong to such entity. Employee shall not
be entitled to any interest in such project, program or venture or
to any commission, finder's fee or other compensation in connection
therewith other than the compensation to be paid to Employee
pursuant to the terms and conditions of this Agreement.
9. CONFIDENTIAL INFORMATION. The Employer Group is primarily engaged in
the business actively investing in early stage development companies,
providing bridge financing to small to medium-sized companies and
providing financial asset recovery services and consulting services to
securities firms, banks and other financial institutions, fiduciaries,
bankruptcy trustees and other businesses. Employee acknowledges that
certain information, described as follows, to which Employee will have
access by virtue of his employment with Employer is highly confidential,
proprietary and trade secret information:
9.1. Proprietary Information. Any and all information pertaining
to or described as (a) any unique attributes of an entity in the
Employer Group's services or products, (b) the identity of an entity
in the Employer Group's suppliers and supplier lists; brokers and
broker lists, and customers and customer lists, (c) marketing
literature and marketing and promotional schedules and plans, (d)
documents and information regarding an entity in the Employer
Group's methods of operation and/or formulation of services, (e)
information concerning sales volumes, profits, operating percentages
and ratios, pricing and costs, including, without limitation,
employee compensation and (f) any and all other highly confidential,
proprietary or trade secret information of such entity.
9.2. Records. All books, records, memos, diaries, appointment
schedules, software, data processing information (whether
transcribed or not), computer processes, as well as
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<PAGE> 5
any other information or records pertaining to the business of any
of the entities in the Employer Group as may come within the
knowledge and/or control of Employee.
9.3. Inventions. Any invention, improvement, discovery, recipe,
formula, idea or concept (whether patentable or not, including,
without limitation, those which are or may be subject to patent,
copyright or trademark protection) (a) relating to the existing or
reasonably foreseeable business interests of an entity in the
Employer Group, or (b) which relate to an entity in the Employer
Group's actual or demonstrably anticipated research or development,
or (c) which result from work performed by Employee for Employer, or
(d) for which equipment, supplies, facilities or trade secret
information of an entity in the Employer Group are used, or (e)
which are developed on Employer's time.
For purposes of this Agreement, the proprietary information, records and
inventions identified above shall be referred to collectively herein as
"Confidential Information", except to the extent any of same becomes
public knowledge through no breach of this Agreement.
10. OWNERSHIP AND PROTECTION OF CONFIDENTIAL INFORMATION. All
Confidential Information shall be the exclusive property of the
appropriate entity in the Employer Group and shall not be removed from
Employer's or the Employer Group's places of business, reproduced or
otherwise used by Employee without the Board's express prior written
consent, which may be granted or withheld in the sole and absolute
discretion of the Board; Employee hereby assigns and transfers to
Employer any right, title or interest Employee may have in any
Confidential Information, which assignment and transfer is hereby
accepted by Employer on behalf of the appropriate entity in the Employer
Group. Employee shall not, at any time during the period commencing on
the date hereof and ending on that date which is ten (10) years after the
date of termination of Employee's employment in any capacity with
Employer, disclose or use any Confidential Information, except to the
extent expressly allowed by this Agreement. Employee agrees not to
disclose, divulge or communicate any Confidential Information to any
person, firm, corporation or other entity, except (a) to persons who are
employed or engaged by Employer or an entity in the Employer Group and
need to know, (b) as to marketing materials, to existing or potential
suppliers and/or customers, (c) as required by law, court order or
governmental demand, provided that Employee has given Employer prompt
written notice that he believes he is required to disclose same so that
the appropriate entity in the Employer Group has had reasonable
opportunity to seek a protective order or other appropriate remedy, and
(d) as to any part of Employee's compensation, to Employee's family or as
required for tax, banking, credit, financing, insurance or other purposes
involving credit or services being sought or maintained by Employee. The
parties hereto stipulate that all Confidential Information has been or
will be acquired or developed by an entity in the Employer Group at great
expense and substantial effort and is and will be important and material
and does and will contribute significantly to the successful conduct of
its business and its goodwill.
5
<PAGE> 6
11. NON-COMPETE. For and in partial consideration of Employer entering
into this Agreement, Employee's continued employment, his salary and
other benefits, and other valuable consideration set forth herein,
Employee agrees that, during the period commencing the date of this
Agreement and ending on that date which is three (3) years after the date
of termination, pursuant to either Section 12.1 or 12.2 hereof, of
Employee's employment with Employer in any capacity whatsoever (the
"Non-Compete Period"), he shall:
11.1. Disclosure. Inform any new employer, prior to accepting
employment, of the existence of this Agreement and provide such
employer with a copy thereof.
11.2. No Solicitation. Not, without the prior written consent of
the Board, which may be given or withheld in the sole and absolute
discretion of the Board, directly or indirectly, in any manner,
contact or solicit any of the then current customers or suppliers of
any entity in the Employer Group (other than Walnut and Walnut's
subsidiaries) for any business purpose whatsoever. The terms
"customers" and "suppliers" shall be deemed to include the parents,
subsidiaries and affiliated persons and entities thereof.
11.3. No Encouragement of Others. Not, directly or indirectly,
assist, induce or encourage any other person, firm, corporation or
other entity, and in particular an employee of Employer or any
entity in the Employer Group (other than Walnut and Walnut's
subsidiaries), in carrying out any activity that would be prohibited
hereunder if such activity were carried out by Employee either
directly or indirectly.
11.4. No Hiring of Others. Not, without the prior written consent
of the Board, which may be given or withheld in the sole and
absolute discretion of the Board, directly or indirectly, in any
manner, employ (or contract with, or solicit for the purpose of
seeking to employ or to contract with) any past, present or
prospective employee, agent, independent contractor or consultant of
any entity in the Employer Group (other than Walnut and Walnut's
subsidiaries).
12. TERMINATION. This Agreement may be terminated prior to the
expiration of the Term by Employer upon the occurrence of grounds
justifying "discharge for cause," or by voluntary election by either
Employer or Employee upon prior written notice, all as further described
hereinbelow:
12.1 Discharge for Cause. Employer shall have the right to
immediately (after the expiration of any applicable cure periods)
terminate this Agreement in the event of (a) Employee's death or any
disability which causes Employee to be unable to perform or engage
in his substantial and material duties as contemplated by this
Agreement for a total of ninety (90) days during any twelve (12)
month period, (b) any material failure by Employee to perform his
duties and responsibilities as
6
<PAGE> 7
described herein, (c) any material dishonesty by Employee, (d)
Employee being under the influence of alcohol at any of Employer's
or any of the Employer Group's places of business or while
conducting Employer's business, (e) Employee being under the
influence of non-prescriptive, hallucinogenic drugs at any of
Employer's or any of the Employer Group's places of business or
while conducting Employer's business, (f) Employee being convicted
of a felony, (g) any action by Employee involving serious moral
turpitude, (h) any material breach by Employee of any material
covenant or condition of this Agreement, (i) any material breach of
any representation or warranty by WCC under that certain Agreement
and Plan of Reorganization dated as of November 8, 1994 by and
between WCC and Employer caused, in whole or in part, directly or
indirectly, by any act or omission of Employee, or (j) Employee
engaging in any other misconduct reasonably likely to materially
adversely affect the business and/or reputation of Employer or any
entity in the Employer Group.
12.1.1. Determination by the Board. The existence or
nonexistence of any of the foregoing causes as grounds for
termination shall be determined in good faith by the Board.
12.1.2. Notice and Cure. In the event the Board's
determination of the existence of any such cause is based on
clauses (b), (g) or (h) above, then, prior to any termination
under this Section 12.1, the Board shall notify Employee of
such cause in writing and Employee shall thereafter have
fifteen (15) days to cure such cause before Employer may
terminate him hereunder based on a failure to timely effect a
cure. As to any other cause described above, the Board will
determine in its reasonable judgment whether the applicable
cause can be cured. If the Board determines that it can be
cured, Employee will be notified in writing of the cause and
given fifteen (15) days to cure such cause before Employer may
terminate him hereunder based on a failure to timely effect a
cure. In the event Employee's acts and/or omissions give rise
to more than one of such causes for termination, then Employer
may nevertheless terminate Employee based on any single cause
provided Employer has complied with any applicable
requirements under this Section 12.1.2 with regard to such
specific cause.
12.1.3. Compensation. Upon a termination by Employer for
any of the foregoing causes, which shall be deemed a
"discharge for cause," Employee shall be entitled to receive
as compensation through the date of termination only his
accrued but unpaid base salary, an amount equivalent to his
earned but unused vacation pay and an amount equivalent to any
other accrued but unpaid benefits, but no bonus. In addition,
in the event Employer terminates Employee for cause based
solely on a disability, as referenced in clause (a)
7
<PAGE> 8
above, which caused Employee to be unable to perform as
described in said clause (a) for a total of ninety (90) days
during any twelve (12) month period, but not for ninety (90)
consecutive days, then Employer shall continue to pay any
premiums necessary to keep any disability policy relating to
Employee in place for ninety (90) days after the date of
termination.
12.2. Early Termination by Employee. Employee may voluntarily
elect to terminate this Agreement upon ninety (90) days prior
written notice to Employer. In such event, Employee shall be
entitled to receive as compensation through the date of termination
only his accrued but unpaid base salary, an amount equivalent to his
earned but unused vacation pay, an amount equivalent to any other
accrued but unpaid benefits, and such bonus as the Board determines
to pay Employee in its sole and absolute discretion.
12.3. Early Termination by Employer. Employer may voluntarily
elect to terminate this Agreement (other than in accordance with the
provisions of Section 12.1 above) upon ninety (90) days prior
written notice to Employee. In such event, Employee shall be
entitled to continue to receive, during the period beginning on the
date of termination and ending on that date which is twelve (12)
months after the date of termination (the "Continuation Period"),
Employee's base salary at the rate applicable as of the date of
termination plus an amount equal to what Employer's cost, as
reasonably determined by Employer, for Employee's fringe benefits
(including, without limitation, retirement, health and medical
insurance, life insurance and auto allowance) at their then-current
levels would have been during the Continuation Period (by accepting
such payment, Employee shall not be deemed to have waived, and shall
still be entitled to exercise, all rights available to him with
regard to health care benefits under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, but only until he obtains
employment with another employer). Payment of the foregoing amounts
shall be made by Employer on a monthly basis. In addition, included
along with such monthly payments shall be a monthly installment of a
prorated bonus relating to Employee's period of employment earned in
connection with Employer's bonus plan, if any, in place on the date
of termination.
12.4. Renewals. Beginning on that date which is thirteen (13)
months prior to the end of the Term and until that date which is
fifteen (15) days after said beginning date (a "Renewal Request
Period"), Employee may inquire of Employer in writing (a "Renewal
Request") whether Employer desires to extend the Term for another
twelve (12) months beyond the then current end of the Term. In the
event Employer receives a Renewal Request during a Renewal Request
Period, Employer shall determine whether to extend the Term by
twelve (12) months and deliver written notice (a "Renewal Response")
to Employee of its determination on or before that date which is
twelve (12) months prior to the then current end of the Term. In
the
8
<PAGE> 9
event Employer timely delivers a Renewal Response which states that
Employer desires to so extend the Term, the Term shall then be
deemed so extended. In the event Employer timely delivers a
Renewal Response which states that Employer does not desire to so
extend the Term, or in the event Employer does not timely deliver a
Renewal Response, then the Term shall not be deemed extended and
shall terminate at the then current end of the Term. Furthermore,
also in the event Employee fails to timely deliver a Renewal
Request, the Term shall not be deemed extended. Notwithstanding
any of the foregoing to the contrary, the end of the Term shall in
all instances be subject to earlier termination pursuant to the
other terms and conditions of this Agreement.
12.5. Method of Payment of Compensation. Except as otherwise
provided above, all amounts to be paid by Employer to Employee in
connection with a termination shall be paid in accordance with
Employer's applicable practices. Furthermore, Employee authorizes
Employer to withhold or deduct from the compensation to be paid to
Employee upon termination (a) all applicable taxes, (b) an amount
equal to any balances remaining from advances against salary given
to Employee during the term of his employment, provided that
Employer complies with any and all applicable requirements of
federal, state and local law, and (c) an amount sufficient to cover
any damages suffered by Employer on account of Employee's discharge
for cause or an early termination by Employee without at least
ninety (90) days' prior written notice as required by Section 12.2
hereof.
12.6. Return of Business Records. Concurrently with Employee's
termination, and whether said termination is voluntary or for cause,
Employee shall turn over to Employer all Confidential Information,
including, without limitation, any and all books, records, memos,
diaries, supplier lists, distributor lists, broker lists, customer
lists, product formulations, appointment schedules, software, data
processing information, computer processes and all other business
records and information pertaining to Employer's business or the
business of any of the entities in the Employer Group without
reproducing same, together with all other property, in good
condition, normal wear and tear excepted.
13. EMPLOYER'S EQUITABLE REMEDIES. Employee hereby expressly agrees that
the restrictions on Employee contained in Sections 9, 10 and 11 hereof
(collectively, the "Restrictive Covenants") are reasonable in scope and
duration and necessary to protect the businesses and goodwill of Employer
and the entities in the Employer Group. A breach of any of the
Restrictive Covenants by Employee will cause substantial irreparable and
continuing damages to Employer which cannot be precisely determined and
for which there may be no adequate remedy at law. Accordingly, in
addition to, and not in limitation of, any other rights available to
Employer, Employer shall be entitled to injunctive relief (preliminarily
and permanently) for any breach of the provisions of any of the
Restrictive Covenants, without posting a bond.
9
<PAGE> 10
The existence of any claim or cause of action of Employee against
Employer, whether predicated on this Agreement, or otherwise, shall not
constitute a defense to the enforcement by Employer of any of the
Restrictive Covenants, except that this provision shall not apply to the
enforcement of the Restrictive Covenants contained in Section 11 hereof
in the event Employer has terminated Employee's employment pursuant to
Section 12.3 hereof and failed to make good faith compensation payments
pursuant to the terms thereof. The Restrictive Covenants are essential
elements of this Agreement as, but for the agreement of Employee to
comply with such Restrictive Covenants, Employer would not have agreed to
enter into this Agreement. Each Restrictive Covenant shall be construed
as an agreement independent of any other provision in this Agreement.
14. UNFUNDED AGREEMENT. Employer's obligations under this Agreement
shall be unfunded, but Employer reserves the right (but has no
obligation) to provide for its liability under this Agreement in any
manner it deems advisable, including, without limitation, the purchasing
of such assets (such as an insurance policy or policies on Employee's
life) as it may deem necessary or proper; provided, however, that
Employee's insurability or noninsurability shall in no way affect
Employer's obligations pursuant to this Agreement. Employee, his wife or
his widow after his death, or his designated beneficiaries, personal
representatives, heirs, successors and assigns, shall have no claim or
rights with respect to, and shall have no property or equitable interest
whatsoever in, any specific funds or assets of Employer and shall only
have the status of a general unsecured creditor with respect to Employer
hereunder.
15. OTHER ENTITIES NOT OBLIGATED. Employee hereby expressly acknowledges
and agrees that none of the other entities in the Employer Group shall be
deemed to have any obligations or liabilities to Employee arising out of
Employer's obligations under this Agreement.
16. SURVIVAL. The obligations contained in Sections 9, 10, 11 and 12
hereof shall survive the termination of this Agreement. In addition, the
termination of this Agreement shall not affect any of the rights or
obligations of either party arising prior to or at the time of the
termination of this Agreement or which may arise by any event causing the
termination of this Agreement.
17. RESERVATION OF RIGHTS. Employer hereby reserves the right, in its
sole and absolute discretion, (a) upon notice to Employee, to change,
interpret, withdraw or add to any of the policies or terms and conditions
of employment, and to increase, decrease or eliminate entirely any
benefits, and (b) to do so without prior notice to or consultation with
Employee, so long as such policies, terms and conditions or benefits do
not constitute a reduction in the compensation or economic benefits of
Employee as provided in this Agreement.
10
<PAGE> 11
18. MISCELLANEOUS.
18.1. Notices. Any notice required or permitted to be given
hereunder shall be in writing, and shall be either (a) personally
delivered, (b) sent by U.S. certified or registered mail, return
receipt requested, postage prepaid, or (c) sent by Federal Express
or other reputable common carrier guaranteeing next business day
delivery, to the respective addresses of the parties set forth
below, or to such other place as any party hereto may by notice
given as provided herein designate for receipt of notices hereunder.
Any such notice shall be deemed given and effective upon receipt or
refusal of receipt thereof by the primary party to whom it is to be
sent.
To Employer: Walnut Financial Services, Inc.
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
Attn: Mr. Burton W. Kanter
with a copy to: Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 W. Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attn: Joshua S. Kanter, Esq.
To Employee: Joel S. Kanter
5903 Moss Wood Lane
McLean, Virginia 22101
18.2. Captions. The captions used herein are for convenience and
ease of reference only, and constitute no part of the agreement or
understanding of the parties hereto.
18.3. Entire Agreement; Amendments. This Agreement contains the
entire agreement between the parties with respect to the matters
described herein and supersedes all prior agreements and
understandings relating to the subject matter hereof. This
Agreement can be altered or amended only by an instrument in writing
signed by each of the parties hereto.
18.4. Applicable Law. This Agreement has been negotiated and
delivered at Chicago, Illinois and shall be governed by and
construed in accordance with the internal laws of the State of
Illinois without reference to (a) its judicially or statutorily
pronounced rules regarding conflict of laws or choice of law; (b)
where any instrument is executed or delivered; (c) where any payment
or other performance required by any such instrument is made or
required to be made; (d) where any breach of any provision of any
such instrument occurs, or any cause of action otherwise accrues;
(e) where any action or other proceeding is instituted or pending;
(f) the nationality, citizenship,
11
<PAGE> 12
domicile, principal place of business, or jurisdiction or
organization or domestication of any party; (g) whether the laws of
the forum jurisdiction otherwise would apply the laws of a
jurisdiction other than the State of Illinois; or (h) any
combination of the foregoing.
18.5. Successors and Assigns. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their
respective successors and assigns. This Agreement may not be
assigned by either party without the prior written consent of the
other party.
18.6. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be effective
and valid under applicable law. If, however, any provision of this
Agreement shall be determined by a court of competent jurisdiction
to be invalid or unenforceable, such provisions shall be ineffective
to the extent of such invalidity or unenforceability, without
invalidating the remainder of such provision or the remaining
provisions of this Agreement.
17.7. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
Agreement.
19. PREVAILING PARTY. If either party hereto shall bring an action
against the other by reason of the breach or alleged violation of any
covenant, term or obligation hereof or for the enforcement of any
provision, or otherwise arising out of this Agreement, the prevailing
party in such suit shall be entitled to its costs of suit and reasonable
attorneys' fees and expenses, which shall be payable whether or not such
action is prosecuted to judgment. As used herein, the term "prevailing
party" shall include, without limitation, a party who dismissed an action
for recovery hereunder in exchange for payment of the sums allegedly due,
performance of covenants allegedly breached, or considerations
substantially equal to the relief sought in the action.
20. EMPLOYEE ACKNOWLEDGEMENTS. Employee hereby expressly acknowledges
that (a) he has read this Agreement fully and completely, (b) he was
given adequate opportunity to consult with legal counsel and is fully
aware of the legal effect of each of the terms and conditions hereof, (c)
the terms and conditions contained herein are reasonable and, to
Employee's knowledge, enforceable, (d) said terms and conditions contain
the sole consideration for this Agreement, and (e) Employee enters into
this Agreement freely, without coercion and based upon Employee's own
judgment and not in reliance upon any representation other than those set
forth in this Agreement.
21. INCORPORATION OF RECITALS. The recitals set forth above are
incorporated herein by this reference.
12
<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
EMPLOYER: WALNUT FINANCIAL SERVICES, INC.,
a Utah corporation
By:/s/ Burton W. Kanter
--------------------------------
Its:Chief Executive Officer
--------------------------------
EMPLOYEE: /s/ Joel S. Kanter
--------------------------------
JOEL S. KANTER
Joinder
For purposes of the Recitals and Section 21 of the foregoing Employment
and Non-Competition Agreement of Joel S. Kanter, the undersigned executes this
joinder to evidence its agreement therewith and intention to be bound by such
provisions.
WALNUT CAPITAL CORP., a Delaware
corporation
By:
------------------------------
Its:
-------------------------
13
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
WALNUT FINANCIAL SERVICES, INC.
Walnut Capital Corp., a Delaware corporation
NFS Services, Inc., a New York corporation (1)
Universal Bridge Fund, Inc., a Delaware corporation (2)
Walnut Consulting, Inc., a Delaware corporation
Walnut Funds, Inc., a Delaware corporation
F&G Holdings, L.L.C., a Delaware limited liability company
- ------------------------------
(1) NFS Services, Inc. has two subsidiaries: Asset Recovery Services, Inc.,
a New York corporation, and NFS Collection Services, Inc., a New York
corporation
(2) Universal Bridge Fund, Inc. has one subsidiary: Universal Partners,
L.P., an Illinois limited partnership
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated January
24, 1997 on our audit of the financial statements included in the filing on
Form 10-K, of Walnut Financial Services, Inc. for the year ended December 31,
1996 in their Registration Statements No. 33-99718 and 33-00516 on Form S-8 as
filed with the Securities and Exchange Commission (i) on November 16, 1995, and
(ii) on January 19, 1996.
Richard A. Eisner & Company, LLP
New York, New York
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 840,225
<SECURITIES> 0
<RECEIVABLES> 967,686
<ALLOWANCES> 547,074
<INVENTORY> 0
<CURRENT-ASSETS> 2,266,272
<PP&E> 190,035
<DEPRECIATION> 146,604
<TOTAL-ASSETS> 33,198,475
<CURRENT-LIABILITIES> 14,353,403
<BONDS> 8,013,321
0
0
<COMMON> 146,167
<OTHER-SE> 14,241,494
<TOTAL-LIABILITY-AND-EQUITY> 33,198,475
<SALES> 2,044,010
<TOTAL-REVENUES> 2,140,172
<CGS> 1,663,663
<TOTAL-COSTS> 3,069,065
<OTHER-EXPENSES> 1,710,022
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,003,189
<INCOME-PRETAX> (4,202,134)
<INCOME-TAX> (1,237,468)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,964,666)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
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