<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 1998 or
-------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from_________ to _________
Commission file number 0-26072 and 814-00157
Walnut Financial Services, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
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<CAPTION>
<S> <C>
Utah 87-0415597
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
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(Address of Principal Executive Offices) (Zip Code)
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(703) 448-3771
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
As of November 12, 1998, the registrant had 19,811,178 shares of Common
Stock issued and outstanding.
1
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WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
SEPTEMBER 30, 1998
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Page Number
Part I - Financial Information
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Item 1 - Financial Statements
Consolidated Statements of Assets and Liabilities as of September 30, 1998
and December 31, 1997 3
Investment in Securities as of September 30, 1998 4
Consolidated Statements of Operations for the nine months ended September 30, 1998
and 1997 and three months ended September 30, 1998 and 1997 6
Consolidated Statements of Changes in Net Assets for the nine months ended
September 30, 1998 and 1997 7
Consolidated Statements of Cash Flows for the nine months ended September 30, 1998
and 1997 8
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II - Other Information
Item 5 - Other Information 15
Item 6 - Exhibits Required by Item 601 and Reports on Form 8-K 15
Signatures 16
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED)
----------------- -----------------
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Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,148,000 in 1998 and
$1,448,000 in 1997 ) $ 8,654,000 $ 13,554,000
Non-marketable equity securities (cost of $11,180,000 in 1998
and $8,183,000 in 1997) 6,587,000 3,384,000
Non-marketable debt securities (cost of $1,150,000 in 1998
and $1,329,000 in 1997) 479,000 659,000
Partnership interests (cost of $1,762,000 in 1998 and
$1,862,000 in 1997) 1,869,000 2,389,000
---------------- -----------------
Total portfolio securities 17,589,000 19,986,000
Cash and cash equivalents 248,000 6,479,000
Other assets 195,000 44,000
---------------- -----------------
Total assets 18,032,000 26,509,000
Liabilities:
Margin payable to brokers 1,610,000 2,297,000
Notes payable to banks 1,301,000 2,025,000
Notes payable to related party 200,000 400,000
Accounts payable, accrued expenses and other current
liabilities 974,000 1,069,000
Debentures payable 2,000,000 4,000,000
Deferred tax liability 0 44,000
----------------- -----------------
Net assets $ 11,947,000 $ 16,674,000
================= =================
Preferred stock, no stated value, 1,000,000, no shares issued
Common stock, $.01 par value, 50,000,000 shares authorized,
18,890,824 and 18,656,687 issued and outstanding $ 189,000 $ 187,000
Additional paid in capital 18,461,000 18,237,000
Accumulated deficit:
Net investment loss (13,749,000) (12,676,000)
Net realized gain on investment 8,500,000 8,263,000
Net unrealized appreciation of investments (1,454,000) 2,663,000
----------------- -----------------
Net assets applicable to outstanding common shares
(equivalent to $0.63 and $0.89 per share based on
18,890,824 and 18,656,687 outstanding common shares at
September 30, 1998 and December 31, 1997, respectively) $ 11,947,000 $ 16,674,000
================ =================
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3
<PAGE> 4
WALNUT FINANCIAL SERVICES, INC.
INVESTMENT IN SECURITIES
SEPTEMBER 30, 1998
(UNAUDITED)
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Shares Value
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<S> <C> <C>
Common and Preferred Stocks - 86%
Healthcare - 56%
-------------------
American Psych Systems, Inc. 122,950 $ 150,000
Mariner Post Acute Network 140,757 730,000
formerly Paragon Health Network, Inc.)
Greystone Medical Group, Inc. 200,000 100,000
First Health Group Corp. 300,000 7,294,000
HP America 66,667 200,000
I-Flow Corporation 300,000 625,000
Ivonyx Group Services, Inc. 100,000 100,000
Med Images, Inc. 241,530 454,000
MHM Services, Inc. 131,955 44,000
Optiva Corporation 10,000 63,000
Osteoimplant Technology, Inc. 80,000 96,000
Rainbow Medical, Inc. 25,000 50,000
Sovereign Medical Acquisition Corp. 3,667 22,000
----------
9,928,000
----------
High technology- 3%
----------------------
Madison Info. Tech. Preferred A 60,000 150,000
Madison Info. Tech. Preferred B 60,000 150,000
Logic Devices Incorporated 45,000 61,000
Nhancements Technology Corp. 9,185 5,000
Thermo Information Solutions, Inc. 10,000 90,000
J.L. Wickham Co., Inc. Common 250,696 -
J.L. Wickham Co., Inc. Preferred 281,788 -
----------
456,000
----------
Communications- 7%
--------------------
International Business Network 70,000 105,000
Trans Global Services, Inc. 62,003 291,000
Vision III Imaging, Inc. 10,835 867,000
----------
1,263,000
----------
Biotechnology- 2%
-------------------
Vaxgen, Inc. 20,000 70,000
BioHorizon Implant Systems, Inc. 193,934 300,000
----------
370,000
----------
Finance - 13%
---------------
Pacific Financial Services Corporation 300 2,339,000
(wholly owned sub)
---------
2,339,000
---------
Other- 5%
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Automotive Performance Group 50,000 100,000
Linter's, Inc. 42,784 75,000
SoftKat, Inc. 155,309 311,000
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4
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<S> <C> <C>
VINnet Inc. Common 25,000 125,000
VINnet Holding, Inc. Preferred A 180 180,000
VINnet Holding, Inc. Preferred B 37,643 94,000
----------
885,000
----------
Total common and preferred stocks (cost $12,328,000) 15,241,000
----------
Partnership Interests - 11%
Universal Partners, L.P. (majority-owned subsidiary) 1,869,000
----------
Total partnership interests (cost $1,762,000) 1,869,000
----------
Debt Securities - 3%
TCOM Services, Inc. 276,000
SoftKat, Inc. 160,000
Sovereign Medical Acquisition Corp. 20,000
VINnet Holding, Inc. 23,000
----------
Total debt securities (cost $1,150,000) 479,000
----------
Total - 100% (cost $15,240,000) $17,589,000
==========
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5
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WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
--------------------------------- ---------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Investment income:
Interest income 77,000 38,000 10,000 2,000
Dividend income 3,000 19,000
----------------------------- --------------------------------
Total income 80,000 57,000 10,000 2,000
Expenses:
Interest expense 415,000 857,000 108,000 250,000
General and administrative 931,000 877,000 263,000 385,000
----------------------------- --------------------------------
Net investment (loss) before taxes (1,266,000) (1,677,000) (361,000) (633,000)
Income tax benefit 193,000 671,000 (169,000) 253,000
----------------------------- --------------------------------
Net investment (loss) (1,073,000) (1,006,000) (530,000) (380,000)
----------------------------- --------------------------------
Realized and unrealized gains on investments:
Realized gain (loss) on sale of investments
Before income tax 395,000 4,642,000 (773,000) (2,257,000)
Income tax provision (158,000) (1,857,000) 309,000 903,000
----------------------------- --------------------------------
Net realized gain (loss)on sale of investments 237,000 2,785,000 (464,000) (1,354,000)
----------------------------- --------------------------------
Unrealized appreciation/(depreciation)
Investments before income tax (4,117,000) (1,558,000) (2,312,000) 4,577,000
Income tax benefit 0 284,000 (722,000) (1,825,000)
----------------------------- --------------------------------
Net unrealized appreciation/(depreciation)
on investments (4,117,000) (1,274,000) (3,034,000) 2,752,000
----------------------------- --------------------------------
Net realized and unrealized gains (losses)
on Investments (3,880,000) 1,511,000 (3,498,000) 1,398,000
Net increase (decrease) in net assets resulting
from operations (4,953,000) 505,000 (4,028,000) 1,018,000
============================= ================================
Gain/(loss) per share - basic and diluted (0.26) 0.03 (0.21) 0.07
----------------------------- --------------------------------
Weighted average shares outstanding 18,864,826 14,616,687 18,890,824 14,616,687
============================= ================================
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6
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WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
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FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
1998 1997
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<S> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $ (1,073,000) $ (1,346,000)
Net realized gains on investments 237,000 2,785,000
Net unrealized depreciation on investments (4,117,000) (934,000)
-------------- --------------
(4,953,000) 505,000
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Increase in net assets resulting from capital share transactions:
Issuance of 234,137 shares of common stock for Pacific Financial
Services Corporation 300,000 0
Expenditures attributable to issuance of common stock (74,000) 0
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226,000 0
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Total increase (decrease) in net assets (4,727,000) 505,000
Net assets at beginning of period 16,674,000 14,387,000
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Net assets at end of period $11,947,000 $14,892,000
=============== ===============
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7
<PAGE> 8
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations $ (4,953,000) 505,000
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Net unrealized depreciation of investments 4,117,000 1,558,000
Net realized gain on investments (395,000) (4,642,000)
Change in net deferred tax liability (44,000) 856,000
Changes in assets and liabilities:
Other assets (151,000) (17,000)
Other liabilities (95,000) 17,000
----------------------------------
Net cash provided by (used in) operating activities (1,521,000) (1,723,000)
----------------------------------
Cash flows from investing activities:
Purchases of common stock, healthcare (362,000) (220,000)
Purchases of common stock, high tech (300,000) (50,000)
Purchases of common stock, bio tech (300,000) --
Purchases of common stock, communications (125,000) --
Purchases of common stock, other (100,000) (165,000)
Purchases of general partnership interest -- (75,000)
Purchase of equity and debt securities, wholly-owned subsidiary (2,159,000) --
Proceeds from sale of general partnership interest 122,000 --
Proceeds from sale of common stock, healthcare 1,914,000 8,945,000
Proceeds from sale of common stock, high tech 33,000 2,000
Proceeds from sale of common stock, other 53,000 943,000
Expenditures attributable to issuance of common stock (75,000) --
Collection of wholly-owned subsidiary note -- 749,000
Collections from debt securities 200,000 65,000
----------------------------------
Net cash provided by (used in) investing activities (1,099,000) 10,194,000
----------------------------------
Cash flows from financing activities:
Borrowings (repayments) of short term debt (724,000) (1,050,000)
Borrowings from (repayments to) related party (200,000) --
Increase (decrease) in margin accounts (687,000) (3,327,000)
Repayments of long term debt (2,000,000) (4,000,000)
----------------------------------
Net cash provided by (used in) financing activities (3,611,000) (8,377,000)
----------------------------------
Net increase (decrease) in cash and cash equivalents (6,231,000) 94,000
Cash and cash equivalents, beginning 6,479,000 350,000
----------------------------------
Cash and cash equivalents, end $ 248,000 $ 444,000
==================================
Supplemental Information:
Cash paid for interest $ 415,000 $ 599,000
==================================
Issuance of common stock and warrants for equity in wholly owned
subsidiary $ 300,000 $ --
==================================
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WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION.
--------------------
The accompanying consolidated financial statements as of September 30,
1998 are unaudited; however, in the opinion of the management of Walnut
Financial Services, Inc., a Utah corporation (the "Company"), such statements
include all adjustments (consisting of normal recurring accruals) necessary to
present a fair statement of the information presented therein. The balance sheet
at December 31, 1997 was derived from the audited financial statements at such
date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
financial statements and these notes do not include all disclosures required by
generally accepted accounting principles for audited financial statements.
Accordingly, these statements should be read in conjunction with the Company's
most recent audited financial statements included in its Form 10-K for the
fiscal year ended December 31, 1997.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for fiscal years.
2. ORGANIZATION.
------------
The Company is a closed-end management investment company, which
elected on October 15, 1997 to be regulated as a business development company (a
"BDC") under the Investment Company Act of 1940 (as amended, the "Investment
Company Act"). As such, the Company is, among other requirements, required to
invest at least 70% of its total assets in certain prescribed "Eligible Assets,"
which generally include securities of privately-held companies and cash items,
government securities and high-quality short-term debt. As of September 30,
1998, the Company has three primary business focuses: (i) investing in start-up
and early stage development companies, (ii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies and (iii) to
a lesser extent, providing accounts receivable factoring services to small and
medium-sized businesses. The Company engages in its investment business (x)
primarily through its wholly-owned subsidiary, Walnut Capital Corp., a Delaware
corporation ("Walnut Capital"), which was formed in 1980 for the purpose of
operating as a Small Business Investment Company (an "SBIC") under the Small
Business Investment Act of 1958 (as amended, the "SBIA") and is subject to
regulations promulgated by the Small Business Administration (the "SBA")
pursuant to the provisions of the SBIA, and (y) to a lesser extent, through its
wholly-owned subsidiary, Walnut Funds, Inc., a Delaware corporation ("Walnut
Funds"), which has a 40% ownership interest in and indirectly (through WGP
Management Company, Inc., a Delaware corporation, in which Walnut Funds has a
40% ownership interest) provides investment management services to Walnut Growth
Partners Limited Partnership, an Illinois limited partnership ("Walnut Growth"),
an investment fund discussed more fully below. Walnut Growth is currently not
active and management believes that it may not resume activities and, as a
result, the Company may not have access to Walnut Growth's remaining investment
capital. 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
engages in its accounts receivable factoring business through its wholly-owned
subsidiary, Pacific Financial Services Corporation, a Washington corporation
based in Seattle ("Pacific"), which was acquired by the Company in January 1998.
The Company engages in the human resources and quality assurance consulting
business through its wholly-owned subsidiary, Walnut Consulting, Inc., a
Delaware corporation ("Walnut Consulting"). The activity of Walnut Consulting
has not been significant to date. Management anticipates that the Company
9
<PAGE> 10
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
may seek to cease to be a BDC upon the acquisition of additional operating
businesses. However, the Company may not change the nature of its business so as
to cease to be a BDC unless such change is approved by the Company's
shareholders in accordance with the Investment Company Act. As a result of the
technical nature of the Investment Company Act, the Company's wholly owned
subsidiaries, Walnut Capital, Walnut Funds and Universal Bridge, also have each
elected to be regulated as a BDC. On September 28, 1997, the Company sold all of
the outstanding stock of its wholly owned subsidiary, NFS Services, Inc., a
Delaware corporation ("NFS"), which performed consulting and asset recovery
services.
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 the purchase by
Universal Bridge (the "Universal Acquisition") of approximately 83% of the
limited partnership interests and 50% of the general partnership interests of
Universal Partners L.P. ("UPLP"). The warrants issued in the Universal
Acquisition were subsequently canceled pursuant to an exchange offer made by the
Company whereby each holder elected to exchange their warrants for shares of
newly issued Common Stock of the Company and cash in lieu of fractional shares.
The exchange offer provided that one share of Common Stock would be issued to
the holder for every four warrants held. The exchange offer was consummated on
December 18, 1997. 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.
On October 27, 1997, the Company initiated a private placement to
accredited investors (the "1997 Private Placement") of 80 units (the "Units") at
$50,000 per Unit. Each Unit consisted of 50,000 shares of Common Stock and
35,000 Class A Redeemable Common Stock purchase warrants (a " Class-A Warrant"
and collectively, the "Class-A Warrants"). Pursuant to the 1997 Private
Placement, the Company issued 4,000,000 shares of Common Stock and 2,800,000
Class-A Warrants for gross proceeds of $4,000,000. The Company used a portion of
the proceeds of the 1997 Private Placement to acquire all of the issued and
outstanding capital stock of Pacific. Also on December 18, 1997, the Company
consummated the sale of additional 1,000,000 Class-A Warrants to certain
investors for $100,000.
On January 28, 1998 the Company entered into a Stock Purchase Agreement
to acquire all outstanding common stock of Pacific for $3,000,000 consisting of
$1,500,000 in cash, $300,000 of the Company's common stock, $300,000 in short
term notes and $900,000 in Pacific notes payable January 2, 2002. Since the 1997
Private Placement occurred prior to the closing of Pacific, the $300,000
short-term notes were paid at the Pacific closing in accordance with the terms
of the acquisition agreement. The remaining notes are unsecured and bear
interest at 8%. Pacific is in the business of accounts receivable factoring in
the Northwest United States.
On October 19, 1998, the Company entered into an agreement to purchase
all of the outstanding common shares of Inland Financial Company ("Inland"), a
Spokane, Washington-based accounts receivable factoring company. The initial
purchase price was $1,450,000 paid in the form of $650,000 cash, a one-year
promissory note of $150,000 and Common Stock valued at $650,000 (920,354
shares). Pursuant to the terms of the agreement, the Company may be required to
pay additional purchase price of up to $950,000 in the event Inland achieves
certain performance criteria as of April 2000. The additional purchase price
paid, if any, will be paid in the form of 21% in cash, 21% in the form of a
one-year promissory note and 58% in Common Stock.
10
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WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
------------------------------------------
Principles of Consolidation. The financial statements of the Company
---------------------------
include the accounts of Walnut, Walnut Funds and Universal Bridge. Inter-company
transactions and balances have been eliminated in consolidation.
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.
4. RELATED PARTY TRANSACTIONS.
--------------------------
The Company and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $437,000 were paid to such firm by the
Company during the nine months ended September 30, 1998, for reimbursement of
expenses and legal services incurred prior to each respective payment. Such
expenses and fees were incurred in connection with normal business activities
(including the acquisitions of Pacific and Inland), costs associated with the
1997 Private Placement and costs related to the status of the Company and
certain of its subsidiaries as BDCs.
In April 1997, the Company received an unsecured loan from a related
party in the amount of $400,000. The loan bears interest at 9.5%. The note will
be repaid in four quarterly payments. The first payment was commenced and paid
on April 1, 1998, of $100,000, and the second payment of $100,000 was made in
July 1998. The third payment of $100,000 was due on October 1, 1998, but has
been deferred. The Company is under the process of renewing the terms of such
loan with the lender.
11
<PAGE> 12
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Results of Operations for the Nine Months Ended September 30, 1998 and 1997.
- ---------------------------------------------------------------------------
For the nine months ended September 30, 1998, the net decrease in net
assets resulting from operations was $4,953,000 or $0.26 per share as compared
to a net increase in net assets resulting from operations of $505,000, or $0.03
per share for the nine months ended September 30, 1997.
The decrease in earnings for the nine months ended September 30, 1998
as compared to September 30, 1997 is primarily due to the unrealized losses
recorded in connection with the changes in valuation of portfolio investments.
Realized gains were $395,000 and unrealized depreciation was $4,117,000 for the
nine months ended September 30, 1998. Realized gains were $4,642,000 and
unrealized depreciation was $1,558,000 for the nine months period ended
September 30, 1997. For the nine months period ended September 30, 1998, the
unrealized depreciation attributable to the Company's wholly owned subsidiary,
Universal Bridge, and majority owned subsidiary, UPLP, was $420,000.
Interest expense for the nine months ended September 30, 1998 was
$415,000 as compared to $857,000 for the same period in the prior fiscal year.
The decrease of $442,000 is attributable to a repayment of $4,000,000 and
$2,000,000 of the Walnut Debentures (defined below) on April 1, 1997 and June 1,
1998 respectively, and a reduction in margin payable to brokers.
General and administrative expenses increased $54,000 for the nine
months ended September 30, 1998 as compared to the comparable period in 1997
from $877,000 to $931,000.
Results for the Company were affected by the non-recognition of tax
benefits from unrealized losses on investments. The deferred tax liability of
$44,000 recorded as of December 31, 1997 was utilized by the operating losses
incurred in 1998. The amount of tax benefits, which exceed the deferred tax
liability of $44,000, will not be eligible for tax benefits accruals. As of
September 30, 1998, the Company reversed the tax benefit of $581,000 that had
been previously recorded as of June 30, 1998. As a result, these is no aggregate
tax benefit for the nine months ended September 30, 1998.
Results of Operations for the Three Months Ended September 30, 1998 and 1997.
- ----------------------------------------------------------------------------
For the three months ended September 30, 1998, the net decrease in net
assets resulting from operations was $4,028,000 or $0.21 per share as compared
to a net increase in net assets resulting from operations of $1,018,000, or
$0.07 per share for the three months ended September 30, 1997.
The decrease in earnings from the three months ended September 30, 1998
as compared to September 30, 1997 is primarily due to the unrealized losses
recorded in connection with the changes in valuation of portfolio investments.
Realized losses were $773,000 and unrealized depreciation was $2,312,000 for the
three months ended September 30, 1998. All of the realized losses were the
result of the recognition of previously recorded unrealized losses. Realized
losses were $2,257,000 and unrealized appreciation was $4,577,000 for the three
months period ended September 30, 1997. For the three months period ended
September 30, 1998, the unrealized depreciation attributable to the Company's
wholly owned subsidiary, Universal Bridge, and majority owned subsidiary, UPLP,
was $81,000.
Interest expense for the three months ended September 30, 1998 was
$108,000 as compared to $250,000 for the same period in the prior fiscal year.
The decrease of $142,000 is attributable to a
<PAGE> 13
repayment of $2,000,000 of the SBA debentures on June 1, 1998, and a reduction
in margin payable to brokers.
General and administrative expenses decreased $122,000 for the three
months ended September 30, 1998 as compared to the comparable period in 1997
from $385,000 to $263,000 primarily due to an decrease in the provision of bad
debt and corporate tax.
Results for the Company were affected by the non-recognition of tax
benefits from unrealized losses on investments. The deferred tax liability of
$44,000 recorded as of December 31, 1997 was utilized by the operating losses in
1998.
LIQUIDITY AND CAPITAL RESOURCES.
Liquidity and Capital Resources of Walnut Capital. As part of the SBIC
program, Walnut Capital has, from time to time, issued $12 million of debentures
to the SBA (the "Walnut Debentures"). Walnut Debentures in the principal amount
of $4 million had been repaid on September 1, 1995, April 1, 1997; and an
additional Walnut Debenture in the principal amount of $2 million was repaid on
June 1, 1998. Walnut Debentures in the principal amount of $2 million were
outstanding as of September 30, 1998. Such Walnut Debentures were originally
issued in September 1989, bear interest at a rate of 8.80% per annum and are due
on September 1, 1999.
Interest on the Walnut Debentures is paid semi-annually, and principal
is due at maturity. Walnut Capital has been current in all of its interest
payments to the SBA. Walnut Capital repaid the $2 million Walnut Debentures due
at June 1, 1998 in accordance with its terms. Additionally, Walnut Capital
reduced its broker margin account by $687,000. Walnut Capital had cash and a
broker margin account available to repay the $2 million of Walnut Debentures due
September 1, 1999.
The Walnut Debentures prohibit the distribution of earnings or other
assets of Walnut Capital 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 Capital 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 Capital 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 Capital can incur.
The Walnut Debentures cannot be prepaid without payment of a prepayment penalty
related to the time of such prepayment.
Liquidity and Capital Resources 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 ("ANB"). This line was replaced as of September 8, 1996
with a term loan of $2,850,000. This loan required interest only payments on
September 30, 1996 and December 31, 1996. A principal payment of $575,000 was
made on March 31, 1997, with the balance due on July 31, 1997. The interest rate
associated with this loan is ANB's base rate plus 2% (10.5% as of September 30,
1998). This loan was renewed and amended to provide for an initial principal
payment of $250,000 and quarterly principal payments thereafter, commencing
December 31, 1997, of $250,000. This loan has an amended maturity date of June
30, 1999 and a current principal amount outstanding of $1,025,000. Two Directors
of the Company personally guarantee the loan. In April 1997, the Company
received an unsecured loan from a related party in the amount of $400,000. Such
loan bears interest at 9.5% per annum. The loan will be repaid in four quarterly
payments, which commenced with a payment on April 1, 1998, of $100,000, and a
second payment of
13
<PAGE> 14
$100,000 in July 1998. The third payment was due on October 1, 1998 and has
been deferred. The Company is under the process of renewing the terms of such
loan with the lender.
Pursuant to the 1997 Private Placement, the Company sold 4,000,000
shares of Common Stock and 2,800,000 Class-A Warrants for gross proceeds of
$4,000,000. The 1997 Private Placement closed in December 1997. Approximately
$1,200,000 of the net proceeds of the 1997 Private Placement was used in
connection with the acquisition of Pacific. Also, in December 1997, the Company
sold additional 1,000,000 Class-A Warrants for total proceeds of $100,000.
In March 1998, Walnut Capital issued a promissory note in an original
principal amount of $30,000 in favor of a third party, as partial consideration
in connection with the purchase of certain securities by Walnut Capital and it
was repaid on September 14, 1998.
The Company does not anticipate any significant costs relating to
upgrading or reprogramming of its software for the year 2000.
INVESTMENT PORTFOLIO CHANGES
- ----------------------------
The sale of certain portfolio investments resulted in unrealized
depreciation and the recognition of realized gains during the nine months ended
September 30 as follows:
<TABLE>
<CAPTION>
Unrealized Appreciation
(Depreciation) Realized Gain/(Loss)
-------------- --------------------
<S> <C> <C>
Vitalink Pharmacy Services, Inc. $(1,620,000) $1,386,000
Nhancements Technology 196,000 (414,000)
Site Based Media, Inc. 340,000 (359,000)
Consolidated Technology Group, Ltd. 292,000 (277,000)
First Health Group (24,000) 36,000
Others, net 0 23,000
</TABLE>
The Company's equity investments that appreciated/(depreciated) in value during
the nine months ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Unrealized Appreciation/(Depreciation)
--------------------------------------
<S> <C>
First Health Group Corp. $ (437,000)
Paragon Health Network, Inc. (1,989,000)
I-Flow Corporation (319,000)
Nhancement Technology 176,000
Pacific Financial Services Corporation (120,000)
Others, net (192,000)
</TABLE>
There were unrealized losses of $420,000 recorded in connection with
Universal Bridge's partnership interest in UPLP.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 5 - OTHER PROCEEDINGS.
On April 15, 1998, the Company, Walnut Capital and The Holding Company
filed a complaint in the District Court for the Northern District of Illinois
against Michael A. Faber, a former officer of Walnut Capital and a current
stockholder, officer, director and member, as applicable, of WGP Management
Company, Inc. ("WGPMC") and Walnut GP, L.L.C. ("Walnut GP"), each of which
entities are 40% owned by Walnut Funds. Walnut GP and WGPMC are the sole general
partner and manager of Walnut Growth, respectively. In June 1998, the parties
reached a settlement pursuant to which such action was dismissed.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for
which the report is filed.
15
<PAGE> 16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALNUT FINANCIAL SERVICES, INC.
(Registrant)
Date: November 13, 1998 /s/ Joel S. Kanter
-------------------------------------
Joel S. Kanter
President (Chief Executive Officer)
Date: November 13, 1998 /s/ Robert F. Mauer
-------------------------------------
Robert F. Mauer
Treasurer (Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 15,240,000
<INVESTMENTS-AT-VALUE> 17,589,000
<RECEIVABLES> 0
<ASSETS-OTHER> 443,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 18,032,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,085,000
<TOTAL-LIABILITIES> 6,085,000
<SENIOR-EQUITY> 189,000
<PAID-IN-CAPITAL-COMMON> 18,461,000
<SHARES-COMMON-STOCK> 18,891,000
<SHARES-COMMON-PRIOR> 18,891,000
<ACCUMULATED-NII-CURRENT> (13,749,000)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,500,000
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,454,000
<NET-ASSETS> 11,947,000
<DIVIDEND-INCOME> 3,000
<INTEREST-INCOME> 77,000
<OTHER-INCOME> 0
<EXPENSES-NET> 931,000
<NET-INVESTMENT-INCOME> (1,073,000)
<REALIZED-GAINS-CURRENT> 395,000
<APPREC-INCREASE-CURRENT> (4,117,000)
<NET-CHANGE-FROM-OPS> (4,953,000)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,727,000)
<ACCUMULATED-NII-PRIOR> (12,676,000)
<ACCUMULATED-GAINS-PRIOR> 8,263,000
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 415,000
<GROSS-EXPENSE> 1,346,000
<AVERAGE-NET-ASSETS> 14,311,000
<PER-SHARE-NAV-BEGIN> .89
<PER-SHARE-NII> (.26)
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0.63
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 7,627,000
<AVG-DEBT-PER-SHARE> 0.40
</TABLE>
