<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X} QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999 or
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period _____ from _____ to
Commission file numbers 0-23201 and 814-00151
---------------------
Walnut Capital Corp.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 36-3217989
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
c/o Walnut Financial Services, Inc.
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(703) 448-3771
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of August 13, 1999, the Registrant had 1,000 shares of common stock,
$.01 par value per share, issued and outstanding.
<PAGE> 2
WALNUT CAPITAL CORP.
INDEX TO FORM 10-Q
JUNE 30, 1999
<TABLE>
<CAPTION>
Page Number
-----------
Part I - Financial Information
<S> <C>
Item 1. Financial Statements
Statements of Assets and Liabilities as of June 30, 1999 and December 31, 1998 3
Investments in Securities as of June 30, 1999 4
Statements of Operations for the Six Months and Three Months ended June 30, 1999
and 1998 5
Statements of Changes in Net Assets for the Six Months ended June 30, 1999 and 1998 6
Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits Required by Item 601 and Reports on Form 8-K 13
Signatures 14
Exhibits 15
Exhibit 27.1
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
WALNUT CAPITAL CORP.
STATEMENTS OF ASSETS AND LIABILITIES
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,049,000 in 1999 and
$1,080,000 in 1998 ) $ 1,173,000 $ 5,132,000
Non-marketable equity securities (cost of $9,943,000 in 1999
and $9,943,000 in 1998) 3,959,000 3,746,000
Non-marketable debt securities (cost of $713,000 in 1999 and
$718,000 in 1998) 23,000 23,000
------------ ------------
Total portfolio securities 5,155,000 8,901,000
Cash and cash equivalents 1,536,000 80,000
Prepaid management fees to Parent 1,316,000 747,000
Other assets 60,000 43,000
------------ ------------
Total assets 8,067,000 9,771,000
Liabilities:
Margin payable to brokers 0 1,692,000
Notes payable to related parties 200,000 200,000
Accounts payable, accrued expenses and other current
liabilities 245,000 165,000
Debentures payable 2,000,000 2,000,000
Deferred Tax Liability 1,466,000 1,466,000
------------ ------------
Net assets $ 4,156,000 $ 4,248,000
============ ============
Common stock, $.01 par value, 1,000 shares authorized, 1,000 and $ 8,000 $ 8,000
1,000 issued and outstanding
Additional paid in capital 9,308,000 9,308,000
Accumulated deficit:
Net investment loss (9,086,000) (8,686,000)
Net realized gain on investment 13,305,000 9,283,000
Net unrealized depreciation of investments (9,379,000) (5,665,000)
------------ ------------
Net assets applicable to outstanding common shares (equivalent to $4,156
and $4,248 per share based on 1,000 and 1,000 outstanding common shares
at June 30, 1999 and December 31, 1998, respectively) $ 4,156,000 $ 4,248,000
============ ============
</TABLE>
<PAGE> 4
WALNUT CAPITAL CORP.
INVESTMENTS IN SECURITIES
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Common and Preferred Stocks -
Healthcare - 40%
American Psych Systems, Inc. 122,950 $ 150,000
Greystone Medical Group, Inc. 200,000 40,000
HP America Inc. 66,667 0
I-Flow Corporation 300,000 1,100,000
Ivonyx Group Services, Inc. 100,000 100,000
Mariner Post-Acute Network (formerly Paragon Health) 140,757 73,000
Med Images, Inc. 241,530 454,000
MHM Services, Inc. 131,955 66,000
Rainbow Medical, Inc. 25,000 50,000
Sovereign Medical Acquisition Corp. -Common 4,000 24,000
Sovereign Medical Acquisition Corp. -Units 3,333 20,000
----------
2,077,000
----------
High technology - 11%
Logic Devices Incorporated 45,000 170,000
Madison Info. Tech. - Preferred A 60,000 150,000
Madison Info. Tech. - Preferred B 60,000 150,000
Thermo Information Solutions, Inc. 10,000 90,000
J.L. Wickham Co., Inc. -Common 250,696 0
J.L. Wickham Co., Inc. -Preferred 281,788 0
----------
560,000
----------
Communications - 20%
International Business Network 70,000 105,000
Trans Global Services, Inc. 83,839 75,000
Vision III Imaging, Inc. 10,835 867,000
----------
1,047,000
----------
Biotechnology - 12%
BioHorizons Implant Systems, Inc. 193,934 300,000
Metatech Corp. 14,817 0
Optiva Corporation 40,000 250,000
Osteoimplant Technology, Inc. 80,000 1,000
Vaxgen, Inc. 11,400 80,000
----------
631,000
----------
Environmental - 0%
Clean America Corp. 59,375 0
Inorganic Recycling, Inc. 10,000 0
----------
0
----------
Other - 16%
Automotive Performance Group 50,000 100,000
Linter's, Inc. 42,784 75,000
Esynch Corp. (formerly SoftKat, Inc.) - Common 36,585 120,000
Esynch Corp. (formerly SoftKat, Inc.) - Preferred 120,000 123,000
VINnet Holdings, Inc. - Common 25,000 125,000
VINnet Holdings, Inc. - Preferred A 180 180,000
VINnet Holdings, Inc. - Preferred B 37,643 94,000
----------
817,000
----------
Total common and preferred stocks (cost $10,992,000) 5,132,000
Debt securities - 1%
TCOM Services, Inc. 0
VINnet Holding, Inc. 23,000
----------
Total debt securities (cost $713,000) 23,000
----------
Total - 100% (cost $11,705,000) $5,155,000
==========
</TABLE>
<PAGE> 5
WALNUT CAPITAL CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Interest Income 37,000 31,000 18,000 17,000
Dividend Income 0 3,000 0 3,000
----------- ----------- ----------- -----------
Total income 37,000 34,000 18,000 20,000
Expenses:
Interest expense 101,000 209,000 49,000 88,000
General and administrative 336,000 325,000 179,000 169,000
----------- ----------- ----------- -----------
Net investment (loss) before taxes (400,000) (500,000) (210,000) (237,000)
Income tax benefit 0 200,000 0 95,000
----------- ----------- ----------- -----------
Net investment (loss) (400,000) (300,000) (210,000) (142,000)
----------- ----------- ----------- -----------
Realized and unrealized gains on investments:
Realized gain on sale of investments
before income tax 4,022,000 1,125,000 2,000 172,000
Income tax provision 0 (450,000) 0 (69,000)
----------- ----------- ----------- -----------
Net realized gain on sale of investments
4,022,000 675,000 2,000 103,000
----------- ----------- ----------- -----------
Unrealized (depreciation) on
investments before income tax (3,714,000) (1,442,000) 268,000 (628,000)
Income tax benefit 0 577,000 0 251,000
----------- ----------- ----------- -----------
Net unrealized (depreciation) on
investments (3,714,000) (865,000) 268,000 (377,000)
----------- ----------- ----------- -----------
Net realized and unrealized gains
(losses) on investments 308,000 (190,000) 270,000 (274,000)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations $ (92,000) $ (490,000) $ 60,000 $ (416,000)
=========== =========== =========== ===========
Loss per share - basic and diluted $ (92.00) $ (490.00) $ (60.00) $ (416.00)
----------- ----------- ----------- -----------
Weighted average shares outstanding 1,000 1,000 1,000 1,000
=========== =========== =========== ===========
</TABLE>
<PAGE> 6
WALNUT CAPITAL CORP.
STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $ (400,000) $ (350,000)
Net realized gains on investments 4,022,000 675,000
Net unrealized depreciation on investments (3,714,000) (865,000)
------------ ------------
Total increase (decrease) in net assets (92,000) (540,000)
------------ ------------
Net assets at beginning of period 4,248,000 11,801,000
------------ ------------
Net assets at end of period $ 4,156,000 $ 11,261,000
============ ============
</TABLE>
<PAGE> 7
WALNUT CAPITAL CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net decrease in net assets resulting from operations $ (92,000) $ (540,000)
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Net unrealized depreciation of investments 3,714,000 1,442,000
Net realized gain on investments (4,022,000) (1,125,000)
Change in net deferred tax liability 0 (276,000)
Changes in assets and liabilities:
Other assets (586,000) 2,868,000
Other liabilities 80,000 130,000
----------- -----------
Net cash used in operating activities (906,000) 2,499,000
----------- -----------
Cash flows from investing activities:
Purchases of common stock, healthcare 0 (120,000)
Purchases of common stock, high tech 0 (300,000)
Purchases of common stock, bio tech 0 (300,000)
Purchases of common stock, communications 0 (125,000)
Proceeds from sale of general partnership interest 0 92,000
Proceeds from sale of common stock, healthcare 4,031,000 1,769,000
Proceeds from sale of common stock, high tech 23,000 74,000
Collections from debt securities 0 200,000
----------- -----------
Net cash provided by investing activities 4,054,000 1,290,000
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) of short term debt 0 (445,000)
Borrowings from (repayments to) related parties 0 (100,000)
Increase (decrease) in margin accounts (1,692,000) (1,418,000)
Repayments of long term debt 0 (2,000,000)
----------- -----------
Net cash (used in) provided by financing activities (1,692,000) (3,963,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,456,000 (174,000)
Cash and cash equivalents, beginning 80,000 197,000
----------- -----------
Cash and cash equivalents, end $ 1,536,000 $ 23,000
=========== ===========
Supplemental Information:
Cash paid for interest $ 101,000 $ 257,000
=========== ===========
</TABLE>
<PAGE> 8
WALNUT CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION.
The accompanying financial statements as of June 30, 1999 are
unaudited; however, in the opinion of the management of Walnut Capital
Corporation, a Delaware corporation (the "Company"), such statements include all
adjustments (consisting of normal recurring accruals) necessary to present a
fair statement of the information presented therein.
Pursuant to accounting requirements of the Securities and Exchange
Commission ("SEC") 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 consolidated
financial statements. Accordingly, these statements should be read in
conjunction with the most recent audited financial statements included in the
Form 10-K, filed by Walnut Financial Services Inc., a Utah corporation (the
"Parent Company"), of the Company are consolidated for the fiscal year ended
December 31, 1998, in which the financial statements are consolidated.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for fiscal years.
The Company has determined it is required to present its financial
statements in accordance with generally accepted accounting principles and SEC
regulations in the format applicable to investment companies, which generally
means that investments are reported at fair market value rather than cost.
2. ORGANIZATION.
The Company is a wholly-owned subsidiary of the Parent Company. The
Parent Company is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a Business Development Company ("BDC") under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
As a result of the technical nature of the Investment Company Act, the Company
and the Parent Company's other then wholly-owned subsidiaries (collectively, the
"Other Subsidiaries"), Walnut Funds, Inc., a Delaware corporation, and Universal
Bridge Fund, Inc., a Delaware corporation, also elected to be regulated as BDCs
and registered as reporting companies under the Securities Exchange Act of 1934,
as amended (the "Securities Exchange Act"). Notwithstanding their registration
under the Securities Exchange Act, the Company and the Other Subsidiaries did
not begin filing the periodic reports and other information required by the
Securities Exchange Act in reliance upon a no-action letter (the "No-Action
Letter") received from the staff of the SEC. In the No-Action Letter, the SEC
staff indicated that it would take no action against the Company and the Other
Subsidiaries for failing to file information required by the Securities Exchange
Act in order to permit the Company, the Parent Company and the Other
Subsidiaries to avoid the significant expense and administrative burden of such
filings while applying to the SEC to permit the Company and the Other
Subsidiaries not to file such reports. The SEC staff's position taken in the
No-Action Letter has expired by its terms and the application of the Company,
the Other Subsidiaries and the Parent Company has not been approved by the SEC.
The Company and the Other Subsidiaries have not asked the SEC staff to renew its
position in the No-Action Letter. Therefore, this Quarterly Report on Form 10-Q
is the first periodic report that the Company has filed under the Exchange Act.
The Company is a closed-end management investment company which was
formed in 1980 for the purpose of operating as a Small Business Investment
Company (an "SBIC") under the Small
<PAGE> 9
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
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 retains a law firm at which a Company officer is of
counsel. No payments was paid to such firm by the Company during the six months
ended June 30, 1999 for reimbursement of expenses and legal services incurred.
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 is to be repaid in four quarterly installments commencing March 31, 1998.
The first and second installments were paid on April 1, 1998 and July 1998,
respectively. The third and forth payments which were due on October 1, 1998 and
January 1, 1999 respectively have been deferred and the Company is allowed to
defer further principal payments provided that quarterly interest is paid on the
outstanding balance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-Q
which are not historical facts are forward-looking statements that are subject
to risks and uncertainties that could cause actual results to differ materially
from those set forth in or implied by such forward-looking statements.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998.
The Company had realized gain income of $4,022,000 for the six months
ended June 30, 1999, compared to $1,125,000 for the six months ended June 30,
1998. The realized gains for the six months ended June 30, 1999 resulted
predominately from the sale of shares of First Health Group, Inc. (formerly
HealthCare COMPARE Corp.) and Multimedia Games, Inc.
Interest expense for the six months ended June 30, 1999 was $101,000 as
compared to $209,000 for the same period in 1998. The decrease of $108,000 or
52% in interest expense is attributable to a repayment of $2,000,000 of
debentures to the SBA (the "Walnut Debentures") on June 1, 1998, and a reduction
in margin payable to brokers. General and administrative expenses for the six
months ended June 30, 1999 was $336,000 as compared to $325,000 for the six
months ended June 30, 1998.
Unrealized depreciation on investments before income tax for the six
months ended June 30, 1999 was $3,715,000 as compared to $1,442,000 for the
same period in 1998. The difference of $2,273,000 in unrealized depreciation is
primarily the result of the recognition for the six months ended June 30, 1999
of amounts previously recorded as unrealized gains on investments before income
tax attributable to First Health Group, Inc. securities.
<PAGE> 10
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998.
The Company had realized gain income of $2,000 for the three months
ended June 30, 1999, compared to $172,000 for the three months ended June 30,
1998. The realized gains for the three months ended June 30, 1999 resulted
predominately from the sale of shares of Multimedia Games, Inc.
Interest expense for the three months ended June 30, 1999 was $49,000
as compared to $88,000 for the same period in 1998. The decrease of $39,000 or
44% in interest expense is attributable to a repayment of $2,000,000 of the
Walnut Debentures on June 1, 1998, and a reduction in margin payable to brokers.
General and administrative expenses for the three months ended June 30, 1999 was
$179,000 as compared to $170,000 for the three months ended June 30, 1998.
Unrealized appreciation on investments before income tax for the three
months ended June 30, 1999 was $268,000 as compared to $628,000 unrealized
depreciation on investments for the same period in 1998. The difference of
$895,000 in unrealized appreciation is primarily the result of the appreciation
in value of I-Flow Corp.'s stock in 1999 and the depreciation in value of
Paragon Health and I-Flow stock in 1998.
LIQUIDITY AND CAPITAL RESOURCES.
As part of the SBIC program, The Company has, from time to time, issued
$12 million of Walnut Debentures of which Walnut Debentures in the principal
amount of $8 million were repaid prior to 1998. Additional Walnut Debentures 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 June 30, 1999. 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. The Company has been current in all of its interest payments
to the SBA.
The Walnut Debentures prohibit the distribution of earnings or other
assets of the Company to its Parent 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 Parent
Company) without the consent of the SBA. In addition, the Company 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 the Company can incur. The Walnut
Debentures cannot be prepaid without payment of a prepayment penalty related to
the time of such prepayment.
Additionally, the Company reduced its broker margin account by $1.7
million and increased its cash and cash equivalents by $1.4 million in the first
quarter of 1999. The source of funds were primarily from the sale of First
Health Group, Inc. (formerly HealthCare COMPARE Corp.) securities, creating a
realized capital gain of approximately $4 million in the first quarter of 1999.
The Company has cash and a broker margin account available to repay the $2
million of Walnut Debentures due September 1, 1999.
In 1998, the SBA issued a finding that the Company had violated Section
107.700, by purchasing securities from a big business as defined in the SBA
regulations. The Company believes the SBA is in
<PAGE> 11
error in its interpretation of this finding, by including shares held by
employees of the seller as being affiliated with such seller. The SBA has also
informed the Company that it is in violation of section 107.503(c) and 107.650
and valuation guidelines for SBICs. The Company disagrees with the SBA's
interpretation of the requirements and the matter is being discussed with the
SBA. The SBA also found the Company in violation of Section 107.825(e), purchase
of securities from non-issuers. The Company believes this finding to be
inconsistent with actions taken by the SBA in the past, and has entered into
discussions with the SBA to clarify the issue. The SBA, if it finally determines
that the Company did violate any of the foregoing regulations, may declare a
default under the outstanding $2,000,000 of Walnut Debentures and accelerate the
maturity for such Walnut Debentures from September 1, 1999 to the date of such
acceleration. Further, the Company has not filed its Form 468 timely for the
year ended December 31, 1998. This report was due on March 31, 1999. Management
believes that none of these findings will have material effect on the Company as
a whole, and believes that if the maturity of the Walnut Debentures is
accelerated, it will have sufficient funds available from existing sources of
liquidity to satisfy its repayment obligations.
In April 1997, the Company received an unsecured loan from The Holding
Company (THC), a company for which Burton W. Kanter, Chief Executive Officer of
the Company, serves as President, in the amount of $400,000. The loan bears
interest at 9.5%. The loan was to be repaid in four installments each following
the end of each of the fiscal quarters of the Company in 1998 with the first
installment to be paid on April 1, 1998. The first and second installments were
paid on April 1, 1998 and July 1998, respectively. The third and fourth payment
which were due on October 1, 1998 and January 1, 1999 had been deferred and the
Company is allowed to delay further principal payments provided that quarterly
interest to be paid on the outstanding balance. The Company has been current in
all of its interest payment to THC, and this loan has a principal balance of
$200,000 as of June 30, 1999.
Unless otherwise approved by the SBA, Walnut Capital is prohibited from
making any dividend or other cash advance to the Parent Company, its sole
stockholder. In addition, the declaration in the future of any cash or stock
dividends will be at the discretion of the Company's Board of Directors
depending upon the earnings, capital requirements and financial position of the
Company, general economic conditions and other pertinent factors.
INVESTMENT PORTFOLIO CHANGES.
The sale of certain portfolio investments resulted in unrealized
depreciation and realized gains during the six months ended June 30, 1999 as
follows:
<TABLE>
<CAPTION>
Unrealized Appreciation
(Depreciation) Realized Gain (Loss)
----------------------- --------------------
<S> <C> <C>
First Health Group
(formerly HealthCare
COMPARE Corp.) $(4,069,000) $4,020,000
Multimedia Games, Inc. (2,000) 2,000
</TABLE>
The Company's equity investments that appreciated/(depreciated) in value during
the six months ended June 30, 1999 were as follows:
<PAGE> 12
<TABLE>
<CAPTION>
Unrealized Appreciation (Depreciation)
--------------------------------------
<S> <C>
I-Flow Corporation $738,000
Mariner Post-Acute Network
(formerly Paragon Health) (598,000)
Optiva Corp. 188,000
Logic Devices Inc. 94,000
ESynch Corp. (formerly SoftKat, Inc.) 80,000
Trans Global Services, Inc. (61,000)
HP America Inc. (67,000)
Others (18,000)
</TABLE>
YEAR 2000 COMPLIANCE.
The year 2000 creates the potential for date related data to cause
computer processing errors or system shut-downs because computer-controlled
systems have historically used two digits rather than four to define years.
Computer programs that contain time data sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. The
miscalculations and systems failures that may be caused by such date
misrecognition could disrupt the operations of the Company or its portfolio
companies. Since this risk relates to computer-controlled systems, the year 2000
issue affects computer software, computer hardware, and any other equipment with
imbedded technology that involves date sensitive functions.
The Company has assessed the scope of its Year 2000 problems and
remediated such problems for each of its internal computer software programs and
its computer hardware. The Company spent no amounts to modify or replace its
internal computer software program and its computer hardware, including to
upgrade software and to modify maintenance agreements in the quarter ended June
30, 1999. Through June 30, 1999, it has spent $15,000 in aggregate for such
upgrades and modifications. The Company does not believe that it has machinery
with embedded computer technology or that it relies upon any supplier that is
material to its business. Since it believes its assessment and remediation
efforts have been completed, the Company has not developed any contingency plans
in the event it or any of its subsidiaries experiences year 2000 problems and it
does not expect to expend any material amounts on such remediation in the
future. However, if the Company has failed to properly assess any of the year
2000 problems or failed to fully remedy any identified year 2000 problems of its
computer hardware or computer software programs, the Company may be forced to
spend more on such remediation in the future and the Company's operations may be
adversely affected.
Since the Company does not control its portfolio companies, it has not
attempted to dictate assessment, remediation or contingency planning for such
companies, though Company representatives on the boards of directors of
portfolio companies have participated in such boards' oversight of those
companies' year 2000 efforts. Each portfolio company's year 2000 efforts are
necessarily directed by such companies' management and boards of directors.
Furthermore, the Company has invested in many private companies which are not
obligated to inform the Company about their year 2000 efforts. If any portfolio
company fails to timely assess or remediate its year 2000 problems, the value of
the Company's investment in such portfolio company may be adversely impacted.
The aggregate value of Company's portfolio could be materially adversely
impacted if a number of portfolio companies experience year 2000 problems or
significant costs to avoid or remediate such problems. The Company does not
expect to know the impact of the year 2000 problem on the aggregate value of its
portfolio until after January 1, 2000. None of the Company's computer systems
are interrelated with those of any of its portfolio companies.
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently involved as plaintiff or defendant in any
material legal actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No Current Reports on Form 8-K have been filed during the quarter for
which this Quarterly Report on Form 10-Q is being filed.
<PAGE> 14
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.
Date: August 13, 1999 WALNUT CAPITAL CORP.
(Registrant)
/s/ Joel S. Kanter
-----------------------------------------------
Joel S. Kanter
President (Principal Administrative Officer)
Date: August 13, 1999 /s/ Robert F. Mauer
-----------------------------------------------
Robert F. Mauer
Treasurer (Principal Financial and Accounting
Officer)
<PAGE> 15
EXHIBIT INDEX
3.1 Articles of Incorporation of Walnut Capital Corp., as amended [3.1](1)
3.2 Bylaws of Walnut Capital Corp. [3.2](1)
10.1 The Walnut Capital Corporation 1987 Stock Option Plan. [10.6](2)
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[ ] Exhibits so marked have been previously filed with the SEC as exhibits to
the filings shown below under the exhibit numbers indicated following the
respective document description and are incorporated herein by reference.
(1) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form 8-A dated October 8, 1997 as filed with the SEC on October 10,
1997.
(2) Previously filed as an Exhibit to the initial filing of Walnut Financial
Services, Inc. Registration Statement on Form 10 dated May 10, 1995 as
filed with the SEC on May 11, 1995.
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