<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, 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 October 29 1999, the Registrant had 1,000 shares of common stock,
$.01 par value per share, issued and outstanding.
<PAGE> 2
WALNUT CAPITAL CORPORATION
INDEX TO FORM 10-Q
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Page Number
-----------
Part I - Financial Information
<S> <C> <C>
Item 1. Financial Statements 2
Statements of Assets and Liabilities as of September 30, 1999 and 2
December 31, 1998
Investments in Securities as of September 30, 1998 3
Statements of Operations for the Nine Months and Three Months ended 5
September 30, 1999 and 1998
Statements of Changes in Net Assets for the Nine Months ended September 6
30, 1999 and 1998
Statements of Cash Flows for the Nine Months ended September 30, 1999 7
and 1998
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits Required by Item 601 and Reports on Form 8-K 14
Signatures 15
Exhibits 16
Exhibit 27.1
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
WALNUT CAPITAL CORP.
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,211,000 in 1999 and
$1,080,000 in 1998 ) $ 1,485,000 $ 5,132,000
Non-marketable equity securities (cost of $9,143,000 in 1999
and $9,943,000 in 1998) 3,849,000 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 5,357,000 8,901,000
Cash and cash equivalents 658,000 80,000
Prepaid management fees to Parent 1,755,000 747,000
Other assets 6,000 43,000
------------ ------------
Total assets 7,776,000 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 96,000 165,000
liabilities 1,500,000 2,000,000
Debentures payable 1,572,000 1,466,000
Deferred Tax Liability ------------ ------------
Net assets $ 4,408,000 $ 4,248,000
============ ============
Common stock, $.01 par value, 1,000 shares authorized, 1,000 and
1,000 issued and outstanding $ 8,000 $ 8,000
Additional paid in capital 9,308,000 9,308,000
Accumulated deficit:
Net investment loss (9,000,000) (8,686,000)
Net realized gain on investment 11,482,000 9,283,000
Net unrealized depreciation of investments (7,390,000) (5,665,000)
------------ ------------
Net assets applicable to outstanding common shares (equivalent to $4,408
and $4,248 per share based on 1,000 and 1,000 outstanding common shares
at September 30, 1999 and December 31, 1998, respectively) $ 4,408,000 $ 4,248,000
============ ============
</TABLE>
<PAGE> 4
WALNUT CAPITAL CORP.
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------- ---------
<S> <C> <C>
Common and Preferred Stocks -
Healthcare - 45%
American Psych Systems, Inc. 122,950 $ 350,000
Greystone Medical Group, Inc. 200,000 40,000
HP America Inc. 66,667 0
I-Flow Corporation 300,000 1,260,000
Ivonyx Group Services, Inc. 100,000 100,000
Mariner Post-Acute Network (formerly Paragon Health) 140,757 56,000
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
----------
2,420,000
----------
High technology - 9%
Logic Devices Incorporated 25,300 68,000
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
----------
458,000
----------
Communications - 19%
International Business Network 70,000 105,000
Trans Global Services, Inc. 73,739 68,000
Vision III Imaging, Inc. 10,835 867,000
----------
1,040,000
----------
Biotechnology - 11%
BioHorizons Implant Systems, Inc. 193,934 300,000
Metatech Corp. 14,817 0
Optiva Corporation 30,039 188,000
Osteoimplant Technology, Inc. 80,000 1,000
Vaxgen, Inc. 8,400 119,000
----------
608,000
----------
Environmental - 0%
Clean America Corp. 59,375 0
Inorganic Recycling, Inc. 10,000 0
----------
0
----------
Other - 15%
Automotive Performance Group 50,000 50,000
Linter's, Inc. 42,784 75,000
Esynch Corp. (formerly SoftKat, Inc.) - Common 36,585 161,000
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
----------
808,000
----------
Total common and preferred stocks (cost $10,354,000) 5,334,000
Debt securities - 1%
TCOM Services, Inc. 0
VINnet Holding, Inc. 23,000
Total debt securities (cost $713,000) 23,000
----------
Total - 100% (cost $11,067,000) $5,357,000
==========
</TABLE>
Page 3 of 16
<PAGE> 5
WALNUT CAPITAL CORP.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment income:
Interest income 51,000 32,000 14,000 1,000
Dividend income 0 3,000 0 0
----------- ----------- ----------- -----------
Total income 51,000 35,000 14,000 1,000
Expenses:
Interest expense 150,000 286,000 49,000 77,000
General and administrative 424,000 495,000 88,000 170,000
----------- ----------- ----------- -----------
Net investment (loss) before taxes (523,000) (746,000) (123,000) (246,000)
Income tax benefit 209,000 298,000 0 98,000
----------- ----------- ----------- -----------
Net investment (loss) (314,000) (448,000) (123,000) (148,000)
----------- ----------- ----------- -----------
Realized and unrealized gains on investments:
Realized gain on sale of investments
before income tax 3,665,000 352,000 (357,000) (773,000)
Income tax provision (1,466,000) (141,000) 0 309,000
----------- ----------- ----------- -----------
Net realized gain on sale of investments
2,199,000 211,000 (357,000) (464,000)
----------- ----------- ----------- -----------
Unrealized appreciation (depreciation)
on investments before income tax (2,875,000) (3,553,000) 839,000 (2,111,000)
Income tax benefit 1,150,000 1,421,000 (107,000) 844,000
----------- ----------- ----------- -----------
Net unrealized appreciation
(depreciation) on investments (1,725,000) (2,132,000) 732,000 (1,267,000)
----------- ----------- ----------- -----------
Net realized and unrealized gains
(losses) on investments 474,000 (1,921,000) 375,000 (1,731,000)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations $ 160,000 $(2,369,000) $ 252,000 $(1,879,000)
----------- ----------- ----------- -----------
Gain (Loss) per share - basic and diluted $ 160.00 $ (2,369.00) $ 252.00 $ (1,879.00)
----------- ----------- ----------- -----------
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 NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $ (314,000) $ (448,000)
Net realized gains on investments 2,199,000 211,000
Net unrealized depreciation on investments (1,725,000) (2,132,000)
------------ ------------
Total increase (decrease) in net assets 160,000 (2,369,000)
------------ ------------
Net assets at beginning of period 4,248,000 11,801,000
------------ ------------
Net assets at end of period $ 4,408,000 $ 9,432,000
============ ============
</TABLE>
<PAGE> 7
WALNUT CAPITAL CORP.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations $ 160,000 $(2,369,000)
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Net unrealized depreciation of investments 2,875,000 3,553,000
Net realized gain on investments (3,665,000) (352,000)
Change in net deferred tax liability 106,000 (1,578,000)
Changes in assets and liabilities:
Other assets (971,000) 2,946,000
Other liabilities (69,000) 35,000
----------- -----------
Net cash used in operating activities (1,564,000) 2,235,000
----------- -----------
Cash flows from investing activities:
Purchases of common stock, healthcare 0 (342,000)
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)
Purchases of common stock, other 0 (100,000)
Purchases of debt securities 0 (20,000)
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, bio tech 201,000 0
Proceeds from sale of common stock, communications 10,000 0
Proceeds from sale of common stock, high tech 92,000 74,000
Collections from debt securities 0 200,000
----------- -----------
Net cash provided by investing activities 4,334,000 948,000
----------- -----------
Cash flows from financing activities:
Borrowings (repayments) of short term debt 0 (445,000)
Borrowings from (repayments to) related parties 0 (200,000)
Increase (decrease) in margin accounts (1,692,000) (687,000)
Repayments of long term debt (500,000) (2,000,000)
----------- -----------
Net cash (used in) provided by financing activities (2,192,000) (3,332,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 578,000 (149,000)
Cash and cash equivalents, beginning 80,000 197,000
----------- -----------
Cash and cash equivalents, end $ 658,000 $ 48,000
=========== ===========
Supplemental Information:
Cash paid for interest $ 190,000 $ 380,000
=========== ===========
</TABLE>
<PAGE> 8
WALNUT CAPITAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION.
The accompanying financial statements as of September 30, 1999 are
unaudited; however, in the opinion of the management of Walnut Capital Corp., 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 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., (the "Parent Company") for the fiscal year ended
December 31, 1998.
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 certain of the Parent Company's other 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,
the Company filed as its first periodic report under the Securities Exchange Act
a Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 1999.
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 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.
<PAGE> 9
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. Payments totaling $2,000 were paid to such firm by the Company during
the nine months ended September 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.
5. RECENT DEVELOPMENTS.
The Parent Company has entered into an Amended and Restated Agreement
and Plan of Merger dated as of August 5, 1999 (the "Merger Agreement"), with
Tower Hill Securities, Inc., a New York corporation, and Tower Hill Acquisition
Corp., a New York corporation and a wholly owned subsidiary of the Parent
Company. The Parent Company has also called a special meeting (the "Special
Meeting") of its stockholders at 8 a.m. Eastern Time on November 1, 1999 and
solicited the proxies of its stockholders to vote at the Special Meeting. At the
Special Meeting, the stockholders of the Company will be asked to consider and
vote upon the transactions contemplated by the Merger Agreement, and, if
approved at the Special Meeting, the transactions are expected to be consummated
as promptly as possible thereafter. In connection with those transactions, the
Company will execute an Agreement and Plan of Mergers with THCG, LLC, a Delaware
limited liability company ("THCG"), and the Other Subsidiaries, pursuant to
which the Company and the Other Subsidiaries will merge with and into THCG and,
as a result, the Company and the Other Subsidiaries will cease to exist as
separate entities.
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998.
The Company had realized gain income of $3,665,000 for the nine
months ended September 30, 1999, compared to $352,000 for the nine months ended
September 30, 1998. The realized gains for the nine months ended September 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 nine months ended September 30, 1999 was
$150,000 as compared to $286,000 for the same period in 1998. The decrease of
$136,000 or 48% in interest expense is
<PAGE> 10
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. An
additional $500,000 of Walnut Debentures was repaid on September 24, 1999. This
repayment did not significantly decrease the Company's interest expense for the
nine months ended September 30, 1999. General and administrative expenses for
the nine months ended September 30, 1999 was $424,000 as compared to $495,000
for the nine months ended September 30, 1998.
Unrealized depreciation on investments before income tax for the nine
months ended September 30, 1999 was $2,875,000 as compared to $3,553,000 for the
same period in 1998. The unrealized depreciation on investments before income
tax for the nine months ended September 30, 1999 is primarily the result of the
recognition of amounts previously recorded as unrealized gains on investments
before income tax attributable to First Health Group, Inc. securities.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998.
The Company had a realized loss of $357,000 for the three months ended
September 30, 1999, compared to a loss of $773,000 for the three months ended
September 30, 1998. The realized losses for three months ended September 30,
1999 due predominately from the sale of shares of Logic Devices Incorporated and
Trans Global Services, Inc.
Interest expense for the three months ended September 30, 1999 was
$49,000 as compared to $77,000 for the same period in 1998. The decrease of
$28,000 or 36% in interest expense is attributable to a repayment of $2,000,000
of the Walnut Debentures on September 1, 1998, and a reduction in margin payable
to brokers. The additional $500,000 of Walnut Debentures repaid on September 24,
1999 did not have a significant effect on the Company's interest expenses for
the three months ended September 30, 1999. General and administrative expenses
for the three months ended September 30, 1999 was $88,000 as compared to
$170,000 for the three months ended September 30, 1998.
Unrealized appreciation on investments before income tax for the three
months ended September 30, 1999 was $839,000 as compared to $2,111,000
unrealized depreciation on investments for the same period in 1998. The
appreciation in 1999 was the result of reversing previously recorded unrealized
losses when the losses were realized with the sale of Logic Devices Incorporated
and Trans Global Services, Inc. shares. The depreciation in 1998 was primarily
due to a decrease in the valuation of First Health Choice securities.
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 $1.5 million were outstanding as of September 30,
1999. Such Walnut Debentures were originally issued in September 1989, bore
interest at a rate of 8.80% per annum, paid semi-annually, and due on September
1, 1999. Pursuant to the terms of an agreement that the Company executed with
the SBA in September 1999, the Company paid only $500,000 of the amount due by
the original maturity date and the maturity of the remainder of the Walnut
Debentures was extended to December 1, 1999, subject to the SBA's right to
demand earlier payment. These Walnut Debentures will bear interest at a rate of
6.75% percent per annum, rather than 8.80%.
The Walnut Debentures prohibit the distribution of earnings or other
assets of the Company to the 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,
the Company 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
<PAGE> 11
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.
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.
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 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 $1,500,000 of
Walnut Debentures. Further, the Company has not filed its Form 468 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,
or 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 have been deferred and the
Company is allowed to delay further principal payments provided that quarterly
interest is paid on the outstanding balance. The Company has been current in all
of its interest payment to THC, and this loan had a principal balance of
$200,000 as of September 30, 1999.
Unless otherwise approved by the SBA, the Company 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.
<PAGE> 12
INVESTMENT PORTFOLIO CHANGES.
The sale of certain portfolio investments resulted in unrealized
depreciation and realized gains during the nine months ended September 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
Trans Global Services, Inc. (358,000)
Logic Devices Incorporated (171,000)
Optiva Corporation 116,000
Multimedia Games, Inc. 2,000 3,000
Vaxgen, Inc. 55,000
</TABLE>
The Company's equity investments that appreciated/(depreciated) in value during
the nine months ended September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Unrealized Appreciation (Depreciation)
--------------------------------------
<S> <C>
I-Flow Corporation $898,000
American Psych Systems, Inc. 200,000
Mariner Post-Acute Network
(formerly Paragon Health) (615,000)
Automotive Performance Group (50,000)
Optiva Corporation 133,000
Logic Devices Incorporated 233,000
Esynch Corp. (formerly SoftKat, Inc.) - Common 121,000
Trans Global Services, Inc. 299,000
HP America Inc. (67,000)
Vaxgen, Inc. 57,000
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
September 30, 1999. Through September 30, 1999, it has spent $15,000 in
aggregate for such upgrades and
<PAGE> 13
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, 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> 14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not presently involved as plaintiff or defendant in any
material legal actions.
ITEM 5. OTHER INFORMATION
The Parent Company has entered into the Merger Agreement, with Tower
Hill Securities, Inc., a New York corporation, and Tower Hill Acquisition Corp.,
a New York corporation and a wholly owned subsidiary of the Parent Company. The
Parent Company has also called a special meeting (the "Special Meeting") of its
stockholders at 8 a.m. Eastern Time on November 1, 1999 and solicited the
proxies of its stockholders to vote at the Special Meeting. At the Special
Meeting, the stockholders of the Company will be asked to consider and vote upon
the transactions contemplated by the Merger Agreement, and, if approved at the
Special Meeting, the transactions are expected to be consummated as promptly as
possible thereafter. In connection with those transactions, the Company will
execute an Agreement and Plan of Mergers with THCG and the Other Subsidiaries,
pursuant to which the Company and the Other Subsidiaries will merge with and
into THCG and, as a result, the Company and the Other Subsidiaries will cease to
exist as separate entities.
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> 15
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
WALNUT CAPITAL CORPORATION
(Registrant)
Date: October 29, 1999 /s/ Joel S. Kanter
---------------------------------------
Joel S. Kanter
President (Principal Executive Officer)
Date: October 29, 1999 /s/ Robert F. Mauer
---------------------------------------
Robert F. Mauer
Treasurer (Principal Financial and
Accounting Officer)
<PAGE> 16
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)
27.1 Financial Data Schedule
- --------------------
[ ] 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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