<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934 (AMENDMENT NO. __)
<TABLE>
<S><C>
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as Permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Walnut Financial Services, Inc. - SEC File No. 814-00157
- -----------------------------------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- -----------------------------------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the amount on
which the filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
</TABLE>
<PAGE> 2
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
1) Amount Previously Paid:
----------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
3) Filing Party:
----------------------------------------------------------------------
4) Date Filed:
----------------------------------------------------------------------
2
<PAGE> 3
WALNUT FINANCIAL SERVICES, INC.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
________________
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
________________
TO BE HELD ON DECEMBER 17, 1997
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders (the
"Annual Meeting") of Walnut Financial Services, Inc. (the "Company") will be
held on Wednesday, December 17, 1997 at 10:00 a.m. at The Tower Club, 8000
Towers Crescent Drive, Vienna, Virginia 22182 for the following purposes:
1. To elect seven (7) directors of the Company to serve until the 1998
Annual Meeting of Stockholders and until their respective successors are duly
elected and qualified;
2. To ratify the selection of Richard A. Eisner & Company, LLP as the
Company's independent auditors;
3. To approve the Company's Amended and Restated 1994 Incentive Stock
Option Plan;
4. To approve the Company's private offering to issue and sell up to 80
of the Company's Units at $50,000 per Unit, with each Unit consisting of 50,000
shares of Common Stock and Class A warrants to purchase an additional 35,000
shares of Common Stock at an exercise price of $1.50 per share;
5. To approve the Company's issuance and sale of 1,000,000 Class A
warrants, having an exercise price of $1.50 per share, for aggregate
consideration of $100,000;
6. To approve the extension of the expiration date from June 17, 2001 to
June 30, 2005 of certain currently outstanding warrants to purchase up to
697,391 shares of Common Stock, having an exercise price of $3.00 per share,
and the ratification of the Company's issuance thereof;
7. To approve the extension of the expiration date from June 30, 1998 to
June 30, 2005 of certain currently outstanding warrants to purchase up to
452,533 shares of Common Stock, having an exercise price of $3.00 per share,
and the ratification of the Company's issuance thereof;
8. To approve the Company's exchange offer pursuant to which the Company
may issue up to 287,481 shares of Common Stock in exchange for currently
outstanding warrants to purchase up to 1,149,924 shares of Common Stock having
an exercise price of $3.00 per share; and
9. To consider and act upon any other matters that may properly be brought
before the Annual Meeting and at any adjournments or postponements thereof.
Any action may be taken on the foregoing matters at the Annual Meeting on
the date specified above, or on any date or dates to which the Annual Meeting
may be adjourned, or to which the Annual Meeting may be postponed.
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<PAGE> 4
The Board of Directors has fixed the close of business on October 15, 1997
as the record date for the Annual Meeting. Only stockholders of record of the
Company's common stock, $0.01 par value per share, at the close of business on
that date will be entitled to notice of and to vote at the Annual Meeting and
at any adjournments or postponements thereof.
You are requested to fill in and sign the enclosed Proxy Card, which is
being solicited by the Board of Directors, and to mail it promptly in the
enclosed postage-prepaid envelope. Any proxy may be revoked by delivery of a
later dated proxy. Stockholders of record who attend the Annual Meeting may
vote in person, even if they have previously delivered a signed proxy.
By Order of the Board of Directors
Vienna, Virginia Joshua S. Kanter
November __, 1997 Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE
AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE-PREPAID ENVELOPE
PROVIDED. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE IN PERSON IF YOU
WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
2
<PAGE> 5
WALNUT FINANCIAL SERVICES, INC.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
________________
PROXY STATEMENT
________________
FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 17, 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Walnut Financial Services, Inc. (the
"Company") for use at the 1997 Annual Meeting of Stockholders of the Company to
be held on Wednesday, December 17, 1997, and at any adjournments or
postponements thereof (the "Annual Meeting"). At the Annual Meeting,
stockholders will be asked to vote on the election of seven (7) directors of
the Company and the other matters discussed in this Proxy Statement and to act
on any other matters properly brought before them.
This Proxy Statement and the accompanying Notice of Annual Meeting and
Proxy Card are first being sent to stockholders on or about November __, 1997.
The Board of Directors has fixed the close of business on October 15, 1997 as
the record date for the Annual Meeting (the "Record Date"). Only stockholders
of record of the Company's common stock, par value $0.01 per share (the "Common
Stock"), at the close of business on the Record Date will be entitled to notice
of and to vote at the Annual Meeting. As of the Record Date, there were
14,659,172 shares of Common Stock outstanding and entitled to vote at the
Annual Meeting. Holders of Common Stock outstanding as of the close of
business on the Record Date will be entitled to one vote for each share held by
them.
STOCKHOLDERS OF THE COMPANY ARE REQUESTED TO COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. SHARES REPRESENTED BY A PROPERLY EXECUTED PROXY CARD RECEIVED PRIOR
TO THE VOTE AT THE ANNUAL MEETING AND NOT REVOKED WILL BE VOTED AT THE ANNUAL
MEETING AS DIRECTED ON THE PROXY CARD. IF A PROPERLY EXECUTED PROXY CARD IS
SUBMITTED AND NO INSTRUCTIONS ARE GIVEN, THE PERSONS DESIGNATED AS PROXY
HOLDERS ON THE PROXY CARD WILL VOTE (I) FOR THE ELECTION OF THE SEVEN (7)
NOMINEES FOR DIRECTORS OF THE COMPANY NAMED IN THIS PROXY STATEMENT, (II) FOR
THE RATIFICATION OF THE SELECTION OF RICHARD A. EISNER & COMPANY, LLP AS THE
COMPANY'S INDEPENDENT AUDITORS, (III) FOR THE APPROVAL OF THE COMPANY'S AMENDED
AND RESTATED 1994 INCENTIVE STOCK OPTION PLAN (THE "AMENDED 1994 STOCK PLAN"),
(IV) FOR THE APPROVAL OF THE COMPANY'S PRIVATE OFFERING TO ISSUE AND SELL UNITS
DISCUSSED IN THIS PROXY STATEMENT, (V) FOR THE APPROVAL OF THE ISSUANCE AND SALE
OF 1,000,000 CLASS A WARRANTS FOR AGGREGATE CONSIDERATION OF $100,000, (VI) FOR
THE APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE FROM JUNE 17, 2001 TO JUNE
30, 2005 OF CERTAIN CURRENTLY OUTSTANDING WARRANTS TO PURCHASE UP TO 697,391
SHARES OF COMMON STOCK AS DESCRIBED IN THIS PROXY STATEMENT AND THE
RATIFICATION OF THE ISSUANCE THEREOF; (VII) FOR THE APPROVAL OF THE EXTENSION
OF THE EXPIRATION DATE FROM JUNE 30, 1998 TO JUNE 30, 2005 OF CERTAIN CURRENTLY
OUTSTANDING WARRANTS TO PURCHASE UP TO 452,533 SHARES OF COMMON STOCK AS
DESCRIBED IN THIS PROXY STATEMENT AND THE RATIFICATION OF THE ISSUANCE THEREOF;
(VIII) FOR THE APPROVAL OF THE COMPANY'S EXCHANGE OFFER AS DESCRIBED IN THIS
PROXY STATEMENT AND THE ISSUANCE OF UP TO 287,481 SHARES IN CONNECTION
THEREWITH; AND (IX) IN THEIR OWN DISCRETION WITH RESPECT TO ANY OTHER BUSINESS
THAT MAY PROPERLY COME BEFORE THE STOCKHOLDERS AT THE ANNUAL MEETING. IT IS
NOT ANTICIPATED THAT ANY MATTERS OTHER THAN THOSE SET FORTH IN THE PROXY
STATEMENT WILL BE PRESENTED AT THE ANNUAL MEETING.
The presence, in person or by proxy, of holders of at least a majority of
the total number of outstanding shares of Common Stock entitled to vote is
necessary to constitute a quorum for the transaction of business at the
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<PAGE> 6
Annual Meeting. The affirmative vote of the holders of a plurality of the
votes cast with a quorum present at the Annual Meeting is required for the
election of directors (Proposal I). The affirmative vote of the holders of a
majority of the Company's outstanding voting securities (presently represented
only by Common Stock) and the holders of a majority of the Company's
outstanding voting securities that are not "affiliated persons" of the Company
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), is required for Proposal VIII and is being sought, but is not required,
for Proposal IV. The affirmative vote of the holders of a majority of the
votes cast with a quorum present at the Annual Meeting is required for
Proposals II, III, IV, V, VI, VII and any other matters to be brought before
the stockholders at the Annual Meeting. Abstentions and broker non-votes will
not be counted as votes cast and, accordingly, will have no effect on the vote
required although both will count towards the presence of a quorum. However,
abstentions and broker non-votes will have the effect of a vote against
Proposal VIII and Proposal IV, as applicable.
A stockholder of record may revoke a proxy at any time before it has been
exercised by filing a written revocation with the Secretary of the Company at
the address of the Company set forth above, by filing a duly executed proxy
bearing a later date, or by appearing in person and voting by ballot at the
Annual Meeting. Any stockholder of record as of the Record Date attending the
Annual Meeting may vote in person whether or not a proxy has been previously
given, but the presence (without further action) of a stockholder at the Annual
Meeting will not constitute revocation of a previously given proxy.
THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K ("ANNUAL REPORT"), INCLUDING
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996, WAS MAILED TO
STOCKHOLDERS ON OR ABOUT APRIL 30, 1997. THE ANNUAL REPORT, HOWEVER, IS NOT
PART OF THE PROXY SOLICITATION MATERIAL. ADDITIONAL COPIES OF THE ANNUAL
REPORT AND ANY QUARTERLY REPORT ON FORM 10-Q, TOGETHER WITH EXHIBITS, ARE
AVAILABLE WITHOUT CHARGE UPON REQUEST IN WRITING TO WALNUT FINANCIAL SERVICES,
INC., 8000 TOWERS CRESCENT DRIVE, SUITE 1070, VIENNA, VIRGINIA 22182,
ATTENTION: INVESTOR RELATIONS OR BY FILLING OUT THE ENCLOSED SELF-ADDRESSED
POSTAGE PAID CARD SPECIFICALLY DESIGNED FOR REQUESTING A COPY OF THE ANNUAL
REPORT.
PROPOSAL I
ELECTION OF DIRECTORS
The Board of Directors of the Company consists of seven (7) members with
the directors serving for a term of one (1) year and until their successors are
duly elected and qualified. The terms of all directors expire at each annual
meeting of stockholders.
At the Annual Meeting, all seven (7) directors will be elected to serve
until the 1998 Annual Meeting of Stockholders and until their successors are
duly elected and qualified. The Board of Directors has nominated Burton W.
Kanter, Joel S. Kanter, William F. Burge, III, Gene E. Burleson, Solomon A.
Weisgal, Albert Morrison, Jr.and Earl Chapman to be directors (the "Nominees").
Mr. Eugene N. Scalercio, who was elected at the 1996 annual meeting of
stockholders, resigned from the Company's Board of Directors in August 1997 to
pursue other business interests, and, accordingly, has not been nominated for
election to the Board of Directors at the Annual Meeting. Mr. Morrison was
elected by the remaining members of the Board of Directors in August 1997 to
fill Mr. Scalercio's vacated position. To the best of the Company's knowledge,
Mr. Scalercio has no disagreements with the Company on any matter relating to
the Company's operations, policies or practices. Mr. Chapman was elected by
the Board of Directors in October 1997 to fill a vacancy created as a result of
an increase in the number of members of the Board of Directors from six (6) to
seven (7). Each of the Nominees has consented to be named as a nominee in this
Proxy Statement. The Board of Directors anticipates that each of the Nominees
will serve as a director if elected. However, if any person nominated by the
Board of Directors is unable or unwilling to accept election, the proxies will
vote for the election of such other person or persons as the Board of Directors
may recommend.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE NOMINEES.
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<PAGE> 7
INFORMATION REGARDING NOMINEES. The following biographical descriptions set
forth certain information with respect to the Nominees for election as
directors at the Annual Meeting, based on information furnished to the Company
by each Nominee. The following information is as of October 10, 1997, unless
otherwise specified.
<TABLE>
<CAPTION>
Name Age Title
---- --- ------------------------------------
<S> <C> <C>
Burton W. Kanter* 67 Director (Chairman)
Joel S. Kanter* 40 Chief Executive Officer, President
and Director
William F. Burge, III 54 Director
Solomon A. Weisgal 70 Director
Gene E. Burleson* 56 Director
Albert Morrison, Jr. 60 Director
Earl Chapman 72 Director
=================================================================
</TABLE>
* Such individuals may be deemed to be "interested persons" as such term is
defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended.
BURTON W. KANTER Director since 1995
Mr. Kanter has served as a Director of the Company since February 27,
1995 and the Chief Executive Officer of Walnut Capital Corp., a Delaware
corporation ("Walnut Capital"), a subsidiary of the Company, since
February 27, 1995. He has been a director of Walnut Capital since 1983,
and was the President of Walnut Capital between 1987 and February 27,
1995, and Treasurer of Walnut Capital from January 1994 until February
27, 1995. Mr. Kanter is of counsel to Neal Gerber & Eisenberg, a
Chicago, Illinois law firm. From 1961 through 1985, Mr. Kanter was a
partner in the law firm of Kanter & Eisenberg or its predecessor firms.
He is the author of numerous articles and a frequent lecturer in the
field of Federal income taxation, and founder and senior editor of the
nationally known column in the Journal of Taxation called "Shop Talk."
He is a member of the faculty of the University of Chicago Law School.
He is a director of numerous companies, including the following public
companies: HealthCare COMPARE Corp., Channel America, Inc., Power-Cell,
Inc., Scientific Measurement Systems, Inc., and Logic Devices
Incorporated. He is a member of the Board of Directors or the Board of
Trustees of: the Midwest Film Center of the Chicago Art Institute, the
Chicago International Film Festival, and the Museum of Contemporary Art
of Chicago. He is also on the advisory board of the Wharton School of
the University of Pennsylvania Real Estate Center and the University of
Chicago Annual Tax Conference. Mr. Kanter is the father of Joel S.
Kanter and Joshua S. Kanter (Secretary of and General Counsel to the
Company).
JOEL S. KANTER Director since 1995
Mr. Kanter has been a Director and the President of the Company since
February 27, 1995 and has been the Chief Executive Officer of the Company
since April 15, 1996. From 1988 to February 27, 1995, Mr. Kanter was a
consultant to Walnut Capital. Mr. Kanter has served as President of
Windy City, Inc. ("WCI"), a privately held investment firm, since July
1986. From 1978 through 1979, Mr. Kanter served as a Legislative
Assistant to Congressman Abner J. Mikva (D-Ill.) specializing in
Judiciary Committee affairs. From 1980 through 1982, Mr. Kanter served
as a Special Assistant to the National Association of Attorneys General,
representing that organization's positions in the criminal justice and
environmental arenas. From 1982 through 1984, Mr. Kanter served as Staff
Director of the House Subcommittee on Legislative Process chaired by
Congressman Gilles D. Long (D-La.). In that capacity, he also lent
assistance to the House Democratic Caucus which was also chaired by
Congressman Long. From 1985 through 1986, Mr. Kanter served as Managing
Director of The Investors' Washington Service, an
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<PAGE> 8
investment advisory company specializing in providing advice to large
institutional clients regarding the impact of federal legislative and
regulatory decisions on debt and equity markets. Clients of The
Investors' Washington Service included Amoco Oil, AT&T, Bankers Trust,
Citicorp, Chase Manhattan Bank, Chrysler Corporation, General Motors,
J.C. Penney, and others. Mr. Kanter currently serves on the Boards of
Directors of GranCare, Inc., I-Flow Corporation, Osteoimplant Technology,
Inc., Encore Medical Corporation and Vitalink Pharmacy Services, Inc.,
each of which is a publicly-held company, as well as a number of private
concerns. Mr. Kanter is the son of Burton W. Kanter and the brother of
Joshua S. Kanter.
WILLIAM F. BURGE, III Director since 1995
Mr. Burge has been a Director of the Company since February 27, 1995.
Mr. Burge has been a director of Walnut Capital since 1992. Since 1987,
Mr. Burge has been Chairman of the Houston Metropolitan Transit Authority
Board of Directors. He is on the Board of Directors of Wallis State
Bank, former Trustee of the University of Houston Foundation and Tartan
Corp. Recently, he was appointed Vice-Chairman of Harris County-Houston
Sports Authority. He was also appointed to the Honorary Advisory Board
of the International Business College of Dalian, China. He is also a
Board member and past Chairman of the West Houston Association. Since
1980, he has been a Board member of Sky Ranch and Vice Chairman of the
Harris County Housing Finance Corporation. Since 1970, Mr. Burge has
served as Managing Director and Vice Chairman of the Board of Directors
of Mitsubishi Estate Company Associates, USA, as well as President and
Managing Director of Ayrshire Corp. He also has experience in commercial
and residential real estate development in Houston, Dallas, New York, New
Orleans, Atlanta and Los Angeles. He is on the advisory board of the
Wharton School of the University of Pennsylvania Real Estate Center and a
member of the Urban Land Institute.
GENE E. BURLESON Directors since 1996
Mr. Burleson has been a Director of the Company since June 1996. Mr.
Burleson has been Chairman of the Board of GranCare, Inc., since 1994.
Following the merger of GranCare, Inc.'s pharmacy operations with
Vitalink Pharmacy Services, Inc., he served as Chief Executive Officer of
Vitalink Pharmacy Services, Inc. from February 1997 to August 1997. His
previous experience included serving as President and Chief Executive
Officer of American Medical International, Inc. ("American"). Prior to
assuming that position, he was President and Chief Executive Officer of
American's European operations for nine years. Mr. Burleson is presently
a director of Decker's Outdoor Corp. and Alternative Living Services
Inc., each publicly-held companies.
SOLOMON A. WEISGAL Director since 1995
Mr. Weisgal has been a Director of the Company since February 27, 1995.
Mr. Weisgal has been a director of Walnut Capital since 1984. Mr.
Weisgal is a Certified Public Accountant and has been President of
Solomon A. Weisgal, Ltd., a financial consulting firm, since its
inception in 1979. Mr. Weisgal is presently a director of Chicago
Holdings, Inc., SportsTrac, Inc. and numerous other privately-held
concerns, and First Merchants Acceptance Corporation, a publicly-held
company.
ALBERT MORRISON, JR. Director since August 1997
Mr. Morrison has been a Director of the Company since August 13, 1997 and
a director of Walnut Capital since 1984. Mr. Morrison is President of
Morrison, Brown, Argiz & Company, Certified Public Accountants. He has
more than 30 years experience as an accountant and is a member of a
number of professional accounting institutes and associations. Mr.
Morrison is Vice Chairman of the Dade County Industrial Development
Authority, Treasurer of the Board of Trustees of Florida International
University, and a member of the Board of Directors of Chicago Holdings,
Inc., Heico Corporation, Logic Devices Incorporated and a Trustee of the
Greater Miami Chamber of Commerce.
4
<PAGE> 9
EARL CHAPMAN Director since October 1997
Mr. Chapman has been a Director of the Company since October 8, 1997.
Mr. Chapman is currently the Chief Executive Officer and Chairman of
Booklines, Hawaii Ltd., a Hawaiian distributor of books, music, video
tapes and other souvenir products. Prior to joining Booklines, Hawaii
Ltd., Mr. Chapman was the Chief Executive Officer and Chairman of SiLite
Corporation, a manufacturer of plastic food service products. Mr.
Chapman serves as the President of the Board of the Neighborhood Justice
Center, a volunteer mediation agency comprised of approximately 200
volunteer mediators.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth (i) the number of shares of Common Stock
beneficially owned by (x) owners of more than five percent (5%) of the
outstanding Common Stock who are known to the Company, and (y) Joel S. Kanter,
Burton W. Kanter, Robert F. Mauer and Michael Alan Faber (collectively, the
"Named Executive Officers"), and each of the directors of the Company,
individually, and the executive officers and directors of the Company, as a
group, and (ii) the percentage of ownership of the outstanding Common Stock
represented by such shares. The share ownership is reported as of October 10,
1997. All share numbers are provided based upon information supplied to
management of the Company by the respective individuals and members of the
group. Each person named in the table has sole voting and investment power with
respect to all shares shown as beneficially owned by such person, except as
otherwise set forth in the notes to the table.
5
<PAGE> 10
<TABLE>
<CAPTION>
Names and Addresses of Directors and
Executive Officers Number of Shares Percent of Class
- -------------------------------------------- ---------------- ----------------
<S> <C> <C>
Burton W. Kanter(1) 1,260,555 8.5%
Two North LaSalle St.
Suite 2200
Chicago, IL 60602
Solomon A. Weisgal(2) 430,057 2.9%
120 S. Riverside Plaza
Suite 1420
Chicago, IL 60606
Joel S. Kanter(3) 1,527,740 10.0%
8000 Towers Crescent Drive Suite 1070
Vienna, VA 22182
William F. Burge, III 0 0%
Ayrshire Corporation
2028 Buffalo Terrace
Houston, TX 77019
Gene E. Burleson 0 0%
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
Albert Morrison, Jr.(4) 540,159 3.7%
9795 South Dixie Highway
Miami, FL 33156
Earl Chapman 0 0%
2039 Laukahi Street
Honolulu, HI 96821
Robert F. Mauer(5) 31,250 *
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
Michael Alan Faber(6) 34,205 *
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
Officers and Directors, as a group(7): 3,835,099 25.3%
</TABLE>
Footnotes follow on next page
6
<PAGE> 11
Names and Addresses of 5% Number of Percent of
Beneficial Owners Shares Class
------------------------- ----------- ------------
Windy City, Inc. (8) 929,103 6.1%
8000 Tower Crescent Drive
Suite 1070
Vienna, Virginia 22182
- ------------
* Less than one percent (1%).
(1) The number of shares reported includes: (i) 9,017 shares owned by BWK,
Inc. ("BWK"), (ii) 40,523 shares owned by Carlco, Inc. ("Carlco"), (iii)
566,098 shares owned by Mr. Kanter, not personally but solely as
Co-Trustee of each of the general partners of the HAP Trusts Partnership
("HAP"), (iv) 354,910 shares owned by THC, (v) 40,078 shares owned by TMT,
Inc. ("TMT"), and (vi) options to purchase up to 249,929 shares at $1.80
per share, all of which options are presently exercisable.
Mr. Kanter disclaims any and all beneficial interest in any of the above
referenced shares of Common Stock owned by BWK, Carlco, HAP, THC or TMT.
Mr. Kanter, as President of BWK, Carlco, TMT and THC, has sole voting and
investment control of the 444,528 shares owned by BWK, Carlco, TMT and
THC and, upon exercise thereof, will have sole voting and investment
control over the 187,447 shares underlying Mr. Kanter's options. Mr.
Kanter, as Co-Trustee of each of the general partners of HAP, shares
voting and investment control of the 566,098 shares owned by HAP with his
fellow co-trustee.
Each of BWK, Carlco, HAP, THC and TMT disclaim any and all beneficial
ownership of the shares owned by the others.
(2) The number of shares reported includes: (i) 45,199 shares owned by
Cypress Lane Investments ("Cypress"), (ii) 45,199 shares owned by Nacha
Investment Company ("Nacha"), and (iii) 339,659 shares owned by the BRT
Partnership ("BRT").
Mr. Weisgal disclaims any and all beneficial interest in any of the
shares owned by Nacha or BRT. As such, Mr. Weisgal has a beneficial
interest only in the 45,199 shares owned by Cypress. Mr. Weisgal has
sole voting and investment control of the 384,858 shares owned by Nacha
and BRT. Mr. Weisgal, as the trustee of one of the general partners of
Cypress, shares voting and investment control of the 45,199 shares owned
by Cypress.
Each of BRT, Cypress and Nacha disclaim any and all beneficial ownership
in the shares owned by the others.
(3) The number of shares reported includes: (i) 398,593 shares owned by the
Kanter Family Foundation ("KFF"), (ii) 476,670 shares owned by WCI, (iii)
warrants to purchase up to 452,533 shares at $3.00 per share owned by WCI,
and (iv) options to purchase up to 199,944 shares at $1.80 per share, all
of which options are presently exercisable.
Mr. Kanter disclaims any and all beneficial interest in any of the above
referenced securities owned by KFF or WCI. Mr. Kanter, as President of
KFF and WCI, has sole voting and investment control of the 855,163 shares
owned by KFF and WCI and, upon exercise thereof, will have sole voting
and investment control over the 199,944 shares underlying Mr. Kanter's
options and the 452,533 shares underlying WCI's warrants.
Each of KFF and WCI disclaim any and all beneficial ownership of the
shares owned by the other.
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<PAGE> 12
(4) The number of shares reported consists of 540,159 shares owned by
Federal Business Investment Company ("FBIC"). Mr. Morrison is the
president of FBIC and exercises sole voting and investment control over
such Common Stock. Trusts established for the benefit of various members
of Burton W. Kanter's family (excluding Mr. Kanter himself) beneficially
own 48% of the outstanding common stock of FBIC. Trusts established for
the benefit of various members of Mr. Morrison's family (excluding Mr.
Morrison himself) beneficially owns 48% of the outstanding common stock of
FBIC. The remaining 4% of the outstanding common stock of FBIC and a
class of preferred stock of FBIC are beneficially owned by unrelated third
parties. Mr. Morrison disclaims beneficial interest to the 540,159 shares
of Common Stock owned by FBIC.
(5) The number of shares reported consists of options to purchase 25,000
shares at $2.00 per share and 6,250 shares at $2.00 per share, all of
which options are presently exercisable.
(6) The number of shares reported includes: (i) 22,265 shares owned by Mr.
Faber, and (ii) 11,940 shares owned by a corporation of which Mr. Faber is
the president and sole director.
(7) Such group consists of eight persons. The number of shares reported
includes all of the shares reported at Footnotes 1 through 6, inclusive.
(8) Includes (i) 476,670 shares owned by WCI, and (ii) warrants to purchase
up to 452,433 shares at $3.00 per share owned by WCI (which warrants WCI
has indicated it will exchange for 113,133 shares of Common Stock).
8
<PAGE> 13
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY COMPENSATION. The following table sets forth the fiscal year
1996 compensation paid by the Company, including its subsidiaries, to all of
the directors of the Company and each of the three highest paid executive
officers of the Company that received an aggregate compensation from the
Company for fiscal year 1996 in excess of $60,000. On October 15, 1997, the
Company and certain of its subsidiaries elected to become regulated as business
development companies ("BDCs") under the 1940 Act. The form of disclosure
regarding executive compensation included in this Proxy Statement is mandated
by the provisions of the 1940 Act and is different in several respects from the
form of disclosure otherwise required under the Securities Exchange Act of
1934, as amended (the "1934 Act"), and used by the Company in the Company's
Annual Report and prior proxy statements. The disclosure regarding executive
compensation required by Item 402 of Regulation S-K promulgated under the 1934
Act and included in the Company's Annual Report is included in this Proxy
Statement at Appendix A to the extent not otherwise included elsewhere in this
Proxy Statement. See also CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS for
additional amounts paid by the Company to its executive officers and their
affiliates.
COMPENSATION TABLE (1996)
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Benefits
Compensation from Accrued as Part of Options/
Name of Person, Position Company(1) Company's Expenses SARs(#)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Burton W. Kanter $100,000 $0 None
Chairman of the Board
Joel S. Kanter, $200,000 $0 None
President and Chief
Executive Officer
Robert F. Mauer, $ 91,667(2) $0 125,000 options
Chief Financial
Officer and Treasurer
Michael Alan Faber(3) $160,000 $0 None
Gene E. Burleson, $ 8,000(4) $0 10,000 options(5)
Director
William F. Burge, III, $ 10,500(4) $0 6,000 options(5)
Director
Solomon A. Weisgal, $ 10,500(4) $0 6,000 options(5)
Director
Albert Morrison, Director $ 7,500(4) $0 6,000 options(5)
Earl Chapman, Director $ 0(6) $0 None
Eugene N. Scalercio, $ 85,000 $0 None
Director(7)
</TABLE>
(1) Non-employee Directors of the Company receive compensation from the
Company only. They do not receive compensation from any subsidiary of the
Company (including, without limitation, those subsidiaries which have
elected to be regulated as a BDC) for their service on such subsidiary
boards of directors or otherwise. Accordingly, the column entitled "Total
Compensation from fund and fund complex paid to directors" required by
Item 22(b)(6)(i) of Schedule 14A promulgated under the 1934 Act has been
omitted.
(2) Mr. Mauer joined the Company on February 1, 1996. Amounts reported
reflect an annual salary of $100,000.
(3) Mr. Faber was formerly the Vice President and Secretary of Walnut
Capital. He resigned all of his positions with Walnut Capital effective
December 31, 1996.
9
<PAGE> 14
(4) Non-employee Directors receive meeting fees. See DIRECTOR COMPENSATION
below.
(5) In conjunction with the Company's election to become regulated as a BDC,
these options were cancelled.
(6) Mr. Chapman held no position with the Company during fiscal year 1996.
(7) Mr. Scalercio's compensation reflects his salary and other amounts paid
by NFS Services, Inc., a wholly-owned subsidiary of the Company which was
sold in September 1997.
OPTIONS AND OTHER AWARDS. The following table provides certain
information regarding the number and value of options and SARs granted to all
of the directors of the Company and each of the three highest paid executive
officers of the Company that received an aggregate compensation from the
Company for fiscal year 1996 in excess of $60,000. No directors or executive
officers of the Company or its subsidiaries exercised any options during fiscal
year 1996.
OPTION/SAR GRANTS IN 1996
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------------------- -----------------------
Percent of Total Exercise or
Options/SARs Granted Options/SARs Granted Base Price Expiration
Name (#) in 1996 (%) ($/sh) (3) Date 5%($) 10%($)
- ---- -------------------- -------------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Burton W. Kanter 0 N/A N/A N/A N/A N/A
Joel S. Kanter 0 N/A N/A N/A N/A N/A
Robert F. Mauer 100,000(1) 56.7% $2.50 2/1/07 $157,225 $398,425
25,000(2) 14.2% $1.50 12/10/07 23,584 59,764
Michael Alan Faber 0 N/A N/A N/A N/A N/A
William F. Burge, III 6,000(4) N/A $2.25 1/1/06
Gene E. Burleson 10,000(4) N/A $2.75 6/5/06
Albert Morrison 0 N/A N/A N/A N/A N/A
Solomon A. Weisgal 6,000(4) N/A $2.25 1/1/06
Earl Chapman 0 N/A N/A N/A N/A N/A
Eugene N. Scalercio 0 N/A N/A N/A N/A N/A
</TABLE>
(1) Represents incentive stock options granted under the Company's 1994
Incentive Stock Option Plan (the "Original 1994 Stock Plan") on February 1,
1996. Such options vest in four equal annual installments, commencing on
February 1, 1997.
(2) Represents incentive stock options granted under the Original 1994 Stock
Plan on December 10, 1996. Such options vest in four equal annual
installments, commencing on December 10, 1997.
(3) Exercise price reflects the closing price per share as reported on The
Nasdaq National Market on the respective date of grant.
(4) These options were canceled effective the date the Company filed its
election to become regulated as a BDC under the 1940 Act.
EMPLOYMENT AGREEMENTS WITH MANAGEMENT. The Company has entered into
employment agreements with Burton W. Kanter and Joel S. Kanter. Mr. Burton
Kanter's employment agreement provides that he is entitled to a minimum base
salary of $100,000 per annum (which is paid in part to Mr. Kanter individually
and in part to his sole proprietorship doing business as BK Consultants). He
is also entitled to a bonus as determined by the Board of Directors from time
to time in its absolute and sole discretion. The agreement expires in February
1998, unless terminated at an earlier date pursuant to terms and conditions of
the agreement. Amounts due under Mr. Burton Kanter's employment agreement were
not currently paid in 1996 and are being accrued by the Company. The terms and
conditions of the employment agreement of Mr. Joel Kanter is generally
identical to that of Burton Kanter except that Joel Kanter is entitled to a
minimum base salary of $70,000 per annum; however, the Board of Directors
determined to increase such base salary to $200,000 for fiscal 1996. Joel
Kanter's agreement also differs in that Joel Kanter has agreed not to compete
with the Company or NFS (but not Walnut Capital) for a period of three years
after his termination of employment with Walnut Capital. In the event of
termination of any of the agreements without cause, Messrs. Kanter would be
entitled to one year's salary.
10
<PAGE> 15
DIRECTOR COMPENSATION. During the 1996 fiscal year the Company paid its
non-employee directors $2,500 for each regularly scheduled meeting attended in
person or by telephone, $2,500 for each special meeting attended in person and
$500 for each committee meeting attended in person or by telephone. The
Company reimburses the directors for reasonable out-of-pocket expenses incurred
in connection with their activities on behalf of the Company. If a director is
re-elected, such director will receive, upon such re-election and the approval
by the Securities and Exchange Commission (the "SEC") of the Company's Amended
1994 Stock Plan (as discussed below), a 10-year option to purchase 6,000 shares
of Common Stock at the market price at the time of grant. Any new director
elected to the Board of Directors will receive a 10-year option to purchase up
to 10,000 shares of Common Stock at the market price at the time of grant.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
GENERAL. The Company is managed by a seven (7) member Board of Directors.
The 1940 Act requires that at least a majority of the members of the board of
directors of a BDC not be "interested persons" as defined in Section 2(a)(19)
of the1940 Act. The current non-interested persons are Messrs. Morrison,
Burge, Chapman and Weisgal. All seven (7) seats on the Board of Directors are
to be filled at the Annual Meeting. Each director will hold office for the
term to which he is elected and until his successor is duly elected and
qualified. At each annual meeting of the stockholders of the Company, the
successors to the directors whose terms expire at that meeting will be elected
to hold office for a term continuing until the annual meeting of stockholders
held in the year following the year of their election and the election and
qualification of their successors.
The Board of Directors held five (5) meetings during the 1996 fiscal year.
Each of the directors then in office attended at least 75% of the total number
of meetings of the Board of Directors and of the committees of the Board of
Directors of which he was a member, except that Mr. Jeremy Shamos (no longer a
member of the Board of Directors) attended only one out of two Audit Committee
meetings. The Board of Directors acted by unanimous written consent on three
(3) occasions during the 1996 fiscal year.
The Board of Directors has appointed an Audit Committee, a Compensation
Committee and an Incentive Stock Option Plan Administrative Committee. The
members of all such committees serve at the discretion of the Board of
Directors.
AUDIT COMMITTEE. The Audit Committee, which consists of Messrs. Burleson,
Burge and Weisgal, makes recommendations concerning the engagement of
independent public accountants, reviews with the independent public accountants
the plans and results of the audit engagement, approves professional services
provided by the independent public accounts, reviews the independence of the
independent public accountants, considers the range of audit and non-audit fees
and reviews the adequacy of the Company's internal accounting controls. The
Audit Committee met three (3) times during the 1996 fiscal year. Mr. Weisgal
is the chairman of the Audit Committee.
COMPENSATION COMMITTEE. The Compensation Committee consists of Messrs.
Burleson, Burge and Weisgal. The Compensation Committee has the authority to
establish the compensation, benefits and perquisites for the executive
officers, directors and other employees of the Company and each of its direct
and indirect subsidiaries. The Compensation Committee met five (5) times
during the 1996 fiscal year. Mr. Burge is the chairman of the Compensation
Committee.
INCENTIVE STOCK OPTION PLAN ADMINISTRATIVE COMMITTEE (the "Option Plan
Committee"). The Option Plan Committee consists of Messrs. Burleson, Burge and
Weisgal. The Option Plan Committee is empowered to administer the Walnut
Capital Corp. 1987 Stock Option Plan, the NFS Services, Inc. 1989 Incentive
Stock Plan and the Original 1994 Stock Plan. The Option Plan Committee met
four (4) times during the 1996 fiscal year. Mr. Burleson is the chairman of
the Option Plan Committee. In connection with the Company's submission of the
Company's Amended 1994 Stock Plan to the SEC for approval as required by the
1940 Act, it is contemplated that a separate Incentive Stock Option Plan
Administrative Committee will be established solely for purposes of the Amended
1994 Stock Plan and that the members of such new committee will be Messrs.
Burge and Weisgal.
11
<PAGE> 16
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee currently consists of Messrs. Burleson, Burge and
Weisgal. None of them has served as an officer of the Company or has any other
business relationship or affiliation with the Company, except his service as a
director. Joel Kanter, President, Chief Executive Officer and a Director of
the Company, serves on the Board of Directors and is a member of the finance
and audit committees of said Board of Directors of GranCare, Inc. Mr. Burleson
served, until February 1997, as the Chief Executive Officer and President of
GranCare, Inc. Mr. Burleson continues as the Chairman of the Board of
Directors of GranCare, Inc.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has retained the firm of Barack Ferrazzano Kirschbaum
Perlman & Nagelberg ("BFKP&N") as its general counsel. Joshua S. Kanter is of
counsel to such firm and is the General Counsel and Secretary of the Company.
Walnut Capital paid approximately $17,400 in legal fees and expenses to such
firm during fiscal year 1996. In addition, the Company has paid approximately
$160,000 in legal fees and expenses to BFKP&N through December 31, 1996 and had
current BFKP&N invoices outstanding as of December 31, 1996 totalling
approximately $121,000. The Company also issued 14,000 shares of Common Stock
to Joshua Kanter during January 1996 in lieu of payment of fees of $35,000
owing to BFKP&N.
Walnut Capital has entered into a sublease agreement with WCI. Messrs.
Joel Kanter and Joshua Kanter are the President and Vice President,
respectively, of WCI. Trusts for the benefit of Mr. Burton Kanter's family are
all of the outstanding Common Stock of WCI. Under the sublease agreement,
Walnut Capital leases offices from WCI and WCI provides Walnut Capital with
secretarial and other administrative services. The costs of the secretarial
and other administrative services are included in the sublease rental payments.
Walnut Capital paid $58,260 to WCI under the sublease agreement in 1996. The
sublease has a one-year term which is renewable annually. Management believes
the terms of such sublease agreement and the amounts paid thereunder are
commensurate to the amounts that Walnut Capital would have to pay to
unaffiliated third parties for comparable leased offices and services.
WCI currently owns warrants to purchase 452,533 shares of Common Stock at
$3.00 per share. The Company has offered to exchange such warrants for 113,133
shares of unregistered, restricted Common Stock pursuant to a private exchange
offer. See PROPOSAL VIII below for a discussion of the exchange offer. WCI
has indicated that it will accept such offer.
The Holding Company ("THC"), a company of which Burton W. Kanter is
President, made unsecured loans to Walnut Capital in the aggregate principal
amount of $270,000. Trusts for the benefit of Mr. Burton Kanter's family
control a majority of the outstanding Common Stock of THC. Management believes
that such loans were on terms no less favorable than the terms available from
institutional lenders. The loans accrued interest at 8.75% per annum. The
loans were repaid in April 1996. In addition, in April 1997, THC made an
unsecured $400,000 loan to Walnut Capital. Such loan bears interest at 9.5%
per annum. The maturity date for the payment of all interest and principal is
October 31, 1997.
The Company has an outstanding $2,025,000 loan from American National Bank
and Trust Company of Chicago, which matures in June 1999. Messrs. Burton W.
Kanter and Joel S. Kanter have personally guaranteed such line of credit.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE ELECTION OF
DIRECTORS.
PROPOSAL II
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The accounting firm of Richard A. Eisner & Company, LLP ("Eisner") has
served as the Company's independent auditors since March 1995. At a meeting on
August 13, 1997, the Audit Committee of the Company's
12
<PAGE> 17
Board of Directors recommended the selection of Eisner as the Company's
independent auditors for fiscal year 1997 and the entire Board (including a
majority of those directors who are not "interested persons" of the Company
within the meaning of the 1940 Act) made such selection at a meeting held in
person on August 13, 1997. The 1940 Act requires that such selection be
ratified by the stockholders of the Company. A representative of Richard A.
Eisner & Company, LLP will be present at the Annual Meeting, will be given the
opportunity to make a statement if he or she so desires and will be available
to respond to appropriate questions.
In February 1995, Walnut Capital dismissed Coopers & Lybrand, L.L.P. as
its independent auditor, in favor of Eisner which had been the independent
auditors for the Company and NFS since March 1993. Management made this change
in order to consolidate the accounting and auditing functions for the Company
and each of its subsidiaries with one independent auditing firm. The Walnut
Capital Board of Directors approved such dismissal. During the Company's two
most recent fiscal years, no report issued by Coopers & Lybrand, L.L.P. to
Walnut Capital contained an adverse opinion or a disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope or accounting principles.
During the Company's two most recent fiscal years, Walnut Capital and Coopers &
Lybrand, L.L.P. had no disagreements on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF SELECTION OF
RICHARD A. EISNER & COMPANY, LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
PROPOSAL III
APPROVAL OF THE AMENDED AND RESTATED 1994 INCENTIVE STOCK OPTION PLAN
INTRODUCTION. The Amended 1994 Stock Plan is intended to promote equity
ownership of the Company by selected officers, directors and employees of the
Company and its subsidiaries, to increase their proprietary interest in the
success of the Company and to encourage them to remain in the employ of the
Company or its subsidiaries. The Board adopted the Original 1994 Stock Plan on
November 15, 1994 and obtained stockholder approval of the Original 1994 Stock
Plan at the Special Meeting of stockholders held on December 7, 1994. The
Board of Directors approved the Amended 1994 Stock Plan in order to conform the
Original 1994 Stock Plan to the requirements of the 1940 Act, to conform it to
the revised Section 16 rules promulgated under the 1934 Act and to make other
minor technical changes. Such changes include the adoption of a formula grant
for all non-employee members of the board of Directors as described below and
deletion of the authority to grant restricted stock awards and stock
appreciation rights. As a result of such changes and the Company's election to
be regulated as a BDC, the 1940 Act requires that the Amended 1994 Stock Plan
be approved by the stockholders of the Company. The following is a summary of
the material provisions of the Amended 1994 Stock Plan and is qualified in its
entirety by the reference to the terms of the Amended 1994 Stock Plan, a copy
of which is attached hereto as Appendix B.
ADMINISTRATION. Upon approval by the stockholders, the Amended 1994 Plan
will be administered by a stock incentive plan administrative committee which
will be comprised only of non-employee disinterested directors appointed by the
Board of Directors (the "Amended 1994 Plan Committee") in accordance with the
1940 Act and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The members of the Amended 1994 Plan Committee will be Messrs. Burge
and Weisgal. The Amended 1994 Stock Plan Committee will have the authority,
subject to approval by the Board, to select the persons to whom awards may be
granted, to determine the terms of each award, to interpret the provisions of
the Amended 1994 Stock Plan and to make all other determinations that it deems
necessary or advisable for the administration of the Amended 1994 Stock Plan.
The Amended 1994 Stock Plan provides for the grant of "incentive stock
options," as defined under Section 422(b) of the Code, options that do not so
qualify (referred to herein as "nonstatutory options"), as determined in each
individual case by the 1994 Stock Plan committee. Subject to approval of the
Amended 1994 Stock Plan by the stockholders, the Board has reserved 1,000,000
shares of Common Stock for issuance under the Amended 1994 Stock Plan. In
general, if any award granted under the Amended 1994 Stock Plan expires,
terminates, is forfeited or is canceled for any reason, the shares of Common
Stock allocable to such award may again be made subject to an award granted
under the Amended 1994 Stock Plan.
13
<PAGE> 18
AWARDS. Officers, directors, employees of the Company and its
subsidiaries will be eligible to receive grants of awards under the Amended
1994 Stock Plan. Subject to the approval of the SEC, grants to non-employee
directors will be made annually pursuant to a prescribed formula described
below. Options may be granted subject to a vesting requirement. The exercise
price of incentive stock options granted under the Amended 1994 Stock Plan must
at least equal the fair market value of the Common Stock subject to the option
(determined as provided in the Amended 1994 Stock Plan) on the date the option
is granted, provided that the exercise price of an incentive stock option
granted under the Amended 1994 Stock Plan to an employee owning more than 10%
of the total combined voting power of all classes of capital stock of the
Company is subject to the further restriction that such option must have an
exercise price of at least 110% of the fair market value of the shares of
Common Stock issuable upon exercise of the option (determined as of the date
the option is granted) and may not have an exercise term of more than five
years. The exercise price of nonstatutory options will be determined by the
Amended 1994 Stock Plan Committee. Options granted under the Amended 1994
Stock Plan may be exercisable for up to ten years, provided that incentive
stock options granted under the Amended 1994 Stock Plan to an employee owning
more than 10% of the total combined voting power of all classes of capital
stock of the Company may be exercisable for no more than five years.
The Amended 1994 Stock Plan will contain a formula grant to all
non-employee directors of the Company. Upon approval of the stockholders of
the Amended 1994 Stock Plan at the Annual Meeting and the SEC, all non-employee
directors will receive an initial grant of options to purchase 60,000 shares at
the market price on the date of grant. One-quarter of such initial options
will vest immediately upon grant and the remaining three-quarters will vest
upon the one-year anniversary of the grant date, subject to acceleration upon
the death, disability or retirement of such director or a change of control of
the Company. In addition, non-employee directors then in office will receive
annual grants of options to purchase 6,000 shares at the market price on the
date of grant which will vest immediately upon grant.
Each person eligible to participate in the Amended 1994 Stock Plan is
notified of his or her selection by the Amended 1994 Stock Plan Committee. To
receive an award under Amended 1994 Stock Plan, a recipient must execute an
award agreement which specifies the type of award to be granted, the number of
shares of Common Stock (if any) to which the award relates, the terms and
conditions of the award and the date granted. In the case of an award of
options, the award agreement also specifies the price at which the shares of
Common Stock subject to the option may be purchased, the date(s) on which the
option becomes exercisable and whether the option is an incentive stock option
or a nonstatutory option.
The full exercise price for all shares of Common Stock purchased upon the
exercise of options granted under the Amended 1994 Stock Plan must be paid at
the time of exercise by cash, personal check, personal note, shares of
Common Stock already owned or awards granted pursuant to the Amended 1994 Stock
Plan which the holder has an immediate right to exercise, all to the extent
permitted by the 1940 Act.
Incentive stock options granted to employees under the Amended 1994 Stock
Plan remain outstanding and will be exercisable only until the expiration of 90
days from the date on which the person to whom they were granted ceases to be
employed by the Company or its subsidiaries. Generally, all other awards will
remain outstanding and will be exercisable only until the expiration of one
year from the date on which the person to whom they were granted ceases to be
employed by the Company or its subsidiaries, or as otherwise determined by the
Amended 1994 Stock Plan Committee.
Incentive stock options granted to employees under the Amended 1994 Stock
Plan will be subject to the further restriction that the aggregate fair market
value of Common Stock as to which any such incentive stock option first becomes
exercisable in any calendar year is limited to $100,000. To the extent options
covering more than $100,000 worth of Common Stock first become exercisable in
any one calendar year, the excess will be considered nonstatutory options. For
purposes of determining which, if any, options have been granted in excess of
the $100,000 limit, options will be considered to become exercisable in the
order granted.
AMENDMENT AND TERMINATION. The Amended 1994 Stock Plan will expire ten
years after its approval by stockholders at the Annual Meeting, unless sooner
terminated by the Board. The Board will have the authority to amend the
Amended 1994 Stock Plan in such manner as it deems advisable, except that the
Board is not permitted without stockholder approval to amend the 1994 Stock
Plan in a manner which would prevent the grant of incentive
14
<PAGE> 19
stock options under the Amended 1994 Stock Plan or increase the number of
shares of Common Stock available. The Amended 1994 Stock Plan will provide for
appropriate adjustment, as determined by the Amended 1994 Stock Plan Committee,
in the number and kind of shares subject to the Amended 1994 Stock Plan, and
the number, kind and per share exercise price of shares subject to unexercised
options, in the event of any change in the outstanding shares of Common Stock
by reason of a stock split, stock dividend, combination or reclassification of
shares, recapitalization, merger or similar event.
GRANTS. As of September 30, 1997, awards of stock options to purchase
258,500 shares of Common Stock had been granted and were outstanding pursuant
to the Original 1994 Stock Plan to various officers, employees of the Company
or the Company's subsidiaries. Said outstanding options are subject to a
variety of vesting schedules and expire between March 1998 and January 2006.
The exercise price of the outstanding options granted pursuant to the Original
1994 Stock Plan ranges from $1.50 per share of Common Stock to $3.00 per share
of Common Stock. Upon approval of the stockholders, the grants made under the
Original 1994 Stock Plan will become grants under the Amended 1994 Stock Plan.
In addition to the Original 1994 Stock Plan, the Company maintains two
other incentive stock option plans (the NFS Services, Inc. 1989 Incentive Stock
Option Plan and the Walnut Capital Corporation 1987 Stock Option Plan);
however, the Company does not intend to grant additional awards under such
plans. As of September 30, 1997, awards of stock options to purchase 619,452
shares of Common Stock had been granted and were outstanding pursuant to such
plans.
The affirmative vote of a majority of the votes cast by holders present in
person or represented by proxy at the Annual Meeting and entitled to vote is
required to approve this Item.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE COMPANY'S AMENDED
AND RESTATED 1994 INCENTIVE STOCK OPTION PLAN.
PROPOSALS IV AND V
APPROVAL OF PRIVATE OFFERING OF UNITS AND APPROVAL OF SALE OF
THE INITIAL WARRANTS
INTRODUCTION. In order to comply with certain provisions of the 1940 Act
and the rules applicable to companies listed for trading on The Nasdaq National
Market, the Company is seeking the approval of stockholders of the Company's
private placement of Units, including the issuance and sale of the Common Stock
and the Class A Warrants, as described below. Specifically, the Company is
seeking the approval of (i) the holders of a majority of the Company's
outstanding Common Stock, and (ii) the holders of a majority of the Company's
outstanding Common Stock that are not "affiliated persons" of the Company
within the meaning of the 1940 Act (collectively, a "1940 Act Stockholder
Approval"). In the alternative, if a 1940 Act Stockholder Approval is not
obtained, the private placement, including the issuance of the Class A
Warrants and the maximum Offering (as defined below), must be approved by a
majority of the votes cast by holders present in person or represented by proxy
at the Annual Meeting and entitled to vote (a "Regular Stockholder Approval")
as described below. In the event that the Company does not obtain a Regular
Stockholder Approval, the private placement will not occur. In the event that
the Company receives a Regular Stockholder Approval, but does not receive a
1940 Act Stockholder Approval, the Company will proceed with the private
placement; however, the Company may be required to reduce the number of shares
issued in such private placement as described below.
The Company is also seeking a Regular Stockholder Approval of the sale of
1,000,000 Class A warrants for aggregate consideration of $100,000, as more
fully described below. In the event that the Company does not obtain a Regular
Stockholder Approval, the sale of the Class A Warrants to the Initial Warrant
Purchasers (as defined below) will not occur.
DESCRIPTION OF THE OFFERING. The Company has elected to be regulated as a
BDC as defined in the 1940 Act, specializing in the financing of and investment
in small to medium-sized companies. The Company is in the process of
circulating a Confidential Private Placement Memorandum (the "Memorandum") for
the proposed offering and sale (the "Offering") of a minimum of $2,500,000, and
a maximum of $4,000,000, of units (the "Units") at $50,000 per Unit
15
<PAGE> 20
(the "Offering Price"). On October 24, 1997, the closing bid price for the
Common Stock as reported on The Nasdaq National Market was $1 1/2. Each Unit
consists of 50,000 shares of the Company's Common Stock and 35,000 Class A
Redeemable Common Stock purchase warrants (a "Class A Warrant", and
collectively, the "Class A Warrants"), subject to adjustment as described
below. The closing of the Offering is subject to and contingent upon the
satisfaction of certain conditions. The Company's current stockholders are not
entitled to any preemptive rights with respect to the Offering.
In addition, prior to the commencement of the Offering, the Company
entered into an agreement with five individual purchasers, including certain
employees of Walsh Manning Securities, LLC, the Company's placement agent (the
"Initial Warrant Purchasers"), to issue to such Initial Warrant Purchasers
1,000,000 Class A Warrants in the aggregate (the "Initial Warrants") for
aggregate consideration of $100,000. Accordingly, in order to close the
Offering and issue the Common Stock and Class A Warrants comprising a portion
of each Unit, the Company is seeking the approval of its stockholders of the
issuance of up to 4,000,000 shares of Common Stock and 3,800,000 Class A
Warrants (including, without limitation, the 1,000,000 Initial Warrants).
Upon the closing of the Offering and assuming no adjustment to the
proposed Offering price, a total of 17,159,172 shares of Common Stock will be
outstanding if the minimum number of Units is sold in the Offering and
18,659,172 shares of Common Stock will be outstanding if the maximum number of
Units is sold in the Offering. In the event of the minimum Offering, an
additional 1,750,000 shares of Common Stock would be reserved for issuance upon
exercise of the Class A Warrants issued in the Offering. In the event of the
maximum Offering, a total of 2,800,000 shares of Common Stock would be reserved
for issuance upon exercise of the Class A Warrants issued in the Offering. In
addition, another 1,000,000 shares of Common Stock would be reserved for
issuance upon exercise of the Initial Warrants.
NASDAQ REQUIREMENTS. The National Association of Securities Dealers
requires stockholder approval of any proposed offering of greater than 20% of a
company's capital stock for consideration below market value. If the minimum
number of Units are sold in the Offering (50 Units), the Offering would not
qualify as a sale of greater than 20% of the capital stock of the Company.
However, if the maximum number of Units are sold in the Offering (80 Units),
the Offering would qualify as a sale of greater than 20% of the capital stock
of the Company. Consequently, a Regular Stockholder Approval is required to
approve that portion of the Offering which would cause the amount of stock of
capital stock of the Company being issued pursuant to the Offering to be
greater than 20% of the Company's capital stock.
1940 ACT REQUIREMENTS. The 1940 Act generally prohibits a BDC like the
Company from selling its common stock at a price below its current "net asset
value." The offering price for the Common Stock comprising a part of each of
the Units is expected to be higher than the net asset value of the Company's
Common Stock, within the meaning of the 1940 Act, at the time of closing.
However, since the assets of the Company on a consolidated basis include shares
of publicly-traded stocks, any change in the aggregate market value of such
stocks would cause a corresponding change in the net asset value of the
Company's Common Stock. If such a change occurs that causes a significant
increase in the net asset value of the Company's Common Stock, the offering
price could be lower than the net asset value at the time of closing. Section
63(2) of the 1940 Act generally permits a BDC to sell common stock of which it
is the issuer at a price below the current net asset value of such stock if (i)
the holders of a majority of such BDC's outstanding voting securities, and the
holders of a majority of such company's outstanding voting securities that are
not affiliated persons of such company (i.e., a 1940 Act Stockholder Approval),
approved such company's policy and practice of making such sales of securities
at the last annual meeting of stockholders within one year immediately prior to
any such sale, (ii) a majority of the directors of the BDC who have no
financial interest in the transaction and a majority of the directors of the
BDC who are not "interested persons" as defined in the 1940 Act of the BDC
(collectively, the "Required Director Majority") has determined that any such
sale would be in the best interests of such BDC and its stockholders, and (iii)
the Required Director Majority has determined in good faith, and as of a time
immediately prior to the issuance of such securities, that the price at which
such securities are to be sold is not less than a price which closely
approximates the market value of those securities, less any distributing
commission or discount.
In the event the requirements of Section 63(2) of the 1940 Act described
above are not met, but a Regular Stockholder Approval is obtained, and, if at
the time of closing, the offering price is below the net asset value, the
offering price will be adjusted to an amount that is no less than the net asset
value per share. Under these
16
<PAGE> 21
circumstances, a purchaser in the Offering would receive fewer shares of the
Company's Common Stock than the purchaser would have received if the net asset
value thereof had remained at or below the offering price.
Section 61(a)(3) of the 1940 Act generally permits a BDC to issue
warrants to purchase voting securities of such BDC if such warrants (i) expire
by their terms within ten (10) years, (ii) are not separately transferable (if
accompanied by securities), unless no class of such warrants and the securities
accompanying them has been publicly distributed, (iii) the exercise price is
not less than the current market value at the date of issuance, or, if no such
market value exists, the current net asset value of such voting securities, and
(iv) the proposal to issue such securities is authorized by the stockholders of
the BDC and such issuance is approved by the Required Director Majority on the
basis that such issuance is in the best interests of such BDC and its
stockholders.
BOARD APPROVAL. The Offering, including the issuance of up to 4,000,000
shares of Common Stock, of up to 2,800,000 Class A Warrants in connection
therewith, and the sale of an additional 1,000,000 Class A Warrants was
unanimously approved by the Board, including a Required Director Majority, on
October 8, 1997, on the basis that such issuances are in the best interests of
the Company and its stockholders.
DESCRIPTION OF COMMON STOCK AND CLASS A WARRANTS. Each Class A Warrant
shall entitle the holder thereof to purchase one share of Common Stock at an
initial exercise price of $1.50 per share (as may be adjusted pursuant to the
terms of the Class A Warrants, the "Class A Exercise Price"). The Class A
Warrants shall be exercisable for a period of five years following the closing
date of the Offering; provided, however, that Class A Warrants may not be
exercised during the first 12 months after the closing date of the Offering,
without the consent of Walsh Manning Securities, LLC (the "Placement Agent").
Class A Warrants shall be represented by a warrant certificate issued pursuant
to the Warrant Agreement between the Company and Corporate Stock Transfer, Inc.
The Company will have the right to redeem all of the then outstanding
Class A Warrants (but not a portion) at a price of $0.10 per Class A Warrant at
any time after the first anniversary of the final closing date of the Offering
if the closing bid price of the Company's Common Stock, as reported by any
national stock exchange or over-the-counter market, is at least $4.00 for
twenty (20) consecutive trading days. The Company will be required to deliver
a written notice to each of the holders of the Class A Warrants of its
intention to exercise this right of redemption. Upon receipt of such notice
from the Company, each Class A Warrant holder will have the right to exercise
the Class A Warrants at the then applicable exercise price for a period of
thirty (30) days after the date of the Company's notice.
A holder of Class A Warrants will not have any rights as a stockholder of
the Company until such time as such holder exercises the Class A Warrant and
pays the Class A Exercise Price. Shares of Common Stock issued upon the
exercise of the Class A Warrants will be validly issued, fully paid and
non-assessable.
Purchasers of Units shall be prohibited from transferring, selling or
otherwise disposing of the Common Stock or the Class A Warrants constituting
the Units for a period of 18 months after the initial closing date of the
Offering without the consent of the Placement Agent. The Initial Warrant
Purchasers will not be subject to such transfer restrictions.
The Class A Warrants are to be issued and become outstanding only to
the extent permitted by the 1940 Act. The 1940 Act states that the amount of
voting securities that would result from the exercise of all outstanding
warrants, options, and rights at the time of issuance shall not generally
exceed 25% of the outstanding voting securities of a BDC. Subject to
stockholder approval, the Company will consummate an exchange offer in order to
eliminate certain currently outstanding derivative securities (e.g., options
and warrants) in order to avoid exceeding such 25% limitation upon the closing
of the Offering. See PROPOSAL VIII for a description of such exchange offer.
DILUTION. At June 30, 1997, the tangible net book value of the Company
prior to the Offering was $13,811,254 or approximately $0.94 per share of
Common Stock. Tangible net book value per share of Common Stock represents the
amount of total tangible assets of the Company less total liabilities (after
adjustment for minority interest), divided by the number of shares of Common
Stock outstanding. After giving effect to the sale by the Company of the
minimum number of Units in the Offering and application of the net proceeds
therefrom and assuming no Class A Warrants are exercised, the pro forma
tangible net book value of the Company will be $15,786,254 or $0.92
17
<PAGE> 22
per share of Common Stock. Assuming all Class A Warrants are exercised, the
pro forma tangible net book value of the Company will be $18,280,004 or $0.97
per share of Common Stock. This represents an immediate decrease to current
stockholders in the tangible net book value per share of Common Stock of $0.02
assuming no Class A Warrants are exercised and an immediate increase of $0.03
assuming all Class A Warrants are exercised. This also represents an immediate
dilution to purchasers of Units in the Offering in tangible net book value per
share of Common Stock of $0.08 or $0.24. Such dilution is the result of the
Company's payment of distributing commissions to the Placement Agent.
After giving effect to the sale by the Company of the maximum number of
Units in the Offering and application of the net proceeds therefrom and
assuming no Class A Warrants are exercised, the pro forma tangible net book
value of the Company will be $17,091,254, or $0.92 per share of Common Stock.
Assuming all Class A Warrants are exercised, the pro forma tangible net book
value of the Company will be $21,081,254 and $0.98 per share of Common Stock.
This represents an immediate decrease to current stockholders in the tangible
net book value per share of Common Stock of $0.02 assuming no Class A Warrants
are exercised and an immediate increase of $0.04 assuming all Class A Warrants
are exercised. This also represents an immediate dilution to purchasers of
Units in the Offering in tangible net book value per share of Common Stock of
$0.08 or $0.23, respectively. Such dilution is the result of the Company's
payment of distributing commissions to the Placement Agent.
REGISTRATION RIGHTS OF HOLDERS OF UNITS. Holders of the Units (the "Unit
Holders") and the Initial Warrant Purchasers will have certain registration
rights pursuant to Registration Rights Agreement. The following summary does
not purport to be complete and is qualified in its entirety by reference to the
Registration Rights Agreement.
Commencing six months after the closing date of the Offering, the
Placement Agent (as defined below) on behalf of the Initial Warrant Purchasers
and/or the Unit Holders shall have the right to demand that the Company prepare
and file a registration statement with respect to the Common Stock comprising
part of the Units and any shares of Common Stock issued upon exercise of the
Class A Warrants (the "Registrable Securities"). The Initial Warrant
Purchasers and the Unit Holders will have certain priorities with respect to
such registration as more fully described in the Registration Rights Agreement.
The Placement Agent is entitled to exercise such demand right with respect to
the Registrable Securities owned by the Initial Warrant Purchasers to the
exclusion of the Unit Holders.
In addition, whenever the Company proposes to register any of its
securities under the Securities Act on appropriate registration form which may
be used for the registration of the Registrable Securities, the Company shall
give 30 days prior written notice to all Initial Warrant Purchasers and all
Unit Holders of its intention to file such a registration statement and shall
include in such registration all such Registrable Securities requested to be
included, subject to certain conditions and priorities as more fully described
in the Registration Rights Agreement. If the Initial Warrant Purchasers and
Unit Holders wish to include their Registrable Securities in such registration,
they must notify the Company. Such notice must be received by the Company
within 20 days after receipt of the Company's notice.
Whenever the Placement Agent has or, in the event of a piggyback
registration, the Initial Warrant Purchasers and the Unit Holders have,
requested that any Registrable Securities be registered pursuant to the
Registration Rights Agreement, the Company will use its best efforts, among
other things, (i) to effect the registration and sale of the Registrable
Securities in accordance with the intended method of disposition thereof and
pursuant thereto the Company will as expeditiously as possible prepare and file
with the SEC the appropriate registration statement with respect to such
Registrable Securities and use its best efforts to cause such registration
statement to become effective; (ii) to prepare and file with the SEC all such
amendments and supplements to the initial registration statement and the
prospectus as may be necessary to keep such registration statement effective
for a period of not less than nine months and comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement during such period in accordance with the intended
method of disposition by the sellers thereof as set forth in the registration
statement; (iii) to furnish to the Initial Warrant Purchasers and the Unit
Holders such copies of the registration statement, amendments and supplements
thereto, and the prospectus as may be reasonably required by the Initial
Warrant Purchasers or Unit Holders; and (iv) to register or qualify, as the case
may be, such Registrable Securities under other securities or blue-
18
<PAGE> 23
sky laws in such jurisdictions as any holder of the Registrable Securities may
reasonably request, as well as additional other items.
At all times after the Company has filed any registration statement with
the SEC pursuant to the requirements of the Registration Rights Agreement, the
Company shall file all reports required to be filed by it pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act
and will take such further action as any Initial Warrant Purchaser or Unit
Holder may reasonably request, all to the extent required to enable such
Initial Warrant Purchaser and Unit Holders to sell the Registrable Securities
pursuant to (i) Rule 144 under the Securities Act or any similar rule then in
force; or (ii) an effective registration statement.
In the event that the Initial Warrant Purchasers or Unit Holders exercise
their "piggyback" rights to include their Registrable Securities in such
registration, then such Registrable Securities will be included subject to the
priorities discussed below relating to that certain Registration Rights
Agreement dated as of February 28, 1995 between the Company and certain parties
to the Reorganization Agreement (the "Original Investors") (the "Original
Registration Rights Agreement"). As a result of the priorities set forth in
the Original Registration Rights Agreement, some or all of the Registrable
Securities may not be included in a proposed piggyback registration.
In connection with any underwritten piggyback registration, the Initial
Warrant Purchaser and the Unit Holders will agree pursuant to the Registration
Rights Agreement not to effect any public sale or distribution of Registrable
Securities for a period beginning seven days prior to the effective date of
such registration and ending 90 days (or longer as the Company's underwriters
may require) after such effective date.
EFFECT ON COMPANY CAPITALIZATION. The following table sets forth the
capitalization of the Company on a consolidated basis as of June 30, 1997, and
as adjusted to give effect to the Offering, on a pro forma basis.
<TABLE>
<CAPTION>
June 30, 1997
-------------
Pro Forma As Pro Forma As
Adjusted (Minimum) Adjusted
Historical (Maximum)
------------- -------------------- --------------------
<S> <C> <C> <C>
(in thousands)
Long-term Debt:
SBA Debentures $ 2,000,000 $ 2,000,000 $ 2,000,000
----------- ----------- -----------
Stockholders' equity:
Common Stock, $0.01 par value 146,167 171,167 186,167
(17,116,687 shares currently issued
and outstanding; 17,116,687 shares
as adjusted for minimum Offering;
18,616,657 shares as adjusted for
maximum Offering)(1)
Paid-in capital 15,030,269 16,980,269 18,270,269
Retained deficit (1,302,228) (1,302,228) (1,302,228)
----------- ----------- -----------
Stockholders' equity 13,874,208 15,849,208 17,154,208
----------- ----------- -----------
Total capitalization $15,874,208 $17,849,208 $19,154,208
=========== =========== ===========
</TABLE>
- -----------
(1) Does not include up to 3,800,000 shares of Common Stock which may be
issued upon the exercise of the Class A Warrants or other Common Stock
which may be issued upon the exercise of outstanding options or warrants.
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<PAGE> 24
PLACEMENT AGENT. The Company has engaged Walsh Manning Securities, LLC
(the "Placement Agent") as the exclusive placement agent for the Offering. The
Company has agreed to pay the Placement Agent a sales commission equal to 10%
and a non-accountable expense allowance equal to 3% of the Offering Price for
each Unit sold in the Offering. In addition, upon the exercise of any Class A
Warrant issued in the Offering (but not the Initial Warrants), the Company is
required to pay the Placement Agent a warrant solicitation fee equal to 5% of
the applicable exercise price. If the Company's stockholders approval the sale
of the Initial Warrants at the Annual Meeting, officers and employees of the
Placement Agent will be issued 800,000 of the Initial Warrants for aggregate
cash consideration of $80,000.
USE OF PROCEEDS. The net proceeds from the sale of the Units offered
hereby are estimated to be $2,175,000 if the minimum number of Units is sold
and $3,480,000 if the maximum number of Units is sold (after payment of the
Placement Agent's compensation, but before payment of the other expenses of the
Offering, including legal, accounting and printing, estimated to be
approximately $200,000). Such proceeds do not include the proceeds generated
upon the exercise of any of the Class A Warrants, which would be $2,493,750 for
the Class A Warrants issued in the minimum Offering and $3,990,000 for the
Class A Warrants issued in the maximum Offering. An additional $1,500,000 of
proceeds would be generated upon the exercise of the Initial Warrants. The
Company expects to use approximately $1.2 million of the net proceeds to
consummate the acquisition of a regional accounts receivable factoring company.
The remaining net proceeds will be added to the Company's working capital.
The Company may use its working capital for (i) investment in new portfolio
companies by its subsidiaries; (ii) acquisitions of additional operating
businesses in the financial services industry, particularly factoring, but
which may also include businesses relating to asset-based lending, equipment
leasing and financial and management consulting; (iii) debt repayment or
restructuring, including partial repayment of certain debentures outstanding to
an affiliate of the Small Business Administration or the Company's margin and
other loans; or (iv) payment of expenses.
REASONS FOR OFFERING. The Board of Directors has approved the Offering as
a means to raise capital which will allow the Company to complete its
acquisition of an accounts receivable factoring company. Such acquisition is
consistent with the Company's goal of providing a wide range of financial
services to its portfolio companies. Remaining proceeds held as working capital
may allow the Company to pursue additional acquisitions and make other
investments. The Company has determined to structure the Offering as a private
placement in order to more quickly and cost-effectively raise such capital.
In determining whether to approve the issuance of the Class A Warrants in
the Offering and to the Initial Warrant Purchasers, stockholders should be
aware that the issuance of the Class A Warrants would allow the holders thereof
to benefit from any future increase in the value of the Company's Common Stock
without being required to invest the exercise price thereof in the Company
until such benefit is realizable. As with any warrant arrangement, the
exercise of the Class A Warrants would increase the number of outstanding
Common Stock of the Company. Such an increase would cause the existing
stockholders to experience a corresponding loss of proportionate voting power
and economic interest in the Company.
FINANCIAL INFORMATION. The financial information required by Items 11(e)
and 13(a) of Schedule 14A promulgated under the 1934 Act is included in this
Proxy Statement at Appendix C.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE OFFERING, INCLUDING
THE ISSUANCE OF COMMON STOCK AND CLASS A WARRANTS, AND FOR APPROVAL OF THE
ISSUANCE OF THE INITIAL WARRANTS.
PROPOSAL VI
APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE,
AND RATIFICATION OF THE ISSUANCE, OF THE UNIVERSAL WARRANTS
INTRODUCTION. In order to comply with certain provisions of the 1940
Act, the Company is seeking a Regular Stockholder Approval to extend the
expiration date to June 30, 2005 of certain warrants to purchase 697,391 shares
of Common Stock (the "Universal Warrants"), having a current expiration date of
June 17, 2001 and an exercise price of $3.00 per share, and to ratify the
issuance of the Universal Warrants in the transaction described below. In the
20
<PAGE> 25
event that the Company does not obtain a Regular Stockholder Approval, the
Universal Warrants will nonetheless remain outstanding as currently issued with
an expiration date of June 17, 2001.
BACKGROUND. On June 17, 1996, the Company's wholly-owned subsidiary,
Universal Bridge Fund, Inc. ("Universal Bridge"), purchased approximately 83%
of the limited partnership interests and 50% of the general partnership
interests of Universal Partners L.P. ("UPLP") and, in connection therewith, the
Company issued 801,974 shares of Common Stock, together with five-year warrants
(the "Universal Warrants") to purchase an additional 697,391 shares of Common
Stock at an exercise price of $3.00, to certain of the former partners of UPLP.
The remaining 50% of the general partnership interests is indirectly owned by
WCI, an affiliate of the Company. The issuance of Common Stock and warrants in
connection with the purchase of the interests of UPLP may have been in
violation of the 1940 Act. See PROPOSAL I - CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS for a description of WCI. In general, UPLP specializes in bridge
financing to and other investments in small to medium-sized companies. UPLP
targets investments that will provide significant return of capital from a
known repayment source (such as a proposed initial public offering) within a
six to eighteen month time frame. UPLP was formed in 1994 and has invested
approximately $5 million in portfolio companies since its inception.
RATIFICATION OF UNIVERSAL TRANSACTION. The Company is seeking
ratification by stockholders of the issuance of the Universal Warrants in
connection with the acquisition of the interests in UPLP because the presence
of such outstanding Universal Warrants may be in violation of the 1940 Act.
The purpose of the ratification by stockholders is to comply with the capital
structure provisions of the 1940 Act applicable to a BDC, which require
stockholder approval in certain circumstances. If such approval is not
obtained, the Universal Warrants will nonetheless remain outstanding and would
be in violation of the 1940 Act.
EXTENSION OF UNIVERSAL WARRANTS. The Universal Warrants have an exercise
price of $3.00 per share and expire on June 17, 2001. In addition, the
Universal Warrants are redeemable in the event that the closing bid price for
the Company's Common Stock as reported by The Nasdaq National Market exceeds
$4.50 per share for twenty (20) out of the thirty (30) consecutive days
immediately prior to the redemption notice. It is unknown whether the
extension of the expiration date of the Universal Warrants would have any
effect on the market price of the Common Stock. The extension of the
expiration date of the Universal Warrants and the ratification of the issuance
thereof is intended to facilitate the exchange offer consistent with the 1940
Act. See PROPOSAL VIII below.
The extension of the expiration date of the Universal Warrants may be
deemed to be an issuance of new warrants under the 1940 Act. Section 61(a)(3)
of the 1940 Act generally permits a BDC to issue warrants to purchase voting
securities of such BDC if such warrants (i) expire by their terms within ten
(10) years, (ii) are not separately transferable (if accompanied by
securities), unless no class of such warrants and the securities accompanying
them has been publicly distributed, (iii) the exercise price is not less than
the current market value at the date of issuance, or, if no such market value
exists, the current net asset value of such voting securities, and (iv) the
proposal to issue such securities is authorized by the stockholders of the BDC
and such issuance is approved by the Required Director Majority on the basis
that such issuance is in the best interests of such BDC and its stockholders.
On October 27, 1997, the Board of Directors, including the Required Director
Majority, approved the extension of the expiration date of the Universal
Warrants from June 19, 2001 to June 30, 2005 on the basis that such extension
is in the best interests of the Company and its stockholders.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE EXTENSION OF THE
EXPIRATION DATE OF THE UNIVERSAL WARRANTS TO JUNE 30, 2005 AND RATIFICATION OF
THE ISSUANCE OF THE 697,391 UNIVERSAL WARRANTS
21
<PAGE> 26
PROPOSAL VII
APPROVAL OF THE EXTENSION OF THE
EXPIRATION DATE OF THE WCI WARRANTS
INTRODUCTION. In order to comply with certain provisions of the 1940
Act, the Company is seeking a Regular Stockholder Approval of the extension of
the expiration date to June 30, 2005 of certain warrants to purchase 452,533
shares of Common Stock (the "WCI Warrants"), having a current expiration date
of June 30, 1998 and an exercise price of $3.00 per share, and to ratify the
issuance of the WCI Warrants. The Company proposes to extend the expiration
date to June 30, 2001. In the event that the Company does not obtain a Regular
Stockholder Approval, the WCI Warrants will nonetheless remain outstanding as
currently issued with an expiration date of June 30, 1998.
BACKGROUND. On June 30, 1995, the Company issued to WCI, an affiliate
of the Company, the WCI Warrants in return for the contribution by WCI to the
capital of the Company of certain portfolio securities. See PROPOSAL I -
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS for a description of WCI.
RATIFICATION OF ISSUANCE OF WCI WARRANTS. The Company is seeking
ratification by stockholders of the issuance of the WCI Warrants in connection
with the contribution of portfolio securities to the Company because the
presence of such outstanding WCI Warrants may be in violation of the 1940 Act.
The purpose of the ratification by stockholders is to comply with the capital
structure provisions of the 1940 Act applicable to a BDC, which require
stockholder approval in certain circumstances. If such approval is not
obtained, the WCI Warrants will nonetheless remain outstanding and would be in
violation of the 1940 Act.
EXTENSION OF WCI WARRANTS. The WCI Warrants have an exercise price of
$3.00 per share and expire on June 30, 1998. The Board of Directors has
determined that it is in the best interest of the Company and its stockholders
to extend the expiration date of the WCI Warrants from June 30, 1998 to June
30, 2005. It is unknown whether the extension of the expiration date of the
WCI Warrants would have any effect on the market price of the Company's Common
Stock. The extension of the expiration date of the WCI Warrants and the
ratification of the issuance thereof is intended to facilitate the exchange
offer consistent with the 1940 Act. See PROPOSAL VIII below.
The extension of the expiration date of the WCI Warrants may be deemed to
be an issuance of new warrants under the 1940 Act. Section 61(a)(3) of the
1940 Act generally permits a BDC to issue warrants to purchase voting
securities of such BDC if such warrants (i) expire by their terms within ten
(10) years, (ii) are not separately transferable (if accompanied by
securities), unless no class of such warrants and the securities accompanying
them has been publicly distributed, (iii) the exercise price is
not less than the current market value at the date of issuance, or , if no such
market value exists, the current net asset value of such voting securities, and
(iv) the proposal to issue such securities is authorized by the stockholders of
the BDC and such issuance is approved by the Required Director Majority on the
basis that such issuance is in the best interests of such BDC and its
stockholders. On October 27, 1997, the Board of Directors, including the
Required Director Majority, approved the extension of the expiration date of
the WCI Warrants on the basis that such extension is in the best interests of
the Company and its stockholders.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE EXTENSION OF THE
EXPIRATION DATE OF THE WCI WARRANTS TO JUNE 30, 2005 AND RATIFICATION OF THE
ISSUANCE OF THE 452,533 WCI WARRANTS
PROPOSAL VIII
APPROVAL OF THE EXCHANGE OFFER
INTRODUCTION. In order to comply with certain provisions of the 1940 Act,
the Company is seeking the approval of stockholders of the Company's exchange
offer as described below. Specifically, the Company is seeking a 1940 Act
Stockholder Approval. In the event that the Company does not obtain a 1940 Act
Stockholder Approval, the exchange offer will not occur.
DESCRIPTION OF EXCHANGE OFFER. Subject to stockholder approval, the
Company intends to initiate a private exchange offer (the "Exchange Offer") to
the current holders of the Universal Warrants and the WCI Warrants. The
Universal Warrants and the WCI Warrants will sometimes be collectively referred
to as the "Exchange Warrants". Pursuant to the Exchange Offer, each holder of
Exchange Warrants will have the right to elect to exchange each of his
unexercised Exchange Warrants for .25 shares of Common Stock. If all such
holders elect to accept the Exchange Offer, an additional 287,481 shares of
restricted Common Stock will be issued. Such Exchange Offer will be conducted
in compliance with the 1940 Act. The Exchange Offer will remain open until
December 18,
22
<PAGE> 27
1997, unless extended at the discretion of the Company. In lieu of issuing
fractional shares, the Company will pay cash at the then current market price
of the Common Stock. Furthermore, the Exchange Offer will also be conditioned
on the acceptance of holders of at least 527,083 Exchange Warrants.
1940 ACT REQUIREMENTS. Pursuant to the 1940 Act, a BDC is generally
prohibited from having outstanding derivative securities (e.g., options,
warrants, etc.) convertible or exchangeable into a number of shares of capital
stock in excess of 25% (the "25% Limitation") of the number of then outstanding
shares of capital stock. If the amount of voting securities that would result
from the exercise of all outstanding options issued to the Company's directors,
officers and employees pursuant to the stock plans would, at the time of
issuance, exceed 15% of the outstanding voting securities of the Company, then
the total amount of voting securities that would result from the exercise of
these and any other outstanding warrants, options and rights at the time of
issuance shall not exceed 20% of the outstanding voting securities of the
Company. These limitations are imposed by the current provisions of the 1940
Act and are subject to change. As of the date hereof, the Company's current
officers and employees hold options to purchase approximately 3.9% of the
outstanding Common Stock of the Company. Upon the closing of the minimum
Offering described in PROPOSAL III above, the Company will have 17,159,172
shares of Common Stock outstanding. As a result, the Company is prohibited
from having outstanding derivative securities convertible or exchangeable into
more than 4,289,793 shares of capital stock. The Company currently has
2,066,876 derivative securities outstanding and would be obligated to issue an
additional 1,750,000 derivative securities (in the form of Class A Warrants) as
a result of the minimum Offering and an additional 1,000,000 Class A Warrants
to the Initial Warrant Purchasers. The exchange of at least 527,083 of such
warrants is required in order to close the minimum Offering as described in
PROPOSAL III above. In order to comply with the 25% Limitation at the close of
the Offering, the Company has determined to commence the Exchange Offer to
holders of 1,149,924 Exchange Warrants, whereby such holders have the right to
elect to accept the Exchange Offer. WCI owns the 452,533 WCI Warrants and has
indicated its election to accept the Exchange Offer. The minimum Offering
cannot close unless holders of an additional 74,550 Exchange Warrants elect to
accept the Exchange Offer.
In addition, an additional 675,000 derivative securities must be cancelled
or an additional 2,700,000 shares of Common Stock must be issued (or some
combination of cancellation of derivative securities and issuances of
additional Common Stock must occur) in order to close the maximum Offering.
It is not possible to determine currently whether the Common Stock to be
issued in connection with the Exchange Offer will be above, at or below the net
asset value of the Common Stock at the time of such issuance. Section 63(2) of
the 1940 Act generally permits a BDC to sell common stock of which it is the
issuer at a price below the current net asset value of such stock if (i) the
holders of a majority of such BDC's outstanding voting securities, and the
holders of a majority of such company's outstanding voting securities that are
not "affiliated persons" of such company (i.e., a 1940 Act Stockholder
Approval), approved such company's policy and practice of making such sales of
securities at the last annual meeting of stockholders within one year
immediately prior to any such sale, (ii) the Required Director Majority has
determined that any such sale would be in the best interests of such BDC and
its stockholders, and (iii) the Required Director Majority has determined in
good faith, and as of a time immediately prior to the issuance of such
securities that the price at which such securities are to be sold is not less
than a price which closely approximates the market value of those securities,
less any distributing commission or discount. On October 8, 1997, the Board,
including the Required Director Majority, unanimously approved the Exchange
Offer on the basis that such issuances are in the best interests of the Company
and its stockholders.
THE BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR THE EXCHANGE OFFER AND THE ISSUANCE
OF UP TO 287,481 SHARES OF COMMON STOCK IN CONNECTION THEREWITH.
OTHER MATTERS
SOLICITATION OF PROXIES. The cost of solicitation of proxies in the form
enclosed herewith will be borne by the Company. In addition to the
solicitation of proxies by mail, the directors, officers and employees of the
Company may also solicit proxies personally or by telephone without additional
compensation for such activities. The Company will also request persons, firms
and corporations holding shares in their names or in the names of
23
<PAGE> 28
their nominees, which are beneficially owned by others, to send proxy materials
to and obtain proxies from such beneficial owners. The Company will reimburse
such holders for their reasonable expenses.
STOCKHOLDER PROPOSALS. Stockholder proposals intended to be presented at
the 1998 Annual Meeting of Stockholders must be received at the Company's
principal executive office no later than July 15, 1998 in order to be
considered for inclusion in the proxy statement and on the proxy card that will
be solicited by the Board of Directors in connection with the 1998 Annual
Meeting of Stockholders.
OTHER MATTERS. The Board of Directors does not know of any matters other
than those described in this Proxy Statement that will be presented for action
at the Annual Meeting. If other matters are presented, it is the intention of
the persons named as proxies in the accompanying Proxy Card to vote in their
discretion all shares represented by validly executed proxies.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS IMPORTANT TO THE
COMPANY. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY
CARD TODAY.
This Proxy Statement is dated November ___, 1997.
24
<PAGE> 29
APPENDIX A
SUPPLEMENTARY INFORMATION
REGARDING
EXECUTIVE COMPENSATION
<PAGE> 30
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the compensation
paid by the Company to Messrs. Burton W. Kanter, Joel S. Kanter, Robert F.
Mauer and Michael A. Faber, in the last three fiscal years of the Company
(collectively, the "Named Executive Officers"). Such persons were the
executive officers of the Company and its subsidiaries whose cash compensation
exceeded $100,000 for the 1996 fiscal year. Amounts paid to Messrs. Burton
Kanter, Joel Kanter, Mauer and Faber reflect the fiscal years ended December
31, 1996, 1995 and 1994.
A-1
<PAGE> 31
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
---------------
Annual Compensation Awards
----------------------- ---------------
Name and Current Principal Options/
Position Year Salary ($) Bonus ($) SARs(#)
- --------------------------- ----- ---------- --------- ----------
<S> <C> <C> <C> <C>
1996 100,000 -- --
Burton W. Kanter(1) 1995 150,000(2) -- --
Chairman of the Board 1994 150,000(2) -- 249,929 options
Joel S. Kanter, 1996 200,000 -- --
President and Chief Executive 1995 70,000 -- --
Officer 1994 70,000(3) -- 199,944 options
Robert F. Mauer, 1996 91,667(4) -- 125,000 options
Chief Financial 1995 -- -- --
Officer and Treasurer 1994 -- -- --
Michael Alan Faber(5) 1996 150,000 10,000 --
1995 150,000 10,000 --
1994 135,000 15,000 149,958 options
</TABLE>
(1) Mr. Kanter was the President and Treasurer of Walnut Capital prior to its
business combination with the Company.
(2) Of the $150,000 reported, $15,000 was base salary and $135,000 was paid
to Mr. Kanter, d/b/a BK Consultants, in the form of consulting fees. See
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(3) Mr. Kanter was a consultant to Walnut Capital prior to its business
combination with the Company and the amounts reflected represent
consulting fees. See CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(4) Mr. Mauer joined the Company on February 1, 1996. Amounts reported
reflect an annual salary of $100,000.
(5) Mr. Faber was the former Vice President and Secretary of Walnut Capital.
He resigned from Walnut Capital effective December 31, 1996.
(6) Such options have expired in accordance with their terms.
OPTIONS AND OTHER AWARDS. The following tables provide certain
information regarding options granted to the Named Executive Officers and as to
the value of outstanding options held by the Named Executive Officers,
respectively.
A-2
<PAGE> 32
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term
------------------------------------------------------------------ ------------------------
Number of Percent of Total Options Exercise
Options Granted Granted to Employees in Price Expiration
Name (#) 1996 (%) ($/sh)(3) Date 5%($) 10%($)
- ---- --- ----------------------- --------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Burton W. Kanter 0 N/A N/A N/A N/A N/A
Joel S. Kanter 0 N/A N/A N/A N/A N/A
Robert F. Mauer 100,000(1) 56.7% $2.50(4) 2/1/07 $157,225 $398,425
25,000(2) 14.2% $1.50 12/10/07 23,584 59,764
Michael Alan Faber 0 N/A N/A N/A N/A N/A
</TABLE>
(1) Represents incentive stock options granted under the Company's 1994 Stock
Incentive Plan (the "1994 Stock Plan") on February 1, 1996. Such options
vest in four equal annual installments, commencing on February 1, 1997.
(2) Represents incentive stock options granted under the 1994 Stock Plan on
December 10, 1996. Such options vest in four equal annual installments,
commencing on December 10, 1997.
(3) Exercise price reflects that the closing price per share as reported on
The Nasdaq National Market on the respective date of grant.
(4) The Board of Directors of the Company recently resolved to reduce the
exercise price of such options to $2.00.
AGGREGATED OPTIONS EXERCISED IN FISCAL YEAR 1996 AND
FISCAL 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Underlying Value of Unexercised in-the-
Acquired on Value Unexercised Options Money Options at Fiscal
Name Exercise (#) Realized ($) at Fiscal Year-End(#) Year-End($)(1)
- ----------------- -------------------- ---------------- ---------------------------------- -------------------------------
Exercisable Unexercisable Exercisable Unexercisable
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Burton W. Kanter 0 0 187,447 62,482(2) 0 0
Joel S. Kanter 0 0 149,958 49,986(2) 0 0
Robert F. Mauer 0 0 0 125,000(3) 0 0
Michael Alan Faber 0 0 149,958(4) 0 $33,741 0
</TABLE>
(1) Except for Mr. Faber's options, no other outstanding options were
in-the-money as of December 31, 1996. The closing bid price per share as
quoted on The Nasdaq National Market on December 31, 1996 was $1-1/8 per
share.
(2) These options became exercisable on February 27, 1997.
(3) 25,000 of such options became exercisable on February 1, 1997.
(4) These options expired in accordance with their terms.
STOCK PERFORMANCE GRAPH. The incorporation by reference of this Proxy
Statement into any document filed with the Securities and Exchange Commission
by the Company shall not be deemed to include the following performance graph
unless such graph is specifically stated to be incorporated by reference into
such document.
The following graph provides a comparison of the cumulative total
stockholder return among the Company, The Nasdaq Stock Market total return
index prepared by the Center for Research in Security Prices (CRSP) (the
"Nasdaq Stock Market Index") and the Nasdaq Financial Stocks total return index
A-3
<PAGE> 33
prepared by CRSP (the "Nasdaq Financial Stocks Index"). The comparison is for
the period from August 1, 1995 (for the Nasdaq Stock Market Index and the
Nasdaq Financial Stocks Index) and August 22, 1995 (for the Company, the date
the Company's Common Stock first became listed on the Nasdaq National Market
System) to December 31, 1996 and assumes the reinvestment of any dividends.
The initial price of the Company's Common Stock shown in the graph below is
based upon the price of $3.50 as reported on August 22, 1995 on the Nasdaq
National Market System. The Nasdaq Stock Market Index comprises all domestic
shares traded on the Nasdaq National Market and The Nasdaq SmallCap Market.
The Nasdaq Financial Stocks Index comprises all shares traded on the Nasdaq
National Market and The Nasdaq SmallCap Market which were issued by companies
whose primary business falls within Standard Industrial Classification (SIC)
codes 60 through 67. The historical information set forth below is not
necessarily indicative of future performance. The following graph was prepared
at the Company's request by Research Holdings Limited, San Francisco,
California.
A-4
<PAGE> 34
[graph]
<TABLE>
<CAPTION>
Cumulative Total Return
------------------------------------
6/30/95 12/31/95 6/30/96 12/31/96
------- -------- ------- --------
<S> <C> <C> <C> <C>
Walnut Financial Services, Inc. $100 $ 64 $ 75 $ 32
Nasdaq Stock Market Index $100 $106 $120 $130
Nasdaq Financial Stocks Index $100 $117 $124 $150
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE. The Compensation Committee of the
Board of Directors is composed of the Company's three independent outside
directors, Messrs. Burge, Burleson & Weisgal. The Compensation Committee is
responsible for administering the policies which govern the Company's executive
compensation.
Objectives of Executive Compensation. The Compensation Committee has
designed its compensation policy to provide the proper incentives to management
to maximize the Company's performance in order to serve the best interests of
its stockholders. As a result, the Compensation Committee intends to focus on
incentive awards, such as stock option grants, as opposed to large salary
increases or bonuses to emphasize performance related incentive compensation.
In general, the
A-5
<PAGE> 35
Compensation Committee believes that cash bonus awards are not appropriate,
except in certain circumstances. Accordingly, the Compensation Committee has
determined not to award a cash bonus to the Chief Executive Officer or the
other executive officers for the calendar year ended 1996.
A-6
<PAGE> 36
The Company maintains the philosophy that compensation of its executive
officers and others should be directly and materially linked to operating
performance. To achieve this linkage, executive compensation is weighted
towards incentive awards granted on the basis of the Company's performance.
Thus, while annual salary increases are based on personal performance of the
executive officers and general economic conditions, annual bonuses, if any, and
incentive award grants are directly tied to the Company's actual economic
performance during the applicable fiscal year.
The Incentive Stock Option Committee (currently comprised of the same
members as the Compensation Committee) determines stock options to the
executives under the provisions of the Walnut Capital Corp. 1987 Stock Option
Plan, the NFS Services, Inc. 1989 Incentive Stock Plan and the 1994 Stock Plan
(collectively, the "Stock Plans"). When granted, such incentive awards provide
incentive to improve stockholder value over the long-term and to encourage and
facilitate executive stock ownership. In general, stock options are granted at
the market price of the Common Stock at the date of grant to ensure that
executives can only be rewarded for appreciation in the price of the Common
Stock when the Company's stockholders are similarly benefitted. The Incentive
Stock Option Committee determines those executives who will receive incentive
award grants, the size and particular vesting and other requirements of such
awards and the Stock Plan to be utilized.
Compensation Committee Procedures. The Compensation Committee will
annually evaluate the personal performance of the Chief Executive Officer and
the other executive officers of the Company, as well as the Company's
performance and analyze the total annual compensation and stock ownership of
the Chief Executive Officer and the other executive officers.
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits
the deductibility on the Company's tax return of compensation over $1 million
to any of the named executive officers of the Company unless, in general, the
compensation is paid pursuant to a plan which is performance-related,
non-discretionary and has been approved by the Company's stockholders. The
Compensation Committee's policy with respect to Section 162(m) is to make
reasonable efforts to ensure that compensation is deductible to the extent
permitted while simultaneously providing Company executives with appropriate
rewards for their performance.
It is Compensation Committee's desire to create a compensation policy that
will reward executive performance when such performance has provided tangible
benefits for the Company's stockholders.
Submitted by the Compensation Committee and the Incentive Stock Option
Committee:
Gene E. Burleson
William F. Burge, III
Solomon A. Weisgal
A-7
<PAGE> 37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee currently consists of Messrs. Burleson, Burge and
Weisgal. None of them has served as an officer of the Company or has any other
business relationship or affiliation with the Company, except his service as a
director. Joel Kanter, President, Chief Executive Officer and a director of
the Company, serves on the Board of Directors of GranCare, Inc. and Vitalink
Pharmacy Services, Inc. Mr. Kanter is a member of the finance and audit
committees of the GranCare, Inc. Board of Directors. Mr. Burleson served as
the Chief Executive Officer, President and Chairman of the Board of Directors
of GranCare, Inc. until February 1997. He is currently the Chairman of the
Board of GranCare, Inc.
A-8
<PAGE> 38
APPENDIX B
AMENDED AND RESTATED 1994 INCENTIVE STOCK OPTION PLAN
<PAGE> 39
AMENDED AND RESTATED
WALNUT FINANCIAL SERVICES, INC.
1994 STOCK INCENTIVE PLAN
<PAGE> 40
AMENDED AND RESTATED
WALNUT FINANCIAL SERVICES, INC.
1994 STOCK INCENTIVE PLAN
1. PURPOSE OF THE PLAN
The AMENDED AND RESTATED WALNUT FINANCIAL SERVICES, INC. 1994 STOCK
INCENTIVE PLAN (hereinafter referred to as the "Plan") hereby amends and
restates in its entirety the NFS SERVICES, INC. 1994 STOCK INCENTIVE PLAN (the
"Original Plan"). The Plan is intended to provide a means whereby key
individuals providing services to WALNUT FINANCIAL SERVICES, INC. (hereinafter
referred to as the "Company") and its related corporations may sustain a sense
of proprietorship and personal involvement in the continued development and
financial success of the Company, and to encourage them to remain with and
devote their best efforts to the business of the Company, thereby advancing the
interests of the Company and its shareholders. Accordingly, certain directors,
officers and employees will be eligible to acquire common stock of the Company
(hereinafter referred to as "Shares") or otherwise participate in the financial
success of the Company, on the terms and conditions established herein;
provided, however, that non-employee directors shall be eligible only for the
formula grants described in Paragraph 4(e) below. For purposes of the Plan, a
corporation shall be deemed a related corporation to the Company if such
corporation would be a parent or subsidiary corporation with respect to the
Company as defined in Section 424(e) or (f), respectively, of the Internal
Revenue Code of 1986, as amended (hereinafter referred to as the "Code").
2. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Walnut Financial Services, Inc.
1994 Stock Incentive Plan Administrative Committee (hereinafter referred to as
the "Committee") which shall be comprised solely of qualified directors
appointed by the Board of Directors of the Company (hereinafter referred to as
the "Board"). A qualified director is any member of the Board who shall (i)
not be deemed to be an "interested person" as defined in Section 2(a)(19) of
the Investment Company Act of 1940, as amended (the "1940 Act"), (ii) be a
non-employee director as defined in Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended, and (iii) be an outside director as defined
in Section 162 of the Code. Except as set forth in Paragraph 4(e) below, the
Committee shall have sole authority to select the individuals from among those
eligible to whom awards shall be made under the Plan, to establish the amount
of such award for each such individual and the time when certificates for
Shares shall be issued, and to prescribe the legend to be affixed to the
certificate. The Committee is authorized, subject to Board approval, to
interpret the Plan and may from time to time adopt such rules, regulations,
forms and agreements, not inconsistent with the provisions of the Plan, as it
may deem advisable to carry out the Plan. All decisions made by the Committee
in administering the Plan shall be subject to Board review.
<PAGE> 41
3. SHARES SUBJECT TO THE PLAN
The aggregate number of Shares that may be awarded to individuals
under the Plan shall be one million (1,000,000) Shares. Any Shares that remain
unissued at the termination of the Plan shall cease to be subject to the Plan,
but until termination of the Plan, the Company shall at all times make
available sufficient Shares to meet the requirements of the Plan. No employee
shall be entitled to receive any one award of Shares in excess of 100,000
Shares; provided, however, that the foregoing shall not prohibit or restrict
successive awards of such amount or lesser amounts. The aggregate number of
Shares which may be awarded under the Plan shall be adjusted to reflect a
change in capitalization of the Company, such as a stock dividend or stock
split.
4. STOCK OPTIONS
a. Type of Options. The Company may issue options that
constitute Incentive Stock Options ("Incentive Options") under Section 422 of
the Code and options that do not constitute Incentive Options ("Nonqualified
Options") to individuals under the Plan. The grant of each option shall be
confirmed by a stock option agreement that shall be executed by the Company and
the optionee as soon as practicable after such grant. The stock option
agreement shall expressly state or incorporate by reference the provisions of
the Plan and state whether the option is an Incentive Option or Nonqualified
Option.
b. Terms of Options. Except as provided in Subparagraphs (c) and
(d) below, each option granted under the Plan shall be subject to the terms and
conditions set forth by the Committee in the stock option agreement including,
but not limited to, option price, option term and transferability.
c. Additional Terms Applicable to All Options. Each option shall
be subject to the following terms and conditions:
(i) Written Notice. An option may be exercised only by
giving written notice to the Company specifying the
number of Shares to be purchased.
(ii) Method of Exercise. The aggregate option price may,
subject to the terms and conditions set forth by the
Committee in the stock option agreement, be paid in
any one or a combination of cash, personal check,
personal note, Shares already owned or Plan awards
which the optionee has an immediate right to exercise
to the extent permitted by the 1940 Act, if
applicable.
(iii) Death of Optionee. If an optionee terminates
employment due to death, disability or retirement,
prior to exercise in full of any options, the
optionee or his successor shall have the right to
exercise the options within a period of twelve months
after the date of such termination to the extent that
the right was exercisable at the date of such
termination, or subject to such other terms as may be
determined by the Committee.
2
<PAGE> 42
(iv) Certain Required Approvals. The date on which the
Committee approved the grant of any option to an
officer of the Company shall be the date of issuance
of such option; provided, however, that if (1) any
such action by the Committee does not constitute
approval thereof by both (A) a majority of the
Company's directors who have no financial interest in
such action and (B) a majority of the Company's
directors who are not "interested persons" (as
defined in Section 2(a)(19) of the 1940 Act) of the
Company and (2) such approval is at such time
required by Section 61(a)(3)(B)(i)(I) or other
applicable provision of the 1940 Act, then the grant
of any option by such action shall not be effective,
and there shall be no issuance of such option, until
there has been approval of such action by (A) a
majority of the Company's directors who have no
financial interest in such action and (B) a majority
of the Company's directors who are not "interested
persons" of the Company, on the basis that such
action is in the best interests of the Company and
its shareholders, and the last date on which such
required approval is obtained shall be the date of
issuance of such option.
(v) Transferability. No option may be transferred,
assigned or encumbered by an optionee, except in the
event of the death of the optionee, by will or the
laws of descent and distribution.
d. Additional Terms Applicable to Incentive Options. Each
Incentive Option shall be subject to the following terms and conditions:
(i) Option Price. The option price per Share shall be
not less than one hundred percent (100%) of the fair
market value of such Share on the date the option is
granted. Notwithstanding the preceding sentence, the
option price per Share granted to an individual who,
at the time such option is granted, owns stock
possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the
Company or related corporation (hereinafter referred
to as a "ten-percent (10%) Stockholder") shall not be
less than one hundred and ten percent (110%) of the
fair market value of such Share on the date the
option is granted.
(ii) Term of Option. No option may be exercised more than
ten (10) years after the date of grant and no option
granted to a ten-percent (10%) Stockholder may be
exercised more than five (5) years after the date of
grant. Notwithstanding the preceding sentence, no
option may be exercised more than three (3) months
after the optionee terminates employment with the
Company or related corporation; except that, if the
optionee terminates employment due to his disability
(within the meaning of Section 22(e)(3) of the Code),
the Committee may extend such three (3) month period
for up to an additional nine (9) months.
3
<PAGE> 43
(iii) Annual Exercise Limit. The aggregate value of Shares
which may be acquired during any calendar year by
reason of the exercise of an option shall not exceed
one hundred thousand dollars ($100,000) multiplied by
the number of calendar years (including the then
current calendar year) that the optionee has been
entitled to exercise options. For purposes of the
preceding sentence, the fair market value of each
Share shall be determined on the date the option with
respect to such Share is granted.
e. Formula Grants to Non-Employee Directors. Upon approval of
the stockholders of the Plan at the Annual Meeting and the approval of the SEC
as contemplated by Paragraph 4(c)(iv) above, all non-employee directors will
receive an initial grant of ten (10) year options to purchase 60,000 Shares at
an exercise price per share equal to the closing bid reported for the Shares on
the most recent trading day preceding the date of grant. One-quarter of such
initial options will vest immediately upon grant and the remaining
three-quarters will vest upon the one-year anniversary of the grant date,
subject to acceleration upon (i) the death, disability or retirement of such
non-employee director or (ii) the change of control of the Company as defined
herein. In addition, non-employee directors then in office will receive annual
grants of ten (10) year options on the first business day of each January to
purchase 6,000 Shares at an exercise price per share equal to the closing bid
reported for the Shares on the most recent trading day preceding the date of
grant. Such annual options will vest immediately upon grant. The grant of any
option shall not be effective, and there shall be no issuance of such option,
until there has been approval of a proposal to issue options to non-employee
directors by order of the Securities and Exchange Commission on the basis that
the terms of the proposal are fair and reasonable and do not involve
overreaching of the Company or its shareholders, and the date on which such
required approval is obtained shall be the date of issuance of such option or
thereafter as provided herein.
5. AMENDMENT OR TERMINATION OF THE PLAN
The Board may amend, suspend or terminate the Plan or any portion
thereof at any time, but (except as provided in Paragraph 3 hereof) no
amendment shall be made without approval of the stockholders of the Company
which shall (i) materially increase the aggregate number of Shares with respect
to which awards may be made under the Plan, or (ii) change the class of persons
eligible to participate in the Plan; provided, however, that no such amendment,
suspension or termination shall impair the rights of any individual, without
his consent, in any award theretofore made pursuant to the Plan.
6. TERM OF PLAN
The Plan shall be effective upon the date of the approval of the Plan
by a majority of the stockholders. Unless sooner terminated under the
provisions of Paragraph 5, awards under the Plan shall not be made after the
expiration of ten (10) years from the effective date of the Plan.
4
<PAGE> 44
7. DELIVERY AND REGISTRATION OF STOCK
The Company's obligation to deliver Shares with respect to an award
shall, if the Committee so requests, be conditioned upon the receipt of a
representation as to the investment intention of the individual to whom such
Shares are to be delivered, in such form as the Committee shall determine to be
necessary or advisable to comply with the provisions of the Securities Act of
1933, as amended, or any other federal, state or local securities legislation
or regulation. It may be provided that any representation requirement shall
become inoperative upon a registration of the Shares or other action
eliminating the necessity of such representation under securities legislation.
In such event, the Company shall not be required to deliver any Shares under
the Plan prior to (i) the admission of such Shares to listing on any stock
exchange on which Shares may then be listed, and (ii) the completion of such
registration or other qualification of such Shares under any state or federal
law, rule or regulation, as the Committee shall determine to be necessary or
advisable.
This Plan is intended to comply with Rule 16b-3 under the Exchange
Act. Any provision of the Plan which is inconsistent with said Rule shall, to
the extent of such inconsistency, be inoperative and shall not affect the
validity of the remaining provisions of the Plan.
RIGHTS AS STOCKHOLDER
Upon delivery of any Share to an individual, such individual shall
have all of the rights of a stockholder of the Company with respect to such
Share, including the right to vote such Share and to receive all dividends or
other distributions paid with respect to such Share.
8. MERGER OR CONSOLIDATION
In the event the Company is merged or consolidated with another
corporation and the Company is not the surviving corporation, all outstanding
options shall become immediately and fully exercisable and unrestricted, and
the surviving corporation may exchange options issued under this Plan for
options (with the same aggregate option price) to acquire and participate in
that number of shares in the surviving corporation that have a fair market
value equal to the fair market value (determined on the date of such merger or
consolidation) of Shares that the grantee is entitled to acquire and
participate in under this Plan on the date of such merger, consolidation or
change of control.
9. EMPLOYMENT RELATIONSHIP
An individual shall be considered to be in the employment of the
Company or related corporation as long as he or she remains an employee of the
Company or related corporation. Nothing herein shall confer on any individual
the right to continued employment with the Company or related corporation or
affect the right of the Company or related corporation to terminate such
employment.
5
<PAGE> 45
10. WITHHOLDING OF TAX
To the extent the award, issuance or exercise of Shares results in the
receipt of compensation by an individual, the Company is authorized to withhold
from any other cash compensation then or thereafter payable to such individual
or to withhold sufficient Shares to pay any tax required to be withheld by
reason of the receipt of the compensation. Alternatively, the individual may
tender a personal check in the amount of tax required to be withheld.
6
<PAGE> 46
APPENDIX C
CERTAIN FINANCIAL INFORMATION
<PAGE> 47
SELECTED FINANCIAL INFORMATION
The following selected financial data for the Company for the five-year
period ended December 31, 1996 is presented below. The information for the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 is derived from the
audited financial statements of the Company as of and for the five years then
ended. The data should be read in conjunction with the financial statements,
related notes and other financial information of the Company for such periods
included elsewhere in this Appendix C to this Proxy Statement.
C--1
<PAGE> 48
WALNUT FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
Six Month Period
Ended June 30, Year Ended December 31,
--------------------- ---------------------------------------------------------------
1997 1996 1996 1995 1994* 1993* 1992
-------- ------ -------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands except for share data)
Income Statement Data:
Income from recovery services
and operational support $ 598 $ 868 $ 2,044 $ 2,034 $ 0 $ 0 $ 0
Investment income 55 32 96 500 186 265 502
Other income 0 0 0 0 257 0 0
---------- ---------- ----------- ---------- ---------- ---------- -------
Operating income 653 900 2,140 2,534 443 265 502
---------- ---------- ----------- ---------- ---------- ---------- -------
Operating expenses(1) 2,216 1,712 4,779 4,342 722 751 721
Interest expense 652 921 2,003 1,840 1,594 1,500 1,349
---------- ---------- ----------- ---------- ---------- ---------- -------
Loss before taxes and realized
and unrealized gains/(losses) (2,249) 1,733 (4,642) (3,648) (1,873) (1,986) (1,568)
Income tax benefit 540 694 1,413 1,438 725 729 576
Realized gain/(loss) on sale of
securities, net of tax 4,188 788 1,791 2,845 637 (181) 886
---------- ---------- ----------- ---------- ---------- ---------- -------
Income/(loss) before
unrealized gains 2,479 (251) (1,438) 635 (511) (1,438) (106)
Unrealized gain/(loss) on
investments, net of tax (2,992) 1,530 (1,527) (2,602) 2,811 (3,583) (4,674)
---------- ---------- ----------- ---------- ---------- ---------- -------
Net income/(loss) $ (513) $1,279 (2,965) (1,967) 2,300 (5,021) (4,780)
========== ========== =========== ========== ========== ========== =======
Earnings/(loss) per Share $ (.04) $ .09 (.21) $ (.15) $ .28 $ (.62)
Weighted average shares
outstanding 14,616,687 14,298,173 14,247,099 12,747,656 8,353,860 8,130,213
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
June 30, 1997 1996 1995 1994* 1993* 1992*
---------------- -------- ----- ------- --------- ------
(in thousands, except share data)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets $26,322 $33,198 $36,064 $ 33,132 $ 28,458 $ 35,184
======= ======= ======= ======== ========= ========
Current liabilities 9,735 14,353 11,387 10,187 6,137 4,499
Long-term liabilities(2) 2,322 4,070 9,278 10,680 13,107 16,500
Minority Interest 391 387
------- ------- ------- -------- --------- --------
Stockholders' equity 13,874 14,388 15,399 12,265 9,214 14,185
------- ------- ------- -------- --------- --------
Total liabilities and
stockholders' equity $26,322 $33,198 $36,064 $ 33,132 $ 28,458 $ 35,184
======= ======= ======= ======== ========= ========
</TABLE>
C--2
<PAGE> 49
(1) Includes provision for credit losses and write off of subsidiary goodwill
(2) Includes non-current deferred tax liability
* Includes the results of operations of Walnut only (see Footnotes 1 and 2
to the financial statements included elsewhere herein).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On September 29, 1997, the Company sold its wholly-owned subsidiary, NFS.
As a result, for future periods, the operating results of NFS will not be
included in the Company's consolidated financial statements. Investors should
not rely on the revenue or other results of NFS described below or reflected in
the financial statements included in this Appendix C. If NFS had been sold as
of January 1, 1997, the Company's consolidated net income/(loss) would have
been for the three months and six months ended June 30, 1997, $652,692 and
$(382,739), respectively, as compared to actual results of $521,978 and
$(513,453), respectively, which include the results of NFS.
Because of its recent election to be regulated as a BDC, the Company's
future financial statements will be presented in a different manner in order to
comply with the 1940 Act. Furthermore, the election of BDC status may affect
the historical presentation of financial statements for prior periods.
The following discussion is made with reference to the condensed
consolidated unaudited financial statements of the Company included in this
Appendix C.
RESULTS OF OPERATIONS FOR THE FISCAL SIX MONTHS ENDED JUNE 30, 1997 AND 1996
RESULTS OF COMPANY AND WALNUT CAPITAL OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1997 AND 1996. The Company and Walnut Capital had
aggregate realized gains of $4,138,700, net of tax, for the six-month period
ended June 30, 1997, compared to a realized gain of $788,000, net of tax, for
the same period in 1996. Both the 1997 and 1996 gains were primarily
attributable to sales of securities of HealthCare COMPARE Corp.; however,
during the six-month period ended June 30, 1997, Walnut Capital sold more
shares of HealthCare COMPARE Corp. than for the prior period in order to repay
certain debentures issued by Walnut Capital to an affiliate of the SBA (the
"Walnut Debentures") which matured in April 1997. Realized gains for the
quarter ended June 30, 1997 were $692,100, net of tax, compared to $345,000 for
the same period in 1996.
Aggregate unrealized losses for the Company and Walnut Capital for the
six-month period ended June 30, 1997 were $2,984,000, net of tax. This
compares with unrealized gains of $1,535,000, net of tax, for same period in
1996. The losses in 1997 resulted primarily from a decrease in portfolio
company share values, primarily health care companies. The gains in 1996
resulted primarily from an increase in the values of various health care
portfolio shares, most notably HealthCare COMPARE Corp. For the quarter ended
June 30, 1997, unrealized gains were $1,126,500, net of taxes, compared to
unrealized losses of $154,000, net of taxes, for the same period last year.
The increase for the quarter is primarily attributable to the increase in value
of the Company's portfolio, primarily the health care companies.
Aggregate interest expense decreased at Walnut Capital and the Company by
$222,000 to $607,000 for the six-month period ended June 30, 1997. This
compares to interest expense of $829,000 for the same period in 1996. Interest
expense consists of two major components: (i) interest paid to the SBA with
respect to the Walnut Debentures and (i) interest paid on margin accounts and
bank lines. For the quarter ended June 30, 1997 interest expense for Walnut
Capital and the Company was $247,000 compared to $394,000 for the same period
in 1996. The reduction in interest expense in 1997 is
C--3
<PAGE> 50
attributable to reduced bank debt and margin payable to brokers and the
repayment of $4,000,000 of the Walnut Debentures in April 1997.
Aggregate general and administrative expenses at Walnut Capital and the
Company declined by $158,000 to $567,000 for the six-month period ended June
30, 1997. Such expenses at Walnut Capital decreased $88,000 to $248,000. Such
expenses at the Company were $318,000 for the period ended June 30, 1997,
compared to $389,000 for the same period in 1996. The decrease in expenses at
both Walnut Capital and the Company were due to lower personnel costs.
Additionally, the Company recorded an expense of $800,000 to reflect a
re-evaluation of the book value of NFS. This re-evaluation occurred due to a
contemplated sale to management of 100% of the stock of NFS. Upon such sale,
an agency relationship between the Company and NFS will be established with
respect to the consulting business of NFS, whereby the Company will be entitled
to a significant portion of the gross margin generated by such consulting
business. This newly developed agency relationship results in a change from
the Company's and NFS' prior structure. The Company will retain the rights to
this consulting business under the new proposed structure.
For the six-month period ended June 30, 1997, consolidated net loss for
the Company was $513,400 compared with a profit of $1,279,000 for the same
period in 1996. Such net loss resulted from lower net income at the Company's
subsidiaries. For the three-month period ended June 30, 1997, consolidated net
income for the Company was $522,000, compared with a loss of$345,000 for the
same period in 1996. The favorable results for the 1997 period were due to
higher subsidiary net income primarily at Walnut Capital.
As of June 30, 1997, Walnut Capital had outstanding a promissory note to a
third party representing principal owed of $494,000. The note was issued in
connection with an acquisition by Walnut Capital of a limited partnership
interest in Knox Liquidating Partnership, L.P., which, in turn, has an
ownership interest in a catalog company known as Foster & Gallagher, Inc. Such
note accrues interest at 8% per annum. As of January 31, 1997, $381,000 of the
principal had been repaid. The remaining principal of $494,000 is due on July
31, 1997.
RESULTS OF NFS OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997
AND 1996. During the six months ended June 30, 1997, revenue for NFS was
$601,500. Revenue for such period was derived from operational support
($232,800), recovery services ($365,700) and other ($3,000). During the six
months ended June 30, 1996, revenue for NFS was $874,000. Revenue for such
period was derived from operational support ($535,000), recovery services
($333,000) and other ($6,000). The reductions in revenue for both the six-month
period and the three-month period were due to lower sales activity at NFS.
During the three months ended June 30, 1997, revenue for NFS was $259,600.
Revenue for such period was derived from operational support ($33,500),
recovery services ($225,700) and other ($400). During the three months ended
June 30, 1996, revenue for NFS was $433,000, derived from operational support
($316,000), recovery services ($114,000) and other ($3,000). The reductions in
revenue for both the six-month period and the three-month period was due to
lower sales activity at NFS.
For the six months ended June 30, 1997, 75% of the revenue from
operational support came from two clients: Chase ($119,500 or 51%) and Radix
Systems ($55,200 or 24%). For the same six-month period, 68% of revenue from
recovery services came from two clients: DBL Liquidating Trust ($191,000 or
52%) and Chemical/Chase Bank ($56,900 or 16%). For the six months ended June
30, 1996, 91% of the revenue from operational support came from three clients:
Citibank N.A. ($188,000 or 35%). Key Investments ($142,000 or 27%) and Chase
Manhattan ($155,000 or 29%). For the same six-month period, 40% of revenue
from recovery services came from two clients: DBL Liquidating Trust ($90,000
or 27%) and Merrill Lynch ($42,000 or 13%).
C--4
<PAGE> 51
For the three months ended June 30, 1997, 90% of the revenue from
operational support came from one client, Radix Systems ($30,200). For the
same three-month period, 96% of revenue from recovery services came from two
clients: DBL Liquidating Trust ($77,000 or 68%) and Chemical/Chase Bank
($33,000 or 28%). For the three months ended June 30, 1996, 65% of the revenue
from operational support came from three clients: Citibank N.A. ($56,000 or
18%), Key Investments ($67,000 or 21%) and Chase Manhattan ($82,000 or 26%).
For the same three month period, 37% of revenue from recovery services came
from one client: Merrill Lynch ($42,000).
For the six months ended June 30, 1997, cost of services was $732,700 or
122% of revenues. General and administrative expenses were $60,000. For the
six months ended June 30, 1996, cost of services was $859,000 or 98% of
revenues. General and administrative expenses for such period were $125,000.
For the three months ended June 30, 1997, cost of services was $346,700 or 134%
of revenues. General and administrative expenses for that period were $36,000.
For the three months ended June 30, 1996, cost of services were $464,000 or
107% of revenues, and general and administrative expenses for the period were
$37,000. The increases in the cost of services relative to the percentage of
revenues for both the six-month period and the three-month period were due to
decreases in revenues with a stable amount of fixed costs.
The following discussion is made with reference to the condensed
consolidated audited financial statements of the Company included in this
Appendix C.
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1996 AND
1995.
Results of Walnut Capital Operations for the Fiscal Years Ended December
31, 1996 and 1995. Walnut Capital had realized gain income of $1,561,000 net
of tax, for the year ended December 31, 1996, compared to $2,845,000, net of
tax, for the year ended December 31, 1995. The realized gains result
predominately from the sale of shares of HealthCare COMPARE Corp. which
produced approximately $2.2 million of realized gains in the current period.
Interest expense decreased $478,000 to $1,217,466 during the year ended
December 31, 1996, representing a 28% decrease under interest expense during
the year ended December 31, 1995. Interest expense consists of two components:
(i) interest paid to the SBA with respect to the SBA Debentures ($731,000 and
$1,027,000 for 1996 and 1995, respectively), and (ii) interest paid on margin
accounts and bank lines ($483,000 and $665,000 for 1996 and 1995,
respectively). The decrease in SBA interest expense was the result of
repayment to the SBA of a $4 million debenture on September 1, 1995.
General and administrative expense increased $64,000 to $770,000 during
the year ended December 31, 1996, representing a 9% increase over operating
expense during the year ended December 31, 1995.
Unrealized losses, net of unrealized gains, for the year ended December
31, 1996 were approximately $1.4 million, net of tax, as compared to unrealized
losses for the year ended December 31, 1995 of approximately $2.6 million, net
of tax. The change is due to a lesser decline in market value of several of
Walnut Capital's larger holdings in 1996 as compared to 1995.
RESULTS OF NFS OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND
THE PERIOD FROM FEBRUARY 28, 1995 TO DECEMBER 31, 1995. During the period from
January 1, 1996 to December 31, 1996, revenues for NFS were $2,122,000.
Revenue was derived from recovery services ($887,000), operational support
($1,157,000) and other ($78,000).
C--5
<PAGE> 52
For such 12 month period, revenue from recoveries was $887,000 of which
56% was derived from three clients (Chemical Bank, $188,000, or 21%, DBL,
$167,000, or 19%, and Merrill Lynch, $145,000, or 16%). Operational support
revenue was $1,157,000 of which 84% was derived from three clients (Chase Bank,
$512,000, or 44%, Citibank, N.A., $210,000, or 18%, and Key Investments,
$255,000, or 22%).
For the ten month period ended December 31, 1995, cost of services was
$2,450,000. This amount included an increase in reserve for non-realization of
two products recorded as Work in Progress. This reserve was due to a change in
the status of the customers' expectations of the completion of projects. NFS
management will continue to pursue the collection of these items valued at
$815,000, even though their ultimate collectibility cannot be assured. General
and administrative expenses were $610,000 for the period.
NFS incurred a charge to operations of $1,100,000 in 1996 representing a
write-down of NFS' goodwill, which resulted from the Company's continuing
re-evaluation of the asset recovery business of NFS. Such write-down was made
in accordance with FAS 121.
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
AND THE PERIOD FROM FEBRUARY 28, 1995 THROUGH DECEMBER 31, 1995. The Company
had interest income of $37,000 and general and administrative cost of $881,000
for the year ended December 31, 1996 as compared to $8,000 and $575,000,
respectively, in the ten month period ended December 31, 1995. Consolidated
net loss for the Company was $2.96 million for the year ended December 31, 1996
as compared to net loss of $1.97 million in the ten month period ended December
31, 1995.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1995 AND 1994.
RESULTS OF WALNUT CAPITAL OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER
31, 1995 AND 1994. Walnut Capital had realized gain income of $2,895,000, net
of tax, for the twelve months ended December 31, 1995, compared to $636,000,
net of tax, for the twelve months ended December 31, 1994. The increase in
realized gains results predominately from the sale of shares of HealthCare
COMPARE Corp. which produced approximately $5.3 million of realized gains in
the current period.
Investment and other income increased $2,000 to $445,000 for the twelve
months ended December 31, 1995. The results for 1995 included realization of
interest income from prior years on debt securities which was simultaneously
converted to an equity position. The results for 1994 included conversion to
equity securities of an income producing partnership investment.
Interest expense decreased $64,000 to $1,529,000 during the twelve months
ended December 31, 1995, representing a 4% decrease under interest expense
during the twelve months ended December 30, 1994. Interest expense consists of
two components: (i) interest paid to the SBA with respect to the SBA Debentures
($1,529,000 and $1,593,000 for 1995 and 1994, respectively), and (ii) interest
paid on margin accounts and bank lines ($504,000 and $424,000 for 1995 and
1994, respectively). The decrease in SBA interest expense was the result of
repayment of a $4 million debenture on September 1, 1995, while the increase in
margin and bank line interest was due to a rise in interest rates.
General and administrative expense decreased $16,000 to $706,000 during
the twelve months ended December 31, 1995, representing a 2% decrease under
operating expense during the twelve months ended December 31, 1994.
Unrealized losses for the twelve months ended December 31, 1995 were
approximately $2.65 million, net of tax, versus unrealized gains for the twelve
months ended December 31, 1994 of
C--6
<PAGE> 53
approximately $2.8 million, net of tax. The change is due to the decline in
market value of several of Walnut Capital's larger holdings.
RESULTS OF NFS OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1995 TO
DECEMBER 31, 1995. During the period from February 28, 1995 to December 31,
1995, revenues for NFS were $2,081,439. Revenue was derived from recovery
services ($312,581), operational support ($1,763,319) and other ($5,539).
For such ten month period, revenue from recovery services was $312,581 of
which 54% was generated from predominately two clients (Chemical Bank,
$117,990, or 38%, and Citibank, N.A., $51,525, or 16%). Operational support
revenue was $1,763,319 of which 90% was derived from three clients (Citibank,
N.A., $1,120,847, or 64%, Chemical Bank, $246,789, or 14%, and Key Investments,
$215,214, or 12%).
For such ten month period, cost of services was $2,450,000. This amount
included an increase in reserve for non-realization of two products recorded as
Work in Progress. This reserve was due to a change in the status of the
customers' expectations of the completion of projects. NFS management will
continue to pursue the collection of these items valued at $815,000, even
though their ultimate collectibility cannot be assured. General and
administrative expenses were $610,034 for the period.
RESULTS OF COMPANY OPERATIONS FOR THE PERIOD FROM FEBRUARY 28, 1995 TO
DECEMBER 31, 1995. During the ten months from February 28, 1995 to December 31,
1995, the Company had interest income of approximately $7,845 and general and
administrative expenses of approximately $575,483. Consolidated net loss for
the Company was $1.9 million for the twelve months ended December 31, 1995
compared to net income of $2.3 million for the twelve months ended December 31,
1994.
LIQUIDITY AND CAPITAL RESOURCES.
LIQUIDITY AND CAPITAL RESOURCES OF WALNUT CAPITAL. Walnut Capital has
historically obtained capital from three primary sources: (i) borrowing
through the SBA Debentures, (ii) other borrowings, including margin loans, and
(iii) sales of portfolio securities. As part of the SBIC program, Walnut
Capital has, from time to time, issued $12 million of SBA Debentures to an
affiliate of the SBA. On September 1, 1995, debentures in the principal amount
of $4 million were repaid and on April 1, 1997 debentures in the amount of $4
million were repaid. SBA Debentures in the principal amount of $4 million were
outstanding as of September 30, 1997. The amounts, maturities and interest
rates of such SBA Debentures are set forth below:
<TABLE>
<CAPTION>
Principal Balance Date Issued Maturity Interest Rate
----------------- ----------- -------- -------------
<S> <C> <C> <C>
2,000,000 06/08/88 06/01/98 9.80%
2,000,000 09/27/89 09/01/99 8.80%
</TABLE>
Interest on the SBA Debentures is paid semi-annually, and principal is due at
maturity. Payment of the SBA Debentures is guaranteed by the SBA. Walnut
Capital has been current in all of its interest payments on the SBA Debentures.
Walnut Capital repaid SBA Debentures in the amount of $4,000,000 due at April
1, 1997, in accordance with their terms. Additionally, Walnut Capital reduced
its broker margin account by $1.99 million to $3.47 million. The source of
funds was primarily the
C--7
<PAGE> 54
sale of HealthCare COMPARE Corp. securities, creating a realized capital gain,
pre-tax, of approximately $6 million in the first quarter.
The SBA 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 SBA 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.
As of September 30, 1997, the SBA Debentures could not be prepaid without
payment of a prepayment penalty of approximately $110,000. Management does not
currently intend to issue any additional debentures to the SBA or its
affiliates.
In April 1997, Walnut Capital received an unsecured loan from THC in the
amount of $400,000. The loan bears interest, which is payable upon maturity,
at a rate of 9.5% per annum and matures on October 31, 1997. See CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS. As of August 31, 1997, Walnut Capital
had approximately $3 million outstanding under its margin loans.
LIQUIDITY AND CAPITAL RESOURCES OF THE COMPANY. On August 31, 1995, the
Company established a $4 million line of credit with ANB. This credit line has
been replaced with a term loan having an outstanding balance as of September
30, 1997 of $2,025,000. This loan requires quarterly principal payments of
$250,000, plus interest. This loan bears interest at ANB's base rate plus 2%
(10.25% as of September 30, 1997), matures on June 30, 1999 and is personally
guaranteed by two Directors of the Company.
C--8
<PAGE> 55
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
ASSETS (Unaudited)
Portfolio securities:
Marketable equity securities $15,949,538 $23,842,962
Non-marketable securities 6,195,968 4,468,692
Non-marketable debt securities 1,315,201 1,512,081
----------- -----------
Total portfolio securities(4) 23,460,707 29,823,735
Current assets:
Cash and cash equivalents 1,305,326 840,225
Accounts receivable (net of allowance) 263,722 420,612
Interest receivable (net of allowance) 3,981 26,603
Unbilled receivables 715,516 770,754
Other current assets 253,753 208,078
----------- -----------
Total current assets 2,542,298 2,266,272
Fixed assets, net of accumulated depreciation 47,116 43,431
Long term assets 208,489 208,489
Intangible assets 62,954 856,548
----------- -----------
TOTAL ASSETS $26,321,564 $33,198,475
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers $ 3,469,813 $ 5,459,118
Notes payable to banks and current portion of long term debt 2,275,000 2,850,000
Notes payable to other 890,056 875,000
Accounts payable, accrued expenses and other current
liabilities 1,035,605 1,119,785
Current portion of long - term debt 2,064,006 4,049,500
----------- -----------
Total current liabilities 9,734,480 14,353,403
Long-term debt, net of current portion 2,000,000 4,013,321
Non-current deferred tax liability 305,667 37,689
Deferred rent, net of amortization 15,966 19,651
----------- -----------
Total liabilities 12,056,113 18,424,064
Minority interest 391,243 386,750
Stockholders' equity:
Preferred stock, no stated value, 1,000,000 shares authorized
no shares issued
Common stock, $.01 stated value, 50,000,000 shares authorized,
14,616,687 issued in 1997 and 14,616,687
issued in 1996 146,167 146,167
Additional paid in capital 15,030,269 15,030,269
Retained earnings (1,302,228) (788,775)
----------- -----------
Total stockholders' equity 13,874,208 14,387,661
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,321,564 $33,198,475
=========== ===========
</TABLE>
Attention is directed to the accompanying notes to these financial statements
C--9
<PAGE> 56
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended For the Three Months Ended
--------------------------------- -------------------------------
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Recovery services $ 365,694 $ 535,285 $ 225,693 $ 315,890
Operational support 232,800 332,749 33,501 113,582
Investment and other income 54,564 31,882 16,852 26,244
------------ ------------ ------------ ------------
653,058 899,916 276,046 455,716
------------ ------------ ------------ ------------
Costs and Expenses:
Cost of services 732,701 858,960 346,738 464,433
General and administrative 1,482,995 853,174 1,124,300 440,386
------------ ------------ ------------ ------------
2,215,696 1,712,134 1,471,038 904,819
------------ ------------ ------------ ------------
Operating (loss) (1,562,638) (812,218) (1,194,992) (449,103)
Interest and other financial costs 652,313 921,169 289,938 439,231
------------ ------------ ------------ ------------
(2,214,951) (1,733,387) (1,484,930) (888,334)
Minority Interest (33,970) 0 (27,352) 0
------------ ------------ ------------ ------------
(Loss) before taxes and realized and
unrealized gain and loss (2,248,921) (1,733,387) (1,512,282) (888,334)
Income tax benefit 539,502 693,706 253,608 356,915
Realized gain/(loss) on sale of
securities, net of tax 4,188,177 788,375 662,120 345,443
------------ ------------ ------------ ------------
Gain/(loss) before unrealized loss 2,478,758 (251,306) (596,554) (185,976)
Unrealized gain(loss) on
investments, net of tax (2,992,211) 1,530,621 1,118,532 (158,882)
------------ ------------ ------------ ------------
Net income/(loss) $ (513,453) $ 1,279,315 $ 521,978 $ (344,858)
============ ============ =========== ===========
Income/(loss) per share $ (0.04) $ 0.09 $ 0.04 $ 0.02
------------ ------------ ------------ ------------
Weighted average shares outstanding 14,616,687 14,298,173 14,638,512 13,930,554
------------ ------------ ------------ ------------
</TABLE>
Attention is directed to the accompanying notes to these financial statements
C--10
<PAGE> 57
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months ended June 30,
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Operating activities:
Net increase/(decrease) in net assets resulting from operations $ (513,453) $ 1,279,315
Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operating activities:
Depreciation/amortization 86,563 73,438
Net unrealized depreciation/(appreciation) 4,987,016 (2,551,038)
Realized gains (6,980,295) (1,358,106)
Write off of NFS Goodwill 800,000 0
Changes in operating assets and liabilities 131,665 1,003,651
----------- -----------
Net cash (used in) operating activities (1,488,504) (1,552,740)
----------- -----------
Investing activities:
Additions to property and equipment (5,250) (5,087)
Purchases of investments (514,975) (334,811)
Proceeds from sale of investments 9,021,894 3,436,676
Cash acquired at UPLP 0 575,740
----------- -----------
Net cash provided by investing activities 8,501,669 3,672,518
----------- -----------
Financing activities:
Net proceeds from sale of common stock 0 35,000
Borrowings/(repayments) of short term debt (4,558,759) (844,800)
Increase/(decrease) in margin accounts (1,989,305) 352,024
----------- -----------
Net cash (used in) financing activities (6,548,064) (457,776)
----------- -----------
Net increase/(decrease) in cash and cash equivalents 465,101 1,662,002
Cash and cash equivalents, at the beginning of the year 840,225 396,440
------------ -----------
Cash and cash equivalents, at the end of the period $ 1,305,326 $ 2,058,442
Supplemental Information: ============ ===========
Cash paid for interest $ 490,432 $ 865,870
============ ===========
</TABLE>
Attention is directed to the accompanying notes to these financial statements
C--11
<PAGE> 58
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
------------------------------
Shares Par Value at $0.01 Additional Paid In Retained Deficit Total
Capital
---------- ------------------ -------------------- ---------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 14,616,687 $ 146,167 $15,030,269 $ (788,775) $14,387,661
Net income/(loss) (513,453) (513,453)
---------- ---------- ----------- ----------- -----------
Balance, June 30, 1997 14,616,687 $ 146,167 $15,030,269 $(1,302,228) $13,874,208
========== ========== =========== =========== ===========
</TABLE>
Attention is directed to the accompanying notes to these financial
statements
C--12
<PAGE> 59
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION.
The accompanying consolidated financial statements as of June 30, 1997 and
for the three and six months ended June 30, 1997 and June 30, 1996, 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, 1996 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, 1996, as amended.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for fiscal years.
2. ORGANIZATION.
The Company currently 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) providing diversified consulting and asset recovery
services (recovery of financial assets, e.g., cash and securities, which had
not been accounted for by its clients) to securities firms, banks and others.
The Company engages in the investment business through its wholly-owned
subsidiary, Walnut Capital Corp., a Delaware corporation ("Walnut"). Walnut
was formed for the purpose of operating as a Small Business Investment Company
(a "SBIC") under the Small Business Investment Act of 1958 (as amended, the
"SBIA"), and is subject to regulations promulgated by the Small Business
Administration (the "SBA") pursuant to the provisions of the SBIA. The Company
pursues its bridge financings through its wholly-owned subsidiary, Universal
Bridge Funds, 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 the
consulting and asset recovery business through its wholly-owned subsidiary, NFS
Services, Inc., a New York corporation ("NFS"), and NFS' wholly-owned
subsidiaries: (i) Asset Recovery Services, Inc., a New York corporation
("ARS"), and (ii) NFS Collection Services, Inc., a New York corporation ("NFS
Collection"). NFS conducts its operations both directly and through its
subsidiaries.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PRINCIPLES OF CONSOLIDATION. The financial statements of the Company
include the accounts of Walnut, NFS and NFS' wholly-owned subsidiaries, ARS and
NFS Collection, and Universal Bridge (from the date of acquisition) and its
subsidiary, UPLP. Intercompany transactions and balances have been eliminated
in consolidation. The Company accounts for its controlling partnership
interest in UPLP on a consolidated basis.
C--13
<PAGE> 60
ACQUISITION OF UPLP. On June 17, 1996, the Company issued 801,974 shares
of Common Stock, together with five-year warrants to purchase an additional
697,391 shares of Common Stock at an exercise price of $3.00, in connection
with Universal Bridge's purchase of approximately 83% of the limited
partnership interests and 50% of the general partnership interests of UPLP.
Universal Bridge's purchase of interests in UPLP has been accounted for as a
purchase according to Accounting Principles Board Opinion 16. The investment
assets of UPLP at the time of acquisition were $1,251,000, net debt securities
were $423,000, total assets were $2,226,000 and liabilities were $75,000.
UPLP's activities are consolidated in the Company's results from the date of
acquisition.
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.
A new accounting pronouncement FAS 128 (Accounting for Earnings per Share)
will provide a simplified standard for accounting for earnings per share. This
will be effective December 31, 1997 and will require restatement of quarterly
per share information as of 1997, 1996 and 1995.
4. SECURITIES.
Securities as of June 30, 1997 consisted of the following:
<TABLE>
<CAPTION>
Market Fair Value Cost
----------------- -----------
<S> <C> <C> <C>
Equity:
Biotechnology $ 473,955 $ 640,566
Communications 1,033,593 2,945,712
Environmental 205,546 75,848
Health Care 15,211,200 5,284,341
High technology 1,816,864 2,909,457
Other 3,404,348 2,835,177
----------- -----------
Total equity $22,145,506 $14,691,101
----------- -----------
Debt:
Environmental $ 93,465 $ 400,590
Health care 175,000 180,460
Services 737,736 1,012,892
Other 309,000 510,000
----------- -----------
Total debt $ 1,315,201 $ 2,103,942
----------- -----------
Total Securities $23,460,707 $16,795,043
=========== ===========
</TABLE>
C--14
<PAGE> 61
5. RELATED PARTY TRANSACTIONS.
The Company and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $114,400 were paid to such firm by the
Company for reimbursement of expenses and legal services incurred during the
six months ended June 30, 1997. Such expenses and fees were incurred in
connection with normal business activities.
In April, 1997, the Company received an unsecured loan from a related
party in the amount of $400,000. The loan bears interest which is payable upon
maturity, at a rate of 9.5% per annum, matures on August 30, 1997, and is
reflected in Notes Payable to Other on the balance sheet.
The Company has a $4 million line of credit with a third party
institutional lender, of which $2,275,000 was outstanding as of June 30, 1997.
Such line of credit has been converted into a permanent loan with a principal
balance of $2,025,000 and matures in June 1999. Repayment of such loan is
guaranteed by two Directors of the Company.
C--15
<PAGE> 62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Consolidated Financial Statements: Page
Report of Independent Auditors................................ C-17
Consolidated Balance Sheets, December 31, 1996 and 1995....... C-20
Consolidated Statements of Operations,
years ended December 31, 1996, 1995 and 1994.................. C-21
Consolidated Statements of Changes in Stockholders' Equity,
years ended December 31, 1996, 1995 and 1994.................. C-22
Consolidated Statements of Cash Flows,
years ended December 31, 1996, 1995 and 1994.................. C-23
Notes to Consolidated Financial Statements.................... C-24
Financial Statement Schedules:
Schedule I - Condensed Financial Information of Registrant.... C-41
Schedule II - Valuation and Qualifying Accounts and Reserves.. C-42
C--16
<PAGE> 63
[RICHARD A. EISNER & COMPANY, LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
Walnut Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of Walnut
Financial Services, Inc. and subsidiaries (the "Company") as at December 31,
1996 and December 31, 1995, and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included verification of investments owned at December 31, 1996 and December
31, 1995, by correspondence with the custodian and by physical examination. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the consolidated financial position of the Company at
December 31, 1996 and December 31, 1995, and the consolidated results of its
operations and its consolidated cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company may have Investment Company Act of 1940
(the "Act") considerations. The Act imposes certain registration, filing and
operating requirements on subject companies.
<PAGE> 64
[RAE LOGO]
As discussed in Note 5, the U.S. Small Business Administration (the "SBA")
has issued its finding that a subsidiary, Walnut Capital Corporation ("Walnut
Capital") has violated Section 107.903(b)(1) and (d) of Part 13 of the Code of
Federal Regulations by financing an associate and paying fees to an associate.
The Company believes that no such violation occurred and the matter is being
discussed with the SBA.
In addition, the SBA has issued a finding that Walnut Capital has violated
Section 107.501(b)(1), (3) and (4) by not seeking prior approval of the SBA
for management services provided by associates. The Company believes that no
such violation occurred and the matter is being discussed with the SBA.
Further, the SBA has issued a finding that Walnut Capital has violated
Section 107.203(d) relating to capital impairment. The SBA has indicated that
under certain circumstances it would refrain from any action against the
Company with regard to capital impairment.
As explained in Note 2, the consolidated financial statements include
securities, valued at $5,981,000 (18% of total assets), whose values have been
estimated by the Board of Directors in the absence of readily ascertainable
market values. We have reviewed the procedures used by the Board of Directors
in arriving at its estimate of value of such securities and have inspected
underlying documentation and, under the circumstances, we believe the
procedures are reasonable and the documentation appropriate. However, because
of the inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a
ready market for the securities existed, and the differences could be material,
either reflecting a lower or a higher valuation.
Richard A. Eisner & Company, LLP
New York, New York
January 24, 1997
<PAGE> 65
[RICHARD A. EISNER & COMPANY, LLP LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS WITH
RESPECT TO SUPPLEMENTARY SCHEDULES
Board of Directors and Shareholders
The audits referred to in our report dated January 24, 1997
includes Schedule I for the year ended December 31, 1996 and Schedule II for
each of the years in the two-year period ended December 31, 1996. In our
opinion, the schedules referred to above present fairly the information set
forth therein, in conformity with the applicable accounting regulation of
the Securities and Exchange Commission.
Richard A. Eisner & Company, LLP
New York, New York
January 24, 1997
<PAGE> 66
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
- ------
Portfolio securities:
Marketable equity securities (cost of $11,864,004
in 1996 and $12,564,401 in 1995 ) $ 23,842,962 $26,622,030
Non-marketable equity securities (cost of $6,760,208
In 1996 and $6,832,836 in 1995) 4,468,692 4,486,237
Non-marketable debt securities (less reserve of $806,711 1,512,081 846,694
in 1996 and $384,008 in 1995) ------------ -----------
Total portfolio securities 29,823,735 31,954,961
Current assets:
Cash and cash equivalents 840,225 396,440
Accounts receivable (net of allowance for doubtful
accounts $547,074 in 1996 and $305,273 in 1995) 420,612 630,092
Interest receivable (net of allowance for doubtful
accounts $14,030 in 1996 and $14,030 in 1995) 26,603 27,549
Unbilled receivables 770,754 501,332
Other current assets 208,078 76,420
------------ -----------
Total current assets 2,266,272 1,631,833
------------ -----------
Fixed assets (net of accumulated depreciation of
$149,604 in 1996 and $123,382 in 1995) 43,431 54,935
------------ -----------
Other assets 208,489 355,283
------------ -----------
Intangible assets, net of accumulated amortization 856,548 2,066,492
------------ -----------
TOTAL ASSETS $ 33,198,475 $36,063,504
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Margin payable to brokers $ 5,459,118 $ 5,131,783
Notes payable to banks 2,850,000 4,933,791
Notes payable to other 875,000 270,000
Accounts payable, accrued expenses, and
other current liabilities 1,119,785 1,003,088
Current portion of long-term debt 4,049,500 47,953
------------ -----------
Total current liabilities 14,353,403 11,386,615
Long-term debt, net of current portion 4,013,321 8,013,285
Non-current deferred tax liability 37,689 1,247,967
Deferred rent, net of amortization 19,651 16,311
------------ -----------
Total liabilities 18,424,064 20,664,178
------------ -----------
Minority Interest 386,750 0
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no stated value, 1,000,000 shares
authorized, no shares issued -- --
Common stock, $.01 stated value, 50,000,000 shares
authorized, 14,616,687 issued in 1996 and 13,800,713
issued in 1995 146,167 138,007
Additional paid in capital 15,030,269 13,085,428
Retained earnings (deficit) (788,775) 2,175,891
----------- -----------
Total stockholders' equity 14,387,661 15,399,326
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $33,198,475 $36,063,504
=========== ===========
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
C--20
<PAGE> 67
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the year ended
------------------------------------------
12/31/96 12/31/95 12/31/94*
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Recovery services $ 886,800 $ 270,716 $ --
Operational support 1,157,210 1,763,320 --
Investment and other income 96,162 500,011 443,354
----------- ----------- -----------
2,140,172 2,534,047 443,354
----------- ----------- -----------
Costs and expenses:
Cost of services 1,663,663 2,450,364 --
General and administrative expenses 3,115,424 1,892,080 722,250
----------- ----------- -----------
4,779,087 4,342,444 722,250
----------- ----------- -----------
Operating (loss) (2,638,915) (1,808,397) (278,896)
Interest and other financial costs 2,003,189 1,839,649 1,593,419
----------- ----------- -----------
(Loss) before taxes and realized gain and
unrealized gain/(loss) (4,642,104) (3,648,046) (1,872,315)
Income tax benefit 1,413,456 1,438,252 725,000
Realized gain/(loss) on sale of
securities, net of tax 1,791,169 2,845,417 636,932
----------- ----------- -----------
Income (loss) before unrealized gain/(loss) (1,437,479) 635,623 (510,383)
Unrealized (loss)/gain on investments, net
of tax (1,527,187) (2,602,589) 2,810,823
----------- ----------- -----------
NET (LOSS)/INCOME $(2,964,666) $(1,966,966) $ 2,300,440
=========== =========== ===========
(Loss)/Income per share $ (0.21) $ (0.15) $ 0.28
=========== =========== ===========
Weighted average shares outstanding 14,247,099 12,747,656 8,353,860
=========== =========== ===========
</TABLE>
* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
C--21
<PAGE> 68
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------
Additional Retained
Par Value Paid in Earnings
Shares at $.01 Capital (Deficit)
---------- --------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993* 8,158,047 $ 81,580 $ 7,290,220 $1,842,417
Net income -- -- -- 2,300,440
Issuance of common stock 667,962 6,680 743,320 --
---------- --------- ----------- -----------
Balance, December 31, 1994* 8,826,009 88,260 8,033,540 4,142,857
Net loss -- -- -- (1,966,966)
Exchange of shares for business combination 3,190,504 31,905 1,591,000 --
Treasury stock at business combination -- -- -- --
Sale of treasury stock -- -- (105) --
Issuance of common stock and warrants in exchange
for marketable securities 452,533 4,525 1,013,675 --
Issuance of common stock for legal fees 69,000 690 127,310 --
Issuance of common stock for finders' fees 125,000 1,250 248,750 --
Issuance of common stock for litigation settlement 22,500 225 44,775 --
Issuance of common stock, net of commissions 1,060,895 10,609 1,951,881 --
Exercise of stock options 54,272 543 74,602 --
---------- --------- ----------- -----------
Balance, December 31, 1995 13,800,713 138,007 13,085,428 2,175,891
Net loss (2,964,666)
Issuance of common stock for legal fees 14,000 140 34,860
Issuance of compensatory warrants for consulting 125,000
Issuance of common stock for Universal acquisition 801,974 8,020 1,784,981
---------- --------- ----------- ----------
Balance, December 31, 1996 14,616,687 $146,167 $15,030,269 $ (788,775)
========== ========= =========== ==========
<CAPTION>
Treasury Stock
--------------------
Shares Value Total
-------- ---------- -----------
<S> <C> <C> <C>
Balance, December 31, 1993* -- -- $ 9,214,217
Net income -- -- 2,300,440
Issuance of common stock -- -- 750,000
-------- ---------- -----------
Balance, December 31, 1994* -- -- 12,264,657
Net loss -- -- (1,966,966)
Exchange of shares for business combination -- -- 1,622,905
Treasury stock at business combination 50,000 $(100,000) (100,000)
Sale of treasury stock (50,000) 100,000 99,895
Issuance of common stock and warrants in exchange
for marketable securities -- -- 1,018,200
Issuance of common stock for legal fees -- -- 128,000
Issuance of common stock for finders' fees -- -- 250,000
Issuance of common stock for litigation settlement -- -- 45,000
Issuance of common stock, net of commissions -- -- 1,962,490
Exercise of stock options -- -- 75,145
-------- --------- -----------
Balance, December 31, 1995 0 0 15,399,326
Net loss (2,964,666)
Issuance of common stock for legal fees 35,000
Issuance of compensatory warrants for consulting 125,000
Issuance of common stock for Universal acquisition 1,793,001
-------- --------- -----------
Balance, December 31, 1996 0 $ 0 14,387,661
======== ========= ===========
</TABLE>
* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
C--22
<PAGE> 69
WALNUT FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------
1996 1995 1994*
------------ ------------ ------------
<S> <C> <C> <C>
Operating activities:
Net (loss)/income $(2,964,666) $(1,966,966) $ 2,300,440
Adjustments to reconcile net income/(loss) to net cash (used
in) operating activities:
Depreciation/amortization 141,510 152,873 1,685
Issuance of stock as litigation settlement 45,000
Provision for loss of receivables 45,099 39,046
Unrealized gain/(loss) 2,545,313 4,321,192 (4,633,835)
Realized gains (2,985,283) (5,596,760) (1,766,329)
Write off of investments 879,714 825,305
Write off of NFS Goodwill 1,100,000
Issuance of compensatory warrants 125,000
Receipt of securities in lieu of interest (437,287)
Provision for loss in unbilled receivables 814,474
Write off of deferred rent (180,466)
Effect on Minority Interest from Net Income in Subsidiaries (7,673)
Changes in operating assets and liabilities:
Decrease in interest and accounts receivable 212,137 322,626 2,596
Decrease in deposits and other assets 19,296 49,112 37,754
Decrease in interest payable (2,740) (140,168)
Increase/(decrease) in accounts payable 123,744 (1,075,715) 39,805
Increase in deferred rent 3,340 15,844
Increase/(decrease) in net deferred tax liability (1,253,383) (1,285,142) 1,498,000
(Increase)/decrease in unbilled receivables (269,422) 82,922
----------- ----------- -----------
Net cash (used in) operating activities (3,212,827) (3,953,648) (1,655,533)
----------- ----------- -----------
Investing activities:
Costs in connection with the acquisition of NFS (291,739)
Additions to property and equipment (9,393) (3,356) (1,491)
Purchases of investments (2,027,940) (7,694,007) (1,250,718)
Proceeds from sale of investments 6,269,661 9,672,259 2,669,514
Advances to officers (23,076)
Cash Acquired in Universal Acquisition 575,740
----------- ----------- -----------
Net cash provided by investing activities 4,808,068 1,660,081 1,417,305
----------- ----------- -----------
Financing activities:
Deferred private placement costs (15,000)
Net proceeds from sale of common stock 1,962,490 750,000
Borrowings/(repayments) of short term debt (1,478,791) 209,569 (1)
Increase/(decrease) in margin accounts 327,335 (88,733) 11,058
Exercise of stock options 75,146
----------- ----------- -----------
Net cash provided by/(used in) financing activities (1,151,456) 2,143,472 761,057
----------- ----------- -----------
Net increase/(decrease) in cash and cash equivalents 443,785 (150,095) 522,829
Cash and cash equivalents, at the beginning of the year 396,440 546,535 23,706
----------- ----------- -----------
Cash and cash equivalents at the end of the year $ 840,225 $ 396,440 $ 546,535
=========== =========== ===========
Supplemental Information:
Cash paid for Interest $ 1,626,419 $ 1,675,965 $ 1,287,339
=========== =========== ===========
Receipt of equity securities in lieu of cash interest $ 437,287 $ 119,565
=========== =========== ===========
Receipt of equity securities in lieu of cash $ 221,547
=========== =========== ===========
Exchange of debt securities for equity securities $ 624,438
=========== =========== ===========
Issuance of common stock and warrants for marketable securities $ 1,018,200
=========== ===========
Issuance of common stock and warrants for Universal Acquisition $ 1,793,001
===========
</TABLE>
* Includes the results of operations of Walnut Capital Corp. only (see
Footnotes 1 and 2).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements
C--23
<PAGE> 70
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Walnut Financial Services, Inc., a Utah corporation (the "Company"),
currently has three primary business focuses: (i) investing in start-up and
early stage development companies, (ii) providing diversified consulting and
asset recovery services (recovery of financial assets, e.g., cash and
securities, which had not been accounted for by its clients) to securities
firms, banks and others, and (iii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies. The
Company engages in the investment business through its wholly-owned subsidiary
Walnut Capital Corp., a Delaware corporation ("Walnut Capital"). Walnut
Capital was formed for the purpose of operating as a Small Business Investment
Company (an "SBIC") under the Small Business Investment Act of 1958 (as amended
the "Act"), and is subject to regulations promulgated by the Small Business
Administration (the "SBA") pursuant to the provisions of the Act. The Company
engages in the consulting and asset recovery business through its wholly-owned
subsidiary NFS Services, Inc., a New York corporation ("NFS"). NFS currently
has two wholly-owned subsidiaries: (i) Asset Recovery Services, Inc., a New
York corporation ("ARS"), and (ii) NFS Collection Services, Inc., a New York
corporation ("NFS Collection"). NFS conducts its operations both directly and
through its subsidiaries. The Company pursues its bridge financings through
its wholly-owned subsidiary, Universal Bridge Fund, Inc., a Delaware
corporation ("Universal Bridge"). Universal Bridge owns 50% of the outstanding
general partnership interests and approximately 83% of the limited partnership
interests of Universal Partners, L.P., an Illinois limited partnership
("UPLP").
The Company has relied on an exemption from the registration, filing and
operating requirements Imposed by the Investment Company Act of 1940, as
amended (the "Investment Company Act") provided by Rule 3a-2 promulgated by
Securities and Exchange Commission (the "SEC") under the Investment Company
Act. The Company's one-year exemption period has expired, and the Company may
be deemed an unregistered investment company. The Board of Directors of the
Company (the "Board") has resolved that the Company's business purpose is to be
an operating company through its subsidiaries and not to be engaged in
activities which would require the Company to register as an investment
company. The Company believes that other exemptions to the registration
requirements of the Investment Company Act may be available to the Company.
Should the Company fail to acquire or develop such assets or otherwise avail
itself on an exemption, the Company may be required to meet the registration,
filing and operating requirements of the Investment Company Act.
In the event that the SEC determines that either the Company or Walnut
Capital is an investment company and that no exemption from the Investment
Company Act is applicable, the Company may incur substantial costs in
connection with the registration of itself or Walnut Capital as an investment
company and otherwise complying with the provisions of the Investment Company
Act. Specifically, if the Company or Walnut Capital were to register as an
investment company under the Investment Company Act, the Company and/or Walnut
Capital would be subject to, among other things, certain limitations with
respect to (i) capital structure and the ability to buy or issue securities;
(ii) the ownership of securities issued by other investment companies,
insurance companies and organizations engaged in investment advisory,
underwriting and brokerage businesses; and (iii) the ability to engage in
transactions involving persons who are "affiliates" of the Company or Walnut
Capital, or "affiliates" of such persons. The Company and/or Walnut Capital
would also be subject to certain other operational restrictions and reporting
requirements.
On February 27, 1995, the Company issued 8,826,009 shares of its Common
Stock (including 333,981 shares issued in August 1995 in settlement of an
appraisal action brought by two dissenting stockholders) in exchange for all of
the outstanding common stock of Walnut Capital (such transaction is
C--24
<PAGE> 71
referred to herein as the "Business Combination.") The Company also issued
125,000 shares of Common Stock as finders' fees in connection with the Business
Combination.
In connection with the Business Combination, the Company engaged in a
private placement (completed in June 1995) of its Common Stock for net proceeds
of $1,962,490 (the "Common Stock Private Placement"). In addition, the Company
issued 45,270 shares of Common Stock in lieu of the payment of cash commissions
in connection with the Common Stock Private Placement.
For financial accounting purposes, in accordance with applicable
accounting standards, the Business Combination has been accounted for as a
reverse acquisition of the Company by the stockholders of Walnut Capital.
Immediately after the consummation of the Business Combination, and without
taking into account any sales in the Common Stock Private Placement, the
stockholders of Walnut Capital owned approximately 73% of the Company. In
connection with the Business Combination, the Company recorded goodwill of
approximately $2,200,000. As a result, on February 27, 1995, Walnut Capital
was deemed to have acquired the Company in exchange for 3,190,504 shares of
Common Stock and incurred acquisition costs of approximately $700,000. The net
assets of the Company, exclusive of goodwill, were valued at approximately
$100,000. If the acquisition of the Company had taken place on January 1, 1995,
pro forma revenues, net loss, and loss per share would have been approximately
$2,975,000, ($2,200,000), and ($.18), respectively. Goodwill is being
amortized, using the straight-line method, over 20 years. Proforma revenues,
net income and income per share for 1994 would have been approximately
$6,222,000, $1,495,000 and $0.12, respectively.
On June 17, 1996, the Company issued 801,974 shares of Common Stock,
together with five-year warrants to purchase an additional 697,391 shares of
Common Stock at an exercise price of $3.00, in connection with Universal
Bridge's purchase of approximately 83% of the limited partnership interests and
50% of the general partnership interests of UPLP. Had the acquisition of the
UPLP partnership interest occurred as of January 1, 1996, the results for the
Company for the twelve month period ended December 31, 1996 would have been a
loss of ($2,434,703) or $(0.17) per share. Universal Bridge's purchase of
interests in UPLP has been accounted for as a purchase according to Accounting
Principles Board Opinion 16. The investment assets of UPLP at the time of
acquisition were $1,251,000, net debt securities were $423,000, total assets
were $2,266,000 and liabilities were $75,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The financial statements include the
accounts of the Company, Walnut Capital, Universal Bridge (from date of
acquisition) and its subsidiary, UPLP, NFS and its wholly-owned subsidiaries,
ARS and NFS Collection. Intercompany transactions and balances have been
eliminated in consolidation. The Company accounts for its controlling
partnership's interest in UPLP on a consolidated basis.
REVERSE STOCK SPLIT AND BUSINESS COMBINATION. In January 1994, the
Company effected a one-for-five reverse stock split. In February 1995, the
Company effected a one-for-two reverse stock split. All references to the
number of common shares and per common share amounts have been restated to
reflect the reverse stock splits. The accompanying financial statements also
reflect, as outstanding for all periods presented, the common stock of Walnut
Capital as adjusted for the exchange ratio (111.327 shares for 1 share of
Walnut Capital) applicable to the Business Combination.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed
based on the weighted average number of shares outstanding for each period.
Common stock equivalents have been considered where they are not anti-dilutive.
C--25
<PAGE> 72
GENERAL. Walnut Capital is an SBIC licensee. In the accompanying
financial statements, the financial information of Walnut has been prepared on
a basis appropriate for SBICs as indicated in the American Institute of
Certified Public Accountants in the Audits of Investment Companies.
INVESTMENT VALUATION. The non-marketable investments are stated at fair
value as determined by the Board at December 31, 1996. The Board takes into
account developments since the acquisition of the investments, and other
factors pertinent to the valuation of investments. The Board, in making its
valuation, has in many instances relied on financial data and on estimates by
the investee companies and professional advisors as to the effect of future
developments. The marketable investments and/or their derivatives are carried
at market value. Market values are determined based on the average of the
closing quotations as of December 31, 1996 and the preceding two trade days,
recognizing a percentage reduction when applicable.
Debt securities are valued at their face principal amount and bear
interest from 7% to 12%. The debt may be issued together with stock or
warrants whose initial value is nominal. The Company does not obtain
collateral upon the extension of credit for most debt securities. In the event
that a debt security is in default with respect to principal or interest, the
Company establishes a reserve against the face value and does not accrue
additional interest. A reserve may be established for the full amount due to
the Company if the Board determines that the issuer will be unable to fulfill
its obligation to the Company.
Realized gains and losses on securities are determined on the specific
identification method by subtracting the cost, plus any transaction fees, from
the sales prices, less any transaction fees. Unrealized gains and losses are
determined by subtracting the carrying value (market/fair value) at the end of
the period from the carrying value at the beginning of the period.
INTEREST INCOME. The Company records interest on debt securities when the
indebtedness is current, in accordance with the terms of the agreements made
with investee debtors. A reserve for loss is established to the extent there
is doubt as to the collectibility of current amounts recorded. The Company
generally recognizes interest earned on debt securities which are six months or
more delinquent only when collectibility is assured.
REVENUES AND COSTS. Under its asset recovery agreements, the Company
charges its customers an agreed-upon percentage of the customers' recoverable
amounts. The Company records, as unbilled receivables, amounts representing
its share of customers' recoverable amounts when the recovery process is
substantially complete and the realization of the amounts is reasonably
assured. The recovery process is substantially complete when the Company
receives third party acknowledgment of pending recoveries. Revenues from
operational support are recognized when billed. Accounts receivable represent
amounts actually billed to customers. Allowances are provided for amounts not
expected to be realized.
Costs of services include salaries, commissions, employee benefits and
payroll taxes and are charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair value
of investments are disclosed in Note 4.
Short-term payables -- the carrying amount approximates fair value due to
the short-term maturities of these instruments.
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<PAGE> 73
Long-term debt approximates fair value based on borrowing rates currently
offered to the Company.
INCOME TAXES. Deferred tax liabilities are recognized for the estimated
future tax consequences of temporary differences and net operating loss
carryforwards. Temporary differences are primarily the result of the
differences between the tax bases of assets and liabilities and their financial
reporting amounts. Deferred tax liabilities are measured by applying enacted
statutory tax rates, applicable to the future years, in which deferred tax
liabilities are expected to be settled or realized. (Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.) Income tax expense consists of the taxes payable for the
current period and the change in deferred tax assets and liabilities during the
period.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents for purposes of the statement of cash flows. Cash and cash
equivalents which potentially subject the Company to concentrations of credit
risk consist principally of temporary cash investments with commercial banks.
The Company had approximately $693,500 of temporary cash on deposit in excess
of insured amounts as of December 31, 1996.
MARGIN ACCOUNTS. The Company uses margin accounts established at several
brokerage houses for operations. Interest accrues at the brokers' call rate
plus 1% and is charged monthly on the margin balance.
FIXED ASSETS. Fixed assets are recorded at cost. Depreciation is
computed on the straight-line method over the estimated economic lives of the
assets, which range from 5 to 7 years.
DEFERRED FINANCING COSTS. Deferred financing costs are being amortized by
the straight-line method over the five year term of the related debt.
USE OF ESTIMATES. The preparation of financial statements, in conformity
with generally accepted accounting principles, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION. During 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The provisions of SFAS No. 123 allow companies
to either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) had the fair value of the options
been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans. See the notes to the
financial statements for further information.
C--27
<PAGE> 74
3. FIXED ASSETS
Fixed assets as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Office furniture & equipment $ 193,035 $ 178,317
Less: accumulated depreciation (149,604) (123,382)
--------- ---------
$ 43,431 $ 54,935
========= =========
</TABLE>
4. SECURITIES Securities as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
Market/ Market/
Fair Value Cost Fair Value Cost
-------------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Equity: Healthcare $21,549,896 $ 6,613,021 $25,941,009 $ 9,648,427
Other 2,728,738 4,034,952 1,600,523 3,740,782
Communications 1,630,703 4,013,187 1,963,396 4,060,639
High technology 1,746,317 2,971,548 1,471,439 1,754,201
Biotechnology 607,132 922,656 131,100 150,000
Environmental 48,867 50,848 0 25,188
Gold 1 18,000 800 18,000
----------- ----------- ----------- -----------
Total equity 28,311,654 18,624,212 31,108,267 19,397,237
----------- ----------- ----------- -----------
Debt: Healthcare 150,000 155,546 -- 5,460
Other 953,486 1,447,526 552,314 690,392
Service 329,970 339,970 294,380 312,350
Environmental 53,625 350,750 -- 222,500
Communication 25,000 25,000 -- --
Gold -- -- -- --
----------- ----------- ----------- -----------
Total debt 1,512,081 2,318,792 846,694 1,230,702
----------- ----------- ----------- -----------
Total securities $29,823,735 $20,943,004 $31,954,961 $20,627,939
=========== =========== =========== ===========
</TABLE>
C--28
<PAGE> 75
5. LONG-TERM DEBT
A) SBA DEBENTURES
Total debentures payable were $8,000,000 at December 31, 1996 (the "Walnut
Debentures"). One Walnut Debenture with a principal balance of $4,000,000 is
payable to SBIC Funding Corp. or its designee on April 1, 1997 and bears
interest at 8.95%, payable semiannually on April 1 and October 1 of each year.
One Walnut Debenture with a principal balance of $2,000,000 is payable to SBIC
Funding Corp. or its designee on June 1, 1998 and bears interest at 9.80%,
payable semiannually on June 1 and December 1 of each year. One Walnut
Debenture with a principal balance of $2,000,000 is payable to SBIC Funding
Corp. or its designee on September 1, 1999 and bears interest at 8.8%, payable
semiannually on March 1 and September 1 of each year. Additionally, eight
debentures with an aggregate principal balance of $4,000,000 were due to the
SBA, as agent for the holders, on September 1, 1995, and were so repaid in
accordance with their terms (the "September Debentures").
All principal and interest payments due pursuant to the Walnut Debentures
and the September Debentures have been paid as required. Payment of the Walnut
Debentures is guaranteed by the SBA. Under the terms of the Walnut Debentures,
Walnut Capital may not, without prior permission of the SBA, repurchase or
retire any of its common stock or make any distribution to the Company, except
from undistributed realized earnings computed in accordance with SBA
regulations.
Pursuant to an examination by the SBA, the SBA issued a finding related to
Walnut Capital's capital impairment. Section 107.203(d) of Part 13 of the Code
of Federal Regulations defines capital impairment as a realized earnings
deficit in excess of 50% of private capital. On July 29, 1994, Walnut Capital
entered into an agreement with the SBA (as amended, the "SBA Agreement")
whereby, subject to certain conditions, the SBA would refrain until June 30,
1995 from declaring an event of default under 13 CFR 107.203(d) with regard to
Walnut Capital's capital impairment. Principal conditions of the agreement
were: (a) Walnut Capital would limit annual management expenses to $609,295 per
year; and (b) Walnut Capital would realize gains of, or would increase paid-in
capital by contributions of cash or marketable securities, in the aggregate of
$4 million (in equal quarterly amounts of $1 million for the quarters ended
September 30, 1994, December 31, 1994, March 31, 1995, and June 30, 1995).
Pursuant to an amendment to the agreement dated September 27, 1994, amounts in
excess of $1 million each quarter could be applied by Walnut Capital to future
quarterly requirements, and the annual management expense was increased to
$659,295.
Effective as of June 30, 1995, the Company entered into a transaction with
Windy City, Inc. ("WCI"), an affiliate, pursuant to which WCI subscribed to
purchase 452,533 units valued at $2.25 per unit, each unit consisting of one
share of Common Stock and one three-year common stock purchase warrant
entitling the holder thereof to purchase one share of Common Stock at $3.00 per
share. WCI made payment for said subscription by delivering to the Company
45,000 shares of Logic Devices Incorporated common stock (Nasdaq - LOGC) and
500,000 shares of Consolidated Technology Group, Inc. common stock (Nasdaq -
TGSI), having an aggregate market value of approximately $1,018,000 as of said
date. Immediately thereafter, the Company contributed these securities to
Walnut Capital in order to satisfy Walnut Capital's June 30, 1995 obligation
pursuant to the SBA Agreement.
As of June 30, 1995, Walnut Capital had realized gains and increased
paid-in capital by an amount in excess of $4,000,000 and had otherwise fully
complied with the terms of the SBA Agreement. The SBA Agreement expired, by
its terms, on June 30, 1995.
By letters dated November 9, 1995 and April 19, 1996, the SBA determined
that it would not take any action with regard to the capital impairment issue
under certain circumstances. Specifically, the SBA stated
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<PAGE> 76
that the SBA "would refrain from any action [against Walnut Capital] if: (1)
the market value of [Walnut Capital's] holdings of HealthCare COMPARE and
GranCare in the aggregate exceeds by $10 million the total of all secured and
unsecured third party debt, and (2) the balance in the Undistributed Net
Realized Account does not become negative in an amount greater than
$9,000,000." As of the year ended December 31, 1996, Walnut Capital's holdings
of HealthCare COMPARE Corp. and GranCare, Inc. in the aggregate exceeded the
total of all secured and unsecured third party debt by approximately $12
million and the "Undistributed Net Realized Earnings Account" equaled
approximately negative $6 million. Accordingly, management believes that, by
terms of its own statements, the SBA will not take any adverse actions against
Walnut Capital with respect to the capital impairment issue.
The SBA has issued a finding that the Company has violated Section
107.903(b)(1) and (d) by financing an Associate and paying fees to an
Associate. The Company has provided information to the SBA to show that such
findings are inaccurate. Additionally, the SBA has issued a finding that the
Company has violated Section 107.501(b)(1), (3) and (4) by not seeking prior
approval of the SBA for management services provided by Associates. The
Company believes that such findings are inaccurate and current SBA regulations
no longer require prior approval in such circumstances.
The last examination report issued to Walnut Capital by the SBA is dated
May 14, 1996 and covered the 14-month period ended February 28, 1995. To date,
the SBA has not declared or threatened to declare a default with respect to any
of its findings; however, there can be no assurance that the SBA will be
willing to further refrain from declaring an event of default under the SBA Act
and it is likely that the SBA will continue to deem these issues to be open
until fully resolved to the SBA's satisfaction, irrespective of any continuing
discussions with respect thereto between the SBA and Walnut Capital's
management. If such a default were to be declared and Walnut Capital failed to
cure the same, the SBA would have the right to accelerate the maturity of the
$8 million debentures issued by Walnut Capital to the SBIC Funding Corp.
pursuant to the SBA Act (the "Walnut Debentures") currently outstanding.
Management believes that Walnut Capital could immediately remedy fully the
capital impairment issue through the sale of certain of Walnut Capital's
portfolio securities.
B) NOTES TO OTHERS
NFS has a note payable outstanding to an individual in the amount of
$50,050. This note is due in monthly installments of $2,000 with interest at
11%. No payments have been made pursuant to this note since August 1994.
NFS has payments due on capital leases in monthly installments through May
2000. The leases bear interest at 12%. The balance outstanding at December
31, 1996 was $12,771.
As of December 31, 1996, the Company had outstanding a promissory note to
a third party representing principal owed of $875,000. The note was issued in
connection with an acquisition by the Company of a limited partnership interest
in Knox Liquidating Partnership, L.P., which, in turn, has an ownership
interest in a catalog company known as Foster & Gallagher, Inc. Such note
accrues interest at 8% per annum. Principal is payable in two installments,
$175,000 on January 31, 1997 (which amount was timely paid) and the remaining
$700,000 on July 31, 1997.
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<PAGE> 77
Long-term debt as of December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Debentures payable to the SBA $8,000,000 $8,000,000
Installment note payable 50,050 44,845
Capital leases 12,771 16,393
---------- ----------
TOTAL 8,062,821 8,061,238
Less: current portion 4,049,500 47,953
---------- ----------
Long-term portion $4,013,321 $8,013,285
========== ==========
</TABLE>
As of December 31, 1996, the aggregate principal maturities of long-term
debt are as follows:
<TABLE>
<CAPTION>
Amount
-----------
<S> <C>
1997 $4,049,500
1998 2,005,660
1999 2,006,129
2000 1,532
-----------
$ 8,062,821
===========
</TABLE>
C) NOTES PAYABLE TO BANKS
On August 31, 1995 the Company established a $4 million line of credit
with American National Bank and Trust Company of Chicago ("ANB"). This credit
line was replaced as of September 8, 1996 with a term loan of $2,850,000. This
loan required interest only payments as of September 30, 1996 and December 31,
1996. A principal payment of $575,000 is due on March 31, 1997, with the
balance due on June 30, 1997. The interest rate associated with this loan is
ANB's base rate plus 2% (10.25% as of December 31, 1996). This loan is
personally guaranteed by two Directors of the Company.
On December 31, 1993, Walnut Capital entered into a $600,000 revolving
credit agreement with ANB, which accrued interest at ANB's base rate plus 2%
(10.25% at December 31, 1996). Interest is payable monthly, with the principal
balance due on July 31, 1996. The line is collateralized by a variety of
securities having a fair market value in excess of $600,000. The balance of
this note was $585,000 at December 31, 1995 and was repaid in full as of
December 31, 1996.
On September 7, 1995, NFS established a $350,000 line of credit with ANB.
The line of credit accrued interest at ANB's base rate plus 2% (10.25% at
December 31, 1996). The amount borrowed was due on July 31, 1996. The balance
of this note was $348,791 at December 31, 1995 and was repaid in full as of
December 31, 1996.
C--31
<PAGE> 78
D) NOTES PAYABLE TO RELATED PARTIES
In November 1995, the Company received two unsecured loans from a related
party for an aggregate amount of $270,000. The loans accrued interest at 8.75%
and mature through April 1996. The aggregate balance of these notes was
$270,000 at December 31, 1995; these notes were repaid upon maturity in April
1996.
6. MARGIN BROKERAGE ACCOUNTS
Brokerage margin payable to one investment banker consists of advances of
$2,586,362 under a line of credit as of December 31, 1996. The brokerage
account accrues interest on a monthly basis at the brokers' call rate plus 1%
(7.75% at December 31, 1996) and was collateralized by 182,500 shares of
HealthCare COMPARE Corp. common stock, having a fair market value of
approximately $7,733,000 at December 31, 1996, and 15,000 shares of GranCare,
Inc. common stock, having a fair market value of approximately $268,000 at
December 31, 1996.
Brokerage margin payable to a second investment banker consists of
advances of $2,872,756 under a line of credit as of December 31, 1996.
Advances under this line cannot exceed 40% of the quoted market bid for shares
accepted by the investment banker, and this amount is calculated on an ongoing
basis to reflect market changes. The brokerage account accrues interest on a
monthly basis at the brokers' call rate plus 1% (7.75% at December 31, 1996)
and is collateralized by 170,000 shares of HealthCare COMPARE Corp. common
stock, having a fair market value of approximately $7,204,000 at December 31,
1996, and 91,916 shares of GranCare, Inc. common stock, having a fair market
value of approximately $1,643,000 at December 31, 1996.
7. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable, accrued expenses and other current liabilities as at
December 31 consisted of the following :
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accounts payable $ 324,581 $ 364,073
Accrued interest 163,118 165,858
Accrued payroll taxes(1) 144,302 211,705
Accrued taxes payable 113,692 157,835
Accrued professional fees 148,237 55,153
Accrued payroll 146,640 31,224
Other accrued expenses 79,215 17,240
---------- ----------
Total $1,119,785 $1,003,088
========== ==========
</TABLE>
(1) NFS had a tentative deferred payment agreement with the State of New York
Department of Taxation and Finance for delinquent payroll taxes, and the
related interest and penalties. The agreement called for monthly installments
of $33,465 with interest at 7.3%. NFS has been current with the terms of this
tentative agreement since November 1994. On February 20, 1996 NFS signed an
installment agreement with the State
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<PAGE> 79
of New York Department of Taxation and Finance for 18 monthly payments of
$8,851.58 effective March 15, 1996.
8. INCOME TAXES
As at December 31 the components of the Company's net deferred tax asset
and liability were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gains $ 3,680,832 4,518,621
Deferred tax asset:
Net operating loss benefit (3,060,400) (2,942,400
Allowance for doubtful accounts (224,442) (127,721
Accounts receivable and other (358,301) (200,533
----------- -----------
Deferred tax liability $ 37,689 $ 1,247,967
=========== ===========
</TABLE>
The difference between book and tax accounting for investments and
allowances is the primary source of the non-current deferred tax liability.
For financial statement purposes, investments are carried at market and for
income tax purposes, investments are carried at cost. This resulted in
unrealized gains that are treated as temporary differences under standards for
accounting for income taxes.
The components of the deferred income taxes for the years ended December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Tax (benefit) on net income:
Federal $(1,201,438) $(1,177,608) $ (594,000)
State (212,018) (260,644) (131,000)
----------- ----------- ----------
Total $(1,413,456) $(1,438,252) $ (725,000)
=========== =========== ==========
Tax expense on realized gain:
Federal $ 1,014,996 $ 1,491,524 $ 328,000
State 179,711 330,192 72,000
----------- ----------- ----------
Total $ 1,194,707 $ 1,821,716 $ 400,000
=========== =========== ==========
Tax expense (benefit) on
unrealized loss: Federal $ (865,406) $ (1,366,361) $1,493,000
State (152,719) (302,483) 330,000
----------- ----------- ----------
$(1,018,125) $(1,668,844) $1,823,000
=========== =========== ==========
</TABLE>
In 1996, current tax expense approximated $27,000.
The Company's effective federal tax rate was 24% in 1996, compared to an
overall statutory rate of 34%. This difference was primarily due to the
reserve for write-off of goodwill at NFS.
C--33
<PAGE> 80
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Pre-tax (loss)/gain $(4,202,000) $(3,252,000) $2,988,000
=========== =========== ==========
Federal tax expense/(benefit) at
statutory rate of 34% (1,428,000) (1,106,000) 1,019,000
Federal tax effect of write-off of
goodwill 374,000 0 0
----------- ----------- ----------
(1,054,000) (1,106,000) 1,019,000
Other - net 3,000 54,000 64,000
----------- ----------- ----------
Tax (benefit)/expense $(1,051,000) $(1,052,000) $1,083,000
=========== =========== ==========
</TABLE>
As of December 31, 1996, the Company had net operating loss carryforwards
available for federal income tax purposes as follows:
<TABLE>
<CAPTION>
Expiration
----------
<S> <C>
2006 $2,192,000
2007 2,588,000
2008 1,933,000
2009 643,000
2011 295,000
----------
$7,651,000
==========
</TABLE>
In addition, NFS has net operating loss carryforwards of approximately
$3,700,000 at December 31, 1996 for federal income tax purposes which may only
be used to offset income earned by NFS. Such net operating loss carryforwards
are subject to limitation under Section 382 of the Internal Revenue Code of
1986 (the "Code"), as amended and expire in various amounts from the years 2002
to 2009. NFS has a deferred tax asset of approximately $1,000,000 which has
been fully reserved due to uncertainty about future operating results.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
A. LEASE
The Company leases office facilities for NFS, ARS and NFS Collection under
an operating lease expiring in August 1999. The annual minimum rentals under
noncancelable operating leases at December 31, 1996 were as follows:
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<PAGE> 81
<TABLE>
<CAPTION>
Year ending
December 31,
------------
<S> <C>
1997 $85,664
1998 85,664
1999 57,109
</TABLE>
The Company leases office space and services for Walnut Capital from an
affiliate at $4,550 per month as of December 31, 1996. The lease is renewable
annually at the discretion of the parties. The Company paid $56,544, $51,482,
and $49,020 for rent for the years ended December 31, 1996, 1995, and 1994,
respectively, and $8,505, $70,051, and $43,626 for services for the years ended
December 31, 1996, 1995 and 1994, respectively.
B. LITIGATION
NFS is the defendant in an action entitled Josephberg Grosz & Co., Inc. v.
NFS Services, Inc. which was filed on September 19, 1996 in the Supreme Court
of the New York, County of New York, Index No. 604744/96 (the "Action"). In
the Action, Josephberg Grosz & Co. ("JGC") asserts, among other things, that,
pursuant to the terms of a 1990 agreement between JGC and NFS Services (as
amended, the "JGC Agreement"), JGC was entitled to manage, and be compensated
in connection with the Business Combination and the Common Stock Private
Placement. In the Action, JGC claims potential damages of $600,000 to
$1,000,000.
On or about November 15, 1996, NFS filed a Memorandum in Support of NFS
Services' Motion to Dismiss (the "Motion to Dismiss"). Pursuant to the Motion
to Dismiss, NFS asserted, among other things, that JGC was not entitled to
manage, or receive compensation in connection with, either the Business
Combination or the Private Placement. In particular, in the Motion to Dismiss,
NFS asserted that NFS was not a party to either the Business Combination or the
Private Placement and that NFS did not, and could not, bind the Company as a
party to the Business Combination and the issuer pursuant to the Common Stock
Private Placement, to the terms of the JGC Agreement.
The Motion to Dismiss was denied on February 18, 1997, and NFS will be
required to file an answer to JGC's original complaint and substantive
discovery will commence. The Action is in the preliminary stages and the
outcome cannot be determined at this time.
In March 1994, a former employee commenced an action against NFS for
failure to pay bonuses (No. 94 CIV 1503, William D. Riley v. NFS Services,
Inc., United States District Court for the Southern District of New York) The
complaint sought damages in excess of $400,000 plus an additional 25% for wages
and legal fees. The claim was settled for a cash payment of $10,000 and the
issuance of 22,500 shares of the Company's Common Stock having a fair value of
$45,000 at the time of issuance in 1995.
In connection with the merger of Walnut Capital and FAO Corp. immediately
after the Business Combination, two former stockholders of Walnut Capital
commenced appraisal proceedings on June 30, 1995 to determine the fair value of
their Walnut Capital common stock pursuant to Section 262 of the Delaware
General Corporation Law. (Civil Action No. 14391, The Lee and Rose Warner
Foundation and Space Center, Inc. v. Walnut Capital, Court of Chancery of the
State of Delaware in and for New Castle
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<PAGE> 82
County.) The parties settled this matter. The Company issued 333,981 shares
of Common Stock in the aggregate to the plaintiffs in connection with such
settlement (the same number of shares of Common Stock the plaintiffs would have
received in connection with the Business Combination).
C. EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Burton W. Kanter
and Joel S. Kanter. In addition, Walnut Capital had entered into an employment
agreement with Michael Faber. Effective December 31, 1996, Michael A. Faber
resigned from Walnut Capital and Walnut Capital has no further contractual
obligations to him. Mr. Burton Kanter's employment agreement provides that he
is entitled to a minimum base salary of $100,000 per annum (which is paid in
part to Mr. Kanter individually and in part to his sole proprietorship doing
business as BK Consultants; see Footnote 10 - Related Party Transactions.) He
is also entitled to a bonus as determined by the Board of Directors from time
to time in its absolute and sole discretion. The agreement expires in February
1998, unless terminated at an earlier date pursuant to terms and conditions of
the agreement. Amounts due under Mr. Burton Kanter's employment agreement were
not currently paid in 1996 and are being accrued by the Company. The terms and
conditions of the employment agreement of Mr. Joel Kanter is generally
identical to that of Burton Kanter except that Joel Kanter is entitled to a
minimum base salary of $70,000 per annum; however, the Board of Directors
determined to increase such base salary to $200,000 for fiscal 1996 (see
Footnote 10 - Related Party Transactions). Joel Kanter's agreement also differs
in that Joel Kanter has agreed not to compete with the Company or NFS (but not
Walnut Capital) for a period of three years after his termination of employment
with Walnut Capital. In the event of termination of any of the agreements
without cause, Messrs. Kanter would be entitled to one year's salary.
Eugene N. Scalercio has entered into a noncompetition agreement with NFS,
which provide that Mr. Scalercio will not compete with the Company, or its
subsidiaries (other than Walnut Capital), for a period of three years after
termination of his employment with the Company. Neither the Company nor NFS
has entered into any employment agreement with Mr. Scalercio.
D. MAJOR CUSTOMERS.
Approximately 60% and 73% of the Company's revenues were derived from
three customers for the year ended December 31, 1996 and 1995, respectively.
Accounts receivable from such customers were approximately $131,000 and
$181,000 in the aggregate at December 31, 1996 and 1995, respectively.
10. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries retain a law firm at which an officer has
been of counsel since 1993. Expenses of $165,692 and $165,127 were incurred by
the Company for reimbursement of expenses and legal services for the years
ended December 31, 1996 and 1995, respectively.
The Company and its subsidiaries retained an additional law firm at which
another officer is of counsel. Expenses of $34,759, were incurred by the
Company for reimbursement of expenses and legal services incurred during the
year ended December 31, 1995. No such expenses were incurred in 1996.
At December 31, 1996 and 1995, approximately $128,000 and $116,000,
respectively, were due to the law firms and are included in accounts payable,
accrued expenses and other current liabilities in the accompanying financial
statements.
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<PAGE> 83
As described above at Footnote 9.c., the Company retains Mr. Burton W.
Kanter and his sole proprietorship doing business as BK Consultants to render
services regarding the Company's operations and investment matters. Salary to
Mr. Kanter and fee payments to such sole proprietorship of $15,000 and
$135,000, respectively, were paid for the years ended December 31, 1995 and
1994. There were no payments in 1996, but $100,000 in salary was accrued by
the Company for fiscal 1996.
Periodically an officer of Walnut Capital, or a designee of Walnut
Capital, serves in the capacity of director or observer to the board of
directors of investee companies.
Prior to March 1, 1995, Walnut Capital retained Mr. Joel S. Kanter on a
consulting basis to perform due diligence and monitor certain investment
matters. Fees paid to Mr. Kanter for professional services performed for the
period from January 1, 1995 through February 28, 1995 were $20,059. As of
March 1, 1995, Mr. Kanter became an officer of Walnut Capital and received
salary payments of $49,941 for the period March 1, 1995 through December 31,
1995. (See Footnote 9.c. - Employment Agreements.)
11. GUARANTY OF LOANS
The Company has guaranteed $318,000 of a secured loan obtained by an
investee company as of December 31, 1996.
12. CONCENTRATION OF CREDIT RISK
The Company has significant holdings of investments in the health care
industry. Total investments in debt and equity were approximately $21,700,000
as of December 31, 1996 (including unrealized appreciation of approximately
$14,931,000 as of December 31, 1996).
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company from time to time makes commitments to provide financing in
the form of loans, debt securities and equity investments. The Company's
maximum exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual notational amount of these instruments. As of
December 31, 1996, no commitments were outstanding.
The Company evaluates each portfolio investee's credit worthiness on a
case-by-case basis. Generally, collateral is not obtained by the Company upon
the extension of credit.
14. STOCKHOLDERS' EQUITY
a. Preferred Stock.
The Company is authorized to issue up to 1,000,000 of its preferred
stock in one or more series. As of December 31, 1996, no shares of
preferred stock were outstanding.
b. Common Stock Options and Warrants.
(1) In 1989, the Company adopted the NFS Services, Inc. 1989 Incentive
Stock Option Plan (as amended, the "1989 Plan"). The 1989 Plan is
administered by a stock incentive plan administrative committee appointed
by the Company's Board of Directors (the "1989 Plan Committee"). The 1989
Plan Committee has the authority, subject to approval by the Company's
Board of Directors and the
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<PAGE> 84
terms of the 1989 Plan, to select the persons to whom awards may be
granted, to determine the terms of each award, to interpret the provisions
of the 1989 Plan and to make all other determinations that it may deem
necessary or advisable for the administration of the 1989 Plan. The 1989
Plan provides for the grant of "incentive stock options," as defined under
Section 422(b) of the Internal Revenue Code ("incentive options"), and
options that do not so qualify ("nonstatutory options"), as determined in
each individual case by the 1989 Plan Committee. The Company's Board of
Directors has reserved 33,700 shares of Common Stock for issuance under
the 1989 Plan. Awards of stock options to purchase 33,700 shares of
Common Stock have been granted pursuant to the 1989 Plan to various
officers, employees and consultants of the Company, or its subsidiaries.
All of said options are fully vested and presently exercisable into shares
of Common Stock and expire on November 23, 1998. The exercise price of
the options granted pursuant to the 1989 Plan is $2.50 per share of Common
Stock. As a result of the Business Combination, no further awards will be
granted under the 1989 Plan.
(2) In 1994, the Company adopted the NFS Services, Inc. (Utah) 1994
Incentive Stock Option Plan (the "1994 Plan"). The 1994 Plan is
administered by a stock incentive plan administrative committee appointed
by the Company's Board of Directors (the "1994 Plan Committee"). The 1994
Plan Committee has the authority, subject to approval by the Company's
Board of Directors and the terms of the 1994 Plan, to select the persons
to whom awards may be granted, to determine the terms of each award, to
interpret the provisions of the 1994 Plan and to make all other
determinations that it may deem necessary or advisable for the
administration of the 1994 Plan. The 1994 Plan provides for the grant of
incentive stock options, nonstatutory options, and restricted stock and
stock appreciation rights ("SARs"), as determined in each individual case
by the 1994 Plan Committee. The Company's Board of Directors has reserved
500,000 shares of Common Stock for issuance under the 1994 Plan. The
Company has granted options under the 1994 Plan as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------- --------------------------
Number of Average Number of Average
Shares Exercise Shares Exercise
Price Price
<S> <C> <C> <C> <C>
Outstanding at January 1 119,500 $2.76
Granted 134,000 2.36 119,500 $ 2.76
-------- -------
Outstanding at December 31 253,500 2.55 119,500 2.76
======== =======
Exercisable 129,500 2.76 35,000 2.79
======== =======
</TABLE>
- ----------
(1) Option exercise prices range from $2.25 to $3.00.
(2) Option expiration dates range from March 1998 to January 2006.
(3) Issued in January 1997.
(3) In connection with the Business Combination, the Company assumed the
Walnut Capital Corporation 1987 Stock Option Plan (as amended, the "1987
Plan"). The 1987 Plan is administered by a stock option plan administrative
committee appointed by the Board of Directors (the "1987 Plan Committee"). The
1987 Plan Committee has the authority, subject to approval by the Company's
Board of Directors and the terms of the 1987 Plan, to select the persons to
whom awards may be granted, to determine the terms of each award, to interpret
the provisions of the 1987 Plan and to make all other
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<PAGE> 85
determinations that it may deem necessary or advisable for the administration
of the 1987 Plan. The 1987 Plan provides for the grant of incentive stock
options or nonstatutory options, as determined in each individual case by the
1987 Plan Committee. There are 806,930 shares of Common Stock reserved for
issuance under the 1987 Plan. Awards of incentive stock options to purchase up
to 149,958 shares of Common Stock, and awards of nonstatutory options to
purchase 656,972 shares of Common Stock, have been granted pursuant to the 1987
Plan to various officers, directors, employees, and consultants of Walnut
Capital. All of said options are subject to a variety of vesting requirements
and at December 31, 1996, 665,238 shares were exercisable. The exercise price
of the options granted pursuant to the 1987 Plan ranges from $.90 to $1.80 per
share of Common Stock. The average exercise price of options outstanding under
the 1987 Plan was $1.63. As a result of the Business Combination between the
Company and Walnut Capital, no further awards will be granted under the 1987
Plan. During the year ended December 31, 1996, no options to acquire Common
Stock were exercised.
(4) In addition to the options granted pursuant to the 1989 Plan, the 1994
Plan and the 1987 Plan, the Company has issued certain options and warrants to
purchase (i) 95,000 shares of Common Stock at $2.00 per share, which options
expire on July 14, 1998, (ii) 225,269 shares of Common Stock at $1.81 per share
which warrants expired on March 13, 1997, (iii) 452,533 shares of Common Stock
at $3.00 per share which options expire June 30, 1998, (iv) 100,000 shares of
Common Stock at $2.50 per share which options expire August 31, 2001, (v)
50,000 shares of Common Stock at $3.00 per share which options expire June 30,
2001, and (vi) 697,391 shares of Common Stock at $3.00 per share which warrants
expire June 17, 2001.
15. SEGMENT INFORMATION
The Company is engaged primarily in two segments: (1) investment
activities; and (2) providing consulting and asset recovery services through
NFS. The following table shows certain operating information for each segment
for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996
----
Consulting and
Corporate Investing Asset Recovery Total
---------- --------- -------------------- -------
<S> <C> <C> <C> <C>
Revenues $ 3,636 $ 79,115 $ 2,057,421 $ 2,140,172
Operating (loss) (877,235) (750,036) (1,011,644) (2,638,915)
Identifiable Assets 2,405,224 28,530,591 2,262,660 33,198,475
Depreciation -- 2,008 18,889 20,897
</TABLE>
<TABLE>
<CAPTION>
1995
----
Consulting and
Corporate Investing Asset Recovery Total
--------- --------- ------------------ --------
<S> <C> <C> <C> <C>
Revenues $ 7,845 $ 444,762 $2,081,440 $ 2,534,047
Operating (loss) (567,639) (261,800) (978,958) (1,808,397)
Identifiable Assets 4,132,014 28,526,894 3,404,596 36,063,504
Depreciation -- 1,910 22,146 24,056
</TABLE>
Prior to the acquisition of NFS in February 1995, the Company was in one
line of business and therefore no segment information is provided for those
years.
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<PAGE> 86
16. STOCK OPTIONS
The Company applies APB 25 in accounting for its stock option plans and,
accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the grant exercise price of the
option at the date of grant. The effect of applying SFAS No. 123 on 1995 and
1996 pro forma net loss as stated above is not necessarily representative of
the effects on reported net loss for future years due to, among other things,
(1) the vesting period of the stock options and (2) the fair value of
additional stock options in future years. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under the plans consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss in 1996 and 1995 would
have been approximately $3,226,041 and $2,105,544, or $(.23) per share and
$(.17) per share, respectively. The fair value of the options granted during
1996 and 1995 are estimated at $1.16 and $1.95, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 67% for 1996 and 62% for 1995,
risk-free interest rate of 5.9%-7.9% for 1996 and 5.3%-6.6% for 1995 and
expected life of 5 years.
17. LONG-TERM ASSETS
The Company is re-evaluating the asset recovery business at NFS. As a
result of the calculations required under FAS 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed of,"
NFS recorded an expense of $1,100,000 representing a write-down of its
goodwill. Management believes that the remaining NFS goodwill of approximately
$800,000 is consistent with the accounting requirements of FAS 121.
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<PAGE> 87
WALNUT FINANCIAL SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
Additions
- -----------------------------------------------------------------------------------------------------------------------------------
(1) (2)
Balance at -------------------------------------
Beginning of Charged to Costs Charged to Balance at
Description Period and Expenses Other Accounts Deductions End of Period
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31,1996:
Allowances for doubtful receivables $ 703,310 $ 421,337 $ 243,168 $ 1,367,815
===========
Year ended December 31, 1995:
Allowances for doubtful receivables $ 1,431,188 $ 462,689 235,163(c) $ 879,710(a) $ 703,310
=========== $ 546,020(b)
</TABLE>
- -----------------------
(a) Write offs.
(b) Conversion of debt securities to equity securities.
(c) Opening valuation balance of acquired company (see Note 1 to
consolidated financial statements).
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements included elsewhere in this
Report on Form 10-K.
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<PAGE> 88
WALNUT FINANCIAL SERVICES, INC.
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS ON DECEMBER 17, 1997
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Joel S. Kanter and Joshua S. Kanter, or either of
them, with full powers of substitution, as proxies of the undersigned, with the
authority to vote upon and act with respect to all shares of Walnut Financial
Services, Inc. (the "Company"), which the undersigned is entitled to vote, at
the Annual Meeting of Stockholders of the Company, to be held at The Tower
Club, 8000 Towers Crescent Drive, Vienna, Virginia 22182, commencing Wednesday,
December 17, 1997, at 10:00 a.m. and at any and all adjournments thereof, with
all the powers the undersigned would possess if then and there personally
present, and especially (but without limiting the general authorization and
power hereby given) with the authority to vote on the following.
<TABLE>
<S><C>
ITEM 1. ELECTION OF SEVEN DIRECTORS
/ / FOR NOMINEES (except as marked / / WITHHOLD AUTHORITY to vote for / / ABSTAIN
to the contrary on the line all nominees listed below
below)
Nominees (term, if elected, expires 1998): William F. Burge, III Gene E. Burleson Earl Chapman Burton W. Kanter
Joel S. Kanter Albert Morrison, Jr. Solomon A. Weisgal
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE OR
NOMINEES, WRITE HIS OR THEIR NAME OR NAMES IN THE SPACE BELOW:
--------------------------------------------------------
ITEM 2. RATIFICATION OF THE SELECTION OF RICHARD A. EISNER & COMPANY, LLP AS
THE COMPANY'S INDEPENDENT AUDITORS.
/ / FOR / / AGAINST / / ABSTAIN
ITEM 3. APPROVAL OF THE COMPANY'S AMENDED AND RESTATED 1994 INCENTIVE STOCK
OPTION PLAN.
/ / FOR / / AGAINST / / ABSTAIN
ITEM 4. APPROVAL OF THE COMPANY'S PRIVATE OFFERING TO ISSUE AND SELL UP TO
80 OF THE COMPANY'S UNITS AT $50,000 PER UNIT, WITH EACH UNIT
CONSISTING OF 50,000 SHARES OF COMMON STOCK AND CLASS A WARRANTS TO
PURCHASE AN ADDITIONAL 35,000 SHARES OF COMMON STOCK AT AN EXERCISE
PRICE OF $1.50 PER SHARE.
/ / FOR / / AGAINST / / ABSTAIN
ITEM 5. APPROVAL OF THE COMPANY'S ISSUANCE AND SALE OF 1,000,000 CLASS A
WARRANTS, HAVING AN EXERCISE PRICE OF $1.50 PER SHARE, FOR AGGREGATE
CONSIDERATION OF $100,000.
/ / FOR / / AGAINST / / ABSTAIN
ITEM 6. APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE FROM JUNE 17, 2001 TO
JUNE 30, 2005 OF CERTAIN CURRENTLY OUTSTANDING WARRANTS TO PURCHASE UP TO
697,391 SHARES OF COMMON STOCK, HAVING AN EXERCISE PRICE OF $3.00 PER
SHARE, AND THE RATIFICATION OF THE COMPANY'S ISSUANCE THEREOF.
/ / FOR / / AGAINST / / ABSTAIN
ITEM 7. APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE FROM JUNE 30, 1998 TO
JUNE 30, 2005 OF CERTAIN CURRENTLY OUTSTANDING WARRANTS TO PURCHASE UP TO
452,533 SHARES OF COMMON STOCK, HAVING AN EXERCISE PRICE OF $3.00 PER
SHARE, AND THE RATIFICATION OF THE COMPANY'S ISSUANCE THEREOF.
/ / FOR / / AGAINST / / ABSTAIN
</TABLE>
<PAGE> 89
ITEM 8. APPROVAL OF THE COMPANY'S EXCHANGE OFFER PURSUANT TO WHICH THE COMPANY
MAY ISSUE UP TO 287,481 SHARES OF COMMON STOCK IN EXCHANGE FOR CURRENTLY
OUTSTANDING WARRANTS TO PURCHASE UP TO 1,149,924 SHARES OF COMMON STOCK
HAVING AN EXERCISE PRICE OF $3.00 PER SHARE.
/ / FOR / / AGAINST / / ABSTAIN
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING OR AT ANY ADJOURNMENT
THEREOF.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to said stock and hereby ratifies and confirms
all that the proxies named herein and their substitutes, or any of them, may
lawfully do by virtue hereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED HEREIN. IF
THIS PROXY DOES NOT INDICATE A CONTRARY CHOICE, IT WILL BE VOTED FOR THE
NOMINEES FOR DIRECTOR AS LISTED IN ITEM 1, FOR THE RATIFICATION OF THE
SELECTION OF RICHARD A. EISNER & COMPANY, LLP AS THE COMPANY'S INDEPENDENT
AUDITORS AS LISTED IN ITEM 2, FOR THE APPROVAL OF THE AMENDED AND RESTATED 1994
INCENTIVE STOCK OPTION PLAN AS LISTED IN ITEM 3, FOR THE APPROVAL OF THE
PRIVATE OFFERING AS LISTED IN ITEM 4, FOR THE APPROVAL OF THE SALE OF WARRANTS
AS LISTED IN ITEM 5, FOR THE APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE,
AND RATIFICATION OF THE ISSUANCE, OF 697,391 WARRANTS AS LISTED IN ITEM 6, FOR
THE APPROVAL OF THE EXTENSION OF THE EXPIRATION DATE, AND RATIFICATION OF THE
ISSUANCE, OF 452,533 WARRANTS AS LISTED IN ITEM 7, FOR THE APPROVAL OF THE
EXCHANGE OFFER AS LISTED ON ITEM 8 AND THE ISSUANCE OF UP TO 287,481 SHARES IN
CONNECTION THEREWITH, AND IN THE DISCRETION OF THE PERSONS NAMED AS PROXIES
HEREIN WITH RESPECT TO ANY AND ALL OTHER MATTERS AS MAY PROPERLY COME BEFORE
THE ANNUAL MEETING OR AT ANY ADJOURNMENT THEREOF.
--------------------------------
Signature of Stockholder
Dated: , 1997
-------------------
NOTE: Please date proxy and sign it exactly as name or names appear above. All
joint owners of shares should sign. State full title when signing as executor,
administrator, trustee, guardian, et cetera. Please return signed proxy in the
enclosed envelope.
