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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
SCHEDULE 13E-4
------------------------
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
WALNUT FINANCIAL SERVICES, INC.
(NAME OF ISSUER)
WALNUT FINANCIAL SERVICES, INC.
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK PURCHASE WARRANTS WITH AN EXERCISE PRICE OF $3.00
(TITLE OF CLASS OF SECURITIES)
NOT APPLICABLE
(CUSIP NUMBER OF CLASS OF SECURITIES)
------------------------
JOEL S. KANTER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WALNUT FINANCIAL SERVICES, INC.
8000 TOWERS CRESCENT DRIVE, SUITE 1070
VIENNA, VIRGINIA 22182
703-448-3771
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICE AND COMMUNICATIONS ON BEHALF OF PERSON(S) FILING STATEMENT)
------------------------
NOVEMBER 10, 1997
(DATE TENDER OFFER FIRST PUBLISHED, SENT OR GIVEN TO SECURITY HOLDERS)
PAGE 1 OF 4 PAGES
EXHIBIT INDEX AT PAGE 3
CALCULATION OF FILING FEE
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Transaction Valuation: Amount of Filing Fee (1):
$417,710 $83.55
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1. In accordance with Rule 0-11(b)(2) and Rule 0-11(a)(4) under the
Securities Exchange Act of 1934, the filing fee was calculated based upon
the average of the high and low prices, which equals $1.453 per share of
Common Stock, as reported by The Nasdaq National Market on November 5,
1997, multiplied by 287,481, the maximum number of shares of Common Stock
sought to be exchanged pursuant to the exchange offer.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the
form or schedule and the date of its filing.
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This Issuer Tender Offer Statement on Schedule 13E-4 (this "Statement") is
being filed by Walnut Financial Services, Inc. (the "Company"), a Utah
corporation, and relates to the offer by the Company to holders of its
outstanding Common Stock Purchase Warrants having an exercise price of $3.00
(the "Warrants"), upon and subject to the terms and conditions set forth in the
Offering Circular, dated November 7, 1997 (the "Offering Circular"), which is
being filed as Exhibit (a)(i) hereto, of one newly issued share of the
Company's common stock, par value $.01 per share (the "Common Stock"), in
exchange for each 4 outstanding Warrants (the "Exchange Offer"). Capitalized
terms used but not otherwise defined herein have the meaning ascribed to such
terms in the Offering Circular.
ITEM 1. SECURITY AND ISSUER.
(a) The issuer of the securities to which this Statement relates is the
Company. The principal executive offices of the Company are located at 8000
Towers Crescent Drive, Suite 1070, Vienna, Virginia 22182.
(b) The information set forth under the heading "The Exchange Offer" in
the Offering Circular is specifically incorporated herein by reference.
(c) The Warrants are not listed on any exchange or quoted on any quotation
system. The $3.00 exercise price for the Warrants exceeds the market price of
the one share of Common Stock ($1.438 per share at November 5, 1997) into which
each of the Warrants is exercisable.
(d) This Statement is being filed by the Company.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) Consideration for the Warrants tendered in the Exchange Offer will be
authorized but unissued shares of Common Stock (which will be issued pursuant
to an exemption from registration under the Securities Act of 1933, as
amended), or working capital in the case of cash payments to be made in lieu of
fractional shares.
(b) No funds are expected to be borrowed for the purpose of the Exchange
Offer.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
(a)-(j) The information set forth under the heading "Background and
Purposes of the Exchange Offer; Certain Effects" in the Offering Circular is
specifically incorporated herein by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
During the 40 business days preceding the date of this Statement, neither
the Company, any director or executive officer of the Company, any person
controlling the Company nor any director or executive officer of any such
controlling person has engaged in any transaction whatsoever involving any
Warrants.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO THE ISSUER'S SECURITIES.
None.
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ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
No person has been employed, retained or is to be compensated by the
Company to make solicitations or recommendations in connection with the
Exchange Offer. Regular employees of the Company, who will not receive
additional compensation therefor, may provide information to holders of
Warrants concerning the Exchange Offer. Corporate Stock Transfer, Inc. will
act as Exchange Agent for the Exchange Offer, but has not been authorized to
make recommendations or solicitations.
ITEM 7. FINANCIAL INFORMATION.
(a)(l)-(4) The financial statements set forth in Exhibits A and B of the
Company's Confidential Private Placement Memorandum dated October 27, 1997
(the "PPM"), which document has been included as Exhibit A to the Offering
Circular, are specifically incorporated herein by reference.
(b)(1)-(3) The information set forth under the heading "Pro Forma
Unaudited Financial Information" in the Offering Circular is specifically
incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) The information set forth under the heading "Management--Executive
Compensation" in the PPM is specifically incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
(d) None.
(e) Reference is made to the Offering Circular, including the PPM, which
is specifically incorporated herein by reference.
ITEM 9. EXHIBITS.
(a)(i) Offering Circular dated November 7, 1997
(a)(ii) Form of Letter of Transmittal
(a)(iii) Form of Notice of Guaranteed Delivery
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
WALNUT FINANCIAL SERVICES, INC.
Dated: November 7, 1997 By: /s/ Joel S. Kanter
-------------------------------------
Joel S. Kanter
President and Chief Executive Officer
4
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Exhibit 99.1
OFFERING CIRCULAR
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OFFERING CIRCULAR
WALNUT FINANCIAL SERVICES, INC.
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK
FOR
EACH 4 OUTSTANDING COMMON STOCK PURCHASE WARRANTS
WITH AN EXERCISE PRICE OF $3.00 PER SHARE
-----------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M. EST ON DECEMBER 18, 1997, UNLESS EXTENDED.
THE EXCHANGE OFFER IS CONDITIONED ON, AMONG OTHER THINGS,
THE SHAREHOLDERS OF THE COMPANY
APPROVING THE EXCHANGE OFFER AND
A MINIMUM OF 527,083 WARRANTS BEING TENDERED PURSUANT
TO THIS EXCHANGE OFFER.
SEE "THE EXCHANGE OFFER--CONDITIONS
TO THE EXCHANGE OFFER."
-----------------------------------------
Walnut Financial Services, Inc., a Utah corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Offering Circular (the "Offering Circular") and in the accompanying Letter of
Transmittal, to exchange one share (the "Exchange Consideration") of Common
Stock, par value $.01 per share (the "Common Stock"), of the Company for each 4
outstanding Common Stock Purchase Warrants having an exercise price of $3.00
per share (the "Warrants") of the Company (the "Exchange Offer"). The value of
the Warrants exchanged for Common Stock issued in the Exchange Offer may be
below the current net asset value for such Common Stock; therefore, the Company
has submitted the Exchange Offer to its stockholders for their approval in
order to comply with the Investment Company Act of 1940, as amended (the "1940
Act").
The expiration date of the Exchange Offer is 5:00 p.m. EST on December 18,
1997 (the "Expiration Date), unless the Expiration Date is extended, in which
case the Expiration Date will be the latest date and time to which the
Expiration Date is extended.
The Common Stock is quoted on The Nasdaq National Market (the "Nasdaq
Stock Market"). On November 5, 1997, the closing price of the Common Stock
reported on The Nasdaq Stock Market was $1.438 per share. The Warrants are not
quoted on The Nasdaq Stock Market or any other exchange or quotation system.
No assurance can be given as to the prices at which the Common Stock might be
traded, or the trading volume of the Common Stock, following the consummation
of the Exchange Offer. See "Market and Trading Information."
For the year ended December 31, 1996, on a pro forma basis, assuming the
Exchange Offer had been consummated on January 1, 1996 and all Warrants had
been exchanged, earnings (loss) per share applicable to the Common Stock would
have increased from $(0.21) per share to $(0.20) per share. See "Pro Forma
Unaudited Financial Information."
As of the date of this Offering Circular, there are 1,149,924 Warrants
outstanding. No members of management currently hold any Warrants, except that
Joel S. Kanter, President and Chief Executive Officer of the Company, may be
deemed to beneficially own 452,533 Warrants (39.4% of the total number of
Warrants outstanding) owned by Windy City, Inc. ("WCI"), the President of which
company is Mr. Kanter. WCI has advised the Company that it intends to tender
all of its Warrants pursuant to the Exchange Offer. See "The Exchange Offer."
----------------------------
The date of this Offering Circular is November 7, 1997.
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Tendering Warrantholders will not be obligated to pay transfer taxes or
exchange commissions in connection with the Exchange Offer. Tenders are
irrevocable, except that Warrants tendered pursuant to the Exchange Offer may
be withdrawn prior to the Expiration Date and, if not theretofore accepted for
exchange, on or after January 12, 1998, pursuant to Rule 13e-4(f)(2)(ii)
promulgated under the Securities Exchange Act of 1934, as amended.
The Exchange Offer is being made by the Company in reliance on the
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), afforded by Section 3(a)(9) thereof. The
Company therefore will not pay any commission or other remuneration to any
broker, dealer, salesman or other person for soliciting tenders of the
Warrants. Regular employees of the Company, who will not receive additional
compensation therefor, may provide information to holders of the Warrants
concerning the Exchange Offer.
The Company has made no arrangements and has no understanding with any
independent dealer, salesman or other person regarding the solicitation of
tenders hereunder, and no person has been authorized by the Company to give any
information or to make any representation in connection with the Exchange Offer
other than those contained herein and, if given or made, such other information
or representations must not be relied upon as having been authorized. The
delivery of this Offering Circular shall not, under any circumstances, create
any implication that the information herein is correct as of any time
subsequent to the date hereof.
The Exchange Offer is not being made to, nor will the Company accept
tenders from, holders of the Warrants in any jurisdiction in which the Exchange
Offer or the acceptance thereof would not be in compliance with the securities
or blue sky laws of such jurisdiction.
THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE EXCHANGE OFFER. HOWEVER,
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO
WARRANTHOLDERS AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING THEIR
WARRANTS. EACH WARRANTHOLDER MUST MAKE THE DECISION WHETHER TO TENDER WARRANTS
AND, IF SO, HOW MANY WARRANTS.
IN EVALUATING THE EXCHANGE OFFER, WARRANTHOLDERS ARE STRONGLY URGED TO READ AND
CONSIDER CAREFULLY THE FACTORS AS DESCRIBED UNDER THE HEADING "RISK FACTORS" IN
THIS OFFERING CIRCULAR.
THE COMMON STOCK TO BE ISSUED IN THE EXCHANGE OFFER HAS NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMMON STOCK TO BE ISSUED IN THE EXCHANGE OFFER (THE "SECURITIES") HAS NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OR UNDER ANY STATE SECURITIES LAWS,
AND THE SECURITIES ARE BEING OFFERED HEREBY IN RELIANCE ON AN EXEMPTION FROM
REGISTRATION RELATING TO EXCHANGE OFFERS. THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES ARE
EXEMPT FROM REGISTRATION. THE SECURITIES WILL BE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE
THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR
AN INDEFINITE PERIOD OF TIME.
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OFFERING CIRCULAR
TABLE OF CONTENTS PAGE
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SUMMARY................................................................ 1
The Company........................................................ 1
Purposes and Effects of the Exchange Offer......................... 1
No Recommendation by Board of Directors............................ 2
Intention of Certain Related Parties............................... 2
Acceptance Not Mandatory........................................... 2
The Exchange Offer................................................. 2
RISK FACTORS........................................................... 5
BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER; CERTAIN EFFECTS......... 5
Purposes and Effects of the Exchange Offer......................... 5
No Recommendation by Board of Directors............................ 6
PRO FORMA UNAUDITED FINANCIAL INFORMATION.............................. 6
MARKET AND TRADING INFORMATION......................................... 7
THE EXCHANGE OFFER..................................................... 7
Description of the Warrants; Ratification of Initial Issuance...... 7
Effect of the Exchange Offer on the Warrantholders................. 8
Terms of the Exchange Offer........................................ 8
Expiration Date; Extensions; Amendments............................ 9
Procedure for Tendering Warrants................................... 10
Guaranteed Delivery Procedures..................................... 11
Assistance......................................................... 11
Acceptance of Warrants for Exchange.................................... 12
Withdrawal Rights.................................................. 12
Conditions to the Exchange Offer................................... 12
Fractional Shares.................................................. 14
Solicitation of Warrant Holders.................................... 14
Transfer Taxes..................................................... 14
Certain U.S. Federal Income Tax Considerations..................... 14
The Exchange Agent................................................. 15
DESCRIPTION OF SECURITIES.............................................. 16
EXPERTS................................................................ 16
AVAILABLE INFORMATION.................................................. 16
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LETTER OF TRANSMITTAL.................................................. 1
1. GUARANTEE OF SIGNATURES................................ 4
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES
FOR WARRANTS; GUARANTEED DELIVERY PROCEDURES........... 4
3. INADEQUATE SPACE....................................... 5
4. WITHDRAWALS OF TENDER.................................. 5
5. PARTIAL TENDERS........................................ 5
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL; INSTRUMENTS
OF TRANSFER AND ENDORSEMENTS........................... 6
7. TRANSFER TAXES......................................... 6
8. SPECIAL EXCHANGE INSTRUCTIONS AND SPECIAL DELIVERY
INSTRUCTIONS........................................... 6
9. IRREGULARITIES AND WAIVER OF CONDITIONS................ 6
10. MUTILATED, LOST, STOLEN OR DESTROYED WARRANTS.......... 7
11. TAXPAYER INFORMATION AND SUBSTITUTE W-9................ 7
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES........... 8
FORM OF NOTICE OF GUARANTEED DELIVERY.................................. 14
Exhibit A -- Confidential Private Placement Memorandum, dated
October 21, 1997 A-1
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SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, contained elsewhere in this Offering
Circular. Capitalized terms used and not defined in this summary shall have
the respective meanings ascribed to them elsewhere in this Offering Circular.
EACH WARRANTHOLDER IS URGED TO READ THIS OFFERING CIRCULAR IN ITS ENTIRETY.
THE COMPANY
Walnut Financial Services, Inc., a Utah corporation (the "Company"), is a
closed-end management investment company, which elected on October 15, 1997 to
be regulated as a business development company ("BDC") under the Investment
Company Act of 1940, as amended (the "1940 Act"). As such, the Company will be
generally required to invest at least 70% of its total assets in certain
prescribed "Eligible Assets," which generally include securities of
privately-held companies and cash items, government securities and high-quality
short-term debt. See "The Company--Government Regulation--BDC Regulation" and
"Risk Factors Restrictions on Future Acquisitions" in the PPM (as defined
below). Prior to such election, the Company may have been operating as an
unregistered investment company. See "Risk Factors--Failure to Comply with the
1940 Act" in the PPM. The Company currently has two primary business focuses:
(i) investing in start-up and early stage development companies and (ii)
operating an investment vehicle that specializes in bridge financing to small
to medium-sized companies. The Company's goal is to expand its business lines
in order to become a single source for the various financing needs of small and
medium-sized companies. The Company is actively pursuing the acquisition of
additional operating businesses in the financial services industry,
particularly in the accounts receivable factoring industry. See "The
Company--Recent Developments" in the PPM. Management anticipates that the
Company may seek to cease to be a BDC upon the acquisition of additional
operating businesses; however, the Company may not change the nature of its
business so as to cease to be a BDC unless such change is approved by the
Company's shareholders in accordance with the 1940 Act.
The principal executive offices of the Company are located at 8000 Towers
Crescent Drive, Vienna, Virginia 22182, telephone number (703) 448-3771.
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The purpose of the Exchange Offer is to eliminate or significantly reduce
the number of derivative securities of the Company outstanding. As a BDC, the
Company 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. As of November 5, 1997, the
Company had 14,659,172 shares of Common Stock outstanding and derivative
securities relating to 2,066,876 shares of Common Stock.
Concurrently with the Exchange Offer, the Company is engaging in a private
placement (the "Private Placement") of units (the "Units"), with each Unit
consisting of 50,000 shares of Common Stock and 35,000 Class A Redeemable
Common Stock purchase warrants (the "Class A Warrants"). In addition, subject
to shareholder approval, the Company intends to sell an additional 1,000,000
Class A warrants (the "Initial Class A Warrants") to certain purchasers. The
Private Placement is described in the Confidential Private Placement Memorandum
dated October 27, 1997 (the "PPM"), a copy of which is attached as Exhibit A to
this Offering Circular and made a part hereof. Consummation of the Exchange
Offer is one of the conditions to the completion of the Private Placement.
The Company proposes to offer and sell a minimum of 50 Units and a maximum
of 80 Units. The closing of the minimum Private Placement would result in the
issuance of 2,500,000 shares of Common Stock and
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1,750,000 Class A Warrants. As a result, at the minimum level the Company would
have a total number of 17,159,172 shares of Common Stock outstanding and
4,816,876 derivative securities (inclusive of the Initial Class A Warrants),
which amount would exceed the 25% Limitation by 527,083 derivative securities.
The Closing of the maximum Private Placement would result in the issuance of
4,000,000 shares of Common Stock and 2,800,000 Warrants. As a result, at the
maximum level the Company would have 18,659,172 shares of Common Stock
outstanding and 5,866,876 derivative securities, which amount would exceed the
25% Limitation by 1,202,083 derivative securities. Accordingly, it is
necessary that the Company reduce the number of derivative securities currently
outstanding through the Exchange Offer in order to be able to close the Private
Placement in compliance with the 25% Limitation. See "Background and Purposes
of the Exchange Offer; Certain Effects--Purposes and Effects of the Exchange
Offer."
NO RECOMMENDATION BY BOARD OF DIRECTORS
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any
recommendation to Warrantholders as to whether to tender or refrain from
tendering their Warrants. Each Warrantholder must make the decision whether to
tender Warrants and, if so, how many Warrants.
INTENTION OF CERTAIN RELATED PARTIES
Joel S. Kanter, President and Chief Executive Officer of the Company, is
the President of Windy City, Inc. ("Windy City"), which is owned by various
trusts for the benefit of members of the family of Burton W. Kanter, the
Company's Chairman of the Board. Windy City owns 452,533 Warrants (the "Windy
City Warrants") and has advised the Company that it intends to tender all of
its Warrants. No other director or officer of the Company owns any Warrants.
See "The Exchange Offer."
ACCEPTANCE NOT MANDATORY
Warrantholders are free to exchange or not exchange their Warrants for
shares of Common Stock in the Exchange Offer and may tender all or some of
their Warrants by properly completing and delivering the Letter of Transmittal,
together with their Warrants, to the Exchange Agent.
THE EXCHANGE OFFER
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The Exchange Offer................. One share of Common Stock in exchange for
each 4 Warrants tendered. The Common
Stock issued in the Exchange Offer will
not be registered under the Securities Act
and will not be subject to registration
rights. The value of the Warrants
exchanged for Common Stock issued in the
Exchange Offer may be below the current
net asset value for such Common Stock;
therefore, the Company has submitted the
Exchange Offer to its stockholders for
their approval in order to comply with
the 1940 Act.
Conditions to
Exchange Offer.................... The Exchange Offer is conditioned upon,
among other things, (i) the Company's
shareholders approving at the Annual
Meeting of Shareholders to be held on
December 18, 1997, and any adjournment
thereof (the "Annual Meeting"), (x) the
Exchange Offer and (y) an extension of the
expiration date of all Warrants to June
30, 2005, and (ii) a minimum of 527,083
Warrants outstanding (45.84%) being
tendered. See "The Exchange
Offer--Conditions to the Exchange" for a
statement of the other conditions to the
Company's obligation to accept Warrants
tendered pursuant to the Exchange Offer.
Fractional Shares.................. Tendering record holders of Warrants that
are accepted for exchange will not receive
fractional shares of Common Stock but
instead will
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receive a cash payment in lieu thereof
equal to the product of such fraction
multiplied by the closing bid price for
the Common Stock as reported on The Nasdaq
National Market on the date the Exchange
Agent receives the properly completed
Letter of Transmittal.
Expiration Date.................... The "Expiration Date" of the Exchange
Offer will be 5:00 p.m. EST on December
18, 1997, unless the Exchange Offer
is extended, in which case the term
"Expiration Date" shall mean 5:00 p.m. EST
on the last date to which the Exchange
Offer is extended. See "The Exchange
Offer--Expiration Date; Extensions;
Amendments."
How to Tender in the
Exchange Offer.................... A holder electing to tender Warrants in the
Exchange Offer should either (i) complete
and sign the Letter of Transmittal, have
the signatures thereon guaranteed, if
required by Instruction 2 thereof, and
mail or deliver the Letter of Transmittal
with the Warrants and any other required
documents to the Exchange Agent at the
address set forth on the back cover page
of this Offering Circular, or (ii) request
his broker, dealer, commercial bank, trust
company or other nominee to effect the
transaction for him. Holders will not be
obligated to pay any brokerage
commissions in connection with the
Exchange Offer.
Withdrawal Rights.................. Tendered Warrants may be withdrawn at any
time until the Expiration Date and, if
not theretofore accepted for exchange by
the Company, on or after January 12, 1998.
See "The Exchange Offer--Withdrawal
Rights."
Acceptance of Warrants and
Delivery of Common Stock.......... Subject to the satisfaction or waiver of
all conditions of the Exchange Offer, the
Company will accept for exchange all
Warrants validly tendered on or prior to
the Expiration Date. The Common Stock
will be delivered in exchange for the
Warrants accepted in the Exchange Offer
promptly after acceptance on the
Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Federal Income Tax
Considerations.................... For a discussion of certain Federal
income tax consequences of the Exchange
Offer to tendering holders and to the
Company, see "Certain Federal Income Tax
Considerations." However, Warrantholders
are urged to consult with their own tax
advisors as to the specific tax
consequences to them of the Exchange
Offer.
Common Stock....................... There are 50,000,000 shares of Common
Stock and 1,000,000 shares of Preferred
Stock authorized for issuance, of
which 14,659,172 shares of Common Stock
and no shares of Preferred Stock are
issued and outstanding. In addition,
options to acquire up to an additional
2,066,876 shares of Common Stock upon the
exercise of options and warrants (not
including the Warrants and the Warrants
which may be issued in the Private
Placement) are outstanding. The maximum
number of shares of Common Stock offered
for exchange by the Company in the
Exchange Offer, an aggregate of 287,481
shares,
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represents approximately 2.0% of
the current number of shares of Common
Stock. See "Description of Securities."
Market and
Trading Information............... The outstanding Common Stock are quoted
on The Nasdaq Stock Market. The Warrants
are not quoted on The Nasdaq National
Market or on any other exchange or
quotation system. The Common Stock
issuable in the Exchange Offer will be
quoted on The Nasdaq National Market,
subject to official notice of issuance,
under the symbol "WNUT". On November 5,
1997, the closing quotation reported on
The Nasdaq Stock Market for the Common
Stock was $1.438. NO ASSURANCE CAN BE
GIVEN CONCERNING THE PRICES AT WHICH THE
COMMON STOCK MIGHT BE TRADED OR THE
TRADING VOLUME OF THE COMMON STOCK
FOLLOWING THE CONSUMMATION OF THE EXCHANGE
OFFER.
Quotations on The Nasdaq National Market
reflect interdealer prices, without
retail mark-up, mark-down or commission,
and may not necessarily represent actual
transactions. WARRANTHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET INFORMATION WITH
RESPECT TO THE COMMON STOCK. See "Market
and Trading Information."
Exchange Agent..................... Corporate Stock Transfer, Inc. is the
exchange agent (the "Exchange Agent") for
the Exchange Offer.
Failure to Participate in
Exchange Offer.................... Holders of the Warrants who do not
exchange their Warrants for shares of
Common Stock in the Exchange Offer
will be entitled to receive shares of
Common Stock upon exercise of the
Company's Warrants upon the same terms and
conditions as are currently contained in
the Warrants, subject to the extension of
the expiration date of the Warrants to
June 30, 2005. See "The Exchange
Offer--Description of the Warrants" and
"--Effect of the Exchange Offer on the
Warrantholders."
Further Information................ Requests for additional copies of this
Offering Circular, the Letter of
Transmittal or any other documents
furnished herewith should be directed to
the Exchange Agent at its address and
telephone number set forth on the back
cover page of this Offering Circular. For
further information concerning the
Exchange Offer, contact the Exchange Agent
or Joel S. Kanter, President and Chief
Operating Officer, Walnut Financial
Services, Inc., 8000 Towers Crescent
Drive, Suite 1070, Vienna, Virginia 22182,
(703) 448-3771.
Use of Proceeds.................... There will be no cash proceeds to the
Company from the Exchange Offer.
Risk Factors....................... Investment in the securities of the
Company involves a high degree of risk,
including, but not limited to, risks
relating to the Company's
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failure to comply, and ongoing compliance,
with the 1940 Act, as well as risks
resulting from the Company's financial
condition, the financial condition of the
Company's portfolio companies, changes in
the Company's industry, numerous competing
entities in the Company's industry, and
the Company's growth strategy. See "Risk
Factors."
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION THAT
WARRANTHOLDERS TENDER OR REFRAIN FROM TENDERING THEIR WARRANTS, AND NO ONE HAS
BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION ON BEHALF OF THE COMPANY. THIS
IS A MATTER FOR EACH WARRANTHOLDER TO DETERMINE AFTER CONSULTATION WITH HIS
ADVISORS, INCLUDING TAX ADVISORS, ON THE BASIS OF HIS OWN FINANCIAL POSITION
AND REQUIREMENTS. SEE "THE EXCHANGE OFFER--CERTAIN U.S. FEDERAL INCOME TAX
CONSIDERATIONS."
RISK FACTORS
THERE ARE SUBSTANTIAL RISK FACTORS INVOLVING INVESTMENT IN THE COMMON
STOCK OFFERED HEREBY AND IN THE WARRANTS. CERTAIN OF THOSE RISK FACTORS ARE
SET FORTH IN THE PPM UNDER THE HEADING "RISK FACTORS," WHICH SECTION DOES NOT
PURPORT TO SET FORTH EVERY RISK FACTOR ASSOCIATED WITH SUCH INVESTMENT. EACH
WARRANTHOLDER SHOULD CAREFULLY CONSIDER SUCH RISKS INHERENT IN, AND AFFECTING
THE BUSINESS OF, THE COMPANY BEFORE MAKING A DECISION TO TENDER WARRANTS FOR
COMMON STOCK. WARRANTHOLDERS ARE ADVISED TO DISCUSS THE POTENTIAL BENEFITS AND
ASSOCIATED RISKS OF TENDERING WARRANTS WITH THEIR INVESTMENT, TAX AND LEGAL
ADVISORS.
THIS OFFERING CIRCULAR AND THE PPM CONTAIN CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995 WITH RESPECT TO THE RESULTS OF OPERATIONS AND BUSINESSES OF THE
COMPANY. THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED, PROJECTED, FORECAST, ESTIMATED OR BUDGETED IN SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING POSSIBILITIES:
(i) HEIGHTENED COMPETITION, INCLUDING SPECIFICALLY THE INTENSIFICATION OF PRICE
COMPETITION, THE ENTRY OF NEW COMPETITORS AND THE FORMATiON OF NEW FINANCIAL
SERVICES AND PRODUCTS BY EXISTING OR NEW FINANCIAL SERVICE PROVIDERS; (ii)
ADVERSE STATE AND FEDERAL LEGISLATION AND REGULATION; (iii) GENERAL MARKET
DECLINE OR OTHER EVENTS WHICH ADVERSELY AFFECT THE STOCK MARKET IN GENERAL OR
THE COMPANY'S PORTFOLIO COMPANIES IN PARTICULAR; (iv) INABILITY TO CONSUMMATE
STRATEGIC ACQUISITIONS AND/OR EXPANSION PLANS; (v) LOSS OF KEY EXECUTIVES; (vi)
CHANGES IN INTEREST RATES; (vii) GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH
ARE LESS FAVORABLE THAN EXPECTED; AND (viii) UNANTICIPATED CHANGES IN INDUSTRY
TRENDS.
BACKGROUND AND PURPOSES OF THE EXCHANGE OFFER; CERTAIN EFFECTS
PURPOSES AND EFFECTS OF THE EXCHANGE OFFER
The purpose of the Exchange Offer is to eliminate or significantly reduce
the number of derivative securities of the Company outstanding. The Warrants
are derivative securities, and those tendered in the Exchange Offer will be
retired by the Company. As a BDC, the Company 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 an
amount that would exceed the 25% Limitation. Under certain circumstances,
which are not currently present, a BDC may be prohibited from having
outstanding derivative securities convertible or exchangeable into a number of
shares of capital stock in excess of 20% of the number of then outstanding
shares of capital stock. See "Term of the Offering--Closing Conditions" in the
PPM. As of November 5, 1997, the Company had 14,659,172 shares of Common Stock
outstanding and derivative securities relating to 2,066,876 shares of Common
Stock.
5
<PAGE> 11
Concurrently with the Exchange Offer, the Company is engaged in the
Private Placement of Units with each Unit consisting of 50,000 shares of Common
Stock and 35,000 Class A Warrants. Consummation of the Exchange Offer is one
of the conditions to the completion of the Private Placement. The Private
Placement is described in the PPM, which is attached hereto as Exhibit A and
made a part hereof. The Company proposes to offer and sell a minimum of 50
Units and a maximum of 80 Units. The closing of the minimum Private Placement
would result in the issuance of 2,500,000 shares of Common Stock and 1,750,000
Class A Warrants. As a result, at the minimum level the Company would have a
total number of 17,159,172 shares of Common Stock outstanding and 4,816,876
derivative securities, which amount would exceed the 25% Limitation by 527,083.
The Closing of the maximum Private Placement will result in the issuance of
4,000,000 shares of Common Stock and 2,800,000 Warrants. As a result, at the
maximum level the Company would have 18,659,172 shares of Common Stock
outstanding and 5,866,876 derivative securities, which amount would exceed the
25% Limitation by 1,202,083 shares. Accordingly, it is necessary that the
Company reduce the number of derivative securities currently outstanding in
order to be able to close the Private Placement in compliance with the 25%
Limitation.
The Company may, in the future, purchase Warrants in private transactions,
through tender offers or otherwise. However, Rule 13e-4 under the Exchange Act
prohibits the Company from making any purchases of shares of Common Stock or
Warrants until 10 business days after the Expiration Date, other than pursuant
to the Exchange Offer. Any purchases the Company may choose to make may be on
the same terms as, or on terms more or less favorable to holders than, the
terms of the Exchange Offer. Any possible future purchases by the Company will
depend on numerous factors, including the market price of the Warrants, the
results of the Exchange Offer, the Company's business and financial condition
and general economic and market conditions.
SHARES OF COMMON STOCK ISSUED IN EXCHANGE FOR WARRANTS IN THE EXCHANGE
OFFER WILL BE DEEMED RESTRICTED STOCK UNDER THE SECURITIES ACT AND CANNOT BE
RESOLD UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITY ACT IS AVAILABLE. SHARES OF COMMON STOCK
ISSUED IN EXCHANGE FOR WARRANTS IN THE EXCHANGE OFFER WILL NOT BE SUBJECT TO
ANY REGISTRATION RIGHTS.
NO RECOMMENDATION BY BOARD OF DIRECTORS
The Board of Directors of the Company has approved the Exchange Offer.
However, neither the Company nor its Board of Directors makes any
recommendation to Warrantholders as to whether to tender or refrain from
tendering their Warrants. Each Warrantholder must make the decision whether to
tender Warrants and, if so, how many Warrants.
PRO FORMA UNAUDITED FINANCIAL INFORMATION
6
<PAGE> 12
The Pro Forma Unaudited Earnings Per Share and Book Value Per Share set
forth below for the year ended December 31, 1996 and the six months ended June
30, 1997 and 1996 are based on the historical financial statements of the
Company and have been prepared to give effect to the Exchange Offer as if it
had been consummated on January 1, 1996 with respect to the fiscal year
comparison and with respect to the nine month comparison. The information
provided that gives effect to the Exchange Offer assumes that holders of
Warrants elect to exchange into Common Stock the minimum number of Warrants
required hereunder, on the one hand, and all Warrants, on the other hand. The
Company's full audited financial statements are included in the PPM, attached
as Exhibit A to, and made a part of, this Offering Circular.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997
----------------------------------- ------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
<S> <C> <C> <C> <C>
Earnings (Loss) Per Share...... (0.21) (0.04)
Assuming Minimum Tender
(131,770 shares) (1)....... (0.21) (0.03)
Assuming Maximum Tender
(287,481 shares) (2)....... (0.20) (0.03)
Book Value Per Share........... 0.98 0.95
Assuming Minimum Tender
(131,770 shares) (1)....... 0.98 0.94
Assuming Maximum Tender
(287,481 shares) (2)....... 0.97 0.93
</TABLE>
- ---------------------
(1) Assumes that holders of 527,083 (45.84%) of the Warrants outstanding
elect to exchange their Warrants for Common Stock.
(2) Assumes that holders of 1,149,924 (100%) of the Warrants outstanding
elect to exchange their Warrants for Common Stock.
MARKET AND TRADING INFORMATION
As of the date hereof, there are 1,149,924 Warrants outstanding, all with
an exercise price of $3.00. The Warrants are not quoted on The Nasdaq Stock
Market or any exchange or other quotation system. All Warrants are currently
"out of the money," based on the closing stock price as of November 5, 1997 of
$1.438 per share. Information concerning the number of outstanding shares of
Common Stock, the market on which Common Stock trades and quarterly price
information is set forth in the PPM under the heading "Description of
Securities--Market Price of Common Stock."
THE EXCHANGE OFFER
DESCRIPTION OF THE WARRANTS; RATIFICATION OF ISSUANCE
There are 1,149,924 currently outstanding Warrants, all of which are
subject to the Exchange Offer. The Warrants were issued in two phases, and
have substantially similar terms, except for different expiration dates. All
Warrants give the holder the right to purchase one share of Common Stock,
subject to certain anti-dilution adjustments, for $3.00 per share. The Windy
City Warrants expire June 30, 1998, with the remaining 697,391 Warrants (the
"Universal Warrants") expiring June 17, 2001. It is a condition to this
Exchange Offer that the shareholders of the Company approve at the Annual
Meeting an extension of the expiration date of the Warrants
7
<PAGE> 13
to June 30, 2005 (the "Extension Condition"). There can be no assurance,
however, that the Extension Condition will be met. Nevertheless, Warrantholders
should act as though the Extension Condition will be satisfied when considering
whether to tender Warrants because the Company is not permitted to waive the
Extension Condition. See "--Conditions to the Exchange Offer."
The Universal Warrants were issued pursuant to and are governed by that
certain Warrant Agreement (Universal) dated as of June 17, 1996 (the "Universal
Agreement"). The Universal Agreement provides that, from and after June 17,
1997, the Universal Warrants may be redeemed, at the option of the Company, at
a price of $0.10 per Warrant; provided, however, that redemptions shall not be
permitted unless (i) the closing bid price for shares of Common Stock for 20 of
the 30 trading days prior to the date of the redemption notice exceeds
$4.50 per share and (ii) the Common Stock which would be issued upon the
exercise of a Warrant shall be registered under the Securities Act. This last
requirement is important because the Warrantholder shall have the right to
exercise his Warrants until 5:00 p.m. on the date preceding the redemption
date. The redemption date must be at least 30 days following the date of the
redemption notice.
The Windy City Warrants were issued pursuant to a subscription agreement,
which provides for a $3.00 exercise price and an expiration date of June 30,
1998.
The Windy City Warrants are owned by Windy City, the president of which is
Joel S. Kanter, the president and chief executive officer of the Company.
Windy City has advised the Company that it intends to tender all of the Windy
City Warrants pursuant to the Exchange Offer.
At the Annual Meeting, the Company is seeking approval of the extension
and ratification by the Company's shareholders of the issuance of the Warrants
because the presence of such outstanding Warrants may otherwise be in violation
of the 1940 Act. The purpose of the ratification by shareholders is to comply
with the capital structure provisions of the 1940 Act applicable to a BDC,
which require shareholder approval in certain circumstances. If such approval
is not obtained, the Warrants will nonetheless remain outstanding and would be
in violation of the 1940 Act.
EFFECT OF THE EXCHANGE OFFER ON THE WARRANTHOLDERS
Upon acceptance of the tendered Warrants by the Company, the
Warrantholders will receive one share of Common Stock for each 4 Warrants
tendered. Warrantholders who do not participate in the Exchange Offer will
retain the right to purchase 1 share of Common Stock at an exercise price of
$3.00 per Warrant, which price will remain subject to the adjustment
provisions, if any, of the governing warrant agreement. The expiration date of
Warrants that are not tendered into the Exchange Offer will be extended to June
30, 2005, assuming the Extension Condition is met.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions
set forth in this Offering Circular and in the accompanying Letter of
Transmittal (the "Letter of Transmittal"), to exchange one share of Common
Stock for each 4 Warrants tendered.
The Company will accept any Warrants validly tendered and not withdrawn
prior to 5:00 p.m. EST on the Expiration Date. Warrants that are not accepted
for exchange will be returned as promptly as practicable after the Expiration
Date. Warrantholders may tender all or a portion of their Warrants pursuant to
the Exchange Offer.
If the Company should increase or decrease the number of shares of Common
Stock offered in exchange for the Warrants in the Exchange Offer, such changed
consideration would be paid with regard to all Warrants accepted in the
Exchange Offer. If the consideration is so changed, the Exchange Offer will
remain open at least
8
<PAGE> 14
ten business days from the date the Company first gives notice, by public
announcement or otherwise, of such increase or decrease.
As of November 5, 1997, 1,149,924 Warrants were outstanding and there were
approximately 50 registered Warrantholders. Only holders or owners of Warrants
(or such Warrantholder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining Warrantholders entitled to participate in the Exchange Offer. The
Company believes that, as of the date of this Offering Circular, none of such
holders is an affiliate (as defined in Rule 405 under the Securities Act) of
the Company, except that Windy City owns 452,533 Warrants and has advised the
Company that it intends to tender all of its Warrants pursuant to the Exchange
Offer.
Warrantholders do not have any appraisal or dissenters' rights under the
Revised Business Corporation Act of the State of Utah or otherwise in
connection with the Exchange Offer. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act and the rules and regulations of the SEC thereunder.
The Company shall be deemed to have accepted validly tendered Warrants
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for tendering
Warrantholders for the purposes of receiving the Common Stock from the Company.
If any tendered Warrants are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Warrants will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Tendering Warrantholders will not be required to pay brokerage commissions
or fees with respect to the exchange of Warrants for Common Stock pursuant to
the Exchange Offer. The Company will pay all charges and expenses in
connection with the Exchange Offer. The Company will also pay all transfer
taxes, if any, applicable to the transfer and exchange of Warrants pursuant to
the Exchange Offer. If, however, Warrants not exchanged are to be delivered
to, or are to be issued in the name of, any person other than the registered
Warrantholder, or if tendered Warrants are recorded in the name of any person
other than the person signing the Letter of Transmittal, then the amount of
such transfer taxes (whether imposed on the registered Warrantholder or any
other person) will be payable by the tendering Warrantholder. See "--Transfer
Taxes."
Although the Company has no plan or intention to do so, it reserves the
right in its sole discretion to purchase or make offers for any Warrants that
remain outstanding after the consummation of the Exchange Offer. The terms of
any such purchases or offers could differ from the terms of the Exchange Offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m. EST on December 18, 1997,
unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a
public announcement thereof, each prior to 9:00 a.m. EST on the next business
day after the previously scheduled Expiration Date.
The Company reserves the right in its sole discretion, (i) to delay
accepting any Warrants, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent, or (iv)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, termination or amendment will be followed as promptly as
practicable by a public
9
<PAGE> 15
announcement thereof. If the Exchange Offer is amended in a manner determined
by the Company to constitute a material change, the Company will promptly
disclose such amendments by means of a supplement to this Offering Circular that
will be distributed to the registered Warrantholders, and the Company will
extend the Exchange Offer for a period of five to ten business days, depending
upon the significance of the amendment and the manner of disclosure to the
registered Warrantholders, if the Exchange Offer would otherwise expire during
such five to ten business day period. If the Company amends the terms of the
Exchange Offer to improve the consideration for the Warrants, the Company will
give such improved consideration to all tendering Warrantholders, including
Warrantholders who have previously tendered Warrants.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, termination or amendment of the Exchange
Offer, the Company shall not have an obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely public disclosure.
PROCEDURE FOR TENDERING WARRANTS
The tender by a Warrantholder as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the
tendering Warrantholder and the Company upon the terms and subject to the
conditions set forth in this Offering Circular and in the accompanying Letter
of Transmittal. Except as set forth below, a Warrantholder who wishes to
tender Warrants for exchange pursuant to the Exchange Offer must transmit such
Warrants, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth herein on or prior
to 5:00 p.m. EST on the Expiration Date.
THE METHOD OF DELIVERY OF WARRANTS, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE WARRANTHOLDER. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
A signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, need not be guaranteed if the Warrants surrendered for exchange
pursuant thereto (i) are tendered by a registered Warrantholder of the Warrants
who has not completed either the box entitled "Special Exchange Instructions"
or the box entitled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) are tendered by an Eligible Institution (as defined below).
In the event that a signature on a Letter of Transmittal or a notice of
withdrawal, as the case may be, is required to be guaranteed, such guarantee
must be by a firm which is a member of a registered national securities
exchange or a member of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States or is otherwise an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible
Institutions"). If Warrants are registered in the name of a person other than
a signer of the Letter of Transmittal, the Warrants surrendered for exchange
must either (i) be endorsed by the registered holder, with the signature
thereon guaranteed by an Eligible Institution or (ii) be accompanied by a stock
power, in satisfactory form as determined by the Company in its sole
discretion, duly executed by the registered Warrantholder, with the signature
thereon guaranteed by an Eligible Institution. The term "registered
Warrantholders" as used herein with respect to the Warrants means any person in
whose name the Warrants are registered on the books of the registrar for the
Warrants.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Warrants tendered for exchange will be
determined by the Company in its sole, reasonable discretion, which
determination shall be final and binding. The Company reserves the absolute
right to reject any and all tenders of any particular Warrants not properly
tendered or to reject any particular Warrants which acceptance might, in the
judgment of the Company or its counsel, be unlawful. The Company also reserves
the absolute right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Warrants either before or after the
10
<PAGE> 16
Expiration Date. The interpretation of the terms and conditions of the
Exchange Offer (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Warrants
for exchange must be cured within such reasonable period of time as the Company
shall determine. The Company will use reasonable efforts to give notification
of defects or irregularities with respect to tenders of Warrants for exchange
but shall not incur any liability for failure to give such notification.
Tenders of the Warrants will not be deemed to have been made until such
irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, stock power, power of attorney
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and, unless waived by the Company,
proper evidence satisfactory to the Company of such person's authority to so
act must be submitted.
Any beneficial owner whose Warrants are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender Warrants in the Exchange Offer should contact such registered
Warrantholder promptly and instruct such registered Warrantholder to tender on
such beneficial owner's behalf. If such beneficial owner wishes to tender
directly, such beneficial owner must, prior to completing and executing the
Letter of Transmittal and tendering Warrants, make appropriate arrangements to
register ownership of the Warrants in such beneficial owner's name. Beneficial
owners should be aware that the transfer of registered ownership may take
considerable time.
GUARANTEED DELIVERY PROCEDURES
Warrantholders who wish to tender their Warrants but whose Warrants are
not immediately available or who cannot deliver their Warrants and Letter of
Transmittal or any other documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date must tender their Warrants
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution and a Notice of Guaranteed Delivery (as defined
in the Letter of Transmittal) must be signed by such Warrantholder, (ii) prior
to the Expiration Date, the Exchange Agent must have received from the
Warrantholder and the Eligible Institution a properly completed and duly
executed Letter of Transmittal and a Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the Warrantholder, the certificate number or numbers of the tendered
Warrants, stating that the tender is being made thereby and guaranteeing that,
within three business days after the date of delivery of the Notice of
Guaranteed Delivery, the tendered Warrants and any other required documents
will be deposited by the Eligible Institution with the Exchange Agent, and
(iii) such properly completed and executed documents required by the Letter of
Transmittal and the tendered Warrants in proper form for transfer must be
received by the Exchange Agent within three business days after the Expiration
Date. Any Warrantholder who wishes to tender Warrants pursuant to the
guaranteed delivery procedures described above must ensure that the Exchange
Agent receives the Notice of Guaranteed Delivery and Letter of Transmittal
relating to such Warrants prior to 5:00 p.m. EST on the Expiration Date.
Failure to complete the guaranteed delivery outlined above will not, of itself,
affect the validity or effect a revocation of any Letter of Transmittal
properly completed if executed by a holder who attempted to use the guaranteed
delivery process.
ASSISTANCE
All tendered Warrants, executed Letters of Transmittal and other related
documents should be directed to the Exchange Agent. Questions and requests for
assistance and requests for additional copies of this Offering Circular, the
Letter of Transmittal and other related documents should be addressed to the
Exchange Agent as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Facsimile: (303) 592-8821
</TABLE>
11
<PAGE> 17
<TABLE>
<S> <C>
CORPORATE STOCK TRANSFER, INC. Confirmed by Telephone: (303) 595-3300
370 17th Street (Originals of all documents submitted by facsimile should be
Suite 2350 sent promptly by hand, overnight courier, or registered or
Denver, Colorado 80202 certified mail.)
Attention: Carylyn Bell
</TABLE>
ACCEPTANCE OF WARRANTS FOR EXCHANGE
Upon satisfaction or waiver of all conditions to the Exchange Offer and
following the Expiration Date, the Company will promptly accept all Warrants
properly tendered, and will immediately thereafter issue the appropriate number
of corresponding shares of Common Stock to eligible Warrantholders. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
Warrants that are tendered for exchange when, and if, the Company has given
oral or written notice thereof to the Exchange Agent.
In all cases, issuances of Common Stock for Warrants that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Warrants, a properly completed and duly executed
Letter of Transmittal, and all other required documents; provided, however,
that the Company reserves the absolute right to waive any defects or
irregularities in the tender or conditions of the Exchange Offer. If any
tendered Warrants are not accepted for any reason set forth in the terms and
conditions of the Exchange Offer or if Warrant certificates are submitted for a
greater number than the holder desires to exchange, such unaccepted or
nonexchanged Warrants or substitute Warrants evidencing the unaccepted portion,
as appropriate, will be returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Warrants may be withdrawn at any time prior to 5:00 p.m.
EST on the Expiration Date and, if not theretofore accepted for exchange by the
Company, on or after January 12, 1998.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth herein. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Warrants to be withdrawn ("Depositor"), (ii) identify the Warrants to be
withdrawn (including the Warrant certificate number or numbers and number of
Warrants), and (iii) be signed in the same manner required for the Letter of
Transmittal by which such Warrants were tendered. All questions as to the
validity, form, and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. The Warrants so withdrawn, if any, will be deemed not
to have been validly tendered for exchange for purposes of the Exchange Offer.
Any Warrants which have been tendered for exchange but which are withdrawn will
be returned to the Warrantholder without cost to such Warrantholder as soon as
practicable after withdrawal. Warrants properly withdrawn may be re-tendered
by following the procedures described under "--Procedure for Tendering
Warrants" at any time on or prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue the Common Stock in
exchange for, any Warrants and may terminate or amend the Exchange Offer if,
any time before the Expiration Date, any of the following events shall occur,
which occurrence, in the sole judgment of the Company and regardless of the
circumstances (including any action by the Company) giving rise to any such
events, makes it inadvisable to proceed with the Exchange Offer:
(i) there shall be threatened, instituted, or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other
12
<PAGE> 18
governmental regulatory or administrative agency or commission (a)
seeking to restrain or prohibit the making or consummation of the Exchange
Offer or any other transaction contemplated by the Exchange Offer, or
assessing or seeking any damages as a result thereof, or (b) resulting in
a material delay in the ability of the Company to accept for exchange some
or all of the Warrants pursuant to the Exchange Offer, or any statute,
rule, regulation, order or injunction shall be sought, proposed,
introduced, enacted, promulgated or deemed applicable to the Exchange
Offer or any of the transactions contemplated by the Exchange Offer by any
domestic or foreign government or governmental authority that, in the
reasonable judgment of the Company, might directly or indirectly result in
any of the consequences referred to in clauses (a) or (b) above, or would
otherwise in the reasonable judgment of the Company make it inadvisable to
proceed with the Exchange Offer;
(ii) there shall have occurred (a) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the
United States or any limitation by any governmental agency or authority
which adversely affects the extension of credit or (b) a commencement of
war, armed hostilities or other similar international calamity directly
or indirectly involving the United States, or, in the case of any of the
foregoing existing at the time of the commencement of the Exchange Offer,
a material acceleration or worsening thereof;
(iii) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operation,
prospects, plans, strategies, development projects or existing or
contemplated financing arrangements of the Company that, in the
reasonable judgment of the Company, is or may be adverse to the Company,
or the Company shall have become aware of facts that, in the sole
judgment of the Company, have or may have adverse significance with
respect to the value of the Warrants or the Common Stock;
(iv) any governmental approval has not been obtained, which approval
the Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby;
(v) the shareholders of the Company shall not have approved the
extension of the expiration date for all Warrants to June 30, 2005 at the
Annual Meeting;
(vi) the shareholders of the Company shall not have approved the
Exchange Offer at the Annual Meeting; or
(vii) less than 527,083 (45.84%) of the Warrants outstanding have
been properly tendered pursuant to the Exchange Offer.
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Warrants
and return all tendered Warrants to the tendering holders, (ii) extend the
Exchange Offer and retain all Warrants tendered prior to the Expiration Date,
subject, however, to the rights of holders to withdraw such Warrants (see
"--Withdrawal Rights"), or (iii) except for the condition set forth in clause
(v) above, waive such unsatisfied conditions with respect to the Exchange Offer
and accept all validly tendered Warrants which have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a supplement to this Offering
Circular that will be distributed to the registered Warrantholders, and the
Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered Warrantholders, if the Exchange Offer would
otherwise expire during such five to ten business day period.
The Company expects that the foregoing conditions will be satisfied. The
foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its
13
<PAGE> 19
reasonable discretion. The failure by the Company at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time. Any determination by the Company concerning the events
described above will be final and binding upon all parties.
FRACTIONAL SHARES
No fractional shares of Common Stock will be issued as a result of the
Exchange Offer. Each holder of a fractional interest in shares of the
Company's Common Stock will be entitled to receive a cash payment in lieu of
such fractional amount based on the current market price of a share of Common
Stock. The current market price will be determined as follows: (i) if the
shares of the Company's Common Stock are listed on a national securities
exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the Nasdaq Stock Market, the current market price shall be the
last reported sale price of the shares of the Company's Common Stock on the
last business day prior to the date of exchange or, if no such sale is made on
such day, the average of the closing bid and asked prices for such day; or (ii)
if the shares of Common Stock are not so listed or admitted to trading and bid
and asked prices are not so reported, the current market price or current value
shall be an amount determined in a reasonable manner by the Board of Directors
of the Company.
As soon as practicable after the determination of the amount of cash, if
any, to be paid to the holder of shares of Common Stock with respect to any
fractional share interests, the Exchange Agent shall distribute in cash the
amount payable to such fractional holder.
SOLICITATION OF WARRANT HOLDERS
The Company will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokers, dealers and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Offering Circular and related
documents to the beneficial owners of the Warrants, and in handling or
forwarding tenders for their customers.
The cash expenses to be incurred by the Company in connection with the
Exchange Offer are estimated to be approximately $75,000, which include
registration fees, listing fees, fees to the Exchange Agent and warrant agent,
accounting, legal and printing fees, and associated expenses.
TRANSFER TAXES
The Company will pay all transfer taxes, if any, applicable to the
exchange of Warrants pursuant to the Exchange Offer. If, however, tendered
Warrants are registered in the name of any person other than the person signing
the Letter of Transmittal or if a transfer tax is imposed for any reason other
than the exchange of Warrants pursuant to the Exchange Offer, the amount of any
such transfer tax (whether imposed on the registered Warrant holder or any
other person) will be payable by the tendering holder. If satisfactory
evidence of payment of such transfer tax or exemption therefrom is not
submitted, the amount of such transfer tax will be billed directly to such
tendering holder.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
THE FOLLOWING DISCUSSION IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER AND DOES
NOT CONSIDER ALL POTENTIAL TAX EFFECTS OF THE EXCHANGE OFFER OR THE TAX
CONSEQUENCES TO A PARTICULAR WARRANTHOLDER IN LIGHT OF SUCH WARRANTHOLDER'S
PERSONAL CIRCUMSTANCES. THIS DISCUSSION ALSO DOES NOT ADDRESS THE U.S. FEDERAL
14
<PAGE> 20
INCOME TAX CONSEQUENCES TO WARRANTHOLDERS (AND UNDERLYING COMMON STOCK) NOT
HELD AS CAPITAL ASSETS OR TO WARRANTHOLDERS SUBJECT TO SPECIAL TREATMENT, SUCH
AS NON-U.S. PERSONS, DEALERS IN SECURITIES, BANKS, INSURANCE COMPANIES,
TAX-EXEMPT ORGANIZATIONS, WARRANTHOLDERS OWNING AT LEAST 10% OF THE VOTING
POWER OF THE COMPANY AND WARRANTHOLDERS WHO ACQUIRED THEIR INTERESTS PURSUANT
TO THE EXERCISE OF OPTIONS OR SIMILAR DERIVATIVE SECURITIES OR OTHERWISE AS
COMPENSATION, NOR PROVIDE AN ANALYSIS OF ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCALITY, OR FOREIGN JURISDICTION. THIS DISCUSSION IS BASED
ON CURRENT PROVISIONS OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), CURRENT AND PROPOSED TREASURY REGULATIONS PROMULGATED THEREUNDER, AND
ADMINISTRATIVE AND JUDICIAL DECISIONS AS OF THE DATE HEREOF, ALL OF WHICH ARE
SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. ACCORDINGLY,
WARRANTHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE U.S.
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE
EXCHANGE OFFER TO THEM.
The exchange of Warrants for shares of Common Stock will result in the
following federal income tax consequences to participating Warrantholders:
1. A participating Warrantholder will recognize gain or loss equal
to the excess of (a) the sum of the fair market value of the shares of
Common Stock received in the Exchange Offer and any cash received in lieu
of a fractional share of Common Stock over (b) the participating
Warrantholder's tax basis in the Warrants exchanged therefor;
2. Such gain or loss will be capital gain or loss and will generally
be a long term capital gain or loss if the Warrantholder has held the
Warrant for more than one year at the time of exchange. Pursuant to
recently enacted legislation, with respect to any capital asset sold or
exchanged after July 29, 1997 and which has been held for more than
eighteen months, capital gains will be subject to tax at a rate of twenty
percent. With respect to any capital asset sold or exchanged after that
date which has been held for more than twelve months but less than
eighteen months, capital gains will remain subject to tax at a rate of
twenty-eight percent;
3. The tax basis of the shares of Common Stock received in the
Exchange Offer will be equal to the fair market value of such shares of
Common Stock received in the Exchange Offer; and
4. The holding period for the shares of Common Stock received in the
Exchange Offer will commence on the day following the consummation of the
Exchange Offer.
Foreign Warrantholders will not be subject to tax as a result of the
exchange of Warrants for Common Stock to the extent that such exchange gives
rise to capital gains not effectively connected to a United States trade or
business.
THE EXCHANGE AGENT
Corporate Stock Transfer, Inc. has been appointed as Exchange Agent for
the Exchange Offer. Corporate Stock Transfer, Inc. also acts as warrant agent
with respect to the Warrants. All correspondence in connection with the
Exchange Offer and the Letters of Transmittal should be addressed to the
Exchange Agent, as follows:
Corporate Stock Transfer, Inc.
370 17th Street
Suite 2350
Denver, Colorado 80202
Attention: Carylyn Bell
15
<PAGE> 21
DESCRIPTION OF SECURITIES
For a complete discussion of the Company's outstanding securities,
including the Common Stock being offered in exchange for Warrants in the
Exchange Offer, see the section entitled "Description of Securities" in the
PPM. That section also contains a discussion of outstanding registration
rights in the Company's securities.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996 and for the year then ended have been included in the PPM attached hereto
and made a part hereof in reliance upon the report of Richard A. Eisner &
Company, LLP, independent auditors, given upon the authority of said firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). In accordance with the
Exchange Act, the Company files proxy statements, reports and other information
with the Securities and Exchange Commission (the "SEC"). This filed material
can be inspected and copied at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's
Regional Offices in Chicago, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and in New York, 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may also be obtained by mail from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The SEC maintains a Web Site address which
contains reports, proxy and information statements and other information
regarding the registrants that file electronically with the SEC. The address
of such site is http://www.sec.gov.
The Company has filed with the SEC an Issuer Tender Offer Statement on
Schedule 13E-4 (together with any amendments thereto, the "Tender Offer
Schedule") under the Exchange Act with respect to the Warrants to be exchanged
for Common Stock. Copies of the Tender Offer Schedule are available from the
SEC upon payment of prescribed rates. Statements contained in this Offering
Circular relating to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the Tender
Offer Schedule or such other document, each such statement being qualified in
all respects by such reference.
The shares of Common Stock are listed on The Nasdaq Stock Market. Reports
and other information concerning the Company may be inspected at The Nasdaq
Stock Market.
16
<PAGE> 22
Facsimile copies of the Letter of Transmittal will be accepted. Letters
of Transmittal, Warrant certificates and any other required documents should be
sent by each holder or his broker, dealer, commercial bank, trust company or
other nominee to the Exchange Agent at the address set forth below:
The Exchange Agent for the Exchange Offer is:
CORPORATE STOCK TRANSFER, INC.
<TABLE>
<S> <C>
By Mail, Hand Delivery or Overnight Carrier: By Facsimile Transmission: (303) 592-8821
Corporate Stock Transfer, Inc. (For Eligible Institutions Only)
370 17th Street
Suite 2350 Confirm Facsimile by Telephone: (303) 595-3300
Denver, Colorado 80202 (For Confirmation Only)
Attention: Carylyn Bell
</TABLE>
<PAGE> 23
EXHIBIT A TO THE
OFFERING CIRCULAR
Name: _______________ Copy No: _____________
WALNUT FINANCIAL SERVICES, INC.
_______________________________________
CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM
_______________________________________
PRIVATE PLACEMENT OF UNITS
$2,500,000 MINIMUM - 50 UNITS
$4,000,000 MAXIMUM - 80 UNITS
Walnut Financial Services, Inc., a Utah corporation (the "Company"),
has elected, as of October 15, 1997, to be regulated as a "business development
company" as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), specializing in the financing of and investment in small to
medium-sized companies. The Company is furnishing this Confidential Private
Placement Memorandum (this "Memorandum") on a confidential basis. This
Memorandum relates to the Company's 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 (the "Offering Price"), being made pursuant to Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended. Each
Unit consists of 50,000 shares of the Company's common stock, $.01 par value
per share (the "Common Stock"), (subject to adjustment as required by the 1940
Act; see "TERMS OF THE OFFERING--Adjustments to Units") and 35,000 Class A
Redeemable Common Stock purchase warrants (a "Class A Warrant", and
collectively, the "Class A Warrants"). Each Class A Warrant entitles the
holder thereof to purchase one share of Common Stock for a period of five years
at an initial exercise price of $1.50. Under certain circumstances, the Class
A Warrants are redeemable by the Company. See "DESCRIPTION OF
SECURITIES--Warrants." SEE "RISK FACTORS" FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE UNITS. The closing of the Offering is subject to and
contingent upon the satisfaction of certain conditions, including, without
limitation, the approval of the Company's stockholders. See "TERMS OF THE
OFFERING--Closing Conditions." The Company is offering the Units only to
accredited investors and reserves the right to reject any subscription in whole
or in part or to terminate the Offering.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Price to Commission and Proceeds to
Investors Expense Allowance(1) Company(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit $ 50,000 $ 6,500 $ 43,500
- ------------------------------------------------------------------------------------------------------------------------------------
Total Minimum $2,500,000 $325,000 $2,175,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Maximum $4,000,000 $520,000 $3,480,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to pay to Walsh Manning Securities, LLC (the
"Placement Agent") a commission equal to 10% of the Offering Price and a
non-accountable expense allowance equal to 3% of the Offering Price. See "PLAN
OF DISTRIBUTION."
(2) Before deducting other expenses of the Offering payable by the
Company, including legal, accounting and other expenses, estimated to be
$200,000. See "THE OFFERING--Use of Proceeds."
_______________________________________
WALSH MANNING SECURITIES, LLC
_______________________________________
October 27, 1997
<PAGE> 24
THIS MEMORANDUM AND THE INFORMATION CONTAINED HEREIN IS CONFIDENTIAL
AND HAS BEEN TRANSMITTED IN CONNECTION WITH THE OFFERING OF UNITS. THIS
MEMORANDUM CONSTITUTES AN OFFER ONLY IF A NAME APPEARS IN THE APPROPRIATE SPACE
ON THE COVER PAGE OF THIS MEMORANDUM AND THEN ONLY TO SUCH NAMED OFFEREE. THE
COMPANY MAKES NO REPRESENTATION OR WARRANTY AS TO THE ACCURACY OR COMPLETENESS
OF THE INFORMATION CONTAINED HEREIN. ANY DISTRIBUTION OF THIS MEMORANDUM TO
ANY OTHER PERSON (EXCEPT THOSE INDIVIDUALS RETAINED BY SUCH PERSON TO ADVISE
SUCH PERSON WITH RESPECT TO THE OFFERING) IS UNAUTHORIZED, AND ANY REPRODUCTION
OF THIS MEMORANDUM IN WHOLE OR IN PART OR THE DISCLOSURE OF ANY OF ITS CONTENTS
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY IS PROHIBITED.
NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATION OTHER THAN
THOSE CONTAINED IN THIS MEMORANDUM CONCERNING THE OFFERING, AND IF MADE, SUCH
REPRESENTATIONS MUST NOT BE RELIED UPON. THE COMPANY MAKES NO REPRESENTATION
OR WARRANTY AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED
HEREIN.
THE OFFEREE, BY ACCEPTING DELIVERY OF THIS MEMORANDUM, AGREES TO
RETURN THIS MEMORANDUM AND ALL DOCUMENTS FURNISHED HEREWITH TO THE COMPANY,
8000 TOWERS CRESCENT DRIVE, SUITE 1070, VIENNA, VIRGINIA 22182, ATTENTION:
JOEL S. KANTER, IF THE OFFEREE DOES NOT PURCHASE ANY OF THE UNITS OR IF THE
OFFERING IS TERMINATED.
THIS MEMORANDUM CONTAINS SUMMARIES, BELIEVED BY THE COMPANY TO BE
ACCURATE, OF CERTAIN DOCUMENTS, BUT ALL SUCH SUMMARIES ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE DOCUMENTS. ANY OR ALL SUCH DOCUMENTS ARE EITHER
INCLUDED HEREIN OR WILL BE FURNISHED TO QUALIFIED PROSPECTIVE INVESTORS AT NO
CHARGE UPON REQUEST. SUCH REQUESTS SHOULD BE DIRECTED TO THE COMPANY, 8000
TOWERS CRESCENT DRIVE, SUITE 1070, VIENNA, VIRGINIA 22182, TELEPHONE: (703)
448-3771, ATTENTION: JOEL S. KANTER.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS
AND RISKS INVOLVED. NONE OF THE UNITS, THE COMMON STOCK OR THE WARRANTS HAS
BEEN RECOMMENDED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY
STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE
ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE UNITS OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES
LAWS, IN RELIANCE ON THE EXEMPTION FROM REGISTRATION RELATING TO TRANSACTIONS
NOT INVOLVING ANY PUBLIC OFFERING. THE SEC HAS NOT MADE AN INDEPENDENT
DETERMINATION THAT THE SECURITIES OFFERED HEREUNDER ARE EXEMPT FROM
REGISTRATION. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM, AND IN COMPLIANCE WITH CERTAIN
RESTRICTIONS SET FORTH HEREIN. INVESTORS SHOULD BE AWARE THAT THEY WILL BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME.
i
<PAGE> 25
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. NO PERSON SHOULD
INVEST IN THE UNITS OFFERED HEREBY WHO IS NOT IN A POSITION TO LOSE HIS ENTIRE
INVESTMENT. (SEE "RISK FACTORS.") INVESTORS WILL BE REQUIRED TO MAKE
REPRESENTATIONS WITH RESPECT TO THEIR NET WORTH AND INCOME AND TO REPRESENT,
AMONG OTHER THINGS, THAT THEY ARE FAMILIAR WITH AND UNDERSTAND THE TERMS OF THE
OFFERING. (SEE "INVESTOR SUITABILITY STANDARDS.")
EXCEPT AS MAY OTHERWISE BE DETERMINED BY THE COMPANY, THIS MEMORANDUM
IS BEING DELIVERED, AND OFFERS AND SALES OF SECURITIES HEREUNDER SHALL BE MADE
ONLY, TO RESIDENTS OF THE FOLLOWING STATES: ARIZONA, CALIFORNIA, CONNECTICUT,
DELAWARE, THE DISTRICT OF COLUMBIA, FLORIDA, ILLINOIS, MARYLAND, NEW JERSEY,
NEW YORK, PENNSYLVANIA, RHODE ISLAND AND TEXAS.
THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY
JURISDICTION IN WHICH AN OFFER OR SOLICITATION IS NOT AUTHORIZED.
ARIZONA RESIDENTS
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE ARIZONA
CORPORATION COMMISSION OR THE STATE OF ARIZONA, NOR HAS THE ARIZONA CORPORATION
COMMISSION OR THE STATE OF ARIZONA PASSED UPON THE ACCURACY OF OR ADEQUACY OF
THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONNECTICUT RESIDENTS
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
CONNECTICUT CORPORATION COMMISSION OR THE STATE OF CONNECTICUT, NOR HAS THE
CONNECTICUT CORPORATION COMMISSION OR THE STATE OF CONNECTICUT PASSED UPON THE
ACCURACY OF OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
FLORIDA RESIDENTS
PURSUANT TO SECTION 517.06(11)(a)(S) OF THE FLORIDA STATUTE, FLORIDA
INVESTORS HAVE A THREE DAY RIGHT OF RECISION. IF A FLORIDA RESIDENT HAS
EXECUTED A SUBSCRIPTION AGREEMENT, HE MAY ELECT, WITHIN THREE BUSINESS DAYS
AFTER SIGNING THE SUBSCRIPTION AGREEMENT, TO WITHDRAW FROM THE SUBSCRIPTION
AGREEMENT AND RECEIVE A FULL REFUND AND RETURN (WITHOUT INTEREST) OF ANY MONEY
PAID BY HIM AND HIS NOTES. A FLORIDA RESIDENTS WITHDRAWAL WILL BE WITHOUT ANY
FURTHER LIABILITY TO ANY PERSON. TO ACCOMPLISH SUCH WITHDRAWAL, A FLORIDA
RESIDENT NEED ONLY SEND A LETTER OR TELEGRAM TO THE COMPANY AT THE ADDRESS SET
FORTH IN THIS MEMORANDUM INDICATING HIS INTENTION TO WITHDRAW. SUCH LETTER OR
TELEGRAM MUST BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED
THIRD BUSINESS DAY. IF A FLORIDA RESIDENT SENDS A LETTER, IT IS PRUDENT TO
SEND IT BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO INSURE THAT IT IS
RECEIVED AND ALSO TO EVIDENCE THE TIME AND DATE WHEN IT IS MAILED. SHOULD A
FLORIDA RESIDENT MAKE THIS REQUEST ORALLY, HE SHOULD ASK FOR WRITTEN
CONFIRMATION THAT HIS REQUEST HAS BEEN RECEIVED.
ii
<PAGE> 26
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
MEMORANDUM SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Selected Financial Information for Walnut Financial Services, Inc. . . . . . . . . . . . . . . . . . . . . . . 3
Securities Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Terms of the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investor Suitability Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Failure to Comply with the 1940 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Restrictions on Future Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Need for SEC Exemptive Relief . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Possible Violations of the SBA Regulations by Walnut Capital . . . . . . . . . . . . . . . . . . . . . . . . . 9
Investments in Privately-Owned Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investments in Small-Cap Public Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Illiquidity of Portfolio Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Potential Need for Additional Investments in
Portfolio Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dependence on Public Offering Market or Availability
of Strategic Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Risks Related to Concentrations of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transfer Restrictions; Limits on Change of Control; Preferred Stock . . . . . . . . . . . . . . . . . . . . 11
Risks of Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Discretionary Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Dependence Upon Key Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Differences In Financial Statement Presentations
Relating to Walnut Capital and UPLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
No Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Listing on Nasdaq; Volatility of Trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Indemnification of Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Immediate Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Risks Related to the Accounts Receivable Factoring Business . . . . . . . . . . . . . . . . . . . . . . . . 15
Disclosure Relating to Low-Priced Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Background Prior to the Business Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Walnut Capital and The Business Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Walnut Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
UPLP and Universal Bridge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Walnut Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Walnut Consulting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
iii
<PAGE> 27
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Recent Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Pacific Financial Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Sale of NFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
BDC Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SBA Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Results of Operations for the Fiscal
Six-Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Results of Company and Walnut Capital Operations for
the Three and Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 30
Results of NFS Operations for the Three and
Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Results of Operations for the Fiscal Year
Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Results of Walnut Capital Operations for the Fiscal
Years Ended December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Results of NFS Operations for the Fiscal Year Ended
December 31, 1996 and the Period from February 28, 1995 through
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Results of Company Operations for the Fiscal Years Ended
December 31, 1996 and the Period February 28, 1995 through
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Results of Operations for the Fiscal Years Ended December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Results of Walnut Capital Operations for the Fiscal Years Ended December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Results of NFS Operations for the Period from February 28, 1995 to December 31, 1995 . . . . . . . . 34
Results of Company Operations for the Period from February 28, 1995 to
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Liquidity and Capital Resources of Walnut Capital . . . . . . . . . . . . . . . . . . . . . . . . . 34
Liquidity and Capital Resources of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Officers and Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
iv
<PAGE> 28
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Options and Other Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Employment Agreements with Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
DESCRIPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Class A Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Market Price of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Stock Plans and Other Derivative Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
The Original 1994 Stock Plan and the Amended 1994 Stock Plan . . . . . . . . . . . . . . . . . . . . 47
The 1987 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
The 1989 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Other Derivative Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Registration Rights of Holders of Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Registration Rights of Other Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Placement Agent Lock Up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Tax-Related Transfer Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
TERMS OF THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Closing Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Adjustments to Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Restrictions on Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Representations to be Made by All Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
INVESTOR SUITABILITY STANDARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
v
<PAGE> 29
TABLE OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
<S> <C>
A Unaudited Financial Information
o Consolidated Balance Sheets at June 30, 1997 and June 30, 1996
o Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1996
o Notes to Consolidated Financial Statements
B Audited Financial Information for the Company
o Opinion of Richard A. Eisner & Company, LLP
o Consolidated Balance Sheets at December 31, 1996 and 1995
o Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994
o Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1996, 1995, 1994 and 1993
o Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994
o Notes to Consolidated Financial Statements
C Subscription Documents, including: Instructions to Investors, Confidential Purchaser Questionnaire,
Subscription Agreement and Supplemental Signature Page to Registration Rights Agreement
D Warrant Agreement
E Registration Rights Agreement
F Company Organizational Chart
</TABLE>
vi
<PAGE> 30
- --------------------------------------------------------------------------------
MEMORANDUM SUMMARY
The following summary is qualified in its entirety by the more
detailed information, the financial information and statements, and the notes
thereto, appearing elsewhere in, and the exhibits to, this Confidential Private
Placement Memorandum (this "Memorandum").
THE COMPANY
Walnut Financial Services, Inc., a Utah corporation (the "Company"),
is a closed-end management investment company, which elected on October 15,
1997 to be regulated as a business development company ("BDC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). As such, the
Company will be generally required to invest at least 70% of its total assets
in certain prescribed "Eligible Assets" as described below which generally
include securities of privately-held companies and cash items, government
securities and high-quality short-term debt. See "THE COMPANY--Government
Regulation--BDC Regulation" and "RISK FACTORS--Restrictions on Future
Acquisitions." Prior to such election, the Company may have been operating as
an unregistered investment company. See "RISK FACTORS--Failure to Comply with
the 1940 Act." The Company currently has two primary business focuses: (i)
investing in start-up and early stage development companies and (ii) operating
an investment vehicle that specializes in bridge financing to small to
medium-sized companies. The Company's goal is to expand its business lines in
order to become a single source for the various financing needs of small and
medium-sized companies. The Company is actively pursuing the acquisition of
additional operating businesses in the financial services industry,
particularly in the accounts receivable factoring industry. See "THE
COMPANY--Recent Developments." Management anticipates that the Company may
seek to cease to be a BDC upon the acquisition of additional operating
businesses; however, the Company cannot change the nature of its business so as
to cease to be a BDC unless such change is approved by the Company's
stockholders in accordance with the 1940 Act.
The Company engages in the investment business primarily through its
wholly-owned subsidiary, Walnut Capital Corp., a Delaware corporation ("Walnut
Capital"). Walnut Capital is licensed as a small business investment company
(an "SBIC") specializing in investments in early stage companies, and is
regulated by the United States Small Business Administration (the "SBA").
Walnut Capital has been making investments since 1984 and, to date, has
invested over $35 million in portfolio companies. Walnut Capital's portfolio
companies are located throughout the United States in numerous industries and
in initial investment amounts ranging from $50,000 to approximately $500,000
and may take the form of debt, equity or some combination thereof. A
significant portion of Walnut Capital's investments are currently concentrated
in the health care industry. The Company also pursues its investment
activities through its wholly-owned subsidiary, Walnut Funds, Inc., a Delaware
corporation ("Walnut Funds"), which has an indirect ownership interest in and
indirectly provides investment management services to Walnut Growth Partners
Limited Partnership, an Illinois limited partnership ("Walnut Growth"), a $30
million investment fund.
- --------------------------------------------------------------------------------
1
<PAGE> 31
- --------------------------------------------------------------------------------
The Company pursues bridge financings and other smaller investments
indirectly 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"). In addition to its primary investment focuses, the
Company has begun to provide certain consulting services to governmental and
quasi-governmental agencies and banks, insurance companies and securities firms
through its wholly-owned subsidiary, Walnut Consulting, Inc., a Delaware
corporation ("Walnut Consulting"). See "THE COMPANY--Walnut Consulting."
RECENT DEVELOPMENTS
The Company is currently negotiating to acquire all of the issued and
outstanding capital stock of Pacific Financial Services Corp., a Washington
corporation ("Pacific Financial"), based in the Seattle metropolitan area and
engaged in the accounts receivable factoring business. It is anticipated that
the aggregate purchase price for such stock will be $3,000,000, payable in cash
($900,000), in the form of Common Stock ($900,000), and in the form of
promissory notes issued by Pacific Financial and guaranteed by the Company
($1,200,000). See "THE COMPANY--Recent Developments" for a description of
additional terms and conditions relating to the acquisition of Pacific
Financial. Management believes that the addition of Pacific Financial's
accounts receivable factoring business to the Company's other financing
businesses will allow the Company to provide valuable additional services to
its portfolio companies and other small to medium-sized companies. The Company
expects to close the acquisition of Pacific Financial during this fiscal year;
however, there can be no assurance that such closing will occur during fiscal
1997 or at all.
On September 29, 1997, the Company sold its wholly-owned subsidiary,
NFS Services, Inc., a Delaware corporation ("NFS"), to an entity controlled by
NFS's management for $150,000 paid in the form of a subordinated five-year
promissory note. As a condition to closing, NFS was required to pay to the
Company $850,000 in satisfaction of an intercompany receivable. In connection
with such sale, the Company entered into an agency agreement with NFS whereby
the Company is entitled to receive a significant portion of the gross profit
margin achieved by NFS's consulting line of business. See "THE COMPANY--Recent
Developments." NFS had been engaged in the business of providing consulting
and assets recovery services to securities firms, banks and others. As a
result of such sale, the Company is no longer engaged in the asset recovery
business, but will remain involved in the consulting business through an
on-going agency relationship between the Company and NFS.
The Company intends to initiate a private exchange offer (the
"Exchange Offer") to the current holders of warrants to purchase up to
1,149,924 shares of Common Stock at an exercise price of $3.00 per share.
Pursuant to the Exchange Offer, each such holder will have the right to elect
to exchange each of his unexercised 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 of at least 527,083 of
such warrants is required in order to close the minimum Offering. See "TERMS
OF THE OFFERING--Closing Conditions."
- --------------------------------------------------------------------------------
2
<PAGE> 32
- --------------------------------------------------------------------------------
RISK FACTORS
THE PURCHASE OF THE UNITS OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN THE
TOTAL LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS."
SELECTED FINANCIAL INFORMATION FOR WALNUT FINANCIAL SERVICES, INC.
The selected financial data for the Company for the five-year period
ended December 31, 1996 and for the six- month periods ended June 30, 1997 and
1996, respectively, 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 information for the periods ended June 30, 1997 and 1996 is derived from
the Company's unaudited financial statements. The data should be read in
conjunction with the audited and unaudited financial statements, related notes
and other financial information of the Company for such periods included
elsewhere in this Memorandum. 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.
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3
<PAGE> 33
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<TABLE>
<CAPTION>
Six-Month Period
Ended June 30, Year Ended December 31,
--------------------------- --------------------------------------------------------------------
1997 1996 1996 1995 1994* 1993* 1992*
------------ ------------ ------------- ------------ ------------ ------------ -------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
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 expense(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 14,616,687 14,298,173 14,247,099 12,747,656 8,353,860 8,130,213
outstanding
- -------------------------
</TABLE>
(1) For the six month periods ended June 30, 1997 and June 30, 1996 and for the
fiscal year ended December 31, 1996, the line item "Operating expense"
includes provision for credit losses of $0, $0 and $178,000, respectively,
and write off of goodwill of NFS of $800,000, $0 and $1,100,000,
respectively.
* Includes the results of operations of Walnut Capital only (see Footnotes 1
and 2 to the audited financial statements included elsewhere herein).
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4
<PAGE> 34
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
June 30, 1997 1996 1995 1994* 1993* 1992*
------------------- ------------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
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(1) 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>
- -------------------------------------------
(1) Includes non-current deferred tax liability
* Includes the results of operations of Walnut Capital only (see Footnotes 1
and 2 to the audited financial statements included elsewhere herein).
SECURITIES OFFERED
The Company, through Walsh Manning Securities, LLC (the "Placement Agent"),
is offering pursuant to this Memorandum a minimum of 50, and a maximum of 80,
Units at $50,000 per Unit. Each Unit consists of 50,000 shares of Common Stock
and 35,000 Class A Warrants, subject to adjustment as required by the 1940 Act.
See "TERMS OF THE OFFERING--Adjustments to Units." Each Class A Warrant
entitles the holder to acquire one share of Common Stock at an initial exercise
price of $1.50. Class A Warrants are not exercisable, without the consent of
the Placement Agent, for the first 12 months after the date of the initial
closing of the Offering (the "Initial Closing Date") and expire on October 15,
2002. See "DESCRIPTION OF SECURITIES--Warrants." The Class A Warrants will be
evidenced by warrant certificates issued pursuant to the Class A Warrant
Agreement between the Company and Corporate Stock Transfer, Inc. in the form
attached hereto as Exhibit D. Purchasers of Units shall be prohibited from
transferring, selling or otherwise disposing of the Common Stock or the Class A
Warrants constituting the Units, or the Common Stock underlying the Class A
Warrants, for a period of 18 months after the Initial Closing Date without the
consent of the Placement Agent. See "DESCRIPTION OF SECURITIES--Restriction on
Transfer" and "--Registration Rights."
Upon the closing of the Offering, 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. The total number of
outstanding shares of Common Stock may be increased by up to 287,481 shares in
the event that the Exchange Offer is accepted in full. An additional 2,750,000
shares of Common Stock (3,800,000 shares if the maximum
- --------------------------------------------------------------------------------
5
<PAGE> 35
- --------------------------------------------------------------------------------
number of Units is sold in the Offering) will be reserved for issuance upon
exercise of the Class A Warrants, including 1,000,000 Class A Warrants intended
to be sold to certain investors contemporaneously with the Offering. See "PLAN
OF DISTRIBUTION." In addition, as of the date hereof, 2,066,876 shares of
Common Stock are reserved and may be issued upon the exercise of options and
other derivative securities currently outstanding (exclusive of the Class A
Warrants); however, it is a condition to closing that at least 527,083
derivative securities be cancelled. See "DESCRIPTION OF SECURITIES--Stock
Plans and Other Derivative Securities" and "TERMS OF THE OFFERING--Closing
Conditions."
The Common Stock is listed on The Nasdaq National Market under the symbol
WNUT. The Common Stock constituting a part of the Units and the Common Stock
underlying the Class A Warrants will also be listed on The Nasdaq National
Market, subject to issuance. It is not intended that the Class A Warrants will
be listed for trading on The Nasdaq National Market or any other exchange or
quotation system. For information regarding high and low quotations and
trading prices for the Common Stock, see "DESCRIPTION OF SECURITIES--Market
Price of Common Stock." The Company has paid no cash dividend since its
inception and it is unlikely that any cash dividend will be paid in the future.
See "DESCRIPTION OF SECURITIES--Dividends."
The Units, including the Common Stock and the Class A Warrants, and the
Common Stock underlying the Class A Warrants, have not been registered under
federal or state securities laws and are being offered and sold in reliance on
exemptions from such registration requirements and such laws. Holders of Units
will have certain registration rights with respect to the Common Stock,
including the Common Stock underlying the Class A Warrants.
TERMS OF THE OFFERING
The Company has engaged the Placement Agent as the exclusive placement agent
for the Offering. The Company has agreed to pay at closing 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, the Company is
required to pay the Placement Agent a warrant solicitation fee equal to 5% of
the applicable exercise price.
It is a requirement under the 1940 Act that the stockholders approve the
Offering. The Company intends to hold a meeting of its stockholders on
December 17, 1997 to vote on the approval of the Offering, among other things.
In order to comply with certain provisions of the 1940 Act related to the
maximum amount of derivative securities that a BDC may have outstanding, the
closing of the sale of the minimum number of Units is contingent upon the
cancellation of at least 527,083 derivative securities of the Company currently
outstanding. In addition, the closing of the sale of the maximum number of
Units is contingent upon the cancellation of at least an additional 675,000
derivative securities of the Company currently outstanding or the issuance of
additional Common Stock. See "TERMS OF THE OFFERING--Closing Conditions."
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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 aggregate compensation to
the Placement Agent, but before payment of other expenses associated with the
Offering, including, without limitation, legal, accounting and printing,
estimated to be $200,000). Such proceeds do not include the net 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.
Approximately $1.2 million of the net proceeds may be used to consummate the
acquisition of Pacific Financial. The remaining net proceeds will be added to
the Company's working capital. The Company may use its working capital for (i)
investment by Walnut Capital or UPLP in new portfolio companies; (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 SBA or the Company's
margin and other loans; or (iv) payment of operating expenses. See "USE OF
PROCEEDS."
INVESTOR SUITABILITY STANDARDS
The Units will be offered to a limited number of accredited investors.
Unless otherwise specifically approved by the Company, all purchasers must be
accredited investors within the meaning of Rule 501(a) of Regulation D
promulgated under the Securities Act. See "INVESTOR SUITABILITY STANDARDS."
Subscription Documents are attached hereto as Exhibit C.
ADDITIONAL INFORMATION
Copies of agreements and documents referred to herein, as well as copies of
the Company's 1996 Annual Report (which includes the Company's Form 10-K for
the fiscal year ended December 31, 1996) and the Company's most recent Form
10-Q for the fiscal quarter ended June 30, 1997, are available at no charge
from the Company upon request. Requests should be directed to the Company,
8000 Towers Crescent Drive, Suite 1070, Vienna, Virginia 22182, Attention:
Joel S. Kanter, Telephone: (703) 448-3771.
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RISK FACTORS
THERE ARE SUBSTANTIAL RISK FACTORS INVOLVING INVESTMENT IN THE UNITS OFFERED
HEREBY AND UNITS SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. THE FOLLOWING LISTS CERTAIN OF THOSE RISK FACTORS,
BUT DOES NOT PURPORT TO SET FORTH EVERY RISK FACTOR ASSOCIATED WITH SUCH
INVESTMENT. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING
RISKS INHERENT IN, AND AFFECTING THE BUSINESS OF, THE COMPANY AND THE OFFERING
BEFORE MAKING AN INVESTMENT DECISION. POTENTIAL INVESTORS WHO WISH TO DO SO
SHOULD DISCUSS THE POTENTIAL BENEFITS AND ASSOCIATED RISKS OF SUCH INVESTMENT
WITH THEIR INVESTMENT, TAX AND LEGAL ADVISORS.
THIS MEMORANDUM CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO
THE RESULTS OF OPERATIONS AND BUSINESSES OF THE COMPANY. THESE FORWARD-LOOKING
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FACTORS THAT MAY CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED, PROJECTED,
FORECAST, ESTIMATED OR BUDGETED IN SUCH FORWARD-LOOKING STATEMENTS INCLUDE,
AMONG OTHERS, THE FOLLOWING POSSIBILITIES: (i) HEIGHTENED COMPETITION,
INCLUDING SPECIFICALLY THE INTENSIFICATION OF PRICE COMPETITION, THE ENTRY OF
NEW COMPETITORS AND THE FORMATION OF NEW FINANCIAL SERVICES AND PRODUCTS BY
EXISTING OR NEW FINANCIAL SERVICE PROVIDERS; (ii) ADVERSE STATE AND FEDERAL
LEGISLATION AND REGULATION; (iii) GENERAL MARKET DECLINE OR OTHER EVENTS WHICH
ADVERSELY AFFECT THE STOCK MARKET IN GENERAL OR THE COMPANY'S PORTFOLIO
COMPANIES IN PARTICULAR; (iv) INABILITY TO CONSUMMATE STRATEGIC ACQUISITIONS
AND/OR EXPANSION PLANS; (v) LOSS OF KEY EXECUTIVES; (vi) CHANGES IN INTEREST
RATES; (vii) GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH ARE LESS FAVORABLE
THAN EXPECTED; AND (viii) UNANTICIPATED CHANGES IN INDUSTRY TRENDS.
FAILURE TO COMPLY WITH THE 1940 ACT
When the Company engaged in the Business Combination (as hereinafter
defined) in February 1995, management did not intend that the Company would
operate as an investment company subject to regulation under the 1940 Act. To
the extent that the Company could have been deemed to be an investment company,
pending the acquisition of additional operating businesses after the Business
Combination, the Company relied on Rule 3a-2 under the 1940 Act, which
generally provides that an issuer is deemed not to be engaged in the business
of investing, reinvesting, owning holding or trading in securities for a
one-year period provided that the issuer has a bona fide intent to be engaged
in a business other than that of investing, reinvesting, owning, holding or
trading in securities. Upon the expiration of such one-year period (February
27, 1996), and until the Company, Walnut Capital, Walnut Funds and Universal
Bridge elected to become regulated as BDCs under the 1940 Act (October 15,
1997), the Company and certain of its subsidiaries may be deemed to have been
unregistered "investment companies" as defined by the 1940 Act. If it is
determined that the Company operated as an unregistered investment company,
then the Company and its officers and directors could be subject to various
monetary and other penalties for violating the Federal securities laws, which
penalties could materially adversely affect the financial condition of the
Company. In addition, certain sanctions could be imposed if the Securities and
Exchange Commission ("SEC") were to bring an enforcement action against the
Company or its officers and directors, which may result in the inability of
current management to continue in such position. Management can make no
prediction as to whether the SEC will begin an enforcement action or require
the Company to take or refrain from taking certain actions.
RESTRICTIONS ON FUTURE ACQUISITIONS
As long as the Company is a BDC, the Company will be prohibited from
acquiring assets which do not qualify as "Eligible Assets" (see "THE
COMPANY--Government Regulation--BDC Regulation") above certain thresholds.
Accordingly, the Company may be prohibited from consummating the
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acquisition of additional operating companies consistent with its business
strategy of becoming a more full-service financial service provider to small
and medium-sized companies unless the Company terminates its BDC status. The
Company cannot cease to be regulated as a BDC without the requisite vote of
stockholders as provided in the 1940 Act. Therefore, the Company's ability to
pursue its strategic business goals may be delayed or significantly compromised
by the Company's BDC status.
NEED FOR SEC EXEMPTIVE RELIEF
In general, the 1940 Act prohibits the Company from co-investing and
otherwise participating in joint transactions with its wholly-owned BDC
subsidiaries (Walnut Capital, Walnut Funds and Universal Bridge) and other
companies, that are or may be deemed to be affiliates of the Company,
including, without limitation, certain entities in which the Kanter family has
an ownership interest or managerial control (collectively, the "Company
Affiliates"). The Company and certain Company Affiliates have from time to
time made investments in the same portfolio companies. The Company intends to
file an application with the SEC seeking exemptive relief to permit, among
other things, such co-investment and joint transactions. Co-investment allows
the Company to participate in larger financings in which the Company might
otherwise be unable to participate. The Company will not make any additional
co-investments unless and until exemptive relief is granted by the SEC. There
is no assurance that the SEC will grant such relief and, if not so granted, the
Company will be unable to co-invest with its BDC subsidiaries or any of the
Company Affiliates.
The Company also intends to seek exemptive relief from the SEC to permit the
Company, Walnut Capital, Walnut Funds and Universal Bridge to operate as one
company for certain purposes of the 1940 Act and to report solely on a
consolidated basis for purposes of the Securities Exchange Act of 1934, as
amended (the "1934 Act"). Such relief would entitle such entities to engage in
certain inter-company transactions and gain relief from limitations relating to
its ability to issue senior securities (to the extent not prohibited by the
SBA). However, there can be no assurance that such exemptive relief will be
granted.
In addition, the Company intends to seek SEC confirmation that UPLP is not
an investment company. There can be no assurance that the SEC will confirm
such position and, as a result, UPLP may be required to elect to be regulated
as a BDC, or register as an investment company under the 1940 Act.
POSSIBLE VIOLATIONS OF THE SBA REGULATIONS BY WALNUT CAPITAL
The SBA has alleged that Walnut Capital has violated a number of the
technical requirements of the Small Business Investment Act of 1958, as amended
(the "SBIA"), or the regulations promulgated thereunder. See "THE
COMPANY--Government Regulation--SBA Regulation" for a detailed discussion of
such allegations. If the SBA determined to declare a default under such
regulations and Walnut Capital failed to cure such default, then the SBA would
have the right to declare $4 million debentures currently outstanding from
Walnut Capital to an affiliate of the SBA (the "SBA Debentures") immediately
due and payable. In such event, Walnut Capital would be required to sell some
of its portfolio securities, or otherwise raise capital, to repay the $4
million SBA Debentures. In addition, the SBA completed a regular periodic
examination of Walnut Capital in April 1997 but has not yet issued its report
to Walnut Capital. There can be no assurance that such report will not contain
any SBA findings of material violations by Walnut Capital.
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INVESTMENTS IN PRIVATELY-OWNED COMPANIES
The portfolio of UPLP and Walnut Growth consists and is expected to consist
primarily of investments in small-to- medium-sized privately-owned businesses.
In addition, many of Walnut Capital's investments are in such companies. There
is generally no publicly available information about such companies, and the
Company must rely on the diligence of its management to obtain information in
connection with the Company's investment decisions. Typically, such companies
depend for their success on the management talents and efforts of one person or
a small group of persons, and the death, disability or resignation of one or
more of these persons could have a material adverse impact on their company.
Moreover, such companies frequently have less diverse product lines and market
shares than their competition. These companies may be more vulnerable to
economic downturns and often need substantial additional capital to expand or
compete. Such companies may also experience substantial variations in
operating results. Therefore, investment in small to medium-sized
privately-owned businesses involves a high degree of business and financial
risk, which can result in substantial losses.
INVESTMENTS IN SMALL-CAP PUBLIC COMPANIES
A number of the investments of Walnut Capital, UPLP and Walnut Growth may be
in securities of small-cap public companies and may involve greater risks than
investments in larger public companies because these securities may have
limited marketability and, thus, may be more volatile. Since small-cap public
companies often have fewer shares outstanding than larger companies, it may be
more difficult for the Company to buy or sell significant amounts of such
shares without an unfavorable impact on prevailing prices. In addition,
small-cap companies are typically subject to a greater degree of change in
earnings and business prospects than are larger, more established public
companies. There is typically less publicly available information concerning
small-cap companies than for larger, more established ones. Securities of
issuers in "special situations" also may be more volatile, since the market
value of these securities may decline in value if the anticipated benefits do
not materialize. Companies in "special situations" include, but are not
limited to, companies involved in an acquisition or consolidation;
reorganization; recapitalization; merger, liquidation of cash, securities or
other assets; a tender or exchange offer; a breakup or workout of a holding
company; or litigation which, if resolved favorably, would improve the value of
the companies' securities. Although investing in securities of small-cap
public companies or special situations offers potential for above-average
returns if the companies are successful, the risk exists that the companies
will not succeed and the prices of the companies' shares could significantly
decline in value. Therefore, an investment in the Company may involve a
greater degree of risk than an investment in other companies or funds that seek
capital appreciation by investing in better-known, larger companies.
ILLIQUIDITY OF PORTFOLIO INVESTMENTS
Many of the investments of the Company, especially those made by UPLP and
Walnut Growth, are securities acquired directly from small, privately-owned
companies. The Company's portfolio securities are often subject to
restrictions on resale or otherwise have no established trading market. The
illiquidity of many of the Company's portfolio securities may adversely affect
the ability of the Company to dispose of such securities in a timely manner and
at a fair price at times when the Company deems it necessary or advantageous.
POTENTIAL NEED FOR ADDITIONAL INVESTMENTS IN PORTFOLIO COMPANIES
Following its initial investments in portfolio companies, the Company
anticipates that it may be called upon to provide additional funds to portfolio
companies or have the opportunity to increase investments
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in successful operations. There is no assurance that the Company will make
follow-up investments or that the Company will have sufficient funds to make
such investments. Any decision by the Company not to make follow-up
investments or its inability to make them may have a substantial impact on
portfolio companies in need of such an investment, may result in a diminution
of any rights or privileges granted by a portfolio company in connection with
the Company's earlier investment, or may result in a missed opportunity for the
Company to increase its participation in a successful operation.
DEPENDENCE ON PUBLIC OFFERING MARKET OR AVAILABILITY OF STRATEGIC BUYERS
The success of the investment strategy of the Company will be affected in
large part by the state of the securities markets in general and the market for
public financings in particular. Changes in the securities markets and general
economic conditions, including economic downturns, fluctuations in interest
rates, the availability of credit, inflation and other factors, may affect the
value of the Company's investments. The market for initial public offerings is
cyclical in nature and, accordingly, there can be no assurance that the
securities markets will be receptive to initial public offerings, particularly
those of small-cap companies. Any adverse change in the market for public
offerings could have a material adverse effect on the Company and could
severely limit the Company's ability to realize its investment objectives. The
availability of strategic buyers for the companies in which the Company invests
may also fluctuate from time to time. Such availability will also be affected
by the state of the securities markets and general economic conditions.
RISKS RELATED TO CONCENTRATIONS OF INVESTMENTS
The Company, on a consolidated basis, has significant holdings of
investments in the health care industry. In particular, at August 31, 1997,
its holdings of HealthCare COMPARE Corp. accounted for approximately $8.6
million, and holdings of other health care portfolio companies accounted for
approximately $6.3 million, of the Company's approximately $26 million of total
assets at that date (approximately 33% and 24%, respectively, or an aggregate
of approximately 57% of total assets). As a result, the assets of the Company
are subject to the risk of a decrease in the stock price of either HealthCare
COMPARE Corp. or health care companies generally which may result (i) directly
from negative events affecting said company, (ii) from negative events
affecting the health care industry generally, or (iii) from a general decline
in stock prices.
TRANSFER RESTRICTIONS; LIMITS ON CHANGE OF CONTROL; PREFERRED STOCK
In an attempt to maintain the use of the Company's consolidated Tax
Attributes (as hereinafter defined), certain transfers of Common Stock to a
transferee who, as a result of the transfer, will own more than 4.5% of the
outstanding Common Stock have been restricted until December 31, 1998, with
certain exceptions. The Board, upon receipt of an opinion of counsel or other
evidence satisfactory to the Board and upon such conditions as the Board may
direct, may exempt a proposed transferee from this restriction. See
"DESCRIPTION OF SECURITIES--Restrictions on Transfer." In addition, each
investor in the Offering will be prohibited from selling or otherwise
transferring their Units (or the Common Stock or Class A Warrants underlying
such Units) for a period of 18 months after the Initial Closing Date without
the consent of the Placement Agent. As a result, investors will be required to
maintain their investment in the Company for such period, whether or not it may
be economically advantageous to sell or transfer their investment prior to the
expiration of such period.
The transfer restrictions, as well as the ability of the Company to issue
additional Common Stock or preferred shares (which may have rights and
preferences senior to the Common Stock), may discourage a change of control of
the Company and may also (i) deter tender offers for the Common Stock, which
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offers may be advantageous to shareholders, and (ii) limit the opportunity for
stockholders to receive a premium for their Common Stock that might otherwise
exist if an investor were attempting to assemble a block of Common Stock in
excess of 5% of the outstanding shares of Common Stock or otherwise effect a
change of control of the Company.
The Company's Articles of Incorporation, as amended (the "Articles"),
authorize the Board to issue up to 1,000,000 shares of preferred stock, no par
value per share ("Preferred Stock"), and to establish the preferences and
rights (including the right to vote and the right to convert into Common Stock)
of any Preferred Stock issued. The power to issue Preferred Stock could have
the effect of delaying or preventing a change in control of the Company even if
a change in control were in the stockholders' interest. No Preferred Stock is
currently issued or outstanding, and the Company has no current plans to issue
any Preferred Stock. The amount and terms of any Preferred Stock issued may be
limited by the 1940 Act.
RISKS OF LEVERAGE
The Company and its subsidiaries intend to continue to borrow funds from and
issue senior debt securities to banks or other lenders up to the limit
permitted by the 1940 Act. When such borrowings occur, the providers of these
funds will have fixed dollar claims on the Company's consolidated assets
superior to the claims of the holders of the Company's Common Stock. Any
increase in the value of the Company's consolidated investments would cause its
consolidated net asset value attributable to Common Stock to increase more
sharply than it otherwise would, had the borrowings not occurred. Decreases in
the value of the consolidated investments below their value at the time of
acquisition, however, would cause the Company's consolidated net asset value
attributable to Common Stock to decline more sharply than it otherwise would if
the senior funds had not been borrowed. Similarly, any increase in the
Company's consolidated income in excess of consolidated interest payable on the
borrowed funds would cause its net income to increase more than it would
without the leverage, while any decrease in its consolidated income would cause
net income to decline more sharply than it would had the funds not been
borrowed for investment. Moreover, the costs of borrowing may exceed the
income from the portfolio securities purchased with the borrowed funds, and a
decline in net asset value may result if the investment performance of the
additional securities purchased fail to cover the Company's costs of borrowing
to purchase these additional securities. Such a decline in net asset value
could negatively affect the Company's ability to make common stock dividend
payments. Also, if asset coverage for a class of senior security representing
indebtedness declines to less than 200%, the Company may be required to sell a
portion of its investments when it may be disadvantageous to do so in order to
comply with the 1940 Act.
Leverage is thus generally considered a speculative investment technique.
The ability of the Company to achieve its investment objective may depend in
part on its continued ability to main a leveraged capital structure by
borrowing from banks or other lenders on favorable terms, and there can be no
assurance that such leverage can in fact be maintained. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources" for a description of the terms of
the Company's indebtedness.
DISCRETIONARY USE OF PROCEEDS
Management intends to use approximately $1.2 million of the net proceeds
from the sale of the Units offered hereby in connection with the acquisition of
Pacific Financial and to add the remaining net proceeds to the Company's
working capital. The Company may use its working capital for (i) investment by
Walnut Capital or UPLP in new portfolio companies; (ii) acquisitions of
additional operating
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businesses in the financial services industry which may include businesses
relating to asset-based lending, equipment leasing and financial and management
consulting; (iii) debt repayment or restructuring, including partial repayment
of the SBA Debentures currently outstanding or the Company's margin loans, its
American National Bank and Trust Company of Chicago ("ANB") loan or The Holding
Company ("THC") loan; or (iv) payment of operating expenses. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION--Liquidity and Capital Resources." The ANB loan is guaranteed by Mr.
Burton W. Kanter and Mr. Joel S. Kanter, who are directors and officers of the
Company. If the Board determines to use some or all of the net proceeds of the
Offering to pay down the ANB loan, Messrs. Kanter may be relieved of some or
all of their contingent liabilities arising in connection with their respective
provision of certain guarantees of said loan.
DEPENDENCE UPON KEY PERSONNEL
The Company is largely dependent upon the efforts of the officers and
directors of the Company, primarily Burton W. Kanter, Chairman of the Board of
the Company, and Joel S. Kanter, President and Chief Executive Officer of the
Company. Although both Messrs. Kanter have entered into employment agreements
with the Company, Mr. Burton W. Kanter is not obligated to devote his full time
to the Company. The Company has obtained "key person" life insurance in the
amount of $1 million on the life of Mr. Burton W. Kanter and $4 million on the
life of Joel S. Kanter (however, $2 million of such life insurance will expire
in the short term). The loss of the services of such key personnel could have
a material adverse effect on the Company's ability to successfully achieve its
business objectives. See "MANAGEMENT--Employment Agreements."
DIFFERENCES IN FINANCIAL STATEMENT PRESENTATIONS RELATING TO WALNUT CAPITAL AND
UPLP
The operations of Walnut Capital and UPLP consist primarily of acquiring,
holding and selling securities of its "investment" or "portfolio" companies.
In connection with the preparation of its periodic financial statements, Walnut
Capital values its portfolio of securities based on a set of valuation
guidelines promulgated by the SBA (the "Valuation Policies") and UPLP values
its portfolio using generally the same guidelines. For a discussion of the
Valuation Policies, see "THE COMPANY--Government Regulation--SBA Regulation."
In addition, generally accepted accounting principles require that Walnut
Capital and UPLP "mark-to-market" any of its investment securities which are
publicly traded at the time of valuation (the "GAAP Requirements"). As such,
operations of Walnut Capital and UPLP are reported as a combination of
"realized" gains and losses, and "unrealized" gains and losses which are
determined in accordance with the Valuation Policies and the GAAP Requirements.
Therefore, there may be a substantial differential between the Company's
consolidated "realized" results as reported on the periodic statement of cash
flows, which will not reflect these unrealized gains and losses, and those
reported for financial accounting purposes on the Company's consolidated
periodic statement of income and expenses which will reflect these unrealized
gains and losses. General economic and market conditions and particular
conditions relating to the portfolio companies of Walnut Capital and UPLP may,
therefore, substantially affect the Company's consolidated operating results as
reported on the Company's consolidated periodic statement of income and
expenses. Further, as a result of Walnut Capital's status as an SBIC, certain
regulations promulgated by the SBA may prohibit Walnut Capital from
capitalizing on short-term gain.
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COMPETITION
Each of Walnut Capital, UPLP and Walnut Growth engages in the business of
investing in companies through debt and equity participation. Consequently,
each of Walnut Capital, UPLP and Walnut Growth competes for investment
opportunities with other venture capital companies, banks and other lenders and
private investors. Many of such entities are significantly larger than the
Company and have greater resources. As a result of this competition, the
Company may from time to time be precluded from making otherwise attractive
investments on terms considered to be prudent in light of the risks assumed.
NO DIVIDENDS
The Company has paid no cash dividends since its inception and it is
unlikely that any cash dividend will be paid in the future. The declaration in
the future of any cash or stock dividends will be at the discretion of the
Board depending upon the earnings, capital requirements and financial position
of the Company, general economic conditions and other pertinent factors.
Restrictions related to Walnut Capital's status as an SBIC impedes the payment
of intercompany dividends, therefore, making more unlikely that the Company
will be in a position to pay cash dividends in the future.
LISTING ON NASDAQ; VOLATILITY OF TRADING
None of the Units, the Common Stock or the Class A Warrants constituting
part of the Units, or the Common Stock underlying the Class A Warrants, is
registered under the Securities Act or any state securities laws and,
accordingly, is not freely tradeable without registration, exemption from
registration or other compliance with the federal and applicable state
securities laws. The Common Stock is listed on The Nasdaq National Market
under the symbol WNUT. The Class A Warrants are not, and are not contemplated
to be, listed on The Nasdaq National Market or any other market.
The Common Stock is traded on a limited basis and, as a result, trades of a
large volume could adversely affect the price of the Common Stock. Pursuant to
the terms of the Company's agreement with the Placement Agent, the Company is
obligated to register all of the Common Stock issued in connection with the
Offering (including the Common Stock underlying the Class A Warrants). In
addition, approximately 10,000,000 shares of Common Stock issued in connection
with the Business Combination and/or the 1995 Private Placement (as hereinafter
defined) are available for resale under Rule 144 promulgated under the
Securities Act of 1933, as amended (the "1933 Act"), and/or have various
registration rights attendant to them. See "DESCRIPTION OF
SECURITIES--Registration Rights." As a result, large amounts of Common Stock
will be available for resale without restriction. Sales of a substantial
number of shares of Common Stock, or the perception that such sales could
occur, could adversely affect prevailing market prices for Common Stock. No
prediction can be made regarding the effect that future sales of Common Stock
will have on the market price of shares.
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INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles and Bylaws include provisions that obligates the
Company to indemnify to the fullest extent not prohibited by law any current or
former officer or director who is made, or threatened to be made, a party to
any action, suit or proceeding, whether civil, criminal, administrative,
investigative or other (including an action, suit or proceeding by or in the
right of the Company), by reason of the fact that the person is or was a
director, officer, employee, fiduciary or agent of the Company, or a fiduciary
with respect to any employee benefit plan of the Company, or serves or served
at the request of the Company as a director, officer, employee or agent or as a
fiduciary of an employee benefit plan of another corporation, joint venture,
trust or other enterprise, subject to certain limitations imposed by the 1940
Act. The Articles expressly provide that such right is not exclusive of any
other provisions for indemnification or advancement of expenses of directors,
officers, employees, agents and fiduciaries included in any statute, bylaw,
agreement, general or specific action of the Board of Directors or other
document or arrangement.
IMMEDIATE DILUTION
Purchasers in the Offering will experience immediate dilution of $0.08 per
share in the net tangible book value of their shares if either the minimum or
the maximum number of Units is sold in the Offering (assuming that no Class A
Warrants are exercised). In the event all of the Class A Warrants are
exercised, purchasers in the Offering will experience dilution of $0.24 per
share in the net tangible book value of their shares of Common Stock if the
minimum number of Units is sold in the Offering, and $0.23 per share if the
maximum number of Units is sold in the Offering. See "DILUTION."
RISKS RELATED TO THE ACCOUNTS RECEIVABLE FACTORING BUSINESS
Upon the consummation of the Pacific Financial Transaction (see "THE
COMPANY--Recent Developments"), the Company will engage in the business of
accounts receivable factoring receivables. The financial failure of a client
or its customers or the failure of the Company to recover under personal
guarantees from the client's principals or from other forms of security may
adversely affect the Company's ability to fully recover amounts due.
Accordingly, losses may result if the Company is unable to recover under
personal guarantees from the client's principals or from other forms of
security. To the extent the Company comes into possession of collateral as a
result of a client's or customer's default, the Company will attempt to dispose
of such collateral. There can be no assurances that the Company will be able
to dispose of the repossessed collateral, or if the collateral can be disposed
of, at the recorded value. Within the receivables financing industry, the
Company will compete with numerous banks and financing companies that serve
small to medium- sized businesses. Many of these competitors have greater
financial and other resources than the Company. In addition, the Company has
no experience in the accounts receivable factoring business and, as a result,
may experience difficulties in assimilating such business into its overall
operations.
DISCLOSURE RELATING TO LOW-PRICED STOCKS
The Commission has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on The Nasdaq
Stock Market system, provided that current price and volume information with
respect to transactions in that security is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document prepared by the Commission that provides information
about penny stocks and the nature and
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level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and
the monthly account statements showing the market value of each penny stock
held in the customer's account. The bid and offer quotations, and the
broker-dealer and salesperson compensation information must be given to the
customer orally or in writing prior to effecting the transaction and must be
given to the customer in writing before or with the customer's confirmation.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to
the penny stock rules. If the Company's securities become subject to the penny
stock rules, holders of the Company's securities may find it more difficult to
sell their securities.
THE COMPANY
GENERAL
The Company is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a BDC under the 1940 Act. As such, the
Company will, among other requirements, be required to invest at least 70% of
its total assets in certain prescribed "Eligible Assets," as defined below,
which generally include securities of privately-held companies and cash items,
government securities and high-quality short-term debt. See "THE
COMPANY--Governmental Regulation--BDC Regulation." The Company currently has
two primary business focuses: (i) investing in start-up and early stage
development companies, and (ii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies. The
Company engages in its investment business (x) through its wholly-owned
subsidiary, Walnut Capital, which was formed in 1980 for the purpose of
operating as an SBIC, and (y) through Walnut Funds, which has an ownership
interest in and provides investment management services to Walnut Growth, a $30
million investment fund. The Company pursues its bridge financings through its
wholly-owned subsidiary, Universal Bridge, which owns 50% of the outstanding
general partnership interests and approximately 83% of the limited partnership
interests of UPLP, an investment vehicle established in 1994. The Company has
begun to engage in the human resources and quality assurance consulting
business through its wholly-owned subsidiary, Walnut Consulting. An
organizational chart of the Company is included in this Memorandum at Exhibit
F. Management anticipates that the Company may seek to cease to be a BDC upon
the acquisition of additional operating businesses; however, the Company may
not change the nature of its business so as to cease to be a BDC unless such
change is approved by the Company's shareholders in accordance with the 1940
Act. As a result of the technical nature of the 1940 Act, the Company's
wholly-owned subsidiaries, Walnut Capital, Walnut Funds and Universal Bridge,
also have each elected to be regulated as a BDC.
BACKGROUND PRIOR TO THE BUSINESS COMBINATION. The Company was organized
under the laws of the State of Utah on June 26, 1984 under the name DNE
Corporation. For the period 1984 through 1988, the Company engaged in
manufacturing operations. After December 1988, the Company ceased all
operations and converted its assets to cash and cash equivalents. During the
period December 1988 to March 1992, the Company did not engage in operations.
In March 1992, the Company acquired NFS and commenced its asset recovery
business.
WALNUT CAPITAL AND THE BUSINESS COMBINATION. Prior to February 27, 1995,
Walnut Capital was a privately held investment company managed by members of
the Company's current management. On February 27, 1995, the former
shareholders of Walnut Capital acquired the Company in a reverse acquisition
(the "Business Combination"). The holders of shares of Walnut Capital $.10 par
value common stock ("Walnut Common Stock") exchanged each share of Walnut
Common Stock for 111.327 shares of the Company's Common Stock. As a result of
the Business Combination, the Company issued
16
<PAGE> 46
8,826,009 shares of Common Stock in exchange for all of the outstanding Walnut
Common Stock and may have inadvertently become an unregistered investment
company. See "RISK FACTORS--Failure to Comply with the 1940 Act."
WALNUT CAPITAL
Walnut Capital was incorporated on September 18, 1980 and maintains offices
in Chicago, Illinois and Vienna, Virginia. Since 1984, Walnut Capital has
invested in more than 100 start-up and early stage development companies
(collectively, the "portfolio companies", individually, a "portfolio company").
Once an investment is made, Walnut Capital's principal objective is to assist
the management of the portfolio company by utilizing the extensive experience
and breadth of professional contacts of Walnut Capital's officers, directors
and consultants. Walnut Capital takes an active approach toward assisting a
portfolio company's management to meet and exceed business objectives in order
to enhance the potential return on Walnut Capital's investment. Walnut
Capital's officers, directors and consultants maintain contacts throughout the
U.S. and international business and financial communities and are dedicated to
introducing the management of portfolio companies to additional business
contacts and sources of financing. Walnut Capital's officers, directors and
consultants provide extensive technical, operational and managerial assistance
in a wide variety of industries, and maintain an array of sales and marketing
contacts in the domestic and international business communities.
Subject to various restrictions established pursuant to the SBIA and the
1940 Act, Walnut Capital does not maintain a specific investment policy to
guide its investment choices. Rather, management reviews investment
opportunities and seeks to identify and select the best among them. However,
Walnut Capital, as a BDC, may not acquire any asset other than "Eligible
Assets" unless, at the time the acquisition is made, Eligible Assets represent
at least 70% of the Company's total assets (other than certain assets necessary
for its operation, such as office furniture, equipment and facilities). See
"THE COMPANY--Government Regulation--BDC Regulation" for a description of
"Eligible Assets." In general, Walnut Capital seeks to maintain a diversified
portfolio of companies from various industries and various geographic
locations. Walnut Capital also seeks to invest in companies with original or
exclusive technology or expertise, and in companies that have the potential for
revenue and earnings growth sufficient to become a candidate for a public
offering within five years. Accordingly, Walnut Capital's portfolio companies
are located throughout the United States and in numerous industries. Initial
investment amounts range from $50,000 to $500,000, and may take the form of
debt, equity or some combination thereof. The amount currently invested in
each such company ranges from $25,000 to approximately $2,000,000 and takes the
form of debt, equity or some combination thereof as indicated below. Walnut
Capital has the contractual right to appoint a member of, or an observer to,
the boards of directors of a number of such companies. In addition, Walnut
Capital currently has a representative on the board of directors of an
additional number of such companies although Walnut Capital has no contractual
right to continue such representation. Walnut Capital's representative on the
board of directors of a portfolio company may receive options to purchase
securities of the portfolio company if such options are provided pursuant to a
plan covering all directors. There can be no assurance that Walnut Capital's
representative to the board of directors of such companies can influence or
affect policy with respect to such companies or that said representative will
continue to be elected to the boards of directors of such companies. As of
June 30, 1997, Walnut Capital held equity securities with a fair market value
of approximately $20.5 million, with a cost basis of approximately $13.7
million, and as of such date, approximately 69% of the fair market value of
Walnut Capital's equity securities were concentrated in the healthcare
industry. As of June 30, 1997, Walnut Capital's debt securities were valued at
$825,000, with a cost basis of approximately $1.3 million. Below is a list of
certain of Walnut Capital's investments, divided into business categories,
which constitute those investments of Walnut Capital currently valued at
approximately $50,000 or more, as of June 30, 1997:
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<PAGE> 47
<TABLE>
<CAPTION>
<S> <C> <C> <C>
I. BIO-TECHNOLOGY COMPANIES IV. MEDICAL AND HEALTH PRODUCTS COMPANIES
------------------------ -------------------------------------
Cell Therapeutics, Inc.(1)(4) Greystone Medical Corp.(1)(2)(4)
Titan Pharmaceuticals, Inc.(1)(4) I-Flow Corporation(1)(2)(4)
VaxGen, Inc.(1) Med Images, Inc.(1)(2)
Optiva Corporation(1)
II. COMPUTER AND HIGH-TECH COMPANIES Osteoimplant Technology, Inc. (1)(2)(4)
--------------------------------
Nhancement Technology Corp.(1)(4)
J.L. Wickham Co., Inc.(1)(2) V. SERVICE-RELATED AND LOW-TECH COMPANIES AND
Logic Devices Incorporated (1)(2)(4) OTHER INVESTMENTS
SoftKat, Inc. (2)(3) -----------------
ThermoInformation Solutions, Inc.(1)
Clean America Corporation(3)(4)
Consolidated Technology Group, Inc. (1)(4)
III. HEALTH CARE COMPANIES Foster & Gallagher, Inc.(3)(5)
--------------------- Jenna Lane, Inc. (1)(4)
Linters Inc.(1)
American Psych Systems, Inc.(1) TransGlobal Services(1)(4)
GranCare, Inc.(1)(2)(4) Vision III Imaging, Inc. (1)(2)
HealthCare COMPARE Corp.(1)(2)(4)
Ivonyx Group Services, Inc.(1)
Mental Health Management, Inc.(1)(4)
</TABLE>
____________________
(1) Investment in the form of equity only.
(2) Walnut Capital representative on the board of directors.
(3) Investment in the form of a combination of equity and debt.
(4) Publicly traded.
(5) Held through an interest in Knox Liquidating Partnership, L.P.
UPLP AND UNIVERSAL BRIDGE
On June 17, 1996, Universal Bridge purchased approximately 83% of the
limited partnership interests and 50% of the general partnership interests of
UPLP and, in connection therewith, 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, to certain of the former
partners of UPLP. The remaining 50% of the outstanding general partnership
interests is indirectly owned by Windy City, Inc., a Company Affiliate ("Windy
City"). See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." 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.
As of June 30, 1997, UPLP held equity securities with a fair market
value of approximately $1.5 million, with a cost basis of approximately
$900,000. As of June 30, 1997, UPLP's debt securities were valued at
approximately $490,000 with a cost basis of $770,000. Below is a list of
certain of UPLP's investments, divided into business categories, which in the
aggregate constitute the principal investments of UPLP as of June 30, 1997:
18
<PAGE> 48
<TABLE>
<S> <C> <C> <C>
I. BIO-TECHNOLOGY COMPANIES
------------------------
Cellegy Pharmaceuticals, Inc.(1)(2)
Innapharma, Inc. (3) V. MEDICAL AND HEALTH PRODUCTS COMPANIES
-------------------------------------
SunPharm Corporation(1)(2)
Osteoimplant Technology, Inc. (1)(4)
II. COMMUNICATIONS AND MEDIA COMPANIES Thermedics Corporation, Inc.(2)
----------------------------------
Amplidyne, Inc.(4) VI. SERVICE-RELATED AND LOW-TECH COMPANIES AND
------------------------------------------
Kideo Productions, Inc.(1)(2) OTHER INVESTMENTS
-----------------
Touch Tone America, Inc.(1)(2)
Country Star Restaurants(1)(2)
III. COMPUTER AND HIGH-TECH COMPANIES IDF International, Inc.(1)(4)
--------------------------------
Jenna Lane, Inc. (1)(2)
Software Publishing Company (1)(2) Kat-Man-Du Entertainment(3)
Daleen Technologies, Inc.(3) New World Coffee, Inc. (1)(2)
Didax On-Line, Inc.(4) Ragar Corporation(1)(2)
Intratel Group, Ltd.(4) Vintage Group(3)
Javelin Systems(1)(2) Weitzer Homebuilders, Inc.(1)(4)
Multimedia Games, Inc.(1)(2)
Palomar Electronics(3) VII. BASIC INDUSTRY
--------------
ThermoLyte Corporation(2)
VictorMaxx Technologies, Inc.(1)(2) Clean America Corporation(1)(4)
Delta-Omega Technologies, Inc.(1)(2)
IV. HEALTH CARE COMPANIES Industrial Flexible Materials, Inc.(1)(2)
---------------------
Nuecol Corporation(2)
American HealthChoice, Inc.(1)(4) Thermo Euro Tech, N.V. (2)
Complete Wellness Centers, Inc.(1)(2)
Greystone Medical Corp.(2)
</TABLE>
___________________
(1) Publicly traded.
(2) Investment in form of equity only.
(3) Investment in form of debt only.
(4) Investment in form of a combination of equity and debt.
WALNUT FUNDS
Walnut Funds owns a 40% interest in WGP Management Company, Inc. (the
"Management Company") and a 40% interest in Walnut GP, L.L.C. (the "General
Partner"), the 1% sole general partner of Walnut Growth. The General Partner
is entitled to a portion of the gains on the investment made by Walnut Growth.
The Teachers' Retirement System of the State of Illinois is the 99% sole
limited partner and is obligated to provide nearly all of the capital for
Walnut Growth. The Management Company provides investment management and other
services to the General Partner and receives management fees. Walnut Growth
was formed in October 1996 to provide initial financing to early stage and
small companies and has currently invested approximately $4.5 million. In
addition, as a result of Walnut Growth's institutional venture capital
capabilities, the Company, through co-investments with Walnut Growth, is now
able to participate in larger financings to more mature early-stage companies
typically available to the institutional financing market.
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<PAGE> 49
WALNUT CONSULTING
Walnut Consulting was formed in January 1997 to provide various
consulting services. Its current clients include three municipal governmental
agencies for which Walnut Consulting provides human resources and quality
assurance consulting services. It had insignificant revenues during the first
six months of 1997; however, Walnut Consulting will be responsible for the
agency relationship established with NFS. See "THE COMPANY--Recent
Developments." In addition, Walnut Consulting will continue to expand its
existing human resources and quality assurance consulting business to
geographically contiguous governmental agencies and quasi-governmental
agencies.
COMPETITION
Each of Walnut Capital, UPLP and Walnut Growth engages in the business
of investing in companies through debt and equity participation. Consequently,
each of Walnut Capital, UPLP and Walnut Growth competes for investment
opportunities with other venture capital companies, banks and other lenders and
private investors. Many of such entities are significantly larger than the
Company and have greater resources. However, typically Walnut Capital, UPLP
and/or Walnut Growth work directly with management of the investee companies
and experiences no direct competition once an initial investment has been made.
EMPLOYEES
As of September 30, 1997, Walnut Capital employed three people and the
Management Company employed one person. None of the employees of Walnut
Capital or the Management Company are represented by any collective bargaining
agreements and the Company believes that the relationship of Walnut Capital and
the Management Company with their respective employees is good. The Company
has two employees, Burton W. Kanter, Chairman of the Board, and Joel S.
Kanter, President and Chief Executive Officer.
PROPERTY
The Company and Walnut Capital lease their office space in Vienna,
Virginia from Windy City. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
RECENT DEVELOPMENTS
PACIFIC FINANCIAL ACQUISITION. The Company is currently negotiating
the terms of an acquisition agreement with the stockholders of Pacific
Financial (the "Pacific Financial Stockholders"), in connection with the
acquisition by the Company of all of the issued and outstanding capital stock
of Pacific Financial or substantially all of the assets and liabilities of
Pacific Financial (the "Pacific Financial Transaction"). It is anticipated
that the aggregate purchase price in connection with the Pacific Financial
Transaction will be $3,000,000 payable to the Pacific Financial Stockholders as
follows: (a) $900,000 paid in cash at closing; (b) $900,000 in the form of the
Company's Common Stock determined by dividing $900,000 by the average closing
bid price for the Company's Common Stock reported on the Nasdaq National Market
for the five trading days immediately preceding the closing (not to exceed
$2.75 per share); (c) $300,000 in the form of one-year promissory notes,
bearing interest at a rate of 8% per annum; and (d) $900,000 in the form of
four-year promissory notes, bearing interest at a rate of 8% per annum. Each
of the promissory notes will be issued by Pacific Financial and guaranteed by
the Company. The maturity of all or a portion of the principal of the
four-year promissory notes may be extended for an additional year in the event
certain accounts receivable of Pacific Financial are not fully or timely
20
<PAGE> 50
collected. In addition, the Company will have certain offset rights under the
promissory notes in the event of uncollected accounts receivable. The closing
of the Pacific Financial Transaction is subject to the satisfaction of various
conditions, including the repayment of approximately $600,000 of notes owed by
Pacific Financial to certain of the Pacific Financial Stockholders and their
affiliates. The Company anticipates that such repayment may be made by
provision to Pacific Financial of equity capital or debt financing from the
Company or arranged by the Company on such terms as the Company deems
appropriate. The Pacific Financial Stockholders will receive registration
rights with respect to the Company's Common Stock issued in the Pacific
Financial Transaction similar to those to which a purchaser in this Offering
will receive.
Management intends to close the Pacific Financial Transaction
irrespective of whether the minimum number of Units is sold hereunder; however,
if the minimum number of Units are sold, the Company intends to use
approximately $1.2 million of the net proceeds in connection with the Pacific
Financial Transaction. Although the documentation relating to the Pacific
Financial Transaction is nearly final, no definitive purchase agreement has
been executed. Accordingly, there can be no assurance that the Pacific
Financial Acquisition will be consummated on the terms described herein or at
all.
SALE OF NFS. On September 29, 1997, the Company consummated the sale
of all of the issued and outstanding capital stock of NFS to an entity (the
"NFS Buyer") controlled by Mr. Eugene Scalercio, the Chief Executive Officer of
NFS and former Director of the Company, for an aggregate purchase price of
$150,000 in the form of a subordinated five- year note made by NFS Buyer. The
Company will recognize into income the proceeds of such note when collected.
The Company and, in the event that no event of default under such note shall
have occurred and be continuing, NFS Buyer each have the right to require the
Company to convert the note into a 15% equity ownership in NFS. As a condition
to closing, NFS was required to pay to the Company $850,000 in satisfaction of
an intercompany receivable. In connection with such sale, the Company and NFS
entered into an agency agreement whereby the Company is entitled to 25% of the
gross profit margin obtained by NFS in its consulting business (but not its
asset recovery business). In addition, in the event that the Company provides
working capital support or advances to NFS in connection with any consulting
arrangement, NFS is obligated to provide such services for a negotiated
commission. Pursuant to the agency agreement, Mr. Scalercio has agreed to not
compete with NFS with respect to the consulting business for a period of three
years and the NFS Buyer has likewise agreed not to compete for a period of ten
years. During the term of the note, NFS is prohibited from declaring or paying
any dividends or other distributions, acquiring or issuing any of its equity
securities, merging or consolidating, liquidating, dissolving or effecting any
form of reorganization, making any investments, incurring certain indebtedness,
selling more than 5% of its assets or taking certain other actions without the
Company's approval. Prior to the sale of NFS, the Company granted to Mr.
Scalercio options to purchase 70,000 shares of Common Stock at an exercise
price of $1.81 per share pursuant to the Company's 1994 Incentive Stock Option
Plan.
GOVERNMENT REGULATION
BDC REGULATION. On October 15, 1997, each of the Company, Walnut
Capital, Walnut Funds and Universal Bridge elected to become regulated as BDCs
under the 1940 Act. Being regulated as a BDC imposes certain limitations upon
the operations of the Company. The following is a brief description of the
1940 Act as it relates to BDCs and is qualified in its entirety by reference to
the full text of the 1940 Act and the rules thereunder.
Generally, to be eligible to elect BDC status, a company must engage
in the business of furnishing capital and offering significant managerial
assistance to companies that do not have ready access to capital through
conventional financial channels. Such portfolio companies are termed "eligible
21
<PAGE> 51
portfolio companies." More specifically, in order to qualify as a BDC, a
company must (i) be a domestic company; (ii) have registered a class of its
securities or have filed a registration statement with the Commission pursuant
to Section 12 of the 1934 Act; (iii) operate for the purpose of investing in
the securities of certain types of eligible portfolio companies, namely less
seasoned or emerging companies and businesses suffering or just recovering from
financial distress; (iv) offer to extend significant managerial assistance to
such eligible portfolio companies; (v) have a majority of directors who are not
"interested persons" (as defined in the 1940 Act); and (vi) file (or, under
certain circumstances, intend to file) a proper notice of election with the
SEC.
An eligible portfolio company generally is a United States company
that is not an investment company and that (i) does not have a class of
securities registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (ii) is actively controlled by a BDC and has an
affiliate of a BDC on its board of trustees or directors; or (iii) meets such
other criteria as may be established by the SEC. Control under the 1940 Act is
presumed to exist where a BDC owns more than 25% of the outstanding voting
securities of the eligible portfolio company.
Making available significant managerial assistance by a BDC means any
arrangement whereby a BDC, through its directors, trustees, officers or
employees, offers to provide, and, if accepted, does so provide, significant
guidance and counsel concerning the management, operations, or business
objectives and policies of a portfolio company. It is expected that one of the
officers or employees of the Company, Walnut Capital or Walnut Funds will offer
to serve on the board of directors of each private company in which the
Company, Walnut Capital, Walnut Funds or Universal Bridge invests and, if such
offer is not accepted, will offer to enter into a consulting contract with the
management of each such private portfolio company. In such capacity, such
person will offer his or her substantial experience in strategic management
and, if requested, will lend his or her assistance in arranging financings,
managing relationships with financing sources, recruiting management personnel,
and evaluating acquisition and divestiture opportunities. Such person will be
able to call on the experience of the other directors and officers of the
Company, if needed.
The 1940 Act prohibits or restricts companies subject to the 1940 Act
from investing in other investment companies. Moreover, the 1940 Act limits
the type of assets that a BDC may acquire to certain prescribed Eligible Assets
unless, at the time the acquisition is made, Eligible Assets represent at least
70% of the value of the BDC total assets (other than non-investment assets
necessary or appropriate to its operations as a BDC). "Eligible Assets"
include (i) privately acquired securities of companies that were eligible
portfolio companies at the time the BDC acquired the securities; (ii)
securities of bankrupt or insolvent companies; (iii) securities of eligible
portfolio companies controlled by a BDC; (iv) securities received in exchange
for or distributed in or with respect to any of the foregoing; and (v) cash
items, government securities and high-quality short-term debt. The 1940 Act
also places restrictions on the nature of the transactions in which, and the
persons from whom, securities can be purchased in order for the securities to
be considered Eligible Assets. Such restrictions include limiting purchases to
transactions not involving a public offering and the requirement that
securities be acquired directly from either the portfolio company or its
officers, directors or affiliates.
Many of the transactions involving an investment company and its
affiliates (as well as affiliates of those affiliates) which would otherwise be
prohibited without the prior approval of the SEC under the 1940 Act are
permissible for a BDC. However, certain transactions involving certain persons
related to the Company, including its directors, officers and employees, may
still require the prior approval of the SEC. In general, (i) any person who
owns, controls or holds power to vote more than 5% of the Company's outstanding
shares of Common Stock; (ii) any director, executive officer or general partner
of that person; and (iii) any person who directly or indirectly controls, is
controlled by, or is under
22
<PAGE> 52
common control with, that person, must obtain the prior approval of a majority
of the company's disinterested directors and, in some situations, the prior
approval of the Commission, before engaging in certain transactions involving
the Company or any company controlled by the Company. The 1940 Act generally
does not restrict transactions between the Company and its eligible portfolio
companies.
Having elected to be regulated as a BDC, the Company may not change
the nature of its business so as to cease to be, or withdraw its election as, a
BDC unless authorized by "the vote of a majority of its outstanding voting
securities" as determined in accordance with the 1940 Act. A BDC may change
the nature of its business so as to cease being a BDC (and in connection
therewith withdraw its election to be treated as a BDC) only if authorized by
its stockholders. Management expects that the Company, in the future, will
seek to no longer be subject to the 1940 Act; however, there can be no
assurance that the Company will become eligible to no longer be subject to the
1940 Act or that the requisite stockholder approval will be obtained.
The 1940 Act prohibits an investment company such as the Company from
knowingly participating in a joint transaction with an affiliate of any
director or investment adviser to the investment company. Accordingly, the
Company may not, without exemptive relief from the SEC, participate in a joint
transaction with the Company Affiliates. The Company has currently co-invested
with Company Affiliates and intends to submit an exemptive application to the
Commission to permit such co-investment in the future. The Company believes
that it will be advantageous for the Company to co-invest with the Company
Affiliates where such investment is consistent with the investment objective,
strategies and other pertinent factors to the Company. The Company believes
that co-investment by the Company and any Company Affiliates will afford the
Company the ability to achieve greater diversification and, together with any
Company Affiliates, the opportunity to exercise greater influence on the
portfolio companies in which the Company and any Company Affiliates invest
together. Accordingly, the application will seek an exemptive order permitting
the Company and any Company Affiliates to invest together in the same portfolio
companies where appropriate. If the exemptive relief is granted, it is
expected that the Company and Company Affiliates will invest together in
proportion to their respective amounts of capital available for investment
where such is consistent with their respective investment objective, strategies
and other pertinent factors. It is expected that exemptive relief permitting
co-investment will be granted only upon the conditions, among others, that
before a co-investment transaction is effected, the independent directors of
the Company will review such co-investment. In the future, it is expected that
prior to committing to a co-investment, a "required majority" (as defined in
Section 57(o) of the 1940 Act) of the independent directors of the Company will
conclude that (i) the terms of the proposed transaction are reasonable and fair
to the Company and its stockholders and do not involve overreaching of the
Company and its stockholders on the part of any person concerned; (ii) the
transaction is consistent with the interests of the stockholders of the Company
and is consistent with the investment objective and policies of the Company;
and (iii) the investment by the Company Affiliate co-investor would not
disadvantage the Company in making its investment, maintaining its investment
position, or disposing of such investment and that participation by the Company
would not be on a basis different from or less advantageous than that of the
Company Affiliate co-investor. There is no assurance that the application for
exemptive relief will be granted by the SEC. Accordingly, there is no
assurance that the Company will be permitted to co-invest with any Company
Affiliates. See "RISK FACTORS--Need for SEC Exemptive Relief."
In addition to asset and income qualifications, a BDC is restricted as
to the amount of leverage that it can incur. Generally, a BDC may not issue
any class of senior security representing an indebtedness unless, immediately
after such issuance or sale, it will have an asset coverage of at least 200%.
"Asset coverage" of a class of senior security representing an indebtedness of
an issuer means the ratio which the value of the total assets of such issuer,
less all liabilities and indebtedness not
23
<PAGE> 53
represented by senior securities, bears to the aggregate amount of senior
securities representing indebtedness of such issuer. Currently, the Company is
in compliance with the asset coverage requirements.
The 1940 Act imposes certain capital structure requirements on BDC,
such as an overall 25% limit on the amount of derivative securities a BDC can
have outstanding. In general, the amount of voting securities that would
result from the exercise of all outstanding warrants, options, and rights to
subscribe to, convert to, or purchase voting securities of a BDC at the time of
issuance is not permitted to exceed 25% of the outstanding voting securities of
the BDC. If, however, these outstanding derivative securities have been issued
predominantly to management personnel as a component of their compensation,
then a somewhat more restrictive upper limit may apply to the aggregate amount
of derivative securities a BDC can have outstanding. In particular, if the
amount of voting securities that would result from the exercise of all
outstanding warrants, options, and rights issued to a BDC's directors,
officers, employees, and general partners pursuant to an executive compensation
plan would exceed 15% of the outstanding voting securities of the BDC, then the
total amount of voting securities that would result from the exercise of all
outstanding warrants, options, and rights at the time of issuance is not
permitted to exceed 20% of the outstanding voting securities of the BDC.
Prior to October 15, 1997, the Company may have been operating as an
unregistered investment company. From and after the Business Combination, the
Company had relied on an exemption from the registration, filing and operating
requirements imposed by the 1940 Act provided by Rule 3a-2 promulgated by the
SEC under the 1940 Act. The Company's one-year exemption period expired on
February 27, 1996 and from such date the Company may be deemed to have been an
unregistered investment company. See "RISK FACTORS--Failure to Comply with the
1940 Act." The Board of Directors of the Company had 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 registered as an investment company; however, the Company has
determined to elect BDC status in order to comply with the 1940 Act pending the
consummation of significant acquisitions of operating companies. The Company
will then seek to cease to become a BDC, subject to stockholder approval. See
"RISK FACTORS--Restrictions on Future Acquisitions."
The Company also intends to seek exemptive relief from the SEC to
permit the Company, Walnut Capital, Walnut Funds and Universal Bridge to
operate as one company for certain purposes of the 1940 Act and to report
solely on a consolidated basis for purposes of the 1934 Act. See "RISK
FACTORS--Need for SEC Exemptive Relief."
SBA REGULATION. Walnut Capital is licensed to operate as a SBIC under
the SBIA, and is subject to regulation by the SBA. A number of the regulations
are discussed below and reference is made to Part 13 of the Code of Federal
Regulations ("CFR") for the full text of the regulations promulgated under the
SBIA. SBICs are subject to periodic examination by the SBA staff for purposes
of determining compliance with the SBA regulations. As an SBIC, Walnut Capital
has received financial assistance from the SBA through the SBA's purchase of
certain debentures from Walnut Capital.
Under the SBIC program, Walnut Capital generally is permitted to make
loans only to, or purchase securities only of, those small businesses which
qualify as "Small Concerns". A "Small Concern", as defined in the SBA Act and
the SBA regulations, is a business concern that is independently owned and
operated and which is not dominant in its field of operation. In addition, a
small business will qualify as a Small Concern only if, at the time of Walnut
Capital's investment, either (i) it has a net worth, together with any
affiliates, of $18 million or less and an average net income after Federal
income taxes for the preceding two years of $6 million or less (average net
income to be computed without
24
<PAGE> 54
benefit of any carryover loss), or (ii) it satisfies alternative criteria under
the SBA regulations that focus on the industry in which the business is engaged
and the number of persons employed by the business or its gross revenue. The
SBA regulations prohibit an SBIC from providing funds to a Small Concern for
certain purposes, such as for certain purchases of securities and real estate.
Under the SBA regulations, loans to Small Concerns under the SBIC
program generally must have a minimum maturity of five years. Short-term
financing is permissible if the financing is (a) in contemplation of long-term
financing of the Small Concern by Walnut Capital or a group including Walnut
Capital equal to at least the amount of the short-term financing and the term
for such short-term financing is no more than one year, (b) to protect prior
investments by Walnut Capital, or (c) to finance certain ownership changes.
The aggregate annual interest rate and other financing costs Walnut Capital may
charge Small Concerns under the SBIC program is limited by the SBA regulations.
As of June 30, 1997, the maximum rate relating to annual financing costs
allowable under the SBA regulations was 15% for straight loans and 14% for
loans containing an equity component.
In addition to providing funds to a Small Concern in the form of debt,
an SBIC can provide equity funding to a Small Concern. An SBIC can also
acquire options or warrants to purchase equity securities as long as such
instruments do not expire later than six years from the termination of the
SBIC's financing of the Small Concern by prepayment or maturity. Redemption of
such equity securities, options or warrants can be required only after the
first five years and only pursuant to a formula based on book value and/or
earnings and not a redemption price which is a fixed dollar amount. Any equity
financing redeemable in a manner other than as described in the foregoing
sentence will be deemed to be a loan rather than an equity investment and,
therefore, will be subject to the various limitations mentioned in the
preceding paragraphs.
The SBA regulations restrict the amount of control an SBIC can
exercise in connection with a Small Concern. A presumption of control exists
whenever an SBIC and its associates (as defined in the SBA regulations), or two
or more SBICs, control, (i) in the case of a Small Concern with fewer than 50
shareholders, 50% or more of the outstanding voting securities and, (ii) in the
case of a Small Concern with 50 or more stockholders, more than 25% or a block
of 20% or more which is as large or larger than the largest other outstanding
block of voting securities. Temporary control is permitted whenever such
control is reasonably necessary for the protection of the SBIC's investment.
However, a plan to relinquish such control within a reasonable period (not to
exceed seven years) must be submitted to the SBA, and any extension of such
period must have prior SBA approval.
The SBA regulations limit the dollar amount of Walnut Capital's
investments in and loans to any single Small Concern and the affiliates of the
Small Concern to 20% of Walnut Capital's common stock and additional paid-in
capital ("Private Capital").
The SBA regulations require that financing by certain entities deemed
to be affiliates of Walnut Capital cannot be on terms more favorable than the
terms on which Walnut Capital has participated in the financing of a Small
Concern. The burden is on Walnut Capital to show that its terms are at least
as favorable as those extended to the affiliate, and the transactions which are
subject to this burden of proof are those extended contemporaneously with
Walnut Capital's financing or within six months before or after the financing
extended by Walnut Capital.
Based on the Valuation Policies, Walnut Capital's loans are valued
based on the value of the collateral, the borrower's ability to make payments,
the borrower's capitalization and profitability, and other pertinent factors.
Generally, the fair values assigned are amounts that are currently expected to
be realized in the ordinary course of business assuming that the loans will be
held to maturity. Therefore
25
<PAGE> 55
the fair value of loans, as determined in good faith by the Board of Directors
of Walnut Capital, correspond to cost unless adverse factors lead to a
determination of fair value at a lower amount, in which case the fair value
assigned is based on the anticipated liquidation value of the collateral.
Based on the Valuation Policies, the fair value of securities owned, as
determined in good faith by the Board of Directors of Walnut Capital, is based
on the liquidity of, existing market price for, and the anticipated sale price
of, the securities, taking into account standard discounts relating to
restricted securities and available trading volumes, as applicable. In
determining market price, the Board of Directors of Walnut Capital refers
either to the most recent bid price at which such securities were traded on a
national exchange or automated quotation system or, in the case of
privately-held companies, the price at which such securities were most recently
sold by the issuer in its last round of equity financing. The reduction in
fair value, if any, resulting from an assessment of the loans and securities
owned by Walnut Capital is reflected in Walnut Capital's reserve for unrealized
losses.
SBA regulations prohibit purchasing securities of any company unless
the proceeds of the subject transaction inure to the benefit of the issuer
thereof. As such, Walnut Capital is effectively prohibited from making
temporary investment divestiture and reacquisition decisions based solely on
prevailing economic and market conditions. As a result, Walnut Capital can
sell its investment holdings only at such time as it makes a decision that
permanent divestiture of the subject investment is desirable. Therefore, the
applicable regulations may cause Walnut Capital to make long-term investment
decisions which are contrary to short-term prevailing economic and market
circumstances. This regulatory structure, therefore, discourages profit taking
except in the context of complete investment divestiture, and, therefore,
encourages SBICs in general, and Walnut Capital in particular, to operate
unprofitably despite the appreciation of securities which must be held until a
final divestiture decision is made. Currently, management believes it is in
the best interest of the Company not to completely divest of most of Walnut
Capital's investments. These restrictions on Walnut Capital may substantially
limit the ability of the Company to pay dividends in the future or operate
profitability. In addition, the SBA regulations require that SBICs maintain a
ratio of undistributed realized earnings (as defined by the SBA regulations to
exclude unrealized gains and losses) to capital stock and surplus of not more
than 50%.
The SBA has issued a finding that the Company has violated Section
107.903(b)(1) and (d) by financing an Associate (as defined in the SBIA) 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 CFR 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.
Another SBA examination covering the period from March 1, 1995 until February
28, 1997 was completed in April 1997. A written report is expected to be
issued by the SBA in the near future. Management believes that the SBA's
findings, if any, from this examination will not have a material affect on
Walnut Capital or the Company as a whole. To date, the SBA has not declared or
threatened to declare a default under the SBA Debentures 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 declared, Walnut Capital would have 15 days
to cure such default. Failure to cure the default would give the SBA the right
to accelerate the maturity of the SBA Debentures. Based on the market price as
of September 30, 1997, management believes that Walnut Capital could sell
approximately
26
<PAGE> 56
65,000 shares of HealthCare COMPARE Corp. (representing approximately 43% of
the Company's consolidated holdings in such company) or liquidate all or a
portion of its holdings in other investments in order to repay such SBA
Debentures. If Walnut Capital were fail to repay the SBA Debentures, the SBA
would have the right to petition a court to appoint a receiver for Walnut
Capital's assets in accordance with Section 311(c) of the SBIA. After
appointment of a receiver and liquidation of assets to repay the SBA Debentures
and other debt of Walnut Capital, the Company would be entitled to any
remaining assets of Walnut Capital realized upon such liquidation.
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
aggregate compensation to the Placement Agent, but before payment of other
expenses associated with the Offering, including, without limitation, legal,
accounting and printing, estimated to be $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. Approximately $1.2 million of the net proceeds will be used in
connection with the Pacific Financial Transaction and the remaining $975,000
($2,280,000 if the maximum number of Units are sold) will be added to the
Company's working capital. The Company may use its working capital for (i)
investment by Walnut Capital or UPLP in new portfolio companies; (ii)
acquisitions of additional operating businesses in the financial services
industry which may include businesses relating to asset-based lending,
equipment leasing and financial and management consulting; (iii) debt repayment
or restructuring, including partial repayment of the walnut Debentures or the
Company's margin loans or line of credit; or (iv) payment of operating
expenses. If the Board determines to use some or all of the net proceeds of
the Offering to pay down the Company's $2,025,000 loan from ANB, Mr. Joel S.
Kanter and Mr. Burton W. Kanter may be relieved of some or all of their
contingent liabilities arising in connection with their respective guarantees
of said line of credit. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Such repayment would reduce the Company's overall interest expenses.
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 offered hereby 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 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. The following table illustrates this dilution.
27
<PAGE> 57
<TABLE>
<CAPTION>
Assuming Minimum Number of Units, but No Class A Warrants Exercised
<S> <C> <C>
Price Paid Per Share(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.00
Net book value prior to the Offering $0.94
Decrease attributable to purchasers of Units in the Offering (2) $0.02
-----
Pro forma net book value after the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.92
Dilution per share of Common Stock to purchasers of Units . . . . . . . . . . . . . . . . . . . . . . . . $0.08
=====
Assuming Minimum Number of Units, and All Class A Warrants Exercised
Price Paid Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.21
Net book value prior to the Offering $0.94
Increase attributable to purchasers of Units in the Offering(2)(3) $0.03
-----
Pro forma net book value after the Offering and Exercise of Class A Warrants . . . . . . . . . . . . . . $0.97
-----
Dilution per share of Common Stock to purchasers of Units . . . . . . . . . . . . . . . . . . . . . . . . $0.24
=====
</TABLE>
After giving effect to the sale by the Company of the maximum number
of Units offered hereby 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. The following table illustrates this dilution.
<TABLE>
<CAPTION>
Assuming Maximum Number of Units, but No Class A Warrants Exercised
<S> <C> <C>
Price Paid Per Share(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.00
Net book value prior to the Offering $0.94
Decrease attributable to purchasers of Units in the Offering (2) $0.02
-----
Pro forma net book value after the Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.92
-----
Dilution per share of Common Stock to purchasers of Units . . . . . . . . . . . . . . . . . . . . . . . . $0.08
=====
Assuming Maximum Number of Units, and All Class A Warrants Exercised
Price Paid Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.21
Net book value prior to the Offering $0.94
Increase attributable to purchasers of Units in the Offering(2)(3) $0.04
-----
Pro forma net book value after the Offering and Exercise of Class A Warrants . . . . . . . . . . . . . . $0.98
-----
Dilution per share of Common Stock to purchasers of Units . . . . . . . . . . . . . . . . . . . . . . . . $0.23
=====
</TABLE>
28
<PAGE> 58
- --------------------------
(1) This price assumes that there is no value attributed to the Class A
Warrants constituting part of the Units.
(2) After taking into account commissions and expenses payable to the
Placement Agent, and other estimated costs of the Offering.
(3) Includes net proceeds resulting from the exercise of all Class A Warrants
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. The information set forth in the following
table should be read in conjunction with the combined financial statements and
notes thereto included elsewhere in this Memorandum and contained in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
June
30, 1997
---------------
Pro Forma As Adjusted Pro Forma As
Historical (Minimum) Adjusted (Maximum)
--------------- ----------------------- ----------------------
(in thousands)
<S> <C> <C> <C>
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)
------------------ --------------------- ----------------------
Shareholders' 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 2,800,000 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.
29
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On September 29, 1997, the Company sold its wholly-owned subsidiary
NFS. See "THE COMPANY--Recent Developments--Sale of 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 attached hereto as Exhibits A and B. 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 attached hereto as
Exhibit A.
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 value 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 (ii) 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 attributable to reduced
bank debt and margin payable to brokers and the repayment of $4,000,000 of the
Walnut Debentures in April 1997.
30
<PAGE> 60
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's 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%).
31
<PAGE> 61
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 attached hereto as
Exhibit B.
RESULTS OF 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: (1) 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).
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<PAGE> 62
For such 12 month period, revenue from recoveries was $887,000 of
which 56% was derived from three clients (Chemical Bank, $188,000, or 21%, DBL,
$167,000, or 19%, and Merrill Lynch, $145,000, or 16%). Operational support
revenue was $1,157,000 of which 84% was derived from three clients (Chase Bank
$512,000, or 44%, Citibank, N.A., $210,000, or 18%, and Key Investments,
$255,000, or 22%).
For the ten month period ended December 31, 1995, cost of services was
$2,450,000. This amount included an increase in reserve for non-realization of
two products recorded as Work in Progress. This reserve was due to a change in
the status of the customers' expectations of the completion of projects. NFS
management will continue to pursue the collection of these items valued at
$815,000, even though their ultimate collectibility cannot be assured. General
and administrative expenses were $610,000 for the period.
NFS incurred a charge to operations of $1,100,000 in 1996 representing
a write-down of NFS's goodwill, which resulted from the Company's continuing
re-evaluation of the asset recovery business of NFS. Such write-down was made
in accordance with FAS 121.
RESULTS OF COMPANY OPERATIONS FOR THE FISCAL YEAR ENDED DECEMBER 31,
1996 AND THE PERIOD FROM FEBRUARY 28, 1995 THROUGH DECEMBER 31, 1995. The
Company had interest income of $37,000 and general and administrative cost of
$881,000 for the year ended December 31, 1996 as compared to $8,000 and
$575,000, respectively, in the ten month period ended December 31, 1995.
Consolidated net loss for 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: (1) 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.
33
<PAGE> 63
Unrealized losses for the twelve months ended December 31, 1995 were
approximately $2.65 million, net of tax, versus unrealized gains for the twelve
months ended December 31, 1994 of approximately $2.8 million, net of tax. The
change is due to the decline in market value of several of Walnut 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 sale of
34
<PAGE> 64
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.
CERTAIN TAX MATTERS
The Company is taxed as a "C" corporation and, unlike many BDCs, has
not elected, and does not intend to elect, to qualify for pass-through tax
treatment under Subchapter M of the Code.
Section 382 of the Internal Revenue Code of 1986, as amended (the
"Code"), substantially limits "trafficking" in loss corporations solely for
their net operating loss carryovers, capital loss carryforwards, tax credit
carryovers, and built-in losses (collectively, "Tax Attributes").
Specifically, Section 382 requires any corporation that has Tax Attributes and
undergoes an "ownership change" to carry a portion of its Tax Attributes
forward to later years. Despite the existence of sufficient income in any year
to absorb its pre-change Tax Attributes, if so required by the Code, the
corporation may offset only a portion of that income by those attributes,
limited on an annual basis to (a) the value of the loss corporation as of the
"change date" multiplied by (b) the long-term tax-exempt rate.
A corporation is subject to limitation under Section 382 of the Code
only if it experiences an ownership change. An ownership change occurs if (a)
the corporation has Tax Attributes (whether carried forward or occurring
currently), and (b) immediately after the "testing date," (i) the percentage of
stock owned by its "five-percent stockholders" has (ii) increased by more than
fifty (50) percentage points over (iii) the lowest percentage of stock that
such stockholders owned at any time in the testing period.
For such purposes, a testing date includes any date, such as the
closing date of the Business Combination, on which there is a shift in the
ownership of the loss corporation's stock among its five-percent stockholders
or upon which the corporation issues or a five-percent stockholder transfers
certain
35
<PAGE> 65
options to purchase or sell loss corporation stock. Further, a testing period
is a "rolling" three year period preceding a testing date but commences, in no
event, earlier than the first day of the taxable year in which the corporation
has Tax Attributes. Finally, a five-percent stockholder is generally any
person who owns, directly or indirectly, five percent or more of the
corporation's stock at any time in the testing period. Constructive ownership
rules apply to attribute ownership of shares from stockholders of record to
their ultimate beneficial owners when determining a corporation's five-percent
stockholders.
The Company and its consolidated subsidiaries other than Walnut
Capital most likely experienced an ownership change under Section 382 as a
result of the Business Combination. In an attempt to avoid further
restrictions upon the use of the Company's consolidated Tax Attributes as a
result of future testing dates, the Company amended its Articles of
Incorporation (as amended, the "Articles") to impose certain transfer
restrictions. Such restrictions are designed to prohibit transfers by and
among five-percent stockholders. However, there is no assurance that the
Company will nonetheless be limited in its ability to apply its Tax Attributes.
MANAGEMENT
OFFICERS AND DIRECTORS
The Company's current executive officers and directors are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------ --------------------- --------------------------------------
<S> <C> <C>
Burton W. Kanter* 67 Chairman of the Board
Joel S. Kanter* 40 President, Chief Executive Officer
and Director
William F. Burge, III 54 Director
Gene E. Burleson* 56 Director
Solomon A. Weisgal 70 Director
Albert Morrison 60 Director
Earl Chapman 72 Director
Joshua S. Kanter* 34 General Counsel and Secretary
Robert F. Mauer 42 Treasurer
</TABLE>
______________
* These individuals are, or may be deemed to be, "interested persons" of
the Company as that term is defined in Section 2(a)(19) of the 1940 Act.
BURTON W. KANTER. Mr. Kanter has served as Chairman of the Board of
Directors 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
36
<PAGE> 66
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.
JOEL S. KANTER. 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. ("Windy City"), 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 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. 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. 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. 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
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<PAGE> 67
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. Mr. Morrison has been a Director of the Company
since August 1997. He has served as a director of Walnut Capital since 1984.
Mr. Morrison is President of Morrison, Brown, Argiz & Company, Certified Public
Accountants. He has more than 35 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.
EARL CHAPMAN. 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.
JOSHUA S. KANTER. Mr. Kanter has been the Secretary of the Company
since February 28, 1995 and General Counsel of the Company since September 14,
1995. Since June 1993, Mr. Kanter has been of counsel to Barack Ferrazzano
Kirschbaum Perlman & Nagelberg, a Chicago, Illinois law firm specializing in
securities, corporate and real estate law. Mr. Kanter was an associate at that
firm from September 1987 to February 1990. Since 1986, Mr. Kanter has also
been Vice-President of Windy City. Mr. Kanter is the son of Burton W. Kanter
and the brother of Joel S. Kanter.
ROBERT F. MAUER. Mr. Mauer has been the Treasurer of the Company and
Walnut Capital since February 1996. From 1991 to February 1996, he was
Director of Corporate Planning of Washington Gas Light Company and,
concurrently, Vice-President of its non-utility subsidiaries. In this
planning role, he developed the strategic plan for the Washington Gas Light
Company and was responsible for acquisition and divestiture analysis. The
non-utility subsidiaries activities included manufacturing, contracting, home
improvement and real estate. Mr. Mauer was employed by Owens Corning
Corporation from 1977 until 1991. While there, he held a variety of financial
positions that involved both domestic and international assignments. His
responsibilities included roles of Manager of Consolidated Accounting,
Controller and Treasurer of British Operations in Wrexham, Wales, which
encompassed complete financial responsibilities of a manufacturing and
import/export company. Other financial roles included that of Assistant
Treasurer in Brussels, Belgium where he was in charge of all foreign currency
transactions for Owens Corning.
EXECUTIVE 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
(a former officer of Walnut Capital), 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 $100,000 for the 1996 fiscal year. Amounts paid to Messrs. Burton
Kanter, Joel Kanter, Mauer and Faber reflect the fiscal years ended December
31, 1996, 1995 and 1994.
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<PAGE> 68
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
---------------------------
Annual Compensation Awards
-------------------------------------- ---------------------------
Name and Current Options/
Principal Position Year Salary ($) Bonus ($) SARs(#)
- -------------------------- --------- -------------------- ------------------- ------------------------
<S> <C> <C> <C> <C>
Burton W. Kanter(1) 1996 $ 100,000 -- --
Chairman of the Board 1995 150,000(2) -- --
1994 150,000(2) -- 249,929 options
Joel S. Kanter, 1996 $ 200,000 -- --
President and Chief 1995 70,000 -- --
Executive 1994 70,000(3) -- 199,944 options
Officer
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(6)
</TABLE>
_______________
(1) Mr. Kanter was the President and Treasurer of Walnut Capital prior to
the Business Combination.
(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 the Business
Combination 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 $100,000.
(5) Mr. Faber was formerly the Vice-President and Secretary of Walnut
Capital. He resigned from Walnut Capital effective December 31, 1996.
(6) Such options have expired in accordance with their terms.
OPTIONS AND OTHER AWARDS. The following tables provide certain
information regarding options granted to the Named Executive Officers and as to
the value of outstanding options held by the Named Executive Officers,
respectively.
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
Potential Realizable
Value At Assumed Annual
Rates of Stock
Price Appreciation for
Individual Grants Option Term
----------------------------------------------------------------- -----------------------------
Number of Percent of Total Options Exercise
Options Granted Granted to Employees in Price Expiration
Name (#) 1996 (%) ($/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>
39
<PAGE> 69
_________________
(1) Represents incentive stock options granted under the Company's 1994
Stock Incentive 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 that the closing price per share as reported
on The Nasdaq National Market on the respective date of grant.
(4) The Board of Directors recently resolved to reduce the exercise price
of such options to $2.00.
AGGREGATED OPTIONS EXERCISED IN FISCAL YEAR 1996 AND
FISCAL 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in-the-
Acquired on Value Underlying Money Options at Fiscal
Name Exercise Realized Unexercised Options Year-End($(1)
(#) ($) at Fiscal Year-End(#)
- ------------------ ------------- ------------ ---------------------------- ---------------------------------
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 0 0 149,958(4) 0 33,741 0
Faber
</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 have expired in accordance with their terms.
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.
Eugene N. Scalercio has entered into a noncompetition agreement with
NFS, which provides 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.
40
<PAGE> 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has retained the firm of Barack Ferrazzano Kirschbaum
Perlman & Nagelberg ("BFKPN") 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 BFKPN
during fiscal 1996, and has current BFKPN invoices outstanding as of December
31, 1996 totalling approximately $19,000. In addition, the Company has paid
approximately $160,000 in legal fees and expenses to BFKPN through December 31,
1996 and has current BFKPN invoices outstanding as of December 31, 1996
totalling approximately $121,000. The Company also issued 14,000 shares of
Common Stock to Joshua Kanter in January 1996 in lieu of payment of fees of
$35,000 owing to BFKPN.
THC, a company of which Burton W. Kanter is President, had 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. Interest and principal are due on October 31, 1997.
Walnut Capital subleases approximately 1,192 square feet of office
space at 8000 Towers Crescent Drive, Vienna, Virginia from Windy City. Messrs.
Joel Kanter and Joshua Kanter are the President and Vice President,
respectively, of Windy City. Trusts for the benefit of Mr. Burton Kanter's
family own all of the outstanding Common Stock of Windy City. Rental under
such lease is $4,855 per month and includes secretarial services, office
equipment and furniture and parking. The sublease has a one-year term which is
renewable annually. Management believes the terms of such sublease and the
amounts paid thereunder are commensurate to the amounts Walnut Capital would
have to pay to unaffiliated third parties for comparable leased offices and
services.
A wholly-owned subsidiary of Windy City is a general partner of UPLP,
together with Universal Bridge. The partnership agreement provides that each
general partner has the authority to bind UPLP and make decisions on behalf of
UPLP. To date, Universal Bridge has primarily been exercising management
control over UPLP.
The Company has an outstanding $2,025,000 loan with ANB. Messrs.
Burton W. Kanter and Joel S. Kanter have personally guaranteed such line of
credit.
In October 1997, certain officers and employees of the Placement Agent
(including the president of the Placement Agent) agreed to purchase, subject to
stockholder approval, Class A Warrants to purchase in aggregate 800,000 shares
of Common Stock, at an exercise price of $1.50 per share, which, if exercised,
would represent approximately 4.5% of the total number of currently outstanding
shares of Common Stock that will be outstanding after closing of the minimum
Offering (4.1% after closing of the maximum Offering). Such Class A Warrants
will be immediately exercisable and will expire on October 15, 2002. Such
Class A Warrants will be redeemable by the Company on the same terms as the
Class A Warrants and will be subject to the Warrant Agreement. Such Class A
Warrants, however, are not subject to the 18-month transfer restriction imposed
on holders of Units. See "DESCRIPTION OF SECURITIES--Restrictions on
Transfer--Placement Agent Lock Up." Such individuals paid aggregate
consideration of $80,000 for such Class A Warrants.
41
<PAGE> 71
Windy City has been offered the option to exchange warrants to
purchase 452,533 shares of Common Stock at $3.00 per share, which Windy City
currently holds, for 113,133 shares of unregistered, restricted Common Stock.
Windy City has indicated it will accept such offer.
On September 29, 1997, the Company sold all of the outstanding stock
of NFS to a company owned and/or controlled by Mr. Eugene Scalercio, who had
been a director of the Company until his resignation in August 1997. Mr.
Scalercio is the Chief Executive Officer of NFS. See "THE COMPANY--Recent
Developments--Sale of NFS."
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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) the Named
Executive Officers and 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 (a) as of September 30, 1997; (b) pro
forma adjusted the sale of 50 Units (the minimum number offered hereby); and
(c) pro forma adjusted the sale of 80 Units (the maximum number offered
hereby). The numbers do not take into account shares of Common Stock issuable
upon exercise of any of the Class A Warrants. All share information supplied
below has been provided 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.
42
<PAGE> 72
<TABLE>
<CAPTION>
(a) (b) (c)
As of Assuming Minimum Assuming Maximum
September 30, 1997 Number of Units Number of Units
--------------------------- -------------------------- -----------------------------
Percent Percent Percent
Number of of Number of of Number of of
Name/Address Shares Class Shares Class Shares Class
- -------------------------- -------------- ------------ ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Burton W. Kanter(1)
Two North LaSalle St. 1,260,555 8.5% 1,271,688 7.2% 1,271,688 6.7%
Suite 2200
Chicago, IL 60602
Solomon A. Weisgal(2) 430,057 2.9% 430,057 2.5% 430,057 2.3%
120 S. Riverside Plaza
Suite 1420
Chicago, IL 60606
Joel S. Kanter(3) 1,527,740 10.0% 1,527,740 8.6% 1,527,740 7.9%
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
William F. Burge, III 0 0% 0 0% 0 0%
Ayrshire Corporation
2028 Buffalo Terrace
Houston, TX 77019
Gene E. Burleson 0 0% 0 0% 0 0%
c/o GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
Albert Morrison(4) 540,159 3.7% 540,159 3.1% 540,159 2.9%
9795 South Dixie Highway
Miami, FL 33156
Earl Chapman 0 0% 0 0% 0 0%
2039 Laukahi Street
Honolulu, HI 96821
Robert F. Mauer(5) 31,250 * 31,250 * 31,250 *
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
Michael Alan Faber(6) 34,205 * 34,205 * 34,205 *
1227 25th Street N.W.
Suite 700
Washington, D.C. 20037
Executive Officers and 3,835,099 25.3% 3,835,099 21.2% 3,835,099 19.5%
Directors, as a group(7)
Windy City, Inc. (8) 929,103 6.1% 929,103 5.3% 929,103 4.9%
8000 Tower Crescent Drive,
Suite 1070
Vienna, Virginia 22182
- ------------------------------
</TABLE>
Footnotes follow on the next page.
43
<PAGE> 73
__________________________
* 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
Windy City, (iii) warrants to purchase up to 452,533 shares at $3.00
per share owned by Windy City (which warrants Windy City has indicated
it will exchange for 113,133 shares of Common Stock) 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 Windy City. Mr. Kanter,
as President of KFF and Windy City, has sole voting and investment
control of the 855,163 shares owned by KFF and Windy City 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 Windy City's warrants.
Each of KFF and Windy City disclaim any and all beneficial ownership
of the shares owned by the other.
(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 Windy City, and (ii) warrants to
purchase up to 452,433 shares at $3.00 per share owned by Windy City
(which warrants Windy City has indicated it will exchange for 113,133
shares of Common Stock).
44
<PAGE> 74
DESCRIPTION OF SECURITIES
COMMON STOCK
The summary of the terms of the Common Stock set forth below does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Articles and Bylaws of the Company (the "Bylaws") and, in
general, to the Utah Revised Business Corporation Act. Copies of the Articles
and the Bylaws are available at no charge from the Company upon request.
The Articles currently provide that the Company may issue up to
50,000,000 shares of Common Stock with a $.01 par value per share, and
1,000,000 shares of Preferred Stock. The Company has the authority to issue
one or more new series of its Preferred Stock. The Board may amend the
Articles without further vote of the stockholders of the Company to create such
series, to fix the number of shares therein, to alter and revoke preferences,
limitations and relative rights of any wholly unissued class or series and to
change the number in such class or series, either before or after issuance, but
not below the number of shares of a series outstanding nor above the number of
shares of a class available for designation as part of a series. Assuming the
maximum number of Units are sold pursuant to the Offering, 18,659,172 shares of
Common Stock will be issued and outstanding and no Preferred Stock will be
issued and outstanding. In addition, assuming the maximum number of Units are
sold pursuant to the Offering, 2,800,000 shares of Common Stock will be
reserved for issuance upon exercise of the Class A Warrants and up to 1,864,793
shares of Common Stock may be issued upon the exercise of options, warrants and
other derivative securities under the Stock Plans and otherwise outstanding
(including 1,000,000 Class A Warrants owned by certain officers and employees
of the Placement Agent and an unrelated individual). See "DESCRIPTION OF
SECURITIES--Stock Plans and Other Derivative Securities."
All Common Stock issued pursuant to the Offering will be duly
authorized, fully paid and nonassessable. Holders of Common Stock are entitled
to receive dividends if, as and when authorized and declared by the Board out
of assets legally available therefor and to share ratably in the assets of the
Company legally available for distribution to its stockholders in the event of
its liquidation, dissolution or winding up after payment of, or adequate
provision for, all known debts and liabilities of the Company.
Each outstanding share of Common Stock entitles the holder to one vote
on all matters submitted to a vote of stockholders, including the election of
directors. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding Common Stock can elect
all of the directors then standing for election.
Holders of Common Stock have no conversion, sinking fund, redemption,
or preferential rights to subscribe for any securities of the Company.
Shares of Common Stock have equal dividend, distribution, liquidation
and other rights, and have no preference, exchange or, except as expressly
required by Utah law, appraisal rights.
Pursuant to Utah law, a corporation generally cannot dissolve, amend
its certificate of incorporation or merge, unless approved by the affirmative
vote of stockholders holding at least a majority of the shares entitled to vote
on the matter unless a greater percentage is set forth in the corporation's
certificate of incorporation. The Articles do not provide for a greater
percentage in such situations.
45
<PAGE> 75
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 until October 15,
2002; provided, however, that Class A Warrants may not be exercised until
October 15, 1998, without the consent of the Placement Agent. Holders of Class
A Warrants (or the Common Stock received upon exercise thereof) will not be
allowed to transfer such securities during the first 18 months after the
Initial Closing Date, without the consent of the Placement Agent. See
"DESCRIPTION OF SECURITIES--Restrictions on Transfer." Class A Warrants shall
be represented by a warrant certificate issued pursuant to the Warrant
Agreement between the Company and Corporate Stock Transfer, Inc. in the form
attached hereto as Exhibit D.
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 October 15, 1998 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. Upon the exercise of any Class A Warrant (other than the
1,000,000 Class A Warrants to be held by certain officers and directors of the
Placement Agent and an unrelated individual), the Company is required to pay
the Placement Agent a warrant solicitation fee equal to 5% of the Class A
Exercise Price.
MARKET PRICE OF COMMON STOCK
As of September 30, 1997, the Company's stock transfer agent reported
14,659,172 shares of Common Stock outstanding, held by approximately 700
holders of record.
Prior to the Business Combination, the Common Stock was quoted in the
National Quotation Bureau's interdealer system through the Nasdaq "Bulletin
Board" under the symbol NFSS. From February 27, 1995 until August 21, 1995,
the Common Stock has been quoted in the National Quotation Bureau's interdealer
system through the Nasdaq "Bulletin Board" under the symbol WNUT. From and
after August 22, 1995, the Common Stock has been listed on The Nasdaq National
Market under the symbol WNUT. On October 24, 1997, the closing bid price for
the Common Stock was $1 1/2 as reported on The Nasdaq National Market. The
following table shows the high and low quotations for Common Stock for each
quarter for the period January 1, 1995 through September 30, 1995 and high and
low trade prices for each quarter thereafter based upon information received
from the National Quotation Bureau or The Nasdaq Stock Market, as applicable.
Such quotations represent prices between dealers and may not necessarily
include retail markups, markdowns or commissions, and may not represent actual
transactions.
46
<PAGE> 76
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------------------- -------------- --------------
<S> <C> <C>
March 31, 1995 $ 3 1/4 $ 2 3/8
June 30, 1995 3 1/8 2 1/2
September 30, 1995 3 5/8 2
December 31, 1995 3 1/2 2
March 31, 1996 $ 3 3/16 $ 2 1/4
June 30, 1996 2 7/8 2 11/32
September 30, 1996 2 7/8 1 1/2
December 31, 1996 2 1/16 1 1/8
March 31, 1997 $ 1 1/2 $ 29/32
June 30, 1997 1 3/8 13/16
September 30, 1997 1 7/8 1 1/8
December 31, 1997 1 5/8 1 3/8
(through October 24, 1997)
</TABLE>
DIVIDENDS
The Company has paid no cash dividends since its inception and it is
unlikely that any cash dividend will be paid in the future. The declaration in
the future of any cash or stock dividends will be at the discretion of the
Board depending upon the earnings, capital requirement and financial position
of the Company, general economic conditions and other pertinent factors.
Unless otherwise approved by the SBA, Walnut Capital is prohibited from making
any dividend or other cash advance to the Company.
STOCK PLANS AND OTHER DERIVATIVE SECURITIES
The Company has three stock option plans as more fully described below
(collectively, the "Stock Plans"). Each of the Stock Plans provides that
options are exercisable into shares of Common Stock.
THE ORIGINAL 1994 STOCK PLAN AND THE AMENDED 1994 STOCK PLAN. The
Original 1994 Stock Plan was intended to promote equity ownership of the
Company by selected officers, directors, employees and consultants 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 stockholder approval of the Original 1994 Stock Plan has
been obtained. The Board approved the amendment of the Original 1994 Stock Plan
in order to bring such plan into conformity with the 1940 Act, to reflect
certain revisions to Section 16(b) of the 1934 Act and to make other technical
changes (as amended, the "Amended 1994 Stock Plan"). The Amended 1994 Stock
Plan is subject to the approval of stockholders at their upcoming Annual
Meeting. The Amended 1994 Stock Plan is likewise intended to promote equity
ownership of the Company by selected officers, directors and employees (but not
consultants) 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 1940 Act prohibits the granting
of any awards to non-employee directors unless and until the Amended 1994 Stock
Plan has been approved by stockholders and the SEC.
The Amended 1994 Stock Plan will be to be administered by a stock
incentive plan administrative committee which must be comprised only of
disinterested directors appointed by the Board (the
47
<PAGE> 77
"Amended 1994 Stock Plan Committee"). 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 may deem necessary or advisable for the administration
of the Amended 1994 Stock Plan.
The 1994 Stock Plan will provide 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 Amended 1994 Stock Plan Committee. The Board has
reserved 500,000 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 cancelled 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.
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 occurrence of certain events. 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.
Generally, options granted to employees under the Amended 1994 Stock
Plan will remain outstanding and are exercisable for not more than 90 days from
the date on which the person to whom they were granted ceases to be employed by
the Company or its subsidiaries, provided that if the reason for said
termination is the death or disability of the person to whom the options were
granted, said options remain outstanding and are exercisable for 12 months from
the date on which the person to whom they were granted ceases to be employed by
the Company or its subsidiaries. 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, stock, 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.
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 multiplied by
the number of calendar years that the optionee has been entitled to exercise
options.
The Amended 1994 Stock Plan will expire ten years after its approval
by stockholders, unless sooner terminated by the Board. The Board has
authority to amend the Amended 1994 Stock Plan in such manner as it deems
advisable, except that the Board will not permitted without stockholder
approval to amend the Amended 1994 Stock Plan in a manner which would prevent
the grant of incentive 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.
48
<PAGE> 78
As of September 30, 1997, awards of stock options to purchase 257,500
shares of Common Stock had been granted and were outstanding pursuant to the
Original 1994 Stock Plan to various officers and employees of the Company or
the Company's subsidiaries. Said outstanding options are subject to a variety
of vesting schedules and expire between September 2005 and December 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. Stock options to purchase an additional 65,000 shares had been
issued under the Original 1994 Stock Plan and were subsequently cancelled in
connection with the Company's election as a BDC, because such grants would not
have complied with the 1940 Act.
THE 1987 STOCK OPTION PLAN. Walnut Capital, prior to the Business
Combination, issued certain stock options under the Walnut Capital Corporation
1987 Stock Option Plan (as amended, the "1987 Plan"). The 1987 Plan provides
for the grant of "incentive stock options," as defined under Section 422(b) of
the Code, and options that do not so qualify (referred to herein as
"nonstatutory options"), as determined in each individual case by a stock
option plan administrative committee which must be comprised of three
disinterested directors appointed by the Board (the "1987 Plan Committee"). As
of September 30, 1997, there were 589,952 shares reserved for issuance under
the 1987 Plan. If any award granted under the 1987 Plan expires, terminates,
is forfeited or is cancelled for any reason, the shares of Common Stock
allocable to such award will cease to be reserved for issuance thereunder.
As of September 30, 1997, awards of stock options to purchase up to
589,952 shares of Common Stock had been granted and were outstanding pursuant
to the 1987 Plan to various officers and employees of Walnut Capital. All of
said outstanding options are fully vested and presently exercisable into shares
of Common Stock and expire in September 2004. The exercise price of all of the
outstanding options granted pursuant to the 1987 Plan is $1.80 per share of
Common Stock. Stock options to purchase an additional 67,020 shares had been
issued under the 1987 Plan and were subsequently cancelled in connection with
the Company's election as a BDC because such grants would not have complied
with the 1940 Act.
The Company does not intend to grant any additional awards under the 1987 Plan.
THE 1989 STOCK OPTION PLAN. The Company, prior to the Business
Combination, issued certain stock options under the NFS Services, Inc. 1989
Incentive Stock Option Plan (as amended, the "1989 Plan"). The 1989 Plan
provides for the grant of "incentive stock options," as defined under Section
422(b) of the Code, and options that do not so qualify (referred to herein as
"nonstatutory options"), as determined in each individual case by a stock
incentive plan administrative committee which must be comprised of at least two
non-employee disinterested directors appointed by the Board (the "1989 Plan
Committee"). As of September 30, 1997, the Board had reserved 29,500 shares of
Common Stock for issuance under the 1989 Plan. In general, if any award
granted under the 1989 Plan expires, terminates, is forfeited or is cancelled
for any reason, the shares of Common Stock allocable to such award may again be
made subject to an award granted under the 1989 Plan.
As of September 30, 1997, awards of stock options to purchase 29,500
shares of Common Stock had been granted and were outstanding pursuant to the
1989 Plan to various officers and employees of the Company and NFS. All of
said outstanding options are fully vested and presently exercisable into shares
of Common Stock and expire on November 23, 1998. The exercise price of the
outstanding options granted pursuant to the 1989 Plan is $2.50 per share of
Common Stock.
The Company does not intend to grant any additional awards under the 1989 Plan.
49
<PAGE> 79
OTHER DERIVATIVE SECURITIES. In addition to the outstanding options
granted pursuant to the Stock Plans, as of September 30, 1997, the Company had
issued and outstanding (i) options to purchase 40,000 shares of Common Stock at
$2.00 per share, which options expire on July 14, 1998, (ii) warrants to
purchase 452,533 shares of Common Stock at $3.00 per share, which warrants
expire on June 30, 1998, (iii) warrants to purchase 697,391 shares of Common
Stock at $3.00 per share, which warrants expire on June 17, 2001 and (iv) to
certain officers and employees of the Placement Agent and an unrelated
individual (collectively, the "Initial Warrant Purchasers") 1,000,000 Class A
Warrants. The warrants described in (ii) and (iii) above are subject to the
Exchange Offer. See "TERMS OF THE OFFERING--Closing Conditions." Stock
options to purchase an additional 200,000 shares had been issued outside the
Stock Plans and were subsequently cancelled in connection with the Company's
election as a BDC because such grants would not have complied with the 1940
Act.
REGISTRATION RIGHTS
REGISTRATION RIGHTS OF HOLDERS OF UNITS. Holders of the Units (the
"Unit Holders") will have certain registration rights pursuant to the
Registration Rights Agreement attached hereto as Exhibit E (the "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 Final Closing Date, the Placement
Agent 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. Furthermore, there is no assurance that the Placement Agent will
exercise any such demand rights.
In addition, whenever the Company proposes to register any of its
securities under the Securities Act on an 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
50
<PAGE> 80
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-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 or the 1934 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 Purchasers 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 (the "Original Registration Rights Agreement") dated as of February
28, 1995 between the Company and certain parties to the Reorganization
Agreement (the "Original Investors"). 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. Copies of
the Original Registration Rights Agreement are available from the Company upon
request.
In connection with any underwritten piggyback registration, the
Initial Warrant Purchasers 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.
REGISTRATION RIGHTS OF OTHER HOLDERS. In connection with the Business
Combination, the Company granted certain demand and piggyback registration
rights for approximately 10,000,000 shares of Common Stock to the Original
Investors pursuant to the Original Registration Rights Agreement. All of the
Common Stock issued to the Original Investors in connection with the Business
Combination is currently available for resale under Rule 144. As a result,
management believes that it is unlikely that the Original Investors will
exercise any of their demand registration rights. In general, the Original
Investors have "piggy-back" registration rights subject to certain conditions
and priorities. In addition, the Original Investors of at least one-third of
the registrable securities held by the Original Investors may at any time, and
up to two times, within five years from the date of the Original Registration
Rights Agreement request that the Company file a registration statement with
respect to all or part of their registrable securities. The Company shall pay
all the registration expenses in connection with such registrations. Within
ten days after the receipt of such request, the Company will give written
notice to all Original Investors and will include in such registration all of
the registrable securities held by the Original Investors with respect to which
the Company receives a written request for inclusion.
In connection with the Universal Acquisition, the Company granted
"piggy-back" registration rights to the former limited partners of UPLP who in
aggregate received 801,974 shares of Common Stock. See "THE COMPANY--UPLP and
Universal Bridge."
51
<PAGE> 81
RESTRICTIONS ON TRANSFER
PLACEMENT AGENT LOCK UP. Purchasers of Units shall be prohibited from
transferring, selling or otherwise disposing of the Common Stock or the Class A
Warrants constituting the Units, or the Common Stock underlying the Class A
Warrants, for a period of 18 months after the Initial Closing Date without the
consent of the Placement Agent. Certain management and other stockholders are
also subject to lock up agreements with the Placement Agent. See "PLAN OF
DISTRIBUTION." The Initial Warrant Purchasers who will hold 1,000,000 Class A
Warrants will not subject to any lock up agreements with the Placement Agent.
TAX-RELATED TRANSFER RESTRICTIONS. The Company has imposed certain
transfer restrictions on its Common Stock in order to achieve certain perceived
tax benefits. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--Certain Tax Matters." Until December 31, 1998 (the
"Expiration Date"), no person may transfer Common Stock (or options to acquire
Common Stock) to any transferee if such transfer (the "Proposed Transfer") (i)
would result in the Ownership Interest Percentage (as defined below) of the
transferee or any other person to increase above 4-1/2% (the "Ownership
Threshold"), whether or not such transferee or other person held Common Stock
in excess of the Ownership Threshold before the Proposed Transfer, (ii) would
result in an increase in the Ownership Interest Percentage of any "Five Percent
Stockholder" (as defined in Treasury Regulation Section 1.382-2T(g)), or (iii)
is a transfer by a Five Percent Stockholder. The Articles define Ownership
Interest Percentage to mean the sum of a person's direct and indirect ownership
interest in the Company as determined by applicable Treasury Regulations
promulgated pursuant to Section 382 of the Code. Any Proposed Transfer of
Common Stock that would otherwise be prohibited pursuant to the foregoing may
be permitted if the Board determines, among other things, that such Proposed
Transfer will not jeopardize its Tax Attributes, based upon an opinion of
counsel selected by the Board.
Any Proposed Transfer prohibited pursuant to the foregoing shall not
be effective to transfer ownership of those shares of Common Stock in excess of
the shares that would be transferred without restriction (the "Prohibited
Shares") to the purported transferee thereof (the "Purported Acquiror"). All
rights with respect to the Prohibited Shares (including, without limitation,
the right to vote and to receive dividends) shall remain the property of the
person who attempted to transfer the Prohibited Shares to the Purported
Acquiror (the "Transferor"). The Purported Acquiror shall be required, among
other things, to transfer any certificate or other evidence of purported
ownership of the Prohibited Shares to an agent designated by the Company (the
"Agent"). The Agent shall then sell the Prohibited Shares in an arms-length
transaction and shall distribute the proceeds therefrom to the Purported
Acquiror up to the consideration paid by the Purported Acquiror for the
Prohibited Shares (or fair value of the Prohibited Shares in the case of a
gift, inheritance or similar transfer). Any excess sale proceeds shall be
distributed to the Transferor.
The Board has the right (i) to accelerate or extend the Expiration
Date, (ii) to modify the definitions of Ownership Interest Percentage and Five
Percent Stockholder, or (iii) to modify the Ownership Threshold, provided that
the Board determines that such action is necessary or desirable to preserve the
Company's consolidated Tax Attributes, based on the opinion of legal counsel.
Any such change shall be published for seven consecutive days in accordance
with applicable regulations and the Company's Articles.
All stock certificates representing Common Stock will bear a legend
referencing these transfer restrictions.
52
<PAGE> 82
TERMS OF THE OFFERING
GENERAL
The Company is offering a minimum of $2,500,000, and a maximum of
$4,000,000, of Units for $50,000 per Unit. Each Unit consists of 50,000 shares
of Common Stock (subject to adjustment; see "TERMS OF THE OFFERING--Adjustment
to Units") and 35,000 Class A Warrants. At the discretion of the Placement
Agent, fractional Units may be offered in increments of one-quarter ($12,500),
one-half ($25,000) or three-quarters ($37,500).
All subscriptions must be paid either in cash by wire transfer or
accompanied by a personal, cashier's or certified bank check for the full
subscription price payable to "Walnut Financial Services, Inc." The closing
for the sale of the Common Stock offered hereby is expected to occur on or
before 60 days after the date of this Memorandum; however, the Company may
extend such closing or hold interim closings at the discretion of the Company
and the Placement Agent. The Company reserves the right, exercisable in its
absolute discretion, to reject any subscription hereunder, in whole or in part,
for any reason, to allot to a particular subscriber fewer than the number of
Units subscribed for and/or to withdraw or cancel the Offering without notice
or to modify the terms thereof.
All amounts received by the Company prior to completion of the
Offering will be deposited in an non-interest-bearing account with American
Stock Transfer, Inc., New York, New York. The funds in the account will not be
released until the minimum number of Units have been subscribed for, at least
$2,500,000 of gross proceeds have been received and the conditions to closing
have been fulfilled. If requisite stockholder approval is not obtained or the
Offering is otherwise terminated, all funds will be returned to subscribers,
without interest thereon.
CLOSING CONDITIONS
The 1940 Act provides that a BDC may issue warrants or options for
voting securities of such company accompanied by securities, if (i) such
warrants, options or rights expire by their terms within 10 years; (ii) such
warrants or options are not separately transferrable unless no class of such
warrants, options, and securities accompanying them has been publicly
distributed; (iii) the exercise or conversion 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 shareholders of such
BDC, and such issuance is approved by the "required majority" (as defined in
the 1940 Act) of the directors of the company on the basis that such issuance
is in the best interest of such company and its stockholders. In addition, the
rules of The Nasdaq National Market require that a listed company such as the
Company obtain the consent of the holders of a majority of the outstanding
shares of Common Stock for certain issuances of Common Stock (or securities
convertible into Common Stock) if such issuance (i) is at an offering price
below the then current market value and (ii) will represent in excess of 20% of
the number of shares outstanding immediately prior to such issuance. The Board
of Directors of the Company unanimously approved the Offering and the sale of
1,000,000 Class A Warrants to the Initial Warrant Purchasers on the basis that
such issuances were in the best interest of the Company and its stockholders.
The Company intends to solicit the approval of its stockholders for
the consummation of the Offering, including the issuance of up to the maximum
number of Units, and the issuance of the Common Stock issuable upon exercise of
the Class A Warrants, at its 1997 annual meeting. In addition, the Company
will seek the approval of stockholders to issue the 1,000,000 Class A Warrants
to the Initial
53
<PAGE> 83
Warrant Purchasers, as well as certain other outstanding warrants as required
by the 1940 Act. The Company intends to hold such annual meeting on December
17, 1997; however, the Company has not yet mailed the necessary proxy materials
to its stockholders. Such proxy materials must be submitted to the SEC and
will be mailed promptly after the review process has been completed. The Board
of Directors will recommend that the stockholders approve the Offering and the
sale of 1,000,000 Class A Warrants to the Initial Warrant Purchasers and have
agreed to vote any shares of Common Stock owned or controlled by them in favor
of such matters. Management believes that the requisite number of stockholders
will vote to approve such issuances; however, there can be no assurance in this
regard. In the event the requisite number of stockholders does not approve the
Offering, investors will receive their funds from escrow without interest.
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. 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. These
limitations are imposed by the current provisions of the 1940 Act and are
subject to change. Upon the closing of the minimum Offering, 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. In order to comply
with the 25% Limitation, the Company intends to commence the Exchange Offer to
holders of 1,149,924 warrants, whereby the holders of such warrants have the
right to elect to exchange each such warrant for .25 shares of unregistered,
restricted Common Stock. In order to close the minimum Offering, holders of at
least 527,083 of such warrants must elect to accept the exchange offer. Windy
City owns 452,533 of such warrants and has indicated its election to accept the
exchange offer. The minimum Offering cannot close unless holders of an
additional 74,550 warrants elect to accept the exchange offer. No assurances
can be given that the requisite number of holders of warrants will elect to so
exchange and, therefore, the size of the Offering may be reduced.
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.
Management anticipates that the Pacific Financial Transaction will close prior
to the closing of the maximum Offering, which will result in the issuance of
approximately 600,000 shares of Common Stock.
ADJUSTMENT TO UNITS
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
54
<PAGE> 84
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.
Accordingly, 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 circumstances, a purchaser
would receive fewer shares of the Company's Common Stock than the purchaser
would have received if the net asset value thereof had remained below the
offering price.
RESTRICTIONS ON TRANSFERABILITY
None of the Units, the Common Stock or Class A Warrants underlying the
Units, or the Common Stock underlying the Class A Warrants issued in the
Offering will be freely tradeable without registration or other compliance with
the federal and applicable state securities laws. Said securities are or will
be "restricted securities" under the meaning of Rule 144 promulgated under the
1933 Act and may be transferred only pursuant to an effective registration
statement under federal and applicable state securities laws or an applicable
exemption.
The holders of restricted securities may be able to sell their Common
Stock without registration in accordance with the exemption provided by Rule
144 under federal securities laws. In general, under Rule 144, a person (or
persons whose shares are aggregated in accordance with Rule 144) who has
beneficially owned "restricted securities" (defined generally as securities
acquired from the issuer or an affiliate in a non-public transaction) for at
least one year, as well as any persons who purchase unrestricted securities on
the open market who may be deemed "affiliates" of the Company (as defined in
Rule 144), would be entitled to sell within any three-month period a number of
said securities that does not exceed the greater of 1% of the then outstanding
number of said securities or the average weekly trading volume of said
securities during the four calendar weeks preceding each such sale. The
Company generally requires that a selling stockholder provide an opinion of
counsel with respect to the applicability of Rule 144 to a proposed sale.
After restricted securities are held for two years, a person who is not deemed
an "affiliate" of the Company is entitled to sell such securities under Rule
144 without regard to the volume limitations described above. Sales of
securities by affiliates will continue to be subject to the volume limitations.
As defined in Rule 144, an "affiliate" of an issuer is a person that directly
or indirectly, through the use of one or more intermediaries, controls, or is
controlled by, or is under common control with, such issuer.
For a description of significant transfer restrictions relating to
Common Stock contained in the Articles and the required lock up agreement, see
"DESCRIPTION OF SECURITIES--Restrictions on Transfer."
REPRESENTATIONS TO BE MADE BY ALL INVESTORS
Unless otherwise determined by the Company in its sole discretion and
in compliance with applicable federal and state securities laws, subscriptions
for Units will only be accepted from those investors who represent, and who can
support their contention, that: (i) they are "accredited investors," (see
"INVESTOR SUITABILITY STANDARDS"); (ii) they are acquiring the Units for their
own account, for investment only and not with a view toward the resale or
distribution of the Units; (iii) they have such knowledge and experience in
financial and business matters that they are capable, either alone or together
with one or more advisors, of evaluating the merits and risks of the
prospective investment; and (iv) they have been provided the opportunity to ask
questions and receive answers concerning the terms and conditions of the
offering and to obtain any additional information which the Company possesses
or can acquire without unreasonable effort or expense that is necessary to
verify the accuracy
55
<PAGE> 85
of the information furnished in this Memorandum. Each subscriber will be
required to sign a Subscription Agreement which provides, in part, that none of
the Units, the Common Stock or Warrants underlying the Units, or the Common
Stock underlying the Warrants may be sold, transferred or otherwise disposed of
unless they are subsequently registered under the applicable securities laws,
or are transferred pursuant to exemption therefrom, and which contains other
representations and acknowledgements of the prospective investor.
PLAN OF DISTRIBUTION
The Placement Agent has agreed, on behalf of the Company, to sell all
or none of the minimum number of Units offered hereby and to use its best
efforts to sell the remaining Units offered hereby, subject to the terms and
conditions set forth in an agreement between the Company and the Placement
Agent (as amended, the "Placement Agent Agreement"). The Placement Agent may
allow other brokers or dealers approved by the Company to sell Units and shall
remit to such brokers and dealers all or a portion of the compensation to which
the Placement Agent would otherwise be entitled with respect to the sales of
such Units.
The Placement Agent is entitled to a sales commission equal to 10%,
and a non-accountable expense allowance equal to 3%, of the Offering Price of
each Unit sold in the Offering. In addition, the Placement Agent will be
entitled to receive a Class A Warrant solicitation fee equal to 5% of the
exercise price of any Class A Warrant exercised (other than the Class A
Warrants held by the Initial Warrant Purchasers).
Pursuant to the terms of the Placement Agent Agreement, all of the
Named Executive Officers and certain other stockholders will enter into a
lock-up agreement with the Placement Agent which prohibits such people and
entities from transferring their Common Stock, without the prior consent of the
Placement Agent, at any time during the two-year period commencing on the
Initial Closing Date.
In the Placement Agent Agreement, the Company has agreed to indemnify
the Placement Agent against certain civil liabilities, including liabilities
under the Securities Act, or to contribute to payments the Placement Agent may
be required to make in respect thereof.
Subject to approval by the stockholders of the sale of the 1,000,000
Class A Warrants to the Initial Warrant Purchasers, 800,000 of such Class A
Warrants will be owned by certain officers and employees of the Placement
Agent. Such Class A Warrants will be subject to the terms and conditions of
the Class A Warrant Agreement and the Registration Rights Agreement. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" and "DESCRIPTION OF
SECURITIES--Class A Warrants" and "--Registration Rights."
INVESTOR SUITABILITY STANDARDS
Investor suitability standards for the Offering are as follows:
1. Substantial Means and Net Worth. Purchase of the Units is
suitable only for investors who have no need for liquidity in this investment
and who have adequate means of providing for their current needs and
contingencies. Unless the Company should otherwise determine in its sole
discretion, no Units will be sold to a prospective investor unless such
investor is an Accredited Investor under 17 CFR 230.501(a). An "Accredited
Investor" shall mean any person who comes within any of the
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<PAGE> 86
following categories, or who the Company reasonably believes comes within any
of the following categories, at the time of the sale of the securities to that
person:
(1) Any bank as defined in Section 3(a)(2) of the 1933
Act or any savings and loan association or other
institution as defined in Section 3(a)(5)(A) of the
1933 Act whether acting in its individual or
fiduciary capacity; any broker or dealer registered
pursuant to Section 15 of the 1934 Act; any insurance
company as defined in Section 2(13) of the 1933 Act;
any investment company registered under the 1940 Act
or a business development company as defined in
Section 2(a)(48) of that Act; any SBIC licensed by
the SBA under Section 301(c) or (d) of the SBIA; any
plan established and maintained by a state, its
political subdivision, or any agency or
instrumentality of a state or its political
subdivision, for the benefit of its employees, if
such plan has total assets in excess of $5,000,000;
any employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974, if
the investment decisions are made by a plan
fiduciary, as defined in Section 3(21) of such Act,
which is either a bank, savings and loan association,
insurance company, or registered investment adviser,
or if the employee benefit plan has total assets in
excess of $5,000,000 or, if a self-directed plan,
with investment decisions made solely by persons that
are accredited investors;
(2) Any private BDC as defined in Section 202(a)(22) of
the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of
the Internal Revenue Code, corporation, Massachusetts
or similar business trust, or partnership, not formed
for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner
of the issuer of the securities being offered or
sold, or any director, executive officer, or general
partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or
joint net worth with the person's spouse, at the time
of his purchase exceeds $1,000,000;
(6) Any natural person who has an individual income in
excess of $200,000 in each of the two most recent
years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a
reasonable expectation of reaching the same income
level in the current year;
(7) Any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person as described in 17 CFR Section
230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are
accredited investors.
The Company will attempt to ensure compliance with the above
suitability standards by, among other things, requiring the investors to
represent in writing in the Subscription Documents that they meet
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<PAGE> 87
the applicable standards. See "TERMS OF THE OFFERING--Representations to be
Made by all Investors."
2. Ability and Willingness to Accept Risks. The economic benefit
from an investment in the securities depends on the successful operation of the
Company's business, and in turn on many factors beyond the control of the
Company. Accordingly, the suitability for any particular investor of an
investment in the securities will depend upon, among other things, such
investor's investment objectives and such investor's ability to accept
substantial risks, including the risk of a total loss of his investment in the
securities.
3. Ability to Accept Limitations on Transferability. The
investors may not be able to liquidate their investment in Units in the event
of an emergency or for any other reason because the transferability of the
securities is affected by restrictions on resales imposed by Federal securities
laws and the laws of some states.
******************
58
<PAGE> 88
EXHIBIT A
UNAUDITED FINANCIAL INFORMATION
FOR THE SIX-MONTHS ENDED JUNE 30, 1997
FOR
WALNUT FINANCIAL SERVICES, INC.
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.
<PAGE> 89
WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
--------------------- ---------------------
(Unaudited)
ASSETS
<S> <C> <C>
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 (Note 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
Other 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 2,275,000 2,850,000
term debt
Notes payable to other 890,056 875,000
Accounts payable, accrued expenses and other 1,035,605 1,119,785
current liabilities
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
Shareholders' equity:
Preferred stock, no stated value, 1,000,000 shares
authorized, no shares issued
Common stock, $.01 stated value, 50,000,000 shares 146,167 146,167
authorized, 14,616,687 issued in 1997 and
14,616,687 issued in 1996
Additional paid in capital 15,030,269 15,030,269
Retained deficit (1,302,228) (788,775)
--------------------- ---------------------
Total shareholders' equity 13,874,208 14,387,661
--------------------- ---------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $26,321,564 $33,198,475
===================== ======================
</TABLE>
Attention is directed to the accompanying notes to these financial statements
A-1
<PAGE> 90
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
------------- ------------- ------------- -------------
Revenue:
<S> <C> <C> <C> <C>
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 652,313 921,169 289,938 439,231
costs ----------- ----------- ---------- -----------
(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 2,478,758 (251,306) (596,554) (185,976)
loss
Unrealized gain on investments, (2,992,211) 1,530,621 1,118,532 (158,882)
net of tax ------------ ----------- ---------- ------------
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 14,616,687 14,298,173 14,638,512 13,930,554
outstanding ----------- ----------- ---------- ----------
</TABLE>
Attention is directed to the accompanying notes to these financial statements
A-2
<PAGE> 91
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 $(513,453) $1,279,315
operations
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
A-3
<PAGE> 92
\ WALNUT FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------
Additional Paid In
Shares Par Value at $0.01 Capital
--------------------- --------------------------- --------------------------
<S> <C> <C> <C>
Balance, December 31, 1996 14,616,687 $146,167 $15,030,269
Net income/(loss)
--------------------- --------------------------- --------------------------
Balance, June 30, 1997 14,616,687 $146,167 $15,030,269
===================== =========================== ==========================
<CAPTION>
Retained Deficit Total
--------------------- ------------
<S> <C> <C>
Balance, December 31, 1996 $(788,775) $14,387,661
Net income/(loss) (513,453) (513,453
--------------------- ------------
Balance, June 30, 1997 $(1,302,228) $13,874,208
===================== ============
</TABLE>
Attention is directed to the accompanying notes to these financial statements
A-4
<PAGE> 93
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.
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
A-5
<PAGE> 94
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>
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
A-6
<PAGE> 95
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.
A-7
<PAGE> 96
EXHIBIT B
AUDITED FINANCIAL INFORMATION
FOR THE YEAR ENDED
DECEMBER 31, 1996
FOR
WALNUT FINANCIAL SERVICES, INC.
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.
<PAGE> 97
AUDITOR'S PAGE
1 of 3
B-1
<PAGE> 98
AUDITOR'S PAGE
2 of 3
B-2
<PAGE> 99
AUDITOR'S PAGE
3 of 3
B-3
<PAGE> 100
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
in 1996 and $384,008 in 1995) 1,512,081 846,694
------------------- ------------------
Total portfolio securities 29,823,735 31,954,961
CURRENT ASSETS:
Cash and cash equivalents 840,225 396,440
Accounts receivable (net of allowance for doubtful
accounts $547,074 in 1996 and $305,273 in 1995) 420,612 630,092
Interest receivable (net of allowance for doubtful
accounts $14,030 in 1996 and $14,030 in 1995) 26,603 27,549
Unbilled receivables 770,754 501,332
Other current assets 208,078 76,420
------------------- ------------------
Total current assets 2,266,272 1,631,833
------------------- ------------------
Fixed assets (net of accumulated depreciation of
$149,604 in 1996 and $123,382 in 1995) 43,431 54,935
------------------- ------------------
Other assets 208,489 355,283
------------------- ------------------
Intangible assets, net of accumulated amortization 856,548 2,066,492
------------------- ------------------
TOTAL ASSETS $ 33,198,475 $ 36,063,504
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Margin payable to brokers $ 5,459,118 $ 5,131,783
Notes payable to banks 2,850,000 4,933,791
Notes payable to other 875,000 270,000
Accounts payable, accrued expenses, and
other current liabilities 1,119,785 1,003,088
Current portion of long-term debt 4,049,500 47,953
------------------- ------------------
Total current liabilities 14,353,403 11,386,615
Long-term debt, net of current portion 4,013,321 8,013,285
Non-current deferred tax liability 37,689 1,247,967
Deferred rent, net of amortization 19,651 16,311
------------------- ------------------
Total liabilities 18,424,064 20,664,178
------------------- ------------------
Minority Interest 386,750 0
------------------- ------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no stated value, 1,000,000 shares -- --
authorized, no shares issued
Common stock, $.01 stated value, 50,000,000 shares
authorized, 14,616,687 issued in 1996 and 13,800,713
issued in 1995 146,167 138,007
Additional paid in capital 15,030,269 13,085,428
Retained earnings (deficit) (788,775) 2,175,891
------------------- ------------------
Total shareholders' equity 14,387,661 15,399,326
------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 33,198,475 $ 36,063,504
=================== ==================
- ----------------------------------
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to the financial statements.
B-4
<PAGE> 101
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.
B-5
<PAGE> 102
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 22,500 225 44,775 --
settlement
Issuance of common stock, net of commissions 1,060,895 10,609 1,951,881 --
Exercise of stock options 54,272 543 74,602 --
----------- ---------------- -------------- -------------------
Balance, December 31, 1995 13,800,713 138,007 13,085,428 2,175,891
Net loss (2,964,666)
Issuance of common stock for legal fees 14,000 140 34,860
Issuance of compensatory warrants for consulting 125,000
Issuance of common stock for Universal
acquisition 801,974 8,020 1,784,981
----------- ---------------- -------------- -------------------
Balance, December 31, 1996 14,616,687 $ 146,167 $15,030,269 $ (788,775)
=========== ================ ============== ===================
</TABLE>
<TABLE>
<CAPTION>
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 -- -- 45,000
settlement
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.
B-6
<PAGE> 103
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 (1,151,456) 2,143,472 761,057
activities ----------------- ------------------- ------------------
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
B-7
<PAGE> 104
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Walnut Financial Services, Inc., a Utah corporation (the "Company"),
currently has three primary business focuses: (i) investing in start-up and
early stage development companies, (ii) providing diversified consulting and
asset recovery services (recovery of financial assets, e.g., cash and
securities, which had not been accounted for by its clients) to securities
firms, banks and others, and (iii) operating an investment vehicle that
specializes in bridge financing to small to medium-sized companies. The
Company engages in the investment business through its wholly-owned subsidiary
Walnut Capital Corp., a Delaware corporation ("Walnut"). Walnut was formed for
the purpose of operating as a Small Business Investment Company (an "SBIC")
under the Small Business Investment Act of 1958 (as amended the "SBA 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 "1940 Act") provided by Rule 3a-2 promulgated by Securities and
Exchange Commission (the "SEC") under the 1940 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 1940 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 1940 Act.
In the event that the SEC determines that either the Company or Walnut
is an investment company and that no exemption from the 1940 Act is applicable,
the Company may incur substantial costs in connection with the registration of
itself or Walnut as an investment company and otherwise complying with the
provisions of the 1940 Act. Specifically, if the Company or Walnut were to
register as an investment company under the 1940 Act, the Company and/or Walnut
would be subject to, among other things, certain limitations with respect to
(i) capital structure and the ability to buy or issue securities; (ii) the
ownership of securities issued by other investment companies, insurance
companies and organizations engaged in investment advisory, underwriting and
brokerage businesses; and (iii) the ability to engage in transactions involving
persons who are "affiliates" of the Company or Walnut, or "affiliates" of such
persons. The Company and/or Walnut would also be subject to certain other
operational restrictions and reporting requirements.
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
B-8
<PAGE> 105
is referred to herein as the "Business Combination.") The Company also issued
125,000 shares of Common Stock as finders' fees in connection with the Business
Combination.
In connection with the Business Combination, the Company engaged in a
private placement (completed in June 1995) of its Common Stock for net proceeds
of $1,962,490 (the "1995 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 1995 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 1995 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.
B-9
<PAGE> 106
GENERAL. Walnut Capital is an SBIC licensee. In the accompanying
financial statements, the financial information of Walnut Capital 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 acknowledgement of pending recoveries. Revenues from
operational support are recognized when billed. Accounts receivable represent
amounts actually billed to customers. Allowances are provided for amounts not
expected to be realized.
Costs of services include salaries, commissions, employee benefits and
payroll taxes and are charged to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial statements:
Cash and cash equivalents approximate fair value. The cost and fair
value of investments are disclosed in Note 4.
Short-term payables -- the carrying amount approximates fair value due
to the short-term maturities of these instruments.
B-10
<PAGE> 107
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 straightline method over the estimated economic lives of the
assets, which range from 5 to 7 years.
DEFERRED FINANCING COSTS. Deferred financing costs are being
amortized by the straight-line method over the five year term of the related
debt.
USE OF ESTIMATES. The preparation of financial statements, in
conformity with generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION. During 1996, the Company adopted Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The provisions of SFAS No. 123 allow companies
to either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" (APB 25) but disclose
the pro forma effects on net income (loss) had the fair value of the options
been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans. See the notes to the
financial statements for further information.
3. FIXED ASSETS
Fixed assets as of December 31 consisted of the following:
B-11
<PAGE> 108
<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>
5. LONG-TERM DEBT
a) SBA DEBENTURES
Total debentures payable were $8,000,000 at December 31, 1996 (the
"SBA Debentures"). One Walnut Capital 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 Capital Debenture with a principal balance of $2,000,000
is payable to SBIC Funding Corp. or its designee
B-12
<PAGE> 109
on June 1, 1998 and bears interest at 9.80%, payable semiannually on June 1 and
December 1 of each year. One Walnut Capital 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 SBA Debentures
and the September Debentures have been paid as required. Payment of the SBA
Debentures is guaranteed by the SBA. Under the terms of the SBA 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. ("Windy City"), an affiliate, pursuant to which Windy
City 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. Windy City 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
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
B-13
<PAGE> 110
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 "SBA 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.
B-14
<PAGE> 111
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.
B-15
<PAGE> 112
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 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:
B-16
<PAGE> 113
<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> <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.
B-17
<PAGE> 114
<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:
B-18
<PAGE> 115
<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 1995 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 1995 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 County.) The parties settled
this matter. The Company issued 333,981 shares of Common Stock
B-19
<PAGE> 116
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.
B-20
<PAGE> 117
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-21
<PAGE> 118
b. Common Stock Options and Warrants.
(1) In 1989, the Company adopted the NFS Services, Inc. 1989
Incentive Stock Option Plan (as amended, the "1989 Plan"). The 1989
Plan is administered by a stock incentive plan administrative
committee appointed by the Company's Board of Directors (the "1989
Plan Committee"). The 1989 Plan Committee has the authority, subject
to approval by the Company's Board of Directors and the terms of the
1989 Plan, to select the persons to whom awards may be granted, to
determine the terms of each award, to interpret the provisions of the
1989 Plan and to make all other determinations that it may deem
necessary or advisable for the administration of the 1989 Plan. The
1989 Plan provides for the grant of "incentive stock options," as
defined under 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 Stock Plan"). The 1994
Stock Plan is administered by a stock incentive plan administrative
committee appointed by the Company's Board of Directors (the "1994
Stock Plan Committee"). The 1994 Stock Plan Committee has the
authority, subject to approval by the Company's Board of Directors and
the terms of the 1994 Stock 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 Stock Plan and to make all other determinations
that it may deem necessary or advisable for the administration of the
1994 Stock Plan. The 1994 Stock 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 Stock Plan Committee. The Company's Board
of Directors has reserved 500,000 shares of Common Stock for issuance
under the 1994 Stock Plan. The Company has granted options under the
1994 Stock Plan as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------ ----------------------------------
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
---------------- ------------ ----------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at January 1 119,500 $2.76
Granted 134,000 2.36 119,500 $ 2.76
---------------- -----------------
Outstanding at December 31 253,500 2.55 119,500 2.76
================ =================
Exercisable 129,500 2.76 35,000 2.79
================ =================
</TABLE>
B-22
<PAGE> 119
- --------------------
(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 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 Stock 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>
B-23
<PAGE> 120
<TABLE>
<CAPTION>
1995
----
Consulting and
Corporate Investing Asset Recovery Total
----------------- --------------- ----------------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 7,845 $ 444,762 $ 2,081,440 $ 2,534,047
Operating (loss) (567,639) (261,800) (978,958) (1,808,397)
Identifiable Assets 4,132,014 28,526,894 3,404,596 36,063,504
Depreciation -- 1,910 22,146 24,056
</TABLE>
Prior to the acquisition of NFS in February 1995, the Company was in
one line of business and therefore no segment information is provided for those
years.
16. STOCK OPTIONS
The Company applies APB 25 in accounting for its stock option plans
and, accordingly, recognizes compensation expense for the difference between
the fair value of the underlying common stock and the grant exercise price of
the option at the date of grant. The effect of applying SFAS No. 123 on 1995
and 1996 pro forma net loss as stated above is not necessarily representative
of the effects on reported net loss for future years due to, among other
things, (1) the vesting period of the stock options and (2) the fair value of
additional stock options in future years. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under the plans consistent with the methodology
prescribed under SFAS No. 123, the Company's net loss in 1996 and 1995 would
have been approximately $3,226,041 and $2,105,544, or $(.23) per share and
$(.17) per share, respectively. The fair value of the options granted during
1996 and 1995 are estimated at $1.16 and $1.95, respectively, on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 67% for 1996 and 62% for 1995,
risk-free interest rate of 5.9%-7.9% for 1996 and 5.3%-6.6% for 1995 and
expected life of 5 years.
17. LONG-TERM ASSETS
The Company is re-evaluating the asset recovery business at NFS. As a
result of the calculations required under FAS 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to Be Disposed of,"
NFS recorded an expense of $1,100,000 representing a write-down of its
goodwill. Management believes that the remaining NFS goodwill of approximately
$800,000 is consistent with the accounting requirements of FAS 121.
B-24
<PAGE> 121
EXHIBIT C
SUBSCRIPTION DOCUMENTS
INTENTIONALLY OMITTED FOR PURPOSES OF OFFERING CIRCULAR
FOR THE EXCHANGE OFFER
<PAGE> 122
EXHIBIT D
WARRANT AGREEMENT
INTENTIONALLY OMITTED FOR PURPOSES OF THE
OFFERING CIRCULAR FOR THE EXCHANGE OFFER
<PAGE> 123
EXHIBIT E
REGISTRATION RIGHTS AGREEMENT
INTENTIONALLY OMITTED FOR PURPOSES OF THE OFFERING CIRCULAR
FOR THE EXCHANGE OFFER
<PAGE> 124
EXHIBIT F
ORGANIZATIONAL CHART OF THE COMPANY
AND ITS SUBSIDIARIES
<PAGE> 125
<TABLE>
<CAPTION>
-----------------------------------
Walnut Financial Services, Inc.
-----------------------------------
<S> <C> <C> <C> <C>
100% 100% 100% 100% --------------
- -------------- ------------- ----------------- ---------------- Various Trusts
Walnut Capital Walnut Funds, Walnut Consulting Universal Bridge --------------
Corp Inc. Inc. Fund, Inc. 100%
- -------------- ------------- ----------------- ---------------- --------------
- -------------- 83% limited 50% general Windy City,
Portfolio partner partner Inc.
Investments --------------
- -------------- 100%
------------- --------------
40% Michael Faber 40% Windy City
------------- Bridges, Inc.
60% 60% ---------------
-------------- ----------------- -----------------------
WGP Management Walnut GP, L.L.C. Universal Partners, L.P.
Company, Inc ----------------- ------------------------ 50% general partner
-------------- ----------------------- partner
1% Portfolio Investments
-------------------- ---------------------- -----------------------
Teachers' Retirement Walnut Growth Partners
System of the State 99% Limited Partnership
of Illinois ----------------------
------------------- ----------------------
Portfolio Investments
----------------------
</TABLE>
<PAGE> 126
- --------------------------------------------------------------------------------
WALNUT FINANCIAL SERVICES, INC.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit 99.2
FORM OF LETTER OF TRANSMITTAL
<PAGE> 2
LETTER OF TRANSMITTAL
TO ACCOMPANY
EXCHANGE OFFER RELATING TO
COMMON STOCK PURCHASE WARRANTS
WITH AN EXERCISE PRICE OF $3.00
OF
WALNUT FINANCIAL SERVICES, INC.
ONE SHARE OF COMMON STOCK
PAR VALUE $0.01 PER SHARE
FOR
EACH 4 OUTSTANDING WARRANTS
TENDERED PURSUANT TO THIS OFFERING CIRCULAR
DATED NOVEMBER 7, 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. EST ON DECEMBER 18, 1997, UNLESS
EXTENDED. TENDERS OF WARRANTS MAY BE WITHDRAWN AT ANY TIME UNTIL THE
EXPIRATION DATE AND, IF NOT THERETOFORE ACCEPTED BY THE COMPANY, ON OR AFTER
JANUARY 12, 1998.
To: CORPORATE STOCK TRANSFER, INC., The Exchange Agent
By Hand, Overnight Delivery or Mail: By Facsimile:
370 17th Street (303) 592-8821
Suite 2350
Denver, Colorado 80202
Attention: Carylyn Bell
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF INSTRUCTIONS
VIA A FACSIMILE NUMBER, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
The undersigned acknowledges receipt of the Offering Circular, dated
November 7, 1997 (the "Offering Circular"), of Walnut Financial Services, Inc.
(the "Company") and this Letter of Transmittal, which together constitute the
Company's offer (the "Exchange Offer") to exchange one share of Common Stock,
par value $.01 per share (the "Common Stock"), of the Company for each 4
outstanding Common Stock Purchase Warrants with an Exercise Price of $3.00 per
Warrant (the "Warrants"). No fractional shares of Common Stock will be issued.
A cash payment based upon the current market price of a share of Common Stock
will be made in lieu of fractional shares.
This Letter of Transmittal is to be used (i) if certificates for Warrants
are to be physically delivered to the Exchange Agent herewith, or (ii) if
tenders of Warrants are to be made by book-entry transfer to one of the
accounts maintained by the Exchange Agent at The Depository Trust Company, The
Midwest Securities Trust Company, or The Philadelphia Depository Trust Company,
sometimes collectively referred to herein as the "Book-Entry Transfer
Facilities," and sometimes individually referred to herein as a "Book-Entry
Transfer Facility" pursuant to the procedures set forth in the Offering
Circular under the caption "The Exchange Offer--Procedure for Tendering
Warrants," or (iii) if tenders of Warrants are to be delivered according to the
guaranteed delivery procedures set forth in the Offering Circular under the
caption "The Exchange Offer--Guaranteed Delivery Procedures." Capitalized
terms used herein and not otherwise defined herein shall have the respective
meanings assigned to them in the Offering Circular.
<PAGE> 3
HOLDERS MUST COMPLETE THE TABLE IN BOX ONE AND SIGN IN BOX TWO TO TENDER
WARRANTS. HOLDERS WHO WISH TO TENDER THEIR WARRANTS MUST, AT A MINIMUM,
COMPLETE COLUMNS (1) THROUGH (3) IN THE TABLE IN BOX ONE AND COMPLETE AND SIGN
WHERE SIGNATURES ARE REQUIRED IN BOX TWO. If only those columns are completed,
the holder of Warrants will be deemed to have tendered for exchange all
Warrants listed in the table in Box One unless otherwise indicated in the space
provided at the top of Box One. If a holder of Warrants wishes to tender less
than all of such Warrants, column 4 must be completed in full, and such holder
should refer to Instruction 5 herein.
NOTE: SIGNATURE(S) MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Holders of Warrants who wish to tender with respect to their Warrants and
(i) whose Warrants are not immediately available, or (ii) who cannot deliver
their Warrants, or any other documents required hereby prior to the Expiration
Date, or (iii) who deliver for book-entry transfer on a timely basis, must
deliver their Warrants according to the guarantee set forth in the Offering
Circular under "Procedure for Tendering Warrants." See Instruction 2.
[ ] CHECK HERE IF TENDERED WARRANTS ARE ENCLOSED HEREWITH.
[ ] CHECK HERE IF TENDERED WARRANTS ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:
--------------------------------------------
Book-entry Transfer Facility
Account Number: Transaction Code Number:
----------------- -----------------
[ ] CHECK HERE IF TENDERED WARRANTS ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT
AND COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s):
------------------------------------------
Date of Execution of Notice of Guaranteed Delivery:
-----------------------
Window Ticket Number (if available):
--------------------------------------
Name of Institution Which Guaranteed Delivery:
----------------------------
Book-Entry Transfer Facility
Account Number (if delivered by book-entry transfer):
---------------------
2
<PAGE> 4
Ladies and Gentlemen:
In accordance with the terms and subject to the conditions set forth in
the Offering Circular, the undersigned hereby tenders to the Company the
above-described number of Warrants subject to and effective upon acceptance for
exchange of the Warrants tendered herewith. The undersigned hereby exchanges,
assigns and transfers to, or upon the order of the Company, all right, title
and interest in and to all the Warrants that are being tendered hereby and that
are being accepted for exchange pursuant to the Exchange Offer, and irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned with respect to such Warrants (with full
knowledge that the Exchange Agent also acts as agent for the Company), with
full power of substitution (such power of attorney being deemed to be an
irrevocable power coupled with an interest), to (a) deliver certificates for
such Warrants or transfer ownership of such Warrants on the account books
maintained by the Exchange Agent at a Book-Entry Transfer Facility, together
with, in either case, all accompanying evidences of transfer and authenticity,
to or upon the order of the Company, (b) present such Warrants for transfer on
the books of the Company, and (c) receive all benefits and otherwise exercise
all rights of beneficial ownership of such Warrants, all in accordance with the
terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, exchange, assign and transfer the Warrants
tendered hereby and that when the same are accepted for exchange by the
Company, the Company will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and such Warrants
shall not be subject to any adverse claims. The undersigned will, upon
request, execute and deliver any additional documents determined by the
Exchange Agent or the Company to be necessary or desirable to complete the
exchange, assignment and transfer of the Warrants tendered hereby.
Warrants properly tendered and not withdrawn will be accepted as soon as
practicable after the satisfaction or waiver of all conditions to the Exchange
Offer. Tenders of Warrants may be withdrawn at any time until the Expiration
Date and, if not theretofore accepted by the Company, on or after January 12,
1998, by delivery of a notice of withdrawal or revocation to the Exchange
Agent. See "The Exchange Offer--Withdrawal Rights" in the Offering Circular.
The Exchange Offer is subject to a number of conditions, each of which,
with one exception, may be waived by the Company, as more particularly set
forth in the Offering Circular. The undersigned recognizes that as a result of
such conditions the Company may not be required to exchange any of the Warrants
tendered hereby. In such event, Warrants not exchanged will be returned to the
undersigned at the address shown below the undersigned's signature, unless
otherwise indicated under "Special Exchange Instructions" or "Special Delivery
Instructions."
Warrants so returned will have the same terms as before the Exchange
Offer, subject to the possibility that the shareholders of the Company will
approve at the Annual Meeting the extension of the expiration date of the
Warrants to June 30, 2005.
All authority conferred or agreed to be conferred herein shall survive the
death or incapacity of the undersigned, and any obligation of the undersigned
hereunder shall be binding upon the heirs, executors, administrators, legal and
personal representatives, successors in interest and assigns of the
undersigned. The undersigned understands that tenders of Warrants pursuant to
any of the procedures described in the Offering Circular and in this Letter of
Transmittal will constitute a binding agreement between the undersigned and the
Company upon the terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated herein under "Special Exchange Instructions" or
"Special Delivery Instructions," please issue the Common Stock and return any
Warrants not tendered or not accepted for exchange in the name(s) of the
undersigned at the address set forth above under "Description of Warrants" in
Box One. In the event that the "Special Exchange Instructions and the Special
Delivery Instructions" are completed, please issue the certificates for the
shares of Common Stock, and/or return such certificates for Warrants and/or
the certificates for the shares of Common Stock, to the person or persons so
indicated.
3
<PAGE> 5
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS
OF THE EXCHANGE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm that is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or by a commercial bank or trust
company having an office in the United States (each an "Eligible Institution").
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE GUARANTEED (A) IF THIS
LETTER OF TRANSMITTAL IS SIGNED BY THE REGISTERED HOLDER(S) OF THE WARRANTS
TENDERED HEREWITH AND SUCH HOLDER(S) HAS/HAVE NOT COMPLETED THE BOXES ENTITLED
"SPECIAL EXCHANGE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON THIS
LETTER OF TRANSMITTAL OR (B) IF SUCH WARRANTS ARE TENDERED FOR THE ACCOUNT OF
AN ELIGIBLE INSTITUTION. SEE INSTRUCTION 6.
2. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES FOR WARRANTS;
GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be used (i)
if certificates for Warrants are to be physically delivered to the Exchange
Agent herewith, or (ii) if tenders of Warrants are to be made by book-entry
transfer to the accounts maintained by the Exchange Agent at one of the
Book-Entry Transfer Facilities pursuant to the procedure set forth in the
Offering Circular, or (iii) if tenders of Warrants are to be made according to
the guaranteed delivery procedures set forth in the Offering Circular.
Certificates for all physically delivered Warrants, or confirmation of any
book-entry transfer, as well as a properly completed and duly executed copy of
this Letter of Transmittal or a facsimile thereof, and any other documents
required by this Letter of Transmittal must be received by the Exchange Agent
at its address set forth on the front page of this Letter of Transmittal prior
to the Expiration Date. Holders of Warrants who wish to tender their Warrants
and (i) whose certificates representing numbers of Warrants are not immediately
available, (ii) who cannot deliver their Warrants or any other documents
required hereby prior to the Expiration Date, or (iii) who cannot complete the
procedure for book-entry transfer on a timely basis, must tender their Warrants
according to the guaranteed delivery procedures set forth in the Offering
Circular under "The Exchange Offer--Guaranteed Delivery Procedures." Pursuant
to such procedures: (a) such tender must be made by or through an Eligible
Institution; (b) a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company must be received by
the Exchange Agent prior to the Expiration Date; and (c) the certificates for
all physically tendered Warrants in proper form for transfer, or a
confirmation of a book-entry transfer, as well as a properly completed and duly
executed Letter of Transmittal and any other required documents, must be
received by the Exchange Agent within five New York Stock Exchange trading days
following the Expiration Date, all as provided under the caption "The Exchange
Offer--Guaranteed Delivery Procedures" in the Offering Circular.
The method of delivery of this Letter of Transmittal, Warrants, and all
other required documents to the Exchange Agent is at the election and risk of
the tendering holder of the Warrants. Except as otherwise provided herein and
in the Offering Circular, such delivery will be deemed made only when actually
received by the Exchange Agent. INSTEAD OF EFFECTING DELIVERY BY MAIL, IT IS
RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. In all
cases, sufficient time should be allowed to assure timely delivery. No
documents should be sent to the Company.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Warrants will be resolved by
the Company, whose determination will be final and binding. The Company
reserves the absolute right to reject any or all tenders and withdrawals of
Warrants that are not in proper form or the acceptance of which would, in the
opinion of the Company or its counsel, be unlawful. The Company reserves the
right to waive any irregularities or conditions of tender as to particular
Warrants. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in this Letter of Transmittal) will
be final and binding.
4
<PAGE> 6
No alternative, conditional or contingent tenders will be accepted.
Unless waived, any defects or irregularities in connection with tenders and
withdrawals of Warrants must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent, nor any other person shall
be under any duty to give notice of any defects or irregularities in tenders,
nor shall any of them incur any liability for failure to give any such notice.
Tenders and withdrawals of Warrants will not be deemed to have been made until
all defects and irregularities have been cured or waived. Any Warrants received
by the Exchange Agent that are not properly tendered or delivered and as to
which the irregularities have not been cured or waived will be returned by the
Exchange Agent to the tendering holders of such Warrants unless otherwise
provided in the Letter of Transmittal as soon as practicable following the
Expiration Date.
3. INADEQUATE SPACE. If the space provided under "Description of
Warrants" is inadequate, list and attach hereto on a separate schedule the
Warrant certificate numbers, the class and number of warrants represented
thereby and the number of Warrants being tendered.
4. WITHDRAWALS OF TENDER. Tenders of Warrants may be withdrawn at any
time until the Expiration Date and, if not theretofore accepted for exchange by
the Company, on or after January 12, 1998.
Any holder of Warrants who has tendered Warrants, who succeeds to the
record ownership of Warrants in respect of which a tender has previously been
given, may withdraw such Warrants by delivery of a written notice of
withdrawal. To be effective, a written or facsimile transmission notice of
withdrawal must (i) be timely received by the Exchange Agent at its address or
facsimile number specified above before the Expiration Date, (ii) specify the
name of the registered holder of the Warrants to be withdrawn, (iii) contain
the certificate numbers (shown on the particular certificates) evidencing the
Warrants to be withdrawn, and the class and number of Warrants to be withdrawn,
and (iv) be signed by the registered holder of such Warrants in the same manner
as the original signature on this Letter of Transmittal including any required
signature guarantees, or be accompanied by documents of transfer sufficient to
have the transfer agent for the Warrants register the transfer of such Warrants
into the name of the person withdrawing the Warrants. The signatures on the
notice of withdrawal must be guaranteed by an Eligible Institution unless such
Warrants have been tendered (i) by a registered holder of Warrants who has not
completed the boxes on this Letter of Transmittal entitled "Special Exchange
Instructions" or "Special Delivery Instructions" or (ii) for the account of an
Eligible Institution.
If the Warrants to be withdrawn have been delivered or otherwise
identified to the Exchange Agent, a signed notice of withdrawal is effective
immediately upon receipt of proper written or facsimile transmission notice of
withdrawal even if physical release is not yet effected.
Any Warrants which have been tendered for exchange but which are not
exchanged will be returned to the holder thereof without cost to such holder as
soon as practicable following the Expiration Date. Warrants so returned will
have the same terms as before the Exchange Offer, subject to the possibility
that the shareholders of the Company will approve at the Annual Meeting the
extension of the expiration date of the Warrants to June 30, 2005. Properly
withdrawn Warrants may be retendered at any time prior to the Expiration Date
by following one of the procedures described under the caption "The Exchange
Offer--Withdrawal Rights" in the Offering Circular.
5. PARTIAL TENDERS. If tenders are to be made with respect to Warrants
evidenced by a particular warrant certificate, fill in the class and number of
Warrants which are represented by such certificate in column (4) of Box One
above. THE ENTIRE NUMBER OF WARRANTS WILL BE DEEMED TO HAVE BEEN TENDERED
UNLESS OTHERWISE INDICATED. In the case of partial tenders, new certificates
representing Warrants in fully registered form for the remainder of the
Warrants represented by the certificate for which such partial tender is made
will be sent to the persons signing this Letter of Transmittal, unless
otherwise indicated in the appropriate boxes on this Letter of Transmittal, as
promptly as practicable after the expiration or termination of the Exchange
Offer.
5
<PAGE> 7
6. SIGNATURES ON THIS LETTER OF TRANSMITTAL; INSTRUMENTS OF TRANSFER AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder
of the Warrants tendered hereby, the signature must correspond with the name as
written on the face of the Warrant without alteration, enlargement or any
change whatsoever.
(a) If any of the Warrants tendered are held of record by two or
more persons, all such persons must sign this Letter of Transmittal.
(b) If any of the Warrants tendered are registered in different
names, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal and any necessary accompanying documents as there
are different registrations.
(c) If this Letter of Transmittal is signed by the registered
holders of Warrants, no endorsements of Warrants or separate instruments
of transfer are required, unless Warrants not exchanged or the
certificates for shares of Common Stock are to be issued in the name of,
or delivered to, any person other than the registered Holders.
Signatures on any such Warrant endorsements or instruments of transfer
must be guaranteed by an Eligible Institution, unless signed by an
Eligible Institution.
(d) If this Letter of Transmittal is signed by a person other than
the registered holders of the Warrants, such Warrants must be endorsed or
accompanied by appropriate instruments of transfer and, in either case,
signed exactly as the name(s) of the registered holder(s) appear(s) on
such Warrants. Signatures on any such Warrants or instruments of
transfer must be guaranteed by an Eligible Institution, unless signed by
an Eligible Institution.
(e) If this Letter of Transmittal or any Warrants or instruments of
transfer are signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation, agent or other person acting
in a fiduciary or representative capacity, such person should so indicate
when signing and, unless waived by the Company, proper evidence
satisfactory to the Company and the Exchange Agent of the authority of
such person to so act must be submitted with this Letter of Transmittal.
7. TRANSFER TAXES. The Company will pay or cause to be paid all transfer
taxes, if any, with respect to the exchange and transfer of any Warrants to it
or its order pursuant to the Exchange Offer. If, however, (i) certificates for
the shares of Common Stock to be received in exchange for Warrants or any
Warrants not exchanged are to be issued in the name of, or delivered to, any
person other than the registered holders, or (ii) if a transfer tax is imposed
for any reason other than the transfer of Warrants to the Company or its order
pursuant to the Exchange Offer, the amount of any transfer taxes (whether
imposed on the registered holders or any other person) will be payable by the
tendering holder(s) of Warrants. Unless satisfactory evidence of the payment
of such taxes, or exemption therefrom, is submitted herewith, the amount of
such transfer taxes will be billed directly to the tendering holder(s) of
Warrants. EXCEPT AS PROVIDED IN THIS INSTRUCTION 7, IT WILL NOT BE NECESSARY
FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE CERTIFICATES LISTED IN THIS LETTER
OF TRANSMITTAL.
8. SPECIAL EXCHANGE INSTRUCTIONS AND SPECIAL DELIVERY INSTRUCTIONS. If
shares of the Common Stock to be received in exchange for Warrants are to be
issued in the name of a person other than the signer of this Letter of
Transmittal or if shares of the Common Stock to be received in exchange for
Warrants are to be sent or returned to someone other than signer of this Letter
of Transmittal or to an address other than that shown above, the appropriate
boxes on this Letter of Transmittal should be completed.
9. IRREGULARITIES AND WAIVER OF CONDITIONS. All questions as to the
validity, form, eligibility (including time of receipt) and acceptance for
exchange of any tender of Warrants will be determined by the Company, in its
sole discretion, which determination shall be final and binding. The Company
reserves the absolute
6
<PAGE> 8
right to reject any and all tenders of Warrants determined by it not to be in
proper form, or the acceptance or exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any defect or irregularity in any tender with respect to any particular
Warrants or any particular Warrantholder, and the Company's interpretations of
the terms and conditions of the Exchange Offer (including these instructions)
shall be final and binding. Unless waived, any defects or irregularities in
connection with tenders must be cured within such time as the Company shall
determine. Neither the Company, the Exchange Agent nor any other person will be
under any duty or obligation to give notice of any defects or irregularities in
tenders, nor shall any of them incur any liability for failure to give such
notice. Any Warrants received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned to the appropriate tending Warrantholder as soon as
possible. Except as otherwise provided in the Offering Circular, the Company
reserves the absolute right to waive any of the specified conditions of the
Exchange Offer, as described in the Offering Circular under the caption "The
Exchange Offer--Conditions to the Exchange Offer."
10. MUTILATED, LOST, STOLEN OR DESTROYED WARRANTS. Any holder whose
Warrants have been mutilated, lost, stolen or destroyed should immediately
contact the Exchange Agent at the address indicated above for further
instructions.
11. TAXPAYER INFORMATION AND SUBSTITUTE W-9.
All Warrantholders. All Warrantholders receiving cash in lieu of
fractional shares must complete the "Substitute Form W-9" set forth in Box
Three.
United States Warrantholders. United States federal income tax law
requires that a United States holder who surrenders Warrants and receives cash
in lieu of fractional shares, to provide the Exchange Agent (as payor) with his
or her correct taxpayer identification number ("TIN"), which, if the
surrendering holder is an individual, is his or her social security number. If
the Exchange Agent is not provided with the correct TIN, the surrendering
holder may be subject to a penalty imposed by the Internal Revenue Service and
payments that are made by the Company to the tendering holder may be subject to
a 31% backup withholding. If withholding results in an overpayment of taxes, a
refund may be obtained. Exempt persons (including generally, among others, all
corporations) are not subject to these backup withholding and reporting
requirements.
To prevent the 31% backup withholding tax, each surrendering United States
holder must provide his or her correct TIN and complete Part 3 of the
"Substitute Form W-9" set forth below, certifying that the TIN provided is
correct (or that the surrendering holder is awaiting a TIN) and that (a) in
accordance with the guidelines included at the end of this Letter of
Transmittal ("Guidelines"), the surrendering holder is exempt from backup
withholding, or (b) the surrendering holder has not been notified by the
Internal Revenue Service that he or she is subject to backup withholding as a
result of failure to report all interest or dividends, or (c) the Internal
Revenue Service has notified the surrendering holder that he or she is no
longer subject to backup withholding. If shares of the Common stock are to be
issued in more than one name or in a name other than that of the actual owner,
consult the Guidelines for information on which TIN to report.
Foreign Warrantholders. United States federal income tax law requires a
foreign holder who surrenders Warrants and receives cash in lieu of fractional
shares, to provide the Exchange Agent (as payor) with a certification on Form
W-8, Certification of Foreign Status, of such holder's foreign status or a TIN.
If the Exchange Agent is not provided with the certification of foreign status
or a TIN, payments that are made by the Company to the surrendering holder may
be subject to the 20% backup withholding tax.
If shares of the Common Stock to be received in exchange for Warrant are
to be owned jointly by more than one foreign holder, the 20% backup withholding
will apply unless every joint payee provides the statement regarding foreign
status or any joint payee who has not established foreign status provides a
TIN.
7
<PAGE> 9
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests
for assistance may be directed to the Exchange Agent at its address and
telephone number set forth above.
IMPORTANT. THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE COPY
HEREOF (TOGETHER WITH CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND
ALL OTHER REQUIRED DOCUMENTS) OR THE NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
BOX ONE
DESCRIPTION OF WARRANTS
- -------------------------------------------------------------------------------
(1) (2) (3) (4)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGREGATE
CERTIFICATE NUMBER OF NUMBER OF
NAME(S) AND ADDRESS(ES) OF NUMBER(S) WARRANTS WARRANTS
REGISTERED HOLDER (ATTACH LIST, REPRESENTED TENDERED FOR
(PLEASE FILL IN, IF BLANK)(a) IF NECESSARY) BY CERTIFICATE EXCHANGE(b)
- -------------------------------------------------------------------------------
TOTAL:
-------------------------------
- ---------------------
(a) Any beneficial holder whose Warrants are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender Warrants should contact such registered holder promptly and
instruct such registered holder to tender Warrants on his behalf. If such
beneficial holder wishes to tender Warrants on his own behalf, such
beneficial holder must, prior to completing and executing this Letter of
Transmittal and delivering his Warrants, make appropriate arrangements to
register ownership of the Warrants in such holder's name. The transfer of
record ownership of Warrants may take considerable time and, depending on
when such transfer is requested, may not be accomplished prior to the
Expiration Date.
(b) Need not be completed by holders who wish to tender all Warrants listed in
column (3).
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
- -------------------------------------------------------------------------------
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 4, AND 8)
To be completed ONLY if the shares of the Common Stock are to be issued in the
name of someone other than the undersigned.
Issue and Mail Shares of the Common Stock to:
Name:
- -------------------------------------------------------------------------------
(PLEASE PRINT)
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
- -------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 4, AND 8)
To be completed ONLY if the shares of the Common Stock are to be mailed to
someone other than the undersigned, or to the undersigned at an address other
than that shown above.
Mail Shares of the Common Stock to:
Name:
- -------------------------------------------------------------------------------
(PLEASE PRINT)
Address:
-----------------------------------------------------------------------
- -------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
- -------------------------------------------------------------------------------
(TAX IDENTIFICATION OR SOCIAL SECURITY NO.)
- -------------------------------------------------------------------------------
9
<PAGE> 11
- -------------------------------------------------------------------------------
BOX TWO
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL HOLDERS OF WARRANTS SURRENDERING FOR EXCHANGE
REGARDLESS OF WHETHER WARRANTS ARE BEING PHYSICALLY DELIVERED HEREWITH)
In order to validly surrender Warrants for exchange pursuant to
the Exchange Offer, this Letter of Transmittal must be signed by the
registered Holder(s) of Warrants exactly as their name(s) appear(s)
on the Warrant certificate(s) or, if surrendered for exchange by a
participant in one of the Book-Entry Transfer Facilities, exactly as
such participant's name appears on a security position listing as
the owner of Warrants, or by person(s) authorized to become
registered Holder(s) by endorsements and documents transmitted with
this Letter of Transmittal.
If signature is by a trustee, executor, administrator,
guardian, attorney-in-fact, officer or other person acting in a
fiduciary or representative capacity, such person must set forth his
or her full title below under "Capacity" and submit evidence
satisfactory to the Company of such person's authority to so act.
See Instruction 6 above.
-------------------------------------------------------------------------
SIGNATURE(S) OF REGISTERED HOLDER(S) OR AUTHORIZED SIGNATORY
Date: , 1997
---------------------
Name(s):
-----------------------------------------------------------------
(PLEASE PRINT)
-------------------------------------------------------------------------
Capacity (full title):
---------------------------------------------------
Address (including zip code):
--------------------------------------------
Area Code and Telephone Number:
------------------------------------------
SIGNATURE GUARANTEE (SEE INSTRUCTION 1 ABOVE) CERTAIN SIGNATURES
MUST BE GUARANTEED BY AN ELIGIBLE INSTITUTION
--------------------------------------------------------------------------
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURES)
-------------------------------------------------------------------------
(ADDRESS (INCLUDING ZIP CODE)/TELEPHONE NUMBER (INCLUDING AREA CODE)
OF FIRM)
-------------------------------------------------------------------------
(AUTHORIZED SIGNATURES)
-------------------------------------------------------------------------
(PRINT NAME)
-------------------------------------------------------------------------
(TITLE)
Date: , 1997
--------------------
PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX THREE OF THIS LETTER OF TRANSMITTAL
- -------------------------------------------------------------------------------
10
<PAGE> 12
- -------------------------------------------------------------------------------
BOX THREE
SUBSTITUTE FORM W-9
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
PAYOR'S NAME: Walnut Financial Services, Inc.
PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AND CERTIFY BY SIGNING AND DATING
BELOW.
------------------------------------
------------------------------
Social Security Number
or
------------------------------
Employer Identification Number
------------------------------------
PART 2 -- CERTIFICATION -- Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification
number (or I am waiting for a number to be issued to me); and
(2) I am not subject to backup withholding because (i) I am exempt from
backup withholding, or (ii) I have not been notified by the Internal
Revenue Service ("IRS") that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (iii) the IRS
has notified me that I am no longer subject to backup withholding.
PART 3 -- Awaiting TIN / / (see below)
CERTIFICATE INSTRUCTIONS -- You must cross out item (2) in Part 2 above if you
have been notified by the IRS that you are subject to backup withholding
because of underreporting interest or dividends on your tax return. However,
if after being notified by the IRS that you are subject to backup withholding
you received another notification from the IRS stating that you are no longer
subject to backup withholding, do not cross out item (2).
SIGNATURE DATE
------------------------------------------- --------------------
NAME
--------------------------------------------
(PLEASE PRINT)
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF
ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW
THE ATTACHED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Officer or (b) I intend to
mail or deliver an application in the near future. I understand that if I do
not provide a taxpayer identification number within 60 days, 31% of all
reportable payments made to me thereafter will be withheld until I provide a
number.
SIGNATURE DATE
----------------------------- -----------------------------
NAME
---------------------------------
(PLEASE PRINT)
- -------------------------------------------------------------------------------
11
<PAGE> 13
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYOR. - Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated
by only one hyphen: i.e., 00-0000000. The table below will help determine the
number to give the payor.
<TABLE>
<CAPTION>
GIVE THE GIVE THE EMPLOYER
SOCIAL SECURITY FOR THIS TYPE OF IDENTIFICATION
FOR THIS TYPE OF ACCOUNT: NUMBER OF - ACCOUNT: NUMBER OF -
- --------------------------------------------------- ------------------------------------------------
<S> <C> <C> <C>
1. Individual The individual 6. A valid trust, Legal entity (Do not
estate, or pension furnish the
trust identification
number of the
personal
representative or
trustee unless the
legal entity itself
is not designated in
the account
title.)(4)
7. Corporate The corporation
8. Association, The organization
2. Two or more The actual owner of club, religious,
individuals (joint the account or, if charitable,
account) (including combined funds, the educational, or
husband and wife) first individual on other tax-exempt
the account(1) organization
9. Partnership The partnership
10. A broker or The broker or nominee
3. Custodian account of The minor(2) registered nominee
a minor (Uniform Gift to 11. Account with The public entity
Minors Act) the Department of
4. a. The usual The grantor-trustee(1) Agriculture in the
revocable savings trust name of a public
(grantor is also entity (such as a
trustee) state or local
b. So-called trust The actual owner(1) government, school
account that is not a district, or
legal or valid trust prison) that
under state law receives
agricultural
5. Sole proprietorship The owner(3) program payments
</TABLE>
(1) List first and circle the name of the person whose number you furnish.
(2) Show the individual's name.
(3) Circle the minor's name and furnish the minor's social security
number.
(4) List first and circle the name of the legal trust, estate, or pension
trust.
(continued next page)
===============================================================================
12
<PAGE> 14
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
<TABLE>
<S> <C>
(Section references are to the Internal Revenue Code) - Payments made by certain foreign organizations.
OBTAINING A NUMBER Payments of interest generally not subject to
If you don't have a taxpayer identification number backup withholding include the following:
("TIN"), apply for one immediately. To apply, - Payments of interest on obligations issued by
obtain Form SS-5, Application for a Social Security individuals
Number Card, or Form SS-4, Application for Employer NOTE: You may be subject to backup withholding
Identification Number, at the local office of the if this interest is $600 or more and is paid in
Social Security Administration or the Internal the course of the payor's trade or business and
Revenue Service ("IRS"). you have not provided your correct TIN to the
payor.
PAYEES AND PAYMENTS EXEMPT FROM BACKUP WITHHOLDING. - Payments of tax-exempt interest (including
- - The following is a list of payees exempt from exempt-interest dividends under section 852).
backup withholding and for which no information - Payments described in section 6049(b)(5) to
reporting is required. For interest and dividends, nonresident aliens.
all listed payees are exempt except item (9). For - Payments on tax-free covenant bonds under
broker transactions, payees listed in (1) through section 1451.
(13) and a person registered under the Investment - Payments made by certain foreign organizations.
Advisers Act of 1940 who regularly acts as a broker - Mortgage interest paid by you.
are exempt. Payments subject to reporting under
sections 6041 and 6041A are generally exempt from Payments that are not subject to information
backup withholding only if made to payees described reporting are also not subject to backup
in items (1) through (7), except that a corporation withholding. For details, see sections 6041,
that provides medical and health care services or 6041A(a), 6042, 6044, 6045, 6049, 6050A, and
bills and collects payments for such services is not 6050N, and the regulations under those sections.
exempt from backup withholding or information
reporting: PRIVACY ACT NOTICE. - Section 6109 requires you
(1) A corporation. to furnish your correct TIN to persons who must
(2) An organization exempt from tax under section file information returns with the IRS to report
501(a), or an individual retirement plan ("IRA"), or interest, dividends, and certain other income
a custodial account under section 403(b)(7). paid to you, mortgage interest you paid, the
(3) The United States or any of its agencies or acquisition or abandonment of secured property,
instrumentalities. or contributions you made to an IRA. The IRS
(4) A state, the District of Columbia, a possession uses the numbers for identification purposes and
of the United States, or any of their political to help verify the accuracy of your tax return.
subdivisions or instrumentalities. You must provide your TIN whether or not you are
(5) A foreign government of any of its political qualified to file a tax return. Payors must
subdivisions, agencies or instrumentalities. generally withhold 20% of taxable interest,
(6) An international organization or any of its dividend, and certain other payments to a payee
agencies or instrumentalities. who does not furnish a TIN to a payor. Certain
(7) A foreign central bank of issue. penalties may also apply.
(8) A dealer in securities or commodities required
to register in the U.S. or a possession of the U.S. PENALTIES
(9) A futures commission merchant registered with (1) FAILURE TO FURNISH TIN. - If you fail to
the Commodity Futures Trading Commission. furnish your correct TIN to a payor, you are
(10) A real estate investment trust. subject to a penalty of $50 for each such
(11) An entity registered at all times during the failure unless your failure is due to reasonable
tax year under the Investment Company Act of 1940. cause and not to willful neglect.
(12) A common trust fund operated by a bank under
section 584(a). (2) CIVIL PENALTY FOR FALSE INFORMATION WITH
(13) A financial institution. RESPECT TO WITHHOLDING. - If you make a false
(14) A middleman known in the investment community statement with no reasonable basis that results
as a nominee or listed in the most recent in no imposition of backup withholding, you are
publication of the American Society of Corporate subject to a penalty of $500.
Secretaries, Inc., Nominee List.
(15) A trust exempt from tax under section 664 or (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.-
described in section 4947. Willfully falsifying certifications or
affirmations may subject you to criminal
Payments of dividends generally not subject to a penalties including fines and/or imprisonment.
backup withholding also include the following:
- - Payments to nonresident aliens subject to FOR ADDITIONAL INFORMATION CONTACT
withholding under section 1441. YOUR TAX CONSULTANT OR THE IRS.
- - Payments to partnerships not engaged in a trade or
business in the U.S. and which have at least one
nonresident partner.
</TABLE>
13
<PAGE> 1
Exhibit 99.3
FORM OF NOTICE OF GUARANTEED DELIVERY
<PAGE> 2
NOTICE OF GUARANTEED DELIVERY
WALNUT FINANCIAL SERVICES, INC.
OFFER TO EXCHANGE
ONE SHARE OF COMMON STOCK
PAR VALUE $.01 PER SHARE
FOR
EACH 4 OUTSTANDING WARRANTS
TENDERED PURSUANT TO ITS OFFERING CIRCULAR
DATED NOVEMBER 7, 1997
THE EXCHANGE OFFER WILL EXPIRE ON
DECEMBER 18, 1997 AT 5:00 P.M. EST
**1 This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of Walnut Financial Services, Inc. (the "Company") made
pursuant to the Offering Circular dated November 7, 1997 and the accompanying
Letter of Transmittal (the "Exchange Offer") if certificates for the Warrants
are not immediately available or time will not permit all required documents to
reach the Exchange Agent prior to the Expiration Date of the Exchange Offer or
if the procedures for book-entry transfer cannot be completed on a timely
basis. Such form may be delivered by hand or transmitted by telegram, telex,
facsimile transmission or mail to the Exchange Agent prior to the Expiration
Date.
To: Corporate Stock Transfer, Inc.
<TABLE>
<S> <C>
By Hand, Overnight Delivery or Mail:
370 17th Street By Facsimile:
Suite 2350 (303) 592-8821
Denver, Colorado 80202 Attention: Carylyn Bell
Attention: Carylyn Bell Confirmation by Telephone: (303) 595-3300
</TABLE>
**2 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF
INSTRUCTION VIA FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
**3 THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. The Eligible
Institution which completes this form must communicate the guarantee to the
Exchange Agent and must deliver the Letter of Transmittal and certificates for
Warrants to the Exchange Agent within the time period shown herein. Failure to
do so could result in a financial loss to such Eligible Institution.
<PAGE> 3
Ladies and Gentlemen:
**4 The Undersigned hereby tenders to the Company, upon the terms and
conditions set forth in the Offering Circular and related Letter of Transmittal
(which constitute the "Exchange Offer"), receipt of which is hereby
acknowledged, Warrants pursuant to the guaranteed delivery procedure described
in the Offering Circular.
(PROCEDURE: TYPE OR PRINT ALL INFORMATION BELOW)
Signatures(s):
-----------------------------------------------------------------
Name(s) of Record Holder(s):
---------------------------------------------------
Address(es):
-------------------------------------------------------------------
Zip Code
Area Code and Tel. No.(s):
-------------------------
Dated:
-------------------------
Warrants Certificate No(s). (if available):
------------------------------------
Number of Warrants:
-----------------------------------------------------------
CHECK IF WARRANTS WILL BE TENDERED BY BOOK-ENTRY TRANSFER.
[ ] The Depository Trust Company
[ ] The Midwest Securities Trust Company
[ ] Philadelphia Depository Trust Company
Account Number:
----------------------------------------------------------------
GUARANTEE
(DO NOT USE FOR SIGNATURE GUARANTEE)
The undersigned, a bank, broker, dealer, credit union, savings association
or other entity that is a member in good standing of a recognized Medallion
Program approved by the Securities Transfer Association, Inc. (an "Eligible
Institution"), hereby guarantees that either the certificate representing the
Warrants tendered hereby, in proper form for transfer, or timely confirmation
of the book-entry transfer of such Warrants into the Exchange Agent's account
at The Depository Trust Company, The Midwest Securities Trust Company or The
Philadelphia Depository Trust Company, in each case together with a properly
completed and duly executed Letter of Transmittal (or facsimile thereof) with
any required signature guarantees and any other required documents, will be
received by the Exchange Agent at one of its addresses set forth above, no
later than three business days after the delivery of this Notice.
Name of Firm:
------------------------------------------------------------------
Address:
-----------------------------------------------------------------------
Zip Code
Area Code & Tel. No.:
---------------------------------------------------------
Authorized Signature:
----------------------------------------------------------
Name/Title:
--------------------------------------------------------------------
Please type or print
Dated: , 1997
-------------------------
<PAGE> 4
NOTE: DO NOT SEND WARRANT CERTIFICATES WITH THIS FORM.
CERTIFICATES MUST BE SENT WITH THE LETTER OF TRANSMITTAL.
