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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission File Numbers 0-26072 and 814-00157
WALNUT FINANCIAL SERVICES, INC.
(Exact name of Registrant as specified in its charter)
UTAH 87-0415597
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8000 TOWERS CRESCENT DRIVE
SUITE 1070, VIENNA, VIRGINIA 22182
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 448-3771
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
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NONE NONE
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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As of March 19, 1998, the Registrant had issued and outstanding 19,180,771.5
shares of the Registrant's common stock, $.01 par value per share (the "Common
Stock"). The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 19, 1998, was $20,200,792.*
* Based on the last reported price of an actual transaction in Registrant's
Common Stock on March 19, 1998 ($1 1/4), and reports of beneficial ownership
filed by directors and executive officers of Registrant and by beneficial
owners of more than 5% of the outstanding shares of Common Stock of Registrant;
however, such determination of shares owned by affiliates does not constitute
an admission of affiliate status or beneficial interest in shares of
Registrant's Common Stock.
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PART I
ITEM 1. BUSINESS
GENERAL. The Company is a closed-end management investment company, which
elected on October 15, 1997 to be regulated as a business development company (a
"BDC") under the Investment Company Act of 1940 (as amended, the "Investment
Company Act"). As such, the Company is, among other requirements, required to
invest at least 70% of its total assets in certain prescribed "Eligible Assets,"
which generally include securities of privately-held companies and cash items,
government securities and high-quality short-term debt. 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) to a lesser
extent, providing accounts receivable factoring services to small and
medium-sized businesses. The Company engages in its investment business (x)
primarily through its wholly-owned subsidiary, Walnut Capital Corp., a Delaware
corporation ("Walnut Capital"), which was formed in 1980 for the purpose of
operating as a Small Business Investment Company (an "SBIC") under the Small
Business Investment Act of 1958 (as amended, the "SBIA") and is subject to
regulations promulgated by the Small Business Administration (the "SBA")
pursuant to the provisions of the Act and (y) to a lesser extent, through its
wholly-owned subsidiary, Walnut Funds, Inc., a Delaware corporation ("Walnut
Funds"), which has a 40% ownership interest in and indirectly (through WGP
Management Company, Inc., a Delaware corporation in which Walnut Funds has a 40%
ownership interest) provides investment management services to Walnut Growth
Partners Limited Partnership, an Illinois limited partnership ("Walnut Growth"),
a $30 million investment fund. The Company pursues its bridge financings
through its wholly-owned subsidiary, Universal Bridge Fund, Inc., a Delaware
corporation ("Universal Bridge"). Universal Bridge owns 50% of the outstanding
general partnership interests and approximately 83% of the limited partnership
interests of Universal Partners, L.P., an Illinois limited partnership ("UPLP").
The Company engages in its accounts receivable factoring business through its
wholly-owned subsidiary, Pacific Financial Services Corporation, a Washington
corporation based in Seattle ("Pacific Financial"), which was acquired by the
Company in January 1998. The Company has begun to engage in the human resources
and quality assurance consulting business through its wholly-owned subsidiary,
Walnut Consulting, Inc., a Delaware corporation ("Walnut Consulting"). The
activity of Walnut Consulting has not been significant to date. On September 29,
1997, the Company sold all of the outstanding stock of its wholly-owned
subsidiary, NFS Services, Inc., a Delaware corporation ("NFS"), which had
performed consulting and asset recovery services. Certain financial information
of UPLP is contained in footnote 11 of the audited financial statements which
are contained in this Report on Form 10-K.
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.
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
Capital Common Stock") exchanged each share of Walnut Capital Common Stock for
111.327 shares of the Company's Common Stock. As a result of the Business
Combination, the Company issued 8,826,009 shares of Common Stock in exchange
for all of the outstanding Walnut Capital Common
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Stock and may have inadvertently become an unregistered investment
company. See "Business--BDC Election."
CAPITAL FINANCING TRANSACTIONS SINCE THE BUSINESS COMBINATION. As a
condition precedent to consummating the Business Combination, the Company
initiated a private placement of its Common Stock which was completed in June
1995 (the "1995 Private Placement"). The Company sold 1,015,625 shares of
Common Stock to investors in the 1995 Private Placement for gross proceeds of
$2,031,250. In addition, the Company issued 125,000 shares of Common Stock as
finders' fees in connection with the Business Combination and 45,270 shares of
Common Stock as sales commissions in connection with the 1995 Private
Placement.
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 (the "Universal Acquisition").
The warrants issued in the Universal Acquisition were subsequently canceled
pursuant to an exchange offer made by the Company whereby each holder elected
to exchange their warrants for shares of newly issued Common Stock and cash in
lieu of fractional shares. The exchange offer provided that one share of
Common Stock would be issued to the holder for every four warrants held. The
exchange offer was consummated on December 18, 1997.
On October 27, 1997, the Company initiated a private placement to
accredited investors (the "1997 Private Placement") of a minimum of 50, and a
maximum of 80, units (the "Units") at $50,000 per Unit. Each Unit consisted of
50,000 shares of Common Stock and 35,000 Class A Redeemable Common Stock
purchase warrants (a "Class A Warrant" and collectively, the "Class A
Warrants"). Each Class A Warrant entitles the holder to acquire one share of
Common Stock at an initial exercise price of $1.50. The Class A Warrants expire
on October 15, 2002. Pursuant to the 1997 Private Placement, the Company issued
4,000,000 shares of Common Stock and 2,800,000 Class A Warrants for gross
proceeds of $4,000,000. The Company used a portion of the proceeds of the 1997
Private Placement to acquire all of the issued and outstanding capital stock of
Pacific Financial. Also on December 18, 1997, the Company consummated the sale
of an additional 1,000,000 Class A Warrants to certain investors.
BDC ELECTION. On October 15, 1997, the Company and certain of its
subsidiaries (Walnut Capital, Universal Bridge and Walnut Funds) elected to be
regulated as BDCs as provided by the Investment Company Act. The Company
inadvertently became subject to the requirements of the Investment Company Act
as a result of the Business Combination. From and after such Business
Combination, the Company had relied on the one-year safe harbor exemption
provided by Rule 3a-2 under the Investment Company Act from the registration,
filing and operating requirements imposed by the Investment Company 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.
As a result, certain actions taken after the expiration of the one-year
exemption period may have violated the Investment Company Act.
The Company has determined it is required to present its financial
statements in accordance with generally accepted accounting principles and
Securities and Exchange Commission regulations in the format applicable to
investment companies. The Company had previously reported its financial
statements in
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accordance with generally accepted accounting principles and Securities and
Exchange Commission rules and regulations applicable to operating companies.
Accordingly, the financial information presented herein for the years ended
prior to December 31, 1997 has been restated in accordance with generally
accepted accounting principles and Securities and Exchange Commission rules in
the format applicable to investment companies which generally means that
investments are reported at fair market value rather than cost, including
wholly-owned subsidiaries.
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. 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 Investment Company Act.
WALNUT CAPITAL-GENERAL. 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, consultants and stockholders. 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, consultants and
stockholders 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, consultants and stockholders 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
Investment Company Act, Walnut Capital does not maintain a specific investment
policy to guide its investment choices. Rather, each of Walnut Capital's
officers reviews investment opportunities and, in collaborative fashion, 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 "Business--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 $100,000 to $750,000, and
may take the form of debt, equity or some combination thereof. The amount
currently invested in each such company ranges from $100,000 to approximately
$1,000,000 and takes the form 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
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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 December 31, 1997, Walnut Capital held
equity securities, including its investment in partnership equity, with a fair
market value of $17.6 million, with a cost basis of approximately $11.0
million, and as of such date, approximately 74% of the fair market value of
Walnut Capital's equity securities were concentrated in the health care
industry. As of December 31, 1997, Walnut Capital's debt securities were valued
at $0.7 million, 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 in the aggregate constitute the principal investments of
Walnut Capital as of December 31, 1997:
<TABLE>
<S> <C>
I. BIO-TECHNOLOGY COMPANIES II. COMPUTER AND HIGH-TECH COMPANIES
Cell Therapeutics, Inc.(3) Nhancement Technology Corp.(2)(5)
J.L. Wickham Co., Inc.(2)(3)
Logic Devices Incorporated (1)(2)(3)
III. HEALTH CARE COMPANIES Multimedia Games, Inc.(1)(3)
American HealthChoice, Inc.(3) SoftKat, Inc. (2)(5)
American Psych Systems, Inc.(3) Thermo Information Solutions, Inc. (3)
First Health Group Corp.(1)(2)(3)
Ivonyx Group Services, Inc.(3) IV. MEDICAL AND HEALTH PRODUCTS
MHM Services, Inc. (1)(3) COMPANIES
Paragon Health Network, Inc. (1)(2)(3) I-Flow Corporation(1)(2)(3)
Greystone Medical Group, Inc. (1)(2)(3)
V. SERVICE-RELATED AND LOW-TECH COMPANIES Med Images, Inc.(2)(3)
AND OTHER INVESTMENTS Optiva Corporation(3)
The Alta Group (1)(5) Osteoimplant Technology, Inc. (1)(2)(3)
Consolidated Technology Group, Inc. (1)(3) Rainbow Medical, Inc. (3)
Inorganic Recycling, Inc. (1) VaxGen, Inc. (3)
Jenna Lane, Inc. (3)
Linters, Inc. (3)
Site Based Media, Inc.
TCOM Services, Inc.(5)
Trans Global Services, Inc. (1)(2)(3)
VINnet, Inc. (3)
Vision III Imaging, Inc. (2)(3)
</TABLE>
__________________
(1) Publicly traded.
(2) Walnut Capital representative on the board of directors.
(3) Investment in the form of equity only.
(4) Investment in the form of debt only.
(5) Investment in the form of a combination of equity and debt.
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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 80,000 shares of Common Stock at an exercise
price of $1.81 per share pursuant to the Company's 1994 Incentive Stock Option
Plan.
UPLP AND UNIVERSAL BRIDGE. Universal Bridge owns 50% of the outstanding
general partnership interests and approximately 83% of the limited partnership
interests of UPLP. The remaining 50% of the outstanding general partnership
interests is indirectly owned by Windy City, Inc., an affiliate of the Company
("Windy City"). UPLP is an investment vehicle that specializes in bridge
financing to 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 1993 and has invested approximately $5 million in
portfolio companies since its inception.
As of December 31, 1997, UPLP had a fair market value of $1.4 million in
equity securities with a cost basis of $1.2 million. UPLP's debt securities
are valued at $0.5 million with a cost basis of $0.8 million. 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 December 31,
1997:
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<TABLE>
<S> <C>
I. BIO-TECHNOLOGY COMPANIES II. COMMUNICATIONS AND MEDIA
Cellegy Pharmaceuticals, Inc.(1)(2) COMPANIES
Innapharma, Inc. (4) Amplidyne, Inc.(1)(2)
SunPharm Corporation(1)(2) Didax On-Line (1)(3)
IntraTel Group, Ltd. (3)
III. COMPUTER AND HIGH-TECH COMPANIES The Outlet Mall Network (4)
Daleen Technologies, Inc.(4) Trex Communications (2)
Dynaco Acquisition Corporation (2)
Multimedia Games, Inc.(1)(2) IV. HEALTH CARE COMPANIES
ThermoLyte Corporation(2) American HealthChoice, Inc.(1)(2)
VictorMaxx Technologies, Inc.(1)(2)
VI. SERVICE-RELATED AND LOW-TECH
V. MEDICAL AND HEALTH PRODUCTS COMPANIES COMPANIES AND OTHER INVESTMENTS
Greystone Medical Group (1)(2) Country Star Restaurants(1)(2)
Osteoimplant Technology, Inc. (1)(4) IDF International, Inc.(1)(4)
Thermedics Detection Corp., Inc.(1)(2) Kat-Man-Du Entertainment(3)
Nations Flooring (1)(2)
Weitzer Homebuilders, Inc.(1)(3)
VII. BASIC INDUSTRY
The Alta Group (1)(4)
Galveston Steakhouse Corp. (3)
Industrial Flexible Materials, Inc.(1)(2)
Nuecol Corporation(2)
S.C.R.U.B.S, Inc.(2)
Thermo Euro Tech, N.V. (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 $6.0 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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PACIFIC FINANCIAL. The Company purchased 100% of the issued and
outstanding capital stock of Pacific Financial in January 1998. Pacific
Financial provides accounts receivable factoring services to small and medium
size businesses and is based in Seattle.
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. 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, Walnut Capital, UPLP
and/or Walnut Growth typically work directly with the management of the investee
companies and experience no direct competition once an initial investment has
been made. Pacific Financial experiences competition from many other regional
and national accounts receivable factoring companies, traditional banks and
other financing sources.
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
Investment Company Act. Being regulated as a BDC imposes certain limitations
upon the operations of the Company. The following is a brief description of
the Investment Company Act as it relates to BDCs and is qualified in its
entirety by reference to the full text of the Investment Company 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 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
Securities Exchange Act of 1934 (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 Investment
Company 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 Investment
Company 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
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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 Investment Company Act prohibits or restricts companies subject to the
Investment Company Act from investing in other investment companies. Moreover,
the Investment Company 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 Investment Company 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 Investment Company
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 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 Investment Company 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 Investment Company 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 Investment Company Act;
however, there can be no assurance that the Company will become eligible to no
longer be subject to the Investment Company Act or that the requisite
stockholder approval will be obtained.
The Investment Company 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,
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participate in a joint transaction with the affiliates. The Company has
currently co-invested with certain 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 certain 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 affiliates will
afford the Company the ability to achieve greater diversification and, together
with any affiliates, the opportunity to exercise greater influence on the
portfolio companies in which the Company and any affiliates invest together.
Accordingly, the application will seek an exemptive order permitting the
Company and certain affiliates to invest together in the same portfolio
companies where appropriate. If the exemptive relief is granted, it is expected
that the Company and 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
Investment Company 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 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 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 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 Investment Company Act and to report solely on a consolidated
basis for purposes of the 1934 Act.
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 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 Investment Company Act imposes certain capital structure requirements
on BDCs, 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.
Page 11 of 56
<PAGE> 12
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 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 December 31,
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
Page 12 of 56
<PAGE> 13
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 guidelines promulgated by the SBA (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 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
Page 13 of 56
<PAGE> 14
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%.
In 1996, the SBA had issued a finding that the Company had violated Section
107.903(b)(1) and (d) by financing an Associate (as defined in the SBIA) and
paying fees to an Associate. Additionally, the SBA had issued a finding that
the Company had 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
SBA subsequently determined that such findings had been resolved and that no
further action was necessary.
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.
ITEM 2. PROPERTY
The Company and Walnut Capital lease their office space in Vienna,
Virginia from Windy City.
ITEM 3. LEGAL PROCEEDINGS
The Company is not presently involved as plaintiff or defendant in any
legal actions.
Page 14 of 56
<PAGE> 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 18, 1997, the Company held its Annual Meeting of Stockholders
(the "Annual Meeting"). At the Annual Meeting, the stockholders elected Burton
W. Kanter, Joel S. Kanter, William F. Burge, III, Solomon A. Weisgal, Gene E.
Burleson, Albert Morrison, Jr. and Earl Chapman as the sole directors of the
Company. In addition, the stockholders voted on and approved the following
proposals at the Annual Meeting:
Proposal 1: To elect seven (7) directors of the Company to serve until
the 1998 Annual Meeting of Stockholders and until their
respective successors are duly elected and qualified;
Proposal 2: To ratify the selection of Richard A. Eisner & Company, LLP
as the Company's independent auditors;
Proposal 3: To approve the Company's Amended and Restated 1994 Incentive
Stock Option Plan;
Proposal 4: To approve the Company's private offering to issue and sell
up to 80 of the Company's Units at $50,000 per Unit,
with each Unit consisting of 50,000 shares of Common Stock
and Class A warrants to purchase an additional 35,000 shares
of Common Stock at an exercise price of $1.50 per share;
Proposal 5: To approve the Company's issuance and sale of 1,000,000 Class
A warrants, having an exercise price of $1.50 per share, for
aggregate consideration of $100,000;
Proposal 6: To approve the extension of the expiration date from June 17,
2001 to June 30, 2005 of certain currently outstanding
warrants to purchase up to 697,391 shares of Common Stock,
having an exercise price of $3.00 per share, and the
ratification of the Company's issuance thereof;
Proposal 7: To approve the extension of the expiration date from June 30,
1998 to June 30, 2005 of certain currently outstanding
warrants to purchase up to 452,533 shares of Common Stock,
having an exercise price of $3.00 per share, and the
ratification of the Company's issuance thereof; and
Proposal 8: To approve the Company's exchange offer pursuant to which the
Company may issue up to 287,481 shares of Common Stock
in exchange for currently outstanding warrants to purchase up
to 1,149,924 shares of Common Stock having an exercise price
of $3.00 per share.
Each of the proposals passed by the following tabulation of votes:
Page 15 of 56
<PAGE> 16
Proposal 1: FOR ABSTAIN
William F. Burge III 7,661,003.5 63,571
Gene E. Burleson 7,661,003.5 63,571
Earl Chapman 7,661,003.5 63,571
Burton W. Kanter 7,412,522.5 312,052
Joel S. Kanter 7,593,428.5 131,146
Albert Morrison, Jr. 7,661,003.5 63,571
Solomon A. Weisgal 7,593,428.5 131,146
Proposal 2: FOR AGAINST ABSTAIN
7,617,279 21,600 85,695
Proposal 3: FOR AGAINST ABSTAIN
6,368,208.5 319,182 23,820
Proposal 4: FOR AGAINST ABSTAIN
6,295,257.5 323,542 92,411
Proposal 5: FOR AGAINST ABSTAIN
6,187,990.5 431,809 91,411
Proposal 6: FOR AGAINST ABSTAIN
6,193,137.5 425,662 92,411
Proposal 7: FOR AGAINST ABSTAIN
6,188,137.5 425,662 97,411
Proposal 8: FOR AGAINST ABSTAIN
6,193,807.5 419,992 97,411
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE OF COMMON STOCK. As of March 19, 1998, the Company's stock
transfer agent reported 19,180,771.5 shares of Common Stock outstanding, held
by approximately 688 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 was 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. The following table shows the high and low trade prices
for Common Stock for each quarter for the period January 1, 1996 through
December 31, 1997
Page 16 of 56
<PAGE> 17
based upon information received from The Nasdaq Stock Market. Such quotations
represent prices between dealers and may not necessarily include retail markups,
markdowns or commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
March 31, 1997 $1-5/16 $29/32
June 30, 1997 3-1/8 13/16
September 30, 1997 1-7/8 1-1/8
December 31, 1997 1-3/4 1-3/8
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
</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 requirements 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.
ITEM 6. SELECTED FINANCIAL INFORMATION
The following selected financial data for the Company for the five-year
period ended December 31, 1997 is presented below. The information for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993 is derived from the
audited financial statements of the Company as of and for the five years then
ended. The data should be read in conjunction with the financial statements,
related notes and other financial information of the Company for such periods
included elsewhere in this Report on Form 10-K.
Page 17 of 56
<PAGE> 18
WALNUT FINANCIAL SERVICES, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994* 1993*
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Investment income
Interest income 69,000 61,000 453,000 186,000 265,000
Dividend income 6,000 16,000 0 257,000 0
------------------------------------------------------------------
Total income 75,000 77,000 453,000 443,000 265,000
Expenses:
Interest expense 1,099,000 1,597,000 1,698,000 1,594,000 1,500,000
General and administrative 1,490,000 1,651,000 1,282,000 722,000 751,000
------------------------------------------------------------------
Net investment (loss) before taxes (2,514,000) (3,171,000) (2,527,000) (1,873,000) (1,986,000)
Income tax benefit 858,000 1,268,000 1,438,000 725,000 729,000
------------------------------------------------------------------
Net investment (loss) (1,656,000) (1,903,000) (1,089,000) (1,148,000) (1,257,000)
------------------------------------------------------------------
Realized and unrealized gains on
investments:
Realized gain on sale of investments
before income tax 3,032,000 2,904,000 4,667,000 1,044,000 (297,000)
Income tax provision (1,391,000) (1,162,000) (1,822,000) (407,000) 116,000
------------------------------------------------------------------
Net realized gain on sale of investments 1,641,000 1,742,000 2,845,000 637,000 (181,000)
Unrealized appreciation depreciation)
on investments tax (1,437,000) (3,773,000) (5,392,000) 4,608,000 (5,874,000)
Income tax (provision) benefit 491,000 969,000 1,669,000 (1,797,000) 2,291,000
Net unrealized appreciation
depreciation) on investments (946,000) (2,804,000) (3,723,000) 2,811,000 (3,583,000)
Net realized and unrealized gains
(losses) on investments 695,000 (1,062,000) (878,000) 3,448,000 (3,764,000)
------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $(961,000) $(2,965,000) $(1,967,000) $2,300,000 $(5,021,000)
==================================================================
Income (loss) per share (.07) (0.21) (0.15) 0.28 (0.62)
------------------------------------------------------------------
Weighted average shares outstanding 14,779,317 14,247,099 12,747,656 8,353,860 8,130,213
Balance Sheet Data:
Total assets 26,509,000 32,353,000 35,073,000 33,132,000 28,458,000
==================================================================
Current liabilities 7,791,000 13,928,000 10,473,000 10,187,000 6,137,000
Long-term liabilities 2,044,000 4,038,000 9,201,000 10,680,000 13,107,000
==================================================================
Net Assets 16,674,000 14,387,000 15,399,000 12,265,000 9,214,000
------------------------------------------------------------------
Total Liabilities and Net Assets $26,509,000 $32,353,000 $35,073,000 $33,132,000 $28,458,000
==================================================================
</TABLE>
* Includes the results of operations of Walnut Capital only
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996.
Results of Operations for the Fiscal Years Ended December 31, 1997 and
1996. Walnut Capital had realized gain income of $3,939,000, net of tax, for
the year ended December 31, 1997, compared to $1,561,000, net of tax, for the
year ended December 31, 1996. The realized gains result predominately from the
sale of shares of First Health Group, Inc.(formerly HealthCare COMPARE Corp.),
offset by realized losses at NFS and other portfolio companies.
Page 18 of 56
<PAGE> 19
Interest expense decreased $373,000 to $844,000 during the year ended
December 31, 1997, representing a 31% decrease from interest expense during the
year ended December 31, 1996. Interest expense consists of two components: (1)
interest paid to the SBA with respect to the Walnut Debentures (as defined
below) ($464,000 and $731,000 for 1997 and 1996, respectively), and (ii)
interest paid on margin accounts and bank lines and other debt ($380,000 and
$483,000 for 1997 and 1996, respectively). The decrease in SBA interest expense
was the result of repayment to the SBA of a $4 million Walnut Debenture on April
1, 1997.
General and administrative expense decreased $2,000 to $768,000 during the
year ended December 31, 1997. Lower personnel costs were offset by a write down
of intangible assets representing prepaid travel expenses.
Unrealized losses, net of tax, for the year ended December 31, 1997 were
approximately $2.6 million, as compared to unrealized losses for the year ended
December 31, 1996 of approximately $1.4 million, net of tax. The increase in
unrealized loss for 1997 was due to the reversal of previously recorded
unrealized gains and the reserve for the reduced valuation of various portfolio
companies.
Results of Walnut Financial Services, Inc.'s Operations for the Fiscal
Years ended December 31, 1997 and 1996. The Company had interest income of
$39,000 and general and administrative cost of $830,000 for the year ended
December 31, 1996 as compared to $37,000 and $881,000, respectively, in the
years ended December 31, 1996. Consolidated net loss for the Company was
$961,000 for the year ended December 31, 1997 as compared to net loss of $2.96
million in the year ended December 31, 1996. The decrease in the loss was due to
a reduction in the unrealized valuation of the Company's portfolio securities.
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 twelve months ended December 31, 1996, compared to $2,845,000,
net of tax, for the twelve months ended December 31, 1995. The realized gains
resulted predominately from the sale of shares of HealthCare COMPARE Corp.
(n/k/a First Health Group, Inc.) which produced approximately $2.2 million of
realized gains in the period.
Investment and other income decreased $405,000 to $40,000 for the twelve
months ended December 31, 1996. The results for 1995 included realization of
interest income from prior years on debt securities which was simultaneously
converted to an equity position.
Interest expense decreased $478,000 to $1,217,000 during the twelve months
ended December 31, 1996, representing a 28% decrease under interest expense
during the twelve months ended December 31, 1995. Interest expense consists of
two components: (1) interest paid to the SBA with respect to the Walnut
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 of a $4 million Walnut Debenture on September 1, 1995.
General and administrative expense increased $64,000 to $770,000 during
the twelve months ended December 31, 1996, representing a 9% decrease under
operating expense during the twelve months ended December 31, 1995.
Page 19 of 56
<PAGE> 20
Unrealized losses for the twelve months ended December 31, 1996 were
approximately $1.4 million, net of tax, versus unrealized loses for the twelve
months 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 Walnut Financial Services, Inc.'s Operations for the Years ended
December 31, 1996 and 1995. During the year ended December 31, 1996, the Company
had interest income of approximately $37,000, including $34,000 from NFS, and
general and administrative expenses of approximately $881,000. Consolidated net
loss for the Company was $2.9 million for the twelve months ended December 31,
1996 compared to net income of $1.9 million for the twelve months ended December
31, 1995.
LIQUIDITY AND CAPITAL RESOURCES.
Liquidity and Capital Resources of Walnut Capital. As part of the SBIC
program, Walnut Capital has, from time to time, issued $12 million of
debentures to the SBA (the "Walnut Debentures"). On September 1, 1995, Walnut
Debentures in the principal amount of $4 million had been repaid and on April
1, 1997, Walnut Debentures in the principal amount of $4 million were repaid.
Walnut Debentures in the principal amount of $4 million were outstanding as of
December 31, 1997. The amounts, maturities and interest rates of such Walnut
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 Walnut Debentures is paid semi-annually, and principal is
due at maturity. Walnut Capital has been current in all of its interest
payments to the SBA. Walnut Capital repaid the $4 million Walnut Debenture due
at April 1, 1997 in accordance with its terms. Additionally, Walnut Capital
reduced its broker margin account by $1.99 million. The source of funds were
primarily from the sale of First Health Group, Inc. (formerly HealthCare COMPARE
Corp.) securities, creating a realized capital gain of approximately $6 million
in the first quarter of 1997. Walnut Capital has cash and broker margin
available to repay the $2 million of Walnut Debentures due June 1, 1998.
The Walnut Debentures prohibit the distribution of earnings or other
assets of Walnut Capital to the Company, except for distributions made out of
undistributed realized earnings computed in accordance with SBA regulations.
For so long as any indebtedness under the Walnut Debentures remains
outstanding, Walnut Capital is prohibited from repurchasing or converting any
of its equity (but not debt) securities or paying dividends (including
dividends to the Company) without the consent of the SBA. In addition, Walnut
Capital is prohibited from incurring any secured indebtedness, except for the
$5,765,000 of secured indebtedness that was outstanding at April 8, 1994.
There are no limitations on the amount of unsecured indebtedness Walnut Capital
can incur. The Walnut Debentures cannot be prepaid without payment of a
substantial prepayment penalty related to the time of such prepayment.
Liquidity and Capital Resources of the Company. Through June 1995, the
Company sold 1,015,625 shares of Common Stock in the 1995 Private Placement at
an offering price of $2.00 per share. The proceeds of the 1995 Private
Placement were used primarily to (i) repay indebtedness of the Company, (ii)
advance funds to NFS to allow NFS to pay indebtedness and accrued federal,
state and city taxes, interest and penalties, and (iii) increase working
capital of the Company.
Page 20 of 56
<PAGE> 21
On August 31, 1995, the Company established a $4 million line of credit
with American National Bank and Trust Company of Chicago ("ANB"). This line
was replaced as of September 8, 1996 with a term loan of $2,850,000. This loan
requires interest only payments on September 30, 1996 and December 31, 1996. A
principal payment of $575,000 was made on March 31, 1997, with the balance due
on July 31, 1997. The interest rate associated with this loan is ANB's base
rate plus 2% (10.5% as of December 31, 1997). This loan was renewed and
amended to provide for an initial principal payment of $250,000 and quarterly
principal payments thereafter, commencing December 31, 1997, of $250,000. This
loan has an amended maturity date of June 30, 1999 and a current principal
amount outstanding of $1,775,000. Two Directors of the Company personally
guarantee the loan. In April, 1997, the Company received an unsecured loan
from a related party in the amount of $400,000. The loan bears interest at
9.5%. The loan will be repaid in 1998 in quarterly payments, commencing March
31, 1998, of $100,000.
Pursuant to the 1997 Private Placement, the Company sold 4,000,000 shares
of Common Stock and 2,800,000 Class A Warrants for gross proceeds of
$4,000,000. The 1997 Private Placement closed in December 1997. Approximately
$1,200,000 of the net proceeds of the 1997 Private Placement were used in
connection with the acquisition of Pacific Financial. Also in December 1997
the Company sold an additional 1,000,000 Class A Warrants for total proceeds of
$100,000.
The Company does not anticipate any significant costs relating to upgrading
or reprogramming of its software for the year 2000.
Page 21 of 56
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Consolidated Financial Statements: Page
- ---------------------------------- ----
<S> <C>
Report of Independent Auditors .................................................................... 22
Consolidated Statements of Assets and Liabilities, December 31, 1997 and 1996 ..................... 23
Investment in Securities, December 31, 1997 and 1996............................................... 24
Consolidated Statements of Operations,
years ended December 31, 1997, 1996 and 1995....................................................... 26
Consolidated Statements of Changes in Net Assets,
years ended December 31, 1997, 1996 and 1995....................................................... 27
Consolidated Statements of Cash Flows,
years ended December 31, 1997, 1996 and 1995....................................................... 28
Notes to Consolidated Financial Statements......................................................... 29
</TABLE>
Page 22 of 56
<PAGE> 23
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of
Walnut Financial Services, Inc.
We have audited the accompanying consolidated statements of assets and
liabilities of Walnut Financial Services, Inc. and subsidiaries (the
"Company"), including the Schedule of Investments, as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in net
assets and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included verification of investments owned as of December 31, 1997
and 1996, by correspondence with the custodian and by physical examination. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements enumerated above present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1997 and 1996, and the consolidated results of its operations and
its consolidated cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
Richard A. Eisner & Company, LLP
New York, New York
February 6, 1998
Page 23 of 56
<PAGE> 24
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996*
------------ ------------
<S> <C> <C>
Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,448,000 in 1997 and
$10,110,000 in 1996) $ 13,554,000 $ 22,903,000
Non-marketable equity securities (cost of $8,183,000 in 1997
and $8,962,000 in 1996) 3,384,000 3,273,000
Non-marketable debt securities (cost of $1,329,000 in 1997
and $2,168,000 in 1996) 659,000 1,647,000
Partnership Interests (Cost of $1,862,000 in 1997 and
$3,968,000 in 1996) 2,389,000 3,821,000
--------------- ---------------------
Total portfolio securities 19,986,000 31,644,000
Cash and cash equivalents 6,479,000 350,000
Other assets 44,000 359,000
--------------- ---------------------
Total assets 26,509,000 32,353,000
Liabilities:
Margin payable to brokers
Notes payable to banks 2,297,000 5,459,000
Notes payable to others 2,025,000 2,850,000
Notes payable to related party - 875,000
Accounts payable, accrued expenses and other current 400,000 -
liabilities 1,069,000 744,000
Debentures payable 4,000,000 8,000,000
Deferred tax liability 44,000 38,000
--------------- ---------------------
Net assets $ 16,674,000 $ 14,387,000
=============== =====================
Preferred stock, no stated value, 1,000,000, no shares issued
Common stock, $.01 par value, 50,000,000 shares authorized,
18,656,687 and 14,616,687 issued and outstanding
Additional paid in capital 187,000 146,000
Accumulated deficit: 18,237,000 15,030,000
Net investment loss (12,676,000) (11,020,000)
Net realized gain on investment 8,263,000 6,622,000
Net unrealized appreciation of investments $ 2,663,000 $ 3,609,000
--------------- ---------------------
Net assets applicable to outstanding common shares
(equivalent to $0.89 and $0.98 per share based on 18,656,687
and 14,616,687 outstanding common shares at December 31,
1997 and 1996, respectively) $ 16,674,000 $ 14,387,000
=============== =====================
</TABLE>
* Reclassified to conform to current period presentation
Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.
Page 24 of 56
<PAGE> 25
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INVESTMENT IN SECURITIES
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1997 1996*
--------------------------------------------
Shares Value Shares Value
---------------------------------------------
<S> <C> <C> <C> <C>
Common and Preferred Stocks -
Healthcare - 72% and 67%
American HealthChoice, Inc. 45,000 433,000
American Psych Systems, Inc. 122,950 150,000 122,950 150,000
Aqua Care 30,000 1,000
Paragon Health (formerly Grancare, Inc.) 140,757 2,718,000 200,000 3,568,000
Greystone Medical Group, Inc. 200,000 100,000
First Health Group Corp. 152,500 7,860,000 200,000 14,995,000
I-Flow Corporation 300,000 945,000 300,000 1,578,000
Ivonyx Group Services, Inc. 100,000 100,000 100,000 100,000
Med Images, Inc. 172,872 379,000 172,872 379,000
MHM Services, Inc. 82,455 60,000 82,455 62,000
Rainbow Medical, Inc. 25,000 50,000
Vitalink, Inc. 83,100 2,005,000
---------- ----------
14,367,000 21,266,000
---------- ----------
High technology- 2% and 4%
Consolidated Technology Group, Inc. 375,000 60,000 500,000 36,000
Logic Devices Incorporated 45,000 110,000 45,000 96,000
Multimedia Games, Inc. 33,334 167,000
Nhancements Technology Corp. 16,185 57,000
Thermo Information Solutions, Inc. 10,000 90,000
J.L. Wickham Co., Inc. Common 250,696 - 250,696 752,000
J.L. Wickham Co., Inc. Preferred 281,788 - 281,788 282,000
-------- ---------
317,000 1,333,000
-------- ---------
Communications- 6% and 5%
Site Based Media, Inc. 321,108 19,000 331,108 60,000
Trans Global Services, Inc. 62,003 374,000 452,534 729,000
Vision III Imaging, Inc. 10,585 847,000 9,960 797,000
--------- ---------
1,240,000 1,586,000
--------- ---------
Biotechnology- 1% and 1%
Biofactors 7,243 17,000
Cell Therapeutics, Inc 10,000 34,000
Optiva Corporation 10,000 63,000 10,000 63,000
Osteoimplant Technology, Inc. 80,000 96,000 80,000 96,000
Titan Pharmaceuticals 24,411 201,000
Vaxgen, Inc. 20,000 70,000
-------- ---------
229,000 411,000
-------- ---------
Environmental- 0% and 1%
Clean America Corp 59,375 - 59,375 4,000
-------- --------
- 4,000
-------- --------
Other- 4% and 5%
Jenna Lane, Inc. 50,000 100,000
Linter's, Inc. 42,784 75,000
NFS Services, Inc. 1,131,000
SoftKat, Inc. 155,309 311,000 155,309 40,000
VINnet Inc. Common 25,000 125,000 25,000 125,000
VINnet Inc. Preferred A 180 180,000 180 180,000
VINnet Inc. Preferred B 37,643 94,000
-------- ---------
785,000 1,576,000
-------- ---------
</TABLE>
Page 25 of 56
<PAGE> 26
<TABLE>
<S> <C> <C>
----------- -----------
Total common and preferred stocks (cost $9,631,000 and
$19,072,000) 16,938,000 26,176,000
----------- -----------
Partnership interests - 12% and 12%
Universal Partners. L.P. (majority-owned subsidiary) 2,289,000 1,727,000
Knox International 100,000 2,094,000
----------- -----------
Total partnership interests (cost $1,862,000 and 3,968,000) 2,389,000 3,821,000
----------- -----------
Debt securities - 3% and 5%
Clean America Corp. - 29,000
NFS Services, Inc. 749,000
Knox International 200,000 200,000
TCOM Services, Inc. 276,000 414,000
SoftKat, Inc. 160,000 160,000
Biofactors 28,000
Performance Factors 44,000
VINnet, Inc. 23,000 23,000
----------- -----------
Total debt securities (cost $1,329,000 and $2,168,000) 659,000 1,647,000
----------- -----------
Total - 100% (cost $12,822,000 and $25,208,000) $19,986,000 $31,644,000
=========== ===========
</TABLE>
* Reclassified to conform to current period classification.
Attention is directed to the accompanying notes to these financial statements.
Page 26 of 56
<PAGE> 27
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------
1997 1996* 1995*
------------ ---------- ---------
<S> <C> <C> <C>
Investment income:
Interest income 69,000 61,000 453,000
Dividend income 6,000 16,000 0
---------- ----------- ------------
Total income 75,000 77,000 453,000
Expenses:
Interest expense 1,099,000 1,597,000 1,698,000
General and administrative 1,490,000 1,651,000 1,282,000
---------- ----------- ------------
Net investment (loss) before taxes (2,514,000) (3,171,000) (2,527,000)
Income tax benefit 858,000 1,268,000 1,438,000
---------- ----------- ------------
Net investment (loss) (1,656,000) (1,903,000) (1,089,000)
---------- ----------- ------------
Realized and unrealized gains on investments:
Realized gain on sale of investments before
income tax 3,032,000 2,904,000 4,667,000
Income tax provision (1,391,000) (1,162,000) (1,822,000)
---------- ----------- ------------
Net realized gain on sale of investments 1,641,000 1,742,000 2,845,000
---------- ----------- ------------
Unrealized (depreciation) on investments before
income tax (1,437,000) (3,773,000) (5,392,000)
Income tax benefit 491,000 969,000 1,669,000
---------- ----------- ------------
Net unrealized (depreciation) on investments (946,000) (2,804,000) (3,723,000)
---------- ----------- ------------
Net realized and unrealized gains (losses) on
investments 695,000 (1,062,000) (878,000)
---------- ----------- ------------
Net increase (decrease) in net assets resulting
from operations $(961,000) $(2,965,000) $(1,967,000)
========== =========== ============
Loss per share - basic and diluted $(.07) $(0.21) $(0.15)
---------- ----------- ------------
Weighted average shares outstanding 14,779,317 14,247,099 12,747,656
========== =========== ============
</TABLE>
* Reclassified to conform to current period presentation.
Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.
Page 27 of 56
<PAGE> 28
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996* 1995*
-----------------------------------------
<S> <C> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $(1,656,000) $(1,903,000) $(1,089,000)
Net realized gains on investments 1,641,000 1,742,000 2,845,000
Net unrealized depreciation on investments (946,000) (2,804,000) (3,723,000)
----------- ---------- ----------
(961,000) (2,965,000) (1,967,000)
----------- ---------- ----------
Increase in net assets resulting from capital share transactions:
Issuance of 3,190,504 shares of common stock for business
combination 1,623,000
Issuance of 452,533 shares of common stock and warrants for
marketable securities 1,018,000
Issuance of 1,060,895 shares of common stock and warrants for
cash net of commissions 1,963,000
Issuance of 125,000 shares of common stock for finders' fees 250,000
Issuance of 69,000 shares of common stock for legal fees 128,000
Issuance of 801,974 shares of common stock for Universal
Partners acquisition 1,793,000
Issuance of compensatory warrants for consulting 125,000
Issuance of 14,000 shares of common stock for legal fees 35,000
Exercise of stock options for 54,272 shares of common stock 75,000
Issuance of 22,500 shares of common stock for litigation
settlement 45,000
Issuance of 4,000,000 shares of common stock and warrants, net
of costs 3,198,000
Issuance of 40,000 shares of common stock for
litigation settlement 50,000
----------- ---------- ----------
3,248,000 1,953,000 5,102,000
----------- ---------- ----------
Total increase (decrease) in net assets 2,287,000 (1,012,000) 3,135,000
Net assets at beginning of period 14,387,000 15,399,000 12,264,000
----------- ---------- ----------
Net assets at end of period $16,674,000 $14,387,000 $15,399,000
=========== =========== ===========
</TABLE>
* Reclassified to conform to current period classification.
Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.
Page 28 of 56
<PAGE> 29
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1997 1996 * 1995 *
------------- ---------------- ----------------
<C> <C> <C> <C>
Cash flows from operating activities:
Net increase in net assets resulting from operations $(961,000) $(2,965,000) $(1,967,000)
Adjustments to reconcile net increase in net assets resulting from
operations to net cash provided by operating activities:
Net unrealized depreciation of investments 1,437,000 3,773,000 5,392,000
Net realized gain on investments (3,032,000) (2,904,000) (4,667,000)
Change in net deferred tax liability 6,000 (1,090,000) (1,285,000)
Issuance of compensatory warrants 0 125,000 0
Receipt of securities in lieu of interest 0 0 (437,000)
Issuance of stock as litigation settlement 0 0 45,000
Changes in assets and liabilities:
Other assets 315,000 (30,000) 150,000
Other liabilities 325,000 148,000 141,000
-----------------------------------------------
Net cash used in operating activities (1,910,000) (2,943,000) (2,628,000)
-----------------------------------------------
Cash flows from investing activities:
Purchases of common stock, healthcare (314,000) (234,000) (4,585,000)
Purchases of common stock, high tech (50,000) 0 0
Purchases of common stock, other (165,000) (1,065,000) (3,109,000)
Purchase of general partnership interest (75,000) 0 0
Purchase of debt securities, wholly-owned subsidiary 0 (750,000) 0
Purchase of debt securities, other 0 (239,000) 0
Proceeds from sale of common stock, healthcare 9,221,000 5,950,000 4,591,000
Proceeds from sale of common stock, high tech 2,000 23,000 2,668,000
Proceeds from sale of common stock, other 3,870,000 0 744,000
Collection of wholly-owned subsidiary note 749,000 0 0
Proceeds from sale of common stock 3,198,000 0 2,037,000
Collections from debt securities 65,000 50,000 0
-----------------------------------------------
Net cash provided by investing activities 16,501,000 3,735,000 2,346,000
-----------------------------------------------
Cash flows from financing activities:
Borrowings (repayments) of short term debt (1,700,000) (1,144,000) 200,000
Borrowings from related party 400,000
Increase (decrease) in margin accounts (3,162,000) 327,000 (89,000)
Repayments of long term debt (4,000,000) 0 0
-----------------------------------------------
Net cash (used in) provided by financing activities (8,462,000) (817,000) 111,000
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,129,000 (25,000) (171,000)
Cash and cash equivalents, beginning 350,000 375,000 546,000
-----------------------------------------------
Cash and cash equivalents, end $6,479,000 $ 350,000 $ 375,000
===============================================
Supplemental Information:
Cash paid for interest $ 813,000 $1,576,000 $1,636,000
===============================================
Issuance of common stock for legal fees $ - $ 35,000 $ -
===============================================
Issuance of common stock and warrants for partnership interest $ - $1,793,000 $ -
===============================================
Issuance of common stock and warrants for marketable securities $ - $ - $1,018,000
===============================================
</TABLE>
* Reclassified to conform to current period presentation.
Attention is directed to the foregoing auditors' report and to the accompanying
notes to these financial statements.
Page 29 of 56
<PAGE> 30
WALNUT FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The Company is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a BDC under the Investment Company Act of
1940 (as amended, the "Investment Company 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," which generally include securities of
privately-held companies and cash items, government securities and high-quality
short-term debt. As of December 31, 1997, the Company 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 Corp., a Delaware
corporation ("Walnut Capital"), which was formed in 1980 for the purpose of
operating as a Small Business Investment Company (an "SBIC") under the Small
Business Investment Act of 1958 (as amended, the "SBIA") and is subject to
regulations promulgated by the Small Business Administration (the "SBA")
pursuant to the provisions of the SBIA, and (y) through its wholly-owned
subsidiary, Walnut Funds, Inc., a Delaware corporation ("Walnut Funds"), which
has an 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. 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"), which was 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,
Inc., a Delaware corporation ("Walnut Consulting"), which activity is currently
insignificant. 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 Investment Company Act. As a result of the technical nature of the
Investment Company Act, the Company's wholly-owned subsidiaries, Walnut Capital,
Walnut Funds and Universal Bridge, also have each elected to be regulated as a
BDC. On September 28, 1997, the Company sold all of the outstanding stock of
its wholly-owned subsidiary, NFS Services, Inc., a Delaware corporation ("NFS"),
which performed consulting and asset recovery services.
On 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 shareholders) in exchange for all of
the outstanding common stock of Walnut Capital (such transaction 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
Page 30 of 56
<PAGE> 31
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.
On June 17, 1996, the Company issued 801,974 shares of Common Stock,
together with five-year warrants to purchase an additional 697,391 shares of
Common Stock at an exercise price of $3.00, in connection with the purchase by
Universal Bridge (the "Universal Acquisition") of approximately 83% of the
limited partnership interests and 50% of the general partnership interests of
Universal Partners L.P. ("UPLP"). The warrants issued in the Universal
Acquisition were subsequently canceled pursuant to an exchange offer made by
the Company whereby each holder elected to exchange their warrants for shares
of newly issued Common Stock and cash in lieu of fractional shares. The
exchange offer provided that one share of Common Stock would be issued to the
holder for every four warrants held. The exchange offer was consummated on
December 18, 1997. 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.
On October 27, 1997, the Company initiated a private placement to
accredited investors (the "1997 Private Placement") of a minimum of 50, and a
maximum of 80, units (the "Units") at $50,000 per Unit. Each Unit consisted of
50,000 shares of Common Stock and 35,000 Class A Redeemable Common Stock
purchase warrants (a "Class A Warrant" and collectively, the "Class A
Warrants"). Pursuant to the 1997 Private Placement, the Company issued
4,000,000 shares of Common Stock and 2,800,000 Class A Warrants for gross
proceeds of $4,000,000. The Company used a portion of the proceeds of the 1997
Private Placement to acquire all of the issued and outstanding capital stock of
Pacific Financial Services Corporation. (See Note 13 -- "Subsequent Event").
Also on December 18, 1997, the Company consummated the sale of an additional
1,000,000 Class A Warrants to certain investors for $100,000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The financial statements include the accounts
of the Company, Walnut Capital, Universal Bridge, Walnut Funds and Walnut
Consulting, each from the applicable date of acquisition or organization.
Intercompany transactions and balances have been eliminated in consolidation.
NET LOSS PER SHARE. The Company adopted SFAS No. 128 "Earnings Per Share"
in the period ended December 31, 1997 and has retroactively applied the effects
thereof for all periods presented. Accordingly, the presentation of per share
information includes calculations of basic and diluted income (loss) per share.
There was no impact on the per share amounts previously reported.
GENERAL. Walnut Capital is an SBIC licensee. The accompanying financial
statements include financial information for Walnut Capital that has been
prepared on a basis appropriate for SBICs as indicated by the American
Institute of Certified Public Accountants in its guide, Audits of Investment
Companies.
Page 31 of 56
<PAGE> 32
INVESTMENT VALUATION. The non-marketable investments are stated at fair
value as determined by the Board at December 31, 1997. 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, 1997 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments other than investments:
Cash and cash equivalents approximate fair value.
Short-term payables -- the carrying amount approximates fair value due to
the short-term maturities of these instruments.
Long-term debt approximates fair value based on borrowing rates currently
offered to the Company.
INCOME TAXES. Deferred tax liabilities and assets 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.
Page 32 of 56
<PAGE> 33
The Company is not entitled to the treatment available to regulated
investment companies and is taxed as a regular corporation for federal and
state income tax purposes. The Company files a consolidated federal income tax
return with its four wholly owned subsidiaries.
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 $3,372,000 of temporary cash on deposit in excess
of insured amounts as of December 31, 1997.
MARGIN ACCOUNTS. The Company uses margin accounts established at several
brokerage houses for operations. Interest accrues at the brokers' call rate
plus 1% and is charged monthly on the margin balance.
FIXED ASSETS. Fixed assets are recorded at cost. Depreciation is
computed on the straight line method over the estimated economic lives of the
assets, which range from 5 to 7 years.
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 Note 12)
3. LONG-TERM DEBT
A) SBA DEBENTURES
Debentures payable were $4,000,000 at December 31, 1997 (the "Walnut
Debentures"). One Walnut Debenture with a principal balance of $2,000,000 is
payable to SBIC Funding Corp. or its designee on June 1, 1998 and bears
interest at 9.80%, payable semiannually on June 1 and December 1 of each year.
One Walnut Debenture with a principal balance of $2,000,000 is payable to SBIC
Funding Corp. or its designee on September 1, 1999 and bears interest at 8.8%,
payable semiannually on March 1 and September 1 of each year.
All principal and interest payments due pursuant to the Walnut Debentures
have been paid as required. Payment of the Walnut Debentures is guaranteed by
the SBA. Under the terms of the Walnut Debentures, Walnut Capital may not,
without prior permission of the SBA, repurchase or retire any of its common
stock or make any distribution to the Company, except from undistributed
realized earnings computed in accordance with SBA regulations.
Page 33 of 56
<PAGE> 34
In 1996, the SBA had issued a finding that the Company had violated Section
107.903(b)(1) and (d) by financing an Associate (as defined in the SBIA) and
paying fees to an Associate. Additionally, the SBA had issued a finding that
the Company had 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
SBA subsequently determined that such findings had been resolved and that no
further action was necessary.
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.
As of December 31, 1997 and December 31, 1996, the Walnut Debentures
payable are due as follows:
1997 1996
---------- -----------
1997 $4,000,000
1998 $2,000,000 $2,000,000
1999 $2,000,000 $2,000,000
---------- ----------
$4,000,000 $8,000,000
========== ==========
B) NOTES TO OTHERS
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
accrued interest at 8% per annum. Principal was payable in two installments,
$175,000 on January 31, 1997 and the remaining $700,000 on July 31, 1997. The
loan was paid off during 1997 in connection with the liquidation of the Knox
Liquidating Partnership.
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 line
was replaced as of September 8, 1996 with a term loan of $2,850,000. A
principal payment of $575,000 was made on March 31, 1997 and the balance was
due on July 31, 1997. This loan was renewed and amended to provide for an
initial principal payment of $250,000 on December 31, 1997 and quarterly
principal payments thereafter. This loan has an amended maturity date of June
30, 1999. The interest rate associated with this loan is ANB's base rate plus
2% (10.5% as of December 31, 1997). Two Directors of the Company personally
guarantee the loan.
D) NOTES PAYABLE TO RELATED PARTIES
In April 1997, the Company received an unsecured loan from a related party
in the amount of $400,000. The loan bears interest at 9.5% and is to be repaid
in quarterly payments commencing March 31, 1998, of $100,000.
4. MARGIN BROKERAGE ACCOUNTS
Brokerage margin payable to one investment banker consists of advances of
$1,147,000 under a line of credit as of December 31, 1997. The brokerage
account accrues interest on a monthly basis at the brokers' call rate plus 1%
(7.25% at December 31, 1997) and was collateralized by 50,000 shares of First
Health Group common stock, having a fair market value of approximately
$2,577,000 at December 31,
Page 34 of 56
<PAGE> 35
1997, and 22,872 shares of Paragon Health common stock, having a fair
market value of approximately $441,000 at December 31, 1997.
Brokerage margin payable to a second investment banker consists of
advances of $1,150,000 under a line of credit as of December 31, 1997.
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% (7.25% at December 31, 1997)
and is collateralized by 100,000 shares of First Health Group, Inc. common
stock, having a fair market value of approximately $5,154,000 at December 31,
1997 and 117,885 shares of Paragon Health common stock, having a fair market
value of approximately $2,277,000 at December 31, 1997.
5. INCOME TAXES
As at December 31 the components of the Company's net deferred tax asset
and liability were as follows:
1997 1996
---------- ----------
Deferred tax liability:
Unrealized gains $2,162,000 $3,681,000
Deferred tax asset:
Net operating loss benefit (2,118,000) (3,643,000)
---------- ----------
Net deferred tax liability $ 44,000 $ 38,000
========== ==========
The difference between book and tax accounting for investments is the
primary source of the non-current deferred tax liability. For financial
reporting 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 income taxes for the years ended December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C> <C>
Tax (benefit) on net income:
Federal (729,000) (1,073,000) (1,222,000)
State $ (129,000) $ (195,000) $ (216,000)
----------- ------------- -------------
Total $ (858,000) $ (1,268,000) $ (1,438,000)
=========== ============= =============
Tax expense on realized gain:
Federal 1,182,000 988,000 1,549,000
State $ 209,000 $ 174,000 $ 273,000
----------- ------------- -------------
Total $ 1,391,000 $ 1,162,000 $ 1,822,000
=========== ============= =============
</TABLE>
Page 35 of 56
<PAGE> 36
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- -------------
<S> <C> <C> <C> <C>
Tax expense (benefit) on unrealized
loss: Federal $ (417,000) $(824,000) (1,419,000)
State (74,000) (145,000) $ (250,000)
------------ ------------- -------------
$ (491,000) $(969,000) $(1,669,000)
============ ============= =============
</TABLE>
The Company's effective federal tax rate was 44% in 1997, compared to an
overall statutory rate of 34%. This difference was due to the non-taxable
realized loss associated with the sale of NFS, a wholly-owned subsidiary.
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Pre-tax (loss)/gain $(919,000) $(4,202,000) $(3,252,000)
========= =========== ===========
Federal tax expense/(benefit) at
statutory rate of 34% (312,000) (1,428,000) (1,106,000)
Non-deductible items related to
wholly-owned subsidiary 390,000 374,000 0
State tax, net of federal benefit (55,000) (96,000) (233,000)
Alternative minimum tax 80,000 27,000
---------- ----------- -----------
103,000 (1,123,000) (1,339,000)
Other - net (61,000) 48,000 54,000
------- ----------- -----------
Tax (benefit) expense $42,000 $(1,075,000) $(1,285,000)
======= =========== ===========
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards
available for federal income tax purposes as follows:
Expiration
----------
2006 $ 20,000
2007 2,588,000
2008 1,933,000
2009 643,000
2010 295,000
----------
$5,479,000
==========
6. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
a. LEASE
Page 36
<PAGE> 37
The Company leases office space and services for Walnut Capital from an
affiliate at approximately $5,000 per month as of December 31, 1997. The lease
is renewable annually at the discretion of the parties. The Company paid
approximately $58,000, $57,000, and $52,000 for rent for the years ended
December 31, 1997, 1996, and 1995, respectively, and $9,000, $70,000, and
$44,000 for services for the years ended December 31, 1997, 1996 and 1995,
respectively.
b. 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 7 - 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. Amounts due under Mr. Burton
Kanter's employment agreement were not paid in 1997 and 1996 and are being
accrued by the Company. The terms and conditions of the employment agreement
of Mr. Joel Kanter are 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 1997 and 1996 and was increased to $225,000 for 1998 (see Footnote 7 -
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. Each of the
agreements expired by its terms in February 1998.
7. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries retain a law firm at which an officer of
the Company has been of counsel since 1993. Legal fees of approximately
$249,000, $165,000 and $165,000 were incurred by the Company for the years
ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, approximately $123,000 and $128,000,
respectively, were due to the law firm and are included in accounts payable,
accrued expenses and other current liabilities in the accompanying financial
statements.
As described above at Footnote 7.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 were paid
for the year ended December 31, 1995. There were no payments in 1997 and 1996,
but $100,000 in salary was accrued by the Company for 1997 and 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 approximately
$20,000. As of March 1, 1995, Mr. Kanter became an officer of the Company and
received salary
Page 37 of 56
<PAGE> 38
payments of approximately $50,000 for the period March 1, 1995
through December 31, 1995. (See Footnote 6.b. - Employment Agreements.)
Mr. Joel S. Kanter and Mr. Burton Kanter personally guarantee the amounts
due to ANB under the Company's line of credit (see Footnote 3).
8. CONCENTRATION OF CREDIT RISK
The Company has significant holdings of investments in the health care
industry. Total investments in debt and equity were approximately $14,367,000
as of December 31, 1997 (including unrealized appreciation of approximately
$9,248,000 as of December 31, 1997).
Additionally, substantially all of the Company's cash and securities are
held by a custodian broker who is highly capitalized and a member of major
securities exchanges or at a major banking institution.
9. 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 is represented by the contractual notational amount of these instruments.
As of December 31, 1997, 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.
10. SHAREHOLDERS' EQUITY
a. PREFERRED STOCK.
The Company is authorized to issue up to 1,000,000 shares of its
preferred stock in one or more series. As of December 31, 1997, no
shares of preferred stock were outstanding.
b. COMMON STOCK.
In December 1997, in connection with the 1997 Private Placement, the
Company issued 4,000,000 shares of Common Stock and 2,800,000 warrants
for net proceeds of $3,098,000. The exercise price of these warrants,
which are not exercisable prior to October 15, 1998 without the consent
of the underwriter of the 1997 Private Placement, is $1.50.
c. COMMON STOCK OPTIONS AND WARRANTS.
(1) In connection with a business combination with NFS Services,
Inc. ("NFS") in a prior year, 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
Page 38 of 56
<PAGE> 39
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 were granted pursuant to the
1989 Plan to various officers, employees and consultants of the Company,
or its subsidiaries. All of said options were either canceled or expired
during 1997. 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 which was amended and restated and approved
by the Company's stockholders in December 1997 (as amended, the "1994
Plan"). The 1994 Plan is administered by a stock incentive plan
administrative committee appointed by the Company's Board of Directors
(the "1994 Plan Committee"). The 1994 Plan Committee has the authority,
subject to approval by the Company's Board of Directors, the terms of the
1994 Plan and the Investment Company Act, to select the persons to whom
awards may be granted, to determine the terms of each award, to interpret
the provisions of the 1994 Plan and to make all other determinations that
it may deem necessary or advisable for the administration of the 1994
Plan. The 1994 Plan provides for the grant of incentive stock options,
nonstatutory options, and restricted stock and stock appreciation rights
("SARs"), as determined in each individual case by the 1994 Plan
Committee. The Company's Board of Directors has reserved 1,000,000
shares of Common Stock for issuance under the 1994 Plan. The Company has
granted options under the Plan as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ---------------------------------
Shares Weighted avg. Shares Weighted avg.
exercise price exercise Price
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 253,500 $2.55 119,500 $2.76
Granted 199,000 $1.84 134,000 $2.36
Expired (76,500) $2.84
Canceled (165,000) $2.41
------- -------
Options outstanding at end of year 211,000 $1.88 253,500 $2.55
======= =======
Options exercisable at end of year 117,500 $1.86 129,500 $2.76
======= =======
</TABLE>
The weighted average life of options outstanding is 7.05 years.
(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. During 1997,
incentive stock options for 149,958 shares were canceled in connection
with termination of employment. Of the non-qualified stock options,
options for 67,020 shares were also canceled in 1997. Options outstanding
at year end are subject to a variety of vesting requirements and, at
December 31, 1997, 582,646 shares were exercisable. The exercise price of
the options
Page 39 of 56
<PAGE> 40
outstanding pursuant to the 1987 Plan is $1.80 per share of Common
Stock. The average exercise price of options outstanding under the 1987
Plan is $1.80. As a result of the Business Combination, no further awards
will be granted under the 1987 Plan. During the year ended December 31,
1997, no options to acquire Common Stock were exercised.
(4) In addition to options granted pursuant to the 1989 Plan, the
1994 Plan and the 1987 Plan, the Company issued other non-plan options.
At December 31, 1996 there were 245,000 non-plan options outstanding.
These options were issued at various exercise prices ranging from $2.00
to $3.00. During 1997, all 245,000 options were canceled.
(5) Warrants: All warrants outstanding at December 31, 1996 either
expired or were canceled during 1997. In December 1997, the Company sold
1,000,000 warrants for $100,000 to five investors. The exercise price of
the warrants, which were immediately exercisable, is $1.50
11. CONDENSED STATEMENTS OF WHOLLY-OWNED SUBSIDIARIES
The following are the condensed financial information of Universal Bridge's
majority-owned subsidiary, Universal Partners, L.P., as of December 31, 1997 and
for the year ended December 31, 1997 and for the period from June 18, 1996 (date
of acquisition) through December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Statement of Operations Data
Net investment (loss) income $ (114,000) $ (62,000)
Realized gains on sale of investments 553,000 270,000
Unrealized gain (loss) on investments 177,000 (172,000)
---------- ----------
Net income $ 616,000 $ 36,000
---------- ----------
Balance Sheet Data
Investments in marketable equity
securities (cost of $662,000 and
$580,000, respectively) $ 986,000 $ 940,000
Investments in non-marketable equity
securities (cost of $534,000 and
$334,000, respectively) 434,000 233,000
Investments in non-marketable debt
securities (less reserves of
$320,000 and $285,000, respectively) 485,000 614,000
---------- ----------
$1,905,000 $1,787,000
========== ==========
Total assets $2,790,000 $2,190,000
Total liabilities 56,000 27,000
---------- ----------
Partnership capital $2,734,000 $2,163,000
========== ==========
</TABLE>
12. STOCK OPTION COMPENSATION
The Company applies APB Opinion 25 and related interpretations in
accounting for its employee stock option and purchase plans. In October, 1995,
Statement of Financial Accounting Standards No. 123 ("SFAS 123") were issued
and requires the Company to elect either expense recognition or disclosure-only
alternative for stock based employee compensation. The expense recognition
provision encouraged by SFAS 123 would require fair-value based financial
accounting to recognize compensation expense for the employee stock
compensation plans. The Company has elected the disclosure-only alternative.
Page 40 of 58
<PAGE> 41
The Company has computed the pro forma disclosures required under SFAS 123
for employee stock options granted as of December 31, 1997, 1996, and 1995
using the Black Scholes option pricing model prescribed by SFAS 123. The
weighted average fair value at date of grant for options granted during the
years ended December 31, 1996 and 1995 is $1.16 and $1.95, per option,
respectively. There were no employee options granted during 1997.
In estimating the value of options pursuant to the accounting provisions
of Financial Accounting Standard No SFAS 123 the Company used the following
assumptions:
<TABLE>
<CAPTION>
Year Ended
------------------------------------
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
Risk free interest rate 5.9% - 7.9% 5.3% - 6.6%
Expected life 5 years 5 years
Expected volatility 67% 62%
Dividend yield 0 0
</TABLE>
If compensation cost was measured using the fair value provisions of SFAS
123 then the Company's net loss and net loss per share would have been
approximately $3,226,000 and ($.23) and $2,106,000 and ($.17), respectively,
for the years ended December 31, 1996 and 1995.
13. SUBSEQUENT EVENT
On January 28, 1998 the Company entered into a Stock Purchase Agreement to
acquire all outstanding common stock of Pacific Financial Services Corporation
("Pacific") for $3,000,000 consisting of $1,500,000 in cash, $300,000 of the
Company's common stock, $300,000 in short term notes and $900,000 in notes
payable January 2, 2002. Since the 1997 Private Placement occurred prior to the
closing of Pacific, the $300,000 short-term notes were paid at the Pacific
closing in accordance with the terms of the acquisition agreement. The remaining
notes are unsecured and bear interest at 8%. Pacific is in the business of
accounts receivable factoring in the Northwest United States.
Page 41 of 56
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 41 President, Chief Executive Officer and Director
William F. Burge, III 55 Director
Gene E. Burleson 57 Director
Solomon A. Weisgal 71 Director
Albert Morrison, Jr. 60 Director
Earl Chapman 72 Director
Joshua S. Kanter 35 General Counsel and Secretary
Robert F. Mauer 43 Chief Financial Officer and Treasurer
</TABLE>
BURTON W. KANTER. Mr. Kanter has served as a Director of the Company
since February 27, 1995 and the Chief Executive Officer of Walnut Capital
Corp., a Delaware corporation ("Walnut Capital"), a subsidiary of the Company,
since February 27, 1995. He has been a director of Walnut Capital since 1983,
and was the President of Walnut Capital between 1987 and February 27, 1995, and
Treasurer of Walnut Capital from January 1994 until February 27, 1995. Mr.
Kanter is of counsel to Neal Gerber & Eisenberg, a Chicago, Illinois law firm.
From 1961 through 1985, Mr. Kanter was a partner in the law firm of Kanter &
Eisenberg or its predecessor firms. He is the author of numerous articles and
a frequent lecturer in the field of Federal income taxation, and founder and
senior editor of the nationally known column in the Journal of Taxation called
"Shop Talk." He is a member of the faculty of the University of Chicago Law
School. He is a director of numerous companies, including the following public
companies: First Health Corp., Scientific Measurement Systems, Inc., and Logic
Devices Incorporated. He is a member of the Board of Directors or the Board of
Trustees of: the Midwest Film Center of the Chicago Art Institute, the Chicago
International Film Festival, and the Museum of Contemporary Art of Chicago. He
is also on the advisory board of the Wharton School of the University of
Pennsylvania Real Estate Center and the University of Chicago Annual Tax
Conference. Mr. Kanter is the father of Joel S. Kanter and Joshua S. Kanter
(Secretary of and General Counsel to the Company).
JOEL S. KANTER. 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,
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
Page 42 of 56
<PAGE> 43
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 Encore Medical
Corporation, Greystone Medical Group, Inc., I-Flow Corporation and Paragon
Health Network, Inc. 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. From February 1997 to August 1997, Mr. Burleson was Chief Executive
Officer and a Director of Vitalink Pharmacy Services Inc., a provider of
pharmacy services to various healthcare providers. From October 1989 to
February 1997, Mr. Burleson was employed by GranCare, Inc., a provider of
routine and specialty medical care and rehabilitative services, where he served
as President and a Director from October 1989 to December 1990 and as Chief
Executive Officer and a Director from December 1990 to February 1997. He
assumed the position of Chairman of the Board of GranCare Inc. in January 1994
and served in this capacity until November 1997, when GranCare Inc. was merged
into Paragon Health Network Inc. Mr. Burleson became a Director of Paragon
Health Network Inc. in November 1997. Mr. Burleson is also a Director of
Alternative Living Services and Deckers Outdoor Corporation. From June 1986 to
March 1989, Mr. Burleson was President of American Medical International, Inc.
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 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 The Alta Group Ltd., SportsTrac,
Inc. and numerous other privately-held concerns.
ALBERT MORRISON, JR. Mr. Morrison has been a Director of the Company
since August 13, 1997 and a director of Walnut Capital since 1984. Mr.
Morrison is President of Morrison, Brown, Argiz & Company, Certified Public
Accountants. He has more than 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,
Secretary 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.
Page 43 of 56
<PAGE> 44
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 November 1997, Mr. Kanter has been Chief Executive Officer of The Alta
Group Ltd. and its wholly-owned subsidiary, Greenway Environmental, Inc.,
companies specializing in waste management services. Since June 1993, Mr.
Kanter has also been 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 and is currently also the Chief Financial
Officer. 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 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.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION. The following table sets forth the compensation
paid by the Company to Messrs. Burton W. Kanter, Joel S. Kanter and Robert F.
Mauer 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 $100,000 for the 1997
fiscal year. Amounts paid to Messrs. Burton Kanter, Joel Kanter and Robert
Mauer reflect the fiscal years ended December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
-------------
Awards
Annual Compensation -------------
------------------------ Options/
Name and Current Principal Position Year Salary ($) Bonus ($) SARs(#)
- ----------------------------------- ---- ---------- ---------- -------
<S> <C> <C> <C> <C>
Burton W. Kanter(1) 1997 $100,000 -- --
Chairman of the Board 1996 100,000 -- --
1995 150,000(2) -- --
Joel S. Kanter, (3) 1997 $200,000 50,000(4) --
President and Chief Executive 1996 200,000 -- --
Officer 1995 70,000 -- --
Robert F. Mauer, 1997 $100,000 30,000(4) --
Chief Financial 1996 91,667(5) -- 125,000 options
Officer and Treasurer 1995 -- -- --
</TABLE>
(1) Mr. Burton 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.
(3) Mr. Joel Kanter was a consultant to Walnut Capital prior to the Business
Combination.
(4) The Company paid bonuses of $50,000 and $30,000 to Mr. Joel Kanter and
Mr. Mauer, respectively, in January 1998 with respect to their job
performance for the fiscal year 1997.
(5) Mr. Mauer joined the Company on February 1, 1996. Amounts reported
reflect an annual salary of $100,000.
Page 44 of 56
<PAGE> 45
OPTIONS AND OTHER AWARDS. The following table provides information
regarding the repricing of any options and SAR's previously awarded to any
executive officer of the Company during the last ten years.
TEN YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
securities Length of original
underlying Market price of option term
options/SAR's stock at time of Exercise price at remaining at date
repriced or amended repricing or time of repricing New exercise price of repricing or
Name Date (#) amendment ($) or amendment ($) ($) amendment
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Mauer 10/8/97 100,000 $1 1/2 $2.50 $2.00 90 days after
termination of
employment
</TABLE>
The following table provides certain information regarding options granted
to the Named Executive Officers.
AGGREGATED OPTIONS EXERCISED IN FISCAL 1997
AND FISCAL YEAR 1997 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
================================================================================================================================
Number of Securities
Underlying Unexercised Value of Unexercised in-the-
Shares Acquired on Options at Fiscal Money Options at Fiscal
Name Exercise (#) Value Realized ($) Year-End(#) Year-End($)(1)
- --------------------------------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Burton W. Kanter 0 0 249,929 0 $0 $0
Joel S. Kanter 0 0 199,944 0 0 0
Robert F. Mauer 0 0 25,000 100,000(2) 0 0
================================================================================================================================
</TABLE>
_____________
(1) No outstanding options were in-the-money as of December 31, 1997. The
closing bid price per share as quoted on The Nasdaq National Market on
December 31, 1997 was $1-33/64 per share.
(2) 31,250 of such options became exercisable on February 1, 1998.
Page 45 of 56
<PAGE> 46
EMPLOYMENT AGREEMENTS WITH MANAGEMENT. The Company had entered into
employment agreements with Burton W. Kanter and Joel S. Kanter. Both
agreements expired by their terms in February, 1998.
STOCK PERFORMANCE GRAPH. The incorporation by reference of this Report on
Form 10-K into any document filed with the SEC by the Company shall not be
deemed to include the following performance graph unless such graph is
specifically stated to be incorporated by reference into such document.
The following graph provides a comparison of the cumulative total
stockholder return among the Company, the Nasdaq Stock Market total return
index prepared by the Center for Research in Security Prices (CRSP) (the
"Nasdaq Stock Market Index") and the Nasdaq Financial Stocks total return index
prepared by CRSP (the "Nasdaq Financial Stocks Index"). The comparison is for
the period from August 1, 1995 (for the Nasdaq Stock Market Index and the
Nasdaq Financial Stocks Index) and August 22, 1995 (for the Company, the date
the Company's Common Stock first became listed on the Nasdaq National Market
System) to December 31, 1997 and assumes the reinvestment of any dividends.
The initial price of the Company's Common Stock shown in the graph below is
based upon the price of $3.50 as reported on August 22, 1995 on the Nasdaq
National Market System. The Nasdaq Stock Market Index comprises all domestic
shares traded on the Nasdaq National Market and The Nasdaq SmallCap Market.
The Nasdaq Financial Stocks Index comprises all shares traded on the Nasdaq
National Market and The Nasdaq SmallCap Market which were issued by companies
whose primary business falls within Standard Industrial Classification (SIC)
codes 60 through 67. The historical information set forth below is not
necessarily indicative of future performance. The following graph was prepared
at the Company's request by Research Holdings Limited, San Francisco,
California.
Page 46 of 56
<PAGE> 47
COMPARISON OF 28 MONTH CUMULATIVE TOTAL RETURN
AMOUNT WALNUT FINANCIAL SERVICES, INC. THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ FINANCIAL INDEX
[GRAPH]
<TABLE>
<CAPTION>
8/22/95 12/95 12/96 12/97
-------------------------------------
<S> <C> <C> <C> <C>
Walnut Financial Services, Inc. $100 $ 64 $ 32 $ 44
NASDAQ Stock Market (U.S) 100 106 130 159
NASDAQ Financial 100 117 150 230
</TABLE>
* $100 INVESTED on 8/22/95 IN STOCK OR 7/31/95 IN INDEX - INCLUDING REINVESTMENT
OF FISCAL YEAR ENDING DECEMBER
REPORT OF THE COMPENSATION COMMITTEE. The Compensation Committee of the
Board of Directors is composed of the Company's three independent outside
directors, Messrs. Burge, Burleson & Weisgal. The Compensation Committee is
responsible for administering the policies which govern the Company's executive
compensation.
Objectives of Executive Compensation. The Compensation Committee has
designed its compensation policy to provide the proper incentives to management
to maximize the Company's performance in order to serve the best interests of
its stockholders. As a result, the Compensation Committee intends to focus on
incentive awards, such as stock option grants, as opposed to large salary
increases or bonuses to emphasize performance related incentive compensation.
As a result, the Compensation Committee awarded cash bonuses to Joel S. Kanter
and Robert F. Mauer of $50,000 and $30,000, respectively, for the calendar year
ended 1997.
The Company maintains the philosophy that compensation of its executive
officers and others should be directly and materially linked to operating
performance. To achieve this linkage, executive compensation is weighted
towards incentive awards granted on the basis of the Company's performance.
Thus, while annual salary increases are based on personal performance of the
executive officers and general economic conditions, annual bonuses, if any, and
incentive award grants are directly tied to the Company's actual economic
performance during the applicable fiscal year.
Page 47 of 56
<PAGE> 48
The Incentive Stock Option Committee (currently comprised of the same
members as the Compensation Committee) determines stock options to the
executives under the provisions of the Walnut Capital Corp. 1987 Stock Option
Plan, the NFS Services, Inc. 1989 Incentive Stock Plan and the 1994 Stock Plan
(collectively, the "Stock Plans"). When granted, such incentive awards provide
incentive to improve stockholder value over the long-term and to encourage and
facilitate executive stock ownership. In general, stock options are granted at
the market price of the Common Stock at the date of grant to ensure that
executives can only be rewarded for appreciation in the price of the Common
Stock when the Company's stockholders are similarly benefited. The Incentive
Stock Option Committee determines those executives who will receive incentive
award grants, the size and particular vesting and other requirements of such
awards and the Stock Plan to be utilized.
Compensation Committee Procedures. The Compensation Committee will
annually evaluate the personal performance of the Chief Executive Officer and
the other executive officers of the Company, as well as the Company's
performance and analyze the total annual compensation and stock ownership of
the Chief Executive Officer and the other executive officers.
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits
the deductibility on the Company's tax return of compensation over $1 million
to any of the named executive officers of the Company unless, in general, the
compensation is paid pursuant to a plan which is performance-related,
non-discretionary and has been approved by the Company's stockholders. The
Compensation Committee's policy with respect to Section 162(m) is to make
reasonable efforts to ensure that compensation is deductible to the extent
permitted while simultaneously providing Company executives with appropriate
rewards for their performance.
It is Compensation Committee's desire to create a compensation policy that
will reward executive performance when such performance has provided tangible
benefits for the Company's stockholders.
On February 1, 1996, the Company granted 100,000 incentive stock options
to Robert F. Mauer under the NFS Services, Inc. 1994 Stock Incentive Plan with
an exercise price of $2.50 per share. Given the disparity between such
exercise price and the current market valuation of the Company's Common Stock,
the Compensation Committee determined in 1997 to reduce the exercise price for
such options to $2.00 per share, to more closely align Mr. Mauer's potential
compensation with the performance of the Company and more effectively provide
an incentive for successful performance.
Submitted by the Compensation Committee and the Incentive Stock Option
Committee:
Gene E. Burleson
William F. Burge, III
Solomon A. Weisgal
DIRECTOR COMPENSATION. During the 1997 fiscal year the Company paid its
non-employee directors $2,500 for each regularly scheduled meeting attended in
person or by telephone, $2,500 for each special meeting attended, and $500 for
each committee meeting attended in person or by telephone. The Company
reimburses the directors for reasonable out-of-pocket expenses incurred in
connection with their activities on behalf of the Company. In the past, if a
director was re-elected, such director would receive, upon such re-election, a
10-year option to purchase 6,000 shares of Common Stock at the market price at
the time of grant. Furthermore, any new director elected to the Board of
Directors would receive a 10-year option to purchase up to 10,000 shares of
Common Stock at the market price at the
Page 48 of 56
<PAGE> 49
time of grant. In light of the Company's recent election to be
regulated as a BDC, such policies must now be approved by the SEC, and the
Company is currently in the process of seeking such approvals.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee currently consists of Messrs. Burleson, Burge and
Weisgal. None of them has served as an officer of the Company or has any other
business relationship or affiliation with the Company, except his service as a
director. Joel Kanter, President, Chief Executive Officer and a director of
the Company, serves on the Board of Directors of GranCare, Inc. and Vitalink
Pharmacy Services, Inc. Mr. Kanter is a member of the finance and audit
committees of the GranCare, Inc. Board of Directors. Mr. Burleson served as
the Chief Executive Officer, President and Chairman of the Board of Directors
of GranCare, Inc. until February 1997. He is currently the Chairman of the
Board of GranCare, Inc.
ITEM 12. 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) Joel S. Kanter,
Burton W. Kanter and Robert F. Mauer (collectively, the "Named Executive
Officers"), and each of the directors of the Company, individually, and the
executive officers and directors of the Company, as a group, and (ii) the
percentage of ownership of the outstanding Common Stock represented by such
shares. The share ownership is reported as of March 19, 1998. All share
numbers are provided based upon information supplied to management of the
Company by the respective individuals and members of the group. Each person
named in the table has sole voting and investment power with respect to all
shares shown as beneficially owned by such person, except as otherwise set
forth in the notes to the table.
<TABLE>
<CAPTION>
Names and Addresses of Directors and
Executive Officers Number of Shares Percent of Class
- ------------------------------------ ---------------- ----------------
<S> <C> <C>
Burton W. Kanter(1)
Two North LaSalle St.
Suite 2200
Chicago, IL 60602 1,349,805 6.9%
Solomon A. Weisgal(2)
120 S. Riverside Plaza
Suite 1620
Chicago, IL 60606 430,057 2.2%
Joel S. Kanter(3)
8000 Towers Crescent Drive Suite 1070
Vienna, VA 22182 1,197,740 6.2%
William F. Burge, III
Ayrshire Corporation
2028 Buffalo Terrace
Houston, TX 77019 0 0%
Gene E. Burleson
Argonne Properties Inc.
325 Argonne Drive
Atlanta, GA 30305 5,000 *
</TABLE>
Page 49 of 56
<PAGE> 50
<TABLE>
<CAPTION>
Names and Addresses of Directors and
Executive Officers Number of Shares Percent of Class
- ------------------------------------ ---------------- ----------------
<S> <C> <C>
Albert Morrison, Jr.(4)
1001 Brickell Bay Drive
9th Floor
Miami, FL 33131 540,159 2.8%
Earl Chapman
2039 Laukahi Street
Honolulu, HI 96821 0 0%
Robert F. Mauer(5)
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182 56,250 *
Officers and Directors, as a group(6): 3,598,011 18.2
</TABLE>
_______________________
* 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"), (vi) 52,500 shares owned by The Nominee Corp. ("Nominee"),
(vii) 36,750 Class A Warrants owned by Nominee and (viii) 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 and Class A Warrants owned by BWK,
Carlco, HAP, THC, TMT or Nominee. Mr. Kanter, as President of BWK, Carlco,
TMT, THC or Nominee has sole voting and investment control of the 497,028
shares owned by BWK, Carlco, TMT and THC and, upon exercise thereof, will
have sole voting and investment control over the 286,679 shares underlying
Nominee's Class A Warrants and 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, TMT and Nominee 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.
Page 50 of 56
<PAGE> 51
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) 372,992 shares owned by the
Kanter Family Foundation ("KFF"), (ii) 589,803 shares owned by Windy City,
(iii) 35,000 Class A Warrants owned by KFF, 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
962,796 shares owned by KFF and Windy City and, upon exercise thereof, will
have sole voting and investment control over the 234,944 shares underlying
KFF's Class A Warrants and Mr. Kanter's options.
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 50,000
shares at $2.00 per share and 6,250 shares at $1.50 per share, all of
which options are presently exercisable.
(6) Such group consists of nine persons. The number of shares reported
includes all of the shares owned by Burton Kanter, Solomon Weisgal, Joel
Kanter, William Burge, Gene Burleson, Albert Morrison, Earl Chapman, Robert
Mauer, as well as the 19,000 shares owned by Joshua Kanter, Secretary and
General Counsel of the Company.
ITEM 13. 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 $24,000 in legal fees and expenses to BFKPN during
fiscal 1997 and has no current BFKPN invoices outstanding as of December 31,
1997. In addition, the Company has paid approximately $217,800 in legal fees
and expenses to BFKPN through December 31, 1997 and has current BFKPN invoices
outstanding as of December 31, 1997 totaling approximately $62,800.
In April 1997, The Holding Company ("THC"), a company of which Burton W.
Kanter is President, made an unsecured loans to Walnut Capital in the aggregate
principal amount of $400,000. Trusts for the benefit of Mr. Burton Kanter's
family control a majority of the outstanding Common Stock of THC. Management
believes that such loan was on terms no less favorable than the terms available
Page 51 of 56
<PAGE> 52
from institutional lenders. The loan accrues interest at 9.5% per annum.
Prior to October 31, 1997, the original maturity date of such loan, THC and
Walnut Capital renegotiated the loan. Under the renegotiated terms, the loan
continues to bear interest at 9.5% per annum, but the principal payments will
be made in four installments of $100,000 at the end of each of the next four
fiscal quarters of the Company, with the first installment to be paid on March
31, 1998.
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
indirectly 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 American National Bank
and Trust Company of Chicago ("ANB"), which matures in June 1999. Messrs.
Burton W. Kanter and Joel S. Kanter have personally guaranteed such line of
credit.
In December 1997, certain officers and employees of Walsh Manning
Securities LLC, the placement agent for the 1997 Private Placement (the
"Placement Agent"), including the president of the Placement Agent, purchased
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 4.1% of the total number of currently outstanding shares of
Common Stock. Such Class A Warrants are currently exercisable and will expire
on October 15, 2002. Such individuals paid aggregate consideration of $80,000
for such Class A Warrants.
Pursuant to the exchange offer made to all holders of warrants to purchase
Common Stock at $3.00 per share, Windy City exchanged warrants it held to
purchase 452,533 shares of Common Stock at $3.00 per share for 113,133 shares
of unregistered, restricted Common Stock.
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.
Page 52 of 56
<PAGE> 53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K.
(a)(1) Financial Statements:
The Company's Consolidated Financial Statements and Notes to Consolidated
Financial Statements appear at pages 23 to 41, inclusive, of this Report; see
Index to Consolidated Financial Statements at page 21 of this Report.
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Consolidated Financial
Statements and Notes thereto.
(a)(3) Exhibits:
The exhibits required by Item 601 of Regulation S-K are included with
this Form 10-K and are listed on the "Index to Exhibits" immediately
following the signature page.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on November 6, 1997 regarding the
Company's election to be a BDC, which Form 8-K is incorporated herein by this
reference.
Page 53 of 56
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WALNUT FINANCIAL SERVICES, INC.
Date: March 31, 1998 By: /s/ Joel S. Kanter
-------------------------
Joel S. Kanter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Joel S. Kanter Chief Executive March 31, 1998
- ------------------ Officer, President
Joel S. Kanter and Director
(Principal
Executive Officer)
/s/ Robert F. Mauer Treasurer March 31, 1998
- ------------------- (Principal
Robert F. Mauer Financial and
Accounting Officer)
/s/ Burton W. Kanter Director March 31, 1998
- --------------------
Burton W. Kanter
/s/ Solomon A. Weisgal Director March 31, 1998
- ----------------------
Solomon A. Weisgal
/s/ William F. Burge, III Director March 31, 1998
- -------------------------
William F. Burge, III
/s/ Albert Morrison, Jr. Director March 31, 1998
- ------------------------
Albert Morrison, Jr.
/s/ Gene E. Burleson Director March 31, 1998
- ------------------------
Gene E. Burleson
/s/ Earl Chapman Director March 31, 1998
- ----------------------
Earl Chapman
</TABLE>
Page 55 of 56
<PAGE> 55
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization dated November 8, 1994 by and between
NFS Services, Inc. (Utah) and Walnut Capital Corp.*
3.1 Articles of Incorporation of Walnut Financial Services, Inc., as
amended.*
3.2 Bylaws of Walnut Financial Services, Inc.*
10.6 The Walnut Capital Corporation 1987 Stock Option Plan, as amended.**
10.7 The NFS Services, Inc. 1989 Incentive Stock Option Plan.*
10.8 The NFS Services, Inc. (Utah) 1994 Incentive Stock Option Plan, as
amended.**
10.9 Agency Agreement dated October 10, 1997 between Walnut Financial Services,
Inc. and Walsh Manning Securities, LLC
10.10 Stock Purchase Agreement dated January 2, 1997 between Jeffrey B. Pyatt,
Paul J. Zeman, Thomas Maurice, Walnut Financial Services, Inc. and Pacific
Financial Services Corp.***
21 Subsidiaries of Walnut Financial Services, Inc.
23.1 Consent Letter of Richard A. Eisner & Company, LLP.
27 Financial Data Schedule
99.1 Class A Warrant Agreement dated October 15, 1997 between Walnut Financial
Services, Inc. and Corporate Stock Transfer, Inc.
99.2 Registration Rights Agreement dated December 18, 1997 between Walnut
Financial Services, Inc., various purchasers of stock and warrants and
Walsh Manning Securities, LLC.
__________________________
* Previously filed as an Exhibit (with the same Exhibit reference number as
contained herein) to the initial filing of the Registrant's Registration
Statement on Form 10 dated May 10, 1995 as filed with the Securities and
Exchange Commission on May 11, 1995, and incorporated herein by this
reference.
** Previously filed as Exhibit B to the 1997 Proxy Statement of Walnut
Financial Services, Inc. filed with the Securities and Exchange
Commission on October 30, 1997, and incorporated herein by this
reference.
*** Walnut Financial Services, Inc. agrees to furnish supplementally to the
Securities and Exchange Commission a copy of any omitted schedule or
exhibit to the Stock Purchase Agreement upon request by the Securities and
Exchange Commission.
Page 56 of 56
<PAGE> 1
EXHIBIT 10.9
WALNUT FINANCIAL SERVICES, INC.
AGENCY AGREEMENT
October 10, 1997
Walsh Manning Securities, LLC
90 Broad Street
New York, New York 10004
Gentlemen:
Walnut Financial Services, Inc., a Utah corporation ("Company"), proposes to
offer for sale in a private placement ("Offering"), up to 80 Units (the
"Units") (with a minimum of 50 Units), each Unit will contain (i) 50,000
shares of the Company's Common Stock; and (ii) 35,000 Class A Warrants.
Minimum purchase shall be One Unit or $50,000. The Placement Agent shall have
the right to accept fractional interests in quarters. The Class A Warrants
shall be exercisable at $1.50 per share over a five year period and are
redeemable, upon the option of the Company, after one year at $0.10 per Warrant
on 30 days written notice if the closing bid price on the NASDAQ quotation
systems is at least $4.00 for 20 consecutive trading days. The Units will be
offered on a "best efforts-all or none" basis, in accordance with Section 4(2)
of the Securities Act of 1933, as amended ("Securities Act"), and Rule 506 of
Regulation D promulgated thereunder with respect to 50 Units ("Minimum Units")
and on a best efforts basis for the balance of the Units.
The Units have the terms and conditions reflected in the Company's
Subscription Agreement to be executed by each purchaser of Shares
("Subscription Agreement"). The Confidential Private Placement Memorandum,
together with all exhibits thereto, including the Subscription Agreement will
be referred to herein as the "Offering Documents." Walsh Manning Securities,
LLC is sometimes referred to herein as the "Placement Agent."
1. Appointment of Placement Agent; The offering.
1.1 Appointment of Placement Agent. You are hereby appointed exclusive
Placement Agent of the Company during the offering period herein specified for
the purpose of assisting the Company in finding qualified investors as
described in the Offering Documents ("Subscribers"). The Offering Period
("Offering Period") shall commence on the day the Offering Documents are first
made available to you by the Company and shall continue for a period of 60
days, provided, however, that the Offering Period may be extended for an
additional period not to exceed thirty (30) days by the mutual agreement of the
Company and the Placement Agent, or may be terminated earlier if all Units
offered hereby have been sold.
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If all Minimum Units are not sold prior to the end of the Offering Period, the
Offering will be terminated and all funds received from Subscribers will be
returned, without interest and without any deduction. The day that the
Offering Period terminates is hereinafter referred to as the "Termination
Date." You hereby accept such agency and agree to use your best efforts to
find qualified Subscribers. Your agency hereunder is not terminable by the
Company except upon termination of the Offering. The Placement Agent shall
have the right to have broker/dealers assist in the Offering at its sole
discretion; provided, however, that such broker/dealers shall be reasonably
acceptable to the Company.
1.2 Offering Documents. The Company will provide the Placement Agent
with a sufficient number of copies of the Offering Documents for delivery to
potential Subscribers and such other information, documents and instruments
which the Placement Agent deems reasonably necessary to comply with the rules,
regulations and judicial and administrative interpretations respecting
compliance with applicable state and federal statutes related to the Offering.
1.3 Segregation of Funds. Each subscriber for Units shall tender to
the Placement Agent a check payable to "American Stock Transfer Company-Walnut
Financial Services, Inc. Special Account" in the amount of the investment
subscribed for, which funds shall be held by held by American Stock
Transfer Company in a segregated non-interest bearing bank account, as set
forth in the Subscription Agreement. Closing of the Offering shall take place
within five business days after the minimum Units are sold and periodically
thereafter as mutually agreed by the parties hereto (the "Closing Date").
2. Representations and Warranties of the Company. The Company and each
of its subsidiaries, all of which are listed on Schedule 2.1 hereto
("Subsidiaries"), jointly and severally, represent and warrant as follows:
2.1 Due Incorporation and Qualification. The Company and each of its
Subsidiaries, respectively, has been duly incorporated, is validly existing
and is in good standing under the laws of its state of incorporation and is
duly qualified as a foreign corporation (except where the failure to so
qualify would not have a material adverse effect on the business, properties,
financial position or results of operations of the company taken as a whole)
for the transaction of business and is in good standing in each jurisdiction
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification. The Company has elected to be regulated
as a "Business Development Company" pursuant to Section 54 of the Investment
Company Act of 1940, as amended (the "1940 Act"). Each of the Company and its
Subsidiaries has all requisite corporate power and authority necessary to own
or hold its properties and
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conduct its business as described in the Offering Documents and holds all
material licenses, permits and other required authorizations from governmental
authorities necessary for the conduct of its business (except where the
failure to obtain such license, permit or other authorization would not have a
material adverse effect on the business, properties, financial position or
results of operations of the Company taken as a whole). The Company owns all
of the issued and outstanding capital stock of each of the Subsidiaries free
and clear of all liens, security interests and other encumbrances of any
nature whatsoever, except as set forth on Schedule 2.1 attached hereto or
described in the Offering Documents. Unless the context otherwise requires,
all further references to the "Company" in this Agreement shall include the
Subsidiaries.
2.2 Authorized Capital. The Company shall have an authorized and
outstanding capitalization as set forth on Schedule 2.2 hereto, with an
authorized capital stock of no more than 50,000,000 shares of common stock,
par value $.01 per share and 1,000,000 shares of Preferred Stock, no stated
value, and all of the issued and outstanding shares of Common Stock have been
duly and validly authorized and issued and are fully paid and non-assessable.
No more than 14,806,653 shares of Common Stock are outstanding (exclusive of
shares of Common Stock underlying Class A Warrants) and no shares of Preferred
Stock will be outstanding prior to the Termination Date. None of the holders
of such outstanding shares of Common Stock is subject to personal liability
solely by reason of being such a holder except as otherwise provided by Utah
corporate law. The offers and sales of such outstanding shares of Common Stock
were at all relevant times either registered under the Securities Act and the
applicable state securities or Blue Sky laws, or exempt from such
registration. Except as described in the Offering Documents, no holder of any
of the Company's securities has any rights, "demand," piggyback" or otherwise,
to have such securities registered or to demand the filing of a registration
statement. With respect to the Company's assets, as of the date hereof, it is
in material compliance with Section 55 of the 1940 Act.
2.3 No Preemptive Rights Options. Except as set forth on Schedule 2.3
hereto or described in the Offering Documents, there are no preemptive or
other rights to subscribe for or purchase, or any restriction upon the voting
or transfer of, any shares of Common Stock of the Company, under the Articles
or Certificate of Incorporation or By-Laws of the Company or under any
agreement or other outstanding instrument to which the Company is a party or
by which it is bound, or under the business corporation law of the State of
Utah. Except as set forth on Schedule 2.3 hereto or described in the Offering
Documents, the Company does not have outstanding any option, warrant,
convertible security, or other right permitting or requiring it to issue, or
otherwise to purchase or convert any obligation into, shares of Common Stock
of
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the Company and the Company has not agreed to issue or sell any shares of
Common Stock of the Company. As of the date hereof, the number of outstanding
options and warrants do not exceed the amounts permitted under Section 61 of
the 1940 Act.
2.4 No Material Adverse Changes. Except as otherwise stated in the
Offering Documents, (i) there has not been any change in the condition,
financial or otherwise, of the Company which could materially adversely affect
its ability to conduct its operations as described in the Offering Documents;
and (ii) the Company has not incurred any material liabilities or obligations,
direct or contingent, not in the ordinary course of business, which would have
a material adverse effect on the business, properties, financial position or
results of operations of the Company taken as a whole.
2.5 No Pending Actions. Except as set forth on Schedule 2.5 hereto
or described in the Offering Documents, there are no actions, suits,
proceedings, claims or hearings of any kind or nature or, to the best of the
knowledge and belief of the Company, any investigations or inquiries, before or
by any court, governmental authority, tribunal or instrumentality (or to the
best of the knowledge and judgment of the Company, any state of facts which
would give rise thereto except as described in the Offering Documents), pending
or, to the best knowledge of the Company, threatened, against the Company or
any of its Subsidiaries, or involving the properties of the Company taken as a
whole, which would result in any material adverse effect on the business,
properties, financial position or results of operations of the Company taken as
a whole, or which would materially adversely affect the transactions or other
acts contemplated by this Agreement or the validity or enforceability of this
Agreement.
2.6 Private Offering Exemption; Offering Documents. The Offering
Documents conform in all material respects with the applicable requirements of
the 1940 Act and Section 4(2) of the Securities Act and Rule 506 of Regulation
D promulgated thereunder ("Reg D") and with the requirements of all other
published rules and regulations of the Securities and Exchange Commission
currently in effect relating to "private offerings." The Offering Documents do
not contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Units conform to
the description contained in the Offering Documents.
2.7 Due Authorization. The Company has full right, power and authority
to enter into this Agreement and issue the Units, the underlying securities and
to perform all of its obligations hereunder and as contemplated hereby and
pursuant to the terms of the securities comprising the Units. This Agreement
has been duly authorized, executed and delivered by the Company and
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is a valid and binding obligation of the Company, enforceable in accordance
with its terms (except (1) as the enforceability thereof may be limited by
bankruptcy or other laws now or hereafter in effect relating to or affecting
creditors' rights generally, (2) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought, and (3) that the enforceability of the indemnification
and contribution provisions of this Agreement may be limited by the federal
securities laws and public policy), and except as described in the Offering
Documents or described in Schedule 2.7 attached hereto, no material consent,
approval, authorization, order of, or filing with, any court or governmental
authority or any other third party is required to consummate the transactions
contemplated by this Agreement, except that the offer and sale of the Units in
certain jurisdictions may be subject to the provisions of the securities or
Blue Sky laws of such jurisdictions.
2.8 Non-Default; Non-Contravention. Neither the Company nor any of its
Subsidiaries, respectively, is in violation of its Articles or Certificate of
Incorporation or By-Laws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any material
contract, lease or other instrument to which it is a party, and the Company's
execution and delivery of this Agreement, and/or the Units, and the incurrence
of the obligations herein and therein set forth, and the consummation of the
transactions contemplated herein will not (i) conflict with, or constitute a
material breach of, or a material default under, the Articles or Certificate of
Incorporation or By-Laws of the Company or any of its Subsidiaries, or any
material contract, lease or other instrument to which the Company or any of its
Subsidiaries is a party, or by which the properties of the Company or any of
its Subsidiaries are bound; (ii) violate in a material way any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any Subsidiary or any of their respective properties or business; or (iii) have
any material adverse effect on any permit, certification, registration,
approval, consent, license or franchise necessary for the Company or any
Subsidiary to own or lease and operate any of its properties and to conduct its
business or the ability of the Company or any Subsidiary to make use thereof.
2.9 Valid Issuances. The Units and the underlying securities have been
duly and validly authorized and, when issued and delivered in accordance with
the terms of the Subscription Agreement and this Agreement, will be duly and
validly issued, fully paid and non-assessable.
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<PAGE> 6
2.10 No Anti-Dilution Adjustments. The issuance of the Units in the
Offering will not give any holder of any of the Company's outstanding
options, warrants or other convertible securities or rights to purchase shares
of the Company's Common Stock, the right to purchase any additional shares of
Common Stock and/or the right to purchase shares at a reduced price.
2.11 No Regulatory Problems. The Company (i) has not filed a
registration statement which is subject of any pending proceeding or
examination under Section 8 of the Securities Act, or is the subject of any
refusal order or stop order thereunder; (ii) is not subject to any pending
proceeding under Rule 261 of the Securities Act or any similar rule adopted
under Section 3(b) of the Securities act, or to an order entered thereunder;
(iii) has not been convicted of any felony or misdemeanor in connection with
the purchase or sale of any security or involving the making of any false
filing with the Securities and Exchange Commission ("Commission"); (iv) is not
subject to any order, judgment, or decree of any court of competent
jurisdiction temporarily or preliminarily restraining or enjoining, or is
subject to any order, judgement, or decree of any court of competent
jurisdiction, permanently restraining or enjoining, the Company from engaging
in or continuing any conduct or practice in connection with the purchase or
sale of any security or involving the making of any false filing with the
Commission; or (v) is not subject a United States Postal Service false
representation order entered under Section 3005 of Title 39, United States
Code; or a temporary restraining order or preliminary injunction entered under
Section 3007 of Title 39, United States Code, with respect to conduct alleged
to have violated Section 3005 of Title 39, United States Code. None of the
Company's directors, officers, or beneficial owners of 10 percent or more of
any class of its equity securities (i) has been convicted of any felony or
misdemeanor in connection with the purchase or sale of any security, involving
the making of a false filing with the commission, or arising out of the conduct
of the business of an underwriter, broker, dealer, municipal securities dealer,
or investment advisor; (ii) is subject to any order, judgement, or decree of
any court of competent jurisdiction temporarily or preliminarily enjoining or
restraining, or is subject to any order, judgment, or decree of any court of
competent jurisdiction, permanently enjoining or restraining such person from
engaging in or continuing any conduct or practice in connection with the
purchase or sale of any security, or involving the making of a false filing
with the Commission, or arising out of the conduct of the business of an
underwriter, broker, dealer, municipal securities dealer, or investment
adviser; (iii) is subject to an order of the Commission entered pursuant to
Section 15(b), 15B(a) or 15B(c) of the Securities Exchange Act of 1934 ("1934
Act"), or is subject to an order of the Commission entered pursuant to Section
203(e) or (f) of the Investment Advisers Act of 1940; (iv) is suspended or
expelled from membership in, or suspended or barred from association with a
member of, an exchange registered as a national securities exchange pursuant to
Section 6 of the 1934 Act, an association registered as a national securities
association under Section 15A of the 1934 Act, or a Canadian
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<PAGE> 7
securities exchange or association for any act or omission to act constituting
conduct inconsistent with just and equitable principles of trade; or (v) is
subject to a United States Postal Service false representation order entered
under Section 3005 of Title 39, United States Code; or is subject to a
restraining order or preliminary injunction entered under Section 3007 of
Title 39, United States Code, with respect to conduct alleged to have violated
Section 3005 of Title 39, United States Code.
3. Representations and Warranties of the Placement Agent. The Placement
Agent represents and warrants as follows:
(a) The Placement Agent is duly incorporated and validly existing and
in good standing under the laws of its State of Incorporation.
(b) The Placement Agent is a member of the National Association of
Securities Dealers, Inc. in good standing and is a registered broker/dealer
under the 1934 Act.
(c) Sales of Units by the Placement Agent will only be made in such
jurisdictions in which the Placement Agent is a registered broker-dealer or
where an applicable exemption from such registration exists.
(d) Offers and sales of Units by the Placement Agent will be made in
compliance with the provisions of Regulation D to accredited investors only and
the Placement Agent will furnish to each investor a copy of the Offering
Documents prior to accepting any payments for Units.
(e) The Placement Agent (i) has not filed a registration statement
which is subject of any pending proceeding or examination under Section 8 of
the Securities Act, or is the subject of any refusal order or stop order
thereunder; (ii) is not subject to any pending proceeding under Rule 261 of the
Securities Act or any similar rule adopted under Section 3(b) of the Securities
act, or to an order entered thereunder; (iii) has not been convicted of any
felony or misdemeanor in connection with the purchase or sale of any security
or involving the making of any false filing with the Securities and Exchange
Commission ("Commission"); (iv) is not subject to any order, judgment, or
decree of any court of competent jurisdiction temporarily or preliminarily
restraining or enjoining, or is subject to any order, judgement, or decree of
any court of competent jurisdiction, permanently restraining or enjoining, the
Placement Agent from engaging in or continuing any conduct or practice in
connection with the purchase or sale of any security or involving the making of
any false filing with the Commission; or (v) is not subject a United States
Postal Service false representation order entered under Section 3005 of Title
39, United States Code; or a temporary restraining order or preliminary
injunction entered under Section
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3007 of Title 39, United States Code, with respect to conduct alleged to have
violated Section 3005 of Title 39, United States Code. None of the Placement
Agent's directors, officers, or beneficial owners of 10 percent or more of any
class of its equity securities (i) has been convicted of any felony or
misdemeanor in connection with the purchase or sale of any security, involving
the making of a false filing with the commission, or arising out of the
conduct of the business of an underwriter, broker, dealer, municipal
securities dealer, or investment advisor; (ii) is subject to any order,
judgement, or decree of any court of competent jurisdiction temporarily or
preliminarily enjoining or restraining, or is subject to any order, judgment,
or decree of any court of competent jurisdiction, permanently enjoining or
restraining such person from engaging in or continuing any conduct or practice
in connection with the purchase or sale of any security, or involving the
making of a false filing with the Commission, or arising out of the conduct of
the business of an underwriter, broker, dealer, municipal securities dealer,
or investment adviser; (iii) is subject to an order of the Commission entered
pursuant to Section 15(b), 15B(a) or 15B(c) of the Securities Exchange Act of
1934 ("1934 Act"), or is subject to an order of the Commission entered
pursuant to Section 203(e) or (f) of the Investment Advisers Act of 1940; (iv)
is suspended or expelled from membership in, or suspended or barred from
association with a member of, an exchange registered as a national securities
exchange pursuant to Section 6 of the 1934 Act, an association registered as a
national securities association under Section 15A of the 1934 Act, or a
Canadian securities exchange or association for any act or omission to act
constituting conduct inconsistent with just and equitable principles of trade;
or (v) is subject to a United States Postal Service false representation order
entered under Section 3005 of Title 39, United States Code; or is subject to a
restraining order or preliminary injunction entered under Section 3007 of
Title 39, United States Code, with respect to conduct alleged to have violated
Section 3005 of Title 39, United States Code.
(f) The Placement Agent has full right, power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Placement Agent and is a valid and binding obligation of the
Placement Agent, enforceable in accordance with its terms (except (1) as the
enforceability thereof may be limited by bankruptcy or other laws now or
hereafter in effect relating to or affecting creditors' rights generally, (2)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion of
the court before which any proceedings therefor may be brought, and (3) that
the enforceability of the indemnification and contribution provisions of this
Agreement may be limited by the federal securities laws and public policy), and
no material consent, approval, authorization, order of, or filing with, any
court or governmental authority or any other third party is required to
consummate the transactions
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contemplated by this Agreement.
(g) The Placement Agent's execution, and delivery of this Agreement and
the incurrence of the obligations herein and the consummation of the
transactions contemplated herein will not (i) conflict with, or constitute of
material breach of, or a material default under, the limited liability
agreement, certificate of limited liability company or other organizational
documents of the Placement Agent, or any contract, lease or other instrument by
which the Placement Agent is bound; (ii) violate in a material way any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Placement
Agent or its properties or business; or (iii) have any material adverse effect
on any permit, certification, registration, approval, consent, license or
franchise necessary for the Placement Agent to conduct its business.
4. Closing.
4.1 Closing. At any time prior to the Termination Date and after the
sale of the Minimum Units and the clearance of the funds representing the sale
of the Minimum Units, upon the mutual consent of the Company and the Placement
Agent that there should be a Closing, a closing (the "Closing") shall take
place at the offices of the Placement Agent, 90 Broad Street, New York, New
York or such other place mutually agreed upon the parties. No Closing shall
occur unless the Company's issued and outstanding securities conform to the
requirements of the 1940 Act applicable to a BDC with respect to (i) type and
amount; and (ii) the price, method and timing of issuance and will conform
after the Closing. Thereafter, during the Offering Period Closings shall be
scheduled periodically upon the sale of the balance of the Units. At each
Closing, payment for the Units issued and sold by the Company shall be made
against delivery of the certificates representing the Units and the underlying
securities. The Placement Agent will deliver the Units to its customers.
4.2 Deliveries at Closing. At the Closing, the Company shall deliver or
cause to be delivered to the Placement Agent on behalf of the Placement Agent
and the Subscribers:
(i) The Opinion of Barack Ferrazzano Kirschbaum Perlman &
Nagelberg dated as of the date of each Closing, substantially to the effect
that:
(A) The Company and each of its Subsidiaries, respectively,
has been duly organized and is validly existing and in good standing under the
laws of the jurisdiction of its incorporation, has all requisite corporate
power and authority necessary to own or hold its properties and conduct its
business as described in the Offering Documents and is duly qualified as a
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foreign corporation for the transaction of business and is in good standing in
each jurisdiction where the failure to be so qualified would have a materially
adverse effect on the business, properties, financial position or results of
operations of the Company taken as a whole.
(B) The Company has full corporate right, power and authority
to enter into this Agreement, and to perform all of its obligations hereunder or
contemplated hereby; the Company has full corporate right, power and authority
to issue, sell and deliver the Units and the underlying securities except that
the approval of the Company's shareholders is required in order to complete
the maximum offering; this Agreement and the Units and the underlying
securities have been duly authorized, executed and delivered by the Company
and are the valid and binding obligation of the Company, enforceable in
accordance with its terms except (1) as the enforceability thereof may be
limited by bankruptcy or other laws now or hereafter in effect relating to or
affecting creditors' rights generally, (2) that the remedy of specific
performance and injunctive and other forms of equitable relief may be subject
to equitable defenses and to the discretion of the court before which any
proceedings therefor may be brought, and (3) that the enforceability of the
indemnification and contribution provisions of the Agreement may be limited by
the federal securities laws and public policy;
(C) The Units and the underlying securities, when issued in
accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and non-assessable. The Units and the underlying securities
conform to the description thereof contained in the Offering Documents. The
certificates representing the Units and the underlying securities are in proper
legal form. To the best knowledge of such counsel, except as described on
Schedule 2.2 hereto or in the Offering Documents, no holder of any of the
Company's securities has any rights, "demand", piggyback" or otherwise, to have
such securities registered or to demand the filing of a registration statement.
Except as set forth on Schedule 2.3 hereto or in the Offering Documents, there
are no preemptive or other rights to subscribe for or purchase, or any
restriction upon the voting or transfer of, any shares of Common Stock of the
Company, under the Articles or Certificate of Incorporation or By-Laws of the
Company or under the business corporation law of the State of Utah, or, to the
best knowledge of such counsel, under any agreement or other outstanding
instrument to which the Company is a party or by which it is bound;
(D) Assuming that a proper Form D is filed in accordance with
Rule 503 and that the offer and the sale of the Units by the Placement Agent
was made in compliance with Rule 502(c) (which facts will not be independently
verified by such counsel), the sale of Units and the underlying securities in
the Offering is exempt from registration under the Securities Act and
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is in compliance with Reg D;
(E) Neither the execution and delivery of this Agreement nor
compliance with the terms hereof, or the consummation of the transactions
herein contemplated, has, or will, (i) conflict with, or constitute a material
breach of, or a material default under, the Articles or Certificate of
Incorporation or By-laws, of the Company or any of its Subsidiaries,
respectively, or, to the best of such counsel's knowledge, any material
contract, instrument or document to which the Company or any of its
Subsidiaries, respectively, is a party, or by which the properties of the
Company or any of its Subsidiaries are bound; (ii) to the best knowledge of
such counsel, violate in a material way any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any Subsidiary or
any of their respective properties or business; or (iii) to the best knowledge
of such counsel, have any material adverse effect on any permit, certification,
registration, approval, consent, license or franchise necessary for the Company
to own or lease and operate any its properties and to conduct its business or
the ability of the Company or any Subsidiary to make use thereof;
(F) To the best of such counsel's knowledge, except as
disclosed on Schedule 2.5 hereto, there are no claims, actions, suits,
hearings, investigations, inquiries or proceedings of any kind or nature,
before or by any court, governmental authority, tribunal or instrumentality
pending or threatened against or affecting the Company or any of its
Subsidiaries or involving the properties of the Company or any of its
Subsidiaries which would result in any material adverse effect on the business,
properties, financial position or results of operations of the Company taken as
a whole, or which would materially adversely affect the transactions or other
acts contemplated by this Agreement or the validity or enforceability of this
Agreement;
(ii) A certificate of the Company, signed by two executive
officers thereof stating that the representations and warranties contained in
Section 2 hereof are true and accurate in all material respects at each
Closing, with the same effect as though expressly made at the Closing.
(iii) The certificates representing the Common Stock and Warrants
underlying the Units; and
(iv) Such other Closing documents as shall be reasonably
requested by the Placement Agent or its counsel.
(v) The Company shall deliver to the Placement Agent the
opinion of counsel acceptable to the Placement Agent.
(A) To the best of such counsel's knowledge and
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based on a certificate delivered by the Company, the Company qualifies for
election as a "Business Development Company" ("BDC") as such term is defined in
the 1940 Act and the regulations promulgated thereunder;
(B) The Company has filed the necessary Notification of
Election to be subject to the provisions of Sections 55 through 65 of the 1940
Act (the "Notice") with the Securities and Exchange Commission (the
"Commission") to effect such election and that it is not aware of any
impediment to such Notice being accepted by the Commission;
(C) To the best of such counsel's knowledge, and based on a
certificate delivered by the Company, the Company is not, as of the date of
Closing, in material violation of any provisions of the 1940 Act applicable to
a BDC;
(D) To the best of such counsel's knowledge and based on a
certificate delivered by the Company, the Company's issued and outstanding
securities conform to the requirements of the 1940 Act applicable to a BDC with
respect to (i) type and amount; and (ii) the price, method and timing of
issuance; and
(E) Based on the information set forth in the Offering
Documents and based on a certificate delivered by the Company, the securities
to be issued by the Company in the Private Placement conform to the
requirements of the 1940 Act applicable to a BDC with respect to (i) type and
amount; and (ii) the price, method and timing of issuance; based on the
information set forth in the Offering Documents and based on a certificate
delivered by the Company, the compensation to be received by the Placement
Agent for placing the securities offered in the Private Placement does not
violate the 1940 Act.
4.3 Blue Sky Survey. Counsel for the Placement Agent shall prepare
and deliver at the Closing a summary blue sky survey stating the extent to
which and the conditions upon which offers and sales of the Units may be made
in certain jurisdictions. It is understood that such survey may be based on or
rely upon; (i) the representations of each Subscriber set forth in his
Subscription Agreement, and (ii) the representations, warranties and agreements
of the Company and the Placement Agent set forth in this Agreement.
4.4 Placement Agent's Fees and Expenses. At each closing, the
Company shall pay to the Placement Agent; (i) a commission equal to 10% of the
aggregate purchase price of the Units sold; and (ii) a non-accountable expense
allowance of 3% of the gross proceeds of the Offering, of which amount the sum
of $15,000 shall be paid simultaneously herewith as a non-refundable deposit.
On or before the Closing, the Company shall pay all expenses of the Offering,
including reasonable fees and disbursements of counsel to the Placement Agent
in connection with
12
<PAGE> 13
the qualification of the Units under the securities or Blue Sky laws of the
states which the Placement Agent shall designate (subject to the reasonable
approval of the Company). All the foregoing amounts are payable directly to
the parties who are owed same by deduction from the aggregate purchase price
of the Units sold. If the Offering is not consummated because the Placement
Agent prevents its completion (except if such prevention is based upon a
breach by the Company of any material covenant, representation or warranty
contained herein or upon a misstatement to the Placement Agent by the Company
of a material fact or omission by the Company to state a material fact
relating to the business and financial condition and prospects of Company
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading), then the Company
shall not be liable to the Placement Agent for any of the foregoing expenses.
If the Offering is not consummated because the Company prevents its completion
or because of a breach by the Company of any such covenants, representations
or warranties or because of any such misstatements or omissions by the
Company, then the Company's liability for the Placement Agent's expenses shall
be equal to the Placement Agent's actual accountable expenses, but the
Company's total liability for such expense allowance shall be no more than
$25,000.00, in the aggregate.
4.5 Warrant Solicitation Fee. Commencing on the date hereof, the
Company shall pay to the Placement Agent a commission equal to five (5%)
percent of the exercise price of the Warrants forming a part of the Units,
payable on the date of exercise thereof on terms provided for in the Warrant
Agreement dated on or before the Closing between the Company and Corporate
Stock Transfer Company, Inc. The Company will not solicit the exercise price of
such Warrants other than through the Placement Agent and will not authorize any
other dealer or engage in such solicitation without the Placement Agent's prior
written consent.
5. Covenants. The Company and each of its Subsidiaries, respectively,
covenant and agree that:
5.1 Amendments to Offering Documents. Until the Offering has been
completed or terminated, if there shall occur any event relating to or
affecting, among other things, the Company, any of its Subsidiaries or any
affiliate, or the proposed operations of the Company as described in the
Offering Documents, as a result of which it is necessary, in the opinion of
counsel for the Placement Agent or counsel for the Company, to amend or
supplement the Offering Documents in order that the Offering Documents will not
contain an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, the Company shall
immediately prepare and furnish to the Placement Agent a reasonable number of
copies of an appropriate amendment of or supplement to the Offering
13
<PAGE> 14
Documents, in form and substance reasonable satisfactory to counsel for the
Placement Agent.
5.2 Use of Proceeds. The net proceeds of the offering of the Units
will be used by the Company for working capital and other operational
requirements of its business as set forth in the Offering Documents.
5.3 Expenses of Offering. The Company shall be responsible for, and
shall pay, all expenses directly and necessarily incurred by the Company in
connection with the proposed financing, including, but not limited to, the
costs of preparing, printing and filing, where necessary, the Offering
Documents and all amendments and supplements thereto, other than Placement
Agent's legal fees.
5.4 Finder's Fees. The Company does hereby engage the Placement Agent
to render services under the terms and conditions herein set forth:
(a) In the event that the Placement Agent introduces in writing,
after the date hereof, any acquisition of and/or merger with other companies or
joint ventures for other contracts or arrangements with any third parties
including, without limitation, the sale of the Company (or any significant
portion, subsidiaries or affiliates thereof) occur which were arranged by the
Placement Agent, the Company shall pay the Placement Agent as follows:
<TABLE>
<CAPTION>
Legal Consideration Fee
------------------- ---
<S> <C>
$ -0- to $3,000,000 5% of Legal Consideration
$3,000,001 to $4,000,000 $150,000 plus 4% of excess Legal
Consideration over $3,000,000
$4,000,001 to $5,000,000 $190,000 plus 3% of excess Legal
Consideration over $4,000,000
$ Over $5,000,000 $220,000 plus 2% of excess Legal
Consideration over $5,000,000
</TABLE>
The phrase "Legal Consideration" for the purpose of this Agreement, shall
mean the total of securities (valued at market on the day of closing, or if
there is no public market, valued as set forth in the acquisition agreement),
cash and assets and property or other benefits exchanged by the Company or
received by the Company or its shareholders as consideration, irrespective of
the period of payment or terms (all valued at fair market present value as
agreed or, if not, by an independent appraiser), for such
14
<PAGE> 15
transaction.
Notwithstanding anything to the contrary contained in this Section 5.4,
the Company shall be under no obligation to negotiate with or consummate any
transaction with any person or entity introduced to the Company by the
Placement Agent except, if at all, on terms and conditions acceptable to the
Company in its sole and absolute discretion. Furthermore, the provisions of
this Section 5.4 shall not apply to the acquisition of any of the assets or
securities of, or merger with, any of Pacific Financial Services Corp., Inland
Financial Services, National Factors, Inc. or Management Financial.
(b) All fees payable under this Section 5.4 are due and payable to
the Placement Agent, in cash or by certified check, at the closing or closings
of any transactions contemplated hereby; provided, that if the Legal
Consideration on any transaction is other than all cash, the payment to the
Placement Agent shall be, at the option of the Placement Agent, either the cash
equivalent or such other consideration proportionate with the types of Legal
Consideration paid on such transaction. No fees shall be payable under this
Section 5.4 or otherwise if, for any reason, the transactions described herein
are not consummated.
(c) Subject to Sections 8 and 9 below, this Section 5.4 shall remain
in effect for a term of two (2) years from the date hereof.
5.5 Right of First Refusal. In consideration of accepting the
appointment as Placement Agent hereunder, the Company does hereby grant to the
Placement Agent for a period of three (3) years from the date hereof (subject
to Sections 8 and 9 below) the first right of refusal to act as managing
underwriter for a public or private offering of securities for the Company,
excluding any offering to employees of the Company or offerings made in
connection with any acquisition of, or merger with, another company. The
Company shall give to the Placement Agent copies of all information concerning
any proposal for a public or private offering by any underwriter and the
Placement Agent shall have 15 business days to accept or reject such proposal.
5.6 Key-Man Life Insurance. The Company shall maintain key-man life
insurance in the face amounts of $1,000,000 on each of Burton W. Kanter and
Joel Kanter.
5.7 Observe Rights. The Placement Agent shall have the right to have
a designee attend all meetings of the Board of Directors for a five year period
from the Closing of the Offering. The Company shall reimburse such designee for
all reasonable out-of-pocket expenses incurred by such designee for attendance
at such meetings, upon presentation of invoices, receipts or such other
documentation reasonably requested by the Company. Such designee
15
<PAGE> 16
shall have no right to vote on any matters brought before the Board of
Directors.
5.8 Notice Requirement. For a period of two years from the closing
of the Offering, the Company shall provide to the Placement Agent 30 days
advance written notice of (i) all issuances of securities by the Company; and
(ii) all registration statements to be filed by the Company with the commission
registering securities for or by the Company or any security holder.
6. Registration Rights; Lock-Up.
6.1 Registration Rights. As more fully described in the Offering
Documents to be executed by the Company and each Subscriber, the Company shall
grant each Subscriber the right to "piggy back" the Common Stock included in
the Units and the Common Stock underlying the Warrants included in the Units
purchased by him on each registration statement for the sale of Common Stock
filed by the Company after the Closing (except Registration Statements on Form
S-4 and S-8), at the Company's cost and expense (except commissions); provided
however, that, if the offering with respect to which the registration statement
is filed is managed by an underwriter, then (A) if shares of Common Stock
to be sold only by the Company are being registered (and not those of security
holders other than the Subscribers), the Subscribers shall not sell their
shares of Common Stock under such registration statement until 90 days after
the effective date of the registration statement or later as determined by the
underwriter in its sole discretion, and (B) if shares of Common Stock are to be
registered for the benefit of any other selling security holder ("Selling
Holder"), each Subscriber shall be entitled to sell immediately under such
registration statement, a percentage of the total number of shares owned by him
equal to the highest percentage of shares to be sold under such registration
statement (vis-a-vis the total number of shares owned) by any such Selling
Holder, with each Subscriber being entitled to sell the balance of his shares
under such registration statement commencing 90 days after the effective date
of the registration statement. The Company shall give the Subscribers 30 days
notice of the filing of any registration statement and shall keep any
registration statement onto which Subscribers have "piggy backed" their shares
effective for a period of not less than nine months from its effective date, or
such shorter period terminating when all Subscribers electing to be included in
such registration statement have sold all of their shares.
6.2 Demand Registration. Commencing six months following the final
Closing hereunder, the Placement Agent on behalf of the Subscribers shall have
the right to demand that the Company register with the Commission the Common
Stock included in
16
<PAGE> 17
the Units and the Common Stock underlying the Warrants included in the Units
(the "Registerable Securities") and to keep such Registration Statement
effective and current" until the earlier of (i) the public sale of all of the
Registerable Securities; or (ii) until all of the Registerable Securities may
be sold pursuant to Rule 144 promulgated under the Securities Act as then in
effect. The Company will, at its sole expense, "Blue Sky" the Registerable
Securities in such states as the Placement Agent shall reasonably request,
including but not limited to each state in which the Units are sold. All
expenses of such registration shall be at the Company's expense. Such
registration statement shall remain effective for a period of nine months from
its effective date.
6.3 Lock-Up. As more fully described in the Subscription Agreement
to be executed by the Company and each Subscriber, each Subscriber will agree
not to sell, transfer, gift or otherwise dispose of, either publicly or
privately, the Units of the underlying securities acquired in the Offering for
a period of 18 months from the final Closing hereunder, without the written
consent of the Placement Agent, and all officers, directors and those
shareholders listed on Schedule 6.3 hereto shall agree not to sell, transfer,
gift or otherwise dispose of, either publicly or privately, their securities in
the Company for a two year period from the final closing, without the consent
of the Placement Agent.
7. Indemnification and Contribution.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless the Placement Agent and each person, if any, who controls
the Placement Agent within the meaning of the Securities Act and/or 1934 Act
against any losses, claims, damages or liabilities, joint or several, to which
the Placement Agent or such controlling person may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement of a material fact contained (A) in the Offering
Documents, or (B) in any blue sky application or other document executed by the
Company specifically for blue sky purposes or based upon any other written
information furnished by the Company or on its behalf to any state or other
jurisdiction in order to qualify any or all of the Units and the underlying
securities under the securities laws thereof (any such application, document or
information being hereinafter called a "Blue Sky Application"), or (ii) the
omission to state in the Offering Documents or in any Blue Sky Application a
material fact required to be stated therein or necessary to make the statements
therein,
17
<PAGE> 18
in light of the circumstances under which they were made, not misleading; and
will reimburse the Placement Agent and each such controlling person for any
legal or other expenses subject to Section 7(c) below reasonably incurred by
the Placement Agent or such controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is
based upon (i) an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company by the Placement Agent in the preparation
of the Offering Documents or any such Blue Sky Application, or (ii) the
Placement Agent's bad faith, gross negligence or willful misconduct.
(b) Indemnification by the Placement Agent. The Placement Agent
agrees to indemnify and hold harmless the Company and each person, if any, who
controls the Company with in the meaning and the Securities Act and/or 1934 Act
against any losses, claims, damages or liabilities, joint or several, to which
the Company or such controlling person may become subject, under the Securities
Act or otherwise insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement of a material fact contained (A) in the Offering Documents, or (B) in
any Blue Sky Application, or (ii) the omission to state in the Offering
Documents or in any Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; but in each case,
only if and to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by the Placement
Agent specifically for use in the preparation of the Offering Documents or any
such Blue Sky Application; provided however that the Placement Agent will not
be liable for the Company's bad faith, gross negligence or willful misconduct.
(c) Procedure. Promptly after receipt by an indemnified party under
this Section 7 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 7, notify in writing the indemnifying
party of the commencement thereof; provided however, that the omission so to
notify the indemnifying party will not relieve the indemnifying party from any
liability under this Section 7 as to the particular item for which
indemnification is then being sought, unless such failure to so notify
materially adversely prejudices the indemnifying party with respect to such
particular item. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate therein, and to
18
<PAGE> 19
the extent that it may wish, jointly with any other indemnifying party,
similarly notified, to assume the defense thereof, with counsel who shall be
to the reasonable satisfaction of such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this paragraph 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. Any such indemnifying
party shall not be liable to any such indemnified party on account of any
settlement of any claim or action effected without the consent of such
indemnifying party.
(d) Contribution. If the indemnification provided for in this Section
7 is unavailable to any indemnified party in respect to any losses, claims,
damages, liabilities or expenses referred to therein then the indemnifying
party, in lieu of indemnifying such indemnified a party, will contribute to the
amount paid or payable by such indemnified party, as a result of such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand, and the Placement Agent on the other hand, from the
Offering, or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above, but also the
relative fault of the Company on the one hand, and of the Placement Agent on
the other hand, in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or expense as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand, and the Placement Agent on the other hand, shall be
deemed to be in the same proportion as the total proceeds from the Offering
(net of sales commissions and other payments to the Placement Agent, but before
deducting expenses) received by the Company, bear to the commissions received
by the Placement Agent. The relative fault of the Company on the one hand, and
the Placement Agent on the other hand, will be determined with reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission to state a material fact relates to information
supplied by the Company, and its relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(e) Equitable Considerations. The Company and the Placement Agent
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable considerations
referred to in the immediately preceding paragraph.
(f) Attorneys' Fees. The amount payable by a party
19
<PAGE> 20
under this Section 7 as a result of the losses, claims, damages, liabilities or
expenses referred to above will be deemed to include any legal or other fees
or expenses reasonably incurred by such party in connection with investigating
or defending (subject to Section 7(c) above) any action or claim.
8. Termination by Placement Agent. The Placement Agent will have the
right to terminate this Agreement by giving written notice to the Company as
herein specified, at any time, at or prior to the Closing Date: (a) if the
Company shall have failed, refused, or been unable to perform any of its
material obligations hereunder, or materially breached any of its
representations or warranties hereunder and failed to cure the same within 30
days after receipt of written notice from the Placement Agent specifying such
failure or breach; or (b) if, in the Placement Agent's opinion, there has
occurred an event materially and adversely affecting the value of the Common
Stock; or (c) the due diligence investigation of the Company by the Placement
Agent shall not be satisfactorily completed to the Placement Agent's sole
satisfaction or (d) failure to obtain shareholder approval for the maximum
Offering shall terminate this Agreement as to the maximum Offering or (e)
failure to reduce outstanding options and warrants to satisfy the requirements
of the Investment Act. Such due diligence shall be completed within 10 business
days following delivery to the Placement Agent of a Confidential Private
Placement Memorandum satisfactory to the Placement Agent. Any termination of
this Agreement pursuant to this Section 8 shall constitute a termination of all
provisions and obligations contained herein including, Sections 5.4 and 5.5,
and the Company shall be liable to the Placement Agent only for the $15,000
non-refundable deposit paid herewith.
9. Termination by Company. The Company shall have the right to terminate
this Agreement (including, without limitation, Sections 5.4 and 5.5) upon
written notice to the Placement Agent, as herein specified, in the event the
Placement Agent fails to sell the Minimum Units during the Offering Period. In
the event of such termination, the Company shall be liable to the Placement
Agent only for the $15,000 non-refundable deposit paid herewith. In addition,
the Company shall have the right to terminate this Agreement (including,
without limitation, Sections 5.4, 5.5 and 6.3) upon written notice to the
Placement Agent, as herein specified, in the event that the Placement Agent
substantially ceases operations. In the event of such termination, the Company
shall be liable to the Placement Agent only for obligations that have fully
accrued prior to the date of such termination.
10. Notices. Any notice hereunder shall be in writing and shall be
effective when delivered in person or by facsimile transmission, or mailed by
certified mail, postage prepaid, return receipt requested, to the appropriate
party or parties, at the following addresses: if to the Placement Agent, to
Walsh Manning
20
<PAGE> 21
Securities, LLC, 90 Broad Street, New York, New York 10004, Attention:
Theodore J. Burns, Senior Managing Director (Fax No. 212-422-5855); with a
copy to McLAUGHLIN & STERN, LLP, 260 Madison Avenue, New York, New York 10016
(Fax No. 212-448-0066); if to the Company: Walnut Financial Services, Inc.
8000 Towers Crescent Drive, Suite 1070 Vienna, Va. 22182, Attention: Joel S.
Kanter, Chief Executive Office (Fax No. 703-448-7751); with a copy to Barack
Ferrazzano Kirschbaum Perlman & Nagelberg, 333 W. Wacker Drive, Suite 2700,
Chicago, Ill. 60606, (Fax No. 312-984-3150); or, in each case, to such other
address as the parties may hereinafter designated by like notice.
11. Parties. This Agreement will inure to the benefit and be binding upon
the Placement Agent, the Company and their respective successors and assigns.
This Agreement is intended to be, and is for the sole and exclusive benefit of
the parties hereto and the persons described in Section 7(a) and 7(b) hereof,
and their respective successors and assigns, and for the benefit of no other
person (including, without limitation, any Subscriber), and no other person
will have any legal or equitable right, remedy or claim under, or in respect
of this Agreement.
12. Amendment and/or Modification. Neither this Agreement, nor any term
or provision hereof, may be changed, waived, discharged, amended, modified or
terminated orally, or in any manner other than by an instrument in writing
signed by each of the parties hereto.
13. Further Assurances. Each party to this Agreement will perform any and
all acts and execute any and all documents as may be reasonably necessary and
proper under the circumstances in order to accomplish the intents and purposes
of this Agreement and to carry out its provisions.
14. Validity. In case any term of this Agreement will be held invalid,
illegal or unenforceable, in whole or in part, the validity of any of the
other terms of this Agreement will not in any way be affected thereby.
15. Waiver of Breach. The failure of any party hereto to insist upon
strict performance of any of the covenants and agreements herein contained, or
to exercise any option or right herein conferred in any one or more instances,
will not be construed to be a waiver or relinquishment of any such option or
right, or of any other covenants or agreements, and the same will be and
remain in full force and effect.
16. Entire Agreement. This Agreement contains the entire agreement and
understanding of the parties with respect to the subject matter hereof and
thereof, respectively, and there are no representations, inducements, promises
or agreements, oral or otherwise, not embodied in this Agreement and/or in the
Letter of
21
<PAGE> 22
Intent. Any and all prior discussions, negotiations, commitments and
understanding relating to the subject matter of these agreements are
superseded by them.
17. Counterparts. This Agreement may be executed in counterparts and
each of such counterparts will for all purposes be deemed to be an original,
and such counterparts will together constitute one and the same instrument.
18. Law. This Agreement will be deemed to have been made and delivered
in New York City and will be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the
State of New York.
19. Representations, Warranties and Covenants to Survive Delivery.
Subject to Sections 8 and 9 above, the respective representations, indemnities,
agreements, covenants, warranties and other statements of the Company and the
Placement Agent shall survive execution of this Agreement and delivery of the
Units.
If you find the foregoing is in accordance with our understanding, kindly
sign and return to us a counterpart hereof, whereupon this instrument along
with all counterparts will become a binding agreement between us.
Very truly yours,
WALNUT FINANCIAL SERVICES, INC.
By: /s/ Joel S. Kanter
-------------------------------
Joel S. Kanter, Chief Executive
Officer
AGREED:
WALSH MANNING SECURITIES, LLC
By:
--------------------------------
Craig Gross, President
22
<PAGE> 23
SCHEDULE 2.1
List of Subsidiaries
<TABLE>
<CAPTION>
Percentage Owned Directly
or Indirectly by
Walnut Financial Services. Inc.
-------------------------------
<S> <C>
Walnut Capital Corp. 100 %
Walnut Funds, Inc. 100%
WGP Management Company, Inc. 40%
Walnut GP, L.L.C. 40%
Walnut Consulting, Inc. 100%
Universal Bridge Fund, Inc. 100%
Universal Partners, L.P. 83%*
F&G Holdings LLC 50%
</TABLE>
* 83% of the outstanding limited partnership interest. In addition, Walnut
Financial Services, Inc., through Universal Bridge Fund, Inc., owns 50% of the
1% general partnership interest.
<PAGE> 24
SCHEDULE 2.2
Authorized Capital
As of September 30, 1997, the number of outstanding common stock was 14,659,172.
<PAGE> 25
SCHEDULE 2.3
PREEMPTIVE RIGHTS; OPTIONS
There are no preemptive rights. As of September 30, 1997, the number of
outstanding shares or options was 2,278,054.
<PAGE> 26
SCHEDULE 2.5
Pending Actions
None.
<PAGE> 27
SCHEDULE 2.7
The Offering Documents describe certain consents, including the approval
of the Company's shareholders for the maximum offering and the consent of
enough holders of Universal Warrants (as defined in the Offering Documents).
<PAGE> 28
SCHEDULE 6.3
Necessary Lock-Up Agreements
----------------------------
<TABLE>
<CAPTION>
Shareholders Number of Shares
------------ ----------------
<S> <C>
Solomon A. Weisgal, Trustee of Bea Ritch 339,659
Trusts
Federal Business Investment Company 540,159
Jay M. Haft 75,000
The Holding Company 366,043
Kanter Family Foundation 282,993
Lawrence Kaplan 193,381
Stanley Kaplan 287,003
Victoria Ross 50,000
Solomon A. Weisgal, Trustee of the Rainbow 89,062
Trusts
Windy City, Inc. 455,033
</TABLE>
<PAGE> 1
EXHIBIT 10.10
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "AGREEMENT") is made and entered
into this ________________ ___, 199_, by and between JEFFREY B. PYATT, PAUL J.
ZEMAN and THOMAS MAURICE, each an individual (hereinafter individually a
"SELLER" and collectively the "SELLERS"), WALNUT FINANCIAL SERVICES, INC., a
Utah corporation ("BUYER"), and PACIFIC FINANCIAL SERVICES CORP., a Washington
corporation ("PACIFIC FINANCIAL");
R E C I T A L S:
A. Each Seller is the legal holder and owner of one hundred (100)
shares (hereinafter the full three hundred (300) shares are collectively
referred to as the "SHARES") of the issued and outstanding common stock of
Pacific Financial, which Shares constitute one hundred percent (100%) of the
issued and outstanding capital stock of Pacific Financial;
B. Buyer desires to purchase from the Sellers and the Sellers desire to
sell to Buyer the Shares on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual
covenants and agreements hereinafter set forth, and other good and valuable
considerations, the receipt and sufficiency of which are mutually acknowledged,
the parties agree as follows:
1. PURCHASE AND SALE. On the Closing Date (as hereinafter defined), the Sellers
shall sell, transfer, convey and assign to Buyer, and Buyer shall purchase from
the Sellers, all of the Shares, together with any and all other shares,
investment securities, units, equity interests, subscription rights, options and
warrants of Pacific Financial, and any other legal or beneficial interest (or
related right) in Pacific Financial now or hereafter owned by Sellers, whether
issued or acquired in substitution for or in addition to any of the Shares, and
whether issued or acquired by dividend, distribution, exchange, stock split,
purchase and sale or otherwise (collectively, together with the Shares, the
"SECURITIES"), free and clear of all liens, claims, charges, restrictions,
voting trusts or comparable arrangements, options, constructive trusts, pledges,
security interests and other encumbrances (collectively, "LIENS"), at the price
and upon the terms and subject to the conditions hereinafter set forth.
2. PURCHASE PRICE.
2.1 Payment and Purchase Price. The aggregate price to be paid by Buyer to
Sellers for the purchase of the Securities shall be Three Million and No/100
Dollars ($3,000,000.00) payable at Closing (as hereinafter defined) as follows:
(a) A total of Nine Hundred Thousand and No/100 Dollars ($900,000.00)
shall be paid in cash (the "CASH PAYMENT") to Sellers by wire transfer of
federal funds in the amount of Three Hundred Thousand and No/100 Dollars
($300,000.00) to or as directed by each Seller;
<PAGE> 2
(b) Buyer shall cause to be issued to Sellers, that number of shares
of Buyer's common stock, par value $0.01 per share ("BUYER'S COMMON"), as
is derived by dividing Nine Hundred Thousand and No/100 Dollars
($900,000.00) by Buyer's Closing Bid Price (as hereinafter defined) (the
"COMMON STOCK PAYMENT") such that each Seller receives that number of
shares of Buyer's Common equal to one third (1/3) of the total Common Stock
Payment; and
(c) Buyer shall cause to be issued to each Seller by Pacific Financial
an unsecured promissory note in the principal amount of One Hundred
Thousand and No/100 Dollars ($100,000.00) such that promissory notes are
issued to Sellers in an aggregate principal amount of Three Hundred
Thousand and No/100 Dollars ($300,000.00) (the "SHORT TERM NOTES"). The
Short Term Notes shall be in substantially the form attached hereto as
EXHIBIT A, shall mature at the earlier to occur of (i) twelve (12) months
from the Closing Date and (ii) the completion of a private placement of
Buyer's securities by Walsh Manning Securities, LLC with net proceeds to
Buyer of at least Two Million One Hundred Seventy-Five Thousand and No/100
Dollars ($2,175,000.00), and shall bear interest at eight percent (8%) per
annum. The Short Term Notes shall be guaranteed by Buyer pursuant to the
form of guaranty that appears at the end of the Short Term Notes (the
"SHORT TERM GUARANTY"); and
(d) Buyer shall cause to be issued to each Seller by Pacific Financial
an unsecured promissory note in the principal amount of Three Hundred
Thousand and No/100 Dollars ($300,000.00) such that promissory notes are
issued to Sellers in an aggregate principal amount of Nine Hundred Thousand
and No/100 Dollars ($900,000.00) (the "LONG TERM NOTES"). The Long Term
Notes shall be in substantially the form attached hereto as EXHIBIT B,
shall mature four (4) years from the Closing Date, which maturity date
shall be subject to extension as set forth in Section 3.2 hereto, and shall
bear interest at eight percent (8%) per annum. The Long Term Notes shall be
guaranteed by Buyer pursuant to the form of guaranty that appears at the
end of the Long Term Notes (the "LONG TERM GUARANTY").
2.2 Common Stock Payment. As used herein, "BUYER'S CLOSING BID PRICE" shall
mean the average closing bid price reported on the Nasdaq National Market System
for Buyer's Common for the five (5) trading days immediately preceding the
Closing Date, provided that Buyer's Closing Bid Price shall be deemed to be not
more than Two and 75/100 Dollars ($2.75) per share. The number of shares of
Buyer's Common delivered hereunder shall be rounded to the nearest whole share
and Buyer shall not issue any fractional shares in connection with the Common
Stock Payment. Buyer shall deliver valid title to Buyer's Common, free and clear
of all Liens; provided, however, that Buyer's Common shall be restricted stock
within the meaning of the Securities Act of 1933, as amended (the "SECURITIES
ACT"), and shall bear the restrictive legends set forth on EXHIBIT C.
Each Seller agrees to deliver to Buyer at the Closing a subscription
agreement and confidential purchaser questionnaire (a "SUBSCRIPTION AGREEMENT")
in substantially the form attached hereto as EXHIBIT D. Sellers shall be granted
those registration rights with respect to the shares of Buyer's Common received
as the Common Stock Payment as set forth in the form of registration agreement
attached hereto as EXHIBIT E (the "REGISTRATION AGREEMENT").
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2.3 Repayment of Certain Pacific Financial Debt. In addition to the
consideration set forth in Sections 2.1 and 2.2 above, Pacific Financial shall
repay, or cause to be repaid, at Closing the unpaid outstanding principal
balance of certain notes owed by Pacific Financial to Messrs. Zeman and Maurice
and the Maurice Trust #1 and identified on Schedule 1 attached hereto but
excluding any interest, default interest or accrued fees with respect thereto
(the "NOTE REPAYMENT"), the aggregate amount of which Note Repayment shall in no
event exceed Six Hundred Thousand and No/100 Dollars ($600,000.00). The Note
Repayment may be made by provision to Pacific Financial of financing from, or
arranged by, Buyer, which financing shall be made on such terms as Buyer
dictates or negotiates in its sole and absolute discretion.
2.4 Allocation of Purchase Price. The parties hereto hereby stipulate that
Thirty Thousand and No/100 Dollars ($30,000.00) of the Purchase Price shall be
allocated as follows: (i) Ten Thousand and No/100 Dollars ($10,000.00) to the
confidentiality and non-compete provisions of the Employment Agreement (as
defined in Section 12.1(e)) and (ii) Ten Thousand and No/100 Dollars
($10,000.00) to each of the Non-Competition Agreements (as defined in Section
12.1(f)). The parties hereto agree to file all applicable tax returns and other
required tax-related schedules and documents in accordance with the allocations
set out above and will not adopt or otherwise assert tax positions inconsistent
therewith.
3. CLOSING BALANCE SHEET; COLLECTION OF RECEIVABLES.
3.1 Closing Balance Sheet. The parties agree that immediately after the
Closing Date, the firm of Richard A. Eisner & Co., L.L.P. or such other
independent public accountants as selected by Buyer (the "ACCOUNTANTS") will
compile and provide to the parties a balance sheet with respect to Pacific
Financial as of the Closing Date (the "CLOSING BALANCE SHEET"), at the sole cost
and expense of Buyer or Pacific Financial, payable after the Closing Date, which
Closing Balance Sheet shall be prepared in accordance with the standard
accounting practices of Pacific Financial as in existence prior to Closing.
Sellers shall afford the Accountants full access to the books and records of
Pacific Financial and full access to all other relevant information, documents
and files required by the Accountants in connection with its preparation of the
Closing Balance Sheet. Sellers represent and warrant that all of such books and
records and other information, documents and files are and will be as of the
Closing Date true, correct and complete and fairly and accurately represent the
financial condition of Pacific Financial and its business and properties and
liabilities and will have been prepared in accordance with generally accepted
accounting principles consistently applied with prior periods.
3.2 Collection of Receivables.
(a) In the event any Pacific Financial Receivable (as defined in
Section 6.13) outstanding as of the Closing Date (whether or not identified
on the Closing Balance Sheet) is deemed to be an Uncollectible Receivable
(as hereinafter defined) at any time on or following the Closing Date,
Sellers may cause such Uncollectible Receivable to be replaced by the
appropriate Pacific Financial client (the "DEFAULTING CLIENT") with
another, nonfactored receivable of the Defaulting Client in an amount equal
to or greater than the value of the Uncollectible Receivable plus any
accrued fees owed to Pacific Financial with respect to such Uncollectible
Receivable (a "REPLACEMENT RECEIVABLE"); provided,
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however, that (i) no additional advance shall be made by Pacific Financial
to the Defaulting Client until an acceptable Replacement Receivable has
been given to Pacific Financial by the Defaulting Client to replace the
Uncollectible Receivable, (ii) the replacement shall not cause the total
obligation of the Defaulting Client to Pacific Financial to exceed eighty
percent (80%) of the value of all collateral pledged by the Defaulting
Client to Pacific Financial, (iii) Pacific Financial has not reasonably
determined that it has ceased doing business with the Defaulting Client,
and (iv) Sellers have no actual information that leads them to reasonably
believe that the Replacement Receivable is or will become an Uncollectible
Receivable. In the event that a Replacement Receivable is deemed to be an
Uncollectible Receivable, Sellers may cause such Replacement Receivable to
be replaced by the Defaulting Client with another Replacement Receivable (a
"FINAL RECEIVABLE"); provided, however, that (w) no additional advance
shall be made by Pacific Financial to the Defaulting Client until an
acceptable Final Receivable has been given to Pacific Financial by the
Defaulting Client to replace the Replacement Receivable that has become an
Uncollectible Receivable, (x) the replacement shall not cause the total
obligation of the Defaulting Client to Pacific Financial to exceed eighty
percent (80%) of the value of all collateral pledged by the Defaulting
Client to Pacific Financial, (y) Pacific Financial has not reasonably
determined that it has ceased doing business with the Defaulting Client,
and (z) Sellers have no actual information that leads them to reasonably
believe that the Final Receivable is or will become an Uncollectible
Receivable. A Receivable, a Replacement Receivable or a Final Receivable
shall be deemed to be an "UNCOLLECTIBLE RECEIVABLE" if Pacific Financial is
not paid in full (and if paid by check, such check has cleared consistent
with the Collected Funds Act) with respect to such Receivable, Replacement
Receivable or Final Receivable, as the case may be, including payment of
all accrued fees owed to Pacific Financial in connection therewith, within
ninety (90) days of Pacific Financial's acquisition of such Receivable,
Replacement Receivable or Final Receivable, as the case may be. Unless
Pacific Financial has reasonably determined that it has ceased doing
business with the Defaulting Client, Pacific Financial shall have no
obligation to charge reserves, if any, of a Defaulting Client with respect
to an Uncollectible Receivable. If Pacific Financial has reasonably
determined that it has ceased doing business with the Defaulting Client,
Pacific Financial shall charge reserves of such Defaulting Client against
such Uncollectible Receivable pro rata among reserves contributed to
Pacific Financial by the Defaulting Client with respect to all of such
Defaulting Client's receivables.
(b) Upon the first occurrence and upon each occurrence thereafter of
any Final Receivable being deemed an Uncollectible Receivable (or any
Uncollectible Receivable being deemed ineligible to be replaced by a
Replacement Receivable or a Final Receivable, as the case may be, for any
reason), payment of an amount of principal of the Long Term Notes (pro rata
among them) equal to the amount of such Final Receivable or Final
Receivables (or such Uncollectible Receivable or Uncollectible Receivables)
plus any accrued fees owed to Pacific Financial in connection therewith,
shall be extended for one year from the Original Maturity Date (as defined
in the Long Term Notes). For example, in the event that a Final Receivable
totaling One Hundred Thousand and No/100 Dollars ($100,000.00) (including
accrued fees owed to Pacific Financial) is deemed an Uncollectible
Receivable, One Hundred Thousand and No/100 ($100,000.00) of the principal
amount due under the Long Term Notes (pro rata among them) shall become due
one year after the
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Original Maturity Date and Eight Hundred Thousand and No/100
($800,000.00) shall be payable on or before the Original Maturity Date of
the Long Term Notes. If subsequently an additional Final Receivable
totaling One Hundred Thousand and No/100 Dollars ($100,000.00) (including
accrued fees owed to Pacific Financial) is deemed an Uncollectible
Receivable, an additional One Hundred Thousand and No/100 Dollars
($100,000.00) of the principal amount due under the Long Term Notes (pro
rata among them) shall become due one year after the Original Maturity Date
such that Two Hundred Thousand and No/100 Dollars ($200,000.00) shall be
due one year after the Original Maturity Date and Seven Hundred Thousand
and No/100 Dollars ($700,000.00) shall be payable on or before the Original
Maturity Date of the Long Term Notes. If the Original Maturity Date of the
Long Term Notes is so extended, Buyer and Sellers agree to execute such
amendments or modifications to the Long Term Notes and take such other
actions reasonably necessary to effectuate such extension. For a period of
nine months following the Closing Date, Pacific Financial shall provide
monthly a written statement to Sellers stating in reasonable detail the
status of collections of any outstanding Uncollectible Receivables,
Replacement Receivables or Final Receivables.
(c) In the event that on or following the Closing Date (i) any
Uncollectible Receivable is not replaced or is not eligible to be replaced
with a Replacement Receivable or a Final Receivable, as the case may be,
for any reason, or (ii) any Final Receivable is not paid in full, including
payment of all accrued fees owed to Pacific Financial in connection
therewith, within ninety (90) days of the acquisition of the Final
Receivable by Pacific Financial, Pacific Financial shall be entitled to
demand payment from Sellers, on a pro rata basis among Sellers, in an
amount equal to the Uncollectible Receivable or Final Receivable, as the
case may be, plus any accrued fees owed to Pacific Financial in connection
therewith and all reasonable out-of-pocket costs incurred by Pacific
Financial, Buyer or any of Buyer's subsidiaries in attempting to collect
such Uncollectible Receivable or Final Receivable, as the case may be (the
"DEMAND AMOUNT"). If Sellers shall not have paid such Demand Amount in full
within ten (10) days following any such demand for payment by Pacific
Financial, Pacific Financial shall offset such Demand Amount or unpaid
portion thereof against the next payment or payments due under either the
Short Term Notes or the Long Term Notes, or both, as Pacific Financial
shall determine in its sole discretion, on a pro rata basis among the
Sellers, until the Demand Amount is satisfied in full. Messrs. Zeman and
Maurice shall be jointly and severally liable with respect to two thirds
(2/3) of any Demand Amount.
(d) In the event any Uncollectible Receivable, any accrued fees owed
to Pacific Financial in connection therewith, and/or any collection costs
of Pacific Financial, Buyer or any of Buyer's subsidiaries incurred in
connection therewith that have been included in a Demand Amount are
actually collected in full or in part by Pacific Financial (a "COLLECTION")
and Pacific Financial has received payment of the Demand Amount associated
with such Uncollectible Receivable or Pacific Financial has offset such
Demand Amount against the Short Term Notes or the Long Term Notes, Pacific
Financial shall credit the amount of such Collection to Sellers by either
(i) making payment of the amount of such Collection to Sellers, or (ii)
reinstating the payment or payments due under the Short Term Notes or Long
Term Notes with respect to which the Demand Amount was offset or scheduled
to be offset.
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(e) Pacific Financial shall use its best efforts and due diligence to
collect any Uncollectible Receivable from a Defaulting Client in accordance
with the standard operating procedures of Pacific Financial in effect as of
the date hereof, including the pursuit of available legal remedies, if
appropriate, in accordance with such procedures; provided, however, that
neither Pacific Financial nor Buyer shall have any obligation to pursue any
remedy available against a Defaulting Client that has an ongoing factoring
relationship with Pacific Financial for payment of any Uncollectible
Receivable, Replacement Receivable or Final Receivable (unless Pacific
Financial institutes litigation against the Defaulting Client involving
other Receivables in which event Pacific Financial shall include the
Uncollectible Receivable as a claim in such litigation). No such pursuit by
Pacific Financial or Buyer, however, shall release Sellers from their
reimbursement obligations or Buyer's right of offset hereunder. Sellers
hereby waive (i) all rights of subrogation, all rights of indemnity and any
other rights to collect reimbursement from a Defaulting Client for any sums
paid to Pacific Financial or Buyer by Sellers hereunder, and (ii) all
rights to enforce any remedy that Pacific Financial or Buyer may have
against a Defaulting Client.
(f) For purposes of this Agreement, the payable from Ultrapak
Packaging, Inc. to Pacific Financial reflected by Letter Agreement dated
April 7, 1997 shall be deemed an Uncollectible Receivable only if there has
been a default on the terms of such payable as set forth in such Letter
Agreement, which such default has existed for at least ninety (90) days. In
addition, that certain note dated June 6, 1996 made by Frank (Pat) and
Marlena Marshall payable to Pacific Financial in connection with Pacific
Financial's factor of receivables of Allstate Fabricators, Inc. shall be
excluded from the Closing Balance Sheet and shall not be deemed a
Receivable for purposes of this Agreement.
4. CLOSING ESCROW. The parties hereto agree to execute and deliver the documents
necessary for the closing of the transactions provided for herein ("CLOSING"),
including but not limited to the documents set forth in paragraph 12 hereof, to
Warren & Duggan (the "ESCROWEE"). The Closing shall take place on such date
agreed upon by the parties in writing, which date shall in any case be no later
than ten business days after the receipt by the Escrowee of the last of the
documents necessary to be executed and/or delivered in order for the Closing to
occur (the "CLOSING DATE"). Until the Closing Date, the parties hereto agree
that the Escrowee shall hold any and all executed documents received by it in
escrow until the Escrowee receives the written instruction of each of the
parties hereto to release such documents in order that the Closing may occur.
5. NO-SHOP. From the date hereof through Closing or the earlier termination of
this Agreement as provided herein, Sellers shall not, and shall cause Pacific
Financial not to, (a) solicit, initiate, consider, encourage or accept any other
proposals or offers from any person, association or entity ("PERSON") relating
to (i) any acquisition or purchase of all or any portion of the assets, capital
stock or other securities of Pacific Financial (other than inventory to be sold
or disposed of in the ordinary course of business consistent with past
practice), (ii) any business combination involving Pacific Financial, or (iii)
any other extraordinary business transaction involving or otherwise relating to
Pacific Financial, or (b) participate in any discussions, negotiations or other
communications regarding, or furnish to any other Person any information with
respect to, or otherwise cooperate in any way, assist or participate in,
facilitate or encourage any effort or attempt by any Person relating to any of
the foregoing. Sellers shall notify the Buyer promptly of any such proposal or
offer, or any
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inquiry or other contact with any Person with respect thereto, and
shall, in any such notice to the Buyer, indicate in reasonable detail the
identity of the Person making such proposal, offer, inquiry or contact and the
terms and conditions of such proposal, offer, inquiry or other contact.
6. REPRESENTATIONS OF SELLERS. Sellers hereby represent, warrant and covenant to
Buyer as of the date hereof and as of the Closing Date, which representations,
warranties and covenants shall be joint and several with respect to Messrs.
Zeman and Maurice as to two-thirds (2/3) of any obligation or loss and shall be
several with respect to Mr. Pyatt as to one-third (1/3) of any obligation or
loss, are material, are being relied upon by Buyer (notwithstanding any
independent investigations) and shall survive the Closing as provided herein, as
follows, subject only to such exceptions as are explicitly set forth on Schedule
6 attached hereto ("SELLERS' DISCLOSURE SCHEDULE") on a section-by-section
basis:
6.1 Organization and Authority. Pacific Financial is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington and has no subsidiaries; has full power and authority to carry on its
business as it is now being conducted and to own, lease and operate its
properties and assets as now owned, leased and operated; and has full power and
authority to take all actions on its part contemplated to be taken under this
Agreement and all other agreements, instruments and documents referred to herein
or contemplated hereby. Pacific Financial is duly qualified and in good standing
as a foreign corporation under the laws of any state or jurisdiction in which
the character of the properties owned or leased by it therein or in which the
transactions of its business makes such qualification necessary and Sellers'
Disclosure Schedule sets forth a list of all such properties.
6.2 Capitalization. The entire authorized capital stock of Pacific
Financial consists of one thousand (1,000) shares of common stock, without par
value, of which three hundred (300) shares are validly issued and outstanding,
fully paid and non-assessable and all three hundred (300) of which are owned by
Sellers. As of the date of this Agreement, the Securities consist only of the
Shares. None of the Shares are subject to any restrictions with respect to
transferability. There are no outstanding options, warrants, voting trusts,
shareholder agreements or other rights of any kind relating to the sale,
encumbrance or other disposition, or the authorization, issuance or voting of,
any shares of capital stock of any class of, or other equity interest in,
Pacific Financial, nor any securities convertible into or evidencing the right
to purchase any share of capital stock of any class of, or other equity interest
in, Pacific Financial.
6.3 Authorization and Enforceability. Each Seller is a natural person who
has reached the age of majority and has full legal capacity, power and authority
to enter into, execute and deliver, and to perform his obligations under, this
Agreement and all other agreements, instruments and documents referred to herein
or contemplated hereby to be executed, delivered and performed by him. This
Agreement, and all other agreements, instruments and documents referred to
herein or contemplated hereby and executed by Sellers, constitute, and will
constitute, valid, binding and enforceable obligations of Sellers in accordance
with its and their terms, subject to the enforcement of involuntary bankruptcy,
insolvency, reorganization and other laws of general applicability relating to
or affecting creditors' rights and to general equitable principles.
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6.4 No Conflicts. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby by Sellers do not
and will not: (a) conflict with the Articles of Incorporation and By-laws of
Pacific Financial, in each case as amended as of the date hereof; (b) conflict
with, or result in a breach or termination of, or constitute a default (or an
event which, with the giving or due notice or lapse of time, or both, would
constitute a default) or cause or permit the acceleration of the maturity of or
give rise to any right to impose any fees or penalties under, any agreement,
commitment, or other instrument, or any order, judgment or decree, to which any
of the Sellers or Pacific Financial is a party or by which any of them or any of
their respective assets is bound; (c) result in the creation or imposition of
any Lien upon any of their respective assets; or (d) constitute a violation by
any of the Sellers or Pacific Financial of any law, statute, judgment,
injunction, decree, order or other authoritative matter of any governmental
authority applicable to Sellers or to any of their respective assets.
6.5 Consents. No consents approvals, waivers, variances or authorizations
of, notices to or filings with (collectively, "CONSENTS") any Person (including,
without limitation, any governmental authority) are necessary in connection with
the execution and delivery by Sellers of this Agreement or the consummation by
Sellers of the transactions contemplated herein other than compliance with
applicable federal and state securities laws.
6.6 Litigation. Except as disclosed on behalf of Sellers in that certain
letter dated January 6, 1997 from Michael J. Warren addressed to Buyer or as set
forth on Section 6.6 of Sellers' Disclosure Schedule: (a) there is no
investigation, audit or review by any governmental authority pending with
respect to the Shares, any of the Sellers, Pacific Financial or any of their
respective business or assets; (b) there are no claims, actions, suits or
proceedings pending, or to the best knowledge of Sellers after due inquiry,
threatened, in connection with the Shares, any of the Sellers, Pacific Financial
or any of their respective business or assets, at law or in equity, before or by
any governmental authority or any third party, and, to the best knowledge of
Sellers after due inquiry, there exists no state of facts that could reasonably
be expected to result in any such claims, actions, suits or proceedings; and (c)
there is no outstanding judgment, order, injunction or decree of any
governmental authority or any third party against or affecting the Shares, any
of the Sellers, Pacific Financial or any of their respective business or assets,
and neither Sellers, nor Pacific Financial has been a party to, or bound by, any
such judgment, order, injunction or decree.
6.7 The Shares. Sellers are and until the Closing shall remain the sole
owners of and have and until the Closing shall continue to have good and
marketable legal and beneficial title of record to all of the Shares, free and
clear of all Liens, and Sellers have and until the Closing shall continue to
have physical possession of the original stock certificate(s) representing the
Shares. Sellers have and shall continue to have the full and unrestricted right
to vote the Shares and to transfer absolute ownership thereof to Buyer. At
Closing the Sellers will transfer the Securities and valid title thereto, free
and clear of all Liens, to Buyer. Except as disclosed on Schedule 1, no Seller
is a creditor or the holder of any debt of Pacific Financial.
6.8 Patents, Trademarks, Etc.. There are no patents, trademarks, copyrights
and service marks, registrations thereof and applications therefor, and trade or
business names owned or used by, registered in the name of, or licensed to or by
Pacific Financial or necessary in connection with the operation of Pacific
Financial's business.
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6.9 Financial Statements. All the existing financial statements of or
pertaining to Pacific Financial (the "FINANCIAL STATEMENTS") have been provided
to Buyer. All the Financial Statements are true, complete and correct, and have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods indicated and from period to period,
and fairly and accurately present the financial condition of Pacific Financial,
its assets and liabilities and the results of its operations as at the
respective dates and for the respective periods indicated. The Financial
Statements reflect all known material claims against, and debts and liabilities
of, Pacific Financial in accordance with generally accepted accounting
principles consistently applied, as of the dates thereof. Except for such
claims, debts and liabilities reflected in the unaudited balance sheet and
related income statements of Pacific Financial for the period ended December 31,
1996 prepared in accordance with generally accepted accounting principles
consistently applied (the "DECEMBER STATEMENT"), Pacific Financial does not have
any claims, debts or liabilities, accrued, absolute, direct, indirect,
perfected, contingent or otherwise, nor is it subject to any claims, debts,
liabilities, fixed or contingent, other than those expressly disclosed in this
Agreement or Sellers' Disclosure Schedule or incurred in the ordinary course of
business since the date hereof and in accordance with this Agreement, including,
without limitation, any liabilities arising from the operation of Pacific
Financial's business in violation of any law, ordinance, rule or regulations of
any federal, state or municipal government or any department, board or agency
thereof, and further including, without limitation, all federal, state or other
tax liabilities due or to become due, including, but not limited to, income,
sales, personal property, use or franchise taxes, whether or not incurred in
respect of or measured by Pacific Financial's income for any period or arising
out of transactions entered into, or any state of facts existing, as of the date
hereof.
6.10 Compliance with Laws. Each of Sellers and Pacific Financial has
complied with and shall continue to comply with through the Closing all
applicable statutes, ordinances, rules and regulations, orders and other laws
relating to any of their respective businesses and assets (including, without
limitation, the Shares) and Pacific Financial has all licenses, permits and
other authorizations required in connection with the conduct of its business
(which licenses, permits and authorizations are valid, fully paid and in full
force and effect). None of such licenses, permits or other authorizations expire
(without being able to be renewed upon payment of a nominal renewal fee) during
the 24 month period following the date hereof.
6.11 Taxes. (a) Pacific Financial has timely filed all returns, reports and
declarations respecting Taxes (as hereinafter defined) which are required to be
filed; (b) to the best of Sellers' knowledge, such returns, reports and
declarations are complete, correct and in accordance with applicable law; (c)
Pacific Financial has paid all Taxes which have become due and are imposed by
law upon it or any of its property, assets, income, receipts, imports, payrolls,
transactions, capital, net worth or franchises, other than those not delinquent
or being contested in good faith by appropriate proceedings or for which all
applicable statutes of limitation, if any (including extensions thereof), have
expired; (d) no issues, deficiencies or claims have been asserted in writing or,
proposed, to Pacific Financial by the Internal Revenue Service or any other
governmental authority in connection with the examination of any of their
respective returns respecting Taxes which would, if determined adversely, have
an adverse affect on the business or any of the assets of Pacific Financial; (e)
no investigation or audit of any governmental authority with respect to Taxes
that might give rise to a lien or other encumbrance against any of such assets
is in effect or, to the best of Sellers' knowledge, has been threatened; and (f)
except as otherwise accrued and adequately
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reserved for in the books of account and other financial records and statements
of Pacific Financial made available to Buyer or its representatives, no
unsatisfied deficiency, delinquency or default for any Taxes that might give
rise to a lien against any of their respective assets has been claimed, proposed
or assessed by the Internal Revenue Service or any other governmental authority.
"TAXES" means all federal, state, county, local and foreign income, use,
exercise, property, sales, unemployment, franchise, business activity and other
taxes, levies and assessments and associated interest and penalties.
6.12 Conduct of Business. Since December 10, 1996, (a) the business of
Pacific Financial has been conducted in the ordinary course and consistent with
past practice, and there have been no material adverse changes in connection
therewith; and (b) there has been no action or omission of any of the Sellers or
Pacific Financial which could interfere with the transactions contemplated
hereby or have an adverse affect on the business of Pacific Financial.
6.13 Accounts Receivable. The unpaid accounts receivable, loans, advances
and contracts receivable (individually, a "RECEIVABLE," collectively, the
"RECEIVABLES") reflected in the December Statement and the Receivables generated
or created between the date reflected on the December Statement and the Closing
are and will be existing debts owed to Pacific Financial, are and will be
genuine, arose or will arise in the ordinary course of business and are and will
be fully collectible according to their terms. To the best of Sellers'
knowledge, none of the Receivables are or will become Uncollectible Receivables.
The amount ultimately collected from such Receivables shall at least be equal to
the amount of Receivables shown on the Closing Balance Sheet.
6.14 Contracts. Sellers have delivered to Buyer true, correct and complete
copies of all of the Material Contracts (as hereinafter defined) that are in
writing, together with reasonably detailed written summaries of the terms of all
Material Contracts that are not in writing. To the best of Sellers' knowledge,
the Material Contracts are legal, valid and binding, enforceable in accordance
with their respective terms, and are in full force and effect. Neither any of
the Sellers nor Pacific Financial is in breach, violation or default, however
defined, in the performance of any of its obligations under any Material
Contract, and no facts and circumstances exist which, whether with the giving of
due notice, lapse of time, or both, would constitute such a breach, violation or
default thereunder or thereof; and, to Seller's best knowledge after due
inquiry, no other parties thereto are in breach, violation or default, however
defined, under any Material Contract, and, no facts or circumstances exist
which, whether with the giving of due notice, lapse of time or both, would
constitute such a breach, violation or default thereunder or thereof. "MATERIAL
CONTRACTS" means all agreements, contracts, leases, licenses and other
commitments, whether written or oral, in effect as of the date hereof, (a) to
which any of the Sellers or Pacific Financial is a party that affect or relate
to the Securities, and/or (b) to which Pacific Financial is a party that (i)
cannot be terminated by Pacific Financial on thirty (30) days or less notice, or
(ii) could require expenditures by Pacific Financial over the anticipated course
of the commitment in excess of Five Thousand Dollars ($5,000.00).
6.15 Disclosure. No representation, warranty or schedule contained in this
Agreement or attached hereto, and no schedule, certificate or other written
document or instrument, including, without limitation, any Material Contract,
delivered, made available or to be delivered or made available to Buyer pursuant
to this Agreement, in connection with the transactions contemplated hereby, or
in connection with Buyer's investigation concerning its purchase of the
Securities,
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contains or will contain any untrue statement of material fact or omits or will
omit to state any material fact necessary to make the statements contained
therein not misleading. There is no fact known to Sellers which has, or which
could reasonably be foreseen by Sellers as likely to have, a material adverse
effect on the assets, liabilities, financial condition, results of operations,
business, prospects or operations of Pacific Financial which has not been
disclosed herein, in any schedule attached hereto or in any schedule,
certificate or other written document or instrument furnished or to be furnished
to Buyer under this Agreement or in connection with the transactions
contemplated hereby.
6.16 Compensation and Employment Agreements. Sellers' Disclosure Schedule
contains a true, correct and complete list of all employees, consultants (other
than accountants and attorneys) and sales or marketing representatives of
Pacific Financial, together with the compensation, bonuses and commissions and
expense reimbursements and allowances for such employees, consultants and
representatives and sets forth the annual rate of such compensation (including
bonuses, commissions and expense allowances, if any) and the positions held by
all such employees, consultants and representatives, together with a list and
brief description of all current and future pension, retirement, profit sharing,
vacation, sick pay, severance and similar arrangements and benefits of the
Company with its employees of a legally binding nature or of the nature of any
informal understanding, all of which are in full force and effect and fully
funded and adequate reserves for which have been established in the December
Statement and the Financial Statements as of the Closing Date. There are no
written or oral employment agreements and arrangements for employees,
consultants or sales and marketing representatives of the Company not disclosed
on Sellers' Disclosure Schedule. Pacific Financial does not maintain and has not
maintained in the past any "employee pension plan," as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended.
6.17 Environment. There exists no violation of any applicable federal,
state or local environmental laws in connection with the business or assets of
Pacific Financial, or in connection with any of the premises owned, used or
occupied by Pacific Financial (and none of the Sellers or Pacific Financial has
received notice of any alleged such violation), and no hazardous materials or
hazardous substances (each as defined in such laws) are now or have in the past
been used, generated, stored, handled, released or disposed of in or about such
premises.
6.18 Collective Bargaining Agreements. Pacific Financial is not currently
nor has it ever been party to or subject to any collective bargaining agreement
or other arrangement with any union. Pacific Financial does not employ any known
union employees.
6.19 Customers and Suppliers. None of Sellers nor Pacific Financial has
received any notice or has any reason to believe that as a result of Sellers'
anticipated sale of the Securities to Buyer hereunder or the negotiation of the
terms this Agreement or of such sale generally any customer of Pacific Financial
has ceased, or will at any time before or after the Closing Date cease, to use
the products, goods or services of the business of Pacific Financial or has
substantially reduced, or will at any time before or after the Closing Date
substantially reduce, the use of such products, goods or services at any time.
None of Sellers nor Pacific Financial has received any notice or has any reason
to believe that any supplier of Pacific Financial has ceased or will cease to
sell supplies, inventory and other goods to the business of Pacific Financial at
any time before or after the Closing Date on terms and conditions substantially
similar to those used in its current sales to
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Seller, subject only to general and customary price increases. None of the
Sellers nor Pacific Financial will take any action as of and after the Closing
Date which could impair any relationships, agreements and understandings between
Pacific Financial and its customers or suppliers notwithstanding the sale of the
Securities to Buyer (except any such action taken by any Seller specifically in
connection with a credit facility provided by such Seller to any such customer
or supplier), and the Sellers and Pacific Financial shall fully cooperate with
Buyer in arranging meetings with such customers and suppliers as Buyer may
reasonably request.
6.20 Insurance. Sellers' Disclosure Schedule contains a true, correct and
complete list and description of all insurance policies and premiums thereon
pertaining to which Pacific Financial is the insured, including, but not limited
to, product and other liability insurance and fire and extended coverage
insurance, true, correct and complete copies of which policies have been
provided to Buyer. Such policies are in full force and effect at the date hereof
and shall remain so in effect through the Closing. Pacific Financial is not in
default under any such policy and has paid all premiums due and payable with
respect to each.
6.21 Investment Company. Pacific Financial is not deemed to be an
investment company under the Investment Company Act of 1940, as amended,
pursuant to the exemption provided by Section 3(c)(5)(A) of such Act.
7. REPRESENTATIONS OF BUYER. Buyer hereby represents, warrants and covenants to
the Sellers as of the date hereof and as of the Closing Date, which
representations, warranties and covenants are material, are being relied upon by
the Sellers (notwithstanding any independent investigations) and shall survive
the Closing as provided herein, as follows, subject only to such exceptions as
are explicitly set forth on Schedule 7 attached hereto ("BUYER'S DISCLOSURE
SCHEDULE") on a section-by-section basis:
7.1 Buyer's Authority. Subject to receiving the approval of the Walnut
Board, Buyer has full power and authority to enter into, execute and deliver,
and to perform its obligations under, this Agreement and all other agreements,
instruments and documents referred to herein or contemplated hereby.
7.2 Authorization and Enforceability. The execution, delivery and
performance of this Agreement by Buyer have been duly authorized by all
requisite action on the part of Buyer, and this Agreement and all other
agreements, instruments and documents referred to herein or contemplated hereby
and executed by Buyer constitute valid, binding and enforceable obligations of
Buyer in accordance with their terms, subject to the enforcement of involuntary
bankruptcy, insolvency, reorganization and other laws of general applicability
relating to or affecting creditors rights' and to general equitable principles.
7.3 No Conflicts. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated hereby by Buyer do not and
will not: (i) conflict with, or result in a breach or termination of, constitute
a default (or an event which, with the giving of due notice or lapse of time, or
both, would constitute a default) or cause or permit the acceleration of the
maturity of or give rise to any right to impose any fees or penalties under, any
agreement, commitment, or other instrument, or any order, judgment or decree, to
which Buyer is a party or by
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which Buyer is bound; or (ii) constitute a violation by Buyer of any law,
statute, judgment, injunction, decree, order or other authoritative matter of
any governmental authority applicable to Buyer, the enforcement of which would
have an adverse effect on Buyer's ability to consummate the transactions
contemplated by this Agreement.
7.4 Consents. No Consents are necessary in connection with the execution
and delivery by Buyer of this Agreement or the consummation by Buyer of the
transactions contemplated herein (other than the approval of the Walnut Board)
other than compliance with applicable federal and state securities laws.
7.5 Statements. Neither this Agreement nor any schedule, exhibit,
certificate, list or other document furnished or to be furnished by or on behalf
of Buyer to Sellers pursuant hereto or thereto contains or will contain any
untrue statement of fact or omits or will omit to state a fact necessary to make
the statements contained herein and therein, in light of the circumstances under
which they are made, not misleading.
7.6 Investment Intent.
(a) Buyer is acquiring the Shares with its own funds, for its own
account, for investment purposes only, and not with the intent to resell
such Shares. Buyer further understands and acknowledges as follows:
(i) The Securities have never been and are not now being
registered under the Securities Act or under any state securities act
or under any other applicable securities act (the "ACTS");
(ii) Sellers have advised Buyer that (however, Buyer makes no
representations, warranties or guarantees whatsoever with respect to
the accuracy of such advice), (w) to be legally transferred from
Sellers to Buyer, the Securities must be exempt from the registration
requirements of the Acts, and that Sellers are relying upon, inter
alia, the exemptions set forth in Sections 4(1) and 4(2) of the
Securities Act, and a combination thereof, and corresponding
exemptions under state law (collectively the "EXEMPTIONS"); (x) the
Securities were originally acquired by Sellers for investment purposes
only, and without the intent of later resale, and Seller are not now
offering the Securities on behalf of an issuer, and thus Sellers have
taken the position they are not underwriters as that term is defined
in the Acts, (y) Sellers are specifically relying on the
representations and warranties contained in this Section 7.6, and
otherwise would not engage in this transaction unless Buyer makes
these representations and warranties; and (z) the transaction
consummated hereunder did not originate from a public offering or
public solicitation of Buyer to acquire the Securities, but instead is
a private and single isolated transaction not involving a public
offering as that term is defined in the Acts;
(iii) Buyer (through its officers and agents) is a highly
sophisticated investor and qualifies as an accredited investor as that
term is defined in the Acts and Regulation D as promulgated by the
Securities and Exchange Commission (17 CFR
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230.501 et seq.) under the Securities Act, regardless of the
availability of Regulation D as an exemption hereunder;
(iv) Because of the sophistication, accreditation and general
knowledge and expertise of Buyer, Buyer does not require the
protection of the registration provisions of the Acts;
(v) Buyer agrees that, to the maximum extent allowed by law, it
is forever estopped from, and waives and forever releases any claim
that it may have against Sellers, their successors, assigns or
affiliates, for failure to register the Securities transferred
hereunder;
(vi) Buyer may have to hold the Securities indefinitely unless
the Securities are registered under the Acts or an additional
exemption from such registration is available; Pacific Financial is
under no obligation to register the Securities or to take any other
action which would make any exemption available; Pacific Financial is
under no obligation to cause or permit the shares purchased hereunder
to be transferred in the absence of registration or availability of an
exemption;
(vii) Buyer and its agents, attorneys and accountants have had
full opportunity, and have exercised such opportunity, in reviewing
the books and records of Pacific Financial, inspecting the assets and
premises of Pacific Financial, and discussing the purchase hereunder
with employees of Pacific Financial, its principals, agents, advisors,
accountants and attorneys;
(viii) the following legend will be placed on the certificates
evidencing the Securities:
These shares have not been registered under the Securities Act of
1933, as amended, any applicable state securities act or any
other applicable securities act (the "ACTS"), and neither the
offering of the shares nor any offering materials have been
reviewed by any administrator under the Acts. The shares were
acquired by the registered shareholder pursuant to the
representation and warranty that the holder was acquiring the
shares with the holder's own funds, for the holder's own account,
for investment. These shares may not be pledged, hypothecated,
sold, transferred, or offered for sale in the absence of an
effective registration statement as to the shares under the Acts
or an opinion of counsel satisfactory to the corporation that
such registration is not required.
7.7 Authorization for Issuance of Common Stock. The shares of Buyer's
Common to be issued to Sellers pursuant to Section 2(b) hereof will be duly
authorized for issuance and will, when issued in accordance with the terms of
this Agreement and upon performance by Sellers of their obligations hereunder,
be validly issued and outstanding, fully paid and non-assessable.
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7.8 Financial Statements. All financial statements of Buyer on file with
the United States Securities and Exchange Commission are true, complete and
correct and have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods indicated and from period
to period, and fairly and accurately present the financial condition of Buyer,
its assets and liabilities and its results of operations as of the respective
dates and for the respective periods indicated.
8. CONDUCT OF BUSINESS. The Sellers hereby covenant to Buyer, which covenants
are joint and several with respect to Messrs. Zeman and Maurice as to two thirds
(2/3) of any obligation or loss, that during the period from the date hereof
through the Closing Date:
8.1 Ordinary Course. The business of Pacific Financial shall be conducted
only in the usual and ordinary course of business in accordance with customary
practices in its industry, and, without Buyer's prior written consent, Pacific
Financial shall not enter into any transactions or agreements, including,
without limitation, any that would result in the sale, lease, transfer, disposal
of or encumbrance of any asset, except in the ordinary course of business.
8.2 Preservation of Pacific Financial's Business and Goodwill. Sellers will
use their reasonable, good faith efforts to preserve intact the relationships of
Pacific Financial with customers, financial institutions, distributors, agents,
employees (subject to Section 8.3 below), suppliers, consultants, salespersons,
and others having relationships with Pacific Financial in connection with such
business (without making any commitment violative of this Agreement on behalf of
Pacific Financial).
8.3 Employees. The Sellers agree that Pacific Financial shall not employ
any new personnel, grant an increase in the salaries of any employees, pay any
bonuses to its personnel (except for regularly accrued bonuses to Mr. Pyatt in
the ordinary course not to exceed Fifteen Thousand and No/100 Dollars
($15,000.00)) prior to the Closing) or make any increase in any other benefit to
which employees may be entitled; provided, however, that Pacific Financial shall
not enter into any employment agreement or any other commitment to employ or
continue the employment of any officer or employee of Pacific Financial without
Buyer's prior written consent.
8.4 No Dividends or Other Distributions. Prior to the Closing, Pacific
Financial may distribute, in accordance with Washington State corporate law, its
after-tax earnings to its stockholders for the period beginning January 1, 1997
and continuing through the date of the execution of this Agreement, which such
earnings total approximately $220,000. In addition, prior to Closing, Pacific
Financial may repay a certain unsecured loan made to Pacific Financial by Mr.
Maurice, the amount of which repayment shall not exceed $44,000. Other than the
foregoing, Sellers agree that Pacific Financial shall not accrue, make or pay
any dividend or other distribution, whether in cash or kind, to any stockholder
or other person or purchase or redeem any shares of its capital stock; provided,
however, the foregoing shall not limit the rights of, or otherwise prohibit,
Pacific Financial from paying salaries, wages, expense reimbursements and other
similar payments in the ordinary course of business to any employee or from
distributing to the Sellers those amounts necessary to pay the Sellers' federal
income tax attributable to the earnings of Pacific Financial for the time period
prior to the Closing.
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8.5 Purchase of Capital Assets. Sellers agree that Pacific Financial shall
not make any capital expenditures or commitments to make capital expenditures in
excess of an aggregate of Thirty Thousand and No/100 Dollars ($30,000.00).
9. CONDITIONS PRECEDENT TO BUYER'S PERFORMANCE. The obligations of Buyer to
purchase the Securities and to consummate the other transactions contemplated
herein pursuant to the terms of this Agreement are subject to the satisfaction,
at or prior to the Closing, of each of the conditions of this Section 9. Buyer
may waive any or all of these conditions in whole or in part, but no such waiver
shall constitute a waiver by Buyer of any of its other rights or remedies at law
or in equity under this Agreement. No condition shall be deemed to have been
waived by Buyer unless such waiver is contained in a writing specifically
referring to this provision and signed by Buyer.
9.1 Approval. Buyer shall have received on or before the Closing Date the
approval of the Walnut Board to consummate the purchase of the Securities on the
terms hereof.
9.2 Financial Information. Buyer shall have prepared and received financial
statements and other information satisfactory to Buyer, in its reasonable
discretion, evidencing Pacific Financial's financial condition.
9.3 Representations and Warranties of Sellers. The representations and
warranties of Sellers contained in this Agreement shall be true and correct in
all material respects at the Closing with the same force and effect as if made
at the Closing.
9.4 Compliance. Sellers shall have performed, complied with and fulfilled
in all material respects all of their respective covenants, agreements,
obligations and conditions required by this Agreement to be performed, complied
with or fulfilled at or prior to the Closing.
9.5 Consents. All Consents necessary to the consummation of the sale of the
Securities or consummation of the other transactions contemplated by this
Agreement shall have been obtained.
9.6 Litigation. No order, decree or ruling of any governmental authority or
court shall have been entered, and no governmental action, suit, claim,
investigation or proceeding seeking to restrain or invalidate the transactions
contemplated by this Agreement or seeking damages from Buyer by reason of the
transactions contemplated by this Agreement shall be pending or threatened.
9.7 No Adverse Change. In the reasonable judgment of Buyer, there shall
have been no material adverse change in Pacific Financial or its assets,
operations, business or prospects.
9.8 Credit Facility. Pacific Financial shall have received at least a one
(1) year extension of the maturity date of the credit facility made available to
Pacific Financial from Wells Fargo Bank (the "CREDIT FACILITY") or Pacific
Financial shall have been provided with a credit facility in substitution of the
Credit Facility with a maturity date and other terms satisfactory to Buyer in
its sole discretion.
9.9 Escrow Instructions. Buyer shall have received the Escrow Instructions
executed by each Seller and the Escrow Agent.
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9.10 Closing Deliveries. Buyer shall have received from Sellers all of the
instruments, documents and considerations described in Section 12.1, and the
form and substance of all such deliveries shall be reasonably satisfactory in
all respects to Buyer and its counsel.
10. CONDITIONS PRECEDENT TO PERFORMANCE BY SELLERS. The obligations of Sellers
to sell the Securities and consummate the other transactions contemplated herein
pursuant to the terms of this Agreement are subject to the satisfaction, at or
prior to the Closing, of each of the conditions of this Section 10. Sellers may
waive any or all of these conditions in whole or in part, but no such waiver
shall constitute a waiver by Sellers of any of their other rights or remedies at
law or in equity under this Agreement. No condition shall be deemed to have been
waived by Sellers unless such waiver is contained in a writing specifically
referring to this provision and signed by Sellers.
10.1 Release of Guarantees. Those certain guarantees issued by the Sellers
to Wells Fargo Bank in connection with the Credit Facility and any personal
liability of the Sellers arising therefrom shall have been released by Wells
Fargo Bank.
10.2 Representations and Warranties of Buyer. The representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects at the Closing with the same force and effect as if made at
the Closing.
10.3 Compliance. Buyer shall have performed, complied with and fulfilled in
all material respects all the covenants, agreements, obligations and conditions
required by this Agreement to be performed, complied with or fulfilled by it at
or prior to the Closing.
10.4 Litigation. No order, decree or ruling of any governmental authority
or court shall have been entered, and no governmental action, suit, claim,
investigation or proceeding seeking to restrain or invalidate the transactions
contemplated by this Agreement or seeking damages from Sellers by reason of the
transactions contemplated by this Agreement shall be pending or threatened.
10.5 Escrow Instructions. Sellers shall have received the Escrow
Instructions executed by Buyer and the Escrow Agent.
10.6 Closing Deliveries. Sellers shall have received from Buyer all of the
instruments, documents and considerations described in Section 12.2, and the
form and substance of all such deliveries shall be reasonably satisfactory in
all respects to Sellers and its counsel.
11. TERMINATION. In addition to the termination rights set forth elsewhere in
this Agreement or otherwise available, this Agreement shall be subject to
termination as set forth below. In the event of any such termination, the
parties shall have no further obligations to each other, except as otherwise
provided herein.
11.1 Termination by Mutual Agreement. This Agreement may be terminated by
the mutual agreement in writing of all of the parties at any time prior to the
Closing.
11.2 Termination by Buyer. This Agreement and any obligations of Buyer
hereunder (other than its obligations under Section 14 hereof, which obligations
shall survive any termination
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of this Agreement) may be terminated by Buyer by
written notice at any time prior to or at the Closing, if any condition to
Buyer's performance contained herein is not capable of being satisfied or has
not been satisfied by the Closing Date. If this Agreement is terminated by Buyer
due to a breach by Sellers, Buyer may pursue whatever rights or remedies it may
have against Sellers arising out of any such breach of this Agreement.
11.3 Termination by Seller. This Agreement and any obligations of the
Sellers hereunder (other than their obligations under Section 14 hereof, which
obligations shall survive any termination of this Agreement) may be terminated
by the Sellers (in whole, but not in part) by written notice at any time prior
to or at the Closing, if any condition to performance by the Sellers contained
herein is not capable of being met or has not been satisfied by the Closing
Date. If this Agreement is terminated by the Sellers due to a Default by Buyer,
then the sole remedy of Sellers shall be the receipt of the Escrow Deposit
pursuant to Section 4 herein.
12. CLOSING DELIVERIES.
12.1 Delivery of Documents by Sellers. Sellers shall deliver (or cause to
be delivered) the following agreements, documents and instruments to Buyer on
the Closing Date, in form and substance as required by the terms of this
Agreement and otherwise in form and substance reasonably acceptable to Buyer's
counsel:
(a) Original certificates representing the Securities, registered in
the name of Sellers, and duly endorsed in blank by Sellers for transfer or,
at Buyer's option, accompanied by assignment(s) separate from certificate
duly endorsed in blank by Sellers.
(b) A certificate executed by each Seller certifying that each of the
representations and warranties of the Sellers set forth herein is true and
complete in all material respects as of the Closing Date, and that each of
the covenants, agreements, terms and conditions on the part of the Sellers
to be observed, performed and complied with hereunder has been fully
observed, performed and complied with in all material respects.
(c) The Subscription Agreements executed by each Seller.
(d) Certified copies of the Articles of Incorporation and Bylaws of
Pacific Financial, along with a Certificate of Good Standing for Pacific
Financial issued by the Secretary of State of Washington within five (5)
days of the Closing and Certificates of Good Standing from all states in
which Pacific Financial is or is required to be qualified to conduct
business.
(e) An employment agreement in substantially the form attached hereto
as EXHIBIT F (the "EMPLOYMENT AGREEMENT") executed by Mr. Pyatt and Pacific
Financial.
(f) Non-competition agreements in substantially the form attached
hereto as EXHIBIT G (the "NON-COMPETITION AGREEMENTS") executed by each of
Messrs. Zeman and Maurice and Pacific Financial.
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(g) Evidence of payment by Sellers of all stamp, transfer and
transaction taxes payable with respect to the transactions provided for
herein, if any.
(h) A receipt for the Cash Payment, executed by Sellers.
(i) Termination Agreement with respect to the Shareholder Agreement of
ZMP, Inc, executed by each Seller and Pacific Financial, in form and
substance reasonably acceptable to Buyer.
(j) The Registration Agreement executed by each Seller.
(k) Such other documents and instruments as may be required by any
other provision of this Agreement or as may be required or desirable to
carry out the terms and intent of this Agreement, as reasonably determined
by Buyer or its counsel.
12.2 Delivery of Documents and Payment by Buyer. Buyer shall execute and
deliver or cause to be delivered the following agreements, documents,
instruments and payments on the Closing Date, in form and substance as required
by the terms of this Agreement and otherwise in form and substance reasonably
acceptable to Sellers' counsel:
(a) The Cash Payment.
(b) The Note Repayment.
(c) Evidence of Buyer's instructions to its transfer agent to issue
the shares of Buyer's Common representing the Common Stock Payment to
Sellers.
(d) The Short Term Notes executed by Pacific Financial and the Short
Term Guaranties executed by Buyer.
(e) The Long Term Notes executed by Pacific Financial and the Long
Term Guaranties executed by Buyer.
(f) A certificate executed by Buyer certifying that each of Buyer's
representations and warranties set forth herein is true and complete in all
material respects as of the Closing Date, and that each of the covenants,
agreements, terms and conditions on Buyer's part to be observed, performed
and complied with hereunder has been fully observed, performed and complied
with in all material respects.
(g) The Registration Agreement executed by Buyer.
(h) Such other documents and instruments as may be required by any
other provision of this Agreement or as may be required or desirable to
carry out the terms and intent of this Agreement, as reasonably determined
by Sellers or their counsel.
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13. POST-CLOSING COVENANTS.
13.1 Transfer Taxes. Sellers shall be responsible for and shall timely pay
all Taxes imposed by any governmental authority with respect to this Agreement,
the sale, assignment or delivery of the Shares or the consummation of the
transactions contemplated by this Agreement. Sellers shall timely pay, before
the same shall become delinquent and before penalties accrue thereon, all Taxes
that could result in any lien on any of the Securities.
13.2 Further Assurances. At the request of any party from time to time on
and after the Closing Date, the other party shall, without further
consideration, execute and/or deliver to or as directed by the requesting party
such document, and take such actions, as the requesting party may reasonably
request in order to consummate and evidence more effectively the transactions
provided for herein. Furthermore, Sellers agree to, and shall cause Pacific
Financial to, fully cooperate with Buyer in securing equity capital and/or debt
financing in connection with the Note Repayment.
13.3 Warrant Title. Sellers shall warrant and defend Buyer's title to the
Securities against all persons and entities whatsoever, lawfully claiming same
or any part thereof or interest therein.
13.4 Section 338 Elections. Buyer and Sellers shall join in an election to
have the provisions of Section 338(h)(10) of the Internal Revenue Code of 1986,
as amended (the "CODE"), and similar provisions of state law ("SECTION
338(H)(10) ELECTION") apply to the acquisition by Buyer of Pacific Financial.
Buyer shall be responsible for, and control, the preparation and filing of such
election. The allocation of purchase price among the assets of Pacific Financial
shall be made in accordance with Code Sections 338 and 1060 and any comparable
provisions of state, local or foreign law, as appropriate. Sellers shall, unless
it would be unreasonable to do so, accept Buyer's determination of such purchase
price allocations and shall report, act, file in all respects and for all
purposes consistent with such determination of Buyer. Sellers shall execute and
deliver to Buyer such documents or forms (including Section 338 Forms, as
defined below) as Buyer shall request or as are required by applicable law for
an effective Section 338(h)(10) Election. "Section 338 Forms" shall mean all
returns, documents, statements and other forms that are required to be submitted
to any federal, state, county or other local taxing authority in connection with
a Section 338(h)(10) Election, including, without limitation, any "statement of
Section 338 election" and Internal Revenue Service Form 8023 (together with any
schedules or attachments thereto) that are required pursuant to Treasury
Regulations.
14. INDEMNIFICATION.
14.1 Indemnification by the Sellers. Sellers shall indemnify, defend and
hold harmless Buyer and Pacific Financial, and each of their respective members,
shareholders, affiliates, officers, directors, agents, attorneys, accountants
and employees, and each of their respective successors and assigns (all
collectively, the "BUYER INDEMNIFIED PARTIES"), of, from and against, any and
all loss, claim, damage, suit, action, cause of action, liability, penalty,
judgment, decree, cost and expense (including, without limitation, reasonable
attorneys' fees and costs), which may at any time be asserted or recovered
against or incurred or suffered by the Buyer Indemnified Parties, or any of
them, arising from, in connection with, on account of, or relating to: (a) any
and all liabilities of Pacific Financial of any nature, whether accrued,
absolute, contingent or otherwise, existing at the
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date of the Closing Balance Sheet, or based on any act or omission or state of
fact which occurred prior to or as of the Closing Date, to the extent not
reflected or reserved against in the Closing Balance Sheet or set forth in the
Exhibits hereto, (b) any and all claims arising out of the conduct of the
business of Pacific Financial between January 1, 1997 and the Closing Date,
other than in the ordinary course of business thereof and as expressly permitted
herein or as otherwise consented to by Buyer in writing, (c) any untruth,
incompleteness or misleading character of any representation or warranty of the
Sellers set forth herein, (d) any breach or default by any of the Sellers of or
under any covenant, agreement, term or condition contained herein, (e) any and
all liability, in excess of the reserves therefor reflected on the December
Statement, arising out of or resulting from any litigation, legal action,
arbitration, proceeding, demand, claim or investigation, pending, or to the best
knowledge of Sellers after due inquiry threatened, contemplated or planned, in
existence as of the Closing Date (whether or not disclosed in this Agreement or
in any Exhibit hereto or on the Closing Balance Sheet), excluding any liability
arising in connection with the Marshall Note or that certain matter brought by
Jack D. Wozow under King County Superior Court Case No. 96-2-29694-5SEA, and/or
(f) any and all liabilities arising out of or resulting from Pacific Financial's
or Sellers' failure to pay when due (or accrue in the December Statement) all
taxes, assessments and impositions in connection with Pacific Financial's
business or properties. Buyer shall have the right to offset against amounts due
to the Sellers hereunder, including amounts due pursuant to Sections 2.1(c) and
2.1(d) above, in the event Sellers do not fully indemnify the appropriate Buyer
Indemnified Parties, or any of them, in a prompt and timely fashion. The
indemnification by Sellers in this Section 14.1 shall be joint and several with
respect to Messrs. Zeman and Maurice as to two thirds (2/3) of any obligation or
loss and shall be several with respect to Mr. Pyatt as to one-third (1/3) of any
obligation or loss.
14.2 Buyer's Indemnification. Buyer shall indemnify, defend and hold
harmless each Seller and each of his heirs, successors, assigns, agents,
attorneys and accountants, and each of their respective successors and assigns
(all collectively, the "SELLER INDEMNIFIED PARTIES"), of, from and against, any
and all loss, claim, damage, suit, action, cause of action, liability, penalty,
judgment, decree, cost and expense (including, without limitation, reasonable
attorneys' fees and costs), which may at any time be asserted or recovered
against or incurred by said Seller Indemnified Parties, or any of them, arising
from, in connection with, on account of, or relating to: (a) any untruth,
incompleteness or misleading character of any representation or warranty of
Buyer set forth herein; and (b) any breach or default by Buyer of or under any
covenant, agreement, term or condition contained herein.
14.3 Notice. If any party entitled to indemnification hereunder (the
"INDEMNIFIED PARTY OR PARTIES") receives notice of any claim or the commencement
of any action or proceeding with respect to which the other party is obligated
to provide indemnification pursuant to this Section 14 (the "INDEMNIFYING PARTY
OR PARTIES"), the indemnified party or parties shall give the indemnifying party
or parties written notice thereof, which notice states specifically and in
reasonable detail the nature of the claim. Such notice shall be a condition
precedent to any liability of an indemnifying party or parties under the
provisions or indemnification contained in this Agreement. The indemnifying
party or parties may compromise, settle or defend at their own expense, using
counsel reasonably satisfactory to the indemnified party or parties, any such
matter involving the asserted liability of the indemnified party or parties. In
any event, the indemnified party or parties shall cooperate in the compromise
of, settlement or defense against, any such asserted liability.
21
<PAGE> 22
15. GENERAL PROVISIONS.
15.1 Expenses. Each party hereto shall bear its own respective costs and
expenses accruing after the execution of this Agreement relating to the
transactions contemplated hereby, including, without limitation, fees and
expenses of legal counsel, accountants, consultants or other representatives for
the services used, hired or connected with the proposed transactions mentioned
above. It is expressly understood that Sellers costs and expenses shall not be
paid by Pacific Financial.
15.2 Headings. The subject headings of the sections of this Agreement are
included for purposes of convenience only, and shall not affect the construction
or interpretation of any of its provisions.
15.3 Entire Agreement; Severability. This Agreement, together with any
exhibits and schedules referred to herein and attached hereto, constitute the
entire agreement and understanding between the parties with regard to the
subject matter hereof, and there are no other prior or contemporaneous written
or oral agreements, undertakings, promises, warranties, or covenants respecting
such subject matter not expressly set forth or described herein. The invalidity,
illegality or unenforceability for any reason of any one or more provisions of
this Agreement shall not affect the validity, legality or enforceability of the
remainder of this Agreement.
15.4 Notices. Any notices, requests, demands, and other communications
required to be given under this Agreement shall be in writing and shall be
either (a) personally delivered, (b) sent by U.S. certified or registered mail,
return receipt requested, postage prepaid, or (c) sent by Federal Express or
other reputable common carrier guaranteeing next business day delivery, to the
respective addresses of the parties set forth below, or to such other place as
any party hereto may by notice given as provided herein designate for receipt of
notices hereunder. Any such notice shall be deemed given and effective upon
receipt or refusal of receipt thereof by the primary party to whom it is to be
sent.
If to Buyer: Walnut Financial Services, Inc.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Mr. Joel S. Kanter
With a copy to: Barack Ferrazzano Kirschbaum
Perlman & Nagelberg
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Attention: Joshua S. Kanter, Esq.
22
<PAGE> 23
If to Sellers: Pacific Financial Services Corp.
12501 Bel-Red Road, Suite 214
Bellevue, Washington 98005
Attention: Mr. Jeffrey B. Pyatt
Paul J. Zeman
P.O. Box 340
Seattle, Washington 98111
With a copy to: Warren & Duggan
401 Second Avenue South, Suite 600
Seattle, Washington 98104
Attention: Michael J. Warren, Esq.
and: Sorrel & Tall, Inc., P.S.
701 Fifth Avenue, Suite 3460
Seattle, Washington 98104-7032
Attention: Orly J. Sorrel
15.5 Modification and Waiver. Except as provided in that certain Agreement
of even date herewith by and between Buyer and Mr. Maurice and that certain
Agreement of even date herewith by and between Buyer and Mr. Zeman, no
supplement, modification or amendment of this Agreement shall be binding unless
executed in writing by all the parties. No waiver of any breach or waiver of any
of the provisions of this Agreement shall constitute or shall be deemed to
constitute a waiver of any other breach or violation of any provision of this
Agreement, whether or not similar, nor shall any waiver constitute a continuing
waiver. No waiver shall be binding unless executed in writing by the party
making the waiver.
15.6 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and may contain the signatures of less than
all parties, but all of which together shall constitute one and the same
instrument.
15.7 Exhibits and Schedules. All exhibits and schedules referred to in and
attached to this Agreement are incorporated herein and made a part hereof by
this reference in the same manner as if such exhibits and schedules were set
forth at length in the text hereof.
15.8 Successors and Third Party Beneficiaries. This Agreement shall be
binding on, and shall inure to the benefit of, the parties and their respective
heirs, successors and assigns; provided, however, no party may assign or
transfer any of its rights or obligations hereunder except with the prior
written consent of all of the other parties. The foregoing is not meant to
restrict the ability of Sellers, subject to compliance with applicable federal
and state securities laws, to transfer or otherwise assign their respective
interests in the Buyer's Common issued under Section 2.1(b). There are no third
party beneficiaries of this Agreement except for the indemnified parties
referred to in Section 14 hereof; provided, however, that following the closing,
Pacific Financial shall be a third party beneficiary of the provisions of
Section 3.2 hereof and the representations and warranties of Sellers made in
Section 6.13 hereof. The liabilities of Messrs. Zeman and Maurice hereunder are
23
<PAGE> 24
joint and several with respect to two-third (2/3) of such liabilities and shall
be several with respect to Mr. Pyatt as to one-third (1/3) of such liabilities.
15.9 Representations and Warranties; Survival. No party shall be deemed to
have made any representations or warranties with respect to the transactions
contemplated by this Agreement, unless the representation or warranty is set
forth herein, or in any other agreement or instrument executed and delivered
pursuant to this Agreement. All representations, warranties, covenants and
agreements contained in this Agreement shall not be affected by any
investigation made by or on behalf of any party to this Agreement. Except as
otherwise expressly provided herein, any provision of this Agreement that
imposes an obligation or restriction, or confers a right or benefit, the
observance, performance or exercise of which may or must occur after Closing,
shall survive Closing.
15.10 Time of Essence. The parties hereto acknowledge and agree that time
is strictly of the essence with respect to each and every term, condition,
obligation and provision hereof.
15.11 Remedies Cumulative. Subject to Sections 4 and 11.3 herein, all
remedies of any party hereunder are cumulative and not alternative, and are in
addition to any other remedies available at law, in equity or otherwise, and may
be exercised concurrently or successively. Buyer shall not be denied any remedy
for any breach or default by any Seller, and the amount recoverable from any or
all Sellers on account thereof shall not be diminished, by reason of the fact
that some or all of the damage therefrom is suffered by Pacific Financial. In
any such case, Buyer shall have all rights and remedies available hereunder, at
law and in equity and, if required by law, any recovery of money from any or all
Sellers shall be deemed made by Buyer for the benefit of Pacific Financial.
15.12 Specific Performance. The parties hereto agree that irreparable
damage would occur to Buyer in the event any provision of this Agreement was not
performed by Seller in accordance with the terms hereof and, as a result, Buyer
shall be entitled to specific performance of the terms hereof, in addition to
any other remedy at law or equity.
15.13 Construction. Any reference to the masculine gender shall be deemed
to include the feminine and neuter genders unless the context otherwise
requires. The singular shall include the plural, and the plural the singular, as
the context may require. The words "hereof," "herein," "hereto," "hereby,"
"hereunder" and other words of similar import refer to this Agreement as a
whole, including, without limitation, all schedules and exhibits. 15.14
Governing Law. This Agreement and all transactions contemplated hereby shall be
governed, construed and enforced in accordance with the laws of the State of
Delaware without reference to (i) its judicially or statutorily pronounced rules
regarding conflict of laws or choice of law; (ii) where any instrument is
executed or delivered; (iii) where any payment or other performance required by
any such instrument is made or required to be made; (iv) where any breach of any
provision of any such instrument occurs, or any cause of action otherwise
accrues; (v) where any action or other proceeding is instituted or pending; (vi)
the nationality, citizenship, domicile, principal place of business, or
jurisdiction or organization or domestication of any party; (vii) whether the
laws of the form jurisdiction otherwise would apply the laws of a jurisdiction
other than the State of Delaware; or (viii) any combination of the foregoing.
Each party hereto (a) agrees that
24
<PAGE> 25
any suit, action or other legal proceeding relating hereto may be brought in
state or federal court, as applicable, in the State of Illinois, the State of
Washington or the Commonwealth of Virginia; and (b) consents to the jurisdiction
of each such court in any such suit, action or proceeding; and (c) waives any
objection said party may have to the laying of venue in any such suit, action or
proceeding in either such court; and (d) consents to service of process by U.S.
mail.
15.15 Brokers. Each party hereto represents, warrants and covenants to the
other that it has not dealt and shall not deal with any broker or finder in
connection with this Agreement or any transaction provided for herein, and that
no person or entity is entitled or shall become entitled to any brokerage or
finder's fee, commission or other compensation on account of any such dealings
with the warranting party. Notwithstanding the foregoing, the parties hereto
acknowledge that they were introduced to each other by Mr. Schocken and that the
compensation paid to Mr. Schocken, if any, shall be paid by Buyer.
15.16 Defense of Title. From and after the Closing Date, Sellers shall
warrant and defend the title of Buyer to the Securities sold, transferred,
conveyed and assigned pursuant hereto against all persons, associations and
entities whatsoever.
15.17 Confidentiality. Buyer acknowledges that it has had access to Pacific
Financial, its assets and business operations (including, without limitation,
Pacific Financial's plants and properties), and its books and records
(including, without limitation, Pacific Financial's financial statements,
supplier and customer lists and the like), all such information actually
obtained by Buyer, to the extent not otherwise publicly available, being
referred to herein as "CONFIDENTIAL INFORMATION"). In the event that this
Agreement is terminated in accordance with Section 11 above, all Confidential
Information shall remain the property of and be returned to Pacific Financial
(along with all copies thereof) or destroyed within 30 days of receipt by Buyer
of a written request from Pacific Financial setting forth the Confidential
Information to be returned or destroyed. The foregoing obligations regarding the
disposition of Confidential Information shall not apply, however, to any
information which (a) is already in the public domain or becomes available to
the public through no breach of this Agreement by Buyer, (b) was in Buyer's
possession prior to receipt from Pacific Financial or any Seller, (c) is
received independently from a third party, or (d) is subsequently independently
developed by Buyer. In addition, in the event that this Agreement is terminated
in accordance with Section 11 above, Buyer hereby agrees not to solicit any
employee or client of Pacific Financial (except to the extent that any such
client or employee is not then an active employee or client of Pacific Financial
during such period) for a period of two (2) years after the termination hereof.
15.18 Publication/Disclosure. Except as may otherwise be required by law,
each party hereto agrees that it will not make any public disclosure about the
existence or contents hereof or negotiation relating to this Agreement, or cause
to be publicized in any manner whatsoever, by way of interview, responses to
questions or inquiries, press releases or otherwise, any aspect or proposed
aspect of this Agreement without the prior approval of the other party which
approval shall not be unreasonably withheld or denied. If any party deems that
it is required by law to make any announcement or release concerning this
Agreement, said party agrees to provide a written copy thereof to the other
parties in advance of any such release.
25
<PAGE> 26
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
SELLERS:
/s/ JEFFREY B. PYATT
-------------------------------------
Jeffrey B. Pyatt, Individually
/s/ PAUL J. ZEMAN
-------------------------------------
Paul J. Zeman, Individually
/s/THOMAS MAURICE
-------------------------------------
Thomas Maurice, Individually
BUYER:
Walnut Financial Services, Inc.
By: /s/ JOEL S. KANTER
-------------------------------------
Its: President
PACIFIC FINANCIAL:
Pacific Financial Services, Corp.
By: /s/ JEFFREY B. PYATT
-------------------------------------
Its: President
<PAGE> 27
CONSENT
Each of the undersigned hereby acknowledges and agrees to the
following:
1. I have read the foregoing Agreement and understand that
pursuant to such Agreement my spouse has agreed to sell his
Securities (as defined in such Agreement) in Pacific Financial
including my community interest in them.
2. As of July 1, 1994 and pursuant to RCW 26.16.060 and RCW
26.26.090, I have irrevocably granted to my spouse a power of
attorney to dispose of our interest in the Securities, which
power of attorney is still in full force and effect.
3. I hereby consent to the terms and provisions of the Agreement
and the sale of the Securities pursuant thereto.
Dated this 2nd day of January, 1998
/s/ ROBERTA L. MAURICE
-----------------------------------
-----------------------------------
-----------------------------------
<PAGE> 28
CONSENT
Each of the undersigned hereby acknowledges and agrees to the
following:
1. I have read the foregoing Agreement and understand that
pursuant to such Agreement my spouse has agreed to sell his
Securities (as defined in such Agreement) in Pacific Financial
including my community interest in them.
2. As of July 1, 1994 and pursuant to RCW 26.16.060 and RCW
26.26.090, I have irrevocably granted to my spouse a power of
attorney to dispose of our interest in the Securities, which
power of attorney is still in full force and effect.
3. I hereby consent to the terms and provisions of the Agreement
and the sale of the Securities pursuant thereto.
Dated this 22nd day of December, 1997
/s/ PAULA PYATT
-----------------------------------
-----------------------------------
-----------------------------------
<PAGE> 29
CONSENT
Each of the undersigned hereby acknowledges and agrees to the
following:
1. I have read the foregoing Agreement and understand that
pursuant to such Agreement my spouse has agreed to sell his
Securities (as defined in such Agreement) in Pacific Financial
including my community interest in them.
2. As of July 1, 1994 and pursuant to RCW 26.16.060 and RCW
26.26.090, I have irrevocably granted to my spouse a power of
attorney to dispose of our interest in the Securities, which
power of attorney is still in full force and effect.
3. I hereby consent to the terms and provisions of the Agreement
and the sale of the Securities pursuant thereto.
Dated this 2nd day of January, 1998
/s/ HANA ZEMAN
-----------------------------------
-----------------------------------
-----------------------------------
<PAGE> 30
LIST OF EXHIBITS AND SCHEDULES
Exhibit A Form of Short Term Note and Short Term Guaranty
Exhibit B Form of Long Term Note and Long Term Guaranty
Exhibit C Restrictive Legends
Exhibit D Form of Subscription Agreement
Exhibit E Form of Registration Agreement
Exhibit F Form of Employment Agreement
Exhibit G Form of Non-Competition Agreement
Schedule 1 Promissory Notes
Schedule 6 Sellers' Disclosure Schedule
Schedule 7 Buyer's Disclosure Schedule
<PAGE> 31
EXHIBIT A
Form of Short Term Note and Short Term Guaranty
A-1
<PAGE> 32
EXHIBIT B
Form of Long Term Note and Long Term Guaranty
B-1
<PAGE> 33
EXHIBIT C
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY APPLICABLE
STATE LAW, AND SUCH SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNLESS: (A)
THEY ARE REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE LAW; OR (B) SUCH SALE
OR TRANSFER IS EXEMPT FROM SUCH REGISTRATION AND THE COMPANY HAS RECEIVED AN
OPINION OF COUNSEL ACCEPTABLE TO IT TO THE EFFECT THAT SUCH SALE OR TRANSFER IS
SO EXEMPT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS OF TRANSFER RELATING TO SECTION 382 OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED, AS SET FORTH IN THE ISSUER'S ARTICLES OF INCORPORATION, AS
AMENDED. SUCH RESTRICTIONS ON TRANSFER MAY PREVENT TRANSFERS OR AGREEMENTS TO
TRANSFER, INCLUDING, WITHOUT LIMITATION, OPTIONS, OF THE SECURITIES REPRESENTED
BY THIS CERTIFICATE WHICH, IF EFFECTIVE, (i) WOULD CAUSE OR RESULT IN THE
OWNERSHIP INTEREST PERCENTAGE OF THE TRANSFEREE OR ANY OTHER PERSON TO INCREASE
ABOVE FOUR AND ONE-HALF (4.5) PERCENT, WHETHER OR NOT SAID TRANSFEREE OR OTHER
PERSON HELD STOCK IN EXCESS OF SUCH PERCENTAGE BEFORE SUCH TRANSFER, (ii) WOULD
CAUSE OR RESULT IN AN INCREASE IN THE OWNERSHIP INTEREST PERCENTAGE OF ANY FIVE
PERCENT SHAREHOLDER OR (iii) IS A TRANSFER BY A FIVE PERCENT SHAREHOLDER. ALL
ITALICIZED TERMS IN THIS LEGEND HAVE THE MEANINGS SET FORTH IN THE ARTICLES OF
INCORPORATION OF THE ISSUER, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON
TRANSFER, WILL BE SENT WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS. IF
THE RESTRICTIONS ON TRANSFER ARE VIOLATED, THE SECURITIES REPRESENTED HEREBY
WILL BE DESIGNATED AND TREATED AS PROHIBITED SHARES WHICH WILL BE SOLD OR
RE-SOLD BY AN AGENT DESIGNATED BY THE ISSUER.
C-1
<PAGE> 34
EXHIBIT D
Form of Subscription Agreement
See Attached
D-1
<PAGE> 35
EXHIBIT E
Form of Registration Agreement
See Attached
E-1
<PAGE> 36
EXHIBIT F
Form of Employment Agreement
See Attached
F-1
<PAGE> 37
EXHIBIT G
Form of Non-Competition Agreement
See Attached
G-1
<PAGE> 38
SCHEDULE 1
Promissory Notes
DATE OF NOTE PRINCIPAL PAYEE
- ------------ --------- -----
March 27, 1996 $ 35,000 Thomas Maurice
June 1, 1996 $ 12,100 Maurice Trust #1
June 1, 1996 $ 8,400 Maurice Trust #1
June 1, 1996 $ 33,900 Maurice Trust #1
June 1, 1996 $ 10,600 Maurice Trust #1
June 1, 1996 $100,000 Maurice Trust #1
June 1, 1996 $100,000 Maurice Trust #1
January 1, 1996 $100,000 Paul J. Zeman
March 1, 1995 $ 65,000 Paul J. Zeman
March 27, 1996 $ 35,000 Paul J. Zeman
April 11, 1996 $100,000 Paul J. Zeman
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF WALNUT FINANCIAL SERVICES, INC.
Walnut Capital Corp., a Delaware corporation
Universal Bridge Fund, Inc., a Delaware corporation (1)
Walnut Consulting, Inc., a Delaware corporation
Walnut Funds, Inc., a Delaware corporation
KLP Holdings, L.L.C., a Delaware limited liability company
Pacific Financial Services Corporation, a Washington corporation (2)
(1) Universal Bridge Fund, Inc. has one subsidiary: Universal Partners,
L.P., an Illinois limited partnership
(2) Pacific Financial Services Corporation was acquired in January 1998.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference of our report dated February 6,
1998 on our audit of the financial statements included in the filing on Form
10-K, of Walnut Financial Services, Inc. and subsidiaries for the year ended
December 31, 1997 and in its Registration Statements No. 33-99718 and 33-00516
on Form S-8 as filed with the Securities and Exchange Commission (i) on November
16, 1995, and (ii) on January 19, 1996, respectively.
Richard A. Eisner & Company, LLP
New York, New York
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 12,822,000
<INVESTMENTS-AT-VALUE> 19,986,000
<RECEIVABLES> 0
<ASSETS-OTHER> 6,523,000
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 26,509,000
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 9,835,000
<TOTAL-LIABILITIES> 9,835,000
<SENIOR-EQUITY> 190,000
<PAID-IN-CAPITAL-COMMON> 18,237,000
<SHARES-COMMON-STOCK> 18,944,150
<SHARES-COMMON-PRIOR> 18,944,150
<ACCUMULATED-NII-CURRENT> (12,676,000)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 8,263,000
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,663,000
<NET-ASSETS> 16,674,000
<DIVIDEND-INCOME> 6,000
<INTEREST-INCOME> 69,000
<OTHER-INCOME> 0
<EXPENSES-NET> 1,490,000
<NET-INVESTMENT-INCOME> (2,514,000)
<REALIZED-GAINS-CURRENT> 3,032,000
<APPREC-INCREASE-CURRENT> (946,000)
<NET-CHANGE-FROM-OPS> 961,000
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> (11,020,000)
<ACCUMULATED-GAINS-PRIOR> 6,622,000
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 1,099,000
<GROSS-EXPENSE> 2,589,000
<AVERAGE-NET-ASSETS> 15,531,000
<PER-SHARE-NAV-BEGIN> 1.16
<PER-SHARE-NII> (.11)
<PER-SHARE-GAIN-APPREC> 0.04
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0.89
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 12,953,000
<AVG-DEBT-PER-SHARE> 0.69
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CLASS A WARRANT AGREEMENT
THIS CLASS A WARRANT AGREEMENT (this "Agreement") is made as of this
15th day of October, 1997, by and among WALNUT FINANCIAL SERVICES, INC. a Utah
corporation (the "Company"), and CORPORATE STOCK TRANSFER, INC., a Colorado
corporation, as Warrant Agent (the "Warrant Agent").
W I T N E S S E T H
WHEREAS, the Company is engaging in a private placement (the
"Offering") pursuant to a placement agent agreement (as amended, the "Placement
Agent Agreement") dated October 10, 1997 between the Company and Walsh Manning
Securities, LLC, a New York limited liability company ("Walsh Manning"), of
units ("Offering Units"), with each Offering Unit consisting of 50,000 shares
of Common Stock and 35,000 Class A Warrants (each as hereinafter defined); and
WHEREAS, as of the date hereof, the Company sold 1,000,000 Class A
Warrants (the "Walsh Manning Warrants") to certain officers and employees of
Walsh Manning and one unrelated individual (collectively, the "Initial Warrant
Purchasers") for aggregate consideration of $100,000 and, in connection
therewith, Walsh Manning and the Company contemplated that such Class A
Warrants would be governed by and subject to this Agreement; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer exchange and redemption of the Class A
Warrants, the issuance of certificates representing the Class A Warrants, the
exercise of the Class A Warrants, and the rights of the Registered Holders (as
hereinafter defined);
NOW THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Class A Warrants and the certificates representing the Class
A Warrants and the respective rights and obligations thereunder of the Company,
the Registered Holders and the Warrant Agent, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS. As used herein, the following terms shall have
the following meanings, unless the context shall otherwise require:
(a) "Adjustment Certificate" shall have the meaning ascribed to it in
Section 9(f) hereof.
(b) "Class A Warrants" shall mean redeemable Common Stock purchase
warrants, each such Class A Warrant entitling the Registered Holder thereof to
purchase one share of Common Stock at the Exercise Price, all on the terms and
conditions set forth herein, including, without limitation, the Walsh Manning
Warrants.
<PAGE> 2
(c) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
distribution of earnings and assets of the Company without limit as to amount
or percentage, which at the date hereof consists of 50,000,000 shares of Common
stock, $.01 par value.
(d) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at Republic Plaza, 370
17th Street, Suite 2350, Denver, Colorado, 80202-4614.
(e) "Exercise Date" shall mean the date on which the Warrant Agent
shall have received both (a) the certificate representing a Warrant, with the
exercise form thereon duly executed by the Registered Holder thereof or his
attorney duly authorized in writing, and (b) payment in cash, or by official
bank or certified check made payable to the Company, of an amount in lawful
money of the United States of America equal to the Exercise Price.
(f) "Exercise Price" with respect to all Class A Warrants shall mean
the purchase price per share of Common Stock to be paid upon exercise of each
Class A Warrant in accordance with the terms hereof, which price shall be
$1.50, subject to adjustment from time to time pursuant to the provisions of
Section 9 hereof.
(g) "Expiration Date" shall mean 5:00 P.M. (New York time) on October
15, 2002, or the Redemption Date, whichever is earlier; provided that if such
date shall in the State of New York or the State of Colorado be a holiday or a
day on which banks are authorized or required to close then 5:00 P.M. (New York
time) on the next following day which in the State of New York and the State of
Colorado is not a holiday or a day on which banks are authorized or required to
close. Upon notice to all Registered Holders, the Company shall have the right
to extend the Expiration Date.
(h) "Redemption Date" shall have the meaning ascribed to it in Section
8(a) hereof.
(i) "Redemption Notice" shall have the meaning ascribed to it in
Section 8(b) hereof.
(j) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Class A Warrants in accordance with the terms hereof,
which price shall be $.10 per Warrant.
(k) "Registered Holder" shall mean as to any Class A Warrant and as of
any particular date, the person in whose name the certificate representing the
Class A Warrant shall be registered on that date on the books maintained by the
Warrant Agent pursuant to Section 6.
2
<PAGE> 3
(l) "Transfer Agent" shall mean Corporate Stock Transfer, Inc., as the
Company's transfer agent, or its authorized successor, as such.
(m) "Warrant Solicitation Fee" shall be five percent (5%) of the
aggregate exercise price of the Class A Warrants being exercised; provided,
however, that no Warrant Solicitation Fee shall be payable with respect to the
Walsh Manning Warrants.
SECTION 2. CLASS A WARRANTS AND ISSUANCE OF CERTIFICATES REPRESENTING
CLASS A WARRANTS.
(a) A Warrant initially shall entitle the Registered Holder of the
certificate representing such Warrant to purchase one share of Common Stock at
the Exercise Price and in accordance with the terms hereof, subject to
modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, certificates representing the
number of Class A Warrants sold by the Company as part of Offering Units in the
Offering and any other Class A Warrants sold by the Company shall be executed
by the Company and delivered to the Warrant Agent. Upon written order of the
Company signed by its President and by its Secretary, the certificates
representing Class A Warrants shall be countersigned, issued and delivered
promptly by the Warrant Agent to the investors in the Offering or, if
applicable, the Initial Warrant Purchasers.
(c) From time to time, up to the Expiration Date, the Transfer Agent
shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 3,800,000 shares of Common
Stock upon the exercise and surrender of Class A Warrants in accordance with
this Agreement.
(d) From time to time, up to the Expiration Date, the Warrant Agent
shall countersign and deliver certificates representing Class A Warrants in
required whole number denominations to the persons entitled thereto in
connection with any transfer or exchange permitted under this Agreement;
provided that no certificates shall be issued except (i) those initially issued
hereunder, (ii) those issued upon any transfer or exchange pursuant to Section
6; (iii) those issued in replacement of lost, stolen, destroyed or mutilated
certificates pursuant to Section 7; and (iv) at the option of the Company, in
such form as may be approved by its Board of Directors, to reflect any
adjustment or change in the Exercise Price or the Redemption Price therefor
made pursuant to Sections 8 or 9 hereof.
SECTION 3. FORM AND EXECUTION OF WARRANT.
(a) The certificates representing Class A Warrants shall be
substantially in the form attached hereto as Exhibit A (the provisions of such
Exhibit are hereby incorporated herein) and may have such letters, numbers or
other marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the
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Company may deem appropriate and as are not inconsistent with the provisions
of this Agreement, or as may be required to comply with any law or with any
rule or regulation made pursuant thereto or with any rule or regulation of any
national or over-the-counter market on which the Class A Warrants may be
listed. The certificates shall be dated the date of issuance thereof (whether
upon initial issuance, transfer, exchange or in lieu of mutilated, lost,
stolen, or destroyed certificates) and issued in registered form.
(b) Certificates representing Class A Warrants shall be executed on
behalf of the Company by its President and by its Secretary, by manual
signatures or by facsimile signatures printed thereon, and shall have imprinted
thereon a facsimile of the Company's seal. Certificates representing Class A
Warrants shall be countersigned by the Warrant Agent, by manual signature or by
facsimile signature printed thereon, and shall not be valid for any purpose
unless so countersigned. In case any officer of the Company who shall have
signed any of the certificates representing Class A Warrants shall cease to be
an officer of the Company or to hold the particular office referenced in the
certificates before the date of issuance of the certificates or before
countersignature by the Warrant Agent and issue and delivery thereof, such
certificates may nevertheless be countersigned by the Warrant Agent, issued and
delivered with the same force and effect as though the person who signed such
warrant Certificates had not ceased to be an officer of the Company or to hold
such office. After countersignature by the Warrant Agent, certificates
representing Class A Warrants shall be delivered by the Warrant Agent to the
Registered Holder without further action by the Company.
SECTION 4. EXERCISE. Each Warrant may be exercised, in whole or in
part, by the Registered Holder thereof at any time prior to the Expiration
Date, upon the terms and subject to the conditions set forth herein and in the
applicable certificate representing the Warrant. A Warrant shall be deemed to
have been exercised immediately prior to the close of business on the Exercise
Date and the person entitled to receive the Common Stock deliverable upon such
exercise shall be treated for all purposes as the holder of such Common Stock
upon the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date, the Warrant Agent
shall deposit the proceeds received from the exercise of a Warrant and shall
notify the Company in writing of the exercise of such Warrant. Promptly
following, and in any event within five business days after the date of such
notice from the Warrant Agent, the Warrant Agent, on behalf of the Company,
shall cause to be issued and delivered by the Transfer Agent, to the person or
persons entitled to receive the following documents, unless prior to the date
of issuance of such documents, the Company shall instruct the Warrant Agent to
refrain from causing such issuance pending clearance of checks received in
payment of the Exercise Price pursuant to such Class A Warrants:
(1) a certificate or certificates representing the number of
shares of Common Stock issuable by reason of such exercise in such
name(s) and such denomination(s) as specified on the applicable
exercise form; and
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(2) a new certificate representing the applicable Class A
Warrants entitling the Registered Holder to purchase the number of
shares of Common Stock as to which the original certificate was not
exercised and reflecting any changes to the Exercise Price which have
theretofore been effectuated and which certificate shall otherwise be
in form and substance identical to that delivered by the Registered
Holder to the Company for said exercise.
Upon the exercise of any Warrant and clearance of the funds received, the
Warrant Agent shall promptly remit (i) the applicable Warrant Solicitation Fee,
if any, to Walsh Manning, and (ii) the balance of the payment received for the
Warrant to the Company or as the Company may direct in writing.
SECTION 5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES; ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of
issuance upon exercise of Class A Warrants, such number of shares of Common
Stock as shall then be issuable upon the exercise of all outstanding Class A
Warrants. The Company covenants that all shares of Common Stock which shall be
issuable upon exercise of the Class A Warrants and payment of the Exercise
Price therefor shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable and free from all taxes, liens and charges with
respect to the issue thereof (other than those which the Company shall promptly
pay or discharge), and that upon issuance such shares shall be listed on each
national securities exchange or eligible for inclusion in each automated
quotation system, if any, on which the other shares of outstanding Common Stock
of the Company are then listed and eligible for inclusion.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Class A Warrants hereunder require registration
with, or approval of, any governmental authority under any federal securities
law before such securities may be validly issued or delivered upon such
exercise or in order to comply with federal securities laws, then the Company
will endeavor to secure such registration or approval in accordance with the
terms of the Placement Agent Agreement. The Company will use reasonable efforts
to obtain appropriate approvals or registrations under state "blue sky"
securities laws. Notwithstanding the foregoing, Class A Warrants may not be
exercised by, or shares of Common Stock issued to, any Registered Holder in any
state in which such exercise would be unlawful.
(c) The Company shall pay all documentary stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Class A Warrants, or the Issuance or delivery of any shares upon exercise of
the Class A Warrants; provided, however, that if the shares of Common Stock
issuable upon exercise of Class A Warrants are to be delivered in a name other
than the name of the Registered Holder of the certificate representing any
Warrant being exercised, then no such delivery shall be made unless the person
requesting the same has paid to the Warrant Agent the amount of transfer taxes
or charges incident thereto, if any.
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(d) The Warrant Agent is hereby irrevocably authorized to requisition the
Company's Transfer Agent from time to time for certificates representing shares
of Common Stock issuable upon exercise of the Class A Warrants, and the Company
will authorize the Transfer Agent to comply with all such proper requisitions.
Whenever the Warrant Agent and the Transfer Agent are not the same entity, the
Company will file with the Warrant Agent a statement setting forth the name and
address of the Transfer Agent of the Company for shares of Common Stock
issuable upon exercise of the Class A Warrants.
SECTION 6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Certificates representing Class A Warrants may be exchanged for other
certificates representing an equal aggregate number of Class A Warrants of the
same class or may be transferred in whole or in part. Certificates representing
Class A Warrants to be exchanged shall be surrendered to the Warrant Agent at
its Corporate Office, and upon satisfaction of the terms and provisions hereof,
the Company shall execute and the Warrant Agent shall countersign, issue and
deliver in exchange therefor the certificate or certificates representing Class
A Warrants which the Registered Holder making the exchange shall be entitled to
receive.
(b) The Warrant Agent shall keep at its Corporate Office, subject to such
reasonable regulations as it may prescribe, books in which it shall register
certificates representing Class A Warrants and the transfer thereof in
accordance with its regular practice. Upon due presentment for registration of
transfer of a certificate representing Class A Warrants at its Corporate
Office, the Company shall execute promptly, and the Warrant Agent shall issue
and deliver promptly to the transferee or transferees, a new certificate or
certificates representing an equal aggregate number of Class A Warrants of the
same class.
(c) With respect to all certificates representing Class A Warrants
presented for registration of transfer, or for exchange or exercise, the
exercise form on the reverse thereof shall be duly endorsed, or be accompanied
by a written instrument or instruments of transfer and exercise, in form
satisfactory to the Company and the Warrant Agent, duly executed by the
Registered Holder or his attorney-in-fact duly authorized in writing.
(d) Any service charge imposed by the Warrant Agent for any exchange or
registration of transfer of certificates representing Class A Warrants shall
be borne by the Company; however, the Company may require payment by such
Registered Holder of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
(e) All certificates representing Class A Warrants surrendered for
exercise, registration or transfer or for exchange in case of mutilated
certificates shall be promptly cancelled by the Warrant Agent and thereafter
retained by the Warrant Agent until termination of this Agreement or
resignation as Warrant Agent, or, disposed of or destroyed at the direction of
the Company.
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(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
certificate representing Class A Warrants as the absolute owner thereof and of
each Warrant represented thereby (notwithstanding any notations of ownership
or writing thereon made by anyone other than a duly authorized officer of the
Company or the Warrant Agent) for all purposes and shall not be affected by
any notice to the contrary. Class A Warrants issuable as a part of an Offering
Unit will be immediately detachable from the Common Stock which, together with
said Class A Warrants, constitute Offering Units, and transferable separately
therefrom.
SECTION 7. LOSS OR MUTILATION. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any certificate representing Class A
Warrants and (in case of loss, theft or destruction) of indemnity satisfactory
to them, and (in the case of mutilation) upon surrender and cancellation
thereof, the Company shall execute and the Warrant Agent shall (in the absence
of notice to the Company or Warrant Agent that the certificate has been
acquired by a bona fide purchaser) countersign and deliver to the Registered
Holder in lieu thereof a new certificate of like tenor representing an equal
aggregate number of Class A Warrants. Applicants for a substitute certificate
representing any Class A Warrants shall comply with such regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
SECTION 8. REDEMPTION OF CLASS A WARRANTS.
(a) Redemption. From and after October 15, 1998, all, but not less than
all, of the Class A Warrants may be redeemed, at the option of the Company, on
not less than thirty (30) days prior notice to the Registered Holders, at the
Redemption Price, provided that (i) the closing bid price for the Common Stock
for twenty (20) consecutive trading days prior to the date of the Redemption
Notice (as hereinafter defined), as quoted on any national stock exchange or
over-the-counter market, is at least $4.00 per share (the "Redemption Price
Requirement") and (ii) the notice and other requirements set forth in Section
8(b) through 8(e) below are satisfied. The Redemption Price Requirement shall
automatically adjust on a pro rata basis upon any adjustment of the Exercise
Price pursuant to Section 9 below. The date fixed for redemption of Class A
Warrants is referred to herein as the "Redemption Date."
(b) If the conditions set forth above in this Section 8 are satisfied and
the Company desires to exercise its right to redeem the Class A Warrants, the
Company shall mail a notice of redemption (the "Redemption Notice") to each
Registered Holder, certified mail, return receipt requested, not later than
the 30th day before the Redemption Date, at the Registered Holder's last
address as shall appear on the Warrant Agent's books maintained pursuant to
Section 6 hereof.
(c) The Redemption Notice shall specify (i) the Redemption Price, (ii)
the Redemption Date, (iii) the place where certificates representing the
applicable Class A Warrants shall be delivered and the Redemption Price is to
be paid, and (iv) that the right to exercise the applicable Class A Warrants
shall terminate at 5:00 p.m. (New York time) on the business
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<PAGE> 8
day immediately preceding the Redemption Date. No failure to mail such notice
nor any defect therein or in the mailing thereof shall affect the validity of
the proceedings for such redemption unless the Redemption Notice was not mailed
in the manner prescribed in Section 8(b) or the Redemption Notice did not
contain the information required by this Section 8(c). An affidavit of the
Warrant Agent or of the Secretary or an Assistant Secretary of the Company that
the Redemption Notice has been mailed shall, in the absence of fraud, be prima
facie evidence of the facts stated therein.
(d) Any right to acquire Common Stock pursuant to the exercise of the
applicable Class A Warrants shall terminate at 5:00 p.m. (New York time) on the
business day immediately preceding the Redemption Date. On and after the
Redemption Date, the Registered Holder shall have no further rights except to
receive, upon surrender of the certificate(s) representing Class A Warrants,
the Redemption Price.
(e) From and after the Redemption Date, the Company shall, at the place
specified in the Redemption Notice, upon presentation and surrender to the
Company by or on behalf of the Registered Holder of certificate(s) representing
the applicable Class A Warrants deliver or cause to be delivered to or upon the
written order of the Registered Holder a sum in cash equal to the Redemption
Price for each such Warrant so presented and surrendered.
SECTION 9. ADJUSTMENT OF EXERCISE PRICE. The Exercise Price shall be
subject to adjustment from time to time as set forth below.
(a) Adjustment for Stock Splits and Combinations. If the Company shall at
any time or from time to time after the date hereof effect a subdivision of
the outstanding Common Stock, the Exercise Price then in effect immediately
before that subdivision shall be proportionately decreased; conversely, if the
Company shall at any time or from time to time after the date hereof reduce the
outstanding shares of Common Stock by combination or otherwise, the Exercise
Price then in effect immediately before the combination shall be
proportionately increased. Any adjustment under this Section 9 (a) shall become
effective at the close of business on the date the subdivision or combination
becomes effective.
(b) Adjustment for Certain Dividends and Distributions of Stock. In the
event the Company at any time or from time to time after the date hereof shall
make or issue, or fix a record date for the determination of holders of Common
Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Exercise
Price then in effect shall be decreased as of the time of such issuance or, in
the event such a record date shall have been fixed, as of the close of business
on such record date, by multiplying the Exercise Price then in effect by a
fraction:
(1) The numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and
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<PAGE> 9
(2) The denominator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, plus the number of
shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, if such record date shall have been fixed
and such dividend is not fully paid or if such distribution is not fully
made on the date fixed therefor, the Exercise Price shall be recomputed
accordingly as of the close of business on such record date and thereafter
the Exercise Price shall be adjusted pursuant to this Section 9 as of the
time of actual payment of such dividends or distributions.
(c) Adjustment for Other Dividends and Distributions. In the event the
Company at any time or from time to time after the date hereof shall make or
issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Company other than shares of Common Stock, then and in each such event
provision shall be made so that the Registered Holder shall receive upon
exercise of a Warrant in addition to the number of shares of Common Stock
receivable thereupon, the amount of such other securities of the Company that
it would have received had the Warrant been exercised on the date of such
event and had thereafter, during the period from the date of such event to and
including the exercise date, retained such securities receivable by it as
aforesaid during such period giving application to all adjustments called for
during such period under this Agreement with respect to the rights of the
Registered Holder.
(d) Adjustment for Reclassification, Exchange or Substitution. If the
Common Stock issuable upon the exercise of the Warrant shall be changed into
the same or a different number of shares of any class or classes of stock,
whether by reclassification, exchange, substitution or other change (other
than a reorganization, merger, consolidation or sale of assets provided for in
Section 9 (e) below), then and in each such event, the Registered Holder shall
have the right thereafter to exercise the Warrant into the kind and amounts of
shares of stock and other securities and property receivable upon such
reclassification, exchange, substitution or other change, by holders of the
number of shares of Common Stock into which the Warrant might have been
exercised immediately prior to such reclassification, exchange, substitution,
or other change, all subject to further adjustment as provided herein.
(e) Reorganization, Mergers, Consolidations or Sales of Assets. If at any
time or from time to time there shall be a reorganization of the Common Stock
(other than a reclassification, exchange or substitution of shares provided
for in Section 9 (d) above) or a merger or consolidation of the Company with
or into another corporation, or the sale of all or substantially all the
Company's properties and assets to any other person, then, as a part of such
reorganization, merger, consolidation or sale, provision shall be made so that
the Registered Holder shall thereafter be entitled to receive upon exercise of
the Warrant, the number of shares of stock or other securities or property of
the Company or of the successor corporation resulting from such
reorganization, merger, consolidation or sale, to which a holder of that
number of shares of Common Stock deliverable upon exercise of the Warrant
would have been entitled on such reorganization, merger, consolidation or
sale. In any such
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case, appropriate adjustment shall be made in the application of the
provisions of this Agreement with respect to the rights of the Registered
Holder after the reorganization, merger, consolidation or sale to the end that
the provisions of this Agreement (including adjustment of the number of shares
issuable upon exercise of the Warrant) shall be applicable after that event as
nearly equivalent as may be practicable.
(f) Certificate of Adjustment. In each case of an adjustment or
readjustment of the Exercise Price, the Company, at its expense, shall prepare
a certificate showing such adjustment or readjustment signed by the duly
elected Treasurer or Chief Financial Officer of the Company (the "Adjustment
Certificate") and shall mail the Adjustment Certificate, by first class mail,
postage prepaid, to each Registered Holder at such Registered Holder's address
as shown in the books of the Warrant Agent maintained pursuant to Section 6
hereof. The Adjustment Certificate shall set forth such adjustment or
readjustment, including a brief summary of the facts upon which such
adjustment or readjustment is based including a statement of the Exercise
Price, the Redemption Price Requirement, and the number of shares of Common
Stock or other securities issuable upon exercise of each Warrant immediately
before and after giving effect to the applicable adjustment or readjustment.
No failure to mail the Adjustment Certificate nor any defect therein or in the
mailing thereof shall affect the validity thereof except as to the Registered
Holder to whom the Company failed to mail such Adjustment Certificate, or
except as to the Registered Holder whose Adjustment Certificate was defective.
The affidavit of an officer of the Warrant Agent or the Secretary or an
Assistant Secretary of the Company that such Adjustment Certificate has been
mailed shall, m the absence of fraud, be prima facie evidence of the facts
stated therein.
(g) No adjustment of the Exercise Price shall be made unless such
adjustment would require an increase or decrease of at least $.10 in the
Exercise Price; provided that any adjustments which by reason of this Section
9(g) are not required to be made shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment which, together
with any adjustment(s) so carried forward, shall require an increase or
decrease of at least $.10 in the Exercise Price then in effect hereunder.
(h) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original
issue of the Offering Units and shall also include any capital stock of any
class of the Company thereafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends and in the distribution of assets upon the voluntary
liquidation, dissolution or winding up of the Company; provided, however, that
the shares issuable upon exercise of the Class A Warrants shall include only
shares of such class designated in the Company's Articles of Incorporation as
Common Stock on the date of the original issue of the Offering Units or (i) in
the case of any reorganization, change, consolidation, merger, sale or
conveyance of the character referred to in Section 9(e) hereof, the stock,
securities or property provided for in Section 9 (e) hereof or (ii) in the
case of any reclassification or change in the outstanding shares of Common
Stock issuable upon exercise of the Warrant as a result of a subdivision or
combination or consisting of a change in par
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value, or from par value to no par value, or from no par value to par value,
such shares of Common Stock as so reclassified or changed.
(i) Any determination as to whether an adjustment in the Exercise Price
in effect hereunder is required pursuant to this Section 9, or as to the
amount of any such adjustment, if required, shall be binding upon all
Registered Holders and the Company if made in good faith by the Board of
Directors of the Company.
SECTION 10. REGISTERED HOLDERS OF CLASS A WARRANTS NOT DEEMED
STOCKHOLDERS. No holder of Class A Warrants shall, as such, be entitled to
vote or to receive dividends or be deemed the holder of Common Stock that may
at any time be issuable upon exercise of such Class A Warrants for any purpose
whatsoever, nor shall anything contained herein be construed to confer upon
the holder of Class A Warrants, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue or reclassification of stock, change of par value or change of stock to
no par value, consolidation, merger or conveyance or otherwise), or to receive
notice of meetings, or to receive dividends or subscription rights, until such
holder shall have exercised such Class A Warrants and been issued shares of
Common Stock in accordance with the provisions hereof.
SECTION 11. RIGHTS OF ACTION. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Class A
Warrants, and any Registered Holder of a Class A Warrant, without consent of
the Warrant Agent or of the holder of any other Class A Warrant, may, in his
own behalf and for his own benefit, enforce against the Company his right to
exercise his Class A Warrants for the purchase of shares of Common Stock in the
manner provided in the certificates representing Class A Warrants and this
Agreement.
SECTION 12. AGREEMENT OF REGISTERED HOLDER. Every Registered Holder, by
his acceptance thereof, consents and agrees with the Company, the Warrant
Agent and every other Registered Holder that:
(a) The Class A Warrants are transferable only on the registry books of
the Warrant Agent by the Registered Holder thereof in person or by his
attorney duly authorized in writing and only if the certificates representing
such Class A Warrants are surrendered at the Corporate Office of the Warrant
Agent, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Warrant Agent and the Company in their sole discretion,
together with payment of any applicable transfer taxes and otherwise strictly
in accordance with Section 6 hereof; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name the certificate representing Class A Warrants is registered as the
holder and as the absolute, true and lawful owner of the Class A Warrants
represented thereby for all purposes,
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and neither the Company nor the Warrant Agent shall be affected by any notice
or knowledge to the contrary, except as otherwise expressly provided in Section
7 hereof.
SECTION 13. CANCELLATION OF CERTIFICATES. If the Company shall purchase
or acquire any Warrant or Class A Warrants, the certificates evidencing the
same shall thereupon be delivered to the Warrant Agent and cancelled by it and
retired. The Warrant Agent shall also cancel the certificates following
exercise of any or all of the Class A Warrants represented thereby or delivered
to it for transfer, split-up, combination or exchange.
SECTION 14. CONCERNING THE WARRANT AGENT. The Warrant Agent acts hereunder
as agent and in a ministerial capacity for the Company, and its duties shall
be determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering certificates representing Class A Warrants or by any
other act hereunder be deemed to make any representations as to the validity,
value or authorization of the certificates or the Class A Warrants represented
thereby or of any securities or other property delivered upon exercise of any
Class A Warrant or whether any Common Stock issued upon exercise of any Class A
Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any Registered Holder to make or cause to be made any
adjustment of the Exercise Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or
for any action taken, suffered or omitted by it in reliance on any certificate
representing Class A Warrants or other document or instrument believed by it
in good faith to be genuine and to have been signed or presented by the proper
party or parties, (ii) be responsible for any failure on the part of the
Company to comply with any of its covenants and obligations contained in this
Agreement or in any certificate, or (iii) be liable for any act or omission in
connection with this Agreement except for its own negligence or wilful
misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to it
(who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith
in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or demand
of the Company shall be sufficiently evidenced by an instrument signed by the
Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand believed by it to be genuine.
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The Company agrees to pay the Warrant Agent reasonable compensation for
its services hereunder and to reimburse it for its reasonable expenses
hereunder. The Company further agrees to indemnify the Warrant Agent and save
it harmless against any and all losses, expenses and liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the Warrant
Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's negligence
or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own negligence or wilful misconduct), after
giving 30 days prior written notice to the Company. At least 15 days prior to
the date such resignation is to become effective, the Warrant Agent shall
cause a copy of such notice of resignation to be mailed to each Registered
Holder at the Company's expense. Upon such resignation, or any inability of
the Warrant Agent to act as such hereunder, the Company shall appoint a new
warrant agent in writing. If the Company shall fall to make such appointment
within a period of 15 days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then the Registered Holder of any
certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed
by the Company or by such a court, shall be a bank or trust company having a
capital and surplus, as shown by its last published report to its
stockholders, of not less than $10,000,000 or a nationally recognized stock
transfer company. After acceptance in writing of such appointment by the new
warrant agent is received by the Company, such new warrant agent shall be
vested with the same powers, rights, duties and responsibilities as if it had
been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act or deed; but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be
legally and validly executed and delivered by the resigning Warrant Agent. Not
later than the effective date of any such appointment the Company shall file
notice thereof with the resigning Warrant Agent and shall forthwith cause a
copy of such notice to be mailed to each Registered Holder.
Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged or a corporation resulting from any consolidation to
which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent
to be mailed to the Company and to each Registered Holder.
The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Class A Warrants or
other securities of the Company and otherwise deal with the Company in the
same manner and to the same extent and with like effects as though it were not
Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in
any other capacity for the Company or for any other legal entity.
13
<PAGE> 14
SECTION 15. MODIFICATION OF AGREEMENT. The Warrant Agent and the Company
may by supplemental agreement make any changes or corrections in this
Agreement (i) that they shall deem appropriate to cure any ambiguity or to
correct a defective or inconsistent provision or manifest mistake or error
herein contained; (ii) to the extent approved by a majority of the Board of
Directors of the Company to reduce the Exercise Price, or (iii) that they may
deem necessary or desirable and which shall not adversely affect the interests
of the Registered Holders; provided, however, that this Agreement shall not
otherwise be modified, supplemented or altered in any respect except with the
consent in writing of the Registered Holders representing not less than 50% of
the Class A Warrants then outstanding.
SECTION 16. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first class registered or certified mail,
postage repaid as follows: if to the Registered Holder of a certificate, at
the address of such holder as shown on the registry books maintained by the
Warrant Agent; if to the Company at 8000 Towers Crescent Drive, Suite 1070,
Vienna, Virginia 22182, Attn: President, or at such other address as may have
been furnished to the Warrant Agent in writing by the Company; and if to the
Warrant Agent, at its Corporate Office.
SECTION 17. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to its principles of conflict of laws.
SECTION 18. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the Company and, the Warrant Agent and their
respective successors and assigns, and the Registered Holders from time to
time. Nothing in this Agreement is intended or shall be construed to confer
upon any other person any right, remedy or claim, in equity or at law, or to
impose upon any other person any duty, liability or obligation.
SECTION 19. TERMINATION. This Agreement shall terminate at the close of
business on the Expiration Date or such earlier date upon which all Class A
Warrants have been exercised, except that the Warrant Agent shall account to
the Company for cash held by it and the provisions of Section 14 hereof shall
survive such termination.
SECTION 20. COUNTERPARTS. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
14
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WALNUT FINANCIAL SERVICES, INC.
By: /s/ Joel S. Kanter
-------------------------------------
CORPORATE STOCK TRANSFER, INC.
By: /s/ Carylyn Bell
-------------------------------------
Authorized Officer
15
<PAGE> 1
EXHIBIT 99.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and
entered into as of this 18th; day of December, 1997 by and between Walnut
Financial Services, Inc., a Utah corporation ("WFS"), Lawrence Kaplan,
Frank Skelly, Craig Gross, Theodore Burns and Paul Savage (individually, a
"Warrant Purchaser" and, collectively, the "Warrant Purchasers"), those parties
listed on Exhibit A attached hereto and made a part hereof, each of whom has
executed a supplemental signature page hereto (individually, a "Purchaser" and,
collectively, the "Purchasers", and, collectively, with the Warrant Purchasers,
the "Holders"), and Walsh Manning Securities, LLC, a New York limited liability
company (the "Placement Agent").
RECITALS
A. Pursuant to a Warrant Purchase Agreement dated as of October 15, 1997
(the "Purchase Agreement") by and between the Warrant Purchasers and
WFS, the Warrant Purchasers have purchased in the aggregate 1,000,000
Class A Warrants of WFS.
B. Pursuant to a private placement consummated in October, 1997 (the
"Private Placement"), each of the Purchasers has purchased units (the
"Units") of WFS, with each Unit consisting of 50,000 shares of WFS'
common stock, $.01 par value per share (the "Common Stock"), and 35,000
Class A Redeemable Common Stock purchase warrants (the "Class A
Warrants").
C. In connection with the Private Placement and the Purchase Agreement,
WFS has agreed to provide certain registration rights to the Holders,
which registration rights are hereby provided on the terms and
conditions of this Agreement.
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
a. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all rules and regulations promulgated thereunder.
b. "Registrable Securities" shall mean the Common Stock and the Common
Stock underlying the Class A Warrants, in each case as issued to a
Holder in connection with the Private Placement or the Purchase
Agreement, and any Common Stock issued or issuable with respect to
such securities by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization.
<PAGE> 2
As to any particular Registrable Securities, such securities will
cease to be Registrable Securities when they have (i) been
effectively registered under the Securities Act and disposed of in
accordance with the Registration Statement covering them, (ii) are
eligible for resale to the public in accordance with Rule 144 under
the Securities Act by a Holder (or any similar rule or regulation
then in force), or (iii) been otherwise transferred and new
certificates for them not bearing a Securities Act restrictive
legend have been delivered by WFS. Whenever any particular
securities cease to be Registrable Securities, the holder thereof
will be entitled to receive from WFS, at such holder's sole cost and
expense, new securities of like tenor not bearing a restrictive
legend.
c. "Registration Expenses" shall mean all expenses incident to the
performance of or compliance with this Agreement, including,
without limitation, all registration and filing fees, fees and
expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, and fees and
disbursements of counsel and all independent certified public
accountants, underwriters (excluding discounts and commissions) and
other persons or entities retained in connection therewith.
d. "Registration Statement" shall mean a registration statement filed
pursuant to the Securities Act on Form S-1, S-2, S-3 or any similar
form pursuant to which the Registrable Securities may be registered.
e. "Securities Act" shall mean the Securities Act of 1933, as amended,
and all rules and regulations promulgated thereunder.
2. PIGGYBACK REGISTRATIONS.
a. RIGHT TO PIGGYBACK. Whenever WFS proposes to register any of its
securities under the Securities Act (other than pursuant to a Demand
Registration (as defined in paragraph 3 below) and other than a
registration on Form S-4 or S-8 or any other registration in
connection with an acquisition by WFS) and the registration form to
be used may be used for the registration of any Registrable
Securities (a "Piggyback Registration"), WFS will (i) give at least
30 days prior written notice to all Holders of its intention to file
such a Registration Statement, and (ii) include in such registration
all Registrable Securities in accordance with the priorities set
forth in paragraphs 2(c) and 2(d) below with respect to which WFS
has received written requests for inclusion therein within 20 days
after the applicable Holder's receipt of WFS' notice.
b. PIGGYBACK EXPENSES. All Registration Expenses incurred by WFS in
connection with any Piggyback Registration will be paid by WFS. All
Registration Expenses incurred by a Holder in connection with any
Piggyback Registration will be paid by such Holder.
<PAGE> 3
c. PRIORITY ON PRIMARY REGISTRATIONS. If a Piggyback Registration is an
underwritten primary registration on behalf of WFS and the managing
underwriters advise WFS in writing that in their opinion the number
of securities requested to be included in such registration exceeds
the number which can be sold in such offering, WFS will include in
such registration (i) first, the securities that WFS proposes to
sell, and (ii) second, the Registrable Securities and other
securities requested to be included in such registration, pro rata
among the Holders and the holders of any other securities requested
to be included therein on the basis of the number of Registrable
Securities or other securities being requested for registration
which are owned by such persons.
d. PRIORITY ON SECONDARY REGISTRATIONS. If a Piggyback Registration is
an underwritten secondary registration on behalf of holders of WFS'
securities and the managing underwriters advise WFS in writing that
in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such
offering, WFS will include in such registration (i) first, the
securities requested to be included therein by the holders of
securities requesting such registration, and (ii) second, the
Registrable Securities and other securities requested to be included
in such registration, pro rata among the Holders and the holders of
any other securities requested to be included therein on the basis
of the number of Registrable Securities or other securities being
requested for registration which are owned by such persons.
3. DEMAND REGISTRATIONS.
a. REQUESTS FOR REGISTRATION. Subject to the terms of this Agreement,
the Placement Agent, at any time after the date which is six months
after the final closing of the Private Placement, may request that
WFS file a Registration Statement with respect to all or part of the
Holders' Registrable Securities. Within 15 days after receipt of any
such request, WFS will give written notice of such request to each
of the other Holders and will include in such registration all
Registrable Securities with respect to which WFS has received
written requests for inclusion therein within 20 days after the
applicable Holder's receipt of WFS' notice. All registrations
requested pursuant to this Paragraph 3 are referred to herein as
"Demand Registrations."
b. NUMBER OF DEMAND REGISTRATIONS. The Placement Agent will be entitled
to request one Demand Registration solely with respect to the
Registrable Securities held by the Warrant Purchasers (excluding the
Purchasers) and one Demand Registration with respect to the
Registrable Securities held by the Holders, and in each such case
WFS will pay all Registration Expenses. A registration will not
count as one of the permitted Demand Registrations (i) until it has
become effective (unless such registration has not become effective
due to the fault of the Placement Agent or the Holders that request
to participate in such registration, as
<PAGE> 4
the case may be) and (ii) unless the Placement Agent or the Holders,
as the case may be, are able to register at least seventy-five
percent (75%) of the Registrable Securities requested to be included
in such registration (unless such persons are not so able to
register such Registrable Securities due to the fault of such
persons).
c. PRIORITY ON DEMAND REGISTRATIONS. In the case of the Demand
Registration relating solely to Registrable Securities held by the
Warrant Purchasers, if other securities (other than Registrable
Securities held by the Placement Agent) are to be included in such
Demand Registration, and such Demand Registration is an underwritten
offering in which the managing underwriters advise WFS in writing
that in their opinion the number of the Registrable Securities and
other securities requested to be included exceeds the number of
Registrable Securities and other securities which can be sold in
such offering, WFS shall include in such registration all of the
Warrant Purchasers' Registrable Securities requested to be
registered prior to the inclusion of Registrable Securities of any
Purchaser, and shall include in such registration, prior to the
inclusion of any securities which are not Registrable Securities,
the number of Registrable Securities requested to be included by the
Purchasers which in the opinion of such underwriters can be sold, pro
rata among the respective Purchasers on the basis of the number of
Registrable Securities so required to be included therein. In the
case of the Demand Registration relating to all of the Registrable
Securities, if other securities (other than Registrable Securities)
are to be included in such Demand Registration, and such Demand
Registration is an underwritten offering in which the managing
underwriters advise WFS in writing that in their opinion the number
of Registrable Securities and other securities requested to be
included exceeds the number of Registrable Securities and other
securities which can be sold in such offering, WFS will include in
such registration, prior to the inclusion of any securities which
are not Registrable Securities, the number of Registrable Securities
requested to be included which in the opinion of such underwriters
can be sold, pro rata among the respective Holders on the basis of
the number of Registrable Securities so requested to be included
therein.
4. HOLDBACK AGREEMENT. In connection with any underwritten Piggyback
Registration, each Holder agrees not to effect any public sale or
distribution of equity securities of WFS, or any securities convertible
into or exchangeable or exercisable for such securities, during the period
beginning seven days prior to and ending on the date which is 90 days
after the effective date of any such underwritten Piggyback Registration
in which Registrable Securities are included on behalf of said Holder,
unless the underwriters managing the registered public offering otherwise
agree.
5. REGISTRATION PROCEDURES. Whenever any holder has requested that any
Registrable Securities be registered pursuant to this Agreement, WFS will
use its best efforts to:
a. effect the registration and the sale of such Registrable Securities
in accordance with the intended method of disposition thereof, and
pursuant thereto, WFS will
<PAGE> 5
as expeditiously as possible prepare and file with the Securities
and Exchange Commission a Registration Statement with respect to
such Registrable Securities and use its best efforts to cause such
Registration Statement to become effective;
b. prepare and file with the Securities and Exchange Commission (the
"SEC") such amendments and supplements to such Registration
Statement and the prospectus used in connection therewith 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 methods of disposition by the sellers
thereof set forth in such Registration Statement;
c. furnish to each Holder such number of copies of such Registration
Statement, each amendment and supplement thereto and the prospectus
included in such Registration Statement (including each preliminary
prospectus) as such Holder may reasonably require; and furnish to
Placement Agent copies of all correspondence with the SEC with
respect to such Registration Statement;
d. register or qualify, as the case may be, such Registrable Securities
under such other securities or blue sky laws of such jurisdictions
as any Holder may reasonably request and do any and all other acts
and things which may be reasonably necessary to enable such Holder
to consummate the disposition in such jurisdictions of Registrable
Securities owned by such Holder (provided that WFS will not be
required to (i) qualify generally to do business in any jurisdiction
where it would not otherwise be required to qualify but for this
subparagraph, (ii) subject itself to taxation in any such
jurisdiction, or (iii) consent to general service of process in any
such jurisdiction);
e. notify the Placement Agent, at any time when a prospectus relating to
Registrable Securities is required to be delivered under the
Securities Act, of the happening of any event as a result of which
the prospectus included in such Registration Statement contains an
untrue statement of a material fact or omits any fact necessary to
make the statements therein not misleading, and, at the request of
the Placement Agent, prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus will not contain an
untrue statement of a material fact or omit to state any fact
necessary to make the statements therein not misleading; and
f. provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such Registration
Statement.
<PAGE> 6
6. INDEMNIFICATION.
a. WFS agrees to indemnify, to the extent permitted by law, each Holder,
its officers and directors and each person or entity who controls
such Holder (within the meaning of the Securities Act) against, and
to pay to such persons the amount of, all losses, claims, damages,
liabilities and expenses caused by any untrue or alleged untrue
statement of material fact contained in any Registration Statement,
prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material
fact required to be stated therein, except insofar as the same are
caused by or contained in any information furnished to WFS by such
Holder in writing expressly for use therein or which such Holder
failed to provide after being so requested or by such Holder's
failure to deliver a copy of the Registration Statement or
prospectus or any amendments or supplements thereto after WFS has
furnished such Holder with a sufficient number of copies of the same
or which is otherwise attributable to the negligence or willful
misconduct of such Holder. In connection with an underwritten
offering, WFS will indemnify such underwriters, their officers and
directors and each person or entity who controls such underwriters
(within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the Holders.
b. In connection with any Registration Statement in which a Holder is
participating, each such Holder will furnish to WFS in writing,
within 15 days after request therefor, such information and
affidavits as WFS reasonably requests for use in connection with any
such Registration Statement or prospectus and, to the extent
permitted by law, will indemnify WFS, its directors and officers and
each person or entity who controls WFS (within the meaning of the
Securities Act), against, and will pay to such persons the amount
of, all losses, claims, damages, liabilities and expenses resulting
from any untrue or alleged untrue statement of material fact
contained or required to be contained in the Registration Statement,
prospectus or preliminary prospectus or any amendment thereof or
supplement thereto or any omission or alleged omission of a material
fact required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such
untrue statement or omission is contained or required to be
contained in any information or affidavit so furnished or required
to be so furnished in writing by such Holder.
c. Any person or entity entitled to indemnification hereunder will (i)
give prompt written notice to the indemnifying party of any claim
with respect to which it seeks indemnification, and (ii) unless in
such indemnified party's reasonable judgment a conflict of interest
between such indemnified and indemnifying parties may exist with
respect to such claim, permit such indemnifying party to assume the
defense of such claim, with counsel reasonably satisfactory to the
indemnified party. If such defense is assumed, the indemnifying
party will not be subject to any liability for any settlement made
by the indemnified party without the
<PAGE> 7
indemnifying party's consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled
to, or elects not to, assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for
all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified
party a conflict of interest may exist between such indemnified
party and any other of such indemnified parties with respect to such
claim.
d. The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or
on behalf of the indemnified party or any officer, director or
controlling person or entity of such indemnified party and will
survive the transfer of securities.
7. CURRENT PUBLIC INFORMATION. At all times after WFS has filed a
Registration Statement with the Securities and Exchange Commission
pursuant to the requirements of either the Securities Act or the Exchange
Act in connection with a registration pursuant to this Agreement, and such
Registration Statement has been declared effective, WFS will file all
reports required to be filed by it pursuant to the Securities Act or the
Exchange Act, and will take such further action as any Holder may
reasonably request, all to the extent required to enable such Holders to
sell Registrable Securities pursuant to (i) Rule 144 under the Securities
Act (or any similar rule or regulation then in force), or (ii) an
effective Registration Statement.
8. MISCELLANEOUS.
a. POWER OF ATTORNEY. Each Holder, by its execution hereof, hereby
makes, constitutes and appoints the Placement Agent as its true and
lawful agent and attorney-in-fact, with full power of substitution
and full power and authority in its name, place and stead to make,
execute, sign, acknowledge, swear to, record and file any amendment,
supplement or modification to this Agreement and any certificate or
other instrument deemed advisable by the Placement Agent to carry
out the provisions of this Agreement and applicable law. The
foregoing power of attorney shall be deemed to be a power coupled
with an interest and shall be irrevocable, may be exercised by the
Placement Agent either by signing as attorney-in-fact for each
Holder or, after listing all of the Holders executing an instrument,
by a single signature of the Placement Agent acting as
attorney-in-fact for all of them, and shall survive the delivery of
an assignment by a Holder of the whole or any fraction of its
Registrable Securities.
b. REMEDIES. Any person or entity having rights under any provision of
this Agreement will be entitled to enforce such rights specifically,
to recover damages caused by reason of any breach of any provision
of this Agreement, and to exercise all other rights granted by law.
<PAGE> 8
c. AMENDMENTS AND WAIVERS. Except as otherwise provided herein, the
provisions of this Agreement may be amended and WFS may take any
action herein prohibited, or omit to perform any act herein required
to be performed by it, only if WFS has obtained the written consent
of the Placement Agent.
d. SUCCESSORS AND ASSIGNS. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto will bind and
inure to the benefit of the respective successors and assigns of the
parties hereto whether so expressed or not.
e. HEADINGS. The headings of various paragraphs of this Agreement have
been inserted for reference only and shall not be a part of this
Agreement.
f. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid
under applicable law. If, however, any provision of this Agreement
shall be determined by a court of competent jurisdiction to be
invalid or unenforceable, such provisions shall be ineffective to
the extent of such invalidity or unenforceability, without
invalidating the remainder of such provision or the remaining
provisions of this Agreement.
g. GOVERNING LAW. This Agreement has been negotiated and delivered at
Chicago, Illinois, and shall be governed by and construed in
accordance with the internal laws of the State of Illinois without
reference to (i) its judicially or statutorily pronounced rules
regarding conflict of laws or choice of law; (ii) where any
instrument is executed or delivered; (iii) where any payment or
other performance required by any such instrument is made or
required to be made; (iv) where any breach of any provision of any
such instrument occurs, or any cause of action otherwise accrues;
(v) where any action or other proceeding is instituted or pending;
(vi) the nationality, citizenship, domicile, principal place of
business, or jurisdiction or organization or domestication of any
party; (vii) whether the laws of the forum jurisdiction otherwise
would apply the laws of a jurisdiction other than the State of
Illinois; or (viii) any combination of the foregoing.
h. NOTICES. Any notice required or permitted to be given hereunder
shall be in writing, and shall be either (i) personally delivered,
(ii) sent by U.S. certified or registered mail, return receipt
requested, postage prepaid, or (iii) sent by Federal Express or
other reputable common carrier guaranteeing next business day
delivery, to the respective addresses of the parties set forth
below, or to such other place as any party hereto may by notice
given as provided herein designate for receipt of notices hereunder.
Any such notice shall be deemed given and effective upon receipt or
refusal of receipt thereof by the primary party to whom it is to be
sent.
<PAGE> 9
If to WFS to: Walnut Financial Services, Inc.
8000 Towers Crescent Drive, Suite 1070
Vienna, Virginia 22182
Attention: Mr. Joel S. Kanter
with a required copy to: Barack Ferrazzano Kirschbaum
Perlman & Nagelberg
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
Attention: Gretchen Anne Trofa, Esq.
If to the Placement
Agent to: Walsh Manning Securities, LLC
90 Broad Street
New York, New York 10004
Attention: Mr. Theodore Burns
with a copy to: McLaughlin & Stern LLP
260 Madison Avenue, 18th Floor
New York, New York 10016
Attention: David W. Sass, Esq.
If to a Holder to: The address of such Holder shown on Exhibit A
i. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and
understanding among the parties with regard to the subject matter hereof,
and there are no other prior or contemporaneous written or oral agreements,
undertakings, promises, warranties, or covenants respecting such subject
matter not expressly set forth herein.
j. COUNTERPARTS. This Agreement may be executed in any number of identical
counterparts, any of which may contain the signatures of less than all
parties, and all of which together shall constitute a single agreement.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
WALNUT FINANCIAL SERVICES, INC.,
a Utah corporation
By: /s/ Joel S. Kanter
--------------------------------------
Its: President
--------------------------------------
WALSH MANNING SECURITIES, LLC,
a New York limited liability company
By: /s/ Theodore Burns
--------------------------------------
Its: Vice President
--------------------------------------
[ADDITIONAL SIGNATURE PAGES FOLLOW]
<PAGE> 11
REGISTRATION RIGHTS AGREEMENT
SUPPLEMENTAL SIGNATURE PAGE
WARRANT PURCHASERS
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
Address: /s/ Lawrence Kaplan
---------------------------- --------------------------------------
Lawrence Kaplan
- ------------------------------------
- ------------------------------------
Address: /s/ Frank Skelly
---------------------------- --------------------------------------
Frank Skelly
- ------------------------------------
- ------------------------------------
Address: /s/ Craig Gross
---------------------------- --------------------------------------
Craig Gross
- ------------------------------------
- ------------------------------------
Address: /s/ Theodore Burns
---------------------------- --------------------------------------
Theodore Burns
- ------------------------------------
- ------------------------------------
Address: /s/ Paul Savage
---------------------------- --------------------------------------
Paul Savage
- ------------------------------------
- ------------------------------------
<PAGE> 12
EXHIBIT A
PURCHASERS
