<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
WALNUT FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
WALNUT FINANCIAL SERVICES, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
4,095,096
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$2.4063 per share, based on the average of the high and low prices of
Registrant's Common Stock reported by Nasdaq on August 12, 1999
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$9,853,824.75
- --------------------------------------------------------------------------------
(5) Total fee paid:
$1,970.76
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
WALNUT FINANCIAL SERVICES, INC.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
----------------
TO BE HELD ON [OCTOBER 12], 1999
NOTICE IS HEREBY GIVEN that a special meeting (the "Special Meeting")
of the stockholders of Walnut Financial Services, Inc. ("Walnut") will be held
on [DATE] at [TIME AND PLACE INFORMATION]. At the Special Meeting, the Walnut
stockholders will be asked to consider and vote upon:
1. A proposal to approve and adopt an Agreement and Plans of Merger,
dated as of August 5, 1999, a copy of which is attached to the accompanying
Proxy Statement as Exhibit A, by and between Walnut and THCG, Inc., a Delaware
corporation and a wholly-owned subsidiary of Walnut, and by and among THCG,
Inc., Tower Hill Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of THCG, Inc., and Tower Hill Securities, Inc., a New York
corporation, to approve the merger of Walnut with and into THCG, Inc. and to
approve the issuance of shares of common stock of THCG, Inc. in connection with
the merger of Tower Hill Acquisition Corp. with and into Tower Hill Securities,
Inc.;
2. A proposal to approve the deregistration of Walnut, Walnut Capital
Corp., Walnut Funds, Inc. and Universal Bridge Funds, Inc., each a Delaware
corporation and a wholly-owned subsidiary of Walnut as business development
companies under the Investment Company Act of 1940, as amended;
3. A proposal to approve the sale and issuance by Walnut of at least
1,500,000 and up to 3,000,000 shares of the common stock of Walnut at $2.00 per
share in a private placement transaction;
4. A proposal to approve the conversion of certain debts and accrued
liabilities of Walnut or its subsidiaries into cash or common stock of Walnut
valued at $2.00 per share and the conversion of certain accrued compensation
into cash or common stock of Walnut valued at $2.00 per share;
5. A proposal to approve the acquisition by Universal Bridge Fund,
Inc., a Delaware corporation and a wholly-owned subsidiary of Walnut, of the
limited and general partnership interests not currently owned by Universal
Bridge Fund, Inc. in Universal Partners, L.P., an Illinois limited partnership
and an affiliate of Walnut;
6. A proposal to approve the adoption by THCG, Inc. of a new stock
incentive plan; and
7. Such other business as may properly be presented at the Special
Meeting or any adjournments or postponements thereof.
In addition, stockholders of Walnut may be asked at the Special Meeting
to approve the adjournment of the Special Meeting to another date and time as
indicated in any such proposed adjournment. Any action may be taken on the
foregoing matters at the Special Meeting on the date specified above, or on any
date or dates to which, by original or later adjournment, the Special Meeting
may be adjourned.
The Board of Directors of Walnut has fixed the close of business on
, 1999 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting and at any adjournments
or postponements thereof.
<PAGE> 3
You are requested to fill in and sign the enclosed Proxy Card, which is
being solicited by the Board of Directors of Walnut, and to mail it promptly in
the enclosed postage-prepaid envelope. Any proxy may be revoked by delivery of a
later dated proxy. Stockholders of record who attend the Special Meeting may
vote in person, even if they have previously delivered a signed proxy.
By Order of the Board of Directors
Vienna, Virginia Joshua S. Kanter
, 1999 Secretary
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE POSTAGE-PREPAID ENVELOPE
PROVIDED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH,
EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
2
<PAGE> 4
WALNUT FINANCIAL SERVICES, INC.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
----------------
PROXY STATEMENT
----------------
FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [OCTOBER 12], 1999
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Walnut Financial Services, Inc.
("Walnut") for use at the special meeting of the holders of Walnut's common
stock (the "Walnut Common Stock"), to be held on , 1999, and at any
adjournments or postponements thereof (the "Special Meeting"). At the Special
Meeting, stockholders will be asked to:
- approve and adopt an Agreement and Plans of Merger, dated as of
August 5, 1999 (the "Merger Agreement"), a copy of which is
attached to this Proxy Statement as Exhibit A, by and between
Walnut and THCG, Inc., a Delaware corporation and a wholly-owned
subsidiary of Walnut ("THCG"), and by and among THCG, Tower Hill
Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of THCG ("Newco"), and Tower Hill Securities, Inc., a
New York corporation ("Tower Hill"), to approve the merger of
Walnut with and into THCG ("Merger 1") and to approve the issuance
of shares of common stock of THCG ("THCG Common Stock") in
connection with the merger of Newco with and into Tower Hill
("Merger 2" and, collectively with Merger 1, the "Mergers");
- approve the deregistration of Walnut, Walnut Capital Corp., a
Delaware corporation and a wholly-owned subsidiary of Walnut
("Walnut Capital"), Walnut Funds, Inc., a Delaware corporation and
a wholly-owned subsidiary of Walnut ("Walnut Funds") and Universal
Bridge Funds, Inc., a Delaware corporation and a wholly-owned
subsidiary of Walnut ("Universal Bridge"), as business development
companies ("BDCs") under the Investment Company Act of 1940 (as
amended, the "1940 Act") (the "BDC Deregistration");
- approve the issuance by Walnut of at least 1,500,000 and up to
3,000,000 shares of Walnut Common Stock at $2.00 per share in a
private placement transaction (the "Capital Investment");
- approve the conversion of certain debts and accrued liabilities of
Walnut or its subsidiaries into cash or Walnut Common Stock valued
at $2.00 per share (the "Debt Conversion") and the conversion of
accrued compensation of Burton W. Kanter into cash or Walnut
Common Stock valued at $2.00 per share (the "Compensation
Satisfaction");
- approve the acquisition by Universal Bridge of the limited and
general partnership interests not currently owned by Universal
Bridge in Universal Partners, L.P., an Illinois limited
partnership and an affiliate of Walnut ("UPLP") (the "UPLP
Acquisition");
- approve the adoption by THCG of a new stock incentive plan (the
"THCG Stock Incentive Plan"); and
- transact such other business as may properly be brought before the
Special Meeting or any adjournments or postponements thereof.
<PAGE> 5
In addition, stockholders may be asked at the Special Meeting to
approve the adjournment of the Special Meeting to another date and time as
indicated in any such proposed adjournment. Proxies voting against the Mergers
will not be used to vote for adjournment of the meeting.
This Proxy Statement and the accompanying Notice of Special Meeting and
Proxy Card are being mailed on or about , 1999 to the stockholders
of Walnut of record at the close of business on , 1999 (the "Record
Date"). Only stockholders of record as of the close of business on the Record
Date will be entitled to notice of and to vote at the Special Meeting. As of the
Record Date, there were [3,350,533] shares of Walnut Common Stock outstanding
and entitled to vote at the Special Meeting. Holders of Walnut Common Stock
outstanding as of the close of business on the Record Date will be entitled to
one vote for each share held by them.
STOCKHOLDERS OF WALNUT ARE REQUESTED TO COMPLETE, SIGN, DATE AND
PROMPTLY RETURN THE ACCOMPANYING PROXY CARD IN THE ENCLOSED POSTAGE-PREPAID
ENVELOPE. SHARES REPRESENTED BY A PROPERLY EXECUTED PROXY CARD RECEIVED PRIOR TO
THE VOTE AT THE SPECIAL MEETING AND NOT REVOKED WILL BE VOTED AT THE SPECIAL
MEETING AS DIRECTED ON THE PROXY CARD. IF A PROPERLY EXECUTED PROXY CARD IS
SUBMITTED AND NO INSTRUCTIONS ARE GIVEN, THE PERSONS DESIGNATED AS PROXY HOLDERS
ON THE PROXY CARD WILL VOTE (I) FOR THE ADOPTION OF THE MERGER AGREEMENT, THE
APPROVAL OF MERGER 1 AND THE ISSUANCE OF THCG COMMON STOCK IN CONNECTION WITH
MERGER 2; (II) FOR THE APPROVAL OF THE BDC DEREGISTRATION; (III) FOR THE
APPROVAL OF THE CAPITAL INVESTMENT; (IV) FOR THE APPROVAL OF THE DEBT CONVERSION
AND THE COMPENSATION SATISFACTION; (V) FOR THE APPROVAL OF THE UPLP ACQUISITION;
(VI) FOR THE ADOPTION OF THE THCG STOCK INCENTIVE PLAN; (VII) FOR ANY
ADJOURNMENT OF THE SPECIAL MEETING AND (VIII) IN THEIR OWN DISCRETION WITH
RESPECT TO ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE STOCKHOLDERS AT
THE SPECIAL MEETING OR AT ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF. IT IS NOT
ANTICIPATED THAT ANY MATTERS OTHER THAN THOSE SET FORTH IN THE PROXY STATEMENT
WILL BE PRESENTED AT THE SPECIAL MEETING.
The presence, in person or by proxy, of holders of a majority of shares
of Walnut Common Stock entitled to vote is necessary to constitute a quorum for
the transaction of business at the Special Meeting. The affirmative vote of
stockholders holding a majority of all shares entitled to vote is required for
approval of the Merger Agreement, Merger 1 and the THCG Stock Incentive Plan.
The affirmative vote of a majority (as defined under the 1940 Act) of all shares
entitled to vote is required for approval of the BDC Deregistration. The
affirmative vote of both a majority (as defined under the 1940 Act) of holders
of outstanding shares entitled to vote and a majority (as defined under the 1940
Act) of holders of outstanding shares entitled to vote not held by affiliated
persons are required for approval of the issuance of THCG Common Stock in
connection with Merger 2, the Capital Investment, the Debt Conversion, the
Compensation Satisfaction and the UPLP Acquisition. The affirmative vote of the
holders of a majority of the votes cast with a quorum present at the Special
Meeting will be required for approval of all other matters to be brought before
the stockholders at the Special Meeting. Under Section 2(9)(42) of the 1940 Act,
a "majority vote" means the lesser of (a) 67% or more of voting securities
present if more than 50% are present in person or by proxy or (b) more than 50%
of outstanding voting securities. Abstentions and broker non-votes will not be
counted as votes cast, although both will count towards the presence of a
quorum.
A stockholder of record may revoke a proxy at any time before it has
been exercised by filing a written revocation with the Secretary of Walnut at
the address of Walnut set forth above, by filing a duly executed proxy bearing a
later date, or by appearing in person and voting by ballot at the Special
Meeting. Any stockholder of record as of the Record Date attending the Special
Meeting may vote in person whether or not a proxy has been previously given, but
the presence (without further action) of a stockholder at the Special Meeting
will not constitute revocation of a previously given proxy. If the Special
Meeting is adjourned for any reason, at any subsequent reconvening of the
Special Meeting, all proxies will be voted in the same manner as such proxies
would have been voted at the original convening of the Special Meeting (except
for any proxies that have theretofore effectively been revoked or withdrawn).
2
<PAGE> 6
The costs of preparing, assembling and mailing the Notice of Special
Meeting, this Proxy Statement and the Proxy Card will be borne by Walnut.
All of the members of Walnut's Board of Directors have indicated their
intention to vote the Walnut Common Stock owned by them in favor of each of the
proposals at the Special Meeting. As of the Record Date, members of the Board of
Directors owned [585,325] shares of Walnut Common Stock entitled to vote at the
Special Meeting, representing approximately [17.03]% of the shares of Walnut
Common Stock issued and outstanding on the Record Date and entitled to vote at
the Special Meeting. In addition, pursuant to the Merger Agreement, each of
Windy City, Inc., The Holding Company and Kanter Family Foundation, entities
affiliated with certain officers and directors of Walnut (the "Principal Walnut
Stockholders"), have entered into a voting agreement (the "Voting Agreement")
pursuant to which they have agreed to vote their shares of Walnut Common Stock
in favor of each of the proposals at the Special Meeting. As of the Record
Date, the Principal Walnut Stockholders collectively owned [197,044] shares of
Walnut Common Stock entitled to vote at the Special Meeting, representing
approximately [7.14]% of the shares of Walnut Common Stock issued and
outstanding on the Record Date and entitled to vote at the Special Meeting. See
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.")
WALNUT'S 1998 ANNUAL REPORT ON FORM 10-K ("ANNUAL REPORT"), INCLUDING
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, WAS MAILED TO
STOCKHOLDERS ON OR ABOUT APRIL 30, 1999. WALNUT'S QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 (THE "QUARTERLY REPORT"),
INCLUDING FINANCIAL STATEMENTS FOR SUCH PERIOD, WAS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION (THE "SEC") ON OR ABOUT MAY 17, 1999. WALNUT'S QUARTERLY
REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 (ALSO A
"QUARTERLY REPORT"), INCLUDING FINANCIAL STATEMENTS FOR SUCH PERIOD, WAS FILED
WITH THE SEC ON OR ABOUT AUGUST , 1999. THE ENTIRE ANNUAL REPORT AND THE
QUARTERLY REPORTS, HOWEVER, ARE NOT PART OF THE PROXY SOLICITATION MATERIAL.
ADDITIONAL COPIES OF THE ANNUAL REPORT, THE QUARTERLY REPORT AND ANY OTHER
QUARTERLY REPORT ON FORM 10-Q, TOGETHER WITH EXHIBITS, ARE AVAILABLE WITHOUT
CHARGE UPON REQUEST IN WRITING TO WALNUT FINANCIAL SERVICES, INC., 8000 TOWERS
CRESCENT DRIVE, SUITE 1070, VIENNA, VIRGINIA 22182, ATTENTION: INVESTOR
RELATIONS, OR BY FILLING OUT THE ENCLOSED SELF-ADDRESSED POSTAGE PAID CARD
SPECIFICALLY DESIGNED FOR REQUESTING A COPY OF THE APPLICABLE ANNUAL REPORT OR
QUARTERLY REPORT.
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"), THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
WHEN USED IN THIS PROXY STATEMENT, THE WORDS "ANTICIPATE," "BELIEVE,"
"ESTIMATE," "MAY," "INTEND," "EXPECT" AND SIMILAR EXPRESSIONS IDENTIFY CERTAIN
OF SUCH FORWARD-LOOKING STATEMENTS. ACTUAL PERFORMANCE OR ACHIEVEMENTS COULD
DIFFER MATERIALLY FROM THOSE CONTEMPLATED, EXPRESSED OR IMPLIED HEREIN.
3
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
SUMMARY.......................................................................................................... 1
ACTION TO BE TAKEN; VOTES REQUIRED....................................................................... 1
THE COMPANIES............................................................................................ 1
Walnut............................................................................................ 1
Tower Hill........................................................................................ 2
THCG.............................................................................................. 2
Newco............................................................................................. 3
MEETING INFORMATION...................................................................................... 3
THE MERGERS.............................................................................................. 3
Merger 1.......................................................................................... 3
Merger 2.......................................................................................... 3
Consideration to be Received in the Mergers....................................................... 3
Representations and Warranties.................................................................... 4
Covenants......................................................................................... 4
Conditions to Consummation of the Mergers......................................................... 5
Termination....................................................................................... 5
Certain Effects of the Mergers.................................................................... 6
Voting Agreement.................................................................................. 6
Opinion of Financial Advisor...................................................................... 7
Rights of Dissenting Stockholders................................................................. 7
Accounting Treatment of the Mergers............................................................... 7
Certain Federal Income Tax Consequences of the Mergers............................................ 7
Financial Data.................................................................................... 7
THE BDC DEREGISTRATION................................................................................... 7
THE CAPITAL INVESTMENT................................................................................... 7
THE DEBT CONVERSION AND COMPENSATION SATISFACTION........................................................ 8
THE UPLP ACQUISITION..................................................................................... 8
THE THCG STOCK INCENTIVE PLAN............................................................................ 8
RISK FACTORS..................................................................................................... 8
Conflicts of Interest of Certain Current and Proposed Directors and Executive Officers............ 8
Concentration of Share Ownership.................................................................. 8
Potential Adverse Effects of Combining Operations................................................. 8
Inability to Accurately Predict Transaction Costs................................................. 9
Changes in Senior Management and Control of Board of Directors.................................... 9
Limitations on Changes in Control................................................................. 9
No Dividends......................................................................................10
Availability of Significant Amounts of THCG Common Stock for Sale.................................10
Sale of Walnut Common Stock Below Current Net Asset Value.........................................10
Dependence on Key Personnel.......................................................................10
Limited Operating History.........................................................................10
Uncertainty of the Industry.......................................................................10
NASD Regulation of Tower Hill.....................................................................11
PROPOSAL I APPROVAL OF THE AGREEMENT AND PLANS OF MERGER AND THE MERGERS.........................................12
BUSINESS OF WALNUT.......................................................................................13
</TABLE>
i
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<TABLE>
<S> <C>
General...........................................................................................13
Walnut Capital....................................................................................14
UPLP..............................................................................................15
Pacific Financial and Inland Financial............................................................15
Walnut Funds......................................................................................16
WalnutConsulting..................................................................................16
Competition.......................................................................................16
BDC Regulation....................................................................................16
SBA Regulation....................................................................................19
Employees.........................................................................................21
Property..........................................................................................21
Legal Proceedings.................................................................................21
BUSINESS OF TOWER HILL...................................................................................21
General...........................................................................................21
History...........................................................................................21
Services..........................................................................................21
Commissions.......................................................................................23
Competitive Conditions............................................................................24
Clients...........................................................................................24
Government Regulation.............................................................................24
Employees.........................................................................................25
Properties........................................................................................25
Legal Proceedings.................................................................................25
Certain Relationships and Related Transactions....................................................25
BACKGROUND OF THE MERGERS................................................................................27
PRINCIPAL REASONS FOR THE MERGERS........................................................................28
POTENTIAL NEGATIVE FACTORS ASSOCIATED WITH THE MERGER....................................................28
OPINION OF FINANCIAL ADVISOR.............................................................................29
THE MERGER AGREEMENT.....................................................................................29
General Description...............................................................................29
Effective Dates of the Mergers....................................................................29
Conversion of Securities..........................................................................30
Treatment of Stock Options........................................................................30
Exchange of Stock Certificates....................................................................31
Effect of the Mergers on Certain Corporate Matters................................................32
Representations and Warranties....................................................................32
Covenants.........................................................................................33
Conditions to Consummation of the Mergers.........................................................38
Termination.......................................................................................40
Amendment and Waiver..............................................................................41
Fees and Expenses.................................................................................42
EQUITY OWNERSHIP OF THCG.................................................................................42
MANAGEMENT OF THCG FOLLOWING THE MERGERS.................................................................43
DESCRIPTION OF THCG CAPITAL STOCK........................................................................45
General...........................................................................................45
THCG Common Stock.................................................................................45
Preferred Stock...................................................................................45
DELISTING AND DEREGISTRATION OF THE WALNUT COMMON STOCK; LISTING OF THCG COMMON STOCK ISSUED IN
CONNECTION WITH THE MERGER...............................................................................45
RESALES OF THCG COMMON STOCK ISSUED IN CONNECTION WITH MERGER 1..........................................46
</TABLE>
ii
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<TABLE>
<S> <C>
COMPARISON OF RIGHTS OF HOLDERS OF WALNUT COMMON STOCK BEFORE AND AFTER THE MERGERS......................46
Capital Stock.....................................................................................46
Number and Election of Directors..................................................................46
Action by Written Consent.........................................................................47
Special Meetings..................................................................................47
Matters to be Considered at Annual Meetings.......................................................47
Amendment of Bylaws...............................................................................47
Waiver of Notice..................................................................................47
Certain Differences Between Delaware and Utah Corporate Law.......................................48
INTERESTS OF CERTAIN PERSONS IN THE MERGERS..............................................................52
Receipt of Securities.............................................................................52
Debt Conversion and Compensation Satisfaction.....................................................53
UPLP Acquisition..................................................................................53
Consulting Agreements.............................................................................53
Employment Agreements.............................................................................54
Board Positions...................................................................................56
Indemnification and Insurance.....................................................................56
DISSENTERS'RIGHTS OF APPRAISAL...........................................................................56
ACCOUNTING TREATMENT OF THE MERGERS......................................................................56
REGULATORY APPROVALS.....................................................................................56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS...................................................57
MARKET PRICE INFORMATION AND DIVIDEND POLICY.............................................................57
Market Price Information of Walnut................................................................57
Market Price Information of Tower Hill............................................................58
Dividend Policy...................................................................................58
PRO FORMA PER SHARE DATA.................................................................................58
SELECTED FINANCIAL INFORMATION...........................................................................59
Walnut Financial Information......................................................................59
Tower Hill Financial Data.........................................................................60
Pro Forma Combined Financial Data.................................................................61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS........................63
OVERVIEW.................................................................................................63
RESULTS OF OPERATIONS............................................................................................63
Historical Operating Results of Walnut............................................................63
LIQUIDITY AND CAPITAL RESOURCES..........................................................................65
Liquidity and Capital Resources of Walnut Capital.................................................65
Liquidity and Capital Resources of Walnut (excluding Walnut Capital)..............................66
INVESTMENT PORTFOLIO CHANGES.............................................................................67
YEAR 2000 COMPLIANCE.....................................................................................67
CAPITALIZATION OF WALNUT AND TOWER HILL..................................................................68
PROPOSAL II APPROVAL OF THE BDC DEREGISTRATION...................................................................69
GENERAL..................................................................................................69
1940 ACT REGULATIONS APPLICABLE TO BUSINESS DEVELOPMENT COMPANIES........................................69
REASONS FOR PROPOSED WITHDRAWAL AS A BDC.................................................................70
EFFECT OF WITHDRAWAL OF ELECTION.........................................................................71
</TABLE>
iii
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<TABLE>
<S> <C>
PROPOSAL III APPROVAL OF THE CAPITAL INVESTMENT..................................................................73
REASONS FOR THE CAPITAL INVESTMENT.......................................................................73
EFFECT OF THE CAPITAL INVESTMENT.........................................................................73
PROPOSAL IV APPROVAL OF THE DEBT CONVERSION......................................................................74
DESCRIPTION OF THE DEBT CONVERSION.......................................................................74
REASONS FOR THE DEBT CONVERSION..........................................................................74
1940 ACT REGULATIONS RELATING TO AFFILIATE TRANSACTIONS..................................................75
PROPOSAL V APPROVAL OF THE UPLP ACQUISITION......................................................................76
UPLP.....................................................................................................76
ACQUISITION OF THE REMAINING UPLP PARTNERSHIP INTERESTS..................................................76
REASONS FOR THE UPLP ACQUISITION.........................................................................76
DISSOLUTION OF UPLP......................................................................................77
PROPOSAL VI APPROVAL OF THE THCG STOCK INCENTIVE PLAN............................................................78
DESCRIPTION OF THE THCG STOCK INCENTIVE PLAN.............................................................78
General Description of the THCG Stock Incentive Plan..............................................78
Administration of the THCG Stock Incentive Plan...................................................78
Eligibility to Participate in the THCG Stock Incentive Plan.......................................78
ISSUANCE OF 1,250,000 OPTIONS............................................................................79
RESTRICTED STOCK GRANTED PURSUANT TO THE THCG OPTION PLAN................................................79
NEW PLAN BENEFITS........................................................................................80
Federal Income Tax Consequences...................................................................80
PRINCIPAL REASONS TO ADOPT THE THCG STOCK INCENTIVE PLAN.................................................81
DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT.......................................................................82
Section 16(a) Beneficial Ownership Reporting Compliance...........................................84
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT.......................................................85
SUMMARY COMPENSATION.....................................................................................85
OPTIONS AND OTHER AWARDS.................................................................................85
EMPLOYMENT AGREEMENTS WITH MANAGEMENT............................................................................85
STOCK PERFORMANCE GRAPH..........................................................................................85
REPORT OF THE COMPENSATION COMMITTEE.............................................................................86
DIRECTOR COMPENSATION............................................................................................87
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION......................................................87
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRIOR TO GIVING EFFECT TO THE MERGERS.............86
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................91
OTHER MATTERS....................................................................................................92
Solicitation of Proxies...........................................................................92
Stockholder Proposals.............................................................................92
Other Matters.....................................................................................92
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
</TABLE>
EXHIBITS
AGREEMENT AND PLANS OF MERGER BY AND BETWEEN WALNUT FINANCIAL SERVICES, INC. AND
THCG, INC., AND BY AND AMONG THCG, INC., TOWER
iv
<PAGE> 11
HILL ACQUISITION CORP., AND TOWER HILL SECURITIES, INC................EXHIBIT A
FAIRNESS OPINION..................................................... EXHIBIT B
THCG, INC. 1999 STOCK INCENTIVE PLAN................................. EXHIBIT C
v
<PAGE> 12
SUMMARY
This summary highlights selected information from this Proxy Statement
and may not contain all of the information that is important to stockholders. To
understand fully the transactions discussed in this Proxy Statement and for a
more complete description of the legal terms of those transactions, stockholders
should carefully read this entire Proxy Statement and the related documents
referred to within this Proxy Statement. In particular, stockholders should
review carefully the Risk Factors presented on pages 8 through 10 of this Proxy
Statement.
Certain capitalized terms used and not defined in this summary are
defined elsewhere in this Proxy Statement.
ACTION TO BE TAKEN; VOTES REQUIRED
At the Special Meeting, the Walnut stockholders will be asked to vote
to approve and adopt the Merger Agreement and the transactions contemplated
therein, including Merger 1, the issuance of THCG Common Stock in connection
with Merger 2, the BDC Deregistration, the Capital Investment, the Debt
Conversion, the Compensation Satisfaction, the UPLP Acquisition and the adoption
of the THCG Stock Incentive Plan. The affirmative vote of a majority of the
issued and outstanding shares of Walnut Common Stock that are entitled to vote
is required to approve the Merger Agreement, Merger 1 and the THCG Stock
Incentive Plan. The affirmative vote of a majority (as defined under the 1940
Act) of holders of outstanding shares entitled to vote is required to approve
the BDC Deregistration. The affirmative vote of a majority (as defined under the
1940 Act) of both (a) holders of outstanding shares entitled to vote and (b)
holders of outstanding shares entitled to vote not held by affiliated persons
are required to approve the issuance of THCG Common Stock in connection with
Merger 2, the Capital Investment, the Debt Conversion, the Compensation
Satisfaction and the UPLP Acquisition. Pursuant to the 1940 Act, "majority"
means the lesser of (a) 67% or more of voting securities if more than 50% are
present in person or by proxy or (b) more than 50% of outstanding voting
securities.
All of the members of Walnut's Board of Directors have indicated their
intention to vote the Walnut Common Stock owned by them in favor of each of the
proposals at the Special Meeting. Walnut's Board of Directors collectively owns
[585,325] shares of Walnut Common Stock (approximately [17.03%] of the shares
outstanding as of the Record Date). In addition, pursuant to the Voting
Agreement, the Principal Walnut Stockholders (each of which is an entity
associated with current officers and directors of Walnut) have agreed to vote
the shares of Walnut Common Stock owned by them in favor of each of the
proposals at the Special Meeting. The Principal Walnut Stockholders collectively
own [197,044] shares of Walnut Common Stock and [45,282] options and warrants to
purchase Walnut Common Stock (approximately [7.14%] of the shares outstanding as
of the Record Date. See "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
THE COMPANIES
WALNUT
Walnut is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a BDC under the 1940 Act. As a BDC, Walnut
has three primary business focuses: (1) investing in start-up and early stage
development companies, (2) operating an investment vehicle that specializes in
bridge financing to small to medium-sized companies and (3) providing accounts
receivable-based commercial financing, or factoring, and related services to
small and medium-sized businesses. Walnut's principal executive offices are
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located at 8000 Towers Crescent Drive, Suite 1070, Vienna, Virginia, 22182, and
its phone number is (703) 448-3771.
Walnut currently engages in its investment business through its
wholly-owned subsidiary, Walnut Capital. Walnut Capital was formed in 1980 for
the purpose of operating as a Small Business Investment Company ("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"). In the past, Walnut also made investments through its wholly-owned
subsidiary, Walnut Funds. Through its wholly-owned subsidiary, WGP Management,
Inc., a Delaware corporation, Walnut Funds indirectly provides investment
management services to Walnut Growth Partners Limited Partnership, an Illinois
limited partnership, an investment fund. Through its wholly-owned subsidiary,
Walnut GP, LLC, Walnut Funds owns a 1% general partnership interest in Walnut
Growth. Walnut Growth did not make any investments in 1998 or 1999, and Walnut
does not expect Walnut Growth to make any further investments.
Walnut pursues its bridge financings through its wholly-owned
subsidiary, Universal Bridge. Universal Bridge owns 50% of the outstanding
general partnership interests and approximately 83% of the outstanding limited
partnership interests of UPLP.
Walnut engages in its accounts receivable factoring business through
its wholly-owned subsidiaries, Pacific Financial Services Corporation, a
Washington corporation based in Bellevue, Washington ("Pacific Financial"),
which was acquired by Walnut in January 1998, and Inland Financial Corporation,
a Washington corporation based in Spokane, Washington ("Inland Financial"),
which was acquired by Walnut in October 1998. Inland Financial and Pacific
Financial are principally engaged in providing receivables-based commercial
financing and related fee-based credit, collection and management information
services to small and medium-sized businesses. Inland Financial and Pacific
Financial generally provide financing to their clients by purchasing accounts
receivable owed to the clients by the clients' customers. Inland Financial and
Pacific Financial also provide financing by guaranteeing amounts due under
letters of credit issued to their clients which are collateralized by accounts
receivable and other assets and provide equipment and inventory financing to
some of their factoring clients.
TOWER HILL
Tower Hill, a broker-dealer registered with and regulated by the
National Association of Securities Dealers ("NASD"), provides investment banking
services to early-stage to post-IPO Internet and new media businesses. These
services include initiating, advising on and implementing private placements of
equity and debt, corporate restructurings, recapitalizations and refinancings,
mergers and acquisitions, sales and divestitures, and strategic alliances and
joint ventures. Tower Hill also provides public offering advisory services,
valuations and fairness opinions, and industry and competitive research
analysis. Tower Hill aims to provide each client with quality solutions to
achieve its strategic objectives, to assist the client with the implementation
and execution of transactions and strategic initiatives and, ultimately, to
enhance each client's long-term shareholder value.
Tower Hill conducts its activities from offices located in New York
City. In addition, Tower Hill recently expanded its geographical coverage and
presence by establishing a representative presence in Israel.
The principal executive offices of Tower Hill are located at 650
Madison Avenue, 21st Floor, New York, New York, 10022, and its phone number is
(212) 223-0440.
THCG
THCG is a Delaware corporation and a wholly-owned subsidiary of Walnut
that was formed for the purpose of facilitating the Mergers.
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NEWCO
Newco is a New York corporation and a wholly-owned subsidiary of THCG
that was formed for the purpose of facilitating the Mergers.
MEETING INFORMATION
This Proxy Statement is being furnished to stockholders of Walnut in
connection with the solicitation of proxies by the Board of Directors of Walnut
for use at the Special Meeting to be held [time and place info], and at any
postponement or adjournment of the Special Meeting.
Only holders of record of Walnut Common Stock at the close of business
on [record date] are entitled to notice of and to vote at the Special Meeting.
THE MERGERS
MERGER 1
In Merger 1, Walnut is to merge with and into THCG, with THCG
continuing as the surviving corporation under the name "THCG, Inc." Merger 1
shall become effective (the "First Effective Time") upon the proper filing of
articles of merger with the Utah Department of Commerce, Division of
Corporations and Commercial Codes and a certificate of merger with the Delaware
Secretary of State. At the First Effective Time, each share of Walnut Common
Stock issued and outstanding immediately prior to the effective time of Merger 1
is to be automatically converted into one share of THCG Common Stock. The
purpose of Merger 1 is to reincorporate Walnut as a Delaware Corporation. For a
further discussion of Merger 1, see "THE MERGER AGREEMENT--General Description."
MERGER 2
In Merger 2, Newco is to merge with and into Tower Hill, with Tower
Hill continuing as the surviving corporation and a wholly-owned subsidiary of
THCG under the name "Tower Hill Securities, Inc." Merger 2 shall become
effective (the "Second Effective Time," and together with the First Effective
Time, the "Effective Time of the Mergers") upon the proper filing of a
certificate of merger with the New York Secretary of State. At the effective
time of Merger 2 (the "Second Effective Time" and, together with the First
Effective Time, the "Effective Time of the Mergers"), each share of common stock
of Newco, par value $0.10 per share (the "Newco Common Stock"), is to be
automatically converted into one share of common stock of Tower Hill, par value
$0.10 per share ("Tower Hill Common Stock"), and each share of Tower Hill Common
Stock issued and outstanding immediately prior to the Second Effective Time is
to be converted into the right to receive 37,228.145 shares of THCG Common Stock
plus additional shares as described in the Merger Agreement. As a result of
Merger 2, the former stockholders of Tower Hill will own approximately 39% of
the THCG Common Stock outstanding after Merger 2, after taking into account the
Capital Investment (assuming 3,000,000 shares are issued in the Capital
Investment and excluding options and warrants). For a further discussion of
Merger 2, see "THE MERGER AGREEMENT--General Description."
CONSIDERATION TO BE RECEIVED IN THE MERGERS
In Merger 1, the stockholders of Walnut will receive one share of THCG
Common Stock for each share of Walnut Common Stock held by them.
In Merger 2, the stockholders of Tower Hill will receive 37,228.145
shares of THCG Common Stock for each share held by them. Additional shares may
be issued to the stockholders of Tower Hill as described in the Merger
Agreement.
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REPRESENTATIONS AND WARRANTIES
Each of Walnut, THCG and Newco, on the one hand, and Tower Hill, on the
other hand, has made certain customary representations and warranties in the
Merger Agreement relating to such matters as (a) corporate organization; (b)
capital structure; (c) financial statements; (d) compliance with laws; and (e)
title to and condition of assets, along with other matters. None of these
representations and warranties will survive the closing of the Merger
Agreement. For a further description of these representations and warranties,
see "THE MERGER AGREEMENT -- Representations and Warranties."
COVENANTS
Each of Walnut and Tower Hill made certain covenants in the Merger
Agreement relating to the conduct of their respective businesses prior to the
Mergers.
In addition, Walnut has made numerous covenants to use its commercially
reasonable efforts to effect certain transactions prior to the closing of the
Merger Agreement, provided that, to the extent necessary, the BDC
Deregistration has been effected:
- The deregistration of Walnut, Walnut Capital, Walnut Funds and
Universal Bridge as BDCs under the 1940 Act;
- The completion of the Capital Investment;
- The completion of the Debt Conversion and the Compensation
Satisfaction;
- The completion of the Compensation Satisfaction;
- The sale by Walnut to Mr. Burton Kanter, and the purchase by Mr.
Burton Kanter from Walnut, of any and all rights Walnut or its
subsidiaries may have under its United Airlines PassPlus Program
for a purchase price of $5,000, payable in cash;
- The dissolution by Universal Bridge of UPLP following the UPLP
Acquisition;
- The relinquishment by Walnut Capital of its license from the SBA
to operate as an SBIC;
- The termination of the oral sublease between Walnut and Windy
City, Inc., an affiliate of Walnut ("Windy City"), for premises
located in Vienna, Virginia;
- The entering into of consulting agreements between (a) Chicago
Advisory Group and Inland Financial and (b) Windy City and THCG;
- The submission for stockholder approval by Walnut of the THCG
Stock Incentive Plan, and subject to stockholder approval of the
THCG Stock Incentive Plan, the consummation of the Mergers, and,
if required, the effectiveness of the BDC Deregistration, the
grant of options to purchase up to 1,250,000 shares of THCG Common
Stock to certain officers, directors and employees of Walnut and
certain principals and officers of Tower Hill;
- The purchase by Walnut of outstanding options to purchase Walnut
Common Stock held by certain officers and directors of Walnut;
- The consent and acknowledgment of certain executive officers of
Walnut that the sole benefit to which they are entitled under
Walnut's Management Incentive Plan, is a cash bonus not to exceed
$90,000, in the aggregate;
- The approval of the listing of the THCG Common Stock on the Nasdaq
National Market; and
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- Upon the later to occur of (a) the approval of the Merger by
Walnut's stockholders or (b) the issuance by the SEC of a notice
of an application for deregistration under Section 8(f) of the
1940 Act, the sale by Walnut of its marketable securities and the
revaluation of its portfolio of non-marketable securities, as
appropriate.
In addition, Tower Hill has made certain covenants to effect the following
matters:
- To use commercially reasonable efforts to cause Joseph D. Mark,
Shai Novik and Adi Raviv, who are the current principals and
officers of Tower Hill, to enter into employment agreements with
THCG;
- The consent of Shai Novik to the cancellation of options to
purchase Tower Hill Common Stock held by him;
- The redemption or cancellation of all outstanding shares of
preferred stock of Tower Hill;
- The creation by Tower Hill of a wholly-owned subsidiary in the
form of a limited liability company ("Tower Hill LLC") and (a) the
contribution by Tower Hill of its portfolio of investment
securities to Tower Hill LLC, (b) the merger of Walnut Capital,
Walnut Funds and Universal Bridge with and into Tower Hill LLC;
and (c) if necessary in connection with the BDC Deregistration,
the dividend by Tower Hill of its membership interest in Tower
Hill LLC to THCG;
- The amendment of the organizational documents of Tower Hill
Capital Group, LLC, a New York limited liability company owned by
the principals of Tower Hill, such that its name will no longer
include the words "Tower Hill;" and
- The receipt by Adi Raviv of waivers from each of the stockholders
of Softwatch Ltd., permitting Mr. Raviv to transfer shares of
Softwatch to Tower Hill for a purchase price that includes a
component of debt forgiveness, provided, that if such waivers
cannot be obtained, the cash component of the purchase price of
the Softwatch shares shall remain an asset of Tower Hill and Tower
Hill shall forgive Mr. Raviv's indebtedness to Tower Hill.
The covenants of Walnut and Tower Hill are discussed further in the Proxy
Statement under "THE MERGER AGREEMENT--Covenants."
CONDITIONS TO CONSUMMATION OF THE MERGERS
The respective obligations of the parties to consummate the Mergers are
subject to numerous conditions, including stockholder approval of the Merger
Agreement and the transactions contemplated thereby. In particular, Tower Hill's
obligation to consummate Merger 2 is contingent not only on the consummation of
Merger 1, but also on the satisfaction of the covenants of Walnut and THCG to
effect the transactions related to the Mergers, including the Capital
Investment, the Debt Conversion, the Compensation Satisfaction, the UPLP
Acquisition, the BDC Deregistration and the adoption of the THCG Stock Incentive
Plan. Certain of these conditions are described further under the discussions of
Proposals II through VI in this Proxy Statement.
TERMINATION
The Merger Agreement may be terminated prior to the effective time of
the Mergers as follows: (a) by the mutual written consent of Walnut and Tower
Hill; (b) by either Walnut or Tower Hill, if the Mergers have not become
effective on or before December 31, 1999, subject to certain conditions as
provided in the Merger Agreement; (c) by either Walnut or Tower Hill, if any
court or other governmental entity has issued a final order, decree or ruling
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by the Merger Agreement and such order, decree or ruling has become
final and nonappealable; (d) by either Walnut or Tower Hill, if the Merger
Agreement, or any of the related matters submitted to the vote of the Walnut
stockholders fails to receive the requisite vote for adoption at the Special
Meeting, unless Tower Hill waives such requirement in writing; (e) by Tower
Hill, in the event of an uncured,
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material breach by Walnut, THCG or Newco of any material representation,
warranty or covenant in the Merger Agreement; (f) by Walnut, in the event of an
uncured, material breach by Tower Hill of any material representation, warranty
or covenant in the Merger Agreement; or (g) by Walnut, if, prior to the date on
which the Walnut stockholders vote on the Merger Agreement, the Board of
Directors of Walnut approves a merger, liquidation, recapitalization,
consolidation, acquisition or other business combination involving Walnut, which
a majority of the members of the board, including a majority of the members of
the board who are not employed or retained as a consultant by Walnut or any of
its subsidiaries, has determined in good faith and on a reasonable basis, after
consultation with Walnut's outside counsel and financial advisors (i) to be more
favorable to Walnut and its stockholders from a financial point of view than the
transactions contemplated by the Merger Agreement; (ii) is reasonably likely to
be consummated without undue delay; and (iii) would result in a breach of
fiduciary duties of Walnut's Board of Directors under applicable law if not
approved. In the event of a termination pursuant to clause (g) of the preceding
sentence, Walnut shall pay to Tower Hill a termination fee of $500,000 and shall
reimburse Tower Hill for all reasonable out-of-pocket fees and expenses, up to
$300,000, incurred in connection with the Merger Agreement.
CERTAIN EFFECTS OF THE MERGERS
Upon consummation of Merger 1, (a) the separate corporate existence of
Walnut will cease and THCG will continue as the surviving corporation; (b) each
issued and outstanding share of Walnut Common Stock will be converted into one
share of THCG Common Stock; (c) each issued and outstanding share of THCG Common
Stock held by Walnut will be cancelled and retired and cease to exist, without
any conversion thereof; (d) certain outstanding options to purchase shares of
Walnut Common Stock will be repurchased and certain outstanding options to
purchase shares of Walnut Common Stock and the Class A Warrants to purchase
shares of Walnut Common Stock will be assumed by THCG and converted into options
or warrants, as appropriate, to purchase shares of THCG Common Stock on
substantially the same terms and conditions as in effect immediately prior to
the First Effective Time; (e) the certificate of incorporation of THCG, as in
effect immediately prior to the First Effective Time, will be the certificate of
incorporation of the surviving corporation; (f) the by-laws of THCG, as in
effect immediately prior to the First Effective Time, will be the by-laws of the
surviving corporation; (g) the directors of THCG immediately preceding the First
Effective Time will be the initial directors and officers of the surviving
corporation and such directors will fill vacancies in the board as provided in
the Merger Agreement; and (h) the officers of THCG immediately preceding the
First Effective Time shall become the officers of the surviving corporation
until the Second Effective Time, at which time they shall resign and be replaced
by Joseph D. Mark, Adi Raviv and Shai Novik. The effect of these changes, as
well as changes resulting from the change in Walnut's domicile from Utah to
Delaware, are discussed further under "THE MERGER AGREEMENT--Comparison of
Rights of Holders of Walnut Common Stock before and after the Mergers" and
"--Management of THCG Following the Mergers."
Upon consummation of Merger 2, (a) the separate corporate existence of
Newco will cease and Tower Hill will continue as the surviving corporation and a
wholly-owned subsidiary of THCG; (b) each issued and outstanding share of Newco
Common Stock will be converted into one share of Tower Hill Common Stock; (c)
each issued and outstanding share of Tower Hill Common Stock will be converted
into 37,228.145 shares of THCG Common Stock plus additional shares as provided
in the Merger Agreement; (d) each outstanding option to purchase shares of Tower
Hill Common Stock that is held by Shai Novik will be canceled, with the intent
that Shai Novik shall receive a grant of 372,281.45 restricted shares of THCG
Common Stock under the THCG Stock Incentive Plan; (e) the certificate of
incorporation of Tower Hill, as in effect immediately prior to the Second
Effective Time, will be the certificate of incorporation of the surviving
corporation; (f) the by-laws of Tower Hill, as in effect immediately prior to
the Second Effective Time, will be the by-laws of the surviving corporation; (g)
the directors and officers of Tower Hill immediately preceding the Second
Effective Time will be the directors and officers of the surviving corporation;
and (h) an aggregate of 1,250,000 options to purchase THCG Common Stock will be
issued to the current officers and directors of Walnut and Tower Hill.
VOTING AGREEMENT
As a condition to entering into the Merger Agreement, Tower Hill
required that the Principal Walnut Stockholders execute the Voting Agreement
with Tower Hill. In the Voting Agreement, each Principal Walnut
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Stockholder (each of which is an entity affiliated with an officer or director
of Walnut) agreed to vote its shares in favor of the Merger Agreement and the
transactions contemplated therein, including the Merger.
OPINION OF FINANCIAL ADVISOR
Gruntal & Co., L.L.C. ("Gruntal"), Walnut's financial advisor, has
rendered its opinion to Walnut's Board of Directors that the aggregate
consideration to be paid by Walnut in connection with the Mergers is fair to
Walnut's stockholders from a financial point of view. This opinion (a copy of
which is attached to this Proxy Statement as Appendix B) should be read in its
entirety with respect to the assumptions made, matters considered and the limits
of the review undertaken by Gruntal in rendering such opinion. See "OPINION OF
FINANCIAL ADVISOR."
RIGHTS OF DISSENTING STOCKHOLDERS
Under Utah law, stockholders of Walnut are not entitled to dissenter's
rights of appraisal in connection with Merger 1. Under Delaware Law, there are
no dissenter's rights in connection with the issuance of THCG Common Stock in
Merger 2.
ACCOUNTING TREATMENT OF THE MERGERS
The Mergers will be accounted for as a "purchase" transaction, as a
reverse acquisition.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
Each Merger will constitute a tax-free reorganization under Section 368
of the Internal Revenue Code of 1986 as currently in effect (the "Code").
Certain tax consequences of the Mergers are discussed further under "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS." Stockholders are urged to
consult their own tax advisors to consider the particular tax consequences of
the Mergers to them.
FINANCIAL DATA
The consolidated historical balance sheets of Walnut and Tower Hill, as
well as pro forma financial information of the combined company after giving
effect to the Mergers, are contained in this Proxy Statement beginning on page
F-1.
THE BDC DEREGISTRATION
Under the Merger Agreement, as a condition precedent to the
consummation of the Mergers, Walnut will file with the SEC an application for an
order pursuant to Section 8(f) of the 1940 Act (the "8(f) Application"), the
purpose of which is to deregister Walnut, Walnut Capital, Walnut Funds and
Universal Bridge as BDCs under the 1940 Act. Following such deregistration, THCG
will conduct business as an operating company and does not intend to be subject
to the 1940 Act, and Walnut Capital, Walnut Funds and Universal Bridge will
merge with and into Tower Hill LLC in an effort to consolidate all of THCG's
portfolio investments into one entity. For a further discussion of the BDC
Deregistration, see "PROPOSAL II -- APPROVAL OF THE BDC DEREGISTRATION."
THE CAPITAL INVESTMENT
Under the Merger Agreement, as a condition precedent to the
consummation of the Mergers, Walnut has agreed to use its commercially
reasonable efforts to issue at least 1,500,000 and up to 3,000,000 shares of
Walnut Common Stock at $2.00 per share in a private placement transaction for
cash to an investor group, consisting solely of accredited investors, which
Walnut Common Stock will subsequently be converted into THCG Common Stock at the
First Effective Time. As a result of the Capital Investment, the investor group
will own approximately [28.7%] of the THCG Common Stock outstanding immediately
following the Second Effective Time if 3,000,000 shares are issued in connection
with
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the Capital Investment, and [16.7%] if 1,500,000 shares are issued in connection
with the Capital Investment (in each case excluding any options or warrants).
For a further discussion of the Capital Investment, see "PROPOSAL III --
APPROVAL OF THE CAPITAL INVESTMENT."
THE DEBT CONVERSION AND COMPENSATION SATISFACTION
Under the Merger Agreement, as a condition precedent to the
consummation of the Mergers, Walnut has agreed to use its commercially
reasonable efforts to convert certain indebtedness and accrued liabilities,
including certain indebtedness owing to affiliates, in the aggregate principal
amount of $1,093,000 (plus any interest accrued thereon) and certain accrued
compensation owed to Burton W. Kanter, into cash or shares of Walnut Common
Stock valued at $2.00 per share, as reasonably determined by Tower Hill. For a
further discussion of the Debt Conversion and the Compensation Satisfaction, see
"PROPOSAL IV -- APPROVAL OF THE DEBT CONVERSION AND THE COMPENSATION
SATISFACTION."
THE UPLP ACQUISITION
Under the Merger Agreement, as a condition precedent to the
consummation of the Mergers, Walnut has agreed to use its commercially
reasonable efforts to cause Universal Bridge to acquire the remaining 17% of the
outstanding limited partnership interests of UPLP in exchange for an amount
equal to the net book value thereof and 50% of the outstanding general
partnership interests of UPLP for up to $134,000, in each case for cash or
Walnut Common Stock valued at $2.00 per share, as reasonably determined by Tower
Hill, and to subsequently dissolve UPLP. For a further discussion of the UPLP
Acquisition, see "PROPOSAL V -- APPROVAL OF THE UPLP ACQUISITION."
THE THCG STOCK INCENTIVE PLAN
Under the Merger Agreement, Walnut has agreed, prior to the First
Effective Time, to adopt, subject to the approval by Walnut stockholders, a
stock incentive plan, subject to the approval of the stock incentive plan by the
Walnut stockholders, providing for the issuance of incentive awards covering up
to 2,250,000 shares of THCG Common Stock and upon the consummation of the
Mergers and the effectiveness of the BDC Deregistration, to grant options to
purchase up to 1,250,000 shares of THCG Common Stock to certain officers,
directors and employees of Walnut and certain principals and officers of Tower
Hill. For a further discussion of the THCG Stock Incentive Plan, see "PROPOSAL
VI -- APPROVAL OF THE THCG STOCK INCENTIVE PLAN."
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RISK FACTORS
Walnut stockholders should carefully consider, among other things, the
following risk factors before voting on the proposals set forth in this Proxy
Statement.
CONFLICTS OF INTEREST OF CERTAIN CURRENT AND PROPOSED DIRECTORS AND EXECUTIVE
OFFICERS
There are several conflicts of interest relating to the transactions
proposed in this Proxy Statement because certain members of Walnut's current
Board of Directors have certain interests in, and will receive certain benefits
from, those transactions that are in addition to the interests of and benefits
to be received by the Walnut stockholders in general. For example, three of the
current executive officers and board members of Walnut have been guaranteed
representation on THCG's Board of Directors, and certain entities affiliated
with executive officers of Walnut will enter into consulting agreements in
connection with the Mergers. Further, in connection with Merger 1, THCG has
agreed to continue directors' and officers' insurance coverage of those persons
who are currently covered by Walnut's directors' and officers' liability
insurance for a period of three years after the First Effective Time. See "THE
MERGER AGREEMENT--Interests of Certain Persons in the Mergers" and
"--Covenants--Indemnification and Insurance."
In addition, pursuant to the Merger Agreement, Walnut has agreed to convert
certain debts and accrued liabilities of Walnut and its subsidiaries, and
liabilities owing to certain affiliates of Walnut, into cash or Walnut Common
Stock valued at $2.00 per share and to satisfy the accrued compensation of
Burton W. Kanter, the Chairman of Walnut with cash or Walnut Common Stock valued
at $2.00 per share. See "THE MERGER AGREEMENT--Related Transactions and
Undertakings" and "PROPOSAL III--APPROVAL OF THE DEBT CONVERSION AND THE
COMPENSATION SATISFACTION."
CONCENTRATION OF SHARE OWNERSHIP
Immediately following the transactions discussed in this Proxy Statement,
the two current Tower Hill stockholders will collectively beneficially own
approximately 37% of the issued and outstanding shares of THCG Common Stock
(assuming the issuance of 3,000,000 shares in the Capital Investment). In
addition, Shai Novik, an employee of Tower Hill, will receive 372,281.45
restricted shares of THCG Common Stock in connection with Merger 2. His receipt
of these shares will result in the ownership by former principals and employees
of Tower Hill of 39% of the THCG Common Stock after consummation of the Mergers,
the Capital Investment and the other transactions contemplated by the Merger
Agreement (assuming the issuance of 3,000,000 shares in the Capital Investment).
Accordingly, following the consummation of the Mergers, a large block of the
THCG Common Stock will be held by a small number of individuals. As a result,
current Walnut stockholders will experience substantial dilution of their voting
power with respect to matters submitted to THCG's stockholders for approval.
POTENTIAL ADVERSE EFFECTS OF COMBINING OPERATIONS
Walnut's Board of Directors elected to approve the Merger Agreement with
the expectation that the Mergers will result in a number of benefits to Walnut,
including operating efficiencies, revenue enhancements and other synergies.
However, as a result of the Mergers, the management of the combined company will
be faced with unfamiliar business issues. Following the consummation of the
Mergers, Walnut's business will change from that of a BDC under the 1940 Act to
that of an operating company. In addition, pursuant to Merger 2, Tower Hill,
which will continue to operate as a broker-dealer under the rules of NASD, will
become a wholly-owned subsidiary of THCG, adding a new business line to THCG.
Furthermore, the current management of Tower Hill, all of whom will take on
management positions with THCG upon consummation of Merger 2, have no experience
with Walnut's current business lines, including its financing and investment
operations. While the consulting agreements to be entered into between THCG and
Windy City (an entity of which Joel S. Kanter, the President and Chief Executive
Officer of Walnut, is president) and between Inland Financial and Chicago
Advisory Group (an entity of which Robert Mauer, the Chief Financial Officer and
Treasurer of Walnut, is an employee) will give the new management of THCG some
assistance with learning Walnut's current business, these consulting agreements
will expire after twelve months unless renewed, and there is no assurance that
they will be renewed. Therefore, in addition to the standard integration
problems that may arise as the entities' operations are combined (discussed
below), the management of
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the combined company may have to spend significant amounts of time learning the
basic operations of the various business lines. The failure to familiarize
themselves with the changes in the nature of the business could have a material
adverse effect on the business, financial condition and operations of the
combined company following the Mergers.
In addition, integrating the operations and personnel of Tower Hill
into Walnut will be a complex process, and there can be no assurance that costs
or other factors associated with the integration of Tower Hill and Walnut will
not adversely effect future combined results of operations. The diversion of
management's attention and any difficulties encountered in the process of
combining the companies could cause the disruption of, or a loss of momentum in,
the activities of the combined company's business. Additionally, the integration
of the separate business enterprises may cause substantial fluctuations in the
operating results of the combined company for the foreseeable future. The
inability to successfully integrate the operations and personnel of the
companies, or any significant delay in achieving integration, could have a
material adverse effect on the combined company's business.
INABILITY TO ACCURATELY PREDICT TRANSACTION COSTS
Walnut's Board of Directors estimates that, as a result of the Mergers,
Walnut will incur transaction costs of between $600,000 and $1,000,000,
including Nasdaq National Market listing fees, fees in connection with obtaining
the fairness opinion discussed below and legal and accounting fees. Walnut will
be forced to bear most of these costs whether or not the transactions
contemplated by the Merger Agreement are consummated. In addition, the combined
company will incur significant consolidation and integration expenses which
cannot be accurately estimated at this time. The amount of the transaction costs
is a preliminary estimate and is subject to change. Actual transaction costs may
substantially exceed the initial estimates, and, when combined with the expenses
incurred in connection with the consolidation and integration of the companies,
could have an adverse effect on the financial condition and operating results of
the combined company.
CHANGES IN SENIOR MANAGEMENT AND CONTROL OF BOARD OF DIRECTORS
Upon consummation of the Mergers, Joseph D. Mark and Adi Raviv will
become the Co-Chief Executive Officers and directors of THCG. Each of such
individuals is an affiliate of Tower Hill and is not currently an officer,
director or employee of Walnut and as such has had no experience with the
operations of Walnut. As a result of their positions within THCG, these
individuals will have substantial influence and control over matters to be
considered by THCG's Board of Directors and as to those matters that the Board
of Directors determines to submit to the stockholders for consideration. In
addition, as Co-Chief Executive Officers, these individuals will have
substantial influence over the combined company's day-to-day operations.
LIMITATIONS ON CHANGES IN CONTROL
Following the consummation of the transactions discussed in this Proxy
Statement, the bylaws and articles of incorporation of the combined company will
contain a number of provisions that may limit the ability of outside parties to
acquire control of the combined company. Commencing at the Second Effective
Time, THCG will have a staggered board of directors, with three classes of
directors. The terms of the first, second and third classes will expire in the
years 2000, 2001 and 2002, respectively. Board members for each class will be
chosen for a three-year term upon the expiration of the term of the then-current
class, beginning in 2000. The staggered terms for board members may affect
stockholders' ability to affect a change in control of THCG, even if a change in
control would be in the best interests of the combined company. Further, the
Principal Walnut Stockholders have entered into the Voting Agreement, pursuant
to which they have agreed not to transfer their shares of THCG Common Stock for
a period of twelve months after the Second Effective Time, subject to certain
exceptions. In addition, THCG will be subject to the Delaware General
Corporation Law, certain provisions of which prohibit a publicly-held Delaware
corporation from engaging in a broad range of business combinations with a
person who, together with affiliates and associates, owns 15% or more of a
corporation's common stock for three years after the person becomes a 15%
stockholder, unless the business combination is approved in a prescribed manner.
Those provisions could discourage or make more difficult a merger, tender offer
or similar transaction involving THCG.
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NO DIVIDENDS
Walnut has never declared or paid a cash dividend on the Walnut Common
Stock. It is not anticipated that any cash dividends will be paid on the THCG
Common Stock in the near or foreseeable future.
AVAILABILITY OF SIGNIFICANT AMOUNTS OF THCG COMMON STOCK FOR SALE
Between approximately 3,000,000 and 4,025,000 shares of Walnut Common
Stock may be issued in connection with the Capital Investment, the Debt
Conversion, the Compensation Satisfaction and the UPLP Acquisition. These shares
will be converted into shares of THCG Common Stock in Merger 1. Approximately
4,095,096 shares of THCG Common Stock will be issued in connection with Merger
2. Many of these shares will be eligible for resale in the public market one
year after they are issued, subject to certain restrictions, including lock-up
agreements and manner-of-sale restrictions under Rule 144 of the Securities Act,
and substantially all of these shares will be eligible for resale without
significant restriction two years after they are issued. The sale of a
significant portion of these shares could have a material adverse effect on the
market price of the THCG Common Stock. In addition, the [3,350,533] shares of
THCG Common Stock to be issued to the current stockholders of Walnut in Merger 1
will be freely tradeable, other than certain shares subject to the Voting
Agreement and certain shares held by affiliates of THCG, which will be subject
to the resale restrictions of Rule 144.
SALE OF WALNUT COMMON STOCK BELOW CURRENT NET ASSET VALUE
Certain transactions related to the Mergers, including the Capital
Investment, the Debt Conversion, the Compensation Satisfaction and the UPLP
Acquisition, may involve the issuance of Walnut Common Stock for $2.00 per
share. The net asset value of the Walnut Common Stock as of June 30, 1999 is
$2.54 per share. Given the nature of Walnut's assets, which consist primarily of
publicly traded securities and private securities, it is not possible to predict
the net asset value of the Walnut Common Stock as of the First or Second
Effective Times. Therefore, these transactions may involve the sale of stock for
a price below current net asset value. Although the Walnut Board of Directors
believes that $2.00 fairly represents the market value of the Walnut Common
Stock, selling the shares below net asset value may increase the dilutive effect
of the issuance of the Walnut Common Stock on the current Walnut stockholders.
DEPENDENCE ON KEY PERSONNEL
Following the Mergers, THCG will be highly dependent on the services of
its executive officers and other key personnel. Attracting and retaining
qualified personnel is critical to THCG's business plan. Should THCG be unable
to attract and retain the qualified personnel necessary, its ability to
implement its business plan would be limited. Although Joseph D. Mark, Adi
Raviv and Shai Novik will enter into employment agreements with THCG pursuant to
the Merger Agreement, these employment agreements may be terminated by them
under certain circumstances (see "INTERESTS OF CERTAIN PERSONS IN THE MERGERS --
Employment Agreements").
LIMITED OPERATING HISTORY
Tower Hill has a limited operating history, having been acquired by its
principals in April 1998, and its management, while consisting of experienced
investment bankers, has no experience managing a public company.
UNCERTAINTY OF THE INDUSTRY
Tower Hill specializes in advising Internet and new media companies. A
substantial portion of the fees earned by Tower Hill for its financial advice
and advisory services is payable in securities, which, given the relative
newness of the Internet and new media markets, may or may not have value in the
future. In determining the consideration paid in Merger 2, the Walnut Board
considered the value of Tower Hill's portfolio of securities; however, the
values assigned to these securities, given the uncertainties involved, are
necessarily difficult to determine accurately. In addition, the Internet and new
media markets are extremely competitive, and Tower Hill may have to compete with
large investment banks with significantly more resources than those available to
Tower Hill.
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NASD REGULATION OF TOWER HILL
After the Mergers, Tower Hill will continue to be a registered
broker-dealer and member of the NASD. As a result, Tower Hill, its principals,
registered representatives and other associated persons must comply with
applicable federal and state securities laws, rules and regulations, and with
the rules of the NASD. Broker-dealers are subject to regulations which cover
all aspects of the securities business, including sales methods, trade
practices, capital structure, record keeping and conduct of directors, officers
and employees. In addition, Tower Hill is required to maintain a minimum
regulatory net capital and a specified ratio of aggregate indebtedness to net
capital. The failure to comply with, or adverse changes in, the laws or
regulations to which Tower Hill's business is subject, or adverse changes in the
interpretation thereof, could have a material adverse effect on Tower Hill's
business. See "BUSINESS OF TOWER HILL -- Government Regulation."
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PROPOSAL I
APPROVAL OF THE AGREEMENT AND PLANS OF MERGER AND THE MERGERS
Stockholders are being asked to consider and vote upon a proposal to
approve the Merger Agreement by and between Walnut and THCG and by and among
THCG, Newco and Tower Hill and to approve the merger of Walnut into THCG and the
issuance of shares of THCG Common Stock in connection with the subsequent merger
of Newco into Tower Hill.
Under the Merger Agreement, Walnut will be merged with and into THCG on
the terms and conditions contained therein and in accordance with the Revised
Business Corporation Act of the State of Utah (the "Utah BCA") and the General
Corporation Law of the State of Delaware (the "Delaware GCL").
Following the consummation of Merger 1, and upon the satisfaction of
certain conditions, Newco will be merged with and into Tower Hill on the terms
and conditions contained therein and in accordance with the Business Corporation
Law of the State of New York (the "New York BCL").
The Utah BCA requires shareholder approval of Merger 1. Under the Utah
BCA, when a parent corporation merges into a subsidiary corporation, with the
subsidiary continuing as the surviving corporation, the plan of merger must be
approved by a majority of all the votes entitled to be cast on the plan.
Under the Delaware GCL, Merger 2 does not require approval by the
stockholders of THCG. However, the corporate governance rules of the Nasdaq
National Market, on which the THCG Common Stock is to be listed and traded,
require majority stockholder approval of the sale or issuance of common stock,
when (among other circumstances) (1) the sale or issuance will result in a
change of control of the issuer or (2) the sale or issuance of common stock (or
securities convertible into or exchangeable for common stock) takes place in
connection with the acquisition of another company and is equal to or in excess
of (a) 20% of the voting power outstanding before the issuance or (b) 20% of the
number of shares of common stock outstanding before the issuance of the stock or
securities. Merger 2 involves the issuance of 4,095,096 shares of THCG Common
Stock, which is in excess of 20% of the shares issued and outstanding
immediately prior to Merger 2 and the Capital Investment. Therefore, the
issuance of stock in connection with Merger 2 requires approval by the
stockholders of THCG holding a majority of its outstanding shares entitled to
vote. In addition, the 1940 Act requires approval by both the holders of a
majority of outstanding voting securities and approval by the holders of a
majority of outstanding voting securities that are not held by affiliated
persons, of any issuance of stock for less than the current net asset value of
such stock. As of June 30, 1999, Walnut had net assets applicable to outstanding
common shares of $8,510,353.82, and had 3,350,533 shares outstanding, yielding a
net asset value of $2.54 per share. Because the shares issued in connection with
Merger 2 will be valued at $2.00 per share, this transaction requires approval
under the 1940 Act.
If the Merger Agreement and the Mergers are approved by the requisite
stockholder vote, Walnut intends to consummate the Mergers as soon as
practicable thereafter. However, if any of Proposals II-VI contained in this
Proxy Statement is not approved by the requisite stockholder vote, conditions
precedent to the consummation of the Mergers will be unable to be fulfilled,
and, as a result, Walnut will not consummate the Mergers unless such conditions
are waived by Tower Hill. See "THE MERGER AGREEMENT--Covenants" and
"--Conditions to Consummation of the Mergers."
The following discussion is an attempt to summarize the principal
components of the Merger Agreement but does not purport to be an exhaustive
discussion of all of the terms of the Merger Agreement. The discussion contained
in this Proxy Statement is qualified in its entirety by reference to the Merger
Agreement and the exhibits and schedules thereto.
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BUSINESS OF WALNUT
GENERAL
Walnut is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a BDC under the 1940 Act. As such, Walnut
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. Walnut has three primary business focuses: (1)
investing in start-up and early stage development companies, (2) operating an
investment vehicle that specializes in bridge financing to small to medium-sized
companies and (3) providing accounts receivable-based commercial financing, or
factoring, and related services to small and medium-sized businesses. Walnut's
goal is to become a single source for the various financing needs of small- and
medium-sized companies.
Walnut currently engages in its investment business through its
wholly-owned subsidiary, Walnut Capital. Walnut Capital was formed in 1980 for
the purpose of operating as an SBIC under the SBIA and is subject to regulations
promulgated by the SBA pursuant to the provisions of the SBIA. In the past,
Walnut made investments through its wholly-owned subsidiary, Walnut Funds.
Through its wholly-owned subsidiary, WGP Management, Inc., a Delaware
corporation, Walnut Funds indirectly provides investment management services to
Walnut Growth Partners Limited Partnership, an Illinois limited partnership, an
investment fund. Walnut Growth did not make any investments in 1998 or 1999, and
Walnut does not expect Walnut Growth to make any further investments.
Walnut pursues its bridge financings through its wholly-owned
subsidiary, Universal Bridge Fund. Universal Bridge owns 50% of the outstanding
general partnership interests and approximately 83% of the outstanding limited
partnership interests of UPLP.
Walnut engages in its accounts receivable factoring business through
its wholly-owned subsidiaries, Pacific Financial, which was acquired by Walnut
in January 1998, and Inland Financial, which was acquired by Walnut in October
1998. Inland Financial and Pacific Financial are principally engaged in
providing receivables-based commercial financing and related fee-based credit,
collection and management information services. Inland Financial and Pacific
Financial generally provide financing to their clients by purchasing accounts
receivable owed to the clients by the clients' customers. Inland Financial and
Pacific Financial also provide financing by guaranteeing amounts due under
letters of credit issued to their clients which are collateralized by accounts
receivable and other assets and provide equipment and inventory financing to
some of their factoring clients.
In addition to the foregoing primary businesses, Walnut operated a
human resources and quality assurance consulting business through its
wholly-owned subsidiary, Walnut Consulting, Inc., a Delaware corporation
("Walnut Consulting"), during 1997 and part of 1998. The operations of Walnut
Consulting were not significant to the revenues of Walnut.
Background. Walnut was organized under the laws of the State of Utah on
June 26, 1984 under the name DNE Corporation. Walnut began its current existence
on February 27, 1995, when the former shareholders of Walnut Capital acquired
Walnut in a reverse acquisition (the "Business Combination") in which such
shareholders exchanged all of their shares of Walnut Capital common stock for
shares of Walnut's Common Stock. Prior to February 27, 1995, Walnut Capital was
a privately held investment company managed by members of Walnut's current
management.
BDC Election. On October 15, 1997, Walnut and certain of its
subsidiaries (Walnut Capital, Universal Bridge and Walnut Funds) elected to be
regulated as BDCs as provided by the 1940 Act. Walnut may have inadvertently
became subject to the requirements of the 1940 Act as a result of the Business
Combination. After the date of the Business Combination, Walnut relied on the
one-year safe harbor exemption provided by Rule 3a-2 under the 1940 Act from the
registration, filing and operating requirements imposed by the 1940 Act.
Walnut's one-year exemption period expired on February 27, 1996 and from such
date Walnut 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 1940 Act.
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The transactions contemplated by the Merger Agreement are intended to
result in Walnut's no longer being subject to the 1940 Act; however, Walnut
cannot change the nature of its business so as to cease to be a BDC unless such
change is approved by Walnut's stockholders in accordance with the 1940 Act.
Reverse Stock Split. On January 22, 1999, Walnut effected a one-for-six
reverse stock split (the "Reverse Stock Split") of the Walnut Common Stock,
pursuant to shareholder approval granted at the annual meeting of the
shareholders of Walnut held on January 20, 1999. Fractional shares held by any
holder of Walnut Common Stock after aggregating all of such holder's shares were
rounded up to the nearest whole share. Immediately following the effectiveness
of the Reverse Stock Split, after giving effect to the rounding up of fractional
shares, there were 3,350,533 issued and outstanding shares of Walnut Common
Stock. All share amounts, price and other material terms described herein for
the Walnut Common Stock and options and warrants exercisable therefor give
effect to the Reverse Stock Split regardless of the date with respect to which
such share amounts, price or other terms are being described.
Presentation of Financial Information. Walnut has determined it is
required to present its financial statements in accordance with generally
accepted accounting principles and SEC regulations in the format applicable to
investment companies. Walnut had previously reported its financial statements in
accordance with generally accepted accounting principles and SEC rules and
regulations applicable to operating companies. Accordingly, the financial
information presented in this Proxy Statement for the years ended prior to
December 31, 1997 has been restated in accordance with generally accepted
accounting principles and SEC 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. Because of such
reporting requirements, the operating results of Inland Financial and Pacific
Financial are not included in the consolidated operating results of Walnut and
instead Walnut reports only the fair value of its investments in such companies.
Similarly, Walnut reports only the fair value of its investment in UPLP.
WALNUT CAPITAL
Walnut Capital was incorporated on September 18, 1980 and maintains
offices in Chicago, Illinois and Vienna, Virginia. Since 1984, Walnut Capital
has invested in more than 100 start-up and early stage development companies.
Each company in which an investment is made is 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 and directors.
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 and
directors 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 and directors 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.
Walnut Capital does not maintain a specific investment policy to guide
its investment choices. Rather, Walnut Capital's officers and directors review
investment opportunities and, in collaborative fashion, seek 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 Walnut's total assets (other
than certain assets necessary for its operation, such as office furniture,
equipment and facilities). See "THE BUSINESS OF WALNUT--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 indicated in the chart below.
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Walnut Capital has the contractual right to appoint a member of, or an
observer to, the boards of directors of a number of such companies. In addition,
Walnut Capital currently has a representative on the board of directors of an
additional number of such companies although Walnut Capital has no contractual
right to continue such representation. Walnut Capital's representative on the
board of directors of a portfolio company may receive options to purchase
securities of the portfolio company if such options are provided pursuant to a
plan covering all directors. There can be no assurance that Walnut Capital's
representative to the board of directors of such companies can influence or
affect policy with respect to such companies or that said representative will
continue to be elected to the boards of directors of such companies.
As of June 30, 1999, Walnut Capital held equity securities with a fair
market value of $11.0 million, with a cost basis of approximately $5.1 million,
and as of such date, approximately $2.1 million of the fair market value of
Walnut Capital's equity securities were concentrated in the health care
industry. As of June 30, 1999, Walnut Capital's debt securities were valued at
$23,000, with a cost basis of approximately $713,000.
UPLP
UPLP was formed in 1993 and has invested approximately $5 million in
portfolio companies since its inception. Walnut's wholly owned subsidiary,
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 Walnut. 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.
As of June 30, 1999, UPLP had a fair market value of $1.2 million in
equity securities with a cost basis of $1.3 million. UPLP's debt securities are
valued at $0.5 million with a cost basis of $0.9 million.
PACIFIC FINANCIAL AND INLAND FINANCIAL
Walnut purchased 100% of the issued and outstanding capital stock of
Pacific Financial in January 1998. Walnut acquired Inland Financial through
reverse merger with a newly created subsidiary of Walnut on October 19, 1998.
Both Inland Financial and Pacific Financial provide accounts receivable
factoring services to small- and medium-sized businesses. Pacific Financial is
based in the Seattle, Washington area. Inland Financial is based in Spokane,
Washington.
Inland Financial and Pacific Financial generally provide financing to
their clients by purchasing accounts receivable owed to the clients by the
clients' customers, usually on a non-recourse basis, as well as by guaranteeing
amounts due under letters of credit issued to the clients which are
collateralized by accounts receivable and other assets. The purchase of accounts
receivable, or "factoring," earns a factoring fee, generally equal to 0.5% to 2%
of the factored sales volume. No money is paid to the client at the time Inland
Financial or Pacific Financial purchases the client's receivables. Instead,
Inland Financial and Pacific Financial record a liability to the client on its
books for the purchase price of the receivable. Generally, Inland Financial and
Pacific Financial and the client notify the client's customer to make all
payments on the receivable directly to Inland Financial or Pacific Financial. In
most cases, a client's customers are other commercial entities and the client
does not deal directly with individuals.
Inland Financial and Pacific Financial also provide their clients with
access to credit management, collection and information services, including
certain computerized accounting services, as well as credit assurance. Inland
and Pacific conduct credit checks on client's customers, analyze the information
and make recommendations as to the amount of any credit to be extended. If
Inland Financial or Pacific Financial approves the credit of the customer, in
accordance with written guidelines established by Inland Financial and Pacific
Financial, then Inland Financial or Pacific Financial will purchase the
receivable for a fee and guarantee the collection of the receivable based solely
on the customer's financial ability to pay the receivable. If the credit of the
customer is not approved,
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Inland Financial or Pacific Financial will purchase the receivable for a fee,
but will not guarantee collection of the receivable.
Inland Financial and Pacific Financial guarantee the collection of each
client's pre-approved receivables or receivables from each client's customers
with pre-approved credit lines. Payment for receivables which are
credit-approved by the Inland Financial or Pacific Financial is made to the
client after collection from the client's customer or, if the receivable is not
paid based solely on the customer's financial inability to pay, payment is made
to the client after an agreed upon period of time, usually 90 to 120 days after
the due date of the receivable. Frequently, Inland Financial and Pacific
Financial also advance funds to its clients prior to collection of receivables,
charge interest on such advances (in addition to any factoring fees) and satisfy
such advances from receivables collections. All payments to clients are reduced
by amounts outstanding to Inland Financial and Pacific Financial, such as the
factoring fee charged to the client or any outstanding advances to the client.
Interest charged on such advances is generally equal to 1% to 4% over prime.
Management believes that the generally short-term and floating rate
characteristics of its advances and the floating rate of its financings result
in minimal interest rate exposure.
Inland Financial and Pacific Financial also provide equipment and
inventory financing to some of their factoring clients and guarantee amounts due
under letters of credit issued to their clients which are collateralized by
accounts receivable and other assets.
WALNUT FUNDS
Walnut Funds is the sole owner of the sole general partners of Walnut
Growth and is the sole owner in an entity that provides investment management
and other services to the general partner of Walnut Growth in consideration for
management fees. The general partner is entitled to a portion of the gains on
the investments made by Walnut Growth. 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. Walnut Growth did not make any
investments in 1998 or thus far in 1999 and Walnut does not expect it to make
any further investments.
WALNUT CONSULTING
Walnut Consulting was formed in 1997 to provide various consulting
services and discontinued its business in 1998. It had insignificant revenues
during the period of its operations to date.
COMPETITION
Each of Walnut Capital and UPLP engages in the business of investing in
companies through debt and equity participation. Consequently, each of Walnut
Capital and UPLP competes for investment opportunities with other venture
capital companies, banks and other lenders and private investors. Many of such
entities are significantly larger than Walnut and have greater resources.
However, Walnut Capital and UPLP typically work directly with the management of
portfolio companies and experience no direct competition once an initial
investment has been made.
Pacific Financial and Inland Financial compete with a small number of
very large factoring companies operating nationally and a multitude of small
companies generally operating on a local or regional basis. In addition to the
greater traditional sources of financing available to larger factoring
companies, many larger factoring companies also are able to participate in the
securitization of factored advances collateralized by factored accounts
receivable.
BDC REGULATION
On October 15, 1997, each of Walnut, Walnut Capital, Walnut Funds and
Universal Bridge elected to become regulated as BDCs under the 1940 Act. Being
regulated as a BDC imposes certain limitations upon the operations of Walnut.
Any discussion of the 1940 Act as it relates to BDCs contained in this Proxy
Statement is qualified in its entirety by reference to the full text of the 1940
Act and the rules thereunder.
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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 (a) be a domestic company; (b) have registered a class of its securities or
have filed a registration statement with the SEC pursuant to Section 12 of the
Exchange Act; (c) 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;
(d) offer to extend significant managerial assistance to such eligible portfolio
companies; (e) have a majority of directors who are not "interested persons" (as
defined in the 1940 Act); and (f) 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 (1) does not have a class of securities
registered on an exchange or included in the Federal Reserve Board's
over-the-counter margin list; (2) is actively controlled by a BDC and has an
affiliate of a BDC on its board of trustees or directors; or (3) meets such
other criteria as may be established by the SEC. Control under the 1940 Act is
presumed to exist where a BDC owns more than 25% of the outstanding voting
securities of the eligible portfolio company.
Having elected to be regulated as a BDC, Walnut 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 of the eligible portfolio company.
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securities" as determined in accordance with the 1940 Act. A BDC may change the
nature of its business so as to cease being a BDC (and in connection therewith
withdraw its election to be treated as a BDC) only if authorized by its
stockholders. Management expects that Walnut, following the consummation of the
Mergers, will no longer be subject to the 1940 Act; however, there can be no
assurance that Walnut will become eligible to no longer be subject to the 1940
Act or that the requisite stockholder approval will be obtained. See "PROPOSAL
II -- APPROVAL OF THE BDC DEREGISTRATION" for a further discussion of how the
1940 Act has impacted Walnut.
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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 received
financial assistance from the SBA through the SBA's purchase of certain
debentures from Walnut Capital. Most of these debentures have been repaid and
the maturity of those remaining is September 1, 1999. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS."
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 (1) 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 (2) 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, 1998, the maximum rate relating to annual financing costs
allowable under the SBA regulations was 15% for straight loans and 14% for loans
containing an equity component.
In addition to providing funds to a Small Concern in the form of debt,
an SBIC can provide equity funding to a Small Concern. An SBIC can also acquire
options or warrants to purchase equity securities as long as such instruments do
not expire later than six years from the termination of the SBIC's financing of
the Small Concern by prepayment or maturity. Redemption of such equity
securities, options or warrants can be required only after the first five years
and only pursuant to a formula based on book value and/or earnings and not a
redemption price which is a fixed dollar amount. Any equity financing redeemable
in a manner other than as described in the foregoing sentence will be deemed to
be a loan rather than an equity investment and, therefore, will be subject to
the various limitations mentioned in the preceding paragraphs.
The SBA regulations restrict the amount of control an SBIC can exercise
in connection with a Small Concern. A presumption of control exists whenever an
SBIC and its associates (as defined in the SBA regulations), or two or more
SBICs, control, (i) in the case of a Small Concern with fewer than 50
shareholders, 50% or more of the outstanding voting securities and, (ii) in the
case of a Small Concern with 50 or more stockholders, more than 25% or a block
of 20% or more which is as large or larger than the largest other outstanding
block of voting securities. Temporary control is permitted whenever such control
is reasonably necessary for the protection of the SBIC's investment. However, a
plan to relinquish such control within a reasonable period (not to exceed seven
years) must be submitted to the SBA, and any extension of such period must have
prior SBA approval.
The SBA regulations limit the dollar amount of Walnut Capital's
investments in and loans to any single Small Concern and the affiliates of the
Small Concern to 20% of Walnut Capital's common stock and additional paid-in
capital.
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
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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 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 Walnut not
to completely divest of most of Walnut Capital's investments. These restrictions
on Walnut Capital may substantially limit the ability of Walnut 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 issued a finding that Walnut had violated Section
107.903(b)(1) of the SBIA 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 Walnut had violated CFR Section 107.501(b)(1), (3) and (4) of the
SBIA 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.
In 1998, the SBA issued a finding that Walnut had violated Section
107.700 of the SBIA, by purchasing securities from a big business as defined
under the SBIA. Walnut believes the SBA is in error in its finding because the
SBA deemed shares held by employees of the seller as being affiliated with such
seller. The SBA has also informed Walnut that it is in violation of sections
107.503(c) and 107.650 of the SBIA and valuation guidelines for SBICs for
failing to timely report changes in the valuations of certain of its
investments. Walnut disagrees with the SBA's interpretation of the requirements
and the matter is being discussed with the SBA. The SBA also found Walnut in
violation of Section 107.825(e) of the SBIA, for purchasing certain securities
from non-issuers. Walnut believes this finding to be inconsistent with actions
taken by the SBA in the past, has entered into discussions with the SBA
regarding the finding. Further, Walnut Capital failed to timely file its Form
468 with the SBA due March 31, 1998. Management believes that neither any of
these findings nor failure to timely file will have material effect on Walnut
Capital, or Walnut as a whole.
The last examination report issued to Walnut Capital by the SBA is
dated June 15, 1998 and covered the 13-month period ended March 31, 1998.
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EMPLOYEES
On December 31, 1998, Walnut had 2 employees, Walnut Capital had 3
employees, Inland Financial had 8 employees and Pacific Financial had 4
employees. None of the foregoing employees are represented by a collective
bargaining agreement, and Walnut believes that its relationship and the
relationships of its subsidiaries with their respective employees is good.
PROPERTY
Walnut's executive offices in Vienna, Virginia are leased from Windy
City. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
LEGAL PROCEEDINGS
Walnut is not presently involved as a plaintiff or defendant in any
material legal action.
BUSINESS OF TOWER HILL
GENERAL
Tower Hill, an NASD-registered broker-dealer, provides investment
banking services to early-stage to post-IPO Internet-based and new media
businesses (sometimes referred to as "e-Businesses"). These services include
initiating, advising on and implementing private placements of equity and debt,
corporate restructurings, recapitalizations and refinancings, mergers and
acquisitions, sales and divestitures, and strategic alliances and joint
ventures. Tower Hill also provides public offering advisory services, valuations
and fairness opinions and industry and competitive research analysis. Tower Hill
aims to provide each client with quality solutions to achieve its strategic
objectives, to assist the client with the implementation and execution of
transactions and strategic initiatives and, ultimately, to enhance each client's
long-term shareholder value.
Tower Hill conducts its activities from offices located in New York
City. In addition, Tower Hill recently expanded its geographical coverage by
establishing a representative presence in Israel.
Tower Hill was originally incorporated in the State of New York in
April 1991, under the name Hambro Resource Development Incorporated. The
principal executive offices of Tower HilI are located at 650 Madison Avenue,
21st Floor, New York, New York, 10022, and its phone number is (212) 223-0440.
HISTORY
Prior to April 1998, Tower Hill (formerly named Hambro America
Securities, Inc.) operated as the U.S. corporate finance division of Hambros
plc, a United Kingdom-based, publicly traded holding company, active in merchant
banking, corporate finance, direct investments, retail financial services, asset
management, real estate brokerage, insurance services and other related
activities. In February 1998, Hambros plc concluded the sale of its Hambros Bank
Limited subsidiary, and its global investment and merchant banking operations,
including Tower Hill, to the French bank Societe Generale.
Tower Hill was acquired by its principals in April 1998 from Societe
Generale. Since that time, Tower Hill has been restructured as an independent,
privately capitalized merchant banking boutique.
SERVICES
Tower Hill provides corporate finance and other investment banking
services to a wide array of U.S. and foreign e-Businesses. Tower Hill's
activities encompass four principal areas: (a) capital raising, (b) mergers and
acquisitions, (c) recapitalizations and refinancings, and (d) general advisory
and business development. Between April 1998 and December 1998, Tower Hill
completed nine transactions on behalf of seven separate entities.
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These transactions included approximately $32.0 million of equity and debt
private placements, approximately $34.7 million of mergers and acquisitions, and
approximately $16.1 million of recapitalizations and refinancings. In the first
six months of 1999, Tower Hill completed five transactions on behalf of three
separate entities. These transactions included approximately $36.7 million of
equity and debt private placements, approximately $1.2 million of mergers and
acquisitions and approximately $1.2 million of recapitalizations and
refinancings.
Capital Raising. Tower Hill's capital raising assignments include
advising both public and private companies regarding, and helping them
implement, private placements of equity and debt securities. Typically, Tower
Hill seeks to effect private placements of equity ranging in amount from $5
million to $50 million. In 1998, Tower Hill served as the placement agent in
five transactions that raised a total of approximately $32.0 million. Since
January 1999, Tower Hill has served as the placement agent in three transactions
that raised a total of approximately $36.7 million. In addition, Tower Hill is
currently acting as a placement agent in six transactions. Tower Hill's services
include:
- Preparing and drafting comprehensive private offering documents
for distribution to potential investors and acquirors;
- Identifying and qualifying potential strategic and financial
investors worldwide;
- Soliciting and negotiating with selected potential investors;
- Assessing the merits, potential problems and relative
attractiveness of various offers;
- Negotiating conditions to obtain commitments from investors; and
- Managing all phases of documentation and transaction execution
until closing, including the coordination of the activities of the
client's other professional advisors.
Mergers and Acquisitions. Tower Hill assists clients in evaluating,
structuring, negotiating and closing specific transactions in the most
economically beneficial manner consistent with market conditions at that time
and the client's overall strategic and financial objectives. Tower Hill provides
its clients with a full range of services through all phases of the transaction.
During 1998, Tower Hill advised on two mergers and acquisitions transactions
with a combined value of approximately $34.7 million. Since January 1999, Tower
Hill has advised on one merger and acquisition, with a value of approximately
$1.2 million. Tower Hill is not currently advising any clients on any mergers
and acquisitions. Tower Hill's services include:
- Identifying and qualifying potential investment and acquisition
targets worldwide;
- Assisting in discussions and negotiations with potential targets,
their owners and professional advisors;
- Assisting with due diligence review and evaluation of a target;
- Preparing financial analyses and valuations of a target and of any
potential consolidated entity;
- Determining the appropriate capital structure for the transaction;
and
- Monitoring and directing the implementation of all phases of the
transaction.
Recapitalizations and Refinancings. Tower Hill assists clients in
analyzing their capital needs and effecting recapitalizations and refinancings
to meet those needs. During 1998, Tower Hill helped two clients raise
approximately $16.1 million through recapitalizations and refinancings. Since
January 1999, Tower Hill has helped one client raise approximately $1.2 million
through a refinancing. Tower Hill is not currently assisting any clients with
recapitalizations or refinancings. Tower Hill's services include:
- Analyzing the client's existing capital structure and needs,
utilizing various valuation and analytical methodologies as well
as knowledge of the client's markets and industries;
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- Assessing the potential public market impact of each corporate
finance alternative;
- Presenting the results of the analyses and recommending the most
advantageous capital alternatives given the client's overall
objectives;
- Preparing and drafting comprehensive information materials and
other communications to shareholders, debtholders, potential
investors and other interested parties; and
- Assisting with the implementation and execution of the chosen
alternatives, including negotiations with shareholders and
debtholders and potential sources of new capital.
General Advisory and Business Development. In addition to providing
services in connection with specific transactions or capital raising
assignments, Tower Hill also accepts assignments to provide its clients with
ongoing business, strategic and other consulting services. In addition to
issuing fairness opinions and valuations, Tower Hill's services include:
- Providing management consulting services, including business
development, marketing strategy and corporate relations;
- Identifying potential partners for strategic relationships and
joint ventures;
- Performing quantitative and qualitative analyses of financial and
strategic alternatives, utilizing various valuation and analytical
methodologies as well as knowledge of the client's markets and
industries;
- Presenting the results of the analyses and recommending the most
appropriate short- and long-term financial and operational
strategies given the client's overall objectives; and
- Assisting in evaluating, structuring and implementing strategic
initiatives.
COMMISSIONS
In connection with accepting an engagement on behalf of a client, Tower
Hill generally receives a retainer payment, usually ranging from $25,000 to
$100,000, with the majority of its project-related fees payable only upon the
successful conclusion of an assignment. Generally, fees received by Tower Hill
are paid in a combination of cash or securities. Because Tower Hill is engaged
in a capital intensive business, Tower Hill must pay certain fixed costs before
it receives payment for its services, which payment may or may not be in cash.
Descriptions of the success fees that Tower Hill generally expects to
receive are set forth below:
Capital Raising. Upon the closing of an equity capital raising
transaction, Tower Hill will generally receive cash success fees in an amount
equal to 5% to 7.5% of the amount of capital raised. In addition, Tower Hill
receives additional success fees in the form of warrants to purchase the
securities issued by the client in the transaction. Such warrants are generally
in a dollar amount equal to 10% of the amount of securities sold in the
transaction and are exercisable for five years at a price equal to the price for
the securities paid by the investors in the transaction. In instances where the
capital raising transaction includes the issuance of warrants and/or options to
purchase additional securities by the investors in such transaction, Tower Hill
will receive additional cash success fees equal to 3% of any amount of capital
raised upon the exercise of such warrants and/or options at the time such
capital is actually received by the client.
Mergers and Acquisitions; Recapitalizations and Refinancings. In
connection with an engagement in which it provides strategic and other advisory
services to a client involved in a sale or exchange of assets, a merger or
consolidation, a leveraged buyout, the formation of a joint venture, a minority
investment or partnership, a leveraged recapitalization, spin-off or any similar
transaction, Tower Hill generally receives a prescribed success fee at the time
that the transaction is concluded. While the amount of such fee is dependent to
some extent upon the
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anticipated nature, complexity and duration of the specific assignment, these
fees generally range from $250,000 to $1,500,000 (and are paid in cash). In
order to avert any potential divergence of interests between itself and its
clients, Tower Hill generally seeks to avoid setting fees that are dependent
upon the consideration paid or received in the transaction. However, Tower Hill
will occasionally receive significant incentive compensation in connection with
maximizing the consideration to be received by a selling entity.
Due Diligence and Strategic Analysis; General Advisory and Business
Development. In connection with these services, Tower Hill will either receive
monthly retainer fees, ranging from $10,000 to $50,000, for the duration of the
engagement or a fixed fee ranging from $50,000 to $150,000 (payable in cash)
paid either at the time of the engagement or upon completion of the assignment.
COMPETITIVE CONDITIONS
The investment banking and financial services industry is highly
competitive. Tower Hill's primary competitors are other broker-dealers,
investment banking firms and merchant banking firms. Tower Hill's competitors
vary in size from small privately-owned firms to large, publicly-held
corporations. Many of Tower Hill's competitors have longer operating histories,
greater financial resources and stronger relationships with potential clients
than Tower Hill. Tower Hill believes that the principal competitive factors in
the investment banking and financial services industry include transaction
experience, breadth of services offered, innovation, reputation and price.
CLIENTS
Tower Hill primarily provides its services to early-stage to post-IPO
e-Businesses. During 1998, Tower Hill's clients included a U.S. distributor of
health and beauty products; a wire and cable manufacturer in Israel; a provider
of visual content to advertising and design agencies, magazine, newspaper, book
and new media publishers and desktop publishers; a provider of XML-based
e-content enterprise applications; a provider of fleet fuel management systems;
a provider of high-end digital video display and home theater systems; and an
early-stage company focused on acquiring independent and hospital-based sleep
disorder clinics. In 1999, Tower Hill's clients have included an Internet-based
clothing portal; an Internet-based steel exchange; an Internet-based portal
providing technical information to the electronics engineering community; and a
global chain of travel agency franchises.
GOVERNMENT REGULATION
Tower Hill is a broker-dealer registered with the SEC under the
Exchange Act and is a member of the NASD. As a registered broker-dealer and NASD
member, Tower Hill and its principals, registered representatives and other
associated persons must comply with applicable federal and state securities
laws, rules and regulations and with the rules of the NASD.
Broker-dealers are subject to regulations which cover all aspects of
the securities business including: sales methods; trade practices; capital
structure; recordkeeping; and the conduct of directors, officers and employees.
As a registered broker-dealer, Tower Hill is subject to the Net Capital
Rule (Rule 15(c)3-1) (the "Net Capital Rule") under the Exchange Act, which
requires the maintenance of minimum regulatory net capital and a specified ratio
of aggregate indebtedness to net capital, both as defined in that rule, which
shall not exceed 15 to 1. The Net Capital Rule is designed to measure the
general financial integrity and liquidity of a broker-dealer and requires that
at least a minimal portion of its assets be kept in relatively liquid form. At
June 30, 1999, Tower Hill had regulatory net capital and a regulatory net
capital requirement of $893,393 and $5,000, respectively. At June 30, 1999,
Tower Hill's aggregate indebtedness to net capital ratio was 56,164 to 892,393.
Tower Hill acted as a placement agent in connection with a private
placement of securities to accredited investors that was exempt from
registration under the Securities Act. Approximately $1,205,000 of such
placement was made to residents in Florida, Georgia and Ohio, in which states
Tower Hill inadvertently failed to register with the appropriate state
regulators as a "dealer." Tower Hill may be required to repay approximately
$75,000 of commissions with respect to the sales of securities in three of those
states. Tower Hill may also be required to offer the purchasers of such
securities in Florida, Georgia and Ohio the right to rescind the transaction.
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EMPLOYEES
As of June 30, 1999, Tower Hill employed a total of thirteen employees.
Tower Hill and its employees are not subject to any collective bargaining
agreements and Tower Hill believes that its relations with its employees are
good.
PROPERTIES
Tower Hill's executive offices occupy approximately 4,800 square feet
of space at 650 Madison Avenue, 21st Floor, New York, New York, under an
Occupancy Agreement, dated as of January 1, 1999, with Hambro America, Inc.
expiring on August 30, 2000. Rental payments under the Occupancy Agreement equal
$21,649.57 per month. Hambro America, Inc. is owned by Joseph D. Mark and Adi
Raviv, the principals and sole stockholders of Tower Hill.
LEGAL PROCEEDINGS
On April 21, 1999, Yoav Bitter, a former employee and stockholder of
Tower Hill, commenced an action against Tower Hill, pursuant to the New York BCL
Section 1104-a, for, inter alia, judicial dissolution of Tower Hill and
appointment of a receiver. On April 26, 1999, New York Supreme Court Justice
Emily Jane Goodman, upon the application of Mr. Bitter, issued an Order to Show
Cause seeking, inter alia, reinstatement of Mr. Bitter's employment with Tower
Hill. The Order to Show Cause contained a Temporary Restraining Order requiring
Tower Hill to pay Mr. Bitter his salary pending hearing of Mr. Bitter's Order to
Show Cause. On April 29, 1999, the parties executed a stipulation providing that
Tower Hill would pay Mr. Bitter his salary through May 13, 1999, the return date
of the Order to Show Cause. On May 13, 1999, the Court heard argument on Mr.
Bitter's dissolution petition and Mr. Bitter's Order to Show Cause for
reinstatement of his employment, continuation of his salary and appointment of a
temporary receiver. The Court also heard Tower Hill's cross-motion to dismiss.
On June 17, 1999, Judge Goodman denied the relief sought by Mr. Bitter, and
granted Tower Hill's cross motion to dismiss the matter. On July 1, 1999, Tower
Hill served Notice of Entry of Order and, on July 26, 1999, Judge Goodman
entered judgment dismissing Mr. Bitter's dissolution petition and awarding Tower
Hill costs and disbursements in the amount of $200.00. On August 3, 1999, Mr.
Bitter filed a notice of appeal with the Appellate Division of the Supreme Court
of the State of New York, First Division seeking a reversal of this decision.
Mr. Bitter has nine months from the date of filing the notice of appeal to
perfect his appeal. See "--Certain Relationships and Related
Transactions--Indemnity Agreement."
On June 18, 1999, Tower Hill initiated an arbitration against Mr.
Bitter requesting relief arising out of the termination of Mr. Bitter's
employment with Tower Hill. In particular, Tower Hill is seeking Mr. Bitter's
return of a company phone and computer, valued at $799, and reimbursement for
travel and other expenses incurred by Mr. Bitter in the amount of $2,179.95.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Hambro America, Inc. Tower Hill leases approximately
4,800 square feet of office space at 650 Madison Avenue, 21st Floor, New York,
New York, under an occupancy agreement, dated as of January 1, 1999, with Hambro
America, Inc., expiring on August 30, 2000. Rental payments under the occupancy
agreement equal $21,649.57 per month. Hambro America, Inc. is owned by Joseph D.
Mark and Adi Raviv, the principals and sole stockholders of Tower Hill.
In October 1998, Tower Hill loaned $95,000 to Hambro America, Inc. This
loan is non-interest bearing and is being repaid over 22 months at $4,318 per
month. As of June 30, 1999, the balance of the loan was $60,456.
In connection with the Mergers, Tower Hill will sell certain securities
and a stock receivable to Hambro America, Inc. for an aggregate purchase price
of $$99,675.26. In addition, Tower Hill will sell certain doubtful receivables,
owed to Tower Hill, to Hambro America, Inc. for a purchase price equal to fair
market value. Tower Hill will also transfer $90,000 to Hambro America, Inc.
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Indemnity Agreement. Pursuant to an agreement, dated as of April 13,
1998, by and among Joseph D. Mark, Adi Raviv and Yoav Bitter, on April 30, 1999,
Messrs. Mark and Raviv exercised their right to purchase all of Mr. Bitter's 25%
interest in Tower Hill. Additional payments are due to Mr. Bitter, in an amount
equal to 25% of "all net profits relative to work-in-progress as of" April 30,
1998. Tower Hill, Joseph D. Mark and Adi Raviv have entered into an
indemnification agreement, dated as of April 30, 1998, pursuant to which Messrs.
Mark and Raviv have agreed to indemnify Tower Hill for any amounts Tower Hill is
obligated to pay to Mr. Bitter in excess of Tower Hill's net profits relative to
the engagements of Tower Hill that were pending, but not completed, on April 30,
1998. Tower Hill has agreed to indemnify Messrs. Mark and Raviv with respect to
any amounts either of them becomes obligated to pay to Mr. Bitter in excess of
the amount described in the two prior sentences, and Tower Hill has agreed to
assume and pay for the defense of any claim brought by Mr. Bitter.
Agreements with Tower Hill Capital Group, LLC. Pursuant to various
agreements, Tower Hill sold to Tower Hill Capital Group, an entity owned by
Joseph D. Mark and Adi Raviv, options to purchase certain warrants held by Tower
Hill, which options were exercised on June 15, 1999. In connection therewith,
Tower Hill Capital Group entered into an agreement with Tower Hill, dated June
15, 1999, pursuant to which Tower Hill Capital Group has agreed to reimburse
Tower Hill with respect to income taxes payable by Tower Hill upon the exercise
of the warrants acquired by Tower Hill Capital Group pursuant to the options. In
addition, Tower Hill Capital Group has sold to Tower Hill options to purchase
certain warrants held by Tower Hill Capital Group, which options were exercised
on June 15, 1999.
Tower Hill Capital Group has established an employee bonus pool in
which certain employees of Tower Hill Capital Group and its affiliates,
including Tower Hill, are entitled to participate. Pursuant to an agreement,
dated as of August 2, 1999, between Tower Hill and Tower Hill Capital Group,
Tower Hill Capital Group has agreed that any distributions from the employee
bonus pool shall be made by, and are the exclusive liability of, Tower Hill
Capital Group. In addition, in the event any employee receives an amount from
Tower Hill in respect of the employee bonus pool, Tower Hill Capital Group has
agreed to indemnify Tower Hill in respect of such amount.
Stock Purchase Agreements. Pursuant to a stock purchase agreement,
dated July 29, 1999, between Tower Hill and Carnegie Partners, Tower Hill will
purchase certain securities from Carnegie Partners for a purchase price of
$64,751, plus interest thereon, subject to consummation of the Mergers. Adi
Raviv owns 50% of Carnegie Partners.
Pursuant to a stock purchase agreement, dated July 29, 1999, between
Tower Hill and HTI Ventures LLC, Tower Hill will purchase certain securities
from HTI Ventures LLC for a purchase price of $25,000 plus interest thereon,
subject to consummation of the Mergers. Adi Raviv holds a 99% interest in HTI
Ventures LLC.
In addition, pursuant to the Merger Agreement, Tower Hill has agreed to
use its commercially reasonable efforts to cause Adi Raviv to transfer certain
securities to Tower Hill for a purchase price of $315,131.58, which purchase
price includes $132.237.18 of debt forgiveness. In the event that Mr. Raviv is
unable to transfer such securities to Tower Hill, Tower Hill has agreed that the
cash component of the purchase price, $182,894.40, will remain an asset of Tower
Hill and that Tower Hill will forgive Mr. Raviv's indebtedness to Tower Hill in
the amount of $132,237.18. See "--Loans to Stockholders."
Loans to Stockholders. In December 1998, Tower Hill loaned each of
Joseph D. Mark and Adi Raviv $50,000. The loan to Mr. Mark will be forgiven
prior to the consummation of the Mergers, and the loan to Mr. Raviv will either
be repaid or forgiven pursuant to the Merger Agreement. In addition, in December
1998, Tower Hill loaned an aggregate of $219,299.16 to Joseph D. Mark, Adi Raviv
and Yoav Bitter. These loans are noninterest-bearing and have no specified
maturity date. The loan to Mr. Mark, in the amount of $82,237.185, will be
forgiven prior to the consummation of the Mergers. The loan to Mr. Raviv, in the
amount of $82,237.185, will be either repaid or forgiven pursuant to the Merger
Agreement. The loan to Mr. Bitter, in the amount of $54,824.79, will not be
forgiven, but is expected to be resolved in a NASD arbitration proceeding.
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BACKGROUND OF THE MERGERS
In May 1999, the principals of Tower Hill, Joseph D. Mark and Adi
Raviv, were introduced to Joel Kanter, the Chief Executive Officer of Walnut. At
such initial meeting, the parties discussed their respective businesses and the
synergy which could be achieved if the companies were combined. Throughout May,
Messrs. Kanter, Mark and Raviv continued to discuss the business issues relating
to the structure of the transactions. In late May 1999, Tower Hill presented
Walnut with a draft non-binding letter of intent which described the general
terms of the Mergers and the transactions related thereto. The parties executed
the letter of intent on May 28, 1999, subject to approval by Walnut's Board of
Directors, and commenced legal and financial due diligence. On June 10, 1999,
Walnut's Board of Directors met telephonically to discuss the status of the
negotiations and the due diligence process.
On June 30, 1999, Walnut's Board of Directors met to discuss the status
of the proposed transaction. At such meeting, Messrs. Mark and Raviv were
invited to attend and made a presentation to the Walnut Board of Directors
regarding the business of Tower Hill. The Walnut Board of Directors asked a
variety of questions of Messrs. Mark and Raviv regarding the nature of Tower
Hill's assets and their plans for the combined company post-closing. After the
presentation and question and answer period, Messrs. Mark and Raviv left the
meeting and the Walnut Board of Directors continued its discussion of the
proposed transaction. The Walnut Board of Directors determined to seek an
independent opinion as to the fairness of the transaction, from a financial
point of view, to the stockholders of Walnut and directed Mr. Joel Kanter to
retain Gruntal to provide such opinion. On July 8, 1999, Walnut entered into an
engagement letter with Gruntal.
During the period from June 30, 1999 through July 26, 1999, Walnut and
Tower Hill and their respective advisors and counsel continued to negotiate
definitive documents evidencing the proposed transaction and continued their
mutual due diligence reviews. On July 26, 1999, the Walnut Board of Directors
met to discuss the status of the proposed transaction. Drafts of the Merger
Agreement and its exhibits and schedules were circulated to the Walnut Board of
Directors for its review. At such meeting, representatives of Gruntal were
invited to attend and presented an analysis of the proposed transactions and
stated that, pending definitive merger documentation, satisfactory in form and
substance to Gruntal, Gruntal could be in a position to determine that the
consideration to be paid by Walnut in connection with the Mergers was fair, from
a financial point of view, to the stockholders of Walnut. Gruntal's presentation
contained a detailed analysis of Tower Hill's assets and liabilities and a
discussion of their prospects for the future. The directors of Walnut took the
opportunity to ask several questions of the Gruntal representatives regarding
the analysis Gruntal presented. Legal counsel to Walnut then presented a report
as to the status of the documentation and due diligence. The Chief Executive
Officer then summarized the open business issues, and the Walnut Board of
Directors engaged in a discussion of the appropriate resolution of such issues.
The Walnut Board of Directors directed Mr. Joel Kanter to finalize the
negotiations and reach resolution on the open business issues and further
directed that the revised documentation reflecting resolution of such business
issues be circulated to the Walnut Board of Directors for its review and
approval.
During the period from July 26, 1999 through August 2, 1999, Walnut and
Tower Hill completed their negotiations and finalized the Merger Agreement and
its exhibits and schedules. On August 4, 1999, the Walnut Board met
telephonically to discuss the final documentation. At such meeting, legal
counsel to Walnut reported that the parties had reached agreement on all
substantive issues, and presented an overview of the negotiations. The Chief
Executive Officer then summarized the resolution of the business issues. A
representative of Gruntal gave its oral opinion that the consideration to be
paid by Walnut in connection with the Mergers was fair, from a financial point
of view, to the Walnut stockholders. The Board of Directors unanimously (i)
approved the terms of the transaction with certain modifications suggested by
its legal counsel, concluding the transaction was fair to, and in the best
interests of, Walnut and its stockholders and (ii) authorized the management of
Walnut to execute any and all documentation required in connection with, or
relating to, the transaction. Walnut, THCG, Newco and Tower Hill executed the
Merger Agreement on August 5, 1999 and Gruntal subsequently delivered its
written opinion that the consideration to be paid by Walnut in connection with
the Mergers was fair, from a financial point of view, to the Walnut
stockholders. The Board of Directors then discussed the preparation of proxy
materials regarding the transaction for submission to the Walnut stockholders.
28
<PAGE> 40
PRINCIPAL REASONS FOR THE MERGERS
The Walnut Board of Directors believes that the terms of the Merger
Agreement and the Mergers are fair to, and in the best interests of, Walnut and
its stockholders and, by unanimous vote, approved the Merger Agreement and the
Mergers. The Walnut Board of Directors has considered and discussed the terms of
the Merger Agreement and the Mergers and reviewed various business, financial
and legal considerations related to the transactions contemplated by the Merger
Agreement (see "BACKGROUND OF THE MERGERS"). In reaching its decision to approve
the Merger Agreement and the Mergers and to recommend that the Walnut
stockholders vote for the Merger Agreement and the Mergers, the Walnut Board of
Directors considered, among other things, the following factors:
- The Board reviewed historical and projected information concerning
Tower Hill's business, prospects, financial performance and
condition, management and competitive position.
- The Board considered that the Mergers could improve the combined
company's competitive position by increasing the level of its
resources, thus enabling the combined company to engage in future
investment opportunities that may be unavailable to Walnut given
its current size and level of capitalization.
- The Board considered that a merger with an operating company in
the financial services industry would enable Walnut to expand the
nature of its business so it would not be an investment company
subject to regulation under the 1940 Act, which imposes
significant costs and restrictions on Walnut's current activities.
- The Board reviewed the principal terms and conditions of the
Merger Agreement, including the representations, warranties and
covenants, and the conditions to each party's obligation to
complete the Mergers. The Board considered favorably that the
terms of the Merger Agreement are reasonable and protective of
Walnut's interests.
- The Board reviewed pro forma financial data for the combined
company after giving effect to the Mergers, and considered
favorably the expectation that the combined company may be able to
realize synergies in its combined operations.
- The Board considered that the combined company's increased size
will enhance investor awareness of the company, particularly in
light of the Internet focus of the combined company.
- The Board considered the ability of Walnut's stockholders to
participate, as THCG stockholders, in a larger, more strategically
balanced enterprise that will have greater financial and
operational resources and long-term growth potential.
POTENTIAL NEGATIVE FACTORS ASSOCIATED WITH THE MERGER
Walnut's Board of Directors also considered potentially negative
factors that could arise from the Merger Agreement, including, but not limited
to, the following:
- The Board considered the significant costs involved in connection
with the negotiation of and consummation of the Mergers, and the
substantial management time and effort required to effectuate the
Mergers.
- The Board considered that the anticipated benefits of the Mergers,
including cost savings and operating synergies, might not be fully
realized, or that integration difficulties may cause the
disruption of the activities of the combined company's business.
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<PAGE> 41
- The Board considered the substantial reduction of current
stockholders' percentage ownership interest and effective voting
power following the consummation of the Mergers, which could
affect the market price of the THCG Common Stock.
- The Board considered the lack of appraisal rights for Walnut's
current stockholders in connection with the Mergers.
- The Board considered the substantial influence to be exercised by
Tower Hill and its principals through their control of the
executive management of the combined company, their selection of
four of the initial seven members of the board of directors and
the concentration of ownership of the common stock of the combined
company.
The Walnut Board of Directors did not believe that the negative factors
were sufficient, either individually or collectively, to outweigh the advantages
to Walnut of the Mergers. Further, in view of the variety of factors considered
by the Board in connection with its evaluation of the Mergers, the Board did not
find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching its conclusion.
OPINION OF FINANCIAL ADVISOR
OPINION OF FINANCIAL ADVISOR
General
In July 8, 1999, the Walnut board of directors engaged Gruntal to act as its
financial advisor with respect to its anticipated merger with Tower Hill. On
August 5, 1999, Gruntal rendered its oral opinion - such date and based upon and
subject to certain matters stated therein, the consideration to be paid by
Walnut to the shareholders of Tower Hill in the merger is fair from a financial
point of view to the shareholders of Walnut.
THE FULL TEXT OF GRUNTAL'S OPINION LETTER, DATED AUGUST 5, 1999, IS ATTACHED
AS EXHIBIT B TO THIS PROXY STATEMENT. STOCKHOLDERS MAY READ THE GRUNTAL OPINION
FOR A DISCUSSION OF THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, FACTORS
CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY GRUNTAL IN RENDERING ITS
OPINION. THE FOLLOWING IS A SUMMARY OF THE GRUNTAL OPINION.
Gruntal advisory services and opinion were provided for the information and
assistance of the Walnut board in connection with the consideration to be paid
in the Mergers. The Gruntal opinion is not intended to be and does not
constitute a recommendation to any shareholder of Walnut as to how such
shareholder should vote on the Mergers, the Capital Investment or any other
transactions described in this Proxy Statement. Gruntal was not requested to
opine as to, and its opinion does not address, Walnut's underlying business
decision to proceed with or effect the merger.
In arriving at its opinion, Gruntal has:
- -- reviewed a draft of the Merger Agreement, dated as of August 5, 1999, and,
for purposes hereof, we have assumed that the final form thereof will not
differ in any material respect from such draft;
- -- reviewed such available information concerning Walnut and Tower Hill as we
believe is relevant to our analysis, including Walnut's Annual Reports on
Form 10-K for the periods ended December 31, 1997 and 1998, and Quarterly
Report on Form 10-Q for the three month period ending March 31, 1999, and
Tower Hill's 1998 Audited Financials, year-to-date Profit and Loss Statement
as of July 14, 1999, as well as the unaudited June 7, 1999 Balance Sheet;
- -- reviewed certain financial and operating information with respect to the
business, operations and prospects of Walnut and Tower Hill furnished to us
by Walnut and Tower Hill;
- -- reviewed certain financial and other information regarding Tower Hill's
portfolio investments supplied by Tower Hill;
- -- reviewed the historical stock prices and trading volumes of the Walnut
Common Stock;
- -- compared the historical results of the operations of Walnut and Tower Hill
with those of certain publicly traded companies which we deemed to be
reasonably comparable; and
- -- reviewed the financial terms, to the extent publicly available, of certain
comparable transactions and compared them with the terms of the proposed
transactions.
In addition, Gruntal had discussions with the management of Walnut and Tower
Hill concerning their business, change of strategy, operations, assets,
investment policies, financial condition and prospects and have undertaken such
other analyses and examinations and considered such other financial, economic
and market data as we deemed appropriate in arriving at our opinion.
Gruntal assumed and relied upon the accuracy and completeness of the financial
and other information it used without assuming any responsibility for
independent verification of such information. Gruntal also relied upon
30
<PAGE> 42
the assurances of Walnut and Tower Hill management that they are not aware of
any facts or circumstances that would make such information inaccurate or
misleading.
In its analyses, Gruntal made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters. Many of
these matters are beyond the control of Gruntal, Walnut and Tower Hill. The
estimates contained in Gruntal's analyses were not necessarily indicative of
actual values or predictive of future results, which may be significantly more
or less favorable than suggested by such analyses. In addition, analyses with
respect to the values of businesses or portfolio securities are not appraisals
and are not intended to reflect the values at which businesses or securities
actually may be sold.
The following is a summary of the material financial analyses used by Gruntal in
connection with providing its opinion to the Walnut Board of Directors. Certain
of the summaries of financial analyses include information presented in tabular
format. In order to fully understand the financial analyses used by Gruntal, the
tables must be read together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses. In particular,
you should note that in applying the various valuation methods to the particular
circumstances of Walnut, Tower Hill and the Mergers, Gruntal made qualitative
judgments as to the significance and relevance of each analysis and factor. In
addition, Gruntal made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Walnut and Tower Hill. Accordingly, the analyses
listed in the tables and described below must be considered as a whole.
Considering any portion of such analyses and of the factors considered, without
considering all analyses and factors, could create a misleading or incomplete
view of the process underlying the Gruntal opinion.
Below is an overview of each analysis:
WALNUT COMPARABLE COMPANY ANALYSIS- The comparable company trading analysis
provides a benchmark based on the common stock trading multiples of selected
comparable companies. For this analysis, a universe of publicly-traded
investment management companies (the "Walnut Comparable Companies"), which
Gruntal deemed reasonably comparable for purposes of its analysis, were
selected. Using publicly available information, Gruntal analyzed the Equity
Value and Net Asset Value ("NAV") for the Walnut Comparable Companies based on
then-current market conditions and determined the ratios of Equity Value to Net
Asset Value. The term "Equity Value" of an entity means the number of shares of
common stock outstanding multiplied by the price of such common stock at the
close of trading on August 4, 1999. NAV is the market value of all securities
held divided by the number of shares outstanding. The list of Walnut Comparable
Companies includes the following:
-- Brantley Capital Corporation
-- Enercorp, Inc.
-- Harris & Harris Group, Inc.
-- MACC Private Equities
-- Point West Capital Corporation
-- Waterside Capital Corporation
-- Winfield Capital Corporation
From the analysis, Gruntal analyzed the High, Low, Mean and Median values for
the Equity Value / NAV ratio on the Walnut Comparable Companies. As shown in the
following table, the market currently values the Walnut Comparable Companies at
a mean NAV multiple of 1.13x and a median NAV multiple of 0.81x.
31
<PAGE> 43
<TABLE>
<CAPTION>
EQUITY VALUE/
NAV
------------
<S> <C>
High 3.14 x
Low 0.56
Mean 1.13
Median 0.81
Walnut 0.85 x
</TABLE>
Based on the value of Walnut at 0.85x times its NAV, This analysis indicates
that Walnut Common Stock is fairly valued when compared with the Walnut
Comparable Companies.
TOWER HILL EQUITY PORTFOLIO ANALYSIS- The Equity Portfolio Analysis provides an
estimation of value for selected equity holdings owned by a particular company.
For this analysis, in conjunction with extensive discussions with Tower Hill
management, an estimated value of equity and options and warrants to purchase
equity by Tower Hill were calculated via the following assumptions:
(a) Equities Owned. Expected one-year target value (calculated via a
combination of current financing valuations and Tower Hill
expectations) discounted at a 40.0% discount rate.
(b) Options and Warrants Owned. Expected one-year target value (calculated
via a combination of current financing valuations, Black-Scholes Option
Pricing Model and Tower Hill expectations) discounted at a 40.0%
discount rate.
(c) Expected Equities, Options and Warrants. Utilizing conservative
estimates for the probability of engaged investment banking and
consulting arrangements being completed by December 31, 1999, the
expected one-year target value for such equities and options and
warrants to purchase equities were calculated in a similar fashion to
(a) and (b) above, except that a 50.0% discount rate was applied.
The following table presents the estimated values for Tower Hill's share and
warrant holdings:
<TABLE>
<CAPTION>
Expected Calculated
One Year Present
Value Value
-------- ----------
<S> <C> <C> <C>
Shares $1,771,038 / 1.40 = $1,175,027
Warrants
Issued 5,359,242 / 1.50 = 3,656,161
Pending $2,675,000 / 1.50 = 1,783,333
-----------
$6,614,522
==========
</TABLE>
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<PAGE> 44
In estimating the value of the equity securities held by Tower Hill, Gruntal
considered the valuation of the latest known rounds of equity financing of the
issuer, Tower Hill management projections and, with respect to warrants expected
to be received by Tower Hill in respect of pending transactions, an additional
discount factor based on the likelihood of the transaction closing.
TOWER HILL COMPARABLE COMPANY ANALYSIS- The comparable company trading analysis
provides a benchmark based on the common stock trading multiples of selected
comparable companies. For this analysis, a universe of reasonably comparable
publicly-traded investment banking/brokerage companies (the "Tower Hill
Comparable Companies") which Gruntal deemed reasonably comparable for purposes
of its analysis were selected. Using publicly available information, Gruntal
analyzed the Enterprise Value, latest twelve months ("LTM") revenue, Equity
Value and stockholders' equity for the Tower Hill Comparable Companies. The term
"Enterprise Value" means the sum of the Equity Value of an entity plus the value
of all preferred stock and long-term debt reflected on its balance sheet minus
all cash, cash equivalents and marketable securities reflected on its balance
sheet. The list of Tower Hill Comparable Companies includes the following:
-- First Albany Companies Inc.
-- First Montauk Financial Corp.
-- Kirlin Holding Corp.
-- Paulson Capital Corp.
-- Stifel Financial Corp.
From the analysis, Gruntal analyzed the High, Low, Mean and Median values for
the Enterprise Value / LTM Revenue and Equity Value / Stockholders' Equity
ratios on the Tower Hill Comparable Companies analyzed.
Additionally, the estimated values derived from the Tower Hill Equity Portfolio
Analysis is combined with the Tower Hill Comparable Company Analysis (the
"Combined Transaction Analysis") in order to properly account for the cash-based
services and the value of the equity and options to purchase equity that Tower
Hill both currently owns, and expects to receive by December 31, 1999.
Accordingly, the below table sets forth the details, both separately and in
combination the Tower Hill Comparable Company Analysis and Tower Hill Equity
Portfolio Analysis:
33
<PAGE> 45
<TABLE>
<CAPTION>
ENTERPRISE EQUITY
VALUE/ VALUE/
LTM BOOK
REVENUE VALUE/
--------- -----
<S> <C> <C>
High 2.38 x 4.42 x
Low 0.48 1.17
Mean 1.02 2.49
Median 0.6 2.71
</TABLE>
<TABLE>
<CAPTION>
Tower Hill Securities
- ---------------------
<S> <C> <C>
Forecasted Fiscal 1999 Revenue/Book Value $ 4,500,000 $ 1,500,000
Mean Multiple 1.02 x 2.49 x
----------- -----------
Implied Multiple Value $ 4,590,000 $ 3,735,000
Plus: Equity Portfolio Value 6,614,522 6,614,522
----------- -----------
Total $11,204,522 $10,349,522
=========== ===========
Walnut Stock Price as of August 4 $ 2.19 $ 2.19
Number of Shares to be issued 4,095,096 4,095,096
Total Consideration Paid by Walnut 8,958,023 8,958,023
Implied Premium $ 2,246,499 $ 1,391,499
Implied Premium % 25.08% 15.53%
</TABLE>
As shown, the Combined Company Analysis indicates that the implied value of the
shares retained by Walnut Shareholders is approximately 15%-25% higher than the
Total Consideration proposed by the financial terms of the Proposed Transaction.
TOWER HILL COMPARABLE TRANSACTION ANALYSIS - The comparable transaction analysis
provides a market benchmark based on the consideration paid in selected
acquisition transactions (the "Comparable Transactions") which Gruntal deemed
reasonably comparable for purposes of its analyses. From publicly available
financial data, Gruntal analyzed transactions in which companies comparable to
Tower Hill were acquired. Pursuant to the analysis, Gruntal calculated the High,
Low, Mean and Median values for the Enterprise Value / LTM Revenue and Equity
Value / Book Value ratios on the Comparable Transactions. The Comparable
Transactions included:
- -- Intrex Inc. / Alexander Wescott & Co. Inc.
- -- First Union Corp. / Everen Capital Group
- -- JW Charles Financial Services / Genesis Merchant Group
- -- Wachovia Corp. / Interstate/Johnson Lane Inc.
- -- Key Corp. / McDonald & Co Investments Inc.
- -- Investor / Olympic Cascade Financial Corp.
- -- Raymond James Financial Inc. / Roney & Co.
- -- BankAtlantic Bancorp. / Ryan Beck & Co.
- -- BB&T Corp. / Scott & Stringfellow Financial
34
<PAGE> 46
<TABLE>
<CAPTION>
MULTIPLES
ENTERPRISE EQUITY
VALUE/ VALUE/
NET REVENUE BOOK VALUE
----------- ----------
<S> <C> <C>
High 1.89 x 0.73 x
Low 0.99 1.11
Mean 1.43 2.56
Median 1.36 2.71
</TABLE>
<TABLE>
<CAPTION>
PREMIUM
FOUR WEEKS
PRIOR TO
ANNOUNCEMENT
------------
<S> <C>
High 34.05
Low 2.74
Mean 22.07
Median 25.01
</TABLE>
<TABLE>
<CAPTION>
Tower Hill Securities
- ---------------------
<S> <C> <C>
Forecasted Fiscal 1999 Revenue/Book Value $ 4,500,000 $ 1,500,000
Mean Multiple 1.43 x 2.56 x
----------- -----------
Implied Multiple Value $ 6,435,000 $ 3,840,000
Plus: Equity Portfolio Value 6,614,522 6,614,522
Total $13,049,522 $10,454,522
=========== ===========
Walnut Stock Price as of August 4, 1999 2.19 2.19
Number of Shares to be issued 4,095,096 4,095,096
Total Consideration Paid by Walnut 8,958,023 8,958,023
Total Implied Premium 4,091,499 2,496,499
Premium % 45.67% 16.71%
</TABLE>
As shown, the Combined Transaction Analysis indicates that the value received by
Walnut Stockholders is approximately 17%-46% higher than the Total Consideration
proposed by the financial terms of the Proposed Transaction.
The table below presents the implied premiums based on revenue and book value
multiples:
<TABLE>
<CAPTION>
SUMMARY OF IMPLIED PREMIUMS:
----------------------------
Combined Company Analysis Combined Transaction Analysis
------------------------- -----------------------------
<S> <C> <C>
Revenue Multiple 25.08% 15.53%
Book Value Multiple 45.67% 16.71%
Mean 35.38% 16.12%
Combined Mean 25.75%
Mean Premium of
Comparable Transactions 22.07%
(4 weeks prior to announcement)
</TABLE>
As demonstrated in the above table, the average premium calculated for the
Proposed Transaction is higher than those of comparable transactions. In
arriving at its opinion, Gruntal did not ascribe a specific range of value to
Walnut or Tower Hill, but rather made its determination as to the fairness, from
a financial point of view, to Walnut of the consideration to be paid by Walnut
in the proposed merger transaction on the basis of the financial and comparative
analyses described above. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial and
comparative analysis and the application of those methods to the particular
circumstances, and therefore, such an opinion is not readily susceptible to
summary description. Furthermore, in arriving at its opinion, Gruntal did not
attribute any particular weight to any analysis or factor considered by it, but
rather made qualitative judgements as to the significance and relevance of each
analysis and factor. Accordingly, Gruntal believes that its analyses must be
considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors as a whole, could create a
misleading or incomplete view of the process underlying its opinion.
Gruntal is a nationally recognized investment banking firm and, as part of its
investment banking activities, is regularly engaged in the valuation of
businesses and their securities in connection with the following:
- -- mergers and acquisitions;
- -- negotiated underwritings;
- -- competitive bids;
- -- secondary distributions of listed and unlisted securities;
- -- private placements; and
- -- valuations for corporate and other purposes.
The Walnut Board of Directors selected Gruntal because of its expertise,
reputation and familiarity with Walnut and the financial services industry
generally and because its investment banking professionals have substantial
experience in transactions comparable to the Mergers.
We have acted as financial advisor to Walnut in connection with the proposed
transactions and will receive a fee for such services and for rendering this
opinion. In addition, Walnut has agreed to indemnify us for certain liabilities
which may arise out of the rendering of this opinion. In the ordinary course of
our business, we may actively trade the debt or equity securities of each of
Walnut for account and for the accounts of customers and, accordingly, may at
any time, hold a long or short position in such securities.
35
<PAGE> 47
THE MERGER AGREEMENT
GENERAL DESCRIPTION
The terms of the Mergers are set forth in the Merger Agreement, which
is attached as Exhibit A to this Proxy Statement. The following description of
the material terms of the Merger Agreement is qualified in its entirety by
reference to the Merger Agreement. Stockholders are urged to review the Merger
Agreement carefully and in its entirety.
Merger 1. The Merger Agreement provides that, at the First Effective
Time and in accordance with the Utah BCA and the Delaware GCL, Walnut will be
merged with and into THCG. THCG will have no business, assets or liabilities
prior to Merger 1. Upon consummation of Merger 1, the separate corporate
existence of Walnut shall cease and THCG shall continue as the surviving
corporation under the name "THCG, Inc." All of the property, rights, privileges,
immunities and powers of Walnut and THCG before Merger 1 will vest in THCG as
the surviving corporation, and all of the debts, liabilities and duties of
Walnut and THCG before Merger 1 will become the debts, liabilities and duties of
THCG as the surviving corporation. The primary purpose of Merger 1 is to
reincorporate Walnut in Delaware.
Merger 2. Following the consummation of Merger 1 at the Second
Effective Time and in accordance with the New York BCL, Newco will be merged
with and into Tower Hill. Newco will have no business, assets or liabilities
prior to Merger 2. At the effective time of Merger 2, the separate corporate
existence of Newco shall cease and Tower Hill shall continue as the surviving
corporation and a wholly-owned subsidiary of THCG under the name "Tower Hill
Securities, Inc." All of the property, rights, privileges, immunities and powers
of Newco and Tower Hill before Merger 2 will vest in the merged Tower Hill, and
all of the debts, liabilities and duties of Newco and Tower Hill before Merger 2
will become the debts, liabilities and duties of the merged Tower Hill.
EFFECTIVE DATES OF THE MERGERS
The Merger Agreement provides that the closing of the Mergers and the
transactions contemplated by the Merger Agreement shall take place as soon as
practicable after all of the conditions to the closing set forth in Article 6 of
the Merger Agreement and described under "Conditions to Consummation of the
Mergers" below have been satisfied or waived (the "Closing") (see "Conditions to
Consummation of the Mergers" below). Merger 1 shall be consummated and shall
become effective at such time as (i) articles of merger are filed with the Utah
Department of Commerce, Division of Corporations and Commercial
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<PAGE> 48
Code and a certificate of merger is filed with the Delaware Secretary of State
in accordance with the relevant provisions of the Utah BCA and the Delaware GCL
and (ii) all other filings or recordings required by the Utah BCA and the
Delaware GCL have been made. Immediately after the First Effective Time and the
satisfaction of all of the conditions precedent to Merger 2, Merger 2 shall be
consummated and shall become effective at such time as (i) a certificate of
merger is filed with the New York Secretary of State in accordance with the New
York BCL and (ii) all other filings or recordings required under the New York
BCL have been made.
CONVERSION OF SECURITIES
At the First Effective Time, each share of Walnut Common Stock issued
and outstanding immediately prior to the First Effective Time will be
automatically converted into one validly issued, fully paid and non-assessable
share of THCG Common Stock. Each share of THCG Common Stock issued and
outstanding prior to the First Effective Time and held by Walnut, and each share
of Walnut Common Stock and each share of THCG Common Stock held in treasury by
Walnut and THCG respectively, immediately prior to the First Effective Time,
will be cancelled and retired and cease to exist, without any conversion
thereof. For a description of the THCG Common Stock, see "DESCRIPTION OF THCG
COMMON STOCK."
At the Second Effective Time, each share of Newco Common Stock issued
and outstanding immediately prior to the Second Effective Time will be
automatically converted into one validly issued, fully paid and non-assessable
share of Tower Hill Common Stock. In addition, at the Second Effective Time,
each share of Tower Hill Common Stock issued and outstanding immediately prior
to the Second Effective Time will be converted into 37,228.145 shares of THCG
Common Stock plus an additional number of shares of THCG Common Stock equal to
one percent (1%) of the number of restricted shares of THCG Common Stock
intended to be granted to Shai Novik in exchange for certain options held by him
(see "--Treatment of Stock Options" below) and which do not vest and are
forfeited in accordance with the terms and conditions thereof, provided that
upon such forfeiture and transfer to the holders of Tower Hill Common Stock,
such shares will no longer be restricted. Each share of Tower Hill Common Stock,
each share of preferred stock of Tower Hill, and each share of Newco Common
Stock held in treasury by Tower Hill and Newco, respectively, immediately prior
to the Second Effective Time will be cancelled and retired and cease to exist,
without any conversion thereof.
TREATMENT OF STOCK OPTIONS
Prior to the First Effective Time, the 687,685 options and Class A
Warrants outstanding at the First Effective Time to purchase shares of Walnut
Common Stock (each, a "Converted Walnut Option"), other than the 95,813 Walnut
Options held by Messrs. Burton and Joel Kanter and Robert Mauer will be assumed
by THCG and will be converted into and shall constitute an option to purchase,
for the same exercise price per share and on the same terms and conditions as
are contained in such option, one fully paid and non-assessable share of THCG
Common Stock. As soon as practicable following the First Effective Time, THCG
will cause to be delivered to each holder of an outstanding Converted Walnut
Option an appropriate notice setting forth such holder's rights pursuant thereto
and that such Converted Walnut Option shall continue in effect on the same terms
and conditions. The 95,813 options to purchase Walnut Common Stock outstanding
at the First Effective Time and held by Messrs. Burton and Joel Kanter and
Robert Mauer will be purchased for the aggregate amount of $10,311.59.
As of the Second Effective Time, each option outstanding to purchase
shares of Tower Hill Common Stock held by Shai Novik, an employee of Tower Hill
(each, a "Novik Option"), will be cancelled, and it is intended that Mr. Novik
will receive a grant of 372,281.45 restricted shares of THCG Common Stock under
the THCG Stock Incentive Plan pursuant to his employment agreement with THCG
(see "INTERESTS OF CERTAIN PERSONS IN THE MERGERS--Employment Agreements"). The
shares of restricted THCG Common Stock issued to Mr. Novik will be subject to a
restricted stock agreement, which shall include restrictions as to
transferability, and shall be subject to forfeiture and shall become
transferable and vested in the same proportions and at the same time as the
Novik Options were scheduled to become exercisable pursuant to Mr. Novik's
employment agreement.
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<PAGE> 49
EXCHANGE OF STOCK CERTIFICATES
Fractional Shares. No fractional shares of THCG Common Stock will be
issued in connection with the Mergers. Any stockholder of Tower Hill who would
otherwise have been entitled to receive a fraction of a share of THCG Common
Stock will receive one whole share of THCG Common Stock in respect of such
fractional share.
Surrender of Shares of Walnut and Tower Hill. Walnut has appointed
Corporate Stock Transfer, Inc. to serve as the exchange agent (the "Exchange
Agent") in the Mergers. Promptly after the First Effective Time, THCG will
deposit with the Exchange Agent the aggregate number of shares of THCG Common
Stock issuable pursuant to the Merger Agreement upon conversion of the issued
and outstanding shares of Walnut Common Stock. Promptly after the Second
Effective Time, THCG shall deposit with the Exchange Agent the aggregate number
of shares of THCG Common Stock issuable pursuant to the Merger Agreement upon
conversion of the issued and outstanding shares of Tower Hill Common Stock and
the Novik Options, respectively.
Within three business days after the Effective Time of the Mergers, the
Exchange Agent will deliver to each record holder of the certificates
representing shares of Walnut Common Stock or Tower Hill Common Stock
(collectively, the "Original Certificates") a letter of transmittal and
instructions to effect the surrender of the Original Certificates for exchange.
Upon surrender of an Original Certificate for cancellation to the Exchange
Agent, together with a duly completed and validly executed letter of
transmittal, and such other documents as may be required by the instructions,
the holder of that Original Certificate will be entitled to receive a
certificate evidencing the number of whole shares of THCG Common Stock which
such holder is entitled to receive in the Mergers. Any Original Certificates so
surrendered will be canceled.
Dividends and Distributions. No dividends or other distributions
declared or made after the Effective Time of the Mergers with respect to shares
of THCG Common Stock with a record date after the Effective Time of the Mergers
will be paid to the holder of any unsurrendered Original Certificate with
respect to the shares of THCG Common Stock that the holder is entitled to
receive until the holder surrenders such Original Certificate as provided above.
Subject to applicable law, upon surrender of any Original Certificate, THCG will
pay to the holder thereof, without interest, any dividends or distributions with
respect to such shares of THCG Common Stock that have become payable between the
Effective Time of the Mergers and the time of such surrender.
Transfers of Ownership. If any certificate for THCG Common Stock is to
be issued in a name other than that in which the Original Certificate
surrendered in exchange is registered, it will be a condition to such issuance
that the Original Certificate so surrendered be properly endorsed and otherwise
in proper form for transfer, accompanied by all documents required to evidence
and effect such transfers pursuant to the Merger Agreement, and that the person
requesting the transfer will have paid to THCG or any designated agent any fees
or transfer taxes required by reason of the issuance of a certificate for shares
of THCG Common Stock in any name other than that of the registered holder of the
Original Certificate surrendered, or established to the satisfaction of THCG or
any designated agent that such fees and taxes have been paid or are not payable.
No Liability. None of the Exchange Agent, THCG, Tower Hill or any party
to the Merger Agreement is liable to any holder of Walnut Common Stock or Tower
Hill Common Stock for any amount properly paid to a public official pursuant to
any applicable abandoned property, escheat or similar law.
Lost, Stolen or Destroyed Certificates. A stockholder may be required
to provide an appropriate affidavit to the Exchange Agent if any Original
Certificates are lost, stolen or destroyed in order to receive consideration for
those Original Certificates. THCG may require the owner of lost, stolen or
destroyed Original Certificates to deliver a bond as indemnity against any claim
that may be made against THCG or the Exchange Agent with respect to any such
Original Certificates.
Withholding Rights. Either THCG or the Exchange Agent is entitled to
deduct and withhold from the consideration payable to any holder of Original
Certificates the amounts THCG or the Exchange Agent is required to deduct and
withhold under the Code or any provision of state, local or foreign tax law. Any
amounts deducted and withheld by THCG or the Exchange Agent will be treated as
having been paid to the holder of Walnut Common Stock or Tower Hill Common
Stock.
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DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED
TO THE WALNUT STOCKHOLDERS PROMPTLY FOLLOWING THE EFFECTIVE TIME OF THE MERGERS
AS TO THE METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF
WALNUT COMMON STOCK. WALNUT STOCKHOLDERS SHOULD NOT SEND CERTIFICATES
REPRESENTING THEIR SHARES TO THE EXCHANGE AGENT PRIOR TO RECEIPT OF THE
TRANSMITTAL LETTER.
EFFECT OF THE MERGERS ON CERTAIN CORPORATE MATTERS
Certificates of Incorporation. At the First Effective Time, the
certificate of incorporation of THCG, as in effect immediately prior to the
First Effective Time, will be the certificate of incorporation of THCG as the
surviving corporation. At the Second Effective Time, the certificate of
incorporation of Tower Hill, as in effect immediately prior to the Second
Effective Time, will be the certificate of incorporation of Tower Hill as the
surviving corporation.
Bylaws. At the First Effective Time, the bylaws of THCG, as in effect
immediately prior to the First Effective Time, will be the bylaws of THCG as the
surviving corporation. At the Second Effective Time, the bylaws of Tower Hill,
as in effect immediately prior to the Second Effective Time, will be the bylaws
of Tower Hill as the surviving corporation.
Directors and Officers. At the First Effective Time, the directors of
THCG immediately preceding the First Effective Time will become the initial
directors of THCG as the surviving corporation until the earlier of their death,
resignation or removal or until their respective successors are duly elected and
qualified. In addition, immediately after the Second Effective Time, pursuant to
the Merger Agreement, the board of directors of THCG will be increased from
three to seven members, and the initial directors will appoint four additional
board members to fill vacancies in THCG's Board of Directors created by such
increase. The four additional board members have been or will be designated by
Tower Hill. See "MANAGEMENT OF THCG FOLLOWING THE MERGERS." The officers of THCG
immediately preceding the First Effective Time will become the officers of THCG
as the surviving corporation until the Second Effective Time or until the
earlier of their death, resignation or removal or until their respective
successors are duly elected or qualified. At the Second Effective Time, the
officers of THCG shall resign, and Joseph D. Mark, Adi Raviv and Shai Novik
shall become the officers of THCG. The directors and officers of Tower Hill
immediately preceding the Second Effective Time shall remain the directors and
officers of Tower Hill until the earlier of their death, resignation or removal
or until their respective successors are duly elected and qualified.
For a discussion of how the above changes will affect the rights of the
stockholders of Walnut, see "COMPARISON OF RIGHTS OF HOLDERS OF WALNUT COMMON
STOCK BEFORE AND AFTER THE MERGERS."
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations by Walnut, THCG
and Newco, on the one hand, and Tower Hill, on the other hand, as to, among
other things: (a) due organization, good standing and absence of violations of
organizational documents; (b) capital structure; (c) ownership of subsidiaries;
(d) requisite corporate power and authority to enter into the Merger Agreement
and the agreements related thereto and to consummate the transactions provided
for thereby; (e) due authorization, execution and delivery of the Merger
Agreement and the agreements related thereto; (f) validity and enforceability of
the Merger Agreement and the agreements related thereto; (g) the disclosure
contained in documents filed with the Securities and Exchange Commission; (h)
required filings and approvals; (i) absence of defaults; (j) absence of
undisclosed liabilities and material changes; (k) absence of litigation; (l)
compliance with applicable laws; (m) employee benefit plans; (n) compliance with
environmental laws and regulations; (o) tax matters; (p) material contracts; (q)
title to properties; (r) condition and sufficiency of assets; (s) intellectual
property matters; (t) Year 2000 issues; (u) investment securities; (v) matters
relating to brokers; (w) absence of certain transactions with affiliates; and
(x) corporate records. None of the representations and warranties contained in
the Merger Agreement survive the Closing of the Mergers; therefore, none of
Walnut, THCG or Tower Hill has any remedies for breach of the representations
and warranties which may first be discovered after the Closing.
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COVENANTS
Conduct of Business Prior to the Merger. Each of Walnut and Tower Hill
has agreed that, except as otherwise authorized by the Merger Agreement until
the Effective Time of the Mergers, each of Walnut and Tower Hill will, and will
cause each of its respective subsidiaries to:
- maintain its corporate existence in good standing;
- maintain the general character of its business;
- maintain in effect all of its presently existing (or substantially
equivalent) insurance coverage;
- preserve intact its present business organization, preserve its
goodwill, keep available the services of its current officers and
employees and preserve its present business relationships with
customers, clients and other persons with whom it has business
relations; and
- in all respects conduct its business only in the usual and
ordinary manner consistent with past practice and perform in all
material respects all material contracts or other obligations with
banks, customers, clients, employees and others.
Until the Second Effective Time, each of Walnut and Tower Hill has
agreed that it will not, directly or indirectly, without the prior written
consent of the other, do, or propose to do, or cause any of their respective
subsidiaries, directly or indirectly, to do, or propose to do, any of the
following:
- amend or otherwise modify its charter or the charters or other
organizational documents of any of their respective subsidiaries;
- issue, sell, dispose of or encumber or authorize the issuance,
sale, disposition or encumbrance of, or grant any option to
acquire any shares of its capital stock or securities convertible
into, exercisable into or exchangeable for any such shares or
securities or alter any of its outstanding securities or make any
change in its outstanding shares of capital stock or its
capitalization (except as authorized by the Merger Agreement);
- encumber any material assets or properties;
- declare, set aside, make or pay any dividend or other distribution
to any stockholder with respect to its capital stock;
- redeem, purchase or acquire any of its own securities (except as
authorized by the Merger Agreement);
- increase the compensation or other remuneration or benefits
payable or to become payable to any of its directors or executive
officers or other employees or agents, except, with respect to
such other employees or agents only, in the ordinary course of
business consistent with past practice (except as authorized by
the Merger Agreement);
- adopt, amend or make any unscheduled contribution to any employee
benefit plans for or with employees, other than as may be required
by law, or enter into any collective bargaining agreement;
- terminate or modify any material contracts requiring future
payments, individually or in the aggregate, in excess of $100,000,
except for the termination of such contracts upon their expiration
during such period in accordance with their terms;
- create, incur, assume or otherwise become liable for any
indebtedness in an aggregate amount in excess of $20,000 or
guarantee or endorse any obligation or the net worth of any
person, except for endorsements of negotiable instruments for
collection in the ordinary course of business consistent with past
practice (except as authorized by the Merger Agreement);
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- pay, discharge or satisfy any claim, liability or obligation,
absolute, accrued, contingent or otherwise, whether due or to
become due, in an aggregate amount in excess of $20,000, other
than liabilities incurred prior to the date of the Merger
Agreement in the ordinary course of business in a manner
consistent with past practice (except as authorized by the Merger
Agreement);
- sell, transfer, lease or otherwise dispose of any of its assets or
properties, other than in the ordinary course of business
consistent with past practice and for cash consideration equal to
the fair value of such assets or properties at the time of such
sale, transfer, lease or other disposition (except as authorized
by the Merger Agreement);
- cancel, compromise, release or waive any material debt, claim or
right (except as authorized by the Merger Agreement);
- other than routine advances made in the ordinary course of
business consistent with past practice, make any loan or advance
or acquire for cash the capital stock or other securities, or any
ownership interest in, or substantially all of the assets of, any
other business (except as authorized by the Merger Agreement);
- make any material capital investment or expenditure or capital
improvement, addition or betterment;
- change its method of accounting, except as authorized by generally
accepted accounting principles;
- institute or settle any proceeding before any governmental entity
relating to it or its assets or properties;
- adopt a plan of liquidation or dissolution with respect to itself
or its subsidiaries;
- enter into any contract, except in the ordinary course of business
consistent with past practice;
- make any new election with respect to taxes or change any current
elections with respect to taxes or settle or compromise any
federal, state, local or foreign tax liability or agree to an
extension of a statute of limitations; or
- enter into any commitment to do any of the foregoing, or any
action which would make any of the representations or warranties
contained in the Merger Agreement untrue or incorrect in any
material respect, or cause any covenant, condition or agreement in
the Merger Agreement not to be complied with or satisfied in any
material respect.
Deregistration of Walnut Under the 1940 Act. Pursuant to the Merger
Agreement, Tower Hill has required that, as a condition to Merger 2, Tower Hill
is to prepare and Walnut is to file with the SEC an 8(f) application, the
purpose of which is to deregister Walnut, Walnut Capital, Walnut Funds and
Universal Bridge as BDCs under the 1940 Act. Walnut has agreed to fully
cooperate with Tower Hill in the preparation of the 8(f) Application and has
agreed to furnish promptly to Tower Hill all information concerning its
business, facilities, properties, assets and personnel, and shall make available
to Tower Hill the appropriate individuals (including officers, employees,
accountants, counsel and other professionals) for discussion of Walnut's
business, facilities, properties and personnel, as Tower Hill may reasonably
request in connection with its preparation of the 8(f) Application. Tower Hill
has agreed to provide Walnut with a reasonable opportunity to review, comment on
and approve the 8(f) Application and any amendment or supplement thereto prior
to filing such 8(f) Application with the SEC, provided that such approval shall
not be unreasonably withheld or delayed. Tower Hill has further agreed to
provide Walnut with a copy of all such filings made with the SEC. The
deregistration process is discussed further under "PROPOSAL V--APPROVAL OF THE
BDC DEREGISTRATION."
SEC and Other Governmental Filings. Pursuant to the Merger Agreement,
each of Walnut and Tower Hill has agreed to provide the other with copies of all
filings made by it or any of its subsidiaries with the SEC or any other
governmental authority in connection with the Merger Agreement and agreements or
documents required to be delivered pursuant to the Merger Agreement, or the
transactions contemplated thereby.
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Related Transactions. Pursuant to the Merger Agreement, Walnut has
agreed to use its commercially reasonable efforts to effect the following
Related Transactions (as defined below) prior to the Closing, provided that, to
the extent required, the BDC Deregistration has been effected.
The "Related Transactions" are:
- The Capital Investment. Walnut required is to issue at least
1,500,000 and up to 2,500,000 shares of Walnut Common Stock at
$2.00 per share in cash to an investor group (which may include
current stockholders of Walnut and Tower Hill) in a private
placement transaction. The total number of shares issued in
connection with the Capital Investment may be increased by one
share for (a) every $2.00 of debt and accrued liabilities
converted to cash in connection with the Debt Conversion, (b)
every $2.00 of accrued compensation and (c) every $2.00 of cash
paid in connection with the UPLP Acquisition, up to a maximum of
3,000,000 shares of Walnut Common Stock. The Capital Investment is
discussed further under "PROPOSAL II--APPROVAL OF THE CAPITAL
INVESTMENT."
- The Debt Conversion. Walnut must convert certain of its debts and
accrued liabilities in the aggregate principal amount of up to
$1,093,000 (plus any interest actually accrued thereon) into cash
or Walnut Common Stock valued at $2.00 per share, as reasonably
determined by Tower Hill. The Debt Conversion is discussed further
under "PROPOSAL III--APPROVAL OF THE DEBT CONVERSION AND THE
COMPENSATION SATISFACTION."
- The Compensation Satisfaction. Walnut must satisfy in full the
accrued compensation of Burton W. Kanter in the aggregate amount
of (i) $387,875 through June 30, 1999; plus (ii) $273.97 per day
from July 1, 1999 through the Closing Date (the "Continuing
Accrual"); less (iii) $150,000 in accrued compensation that Mr.
Kanter has agreed to forgive, either in cash or by issuing to Mr.
Kanter shares of Walnut Common Stock valued at $2.00 per share, as
reasonably determined by Tower Hill. The Compensation Satisfaction
is discussed further under "PROPOSAL III--APPROVAL OF THE DEBT
CONVERSION AND THE COMPENSATION SATISFACTION."
- UPLP Acquisition. Walnut is to cause Universal Bridge to acquire
(a) 17% of the outstanding limited partnership interests in UPLP
in exchange for an amount equal to the net book value thereof
payable either in cash or Walnut Common Stock valued at $2.00 per
share, as reasonably determined by Tower Hill, and (b) 50% of the
outstanding general partnership interests of UPLP for up to
$134,000, payable in cash or shares of Walnut Common Stock valued
at $2.00 per share, as reasonably determined by Tower Hill.
Following the UPLP Acquisition, UPLP will be dissolved. The UPLP
Acquisition is discussed further under "PROPOSAL IV--APPROVAL OF
THE UPLP ACQUISITION."
- Sale of PassPlus Program. At the Closing, Walnut is to sell to
Burton W. Kanter, and Burton W. Kanter is to purchase from Walnut,
any and all rights Walnut or its subsidiaries may have under its
United Airlines PassPlus Program for a cash purchase price of
$5,000.
- Relinquishment of Walnut Capital SBA License. Walnut is to cause
Walnut Capital to relinquish its license from the SBA to operate
as an SBIC.
- Cancellation of the Windy City/Walnut Sublease. Walnut is to
terminate the oral sublease by and between Walnut and Windy City
for premises located in Vienna, Virginia, with no cost or penalty
to Walnut.
Any agreements necessary to effect the Related Transactions are referred to in
this Proxy Statement as the "Related Agreements."
Consulting Agreements. Pursuant to the Merger Agreement, Walnut has
agreed to use its commercially reasonable efforts to cause (a) Chicago Advisory
Group (of which Robert Mauer, Walnut's Chief Financial Officer and Treasurer, is
an employee) to enter into a consulting agreement with Inland Financial
Corporation, a Washington corporation and a wholly-owned subsidiary of Walnut;
and (b) Windy City (of which Joel Kanter, Walnut's
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Chief Executive Officer, is the President) to enter into a consulting agreement
with THCG. See "INTERESTS OF CERTAIN PERSONS IN THE MERGERS--Consulting
Agreements."
Employment Agreements. Pursuant to the Merger Agreement, Tower Hill is
to use its commercially reasonable efforts to cause each of Joseph D. Mark, Shai
Novik and Adi Raviv, the current executive officers of Tower Hill, to enter into
employment agreements with THCG. See "INTERESTS OF CERTAIN PERSONS IN THE
MERGERS--Employment Agreements."
Voting Agreement. Concurrently with the execution of the Merger
Agreement, the Principal Walnut Stockholders, each of which is affiliated with
Messrs. Burton and Joel Kanter, entered into the Voting Agreement, pursuant to
which they have (a) agreed to vote their shares of Walnut Common Stock in favor
of the Mergers and the Related Transactions and (b) agreed not to sell their
shares of THCG Common Stock for a period of 12 months following the consummation
of the Mergers and the Related Transactions, subject to certain exceptions set
forth in the Voting Agreement. See "RESALES OF THCG COMMON STOCK ISSUED IN
CONNECTION WITH THE MERGERS."
Investment Letter. Pursuant to the Merger Agreement, Tower Hill has
agreed to use its commercially reasonable efforts to cause each of its
stockholders to execute and deliver to Walnut an investment letter, pursuant to
which each Tower Hill stockholder will, among other things, (a) acknowledge that
the shares of THCG Common Stock that they will receive in Merger 2 have not been
registered under the Securities Act or any securities laws, and cannot be sold
unless registered under the Securities Act and any applicable state securities
laws, or are exempt from registration; (b) represent and warrant that they are
"accredited investors" as defined under Rule 501(a) of Regulation D promulgated
under the Securities Act or a "qualified institutional buyer" as defined under
the Securities Act; and (c) represent and warrant that the THCG Common Stock is
being acquired for their own account and not for any other person or entity, for
investment only and with no intention of distribution or reselling the THCG
Common Stock in any transaction that would violate the securities law of the
United States.
No Solicitation. Pursuant to the Merger Agreement, Walnut agreed that
each of Walnut, THCG and Newco, their affiliates and their respective officers,
directors, employees, representatives and agents were to immediately cease any
existing discussions or negotiations, if any, with respect to any acquisition or
exchange of all or any material portion of the assets of, or any equity interest
in, Walnut or any of its subsidiaries or any business combination with Walnut or
any of its subsidiaries (except for existing discussions or negotiations with
respect to the acquisition by Walnut of factoring businesses in exchange for
assets of, or an equity interest in, Walnut). In addition, Walnut agreed, prior
to the Effective Time of the Mergers, it shall not, and shall not authorize or
permit any of its subsidiaries or any of its or its subsidiaries' directors,
officers, employees, agents or representatives, directly or indirectly, to
solicit, initiate, encourage, facilitate, furnish or disclose non-public
information in furtherance of, any inquiries or the making of any proposal with
respect to any merger, liquidation, recapitalization, consolidation or other
business combination involving Walnut or any of its subsidiaries or acquisition
of any capital stock or material portion of the assets of Walnut or any of its
subsidiaries, or any combination of the foregoing (each, an "Acquisition
Transaction"), or negotiate, explore or otherwise engage in discussion with any
person (other than Tower Hill or its directors, officers, employees, agents and
representatives) with respect to any Acquisition Transaction, or enter into any
agreement, arrangement or understanding requiring it to abandon, terminate or
fail to consummate the Mergers, the Related Transactions or any other
transactions contemplated by the Merger Agreement. However, Walnut is permitted
to furnish information to, and negotiate or otherwise engage in discussion with
any party who delivers a bona fide written proposal for an Acquisition
Transaction if (a) the Walnut Board determines in good faith and on a reasonable
basis by a majority vote, after consultation with its outside counsel and its
financial advisors, that (i) such Acquisition Transaction is reasonably likely
to be more favorable to Walnut and its stockholders from a financial point of
view than the transactions contemplated by the Merger Agreement and (ii) that
failure to take such action would constitute a breach of its fiduciary duties;
(b) Walnut enters into a customary confidentiality agreement with respect to
such Acquisition Transaction; and (c) Walnut, as soon as practicable, advises
Tower Hill in writing and in detail of the receipt or the existence of any
discussions, negotiations, proposals or substantive inquiries relating to an
Acquisition Transaction, identifies the offeror and furnishes to Tower Hill a
copy of such proposal or substantive inquiry, if it is in writing, or a written
summary of any oral proposal or substantive inquiry relating to an Acquisition
Transaction. Walnut has agreed that, as soon as practicable, it shall advise
Tower Hill in writing of any substantive development relating to such proposal,
including the results of any substantive discussion or negotiations with respect
thereto.
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Tower Hill agreed that it, Tower Hill LLC and their affiliates and
respective officers, directors, employees, representatives and agents would
immediately cease discussions or negotiations, if any, with any parties
conducted with respect to any acquisition or exchange of all or any material
portion of the assets of, or any equity interest in, Tower Hill or Tower Hill
LLC, or any business combination with Tower Hill or Tower Hill LLC. In addition,
Tower Hill agreed that, prior to the Effective Time of the Mergers, it will not,
and will not authorize or permit Tower Hill LLC or any of their respective
directors, officers, employees, agents or representatives, directly or
indirectly, to solicit, encourage, facilitate, or furnish or disclose non-public
information in furtherance of, any inquiries into the making of or make any
proposal with respect to any merger, liquidation, recapitalization,
consolidation or other business combination involving Tower Hill or Tower Hill
LLC or acquisition of any capital stock or any portion of the assets of Tower
Hill or Tower Hill LLC or any combination of the foregoing, or negotiate,
explore or otherwise engage in discussion with any person (other than Walnut or
its directors, officers, employees, agents and representatives) with respect to
any such transaction, or enter into any agreement, arrangement or understanding
requiring it to abandon, terminate or fail to consummate Merger 2, the Related
Transactions or any other transactions contemplated by the Merger Agreement.
Indemnification and Insurance. Pursuant to the Merger Agreement, THCG
has agreed that the bylaws and certificate of incorporation of THCG at the First
Effective Time will contain the indemnification provisions set forth in the THCG
bylaws and certificate of incorporation on the date of the Merger Agreement,
which provisions may not be amended, repealed or otherwise modified (other than
as may be required by law) for a period of six years after the First Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who at the First Effective Time were directors, officers, employees
or agents of Walnut or its subsidiaries. THCG will indemnify and hold harmless
each present and former director, officer, employee or agent of Walnut or any of
its subsidiaries against any costs or expenses pertaining to any matter arising
out of or in connection with the transactions contemplated by the Merger
Agreement or the Related Agreements or otherwise with respect to any acts or
omissions occurring at or prior to the First Effective Time to the fullest
extent possible under applicable law or under its certificate of incorporation
and bylaws, in each case for a period of six years after the First Effective
Time. For three years after the First Effective Time, THCG is to maintain in
effect policies of directors' and officers' liability insurance covering those
persons who are currently covered by Walnut's directors' and officers' liability
insurance policy, provided, however, that THCG shall not be required to pay more
than 150% of the annual premium currently paid by Walnut for such coverage.
THCG Stock Incentive Plan. Pursuant to the Merger Agreement, Walnut has
agreed, prior to the First Effective Time, (a) to cause THCG to adopt, subject
to approval by the Walnut stockholders, the THCG Stock Incentive Plan providing
for the grant of incentive awards thereunder with respect to a number of shares
that in the aggregate does not exceed 2,250,000 shares of THCG Common Stock, and
(b) to grant, subject to approval of the THCG Stock Incentive Plan by the Walnut
stockholders, the consummation of the Mergers and, if required, the BDC
Deregistration, options to purchase up to 1,250,000 shares of THCG Common Stock
to certain officers, directors and employees of Walnut and certain principals
and officers of Tower Hill and 372,281.45 restricted shares of THCG Common Stock
to Shai Novik pursuant to his employment agreement. The THCG Stock Incentive
Plan is discussed further under "PROPOSAL VI--APPROVAL OF THE THCG STOCK
INCENTIVE PLAN."
Repurchase of Walnut Options. Pursuant to the Merger Agreement, Walnut
is to use its commercially reasonable efforts to repurchase all outstanding
options to purchase Walnut Common Stock, other than the Converted Walnut
Options. Each holder of an option so repurchased shall deliver a copy of the
agreement evidencing such Walnut option, marked "cancelled."
Walnut Incentive Program. Pursuant to the Merger Agreement, prior to
the First Effective Time, Walnut shall use commercially reasonable efforts to
obtain the consent and acknowledgment of Joel Kanter and Robert Mauer, as the
sole beneficiaries under the Walnut Financial Services, Inc. Management
Incentive Plan, that the sole benefit to which they are entitled under such plan
is the payment to them, in cash only, of a maximum amount of $90,000 in the
aggregate.
Cancellation of Novik Options. Prior to the Second Effective Time,
Tower Hill is to use commercially reasonable efforts to obtain the consent of
Shai Novik to the cancellation of the Novik Options.
The LLC Merger. Pursuant to the Merger Agreement, Tower Hill has to
establish Tower Hill LLC. Walnut and Tower Hill have agreed, immediately after
the Effective Time of the Mergers, to cause (a) Tower Hill to contribute its
portfolio of investment securities to Tower Hill LLC; (b) the merger of Walnut
Capital, Walnut Funds and Universal Bridge with and into Tower Hill LLC, with
Tower Hill LLC as the surviving entity, and (c), if necessary in connection with
the BDC Deregistration, the dividend by Tower Hill of its membership interest in
Tower Hill LLC to THCG. After doing so, ownership of all of the combined
company's portfolio investments will be concentrated in a single wholly-owned
direct subsidiary of THCG.
THCG Board of Directors. Pursuant to the Merger Agreement, upon the
consummation of Merger 2, the THCG Board of Directors shall be increased from
three directors to seven directors and shall be classified into three classes.
The Class I directors shall consist of Messrs. Evan Marks and Joseph D. Mark,
who shall serve until the first annual meeting of the THCG stockholders after
the Mergers. The Class II directors shall consist of Mr.
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and Gene Burleson [and an additional Tower Hill designee], who shall serve until
the second annual meeting of the THCG stockholders after the Mergers. The Class
III directors shall consist of Messrs. Burton W. Kanter, Joel S. Kanter and Adi
Raviv, who shall serve until the third annual meeting of the THCG stockholders
after the Mergers. See "MANAGEMENT OF THCG FOLLOWING THE MERGERS."
Tower Hill Preferred Stock. Pursuant to the Merger Agreement, prior to
the Second Effective Time, Tower Hill has agreed to cause its stockholders to
contribute to the capital of Tower Hill all outstanding shares of preferred
stock in Tower Hill, or to take all such action as is necessary to ensure that
no shares of preferred stock of Tower Hill are outstanding at the Second
Effective Time.
Tower Hill Capital Group, LLC. Pursuant to the Merger Agreement, the
principals of Tower Hill, who are also the principals of Tower Hill Capital
Group, LLC, have agreed to change the name of Tower Hill Capital Group, LLC such
that its name will no longer contain the words "Tower Hill."
Walnut Securities. Upon the later to occur of (a) the approval of the
Mergers by the Walnut stockholders and (b) the SEC's issuance of a notice with
respect to the 8(f) Application, Walnut is to sell its marketable securities for
cash and to revalue its portfolio of nonmarketable securities as appropriate.
Softwatch Securities. Tower Hill has agreed to use its commercially
reasonable efforts to cause Adi Raviv to obtain a waiver from each of the
shareholders of Softwatch Ltd., in order to permit Mr. Raviv to transfer to
Tower Hill 127,010 shares of Softwatch for a purchase price of $315,131.58,
which price includes $132,237.18 of debt forgiveness. If Mr. Raviv is unable to
obtain the required waivers, the $182,894.40 cash component of the purchase
price shall remain an asset of Tower Hill, and Tower Hill shall forgive Mr.
Raviv's indebtedness to Tower Hill in the amount of $132,237.18.
Additional Covenants. In addition to the covenants detailed above, each
of Walnut and Tower Hill have made certain additional covenants, relating to,
among other matters, the following: (a) restrictions on the making of press
releases; (b) the maintenance of confidentiality; (c) the provision of access to
one another's facilities and records and (d) the tax treatment of the Mergers.
CONDITIONS TO CONSUMMATION OF THE MERGERS
The respective obligations of each party to consummate the Mergers and
the other transactions contemplated by the Agreements (as defined below) are
subject to the satisfaction at or prior to the Effective Time of the Mergers of
a number of conditions as set forth in more detail in the Merger Agreement. The
conditions include the following:
- The Walnut stockholders shall have approved and adopted by the
applicable requisite vote the Merger Agreement, the BDC
Deregistration, the Capital Investment, the Debt Conversion, the
Compensation Satisfaction, the UPLP Acquisition and the THCG Stock
Incentive Plan;
- No statute, rule, regulation, executive order, decree, ruling or
injunction shall be in effect that prohibits, restrains, enjoins
or restricts the consummation of the transactions contemplated by
the Merger Agreement, the Related Agreements or any other
agreements required to be delivered under the Merger Agreement
(collectively, the "Agreements"), or which subjects any party to
substantial damages as a result of the transactions contemplated
by the Agreements;
- All required consents, approvals, waivers and authorizations of
any governmental entity or regulatory agency which are necessary
to effect the transactions contemplated by the Agreements shall
have been obtained; and
- The Capital Investment, the Compensation Satisfaction and the
termination of the oral sublease between Walnut and Windy City
shall have been consummated in accordance with the terms of the
applicable Related Agreements.
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<PAGE> 57
The obligation of Tower Hill to effect Merger 2 is also subject to the
satisfaction at or prior to the Second Effective Time of the following
conditions:
- The representations and warranties of Walnut, THCG and Newco set
forth in the Merger Agreement or in any schedule or certificate
delivered pursuant thereto that are qualified as to materiality
shall be true and correct, and the representations and warranties
of Walnut, THCG and Newco set forth in the Merger Agreement or in
any schedule or certificate delivered pursuant thereto that are
not so qualified shall be true and correct in all material
respects, in each case as of the date of the Merger Agreement and
as of the Second Effective Time, as though made on and as of the
Second Effective Time, except to the extent the representation or
warranty is expressly limited by its terms to another date;
- Each of Walnut, THCG and Newco shall have obtained all required
consents, approvals or waivers necessary in order to consummate
the transactions contemplated by the Agreements except for those
for which the failure to obtain such consent, approval or waiver,
individually or in the aggregate, is not reasonably likely to
result in a change, event or effect (a) in, on or relating to its
business that is, or is reasonably likely to be, materially
adverse to its business, properties, assets, liabilities,
condition (financial or otherwise) or results of operations taken
as a whole, other than a change or effect arising out of the
general economic conditions in the United States; or (b) that may
prevent or materially delay its performance of the Agreements or
its consummation of the transactions contemplated by the
Agreements (a "Walnut Material Adverse Effect");
- Walnut, THCG and Newco shall have performed in all material
respects all covenants and obligations required to be performed by
them under the Agreements at or prior to the Second Effective
Time;
- Tower Hill shall have received customary officer's certificates
and legal opinions;
- Merger 1 shall have become effective under the Utah BCA and the
Delaware GCL, and the THCG Common Stock shall be listed for
trading on the Nasdaq National Market;
- Since January 1, 1999, no change or event shall have occurred
which has had or could reasonably be expected to have,
individually or in the aggregate, a Walnut Material Adverse
Effect;
- The Agreements to which any of Walnut, THCG and Newco is a party
shall have been duly executed and delivered to Tower Hill;
- Walnut shall have purchased all outstanding options to purchase
Walnut Common Stock, other than the Converted Walnut Options, and
shall have obtained from the holder of each repurchased Walnut
option a copy of the agreement evidencing such option, marked
"cancelled;"
- Walnut shall have obtained the consent and acknowledgment of Joel
Kanter and Robert Mauer, as the sole beneficiaries under the
Walnut Financial Services, Inc. Management Incentive Plan, that
the sole benefit to which they are entitled thereunder is a cash
bonus of a maximum of $90,000 in the aggregate;
- The Debt Conversion, the UPLP Acquisition and the relinquishment
by Walnut Capital of its license to operate as an SBIC shall have
be consummated in accordance with the terms of the applicable
Related Agreements; and
- No tender offer for more than 25% of the outstanding shares of
Walnut Common Stock shall have been announced or completed.
The obligations of each of Walnut, THCG and Newco to effect the Mergers
and the other transactions contemplated by the Agreements are subject to the
satisfaction or waiver prior to the Effective Time of the Mergers of the
following conditions:
- The representations and warranties of Tower Hill set forth in the
Merger Agreement or in any schedule or certificate delivered
pursuant thereto that are qualified as to materiality shall be
true and correct, and the representations and warranties of Tower
Hill set forth in the Merger Agreement or in any schedule or
certificate delivered pursuant thereto that are not so qualified
shall be true and correct in all material respects, in each case
as of the date of the Merger Agreement and as of each of the First
Effective Time and the Second Effective Time, respectively, as
though made on and as of each of the First
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<PAGE> 58
Effective Time and the Second Effective Time, respectively, except
to the extent the representation or warranty is expressly limited
by its terms to another date;
- Tower Hill shall have obtained all required consents, approvals or
waivers necessary in order to consummate the transactions
contemplated by the Agreements, except those for which the failure
to obtain such consent, approval or waiver, individually or in the
aggregate, is not reasonably likely to result in a change, event
or effect (a) in, on or relating to the business of Tower Hill and
Tower Hill LLC that is, or is reasonably likely to be, materially
adverse to the business, properties, assets, liabilities,
condition (financial or otherwise) or results of operations of
Tower Hill and Tower Hill LLC, taken as a whole, other than any
change or effect arising out of the general economic conditions in
the United States; or (b) that may prevent or materially delay
performance or consummation of the transactions contemplated by
the Agreements (a "Tower Hill Material Adverse Effect");
- Tower Hill shall have performed in all material respects all
covenants and obligations required to be performed by it under the
Agreements at or prior to the Second Effective Time;
- Walnut shall have received customary officer's certificates and
legal opinions;
- Since January 1, 1999, no change or event shall have occurred
which has had or could reasonably be expected to have,
individually or in the aggregate, a Tower Hill Material Adverse
Effect;
- Walnut shall have received an investment letter duly executed by
each of the stockholders of Tower Hill;
- The Agreements to which Tower Hill is a party shall have been duly
executed and delivered to Walnut;
- The proceeds of the Capital Investment shall have been used to:
(a) repay the $2,000,000 debentures of Walnut Capital outstanding
to SBIC Funding Corp. and all interest accrued thereon, or any
other indebtedness incurred, the proceeds of which were used to
repay such debentures, and the full release of all personal
guarantees of such indebtedness made by any officer or director of
Walnut shall have been obtained, and (b) repay Walnut's line of
credit with American National Bank and Trust Company of Chicago
("ANB") and the full release of all personal guarantees of such
indebtedness made by any officer or director of Walnut shall have
been obtained; and
- Tower Hill shall have obtained the consent of Shai Novik to the
cancellation of the Novik Options.
TERMINATION
Termination. The Merger Agreement provides that, prior to the Effective
Time of the Mergers, the Merger Agreement may be terminated:
- by mutual written consent of Walnut and Tower Hill;
- by either Walnut or Tower Hill, if
1. the Effective Time of the Mergers shall not have occurred on
or before December 31, 1999, provided, however, that (a)
Walnut shall not have the right to so terminate the Merger
Agreement if the failure of Walnut or any of its subsidiaries
to effect the Related Transactions shall have been the cause
of, or resulted in, the failure of the Effective Time of the
Mergers to occur before December 31, 1999, other than due to
events or circumstances beyond Walnut's control and (b)
neither party shall have the right to terminate the Merger
Agreement if the failure of such party to fulfill any
obligation under the Merger Agreement shall have been the
cause of, or resulted in, the failure of the Effective Time
of the Mergers to occur on or before December 31, 1999;
2. any final and non-appealable order, decree or ruling shall
have been entered by a governmental entity permanently
restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by the
Agreements; or
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<PAGE> 59
3. the Merger Agreement or any of the Related Transactions or
other matters submitted to the vote of the Walnut
stockholders fails to receive the requisite vote for adoption
at the Special Meeting, unless Tower Hill has waived in
writing such requirement;
- by Walnut, if Tower Hill has materially breached or failed to
perform any material representation, warranty, covenant or
agreement contained in the Merger Agreement, which breach shall
not have been cured within 30 days following delivery of written
notice of such breach by Walnut to Tower Hill;
- by Tower Hill, if any of Walnut, THCG or Newco has materially
breached or failed to perform any material representation,
warranty, covenant or agreement in the Merger Agreement, which
breach shall not have been cured within 30 days following delivery
of written notice of such breach by Tower Hill to Walnut, THCG or
Newco, as the case may be; and
- by Walnut if, prior to the date on which the Walnut stockholders
vote on the Merger Agreement, the Walnut Board of Directors
approves an Acquisition Transaction, on terms which a majority of
the members of the Board, including a majority of those members
who are not employed or retained as a consultant by Walnut or any
of its subsidiaries, has determined in good faith and on a
reasonable basis after consultation with its outside counsel and
financial advisors, that (a) such Acquisition Transaction is more
favorable to Walnut and its stockholders from a financial point of
view than the transactions contemplated by the Merger Agreement;
(b) such Acquisition Transaction is reasonably likely to be
consummated without undue delay; and (c) failure to approve such
Acquisition Transaction and terminate the Merger Agreement would
constitute a breach of its fiduciary duties under applicable law.
Termination Fee. In the event that Walnut terminates the Merger
Agreement following the Board's approval of an Acquisition Transaction, Walnut
shall, on or prior to such termination, pay to Tower Hill a termination fee of
$500,000 and reimburse Tower Hill for all reasonable out-of-pocket fees and
expenses (up to $300,000) incurred in connection with the transactions
contemplated by the Merger Agreement (collectively, the "Termination Fee").
Effect of Termination. In the event of termination of the Merger
Agreement, the Merger Agreement will become void and have no effect, without any
liability or obligation on the part of any party to the Merger Agreement, other
than the Termination Fee, except that the covenants in the Merger Agreement
relating to press releases and confidentiality and the provisions in the Merger
Agreement regarding the procedure for and effect of termination and certain
miscellaneous provisions shall survive any termination of the Merger Agreement.
AMENDMENT AND WAIVER
The parties may amend the Merger Agreement at any time, but, after
approval of the Merger Agreement by the Walnut stockholders and the Tower Hill
stockholders, no amendment shall be made that by law requires the further
approval by the stockholders without such further approval.
At any time prior to the Effective Time of the Mergers, the parties to
the Merger Agreement may:
- extend the time for performance of any of the obligations or other
acts required by the Merger Agreement;
- waive any inaccuracies in the representations and warranties of
the other party contained in the Merger Agreement or in any
document, certificate or writing delivered in connection with the
Merger Agreement; and
- waive compliance by the other party with any of the agreements or
conditions contained in the Merger Agreement.
Any such extensions or waivers must be in writing and signed by the party
granting the extension or waiver.
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FEES AND EXPENSES
Each of Walnut, THCG and Newco, on the one hand, and Tower Hill, on the
other hand, shall bear its own fees, costs, and expenses incurred in connection
with the Agreements and the transactions contemplated thereby except with
respect to the Termination Fee.
EQUITY OWNERSHIP OF THCG
As a result of the Mergers and the Related Transactions, the THCG
Common Stock will be held as follows:
<TABLE>
<CAPTION>
Alternative 1 Alternative 2 Alternative 3 Alternative 4
------------- ------------- ------------- -------------
Number of Number of Number of Number of
Shares(1) % Shares(3) % Shares(4) % Shares(5) %
--------- --- --------- --- --------- --- --------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Former Walnut 3,350,533(2) 37.45% 3,350,533 32.01% 4,350,154(2) 40.11% 4,390,154 35.45%
stockholders
Former Tower Hill 4,095,096 45.78% 4,095,096 39.20% 4,995,096 37.76% 4,995,096 40.33%
stockholders(6)
Investor Group(7) 1,500,000 16.77% 3,000,000 28.72% 1,500,000 13.83% 3,000,000 24.22%
--------- ----- --------- ----- ---------- ----- ---------- -----
Total 8,945,629 100% 10,445,629 100% 11,777,688 100% 12,385,250 100%
--------- ----- ---------- ----- ---------- ----- ---------- -----
</TABLE>
- -----------------------------------------
(1) Excludes outstanding options and warrants and assumes 1,500,000 shares
of Walnut Common Stock issued in the Capital Investment.
(2) Excludes any shares of Walnut Common Stock that may be issued in
connection with the Debt Conversion, the Compensation Satisfaction and
the UPLP Acquisition.
(3) Excludes outstanding options and warrants and assumes 3,000,000 shares
of Walnut Common Stock issued in the Capital Investment.
(4) Includes outstanding options and warrants and assumes 1,500,000 shares
of Walnut Common Stock issued in the Capital Investment.
(5) Includes outstanding options and warrants and assumes 3,000,000 shares
of Walnut Common Stock issued in the Capital Investment.
(6) Includes restricted stock.
(7) This group may include former Walnut and Tower Hill stockholders.
Because the actual ownership of these shares cannot be determined at
this time, this possibility is not accounted for.
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MANAGEMENT OF THCG FOLLOWING THE MERGERS
The following biographical descriptions set forth certain information
with respect to the proposed members of THCG's Board of Directors, based on
information supplied by such persons. The following information is as of
, 1999, unless otherwise specified.
<TABLE>
<CAPTION>
Name Age Class Title
- -------------------------- --------- ------------------------------------------------------
<S> <C> <C> <C>
Burton W. Kanter 68 III Director
Joel S. Kanter 41 III Director
Adi Raviv 43 III Director, Co-Chief Executive Officer
Gene E. Burleson 57 II Director
[Additional Tower Hill Designee] [ ] II Director
Evan Marks 42 I Director
Joseph D. Mark 43 I Director, Co-Chief Executive Officer
====================================================================================================
</TABLE>
PROPOSED CLASS I DIRECTORS - TERMS TO EXPIRE IN 2000
JOSEPH D. MARK
Mr. Mark joined Tower Hill (formerly Hambro America Securities, Inc.)
in 1988. Since 1992, he has been responsible for the management,
coordination, and direction of Tower Hill's domestic and cross-border
corporate finance and mergers and acquisitions business. He is also a
founder, general partner and member of the investment committee of The
Israel International Fund. Prior to joining Tower Hill, Mr. Mark worked
for a number of years as a mergers and acquisitions specialist, most
recently as a Vice President and shareholder of Drexel Burnham Lambert
Incorporated. Previously, he was a member of the investment banking
departments of Salomon Brothers Inc., Warburg Paribas Becker, Inc., and
Bankers Trust. Mr. Mark is a director Clay-Park Labs, Inc., the U.S.
subsidiary of Agis Industries Ltd.; and Sleep HealthCenters LLC; and is
also the co-managing member of Label Ventures LLC, the controlling
shareholder of Multicolor Inc., a public company.
EVAN MARKS
Mr. Marks is the Managing Member of Alben Asset Management LLC, a
private investment company based in New York. Prior to forming Alben,
Mr. Marks was in partnership with George Soros from 1992 to 1998 as the
President of G. Soros Realty, Inc. Prior to his association with Mr.
Soros, during the 1980s Mr. Marks was a Managing Director of
Wasserstein Perella & Co. and a principal in the real estate investment
group of Lazard Freres & Co. Mr. Marks is a Director of Telex
Corporation, a manufacturer of professional audio and telecommunication
devices, GunForHire Production Centers LLC, a provider of pre- and
post-production services to the film, television and cable industries,
and the Hebrew Home for the Aged at Riverdale, New York.
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PROPOSED CLASS II DIRECTORS - TERMS TO EXPIRE IN 2001
GENE E. BURLESON
Mr. Burleson has been of Walnut and a director of Walnut
Capital since June 1996. Mr. Burleson served as Chairman of the Board
and Chief Executive Officer of GranCare, Inc., from 1994 to 1997.
Following the merger of GranCare, Inc.'s pharmacy operations with
Vitalink Pharmacy Services, Inc., he served as Chief Executive Officer
of Vitalink Pharmacy Services, Inc. from February 1997 to August 1997.
His previous experience includes serving as President and Chief
Operating Officer of American Medical International, Inc. Mr. Burleson
is presently a director of Decker's Outdoor Corp., Alternative Living
Services Inc., and Mariner Post-Acute Network, Inc., all publicly-held
companies.
[ADDITIONAL TOWER HILL DESIGNEE]
[Tower Hill shall designate an additional Class II Director, which
designee will be disclosed in the final definitive proxy statement]
PROPOSED CLASS III DIRECTORS - TERMS TO EXPIRE IN 2002
BURTON W. KANTER
Mr. Kanter has been a director of Walnut and the Chief Executive
Officer of Walnut Capital 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 Group 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. In addition, Mr.
Kanter serves as a member of the Visiting Committee of the University
of Chicago Art Department and as a member of the Visiting Committee of
the Law School of the University of Chicago.
JOEL S. KANTER
Mr. Kanter has been a director and the President of Walnut since
February 27, 1995 and has been the Chief Executive Officer of Walnut
since April 15, 1996. From 1988 to February 27, 1995, Mr. Kanter was a
consultant to Walnut Capital. Mr. Kanter has been President and a
director of Walnut Capital since February 27, 1995. 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 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 Mariner Post-Acute Network, Inc., I-Flow
Corporation, Osteoimplant Technology, Inc., Encore Medical Corporation
and Magna-Lab, Inc., each of which is a publicly-held company, as well
as a number of private concerns. Mr. Kanter is the son of Burton W.
Kanter.
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<PAGE> 63
ADI RAVIV
Mr. Raviv joined Tower Hill in 1997. Prior to joining Tower Hill, he
was founder and Managing Director of the HTI Group, a small merchant
banking group focusing on technology, healthcare and emerging growth
companies. From 1994 to 1996, Mr. Raviv was a Senior Managing Director
and Head of Global Investment and Merchant Banking for Oscar Gruss &
Son Incorporated until the acquisition of its Israeli operations by
CIBC Oppenheimer. Prior to his association with Oscar Gruss, he was the
President and one of the founders of the Stockton Group, established in
1993 to organize and manage the Renaissance Funds, a $155 million
private equity fund for investing in the Middle East. Mr. Raviv was
also a Vice President at BEA Associates (a money management firm
acquired by Credit Suisse) and a member of the management team of its
International Equities Group. From 1987 to 1993, Mr. Raviv was a member
of the investment banking department at Lehman Brothers in New York.
Mr. Raviv is a director of several private companies including
CardioCom Ltd. and Orisol Original Solutions Ltd. Mr. Raviv served in
the Israel Defense Forces from 1974 to 1977.
DESCRIPTION OF THCG CAPITAL STOCK
The following is a summary of the material terms of THCG's capital
stock and is qualified in its entirety by reference to THCG's certificate of
incorporation and bylaws. Because it is only a summary, it does not contain all
information that may be important to stockholders.
GENERAL
As of the date of this Proxy Statement, THCG's authorized capital stock
consists of 55,000,000 shares, of which 50,000,000 are designated as common
stock, par value $0.01 per share, and 5,000,000 are designated preferred stock,
par value $0.01 per share. No other classes of capital stock are authorized
under the THCG certificate of incorporation.
THCG COMMON STOCK
The holders of THCG Common Stock are entitled to one vote for each
share held. Subject to the rights of preferred stockholders, the holders of the
THCG Common Stock are entitled to receive dividends when and as declared by the
THCG board of directors out of funds legally available for the payment of
dividends. Upon THCG's liquidation, dissolution or winding up, the holders of
THCG Common Stock are entitled to share ratably in the assets and funds of THCG
after the payment of any liquidating distributions to the preferred
stockholders, if any.
PREFERRED STOCK
The THCG Board of Directors has the power, without further vote of the
stockholders, to authorize the issuance of up to 5,000,000 shares of THCG
preferred stock and to fix and determine the terms, limitations and relative
rights and preferences of any shares of such preferred stock. This power
includes the authority to establish voting, dividend, redemption, conversion,
liquidation and other rights of any such shares. As of the Effective Time of the
Mergers, no preferred stock shall have been authorized or issued.
DELISTING AND DEREGISTRATION OF THE WALNUT COMMON STOCK; LISTING OF THCG COMMON
STOCK ISSUED IN CONNECTION WITH THE MERGER
The Walnut Common Stock is currently listed for quotation on the Nasdaq
National Market under the symbol "WNUT." Upon consummation of Merger 1, the
Walnut Common Stock will be delisted from the Nasdaq National Market.
Application will be made to list the THCG Common Stock under the symbol "THCG"
on the Nasdaq National Market and the THCG Common Stock will become registered
under the Exchange Act as result of Merger 1. The listing of the THCG Common
Stock is a condition
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<PAGE> 64
precedent to Tower Hill's obligation to consummate Merger 2. See "The Merger
Agreement--Conditions to Consummation of the Mergers".
RESALES OF THCG COMMON STOCK ISSUED IN CONNECTION WITH MERGER 1
THCG Common Stock issued in connection with Merger 1 will be freely
transferable, except that shares of THCG Common Stock received by persons who
are deemed to be "affiliates," as such term is defined by Rule 144 under the
Securities Act, of Walnut at the First Effective Time may be resold only as
permitted by the resale provisions of Rule 144 under the Securities Act or as
otherwise permitted under the Securities Act.
In addition to the restrictions imposed by the Securities Act, the
Principal Walnut Stockholders have entered into the Voting Agreement, pursuant
to which they have agreed not to sell their shares of THCG Common Stock for a
period of 12 months following the consummation of the Mergers, subject to
certain exceptions.
COMPARISON OF RIGHTS OF HOLDERS OF WALNUT COMMON STOCK BEFORE AND AFTER THE
MERGERS
The following is a summary of the material differences between the
rights of holders of Walnut Common Stock and the rights of holders of THCG
Common Stock. Because Walnut is a Utah corporation and THCG is a Delaware
corporation, the differences arise from differences between the Utah BCA and the
Delaware GCL, as well as from differences between various provisions of the
articles of incorporation of Walnut and the certificate of incorporation of THCG
and the respective bylaws of Walnut and THCG. The following discussion is
qualified in its entirety by the Utah BCA, the Delaware GCL and the articles of
incorporation of Walnut, the certificate of incorporation of THCG and the
respective bylaws of Walnut and THCG. See "Description of THCG Common Stock" for
a summary of a number of other rights relating to the THCG Common Stock.
CAPITAL STOCK
As of the Record Date, the total number of authorized shares of Walnut
capital stock was 51,000,000, of which 50,000,000 consisted of Walnut Common
Stock and 1,000,000 consisted of preferred stock, no par value. As of the Record
Date, [3,350,533] shares of Walnut Common Stock were issued and outstanding,
[316,830] shares of Walnut Common Stock were reserved for issuance upon the
exercise of outstanding Walnut Options and [633,334] shares of Walnut Common
Stock were reserved for issuance upon the exercise of Class A Warrants. As of
the Record Date, the total number of authorized shares of THCG capital stock was
55,000,000, of which 50,000,000 were designated as THCG Common Stock and
5,000,000 were designated as THCG Preferred Stock.
NUMBER AND ELECTION OF DIRECTORS
Walnut's bylaws provide that Walnut's Board of Directors shall consist
of no less than three and no more than nine members, with the number to be
determined by the Board of Directors, with each director serving a one-year
term. The number of directors is currently designated as seven. The Directors
are entitled to compensation as determined by the Board, except that any
director already receiving compensation as an employee of Walnut may not receive
additional compensation as a director.
The THCG bylaws provide that THCG's Board of Directors shall consist of
no less than three nor more than twelve directors, which number shall be fixed
by resolution duly adopted from time to time by the Board of Directors. The
number of directors is currently designated as seven. The THCG bylaws provide
that any vacancies occurring on the board, including vacancies created through
an increase in the number of directors, may be filled by the affirmative vote of
a majority of the directors then in office, even if such directors constitute
less than a quorum of the board.
The THCG bylaws further provide that the board of directors be
classified, with respect to the term for which the directors severally hold
office, into three classes, as nearly equal in number as possible. One class of
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directors shall be initially elected for a term expiring at first annual meeting
of stockholders (the "THCG Annual Meeting") to be held following the
consummation of Merger 2, another class shall be initially elected for a term
expiring at the second THCG Annual Meeting to be held following the consummation
of Merger 2, and another class shall be initially elected for a term expiring at
the third THCG Annual Meeting to be held following the consummation of Merger 2.
Members of each class shall hold office until their successors are duly elected
and qualified or until their earlier death, disqualification, resignation or
removal. At each succeeding THCG Annual Meeting, the successors of the class of
directors whose term expires at that meeting shall be elected by a plurality
vote of all votes cast at such meeting to hold office for a term expiring at the
THCG Annual Meeting held in the third year following the year of their election.
ACTION BY WRITTEN CONSENT
Walnut's articles of incorporation do not restrict the ability of
stockholders to take action without a meeting. However, under the Utah BCA,
action may be taken without a meeting only upon unanimous written consent.
THCG's certificate of incorporations provides that any action required or
permitted to be taken by the stockholders must be effected at a duly called
annual or special meeting of the stockholders, and may not be effected by a
consent in writing by any such stockholders.
SPECIAL MEETINGS
The Walnut bylaws provide that special meetings of stockholders may be
called by the Chairman of the Board, the President, the Board of Directors or
the holders of at least ten percent of all shares entitled to vote on any issue
to be considered at the proposed special meeting. The THCG bylaws provide that,
except as otherwise required by law, special meetings of the stockholders may be
called only by a Co-Chief Executive Officer or the Board of Directors pursuant
to a resolution adopted by the affirmative vote of a majority of the directors
then in office.
MATTERS TO BE CONSIDERED AT ANNUAL MEETINGS
The Walnut bylaws do not restrict the ability of shareholders to bring
business before annual meetings. The THCG bylaws require, in order for a
stockholder to bring business before an Annual Meeting, that such stockholder
provide a stockholder's notice prior to the annual meeting, which notice must
set forth a description of the business the stockholder wishes to bring forth at
the meeting, as well as other information, including the identity of the
stockholder and the stockholder's beneficial ownership.
AMENDMENT OF BYLAWS
Walnut's bylaws allow the Board of Directors to amend the bylaws, or
repeal and adopt new bylaws, which action is subject to repeal or change by
action of the stockholders. THCG's certificate of incorporation and bylaws also
allow the Board of Directors to amend the bylaws, or repeal and adopt new ones.
THCG's shareholders may amend or repeal the bylaws at annual meetings, or at a
special meeting called for that purpose, by a majority of votes eligible to be
cast on the issue by holders of voting stock, voting together as a single class.
WAIVER OF NOTICE
According to the Utah BCA, a shareholder who attends any shareholder
meeting has waived objection to lack of notice or defective notice unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting because of lack of notice or defective
notice. THCG's bylaws provide that a shareholder who did not receive notice of a
meeting may attend the meeting for the purpose of objecting that the meeting was
not lawfully called without such attendance constituting a waiver of notice.
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CERTAIN DIFFERENCES BETWEEN DELAWARE AND UTAH CORPORATE LAW
THCG will be governed by the Delaware GCL, which will result in certain
changes in the rights of stockholders. While it is not practical to compare all
of the differences between the Utah BCA and the Delaware GCL, the following
discussion highlights some of the material differences affecting stockholders.
Such differences can be determined in full by reference to the Utah BCA and the
Delaware GCL. In addition, stockholders should note that some of the statutory
provisions may be modified by provisions in a company's articles or certificate
of incorporation or bylaws.
Advantages of Delaware Corporation Law. For many years, Delaware has
followed a policy of encouraging incorporation under its jurisdiction. In
furtherance of that policy, Delaware has long been the leading state in
adopting, construing and implementing comprehensive and flexible corporate laws
responsive to the legal and business needs of corporations. As a result, the
Delaware GCL has become widely regarded as the most extensive and well-defined
body of corporate law in the United States. Because of Delaware's prominence as
the state of incorporation for many major corporations, both the legislature and
courts in Delaware have demonstrated an ability and a willingness to act quickly
and effectively to meet changing business needs. Moreover, the Delaware courts
have rendered a substantial number of decisions interpreting and explaining the
Delaware GCL. Accordingly, Merger 1 should be beneficial to Walnut's
stockholders in that it will provide (i) a greater degree of predictability and
certainty regarding how THCG's affairs should be conducted in order to comply
with applicable laws (such predictability and certainty resulting from a large
body of case law decided under those laws) and (ii) the comfort and security
resulting from the responsiveness of Delaware's legislature and courts to the
needs of corporations organized under Delaware's jurisdiction.
However, it should be noted that Delaware law has been criticized by
some commentators on the grounds that it does not afford minority stockholders
the same substantive rights and protections as are available in a number of
other states, including Utah, for example, by making it more difficult for
minority stockholders to elect directors and influence corporate policies.
Stockholder Appraisal Rights. Stockholder appraisal rights are
statutory rights of dissenting stockholders to demand that, upon consummation of
certain reorganizations or other designated corporate action, the corporation
purchase their shares at an appraised fair value. The Delaware GCL provides
rights of appraisal to stockholders in the event of a merger or consolidation,
except (a) a merger by a corporation, the shares of which are either listed on a
national securities exchange or are widely held (by more than 2,000 stockholders
of record) if such stockholders receive shares of the surviving corporation and
(b) a merger, if the corporation in which the dissenter is a stockholder
survives the merger and no vote of such corporation's stockholders is required
to approve the merger. Under the Delaware GCL, no vote of the stockholders of a
corporation surviving a merger is required if the number of shares to be issued
in the merger does not exceed 20% of the shares of the surviving corporation
outstanding immediately prior to such issuance and if certain other conditions
are met. The Delaware GCL provides that any corporation may stipulate in its
certificate of incorporation that appraisal rights shall be available for shares
of its stock as a result of an amendment to its certificate of incorporation,
and merger in which the corporation is a constituent corporation, or the sale of
all or substantially all of the assets of the corporation.
The Utah BCA grants shareholder appraisal rights with certain
exceptions that are similar to the exceptions under the Delaware GCL. However,
the Delaware GCL contains exceptions that are not found in the Utah BCA.
Payment of Dividends and Repurchase of Shares of Stock. Under the
Delaware GCL, a corporation may pay dividends only out of surplus (generally,
the stockholders' equity of the corporation less the par value of the capital
stock outstanding) or, if there exists no surplus, out of the net profits of the
corporation for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. If the capital of the corporation has diminished to an
amount less than the aggregate amount of capital represented by issued and
outstanding stock having a liquidation preference, the corporation may not
declare and pay out of its net profits any dividends to the holders of its
common stock until the deficiency has been repaired. In general, the Delaware
GCL provides that shares of a corporation's capital stock may only be
repurchased or redeemed by the corporation out of surplus. To determine the
surplus, assets and liabilities are valued at their current fair market value.
Assuming that such assets have a fair market value greater than their book value
and that liabilities have not increased in value to a greater extent, such
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revaluation will increase the surplus of the corporation and thereby permit the
corporation to pay an increased dividend and/or to repurchase a greater number
of shares.
Under the Utah BCA law, a corporation is prohibited from making a
distribution (including a repurchase of its shares) to its stockholders if,
after giving effect to the distribution, the corporation would not be able to
pay its debts as they become due in the usual course of business or the
corporation's total assets would be less than its total liabilities (plus any
amounts necessary to satisfy any preferential rights).
It is the present policy of Walnut's Board of Directors to retain any
earnings for use in Walnut's business and it is anticipated that THCG will do
the same.
Acquisition of Significant Shares of Stock. As a result of Merger 1,
THCG will become subject to Section 203 of the Delaware GCL which regulates
certain business combinations, including tender offers. Section 203 may have the
effect of significantly delaying certain stockholders' ability to acquire a
significant equity interest in THCG if such acquisition is not approved by
THCG's Board of Directors. In general, Section 203 prevents an "Interested
Stockholder" (defined generally as a person who beneficially owns 15% or more of
a corporation's outstanding voting stock) of a Delaware corporation from
engaging in a "Business Combination" (defined to include mergers and a variety
of other transactions such as transfers of assets, loans, and transactions that
would increase the Interested Stockholder's proportionate share of stock) with a
Delaware corporation for three years following the date such person became an
Interested Stockholder unless, among other things, before such person became an
Interested Stockholder the board of directors of the corporation approved the
Business Combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder. Under Section 203, the restrictions
described above do not apply to certain Business Combinations proposed by an
Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors. In addition, the restrictions under Section 203 do not
apply if the corporation's original certificate of incorporation contains a
provision expressly electing not to be governed by Section 203. THCG's
certificate of incorporation does not have such a provision.
The Utah Control Share Acquisitions Act provides, among other things,
that, when any person obtains shares (or the power to direct the voting shares)
of "an issuing public corporation" such that the person's voting power equals or
exceeds any of three levels (20%, 33-1/3% or a majority), the ability to vote
(or to direct the voting of) the "control shares" is conditioned on approval by
a majority of the corporation's shares (voting in voting groups, if applicable),
excluding "interested shares" (which include the shares acquired in the "control
share acquisition.") Shareholder approval may occur at the next annual meeting
of the stockholders, or, if the acquiring person requests and agrees to pay the
associated costs of the corporation, at a special meeting of the stockholders
(to be held within fifty (50) days of the corporation's receipt of the request
by the acquiring person). If authorized by the articles of incorporation or the
bylaws, the corporation may redeem "control shares" acquired in the "control
share acquisition" at their fair market value if the acquiring person fails to
file an "acquiring person statement" or if the stockholders do not grant full
voting rights to the control shares. If the stockholders grant full voting
rights to the control shares, and if the acquiring person obtained a majority or
more of the voting power, all stockholders are entitled to dissenters' rights
under the Utah BCA. An acquisition of shares does not constitute a control share
acquisition if (a) the corporation's articles of incorporation or bylaws provide
that the Control Share Acquisition Act does not apply, (b) the acquisition is
consummated pursuant to a merger in accordance with the Utah BCA or (c) under
certain other specified circumstances.
Voting Rights with Respect to Extraordinary Corporate Transactions.
Under the Delaware GCL, approval of mergers and consolidations requires the
affirmative vote or consent of the holders of a majority of the outstanding
shares entitled to vote, except that, unless required by the certificate of
incorporation, no vote of stockholders of the corporation surviving a merger is
necessary if: (a) the merger does not amend in any respect the certificate of
incorporation of the corporation; (b) each outstanding share immediately prior
to the effective date of the merger is to be an identical share of the surviving
corporation after the merger; and (c) either no common stock of the corporation
and no securities or obligations convertible into common stock are to be issued
in the merger, or the common stock to be issued in the merger plus that
initially issuable on conversion of other securities issued in
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the merger does not exceed 20% of the common stock of the corporation
outstanding immediately before the merger.
Under the Utah BCA, a merger, share exchange or sale, lease, exchange
or other disposition of all or substantially all of the assets of a corporation
(other than in the ordinary course of the corporation's business) requires the
approval of a majority (unless the Utah BCA, the articles of incorporation, the
bylaws or a resolution of the board of directors requires a greater number) of
the outstanding shares of the corporation (voting in separate voting groups, if
applicable). No vote of the stockholders of the surviving corporation in a
merger is required if: (a) the articles of incorporation of the surviving
corporation will not be changed; (b) each shareholder of the surviving
corporation whose shares were outstanding immediately before the effective date
of the merger will hold the same number of shares, with identical designations,
preferences, limitations and relative rights, immediately after the merger; (c)
the number of voting shares outstanding immediately after the merger, plus the
number of voting shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or the exercise of rights
and warrants issued pursuant to the merger), will not exceed by more than 20% of
the total number of voting shares of the surviving corporation outstanding
immediately before the merger; and (d) the number of participating shares
(shares that entitle their holder to participate without limitation in
distributions) outstanding immediately after the merger, plus the number of
participating shares issuable as a result of the merger (either by the
conversion of securities issued pursuant to the merger or the exercise of rights
and warrants issued pursuant to the merger), will not exceed by more than 20%
the total number of participating shares of the surviving corporation
outstanding immediately before the merger.
Stockholders Consent Without a Meeting. Under the Delaware GCL, unless
otherwise provided in the certificate of incorporation, any action requiring the
vote of stockholders may be taken without a meeting, without prior notice and
without a vote, by the written consent of stockholders having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted. The certificate of incorporation of THCG provides that the stockholders
of THCG may not take action by written consent.
Under the Utah BCA, unless otherwise provided in the articles of
incorporation, action requiring the vote of stockholders may be taken without a
meeting and without prior notice by one or more written consents of the
stockholders having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which all shares entitled to vote
thereon were present and voted (if shareholder action is by less than unanimous
written consent, notice shall be provided to the stockholders who did not
consent at least ten (10) days before the consummation of the transaction,
action or event authorized by the stockholders). However, any written consent
for the election of directors must be unanimous and the stockholders of any
corporation in existence prior to July 1, 1992, which includes Walnut, are
required to adopt a resolution permitting action by less than unanimous written
consent otherwise, the stockholders are only permitted to act by unanimous
written consent. Walnut's stockholders have not adopted such a resolution.
Quorum of Directors. Under the Delaware GCL, unless a greater or lesser
number is required for a quorum by the certificate of incorporation or bylaws
(but in no event less than one-third of the votes of the entire board or
committee), a majority of the directors then in office shall constitute a
quorum.
Under the Utah BCA, a quorum of the board of directors consists of a
majority of the fixed number of directors if the corporation has a fixed board
size, or if the corporation's bylaws provide for a range for the size of the
board, a majority of the number of directors prescribed, or if no number is
prescribed, the number in office. However, the articles of incorporation or the
bylaws may establish a higher or lower number of directors to constitute a
quorum, but in no event may the number be less than one-third of the number of
directors.
Derivative Suits. Under the Delaware GCL, the plaintiff must have been
a shareholder of the corporation at the time of the transaction of which he
complains or his stock thereafter must have devolved under him by operation of
law.
Under the Utah BCA, a person may not commence a derivative action
unless the person was a shareholder of the corporation at the time when the
transaction complained of occurred (unless the person became a shareholder
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through transfer by operation of law from a person who was a shareholder at the
time). The complaint must be verified and allege with particularity (i) the
demand made on the board of directors and that either the demand was refused or
ignored by the board of directors, or (ii) if no demand was made on the board of
directors, why the person did not make the demand. On the termination of the
proceeding, if the court finds that the proceeding was commenced without
reasonable cause, the court may require the plaintiff to pay the defendant's
reasonable expenses, including counsel fees.
Special Meetings of Stockholders. Under the Delaware GCL, stockholders
generally do not have the right to call meetings of stockholders unless such
right is granted in the certificate of incorporation or bylaws. THCG's
certificate of incorporation does not grant stockholders the right to call
special meetings. However, if a corporation fails to hold its annual meeting
within a period of 30 days after the date designated therefor, or if no date has
been designated for a period of 13 months after its last annual meeting, the
Delaware Court of Chancery may order a meeting to be held upon the application
of a shareholder.
Under the Utah BCA, special meetings of the stockholders may be called
by: (a) the board of directors (b) the person or persons authorized by the
bylaws to call a special meeting, or (c) the holders of shares representing at
least 10% of all votes entitled to be cast on any issue proposed to be
considered at the special meeting. The corporation shall give notice of the
date, time and place of the meeting no fewer than ten (10) and no more than
sixty (60) days before the meeting. Notice of a special meeting must include a
description of the purposes for which the special meeting is called. Walnut's
current bylaws do not limit the ability of shareholders to call special
meetings.
Inspection of Books and Records. Under the Delaware GCL, any
stockholder of record, upon written demand under oath stating the purpose
thereof, has the right during the usual hours for business to inspect for any
proper purpose, the corporation's stock ledger, a list of its stockholders and
its other books and records and to make copies or extracts therefrom.
Under the Utah BCA, upon providing the corporation with a written
demand at least five business days before the date the shareholder wishes to
make an inspection, a shareholder and his agent and attorneys are entitled to
inspect and copy, during regular business hours, (a) the articles of
incorporation, bylaws, minutes of stockholders meetings and records of actions
taken by the stockholders without a meeting for the previous three years, all
written communications to stockholders within the previous three years, a list
of the names and business addresses of the officers and directors, the most
recent annual report delivered to the State of Utah, and all financial
statements for periods ending during the previous three years and (b) if the
shareholder is acting in good faith and for a proper purpose, excerpts from (i)
the minutes of any meeting or records of any action taken by the board of
directors or by a committee of the board of directors acting in place of the
board of directors, (ii) minutes or records of any meeting of or action taken by
the stockholders, (iii) waivers of notice of any meeting of the stockholder,
board of directors, or committee of the board of directors, (iv) accounting
records of the corporation, and (v) shareholder lists.
Amendments to Charter. Under the Delaware GCL, amendments to the
certificate of incorporation require the approval of the Board and the
affirmative vote of the holders of a majority of the outstanding shares entitled
to vote thereon, except that if the certificate of incorporation requires the
vote of a greater number of the holders of any class of stock than is required
by the Delaware GCL with respect to any matter, the provision of the certificate
of incorporation may not be amended, altered or repealed except by such greater
vote.
Under the Utah BCA, the board of directors may propose amendments to
the articles of incorporation for submission to the stockholders. For an
amendment to be adopted, (1) the board of directors must recommend the amendment
to the stockholders (unless the board determines that because of a conflict of
interest or other special circumstances it should not make a recommendation and
communicates the basis for its determination to the stockholders), and (2)
unless the articles of incorporation, the bylaws (if authorized by the articles
of incorporation) or a resolution of the board of directors require a greater
number, the amendment must be approved by (a) a majority of the votes entitled
to be cast on the amendment by any voting group as to which the amendment would
create dissenters' rights, (b) a majority of the votes entitled to be cast on
the amendment by any voting group as to which the amendment would materially and
adversely affect the voting group's rights in shares (including preferential
rights, rights in redemption, preemptive rights, voting rights or rights in
certain reverse splits), and (c) a
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majority of the votes cast by each and every other voting group (voting
separately from any other voting group, as applicable, with shares constituting
a quorum present for each voting group).
Transactions with Officers and Directors. Under the Delaware GCL,
contracts or transactions in which a director or officer is financially
interested are not automatically void or voidable, if approved by the
stockholders or the directors under substantially the same circumstances as in
Utah. Approval by the stockholders, however, requires only a simple majority.
Board approval must be by a majority of the disinterested directors, but
interested directors may be counted for purposes of establishing a quorum.
Under the Utah BCA, a "director's conflicting interest transaction" (a
transaction that is financially significant to the director or a person related
to the director or a transaction brought or which in the normal course would be
brought to the board of directors in which an entity or person related to the
director is either a party or is so closely linked or for which or whom the
transaction is so financially significant that the interest would reasonably be
expected to exert an influence on the director's judgment) may not be enjoined,
set aside, or give rise to an award of damages or other sanctions solely because
the directors "conflicting interest" if the (a) the transaction received the
affirmative vote of a majority of the directors who did not have a "conflicting
interest" after disclosure to them of the existence of the conflicting interest
and all other relevant facts; (b) approval of the transaction by a majority of
the votes entitled to be cast by the holders of qualified shares present in
person or by proxy after notice to the shareholders describing the "conflicting
interest transaction" and disclosure to them of all other relevant facts; or (c)
the transaction is established to be fair to the corporation.
Limitation on Liability of Directors; Indemnification of Officers and
Directors. The Delaware GCL permits a corporation to adopt provisions in its
certificate of incorporation eliminating or limiting the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, with the following exceptions: (a) a breach of
the director's duty of loyalty; (b) payment of an unlawful stock dividend or
making an unlawful stock repurchase or redemption; (c) acts or omissions not in
good faith or involving intentional misconduct or a knowing violation of law;
or (d) in any transaction in which the director derived an improper personal
benefit.
Under the Utah BCA, a corporation may, if so provided in its articles
of incorporation, its bylaws or in a shareholder resolution, eliminate or limit
the liability of a director to the corporation or its stockholders for monetary
damages for any action taken or any failure to take action as a director, except
liability for: (a) improper financial benefits received by a director; (b)
intentional infliction of harm on the corporation or its stockholders; (c)
payment of a distribution (a direct or indirect transfer of money or other
property, including a dividend, to or incurrence of indebtedness for the benefit
of its stockholders in respect of any of its shares), to stockholders after
which the corporation is insolvent; and (d) an intentional violation of criminal
law.
The Delaware and Utah laws contain basically similar provisions
governing indemnification of officers and directors.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
RECEIPT OF SECURITIES
In Merger 1, Burton W. Kanter, Joel S. Kanter and Gene E. Burleson will
receive an aggregate of [400,188] shares of THCG Common Stock, representing
[11.94%] of the shares of THCG Common Stock issued and outstanding. In addition,
they will receive options to purchase a total of 180,000 shares of THCG Common
Stock, all of which will be immediately exercisable.
In Merger 2, Joseph D. Mark and Adi Raviv will receive an aggregate of
3,722,814.50 shares of THCG Common Stock, representing approximately 37% of the
shares of THCG Common Stock then issued and outstanding plus an additional
number of shares of THCG Common Stock equal to one percent (1%) of the number of
restricted shares intended to be granted to Shai Novik and which do not vest and
are forfeited in accordance with the terms and conditions thereof. Shai Novik
will receive an aggregate of 372,281.45 shares of restricted stock of
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THCG Common Stock, representing approximately 3.6% of the shares of THCG Common
Stock then issued and outstanding.
DEBT CONVERSION AND COMPENSATION SATISFACTION
As discussed, the Debt Conversion and the Compensation Satisfaction are
conditions precedent to the consummation of Merger 2. The Debt Conversion will
involve the conversion of certain debts and accrued liabilities of Walnut or its
subsidiaries into cash or shares of Walnut Common Stock valued at $2.00 per
share, as reasonably determined by Tower Hill, and the Compensation Satisfaction
will involve the conversion of the accrued compensation of Burton W. Kanter, a
director of Walnut, into cash or Walnut Common Stock valued at $2.00 per share,
as reasonably determined by Tower Hill. Nearly all of the parties converting
accrued liabilities are affiliates of Walnut (as discussed in "PROPOSAL
III--APPROVAL OF THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION"). As a
result of the Debt Conversion and the Compensation Satisfaction, up to 655,438
shares of Walnut Common Stock may be issued to affiliates of Walnut.
UPLP ACQUISITION
The UPLP Acquisition, another condition precedent to the consummation
of Merger 2, involves the purchase by Universal Bridge of 50% of the outstanding
general partnership interests of UPLP from Windy City, a privately held
investment firm and an affiliate of Walnut, for cash or Walnut Common Stock
valued at $2.00 per share, as reasonably determined by Tower Hill. Assuming all
of the outstanding general partnership interests are acquired for Walnut Common
Stock, as a result of the UPLP Acquisition, up to approximately 267,000 shares
of Walnut Common Stock will be issued to Windy City (assuming a book value of
$400,000 for the limited partnership interests and a value of $134,000 for the
general partnership interests).
CONSULTING AGREEMENTS
In connection with the Mergers, Chicago Advisory Group is to enter into
a consulting agreement with Inland Financial, a wholly-owned subsidiary of
Walnut. In addition, Windy City is to enter into a consulting agreement with
THCG. Each entity is owned primarily by trusts for the benefit of Joel Kanter
and other members of Burton Kanter's family.
Pursuant to the consulting agreement between Chicago Advisory Group and
Inland Financial, Chicago Advisory Group, through the provision of the services
of Robert Mauer, is to serve as a consultant to Inland for an initial term of
twelve months, which term shall automatically be extended for one or more
additional three-month periods unless Chicago Advisory Group or Inland Financial
gives written notice, no less than ninety (90) days prior to the end of the
initial term or, as applicable, sixty (60) days prior to the end of any
extension of the term, of its election not to renew the agreement. The agreement
provides that Chicago Advisory Group's annual consulting fee shall be $50,000.
In addition, Inland Financial is to reimburse Chicago Advisory Group for
reasonable business expenses incurred in connection with the performance of its
duties and responsibilities under the agreement. In the event that the agreement
is terminated prior to the end of its term, including any extensions thereof,
Chicago Advisory Group shall be entitled to any accrued but unpaid consulting
fees to the date of termination and any accrued but unpaid expenses required to
be reimbursed pursuant to the agreement. Further, in addition to those payments,
if Chicago Advisory Group terminates the agreement as a result of a material
breach of the agreement by Inland Financial, Chicago Advisory Group is entitled
to the continued payment of consulting fees through the end of the term (as the
same may have been extended) as if such termination had not occurred. Pursuant
to the agreement, both Chicago Advisory Group and Robert Mauer have agreed that,
during the term of the agreement, neither Chicago Advisory Group nor Mr. Mauer
will compete with Inland Financial or engage in a comparable business (i.e. a
business engaged in the business of factoring or financing of receivables in the
United States or Canada). Further, Chicago Advisory Group and Mauer have each
agreed to a noncompetition and nonsolicitation provision which is to be
effective during the term and for a period of up to one year following its
termination.
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Pursuant to the consulting agreement between Windy City and THCG, Windy
City, through the provision of the services of Joel Kanter, is to serve as a
consultant to THCG for an initial term of twelve months, which term shall
automatically be extended for one or more additional three-month periods unless
Windy City or THCG gives written notice, no less than ninety (90) days prior to
the end of the initial term or, as applicable, sixty (60) days prior to the end
of any extension of the term, of its election not to renew the agreement. Windy
City's annual consulting fee will be $100,000. In addition, THCG is to reimburse
Windy City for reasonable business expenses incurred in connection with the
performance of its duties and responsibilities under the agreement. If the
Agreement is terminated prior to the end of its term, including any extensions
thereof, Windy City shall be entitled to any accrued but unpaid consulting fees
to the date of termination and any accrued but unpaid expenses required to be
reimbursed pursuant to the agreement. In addition, if Windy City terminates the
agreement as the result of a material breach of the agreement by THCG, Windy
City is entitled to the continued payment of consulting fees through the end of
the term (as the same may have been extended). Pursuant to the agreement, both
Windy City and THCG have agreed, to a nonsolicitation provision which is to be
effective during the term of the agreement and for a period of up to one year
following its termination.
EMPLOYMENT AGREEMENTS
In connection with the Mergers, each of Joseph D. Mark, Adi Raviv and
Shai Novik will enter into an employment agreement with THCG.
Pursuant to his employment agreement, Joseph D. Mark will serve as a
Co-Chief Executive Officer of THCG for a five year term ending in 2004, which
term shall be automatically extended for one or more additional annual periods
unless either THCG or Mr. Mark gives written notice, no less than ninety (90)
days prior to the end of the initial term, or any extension thereof, of his or
its election not to renew the agreement. The agreement provides that Mr. Mark's
annual salary will be a minimum of $200,000 per year, or such greater sum as may
be fixed by the Compensation Committee of THCG's Board of Directors, provided
that any such greater sum shall become the minimum rate of compensation for so
long as Mr. Mark remains employed by THCG. In addition, Mr. Mark will be
entitled to bonus compensation as reasonably determined in good faith by the
Compensation Committee. Mr. Mark will also receive options to purchase an
aggregate of 450,000 shares of THCG Common Stock under the THCG Stock Incentive
Plan and will be entitled to participate in any and all employee benefit plans
generally available to THCG's most senior executives. THCG will lease or
purchase an automobile for Mr. Mark at a cost not to exceed $1,000 per month and
THCG will pay the premiums on an ordinary life insurance policy on Mr. Mark's
behalf in the principal amount of $2,000,000. THCG will also reimburse Mr. Mark
for personal tax preparation and financial planning assistance in a total amount
not to exceed $5,000 per year.
In the event that Mr. Mark's employment is terminated prior to the
expiration of the term by reason of his death or total disability, THCG shall
pay Mr. Mark the following: any accrued but unpaid base salary for services
rendered through the date of termination, a prorated amount of bonus
compensation, any accrued but unpaid expenses required to be reimbursed pursuant
to the employment agreement, and any accrued vacation to the date of
termination. If Mr. Mark's employment is terminated by THCG for "cause" (as
defined in the agreement), or by Mr. Mark without "good reason" (as defined in
the agreement), THCG shall pay Mr. Mark: any accrued but unpaid base salary for
services rendered to the date of termination, any accrued but unpaid expenses
required to be reimbursed pursuant to the employment agreement, and any accrued
vacation to the date of termination. In the event that Mr. Mark's employment is
terminated by THCG without cause, or by Mr. Mark with good reason, THCG shall
pay Mr. Mark the following: any accrued but unpaid base salary for services
rendered to the date of termination, such bonus as may reasonably be determined
by THCG based on Mr. Mark's performance through the date of termination, any
accrued but unpaid expenses required to be reimbursed pursuant to the employment
agreement, any accrued vacation to the date of termination, and continued
payment of his base salary until the earlier of (a) 36 months after the date of
termination or (b) expiration of the term. Under each of the conditions of
termination, any benefits to which Mr. Mark is entitled pursuant to any employee
benefit plans and programs in which he participated will be paid in accordance
with the terms of those plans and programs. Mr. Mark has also agreed to a
noncompetition provision, which is effective during the term of his employment,
and to a nonsolicitation provision which is effective during the term of the
agreement and for a period of up to one year following its termination.
Pursuant to his employment agreement, Adi Raviv will serve as a
Co-Chief Executive Officer of THCG for a five year term ending in 2004, which
term shall be automatically extended for one or more additional annual periods
unless either THCG or Mr. Raviv gives written notice, no less than ninety (90)
days prior to the end of the term, of his or its election not to renew the
agreement. The agreement provides that Mr. Raviv's annual salary will be a
minimum of $200,000 per year, or such greater sum as may be fixed by the
Compensation Committee of
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<PAGE> 73
THCG's Board of Directors, provided that any such greater sum shall become the
minimum rate of compensation for so long as Mr. Raviv remains employed by THCG.
In addition, Mr. Raviv will be entitled to bonus compensation as reasonably
determined in good faith by the Compensation Committee. Mr. Raviv will also
receive options to purchase an aggregate of 450,000 shares of THCG Common Stock
under the THCG Stock Incentive Plan and will be entitled to participate in any
and all employee benefit plans generally available to THCG's most senior
executives. THCG will lease or purchase an automobile for Mr. Raviv at a cost
not to exceed $1,000 per month and THCG will pay the premiums on an ordinary
life insurance policy on Mr. Raviv's behalf in the principal amount of
$2,000,000. THCG will also reimburse Mr. Raviv for personal tax preparation and
financial planning assistance in a total amount not to exceed $5,000 per year.
In the event that Mr. Raviv's employment is terminated prior to the
expiration of the term by reason of his death or total disability, the Company
shall pay Mr. Raviv the following: any accrued but unpaid base salary for
services rendered to the date of termination, a prorated amount of bonus
compensation, any accrued but unpaid expenses required to be reimbursed pursuant
to the employment agreement, and any accrued vacation to the date of
termination. If Mr. Raviv's employment is terminated by the Company for "cause,"
or by Mr. Raviv without "good reason," the Company shall pay Mr. Raviv the
following: any accrued but unpaid base salary for services rendered to the date
of termination any accrued but unpaid expenses required to be reimbursed
pursuant to the employment agreement, and any accrued vacation to the date of
termination. In the event that Mr. Raviv's employment is terminated by the
Company without cause, or by Mr. Raviv with good reason, the Company shall pay
Mr. Raviv the following: any accrued but unpaid base salary for services
rendered to the date of termination, such bonus as may reasonably be determined
by the Company based upon Mr. Raviv's performance through the date of
termination, any accrued but unpaid expenses required to be reimbursed pursuant
to the employment agreement, any accrued vacation to the date of termination,
and continued payment of his base salary until the earlier of (a) 36 months
after the date of termination or (b) the expiration of the term. Under each of
the conditions of termination, any benefits to which Mr. Raviv is entitled to
any employee benefit plans and programs in which he participated will be paid in
accordance with the terms of those plans and programs. Mr. Raviv has also agreed
to a noncompetition provision, which is effective during the term of his
employment, and to a nonsolicitation provision which is effective during the
term of the agreement and for a period of up to one year following its
termination.
Pursuant to his employment agreement, Shai Novik will serve as the
Chief Operating Officer of THCG for a five year term ending in 2004, which term
shall be automatically extended for one or more additional annual periods unless
either THCG or Mr. Novik gives written notice, no less than ninety (90) days
prior to the end of the term, of his or its election not to renew the agreement.
The agreement provides that Mr. Novik's annual salary will be a minimum of
$150,000 per year, or such greater sum as may be fixed by the Board of
Directors, provided that any such greater sum shall become the minimum rate of
compensation for so long as Mr. Novik remains employed by THCG. In addition, Mr.
Novik will be entitled to bonus compensation as reasonably determined in good
faith by the Compensation Committee. Mr. Novik will also receive a grant of
372,281.45 shares of restricted THCG Common Stock under the THCG Stock Incentive
Plan and will be entitled to participate in any and all employee benefit plans
generally available to THCG's senior executives and employees. THCG will lease
or purchase an automobile for Mr. Novik at a cost not to exceed $1,000 per month
and THCG will pay the premiums on an ordinary life insurance policy on Mr.
Novik's behalf in the principal amount of $2,000,000. THCG will also reimburse
Mr. Novik for personal tax preparation and financial planning assistance in a
total amount not to exceed $5,000 per year.
In the event that Mr. Novik's employment is terminated prior to the
expiration of the term by reason of his death or total disability, THCG shall
pay Mr. Novik the following: any accrued but unpaid base salary for services
rendered to the date of termination, a prorated amount of bonus compensation,
any accrued but unpaid expenses required to be reimbursed pursuant to the
employment agreement, and any accrued vacation to the date of termination. If
Mr. Novik's employment is terminated by THCG for "cause," or by Mr. Novik
without "good reason," THCG shall pay Mr. Novik the following: any accrued but
unpaid base salary for services rendered to the date of termination, any accrued
but unpaid expenses required to be reimbursed pursuant to the employment
agreement, and any accrued vacation to the date of termination. In the event
that Mr. Novik's employment is terminated by THCG without cause, or by Mr. Novik
with good reason, THCG shall pay Mr. Novik the following: any accrued but unpaid
base salary for services rendered to the date of termination any accrued but
unpaid expenses required to be reimbursed pursuant to the employment agreement,
any accrued vacation to the date of termination, and continued payment of the
base salary for six months after the date of termination. Under each of the
conditions of termination, any
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<PAGE> 74
benefits to which Mr. Novik is entitled pursuant to any employee benefit plans
and programs in which he participated will be paid in accordance with the terms
of those plans and programs. Mr. Novik has also agreed to a noncompetition
provision, which is effective during the term of his employment, and to a
nonsolicitation provision which is effective during the term of the agreement
and for a period of up to one year following its termination.
BOARD POSITIONS
Walnut and Tower Hill have agreed that members of the current Board of
Directors of Walnut are to be elected to three of the seven positions on the
THCG Board of Directors. The three board positions will initially be filled by
Burton W. Kanter, Joel S. Kanter and Gene E. Burleson. Upon classification of
the Board, Mr. Burleson will be a Class II director and will serve until the
second Annual Meeting of the THCG stockholders following the Mergers, and
Messrs. Burton Kanter and Joel Kanter will be Class III directors and will serve
until the third Annual Meeting of the THCG stockholders following the Mergers.
Upon consummation of the Mergers, Joseph D. Mark, Adi Raviv, Evan Marks
[AND ONE ADDITIONAL TOWER HILL DESIGNEE] will occupy four of the seven seats on
the Board of Directors of THCG. Joseph D. Mark and Evan Marks will be Class I
directors and will serve until the first Annual Meeting of the THCG stockholders
following the Mergers. [Tower Hill is to designate an additional director who
will be] a Class II director and will serve until the second Annual Meeting of
the THCG stockholders following the Mergers. Adi Raviv will be a Class III
director and will serve until the third Annual Meeting of the THCG stockholders
following the Mergers.
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, THCG has, for the time periods
specified in the Merger Agreement, agreed to:
- indemnify each present director and officer of Walnut against
liabilities or expenses incurred in connection with claims arising
out of or pertaining to matters existing or occurring at or prior
to the effective time of the Mergers; and
- maintain in effect directors' and officers' liability insurance
for the benefit of the directors and officers of Walnut with
coverage in amount and scope at least as favorable to such persons
as Walnut's existing coverage. For a further discussion of the
indemnification and insurance provisions, see "THE MERGER
AGREEMENT--Covenants--Indemnification and Insurance."
DISSENTERS' RIGHTS OF APPRAISAL
Stockholders of Walnut are not entitled to dissenting stockholders'
appraisal rights under the Utah BCA. The Utah BCA does not provide appraisal
rights to stockholders of a corporation in connection with a merger if the
corporation's shares are listed on Nasdaq National Market on the record date for
determining stockholders entitled to vote on such merger and the stockholder
will receive nothing other than (1) shares of the corporation surviving the plan
of merger; (2) shares of a corporation which will be listed on a national
securities exchange or the Nasdaq National Market; (3) cash in lieu of
fractional shares or (4) any combination of the foregoing.
ACCOUNTING TREATMENT OF THE MERGERS
The Mergers will be accounted for as a purchase transaction, as a
reverse acquisition.
REGULATORY APPROVALS
The management of Walnut believes that no filings with or approval of
any governmental authority is necessary prior to the consummation of Merger 1.
Merger 2 requires the prior approval of the NASD, which approval is a condition
precedent to the consummation of Merger 2.
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<PAGE> 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
The discussion below is based upon current provisions of the Code,
currently applicable Treasury Regulations promulgated thereunder, and judicial
and administrative decisions and rulings. Future legislative, judicial or
administrative changes or interpretations could alter or modify the statements
and conclusions set forth herein, and any such changes or interpretations could
be retroactive and could affect the tax consequences to the holders of common
stock issued in connection with the Mergers.
The discussion below does not purport to deal with all aspects of
federal income taxation that may affect particular stockholders in light of
their individual circumstances, and are not intended for stockholders subject to
special treatment under the federal income tax law. Stockholders subject to
special treatment include insurance companies, tax-exempt organizations,
financial institutions, broker-dealers and foreign persons. In addition, the
discussion below does not consider the effect of any applicable state, local or
foreign tax laws. In addition, the discussion below does not consider the effect
of the receipt of Walnut Common Stock in connection with one or more of the
Related Transactions and the conversion of such Walnut Common Stock into THCG
Common Stock at the First Effective Time.
EACH HOLDER OF WALNUT COMMON STOCK IS URGED TO CONSULT HIS OR HER TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGERS,
INCLUDING THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF
CHANGES IN THE APPLICABLE TAX LAWS.
The Mergers will constitute a reorganization within the meaning of
Section 368(a) of the Code. Accordingly, subject to certain limitations and
qualifications, the following tax consequences will result:
- No gain or loss will be recognized by Walnut, THCG, Newco or Tower
Hill solely as a result of the Mergers.
- No gain or loss will be recognized by the holders of Walnut Common
Stock upon the receipt of THCG Common Stock in exchange for such
Walnut Common Stock in Merger 1.
- Upon the receipt of THCG Common Stock in exchange for Walnut
Common Stock, the holders of THCG Common Stock will have basis and
holding periods in that stock substituted from their basis and
holding periods in their Walnut Common Stock.
A successful Internal Revenue Service challenge to the reorganization
status of the Mergers would result in a Walnut stockholder recognizing gain or
loss with respect to each share of Walnut Common Stock surrendered in Merger 1
equal to the difference between the Walnut stockholder's basis in such share and
the fair market value, as of the First Effective Time, of the THCG Common Stock
received in exchange therefor.
MARKET PRICE INFORMATION AND DIVIDEND POLICY
MARKET PRICE INFORMATION OF WALNUT
As of August 12, 1999, Walnut had [3,350,533] shares of Walnut Common
Stock outstanding, held by approximately [615] holders of record.
The Walnut Common Stock is listed on the Nasdaq National Market under
the symbol "WNUT". The following table shows the high and low trade prices
quoted for bid for Walnut for each quarter for the period January 1, 1996
through June 30, 1999 based upon information received from the Nasdaq National
Market.
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<PAGE> 76
<TABLE>
<CAPTION>
QUARTER ENDED WALNUT COMMON STOCK
---------------------- --------------------
HIGH LOW
---- ---
<S> <C> <C>
March 31, 1999 $ 4-5/8 $ 1-3/4
June 30, 1999 2-7/8 1-15/16
March 31, 1998 $8-13/16 $ 6-3/4
June 30, 1998 7-7/8 6
September 30, 1998 6 1-7/8
December 31, 1998 4-1/2 1-11/16
March 31, 1997 $ 7-7/8 $5-14/32
June 30, 1997 18-3/4 4-7/8
September 30, 1997 11-1/4 6-3/4
December 31, 1997 10-1/2 8-1/4
</TABLE>
The Nasdaq Stock Market is a highly-regulated electronic securities
market utilizing a sophisticated computer and telecommunications network. Market
participants are comprised of competing Market Makers, independent dealers who
commit capital to stocks and compete with each other for orders, and Electronic
Communications Networks, trading systems recently integrated into the Nasdaq
Stock Market which bring additional orders into the market. This market
structure provides visibility of orders and allows market participants to
compete for order flow. Trading is supported by a communications network linking
the market participants to quotations dissemination, trade reporting, and order
execution systems. This market also provides specialized automation services for
screen-based negotiations of transactions, online comparison of transactions,
and a range of information services tailored to the needs of the securities
industry, investors and issuers.
The Nasdaq Stock Market consists of two distinct market tiers: the
Nasdaq National Market (on which the Walnut Common Stock is currently listed and
the THCG Common Stock is to be listed) and the Nasdaq Smallcap Market. The
Nasdaq Stock Market is operated by The Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the NASD.
MARKET PRICE INFORMATION OF TOWER HILL
There is no established public trading market for Tower Hill.
As of June 30, 1999, Tower Hill had two stockholders, Joseph D. Mark
and Adi Raviv, each owning 50% of the outstanding Tower Hill Common Stock. In
addition, Shai Novik owns the Novik Options, comprised of: (i) an option to
purchase 5% of the outstanding equity of Tower Hill at an exercise price of
$0.01 per share and (ii) an option to purchase an additional 5% of the
outstanding equity of Tower Hill at an exercise price of $0.01 per share.
DIVIDEND POLICY
Neither Walnut nor Tower Hill has paid any cash dividends since its
inception.
PRO FORMA PER SHARE DATA
Set forth below is certain information regarding the book value per
common share and income (loss) per common share on a pro forma basis assuming
the Mergers had been consummated at March 31, 1999 with respect
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<PAGE> 77
to book value per common share, and January 1, 1998 with respect to net (loss)
income per common share. The information set forth below should be read in
conjunction with the unaudited pro forma combined condensed consolidated
financial statements, including the notes thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
At and For the Three At and For the Year
Months Ended
Ended March 31, 1999 December 31, 1998
-------------------- --------------------
Combined Pro Forma Combined Pro Forma
(unaudited) (unaudited)
-------------------- --------------------
<S> <C> <C>
Book Value per Common Share 1.62 1.68
Net income (loss) per Common Share 0.18 (0.09)
</TABLE>
SELECTED FINANCIAL INFORMATION
WALNUT FINANCIAL INFORMATION
The following table sets forth certain selected financial data for
Walnut for the five-year period ended December 31, 1998. The information for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994 is derived from the
audited financial statements of Walnut 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 Walnut for such periods included
elsewhere in this Proxy Statement.
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<PAGE> 78
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995* 1994*
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Investment income
Interest income 87,000 69,000 61,000 453,000 186,000
Dividend income 3,000 6,000 16,000 0 257,000
----------- ----------- ----------- ----------- -----------
Total income 90,000 75,000 77,000 453,000 443,000
Expenses:
Interest expense 533,000 1,099,000 1,597,000 1,698,000 1,594,000
General and administrative 1,182,000 1,490,000 1,651,000 1,282,000 722,000
----------- ----------- ----------- ----------- -----------
Net investment (loss) before taxes (1,625,000) (2,514,000) (3,171,000) (2,527,000) (1,873,000)
Income tax benefit 8,000 858,000 1,268,000 1,438,000 725,000
----------- ----------- ----------- ----------- -----------
Net investment (loss) (1,617,000) (1,656,000) (1,903,000) (1,089,000) (1,148,000)
----------- ----------- ----------- ----------- -----------
Realized and unrealized gains on
investments:
Realized gain on sale of 1,372,000 3,032,000 2,904,000 4,667,000 1,044,000
investments before income tax
Income tax provision (7,000) (1,391,000) (1,162,000) (1,822,000) (407,000)
----------- ----------- ----------- ----------- -----------
Net realized gain on sale of
investments 1,365,000 1,641,000 1,742,000 2,845,000 637,000
----------- ----------- ----------- ----------- -----------
Unrealized appreciation
(depreciation) on investments (8,371,000) (1,437,000) (3,773,000) (5,392,000) 4,608,000
before tax
Income tax (provision) benefit 43,000 491,000 969,000 1,669,000 (1,797,000)
----------- ----------- ----------- ----------- -----------
Net unrealized appreciation
(depreciation) on investments (8,328,000) (946,000) (2,804,000) (3,723,000) 2,811,000
----------- ----------- ----------- ----------- -----------
Net realized and unrealized gains
(losses) on investments (6,963,000) 695,000 (1,062,000) (878,000) 3,448,000
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations $(8,580,000) $ (961,000) $(2,965,000) $(1,967,000) $ 2,300,000
Income (loss) per share $ (2.70) $ (0.39) $ (1.25) $ (0.93) $ 1.65
Weighted average shares outstanding 3,176,660 2,463,219 2,374,516 2,124,609 1,392,310
Balance Sheet Data:
Total assets 15,322,000 26,509,000 32,353,000 35,073,000 33,132,000
Current liabilities 6,317,000 7,791,000 13,928,000 10,473,000 10,187,000
Long-term liabilities 0 2,044,000 4,038,000 9,201,000 10,680,000
Net Assets 9,005,000 16,674,000 14,387,000 15,399,000 12,265,000
Total Liabilities and Net Assets $15,322,000 $26,509,000 $32,353,000 $35,073,000 $33,132,000
</TABLE>
* Includes the results of operations of Walnut Capital only
TOWER HILL FINANCIAL DATA
The following table sets forth certain selected financial data for
Tower Hill for the one-year period ended March 31, 1998. The information for the
year ended March 31, 1998 is derived from the audited financial statements of
Tower Hill as of and for the year then ended. The data should be read in
conjunction with the financial
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<PAGE> 79
statements, related notes and other financial information of Walnut for such
periods included elsewhere in this Proxy Statement.
HAMBRO AMERICA SECURITIES, INC.
HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended
March 31, 1998
--------------
<S> <C>
Income Statement Data:
Revenue:
Advisory and corporate finance fees $ 210,461
Interest 18,454
------------
228,915
============
Expenses:
Employee compensation and benefits 823,393
Occupancy 110,912
General and administrative 381,188
Interest 137,293
Depreciation 12,893
Other 87,966
------------
1,553,645
Net loss $ (1,324,730)
============
Balance Sheet Date:
Total assets $ 396,749
Liabilities 51,523
Net Assets 345,226
------------
Total Liabilities and Net Assets $ 396,749
============
</TABLE>
PRO FORMA COMBINED FINANCIAL DATA
The following tables set forth the unaudited pro forma financial and
operating data for the three months ended March 31, 1999 and for the year ended
December 31, 1998. This information is presented as if the completion of the
Mergers occurred as of March 31, 1999 for balance sheet purposes and as of
January 1, 1998 for purposes of the statements of operations. The pro forma
information is based upon certain assumptions that are included in the notes to
the pro forma financial statements included elsewhere in this Proxy Statement.
The pro forma information is unaudited and is not necessarily indicative of what
the financial position and results of operations of Walnut would have been as of
and for the periods indicated, nor does it purport to represent the financial
position and results of operations for future periods.
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<PAGE> 80
<TABLE>
<CAPTION>
Three Months Ended Year Ended December
March 31, 1999 31, 1998
----------------------- ----------------------
<S> <C> <C>
Income Statement Date:
Revenue 266,000 2,114,000
Consulting income 392,000 1,873,000
Factoring income 79,000 1,059,000
----------------------- ----------------------
Investment and other income 737,000 5,046,000
Costs and expenses 102,000 84,000
Cost of services 1,159,000 5,318,000
----------------------- ----------------------
General and administrative expenses 1,261,000 5,402,000
Operating gain/(loss) (524,000) (356,000)
Interest and other financial costs 119,000 1,228,000
----------------------- ----------------------
Gain/(Loss) before taxes and realized gain (643,000) (1,584,000)
Income tax benefit/(expenses) 15,000 44,000
Realized gain/(loss) on sale of securities, net of tax 2,522,000 1,311,000
Effect on net income of minority interest 0
----------------------- ----------------------
NET INCOME/(LOSS) 1,894,000 (229,000)
======================= ======================
Income/(Loss) per share 0.19 (0.02)
======================= ======================
Weighted average shares outstanding 9,928,033 9,754,160
======================= ======================
Balance Sheet Data:
Total Assets $20,593,000 $24,440,000
Current Liabilities 5,616,000 5,382,000
Long-term Liabilities 2,897,000 3,479,000
Net Assets 12,080,000 15,579.00
----------------------- ----------------------
Total Liabilities and Net Assets $20,593,000 $24,440,000
======================= ======================
</TABLE>
69
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND THE RESULTS OF OPERATIONS
OVERVIEW
Walnut is required to present its financial statements in accordance
with generally accepted accounting principles and SEC regulations in the format
applicable to investment companies. Walnut had previously reported its financial
statements in accordance with generally accepted accounting principles and SEC
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 SEC 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. Because of such reporting, Walnut's
consolidated financial statements include the operating results only of Walnut
and Walnut Capital. For all subsidiaries other than Walnut Capital and Universal
Bridge, Walnut reports only the fair value of its investments therein as of the
date of such information. The only operating activity of Universal Bridge is
recording the change in fair value of its investment in UPLP. Universal Bridge
recorded a decrease of $395,000 in the year ended December 31, 1998 and an
increase of $562,000 in the year ended December 31, 1997.
Walnut separately discusses and analyzes the results of operations and
the liquidity and capital resources of Walnut and Walnut Capital. Walnut is
required by regulations promulgated by the SBA to separately present such
information for Walnut Capital. The results of operations of Walnut and Walnut
Capital for a particular period in the aggregate represent the consolidated
results of operations of Walnut for such period before adjustments to reflect
intercompany transfers and other adjustments all made in accordance with
generally accepted accounting principles.
RESULTS OF OPERATIONS
HISTORICAL OPERATING RESULTS OF WALNUT
Results of Operations for the Three Months Ended March 31, 1999 and the Three
Months Ended March 31, 1998
Results of Walnut Capital's Operations for the Three Months Ended March
31, 1999 and March 31, 1998. Walnut Capital had realized gain income of
$4,020,000 for the three months ended March 31, 1999, compared to $953,000 for
the three months ended March 31, 1998. The realized gains for the three months
ended March 31, 1999 resulted predominately from the sale of shares of First
Health Group, Inc. (formerly HealthCare COMPARE Corp.).
Interest expense for the three months ended March 31, 1999 was $52,000
as compared to $121,000 for the same period in 1998. The decrease of $69,000 or
57% in interest expense is attributable to a repayment of Walnut Debentures in
the principal amount of $2,000,000 on June 1, 1998, and a reduction in margin
payable to brokers. General and administrative expenses for the three months
ended March 31, 1999 was $94,000 as compared to $93,000 for the three months
ended March 31, 1998.
Unrealized depreciation on investments before income tax for the three
months ended March 31, 1999 was $3,982,000 as compared to $814,000 for the same
period in 1998. The difference of $3,168,000 in unrealized depreciation is
primarily the result of the recognition for the three months ended March 31,
1999 of amounts previously recorded as unrealized gains on investments before
income tax attributable to First Health Group, Inc.
securities.
Results of the Operations of Walnut (excluding Walnut Capital) for the
Three Months Ended March 31, 1999 and March 31, 1998. Walnut had interest income
of $6,000 and general and administrative costs of $196,000 for the three months
ended March 31, 1999 as compared to $19,000 and $211,000, respectively, for the
three months ended March 31, 1998. The $15,000 decrease in general and
administrative costs is due to the payment of
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less directors' fees. For the three months ended March 31, 1999, the unrealized
depreciation attributable to Walnut's wholly-owned subsidiary, Universal Bridge
and its majority owned subsidiary, UPLP, was $15,000.
Results of Operations for the Fiscal Years Ended December 31, 1998 and December
31, 1997
Results of Walnut Capital's Operations for the Fiscal Years Ended
December 31, 1998 and December 31, 1997. Walnut Capital had realized gain income
of $1,330,000, for the year ended December 31, 1998, compared to $3,939,000, net
of tax, for the year ended December 31, 1997. The realized gains result
predominately from the sale of shares of Vitalink, Inc., and First Health Group,
Inc. (formerly HealthCare COMPARE Corp.), offset by realized losses at
Nhancement Technology Corp. and Consolidated Technology Group, Inc. and the
write-off of the investment in Site Based Media, Inc.'s stock.
Interest expense decreased $473,000 to $371,000 during the year ended
December 31, 1998, representing a 56% decrease from interest expense during the
year ended December 31, 1997. Interest expense consists of two components: (1)
interest paid to the SBA with respect to the Walnut Debentures (as defined
below) ($250,000 and $464,000 for 1998 and 1997, respectively), and (2) interest
paid on margin accounts and bank lines and other debt ($121,000 and $380,000 for
1998 and 1997, respectively). The decrease in SBA interest expense was the
result of repayment to the SBA of $2 million of Walnut Debentures on June 1,
1998.
General and administrative expense decreased $111,000 to $657,000
during the year ended December 31, 1998. The decrease in general and
administrative expense for 1998 was due to the write down of intangible assets,
representing prepaid travel expenses and bad debt reserves related to debt
securities in 1997.
Unrealized losses for the year ended December 31, 1998 were
approximately $7,700,000, as compared to unrealized losses for the year ended
December 31, 1997 of approximately $2,600,000, net of tax. The increase in
unrealized loss for 1998 is primarily due to the unrealized losses recorded in
connection with the change in valuation of portfolio investments and a
$3,000,000 related tax benefit that was fully reserved in 1998.
Results of Walnut's Unconsolidated Operations for the Fiscal Years
ended December 31, 1998 and December 31, 1997. Walnut had interest income of
$54,000 and general and administrative cost of $817,000 for the year ended
December 31, 1998 as compared to $39,000 and $830,000, respectively, in the
years ended December 31, 1997. Consolidated net loss for Walnut was
approximately $8.6 million, for the year ended December 31, 1998 as compared to
net loss of approximately $1,000,000 in the year ended December 31, 1997. The
increase in the loss was due to an increase in the unrealized losses in
valuation of Walnut's portfolio securities and a $3,000,000 related tax benefit
that was fully reserved in 1998.
Results of Operations for the Fiscal Years Ended December 31, 1997 and December
31, 1996
Results of Walnut Capital's Operations for the Fiscal Years Ended
December 31, 1997 and December 31, 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 Services,
Inc. and other portfolio companies.
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 $4,000,000 of Walnut Debentures 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.
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Unrealized losses, net of tax, for the year ended December 31, 1997
were approximately $2,600,000 million, as compared to unrealized losses for the
year ended December 31, 1996 of approximately $1,400,000 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's Unconsolidated Operations for the Fiscal Years
ended December 31, 1997 and December 31, 1996. Walnut 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 Walnut was $961,000 for
the year ended December 31, 1997 as compared to net loss of $2,960,000 million
in the year ended December 31, 1996. The decrease in the loss was due to a
reduction in the unrealized valuation of Walnut's portfolio securities.
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"), of which
Walnut Debentures in the principal amount of $8 million were repaid prior to
1998. Additional Walnut Debentures in the principal amount of $2 million were
repaid on June 1, 1998. Walnut Debentures in the principal amount of $2 million
were outstanding as of March 31, 1999. Such Walnut Debentures were originally
issued in September 1989, bear interest at a rate of 8.80% per annum and are due
on September 1, 1999.
Interest on the Walnut Debentures is paid semi-annually, and principal
is due at maturity. Walnut Capital has been current in all of its interest
payments to the SBA.
The Walnut Debentures prohibit the distribution of earnings or other
assets of Walnut Capital to Walnut, 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 Walnut)
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 prepayment penalty related to
the time of such prepayment.
Additionally, Walnut Capital reduced its broker margin account by $1.7
million and increased its cash and cash equivalents by $1.9 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 $4 million in the first quarter of 1999. Walnut Capital has cash
and a broker margin account available to repay the $2 million of Walnut
Debentures due September 1, 1999.
In 1998, the SBA issued a finding that Walnut Capital and Walnut had
violated Section 107.700 of the Small Business Investment Act of 1958 (as
amended, the "SBIA"), by purchasing securities from a big business as defined in
the SBA regulations. Walnut believes the SBA is in error in its interpretation
of this finding, by including shares held by employees of the seller as being
affiliated with such seller. The SBA has also informed Walnut Capital that it is
in violation of sections 107.503(c) and 107.650 of the SBIA and valuation
guidelines for SBICs for failing to timely report changes in the valuations of
certain of its investments. Walnut disagrees with the SBA's interpretation of
the requirements and the matter is being discussed with the SBA. The SBA also
found Walnut Capital in violation of Section 107.825(e) of the SBIA, for
purchasing certain securities from non-issuers. Walnut believes this finding to
be inconsistent with actions taken by the SBA in the past, and has entered into
discussions with the SBA to clarify the issue. The SBA, if it finally determines
that Walnut Capital did violate any of the foregoing regulations, may declare a
default under the outstanding $2,000,000 of Walnut Debentures and accelerate the
maturity for such Walnut Debentures from September 1, 1999 to the date of such
acceleration. Further, Walnut Capital did not file its Form 468 timely for the
year ended December 31, 1998. This report was due
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on March 31, 1999. Management believes that none of these findings will have
material effect on Walnut Capital, or Walnut as a whole, and believes that if
the maturity of the Walnut Debentures is accelerated, it will have sufficient
funds available from existing sources of liquidity to satisfy its repayment
obligations.
LIQUIDITY AND CAPITAL RESOURCES OF WALNUT (EXCLUDING WALNUT CAPITAL)
On August 31, 1995, Walnut established a $4 million line of credit with
American National Bank and Trust Company of Chicago. 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 quarterly principal payment of
$250,000 commencing on December 31, 1997 with a maturity date of June 30, 1999.
On December 31, 1998, this bank loan was further amended to require an immediate
principal payment of $100,000 and quarterly principal payments thereafter and it
has an amended maturity date of December 31, 1999. Following the principal
payment required on such date, the loan had a principal balance of $925,000. As
of July 1, 1999, the principal balance of this loan was $725,000. The interest
rate associated with this loan is ANB's base rate plus 2% (10.0% as of June 30,
1999). Two directors of Walnut personally guarantee the loan.
In April 1997, Walnut received an unsecured loan from The Holding
Company, a company for which Burton W. Kanter, a director of Walnut, serves as
President, in the amount of $400,000. The loan bears interest at 9.5%. The loan
was to be repaid in four installments each following the end of each of the
fiscal quarters of Walnut in 1998 with the first installment to be paid on April
1, 1998. The first and second installments were paid on April 1, 1998 and July
1998, respectively. The third and fourth payment which were due on October 1,
1998 and January 1, 1999 had been deferred and Walnut has delayed further
principal payments until December 31, 1999 provided that quarterly interest
shall continue to be paid on the outstanding balance.
In connection with the transaction through which Walnut acquired Inland
Financial, Walnut borrowed $250,000 from each of the Kanter Family Foundation,
an entity affiliated with Walnut, and UPLP in October 1998. Walnut issued to
each entity a promissory note which matures on October 13, 2001. The promissory
notes bear interest at a rate of 15% per year which is payable quarterly. This
loan is unsecured.
Walnut guarantees the indebtedness of each of Pacific Financial and
Inland Financial under their respective revolving lines of credit. Subject to
certain conditions, Inland Financial is permitted to borrow up to $2,500,000
under its credit facility and Pacific Financial is permitted to borrow up to
$1,000,000 under its credit facility. Walnut's guarantee of each facility is a
guarantee of payment and not a guarantee of collection.
Walnut 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 Walnut's
Board of Directors depending upon the earnings, capital requirements and
financial position of Walnut, 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 Walnut. Inland Financial is
prohibited from making any dividends to Walnut without the consent of Inland
Financial's lender under the terms of a revolving credit facility. Pacific
Financial is prohibited from making any dividends to Walnut without the consent
of Pacific Financial's lender under the terms of a revolving credit facility.
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INVESTMENT PORTFOLIO CHANGES
The sale of certain portfolio investments resulted in unrealized
depreciation and realized gains during the three months ended March 31, 1999 as
follows:
<TABLE>
<CAPTION>
Unrealized Appreciation
(Depreciation) Realized Gain (Loss)
-------------- --------------------
<S> <C> <C>
First Health Group
(formerly HealthCare
COMPARE Corp.) $(4,069,000) $4,020,000
</TABLE>
Walnut's equity investments that appreciated/(depreciated) in value during the
three months ended March 31, 1999 were as follows:
<TABLE>
<CAPTION>
Unrealized Appreciation (Depreciation)
--------------------------------------
<S> <C>
I-Flow Corporation $500,000
Mariner Post-Acute Network
(formerly Paragon Health) (346,000)
Logic Devices Inc. 52,000
HP America Inc. (67,000)
Others (52,000)
</TABLE>
There were unrealized losses of ($15,000) recorded in connection with
Universal Bridge's partnership interest in UPLP.
YEAR 2000 COMPLIANCE
The year 2000 creates the potential for date related data to cause
computer processing errors or system shut-downs because computer-controlled
systems have historically used two digits rather than four to define years.
Computer programs that contain time data sensitive software may recognize a date
using two digits of "00" as the year 1900 rather than the year 2000. The
miscalculations and systems failures that may be caused by such date
misrecognition could disrupt the operations of Walnut or its portfolio
companies. Since this risk relates to computer-controlled systems, the year 2000
issue affects computer software, computer hardware, and any other equipment with
imbedded technology that involves date sensitive functions.
Walnut has assessed the scope of its year 2000 problems and remediated
such problems for each of its internal computer software programs and its
computer hardware. Walnut spent no amounts to modify or replace its internal
computer software program and its computer hardware, including to upgrade
software and to modify maintenance agreements in the quarter ended June 30,
1999. Prior to the quarter ended June 30, 1999, it has spent $15,000 in
aggregate for such upgrades and modifications. Walnut does not believe that it
has machinery with embedded computer technology or that it relies upon any
supplier that is material to its business. Since it believes its assessment and
remediation efforts have been completed, Walnut has not developed any
contingency plans in the event it or any of its subsidiaries experiences year
2000 problems and it does not expect to expend any material amounts on such
remediation in the future. However, if Walnut has failed to properly assess any
of the year 2000 problems or failed to fully remedy any identified year 2000
problems of its computer hardware or computer software programs, Walnut may be
forced to spend more on such remediation in the future and Walnut's operations
may be adversely affected.
Since Walnut does not control its portfolio companies (other than
wholly-owned subsidiaries which are accounted for as portfolio companies because
Walnut reports its financial results as an investment company), it has not
attempted to dictate assessment, remediation or contingency planning for such
companies, though Walnut
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representatives on the boards of directors of portfolio companies have
participated in such boards' oversight of those companies' year 2000 efforts.
Each portfolio company's year 2000 efforts are necessarily directed by such
companies' management and boards of directors. Furthermore, Walnut has invested
in many private companies which are not obligated to inform Walnut about their
year 2000 efforts. If any portfolio company fails to timely assess or remediate
its year 2000 problems, the value of Walnut's investment in such portfolio
company may be adversely impacted. The aggregate value of Walnut's portfolio
could be materially adversely impacted if a number of portfolio companies
experience year 2000 problems or significant costs to avoid or remediate such
problems. Walnut does not expect to know the impact of the year 2000 problem on
the aggregate value of its portfolio until after January 1, 2000. None of
Walnut's computer systems are interrelated with those of any of its portfolio
companies.
CAPITALIZATION OF WALNUT AND TOWER HILL
The following table sets forth the capitalization of each of Walnut and
of Tower Hill, at March 31, 1999, and the pro forma combined capitalization of
THCG as adjusted to give effect to the Mergers and the Related Transactions as
if they had occurred on March 31, 1999.
<TABLE>
<CAPTION>
March 31, 1999
--------------
(unaudited)
(in thousands)
Combined Pro Forma
of THCG
-------------------
<S> <C>
Debt 2,719
Participation Loans Payable 2,288
Minority Interest
Stockholders' Equity
Common Stock 99
Additional Paid-in Capital 27,201
Deficit (11,252)
Total Stockholders' Equity 16,048
Total Capitalization 21,664
</TABLE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE AGREEMENT AND PLANS OF MERGER AND THE MERGERS.
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PROPOSAL II
APPROVAL OF THE BDC DEREGISTRATION
GENERAL
Walnut is a closed-end management investment company, which elected,
together with Walnut Capital, Walnut Funds and Universal Bridge, on October 15,
1997 to be regulated as BDCs under the 1940 Act. As a BDC, Walnut is subject
only to specified portions of the 1940 Act, which has generally provided greater
flexibility with respect to management issues, capital structure and other
matters than does the full regulatory scheme of the 1940 Act. Nevertheless, as a
BDC, Walnut remains subject to significant regulation of its activities, as
described below in "1940 Act Regulations Applicable to Business Development
Companies."
The Board of Directors believes that, since the composition of Walnut's
assets will change as a result of the Mergers and the merger of Walnut Capital,
Walnut Funds and Universal Bridge into Tower Hill LLC, and since Walnut, as a
result of Merger 2, will acquire Tower Hill's broker-dealer business, the
regulatory scheme governing BDCs will no longer be appropriate for the combined
companies following the consummation of the Mergers and will hinder their future
growth. Accordingly, the Board of Directors recommends that Walnut, Walnut
Capital, Walnut Funds and Universal Bridge withdraw their elections to be BDCs,
effective as soon as possible after the Effective Time of the Mergers. If
stockholders approve this proposal, it will indicate to Walnut the stockholders'
agreement with the Board's plan to conduct its business primarily as an
operating company and not as an investment company, and Walnut's investment
assets will constitute a significantly smaller portion of its overall assets.
The BDC Deregistration is a condition to the Mergers, and, in addition, must be
completed in order to complete Proposals IV and V of this Proxy Statement
without otherwise seeking SEC approval of such transactions.
In the event that stockholders approve this proposal to permit Walnut
to withdraw its BDC election, the withdrawal will not become effective until the
issuance by the SEC of an order permitting Walnut to withdraw its BDC election.
Stockholder approval of this proposal will be valid for one year following the
date of approval. If Walnut's application for withdrawal is not granted within
this one-year period, Walnut will be required to present the matter to
stockholders again for approval prior to filing a subsequent withdrawal
application.
The affirmative vote of a majority of Walnut's outstanding shares
entitled to vote is required to approve the withdrawal of Walnut's election to
be treated as a BDC under the 1940 Act. Under the 1940 Act, "majority" means the
lesser of (a) 67% of the outstanding voting securities present if more than 50%
are present in person or by proxy or (b) more than 50% of the outstanding voting
securities.
1940 ACT REGULATIONS APPLICABLE TO BUSINESS DEVELOPMENT COMPANIES
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. More specifically, in order to qualify as a
BDC, a company must (a) be a domestic company; (b) have registered a class of
its securities or have filed a registration statement with the SEC pursuant to
Section 12 of the Exchange Act; (c) 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; (d) offer to extend significant managerial assistance to
such eligible portfolio companies; (e) have a majority of directors who are not
"interested persons" (as defined in the 1940 Act); and (f) file (or, under
certain circumstances, intend to file) a proper notice of election with the SEC.
Among others, the 1940 Act imposes the following regulations on Walnut:
1. Walnut must carry its assets at fair value rather than cost in
financial reports;
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2. Walnut may not change the nature of its business or fundamental
investment policies without the prior approval of the
stockholders;
3. The composition of the Board of Directors is restricted (for
example, investment bankers, securities brokers, legal counsel and
affiliated persons may not constitute 50% or more of the directors
of Walnut);
4. Walnut may not engage in certain transactions with affiliates
without obtaining exemptive relief, which customarily requires
prior stockholder approval;
5. The issuance of senior equity and debt securities is restricted;
6. Walnut's right to issue options, rights and warrants to purchase
stock of Walnut is restricted except under certain circumstances
as employee compensation; and
7. Walnut may not issue common stock at a per share price less than
the then-current NAV of the common stock without the prior
approval of stockholders.
REASONS FOR PROPOSED WITHDRAWAL AS A BDC
As a result of the Mergers, the Board believes that the combined
company will be an operating company that will not primarily be engaged in the
business of investing and will be likely to achieve greater stability in the
valuation of its assets and will be able to prosper and grow with a long-term
strategy of operating as an on-going business rather than as a BDC. Given the
asset mix, business and operations of the combined company, the Board believes
that the company will not be an "investment company" by reason of the 1940 Act
and that the regulatory and financial reporting requirements imposed by the 1940
Act, discussed above, will no longer be appropriate or in the best interests of
the combined company or its stockholders. For example:
1. As a result of the Mergers, the nature of Walnut's business will
primarily focus on rendering investment banking services and other financial
advice to start-up and intermediate stage companies; consequently BDC regulation
will be inappropriate for the combined company.
2. By virtue of its BDC election, Walnut may not issue new shares of
Walnut Common Stock at a per share price less than the then net asset value per
share of outstanding Walnut Common Stock without prior stockholder approval.
While this restriction provides stockholders of an investment company with
appropriate and meaningful protection against dilution of their indirect
investment in the fund's portfolio securities, the Walnut Board of Directors
regards this as essentially irrelevant to the interests of investors in an
operating company, who look to its consolidated earnings stream and cash flow
from operations for investment value.
3. The 1940 Act significantly restricts (a) transactions involving
transfers of property in either direction between Walnut and most affiliated
persons of Walnut (or the affiliated persons of such affiliated persons) and (b)
transactions between Walnut and such affiliated persons (or the affiliated
persons of such affiliated persons) participating jointly on the one hand and
third parties on the other. These restrictions, while somewhat relaxed as
applied to BDCs, nevertheless require SEC approval, often a time-consuming and
expensive procedure, for transactions of the types described above involving
directors, officers, employees or principal underwriters of Walnut, regardless
of the intrinsic fairness of such transactions or the approval thereof by
disinterested directors of Walnut. Although Walnut believes interested-party
transactions should not become a routine fact of a public corporation's life,
situations may arise in which a corporation's best interests are served by such
transactions. The Board believes that stockholders are adequately protected by
the fiduciary duty of loyalty already imposed on Walnut's directors under state
corporate law, which generally permits the disinterested members of the Board to
determine the fairness to Walnut of an interested-party transaction, provided
full disclosure of all material facts regarding the transaction and the
interested party's relationship with Walnut is made. The Walnut Board believes
that Walnut's growth will be hampered by the extensive restrictions and
protections imposed by the 1940 Act in this regard, and that the more flexible
state-legislated protective scheme should accordingly prevail.
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<PAGE> 89
4. The 1940 Act limits the extent to which and the circumstances under
which executives of a BDC may be paid compensation other than in the form of
salary payable in cash. For example, stock options may be granted only pursuant
to a plan approved by stockholders and in conformity with specified
restrictions. The Board believes that by ceasing to be a BDC and thereby being
permitted significantly greater flexibility in the structuring of employee
compensation packages, Walnut will be able to attract and retain additional
talented and qualified personnel and to more fairly reward and more effectively
motivate its personnel in accordance with industry practice.
5. BDCs are limited as to the type of securities other than common
stock which they may issue. The issuance of convertible securities and rights to
acquire shares of common stock (e.g. warrants and options) is restricted
primarily because of the statutory interest in facilitating computation of
Walnut's net asset value per share. In addition, issuances of senior debt and
senior equity securities require that certain "asset coverage" tests and other
criteria be satisfied on a continuing basis. This virtually precludes the use of
these types of securities because asset coverage is continuously affected by
variations in market prices of Walnut's investment securities. Operating
companies, including holding companies operating through subsidiaries, benefit
from having maximum flexibility to raise capital through various means.
The Board believes that the above reasons, among others, indicate that
the restrictions of the 1940 Act have the effect of dampening market interest in
Walnut and hindering its financial growth. The Board believes that such
restrictions are inappropriate for and on balance are inimical to the interests
of stockholders of Walnut based on Walnut's current and future objectives.
EFFECT OF WITHDRAWAL OF ELECTION
Walnut, Walnut Capital, Walnut Funds and Universal Bridge will file an
8(f) Application. The companies' withdrawal will not become effective until the
issuance by the SEC of an order permitting them to withdraw their BDC elections.
If the SEC issues such an order, none of Walnut, Walnut Capital, Walnut Funds
and Universal Bridge will be subject to the provisions of the 1940 Act
applicable to BDCs generally, including regulations related to insurance,
custody, composition of the board of directors, affiliated transactions and
compensation arrangements. Should Walnut fail to receive approval from
stockholders of the Mergers or the BDC Deregistration, or should the Mergers not
close for any reason, Walnut, Walnut Capital, Walnut Funds and Walnut Bridge
will not deregister as BDCs.
Following the Mergers, the nature of Walnut's business will change from
that of primarily investing in a portfolio of securities with the goal of
achieving gains on appreciation to that of primarily being actively engaged in
the ownership and management of an operating business with the goal of
generating income and cash flow from the operations of that business.
Until Walnut ceases to be a BDC, the conduct of the business will
continue to be subject to the current investment policies. Upon cessation of its
status as a BDC, the investment policies then in effect will automatically cease
to be effective and will not bind in any way Walnut and its management.
Withdrawal of Walnut's BDC election will result in a significant change
in Walnut's method of accounting. BDC financial statement presentation and
accounting utilizes the value method of accounting used by investment companies.
As an operating company, the required financial statement presentation and
accounting for securities held will be either fair value or historical cost
accounting, depending on the classification of the investment and Walnut's
intent with respect to the period of time it intends to hold the investment.
Withdrawal of Walnut's BDC election will not effect its registration
under Section 12(d) of the Exchange Act. Under the Exchange Act, Walnut is
required to file periodic reports on Form 10-K, Form 10-Q, Form 8-K, proxy
statements and other required reports. In addition, withdrawal by Walnut of its
BDC election will have no direct effect on Walnut's Articles of Incorporation or
by-laws (as each will be modified by the Mergers), nor will it effect the status
of Walnut under state corporate laws.
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<PAGE> 90
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE BDC DEREGISTRATION.
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PROPOSAL III
APPROVAL OF THE CAPITAL INVESTMENT
Stockholders are being asked to consider and vote upon the issuance by
Walnut of up to 3,000,000 shares of Walnut Common Stock at $2.00 per share in a
private placement transaction to an investor group (the "Investor Group") (the
"Capital Investment").
The Capital Investment involves the issuance of at least 1,500,000 and
up to 3,000,000 shares of Walnut Common Stock, which represents approximately
44.8% to 89.5% of the Walnut Common Stock outstanding (prior to giving effect to
the Mergers). Therefore, the Capital Investment requires approval of a majority
of the holders of Walnut Common Stock pursuant to the Nasdaq National Market
corporate governance rules. In addition, the 1940 Act requires approval by the
holders of a majority of a BDC's outstanding voting securities, and approval by
the holders of a majority of such BDC's outstanding voting securities that are
not held by affiliated persons, of any issuance of stock for less than the
current net asset value of such stock. As of June 30, 1999, Walnut had net
assets applicable to outstanding common shares of $8,510,353.82, and had
3,350,533 shares outstanding, yielding a net asset value of $2.54 per share.
Because the Capital Investment involves the issuance of Walnut Common Stock for
$2.00 per share, this transaction requires the approval of the holders of a
majority of New Walnut's outstanding common stock and the holders of a majority
of Walnut's outstanding common stock who are not deemed "affiliated persons" of
Walnut under the 1940 Act. Under the 1940 Act, "majority" means the lesser of
(a) 67% of the outstanding securities present if more than 50% are present in
person or by proxy or (b) more than 50% of the outstanding voting securities.
REASONS FOR THE CAPITAL INVESTMENT
The Board of Directors of Walnut has unanimously determined that the
Capital Investment is in the best interests of Walnut and its stockholders. The
Board of Directors has considered that the price per share of the Walnut Common
Stock to be issued in the Capital Investment, although below net asset value,
closely approximates the current market value of the Walnut Common Stock less a
discount to reflect the fact that the Walnut Common Stock issued in the Capital
Investment will not be registered under the Securities Act and therefore will
not be freely transferable.
The Capital Investment is required as a condition precedent to the
consummation of the Mergers. For the reasons discussed above, under "PROPOSAL
I--PRINCIPAL REASONS FOR THE MERGERS," the Board feels that Mergers are in the
best interests of Walnut and its stockholders. In particular, the Board
considered that the benefits to Walnut of combining its business with an
operating company, which benefits include the ability to increase revenues and
to cease being regulated under the 1940 Act, will enable the combined company to
enhance its performance and competitive position.
Further, the Capital Investment will bring up to an additional
$6,000,000 in funds into the combined business. The proceeds from the Capital
Investment will be used to repay approximately $725,000 remaining outstanding
under Walnut's term loan from ANB and to repay the $2,000,000 outstanding Walnut
Debentures issued to the SBA by Walnut Capital as a part of the SBIC program.
EFFECT OF THE CAPITAL INVESTMENT
The issuance of the Walnut Common Stock, which will be converted into
THCG Common Stock at the First Effective Time, will result in the Investor Group
owning approximately 16.7% of the outstanding shares of THCG following the
consummation of Merger 2 if 1,500,000 shares of stock are issued in connection
with the Capital Investment and 28.7% if 3,000,000 shares are issued.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE CAPITAL INVESTMENT.
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PROPOSAL IV
APPROVAL OF THE DEBT CONVERSION
In connection with the Mergers, Walnut is required to convert certain
of its debts and accrued liabilities in the aggregate principal amount of up to
$1,093,000 (plus any interest accrued thereon) into either cash or Walnut Common
Stock valued at $2.00 per share, as reasonably determined by Tower Hill. In
addition, Walnut is to satisfy in full the accrued compensation of Burton W.
Kanter in the aggregate amount of (i) $387,875 through June 30, 1999; plus (ii)
the Continuing Accrual (which is $273.97 per day from July 1, 1999 through the
Closing of the Mergers); less (iii) $150,000 in accrued compensation that Mr.
Kanter has forgiven, payable in cash or by issuing to Mr. Kanter shares of
Walnut Common Stock at a rate of $2.00 per share, or a combination thereof, as
reasonably determined by Tower Hill.
As discussed above, the 1940 Act requires majority stockholder approval
of any transaction which involves the issuance of shares for less than current
net asset value. The Debt Conversion may involve the issuance of shares of
Walnut Common Stock for $2.00 per share, which is less than the current net
asset value of $2.54. In addition, this is an affiliate transaction, which, as
discussed above under the discussion of BDC regulation under the 1940 Act,
requires stockholder approval. Therefore, this transaction requires the approval
of the holders of a majority of Walnut outstanding common stock and the holders
of a majority of Walnut's outstanding common stock who are not deemed
"affiliated persons" of Walnut under the 1940 Act. Under the 1940 Act,
"majority" means the lesser of (a) 67% of the outstanding securities present if
more than 50% are present in person or by proxy or (b) more than 50% of the
outstanding voting securities.
DESCRIPTION OF THE DEBT CONVERSION
The Debt Conversion involves the conversion of the following debt and
accrued expenses either into cash or into equity at a conversion price per share
of $2.00:
<TABLE>
<CAPTION>
Number of Shares of
Party Debt Amount Walnut Common Stock(1)
----- ----------- ----------------------
<S> <C> <C>
The Holding Company $ 200,000 100,000
William J. von Liebig 1994 Charitable Remainder $ 600,000 300,000
Unitrust
Kanter Family Foundation $ 250,000 125,000
Windy City, Inc. $ 43,000 21,500
---------- -------
Total $1,093,000 546,500
---------- -------
</TABLE>
- -----------------------------------------
(1) Assuming all debt is converted into shares of Walnut Common Stock.
In addition, Walnut must convert certain accrued compensation of Burton
Kanter into either cash or Walnut Common Stock at the rate of $2.00 per share or
a combination thereof, as reasonably determined by Tower Hill. Assuming all
accrued compensation owed to Mr. Kanter (other than the Continuing Accrual) is
paid in shares of Walnut Common Stock, 118,938 shares of Walnut Common Stock
will be issued to Mr. Kanter.
REASONS FOR THE DEBT CONVERSION
The Debt Conversion is also a condition precedent to the consummation
of the Mergers, which the Board of Directors has determined is in the best
interests of the combined company and its stockholders for the reasons discussed
above.
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In addition, the Debt Conversion enables Walnut to eliminate debt,
thereby reducing ongoing interest costs and improving Walnut's balance sheet,
which will in turn put the combined entity in a better position to begin
operations following the Mergers.
1940 ACT REGULATIONS RELATING TO AFFILIATE TRANSACTIONS
All of the parties who are taking part in the Debt Conversion, other
than the William J. von Liebig 1994 Charitable Remainder Unitrust, are
"affiliates" of Walnut as that term is defined under the 1940 Act. See "Certain
Affiliates and Related Transactions." As discussed above under "PROPOSAL
II--1940 ACT REGULATIONS APPLICABLE TO BUSINESS DEVELOPMENT COMPANIES," the 1940
Act restricts the ability of a BDC to engage in affiliate transactions.
The parties taking part in the Debt Conversion are affiliated with
Walnut as follows:
- Burton W. Kanter is the president of The Holding Company and trusts
for the benefit of Burton Kanter's family control a majority of the
outstanding common stock of The Holding Company.
- Kanter Family Foundation is an Illinois not-for-profit private
charitable foundation established by the Kanter family of which
Joel Kanter is President and a director, and Joshua Kanter is Vice
President and a Director.
- Joshua Kanter is the General Counsel and Secretary of Walnut, and
is of counsel to the firm of Barack Ferrazzano Kirschbaum Perlman &
Nagelberg ("BFKP&N"), general counsel to Walnut.
- Joel Kanter and Joshua Kanter are the President and Vice President,
respectively, of Windy City. Trusts for the benefit of Burton W.
Kanter's family own indirectly all of the outstanding common stock
of Windy City.
- Burton W. Kanter is the chairman and a director of Walnut. Joel
Kanter is the Chief Executive Officer, President, and a director of
Walnut. Joshua Kanter is the Secretary and General Counsel of
Walnut. Joshua and Joel Kanter are the sons of Burton W. Kanter.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE DEBT CONVERSION.
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PROPOSAL V
APPROVAL OF THE UPLP ACQUISITION
As a condition precedent to the Mergers, Walnut is required to cause
its wholly-owned subsidiary Universal Bridge to acquire certain limited and
general partnership interests in UPLP, a subsidiary of Walnut, currently owned
by Windy City Bridges, Inc. (a wholly-owned subsidiary of Windy City) and
certain third parties. Following the acquisition of these interests, UPLP is to
dissolve and all of its assets and liabilities will be distributed to Universal
Bridge. Immediately after the Mergers, Universal Bridge will be merged with and
into Tower Hill LLC, with Tower Hill LLC continuing as the surviving entity.
As discussed above, the 1940 Act requires majority stockholder approval
of any transaction that involves the issuance of shares for less than current
net asset value. The UPLP Acquisition involves the issuance of shares of Walnut
Common Stock for $2.00 per share in exchange for the general partnership
interests of UPLP, which is less than the current net asset value of $2.54. In
addition, this is an affiliate transaction, which, as discussed above under the
discussion of BDC regulation under the 1940 Act, requires stockholder approval.
Therefore, this transaction requires the approval of the holders of a majority
of Walnut's outstanding common stock and the holders of a majority of Walnut's
outstanding common stock who are not deemed "affiliated persons" of Walnut under
the 1940 Act. Under the 1940 Act, "majority" means the lesser of (a) 67% of the
outstanding securities present if more than 50% are present in person or by
proxy or (b) more than 50% of the outstanding voting securities.
UPLP
UPLP was formed in 1993 and is an investment vehicle that specializes
in bridge financing to small- to medium-sized companies. Universal Bridge
currently owns 50% of the outstanding general partnership interests and
approximately 83% of the limited partnership interests of UPLP.
As of December 31, 1998, UPLP held equity securities that had a cost
basis of $1.4 million and a fair market value of $1.5 million and debt
securities that had a cost basis of $0.9 million and a fair market value of $0.5
million.
ACQUISITION OF THE REMAINING UPLP PARTNERSHIP INTERESTS
Walnut will cause Universal Bridge to acquire 17% of the outstanding
limited partnership interests of UPLP from four unrelated non-affiliated
individuals in exchange for the net book value thereof payable in cash or shares
of Walnut Common Stock (valued at $2.00 per share), as reasonably determined by
Tower Hill. The net book value of those limited partnership interests as of
March 31, 1999 was $411,000 and the net book value at the time of the UPLP
Acquisition should approximate $400,000. Walnut will also cause Universal Bridge
to acquire 50% of the outstanding general partnership interests of UPLP from
Windy City Bridges, Inc. for up to $134,000, payable in cash or shares of Walnut
Common Stock valued at $2.00 per share, as reasonably determined by Tower Hill.
If all of the limited and general partnership interests are converted
into Walnut Common Stock, up to 267,000 shares of Walnut Common Stock may be
issued in connection with the UPLP Acquisition (assuming a net book value of
approximately $400,000 for the limited partnership interests and a value of
$134,000 for the general partnership interests).
REASONS FOR THE UPLP ACQUISITION
The UPLP Acquisition is also a condition precedent to the consummation
of the Mergers, which, as discussed, the Board of Directors has determined to be
in the best interest of Walnut and its stockholders.
In addition, the acquisition of the remaining limited partnership
interests of UPLP which are not owned by Universal Bridge or any affiliate of
Walnut will enable Walnut to eliminate the minority interest in UPLP and will
reduce reporting requirements and other administrative costs.
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The acquisition of the general partnership interests in UPLP will
reduce the potential for deadlocks in the operation of the partnership's
business, which in turn will facilitate the dissolution of UPLP.
DISSOLUTION OF UPLP
Following the acquisition by Universal Bridge of the UPLP partnership
interests, UPLP is to be dissolved and liquidated in accordance with the
provisions of the UPLP partnership agreement. All of UPLP's assets and
liabilities will be distributed to Universal Bridge, which, following the
Mergers, will be merged with and into Tower Hill LLC.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE UPLP ACQUISITION.
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PROPOSAL VI
APPROVAL OF THE THCG STOCK INCENTIVE PLAN
Walnut is submitting to its stockholders for approval the THCG Stock
Incentive Plan. The THCG Stock Incentive Plan is designed to provide certain key
individuals, on whose initiative and efforts the successful conduct of the
business of THCG largely depends, and who are largely responsible for the
management, growth and protection of the business of THCG, with incentives and
rewards to encourage them to continue their association with THCG, and to
maximize their performance and to provide certain "performance-based
compensation" to these key individuals.
Shareholder approval of the THCG Stock Incentive Plan is required under
the Nasdaq National Market corporate governance rules. The THCG Stock Incentive
Plan must be approved by a majority of votes cast on this Proposal.
DESCRIPTION OF THE THCG STOCK INCENTIVE PLAN
The following summary discussion of the THCG Stock Incentive Plan is
qualified in its entirety by reference to the full text of the THCG Stock
Incentive Plan, a copy of which is attached hereto as Exhibit C.
GENERAL DESCRIPTION OF PLAN
Nature of Shares to be Issued/ Administrative Committee.
Shares issued under the THCG Stock Incentive Plan may be authorized but unissued
shares of THCG Common Stock or treasury shares of THCG Common Stock, at the
discretion of a committee designated to administer the THCG Stock Incentive Plan
(the "Committee"). The THCG Stock Incentive Plan provides that the Committee
shall be the Compensation Committee of the Board of Directors or such other
committee of the Board of Directors as the Board of Directors shall appoint to
administer the THCG Stock Incentive Plan. At all times, the Committee must
consist of at least two persons. In addition, the Committee is to consist solely
of individuals who are (or grants shall be made by a subcommittee of two or more
persons, each of whom shall be) "non-employee directors," and all members of the
Committee must be "outside directors."
Awards. The THCG Stock Incentive Plan specifically provides
for the grant of (i) non-qualified stock options ("NQOs"), (ii) incentive stock
options ("ISOs"), (iii) limited stock appreciation rights ("LSARs"), (iv) tandem
stock appreciation rights ("Tandem SARs"), (v) stand-alone stock appreciation
rights ("Stand-Alone SARs"), (vi) shares of restricted stock, (vii) shares of
phantom stock, (viii) stock bonuses, (ix) cash bonuses and (x) dividend
equivalent rights ("DERs") (collectively, "Incentive Awards"). The THCG Stock
Incentive Plan also provides that the Committee may grant other types of
stock-based awards in such amounts and subject to such terms and conditions, as
the Committee shall in its discretion determine.
Maximum Number of Shares. The maximum number of shares of THCG
Common Stock with respect to which "Incentive Awards" may be granted under the
THCG Stock Incentive Plan is 2,250,000 shares. The maximum number of shares of
THCG Common Stock with respect to which any individual may be granted Incentive
Awards during any one year is 450,000 shares.
Eligibility. Key current and former employees of THCG and its
affiliates (including prospective employees) and certain current and former
consultants or other independent contractors to THCG and its affiliates
(including non-employee directors of THCG or its affiliates) will be eligible to
receive grants of Incentive Awards. Except with respect to certain consultants
or other independent contractors (including non-employee directors of THCG or
its affiliates), persons who are not (or are not expected to be ) classified as
employees of THCG or any affiliate of THCG for payroll purposes shall not be
eligible to receive a grant under the THCG Stock Incentive Plan. [Ten]
individuals have received awards, subject to shareholder approval and certain
other conditions. On an ongoing basis, the number of individuals in any eligible
class is indeterminable.
Committee's Authority. The Committee will determine which key
individuals receive grants of Incentive Awards, the type of Incentive Awards
granted and the number of shares subject to each Incentive Award. No Incentive
Award may be granted under the THCG Stock Incentive Plan after _________, 2009.
Subject to the terms of the THCG Stock Incentive Plan, the Committee also will
determine the prices, expiration dates and other material features of Incentive
Awards granted under the THCG Stock Incentive Plan.
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The Committee may, in its absolute discretion, without
amendment to the THCG Stock Incentive Plan, (i) accelerate the date on which any
option or stock appreciation right granted under the THCG Stock Incentive Plan
becomes exercisable or otherwise adjust any of the terms of such option or stock
appreciation right, (ii) accelerate the date on which any Incentive Award vests,
(iii) waive any condition imposed under the THCG Stock Incentive Plan with
respect to any Incentive Award or (iv) otherwise adjust any of the terms of any
Incentive Award.
The Committee will administer the THCG Stock Incentive Plan
and has the authority to interpret and construe any provision of the THCG Stock
Incentive Plan and to adopt such rules and regulations for administering the
THCG Stock Incentive Plan as it deems necessary or appropriate. All decisions
and determinations of the Committee are final and binding on all parties. THCG
will indemnify each member of the Committee against any loss, cost, expense or
liability arising out of any action, omission or determination relating to the
THCG Stock Incentive Plan, unless such action, omission or determination was
taken or made in bad faith and without reasonable belief that it was in the best
interests of THCG.
Suspension, Discontinuance, Amendment. The Board of Directors
may, at any time, suspend or discontinue the THCG Stock Incentive Plan or revise
or amend it in any respect whatsoever; provided, however, that if and to the
extent required under Section 422 of the Internal Revenue Code of 1986 (the
"Code") (related to the grant of ISOs) (if and to the extent that the Board of
Directors deems it appropriate to comply with Section 422) and if and to the
extent required to treat some or all of the Incentive Awards as
"performance-based compensation" within the meaning of Section 162(m) of the
Code (if and to the extent that the Board of Directors deems it appropriate to
meet such requirements), no amendment shall be effective without the approval of
the shareholders of THCG, that (i) increases the number of shares of THCG Common
Stock with respect to which Incentive Awards may be issued under the Plan, (ii)
modifies the class of individuals eligible to participate in the Plan or (iii)
materially increases the benefits accruing to individuals pursuant to the Plan.
No amendment or modification may, without the consent of a participant, reduce
the participant's rights under any previously granted and outstanding Incentive
Award except to the extent that the Board of Directors determines that such
amendment is necessary or appropriate to prevent such Incentive Awards from
constituting "applicable employee remuneration" within the meaning of Section
162(m) of the Code.
SUMMARY OF AWARDS AVAILABLE UNDER THE PLAN
Non-Qualified Stock Options. The exercise price of each NQO
granted under the THCG Stock Incentive Plan shall be such price as the Committee
shall determine on the date on which such NQO is granted, which price shall not
be less than that required by law. Each NQO shall be exercisable for a term, not
to exceed ten years, established by the Committee on the date on which such NQO
is granted. The exercise price shall be paid in cash or, subject to the approval
of the Committee, in shares of THCG Common Stock valued at their fair market
value on the date of exercise.
Except in the event of a "Termination of Employment" for
"Cause," "Disability" (as each such term is defined in the THCG Stock Incentive
Plan) or death, unless otherwise determined by the Committee and included in the
agreement pursuant to which an NQO is granted, in the event a participant's
employment terminates: (i) NQOs, to the extent that they were exercisable at the
time of such termination, shall remain exercisable until the expiration of three
months after such termination (or, if earlier, the expiration of their term) and
(ii) NQOs, to the extent that they were not exercisable at the time of such
termination, shall expire at the close of business on the date of such
termination. In the event a participant's employment terminates by reason of
Disability or death, (i) NQOs, to the extent that they were exercisable at the
time of such termination, shall remain exercisable until the expiration of their
original term and (ii) NQOs, to the extent that they were not exercisable at the
time of such termination, shall expire at the close of business on the date of
such termination. In the event of the Termination of Employment of a participant
for Cause, all NQOs held by such participant terminate immediately as of the
date of such termination.
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In the event a participant's employment is terminated by THCG,
other than for Cause, on or after the occurrence of a "Change in Control" of
THCG (as defined in the THCG Stock Incentive Plan) but prior to the expiration
of a six-month period following the Change in Control, all NQOs become
immediately exercisable.
Incentive Stock Options. Very generally, ISOs are options that
may provide certain federal income tax benefits to a participant that are not
available with NQOs provided that the participant holds the shares acquired upon
exercise of an ISO for at least two years after the date the ISO is granted and
at least one year after the exercise date. The exercise price-per-share of each
ISO granted under the THCG Stock Incentive Plan must be the fair market value of
a share of THCG Common Stock on the date on which such ISO is granted. An ISO
will be exercisable for a maximum term, not to exceed ten years, established by
the Committee on the date on which such ISO is granted. The exercise price in
respect of an ISO will be paid in cash or, subject to the approval of the
Committee, in shares of THCG Common Stock valued at their fair market value on
the date of exercise.
An ISO granted to any individual who owns stock possessing
more than ten percent of the total combined voting power of all classes of stock
of THCG is subject to the following additional limitations: (i) the exercise
price-per-share of the ISO must be at least 110% of the fair market value of a
share of THCG Common Stock at the time any such ISO is granted and (ii) the ISO
cannot be exercisable after the expiration of five years from the grant date.
The aggregate fair market value of shares of THCG Common Stock
with respect to which ISOs are exercisable for the first time by a participant
during any calendar year (determined on the grant date) under the THCG Stock
Incentive Plan or any other plan of THCG or its subsidiaries may not exceed
$100,000.
In the event of a participant's Termination of Employment,
ISOs granted to the participant are exercisable to the same extent as described
above with respect to NQOs (although the definition of the term Disability in
respect of ISOs may differ). ISOs are not transferable other than by will or by
the laws of descent and distribution.
In the event a participant's employment is terminated by THCG,
other than for Cause, on or after the occurrence of a Change in Control of THCG
but prior to the expiration of a six-month period following the Change in
Control, all ISOs become immediately exercisable.
Reload Options. In certain circumstances, the Committee may
include in any agreement evidencing an option (the "Original Option") a
provision that a "reload option" shall be granted to any participant who
delivers shares of THCG Common Stock in partial or full payment of the exercise
price of the Original Option. The reload option will relate to a number of
shares of THCG Common Stock equal to the number of shares of THCG Common Stock
delivered, and will have an exercise price-per-share equal to the fair market
value of a share of THCG Common Stock on the date of the exercise of the
Original Option.
Limited Stock Appreciation Rights. Each NQO and ISO granted
under the THCG Stock Incentive Plan may include an LSAR with respect to a number
of shares equal to the number of shares subject to the related option. The
exercise of an LSAR with respect to a number of shares causes the cancellation
of the option with which it is included with respect to an equal number of
shares. The exercise of an option with respect to a number of shares causes the
cancellation of the LSAR included with it with respect to an equal number of
shares.
In general, LSARs are exercisable only during the sixty-day
period immediately following a Change in Control and only to the extent that
their related options are exercisable. The exercise of an LSAR included with a
NQO with respect to a number of shares entitles the participant to an amount in
cash, for each such share, equal to the excess of (i) the greater of (A) the
highest price-per-share of THCG Common Stock paid in connection with the Change
in Control in connection with which the LSAR became exercisable and (B) the
highest fair market value of a share of THCG Common Stock on the date of such
Change in Control over (ii) the exercise price of the related NQO. The exercise
of an LSAR included with an ISO with respect to a number of shares entitles the
participant to an amount in cash, for each such share, equal to the excess of
(i) the fair market value of a share of THCG Common Stock on the date of
exercise over (ii) the exercise price of the related ISO.
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Tandem Stock Appreciation Rights. The Committee may grant, in
connection with any NQO or ISO, a Tandem SAR with respect to a number of shares
of THCG Common Stock less than or equal to the number of shares subject to the
related option. The exercise of a Tandem SAR with respect to a number of shares
causes the cancellation of its related option with respect to an equal number of
shares. The exercise of an option with respect to a number of shares causes the
cancellation of its related Tandem SAR to the extent that the number of shares
subject to the option after its exercise is less than the number of shares
subject to the Tandem SAR.
A Tandem SAR is exercisable at the same time and to the same
extent as its related option. The exercise of a Tandem SAR with respect to a
number of shares entitles the participant to an amount in cash, for each such
share, equal to the excess of (i) the fair market value of a share of THCG
Common Stock on the date of exercise over (ii) the exercise price of the related
option.
Stand-Alone Stock Appreciation Rights. The Committee may grant
Stand-Alone SARs, which are stock appreciation rights that are not related to
any option, pursuant to the THCG Stock Incentive Plan. The exercise price of
each Stand-Alone SAR granted under the THCG Stock Incentive Plan shall be such
price as the Committee shall determine on the date on which such Stand-Alone SAR
is granted. A Stand-Alone SAR shall be exercisable for a term, not to exceed ten
years, established by the Committee on the date on which such Stand-Alone SAR is
granted. The exercise of a Stand-Alone SAR with respect to a number of shares
entitles the participant to an amount in cash, for each such share, equal to the
excess of (i) the fair market value of a share of THCG Common Stock on the date
of exercise over (ii) the exercise price of the Stand-Alone SAR.
Except in the event of a Termination of Employment of a
participant for Cause, Disability or death, unless otherwise determined by the
Committee and included in the agreement pursuant to which a Stand-Alone SAR is
granted, in the event a participant's employment terminates: (i) Stand-Alone
SARs, to the extent that they were exercisable at the time of such termination,
shall remain exercisable until the expiration of three months after such
termination (or, if earlier, the expiration of their term) and (ii) Stand-Alone
SARs, to the extent that they were not exercisable at the time of such
termination, shall expire at the close of business on the date of such
termination. In the event a participant's employment terminates by reason of
Disability or death, (i) Stand-Alone SARs, to the extent that they were
exercisable at the time of such termination, shall remain exercisable until the
expiration of their original term and (ii) Stand-Alone SARs, to the extent that
they were not exercisable at the time of such termination, shall expire at the
close of business on the date of such termination. In the event of the
Termination of Employment of a participant for Cause, all Stand-Alone SARs held
by such participant terminate immediately as of the date of such termination.
In the event a participant's employment is terminated by THCG,
other than for Cause, on or after the occurrence of a Change in Control of THCG
but prior to the expiration of a six-month period following the Change in
Control, all Stand-Alone SARs become immediately exercisable.
Restricted Stock. A grant of shares of restricted stock
represents the promise of the Company to issue shares of THCG Common Stock on a
predetermined date (the "issue date") to a participant, provided the participant
is continuously employed by THCG until the issue date. Prior to the vesting of
the shares, the shares are not transferable by the participant and are
forfeitable. Vesting of the shares occurs on a second predetermined date (the
"vesting date") if the participant has been continuously employed by THCG until
that date. The Committee may, at the time shares of restricted stock are
granted, impose additional conditions, such as, for example, the achievement of
specified performance goals, to the vesting of the shares. Vesting of some
portion of, or all, shares of restricted stock may occur upon the Termination of
Employment of a participant other than for Cause prior to the vesting date. If
vesting does not occur, shares of restricted stock are forfeited upon a
participant's Termination of Employment for any reason.
In the event a participant's employment is terminated by THCG,
other than for Cause, on or after the occurrence of a Change in Control of THCG
but prior to the expiration of a six-month period following the Change in
Control, all shares of restricted stock that have not been issued (or forfeited)
automatically are issued and all shares of restricted stock that have not yet
been vested (or forfeited), automatically vest.
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Phantom Stock. A grant of shares of phantom stock represents
the right to the economic equivalent of a grant of restricted stock, which is
payable in cash. Shares of phantom stock are subject to the same vesting
requirements as are shares of restricted stock. In addition, the value of a
share of phantom stock (whether or not vested) is paid immediately upon a
participant's Termination of Employment on or after a Change in Control of THCG
but only if the Termination of Employment occurs prior to the expiration of a
six-month period following the Change in Control.
Stock Bonuses. Bonuses payable in THCG Common Stock may be
granted by the Committee and may be payable at such times and subject to such
conditions as the Committee determines.
Cash Bonuses. In connection with a grant of shares of
restricted stock or in connection with the grant of a stock bonus, the Committee
may grant a cash "tax bonus," payable when a participant is required to
recognize income for federal income tax purposes with respect to such shares.
The tax bonus may not be greater than the value of the shares of restricted
stock or stock bonus at the time the income is required to be recognized.
Dividend Equivalent Rights. The Committee may, in its
discretion, grant with respect to any Incentive Award a DER entitling a
participant to receive amounts equal to the ordinary dividends that would have
been paid during the time such Incentive Award is outstanding (and, in the case
of Options and SARs, unexercised, in the case of an award of Restricted Stock or
a Stock Bonus, prior to the issue date for the related shares and, in the case
of an award of Phantom Stock, prior to the payment date in respect of such
Phantom Stock) on the shares of THCG Common Stock covered by such Incentive
Award if such shares were then outstanding. Dividend Equivalent Rights may be
payable in cash, in shares of THCG Common Stock or in any other form.
TRANSFERABILITY
In general, no Incentive Award is transferable other than by
will or the laws of descent and distribution (except to the extent an agreement
with respect to an Incentive Award permits certain transfers to certain of a
participant's family members or trusts).
CERTAIN CORPORATE CHANGES
The THCG Stock Incentive Plan provides for an adjustment in
the number of shares of THCG Common Stock available to be issued under the THCG
Stock Incentive Plan, the number of shares subject to Incentive Awards, and the
exercise prices of certain Incentive Awards upon a change in the capitalization
of THCG, a stock dividend or split, a merger or combination of shares and
certain other similar events. The THCG Stock Incentive Plan also provides for
the adjustment or termination of Incentive Awards upon the occurrence of certain
corporate events.
INCOME TAX WITHHOLDING
The THCG Stock Incentive Plan provides that a participant may
be required to meet certain income tax withholding requirements by remitting to
THCG cash or through the withholding of shares otherwise payable to the
participant. In addition, the participant may meet such withholding
requirements, subject to certain conditions, by remitting shares of previously
acquired THCG Common Stock.
LIMITATIONS IMPOSED BY SECTION 162(m)
Prior to a Change in Control of THCG, if and to the extent
that the Committee determines the Company's federal tax deduction in respect of
an Incentive Award may be limited as a result of Section 162(m) of the Internal
Revenue Code, the Committee may delay payments to a participant with respect to
stock options, Tandem SARs, Stand-Alone SARs or DERs (the "Delayed Payments") or
require a participant to surrender to the Committee any certificates with
respect to restricted stock and stock bonuses and agreements with respect to
phantom stock in order to cancel such awards (and any related cash bonuses or
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DERs) and, in exchange for such cancellation, credit to a book account a cash
amount equal to the fair market value of the shares of THCG Common Stock subject
to such awards (the "Book Accounts"). The Delayed Payments and Book Accounts
will be paid to the participant within thirty days after the earlier to occur of
(i) the date the compensation paid to the participant no longer is subject to
the deduction limitation under Section 162(m) of the Internal Revenue Code and
(ii) a Change in Control of THCG.
FORFEITURE OF GAIN FROM AWARDS IN CERTAIN EVENTS
To the extent that a participant breaches any restrictive
covenant applicable to the participant (such as a noncompetition,
nonsolicitation or nondisclosure covenant) within one year after the date on
which the participant exercises a stock option, LSAR, Tandem SAR or Stand-Alone
SAR, or the date on which any Restricted Stock or Phantom Stock vests, or the
date on which the participant realizes income with respect to any other
Incentive Award, then any gain realized by the participant thereby, will be
repaid to THCG.
APPLICATION OF INVESTMENT COMPANY ACT OF 1940
Any provision of the THCG Stock Incentive Plan that would
conflict with a provision of the Investment Company Act of 1940, to the extent
applicable to THCG or any affiliate, shall have no force or effect.
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<PAGE> 102
ISSUANCE OF 1,250,000 OPTIONS
If the THCG Option Plan is approved by stockholders, upon the
consummation of the Mergers and the effectiveness of the BDC Deregistration,
THCG will grant options to purchase 1,250,000 shares of THCG Common Stock (the
"Initial Options") to certain executives, directors and employees of THCG and
its subsidiaries. The following table indicates the amount of such Initial
Options to be held by the executive officers, directors, nominees and associates
of such officers, directors and nominees:
Number of
Name and Position Shares(1)
------------------------ ---------
Joseph D. Mark, Co-Chief Executive Officer 450,000
Adi Raviv, Co-Chief Executive Officer 450,000
Executive Group(2) 900,000
Non-Executive Director Group(3) 180,000
Director Nominees(4) 0
Associates of Directors, Executive Officers and
Nominees(5) 25,000
Other 5% recipients 0
Non-Executive Officer Employee Group 0
- ----------------
(1) Number of shares acquirable with each option grant.
(2) Includes the Executive Officers of THCG following the consummation of
the Mergers.
(3) Includes directors of THCG following the consummation of the Mergers.
(4) Assumes THCG directors have been elected following the consummation of
the Mergers.
(5) Includes options held by Joshua S. Kanter, the son of Burton W. Kanter,
a director of THCG following consummation of the Mergers.
It is contemplated that the Initial Options will be exercisable to
purchase shares of THCG Common Stock at $2.00 per share, will be immediately
exercisable, and will expire five years after they are issued. THCG will receive
no consideration for the granting of the Initial Options.
RESTRICTED STOCK GRANTED PURSUANT TO THE THCG OPTION PLAN
Pursuant to the employment agreement to be entered into between Shai
Novik and THCG, Mr. Novik will be granted 372,281.45 restricted shares of THCG
Common Stock.
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<PAGE> 103
NEW PLAN BENEFITS
The following individuals will receive immediately vested option grants
and/or restricted shares of THCG Common Stock upon consummation of the Mergers
to acquire the number of shares of THCG Common Stock indicated below, subject to
the approval of the THCG Stock Incentive Plan by Walnut's stockholders.
NEW PLAN BENEFITS
1999 THCG, INC. STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
Number
Name and Position Dollar Value(1) of Units(2)
----------------- ------------ --------
<S> <C> <C>
Joseph D. Mark, Co-Chief Executive Officer -- 450,000(3)
Adi Raviv, Co-Chief Executive Officer -- 450,000(3)
Shai Novik, Chief Financial Officer -- 372,281.45(4)
Executive Group(5) -- $1,272,281.45
Non-Executive Director Group(6) -- 180,000.00
Non-Executive Officer Employee Group -- 0
</TABLE>
- ----------------
(1) The dollar value of the awards is based on the difference between the
exercise price and the fair market value of the THCG Common Stock on
the date of the grant. Because the grant will not be made until after
the Mergers, and because there is currently no market for THCG Common
Stock, the current value of the grants to be made under the THCG Stock
Incentive Plan cannot be determined.
(2) Number of shares acquirable with each option grant or restricted share
grant, as applicable.
(3) Includes options to purchase up to 450,000 shares of THCG Common Stock
granted to each of Messrs. Mark and Raviv pursuant to their respective
employment agreements.
(4) Includes 372,281.45 restricted shares of THCG Common Stock granted
to Mr. Novik pursuant to his employment agreement.
(5) Includes the Executive Officers of THCG following the consummation of
the Mergers.
(6) Includes directors of THCG following the consummation of the Mergers.
SUMMARY OF FEDERAL TAX CONSEQUENCES
The following is a description of the principal federal income
tax consequences of awards under the THCG Stock Incentive Plan based on present
federal tax laws. Federal tax laws may change from time to time and any
legislation that may be enacted in the future by the United States Congress may
significantly affect the federal income tax consequences described below. No
representation is or can be made regarding whether any such legislation will or
may be enacted and/or the impact of any such legislation. The description below
does not purport to be a complete description of the tax consequences associated
with awards under the THCG Stock Incentive Plan applicable to any particular
award recipient. Differences in each individual's financial situation may cause
federal, state and local tax consequences of awards to vary. Each recipient of
an award should consult his or her personal tax adviser about the detailed
provisions of the applicable tax laws and regulations. No employee of THCG is
authorized or permitted to give tax advice to any award recipient.
Non-Qualified Stock Options. In general, an optionee will not
be deemed to receive any income at the time an NQO is granted, nor will THCG be
entitled to a federal tax deduction at that time.
When an optionee exercises an NQO, the optionee will recognize
ordinary compensation income equal to the excess of (a) the fair market value of
the THCG Common Stock received as a result of the exercise of the option on the
exercise date over (b) the option exercise price, and THCG will be entitled to a
tax deduction in that amount. The shares acquired by the optionee upon exercise
of the NQO will have a tax basis equal to the fair market value of the shares on
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<PAGE> 104
the exercise date. Upon any subsequent sale of THCG Stock received on exercise
of the NQO, the optionee will recognize a capital gain (or loss) in an amount
equal to the difference between the amount realized on the sale and such tax
basis. Any such gain (or loss) will be characterized as long-term capital gain
(or loss) if the shares have been held for more than one year; otherwise, the
gain (or loss) will be characterized as a short-term capital gain (or loss). An
optionee's holding period for Federal income tax purposes for such shares will
commence on the date following the date of exercise. Short-term capital gain is
subject to tax at the same rate as is ordinary income. Under current law, the
rate at which net long-term capital gain will be taxed will vary depending on
the optionee's holding period and the date the optionee disposes of the shares.
The Internal Revenue Code currently provides that, in general, the net long-term
capital gain resulting from the sale of shares held for more than 12 months will
be subject to tax at a maximum rate of 20% (10% for individuals in the 15% tax
bracket). The Internal Revenue Code currently provides that net long-term
capital gain resulting from dispositions after December 31, 2000 of shares held
for more than 5 years may be subject to a reduced rate.
If all or any part of the exercise price of an NQO is paid by
the optionee with shares of common stock (including, based upon proposed
regulations under the Internal Revenue Code, shares previously acquired upon
exercise of an ISO), no gain or loss will be recognized by the optionee on the
shares surrendered in payment. The number of shares received on such exercise of
the NQO equal to the number of shares surrendered will have the same tax basis
and holding period, for purposes of determining whether subsequent dispositions
result in long-term or short-term capital gain or loss and the applicable tax
rates, as the basis and holding period of the shares surrendered. The balance of
the shares received on such exercise will be treated for federal income tax
purposes as described in the preceding paragraphs as though issued upon the
exercise of the NQO for an exercise price equal to the consideration, if any,
paid by the optionee in cash. The optionee's compensation taxable as ordinary
income upon such exercise, and THCG's deduction, will not be affected by whether
the exercise price is paid in cash or in shares of THCG Common Stock.
Incentive Stock Options. In general, an optionee will not be
deemed to receive any income at the time an ISO is granted or exercised if the
optionee does not dispose of the shares acquired on exercise of the ISO within
two years after the grant of the ISO and one year after the exercise of the ISO
(discussed more fully in the next paragraph). In such a case, the gain (if any)
on a subsequent sale (the excess of the amount received over the exercise price)
or loss (if any) on a subsequent sale (the excess of the exercise price over the
amount received) will be a long-term capital gain or loss and will be subject to
tax based on the holding period of the shares described in the discussion of
NQOs above. However, for purposes of computing the "alternative minimum tax"
applicable to an optionee, the optionee will include in the optionee's
alternative minimum taxable income the amount the optionee would have included
in income if the ISO were an NQO. Such amount may be subject to an alternative
minimum tax of 26% or 28%. Similarly, for purposes of making alternative minimum
tax calculations, the optionee's basis in the stock received on the exercise of
an ISO will be determined as if the ISO were an NQO.
If an optionee sells the shares acquired on exercise of an ISO
within two years after the date of grant of the ISO or within one year after the
exercise of the ISO, the disposition is a "disqualifying disposition," and the
optionee will recognize income in the year of the disqualifying disposition
equal to the excess of the amount received for the shares over the exercise
price. Of that income, the portion equal to the excess of the fair market value
of the shares at the time the ISO was exercised over the exercise price will be
treated as compensation to the optionee, taxable as ordinary income, and the
balance (if any) will be long- or short- term capital gain depending on whether
the shares were sold more than one year after the ISO was exercised. The federal
tax rate applicable to any long-term capital gain will depend upon the holding
period of the shares as described above. If the optionee sells the shares in a
disqualifying disposition at a price that is below the exercise price, the loss
will be a short-term capital loss if the optionee has held the shares for one
year or less and otherwise will be a long-term capital loss.
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<PAGE> 105
If an optionee uses shares acquired upon the exercise of an
ISO to exercise an ISO, and the sale of the shares so surrendered for cash on
the date of surrender would be a disqualifying disposition of such shares, the
use of such shares to exercise an ISO also would constitute a disqualifying
disposition. In such case, proposed regulations under the Internal Revenue Code
appear to provide that the tax consequences described above with respect to
disqualifying dispositions would apply, except that no capital gain would be
recognized with respect to such disqualifying disposition. In addition, the
basis of the surrendered shares would be allocated to the shares acquired upon
exercise of the ISO, and the holding period of the shares so acquired would be
determined, in a manner prescribed in proposed regulations under the Internal
Revenue Code.
THCG is not entitled to a deduction as a result of the grant
or exercise of an ISO. If the optionee has compensation taxable as ordinary
income as a result of a disqualifying disposition, THCG will be entitled to a
deduction in an amount equal to the compensation income resulting from the
disqualifying disposition in the taxable year of THCG in which the disqualifying
disposition occurs.
Stock Appreciation Rights. A recipient of a stock appreciation
right will not be deemed to receive any income at the time a stock appreciation
right is granted, nor will THCG be entitled to a deduction at that time.
However, when a stock appreciation right is exercised, the recipient will be
deemed to have received compensation taxable as ordinary income in an amount
equal to the amount of cash or fair market value of THCG Common Stock or other
property received. THCG will be entitled to a deduction in an amount equal to
the amount of ordinary income recognized by the recipient.
Restricted Stock. A grant of restricted shares of THCG Common
Stock will not result in income for the recipient or a tax deduction for THCG
until such time as the shares are no longer subject to a substantial risk of
forfeiture or restrictions on transferability (unless, as described below, the
recipient elects otherwise under Section 83(b) of the Code within 30 days of the
date of grant). Upon lapse or release of such restrictions, the recipient
generally will include in gross income an amount equal to the fair market value
of the shares less any amount paid for them, and THCG will be entitled to a tax
deduction in the same amount. The recipient's tax basis in the shares will equal
the income so recognized plus the amount paid for the shares. Any gain or loss
upon a subsequent disposition of the shares will be long-term capital gain or
loss if the shares are held for more than one year and otherwise will be
short-term capital gain or loss. The federal tax rate applicable to any
long-term capital gain will depend upon the holding period of the shares as
described above.
Pursuant to Section 83(b) of the Code, the recipient of a
restricted stock award may elect within 30 days of receipt of the award to be
taxed at ordinary income tax rates on the fair market value of the THCG Common
Stock comprising the award at the time of award. If the election is made, the
recipient will acquire a tax basis in the shares equal to the ordinary income
recognized by the recipient at the time of award plus any amount paid for the
shares and THCG will be entitled to a deduction in an amount equal to the amount
of ordinary income recognized by the recipient. No income will be recognized
upon lapse or release of the restrictions. Any gain or loss upon a subsequent
disposition of the shares will be long-term capital gain or loss if the shares
are held for more than one year and otherwise will be short-term capital gain or
loss. The federal tax rate applicable to any long-term capital gain will depend
upon the holding period of the shares. In the event of a forfeiture of the
shares with respect to which a recipient previously made a Section 83(b)
election, the recipient will not be entitled to a loss deduction.
Phantom Stock. A participant will not be deemed to receive any
income at the time shares of phantom stock are granted, nor will THCG be
entitled to a deduction at that time. However, when shares of phantom stock
vest, the participant will be deemed to have received compensation taxable as
ordinary income in the amount of the cash received. THCG will be entitled to a
deduction in an amount equal to the amount of ordinary income recognized by the
participant.
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<PAGE> 106
\
Stock Bonuses. In general, upon the receipt of a stock bonus,
a participant will be deemed to have received compensation taxable as ordinary
income in an amount equal to the fair market value of the stock at the time it
is received. THCG will be entitled to a deduction in an amount equal to the
amount of ordinary income recognized by the participant.
Upon any sale of shares of THCG Common Stock received as a
stock bonus, any gain (the excess of the amount received over the fair market
value of the shares on the date ordinary income was recognized) or loss (the
excess of the fair market value of the shares on the date ordinary income was
recognized over the amount received) will be a long-term capital gain or loss if
the sale occurs more than one year after such date of recognition and otherwise
will be a short-term capital gain or loss.
Cash Bonuses. Upon the receipt of a cash bonus, a participant
will be deemed to have received compensation taxable as ordinary income in the
amount of the cash received. THCG will be entitled to a deduction in an amount
equal to the amount of ordinary income recognized by the participant.
Dividend Equivalent Rights. The grant of dividend equivalent
rights will not result in income to the recipient or in a tax deduction for
THCG. When any amount is paid or distributed to recipient in respect of a
dividend equivalent right, the recipient will recognize ordinary income equal to
the fair market value of any property distributed and/or the amount of any cash
distributed, and THCG will be entitled to a tax deduction in the same amount at
such time.
Deduction Limit under Section 162(m) of the Code. In general,
Section 162(m) of the Code (the "Million Dollar Limit") provides that, subject
to certain exceptions, remuneration in excess of $1 million that is paid to
certain "covered employees" of a publicly held corporation (generally, the
corporation's Chief Executive Officer and its four most highly compensated
employees other than the Chief Executive Officer) will not be deductible by the
corporation. One such exception to the application of the Million Dollar Limit
is for compensation payable solely on account of the attainment of one or more
performance goals, but only if:
1. the performance goals are determined by a compensation
committee of the board of directors of the corporation which is comprised solely
of two or more outside directors;
2. the material terms under which the compensation is to be
paid, including the performance goals, are disclosed to shareholders and
approved by a majority of the vote in a separate shareholder vote before the
payment of such compensation; and
3. before any payment of such compensation, the compensation
committee certifies that the performance goals and any other material terms
were in fact satisfied.
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<PAGE> 107
PRINCIPAL REASONS TO ADOPT THE THCG STOCK INCENTIVE PLAN
The Board views the issuance of stock options and other equity-based
award to key individuals as necessary in order to attract and maintain the
services of individuals essential to THCG's long term success as the successor
to Walnut's business. The purpose of the THCG Stock Incentive Plan is primarily
to encourage and enable the key individuals associated with THCG, upon whose
judgment, initiative and efforts THCG will largely depend for the successful
conduct of its business, to acquire or increase their proprietary interest in
the success of THCG. It is anticipated that providing such persons with a direct
stake in THCG's welfare will assure a close identification of their interests
with those of THCG, thereby stimulating their efforts on THCG's behalf and
strengthening their desire to remain with THCG following the Mergers.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE ADOPTION OF THE
THCG STOCK INCENTIVE PLAN.
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<PAGE> 108
DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT
The following information is as of , 1999, unless otherwise
specified. It is contemplated that Burton W. Kanter, Joel Kanter and Gene
Burleson will remain as directors of THCG after the Mergers. For additional
information regarding the management of THCG following the Mergers, see
"Management of THCG Following the Mergers."
<TABLE>
<CAPTION>
Name Age Title
-------------------------- --------- -----------------------------------------------
<S> <C> <C>
Burton W. Kanter* 68 Director (Chairman)
Joel S. Kanter* 41 Chief Executive Officer, President and Director
William F. Burge, III 58 Director
Gene E. Burleson* 57 Director
Earl Chapman 73 Director
Albert Morrison, Jr. 62 Director
Solomon A. Weisgal 72 Director
Robert F. Mauer 44 Chief Financial Officer and Treasurer
Joshua S. Kanter* 36 Secretary and General Counsel
======================================================================================
</TABLE>
* Such individuals may be deemed to be "interested persons" as such
term is defined in Section 2(a)(19) of the 1940 Act.
BURTON W. KANTER Director since 1995
Mr. Kanter has served as a director of Walnut and the Chief Executive
Officer of Walnut Capital 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 Group 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. In addition, Mr.
Kanter serves as a member of the Visiting Committee of the University
of Chicago Art Department and as a member of the Visiting Committee of
the Law School of the University of Chicago. Mr. Kanter is the father
of Joel S. Kanter and Joshua S. Kanter.
JOEL S. KANTER Director since 1995
Mr. Kanter has been a director and the President of Walnut since
February 27, 1995 and has been the Chief Executive Officer of Walnut
since April 15, 1996. From 1988 to February 27, 1995, Mr. Kanter was a
consultant to Walnut Capital. Mr. Kanter has been President and a
director of Walnut Capital since February 27, 1995. 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.
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Kanter served as Staff Director of the House Subcommittee on
Legislative Process chaired by Congressman Gilles D. Long (D-La.). In
that capacity, he also lent assistance to the House Democratic Caucus
which was also chaired by Congressman Long. From 1985 through 1986, Mr.
Kanter served as Managing Director of The Investors' Washington
Service, an investment advisory company specializing in providing
advice to large institutional clients regarding the impact of federal
legislative and regulatory decisions on debt and equity markets.
Clients of The Investors' Washington Service included Amoco Oil, AT&T,
Bankers Trust, Citicorp, Chase Manhattan Bank, Chrysler Corporation,
General Motors, J.C. Penney, and others. Mr. Kanter currently serves on
the Boards of Directors of Mariner Post-Acute Network, Inc., I-Flow
Corporation, Osteoimplant Technology, Inc., Encore Medical Corporation
and Magna-Lab, Inc., each of which is a publicly-held company, as well
as a number of private concerns. Mr. Kanter is the son of Burton W.
Kanter and the brother of Joshua S. Kanter.
WILLIAM F. BURGE, III Director since 1995
Mr. Burge has been a director of Walnut since February 27, 1995. Mr.
Burge has been a director of Walnut Capital since 1992. 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. From 1987 through 1997, Mr. Burge
was Chairman of the Houston Metropolitan Transit Authority Board of
Directors. 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 Director since 1996
Mr. Burleson has been a director of Walnut and a director of Walnut
Capital since June 1996. Mr. Burleson served as Chairman of the Board
and Chief Executive Officer of GranCare, Inc., from 1994 to 1997.
Following the merger of GranCare, Inc.'s pharmacy operations with
Vitalink Pharmacy Services, Inc., he served as Chief Executive Officer
of Vitalink Pharmacy Services, Inc. from February 1997 to August 1997.
His previous experience included serving as President and Chief
Operating Officer of American Medical International, Inc. Mr. Burleson
is presently a director of Decker's Outdoor Corp., Alternative Living
Services Inc., and Mariner Post-Acute Network, Inc., all publicly-held
companies.
EARL CHAPMAN Director since 1997
Mr. Chapman has been a director of Walnut and a director of Walnut
Capital 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 a court mediator
for the Board of the Neighborhood Justice Center, a volunteer mediation
agency comprised of approximately 200 volunteer mediators.
ALBERT MORRISON, JR. Director since 1997
Mr. Morrison has been a director of Walnut since August 13, 1997 and a
director of Walnut Capital since 1984. Mr. Morrison is Chairman 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, a member of the Board of Trustees of Florida International
University Foundation, and a
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<PAGE> 110
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.
SOLOMON A. WEISGAL Director since 1995
Mr. Weisgal has been a director of Walnut 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. and
numerous other privately-held concerns.
ROBERT F. MAUER Treasurer
Mr. Mauer has been the Treasurer of Walnut and Walnut Capital since
February 1996 and is currently also the Chief Financial Officer of
Walnut. From 1991 to February 1996, he was Director of Corporate
Planning of Washington Gas Light Company and, concurrently, he is
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.
JOSHUA S. KANTER Secretary and General Counsel
Mr. Kanter has been the Secretary of Walnut since February 28, 1995
and General Counsel of Walnut since September 14, 1995. Mr. Kanter has
been the Assistant Secretary and General Counsel of Walnut Capital
since June 6, 1996. 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
of counsel to BFKP&N, 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Walnut's executive officers
and directors, and persons who own more than ten percent of a registered class
of Walnut's equity securities, to file reports of ownership and changes in
ownership with the SEC. Executive officers, directors and "greater than
ten-percent" stockholders are required by SEC regulations to furnish Walnut with
copies of all Section 16(a) forms so filed. Based solely on review of the copies
of such forms furnished to Walnut for 1998, Walnut is not aware of any of
Walnut's officers, directors or "greater than ten-percent" stockholders who
failed to comply with Section 16(a) filing requirements.
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COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT
SUMMARY COMPENSATION
The following table sets forth the compensation paid by Walnut to
Messrs. Burton W. Kanter, Joel S. Kanter and Robert F. Mauer in the last three
fiscal years of Walnut (collectively, the "Named Executive Officers"). Such
persons were the only executive officers of Walnut and its subsidiaries whose
cash compensation exceeded $60,000 for the 1998 fiscal year. Amounts paid to
Messrs. Burton Kanter, Joel Kanter and Robert Mauer reflect the fiscal years
ended December 31, 1998, 1997 and 1996. Walnut had entered into employment
agreements with Burton W. Kanter and Joel S. Kanter. Both agreements expired by
their terms in February 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------- ------------
Name and Current Principal
Position Year Salary($) Bonus($) Options
- ---------------------------- ---- --------- --------- ------------
<S> <C> <C> <C> <C>
Burton W. Kanter, 1998 $100,000(1) -- --
Chairman of the Board 1997 100,000(1) -- --
1996 100,000(1) -- --
Joel S. Kanter, 1998 225,000 -- --
President and Chief Executive 1997 200,000 $50,000(2) --
Officer 1996 200,000 -- --
Robert F. Mauer, 1998 115,000 -- --
Chief Financial 1997 100,000 30,000(2) --
Officer and Treasurer 1996 91,667(3) -- 20,833
</TABLE>
- ---------------
(1) No pension or retirement benefit is to be paid to non-employee
directors or the Named Executive Officers of Walnut under any existing
plan in the event of retirement at normal retirement date nor were any
such benefits accrued as part of Walnut's expenses. Accordingly, the
columns entitled "Total compensation from fund and fund complex paid to
directors," "Estimated annual benefits upon retirement" and "Pension or
retirement benefits accrued as part of Company's expenses" required by
Item 22(b)(6)(i) of Schedule 14A promulgated under the Exchange Act
have been omitted.
(2) Mr. Burton Kanter's salary for the years 1998, 1997 and 1996 was not
paid and is being accrued by Walnut. This accrued compensation will be
converted into cash or Walnut Common Stock in connection with the
Mergers. See "PROPOSAL V--APPROVAL OF THE DEBT CONVERSION AND THE
COMPENSATION SATISFACTION."
(3) Walnut 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.
(4) Mr. Mauer joined Walnut on February 1, 1996. Amounts reported reflect
an annual salary of $100,000.
OPTIONS AND OTHER AWARDS
There were no options or SARs granted to any directors of Walnut or the
Named Executive Officers in the fiscal year 1998. No directors or officers
exercised any options in the fiscal year 1998.
The following table provides certain information regarding options
granted to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND FISCAL 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in-the-
Acquired on Value Underlying Unexercised Money Options at Fiscal
Name Exercise (#) Realized ($) Options at Fiscal Year-End($)((1)
Year-End(#)
- ----------------- -------------- ------------- ----------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Burton W. Kanter 0 $ 0 41,655 0 $ 0 $ 0
Joel S. Kanter 0 0 33,324 0 0 0
Robert F. Mauer 0 0 20,834 0 0 0
</TABLE>
100
<PAGE> 112
(1) No outstanding options were in-the-money as of December 31, 1998. The
closing bid price per share as quoted on the Nasdaq National Market on
December 31, 1998 was $1 1/32 per share.
EMPLOYMENT AGREEMENTS WITH MANAGEMENT
Walnut 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 Proxy Statement into any
document filed with the SEC by Walnut 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 Walnut, the Nasdaq Stock Market total return index (the "Nasdaq
Stock Market Index") prepared by the Center for Research in Security Prices
("CRSP") and the Nasdaq Financial Stocks total return index prepared by CRSP
(the "Nasdaq Financial Stocks Index"). The comparison is for the period from
August 22, 1995 (the date Walnut's Common Stock first became listed on the
Nasdaq National Market) to December 31, 1998 and assumes the reinvestment of any
dividends. The initial price of Walnut'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. 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.
[Graphic Material Presented Here]
Cumulative Total Return
<TABLE>
<CAPTION>
8/22/95 12/95 12/96 12/97 12/98
<S> <C> <C> <C> <C> <C>
Walnut Financial Services, Inc. 100 64 32 44 10
Nasdaq Stock Market Index 100 103 127 155 219
Nasdaq Financial Stocks Index 100 115 147 224 217
</TABLE>
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is composed of
Walnut's three independent outside directors, Messrs. Burge, Burleson and
Weisgal. The Compensation Committee is responsible for administering the
policies which govern Walnut's executive compensation.
Objectives of Executive Compensation. The Compensation Committee has
designed its compensation policy to provide the proper incentives to management
to maximize Walnut'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.
The Compensation Committee awarded no cash bonuses for 1998.
Walnut 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 Walnut'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 Walnut's actual economic performance during
the applicable fiscal year.
101
<PAGE> 113
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 Walnut'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 Walnut, as well as Walnut'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 Walnut's tax return of compensation over $1 million to any
of the named executive officers of Walnut unless, in general, the compensation
is paid pursuant to a plan which is performance-related, non-discretionary and
has been approved by Walnut'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 Walnut's stockholders.
Submitted by the Compensation Committee:
Gene E. Burleson
William F. Burge, III
Solomon A. Weisgal
DIRECTOR COMPENSATION
During the 1998 fiscal year Walnut 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. Walnut reimburses the directors for
reasonable out-of-pocket expenses incurred in connection with their activities
on behalf of Walnut.
In the past, if a director was re-elected, such director would receive, upon
such re-election, a 10-year option to purchase 1,000 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 1,666
shares of Common Stock at the market price at the time of grant.
Since Walnut's election to be regulated as a BDC, Walnut has been
prohibited from issuing such options.
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 Walnut or has any
other business relationship or affiliation with Walnut, except his service as a
director.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT PRIOR TO GIVING EFFECT TO THE MERGERS
The following table sets forth (i) the number of shares of Common Stock
beneficially owned by Joel S. Kanter, Burton W. Kanter and Robert F. Mauer
(collectively, the "Named Executive Officers"), and each of the directors of
Walnut, individually, and the executive officers and directors of Walnut, as a
group, and (ii) the percentage of ownership of the outstanding Common Stock
represented by such shares. Except for such persons, no owner of more than five
percent (5%) of the outstanding Common Stock is known to Walnut. The share
ownership is reported as of July 7, 1999. All share numbers are provided based
upon information supplied to management of Walnut 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.
102
<PAGE> 114
<TABLE>
<CAPTION>
Actual Pro-Forma
------ ---------
Names and Addresses of Directors Number Percent Number Percent
and Executive Officers of Shares of Class of Shares of Class
------------------------------------ -------------- ------------ ------------- ----------
<S> <C> <C> <C> <C>
Burton W. Kanter [187,550](1) [5.52%] [215,895](2) [2.05%]
Two North LaSalle St.
Suite 2200
Chicago, IL 60602
Solomon A. Weisgal [73,344](3) [2.19%] [93,344](4) *
120 S. Riverside Plaza
Suite 1620
Chicago, IL 60606
Joel S. Kanter [209,238](5) [6.16%] [265,914](6) [2.52%]
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
William F. Burge, III [9,915](7) * [29,915](8) *
Ayrshire Corporation
2028 Buffalo Terrace
Houston, TX 77019
Gene E. Burleson [3,400] * [23,400](9) *
Argonne Properties Inc.
325 Argonne Drive
Atlanta, GA 30305
Albert Morrison, Jr. [100,212](10) [2.99%] [120,212](11) [1.15%]
1001 Brickell Bay Drive
9th Floor
Miami, FL 33131
Earl Chapman [1,666](12) * [21,667](13) *
2039 Laukahi Street
Honolulu, HI 96821
Robert F. Mauer 14,584(14) * 50,000 (15) *
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
Joseph D. Mark 0 0 [1,842,793](16) [16.9%]
Tower Hill Securities, Inc.
650 Madison Avenue
New York, NY 10022
Adi Raviv 0 0 [1,842,793](17) [16.9%]
Tower Hill Securities, Inc.
650 Madison Avenue
New York, NY 10022
</TABLE>
103
<PAGE> 115
<TABLE>
<S> <C> <C> <C> <C>
Shai Novik 0 0 [372,281](18) [3.60%]
Tower Hill Securities, Inc
650 Madison Avenue
New York, NY 10022
Evan Marks 0 0 [20,000](19) *
Alben Asset Management
885 Third Avenue
New York, NY 10022
[OTHER DIRECTOR DESIGNATED BY TOWER HILL] 0 0 [20,000](20) *
Officers and Directors, as a [599,458](21) [17.43%] [4,603,013](22) [39.94%]
group(7)
</TABLE>
- -------------------------
* Less than one percent (1%).
(1) The number of shares reported includes: (i) 1,504 shares owned by BWK,
Inc. ("BWK"), (ii) 6,755 shares owned by Carlco, Inc. ("Carlco"), (iii)
94,351 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) 36,605 shares owned by THC, (v) 6,680 shares
owned by TMT, Inc. ("TMT") and (vi) options to purchase up to 41,655
shares at $10.80 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 or TMT. Mr. Kanter, as President of BWK, Carlco,
TMT and THC, has sole voting and investment control of the shares owned
by BWK, Carlco, TMT and THC and, upon exercise thereof, will have sole
voting and investment control over the 41,655 shares underlying Mr.
Kanter's options. Mr. Kanter, as Co-Trustee of each of the general
partners of HAP, shares voting and investment control of the shares
owned by HAP with his fellow co-trustee.
Each of BWK, Carlco, HAP, THC and TMT disclaim any and all beneficial
ownership of the shares owned by the others.
(2) The number of shares reported includes shares described in footnote (1)
less the options to purchase up to 41,655 shares at $10.80 per share
which options were repurchased in connection with the Mergers, plus
options to purchase up to 70,000 shares at $2.00 per share, all of
which options are currently exercisable.
(3) The number of shares reported includes: (i) 7,534 shares owned by
Cypress Lane Investments ("Cypress"), (ii) 7,534 shares owned by Nacha
Investment Company ("Nacha"), the general partners of which are
individual trusts of which Mr. Weisgal is trustee and Mr. Chapman and
members of his family are the beneficial owners, (iii) 1,666 shares
owned by Cana Investors ("Cana"), among the general partners of which
are a revocable trust of which Mr. Weisgal is a co-trustee and a
revocable trust of which Mr. Chapman is a trustee, Cypress and Nacha
and (iv) 56,610 shares owned by the BRT Partnership ("BRT"), the
general partners of which are individual trusts of which Mr. Weisgal is
the trustee and members of the Kanter family including Joel S. Kanter
and Joshua S. Kanter, but excluding Burton W. Kanter, are the
beneficiaries.
104
<PAGE> 116
Mr. Weisgal disclaims any and all beneficial interest in any of the
shares owned by Nacha or BRT. Mr. Weisgal has sole voting and
investment control of the 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 shares owned by Cypress. Mr. Weisgal
shares with Mr. Chapman, each as the trustee of a separate revocable
trust that is one of the general partners of Cana, the voting and
investment control of the shares owned by Cana.
Each of BRT, Cana, Cypress and Nacha disclaim any and all beneficial
ownership in the shares owned by the others.
(4) The number of shares reported includes shares described in footnote (3)
plus options to purchase up to 20,000 shares at $2.00 per share, all of
which options are currently exercisable.
(5) The number of shares reported includes: (i) 55,501 shares owned by
Kanter Family Foundation, (ii) 104,938 shares owned by Windy City,
(iii) 5,833 Class A Warrants owned by Kanter Family Foundation, (iv)
6,125 Class A Warrants owned by Windy City and (v) options to purchase
up to 33,324 shares at $10.80 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 Kanter Family Foundation or Windy
City. Mr. Kanter, as President of Kanter Family Foundation and Windy
City, has sole voting and investment control of the shares owned by
Kanter Family Foundation and Windy City and, upon exercise thereof,
will have sole voting and investment control over the shares underlying
Kanter Family Foundation's and Windy City's Class A Warrants and Mr.
Kanter's options.
Each of Kanter Family Foundation and Windy City disclaim any and all
beneficial ownership of the shares owned by the other.
(6) The numbers of shares reported includes shares described in footnote
(5) less the options to purchase up to 33,324 shares at $10.80 per
share, which options were repurchased in connection with the Mergers,
plus options to purchase up to 90,000 shares at $2.00 per share, all of
which options are currently exercisable.
(7) The number of shares reported consists of 9,915 shares owned by the
Burge Grandchildren's 1996 Trust, of which Mr. Burge is the sole
trustee and over which Mr. Burge has sole voting and investment power.
(8) The number of shares reported includes shares described in footnote (7)
plus options to purchase up to 20,000 shares at $2.00 per share, all of
which options are currently exercisable.
(9) The number of shares reported includes options to purchase up to
20,000 shares at $2.00 per share, all of which options are currently
exercisable.
(10) The number of shares reported consists of (i) 90,027 shares owned by
Federal Business Investment Company ("FBIC") and (ii) 10,185 shares
owned by the UP Trust ("UP"). Mr. Morrison is the president of FBIC and
the sole trustee of UP and exercises sole voting and investment control
over such common stock. Trusts established for the benefit of members
of Burton Kanter's family (excluding Mr. Kanter) 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) beneficially own 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 shares of
Common Stock owned by FBIC and UP.
(11) The number of shares reported includes shares described in footnote
(11) plus options to purchase up to 20,000 shares at $2.00 per share,
all of which options are currently exercisable.
105
<PAGE> 117
(12) The number of shares reported is 1,666 shares owned by Cana, the
beneficial ownership of which has also been reported by Mr. Weisgal.
Mr. Chapman is a trustee of a revocable trust that is one of the
general partners of Cana, and consequently shares voting and investment
control of the shares owned by Cana.
(13) The number of shares reported includes shares described in footnote
(12) plus options to purchase up to 20,000 shares at $2.00 per share,
all of which options are currently exercisable.
(14) The number of shares reported consists of options to purchase 12,501
shares at $12.00 per share and 2,083 shares at $9.00 per share, all of
which options are presently exercisable.
(15) The number of shares reported consists of options to purchase up to
50,000 shares at $2.00 per share, all of which options are currently
exercisable.
(16) The number of shares reported includes options to purchase 450,000
shares at $2.00 per share, all of which options are currently
exercisable.
(17) The number of shares reported includes options to purchase 450,000
shares at $2.00 per share, all of which options are currently
exercisable.
(18) The number of shares reported consists of restricted shares granted
pursuant to Mr. Novik's employment agreement.
(19) The number of shares reported consists of options to purchase up to
20,000 shares at $2.00 per share, all of which options are currently
exercisable.
(20) The number of shares reported consists of options to purchase up to
20,000 shares at $2.00 per share, all of which options are currently
exercisable.
(21) Such group consists of nine persons. The number of shares reported
includes all of the shares reported at footnotes (1),(3),(5),(7),(11)
and (13) and shares owned by Gene Burleson and by Joshua Kanter,
Secretary and General Counsel of Walnut.
(22) Such group consists of Burton W. Kanter, Joel S. Kanter, Gene Burleson,
Joseph D. Mark, Adi Raviv, Evan Marks and [the additional director
designated by Tower Hill].
106
<PAGE> 118
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Walnut has retained the firm of BFKP&N as its general counsel. Joshua
S. Kanter, the General Counsel and Secretary of Walnut, is of counsel to such
firm and his wife, Catherine McNichols Kanter, is a partner of such firm. Walnut
and its subsidiaries paid approximately $342,000 in legal fees and expenses to
BFKP&N during 1998 and 118,860 during the first six months of 1999, and had
current BFKP&N invoices outstanding as of June 30, 1999 totaling approximately
$109,112.05.
In April 1997, The Holding Company, a company of which Burton W. Kanter
is President, made 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 The Holding Company. The loan
accrues interest at 9.5% per annum. Under amended terms, principal payments were
to be made on the loan in four installments of $100,000 following the end of
each of the fiscal quarters of Walnut in 1998, with the first installment to be
paid on April 1, 1998. The first and second installments were paid on April 1,
1998 and in July 1998. The third and fourth payments, which were due on October
1, 1998 and January 1, 1999, respectively, have been deferred pursuant to
another amendment to the agreement between The Holding Company and Walnut
Capital. Walnut has been permitted to further defer the principal payments until
December 31, 1999 as long as Walnut makes quarterly interest payments on the
balance. Management believes that such loan is on terms no less favorable than
the terms available from institutional lenders. It is intended that this loan be
repaid as part of the Debt Conversion.
In connection with the transaction through which Walnut acquired Inland
Financial, Inland Financial borrowed $250,000 in October 1998 from the Kanter
Family Foundation, an Illinois not-for-profit private charitable foundation
established by the Kanter family and of which Joel Kanter is President and a
director, and Joshua Kanter is Vice President and a director and $43,000 from
Windy City. Inland Financial issued to each of the Kanter Family Foundation and
Windy City a promissory note which matures on October 19,1999. The promissory
notes bear interest at a rate of 16% per year which is payable quarterly. These
loans are unsecured. It is intended that these loans be repaid as part of the
Debt Conversion.
Walnut Capital subleases office space in Vienna, Virginia, which is
also utilized by Walnut, from Windy City pursuant to an oral sublease. 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. Walnut and Walnut Capital paid Windy City
$56,000 in rent in 1998. 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. It is intended that this sublease will be terminated at the Effective
Time of the Mergers, pursuant to the Merger Agreement.
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.
Walnut has a term loan with American National Bank and Trust Company of
Chicago, under which $725,000 was outstanding as of July 1, 1999, following a
principal payment of $100,000 on such date. This loan matures on December 31,
1999 and has an interest rate equal to ANB's base rate plus 2% (10.0% as of July
1, 1999). Messrs. Burton W. Kanter and Joel S. Kanter have personally guaranteed
such loan. In consideration for such guarantee, Walnut has agreed to pay Messrs.
Kanter, in the aggregate, an amount equal to .25% per annum of the amounts so
guaranteed. The amount outstanding to ANB will be repaid at the closing of the
Mergers with proceeds from the Capital Investment. See "PROPOSAL III--APPROVAL
OF THE CAPITAL INVESTMENT."
107
<PAGE> 119
OTHER MATTERS
SOLICITATION OF PROXIES
The cost of solicitation of proxies in the form enclosed herewith will
be borne by Walnut. In addition to the solicitation of proxies by mail, the
directors, officers and employees of Walnut may also solicit proxies personally
or by telephone without additional compensation for such activities. Walnut will
also request persons, firms and corporations holding shares in their names or in
the names of their nominees, which are beneficially owned by others, to send
proxy materials to and obtain proxies from such beneficial owners. Walnut will
reimburse such holders for their reasonable expenses.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 2000 Annual
Meeting of stockholders of THCG must have been received at Walnut's principal
executive office no later than August 6, 1999 in order to be considered for
inclusion in the proxy statement and on the proxy card that will be solicited by
the Board of Directors in connection with the 2000 Annual Meeting of
stockholders so long as the THCG Annual Meeting is held within 30 days from the
date of the anniversary of Walnut's last Annual Meeting. If there is more than
30 days difference in such dates, then stockholder proposals intended to be
presented at the next annual meeting of stockholders and considered for
inclusion in the proxy materials must be received in a reasonable time before
THCG begins to print and mail its proxy materials.
OTHER MATTERS
The Board of Directors does not know of any matters other than those
described in this Proxy Statement that will be presented for action at the
Special Meeting. If other matters are presented, it is the intention of the
persons named as proxies in the accompanying Proxy Card to vote in their
discretion all shares represented by validly executed proxies.
REGARDLESS OF THE NUMBER OF SHARES YOU OWN, YOUR VOTE IS IMPORTANT TO THE
COMPANY. PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD
TODAY.
108
<PAGE> 120
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
I. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
- Introduction to Unaudited Pro Forma Condensed Combined Financial Information F-3
- Unaudited Pro Forma Condensed Combined Balance Sheets as of December 31, 1998
and as of March 31, 1999 F-4
- Unaudited Pro Forma Condensed Combined Statements of Operations for the Year
Ended December 31, 1998 and the Three Months Ended March 31, 1999 F-6
- Notes to Unaudited Pro Forma Condensed Combined Financial Statements F-8
II. CONSOLIDATED FINANCIAL STATEMENTS OF WALNUT
- Report of Independent Certified Public Accountants F-11
- Consolidated Statements of Assets and Liabilities as of December 31, 1998 and
December 31, 1997 F-12
- Investments in Securities as of December 31, 1998 and December 31, 1997 F-13
- Consolidated Statements of Operations for the Years Ended December 31,
1998, December 31, 1997 and December 31, 1996 F-15
- Consolidated Statements of Changes in Net Assets for the Years Ended December 31,
1998, December 31, 1997 and December 31, 1996 F-16
- Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
December 31, 1997 and December 31, 1996 F-17
- Notes to Consolidated Financial Statements F-18
- Consolidated Statements of Assets and Liabilities as of March 31, 1999 and December
31, 1998 F-29
- Investments in Securities as of March 31, 1999 F-30
- Consolidated Statements of Operations for the Three Months Ended March 31, 1999
and March 31, 1998 F-32
- Consolidated Statements of Changes in Net Assets for the Three Months Ended March
31, 1999 and March 31, 1998 F-33
- Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999
and March 31, 1998 F-34
- Notes to Consolidated Financial Statements F-35
III. FINANCIAL STATEMENTS OF TOWER HILL
- Independent Auditors' Report F-38
- Statement of Financial Condition as of March 31, 1998 F-39
- Statement of Operations for the Year Ended March 31, 1998 F-40
- Statement of Changes in Stockholder's Equity for the Year Ended March 31, 1998 F-41
- Statement of Cash Flows for the Year Ended March 31, 1998 F-42
- Notes to Financial Statements F-43
</TABLE>
F-1
<PAGE> 121
<TABLE>
<S> <C>
- Computation of Net Capital Pursuant to Rule 15c3-1 and Statement Pursuant to
Rule 17a-5(d)(4) F-45
- Independent Auditors' Report F-46
- Statement of Financial Condition as of December 31, 1998 F-47
- Statement of Operations for the Nine Months Ended December 31, 1998 F-48
- Statement of Changes in Stockholder's Equity for the Nine Months Ended December
31, 1998 F-49
- Statement of Cash Flows for the Nine Months Ended December 31, 1998 F-50
- Notes to Financial Statements F-51
- Computation of Net Capital Pursuant to Rule 15c3-1 and Statement Pursuant to
Rule 17a-5(d)(4) F-53
- Balance Sheet as of March 31, 1999 F-54
- Statement of Profits and Losses for the Three Months Ended March 31, 1999 F-55
</TABLE>
F-2
<PAGE> 122
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We have provided unaudited condensed combined financial statements of
Walnut Financial Services, Inc., after giving effect to the Mergers, which are
referred to as "pro forma" information. In presenting these unaudited pro forma
condensed combined financial statements, we treated our companies as if they had
always been combined for accounting and financial reporting purposes. You should
be aware that these unaudited pro forma condensed combined financial statements
are presented for illustrative purposes only and may not be indicative of the
operating results or financial position that would have occurred or that will
occur after the consummation of the Mergers.
We have provided an unaudited pro forma condensed combined balance
sheet as of March 31, 1999 and December 31, 1998 that includes the impact of
transaction costs and various material transactions associated with the Mergers.
We have also provided unaudited pro forma condensed combined statements of
operations for the three month period ended March 31, 1999 and the twelve month
period ended December 31, 1998, assuming the Mergers had occurred on January 1,
1998.
Certain historical Walnut Financial Services, Inc. results have been
reclassified to reflect the presentation as an operating company, instead of as
an investment company. Walnut has been using investment company accounting since
their election to become regulated as a Business Development Company on October
15, 1997. The effect of this reclassification has been to record the assets and
liabilities of UPLP, Pacific Financial Services, Inc., and Inland Financial
Services, Inc. instead recording only the investment in subsidiaries as a single
asset on WFS' balance sheet Additionally, unrealized gains and losses are
recorded directly to Shareholders' Equity, instead of being recorded in Net
Income.
F-3
<PAGE> 123
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(Restated)
Historical Historical Pro Forma
-------------- -------------- --------------- ------------
Walnut Tower Hill Adjustments Combined
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents 270,000 610,000 (425,000) 455,000
Accounts receivable, net of allowance 4,507,000 525,000 5,032,000
Interest receivable 253,000 253,000
Loans receivable 25,000 294,000 319,000
---------- --------- ----------
Total Current Assets 5,055,000 1,429,000 6,059,000
Fixed Assets, net of accumulated depreciation 117,000 70,000 187,000
Available for sale securities 6,499,000 6,499,000
Non-marketable securities 3,646,000 714,000 4,360,000
Notes receivable 1,344,000 1,344,000
Goodwill 4,901,000 2,079,000 6,980,000
Other assets 3,000 49,000 52,000
---------- --------- ---------- ----------
TOTAL ASSETS 21,565,000 1,548,000 2,368,000 25,481,000
========== ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers 1,692,000 1,692,000
Notes payable to banks 1,785,000 (825,000) 960,000
Notes payable to related parties 1,093,000 10,000 (1,093,000) 10,000
Notes payable to others 320,000 320,000
Accounts payable, accrued expenses, and other 1,304,000 245,000 (372,000) 1,177,000
current liabilities
Customer Retention Payable 1,223,000 1,223,000
Current portion of long-term debts 2,000,000 (2,000,000) 0
---------- --------- ----------
Total current liabilities 9,417,000 255,000 5,382,000
Long Term debt, net of current portion 609,000 609,000
Participation Loans Payable 2,870,000 2,870,000
---------- --------- ----------
Total liabilities 12,896,000 255,000 8,861,000
Minority Interest 415,000 0 (415,000) 0
Shareholders' equity: 8,254,000 1,293,000 7,073,000 16,620,000
---------- --------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 21,565,000 1,548,000 2,368,000 25,481,000
========== ========= ========== ==========
</TABLE>
F-4
<PAGE> 124
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(Restated)
Historical Historical Pro Forma
-------------- -------------- --------------- ------------
Walnut Tower Hill Adjustments Combined
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents 2,427,000 185,000 (425,000) 2,187,000
Accounts receivable, net of allowance 2,582,000 393,000 2,975,000
Interest receivable 262,000 0 262,000
Loans receivable 412,000 288,000 700,000
---------- --------- ---------
Total Current Assets 5,683,000 866,000 6,124,000
Fixed Assets, net of accumulated depreciation 115,000 67,000 182,000
Available for sale securities 2,512,000 50,000 2,562,000
Non-marketable securities 3,523,000 684,000 4,207,000
Notes receivable 1,102,000 100,000 1,202,000
Goodwill 4,970,000 0 2,109,000 7,079,000
Other assets 205,000 103,000 308,000
---------- --------- ---------- ----------
TOTAL ASSETS 18,110,000 1,186,000 2,368,000 21,664,000
========== ========= ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers 0 0
Notes payable to banks 1,544,000 (825,000) 719,000
Notes payable to related parties 1,093,000 (1,093,000) 0
Notes payable to others 158,000 158,000
Accounts payable, accrued expenses, and other 1,200,000 111,000 (372,000) 939,000
current liabilities
Customer Retention Payable 903,000 903,000
Current portion of long-term debts 2,000,000 (2,000,000) 0
---------- --------- ----------
Total current liabilities 6,898,000 111,000 2,719,000
Long Term Notes, net of current portion 609,000 0 609,000
Participation Loans Payable 2,288,000 2,288,000
---------- --------- ----------
Total liabilities 9,795,000 111,000 5,616,000
Minority Interest 411,000 0 (411,000) 0
Shareholders' equity: 7,904,000 1,075,000 7,069,000 16,048,000
---------- --------- ---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 18,110,000 1,186,000 2,368,000 21,664,000
========== ========= ========== ==========
</TABLE>
F-5
<PAGE> 125
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
(Restated)
Historical Historical Pro Forma
-------------- -------------- --------------- ------------
Walnut Tower Hill Adjustments Combined
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue
Consulting income 2,114,000 2,114,000
Factoring income 1,873,000 0 1,873,000
Interest, investment and other income 1,037,000 22,000 1,059,000
---------- --------- ----------
Total revenue 2,910,000 2,136,000 5,046,000
Costs and expenses
Cost of services 84,000 0 84,000
General and administrative expenses 2,850,000 2,221,000 667,000 5,738,000
---------- --------- --------- ----------
2,934,000 2,221,000 667,000 5,822,000
Operating gain/(loss) (24,000) (85,000) (667,000) (776,000)
Interest and other financial costs 1,652,000 20,000 (489,000) 1,183,000
---------- --------- --------- ----------
Gain/(Loss) before taxes and realized gain (1,676,000) (105,000) 178,000 (1,959,000)
Income tax benefit/(expenses) 44,000 0 0 44,000
Realized gain/(loss) on sale of securities, net
of tax 1,019,000 0 0 1,019,000
Effect on net income of minority interest 88,000 (88,000)
---------- --------- --------- ----------
NET INCOME/(LOSS) (525,000) (105,000) (266,000) (896,000)
========== ========= ========= ==========
Income/(Loss) per share (0.17) (0.09)
========== ==========
Weighted average shares outstanding 3,176,660 6,527,539 9,878,067
========== ========= ==========
</TABLE>
F-6
<PAGE> 126
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(Restated)
Historical Historical Pro Forma
-------------- -------------- --------------- ------------
Walnut Tower Hill Adjustments Combined
-------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue
Consulting income 266,000 266,000
Factoring income 392,000 0 392,000
Interest, investment and other income 75,000 4,000 79,000
--------- -------- ---------
Total revenue 467,000 270,000 737,000
Costs and expenses
Cost of services 102,000 0 102,000
General and administrative expenses 578,000 519,000 167,000 1,264,000
--------- -------- -------- ---------
680,000 519,000 167,000 1,366,000
Operating gain/(loss) (213,000) (249,000) (167,000) (629,000)
Interest and other financial costs 243,000 0 (135,000) 108,000
--------- -------- --------- ---------
Gain/(Loss) before taxes and realized gain (456,000) (249,000) 32,000 (737,000)
Income tax benefit/(expenses) 15,000 0 15,000
Realized gain/(loss) on sale of securities, net
of tax 2,522,000 0 2,522,000
Effect on net income of minority interest 3,000 (3,000) 0
--------- -------- --------- ---------
NET INCOME/(LOSS) 2,084,000 (249,000) (35,000) 1,800,000
========= ======== ========= =========
Income/(Loss) per share 0.62 0.18
========= =========
Weighted average shares outstanding 3,350,533 6,527,534 9,878,067
========= ========= =========
</TABLE>
F-7
<PAGE> 127
WALNUT FINANCIAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements assume
a business combination between Walnut Financial Services, Inc. (WFS) and Tower
Hill Securities, Inc. (THSI) accounted for using the purchase method of
accounting and are based upon the respective restated historical financial
statements and the accompanying notes of Walnut Financial Services, Inc. and the
historical financial statements and the accompanying notes of Tower Hill
Securities, Inc. Because of the nature of the transaction, the merger has been
accounted for as a reverse acquisition.
Because the transaction has not been completed, the costs of the merger
can only be estimated at this time. The closing expenses have been estimated to
be $600,000, and have been accounted for as additional goodwill on the condensed
combined balance sheets. The unaudited pro forma condensed combined statements
of operations for all periods presented include the effects of the costs of the
combined companies.
The unaudited pro forma condensed combined balance sheet as of March
31, 1999 includes the impact of all transactions, whether of a recurring of
non-recurring nature, that can be reasonably estimated and should be reflected
as of that date.
Certain historical Walnut Financial Services, Inc. results have been
reclassified to reflect the presentation as an operating company, instead of as
an investment company. Walnut has been using investment company accounting since
their election to become regulated as a Business Development Company on October
15, 1997. The effect of this reclassification has been to consolidate the assets
and liabilities of UPLP, Pacific Financial Services, Inc., and Inland Financial
Services, Inc. instead recording only the investment in subsidiaries as a single
asset on WFS' balance sheet. This has had the impact of having WFS' reported
assets increase by $5,541,000 as of March 31, 1999 and $6,957,000 as of December
31, 1998. WFS' reported liabilities increased by $5,606,000 as of March 31,
1999, and $6,994,000 as of December 31, 1998. The asset increases were primarily
due to the reporting of consolidated receivables of Inland Financial Services
and Pacific Financial Services. The increase in liabilities were primarily due
the reporting of Notes Payable, Customer Retention Payable and Participations
Payable at Inland Financial Services and Pacific Financial Services.
Additionally, unrealized gains and losses on securities available for sale are
recorded directly to Shareholders' Equity, instead of being recorded in Net
Income. The effect on the three month period ended March 31, 1999 was an
increase in Net Income equal to the unrealized loss for the same period of
$2,400,000 net of taxes. The amount of unrealized loss recorded directly to
Shareholder's Equity for the 12 months ended December 31, 1998 was $8,328,000.
Also, non-marketable securities are recorded at cost or lower in the case of
unknown impairments to the recovery of cost. This has reduced Walnut's
non-marketable securities by $684,000 as of March 31, 1999 and $714,000 as of
December 31, 1999.
2. PRO FORMA ADJUSTMENTS
INTERCOMPANY TRANSACTIONS. All material inter-company transactions are
eliminated from the unaudited pro forma condensed combined statements of
operation or balance sheet.
BALANCE SHEET.
Current Assets. Cash has been adjusted to reflect the impact of
the private placement of additional shares, ($3,000,000), the payment of the
long term debenture ($2,000,000), the payment of a note to American National
Bank ($825,000), and the payment of closing costs ($600,000).
NON-MARKETABLE SECURITIES.
These have been increased by $684,000 as of March 31, 1999 and $714,000
as of December 31, 1998 to record unrealized gains on non-marketable securities
reflecting their fair market value as of the pro forma statement dates.
Other Noncurrent Assets. Goodwill has been increased by $2,109,000 as
of March 31, 1999 and as of December 31, 1998. This was the result of the
addition due to closing costs ($600,000), finders fees for the private placement
($200,000) and goodwill associated with the acquisition ($1,175,000) and the
purchase of the future value of UPLP's general partner ($134,000). The
additional goodwill was amortized based on a straight line five year life.
F-8
<PAGE> 128
Accounts Payable, Accrued Liabilities, and Income Taxes Payable.
Accounts Payable and Accrued Liabilities have been decreased to reflect the
conversion of accrued salary at Walnut Financial ($342,000) and accrued interest
at Pacific Financial and Inland Financial ($30,000).
Notes Payable - Related Parties. There was a reduction of $293,000
due to the conversion of subordinated debt at Inland Financial Services, and a
reduction of $600,000 due to the conversion of subordinated debt at Pacific
Financial Services.
Notes Payable - Banks. There was a reduction of $825,000 due to
the projected payment of the American National Bank note at Walnut Financial
Services.
Long Term Notes. There was a reduction of $2,000,000 due to the
projected payment of the SBA debenture.
Minority Interest. Minority interest was adjusted to reflect the
conversion of the minority ownership of UPLP. This resulted in a decrease in
minority interest of $415,000 as of December 31, 1998 and $412,000 as of March
31, 1999.
STOCKHOLDERS EQUITY. Stockholders' Equity has been increased to reflect
the transactions involving additional capital contributions to WFS from various
transactions involving conversion of existing debt and payables and a planned
private placement of WFS shares. These adjustments are identical for the March
31, 1999, and December 31, 1998 condensed combined balance sheet.
<TABLE>
<CAPTION>
The adjustments are: 3/31/99 12/31/98
<S> <C> <C>
- Private Placement of WFS common shares $3,000,000 $3,000,000
- Conversion of Pacific Financial Services subordinated debt $ 600,000 $ 600,000
- Conversion of Inland Financial Services subordinated debt $ 293,000 $ 293,000
- Conversion of Interest Payable on Pacific subordinated debt $ 30,000 $ 30,000
- Conversion of UPLP Minority Interest $ 411,000 $ 415,000
- Conversion of salary payable $ 342,000 $ 342,000
- Issuance of shares for Private Placement finders fee $ 200,000 $ 200,000
- Conversion of related party debt to equity $ 200,000 $ 200,000
- Purchase of future value of UPLP general partner $ 134,000 $ 134,000
</TABLE>
In additional there was $1,175,000 of Goodwill recorded representing
the difference between the market value of the shares of Tower Hill and the net
asset value of Walnut Financial Services at the time of acquisition.
STATEMENT OF OPERATIONS.
General and Administrative Costs. Costs were increased by $62,000
in the pro forma condensed combined statement of operations for the 3 months
ended March 31, 1999 and $247,000 for the 12 months ended December 31, 1999. The
adjustments were due to additional personnel costs of $77,000 for the three
months ended March 31, 1999 and $305,000 for the twelve months ended December
31, 1998. Costs were reduced by the proposed termination of WFS' existing lease.
This reduced costs by $15,000 for the three months ended March 31, 1999 and
$58,000 for the twelve months ended December 31, 1998.
Interest Expense. Interest expense was adjusted by a reduction
reflecting the conversion of subordinated debt to equity at Pacific and Inland,
the reduction in debentures payable to the SBA, and the payment of the American
National Bank loan. This was offset by increases in interest expense relating to
the additional use of cash for the closing expenses and additional expenses
described above as well as additional amortization of goodwill related to the
transaction. The amount of the pro forma adjustment for the three months ended
March 31, 1999 was a reduction in interest expense of $124,000 and a reduction
of $444,000 for the twelve months ended December 1998.
F-9
<PAGE> 129
Effect on Net Income of Minority Interest. The income (loss)
associated with the minority interest is adjusted to reflect the conversion of
the minority ownership. This resulted in an increase in net income in the pro
forma condensed combined statement of operations for the 12 months ended
December 31, 1998 of $88,000 and a decrease in net income in the pro forma
condensed combined statement of operations for the three months ended March 31,
1999 of $3,000.
Income (Loss) per Common share. Historical and unaudited pro forma
per share date of Walnut Financial Services, Inc. and Tower Hill Capital Group,
Inc. include the issuance of an estimated additional shares of 6,527,534 shares.
This is reflective of the additions to Stockholders' Equity outlined above, with
an additional 4,095,096 shares being issued consistent with the terms of the
merger.
F-10
<PAGE> 130
CONSOLIDATED FINANCIAL INFORMATION OF WALNUT
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To stockholders 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 in securities, as of December 31, 1998 and
1997, 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, 1998. 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, 1998 and 1997, 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, 1998 and 1997, 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, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 3, the U.S. Small Business Administration (the "SBA") has
issued its finding that a subsidiary of the Company, Walnut Capital Corp.
("Walnut Capital") has violated Section 107.700 of Part 13 of Federal
Regulations by investing in a big business as defined. The Company believes that
no such violation has occurred and has entered into discussions with the SBA to
clarify the issue.
In addition, the SBA has issued a finding that Walnut Capital has violated
Section 107.825(e) relating to acquiring shares from a non-issuer. The Company
believes that no such violation has occurred and has entered into discussions
with the SBA to clarify the issue.
Further, the SBA has issued a finding that Walnut Capital has violated Section
107.503(c), 107.650 and Valuation Guidelines for Small Business Investment
Companies. The Company believes that no such violation has occurred and has
entered into discussions with the SBA to clarify the issue.
Richard A. Eisner & Company, LLP
New York, New York
January 21 1999
F-11
<PAGE> 131
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,080,000 in 1998 and
$1,448,000 in 1997) $ 5,132,000 $ 13,554,000
Non-marketable equity securities (cost of $13,483,000 in 1998
and $8,183,000 in 1997) 7,287,000 3,384,000
Non-marketable debt securities (cost of $1,418,000 in 1998
and $1,329,000 in 1997) 723,000 659,000
Partnership Interests (Cost of $1,762,000 in 1998 and
$1,862,000 in 1997) 1,894,000 2,389,000
------------ ------------
Total portfolio securities 15,036,000 19,986,000
Cash and cash equivalents 140,000 6,479,000
Other assets 146,000 44,000
------------ ------------
Total assets 15,322,000 26,509,000
Liabilities:
Margin payable to brokers 1,692,000 2,297,000
Notes payable to banks 1,025,000 2,025,000
Notes payable to related parties 700,000 400,000
Accounts payable, accrued expenses and other current liabilities 600,000 869,000
Accrued officer's compensation 300,000 200,000
Debentures payable 2,000,000 4,000,000
Deferred tax liability 0 44,000
------------ ------------
Net assets $ 9,005,000 $ 16,674,000
============ ============
Preferred stock, no stated value, 1,000,000, no shares issued
Common stock, $.01 par value, 50,000,000 shares authorized,
3,301,863 and 3,109,447 issued and outstanding $ 198,000 $ 187,000
Additional paid in capital 19,137,000 18,237,000
Accumulated deficit:
Net investment loss (14,293,000) (12,676,000)
Net realized gain on investment 9,628,000 8,263,000
Net unrealized (depreciation) appreciation of investments (5,665,000) 2,663,000
------------ ------------
Net assets applicable to outstanding common shares
(equivalent to $2.73 and $5.36 per share based on
3,301,863 and 3,109,447 outstanding common shares at
December 31, 1998 and 1997, respectively) $ 9,005,000 $ 16,674,000
============ =============
</TABLE>
Attention is directed to the foregoing auditors' report and to the
accompanying notes to these financial statements.
F-12
<PAGE> 132
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
INVESTMENTS IN SECURITIES
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997
----------------------- -----------------------
Shares Value Shares Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Common and Preferred Stocks -
Healthcare - 40% and 72%
American Psych Systems, Inc. 122,950 $ 150,000 122,950 $ 150,000
Greystone Medical Group, Inc. 200,000 40,000 200,000 100,000
First Health Group Corp. 255,000 4,080,000 255,000 7,860,000
HP America Inc. 66,667 67,000 0 0
I-Flow Corporation 300,000 362,000 300,000 945,000
Ivonyx Group Services, Inc. 100,000 100,000 100,000 100,000
Mariner Post-Acute Network (Formerly 140,757 672,000 140,757 2,718,000
Paragon Health)
Med Images, Inc. 241,530 454,000 172,872 379,000
MHM Services, Inc. 131,955 66,000 82,455 60,000
Rainbow Medical, Inc. 25,000 50,000 25,000 50,000
Sovereign Medical Acquisition Corp. - Common 4,000 24,000 0 0
Sovereign Medical Acquisition Corp. - Units 3,333 20,000 0 0
Vitalink, Inc. 0 0 83,100 2,005,000
----------- -----------
$ 6,085,000 $ 4,367,000
----------- -----------
High technology - 3% and 2%
Consolidated Technology Group, Inc. 0 $ 0 375,000 $ 60,000
Logic Devices Incorporated 45,000 76,000 45,000 110,000
Madison Info. Tech. -Preferred A 60,000 150,000 0 0
Madison Info. Tech. -Preferred B 60,000 150,000 0 0
Multimedia Games, Inc. 2,500 18,000 0 0
Nhancements Technology Corp. 0 0 16,185 57,000
Thermo Information Solutions, Inc. 10,000 90,000 10,000 90,000
J.L. Wickham Co., Inc. - Common 250,696 0 250,696 0
J.L. Wickham Co., Inc. - Preferred 281,788 0 281,788 0
----------- -----------
$ 484,000 $ 317,000
----------- -----------
Communications - 7% and 6%
International Business Network 70,000 $ 105,000 0 $ 0
Site Based Media, Inc. 0 0 321,108 19,000
Trans Global Services, Inc. - Common 83,839 139,000 62,003 374,000
Vision III Imaging, Inc. 10,585 867,000 10,585 847,000
----------- -----------
$ 1,111,000 $ 1,240,000
----------- -----------
Biotechnology - 3% and 1%
BioHorizon Implant system, Inc. 193,934 $ 300,000 0 $ 0
Metatech Corp. 14,817 0 0 0
Optiva Corporation 10,000 63,000 10,000 63,000
Osteoimplant Technology, Inc. - Common 80,000 16,000 80,000 96,000
Vaxgen, Inc. 22,800 83,000 20,000 70,000
----------- -----------
$ 462,000 $ 229,000
----------- -----------
</TABLE>
F-13
<PAGE> 133
<TABLE>
<S> <C> <C> <C> <C>
Environmental - 0% and 0%
Clean America Corp. (The Alta Group) 59,375 $ 0 59,375 $ 0
Inorganic Recycling, Inc. 10,000 0 0 0
----------- -----------
$ 0 $ 0
----------- -----------
Finance - 24% and 0%
Pacific Financial Services Corp. (wholly 300 $ 2,212,000 0 $ 0
owned subsidiary)
Inland Financial Corp. (wholly owned
subsidiary) 100 1,328,000 0 0
----------- -----------
$ 3,540,000 $ 0
----------- -----------
Other - 5% and 4%
Automotive Performance Group 50,000 $ 100,000 0 $ 0
Linter's, Inc. 42,784 75,000 42,784 75,000
SoftKat, Inc. -Common 155,309 40,000 155,309 311,000
SoftKat, Inc. -Preferred 120,000 123,000 0 0
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 37,643 94,000
----------- -----------
$ 737,000 $ 785,000
----------- -----------
Total common and preferred stocks (cost $14,563,000 and
$9,631,000) $12,419,000 $16,938,000
----------- -----------
Debt securities - 5% and 3%
Inland Financial (wholly-owned subsidiary) $ 500,000 $ 0
Knox International 0 200,000
Pacific Financial (wholly-owned subsidiary) 200,000 0
TCOM Services, Inc. 0 276,000
SoftKat, Inc. 0 160,000
VINnet Inc. 23,000 23,000
----------- ------------
Total debt securities (cost $1,418,000 and $1,329,000) $ 723,000 $ 659,000
----------- ------------
Partnership interests - 13% and 12%
Universal Partners. L.P. (majority-owned
subsidiary) $ 1,894,000 $ 2,289,000
Knox International 0 100,000
----------- -----------
Total partnership interests (cost $1,762,000 and 1,862,000) 1,894,000 2,389,000
----------- -----------
Total - 100% (cost $17,743,000 and
$12,822,000) $15,036,000 $19,986,000
=========== ===========
</TABLE>
Attention is directed to the foregoing auditor's report and to the
accompanying notes to these financial statements.
F-14
<PAGE> 134
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------
1998 1997 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Investment income:
Interest income $ 87,000 $ 69,000 $ 61,000
Dividend income 3,000 6,000 16,000
----------- ----------- -----------
Total income 90,000 75,000 77,000
Expenses:
Interest expense 533,000 1,099,000 1,597,000
General and administrative 1,182,000 1,490,000 1,651,000
----------- ----------- -----------
Investment (loss) before taxes (1,625,000) (2,514,000) (3,171,000)
Income tax benefit 8,000 858,000 1,268,000
----------- ----------- -----------
Net investment (loss) (1,617,000) (1,656,000) (1,903,000)
----------- ----------- -----------
Realized and unrealized gains on investments:
Realized gain on sale of investments before
income tax 1,372,000 3,032,000 2,904,000
Income tax provision (7,000) (1,391,000) (1,162,000)
----------- ----------- -----------
Net realized gain on sale of investments 1,365,000 1,641,000 1,742,000
----------- ----------- -----------
Unrealized (depreciation) on investments before
income tax (8,371,000) (1,437,000) (3,773,000)
Income tax benefit 43,000 491,000 969,000
----------- ----------- -----------
Net unrealized (depreciation) on investments (8,328,000) (946,000) (2,804,000)
----------- ----------- -----------
Net realized and unrealized gains (losses) on
investments (6,963,000) 695,000 (1,062,000)
----------- ----------- -----------
Net increase (decrease) in net assets resulting from
operations $(8,580,000) $ (961,000) $(2,965,000)
=========== =========== ===========
Loss per share - basic and diluted $ (2.70) $ (.39) $ (1.25)
=========== =========== ===========
Weighted average shares outstanding 3,176,660 2,463,219 2,374,516
=========== =========== ===========
</TABLE>
Attention is directed to the foregoing auditors' report and to the
accompanying notes to these financial statements.
F-15
<PAGE> 135
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1998 1997 1996
--------------- ---------------- --------------
<S> <C> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $ (1,617,000) $ (1,656,000) $ (1,903,000)
Net realized gains on investments 1,365,000 1,641,000 1,742,000
Net unrealized depreciation on investments (8,328,000) (946,000) (2,804,000)
------------ ------------ ------------
(8,580,000) (961,000) (2,965,000)
------------ ------------ ------------
Increase in net assets resulting from capital share transactions:
Issuance of 133,663 shares of common stock for Universal Partners
acquisition 1,793,000
Issuance of compensatory warrants for consulting 125,000
Issuance of 2,334 shares of common stock for legal fees 35,000
Issuance of 666,667 shares of common stock and
466,667 warrants, net of costs 46,000 3,098,000
Issuance of 166,667 warrants 100,000
Issuance of 6,667 shares of common stock for litigation settlement 50,000
Issuance of 39,022 shares of common stock for Pacific
Financial Services Corporation acquisition 300,000
Issuance of 153,393 shares of common stock for Inland Financial
Services Corporation acquisition 650,000
Expenditures attributable to issuance of common stock (85,000)
------------ ------------ ------------
911,000 3,248,000 1,953,000
------------ ------------ ------------
Total increase (decrease) in net assets (7,669,000) 2,287,000 (1,012,000)
Net assets at beginning of period 16,674,000 14,387,000 15,399,000
------------ ------------ ------------
Net assets at end of period $ 9,005,000 $ 16,674,000 $ 14,387,000
============ ============ ============
</TABLE>
Attention is directed to the foregoing auditors' report and to the
accompanying notes to these financial statements.
F-16
<PAGE> 136
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------
1998 1997 1996
--------------- ---------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net decrease in net assets resulting from operations $(8,580,000) $ (961,000) $(2,965,000)
Adjustments to reconcile net decrease in net assets resulting
from operations to net cash provided by operating activities:
Net unrealized depreciation of investments 8,371,000 1,437,000 3,773,000
Net realized gain on investments (1,372,000) (3,032,000) (2,904,000)
Change in net deferred tax liability (44,000) 6,000 (1,090,000)
Issuance of compensatory warrants 0 0 125,000
Changes in assets and liabilities:
Other assets (102,000) 315,000 (30,000)
Other liabilities (169,000) 325,000 148,000
----------- ----------- -----------
Net cash used in operating activities (1,896,000) (1,910,000) (2,943,000)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of common stock, healthcare (362,000) (314,000) (234,000)
Purchases of common stock, high tech (320,000) (50,000) 0
Purchases of common stock, bio tech (313,000) 0 0
Purchases of common stock, communications (125,000) 0 0
Purchases of common stock, other (100,000) (165,000) (1,065,000)
Purchase of general partnership interest 0 (75,000) 0
Purchase of equity and debt securities, wholly-owned (3,290,000) 0 (750,000)
subsidiaries
Purchase of debt securities, other 0 0 (239,000)
Proceeds from sale of partnership interest 122,000 0 0
Proceeds from sale of common stock, healthcare 2,961,000 9,221,000 5,950,000
Proceeds from sale of common stock, high technology 38,000 2,000 23,000
Proceeds from sale of common stock, other 53,000 3,870,000 0
Collection of wholly-owned subsidiary note 0 749,000 0
Collections from debt securities 237,000 65,000 50,000
------------ ----------- -----------
Net cash provided by investing activities (1,099,000) 13,303,000 3,735,000
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 46,000 3,098,000 0
Expenditures attributable to issuance of common stock (85,000) 0 0
Proceeds from sale of warrants 0 100,000 0
Repayments of short term debt (1,000,000) (1,700,000) (1,144,000)
Borrowings from related party 300,000 400,000 0
Increase (decrease) in margin accounts (605,000) (3,162,000) 327,000
Repayments of long term debt (2,000,000) (4,000,000) 0
----------- ----------- -----------
Net cash used in financing activities (3,344,000) (5,264,000) (817,000)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (6,339,000) 6,129,000 (25,000)
Cash and cash equivalents, beginning 6,479,000 350,000 375,000
----------- ----------- -----------
Cash and cash equivalents, end $ 140,000 $ 6,479,000 $ 350,000
=========== =========== ===========
Supplemental Information:
Cash paid for interest $ 443,000 $ 813,000 $ 1,576,000
=========== =========== ===========
Issuance of common stock for legal fees $ 0 $ 0 $ 35,000
=========== =========== ===========
Issuance of common stock and warrants for partnership interest $ 0 $ 0 $ 1,793,000
=========== =========== ===========
Issuance of common stock and warrants for equity in wholly
owned sub. $ 950,000 $ 0 $ 0
=========== =========== ===========
</TABLE>
Attention is directed to the foregoing auditors' report and to the
accompanying notes to these financial statements.
F-17
<PAGE> 137
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Walnut is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a Business Development Company ("BDC") under
the Investment Company Act of 1940 (as amended, the "Investment Company Act").
As such, Walnut, among other requirements, is 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, 1998, Walnut has
three primary business focuses: (i) investing in start-up and early stage
development companies; (ii) operating an investment vehicle that specializes in
bridge financing to small to medium-sized companies; and (iii) providing
accounts receivable factoring services to small and medium sized businesses.
Walnut 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. Walnut 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. Walnut engages in its accounts receivable factoring service
business through its two wholly-owned subsidiaries; Pacific Financial Services
Corp., a Washington corporation ("Pacific Financial"), which was acquired in
January 1998; and (2) Inland Financial Corp., a Washington corporation ("Inland
Financial") which was acquired in October 1998. Walnut engages 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 Walnut may seek to cease to be a BDC upon the acquisition of additional
operating businesses. However, Walnut may not change the nature of its business
so as to cease to be a BDC unless such change is approved by Walnut's
stockholders in accordance with the Investment Company Act. As a result of the
technical nature of the Investment Company Act, Walnut'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, Walnut 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 June 17, 1996, Walnut issued 133,663 shares of Common Stock,
together with five-year warrants to purchase an additional 116,391 shares of
Common Stock at an exercise price of $18.00, 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
UPLP. The warrants issued in the Universal Acquisition were subsequently
canceled pursuant to an exchange offer made by Walnut 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. 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, Walnut 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 8,333 shares
of Common Stock and 5,833 Class A Redeemable Common Stock purchase warrants (a
"Class A Warrant" and collectively, the "Class A Warrants"). Pursuant to the
1997 Private Placement, Walnut issued 666,667 shares of Common Stock and 466,667
Class A Warrants for gross proceeds of $4,000,000. Walnut used a portion of the
proceeds of the 1997 Private Placement to acquire all of the issued and
outstanding capital
F-18
<PAGE> 138
stock of Pacific Financial Services Corporation. Also on December 18, 1997,
Walnut consummated the sale of an additional 166,667 Class A Warrants to certain
investors for $100,000.
On January 28, 1998, Walnut acquired all the outstanding common stock
of Pacific Financial for $3,000,000 consisting of $1,500,000 in cash, 39,022
shares of Walnut's common stock valued at $300,000, $300,000 in short term notes
and $900,000 in notes payable January 2, 2002. 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 guaranteed by Walnut and bear interest at 8%.
Pacific is in the business of accounts receivable factoring in the Northwest
United States.
On October 19, 1998, Walnut acquired Inland Financial through the
merger of a newly formed, wholly owned subsidiary of Walnut with and into Inland
Financial with Inland Financial continuing after such merger as the surviving
corporation. Upon consummation of the merger, Walnut received all the
outstanding shares of capital stock of the surviving corporation and the former
stockholders of Inland Financial received in the aggregate $650,000 in cash,
153,393 shares of Walnut's common stock valued at $650,000, and $150,000 in
short term notes. The short-term notes are guaranteed by Walnut and bear
interest at 8% per annum. Such stockholders are eligible to receive additional
payments of cash, notes and stock of Walnut valued at up to $950,000, based on
the net income performance of Inland through April 2000. Inland is in the
business of accounts receivable factoring in the Northwest United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The financial statements include the
accounts of Walnut, Walnut Capital, Universal Bridge, Walnut Funds and Walnut
Consulting, each from the applicable date of acquisition or organization.
Investments in Pacific and Inland are recorded at cost which approximate fair
market value. Inter-company transactions and balances have been eliminated in
consolidation.
NET LOSS PER SHARE. Walnut adopted SFAS No. 128 "Earnings Per Share" in
the period ended December 31, 1997 and has retroactively applied the effects
thereof for 1996. 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. In January 1999, Walnut
effected a 1 for 6 reverse stock split. All share and per share amounts have
been retroactively adjusted to account for the split.
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.
INVESTMENT VALUATION. The non-marketable investments and partnership
interests are stated at fair value as determined by the Board at December 31,
1998 and 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 made 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, 1998 and 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. Walnut 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, Walnut establishes a
reserve against the face value and does not accrue additional interest. A
reserve may be established for the full amount due to Walnut if the Board
determines that the issuer will be unable to fulfill its obligation to Walnut.
F-19
<PAGE> 139
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 (market/fair value) at the beginning of the
period.
INTEREST INCOME. Walnut 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. Walnut 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 Walnut 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 Walnut.
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 (benefit) consists of the taxes payable
(benefits available) for the current period and the change in deferred tax
assets and liabilities during the period.
Walnut 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. Walnut files a consolidated federal income tax return with
its four wholly owned subsidiaries.
CASH AND CASH EQUIVALENTS. Walnut 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 Walnut to concentrations of credit risk
consist principally of temporary cash investments with commercial banks. Walnut
had no temporary cash on deposit in excess of insured amounts as of December 31,
1998.
MARGIN ACCOUNTS. Walnut 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, Walnut 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)
F-20
<PAGE> 140
but disclose the pro forma effects on net income (loss) had the fair value of
the options been expensed. Walnut 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 $2,000,000 at December 31, 1998 (the "Walnut
Debentures"). Walnut Debentures with a principal balance of $2,000,000 are
payable to SBIC Funding Corp. or its designee on September 1, 1999 and bears
interest at 8.8%, payable semiannually on March 1, 1999 and September 1, 1999.
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 Walnut, except from undistributed
realized earnings computed in accordance with SBA regulations.
In 1998, the SBA issued a finding that Walnut had violated Section
107.700, by purchasing securities from a big business as defined. Walnut
believes the SBA is in error in their interpretation of this finding, by
including shares held by employees of the seller as being affiliated with such
seller. The SBA has also informed Walnut that it is in violation of section
107.503(c) and 107.650 and valuation guidelines for SBICs. Walnut disagrees with
the SBA's interpretation of the requirements and the matter is being discussed
with the SBA. The SBA also found the company in violation of Section 107.825(e),
purchase of securities from non-issuers. Walnut believes this finding to be
inconsistent with actions taken by the SBA in the past, and has entered into
discussions with the SBA to clarify the issue. Further, Walnut Capital did not
file its Form 468 timely for the year ended December 31, 1998. This report was
due on March 31, 1999. Management believes that none of these findings will have
material effect on Walnut Capital, or Walnut as a whole.
As of December 31, 1998 and December 31, 1997, the Walnut Debentures
payable are due as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
1998 $2,000,000
1999 $2,000,000 $2,000,000
---------- ----------
$2,000,000 $4,000,000
========== ==========
</TABLE>
B) NOTES PAYABLE TO BANKS
On August 31, 1995, Walnut 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 quarterly principal
payment of $250,000 commencing on December 31, 1997 with a maturity date of June
30, 1999. On December 31, 1998, this bank loan was further amended to require an
immediate principal payment of $100,000 and quarterly principal payments
thereafter and it has an amended maturity date of December 31, 1999. Following
the principal payment required on such date, the loan had a principal balance of
$1,025,000 on December 1998. The interest rate associated with this loan is
ANB's base rate plus 2% (10.5% as of December 31, 1998 and 1997). Two Directors
of Walnut personally guarantee the loan.
C) NOTES PAYABLE TO RELATED PARTIES
In April 1997, Walnut received an unsecured loan from a related party
in the amount of $400,000. Such loan bears interest at 9.5% per annum. The loan
is to be repaid in four quarterly installments commencing March 31, 1998. The
first and second installments were paid on April 1, 1998 and July 1998,
respectively. The third and fourth
F-21
<PAGE> 141
payments which were due on October 1, 1998 and January 1, 1999 respectively have
been deferred and Walnut is allowed to defer further principal payments until
the quarter ending June 30, 1999 provided that quarterly interest is paid on the
outstanding balance.
In connection with the transaction through which Walnut acquired Inland
Financial, Walnut borrowed $250,000 from each of two related parties. Walnut
issued to each entity a promissory note which matures on October 13, 2001. The
promissory notes bear interest at a rate of 15% per year payable quarterly.
4. MARGIN BROKERAGE ACCOUNTS
Brokerage margin payable to one investment banker consists of advances
of $894,000 under a line of credit as of December 31, 1998. The brokerage
account accrues interest on a monthly basis at the brokers' call rate plus 1%
(7.75% at December 31, 1998) and is collateralized by 200,000 shares of First
Health Group common stock, having a fair market value of approximately
$3,200,000 at December 31, 1998, and 22,872 shares of Mariner Post-Acute
Network, Inc. common stock, having a fair market value of approximately $109,000
at December 31, 1998.
Brokerage margin payable to a second investment banker consists of
advances of $799,000 under a line of credit as of December 31, 1998. 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% (7.5% at December 31, 1998). This line
of credit is collateralized by 55,000 shares of First Health Group, Inc. common
stock, having a fair market value of approximately $911,000 at December 31,
1998, 117,885 shares of Mariner Post-Acute Network, Inc. common stock, having a
fair market value of approximately $553,000 at December 31, 1998, and 300,000
shares of I-Flow Corp. common stock, having a fair market value of approximately
$366,000 at December 31, 1998.
5. INCOME TAXES
As at December 31, 1998 and 1997, the components of Walnut's net
deferred tax asset and liability were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liability:
Unrealized gains $ 0 $(2,162,000)
Deferred tax asset:
Unrealized losses 1,082,000
Alternative minimum tax credit 145,000
Deferred compensation 120,000
Net operating loss benefit 1,632,000 2,118,000
----------- -----------
2,979,000 (44,000)
Valuation allowance (2,979,000) 0
----------- -----------
Net deferred tax asset (liability) $ 0 $ (44,000)
=========== ===========
</TABLE>
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. Additionally, in 1998, it was determined that Walnut would fully
reserve its deferred tax asset as the realization of such asset was not assured.
The valuation allowance was increased by $2,979,000 for the year ended December
31, 1998.
F-22
<PAGE> 142
The components of the income taxes for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Tax (benefit) on net income:
Federal $ 7,000 $ (729,000) $ (1,073,000)
State 1,000 (129,000) (195,000)
----------------- ---------------- ----------------
Total $ 8,000 $ (858,000) $ (1,268,000)
================= ================ ================
Tax expense on realized gain:
Federal $ (6,000) $ 1,182,000 $ 988,000
State (1,000) 209,000 174,000
----------------- ---------------- ----------------
Total $ (7,000) $ 1,391,000 $ 1,162,000
================= ================ ================
Tax expense (benefit) on unrealized
loss: Federal $ 37,000 $ (417,000) $ (824,000)
State 6,000 (74,000) (145,000)
----------------- ---------------- ----------------
$ 43,000 $ (491,000) $ (969,000)
Total ================= ================ ================
</TABLE>
Walnut's effective federal tax rate was 0.5% in 1998, compared to an
overall statutory rate of 34%. This difference was due to Walnut fully reserving
its deferred tax asset.
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
Pre-tax (loss)/gain $ (8,624,000) $ (919,000) $ (4,202,000)
=============== ================ ================
Federal tax expense/(benefit) at
statutory rate of 34% (2,932,000) (312,000) (1,428,000)
Non-deductible items related to
wholly-owned subsidiary 0 390,000 374,000
State tax, net of federal benefit (129,000) (55,000) (96,000)
Alternative minimum tax 38,000 80,000 27,000
Increase in valuation allowance 2,979,000 0 0
--------------- --------------- ----------------
(44,000) 103,000 (1,123,000)
Other - net 0 (61,000) 48,000
--------------- --------------- ----------------
Tax (benefit) expense $ (44,000) $ 42,000 $ (1,075,000)
=============== =============== ================
</TABLE>
F-23
<PAGE> 143
As of December 31, 1998, Walnut had net operating loss carryforwards
available for federal income tax purposes as follows:
<TABLE>
<CAPTION>
Expiration Amount
-------------------------------- ----------------
<S> <C>
2007 $ 1,067,000
2008 1,933,000
2009 643,000
2010 295,000
2018 143,000
----------------
$ 4,081,000
================
</TABLE>
6. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
A. LEASE
Walnut Capital leases office space and services, also utilized by
Walnut, from an affiliate at approximately $5,000 per month as of December 31,
1998. The lease is renewable annually at the discretion of the parties. Walnut
paid approximately $56,000, $58,000, and $57,000 for rent for the years ended
December 31, 1998, 1997, and 1996, respectively, and $10,000, $9,000, and
$70,000 for services for the years ended December 31, 1998, 1997 and 1996,
respectively.
B. EMPLOYMENT AGREEMENTS
Walnut entered into employment agreements with each of Burton W. Kanter
and Joel S. Kanter in January 1996. Each of the agreements expired by its terms
in February 1998. Mr. Burton Kanter's employment agreement provided that he was
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 1998, 1997 and 1996 and are being accrued
by Walnut. The terms and conditions of the employment agreement of Mr. Joel
Kanter was generally identical to that of Burton Kanter except that Joel Kanter
was 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 increase such salary to $225,000 for 1998 (see Footnote 7 - Related
Party Transactions). Joel Kanter's agreement also differed in that Joel Kanter
agreed not to compete with Walnut or NFS (but not Walnut Capital) for a period
of three years after his termination of employment with Walnut Capital.
C. GUARANTEES OF INDEBTEDNESS
Walnut guarantees the indebtedness of each of Pacific Financial and
Inland Financial under their respective revolving lines of credit. Subject to
certain conditions, Inland Financial is permitted to borrow up to $2,500,000
under its credit facility and Pacific Financial is permitted to borrow up to
$1,000,000 under its credit facility. Walnut's guarantee of each facility is a
guarantee of payment and not a guarantee of collection.
7. RELATED PARTY TRANSACTIONS
Walnut and its subsidiaries retain a law firm at which an officer of
Walnut has been of counsel since 1993. The wife of such officer has been an
employee of and is currently a partner in such firm. Legal fees of approximately
F-24
<PAGE> 144
$115,000, $249,000 and $165,000 were incurred by Walnut for the years ended
December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, 1997 and 1996, approximately $120,000, $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 balance sheet.
As described above at Footnote 6.b., Walnut retains Mr. Burton W.
Kanter and his sole proprietorship doing business as BK Consultants to render
services regarding Walnut's operations and investment matters. There were no
payments to him in 1998, 1997 and 1996, but $100,000 in salary was accrued by
Walnut for 1998, 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.
Mr. Joel S. Kanter and Mr. Burton Kanter personally guarantee the
amounts due to ANB under Walnut's line of credit (see Footnote 3.b.).
8. CONCENTRATION OF RISK
Walnut has significant holdings of investments in the health care
industry. Total investments in the health care industry in debt and equity
securities were approximately $6,085,000 and $14,367,000 as of December 31, 1998
and 1997 respectively (including unrealized appreciation of approximately
$1,095,000 and $9,248,000 as of December 31, 1998 and 1997 respectively).
Additionally, substantially all of Walnut'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
Walnut from time to time makes commitments to provide financing in the
form of loans, debt securities and equity investments. Walnut'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,
1998, no commitments were outstanding.
Walnut evaluates each portfolio investee's credit worthiness on a
case-by-case basis. Generally, collateral is not obtained by Walnut upon the
extension of credit.
10. STOCKHOLDERS' EQUITY
A. PREFERRED STOCK.
Walnut is authorized to issue up to 1,000,000 shares of its
preferred stock in one or more series. As of December 31, 1998, no shares of
preferred stock were outstanding.
B. COMMON STOCK.
In December 1997, in connection with the 1997 Private
Placement, Walnut issued 666,667 shares of Common Stock and 466,667 warrants,
exercisable through December, 2000 for net proceeds of $46,000 in 1998 and
$3,098,000 in 1997. The exercise price of these warrants is $9.00.
In February 1998, Walnut issued 39,022 shares of common stock
in the acquisition of Pacific Financial Services Corp.
F-25
<PAGE> 145
In October 1998, Walnut issued 153,393 shares of common stock
in the acquisition of Inland Financial Services Corp.
C. COMMON STOCK OPTIONS AND WARRANTS.
(1) In 1994, Walnut adopted the NFS Services, Inc. (Utah) 1994
Incentive Stock Option Plan, which was amended and restated and approved by
Walnut's stockholders in December 1997 (as amended, the "1994 Plan"). The 1994
Plan is administered by a stock incentive plan administrative committee
appointed by Walnut's Board of Directors (the "1994 Plan Committee"). The 1994
Plan Committee has the authority, subject to approval by Walnut'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.
Walnut's Board of Directors has reserved 1,000,000 shares of Common Stock for
issuance under the 1994 Plan. Walnut has granted options under the Plan as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- ----------------------------------
Shares Weighted avg. Shares Weighted avg.
exercise price exercise price
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 35,167 $11.28 42,250 $15.30
Granted 16,667 $ 7.86 33,167 $11.04
Expired 0 (12,750) $17.04
Canceled 0 (27,500) $14.46
--------------- ---------------
Options outstanding at end of year 51,834 $10.18 35,167 $11.28
=============== ===============
Options exercisable at end of year 24,750 $11.22 19,583 $11.16
=============== ===============
</TABLE>
The weighted average life of options outstanding is 7.37 years.
(2) In connection with the Business Combination, Walnut
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
Walnut'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 24,993 shares of Common
Stock, and awards of nonstatutory options to purchase 109,495 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 24,993 shares were canceled in connection with termination of
employment. Of the non-qualified stock options, options for 11,170 shares were
also canceled in 1997. Options outstanding at year end are subject to a variety
of vesting requirements and, at December 31, 1997, 97,107 shares were
exercisable. The exercise price of the options outstanding pursuant to the 1987
Plan is $10.80 per share of Common Stock. The average exercise price of options
outstanding under the 1987 Plan is $10.80. As a result of the Business
Combination, no further awards will be granted under the 1987 Plan. During the
year ended December 31, 1998 and 1997, no options to acquire Common Stock were
exercised.
(3) In December 1997, Walnut sold 166,667 warrants for
$100,000 to five investors. The exercise price of the warrants, which were
immediately exercisable, is $9.00.
F-26
<PAGE> 146
11. CONDENSED FINANCIAL INFORMATION OF SUBSIDIARY
The following is the condensed financial information of Universal
Bridge's majority-owned subsidiary, Universal Partners, LP., as of and for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
<S> <C> <C>
Statement of Operations Data
Net investment (loss) income $ (81,000) $ (114,000)
Realized gains on sale of investments 4,000 553,000
Unrealized gain (loss) on investments (416,000) 177,000
----------------- ---------------
Net income (loss) (493,000) $ 616,000
================ ===============
Balance Sheet Data
Investments in marketable equity securities
(cost of $450,000 and $662,000, $ 748,000 $ 986,000
respectively)
Investments in non-marketable equity securities
(cost of $955,000 and $534,000, 729,000 434,000
respectively)
Investments in non-marketable debt securities
(less reserves of $375,000 and $320,000,
respectively) 480,000 485,000
---------------- ---------------
$ 1,957,000 $ 1,905,000
================ ===============
Total assets $ 2,328,000 $ 2,790,000
Total liabilities 58,000 56,000
---------------- ---------------
Partnership capital $ 2,270,000 $ 2,734,000
================ ===============
</TABLE>
12. STOCK OPTION COMPENSATION
Walnut 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
Walnut 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. Walnut has
elected the disclosure-only alternative.
Walnut has computed the pro forma disclosures required under SFAS 123
for employee stock options granted as of December 31, 1996 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 is $6.96. There were no employee options granted during 1998 or 1997.
In estimating the value of options pursuant to the accounting
provisions of Financial Accounting Standard No SFAS 123 Walnut used the
following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Risk free interest rate 5.9% - 7.9%
Expected life 5 years
Expected volatility 67%
Dividend yield 0
</TABLE>
F-27
<PAGE> 147
If compensation cost was measured using the fair value provisions of
SFAS 123 then Walnut's net loss and net loss per share would have been
approximately $3,226,000 and ($1.36) and, for the year ended December
31, 1996.
F-28
<PAGE> 148
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
----------------- -----------------
<S> <C> <C>
Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,069,000 in 1999 and
$1,080,000 in 1998 ) $ 1,199,000 $ 5,132,000
Non-marketable equity securities (cost of $13,483,000 in 1999
and $13,483,000 in 1998) 7,227,000 7,287,000
Non-marketable debt securities (cost of $1,413,000 in 1999
and $1,418,000 in 1998) 723,000 723,000
Partnership Interests (Cost of $1,762,000 in 1999 and
$1,762,000 in 1998) 1,879,000 1,894,000
----------------- -----------------
Total portfolio securities 11,028,000 15,036,000
Cash and cash equivalents 2,067,000 140,000
Other assets 158,000 146,000
----------------- -----------------
Total assets 13,253,000 15,322,000
Liabilities:
Margin payable to brokers 0 1,692,000
Notes payable to banks 925,000 1,025,000
Notes payable to related parties 700,000 700,000
Accounts payable, accrued expenses and other current liabilities 650,000 600,000
Accrued officer's compensation 325,000 300,000
Debentures payable 2,000,000 2,000,000
----------------- -----------------
Net assets $ 8,653,000 $ 9,005,000
----------------- =================
Preferred stock, no stated value, 1,000,000, no shares issued
Common stock, $.01 par value, 50,000,000 shares authorized,
3,350,533 and 3,301,863 issued and outstanding $ 198,000 $ 198,000
Additional paid in capital 19,137,000 19,137,000
Accumulated deficit:
Net investment loss (14,668,000) (14,293,000)
Net realized gain on investment 13,648,000 9,628,000
Net unrealized depreciation of investments (9,662,000) (5,665,000)
----------------- -----------------
Net assets applicable to outstanding common shares
(equivalent to $2.58 and $2.73 per share based on
3,350,533 and 3,301,863 outstanding common shares
at March 31, 1999 and December 31, 1998, respectively) $ 8,653,000 $ 9,005,000
================= =================
</TABLE>
F-29
<PAGE> 149
WALNUT FINANCIAL SERVICES, INC.
INVESTMENTS IN SECURITIES
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
Common and Preferred Stocks -
Healthcare - 19%
American Psych Systems, Inc. 122,950 $ 150,000
Greystone Medical Group, Inc. 200,000 40,000
HP America Inc. 66,667 0
I-Flow Corporation 300,000 863,000
Ivonyx Group Services, Inc. 100,000 100,000
Mariner Post-Acute Network (formerly Paragon Health) 140,757 326,000
Med Images, Inc. 241,530 454,000
MHM Services, Inc. 131,955 66,000
Rainbow Medical, Inc. 25,000 50,000
Sovereign Medical Acquisition Corp. -Common 4,000 24,000
Sovereign Medical Acquisition Corp. -Units 3,333 20,000
----------
2,093,000
----------
High technology - 5%
Logic Devices Incorporated 45,000 128,000
Madison Info. Tech. - Preferred A 60,000 150,000
Madison Info. Tech. - Preferred B 60,000 150,000
Multimedia Games, Inc. 2,500 11,000
Thermo Information Solutions, Inc. 10,000 90,000
J.L. Wickham Co., Inc. -Common 250,696 0
J.L. Wickham Co., Inc. -Preferred 281,788 0
----------
529,000
----------
Communications - 10%
International Business Network 70,000 105,000
Trans Global Services, Inc. 83,839 93,000
Vision III Imaging, Inc. 10,835 867,000
----------
1,065,000
----------
Biotechnology - 4%
BioHorizons Implant Systems, Inc. 193,934 300,000
Metatech Corp. 14,817 0
Optiva Corporation 10,000 63,000
Osteoimplant Technology, Inc. 80,000 16,000
Vaxgen, Inc. 22,800 83,000
----------
462,000
----------
Environmental - 0%
Clean America Corp. 59,375 0
Inorganic Recycling, Inc. 10,000 0
----------
0
----------
Finance - 32%
Inland Financial Corp. (wholly-owned subsidiary) 100 1,328,000
</TABLE>
F-30
<PAGE> 150
<TABLE>
<S> <C> <C>
Pacific Financial Services, Inc. (wholly-owned 300 2,212,000
-----------
subsidiary)
3,540,000
-----------
Other - 7%
Automotive Performance Group 50,000 100,000
Linter's, Inc. 42,784 75,000
ESynch Corp. (formerly SoftKat, Inc.) - Common 155,309 40,000
ESynch Corp. (formerly SoftKat, Inc.) - Preferred 120,000 123,000
VINnet Holdings, Inc. - Common 25,000 125,000
VINnet Holdings, Inc. - Preferred A 180 180,000
VINnet Holdings, Inc. - Preferred B 37,643 94,000
-----------
737,000
-----------
Total common and preferred stocks (cost $14,552,000) 8,426,000
Debt securities - 6%
Inland Financial (wholly-owned subsidiary) 500,000
Pacific Financial (wholly-owned subsidiary) 200,000
TCOM Services, Inc. 0
VINnet Holding, Inc. 23,000
-----------
Total debt securities (cost $1,413,000) 723,000
-----------
Partnership interests - 17%
Universal Partners. L.P. (majority-owned subsidiary) 1,879,000
-----------
Total partnership interests (cost $1,762,000) 1,879,000
-----------
Total - 100% (cost $17,727,000) $11,028,000
-----------
</TABLE>
F-31
<PAGE> 151
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------- ------------------
1999 1998
-------------------- ------------------
<S> <C> <C>
Investment income:
Interest income 26,000 34,000
Dividend income 0 0
-------------------- ------------------
Total income 26,000 34,000
Expenses:
Interest expense 111,000 177,000
General and administrative 290,000 304,000
-------------------- ------------------
Net investment (loss) before taxes (375,000) (447,000)
Income tax benefit 0 179,000
-------------------- ------------------
Net investment (loss) (375,000) (268,000)
-------------------- ------------------
Realized and unrealized gains on investments:
Realized gain on sale of investments before income tax 4,020,000 959,000
Income tax provision 0 (384,000)
-------------------- ------------------
Net realized gain on sale of investments 4,020,000 575,000
-------------------- ------------------
Unrealized (depreciation) on investments before income tax (3,997,000) (928,000)
Income tax benefit 0 371,000
-------------------- ------------------
Net unrealized (depreciation) on investments (3,997,000) (557,000)
-------------------- ------------------
Net realized and unrealized gains (losses) on investments 23,000 18,000
-------------------- ------------------
Net increase (decrease) in net assets resulting from operations $ (352,000) $ (250,000)
==================== ==================
Loss per share - basic and diluted $ (0.11) $ (0.08)
-------------------- ------------------
Weighted average shares outstanding 3,350,533 3,135,400
==================== ==================
</TABLE>
F-32
<PAGE> 152
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $ (375,000) $ (268,000)
Net realized gains on investments 4,020,000 575,000
Net unrealized depreciation on investments (3,997,000) (557,000)
---------------- ----------------
(352,000) (250,000)
---------------- ----------------
Increase in net assets resulting from capital share transactions:
Issuance of 39,022 shares of common stock for Pacific Financial
Services, Inc. 0 300,000
Expenditures attributable to issuance of common stock 0 (74,000)
---------------- ----------------
0 226,000
Total increase (decrease) in net assets (352,000) (24,000)
---------------- ----------------
Net assets at beginning of period 9,005,000 16,674,000
---------------- ----------------
Net assets at end of period $ 8,653,000 $ 16,650,000
================ ================
</TABLE>
F-33
<PAGE> 153
<TABLE>
<CAPTION>
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------------
1999 1998
-------- ------
<S> <C> <C>
Cash flows from operating activities:
Net decrease in net assets resulting from operations $ (352,000) $ (250,000)
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Net unrealized depreciation of investments 3,997,000 928,000
Net realized gain on investments (4,020,000) (959,000)
Change in net deferred tax liability 0 (194,000)
Changes in assets and liabilities:
Other assets (12,000) (42,000)
Other liabilities 75,000 (35,000)
---------------- -------------
Net cash used in operating activities (312,000) (552,000)
---------------- -------------
Cash flows from investing activities:
Purchases of common stock, healthcare 0 (140,000)
Purchases of common stock, other 0 (12,000)
Purchase of equity and debt securities, wholly-owned subsidiary 0 (2,082,000)
Proceeds from sale of general partnership interest 0 122,000
Proceeds from sale of common stock, healthcare 4,031,000 1,458,000
Proceeds from sale of common stock, other 0 53,000
Expenditures attributable to issuance of common stock 0 (75,000)
Collections from debt securities 0 200,000
---------------- -------------
Net cash provided by investing activities 4,031,000 (476,000)
---------------- -------------
Cash flows from financing activities:
Repayments of short term debt (100,000) (200,000)
Decrease in margin accounts (1,692,000) (2,286,000)
---------------- -------------
Net cash (used in) provided by financing activities (1,792,000) (2,486,000)
---------------- -------------
Net increase (decrease) in cash and cash equivalents 1,927,000 (3,514,000)
Cash and cash equivalents, beginning 140,000 6,479,000
================ =============
Cash and cash equivalents, end $ 2,067,000
$ 2,965,000
================ =============
Supplemental Information:
Cash paid for interest $ 123,000 $ 163,000
================ =============
Issuance of common stock and warrants for equity in wholly owned
subsidiary $ 0 $ 300,000
================ =============
</TABLE>
F-34
<PAGE> 154
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION.
The accompanying consolidated financial statements as of March 31, 1999
are unaudited; however, in the opinion of the management of Walnut Financial
Services, Inc., a Utah corporation (the "Company"), such statements include all
adjustments (consisting of normal recurring accruals) necessary to present a
fair statement of the information presented therein. The balance sheet at
December 31, 1998 was derived from the audited financial statements at such
date.
Pursuant to accounting requirements of the Securities and Exchange
Commission ("SEC") applicable to quarterly reports on Form 10-Q, the
accompanying financial statements and these notes do not include all disclosures
required by generally accepted accounting principles for audited financial
statements. Accordingly, these statements should be read in conjunction with
Walnut's most recent audited financial statements included in its Form 10-K for
the fiscal year ended December 31, 1998.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for fiscal years.
Walnut has determined it is required to present its financial
statements in accordance with generally accepted accounting principles and SEC
regulations in the format applicable to investment companies, which generally
means that investments are reported at fair market value rather than cost,
including wholly-owed subsidiaries.
2. ORGANIZATION.
Walnut is a closed-end management investment company, which elected on
October 15, 1997 to be regulated as a Business Development Company ("BDC") under
the Investment Company Act of 1940 (as amended, the "Investment Company Act").
As such, Walnut, among other requirements, is 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 March 31, 1999, Walnut had
three primary business focuses: (i) investing in start-up and early stage
development companies; (ii) operating an investment vehicle that specializes in
bridge financing to small to medium-sized companies; and (iii) providing
accounts receivable factoring services to small and medium sized businesses.
Walnut engages in its investment business 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. In the past,
Walnut also made investments 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. Walnut Growth did not make any investments in
1998, has not made any investments in 1999, and Walnut does not expect Walnut
Growth to make any future investments. Walnut 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. Walnut engages in its accounts receivable
factoring service business through its two wholly-owned subsidiaries; Pacific
Financial Services Corp., a Washington corporation ("Pacific Financial"), which
was acquired in January 1998; and Inland Financial Corp., a Washington
corporation ("Inland Financial") which was acquired in October 1998. Walnut
engaged in the human resources and quality assurance consulting business through
its wholly-owned subsidiary, Walnut Consulting, Inc., a Delaware corporation
("Walnut Consulting"), during 1997 and 1998. The operations of Walnut Consulting
were not significant to the revenues of Walnut. Management anticipates that
Walnut may seek to cease to be a BDC upon the acquisition of additional
operating businesses.
F-35
<PAGE> 155
However, Walnut may not change the nature of its business so as to cease to be a
BDC unless such change is approved by Walnut's stockholders in accordance with
the Investment Company Act. As a result of the technical nature of the
Investment Company Act, Walnut'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, Walnut 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 October 27, 1997, Walnut 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 8,333 shares
of Common Stock and 5,833 Class A Redeemable Common Stock purchase warrants (a
"Class A Warrant" and collectively, the "Class A Warrants"). Pursuant to the
1997 Private Placement, Walnut issued 666,667 shares of Common Stock and 466,667
Class A Warrants for gross proceeds of $4,000,000. Walnut 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. Also on
December 18, 1997, Walnut consummated the sale of an additional 166,667 Class A
Warrants to certain investors for $100,000.
On January 28, 1998, Walnut acquired all the outstanding common stock
of Pacific Financial for $3,000,000 consisting of $1,500,000 in cash, 39,022
shares of Walnut's common stock valued at $300,000, $300,000 in short term notes
and $900,000 in notes payable January 2, 2002. 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 guaranteed by Walnut and bear interest at 8%.
Pacific is in the business of accounts receivable factoring in the Northwest
United States.
On October 19, 1998, Walnut acquired Inland Financial through the
merger of a newly formed, wholly owned subsidiary of Walnut with and into Inland
Financial with Inland Financial continuing after such merger as the surviving
corporation. Upon consummation of the merger, Walnut received all the
outstanding shares of capital stock of the surviving corporation and the former
stockholders of Inland Financial received in the aggregate $650,000 in cash,
153,393 shares of Walnut's common stock valued at $650,000, and $150,000 in
short term notes. The short-term notes are guaranteed by Walnut and bear
interest at 8% per annum. Such stockholders are eligible to receive additional
payments of cash, notes and stock of Walnut valued at up to $950,000, based on
the net income performance of Inland through April 2000. Inland is in the
business of accounts receivable factoring in the Northwest United States.
On January 22, 1999, Walnut effected a one-for-six reverse stock split
(the "Reverse Stock Split") of its Common Stock, pursuant to stockholder
approval granted at the annual meeting of the stockholders of Walnut held on
January 20, 1999. Fractional shares held by any holder of Common Stock after
aggregating all of such holder's shares were rounded up to the nearest whole
share. Immediately following the effectiveness of the Reverse Stock Split, after
giving effect to the rounding up of fractional shares, there were 3,350,533
issued and outstanding shares of Common Stock. All share amounts, price and
other material terms described herein for the Common Stock and options and
warrants exercisable therefor give effect to the Reverse Stock Split regardless
of the date with respect to which such share amounts, price or other terms are
being described.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PRINCIPLES OF CONSOLIDATION. The financial statements of Walnut include
the accounts of Walnut, Walnut Funds, Walnut Consulting and Universal Bridge.
Investments in Pacific Financial and Inland Financial are recorded at costs
which approximate fair market value. Intercompany transactions and balances have
been eliminated in consolidation.
NET INCOME (LOSS) PER SHARE. Net income (loss) per share is computed
based on the weighted-average number of shares outstanding for each period.
Common stock equivalents have been considered where they are not anti-dilutive.
All share and per share amounts have been retroactively adjusted to account for
the Reverse Stock Split.
F-36
<PAGE> 156
4. RELATED PARTY TRANSACTIONS.
Walnut and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $43,000 were paid to such firm by Walnut
during the three months ended March 31, 1999 for reimbursement of expenses and
legal services incurred. Such expenses and fees were incurred in connection with
normal business activities and costs associated with the acquisition of Inland
Financial and the Annual Meeting Proxy.
In April 1997, Walnut received an unsecured loan from a related party
in the amount of $400,000. Such loan bears interest at 9.5% per annum. The loan
is to be repaid in four quarterly installments commencing March 31, 1998. The
first and second installments were paid on April 1, 1998 and July 1998,
respectively. The third and forth payments which were due on October 1, 1998 and
January 1, 1999 respectively have been deferred and Walnut is allowed to defer
further principal payments until the quarter ending June 30, 1999 provided that
quarterly interest is paid on the outstanding balance.
In connection with the transaction through which Walnut acquired Inland
Financial, Walnut borrowed $250,000 from each of two related parties. Walnut
issued to each entity a promissory note, which matures on October 13, 2001. The
promissory notes bear interest at a rate of 15% per year payable quarterly.
F-37
<PAGE> 157
FINANCIAL INFORMATION OF TOWER HILL
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Hambro America Securities, Inc.
New York, New York
We have audited the accompanying statement of financial condition of Hambro
America Securities, Inc. as of March 31, 1998, and the related statements of
operations, changes in stockholder's equity, and cash flows for the year then
ended. 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 audit.
We conducted our audit 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hambro America Securities, Inc.
as of March 31, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The information contained in the supplemental
material listed in the accompanying index is presented for purposes of
additional analysis and is not required for the fair presentation of the
financial statements, but is supplementary information required by Rule 17a-5 of
the Securities and Exchange Commission. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
May 20, 1998
F-38
<PAGE> 158
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Assets:
Cash $ 271,683
Fees receivable 34,263
Prepaid expenses 25,036
Furniture and equipment, at cost, less accumulated depreciation of $104,165 65,767
--------------
$ 396,749
==============
Liabilities and Stockholder's Equity:
Liabilities:
Accrued expenses and other liabilities $ 51,523
Stockholder's equity:
Cumulative preferred stock - variable rate, $1.00 par value, shares 1,000,000
authorized 3,000,000 issued and outstanding 1,000,000
Additional paid-in capital 10,348,418
Accumulated deficit (11,003,192)
345,226
--------------
396,749
==============
</TABLE>
See accompanying notes to financial statements
F-39
<PAGE> 159
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
March 31, 1998
--------------
<S> <C>
Revenue:
Advisory and corporate finance fees $ 210,461
Interest 18,454
228,915
Expenses
Employee compensation and benefits 823,393
Occupancy 110,912
General and administrative 381,188
Interest 137,293
Depreciation 12,893
Other 87,966
1,553,645
Net loss $ (1,324,730)
</TABLE>
See accompanying notes to financial statements
F-40
<PAGE> 160
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDER's Equity
<TABLE>
<CAPTION>
Year Ended March 31, 1998
----------------------------------------------------------------------------------------
Cumulative Preferred
Stock-Variable Rate
---------------------------------
Additional
Number of Paid-in Accumulated
Shares Amount Capital Deficit Total
-------------- -------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1997 $ 2,391,294 $ 2,391,294 $ 904,000 $ (3,068,255) $ 227,039
Merger of Hambro America - - 6,706,635 (6,610,207) 96,428
Securities, Inc.
Reclass of preferred stock to (2,391,294) (2,391,294) 2,391,294 - -
additional paid-in capital
Conversion of debt to equity - - 346,489 - 346,489
Issuance of preferred stock 1,000,000 1,000,000 - - 1,000,000
Net loss - - - (1,324,730) (1,324,730)
-------------- -------------- ------------- ---------------- ---------------
Balance, March 31, 1998 $ 1,000,000 $ 1,000,000 $ 10,348,418 $ (11,003,192) $ 345,226
============== ============== ============= ================ ===============
</TABLE>
See accompanying notes to financial statements
F-41
<PAGE> 161
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended
March 31, 1998
--------------
<S> <C>
Cash flows from operating activities:
Net loss $ (1,324,730)
Adjustments to reconcile net loss to net cash (used) in operating
activities:
Depreciation 12,983
Realized loss on securities owned 10,000
Changes in assets and liabilities, net of effects of the
merger:
Due from broker 48,408
Fees and other receivable 10,319
Prepaid expenses (8,740)
Other assets 52,530
Accrued expenses and other liabilities (203,169)
--------------
Net cash (used) in operating activities (1,402,399)
==============
Cash flows from investing activities
Purchase of furniture and equipment (5,711)
Cash flows from financing activities
Issuance of preferred stock 1,000,000
Loans from Parent 469,228
Net cash used in financing activities 1,469,228
Net increase in cash 61,118
Cash, beginning of year 210,565
--------------
Cash, end of year $ 271,683
--------------
Supplemental disclosure of cash flow information
Cash paid during the year for interest $ 137,293
--------------
</TABLE>
Supplemental schedule of non-cash financing activities
During the year ended March 31, 1998, the Company converted $346,489 of
debt with its Parent to equity.
See accompanying notes to financial statements
F-42
<PAGE> 162
HAMBRO AMERICA SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Hambro America Securities, Inc. (the "Company") is a registered
broker/dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. The Company is engaged in the
private placement of corporate debt and equity securities with accredited
investors as defined by SEC Rule 501 of Regulation D. In addition, the Company
provides general financial advisory services to corporations.
The Company does not hold customer funds or safekeep customer
securities pursuant to SEC Rule 15c3-3(k)(2)(i).
In May 1997, Hambro America Securities, Inc. was merged into Hambro
Resource Development, Inc. ("HRDI") and simultaneously HRDI changed its name to
Hambro America Securities, Inc.
The Company is a wholly-owned subsidiary of Hambro America,
Incorporated (the "Parent"), which was owned by Hambros PLC, a London based
merchant bank. In March 1998 Hambros PLC was acquired by Societe Generale, a
French bank.
In April 1998, a group of investors purchased 99% of all of the issued
and outstanding equity securities of the Company for $74,250. In May 1998, the
same group purchased the remaining 1% for $750. In connection with this
acquisition, Hambro America Incorporated contributed capital of $904,775 in
April 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION. Advisory fee income is recognized as earned,
taking into consideration the terms of contractual arrangements and the period
in which services are rendered. Corporate finance fees are generally recognized
upon closing of the transaction.
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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
INCOME TAXES. The Company accounts for income taxes using the asset
and liability method. Deferred income taxes arise from the differences between
the financial reporting and income tax bases of assets and liabilities based
upon statutory tax rates enacted for future periods. There are no significant
differences between the Company's financial statement and taxable income.
The Company files a consolidated Federal return and a combined New
York State and New York City return with the Parent. For financial statement
purposes, the Company's provision for Federal, state and local taxes has been
computed on a stand-alone basis.
3. NET CAPITAL REQUIREMENT
The Company is subject to the SEC Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum net capital and a specified
ratio of aggregate indebtedness to net capital, both as defined, which shall not
exceed 15 to 1. At March 31, 1998, the Company had regulatory net capital and a
regulatory net capital requirement of $220,160 and $5,000, respectively. The
Company's aggregate indebtedness to net capital ratio was .23 to 1.
F-43
<PAGE> 163
4. TRANSACTIONS WITH RELATED PARTIES
a. Balances at March 31, 1998 and income and expenses for the year
ended March 31, 1998 with related parties are as follows:
Statement of operations
Interest expense paid to the Parent $137,293
b. The Parent provided the Company with a working capital credit line
of $1,500,000. Outstanding borrowings under this arrangement bear interest at
the London Interbank Offered Rate plus one point. At March 31, 1998, there were
no borrowings under this arrangement.
c. The Company received administrative support from and utilized
assets owned by the Parent and other affiliates pursuant to agreements that did
not provide for intercompany charges.
5. CUMULATIVE PREFERRED STOCK - VARIABLE RATE
In order to maintain sufficient levels of regulatory net capital, the
Company has periodically issued variable rate cumulative preferred stock to the
Parent at $1 per share. The Company, at its option, may redeem the outstanding
shares at $1 per share. The Company has had no obligation to declare and pay any
dividends.
F-44
<PAGE> 164
HAMBRO AMERICA SECURITIES, INC.
COMPUTATION OF NET CAPITAL PURSUANT TO RULE 15C3-1
AND STATEMENT PURSUANT TO RULE 17A-5(D)(4)
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Computation of net capital pursuant to Rule 15c3-1
Net capital
Total stockholder's equity from statement of $ 345,226
financial condition
Less nonallowable assets
Fees receivable $ 34,263
Prepaid expenses 25,036
Furniture and equipment - net 65,767 125,066
Net capital $ 220,160
Computation of basic net capital requirement
Minimum net capital required, 6-2/3% of $51,523 pursuant $ 3,435
to Rule 15c3-1
Minimum dollar net capital requirement of broker and $ 5,000
dealer
Net capital requirement $ 5,000
Excess net capital $ 215,160
Computation of aggregate indebtedness
Accrued expenses and other liabilities $ 51,523
Total aggregate indebtedness liabilities $ 51,523
Ratio of aggregate indebtedness to net capital .23 to 1
</TABLE>
Statement pursuant to Rule 17a-5(d)(4)
No material differences between the above computation and computation
included in the Company's corresponding unaudited amended Form X-17A-5 Part IIA
filing.
F-45
<PAGE> 165
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Hambro America Securities, Inc.
New York, New York
We have audited the accompanying statement of financial condition of Hambro
America Securities, Inc. as of December 31, 1998, and the related statements of
operations, changes in stockholder's equity, and cash flows for the nine months
then ended. 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 audit.
We conducted our audit 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hambro America Securities, Inc.
as of December 31, 1998, and the results of its operations and its cash flows
for the nine months then ended in conformity with generally accepted accounting
principles.
Our audit was conducted for the purpose of forming an opinion on the financial
statements taken as a whole. The information contained in the supplemental
material listed in the accompanying index is presented for purposes of
additional analysis and is not required for the fair presentation of the
financial statements, but is supplementary information required by Rule 17a-5 of
the Securities and Exchange Commission. Such information has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
January 26, 1999
F-46
<PAGE> 166
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Assets:
Cash and cash equivalents $ 610,499
Fees and other receivable, net of allowance for doubtful accounts of $63,000 524,749
Prepaid expenses 37,980
Loan receivable, related party (note 4) 77,728
Loans receivable, stockholders (note 5) 216,049
Furniture and equipment, at cost, less accumulated depreciation of $117,845 69,633
Organizational costs, less accumulated amortization of $1,760 11,435
------------
Total assets $ 1,548,073
============
Liabilities:
Accounts payable and accrued expenses $ 222,111
Due to related party 10,000
Deferred revenues 22,917
Income taxes payable (note 6) 35,389
------------
Total liabilities 290,417
============
Stockholder's equity (note 7):
Cumulative preferred stock - variable rate, $1.00 par value, shares authorized 1,00,000
3,000,000 issued and outstanding 1,000,000
Additional paid-in capital 11,327,443
Subscriptions receivable (66,825)
Accumulated deficit (11,002,962)
------------
$ 1,257,656
$ 1,548,073
============
</TABLE>
See accompanying notes to financial statements
F-47
<PAGE> 167
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
-----------------
<S> <C>
Revenues:
Advisory and corporate finance fees $ 2,105,059
Interest 20,459
-----------
2,125,518
===========
Expenses:
Compensation and benefits 1,258,145
Occupancy and equipment rental 211,936
General and administrative 310,196
Finders fees 172,000
Professional fees 122,182
Depreciation and amortization 2,089,899
-----------
Income before provision for income taxes (note 6) $ 35,619
===========
Provision for income taxes 35,389
-----------
Net income $ 230
===========
</TABLE>
See accompanying notes to financial statements
F-48
<PAGE> 168
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDER's Equity
NINE MONTHS ENDED DECEMBER 31, 1998
CUMULATIVE PREFERRED
<TABLE>
<CAPTION>
Stock - Variable Rate Additional
Number of Paid-in Subscriptions
Shares Amount Capital Receivable
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, March 31, 1998 1,000,000 $1,000,000 $ 10,348,418 --
Capital contribution by Hambro America, Inc. -- -- 904,775 --
Capital contribution by stockholders -- -- 74,250 (66,825)
Net income -- -- -- --
--------- ---------- -------------- -------
Balance, December 31, 1998 1,000,000 $1,000,000 $ 11,327,443 (66,825)
========= ========== ============== =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
----------- -----
<S> <C> <C>
Balance, March 31, 1998 $ (11,003,192) $ 345,226
Capital contribution by Hambro America, Inc. -- 904,775
Capital contribution by stockholders -- 7,425
Net income 230 230
---------------- -------------
Balance, December 31, 1998 $ (11,002,962) $ 1,257,656
================ =============
</TABLE>
See accompanying notes to financial statements
F-49
<PAGE> 169
HAMBRO AMERICA SECURITIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31, 1998
-----------------
<S> <C>
Cash flows from operating activities:
Net income $ 230
Adjustments to reconcile net income to net cash (used) in operating
activities:
Depreciation and amortization 15,440
Provision for doubtful accounts 63,000
Changes in assets and liabilities:
Fees and other receivables (553,486)
Prepaid expenses (12,944)
Accounts payable and accrued expenses 170,588
Due to related party 10,000
Deferred Revenues 22,917
Income taxes payable 35,389
------------
Net cash (used) in operating activities $ (248,866)
============
Cash flows from investing activities:
Purchase of furniture and equipment (17,546)
Increase in organizational costs (13,195)
Net increase in loan to related party (77,728)
Net increase in loans to stockholders (216,049)
------------
(324,518)
Cash flows from financing activities:
Capital contribution by Hambro America, Inc. 904,775
Capital contribution by stockholders: 7,425
------------
Net cash provided by financing activities 912,200
Net increase in cash and cash equivalents 338,816
------------
Cash and cash equivalents, beginning of period 217,683
------------
Cash and cash equivalents, end of period $ 610,499
============
</TABLE>
See accompanying notes to financial statements
F-50
<PAGE> 170
HAMBRO AMERICA SECURITIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION
Tower Hill Securities, Inc. (the "Company") is a registered
broker/dealer under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. The Company is engaged in the
private placement of corporate debt and equity securities with accredited
investors as defined by SEC Rule 501 of Regulation D. In addition, the Company
provides general financial advisory services to corporations.
The Company does not hold customer funds or safekeep customer
securities pursuant to SEC Rule 15c3-3(k)(2)(i).
In April 1998, a group of investors purchased 99% of all of the issued
and outstanding equity securities of the Company for $74,250. In May 1998, the
same group purchased the remaining 1% for $750. In connection with this
acquisition, Hambro America, Inc. contributed capital of $904,775 in April 1998.
Effective January 20, 1999, the Company changed its name to Tower Hill
Securities, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. The Company classifies cash held in a money
market account as a cash equivalent.
DEPRECIATION. Depreciation is provided on furniture and equipment on
the straight-line method over the estimated useful lives of the assets.
REVENUE RECOGNITION. Advisory fee income is recognized as earned,
taking into consideration the terms of contractual arrangements and the period
in which services are rendered. Deferred revenue is recorded for fees which are
unearned. Corporate finance fees are generally recognized upon closing of the
transaction.
401(K) PROFIT SHARING PLAN. The Company through a related entity
maintains a 401(k) profit sharing plan for all eligible employees. Employees can
defer up to 15% of their compensation subject to certain limitations. The
Company may make discretionary matching contributions to the plan. For the nine
months ended December 31, 1998, the Company made matching contributions of
approximately $8,000.
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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
INCOME TAXES. The Company accounts for income taxes using the asset
and liability method. Deferred income taxes arise from the differences between
the financial reporting and income tax bases of assets and liabilities based
upon statutory tax rates enacted for future periods. A valuation allowance is
recorded for deferred tax assets whose realization is more likely than not.
3. NET CAPITAL REQUIREMENT
The Company is subject to the SEC's Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum regulatory net capital and a
specified ratio of aggregate indebtedness to net capital, both as defined, which
shall not exceed 15 to 1. At December 31, 1998, the Company had regulatory net
capital and a
F-51
<PAGE> 171
regulatory net capital requirement of $320,082 and $5,000, respectively. The
Company's aggregate indebtedness to net capital ratio was .91 to 1.
4. TRANSACTIONS WITH RELATED PARTIES
In October 1998, the Company loaned $95,000 to a related party. This
loan is noninterest-bearing and is being repaid over 22 months at $4,318 per
month. As of December 31, 1998, the loan to related party balance is $77,728.
In addition, the Company leases its office space from a related party
under a month-to-month arrangement. Rent expense for the nine months ended
December 31, 1998 amounted to approximately $180,000.
5. LOANS RECEIVABLE, STOCKHOLDERS
During the nine months ended December 31, 1998, the Company loaned
$216,049 to its stockholders. These loans are noninterest-bearing and have no
specified maturity date.
6. DEFERRED INCOME TAXES
The Company has a deferred tax asset of approximately $148,000
resulting from the availability of net operating loss carryforwards and a
temporary difference arising from allowance for doubtful accounts. This deferred
tax assets is offset by a valuation allowance in the same amount.
At December 31, 1998, the Company has approximately $326,000 of net
operating loss carryforwards which expire in the year 2014. Such net operating
loss carryforwards are subject to a limitation of $25,788 per year because of an
ownership change in 1998.
7. CUMULATIVE PREFERRED STOCK - VARIABLE RATE
The Company, at its option, may redeem the outstanding shares at $1
per share. The Company has had no obligation to declare and pay any dividends.
8. YEAR 2000 ISSUE (UNAUDITED)
Like other companies, the Company could be adversely affected if the
computer systems we, our suppliers or customers use do not properly process and
calculate date-related information and data from the period surrounding and
including January 1, 2000. This is commonly known as the "Year 2000" issue.
Additionally, this issue could impact noncomputer systems and devices such as
production equipment, elevators, etc. At this time, because of the complexities
involved in the issue, management cannot provide assurances that the Year 2000
issue will not have an impact on the Company's operations.
F-52
<PAGE> 172
HAMBRO AMERICA SECURITIES, INC.
COMPUTATION OF NET CAPITAL PURSUANT TO RULE 15C3-1
AND STATEMENT PURSUANT TO RULE 17A-5(D)(4)
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C> <C>
Computation of net capital pursuant to Rule 15c3-1:
Net capital:
Total stockholder's equity from statement of financial condition $ 1,257,656
Less nonallowable assets:
Fees and other receivables $ 524,749
Prepaid expenses 37,980
Loan receivable, related party 77,728
Loans receivable, stockholders 216,049
Organizational costs - net 11,435
Furniture and equipment - net 69,633 937,574
----------- -------------
Net capital $ 320,082
-------------
Computation of basic net capital requirement:
Minimum net capital required, 6-2/3% of $290,417 pursuant to Rule
15c3-1 19,361
-------------
Minimum dollar net capital requirement of broker and dealer
$ 5,000
-------------
Net capital requirement $ 5,000
-------------
Excess net capital $ 300,721
-------------
Computation of aggregate indebtedness:
Accounts payable and accrued expenses 222,111
Due to related party 10,000
Deferred revenues 22,917
Income taxes payable 35,389
-------------
Total aggregate indebtedness liabilities $ 290,417
=============
Ratio of aggregate indebtedness to net capital .91 to 1
</TABLE>
Statement pursuant to Rule 17a-5(d)(4)
No material differences between the above computation and computation
included in the Company's corresponding unaudited amended Form X-17A-5 Part IIA
filing.
F-53
<PAGE> 173
TOWER HILL SECURITIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1999
--------------
<S> <C>
Assets:
Current Assets:
Checking/Savings:
Excelsior MMA $ 168,479.74
U.S. Trust Checking 16,991.96
Total Checking/Savings 185,471.70
Accounts Receivable
Allowance for Bad Debt $ (63,000.00)
Accounts Receivable - Other 338,778.21
Total Accounts Receivable 325,778.21
Other Current Assets:
Loan Receivable R/E 69,092.00
Prepaid assets 17,638.05
--------------
Total Other Current Assets 86,730.05
--------------
Total Current Assets 668,804.96
Fixed Assets:
Computer Equipment:
Accumulated Depreciation - Computer (109,392.00)
Computer Equipment - Other 173,864.70
--------------
Total Computer Equipment 64,472.70
Furniture & Fixtures:
Accumulated Depreciation - F&F (13,424.00)
Furniture & Fixtures - Other 15,427.00
--------------
Total Furniture & Fixtures 2,003.00
--------------
Total Fixed Assets 66,475.70
Other Assets:
Loan Receivable S/H 218,963.16
Notes Receivable 100,000.00
Restricted Stock 49,837.63
Start-Up Costs
Accumulated Amortization (2,420.00)
Start-Up Costs - Other 13,195.00
Total Start-Up Costs 10,775.00
--------------
Stock Receivable 75,000.00
Total Other Assets 454,575.79
--------------
Total Assets: $ 1,185,856.45
==============
Liabilities and Equity:
Liabilities:
Current Liabilities:
Accounts Payable $ 14,534.94
Accrued Expenses 80,000.00
Total Accounts Payable 94,534.94
Other Current Liabilities:
Deferred Revenue 9,438.00
Payroll Liabilities 6,441.65
Total Other Current Liabilities 15,924.65
--------------
Total Current Liabilities 110,459.59
--------------
Total Liabilities 110,459.59
Equity:
Additional Paid in Capital 14,534.94
Retained Earnings (11,002,962.19)
Net Income (249,083.95)
Variable Rate Preferred Stock 1,000,000.00
--------------
Total Equity 1,075,396.86
--------------
Total Liabilities & Equity $ 1,185,856.45
==============
</TABLE>
F-54
<PAGE> 174
TOWER HILL SECURITIES, INC.
STATEMENT OF PROFITS AND LOSSES
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
------------------
<S> <C>
Ordinary Income/Expense:
Income:
Consulting Income $265,960.00
Reimbursed Expenses 31,581.56
-----------
Total Income 297,541.56
Expense:
Amortization Expense 660.00
Bad debt expense 641.11
Car Service 4,772.04
Communications 3,820.89
Computer supplies 5.40
Conferences & Seminars 7,085.00
Depreciation Expense 4,971.00
Dues and Subscriptions 1,107.48
Education 12,600.00
Facsimile Transmission 2,211.00
Information Services 15,995.73
Insurance:
Accidental Death & Dismemberment 110.00
Commercial 653.98
Long-term Disability 1,100.76
Short-term Disability 184.20
Umbrella 399.99
Work Comp (116.81)
-----------
Total Insurance 2,332.12
Licenses and Permits 9.00
Messenger Delivery Service 803.00
Miscellaneous 591.76
NASD and SEC Regul. Expenses 1,225.00
Office Supplies 8,829.56
Office Supplies & Cellular Phone 0.00
Outside Services
Payroll 776.90
Outside Services - Other 415.78
-----------
Total Outside Services 1,192.68
Overnight Courier 87.30
Personnel Expenses
AD&D (4.10)
Assess Fees (11.36)
Bonus-Staff 14,500.00
Employer Futa 636.12
Employer Medicare 5,214.16
Employer NYSUI 3,734.74
Employer SS 22,294.11
Life Insurance 376.20
LTD/Unemployment/Futa/Sui (9.27)
Medical Insurance 18,994.17
NYS Disability (70.10)
Retirement Plans 5,714.58
</TABLE>
F-55
<PAGE> 175
<TABLE>
<S> <C>
Salaries 234,715.47
W/C (88.66)
------------
Total Personnel Expenses 305,996.06
Premises
Commercial Rent Tax 5,686.95
Leasehold charges 4,298.13
Operating costs 22,097.91
Other 900.00
Rent 57,010.53
------------
Total Premises 89,993.52
Printing and Reproduction 0.00
Professional Fees
Accounting 12,350.00
Consulting 6,250.00
Legal Fees 2,025.00
------------
Total Professional Fees 20,625.00
Reimbursable Expenses 0.00
Repairs & Maintenance
Computer Repairs 433.73
Equipment Repairs 121.78
Locks 1.75
------------
Total Repairs & Maintenance 557.26
Service Charge 26.75
Shipping and Freight 0.00
Taxes
Federal 7,111.00
Local 4,860.00
State 0.00
Taxes - Other 140.00
------------
Total Taxes 12,111.00
Telephone
Cellular 3,644.84
Local Telephone 3,522.45
Long-Distance Telephone 18,013.32
Telephone - Other 236.69
------------
Total Telephone 25,417.30
Travel & Entertainment
Airfare 17,103.70
Automobile Expense 327.23
Car Rental 5,960.00
Entertainment (1,959.52)
Meals 2,277.37
Parking 276.21
Tolls 77.50
------------
Total Travel & Entertainment 24,062.49
Yellow Taxis 3,261.91
------------
Total Expense 550,991.36
------------
Net Ordinary Income $(253,449.80)
============
Other Income/Expense
Other Income
Interest Income 4,528.22
Other Income (162.37)
------------
Total Other Income 4,365.85
Net Other Income 4,365.85
------------
Net Income $(249,083.95)
============
</TABLE>
F-56
<PAGE> 176
EXHIBIT A
================================================================================
AGREEMENT AND PLANS OF MERGER
BY AND BETWEEN
WALNUT FINANCIAL SERVICES, INC.
AND
THCG, INC.,
AND
BY AND AMONG
THCG, INC.,
TOWER HILL ACQUISITION CORP.,
AND
TOWER HILL SECURITIES, INC.
DATED AS OF AUGUST 5, 1999
================================================================================
<PAGE> 177
AGREEMENT AND PLANS OF MERGER
AGREEMENT AND PLANS OF MERGER, dated as of August 5, 1999 (this
"AGREEMENT"), by and between Walnut Financial Services, Inc., a Utah corporation
("Walnut"), and THCG, Inc., a Delaware corporation and a wholly-owned subsidiary
of Walnut ("THCG"), and by and among THCG, Tower Hill Acquisition Corp., a New
York corporation and a wholly-owned subsidiary of THCG ("NEWCO" and together
with Walnut and THCG, the "WALNUT ENTITIES"), and Tower Hill Securities, Inc., a
New York corporation (the "Company"). Certain other capitalized terms used in
this Agreement have the meanings given them in Section 8.11.
WHEREAS, the respective boards of directors of Walnut and THCG, deeming
it advisable and for the respective benefit of Walnut and THCG and their
stockholders, have approved this Agreement pursuant to which, among other
things, Walnut will be merged with and into THCG ("MERGER 1") on the terms and
conditions contained herein and in accordance with the Revised Business
Corporation Act of the State of Utah (the "UBCA") and the General Corporation
Law of the State of Delaware (the "DGCL");
WHEREAS, the respective boards of directors of THCG, Newco and the
Company, deeming it advisable and for the respective benefit of THCG, Newco and
the Company, and their stockholders, have approved this Agreement pursuant to
which, among other things, Newco will be merged with and into the Company
("MERGER 2" and, together with Merger 1, the "MERGERS") on the terms and
conditions contained herein and in accordance with the Business Corporation Law
of the State of New York (the "NYBCL");
WHEREAS, the parties hereto intend, by approving resolutions
authorizing this Agreement, to adopt this Agreement as plans of reorganization
within the meaning of Section 368 of the United States Internal Revenue Code of
1986, as amended (the "CODE"), and the regulations promulgated thereunder, and
that the transactions contemplated by this Agreement be undertaken pursuant to
such plans;
WHEREAS, pursuant to the Mergers, each outstanding share of common
stock, par value $0.01 per share, of Walnut (the "WALNUT COMMON STOCK") and each
outstanding share of common stock, par value $0.10 per share, of the Company
(the "COMPANY COMMON STOCK") shall be automatically converted into the right to
receive the consideration specified in Article 2 upon the terms and conditions
hereinafter set forth;
WHEREAS, concurrently with the execution and delivery of this Agreement
and as a condition to the willingness of each of the Walnut Entities and the
Company to enter into this Agreement, Walnut has agreed to the issuance of
Walnut Common Stock in a private placement transaction, the conversion of
certain debt into equity of Walnut, the conversion of certain accrued
compensation into equity of Walnut and certain other related transactions as
specified in Section 5.6;
<PAGE> 178
WHEREAS, the Walnut Entities and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Mergers and to prescribe various conditions to the Mergers;
NOW, THEREFORE, in consideration of the premises and
representations, warranties, covenants and agreements herein contained, and
intending to be legally bound hereby, the Walnut Entities and the Company hereby
agree as follows:
ARTICLE 1
THE MERGERS
SECTION 1.1 The Mergers.
(a) Upon the terms and subject to the conditions of this Agreement,
at the First Effective Time and in accordance with the UBCA and the DGCL, Walnut
shall be merged with and into THCG. Following Merger 1, the separate corporate
existence of Walnut shall cease and THCG shall continue as the surviving
corporation ("SURVIVING CORPORATION 1") under the name "THCG, Inc."
(b) Upon the terms and subject to the conditions of this Agreement,
at the Second Effective Time and in accordance with the NYBCL, Newco shall be
merged with and into the Company. Following Merger 2, the separate corporate
existence of Newco shall cease and the Company shall continue as the surviving
corporation ("SURVIVING CORPORATION 2") under the name "Tower Hill Securities,
Inc."
SECTION 1.2 Closing. The closing of the transactions contemplated hereby shall
take place at the offices of Kramer Levin Naftalis & Frankel LLP, 919 Third
Avenue, New York, New York (the "CLOSING") as soon as practicable after all of
the conditions to the Closing set forth in Article 6 have been satisfied or
waived, unless another date, time or place is agreed to in writing by the
parties hereto. The date on which the Closing actually occurs is hereinafter
referred to as the "CLOSING DATE."
SECTION 1.3 Effective Time.
(a) Simultaneously with the Closing, the parties hereto shall cause
Merger 1 to be consummated by (i) filing a certificate of merger (the "FIRST
CERTIFICATE OF MERGER") in such form as is required by and executed in
accordance with the relevant provisions of the UBCA and the DGCL, and (ii)
making all other filings or recordings required under the UBCA and the DGCL.
Merger 1 shall become effective at such time as the First Certificate of Merger
is duly filed with the Secretary of State of the State of Utah and the Secretary
of State of the State of Delaware or at such subsequent time as the parties
shall agree and shall be specified in the First Certificate of Merger (the date
and time Merger 1 becomes effective being the "FIRST EFFECTIVE TIME").
(b) Immediately after the First Effective Time, the parties hereto
shall cause Merger 2 to be consummated by (i) filing a certificate of merger
(the "SECOND CERTIFICATE OF
-2-
<PAGE> 179
MERGER") in such form as is required by and executed in accordance with the
relevant provisions of the NYBCL, and (ii) making all other filings or
recordings required under the NYBCL. Merger 2 shall become effective at such
time as the Second Certificate of Merger is duly filed with the Secretary of
State of the State of New York or at such subsequent time as the parties shall
agree and shall be specified in the Second Certificate of Merger (the date and
time Merger 2 becomes effective being the "SECOND EFFECTIVE TIME" and, together
with the First Effective Time, the "EFFECTIVE TIME OF THE MERGERS").
SECTION 1.4 Certificate of Incorporation.
(a) At the First Effective Time, the certificate of incorporation of
THCG, as in effect immediately prior to the First Effective Time, shall be the
certificate of incorporation of Surviving Corporation 1, unless and until
thereafter changed or amended as provided therein or in accordance with
applicable Law.
(b) At the Second Effective Time, the certificate of incorporation of
the Company, as in effect immediately prior to the Second Effective Time, shall
be the certificate of incorporation of Surviving Corporation 2, unless and until
thereafter changed or amended as provided therein or in accordance with
applicable Law.
SECTION 1.5 By-laws.
(a) At the First Effective Time, the by-laws of THCG, as in effect
immediately prior to the First Effective Time, shall be the by-laws of Surviving
Corporation 1, unless and until thereafter changed or amended as provided
therein or in the certificate of incorporation of Surviving Corporation 1 or by
applicable Law.
(b) At the Second Effective Time, the by-laws of the Company, as in
effect immediately prior to the Second Effective Time, shall be the by-laws of
Surviving Corporation 2, unless and until thereafter changed or amended as
provided therein or in the certificate of incorporation of Surviving Corporation
2 or by applicable Law.
SECTION 1.6 Directors and Officers
(a) Subject to Section 5.22, at the First Effective Time, the
directors of THCG immediately preceding the First Effective Time shall become
the directors of Surviving Corporation 1 to serve until the earlier of their
death, resignation or removal or until their respective successors are duly
elected and qualified. At the First Effective Time, the officers of THCG
immediately preceding the First Effective Time shall become the officers of
Surviving Corporation 1 until the Second Effective Time or until the earlier of
their death, resignation or removal or until their respective successors are
duly elected or qualified. At the Second Effective Time, all of the current
officers of THCG shall resign and the individuals identified on Schedule 1.6(a)
shall become the officers of Surviving Corporation 1 to serve until the earlier
of their death, resignation or removal or until their respective successors are
duly elected and qualified.
(b) At the Second Effective Time, the directors of the Company
immediately preceding the Second Effective Time shall become the directors of
Surviving Corporation 2 to
-3-
<PAGE> 180
serve until the earlier of their death, resignation or removal or until their
respective successors are duly elected and qualified. At the Second Effective
Time, the officers of the Company immediately preceding the Second Effective
Time shall become the officers of Surviving Corporation 2 until the earlier of
their death, resignation or removal or until their respective successors are
duly elected and qualified.
ARTICLE 2
CONVERSION OF CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS
SECTION 2.1 Merger 1. As of the First Effective Time by virtue of Merger 1 and
without any action on the part of the holder of any shares of Walnut Common
Stock or any shares of capital stock of THCG:
(a) Conversion of Capital Stock of Walnut. Each share of Walnut
Common Stock issued and outstanding immediately prior to the First Effective
Time shall be converted into one (1) validly issued, fully paid and
non-assessable share of common stock, par value $.01 per share, of Surviving
Corporation 1 (the "THCG COMMON STOCK").
(b) Walnut Stock Options. Prior to the First Effective Time, each
Option outstanding at the First Effective Time to purchase shares of Walnut
Common Stock (a "WALNUT OPTION") under the Amended and Restated Walnut Financial
Services, Inc. 1994 Incentive Stock Option Plan and the Walnut Capital
Corporation 1987 Stock Option Plan, as amended (the "WALNUT OPTION PLANS"),
other than the Walnut Options listed on Schedule 2.1(b)(i) (the "CONVERTED
WALNUT OPTIONS"), shall be purchased for the amount set forth on Schedule
2.1(b)(ii), which amount equals the value of said Walnut Options as determined
using a Black-Scholes valuation. As of the First Effective Time, each of the
Converted Walnut Options shall be assumed by THCG and shall be converted into
and shall constitute an Option to purchase, for the same exercise price per
share and on the same terms and conditions as are contained in such Walnut
Option on the date hereof, one fully paid and non-assessable share of THCG
Common Stock. As soon as practicable following the First Effective Time, THCG
will cause to be delivered to each holder of an outstanding Converted Walnut
Option an appropriate notice setting forth such holder's rights pursuant thereto
and that such Converted Walnut Option shall continue in effect on the same terms
and conditions.
(c) Conversion of Capital Stock of THCG. Each share of THCG Common
Stock issued and outstanding immediately prior to the First Effective Time and
held by Walnut shall be cancelled and retired and cease to exist, without any
conversion thereof.
(d) Treasury Shares. Each share of Walnut Common Stock and THCG
Common Stock held in treasury by Walnut and THCG, respectively, immediately
prior to the First Effective Time shall be cancelled and retired and cease to
exist, without any conversion thereof.
SECTION 2.2 Merger 2. At the Second Effective Time, by virtue of Merger 2 and
without any action on the part of the holder of any shares of Company Common
Stock or any shares of capital stock of Newco:
-4-
<PAGE> 181
(a) Conversion of Capital Stock of Newco. Each share of common stock
of Newco, par value $0.10 per share (the "NEWCO COMMON STOCK"), issued and
outstanding immediately prior to the Second Effective Time shall be converted
into one (1) validly issued, fully paid and non-assessable share of common
stock, par value $0.10 per share, of Surviving Corporation 2.
(b) Conversion of Company Common Stock. Subject to the provisions of
Sections 2.3(c), (h), (i), (j) and (k), each share of Company Common Stock
issued and outstanding immediately prior to the Second Effective Time shall be
converted into 37,228.145 shares of THCG Common Stock, plus an additional number
of shares of THCG Common Stock equal to one percent of the number of restricted
shares of THCG Common Stock intended to be granted to Shai Novik pursuant to
Section 2.2(c) and which do not vest and are forfeited in accordance with the
terms and conditions thereof; provided that upon such forfeiture and transfer to
the holders of Company Common Stock, such shares shall no longer be restricted.
(c) Conversion of Novik Options. As of the Second Effective Time,
each outstanding Option to purchase shares of Company Common Stock that is held
by Shai Novik (the "NOVIK OPTIONS"), which Novik Options are the only Options
outstanding to purchase shares of Company Common Stock, shall be cancelled. It
is intended that Shai Novik shall receive a grant of 372,281.45 restricted
shares of THCG Common Stock under the THCG Stock Incentive Plan pursuant to his
employment agreement with THCG attached hereto as Exhibit C-2. The restricted
shares of THCG Common Stock will be subject to the terms and conditions
contained in a restricted stock agreement, in form and content reasonably
satisfactory to Walnut, including provisions that such shares shall be
restricted as to transferability and subject to forfeiture and shall become
transferable and vested in the same proportions and at the same time as the
Novik Options were scheduled to become exercisable. At the Second Effective
Time, Shai Novik shall deliver to THCG a copy of the agreement evidencing the
Novik Options, marked "cancelled," against receipt of a certificate for such
restricted shares.
(d) Treasury Shares. Each share of Company Common Stock and Company
Preferred Stock and each share of Newco Common Stock held in treasury by the
Company and Newco, respectively, immediately prior to the Second Effective Time
shall be cancelled and retired and cease to exist, without any conversion
thereof.
SECTION 2.3 Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time of the Mergers,
Walnut shall appoint Corporate Stock Transfer to act as exchange agent (the
"EXCHANGE AGENT") in the Mergers.
(b) THCG to Provide Common Stock. Promptly after the First Effective
Time, THCG shall deposit with the Exchange Agent, for exchange in accordance
with this Article 2, the aggregate number of shares of THCG Common Stock
issuable pursuant to Section 2.1(a) in exchange for the issued and outstanding
shares of Walnut Common Stock. Promptly after the Second Effective Time, THCG
shall deposit with the Exchange Agent, for exchange in accordance with this
Article 2, the aggregate number of shares of THCG Common Stock
-5-
<PAGE> 182
issuable pursuant to Section 2.2(b) in exchange for the issued and outstanding
shares of the Company Common Stock and the Novik Options, respectively.
(c) Exchange Procedures. Within three business days after the
Effective Time of the Mergers, the Exchange Agent shall cause to be delivered to
each holder of record of (i) a certificate or certificates which immediately
prior to the First Effective Time represented outstanding shares of Walnut
Common Stock and (ii) a certificate or certificates which immediately prior to
the Second Effective Time represented outstanding shares of Company Common Stock
(collectively, the "OLD CERTIFICATES") whose shares were converted into the
right to receive THCG Common Stock pursuant to Sections 2.1(a) and 2.2(b),
respectively, (x) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Old Certificates shall
pass, only upon delivery of the Old Certificates to the Exchange Agent and shall
be in such form and have such other provisions as THCG may reasonably specify),
and (y) instructions to effect the surrender of the Old Certificates for
certificates evidencing shares of THCG Common Stock. Upon surrender of an Old
Certificate for cancellation to the Exchange Agent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, and such other documents as may be required by such
instructions, the holder of such Old Certificates shall be entitled to receive
in exchange therefor a certificate evidencing the number of whole shares of THCG
Common Stock to which such holder is entitled pursuant to Sections 2.1(a) and
2.2(b), and the Old Certificate so surrendered shall forthwith be cancelled.
Until so surrendered, each outstanding Old Certificate that, prior to the
Effective Time of the Mergers, evidenced shares of Walnut Common Stock or
Company Common Stock will be deemed from and after the Effective Time of the
Mergers, for all corporate purposes, other than the payment of dividends or
other distributions, to evidence the ownership of the number of whole shares of
THCG Common Stock into which such shares of Walnut Common Stock or Company
Common Stock shall have been so converted pursuant to Sections 2.1(a) and
2.2(b).
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions or payments declared or made after the Effective Time of the
Mergers with respect to shares of THCG Common Stock with a record date after the
Effective Time of the Mergers will be paid to the holder of any unsurrendered
Old Certificate with respect to the shares of THCG Common Stock evidenced
thereby until the holder of record of such Old Certificate shall surrender such
Old Certificate pursuant to this Section 2.3. Subject to applicable Law,
following surrender of any such Old Certificate, there shall be paid to the
record holder of the certificates evidencing whole shares of THCG Common Stock
issued in exchange therefor, without interest, at the time of such surrender,
the amount of dividends or other distributions or payments with a record date
after the Effective Time of the Mergers theretofore paid with respect to such
whole shares of THCG Common Stock.
(e) Transfers of Ownership. If any certificate for shares of THCG
Common Stock is to be issued in a name other than that in which the Old
Certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the Old Certificate so surrendered will
be properly endorsed and otherwise in proper form for transfer, accompanied by
all documents required to evidence and effect such transfer pursuant to this
Section 2.3, and that the Person requesting such transfer will have paid to THCG
or any agent designated by it any fees or transfer or other Taxes required by
reason of the issuance of a certificate for shares of THCG Common Stock in any
name other than that of the registered holder of the Old
-6-
<PAGE> 183
Certificate surrendered, or established to the satisfaction of THCG or any agent
designated by it that such fees and Taxes have been paid or are not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
Section 2.3, none of the Exchange Agent, Surviving Corporation 1, Surviving
Corporation 2 or any party hereto shall be liable to any holder of shares of
Walnut Common Stock or Company Common Stock for any amount properly paid to a
public official pursuant to any applicable abandoned property, escheat or
similar Law.
(g) No Further Ownership Rights in Walnut Common Stock or Company
Common Stock. All shares of THCG Common Stock issued upon the surrender for
exchange of shares of Walnut Common Stock or Company Common Stock in accordance
with the terms hereof shall be deemed to have been issued in full satisfaction
of all rights pertaining to such shares of Walnut Common Stock or Company Common
Stock which were outstanding immediately prior to the Effective Time of the
Mergers. If, after the Effective Time of the Mergers, Old Certificates are
presented to Surviving Corporation 1 or Surviving Corporation 2 or the Exchange
Agent for any reason, they shall be cancelled and exchanged as provided in this
Section 2.3.
(h) Lost, Stolen or Destroyed Certificates. In the event any Old
Certificates evidencing shares of Walnut Common Stock or Company Common Stock
shall have been lost, stolen or destroyed, the Exchange Agent may require,
before issuing certificates in respect of the shares of THCG Common Stock
evidenced thereby, such affidavits and indemnities and bonds in support thereof
as it may reasonably require with respect to such loss, theft or destruction.
(i) Dissenters' Rights. Notwithstanding any provision of this
Agreement to the contrary, any shares of Walnut Common Stock or Company Common
Stock outstanding immediately prior to the Effective Time of the Mergers held by
a holder who has demanded and perfected the right, if any, for appraisal of
those shares in accordance with the provisions of Section 16-10a-1301 of the
UBCA or Section 910 of the NYBCL and as of the Effective Time of the Mergers has
not withdrawn or lost such right to appraisal ("DISSENTING SHARES") shall not be
converted into or represent a right to receive THCG Common Stock pursuant to
Sections 2.1(a) and 2.2(b), but the holder shall only be entitled to such rights
as are granted by said Sections of the UBCA or NYBCL. If a holder of shares of
Walnut Common Stock or Company Common Stock who demands appraisal of those
shares under the UBCA or NYBCL shall effectively withdraw or lose (through
failure to perfect or otherwise) the right to appraisal, then, as of the
Effective Time of the Mergers or the occurrence of such event, whichever last
occurs, those shares shall be converted into and represent only the right to
receive THCG Common Stock as provided in Sections 2.1(a) and 2.2(b), without
interest, upon compliance with the provisions, and subject to the limitations,
of Section 2.3. Walnut and the Company shall give each other (i) prompt notice
of any written demands for appraisal of any shares of Walnut Common Stock or
Company Common Stock, attempted withdrawals of such demands, and any other
instruments served pursuant to the UBCA or NYBCL and received by either Walnut
or the Company relating to stockholders' rights of appraisal. Walnut and the
Company shall not, except with the prior written consent of the other,
voluntarily make any payment with respect to any demands for appraisals of
Walnut Common Stock or Company Common Stock, offer to settle or settle any such
demands or approve any
-7-
<PAGE> 184
withdrawal of any such demands.
(j) Withholding Rights. THCG or the Exchange Agent shall be entitled
to deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Walnut Common Stock or Company Common Stock such
amounts as THCG or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or foreign Tax Law. To the extent that amounts are so deducted and
withheld by THCG or the Exchange Agent, such deducted and withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the holder
of Walnut Common Stock or Company Common Stock in respect of which such
deduction and withholding was made by THCG or the Exchange Agent.
(k) No Fractional Shares. Notwithstanding any provision of this
Agreement to the contrary, neither certificates nor scrip for fractional shares
of THCG Common Stock shall be issued in connection with the Mergers, but in lieu
thereof each holder of shares of Company Common Stock otherwise entitled to a
fraction of a share of THCG Common Stock pursuant to the provisions of 2.2(b)
and 2.2(c) shall receive one whole share of THCG Common Stock in respect of such
fraction. If more than one Old Certificate shall be surrendered for the account
of the same Company Stockholder, the number of whole shares of THCG Common Stock
for which such Old Certificates shall be exchanged pursuant to Section 2.3 shall
be computed on the basis of the aggregate number of shares of Company Common
Stock evidenced by such Old Certificates.
SECTION 2.4 Tax Consequences. It is intended by the parties hereto that the
Mergers shall each constitute a reorganization within the meaning of Section 368
of the Code and the regulations promulgated thereunder. The parties hereto
hereby adopt this Agreement as a "plan of reorganization" within the meaning of
Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations
with respect to each of Merger 1 and Merger 2.
-8-
<PAGE> 185
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Walnut Entities as
follows:
SECTION 3.1 Organization and Qualification; Subsidiaries.
(a) Each of the Company and its Subsidiary has been duly organized
and is validly existing and in good standing under the laws of the jurisdiction
of its incorporation or organization, as the case may be, and has the requisite
corporate or other power and authority to own, lease and operate its properties
and to carry on its business as it is now being conducted. Each of the Company
and its Subsidiary is duly qualified or licensed to do business, and is in good
standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failure to be so qualified or licensed
and in good standing that could not reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect. For purposes of this
Agreement, "COMPANY MATERIAL ADVERSE EFFECT" means any change, event or effect
(i) in, on or relating to the business of the Company and its Subsidiary that
is, or is reasonably likely to be, materially adverse to the business,
properties, assets, liabilities, condition (financial or otherwise) or results
of operations of the Company and its Subsidiary, taken as a whole, other than
any change or effect arising out of general economic conditions in the United
States or (ii) that may prevent or materially delay the performance of this
Agreement, the Transaction Documents or the Related Agreements by the Company or
the consummation by the Company of the transactions contemplated by this
Agreement, the Transaction Documents or the Related Agreements (including Merger
2 and the Related Transactions). Except for the formation of a wholly-owned
subsidiary in the form of a limited liability company (the "LLC"), the Company
has no Subsidiaries and is not a general partner in any partnership.
(b) The Company has delivered to Walnut correct and complete copies
of the Company's Certificate of Incorporation and By-laws (collectively, the
"COMPANY CHARTER DOCUMENTS") and will deliver to Walnut all comparable
organizational documents of its Subsidiary. The Company Charter Documents and
all comparable organizational documents of the Subsidiary of the Company are or
will be at the Closing in full force and effect. The Company is not in violation
of any of the provisions of the Company Charter Documents and its Subsidiary is
not in violation of its organizational documents.
-9-
<PAGE> 186
SECTION 3.2 Capitalization of the Company and its Subsidiary.
(a) The authorized capital stock of the Company consists of (i) 1,000
shares of Company Common Stock, of which 100 shares are issued and outstanding,
and (ii) 1,000,000 shares of Variable Rate Cumulative Preferred Stock, par value
$1.00 per share (the "COMPANY PREFERRED STOCK"), of which 100 shares are issued
and outstanding as of the date hereof. All of the issued and outstanding shares
of Company Common Stock and Company Preferred Stock have been duly authorized
and validly issued and are fully paid, nonassessable and free of preemptive
rights. None of the issued and outstanding shares of Company Common Stock and
Company Preferred Stock were issued in violation of the registration
requirements of any federal or state securities laws. As of the date hereof, ten
shares of Company Common Stock were reserved for issuance and issuable upon or
otherwise deliverable in connection with the exercise of outstanding Options
issued pursuant to the Company Stock Option Plans. Schedule 3.2(a)(1) to this
Agreement sets forth, as of the date hereof, (i) the Persons to whom Options
have been granted by the Company, (ii) the exercise price for Options held by
each such Person, (iii) the number of vested and unvested Options and (iv) the
termination dates of such Options. Except as set forth on Schedule 3.2(a) to
this Agreement, no shares of the Company's capital stock have been issued other
than pursuant to the exercise of the Company Options already in existence on
such date, and no Options have been granted by the Company to any Person. Except
as set forth above, as set forth on Schedule 3.2(a)(2) to this Agreement, or as
contemplated in the Related Agreements, there are outstanding (i) no shares of
capital stock or other voting securities of the Company or its Subsidiary, (ii)
no securities of the Company or its Subsidiary convertible or exercisable into
or exchangeable for shares of capital stock or voting securities of the Company
or its Subsidiary, (iii) no Options to acquire from the Company or its
Subsidiary, and no obligations of the Company or its Subsidiary to issue, any
capital stock, voting securities or securities convertible or exercisable into
or exchangeable for capital stock or voting securities of the Company or its
Subsidiary, (iv) no equity equivalents, interests in the ownership or earnings
of the Company or its Subsidiary or other similar rights (including stock
appreciations rights) (the items listed in subclauses (i), (ii), (iii) and (iv)
of this sentence being referred to, collectively, as "COMPANY SECURITIES") and
(v) no obligations of the Company or its Subsidiary to repurchase, redeem or
otherwise acquire any Company Securities. Except as set forth on Schedule
3.2(a)(3) to this Agreement, there are no stockholder agreements, voting trusts
or other agreements or understandings to which the Company or its Subsidiary is
a party or by which it is bound relating to the voting or registration of any
shares of capital stock of the Company or its Subsidiary.
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SECTION 3.3 Authority Relative to this Agreement; Board Action.
(a) The Company has all necessary corporate power and authority to
execute and deliver this Agreement and the Transaction Documents and the Related
Agreements to which it is a party, to consummate the transactions contemplated
by this Agreement and the Transaction Documents and the Related Agreements to
which it is a party (including Merger 2), and to perform its obligations under
this Agreement and the Transaction Documents and the Related Agreements to which
it is a party. The execution and delivery by the Company of this Agreement and
the Transaction Documents and the Related Agreements to which it is a party and
the consummation by the Company of the transactions contemplated by this
Agreement and the Transaction Documents and the Related Agreements to which it
is a party (including Merger 2) have been duly authorized and approved by the
board of directors of the Company (the "COMPANY BOARD") and the Company
Stockholders, and no other corporate proceedings on the part of the Company are,
or will be, necessary to authorize this Agreement and the Transaction Documents
and the Related Agreements to which it is a party or to consummate the
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements to which it is a party (including Merger 2). Each of this
Agreement and each of the Transaction Documents and the Related Agreements to
which the Company is a party have been, or will be at the Closing, assuming the
due authorization, execution and delivery of the same by each of the other
parties hereto or thereto, duly and validly executed and delivered by the
Company and constitutes, or will constitute at the Closing, a valid, legal and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, subject to (i) bankruptcy, insolvency, reorganization,
fraudulent conveyance or transfer, moratorium and other similar laws now or
hereafter in effect relating to or affecting creditors' rights generally, and
(ii) general principles of equity (regardless of whether considered in a
proceeding at law or in equity).
(b) The Company Board, by resolutions duly adopted at a meeting duly
called and held and not subsequently rescinded or modified in any way, has duly
(i) determined that this Agreement and Merger 2 are in the best interests of the
Company and its stockholders (the "COMPANY STOCKHOLDERS"), (ii) approved this
Agreement and Merger 2, and (iii) unanimously recommended that the Company
Stockholders approve this Agreement and Merger 2.
(c) The Company Stockholders, by resolutions duly adopted and not
subsequently rescinded or modified in any way, have unanimously approved this
Agreement and Merger 2.
SECTION 3.4 Financial Statements.
(a) For purposes of this Agreement: (i) "COMPANY FINANCIAL STATEMENTS"
shall mean (x) the audited balance sheet of the Company as of December 31, 1998
and the related income statement for the nine months then ended, and (y) the
audited balance sheet of the Company as of March 31, 1998 and the related income
statement for the year then ended, and (ii) "COMPANY INTERIM FINANCIAL
STATEMENTS" shall mean the unaudited balance sheet of the Company as of June 30,
1999 and the related income statement for the six months ended on June 30, 1999.
The Company has delivered to Walnut correct and complete copies of the Company
Financial Statements and Company Interim Financial Statements.
(b) The Company Financial Statements (i) have been prepared from the
books and
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records of the Company in accordance with GAAP, and (ii) fairly present in all
material respects the financial position of the Company as of March 31, 1998 and
December 31, 1998 and the results of its operations for the fiscal year and the
nine months then ended, respectively. The Company Interim Financial Statements
(i) have been prepared from the books and records of the Company in accordance
with GAAP on a basis consistent with the Company's historical practices, and
(ii) fairly present in all material respects the financial position of the
Company as of June 30, 1999 and the results of its operations for the six months
then ended; provided, however, the Company Interim Financial Statements (x) are
subject to normal year-end adjustments, and (y) do not include footnotes.
(c) As of June 30, 1999, the Company has the assets listed on Schedule
3.4(c)(i) and the liabilities listed on Schedule 3.4(c)(ii). Other than as
listed on Schedules 3.4(c)(i) and 3.4(c)(ii) and except for the potential tax
liabilities identified on Schedule 3.4(c)(iii), the Company has no other
material assets or liabilities, other than reasonable accounting and attorneys
fees and such other reasonable expenses related to Merger 2 and the Related
Transactions.
SECTION 3.5 Information Supplied. None of the written information supplied or to
be supplied by the Company for inclusion in (a) the Form 8-F pertaining to the
Company (the "COMPANY 8-F INFORMATION") will, at the time the Form 8-F is filed
with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Investment Company Act, contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (b) the
Proxy Statement (the "COMPANY PROXY INFORMATION") will, on the date first mailed
to the Walnut Stockholders and at the time of the Walnut Stockholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. Notwithstanding the foregoing, the Company makes no representation
or warranty with respect to any information supplied by any of the Walnut
Entities which is contained or incorporated by reference in, or furnished in
connection with the preparation of, the Proxy Statement.
SECTION 3.6 Consents and Approvals; No Violations.
(a) Except as set forth on Schedule 3.6(a) to this Agreement, no
filing, registration or submission with or notice to, and no permit,
authorization, consent or approval of or with (collectively, "FILINGS AND
APPROVALS"), any Governmental Entity is, or will be, necessary for the execution
and delivery by the Company of this Agreement, the Transaction Documents or the
Related Agreements to which the Company is a party or the consummation by the
Company of the transactions contemplated by this Agreement, the Transaction
Documents or the Related Agreements to which it is a party (including Merger 2,
the formation of the LLC and the Transfer), except (i) Filings and Approvals to,
of or with the National Association of Securities Dealers and any other
regulatory, self-regulatory and trade agencies, boards, commissions,
organizations, departments and entities (the "REGULATORY AGENCIES"), (ii) the
filing of the Second Certificate of Merger with the Secretary of State of the
State of New York, and (iii) Filings and Approvals that, if not made or
obtained, could not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect.
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(b) Except as set forth on Schedule 3.6(b) to this Agreement, no
consent or approval of any third party is, or will be, necessary for the
execution and delivery by the Company of this Agreement, the Transaction
Documents, or the Related Agreements to which the Company is a party or the
consummation by the Company of the transactions contemplated by this Agreement,
the Transaction Documents or the Related Agreements to which it is a party
(including Merger 2).
(c) Except as set forth on Schedule 3.6(c) to this Agreement, neither
the execution, delivery and performance by the Company of this Agreement, the
Transaction Documents or the Related Agreements to which the Company is a party,
nor the consummation by the Company of the transactions contemplated by this
Agreement, the Transaction Documents or the Related Agreements to which it is a
party (including Merger 2) will (i) conflict with or result in any breach of any
provision of the Company Charter Documents or any comparable organizational
documents of the Subsidiary of the Company, (ii) result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration or Lien) under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, lease, license, contract, agreement or other
instrument or obligation to which the Company is a party or by which its
properties or assets are bound, or (iii) assuming that all Filings and Approvals
have been made or obtained, violate any Law or any Governmental Order applicable
to the Company or its properties or assets, except in the case of clauses (ii)
or (iii) for violations, breaches or defaults which could not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect.
SECTION 3.7 No Default. Except as set forth on Schedule 3.7 to this Agreement,
neither the Company nor its Subsidiary is in default or violation (and no event
has occurred which with due notice or the lapse of time or both would constitute
a default or violation) of any term, condition or provision of (i) the Company
Charter Documents or any comparable organizational documents of the Subsidiary
of the Company, (ii) any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which the Company or
its Subsidiary is a party or by which any of their respective properties or
assets are bound, or (iii) any Governmental Order applicable to the Company or
its Subsidiary or any of their respective properties or assets, except in the
case of clauses (ii) or (iii) for violations, breaches or defaults that could
not reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
SECTION 3.8 No Undisclosed Liabilities; Absence of Changes.
(a) Except as set forth on Schedule 3.8(a) to this Agreement, and
except as reflected in, reserved against or otherwise described in the balance
sheet included in the Company Financial Statements (including the notes
thereto), as of December 31, 1998, neither the Company nor its Subsidiary had
any liabilities or obligations of any nature, whether accrued, contingent or
otherwise, and whether due or to become due or asserted or unasserted, which
would be required by GAAP to be reflected in, reserved against or otherwise
described in the balance sheet of the Company (including the notes thereto) as
of such date, except for liabilities and obligations that could not reasonably
be expected to have, individually or in the aggregate, a Company Material
Adverse Effect.
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(b) Except as disclosed by the Company on Schedule 3.8(b) to this
Agreement, since January 1, 1999, the business of the Company and its Subsidiary
has been carried on only in the ordinary course and in a manner consistent with
past practice, neither the Company nor its Subsidiary has incurred any
liabilities or obligations of any nature, whether accrued, contingent or
otherwise, and whether due or to become due or asserted or unasserted, except in
the ordinary course of business and in a manner consistent with past practice,
none of which could reasonably be likely to have, individually or in the
aggregate, a Company Material Adverse Effect, and there has not been any event,
condition or occurrence that, individually or in the aggregate, has resulted or
which could reasonably be expected to result in, a Company Material Adverse
Effect. Except as disclosed on Schedule 3.8(b) to this Agreement, since January
1, 1999, there has not been (i) any material change by the Company in its
accounting methods, principles or practices, (ii) any declaration, setting aside
or payment of any dividend or distribution in respect of shares of the capital
stock of the Company or its Subsidiary or any redemption, purchase or other
acquisition of any of the Company Securities, or (iii) any increase in the
compensation or benefits or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards, restricted stock awards or similar
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation payable or to become payable, or the Company's obligations in
respect of any program or arrangement for, officers or other key employees of
the Company or its Subsidiary.
SECTION 3.9 No Litigation. Except as disclosed on Schedule 3.9 to this
Agreement, there is no suit, claim, action, investigation, litigation,
arbitration or other proceeding ("PROCEEDING") pending or, to the Knowledge of
the Company, threatened against the Company or its Subsidiary or any of their
respective properties or assets which (a) if adversely determined, could
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect, or (b) questions the validity of this Agreement, any
Transaction Document or any Related Agreement to which the Company is a party or
any action to be taken by the Company in connection with the consummation of the
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements to which the Company is a party (including Merger 2) or could
otherwise prevent, delay, make illegal or otherwise interfere with the
consummation of such transactions. Except as disclosed on Schedule 3.9 to this
Agreement, neither the Company nor its Subsidiary is subject to any outstanding
Governmental Order which could reasonably be expected to have a Company Material
Adverse Effect.
SECTION 3.10 Compliance with Applicable Law.
(a) Except as disclosed on Schedule 3.10(a) to this Agreement, the
Company and its Subsidiary have made or have obtained and hold all
registrations, filings, submissions, certificates, determinations, permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Entities (collectively, "PERMITS") necessary for the lawful conduct of their
respective businesses, except where the failure to make, obtain or hold any such
Permit would not have, individually or in the aggregate, a Company Material
Adverse Effect. Except as disclosed on Schedule 3.10(a) to this Agreement, (i)
the Permits of the Company and its Subsidiary are valid and in full force and
effect, (ii) neither the Company nor its Subsidiary is in default under, and no
condition exists that with notice or lapse of time or both would
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constitute a default under, such Permits, and (iii) none of such Permits will be
terminated or impaired or become terminable, in whole or in part, as a result of
the transactions contemplated by this Agreement, the Transaction Documents or
the Related Agreements to which the Company is a party, except in the case of
clauses (i), (ii) and (iii) for Permits, the failure of which to be valid or in
full force and effect or of the Company or its Subsidiary to hold could not
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(b) Except as disclosed on Schedule 3.10(b) to this Agreement, the
businesses of the Company and its Subsidiary have not been conducted in
violation of any Law, except for violations or possible violations which could
not reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. Except as disclosed on Schedule 3.10(b) to this
Agreement, no material investigation or review by any Governmental Entity with
respect to the Company or its Subsidiary is pending or, to the Knowledge of the
Company, threatened, nor, to the Knowledge of the Company, has any Governmental
Entity indicated an intention to conduct the same.
SECTION 3.11 Employee Benefits and ERISA.
(a) Schedule 3.11(a) to this Agreement contains a true and complete
list of each material employee benefit plan, policy, program, practice,
agreement, understanding, arrangement or commitment (whether written or
unwritten) providing compensation, benefits or perquisites of any kind to any
current or former officer, employee or consultant (or to any dependent or
beneficiary thereof) of the Company, which are now, or were within the past six
years, maintained by, contributed to, by or with respect to which an obligation
to contribute exists or existed on the part of any of the Company, its
predecessors, or any other trade or business (whether or not incorporated)
which, together with the Company, is treated as a single employer under Section
414 of the Code (such other trades or businesses, collectively, the "COMMONLY
CONTROLLED COMPANY ENTITIES") or with respect to which the Company or any
Commonly Controlled Company Entity has or may have any material liability
(including, without limitation, a liability arising out of an indemnification,
guarantee, hold harmless or similar agreement) including, without limitation,
all material employment or consulting agreements, incentive, bonus, deferred
compensation, pension, profit sharing, vacation, holiday, cafeteria, medical,
disability, stock purchase, stock option, stock appreciation, phantom stock,
restricted stock or other stock-based compensation plans, policies, programs,
practices or arrangements and any "employee benefit plan" within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
from time to time ("ERISA"), whether or not subject to ERISA (each, a "COMPANY
PLAN" and together, the "COMPANY PLANS").
(b) With respect to each Company Plan, the Company has delivered or
made available to Walnut, to the extent applicable: (i) a current, correct and
complete copy of each written plan document (including without limitation, any
employment agreement, employment policies and procedures and plan instrument,
and any amendments thereto) or, to the extent no such written plan document
exists, an accurate written description thereof; (ii) any related trust
agreement or other funding instrument; (iii) the most recent determination
letter with respect to any Company Plan intended to be qualified under Section
401(a) of the Code; (iv) any summary plan description, summary of material
modifications or other material written
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communication from the Company to its employees concerning the extent of the
benefits provided under any Company Plan; and (v) for the three most recent
years (A) the Form 5500 and attached schedules, (B) audited financial statements
and (C) actuarial valuation reports.
(c) (i) Each Company Plan has been established and maintained, in
form and operation, in all material respects (A) in accordance with its terms,
and (B) in compliance with the applicable provisions of ERISA, the Code and
other applicable Laws, rules and regulations; (ii) each Company Plan that is
intended to be qualified within the meaning of Section 401(a) of the Code has
received a favorable determination letter as to its qualification, and, to the
Knowledge of the Company, nothing has occurred, whether by action or failure to
act, that would reasonably be expected to cause such determination letter to be
revoked.
(d) Except as set forth on Schedule 3.11(d), no Company Plan provides
for benefits, including, without limitation, medical or health benefits (through
insurance or otherwise), or provides for the continuation of such benefits or
coverage for any participant or any dependent or beneficiary of any participant,
after such participant's retirement or other termination of employment (except
(i) as may be required by applicable Law, (ii) retirement or death benefits
under any employee pension plan, (iii) disability benefits under any employee
welfare plan that have been fully provided for by insurance or otherwise, (iv)
deferred compensation benefits accrued as liabilities on the books of the
Company; or (v) benefits in the nature of severance pay).
(e) For each Company Plan with respect to which a Form 5500 has been
filed, no change has occurred with respect to the matters covered by the most
recent Form 5500 since the date thereof other than any such change as would not
be reasonably likely to result in a material liability to the Company.
(f) Except as disclosed on Schedule 3.11(f) to this Agreement, with
respect to each Company Plan that is subject to Title IV of ERISA:
(i) no such Company Plan has been terminated so as to result,
directly or indirectly, in any material liability, contingent or
otherwise, of the Company or any Commonly Controlled Company Entity;
(ii) no complete or partial withdrawal from such Company Plan
has been made by the Company or any Commonly Controlled Company Entity,
or by any other Person, so as to result in a material liability to the
Company or any Commonly Controlled Company Entity, whether such
liability is contingent or otherwise;
(iii) no proceeding has been initiated by any Person
(including the PBGC) to terminate any such Company Plan or to appoint a
trustee for any such Company Plan;
(iv) no condition or event currently exists or currently is
expected to occur that would reasonably be expected to result, directly
or indirectly, in any material liability of the Company or any Commonly
Controlled Company Entity under Title IV of ERISA, whether to the PBGC
or otherwise, on account of the termination of any such Company Plan;
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(v) if any such Company Plan were to be terminated as of the
Closing Date, neither the Company nor any Commonly Controlled Company
Entity would incur, directly or indirectly, any material liability
under Title IV of ERISA;
(vi) no "reportable event" (as defined in section 4043 of
ERISA) has occurred with respect to any such Company Plan; and
(vii) no such Company Plan has incurred any "accumulated
funding deficiency" (as defined in Section 302 of ERISA and Section 412
of the Code, respectively), whether or not waived.
(g) Except as disclosed on Schedule 3.11(g) to this Agreement, with
respect to any Company Plan that is a multiemployer plan (within the meaning of
Section 3(37) of ERISA): (i) neither the Company nor any Commonly Controlled
Company Entity would be subject to any withdrawal liability if, as of the
Closing Date, the Company or any Commonly Controlled Company Entity were to
engage in a complete withdrawal (as defined in Section 4203 of ERISA) or partial
withdrawal (as defined in Section 4205 of ERISA) from any such multiemployer
plan; and (ii) no such multiemployer plan is in reorganization or insolvent (as
those terms are defined in Sections 4241 and 4245 of ERISA, respectively).
(h) Except as disclosed on Schedule 3.11(h) to this Agreement or as
would not be reasonably likely to result in a material liability to the Company,
with respect to any Company Plan that is not a multiemployer plan (within the
meaning of Section 3(37) of ERISA): (i) no actions, suits or claims (other than
routine claims for benefits in the ordinary course) are pending or, to the
Knowledge of the Company, threatened; (ii) no facts or circumstances exist that
could give rise to any such actions, suits or claims; and (iii) no written or
oral communication has been received from the PBGC in respect of any Company
Plan subject to Title IV of ERISA concerning the funded status of any such
Company Plan or any transfer of assets and liabilities from any such plan in
connection with the transactions contemplated herein.
(i) Except as disclosed on Schedule 3.11(i) to this Agreement,
neither the Company nor any Commonly Controlled Company Entity has agreed to or
communicated to employees any changes to any Company Plan that would: (i) cause
an increase in benefits or create new benefits under any Company Plan; or (ii)
change any employee coverage so as to cause an increase in the expense of
maintaining any such Company Plan.
(j) Except as disclosed on Schedule 3.11(j) to this Agreement, the
consummation of the transactions contemplated hereby will not result in: (i) any
payment (including, without limitation, any severance, unemployment
compensation, golden parachute or bonus payment) becoming due to any current or
former director, officer, employee or consultant of the Company or any of its
Affiliates; (ii) any increase in the amount of compensation or benefits payable
in respect of any current or former director, officer, employee or consultant of
the Company or any of its Affiliates; or (iii) the acceleration of vesting or
time of payment of any benefits or compensation payable in respect of any
current or former director, officer, employee or consultant of the Company or
any of its Affiliates, and the transactions contemplated by this Agreement will
not result in any payment or series of payments constituting a "parachute
payment" within the meaning of Section 280G of the Code.
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(k) Except as disclosed on Schedule 3.11(k) to this Agreement,
neither the Company nor any Commonly Controlled Company Entity has engaged in or
participated in any transaction, whether or not related to a Company Plan, that
could, directly or indirectly, result in any tax, penalty or liability imposed
by ERISA or the Code including, without limitation, any excise tax under Section
4975 of the Code or any civil penalty under Section 409 or 502 of ERISA, that,
alone or together with any other such tax or penalty, could have a Company
Material Adverse Effect.
(l) Neither the Company nor any affiliate thereof (as defined in Part
V(d) of Department of Labor Prohibited Transaction Class Exemption 84-14) (the
"QPAM EXEMPTION"), nor any owner, direct or indirect, of a 5 percent or more
interest in the Company, is a Person who has engaged in any act described in
Part I(g) of the QPAM Exemption.
(m) Except as disclosed on Schedule 3.11(m) to this Agreement, the
Company is not a party to any collective bargaining or other labor union
contract applicable to employees of the Company, and no collective bargaining
agreement or other labor union contract is being negotiated by the Company. As
of the date of this Agreement, there is no labor dispute, strike or work
stoppage against the Company pending or threatened in writing which will
materially interfere with the business activities of the Company. As of the date
of this Agreement, none among the Company, its representatives or employees has
committed within the past five years any unfair labor practices in connection
with the operation of the business of the Company, and there is no charge or
complaint against the Company by the National Labor Relations Board or any
comparable state or foreign agency pending or, to the Knowledge of the Company,
threatened in writing.
(n) Except as disclosed on Schedule 3.11(n) to this Agreement, as of
the Effective Time of the Mergers, the Company has not incurred any liability or
obligation under the Worker Adjustment and Retraining Notification Act, as it
may be amended from time to time, and, to the Knowledge of the Company, within
the 90-day period immediately following the Effective Time of the Mergers will
not incur any such liability or obligation if, during such 90-day period, only
terminations of employment in the normal course of operations occur.
SECTION 3.12 Environmental Laws and Regulations.
(a) Except as disclosed on Schedule 3.12(a) to this Agreement, (i) the
Company and its Subsidiary are in compliance, in all material respects, with all
applicable Laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water, ground
water, land surface or subsurface strata) (collectively, "ENVIRONMENTAL LAWS"),
which compliance includes, but is not limited to, the possession by the Company
and its Subsidiary of all material Permits and other governmental authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof; (ii) neither the Company nor its Subsidiary has received
written notice of, or, to the Knowledge of the Company, is the subject of, any
material action, cause of action, claim, investigation, demand or notice by any
Person or entity alleging liability under or non-compliance with any
Environmental Law (an "ENVIRONMENTAL CLAIM"); and (iii) to the Knowledge of the
Company, there are no circumstances that are reasonably likely to prevent
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or interfere with such material compliance in the future.
(b) Except as disclosed on Schedule 3.12(b) to this Agreement, to the
Knowledge of the Company, there are no material Environmental Claims that are
pending or threatened against any Person whose liability for any Environmental
Claim the Company or its Subsidiary has or may have retained or assumed either
contractually or by operation of Law.
SECTION 3.13 Tax Matters.
(a) The Company and its Subsidiary have timely and accurately filed,
or caused to be timely and accurately filed, all material Tax Returns (as
hereinafter defined) required to be filed by them, and have paid, collected or
withheld, or caused to be paid, collected or withheld, all material amounts of
Taxes (as hereinafter defined) required to be paid, collected or withheld, other
than such Taxes for which adequate reserves have been established or which are
being contested in good faith. Except as set forth on Schedule 3.13(a) to this
Agreement, there are no material claims or assessments pending against the
Company or its Subsidiary for any alleged deficiency in any Tax, there are no
pending or, to the Knowledge of the Company, threatened audits or investigations
for or relating to any liability in respect of any Taxes, and neither the
Company nor its Subsidiary has been notified in writing of any proposed Tax
claims or assessments against the Company or its Subsidiary (other than claims
or assessments for which adequate reserves have been established or which are
being contested in good faith or are immaterial in amount).
(b) For purposes of this Agreement, the term "TAX" shall mean any
United States or non-United States federal, national, state, provincial, local
or other jurisdictional income, gross receipts, property, sales, use, license,
excise, franchise, employment, payroll, alternative or add-on minimum, ad
valorem, transfer or excise tax, or any other tax, custom, duty, governmental
fee or other like assessment or charge imposed by any Governmental Entity,
together with any interest or penalty imposed thereon. The term "TAX RETURN"
shall mean a report, return or other information (including any attached
schedules or any amendments to such report, return or other information)
required to be supplied to or filed with a Governmental Entity with respect to
any Tax, including an information return, claim for refund, amended return or
declaration or estimated Tax.
(c) Except as set forth on Schedule 3.13(c) to this Agreement, neither
the Company nor its Subsidiary is liable for Taxes of any other Person, or is
currently under any contractual obligation to indemnify any Person with respect
to Taxes (except for customary agreements to indemnify lenders or security
holders in respect of Taxes other than income Taxes), or is a party to any Tax
sharing agreement or any other agreement providing for payments by the Company
or its Subsidiary with respect to Taxes. Except as set forth on Schedule 3.13(c)
to this Agreement, there are no outstanding powers of attorney enabling any
party to represent the Company or its Subsidiary with respect to Tax matters.
The Company and its Subsidiary have withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other third Person. All
material elections with respect to Taxes made by the Company and its Subsidiary
as of the date hereof are set forth on Schedule 3.13(c) to this Agreement. There
are no private letter rulings in respect of any Tax pending between the Company
and any Tax authority. Neither the Company nor its Subsidiary is a personal
holding company within the
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meaning of Section 542 of the Code. Neither the Company nor its Subsidiary is a
party to any joint venture, partnership or other arrangement or contract which
could be treated as a partnership for Tax purposes. Neither the Company nor its
Subsidiary has agreed to nor is required, as a result of a change in method of
accounting or otherwise, to include any adjustment under Section 481 of the Code
(or any corresponding provision of state, local or foreign Law) in taxable
income. Neither the Company nor its Subsidiary is a party to any contract,
arrangement or plan that could result (taking into account the transactions
contemplated by this Agreement and the Related Agreements), separately or in the
aggregate, in the payment of any "excess parachute payments" within the meaning
of Section 280G of the Code. Schedule 3.13(c) to this Agreement contains a list
of all jurisdictions to which any Tax is properly payable or in which any Tax
Return is required to be filed by the Company and its Subsidiary, and no written
claim has ever been made by any Tax authority in any other jurisdiction that the
Company or its Subsidiary is subject to taxation in such jurisdiction.
SECTION 3.14 Material Contracts.
(a) Set forth on Schedule 3.14(a) to this Agreement is a correct and
complete list of each of the following contracts and agreements (and all
amendments, modifications and supplements thereto and all related letters to
which the Company or its Subsidiary is a party affecting the obligations of any
party thereunder) to which the Company or its Subsidiary is a party or by which
any of their respective properties or assets are bound, correct and complete
copies of which have been delivered to Walnut: (i) each employment, consulting,
non-competition, severance, golden parachute or indemnification contract
(including, without limitation, any contract to which the Company or its
Subsidiary is a party involving employees of the Company or its Subsidiary)
which contemplates payments equal to or in excess of $30,000 per year; (ii) each
agreement under which the Company or its Subsidiary has a continuing obligation
to provide financial advisory or other consulting services; (iii) contracts
granting a right of first refusal or first negotiation; (iv) each partnership or
joint venture agreement; (v) except as contemplated by Section 5.26, each
agreement for the acquisition, sale, lease or license of properties or assets of
the Company or its Subsidiary or by the Company or its Subsidiary (by merger,
purchase or sale of assets or stock or otherwise), including commitments to make
an investment by the Company or its Subsidiary, in which the aggregate amount to
be paid or received by the Company or its Subsidiary is equal to or in excess of
$5,000; (vi) each contract or agreement with any Governmental Entity; (vii) each
agreement relating to indebtedness of the Company or its Subsidiary or
guarantees of indebtedness by the Company or its Subsidiary in excess of $5,000;
(viii) each noncompetition, exclusivity or other agreement restricting the
ability of the Company or its Subsidiary to hire any Person or operate its
business as now, or contemplated to be, conducted, except for any such agreement
which could not reasonably be expected to have a Company Material Adverse
Effect; (ix) each agreement between the Company or its Subsidiary and any of
their respective officers, directors, holders of 5% of the outstanding Company
Common Stock or other Affiliates of the Company or its Subsidiary; (x) each
contract or agreement that contains a "change of control" provision; (xi) any
agreement which encumbers or places a Lien on any assets of the Company or its
Subsidiary; and (xii) all commitments and agreements to enter into any of the
foregoing (collectively, the "COMPANY MATERIAL CONTRACTS").
(b) Except as set forth on Schedule 3.14(b) to this Agreement:
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(i) Each Company Material Contract is in full force and
effect and there is no default under any Company Material Contract
either by the Company or its Subsidiary or, to the Knowledge of the
Company, by any other party thereto, and no event has occurred that
with the lapse of time or the giving of notice or both would constitute
a default thereunder by the Company or its Subsidiary or, to the
Knowledge of the Company, any other party, in any such case in which
such default or event could reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
(ii) No party to any such Company Material Contract has given
notice to the Company or its Subsidiary of or made a claim against the
Company or its Subsidiary with respect to any breach or default
thereunder, in any such case in which such breach or default could
reasonably be expected to have a Company Material Adverse Effect.
SECTION 3.15 Title to Properties; Encumbrances. Schedule 3.15 to this
Agreement contains a complete and accurate list of all real property, leaseholds
or other interests in real property owned or used by the Company and its
Subsidiary. The Company has delivered or made available to Walnut correct and
complete copies of the leases or other agreements to which the Company or its
Subsidiary is party and pursuant to which it uses or occupies any real property.
Except as set forth in Schedule 3.15 to this Agreement, the Company and its
Subsidiary have good title to all of the properties and assets, real and
personal, tangible and intangible, they own or purport to own, including those
reflected on their respective books and records and in the Company Financial
Statements and the Company Interim Financial Statements (except for accounts
receivable collected and materials and supplies disposed of in the ordinary
course of business consistent with past practice after the date of the Company
Financial Statements and the Company Interim Financial Statements). The Company
and its Subsidiary have a valid leasehold, license or other interest in all of
the other properties and assets, tangible or intangible, which are used in the
operation of their respective businesses. Except as set forth in Schedule 3.15
to this Agreement, all properties and assets owned, leased or used by the
Company and its Subsidiary are free and clear of all Liens, except for (a) Liens
for current Taxes not yet due, (b) workmen's, common carrier and other similar
Liens arising in the ordinary course of business, none of which materially
detracts from the value or materially impairs the use of the property or asset
subject thereto, or materially impairs the operations of the Company and its
Subsidiary, (c) Liens disclosed in the Company Financial Statements, and (d)
such imperfections of title and other Liens, if any, which do not individually
or in the aggregate materially interfere with the value or the use of such
properties or assets or otherwise could not reasonably be expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
SECTION 3.16 Condition and Sufficiency of Assets. Except as disclosed
on Schedule 3.16 to this Agreement, all of the properties and assets owned,
leased or used by the Company and its Subsidiary are in good operating condition
and repair (normal wear and tear excepted), are suitable for the purposes used
and are adequate and sufficient for all current operations of the Company and
its Subsidiary. Following the Second Effective Time, Surviving Corporation 2
will be able to conduct the business of the Company and its Subsidiary as it was
conducted prior thereto.
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SECTION 3.17 Intellectual Property. Except as disclosed on Schedule 3.17
to this Agreement, the Company and its Subsidiary own or are licensed or
otherwise have legally enforceable rights to use all patents, copyrights,
trademarks, service marks and trade names, including any registrations or
applications for registration of any of the foregoing trade secrets, know-how,
computer software programs and applications, Internet domain names, and
proprietary information and materials (collectively, "INTELLECTUAL PROPERTY")
used in or otherwise material to the operation of the businesses of the Company
and its Subsidiary as presently conducted. To the Knowledge of the Company, the
use of the Intellectual Property by the Company and its Subsidiary does not
infringe upon or otherwise violate any Intellectual Property rights of third
parties. To the Knowledge of the Company, no third party, including any
employee, former employee, independent contractor or consultant, is infringing
upon or otherwise violating the rights of the Company or its Subsidiary in the
Intellectual Property that, individually or in the aggregate, would reasonably
be expected to have a Company Material Adverse Effect. Except as disclosed on
Schedule 3.17, or as would not reasonably be expected, individually or in the
aggregate, to have a Company Material Adverse Effect, no claims (i) are
currently pending or, to the Knowledge of the Company, threatened with respect
to the Intellectual Property, or (ii) are, to the Knowledge of the Company,
currently pending or threatened with respect to the Intellectual Property rights
of a third party to the extent arising out of any use, reproduction or
distribution of the Intellectual Property of such third party by the Company or
its Subsidiary.
SECTION 3.18 Year 2000. To the Knowledge of the Company, the software and
hardware of the Company and its Subsidiary, when used or operated in accordance
with their printed documentation and in conjunction with computer hardware and
software that itself correctly processes date-related data, is free of defects
in programming and operation and will continue to operate after December 31,
1999, with the same level of functionality as the software operated prior
thereto, including, without limitation, correctly storing, processing and
presenting calendar dates falling on or after December 31, 1999. To the
Knowledge of the Company, the software will be free from logic and other errors
attributable to dates falling on or after December 31, 1999 and will not be
responsible for any error associated with any date falling on or after December
31, 1999.
SECTION 3.19 Investment Securities. Schedule 3.19 to this Agreement sets
forth a complete and correct list of all securities (including warrants)
beneficially owned by the Company and its Subsidiary on the date hereof. The
Company and its Subsidiary have good and marketable title to all such securities
(except securities sold under repurchase agreements (which are indicated as such
on Schedule 3.19) or held in any fiduciary or agency capacity(which are
indicated as such on Schedule 3.19)), free and clear of any Lien, except to the
extent such securities are pledged in the ordinary course of business consistent
with prudent business practices to secure obligations of the Company or its
Subsidiary. Such securities are valued on the books of the Company in accordance
with GAAP.
SECTION 3.20 Brokers. Except as set forth on Schedule 3.20 to this
Agreement, no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Mergers or the other
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements (including the Related Transactions) based upon arrangements
made by or on behalf of the Company or any of its Affiliates.
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SECTION 3.21 Insurance. Schedule 3.21 to this Agreement sets forth a list of
all policies or binders of fire, liability, workmen's compensation or other
insurance held by or on behalf of the Company (specifying the insurer, the
policy number or covering note number with respect to binders). Correct and
complete copies of such policies or binders have been delivered or made
available to Walnut. The Company (i) is not in default with respect to any
material provision contained in any such policy or binder, and (ii) has not
received a notice of cancellation or non-renewal of any such policy or binder.
All of such insurance is in full force and effect and all premiums due and
payable thereon have been paid.
SECTION 3.22 Transactions with Affiliates. Except as set forth on Schedule
3.22 to this Agreement, since January 1, 1999, no stockholder, officer, director
or Affiliate of the Company or its Subsidiary has entered into any transaction
with or is a party to any contract with the Company or its Subsidiary. Except as
set forth in Schedule 3.22, no stockholder, officer, director or Affiliate of
the Company or its Subsidiary owns any direct or indirect interest of any kind
in, or controls or is a stockholder, director, officer, employee or partner of,
or consultant to, or lender or borrower from or has the right to participate in
the profits of, any Person which is a competitor, client, landlord, tenant,
creditor or debtor of the Company or its Subsidiary.
SECTION 3.23 Books and Records. All constituent documents, business
licenses, minute books, stock certificate books, stock transfer ledgers and
other records of the Company and its Subsidiary (collectively, the "COMPANY
RECORDS") have been maintained in accordance with reasonable business practices
and applicable legal requirements. The Company Records are complete and correct
in all material respects and contain all material matters required to be
reflected in such Company Records.
SECTION 3.24 Disclosure. The representations and warranties by the Company
contained in this Agreement and in any Schedule or certificate furnished or to
be furnished by it pursuant hereto do not contain or will not, as of the Closing
Date, contain any untrue statement of a material fact, and do not omit or will
not, as of the Closing Date, omit to state any fact required to be stated
therein or necessary in order to make the statements herein or therein, in light
of the circumstances under which they were made, not misleading. The
representations and warranties contained in this Section 3.24 or elsewhere in
this Agreement or in any Schedule or certificate furnished or to be furnished as
aforesaid pursuant hereto shall not be affected or deemed waived by reason of
the fact that the Walnut Entities or their representatives know or should have
known that any such representation or warranty is or might be inaccurate in any
respect.
SECTION 3.25 Stockholders of the Company. The Company has two stockholders
and each stockholder is an "accredited" investor within the meaning of Rule 501
under the Securities Act.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
OF THE WALNUT ENTITIES
Each of the Walnut Entities, jointly and severally, hereby
represents and warrants to the Company as follows:
SECTION 4.1 Organization and Qualification; Subsidiaries.
(a) Each of Walnut and each Subsidiary of Walnut has been duly
organized and is validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization, as the case may be, and has
the requisite corporate or other power and authority to own, lease and operate
its properties and to carry on its business as it is now being conducted. Each
of Walnut and each Subsidiary of Walnut is duly qualified or licensed to do
business, and is in good standing, in each jurisdiction where the character of
the properties owned, leased or operated by it or the nature of its business
makes such qualification or licensing necessary, except for such failures to be
so qualified or licensed and in good standing that could not reasonably be
expected to have, individually or in the aggregate, a Walnut Material Adverse
Effect. For purposes of this Agreement, "WALNUT MATERIAL ADVERSE EFFECT" means
any change, event or effect (i) in, on or relating to the business of Walnut and
the Subsidiaries of Walnut that is, or is reasonably likely to be, materially
adverse to the business, properties, assets, liabilities, conditions in the
United States; or(ii) that may prevent or materially delay performance of this
Agreement, th e Transaction Documents or the Related Agreements by any of the
Walnut Entities or the consummation by any of the WAlnut Entities of the
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements(including the Mergers and the Related Transactions). Schedule
4.1(a) to this Agreement sets forth a complete and accurate list of each
Subsidiary of Walnut, the jurisdiction of incorporation or organization of each
such Subsidiary and each jurisdiction where each such Subsidiary is qualified or
licensed to do business. Neither Walnut nor any Subsidiary of Walnut is a
general partner in any partnership, except as set forth on Schedule 4.1(a).
(b) The copies of Walnut's Articles of Incorporation, as amended, and
By-laws (collectively, the "WALNUT CHARTER DOCUMENTS") that are set forth as
Exhibits to Walnut's Annual Report on Form 10-K for the year ended December 31,
1998, and the Certificate of Incorporation and By-laws or comparable
organizational documents of THCG, Newco and each other Subsidiary of Walnut in
the forms delivered to the Company, are complete and correct copies thereof. The
Walnut Charter Documents and all comparable organizational documents of each
Subsidiary of Walnut are in full force and effect. Walnut is not in violation of
any of the provisions of the Walnut Charter Documents and no Subsidiary of
Walnut is in violation of its organizational documents.
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SECTION 4.2 Capitalization of Walnut and its Subsidiaries.
(a) The authorized capital stock of Walnut consists of (i) 50,000,000
shares of Walnut Common Stock, of which 3,350,533 shares are issued and
outstanding, and (ii) 1,000,000 shares of preferred stock, no par value, of
which no shares are issued or outstanding. All of the issued and outstanding
shares of Walnut Common Stock have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. None of the issued
and outstanding shares of Walnut Common Stock were issued in violation of the
registration requirements of any federal or state securities laws. As of the
date hereof, 316,830 shares of Walnut Common Stock were reserved for issuance
and issuable upon or otherwise deliverable in connection with the exercise of
outstanding Options. Schedule 4.2(a) to this Agreement sets forth, as of the
date hereof, (i) the Persons to whom Options have been granted by Walnut, (ii)
the exercise price for Options held by each such Person, (iii) the number of
vested and unvested Options and (iv) the termination dates of such Options.
Except as disclosed in the Walnut Filed SEC Reports or as set forth on Schedule
4.2(a) to this Agreement, no shares of Walnut's capital stock have been issued
other than pursuant to the exercise of stock options already in existence on
such date, and, subject to Section 5.20, no stock options have been granted by
Walnut to any Person. Except as disclosed in the Walnut Filed SEC Reports, as
set forth above or in Schedule 4.2(a) to this Agreement or as contemplated by
this Agreement, the Transaction Documents or the Related Agreements, there are
outstanding (i) no shares of capital stock or other voting securities of Walnut
or its Subsidiaries, (ii) no securities of Walnut or any Subsidiary of Walnut
convertible or exercisable into or exchangeable for shares of capital stock or
voting securities of Walnut or any Subsidiary of Walnut, (iii) no Options to
acquire from Walnut or any Subsidiary of Walnut, and no obligations of Walnut or
any Subsidiary of Walnut to issue, any capital stock, voting securities or
securities convertible or exercisable into or exchangeable for capital stock or
voting securities of Walnut or any Subsidiary of Walnut, (iv) no equity
equivalents, interests in the ownership or earnings of Walnut or any Subsidiary
of Walnut or other similar rights (including stock appreciation rights) (the
items listed in subclauses (i), (ii), (iii) and (iv) being referred to,
collectively, as "WALNUT SECURITIES") and (v) no obligations of Walnut or any
Subsidiary of Walnut to repurchase, redeem or otherwise acquire any Walnut
Securities. Except as set forth on Schedule 4.2(a) to this Agreement, there are
no stockholders agreements, voting trusts or other agreements or understandings
to which Walnut or any Subsidiary of Walnut is a party or to which any of them
is bound relating to the voting or registration of any shares of capital stock
of Walnut or any Subsidiary of Walnut.
(b) The authorized capital stock of THCG consists of (i) 50,000,000
shares of THCG Common Stock, of which 10 shares are issued and outstanding, and
(ii) 5,000,000 shares of preferred stock, par value $.01 per share, of which no
shares are issued or outstanding. All of the issued and outstanding shares of
THCG Common Stock have been duly authorized and validly issued and are fully
paid, non-assessable and free of preemptive rights. All of the issued and
outstanding shares of THCG Common Stock are owned by Walnut, free and clear of
any Lien. The shares of THCG Common Stock that will be issued as a result of the
Mergers will be, when issued in accordance with the terms of this Agreement and
the Related Agreements, duly authorized, validly issued, fully paid and
non-assessable. The authorized capital stock of Newco consists of 100 shares of
Newco Common Stock, of which 10 shares are issued and outstanding. All of the
issued and outstanding shares of Newco Common Stock have been duly authorized
and validly issued and are fully paid,
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non-assessable and free of preemptive rights. All of the issued and outstanding
shares of Newco Common Stock are owned by THCG, free and clear of any Lien.
(c) The authorized and outstanding shares of each class of capital
stock of each Subsidiary of Walnut is completely and accurately set forth on
Schedule 4.2(c) to this Agreement. Each outstanding share of capital stock of
each Subsidiary of Walnut is duly authorized and validly issued and is fully
paid and nonassessable and owned by Walnut or a Subsidiary of Walnut free and
clear of any Lien or any other limitation or restriction (including any
restriction on the right to vote or sell the same, except as may be provided as
a matter of law).
(d) The Walnut Common Stock constitutes the only class of equity
securities of Walnut or any Walnut Subsidiary registered or required to be
registered under the Exchange Act, except that the equity securities of Walnut
Funds, Inc., a Delaware corporation and a wholly-owned subsidiary of Walnut
("WALNUT FUNDS"), Walnut Capital Corp., a Delaware corporation and a
wholly-owned subsidiary of Walnut ("WALNUT CAPITAL"), and Universal Bridge Fund,
Inc., a Delaware corporation and a wholly-owned subsidiary of Walnut ("UNIVERSAL
BRIDGE"), are also registered under the Exchange Act.
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SECTION 4.3 Authority Relative to this Agreement; Board Action.
(a) Each of the Walnut Entities has all necessary corporate or other
power and authority to execute and deliver this Agreement and the Transaction
Documents and the Related Agreements to which it is a party, to consummate the
transactions contemplated by this Agreement and the Transaction Documents and
the Related Agreements to which it is a party (including the Mergers and the
Related Transactions), and to perform its obligations under this Agreement and
the Transaction Documents and the Related Agreements to which it is a party. The
execution and delivery by each of the Walnut Entities of this Agreement and the
Transaction Documents and the Related Agreements to which it is a party and the
consummation by each of the Walnut Entities of the transactions contemplated by
this Agreement and the Transaction Documents and the Related Agreements to which
it is a party (including the Mergers and the Related Transactions) have been
duly and validly authorized by the Board of Directors of Walnut (the "WALNUT
BOARD"), the Board of Directors of each of THCG and Newco and the sole
stockholder of each of THCG and Newco, and no other corporate or other
proceedings on the part of any Walnut Entity are, or will be, necessary to
authorize this Agreement and the Transaction Documents and the Related
Agreements to which any such Walnut Entity is a party or to consummate the
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements (including the Mergers and the Related Transactions), other
than, with respect to Merger 1, the approval and adoption of this Agreement by
the stockholders of Walnut (the "WALNUT STOCKHOLDERS") and other than the
approval by the Walnut Stockholders of certain of the Related Transactions. Each
of this Agreement and each of the Transaction Documents and the Related
Agreements to which any of the Walnut Entities is a party has been, or will be
at the Closing, assuming the due authorization, execution and delivery of the
same by each of the other parties hereto or thereto, duly and validly executed
and delivered by the Walnut Entities and constitutes, or will constitute at the
Closing, a valid, legal and binding agreement of the Walnut Entities,
enforceable against such Walnut Entities in accordance with its terms, subject
to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or
transfer, moratorium and other similar laws now or hereafter in effect relating
to or affecting creditors' rights generally and (ii) general principles of
equity (regardless of whether considered in a proceeding at law or in equity).
(b) The Walnut Board and the Boards of Directors of each of THCG and
Newco, by resolutions duly adopted at a meeting duly called and held and not
subsequently rescinded or modified in any way, have each duly (i) determined
that this Agreement, the Mergers and the Related Transactions are in the best
interests of each Walnut Entity and their respective stockholders, (ii) approved
this Agreement, the Mergers and the Related Transactions and (iii) unanimously
recommended that the Walnut Stockholders and the sole stockholder of each of
THCG and Newco approve this Agreement, the Mergers and the Related Transactions.
SECTION 4.4 SEC Filings; Financial Statements.
(a) Since January 1, 1996, Walnut has filed all forms, reports,
schedules, statements and other documents (including all exhibits thereto) (the
"WALNUT SEC FILINGS") required to be filed with the SEC, each of which has
complied with all applicable requirements of the Securities Act, the Exchange
Act and the Investment Company Act, each as in effect on the dates such forms,
reports, schedules, statements and other document were filed. Walnut
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has heretofore delivered to or made available to the Company, in the form filed
with the SEC (including any amendments and all exhibits thereto), the following
(the "WALNUT FILED SEC REPORTS"): (i) the Annual Reports on Form 10-K for each
of the three fiscal years ended December 31, 1998, (ii) all definitive proxy
statements relating to Walnut's meetings of stockholders (whether annual or
special) held since January 1, 1996 and prior to the date of this Agreement and
(iii) all other forms, reports or registration statements filed prior to the
date of this Agreement by Walnut with the SEC since January 1, 1996 (other than
quarterly reports on Form 10-Q or current reports on Form 8-K filed before
January 1, 1999). As of their respective dates, none of the Walnut SEC Filings
or documents, including, without limitation, any financial statements or
schedules included or incorporated by reference therein, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated or incorporated by reference therein or necessary in order to make the
statements therein, in light of the circumstance under which they were made, not
misleading. The consolidated financial statements of Walnut (the "WALNUT
FINANCIAL STATEMENTS") included or incorporated by reference in the Walnut SEC
Filings complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto and all of such financial statements were prepared from the books and
records of Walnut and fairly present in all material respects, in conformity
with GAAP (except as may be indicated in the notes thereto and except that the
unaudited financial statements may not include all notes thereto required by
GAAP), the consolidated statement of assets and liabilities, investment in
securities of Walnut and its Subsidiaries as of the dates thereof and their
consolidated statements of operations, changes in net assets and cash flows for
the periods then ended (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments). Since January 1, 1999, there has
not been any change, or any application or request for any change, by Walnut or
any Subsidiary of Walnut in accounting principles, methods or policies for
financial accounting or tax purposes.
(b) Walnut has heretofore made available to the Company a complete and
correct copy of any material amendment or modification, which has not yet been
filed with the SEC, to agreements, documents or other instruments which prior to
the date of this Agreement had been filed by Walnut with the SEC pursuant to the
Securities Act, the Exchange Act or the Investment Company Act.
(c) As of June 30, 1999, the balance sheet of Walnut reflects: (i) a
minimum balance of $1.15 million in cash; (ii) a zero balance in margin payable
to brokers; (iii) a maximum balance of $0.825 million in notes payable to banks;
(iv) a maximum balance of $2.0 million in debentures payable; (v) a minimum
balance of $0.1 million in cash on the balance sheet of Universal Partners,
L.P.; and (vi) no additional liabilities and/or no higher liability balances
than are disclosed on its April 30, 1999 balance sheet, attached as Schedule
4.4(c) to this Agreement, excluding reasonable accounting and attorneys fees and
such other reasonable expenses related to the Mergers and the Related
Transactions.
(d) To the Knowledge of Walnut, the accounts receivable, loans,
advances and contracts receivable from the clients (individually, a
"RECEIVABLE," and collectively, the "RECEIVABLES") of Pacific Financial Services
Corporation, a Washington corporation and a wholly-owned subsidiary of Walnut
("PACIFIC FINANCIAL"), and Inland Financial Corporation, a Washington
corporation and a wholly-owned subsidiary of Walnut ("INLAND FINANCIAL"),
reflected on Schedule 4.4(d) to this Agreement or arising between the date
hereof and the
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Closing Date, arose or will arise in the ordinary course of business and at
least 80% of the Receivables outstanding at any given time are and will be fully
collectible according to their terms, without resort to litigation. The amount
ultimately collected from the Receivables outstanding at any given time with
respect to each of Pacific Financial and Inland Financial shall at least be
equal to 80% of the principal amount outstanding at such time of the loan made
to Pacific Financial by Northwest International Bank and the loan made to Inland
Financial by Capital Business Credit, respectively. For the purposes of this
Section 4.4(d), a Receivable shall be deemed to become an "UNCOLLECTIBLE
RECEIVABLE" if Pacific Financial or Inland Financial, as the case may be, is not
paid in full with respect to such Receivable, including payment of all accrued
fees owed to Pacific Financial or Inland Financial, as the case may be, in
connection therewith, within 90 days of Pacific Financial's or Inland
Financial's acquisition of such Receivable, as the case may be.
SECTION 4.5 Information Supplied. None of the information included or
incorporated by reference in (a) the Form 8-F will, at the time the Form 8-F is
filed with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Investment Company Act, contain any untrue statement
of material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (b) the
Proxy Statement will, on the date mailed to the Walnut Stockholders and at the
time of the Walnut Stockholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Proxy Statement
will comply as to form in all material respects with the Investment Company Act
and the Exchange Act, respectively, and the rules and regulations of the SEC
thereunder. Notwithstanding the foregoing, Walnut makes no representation or
warranty with respect to any Company 8-F Information or Company Proxy
Information.
SECTION 4.6 Consents and Approvals; No Violations.
(a) Except as set forth on Schedule 4.6(a) to this Agreement, no
Filings and Approvals to, of or with any Governmental Entity are, or will be,
necessary for the execution and delivery by any of the Walnut Entities of this
Agreement, the Transaction Documents or the Related Agreements to which any
Walnut Entity is a party or the consummation by any of the Walnut Entities of
the transactions contemplated by this Agreement, the Transaction Documents or
the Related Agreements to which any such Walnut Entity is a party (including the
Mergers and the Related Transactions), except for those required (i) under the
UBCA, DGCL and NYBCL with respect to the filing of the First Certificate of
Merger and Second Certificate of Merger, (ii) under the Securities Act, the
Exchange Act and the Investment Company Act or by any Regulatory Agency, and
(iii) such Filings and Approvals that, if not made or obtained could not
reasonably be expected to have, individually or in the aggregate, a Walnut
Material Adverse Effect.
(b) Except as set forth on Schedule 4.6(b) to this Agreement, no
consent or approval of any third party is, or will be, necessary for the
execution and delivery by any of the Walnut Entities of this Agreement, any
Transaction Documents or any Related Agreements to which any such Walnut Entity
is a party or the consummation by any of the Walnut Entities of the transactions
contemplated by this Agreement, the Transaction Documents or the Related
Agreements to which any such Walnut Entity is a party (including the Mergers and
the Related
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Transactions).
(c) Except as set forth on Schedule 4.6(c) to this Agreement, neither
the execution, delivery and performance of this Agreement, the Transaction
Documents or the Related Agreements to which any of the Walnut Entities is a
party, or the consummation by any of the Walnut Entities of the transactions
contemplated by this Agreement, the Transaction Documents or the Related
Agreements to which any such Walnut Entity is a party (including the Mergers and
the Related Transactions) will (i) conflict with or result in any breach of any
provision of the Walnut Charter Documents or any comparable organizational
documents of THCG or Newco or any other Subsidiary of Walnut, (ii) result in a
violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration or Lien) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which any of the Walnut Entities
is a party or by which any of their respective properties or assets are bound,
or (iii) assuming that all Filings and Approvals have been made or obtained,
violate any Law or any Governmental Order applicable to any of the Walnut
Entities or any of their respective properties or assets, except in the case of
clauses (ii) or (iii) for violations, breaches or defaults which could not
reasonably be expected to have, individually or in the aggregate, a Walnut
Material Adverse Effect.
SECTION 4.7 No Default. Except as set forth on Schedule 4.7 to this
Agreement, none of the Walnut Entities or any other Subsidiary of Walnut is in
default or violation (and no event has occurred which with due notice or the
lapse of tim or both would constitute a default or violation) of any term,
condition or provision of (i) the Walnut Charter Documents or comparable
organizational documents of THCG or Newco or any other Subsidiary of Walnut,
(ii) any note, bond, mortgage, indenture, lease, license, contract, agreement or
other instrument or obligation to which any Walnut Entity or any other
Subsidiary of Walnut is a party or by which any of them or any of their
respective properties or assets are bound, or (iii) any Governmental Order
applicable to any Walnut Entity or any other Subsidiary of Walnut or any of
their respective properties or assets, except in the case of clauses (ii) or
(iii) for violations, breaches or defaults that could not reasonably be expected
to have, individually or in the aggregate, a Walnut Material Adverse Effect,
except for liabilities of any Subsidiary of Walnut owed to Walnut or to any
other wholly-owned Subsidiary of Walnut.
SECTION 4.8 No Undisclosed Liabilities; Absence of Changes.
(a) Except as and to the extent disclosed in the Walnut Filed SEC
Reports or on Schedule 4.8(a) to this Agreement, as of December 31, 1998,
neither Walnut nor any Subsidiary of Walnut had any liabilities or obligations
of any nature, whether accrued, contingent or otherwise, and whether due or to
become due or asserted or unasserted, which would be required by GAAP to be
reflected in, reserved against or otherwise described in the consolidated
balance sheet of Walnut (including the notes thereto) as of such date, except
for liabilities and obligations that could not reasonably be expected to have,
individually or in the aggregate, a Walnut Material Adverse Effect.
(b) Except as disclosed in the Walnut Filed SEC Reports or on Schedule
4.8(b) to this Agreement, since January 1, 1999, the business of Walnut and its
Subsidiaries has been
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carried on only in the ordinary course and in a manner consistent with past
practice, neither Walnut nor any of its Subsidiaries has incurred any
liabilities or obligations of any nature, whether accrued, contingent or
otherwise, and whether due or to become due or asserted or unasserted, except in
the ordinary course of business and in a manner consistent with past practice,
none of which could reasonably be likely to have, individually or in the
aggregate, a Walnut Material Adverse Effect, and there has not been any event,
condition or occurrence that, individually or in the aggregate, has resulted or
which could reasonably be expected to result in, a Walnut Material Adverse
Effect. Except as disclosed in the Walnut Filed SEC Reports, since January 1,
1999, there has not been (i) any material change by Walnut in its accounting
methods, principles or practices, (ii) any declaration, setting aside or payment
of any dividend or distribution in respect of shares of the capital stock of
Walnut or any of its Subsidiaries or any redemption, purchase or other
acquisition of any of the Walnut Securities, or (iii) any increase in the
compensation or benefits or establishment of any bonus, insurance, severance,
deferred compensation, pension, retirement, profit sharing, stock option
(including, without limitation, the granting of stock options, stock
appreciation rights, performance awards, restricted stock awards or similar
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation payable or to become payable, or Walnut's obligations in
respect of any program or arrangement for, officers or other key employees of
Walnut or any Walnut Subsidiary.
SECTION 4.9 No Litigation. Except as disclosed in the Walnut Filed SEC
Reports or on Schedule 4.9 to this Agreement, there is no Proceeding pending or,
to the Knowledge of Walnut, threatened against any Walnut Entity or any other
Subsidiary of Walnut or any of their respective properties or assets which (a)
if adversely determined, could reasonably be expected to have, individually or
in the aggregate, a Walnut Material Adverse Effect, or (b) questions the
validity of this Agreement, any Transaction Document or any Related Agreement or
any action to be taken by any of the Walnut Entities in connection with the
consummation of the transactions contemplated by this Agreement, the Transaction
Documents or the Related Agreements (including the Mergers and the Related
Transactions) or could otherwise prevent, delay, make illegal or otherwise
interfere with the consummation of such transactions. Except as disclosed on
Schedule 4.9 to this Agreement, neither Walnut nor any Subsidiary of Walnut is
subject to any outstanding Governmental Order which could reasonably be expected
to have a Walnut Material Adverse Effect.
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SECTION 4.10 Compliance with Applicable Law.
(a) Except as disclosed in the Walnut Filed SEC Reports or in Schedule
4.10(a) to this Agreement, Walnut and all Subsidiaries of Walnut have made or
have obtained and hold all Permits necessary for the lawful conduct of their
respective businesses, except where the failure to obtain any such Permit would
not have, individually or in the aggregate, a Walnut Material Adverse Effect.
Except as disclosed on Schedule 4.10(a) to this Agreement, (i) the Permits of
Walnut and its Subsidiaries are valid and in full force and effect, (ii) none of
the Walnut Entities or any Subsidiary of Walnut is in default under, and no
condition exists that with notice or lapse of time or both would constitute a
default under, such Permits, and (iii) none of such Permits will be terminated
or impaired or become terminable, in whole or in part, as a result of the
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements, except in the case of clauses (i), (ii) and (iii) for
Permits, the failure of which to be valid or in full force and effect or of
Walnut or its Subsidiaries to hold could not reasonably be expected to have,
individually or in the aggregate, a Walnut Material Adverse Effect.
(b) Except as disclosed in the Walnut Filed SEC Reports or on Schedule
4.10(b) of this Agreement, the businesses of Walnut and its Subsidiaries have
not been conducted in violation of the Investment Company Act, the Small
Business Investment Act of 1958, the regulations promulgated by the Small
Business Administration or any other Law, except for violations or possible
violations which could not reasonably be expected to have, individually or in
the aggregate, a Walnut Material Adverse Effect. Except as disclosed in the
Walnut Filed SEC Reports or on Schedule 4.10(b) to this Agreement, no material
investigation or review by any Governmental Entity with respect to Walnut or any
of its Subsidiaries is pending or, to the Knowledge of Walnut, threatened, nor,
to the Knowledge of Walnut, has any Governmental Entity indicated an intention
to conduct the same.
SECTION 4.11 Employee Benefits and ERISA.
(a) (i) Schedule 4.11(a) to this Agreement contains a true and complete
list of each material employee benefit plan, policy, program, practice,
agreement, understanding, arrangement or commitment (whether written or
unwritten) providing compensation, benefits or perquisites of any kind to any
current or former officer, employee or consultant (or to any dependent or
beneficiary thereof) of Walnut, which are now, or were within the past six
years, maintained by, contributed to, by or with respect to which an obligation
to contribute exists or existed on the part of any of Walnut, its predecessors,
or any other trade or business (whether or not incorporated) which, together
with Walnut, is treated as a single employer under Section 414 of the Code (such
other trades or businesses, collectively, the "COMMONLY CONTROLLED WALNUT
ENTITIES") or with respect to which Walnut or any Commonly Controlled Walnut
Entity has or may have any material liability (including, without limitation, a
liability arising out of an indemnification, guarantee, hold harmless or similar
agreement) including, without limitation, all material employment or consulting
agreements, incentive, bonus, deferred compensation, pension, profit sharing,
vacation, holiday, cafeteria, medical, disability, stock purchase, stock option,
stock appreciation, phantom stock, restricted stock or other stock-based
compensation plans, policies, programs, practices or arrangements and any
"employee benefit plan" within the meaning of Section 3(3) of ERISA, whether or
not subject to ERISA (each, a "WALNUT PLAN" and together, the "WALNUT PLANS").
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(ii) With respect to the Walnut Financial Services, Inc.
Management Incentive Plan (the "WALNUT INCENTIVE PROGRAM"), the only two
beneficiaries thereunder are Joel Kanter and Robert Mauer, in their capacities
as the Chief Executive Officer and Chief Financial Officer/Chief Operating
Officer of Walnut, respectively. Messrs. Kanter and Mauer have agreed that, in
the event Merger 2 occurs, the sole benefit to which Messrs. Kanter and Mauer
would be entitled under the Walnut Incentive Program is the payment to them, in
cash only, of a maximum of $90,000, in the aggregate, based on their
achievement, in 1999, of performance milestones set by the Compensation
Committee of the Walnut Board (the"CASH BONUS").
(b) With respect to each Walnut Plan, Walnut has delivered or made
available to the Company, to the extent applicable: (i) a current, correct and
complete copy of each written plan document (including without limitation, any
employment agreement, employment policies and procedures and plan instrument,
and any amendments thereto) or, to the extent no such written plan document
exists, an accurate written description thereof; (ii) any related trust
agreement or other funding instrument; (iii) the most recent determination
letter with respect to any Walnut Plan intended to be qualified under Section
401(a) of the Code; (iv) any summary plan description, summary of material
modifications or other material written communication from Walnut to its
employees concerning the extent of the benefits provided under any Walnut Plan;
and (v) for the three most recent years (A) the Form 5500 and attached
schedules, (B) audited financial statements and (C) actuarial valuation reports.
(c) (i) Each Walnut Plan has been established and maintained, in form
and operation, in all material respects (A) in accordance with its terms, and
(B) in compliance with the applicable provisions of ERISA, the Code and other
applicable Laws, rules and regulations; (ii) each Walnut Plan that is intended
to be qualified within the meaning of Section 401(a) of the Code has received a
favorable determination letter as to its qualification, and, to the Knowledge of
Walnut, nothing has occurred, whether by action or failure to act, that would
reasonably be expected to cause such determination letter to be revoked.
(d) Except as set forth on Schedule 4.11(d), no Walnut Plan provides
for benefits, including, without limitation, medical or health benefits (through
insurance or otherwise), or provides for the continuation of such benefits or
coverage for any participant or any dependent or beneficiary of any participant,
after such participant's retirement or other termination of employment (except
(i) as may be required by applicable law, (ii) retirement or death benefits
under any employee pension plan, (iii) disability benefits under any employee
welfare plan that have been fully provided for by insurance or otherwise, (iv)
deferred compensation benefits accrued as liabilities on the books of Walnut; or
(v) benefits in the nature of severance pay).
(e) For each Walnut Plan with respect to which a Form 5500 has been
filed, no change has occurred with respect to the matters covered by the most
recent Form 5500 since the date thereof other than any such change as would not
be reasonably likely to result in a material liability to Walnut.
(f) Except as disclosed on Schedule 4.11(f) to this Agreement, with
respect to each Walnut Plan that is subject to Title IV of ERISA:
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(i) no such Walnut Plan has been terminated so as to result,
directly or indirectly, in any material liability, contingent or
otherwise, of Walnut or any Commonly Controlled Walnut Entity;
(ii) no complete or partial withdrawal from such Walnut Plan
has been made by Walnut or any Commonly Controlled Walnut Entity, or by
any other Person, so as to result in a material liability to Walnut or
any Commonly Controlled Walnut Entity, whether such liability is
contingent or otherwise;
(iii) no proceeding has been initiated by any Person
(including the PBGC) to terminate any such Walnut Plan or to appoint a
trustee for any such Walnut Plan;
(iv) no condition or event currently exists or currently is
expected to occur that would reasonably be expected to result, directly
or indirectly, in any material liability of Walnut or any Commonly
Controlled Walnut Entity under Title IV of ERISA, whether to the PBGC
or otherwise, on account of the termination of any such Walnut Plan;
(v) if any such Walnut Plan were to be terminated as of the
Closing Date, neither Walnut nor any Commonly Controlled Walnut Entity
would incur, directly or indirectly, any material liability under Title
IV of ERISA;
(vi) no "reportable event" (as defined in Section 4043 of
ERISA) has occurred with respect to any such Walnut Plan; and
(vii) no such Walnut Plan has incurred any "accumulated
funding deficiency" (as defined in Section 302 of ERISA and Section 412
of the Code, respectively), whether or not waived.
(g) Except as disclosed on Schedule 4.11(g) to this Agreement, with
respect to any Walnut Plan that is a multiemployer plan (within the meaning of
Section 3(37) of ERISA): (i) neither Walnut nor any Commonly Controlled Walnut
Entity would be subject to any withdrawal liability if, as of the date of the
Closing, Walnut or any Commonly Controlled Walnut Entity were to engage in a
complete withdrawal (as defined in ERISA section 4203) or partial withdrawal (as
defined in Section 4205 of ERISA) from any such multiemployer plan; and (ii) no
such multiemployer plan is in reorganization or insolvent (as those terms are
defined in Sections 4241 and 4245 of ERISA, respectively).
(h) Except as disclosed on Schedule 4.11(h) to this Agreement or as
would not be reasonably likely to result in a material liability to Walnut, with
respect to any Walnut Plan that is not a multiemployer plan (within the meaning
of Section 3(37) of ERISA): (i) no actions, suits or claims (other than routine
claims for benefits in the ordinary course) are pending or, to the Knowledge of
Walnut, threatened; (ii) no facts or circumstances exist that could give rise to
any such actions, suits or claims; and (iii) no written or oral communication
has been received from the PBGC in respect of any Walnut Plan subject to Title
IV of ERISA concerning the funded status of any such Walnut Plan or any transfer
of assets and liabilities from any such plan in connection with the transactions
contemplated herein.
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(i) Except as disclosed on Schedule 4.11(i) to this Agreement, neither
Walnut nor any Commonly Controlled Walnut Entity has agreed to or communicated
to employees any changes to any Walnut Plan that would: (i) cause an increase in
benefits or create new benefits under any Walnut Plan; or (ii) change any
employee coverage so as to cause an increase in the expense of maintaining any
such Walnut Plan.
(j) Except as disclosed on Schedule 4.11(j) to this Agreement, the
consummation of the transactions contemplated hereby will not result in: (i) any
payment (including, without limitation, any severance, unemployment
compensation, golden parachute or bonus payment) becoming due to any current or
former director, officer, employee or consultant of Walnut or any of its
Affiliates; (ii) any increase in the amount of compensation or benefits payable
in respect of any current or former director, officer, employee or consultant of
Walnut or any of its Affiliates; or (iii) the acceleration of vesting or time of
payment of any benefits or compensation payable in respect of any current or
former director, officer, employee or consultant of Walnut or any of its
Affiliates, and the transactions contemplated by this Agreement will not result
in any payment or series of payments constituting a "parachute payment" within
the meaning of Section 280G of the Code.
(k) Except as disclosed on Schedule 4.11(k) to this Agreement, neither
Walnut nor any Commonly Controlled Walnut Entity has engaged in or participated
in any transaction, whether or not related to a Walnut Plan, that could,
directly or indirectly, result in any tax, penalty or liability imposed by ERISA
or the Code including, without limitation, any excise tax under Section 4975 of
the Code or any civil penalty under Section 409 or 502 of ERISA, that, alone or
together with any other such tax or penalty, could have a Walnut Material
Adverse Effect.
(l) Neither Walnut nor any affiliate thereof (as defined in the QPAM
Exemption, nor any owner, direct or indirect, of a 5 percent or more interest in
Walnut, is a Person who has engaged in any act described in Part I(g) of the
QPAM Exemption.
(m) Except as disclosed on Schedule 4.11(m) to this Agreement, Walnut
is not a party to any collective bargaining or other labor union contract
applicable to employees of Walnut, and no collective bargaining agreement or
other labor union contract is being negotiated by Walnut. As of the date of this
Agreement, there is no labor dispute, strike or work stoppage against Walnut
pending or threatened in writing which will materially interfere with the
business activities of Walnut. As of the date of this Agreement, none among
Walnut, its representatives or employees has committed within the past five
years any unfair labor practices in connection with the operation of the
business of Walnut, and there is no charge or complaint against Walnut by the
National Labor Relations Board or any comparable state or foreign agency pending
or, to the Knowledge of Walnut, threatened in writing.
(n) Except as disclosed on Schedule 4.11(n) to this Agreement, as of
the Effective Time of the Mergers, Walnut has not incurred any liability or
obligation under the Worker Adjustment and Retraining Notification Act, as it
may be amended from time to time, and, to Knowledge of Walnut, within the 90-day
period immediately following the Effective Time of the Mergers will not incur
any such liability or obligation if, during such 90-day period, only
terminations of employment in the normal course of operations occur.
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SECTION 4.12 Environmental Laws and Regulations.
(a) Except as disclosed in the Walnut Filed SEC Reports or on Schedule
4.12(a) to this Agreement, (i) each of Walnut and its Subsidiaries is in
compliance, in all material respects, with all applicable Environmental Laws,
which compliance includes, but is not limited to, the possession by Walnut and
its Subsidiaries of all material Permits and other governmental authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof; (ii) neither Walnut nor any of its Subsidiaries has received
written notice of, or, to the Knowledge of Walnut, is the subject of, any
Environmental Claim; and (iii) to the Knowledge of Walnut, there are no
circumstances that are reasonably likely to prevent or interfere with such
material compliance in the future.
(b) Except as disclosed on Schedule 4.12(b) to this Agreement, to the
Knowledge of Walnut, there are no material Environmental Claims that are pending
or threatened against any Person whose liability for any Environmental Claim
Walnut or any Subsidary of Walnut has or may have retained or assumed either
contractually or by operation of Law.
SECTION 4.13 Tax Matters
(a) Walnut and its Subsidiaries have timely and accurately filed, or
caused to be timely and accurately filed, all material Tax Returns required to
be filed by them, have paid, collected or withheld, or caused to be paid,
collected or withheld, all material amounts of Taxes required to be paid,
collected or withheld, other than such Taxes for which adequate reserves have
been established or which are being contested in good faith. Except as set
forth on Schedule 4.13(a) to this Agreement, no material claim or assessment of
any Tax authority is pending against Walnut or any of its Subsidaries for any
alleged deficiency in any Tax, there are no pending or, to the Knowledge of
Walnut, threatened audits or investigations for or relating to any liability in
respect of any Taxes, and niether Walnut nor any of its Subsidiaries have been
notified in writing of any proposed Tax claims or assessments against Walnut or
any Subsidiary of Walnut (other than in each case, claims or assessments for
which adequate reserves have been established or which are being contested in
good faith or are immaterial in amount).
(b) Except as set forth on Schedule 4.13(b) to this Agreement, neither
Walnut nor any of its Subsidiaries is liable for Taxes of any other Person, or
is currently under any contractual obligation to indemnify any Person with
respect to Taxes (except for customary agreements to indemnify lenders or
security holders in respect of Taxes other than income Taxes), or is a party to
any Tax sharing agreement or any other agreement providing for payments by
Walnut or any of its Subsidiaries with respect to Taxes. Except as set forth on
Schedule 4.13(b) to this Agreement, there are no outstanding powers of attorney
enabling any party to represent Walnut or any of its Subsidiaries with respect
to Tax matters. Walnut and its Sudsidiaries have withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor,stockholder or other third
Person. All material elections with respect to Taxes made by Walnut and its
Subsidiaries as of the date hereof are set forth on Schedule 4.13(b) to this
Agreement. There are no private letter rulings in respect of any Tax pending
between Walnut and its Subsidiaries and any Tax authority. Neither Walnut nor
any of its Subsidiaries is a personal holding company within the meaning of
Section 542 of the Code. Except as set forth
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on Schedule 4.13(b) to this Agreement, neither Walnut nor any of its
Subsidiaries is a party to any joint venture, partnership or other arrangement
or contract which could be treated as a partnership for Tax purposes. Neither
Walnut nor any of its Subsidiaries has agreed to or is required, as a result of
a change in method of accounting or otherwise, to include any adjustment under
Section 481 of the Code (or any corresponding provision of state, local or
foreign Law) in taxable income. Neither Walnut nor any of its Subsidiaries is a
party to any contract, arrangement or plan that could result (taking into
account the transactions contemplated by this Agreement and the Related
Agreements), separately or in the aggregate, in the payment of an "excess
parachute payments" within the meaning of Section 280G of the Code. Schedule 4.
13(b) to this Agreement contains a list of all jurisdictions to which any Tax is
properly payable or in which any Tax Return is required to be filed by Walnut
and its Subsidiaries, and no written claim has ever been made by any Tax
authority in any other jurisdiction that Walnut or any of its Subsidiaries is
subject to taxation in such jurisdiction.
SECTION 4.14 Material Contracts.
(a) Set forth on Schedule 4.14(a) to this Agreement is a correct and
complete list of each of the following contracts and agreements (and all
amendments, modifications and supplements thereto and all related letters to
which Walnut or any of its Subsidiaries is a party affecting the obligations of
any party thereunder) to which Walnut or any of its Subsidiaries is a party or
by which any of their respective properties or assets are bound, correct and
complete copies of which have been delivered to the Company: (i) each
employment, consulting, non-competition, severance, golden parachute or
indemnification contract (including, without limitation, any contract to which
Walnut or any of its Subsidiaries is a party involving employees of Walnut or
any of its Subsidiaries) which contemplates payments equal to or in excess of
$30,000 per year; (ii) each agreement under which Walnut or any of its
Subsidiaries has a continuing obligation to provide financial advisory or other
consulting services; (iii) contracts granting a right of first refusal or first
negotiation; (iv) each partnership or joint venture agreement; (v) each
agreement for the acquisition, sale, lease or license of properties or assets of
Walnut or any of its Subsidiaries or by Walnut or any of its Subsidiaries (by
merger, purchase or sale of assets or stock or otherwise), including, without
limitation, commitments for future investments, in which the aggregate amount to
paid or received by Walnut or any Subsidiary of Walnut is equal to or in excess
of $5,000; (vi) each contract or agreement with any Governmental Entity; (vii)
each agreement relating to indebtedness of Walnut or any of its Subsidiaries or
guarantees of indebtedness by Walnut or any of its Subsidiaries in excess of
$5,000; (viii) each noncompetition, exclusivity or other agreement restricting
the ability of Walnut or any of its Subsidiaries to hire any Person or operate
its business as now, or contemplated to be, conducted, except for any such
agreement which could not reasonably be expected to have a Walnut Material
Adverse Effect; (ix) each agreement between Walnut or any of its Subsidiaries
and any of its officers, its directors, holders of 5% of the outstanding Walnut
Common Stock or other Affiliates of Walnut or any of its Subsidiaries; (x) each
contract or agreement that contains a "change of control" provision; (xi) any
agreement which encumbers or places a Lien on any assets of Walnut or its
Subsidiaries; and (xii) all commitments and agreements to enter into any of the
foregoing (collectively, together with the contracts and agreements filed as
exhibits to the Walnut Filed SEC Reports, the "WALNUT MATERIAL CONTRACTS").
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(b) Except as set forth on Schedule 4.14(b) to this Agreement:
(i) Each Walnut Material Contract is in full force and effect
and there is no default under any Walnut Material Contract either by
Walnut or any of its Subsidiaries or, to the Knowledge of Walnut, by
any other party thereto, and no event has occurred that with the lapse
of time or the giving of notice or both would constitute a default
thereunder by Walnut or any of its Subsidiaries or, to the Knowledge of
Walnut, any other party, in any such case in which such default or
event could reasonably be expected to have, individually or in the
aggregate, a Walnut Material Adverse Effect.
(ii) No party to any such Walnut Material Contract has given
notice to Walnut or any of its Subsidiaries of or made a claim against
Walnut or any of its Subsidiaries with respect to any breach or default
thereunder, in any such case in which such breach or default could
reasonably be expected to have, individually or in the aggregate, a
Walnut Material Adverse Effect.
SECTION 4.15 Title to Properties; Encumbrances. Except as set forth in
Schedule 4.15 to this Agreement, Walnut and its Subsidiaries have good title to
all of the properties and assets, real and personal, tangible and intangible, it
owns or purports to own, including those reflected on their books and records
and in the Walnut Financial Statements (except for accounts receivable collected
and materials and supplies disposed of in the ordinary course of business
consistent with past practice after the respective dates of the Walnut Financial
Statements). Walnut and its Subsidiaries have a valid leasehold, license or
other interest in all of the other properties and assets, tangible or
intangible, which are used in the operation of their respective businesses.
Except as set forth in Schedule 4.15 to this Agreement, all properties and
assets owned, leased or used by Walnut and its Subsidiaries are free and clear
of all Liens, except for (a) Liens for current Taxes not yet due, (b) workmen's,
common carrier and other similar Liens arising in the ordinary course of
business, none of which materially detracts from the value or materially impairs
the use of the asset or property subject thereto, or materially impairs the
operations of Walnut and its Subsidiaries, (c) Liens disclosed in the Walnut
Financial Statements, and (d) such imperfections of title and other Liens, if
any, which do not individually or in the aggregate materially interfere with the
value or the use of such properties or assets or otherwise could not reasonably
be expected to have, individually or in the aggregate, a Walnut Material Adverse
Effect.
SECTION 4.16 Intellectual Property. Except as disclosed on Schedule 4.16 to
this Agreement, Walnut and its Subsidiaries own or are licensed or otherwise
have legally enforceable rights to use all Intellectual Property used or
otherwise material to the operation of the business of Walnut and its
Subsidiaries as presently conducted. To the Knowledge of Walnut, the use of the
Intellectual Property by Walnut and its Subsidiaries does not infringe upon or
otherwise violate any material Intellectual Property rights of third parties.
To the Knowledge of Walnut, no third party, including any employee, former
employee, independent contractor or consultant, is infringing upon or otherwise
violating the rights of Walnut or any Subsidiary of Walnut in the Intellectual
Property that, individually or in the aggregate, would reasonably be expected to
have a Walnut Material Adverse Effect. Except as disclosed on Schedule 4.16, or
as would not reasonably be expected, individually or in the aggregate, to have a
Walnut Material Adverse Effect, no claims (i) are currently pending or, to the
Knowledge of Walnut, threatened with respect to the Intellectual Property of
Walnut or any
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Subsidiary of Walnut, or (ii) are, to the Knowledge of Walnut, currently pending
or threatened with respect to the Intellectual Property rights of a third party
to the extent arising out of any use, reproduction or distribution of the
Intellectual Property of such third party by Walnut or a Subsidiary of Walnut.
SECTION 4.17 Year 2000. To the Knowledge of Walnut, the software and
hardware of Walnut and its Subsidiaries, when used or operated in accordance
with their printed documentation and in conjunction with computer hardware and
software that itself correctly processes date-related data, is free of defects
in programming and operation and will continue to operate after December 31,
1999, with the same level of functionality as the software operated prior
thereto, including, without limitation, correctly storing, processing and
presenting calendar dates falling on or after December 31, 1999. To the
Knowledge of Walnut, the software will be free from logic and other errors
attributable to dates falling on or after December 31, 1999 and will not be
responsible for any error associated with any date falling on or after
December 31, 1999.
SECTION 4.18 Investment Securities. Schedule 4.18 to this Agreement sets
forth a complete and correct list of all securities (including warrants) owned
by Walnut and its Subsidiaries on the date specified in Schedule 4.18, which
date shall be no more than ten days prior to the date hereof. Except as
described in Schedule 4.18 to this Agreement, Walnut and its Subsidiaries have
good and marketable title to all such securities (except securities sold under
repurchase agreements (which are indicated as such on Schedule 4.18) or held in
any fiduciary or agency capacity (which are indicated as such on
Schedule 4.18)), free and clear of any Lien, except to the extent such
securities are pledged in the ordinary course of business consistent with
prudent business practices to secure obligations of Walnut or such Subsidiary.
Such securities are valued on the books of Walnut in accordance with the methods
and procedures described in the Walnut Filed SEC Reports.
SECTION 4.19 Ownership of THCG and Newco.
(a) THCG is a direct, wholly-owned subsidiary of Walnut and Newco is a
direct, wholly-owned subsidiary of THCG. Each of THCG and Newco was formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement.
(b) As of the date hereof and the Effective Time of the Mergers, except
for obligations or liabilities incurred in connection with its incorporation or
organization and the transactions contemplated by this Agreement and the
Transaction Documents and the Related Agreements and except for this Agreement
and the Transaction Documents and the Related Agreements, neither of THCG or
Newco has or will have incurred, directly or indirectly, through any Subsidiary
or Affiliate, any obligation or liability or engaged in any business activity of
any type or kind whatsoever or entered into any agreement or arrangement with
any Person.
SECTION 4.20 Brokers. Except as set forth on Schedule 4.20 to this
Agreement, no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Mergers or the other
transactions contemplated by this Agreement, the Transaction Documents or the
Related Agreements (including the Related Transactions) based upon arrangements
made by or on behalf of Walnut or any of its
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Affiliates.
SECTION 4.21 Transactions with Affiliates. Except as disclosed in the Walnut
Filed SEC Reports or as set forth on Schedule 4.21 to this Agreement, since
January 1, 1999, no stockholder, officer, director or Affiliate of Walnut or any
Subsidiary of Walnut has entered into any transaction with or is a party to any
contract with Walnut or any of its Subsidiaries. No officer, director or
Affiliate of Walnut or any Subsidiary of Walnut owns any direct or indirect
interest of any kind in, or controls or is a director, officer, employee or
partner of, or consultant to, or lender or borrower from or has the right to
participate in the profits of, any Person which is a competitor, client,
landlord, tenant, creditor or debtor of Walnut or its Subsidiaries. All
agreements or arrangements relating to any transaction involving Walnut or any
of its Subsidiaries and any of their respective directors, officers, principal
employees or Affiliates which are required to be described in the Walnut Filed
SEC Reports are described therein, and such descriptions set forth the material
terms of all such transactions and do not omit to state any material facts with
respect to any such transaction.
SECTION 4.22 Books and Records. All constituent documents, business
licenses, minute books, stock certificate books, stock transfer ledgers and
other records of Walnut and its Subsidiaries (collectively, the "WALNUT
RECORDS") have been maintained in accordance with reasonable business practices
and applicable legal requirements. The Walnut Records are complete and correct
in all material respects and contain all material matters required to be
reflected in such Walnut Records, except that the minutes of the meetings of the
Board of Directors of Walnut held in December 1998, April 1999, June 1999 and
July 1999, and certain minutes of the compensation committee and the investment
committee, have not yet been prepared. Neither the Walnut Board nor the
compensation committee or investment committee discussed, authorized or approved
at any of those meetings, any event, transaction, agreement or other commitment
that would reasonably be likely to result in a Walnut Material Adverse Effect.
SECTION 4.23 Disclosure. The representations and warranties by the Walnut
Entities contained in this Agreement and in any Schedule or certificate
furnished or to be furnished by them pursuant hereto do not contain or will not,
as of the Closing Date, contain any untrue statement of a material fact, and do
not omit or will not, as of the Closing Date, omit to state any fact required to
be stated therein or necessary in order to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading. The representations and warranties contained in this Section 4.23 or
elsewhere in this Agreement or in any Schedule or certificate furnished or to be
furnished as aforesaid pursuant hereto shall not be affected or deemed waived by
reason of the fact that the Company or its representatives know or should have
known that any such representation or warranty is or might be inaccurate in any
respect.
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ARTICLE 5
COVENANTS
The parties, as applicable, hereby covenant and agree as follows:
SECTION 5.1 Conduct of Business of the Company.
(a) From the date hereof until the Second Effective Time, the Company
shall: (i) maintain its corporate existence in good standing; (ii) maintain the
general character of its business; (iii) maintain in effect all of its presently
existing insurance coverage (or substantially equivalent insurance coverage);
(iv) preserve its business organization intact, preserve its good will, keep
available to the Company the services of its current officers and employees and
preserve its present business relationships with its customers, clients and
other Persons with which the Company has business relations; and (v) in all
respects conduct its business only in the usual and ordinary manner consistent
with past practice and perform in all material respects all Company Material
Contracts or other obligations with banks, customers, clients, employees and
others; provided, however, that it shall not be a violation of this Section
5.1(a) for the Company to establish the LLC and to transfer to the LLC
securities owned by the Company (the "TRANSFER"), provided that all such
organizational documents regarding the LLC and all documents relating to the
Transfer shall be subject to the approval of Walnut, which approval shall not be
unreasonably withheld, and that the Transfer is accomplished in compliance in
all material respects with all applicable Law and that all material consents and
approvals with respect thereto have been obtained.
(b) Without limiting the provisions of Section 5.1(a), from the date
hereof until the Second Effective Time, the Company shall not, directly or
indirectly, do, or propose to do, or cause the LLC to, directly or indirectly,
do, or propose to do, any of the following without the prior written consent of
Walnut:
i. amend or otherwise modify any Company Charter Documents;
ii. issue, sell, dispose of or encumber or authorize the
issuance, sale, disposition or encumbrance of, or grant or issue any Option to
acquire or make any agreement of the type referred to in Section 3.2 with
respect to, any shares of its capital stock or any other of its securities or
any security convertible or exercisable into or exchangeable for any such shares
or securities, or alter any term of any of its outstanding securities or make
any change in its outstanding shares of capital stock or its capitalization,
whether by reason of a reclassification, recapitalization, stock split,
combination, exchange or readjustment of shares, stock dividend or otherwise;
iii.encumber any material assets or properties of the Company
or the LLC;
iv. declare, set aside, make or pay any dividend or other
distribution to any stockholder with respect to its capital stock;
v. redeem, purchase or otherwise acquire any Company
Securities;
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vi. increase the compensation or other remuneration or
benefits payable or to become payable to any director or executive officer of
the Company or the LLC, or increase the compensation or other remuneration or
benefits payable or to become payable to any of its or the LLC's other employees
or agents, except, with respect to such other employees or agents only, for
increases in the ordinary course of business consistent with past practice;
vii. adopt or (except as otherwise required by Law) amend or
make any unscheduled contribution to any employee benefit plan for or with
employees, or enter into any collective bargaining agreement;
viii. terminate or modify any Company Material Contract
requiring future payments to or from the Company or the LLC, individually or in
the aggregate, in excess of $100,000, except for terminations of Company
Material Contracts upon their expiration during such period in accordance with
their terms;
ix. create, incur, assume or otherwise become liable for any
indebtedness in an aggregate amount in excess of $20,000 or guarantee or endorse
any obligation or the net worth of any Person, except for endorsements of
negotiable instruments for collection in the ordinary course of business;
x. pay, discharge or satisfy any claim, obligation or
liability, absolute, accrued, contingent or otherwise, whether due or to become
due, in an aggregate amount in excess of $20,000, except for liabilities
incurred prior to the date hereof in the ordinary course of business in a manner
consistent with past practice;
xi. except as contemplated in the proviso to Section 5.1(a)
and except as set forth on Schedule 5.1(b)(xi) to this Agreement, sell,
transfer, lease or otherwise dispose of any of its assets or properties, except
in the ordinary course of business in a manner consistent with past practice and
for a cash consideration equal to the fair value thereof at the time of such
sale, transfer, lease or other disposition;
xii. except as set forth on Schedule 5.1(b)(xii) to this
Agreement, cancel, compromise, release or waive any material debt, claim or
right;
xiii. make any loan or advance to any Person other than travel
and other similar routine advances in the ordinary course of business in a
manner consistent with past practice, or, except as contemplated by Section 5.26
of this Agreement or as disclosed on Schedule 5.1(b)(xiii) to this Agreement,
acquire for cash (a "COMPANY ACQUISITION") the capital stock or other securities
or any ownership interest in, or substantially all of the assets of, any other
business enterprise, except for any Company Acquisitions that do not
individually exceed $50,000 or that do not exceed $200,000 in the aggregate;
xiv. make any material capital investment or expenditure or
capital improvement, addition or betterment;
xv. change its method of accounting or the accounting
principles or practices
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utilized in the preparation of the Company Financial Statements, other than as
required by GAAP;
xvi. institute or settle any Proceeding before any
Governmental Entity relating to it or its assets or properties;
xvii. adopt a plan of dissolution or liquidation with respect
to the Company or the LLC;
xviii. enter into any contract, except contracts made in the
ordinary course of business in a manner consistent with past practice;
xix. make any new election with respect to Taxes or any change
in current elections with respect to Taxes, or settle or compromise any federal,
state, local or foreign Tax liability or agree to an extension of a statute of
limitations; or
xx. enter into any commitment to do any of the foregoing, or
any action which would make any of the representations or warranties of the
Company contained in this Agreement untrue or incorrect in any material respect
(subject to the Knowledge and materiality limitations set forth therein) or
cause any covenant, condition or agreement of the Company in this Agreement not
to be complied with or satisfied in any material respect.
SECTION 5.2 Conduct of Business of Walnut.
(a) From the date hereof until the Effective Time of the Mergers,
Walnut shall and shall cause each of its Subsidiaries to: (i) maintain its
corporate existence in good standing; (ii) maintain the general character of its
business; (iii) maintain in effect all of its presently existing insurance
coverage (or substantially equivalent insurance coverage); (iv) preserve its
business organization intact, preserve its good will, keep available the
services of its current officers and employees and preserve its present business
relationships with its customers, clients and other Persons with which it has
business relations; and (v) in all respects conduct its business only in the
usual and ordinary manner consistent with past practice and perform in all
material respects all Walnut Material Contracts or other obligations with banks,
customers, clients, employees and others.
(b) Without limiting the provisions of Section 5.2(a), from the date
hereof until the Effective Time of the Mergers, neither Walnut nor any of its
Subsidiaries shall, directly or indirectly, do, or propose to do, any of the
following without the prior written consent of the Company:
i. amend or otherwise modify any Walnut Charter Documents or
any of the organizational documents or any of such Subsidiaries;
ii. except for Walnut Common Stock issued pursuant to the
Capital Investment, the Debt Conversion, the Compensation Satisfaction and the
UPLP Acquisition pursuant to Sections 5.6(A), (B) and (D), respectively, and
except for the grant of THCG Options pursuant to Sections 5.20(a), and the
purchase of certain Walnut Options by Walnut pursuant to Section 5.20(b), issue,
sell, dispose of or encumber or authorize the issuance, sale,
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disposition or encumbrance of, or grant or issue any Option, warrant or other
right to acquire or make any agreement of the type referred to in Section 3.2
with respect to, any shares of its capital stock or any other of its securities
or any security convertible or exercisable into or exchangeable for any such
shares or securities, or alter any term of any of its outstanding securities or
make any change in its outstanding shares of capital stock or its
capitalization, whether by reason of a reclassification, recapitalization,
stock split, combination, exchange or readjustment of shares, stock dividend or
otherwise;
iii. encumber any of its material assets or properties;
iv. declare, set aside, make or pay any dividend or other
distribution to any stockholder with respect to its capital stock;
v. except for the UPLP Acquisition pursuant to Section 5.6
(D) or the purchase of certain Walnut Options pursuant to Section 5.20(b),
redeem, purchase or otherwise acquire any Walnut Securities;
vi. except for the payment of the Cash Bonus to Joel Kanter
and Robert Mauer, increase the compensation or other remuneration or benefits
payable or to become payable to any director or executive officer of Walnut or
its Subsidiaries, or increase the compensation or other remuneration or benefits
payable or to become payable to any of its other employees or agents, except,
with respect to such other employees or agents only, for increases in the
ordinary course of business consistent with past practice;
vii. adopt or (except as otherwise required by Law) amend or
make any unscheduled contribution to any employee benefit plan for or with
employees, or enter into any collective bargaining agreement;
viii. terminate or modify any Walnut Material Contract
requiring future payments to or from Walnut, individually or in the aggregate,
in excess of $100,000, except for terminations of Walnut Material Contracts upon
their expiration during such period in accordance with their terms;
ix. except as set forth on Schedule 5.2(b)(ix), create,
incur, assume or otherwise become liable for any indebtedness in an aggregate
amount in excess of $20,000 or guarantee or endorse any obligation or the net
worth of any Person, except for endorsements of negotiable instruments for
collection in the ordinary course of business;
x. except as contemplated by Sections 5.6(B) and 5.6(F) to
this Agreement or as set forth on Schedule 5.2(b)(x) to this Agreement, pay,
discharge or satisfy any claim, obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, in an aggregate amount in
excess of $20,000, except for liabilities incurred prior to the date hereof in
the ordinary course of business in a manner consistent with past practice;
xi. sell, transfer, lease or otherwise dispose of any of its
assets or properties, except in the ordinary course of business in a manner
consistent with past practice and for a cash consideration equal to the fair
value thereof at the time of such sale, transfer, lease or other disposition;
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xii. cancel, compromise, release or waive any material debt,
claim or right;
xiii. make any loan or advance to any Person other than travel
and other similar routine advances in the ordinary course of business consistent
with past practice, or acquire for cash (a "WALNUT ACQUISITION") the capital
stock or other securities or any ownership interest in, or substantially all of
the assets of, any other business enterprise, except for any Walnut Acquisitions
that do not individually exceed $50,000 or that do not exceed $200,000 in the
aggregate;
xiv. make any material capital investment or expenditure or
capital improvement, addition or betterment;
xv. change its method of accounting or the accounting
principles or practices utilized in the preparation of Walnut Financial
Statements, other than as required by GAAP;
xvi. institute or settle any Proceeding before any
Governmental Entity relating to it or its assets or properties;
xvii. adopt a plan of dissolution or liquidation with respect
to itself;
xviii. enter into any contract, except contracts made in the
ordinary course of business consistent with past practice;
xix. make any new election with respect to Taxes or any change
in current elections with respect to Taxes, or settle or compromise any federal,
state, local or foreign Tax liability or agree to an extension of a statute of
limitations; or
xx. except as contemplated by Section 5.6(F), enter into any
commitment to do any of the foregoing, or any action which would make any of the
representations or warranties of the Walnut Entities contained in this Agreement
untrue or incorrect in any material respect (subject to the Knowledge and
materiality limitations set forth therein) or cause any covenant, condition or
agreement of the Walnut Entities in this Agreement not to be complied with or
satisfied in any material respect.
SECTION 5.3 Preparation and Filing of Proxy Statement; Walnut Stockholders
Meeting.
(a) As promptly as practicable following the date of this Agreement,
Walnut shall prepare and file with the SEC the proxy materials relating to the
Walnut Stockholders Meeting to be held in connection with the transactions
contemplated by this Agreement (including the approval of the Mergers), the
Transaction Documents and the Related Agreements (the "PROXY STATEMENT"). The
Proxy Statement shall comply as to form with the applicable provisions of the
Exchange Act and the Investment Company Act and the rules and regulations
thereunder. Walnut shall, as promptly as practicable after receipt thereof,
provide copies of any written comments received from the SEC with respect to the
Proxy Statement to the Company and advise the Company of any oral comments with
respect to the Proxy Statement received from the SEC. Walnut shall provide the
Company with a reasonable opportunity to review and comment on the Proxy
Statement and any amendment or supplement to the Proxy Statement
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prior to filing such with the SEC, and shall provide the Company with a copy of
all such filings made with the SEC. No amendment or supplement to the
information supplied by the Company for inclusion in the Proxy Statement shall
be made without the approval of the Company, which approval shall not be
unreasonably withheld or delayed.
(b) Walnut shall, as promptly as practicable following the date of this
Agreement, duly call, give notice of, convene and hold a meeting of its
stockholders (the "WALNUT STOCKHOLDERS MEETING") for the purpose of obtaining
the requisite approval of the Walnut Stockholders of this Agreement and the
transactions contemplated by this Agreement and the Related Agreements
(including the Mergers and the Related Transactions). Walnut shall, through the
Walnut Board, recommend to its stockholders approval of this Agreement and all
of such transactions.
SECTION 5.4 Preparation and Filing of Form 8-F. As promptly as practicable
following the date of this Agreement, the Company shall prepare and Walnut shall
file with the SEC a Form 8-F, the purpose of which will be to deregister Walnut,
Walnut Capital, Walnut Funds and Universal Bridge under the Investment Company
Act (the "BDC DEREGISTRATION"). Walnut shall fully cooperate with the Company in
the preparation of the Form 8-F and shall furnish promptly to the Company all
information concerning its business, facilities, properties, assets and
personnel, and shall make available to the Company the appropriate individuals
(including officers, employees, accountants, counsel and other professionals)
for discussion of Walnut's business, facilities, properties and personnel, as
the Company may reasonably request in connection with its preparation of the
Form 8-F. The Company will provide Walnut with a reasonable opportunity to
review, comment on, and approve the Form 8-F and any amendment or supplement
thereto prior to filing such with the SEC, provided that such approval shall not
be unreasonably withheld or delayed. The Company will provide Walnut with a copy
of all such filings made with the SEC.
SECTION 5.5 SEC and Other Governmental Filings. Each of Walnut and the Company
shall promptly provide the other (or its counsel) with copies of all filings
made by it or any of its Subsidiaries with the SEC or any other Governmental
Entity in connection with this Agreement, the Transaction Documents and the
Related Agreements and the transactions contemplated hereby and thereby
(including the Mergers and the Related Transactions).
SECTION 5.6 Related Transactions. Walnut shall use its commercially reasonable
efforts to effect the Related Transactions prior to the Closing provided that,
to the extent required, the BDC Deregistration has been effected.
For the purposes of this Agreement, "RELATED TRANSACTIONS" means:
(A) the issuance by Walnut in a private placement
transaction of at least 1,500,000, and up to 2,500,000, shares
of Walnut Common Stock to an investor group at $2.00 per share
in cash; provided, however, that such number may be increased
by one share for (i) every $2.00 of debt and accrued
liabilities of Walnut converted into cash pursuant to Section
5.6(B), (ii) every $2.00 of cash paid in satisfaction of the
Accrued Compensation pursuant to Section 5.6(C), and (iii)
every $2.00 of cash paid in connection with the UPLP
Acquisition pursuant to Section 5.6(D), up to a maximum of an
additional
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500,000 shares of Walnut Common Stock (the "CAPITAL
INVESTMENT");
(B) the conversion of the debts and accrued
liabilities of Walnut, in the aggregate principal amount of
$1,093,000 (plus any interest actually accrued thereon),
described on Schedule 5.6(B) to this Agreement, into cash or
Walnut Common Stock, as reasonably determined by the Company,
on substantially the same terms and conditions as the Capital
Investment (the "DEBT CONVERSION");
(C) (i) the satisfaction in full of the accrued
compensation of Burton W. Kanter in the amount of $387,875
through June 30, 1999 (the "PAST COMPENSATION") and $273.97
per day from July 1, 1999 until the Closing Date (the
"CONTINUING ACCRUAL" and, together with the Past Compensation,
the "ACCRUED COMPENSATION"), by (x) the forgiveness by Burton
W. Kanter of $150,000 of such Past Compensation (the "FORGIVEN
AMOUNT"), and (y) the payment or issuance to Burton W. Kanter
of cash or a number of shares of Walnut Common Stock, valued
at $2.00 per share, or a combination thereof, as reasonably
determined by the Company, equal to the total amount of such
Accrued Compensation (less the Forgiven Amount) (the
"COMPENSATION SATISFACTION"); and
(ii) the sale by Walnut to Burton W. Kanter,
and the purchase by Burton W. Kanter from Walnut, of any and
all rights Walnut or its Subsidiaries may have under the
United Airlines PassPlus Program for a purchase price of
$5,000, payable in cash at the Closing;
(D) the dissolution of Universal Partners, L.P., an
Illinois limited partnership ("UPLP"), following Universal
Bridge's acquisition of 17% of the outstanding limited
partnership interest of UPLP in exchange for an amount equal
to the net book value thereof payable in cash or Walnut Common
Stock (valued at $2.00 per share), as reasonably determined by
the Company, and 50% of the outstanding general partnership
interest of UPLP for up to $134,000, payable in cash or Walnut
Common Stock valued at $2.00 per share, as reasonably
determined by the Company (collectively, the "UPLP
ACQUISITION");
(E) the relinquishment by Walnut Capital Corp., a
Delaware corporation and a wholly-owned subsidiary of Walnut,
of its license from the Small Business Administration to
operate as a Small Business Investment Company; and
(F) the termination of the oral sublease between
Walnut and Windy City, Inc. for premises located in Vienna,
Virginia, with no cost or penalty to Walnut.
With respect to the Sections 5.6(B), 5.6(C) and 5.6(D), any
determination of the Company to make payments in cash or Walnut Common Stock
shall be consistent with Walnut's contractual obligations, if any.
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For the purposes of this Agreement, "RELATED AGREEMENTS" shall include
all agreements necessary to effect the Related Transactions, all of which
Related Agreements will be reasonably satisfactory in form and substance to the
Company. In connection with the Capital Investment, the Company shall use its
commercially reasonable efforts to secure suitable accredited investors in the
Capital Investment, which investors shall in all cases be subject to the
reasonable approval of Walnut. The Company shall not be paid any finders fee or
other remuneration in connection with such efforts (whether or not customary).
The parties agree and acknowledge that Walnut shall not be required to use any
efforts to secure suitable investors in the Capital Investment.
SECTION 5.7 Consulting Agreements.
(a) At or prior to the Closing, Walnut shall use its commercially
reasonable efforts to cause the Chicago Advisory Group to enter into a
consulting agreement (the "CAG CONSULTING AGREEMENT") with Inland Financial,
substantially in the form attached as Exhibit A to this Agreement.
(b) At or prior to the Closing, Walnut shall use its commercially
reasonable efforts to cause Windy City, Inc. to enter into a consulting
agreement (the "WCI CONSULTING AGREEMENT") with THCG, substantially in the form
attached as Exhibit B to this Agreement.
SECTION 5.8 Employment Agreements. At or prior to the Closing, the Company shall
use its commercially reasonable efforts to cause each of Joseph D. Mark, Shai
Novik and Adi Raviv to enter into an employment agreement with THCG,
substantially in the form attached as Exhibits C-1, C-2 and C-3 to this
Agreement, respectively.
SECTION 5.9 Voting Agreement. Walnut shall use its commercially reasonable
efforts to cause each of Windy City, Inc., The Holding Company and the Kanter
Family Foundation (the "WALNUT PRINCIPAL STOCKHOLDERS") to execute on the date
hereof a voting agreement (the "VOTING AGREEMENT"), in the form attached as
Exhibit D to this Agreement, pursuant to which (a) the Walnut Principal
Stockholders will agree to vote their shares of Walnut Common Stock in favor of
the Mergers and the Related Transactions, and (b) the Walnut Principal
Stockholders will agree not to sell their shares of THCG Common Stock for a
period of 12 months following the consummation of the Mergers and the Related
Transactions, subject to certain exceptions to be set forth therein.
SECTION 5.10 [Intentionally Omitted].
SECTION 5.11 Investment Letters. At the Closing, the Company shall use its
commercially reasonable efforts to cause each of the stockholders of the Company
to execute and deliver to Walnut an investment letter (the "INVESTMENT
LETTERS"), substantially in the form attached as Exhibit E to this Agreement.
SECTION 5.12 Press Releases. No party will issue or cause the publication of any
press release or other public announcement with respect to this Agreement or the
transactions contemplated by this Agreement, the Transaction Documents and the
Related Agreements, other than the Proxy Statement and the Form 8-F, without the
prior written consent of
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the other parties hereto; provided, however, that nothing herein will prohibit
any party from issuing or causing publication of any such press release or
public announcement to the extent that such party determines such action to be
required by Law, in which case the party making such determination will allow
the other parties reasonable time to comment on such release or announcement in
advance of its issuance.
SECTION 5.13 Access to Information; Confidentiality. Upon reasonable notice, the
Company and Walnut each shall afford to the officers, employees, accountants,
counsel and other representatives of the other reasonable access, during the
period prior to the Effective Time of the Mergers, to all its facilities,
properties, assets, books, contracts and records and, during such period, the
Company and Walnut each shall furnish promptly to the other all information
concerning its business, facilities, properties, assets and personnel as such
other party may reasonably request, and each shall make available to the other
the appropriate individuals (including officers, employees, accountants, counsel
and other professionals) for discussion of the other's business, facilities,
properties, assets and personnel as either the Company or Walnut may reasonably
request. Each party shall keep such information confidential in accordance with
the terms of the Confidentiality Agreement.
SECTION 5.14 Non-Solicitation.
(a) The Walnut Entities, their Affiliates and their respective
officers, directors, employees, representatives and agents shall immediately
cease any existing discussions or negotiations, if any, with any parties
conducted heretofore with respect to any acquisition or exchange of all or any
material portion of the assets of, or any equity interest in, Walnut or any of
its Subsidiaries or any business combination with Walnut or any of its
Subsidiaries, except that Walnut may continue any existing discussions or
negotiations with respect to the acquisition by Walnut of other factoring
businesses in exchange for assets of, or an equity interest in, Walnut. Walnut
agrees that, prior to the Effective Time of the Mergers, it shall not, and shall
not authorize or permit any of its Subsidiaries or any of its or its
Subsidiaries' directors, officers, employees, agents or representatives,
directly or indirectly, to solicit, initiate, encourage or facilitate, or
furnish or disclose non-public information in furtherance of, any inquiries or
the making of any proposal with respect to any merger, liquidation,
recapitalization, consolidation or other business combination involving Walnut
or its Subsidiaries or acquisition of any capital stock or any material portion
of the assets of Walnut or any of its Subsidiaries, or any combination of the
foregoing (an "ACQUISITION TRANSACTION"), or negotiate, explore or otherwise
engage in discussion with any Person (other than the Company or its directors,
officers, employees, agents and representatives) with respect to any Acquisition
Transaction, or enter into any agreement, arrangement or understanding requiring
it to abandon, terminate or fail to consummate the Mergers, the Related
Transactions or any other transactions contemplated by this Agreement; provided
that Walnut may furnish information to, and negotiate or otherwise engage in
discussions with, any party who delivers a bona fide written proposal for an
Acquisition Transaction if (i) the Walnut Board determines in good faith and on
a reasonable basis by a majority vote, after consultation with its outside
counsel and financial advisors, that (x) such Acquisition Transaction is
reasonably likely to be more favorable to Walnut and its stockholders from a
financial point of view than the transactions contemplated by this Agreement and
(y) that failure to take such action would thus constitute a breach of the
fiduciary duties of the Walnut Board, and (ii) Walnut enters into a customary
confidentiality agreement with respect thereto,
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and (iii) Walnut complies with the provisions of Section 5.14(b). The term
"Acquisition Transaction" shall not include any of the Related Transactions
provided for in Section 5.6.
(b) From and after the execution of this Agreement, Walnut shall, as
soon as practicable, advise the Company in writing of the receipt, directly or
indirectly, or the existence of any discussions, negotiations, proposals or
substantive inquiries relating to an Acquisition Transaction, identify the
offeror and furnish to the Company a copy of such proposal or substantive
inquiry, if it is in writing, or a written summary of any oral proposal or
substantive inquiry relating to an Acquisition Transaction. Walnut shall as soon
as practicable advise the Company in writing of any substantive development
relating to such proposal, including the results of any substantive discussion
or negotiations with respect thereto.
(c) Neither the Walnut Board nor any committee thereof shall (i)
withdraw or modify, or propose to withdraw or modify, in a manner adverse to the
Company, the approval or recommendation of the Walnut Board or a committee
thereof of this Agreement or the transactions contemplated hereby or (ii)
recommend to the Walnut Stockholders, or propose to recommend to the Walnut
Stockholders, any Acquisition Transaction except at or after the termination of
this Agreement pursuant to and in accordance with Section 7.1(g).
(d) The Company, its Subsidiary and their Affiliates and their
respective officers, directors, employees, representatives and agents shall
immediately cease any existing discussions or negotiations, if any, with any
parties conducted heretofore with respect to any acquisition or exchange of all
or any material portion of the assets of, or any equity interest in, the Company
or its Subsidiary or any business combination with the Company or its
Subsidiary. The Company agrees that, prior to the Effective Time of the Mergers,
it shall not, and shall not authorize or permit its Subsidiary or any of its or
its Subsidiary's directors, officers, employees, agents or representatives,
directly or indirectly, to solicit, initiate, encourage or facilitate, or
furnish or disclose non-public information in furtherance of, any inquiries or
the making of any proposal with respect to any merger, liquidation,
recapitalization, consolidation or other business combination involving the
Company or its Subsidiary or acquisition of any capital stock or any material
portion of the assets of the Company or its Subsidiary or any combination of the
foregoing (a "COMPANY TRANSACTION"), or negotiate, explore or otherwise engage
in discussion with any Person (other than Walnut or its directors, officers,
employees, agents and representatives) with respect to any Company Transaction,
or enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger 2, the Related Transactions
or any other transactions contemplated by this Agreement.
SECTION 5.15 Commercially Reasonable Efforts; Further Action. Upon the terms and
subject to the conditions set forth in this Agreement, each of the parties
hereto agrees to use its commercially reasonable efforts to take, or cause to be
taken, all actions, and to do, or cause to be done, and to assist and cooperate
with the other parties in doing, or causing to be done, all things necessary,
proper or advisable to fulfill all conditions applicable to such party pursuant
to this Agreement, the Transaction Documents and the Related Agreements and to
consummate and make effective, in the most expeditious manner practicable, the
Mergers, the Related Transactions and the other transactions contemplated by
this Agreement, the Transaction Documents and the Related Agreements, including
(i) the obtaining of all
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necessary actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and filings
and the taking of all reasonable steps as may be necessary to make or obtain a
Filing and Approval to, of or with, or to avoid an action or Proceeding by, any
Governmental Entity; (ii) the obtaining of all necessary consents, approvals,
waivers or exemption from non-governmental third parties; and (iii) the
execution and delivery of any additional instruments necessary to consummate the
transactions contemplated by, and to fully carry out the purposes and intent of,
this Agreement and the Transaction Documents and the Related Agreements.
SECTION 5.16 Indemnification and Insurance. (a) The By-Laws and Certificate of
Incorporation of Surviving Corporation 1 shall contain the provisions with
respect to indemnification set forth in the By-Laws and Certificate of
Incorporation of THCG on the date hereof, which provisions shall not be amended,
repealed or otherwise modified for a period of six years from the First
Effective Time in any manner that would adversely affect the rights thereunder
as of the First Effective Time of individuals who at the First Effective Time
were directors, officers, employees or agents of Walnut or its Subsidiaries,
unless such modification is required after the First Effective Time by Law.
(b) Surviving Corporation 1 shall, to the fullest extent permitted
under applicable law or under the Certificate of Incorporation or By-Laws of
Surviving Corporation 1, indemnify and hold harmless each present and former
director, officer, employee or agent of Walnut or any of its Subsidiaries
(collectively, the "INDEMNIFIED PARTIES") against any costs or expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative (collectively, "Actions"), (x) arising out of or
pertaining to the transactions contemplated by this Agreement and the
Transaction Documents and the Related Agreements or (y) otherwise with respect
to any acts or omissions occurring at or prior to the First Effective Time, in
each case to the same extent (including any provision for the advancement of
expenses) as provided in the Walnut Charter Documents as in effect on the date
hereof, in each case for a period of six years after the First Effective Time;
provided, however, that, in the event that any claim or claims for
indemnification are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until the
disposition of any and all such claims. In the event of any such Action (whether
arising before or after the First Effective Time), the Indemnified Parties shall
promptly notify Surviving Corporation 1 in writing, but the failure to so notify
shall not relieve Surviving Corporation 1 of its obligations under this Section
5.16(b) except to the extent it is materially prejudiced by such failure, and
Surviving Corporation 1 shall have the right to assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Parties. The Indemnified Parties shall have the right to employ separate counsel
in any such Action and to participate in (but not control) the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Indemnified Parties unless (a) Surviving Corporation 1 has agreed to pay such
fees and expenses, (b) Surviving Corporation 1 shall have failed to assume the
defense of such Action, or (c) the named parties to such Action include both
Surviving Corporation 1 and the Indemnified Parties, the Indemnified Parties
shall have been reasonably advised in writing by counsel that there may be one
or more legal defenses available to the Indemnified Parties which are in
conflict with those available to Surviving Corporation 1. In the event such
Indemnified Parties employ separate counsel at the expense of Surviving
Corporation 1
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pursuant to clauses (b) or (c) of the previous sentence, (i) any counsel
retained by the Indemnified Parties for any period after the First Effective
Time shall be reasonably satisfactory to Surviving Corporation 1; (ii)
the Indemnified Parties as a group may retain only one law firm to represent
them in each applicable jurisdiction with respect to any single Action unless
there is, under applicable standards of professional conduct, a conflict on any
significant issue between the positions of any two or more Indemnified Parties,
in which case each Indemnified Person with respect to whom such a conflict
exists (or group of such Indemnified Persons who among them have no such
conflict) may retain one separate law firm in each applicable jurisdiction;
(iii) after the First Effective Time, Surviving Corporation 1 shall pay the
reasonable fees and expenses of such counsel, promptly after statements therefor
are received; and (iv) Surviving Corporation 1 will cooperate in the defense of
any such Action. Surviving Corporation 1 shall not be liable for any settlement
of any such Action effected without its written consent.
(c) For a period of three years after the First Effective Time,
Surviving Corporation 1 shall maintain in effect, if available, directors' and
officers' liability insurance covering those Persons who are currently covered
by Walnut's directors' and officers' liability insurance policy (a correct and
complete copy of which has been made available to the Company) on terms
comparable to those now applicable to directors and officers of Walnut;
provided, however, that in no event shall Surviving Corporation 1 be required to
expend in excess of 150% of the annual premium currently paid by Walnut for such
coverage; and provided further, that if the premium for such coverage exceeds
such amount, Surviving Corporation 1 shall purchase a policy with the greatest
coverage available for such 150% of such annual premium.
(d) The provisions of this Section 5.16 shall survive the consummation
of the Mergers, is intended to benefit Surviving Corporation 1 and the
Indemnified Parties, shall be binding on all successors and assigns of Surviving
Corporation 1 and shall be enforceable by the Indemnified Parties.
SECTION 5.17 Notification of Certain Matters. The Company shall give prompt
notice to Walnut, and Walnut shall give prompt notice to the Company, of (i) the
occurrence or nonoccurrence of any event the occurrence or nonoccurrence of
which would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at or prior to the
Effective Time of the Mergers, (ii) any material failure of the Company or any
of the Walnut Entities, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement, any Transaction Document or any Related Agreement, (iii) any
notice of, or other communication relating to, a default or event which, with
notice or lapse of time or both, would become a default, received by it or any
of its Subsidiaries subsequent to the date of this Agreement and prior to the
Effective Time of the Mergers, under any contract or agreement material to the
businesses, properties, assets, liabilities, condition (financial or otherwise)
or results of operations of it and its Subsidiaries taken as a whole to which it
or any of its Subsidiaries is a party or by which any of their respective
properties or assets are bound, (iv) any notice or other communication from any
third party alleging that the consent of such third party is or may be required
in connection with the transactions contemplated by this Agreement, the
Transaction Documents or the Related Agreements (including the Mergers and the
Related Transactions), or (v) any Walnut Material Adverse Effect (in the case of
Walnut)
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or Company Material Adverse Effect (in the case of the Company); provided,
however, that the delivery of any notice pursuant to this Section 5.17
shall not cure such breach, non-compliance or non-satisfaction or limit or
otherwise affect the remedies if any, available hereunder to the party receiving
such notice.
SECTION 5.18 Tax Treatment. Each of the parties hereto shall use its
commercially reasonable efforts to cause the Mergers to qualify, and will not
(either before or after consummation of the Mergers) knowingly take any actions,
or fail to take any action, that might reasonably be expected to prevent the
Mergers from qualifying as reorganizations under the provisions of Section 368
of the Code. Walnut and THCG shall, and shall use their reasonable best efforts
to cause Surviving Corporation 2 to, report, to the extent required by the Code,
the Mergers for United States federal income tax purposes as reorganizations
within the meaning of Section 368 of the Code.
SECTION 5.19 State Takeover Laws. Walnut shall, upon the request of the Company,
take all reasonable steps to assist in any challenge by the Company to the
validity or applicability of the transactions contemplated by this Agreement and
the Transaction Documents and the Related Agreements (including the Mergers and
Related Transactions), of any state takeover law.
SECTION 5.20 THCG Options and Walnut Options.
(a) Prior to the First Effective Time, Walnut shall cause THCG to (i)
adopt, and submit to the Walnut Stockholders for approval, a stock incentive
plan (the "THCG STOCK INCENTIVE PLAN"), in form and substance reasonably
satisfactory to the Company, providing for the grant of incentive awards
thereunder with respect to a number of shares of THCG Common Stock that in the
aggregate does not exceed 2,250,000 shares, and (b) grant, in accordance with
the terms of the THCG Stock Incentive Plan (including that grants made by the
Committee as defined therein) and subject to the approval of the THCG Stock
Incentive Plan by the Walnut Stockholders, the consummation of the Mergers and,
if required, the BDC Deregistration, options to purchase up to 1,250,000 shares
of THCG Common Stock (the "THCG OPTIONS") under the THCG Stock Incentive Plan to
the Persons set forth on Schedule 5.20(a) to this Agreement. As promptly as
practicable following the consummation of the Mergers, THCG shall prepare and
file with the SEC a Registration Statement on Form S-8 with respect to the THCG
Common Stock authorized for issuance under the THCG Stock Incentive Plan and
shall use its commercially reasonable efforts to cause such registration
statement to become effective.
(b) Prior to the First Effective Time, Walnut shall use its
commercially reasonable efforts to purchase all outstanding Walnut Options,
other than the Converted Walnut Options, pursuant to Section 2.1(b). Each holder
of a Walnut Option purchased pursuant to Section 2.1(b) shall deliver to Walnut
a copy of the agreement evidencing such Walnut Option, marked "cancelled,"
against receipt of payment therefor.
(c) Prior to the Second Effective Time, the Company shall use its
commercially reasonable efforts to obtain the consent of Shai Novik to the
cancellation of the Novik Options pursuant to Section 2.2(c).
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(d) Prior to the First Effective Time, Walnut shall use its
commercially reasonable efforts to obtain the consent and acknowledgment of Joel
Kanter and Robert Mauer, as the sole beneficiaries under the Walnut Incentive
Program, that the sole benefit to which they are entitled thereunder is the Cash
Bonus.
SECTION 5.21 LLC Merger.
(a) Prior to the First Effective Time, the Company shall establish the
LLC. With respect to the LLC, the Company represents and warrants to Walnut as
follows:
(i) The LLC will be a direct, newly formed, wholly-owned
subsidiary of the Company. The LLC was formed in compliance
with all applicable Law. The LLC will be formed solely for the
purpose of facilitating the transactions contemplated by this
Agreement.
(ii) As of the Effective Time of the Mergers, except for
obligations or liabilities incurred in connection with the
transactions contemplated by this Agreement, including but not
limited to the Transfer, the LLC will not have incurred,
directly or indirectly, through any subsidiary or Affiliate,
any obligation or liability or engaged in any business
activity of any type or kind whatsoever or entered into any
agreement or arrangement with any Person.
(iii) As of the Effective Time of the Mergers, except for
securities owned as a result of the Transfer, the LLC will not
have any assets.
(b) Immediately after the Effective Time of the Mergers, Walnut and the
Company shall cause (i) Surviving Corporation 2 to contribute its portfolio of
investment securities to the LLC, (ii) the merger of Walnut Capital, Walnut
Funds and Universal Bridge with and into the LLC, with the LLC as the surviving
entity, and (iii) if necessary in connection with the BDC Deregistration, the
dividend by Surviving Corporation 2 of its membership interest in the LLC to
THCG.
SECTION 5.22 THCG Board of Directors. Upon consummation of Merger 2, the Board
of Directors of THCG shall be classified into three classes. The Class I
directors shall consist of Messrs. Evan Marks and Joseph D. Mark and shall serve
until the first annual meeting of the THCG stockholders after the Mergers. The
Class II directors shall consist of Mr. Gene Burleson and a director nominated
by the Company and reasonably acceptable to Walnut, and shall serve until the
second annual meeting of the THCG stockholders after the Mergers. The Class III
directors shall consist of Messrs. Burton W. Kanter, Joel Kanter and Adi Raviv,
and shall serve until the third annual meeting of the THCG stockholders after
the Mergers.
SECTION 5.23 Company Preferred Stock. Prior to the Second Effective Time, the
Company shall cause the Company Stockholders to contribute to the capital of the
Company all outstanding shares of Company Preferred Stock, or shall take all
such other action as is necessary to ensure that no shares of Company Preferred
Stock are outstanding at the Second Effective Time.
SECTION 5.24 Change of Name. Promptly following the Closing Date, the Company
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shall cause to be taken all actions required to amend the organizational
documents of Tower Hill Capital Group LLC to change its corporate name to a name
which does not contain the words "Tower Hill."
SECTION 5.25 Walnut Securities. Upon the later to occur of the approval of
the Mergers by the Walnut Stockholders and the issuance by the SEC of a notice
of an application for deregistration under Section 8(f) of the Investment
Company Act pursuant to the Form 8-F, Walnut shall sell for cash its marketable
securities and shall revalue its portfolio of nonmarketable securities to fair
market value.
SECTION 5.26 Softwatch Securities. The Company shall use its commercially
reasonable efforts to cause Adi Raviv to obtain a waiver from each of the
shareholders of Softwatch Ltd. ("SOFTWATCH"), pursuant to Section 19 of the
Articles of Association of Softwatch, in order to permit him to transfer to the
Company 127,010 ordinary shares of Softwatch for a purchase price of
$315,131.58, which purchase price includes $132,237.18 of debt forgiveness;
provided, however, that in the event Adi Raviv is unable to obtain such waivers,
the cash component of the purchase price, $182,894.40, shall remain an asset of
the Company and the Company shall forgive Adi Raviv's indebtedness to the
Company in the amount of $132,237.18.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE MERGERS
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Mergers. The
respective obligations of each party hereto to effect the Mergers and the other
transactions contemplated by this Agreement, the Transaction Documents and the
Related Agreements (including the Related Transactions) are subject to the
satisfaction at or prior to the Effective Time of the Mergers of the following
conditions:
(a) this Agreement, the Related Transactions and the BDC Deregistration
shall have been approved and adopted by the applicable requisite vote of the
Walnut Stockholders;
(b) no statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, restrains, enjoins or restricts the
consummation of the transactions contemplated by this Agreement, the Transaction
Documents or the Related Agreements (including the Mergers and the Related
Transactions) or which subjects any party to substantial damages as a result of
the consummation of the transactions contemplated by this Agreement, the
Transaction Documents or the Related Agreements (including the Mergers and the
Related Transactions);
(c) all required consents, approvals, waivers and authorizations of any
Governmental Entity or Regulatory Agency which are necessary to effect the
transactions contemplated by this Agreement and the Transaction Documents and
the Related Agreements (including the Mergers and the Related Transactions)
shall have been obtained; and
(d) those Related Transactions described in Sections 5.6(A), 5.6(C) and
5.6(F)
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which are to be consummated prior to the Closing shall have been
consummated in accordance with the terms of the applicable Related Agreements.
SECTION 6.2 Conditions to the Obligations of the Company. The obligation of the
Company to effect Merger 2 is subject to the satisfaction at or prior to the
Second Effective Time of the following conditions:
(a) the representations and warranties of the Walnut Entities set forth
in this Agreement or in any Schedule or certificate delivered pursuant hereto
that are qualified as to materiality shall be true and correct, and the
representations and warranties of the Walnut Entities set forth in this
Agreement or in any Schedule or certificate delivered pursuant hereto that are
not so qualified shall be true and correct in all material respects, in each
case as of the date of this Agreement and as of the Second Effective Time, as
though made on and as of the Second Effective Time, except to the extent the
representation or warranty is expressly limited by its terms to another date;
(b) each of the Walnut Entities shall have obtained the consent,
approval or waiver of each non-governmental Person whose consent, approval or
waiver shall be required in order for such Walnut Entity to consummate the
transactions contemplated by this Agreement, the Transaction Documents and the
Related Agreements, except those for which the failure to obtain such consent,
approval or waiver, individually or in the aggregate, is not reasonably likely
to have a Walnut Material Adverse Effect;
(c) each of the covenants and obligations of the Walnut Entities to be
performed at or before the Second Effective Time pursuant to the terms of this
Agreement and the obligations of Walnut and each other party (other than the
Company) to each of the Related Agreements to be performed at or before the
Second Effective Time pursuant to the terms of each such Related Agreement shall
have been duly performed in all material respects at or before the Effective
Time of the Mergers;
(d) the Company shall have received the opinion of Barack Ferrazzano
Kirschbaum Perlman & Nagelberg, counsel to Walnut, dated the Closing Date,
substantially in the form attached as Exhibit F to this Agreement;
(e) the Company shall have received a certificate, in form and
substance reasonably satisfactory to it, signed by the Secretary of Walnut,
certifying (i) that full and complete copies of the following are attached
thereto: (A) resolutions or similar documents evidencing the authorization and
approval by the Walnut Board, the boards of directors of the other Walnut
Entities and the Walnut Stockholders of this Agreement and the Transaction
Documents and the Related Transactions and the transactions contemplated by this
\Agreement, the Transaction Documents and the Related Agreements (including the
Mergers and the Related Transactions), (B) the Walnut Charter Documents and the
charter documents of THCG and Newco; and (ii) as to the incumbency and specimen
signature of each representative of each Walnut Entity signing this Agreement,
the Transaction Documents, the Related Agreements and any other document in
connection herewith or therewith;
(f) Merger 1 shall have become effective under the UBCA and the DGCL
and the THCG Common Stock shall be listed for trading on the NASDAQ National
Market;
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(g) since January 1, 1999, no change or event shall have occurred which
has had or could reasonably be expected to have, individually or in the
aggregate, a Walnut Material Adverse Effect;
(h) the Transaction Documents and Related Agreements to which any
Walnut Entity is a party shall have been duly executed and delivered to the
Company;
(i) Walnut shall have purchased all outstanding Walnut Options, other
than the Converted Walnut Options, pursuant to Section 2.1(b), and shall have
obtained from each holder of a Walnut Option purchased pursuant to Section
2.1(b) a copy of the agreement evidencing such Walnut Option, marked
"cancelled."
(j) Walnut shall have obtained the consent and acknowledgement of Joel
Kanter and Robert Mauer pursuant to Section 5.20(c);
(k) those Related Transactions described in Sections 5.6(B), 5.6(D) and
5.6(E) which are to be consummated prior to Closing shall have been consummated
in accordance with the terms of the applicable Related Agreements;
(l) the Company shall have received a certificate of an executive
officer of Walnut, dated the Closing Date, certifying as to the matters set
forth in (a), (c), (g), (i), (j) and (k) of this Section 6.2 as of the Closing
Date; and
(m) no tender offer for more than 25% of the outstanding shares of
Walnut Common Stock shall have been announced or completed.
SECTION 6.3 Conditions to the Obligations of Walnut. The obligations of each
Walnut Entity to effect the Mergers and the other transactions contemplated by
this Agreement and the Transaction Documents and the Related Agreements
(including the Related Transactions) are subject to the satisfaction at or prior
to the Effective Time of the Mergers of the following conditions:
(a) the representations and warranties of the Company set forth in this
Agreement or in any Schedule or certificate delivered pursuant hereto that are
qualified as to materiality shall be true and correct, and the representations
and warranties of the Company set forth in this Agreement or in any Schedule or
certificate delivered pursuant hereto that are not so qualified shall be true
and correct in all material respects, in each case as of the date of this
Agreement and as of each of the First Effective Time and the Second Effective
Time, respectively, as though made on and as of each of the First Effective Time
and the Second Effective Time, respectively, except to the extent the
representation or warranty is expressly limited by its terms to another date;
(b) the Company shall have obtained the consent, approval or waiver of
each non-governmental Person whose consent, approval or waiver shall be required
in order for the Company to consummate the transactions contemplated hereby and
by the Transaction Documents and the Related Agreements to which it is a party,
except those for which the failure to obtain such consent, approval or waiver,
individually or in the aggregate, is not
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reasonably likely to have, a Company Material Adverse Effect;
(c) each of the covenants and obligations of the Company to be
performed at or before the Effective Time of the Mergers pursuant to the terms
of this Agreement and the obligations of the Company and each other party (other
than the Walnut Entities) to each of the Related Agreements to be performed at
or before the Effective Time of the Mergers pursuant to the terms of each such
Related Agreement shall have been duly performed in all material respects at or
before the Effective Time of the Mergers;
(d) Walnut shall have received the opinion of Kramer Levin Naftalis &
Frankel LLP, counsel to the Company, dated the Closing Date, substantially in
the form attached as Exhibit G to this Agreement;
(e) Walnut shall have received a certificate, in form and substance
reasonably satisfactory to it, signed by the Secretary of the Company,
certifying (i) that full and complete copies of the following are attached
thereto: (A) resolutions or similar documents evidencing the authorization and
approval by the Company Board and the Company Stockholders of this Agreement and
the Transaction Documents and the Related Agreements and the transactions
contemplated by this Agreement and the Transaction Documents and the Related
Agreements (including the Mergers and the Related Transactions), (B) the Company
Charter Documents; and (ii) as to the incumbency and specimen signature of each
representative of the Company signing this Agreement, the Transaction Documents
and the Related Agreements to which it is a party and any other document in
connection herewith or therewith.
(f) since January 1, 1999, no change or event shall have occurred which
has had or could reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect;
(g) Walnut shall have received an Investment Letter duly executed by
each of the Company Stockholders;
(h) the Transaction Documents and Related Agreements to which the
Company is a party shall have been duly executed and delivered to Walnut;
(i) Walnut shall have received a certificate of an executive officer of
the Company, dated the Closing Date, certifying as to the matters set forth in
(a), (c) and (f) of this Section 6.3 as of the Closing Date;
(j) the proceeds of the Capital Investment shall have been used to: (i)
repay the $2,000,000 debentures outstanding to SBIC Funding Corp. and all
interest accrued thereon, or any other indebtedness incurred, the proceeds of
which were used to repay such debentures, and the full release of all personal
guarantees of such indebtedness made by any officer or director of Walnut shall
have been obtained, and (ii) repay Walnut's line of credit with American
National Bank and the full release of all personal guarantees of such
indebtedness made by any officer or director of Walnut shall have been obtained;
and
(m) the Company shall have obtained the consent of Shai Novik to the
cancellation of the Novik Options pursuant to Section 2.2(c).
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ARTICLE 7
TERMINATION; AMENDMENT; WAIVER; FEES AND EXPENSES
SECTION 7.1 Termination. This Agreement may be terminated and the Mergers may be
abandoned at any time, but prior to the Effective Time of the Mergers,
notwithstanding approval thereof by the Company Stockholders and the Walnut
Stockholders:
(a) by mutual written consent of Walnut and the Company;
(b) by either Walnut or the Company, if the Effective Time of the
Mergers shall not have occurred on or before December 31, 1999; provided,
however, that (i) Walnut's right to terminate this Agreement under this Section
7.1(b) shall not be available if the failure of Walnut (or any Walnut
Subsidiary) to effect the Related Transactions shall have been the cause of, or
resulted in, the failure of the Effective Time of the Mergers to occur before
December 31, 1999, other than due to events or circumstances which are beyond
the control of Walnut; and (ii) the right to terminate this Agreement under this
Section 7.1(b) shall not be available to the party whose failure to fulfill any
obligation under this Agreement shall have been the cause of, or resulted in,
the failure of the Effective Time of the Mergers to occur on or before December
31, 1999;
(c) by either Walnut or the Company, if any final order, decree or
ruling permanently restraining, enjoining or otherwise prohibiting the
consummation of the transactions contemplated by this Agreement or the Related
Agreements (including the Mergers or the Related Transactions) shall have been
entered by any Governmental Entity and shall have become final and
nonappealable;
(d) by either Walnut or the Company, if this Agreement or any of the
Related Transactions or any other matter submitted to the vote of the Walnut
Stockholders shall fail to receive the requisite vote for adoption at the Walnut
Stockholders Meeting, unless the Company has waived in writing such requirement;
(e) by the Company, if any Walnut Entity has materially breached any
material representation or warranty or failed to perform any material covenant
or agreement contained in this Agreement, which breach has not been cured on or
prior to 30 days following delivery of written notice of such breach by the
Company to the breaching Walnut Entity; or
(f) by Walnut, if the Company has materially breached any material
representation or warranty or failed to perform any material covenant or
agreement contained in this Agreement, which breach has not been cured on or
prior to 30 days following delivery of written notice of such breach by Walnut
to the Company.
(g) by Walnut if, prior to the date on which the Walnut Stockholders
vote on the Mergers, the Walnut Board approves an Acquisition Transaction, on
terms which a majority of the members of the Walnut Board, including a majority
of the members of the Walnut Board who are not employed or retained as a
consultant by Walnut or any Subsidiary of Walnut, have
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determined in good faith and on a reasonable basis, after consultation with its
outside counsel and financial advisors, that (i) such Acquisition Transaction is
more favorable to Walnut and its stockholders from a financial point of view
than the transactions contemplated by this Agreement, (ii) such Acquisition
Transaction is reasonably likely to be consummated without undue delay, and
(iii) failure to approve such proposal and terminate this Agreement would thus
constitute a breach of fiduciary duties of the Walnut Board under applicable
law; provided that the termination permitted by this Section 7.1(g) shall not be
effective unless and until Walnut shall have paid to the Company the Termination
Fee (as defined in Section 7.4(b)).
SECTION 7.2 Procedure for and Effect of Termination. In the event that this
Agreement is terminated and the Mergers abandoned pursuant to Section 7.1,
written notice of such termination and abandonment shall forthwith be given to
the other parties and this Agreement shall terminate and the Mergers shall be
abandoned without any further action. If this Agreement is terminated as
provided herein, no party hereto and none of their respective subsidiaries or
any of the officers or directors of any of them shall have any liability of any
nature whatsoever hereunder, or in connection with the transactions contemplated
hereby, except that Sections 5.12, 5.13, 7.2, 7.4 and Article 8 shall survive
any termination of this Agreement, and no such termination shall relieve any
party of the consequences of any breach of this Agreement.
SECTION 7.3 Amendment; Extension Waiver.
(a) This Agreement may be amended by action taken by the Company and
the Walnut Entities at any time before or after approval of the Mergers by the
Company Stockholders and the Walnut Stockholders but, after any such approval,
no amendment shall be made which requires the approval of such stockholders
under applicable Law without such approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of the parties hereto.
(b) At any time prior to the Effective Time of the Mergers, each party
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document, certificate or writing delivered pursuant hereto or (iii) waive
compliance by the other party with any of the agreements or conditions contained
herein. Any agreement on the part of either party hereto to any such extension
or waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party. The failure of either party hereto to assert any of its
rights hereunder shall not constitute a waiver of such rights.
SECTION 7.4 Fees and Expenses.
(a) Except as provided in Section 7.4(b), the Company and the Walnut
Entities shall each bear its respective fees, costs and expenses incurred in
connection with this Agreement, the Transaction Documents, the Related
Agreements and the transactions contemplated hereby and thereby.
(b) In the event that this Agreement is terminated pursuant to Section
7.1(g), then Walnut shall, upon or prior to such termination, pay the Company a
termination fee of
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$500,000 and shall reimburse the Company for all reasonable out-of-pocket fees
and expenses it incurred in connection with the transactions contemplated by
this Agreement, up to $300,000 (collectively, the "TERMINATION FEE"), in
immediately available funds by wire transfer to an account designated by the
Company.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements of the Company or the
Walnut Entities contained herein shall survive the Effective Time of the
Mergers.
SECTION 8.2 Entire Agreement; Assignment. This Agreement (a) constitutes the
entire agreement among the parties hereto with respect to the subject matter
hereof and supersedes all other prior agreements and understandings (other than
the Confidentiality Agreement), both written and oral, between the parties with
respect to the subject matter hereof and (b) shall not be assigned by operation
of law or otherwise. Walnut guarantees the full and punctual performance by each
of the other Walnut Entities of all the obligations hereunder of the other
Walnut Entities.
SECTION 8.3 [Intentionally omitted.]
SECTION 8.4 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in Person, by cable,
telegram, facsimile or telex, or by registered or certified mail (postage
prepaid, return receipt requested), to the other party as follows:
if to the Walnut Entities: Walnut Financial Services, Inc.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Joel Kanter
Chief Executive Officer
Facsimile: (703) 448-7751
with a copy to: Barack Ferrazzano Kirschbaum Perlman &
Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attention: Gretchen Anne Trofa, Esq.
Facsimile: (312) 984-3150
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if to the Company to: Tower Hill Securities, Inc.
650 Madison Avenue
New York, New York 10022
Attention: Joseph D. Mark,
President
Facsimile: (212) 223-0161
with a copy to: Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Peter S. Kolevzon, Esq.
Facsimile: (212) 715-8000
or to such other address, facsimile number or Person's attention as the Person
to whom notice is given may have previously furnished to the other in writing in
the manner set forth above.
SECTION 8.5 Parties in Interest. This Agreement shall be binding upon and inure
solely to the benefit of each party hereto and its successors and permitted
assigns, and nothing in this Agreement, express or implied, other than the
express provisions of Section 5.16, is intended to or shall confer upon any
other Person any rights, benefits or remedies of any nature whatsoever under or
by reason of this Agreement. The Persons covered by the provisions of Section
5.16 shall have the right to enforce such provisions against THCG.
SECTION 8.6 Severability. If any term or other provision of this Agreement is
invalid, illegal or unenforceable, all other provisions of this Agreement shall
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner materially
adverse to any party.
SECTION 8.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 8.8 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section, Article, Schedule or
Exhibit, such reference shall be to a Section or Article of or Schedule or
Exhibit to this Agreement unless otherwise indicated. Where the reference
"hereby" or "herein" appears in this Agreement, such reference shall be deemed
to be a reference to this Agreement as a whole. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation." Words denoting the singular include
the plural, and vice versa, and references to it or its or words denoting any
gender shall include all genders.
SECTION 8.9 Governing Law and Venue. THIS AGREEMENT SHALL BE DEEMED TO BE MADE
IN AND IN ALL RESPECTS SHALL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT
OF LAW PRINCIPLES THEREOF, EXCEPT THAT THE UBCA AND THE DGCL SHALL APPLY TO THE
EXTENT
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REQUIRED IN CONNECTION WITH THE EFFECTUATION OF MERGER 1.
SECTION 8.10 Waiver of Jury Trial. EACH OF THE WALNUT ENTITIES AND THE COMPANY
IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT,
TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED HEREBY.
SECTION 8.11 Certain Definitions. (a) For the purposes of this Agreement, the
following terms shall have the meanings ascribed to them in this Section 8.11:
(1) "AFFILIATE" means, with respect to any Person, any Person directly
or indirectly controlling, controlled by or under common control with such
Person;
(2) "CONFIDENTIALITY AGREEMENT" means the Confidentiality Agreement,
dated July 1, 1999, by and between Walnut and the Company.
(3) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended, or any successor law.
(4) "GAAP" means United States generally accepted accounting
principles, consistently applied.
(5) "GOVERNMENTAL ENTITY" means any federal or national, state or
provincial, municipal or local government, governmental authority, regulatory or
administrative agency (including the NASD), governmental commission, department,
board, bureau, agency or instrumentality, political subdivision, court,
tribunal, official arbitrator or arbitral body, in each case whether domestic or
foreign.
(6) "GOVERNMENTAL ORDER" means any order, writ, rule, judgment,
injunction, decree, stipulation, determination, decision, consent, agreement or
award entered into by or with any Governmental Entity.
(7) "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940,
as amended, or any successor law.
(8) "KNOWLEDGE" means (i) with respect to the Company, the actual
knowledge of any executive officer of the Company after conducting a reasonable
investigation and (ii) with respect to Walnut, the actual knowledge of any
executive officer of Walnut or any of its Subsidiaries after conducting a
reasonable investigation.
(9) "LAW" means all applicable provisions of all constitutions,
treaties, statutes, laws (including, but not limited to, common law), rules,
regulations, ordinances codes or orders of any Governmental Entity."
(10) "LIENS" means any mortgage, lien, debt, pledge, security interest,
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<PAGE> 240
encumbrance, assessment, restriction charge or other adverse claim or interest
of every nature.
(11) "OPTIONS" means any right, option, warrant or agreement to
purchase or subscribe for any securities of another Person.
(12) "PERSON" means any individual, corporation (including any
non-profit corporation), general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, labor union or
other entity or governmental body or Governmental Entity.
(13) "RELATED AGREEMENTS" has the meaning specified in Section 5.6.
(14) "RELATED TRANSACTIONS" has the meaning specified in Section 5.6.
(15) "SEC" means the Securities and Exchange Commission.
(16) "SECURITIES ACT" means the Securities Act of 1933, as amended, or
any successor law.
(17) "SUBSIDIARY" or "SUBSIDIARIES" of any Person means any
corporation, partnership, limited liability company or other legal entity of
which such Person, either directly or indirectly through or with any other
Subsidiary, owns more than 50% of the stock or other equity interests the
holders of which are generally entitled to vote for the election of the board of
directors or other governing body of such legal entity.
(18) "TRANSACTION DOCUMENTS" means the CAG Consulting Agreement, the
WCI Consulting Agreement, the Employment Agreements, the Voting Agreement, the
Investment Representation Letter and the other agreements, documents or
instruments executed and delivered by a party hereto as contemplated under this
Agreement (other than the Related Agreements).
(b) Other terms set forth below are defined in the Section of this
Agreement set forth opposite such term:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Accrued Compensation......................................................................................5.6(C)(i)
Acquisition Transaction.....................................................................................5.14(a)
Actions.....................................................................................................5.16(b)
Agreement..................................................................................................Recitals
BDC Deregistration..............................................................................................5.4
CAG Consulting Agreement.....................................................................................5.7(a)
Capital Investment..............................................................................................5.6
Cash Bonus..............................................................................................4.11(a)(ii)
Closing.........................................................................................................1.2
Closing Date....................................................................................................1.2
Code.......................................................................................................Recitals
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Company....................................................................................................Recitals
Company Board................................................................................................3.3(a)
Company Charter Documents....................................................................................3.1(b)
Company Common Stock.......................................................................................Recitals
Commonly Controlled Company Entities........................................................................3.11(a)
Commonly Controlled Walnut Entities.........................................................................4.11(a)
Company Acquisition ...................................................................................5.1(b)(xiii)
Company 8-F Information.........................................................................................3.5
Company Financial Statements.................................................................................3.4(a)
Company Interim Financial Statements.........................................................................3.4(a)
Company Material Adverse Effect..............................................................................3.1(a)
Company Material Contracts.....................................................................................3.14
Company Plans...............................................................................................3.11(a)
Company Preferred Stock......................................................................................3.2(a)
Company Proxy Information.......................................................................................3.5
Company Records................................................................................................3.23
Company Securities...........................................................................................3.1(a)
Company Stockholders.........................................................................................3.3(b)
Company Transaction.........................................................................................5.14(d)
Compensation Satisfaction....................................................................................5.6(C)
Continuing Accrual........................................................................................5.6(C)(i)
Converted Walnut Option .....................................................................................2.1(b)
DGCL.......................................................................................................Recitals
Debt Conversion..............................................................................................5.6(B)
Dissenting Shares............................................................................................2.3(i)
Effective Time of the Mergers................................................................................1.3(b)
Environmental Claim.........................................................................................3.12(a)
Environmental Laws..........................................................................................3.12(b)
ERISA.......................................................................................................3.11(a)
Exchange Agent...............................................................................................2.3(a)
Filings and Approvals...........................................................................................3.6
First Certificate of Merger..................................................................................1.3(a)
First Effective Time.........................................................................................1.3(a)
Forgiven Amount...........................................................................................5.6(C)(i)
Inland Financial ...........................................................................................4.4(d)
Intellectual Property..........................................................................................3.17
Investment Letters.............................................................................................5.11
LLC..........................................................................................................5.1(a)
Merger 1...................................................................................................Recitals
Merger 2...................................................................................................Recitals
Mergers....................................................................................................Recitals
Newco......................................................................................................Recitals
Newco Common Stock...........................................................................................2.2(a)
NYBCL ....................................................................................................Recitals
Old Certificates.............................................................................................2.3(c)
Pacific Financial............................................................................................4.4(d)
Past Compensation.........................................................................................5.6(C)(i)
Permits........................................................................................................3.10
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Proceeding......................................................................................................3.9
Proxy Statement..............................................................................................5.3(a)
QPAM Exemption..............................................................................................3.11(l)
Receivable...................................................................................................4.4(d)
Regulatory Agencies..........................................................................................3.6(a)
Related Agreements..............................................................................................5.6
Related Transactions............................................................................................5.6
Second Certificate of Merger.................................................................................1.3(b)
Second Effective Time........................................................................................1.3(b)
Softwatch......................................................................................................5.26
Stockholders Agreement.........................................................................................5.10
Surviving Corporation 1......................................................................................1.1(a)
Surviving Corporation 2......................................................................................1.1(b)
Tax Returns.................................................................................................3.13(b)
Taxes.......................................................................................................3.13(b)
Termination Fee..............................................................................................7.4(b)
THCG Common Stock............................................................................................2.1(a)
THCG Option.................................................................................................5.20(a)
THCG Stock Incentive Plan...................................................................................5.20(a)
Transfer.....................................................................................................5.1(a)
UBCA.......................................................................................................Recitals
Uncollected Receivable.......................................................................................4.4(d)
Universal Bridge.............................................................................................4.2(d)
UPLP............................................................................................................5.6
UPLP Acquisition.............................................................................................5.6(d)
Voting Agreement................................................................................................5.9
Walnut.....................................................................................................Recitals
Walnut Acquisition.....................................................................................5.2(b)(xiii)
Walnut Board.................................................................................................4.3(a)
Walnut Capital...............................................................................................4.2(d)
Walnut Charter Documents.....................................................................................4.1(b)
Walnut Common Stock........................................................................................Recitals
Walnut Entities............................................................................................Recitals
Walnut Filed SEC Reports.....................................................................................4.4(a)
Walnut Financial Statements .................................................................................4.4(a)
Walnut Fund..................................................................................................4.2(d)
Walnut Incentive Program................................................................................4.11(a)(ii)
Walnut Material Adverse Effect...............................................................................4.1(a)
Walnut Option................................................................................................2.1(b)
Walnut Option Plans..........................................................................................2.1(b)
Walnut Principal Stockholders...................................................................................5.9
Walnut Records.................................................................................................4.19
Walnut SEC Filings...........................................................................................4.1(a)
Walnut Securities............................................................................................4.1(a)
Walnut Stockholders..........................................................................................4.3(a)
Walnut Stockholders Meeting..................................................................................5.3(b)
WCI Consulting Agreement.....................................................................................5.7(b)
</TABLE>
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly
executed on its behalf as of the day and year first above written.
WALNUT FINANCIAL SERVICES, INC.
By /s/ Joel S. Kanter
---------------------
Name: Joel S. Kanter
Title: President
THCG, INC.
By /s/ Joel S. Kanter
---------------------
Name: Joel S. Kanter
Title: President
TOWER HILL ACQUISITION CORP.
By /s/ Joel S. Kanter
---------------------
Name: Joel S. Kanter
Title: President
TOWER HILL SECURITIES, INC.
By /s/ Joseph D. Mark
---------------------
Name: Joseph D. Mark
Title: President
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
AGREEMENT AND PLANS OF MERGER.....................................................................................1
ARTICLE 1.........................................................................................................2
SECTION 1.1 The Mergers...................................................................2
SECTION 1.2 Closing.......................................................................2
SECTION 1.3 Effective Time................................................................2
SECTION 1.4 Certificate of Incorporation..................................................3
SECTION 1.5 By-laws.......................................................................3
SECTION 1.6 Directors and Officers........................................................3
ARTICLE 2 ........................................................................................................4
SECTION 2.1 Merger 1......................................................................4
SECTION 2.2 Merger 2......................................................................4
SECTION 2.3 Exchange of Certificates......................................................5
SECTION 2.4 Tax Consequences..............................................................8
ARTICLE 3.........................................................................................................9
SECTION 3.1 Organization and Qualification; Subsidiaries..................................9
SECTION 3.2 Capitalization of the Company and its Subsidiary.............................10
SECTION 3.3 Authority Relative to this Agreement; Board Action...........................11
SECTION 3.4 Financial Statements.........................................................11
SECTION 3.5 Information Supplied.........................................................12
SECTION 3.6 Consents and Approvals; No Violations........................................12
SECTION 3.7 No Default...................................................................13
SECTION 3.8 No Undisclosed Liabilities; Absence of Changes...............................13
SECTION 3.9 No Litigation................................................................14
SECTION 3.10 Compliance with Applicable Law...............................................14
SECTION 3.11 Employee Benefits and ERISA..................................................15
SECTION 3.12 Environmental Laws and Regulations...........................................18
SECTION 3.13 Tax Matters..................................................................19
SECTION 3.14 Material Contracts...........................................................20
SECTION 3.15 Title to Properties; Encumbrances............................................21
SECTION 3.16 Condition and Sufficiency of Assets..........................................21
SECTION 3.17 Intellectual Property........................................................22
SECTION 3.18 Year 2000....................................................................22
SECTION 3.19 Investment Securities........................................................22
SECTION 3.20 Brokers......................................................................22
SECTION 3.21 Insurance....................................................................23
SECTION 3.22 Transactions with Affiliates.................................................23
SECTION 3.23 Books and Records............................................................23
SECTION 3.24 Disclosure...................................................................23
</TABLE>
<PAGE> 245
<TABLE>
<CAPTION>
<S> <C>
SECTION 3.25 Stockholders of the Company..................................................23
ARTICLE 4........................................................................................................24
SECTION 4.1 Organization and Qualification; Subsidiaries.................................24
SECTION 4.2 Capitalization of Walnut and its Subsidiaries................................25
SECTION 4.3 Authority Relative to this Agreement; Board Action...........................27
SECTION 4.4 SEC Filings; Financial Statements............................................27
SECTION 4.5 Information Supplied.........................................................29
SECTION 4.6 Consents and Approvals; No Violations........................................29
SECTION 4.7 No Default...................................................................30
SECTION 4.8 No Undisclosed Liabilities; Absence of Changes...............................30
SECTION 4.9 No Litigation................................................................31
SECTION 4.10 Compliance with Applicable Law...............................................32
SECTION 4.11 Employee Benefits and ERISA..................................................32
SECTION 4.12 Environmental Laws and Regulations...........................................36
SECTION 4.13 Tax Matters..................................................................36
SECTION 4.14 Material Contracts...........................................................37
SECTION 4.15 Title to Properties; Encumbrances............................................38
SECTION 4.16 Intellectual Property........................................................38
SECTION 4.17 Year 2000....................................................................39
SECTION 4.18 Investment Securities........................................................39
SECTION 4.19 Ownership of THCG and Newco..................................................39
SECTION 4.20 Brokers......................................................................39
SECTION 4.21 Transactions with Affiliates.................................................40
SECTION 4.22 Books and Records............................................................40
SECTION 4.23 Disclosure...................................................................40
ARTICLE 5........................................................................................................41
SECTION 5.1 Conduct of Business of the Company...........................................41
SECTION 5.2 Conduct of Business of Walnut................................................43
SECTION 5.3 Preparation and Filing of Proxy Statement; Walnut Stockholders Meeting.......45
SECTION 5.4 Preparation and Filing of Form 8-F...........................................46
SECTION 5.5 SEC and Other Governmental Filings...........................................46
SECTION 5.6 Related Transactions.........................................................46
SECTION 5.7 Consulting Agreements........................................................48
SECTION 5.8 Employment Agreements........................................................48
SECTION 5.9 Voting Agreement.............................................................48
SECTION 5.10 .............................................................................48
SECTION 5.11 Investment Letters...........................................................48
SECTION 5.12 Press Releases...............................................................48
SECTION 5.13 Access to Information; Confidentiality.......................................49
SECTION 5.14 Non-Solicitation.............................................................49
SECTION 5.15 Commercially Reasonable Efforts; Further Action..............................50
SECTION 5.16 Indemnification and Insurance................................................51
SECTION 5.17 Notification of Certain Matters..............................................52
SECTION 5.18 Tax Treatment................................................................53
SECTION 5.19 State Takeover Laws..........................................................53
SECTION 5.20 THCG Options and Walnut Options..............................................53
SECTION 5.21 LLC Merger...................................................................54
SECTION 5.22 THCG Board of Directors......................................................54
</TABLE>
<PAGE> 246
<TABLE>
<CAPTION>
<S> <C>
SECTION 5.23 Company Preferred Stock......................................................54
SECTION 5.24 Change of Name...............................................................54
SECTION 5.25 Walnut Securities............................................................55
SECTION 5.26 Softwatch Securities.........................................................55
ARTICLE 6 .......................................................................................................55
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Mergers.................55
SECTION 6.2 Conditions to the Obligations of the Company.................................56
SECTION 6.3 Conditions to the Obligations of Walnut......................................57
ARTICLE 7 .......................................................................................................59
SECTION 7.1 Termination..................................................................59
SECTION 7.2 Procedure for and Effect of Termination......................................60
SECTION 7.3 Amendment; Extension Waiver..................................................60
SECTION 7.4 Fees and Expenses............................................................60
ARTICLE 8 .......................................................................................................61
SECTION 8.1 Non-Survival of Representations, Warranties and Agreements...................61
SECTION 8.2 Entire Agreement; Assignment.................................................61
SECTION 8.3 [Intentionally omitted.].....................................................61
SECTION 8.4 Notices......................................................................61
SECTION 8.5 Parties in Interest..........................................................62
SECTION 8.6 Severability.................................................................62
SECTION 8.7 Counterparts.................................................................62
SECTION 8.8 Interpretation...............................................................62
SECTION 8.9 Governing Law and Venue......................................................62
SECTION 8.10 Waiver of Jury Trial.........................................................63
SECTION 8.11 Certain Definitions..........................................................63
EXHIBITS
EXHIBIT A Consulting Agreement between Inland Financial Corporation and
Chicago Advisory Group
EXHIBIT B Consulting Agreement between THCG, Inc. and Windy City, Inc.
EXHIBIT C-1 Employment Agreement between THCG, Inc. and Joseph Mark
EXHIBIT C-2 Employment Agreement between THCG, Inc. and Shai Novik
EXHIBIT C-3 Employment Agreement between THCG, Inc. and Adi Ravir
EXHIBIT D Voting Agreement between Tower Hill Securities Inc., The Holding Company
and the Kanter Family Foundation
EXHIBIT E Investment Representation Letter*
EXHIBIT F Form of Opinion of Barack Ferrazzano Kirschbaum Perlman & Nagelberg*
EXHIBIT G Form of Opinion of Kramer Levin Naftalis & Frankel LLP*
SCHEDULES
Disclosure Schedules of Tower Hill Securities, Inc.*
Disclosure Schedules of Walnut Financial Services, Inc.*
General Schedules
* Omitted from this Proxy Statement. Copies will be furnished supplementally to the SEC upon request.
</TABLE>
<PAGE> 247
EXHIBIT A TO MERGER AGREEMENT
Inland Financial Corporation
9207 East Mission, Suite A
Spokane, Washington 99206
As of , 1999
Robert Mauer
Chicago Advisory Group
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Dear Mr. Mauer:
Inland Financial Corporation (the "Company") desires to engage
Chicago Advisory Group ("CAG") as a consultant, and CAG desires to be so engaged
by the Company, all subject to the terms and conditions set forth in this letter
agreement (this "Agreement").
Accordingly, in consideration of the mutual covenants hereinafter
set forth and intending to be legally bound, the Company and CAG hereby agree as
follows:
1. Engagement; Term. The Company hereby engages CAG, and CAG
hereby accepts such engagement and agrees to serve as a consultant to the
Company, upon the terms and conditions hereinafter set forth, for a term
commencing on , 1999 (the "Effective Date") and (unless sooner
terminated as hereinafter provided) expiring twelve months after the Effective
Date (such term being hereinafter referred to as the "Initial Term").
Thereafter, this Agreement shall automatically be extended for one or more
additional three-month periods unless CAG or the Company gives written notice,
no less than ninety (90) days prior to the end of the Initial Term, or, as
applicable, sixty (60) days prior to the end of any extension thereof, of CAG's
or the Company's election not to renew the Agreement. As used in this Agreement,
"Term" shall be defined as the Initial Term and, if applicable, any extension
thereof.
2. Duties; Conduct.
(a) During the Term, CAG shall make available to the Company
the services of Robert Mauer ("Mauer") who shall serve in the capacity of a
senior advisor to the Company; as such, CAG shall render consulting services
from time to time as hereinafter provided on such project or projects relating
to the business, affairs and management of the Company as may be reasonably
delegated to CAG by the Board of Directors, the Co-Chief
<PAGE> 248
Executive Officers, or, as applicable, Chief Executive Officer, or the Chief
Operating Officer of the Company or of THCG, Inc. ("THCG"). CAG agrees that it
shall use its best efforts to perform such services faithfully and diligently,
and to the best of its ability, and shall use its best efforts to cause Mauer to
use his best efforts to perform such services faithfully and diligently, and to
the best of his ability.
(b) To the extent practicable, the services to be provided by
CAG shall be performed at such times as are reasonably convenient to CAG. The
Company acknowledges that CAG and Mauer may have other activities, obligations
and engagements which may command its or his time and attention and the Company
will exercise its best efforts to respect such other commitments.
(c) The services to be provided hereunder may require travel.
Domestic travel shall be as reasonably required for the performance of the
duties hereunder; except as provided below, CAG shall not need prior approval
for any domestic travel required hereunder unless and until it incurs business
expenses in connection with such travel in the aggregate amount of $10,000 per
annum. Once such threshold has been exceeded, CAG shall obtain the consent of
THCG's Chief Operating Officer prior to incurring any additional domestic travel
expense. The parties agree that, subject to the prior two sentences, (i)
business class (as opposed to coach) and (ii) the costs of upgrade certificates
pursuant to frequent flier programs (not to exceed $100 per flight) shall be
deemed to be reasonable expenses. Foreign travel shall be as the Company and CAG
shall mutually agree.
3. Compensation and Expenses.
(a) Except as otherwise provided in Section 3(b), as full
compensation for all services to be provided by CAG hereunder during the Term,
the Company will pay CAG and CAG will accept consulting fees at an annual rate
of Fifty Thousand Dollars ($50,000). Such consulting fees will be paid monthly
in arrears.
(b) The Company will reimburse CAG for all reasonable travel,
business entertainment and other business expenses as may be incurred by it
during the Term in the performance of the duties and responsibilities assigned
to it under this Agreement. Such reimbursements shall be made by the Company on
a timely basis upon submission by CAG of proper accounts therefor in accordance
with the Company's standard procedures.
4. Termination.
(a) The Company may terminate the consulting engagement
hereunder and this Agreement at any time for Cause.
<PAGE> 249
For purposes of this Agreement, the term "Cause" shall mean any of the
following: (i) conviction of a felony by Mauer; (ii) perpetration of an
intentional and knowing fraud by CAG or Mauer against or adversely affecting the
Company, THCG or any of the Company's affiliates or any customer, client, agent,
or employee of any of the foregoing; (iii) any action or conduct by CAG or Mauer
in any manner which would reasonably be expected to harm the reputation or
goodwill of the Company, THCG or any of the Company's affiliates; (iv) willful
breach of a covenant set forth in Section 5 or 6 by CAG or Mauer; (v)
substantial failure of CAG to perform its duties hereunder; or (vi) subject to
Section 2(b) above and after taking into account Mauer's reasonable personal
commitments and vacation time, CAG's failure or inability to make Mauer
available to provide the services contemplated hereunder for any reason as
determined in good faith by the Board of Directors of the Company or of THCG;
provided, however, that a termination pursuant to clause (iii), (v) or (vi)
shall not become effective unless CAG fails to cure such action, conduct or
failure to perform within fifteen (15) days after written notice from the
Company, such notice to describe such action, conduct or failure to perform and
identify what reasonable actions shall be required to cure such action, conduct
or failure to perform, if such action, conduct or failure to perform is
susceptible of cure.
No act or failure to act on CAG's or Mauer's part shall be
considered "willful" under this Section 4(a) unless it is done, or omitted to be
done, by CAG or Mauer in bad faith or without reasonable belief that its or his
action or omission was in the best interests of the Company. Any act or failure
to act that is based upon authority given pursuant to a resolution duly adopted
by the Board of Directors of the Company or of THCG, or upon direction or
authority of the Co-Chief Executive Officers or, as applicable, Chief Executive
Officer of the Company or of THCG, or upon the advice of counsel for the Company
or THCG, shall be conclusively presumed to be done, or omitted to be done, by
CAG in good faith and in the best interests of the Company.
(b) The Term shall terminate forthwith upon a sale of all or
substantially all of the stock or assets of the Company or THCG.
(c) CAG may terminate the consulting engagement hereunder and
this Agreement at any time in the event of any material breach of this Agreement
by the Company; provided, however, that such termination shall not become
effective unless the Company fails to cure such breach within fifteen (15) days
after written notice from CAG, such notice to describe such breach and identify
what reasonable actions shall be required to cure such breach.
(d) In the event of a termination pursuant to any of Section
4(a), (b) or (c) above, CAG shall be entitled to, and
<PAGE> 250
the Company shall pay to CAG within thirty (30) days after any such termination,
any accrued but unpaid consulting fees to the date of termination and any
accrued but unpaid expenses required to be reimbursed pursuant to Section 3(b)
above. In the event of a termination pursuant to Section 4(c) above, CAG shall
be entitled to continued payment of the consulting fees pursuant to Section 3(a)
above until the expiration of the Term as if such termination had not occurred,
with such payments being in addition to the payments described in the previous
sentence.
5. Noncompetition and Nonsolicitation; Nondisclosure of
Proprietary Information; Surrender of Records.
5.1 Noncompetition and Nonsolicitation. In view of the unique
and valuable services it is expected CAG and Mauer will render to the Company,
CAG's and Mauer's knowledge of the customers, trade secrets, and other
proprietary information relating to the business of the Company, THCG and the
Company's affiliates and their customers and suppliers, and in consideration of
compensation to be received hereunder, CAG and Mauer each agrees that during the
consulting engagement hereunder it and he will not compete with or be engaged in
any business which, during the consulting engagement hereunder, is engaged in
the business of factoring or financing of receivables in the United States or
Canada, provided that the provisions of this Section will not be deemed breached
merely because CAG or Mauer owns less than 10% of the outstanding common stock
of a publicly-traded company or is a passive investor who owns less than 10% of
the outstanding common stock of a privately-held company.
In further consideration of the payment by the Company to CAG of
amounts that may hereafter be paid to CAG pursuant to this Agreement (including,
without limitation, pursuant to Section 3), CAG and Mauer each agrees that
during the Term and for a period of one year subsequent to any termination
hereunder, CAG and Mauer shall not (i) directly or indirectly solicit or attempt
to solicit any of the employees, agents, consultants or representatives of the
Company, THCG or the Company's affiliates to terminate his, her, or its
relationship with the Company, THCG or the Company's affiliates; or (ii)
directly or indirectly solicit or attempt to solicit any of the employees,
agents, consultants (other than Joel Kanter and/or Windy City, Inc.) or
representatives of the Company, THCG or the Company's affiliates to become
employees, agents, representatives or consultants of any other person or entity;
(iii) directly or indirectly solicit or attempt to solicit any customer of the
Company or Pacific Financial Services Corp. ("Pacific Financial") with respect
to any product or service being furnished, made, sold or leased by the Company
or Pacific Financial; or (iv) persuade or seek to persuade any customer of the
Company or Pacific Financial to cease to do business or to reduce the amount of
business which any customer has customarily done or contemplates doing with the
Company or Pacific Financial, whether or not the relationship
<PAGE> 251
between the Company or Pacific Financial and such customer was originally
established in whole or in part through CAG's or Mauer's efforts.
5.2 Proprietary Information. CAG and Mauer each acknowledges
that during the course of the consulting engagement hereunder CAG and Mauer will
necessarily have access to and make use of proprietary information and
confidential records of the Company, THCG and the Company's affiliates. CAG and
Mauer each covenants that it and he shall not during the Term or at any time
thereafter, directly or indirectly, use for its or his own purpose or for the
benefit of any person or entity other than the Company, nor otherwise disclose,
any such proprietary information to any individual or entity, unless such
disclosure has been authorized in writing by the Company or is otherwise
required by law.
For purposes of this Section 5, "proprietary information"
shall not include information which (i) is or becomes generally available to the
public other than as a result of a breach of this Agreement by CAG or Mauer;
(ii) was within CAG's or Mauer's possession or knowledge prior to its being
furnished to the Company, provided that the information was not obtained in
connection with the consulting engagement hereunder or Mauer's prior employment
by Walnut Financial Services, Inc.; (iii) is independently developed by CAG or
Mauer other than in connection with the consulting engagement hereunder; or (iv)
is obtained by CAG or Mauer in its or his capacity as an investor in THCG or
THCG's (or its subsidiaries') portfolio companies and not in connection with the
performance of the duties hereunder, provided that information obtained by CAG
or Mauer under circumstances under which it or he has any obligation to keep
such information confidential shall be "proprietary information" to the extent
of such obligation.
5.3 Confidentiality and Surrender of Records. CAG and Mauer
each agrees that it or he shall not during the Term or at any time thereafter
(irrespective of the circumstances under which the consulting engagement
terminates), except as required by law, directly or indirectly publish, make
known or in any fashion disclose any confidential records to, or permit any
inspection or copying of confidential records by, any individual or entity other
than in the course of such individual's or entity's employment or retention by
the Company, nor shall CAG or Mauer retain, and will deliver promptly to the
Company, any of the same following termination of the consulting engagement
hereunder for any reason or upon request by the Company. For purposes hereof,
"confidential records" means all correspondence, memoranda, files, manuals,
books, lists, financial, operating or marketing records, magnetic tape or
electronic or other media or equipment of any kind which may be in CAG's or
Mauer's possession or under its or his control or accessible to it or him which
contain any proprietary information of the Company, THCG or the
<PAGE> 252
Company's affiliates. All confidential records shall be and remain the sole
property of the Company, or, as applicable, THCG or the Company's affiliates
during the Term and thereafter.
5.4 Enforcement. CAG and Mauer each agrees that the remedy at
law for any breach or threatened breach of any covenant contained in this
Section 5 would be inadequate and that the Company, in addition to such other
remedies as may be available to it at law or in equity, shall be entitled to
institute proceedings in any court or courts of competent jurisdiction to obtain
damages for breach of this Section 5 and injunctive relief.
6. No Conflict. CAG covenants that neither it nor Mauer is now,
and shall not become, party to or subject to any agreement, contract,
understanding or covenant, or under any obligation, contractual or otherwise, in
any way restricting or adversely affecting its or his ability to act for the
Company in all of the respects contemplated hereby.
7. Cooperation. CAG shall cooperate fully with the Company in
the prosecution or defense, as the case may be, of any and all actions,
governmental inquiries or other legal proceedings in which CAG's or Mauer's
assistance may be requested by the Company. Such cooperation shall include,
among other things, making documents relating to the Company, THCG or the
Company's affiliates or any of their respective businesses in CAG's or Mauer's
custody or control available to the Company or its counsel, making Mauer
available for interviews by the Company or its counsel, and making Mauer
available to appear as a witness, at deposition, trial or otherwise. Any
reasonable vouchered out-of-pocket expenses incurred by CAG in fulfilling its
obligations under this Section 7 shall be promptly reimbursed by the Company.
The provisions of this Section 7 shall survive the
termination or expiration of this Agreement and the Term; provided, however,
that CAG's obligations under this Section 7 subsequent to the expiration of this
Agreement and the Term shall be on terms to be negotiated between CAG and the
Board of Directors of the Company or of THCG in good faith.
8. Notices. Any notice, consent, request or other communication
made or given in accordance with this Agreement shall be in writing either (i)
by personal delivery to the party entitled thereto, (ii) by facsimile with
confirmation of receipt, or (iii) by registered or certified mail, return
receipt requested. The notice, consent, request or other communication shall be
deemed to have been received upon personal delivery, upon confirmation of
receipt of facsimile transmission, or, if mailed, three days after mailing. Any
notice, consent, request or other communication made or given in accordance with
this Agreement shall be made to those listed below at their following
<PAGE> 253
respective addresses or at such other address as each may specify by notice to
the others:
To the Company:
Inland Financial Corporation
c/o THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
Facsimile No.: [(212) 223-0161]
With a copy to:
Peter S. Kolevzon, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Facsimile No.: (212) 715-8000
To Chicago Advisory Group:
Chicago Advisory Group
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Robert Mauer
Facsimile No.:
9. Miscellaneous.
(a) The failure of either party at any time to
require performance by the other party of any provision hereunder will in no way
affect the right of that party thereafter to enforce the same, nor will it
affect any other party's right to enforce the same, or to enforce any of the
other provisions in this Agreement; nor will the waiver by either party of the
breach of any provision hereof be taken or held to be a waiver of any prior or
subsequent breach of such provision or as a waiver of the provision itself.
(b) This Agreement is a personal contract calling for
the provision of unique services by Mauer, and CAG's rights and obligations
hereunder may not be sold, transferred, assigned, pledged or hypothecated by CAG
or Mauer. The rights and obligations of the Company hereunder will be binding
upon and run in favor of the successors and assigns of the Company, but no
assignment by the Company shall release the Company from its obligations
hereunder, and the Company shall not assign this Agreement to any entity outside
of the Company.
(c) Each of the covenants and agreements set forth in
this Agreement are separate and independent covenants,
<PAGE> 254
each of which has been separately bargained for and the parties hereto intend
that the provisions of each such covenant shall be enforced to the fullest
extent permissible. Should the whole or any part or provision of any such
separate covenant be held or declared invalid, such invalidity shall not in any
way affect the validity of any other such covenant or of any part or provision
of the same covenant not also held or declared invalid. If any covenant shall be
found to be invalid but would be valid if some part thereof were deleted or the
period or area of application reduced, then such covenant shall apply with such
minimum modification as may be necessary to make it valid and effective.
(d) This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be wholly performed within that State, without regard to the principles
of conflicts of law.
(e) This Agreement sets forth the entire
understanding between the parties as to the subject matter of this Agreement and
merges and supersedes all prior agreements, commitments, representations,
writings and discussions between the parties with respect to that subject
matter. This Agreement may be terminated, altered, modified or changed only by a
written instrument signed by both parties hereto.
(f) The Section headings contained herein are for
purposes of convenience only and are not intended to define or list the contents
of the Sections.
(g) The provisions of this Agreement which by their
terms call for performance subsequent to termination of the Term, or of this
Agreement, shall so survive such termination.
(h) In rendering the services to be rendered by CAG
hereunder, CAG shall be an independent contractor. Neither CAG nor Mauer shall
be considered as having an employee status or being entitled to participate in
any employee plans, arrangements or distributions by the Company. Neither CAG
nor Mauer shall act as an agent of the Company and neither shall be entitled to
enter into any agreements, incur any obligations on behalf of the Company, or be
authorized to bind the Company in any manner whatsoever, and neither shall refer
to the Company as a customer in any manner or format without the prior written
consent of the Company. No form of joint venture, partnership or similar
relationship between the parties is intended or hereby created.
As an independent contractor, CAG shall be solely
responsible for determining the means and methods for performing the
professional and/or technical services described herein, and CAG shall have
complete charge and responsibility for Mauer. All of CAG's activities will be at
its own risk and CAG is hereby given notice of its responsibility for
arrangements to guard against physical, financial, and other risks, as
appropriate.
<PAGE> 255
Except as otherwise required by law, the Company
shall not withhold any sums from the payments to be made for Social Security or
other federal, state or local tax liabilities or contributions, and all
withholding, liabilities, and contributions shall be solely CAG's
responsibility.
Please confirm CAG's agreement with the foregoing by signing
and returning the enclosed copy of this letter, following which this will be a
legally binding agreement between us as of the date first written above.
Very truly yours,
Inland Financial Corporation
By:
------------------------------------
Name:
Title:
Accepted and Agreed:
Chicago Advisory Group
By:
------------------------------------
Name:
Title:
Robert Mauer hereby accepts, and agrees to abide by, the
terms of Section 5 of the Agreement.
---------------------------------------
Robert Mauer
<PAGE> 256
EXHIBIT B TO MERGER AGREEMENT
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
As of , 1999
Joel Kanter
Windy City, Inc.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Dear Mr. Kanter:
THCG, Inc. (the "Company") desires to engage Windy City, Inc. ("Windy
City") as a consultant, and Windy City desires to be so engaged by the Company,
all subject to the terms and conditions set forth in this letter agreement (this
"Agreement").
Accordingly, in consideration of the mutual covenants hereinafter set
forth and intending to be legally bound, the Company and Windy City hereby agree
as follows:
1. Engagement; Term. The Company hereby engages Windy City, and Windy
City hereby accepts such engagement and agrees to serve as a consultant to the
Company, upon the terms and conditions hereinafter set forth, for a term
commencing on , 1999 (the "Effective Date") and (unless sooner
terminated as hereinafter provided) expiring twelve months after the Effective
Date (such term being hereinafter referred to as the "Initial Term").
Thereafter, this Agreement shall automatically be extended for one or more
additional three-month periods unless Windy City or the Company gives written
notice, no less than ninety (90) days prior to the end of the Initial Term, or,
as applicable, sixty (60) days prior to the end of any extension thereof, of
Windy City's or the Company's election not to renew the Agreement. As used in
this Agreement, "Term" shall be defined as the Initial Term and, if applicable,
any extension thereof.
2. Duties; Conduct.
(a) During the Term, Windy City shall make available to the
Company the services of Joel Kanter ("Kanter") who shall serve in the capacity
of a senior advisor to the Company; as such, Windy City shall render consulting
services from time to time as hereinafter provided on such project or projects
relating to the business, affairs and management of the Company as may be
reasonably delegated to Windy City by the Board of Directors of the Company
("Board of Directors"), the Company's
<PAGE> 257
Co-Chief Executive Officers or, as applicable, the Company's Chief Executive
Officer. Windy City agrees that it shall use its best efforts to perform such
services faithfully and diligently, and to the best of its ability, and shall
use its best efforts to cause Kanter to use his best efforts to perform such
services faithfully and diligently, and to the best of his ability.
(b) To the extent practicable, the services to be provided by
Windy City shall be performed at such times as are reasonably convenient to
Windy City. The Company acknowledges that Windy City and Kanter may have other
activities, obligations and engagements which may command its or his time and
attention and the Company will exercise its best efforts to respect such other
commitments.
(c) The services to be provided hereunder may require travel.
Domestic travel shall be as reasonably required for the performance of the
duties hereunder; except as provided below, Windy City shall not need prior
approval for any domestic travel required hereunder unless and until it incurs
business expenses in connection with such travel in the aggregate amount of
$10,000 per annum. Once such threshold has been exceeded, Windy City shall
obtain the consent of the Company's Chief Operating Officer prior to incurring
any additional domestic travel expense. The parties agree that, subject to the
prior two sentences, (i) business class (as opposed to coach) and (ii) the costs
of upgrade certificates pursuant to frequent flier programs (not to exceed $100
per flight) shall be deemed to be reasonable expenses. Foreign travel shall be
as the Company and Windy City shall mutually agree.
3. Compensation and Expenses.
(a) Except as otherwise provided in Section 3(b), as full
compensation for all services to be provided by Windy City hereunder during the
Term, the Company will pay Windy City and Windy City will accept consulting fees
at an annual rate of One Hundred Thousand Dollars ($100,000). Such consulting
fees will be paid monthly in arrears.
(b) The Company will reimburse Windy City for all reasonable
travel, business entertainment and other business expenses as may be incurred by
it during the Term in the performance of the duties and responsibilities
assigned to it under this Agreement. Such reimbursements shall be made by the
Company on a timely basis upon submission by Windy City of proper accounts
therefor in accordance with the Company's standard procedures.
4. Termination.
(a) The Company may terminate the consulting engagement
hereunder and this Agreement at any time for Cause.
<PAGE> 258
For purposes of this Agreement, the term "Cause" shall mean any of the
following: (i) conviction of a felony by Kanter; (ii) perpetration of an
intentional and knowing fraud by Windy City or Kanter against or adversely
affecting the Company or any customer, client, agent, or employee thereof; (iii)
any action or conduct by Windy City or Kanter in any manner which would
reasonably be expected to harm the reputation or goodwill of the Company; (iv)
willful breach of a covenant set forth in Section 5 or 6 by Windy City or
Kanter; (v) substantial failure of Windy City to perform its duties hereunder;
or (vi) subject to Section 2(b) above and after taking into account Kanter's
reasonable personal commitments and vacation time, Windy City's failure or
inability to make Kanter available to provide the services contemplated
hereunder for any reason as determined in good faith by the Company's Board of
Directors; provided, however, that a termination pursuant to clause (iii), (v)
or (vi) shall not become effective unless Windy City fails to cure such action,
conduct or failure to perform within fifteen (15) days after written notice from
the Company, such notice to describe such action, conduct or failure to perform
and identify what reasonable actions shall be required to cure such action,
conduct or failure to perform, if such action, conduct or failure to perform is
susceptible of cure.
No act or failure to act on Windy City's or Kanter's part shall be
considered "willful" under this Section 4(a) unless it is done, or omitted to be
done, by Windy City or Kanter in bad faith or without reasonable belief that its
or his action or omission was in the best interests of the Company. Any act or
failure to act that is based upon authority given pursuant to a resolution duly
adopted by the Board of Directors, or upon direction or authority of the
Company's Co-Chief Executive Officers or, as applicable, the Company's Chief
Executive Officer, or upon the advice of counsel for the Company, shall be
conclusively presumed to be done, or omitted to be done, by Windy City in good
faith and in the best interests of the Company.
(b) The Term shall terminate forthwith upon a sale of all or
substantially all of the assets of the Company.
(c) Windy City may terminate the consulting engagement hereunder
and this Agreement at any time in the event of any material breach of this
Agreement by the Company; provided, however, that such termination shall not
become effective unless the Company fails to cure such breach within fifteen
(15) days after written notice from Windy City, such notice to describe such
breach and identify what reasonable actions shall be required to cure such
breach.
(d) In the event of a termination pursuant to any of Section 4(a),
(b) or (c) above, Windy City shall be entitled to, and the Company shall pay to
Windy City within thirty (30) days after any such termination, any accrued but
unpaid
<PAGE> 259
consulting fees to the date of termination and any accrued but unpaid expenses
required to be reimbursed pursuant to Section 3(b) above. In the event of a
termination pursuant to any of Section 4(b) or (c) above, Windy City shall be
entitled to continued payment of the consulting fees pursuant to Section 3(a)
above until the expiration of the Term as if such termination had not occurred,
with such payments being in addition to the payments described in the previous
sentence.
5. Nonsolicitation; Nondisclosure of Proprietary Information; Surrender
of Records.
5.1 Nonsolicitation. In view of the unique and valuable services
it is expected Windy City and Kanter will render to the Company, Windy City's
and Kanter's knowledge of the customers, trade secrets, and other proprietary
information relating to the business of the Company and the Company's
subsidiaries and their customers and suppliers, and in consideration of
compensation to be received hereunder, Windy City and Kanter each agrees that
during the Term and for a period of one year subsequent to any termination
hereunder, Windy City and Kanter shall not (i) directly or indirectly solicit or
attempt to solicit any of the employees, agents, consultants or representatives
of the Company or the Company's subsidiaries to terminate his, her, or its
relationship with the Company or the Company's subsidiaries; or (ii) directly or
indirectly solicit or attempt to solicit any of the employees, agents,
consultants (other than Robert Mauer and/or Chicago Advisory Group) or
representatives of the Company or the Company's subsidiaries to become
employees, agents, representatives or consultants of any other person or entity.
5.2 Proprietary Information. Windy City and Kanter each
acknowledges that during the course of the consulting engagement hereunder Windy
City and Kanter will necessarily have access to and make use of proprietary
information and confidential records of the Company and the Company's
subsidiaries. Windy City and Kanter each covenants that it and he shall not
during the Term or at any time thereafter, directly or indirectly, use for its
or his own purpose or for the benefit of any person or entity other than the
Company, nor otherwise disclose, any such proprietary information to any
individual or entity, unless such disclosure has been authorized in writing by
the Company or is otherwise required by law.
For purposes of this Section 5, "proprietary information" shall
not include information which (i) is or becomes generally available to the
public other than as a result of a breach of this Agreement by Windy City or
Kanter; (ii) was within Windy City's or Kanter's possession or knowledge prior
to its being furnished to the Company, provided that the information was not
obtained in connection with the consulting engagement hereunder or Kanter's
prior employment by Walnut Financial
<PAGE> 260
Services, Inc.; (iii) is independently developed by Windy City or Kanter other
than in connection with the consulting engagement hereunder; or (iv) is obtained
by Windy City or Kanter in its or his capacity as an investor in the Company or
the Company's (or its subsidiaries') portfolio companies and not in connection
with the performance of the duties hereunder, provided that information obtained
by Windy City or Kanter under circumstances under which it or he has any
obligation to keep such information confidential shall be "proprietary
information" to the extent of such obligation.
5.3 Confidentiality and Surrender of Records. Windy City and
Kanter each agrees that it or he shall not during the Term or at any time
thereafter (irrespective of the circumstances under which the consulting
engagement terminates), except as required by law, directly or indirectly
publish, make known or in any fashion disclose any confidential records to, or
permit any inspection or copying of confidential records by, any individual or
entity other than in the course of such individual's or entity's employment or
retention by the Company, nor shall Windy City or Kanter retain, and will
deliver promptly to the Company, any of the same following termination of the
consulting engagement hereunder for any reason or upon request by the Company.
For purposes hereof, "confidential records" means all correspondence, memoranda,
files, manuals, books, lists, financial, operating or marketing records,
magnetic tape or electronic or other media or equipment of any kind which may be
in Windy City's or Kanter's possession or under its or his control or accessible
to it or him which contain any proprietary information of the Company or the
Company's subsidiaries. All confidential records shall be and remain the sole
property of the Company, or, as applicable, the Company's subsidiaries during
the Term and thereafter.
5.4 Enforcement. Windy City and Kanter each agrees that the
remedy at law for any breach or threatened breach of any covenant contained in
this Section 5 would be inadequate and that the Company, in addition to such
other remedies as may be available to it at law or in equity, shall be entitled
to institute proceedings in any court or courts of competent jurisdiction to
obtain damages for breach of this Section 5 and injunctive relief.
6. No Conflict. Windy City covenants that neither it nor Kanter is now,
and shall not become, party to or subject to any agreement, contract,
understanding or covenant, or under any obligation, contractual or otherwise, in
any way restricting or adversely affecting its or his ability to act for the
Company in all of the respects contemplated hereby.
7. Cooperation. Windy City shall cooperate fully with the Company in
the prosecution or defense, as the case may be, of any and all actions,
governmental inquiries or other legal
<PAGE> 261
proceedings in which Windy City's or Kanter's assistance may be requested by the
Company. Such cooperation shall include, among other things, making documents
relating to the Company or its subsidiaries or any of their respective
businesses in Windy City's or Kanter's custody or control available to the
Company or its counsel, making Kanter available for interviews by the Company or
its counsel, and making Kanter available to appear as a witness, at deposition,
trial or otherwise. Any reasonable vouchered out-of-pocket expenses incurred by
Windy City in fulfilling its obligations under this Section 7 shall be promptly
reimbursed by the Company.
The provisions of this Section 7 shall survive the termination or
expiration of this Agreement and the Term; provided, however, that Windy City's
obligations under this Section 7 subsequent to the expiration of this Agreement
and the Term shall be on terms to be negotiated between Windy City and the
Company's Board of Directors in good faith.
8. Notices. Any notice, consent, request or other communication made or
given in accordance with this Agreement shall be in writing either (i) by
personal delivery to the party entitled thereto, (ii) by facsimile with
confirmation of receipt, or (iii) by registered or certified mail, return
receipt requested. The notice, consent, request or other communication shall be
deemed to have been received upon personal delivery, upon confirmation of
receipt of facsimile transmission, or, if mailed, three days after mailing. Any
notice, consent, request or other communication made or given in accordance with
this Agreement shall be made to those listed below at their following respective
addresses or at such other address as each may specify by notice to the others:
To the Company:
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
Facsimile No.: [(212) 223-0161]
With a copy to:
Peter S. Kolevzon, Esq.
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Facsimile No.: (212) 715-8000
To Windy City:
Windy City, Inc.
8000 Towers Crescent Drive
<PAGE> 262
Suite 1070
Vienna, Virginia 22182
Attention: Joel Kanter
Facsimile No.: (703) 448-7751
9. Miscellaneous.
(a) The failure of either party at any time to require
performance by the other party of any provision hereunder will in no way affect
the right of that party thereafter to enforce the same, nor will it affect any
other party's right to enforce the same, or to enforce any of the other
provisions in this Agreement; nor will the waiver by either party of the breach
of any provision hereof be taken or held to be a waiver of any prior or
subsequent breach of such provision or as a waiver of the provision itself.
(b) This Agreement is a personal contract calling for the
provision of unique services by Kanter, and Windy City's rights and obligations
hereunder may not be sold, transferred, assigned, pledged or hypothecated by
Windy City or Kanter. The rights and obligations of the Company hereunder will
be binding upon and run in favor of the successors and assigns of the Company,
but no assignment by the Company shall release the Company from its obligations
hereunder, and the Company shall not assign this Agreement to any entity outside
of the Company.
(c) Each of the covenants and agreements set forth in this
Agreement are separate and independent covenants, each of which has been
separately bargained for and the parties hereto intend that the provisions of
each such covenant shall be enforced to the fullest extent permissible. Should
the whole or any part or provision of any such separate covenant be held or
declared invalid, such invalidity shall not in any way affect the validity of
any other such covenant or of any part or provision of the same covenant not
also held or declared invalid. If any covenant shall be found to be invalid but
would be valid if some part thereof were deleted or the period or area of
application reduced, then such covenant shall apply with such minimum
modification as may be necessary to make it valid and effective.
(d) This Agreement shall be governed and construed in accordance
with the laws of the State of New York applicable to agreements made and to be
wholly performed within that State, without regard to the principles of
conflicts of law.
(e) This Agreement sets forth the entire understanding between
the parties as to the subject matter of this Agreement and merges and supersedes
all prior agreements, commitments, representations, writings and discussions
between the parties with respect to that subject matter. This Agreement may be
terminated, altered, modified or changed only by a written instrument signed by
both parties hereto.
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(f) The Section headings contained herein are for purposes of
convenience only and are not intended to define or list the contents of the
Sections.
(g) The provisions of this Agreement which by their terms call
for performance subsequent to termination of the Term, or of this Agreement,
shall so survive such termination.
(h) In rendering the services to be rendered by Windy City
hereunder, Windy City shall be an independent contractor. Neither Windy City nor
Kanter shall be considered as having an employee status or being entitled to
participate in any employee plans, arrangements or distributions by the Company.
Neither Windy City nor Kanter shall act as an agent of the Company and neither
shall be entitled to enter into any agreements, incur any obligations on behalf
of the Company, or be authorized to bind the Company in any manner whatsoever,
and neither shall refer to the Company as a customer in any manner or format
without the prior written consent of the Company. No form of joint venture,
partnership or similar relationship between the parties is intended or hereby
created.
As an independent contractor, Windy City shall be solely
responsible for determining the means and methods for performing the
professional and/or technical services described herein, and Windy City shall
have complete charge and responsibility for Kanter. All of Windy City's
activities will be at its own risk and Windy City is hereby given notice of its
responsibility for arrangements to guard against physical, financial, and other
risks, as appropriate.
Except as otherwise required by law, the Company shall not
withhold any sums from the payments to be made for Social Security or other
federal, state or local tax liabilities or contributions, and all withholding,
liabilities, and contributions shall be solely Windy City's responsibility.
<PAGE> 264
Please confirm Windy City's agreement with the foregoing by
signing and returning the enclosed copy of this letter, following which this
will be a legally binding agreement between us as of the date first written
above.
Very truly yours,
THCG, Inc.
By:
---------------------------
Name:
Title:
Accepted and Agreed:
Windy City, Inc.
By:
-------------------------
Name:
Title:
Joel Kanter hereby accepts, and agrees to abide by, the terms of
Section 5 of the Agreement.
---------------------------------
Joel Kanter
<PAGE> 265
EXHIBIT C-1 TO MERGER AGREEMENT
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of
, 1999 (the "Effective Date"), by and between THCG, INC., a Delaware
corporation (the "Company") and JOSEPH MARK (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to accept such employment in the capacities and on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the parties hereto hereby agree as follows:
1. Employment; Term.
(a) The Company hereby employs the Executive, and the Executive
hereby accepts employment by the Company, in accordance with and subject to the
terms and conditions set forth herein.
(b) The term of this Agreement shall commence on the Effective
Date and, unless earlier terminated in accordance with Paragraph 5 hereof, shall
terminate on the fifth anniversary of the Effective Date (the "Initial Term").
Thereafter, this Agreement shall automatically be extended for one or more
additional annual periods unless the Executive or the Company gives written
notice, no less than ninety (90) days prior to the end of the Initial Term or
any extension thereof (together, the "Term"), of his or its election not to
renew this Agreement.
2. Duties.
(a) During the Term, the Executive shall serve as the Co-Chief
Executive Officer of the Company and shall report to the Board of Directors of
the Company (the "Board of Directors").
(b) The Executive shall have such authority and responsibility as
is customary for such position or positions in businesses comparable in size and
function, and such other responsibilities as may reasonably be assigned by the
Board of Directors.
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(c) During the period the Executive is employed by the Company,
the Executive shall devote his full business time and best efforts to the
business and affairs of the Company; provided, however, the Executive may engage
in outside business activities with the consent of the Board of Directors. It
shall not be considered a violation of the foregoing for the Executive to serve
on corporate, industry, civic or charitable boards or committees, so long as
such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement.
(d) The Executive's services shall be performed primarily at the
Company's principal place of business, located in New York, New York. The
Executive recognizes that his duties will require from time-to-time and at the
Company's expense, travel to domestic and international locations.
3. Compensation.
(a) The Company shall pay the Executive a base salary (the "Base
Salary") of not less than $200,000 per annum, or such greater sum as may from
time to time be fixed by the Compensation Committee of the Board of Directors,
provided that any such greater sum shall become the minimum rate of compensation
for so long as the Executive shall be employed by the Company. Payments of Base
Salary to the Executive shall be made in equal semi-monthly installments and
subject to all legally required and customary withholdings.
(b) The Executive shall be entitled to bonus compensation (the
"Bonus Compensation") as reasonably determined in good faith by the Compensation
Committee of the Board of Directors.
(c) The Executive shall receive an option to purchase 450,000
shares of the common stock of the Company, in accordance with and subject to the
provisions of The 1999 THCG, Inc. Stock Incentive Plan and the grant thereunder.
4. Benefits.
(a) The Company agrees to reimburse the Executive for all
reasonable travel, business entertainment and other business expenses incurred
by the Executive in connection with the performance of his duties under this
Agreement. Such reimbursements shall be made by the Company on a timely basis
upon submission by the Executive of proper accounts therefor in accordance with
the Company's standard procedures.
(b) The Executive shall be entitled to
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participate in any and all medical insurance, group health, disability
insurance, life insurance and other benefit plans and programs which are made
generally available by the Company to its most senior executives. If the
Executive elects to participate in any such benefit plan and/or program, the
Company agrees to pay the premiums for the coverage elected by the Executive.
(c) The Executive shall be entitled to participate fully in the
Company's group pension, profit-sharing and employee benefit programs now or
hereafter made available to employees of the Company generally.
(d) The Company shall pay the premiums on an ordinary life
insurance policy on the Executive's behalf in the principal amount of
$2,000,000.
(e) The Executive shall not be limited to the general vacation
policy and program of the Company as a whole, but, in view of his position and
stature with the Company, shall be entitled to such vacation time as may be
reasonably appropriate to the Company and its clients, and the proper
performance of his duties and responsibilities.
(f) The Company shall lease or purchase an automobile of make and
model as the Executive shall specify for the sole use of the Executive;
provided, however, that the Executive may, at his own option, lease an
automobile in his own name and at Company expense. The Executive shall cause the
vehicle to be properly insured and maintained. The Company shall pay or
reimburse the Executive for all purchase or lease costs, parking costs, toll
fees, costs of insurance, routine maintenance, service and repair of the
vehicle, provided that the Company's obligation pursuant to this Paragraph 4(f)
shall not exceed $1,000 per month. At the expiration of this Agreement, the
Company shall, if requested by the Executive, exercise its purchase option under
any lease agreement and grant the Executive an option to purchase the vehicle
upon the same terms and conditions offered to the Company by the leasing
company.
(g) The Company shall pay for the Executive's use of computers,
e-mail, facsimile, access to Internet and cellular phones for both the
Executive's office use and for use in his home for business purposes.
(h) The Company agrees to reimburse the Executive for personal tax
preparation and financial planning assistance in a total amount not to exceed
$5,000 per year.
(i) The Executive shall be indemnified by the Company to the
greatest extent permitted under Delaware law.
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(j) The Executive shall be entitled to use the Company's season
tickets to New York Knicks basketball games. In the event that the Executive's
employment is terminated for any reason, the Company shall use its best efforts
to have the tickets transferred into the Executive's name for his sole ownership
and use; provided, however, that any expenses paid by the Company with respect
to games not played in the current basketball season shall be reimbursed by the
Executive. In the event that the Company is unable to make such transfer, the
Executive shall be entitled to the use of these tickets; provided, however, the
Executive shall reimburse the Company for the cost of such tickets.
(k) The Executive shall be entitled to any other benefits or
perquisites on terms no less favorable than those pursuant to which such
benefits or perquisites are made available to any other executive or employee of
the Company.
5. Termination.
(a) Death. The Executive's employment hereunder shall terminate
upon the Executive's death.
(b) Total Disability. The Company may terminate the Executive's
employment hereunder at any time after the Executive becomes "Totally Disabled."
For purposes of this Agreement, "Totally Disabled" means that the Executive has
been unable, for a period of one hundred eighty (180) consecutive business days,
to perform the Executive's duties under this Agreement, as a result of physical
or mental illness or injury. A termination of the Executive's employment by the
Company for Total Disability shall be communicated to the Executive by written
notice, and shall be effective on the 30th day after receipt of such notice by
the Executive (the "Total Disability Effective Date"), unless the Executive
returns to full-time performance of the Executive's duties before the Total
Disability Effective Date.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment hereunder for Cause. For purposes of this
Agreement, the term "Cause" shall mean any of the following: (i) conviction of a
felony; (ii) perpetration of an intentional and knowing fraud against or
adversely affecting the Company or any customer, client, agent, or employee
thereof; (iii) willful breach of a covenant set forth in Paragraph 7; or (iv)
willful and substantial failure of the Executive to perform his duties hereunder
(other than as a result of total or partial incapacity due to physical or mental
illness or injury); provided, however, that a termination pursuant to clause
(iv) shall not become effective unless the Executive fails to cure such failure
to perform within thirty (30) days after
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written notice from the Company, such notice to describe such failure to perform
and identify what reasonable actions shall be required to cure such failure to
perform.
No act or failure to act on the part of the Executive shall be
considered "willful" under this Paragraph 5(c) unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any act
or failure to act that is based upon authority given pursuant to a resolution
duly adopted by the Board of Directors or upon the advice of counsel for the
Company, shall be conclusively presumed to be done, or omitted to be done, by
the Executive in good faith and in the best interests of the Company.
(d) Termination by the Company Without Cause. The Company may
terminate the Executive's employment hereunder at any time for any reason or no
reason by giving the Executive thirty (30) days prior written notice of the
termination.
(e) Termination by the Executive For Good Reason.
(1) The Executive may terminate his employment hereunder for
"Good Reason" for (i) a Change in Control of the Company; (ii) the assignment to
the Executive of any duties inconsistent in any respect with Paragraph 2, or any
other action by the Company that results in a diminution in the Executive's
position, authority, duties or responsibilities; (iii) any failure by the
Company to comply with Paragraph 3 or 4, other than an isolated, insubstantial
and inadvertent failure that is not taken in bad faith and is remedied by the
Company promptly after receipt of notice thereof from the Executive; (iv) a
change in the Executive's location of employment to a place of employment
outside the New York Metropolitan Area; (v) any purported termination of the
Executive's employment by the Company for a reason or in a manner not expressly
permitted by this Agreement; (vi) any failure by the Company to comply with
Paragraph 10(c) of this Agreement; or (vii) any other substantial breach of this
Agreement by the Company.
(2) "Change in Control of the Company" shall be conclusively
deemed to have occurred if any of the following shall have taken place:
i. a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934
("Exchange Act") shall have occurred, unless such change in
control results in control by the Executive, his designee(s) or
"affiliate(s)" (as
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defined in Rule 12b-2 under the Exchange Act) or any combination
thereof;
ii. any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act), other than the Executive, his designee(s) or
"affiliate(s)" (as defined in Rule 12b-2 under the Exchange Act),
or any "person" who was a shareholder as of the Effective Date or
any combination thereof, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing forty
percent (40%) or more of the combined voting power of the
Company's then outstanding securities;
iii. during any period of two (2) consecutive years during this
Agreement, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least a
majority thereof, unless the election of each director who was not
a director at the beginning of such period has been approved in
advance by directors representing at least a majority of the
directors then in office who were directors at the beginning of
the period;
iv. the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such merger
or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 25% of the combined voting
power of the Company's then outstanding securities shall not
constitute a Change in Control of the Company; or
v. the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of, or the Company sells or disposes
of,
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all or substantially all of the Company's assets.
(3) If an event should occur that would allow the Executive to
terminate his employment hereunder for Good Reason, the Executive shall have a
period of one year from the date on which the Executive first becomes aware of
such event in which to elect to terminate his employment for Good Reason. If the
Executive elects to terminate his employment for Good Reason, he shall provide
the Company with a written notice.
(f) Termination by the Executive Without Good Reason. The
Executive may terminate his employment hereunder for any reason or no reason by
giving the Company sixty (60) days prior written notice of the termination.
6. Compensation Following Termination Prior to the End of the Term.
In the event that the Employee's employment hereunder is terminated prior to the
end of the Term, the Executive shall be entitled to the following compensation
and benefits upon such termination:
(a) Termination by Reason of Death or Total Disability. In the
event that the Executive's employment is terminated prior to the expiration of
the Term by reason of the Executive's death or Total Disability pursuant to
Paragraph 5(a) or 5(b), the Company shall pay the following amounts to the
Executive (or the Executive's estate, as the case may be):
i. Any accrued but unpaid Base Salary (as determined pursuant to
Paragraph 3) for services rendered to the date of termination;
ii. A prorated amount of Bonus Compensation, to be paid at the time
the Executive's Bonus Compensation would have been paid had he
remained employed by the Company, computed by multiplying the
amount of Bonus Compensation the Executive would have earned for
the year in which the termination occurred and the fraction of the
year the Executive was employed by the Company;
iii. Any accrued but unpaid expenses required to be reimbursed pursuant
to Paragraph 4; and
iv. Any vacation accrued to the date of termination.
The benefits to which the Executive may be entitled upon termination
pursuant to the plans and programs referred to in Paragraph 4 and the
plan and grant thereunder referred to in Paragraph 3(c) hereof shall be
determined and paid in accordance with the terms of
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such plans, programs and grant, except that the Company shall, with
respect to any major medical and all other health, accident, or
disability plans for which the Executive, or his spouse or legal
representative, elects continuation in accordance with COBRA, be
responsible for payment of premiums related to the maintenance of such
plans for a period of six (6) months following the date of termination.
(b) Termination by the Company for Cause; Termination by the
Executive Without Good Reason. In the event that the Executive's employment is
terminated by the Company for Cause pursuant to Paragraph 5(c) or by the
Executive without Good Reason pursuant to Paragraph 5(f), the Company shall pay
the following amounts to the Executive:
i. Any accrued but unpaid Base Salary (as determined pursuant to
Paragraph 3) for services rendered to the date of termination;
ii. Any accrued but unpaid expenses required to be reimbursed pursuant
to Paragraph 4; and
iii. Any vacation accrued to the date of termination.
The benefits to which the Executive may be entitled upon termination
pursuant to the plans and programs referred to in Paragraph 4 and the
plan and grant thereunder referred to in Paragraph 3(c) hereof shall be
determined in accordance with the terms of such plans, programs and
grant.
(c) Termination by the Company Without Cause; Termination by the
Executive For Good Reason. In the Event that the Executive's employment is
terminated by the Company without Cause pursuant to Paragraph 5(d) or by the
Executive for Good Reason pursuant to Paragraph 5(e), the Company shall pay the
following amounts to the Executive:
i. Any accrued but unpaid Base Salary (as determined pursuant to
Paragraph 3) for services rendered to the date of termination;
ii. Such bonus as may reasonably be determined by the Company based
upon the Executive's performance through the date of termination;
iii. Any accrued but unpaid expenses required to be reimbursed pursuant
to Paragraph 4;
iv. Any vacation accrued to the date of termination;
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and
v. Continued payment of the Base Salary (as determined under
Paragraph 3) until the earlier of (a) thirty-six (36) months after
the date of termination, or (b) the expiration of the Term. Such
payments shall be made in accordance with the Company's standard
payroll practices then in effect.
The Company shall continue to provide the Executive with the benefits
set forth in Paragraph 4 as if he had remained employed by the Company
pursuant to this Agreement through the earlier of (a) thirty-six (36)
months after the date of termination, or (b) the end of the Term;
provided that to the extent any benefits described in Paragraph 4
cannot be provided pursuant to the plan or program maintained by the
Company for its employees and/or executives, the Company shall provide
such benefits outside such plan or program at no additional cost
(including without limitation tax cost) to the Executive. The benefits
referred to in Paragraph 3(c) shall be determined in accordance with
the terms of such plan and grant thereunder.
(d) No Duty to Mitigate. In the event that the Executive's
employment is terminated by reason of the Executive's Total Disability Pursuant
to Paragraph 5(b), the Executive's employment is terminated by the Company
without Cause pursuant to Paragraph 5(d), or the Executive's employment is
terminated by the Executive for Good Reason pursuant to Paragraph 5(e), the
Executive shall not be required to seek other employment to mitigate damages,
and any income earned by the Executive from other employment or self-employment
shall not be offset against any obligations of the Company to the Executive
under this Agreement.
(e) No Other Benefits or Compensation. Except as may be provided
under this Agreement, under the terms of any incentive compensation, employee
benefit or fringe benefit plan applicable to the Executive at the time of the
termination of the Executive's employment prior to the end of the Term, the
Executive shall have no right to receive any other compensation, or to
participate in any other plan, arrangement or benefit, with respect to any
future period after such termination.
7. Noncompetition and Nonsolicitation; Nondisclosure of Proprietary
Information; Surrender of Records.
7.1 Noncompetition and Nonsolicitation. In view of the unique and
valuable services it is expected the Executive
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will render to the Company, the Executive's knowledge of the customers, trade
secrets, and other proprietary information relating to the business of the
Company and its customers and suppliers, and in consideration of compensation to
be received hereunder, the Executive agrees that during his employment hereunder
the Executive will not compete with or be engaged in any business which, during
his employment hereunder, is engaged in the investment banking, asset
management, or internet (including media buying, web design, technology
engineering, or other internet-related services) business in the United States
or Canada, provided that the provisions of this Paragraph will not be deemed
breached merely because the Executive owns less than 10% of the outstanding
common stock of a publicly-traded company or is a passive investor who owns less
than 10% of the outstanding common stock of a privately-held company.
In further consideration of the compensation to be received hereunder,
the Executive agrees that during the Term and for a period of one year
subsequent to any termination hereunder, the Executive shall not (i) directly or
indirectly solicit or attempt to solicit any of the employees, agents,
consultants or representatives of the Company to terminate his, her or its
relationship with the Company; (ii) directly or indirectly solicit or attempt to
solicit any of the employees, agents, consultants or representatives of the
Company to become employees, agents, representatives or consultants of any other
person or entity; (iii) directly or indirectly solicit or attempt to solicit any
customer, vendor or distributor of the Company with respect to any product or
service being furnished, made, sold or leased by the Company; or (iv) persuade
or seek to persuade any customer of the Company to cease to do business or to
reduce the amount of business which any customer has customarily done or
contemplates doing with the Company, whether or not the relationship between the
Company and such customer was originally established in whole or in part through
the Executive's efforts.
7.2 Proprietary Information. The Executive acknowledges that during
the course of his employment with the Company he will necessarily have access to
and make use of proprietary information and confidential records of the Company
and the Company's subsidiaries. The Executive covenants that he shall not during
the Term or at any time thereafter, directly or indirectly, use for his own
purpose or for the benefit of any person or entity other than the Company, nor
otherwise disclose, any such proprietary information to any individual or
entity, unless such disclosure has been authorized in writing by the Company or
is otherwise required by law.
For purposes of this Section 7, "proprietary information" shall not
include information which is or becomes
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generally available to the public other than as a result of a breach of this
Agreement by the Executive.
7.3 Confidentiality and Surrender of Records. The Executive shall not
during the Term or at any time thereafter (irrespective of the circumstances
under which the Executive's employment by the Company terminates), except as
required by law, directly or indirectly publish, make known or in any fashion
disclose any confidential records to, or permit any inspection or copying of
confidential records by, any individual or entity other than in the course of
such individual's or entity's employment or retention by the Company, nor shall
he retain, and will deliver promptly to the Company, any of the same following
termination of his employment hereunder for any reason or upon request by the
Company. For purposes hereof, "confidential records" means all correspondence,
memoranda, files, manuals, books, lists, financial, operating or marketing
records, magnetic tape or electronic or other media or equipment of any kind
which may be in the Executive's possession or under his control or accessible to
him which contain any proprietary information of the Company or the Company's
subsidiaries. All confidential records shall be and remain the sole property of
the Company, or, as applicable, the Company's subsidiaries during the Term and
thereafter.
7.4 Inventions and Patents. Any interest in patents, patent
applications, inventions, copyrights, developments and processes ("Inventions")
which the Executive develops during his employment with the Company and which
relates to the fields in which the Company or the Company's subsidiaries is then
engaged shall belong to the Company, or, as applicable, the Company's
subsidiaries. Upon request, the Executive shall execute all such assignments and
other documents and take all such other action as the Company may reasonably
request in order to vest in the Company, or, as applicable, a subsidiary of the
Company all his right, title, and interest in and to such Inventions.
7.5 Enforcement.
(a) The Executive agrees that the remedy at law for any breach or
threatened breach of any covenant contained in this Paragraph 7 would be
inadequate and that the Company, in addition to such other remedies as may be
available to it at law or in equity, shall be entitled to institute proceedings
in any court or courts of competent jurisdiction to obtain damages for breach of
this Paragraph 7 and injunctive relief.
(b) In no event shall any asserted violation of any provision of
this Paragraph 7 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
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8. Key Man Insurance. The Executive recognizes and acknowledges that
the Company or its affiliates may seek and purchase one or more policies
providing key man life insurance with respect to the Executive, the proceeds of
which would be payable to the Company or such affiliate. The Executive hereby
consents to the Company or its affiliates seeking and purchasing such insurance
and will provide such information, undergo such medical examinations (at the
Company's expense), execute such documents and otherwise take any and all
actions necessary or desirable in order for the Company or its affiliates to
seek, purchase and maintain in full force and effect such policy or policies.
9. Notices. Any notice, consent, request or other communication made
or given in accordance with this Agreement shall be in writing either (i) by
personal delivery to the party entitled thereto, (ii) by facsimile with
confirmation of receipt, or (iii) by registered or certified mail, return
receipt requested. The notice, consent request or other communication shall be
deemed to have been received upon personal delivery, upon confirmation of
receipt of facsimile transmission, or, if mailed, three days after mailing. Any
notice, consent, request or other communication made or given in accordance with
the Agreement shall be made to those listed below at their following respective
addresses or at such other address as each may specify by notice to the others:
To the Company:
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Adi Raviv
Facsimile No.: [(212) 223-0161]
To the Executive:
Joseph Mark
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Facsimile No.: [(212) 223-0161]
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10. Successors.
(a) This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs and
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
11. Complete Understanding; Amendment; Waiver. This Agreement
constitutes the complete understanding between the parties with respect to the
employment of the Executive and supersedes all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, and no statement, representation, warranty or covenant
has been made by either party with respect thereto except as expressly set forth
herein. This Agreement shall not be altered, modified, amended or terminated
except by a written instrument signed by each of the parties hereto. Any waiver
of any term or provision hereof, or of the application of any such term or
provision to any circumstances, shall be in writing signed by the party charged
with giving such waiver. Waiver by either party hereto of any breach hereunder
by the other party shall not operate as a waiver of any other breach, whether
similar to or different from the breach waived. No delay on the part of the
Company or the Executive in the exercise of any of their respective rights or
remedies shall operate as a waiver thereof, and no single or partial exercise by
the Company or the Executive of any such right or remedy shall preclude other or
further exercise thereof.
12. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement. If any provision of this Agreement shall be held
invalid or unenforceable in part, the remaining portion of such provision,
together with all other provisions of this Agreement, shall
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remain valid and enforceable and continue in full force and effect to the
fullest extent consistent with law.
13. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be wholly performed within that State, without regard to the principles
of conflicts of law.
14. Titles and Captions. All paragraph titles or captions in this
Agreement are for convenience only and in no way define, limit, extend or
describe the scope or intent of any provision hereof.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Executive has executed this Agreement and,
pursuant to the authorization of the Board of Directors, the Company has caused
this Agreement to be executed in its name and on its behalf, all as of the date
above written.
THCG, INC.
By:
-----------------------------------
Name:
Title:
--------------------------------------
Joseph Mark
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EXHIBIT C-2 TO MERGER AGREEMENT
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of
, 1999 (the "Effective Date"), by and between THCG, INC., a Delaware
corporation (the "Company") and SHAI NOVIK (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to accept such employment in the capacities and on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter
contained, the parties hereto hereby agree as follows:
1. Employment; Term.
(a) The Company hereby employs the Executive, and the Executive
hereby accepts employment by the Company, in accordance with and subject to the
terms and conditions set forth herein.
(b) The term of this Agreement shall commence on the Effective
Date and, unless earlier terminated in accordance with Paragraph 5 hereof, shall
terminate on the fifth anniversary of the Effective Date (the "Initial Term").
Thereafter, this Agreement shall automatically be extended for one or more
additional annual periods unless the Executive or the Company gives written
notice, no less than ninety (90) days prior to the end of the Initial Term or
any extension thereof (together, the "Term"), of his or its election not to
renew this Agreement.
2. Duties.
(a) During the Term, the Executive shall serve as the Chief
Operating Officer of the Company and shall report to the Chief Executive Officer
or the Co-Chief Executive Officers as the case may be.
(b) The Executive shall have such authority and responsibility
as is customary for such position or positions in businesses comparable in size
and function, and such other responsibilities as may reasonably be assigned by
the Chief Executive Officer or the Co-Chief Executive Officers as the case
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may be.
(c) During the period the Executive is employed by the Company,
the Executive shall devote his full business time and best efforts to the
business and affairs of the Company; provided, however, the Executive may engage
in outside business activities with the consent of the Board of Directors of the
Company (the "Board of Directors"). It shall not be considered a violation of
the foregoing for the Executive to serve on corporate, industry, civic or
charitable boards or committees, so long as such activities do not significantly
interfere with the performance of the Executive's responsibilities as an
employee of the Company in accordance with this Agreement.
(d) The Executive's services shall be performed primarily at the
Company's principal place of business, located in New York, New York. The
Executive recognizes that his duties will require from time-to-time and at the
Company's expense, travel to domestic and international locations.
3. Compensation.
(a) The Company shall pay the Executive a base salary (the
"Base Salary") of not less than $150,000 per annum, or such greater sum as may
from time to time be fixed by the Compensation Committee of the Board of
Directors, provided that any such greater sum shall become the minimum rate of
compensation for so long as the Executive shall be employed by the Company.
Payments of Base Salary to the Executive shall be made in equal semi-monthly
installments and subject to all legally required and customary withholdings.
(b) The Executive shall be entitled to bonus compensation (the
"Bonus Compensation") as reasonably determined in good faith by the Compensation
Committee of the Board of Directors, provided that the Executive shall be
entitled to participate in any bonus compensation plans the Company makes
generally available to its senior executives or its employees, in accordance
with the terms of such plans.
(c) The Executive shall receive a grant of 372,281.45 shares of
restricted stock in accordance with and subject to the provisions of The 1999
THCG, Inc. Stock Incentive Plan and the grant thereunder, as provided for in the
Agreement and Plans of Merger By and Between Walnut Financial Services, Inc. and
THCG, Inc., and By and Among THCG, Inc., Tower Hill Acquisition Corp. and Tower
Hill Securities, Inc., dated as of August , 1999.
4. Benefits.
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(a) The Company agrees to reimburse the Executive for all
reasonable travel, business entertainment and other business expenses incurred
by the Executive in connection with the performance of his duties under this
Agreement. Such reimbursements shall be made by the Company on a timely basis
upon submission by the Executive of proper accounts therefor in accordance with
the Company's standard procedures.
(b) The Executive shall be entitled to participate in any and
all medical insurance, group health, disability insurance, life insurance and
other benefit plans and programs which are made generally available by the
Company to its most senior executives. If the Executive elects to participate in
any such benefit plan and/or program, the Company agrees to pay the premiums for
the coverage elected by the Executive.
(c) The Executive shall be entitled to participate fully in the
Company's group pension, profit-sharing and employee benefit programs now or
hereafter made available to employees of the Company generally.
(d) The Company shall pay the premiums on an ordinary life
insurance policy on the Executive's behalf in the principal amount of
$2,000,000.
(e) The Executive shall not be limited to the general vacation
policy and program of the Company as a whole, but, in view of his position and
stature with the Company, shall be entitled to such vacation time as may be
reasonably appropriate to the Company and its clients, and the proper
performance of his duties and responsibilities.
(f) The Company shall lease or purchase an automobile of make
and model as the Executive shall specify for the sole use of the Executive;
provided, however, that the Executive may, at his own option, lease an
automobile in his own name and at Company expense. The Executive shall cause the
vehicle to be properly insured and maintained. The Company shall pay or
reimburse the Executive for all purchase or lease costs, parking costs, toll
fees, costs of insurance, routine maintenance, service and repair of the
vehicle, provided that the Company's obligation pursuant to this Paragraph 4(f)
shall not exceed $1,000 per month. At the expiration of this Agreement, the
Company shall, if requested by the Executive, exercise its purchase option under
any lease agreement and grant the Executive an option to purchase the vehicle
upon the same terms and conditions offered to the Company by the leasing
company.
(g) The Company shall pay for the Executive's use of computers,
e-mail, facsimile, access to Internet and cellular phones for both the
Executive's office use and for use in his
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home for business purposes.
(h) The Company agrees to reimburse the Executive for personal
tax preparation and financial planning assistance in a total amount not to
exceed $5,000 per year.
(i) The Executive shall be indemnified by the Company to the
greatest extent permitted under Delaware law.
(j) The Executive shall be entitled to any other benefits or
perquisites on terms no less favorable than those pursuant to which such
benefits or perquisites are made available to any other executive or employee of
the Company.
5. Termination.
(a) Death. The Executive's employment hereunder shall terminate
upon the Executive's death.
(b) Total Disability. The Company may terminate the Executive's
employment hereunder at any time after the Executive becomes "Totally Disabled."
For purposes of this Agreement, "Totally Disabled" means that the Executive has
been unable, for a period of one hundred eighty (180) consecutive business days,
to perform the Executive's duties under this Agreement, as a result of physical
or mental illness or injury. A termination of the Executive's employment by the
Company for Total Disability shall be communicated to the Executive by written
notice, and shall be effective on the 30th day after receipt of such notice by
the Executive (the "Total Disability Effective Date"), unless the Executive
returns to full-time performance of the Executive's duties before the Total
Disability Effective Date.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment hereunder for Cause. For purposes of this
Agreement, the term "Cause" shall mean any of the following: (i) conviction of a
felony; (ii) perpetration of an intentional and knowing fraud against or
adversely affecting the Company or any customer, client, agent, or employee
thereof; (iii) willful breach of a covenant set forth in Paragraph 7; or (iv)
willful and substantial failure of the Executive to perform his duties hereunder
(other than as a result of total or partial incapacity due to physical or mental
illness or injury); provided, however, that a termination pursuant to clause
(iv) shall not become effective unless the Executive fails to cure such failure
to perform within thirty (30) days after written notice from the Company, such
notice to describe such failure to perform and identify what reasonable actions
shall be required to cure such failure to perform.
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No act or failure to act on the part of the Executive shall be
considered "willful" under this Paragraph 5(c) unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any act
or failure to act that is based upon authority given pursuant to a resolution
duly adopted by the Board of Directors, or upon direction or authority of the
Company's Co-Chief Executive Officers or, as applicable, the Company's Chief
Executive Officer, or upon the advice of counsel for the Company, shall be
conclusively presumed to be done, or omitted to be done, by the Executive in
good faith and in the best interests of the Company.
(d) Termination by the Company Without Cause. The Company may
terminate the Executive's employment hereunder at any time for any reason or no
reason by giving the Executive thirty (30) days prior written notice of the
termination.
(e) Termination by the Executive For Good Reason.
(1) The Executive may terminate his employment hereunder
for "Good Reason" for (i) a Change in Control of the Company; (ii) the
assignment to the Executive of any duties inconsistent in any respect with
Paragraph 2, or any other action by the Company that results in a diminution in
the Executive's position, authority, duties or responsibilities; (iii) any
failure by the Company to comply with Paragraph 3 or 4, other than an isolated,
insubstantial and inadvertent failure that is not taken in bad faith and is
remedied by the Company promptly after receipt of notice thereof from the
Executive; (iv) a change in the Executive's location of employment to a place of
employment outside the New York Metropolitan Area; (v) any purported termination
of the Executive's employment by the Company for a reason or in a manner not
expressly permitted by this Agreement; (vi) any failure by the Company to comply
with Paragraph 10(c) of this Agreement; or (vii) any other substantial breach of
this Agreement by the Company.
(2) "Change in Control of the Company" shall be
conclusively deemed to have occurred if any of the following shall have taken
place:
i. a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934
("Exchange Act") shall have occurred, unless such change in
control results in control by the Executive, his designee(s) or
"affiliate(s)" (as defined in Rule 12b-2 under the Exchange Act)
or any combination thereof;
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ii. any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Exchange Act), other than the Executive, his designee(s)
or "affiliate(s)" (as defined in Rule 12b-2 under the Exchange
Act), or any "person" who was a shareholder as of the Effective
Date or any combination thereof, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing
forty percent (40%) or more of the combined voting power of the
Company's then outstanding securities;
iii. during any period of two (2) consecutive years during this
Agreement, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least
a majority thereof, unless the election of each director who was
not a director at the beginning of such period has been approved
in advance by directors representing at least a majority of the
directors then in office who were directors at the beginning of
the period;
iv. the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company
or such surviving entity outstanding immediately after such
merger or consolidation; provided, however, that a merger or
consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 25% of the combined
voting power of the Company's then outstanding securities shall
not constitute a Change in Control of the Company; or
v. the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of, or the Company sells or disposes
of, all or substantially all of the Company's assets.
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(3) If an event should occur that would allow the Executive to
terminate his employment hereunder for Good Reason, the Executive shall have a
period of one year from the date on which the Executive first becomes aware of
such event in which to elect to terminate his employment for Good Reason. If the
Executive elects to terminate his employment for Good Reason, he shall provide
the Company with a written notice.
(f) Termination by the Executive Without Good Reason. The
Executive may terminate his employment hereunder for any reason or no reason by
giving the Company sixty (60) days prior written notice of the termination.
6. Compensation Following Termination Prior to the End of the
Term. In the event that the Employee's employment hereunder is terminated prior
to the end of the Term, the Executive shall be entitled to the following
compensation and benefits upon such termination:
(a) Termination by Reason of Death or Total Disability. In the
event that the Executive's employment is terminated prior to the expiration of
the Term by reason of the Executive's death or Total Disability pursuant to
Paragraph 5(a) or 5(b), the Company shall pay the following amounts to the
Executive (or the Executive's estate, as the case may be):
i. Any accrued but unpaid Base Salary (as determined pursuant to
Paragraph 3) for services rendered to the date of termination;
ii. A prorated amount of Bonus Compensation, to be paid at the time
the Executive's Bonus Compensation would have been paid had he
remained employed by the Company, computed by multiplying the
amount of Bonus Compensation the Executive would have earned for
the year in which the termination occurred and the fraction of
the year the Executive was employed by the Company;
iii. Any accrued but unpaid expenses required to be reimbursed
pursuant to Paragraph 4; and
iv. Any vacation accrued to the date of termination.
The benefits to which the Executive may be entitled upon termination
pursuant to the plans and programs referred to in Paragraph 4 and under
the plan and grant thereunder referred to in Paragraph 3(c) hereof
shall be determined and paid in accordance with the terms of such
plans, programs and grant, except that the Company shall, with respect
to any major medical and all other
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health, accident, or disability plans for which the Executive, or his
spouse or legal representative, elects continuation in accordance with
COBRA, be responsible for payment of premiums related to the
maintenance of such plans for a period of six (6) months following the
date of termination.
(b) Termination by the Company for Cause; Termination by the
Executive Without Good Reason. In the event that the Executive's employment is
terminated by the Company for Cause pursuant to Paragraph 5(c) or by the
Executive without Good Reason pursuant to Paragraph 5(f), the Company shall pay
the following amounts to the Executive:
i. Any accrued but unpaid Base Salary (as determined pursuant to
Paragraph 3) for services rendered to the date of termination;
ii. Any accrued but unpaid expenses required to be reimbursed
pursuant to Paragraph 4; and
iii. Any vacation accrued to the date of termination.
The benefits to which the Executive may be entitled upon termination
pursuant to the plans and programs referred to in Paragraph 4 and under
the plan and grant thereunder referred to in Paragraph 3(c) hereof
shall be determined in accordance with the terms of such plans,
programs and grant.
(c) Termination by the Company Without Cause; Termination by
the Executive For Good Reason. In the Event that the Executive's employment is
terminated by the Company without Cause pursuant to Paragraph 5(d) or by the
Executive for Good Reason pursuant to Paragraph 5(e), the Company shall pay the
following amounts to the Executive:
i. Any accrued but unpaid Base Salary (as determined pursuant to
Paragraph 3) for services rendered to the date of termination;
ii. Any accrued but unpaid expenses required to be reimbursed
pursuant to Paragraph 4;
iii. Any vacation accrued to the date of termination; and
iv. Continued payment of the Base Salary (as determined under
Paragraph 3) for a period of six (6) months after the date of
termination; provided, however, that in the event the Executive
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has terminated the Agreement pursuant to Paragraph 5(e)(2), the
Company shall make continued payment of the Base Salary until the
earlier of (a) thirty-six (36) months after the date of
termination, or (b) the expiration of the Term. Such payments
shall be made in accordance with the Company's standard payroll
practices then in effect.
The Company shall continue to provide the Executive with the benefits
set forth in Paragraph 4 for a period of six (6) months after the date
of termination as if he had remained employed by the Company pursuant
to this Agreement during such period; provided, however, that in the
event the Executive has terminated the Agreement pursuant to Paragraph
5(e)(2), the Company shall continue to provide the Executive with the
benefits set forth in Paragraph 4 as if he had remained employed by the
Company pursuant to this Agreement through the earlier of (a)
thirty-six (36) months after the date of termination, or (b) the end of
the Term. To the extent any benefits described in Paragraph 4 cannot be
provided pursuant to the plan or program maintained by the Company for
its employees and/or executives, the Company shall provide such
benefits outside such plan or program at no additional cost (including
without limitation tax cost) to the Executive. The benefits referred to
in Paragraph 3(c) shall be determined in accordance with the terms of
such plan and grant thereunder.
(d) No Duty to Mitigate. In the event that the Executive's
employment is terminated by reason of the Executive's Total Disability Pursuant
to Paragraph 5(b), the Executive's employment is terminated by the Company
without Cause pursuant to Paragraph 5(d), or the Executive's employment is
terminated by the Executive for Good Reason pursuant to Paragraph 5(e), the
Executive shall not be required to seek other employment to mitigate damages,
and any income earned by the Executive from other employment or self-employment
shall not be offset against any obligations of the Company to the Executive
under this Agreement.
(e) No Other Benefits or Compensation. Except as may be provided
under this Agreement, under the terms of any incentive compensation, employee
benefit or fringe benefit plan applicable to the Executive at the time of the
termination of the Executive's employment prior to the end of the Term, the
Executive shall have no right to receive any other compensation, or to
participate in any other plan, arrangement or benefit, with respect to any
future period after such termination.
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7. Noncompetition and Nonsolicitation; Nondisclosure of Proprietary
Information; Surrender of Records.
7.1 Noncompetition and Nonsolicitation. In view of the unique and
valuable services it is expected the Executive will render to the Company, the
Executive's knowledge of the customers, trade secrets, and other proprietary
information relating to the business of the Company and its customers and
suppliers, and in consideration of compensation to be received hereunder, the
Executive agrees that during his employment hereunder the Executive will not
compete with or be engaged in any business which, during his employment
hereunder, is engaged in the investment banking, asset management, or internet
(including media buying, web design, technology engineering, or other
internet-related services) business in the United States or Canada, provided
that the provisions of this Paragraph will not be deemed breached merely because
the Executive owns less than 10% of the outstanding common stock of a
publicly-traded company or is a passive investor who owns less than 10% of the
outstanding common stock of a privately-held company.
In further consideration of the compensation to be received hereunder,
the Executive agrees that during the Term and for a period of one year
subsequent to any termination hereunder, the Executive shall not (i) directly or
indirectly solicit or attempt to solicit any of the employees, agents,
consultants or representatives of the Company to terminate his, her or its
relationship with the Company; (ii) directly or indirectly solicit or attempt to
solicit any of the employees, agents, consultants or representatives of the
Company to become employees, agents, representatives or consultants of any other
person or entity; (iii) directly or indirectly solicit or attempt to solicit any
customer, vendor or distributor of the Company with respect to any product or
service being furnished, made, sold or leased by the Company; or (iv) persuade
or seek to persuade any customer of the Company to cease to do business or to
reduce the amount of business which any customer has customarily done or
contemplates doing with the Company, whether or not the relationship between the
Company and such customer was originally established in whole or in part through
the Executive's efforts.
7.2 Proprietary Information. The Executive acknowledges that during
the course of his employment with the Company he will necessarily have access to
and make use of proprietary information and confidential records of the Company
and the Company's subsidiaries. The Executive covenants that he shall not during
the Term or at any time thereafter, directly or indirectly, use for his own
purpose or for the benefit of any person or entity other than the Company, nor
otherwise disclose,
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any such proprietary information to any individual or entity, unless such
disclosure has been authorized in writing by the Company or is otherwise
required by law.
For purposes of this Section 7, "proprietary information" shall not
include information which is or becomes generally available to the public other
than as a result of a breach of this Agreement by the Executive.
7.3 Confidentiality and Surrender of Records. The Executive shall not
during the Term or at any time thereafter (irrespective of the circumstances
under which the Executive's employment by the Company terminates), except as
required by law, directly or indirectly publish, make known or in any fashion
disclose any confidential records to, or permit any inspection or copying of
confidential records by, any individual or entity other than in the course of
such individual's or entity's employment or retention by the Company, nor shall
he retain, and will deliver promptly to the Company, any of the same following
termination of his employment hereunder for any reason or upon request by the
Company. For purposes hereof, "confidential records" means all correspondence,
memoranda, files, manuals, books, lists, financial, operating or marketing
records, magnetic tape or electronic or other media or equipment of any kind
which may be in the Executive's possession or under his control or accessible to
him which contain any proprietary information of the Company or the Company's
subsidiaries. All confidential records shall be and remain the sole property of
the Company, or, as applicable, the Company's subsidiaries during the Term and
thereafter.
7.4 Inventions and Patents. Any interest in patents, patent
applications, inventions, copyrights, developments and processes ("Inventions")
which the Executive develops during his employment with the Company and which
relates to the fields in which the Company or the Company's subsidiaries is then
engaged shall belong to the Company, or, as applicable, the Company's
subsidiaries. Upon request, the Executive shall execute all such assignments and
other documents and take all such other action as the Company may reasonably
request in order to vest in the Company, or, as applicable, a subsidiary of the
Company all his right, title, and interest in and to such Inventions.
7.5 Enforcement.
(a) The Executive agrees that the remedy at law for any breach or
threatened breach of any covenant contained in this Paragraph 7 would be
inadequate and that the Company, in addition to such other remedies as may be
available to it at law or in equity, shall be entitled to institute proceedings
in any court or courts of competent jurisdiction to obtain damages for
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breach of this Paragraph 7 and injunctive relief.
(b) In no event shall any asserted violation of any provision of
this Paragraph 7 constitute a basis for deferring or withholding any amounts
otherwise payable to the Executive under this Agreement.
8. Key Man Insurance. The Executive recognizes and acknowledges that
the Company or its affiliates may seek and purchase one or more policies
providing key man life insurance with respect to the Executive, the proceeds of
which would be payable to the Company or such affiliate. The Executive hereby
consents to the Company or its affiliates seeking and purchasing such insurance
and will provide such information, undergo such medical examinations (at the
Company's expense), execute such documents and otherwise take any and all
actions necessary or desirable in order for the Company or its affiliates to
seek, purchase and maintain in full force and effect such policy or policies.
9. Notices. Any notice, consent, request or other communication made
or given in accordance with this Agreement shall be in writing either (i) by
personal delivery to the party entitled thereto, (ii) by facsimile with
confirmation of receipt, or (iii) by registered or certified mail, return
receipt requested. The notice, consent request or other communication shall be
deemed to have been received upon personal delivery, upon confirmation of
receipt of facsimile transmission, or, if mailed, three days after mailing. Any
notice, consent, request or other communication made or given in accordance with
the Agreement shall be made to those listed below at their following respective
addresses or at such other address as each may specify by notice to the others:
To the Company:
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
Facsimile No.: [(212) 223-0161]
To the Executive:
Shai Novik
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Facsimile No.: [(212) 223-0161]
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10. Successors.
(a) This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's heirs and
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
11. Complete Understanding; Amendment; Waiver. This Agreement
constitutes the complete understanding between the parties with respect to the
employment of the Executive and supersedes all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, and no statement, representation, warranty or covenant
has been made by either party with respect thereto except as expressly set forth
herein. This Agreement shall not be altered, modified, amended or terminated
except by a written instrument signed by each of the parties hereto. Any waiver
of any term or provision hereof, or of the application of any such term or
provision to any circumstances, shall be in writing signed by the party charged
with giving such waiver. Waiver by either party hereto of any breach hereunder
by the other party shall not operate as a waiver of any other breach, whether
similar to or different from the breach waived. No delay on the part of the
Company or the Executive in the exercise of any of their respective rights or
remedies shall operate as a waiver thereof, and no single or partial exercise by
the Company or the Executive of any such right or remedy shall preclude other or
further exercise thereof.
12. Severability. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement. If any provision of this Agreement shall be held
invalid or unenforceable in part, the remaining portion of such provision,
together with all other provisions of this Agreement, shall
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remain valid and enforceable and continue in full force and effect to the
fullest extent consistent with law.
13. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be wholly performed within that State, without regard to the principles
of conflicts of law.
14. Titles and Captions. All paragraph titles or captions in this
Agreement are for convenience only and in no way define, limit, extend or
describe the scope or intent of any provision hereof.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Executive has executed this Agreement and,
pursuant to the authorization of the Board of Directors, the Company has caused
this Agreement to be executed in its name and on its behalf, all as of the date
above written.
THCG, INC.
By:
---------------------------------
Name:
Title:
-------------------------------------
Shai Novik
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EXHIBIT C-3 TO MERGER AGREEMENT
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of
___________ ___, 1999 (the "Effective Date"), by and between THCG, INC., a
Delaware corporation (the "Company") and ADI RAVIV (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the
Executive desires to accept such employment in the capacities and on the terms
and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants
hereinafter contained, the parties hereto hereby agree as follows:
1. Employment; Term.
(a) The Company hereby employs the Executive, and the
Executive hereby accepts employment by the Company, in accordance with and
subject to the terms and conditions set forth herein.
(b) The term of this Agreement shall commence on the Effective
Date and, unless earlier terminated in accordance with Paragraph 5 hereof, shall
terminate on the fifth anniversary of the Effective Date (the "Initial Term").
Thereafter, this Agreement shall automatically be extended for one or more
additional annual periods unless the Executive or the Company gives written
notice, no less than ninety (90) days prior to the end of the Initial Term or
any extension thereof (together, the "Term"), of his or its election not to
renew this Agreement.
2. Duties.
(a) During the Term, the Executive shall serve as the Co-Chief
Executive Officer of the Company and shall report to the Board of Directors of
the Company (the "Board of Directors").
(b) The Executive shall have such authority and responsibility
as is customary for such position or positions in businesses comparable in size
and function, and such other responsibilities as may reasonably be assigned by
the Board of Directors.
(c) During the period the Executive is employed by the
Company, the Executive shall devote his full business time
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and best efforts to the business and affairs of the Company; provided, however,
the Executive may engage in outside business activities with the consent of the
Board of Directors. It shall not be considered a violation of the foregoing for
the Executive to serve on corporate, industry, civic or charitable boards or
committees, so long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
(d) The Executive's services shall be performed primarily at
the Company's principal place of business, located in New York, New York. The
Executive recognizes that his duties will require from time-to-time and at the
Company's expense, travel to domestic and international locations.
3. Compensation.
(a) The Company shall pay the Executive a base salary (the
"Base Salary") of not less than $200,000 per annum, or such greater sum as may
from time to time be fixed by the Compensation Committee of the Board of
Directors, provided that any such greater sum shall become the minimum rate of
compensation for so long as the Executive shall be employed by the Company.
Payments of Base Salary to the Executive shall be made in equal semi-monthly
installments and subject to all legally required and customary withholdings.
(b) The Executive shall be entitled to bonus compensation (the
"Bonus Compensation") as reasonably determined in good faith by the Compensation
Committee of the Board of Directors.
(c) The Executive shall receive an option to purchase 450,000
shares of the common stock of the Company, in accordance with and subject to the
provisions of The 1999 THCG, Inc. Stock Incentive Plan and the grant thereunder.
4. Benefits.
(a) The Company agrees to reimburse the Executive for all
reasonable travel, business entertainment and other business expenses incurred
by the Executive in connection with the performance of his duties under this
Agreement. Such reimbursements shall be made by the Company on a timely basis
upon submission by the Executive of proper accounts therefor in accordance with
the Company's standard procedures.
(b) The Executive shall be entitled to participate in any and
all medical insurance, group health, disability insurance, life insurance and
other benefit plans and programs which are made generally available by the
Company to its most senior executives. If the Executive elects to participate
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in any such benefit plan and/or program, the Company agrees to pay the premiums
for the coverage elected by the Executive.
(c) The Executive shall be entitled to participate fully in
the Company's group pension, profit-sharing and employee benefit programs now or
hereafter made available to employees of the Company generally.
(d) The Company shall pay the premiums on an ordinary life
insurance policy on the Executive's behalf in the principal amount of
$2,000,000.
(e) The Executive shall not be limited to the general vacation
policy and program of the Company as a whole, but, in view of his position and
stature with the Company, shall be entitled to such vacation time as may be
reasonably appropriate to the Company and its clients, and the proper
performance of his duties and responsibilities.
(f) The Company shall lease or purchase an automobile of make
and model as the Executive shall specify for the sole use of the Executive;
provided, however, that the Executive may, at his own option, lease an
automobile in his own name and at Company expense. The Executive shall cause the
vehicle to be properly insured and maintained. The Company shall pay or
reimburse the Executive for all purchase or lease costs, parking costs, toll
fees, costs of insurance, routine maintenance, service and repair of the
vehicle, provided that the Company's obligation pursuant to this Paragraph 4(f)
shall not exceed $1,000 per month. At the expiration of this Agreement, the
Company shall, if requested by the Executive, exercise its purchase option under
any lease agreement and grant the Executive an option to purchase the vehicle
upon the same terms and conditions offered to the Company by the leasing
company.
(g) The Company shall pay for the Executive's use of
computers, e-mail, facsimile, access to Internet and cellular phones for both
the Executive's office use and for use in his home for business purposes.
(h) The Company agrees to reimburse the Executive for personal
tax preparation and financial planning assistance in a total amount not to
exceed $5,000 per year.
(i) The Executive shall be indemnified by the Company to the
greatest extent permitted under Delaware law.
(j) The Executive shall be entitled to any other benefits or
perquisites on terms no less favorable than those pursuant to which such
benefits or perquisites are made available to any other executive or employee of
the Company.
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5. Termination.
(a) Death. The Executive's employment hereunder shall
terminate upon the Executive's death.
(b) Total Disability. The Company may terminate the
Executive's employment hereunder at any time after the Executive becomes
"Totally Disabled." For purposes of this Agreement, "Totally Disabled" means
that the Executive has been unable, for a period of one hundred eighty (180)
consecutive business days, to perform the Executive's duties under this
Agreement, as a result of physical or mental illness or injury. A termination of
the Executive's employment by the Company for Total Disability shall be
communicated to the Executive by written notice, and shall be effective on the
30th day after receipt of such notice by the Executive (the "Total Disability
Effective Date"), unless the Executive returns to full-time performance of the
Executive's duties before the Total Disability Effective Date.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment hereunder for Cause. For purposes of this
Agreement, the term "Cause" shall mean any of the following: (i) conviction of a
felony; (ii) perpetration of an intentional and knowing fraud against or
adversely affecting the Company or any customer, client, agent, or employee
thereof; (iii) willful breach of a covenant set forth in Paragraph 7; or (iv)
willful and substantial failure of the Executive to perform his duties hereunder
(other than as a result of total or partial incapacity due to physical or mental
illness or injury); provided, however, that a termination pursuant to clause
(iv) shall not become effective unless the Executive fails to cure such failure
to perform within thirty (30) days after written notice from the Company, such
notice to describe such failure to perform and identify what reasonable actions
shall be required to cure such failure to perform.
No act or failure to act on the part of the Executive shall be
considered "willful" under this Paragraph 5(c) unless it is done, or omitted to
be done, by the Executive in bad faith or without reasonable belief that the
Executive's action or omission was in the best interests of the Company. Any act
or failure to act that is based upon authority given pursuant to a resolution
duly adopted by the Board of Directors or upon the advice of counsel for the
Company, shall be conclusively presumed to be done, or omitted to be done, by
the Executive in good faith and in the best interests of the Company.
(d) Termination by the Company Without Cause. The Company may
terminate the Executive's employment hereunder at any time for any reason or no
reason by giving the Executive thirty (30) days prior written notice of the
termination.
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(e) Termination by the Executive For Good Reason.
(1) The Executive may terminate his employment hereunder
for "Good Reason" for (i) a Change in Control of the Company; (ii) the
assignment to the Executive of any duties inconsistent in any respect with
Paragraph 2, or any other action by the Company that results in a diminution in
the Executive's position, authority, duties or responsibilities; (iii) any
failure by the Company to comply with Paragraph 3 or 4, other than an isolated,
insubstantial and inadvertent failure that is not taken in bad faith and is
remedied by the Company promptly after receipt of notice thereof from the
Executive; (iv) a change in the Executive's location of employment to a place of
employment outside the New York Metropolitan Area; (v) any purported termination
of the Executive's employment by the Company for a reason or in a manner not
expressly permitted by this Agreement; (vi) any failure by the Company to comply
with Paragraph 10(c) of this Agreement; or (vii) any other substantial breach of
this Agreement by the Company.
(2) "Change in Control of the Company" shall be
conclusively deemed to have occurred if any of the following shall have taken
place:
i. a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act
of 1934 ("Exchange Act") shall have occurred, unless such
change in control results in control by the Executive, his
designee(s) or "affiliate(s)" (as defined in Rule 12b-2
under the Exchange Act) or any combination thereof;
ii. any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act), other than the Executive, his
designee(s) or "affiliate(s)" (as defined in Rule 12b-2
under the Exchange Act), or any "person" who was a
shareholder as of the Effective Date or any combination
thereof, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing forty percent
(40%) or more of the combined voting power of the Company's
then outstanding securities;
iii. during any period of two (2) consecutive years during this
Agreement, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at
least a majority thereof, unless the election of each
director who was not a director at the beginning
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of such period has been approved in advance by directors
representing at least a majority of the directors then in
office who were directors at the beginning of the period;
iv. the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation,
other than a merger or consolidation which would result in
the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately
after such merger or consolidation; provided, however, that
a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in
which no "person" (as hereinabove defined) acquires more
than 25% of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in
Control of the Company; or
v. the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or
disposition by the Company of, or the Company sells or
disposes of, all or substantially all of the Company's
assets.
(3) If an event should occur that would allow the Executive
to terminate his employment hereunder for Good Reason, the Executive shall have
a period of one year from the date on which the Executive first becomes aware of
such event in which to elect to terminate his employment for Good Reason. If the
Executive elects to terminate his employment for Good Reason, he shall provide
the Company with a written notice.
(f) Termination by the Executive Without Good Reason. The
Executive may terminate his employment hereunder for any reason or no reason by
giving the Company sixty (60) days prior written notice of the termination.
6. Compensation Following Termination Prior to the End of the
Term. In the event that the Employee's employment hereunder is terminated prior
to the end of the Term, the Executive shall be entitled to the following
compensation and benefits upon such termination:
(a) Termination by Reason of Death or Total Disability. In
the event that the Executive's employment is terminated prior to the expiration
of the Term by reason of the
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Executive's death or Total Disability pursuant to Paragraph 5(a) or 5(b), the
Company shall pay the following amounts to the Executive (or the Executive's
estate, as the case may be):
i. Any accrued but unpaid Base Salary (as determined pursuant
to Paragraph 3) for services rendered to the date of
termination;
ii. A prorated amount of Bonus Compensation, to be paid at the
time the Executive's Bonus Compensation would have been paid
had he remained employed by the Company, computed by
multiplying the amount of Bonus Compensation the Executive
would have earned for the year in which the termination
occurred and the fraction of the year the Executive was
employed by the Company;
iii. Any accrued but unpaid expenses required to be reimbursed
pursuant to Paragraph 4; and
iv. Any vacation accrued to the date of termination.
The benefits to which the Executive may be entitled upon
termination pursuant to the plans and programs referred to in
Paragraph 4 and the plan and grant thereunder referred to in
Paragraph 3(c) hereof shall be determined and paid in accordance
with the terms of such plans, programs and grant, except that the
Company shall, with respect to any major medical and all other
health, accident, or disability plans for which the Executive, or
his spouse or legal representative, elects continuation in
accordance with COBRA, be responsible for payment of premiums
related to the maintenance of such plans for a period of six (6)
months following the date of termination.
(b) Termination by the Company for Cause; Termination by the
Executive Without Good Reason. In the event that the Executive's employment is
terminated by the Company for Cause pursuant to Paragraph 5(c) or by the
Executive without Good Reason pursuant to Paragraph 5(f), the Company shall pay
the following amounts to the Executive:
i. Any accrued but unpaid Base Salary (as determined pursuant
to Paragraph 3) for services rendered to the date of
termination;
ii. Any accrued but unpaid expenses required to be reimbursed
pursuant to Paragraph 4; and
iii. Any vacation accrued to the date of termination.
The benefits to which the Executive may be entitled
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upon termination pursuant to the plans and programs referred to
in Paragraph 4 and the plan and grant thereunder referred to in
Paragraph 3(c) hereof shall be determined in accordance with the
terms of such plans, programs and grant.
(c) Termination by the Company Without Cause; Termination by
the Executive For Good Reason. In the Event that the Executive's employment is
terminated by the Company without Cause pursuant to Paragraph 5(d) or by the
Executive for Good Reason pursuant to Paragraph 5(e), the Company shall pay the
following amounts to the Executive:
i. Any accrued but unpaid Base Salary (as determined pursuant
to Paragraph 3) for services rendered to the date of
termination;
ii. Such bonus as may reasonably be determined by the Company
based upon the Executive's performance through the date of
termination;
iii. Any accrued but unpaid expenses required to be reimbursed
pursuant to Paragraph 4;
iv. Any vacation accrued to the date of termination; and
v. Continued payment of the Base Salary (as determined under
Paragraph 3) until the earlier of (a) thirty-six (36) months
after the date of termination, or (b) the expiration of the
Term. Such payments shall be made in accordance with the
Company's standard payroll practices then in effect.
The Company shall continue to provide the Executive with the
benefits set forth in Paragraph 4 as if he had remained employed
by the Company pursuant to this Agreement through the earlier of
(a) thirty-six (36) months after the date of termination, or (b)
the end of the Term; provided that to the extent any benefits
described in Paragraph 4 cannot be provided pursuant to the plan
or program maintained by the Company for its employees and/or
executives, the Company shall provide such benefits outside such
plan or program at no additional cost (including without
limitation tax cost) to the Executive. The benefits referred to
in Paragraph 3(c) shall be determined in accordance with the
terms of such plan and grant thereunder.
(d) No Duty to Mitigate. In the event that the Executive's
employment is terminated by reason of the Executive's Total Disability Pursuant
to Paragraph 5(b), the Executive's
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employment is terminated by the Company without Cause pursuant to Paragraph
5(d), or the Executive's employment is terminated by the Executive for Good
Reason pursuant to Paragraph 5(e), the Executive shall not be required to seek
other employment to mitigate damages, and any income earned by the Executive
from other employment or self-employment shall not be offset against any
obligations of the Company to the Executive under this Agreement.
(e) No Other Benefits or Compensation. Except as may be
provided under this Agreement, under the terms of any incentive compensation,
employee benefit or fringe benefit plan applicable to the Executive at the time
of the termination of the Executive's employment prior to the end of the Term,
the Executive shall have no right to receive any other compensation, or to
participate in any other plan, arrangement or benefit, with respect to any
future period after such termination.
7. Noncompetition and Nonsolicitation; Nondisclosure of
Proprietary Information; Surrender of Records.
7.1 Noncompetition and Nonsolicitation. In view of the unique and
valuable services it is expected the Executive will render to the Company, the
Executive's knowledge of the customers, trade secrets, and other proprietary
information relating to the business of the Company and its customers and
suppliers, and in consideration of compensation to be received hereunder, the
Executive agrees that during his employment hereunder the Executive will not
compete with or be engaged in any business which, during his employment
hereunder, is engaged in the investment banking, asset management, or internet
(including media buying, web design, technology engineering, or other
internet-related services) business in the United States or Canada, provided
that the provisions of this Paragraph will not be deemed breached merely because
the Executive owns less than 10% of the outstanding common stock of a
publicly-traded company or is a passive investor who owns less than 10% of the
outstanding common stock of a privately-held company.
In further consideration of the compensation to be received
hereunder, the Executive agrees that during the Term and for a period of one
year subsequent to any termination hereunder, the Executive shall not (i)
directly or indirectly solicit or attempt to solicit any of the employees,
agents, consultants or representatives of the Company to terminate his, her or
its relationship with the Company; (ii) directly or indirectly solicit or
attempt to solicit any of the employees, agents, consultants or representatives
of the Company to become employees, agents, representatives or consultants of
any other person or entity; (iii) directly or indirectly solicit or attempt to
solicit any customer, vendor or distributor of the Company with respect to any
product or service being furnished, made, sold or leased by the Company; or (iv)
persuade or seek to
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persuade any customer of the Company to cease to do business or to reduce the
amount of business which any customer has customarily done or contemplates doing
with the Company, whether or not the relationship between the Company and such
customer was originally established in whole or in part through the Executive's
efforts.
7.2 Proprietary Information. The Executive acknowledges that
during the course of his employment with the Company he will necessarily have
access to and make use of proprietary information and confidential records of
the Company and the Company's subsidiaries. The Executive covenants that he
shall not during the Term or at any time thereafter, directly or indirectly, use
for his own purpose or for the benefit of any person or entity other than the
Company, nor otherwise disclose, any such proprietary information to any
individual or entity, unless such disclosure has been authorized in writing by
the Company or is otherwise required by law.
For purposes of this Section 7, "proprietary information" shall
not include information which is or becomes generally available to the public
other than as a result of a breach of this Agreement by the Executive.
7.3 Confidentiality and Surrender of Records. The Executive shall
not during the Term or at any time thereafter (irrespective of the circumstances
under which the Executive's employment by the Company terminates), except as
required by law, directly or indirectly publish, make known or in any fashion
disclose any confidential records to, or permit any inspection or copying of
confidential records by, any individual or entity other than in the course of
such individual's or entity's employment or retention by the Company, nor shall
he retain, and will deliver promptly to the Company, any of the same following
termination of his employment hereunder for any reason or upon request by the
Company. For purposes hereof, "confidential records" means all correspondence,
memoranda, files, manuals, books, lists, financial, operating or marketing
records, magnetic tape or electronic or other media or equipment of any kind
which may be in the Executive's possession or under his control or accessible to
him which contain any proprietary information of the Company or the Company's
subsidiaries. All confidential records shall be and remain the sole property of
the Company, or, as applicable, the Company's subsidiaries during the Term and
thereafter.
7.4 Inventions and Patents. Any interest in patents, patent
applications, inventions, copyrights, developments and processes ("Inventions")
which the Executive develops during his employment with the Company and which
relates to the fields in which the Company or the Company's subsidiaries is then
engaged shall belong to the Company, or, as applicable, the Company's
subsidiaries. Upon request, the Executive shall execute all such
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assignments and other documents and take all such other action as the Company
may reasonably request in order to vest in the Company, or, as applicable, a
subsidiary of the Company all his right, title, and interest in and to such
Inventions.
7.5 Enforcement.
(a) The Executive agrees that the remedy at law for any
breach or threatened breach of any covenant contained in this Paragraph 7 would
be inadequate and that the Company, in addition to such other remedies as may be
available to it at law or in equity, shall be entitled to institute proceedings
in any court or courts of competent jurisdiction to obtain damages for breach of
this Paragraph 7 and injunctive relief.
(b) In no event shall any asserted violation of any
provision of this Paragraph 7 constitute a basis for deferring or withholding
any amounts otherwise payable to the Executive under this Agreement.
8. Key Man Insurance. The Executive recognizes and acknowledges
that the Company or its affiliates may seek and purchase one or more policies
providing key man life insurance with respect to the Executive, the proceeds of
which would be payable to the Company or such affiliate. The Executive hereby
consents to the Company or its affiliates seeking and purchasing such insurance
and will provide such information, undergo such medical examinations (at the
Company's expense), execute such documents and otherwise take any and all
actions necessary or desirable in order for the Company or its affiliates to
seek, purchase and maintain in full force and effect such policy or policies.
9. Notices. Any notice, consent, request or other communication
made or given in accordance with this Agreement shall be in writing either (i)
by personal delivery to the party entitled thereto, (ii) by facsimile with
confirmation of receipt, or (iii) by registered or certified mail, return
receipt requested. The notice, consent request or other communication shall be
deemed to have been received upon personal delivery, upon confirmation of
receipt of facsimile transmission, or, if mailed, three days after mailing. Any
notice, consent, request or other communication made or given in accordance with
the Agreement shall be made to those listed below at their following respective
addresses or at such other address as each may specify by notice to the others:
To the Company:
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
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Facsimile No.: [(212) 223-0161]
To the Executive:
Adi Raviv
THCG, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Facsimile No.: [(212) 223-0161]
10. Successors.
(a) This Agreement is personal to the Executive and, without
the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
heirs and legal representatives.
(b) This Agreement shall inure to the benefit of and be
binding upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
11. Complete Understanding; Amendment; Waiver. This Agreement
constitutes the complete understanding between the parties with respect to the
employment of the Executive and supersedes all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof, and no statement, representation, warranty or covenant
has been made by either party with respect thereto except as expressly set forth
herein. This Agreement shall not be altered, modified, amended or terminated
except by a written instrument signed by each of the parties hereto. Any waiver
of any term or provision hereof, or of the application of any such term or
provision to any circumstances, shall be in writing signed by the party charged
with giving such waiver. Waiver by either party hereto of any breach hereunder
by the other party shall not operate as a waiver of any other breach, whether
similar to or different from the breach waived. No delay on the part of the
Company or the Executive in the exercise of any of their respective rights or
remedies shall operate as a waiver thereof, and no single or partial exercise by
the Company or the Executive of any such right or remedy shall preclude other or
further
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exercise thereof.
12. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement. If any provision of this Agreement shall
be held invalid or unenforceable in part, the remaining portion of such
provision, together with all other provisions of this Agreement, shall remain
valid and enforceable and continue in full force and effect to the fullest
extent consistent with law.
13. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be wholly performed within that State, without regard to the
principles of conflicts of law.
14. Titles and Captions. All paragraph titles or captions in this
Agreement are for convenience only and in no way define, limit, extend or
describe the scope or intent of any provision hereof.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall be deemed an original, and all such
counterparts shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the Executive has executed this Agreement
and, pursuant to the authorization of the Board of Directors, the Company has
caused this Agreement to be executed in its name and on its behalf, all as of
the date above written.
THCG, INC.
By:--------------------------------
Name:
Title:
--------------------------------
Adi Raviv
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EXHIBIT D TO MERGER AGREEMENT
VOTING AGREEMENT
VOTING AGREEMENT (the "Agreement"), dated as of August , 1999, by
and between Tower Hill Securities, Inc., a New York corporation ("Tower Hill"),
and the undersigned stockholders (collectively, the "Stockholders") of Walnut
Financial Services, Inc., a Utah corporation ("Walnut").
WHEREAS, concurrently herewith, Tower Hill, Walnut, THCG, Inc., a
Delaware corporation and wholly-owned subsidiary of Walnut ("THCG"), and Tower
Hill Acquisition Corp., a New York corporation and wholly-owned subsidiary of
THCG ("Newco"), are entering into an Agreement and Plans of Merger (the "Merger
Agreement") pursuant to which (i) Walnut will be merged with and into THCG
("Merger 1") and (ii) Newco will be merged with and into Tower Hill ("Merger 2"
and, together with Merger 1, the "Mergers"). Capitalized terms used herein but
not otherwise defined herein shall have the meaning ascribed to them in the
Merger Agreement; and
WHEREAS, as of the date hereof, each of the Stockholders is the
record holder and beneficial owner (as defined in Rule 13d-3 under the
Securities Act of 1934, as amended) of such number of shares of common stock,
par value $0.01 per share, of Walnut (the "Walnut Common Stock") as is indicated
below his signature on the final page of this Agreement (the "Walnut Shares");
WHEREAS, pursuant to the Merger Agreement, each share of Walnut
Common Stock issued and outstanding immediately prior to the First Effective
Time shall be converted into one validly issued, fully paid and non-assessable
share of common stock, par value $0.01 per share, of THCG (the "THCG Common
Stock");
WHEREAS, immediately after the First Effective Time, pursuant to
the Merger Agreement, each of the Stockholders will be the record holder and
beneficial owner of such number of shares of THCG Common Stock as is equal to
the number of Walnut Shares held by such Stockholder prior to the First
Effective Time (the "THCG Shares");
WHEREAS, as a material inducement to Tower Hill to enter into the
Merger Agreement, the Stockholders are willing to enter into and be bound by
this Agreement pursuant to which the Stockholders agree (i) not to transfer or
otherwise dispose of any of the Walnut Shares prior to the Expiration Date (as
defined in Section 4 below), or any other shares of capital stock of Walnut
acquired hereafter and prior to the Expiration Date, except as otherwise
permitted hereby, (ii) to vote the Walnut Shares and such other shares of
capital stock of Walnut so as to facilitate the consummation of the Mergers, and
(iii) not to transfer or otherwise dispose of any THCG Shares, except as
permitted hereby;
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration given to each party hereto, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
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ARTICLE I
AGREEMENT TO VOTE WALNUT SHARES
Section 1.1 Agreement to Vote Walnut Shares. From and after the
date of this Agreement and ending as of the Expiration Date, the Stockholders
hereby agree that, at any meeting of the stockholders of Walnut, however called,
the Stockholders shall vote the Walnut Shares (a) in favor of the Mergers and
each other item submitted to the stockholders of Walnut for their approval and
recommended by the Board of Directors of Walnut; (b) against any action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of Walnut, THCG or Newco under the
Merger Agreement; and (c) against any action or agreement (other than the Merger
Agreement or the Related Transactions) that would impede, interfere with, delay,
postpone or attempt to discourage either or both of the Mergers, including, but
not limited to: (i) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Walnut or any of its
Subsidiaries; (ii) a sale or transfer of a material amount of assets of Walnut
or any of its Subsidiaries or a reorganization, recapitalization or liquidation
of Walnut or any of its Subsidiaries, except as provided in the Merger Agreement
or effected in connection with the Related Transactions; (iii) any change in the
management or board of directors of Walnut, except as otherwise agreed to, in
writing, by Tower Hill; (iv) any material change in the present capitalization
or dividend policy of Walnut, except as provided in the Merger Agreement or
effected in connection with the Related Transactions; or (v) any other material
change in Walnut's corporate structure or business, except as provided in the
Merger Agreement or effected in connection with the Related Transactions.
Section 1.2 Grant of Irrevocable Proxy; Appointment of Proxy.
(a) Each Stockholder hereby irrevocably grants to, and
appoints, Joseph D. Mark and Adi Raviv, or either of them, in their respective
capacities as officers or directors of Tower Hill, and any individual who shall
hereafter succeed to any such office or directorship of Tower Hill, and each of
them individually, as such Stockholder's proxy and attorney-in-fact (with full
power of substitution and resubstitution), for and in the name, place and stead
of such Stockholder, to vote the Walnut Shares and New Shares in favor of the
Mergers and the Related Transactions and against each matter contemplated by
Sections 1.1(b) and (c) hereof.
(b) Each Stockholder represents and warrants that any
proxies heretofore given in respect of the Walnut Shares are revocable, and that
any such proxies are hereby revoked.
(c) Each Stockholder understands and acknowledges that
Tower Hill is entering into the Merger Agreement in reliance upon such
Stockholder's execution and delivery of this Agreement. Each Stockholder hereby
affirms that the irrevocable proxy set forth in this Section 1.2 is given in
connection with the execution of the Merger Agreement, and that such irrevocable
proxy is given to secure the performance of the duties of such Stockholder under
this Agreement. Each Stockholder hereby further affirms that the ir-
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<PAGE> 308
revocable proxy is coupled with an interest and may under no circumstances be
revoked. Each Stockholder hereby ratifies and confirms all that such irrevocable
proxy may lawfully do or cause to be done by virtue hereof. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 16-10a-722 of the Revised Business Corporation Act of the
State of Utah.
Section 1.3 No Inconsistent Arrangements. Each Stockholder hereby
covenants and agrees that, except as contemplated by this Agreement and the
Merger Agreement, it shall not (a) transfer (which term shall include, without
limitation, any sale, gift, pledge or other disposition), or consent to any
transfer of, any or all of the Walnut Shares or any interest therein, (b) enter
into any contract, option or other agreement or understanding with respect to
any transfer of any or all of the Walnut Shares or any interest therein, (c)
grant any proxy, power-of-attorney or other authorization in or with respect to
the Walnut Shares, (d) deposit the Walnut Shares into a voting trust or enter
into a voting agreement or arrangement with respect to the Walnut Shares or (e)
take any other action that would in any way restrict, limit or interfere with
the performance of its obligations hereunder or the transactions contemplated
hereby or by the Merger Agreement or which would make any representation or
warranty of such Stockholder hereunder untrue or incorrect.
Section 1.4 Additional Walnut Shares. Each Stockholder hereby
agrees, while this Agreement is in effect, to promptly notify Tower Hill of the
number of any new shares of equity securities of Walnut acquired by such
Stockholder, if any, after the date hereof and prior to the Expiration Date
("New Shares"), other than New Shares a Stockholder may receive in connection
with the Related Transactions. Each Stockholder agrees that such New Shares
shall be voted in the same manner and subject to the same conditions as the
Walnut Shares as provided for in this Agreement.
Section 1.5 Expiration. Article I hereof and each Stockholder's
obligations under such Article I shall terminate and shall no longer be in
effect on the earlier of the First Effective Time or the termination of the
Merger Agreement in accordance with its terms (such date, the "Expiration
Date").
ARTICLE II
RESTRICTIONS ON TRANSFER OF THCG SHARES
Section 2.1 Restriction on Transfers. Except as permitted by
Section 2.2 hereof, no Stockholder shall, directly or indirectly, Transfer any
THCG Shares or any interest therein during the twelve (12) month period
following the Second Effective Time to any other Person (including, without
limitation, by operation of law), except as expressly permitted by this
Agreement. Any attempt to Transfer any THCG Shares not in accordance with this
Agreement shall be null and void and THCG shall not give any effect to any such
attempted Transfer on its stock records. For the purposes of this Article II,
"Transfer" means any transfer, sale, assignment, exchange, mortgage, pledge,
encumbrance, hypothecation or other disposition of any THCG Shares or any
interest therein.
Section 2.2 Permitted Transfers.
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<PAGE> 309
(a) If the Average Closing Bid Price of the THCG Common
Stock is greater than $4.00 per share, then the Stockholders shall be permitted
to Transfer any of their THCG Shares; provided, however, that if the closing
price of the THCG Common Stock on any trading day thereafter is $2.00 or less,
the Stockholders shall no longer be permitted to Transfer any of their THCG
Shares pursuant to this Section 2.2, unless and until the Average Closing Bid
Price thereafter is greater than $4.00 per share. For the purposes of this
Section 2.2(a), "Average Closing Bid Price" shall mean the average of the last
sale prices of the THCG Common Stock for twenty consecutive trading days, as
reported on the Nasdaq National Market, or the closing bid prices as reported in
the over-the-counter market if the THCG Common Stock is not traded on the Nasdaq
National Market (subject to appropriate adjustment for any stock split, reverse
split, stock dividend, reorganization, recapitalization or other like change
with respect to the THCG Common Stock occurring after the Closing Date).
(b) Notwithstanding anything to the contrary contained in
this Article II, any Stockholder may freely Transfer its THCG Shares, provided
that each such transferee shall first (i) execute and deliver to the
transferring Stockholder a written consent (in the form attached hereto as
Exhibit A) to be bound by all of the provisions of this Article II as though
such transferee were the transferring Stockholder, and (ii) give a duplicate
original of such consent to THCG. The provisions of this Section 2.2(b) shall
not apply if the Board of Directors of THCG so consents.
(c) Notwithstanding anything to the contrary contained in
this Article II, (i) if any of the Walnut Common Stock issued pursuant to
Section 5.6(A) of the Merger Agreement and converted into THCG Common Stock
pursuant to Section 2.1(a) of the Merger Agreement is covered by an effective
registration statement under the Securities Act, then the Walnut Stockholders
may freely Transfer, in the aggregate, a percentage of their THCG Shares equal
to the percentage of the shares of such THCG Common Stock covered by such
registration statement, or (ii) if any of the THCG Common Stock issued to the
stockholders of Tower Hill pursuant to the Merger Agreement is subsequently
covered by an effective registration statement under the Securities Act, then
the Walnut Stockholders may freely Transfer, in the aggregate, a number of their
THCG shares equal to such number of shares of THCG Common Stock covered by such
registration statement.
Section 2.3 Legend. The following statement shall be inscribed on
all certificates representing the THCG Shares held by the Stockholders so long
as this Agreement is in effect with respect to the shares represented by such
certificates:
THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A VOTING AGREEMENT DATED AS OF AUGUST __, 1999 AND
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE
THEREWITH. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY, AND THE COMPANY WILL FURNISH A
COPY OF SUCH AGREEMENT TO THE HOLDER OF THIS CERTIFICATE UPON
WRITTEN REQUEST AND WITHOUT CHARGE.
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<PAGE> 310
ARTICLE III
CERTAIN ADDITIONAL COVENANTS
Section 3.1 Covenant to Effect the Related Transactions. Each of
the Stockholders hereby covenants and agrees to use its commercially reasonable
efforts to approve and to effect the Related Transactions provided for in
Section 5.6 of the Merger Agreement.
Section 3.2 Non-solicitation. Each of the Stockholders hereby
covenants and agrees to immediately cease any existing discussions or
negotiations, if any, with any parties conducted heretofore with respect to any
acquisition or exchange of all or any material portion of the assets of, or any
equity interest in, Walnut or any of its Subsidiaries or any business
combination with Walnut or any of its Subsidiaries, except that any Stockholder
may continue any existing discussions or negotiations with respect to the
acquisition by Walnut of other factoring businesses in exchange for assets of,
or an equity interest in, Walnut. Each of the Stockholders hereby covenants and
agrees that, prior to the Effective Time of the Mergers, it shall not, directly
or indirectly, solicit, initiate, encourage or facilitate, or furnish or
disclose non-public information in furtherance of, any inquiries or the making
of any proposal with respect to any merger, liquidation, recapitalization,
consolidation or other business combination involving Walnut or its Subsidiaries
or acquisition of any capital stock or any material portion of the assets of
Walnut and its Subsidiaries, or any combination of the foregoing (an
"ACQUISITION TRANSACTION"), or negotiate, explore or otherwise engage in
discussion with any Person (other than Tower Hill or its directors, officers,
employees, agents and representatives) with respect to any Acquisition
Transaction, except in accordance with Section 5.14 of the Merger Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representation and Warranties of Stockholders. Each
Stockholder hereby represents and warrants to Tower Hill as follows:
(a) Title. Such Stockholder has good and valid title
to the Walnut Shares listed next to such Stockholder's
name on the signature page hereto, free and clear of any
lien, pledge, charge, encumbrance or claim of whatever
nature.
(b) Ownership of Shares. On the date hereof, the
Walnut Shares listed next to such Stockholder's name on
the signature page hereto, are owned of record or
beneficially by such Stockholder and, on the date hereof,
such Walnut Shares constitute all of the shares or equity
securities of Walnut owned of record or beneficially by
such Stockholder. Such Stockholder has sole voting power
and sole power of disposition with respect to all of the
Walnut Shares listed next to such Stockholder's name on
the signature page hereto, with no restrictions, subject
to applicable federal securities laws, on such
Stockholder's rights
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<PAGE> 311
of disposition pertaining thereto.
(c) Power; Binding Agreement. Such Stockholder has the
legal capacity, power and authority to enter into and
perform all of its obligations under this Agreement. The
execution, delivery and performance of this Agreement by
such Stockholder will not violate any other agreement to
which such Stockholder is a party including, without
limitation, any voting agreement, stockholders agreement
or voting trust. This Agreement has been, assuming the due
authorization, execution and delivery of the same by each
of the other parties hereto, duly and validly executed and
delivered by such Stockholder and constitutes a valid,
legal and binding agreement of such Stockholder,
enforceable against such Stockholder in accordance with
its terms, subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer,
moratorium and other similar laws now or hereafter in
effect relating to or affecting creditors' rights
generally, and (ii) general principles of equity
(regardless of whether considered in a proceeding at law
or in equity).
Section 4.2 Representations and Warranties of Tower Hill. Tower
Hill hereby represents and warrants to the Stockholders as follows:
(a) Organization; Qualification. Tower Hill has been duly
organized and is validly existing and in good standing under the laws of the
State of New York, and has the requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as it is now being
conducted. Tower Hill is duly qualified or licensed to do business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failure to be so qualified or licensed
and in good standing that could not reasonably be expected to have, individually
or in the aggregate, a Company Material Adverse Effect.
(b) Authority Relative to this Agreement. Tower Hill has
all necessary corporate power and authority to execute and deliver this
Agreement, to consummate the transactions contemplated by this Agreement and to
perform its obligations under this Agreement. The execution and delivery by
Tower Hill of this Agreement and the consummation by Tower Hill of the
transactions contemplated by this Agreement have been duly authorized and
approved by the board of directors of Tower Hill, and no other corporate
proceedings on the part of Tower Hill are necessary to authorize this Agreement
and the transactions contemplated by this Agreement. This Agreement has been,
assuming the due authorization, execution and delivery of the same by each of
the other parties hereto, duly and validly executed and delivered by Tower Hill
and constitutes a valid, legal and binding agreement of Tower Hill, enforceable
against Tower Hill in accordance with its terms, subject to (i) bankruptcy,
insolvency, reorganization, fraudulent conveyance or transfer, moratorium and
other similar laws now or hereafter in effect relating to or affecting
creditors' rights generally, and (ii) general principles of equity (regardless
of whether considered in a proceeding at law or in equity).
-6-
<PAGE> 312
ARTICLE V
MISCELLANEOUS
Section 5.1 Further Assurances. From time to time, at Tower Hill's
request and without further consideration, the Stockholders shall execute and
deliver such additional documents and take all such further action as may be
reasonably necessary to consummate and make effective the transactions
contemplated by this Agreement.
Section 5.2 Entire Agreement; Assignment. This Agreement (i)
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all other prior agreements and understandings, both
written and oral, between the parties with respect to the subject matter hereof
and (ii) shall not be assigned by operation of law or otherwise.
Section 5.3 Parties in Interest. Except for THCG, this Agreement
shall be binding upon and inure solely to the benefit of each party hereto and
its successors and permitted assignees, and nothing in this Agreement, express
or implied, is intended to or shall confer upon any other Person any rights,
benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 5.4 Amendments. This Agreement may not be modified,
amended, altered or supplemented, except upon the execution and delivery of a
written agreement executed by the parties hereto.
Section 5.5 Notices. All notices, requests, claims, demands and
other communications hereunder shall be in writing and shall be given by hand
delivery, telegram, telex or telecopy or by any courier service, such as Federal
Express, providing proof of delivery. All communications hereunder shall be
delivered to the respective parties at the following addresses:
If to the Stockholders:
at the respective addresses and telecopier
numbers set forth opposite their names on
Schedule I to this Agreement:
With a copy to:
Barack Ferrazzano Kirschbaum Perlman & Nagelberg
333 West Wacker Drive, Suite 2700
Chicago, Illinois 60606
Attention: Gretchen Anne Trofa, Esq.
Telecopier No.: (312) 984-3150
If to Tower Hill:
Tower Hill Securities, Inc.
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<PAGE> 313
650 Madison Ave.
New York, New York 10022
Attention: Joseph D. Mark, President
Telecopier No.: (212) 223-0161
With a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Peter S. Kolevzon, Esq.
Telecopier No.: (212) 715-8000
or to such other address, person's attention or telecopier number as the person
to whom notice is given may have previously furnished to the others, in writing,
in the manner set forth above.
Section 5.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York regardless of the
laws that might otherwise govern under applicable principles of conflict of laws
thereof.
Section 5.7 Specific Performance. Each Stockholder recognizes and
acknowledges that a breach by him of any covenants or agreements contained in
this Agreement will cause Tower Hill to sustain damages for which it would not
have an adequate remedy at law for money damages, and therefore each Stockholder
agrees that in the event of any such breach Tower Hill shall be entitled to the
remedy of specific performance of such covenant and agreement and injunctive and
other equitable relief in addition to any other remedy to which it may be
entitled, at law or in equity, without the posting of any bond and without
proving that damages would be inadequate.
Section 5.8 Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same Agreement.
Section 5.9 Descriptive Headings. The descriptive headings used
herein are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
Section 5.10 Severability. Whenever possible, each provision or
portion of any provision of this Agreement will be interpreted in such manner as
to be effective and valid under applicable law but if any provision or portion
of any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and this
Agreement will be reformed, construed and enforced in such jurisdiction as if
such invalid, illegal or unenforceable provision or portion of any provision had
never been contained herein.
-8-
<PAGE> 314
SECTION 5.11 WAIVER OF JURY TRIAL. EACH OF TOWER HILL AND EACH
STOCKHOLDER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER
BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY.
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<PAGE> 315
IN WITNESS WHEREOF, Tower Hill and each Stockholder and Seller
have caused this Agreement to be duly executed as of the day and year first
above written.
TOWER HILL SECURITIES, INC.
By:
------------------------------
Name:
Title:
WINDY CITY, INC.
By:
------------------------------
Name:
Title:
Shares owned:
shares of Common Stock
------------
THE HOLDING COMPANY
By:
------------------------------
Name:
Title:
Shares owned:
shares of Common Stock
------------
THE KANTER FAMILY FOUNDATION
By:
------------------------------
Name:
Title:
Shares owned:
shares of Common Stock
------------
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<PAGE> 316
SCHEDULE I
Windy City, Inc.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Joel Kanter
The Holding Company
c/o Neal Gerber & Eisenberg
2 N. LaSalle Street
22nd Floor
Chicago, Illinois 60602
Attention: Burton W. Kanter
copy to:
The Holding Company
c/o Linda Diane Enterprises
N8939 Waterpower Road
Deerbrook, Wisconsin 54424-9635
Attention: Linda Gallenberger
The Kanter Family Foundation
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Joel Kanter
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<PAGE> 317
EXHIBIT A
Form of Transferee's Consent
CONSENT
TO: THCG, Inc.
650 Madison Avenue
21st Floor
New York, New York 10022
Attention: Joseph D. Mark
The undersigned transferee (the "Transferee") of the
Stockholder of THCG, Inc., a Delaware corporation ("THCG"), named below (the
"Transferring Stockholder") hereby agrees to be bound by all the provisions of
Article II of that certain Voting Agreement dated as of August , 1999 by and
among Tower Hill Securities, Inc., a New York corporation, and certain
stockholders of Walnut Financial Services, Inc., a Utah corporation, as though
the undersigned were an original signatory to said Voting Agreement.
------------------------------
Transferee:
Name of
Transferring
Stockholder:
------------------
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<PAGE> 318
GENERAL SCHEDULES TO MERGER AGREEMENT
SCHEDULES
TO THE
AGREEMENT AND PLANS OF MERGER
BY AND BETWEEN
WALNUT FINANCIAL SERVICES, INC.,
AND
THCG, INC.
AND
BY AND AMONG
THCG, INC.,
TOWER HILL ACQUISITION CORP.,
AND
TOWER HILL SECURITIES, INC.
DATED AS OF AUGUST 5, 1999
<PAGE> 319
SCHEDULE 1.6(a) OFFICERS OF SURVIVING CORPORATION 1
Joseph D. Mark - Co-Chief Executive Officer
Adi Raviv - Co-Chief Executive Officer
Shai Novik - Chief Operating Officer/Chief Financial Officer/Secretary
SCHEDULE 2.1(b)(i) WALNUT OPTIONS NOT CANCELLED
<TABLE>
<CAPTION>
HOLDER PLAN NUMBER OF OPTIONS EXERCISE PRICE EXPIRATION DATE
- ------ ---- ----------------- -------------- ---------------
<S> <C> <C> <C> <C>
Jeffrey Pyatt (1) 16,667 $7.8750 1/27/08
Eugene Scalercio (1) 13,334 $10.86 2/28/03
Jeremy Shamos (1) 1,000 $13.50 1/1/06
Various (3) 633,334 $9.00 10/15/02
Linda Gallenberger (2) 4,871 $10.80 9/6/04
Victoria Ross (2) 7,306 $10.80 9/6/04
Jeremy Shamos (2) 5,585 $10.80 9/6/04
James A. Weisgal (2) 1,397 $10.80 9/6/04
Lawrence J. Weisgal (2) 1,397 $10.80 9/6/04
Richard P. Weisgal (2) 1,397 $10.80 9/6/04
Lee W. Weisgal (2) 1,397 $10.80 9/6/04
</TABLE>
(1) Amended and Restated NFS Services, Inc. (Utah) 1994 Incentive Stock
Option Plan
(2) Walnut Capital Corporation 1987 Stock Option Plan, as amended
(3) Class A Warrants issued subject to the Class A Warrant Agreement
dated October 15, 1997 by and between Walnut and Corporate Stock
Transfer, Inc.
SCHEDULE 2.1(b)(ii) WALNUT OPTIONS TO BE REPURCHASED
<TABLE>
<CAPTION>
============================================================================================
HOLDER NUMBER OF OPTIONS BLACK-SCHOLES VALUE TOTAL PURCHASE PRICE
TO BE PURCHASED PER OPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert F. Mauer 16,667 $0.14 $2,333.38
- --------------------------------------------------------------------------------------------
4,167 $0.30 $1,250.10
- --------------------------------------------------------------------------------------------
Burton W. Kanter 41,655 $0.09 $3,748.95
- --------------------------------------------------------------------------------------------
Joel S. Kanter 33,324 $0.09 $2,999.16
============================================================================================
</TABLE>
SCHEDULE 5.1(b)(xi) TRANSFER OF ASSETS PRE-CLOSING
Sale of 58,633 shares of Vidikron of America, Inc. by Tower Hill to
Hambro America, Inc. for a purchase price of $49,837.63.
Sale of stock receivable in the amount of 58,633 shares of Common Stock
of Vidikron by Tower Hill to Hambro America, Inc. for a purchase price of
$49,837.63.
<PAGE> 320
Sale of doubtful receivables, owed to Tower Hill, by Tower Hill to
Hambro America, Inc. for a purchase price equal to fair market value.
Transfer of $90,000 by Tower Hill to Hambro America, Inc.
SCHEDULE 5.1(b)(xii) CANCELLATION OF CERTAIN INDEBTEDNESS PRE-CLOSING
Promissory Note, dated December 26, 1998, executed by Joseph Mark in
the principal amount of $50,000. This Promissory Note will be forgiven
pre-Closing.
Promissory Note, dated December 26, 1998, executed by Adi Raviv in the
principal amount of $50,000. This Promissory Note will be either repaid or
forgiven pursuant to Section 5.26 of the Merger Agreement.
In December 1998, Tower Hill loaned an aggregate of $219,299.16 to
Joseph D. Mark, Adi Raviv and Yoav Bitter. These loans are noninterest-bearing
and have no specified maturity date. The loan to Mr. Mark, in the amount of
$82,237.185, will be forgiven pre-Closing. The loan to Mr. Raviv, in the amount
of $82,237.185, will be either repaid or forgiven pursuant to Section 5.26 of
the Merger Agreement. The loan to Mr. Bitter, in the amount of $54,824.79, will
not be forgiven pre-Closing, but is expected to be resolved in the NASD
arbitration proceeding referred to in Schedule 3.9(b).
SCHEDULE 5.1(b)(xiii) ACQUISITIONS OF SECURITIES
Stock Purchase Agreement, dated July 29, 1999, between Tower Hill and
Carnegie Partners, pursuant to which Carnegie Partners will sell 57,381 shares
of Series B Preferred Stock of RTImage Ltd. and a warrant to purchase 7,371
shares of Series B Preferred Stock of RTImage Ltd. to Tower Hill for a purchase
price of $64,751 plus interest thereon. Adi Raviv owns 50% of Carnegie Partners.
Stock Purchase Agreement, dated July 29, 1999, between Tower Hill and
HTI Ventures LLC, pursuant to which HTI Ventures LLC will sell 200 shares of
Convertible Preferred Class B Stock of Sunshine Media Corporation to Tower Hill
for a purchase price of $25,000 plus interest. Adi Raviv holds a 99% interest in
HTI Ventures LLC.
SCHEDULE 5.2(b)(ix) CERTAIN PERMITTED INDEBTEDNESS
Walnut is permitted to increase its indebtedness by $2,000,000 provided
such loan proceeds are used to repay the outstanding $2,000,000 debenture issued
by Walnut Capital Corporation to SBIC Funding Corp.
SCHEDULE 5.2(b)(x) CERTAIN PERMITTED PAYMENTS
<PAGE> 321
Payment of $2,000,000, plus accrued interest, to SBIC Funding Corp. in
accordance with the terms of the outstanding $2,000,000 debenture issued by
Walnut Capital Corporation to SBIC Funding Corp. and any debt incurred pursuant
to Schedule 5.2(b)(ix).
SCHEDULE 5.6(B) CERTAIN DEBTS/LIABILITIES OF WALNUT FINANCIAL SERVICES,
INC. AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
========================================================================
<S> <C>
The Holding Company $200,000
------------------------------------------------------------------------
William J. Von Liebig 1994 Charitable $600,000
Remainder Unitrust
------------------------------------------------------------------------
Kanter Family Foundation $250,000
------------------------------------------------------------------------
Windy City, Inc. $43,000
------------------------------------------------------------------------
TOTAL $1,093,000
========================================================================
</TABLE>
<PAGE> 322
SCHEDULE 5.20(a) THCG OPTIONS
<TABLE>
<CAPTION>
(A) (B)
<S> <C> <C>
Joseph D. Mark 250,000 200,000(1)
Adi Raviv 250,000 200,000(1)
Joel S. Kanter 90,000(1)
Burton W. Kanter 70,000(1)
Robert F. Mauer 50,000(1)
Joshua S. Kanter 25,000(1)
Solomon A. Weisgal 20,000(1)
William F. Burge III 20,000(1)
Albert Morrison 20,000(1)
Earl Chapman 20,000(1)
Gene E. Burleson 20,000(1)
Shea Cordell 15,000(1)
Total 1,250,000
</TABLE>
(1) The terms of such options shall be as follows:
(i) The options shall have an exercise price of $2.00 per share or
such other higher or lower exercise price as is equal to the
exercise price of the 500,000 options to be issued to Joseph
D. Mark and Adi Raviv as contemplated by column (A) of this
Schedule (the "Mark/Raviv Options").
(ii) The options shall have a term of five (5) years or such longer
term as is equal to the term of the Mark/Raviv Options.
(iii) The options shall be immediately exercisable.
(iv) The options shall not be subject to forfeiture.
(v) The options shall be non-transferable.
<PAGE> 323
EXHIBIT B
August 5, 1999
Board of Directors
Walnut Financial Services, Inc.
8000 Towers Crescent Drive
Suite 1070
Vienna, VA 22182
Dear Sirs:
We understand that Walnut Financial Services, Inc., a Utah corporation
("Walnut"), THCG, Inc., a Delaware corporation and a wholly-owned subsidiary of
Walnut ("THCG"), Tower Hill Acquisition Corp., a New York corporation and a
wholly-owned subsidiary of THCG ("Newco" and, together with Walnut and THCG, the
"Walnut Entities") and Tower Hill Securities, Inc., a New York corporation
("Tower Hill"), are proposing to enter into an Agreement and Plans of Merger
(the "Merger Agreement") which will in general contain the terms outlined below.
The Merger Agreement will provide, among other things, for two mergers (or other
structures mutually agreeable to Walnut and Tower Hill), whereby under the first
merger ("Merger 1"), Walnut will be merged with and into THCG (the date and time
Merger 1 becomes effective being the "First Effective Time"). Following Merger
1, the separate corporate existence of Walnut will cease and THCG will continue
as the surviving corporation under the name "THCG, Inc." ("Surviving Corporation
1"). Under the second merger ("Merger 2" and, together with Merger 1, the
"Mergers"), Newco will be merged with and into Tower Hill (the date and time
Merger 2 becomes effective being the "Second Effective Time" and, together with
the First Effective Time, the "Effective Time of the Mergers"). Following Merger
2, the separate corporate existence of Newco will cease and Tower Hill will
continue as the surviving corporation under the name "Tower Hill Securities,
Inc." ("Surviving Corporation 2"). Each share of common stock of Walnut ("Walnut
Common Stock") issued and outstanding immediately prior to the First Effective
Time will be converted into one validly issued, fully paid and non-assessable
share of common stock, par value $.01 per share, of Surviving Corporation 1 (the
"THCG Common Stock"). Each share of common stock of Newco, issued and
outstanding immediately prior to the Second Effective Time will be converted
into one validly issued, fully paid and non-assessable share of common stock of
Surviving Corporation 2. Each share of common stock of Tower Hill issued and
outstanding immediately prior to the Second Effective Time will be converted
into 37,228,145 shares of THCG Common Stock, as adjusted pursuant to the Merger
Agreement. In addition, Walnut will agree to use its commercially reasonable
efforts to effect, prior to the closing of the Mergers, the issuance by Walnut
in a private placement transaction of at least 1,500,000 shares, and up to
3,000,000, shares of Walnut Common Stock to an investor group (the "New Investor
Group") at $2.00 per share in cash; provided, however, that cash or shares of
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Board of Directors
Board of Directors
Walnut Financial Services, Inc.
August 5, 1999
Page 2
Walnut Common Stock valued at $2.00 per share may be issued for: (i) the
conversion of certain debt and accrued liabilities of Walnut, (ii) the
conversion of certain accrued compensation owed by Walnut and (iii)
consideration to be paid in connection with a certain acquisition, pursuant to
the Merger Agreement (the transactions listed in this sentence, together with
the Mergers, the "Proposed Transactions"). As a result of, and immediately
following, the Proposed Transactions (assuming the issuance of 1,500,000 shares
of Walnut Common Stock to the New Investor Group and assuming no shares of
Walnut Common Stock are issued pursuant to clauses (i) through (iii) of the
immediately preceding sentence), THCG Common Stock will be held in the amounts
(and percentages) as follows: (x) former Tower Hill shareholders will own
4,095,096 shares (45.78%), (y) former Walnut shareholders will own 3,350,533
shares (37.45%) and (z) the New Investor Group will own 1,500,000 shares
(16.77%). The aggregate shares of THCG Common Stock issued in the Proposed
Transactions to Tower Hill shareholders are sometimes referred to herein as the
"Total Consideration". As a result of the Proposed Transactions, the former
shareholders of Tower Hill will be able to appoint four of the seven THCG
Directors immediately subsequent to the Mergers. The terms of the Proposed
Transactions are set forth in more detail in the Merger Agreement.
You have requested our opinion, as investment bankers, as to the fairness from
a financial point of view, to the shareholders of Walnut of the Total
Consideration to be paid by Walnut in the Proposed Transactions. Our opinion
addresses only the fairness, from a financial point of view of the Total
Consideration to be paid by Walnut in the Proposed Transactions, and we do not
express any views on any other terms of the Proposed Transactions.
Specifically, we have not been requested to opine as to, and our opinion
does not in any manner address, Walnut's underlying business decision to
proceed with or effect the Proposed Transactions.
In arriving at our opinion we have: (i) reviewed a draft of the Merger
Agreement, dated as of August 5, 1999, and, for purposes hereof, we have
assumed that the final form thereof will not differ in any material respect
from such draft; (ii) reviewed such available information concerning Walnut and
Tower Hill as we believe is relevant to our analysis, including Walnut's Annual
Reports on Form 10-K for the periods ended December 31, 1997 and 1998, and
Quarterly Report on Form 10-K for the three month period ending March 31, 1999,
and Tower Hill's 1998 Audited Financials, year-to-date Profit and Loss
Statement as of July 14, 1999, as well as the unaudited June 7, 1999 Balance
Sheet; (iii) reviewed certain financial and operating information with respect
to the business, operations and prospects of Walnut and Tower Hill furnished to
us by Walnut and Tower Hill; (iv) reviewed certain financial and other
information regarding Tower Hill's portfolio investments supplied by Tower
Hill; (v) reviewed the historical stock prices and trading volumes of the
Walnut Common Stock; (vi) compared the historical results of the operations of
Walnut and Tower Hill with those of certain publicly traded companies which we
deemed to be reasonably comparable; and (vii) reviewed the financial terms, to
the extent publicly available, of certain comparable transactions and compared
them with the terms of the Proposed Transactions. In addition, we have had
discussions with the management of Walnut and Tower Hill concerning
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Board of Directors
Walnut Financial Services, Inc.
August 5, 1999
Page 3
their business, operations, assets, investment policies, financial condition
and prospects and have undertaken such other analyses and examinations and
considered such other financial, economic and market data as we deemed
appropriate in arriving at our opinion.
In arriving at our opinion we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without assuming
any responsibility for the independent verification of such information and have
further relied upon the assurances of Walnut and Tower Hill that they are not
aware of any facts or circumstances that would make such information inaccurate
or misleading. We have also assumed that obtaining all regulatory approvals and
third party consents required for the consummation of the Proposed Transactions
will not have an adverse impact on Walnut or Tower Hill or on the anticipated
benefits of the transaction, and we have assumed that the transactions described
in the Merger Agreement will be consummated without waiver or modification of
any of the material terms or conditions contained therein by any party thereto.
In arriving at our opinion, we have not made or obtained any evaluations or
appraisals of the assets or liabilities of Walnut or Tower Hill. Our opinion
set forth herein is necessarily based upon financial, market, economic and other
conditions and circumstances as they exist and have been disclosed of, and can
be evaluated as of, the date hereof. We are not expressing any opinion herein as
to the price at which the Walnut Common Stock or THCG Common Stock may actually
trade at any time.
We have acted as financial advisor to Walnut in connection with the Proposed
Transactions and will receive a fee for such services and for rendering this
opinion. In addition, Walnut has agreed to indemnify us for certain
liabilities which may arise out of the rendering of this opinion. In the
ordinary course of our business, we may actively trade the debt or equity
securities of each of Walnut for our account and for the accounts of customers
and, accordingly, may at any time, hold a long or short position in such
securities.
Our opinion is provided for the use and benefit of the Board of Directors of
Walnut and is rendered to the Board of Directors in connection with the
Proposed Transactions. This opinion is not intended and does not constitute a
recommendation to any stockholder as to how such stockholder should vote with
respect to the Proposed Transactions. This opinion is not to be reprinted
reproduced or disseminated without our prior written consent, and is not to be
quoted or referred to, in whole or in part, in connection with the Proposed
Transactions or any other matter; provided that we understand and agree that if
this opinion is required pursuant to any applicable statute or regulation to be
included in any materials to be filed with the Securities and Exchange
Commission or mailed to the shareholders of Walnut in connection with the
Proposed Transactions, the opinion may be reproduced in such materials only in
its entirety; provided, further, that any description of or reference to us or
any summary of this opinion in such materials will be in a form acceptable to
and consented to in advance by us, such consent not to be unreasonably withheld.
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Board of Directors
Walnut Financial Services, Inc.
August 5, 1999
Page 4
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, we are of the opinion that, as of the date hereof,
the Total Consideration to be paid by Walnut in connection with the Proposed
Transactions is fair, from a financial point of view, to the shareholders of
Walnut.
Respectfully submitted,
Gruntal & Co., L.L.C.
<PAGE> 327
EXHIBIT C
THE 1999 THCG, INC.
STOCK INCENTIVE PLAN
(AS ADOPTED _______, 1999)
1. PURPOSE OF THE PLAN
This 1999 THCG, Inc. Stock Incentive Plan is intended to promote the
interests of the Company and its stockholders by providing certain key
individuals, on whose judgment, initiative and efforts the successful conduct of
the business of the Company largely depends, and who are largely responsible for
the management, growth and protection of the business of the Company, with
appropriate incentives and rewards to encourage them to continue their
Employment with the Company and to maximize their performance and to provide
certain "performance-based compensation" within the meaning of Section
162(m)(4)(C) of the Code.
2. DEFINITIONS
As used in the Plan, the following definitions apply to the terms
indicated below:
(a) "Affiliate" shall mean any entity (whether or not incorporated)
controlling, controlled by or under common control with the Company.
(b) "Board of Directors" shall mean the Board of Directors of the
Company.
(c) "Cash Bonus" shall mean an award of a bonus payable in cash
pursuant to Section 13 hereof.
(d) "Cause" shall mean, when used in connection with a Participant's
Termination of Employment:
(i) to the extent that there is an employment, severance or other
agreement governing the relationship between the Participant and the
Company, which agreement contains a definition of "cause", Cause will
consist of those acts or omissions that would constitute "cause" under
such agreement; and otherwise
(ii) the Participant's Termination of Employment by the Company or
an Affiliate on account of any one or more of the following:
(A) any failure by the Participant substantially to perform
the Participant's employment duties;
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(B) any excessive unauthorized absenteeism by the
Participant;
(C) any refusal by the Participant to obey the lawful orders
of the Board of Directors or any other person or committee to whom
the Participant reports;
(D) any act or omission by the Participant that is or may be
injurious to the Company, monetarily or otherwise;
(E) any act by the Participant that is competitive with the
best interests of the Company;
(F) the Participant's material violation of any of the
Company's policies, including, without limitation, those policies
relating to discrimination or sexual harassment;
(G) the Participant's unauthorized (a) removal from the
premises of the Company or Affiliate of any document (in any
medium or form) relating to the Company or an Affiliate or the
customers of the Company or an Affiliate or (b) disclosure to any
person or entity of any of the Company's confidential or
proprietary information;
(H) the Participant's commission of any felony, or any other
crime involving moral turpitude; and
(I) the Participant's commission of any act involving
dishonesty or fraud.
To the extent the definition of Cause herein is determined pursuant to
Section 2(d)(ii) hereof, then solely for the purposes of Sections 6(h), 9(e),
10(g) and 11(e) of this Plan the definition of Cause shall be determined only by
reference to subsections (C), (F), (G), (H) and (I) of such Section 2(d)(ii).
Any rights the Company may have hereunder in respect of the events
giving rise to Cause shall be in addition to the rights the Company may have
under any other agreement with a Participant or at law or in equity. Any
determination of whether a Participant's Employment is (or is deemed to have
been) terminated for Cause shall be made by the Committee in its discretion,
which determination shall be final and binding on all parties. If, subsequent to
a Participant's voluntary Termination of Employment or involuntary Termination
of Employment without Cause, it is discovered that the Participant's Employment
could have been terminated for Cause, such Participant's Employment shall be
deemed to have been terminated for Cause. A Participant's Termination of
Employment for Cause shall be effective as of the date of the occurrence of the
event giving rise to Cause, regardless of when the determination of Cause is
made.
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(e) "Change in Control" shall mean the occurrence of any of the
following:
(i) a change in control of a nature that would be required to be
reported in response to Item 5(f) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 ("Exchange Act")
shall have occurred, unless such change in control results in control
by the Participant, his designee(s) or "affiliate(s)" (as defined in
Rule 12b-2 under the Exchange Act) or any combination thereof;
(ii) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act), other than the Participant, his
designee(s) or "affiliate(s)" (as defined in Rule 12b-2 under the
Exchange Act), or any "person" who was a shareholder as of the
Effective Date or any combination thereof, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing forty
percent (40%) or more of the combined voting power of the Company's
then outstanding securities;
(iii) during any period of two (2) consecutive years during this
Agreement, individuals who at the beginning of such period constitute
the Board cease for any reason to constitute at least a majority
thereof, unless the election of each director who was not a director at
the beginning of such period has been approved in advance by directors
representing at least a majority of the directors then in office who
were directors at the beginning of the period;
(iv) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 80% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; provided, however, that a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no "person" (as hereinabove defined) acquires
more than 25% of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control of the
Company; or
(v) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition
by the Company of, or the Company sells or disposes of, all or
substantially all of the Company's assets.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
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(g) "Committee" shall mean the Compensation Committee of the Board of
Directors or such other committee as the Board of Directors shall appoint from
time to time to administer the Plan; provided, however, that the Committee shall
at all times consist of two or more persons. The Committee shall consist solely
of individuals who are (or grants shall be made by a subcommittee of two or more
persons, each of whom shall be) a "non-employee director" within the meaning of
Rule 16b-3. Each member of the Committee shall be an "outside director" within
the meaning of Section 162(m) of the Code.
(h) "Company" shall mean THCG, Inc. or any successor thereto.
(i) "Company Stock" shall mean the common stock of the Company.
(j) "Disability" shall mean, except in connection with an Incentive
Stock Option, any physical or mental condition that would qualify a Participant
for a disability benefit under the long-term disability plan maintained by the
Company or, if there is no such plan, a physical or mental condition that
prevents the Participant from performing the essential functions of the
Participant's position (with or without reasonable accommodation) for a period
of six consecutive months or, in connection with an Incentive Stock Option, a
disability described in Section 422(c)(6) of the Code. The existence of a
Disability shall be determined by the Committee in its absolute discretion.
(k) "Dividend Equivalent Right" shall mean an Incentive Award granted
pursuant to Section 14 hereof of a right to receive an amount equivalent to the
ordinary cash dividends paid in respect to some or all of the shares of Company
Stock underlying an Incentive Award.
(l) "Employment" shall mean, in the case of a Participant who is not an
employee of the Company, the Participant's association with the Company or an
Affiliate as a consultant.
(m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(n) "Fair Market Value" shall mean, with respect to a share of Company
Stock on an applicable date:
(i) If Company Stock is traded on a national securities exchange,
(A) the average of the high and low reported sales price regular way
per share of Company Stock on the principal national securities
exchange on which Company Stock is traded or (B) if no reported sales
take place on the applicable date, the average of the highest bid and
lowest asked price of Company Stock on such exchange or (C) if no such
quotation is made on such date, on the next preceding day (not more
than 10 business days prior to the applicable date) on which there were
reported sales or such quotations.
(ii) If Company Stock is not traded on a national securities
exchange but quotations
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are available for Company Stock on the over-the-counter market, (A) the
mean between the highest bid and lowest asked quotation on the
over-the-counter market as reported by the National Quotations Bureau,
or any similar organization, on the applicable date or (B) if no such
quotation is made on such date on the next preceding day (not more than
10 business days prior to the applicable date) on which there were such
quotations.
(iii) If Company Stock is neither traded on a national securities
exchange nor are quotations therefor available on the over-the-counter
market or if there are no sales or quotations in the 10 business days
immediately prior to the applicable date, as determined in good faith
by the Committee in a manner consistently applied.
(o) "Incentive Award" shall mean an Option, LSAR, Tandem SAR,
Stand-Alone SAR, Dividend Equivalent Right, share of Restricted Stock, share of
Phantom Stock, Stock Bonus, Cash Bonus or other equity-based award granted
pursuant to the terms of the Plan.
(p) "Incentive Stock Option" shall mean an Option that is an "incentive
stock option" within the meaning of Section 422 of the Code and that is
identified as an Incentive Stock Option in the agreement by which it is
evidenced.
(q) "Issue Date" shall mean the date established by the Committee on
which certificates representing shares of Restricted Stock shall be issued by
the Company pursuant to the terms of Section 10(d) hereof.
(r) "LSAR" shall mean a limited stock appreciation right that is
granted pursuant to the provisions of Section 7 hereof and that relates to an
Option. Each LSAR shall be exercisable only upon the occurrence of a Change in
Control and only in the alternative to the exercise of its related Option.
(s) "Non-Qualified Stock Option" shall mean an Option that is not an
Incentive Stock Option.
(t) "Option" shall mean an option to purchase shares of Company Stock
granted pursuant to Section 6 hereof. Each Option shall be identified as either
an Incentive Stock Option or a Non-Qualified Stock Option in the agreement by
which it is evidenced.
(u) "Participant" shall mean any person who is eligible to participate
in the Plan and to whom an Incentive Award is granted pursuant to the Plan, and,
upon his death, the employee's successors, heirs, executors and administrators,
as the case may be.
(v) "Person" shall mean a "person," as such term is used in Sections
13(d) and 14(d) of the Exchange Act.
(w) "Phantom Stock" shall mean the right to receive in cash the Fair
Market Value of a
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share of Company Stock, which right is granted pursuant to Section 11 hereof and
subject to the terms and conditions contained therein.
(x) "Plan" shall mean this 1999 THCG, Inc. Stock Incentive Plan, as it
may be amended from time to time.
(y) "Reload Option" shall mean an Option granted to a Participant in
accordance with Section 6 hereof upon the exercise of an Option.
(z) "Restricted Stock" shall mean a share of Company Stock that is
granted pursuant to the terms of Section 10 hereof and that is subject to the
restrictions set forth in Section 10(c) hereof for so long as such restrictions
continue to apply to such share.
(aa) "SAR shall mean a Tandem SAR, Stand-Alone SAR or LSAR.
(bb) "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
(cc) "Stand-Alone SAR" shall mean a stock appreciation right granted
pursuant to Section 9 hereof that is not related to any Option.
(dd) "Stock Bonus" shall mean a grant of a bonus payable in shares of
Company Stock pursuant to Section 12 hereof.
(ee) "Tandem SAR" shall mean a stock appreciation right granted
pursuant to Section 8 hereof that is related to an Option. Each Tandem SAR shall
be exercisable only to the extent its related Option is exercisable and only in
the alternative to the exercise of its related Option.
(ff) "Termination of Employment" shall mean a Participant's ceasing to
be employed by the Company and any Affiliates or by a corporation assuming
Incentive Awards in a transaction to which section 424(a) of the Code applies.
The Committee may determine, in its absolute discretion (i) whether any leave of
absence or absence in military or government service constitutes a Termination
of Employment for purposes of the Plan, subject to applicable law, (ii) the
effect, if any, of any such leave of absence on Incentive Awards granted under
the Plan, and (iii) when a change in a non-employee's association with the
Company constitutes a Termination of Employment for purposes of the Plan.
(gg) "Vesting Date" shall mean the date established by the Committee on
which a share of Restricted Stock or Phantom Stock may vest.
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3. STOCK SUBJECT TO THE PLAN
(a) Plan Limit
Subject to adjustment as provided in Section 16 hereof, the
Committee may grant Incentive Awards hereunder with respect to a number of
shares of Company Stock that in the aggregate does not exceed 2,250,000 shares.
The grant of an LSAR, Tandem SAR or Dividend Equivalent Right shall not reduce
the number of shares of Company Stock with respect to which Incentive Awards may
be granted pursuant to the Plan. Incentive Awards granted under the Plan shall
count against the foregoing limits at the time they are granted but shall again
become available for grant under the Plan as follows:
(i) To the extent that any Options, together with any related
rights granted under the Plan, terminate, expire or are canceled
without having been exercised (including a cancellation resulting from
the exercise of a related LSAR or a Tandem SAR) the shares covered by
such Options shall again be available for grant under the Plan.
(ii) To the extent that any Stand-Alone SARs terminate, expire or
are canceled without having been exercised, the shares covered by such
Stand-Alone SARs shall again be available for grant under the Plan.
(iii) To the extent any shares of Restricted Stock or Phantom
Stock, or any shares of Company Stock granted as a Stock Bonus are
forfeited or canceled for any reason, such shares shall again be
available for grant under the Plan.
Shares of Company Stock issued under the Plan may be either newly
issued shares or treasury shares, at the discretion of the Committee.
(b) Individual Limit
Subject to adjustment as provided in Section 14 hereof, the
Committee shall not, during any calendar year, grant any one Participant
Incentive Awards hereunder with respect to more than 450,000 shares of Company
Stock. Such Incentive Awards may be made up entirely of any one type of
Incentive Award or any combination of types of Incentive Awards available under
the Plan, in the Committee's sole discretion. Once granted to a Participant,
Incentive Awards shall not again be available for grant to that Participant. The
grant of an LSAR, Tandem SAR or Dividend Equivalent Right shall not reduce the
number of shares of Company Stock with respect to which Incentive Awards may be
granted to any Participant pursuant to the Plan.
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4. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall
from time to time designate the key individuals who shall be granted Incentive
Awards and the amount and type of such Incentive Awards.
The Committee shall have full authority to administer the Plan,
including authority to interpret and construe any provision of the Plan and the
terms of any Incentive Award issued under it, and to adopt such rules and
regulations for administering the Plan as it may deem necessary or appropriate.
Decisions of the Committee shall be final and binding on all parties. The
Committee's determinations under the Plan may, but need not, be uniform and may
be made on a Participant-by-Participant basis (whether or not two or more
Participants are similarly situated).
The Committee may, in its absolute discretion, without amendment to the
Plan, (i) accelerate the date on which any Option or Stand-Alone SAR granted
under the Plan becomes exercisable or otherwise adjust any of the terms of such
Option or Stand-Alone SAR (except that no such adjustment shall, without the
consent of a Participant, reduce the Participant's rights under any previously
granted and outstanding Incentive Award unless the Committee determines that
such adjustment is necessary or appropriate to prevent such Incentive Award from
constituting "applicable employee remuneration" within the meaning of Section
162(m) of the Code), (ii) accelerate the Vesting Date or Issue Date, or waive
any condition imposed hereunder, with respect to any share of Restricted Stock
granted under the Plan or otherwise adjust any of the terms of such Restricted
Stock and (iii) accelerate the Vesting Date or waive any condition imposed
hereunder, with respect to any share of Phantom Stock granted under the Plan or
otherwise adjust any of the terms of such Phantom Stock.
In addition, the Committee may, in its absolute discretion and without
amendment to the Plan, grant Incentive Awards of any type to Participants on the
condition that such Participants surrender to the Committee for cancellation
such other Incentive Awards of the same or any other type (including, without
limitation, Incentive Awards with higher exercise prices or values) as the
Committee specifies. Notwithstanding Section 3(a) hereof, prior to the surrender
of such other Incentive Awards, Incentive Awards granted pursuant to the
preceding sentence of this Section 4 shall not count against the limits set
forth in such Section 3(a).
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No member of the Committee shall be liable for any action, omission, or
determination relating to the Plan, and the Company shall indemnify and hold
harmless each member of the Committee and each other director or employee of the
Company to whom any duty or power relating to the administration or
interpretation of the Plan has been delegated against any cost or expense
(including counsel fees) or liability (including any sum paid in settlement of a
claim with the approval of the Committee) arising out of any action, omission or
determination relating to the Plan, unless, in either case, such action,
omission or determination was taken or made by such member, director or employee
in bad faith and without reasonable belief that it was in the best interests of
the Company.
Notwithstanding anything in the Plan to the contrary, until the Board
of Directors shall have appointed the members of the Committee, the Board of
Directors shall administer the Plan. In addition, the Board of Directors may, in
its sole discretion, at any time and from time to time, grant Incentive Awards
or resolve to administer the Plan in which case, to the extent provided in such
resolutions, the Board of Directors shall have the powers of the Committee.
5. ELIGIBILITY
The persons who shall be eligible to receive Incentive Awards pursuant
to the Plan shall be those key current and former employees of the Company and
its Affiliates (including prospective employees, which Incentive Awards shall be
conditioned on the prospective employees actually becoming employees) and
certain current and former consultants or other independent contractors
(including directors of the Company or any of its Affiliates who are not
employees of the Company or any of its Affiliates) to the Company and its
Affiliates who are largely responsible for the management, growth and protection
of the business of the Company and its Affiliates (including officers of the
Company, whether or not they are directors of the Company) as the Committee
shall select from time to time. Except with respect to certain consultants or
other independent contractors (including directors of the Company or any of its
Affiliates who are not employees of the Company or any of its Affiliates) to the
Company and its Affiliates, persons who are not (or are not expected to be)
classified as employees of the Company or an Affiliate for purposes of the
Company's or an Affiliate's payroll shall not be eligible to receive Incentive
Awards under the Plan.
6. OPTIONS
The Committee may grant Options pursuant to the Plan. Such Options
shall be evidenced by agreements in such form as the Committee shall from time
to time approve. Options shall comply with and be subject to the following terms
and conditions:
(a) Identification of Options
All Options granted under the Plan shall be clearly identified in the
agreement evidencing such Options as either Incentive Stock Options or as
Non-Qualified Stock Options.
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(b) Conditions to Issuance and Excercisability
At the time of the grant of any Options under the Plan, the
Committee may impose such restrictions or conditions, not inconsistent with the
provisions hereof, to the issuance or excercisability of the Options, as the
Committee, in its absolute discretion, deems appropriate. By way of example and
not by way of limitation, the Committee may require, as a condition to the
issuance or exercisability of any Options, that the Participant or the Company
achieve such performance criteria as the Committee may specify at the time of
the grant of such shares.
(c) Exercise Price
The exercise price of any Non-Qualified Stock Option granted under
the Plan shall be such price as the Committee shall determine (which may be
equal to, less than or greater than the Fair Market Value of a share of Company
Stock on the date such Non-Qualified Stock Option is granted) on the date on
which such Non-Qualified Stock Option is granted; provided, that such price may
not be less than the minimum price required by law. Subject to Paragraph (d) of
this Section 6, the exercise price-per-share of any Incentive Stock Option
granted under the Plan shall be not less than 100% of the Fair Market Value of a
share of Company Stock on the date on which such Incentive Stock Option is
granted (except as permitted in connection with the assumption or issuance of
Options in a transaction to which Section 424(a) of the Code applies).
(d) Term and Exercise of Options
(i) Each Option shall be exercisable on such date or dates, during
such period and for such number of shares of Company Stock as shall be
determined by the Committee on the day on which such Option is granted
and set forth in the agreement evidencing such Option; provided,
however, that: (A) if such agreement does not specify the date or dates
on which the Option will become exercisable, the shares subject to the
Option shall become exercisable in three equal installments on each of
the first, second and third anniversary of the day on which the Option
is granted; (B) no Option shall be exercisable after the expiration of
ten years from the date such Option was granted; and (C) each Option
shall be subject to earlier termination, expiration or cancellation as
provided in the Plan.
(ii) Each Option shall be exercisable in whole or in part;
provided, that no partial exercise of an Option shall be for an
aggregate exercise price of less than $1,000. The partial exercise of
an Option shall not cause the expiration, termination or cancellation
of the remaining portion thereof. Upon the partial exercise of an
Option, the agreement evidencing such Option and any related LSARs and
Tandem SARs shall be returned to the Participant exercising such Option
together with the delivery of the certificates
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described in Section 6(d)(v) hereof.
(iii) An Option shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the agreement or
agreements evidencing the Option and any related LSARs and Tandem SARs,
shall specify the number of shares of Company Stock with respect to
which the Option is being exercised and the effective date of the
proposed exercise and shall be signed by the Participant. The
Participant may withdraw such notice at any time prior to the close of
business on the business day immediately preceding the effective date
of the proposed exercise, in which case such agreement or agreements
shall be returned to him. Payment for shares of Company Stock purchased
upon the exercise of an Option shall be made on the effective date of
such exercise either:
(A) in cash, by certified check, bank cashier's check or wire
transfer; or
(B) subject to the approval of the Committee, in shares of
Company Stock owned by the Participant and valued at their Fair
Market Value on the effective date of such exercise, or partly in
shares of Company Stock with the balance in cash, by certified
check, bank cashier's check or wire transfer; or
(C) subject to the approval of the Committee, pursuant to a
"cashless exercise" pursuant to procedures adopted by the
Committee whereby the Participant, by a properly written notice,
directing (A) an immediate market sale or margin loan respecting
all or a part of the shares of Company Stock to which the
Participant is entitled upon exercise pursuant to an extension of
credit by the Company to the Participant of the exercise price,
(B) the delivery of the shares of Company Stock from the Company
directly to the brokerage firm, and (C) the delivery of the
exercise price from the sale or margin loan proceeds from the
brokerage firm directly to the Company.
Any payment in shares of Company Stock shall be effected by the
delivery of such shares to the Secretary of the Company, duly endorsed
in blank or accompanied by stock powers duly executed in blank,
together with any other documents and evidences as the Secretary of the
Company shall require from time to time.
(iv) Except as otherwise provided in an applicable agreement
evidencing an Option, during the lifetime of a Participant, each Option
granted to a Participant shall be exercisable only by the Participant
and no Option shall be assignable or transferable otherwise than by
will or by the laws of descent and distribution. The Committee may, in
any applicable agreement evidencing an Option (other than an Incentive
Stock Option to the extent inconsistent with the requirements of
Section 422 of the Code applicable to incentive stock options), permit
a Participant to transfer all or some of the Options to
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(A) the Participant's spouse, children or grandchildren ("Immediate
Family Members"), (B) a trust or trusts for the exclusive benefit of
such Immediate Family Members, or (C) other parties approved by the
Committee in its absolute discretion. Following any such transfer, any
transferred Options shall continue to be subject to the same terms and
conditions as were applicable immediately prior to the transfer.
(v) Certificates for shares of Company Stock purchased upon the
exercise of an Option shall be issued in the name of the Participant or
his beneficiary (or permitted transferee), as the case may be, and
delivered to the Participant or his beneficiary (or permitted
transferee), as the case may be, as soon as practicable following the
effective date on which the Option is exercised.
(e) Limitations on Grant of Incentive Stock Options
(i) The aggregate Fair Market Value of shares of Company Stock
with respect to which Incentive Stock Options granted hereunder are
exercisable for the first time by a Participant during any calendar
year under the Plan and any other stock option plan of the Company (or
any "subsidiary corporation" of the Company within the meaning of
Section 424 of the Code) shall not exceed $100,000. Such Fair Market
Value shall be determined as of the date on which each such Incentive
Stock Option is granted. In the event that the aggregate Fair Market
Value of shares of Company Stock with respect to such Incentive Stock
Options exceeds $100,000, then Incentive Stock Options granted
hereunder to such Participant shall, to the extent and in the order in
which they were granted, automatically be deemed to be Non-Qualified
Stock Options, but all other terms and provisions of such Incentive
Stock Options shall remain unchanged.
(ii) No Incentive Stock Option may be granted to an individual if,
at the time of the proposed grant: (i) such individual was not an
employee of the company, a parent or subsidiary corporation of the
Company, or a corporation or a parent or subsidiary corporation of such
corporation issuing or assuming a stock option in a transaction to
which Section 424(a) of the Code applies or (ii) such individual owns
stock possessing more than ten percent of the total combined voting
power of all classes of stock of the Company or any of its "subsidiary
corporations" (within the meaning of Section 424 of the Code), unless
(A) the exercise price of such Incentive Stock Option is at least one
hundred ten percent (110%) of the Fair Market Value of a share of
Company Stock at the time such Incentive Stock Option is granted and
(B) such Incentive Stock Option is not exercisable after the expiration
of five years from the date such Incentive Stock Option is granted.
(f) Grants of Reload Options
The Committee may, in its discretion, include in any agreement
evidencing an Option (the "Original Option") a provision that a Reload Option
shall be granted to any
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Participant who, pursuant to Section 6(d)(iii), delivers shares of Company Stock
in partial or full payment of the exercise price of the Original Option. The
Reload Option shall relate to a number of shares of Company Stock equal to the
number of shares of Company Stock delivered, and shall have an exercise
price-per-share equal to the Fair Market Value of a share of Company Stock on
the date of the exercise of the Original Option. In the event that an agreement
evidencing an Original Option provides for the grant of a Reload Option, such
agreement shall also provide that the exercise price-per-share of the Original
Option shall be no less that the Fair Market Value of a share of Company Stock
on its date of grant, and that any shares that are delivered pursuant to Section
6(d)(iii) in payment of such exercise price shall have been held for at least
six months.
(g) Effect of Termination of Employment
(i) Unless otherwise provided in any agreement evidencing an
Option, in the event that the Employment of a Participant with the
Company and its Affiliates shall terminate for any reason other than
Cause, Disability or death (A) Options granted to such Participant, to
the extent that they were exercisable at the time of such Termination
of Employment, shall remain exercisable until the expiration of three
months after such Termination of Employment, on which date they shall
expire, and (B) Options granted to such Participant, to the extent that
they were not exercisable at the time of such Termination of
Employment, shall expire at the close of business on the date of such
Termination of Employment; provided, however, that no Option shall be
exercisable after the expiration of its term.
(ii) Unless otherwise provided in any agreement evidencing an
Option, in the event that the Employment of a Participant with the
Company shall terminate on account of the Disability or death of the
Participant (A) Options granted to such Participant, to the extent that
they were exercisable at the time of such Termination of Employment,
shall remain exercisable until the expiration of the original term as
provided for in the Plan or as specified in the agreement evidencing
the Option, and (B) Options granted to such Participant, to the extent
that they were not exercisable at the time of such Termination of
Employment, shall expire at the close of business on the date of such
Termination of Employment.
(iii) Unless otherwise provided in any agreement evidencing an
Option, in the event of a Participant's Termination of Employment for
Cause, all outstanding Options granted to such Participant shall expire
at the commencement of business on the effective date of such
Termination of Employment.
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(h) Acceleration of Exercise Date Upon Change in Control
In the event a Participant's employment is terminated by the
Company, other than for Cause, on or after the occurrence of a Change in Control
but prior to the expiration of a six-month period following the Change in
Control, each Option granted under the Plan that is outstanding and
unexercisable immediately prior to such termination of employment shall become
fully and immediately exercisable and shall remain exercisable until its
expiration, termination or cancellation pursuant to the terms of the Plan.
7. LSARS
The Committee may grant in connection with any Option granted
hereunder one or more LSARs relating to a number of shares of Company Stock less
than or equal to the number of shares of Company Stock subject to the related
Option. An LSAR may be granted at the same time as, or, in the case of a
Non-Qualified Stock Option, subsequent to the time that, its related Option is
granted. Each LSAR shall be evidenced by an agreement in such form as the
Committee shall from time to time approve. Each LSAR granted hereunder shall be
subject to the following terms and conditions:
(a) Benefit Upon Exercise
(i) The exercise of an LSAR relating to a Non-Qualified Stock
Option with respect to any number of shares of Company Stock shall
entitle the Participant to a cash payment, for each such share, equal
to the excess of (A) the greater of (x) the highest price-per-share of
Company Stock paid in the Change in Control in connection with which
such LSAR became exercisable and (y) the Fair Market Value of a share
of Company Stock on the date of such Change in Control over (B) the
exercise price of the related Option. Such payment shall be made as
soon as practicable, but in no event later than the expiration of five
business days after the effective date of such exercise.
(ii) The exercise of an LSAR relating to an Incentive Stock Option
with respect to any number of shares of Company Stock shall entitle the
Participant to a cash payment, for each such share, equal to the excess
of (A) the Fair Market Value of a share of Company Stock on the
effective date of such exercise over (B) the exercise price of the
related Option. Such payment shall be made as soon as practicable, but
in no event later than the expiration of five business days, after the
effective date of such exercise.
(b) Term and Exercise of LSARs
(i) An LSAR shall be exercisable only during the period commencing
on the first day following the occurrence of a Change in Control and
terminating on the expiration of sixty days after such date.
Notwithstanding anything else herein, an LSAR relating to an Incentive
Stock Option may be exercised with respect to a share of Company Stock
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only if the Fair Market Value of such share on the effective date of
such exercise exceeds the exercise price relating to such share.
Notwithstanding anything else herein, an LSAR may be exercised only if
and to the extent that the Option to which it relates is exercisable.
(ii) The exercise of an LSAR with respect to a number of shares of
Company Stock shall cause the immediate and automatic cancellation of
the Option to which it relates with respect to an equal number of
shares. The exercise of an Option, or the cancellation, termination or
expiration of an Option (other than pursuant to this Paragraph (ii)),
with respect to a number of shares of Company Stock, shall cause the
cancellation of the LSAR related to it with respect to an equal number
of shares.
(iii) Each LSAR shall be exercisable in whole or in part;
provided, that no partial exercise of an LSAR shall be for an aggregate
exercise price of less than $1,000. The partial exercise of an LSAR
shall not cause the expiration, termination or cancellation of the
remaining portion thereof. Upon the partial exercise of an LSAR, the
agreement evidencing the LSAR, the related Option and any Tandem SARs
related to such Option, marked with such notations as the Committee may
deem appropriate to evidence such partial exercise, shall be returned
to the Participant exercising such LSAR together with the payment
described in Paragraph 7(a)(i) or (ii) hereof, as applicable.
(iv) Except as otherwise provided in an applicable agreement
evidencing an LSAR, during the lifetime of a Participant, each LSAR
granted to a Participant shall be exercisable only by the Participant
and no LSAR shall be assignable or transferable otherwise than by will
or by the laws of descent and distribution and otherwise than together
with its related Option. The Committee may, in any applicable agreement
evidencing an LSAR, permit a Participant to transfer all or some of the
LSAR to (A) the Participant's Immediate Family Members, (B) a trust or
trusts for the exclusive benefit of such Immediate Family Members, or
(C) other parties approved by the Committee in its absolute discretion.
Following any such transfer, any transferred LSARs shall continue to be
subject to the same terms and conditions as were applicable immediately
prior to the transfer.
(v) An LSAR shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the applicable
agreement evidencing the LSAR, the related Option and any Tandem SARs
relating to such Option, shall specify the number of shares of Company
Stock with respect to which the LSAR is being exercised and the
effective date of the proposed exercise and shall be signed by the
Participant. The Participant may withdraw such notice at any time prior
to the close of business on the business day immediately preceding the
effective date of the proposed exercise, in which case such agreement
shall be returned to him.
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8. TANDEM SARS
The Committee may grant in connection with any Option granted hereunder
one or more Tandem SARs relating to a number of shares of Company Stock less
than or equal to the number of shares of Company Stock subject to the related
Option. A Tandem SAR may be granted at the same time as, or subsequent to the
time that, its related Option is granted. Each Tandem SAR shall be evidenced by
an agreement in such form as the Committee shall from time to time approve.
Tandem SARs shall comply with and be subject to the following terms and
conditions:
(a) Benefit Upon Exercise
The exercise of a Tandem SAR with respect to any number of shares
of Company Stock shall entitle a Participant to a cash payment, for each such
share, equal to the excess of (i) the Fair Market Value of a share of Company
Stock on the effective date of such exercise over (ii) the exercise price of the
related Option. Such payment shall be made as soon as practicable, but in no
event later than the expiration of five business days, after the effective date
of such exercise.
(b) Term and Exercise of Tandem SAR
(i) A Tandem SAR shall be exercisable at the same time and to the
same extent (on a proportional basis, with any fractional amount being
rounded down to the immediately preceding whole number) as its related
Option. Notwithstanding the first sentence of this Section 8(b)(i), (A)
a Tandem SAR shall not be exercisable at any time that an LSAR related
to the Option to which the Tandem SAR is related is exercisable and (B)
a Tandem SAR relating to an Incentive Stock Option may be exercised
with respect to a share of Company Stock only if the Fair Market Value
of such share on the effective date of such exercise exceeds the
exercise price relating to such share.
(ii) The exercise of a Tandem SAR with respect to a number of
shares of Company Stock shall cause the immediate and automatic
cancellation of its related Option with respect to an equal number of
shares. The exercise of an Option, or the cancellation, termination or
expiration of an Option (other than pursuant to this Paragraph (ii)),
with respect to a number of shares of Company Stock shall cause the
automatic and immediate cancellation of its related Tandem SARs to the
extent that the number of shares of Company Stock subject to such
Option after such exercise, cancellation, termination or expiration is
less than the number of shares subject to such Tandem SARs. Such Tandem
SARs shall be canceled in the order in which they became exercisable.
(iii) Each Tandem SAR shall be exercisable in whole or in part;
provided, that no partial exercise of a Tandem SAR shall be for an
aggregate exercise price of less than
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$1,000. The partial exercise of a Tandem SAR shall not cause the
expiration, termination or cancellation of the remaining portion
thereof. Upon the partial exercise of a Tandem SAR, the agreement
evidencing such Tandem SAR, its related Option and LSARs relating to
such Option shall be returned to the Participant exercising such Tandem
SAR together with the payment described in Section 8(a) hereof.
(iv) Except as otherwise provided in an applicable agreement evidencing
a Tandem SAR, during the lifetime of a Participant, each Tandem SAR
granted to a Participant shall be exercisable only by the Participant
and no Tandem SAR shall be assignable or transferable otherwise than by
will or by the laws of descent and distribution. The Committee may, in
any applicable agreement evidencing a Tandem SAR, permit a Participant
to transfer all or some of the Tandem SAR to (A) the Participant's
Immediate Family Members, (B) a trust or trusts for the exclusive
benefit of such Immediate Family Members, or (C) other parties approved
by the Committee in its absolute discretion. Following any such
transfer, any transferred Tandem SARs shall continue to be subject to
the same terms and conditions as were applicable immediately prior to
the transfer.
(v) A Tandem SAR shall be exercised by delivering notice to the
Company's principal office, to the attention of its Secretary, no less
than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the applicable
agreement evidencing the Tandem SAR, its related Option and any LSARs
related to such Option, shall specify the number of shares of Company
Stock with respect to which the Tandem SAR is being exercised and the
effective date of the proposed exercise and shall be signed by the
Participant. The Participant may withdraw such notice at any time prior
to the close of business on the business day immediately preceding the
effective date of the proposed exercise, in which case such agreement
shall be returned to him.
9. STAND-ALONE SARS
The Committee may grant Stand-Alone SARs pursuant to the Plan, which
Stand-Alone SARs shall be evidenced by agreements in such form as the Committee
shall from time to time approve. Stand-Alone SARs shall comply with and be
subject to the following terms and conditions:
(a) Exercise Price
The exercise price of any Stand-Alone SAR granted under the Plan
shall be determined by the Committee at the time of the grant of such
Stand-Alone SAR.
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(b) Benefit Upon Exercise
(i) The exercise of a Stand-Alone SAR with respect to any number
of shares of Company Stock prior to the occurrence of a Change in
Control shall entitle a Participant to a cash payment, for each such
share, equal to the excess of (A) the Fair Market Value of a share of
Company Stock on the exercise date over (B) the exercise price of the
Stand-Alone SAR.
(ii) The exercise of a Stand-Alone SAR with respect to any number
of shares of Company Stock on or after the occurrence of a Change in
Control shall entitle a Participant to a cash payment, for each such
share, equal to the excess of (A) the greater of (x) the highest
price-per-share of Company Stock paid in connection with such Change in
Control and (y) the Fair Market Value of a share of Company Stock on
the date of such Change in Control over (B) the exercise price of the
Stand-Alone SAR.
(iii) All payments under this Section 9(b) shall be made as soon
as practicable, but in no event later than five business days, after
the effective date of the exercise.
(c) Term and Exercise of Stand-Alone SARs
(i) Each Stand-Alone SAR shall be exercisable on such date or
dates, during such period and for such number of shares of Company
Stock as shall be determined by the Committee and set forth in the
agreement evidencing such Stand-Alone SAR; provided, however, that: (A)
if such agreement does not specify the date or dates on which the
Stand-Alone SAR will become exercisable, the shares subject to the
Stand-Alone SAR shall become exercisable in three equal installments on
each of the first, second and third anniversary of the day on which the
Stand-Alone SAR is granted; (B) no Stand-Alone SAR shall be exercisable
after the expiration of ten years from the date such Stand-Alone SAR
was granted; and (C) each Stand-Alone SAR shall be subject to earlier
termination, expiration or cancellation as provided in the Plan.
(ii) Each Stand-Alone SAR may be exercised in whole or in part;
provided, that no partial exercise of a Stand-Alone SAR shall be for an
aggregate exercise price of less than $1,000. The partial exercise of a
Stand-Alone SAR shall not cause the expiration, termination or
cancellation of the remaining portion thereof. Upon the partial
exercise of a Stand-Alone SAR, the agreement evidencing such
Stand-Alone SAR, marked with such notations as the Committee may deem
appropriate to evidence such partial exercise, shall be returned to the
Participant exercising such Stand-Alone SAR, together with the payment
described in Section 9(b)(i) or 9(b)(ii) hereof.
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(iii) A Stand-Alone SAR shall be exercised by delivering notice to
the Company's principal office, to the attention of its Secretary, no
less than five business days in advance of the effective date of the
proposed exercise. Such notice shall be accompanied by the applicable
agreement evidencing the Stand-Alone SAR, shall specify the number of
shares of Company Stock with respect to which the Stand-Alone SAR is
being exercised and the effective date of the proposed exercise, and
shall be signed by the Participant. The Participant may withdraw such
notice at any time prior to the close of business on the business day
immediately preceding the effective date of the proposed exercise, in
which case the agreement evidencing the Stand-Alone SAR shall be
returned to him.
(iv) Except as otherwise provided in an applicable agreement
evidencing a Stand-Alone SAR, during the lifetime of a Participant,
each Stand-Alone SAR granted to a Participant shall be exercisable only
by the Participant and no Stand-Alone SAR shall be assignable or
transferable otherwise than by will or by the laws of descent and
distribution. The Committee may, in any applicable agreement evidencing
a Stand-Alone SAR, permit a Participant to transfer all or some of the
Stand-Alone SAR to (A) the Participant's Immediate Family Members, (B)
a trust or trusts for the exclusive benefit of such Immediate Family
Members, or (C) other parties approved by the Committee in its absolute
discretion. Following any such transfer, any transferred Stand-Alone
SARs shall continue to be subject to the same terms and conditions as
were applicable immediately prior to the transfer.
(d) Effect of Termination of Employment
(i) Unless otherwise provided in any agreement evidencing a
Stand-Alone SAR, in the event that the Employment of a Participant with
the Company and its Affiliates shall terminate for any reason other
than Cause, Disability or death (A) Stand-Alone SARs granted to such
Participant, to the extent that they were exercisable at the time of
such Termination of Employment, shall remain exercisable until the
expiration of three months after such Termination of Employment, on
which date they shall expire, and (B) Stand-Alone SARs granted to such
Participant, to the extent that they were not exercisable at the time
of such Termination of Employment, shall expire at the close of
business on the date of such Termination of Employment; provided,
however, that no Stand-Alone SAR shall be exercisable after the
expiration of its term.
(ii) Unless otherwise provided in any agreement evidencing a
Stand-Alone SAR, in the event that the Employment of a Participant with
the Company and its Affiliates shall terminate on account of the
Disability or death of the Participant (A) Stand-Alone SARs granted to
such Participant, to the extent that they were exercisable at the time
of such Termination of Employment, shall remain exercisable until the
expiration of the original term as provided for in the Plan or as
specified in the agreement evidencing the Stand-Alone SAR, and (B)
Stand-Alone SARs granted to such Participant, to the extent that
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they were not exercisable at the time of such Termination of
Employment, shall expire at the close of business on the date of such
Termination of Employment.
(iii) In the event of a Participant's Termination of Employment
for Cause, all outstanding Stand-Alone SARs granted to such Participant
shall expire at the commencement of business on the effective date of
such Termination of Employment.
(e) Acceleration of Exercise Date Upon Change in Control
In the event a Participant's employment is terminated by the
Company, other than for Cause, on or after the occurrence of a Change in Control
but prior to the expiration of a six-month period following the Change in
Control, each Stand-Alone SAR granted under the Plan that is outstanding and
unexercisable immediately prior to such termination of employment shall become
fully and immediately exercisable and shall remain exercisable until its
expiration, termination or cancellation pursuant to the terms of the Plan.
10. RESTRICTED STOCK
The Committee may grant shares of Restricted Stock pursuant to the
Plan. Each grant of shares of Restricted Stock shall be evidenced by an
agreement in such form and containing such terms and conditions and subject to
such agreements or understandings as the Committee shall from time to time
approve. Each grant of shares of Restricted Stock shall comply with and be
subject to the following terms and conditions:
(a) Issue Date and Vesting Date
At the time of the grant of shares of Restricted Stock, the
Committee shall establish an Issue Date or Issue Dates and a Vesting Date or
Vesting Dates with respect to such shares. The Committee may divide such shares
into classes and assign a different Issue Date and/or Vesting Date for each
class. If the Committee does not specify a Vesting Date or Vesting Dates at the
time of the grant, the shares shall vest in three equal installments on the
first, second and third anniversary of the Issue Date. Except as provided in
Sections 10(c) and 10(f) hereof, upon the occurrence of the Issue Date with
respect to a share of Restricted Stock, a share of Restricted Stock shall be
issued in accordance with the provisions of Section 10(d) hereof. Provided that
all conditions to the vesting of a share of Restricted Stock imposed pursuant to
Section 10(b) hereof are satisfied, and except as provided in Sections 10(c) and
10(f) hereof, upon the occurrence of the Vesting Date with respect to a share of
Restricted Stock, such share shall vest and the restrictions of Section 10(c)
hereof shall cease to apply to such share.
(b) Conditions to Vesting
At the time of the grant of shares of Restricted Stock, the
Committee may impose such restrictions or conditions, not inconsistent with the
provisions hereof, to the vesting of such shares as it, in its absolute
discretion, deems appropriate. By way of example and not by way of
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limitation, the Committee may require, as a condition to the vesting of any
class or classes of shares of Restricted Stock, that the Participant or the
Company achieve such performance criteria as the Committee may specify at the
time of the grant of such shares.
(c) Restrictions on Transfer Prior to Vesting
Prior to the vesting of a share of Restricted Stock, no transfer
of a Participant's rights with respect to such share, whether voluntary or
involuntary, by operation of law or otherwise, shall vest the transferee with
any interest or right in or with respect to such share, but immediately upon any
attempt to transfer such rights, such share, and all of the rights related
thereto, shall be forfeited by the Participant and the transfer shall be of no
force or effect.
(d) Issuance of Certificates
(i) Except as provided in Sections 10(c) or 10(f) hereof,
reasonably promptly after the Issue Date with respect to shares of
Restricted Stock, the Company shall cause to be issued a stock
certificate, registered in the name of the Participant to whom such
shares were granted, evidencing such shares; provided, that the Company
shall not cause to be issued such a stock certificate unless it has
received a stock power duly endorsed in blank with respect to such
shares. Each such stock certificate shall bear the following legend:
The transferability of this certificate and the shares of stock
represented hereby are subject to the restrictions, terms and
conditions (including forfeiture provisions and restrictions
against transfer) contained in the 1999 THCG, Inc. Stock
Incentive Plan and an Agreement entered into between the
registered owner of such shares and THCG, Inc. A copy of the
Plan and Agreement is on file in the office of the Secretary of
THCG, Inc., 650 Madison Avenue, 21st Floor, New York, New York
10022.
Such legend shall not be removed from the certificate evidencing such shares
until such shares vest pursuant to the terms hereof.
(ii) Each certificate issued pursuant to Section 10(d)(i) hereof,
together with the stock powers relating to the shares of Restricted
Stock evidenced by such certificate, shall be deposited by the Company
with a custodian designated by the Company (which custodian may be the
Company). The Company shall cause such custodian to issue to the
Participant a receipt evidencing the certificates held by it which are
registered in the name of the Participant.
(e) Consequences Upon Vesting
Upon the vesting of a share of Restricted Stock pursuant to the
terms hereof, the
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restrictions of Section 10(c) hereof shall cease to apply to such share.
Reasonably promptly after a share of Restricted Stock vests pursuant to the
terms hereof, the Company shall cause to be issued and delivered to the
Participant to whom such shares were granted, a certificate evidencing such
share, free of the legend set forth in Section 10(d)(i) hereof, together with
any other property of the Participant held by the custodian pursuant to Section
16(b) hereof.
(f) Effect of Termination of Employment
(i) In the event that the Employment of a Participant with the
Company shall terminate for any reason (other than a termination that
is, or is deemed to have been, for Cause) prior to the vesting of
shares of Restricted Stock granted to such Participant, a proportion of
such shares, to the extent not forfeited or canceled on or prior to
such Termination of Employment pursuant to any provision hereof, shall
vest on the date of such Termination of Employment. The proportion
referred to in the preceding sentence shall initially be determined by
the Committee at the time of the grant of such shares of Restricted
Stock and may be based on the achievement of any conditions imposed by
the Committee with respect to such shares pursuant to Section 10(b).
Such proportion may be equal to zero. In the absence of any such
provision in an agreement evidencing an award of Restricted Stock, a
Participant's Termination of Employment with the Company and its
Affiliates for any reason (including death or Disability) shall cause
the immediate forfeiture of all shares of Restricted Stock that have
not vested as of the date of such Termination of Employment.
(ii) In the event a Participant's Employment is or is deemed to
have been terminated for Cause, all shares of Restricted Stock granted
to such Participant that have not vested as of the effective date of
such Termination of Employment immediately shall be forfeited.
(g) Effect of Change in Control
In the event a Participant's employment is terminated by the
Company, other than for Cause, on or after the occurrence of a Change in Control
but prior to the expiration of a six-month period following the Change in
Control, all shares of Restricted Stock which have not vested as of the date
immediately prior to such termination of employment (including those with
respect to which the Issue Date has not yet occurred), or have not been canceled
or forfeited pursuant to any provision hereof, immediately shall vest.
11. PHANTOM STOCK
The Committee may grant shares of Phantom Stock pursuant to the Plan.
Each grant of shares of Phantom Stock shall be evidenced by an agreement in such
form as the Committee shall from time to time approve. Each grant of shares of
Phantom Stock shall comply with and be subject to the following terms and
conditions:
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(a) Vesting Date
At the time of the grant of shares of Phantom Stock, the Committee
shall establish a Vesting Date or Vesting Dates with respect to such shares. The
Committee may divide such shares into classes and assign a different Vesting
Date for each class. If the Committee does not specify a Vesting Date or Vesting
Dates at the time of the grant, the shares shall vest in three equal
installments on the first, second and third anniversary of the date on which
such Phantom Stock was granted. Provided that all conditions to the vesting of a
share of Phantom Stock imposed pursuant to Section 11(c) hereof are satisfied,
and except as provided in Section 11(d) hereof, upon the occurrence of the
Vesting Date with respect to a share of Phantom Stock, such share shall vest.
(b) Benefit Upon Vesting
Upon the vesting of a share of Phantom Stock, a Participant shall
be entitled to receive, within 30 days after the date on which such share vests,
an amount in cash in a lump sum equal to the sum of (i) the Fair Market Value of
a share of Company Stock on the date on which such share of Phantom Stock vests
and (ii) the aggregate amount of cash dividends paid with respect to a share of
Company Stock the record date for which occurs during the period commencing on
the date on which the share of Phantom Stock was granted and terminating on the
date on which such share vests.
(c) Conditions to Vesting
At the time of the grant of shares of Phantom Stock, the Committee
may impose such restrictions or conditions, not inconsistent with the provisions
hereof, to the vesting of such shares as it, in its absolute discretion, deems
appropriate. By way of example and not by way of limitation, the Committee may
require, as a condition to the vesting of any class or classes of shares of
Phantom Stock, that the Participant or the Company achieve such performance
criteria as the Committee may specify at the time of the grant of such shares of
Phantom Stock.
(d) Effect of Termination of Employment
(i) In the event that the Employment of a Participant with the
Company and its Affiliates shall terminate for any reason (other than a
termination that is, or is deemed to have been, for Cause) prior to the
vesting of shares of Phantom Stock granted to such Participant, a
proportion of such shares, to the extent not forfeited or canceled on
or prior to such Termination of Employment pursuant to any provision
hereof, shall vest on the date of such Termination of Employment. The
proportion referred to in the
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preceding sentence initially shall be determined by the Committee at
the time of the grant of such shares of Phantom Stock and may be based
on the achievement of any conditions imposed by the Committee with
respect to such shares pursuant to Section 11(c). Such proportion may
be equal to zero. In the absence of any such provision in an agreement
evidencing an award of Phantom Stock, a Participant's Termination of
Employment with the Company and its Affiliates for any reason
(including death or Disability) shall cause the immediate forfeiture of
all shares of Phantom Stock that have not vested as of the date of such
Termination of Employment.
(ii) In the event a Participant's Employment is or is deemed to
have been terminated for Cause, all shares of Phantom Stock granted to
such Participant which have not vested as of the date of such
Termination of Employment immediately shall be forfeited.
(e) Effect of Change in Control
In the event a Participant's employment is terminated by the
Company, other than for Cause, on or after the occurrence of a Change in Control
but prior to the expiration of a six-month period following the Change in
Control, all shares of Phantom Stock which have not vested as of the date
immediately prior to such termination of employment, or have not been canceled
or forfeited pursuant to any provision hereof, immediately shall vest.
12. STOCK BONUSES
The Committee may grant Stock Bonuses in such amounts as it shall
determine from time to time. A Stock Bonus shall be paid at such time (including
a future date selected by the Committee at the time of grant) and subject to
such conditions as the Committee shall determine at the time of the grant of
such Stock Bonus. Certificates for shares of Company Stock granted as a Stock
Bonus shall be issued in the name of the Participant to whom such grant was made
and delivered to such Participant as soon as practicable after the date on which
such Stock Bonus is required to be paid. Prior to the date on which a Stock
Bonus awarded hereunder is required to be paid, such award shall constitute an
unfunded, unsecured promise by the Company to distribute Company Stock in the
future.
13. CASH BONUSES
The Committee may, in its absolute discretion, in connection with any
grant of Restricted Stock or Stock Bonus or at any time thereafter, grant a cash
bonus, payable promptly after the date on which the Participant is required to
recognize income for federal income tax purposes in connection with such grant
of Restricted Stock or Stock Bonus, in such amounts as the Committee shall
determine from time to time; provided, however, that in no event shall the
amount of a Cash Bonus exceed the Fair Market Value of the related shares of
Restricted Stock or Stock Bonus on such date. A Cash Bonus shall be subject to
such conditions as the Committee
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shall determine at the time of the grant of such Cash Bonus.
14. GRANT OF DIVIDEND EQUIVALENT RIGHTS
The Committee may, in its absolute discretion, in connection with any
Incentive Award (other than an award of shares of Phantom Stock), grant a
Dividend Equivalent Right entitling the Participant to receive amounts equal to
the ordinary dividends that would be paid on the shares of Company Stock covered
by such Incentive Award if such shares then were outstanding, during the time
such Incentive Award is outstanding and (a) in the case of Options and SARs,
during the time such Options or SARs are unexercised or (b) in the case of
Restricted Stock and Stock Bonuses, prior to the issue date for the related
shares of Company Stock. The Committee shall determine whether any Dividend
Equivalent Rights shall be payable in cash, in shares of Company Stock or in
another form, the time or times at which they shall be made, and such other
terms and conditions as the Committee shall deem appropriate. No Dividend
Equivalent Right shall be conditioned on the exercise of any Option or SAR.
15. OTHER EQUITY-BASED AWARDS
The Committee may grant other types of equity-based awards in such
amounts and subject to such terms and conditions, as the Committee shall in its
discretion determine, subject to the provisions of the Plan. Such Incentive
Awards may entail the transfer of actual shares of Company Stock to
Participants, or payment in cash or otherwise of amounts based on the value of
shares of Company Stock.
16. ADJUSTMENT UPON CHANGES IN COMPANY STOCK
(a) Shares Available for Grants
In the event of any change in the number of shares of Company
Stock outstanding by reason of any stock dividend or split, reverse stock split,
recapitalization, merger, consolidation, combination or exchange of shares or
similar corporate change, the maximum number of shares of Company Stock with
respect to which the Committee may grant Incentive Awards under Section 3 hereof
shall be appropriately adjusted by the Committee. In the event of any change in
the number of shares of Company Stock outstanding by reason of any other event
or transaction, the Committee may, but need not, make such adjustments in the
number and class of shares of Company Stock with respect to which Incentive
Awards may be granted under Section 3 hereof as the Committee may deem
appropriate.
(b) Outstanding Restricted Stock and Phantom Stock
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Unless the Committee in its absolute discretion otherwise
determines, any securities or other property (including dividends paid in cash)
received by a Participant with respect to a share of Restricted Stock, the Issue
Date with respect to which occurs prior to such event, but which has not vested
as of the date of such event, as a result of any dividend, stock split, reverse
stock split, recapitalization, merger, consolidation, combination, exchange of
shares or otherwise will not vest until such share of Restricted Stock vests,
and shall be promptly deposited with the custodian designated pursuant to
Paragraph 10(d)(ii) hereof.
The Committee may, in its absolute discretion, adjust any grant of
shares of Restricted Stock, the Issue Date with respect to which has not
occurred as of the date of the occurrence of any of the following events, or any
grant of shares of Phantom Stock, to reflect any dividend, stock split, reverse
stock split, recapitalization, merger, consolidation, combination, exchange of
shares or similar corporate change as the Committee may deem appropriate to
prevent the enlargement or dilution of rights of Participants under the grant.
(c) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Increase or Decrease in Issued
Shares Without Consideration
Subject to any required action by the stockholders of the Company,
in the event of any increase or decrease in the number of issued shares of
Company Stock resulting from a subdivision or consolidation of shares of Company
Stock or the payment of a stock dividend (but only on the shares of Company
Stock), or any other increase or decrease in the number of such shares effected
without receipt of consideration by the Company, the Committee shall
proportionally adjust the number of shares of Company Stock subject to each
outstanding Option, LSAR, Tandem SAR and Stand-Alone SAR, and the exercise
price-per-share of Company Stock of each such Option, LSAR, Tandem SAR and
Stand-Alone SAR and the number of any related Dividend Equivalent Rights.
(d) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Certain Mergers
Subject to any required action by the stockholders of the Company,
in the event that the Company shall be the surviving corporation in any merger
or consolidation (except a merger or consolidation as a result of which the
holders of shares of Company Stock receive securities of another corporation),
each Option, LSAR, Tandem SAR, Stand-Alone SAR and Dividend Equivalent Right
outstanding on the date of such merger or consolidation shall pertain to and
apply to the securities which a holder of the number of shares of Company Stock
subject to such Option, LSAR, Tandem SAR, Stand-Alone SAR or Dividend Equivalent
Right would have received in such merger or consolidation
(e) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
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Dividend Equivalent Rights -- Certain Other Transactions
In the event of (i) a dissolution or liquidation of the Company,
(ii) a sale of all or substantially all of the Company's assets, (iii) a merger
or consolidation involving the Company in which the Company is not the surviving
corporation or (iv) a merger or consolidation involving the Company in which the
Company is the surviving corporation but the holders of shares of Company Stock
receive securities of another corporation and/or other property, including cash,
the Committee shall, in its absolute discretion, have the power to:
(A) cancel, effective immediately prior to the occurrence of such
event, each Option (including each LSAR, Tandem-SAR or Dividend
Equivalent Right related thereto) and Stand-Alone SAR (including each
Dividend Equivalent Right related thereto) outstanding immediately
prior to such event (whether or not then exercisable), and, in full
consideration of such cancellation, pay to the Participant to whom such
Option or Stand-Alone SAR was granted an amount in cash, for each share
of Company Stock subject to such Option or Stand-Alone SAR,
respectively, equal to the excess of (x) the value, as determined by
the Committee in its absolute discretion, of the property (including
cash) received by the holder of a share of Company Stock as a result of
such event over (y) the exercise price of such Option or Stand-Alone
SAR; or
(B) provide for the exchange of each Option (including any related
LSAR, Tandem SAR or Dividend Equivalent Right) and Stand-Alone SAR
(including any related Dividend Equivalent Right) outstanding
immediately prior to such event (whether or not then exercisable) for
an option on or stock appreciation right and dividend equivalent right
with respect to, as appropriate, some or all of the property for which
such Option or Stand-Alone SAR is exchanged and, incident thereto, make
an equitable adjustment as determined by the Committee in its absolute
discretion in the exercise price of the option or stock appreciation
right, or the number of shares or amount of property subject to the
option, stock appreciation right or dividend equivalent right or, if
appropriate, provide for a cash payment to the Participant to whom such
Option or Stand-Alone SAR was granted in partial consideration for the
exchange of the Option or Stand-Alone SAR.
(f) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
Dividend Equivalent Rights -- Other Changes
In the event of any change in the capitalization of the Company or
a corporate change other than those specifically referred to in Sections 16(c),
(d) or (e) hereof, the Committee may, in its absolute discretion, make such
adjustments in the number and class of shares subject to Options, LSARs, Tandem
SARs, Stand-Alone SARs and Dividend Equivalent Rights outstanding on the date on
which such change occurs and in the per-share exercise price of each such
Option, LSAR, Tandem SAR and Stand-Alone SAR as the Committee may consider
appropriate to prevent dilution or enlargement of rights. In addition, if and to
the extent the
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Committee determines it is appropriate, the Committee may elect to cancel each
Option (including each LSAR, Tandem-SAR or Dividend Equivalent Right related
thereto) and Stand-Alone SAR (including each Dividend Equivalent Right related
thereto) outstanding immediately prior to such event (whether or not then
exercisable), and, in full consideration of such cancellation, pay to the
Participant to whom such Option or Stand-Alone SAR was granted an amount in
cash, for each share of Company Stock subject to such Option or Stand-Alone SAR,
respectively, equal to the excess of (i) the Fair Market Value of Company Stock
on the date of such cancellation over (ii) the exercise price of such Option or
Stand-Alone SAR
(g) No Other Rights
Except as expressly provided in the Plan, no Participant shall
have any rights by reason of any subdivision or consolidation of shares of stock
of any class, the payment of any dividend, any increase or decrease in the
number of shares of stock of any class or any dissolution, liquidation, merger
or consolidation of the Company or any other corporation. Except as expressly
provided in the Plan, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Company Stock subject to an Incentive Award or the exercise
price of any Option, LSAR, Tandem SAR or Stand-Alone SAR.
17. RIGHTS AS A STOCKHOLDER
No person shall have any rights as a stockholder with respect to any
shares of Company Stock covered by or relating to any Incentive Award granted
pursuant to this Plan until the date the Participant becomes the registered
owner of such shares. Except as otherwise expressly provided in Section 16
hereof, no adjustment to any Incentive Award shall be made for dividends or
other rights for which the record date occurs prior to the date such stock
certificate is issued.
18. NO SPECIAL EMPLOYMENT RIGHTS; NO RIGHT TO INCENTIVE AWARD
Nothing contained in the Plan or any Incentive Award shall confer upon
any Participant any right with respect to the continuation of his Employment by
the Company or interfere in any way with the right of the Company or an
Affiliate, subject to the terms of any separate employment agreement to the
contrary, at any time to terminate such Employment or to increase or decrease
the compensation of the Participant from the rate in existence at the time of
the grant of an Incentive Award.
No person shall have any claim or right to receive an Incentive Award
hereunder. The Committee's granting of an Incentive Award to a Participant at
any time shall neither require the Committee to grant an Incentive Award to such
Participant or any other Participant or other person at any time nor preclude
the Committee from making subsequent grants to such
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Participant or any other Participant or other person.
19. SECURITIES MATTERS
(a) The Company shall be under no obligation to effect the registration
pursuant to the Securities Act of any interests in the Plan or any shares of
Company Stock to be issued hereunder or to effect similar compliance under any
state laws. Notwithstanding anything herein to the contrary, the Company shall
not be obligated to cause to be issued or delivered any certificates evidencing
shares of Company Stock pursuant to the Plan unless and until the Company is
advised by its counsel that the issuance and delivery of such certificates is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Company Stock are
traded. The Committee may require, as a condition of the issuance and delivery
of certificates evidencing shares of Company Stock pursuant to the terms hereof,
that the recipient of such shares make such covenants, agreements and
representations, and that such certificates bear such legends, as the Committee,
in its sole discretion, deems necessary or desirable.
(b) The exercise of any Option granted hereunder shall be effective
only at such time as counsel to the Company shall have determined that the
issuance and delivery of shares of Company Stock pursuant to such exercise is in
compliance with all applicable laws, regulations of governmental authority and
the requirements of any securities exchange on which shares of Company Stock are
traded. The Committee may, in its sole discretion, defer the effectiveness of
any exercise of an Option granted hereunder in order to allow the issuance of
shares of Company Stock pursuant thereto to be made pursuant to registration or
an exemption from registration or other methods for compliance available under
federal or state securities laws. The Committee shall inform the Participant in
writing of its decision to defer the effectiveness of the exercise of an Option
granted hereunder. During the period that the effectiveness of the exercise of
an Option has been deferred, the Participant may, by written notice, withdraw
such exercise and obtain a refund of any amount paid with respect thereto.
20. WITHHOLDING TAXES
(a) Cash Remittance
Whenever shares of Company Stock are to be issued upon the
exercise of an Option, the occurrence of the Issue Date or Vesting Date with
respect to a share of Restricted Stock or the payment of a Stock Bonus, or in
connection with a Dividend Equivalent Right, the Company shall have the right to
require the Participant to remit to the Company, in cash, an amount sufficient
to satisfy the federal, state and local withholding tax requirements, if any,
attributable to such exercise, occurrence or payment prior to the delivery of
any certificate or certificates for such shares. In addition, upon the exercise
of an LSAR, Tandem SAR or Stand-Alone SAR, the grant of a Cash Bonus or the
making of a payment with respect to a share
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of Phantom Stock or a Dividend Equivalent Right, the Company shall have the
right to withhold from any cash payment required to be made pursuant thereto an
amount sufficient to satisfy the federal, state and local withholding tax
requirements, if any, attributable to such exercise or grant.
(b) Stock Remittance
At the election of the Participant, subject to the approval of the
Committee, when shares of Company Stock are to be issued upon the exercise of an
Option, the occurrence of the Issue Date or the Vesting Date with respect to a
share of Restricted Stock or the grant of a Stock Bonus, or a payment in
connection with a Dividend Equivalent Right, in lieu of the remittance required
by Section 20(a) hereof, the Participant may tender to the Company a number of
shares of Company Stock, the Fair Market Value of which at the tender date the
Committee determines to be sufficient to satisfy the federal, state and local
withholding tax requirements, if any, attributable to such exercise, occurrence,
grant or payment and not greater than the Participant's estimated total federal,
state and local tax obligations associated with such exercise, occurrence, grant
or payment.
(c) Stock Withholding
The Company shall have the right, when shares of Company Stock
are to be issued upon the exercise of an Option, the occurrence of the Issue
Date or the Vesting Date with respect to a share of Restricted Stock or the
grant of a Stock Bonus or a payment in connection with a Dividend Equivalent
Right, in lieu of requiring the remittance required by Section 20(a) hereof, to
withhold a number of such shares, the Fair Market Value of which at the exercise
date the Committee determines to be sufficient to satisfy the federal, state and
local withholding tax requirements, if any, attributable to such exercise,
occurrence, grant or payment and is not greater than the Participant's estimated
total federal, state and local tax obligations associated with such exercise,
occurrence, grant or payment.
21. AMENDMENT OR TERMINATION OF THE PLAN
The Board of Directors may, at any time, suspend or discontinue the
Plan or revise or amend it in any respect whatsoever; provided, however, that if
and to the extent required under Section 422 of the Code (if and to the extent
that the Board of Directors deems it appropriate to comply with Section 422) and
if and to the extent required to treat some or all of the Incentive Awards as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, (if and to the extent that the Board of Directors deems it appropriate to
meet such requirements), no amendment shall be effective without the approval of
the stockholders of the Company, that (a) except as provided in Section 16
hereof, increases the number of shares of Company Stock with respect to which
Incentive Awards may be issued under the Plan, (b)
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modifies the class of individuals eligible to participate in the Plan or (c)
materially increases the benefits accruing to individuals pursuant to the Plan.
Nothing herein shall restrict the Committee's ability to exercise its
discretionary authority hereunder pursuant to Section 4 hereof, which discretion
may be exercised without amendment to the Plan. No action under this Section 21
may, without the consent of a Participant, reduce the Participant's rights under
any previously granted and outstanding Incentive Award except to the extent that
the Board of Directors determines that such amendment is necessary or
appropriate to prevent such Incentive Awards from constituting "applicable
employee remuneration" within the meaning of Section 162(m) of the Code.
22. NO OBLIGATION TO EXERCISE
The grant to a Participant of an Option, LSAR, Tandem SAR or
Stand-Alone SAR shall impose no obligation upon such Participant to exercise
such Option, LSAR, Tandem SAR or Stand-Alone SAR.
23. TRANSFERS UPON DEATH
Upon the death of a Participant, outstanding Incentive Awards granted
to such Participant may be exercised only by the executors or administrators of
the Participant's estate or by any person or persons who shall have acquired
such right to exercise by will or by the laws of descent and distribution. No
transfer by will or the laws of descent and distribution of any Incentive Award,
or the right to exercise any Incentive Award, shall be effective to bind the
Company unless the Committee shall have been furnished with (a) written notice
thereof and with a copy of the will and/or such evidence as the Committee may
deem necessary to establish the validity of the transfer and (b) an agreement by
the transferee to comply with all the terms and conditions of the Incentive
Award that are or would have been applicable to the Participant and to be bound
by the acknowledgments made by the Participant in connection with the grant of
the Incentive Award. Except as provided in this Section 23, or in any applicable
agreement pursuant to Sections 6(d)(iv), 7(b)(iv), 8(b)(iv), or 9(c)(iv) of the
Plan, no Incentive Award shall be transferable, and Incentive Awards shall be
exercisable only by a Participant during the Participant's lifetime.
24. EXPENSES AND RECEIPTS
The expenses of the Plan shall be paid by the Company. Any proceeds
received by the Company in connection with any Incentive Award will be used for
general corporate purposes.
25. LIMITATIONS IMPOSED BY SECTION 162(M)
Notwithstanding any other provision hereunder, prior to a Change in
Control, if and to the extent that the Committee determines the Company's
federal tax deduction in respect of an Incentive Award may be limited as a
result of Section 162(m) of the Code, the Committee may
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take the following actions:
(a) With respect to Options, Tandem SARs, Stand-Alone SARs or Dividend
Equivalent Rights, the Committee may delay the payment in respect of such
Options, Tandem SARs, Stand-Alone SARs or Dividend Equivalent Rights until a
date that is within 30 days after the earlier to occur of (i) the date that
compensation paid to the Participant no longer is subject to the deduction
limitation under Section 162(m) of the Code and (ii) the occurrence of a Change
in Control. In the event that a Participant exercises an Option, Tandem SAR or
Stand-Alone SAR or would receive a payment in respect of a Dividend Equivalent
Right at a time when the Participant is a "covered employee," and the Committee
determines to delay the payment in respect of any such Incentive Award, the
Committee shall credit cash or, in the case of an amount payable in Company
Stock, the Fair Market Value of the Company Stock, payable to the Participant to
a book account. The Participant shall have no rights in respect of such book
account and the amount credited thereto shall not be transferable by the
Participant other than by will or laws of descent and distribution. The
Committee may credit additional amounts to such book account as it may determine
in its sole discretion. Any book account created hereunder shall represent only
an unfunded unsecured promise by the Company to pay the amount credited thereto
to the Participant in the future.
(b) With respect to Restricted Stock, Phantom Stock and Stock Bonuses,
the Committee may require the Participant to surrender to the Committee any
certificates with respect to Restricted Stock and Stock Bonuses and agreements
with respect to Phantom Stock, in order to cancel the awards of such Restricted
Stock, Phantom Stock and Stock Bonuses (and any related Cash Bonuses or Dividend
Equivalent Rights). In exchange for such cancellation, the Committee shall
credit to a book account a cash amount equal to the Fair Market Value of the
shares of Company Stock subject to such awards. The amount credited to the book
account shall be paid to the Participant within 30 days after the earlier to
occur of (i) the date that compensation paid to the Participant no longer is
subject to the deduction limitation under Section 162(m) of the Code and (ii)
the occurrence of a Change in Control. The Participant shall have no rights in
respect of such book account and the amount credited thereto shall not be
transferable by the Participant other than by will or laws of descent and
distribution. The Committee may credit additional amounts to such book account
as it may determine in its sole discretion. Any book account created hereunder
shall represent only an unfunded unsecured promise by the Company to pay the
amount credited thereto to the Participant in the future.
26. FAILURE TO COMPLY
In addition to the remedies of the Company elsewhere provided for
herein, a failure by a Participant (or beneficiary or permitted transferee) to
comply with any of the terms and conditions of the Plan or the agreement
executed by such Participant (or beneficiary or permitted transferee) evidencing
an Incentive Award, unless such failure is remedied by such Participant (or
beneficiary or permitted transferee) within ten days after having been notified
of such failure by the Committee, shall be grounds for the cancellation and
forfeiture of such Incentive Award,
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in whole or in part, as the Committee, in its absolute discretion, may
determine.
27. EFFECTIVE DATE OF PLAN
The Plan was adopted by the Board of Directors on , 1999, subject
to approval by the stockholders of the Company. Incentive Awards may be granted
under the Plan at any time prior to the receipt of such stockholder approval;
provided, however, that each such grant shall be subject to such approval.
Without limitation on the foregoing, no Option, LSAR, Tandem SAR or Stand-Alone
SAR may be exercised prior to the receipt of such approval, no share certificate
shall be issued pursuant to a grant of Restricted Stock or Stock Bonus prior to
the receipt of such approval and no Cash Bonus or payment with respect to a
Dividend Equivalent Right or share of Phantom Stock shall be paid prior to the
receipt of such approval. If the Plan is not so approved on or before [day
before 1st anniversary of date of adoption], 2000 then the Plan and all
Incentive Awards then outstanding under the Plan shall forthwith automatically
terminate and be of no force or effect.
28. TERM OF THE PLAN
The right to grant Incentive Awards under the Plan will terminate upon
the expiration of 10 years after the date the Plan was adopted.
29. APPLICATION OF INVESTMENT COMPANY ACT OF 1940
Any provision of this Plan that would conflict with a provision of
the Investment Company Act of 1940, to the extent applicable to the Company or
any Affiliate, shall have no force or effect.
30. FORFEITURE OF GAIN FROM AWARDS IN CERTAIN EVENTS
To the extent that a Participant breaches any restrictive covenant
applicable to the Participant (such as a noncompetition, nonsolicitation or
nondisclosure covenant) within [one year] after the date on which the
Participant exercises an Option, LSAR, Tandem SAR or Stand-Alone SAR, or the
date on which any Restricted Stock or Phantom Stock vests, or the date on which
the Participant realizes income with respect to any other Incentive Award (each
such event, a "Realization Event"), then any gain realized by the Participant
from the Realization Event shall be paid by the Participant to the Company
immediately upon notice from the Company. Such gain shall be determined as of
the date of the Realization Event, without regard to any subsequent change in
the Fair Market Value of a share of Company Stock. To the fullest extent
permitted by applicable law, the Company shall have the right to offset such
gain against any amounts otherwise owed to the Participant by the Company
(whether as wages, vacation pay or pursuant to any benefit plan or other
compensatory arrangement or otherwise).
31. APPLICABLE LAW
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Except to the extent preempted by any applicable federal law, the Plan
will be construed and administered in accordance with the laws of the State of
New York, without reference to the principles of conflicts of law.
34
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SUMMARY OF FEDERAL TAX CONSEQUENCES
The following is a description of the principal federal income
tax consequences of awards under the THCG Stock Incentive Plan based on present
federal tax laws. Federal tax laws may change from time to time and any
legislation that may be enacted in the future by the United States Congress may
significantly affect the federal income tax consequences described below. No
representation is or can be made regarding whether any such legislation will or
may be enacted and/or the impact of any such legislation. The description below
does not purport to be a complete description of the tax consequences associated
with awards under the THCG Stock Incentive Plan applicable to any particular
award recipient. Differences in each individual's financial situation may cause
federal, state and local tax consequences of awards to vary. Each recipient of
an award should consult his or her personal tax adviser about the detailed
provisions of the applicable tax laws and regulations. No employee of THCG is
authorized or permitted to give tax advice to any award recipient.
Non-Qualified Stock Options. In general, an optionee will not
be deemed to receive any income at the time an NQO is granted, nor will THCG be
entitled to a federal tax deduction at that time.
When an optionee exercises an NQO, the optionee will recognize
ordinary compensation income equal to the excess of (a) the fair market value of
the THCG Common Stock received as a result of the exercise of the option on the
exercise date over (b) the option exercise price, and THCG will be entitled to a
tax deduction in that amount. The shares acquired by the optionee upon exercise
of the NQO will have a tax basis equal to the fair market value of the shares on
the exercise date. Upon any subsequent sale of THCG Stock received on exercise
of the NQO, the optionee will recognize a capital gain (or loss) in an amount
equal to the difference between the amount realized on the sale and such tax
basis. Any such gain (or loss) will be characterized as long-term capital gain
(or loss) if the shares have been held for more than one year; otherwise, the
gain (or loss) will be characterized as a short-term capital gain (or loss). An
optionee's holding period for Federal income tax purposes for such shares will
commence on the date following the date of exercise. Short-term capital gain is
subject to tax at the same rate as is ordinary income. Under current law, the
rate at which net long-term capital gain will be taxed will vary depending on
the optionee's holding period and the date the optionee disposes of the shares.
The Internal Revenue Code currently provides that, in general, the net long-term
capital gain resulting from the sale of shares held for more than 12 months will
be subject to tax at a maximum rate of 20% (10% for individuals in the 15% tax
bracket). The Internal Revenue Code currently provides that net long-term
capital gain resulting from dispositions after December 31, 2000 of shares held
for more than 5 years may be subject to a reduced rate.
If all or any part of the exercise price of an NQO is paid by
the optionee with shares of common stock (including, based upon proposed
regulations under the Internal Revenue Code, shares previously acquired upon
exercise of an ISO), no gain or loss will be recognized by the optionee on the
shares surrendered in payment. The number of shares received on such exercise of
the NQO equal to the number of shares surrendered will have the same tax basis
and holding period, for purposes of determining whether subsequent dispositions
result in long-term or short-term capital gain or loss and the applicable tax
rates, as the basis and holding period of the shares surrendered. The balance of
the shares received on such exercise will be treated for federal income tax
purposes as described in the preceding paragraphs as though issued upon the
exercise of the NQO for an exercise price equal to the consideration, if any,
paid by the optionee in cash. The optionee's compensation taxable as ordinary
income upon such exercise, and THCG's deduction, will not be affected by whether
the exercise price is paid in cash or in shares of THCG Common Stock.
Incentive Stock Options. In general, an optionee will not be
deemed to receive any income at the time an ISO is granted or exercised if the
optionee does not dispose of the shares acquired on exercise of the ISO within
two years after the grant of the ISO and one year after the exercise of the ISO
(discussed more fully in the next paragraph). In such a case, the gain (if any)
on a subsequent sale (the excess of the amount received over the exercise price)
or loss (if any) on a subsequent sale (the excess of the exercise price over the
amount received) will be a long-term capital gain or loss and will be subject to
tax based on the holding period of the shares described in the discussion of
NQOs above. However, for purposes of computing the "alternative minimum tax"
applicable to an optionee, the optionee will include in the optionee's
alternative minimum taxable income the amount the optionee would have included
in income if the ISO were an NQO. Such amount may be subject to an alternative
minimum tax of 26% or 28%. Similarly, for purposes of making alternative minimum
tax calculations, the optionee's basis in the stock received on the exercise of
an ISO will be determined as if the ISO were an NQO.
If an optionee sells the shares acquired on exercise of an ISO
within two years after the date of grant of the ISO or within one year after the
exercise of the ISO, the disposition is a "disqualifying disposition," and the
optionee will recognize income in the year of the disqualifying disposition
equal to the excess of the amount received for the shares over the exercise
price. Of that income, the portion equal to the excess of the fair market value
of the shares at the time the ISO was exercised over the exercise price will be
treated as compensation to the optionee, taxable as ordinary income, and the
balance (if any) will be long- or short- term capital gain depending on whether
the shares were sold more than one year after the ISO was exercised. The federal
tax rate applicable to any long-term capital gain will depend upon the holding
period of the shares as described above. If the optionee sells the shares in a
disqualifying disposition at a price that is below the exercise price, the loss
will be a short-term capital loss if the optionee has held the shares for one
year or less and otherwise will be a long-term capital loss.
If an optionee uses shares acquired upon the exercise of an
ISO to exercise an ISO, and the sale of the shares so surrendered for cash on
the date of surrender would be a disqualifying disposition of such shares, the
use of such shares to exercise an ISO also would constitute a disqualifying
disposition. In such case, proposed regulations under the Internal Revenue Code
appear to provide that the tax consequences described above with respect to
disqualifying dispositions would apply, except that no capital gain would be
recognized with respect to such disqualifying disposition. In addition, the
basis of the surrendered shares would be allocated to the shares acquired upon
exercise of the ISO, and the holding period of the shares so acquired would be
determined, in a manner prescribed in proposed regulations under the Internal
Revenue Code.
THCG is not entitled to a deduction as a result of the grant
or exercise of an ISO. If the optionee has compensation taxable as ordinary
income as a result of a disqualifying disposition, THCG will be entitled to a
deduction in an amount equal to the compensation income resulting from the
disqualifying disposition in the taxable year of THCG in which the disqualifying
disposition occurs.
Stock Appreciation Rights. A recipient of a stock appreciation
right will not be deemed to receive any income at the time a stock appreciation
right is granted, nor will THCG be entitled to a deduction at that time.
However, when a stock appreciation right is exercised, the recipient will be
deemed to have received compensation taxable as ordinary income in an amount
equal to the amount of cash or fair market value of THCG Common Stock or other
property received. THCG will be entitled to a deduction in an amount equal to
the amount of ordinary income recognized by the recipient.
Restricted Stock. A grant of restricted shares of THCG Common
Stock will not result in income for the recipient or a tax deduction for THCG
until such time as the shares are no longer subject to a substantial risk of
forfeiture or restrictions on transferability (unless, as described below, the
recipient elects otherwise under Section 83(b) of the Code within 30 days of the
date of grant). Upon lapse or release of such restrictions, the recipient
generally will include in gross income an amount equal to the fair market value
of the shares less any amount paid for them, and THCG will be entitled to a tax
deduction in the same amount. The recipient's tax basis in the shares will equal
the income so recognized plus the amount paid for the shares. Any gain or loss
upon a subsequent disposition of the shares will be long-term capital gain or
loss if the shares are held for more than one year and otherwise will be
short-term capital gain or loss. The federal tax rate applicable to any
long-term capital gain will depend upon the holding period of the shares as
described above.
Pursuant to Section 83(b) of the Code, the recipient of a
restricted stock award may elect within 30 days of receipt of the award to be
taxed at ordinary income tax rates on the fair market value of the THCG Common
Stock comprising the award at the time of award. If the election is made, the
recipient will acquire a tax basis in the shares equal to the ordinary income
recognized by the recipient at the time of award plus any amount paid for the
shares and THCG will be entitled to a deduction in an amount equal to the amount
of ordinary income recognized by the recipient. No income will be recognized
upon lapse or release of the restrictions. Any gain or loss upon a subsequent
disposition of the shares will be long-term capital gain or loss if the shares
are held for more than one year and otherwise will be short-term capital gain or
loss. The federal tax rate applicable to any long-term capital gain will depend
upon the holding period of the shares. In the event of a forfeiture of the
shares with respect to which a recipient previously made a Section 83(b)
election, the recipient will not be entitled to a loss deduction.
Phantom Stock. A participant will not be deemed to receive any
income at the time shares of phantom stock are granted, nor will THCG be
entitled to a deduction at that time. However, when shares of phantom stock
vest, the participant will be deemed to have received compensation taxable as
ordinary income in the amount of the cash received. THCG will be entitled to a
deduction in an amount equal to the amount of ordinary income recognized by the
participant.
Stock Bonuses. In general, upon the receipt of a stock bonus,
a participant will be deemed to have received compensation taxable as ordinary
income in an amount equal to the fair market value of the stock at the time it
is received. THCG will be entitled to a deduction in an amount equal to the
amount of ordinary income recognized by the participant.
Upon any sale of shares of THCG Common Stock received as a
stock bonus, any gain (the excess of the amount received over the fair market
value of the shares on the date ordinary income was recognized) or loss (the
excess of the fair market value of the shares on the date ordinary income was
recognized over the amount received) will be a long-term capital gain or loss if
the sale occurs more than one year after such date of recognition and otherwise
will be a short-term capital gain or loss.
Cash Bonuses. Upon the receipt of a cash bonus, a participant
will be deemed to have received compensation taxable as ordinary income in the
amount of the cash received. THCG will be entitled to a deduction in an amount
equal to the amount of ordinary income recognized by the participant.
Dividend Equivalent Rights. The grant of dividend equivalent
rights will not result in income to the recipient or in a tax deduction for
THCG. When any amount is paid or distributed to recipient in respect of a
dividend equivalent right, the recipient will recognize ordinary income equal to
the fair market value of any property distributed and/or the amount of any cash
distributed, and THCG will be entitled to a tax deduction in the same amount at
such time.
Deduction Limit under Section 162(m) of the Code. In general,
Section 162(m) of the Code (the "Million Dollar Limit") provides that, subject
to certain exceptions, remuneration in excess of $1 million that is paid to
certain "covered employees" of a publicly held corporation (generally, the
corporation's Chief Executive Officer and its four most highly compensated
employees other than the Chief Executive Officer) will not be deductible by the
corporation. One such exception to the application of the Million Dollar Limit
is for compensation payable solely on account of the attainment of one or more
performance goals, but only if:
1. the performance goals are determined by a compensation
committee of the board of directors of the corporation which is comprised solely
of two or more outside directors;
2. the material terms under which the compensation is to be
paid, including the performance goals, are disclosed to shareholders and
approved by a majority of the vote in a separate shareholder vote before the
payment of such compensation; and
3. before any payment of such compensation, the compensation
committee certifies that the performance
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to emphasize performance related incentive compensation. The Compensation
Committee awarded no cash bonuses for 1998.
Walnut 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 Walnut'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 Walnut's actual economic performance during
the applicable fiscal year.
The Incentive Stock Option Committee (currently comprised of the same
members as the Compensation Committee) determines stock options to the
executives under the provisions of the Walnut Capital Corp. 1987 Stock Option
Plan, the NFS Services, Inc. 1989 Incentive Stock Plan and the 1994 Stock Plan
(collectively, the "Stock Plans"). When granted, such incentive awards provide
incentive to improve stockholder value over the long-term and to encourage and
facilitate executive stock ownership. In general, stock options are granted at
the market price of the Common Stock at the date of grant to ensure that
executives can only be rewarded for appreciation in the price of the Common
Stock when Walnut'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 Walnut, as well as Walnut'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 Walnut's tax return of compensation over $1 million to any
of the named executive officers of Walnut unless, in general, the compensation
is paid pursuant to a plan which is performance-related, non-discretionary and
has been approved by Walnut'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 Walnut's stockholders.
Submitted by the Compensation Committee:
Gene E. Burleson
William F. Burge, III
Solomon A. Weisgal
DIRECTOR COMPENSATION
During the 1998 fiscal year Walnut 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. Walnut reimburses the directors for
reasonable out-of-pocket expenses incurred in connection with their activities
on behalf of Walnut.
<PAGE> 363
In the past, if a director was re-elected, such director would receive, upon
such re-election, a 10-year option to purchase 1,000 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 1,666
shares of Common Stock at the market price at the time of grant.
Since Walnut's election to be regulated as a BDC, Walnut has been
prohibited from issuing such options.
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 Walnut or has any
other business relationship or affiliation with Walnut, except his service as a
director.
<PAGE> 364
WALNUT FINANCIAL SERVICES, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS ON [OCTOBER 12,1999]
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned appoints Joel S. Kanter and Joshua S. Kanter, or either
of them, with full powers of substitution, as proxies of the undersigned, with
the authority to vote upon and act with respect to all shares of common stock,
par value $.01 per share ("Common Stock"), of Walnut Financial Services, Inc.
("Walnut"), which the undersigned is entitled to vote, at the Special Meeting of
Stockholders of Walnut, [to be held at The Tower Club, 8000 Towers Crescent
Drive, Vienna, Virginia 22182, commencing Tuesday, October 12, 1999, at 10:00
a.m.] and at any and all adjournments thereof, with all the powers the
undersigned would possess if then and there personally present, and especially
(but without limiting the general authorization and power hereby given) with the
authority to vote on the following.
ITEM 1. APPROVAL OF THE MERGER AGREEMENT, MERGER 1 AND THE ISSUANCE OF THCG
COMMON STOCK IN CONNECTION WITH MERGER 2 (EACH AS DEFINED AND MORE FULLY
DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT; CAPITALIZED TERMS HAVE
THE MEANINGS ASCRIBED THERETO IN THE ACCOMPANYING PROXY STATEMENT).
FOR AGAINST ABSTAIN
ITEM 2. APPROVAL OF THE BDC DEREGISTRATION.
FOR AGAINST ABSTAIN
ITEM 3. APPROVAL OF THE CAPITAL INVESTMENT.
FOR AGAINST ABSTAIN
ITEM 4. APPROVAL OF THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION.
FOR AGAINST ABSTAIN
ITEM 5. APPROVAL OF THE UPLP ACQUISITION.
FOR AGAINST ABSTAIN
ITEM 6. APPROVAL OF THE THCG STOCK INCENTIVE PLAN.
FOR AGAINST ABSTAIN
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING OR AT ANY ADJOURNMENT THEREOF.
The undersigned hereby revokes any proxy or proxies heretofore given to
vote upon or act with respect to said stock and hereby ratifies and confirms all
that the proxies named herein and their substitutes, or any of them, may
lawfully do by virtue hereof.
This Proxy, when properly executed, will be voted as specified herein.
If a properly executed Proxy Card is submitted and no instructions are given,
the persons designated as proxy holders on the Proxy Card will vote (i) FOR the
adoption of the Merger Agreement, the approval of Merger 1 and the approval of
the issuance of THCG Common Stock in connection with Merger 2; (ii) FOR the
approval of the BDC Deregistration; (iii) FOR the approval of the Capital
Investment; (iv) FOR the approval of the Debt Conversion and the Compensation
Satisfaction; (v) FOR the approval of the UPLP Acquisition; (vi) FOR the
adoption of the THCG Stock Incentive Plan; (vii) FOR any adjournment of the
Special Meeting and (viii) in their own discretion with respect to any other
business that may properly come before the stockholders at the Special Meeting
or at any adjournment or postponement thereof. It is not anticipated that any
matters other than those set forth in the Proxy Statement will be presented at
the Special Meeting.
Signature of Stockholder
Dated:
NOTE: Please date proxy and sign it exactly as the name or names appear above.
All joint owners of shares should sign. State full title when signing as
executor, administrator, trustee, guardian, et cetera. Please return signed
proxy in the enclosed envelope.
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