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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:
[ ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] 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.
[ ] 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:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[X] 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:
$1,970.76
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(2) Form, schedule or registration statement no.:
000-26072
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(3) Filing party:
Walnut Financial Services, Inc.
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(4) Date filed:
August 13, 1999
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WALNUT FINANCIAL SERVICES, INC.
8000 TOWERS CRESCENT DRIVE
SUITE 1070
VIENNA, VIRGINIA 22182
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 1, 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 Monday, November 1, 1999 at 8:00 a.m. local time at The Tower Club,
8000 Towers Crescent Drive, 17th Floor, Vienna, Virginia 23182. At the Special
Meeting, the Walnut stockholders will be asked to consider and vote upon:
1. A proposal to approve the issuance of shares of common stock of
Walnut in connection with the merger of Tower Hill Acquisition Corp., a New York
corporation and a wholly-owned subsidiary of Walnut, with and into Tower Hill
Securities, Inc., a New York corporation, pursuant to the Amended and Restated
Agreement and Plan of Merger, dated as of August 5, 1999, among Walnut, Tower
Hill Acquisition Corp. and Tower Hill Securities, Inc.;
2. A proposal to approve a change in the nature of Walnut's business as
described in the accompanying Proxy Statement and the withdrawal by each of
Walnut, Walnut Capital Corp., Walnut Funds, Inc. and Universal Bridge Fund,
Inc., each a Delaware corporation and a wholly-owned subsidiary of Walnut, of
their elections to be regulated as business development companies under the
Investment Company Act of 1940, as amended;
3. A proposal to approve the issuance by Walnut of (a) at least
1,500,000 and up to 3,432,500 shares of common stock of Walnut at $2.00 per
share and (b) warrants to purchase up to 2,000,000 shares of common stock of
Walnut in one or more private placement transactions;
4. A proposal to approve the conversion of certain debts and accrued
liabilities of Walnut or its subsidiaries into common stock of Walnut valued at
$2.00 per share and the conversion of certain accrued compensation into 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
outstanding limited and general partnership interests in Universal Partners,
L.P., an Illinois limited partnership and an affiliate of Walnut;
6. A proposal to approve and adopt the Walnut Financial Services, Inc.
1999 Stock Incentive Plan;
7. A proposal to approve and adopt Walnut's Articles of Amendment and
Restatement, which shall take effect only upon consummation of the merger of
Tower Hill Securities, Inc. with and into Tower Hill Acquisition Corp.; and
8. 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 has fixed the close of business on September 21,
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
Joshua S. Kanter
Secretary
Vienna, Virginia
September 30, 1999
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
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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 NOVEMBER 1, 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 Monday, November 1, 1999, and
at any adjournments or postponements thereof (the "Special Meeting"). At the
Special Meeting, stockholders will be asked to:
o approve the issuance of shares of Walnut Common Stock, valued
at approximately $8,968,260.00 in the aggregate, in
connection with the merger (the "Merger") of Tower Hill
Acquisition Corp., a New York corporation and a wholly-owned
subsidiary of Walnut ("Newco"), with and into Tower Hill
Securities, Inc., a New York corporation ("Tower Hill"),
pursuant to the Amended and Restated Agreement and Plan 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 among Walnut, Newco and Tower Hill;
o approve a change in the nature of Walnut's business as
described in this Proxy Statement and the withdrawal by each
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
Fund, Inc., a Delaware corporation and a wholly-owned
subsidiary of Walnut ("Universal Bridge"), of their elections
to be regulated as business development companies ("BDCs")
under the Investment Company Act of 1940 (as amended, the
"1940 Act") (the change in the nature of Walnut's business
and the withdrawal are referred to collectively as the "BDC
Withdrawal");
o approve the issuance by Walnut of (a) at least 1,500,000 and
up to 3,432,500 shares of Walnut Common Stock at $2.00 per
share and (b) warrants to purchase up to 2,000,000 shares of
Walnut Common Stock in connection with one or more private
placement transactions (the "Capital Investment");
o approve the conversion of certain debts and accrued
liabilities of Walnut or its subsidiaries into Walnut Common
Stock valued at $2.00 per share (the "Debt Conversion") and
the conversion of accrued compensation of Burton W. Kanter,
Chairman of the Board of Walnut, into Walnut Common Stock
valued at $2.00 per share (the "Compensation Satisfaction");
o approve the acquisition (the "UPLP Acquisition") by Universal
Bridge of the outstanding limited and general partnership
interests in Universal Partners, L.P., an Illinois limited
partnership and an affiliate of Walnut ("UPLP");
o approve and adopt the Walnut Financial Services, Inc. 1999
Stock Incentive Plan (the "Walnut Stock Incentive Plan");
o approve and adopt Walnut's Articles of Amendment and
Restatement (the "Restated Charter"), which shall take effect
only upon consummation of the Merger; and
<PAGE> 5
o transact such other business as may properly be brought
before the Special Meeting or any adjournments or
postponements thereof.
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 issuance
of Walnut Common Stock in connection with the Merger will not be used to vote
for adjournment of the meeting.
In the event that the Walnut stockholders approve Proposal I but fail
to approve any of Proposals II through VII, the Merger will not be consummated
(despite the approval of the issuance of shares of Walnut Common Stock in
connection with the Merger), because conditions precedent to the Merger will not
have been fulfilled. Further, in the event that Proposal I is not approved by
the Walnut stockholders, none of Proposals II through VII will be consummated,
regardless of whether such proposals are approved by the Walnut stockholders, as
each of such proposals is contemplated as taking place solely in connection with
the Merger.
This Proxy Statement and the accompanying Notice of Special Meeting and
Proxy Card are being mailed on or about October 1, 1999 to the stockholders
of Walnut of record at the close of business on September 21, 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 APPROVAL OF THE ISSUANCE OF WALNUT
COMMON STOCK IN CONNECTION WITH THE MERGER; (ii) FOR THE APPROVAL OF THE BDC
WITHDRAWAL; (iii) FOR THE APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK AND
WARRANTS IN CONNECTION WITH 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 APPROVAL AND ADOPTION OF THE WALNUT STOCK
INCENTIVE PLAN; (vii) FOR THE APPROVAL AND ADOPTION OF THE RESTATED CHARTER;
(viii) FOR ANY ADJOURNMENT OF THE SPECIAL MEETING; AND (ix) 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
the approval and adoption of the Restated Charter. 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 Withdrawal. 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 each of (a) the issuance of Walnut Common Stock in connection
with the Merger, (b) the issuance of Walnut Common Stock and warrants in
connection with the Capital Investment, (c) the Debt Conversion, (d) the
Compensation Satisfaction, and (e) 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 the approval and adoption of the Walnut
Stock Incentive Plan and the approval of all other matters to be brought before
the stockholders at the Special Meeting. Under Section 2(a)(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
2
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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).
Proxies may be solicitated by officers, directors or associates of
Walnut, in person, by telephone or through other forms of communication. Such
persons will not receive additional compensation for their solicitation
services, although they will be reimbursed by Walnut for their reasonable
out-of-pocket expenses incurred in connection with such solicitation. In
addition, Tower Hill has retained MacKenzie Partners, Inc. to perform proxy
solicitation services. MacKenzie Partners is entitled to a fee not to exceed
$3,000, plus out-of-pocket expenses for its services, which amounts will be paid
by Tower Hill. 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 collectively owned 607,872 shares of Walnut Common Stock, representing
approximately 18.14% of the shares of Walnut Common Stock issued and outstanding
on the Record Date and entitled to vote at the Special Meeting. Pursuant to the
Merger Agreement, each of Windy City, Inc., Chicago Investments, Inc. and the
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 264,477 shares of Walnut Common Stock (which number includes
219,195 shares of Walnut Common Stock and options and warrants to purchase up to
45,282 shares of Walnut Common Stock), representing approximately 7.79% of the
shares of Walnut Common Stock issued and outstanding on the Record Date and
entitled to vote at the Special Meeting. The shares held by the Principal Walnut
Stockholders are included in the 607,872 shares of Walnut Common Stock owned by
members of the Board of Directors. 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 16, 1999. THE ENTIRE ANNUAL REPORT AND THE
QUARTERLY REPORTS, HOWEVER, ARE NOT PART OF THE PROXY SOLICITATION MATERIAL.
ADDITIONAL COPIES OF THE ANNUAL REPORT AND THE QUARTERLY REPORTS, 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 FOR A
VARIETY OF REASONS, INCLUDING THOSE SET FORTH IN "RISK FACTORS" ON PAGES 9 TO 12
OF THIS PROXY STATEMENT.
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TABLE OF CONTENTS
<TABLE>
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SUMMARY...................................................................................................................1
ACTION TO BE TAKEN; VOTES REQUIRED...............................................................................1
THE COMPANIES....................................................................................................1
Walnut..................................................................................................1
Tower Hill..............................................................................................2
Newco...................................................................................................2
MEETING INFORMATION..............................................................................................2
THE MERGER.......................................................................................................3
General Description.....................................................................................3
Consideration to be Paid by Walnut in the Merger........................................................3
Representations and Warranties..........................................................................3
Covenants...............................................................................................3
Conditions to Consummation of the Merger................................................................5
Termination.............................................................................................5
Certain Effects of the Merger...........................................................................6
Voting Agreement........................................................................................6
Opinion of Financial Advisor............................................................................6
Rights of Dissenting Stockholders.......................................................................6
Accounting Treatment of the Merger......................................................................6
Financial Data..........................................................................................6
THE BDC WITHDRAWAL...............................................................................................6
THE CAPITAL INVESTMENT...........................................................................................7
THE DEBT CONVERSION AND COMPENSATION SATISFACTION................................................................7
THE UPLP ACQUISITION.............................................................................................7
THE WALNUT STOCK INCENTIVE PLAN..................................................................................7
THE RESTATED CHARTER.............................................................................................8
RISK FACTORS..............................................................................................................9
Conflicts of Interest of Certain Current and Proposed Directors and Executive Officers..................9
Concentration of Share Ownership........................................................................9
Potential Adverse Effects of Combining Operations.......................................................9
Inability to Accurately Predict Transaction Costs......................................................10
Changes in Senior Management and Control of Board of Directors.........................................10
Limitations on Changes in Control......................................................................10
No Dividends...........................................................................................10
Availability of Significant Amounts of Walnut Common Stock for Sale....................................11
Sale of Walnut Common Stock Below Current Net Asset Value..............................................11
Dependence on Key Personnel............................................................................11
Limited Operating History..............................................................................11
Uncertainty of the Industry............................................................................11
NASD Regulation of Tower Hill..........................................................................11
Risks Associated with the 1940 Act.....................................................................12
Legal Proceedings affecting Tower Hill.................................................................12
</TABLE>
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PROPOSAL I APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE MERGER.................................13
BUSINESS OF WALNUT..............................................................................................13
General................................................................................................13
Walnut Capital.........................................................................................15
UPLP...................................................................................................15
Pacific Financial and Inland Financial.................................................................16
Walnut Funds...........................................................................................16
Walnut Consulting......................................................................................16
Competition............................................................................................17
BDC Regulation.........................................................................................17
SBA Regulation.........................................................................................17
Employees..............................................................................................19
Property...............................................................................................20
Legal Proceedings......................................................................................20
BUSINESS OF TOWER HILL..........................................................................................20
General................................................................................................20
History................................................................................................20
Services...............................................................................................20
Commissions............................................................................................22
Competitive Conditions.................................................................................23
Clients................................................................................................23
Government Regulation..................................................................................23
Employees..............................................................................................23
Properties.............................................................................................24
Legal Proceedings......................................................................................24
Certain Relationships and Related Transactions.........................................................24
BACKGROUND OF THE MERGER........................................................................................25
PRINCIPAL REASONS FOR THE MERGER................................................................................27
POTENTIAL NEGATIVE FACTORS ASSOCIATED WITH THE MERGER...........................................................27
OPINION OF FINANCIAL ADVISOR....................................................................................28
THE MERGER AGREEMENT............................................................................................33
General Description....................................................................................34
Effective Time of the Merger...........................................................................34
Conversion of Securities...............................................................................34
Treatment of Stock Options.............................................................................34
Exchange of Stock Certificates.........................................................................34
Effect of the Merger on Certain Corporate Matters of Tower Hill........................................35
Representations and Warranties.........................................................................35
</TABLE>
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Covenants..............................................................................................36
Conditions to Consummation of the Merger...............................................................42
Termination............................................................................................44
Amendment and Waiver...................................................................................45
Fees and Expenses......................................................................................45
TIMING OF THE TRANSACTIONS......................................................................................45
Events Taking Place Prior to the Effective Time of the Merger..........................................45
Events Taking Place at the Effective Time of the Merger................................................46
Events Taking Place After the Effective Time of the Merger and Prior to the BDC
Withdrawal.........................................................................................46
Events Taking Place Upon the Effectiveness of the BDC Withdrawal.......................................46
EQUITY OWNERSHIP OF WALNUT......................................................................................47
MANAGEMENT OF WALNUT FOLLOWING THE MERGER.......................................................................47
DESCRIPTION OF WALNUT CAPITAL STOCK.............................................................................50
INTERESTS OF CERTAIN PERSONS IN THE MERGER......................................................................50
Receipt of Securities..................................................................................50
Purchase of Options....................................................................................50
Debt Conversion and Compensation Satisfaction..........................................................50
UPLP Acquisition.......................................................................................51
Consulting Agreements..................................................................................51
Employment Agreements..................................................................................52
Board Positions........................................................................................54
Indemnification and Insurance..........................................................................54
ACCOUNTING TREATMENT OF THE MERGER..............................................................................54
REGULATORY APPROVALS............................................................................................54
MARKET PRICE INFORMATION AND DIVIDEND POLICY....................................................................54
Market Price Information of Walnut.....................................................................54
Market Price Information of Tower Hill.................................................................55
Dividend Policy........................................................................................55
PRO FORMA PER SHARE DATA........................................................................................55
SELECTED FINANCIAL INFORMATION..................................................................................56
Walnut Financial Information...........................................................................56
Tower Hill Financial Data..............................................................................57
Pro Forma Combined Financial Data......................................................................58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................60
OVERVIEW........................................................................................................60
HISTORICAL OPERATING RESULTS OF WALNUT..........................................................................60
Results of Operations for the Six Months Ended June 30, 1999 and 1998..................................60
Results of Operations for the Three Months Ended June 30, 1999 and 1998................................60
Results of Operations for the Fiscal Years Ended December 31, 1998 and December 31,
1997...............................................................................................61
Results of Operations for the Fiscal Years Ended December 31, 1997 and December 31,
1996...............................................................................................61
LIQUIDITY AND CAPITAL RESOURCES.................................................................................62
Liquidity and Capital Resources of Walnut Capital......................................................62
Liquidity and Capital Resources of Walnut (excluding Walnut Capital)...................................63
INVESTMENT PORTFOLIO CHANGES....................................................................................64
</TABLE>
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YEAR 2000 COMPLIANCE............................................................................................64
PRO FORMA CAPITALIZATION OF WALNUT..............................................................................65
PROPOSAL II APPROVAL OF THE BDC WITHDRAWAL...............................................................................66
Procedure for Withdrawal...............................................................................66
1940 Act Regulations Applicable to Business Development Companies......................................66
Change in Walnut's Business; Reasons for the BDC Withdrawal............................................67
Effect of the BDC Withdrawal...........................................................................68
PROPOSAL III APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK AND WARRANTS IN CONNECTION WITH THE CAPITAL
INVESTMENT..........................................................................................................69
INITIAL PRIVATE PLACEMENT.......................................................................................69
General................................................................................................69
Warrants...............................................................................................69
Rights Granted to GSCP.................................................................................70
ADDITIONAL PRIVATE PLACEMENT....................................................................................70
REASONS FOR THE CAPITAL INVESTMENT..............................................................................71
EFFECT OF THE CAPITAL INVESTMENT................................................................................71
PROPOSAL IV APPROVAL OF THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION............................................72
Description of the Debt Conversion and the Compensation Satisfaction...................................72
Reasons for the Debt Conversion and the Compensation Satisfaction......................................72
1940 Act Regulations Relating to Affiliate Transactions................................................72
PROPOSAL V APPROVAL OF THE UPLP ACQUISITION..............................................................................74
UPLP...................................................................................................74
Acquisition of the Outstanding UPLP Partnership Interests..............................................74
Reasons for the UPLP Acquisition.......................................................................74
Dissolution of UPLP....................................................................................75
PROPOSAL VI APPROVAL AND ADOPTION OF THE WALNUT STOCK INCENTIVE PLAN.....................................................76
DESCRIPTION OF THE WALNUT STOCK INCENTIVE PLAN..................................................................76
General Description of Plan............................................................................76
Summary of Awards Available Under the Walnut Stock Incentive Plan......................................77
Transferability........................................................................................80
Certain Corporate Changes..............................................................................80
Income Tax Withholding.................................................................................80
Limitations Imposed by Section 162(m)..................................................................80
Forfeiture of Gain from Awards in Certain Events.......................................................80
Application of 1940 Act................................................................................81
ISSUANCE OF OPTIONS.............................................................................................81
RESTRICTED STOCK GRANTED PURSUANT TO THE WALNUT STOCK INCENTIVE PLAN............................................81
NEW PLAN BENEFITS...............................................................................................81
SUMMARY OF FEDERAL TAX CONSEQUENCES.............................................................................82
PRINCIPAL REASONS TO APPROVE AND ADOPT THE WALNUT STOCK INCENTIVE PLAN..........................................85
PROPOSAL VII APPROVAL AND ADOPTION OF THE RESTATED CHARTER...............................................................86
Significant Changes Resulting from the Approval and Adoption of the Restated Charter...................86
</TABLE>
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Principal Reasons to Approve and Adopt the Restated Charter............................................87
Significant Changes Resulting from the Adoption of the Restated Bylaws.................................88
CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT.......................................................................89
Section 16(a) Beneficial Ownership Reporting Compliance................................................91
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT...............................................................91
Summary Compensation...................................................................................91
Options and Other Awards...............................................................................92
Employment Agreements with Management..................................................................93
Stock Performance Graph................................................................................93
Report of the Compensation Committee...................................................................94
Director Compensation..................................................................................95
Compensation Committee Interlocks and Insider Participation............................................96
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................................................96
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................................100
OTHER MATTERS...........................................................................................................101
Solicitation of Proxies...............................................................................101
Stockholder Proposals.................................................................................101
Other Matters.........................................................................................101
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS
--------
<S> <C>
EXHIBIT A AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER BY AND AMONG WALNUT FINANCIAL SERVICES,
INC., TOWER HILL ACQUISITION CORP. AND TOWER HILL SECURITIES, INC.
EXHIBIT B FAIRNESS OPINION
EXHIBIT C ARTICLES OF AMENDMENT AND RESTATEMENT OF WALNUT FINANCIAL SERVICES, INC.
EXHIBIT D AMENDED AND RESTATED BYLAWS OF THCG, INC. (FORMERLY KNOWN AS WALNUT FINANCIAL SERVICES, INC.)
EXHIBIT E WALNUT FINANCIAL SERVICES, INC. 1999 STOCK INCENTIVE PLAN
</TABLE>
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 9 through 12 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 (a) the issuance of Walnut Common Stock in connection with the
Merger, (b) the BDC Withdrawal, (c) the issuance of Walnut Common Stock and
warrants in connection with the Capital Investment, (d) the Debt Conversion, (e)
the Compensation Satisfaction, (f) the UPLP Acquisition, (g) the adoption of the
Walnut Stock Incentive Plan and (h) the adoption of the Restated Charter.
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 and
adopt the Restated Charter. The affirmative vote of a majority (as defined
under the 1940 Act) of all shares entitled to vote is required to approve the
BDC Withdrawal. The affirmative vote of a majority (as defined under the
1940 Act) of both (x) holders of outstanding shares entitled to vote and (y)
holders of outstanding shares entitled to vote not held by affiliated persons
are required to approve each of (a) the issuance of Walnut Common Stock in
connection with the Merger, (b) the issuance of Walnut Common Stock and
warrants in connection with the Capital Investment, (c) the Debt Conversion,
(d) the Compensation Satisfaction and (e) the UPLP Acquisition. Pursuant to the
1940 Act, "majority" 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. The affirmative vote of the holders of a
majority of the votes cast with a quorum present at the Special Meeting will be
required to approve and adopt the Walnut Stock Incentive Plan.
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. Members of Walnut's Board of Directors
collectively own 607,872 shares of Walnut Common Stock, representing
approximately 18.14% of the shares outstanding as of the Record Date and
entitled to vote at the Special Meeting. Pursuant to the Voting Agreement, the
Principal Walnut Stockholders (each of which is an entity affiliated 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 264,477
shares of Walnut Common Stock (which number includes 219,195 shares of Walnut
Common Stock and options and warrants to purchase 45,282 shares of Walnut Common
Stock), representing approximately 7.79% of the shares outstanding as of the
Record Date and entitled to vote at the Special Meeting, which shares are
included in the 607,872 shares owned by members of the Board of Directors. 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
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
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<PAGE> 13
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 provided
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 registered broker-dealer and a member of the National
Association of Securities Dealers ("NASD"), provides investment banking services
and related general financial advisory 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.
NEWCO
Newco is a New York corporation and a wholly-owned subsidiary of Walnut
that was formed solely for the purpose of facilitating the Merger.
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 on Monday, November 1 at The Tower
Club, 8000 Towers Crescent Drive, 17th Floor, Vienna, Virginia 22182, and at any
postponement or adjournment of the Special Meeting.
Only holders of record of Walnut Common Stock at the close of business
on September 21, 1999 are entitled to notice of and to vote at the Special
Meeting.
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<PAGE> 14
THE MERGER
GENERAL DESCRIPTION
In the Merger, Newco is to merge with and into Tower Hill, with Tower
Hill continuing as the surviving corporation and a wholly-owned subsidiary of
Walnut under the name "Tower Hill Securities, Inc." The Merger shall become
effective (the "Effective Time") upon the proper filing of a certificate of
merger with the New York Secretary of State. At the Effective Time, each share
of common stock of Newco (the "Newco Common Stock") issued and outstanding
immediately prior to the Effective Time is to be automatically converted into
and exchanged for one share of common stock of Tower Hill (the "Tower Hill
Common Stock"), and each share of Tower Hill Common Stock issued and outstanding
immediately prior to the Effective Time is to be converted into and exchanged
for 37,228.145 shares of Walnut Common Stock, plus additional shares as
described in the Merger Agreement. As a result of the Merger, the former
stockholders and employees of Tower Hill will own an aggregate of approximately
37.6% of the Walnut Common Stock issued and outstanding after the Merger, after
taking into account the Capital Investment (assuming 3,432,500 shares are issued
in the Capital Investment and excluding options and warrants). For a further
discussion of the Merger, see "PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT
COMMON STOCK IN CONNECTION WITH THE MERGER--THE MERGER AGREEMENT--General
Description."
CONSIDERATION TO BE PAID BY WALNUT IN THE MERGER
In the Merger, the stockholders of Tower Hill will receive 37,228.145
shares of Walnut Common Stock for each share of Tower Hill Common Stock held by
them, or a total of 3,722,815 shares of Walnut Common Stock. In addition,
372,281 restricted shares of Walnut Common Stock will be issued to Shai Novik,
an employee of Tower Hill. Based on a market value of the Walnut Common Stock of
$2.19 per share as of August 4, 1999, the total value of the consideration to be
paid by Walnut in connection with the Merger is approximately $8,968,260.00. See
"PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH
THE MERGER--OPINION OF FINANCIAL ADVISOR."
REPRESENTATIONS AND WARRANTIES
Each of Walnut 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 "PROPOSAL I--APPROVAL
OF THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE MERGER--THE MERGER
AGREEMENT--Representations and Warranties."
COVENANTS
Each of Walnut and Tower Hill has made certain covenants in the Merger
Agreement relating to the conduct of its respective businesses prior to the
Merger.
In addition, Walnut has made certain covenants regarding the following
matters:
o The withdrawal by each of Walnut, Walnut Capital, Walnut
Funds and Universal Bridge of their elections to be regulated
as BDCs under the 1940 Act immediately after the Effective
Time and the LLC Merger (as defined below);
o The consummation of the Capital Investment;
o The consummation of the Debt Conversion and the Compensation
Satisfaction;
o 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;
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<PAGE> 15
o The dissolution by Universal Bridge of UPLP following the
UPLP Acquisition;
o The use of commercially reasonable efforts to cause Chicago
Advisory Group to enter into a consulting agreement with
Inland Financial and to cause Windy City, Inc. ("Windy
City"), an affiliate of Walnut, to enter into a consulting
agreement with Walnut;
o The submission for stockholder approval by Walnut of the
Walnut Stock Incentive Plan, and subject to Walnut
stockholder approval and adoption of the Walnut Stock
Incentive Plan, the grant of options to purchase up to
1,250,000 shares of Walnut Common Stock to certain officers,
directors and employees of Walnut and its affiliates and
certain principals and officers of Tower Hill upon the
effectiveness of the BDC Withdrawal;
o The purchase by Walnut of certain outstanding options to
purchase Walnut Common Stock held by certain officers and
directors of Walnut;
o 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;
o Upon the effectiveness of the BDC Withdrawal, the sale by
Walnut of its marketable securities and the revaluation of
its portfolio of non-marketable securities, as appropriate;
o The relinquishment by Walnut Capital of its license from the
SBA to operate as an SBIC;
o The termination of the oral sublease between Walnut and Windy
City for premises located in Vienna, Virginia;
o The repayment of (a) debentures owed to SBIC Funding Corp.
and (b) Walnut's line of credit with American National Bank
and Trust Company of Chicago ("ANB"), using the proceeds of
the Capital Investment;
o The approval and adoption of (a) the Restated Charter,
subject to stockholder approval and adoption of the Restated
Charter, and (b) the adoption of the Amended and Restated
Bylaws of Walnut Financial Services, Inc. (the "Restated
Bylaws"); and
o Upon the filing of the Restated Charter, the establishment of
a classified Board of Directors, the increase in the size of
the Board of Directors, the resignation of certain current
directors and the appointment of individuals to fill vacancies
in the Board of Directors as provided in the Merger Agreement.
In addition, Tower Hill has made certain covenants regarding the following
matters:
o The use of 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;
o The use of commercially reasonable efforts to cause each of
Joseph D. Mark, Shai Novik and Adi Raviv, who are the current
principals and officers of Tower Hill, to enter into
employment agreements with Walnut;
o The use of commercially reasonable efforts to obtain the
consent of Shai Novik to the cancellation of his options to
purchase Tower Hill Common Stock;
o The redemption or cancellation of all outstanding shares of
preferred stock of Tower Hill;
o 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 and (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 (the "LLC Merger");
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<PAGE> 16
o 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;"
o The use of commercially reasonable efforts to cause Adi Raviv
to obtain 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; and
o The use of commercially reasonable efforts to cause Carnegie
Partners to transfer certain securities of RTImage Ltd. to
Tower Hill, provided, that if such securities are not so
transferred, the cash purchase price for these securities
shall remain an asset of Tower Hill.
The covenants of Walnut and Tower Hill are discussed further in the Proxy
Statement under "PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN
CONNECTION WITH THE MERGER--THE MERGER AGREEMENT--Covenants."
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of the parties to consummate the Merger are
subject to numerous conditions, including stockholder approval of certain
transactions contemplated by the Merger Agreement. In particular, Tower Hill's
obligation to consummate the Merger is contingent on (a) the satisfaction of the
covenants of Walnut to close into escrow the Capital Investment, the Debt
Conversion, the Compensation Satisfaction and the UPLP Acquisition, (b) the
approval of the BDC Withdrawal and (c) the approval and adoption of the Walnut
Stock Incentive Plan and the Restated Charter. Certain of these conditions are
described further under the discussions of Proposals II through VII in this
Proxy Statement, as well as under "PROPOSAL I--APPROVAL OF THE ISSUANCE OF
WALNUT COMMON STOCK IN CONNECTION WITH THE MERGER--THE MERGER
AGREEMENT--Conditions to Consummation of the Merger."
TERMINATION
The Merger Agreement may be terminated prior to the effective time of
the Merger as follows: (a) by the mutual written consent of Walnut and Tower
Hill; (b) by either Walnut or Tower Hill, if the Merger has 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 any of the 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, material
breach by Walnut 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.
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<PAGE> 17
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, (a) the separate corporate existence
of Newco will cease and Tower Hill will continue as the surviving corporation
and a wholly-owned subsidiary of Walnut; (b) each share of Newco Common Stock
issued and outstanding immediately prior to the Effective Time will be converted
into and exchanged for one share of Tower Hill Common Stock; (c) each share of
Tower Hill Common Stock issued and outstanding immediately prior to the
Effective Time will be converted into and exchanged for 37,228.145 shares of
Walnut Common Stock plus additional shares as provided in the Merger Agreement;
(d) each outstanding option to purchase shares of Tower Hill Common Stock held
by Shai Novik will be canceled, with the intent that Shai Novik shall receive a
grant of 372,281 restricted shares of Walnut Common Stock under the Walnut Stock
Incentive Plan; (e) the certificate of incorporation of Tower Hill, as in effect
immediately prior to the Effective Time, will be the certificate of
incorporation of the surviving corporation; (f) the bylaws of Tower Hill, as in
effect immediately prior to the Effective Time, will be the bylaws of the
surviving corporation; (g) the directors and officers of Tower Hill immediately
preceding the Effective Time will be the directors and officers of the surviving
corporation; and (h) options to purchase an aggregate of 1,250,000 shares of
Walnut Common Stock will be issued to certain of the current officers, directors
and employees of Walnut and its affiliates and of 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 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 issuance of Walnut Common Stock in
connection with 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 Merger 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 "PROPOSAL
I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE
MERGER--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 the issuance of Walnut Common Stock in
the Merger.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a "purchase" transaction, as a
reverse acquisition.
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 Merger, are contained in this Proxy Statement beginning on page
F-1.
THE BDC WITHDRAWAL
Under the Merger Agreement, immediately after the Effective Time and
the LLC Merger, Walnut will file with the SEC a Form N-54C pursuant to Section
54(c) of the 1940 Act (the "Form N-54C") on behalf of each of Walnut, Walnut
Capital, Walnut Funds and Universal Bridge to withdraw their elections to be
regulated as BDCs under the 1940 Act. Following the withdrawal of such
elections, Walnut will conduct business as an operating company and does not
intend to be subject to the 1940 Act. Prior to the BDC Withdrawal, Walnut
Capital, Walnut Funds and Universal Bridge, will merge with
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<PAGE> 18
and into Tower Hill LLC in an effort to consolidate all of Walnut's portfolio
investments into one entity. For a further discussion of the BDC Withdrawal, see
"PROPOSAL II--APPROVAL OF THE BDC WITHDRAWAL."
THE CAPITAL INVESTMENT
Under the Merger Agreement, Walnut has agreed to use its commercially
reasonable efforts to issue (a) at least 1,500,000 and up to 3,432,500 shares of
Walnut Common Stock at $2.00 per share and (b) warrants to purchase up to (i)
1,000,000 shares of Walnut Common Stock at an exercise price of at least $3.00
per share and (ii) 1,000,000 shares of Walnut Common Stock at an exercise price
of at least $4.00 per share in one or more private placement transactions for
cash to one or more investor groups, consisting solely of accredited investors.
In connection with the Capital Investment, Walnut has entered into a non-binding
letter of intent with Greenwich Street Capital Partners II, L.P., a private
equity fund ("GSCP"), pursuant to which GSCP (or its designated affiliates) is
to acquire 2,500,000 shares of Walnut Common Stock at $2.00 per share and the
warrants as described above. The Capital Investment will be closed into escrow
simultaneously with the closing of the Merger. The only condition to the release
of such escrow shall be the BDC Withdrawal. As a result of the Capital
Investment, GSCP and any additional investor group(s) will collectively own
approximately 31.6% of the Walnut Common Stock outstanding immediately following
the Effective Time if 3,432,500 shares are issued in connection with the Capital
Investment excluding any options or warrants and approximately 36.8% of the
Walnut Common Stock outstanding immediately after the Effective Time on a
fully-diluted basis if 3,432,500 shares are issued in connection with the
Capital Investment, taking into account all outstanding options and warrants.
For a further discussion of the Capital Investment, see "PROPOSAL III--APPROVAL
OF THE ISSUANCE OF WALNUT COMMON STOCK AND WARRANTS IN CONNECTION WITH THE
CAPITAL INVESTMENT."
THE DEBT CONVERSION AND COMPENSATION SATISFACTION
Under the Merger Agreement, Walnut has agreed to use its commercially
reasonable efforts to pay in cash or convert (a) certain indebtedness and
accrued liabilities of Walnut or its subsidiaries, including certain
indebtedness owing to affiliates, in the aggregate principal amount of
$1,093,000 (plus any interest accrued thereon) and (b) certain accrued
compensation owed to Burton W. Kanter, into shares of Walnut Common Stock valued
at $2.00 per share as reasonably determined by Tower Hill. The Debt Conversion
and the Compensation Satisfaction shall each be closed into escrow
simultaneously with the closing of the Merger. The only condition to the release
of each escrow shall be the BDC Withdrawal. 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, Walnut has agreed to use its commercially
reasonable efforts to cause Universal Bridge to acquire 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 thereafter to
dissolve UPLP. The UPLP Acquisition shall be closed into escrow simultaneously
with the closing of the Merger. The only condition to the release of such escrow
shall be the BDC Withdrawal. For a further discussion of the UPLP Acquisition,
see "PROPOSAL V--APPROVAL OF THE UPLP ACQUISITION."
THE WALNUT STOCK INCENTIVE PLAN
Under the Merger Agreement, Walnut has agreed, prior to the Effective
Time, to adopt and submit to the Walnut stockholders for approval, a stock
incentive plan, providing for the issuance of incentive awards covering up to
2,250,000 shares of Walnut Common Stock. Upon the effectiveness of the BDC
Withdrawal, Walnut shall grant, subject to approval and adoption of the Walnut
Stock Incentive Plan by the Walnut stockholders, options to purchase up to
1,250,000 shares of Walnut Common Stock to certain of the current officers,
directors and employees of Walnut and its affiliates and of Tower Hill. For a
further discussion of the Walnut Stock Incentive Plan, see "PROPOSAL VI--
APPROVAL AND ADOPTION OF THE WALNUT STOCK INCENTIVE PLAN."
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THE RESTATED CHARTER
Under the Merger Agreement, Walnut has agreed to approve and adopt the
Restated Charter, unanimously recommend that the Walnut stockholders approve and
adopt the Restated Charter, and has agreed to submit to the Walnut stockholders
for approval and adoption the Restated Charter. Subject to the receipt of the
requisite stockholder approval, the Restated Charter will be filed with the
State of Utah Department of Commerce, Division of Corporations and Commercial
Code immediately after the Effective Time. For a further discussion of the
Restated Charter, see "PROPOSAL VII--APPROVAL AND ADOPTION OF THE RESTATED
CHARTER."
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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 certain of the
transactions proposed in this Proxy Statement because certain officers and
directors of Walnut have interests in, and will receive 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, certain entities
affiliated with executive officers of Walnut will enter into consulting
agreements in connection with the Merger. See "PROPOSAL I--APPROVAL OF THE
ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE MERGER--INTERESTS OF
CERTAIN PERSONS IN THE MERGER."
In addition, pursuant to the Merger Agreement, Walnut has agreed to
convert certain debts and accrued liabilities of Walnut and its subsidiaries
into cash or Walnut Common Stock valued at $2.00 per share, as reasonably
determined by Tower Hill, 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, as reasonably determined by Tower Hill. See "PROPOSAL I--APPROVAL OF
THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE MERGER--INTERESTS OF
CERTAIN PERSONS IN THE MERGER" and "PROPOSAL IV--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 own in aggregate
approximately 34.2% of the issued and outstanding shares of Walnut Common Stock
(assuming the issuance of 3,432,500 shares in the Capital Investment and
excluding any options or warrants). In addition, Shai Novik, an employee of
Tower Hill, will receive 372,281 restricted shares of Walnut Common Stock in
connection with the Merger. As a result, former stockholders and employees of
Tower Hill will own in aggregate approximately 37.6% of the Walnut Common Stock
after consummation of the Merger, the Capital Investment and the other
transactions contemplated by the Merger Agreement (including the 3,722,815
shares issued to the Tower Hill stockholders and the 372,281 shares issued to
Shai Novik, assuming the issuance of 3,432,500 shares in the Capital Investment
and excluding any options or warrants). Further, in connection with the Capital
Investment, GSCP will acquire approximately 23.0% of the Walnut Common Stock
following the completion of the transactions contemplated by the Merger
Agreement, assuming 3,432,500 shares are issued in the Capital Investment and
excluding any warrants and approximately 30.5% of the Walnut Common Stock
outstanding on a fully-diluted basis, taking into account all outstanding
options and warrants. Accordingly, following the consummation of the Merger, a
large percentage of the Walnut Common Stock issued and outstanding 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 Walnut's stockholders for approval.
POTENTIAL ADVERSE EFFECTS OF COMBINING OPERATIONS
Walnut's Board of Directors approved the Merger Agreement with the
expectation that the Merger will result in a number of benefits to Walnut,
including operating efficiencies, revenue enhancements and other synergies.
However, as a result of the Merger, the management of the combined company will
be faced with unfamiliar business issues. Following the consummation of the
Merger and the effectiveness of the BDC Withdrawal, Walnut's business which is
conducted through its wholly-owned subsidiaries, will change from that of a BDC
under the 1940 Act to that of an operating company. In addition, pursuant to the
Merger, Tower Hill, which will continue to operate as a broker-dealer under the
rules of NASD, will become a wholly-owned subsidiary of Walnut, adding a new
business line to Walnut. Furthermore, the current management of Tower Hill, all
of whom will take on management positions with Walnut upon consummation of the
Merger, have no experience with Walnut's factoring business. While the
consulting agreements to be entered into between Walnut and Windy City (an
entity of which Joel S. Kanter, the current President and Chief Executive
Officer of Walnut, is president) and between Inland Financial and Chicago
Advisory Group (an entity of which Robert Mauer, the current Chief Financial
Officer and Treasurer of Walnut, is an employee) will give the new management of
Walnut some assistance with learning Walnut's factoring business, these
consulting agreements will expire after twelve months unless renewed, and there
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is no assurance that they will be renewed. Therefore, in addition to the
standard integration problems that may arise as the operations of Walnut and
Tower Hill are combined (discussed below), the management of the combined
company may have to spend significant amounts of time learning the basic
operations of the factoring business. 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 Walnut following the
Merger.
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 affect 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 Merger,
Walnut and Tower Hill will incur combined transaction costs of between $600,000
and $1,000,000, including fees in connection with obtaining the fairness opinion
discussed below and legal and accounting fees. Walnut will be forced to bear
its own 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 Merger, Joseph D. Mark and Adi Raviv will
become the Co-Chief Executive Officers and directors of Walnut, and Shai Novik
will become the Chief Operating Officer of Walnut. 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 current operations of
Walnut's factoring business. As a result of their positions within Walnut, these
individuals will have substantial influence and control over matters to be
considered by Walnut'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, Messrs. Mark and Raviv 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 Restated Charter and Restated Bylaws will contain a number of
provisions that may limit the ability of outside parties to acquire control of
the combined company. Commencing at the Effective Time, Walnut 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 Walnut, 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 Walnut Common Stock for a period of twelve months
after the Effective Time, subject to certain exceptions. Those provisions could
discourage or make more difficult a merger, tender offer or similar transaction
involving Walnut.
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 Walnut
Common Stock in the near or foreseeable future.
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AVAILABILITY OF SIGNIFICANT AMOUNTS OF WALNUT COMMON STOCK FOR SALE
Up to 3,432,500 shares of Walnut Common Stock, plus warrants to
purchase up to 2,000,000 shares of Walnut Common Stock (all of which will be
immediately exercisable), may be issued in connection with the Capital
Investment, the Debt Conversion, the Compensation Satisfaction and the UPLP
Acquisition. In addition, approximately 4,095,096 shares of Walnut Common Stock
will be issued in connection with the Merger. 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 Walnut Common
Stock.
SALE OF WALNUT COMMON STOCK BELOW CURRENT NET ASSET VALUE
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
Effective Time. 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 Merger, Walnut will be highly dependent on the services
of its executive officers and other key personnel. Attracting and retaining
qualified personnel is critical to Walnut's business plan. Should Walnut 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 Walnut pursuant to the
Merger Agreement, these employment agreements may be terminated by them under
certain circumstances (see "PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT
COMMON STOCK IN CONNECTION WITH THE MERGER--INTERESTS OF CERTAIN PERSONS IN THE
MERGER--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 the Merger, 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.
NASD REGULATION OF TOWER HILL
After the Merger, 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
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material adverse effect on the financial condition and operating results of the
combined company. "PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK
IN CONNECTION WITH THE MERGER--BUSINESS OF TOWER HILL--Government Regulation."
RISKS ASSOCIATED WITH THE 1940 ACT
Following the Merger, Walnut will act as a holding company for its
wholly-owned operating subsidiaries, Tower Hill, Pacific Financial and Inland
Financial, and will also own Tower Hill LLC (through its ownership of Tower
Hill), which will hold the portfolio investments of the combined company as a
result of the LLC Merger. Although it is possible that, for a short period of
time, Walnut may own investment securities having a value exceeding 40% of the
value of its total assets (exclusive of government securities and cash items) on
any unconsolidated basis, and may therefore meet the definition of an
"investment company" under the 1940 Act, the Board of Directors believes that
Walnut will not be deemed an "investment company" by virtue of the "primarily
engaged" exemption under Section 3(b)(1) of the 1940 Act. This statutory
exclusion provides that, even if a company owns investment securities having a
value exceeding 40% of its total assets, it may not be an investment company if
it in fact is directly or indirectly (through wholly-owned subsidiaries)
"primarily engaged" in a non-investment company business. While the Board of
Directors believes that, upon consummation of the Merger, Walnut will be
primarily engaged--through its wholly-owned subsidiaries--in a business other
than owning securities, the applicability of the "primarily engaged" exclusion
is determined on a case-by-case basis, and it is possible that Walnut may be
deemed by the SEC to be an investment company subject to the 1940 Act. In the
event that the SEC determines that Walnut cannot take advantage of the primarily
engaged exclusion, the Board of Directors believes that Walnut could rely on
Rule 3a-2 of the 1940 Act, which deems an issuer otherwise subject to the 1940
Act not to be subject to the registration requirements of the 1940 Act for up to
one year if certain conditions are met. However, it is possible that the SEC may
disagree with the Board's conclusion that this safe harbor is available to
Walnut, thus subjecting Walnut to the risk that it should have registered as an
investment company under the 1940 Act following the BDC Withdrawal and that
therefore Walnut may be in violation of the 1940 Act. Such a violation could
lead to penalties and other enforcement action by the SEC.
LEGAL PROCEEDINGS AFFECTING TOWER HILL
Yoav Bitter, a former employee and stockholder of Tower Hill, recently
brought an action against Tower Hill, seeking (among other things) judicial
dissolution of Tower Hill. While Mr. Bitter's relief was denied by the New York
Supreme Court, Mr. Bitter has filed a notice of appeal with the Appellate
Division of the Supreme Court of the State of New York, seeking a reversal of
this denial. See "PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN
CONNECTION WITH THE MERGER--BUSINESS OF TOWER HILL--Legal Proceedings." Although
Walnut's Board of Directors has been advised that Mr. Bitter's claims lack
merit, there is no assurance that this litigation will not be decided in Mr.
Bitter's favor. A judicial dissolution of Tower Hill would, among other
things, lead to a loss of Tower Hill's NASD registration and impede the combined
company's ability to engage in the broker-dealer business.
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PROPOSAL I
APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK
IN CONNECTION WITH THE MERGER
Stockholders are being asked to consider and vote upon a proposal to
approve the issuance of shares of Walnut Common Stock in connection with the
merger of Newco into Tower Hill.
Under the Merger Agreement, 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").
Under Utah corporate law, the Merger does not require approval by the
stockholders of Walnut. However, the corporate governance rules of the Nasdaq
National Market, on which the Walnut Common Stock is 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. The Merger involves the issuance of 4,095,096 shares of Walnut
Common Stock (including the restricted shares of Walnut Common Stock to be
issued to Shai Novik), which is in excess of 20% of the shares of Walnut Common
Stock issued and outstanding immediately prior to the Merger and the Capital
Investment. In addition, the 1940 Act requires approval by both (a) the holders
of a majority of outstanding voting securities and (b) 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. 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. As of June 30, 1999, Walnut
had net assets applicable to outstanding shares of Walnut Common Stock of
$8,510,353.82, and had 3,350,533 shares of Walnut Common Stock outstanding,
yielding a net asset value of $2.54 per share. Because the shares issued in
connection with the Merger will be valued at $2.00 per share, their issuance
requires approval under the 1940 Act.
If the issuance of Walnut Common Stock in connection with the Merger is
approved by the requisite stockholder vote, Walnut intends to consummate the
Merger as soon as practicable thereafter. However, if any of Proposals II
through VII contained in this Proxy Statement is not approved by stockholders,
conditions precedent to the Merger will not be fulfilled and the Merger will not
be consummated.
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, through its subsidiaries, currently 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.
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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 stockholders of Walnut Capital acquired
Walnut in a reverse acquisition (the "Business Combination") in which such
stockholders 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 until October 15, 1997, 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.
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. See
"PROPOSAL II--APPROVAL OF THE BDC WITHDRAWAL."
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
stockholders 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 that 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 investments in wholly-owned subsidiaries.
Because of such reporting requirements, the operating results of Inland
Financial and Pacific Financial are not
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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 "--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.
Walnut Capital has the contractual right to appoint a member of, or an
observer to, the boards of directors of a number of companies in which it holds
investments. 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 $5.0 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, 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.
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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 a
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
2.0% 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, 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 general partner of Walnut Growth
and is the 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.
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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 promulgated thereunder.
Generally, to be eligible to elect BDC status, a company must engage in
the business of furnishing capital and offering significant managerial
assistance to companies that do not have ready access to capital through
conventional financial channels. Such portfolio companies are termed "eligible
portfolio companies." More specifically, in order to qualify as a BDC, a company
must (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 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 Merger, will no longer be subject
to the 1940 Act; however, there can be no assurance that Walnut will be 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 WITHDRAWAL" for
a further discussion of how the 1940 Act has impacted Walnut and further
discussion of the withdrawal process.
SBA REGULATION
Walnut Capital is licensed to operate as an 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. The
maturity of the remaining debentures having a face amount of $2,000,000 has been
extended to December 1,
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1999, subject to earlier demand by the SBA. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
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 Businesses." A "Small Business," as defined in the SBIA 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 Business 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 fiscal 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. An SBIC has an obligation, as to 20% of the
dollar amount of its financings, to also finance smaller businesses, i.e.
companies whose net worth and average net income, as determined above, does not
exceed $6 million and $2 million, respectively. The SBA regulations prohibit an
SBIC from providing funds to a Small Business for certain purposes, such as for
certain purchases of securities and real estate.
Under the SBA regulations, loans to Small Business 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 Business 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 Businesses 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 Business in the form of debt,
an SBIC receiving financial assistance from the SBA in the form of so-called
"Participating Securities" can provide equity funding to a Small Business. Under
prior SBA rules an SBIC receiving financial assistance through the purchase or
guarantee of its debentures could also make equity investments in Small
Businesses. This is no longer the case. Walnut Capital has not been licensed to
issue participating securities. 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 Business by
prepayment or maturity. A mandatory 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 above cost. 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 prohibit an SBIC from controlling a Small Business.
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 Business with fewer than 50 stockholders, 50% or more of the outstanding
voting securities and, (ii) in the case of a Small Business 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, there has been a material breach of the
financing documents and under certain other circumstances. However, a plan to
relinquish such control within a reasonable period (not to exceed five 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 Business and the affiliates of the
Small Business to 20% of Walnut Capital's "Regulatory 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
Business. The burden is on Walnut Capital to show that its terms are at least as
favorable as those extended to the affiliate, and the transactions which are
subject to this burden of proof are those extended contemporaneously with Walnut
Capital's financing or within six months before or after the financing extended
by Walnut Capital.
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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 (though this
conclusion will change following the Merger and the BDC Withdrawal). These
restrictions on Walnut Capital may substantially limit the ability of Walnut to
pay dividends in the future or operate profitably. 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 Capital had violated
Sections 107.903(b)(1) and (d) of the SBIA by financing an associate
(as defined in the SBIA) and paying fees to an associate. Additionally, the SBA
had issued a finding that Walnut Capital 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 Capital had violated
Section 107.700 of the SBIA, by purchasing securities from a big business as
defined under the SBIA. Walnut Capital 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 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 Capital 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 Capital
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 none of these findings nor the failure to timely
file will have a 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.
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 is represented by a collective
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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 "--INTERESTS OF CERTAIN PERSONS IN THE MERGER."
LEGAL PROCEEDINGS
Walnut is not presently involved as a plaintiff or defendant in any
material legal action.
BUSINESS OF TOWER HILL
GENERAL
Tower Hill, a registered broker-dealer and a member of the NASD,
provides investment banking services and related general financial advisory
services to early-stage to post-IPO Internet 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, which
subsequently changed its name to Hambro America Securities, Inc. and ultimately
to Tower Hill Securities, Inc. 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.
HISTORY
Prior to April 1998, Tower Hill 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. 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.
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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. In the
first six months of 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:
o Preparing and drafting comprehensive private offering
documents for distribution to potential investors;
o Identifying and qualifying potential strategic and financial
investors worldwide;
o Soliciting and negotiating with selected potential investors;
o Assessing the merits, potential problems and relative
attractiveness of various offers;
o Negotiating conditions to obtain commitments from investors;
and
o 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. In the first six months of
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:
o Identifying and qualifying potential purchasers and
acquisition targets worldwide;
o Assisting in discussions and negotiations with potential
purchasers and targets, their owners and professional
advisors;
o Assisting with due diligence review and evaluation of a
purchaser and target;
o Preparing financial analyses and valuations of a purchaser
and target and of any potential consolidated entity;
o Determining the appropriate capital structure for the
transaction; and
o 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. In the
first six months of 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:
o 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;
o Assessing the potential financial market impact of each
corporate finance alternative;
o Presenting the results of the analyses and recommending the
most advantageous capital alternatives given the client's
overall objectives;
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o Preparing and drafting comprehensive information materials
and other communications to stockholders, debtholders,
potential investors and other interested parties; and
o Assisting with the implementation and execution of the chosen
alternatives, including negotiations with stockholders 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:
o Providing management consulting services, including business
development, marketing strategy and corporate relations;
o Identifying potential partners for strategic relationships
and joint ventures;
o 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;
o 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
o 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, purchase 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 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
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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 steel exchange and marketplace; an Internet
portal providing interactive education and 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 net capital and a regulatory net capital
requirement of $892,393 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 $1,000,000 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
$50,000 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 their transactions.
EMPLOYEES
As of June 30, 1999, Tower Hill employed a total of 13 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.
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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, among other things, 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, among other things, 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
Department 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 NASD 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. On
September 9, 1999, Mr. Bitter filed an answer and counterclaim seeking damages
in the aggregate amount of $158,500.
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, through
their ownership of Tower Hill Capital Group, LLC.
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 Merger, 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.
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
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<PAGE> 36
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, LLC, 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, LLC entered into an agreement with Tower Hill, dated
June 15, 1999, pursuant to which Tower Hill Capital Group, LLC 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, LLC pursuant to
the options. In addition, Tower Hill Capital Group, LLC has sold to Tower Hill
options to purchase certain warrants held by Tower Hill Capital Group, LLC,
which options were exercised on June 15, 1999.
Tower Hill Capital Group, LLC has established an employee bonus pool in
which certain employees of Tower Hill Capital Group, LLC 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,
LLC, Tower Hill Capital Group, LLC has agreed that any distributions from the
employee bonus pool shall be made by, and are the exclusive liability of, Tower
Hill Capital Group, LLC. In addition, in the event any employee receives an
amount from Tower Hill in respect of the employee bonus pool, Tower Hill Capital
Group, LLC 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 shares of preferred stock and warrants issued by RTImage, Ltd.
from Carnegie Partners for a purchase price of $64,751, plus interest thereon,
subject to consummation of the Merger. Adi Raviv owns 50% of Carnegie Partners.
In the event that Carnegie Partners is unable to effect such transfer, the
purchase price of the RTImage, Ltd. preferred stock and warrants shall remain an
asset of Tower Hill.
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 Merger. Adi Raviv owns 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" below.
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 Merger, 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 $82,237.18, will be
forgiven prior to the consummation of the Merger. The loan to Mr. Raviv, in the
amount of $82,237.18, will be either repaid or forgiven pursuant to the Merger
Agreement. The loan to Mr. Bitter is in the amount of $54,824.79. See "--Legal
Proceedings" above.
BACKGROUND OF THE MERGER
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 Merger 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.
25
<PAGE> 37
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 an initial
merger agreement (the "Original 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 Merger 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 Original 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 Merger 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, Newco and Tower Hill executed the Original
Agreement on August 5, 1999 and Gruntal subsequently delivered its written
opinion that the consideration to be paid by Walnut in connection with the
Merger 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.
Throughout August and early September, pursuant to the authorization
granted to it by the Board of Directors, Walnut's management, together with its
counsel, continued to discuss the structure of the transaction with the
principals of Tower Hill. In response to discussions that took place between the
SEC and counsel to Walnut, the parties determined that it was in the best
interests of their respective companies to revise the structure of the
transaction (eliminating a planned migratory merger). In addition, the SEC
advised counsel to the parties of changes required in the procedure for
effecting the BDC Withdrawal. The Board of Directors met telephonically on
September 21, 1999, at which time the Board approved the revised terms of the
transaction and authorized management to execute any and all documentation
relating to the transaction. The Board also discussed the finalization of proxy
materials regarding the transaction, approved the definitive proxy materials,
with certain modifications suggested by legal counsel, and approved the
submission of the proxy materials to stockholders. Also, on September 21, 1999,
the Board of Directors, through a unanimous written consent, set the date for
the Special Meeting at November 1, 1999, and set a Record Date of September 21,
1999. On September 27, 1999, the Board of Directors met telephonically and
determined, after discussion and deliberation, that the economic and other
material terms of the proposed transaction had not changed from those set forth
in the Original Agreement and, as a result, decided to proceed with the
transaction as restructured without obtaining an update to the fairness opinion
issued by Gruntal. Also on September 27, 1999, the parties executed the
Merger Agreement, effective as of August 5, 1999.
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<PAGE> 38
PRINCIPAL REASONS FOR THE MERGER
The Walnut Board of Directors believes that the terms of the Merger
Agreement and the Merger are fair to, and in the best interests of, Walnut and
its stockholders and, by unanimous vote, approved the Merger Agreement and the
transactions contemplated thereby. The Walnut Board of Directors has considered
and discussed the terms of the Merger Agreement and the Merger and reviewed
various business, financial and legal considerations related to the transactions
contemplated by the Merger Agreement (see "BACKGROUND OF THE MERGER"). In
reaching its decision to approve the Merger Agreement and the transactions
contemplated thereby and to recommend that the Walnut stockholders vote for the
Merger Agreement and the transactions contemplated thereby, the Walnut Board of
Directors considered, among other things, the following factors:
o The Board reviewed historical and projected information
concerning Tower Hill's business, prospects, financial
performance and condition, management and competitive
position.
o The Board considered that the Merger could improve Walnut's
competitive position by increasing the level of its
resources, thus enabling Walnut to engage in future
investment opportunities that may currently be unavailable to
it given its current size and level of capitalization.
o The Board considered that a merger with an operating company
in the financial services industry would enable Walnut to
change 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.
o 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 Merger. The Board considered favorably that
the terms of the Merger Agreement are reasonable and
protective of Walnut's interests.
o The Board reviewed pro forma financial data for the combined
company after giving effect to the Merger, and considered
favorably the expectation that the combined company may be
able to realize synergies in its combined operations.
o 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.
o The Board considered the ability of Walnut's stockholders to
participate 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:
o The Board considered the significant costs involved in
connection with the negotiation of and consummation of the
Merger, and the substantial management time and effort
required to effectuate the Merger.
o The Board considered that the anticipated benefits of the
Merger, 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.
o The Board considered the substantial reduction of current
stockholders' percentage ownership interest and effective
voting power following the consummation of the Merger, which
could affect the market price of the Walnut Common Stock.
o The Board considered the lack of appraisal rights for
Walnut's current stockholders in connection with the Merger.
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<PAGE> 39
o 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 five of the initial nine 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 Merger. Further, in view of the variety of factors considered
by the Board in connection with its evaluation of the Merger, 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
GENERAL
On July 8, 1999, the 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 that, as of such date and
based upon and subject to certain matters stated therein, the consideration to
be paid by Walnut to the stockholders of Tower Hill in the Merger is fair from a
financial point of view to the stockholders of Walnut.
The full text of Gruntal's opinion letter, dated August 5, 1999, is
attached as Exhibit B to this Proxy Statement. Stockholders should 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's advisory services and opinion were provided for the
information and assistance of the Board of Directors in connection with the
consideration to be paid in the Merger. The Gruntal opinion is not intended to
be and does not constitute a recommendation to any stockholder of Walnut as to
how such stockholder should vote on the Merger, 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:
o reviewed a draft of the Original Agreement, dated as of
August 5, 1999, and, for purposes hereof, has assumed that
the final form thereof will not differ in any material
respect from such draft;
o reviewed such available information concerning Walnut and
Tower Hill as they believed was relevant to their 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;
o reviewed certain financial and operating information with
respect to the business, operations and prospects of Walnut
and Tower Hill furnished to Gruntal by Walnut and Tower Hill;
o reviewed certain financial and other information regarding
Tower Hill's portfolio investments supplied by Tower Hill;
o reviewed the historical stock prices and trading volumes of
the Walnut Common Stock;
o compared the historical results of the operations of Walnut
and Tower Hill with those of certain publicly traded
companies which Gruntal deemed to be reasonably comparable;
and
o reviewed the financial terms, to the extent publicly
available, of certain comparable transactions and compared
them with the terms of the proposed transactions.
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<PAGE> 40
In addition, Gruntal had discussions with the management of Walnut and
Tower Hill concerning their business, change of strategy, operations, assets,
financial condition and prospects and under-took such other analyses and
examinations and considered such other financial, economic and market data as
they deemed appropriate in arriving at its 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 the
assurances of Walnut and Tower Hill management that they were 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, stockholders should note that in applying the various
valuation methods to the particular circumstances of Walnut, Tower Hill and the
Merger, 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:
o Brantley Capital Corporation
o Enercorp, Inc.
o Harris & Harris Group, Inc.
o MACC Private Equities
o Point West Capital Corporation
o Waterside Capital Corporation
o Winfield Capital Corporation
29
<PAGE> 41
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.
EQUITY VALUE/
NAV
High...................................... 3.14x
Low....................................... 0.56
Mean...................................... 1.13
Median.................................... 0.81
Walnut.................................... 0.85x
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 owned by Tower Hill was 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:
EXPECTED CALCULATED
ONE YEAR PRESENT
VALUE VALUE
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
-------------
$ 6,614,521
=============
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
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<PAGE> 42
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:
o First Albany Companies Inc.
o First Montauk Financial Corp.
o Kirlin Holding Corp.
o Paulson Capital Corp.
o 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:
<TABLE>
<CAPTION>
ENTERPRISE EQUITY
VALUE/ VALUE/
LTM BOOK
REVENUE VALUE
<S> <C> <C>
High........................................................................... 2.38x 4.42x
Low............................................................................ 0.48 1.17
Mean........................................................................... 1.02 2.49
Median......................................................................... 0.6 2.71
</TABLE>
TOWER HILL SECURITIES, INC.
<TABLE>
<S> <C> <C>
Forecasted Fiscal 1999 Revenue/Book Value............................. $ 4,500,000 $ 1,500,000
Mean Multiple......................................................... 1.02x 2.49x
------------- -------------
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 Transaction Analysis indicates that the implied
value of the shares retained by Walnut stockholders 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:
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<PAGE> 43
o Intrex Inc./Alexander Wescott & Co. Inc.
o First Union Corp./Everen Capital Group
o JW Charles Financial Services/Genesis Merchant Group
o Wachovia Corp./Interstate/Johnson Lane Inc.
o Key Corp./McDonald & Co Investments Inc.
o Investor/Olympic Cascade Financial Corp.
o Raymond James Financial Inc./Roney & Co.
o BankAtlantic Bancorp./Ryan Beck & Co.
<TABLE>
<CAPTION>
MULTIPLES
---------
ENTERPRISE EQUITY
VALUE/ VALUE/
NET REVENUE BOOK VALUE
----------- -----------
<S> <C> <C>
High.................................................................. 1.89x 0.73x
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, INC.
<S> <C> <C>
Forecasted Fiscal 1999 Revenue/Book Value...................................... $ 4,500,000 $ 1,500,000
Mean Multiple.................................................................. 1.43x 2.56x
---------------- --------------
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:
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<PAGE> 44
<TABLE>
<CAPTION>
SUMMARY OF IMPLIED PREMIUMS:
COMBINED COMPANY COMBINED TRANSACTION
ANALYSIS 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
(4 weeks prior to announcement)................................... 22.07%
</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 values to
Walnut or Tower Hill, but rather made its determination as to the fairness, from
a financial point of view, to the stockholders of 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 judgments 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:
o mergers and acquisitions;
o negotiated underwritings;
o competitive bids;
o secondary distributions of listed and unlisted securities;
o private placements; and
o 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 Merger.
Gruntal acted as financial advisor to Walnut in connection with the
proposed transactions and will receive a fee for such services and for rendering
its opinion. In addition, Walnut has agreed to indemnify Gruntal for certain
liabilities which may arise out of the rendering of its opinion. In the ordinary
course of its business, Gruntal may actively trade the debt or equity securities
of Walnut for its own account and for the accounts of customers and,
accordingly, may at any time, hold a long or short position in such securities.
THE MERGER AGREEMENT
The terms of the Merger are set forth in the Merger Agreement, which is
attached as Exhibit A to this Proxy Statement. 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 following description of the
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material terms of the Merger Agreement is qualified in its entirety by reference
to the Merger Agreement and the exhibits and schedules thereto. Stockholders are
urged to review the Merger Agreement carefully and in its entirety.
GENERAL DESCRIPTION
The Merger Agreement provides that, at the 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 the Merger. At the
Effective Time, the separate corporate existence of Newco shall cease and Tower
Hill shall continue as the surviving corporation and a wholly-owned subsidiary
of Walnut under the name "Tower Hill Securities, Inc." All of the property,
rights, privileges, immunities and powers of Newco and Tower Hill before the
Merger will vest in the merged Tower Hill, and all of the debts, liabilities and
duties of Newco and Tower Hill before the Merger will become the debts,
liabilities and duties of the merged Tower Hill.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that the closing of the Merger 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 the Merger
Agreement and described under "Conditions to Consummation of the Merger" below
have been satisfied or waived (the "Closing"). The Merger shall be consummated
and shall become effective at such time as a certificate of merger is filed with
the New York Secretary of State in accordance with the New York BCL.
CONVERSION OF SECURITIES
At the Effective Time, each share of Newco Common Stock issued and
outstanding immediately prior to the Effective Time will be automatically
converted into and exchanged for one validly issued, fully paid and
non-assessable share of Tower Hill Common Stock. In addition, at the Effective
Time, each share of Tower Hill Common Stock issued and outstanding immediately
prior to the Effective Time will be converted into and exchanged for 37,228.145
shares of Walnut Common Stock plus an additional number of shares of Walnut
Common Stock equal to one percent (1%) of the number of restricted shares of
Walnut Common Stock intended to be granted to Shai Novik pursuant to his
employment agreement with Walnut 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,
Tower Hill preferred stock and Newco Common Stock held in treasury by Tower Hill
and Newco, respectively, immediately prior to the Effective Time, will be
canceled and retired and cease to exist, without any conversion thereof.
TREATMENT OF STOCK OPTIONS
As of the Effective Time, each outstanding option to purchase shares of
Tower Hill Common Stock held by Shai Novik, an employee of Tower Hill (each, a
"Novik Option"), will be canceled, and it is intended that Mr. Novik will
receive a grant of 372,281 restricted shares of Walnut Common Stock under the
Walnut Stock Incentive Plan pursuant to his employment agreement with Walnut
(see "INTERESTS OF CERTAIN PERSONS IN THE MERGERS--Employment Agreements"). The
shares of restricted Walnut Common Stock issued to Mr. Novik will be subject to
a restricted stock agreement, which shall include 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 pursuant to Mr. Novik's
stock option agreement with Tower Hill, or in such greater proportions or at
such earlier times as shall be reasonably satisfactory to Walnut.
EXCHANGE OF STOCK CERTIFICATES
Fractional Shares. No fractional shares of Walnut Common Stock will be
issued in connection with the Merger. Any stockholder of Tower Hill who would
otherwise have been entitled to receive a fraction of a share of Walnut Common
Stock will receive one whole share of Walnut Common Stock in respect of such
fractional share.
Exchange Procedures. Within one business day after the Effective Time,
Walnut shall cause to be delivered to each holder of a certificate representing
outstanding shares of Tower Hill Common Stock (each a "Certificate"), a
certificate
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evidencing the number of whole shares of Walnut Common Stock to which such
holder is entitled pursuant to the Merger Agreement, and the surrendered
Certificate shall be canceled.
Dividends and Distributions. No dividends or other distributions
declared or made after the Effective Time with respect to shares of Walnut
Common Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered Certificate with respect to the shares of Walnut
Common Stock that the holder is entitled to receive until the holder surrenders
such Certificate as provided above. Subject to applicable law, upon surrender of
any Certificate, Walnut will pay to the holder thereof, without interest, any
dividends or distributions with respect to such shares of Walnut Common Stock
that have become payable between the Effective Time and the time of such
surrender.
Transfers of Ownership. If any certificate for Walnut Common Stock is
to be issued in a name other than that in which the Certificate surrendered in
exchange is registered, it will be a condition to such issuance that the
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 Walnut or any designated agent any fees or transfer
taxes required by reason of the issuance of a certificate for shares of Walnut
Common Stock in any name other than that of the registered holder of the
Certificate surrendered, or established to the satisfaction of Walnut or any
designated agent that such fees and taxes have been paid or are not payable.
No Liability. None of Walnut, Tower Hill, any agent designated by
Walnut or any party to the Merger Agreement shall be liable to any holder of
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. Walnut or any agent designated
by it may require stockholders to provide an appropriate affidavit to it or such
agent if any Certificates are lost, stolen or destroyed in order to receive
consideration for those Certificates. Walnut or any agent designated by it may
require the owner of lost, stolen or destroyed Certificates to deliver a bond as
indemnity against any claim that may be made against Walnut or such agent with
respect to any such Certificates.
Withholding Rights. Either Walnut or any agent designated by Walnut is
entitled to deduct and withhold from the consideration payable to any holder of
Certificates the amounts Walnut or such 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 Walnut or such agent will be treated as having been
paid to the holder of Tower Hill Common Stock.
EFFECT OF THE MERGER ON CERTAIN CORPORATE MATTERS OF TOWER HILL
Certificate of Incorporation. At the Effective Time, the certificate of
incorporation of Tower Hill, as in effect immediately prior to the Effective
Time, will be the certificate of incorporation of Tower Hill as the surviving
corporation.
Bylaws. At the Effective Time, the bylaws of Tower Hill, as in effect
immediately prior to the Effective Time, will be the bylaws of Tower Hill as the
surviving corporation.
Directors and Officers. At the Effective Time, the directors and
officers of Tower Hill immediately preceding the Effective Time shall become the
directors and officers of Tower Hill as the surviving corporation, to serve
until the earlier of their death, resignation or removal, or until their
respective successors are duly elected and qualified.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains customary representations by Walnut 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 SEC; (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;
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(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 survives the Effective Time;
therefore, neither of Walnut or Tower Hill has any remedies for breach of the
representations and warranties which may first be discovered after the Closing.
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, each of Walnut and Tower Hill will, and will cause each of
its respective subsidiaries to:
o maintain its corporate existence in good standing;
o maintain the general character of its business;
o maintain in effect all of its presently existing (or
substantially equivalent) insurance coverage;
o 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
o 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 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:
o amend or otherwise modify its charter or the charters or
other organizational documents of any of their respective
subsidiaries (except as authorized by the Merger Agreement);
o 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);
o encumber any material assets or properties;
o declare, set aside, make or pay any dividend or other
distribution to any stockholder with respect to its capital
stock;
o redeem, purchase or acquire any of its own securities (except
as authorized by the Merger Agreement);
o 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, for increases
in the ordinary course of business consistent with past
practice (except as authorized by the Merger Agreement);
o 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 (except as authorized by the Merger
Agreement);
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o 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 (except as authorized by the Merger Agreement);
o 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 (except as
authorized by the Merger Agreement);
o 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);
o 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);
o cancel, compromise, release or waive any material debt, claim
or right (except as authorized by the Merger Agreement);
o make any loan or advance to any person, other than routine
advances made in the ordinary course of business consistent
with past practice, 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);
o make any material capital investment or expenditure or
capital improvement, addition or betterment;
o change its method of accounting, except as authorized by
generally accepted accounting principles; o institute or
settle any proceeding before any governmental entity relating
to it or its assets or properties;
o adopt a plan of liquidation or dissolution with respect to
itself or its subsidiaries;
o enter into any contract, except in the ordinary course of
business consistent with past practice (except as authorized
by the Merger Agreement);
o 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
o 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 (except as
authorized by the Merger Agreement).
BDC Withdrawal. Pursuant to the Merger Agreement, a Form N-54C is to be
filed on behalf of each of Walnut, Walnut Capital, Walnut Funds and Universal
Bridge, withdrawing each of their elections to be treated as BDCs under the 1940
Act. The withdrawal process is discussed further under "PROPOSAL II--APPROVAL OF
THE BDC WITHDRAWAL."
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
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governmental entity in connection with the Merger Agreement and agreements or
documents required to be delivered pursuant to the Merger Agreement, or the
transactions contemplated thereby.
Related Transactions. The "Related Transactions" are:
o The Capital Investment. Walnut is required to issue to an
accredited investor group in a private placement transaction
(x) at least 1,500,000 and up to 2,500,000 shares of Walnut
Common Stock at $2.00 per share in cash and (y) warrants to
purchase (i) up to an aggregate of 1,000,000 shares of Walnut
Common Stock at an exercise price of at least $3.00 per share
and (ii) up to an aggregate of 1,000,000 shares of Walnut
Common Stock at an exercise price of at least $4.00 per
share, all on terms and conditions approved by Walnut and
Tower Hill, which approval shall not be unreasonably withheld
or delayed. In addition, Walnut may issue to an accredited
investor group in a private placement transaction, at $2.00
per share, one share of Walnut Common Stock for (a) every
$2.00 of debt and accrued liabilities paid in cash in
connection with the Debt Conversion, (b) every $2.00 of cash
paid in connection with the Compensation Satisfaction and
(c) every $2.00 of cash paid in connection with the UPLP
Acquisition, up to a maximum of 932,500 shares of Walnut
Common Stock. The Capital Investment is discussed further
under "PROPOSAL III--APPROVAL OF THE ISSUANCE OF WALNUT
COMMON STOCK AND WARRANTS IN CONNECTION WITH THE CAPITAL
INVESTMENT."
o The Debt Conversion. Walnut must pay in cash or convert
certain of its or its subsidiaries' debts and accrued
liabilities in the aggregate principal amount of $1,093,000
(plus any interest actually accrued thereon) into Walnut
Common Stock valued at $2.00 per share, as reasonably
determined by Tower Hill. The Debt Conversion is discussed
further under "PROPOSAL IV--APPROVAL OF THE DEBT CONVERSION
AND THE COMPENSATION SATISFACTION."
o 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 or a combination thereof, as
reasonably determined by Tower Hill. The Compensation
Satisfaction is discussed further under "PROPOSAL
IV--APPROVAL OF THE DEBT CONVERSION AND THE COMPENSATION
SATISFACTION."
o 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 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 VI--APPROVAL OF THE UPLP
ACQUISITION."
o 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.
Any agreements necessary to effect the Related Transactions are referred to in
this Proxy Statement as the "Related Agreements." Each Related Agreement is to
provide that the closing thereunder shall take place in escrow simultaneously
with the closing of the Merger, with the effectiveness of the BDC Withdrawal as
the sole condition to the release of the escrow.
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,
will be an employee) to enter into a consulting agreement with Inland
Financial; and (b) Windy City (of which Joel Kanter, Walnut's Chief Executive
Officer, is the President) to enter into a consulting agreement with Walnut.
See "INTERESTS OF CERTAIN PERSONS IN THE MERGER--Consulting Agreements."
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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 Walnut. See "INTERESTS OF CERTAIN PERSONS
IN THE MERGER--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 (a) agreed to vote their shares of Walnut Common Stock in favor of
the Merger and the Related Transactions and (b) agreed not to sell their shares
of Walnut Common Stock for a period of 12 months following the consummation of
the Merger and the Related Transactions, subject to certain exceptions set
forth in the Voting Agreement.
Investment Letter. Pursuant to the Merger Agreement, Tower Hill has
agreed to deliver to Walnut an investment letter, pursuant to which each Tower
Hill stockholder will, among other things, (a) acknowledge that the shares of
Walnut Common Stock that he will receive in the Merger 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 he is an
"accredited investor" 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 Walnut Common Stock
is being acquired for his own account and not for any other person or entity,
for investment only and with no intention of distribution or reselling the
Walnut Common Stock in any transaction that would violate the securities law of
the United States.
No Solicitation. Pursuant to the Merger Agreement, Walnut has agreed
that each of Walnut 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 that, prior to the Effective Time, 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
Merger, 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.
Pursuant to the Merger Agreement, Tower Hill agreed that it, Tower
Hill LLC and their affiliates and respective officers, directors, employees,
representatives and agents would immediately cease any existing 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, 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, initiate, encourage,
facilitate, or furnish or disclose non-public information in furtherance of,
any inquiries or the making of any
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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 material 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 the
Merger, the Related Transactions or any other transactions contemplated by the
Merger Agreement.
Indemnification and Insurance. Pursuant to the Merger Agreement, Walnut
has agreed that the indemnification provisions of the Restated Charter and
Restated Bylaws of Walnut shall not be amended, repealed or otherwise modified
(other than as may be required by law) for a period of six years after the
Effective Time in any manner that would adversely affect the rights thereunder
of individuals who at the Effective Time were directors, officers, employees or
agents of Walnut or its subsidiaries. Walnut 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 Effective Time to the fullest extent
possible under applicable law or under the Restated Charter and Restated Bylaws,
in each case for a period of six years after the Effective Time. For three years
after the Effective Time, Walnut is to maintain in effect, if available,
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 Walnut shall not be required to pay
more than 150% of the annual premium currently paid by Walnut for such coverage.
Walnut Stock Incentive Plan. Pursuant to the Merger Agreement, Walnut
has adopted and agreed, prior to the Effective Time, to submit to the Walnut
stockholders for approval, the Walnut 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 Walnut Common Stock. Upon the
effectiveness of the BDC Withdrawal, Walnut is to grant, subject to approval and
adoption of the Walnut Stock Incentive Plan by the Walnut stockholders, options
to purchase up to 1,250,000 shares of Walnut Common Stock to certain of the
current officers, directors and employees of Walnut and its affiliates and
of Tower Hill. In addition, Walnut will grant 372,281 restricted shares
of Walnut Common Stock to Shai Novik pursuant to his employment agreement. The
Walnut Stock Incentive Plan is discussed further under "PROPOSAL VI--APPROVAL
AND ADOPTION OF THE WALNUT STOCK INCENTIVE PLAN."
Purchase of Walnut Options. Pursuant to the Merger Agreement,
simultaneously with the Closing, Walnut is to close into escrow its purchase of
all outstanding options to purchase Walnut Common Stock held by Robert F. Mauer,
Burton W. Kanter and Joel Kanter. Each holder of a purchased option shall
deliver to Walnut a copy of the agreement evidencing such purchased option,
marked "canceled," against receipt of payment therefor. The only condition to
the release of the escrow shall be the BDC Withdrawal.
Cancellation of Novik Options. Pursuant to the Merger Agreement, prior
to the Effective Time, Tower Hill is to use its commercially reasonable efforts
to obtain the consent of Shai Novik to the cancellation of the Novik Options.
Walnut Incentive Program. Pursuant to the Merger Agreement, prior to
the 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.
The LLC Merger. Pursuant to the Merger Agreement, prior to the
Effective Time, Tower Hill has agreed to establish Tower Hill LLC. Walnut and
Tower Hill have further agreed, contemporaneously with the Effective Time, to
cause (a) Tower Hill to contribute its portfolio of investment securities to
Tower Hill LLC and (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. As a result, ownership of all of the combined company's portfolio
investments will be concentrated in a single wholly-owned direct subsidiary of
Walnut.
Walnut Board of Directors. Upon the consummation of the Merger and the
filing of the Restated Charter with the State of Utah Department of Commerce,
Division of Corporations and Commercial Code, the Walnut Board of Directors
shall be increased from seven to nine directors and shall be classified into
three classes as provided in the Restated Charter. Concurrently therewith, the
current directors of Walnut, other than Gene Burleson, Burton Kanter and Joel
Kanter, shall
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<PAGE> 52
resign and the Walnut Board of Directors shall fill the resulting vacancies as
follows: (a) the Class I directors shall consist of Messrs. Evan Marks, Joseph
D. Mark and Stanley B. Stern, who shall serve until the first annual meeting of
the Walnut stockholders after the Merger; (b) the Class II directors shall
consist of Messrs. Keith W. Abell, Gene Burleson and Henry Klein, who shall
serve until the second annual meeting of the Walnut stockholders after the
Merger and (c) 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 Walnut stockholders after the Merger. See "--MANAGEMENT OF
WALNUT FOLLOWING THE MERGER."
Walnut Officers. At the Effective Time, all of the current officers of
Walnut shall resign or be removed, and Joseph D. Mark, Adi Raviv and Shai Novik
shall be elected or appointed as officers of Walnut to serve until the earlier
of their death, resignation or removal or until their respective successors are
duly elected and qualified.
Tower Hill Preferred Stock. Pursuant to the Merger Agreement, prior to
the 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 Effective
Time.
Tower Hill Capital Group, LLC. Pursuant to the Merger Agreement,
promptly following the Closing, Tower Hill shall cause the principals of Tower
Hill, who are also the principals of Tower Hill Capital Group, LLC, 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 effectiveness of the BDC Withdrawal,
Walnut is to sell its marketable securities for cash and to revalue its
portfolio of nonmarketable securities, as appropriate.
Acquisition of Securities. Prior to the Effective Time, Tower Hill has
agreed to use its commercially reasonable efforts to cause Adi Raviv to obtain a
waiver from each of the stockholders of Softwatch Ltd., in order to permit Mr.
Raviv to transfer to Tower Hill certain securities 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.
In addition, prior to the Effective Time, Tower Hill has agreed to use
its commercially reasonable efforts to cause Carnegie Partners to transfer to
Tower Hill certain securities of RTImage, Ltd. for a purchase price of $64,751,
plus interest. If Carnegie Partners is unable to transfer the RTImage securities
to Tower Hill, the purchase price for such securities shall remain an asset of
Tower Hill.
Relinquishment of Walnut Capital SBA License. Prior to or
simultaneously with the consummation of the Capital Investment, Walnut is to use
its commercially reasonable efforts to cause Walnut Capital to relinquish its
license from the SBA to operate as an SBIC.
Cancellation of the Windy City/Walnut Sublease. Prior to the Effective
Time, 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.
Repayment of Indebtedness. Upon the effectiveness of the BDC
Withdrawal, Walnut is to use the proceeds of the Capital Investment, among other
things, to: (a) repay the $1,500,000 remaining principal owing on the $2,000,000
debentures outstanding to SBIC Funding Corp. and all interest accrued thereon,
and obtain the full release of all personal guaranties of such indebtedness made
by any officer or director of Walnut, and (b) repay Walnut's line of credit with
ANB, and obtain the full release of all personal guaranties of such indebtedness
made by any officer or director of Walnut.
Walnut Charter and Bylaws. Pursuant to the Merger Agreement, Walnut has agreed
to approve and adopt the Restated Charter, unanimously recommend that the Walnut
stockholders approve and adopt the Restated Charter and submit the Restated
Charter to the Walnut stockholders for approval and adoption. The Restated
Charter shall, as approved by stockholders, be filed with the State of Utah
Department of Commerce, Division of Corporations and Commercial Code immediately
after to the Effective Time. Walnut has also agreed that its Board of Directors
is to adopt the Restated Bylaws effective as of the Effective Time. The Restated
Charter is discussed further under "PROPOSAL VII--APPROVAL AND ADOPTION OF THE
RESTATED
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<PAGE> 53
CHARTER," and the Restated Charter and Restated Bylaws are attached to this
Proxy Statement as Exhibits C and D, respectively.
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 Merger.
CONDITIONS TO CONSUMMATION OF THE MERGER
The respective obligations of each party to consummate the Merger and
the other transactions contemplated by the Agreements (as defined below) are
subject to the satisfaction at or prior to the Effective Time of a number of
conditions as set forth in more detail in the Merger Agreement. The conditions
include the following:
o The Walnut stockholders shall have approved by the applicable
requisite vote (a) the issuance of Walnut Common Stock in
connection with the Merger, (b) the BDC Withdrawal, (c) the
issuance of Walnut Common Stock and warrants in connection
with the Capital Investment, (d) the Debt Conversion and the
Compensation Satisfaction, (e) the UPLP Acquisition, (f) the
adoption of the Walnut Stock Incentive Plan, and (g) the
adoption of the Restated Charter;
o 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;
o 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
o The Capital Investment and the Compensation Satisfaction
shall have been closed into escrow pursuant to the Merger
Agreement
The obligation of Tower Hill to effect the Merger is also subject to
the satisfaction at or prior to the Effective Time of the following conditions:
o The representations and warranties of Walnut 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 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 Effective
Time, as though made on and as of the Effective Time, except
to the extent the representation or warranty is expressly
limited by its terms to another date;
o Each of Walnut and Newco shall have obtained all required
non-governmental 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");
o Walnut 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
Effective Time;
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<PAGE> 54
o Tower Hill shall have received customary officer's
certificates and legal opinions;
o 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;
o The Agreements to which either of Walnut or Newco is a party
shall have been duly executed and delivered to Tower Hill;
o The purchase of all outstanding options to purchase Walnut
Common Stock held by Burton W. Kanter, Joel S. Kanter and
Robert F. Mauer shall have been closed into escrow pursuant
to the Merger Agreement;
o 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;
o The Debt Conversion and the UPLP Acquisition shall have been
closed into escrow pursuant to the Merger Agreement;
o Walnut shall have terminated the oral sublease between Walnut
and Windy City;
o The current officers of Walnut shall have resigned or been
removed and their replacements shall have been elected or
appointed as provided in the Merger Agreement; and
o 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 and Newco to effect the Merger and
the other transactions contemplated by the Agreements are subject to the
satisfaction or waiver prior to the Effective Time of the following conditions:
o 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 the Effective Time, as
though made on and as of the Effective Time, except to the
extent the representation or warranty is expressly limited by
its terms to another date;
o Tower Hill shall have obtained all required non-governmental
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");
o 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 Effective Time;
o Walnut shall have received customary officer's certificates
and legal opinions;
o 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;
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<PAGE> 55
o Walnut shall have received an investment letter duly executed
by each of the stockholders of Tower Hill;
o The Agreements to which Tower Hill is a party shall have been
duly executed and delivered to Walnut; and
o 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, the Merger Agreement may be terminated:
o by mutual written consent of Walnut and Tower Hill;
o by either Walnut or Tower Hill, if
1. the Effective Time 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 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 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
3. the Merger Agreement or any of the Related Transactions or
any other matter 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;
o 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;
o by Tower Hill, if any of Walnut 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 or Newco, as the case may be; and
o 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 Walnut 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
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<PAGE> 56
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, the parties to the Merger
Agreement may:
o extend the time for performance of any of the obligations or
other acts required by the Merger Agreement;
o 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
o 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.
FEES AND EXPENSES
Each of Walnut 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.
TIMING OF THE TRANSACTIONS
As set forth in the discussion of the Merger Agreement, numerous events
are to occur either prior to, contemporaneously with or immediately following
the Effective Time of the Merger (see "THE MERGER AGREEMENT--Covenants" and "THE
MERGER AGREEMENT--Conditions to Consummation of the Merger"). The following
discussion provides a chronology of the transactions and events to be undertaken
by Walnut.
EVENTS TAKING PLACE PRIOR TO THE EFFECTIVE TIME OF THE MERGER
The following events are to occur prior to the Effective Time of the
Merger:
o Walnut's Board of Directors shall have adopted and submitted
to the Walnut stockholders for approval each of (a) the
issuance of Walnut Common Stock in connection with the
Merger, (b) the BDC Withdrawal, (c) the issuance of Walnut
Common Stock and warrants in connection with the Capital
Investment, (d) the Debt Conversion, (e) the Compensation
Satisfaction and (f) the UPLP Acquisition.
o Walnut's Board of Directors shall have adopted and submitted
to the Walnut stockholders for approval and adoption the
Walnut Stock Incentive Plan (however, no awards will be made
under the Walnut Stock Incentive Plan until the BDC
Withdrawal has become effective).
o Walnut's Board of Directors shall have approved and adopted
the Restated Charter, unanimously recommended that the Walnut
stockholders approve and adopt the Restated Charter and
submitted the Restated Charter to the Walnut stockholders for
approval and adoption.
o Walnut shall have terminated the oral sublease by and between
Walnut and Windy City for the premises located in Vienna,
Virginia.
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o The Walnut stockholders shall have approved by the applicable
requisite vote each of (a) the issuance of Walnut Common Stock
in connection with the Merger, (b) the BDC Withdrawal, (c) the
issuance of Walnut Common Stock and warrants in connection
with the Capital Investment, (d) the Debt Conversion, (e) the
adoption of the Compensation Satisfaction, (f) the UPLP
Acquisition, (g) the adoption of the Walnut Stock Incentive
Plan and (h) the adoption of the Restated Charter
(see the discussion of Proposals II through VII in this Proxy
Statement for more specific information regarding the approval
of each transaction).
o Each of (a) the Capital Investment, (b) the Debt Conversion,
(c) the Compensation Satisfaction and (d) the UPLP
Acquisition shall have been closed into escrow. The sole
condition to the release of each escrow will be the
effectiveness of the BDC Withdrawal.
o Walnut's purchase of all outstanding options to purchase
Walnut Common Stock held by Burton Kanter, Joel Kanter and
Robert Mauer shall have been closed into escrow. The sole
condition to the release of this escrow will be the
effectiveness of the BDC Withdrawal.
EVENTS TAKING PLACE AT THE EFFECTIVE TIME OF THE MERGER
The following events are to occur simultaneously with the Effective
Time:
o The Merger shall be consummated by filing a certificate of
merger with the Secretary of State of the State of New York.
o Walnut shall sell to Burton Kanter, and Burton 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.
o The current officers of Walnut shall resign, and shall be
replaced by Joseph Mark and Adi Raviv as Co-Chief Executive
Officers and Shai Novik as Chief Operating Officer, Chief
Financial Officer and Secretary.
o Walnut and Tower Hill shall cause (a) Tower Hill to
contribute its portfolio of investment securities to Tower
Hill LLC and (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.
o Walnut's Board of Directors shall adopt the Restated Bylaws.
EVENTS TAKING PLACE AFTER THE EFFECTIVE TIME OF THE MERGER AND PRIOR TO THE BDC
WITHDRAWAL
The following events are to occur immediately after the Effective Time:
o Walnut is to file the Restated Charter with the State of Utah
Department of Commerce, Division of Corporations and
Commercial Code (see "PROPOSAL VII--APPROVAL AND ADOPTION OF
THE RESTATED CHARTER").
o Upon the filing of the Restated Charter, the Walnut Board of
Directors shall be increased from seven to nine directors and
shall be classified into three classes as provided in the
Restated Charter.
o Each of Walnut, Walnut Capital, Walnut Funds and Universal
Bridge shall file its Form N-54C, withdrawing its election to
be treated as a BDC under the 1940 Act (see "PROPOSAL
II--APPROVAL OF THE BDC WITHDRAWAL").
EVENTS TAKING PLACE UPON THE EFFECTIVENESS OF THE BDC WITHDRAWAL
Certain transactions will not be undertaken until following the
effectiveness of the BDC Withdrawal. Upon the effectiveness of the BDC
Withdrawal, the following events will take place:
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<PAGE> 58
o Each of the Capital Investment, the Debt Conversion, the
Compensation Satisfaction, the UPLP Acquisition and the
purchase of options from Burton Kanter, Joel Kanter and
Robert Mauer will be released from escrow and thereupon be
consummated.
o Walnut shall grant options to purchase up to 1,250,000 shares
of Walnut Common Stock pursuant to the Walnut Stock Incentive
Plan (see "PROPOSAL VI--APPROVAL AND ADOPTION OF THE WALNUT
STOCK INCENTIVE PLAN").
o Walnut shall commence to sell its marketable securities for
cash and revalue its portfolio of non-marketable securities,
as appropriate.
EQUITY OWNERSHIP OF WALNUT
As a result of the Merger and the Related Transactions, the Walnut
Common Stock will be held as follows:
<TABLE>
<CAPTION>
Alternative 1 Alternative 2
------------- -------------
Number of Number of
Shares (2) % Shares (3) %
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Existing Walnut stockholders(1) 3,350,533 30.8% 4,350,154 29.4%
Tower Hill stockholders and employees(4) 4,095,096 37.6% 4,995,096 33.8%
Greenwich Street Capital Partners(5) 2,500,000 23.0% 4,500,000 30.5%
Investor Group(6) 932,500 8.6% 932,500 6.3%
---------- ---------- ---------- ----------
Total 10,878,129 100% 14,777,750 100%
========== ========== ========== ==========
</TABLE>
(1) Assumes no shares of Walnut Common Stock will be issued to
existing Walnut stockholders in connection with the Debt Conversion,
the Compensation Satisfaction and the UPLP Acquisition.
(2) Assumes 3,432,500 shares of Walnut Common Stock issued in the Capital
Investment, but excludes the effect of all options and warrants,
whether or not exercisable.
(3) Assumes 3,432,500 shares of Walnut Common Stock and warrants to
purchase 2,000,000 shares of Walnut Common Stock issued in the Capital
Investment, and assumes the exercise of all options and warrants that
will be outstanding as of the Closing, whether or not exercisable.
(4) Includes 372,281 shares of restricted stock to be issued to Shai
Novik.
(5) This entity and its designated affiliates propose to acquire 2,500,000
shares of Walnut Common Stock and warrants to purchase up to 2,000,000
additional shares of Walnut Common Stock in the Capital Investment.
(6) This group may include existing Walnut stockholders and the principals
of Tower Hill, as well as certain individuals who will be directors of
Walnut following the Merger.
MANAGEMENT OF WALNUT FOLLOWING THE MERGER
The following biographical descriptions set forth certain information
with respect to the proposed members of Walnut's Board of Directors, based on
information supplied by such persons. The following information is as of
September 21, 1999, unless otherwise specified.
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<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
Keith W. Abell ................................. 42 II Director
Gene E. Burleson................................. 57 II Director
Henry Klein...................................... 37 II Director
Evan Marks....................................... 42 I Director
Joseph D. Mark................................... 43 I Director, Co-Chief Executive
Officer
Stanley B. Stern................................ 42 I Director
</TABLE>
PROPOSED CLASS I DIRECTORS--TERMS TO EXPIRE IN 2000
JOSEPH D. MARK Mr. Mark joined Tower Hill 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 and general partner 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 of 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.
STANLEY B. STERN Mr. Stern is the head of CIBC World Markets'
Technology Investment Banking group and has been with CIBC World Markets for
sixteen years. Mr. Stern's broad transaction experience includes numerous
public and private financings of equity and debt, and financial advisory
assignments including mergers and acquisition, opinions and restructurings.
Prior to joining CIBC World Markets, Mr. Stern was associated with Salomon
Brothers.
PROPOSED CLASS II DIRECTORS--TERMS TO EXPIRE IN 2001
KEITH W. ABELL Mr. Abell currently serves as Senior Managing Director of
GSCP, Inc., the predecessor of which he joined in 1994. GSCP, Inc. is the
manager of GSCP. Prior to joining GSCP, Inc., Mr. Abell was a Managing Director
with the Blackstone Group and prior thereto was a Vice President of Goldman,
Sachs & Co. Mr. Abell is Chairman of the Board of Worth Media and is also a
director of Telex Communications, Inc., RAM Holdings Ltd., The Shooting
Gallery, Inc. and Espernet of New York, Inc., each of which is a private
company.
GENE E. BURLESON 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 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.
HENRY KLEIN Henry Klein is a co-founder of TDA Capital Partners, Inc.
("TDA") which, was formed as Templeton Direct Advisors, Inc., a subsidiary of
Templeton Worldwide, Inc. in 1996. In June 1999, Templeton Direct Advisors was
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acquired by its management from Templeton Worldwide and changed its name to TDA
Capital Partners, Inc. TDA manages more than $100 million of assets through
funds investing in Central Europe, Israel and the United States. Mr. Klein is
responsible for technology and telecommunications investments at TDA. Prior to
joining TDA, Mr. Klein was a Senior Vice President of Bassini, Playfair +
Associates LLC, the successor to the private equity investment arm of BEA
Associates. At BEA Associates, Mr. Klein managed direct investments in emerging
markets and served as an investment officer of a number of New York Stock
Exchange listed closed-end funds. Prior to joining BEA Associates, Mr. Klein
was an investment banker with Lehman Brothers. Mr. Klein serves on the board of
directors of several companies currently including RTImage, Inc., SpearHead
Technologies, Ltd., and Monor Telefon Tarsag Rt. Mr. Klein is a South African
citizen and is based in the United States.
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.
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.
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DESCRIPTION OF WALNUT CAPITAL STOCK
The following is a summary of the material terms of Walnut's capital
stock and is qualified in its entirety by reference to Walnut's current Charter
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, Walnut'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 Walnut's current Charter.
Walnut Common Stock. The holders of Walnut Common Stock are entitled to
one vote for each share held. Subject to the rights of preferred stockholders,
the holders of the Walnut Common Stock are entitled to receive dividends when
and as declared by the Walnut board of directors out of funds legally available
for the payment of dividends. Upon Walnut's liquidation, dissolution or winding
up, the holders of Walnut Common Stock are entitled to share ratably in the
assets and funds of Walnut after the payment of any liquidating distributions to
the preferred stockholders, if any.
Preferred Stock. The Walnut Board of Directors has the power, without
further vote of the stockholders, to authorize the issuance of up to 5,000,000
shares of Walnut 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, no preferred stock shall have been authorized or issued.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
RECEIPT OF SECURITIES
In connection with the Merger, Burton W. Kanter, Joel S. Kanter and
Gene E. Burleson, each a current director of Walnut, will receive options to
purchase a total of 180,000 shares of Walnut Common Stock, all of which will be
immediately exercisable. Joseph D. Mark and Adi Raviv will receive an aggregate
of 3,722,815 shares of Walnut Common Stock, representing approximately 34.2% of
the shares of Walnut Common Stock then issued and outstanding, and Shai Novik
will receive 372,281 shares of restricted Walnut Common Stock, representing
approximately 3.4% of the shares of Walnut Common Stock then issued and
outstanding. In addition, Messrs. Mark and Raviv will receive options to
purchase a total of 900,000 shares of Walnut Common Stock, 500,000 of which will
be immediately exercisable. Further, Evan Marks, who is to be appointed as a
director of Walnut following the Merger, will receive 100,000 shares of Walnut
Common Stock as a finder's fee in connection with the Capital Investment (Mr.
Marks is not currently an affiliate of Walnut or Tower Hill).
PURCHASE OF OPTIONS
In connection with the Merger, Walnut has agreed that, simultaneously
with the Closing, it will close into escrow its purchase of all outstanding
options to purchase shares of Walnut Common Stock held by Robert F. Mauer,
Burton W. Kanter and Joel S. Kanter. The aggregate purchase price paid by Walnut
for the options shall be $10,331.59, which price was determined based on a
Black-Scholes valuation.
DEBT CONVERSION AND COMPENSATION SATISFACTION
As discussed, the closing into escrow of each of the Debt Conversion
and the Compensation Satisfaction is a condition precedent to the consummation
of the Merger. The Debt Conversion will involve the payment in cash or
conversion of certain debts and accrued liabilities of Walnut or its
subsidiaries into shares of Walnut Common Stock valued at $2.00 per share, as
reasonably determined by Tower Hill, and the Compensation Satisfaction will
involve the payment in cash or conversion of the accrued compensation of Burton
W. Kanter, a director of Walnut, into shares of Walnut Common Stock valued at
$2.00 per share, as reasonably determined by Tower Hill. Nearly all of the
parties converting debts or accrued liabilities are affiliates of Walnut (as
discussed in "PROPOSAL IV--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.
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UPLP ACQUISITION
The UPLP Acquisition, the closing into escrow of which is another
condition precedent to the consummation of the Merger, 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. In addition, Universal Bridge will be purchasing 17%
of the outstanding limited partnership interests of UPLP from various
individuals. 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 Merger, 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
Walnut. Each of Chicago Advisory Group and Windy City 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 Financial 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 Chicago Advisory Group's or Inland Financial's
election not to renew the agreement. The agreement provides that Chicago
Advisory Group's consulting fees shall be at an annual rate of $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 that is not satisfactorily cured,
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, with such payments being in addition to the
payments described in the previous sentence. 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 or be
engaged in any business which is engaged in the business of factoring or
financing of receivables in the United States or Canada. Further, Chicago
Advisory Group and Mr. Mauer have agreed to a nonsolicitation provision
(relating to employees and customers) which is effective during the term of the
agreement and for a period of one year subsequent to a termination of the
agreement or the consulting engagement thereunder.
Pursuant to the consulting agreement between Windy City and Walnut,
Windy City, through the provision of the services of Joel Kanter, is to serve as
a consultant to Walnut 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 Walnut 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 Windy City's or Walnut's election not to
renew the agreement. The agreement provides that Windy City's consulting fees
will be at an annual rate of $100,000. In addition, Walnut 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 Walnut that is
not satisfactorily cured, or if the term shall terminate as the result of a sale
of all or substantially all of the assets of Walnut, Windy City 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, with such
payments being in addition to payments described in the previous sentence.
Pursuant to the agreement, both Windy City and Walnut have agreed to a
nonsolicitation provision (relating to employees) which is to be effective
during the term of the agreement and for a period of one year subsequent to any
termination of the agreement or the consulting engagement thereunder.
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EMPLOYMENT AGREEMENTS
In connection with the Merger, each of Joseph D. Mark, Adi Raviv and
Shai Novik will enter into an employment agreement with Walnut.
Pursuant to his employment agreement, Joseph D. Mark will serve as a
Co-Chief Executive Officer of Walnut for a five year term, which term shall be
automatically extended for one or more additional annual periods unless either
Walnut 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 base
salary will be a minimum of $200,000 per year, or such greater sum as may be
fixed by the Compensation Committee of Walnut'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 Walnut. 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 an option to purchase 450,000
shares of Walnut Common Stock under the Walnut Stock Incentive Plan. Mr. Mark
will be entitled to participate in any and all employee benefit plans generally
available to Walnut's most senior executives and will be entitled to participate
fully in Walnut's group pension, profit sharing and employee benefit programs
now or hereafter made available to employees of Walnut generally. Walnut shall
provide other benefits to Mr. Mark, including, without limitation, the
following: Walnut will lease or purchase an automobile for Mr. Mark (or
reimburse Mr. Mark for a lease of an automobile in his own name) at a cost not
to exceed $1,000 per month (including other related costs, expenses and fees);
Walnut will pay the premiums on an ordinary life insurance policy on Mr. Mark's
behalf in the principal amount of $2,000,000; and Walnut 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, Walnut 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 Walnut for "cause" (as
defined in the agreement), or by Mr. Mark without "good reason" (as defined in
the agreement), Walnut shall pay Mr. Mark the following: any accrued but unpaid
base salary for services rendered through 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 Walnut without cause, or by Mr. Mark
for good reason, Walnut 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 Walnut 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) the expiration of the term.
Generally, in the event of Mr. Mark's termination, any benefits to which Mr.
Mark may be entitled pursuant to any employee benefit plans and programs in
which he participated will be determined 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 (relating to employees and customers) which is effective during the
term of the agreement and for a period of one year subsequent to any termination
of the agreement or Mr. Mark's employment thereunder.
Pursuant to his employment agreement, Adi Raviv will serve as a
Co-Chief Executive Officer of Walnut for a five year term, which term shall be
automatically extended for one or more additional annual periods unless either
Walnut or Mr. Raviv 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. Raviv's annual base
salary will be a minimum of $200,000 per year, or such greater sum as may be
fixed by the Compensation Committee of Walnut'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 Walnut. 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 an option to purchase
450,000 shares of Walnut Common Stock under the Walnut Stock Incentive Plan. Mr.
Raviv will be entitled to participate in any and all employee benefit plans
generally available to Walnut's most senior executives and will be entitled to
participate fully in Walnut's group pension, profit sharing and employee benefit
programs now or hereafter made available to employees of Walnut generally.
Walnut shall provide other benefits to Mr. Raviv, including, without limitation,
the following: Walnut will lease or purchase an automobile for Mr. Raviv (or
reimburse Mr. Raviv for a lease of an automobile in his own name) at a cost not
to exceed $1,000 per month (including other related costs, expenses and fees);
Walnut will pay the premiums on an ordinary life
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insurance policy on Mr. Raviv's behalf in the principal amount of $2,000,000;
and Walnut 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, Walnut shall
pay Mr. Raviv 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. Raviv's employment is terminated by Walnut for "cause," or
by Mr. Raviv without "good reason," Walnut 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 Walnut
without cause, or by Mr. Raviv for good reason, Walnut 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 Walnut 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. Generally, in the event of Mr. Raviv's termination,
any benefits to which Mr. Raviv may be entitled pursuant to any employee benefit
plans and programs in which he participated will be determined 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 (relating to employees and customers) which
is effective during the term of the agreement and for a period of one year
subsequent to any termination of the agreement or Mr. Raviv's employment
thereunder.
Pursuant to his employment agreement, Shai Novik will serve as the
Chief Operating Officer of Walnut for a five year term, which term shall be
automatically extended for one or more additional annual periods unless either
Walnut or Mr. Novik 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. Novik's annual base
salary will be a minimum of $150,000 per year, or such greater sum as may be
fixed by the Compensation Committee of the Walnut 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 Walnut. In addition, Mr. Novik will be
entitled to bonus compensation as reasonably determined in good faith by the
Compensation Committee, provided that Mr. Novik shall be entitled to participate
in any bonus compensation plans Walnut makes generally available to its senior
executives or its employees, in accordance with the terms of such plans. Mr.
Novik will also receive a grant of 372,281 shares of restricted Walnut Common
Stock under the Walnut Stock Incentive Plan. Mr. Novik will be entitled to
participate in any and all employee benefit plans generally available to
Walnut's most senior executives and will be entitled to participate fully in
Walnut's group pension, profit sharing and employee benefit programs now or
hereafter made available to employees of Walnut generally. Walnut shall provide
other benefits to Mr. Novik, including, without limitation, the following:
Walnut will lease or purchase an automobile for Mr. Novik (or reimburse Mr.
Novik for a lease of an automobile in his own name) at a cost not to exceed
$1,000 per month (including other related costs, expenses and fees); Walnut will
pay the premiums on an ordinary life insurance policy on Mr. Novik's behalf in
the principal amount of $2,000,000; and Walnut 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, Walnut shall
pay Mr. Novik 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. Novik's employment is terminated by Walnut for "cause," or
by Mr. Novik without "good reason," Walnut 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 Walnut
without cause, or by Mr. Novik for good reason, Walnut 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, except as otherwise provided in the agreement. Generally,
in the event of Mr. Novik's termination, any benefits to which Mr. Novik may be
entitled pursuant to any employee benefit plans and programs in which he
participated will be determined 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
(relating to employees and customers) which
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is effective during the term of the agreement and for a period of one year
subsequent to any termination of the agreement or Mr. Novik's employment
thereunder.
BOARD POSITIONS
At the Effective Time, the Walnut Board of Directors shall be increased
from seven to nine members and shall be classified. Walnut and Tower Hill have
agreed that members of the current Board of Directors of Walnut shall retain
three of the nine positions on the Walnut Board of Directors. The three board
positions will initially be held 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 Walnut
stockholders following the Merger, and Messrs. Burton Kanter and Joel Kanter
will be Class III directors and will serve until the third annual meeting of the
Walnut stockholders following the Merger. All other current directors of Walnut
shall resign.
Upon consummation of the Merger, Joseph D. Mark, Adi Raviv, Evan Marks,
Henry Klein and Stanley B. Stern will be appointed to five of the nine seats on
the Board of Directors of Walnut. Joseph D. Mark, Evan Marks and Stanley B.
Stern will be Class I directors and will serve until the first annual meeting of
the Walnut stockholders following the Merger. Henry Klein will be a Class II
director and will serve until the second annual meeting of the Walnut
stockholders following the Merger. Adi Raviv will be a Class III director and
will serve until the third annual meeting of the Walnut stockholders following
the Merger.
In addition, in connection with the Capital Investment, a
representative appointed by GSCP will be appointed to the Board of Directors.
Walnut and Tower will have agreed that this position is initially to be held by
Keith Abell, the Senior Managing Director of GSCP, Inc., which is the manager
of GSCP. See "PROPOSAL III-ISSUANCE OF WALNUT COMMON STOCK AND WARRANTS IN
CONNECTION WITH THE CAPITAL INVESTMENT."
INDEMNIFICATION AND INSURANCE
Pursuant to the Merger Agreement, Walnut has, for the time periods
specified in the Merger Agreement, agreed to:
o 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 Merger; and
o 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."
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a purchase transaction, as a
reverse acquisition.
REGULATORY APPROVALS
The Merger requires the prior approval of the NASD, which approval is a
condition precedent to the consummation of the Merger.
MARKET PRICE INFORMATION AND DIVIDEND POLICY
MARKET PRICE INFORMATION OF WALNUT
As of September 21, 1999, Walnut had 3,350,533 shares of Walnut Common
Stock outstanding, held by approximately 604 holders of record.
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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 September 21, 1999 based upon information received from the Nasdaq
National Market.
<TABLE>
<CAPTION>
WALNUT COMMON
STOCK
-------------
QUARTER ENDED HIGH LOW
- ------------- ---- ---
<S> <C> <C>
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
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, 1999.............................................................. $ 4- 5/8 $ 1- 3/4
June 30, 1999............................................................... 2- 7/8 1-15/16
September 30, 1999 (through September 21, 1999)............................. 2- 5/8 2- 1/8
</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 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 to purchase an aggregate of 10% 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 Merger had been consummated at June 30, 1999 with respect to book value per
common share, and January 1, 1998 with respect to net (loss) income per common
share (and assuming 3,432,500 shares issued in the Capital Investment). 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.
55
<PAGE> 67
<TABLE>
<CAPTION>
AT AND FOR THE SIX AT AND FOR THE
MONTHS ENDED YEAR ENDED
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
COMBINED COMBINED
PRO FORMA PRO FORMA
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Book Value per Common Share................................................ $ 1.65 $ 1.66
Net income (loss) per Common Share......................................... $ 0.17 $ (0.08)
</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.
56
<PAGE> 68
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
investments before
income tax ................ 1,372,000 3,032,000 2,904,000 4,667,000 1,044,000
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 before tax ....... (8,371,000) (1,437,000) (3,773,000) (5,392,000) 4,608,000
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
57
<PAGE> 69
of and for the year 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.
TOWER HILL 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 Data:
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 unaudited pro forma financial and
operating data for the six months ended June 30, 1999 and for the year ended
December 31, 1998 (assuming the issuance of 3,432,500 shares in the Capital
Investment). This information is presented as if the completion of the Merger
occurred as of June 30, 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.
58
<PAGE> 70
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
Income Statement Data:
Revenue
Consulting income $ 1,938,000 $ 2,114,000
Factoring income 569,000 1,873,000
Investment and other income 245,000 1,059,000
-------------- --------------
Total Revenue 2,752,000 5,046,000
Costs and expenses
Cost of services 119,000 84,000
General and administrative expenses 3,063,000 5,718,000
-------------- --------------
Total Costs and Expenses 3,182,000 5,802,000
Operating gain/(loss) (430,000) (756,000)
Interest and other financial costs 163,000 1,223,000
-------------- --------------
Gain/(Loss) before taxes and realized gain (593,000) (1,979,000)
Income tax benefit/(expenses) 0 44,000
Realized gain/(loss) on sale of securities, net of tax 2,506,000 1,019,000
Effect on net income of minority interest 0 0
-------------- --------------
NET INCOME/(LOSS) $ 1,913,000 $ (916,000)
============== ==============
Income/(Loss) per share $ 0.17 $ (0.08)
============== ==============
Weighted average shares outstanding 11,078,129 11,078,129
============== ==============
Balance Sheet Data:
Total Assets $ 24,640,000 $ 27,305,000
Current Liabilities 3,496,000 5,382,000
Long-term Liabilities 2,903,000 3,479,000
Net Assets 18,241,000 18,444,000
============== ==============
Total Liabilities and Net Assets $ 24,640,000 $ 27,305,000
============== ==============
</TABLE>
59
<PAGE> 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Walnut reports the results of its operations as an investment company
rather than as an operating company. Because of such reporting, Walnut's
consolidated financial statements include the operating results only of Walnut,
Walnut Capital and Universal Bridge. 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.
Walnut separately discusses and analyzes the results of operations and
the liquidity and capital resources of Walnut (excluding Walnut Capital) and
Walnut Capital. Walnut is required by regulations promulgated by the SBA to
separately present such information for Walnut Capital in its Annual Reports on
Form 10-K and is utilizing the same reporting format in this Proxy Statement.
The results of operations of Walnut (excluding Walnut Capital) 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.
Certain statements contained in this Proxy Statement which are not
historical facts are forward-looking statements that are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by such forward-looking statements. These risks and
uncertainties include Walnut's entry into new commercial businesses, the risk of
obtaining financing, and other risks described in Walnut's filings with the SEC.
HISTORICAL OPERATING RESULTS OF WALNUT
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Results of Walnut Capital's Operations for the Six Months Ended June
30, 1999 and 1998. Walnut Capital had realized gain income of $4,022,000 for the
six months ended June 30, 1999, compared to $1,126,000 for the six months ended
June 30, 1998. The realized gains for the six months ended June 30, 1999
resulted predominately from the sale of shares of First Health Group, Inc.
(formerly HealthCare COMPARE Corp.) and Multimedia Games, Inc.
Interest expense for the six months ended June 30, 1999 was $101,000
as compared to $209,000 for the same period in 1998. The decrease of $108,000
or 52% in interest expense is attributable to a repayment of $2,000,000 of
debentures to the SBA on June 1, 1998, and a reduction in margin payable to
brokers. General and administrative expense for the six months ended June 30,
1999 was $336,000 as compared to $325,000 for the six months ended June 30,
1998.
Unrealized depreciation on investments before income tax for the six
months ended June 30, 1999 was $3,715,000 as compared to $1,442,000 for the same
period in 1998. The difference of $2,273,000 in unrealized depreciation is
primarily the result of the recognition for the six months ended June 30, 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
Six Months Ended June 30, 1999 and 1998. Walnut had interest income of $60,000
and general and administrative costs of $407,000 for the six months ended June
30, 1999 as compared to $35,000 and $468,000, respectively, for the six months
ended June 30, 1998. The $61,000 decrease in general and administrative costs is
due to the payment of less directors' fees and legal fees. For the six months
ended June 30, 1999, the unrealized depreciation attributable to Walnut's
wholly-owned subsidiary, Universal Bridge and its majority owned subsidiary,
UPLP, was $65,000.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Results of Walnut Capital's Operations for the Three Months Ended June
30, 1999 and 1998. Walnut Capital had realized gain income of $2,000 for the
three months ended June 30, 1999, compared to $172,000 for the three months
ended June 30, 1998. The realized gains for the three months ended June 30, 1999
resulted predominately from the sale of shares of Multimedia Games, Inc.
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<PAGE> 72
Interest expense for the three months ended June 30, 1999 was $49,000
as compared to $88,000 for the same period in 1998. The decrease of $39,000 or
44% in interest expense is attributable to a repayment of $2,000,000 of the
debentures to the SBA on June 1, 1998, and a reduction in margin payable to
brokers. General and administrative expense for the three months ended June 30,
1999 was $179,000 as compared to $170,000 for the three months ended June 30,
1998.
Unrealized appreciation on investments before income tax for the three
months ended June 30, 1999 was $267,000 as compared to $628,000 unrealized
depreciation on investments for the same period in 1998. The difference of
$895,000 in unrealized appreciation is primarily the result of the appreciation
in value of I-Flow Corp. stock in 1999 and the depreciation in value of Paragon
Health and I-Flow stock in 1998.
Results of the Operations of Walnut (excluding Walnut Capital) for the
Three Months Ended June 30, 1999 and 1998. Walnut had interest income of $19,000
and general and administrative costs of $211,000 for the three months ended June
30, 1999 as compared to $16,000 and $257,000, respectively, for the three months
ended June 30, 1998. The $46,000 decrease in general and administrative costs is
due to a decrease in legal fees. For the three months ended June 30, 1999, the
unrealized depreciation attributable to Walnut's wholly-owned subsidiary,
Universal Bridge and its majority owned subsidiary, UPLP, was $50,000.
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 resulted
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. 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 debentures to the SBA ($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 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 costs of $817,000 for the year ended
December 31, 1998 as compared to $39,000 and $830,000, respectively, in the year
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
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<PAGE> 73
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 SBA debentures (described 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 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.
Unrealized losses, net of tax, for the year ended December 31, 1997
were approximately $2,600,000, as compared to unrealized losses for the year
ended December 31, 1996 of approximately $1,400,000, 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 costs of $830,000 for the year ended
December 31, 1996 as compared to $37,000 and $881,000, respectively, in the year
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 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, of which debentures in the
principal amount of $8 million were repaid prior to 1998. Additional debentures
in the principal amount of $2 million was repaid on June 1, 1998. Debentures in
the principal amount of $2 million were outstanding as of June 30, 1999. Such
debentures were originally issued in September 1989, bear interest at a rate of
8.80% per annum and are due on December 1, 1999, subject to early demand by the
SBA. On or about September 1, 1999, Walnut Capital made a $500,000 payment with
respect to such debentures.
Interest on the 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 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 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 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 $1.4 million in the first
quarter of 1999. The source of funds were primarily from the sale of First
Health Group, Inc. (formerly HealthCare COMPARE Corp.) securities, creating a
realized capital gain of approximately $4 million in the first quarter of 1999.
Walnut Capital has cash and a broker margin account available to repay the $2
million of SBA debentures due September 1, 1999.
In 1998, the SBA issued a finding that Walnut Capital had violated
Section 107.700 of 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
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<PAGE> 74
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 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 Walnut Capital
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. 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 debentures to the SBA and accelerate the maturity for such
debentures from September 1, 1999 to the date of such acceleration. Further,
Walnut Capital has not filed its Form 468 for the year ended December 31, 1998.
This report was due on March 31, 1999. Management believes that none of these
findings will have material effect on Walnut Capital, or Walnut as a whole, and
believes that if the maturity of the debentures is accelerated, it will have
sufficient funds available from existing sources of liquidity to satisfy its
repayment obligations.
In April 1997, Walnut Capital 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 1, 1998, respectively. The third and fourth payment which were due on
October 1, 1998 and January 1, 1999 had been deferred and Walnut is allowed to
delay further principal payments provided that quarterly interest to be paid on
the outstanding balance. Walnut has been current in all of its interest payment
to The Holding Company, and this loan has a principal balance of $200,000 as of
June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES OF WALNUT (EXCLUDING WALNUT CAPITAL)
On August 31, 1995, Walnut established a $4 million line of credit with
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 payments 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 $825,000 on June 30, 1999. The interest rate associated
with this loan is ANB's base rate plus 2% (10.5% as of June 30, 1999). Two
Directors of Walnut personally guarantee the loan.
In connection with the transaction through which Walnut indirectly
acquired Inland Financial, Inland Financial borrowed $250,000 from the Kanter
Family Foundation, an entity affiliated with Walnut, and $43,000 from Windy
City, Inc., an entity affiliated with Walnut, in October 1998. Walnut issued to
each entity 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.
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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<PAGE> 75
INVESTMENT PORTFOLIO CHANGES
The sale of certain portfolio investments resulted in unrealized
depreciation and realized gains during the six months ended June 30, 1999 as
follows:
<TABLE>
<CAPTION>
Unrealized Appreciation
(Depreciation) Realized Gain (Loss)
-------------- --------------------
<S> <C> <C>
First Health Group
(formerly HealthCare
COMPARE Corp.) $(4,069,000) $4,020,000
Multimedia Games, Inc. (2,000) 2,000
</TABLE>
Walnut's equity investments that appreciated/(depreciated) in value during the
six months ended June 30, 1999 were as follows:
<TABLE>
<CAPTION>
Unrealized Appreciation
(Depreciation)
--------------
<S> <C>
I-Flow Corporation $738,000
Mariner Post-Acute Network
(formerly Paragon Health) (598,000)
Optiva Corp. 188,000
Logic Devices Inc. 94,000
eSynch Corp. (formerly SoftKat, Inc.) 80,000
Trans Global Services, Inc. (61,000)
HP America Inc. (67,000)
Others (18,000)
</TABLE>
There were unrealized losses of ($65,000) 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. Through 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.
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<PAGE> 76
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 Company representatives on the boards of directors of
portfolio companies have participated in such boards' oversight of those
companies' year 2000 efforts. Each portfolio company's year 2000 efforts are
necessarily directed by such companies' management and boards of directors.
Furthermore, 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 Company's portfolio could be materially adversely impacted if
a number of portfolio companies experience year 2000 problems or significant
costs to avoid or remediate such problems. 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 is interrelated with
those of any of its portfolio companies.
PRO FORMA CAPITALIZATION OF WALNUT
The following table sets forth the pro forma combined capitalization of
Walnut as adjusted to give effect to the Merger and the Related Transactions as
if they had occurred on June 30, 1999 (assuming 3,432,500 shares are issued in
the Capital Investment). The pro forma information is unaudited and is not
necessarily indicative of what the financial position of Walnut would have been
as of June 30, 1999, and is qualified in its entirety by reference to the more
complete pro forma information contained in the financial information beginning
on page F-1 of this Proxy Statement.
<TABLE>
<CAPTION>
JUNE 30, 1999
-------------
(UNAUDITED)
(IN THOUSANDS)
COMBINED PRO FORMA
OF WALNUT
---------
<S> <C>
Debt............................................................................... $ 4,150
Participation Loans Payable........................................................ 2,249
Stockholders' Equity
Common Stock.................................................................... 111
Additional Paid-in Capital...................................................... 29,221
Deficit......................................................................... (11,091)
Total Stockholders' Equity......................................................... 18,241
Total Capitalization............................................................... 24,640
</TABLE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE
MERGER.
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<PAGE> 77
PROPOSAL II
APPROVAL OF THE BDC WITHDRAWAL
Stockholders are being asked to consider and vote upon a proposal to
approve a change in the nature of Walnut's business from that of investing in
securities to that of operating--through its wholly-owned subsidiaries--a
merchant, investment banking and financial advisory services business and a
factoring business, and the withdrawal by each of Walnut, Walnut Capital, Walnut
Funds and Universal Bridge of their respective elections to be treated as BDCs
under the 1940 Act.
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 Merger, the LLC Merger and the acquisition
by Walnut of Tower Hill's broker-dealer business, the regulatory scheme
governing BDCs will no longer be appropriate for Walnut. Accordingly, the
Board of Directors recommends that Walnut, Walnut Capital, Walnut Funds and
Universal Bridge withdraw their elections to be regulated as BDCs, as soon as
possible after the Effective Time. 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 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.
PROCEDURE FOR WITHDRAWAL
In order to withdraw its election, Walnut must complete the
transactions necessary so that it is no longer a BDC and must file with the SEC
a Notification of Withdrawal of Election on Form N-54C pursuant to Section 54(c)
of the 1940 Act indicating the basis for its withdrawal. The receipt by the SEC
results in the automatic withdrawal of Walnut's election to be a BDC, provided
that Walnut has met the requirements for the withdrawal of its election. Walnut
has based its ability to withdraw as a BDC on the fact that, upon consummation
of the Merger, Walnut will be primarily engaged--through its wholly-owned
subsidiaries--in a business other than owning or investing in securities, thus
meeting the requirements for the withdrawal of its election. Each of Walnut
Capital, Walnut Funds and Universal Bridge is permitted to withdraw its election
to be treated as a BDC as a result of the LLC Merger and to file a Form N-54C on
that basis.
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:
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<PAGE> 78
1. Walnut must carry its assets at fair value rather than
cost in financial reports;
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.
CHANGE IN WALNUT'S BUSINESS; REASONS FOR THE BDC WITHDRAWAL
As a result of the Merger, the Board believes that the combined company
will be an operating company that will not be primarily engaged in the business
of investing, 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. Following the Merger,
Walnut will act as a holding company for its wholly-owned operating
subsidiaries, Pacific Financial, Inland Financial and Tower Hill. Through these
subsidiaries (none of which is or will be an investment company), Walnut will be
primarily engaged in a business other than owning or investing in securities.
Given the asset mix, business and operations of the combined company, the Board
believes that the company will not be an "investment company" as defined in 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 Merger, the nature of Walnut's business
will, through its subsidiaries, primarily focus on rendering
investment banking services and related general financial advisory
services, as well as professional consulting services, to start-up and
intermediate stage companies; consequently BDC regulation will be
inappropriate for Walnut following the Merger.
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, which is 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
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<PAGE> 79
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.
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. In particular, the issuance of
convertible securities and rights to acquire shares of common stock
(e.g. warrants and options) is restricted. 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 THE BDC WITHDRAWAL
Immediately after the Effective Time and the LLC Merger, each of
Walnut, Walnut Capital, Walnut Funds and Universal Bridge will file a Form
N-54C with the SEC. The companies' withdrawal will become effective upon the
SEC's receipt of such Forms N-54C, at which time each of Walnut, Walnut
Capital, Walnut Funds and Universal Bridge will cease to 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 Merger or the BDC Withdrawal, or
should the Merger not close for any reason, Walnut, Walnut Capital, Walnut
Funds and Walnut Bridge will not withdraw their elections to be regulated as
BDCs.
Following the Merger, 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 its 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 Walnut and its management in any way.
The BDC Withdrawal 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.
The BDC Withdrawal 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 bylaws (as each will be
modified by the Merger), nor will it effect the status of Walnut under state
corporate laws.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE BDC WITHDRAWAL.
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<PAGE> 80
PROPOSAL III
APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK
AND WARRANTS IN CONNECTION WITH THE CAPITAL INVESTMENT
Stockholders are being asked to consider and vote upon the issuance by
Walnut of up to 3,432,500 shares of Walnut Common Stock at $2.00 per share and
warrants to purchase up to an aggregate of (a) 1,000,000 shares of Walnut common
Stock at an exercise price of at least $3.00 per share Walnut Common Stock and
(b) 1,000,000 shares of Walnut Common Stock at an exercise price of at least
$4.00 per share in one or more private placement transactions to one or more
accredited investor groups.
The Capital Investment involves the issuance of at least 1,500,000 and
up to 3,432,500 shares of Walnut Common Stock, which represents approximately
20.1% to 44.9% of the Walnut Common Stock outstanding (after giving effect to
the Merger and prior to taking into account the Capital Investment). In
addition, the Capital Investment involves the issuance of warrants to purchase
up to 2,000,000 shares of Walnut Common Stock. The amount of Walnut Common Stock
issuable upon exercise of these warrants represents approximately 26.9% of the
Walnut Common Stock currently outstanding (after giving effect to the Merger and
prior to taking into account the Capital Investment). Therefore, the issuance of
Walnut Common Stock in connection with 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 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.
The following discussion summarizes the principal components of the
Capital Investment, and does not purport to be an exhaustive discussion of all
of the terms of the Capital Investment.
INITIAL PRIVATE PLACEMENT
GENERAL
On September 2, 1999, Walnut entered into a non-binding letter of
intent with GSCP (the "Letter of Intent"). Pursuant to the Letter of Intent,
Walnut is to issue 2,500,000 shares of Walnut Common Stock to GSCP and its
designated affiliates, in a private placement transaction, at a purchase price
of $2.00 per share. In addition, GSCP is to receive warrants to purchase (a) up
to an aggregate of 1,000,000 shares of Walnut Common Stock, at an exercise price
of at least $3.00 per share, and (b) up to an aggregate of 1,000,000 shares of
Walnut Common Stock at an exercise price of at least $4.00 per share.
WARRANTS
Initial Warrants. Walnut is to issue to GSCP and its designated
affiliates warrants to purchase 1,000,000 shares of Walnut Common Stock. The
exercise price of these warrants will equal 150% of the market price of Walnut
Common Stock at the time of the Closing of the Merger, but in no event shall
such price be less than $3.00 per share (the "Initial Warrants").
Additional Warrants. Walnut is to issue to GSCP and its designated
affiliates additional warrants to purchase 1,000,000 shares of Walnut Common
Stock. The exercise price of these warrants will equal 200% of the market price
of Walnut Common Stock at the time of the Closing of the Merger, but in no event
shall such price be less than $4.00 per share (the "Additional Warrants," and
together with the Initial Warrant, the "Warrants").
Adjustment. The Warrants shall be appropriately adjusted from time to
time with respect to stock dividends, stock splits, mergers, consolidations and
other business combinations.
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Term. The Warrants will be exercisable at any time during the three
years following the Closing of the Merger.
Demand Right. Walnut shall be permitted to demand that GSCP and its
designated affiliates exercise up to 50% of its Warrants if, at any time
following the six month anniversary of the Closing of the Merger, the market
price for Walnut Common Stock exceeds 150% of the applicable exercise price of
the Warrants for a period of sixty consecutive trading days. Any Warrants not
exercised pursuant to such a demand shall expire within thirty days of the
demand. This demand right is only exercisable by Walnut in connection with a
capital raising transaction of at least $5,000,000 (exclusive of the capital
raised by the exercise of the Warrants).
RIGHTS GRANTED TO GSCP
Pursuant to the Letter of Intent, Walnut has agreed to grant the
following rights to GSCP:
Approval Rights. Subject to certain exceptions, any merger,
consolidation, recapitalization, redemption or repurchase, extraordinary
dividend or distribution or other extraordinary transaction affecting Walnut or
any of its subsidiaries, or the capital stock of Walnut or its subsidiaries,
must be approved by GSCP for so long as GSCP and its designated affiliates are
the holders of shares or Warrants to purchase shares of Walnut Common Stock
which, in the aggregate, equal at least 5% of the then outstanding shares of
Walnut Common Stock on a fully diluted basis. Such approval will not be required
in the event: (i) that (a) all shares of Walnut Common Stock owned by GSCP and
its designated affiliates (including shares issuable upon exercise of the
Warrants) are treated as favorably as all other shares of Walnut Common Stock
are treated, and (b) no holder of Walnut Common Stock (or any affiliate or
related party of such holder) receives any additional value or consideration in
connection with the transaction (excluding compensation payable to Walnut's
employees in the ordinary course of business), unless approved by GSCP; (ii) of
certain repurchases of Walnut Common Stock from Walnut employees, approved by
disinterested and independent directors of Walnut; (iii) of redemptions of
preferred stock or other redeemable securities issued subsequent to a Merger to
persons who are not principals of Walnut or Tower Hill, approved by the
disinterested and independent directors of Walnut; (iv) of open market purchases
of shares of Walnut Common Stock approved by the disinterested and independent
directors of Walnut; and (v) of any other repurchase or redemption of shares of
Walnut Common Stock from a stockholder, approved by the disinterested and
independent directors of Walnut so long as the aggregate of such repurchases and
redemptions from such stockholder do not exceed an amount equal to five percent
(5%) of the outstanding shares of Walnut Common Stock on a fully diluted basis
after the Merger. Subject to certain exceptions, GSCP will also have approval
rights over the grant of certain registration rights. All compensation of and
transactions with principals of Walnut and Tower Hill are to be subject to the
approval of the disinterested and independent directors of Walnut who are not
principals of Walnut or Tower Hill.
Board Representation. GSCP has been granted the right to appoint one
individual to Walnut's Board of Directors so long as GSCP and its designated
affiliates are the holders of shares or warrants to purchase shares of Walnut
Common Stock which, in the aggregate, represent at least 5% of the then
outstanding shares of Walnut Common Stock on a fully diluted basis. Walnut is to
use its best efforts to appoint GSCP's nominee to the compensation committee
(including any stock option or similar committee) of Walnut's Board of
Directors. GSCP has nominated Keith Abell to serve as a Class II director and
Walnut has acknowledged that Keith Abell is an acceptable nominee.
Registration Rights. GSCP and its designated affiliates are to have
customary registration rights with respect to all Walnut Common Stock.
Tag-Along Rights. Subject to certain limitations and exceptions, GSCP
and its designated affiliates are to have pro-rata tag-along rights with respect
to any proposed transfer by the Tower Hill principals of their shares of
Walnut Common Stock.
ADDITIONAL PRIVATE PLACEMENT
In addition to the private placement to GSCP and its designated
affiliates, the Walnut stockholders are also being asked to approve the
issuance, at $2.00 per share, by Walnut to an accredited investor group,
in a private placement transaction, of one share of Walnut Common Stock
for (a) every $2.00 of debt and accrued liabilities of Walnut converted
into cash pursuant to the Debt Conversion, (b) every $2.00 of cash paid in
connection with the Compensation Satisfaction, and (c) every $2.00 of cash
paid in connection with the UPLP Acquisition, up to a maximum of 932,500
shares of Walnut Common Stock. The accredited investor group participating
in this private placement may include existing Walnut stockholders and the
principals of Tower Hill, as well as certain individuals who will be
directors of Walnut following the Merger.
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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 closing into escrow of the Capital Investment is required as a
condition precedent to the consummation of the Merger. For the reasons discussed
above, under "PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN
CONNECTION WITH THE MERGER--PRINCIPAL REASONS FOR THE MERGER," the Board feels
that the Merger is 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
$6,865,000 in funds into the combined business (with the possibility of at least
an additional $7,000,000 upon exercise of the warrants). The proceeds from the
Capital Investment will be used to repay approximately $725,000 remaining
outstanding under Walnut's term loan from ANB, to repay the $1,500,000 remaining
principal due under the debenture of Walnut Capital outstanding to SBIC Funding
Corp and, unless otherwise converted into Walnut Common Stock, to satisfy the
Debt Conversion, the Compensation Satisfaction and the UPLP Acquisition.
EFFECT OF THE CAPITAL INVESTMENT
The issuance of the Walnut Common Stock will result in the investors in
the Capital Investment collectively owning approximately 31.6% if 3,432,500
shares are issued (excluding all outstanding options and warrants) and
approximately 36.8% on a fully-diluted basis if 3,432,500 shares are issued and
taking into account the exercise of all outstanding options and warrants. See
"PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH
THE MERGER--EQUITY OWNERSHIP OF WALNUT."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE ISSUANCE OF WALNUT COMMON STOCK AND WARRANTS IN
CONNECTION WITH THE CAPITAL INVESTMENT.
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PROPOSAL IV
APPROVAL OF THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION
In connection with the Merger, Walnut is required to pay in cash or
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 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 Merger); less (iii) $150,000 in accrued compensation that Mr.
Kanter has agreed to forgive, either in cash or by issuing to Mr. Kanter or his
assignee 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 previously, 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 and the Compensation Satisfaction
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. Therefore, these
transactions require 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.
Stockholders should note that, regardless of whether this proposal to
approve the Debt Conversion and the Compensation Satisfaction is approved by
stockholders, Walnut may satisfy these liabilities through payment in cash.
DESCRIPTION OF THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION
The Debt Conversion involves the payment in cash or the conversion of
the following debt and accrued expenses into equity at a conversion price per
share of $2.00:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF WALNUT
PARTY DEBT AMOUNT COMMON STOCK(1)
- ----- ----------- ---------------
<S> <C> <C>
The Holding Company................................................................ $ 200,000 100,000
William J. von Liebig 1994 Charitable Remainder Unitrust........................... 600,000 300,000
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 connection with the Compensation Satisfaction, Walnut must pay in
cash or convert certain accrued compensation of Burton Kanter into 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 or his
assignee.
REASONS FOR THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION
The closings into escrow of the Debt Conversion and the Compensation
Satisfaction are conditions precedent to the consummation of the Merger, which
the Board of Directors has determined is in the best interests of Walnut and its
stockholders for the reasons discussed above.
In addition, the Debt Conversion and the Compensation Satisfaction
enable 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 continue operations following the Merger.
1940 ACT REGULATIONS RELATING TO AFFILIATE TRANSACTIONS
All of the parties who are taking part in the Debt Conversion and the
Compensation Satisfaction, other than the William J. von Liebig 1994 Charitable
Remainder Unitrust, are "affiliates" of Walnut as that term is defined under the
1940
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Act. See "Certain Affiliates and Related Transactions." As discussed above
under "PROPOSAL II APPROVAL OF THE BDC WITHDRAWAL--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 and the Compensation
Satisfaction are affiliated with Walnut as follows:
o Burton W. Kanter is the president of The Holding Company and
trusts for the benefit of members of Burton W. Kanter's
family control a majority of the outstanding common stock of
The Holding Company.
o The 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.
o Joel Kanter is the President of Windy City. Trusts for the
benefit of members of Burton W. Kanter's family own indirectly
all of the outstanding common stock of Windy City.
o Burton W. Kanter is the chairman and a director of Walnut.
Joel Kanter is the Chief Executive Officer, President, and a
director of Walnut. Joel Kanter is a son of Burton W.
Kanter.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE THE DEBT CONVERSION AND THE COMPENSATION SATISFACTION.
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PROPOSAL V
APPROVAL OF THE UPLP ACQUISITION
In connection with the Merger, 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 will be dissolved
and all of its assets and liabilities will be distributed to Universal Bridge.
Immediately after the Merger, 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.
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.
Stockholders should note that, regardless of whether the UPLP
Acquisition is approved by stockholders, Walnut may cause Universal Bridge to
purchase the outstanding limited and general partnership interests for cash.
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 OUTSTANDING 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 June
30, 1999 was $401,000 and management anticipates that 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 closing into escrow of the UPLP Acquisition is a condition
precedent to the consummation of the Merger, which, as discussed, the Board of
Directors has determined to be in the best interests of Walnut and its
stockholders.
In addition, the acquisition of the outstanding 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.
The acquisition of the outstanding 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.
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DISSOLUTION OF UPLP
Following the acquisition by Universal Bridge of the outstanding 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
Merger, 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 AND ADOPTION OF THE WALNUT STOCK INCENTIVE PLAN
Walnut is submitting to its stockholders for approval and adoption the
Walnut Stock Incentive Plan. The Walnut Stock Incentive Plan is designed to
provide certain key individuals, on whose initiative and efforts the successful
conduct of the business of Walnut largely depends, and who are largely
responsible for the management, growth and protection of the business of Walnut,
with incentives and rewards to encourage them to continue their association with
Walnut, and to maximize their performance and to provide certain
"performance-based compensation" to these key individuals.
Walnut's Board of Directors has unanimously approved a resolution
adopting the Walnut Stock Incentive Plan, subject to stockholder approval.
Stockholder approval and adoption of the Walnut Stock Incentive Plan is required
under the Nasdaq National Market corporate governance rules. The Walnut Stock
Incentive Plan must be approved by a majority of votes cast on this Proposal.
The Board of Directors believes that it is in the best interests of Walnut and
its stockholders to approve and adopt the Walnut Stock Incentive Plan and
unanimously recommends that the Walnut Stockholders approve and adopt the
Walnut Stock Incentive Plan.
DESCRIPTION OF THE WALNUT STOCK INCENTIVE PLAN
The following summary discussion of the Walnut Stock Incentive Plan is
qualified in its entirety by reference to the full text of the Walnut Stock
Incentive Plan, a copy of which is attached hereto as Exhibit E.
GENERAL DESCRIPTION OF PLAN
Nature of Shares to be Issued/Administrative Committee. Shares issued
under the Walnut Stock Incentive Plan may be authorized but unissued shares of
Walnut Common Stock or treasury shares of Walnut Common Stock, at the
discretion of a committee designated to administer the Walnut Stock Incentive
Plan (the "Committee"). The Walnut 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 Walnut 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" (as defined in Section 162(m) of the Code), and all members of the
Committee must be "outside directors" (as defined in Rule 16b-3 promulgated
under the Exchange Act).
Awards. The Walnut 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 Walnut 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 Walnut Common
Stock with respect to which "Incentive Awards" may be granted under the Walnut
Stock Incentive Plan is 2,250,000 shares. The maximum number of shares of Walnut
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 Walnut and its
affiliates (including prospective employees) and certain current and former
consultants or other independent contractors to Walnut and its affiliates
(including non-employee directors of Walnut or its affiliates) will be eligible
to receive grants of Incentive Awards. Thirteen individuals will receive awards
in conjunction with the Merger, subject to stockholder approval and certain
other conditions. See "Issuance of Options," "Restricted Stock Granted Pursuant
to the Walnut Stock Incentive Plan" and "New Plan Benefits" below for more
details on the awards to certain of these individuals. 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. Subject to the
terms of the Walnut Stock Incentive Plan, the Committee also will determine the
prices, expiration dates and other material features of Incentive Awards granted
under the Walnut Stock Incentive Plan.
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The Committee may, in its absolute discretion, without amendment to the
Walnut Stock Incentive Plan, (i) accelerate the date on which any option or
stock appreciation right granted under the Walnut 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 Walnut 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 Walnut Stock Incentive Plan and has
the authority to interpret and construe any provision of the Walnut Stock
Incentive Plan and to adopt such rules and regulations for administering the
Walnut Stock Incentive Plan as it deems necessary or appropriate. All decisions
and determinations of the Committee are final and binding on all parties. Walnut
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
Walnut 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 Walnut.
Suspension, Discontinuance, Amendment. The Board of Directors may, at
any time, suspend or discontinue the Walnut 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 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 stockholders of Walnut, that (i) increases the
number of shares of Walnut 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 Walnut Stock Incentive Plan or (iii) materially increases the
benefits accruing to individuals pursuant to the Walnut Stock Incentive 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 WALNUT STOCK INCENTIVE PLAN
Non-Qualified Stock Options. The exercise price of each NQO granted
under the Walnut 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 Walnut 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 Walnut 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 of a participant's Termination of Employment 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.
In the event a participant's employment is terminated by Walnut, other
than for Cause, on or after the occurrence of a "Change in Control" of Walnut
(as defined in the Walnut 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. 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 Walnut Stock Incentive Plan must be the fair market value of a share
of Walnut
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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 Walnut 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 Walnut
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 Walnut 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 Walnut 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 Walnut Stock
Incentive Plan or any other plan of Walnut 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). However, in the event of a Termination of Employment by reason
of Disability, an option granted as an ISO may be treated for tax purposes as an
NQO rather than an ISO to the extent it is exercised more than one year after
the Termination of Employment. ISOs are not transferable other than by will or
by the laws of descent and distribution.
In the event of a participant's Termination of Employment by Walnut,
other than for Cause, on or after the occurrence of a Change in Control of
Walnut 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
Walnut 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 Walnut
Common Stock equal to the number of shares of Walnut Common Stock delivered, and
will have an exercise price-per-share equal to the fair market value of a share
of Walnut Common Stock on the date of the exercise of the Original Option.
Limited Stock Appreciation Rights. Each NQO and ISO granted under the
Walnut 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 Walnut 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 Walnut 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 Walnut Common Stock on the
date of exercise over (ii) the exercise price of the related ISO.
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 Walnut 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.
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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 Walnut 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 Walnut Stock Incentive Plan. The exercise price of
each Stand-Alone SAR granted under the Walnut 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 Walnut
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 of a participant's Termination of Employment: (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 of a
participant's Termination of Employment 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 of a participant's Termination of Employment by Walnut,
other than for Cause, on or after the occurrence of a Change in Control of
Walnut 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 Walnut Common Stock on a predetermined
date (the "issue date") to a participant, provided the participant is
continuously employed by Walnut 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 Walnut
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 of a participant's Termination of Employment by Walnut,
other than for Cause, on or after the occurrence of a Change in Control of
Walnut 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.
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 the event of a participant's Termination of
Employment by Walnut, other than for Cause, on or after the occurrence of a
Change in Control of Walnut but prior to the expiration of a six-month period
following the Change in Control, all shares of Phantom Stock which have not
vested, or have not been canceled or forfeited, automatically vest.
Stock Bonuses. Bonuses payable in Walnut Common Stock may be granted
by the Committee and may be payable at such times and subject to such
conditions as the Committee determines.
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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 Walnut Common Stock covered by such Incentive Award if such shares were then
outstanding. Dividend Equivalent Rights may be payable in cash, in shares of
Walnut Common Stock or in any other form. 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, subject to the provisions of
the Walnut Stock Incentive Plan.
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 Walnut Stock Incentive Plan provides for an adjustment in the
number of shares of Walnut Common Stock available to be issued under the Walnut
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 Walnut, a stock dividend or split, a merger or combination of shares and
certain other similar events. The Walnut Stock Incentive Plan also provides for
the adjustment or termination of Incentive Awards upon the occurrence of certain
corporate events.
INCOME TAX WITHHOLDING
The Walnut Stock Incentive Plan provides that a participant may be
required to meet certain income tax withholding requirements by remitting to
Walnut 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 Walnut Common Stock.
LIMITATIONS IMPOSED BY SECTION 162(M)
Prior to a Change in Control of Walnut, 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 delay payments to a participant with respect to stock options,
Tandem SARs, Stand-Alone SARs or DERs (collectively, 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
DERs) and, in exchange for such cancellation, credit to an account on the books
and records of Walnut a cash amount equal to the fair market value of the shares
of Walnut Common Stock subject to such awards (collectively, 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 Walnut.
FORFEITURE OF GAIN FROM AWARDS IN CERTAIN EVENTS
To the extent that a participant breaches any restrictive covenant
otherwise 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
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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 required to be repaid to Walnut.
APPLICATION OF 1940 ACT
Any provision of the Walnut Stock Incentive Plan that would conflict
with a provision of the of 1940 Act, to the extent applicable to Walnut or any
affiliate, shall have no force or effect.
ISSUANCE OF OPTIONS
If the Walnut Stock Incentive Plan is approved by stockholders, upon
the effectiveness of the BDC Withdrawal, Walnut will grant options to purchase
1,250,000 shares of Walnut Common Stock (the "Initial Options") to certain
individuals. 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 of Walnut and its subsidiaries:
<TABLE>
<CAPTION>
NAME AND POSITION NUMBER OF NUMBER OF TOTAL NUMBER
SHARES(1) SHARES(1) OF SHARES
--------- --------- ---------
<S> <C> <C> <C>
Joseph D. Mark, Co-Chief Executive Officer................................ 250,000(2) 200,000(3) 450,000
Adi Raviv, Co-Chief Executive Officer..................................... 250,000(2) 200,000(3) 450,000
Executive Group(4)........................................................ 500,000(2) 400,000(3) 900,000
Non-Executive Director Group (5)......................................... 180,000(2) 0 180,000
Director Nominees......................................................... 0 0 0
Associates of Directors, Executive Officers and Nominees(6)............... 25,000 0 25,000
Other 5% recipients....................................................... 0 0 0
Non-Executive Officer Employee Group...................................... 0 0 0
</TABLE>
- -----------------
(1) Number of shares acquirable with each option grant.
(2) These options shall have an exercise price equal to the fair market
value of the Walnut Common Stock on the date of the grant, shall be
immediately exercisable, and shall have a term of five (5) years.
(3) These options will vest on the same schedule as the restricted shares
of Walnut Common Stock to be granted to Shai Novik pursuant to his
employment agreement with Walnut. These options shall be reduced by
the number of shares of restricted stock that are forfeited by Shai
Novik in accordance with the terms and conditions of the grant
thereof. These options shall have an exercise price equal to the fair
market value of the Walnut Common Stock on the date of the grants.
(4) This group is comprised of the executive officers of Walnut following
the consummation of the Merger.
(5) Consists of directors of Walnut following consummation of the Merger
who will not be employees of Walnut.
(6) Includes options held by Joshua S. Kanter, the son of Burton W.
Kanter, a director of Walnut following consummation of the Merger.
RESTRICTED STOCK GRANTED PURSUANT TO THE WALNUT STOCK INCENTIVE PLAN
Pursuant to the employment agreement to be entered into between Shai
Novik and Walnut, Mr. Novik will be granted 372,281 restricted shares of Walnut
Common Stock in exchange for the outstanding Novik Options held by him as of the
Effective Time. The restricted shares will vest, and the restrictions shall
lapse, in accordance with the schedule applicable to the Novik Options, or
pursuant to such other schedule as may be reasonably satisfactory to Walnut.
NEW PLAN BENEFITS
The following individuals will receive immediately vested option grants
and/or restricted shares of Walnut Common Stock upon consummation of the Merger
to acquire the number of shares of Walnut Common Stock indicated below, subject
to the approval and adoption of the Walnut Stock Incentive Plan by Walnut's
stockholders.
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<PAGE> 93
NEW PLAN BENEFITS
1999 WALNUT FINANCIAL SERVICES, 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......................................... $0 450,000(3)
Adi Raviv, Co-Chief Executive Officer.............................................. $0 450,000(3)
Shai Novik, Chief Financial Officer................................................ $0 372,281(4)
Executive Group(5)................................................................. $0 1,272,281
Non-Executive Director Group(6).................................................... $0 180,000
Non-Executive Officer Employee Group............................................... $0 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 Walnut Common Stock on
the date of the grant. Because the grant will not be made until after
the Merger, the current value of the grants to be made under the
Walnut Stock Incentive Plan cannot be determined.
(2) Number of shares acquirable with each option grant or restricted share
grant, as applicable.
(3) Consists of options to purchase up to an aggregate of 450,000 shares
of Walnut Common Stock to be granted to each of Messrs. Mark and Raviv
pursuant to their respective employment agreements with Walnut.
(4) Consists of 372,281 restricted shares of Walnut Common Stock to be
granted to Mr. Novik pursuant to his employment agreement with Walnut.
(5) Consists of the executive officers of Walnut following the
consummation of the Merger.
(6) Consists of directors of Walnut following consummation of the Merger
who will not be employees of Walnut.
SUMMARY OF FEDERAL TAX CONSEQUENCES
The following is a description of the principal federal income tax
consequences of awards under the Walnut 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 Walnut 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 Walnut 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 Walnut 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
Walnut Common Stock received as a result of the exercise of the option on the
exercise date over (b) the option exercise price, and Walnut 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 Walnut 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 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 Code currently provides that net
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<PAGE> 94
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 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
Walnut's deduction, will not be affected by whether the exercise price is paid
in cash or in shares of Walnut 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 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 Code.
Walnut 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, Walnut will be entitled to a
deduction in an amount equal to the compensation income resulting from the
disqualifying disposition in the taxable year of Walnut 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 Walnut 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 Walnut Common Stock or other property
received. Walnut will be entitled to a deduction in an amount equal to the
amount of ordinary income recognized by the recipient.
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<PAGE> 95
Restricted Stock. A grant of restricted shares of Walnut Common Stock
will not result in income for the recipient or a tax deduction for Walnut 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 Walnut 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 Walnut 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 Walnut 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 Walnut 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. Walnut 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. Walnut 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 Walnut 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. Walnut 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 Walnut.
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 Walnut 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. If
the Walnut Stock Incentive Plan is approved by the Walnut stockholders, grants
of NQOs, ISOs, Tandem SARs, LSARs and Stand-Alone SARs generally would be
eligible for an exception to the Million Dollar Limit applicable to certain
qualified "performance-based compensation." However, without meeting certain
other requirements, it would not appear that other Incentive Awards would be
exempt from the Million Dollar Limit. Thus, if and to the extent such other
Incentive Awards constitute taxable income to a covered employee in a year and
such covered employee's income subject to the Million Dollar Limit exceeds $1
million, Walnut would not be entitled to a deduction for such excess. The Walnut
Stock Incentive Plan
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<PAGE> 96
permits the Committee, prior to a Change in Control, to defer payments to
covered employees that otherwise might count against the Million Dollar Limit
until a year in which such individuals are no longer covered employees as
described above regarding limitations imposed by Section 162(m). As a result, it
would appear that Walnut's deduction for such amounts would be preserved.
PRINCIPAL REASONS TO APPROVE AND ADOPT THE WALNUT 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 Walnut's long term success. The purpose of
the Walnut Stock Incentive Plan is primarily to encourage and enable the key
individuals associated with Walnut, upon whose judgment, initiative and efforts
Walnut will largely depend for the successful conduct of its business, to
acquire or increase their proprietary interest in the success of Walnut. It is
anticipated that providing such persons with a direct stake in Walnut's welfare
will assure a close identification of their interests with those of Walnut,
thereby stimulating their efforts on Walnut's behalf and strengthening their
desire to remain with Walnut.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THIS PROPOSAL TO
APPROVE AND ADOPT THE WALNUT STOCK INCENTIVE PLAN.
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PROPOSAL VII
APPROVAL AND ADOPTION OF THE RESTATED CHARTER
Stockholders are being asked to consider and vote upon a proposal to
approve certain amendments to Walnut's Articles of Incorporation, as set forth
in the Restated Charter, that would: (a) change Walnut's corporate name to
"THCG, Inc.;" (b) authorize additional shares of capital stock; (c) provide for
staggered terms of the Board of Directors; (d) change the required vote for
election of directors; (e) change the standard for removal of directors; (f)
limit the personal liability of directors for breaches of fiduciary duties; and
(g) eliminate the ability of stockholders to take action without a meeting.
Walnut's Board of Directors has unanimously approved a resolution
adopting the Restated Charter, subject to stockholder approval, and the Restated
Bylaws, subject to the adoption of the Restated Charter. The Board of Directors
believes that it is in the best interests of Walnut and its stockholders to
approve and adopt the Restated Charter and unanimously recommends that the
Walnut stockholders approve and adopt the Restated Charter.
The Restated Charter, if approved by stockholders, will be filed with
the State of Utah Department of Commerce, Division of Corporations and
Commercial Code, and will become effective immediately following the
consummation of the Merger. If the Merger is not approved or if the Merger does
not close, the Board of Directors will not cause the Restated Charter to become
effective, and Walnut's current Articles will remain in effect. The affirmative
vote of holders of a majority of outstanding shares of Walnut Common Stock
entitled to vote at the Special Meeting will be required to approve and adopt
the Restated Charter.
SIGNIFICANT CHANGES RESULTING FROM THE APPROVAL AND ADOPTION OF THE RESTATED
CHARTER.
The following discussion of the significant differences between
Walnut's current Charter and the Restated Charter summarizes the principal
differences and does not purport to be an exhaustive discussion of all of the
terms of the Restated Charter. The discussion contained in this Proxy Statement
is qualified in its entirety by reference to the Utah BCA, the current Charter,
the Restated Charter, the current Bylaws and the Restated Bylaws. Further
changes in the rights of stockholders as a result of the Merger are discussed
further below under "Significant Changes Resulting from the Adoption of the
Restated Bylaws." Stockholders should carefully review the Restated Charter and
the Restated Bylaws for a full understanding of how their rights may be affected
by the amendments discussed in this Proxy Statement.
Corporate Name. The Restated Charter would change Walnut's corporate
name to "THCG, Inc."
Capital Stock. Walnut's current Charter provides authority for the
issuance of up to 50,000,000 shares of Walnut Common Stock and up to 1,000,000
shares of preferred stock.
The Restated Charter would provide for the issuance of up to 50,000,000
shares of common stock and up to 5,000,000 shares of preferred stock.
Classified Board of Directors. Walnut's current Charter provides that
each member of Walnut's Board of Directors is to be elected annually at each
annual meeting of stockholders to serve one-year terms.
As amended by the Restated Charter, the Board of Directors shall be
classified, with respect to the term for which the directors severally hold
office, into three classes, as nearly equal in number as possible. The first
class of directors shall initially be appointed for a term expiring at the first
annual meeting of stockholders to be held following the consummation of the
Merger, the second class shall initially be appointed for a term expiring at the
second annual meeting of stockholders to be held following the consummation of
the Merger, and the third class shall initially be appointed for a term expiring
at the third annual meeting of stockholders to be held following the
consummation of the Merger. At each such annual meeting, the directors shall be
elected to serve three-year terms.
Election of Directors. Walnut's current Charter does not address the
election of directors. Under Walnut's current Bylaws, directors are to be
elected annually by a majority of votes cast on the election.
As amended by the Restated Charter, directors will be elected by a
plurality of votes cast on the election.
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<PAGE> 98
Removal of Directors. Walnut's current Charter does not address the
standard for removal of directors. Therefore, pursuant to Section 16-10a-808 of
the Utah BCA, the stockholders are permitted to remove directors with or without
cause.
The Restated Charter would provide that directors may be removed only
for cause.
Director Liability. Walnut's current Charter does not contain any
express limitations on the personal liability of directors for monetary damages
for breach of fiduciary duty.
Under the Restated Charter, directors would not be personally liable to
Walnut or its stockholders for monetary damages for breaches of fiduciary duty,
except for liability (a) for breaches of the director's duty of loyalty, (b) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (c) as provided by the Utah BCA or (d) for any
transaction from which the director derived improper personal benefit.
Stockholder Action by Written Consent. Walnut's current Charter does
not restrict the ability of stockholders to take action by written consent.
Therefore, pursuant to Sections 16-10a-704 and 16-10a-1704 of the Utah BCA,
stockholders are permitted to take action without a meeting and without prior
notice only if one or more consents in writing, setting forth the action to be
taken, have been signed by all of the holders of outstanding Walnut Common
Stock.
The Restated Charter would provide that any action required or
permitted to be taken by stockholders must be taken at a properly called special
or annual meeting of the stockholders, and may not be effected by written
consent.
PRINCIPAL REASONS TO APPROVE AND ADOPT THE RESTATED CHARTER
The Board of Directors believes that the Restated Charter will provide
long-term benefits to Walnut and its stockholders in that it will allow Walnut
and the Board of Directors needed flexibility in corporate planning and the
ability to respond to developments in Walnut's business. In addition, the Board
of Directors believes that the amendments effected by the proposed Restated
Charter will enhance Walnut's ability to attract highly qualified individuals as
directors. Finally, certain of the changes proposed by the amendments contained
in the Restated Charter are substantially ministerial in nature.
Hostile Takeover Attempts. The Board of Directors believes that the
creation of a classified Board of Directors and the heightened standard for
removal of Directors will have an anti-takeover effect, as they will render more
difficult unsolicited attempts from third parties to take over Walnut. This
would give the Board of Directors sufficient time to consider carefully and
evaluate unsolicited offers and would increase the likelihood that all
stockholders will receive a fair price for their shares in any transactions
relating to such offers. A hostile takeover attempt that has not been negotiated
or approved by the board of a corporation can seriously disrupt the business and
management of a corporation, and generally presents to stockholders the risk of
terms that may be less than favorable to all of the stockholders than would be
available in a board-approved transaction. Board-approved transactions must be
carefully planned and undertaken at an opportune time in order to obtain maximum
value for the corporation and all of its stockholders, with due consideration to
matters such as the recognition or postponement of gain or loss for tax
purposes, the management and business of the acquiring corporation and maximum
strategic deployment of corporate assets. The Board of Directors believes that
the provisions of the Restated Charter will reduce the likelihood that an
unsolicited offer to acquire control of Walnut will be pursued in an unfair or
inequitable manner, and thus reduce the likelihood that Walnut would be required
to incur significant expense and be subject to substantial disruption in
connection with such an attempt.
The Board of Directors recognizes that hostile takeover attempts do not
always have the unfavorable consequences or effects described above, and may
sometimes be beneficial to stockholders by providing them with considerable
value for their shares. The changes described above could therefore impede or
delay an attempt to effect a change in control even if such change were in the
best interests of the stockholders. In addition, the approval and adoption of
the Restated Charter will not necessarily ensure or guarantee that stockholders
will receive a fair price for their shares in connection with an acquisition of
control. See "RISK FACTORS--Limitations on Changes in Control." However, the
Board of Directors believes that the potential disadvantages of unsolicited and
unapproved takeover attempts are sufficiently great that prudent steps to reduce
the likelihood of such attempts are in the best interests of Walnut and its
stockholders.
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Members of the Board of Directors. The Board of Directors believes that
such provisions as the heightened standard of removal for directors and the
limitation of personal liability of directors for breaches of fiduciary duty
will be beneficial to Walnut and its stockholders. Walnut seeks to retain the
most capable individuals to serve as its directors, and the Board of Directors
believes that providing these protections could be a significant factor in
ensuring the continued services of its directors, attracting other qualified and
experienced individuals to serve in such capacities and freeing them to make
corporate decisions on the merits rather than a desire to avoid personal
liability.
Ministerial Changes. The proposed amendments contained in the Restated
Charter include numerous ministerial changes included primarily to clarify the
language of the Charter. These changes are not significant, and therefore have
not been discussed in this Proxy Statement.
SIGNIFICANT CHANGES RESULTING FROM THE ADOPTION OF THE RESTATED BYLAWS.
Walnut's Board of Directors has also approved the Restated Bylaws,
which shall become effective concurrently with the effectiveness of the Restated
Charter. The Restated Bylaws were adopted to bring them into conformity with the
Restated Charter. Thus, the following discussion should be considered together
with the discussion of the changes arising from the approval and adoption of the
Restated Charter. Stockholders should note, however, that they are not being
asked to approve or adopt the Restated Bylaws.
Number and Election of Directors. Walnut's current Bylaws provide that
the 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 Restated Bylaws provide that Walnut'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 nine. The Restated 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 Restated Bylaws, so that they may conform to the Restated Charter,
further provide that the board of directors be classified with respect to the
term for which the directors severally hold office as provided in the Restated
Charter.
Matters to be Considered at Annual Meetings. The current Bylaws do not
restrict the ability of stockholders to bring business before annual meetings.
The Restated 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.
Waiver of Notice. The current Bylaws do not address stockholders'
waiver of a lack of proper notice of a stockholder meeting. According to the
Utah BCA, a stockholder who attends any stockholder meeting has waived objection
to lack of notice or defective notice unless the stockholder 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. The Restated Bylaws
provide that a stockholder 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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THIS
PROPOSAL TO APPROVE AND ADOPT THE RESTATED CHARTER.
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CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF WALNUT
The following information is as of September 21, 1999, unless otherwise
specified. It is contemplated that Burton W. Kanter, Joel Kanter and Gene
Burleson will remain as directors of Walnut after the Merger. For additional
information regarding the management of Walnut following the Merger, see
"PROPOSAL I--APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH
THE MERGER--MANAGEMENT of Walnut Following the Merger."
<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 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.
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. 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
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<PAGE> 101
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 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.
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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 Barack Ferrazzano Kirschbaum Perlman & Nagelberg, a
Chicago, Illinois law firm specializing in securities, corporate and real estate
law. Mr. Kanter was an associate at that firm from September 1987 to February
1990. Since 1986, Mr. Kanter has also been vice-president of Windy City. Mr.
Kanter is the son of Burton W. Kanter and the brother of Joel S. Kanter.
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.
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 $60,000 for the 1998 fiscal year. Amounts paid to
Messrs. Burton Kanter, Joel Kanter and Robert Mauer reflect the fiscal years
ended December 31, 1998, 1997 and 1996. Walnut had entered into employment
agreements with Burton W. Kanter and Joel S. Kanter. Both agreements expired by
their terms in February 1998.
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<PAGE> 103
SUMMARY COMPENSATION TABLE (1)
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- ------------
NAME AND CURRENT PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS
- ----------------------------------- ---- ---------- ----------- -------
<S> <C> <C> <C> <C>
Burton W. Kanter,............................ 1998 $100,000(2) -- --
Chairman of the Board.................... 1997 100,000(2) -- --
1996 100,000(2) -- --
Joel S. Kanter,.............................. 1998 $225,000 -- --
President and Chief Executive Officer 1997 200,000 $50,000(3)
1996 200,000 -- --
Robert F. Mauer,............................. 1998 $115,000 -- --
Chief Financial Officer and Treasurer 1997 100,000 $30,000(3)
1996 91,667(4) -- 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
Merger. See "PROPOSAL IV--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 $100,000.
OPTIONS AND OTHER AWARDS
There were no options or SARs granted to any directors of Walnut or the
Named Executive Officers in the fiscal year 1998. No directors or officers
exercised any options in the fiscal year 1998.
The following table provides certain information regarding options
granted to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN FISCAL 1998
AND FISCAL 1998 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS
SHARES YEAR-END(#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) 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 20,833 0 0 0
</TABLE>
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- ----------------------
(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 per share.
EMPLOYMENT AGREEMENTS WITH MANAGEMENT
Walnut had entered into written 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.
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<PAGE> 105
COMPARISON OF 40 MONTH CUMULATIVE TOTAL RETURN
AMONG WALNUT FINANCIAL SERVICES, INC.,
THE NASDAQ STOCK MARKET INDEX
AND THE NASDAQ FINANCIAL STOCKS INDEX
[GRAPH]
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
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<PAGE> 106
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.
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 Option Plan and the Amended
and Restated Walnut Financial Services, Inc. 1994 Stock Incentive 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 Code 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 the 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.
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<PAGE> 107
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
The following table sets forth (a) on an actual basis as of September
21, 1999, (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 Walnut Common Stock represented by such shares, and
(b) on a pro-forma basis after giving effect to the Merger and the other
transactions contemplated by the Merger Agreement (assuming the issuance of
3,432,500 shares in the Capital Investment and excluding any shares that may be
issued to current Walnut stockholders in connection with the Debt Conversion or
the Compensation Satisfaction), (i) the number of shares of Walnut Common Stock
that will be owned by the Named Executive Officers, each of the directors of
Walnut, individually, and the executive officers as a group, and (ii) the
percentage ownership of the Walnut 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. 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.
<TABLE>
<CAPTION>
ACTUAL PRO-FORMA
------------------------- -------------------------
NAME AND ADDRESSES OF NUMBER PERCENT NUMBER PERCENT
DIRECTORS AND EXECUTIVE OFFICERS OF SHARES OF CLASS OF SHARES OF CLASS
- -------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Burton W. Kanter ........................... 210,097(1) 6.19% 238,442(2) 2.18%
Two North LaSalle Street
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) 2.42%
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) 1.10%
1001 Brickell Bay Drive
9th Floor
Miami, FL 33131
</TABLE>
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<PAGE> 108
<TABLE>
<CAPTION>
ACTUAL PRO-FORMA
------------------------- -------------------------
NAME AND ADDRESSES OF NUMBER PERCENT NUMBER PERCENT
DIRECTORS AND EXECUTIVE OFFICERS OF SHARES OF CLASS OF SHARES OF CLASS
- -------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
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 2,111,407(16) 18.97%
Tower Hill Securities, Inc.
650 Madison Avenue
New York, NY 10022
Adi Raviv .................................. 0 0 2,111,407(17) 18.97%
Tower Hill Securities, Inc.
650 Madison Avenue
New York, NY 10022
Shai Novik ................................. 0 0 372,281(18) 3.42%
Tower Hill Securities, Inc.
650 Madison Avenue
New York, NY 10022
Evan Marks ................................. 0 0 100,000 *
Alben Asset Management
885 Third Avenue
New York, NY 10022
Henry Klein ................................ 0 0 0 0
Templeton Direct Advisors, Inc.
15 Valley Drive
Greenwich, CT 06831
Stanley B. Stern ........................... 0 0 0 0
CIBC Oppenheimer
200 Liberty Street
39th Floor
New York, NY 10281
Keith W. Abell ............................. 0 0 0 0(19)
Greenwich Street Capital Partners, Inc.
388 Greenwich Street 36th Floor
New York, NY 10013
Officers and Directors, as a group ......... 599,458(20) 17.43% 5,222,857(21) 45.19%
</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) 59,152 shares owned by Chicago Investments,
Inc.,
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<PAGE> 109
(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, Chicago Investments, Inc. or TMT. Mr. Kanter, as
President of BWK, Carlco, TMT and Chicago Investments, Inc., has sole
voting and investment control of the shares owned by BWK, Carlco, TMT
and Chicago Investments, Inc. 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, Chicago Investments 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 will be repurchased in connection with the Merger,
plus options to purchase up to 70,000 shares, all of which options
will be exercisable on the grant thereof.
(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. 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, all of which options
will be exercisable on the grant thereof.
(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) Class A Warrants to purchase 5,833 shares of Walnut Common Stock
owned by Kanter Family Foundation, (iv) Class A Warrants to purchase
6,125 shares of Walnut Common Stock 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 will be repurchased in connection with the
Merger, plus options to purchase up to 90,000 shares per share, all of
which options will be exercisable on the grant thereof.
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<PAGE> 110
(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, all of which options
will be exercisable on the grant thereof.
(9) The number of shares reported includes options to purchase up to
20,000 shares, all of which options will be exercisable on the grant
thereof.
(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, all of which
options will be exercisable on the grant thereof.
(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, all of which
options will be exercisable on the grant thereof.
(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, all of which options will be exercisable on the grant
thereof.
(16) The number of shares reported includes options to purchase 250,000
shares of Walnut Common Stock, all of which options will be
exercisable on the grant thereof. The number of shares reported does
not include options to purchase 200,000 shares of Walnut Common Stock,
which options will be reduced by the number of shares of restricted
stock that are forfeited by Shai Novik in accordance with the terms
and conditions of the grant thereof.
(17) The number of shares reported includes options to purchase 250,000
shares of Walnut Common Stock, all of which options will be
exercisable on the grant thereof. The number of shares reported does
not include options to purchase 200,000 shares of Walnut Common Stock,
which options will be reduced by the number of shares of restricted
stock that are forfeited by Shai Novik in accordance with the terms
and conditions of the grant thereof.
(18) The number of shares reported consists of restricted shares to be
granted pursuant to Mr. Novik's employment agreement with Walnut.
(19) Mr. Abell will disclaim ownership of the 2,500,000 shares and the
warrants to purchase up to 2,000,000 shares to be granted to GSCP and
its designated affiliates.
(20) Such group consists of nine persons. The number of shares reported
includes all of the shares reported at footnotes
(1),(3),(5),(7),(10),(12) and (14) and shares owned by Gene Burleson
and by Joshua Kanter, Secretary and General Counsel of Walnut.
(21) Such group consists of Burton W. Kanter, Joel S. Kanter, Gene
Burleson, Joseph D. Mark, Adi Raviv, Evan Marks, Henry Klein, Stanley
B. Stern, Keith Abell and Shai Novik.
99
<PAGE> 111
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Walnut has retained the firm of Barack Ferrazzano Kirschbaum Perlman &
Nagelberg 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 paid approximately $82,000
in legal fees and expenses to Barack Ferrazzano Kirschbaum Perlman and Nagleberg
during 1998 and $118,860 during the first six months of 1999, and had Barack
Ferrazzano Kirschbaum Perlman and Nagelberg 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 or converted into Walnut Common Stock 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 or converted into
Walnut Common Stock 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, 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
Merger with proceeds from the Capital Investment. See "PROPOSAL III--APPROVAL OF
THE ISSUANCE OF WALNUT COMMON STOCK AND WARRANTS IN CONNECTION WITH THE CAPITAL
INVESTMENT."
100
<PAGE> 112
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. In addition, Tower Hill
has retained MacKenzie Partners, Inc. to perform proxy solicitation services.
MacKenzie Partners is entitled to a fee not to exceed $3,000, plus out-of-pocket
expenses for its services, which amounts will be paid by Tower Hill.
STOCKHOLDER PROPOSALS
Stockholder proposals intended to be presented at the 2000 annual
meeting of stockholders of Walnut 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 Walnut 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
Walnut 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 WALNUT.
PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD TODAY.
101
<PAGE> 113
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-2
-- Unaudited Pro Forma Condensed Combined Balance Sheets as of
December 31, 1998 and as of June 30, 1999........................................................ F-3
-- Unaudited Pro Forma Condensed Combined Statements of Operations for the
Year Ended December 31, 1998 and the Six Months Ended June 30, 1999.............................. F-7
-- Notes to Unaudited Pro Forma Condensed Combined Financial Statements............................. F-9
II. CONSOLIDATED FINANCIAL STATEMENTS OF WALNUT
-- Report of Independent Certified Public Accountants............................................... F-12
-- Consolidated Statements of Assets and Liabilities as of
December 31, 1998 and December 31, 1997.......................................................... F-13
-- Investments in Securities as of December 31, 1998 and December 31, 1997.......................... F-14
-- Consolidated Statements of Operations for the Years Ended
December 31, 1998, December 31, 1997 and December 31, 1996....................................... F-16
-- Consolidated Statements of Changes in Net Assets for the
Years Ended December 31, 1998, December 31, 1997 and December 31, 1996........................... F-17
-- Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, December 31, 1997 and December 31, 1996....................................... F-18
-- Notes to Consolidated Financial Statements....................................................... F-19
-- Consolidated Statements of Assets and Liabilities as of
June 30, 1999 and December 31, 1998.............................................................. F-28
-- Investments in Securities as of June 30, 1999.................................................... F-29
-- Consolidated Statements of Operations for the Six Months Ended
June 30, 1999 and June 30, 1998.................................................................. F-31
-- Consolidated Statements of Changes in Net Assets for the Six
Months Ended June 30, 1999 and June 30, 1998..................................................... F-32
-- Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1999 and June 30, 1998.................................................................. F-33
-- Notes to Consolidated Financial Statements....................................................... F-34
III. FINANCIAL STATEMENTS OF TOWER HILL
-- Independent Auditors' Report..................................................................... F-37
-- Statement of Financial Condition as of March 31, 1998............................................ F-38
-- Statement of Operations for the Year Ended March 31, 1998........................................ F-39
-- Statement of Changes in Stockholder's Equity for the Year Ended
March 31, 1998................................................................................... F-40
-- Statement of Cash Flows for the Year Ended March 31, 1998........................................ F-41
-- Notes to Financial Statements.................................................................... F-42
-- Computation of Net Capital Pursuant to Rule 15c3-1 and Statement
Pursuant to Rule 17a-5(d)(4)..................................................................... F-44
-- Report of Independent Certified Public Accountants............................................... F-45
-- Statement of Financial Condition as of December 31, 1998......................................... F-47
-- Statement of Operations for the Nine Months Ended December 31, 1998.............................. F-47
-- Statement of Changes in Stockholder's Equity for the Nine Months
Ended December 31, 1998.......................................................................... F-48
-- Statement of Cash Flows for the Nine Months Ended December 31, 1998.............................. F-49
-- Notes to Financial Statements.................................................................... F-50
-- Computation of Net Capital Pursuant to Rule 15c3-1 and Statement
Pursuant to Rule 17a-5(d)(4)..................................................................... F-52
-- Balance Sheet as of June 30, 1999................................................................ F-53
-- Statement of Profits and Losses for the Six Months Ended June 30, 1999........................... F-55
</TABLE>
F-1
<PAGE> 114
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We have provided unaudited condensed combined financial statements of
Walnut, after giving effect to the Merger, 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 Merger.
We have provided an unaudited pro forma condensed combined balance
sheet as of June 30, 1999 and December 31, 1998 that includes the impact of
transaction costs and various material transactions associated with the Merger.
We have also provided unaudited pro forma condensed combined statements of
operations for the six month period ended June 30, 1999 and the twelve month
period ended December 31, 1998, assuming the Merger had occurred on January 1,
1998.
Certain historical Walnut 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 BDC on October 15, 1997. The effect of this
reclassification has been to record the assets and liabilities of UPLP, Pacific
Financial and Inland Financial instead recording only the investment in
subsidiaries as a single asset on Walnut's balance sheet. Additionally,
unrealized gains and losses are recorded directly to Shareholders' Equity,
instead of being recorded in Net Income.
F-2
<PAGE> 115
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ASSUMING MINIMUM PRIVATE PLACEMENT
<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 (825,000) 55,000
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 5,659,000
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 2,335,000 7,236,000
Other assets......................................... 3,000 49,000 52,000
-------------- ------------ -------------- --------------
Total assets................................... 21,565,000 1,548,000 2,224,000 25,337,000
============== ============ ============== ==============
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 current liabilities.................. 1,304,000 245,000 (372,000) 1,177,000
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 (4,290,000) 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 (4,290,000) 8,861,000
Minority Interest.................................... 415,000 0 (415,000) 0
Shareholders' equity:................................ 8,254,000 1,293,000 6,929,000 16,476,000
-------------- ------------ -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... 21,565,000 1,548,000 2,224,000 25,337,000
============== ============ ============== ==============
</TABLE>
F-3
<PAGE> 116
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ASSUMING MAXIMUM PRIVATE PLACEMENT
<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 1,143,000 2,023,000
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 7,627,000
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 2,335,000 7,236,000
Other assets......................................... 3,000 49,000 52,000
-------------- ------------ -------------- --------------
Total assets................................... 21,565,000 1,548,000 4,192,000 27,305,000
============== ============ ============== ==============
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 current liabilities.................. 1,304,000 245,000 (372,000) 1,177,000
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 (4,290,000) 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 (4,290,000) 8,861,000
Minority Interest.................................... 415,000 0 (415,000) 0
Shareholders' equity:................................ 8,254,000 1,293,000 8,897,000 18,444,000
-------------- ------------ -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........... 21,565,000 1,548,000 4,192,000 27,305,000
============== ============ ============== ==============
</TABLE>
F-4
<PAGE> 117
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE SIX MONTHS ENDED JUNE 30, 1999
ASSUMING MINIMUM PRIVATE PLACEMENT
<TABLE>
<CAPTION>
(RESTATED)
HISTORICAL HISTORICAL PRO FORMA
-------------- ------------ --------------------------------
WALNUT TOWER HILL ADJUSTMENTS COMBINED
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... 1,711,000 948,000 (825,000) 1,834,000
Accounts receivable, net of allowance............. 3,947,000 96,000 4,043,000
Interest receivable............................... 268,000 0 268,000
Loans receivable.................................. 670,000 281,000 951,000
-------------- ----------- --------------
Total Current Assets........................ 6,596,000 1,325,000 7,096,000
Fixed Assets, net of accumulated
depreciation...................................... 108,000 67,000 175,000
Available for sale securities........................ 1,173,000 140,000 1,313,000
Non-marketable securities............................ 4,823,000 869,000 5,692,000
Notes receivable..................................... 1,121,000 100,000 1,221,000
Goodwill ............................................ 4,859,000 0 1,980,000 6,839,000
Other assets......................................... 229,000 93,000 322,000
-------------- ----------- --------------- --------------
Total assets................................ 18,909,000 1,725,000 2,024,000 22,658,000
============== =========== =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers......................... 0 0
Notes payable to banks............................ 1,956,000 (825,000) 1,131,000
Notes payable to related parties.................. 1,093,000 (1,093,000) 0
Notes payable to others........................... 135,000 135,000
Accounts payable, accrued expenses,
and other current liabilities..................... 749,000 56,000 (372,000) 433,000
Customer Retention Payable........................ 1,797,000 1,797,000
Current portion of long-term debts................ 2,000,000 (2,000,000) 0
-------------- ----------- --------------- --------------
Total current liabilities................... 7,730,000 56,000 (4,290,000) 3,496,000
Long Term Notes, net of current portion.............. 654,000 0 654,000
Participation Loans Payable.......................... 2,249,000 2,249,000
-------------- ----------- --------------- --------------
Total liabilities........................... 10,633,000 56,000 (4,290,000) 6,399,000
Minority Interest.................................... 401,000 0 (401,000) 0
Shareholders' equity:................................ 7,875,000 1,669,000 6,715,000 16,259,000
-------------- ----------- --------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...................... 18,909,000 1,725,000 2,024,000 22,658,000
============== =========== =============== ==============
</TABLE>
F-5
<PAGE> 118
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
FOR THE SIX MONTHS ENDED JUNE 30, 1999
ASSUMING MAXIMUM PRIVATE PLACEMENT
<TABLE>
<CAPTION>
(RESTATED)
HISTORICAL HISTORICAL PRO FORMA
-------------- ------------ --------------------------------
WALNUT TOWER HILL ADJUSTMENTS COMBINED
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents......................... 1,711,000 948,000 1,157,000 3,816,000
Accounts receivable, net of allowance............. 3,947,000 96,000 4,043,000
Interest receivable............................... 268,000 0 268,000
Loans receivable.................................. 670,000 281,000 951,000
-------------- ----------- --------------
Total Current Assets........................ 6,596,000 1,325,000 9,078,000
Fixed Assets, net of accumulated
depreciation...................................... 108,000 67,000 175,000
Available for sale securities........................ 1,173,000 140,000 1,313,000
Non-marketable securities............................ 4,823,000 869,000 5,692,000
Notes receivable..................................... 1,121,000 100,000 1,221,000
Goodwill ............................................ 4,859,000 0 1,980,000 6,839,000
Other assets......................................... 229,000 93,000 322,000
-------------- ----------- --------------- --------------
Total assets................................ 18,909,000 1,725,000 4,006,000 24,640,000
============== =========== =============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Margin payable to brokers......................... 0 0
Notes payable to banks............................ 1,956,000 (825,000) 1,131,000
Notes payable to related parties.................. 1,093,000 (1,093,000) 0
Notes payable to others........................... 135,000 135,000
Accounts payable, accrued expenses,
and other current liabilities..................... 749,000 56,000 (372,000) 433,000
Customer Retention Payable........................ 1,797,000 1,797,000
Current portion of long-term debts................ 2,000,000 (2,000,000) 0
-------------- ----------- --------------- --------------
Total current liabilities................... 7,730,000 56,000 (4,290,000) 3,496,000
Long Term Notes, net of current portion.............. 654,000 0 654,000
Participation Loans Payable.......................... 2,249,000 2,249,000
-------------- ----------- --------------- --------------
Total liabilities........................... 10,633,000 56,000 (4,290,000) 6,399,000
Minority Interest.................................... 401,000 0 (401,000) 0
Shareholders' equity:................................ 7,875,000 1,669,000 8,697,000 18,241,000
-------------- ----------- --------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...................... 18,909,000 1,725,000 4,006,000 24,640,000
============== =========== =============== ==============
</TABLE>
F-6
<PAGE> 119
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 2,221,000 647,000 5,718,000
-------------- ----------- --------------- --------------
2,934,000 2,221,000 647,000 5,802,000
Operating gain/(loss)................................ (24,000) (85,000) (647,000) (756,000)
Interest and other financial costs................... 1,652,000 20,000 (449,000) 1,223,000
-------------- ----------- --------------- --------------
Gain/(Loss) before taxes and
realized gain..................................... (1,676,000) (105,000) (198,000) (1,979,000)
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) (286,000) (916,000)
============== =========== =============== ==============
Assuming Minimum Private Placement
Income/(Loss) per share........................... (0.16) (0.09)
============== ==============
Weighted average shares outstanding............... 3,350,533 6,736,596 10,087,129
============== =============== ==============
Assuming Maximum Private Placement
Income/(Loss) per share........................... (0.16) (0.08)
============== ==============
Weighted average shares outstanding............... 3,350,533 7,727,596 11,078,129
============== =============== ==============
</TABLE>
F-7
<PAGE> 120
WALNUT FINANCIAL SERVICES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
(RESTATED)
HISTORICAL HISTORICAL PRO FORMA
-------------- ------------ --------------------------------
WALNUT TOWER HILL ADJUSTMENTS COMBINED
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenue
Consulting income................................. 1,938,000 1,938,000
Factoring income.................................. 569,000 0 569,000
Interest, investment and other income............. 174,000 71,000 245,000
-------------- ----------- --------------
Total revenue............................... 743,000 2,009,000 2,752,000
Costs and expenses
Cost of services.................................. 119,000 0 119,000
General and administrative expenses............... 1,142,000 1,598,000 323,000 3,063,000
-------------- ----------- --------------- --------------
1,261,000 1,598,000 323,000 3,182,000
Operating gain/(loss)................................ (518,000) 411,000 (323,000) (430,000)
Interest and other financial costs................... 395,000 0 (232,000) 163,000
-------------- ----------- --------------- --------------
Gain/(Loss) before taxes
and realized gain................................. (913,000) 411,000 (91,000) (593,000)
Income tax benefit/(expenses)........................ 0 0 0
Realized gain/(loss) on sale of
securities, net of tax............................ 2,506,000 0 2,506,000
Effect on net income of
minority interest................................. 14,000 (14,000) 0
-------------- ----------- --------------- --------------
Net Income/(Loss)........................... 1,607,000 411,000 (105,000) 1,913,000
-------------- ----------- --------------- --------------
Assuming Minimum Private Placement:
Income/(Loss) per share........................... 0.48 0.19
============== ==============
Weighted average shares outstanding............... 3,350,533 6,736,596 10,087,129
============== =============== ==============
Assuming Maximum Private Placement:
Income/(Loss) per share........................... 0.48 0.17
============== ==============
Weighted average shares outstanding.................. 3,350,533 7,727,596 11,078,129
============== =============== ==============
</TABLE>
F-8
<PAGE> 121
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 $1,000,000, 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 June
30, 1999 includes the impact of all transactions, whether of a recurring or
non-recurring nature, that can be reasonably estimated and should be reflected
as of that date.
There are two unaudited pro forma consolidated balance sheets
presented. These represent the minimum amount of the private placement
(1,500,000 shares for $3,000,000) and the maximum amount of the private
placement (3,000,000 shares for $6,000,000).
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 $5,844,000 as of June 30, 1999 and
$6,957,000 as of December 31, 1998. WFS' reported liabilities increased by
$6,091,000 as of June 30, 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 to 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 six month period
ended June 30, 1999 was an increase in Net Income equal to the unrealized loss
for the same period of $2,300,000 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 known impairments to the recovery of cost. This has
reduced Walnut's non-marketable securities by $869,000 as of June 30, 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 various
transactions associated with the merger and private placement. The adjustments
are:
<TABLE>
<CAPTION>
Minimum Maximum
------- -------
<S> <C> <C>
Private placements 3,000,000 6,865,000
Payment of long term debenture (2,000,000) (2,000,000)
Payment of note to ANB (825,000) (825,000)
Payment of closing costs (1,000,000) (1,000,000)
Payment of subsidiary debt - (893,000)
Payment of accrued salary and other - (255,000)
Payment of minority interest - (401,000)(415,000 as of 12/31/98)
Payment to UPLP general partner - (134,000)
Payment of related party debt - (200,000)
</TABLE>
F-9
<PAGE> 122
NON-MARKETABLE SECURITIES.
These have been increased by $869,000 as of June 30, 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 $1,980,000 as
of June 30, 1999 and $2,335,000 as of December 31, 1998. This was the result of
the addition due to closing costs ($1,000,000), finders fees for the private
placement ($400,000) and goodwill associated with the acquisition ($1,811,000)
and the purchase of the future value of UPLP's general partner ($134,000).
Also, goodwill was reduced in accordance with the adjustments made to reflect
the fair market value of non-marketable securities as of the proxy reporting
dates. These amounts were $869,000 as of June 30, 1999 and $714,000 as of March
31, 1999. The additional goodwill was amortized based on a straight line five
year life.
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 $401,000 as of June
30, 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 June 30, 1999, and December 31, 1998 condensed combined balance sheet.
The adjustments are:
<TABLE>
<CAPTION>
6/30/99 12/31/98
------- --------
<S> <C> <C>
Private Placement of WFS common shares (minimum).................................. $ 3,000,000 $ 3,000,000
Private Placement of WFS common shares (maximum).................................. $ 6,000,000 $ 6,000,000
Conversion of Pacific Financial Services subordinated debt (minimum).............. $ 600,000 $ 600,000
Conversion of Inland Financial Services subordinated debt (minimum)............... $ 293,000 $ 293,000
Conversion of Interest Payable on Pacific subordinated debt (minimum)............. $ 30,000 $ 30,000
Conversion of UPLP Minority Interest (minimum).................................... $ 401,000 $ 415,000
Conversion of salary payable (minimum)............................................ $ 225,000 $ 225,000
Issuance of shares for finders' fees (minimum and maximum)........................ $ 400,000 $ 400,000
Conversion of related party debt to equity (minimum).............................. $ 200,000 $ 200,000
Purchase of future value of UPLP general partner (minimum)........................ $ 134,000 $ 134,000
</TABLE>
In addition, there was $1,811,000 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 net of additional amortization
of goodwill were increased by $123,000 in the pro forma condensed combined
statement of operations for the six months ended June 30, 1999 and $247,000 for
the
F-10
<PAGE> 123
twelve months ended December 31, 1999. The adjustments were due to additional
personnel costs of $153,000 for the six months ended June 30, 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 $30,000 for
the six months ended June 30, 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 six months ended
June 30, 1999 was a reduction in interest expense of $232,000 and a reduction
of $449,000 for the twelve months ended December 1998.
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 six months ended June 30,
1999 of $14,000.
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 6,736,596 shares minimum
and 7,727,596 shares maximum. 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-11
<PAGE> 124
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-12
<PAGE> 125
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-13
<PAGE> 126
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 Paragon Health).................. 140,757 672,000 140,757 2,718,000
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-14
<PAGE> 127
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
SHARES VALUE SHARES VALUE
----------- --------------- ------------ ---------------
<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 owned subsidiary).................. 300 $ 2,212,000 0 $ 0
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-15
<PAGE> 128
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-16
<PAGE> 129
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-17
<PAGE> 130
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 subsidiaries........................ (3,290,000) 0 (750,000)
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-18
<PAGE> 131
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 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.
F-19
<PAGE> 132
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.
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
F-20
<PAGE> 133
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) 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.
F-21
<PAGE> 134
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 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
F-22
<PAGE> 135
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.
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)
--------------- ----------------- ------------------
Total........................................ $ 43,000 $ (491,000) $ (969,000)
=============== ================= ==================
</TABLE>
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<PAGE> 136
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>
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.
F-24
<PAGE> 137
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 $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.
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<PAGE> 138
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.
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
------------------------------- ------------------------------
WEIGHTED WEIGHTED
AVG. AVG.
EXERCISE EXERCISE
SHARES PRICE SHARES 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.
F-26
<PAGE> 139
(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.
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, respectively)................ $ 748,000 $ 986,000
Investments in non-marketable equity
securities (cost of $955,000 and
$534,000, respectively)...................................... 729,000 434,000
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>
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-27
<PAGE> 140
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
JUNE 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
---------------- ----------------
<S> <C> <C>
Assets:
Investments at Market or Fair Value:
Marketable equity securities (cost of $1,049,000 in 1999 and
$1,080,000 in 1998) $ 1,173,000 $ 5,132,000
Non-marketable equity securities (cost of $13,483,000 in 1999
and $13,483,000 in 1998) 7,499,000 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) 1,829,000 1,894,000
---------------- ----------------
Total portfolio securities 11,224,000 15,036,000
Cash and cash equivalents 1,559,000 140,000
Other assets 282,000 146,000
---------------- ----------------
Total assets 13,065,000 15,322,000
Liabilities:
Margin payable to brokers 0 1,692,000
Notes payable to banks 825,000 1,025,000
Notes payable to related parties 700,000 700,000
Accounts payable, accrued expenses and other current liabilities 667,000 600,000
Accrued officer's compensation 350,000 300,000
Debentures payable 2,000,000 2,000,000
---------------- ----------------
Net assets $ 8,523,000 $ 9,005,000
================ ================
Preferred stock, no stated value, 1,000,000 shares authorized, 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 (15,017,000) (14,293,000)
Net realized gain on investment 13,650,000 9,628,000
Net unrealized depreciation of investments (9,445,000) (5,665,000)
---------------- ----------------
Net assets applicable to outstanding common shares
(equivalent to $2.54 and $2.73 per share based on
3,350,533 and 3,301,863 outstanding common shares at
June 30, 1999 and December 31, 1998, respectively) $ 8,523,000 $ 9,005,000
================ ================
</TABLE>
F-28
<PAGE> 141
WALNUT FINANCIAL SERVICES, INC.
INVESTMENTS IN SECURITIES
JUNE 30, 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 1,100,000
Ivonyx Group Services, Inc. 100,000 100,000
Mariner Post-Acute Network (formerly Paragon Health) 140,757 73,000
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
-----------
2,077,000
-----------
High technology - 5%
Logic Devices Incorporated 45,000 170,000
Madison Info. Tech. - Preferred A 60,000 150,000
Madison Info. Tech. - Preferred B 60,000 150,000
Thermo Information Solutions, Inc. 10,000 90,000
J.L. Wickham Co., Inc. -Common 250,696 0
J.L. Wickham Co., Inc. -Preferred 281,788 0
-----------
560,000
-----------
Communications - 9%
International Business Network 70,000 105,000
Trans Global Services, Inc. 83,839 75,000
Vision III Imaging, Inc. 10,835 867,000
-----------
1,047,000
-----------
Biotechnology - 6%
BioHorizons Implant Systems, Inc. 193,934 300,000
Metatech Corp. 14,817 0
Optiva Corporation 40,000 250,000
Osteoimplant Technology, Inc. 80,000 1,000
Vaxgen, Inc. 11,400 80,000
-----------
631,000
-----------
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
Pacific Financial Services, Inc. (wholly-owned subsidiary) 300 2,212,000
-----------
3,540,000
-----------
</TABLE>
F-29
<PAGE> 142
<TABLE>
<S> <C> <C>
Other - 7%
Automotive Performance Group 50,000 100,000
Linter's, Inc. 42,784 75,000
Esynch Corp. (formerly SoftKat, Inc.) - Common 36,585 120,000
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
-----------
817,000
-----------
Total common and preferred stocks (cost $14,532,000) 8,672,000
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 - 16%
Universal Partners, L.P. (majority-owned subsidiary) 1,829,000
-----------
Total partnership interests (cost $1,762,000) 1,829,000
-----------
Total - 100% (cost $17,707,000) $11,224,000
===========
</TABLE>
F-30
<PAGE> 143
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Investment Income:
Interest Income 44,000 67,000 18,000 33,000
Dividend Income 0 3,000 0 3,000
--------------- --------------- -------------- --------------
Total income 44,000 70,000 18,000 36,000
Expenses:
Interest expense 150,000 307,000 39,000 130,000
General and administrative 618,000 668,000 328,000 364,000
--------------- --------------- -------------- --------------
Net investment (loss) before taxes (724,000) (905,000) (349,000) (458,000)
Income tax benefit 0 362,000 0 183,000
--------------- --------------- -------------- --------------
Net investment (loss) (724,000) (543,000) (349,000) (275,000)
--------------- --------------- -------------- --------------
Realized and unrealized gains on investments:
Realized gain on sale of investments
before income tax 4,022,000 1,168,000 2,000 209,000
Income tax provision 0 (467,000) 0 (83,000)
--------------- --------------- -------------- --------------
Net realized gain on sale of investments 4,022,000 701,000 2,000 126,000
--------------- --------------- -------------- --------------
Unrealized (depreciation) on
investments before income tax (3,780,000) (1,805,000) 217,000 (877,000)
Income tax benefit 0 722,000 0 351,000
--------------- --------------- -------------- --------------
Net unrealized (depreciation) on
investments (3,780,000) (1,083,000) 217,000 (526,000)
--------------- --------------- -------------- --------------
Net realized and unrealized gains
(losses) on investments 242,000 (382,000) 219,000 (400,000)
--------------- --------------- -------------- --------------
Net increase (decrease) in net assets
resulting from operations $ (482,000) $ (925,000) $ (130,000) $ (675,000)
=============== =============== ============== ==============
Loss per share - basic and diluted $ (0.14) $ (0.29) $ (0.04) $ (0.21)
=============== =============== ============== ==============
Weighted average shares outstanding 3,350,533 3,141,971 3,350,533 3,148,471
=============== =============== ============== ==============
</TABLE>
F-31
<PAGE> 144
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Decrease in net assets resulting from operations:
Net investment loss $ (724,000) $ (543,000)
Net realized gains on investments 4,022,000 701,000
Net unrealized depreciation on investments (3,780,000) (1,083,000)
------------- -------------
(482,000) (925,000)
------------- -------------
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 (482,000) (699,000)
------------- -------------
Net assets at beginning of period 9,005,000 16,674,000
------------- -------------
Net assets at end of period $ 8,523,000 $ 15,975,000
============= =============
</TABLE>
F-32
<PAGE> 145
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net decrease in net assets resulting from operations $ (482,000) $ (925,000)
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating
activities:
Net unrealized depreciation of investments 3,780,000 1,805,000
Net realized gain on investments (4,022,000) (1,168,000)
Change in net deferred tax liability 0 (703,000)
Changes in assets and liabilities:
Other assets (136,000) (86,000)
Other liabilities 117,000 (180,000)
------------- -------------
Net cash used in operating activities (743,000) (1,257,000)
------------- -------------
Cash flows from investing activities:
Purchases of common stock, healthcare 0 (140,000)
Purchases of common stock, high tech 0 (300,000)
Purchases of common stock, bio tech 0 (300,000)
Purchases of common stock, communications 0 (125,000)
Purchase of equity and debt securities, wholly-owned subsidiary 0 (2,159,000)
Proceeds from sale of general partnership interest 0 122,000
Proceeds from sale of common stock, healthcare 4,031,000 1,914,000
Proceeds from sale of common stock, high tech 23,000 22,000
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 4,054,000 (788,000)
------------- -------------
Cash flows from financing activities:
Borrowings (repayments) of short term debt (200,000) (674,000)
Borrowings from (repayments to) related parties 0 (100,000)
Increase (decrease) in margin accounts (1,692,000) (1,419,000)
Repayments of long term debt 0 (2,000,000)
------------- -------------
Net cash (used in) provided by financing activities (1,892,000) (4,193,000)
------------- -------------
Net increase (decrease) in cash and cash equivalents 1,419,000 (6,238,000)
Cash and cash equivalents, beginning 140,000 6,479,000
------------- -------------
Cash and cash equivalents, end $ 1,559,000 $ 241,000
============= =============
Supplemental Information:
Cash paid for interest $ 148,000 $ 307,000
============= =============
Issuance of common stock and warrants for equity in wholly owned
subsidiary $ 0 $ 300,000
============= =============
</TABLE>
F-33
<PAGE> 146
WALNUT FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
The accompanying consolidated financial statements as of June 30, 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-owned 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 "1940 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 June 30, 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.
As a result of the technical nature of the 1940 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.
F-34
<PAGE> 147
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
shareholders 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 shareholders 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 shareholder
approval granted at the annual meeting of the shareholders 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.
4. RELATED PARTY TRANSACTIONS
Walnut and its subsidiaries retain a law firm at which a Company
officer is of counsel. Payments of $82,000 were paid to such firm by Walnut
during the six months ended June 30, 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 Annual Meeting
Proxy Statement and the Reverse Stock Split.
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
was 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
F-35
<PAGE> 148
due on October 1, 1998 and January 1, 1999 respectively have been deferred and
Walnut is allowed to defer further principal payments provided that quarterly
interest is paid on the outstanding balance.
In connection with the transaction through which Walnut acquired
Inland Financial, Inland Financial borrowed $293,000 from two related parties.
Walnut issued to each entity a promissory note, which matures on October 19,
1999. The promissory notes bear interest at a rate of 16% per year payable
quarterly.
F-36
<PAGE> 149
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-37
<PAGE> 150
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 authorized 3,000,000 issued and outstanding 1,000,000............................. 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-38
<PAGE> 151
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-39
<PAGE> 152
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
Securities, Inc.................. -- -- 6,706,635 (6,610,207) 96,428
Reclass of preferred stock to
additional paid-in capital....... (2,391,294) (2,391,294) 2,391,294 -- --
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-40
<PAGE> 153
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-41
<PAGE> 154
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-42
<PAGE> 155
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
<TABLE>
<S> <C>
Interest expense paid to the Parent....................................................................... $137,293
</TABLE>
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-43
<PAGE> 156
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> <C>
Computation of net capital pursuant to Rule 15c3-1
Net capital
Total stockholder's equity from statement
of financial condition................................................ $ 345,226
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
to Rule 15c3-1........................................................... $ 3,435
Minimum dollar net capital requirement of broker and dealer................. $ 5,000
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-44
<PAGE> 157
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-45
<PAGE> 158
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 3,000,000 issued and outstanding 1,000,000............................... 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-46
<PAGE> 159
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-47
<PAGE> 160
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 PAID-IN SUBSCRIPTIONS
OF 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-48
<PAGE> 161
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-49
<PAGE> 162
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 regulatory net capital requirement of $320,082 and
$5,000, respectively. The Company's aggregate indebtedness to net capital ratio
was .91 to 1.
F-50
<PAGE> 163
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-51
<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>
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-52
<PAGE> 165
TOWER HILL SECURITIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
---------------
<S> <C>
Assets:
Current Assets:
Checking/Savings:
Excelsior MMA $ 936,710.47
U.S. Trust Checking 1,826.11
U.S. Trust Interest 10,020.79
---------------
Total Checking/Savings 948,557.37
Accounts Receivable 95,683.14
Other Current Assets:
Loan Receivable R/E 60,456.00
Loan Receivable TH, LLC 1,711.80
Prepaid assets 32,873.25
---------------
Total Other Current Assets 95,041.05
---------------
Total Current Assets 1,139,281.56
Fixed Assets:
Computer Equipment:
Accumulated Depreciation - Computer (113,922.00)
Computer Equipment - Other 178,391.78
---------------
Total Computer Equipment 64,469.78
Furniture & Fixtures:
Accumulated Depreciation - F&F (13,625.00)
Furniture & Fixtures - Other 15,427.00
---------------
Total Furniture & Fixtures 1,802.00
---------------
Total Fixed Assets 66,271.78
Other Assets:
Investment in Fashion 500.com 40,000.00
Investment in Lognet 50,000.00
Loan Receivable S/H 219,288.16
Notes Receivable 100,000.00
Restricted Stock 49,837.63
Start-Up Costs
Accumulated Amortization (3,080.00)
Start-Up Costs - Other 13,195.00
Total Start-Up Costs 10,115.00
---------------
Stock Receivable 49,837.63
Total Other Assets 519,078.42
---------------
Total Assets: $ 1,724,631.76
===============
</TABLE>
F-53
<PAGE> 166
<TABLE>
<S> <C>
Liabilities and Equity:
Liabilities:
Current Liabilities:
Accounts Payable $ 18,000.00
Other Current Liabilities:
Due to HAI 26,000.00
Payroll Liabilities 12,163.77
Total Other Current Liabilities 38,163.77
---------------
Total Current Liabilities 56,163.77
---------------
Total Liabilities 56,163.77
Equity:
Additional Paid in Capital 12,260,618.00
Retained Earnings (11,002,962.19)
Net Income 410,812.18
---------------
Total Equity 1,668,467.99
---------------
Total Liabilities & Equity $ 1,724,631.76
===============
</TABLE>
F-54
<PAGE> 167
TOWER HILL SECURITIES, INC.
STATEMENT OF PROFITS AND LOSSES
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999
---------------
<S> <C>
Ordinary Income/Expense:
Income:
Consulting Income $ 1,937,900.99
Reimbursed Expenses 53,440.31
---------------
Total Income 1,991,341.30
Expense:
Advertising Expense 398.25
Amortization Expense 1,320.00
Bad debt expense 89,602.04
Bank Service Charges 340.99
Car Service 1,620.45
Communications 4,942.84
Computer supplies (1,494.60)
Conferences & Seminars 13,492.94
Depreciation Expense 9,702.00
Dues and Subscriptions 491.74
Education 12,600.00
Facsimile Transmission 1,757.00
Finders Fees 17,000.00
Information Services 41,805.38
Insurance:
Accidental Death & Dismemberment 223.89
Commercial 1,720.98
Long-term Disability 2,226.82
Short-term Disability 387.85
Umbrella 1,066.68
Work Comp 1,428.48
---------------
Total Insurance 7,054.70
Licenses and Permits 9.00
Messenger Delivery Service 663.65
Miscellaneous 1,027.95
NASD and SEC Regulation. Expenses 3,126.00
Office Supplies 11,670.74
Office Supplies & Cellular Phone 0.00
Outside Services
Consulting 0.00
Payroll 1,272.29
Personnel 1,065.00
Outside Services - Other 837.78
---------------
Total Outside Services 3,175.07
Overnight Courier 850.75
Personnel Expenses
AD&D (4.10)
Assess Fees 64.83
Bonus-Staff 14,500.00
Employer Fuca 685.11
Employer Medicare 9,033.03
Employer NYSUI 8,069.49
</TABLE>
F-55
<PAGE> 168
<TABLE>
<S> <C>
Employer SS 37,533.23
Flex Spending Program 9,364.22
Life Insurance 805.28
LTD/Unemployment/Futa/Sui (9.27)
Medical Insurance 36,077.10
NYS Disability (93.30)
Retirement Plans 10,304.68
Salaries 502,610.31
W/C (120.32)
---------------
Total Personnel Expenses 628,820.29
Premises
Commercial Rent Tax 8,000.25
Leasehold charges 8,795.75
Operating costs 44,166.08
Other 2,037.39
Rent 102,667.12
---------------
Total Premises 165,666.59
Printing and Reproduction 3,185.86
Professional Fees
Accounting 24,685.00
Consulting 370,250.00
Legal Fees 52,452.13
---------------
Total Professional Fees 447,387.13
Reimbursable Expenses 0.00
Repairs & Maintenance
Computer Repairs (430.78)
Equipment Repairs 1,063.82
Locks 1.75
Other 0.00
---------------
Total Repairs & Maintenance 634.79
Service Charge 63.50
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 9,831.88
Local Telephone 11,953.35
Long-Distance Telephone 24,285.75
Telephone - Other 236.69
---------------
Total Telephone 46,307.67
Travel & Entertainment
Airfare 14,202.30
Automobile Expense 829.61
Car Rental 7,920.00
Car Service 1,224.53
Entertainment 2,900.48
Lodging 11,080.39
Meals 4,452.87
Parking 401.63
Railroad 654.00
Tolls 100.50
Yellow Taxis 403.10
</TABLE>
F-56
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<TABLE>
<S> <C>
Travel & Entertainment - Other 82.93
---------------
Total Travel & Entertainment 44,252.34
Uncategorized Expenses 0.00
Yellow Taxis 2,859.91
---------------
Total Expense 1,572,445.97
Net Ordinary Income $ 418,895.33
===============
Other Income/Expense
Other Income
Interest Income 15,529.79
Other Income 1,549.43
---------------
Total Other Income 17,079.22
Other Expense
Other Expenses 25,162.37
---------------
Total Other Expense 25,162.37
---------------
Net Other Income (8,083.15)
---------------
$ 410,812.18
===============
</TABLE>
F-57
<PAGE> 170
EXHIBIT A
===============================================================================
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
WALNUT FINANCIAL SERVICES, INC.,
TOWER HILL ACQUISITION CORP.,
AND
TOWER HILL SECURITIES, INC.
DATED AS OF AUGUST 5, 1999
===============================================================================
<PAGE> 171
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
AGREEMENT AND PLAN OF MERGER......................................................................................1
ARTICLE 1.........................................................................................................2
SECTION 1.1 The Merger..................................................................................2
SECTION 1.2 Closing.....................................................................................2
SECTION 1.3 Effective Time..............................................................................2
SECTION 1.4 Certificate of Incorporation................................................................2
SECTION 1.5 By-laws.....................................................................................2
SECTION 1.6 Directors and Officers......................................................................2
ARTICLE 2.........................................................................................................3
SECTION 2.1 Effect on Capital Stock.....................................................................3
SECTION 2.2 Exchange of Certificates....................................................................4
SECTION 2.3 Tax Consequences............................................................................5
ARTICLE 3.........................................................................................................6
SECTION 3.1 Organization and Qualification; Subsidiaries................................................6
SECTION 3.2 Capitalization of the Company and its Subsidiary............................................7
SECTION 3.3 Authority Relative to this Agreement; Board Action..........................................8
SECTION 3.4 Financial Statements........................................................................8
SECTION 3.5 Information Supplied........................................................................9
SECTION 3.6 Consents and Approvals; No Violations.......................................................9
SECTION 3.7 No Default.................................................................................10
SECTION 3.8 No Undisclosed Liabilities; Absence of Changes.............................................10
SECTION 3.9 No Litigation..............................................................................11
SECTION 3.10 Compliance with Applicable Law.............................................................11
SECTION 3.11 Employee Benefits and ERISA................................................................12
SECTION 3.12 Environmental Laws and Regulations.........................................................15
SECTION 3.13 Tax Matters................................................................................15
SECTION 3.14 Material Contracts.........................................................................16
SECTION 3.15 Title to Properties; Encumbrances..........................................................17
SECTION 3.16 Condition and Sufficiency of Assets........................................................17
SECTION 3.17 Intellectual Property......................................................................17
SECTION 3.18 Year 2000..................................................................................18
SECTION 3.19 Investment Securities......................................................................18
SECTION 3.20 Brokers....................................................................................18
SECTION 3.21 Insurance..................................................................................18
SECTION 3.22 Transactions with Affiliates...............................................................18
SECTION 3.23 Books and Records..........................................................................19
SECTION 3.24 Disclosure.................................................................................19
SECTION 3.25 Stockholders of the Company................................................................19
</TABLE>
i
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<TABLE>
<S> <C>
ARTICLE 4........................................................................................................20
SECTION 4.1 Organization and Qualification; Subsidiaries...............................................20
SECTION 4.2 Capitalization of Walnut and its Subsidiaries..............................................21
SECTION 4.3 Authority Relative to this Agreement; Board Action.........................................22
SECTION 4.4 SEC Filings; Financial Statements..........................................................23
SECTION 4.5 Information Supplied.......................................................................24
SECTION 4.6 Consents and Approvals; No Violations......................................................24
SECTION 4.7 No Default.................................................................................25
SECTION 4.8 No Undisclosed Liabilities; Absence of Changes.............................................25
SECTION 4.9 No Litigation..............................................................................26
SECTION 4.10 Compliance with Applicable Law.............................................................26
SECTION 4.11 Employee Benefits and ERISA................................................................26
SECTION 4.12 Environmental Laws and Regulations.........................................................29
SECTION 4.13 Tax Matters................................................................................30
SECTION 4.14 Material Contracts.........................................................................31
SECTION 4.15 Title to Properties; Encumbrances..........................................................32
SECTION 4.16 Intellectual Property......................................................................32
SECTION 4.17 Year 2000..................................................................................32
SECTION 4.18 Investment Securities......................................................................32
SECTION 4.19 Ownership of Newco.........................................................................33
SECTION 4.20 Brokers....................................................................................33
SECTION 4.21 Transactions with Affiliates...............................................................33
SECTION 4.22 Books and Records..........................................................................33
SECTION 4.23 Disclosure.................................................................................33
ARTICLE 5........................................................................................................34
SECTION 5.1 Conduct of Business of the Company.........................................................34
SECTION 5.2 Conduct of Business of Walnut..............................................................36
SECTION 5.3 Preparation and Filing of Proxy Statement; Walnut Stockholders Meeting.....................38
SECTION 5.4 Preparation and Filing of Forms N-54C......................................................38
SECTION 5.5 SEC and Other Governmental Filings.........................................................39
SECTION 5.6 Related Transactions.......................................................................39
SECTION 5.7 Consulting Agreements......................................................................40
SECTION 5.8 Employment Agreements......................................................................40
SECTION 5.9 Voting Agreement...........................................................................40
SECTION 5.10 ...........................................................................................41
SECTION 5.11 Investment Letters.........................................................................41
SECTION 5.12 Press Releases.............................................................................41
SECTION 5.13 Access to Information; Confidentiality.....................................................41
SECTION 5.14 Non-Solicitation...........................................................................41
SECTION 5.15 Commercially Reasonable Efforts; Further Action............................................42
SECTION 5.16 Indemnification and Insurance..............................................................43
SECTION 5.17 Notification of Certain Matters............................................................44
SECTION 5.18 Tax Treatment..............................................................................44
SECTION 5.19 State Takeover Laws........................................................................44
SECTION 5.20 Options....................................................................................45
SECTION 5.21 LLC Merger.................................................................................45
SECTION 5.22 Walnut Board...............................................................................46
SECTION 5.23 Company Preferred Stock....................................................................46
SECTION 5.24 Change of Name.............................................................................46
SECTION 5.25 Walnut Securities..........................................................................46
</TABLE>
ii
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<TABLE>
<S> <C>
SECTION 5.26 Acquisition of Securities..................................................................46
SECTION 5.27 Relinquishment of SBA License..............................................................47
SECTION 5.28 Termination of Lease.......................................................................47
SECTION 5.29 Repayment of Indebtedness..................................................................47
SECTION 5.30 Charter and Bylaw Amendments...............................................................47
ARTICLE 6........................................................................................................48
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Merger................................48
SECTION 6.2 Conditions to the Obligations of the Company...............................................48
SECTION 6.3 Conditions to the Obligations of Walnut....................................................49
ARTICLE 7........................................................................................................51
SECTION 7.1 Termination................................................................................51
SECTION 7.2 Procedure for and Effect of Termination....................................................52
SECTION 7.3 Amendment; Extension Waiver................................................................52
SECTION 7.4 Fees and Expenses..........................................................................52
ARTICLE 8........................................................................................................52
SECTION 8.1 Non-Survival of Representations, Warranties and Agreements.................................52
SECTION 8.2 Entire Agreement; Assignment...............................................................53
SECTION 8.3 [Intentionally omitted.]...................................................................53
SECTION 8.4 Notices....................................................................................53
SECTION 8.5 Parties in Interest........................................................................53
SECTION 8.6 Severability...............................................................................54
SECTION 8.7 Counterparts...............................................................................54
SECTION 8.8 Interpretation.............................................................................54
SECTION 8.9 Governing Law and Venue....................................................................54
SECTION 8.10 Waiver of Jury Trial.......................................................................54
SECTION 8.11 Certain Definitions........................................................................54
EXHIBITS
EXHIBIT A Consulting Agreement between Inland Financial Corporation and Chicago Advisory Group
EXHIBIT B Consulting Agreement between Walnut Financial Services, Inc. and Windy City, Inc.
EXHIBIT C-1 Employment Agreement between Walnut Financial Services, Inc. and Joseph Mark
EXHIBIT C-2 Employment Agreement between Walnut Financial Services, Inc. and Shai Novik
EXHIBIT C-3 Employment Agreement between Walnut Financial Services, Inc. and Adi Raviv
EXHIBIT D Voting Agreement between Tower Hill Securities, Inc., Chicago Investments, Inc.
and the Kanter Family Foundation
EXHIBIT E Investment Representation Letter*
EXHIBIT F Articles of Amendment and Restatement of Walnut Financial Services, Inc.**
EXHIBIT G Amended and Restated Bylaws of Walnut Financial Services, Inc.***
EXHIBIT H Form of Opinion of Barack Ferrazzano Kirschbaum Perlman & Nagelberg*
EXHIBIT I Form of Legal Opinion of Kramer Levin Naftalis & Frankel LLP*
</TABLE>
iii
<PAGE> 174
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
upon request.
** Attached as Exhibit D to this Proxy Statement
*** Attached as Exhibit E to this Proxy Statement
iv
<PAGE> 175
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of August
5, 1999 (this "AGREEMENT"), by and among Walnut Financial Services, Inc., a
Utah corporation ("WALNUT"), Tower Hill Acquisition Corp., a New York
corporation and a wholly-owned subsidiary of Walnut ("NEWCO" and together with
Walnut, 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 Walnut, THCG, Inc., a Delaware corporation and a then
wholly-owned subsidiary of Walnut ("THCG"), Newco, a then wholly-owned
subsidiary of THCG, and the Company entered into an Agreement and Plans of
Merger, dated as of August 5, 1999 (the "ORIGINAL AGREEMENT");
WHEREAS, the Original Agreement provided for the merger of Walnut with
and into THCG and for the merger of Newco with and into the Company;
WHEREAS, pursuant to Section 7.3 of the Original Agreement, the
parties may amend the Original Agreement in accordance with the provisions of
such Section;
WHEREAS, the parties hereto desire to amend and restate the Original
Agreement in its entirety as set forth herein in order to abandon the merger of
Walnut with and into THCG, to delete THCG as a party to this Agreement and to
effect certain other changes all as provided herein;
WHEREAS, the boards of directors of Walnut, Newco and the Company,
deeming it advisable and in the best interests of their respective
stockholders, have each approved this Agreement pursuant to which, among other
things, Newco will be merged with and into the Company (the "MERGER") 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 a plan 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 plan;
WHEREAS, pursuant to the Merger, 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 effect the
related transactions specified in Section 5.6;
WHEREAS, the Walnut Entities and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and to prescribe various conditions to the Merger;
<PAGE> 176
NOW, THEREFORE, in consideration of the premises and the respective
agreements herein contained and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged by each of the parties
hereto, the Original Agreement is hereby amended and restated in its entirety
as follows:
ARTICLE 1
THE MERGER
SECTION 1.1 The Merger. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time and in accordance with the NYBCL, Newco shall
be merged with and into the Company. Following the Merger, the separate
corporate existence of Newco shall cease and the Company shall continue as the
surviving corporation (the "SURVIVING CORPORATION") 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. Simultaneously with the Closing, the parties hereto
shall cause the Merger to be consummated by (i) filing a certificate of merger
(the "CERTIFICATE OF 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. The Merger shall become
effective at such time as the 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 Certificate of Merger (the
date and time the Merger becomes effective being the "EFFECTIVE TIME").
SECTION 1.4 Certificate of Incorporation. At the Effective Time, the
certificate of incorporation of the Company, as in effect immediately prior to
the Effective Time, shall be the certificate of incorporation of the Surviving
Corporation, unless and until thereafter changed or amended as provided therein
or in accordance with applicable Law.
SECTION 1.5 By-laws. At the Effective Time, the by-laws of the Company, as in
effect immediately prior to the Effective Time, shall be the by-laws of the
Surviving Corporation, unless and until thereafter changed or amended as
provided therein or in the certificate of incorporation of the Surviving
Corporation or by applicable Law.
SECTION 1.6 Directors and Officers. At the Effective Time, the directors of the
Company immediately preceding the Effective Time shall become the directors of
the Surviving Corporation to serve until the earlier of their death,
resignation or removal or until their respective successors are duly elected
and qualified. At the Effective Time, the officers of the Company immediately
preceding the Effective Time shall become the officers of the Surviving
Corporation until the earlier of their death, resignation or removal or until
their respective successors are duly elected and qualified.
- 2 -
<PAGE> 177
ARTICLE 2
CONVERSION OF CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS
SECTION 2.1 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger 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:
(a) Conversion of Capital Stock of Newco. Each share of common stock,
par value $0.10 per share, of Newco (the "NEWCO COMMON STOCK") issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for one (1) validly issued, fully paid and non-assessable share of
common stock, par value $0.10 per share, of the Surviving Corporation.
(b) Conversion of Company Common Stock. Subject to the provisions of
Section 2.2, each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for 37,228.145 shares of common stock, par value $0.01 per share, of Walnut
(the "WALNUT COMMON STOCK"), plus an additional number of shares of Walnut
Common Stock equal to one percent of the number of restricted shares of Walnut
Common Stock intended to be granted to Shai Novik pursuant to Section 2.1(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. At the 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 restricted shares
of Walnut Common Stock under the Walnut Stock Incentive Plan pursuant to his
employment agreement with Walnut attached hereto as Exhibit C-2. The restricted
shares of Walnut 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, or in such greater
proportions or at such earlier time as shall be reasonably satisfactory to
Walnut. At the Effective Time, Shai Novik shall deliver to Walnut 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 Effective Time shall
be cancelled and retired and cease to exist, without any conversion thereof.
- 3 -
<PAGE> 178
SECTION 2.2 Exchange of Certificates.
(a) Exchange Procedures. Within one business day after the Effective
Time, Walnut shall cause to be delivered to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock (each a "CERTIFICATE")
whose shares were converted into the right to receive Walnut Common Stock
pursuant to Section 2.1(b), against receipt of a Certificate, a certificate
evidencing the number of whole shares of Walnut Common Stock to which such
holder is entitled pursuant to Section 2.1(b), and the Certificate so
surrendered shall forthwith be cancelled. Until so surrendered, each
outstanding Certificate that, prior to the Effective Time evidenced shares of
Company Common Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends or other distributions,
to evidence the ownership of the number of whole shares of Walnut Common Stock
into which such shares of Company Common Stock shall have been so converted
pursuant to Sections 2.1(b).
(b) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions or payments declared or made after the Effective Time with
respect to shares of Walnut Common Stock with a record date after the Effective
Time will be paid to the holder of any unsurrendered Certificate with respect
to the shares of Walnut Common Stock evidenced thereby until the holder of
record of such Certificate shall surrender such Certificate pursuant to this
Section 2.2. Subject to applicable Law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
evidencing whole shares of Walnut 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
theretofore paid with respect to such whole shares of Walnut Common Stock.
(c) Transfers of Ownership. If any certificate for shares of Walnut
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the 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 2.2, and
that the Person requesting such transfer will have paid to Walnut 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 Walnut Common Stock in any name other
than that of the registered holder of the Walnut Certificate surrendered, or
established to the satisfaction of Walnut or any agent designated by it that
such fees and Taxes have been paid or are not payable.
(d) No Liability. Notwithstanding anything to the contrary in this
Section 2.2, none of the Surviving Corporation or any party hereto shall be
liable to any holder of shares of Company Common Stock for any amount properly
paid to a public official pursuant to any applicable abandoned property,
escheat or similar Law.
(e) No Further Ownership Rights in Company Common Stock. All shares of
Walnut Common Stock issued upon the surrender for exchange of shares of 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 Company
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided
in this Section 2.2.
(f) Lost, Stolen or Destroyed Certificates. In the event any
Certificate evidencing shares of Company Common Stock shall have been lost,
stolen or destroyed, Walnut may
- 4 -
<PAGE> 179
require, before issuing certificates in respect of the shares of Walnut Common
Stock evidenced thereby, such affidavits and indemnities and bonds in support
thereof as it or any agent designated by it may reasonably require with respect
to such loss, theft or destruction.
(g) Dissenters' Rights. [Intentionally Omitted]
(h) Withholding Rights. Walnut or any agent designated by it shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of Company Common Stock such amounts
as Walnut or such 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
Walnut or any agent designated by it, such deducted and withheld amounts shall
be treated for all purposes of this Agreement as having been paid to the holder
of Company Common Stock in respect of which such deduction and withholding was
made by Walnut or such agent.
(i) No Fractional Shares. Notwithstanding any provision of this
Agreement to the contrary, neither certificates nor scrip for fractional shares
of Walnut Common Stock shall be issued in connection with the Merger, but in
lieu thereof each holder of shares of Company Common Stock otherwise entitled
to a fraction of a share of Walnut Common Stock pursuant to the provisions of
2.1(b) shall receive one whole share of Walnut Common Stock in respect of such
fraction. If more than one Certificate shall be surrendered for the account of
the same Company Stockholder, the number of whole shares of Walnut Common Stock
for which such Certificates shall be exchanged pursuant to this Section 2.2
shall be computed on the basis of the aggregate number of shares of Company
Common Stock evidenced by such Certificates.
SECTION 2.3 Tax Consequences. It is intended by the parties hereto that the
Merger shall 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 the Merger.
- 5 -
<PAGE> 180
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
the Merger 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.
- 6 -
<PAGE> 181
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 the outstanding
Novik Options. 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.
- 7 -
<PAGE> 182
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 the Merger), 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 the Merger) 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 the
Merger). 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 the Merger are in the best interests of
the Company and its stockholders (the "COMPANY STOCKHOLDERS"), (ii) approved
and adopted this Agreement and the Merger, and (iii) unanimously recommended
that the Company Stockholders approve and adopt this Agreement and the Merger.
(c) The Company Stockholders, by resolutions duly adopted and not
subsequently rescinded or modified in any way, have unanimously approved and
adopted this Agreement and the Merger.
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 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
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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 the Original Agreement, the
Merger 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 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 the Merger, 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 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.
(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 the Merger).
(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 the Merger) 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
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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.
(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.
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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 the Merger)
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 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.
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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 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
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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;
(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.
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(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.
(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, 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 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 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 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
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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 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 Effective Time, the Surviving Corporation will be
able to conduct the business of the Company and its Subsidiary as it was
conducted prior thereto.
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
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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 Merger 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.
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
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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, condition
(financial or otherwise) or results of operations of Walnut and its
Subsidiaries 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 performance of this Agreement, the 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 Merger 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 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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<PAGE> 195
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. The shares
of Walnut Common Stock that will be issued as a result of the Merger and the
Related Transactions 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. 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 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, non-assessable and free of preemptive
rights. All of the issued and outstanding shares of Newco Common Stock are
owned by Walnut, 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
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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.
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 Merger 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 Merger and the Related
Transactions) have been duly and validly authorized by the Board of Directors
of Walnut (the "WALNUT BOARD") and the Board of Directors of Newco (the "NEWCO
BOARD") and the sole stockholder of 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 Merger and the Related Transactions), other
than, the approval by the stockholders of Walnut (the "WALNUT STOCKHOLDERS") of
(i) the issuance of Walnut Common Stock in connection with the Merger and the
Capital Investment, (ii) the BDC Withdrawal, (iii) the Related Transactions,
(iii) the adoption of the Walnut Stock Incentive Plan, and (iv) the adoption of
the Restated Charter (collectively, the "WALNUT STOCKHOLDER PROPOSALS"). 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 (x) 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 (y) general principles of
equity (regardless of whether considered in a proceeding at law or in equity).
(b) The Walnut 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 each of the Walnut Stockholder Proposals are in the best
interests of Walnut and the Walnut Stockholders, (ii) approved each of the
Walnut Stockholder Proposals and (iii) unanimously recommended that the Walnut
Stockholders approve each of the Walnut Stockholder Proposals.
(c) The Newco 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, the Merger and the Related Transactions are
in the best interests of Newco and its sole stockholder, (ii) approved and
adopted this Agreement, the Merger and the Related Transactions and (iii)
unanimously recommended that the sole stockholder of Newco approve and adopt
this Agreement, the Merger and the Related Transactions.
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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 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 Original
Agreement, this Agreement, the Merger 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
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"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 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 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 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 Merger and the Related Transactions), except for those required (i) under
the NYBCL with respect to the filing of the 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
Merger and the Related 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
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<PAGE> 199
the Merger 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 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 time
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 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 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,
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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 Merger 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.
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
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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").
(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 the Merger 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).
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(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:
(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
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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.
(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, 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 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 4.12 Environmental Laws and Regulations.
(a) Except as disclosed in the Walnut Filed SEC Reports or on Schedule
4.12(a) to
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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 Subsidiary 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, and 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 Subsidiaries 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 neither 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 Subsidiaries 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 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
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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").
(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.
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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 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
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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 Newco.
(a) Newco is a direct, wholly-owned subsidiary of Walnut. Newco was
formed solely for the purpose of engaging in the transactions contemplated by
the Original Agreement.
(b) As of the date hereof and the Effective Time, 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, Newco has not or 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,
except for liability for corporate franchise taxes and other incorporation
expenses.
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 Merger 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 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 Walnut Board
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
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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.
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 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 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;
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iv. declare, set aside, make or pay any dividend or other
distribution to any stockholder with respect to its capital stock;
v. except as set forth in Section 5.23, redeem, purchase or
otherwise acquire any Company Securities;
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 utilized in the preparation of the Company Financial
Statements, other than as required by GAAP;
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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, 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, 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. except as set forth in Section 5.30, amend or otherwise
modify any Walnut Charter Documents or any of the organizational documents of
any of its Subsidiaries;
ii. except as set forth on Schedule 5.2(b)(ii) to this
Agreement and except for customary remuneration to Persons other than the
Company in connection with the Capital Investment, issue, sell, dispose of or
encumber or authorize the issuance, sale, 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 4.2 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;
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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 Option Purchase 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. except as set forth on Schedule 5.2(b)(vii) to this
Agreement, 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. except as set forth on Schedule 5.2(b)(viii) to this
Agreement, 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) to this
Agreement, 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 5.28 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;
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
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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. except as set forth in Schedule 5.2(b)(xviii) to this
Agreement, 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 5.28, 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 Merger), 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 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 and the completion of any SEC review of the Proxy Statement,
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 each of the Walnut Stockholder
Proposals. Walnut shall, through the Walnut Board, recommend to its
stockholders approval of each of the Walnut Stockholders Proposals.
SECTION 5.4 Preparation and Filing of Forms N-54C. The Company shall prepare
and, immediately after the Effective Time and the LLC Merger, Walnut shall file
with the SEC a Form N-54C on behalf of each of Walnut, Walnut Capital, Walnut
Funds and Universal Bridge to withdraw each of their elections to be treated as
business development companies under the Investment Company Act (the "BDC
WITHDRAWAL"). The Company will provide Walnut with a reasonable opportunity to
review, comment on, and approve the Forms N-54C prior to filing such with the
SEC, provided that such approval shall not be unreasonably withheld or delayed.
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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 Merger and the Related Transactions).
SECTION 5.6 Related Transactions. For the purposes of this Agreement, "RELATED
TRANSACTIONS" means:
(A) (i) The issuance by Walnut to an accredited
investor group in a private placement transaction of (x) at
least 1,500,000, and up to 2,500,000, shares of Walnut Common
Stock at $2.00 per share in cash, and (y) warrants to
purchase up to an aggregate of 2,000,000 shares of Walnut
Common Stock at an exercise price of at least $3.00 per share
and otherwise on terms and conditions approved by Walnut and
the Company, which approval shall not be unreasonably
withheld;
(ii) The issuance by Walnut to an
accredited investor group in a private placement transaction
of one share of Walnut Common Stock for (x) every $2.00 of
debt and accrued liabilities of Walnut paid in cash pursuant
to Section 5.6(B), (y) every $2.00 of cash paid in
satisfaction of the Accrued Compensation pursuant to Section
5.6(C), and (z) every $2.00 of cash paid in connection with
the UPLP Acquisition pursuant to Section 5.6(D), up to a
maximum of 932,500 shares of Walnut Common Stock. The private
placement transaction contemplated by Section 5.6(A)(i) and
the private placement transaction contemplated by this
Section 5.6(A)(ii) are hereinafter collectively referred to
as the "CAPITAL INVESTMENT"; and
(iii) 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;
(B) The payment or conversion of the debts and
accrued liabilities of Walnut or its Subsidiaries, in the
aggregate principal amount of $1,093,000 (plus any interest
actually accrued thereon), described on Schedule 5.6(B) to
this Agreement, in cash or into Walnut Common Stock valued at
$2.00 per share, respectively, as reasonably determined by
the Company (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, respectively,
or a
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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; and
(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").
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 to issue Walnut Common
Stock shall be consistent with Walnut's contractual obligations, if any.
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. Each Related Agreement shall provide that the closing thereunder shall
take place "in escrow" simultaneously with the Closing on terms and conditions
mutually satisfactory to the Company and Walnut; provided, however, that the
only condition to the release of the escrow shall be the BDC Withdrawal.
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 Walnut, 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 Walnut,
substantially in the form attached as Exhibits C-1, C-2 and C-3 to this
Agreement, respectively.
SECTION 5.9 Voting Agreement. The Company acknowledges that each of Windy City,
Inc., Chicago Investments, Inc. and the Kanter Family Foundation (the "WALNUT
PRINCIPAL STOCKHOLDERS") has entered into the Amended and Restated Voting
Agreement, dated as of August 5, 1999 (the "VOTING AGREEMENT"), attached as
Exhibit D to this Agreement, pursuant to which (a) the Walnut Principal
Stockholders agreed to vote their shares of Walnut Common Stock in favor of the
Merger and the Related Transactions, and (b) the Walnut Principal
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Stockholders agreed not to sell their shares of Walnut Common Stock for a
period of 12 months following the consummation of the Merger and the Related
Transactions, subject to certain exceptions as set forth therein.
SECTION 5.10 [Intentionally Omitted].
SECTION 5.11 Investment Letters. At the Closing, the Company shall deliver to
Walnut an investment letter (the "INVESTMENT LETTERS"), substantially in the
form attached as Exhibit E to this Agreement, executed by each of the Company
Stockholders.
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 Forms N-54C,
without the prior written consent of 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, 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, 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 Merger, the Related Transactions or any other
transactions
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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, 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, 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, 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
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consummate and make effective, in the most expeditious manner practicable, the
Merger, the Related Transactions and the other transactions contemplated by
this Agreement, the Transaction Documents and the Related Agreements, including
(i) the obtaining of all 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 indemnification provisions set forth in the Restated Charter
and Restated Bylaws shall not be amended, repealed or otherwise modified for a
period of six years from the Effective Time in any manner that would adversely
affect the rights thereunder as of the Effective Time of individuals who at the
Effective Time were directors, officers, employees or agents of Walnut or its
Subsidiaries, unless such modification is required after the Effective Time by
Law.
(b) Walnut shall, to the fullest extent permitted under applicable Law
or under the Restated Charter and Restated Bylaws, 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 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 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 Effective Time), the Indemnified Parties
shall promptly notify Walnut in writing, but the failure to so notify shall not
relieve Walnut of its obligations under this Section 5.16(b) except to the
extent it is materially prejudiced by such failure, and Walnut 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)
Walnut has agreed to pay such fees and expenses, (b) Walnut shall have failed
to assume the defense of such Action, or (c) the named parties to such Action
include both Walnut 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 Walnut. In the event such Indemnified Parties employ
separate counsel at the expense of Walnut pursuant to clauses (b) or (c) of the
previous sentence, (i) any counsel retained by the Indemnified Parties for any
period after the Effective Time shall be reasonably satisfactory to Walnut;
(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
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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 Effective Time, Walnut shall pay the reasonable
fees and expenses of such counsel, promptly after statements therefor are
received; and (iv) Walnut will cooperate in the defense of any such Action.
Walnut 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 Effective Time, Walnut 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
Walnut 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, Walnut 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 Merger, is intended to benefit Walnut and the Indemnified Parties, shall
be binding on all successors and assigns of Walnut 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, (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, 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 Merger and the Related Transactions), or (v)
any Walnut Material Adverse Effect (in the case of Walnut) 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 Merger to qualify, and will not
(either before or after consummation of the Merger) knowingly take any actions,
or fail to take any action, that might reasonably be expected to prevent the
Merger from qualifying as a reorganization under the provisions of Section 368
of the Code. Walnut shall, and shall use its reasonable best efforts to cause
the Surviving Corporation to, report, to the extent required by the Code, the
Merger for United States federal income tax purposes as a reorganization within
the meaning of Section 368 of the Code.
SECTION 5.19 State Takeover Laws. Walnut shall, upon the request of the
Company,
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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 Merger
and Related Transactions), of any state takeover law.
SECTION 5.20 Options.
(a) Prior to the Effective Time, Walnut shall adopt, and submit to the
Walnut Stockholders for approval, a stock incentive plan (the "WALNUT 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 Walnut Common Stock that in the aggregate does not exceed
2,250,000 shares. Upon the effectiveness of the BDC Withdrawal, Walnut shall
grant, in accordance with the terms of the Walnut Stock Incentive Plan
(including that grants made by the Committee as defined therein), subject to
the approval of the Walnut Stock Incentive Plan by the Walnut Stockholders,
options to purchase up to 1,250,000 shares of Walnut Common Stock under the
Walnut 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
Merger, Walnut shall prepare and file with the SEC a Registration Statement on
Form S-8 with respect to the Walnut Common Stock authorized for issuance under
the Walnut Stock Incentive Plan and shall use its commercially reasonable
efforts to cause such registration statement to become effective.
(b) Simultaneously with the Closing, Walnut shall close into escrow
its purchase of all outstanding options to purchase shares of Walnut Common
Stock 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, held by Robert F. Mauer, Burton W. Kanter and Joel
Kanter (each a "PURCHASED WALNUT OPTION") for the amount set forth on Schedule
5.20(b) to the Merger Agreement, which amount equals the value of each
Purchased Walnut Option as determined using a Black-Scholes valuation (the
"OPTION PURCHASE"). Each holder of a Purchased Walnut Option shall deliver to
Walnut a copy of the agreement evidencing such Purchased Walnut Option marked
"cancelled," against receipt of payment therefor. The only condition to the
release of the escrow shall be the BDC Withdrawal.
(c) Prior to the 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 2.1(c).
(d) Prior to the 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 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, except for obligations or
liabilities incurred in connection with the transactions
contemplated by this Agreement, including but
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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, except for securities owned
as a result of the Transfer, the LLC will not have any
assets.
(b) Contemporaneously with the Effective Time, Walnut and the Company
shall cause (i) the Surviving Corporation to contribute its portfolio of
investment securities to the LLC and (ii) the merger of Walnut Capital, Walnut
Funds and Universal Bridge with and into the LLC, with the LLC as the surviving
entity (the "LLC MERGER").
SECTION 5.22 Walnut Board and Walnut Officers.
(a) Upon consummation of the Merger and the filing of the Restated
Charter with the Utah Department of Commerce, the Walnut Board shall be
increased from seven to nine directors and shall be classified into three
classes as provided in the Restated Charter. Concurrently therewith, the
current directors of Walnut, other than Gene Burleson, Burton W. Kanter and
Joel Kanter shall resign, and the Walnut Board shall appoint the individuals
specified in clauses (i), (ii) and (iii) of this Section 5.22(a) to fill the
resulting vacancies as follows: (i) the Class I directors shall consist of
Messrs. Evan Marks, Joseph D. Mark and Stanley Stern, and shall serve until the
first annual meeting of the Walnut Stockholders after the Merger; (ii) the
Class II directors shall consist of Messrs. Gene Burleson and Henry Klein and
shall serve until the second annual meeting of the Walnut Stockholders after
the Merger; and (iii) 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 Walnut Stockholders after the Merger.
(b) At the Effective Time, all of the current officers of Walnut shall
resign or be removed and the individuals identified on Schedule 5.22(b) to this
Agreement shall be elected or appointed to the offices of Walnut set forth
opposite their respective names on Schedule 5.22(b), to serve until the earlier
of their death, resignation or removal or until their respective successors are
duly elected and qualified.
SECTION 5.23 Company Preferred Stock. Prior to the 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 Effective Time.
SECTION 5.24 Change of Name. Promptly following the Closing Date, the Company
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 effectiveness of the BDC Withdrawal,
Walnut shall sell for cash its marketable securities and shall revalue its
portfolio of nonmarketable securities to fair market value.
SECTION 5.26 Acquisition of Securities.
(a) Prior to the Effective Time, the Company shall use its
commercially reasonable efforts to cause Adi Raviv to obtain a waiver from each
of the shareholders of Softwatch Ltd.
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("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.
(b) Prior to the Effective Time, the Company shall use its
commercially reasonable efforts to cause Carnegie Partners to transfer to the
Company 57,381 shares of Series B Preferred Stock of RTImage Ltd. and warrants
to purchase 7,370 shares of Series B Preferred Stock of RTImage Ltd.
(collectively, the "RTIMAGE SECURITIES") for a purchase price of $64,751 plus
interest thereon from January 12, 1998 until, but not including the Closing
Date, at the rate of 5.68% per annum; provided, however, that in the event that
Carnegie Partners is unable to effect such transfer, the purchase price for the
RTImage Securities shall remain an asset of the Company.
SECTION 5.27 Relinquishment of SBA License. Prior to or simultaneously with the
Capital Investment, Walnut shall use its commercially reasonable efforts to
cause Walnut Capital to relinquish its license from the Small Business
Administration to operate as a Small Business Investment Company.
SECTION 5.28 Termination of Lease. Prior to the Effective Time, Walnut shall
use its commercially reasonable efforts to terminate the oral sublease between
Walnut and Windy City, Inc. for premises located in Vienna, Virginia, with no
cost or penalty to Walnut.
SECTION 5.29 Repayment of Indebtedness. Upon the effectiveness of the BDC
Withdrawal, the proceeds of the Capital Investment shall be used to: (i) repay
the $1,500,000 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.
SECTION 5.30 Charter and Bylaw Amendments.
(a) The Walnut Board has: (i) approved and adopted the Amended and
Restated Articles of Incorporation of Walnut Financial Services, Inc., in the
form attached as Exhibit F to this Agreement (the "RESTATED CHARTER"), (ii)
unanimously recommended that the Walnut Stockholders approve and adopt the
Restated Charter and (iii) submitted to the Walnut Stockholders for approval
and adoption the Restated Charter. Immediately prior to the Effective Time,
subject to receipt of the requisite stockholder approval of the Restated
Charter, Walnut shall execute and file the Restated Charter with the State of
Utah Department of Commerce, Division of Corporations and Commercial Code (the
"UTAH DEPARTMENT OF COMMERCE").
(b) Effective as of the Effective Time, the Walnut Board shall adopt
the Amended and Restated Bylaws of Walnut Financial Services, Inc. (the
"RESTATED BYLAWS"), in the form attached as Exhibit G to this Agreement.
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ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 6.1 Conditions to Each Party's Obligations to Effect the Merger. The
respective obligations of each party hereto to effect the Merger 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 following conditions:
(a) each of Walnut Stockholder Proposals shall have been approved 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 Merger 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 Merger 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 Merger and the Related Transactions)
shall have been obtained; and
(d) the Related Transactions described in Sections 5.6(A) and 5.6(C)
shall have been closed into escrow as described in the last paragraph of
Section 5.6.
SECTION 6.2 Conditions to the Obligations of the Company. The obligation of the
Company to effect the Merger is subject to the satisfaction at or prior to the
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 Effective Time, as though
made on and as of the 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 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
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;
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(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 H 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 Newco Board and the sole stockholder of Newco
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 Merger and the Related Transactions),
(B) resolutions or similar documents evidencing the authorization and approval
by the Walnut Stockholders of each Walnut Stockholder Proposal, (C) the Walnut
Charter Documents and the charter documents of 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) 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;
(g) the Transaction Documents and Related Agreements to which any
Walnut Entity is a party shall have been duly executed and delivered to the
Company;
(h) the Option Purchase shall have been closed into escrow as
described in Section 5.20(b);
(i) Walnut shall have obtained the consent and acknowledgement of Joel
Kanter and Robert Mauer pursuant to Section 5.20(d);
(j) the Related Transactions described in Sections 5.6(B) and 5.6(D)
shall have been closed into escrow as described in the last paragraph of
Section 5.6;
(k) Walnut shall have terminated the oral sublease between Walnut and
Windy City, Inc. pursuant to Section 5.28;
(l) the current officers of Walnut shall have resigned or been removed
and the new officers identified on Schedule 5.22(b) to this Agreement shall
have been elected or appointed pursuant to Section 5.22(b);
(m) 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), (f), (h), (i), (k) and (l) of this Section 6.2 as of the
Closing Date; and
(n) 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 Merger 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 following conditions:
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(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 the Effective Time, as though made on and as of the
Effective Time, 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 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 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 pursuant to the terms of each such Related Agreement
shall have been duly performed in all material respects at or before the
Effective Time;
(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 I 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 Merger 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; and
(j) the Company shall have obtained the consent of Shai Novik to the
cancellation of the Novik Options pursuant to Section 2.1(c).
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ARTICLE 7
TERMINATION; AMENDMENT; WAIVER; FEES AND EXPENSES
SECTION 7.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time, but prior to the Effective Time, 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 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 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 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 Merger 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 any of the Walnut Stockholder
Proposals submitted to the vote of the Walnut Stockholders shall fail to
receive the requisite vote for approval 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 Walnut Stockholder Proposals, 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 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
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<PAGE> 226
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 Merger is 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 Merger 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 Merger by the
Company Stockholders and the Walnut Stockholder Proposals by 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, 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 $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 the Original Agreement and 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.
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<PAGE> 227
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
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 Walnut.
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<PAGE> 228
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 SHALL APPLY TO THE EXTENT
REQUIRED IN CONNECTION WITH THE ADOPTION OF THE RESTATED CHARTER.
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.
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<PAGE> 229
(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, 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).
(19) "UBCA" means the Revised Business Corporation Act of the State of
Utah.
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<PAGE> 230
(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 Withdrawal .................................................................................................5.4
CAG Consulting Agreement ....................................................................................5.7(a)
Capital Investment .............................................................................................5.6
Cash Bonus .............................................................................................4.11(a)(ii)
Certificate of Merger ..........................................................................................1.3
Certificates ................................................................................................2.2(a)
Closing ........................................................................................................1.2
Closing Date ...................................................................................................1.2
Code ......................................................................................................Recitals
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 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)
Debt Conversion .............................................................................................5.6(B)
Effective Time .................................................................................................1.3
Environmental Claim ........................................................................................3.12(a)
Environmental Laws .........................................................................................3.12(b)
ERISA ......................................................................................................3.11(a)
Filings and Approvals ..........................................................................................3.6
Forgiven Amount ..........................................................................................5.6(C)(i)
Indemnified Parties ........................................................................................5.16(b)
Inland Financial ............................................................................................4.4(d)
Intellectual Property .........................................................................................3.17
Investment Letters ............................................................................................5.11
LLC .........................................................................................................5.1(a)
LLC Merger .................................................................................................5.21(b)
Merger ....................................................................................................Recitals
Newco .....................................................................................................Recitals
</TABLE>
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<PAGE> 231
<TABLE>
<S> <C>
Newco Board .................................................................................................4.3(a)
Newco Common Stock...........................................................................................2.1(a)
Novik Options................................................................................................2.1(c)
NYBCL......................................................................................................Recitals
Option Purchase.............................................................................................5.20(b)
Original Agreement.........................................................................................Recitals
Pacific Financial............................................................................................4.4(d)
Past Compensation.........................................................................................5.6(C)(i)
Permits........................................................................................................3.10
Proceeding......................................................................................................3.9
Proxy Statement..............................................................................................5.3(a)
Purchased Walnut Options....................................................................................5.20(b)
QPAM Exemption..............................................................................................3.11(l)
Receivable...................................................................................................4.4(d)
Regulatory Agencies..........................................................................................3.6(a)
Related Agreements..............................................................................................5.6
Related Transactions............................................................................................5.6
Restated Bylaws.............................................................................................5.30(a)
Restated Charter............................................................................................5.30(b)
RTImage Securities..........................................................................................5.26(b)
Softwatch......................................................................................................5.26
Stockholders Agreement.........................................................................................5.10
Surviving Corporation...........................................................................................1.1
Tax Returns.................................................................................................3.13(b)
Taxes.......................................................................................................3.13(b)
Termination Fee..............................................................................................7.4(b)
Transfer.....................................................................................................5.1(a)
Uncollected Receivable.......................................................................................4.4(d)
Universal Bridge.............................................................................................4.2(d)
UPLP............................................................................................................5.6
UPLP Acquisition.............................................................................................5.6(D)
Utah Department of Commerce.................................................................................5.30(a)
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..........................................................................................2.1(b)
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 Principal Stockholders...................................................................................5.9
Walnut Records.................................................................................................4.19
Walnut SEC Filings...........................................................................................4.1(a)
Walnut Securities............................................................................................4.1(a)
Walnut Stockholder Proposals.................................................................................4.3(a)
Walnut Stockholders..........................................................................................4.3(a)
Walnut Stockholders Meeting..................................................................................5.3(b)
Walnut Stock Incentive Plan.................................................................................5.20(a)
WCI Consulting Agreement.....................................................................................5.7(b)
</TABLE>
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<PAGE> 232
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: Chief Executive Officer; 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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<PAGE> 233
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> 234
Executive Officers, or, as applicable, Chief Executive Officer, or the Chief
Operating Officer of the Company or of Walnut Financial Services, Inc.
("Walnut"). 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
Walnut'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. For purposes of this
Agreement, the term "Cause" shall mean any of the following: (i) conviction of a
felony by Mauer;
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<PAGE> 235
(ii) perpetration of an intentional and knowing fraud by CAG or Mauer against or
adversely affecting the Company, Walnut 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, Walnut 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 Walnut; 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 Walnut, or upon direction or
authority of the Co-Chief Executive Officers or, as applicable, Chief Executive
Officer of the Company or of Walnut, or upon the advice of counsel for the
Company or Walnut, 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 Walnut.
(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 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
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<PAGE> 236
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, Walnut 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, 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, Walnut or the Company's affiliates to terminate
his, her, or its relationship with the Company, Walnut 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, Walnut 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 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, Walnut and the Company's affiliates. CAG
and Mauer each
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<PAGE> 237
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; (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 Walnut or Walnut'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, Walnut or the Company's
affiliates. All confidential records shall be and remain the sole property of
the Company, or, as applicable, Walnut 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.
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<PAGE> 238
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, Walnut 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 Walnut 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:
Inland Financial Corporation
c/o Walnut Financial Services, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
Facsimile No.: [(212) 223-0161]
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<PAGE> 239
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, 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.
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<PAGE> 240
(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.
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:
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<PAGE> 241
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
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<PAGE> 242
EXHIBIT B TO MERGER AGREEMENT
Walnut Financial Services, 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:
Walnut Financial Services, 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
<PAGE> 243
Company as may be reasonably delegated to Windy City by the Board of Directors
of the Company ("Board of Directors"), the Company's 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.
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<PAGE> 244
4. Termination.
(a) The Company may terminate the consulting engagement
hereunder and this Agreement at any time for Cause. 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)
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<PAGE> 245
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 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 the Company; (iii) is independently developed by Windy City
or Kanter other than in connection with the consulting engagement hereunder; or
(iv) is
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<PAGE> 246
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 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
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<PAGE> 247
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:
Walnut Financial Services, 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
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<PAGE> 248
To Windy City:
Windy City, Inc.
8000 Towers Crescent Drive
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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<PAGE> 249
(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.
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<PAGE> 250
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,
WALNUT FINANCIAL SERVICES, 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
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<PAGE> 251
EXHIBIT C-1 TO MERGER AGREEMENT
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of ___________
___, 1999 (the "Effective Date"), by and between WALNUT FINANCIAL SERVICES,
INC., a Utah 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.
(c) During the period the Executive is employed by the
Company, the Executive shall devote his full business time
<PAGE> 252
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 two options to purchase
250,000 and 200,000 shares, respectively, of the common stock of the Company,
in accordance with and subject to the provisions of The 1999 Walnut Financial
Services, Inc. Stock Incentive Plan and the grants 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
in any such benefit plan and/or program, the Company agrees to pay the premiums
for the coverage elected by the Executive.
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(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 Utah law.
(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.
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(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 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.
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(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;
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
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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.
(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
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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 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.
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(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 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.
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<PAGE> 259
(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 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
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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 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.
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(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:
Walnut Financial Services, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Adi Raviv
Facsimile No.: (212) 223-0161
To the Executive:
Joseph Mark
Walnut Financial Services, 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 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
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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.
WALNUT FINANCIAL SERVICES, 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 WALNUT FINANCIAL
SERVICES, INC., a Utah 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 may be.
<PAGE> 265
(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 shares
of restricted stock in accordance with and subject to the provisions of The 1999
Walnut Financial Services, Inc. Stock Incentive Plan and the grant thereunder,
as provided for in the Amended and Restated Agreement and Plan of Merger By and
Among Walnut Financial Services, Inc., Tower Hill Acquisition Corp. and Tower
Hill Securities, Inc., dated as of August 5, 1999.
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.
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(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 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 Utah 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 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.
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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 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;
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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 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):
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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 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
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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 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
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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 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.
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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 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
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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:
Walnut Financial Services, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
Facsimile No.: (212) 223-0161
To the Executive:
Shai Novik
Walnut Financial Services, 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 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
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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.
WALNUT FINANCIAL SERVICES, 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 WALNUT FINANCIAL
SERVICES, INC., a Utah 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.
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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 two options to purchase 250,000
and 200,000 shares, respectively, of the common stock of the Company, in
accordance with and subject to the provisions of The 1999 Walnut Financial
Services, Inc. Stock Incentive Plan and the grants 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 in
any such benefit plan and/or program, the Company agrees to pay the premiums for
the coverage elected by the Executive.
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(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 Utah 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 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;
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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 herein
above 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 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;
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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 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
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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 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
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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 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 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:
Walnut Financial Services, Inc.
650 Madison Avenue, 21st Floor
New York, New York 10022
Attention: Joseph Mark
Facsimile No.: (212) 223-0161
To the Executive:
Adi Raviv
Walnut Financial Services, 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.
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(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 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.
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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.
WALNUT FINANCIAL SERVICES, INC.
By:
--------------------------------
Name:
Title:
-----------------------------------
Adi Raviv
<PAGE> 290
EXHIBIT D TO MERGER AGREEMENT
AMENDED AND RESTATED
VOTING AGREEMENT
AMENDED AND RESTATED VOTING AGREEMENT (the "Agreement"), dated
as of August 5, 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, Tower Hill, Windy City, Inc., The Holding Company and
The Kanter Family Foundation entered into a Voting Agreement, dated as of August
5, 1999 (the "Original Agreement");
WHEREAS, pursuant to Section 5.4 of the Original Agreement,
the parties thereto may modify, amend, alter or supplement the Original
Agreement in accordance with the provisions of such Section;
WHEREAS, The Holding Company transferred to Chicago
Investments, Inc. (the "Transferee"), effective August 31, 1999, 59,153 shares
(the "Shares") of common stock, par value $0.01 per share, of Walnut (the
"Walnut Common Stock"), which Shares represented all of the Walnut Common Stock
owned by The Holding Company;
WHEREAS, Tower Hill and each of the Stockholders (other than
The Holding Company) consented to the transfer by The Holding Company of the
Shares to the Transferee and now desire to amend the Voting Agreement to
substitute the Transferee as a party thereto in place of The Holding Company;
and
WHEREAS, the Transferee desires to be bound by all of the
provisions of the Voting Agreement, as though it were an original signatory
thereto;
WHEREAS, The parties hereto desire to otherwise amend and
restate the Original Agreement in its entirety as set forth herein;
WHEREAS, concurrently herewith, Tower Hill, Walnut and Tower
Hill Acquisition Corp., a New York corporation and wholly-owned subsidiary of
Walnut ("Newco"), are entering into an Amended and Restated Agreement and Plan
of Merger (the "Merger Agreement") pursuant to which Newco will be merged with
and into Tower Hill (the "Merger"). 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, 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
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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 Merger,
and (iii) not to transfer or otherwise dispose of any Walnut 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 by each of the parties hereto, the
Original Agreement is hereby amended and restated in its entirety as follows:
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
each Walnut Stockholder Proposal 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 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 the Merger, 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 Merger 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,
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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 irrevocable 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 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 WALNUT SHARES
FOLLOWING THE EFFECTIVE TIME
Section 2.1 Restriction on Transfers. Except as permitted by
Section 2.2 hereof, no Stockholder shall, directly or indirectly, Transfer any
Walnut Shares or any interest therein during the twelve (12) month period
following the 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 Walnut Shares not in accordance with this Agreement
shall be null and void and Walnut 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 Walnut Shares or any
interest therein.
Section 2.2 Permitted Transfers.
(a) If the Average Closing Bid Price of the Walnut
Common Stock is greater than $4.00 per share, then the Stockholders shall be
permitted to Transfer any of their Walnut Shares; provided, however, that if the
closing price of the Walnut Common Stock
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on any trading day thereafter is $2.00 or less, the Stockholders shall no longer
be permitted to Transfer any of their Walnut 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 Walnut 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
Walnut 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 Walnut
Common Stock occurring after the Closing Date).
(b) Notwithstanding anything to the contrary
contained in this Article II, any Stockholder may freely Transfer its Walnut
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 Walnut. The provisions of this Section 2.2(b) shall
not apply if the Board of Directors of Walnut 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 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 Walnut Shares equal
to the percentage of the shares of such Walnut Common Stock covered by such
registration statement, or (ii) if any of the Walnut 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
Walnut shares equal to such number of shares of Walnut Common Stock covered by
such registration statement.
Section 2.3 Stop-Transfer. Walnut shall not register the
transfer of any certificate representing any Walnut Shares, unless such transfer
is in compliance with this Agreement, as evidenced by a written confirmation
signed by Walnut. Each Stockholder acknowledges that its Walnut Shares will be
placed by Walnut on the "stop-transfer list" maintained by Walnut's transfer
agent until this Agreement is terminated pursuant to its terms.
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, 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
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<PAGE> 294
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 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
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<PAGE> 295
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).
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. 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 (except for
Walnut) 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:
- 6 -
<PAGE> 296
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.
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.
- 7 -
<PAGE> 297
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.
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.
- 8 -
<PAGE> 298
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: /s/ Joseph D. Mark
------------------------------
Name: Joseph D. Mark
Title: President
WINDY CITY, INC.
By: /s/ Joel S. Kanter
------------------------------
Name: Joel S. Kanter
Title: President
Shares owned:
104,938 shares of Common Stock
CHICAGO INVESTMENTS, INC.
By: /s/ Linda Gallenberger
------------------------------
Name: Linda Gallenberger
Title: Secretary
Shares owned:
59,152 shares of Common Stock
THE KANTER FAMILY FOUNDATION
By: /s/ Joel S. Kanter
------------------------------
Name: Joel S. Kanter
Title: President
Shares owned:
55,105 shares of Common Stock
- 9 -
<PAGE> 299
SCHEDULE I
Windy City, Inc.
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Joel Kanter
Chicago Investments, Inc.
The Kanter Family Foundation
8000 Towers Crescent Drive
Suite 1070
Vienna, Virginia 22182
Attention: Joel Kanter
- 10 -
<PAGE> 300
EXHIBIT A
Form of Transferee's Consent
CONSENT
TO: Walnut Financial Services, Inc.
650 Madison Avenue
21st Floor
New York, New York 10022
Attention: Joseph D. Mark
The undersigned transferee (the "Transferee") of the
Stockholder of Walnut Financial Services, Inc., a Utah corporation ("Walnut"),
named below (the "Transferring Stockholder") hereby agrees to be bound by all
the provisions of Article II of that certain Amended and Restated Voting
Agreement dated as of August 5, 1999 by and among Tower Hill Securities, Inc., a
New York corporation, and certain stockholders of Walnut, as though the
undersigned were an original signatory to said Amended and Restated Voting
Agreement.
----------------------------------
Transferee:
Name of
Transferring
Stockholder:
---------------------------
- 11 -
<PAGE> 301
GENERAL SCHEDULES TO MERGER AGREEMENT
SCHEDULES
TO THE
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
BY AND AMONG
WALNUT FINANCIAL SERVICES, INC.,
TOWER HILL ACQUISITION CORP.,
AND
TOWER HILL SECURITIES, INC.
DATED AS OF AUGUST 5, 1999
<PAGE> 302
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.
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 100% interest
in HTI Ventures LLC.
SCHEDULE 5.2(b)(ii) CERTAIN ACTIONS WITH RESPECT TO SECURITIES
Issuance by Walnut of Walnut Common Stock and warrants to purchase
Walnut Common Stock pursuant to Section 5.6(A) of the Merger Agreement.
Issuance by Walnut of Walnut Common Stock pursuant to Sections 5.6(B),
5.6(C) and 5.6(D) of the Merger Agreement.
Grant by Walnut of options to purchase Walnut Common Stock pursuant to
Section 5.20(a) of the Merger Agreement.
<PAGE> 303
Repurchase by Walnut of certain Walnut Options pursuant to Section
5.20(b) of the Merger Agreement.
Walnut and/or Walnut Capital Corp. ("Walnut Capital") is permitted to
repay or to modify or amend the terms of the outstanding debenture (the
"Debenture") issued by Walnut Capital to SBIC Funding Corp. ("SBIC") in order to
modify the payment schedule thereunder, extend the maturity thereof or
otherwise, provided that any such modification or amendment does not increase
the principal amount owed by Walnut Capital under the Debenture, the interest
rate applicable thereto, or provide for a prepayment penalty. Any such
modification or amendment may result in the technical reissuance of the
Debenture by Walnut Capital.
SCHEDULE 5.2(b)(vii) CERTAIN ACTIONS WITH RESPECT TO EMPLOYEE BENEFIT PLANS
Walnut may adopt the Walnut Stock Incentive Plan.
SCHEDULE 5.2(b)(viii) CERTAIN PERMITTED MODIFICATIONS
Walnut and/or Walnut Capital is permitted to modify or amend the terms
of the Debenture in order to modify the payment schedule thereunder, extend the
maturity thereof or otherwise, provided that any such modification or amendment
does not increase the principal amount owed by Walnut Capital under the
Debenture, the interest rate applicable thereto or provide for a prepayment
penalty. Any such modification or amendment may result in the technical
reissuance of the Debenture by Walnut Capital.
SCHEDULE 5.2(b)(ix) CERTAIN PERMITTED INDEBTEDNESS
Walnut is permitted to increase its indebtedness by $1,500,000 provided
such loan proceeds are used to repay the Debenture.
Walnut and/or Walnut Capital is permitted to modify or amend the terms
of the Debenture in order to modify the payment schedule thereunder, extend the
maturity thereof or otherwise, provided that any such modification or amendment
does not increase the principal amount owed by Walnut Capital under the
Debenture, the interest rate applicable thereto or provide for a prepayment
penalty. Any such modification or amendment may result in the technical
reissuance of the Debenture by Walnut Capital.
<PAGE> 304
SCHEDULE 5.2(b)(x) CERTAIN PERMITTED PAYMENTS
(a) Payment of $500,000 to SBIC on or about September 1, 1999, (b)
repayment to SBIC of the remaining outstanding principal under the Debenture,
plus accrued interest, in accordance with the terms of the Debenture, and (c)
any debt incurred pursuant to Schedule 5.2(b)(ix).
SCHEDULE 5.2(b)(xviii) CERTAIN PERMITTED CONTRACTS
Walnut and/or Walnut Capital is permitted to enter into an agreement or
agreements with SBIC to modify the payment schedule of, extend the maturity date
of, or to otherwise modify the terms of the Debenture, provided that any such
agreement or agreements do not increase the principal amount owed by Walnut
Capital under the Debenture, the interest rate applicable thereto or provide for
a prepayment penalty.
SCHEDULE 5.6(b) CERTAIN DEBTS/LIABILITIES OF WALNUT FINANCIAL SERVICES,
INC. AND ITS SUBSIDIARIES
<TABLE>
<S> <C>
The Holding Company $ 200,000
William J. Von Liebig 1994 Charitable
Remainder Unitrust $ 600,000
Kanter Family Foundation $ 250,000
Windy City, Inc. $ 43,000
----------
TOTAL $1,093,000
==========
</TABLE>
<PAGE> 305
SCHEDULE 5.20(a) WALNUT OPTIONS
<TABLE>
<CAPTION>
(A) (B)
<S> <C> <C>
Joseph D. Mark 250,000(1) 200,000(2)
Adi Raviv 250,000(1) 200,000(2)
Joel S. Kanter 90,000(3)
Burton W. Kanter 70,000(3)
Robert F. Mauer 50,000(3)
Joshua S. Kanter 25,000(3)
Solomon A. Weisgal 20,000(3)
William F. Burge III 20,000(3)
Albert Morrison 20,000(3)
Earl Chapman 20,000(3)
Gene E. Burleson 20,000(3)
Shea Cordell 15,000(3)
Total 1,250,000
</TABLE>
(1) The terms of such options shall be as follows:
(i) These options shall have an exercise price equal to the fair
market value of the Walnut Common Stock on the date of grant.
(ii) The options shall have a term of five (5) years.
(iii) The options shall be immediately exercisable.
(2) The terms of such options shall be as follows:
(i) The options shall have an exercise price 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.
(iii) These options (i) shall vest on the same schedule as the
restricted shares of Walnut Common Stock intended to be
granted to Shai Novik pursuant to Section 2.2(c) of the Merger
Agreement vest, and (ii) shall be reduced by the number of
shares of such restricted stock that are forfeited by Shai
Novik in accordance with the terms and conditions of the grant
thereof.
(iv) The options shall not be subject to forfeiture.
(v) The options shall be non-transferable.
<PAGE> 306
(3) The terms of such options shall be as follows:
(i) The options shall have an exercise price equal to the
exercise price of the Mark/Raviv Options.
(ii) The options shall have a term of five (5) years.
(iii) The options shall be immediately exercisable.
(iv) The options shall not be subject to forfeiture.
(v) The options shall be non-transferable.
SCHEDULE 5.20(b) PURCHASED WALNUT OPTIONS
<TABLE>
<CAPTION>
HOLDER NUMBER OF OPTIONS TO BE BLACK-SCHOLES VALUE PER TOTAL PURCHASE
PURCHASED OPTION PRICE
----------------------- ----------------------- --------------
<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 5.22 OFFICERS OF WALNUT FOLLOWING THE MERGER
Joseph D. Mark - Co-Chief Executive Officer
Adi Raviv - Co-Chief Executive Officer
Shai Novik - Chief Operating Officer/Chief Financial Officer/Secretary
<PAGE> 307
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
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.
<PAGE> 308
Board of Directors
Walnut Financial Services, Inc.
August 5, 1999
Page 2
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 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
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Board of Directors
Walnut Financial Services, Inc.
August 5, 1999
Page 3
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.
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> 310
EXHIBIT C
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
WALNUT FINANCIAL SERVICES, INC.
Pursuant to Section 16-10a-1007 of the Utah Revised Business
Corporation Act (the "URBCA"), the undersigned corporation adopts the following
Articles of Amendment and Restatement by stating as follows:
1. The present name of the corporation is Walnut Financial Services,
Inc.
2. The following amendment and restatement of its Articles of
Incorporation was approved by the Board of Directors for submission to the
stockholders of the corporation, and was adopted by the shareholders of the
corporation at a meeting duly held on ____________, 1999, in the manner
prescribed by the URBCA.
FIRST: The name of the Corporation is THCG, Inc. (the "Corporation").
SECOND: The address of the Corporation's present registered office in
the State of Utah and name of its present registered agent at such office is:
Name of Registered Agent Address of Registered Agent
------------------------ -------------------------------
CT Corporation Sys. 50 W. Broadway, 8th Floor
------------------------ -------------------------------
Salt Lake City, Utah 84101
-------------------------------
-------------------------------
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the URBCA.
FOURTH: The total number of shares of all classes of stock which the
Corporation is authorized to issue is 55,000,000 shares, of which 50,000,000
shall be designated Common
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Stock, par value $0.01 per share, and 5,000,000 shall be designated Preferred
Stock, par value $0.01 per share.
(a) The Common Stock:
The holders of Common Stock shall be entitled to one
vote for each share so held (with all such shares voting together as a single
group), and shall be entitled to notice of any stockholders meeting and to vote
upon any such matters as provided in the by-laws of the Corporation or as may be
provided by law. Except for and subject to those rights expressly granted to
holders of Preferred Stock, and except as may be provided by the laws of the
State of Utah, the holders of Common Stock shall have all other rights of
stockholders, including, without limitation, (i) the right to receive dividends,
when, as and if declared by the Board of Directors of the Corporation, out of
assets lawfully available therefor, and (ii) in the event of any distribution of
assets upon a liquidation or otherwise, the right to receive all the assets and
funds of the Corporation, remaining after the payment to the holders of the
Preferred Stock, if any, of the specific amounts which they are entitled to
receive upon such distribution.
(b) The Preferred Stock:
The Board of Directors is hereby expressly authorized
to provide for, designate and issue, out of the authorized but unissued shares
of Preferred Stock, one or more series of Preferred Stock, subject to the terms
and conditions set forth herein. Before any shares of any such series are
issued, the Board of Directors shall fix, and hereby is expressly empowered to
fix, by resolution or resolutions, the following provisions of the shares of any
such series:
(i) the designation of such series, the number
of shares to constitute such series and the stated value thereof, if different
from the par value thereof;
(ii) whether the shares of such series shall have
voting rights or powers, in addition to any voting rights required by law, and,
if so, the terms of such voting rights or powers, which may be full or limited;
(iii) the dividends, if any, payable on such
series, whether any such dividends shall be cumulative, and, if so, from what
dates, the conditions and dates upon which such dividends shall be payable, and
the preference or relation which such dividends shall bear to the dividends
payable on any other series of Preferred Stock or on any other class of stock,
of the Corporation or any series of such class;
(iv) whether the shares of such series shall be
subject to redemption by the Corporation, and, if so, the times, prices and
other conditions of such redemption;
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(v) the amount or amounts payable upon shares of
such series upon, and the rights of the holders of such series in, the voluntary
or involuntary liquidation, dissolution or winding up, or upon any distribution
of the assets, of the Corporation;
(vi) whether the shares of such series shall be
subject to the operation of a retirement or sinking fund and, if so, the extent
to and manner in which any such retirement or sinking fund shall be applied to
the purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relative to the operation
thereof;
(vii) whether the shares of such series shall be
convertible into, or exchangeable for, shares of Preferred Stock of any other
series or any other class of stock of the Corporation or any series of such
class or any other securities and, if so, the price or prices or the rate or
rates of conversion or exchange and the method, if any, of adjusting the same,
and any other terms and conditions of such conversion or exchange;
(viii) the limitations and restrictions, if any,
to be effective while any shares of such series are outstanding upon the payment
of dividends or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the Corporation of, the Common Stock or
shares of Preferred Stock of any other series or any other class of stock of the
Corporation or any series of such class;
(ix) the conditions or restrictions, if any, to
be effective while any shares of such series are outstanding upon the creation
of indebtedness of the Corporation or upon the issuance of any additional stock,
including additional shares of such series or of any other series of the
Preferred Stock or of any class of stock of the Corporation or any series of
such class; and
(x) any other powers, designations, preferences
and relative, participating, optional or other special rights, and any
qualifications, limitations or restrictions thereof.
The powers, designations, preferences and relative, participating,
optional or other special rights of each series of Preferred Stock, and the
qualifications, limitations or restrictions thereof, if any, may differ from
those of any and all other series at any time outstanding. The Board of
Directors is hereby expressly authorized from time to time to increase (but not
above the total number of authorized shares of Preferred Stock) or decrease (but
not below the number of shares thereof then outstanding) the number of shares of
stock of any series of Preferred Stock designated as any one or more series of
Preferred Stock.
FIFTH: (a) The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided herein, in the by-laws of the Corporation or required by law.
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(b) Election of directors need not be by written ballot unless
the by-laws of the Corporation shall so provide.
(c) The number of directors of the Corporation shall be fixed
by, or in the manner provided in, the by-laws of the Corporation. Commencing on
the effective time of the merger (the "Merger") of Tower Hill Acquisition Corp.,
a New York corporation and a wholly-owned subsidiary of the Corporation, with
and into Tower Hill Securities, Inc., a New York corporation, the directors,
other than those who may be elected by the holders of any series of Preferred
Stock, shall be classified, with respect to the term for which they severally
hold office, into three classes, as nearly equal in number as possible. The
initial Class I, II and III directors shall be appointed by the Board of
Directors upon the effective time of the Merger. The initial Class I directors
shall serve until the first annual meeting of stockholders after the Merger. The
initial Class II directors shall serve until the second annual meeting of
stockholders after the Merger. The initial Class III directors shall serve until
the third annual meeting of stockholders after the Merger. 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 annual meeting of the stockholders of the Corporation, 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 annual meeting of stockholders held in the third year following
the year of their election and until their successors are duly elected and
qualified or until their earlier death, disqualification, resignation or
removal.
(d) No director of the Corporation shall be removed from his
office as a director by vote, consent or other action of the stockholders or
otherwise except for cause.
SIXTH: Any action required or permitted to be taken by the
stockholders of the Corporation 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.
SEVENTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 16-10a-842 of the URBCA, or (iv) for any
transaction from which the director derived any improper personal benefit. If
the URBCA is amended after the date hereof to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the URBCA, as so amended. No amendment to or repeal of this
Article EIGHTH shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment.
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EIGHTH: (a) The Corporation shall to the fullest extent permitted by
Utah law, as in effect from time to time (but in case of any amendment of the
URBCA, only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment), indemnify each person who is or was a director
or officer of the Corporation (or any predecessor) or of any of its wholly-owned
subsidiaries who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, or was or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee or agent of the Corporation or of any of its subsidiaries, or
is or was at any time serving, at the request of the Corporation, any other
corporation, partnership, limited liability company, joint venture, trust,
employee benefit plan or other enterprise in any capacity, against all expense,
liability and loss (including, but not limited to, attorneys' fees, judgments,
fines, excise taxes or penalties with respect to any employee benefit plan or
otherwise, and amounts paid or to be paid in settlement) incurred or suffered by
such director or officer in connection with such proceeding; provided, however,
that the Corporation shall not be obligated to indemnify any person under this
Article NINTH in connection with a proceeding (or part thereof) if such
proceeding (or part thereof) was initiated by such person, but was not
authorized by the Board of Directors of the Corporation against (i) the
Corporation or any of its subsidiaries; (ii) any person who is or was a
director, officer, employee or agent of the Corporation or any of its
subsidiaries and/or (iii) any person or entity which is or was controlled,
controlled by or under common control with the Corporation or has or had
business relations with the Corporation or any of its subsidiaries.
(b) Expenses incurred by a person who is or was a director or
officer of the Corporation (or any predecessor) or any of its wholly-owned
Subsidiaries in defending a proceeding shall be paid by the Corporation as they
are incurred in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation. Such expenses incurred by former directors or
other employees or agents of the Corporation may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
(c) For purposes of this Article NINTH, the term "Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed by the
Corporation in a consolidation or merger; the term "other enterprise" shall
include any corporation, partnership, joint venture, limited liability company,
trust or employee benefit plan; service "at the request of the Corporation"
shall include, without limitation, service as a director, officer or employee of
the Corporation which imposes duties on, or involves service by, such director,
officer or employee with respect to an employee benefit plan, its participants
or beneficiaries; any excise taxes assessed on a person with respect to an
employee benefit plan shall be deemed to be indemnifiable expenses; and action
by a person with respect to any employee benefit plan which such person
reasonably believes to be in the interest of the participants and beneficiaries
of such plan shall be deemed to be action in or not opposed to the best
interests of the Corporation.
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(d) Notwithstanding any other provision of this Certificate of
Incorporation or the by-laws of the Corporation, no action by the Corporation,
either by amendment to or repeal of this Article NINTH or the by-laws of the
Corporation or otherwise shall diminish or adversely affect any right or
protection granted under this Article NINTH to any director or officer or former
director or officer of the Corporation (or any predecessor) or of any of its
wholly-owned subsidiaries which shall have become vested as aforesaid prior to
the date that any such amendment, repeal or other corporate action is taken.
NINTH: (a) Except as provided otherwise by law or the by-laws of the
Corporation, the by-laws of the Corporation may be amended or repealed or new
by-laws (not inconsistent with any provision of law or this Certificate of
Incorporation) may be adopted by the Board of Directors.
(b) The by-laws of the Corporation may be amended or repealed
at any annual meeting of stockholders, or special meeting of stockholders called
for such purpose, by the affirmative vote of a majority of the total votes
eligible to be cast on such amendment or repeal by holders of voting stock,
voting together as a single class.
3. At the time of the adoption of this Restatement of Articles of
Incorporation, there were a total of 3,350,533 shares of Common Stock
outstanding, all of which shares were entitled to vote on this Restatement of
Articles of Incorporation. Holders of shares were indisputably represented at
the meeting.
4. At least ___________ shares were voted for this Restatement of
Articles of Incorporation, and that number was sufficient for its approval.
Dated as of the ____ day of ___________, 1999.
WALNUT FINANCIAL SERVICES, INC.
By:
--------------------------------
Joel S. Kanter, President
ATTEST:
- ------------------------------
Joshua S. Kanter, Secretary
ACKNOWLEDGMENT OF REGISTERED AGENT
----------------------------------
The undersigned, ______________________, hereby acknowledges that
he/she has been named as registered agent of THCG, INC., a Utah corporation
(formerly known as Walnut Financial Services, Inc.), and the undersigned hereby
agrees to act as registered agent of said corporation.
------------------------------
[Name]
Registered Agent
6
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EXHIBIT D
AMENDED AND RESTATED
BY-LAWS
OF
THCG, INC.
(formerly known as Walnut Financial Services, Inc.)
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of stockholders
shall be held at the hour, date and place within or without the United States
which is fixed by the Board of Directors or an officer designated by the Board
of Directors, which time, date and place may subsequently be changed at any time
by vote of the Board of Directors or by such officers so designated.
SECTION 2. Matters to be Considered at Annual Meetings. At any
annual meeting or special meeting of stockholders in lieu thereof (the "Annual
Meeting"), only such business shall be conducted, and only such proposals shall
be acted upon as shall have been properly brought before such Annual Meeting. To
be considered as properly brought before an Annual Meeting, business must be:
(a) specified in the notice of meeting, (b) otherwise properly brought before
the meeting by, or at the direction of, the Board of Directors, or (c) otherwise
properly brought before the meeting by any holder of record (both as of the time
notice of such proposal is given by the stockholder as set forth below and as of
the record date for the Annual Meeting in question) of any shares of capital
stock of the Corporation entitled to vote at such Annual Meeting on such
business who complies with the requirements set forth in this Section 2.
In addition to any other applicable requirements, for business
to be properly brought before an Annual Meeting by a stockholder of record of
any shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (i) give timely notice as required by this Section 2 to the
Secretary of the Corporation, and (ii) be present at such meeting, either in
person or by a representative. For the first Annual Meeting following the merger
(the "Merger") of Tower Hill Acquisition Corp., a New York corporation and a
wholly-owned subsidiary of the Corporation, with and into Tower Hill Securities,
Inc., a New York corporation, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the later of (A) the
75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day
following the day on which public announcement of the date of such Annual
Meeting is first made by the Corporation. For all subsequent Annual Meetings, a
stockholder's notice shall be timely if
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delivered to, or mailed to and received by, the Corporation at its principal
executive office not less than 75 days nor more than 120 days prior to the
anniversary date of the immediately preceding Annual Meeting (the "Anniversary
Date"); provided, however, that in the event the Annual Meeting is scheduled to
be held on a date more than 30 days before the Anniversary Date or more than 60
days after the Anniversary Date, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the later of (A) the
75th day prior to the scheduled date of such Annual Meeting, or (B) the 15th day
following the day on which public announcement of the date of such Annual
Meeting is first made by the Corporation.
For purposes of these By-Laws, "public announcement" shall
mean: (i) disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service, (ii) a report or other
document filed publicly with the Securities and Exchange Commission (including,
without limitation, a Current Report on Form 8-K), or (iii) a letter or report
sent to stockholders of record of the Corporation at the close of business on
the day of the mailing of such letter or report.
A stockholder's notice to the Secretary shall set forth as to
each matter proposed to be brought before an Annual Meeting: (i) a brief
description of the business the stockholder desires to bring before such Annual
Meeting and the reasons for conducting such business at such Annual Meeting,
(ii) the name and address, as they appear on the Corporation's stock transfer
books, of the stockholder proposing such business, (iii) the class and number of
shares of the Corporation's capital stock beneficially owned by the stockholder
proposing such business, (iv) the names and addresses of the beneficial owners,
if any, of any capital stock of the Corporation registered in such stockholder's
name on such books, and the class and number of shares of the Corporation's
capital stock beneficially owned by such beneficial owners, (v) the names and
addresses of other stockholders known by the stockholder proposing such business
to support such proposal, and the class and number of shares of the
Corporation's capital stock beneficially owned by such other stockholders, and
(vi) any material interest of the stockholder proposing to bring such business
before such meeting (or any other stockholders known to be supporting such
proposal) in such proposal.
If the Board of Directors or a designated committee thereof
determines that any stockholder proposal was not made in a timely fashion in
accordance with the provisions of this Section 2 or that the information
provided in a stockholder's notice does not satisfy the information requirements
of this Section 2 in any material respect, such proposal shall not be presented
for action at the Annual Meeting in question. If neither the Board of Directors
nor such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the Annual
Meeting shall determine whether the stockholder proposal was made in accordance
with the terms of this Section 2. If the presiding officer determines that any
stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2 or that the information provided in a stockholder's
notice does not satisfy the information requirements of this Section 2 in any
material respect, such proposal shall not be presented for action at the Annual
Meeting in question. If the Board of Directors, a designated committee thereof
or the presiding officer determines that a stockholder
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proposal was made in accordance with the requirements of this Section 2, the
presiding officer shall so declare at the Annual Meeting and ballots shall be
provided for use at the meeting with respect to such proposal.
Notwithstanding the foregoing provisions of these By-Laws, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder with respect to the matters set forth in this By-Law, and
nothing in this By-Law shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement, or the
Corporation's right to refuse inclusion thereof, pursuant to Rule 14a-8 under
the Exchange Act.
SECTION 3. Special Meetings. Except as otherwise permitted by
law, special meetings of the stockholders of the Corporation may be called only
by the Chief Executive Officer of the Corporation or the Board of Directors
pursuant to a resolution approved by the affirmative vote of a majority of the
Directors then in office.
SECTION 4. Matters to be Considered at Special Meetings. Only
those matters set forth in the notice of the special meeting may be considered
or acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice
of all Annual Meetings stating the hour, date and place of such Annual Meetings
shall be given by the Secretary (or other person authorized by these By-Laws or
by law) not less than 10 days nor more than 60 days before the Annual Meeting,
to each stockholder entitled to vote thereat and to each stockholder who, by law
or under the Articles of Incorporation of the Corporation ("Articles of
Incorporation") or under these By-Laws, is entitled to such notice, by
delivering such notice to him or by mailing it, postage prepaid, addressed to
such stockholder at the address of such stockholder as it appears on the
Corporation's stock transfer books. Such notice shall be deemed to be delivered
when hand delivered to such address or deposited in the mail so addressed, with
postage prepaid.
Notice of all special meetings of stockholders shall be given
in the same manner as provided for Annual Meetings, except that the written
notice of all special meetings shall state the purpose or purposes for which the
meeting has been called.
Notice of an Annual Meeting or special meeting of stockholders
need not be given to a stockholder if a written waiver of notice is signed
before or after such meeting by such stockholder or if such stockholder attends
such meeting, unless such attendance was for the express purpose of objecting at
the beginning of the meeting to the transaction of any business because the
meeting was not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any Annual Meeting or special meeting of
stockholders need be specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any
previously scheduled Annual Meeting or special meeting of stockholders and any
record date with respect thereto, regardless of whether any notice or public
disclosure with respect to any such meeting has been
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sent or made pursuant to Section 2 of this Article I or Section 3 of Article II
of these By-Laws or otherwise. In no event shall the public announcement of an
adjournment, postponement or rescheduling of any previously scheduled meeting of
stockholders commence a new time period for the giving of a stockholder's notice
under Section 2 of this Article I or Section 3 of Article II of these By-Laws.
When any meeting is convened, the presiding officer may
adjourn the meeting if (a) no quorum is present for the transaction of business,
(b) the Board of Directors determines that adjournment is necessary or
appropriate to enable the stockholders to consider fully information which the
Board of Directors determines has not been made sufficiently or timely available
to stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting other than an announcement at
the meeting at which the adjournment is taken of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Articles of Incorporation or under these By-Laws, is entitled
to such notice.
SECTION 6. Quorum. The holders of shares of voting stock
representing a majority of the voting power of the outstanding shares of voting
stock issued, outstanding and entitled to vote at a meeting of stockholders,
represented in person or by proxy at such meeting, shall constitute a quorum;
but if less than a quorum is present at a meeting, the holders of voting stock
representing a majority of the voting power present at the meeting or the
presiding officer may adjourn the meeting from time to time, and the meeting may
be held as adjourned without further notice, except as provided in Section 5 of
this Article I. At such adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the meeting as
originally noticed. The stockholders present at a duly constituted meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 7. Voting and Proxies. Stockholders shall have one
vote for each share of stock entitled to vote owned by them of record according
to the books of the Corporation, unless otherwise provided by law or by the
Articles of Incorporation. Stockholders may vote either in person or by written
proxy, but no proxy shall be voted or acted upon after eleven months from its
date, unless the proxy provides for a longer period. Proxies shall be filed with
the Secretary of the meeting before being voted. Except as otherwise limited
therein or as otherwise provided by law, proxies shall entitle the persons
authorized thereby to vote at any adjournment of such meeting. A proxy with
respect to stock held in the name of two or more persons shall be valid if
executed by or on behalf of any one of them unless at or prior to the exercise
of the proxy the Corporation receives a specific written notice to the contrary
from any one of them. A proxy purporting to be executed by or on behalf of a
stockholder shall be deemed valid, and the burden of proving invalidity shall
rest on the challenger.
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SECTION 8. Action at Meeting. When a quorum is present, any
matter properly brought before any meeting of stockholders shall be decided by
the vote of a majority of the voting power of shares of voting stock present in
person or represented by proxy at such meeting and entitled to vote on such
matter, except where a larger vote is required by law, by the Articles of
Incorporation or by these By-Laws. Any election of Directors by stockholders
shall be determined by a plurality of the votes cast, except where a larger vote
is required by law, by the Articles of Incorporation or by these By-Laws. The
Corporation shall not directly or indirectly vote any shares of its own stock;
provided, however, that the Corporation may vote shares which it holds in a
fiduciary capacity to the extent permitted by law.
SECTION 9. Stockholder Lists. The Secretary (or the
Corporation's transfer agent or other person authorized by these By-Laws or by
law) shall prepare and make a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
The list shall be made on the earlier of ten days before the meeting for which
the list was prepared or two days after notice of the meeting was given. Such
list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period beginning
on the date the list is made pursuant to the foregoing sentence and continuing
through the meeting and any meeting adjournments, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held.
SECTION 10. Presiding Officer. The Chairman of the Board or if
there is no Chairman of the Board, or in his absence, one of the Co-Chief
Executive Officers of the Corporation or, in their absence, such other officer
as shall be designated by the Board of Directors shall preside at all Annual
Meetings or special meetings of stockholders and shall have the power, among
other things, to adjourn such meeting at any time and from time to time, subject
to Sections 5 and 6 of this Article I. The order of business and all other
matters of procedure at any meeting of the stockholders shall be determined by
the presiding officer.
SECTION 11. Voting Procedures and Inspectors of Elections. The
Corporation shall, in advance of, or at, any meeting of stockholders, appoint
one or more inspectors to act at the meeting and make a written report thereof.
The Corporation may designate one or more persons as alternate inspectors to
replace any inspector who fails to act. If no inspector or alternate is able to
act at a meeting of stockholders, the presiding officer shall appoint one or
more inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall perform such duties as
circumstances reasonably require, including the counting of all votes and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors. The
presiding officer may review all determinations made by the inspector(s), and in
so doing the presiding officer shall be entitled to exercise his or her sole
judgment and discretion and he or she shall not be bound by any determinations
made by the inspector(s). All determinations by the inspector(s) and, if
applicable, the presiding officer shall be subject to further review by any
court of competent jurisdiction.
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SECTION 12. No Action by Written Consent. Any action required
or permitted to be taken by the stockholders of the Corporation 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.
ARTICLE II
Directors
SECTION 1. Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors except as
otherwise provided by the Articles of Incorporation or required by law.
SECTION 2. Number and Terms. The number of Directors
constituting the entire Board of Directors of the Corporation shall not be less
than 3 nor more than 12 as fixed by resolution duly adopted from time to time by
the Board of Directors.
Commencing on the effective time of the Merger, the Directors
shall be classified, with respect to the term for which they severally hold
office, into three classes, as nearly equal in number as possible. The initial
Class I, II and III Directors shall be appointed by the Board of Directors upon
the effective time of the Merger. The initial Class I Directors shall serve
until the first Annual Meeting after the Merger. The initial Class II Directors
shall serve until the second Annual Meeting after the Merger. The initial Class
III Directors shall serve until the third Annual Meeting after the Merger.
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 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
Annual Meeting held in the third year following the year of their election.
SECTION 3. Director Nominations. Nominations of candidates for
election as Directors of the Corporation at any Annual Meeting may be made only
(a) by, or at the direction of, the Board of Directors or (b) by any holder of
record (both as of the time notice of such nomination is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of the capital stock of the Corporation entitled to
vote for the election of Directors at such Annual Meeting who complies with the
timing, informational and other requirements set forth in this Section 3. Any
stockholder who seeks to make such a nomination or his representative must be
present in person at the Annual Meeting. Only persons nominated in accordance
with the procedures set forth in this Section 3 shall be eligible for election
as Directors at an Annual Meeting.
Nominations, other than those made by, or at the direction of,
the Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation as set forth in this Section 3. For the first
Annual Meeting following the Merger, a stockholder's
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notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not later than the close of
business on the later of (A) the 75th day prior to the scheduled date of such
Annual Meeting or (B) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the
Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be
timely if delivered to, or mailed to and received by, the Corporation at its
principal executive office not less than 75 days nor more than 120 days prior to
the Anniversary Date; provided, however, that in the event the Annual Meeting is
scheduled to be held on a date more than 30 days before the Anniversary Date or
more than 60 days after the Anniversary Date, a stockholder's notice shall be
timely if delivered to, or mailed and received by, the Corporation at its
principal executive office not later than the close of business on the later of
(i) the 75th day prior to the scheduled date of such Annual Meeting or (ii) the
15th day following the day on which public announcement of the date of such
Annual Meeting is first made by the Corporation.
A stockholder's notice to the Secretary shall set forth as to
each person whom the stockholder proposes to nominate for election or
re-election as a Director: (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation's capital stock
which are beneficially owned by such person on the date of such stockholder
notice, (iv) the consent of each nominee to serve as a Director if elected, and
(v) such information concerning such person as is required to be disclosed
concerning a nominee for election as Director of the Corporation pursuant to the
rules and regulations under the Exchange Act. A stockholder's notice to the
Secretary shall further set forth as to the stockholder giving such notice: (i)
the name and address, as they appear on the Corporation's stock transfer books,
of such stockholder and of the beneficial owners (if any) of the Corporation's
capital stock registered in such stockholder's name and the name and address of
other stockholders known by such stockholder to be supporting such nominee(s),
(ii) the class and number of shares of the Corporation's capital stock which are
held of record, beneficially owned or represented by proxy by such stockholder
and by any other stockholders known by such stockholder to be supporting such
nominee(s) on the record date for the Annual Meeting in question (if such date
shall then have been made publicly available) and on the date of such
stockholder's notice, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by such stockholder or in connection therewith.
If the Board of Directors or a designated committee thereof
determines that any stockholder nomination was not timely made in accordance
with the terms of this Section 3 or that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section 3 in any material respect, then such nomination shall not be considered
at the Annual Meeting in question. If neither the Board of Directors nor such
committee makes a determination as to whether a nomination was made in
accordance with the provisions of this Section 3, the presiding officer of the
Annual Meeting shall determine whether a nomination was made in accordance with
such provisions. If the presiding officer determines that any stockholder
nomination was not timely made in accordance with the terms of this Section 3 or
that the information provided in a stockholder's notice does not satisfy the
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information requirements of this Section 3 in any material respect, then such
nomination shall not be considered at the Annual Meeting in question. If the
Board of Directors, a designated committee thereof or the presiding officer
determines that a nomination was made in accordance with the terms of this
Section 3, the presiding officer shall so declare at the Annual Meeting and such
nominee shall be eligible for election at the meeting.
No person shall be elected by the stockholders as a Director
of the Corporation unless nominated in accordance with the procedures set forth
in this Section. Election of Directors at the Annual Meeting need not be by
written ballot, unless otherwise provided by the Board of Directors or the
presiding officer at such Annual Meeting. If written ballots are to be used,
ballots bearing the names of all the persons who have been nominated for
election as Directors at the Annual Meeting in accordance with the procedures
set forth in this Section shall be provided for use at the Annual Meeting.
SECTION 4. Qualification. No Director need be a stockholder of
the Corporation.
SECTION 5. Vacancies. Any and all vacancies occurring on the
Board of Directors, including, without limitation, any vacancy created by reason
of an increase in the number of Directors, or resulting from death, resignation,
disqualification, removal or any other cause, may be filled by the affirmative
vote of a majority of the remaining Directors then in office, even if such
remaining Directors constitute less than a quorum of the Board of Directors, or
if such vacancy is not so filled by the remaining Directors, by the stockholders
of the Corporation. Any Director appointed or elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
class of Directors in which the new directorship was created or the vacancy
occurred and until such Director's successor shall have been duly elected and
qualified or until his or her earlier death, disqualification, resignation or
removal. When the number of Directors is increased or decreased, the Board of
Directors shall determine the class or classes to which the increased or
decreased number of Directors shall be apportioned; provided, however, that no
decrease in the number of Directors shall shorten the term of any incumbent
Director unless such Director is removed as permitted in the Articles of
Incorporation. In the event of a vacancy in the Board of Directors, the
remaining Directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
SECTION 6. Removal. Directors may be removed from office in
the manner provided in the Articles of Incorporation.
SECTION 7. Resignation. A Director may resign at any time by
giving written notice to the Corporation addressed to a Co-Chief Executive
Officer or the Secretary. A resignation shall be effective upon receipt, unless
the resignation otherwise provides, and need not be accepted by the Corporation.
SECTION 8. Regular Meetings. The regular annual meeting of the
Board of Directors shall be held, without notice other than this By-Law, on the
same date and at the same
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place as the Annual Meeting following the close of such meeting of stockholders.
Other regular meetings of the Board of Directors may be held at such hour, date
and place as the Board of Directors may by resolution from time to time
determine without notice other than such resolution.
SECTION 9. Special Meetings. Special meetings of the Board of
Directors may be called, orally or in writing, by or at the request of a
majority of the Directors then in office or one of the co-Chief Executive
Officers of the Corporation. The person calling any such special meeting of the
Board of Directors may fix the hour, date and place thereof.
SECTION 10. Notice of Meetings. Notice of the hour, date and
place of all special meetings of the Board of Directors shall be given to each
Director by the Secretary or the person calling such meeting, or in case of the
death, absence, incapacity or refusal of such person, by a Co-Chief Executive
Officer of the Corporation or such other officer as shall be designated by the
Board of Directors. Notice of any special meeting of the Board of Directors
shall be given to each Director in person, by telephone, or by telex, telecopy
telegram, or other written form of electronic communication, sent to his
business or home address, at least 24 hours in advance of the meeting, or by
written notice sent by next-day delivery courier service to his business or home
address, at least 48 hours in advance of the meeting. Such notice shall be
deemed to be delivered when hand delivered to such address, read to such
Director by telephone, deposited in the mail so addressed, with postage thereon
prepaid if mailed, dispatched or transmitted if telexed, telecopied or effected
by another written form of electronic communication, or when delivered to the
telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or
special, is adjourned for 30 days or more, notice of the adjourned meeting shall
be given as in the case of an original meeting. It shall not be necessary to
give any notice of the hour, date or place of any meeting adjourned for less
than 30 days or of the business to be transacted thereat, other than an
announcement at the meeting at which such adjournment is taken of the hour, date
and place to which the meeting is adjourned.
A written waiver of notice signed before or after a meeting by
a Director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Articles of
Incorporation or by these By-Laws, neither the business to be transacted at, nor
the purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 11. Quorum. At any meeting of the Board of Directors,
a majority of the Directors then in office (but in no event less than one-third
of the entire Board of Directors) shall constitute a quorum for the transaction
of business, but if less than a quorum is present at a meeting, a majority of
the Directors present may adjourn the meeting from time to time, and the meeting
may be held as adjourned without further notice, except as provided in Section
10 of this
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Article II. Any business which might have been transacted at the meeting as
originally noticed may be transacted at such adjourned meeting at which a quorum
is present.
SECTION 12. Action at Meeting. At any meeting of the Board of
Directors at which a quorum is present, a majority of the Directors present may
take any action on behalf of the Board of Directors, unless otherwise required
by law, by the Articles of Incorporation or by these By-Laws.
SECTION 13. Action by Consent. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if all members of the Board of Directors consent thereto in
writing. Such written consent shall be filed with the records of the meetings of
the Board of Directors and shall be treated for all purposes as a vote at a
meeting of the Board of Directors.
SECTION 14. Manner of Participation. Directors may participate
in meetings of the Board of Directors by means of conference telephone or
similar communications equipment by means of which all Directors participating
in the meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-Laws.
SECTION 15. Committees. The Board of Directors, by vote of a
majority of the Directors then in office, may elect from its number, one or more
committees, including but not limited to, an Executive Committee, a Compensation
Committee and an Audit Committee, and may delegate thereto some or all of its
powers except those which by law, by the Articles of Incorporation or by these
By-Laws may not be delegated. Except as the Board of Directors may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Board of Directors or in such rules, its
business shall be conducted so far as possible in the same manner as is provided
by these By-Laws for the Board of Directors. All members of such committees
shall hold such offices at the pleasure of the Board of Directors. The Board of
Directors may abolish any such committee at any time. Any committee to which the
Board of Directors delegates any of its powers or duties shall keep records of
its meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, to the extent
permitted by law, but no such rescission shall have retroactive effect.
SECTION 16. Compensation of Directors. Directors shall receive
such compensation for their services as shall be determined by a majority of the
Directors then in office provided that Directors who are serving the Corporation
as employees and who receive compensation for their services as such shall not
receive any salary or other compensation for their services as Directors of the
Corporation.
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ARTICLE III
Officers
SECTION 1. Enumeration. The officers of the Corporation shall
consist of Co-Chief Executive Officers, a Chief Operating Officer, a Chief
Financial Officer, a Secretary and such other officers, including, without
limitation, a Treasurer, a Chairman of the Board and one or more Vice-Chairmen
of the Board, Vice-Presidents (including Executive Vice Presidents or Senior
Vice Presidents), Assistant Vice Presidents, Assistant Treasurers and Assistant
Secretaries, as the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the
Board following the Annual Meeting, the Board of Directors shall
elect the Co-Chief executive officers, the Chief Operating Officers, the Chief
Financial Officer, and the Secretary. Other officers may be elected or appointed
by the Board of Directors at such regular annual meeting of the Board of
Directors or at any other regular or special meeting.
SECTION 3. Qualification. No officer need be a stockholder or
a Director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for the
faithful performance of his duties in such amount and with such sureties as the
Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the
Articles of Incorporation or by these By-Laws, each of the officers of the
Corporation shall hold office until the regular annual meeting of the Board of
Directors following the next Annual Meeting and until his successor is elected
and qualified or until his earlier death, disqualification, resignation or
removal.
SECTION 5. Resignation. Any officer may resign by giving
written notice to the Corporation addressed to a Co-Chief Executive Officer or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides, and need not be accepted by the Corporation.
SECTION 6. Removal. Except as otherwise provided by law, the
Board of Directors may remove any officer with or without cause at any time.
SECTION 7. Absence or Disability. In the event of the absence
or disability of any officer, the Board of Directors may designate another
officer to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled
for the unexpired portion of the term by the Board of Directors.
SECTION 9. Powers and Duties. Each of the officers of the
Corporation shall, unless otherwise ordered by the Board of Directors, have such
powers and duties as generally pertain to the officer's respective office as
well as such powers and duties as from time to time may be conferred upon the
officer by the Board of Directors.
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ARTICLE IV
Capital Stock
SECTION 1. Certificates of Stock. Each stockholder shall be
entitled to a certificate of the capital stock of the Corporation in such form
as may from time to time be prescribed by the Board of Directors. Such
certificate shall be signed by the Chairman or Vice-Chairman of the Board or a
Co-Chief Executive Officer, the Chief Operating Officer or a Vice President and
by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary. The corporate seal and the signatures by Corporation officers, the
transfer agent or the registrar may be facsimiles. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
on such certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the time of its issue. Every certificate for shares of stock which are subject
to any restriction on transfer and every certificate issued when the Corporation
is authorized to issue more than one class or series of stock shall contain such
legend with respect thereto as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer
and unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required
by law, by the Articles of Incorporation or by these By-Laws, the Corporation
shall be entitled to treat the record holder of stock as shown on its books as
the owner of such stock for all purposes, including the payment of dividends and
the right to vote with respect thereto, regardless of any transfer, pledge or
other disposition of such stock, and regardless of any notice to the Corporation
until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-Laws.
It shall be the duty of each stockholder to notify the
Corporation of his or her post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof or entitled to receive payments of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall, unless otherwise required by law, not be more than
sixty nor less than ten days before the date of such meeting. If no record date
is fixed, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day on which the first notice is delivered to stockholders.
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ARTICLE V
Indemnification
The Corporation shall to the fullest extent permitted by Utah
law, as in effect from time to time (but, in the case of any amendment of the
Utah Revised Business Corporation Act, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), indemnify each
person who is or was a Director or officer of the Corporation (or any
predecessor) or of any of its wholly-owned subsidiaries who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, or was or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or she
is or was a Director, officer, employee or agent of the Corporation or of any of
its subsidiaries, or is or was at any time serving, at the request of the
Corporation, any other corporation, partnership, limited liability company,
joint venture, trust, employee benefit plan or other enterprise in any capacity,
against all expense, liability and loss (including, but not limited to,
attorneys' fees, judgments, fines, excise taxes or penalties with respect to any
employee benefit plan or otherwise, and amounts paid or to be paid in
settlement) incurred or suffered by such Director or officer in connection with
such proceeding; provided, however, that the Corporation shall not be obligated
to indemnify any person under this Article V in connection with a proceeding (or
part thereof) if such proceeding (or part thereof) was initiated by such person,
but was not authorized by the Board of Directors of the Corporation, against (i)
the Corporation or any of its subsidiaries, (ii) any person who is or was a
Director, officer, employee or agent of the Corporation or any of its
subsidiaries and/or (iii) any person or entity which is or was controlled,
controlled by or under common control with the Corporation or has or had
business relations with the Corporation or any of its subsidiaries.
Expenses incurred by a person who is or was a Director or
officer of the Corporation (or any predecessor) or any of its wholly-owned
subsidiaries in defending a proceeding shall be paid by the Corporation as they
are incurred in advance of the final disposition of such proceeding upon receipt
of an undertaking by or on behalf of such Director or officer to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation. Such expenses incurred by former Directors or
other employees or agents of the Corporation may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate.
For purposes of this Article, the term "Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed by the Corporation in a
consolidation or merger; the term "other enterprise" shall include any
corporation, partnership, joint venture, limited liability company, trust or
employee benefit plan; service "at the request of the Corporation" shall
include, without limitation, service as a Director, officer or employee of the
Corporation which imposes duties on, or involves
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service by, such Director, officer or employee with respect to an employee
benefit plan, its participants or beneficiaries; any excise taxes assessed on a
person with respect to an employee benefit plan shall be deemed to be
indemnifiable expenses; and action by a person with respect to any employee
benefit plan which such person reasonably believes to be in the interest of the
participants and beneficiaries of such plan shall be deemed to be action in or
not opposed to the best interests of the Corporation.
Notwithstanding any other provision of these By-laws, no
action by the Corporation, either by amendment to or repeal of this Article or
otherwise, shall diminish or adversely affect any right or protection granted
under this Article to any Director or officer or former Director or officer of
the Corporation (or any predecessor) or of any of its wholly-owned subsidiaries
which shall have become vested as aforesaid prior to the date that any such
amendment, repeal or other corporate action is taken.
ARTICLE VI
Miscellaneous Provisions
SECTION 1. Fiscal Year. Except as otherwise determined by the
Board of Directors, the fiscal year of the Corporation shall end on the last day
of December of each year.
SECTION 2. Seal. The Board of Directors shall have power to
adopt and alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases,
transfers, contracts, bonds, notes and other obligations to be entered into by
the Corporation in the ordinary course of its business without Board of
Directors action may be executed on behalf of the Corporation by the Chairman of
the Board, a Co-Chief Executive Officer, the Chief Operating Officer, the Chief
Financial Officer, any Vice President or any other officer, employee or agent
of the Corporation as the Board of Directors may authorize.
SECTION 4. Voting of Securities. Unless otherwise ordered by
the Board of Directors, the Chairman of the Board, a Co-Chief Executive Officer,
the Chief Operating Officer, the Chief Financial Officer and any Vice President
each shall have full power and authority on behalf of the Corporation to attend
and to vote at any meeting of stockholders of any corporation or other entity in
which this Corporation may hold stock or an ownership interest, and may exercise
on behalf of this Corporation any and all of the rights and powers incident to
the ownership of such stock or ownership interest at any such meeting and shall
have power and authority to execute and deliver proxies, waivers and consents on
behalf of the Corporation in connection with the exercise by the Corporation of
the rights and powers incident to the ownership of such stock or ownership
interest. The Board of Directors, from time to time, may confer like powers upon
any other person or persons.
SECTION 5. Resident Agent. The Board of Directors may appoint
a resident agent upon whom legal process may be served in any action or
proceeding against the Corporation.
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SECTION 6. Corporate Records. The original or attested copies
of the Articles of Incorporation, By-Laws and records of all meetings of the
incorporators, stockholders and the Board of Directors (and committees thereof)
and the stock transfer books, which shall contain the names of all stockholders,
their record addresses and the amount of stock held by each, may be kept outside
the State of Utah and shall be kept at the principal office of the Corporation,
at the office of its counsel or at an office of its transfer agent or at such
other place or places as may be designated from time to time by the Board of
Directors.
SECTION 7. Articles of Incorporation. All references in these
By-Laws to the Articles of Incorporation shall be deemed to refer to the
Articles of Incorporation of the Corporation as in effect from time to time
(including all certificates and other instruments which are filed with the
Secretary of State of the State of Utah pursuant to the provisions of the Utah
Revised Business Corporation Act and which have the effect of amending or
supplementing in some respect the Articles of Incorporation of the Corporation).
SECTION 8. Amendment of By-Laws.
(a) Amendment by Directors. Except as provided otherwise by
law, these By-Laws may be amended or repealed or new By-Laws (not inconsistent
with any provision of law or the Articles of Incorporation) may be adopted, by
the Board of Directors.
(b) Amendment by Stockholders. These By-Laws may be amended or
repealed at any Annual Meeting, or special meeting of stockholders
called for such purpose, by the affirmative vote of a majority of the total
votes eligible to be cast on such amendment or repeal by holders of voting
stock, voting together as a single class.
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EXHIBIT E
THE 1999 WALNUT FINANCIAL SERVICES, INC.
STOCK INCENTIVE PLAN
(AS ADOPTED _______, 1999)
1. PURPOSE OF THE PLAN
This 1999 Walnut Financial Services, 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;
(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;
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(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 Walnut Financial Services, 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 are available for Company Stock on the
over-the-counter market, (A) the mean between
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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 share of Company Stock, which right is granted pursuant to
Section 11 hereof and subject to the terms and conditions contained therein.
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(x) "Plan" shall mean this 1999 Walnut Financial Services, 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 Exercisability
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 exercisability 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 described in
Section 6(d)(v) hereof.
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(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 Walnut Financial
Services, Inc. Stock Incentive Plan and an Agreement entered into
between the registered owner of such shares and Walnut Financial
Services, Inc. A copy of the Plan and Agreement is on file in the
office of the Secretary of Walnut Financial Services, 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.
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(e) Consequences Upon Vesting
Upon the vesting of a share of Restricted Stock pursuant to the
terms hereof, the 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
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on the date of such Termination of Employment. The proportion referred
to in the 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
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or Stock Bonus on such date. A Cash Bonus shall be subject to such conditions as
the Committee 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.
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(b) Outstanding Restricted Stock and Phantom Stock
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.
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(e) Outstanding Options, LSARs, Tandem SARs, Stand-Alone SARs and
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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<PAGE> 358
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 Participant or any other
Participant or other person.
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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
29
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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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<PAGE> 361
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 take the following
actions:
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<PAGE> 362
(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, in whole or in part, as the Committee, in
its absolute discretion, may determine.
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<PAGE> 363
27. EFFECTIVE DATE OF PLAN
The Plan was adopted by the Board of Directors on September 27, 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 September 26, 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).
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<PAGE> 364
31. APPLICABLE LAW
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
<PAGE> 365
WALNUT FINANCIAL SERVICES, INC.
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS ON NOVEMBER 1, 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 the Company, to be held at The Tower Club, 8000 Towers Crescent
Drive, 17th Floor, Vienna, Virginia 22182, commencing Monday, November 1, 1999,
at 8:00 a.m. local time 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 ISSUANCE OF WALNUT COMMON STOCK IN CONNECTION WITH THE
MERGER (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 WITHDRAWAL.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 3. APPROVAL OF THE ISSUANCE OF WALNUT COMMON STOCK AND WARRANTS IN
CONNECTION WITH 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 ADOPTION OF THE WALNUT STOCK INCENTIVE PLAN.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
ITEM 7. APPROVAL OF THE ADOPTION OF THE RESTATED CHARTER.
[ ] 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.
<PAGE> 366
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
approval of the issuance of Walnut Common Stock in connection with the Merger;
(ii) FOR the approval of the BDC Withdrawal; (iii) FOR the approval of the
issuance of Walnut Common Stock and warrants in connection with 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 Walnut Stock Incentive Plan; (vii) FOR the adoption of the
Restated Charter; (viii) FOR any adjournment of the Special Meeting and (ix) 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.
