SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
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 Under Rule 14a-12
REXX ENVIRONMENTAL CORPORATION
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ 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:
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2) Aggregate number of securities to which transaction applies:
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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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
1) Amount Previously Paid:
___________________________________________________________________________
2) Form, Schedule or Registration Statement No.:
___________________________________________________________________________
3) Filing Party:
___________________________________________________________________________
4) Date Filed:
___________________________________________________________________________
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REXX ENVIRONMENTAL CORPORATION
445 Park Avenue
New York, New York 10022
(212) 750-7755
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
September 19, 2000
To the Shareholders of REXX Environmental Corporation:
NOTICE IS HEREBY GIVEN, that the 1999 Annual Meeting (the "Annual
Meeting") of the Shareholders of REXX Environmental Corporation ("REXX") will be
held at the offices of REXX Environmental Corporation, located at 445 Park
Avenue, New York, New York, on September 19, 2000, commencing at 8:30 a.m.,
local time, or at any adjournment thereof, for the following purposes:
1. To elect five directors of REXX;
2. To consider and act upon a proposal to approve the sale of
REXX's sole operating business, Watkins Contracting, Inc.,
pursuant to a Stock Purchase Agreement, dated as of June 10,
1999, among Greg S. Watkins, Daren J. Barone and REXX;
3. To consider and act upon a proposal to adopt and approve the
Agreement and Plan of Merger, among REXX, Newtek Capital, Inc.
(formerly known as "TWG, Inc.") and REXX Acquisition Corp.,
pursuant to which REXX Acquisition Corp., a wholly owned
subsidiary of Newtek, will be merged with and into REXX, REXX
will become a wholly owned subsidiary of Newtek and the
shareholders of REXX will receive one share of Newtek Common
Stock for each share of REXX Common Stock owned; and
4. To consider and act upon such other matters as may properly
come before the Annual Meeting.
The foregoing matters are more fully described in the proxy
statement/prospectus accompanying this Notice to which your attention is
directed.
Each shareholder has the right to dissent from the proposed sale of
Watkins Contracting, Inc. (Proposal 2 above) and demand payment of the fair
value of his or her shares of REXX common stock if the sale is completed. The
right of a shareholder to receive such payment is contingent upon strict
compliance with the requirements of Section 623 of the New York Business
Corporation Law. The full text of Section 623 is included as Appendix C to this
proxy statement/prospectus.
<PAGE>
If REXX shareholders do not vote their shares of common stock or if
they abstain, it will have the effect of a vote against the Watkins transaction
and the Newtek/REXX merger.
Only shareholders of record on the books of the Company at the close of
business on August 10, 2000 will be entitled to vote at the Annual Meeting. You
are requested to sign, date and return the enclosed proxy card at your earliest
convenience in order that your shares may be voted for you as specified.
By Order of the Board of Directors,
Michael A. Asch, President
New York, New York
August 15, 2000
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENCLOSED POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN
TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY VOTE
YOUR SHARES IN PERSON IF YOU WISH, EVEN IF YOU PREVIOUSLY RETURNED OR GRANTED
YOUR PROXY.
<PAGE>
August 15, 2000
Proxy Statement/Prospectus of Prospectus of
REXX ENVIRONMENTAL NEWTEK CAPITAL, INC.
CORPORATION
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This proxy statement/prospectus is being furnished to the holders of
REXX common stock in connection with the solicitation of proxies by the REXX
board of directors for use at REXX's 1999 annual meeting of shareholders. At the
annual meeting the REXX shareholders will be asked to:
o elect five directors of REXX;
o approve the Watkins agreement and sale of Watkins; and
o approve and adopt the Newtek/REXX merger agreement.
The holders of at least two-thirds of REXX outstanding shares must vote
in favor of the Watkins transaction for it to be approved. A copy of the Watkins
stock purchase agreement is attached as Appendix A.
In the Newtek/REXX merger, REXX shareholders will become Newtek
shareholders, and REXX will become wholly owned by Newtek. If the merger is
completed, REXX shareholders will receive one share of Newtek common stock for
each share of REXX common stock they own. A copy of the Newtek/REXX merger
agreement is attached as Appendix B. The holders of at least two-thirds of REXX
outstanding shares must vote in favor of the Newtek/REXX merger agreement for it
to be approved.
This proxy statement/prospectus is also the prospectus of Newtek filed
as part of a registration statement with the SEC, relating to the shares of
Newtek common stock. Newtek anticipates that 2,467,576 shares of Newtek common
stock will be issued to REXX shareholders in the merger and will represent
approximately 12% of the outstanding common stock after the merger. Newtek will
also issue 18,514,285 shares of its common stock in connection with the merger
of Whitestone Acquisition Corp. into BJB Holdings, Inc.
REXX common stock is quoted on The American Stock Exchange under the
symbol "REX." The American Stock Exchange has approved the application of Newtek
for the listing of its common stock under the symbol "NKC".
The date of this proxy statement/prospectus is August 15, 2000 and is
first being mailed to REXX shareholders on or about August 17, 2000.
You should carefully consider all of the information that you receive
in this transaction. See "Risk Factors" beginning on page 16 for a discussion of
risks that you should consider in determining how to vote on the proposed
Watkins transaction and Newtek/REXX merger.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
proxy statement/ prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
QUESTIONS AND ANSWERS............................................................................................... 1
SUMMARY ............................................................................................................ 3
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.............................................................. 10
Selected Historical Consolidated Financial Information of REXX............................................. 10
Selected Historical Combined Financial Information of Newtek............................................... 12
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA.................................................. 14
SELECTED COMPARATIVE PER SHARE DATA................................................................................. 15
RISK FACTORS........................................................................................................ 16
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS................................................................... 25
THE REXX ANNUAL MEETING............................................................................................. 26
Meeting Date; Location of Meeting.......................................................................... 26
Record Date; Voting Rights; Requirements................................................................... 26
Voting of Proxies.......................................................................................... 28
Revocation of Proxies...................................................................................... 28
Solicitation of Proxies.................................................................................... 29
PROPOSAL NUMBER 1 - ELECTION OF DIRECTORS........................................................................... 29
Security Ownership......................................................................................... 29
General.................................................................................................... 31
Director-Nominees.......................................................................................... 31
Principal Positions and Offices of REXX's Directors and Executive Officers................................. 32
Directors' Compensation.................................................................................... 35
Board Meetings and Committees.............................................................................. 35
Executive Compensation..................................................................................... 35
Stock Option Grants in 1999................................................................................ 36
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values................... 36
Employment Agreements...................................................................................... 37
REXX Stock Plans........................................................................................... 37
Deferred Compensation Plans................................................................................ 38
Certain Relationships and Related Transactions............................................................. 38
Section 16(a) Beneficial Ownership Reporting Compliance.................................................... 39
Compensation Committee Interlocks and Insider Participation................................................ 39
PROPOSAL NUMBER 2 - SALE OF WATKINS CONTRACTING, INC................................................................ 39
Overview................................................................................................... 39
Background to the Watkins Transaction...................................................................... 39
Reasons for the Watkins Transaction........................................................................ 45
The Watkins Agreement...................................................................................... 46
Operations of REXX if the Watkins Transaction is Not Completed............................................. 50
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Certain Regulatory Matters Regarding the Watkins Transaction............................................... 51
Tax Consequences of the Watkins Transaction................................................................ 51
Tax Consequences of REXX Activities after Completion of the Watkins Transaction............................ 51
Rights of Security Holders Following the Watkins Transaction............................................... 52
Rights of Dissenting Shareholders.......................................................................... 52
Interests of Certain Persons in Matters to be Acted Upon................................................... 55
Required Vote.............................................................................................. 55
Recommendation of the Board of Directors................................................................... 55
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION................................................... 56
Unaudited Condensed Consolidated Pro Forma Statement of Operations......................................... 56
Unaudited Condensed Consolidated Pro Forma Balance Sheet................................................... 59
PROPOSAL NUMBER 3 - ADOPTION OF THE NEWTEK/REXX MERGER AGREEMENT.................................................... 61
THE MERGERS......................................................................................................... 61
THE NEWTEK/REXX AND NEWTEK/BJB HOLDINGS MERGER AGREEMENTS........................................................... 62
The Newtek/REXX Merger..................................................................................... 62
Background of the Newtek/REXX Merger....................................................................... 62
Reasons of REXX for the Newtek/REXX Merger................................................................. 66
Reasons of Newtek for the Newtek/REXX Merger............................................................... 67
Effective Time of the Newtek/REXX Merger................................................................... 68
Distribution of Newtek Certificates........................................................................ 68
Fractional Shares.......................................................................................... 68
Termination, Amendment and Waiver.......................................................................... 68
Termination Fee............................................................................................ 69
Expenses and Fees.......................................................................................... 69
Accounting Treatment....................................................................................... 69
Stock Exchange Listing of Newtek Common Stock; Delisting and Deregistration of REXX Common Stock........... 69
Resales of Newtek Common Stock............................................................................. 70
Treatment of Outstanding REXX Options...................................................................... 70
The Newtek/BJB Holdings Merger............................................................................. 70
Additional Share Issuance.................................................................................. 71
INFORMATION ABOUT NEWTEK CAPITAL, INC............................................................................... 71
Overview and Business Strategy............................................................................. 71
Certified Capital Companies................................................................................ 72
Partner Companies.......................................................................................... 74
Execution; Regional Business Development Centers........................................................... 78
Advisory Committee......................................................................................... 80
Business Development Services.............................................................................. 81
Selection Strategies....................................................................................... 81
Government Regulation; Investment Company Act of 1940...................................................... 82
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Shareholder Value.......................................................................................... 84
Sources of Funding and Revenue............................................................................. 85
Expanded Product and Service Offerings..................................................................... 86
Employees.................................................................................................. 86
Properties................................................................................................. 86
Legal Proceedings.......................................................................................... 86
NEWTEK CAPITAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................................................................... 87
December 31, 1999 and 1998................................................................................. 87
Comparison of the Period March 17, 1998 (Commencement of Operations) to
December 31, 1998 with year ended December 31, 1999........................................................ 87
Income from Capco Tax Credits.............................................................................. 87
Liquidity and Capital Resources............................................................................ 89
Impact of Inflation........................................................................................ 91
March 31, 2000 and 1999.................................................................................... 91
Liquidity and Capital Resources............................................................................ 91
Other Investments.......................................................................................... 91
Results of Operations...................................................................................... 92
RECENT DEVELOPMENTS................................................................................................. 92
Recent Developments - Newtek............................................................................... 92
Recent Developments - REXX................................................................................. 94
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................... 95
PRINCIPAL SHAREHOLDERS OF NEWTEK COMMON STOCK....................................................................... 95
DESCRIPTION OF NEWTEK CAPITAL STOCK................................................................................. 96
General.................................................................................................... 96
Common Stock............................................................................................... 96
Preferred Stock............................................................................................ 96
Shares Available for Future Issuance....................................................................... 97
Transfer Agent and Registrar............................................................................... 97
DESCRIPTION OF REXX CAPITAL STOCK................................................................................... 97
REXX Common Stock.......................................................................................... 97
Serial Preferred Stock..................................................................................... 98
Transfer Agent and Registrar............................................................................... 98
PRICE RANGE OF REXX COMMON STOCK AND DIVIDENDS...................................................................... 99
NEWTEK CAPITAL, INC. AFTER THE MERGER............................................................................... 100
Management................................................................................................. 100
Directors and Executive Officers of Newtek................................................................. 100
Composition of Newtek's Board and Committees............................................................... 102
Outside Director Compensation.............................................................................. 103
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Executive Compensation..................................................................................... 103
Employment Agreements...................................................................................... 103
Cash Bonus Plan............................................................................................ 105
Newtek Capital, Inc. 2000 Stock Plan....................................................................... 105
Purpose of the Plan........................................................................................ 105
Description of the Plan.................................................................................... 106
Federal Income Tax Consequences............................................................................ 111
COMPARISON OF SHAREHOLDER RIGHTS.................................................................................... 111
General.................................................................................................... 111
Issuance of Capital Stock.................................................................................. 112
Number and Term of Directors............................................................................... 112
Indemnification............................................................................................ 112
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS............................................................. 113
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION.................................................... 114
Unaudited Pro Forma Condensed Consolidated Balance Sheet................................................... 115
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1999.... 117
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the three months ended March 31, 2000...................................................................... 119
EXPERTS ............................................................................................................ 121
LEGAL MATTERS....................................................................................................... 121
OTHER MATTERS....................................................................................................... 121
WHERE YOU CAN FIND MORE INFORMATION................................................................................. 121
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS........................................................................ 123
REXX....................................................................................................... 123
Newtek..................................................................................................... 123
INDEX TO NEWTEK CAPITAL, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS................................................. F-1
APPENDIX A - WATKINS CONTRACTING, INC. STOCK PURCHASE AGREEMENT..................................................... A-1
APPENDIX B - AGREEMENT AND PLAN OF MERGER BY AND BETWEEN REXX ENVIRONMENTAL CORPORATION AND
NEWTEK CAPITAL, INC. (FORMERLY KNOWN AS TWG, INC.)..................................................... B-1
APPENDIX C - SECTION 623 OF THE NEW YORK BUSINESS CORPORATION LAW................................................... C-1
</TABLE>
<PAGE>
QUESTIONS AND ANSWERS
Q: What are REXX shareholders being asked to vote upon?
A: REXX shareholders are being asked to:
o elect five individuals as the directors of REXX to serve until
completion of the Newtek/REXX merger or until the 2000 annual
meeting of shareholders;
o approve the Watkins agreement that provides for the sale of
Watkins, REXX's sole operating business; and
o adopt the Newtek/REXX merger agreement.
A copy of the Watkins agreement is attached as Appendix A to this
proxy statement/prospectus. A copy of the Newtek/REXX merger agreement
is attached as Appendix B to this proxy statement/prospectus.
Q: What do REXX shareholders need to do now?
A: Just indicate on your proxy card how you want to vote. Sign and mail
it in the enclosed prepaid return envelope marked "Proxy" as soon as
possible, so that your shares may be represented and voted at the
annual meeting to be held on September 19, 2000.
Q: What are the tax consequences to REXX shareholders of the Watkins
transaction and Newtek/REXX merger?
A: The Watkins transaction will be tax-free to REXX shareholders, assuming
you do not exercise your appraisal rights. REXX shareholders who solely
receive Newtek common stock in the Newtek/REXX merger will not be
required to recognize any gain or loss.
Q: Are the Watkins transaction and the Newtek/REXX merger conditioned upon
each other?
A: The Newtek/REXX merger is conditioned upon the completion of the
Watkins transaction and the effectiveness of the Newtek/BJB Holdings
merger at the same time as the Newtek/REXX merger; however, the Watkins
transaction is not conditioned upon completion of the Newtek/REXX
merger. Accordingly, REXX may sell Watkins but not complete the
Newtek/REXX merger and continue to exist as a separate entity owned by
its public shareholders.
Q: Can I change my vote after I have mailed my signed proxy card?
A: Yes. There are three ways in which you may revoke your proxy and change
your vote. First, you may send a written notice to the party to whom
you submitted your proxy stating that you would like to revoke your
proxy. Second, you may complete and submit a new proxy card with
respect to the vote on the merger. Third, you may attend the annual
meeting and vote in person. Simply attending the annual meeting,
however, will not revoke your proxy.
1
<PAGE>
Q: Do I have appraisal rights?
A: REXX shareholders have appraisal rights with respect to the Watkins
transaction. However, REXX shareholders do not have any appraisal
rights in connection with the Newtek/REXX merger. Appraisal rights are
governed by state law, and you must carefully and completely comply
with these laws in order to enforce your appraisal rights. A discussion
on appraisal rights is provided in this proxy statement/prospectus and
the applicable section of the New York Business Corporation Law is
included in Appendix C.
Q: Should I send in my stock certificates now?
A: No. After the Newtek/REXX and Newtek/BJB Holdings mergers are
completed, Newtek will send you written instructions for exchanging
your stock certificates.
Q: When do you expect the Watkins transaction to be completed?
A. We expect the Watkins transaction to be completed as soon as possible
following the approval of the Watkins transaction by the REXX
shareholders.
Q: When do you expect the Newtek/REXX merger to be completed?
A: We expect the Newtek/REXX merger to be completed by September 30, 2000.
Newtek and REXX are working towards completing the Newtek/REXX merger
as quickly as possible. To do so, REXX must obtain REXX shareholder
approval of the Newtek/REXX merger agreement.
Q: Whom should I call with questions or to obtain additional copies of
this proxy statement/prospectus?
A: You should call Daniel Sullivan at Georgeson Shareholder
Communications, Inc. at (212) 440-9800.
2
<PAGE>
SUMMARY
This brief summary highlights selected information from this proxy
statement/prospectus. It does not contain all of the information that is
important to you. You should carefully read the entire proxy
statement/prospectus and the other documents to which we refer to fully
understand the merger. See "Where You Can Find More Information" on page 121 on
how to obtain copies of those documents. Each item in this summary refers to the
page where that subject is discussed in more detail.
The Parties
Newtek Capital, Inc.
845 Third Avenue, 8th Floor
New York, NY 10022
(212) 826-9022
Newtek Capital, Inc. was formed in 1999 as a holding company to
consolidate the business of REXX and the businesses previously owned and
operated by Messrs. Rubin, Sloane and Wasserman primarily engaged in the
structuring, funding and development of early stage companies principally in
high technology and Internet businesses. A significant portion of this business
has been conducted through the formation and operation of certified capital
companies, or capcos, under the laws adopted in a number of states. Beginning in
mid 1998, these individuals funded and managed the organization, regulatory
certification and initial operations of certified capital companies in the
states of New York, Florida, Louisiana and Wisconsin. As of June 30, 2000, these
companies had raised, from the sale of their equity and debt securities to
various insurance companies, a total of approximately $85 million. Newtek has
determined that the capcos provide a base for the structuring, development and
acquisition of further businesses, particularly early-stage, technology-oriented
companies focused on Internet related commerce, or "e-commerce." Since the last
quarter of 1999, Newtek has been working to expand its business development
activities, and its goal is to be a premier business partner for its partner
companies by helping them implement their business strategies in a manner
consistent with Newtek`s objectives. Through the capco programs and otherwise,
Newtek is in the early stages of operation as a holding company for a network of
partner companies in a collaborative and coordinated effort to develop
successful businesses in a number of emerging, technological areas.
All management functions for these certified capital companies are
performed by The Whitestone Group, LLC, a wholly-owned subsidiary of Newtek.
Newtek Capital, Inc. was originally organized in 1999 as TWG, Inc. and
changed its name in January 2000. The businesses and companies which will be
consolidated with and into Newtek previously operated as affiliated companies,
under common ownership and control. In order to eliminate unnecessary confusion
and complexity in the presentation of historical information or financial data,
Newtek has in this proxy statement/prospectus described the enterprise as if
Newtek had been in existence since March 1998 and as if the related businesses
had been subsidiaries of Newtek since their respective inception. However, in
those situations where this treatment might lead to any confusion, Newtek has
differentiated among the newly formed and the preexisting companies.
Newtek will take all reasonable actions to avoid the appearance or
characterization of Newtek as an investment company and subject it to regulation
under the Investment Company Act of 1940.
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<PAGE>
REXX Environmental Corporation
445 Park Avenue
New York, New York 10022
(212) 750-7755
REXX Environmental Corporation, through its sole operating subsidiary,
Watkins Contracting, Inc., is a leading regional provider of asbestos abatement,
demolition and dismantling and other related specialty contracting services,
including lead paint abatement, to a broad range of governmental, commercial,
industrial and institutional clients located primarily in California. REXX also
owns real estate in Mississippi and certain other assets.
The Transactions (see pages 39 and 61)
The REXX shareholders are being asked to approve and adopt two separate
agreements that each contemplate separate transactions. These transactions are:
o the Watkins transaction - REXX's sale of Watkins to the
buyers, Greg S. Watkins and Daren J. Barone or their permitted
assignees; and
o the Newtek/REXX merger - the merger of REXX Acquisition
Corporation, a wholly-owned subsidiary of Newtek Capital,
Inc., with and into REXX. REXX will become a wholly-owned
subsidiary of Newtek, and each share of REXX common stock,
including fractional shares, will be converted into the right
to receive one share of Newtek common stock.
The REXX shareholders are also being asked to elect five directors to
REXX's board of directors.
The Watkins transaction (see page 39)
REXX has entered into a stock purchase agreement, dated as of June 10,
1999, with Greg S. Watkins and Daren J. Barone which provides for REXX's sale to
Messrs. Watkins and Barone of all of the shares of Watkins common stock
presently owned by REXX. These shares constitute all of the outstanding capital
stock of Watkins. The purchase price to be collectively paid by Messrs. Watkins
and Barone for the Watkins common stock is:
o $1,300,000 in cash;
o the assignment and transfer to REXX of 125,000 shares of REXX
common stock presently owned by the buyers or the payment of
$171,875 in cash at buyers' option; and
o certain other consideration.
The Newtek/REXX Merger (see page 61)
In the Newtek/REXX merger, a subsidiary of Newtek will merge with and
into REXX, and REXX will become a wholly owned subsidiary of Newtek. REXX
shareholders will receive shares in Newtek.
Merger consideration will be one share of Newtek for each REXX share
(see page 62)
When the Newtek/REXX merger is complete, shares of REXX common stock,
including fractional shares, will be converted into shares of Newtek common
stock on a one-for-one basis. This exchange ratio is fixed. However, the market
price of REXX common stock may change at any time. The Newtek/REXX merger
consideration will not be adjusted under any circumstances.
4
<PAGE>
The Newtek/BJB Holdings Merger (see page 70)
In the Newtek/BJB Holdings merger, a subsidiary of Newtek will merge
with and into BJB Holdings, and BJB Holdings will become a wholly owned
subsidiary of Newtek. The shareholders of BJB Holdings will be issued a total of
18,514,285 shares of Newtek in connection with the merger. Shareholder approval
is not being sought for this transaction.
Markets and Market Prices (see page 99)
Newtek is a privately held corporation. There has never been a market
for the Newtek securities, and no market prices or other comparative price
information is available for its common stock. The American Stock Exchange has
approved the application of Newtek for the listing of its common stock under the
symbol "NKC" following the Newtek/REXX merger.
REXX common stock has been traded on the American Stock Exchange under
the symbol "REX" since May 14, 1998 and previously on the Nasdaq National Market
under the symbol "REXX" ("OHSC" prior to February 19, 1998). The following table
lists the closing price of REXX common stock on December 8, 1999, the last
trading day before the merger announcement, and on August 8, 2000, the latest
practical date before this proxy statement/prospectus was finalized.
Date REXX Common Stock
---- -----------------
December 8, 1999 $0.6875
August 8, 2000 $3.75
The market price of REXX common stock will fluctuate prior to the
Newtek/REXX merger but will not affect the merger exchange ratio. Shareholders
should obtain current market quotations for REXX common stock.
Federal Income Tax Considerations
o Watkins transaction (see pages 51 and 113)
REXX will recognize a loss in the Watkins transaction for federal and
state income tax purposes, which will be equal to the difference between the
amount realized by REXX from the Watkins transaction and REXX's tax basis in the
Watkins shares. The loss to be recognized by REXX on the Watkins transaction
should be treated as a long-term capital loss. REXX estimates that its capital
loss on the sale of Watkins will be approximately $3,000,000.
REXX shareholders will not recognize any tax consequences upon
consummation of the Watkins transaction. REXX shareholders who duly exercise
appraisal rights generally will recognize capital gain or loss, long-term or
short-term, for federal and state income tax purposes measured by the difference
between the cash received through the appraisal proceedings and their aggregate
tax basis in their shares of REXX common stock.
o Newtek/REXX merger (see page 113)
We have structured the Newtek/REXX merger so that, in general, Newtek
and REXX, as well as the REXX shareholders who receive solely Newtek common
stock in the merger in exchange for their REXX common stock, should not
recognize gain or loss for United States federal income tax purposes in the
Newtek/REXX merger. It is a condition to the Newtek/REXX merger that REXX
receive a legal opinion to this effect.
o Newtek/BJB Holdings merger (see page 113)
5
<PAGE>
We have structured the Newtek/BJB Holdings merger so that, in general,
Newtek and BJB Holdings, as well as the BJB Holdings shareholders who receive
solely Newtek common stock in the merger in exchange for their BJB Holdings
common stock, should not recognize gain or loss for United States federal income
tax purposes in the Newtek/BJB Holdings merger.
Comparison of Shareholder Rights (see page 111)
Currently, the rights of REXX shareholders are governed by New York
law, REXX's certificate of incorporation and by-laws. Newtek shareholder's
rights are also governed by New York law, Newtek's certificate of incorporation
and by-laws. After the Newtek/REXX merger, REXX shareholders will become Newtek
shareholders and their rights will still be governed by New York law as well as
Newtek's certificate of incorporation and by-laws.
The REXX board recommends that REXX shareholders approve the Watkins transaction
and the Newtek/REXX merger (see pages 55 and 66)
The REXX board of directors has approved both the Watkins transaction
and Newtek/REXX merger, including the form, terms and provisions of the Watkins
agreement and Newtek/REXX merger agreement. The REXX board of directors has
determined that the terms of the Watkins transaction and the Newtek/REXX merger
are fair to and in the best interest of REXX and its shareholders, and
recommends that shareholders vote "FOR" approval of the Watkins transaction and
adoption of the Newtek/REXX merger agreement.
Annual Meeting to be held on September 19, 2000 (see page 26)
The annual meeting of REXX shareholders will be held at 8:30 a.m. on
September 19, 2000, at the office of REXX Environmental Corporation located at
445 Park Avenue, New York, New York. At the annual meeting, shareholders will be
asked to elect directors and to consider and vote to adopt the Watkins
transaction agreement which provides for the sale of Watkins to the buyers.
Shareholders will also be asked to consider and vote to adopt the Newtek/REXX
merger agreement which provides for the merger of REXX with and into Newtek.
Record Date has been set at August 10, 2000; two-thirds vote of outstanding
shares is required to approve each of the Watkins transaction and the
Newtek/REXX merger (see page 26)
Shareholders can vote at the annual meeting if they owned REXX common
stock at the close of business on August 10, 2000. As of that date, there were
2,467,576 shares of REXX common stock issued and outstanding and entitled to be
voted at the annual meeting. The affirmative vote of the holders of at least
two-thirds of the outstanding shares of REXX common stock is required to approve
the Watkins agreement and adoption of the Newtek/REXX merger. Directors will be
elected by a plurality of shares voted. As of the record date, the directors and
executive officers of REXX and Watkins owned, of record or beneficially or hold
proxies for, and are entitled to vote, 847,051 shares of REXX common stock,
which represents approximately 34% of the outstanding shares of REXX common
stock. These individuals have agreed to vote in favor of the Watkins transaction
and the Newtek/REXX merger.
If REXX shareholders do not vote their shares of common stock or if
they abstain, it will have the effect of a vote against the Watkins transaction
and the Newtek/REXX merger.
6
<PAGE>
Certain REXX shareholders have agreed to vote in favor of the Newtek/REXX
merger (see page 28)
Directors and executive officers of REXX who together hold or have
proxies for approximately 34% of REXX outstanding common stock have entered into
voting agreements with Newtek. Under the voting agreements, these shareholders
have agreed to vote their shares of REXX common stock in favor of the
Newtek/REXX merger. The voting agreements could discourage other companies from
trying or proposing to combine with or acquire REXX.
REXX's reasons for the Watkins transaction (see page 45)
The REXX board of directors considered a variety of factors in making
its recommendation that shareholders vote for approval of the Watkins
transaction. These factors include:
o the operating losses incurred by Watkins in the quarter and
year ended December 31, 1998 and the quarter ended March 31,
1999;
o the inability to obtain a line of credit for Watkins'
operations on terms acceptable to REXX;
o the difficulty and potential inability to obtain bid and
performance bonds necessary for Watkins' operations on terms
acceptable to REXX;
o the inability to obtain funding, including acquisition
financing, to grow Watkins' business on terms acceptable to
REXX;
o the possibility of utilizing the net proceeds from a Watkins
transaction to fund an alternative investment opportunity
which may be able to generate a positive return for the REXX
shareholders;
o the alternatives available to REXX in the event that it did
not undertake the Watkins transaction; and
o Messrs. Watkins and Barone's strong preference against REXX
proceeding with any business combination or other transaction
involving Watkins and an unrelated third party and their
interest in acquiring Watkins themselves.
Interests of certain persons in the Watkins transaction and Newtek/REXX merger
(see pages 55 and 95)
In considering the Watkins transaction, shareholders should be aware
that the buyers are two of the executive officers of Watkins and were the owners
from whom REXX acquired Watkins in October 1997.
In considering the board's recommendation that shareholders vote for
the Newtek/REXX merger, they should be aware that a member of REXX's board of
directors has certain interests in the merger that are different from and in
addition to theirs. Brian A. Wasserman, a REXX director, currently is an
executive officer, director and principal shareholder of Newtek and has
abstained from voting on the Newtek/REXX merger. Mr. Wasserman will own
5,799,000 shares of Newtek common stock or 28% following the Newtek/REXX merger.
Further, Mr. Wasserman will enter into a two year employment agreement at an
annual base salary of $300,000 with Newtek as a condition to the merger.
REXX's reasons for the merger with Newtek (see page 66)
The REXX board of directors considered a variety of factors in making
its recommendation that shareholders vote for adoption of the Newtek/REXX merger
agreement. These factors include:
o changing the strategic focus of REXX after concluding that
growth in Watkins' business operations cannot be achieved due
in large part to Watkins' and REXX's:
o operating losses;
7
<PAGE>
o inability to obtain additional operating financing or
acquisition financing on acceptable terms; and
o inability to obtain bid and performance bond
underwriting on acceptable terms.
o a review of the possible alternatives to the merger,
including:
o continuing to operate REXX as an independent entity;
o various potential strategic acquisitions and the
possible benefits of each alternative to REXX
shareholders; and
o the timing and likelihood of actually accomplishing
these alternatives.
o a review of the terms of the Newtek/REXX merger agreement.
In addition to the factors noted above, the REXX board considered the
following factors in its determination to approve the Newtek/REXX merger:
o Newtek's success in organizing its certified capital
companies, and its ability to raise significant funds from
insurance company investors for these capcos;
o the significant management and financial experience of
Newtek's principals in managing and investing in small and
medium size, early stage companies;
o the business plan of Newtek to expand the certified capital
company aspect of its business as well as in related
investment banking and advisory services;
o the opportunity to position Newtek/REXX to raise additional
equity or debt capital for future growth and development after
the sale of the Watkins business; and
o Newtek's management will be significant shareholders of Newtek
and their interest in Newtek's success will be closely aligned
with the interests of Newtek and its shareholders.
Newtek will be the surviving corporation (see page 62)
Newtek will be the surviving corporation after the Newtek/REXX merger.
The directors and officers of Newtek in office before the merger will serve as
the directors and officers of Newtek after the merger with REXX. In addition,
Newtek has named two individuals to serve as independent directors.
The business of Newtek (see page 71)
Newtek focuses on structuring, funding and developing early-stage,
companies. Newtek's goal is to be a premier business partner for these companies
by helping them implement their business strategies in a manner consistent with
Newtek's objectives. Newtek refers to these companies as "partner companies."
However, Newtek does not act as an agent or legal representative for any of its
partner companies, Newtek does not have the power or authority to bind them
legally, and Newtek does not have the types of liabilities for the partner
companies that a general partner of a partnership would have. Furthermore, the
relationship between Newtek and any one of these partner companies can take a
variety of forms in terms of the extent of equity investment as well as the
degree of involvement in the management of the company.
Regulatory Approvals
Neither REXX nor Newtek will have to obtain approval or comply with any
state or federal regulatory requirements in connection with the merger.
8
<PAGE>
Dissenters' Rights (see page 52)
o Watkins transaction
Under Section 623 of the New York Business Corporation Law or NYBCL,
and assuming that the Watkins transaction is consummated, you will have the
right to receive the "fair value" of your REXX common stock shares by filing
with REXX a written objection to the Watkins transaction before the vote of
shareholders on the Watkins transaction is taken and by otherwise complying with
the provisions of Section 623 of the NYBCL, including not voting your shares in
favor of the Watkins transaction. A vote against the Watkins transaction does
not constitute the required written objection and a failure to vote against the
Watkins transaction does not constitute a waiver of a shareholder's appraisal
rights under the NYBCL. A copy of the text of Section 623 of the NYBCL is
attached to this proxy statement as Appendix C.
o Newtek/REXX merger
REXX shareholders are not entitled to appraisal rights under New York
law in connection with the Newtek/REXX merger.
Accounting Treatment (see page 69)
The Watkins transaction will be accounted for as a stock sale for
accounting and financial reporting purposes.
The Newtek/REXX merger will be accounted for as a purchase for
financial reporting purposes.
Newtek common stock is freely transferable by non-affiliates (see page 70)
Newtek common stock issued in the Newtek/REXX and Newtek/BJB Holdings
mergers will be freely transferable by shareholders unless they are deemed to be
an affiliate of REXX or Newtek under applicable federal securities laws.
Generally, affiliates include directors, certain executive officers and 10% or
greater shareholders.
Conditions that must be satisfied for the Newtek/REXX merger to occur
(see page 68)
Completion of the Newtek/REXX merger is subject to various conditions
which include:
o the sale of Watkins by REXX;
o receipt by Newtek and REXX of all consents and approvals
necessary to permit completion of the merger;
o receipt by Newtek and REXX of opinions meeting the conditions
contained in the merger agreement; and
o satisfaction of other usual conditions. Under the terms of the
Newtek/REXX merger agreement, the conditions to the merger
generally may be waived by Newtek or REXX, as applicable.
Termination of the Newtek/REXX merger agreement (see page 68)
REXX and Newtek can agree at any time prior to the effective time to
abandon the merger and terminate the Newtek/REXX merger agreement. If the REXX
shareholders fail to approve the sale of Watkins by REXX, unless waived by
Newtek, or fail to approve the merger agreement, the Newtek/REXX merger may not
proceed.
9
<PAGE>
No Opinion of Financial Advisor
The REXX board of directors concluded not to engage a financial advisor
to render an opinion as to the fairness to REXX shareholders of the Watkins
transaction or Newtek/REXX merger.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
Selected Historical Consolidated Financial Information of REXX
In the following table, REXX provides selected financial data as of and
for the years ended December 31, 1995 through 1999 and the three months ended
March 31, 1999 and 2000. REXX derived the information as of and for the years
ended December 31, 1995 through 1999 from its audited financial statements,
although the table itself is not audited. REXX derived the March 31, 2000 and
1999 information from its unaudited interim financial statements appearing in
its Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000.
The following data should be read together with REXX's financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which are incorporated by reference in this proxy
statement/prospectus from REXX's Annual Report on Form 10-K, as amended on Form
10-K/A, for the fiscal year ended December 31, 1999 and REXX's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 31, 2000.
Selected Historical Consolidated Financial Data of REXX
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Years Ended December 31,
-------------------- --------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
Statements of Operations Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 4,007 $ 3,500 $ 15,895 $ 13,743 $ 2,298 $ 75 $ 38
Gross Profit 925 414 3,021 3,419 962 75 38
General and administrative expenses 841 960 3,433 3,859 1,226 531 215
Income (loss) from operations 84 (546) (412) (440) (264) (456) (177)
Other expenses (income) - net (97) (67) 315 101 (145) (247) (121)
Net loss $ (13) $ (613) $ (736) $ (496) $ (167) $ (1,310) $ (6,839)
Weighted average shares outstanding
basic and diluted 2,468 2,468 2,468 2,468 2,137 2,058 2,058
Earnings per share basic and diluted $ (.01) $ (.25) $ (.30) $ (.20) $ (.08) $ (.64) $ (3.32)
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
As of As of December 31,
March 31, -------------------------------------------------
2000 1999 1998 1997 1996 1995
--------- ------ -------- -------- ------ -----
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Working capital $ 230 $ 415 $ 943 $ 1,469 $ 4,736 $ 6,046
Net property and equipment 1,476 1,378 1,487 718 0 0
Goodwill - net 2,650 2,703 2,914 3,125 0 0
Total assets 9,679 8,617 10,422 9,055 6,880 9,115
Long-term debt 498 606 738 180 0 0
Shareholders' equity $ 3,894 $ 3,907 $ 4,643 $ 5,139 $ 4,736 $ 6,046
</TABLE>
11
<PAGE>
Selected Historical Combined Financial Information of Newtek
In the following table, Newtek provides selected financial data on a
combined basis as of December 31, 1998 and 1999 and March 31, 2000, and for the
period ended December 31, 1998, the year ended December 31, 1999 and the three
months ended March 31, 1999 and 2000. Newtek derived this information as of and
for the period ended December 31, 1998 and as of and for the year ended December
31, 1999 from its audited financial statements appearing elsewhere in this proxy
statement/prospectus although the table itself is not audited. Newtek derived
the March 31, 2000 and 1999 information from its unaudited interim financial
statements which appear elsewhere in this proxy statement/prospectus.
All historical information, other than pro forma information, is based
upon the historical information of the Newtek subsidiaries then in existence,
and all of which information precedes the Newtek/BJB Holdings and the
Newtek/REXX mergers. The following data should be read together with Newtek's
audited financial statements as of December 31, 1998 and 1999, and for the
period ended December 31, 1998 and the year ended December 31, 1999, Newtek's
unaudited interim financial statements as of March 31, 2000, and for the three
months ended March 31, 1999 and 2000, and "Newtek's Management's Discussion and
Analysis of Financial Condition and Results of Operations" which appear
elsewhere in this proxy statement/prospectus.
Selected Historical Combined Financial Data of Newtek
(In thousands, except for per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended Period Ended
----------------------- December 31, December 31,
2000 1999 1999 1998
---- ---- ------------ -------------
Statements of Operations Data:
<S> <C> <C> <C> <C>
Operating revenues and interest income $ 601 $ 437 $11,882 $ 598
Operating expenses 1,958 190 3,860 556
Net income (loss) before extraordinary gain
on defeasance of debt and minority interest (1,357) 247 8,022 42
Extraordinary gain on defeasance of debt -- -- 924 --
Net income (loss) before minority interest (1,357) 247 8,946 --
Minority interest (545) 32 3,521 (34)
Net income (loss) (812) 216 5,425 76
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Information:
<S> <C> <C> <C> <C>
Weighted average shares outstanding 18,482 18,250 18,250 18,250
Net income per share $ (.04) $ .00 $.30 $.01
Balance Sheet Data:
</TABLE>
<TABLE>
<CAPTION>
As of As of As of
March 31, December 31, December 31,
2000 1999 1998
----------------- ----------------- -----------
<S> <C> <C> <C>
Working capital (1) $27,786 $31,442 $1,735
Furniture, fixtures and equipment, net 12 9 11
Total assets 54,820 54,645 3,920
Debt (2) 6,620 6,619 2,612
Minority interest 5,393 5,938 190
Members' equity 8,896 8,309 841
</TABLE>
------------------
(1) Working capital is defined as cash and cash equivalents plus prepaid
insurance and prepaid expenses, less accounts payable and accrued expenses, note
payable - bank, loans payable-members and note payable - other.
(2) Debt is defined as notes payable - certified investors and notes payable -
insurance.
13
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following selected unaudited pro forma condensed consolidated
financial data gives effect to the mergers. The pro forma adjustments are based
upon available information and certain assumptions that management believes are
reasonable. The selected unaudited pro forma condensed consolidated financial
data are presented for illustrative purposes only and are not necessarily
indicative of the operating results or financial condition of the combined
company that would have occurred had the mergers occurred at the beginning of
the period presented, nor are the selected unaudited pro forma condensed
consolidated financial data necessarily indicative of future operating results
or financial position of the combined company. The selected unaudited pro forma
condensed consolidated financial data have been derived from and should be read
together with the Unaudited Pro Forma Condensed Consolidated Financial Data and
the related notes included elsewhere in this proxy statement/prospectus, with
the consolidated financial statements of REXX, which are incorporated by
reference and the financial statements of Newtek for the year ended December 31,
1999 and the unaudited three months ended March 31, 2000, which appear elsewhere
in this proxy statement/prospectus. (In thousands, except per share data.)
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 2000 December 31, 1999
---------------------- -----------------
<S> <C> <C>
Income Statement Data
Operating revenues and interest income $ 601 $ 11,890
Operating expenses 987 2,138
Interest expense 1,157 2,439
Income (loss) before minority interest and
extraordinary item (1,543) 7,313
Extraordinary gain on defeasance of debt --
924
Income from continuing operations (998) 2,615
Earnings per share - basic
Income (loss) from continuing operations $ (.05) $ .13
Earnings per share - diluted
Income (loss) from continuing operations $ $ .13
(.05)
Balance Sheet Data
Total assets $ 56,081
Capitalization:
Debt 6,620
Minority interest 5,394
Shareholders' equity 7,410
--------
Total capitalization $ 19,424
========
Book value per share $ .35
========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Consolidated Financial Information,
beginning on page 116.
14
<PAGE>
SELECTED COMPARATIVE PER SHARE DATA
The following table sets forth selected historical per share data for
REXX, selected unaudited pro forma per share data for REXX giving effect to the
Watkins transaction, selected unaudited historical per share data for Newtek,
and selected pro forma data for Newtek giving effect to the Newtek/REXX merger
and the Newtek/BJB Holdings merger. The pro forma data does not necessarily
indicate the Newtek actual financial or future operating results or what would
have occurred or will occur upon completion of the Watkins transaction and the
mergers. The information shown below should be read together with the
consolidated financial statements of REXX and the combined financial statements
of Newtek for the year ended December 31, 1999 and the unaudited three months
ended March 31, 2000 and the notes to those financial statements included or
incorporated by reference in this proxy statement/prospectus and the selected
pro forma financial data included elsewhere in this proxy statement/prospectus.
Comparative Per Share Information
<TABLE>
<CAPTION>
As of and for the Three Months Ended
March 31, 2000
---------------------------------------------------------------------------
REXX Newtek/REXX
REXX Pro Forma Newtek Pro Forma
Historical Continuing Historical Continuing
Consolidated Operations (a) Consolidated (b) Operations (c)
------------ -------------- ---------------- --------------
<S> <C> <C> <C> <C>
Book value per share $ 1.58 0 $ .48 $ .35
Cash dividends declared per share 0 0 0 0
Net income (loss) per share $ (.01) $ (.08) $ (.04) $ (.05)
Average number of shares outstanding 2,467,576 2,467,576 18,482,142 20,949,718
As of and for the Twelve Months Ended
December 31, 1999
---------------------------------------------------------------------------
REXX Newtek/REXX
REXX Pro Forma Newtek Pro Forma
Historical Continuing Historical Continuing
Consolidated Operations (a) Consolidated (b) Operations (c)
------------ -------------- ---------------- --------------
Book value per share $ 1.58 0 $ .45 $ .35
Cash dividends declared per share 0 0 0 0
Net income (loss) per share $ (.30) $ (.26) $ .30 $ .13
Average number of shares outstanding 2,467,576 2,467,576 18,250,000 20,717,576
</TABLE>
------------
(a) Reflects the proposed sale of Watkins Contracting, Inc. and the
costs and expenses associated with the transaction.
(b) As Newtek was not in existence at the dates shown, historical
information for Newtek represents the combination of the subsidiary companies
which were in existence as of the dates shown, which have been derived from the
unaudited financial statements of Newtek at March 31, 2000 and the audited
financial statements of Newtek at December 31, 1999. Newtek share and per share
information is presented on a pro forma basis.
(c) Reflects the Newtek/REXX merger and the Newtek/BJB Holdings merger
and the costs and expenses associated therewith.
15
<PAGE>
RISK FACTORS
In considering whether to approve the Newtek/REXX merger agreement and
receive Newtek common stock, REXX and BJB shareholders should consider the
following risk factors:
Risks about the Newtek/REXX merger:
Because REXX's ability to use its net operating loss carryforwards will be lost
or limited as a result of the merger with Newtek, the amount of potential income
tax liability will increase.
As a result of the Newtek/REXX merger, REXX and Newtek will be limited
in the use of REXX's net operating loss carryforwards. Currently, REXX has
approximately $12 million in loss carryforwards and will have approximately $15
million following the sale of Watkins. After the Newtek/REXX merger, or any
other change in control, the income sheltering use of the loss carryforwards
will be substantially unavailable. Assuming sufficient income, the maximum
potential tax savings to REXX of approximately $5 million represented by these
loss carryforwards exceeds the $845,000 pro forma estimated book value of REXX
subsequent to the Watkins sale. The potential tax savings to REXX also exceeds
the approximately $1,230,000 pro forma book value of the Newtek stock to be
issued to REXX shareholders as a result of the Newtek/REXX merger.
REXX's common stock will be subject to delisting and to diminished liquidity if
REXX shareholders approve the Watkins sale and the Newtek/REXX merger is not
consummated.
REXX will be subject to delisting on the American Stock Exchange in the
event it has sold Watkins and it has no ongoing operations. REXX's shareholders
would experience difficulty trading their common stock and they may ultimately
experience a decline in the common stock price. Because REXX's common stock
would no longer be listed or have an established trading market, alternative
business opportunities may be difficult to pursue.
Risks relating to Newtek:
This section describes risks relating to Newtek and its business operations.
Other material risks relating to Newtek's partner companies and to the Internet
industry are more fully described below under "Risks relating to Newtek's
Partner Companies" and "Risks Relating to the Internet Industry".
Because Newtek has a limited operating history, your investment decision will be
based on limited available Newtek information.
Newtek has primarily engaged in the creation and operation of certified
capital companies or capcos, and Newtek has a limited operating history as an
Internet holding company upon which you may evaluate its business and prospects.
Newtek's business and prospects must be considered in view of the risk, expense
and competition frequently encountered by companies in early stages of
development, particularly companies in new and rapidly evolving markets such as
e-commerce.
Newtek incurred a net loss of $2,246,000 for the six months ended June 30, 2000,
and Newtek and its partner companies may never become profitable.
There is a risk that Newtek and its partner companies may never become
profitable. Newtek incurred a net loss of approximately $812,000 for the three
months ended March 31, 2000, and a net loss of $2,246,000 for the six months
ended June 30, 2000. In addition, Newtek reported negative cash flows from
operating activities for each of 1999 and the three months ended March 31, 2000.
Newtek's partner companies are, and Newtek expects that its future partner
companies will be, in early stages of development and will have limited or no
revenues. Because e-commerce companies, even if successful, typically generate
significant losses while they grow, Newtek does not expect its partner companies
to generate income for the foreseeable future, and they may never generate
income. Further the income, if any, generated by partner companies will be
offset by losses of other partner companies. Moreover, Newtek's continuing
acquisition of interests in early stage partner companies may further delay
profitability. Newtek's short-term success will depend heavily on the continued
operations of its capcos.
16
<PAGE>
Because Newtek is significantly smaller than the majority of its competitors, it
may lack the financial resources needed to capture increased market share or
expand its business.
Many of Newtek's current and potential competitors have longer
operating histories, greater name recognition and substantially greater
operational, financial, marketing and other resources than Newtek. If capital
markets were to weaken for an extended period of time, Newtek's larger
competitors might then have easier access to expand their businesses. Therefore,
they may be able to respond more quickly than Newtek can to new or changing
opportunities, technologies, standards or customer requirements.
If Newtek cannot acquire interests in partner companies, Newtek's business
strategy may fail.
If Newtek cannot acquire interests in attractive partner companies on
reasonable terms, Newtek's business strategy may not succeed. Newtek may be
unable to acquire an interest in businesses for a number of reasons, including:
o a lack of capital sufficient to acquire an interest in the
company;
o incompatibility of vision and strategy between Newtek and a
business;
o a failure to agree on terms of the acquisition, such as extent
or price of acquisition;
o competition from other acquirors; or
o the unwillingness of the company to partner with Newtek.
These factors create the possibility that Newtek may not be able to
compete effectively with current or future competitors, and these competitors
may limit Newtek's opportunities to acquire interests in new partner companies.
Because Newtek's common stock has never been publicly traded, the price may
fluctuate significantly and a market may not develop for its shares.
Prior to this offering, there has been no public market for Newtek
common stock. An active trading market may not develop after the closing of the
Newtek/REXX merger or, if developed, may not be sustained.
17
<PAGE>
The value of Newtek's common stock could be adversely impacted by the
performance of its partner companies, aspects of which may be outside the
control of Newtek.
Each of Newtek's partner companies may be impacted by economic,
governmental, industrial and internal company factors outside the control of
Newtek. If Newtek's partner companies do not succeed, the value of Newtek assets
and the price of Newtek stock would decline.
Because Newtek's capcos are subject to various state law requirements, a failure
of any of them to meet these requirements could subject the capco and Newtek
shareholders to serious financial consequences.
Decertification of all or substantially all of Newtek's capcos would
result in material loss to Newtek and its shareholders. In general, capcos issue
debt and equity instruments, generally warrants, to insurance company investors
and the capcos then acquire interests in companies in accordance with applicable
state statutes. In return, the states issue tax credits to the capcos, which are
available to and used by the insurance company investors to reduce their state
tax liabilities. In order to maintain its status as a capco and to avoid the
recapture of the tax credits granted, each capco must meet a number of state
requirements. A key requirement in order to continue capco certification is that
a capco must comply with minimum investment schedules that benchmark both the
timing and type of required investments. A final loss of capco status, that is
decertification as a capco, results in loss of the tax credits.
Losses by the capcos due to investments in riskier early stage, start up and
high growth businesses could make it significantly more difficult for the capcos
to meet minimum state statutory investment benchmarks and thus subject the
capcos to decertification as a capco and further financial loss.
In accordance with Newtek's investment objectives, it and the capcos
will acquire interests in early stage, technology-oriented companies which are
riskier than some other investments. If significant losses occur due to these
investments, one or more of the capcos could find that it has diminished
resources with which to meet applicable minimum investment benchmarks. If Newtek
fails to meet minimum investment benchmarks it is likely that shareholders would
experience significant losses. If additional funds could not be made available
to the capco for investment purposes by Newtek or from other sources, it is
possible that the capco's certified status could be withdrawn. This could
require that the capco make compensatory payments to its investors or suffer the
assumption of control of the capco by the capco insurer.
In the event of a threat of decertification by a state, the capco insurer would
be authorized to assume up to complete control of a capco which would likely
result in financial loss to the capco and possibly Newtek and its shareholders.
Under the terms of insurance purchased by the capcos for the benefit of
the investors, the capco insurer would be authorized, in the event of a threat
of decertification by a state, to assume up to complete control of a capco so as
to avoid final decertification and interest payments. While avoiding final
decertification, control by the insurer would result in significant disruption
of the capco's business and likely result in financial loss to the capco and
possibly Newtek and its shareholders.
In the absence of funds from sources other than the capcos, Newtek's ability to
make investments in partner companies will be limited to those permissible to
the capcos.
Absent other funding sources, Newtek's ability to invest in or acquire
partner companies is limited to investments permissible to the various capcos,
and Newtek may be required to forego attractive or desirable partner company
investments, which in turn could adversely affect or prevent Newtek's
implementation of its business strategy. In the programs under which the capcos
operate, investments may only be made in the state in which the particular capco
operates and the target company must meet certain requirements, as to size,
employment of state residents and possible relocation. As investment benchmarks
are met, the programs provide for elimination of this limitation.
18
<PAGE>
In the absence of the adoption of new capco programs, Newtek will be unable to
derive any income from tax credits.
Virtually all of Newtek's income for the year ended December 31, 1999,
was derived from the recognition of income related to tax credits available
under current certified capital company programs in which it participates.
Newtek will recognize additional income over the next four to ten years from
these programs. Thereafter, unless additional capco programs are adopted and
Newtek is able to participate in them, Newtek will derive no income from this
source. The adoption of new state capco programs in the future could be
materially and adversely affected by adverse changes in the current relatively
good economic conditions. When an adverse change occurs, the willingness of
state governments to provide capco tax credits could be materially diminished.
In the absence of such income, Newtek would have incurred losses of
approximately $5,540,000 for the year ended December 31, 1999 and $922,000 for
the three months ended March 31, 2000.
Because Newtek's method of recognition of income derived from the capco tax
credits causes most or all such income to be received in early years of the
programs, in the absence of income from other sources, Newtek and its capcos
could sustain material losses in later years.
In all capco programs, a majority of Newtek's income from the delivery
of tax credits will be recognized no later than five years into the ten-year
programs. In the absence of income from other sources, Newtek and its capcos
could sustain material losses. Despite the cessation of tax credit income,
Newtek will continue to incur costs for the administration of the capcos and
will not have any tax credit income, which thus far has been its only source of
income, to offset the costs.
Because Newtek's business strategy requires partner companies to share relevant
information which may be confidential, Newtek and competing partner companies
may be unable to benefit from their sharing of relevant information, and
Newtek's business strategy may not succeed.
Newtek's business strategy depends on its ability to share relevant
information within its network of partner companies, while at the same time
maintaining appropriate confidentiality. If competition develops among these
partner companies, Newtek and its partners may be unable to benefit fully from
their sharing of information. If Newtek cannot convince partner companies of the
value of its business model, Newtek's ability to attract new companies will be
adversely affected, and its strategy of building a collaborative network may not
succeed.
Newtek could compete with some of its partner companies, and some of
its partner companies could compete with each other for Internet related
opportunities.
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Because Newtek depends on its ability and the ability of its partner companies
to attract and retain key personnel, any loss of, or inability to attract these
personnel could adversely affect Newtek.
Newtek's success depends upon the continued service of each member of
its senior management and upon its ability and the ability of its partner
companies to attract and retain qualified personnel. Competition for qualified
employees is intense. If Newtek or its partner companies lose the services of
key personnel or officers, or are unable to attract additional qualified
personnel, the business, financial condition, results of operations and cash
flows, could be materially adversely affected. It can take a significant period
of time to identify and hire personnel with the combination of skills and
attributes required in carrying out Newtek's strategy. Newtek has employment
agreements only with Messrs. Sloane, Wasserman and Rubin, and Newtek does not
currently maintain key-man life insurance policies on any of these individuals.
Because expenses are expected to increase as Newtek establishes an
infrastructure to implement its business strategy, Newtek may incur additional
losses in the future.
Because Newtek's expenses are expected to increase as Newtek builds an
infrastructure to implement its business strategy, Newtek may incur additional
losses in the future. For example, Newtek expects to hire additional employees
and expand existing systems. In addition, Newtek plans to:
o broaden partner company support capabilities;
o explore acquisition opportunities and alliances; and
o facilitate business arrangements among partner companies.
Because there will be three controlling shareholders who will own approximately
83% of Newtek common stock, other shareholders will have no effective voting
power or control over its affairs or decisions.
After the Newtek/REXX merger, Newtek's management group will hold
approximately 83% of the issued and outstanding shares of common stock, and REXX
shareholders will own approximately 12% of Newtek. REXX shareholders will
effectively have no control over Newtek's operations or future business
decisions. Newtek's management control over Newtek's affairs, will include the
power to:
o elect directors;
o appoint management; and
o approve action that usually requires shareholder
authorization, including the adoption of amendments to the
articles of incorporation and approval of mergers or sales of
substantially all of Newtek's assets.
Because Newtek expects to issue additional securities, shareholders are subject
to dilution of their ownership.
Following consummation of the REXX and Newtek mergers, management of
Newtek expects to raise additional capital or issue additional shares of common
stock. Any additional issuance would likely dilute shareholders' ownership
interest in Newtek and may have an adverse impact on the price of Newtek common
stock. In addition, shares issued under Newtek's stock option plan will also
dilute shareholders' ownership interest.
o It is expected that two individuals will exercise their rights
to acquire up to 250,000 shares of BJB Holdings common stock
before completion of the Newtek/REXX merger, which will
thereafter be exchanged for an equal number of Newtek shares.
o During the first five months of 2000, BJB Holdings privately
placed a total of 264,285 shares of its common stock which
will also be exchanged for an equal number of Newtek shares.
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o Newtek management has held extensive discussions with
securities underwriters regarding a private placement of up to
3.5 million shares of Newtek common stock to institutional
investors, but no agreement for the transaction has been
entered into.
o Newtek intends to explore the possibility of exchanging
outstanding warrants for equity interests in its capcos held
by insurance company investors for warrants in capital stock
of Newtek.
o Newtek is considering various transactions for the acquisition
of additional partner companies which may result in the
issuance of options by Newtek, either in exchange for
previously issued BJB Holdings options or directly in
transactions following completion of the merger. Only one
transaction is currently in active negotiation, which would
result in the issuance of options to acquire up to 85,000 BJB
Holdings shares. These options, if granted, would be assumed
by Newtek after the merger.
If Newtek is deemed to be an investment company under the Investment Company Act
of 1940, Newtek will not be able to execute successfully its business strategy,
and if Newtek fails to comply with the requirements of this Act, Newtek will be
prohibited from engaging in business or selling its securities, and could be
subject to civil and criminal actions for doing so.
There is a risk that the Securities and Exchange Commission or a court
might conclude that Newtek falls within the definition of investment company,
and unless an exclusion were available, Newtek would be required to register
under the Investment Company Act of 1940. Compliance with the Investment Company
Act, as a registered investment company, would cause Newtek to alter
significantly its business strategy, impair its ability to operate as planned
and seriously harm its business. If Newtek fails to comply with the requirements
of this Act, it would be prohibited from engaging in business or selling its
securities, and could be subject to civil and criminal actions for doing so. In
addition, Newtek's contracts would be voidable and a court could appoint a
receiver to take control of and liquidate its business.
Companies that are publicly offered in the U.S. and which (1) are, or
hold themselves out as being, engaged primarily or proposing to engage primarily
in the business of investing, reinvesting or trading in securities, or (2) own
or hold investment securities exceeding 40% of the value of their total assets
(adjusted to exclude U.S. government securities and cash) and are engaged in the
business of investing, reinvesting, owning, holding or trading in securities,
are considered to be investment companies under the Investment Company Act.
Unless an exclusion from registration were available or obtained by grant of an
SEC order, these companies must register under this Act and, thus, become
subject to extensive regulation regarding several aspects of their operations.
The SEC has adopted Rule 3a-1 that provides an exclusion from
registration as an investment company if a company meets both an asset and an
income test and is not otherwise primarily engaged in an investment company
business by, among other things, holding itself out to the public as such or by
taking controlling interests in companies with a view to realizing profits
through subsequent sales of these interests. A company satisfies the asset test
of Rule 3a-1 if it has no more than 45% of the value of its total assets
(adjusted to exclude U.S. government securities and cash) in the form of
securities other than interests in majority owned subsidiaries and companies
which it primarily and actively controls. A company satisfies the income test of
Rule 3a-1 if it has derived no more than 45% of its net income for its last four
fiscal quarters combined from securities other than interests in majority owned
subsidiaries and primarily and actively controlled companies.
Registration under the Investment Company Act would make Newtek subject
to the significant restraints on its operations imposed by this Act which are
inconsistent with Newtek's strategy of participating in the management and
development of partner companies. Newtek either owns at least 50% of the
outstanding voting securities of these companies or more than 25% of their
outstanding voting securities and has a degree of control over such companies
that is greater than any other investor. Newtek cannot feasibly operate its
business as a registered investment company.
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If Newtek is required to register as an investment company under the
Investment Company Act, Newtek will be forced to comply with substantive
requirements under the Act, including:
o limitations on its ability to borrow;
o limitations on its capital structure;
o restrictions on acquisitions of interests in partner
companies;
o prohibitions on transactions with affiliates;
o restrictions on specific investments; and
o compliance with reporting, record-keeping, voting, proxy
disclosure and other rules and regulations.
If to avoid registration under the Investment Company Act, Newtek is forced to
sell, buy or retain assets against its wishes, Newtek may be prevented from
successfully executing its current business strategy and the strength of its
collaborative network could be adversely affected.
To avoid registration under the Investment Company Act, Newtek may need
to sell assets which it would otherwise want to retain, and may be unable to
sell assets which it would otherwise want to sell. If Newtek were forced to sell
assets, it may not receive maximum value for its position. If Newtek were forced
to acquire additional, or to retain existing, income-generating or
loss-generating assets which it would not otherwise have acquired or retained,
it may need to forego opportunities to acquire interests in attractive companies
that would benefit its business. If Newtek were forced to sell, buy or retain
assets in this manner, it may be prevented from successfully executing its
current business strategy and the strength of its collaborative network could be
adversely affected.
Newtek's ability to sell partner company interests to generate income
or to avoid regulation under the Investment Company Act may be limited;
especially where there is no public market for a partner company's stock.
Market, regulatory, contractual and other conditions largely beyond Newtek's
control will affect:
o its ability to sell its interests in partner companies;
o the timing of these sales; and
o the amount of proceeds from these sales.
If Newtek divests all or part of its interest in a partner company, it
may not receive maximum value for that interest, and it may sell the interest
for less than the amount it paid to acquire it or at less than its maximum
value. Even if a partner company has publicly-traded stock, Newtek may be unable
to sell its interest in that company at then-quoted market prices. In addition,
Newtek may be required to buy assets in order to avoid excessive income from
non-controlled businesses, or it may be required to ensure that it retains a
more than 25% ownership interest in a partner company after an equity offering.
Newtek cannot operate as an investment company registered under the Investment
Company Act and, if an exemption from registration is requested, it may not be
granted, and Newtek would be prevented from successfully executing its current
business strategy.
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If Newtek were deemed to be an investment company and could not rely on
any statutory or regulatory exclusion under the Investment Company Act, it must
either register under this Act or seek an administrative exemption from
Investment Company Act regulation. Newtek cannot feasibly operate its business
as a registered investment company. If an exemption is requested, it may not be
granted to Newtek, and Newtek would be prevented from successfully executing its
current business strategy.
Risks relating to Newtek's Partner Companies
Because Newtek acquires interests in private, non-reporting early stage and
start-up companies, shareholders will have limited or no information about the
operations and financial results of these companies.
Separate financial statements or additional disclosure relating to the
partner companies will be provided by Newtek only to the extent required by
applicable accounting requirements and may not be otherwise available to
shareholders. Shareholders may have difficulty evaluating the results of
Newtek's individual partner companies. If Newtek's strategy does not result in
successful business ventures, the value of its assets and the price of its
common stock would likely decline. This risk is increased due to Newtek's plan
to concentrate on the acquisition of early stage, technology-oriented companies.
If Newtek and its partner companies are unable to obtain the resources required
by the partner companies for their growth and development, the partner companies
will be highly susceptible to failure, which would directly affect Newtek's
profitability and value.
If Newtek and its partner companies are unable to obtain the resources
the partner companies require for their growth and development, the partner
companies will be highly susceptible to failure, which would directly affect
Newtek's profitability and value. Early-stage businesses often fail due to their
limited material and human resources. The success of Newtek's business model is
dependent upon the ability of the partner companies, with assistance from
Newtek, to arrange for the managerial, capital and other resources which they
usually require in order to become and remain profitable.
The success of Newtek's partner companies depends on the development of the
Internet, which is uncertain.
If widespread commercial use of the Internet does not develop, or if
the Internet does not develop as an effective medium for providing products and
services, Newtek's partner companies may not succeed.
Newtek's long-term success depends on widespread market acceptance of
the Internet. A number of factors could prevent acceptance of the Internet,
including:
o the unwillingness of businesses to shift from traditional
processes to e-commerce processes;
o the necessary network infrastructure and telecommunications
services for substantial growth in usage of e-commerce may not
develop adequately;
o increased government regulation or taxation of e-commerce may
adversely affect its viability; and
o the security of e-commerce transactions.
Newtek's partner companies may fail if their competitors provide superior
Internet-related offerings or continue to have greater resources.
Competition for Internet products and services is intense, and is
expected to continue to intensify. Barriers to entry are minimal, and
competitors can offer products and services at a relatively low cost. Our
partner companies' competitors may develop Internet products or services that
are superior to, or have greater market acceptance than, the solutions offered
by its partner companies. If Newtek's partner companies are unable to compete
successfully against their competitors, they may fail.
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Many of Newtek's partner companies' competitors have greater brand
recognition and greater financial, marketing and other resources than its
partner companies. Newtek's partner companies may be at a disadvantage in
responding to competitors' initiatives.
At the time that Newtek or its partner companies require capital in excess of
funds available through the capco programs, they will be dependent on their
ability to access the capital markets from which they may be excluded, and they
then may lack the resources necessary to grow, become profitable or execute
their business strategy.
The inability to raise funds in the capital markets may result in a
material loss to Newtek and its partner companies. To the extent permissible
under applicable state laws, Newtek intends to utilize the capco programs to
fund the growth and operations of its partner companies. If these funds are not
available or are available but not sufficient, Newtek or its partner companies
will have to access the private or public capital markets from which they, as
new and unprofitable Internet and high technology companies, may be excluded. In
recent months, the capital markets for Internet and high technology companies
generally have weakened and may remain so for an extended period of time. If
access to these markets is not available or is available but on unacceptable
terms, Newtek and its partner companies may lack the funds necessary to expand
their operations, become profitable or execute their business strategy.
To the extent that Newtek's partner companies grow rapidly, and as Newtek
acquires more and larger interests in partner companies, the resources Newtek
allocates to assist its partner companies may become strained.
Newtek may have difficulty assisting partner companies in managing
their growth if the partner companies grow rapidly or if Newtek acquires more
and larger interests in partner companies. In addition, Newtek may be unable to
convince its partner companies to adopt Newtek's strategies for managing their
growth.
Risks Relating to the Internet Industry
Concerns regarding security of transactions and transmitting confidential
information over the Internet may result in a loss of business and potential
legal expenses.
Newtek believes that concerns regarding the security of confidential
information transmitted over the Internet prevent many potential customers from
engaging in online transactions. If Newtek's partner companies that depend on
online transactions do not add sufficient security features to their future
product releases, their products may not gain market acceptance or there may be
additional legal exposure to them.
The infrastructure of each partner company is potentially vulnerable to
physical or electronic break-ins, viruses or similar problems. If a person
circumvents the security measures imposed by any one of Newtek's partner
companies, he or she could misappropriate proprietary information or cause
interruption in operations of the partner company. Security breaches that result
in access to confidential information could damage the reputation of any one of
Newtek's partner companies and expose the partner company affected to a risk of
loss or liability. Some of Newtek's partner companies may be required to make
significant investments and efforts to protect against or remedy security
breaches. Additionally, as e-commerce becomes more widespread, Newtek's partner
companies' customers will become more concerned about security. If Newtek's
partner companies are unable to address these concerns adequately, they may be
unable to sell their goods and services.
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Rapid technological changes may prevent Newtek's partner companies from
remaining current with their technical resources and maintaining competitive
product and service offerings.
The markets in which Newtek's partner companies operate are
characterized by rapid technological change, frequent new product and service
introductions and evolving industry standards. Significant technological changes
could render their existing Web site technology or other products and services
obsolete. The e-commerce market's growth and intense competition exacerbate
these conditions. If Newtek's partner companies are unable to respond
successfully to these developments or do not respond in a cost-effective way,
Newtek's business, financial condition and operating results will be adversely
affected. To be successful, Newtek's partner companies must adapt to their
rapidly changing markets by continually improving the responsiveness, services
and features of their products and services and by developing new features to
meet the needs of their customers. Newtek's success will depend, in part, on
Newtek's partner companies' ability to license leading technologies useful in
their businesses, enhance their existing products and services and develop new
offerings and technology that address the needs of their customers. Newtek's
partner companies will also need to respond to technological advances and
emerging industry standards in a cost-effective and timely manner.
Government regulations and legal uncertainties may place financial burdens on
Newtek's business and the businesses of Newtek's partner companies.
There are currently few laws or regulations directed specifically at
e-commerce. However, because of the Internet's popularity and increasing use,
new laws and regulations may be adopted. These laws and regulations may cover
issues such as the collection and use of data from Web site visitors and related
privacy issues, pricing, content, copyrights, online gambling, distribution and
quality of goods and services. The enactment of any additional laws or
regulations may impede the growth of the Internet and e-commerce, which could
decrease the revenue of Newtek's partner companies and place additional
financial burdens on Newtek's business and the businesses of partner companies.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this proxy/prospectus, including the above
risk factors section, contains "forward-looking statements" that involve risks
and uncertainties. "Forward-looking statements" are statements that relate to
future events or our future financial performance. In many cases,
forward-looking statements can be identified by terminology such as:
o may
o will
o should
o expects
o plans
o anticipates
o believes
o estimates
o predicts
o potential
o continue
o or the negative of these terms and other comparable
terminology.
Undue reliance should not be placed on these statements, which speak
only as of the date that they were made. Actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including the risks described above and elsewhere in this proxy
statement/prospectus. Neither Newtek nor REXX undertakes any obligation to
publicly update any revisions to forward-looking statements after completion of
the Watkins transaction or the Newtek/REXX merger to reflect later events or
circumstances or to reflect the occurrence of unanticipated events.
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Newtek and REXX believe it is important to communicate their
expectations to investors. However, there may be events in the future that we
are not able to predict accurately or over which we have no control. The risk
factors listed above, as well as any cautionary language in this prospectus,
provide examples of risks, uncertainties and events that may cause actual
results to differ materially from the expectations described in the
forward-looking statements. Before you determine how to vote at the annual
meeting, you should be aware that the occurrence of the events described in
these risk factors and elsewhere in this proxy statement/prospectus could have a
material adverse effect on the business, operating results and financial
condition of Newtek and/or REXX.
THE REXX ANNUAL MEETING
The REXX board of directors is providing this proxy
statement/prospectus to you in connection with the solicitation of proxies for
use at the annual meeting of REXX shareholders and at any adjournments or
postponements of the annual meeting. At the annual meeting, you will be asked to
consider and vote on:
o election of five individuals to serve as directors of REXX;
o approval of the Watkins transaction; and
o adoption of the Newtek/REXX merger agreement.
You may also be asked to consider any other business that properly
comes before the annual meeting. Each copy of this proxy statement/prospectus
mailed to REXX shareholders is accompanied by a proxy card for use in connection
with the annual meeting.
Newtek is also providing this proxy statement/prospectus to you as a
prospectus in connection with the offer and sale by Newtek of its shares of
common stock as a result of the Newtek/REXX merger.
Meeting Date; Location of Meeting
The annual meeting will be held at 8:30 a.m. (local time) on September
19, 2000, at the offices of REXX Environmental Corporation located at 445 Park
Avenue, New York, New York.
Record Date; Voting Rights; Requirements
Record Date. REXX's board of directors has fixed August 10, 2000, as
the record date for the determination of REXX shareholders entitled to receive
notice of, and to vote at, the annual meeting. Accordingly, only REXX
shareholders of record at the close of business on the record date will be
entitled to notice of, and to vote at, the annual meeting. At the close of
business on the record date, there were 2,467,576 shares of REXX common stock
entitled to vote at the annual meeting, held by approximately 340 record
holders.
Voting Rights. Each share of REXX common stock outstanding on the
record date entitles its holder to one vote on the proposals to approve the
Watkins transaction and adopt the Newtek/REXX merger agreement, one vote on the
election of directors and one vote on any other proposal that properly comes
before the annual meeting.
Quorum Requirement. A majority of the total voting power of the shares
of REXX common stock entitled to vote on the record date is necessary to
constitute a quorum at the annual meeting. A quorum is required in order for
business to be lawfully conducted at the annual meeting. Accordingly, the
presence, in person or by proxy, of holders of 1,233,789 shares of REXX common
stock is required for business to be conducted at the annual meeting.
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Vote Required. Under New York law, the affirmative vote of at least
two-thirds of the shares entitled to vote on the record date is required to
approve the Watkins transaction and the Newtek/REXX merger agreement.
Accordingly, we will need the holders of 1,645,051 shares of REXX common stock
to vote for the Watkins transaction and adoption of the Newtek/REXX merger
agreement. Directors will be elected by a plurality of votes cast.
Abstentions and Broker Non-Votes. REXX will count shares of REXX common
stock present in person at the annual meeting but not voting, and shares of REXX
common stock for which it has received proxies but where holders of these shares
have abstained, as present at the annual meeting for purposes of determining
whether a quorum is present for the transaction of business. Applicable rules
provide that brokers who hold shares of REXX common stock in nominee or "street
name" for customers who are the beneficial owners of the shares are prohibited
from giving a proxy to vote shares held for these customers on the matters to be
voted on at the annual meeting, with the exception of the election of directors,
without specific instructions from these customers.
Shares of REXX common stock represented by proxies returned by a broker
holding those shares in nominee or "street name" will be counted for purposes of
determining whether a quorum exists, even if the shares are "broker non-votes."
Abstentions from voting and broker non-votes will, in effect, be
counted as votes against the approval of the sale of the Watkins transaction and
the Newtek/REXX merger agreement.
REXX's board of directors urges each REXX shareholder to complete, date and sign
the enclosed proxy card and return it promptly in the enclosed postage-paid
envelope.
Voting by REXX's Directors and Executive Officers. On the record date
for the annual meeting, Arthur L. Asch, Chairman of the Board and Chief
Executive Officer of REXX, owned 371,051 shares of REXX Common Stock and Michael
A. Asch, President, Chief Operating Officer, Treasurer, Chief Financial Officer
and a director of REXX, owned 50,000 shares of REXX common stock, individually,
and 26,000 shares of REXX common stock, as custodian for his minor children.
Messrs. A. and M. Asch have each agreed to vote all of their aggregate 447,051
shares of REXX common stock for approval of the Watkins transaction pursuant to
individual shareholders voting agreements entered into with each of the buyers,
and Tari Watkins, as trustee under the Tari M. Watkins Revocable Trust, dated
March 27, 1998. Ms. Watkins is the former spouse of one of the buyers. On the
record date, Hilltop Investment Co., Inc., an assignee of Mr. Barone, owned
200,000 shares of REXX common stock, Mr. Watkins owned 100,000 shares of REXX
common stock and the trust owned 100,000 shares of REXX common stock.
The buyers and the trust have also each agreed to vote their aggregate
400,000 shares of REXX common stock, and have granted Messrs. A. and M. Asch
proxies to vote these shares, for approval of the Watkins transaction pursuant
to the shareholders agreement. Accordingly, an aggregate 847,051 shares of REXX
common stock are committed to vote for approval of the Watkins transaction. In
addition, James L. Hochfelder, a director of REXX, and the spouses and a
relative of Messrs. A. and M. Asch, who owned an aggregate 100,000 shares of
REXX common stock on the record date have indicated to REXX that they each
intend to vote for approval of the Watkins transaction. Thus, a total of 947,051
shares of REXX common stock, or approximately 38% of the shares entitled to vote
at the annual meeting, are either committed or likely to vote for approval of
the Watkins transaction.
Further, Messrs. A. and M. Asch have agreed to vote all of the
aggregate 447,051 shares of REXX common stock owned by them, individually and in
the capacity as custodian, for adoption of the Newtek/REXX merger agreement
pursuant to voting agreements entered into with Newtek. Under the terms of the
shareholder agreements, the buyers and the trust have granted proxies to Messrs.
A. and M. Asch to vote their aggregate 400,000 shares of REXX common stock for
adoption of the Newtek/REXX merger agreement. Accordingly, an aggregate 847,051
shares of REXX common stock are committed to vote for adoption of the
Newtek/REXX merger agreement. In addition, Mr. Hochfelder and the spouses and a
relative of Messrs. A. and M. Asch have each indicated that they intend to vote
their aggregate 100,000 shares of REXX common stock for adoption of the
Newtek/REXX merger agreement. Thus, a total of 947,051 shares of REXX common
stock, or approximately 38% of the shares entitled to vote at the annual
meeting, are either committed or likely to vote for adoption of the Newtek/REXX
merger agreement.
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Copies of the form of these voting agreements have been filed as
exhibits to the registration statement of which this proxy statement/prospectus
is a part.
Voting of Proxies
REXX shareholders may use the proxy card that came with this proxy
statement/prospectus if they are unable to attend the annual meeting in person
or wish to have their shares voted by proxy even if they do attend the annual
meeting. All shares represented by valid proxies received pursuant to this
solicitation and not revoked before they are exercised will be voted in the
manner that the proxies specify. If REXX shareholders return proxies without
specifying how their proxies are to be voted, their proxies will be voted for
the approval of the Watkins transaction, for adoption of the Newtek/REXX merger
agreement and for the director-nominees of REXX's board of directors. There are
no matters other than voting on the Watkins transaction, adoption of the
Newtek/REXX merger agreement and election of directors that are scheduled to be
brought before the annual meeting.
If any other business is brought before the annual meeting, including a
motion to adjourn or postpone the annual meeting to another time and/or place
for the purpose of soliciting additional proxies in favor of the Watkins
transaction, adoption of the Newtek/REXX merger agreement and election of
directors or to permit dissemination of information regarding material
developments relating to the Watkins transaction, adoption of the Newtek/REXX
merger agreement and election of directors or otherwise relevant to the annual
meeting, the persons named in the proxy will vote the shares represented by
proxies as determined in their discretion.
If the annual meeting is adjourned for any reason prior to the approval
of the Watkins transaction, adoption of the Newtek/REXX merger agreement and
election of directors, then the approval of the Watkins transaction, adoption of
the Newtek/REXX merger agreement and/or election of directors may be considered
and voted on by REXX shareholders at any subsequently reconvened meeting.
Revocation of Proxies
A REXX shareholder may revoke the shareholder's proxy at any time
before it is exercised by:
o submitting to the Secretary of REXX, before or at the annual
meeting, but before the proposal is voted upon, a written
notice of revocation or a properly executed proxy of a later
date; or
o attending the annual meeting and voting in person.
However, attendance by a REXX shareholder at the annual meeting will
not in and of itself constitute a revocation of the shareholder's proxy. REXX
shareholders should address any written notice of revocation and other
communication about the revocation of proxies to REXX Environmental Corporation,
445 Park Avenue, New York, New York 10022, Attention: Michael A. Asch,
President.
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Solicitation of Proxies
This solicitation of proxies is made on behalf of REXX's board of
directors. REXX will pay all of the costs of soliciting the proxies and the cost
of printing and mailing this proxy statement/prospectus. Newtek will pay the
cost of filing the registration statement, of which this proxy
statement/prospectus is a part, with the SEC. Proxies may be solicited by
officers, directors and employees of REXX, none of whom will receive any
additional compensation for their services, but who may be reimbursed for
reasonable out-of-pocket expenses in connection with the solicitation.
In addition, REXX has engaged Georgeson Shareholder Communications Inc.
to solicit proxies for a fee of approximately $12,000, including expenses.
Solicitations of proxies may be made personally or by mail, telephone, facsimile
or messenger. Moreover, REXX may pay persons holding shares of REXX common stock
in their names or in the names of nominees, but not owning the shares
beneficially, such as brokerage houses, banks and other fiduciaries, for the
expense of forwarding soliciting materials to their principals.
PROPOSAL NUMBER 1 - ELECTION OF DIRECTORS
Security Ownership
The following table sets forth, as of the record date, the beneficial
ownership of shares of REXX common stock by:
o each person known by REXX to beneficially own 5% or more of
the outstanding shares of REXX common stock, based on filings
with the SEC and certain other information;
o each director of REXX;
o each current executive officer of REXX for whom information is
given in the "Executive Compensation" section below; and
o all executive officers and directors of REXX as a group.
The REXX common stock is the only outstanding class of voting
securities of REXX. Except as otherwise indicated, all shares are beneficially
owned, and investment and voting power is held by the persons named as owners.
Unless otherwise indicated, the address for each beneficial owner listed in the
table is c/o REXX Environmental Corporation, 445 Park Avenue, New York, New York
10022 and REXX believes that all persons named in the table have sole voting and
investment power with respect to all shares of REXX common stock beneficially
owned by them. A person is deemed to be the beneficial owner of securities which
may be acquired by that person within 60 days from the date on which beneficial
ownership is to be determined upon the exercise of options, warrants or
convertible securities. Each beneficial owner's percentage ownership is
determined by assuming that stock options and warrants that are held by this
person (but not those held by any other person) and which are exercisable within
60 days from the date on which beneficial ownership is to be determined have
been exercised.
Messrs. Barone and Watkins, along with a trust in which Mr. Watkins's
former spouse acts as trustee, have each granted Messrs. A. Asch and M. Asch a
proxy to vote all of the aggregate 400,000 shares of REXX Common Stock owned by
them for (a) approval of the Watkins transaction and (b) all other matters which
Messrs. A. Asch and M. Asch have obligated themselves, as REXX shareholders, to
vote in favor of. These other matters would include adoption of the REXX/Newtek
merger agreement. These proxies expire on August 31, 2000. In connection with
the grant of these proxies, Messrs. A. Asch and M. Asch have each agreed to vote
the aggregate 447,051 shares of REXX common stock held by them, either
individually or as custodian, for (a) approval of the Watkins transaction and
(b) all other matters which Messrs. A Asch and M. Asch have obligated
themselves, as REXX shareholders, to vote in favor of.
29
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature Percentage
Name and Address of of Common Stock Amount of Options Ownership of
Beneficial Owner Directly Owned Currently Exercisable Common Stock
---------------- -------------- --------------------- ------------
<S> <C> <C> <C>
Arthur L. Asch......................... 396,051 (1) 30,000 17.1%
Daren J. Barone........................ 200,000 (2) 5,000 8.3
c/o Watkins Contracting, Inc.
8690 Aero Drive, M321
San Diego, CA 92133
Greg S. Watkins........................ 100,000 5,000 4.2
c/o Watkins Contracting, Inc.
8690 Aero Drive, M321
San Diego, CA 92133
Michael A. Asch........................ 96,000 (3) 50,000 5.8
James L. Hochfelder.................... 5,000 10,000 *
Brian A. Wasserman..................... -0- 10,000 *
Joseph Greenberger..................... -0- -0- 0.0
All executive officers and directors as
a group (8 persons).................... 797,051 115,000 (4) 35.5%
</TABLE>
------------------
* Less than 1.0%.
(1) Includes 25,000 shares of REXX common stock held by his spouse, which
shares Mr. A. Asch disclaims beneficial ownership.
(2) Mr. Barone assigned these 200,000 shares to Hilltop Investment Co., Inc.,
an affiliate of Mr. Barone.
(3) Includes (a) 26,000 shares of REXX common stock held by Mr. M. Asch as
custodian for his minor children, which shares Mr. M. Asch disclaims
beneficial ownership and (b) 20,000 shares of REXX common stock held by
his spouse, which shares Mr. M. Asch disclaims beneficial ownership.
(4) Includes an additional 5,000 shares of REXX common stock issuable upon
exercise of an option granted to another Watkins executive officer under
the REXX Option Plan which are exercisable within the next 60 days.
30
<PAGE>
General
REXX's bylaws provides for a board of directors consisting of not less
than three or more than eleven directors. REXX's board of directors currently
consists of five directors. These directors are:
o Arthur L. Asch
o Michael A. Asch
o Joseph Greenberger
o James L. Hochfelder
o Brian A. Wasserman
Director-Nominees
Each of the current directors of REXX have been nominated by the
Nominating Committee of REXX's board of directors for reelection at the annual
meeting, to hold office until the earlier of:
o REXX's next annual meeting of shareholders to be held in 2000;
or
o the completion of the Newtek/REXX merger.
Each REXX director remains in office unless he shall resign, become
disqualified, disabled or otherwise be removed from office.
Shares represented by executed proxies in the form enclosed will be
voted, if authority to do so is not withheld, for the election as directors of
each of these five individuals, unless this individual(s) shall be unavailable,
in which case these shares will be voted for the substitute nominee(s)
designated by REXX's board of directors. REXX's board of directors has no reason
to believe that any of the five director-nominees will be unavailable or, if
elected, will decline to serve.
Directors will be elected by a plurality of votes cast at the annual
meeting.
The board of directors of REXX recommends a vote for the election of
Arthur L. Asch, Michael A. Asch, Joseph Greenberger, James L. Hochfelder and
Brian A. Wasserman as directors of REXX at the annual meeting.
31
<PAGE>
Principal Positions and Offices of REXX's Directors and Executive Officers
REXX has two executive officers, and there are three executive officers
of Watkins. Set forth below are the current positions of REXX's directors.
REXX's current officers will resign upon completion of the Newtek/REXX merger.
<TABLE>
<CAPTION>
Name Age Positions and Offices with REXX Director Since
---- --- ------------------------------- --------------
<S> <C> <C> <C>
Arthur L. Asch 59 Chairman of the Board of Directors and Chief 1979
Executive Officer. Member of Executive and
Nominating Committees of the Board Of Directors.
Michael A. Asch 34 President, Chief Operating Officer, Treasurer 1996
and Chief Financial Officer. Member of the
Executive, Compensation and Nominating
Committees of the Board of Directors.
Joseph Greenberger 64 Secretary. Member of the Executive, 1979
Nominating, Audit and Stock Option Committees
of the Board of Directors.
James L. Hochfelder 55 Member of the Audit, Compensation and Stock 1997
Option Committees of the Board of Directors
Brian A. Wasserman 34 Member of the Audit, Compensation and Stock 1997
Option Committees of the Board of Directors
</TABLE>
32
<PAGE>
Set forth below are the current positions of Watkins' executive
officers.
Name Age Positions and Offices with Watkins
---- --- ----------------------------------
Greg S. Watkins 35 President.
Daren J. Barone 35 Chief Executive Officer.
John Sullivan, III 33 Chief Financial Officer.
Set forth below is a brief description of the background of the
executive officers and directors of REXX and the executive officers of Watkins,
based on information provided by them to REXX.
Arthur L. Asch has been Chairman of the Board of Directors and Chief
Executive Officer of REXX since 1979. Mr. A. Asch served as Chairman of the Oak
Hill Sportswear Division of Donnkenny Apparel, Inc., a clothing and accessory
manufacturer, importer and marketer, from July 1995 through December 1997. Mr.
A. Asch is the father of Michael A. Asch.
Michael A. Asch has been President, Chief Operating Officer and
Treasurer of REXX since January 1997 and its Chief Financial Officer since March
1994. From March 1994 through December 1996, Mr. M. Asch served as Vice
President of REXX. From July 1995 through December 1996, he was Vice President
and Chief Financial Officer of the Oak Hill Sportswear Division of Donnkenny
Apparel, Inc. Since February 1992, Mr. M. Asch has also served as President and
a principal of Anniston Capital, Inc., an investment banking firm. Michael A.
Asch is the son of Arthur L. Asch.
Daren J. Barone has served as Chief Executive Officer of Watkins since
November 1997 and as Secretary and Treasurer of Watkins since January 1995. Mr.
Barone also served as Sales Manager of Watkins from February 1992 to January
1995.
Joseph Greenberger has been Secretary of REXX since 1979. Mr.
Greenberger has been engaged in the practice of law in New York City since 1962.
James L. Hochfelder has been the President of Beldoch Industries Corp.
(women's apparel) for more than the past ten years.
John Sullivan, III has served as Chief Financial Officer of Watkins
since April 1998. Prior to joining Watkins, he served as Chief Financial Officer
of TC Construction Co. for more than five years.
Brian A. Wasserman is Chief Executive Officer of Wilshire Investors,
LLC, Wilshire Louisiana Advisers, LLC, Wilshire Advisers, LLC, Wilshire
Partners, LLC and Wilshire New York Advisers II. He is also currently Chief
Executive Officer of The Whitestone Group, LLC, which is a full service
investment banking and venture capital firm which specializes in identifying and
investing in early-stage growth opportunities, fund management, mergers and
acquisitions and general corporate finance advisory consulting.
From December 1997 until December 1999, Mr. Wasserman was the general
partner of two private venture capital limited partnerships with very diverse
public and private investments. The partnerships had in excess of $30,000,000 in
partners' capital and investment holdings. From April 1992 through December
1997, Mr. Wasserman acted as an investment consultant/analyst for these
partnerships. From December 1997 until December 1999, Mr. Wasserman was also an
investment consultant/analyst for two other private venture capital partnerships
with very diverse public and private investments. These partnerships had in
excess of $20,000,000 of partners' capital and investment holdings.
Mr. Wasserman previously founded and was the Chief Financial Officer of
First Lawrence Capital Corp., an investment banking firm specializing in mergers
and acquisitions for small to medium-sized emerging companies. From December
1997 until November 1999, Mr. Wasserman served on the board of directors of
Heuristic Development Group (now know as Virtual Communities Inc.), a company
which engaged in the development, marketing, sale and licensing of the
Intellifit System, a computerized system which generates personalized exercise
prescriptions. Mr. Wasserman currently serves on the board of directors of REXX
Environmental Corporation and is also the Managing Member of Sharp Management,
LLC, a financial consulting company.
33
<PAGE>
From April 1992 through September 1998, Mr. Wasserman was the Treasurer
of Engex, Inc., a closed-end mutual fund which makes early stage venture capital
investments in both public and private companies. The fund generally invests in
high technology, biotechnology and early stage pharmaceutical companies. From
April 1992 through December 1997, Mr. Wasserman acted as chief financial officer
of D.H. Blair Investment Banking Corp., a New York Stock Exchange and NASD
member firm, which is an investment banking and merchant banking firm which
specializes in public offerings and private placements of early stage and
emerging new companies. From September 1987 through April 1992, Mr. Wasserman
was an audit/tax manager and a staff investment analyst for
PricewaterhouseCoopers LLP. Mr. Wasserman is a Certified Public Accountant in
the state of New York and a member of the American Institute of Certified Public
Accountants and the New York State Society of Certified Public Accountants.
Greg S. Watkins has served as the President of Watkins since January
1995. Prior to his appointment as President of Watkins, he served as its
Secretary and Treasurer (July 1991 to January 1995) and Vice President (June
1992 to January 1995).
34
<PAGE>
Directors' Compensation
Directors who are not also officers or employees of REXX are paid a
director's fee of $10,000 per year. The only directors who received this
director's fee from REXX for 1999 were James L. Hochfelder and Brian A.
Wasserman. In addition, upon joining REXX's board of directors, each person who
is not an employee of REXX is automatically granted under the REXX Option Plan
an option to purchase 15,000 shares of REXX common stock at an exercise price
per share equal to the then current per share market price of the REXX common
stock. Messrs. Hochfelder and Wasserman were each granted an option to purchase
15,000 shares of REXX common stock upon their joining REXX's board of directors
in 1997.
Board Meetings and Committees
During 1999, REXX's board of directors met nine times. All current
directors of REXX attended all of these meetings of the board and all meetings
of each board committee on which they serve.
REXX's board of directors has an Executive Committee, an Audit
Committee, a Compensation Committee, a Nominating Committee and a Stock Option
Committee.
The Executive Committee has been granted all of the authority which,
under the New York Business Corporation Law, may be delegated to this committee.
It consists of Messrs. A. Asch, M. Asch and Greenberger. The Executive Committee
did not meet during 1999.
The Audit Committee recommends the firm of independent public
accountants to be engaged as REXX's auditors and participates in accounting
reviews as it deems appropriate. It consists of Messrs. Greenberger, Hochfelder
and Wasserman. The Audit Committee held one meeting during 1999.
The Nominating Committee recommends to the Board the slate of nominees
for election as directors of REXX and also recommends individuals for various
offices with REXX. It consists of Messrs. A. Asch, M. Asch and Greenberger. The
Nominating Committee will consider nominations by shareholders made in writing
to REXX's Chairman of the Board. The Nominating Committee held one meeting
during 1999.
The Stock Option Committee is authorized to award options under the
REXX Option Plan. It consists of Messrs. Greenberger, Hochfelder and Wasserman.
The Stock Option Committee did not meet during 1999.
The Compensation Committee is empowered to authorize executive
officers' compensation. It consists of Messrs. M. Asch, Hochfelder and
Wasserman. The Compensation Committee held one meeting during 1999.
Executive Compensation
The following table sets forth, for the three years ended December 31,
1999, the cash and other compensation paid to all individuals serving as REXX's
Chief Executive Officer, or acting in a similar capacity, during 1999 and all
other individuals serving as executive officers of REXX and its Watkins
subsidiary at December 31, 1999 whose total compensation, for services rendered
to REXX during 1999, was $100,000 or more.
35
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------------- ------------
Other Annual Securities All Other
Name and Principal Position Year Salary Bonus Compensation Underlying Compensation(3)
---------------------------- ---- ------ ----- (1) Options (2) ---------------
------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Asch, REXX's 1999 $ 37,500 (4) $ -- $ -- -- $ --
Chief Executive Officer 1998 225,000 (4) -- -- -- --
1997 50,000 (4) 120,000 -- -- 1,820
Michael A. Asch, REXX's Chief 1999 $ 35,833 (5) $ -- $ -- -- $ --
Operating Officer 1998 215,000 (5) -- -- -- --
1997 215,000 (5) -- -- -- 8,400
Greg S. Watkins, Watkins' 1999 $ 180,000 (6) $ -- $ -- -- $ 1,443
President 1998 180,000 (6) -- -- 20,000 1,415
Daren J. Barone, Watkins' 1999 $ 180,000 (6) $ -- $ -- -- $ 1,500
Chief Executive Officer 1998 180,000 (6) -- -- 20,000 1,500
</TABLE>
---------
(1) The value of all perquisites provided did not exceed the lesser of
$50,000 or 10% of the officer's salary and bonus.
(2) No options were granted in the 1999 fiscal year.
(3) Represents amounts paid under REXX's defined contribution pension and
profit sharing plans in 1997 and under Watkins' 401(k) Plan in 1998 and
1999.
(4) Until July 24, 1995, when the sale of REXX's Sportswear Division was
consummated, Mr. A. Asch was compensated by REXX at the rate of
$500,000 per year, and he was compensated by the new owner of the
Sportswear Division from July 25, 1995 through December 31, 1997 at the
rate of $450,000 per year. As negotiated in connection with the sale of
the Sportswear Division, from July 25, 1995 through December 31, 1997,
Mr. A. Asch was paid regular compensation by REXX at the rate of
$50,000 per year. Although on January 22, 1998, the Board's
Compensation Committee authorized compensation to Mr. A. Asch at the
rate of $325,000 per year, on March 19, 1999, his rate of compensation
was reduced to $225,000 a year for 1998 through February 28, 1999. Mr.
A. Asch has agreed that he would be paid no compensation by REXX from
March 1, 1999 until further Compensation Committee action.
(5) Although on January 22, 1998, the Board's Compensation Committee
authorized compensation to Mr. M. Asch at the rate of $215,000 per
year, on March 19, 1999, Mr. M. Asch agreed that he would be paid no
compensation by REXX from March 1, 1999 until further Compensation
Committee action.
(6) See also "Certain Relationships and Related Transactions."
Stock Option Grants in 1999
No stock options were granted in 1999.
Aggregate Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
Set forth in the table below is information, with respect to each of
the individuals listed in the table to the "Executive Compensation" section
above, as to:
o the number of shares acquired during 1999 upon each exercise
of options granted to these individuals;
o the aggregate value realized upon each such exercise,
calculated as the difference between the market value of the
shares at exercise and their exercise price;
o the total number of unexercised options held on December 31,
1999, separately identified between those exercisable and
those not exercisable as of that date; and
36
<PAGE>
o the aggregate value of in-the-money, unexercised options held
on December 31, 1999, separately identified between those
exercisable and those not exercisable.
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 1999 at December 31, 1999
Acquired Value -------------------- --------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arthur L. Asch........ -0- -0- 30,000 0 $ 26,250 $ 0
Michael A. Asch....... -0- -0- 50,000 0 43,750 0
Daren J. Barone....... -0- -0- 5,000 15,000 4,375 13,125
Greg S. Watkins....... -0- -0- 5,000 15,000 4,375 13,125
</TABLE>
Employment Agreements
Watkins has entered into employment agreements with Daren J. Barone and
Greg S. Watkins. These employment agreements each provide for:
o base salaries of $180,000 per year;
o incentive compensation equal to 5% of the annual pretax income
of Watkins above $2,700,000; and
o additional incentive compensation equal to 2.5% of the annual
pretax income of Watkins above the greater of Watkins'
previous year's pretax income or $2,700,000.
These employment agreements further provide that, if the executive is
terminated for good reason, which includes a material breach of the employment
agreement or that the executive be based outside the original employment area,
he shall be entitled to six months, base salary plus a pro rata portion of any
additional compensation for the year of termination. The employment agreements
also contain provisions protecting Watkins' proprietary rights and information.
REXX Stock Plans
On October 11, 1994, REXX's board of directors adopted the REXX Option
Plan covering up to 199,250 shares of REXX common stock. The REXX Option Plan
provides, among other matters, that:
o the option price per share is to be not less than 50% of the
fair market value of the stock on the date of the grant;
o options granted shall be for a term of not more than five
years and shall become exercisable in equal installments in
each year of the term on a cumulative basis, other than the
first year, or to the extent that REXX's board of directors
shall otherwise determine; and
o no option may be granted under the REXX Option Plan after
October 11, 2004.
On April 22, 1996, the REXX board of directors approved an amendment to
the REXX Option Plan, which was also approved by the REXX shareholders on June
26, 1996. This amendment provides that the REXX Option Plan is permitted to
grant options to non-employee directors and provides that each director who is
not an employee of REXX shall receive options to purchase 15,000 shares of REXX
common stock at the then-current market price for the REXX common stock upon
joining the board.
37
<PAGE>
On December 3, 1997, the REXX board of directors approved further
amendments to the REXX Option Plan, which were also approved by the REXX
shareholders on February 17, 1998. These amendments provide for:
o reserving from REXX's authorized but unissued shares of REXX
common stock 250,000 shares for issuance on exercise of
options which may be granted under the REXX Option Plan;
o increasing the maximum number of shares for which a person may
receive options under the REXX Option Plan from 100,000 shares
to 150,000 shares of REXX common stock; and
o adding the incentive to key employees of any business which
REXX acquires or in which REXX acquires an interest to
continue in its employ, by the grants of options under the
REXX Option Plan to these employees, as a purpose of the REXX
Option Plan.
As of the record date, there were outstanding options granted under the
REXX Option Plan to purchase 230,000 shares of REXX common stock, at exercise
prices ranging from $2.00 to $5.00 per share.
Deferred Compensation Plans
REXX has non-contributory defined contribution pension and profit
sharing plans covering certain employees including its executive officers.
Contributions to these plans ceased permanently in October 1997 and final
distributions were made from these plans in December 1999. In addition, Watkins
has a matching contribution 401(k) retirement plan covering certain employees
including its executive officers. Neither REXX nor Watkins has a defined benefit
or actuarial plan.
Certain Relationships and Related Transactions
Greg S. Watkins and Daren J. Barone are executive officers of Watkins.
REXX acquired Watkins from these individuals in October 1997. The consideration
paid to Messrs. Watkins and Barone for REXX's acquisition of Watkins included:
o $3,600,000 in cash;
o 400,000 shares of REXX common stock; and
o rights entitling each of them to sell to REXX, at $5.00 per
share, up to:
o 25,000 shares of REXX common stock per quarter,
starting April 1, 1999, if Watkins earned in excess
of $2,700,000 in pretax income during 1998, and
o 25,000 shares of REXX common stock per quarter,
starting April 1, 2000, if Watkins earned in excess
of $2,700,000 in pretax income during 1999.
Employment agreements, each dated October 21, 1997, between Watkins and
each of Messrs. Watkins and Barone were executed in accordance with the Stock
Purchase Agreement pursuant to which REXX purchased Watkins. These employment
agreements entitle Mr. Watkins and Mr. Barone to each receive from Watkins:
o a salary at the rate of $180,000 a year;
o incentive compensation equal to 5% of the annual pretax income
of Watkins above $2,700,000; and
o additional incentive compensation equal to 2.5% of the annual
pretax income of Watkins above the greater of Watkins'
previous year's pretax income or $2,700,000.
38
<PAGE>
Mr. Watkins and an assignee of Mr. Barone have agreed to repurchase
from Watkins all of the shares of Watkins common stock. See "Proposal Number 2 -
Sale of Watkins Contracting, Inc."
Anniston Capital, Inc., a corporation controlled by Michael A. Asch, a
REXX director and executive officer, paid REXX $7,200 in 1999 for its use of
REXX's office facilities and other office expenses.
Joseph Greenberger, a REXX director, performed certain legal services
for REXX during 1999 and in prior years. Mr. Greenberger was paid approximately
$90,000 for legal services rendered in 1999.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to REXX, together with written representations received by REXX from
applicable parties that no Form 5 was required to be filed by these parties, all
parties subject to the reporting requirements of Section 16(a) of the Exchange
Act filed all these required reports during and with respect to the 1999 Fiscal
Year.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of REXX's board of directors consists of
Michael A. Asch, James L. Hochfelder and Brian A. Wasserman. Anniston Capital,
Inc., a corporation controlled by Michael A. Asch, a REXX director and executive
officer, paid REXX $7,200 in 1999 for its use of REXX's office facilities and
other office expenses.
PROPOSAL NUMBER 2 - SALE OF WATKINS CONTRACTING, INC.
Overview
Pursuant to the terms of the Watkins agreement, REXX will sell to Greg
S. Watkins and an assignee of Daren J. Barone all of the shares of Watkins
common stock presently owned by REXX. These shares represent all of the issued
and outstanding common stock of Watkins. Accordingly, upon completion of the
Watkins transaction, Watkins will be owned solely by the buyers. The purchase
price to be paid by the buyers is:
o $1,300,000 in cash;
o the assignment and transfer to REXX of 125,000 shares of REXX
common stock presently owned by the buyers or the payment of
$171,875 in cash at buyers' option; and
o certain other consideration.
The information contained in this proxy statement/prospectus with
respect to the Watkins transaction and Watkins agreement constitutes a summary
of the Watkins agreement and is qualified in its entirety by reference to the
complete text of the Watkins agreement, a copy of which is attached to this
proxy statement/prospectus as Appendix A and is incorporated herein by reference
thereto.
Background to the Watkins Transaction
Watkins is a leading California regional provider of asbestos
abatement, demolition and dismantling and other related specialty contracting
services, including lead paint abatement, to a broad range of governmental,
commercial, industrial and institutional clients located primarily in
California.
39
<PAGE>
In October 1997, REXX, then named "Oak Hill Sportswear Corporation" and
without material operations, acquired Watkins from Greg S. Watkins and Daren J.
Barone. The total consideration paid to Messrs. Watkins and Barone for REXX's
acquisition of Watkins consisted of:
o $3,600,000 in cash;
o 400,000 shares of REXX common stock; and
o rights entitling each of Messrs. Watkins and Barone to sell
back to REXX, at $5.00 per share, up to:
o 25,000 shares per quarter, starting April 1, 1999, if
Watkins earned in excess of $2,700,000 in pretax
income during 1998; and
o an additional 25,000 shares per quarter, starting
April 1, 2000, if Watkins earned in excess of
$2,700,000 pretax income during 1999.
Messrs. Watkins and Barone also entered into employment agreements with
Watkins in connection with REXX's October 1997 purchase of Watkins. These
employment agreements, which terminate on December 31, 2000, subject to
extension through December 31, 2003 by mutual consent, entitle Messrs. Watkins
and Barone to each receive:
o a base salary at the rate of $180,000 a year, subject to costs
of living adjustments during any extension period;
o incentive compensation equal to 5% of the pretax income of
Watkins above $2,700,000; and
o additional incentive compensation equal to 2.5% of the pretax
income of Watkins above the greater of $2,700,000 or Watkins'
prior year's pretax income.
REXX acquired Watkins with the intent of expanding Watkins' asbestos
abatement, demolition and dismantling businesses. This expansion was anticipated
to be made through regional acquisitions, the opening of additional regional
offices and by aggressive bidding on projects to increase market share.
Watkins had ten performance bonds outstanding, through two surety
bonding companies, when Watkins was acquired by REXX. These performance bonds
were personally guaranteed by Messrs. Watkins and Barone. However, REXX was
required to use its best efforts to obtain replacements of the existing bonds
and the termination of the guarantees of Messrs. Watkins and Barone. Immediately
after REXX acquired Watkins, REXX began to hold general discussions with one of
the underwriters of Watkins' bid and performance bonds in an effort to reduce
the underwriter's requirements to continue underwriting these bonds. However,
this underwriter continued to insist on collateral and personal guarantees that
Watkins and REXX were either unable or unwilling to provide. By April 1998,
Watkins located a new underwriter who began issuing bid and performance bonds on
terms satisfactory to Watkins and REXX.
Watkins also had a $312,000 line of credit with Wells Fargo Bank when
Watkins was acquired by REXX. This line of credit was also personally guaranteed
by Messrs. Watkins and Barone.
For the quarter ended March 31, 1998, REXX reported net income of
approximately $203,000 on revenues of $4,203,000. For the quarter ended June 30,
1998, REXX reported net income of approximately $206,000 on revenues of
$3,371,000. Both of these quarters' revenues were almost totally generated by
Watkins and were higher than the revenues generated by Watkins in the comparable
1997 first and second quarters. This growth in revenues resulted from a higher
than usual emphasis by Watkins on a larger number of and increased size of
demolition work that had lower margins.
REXX also initiated preliminary discussions with privately-held
environmental remediation companies located in the Los Angeles, California area
in the quarter ended March 31, 1998 in order to implement its acquisition
strategy within the market segments in which Watkins operated. During the same
period, REXX held preliminary discussions with several private venture capital
funds and other potential financing sources, including Jeffrey Rubin, a
principal of Newtek, for the purpose of soliciting interest in a possible sale
of REXX equity, debt or a combination of REXX equity and debt to finance the
acquisition of additional environmental remediation companies. REXX provided
these funds and others with certain projections of future operating results and
other financial and business information. No definitive terms were reached with
these funds and others regarding this financing.
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The REXX directors were often individually updated by REXX management
on the status of potential acquisitions and financing options and, subsequently,
the full REXX board of directors reviewed management's acquisition strategy at
its June 25, 1998 meeting. At this time, the board of directors also discussed
several of the acquisition candidates preliminary identified by REXX's
management.
Through the efforts of REXX, Watkins' line of credit with Wells Fargo
was increased to $750,000 in June 1998. In August 1998, REXX requested a working
capital line of credit of $2,000,000 and an additional $2,000,000 line of credit
for acquisitions in order to more fully execute REXX's growth strategy for
Watkins. Wells Fargo gave oral approval to a $2,000,000 working capital line of
credit in September 1998. By October 1998, the bank granted an interim increase
in the original line of credit to $1,000,000 while the documentation for the
$2,000,000 line of credit was being finalized. Watkins executed the
documentation for the $2,000,000 line as of November 10, 1998. This new
$2,000,000 line of credit was secured by all of the assets of Watkins and
guaranteed by REXX. However, Well Fargo declined to grant any acquisition
financing to Watkins or REXX. For the quarter ended September 30, 1998, REXX
reported net income of approximately $149,000 and revenues of $3,285,000.
On October 8, 1998, REXX announced that it had signed a letter of
intent to acquire the business and certain related assets of a hazardous
materials remediation contractor headquartered in the Los Angeles, California
area. However, on November 13, 1998, REXX announced that it had terminated
discussions with this company after a due diligence review of the company's
business.
Watkins was subject to a non-competition agreement covering the State
of Nevada when it was acquired by REXX. This non-competition prohibition arose
in connection with Watkins' 1995 sale of its Las Vegas, Nevada operations. This
prohibition terminated in November 1998. In November and December 1998, REXX
began exploring and held discussions with third parties concerning the opening
of a Watkins regional office in Las Vegas and possibly, expanding Watkins'
operations to the Phoenix, Denver and San Francisco metropolitan areas. REXX
also investigated acquiring other regional providers of asbestos abatement,
hazardous materials and soil remediation and demolition services in the Southern
California and Las Vegas areas.
During the course of 1998, Watkins performed a higher percentage of
demolition projects relative to prior years, which resulted in lower gross
margins during 1998, particularly in the fourth quarter, when REXX, on a
consolidated basis incurred a substantial net loss of approximately $1,054,000,
causing a net loss of $496,000 for the year.
In early 1999, REXX became aware that gross margins for the 1998 fourth
quarter had deteriorated significantly and that it would report a substantial
net loss for this quarter and that these net losses would result in a net loss
for the entire 1998 fiscal year. Unanticipated difficulties associated with many
demolition projects caused these lower than anticipated gross profits on large
projects, due principally to:
o higher than planned costs to complete jobs, including
additional hauling and disposal fees, as well as for extra
labor, especially on jobs performed outside Watkins' primary
San Diego County region;
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o an inability to maximize the utilization of Watkins-owned
equipment and minimize use of leased equipment when delays on
out-of-town projects arose;
o higher labor and living costs on out-of-town projects which
were not completed on an efficient or timely schedule;
o the need to reserve for future projected losses on certain
projects; and
o the elimination of a portion of the revenue on a project that
had been completed because the customer notified Watkins in
January 1999 that it would not pay for work performed under an
unsigned change order.
In early 1999, REXX also initiated discussions with a large national
remediation company regarding a possible business combination or other
transactions involving Watkins. Management was advised by the other company that
one of the conditions to an offer for REXX would be the continued involvement of
Messrs. Watkins and Barone in the management of Watkins. However, after this
company conducted a preliminary examination of Watkins and held further
discussions with REXX's management, in February 1999, Messrs. Watkins and Barone
advised REXX that they had a strong preference against REXX proceeding with a
transaction with this company or with any other company. Messrs. Watkins and
Barone also indicated that rather than REXX completing a business combination or
other transaction involving Watkins, that they were interested in acquiring
Watkins themselves. Despite these factors, REXX continued to hold discussions
with this other company and with other entities concerning a business
combination or other transactions involving REXX while discussions with Messrs.
Watkins and Barone continued. REXX and this large national remediation company
continued their negotiations, which concentrated on the value of Watkins. On
February 8, 1999, based upon discussions which included certain financial
projections, the national remediation company suggested that the maximum it
would be willing to pay was equal to the book value of Watkins plus $750,000 in
cash and a contingent payout equal to 37.5% of the net profits of Watkins over a
three year period. However, many issues were not addressed, including potential
payments by REXX to the management team, and REXX was particularly concerned
with respect to the potential for post-closing purchase price adjustments and
further negotiations did not progress. Due to the losses incurred in the 1998
fourth quarter and fiscal year, REXX management concluded, based on its prior
discussions with this other company and the other company's focus on the book
value and earnings of Watkins, that this other company would reduce its
perceived value of Watkins and, therefore, reduce the consideration it would be
willing to pay in any transaction involving Watkins, if it was still willing to
pursue a transaction with Watkins.
On February 10, 1999, Messrs. Watkins and Barone made a preliminary
offer for the purchase of Watkins for $900,000 in cash and 200,000 shares of
REXX common stock with a conversion of a $200,000 intercompany debt into a note
payable to REXX over an unspecified period of time. REXX rejected this offer.
The next day Messrs. Watkins and Barone offered a revised purchase price of
$1,750,000 in cash, 200,000 shares of REXX common stock, the forgiveness of the
$200,000 intercompany debt, a payment of $30,000 per month to REXX for one year,
and a one time payment by REXX to Messrs. Watkins and Barone of $40,000. This
offer was rejected by REXX because, among other things, it had a payout to the
buyers and a forgiveness of the intercompany debt.
On February 12, 1999, REXX proposed a revised purchase price of
$1,800,000 cash, 200,000 shares of REXX common stock, payment of the $200,000
intercompany indebtedness and a payout of $50,000 per month to REXX for one
year.
On February 15, 1999 Messrs. Watkins and Barone responded with an offer
of $1,365,000 cash, 200,000 shares of REXX common stock, payment of the
intercompany indebtedness and the equal split of any recovery by Watkins against
National Aeronautics and Space Administration for work performed by Watkins.
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On February 18, 1999, Messrs. Watkins and Barone revised their offer to
increase the cash portion to $1,600,000 and increase the shares to 400,000
shares of REXX common stock. On February 19, 1999, REXX corresponded with
Messrs. Watkins and Barone confirming the revised offer.
On February 19, 1999, REXX indicated that the revised offer was
acceptable and REXX was advised that Messrs. Watkins and Barone had commenced
their efforts to secure the necessary financing to purchase Watkins from REXX.
Negotiations of Messrs. Watkins and Barone assumed that they would purchase
Watkins on an "as is" basis and that the availability of financing, for both the
purchase and continuing operations of Watkins following the purchase, would not
be a condition to the buyers' obligation to complete the purchase transaction.
During these negotiations with Messrs. Watkins and Barone, REXX, with
the knowledge that Watkins' preliminary estimates for fourth quarter 1998 were
substantially below those previously given to the national remediation company,
contacted the national remediation company to advise them that Messrs. Watkins
and Barone had made an offer to purchase Watkins. REXX further advised them that
Messrs. Watkins and Barone were attempting to arrange financing for the purchase
and if they were unsuccessful in obtaining financing, REXX would again contact
them to ascertain their interest.
In February 1999, REXX also explored alternate means of financing
Watkins' operations. Discussions were held with several potential lenders about
asset-based lending, primarily against Watkins' accounts receivable. None of
these potential lenders were interested in financing Watkins' operations under
these terms.
By February 1999, REXX ceased seeking external growth of opportunities
for Watkins' business through acquisitions or the opening of additional regional
offices because of its working capital constraints and in order to concentrate
more fully on the necessary actions to improve existing operations.
In early March 1999, REXX contacted another environmental company as a
follow up to a prior preliminary conversation to ascertain if they would be
interested in the purchase of Watkins. Between March 8 and March 16, 1999 REXX
and this other company exchanged financial information and met to discuss the
transaction. Messrs. Watkins and Barone indicated to REXX that they were less
interested in continuing in management for Watkins in the event of a sale to
this other company than in purchasing Watkins themselves.
As the earnings for Watkins in 1998 were substantially below the levels
that REXX had indicated in preliminary discussions with this environmental
company, further discussions were limited and the other company did not make an
offer to purchase Watkins.
Later in March 1999, REXX learned that the Watkins losses incurred in
the 1998 fourth quarter and fiscal year were greater than anticipated. On March
18, 1999, Messrs. Watkins and Barone advised REXX that as a result of the weaker
fiscal results, they were revising their offer to $1,500,000 cash and 100,000
shares of REXX common stock with no payment for intercompany debt or additional
payout. This offer was not contingent on receiving financing and was for an "as
is" transaction.
By late March 1999, REXX had advised Wells Fargo and its bonding
underwriters of its 1998 fourth quarter and fiscal year anticipated losses.
Negotiations with Wells Fargo were commenced as it became more apparent that
these losses would result in Watkins being in breach of certain financial
covenants contained in the credit agreement with the bank and this
non-compliance would require a waiver from Wells Fargo. Watkins' obligations
under the credit agreement were guaranteed by REXX. In March 1999, Wells Fargo
waived this non-compliance through the period ended December 31, 1998. In
addition, the company underwriting most of Watkins' bid and performance bonds
advised REXX of their reluctance to issue new bonds and that any request for
bonds would be reviewed on a case-by-case basis. The bonding company also was
advised that REXX was in negotiations with Messrs. Barone and Watkins to sell
Watkins to them. Over the next few months, the bonding company approved and
issued a few bonds for small amounts. However, in May 1999, the bonding company
declined to issue a $520,000 bid bond to Watkins despite:
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o assurances of Watkins and REXX that no funds would be
transferred from Watkins to REXX, including funds for the
repayment of loans made by REXX to Watkins; and
o the fact that Arthur L. Asch, REXX's Chairman of the Board of
Directors and Chief Executive Officer, and Michael A. Asch,
REXX's President and Chief Operating Officer, had agreed that
they would not draw their respective salaries from March 1,
1999 until further notice.
As a result of the bonding company's declining to issue the $520,000
bid bond, Watkins was forced to obtain and fund an alternative $52,000 cashier's
check when submitting its bid on a remediation project.
The posting of a cashier's check in lieu of a bid bond causes the
demolition and remediation industry to perceive the bidding party has an
unstable financial condition, since the bidder's bonding company is not willing
to issue a bond to secure the bidder's ability to properly complete a project.
This perception also influences parties seeking bids for demolitions and
remediation services, as these parties desire a company in a stable financial
position rather than a company that is perceived to have financial difficulties.
REXX believes that, while an occasional use of a cashier's check in lieu of a
bond may be explained, the continued use of a cashier's check when bidding on
projects would affect the ability of Watkins to successfully bid on projects,
which will adversely affect Watkins' and REXX's financial condition.
The bonding underwriter's reluctance to issue bid and performance
bonds, Messrs. Watkins' and Barone's strong preference against REXX proceeding
with any potential business combination or other transaction involving Watkins
and their interest in acquiring Watkins themselves, and the lack of financing
for operations, growth or acquisitions together resulted in REXX ceasing to
actively pursue other offers for Watkins, including discussions with parties
previously contacted.
In April 1999, REXX continued negotiations, on an exclusive basis, with
Messrs. Watkins and Barone over the terms of the Watkins agreement. On April 27,
1999, Messrs. Watkins and Barone advised REXX that the book value of Watkins was
lower than they had anticipated and that they would be proposing a revised
offer. On April 28, 1999, Messrs. Watkins and Barone revised their offer to
$1,200,000 cash and 100,000 shares of REXX common stock. REXX responded that
they would be willing to accept an offer of $1,500,000 cash plus 100,000 shares
of REXX common stock or $1,300,000 cash plus 200,000 shares of REXX common
stock. Messrs. Watkins and Barone rejected this counteroffer and REXX proposed
purchase prices with a combination of cash and stock with a range of between
$1,200,000 to $1,400,000 in cash plus a range of between 100,000 to 200,000
shares of REXX common stock. On April 28, 1999, the parties agreed to the
revised offer of $1,300,000 cash plus 125,000 shares of REXX common stock with
repayment of the $6,001 intercompany loan due to REXX and a 50/50 split of the
collection, if any, of the NASA claim. The transaction was also structured for
the purchase of the Watkins stock on an "as is" basis. During April various
drafts of the Watkins agreement were circulated between the parties and their
respective attorneys.
In early May 1999, REXX reported that it had incurred a net loss for
the quarter ended March 31, 1999. Despite management's belief that actions had
been taken to return Watkins and REXX to profitability, the effect of these
actions was not expected to be apparent until the second quarter of 1999, when
management expected REXX to report profitable results. As a result of the 1999
first quarter loss, Watkins was again in breach of certain financial covenants
contained in its credit agreement with Wells Fargo. On May 11, 1999, Wells Fargo
waived this non-compliance through the period ended March 31, 1999.
At its May 17, 1999 meeting, REXX's Board of Directors authorized the
execution of an agreement providing for the sale of Watkins to Messrs. Watkins
and Barone for similar consideration as set forth in the Watkins agreement.
Final negotiations were conducted through June 10, 1999. The Watkins agreement
was executed by REXX and Messrs. Watkins and Barone on June 14, 1999.
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Following the signing of the Watkins agreement, Watkins was awarded the
project in which it submitted the alternative $52,000 cashier's check in lieu of
a $520,000 bid bond. Watkins then requested that its bonding company issue a
$520,000 performance bond. The bonding company agreed to issue the performance
bond and to issue future bid and performance bonds only if Messrs. Watkins and
Barone personally guaranteed these bonds. Messrs. Watkins and Barone agreed to
so guarantee this bond and future Watkins' bid and performance bonds, but only
if Watkins could grant them a 25% profit participation in the projects for which
they personally guaranteed the bonds. REXX agreed to this requirement. These
profit participations will only be effective if the REXX shareholders do not
approve or if REXX declines to close the Watkins transaction. To date, Messrs.
Watkins and Barone have personally guaranteed bonds on two Watkins projects in
the aggregate amount of $868,500. Watkins and REXX have agreed to indemnify
Messrs. Watkins and Barone for any liability arising under these guarantees.
On November 29, 1999, the termination date of the Watkins agreement was
extended to February 29, 2000, and the purchase price was adjusted to allow for
the buyers' option to make a payment of $171,875 in lieu of the transfer to REXX
of 125,000 shares of its common stock. On January 6, 2000, the termination date
of the Watkins Agreement was extended to April 30, 2000, and REXX agreed to
grant the buyers a 66 2/3% profit participation in a particular project for
which the buyers personally guaranteed and arranged for a letter of credit as
collateral for the completion bonds required for the project. This profit
participation will only be paid to the buyers if the REXX shareholders do not
approve or REXX declines to consummate the Watkins transaction. On April 27,
2000, the termination date of the Watkins Agreement was extended to June 30,
2000, and on June 28, 2000, the termination date of the Watkins Agreement was
further extended to August 31, 2000. It is expected that the termination date of
the Watkins Agreement will be extended beyond August 31, 2000, if the Watkins
transaction is not consummated by that date.
Reasons for the Watkins Transaction
REXX's board of directors has determined that the Watkins transaction
is in the best interest of REXX and the REXX shareholders and is fair to the
REXX shareholders. In the course of reaching its decision to approve the Watkins
transaction, REXX's board of directors, after consulting with REXX's legal
counsel, considered the following material factors:
o all relevant and reasonably available information concerning
Watkins' recent results of operations, declining financial
conditions and prospects;
o the requirements and restrictions concerning Watkins' line of
credit;
o the difficulty and potential inability of Watkins to obtain
bid and performance bonds without personal guarantees;
o the inability of REXX to obtain financing for acquisitions to
grow Watkins' business;
o the possibility of utilizing the net proceeds from a Watkins
transaction to fund an alternative investment opportunity
which may be able to generate a positive return for its
shareholders;
o the alternatives available to REXX in the event that it did
not undertake the Watkins transaction, including:
o the limited availability of other possible potential
purchasers of Watkins on terms acceptable to REXX;
o the difficulties which could arise in negotiating and
consummating a substitute transaction, if an
acceptable alternative could be found;
o attempting to remain an independent company with
inadequate capital and difficulty in obtaining
additional financing on commercially reasonable
terms; and
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o the possibility that the financing in a sufficient
amount would not be available from any source,
especially in light of REXX's and Watkins' inability
to obtain third party financing in the past; and
o Messrs. Watkins and Barone's strong preference against REXX
proceeding with any business combination or other transaction
involving Watkins and their interest in acquiring Watkins
themselves.
The above factors considered by the REXX board are not intended to be
exhaustive but include all material factors considered by the REXX board. In
reaching its determination to approve the Watkins transaction and recommend its
approval to the REXX shareholders, the REXX board did not assign any relative or
specific weights to the various factors considered by it.
In the event REXX does not sell Watkins, REXX would face certain
constraints based upon its working capital requirements and Watkins' credit
agreement with Wells Fargo. These constraints would result in continuing the
suspension of REXX's external growth efforts in its Watkins environmental and
demolition business, as well as a further reevaluation of the mix of projects
Watkins bids, contracts for and performs in the future. In order to exercise
greater control over field expenses and projects, particularly those involving
demolition, management anticipates that Watkins would continue to seek less work
outside of REXX's primary San Diego County geographic area. In addition,
projects which utilize equipment owned by Watkins rather than third party
rentals would be more attractive to Watkins in the bidding process. However,
even though REXX and Watkins were successful in negotiating a resetting of the
financial covenants in the credit agreement and acceptable borrowing limits and
interest rates payable, as well as a continuation of the credit agreement to
November 9, 1999, its original expiration date, and, if REXX and Watkins could
negotiate an extension of the credit agreement, (which was later extended to
June 9, 2000 and is currently under discussion for extension to September 30,
2000), it is likely that Watkins, as a subsidiary of REXX, would not be able to
increase its revenues significantly in the foreseeable future, and may, shrink
its revenues, as a result of working capital constraints. It is also uncertain
as to whether Wells Fargo would continue to lend to Watkins if REXX, rather than
the buyers, owned Watkins in the future.
After considering the foregoing factors, as well as projected
out-of-pocket costs which would be incurred by REXX in the event that the
Watkins transaction failed to be consummated, and after reviewing the provisions
of the Watkins agreement and the related agreements which had been negotiated
with Messrs. Watkins and Barone, REXX's board of directors concluded that REXX
management had negotiated fair and reasonable terms with Messrs. Watkins and
Barone, which the board believed were in the best interest of REXX and its
shareholders under the circumstances, and approved the Watkins transaction.
The Watkins Agreement
General. Pursuant to the terms of the Watkins agreement, REXX will sell
to the buyers all of the outstanding capital stock of Watkins.
Purchase Price. On the date of closing of the Watkins transaction, the
buyers will pay to REXX:
o $1,300,000 in cash;
o the assignment and transfer to REXX of 125,000 shares of REXX
common stock presently owned by the buyers or the payment of
$171,875 in cash at buyers' option; and
o certain other consideration, consisting of:
o Watkins repayment of a $6,001 inter-company loan due
REXX; and
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o the buyers and Watkins using their best efforts to
obtain the release of REXX and the termination of
REXX's obligations under specified agreements,
guarantees and other instruments, under which REXX
estimates its potential aggregate liabilities to be
approximately $7,000,000, or, if the buyers and
Watkins are unable to obtain these releases and
termination, the buyers shall guarantee and agree to
indemnify REXX against these potential liabilities.
REXX has the option to have a third party purchase all or a part of the
125,000 shares of REXX common stock that comprise a part of the purchase price
for consideration at or above $1.375 per share. If exercised, the buyers would
sell these shares to the third party and deliver to REXX the net proceeds of
this sale, after payment of all applicable taxes, in lieu of delivery of the
shares so sold.
In addition, the Watkins agreement provides for Watkins to pay REXX,
upon closing the Watkins transaction, 50% of the net recovery by Watkins with
respect to a claim of Watkins against the National Aeronautics and Space
Administration in connection with work done by Watkins at a NASA facility. This
claim was settled for $145,000 and was paid to Watkins in December 1999.
Conditions. The buyers' obligations to consummate the Watkins
transaction are subject to, among others, the following conditions being
satisfied:
o the representations and warranties of REXX contained in the
Watkins agreement being true and correct as if made on the
closing date;
o the Watkins transaction being duly approved by the REXX
shareholders;
o the Watkins capital stock to be sold to the buyers to
effectuate the Watkins transaction being free and clear of all
liens, except for those permitted by the Watkins agreement;
o no court order or other legal or regulatory restraint having
been issued which prevents the consummation of the Watkins
transaction;
o no legal proceedings being pending or threatened which relate
to the Watkins transaction and which could result in material
liability to Watkins; and
o no statute, rule, regulation or order having been enacted,
entered, enforced or deemed applicable to the Watkins
transaction which would make completion of the Watkins
transaction illegal.
REXX's obligations to consummate the Watkins transaction are subject
to, among others, the following conditions being satisfied on the closing date:
o the representations and warranties of the buyers contained in
the Watkins agreement being true and correct as if made on the
closing date;
o the Watkins transaction being duly approved by the REXX
shareholders;
o no court order or other legal or regulatory restraint having
been issued which prevents the consummation of the Watkins
transaction;
o no legal proceedings being pending or threatened which relates
to the Watkins transaction; and
o no statute, rule, regulation or order having been enacted,
entered, enforced or deemed applicable to the Watkins
transaction which would make consummation of the Watkins
transaction illegal.
Covenants. REXX has agreed, among other things, that prior to the
closing date or the termination of the Watkins agreement, REXX will:
o not solicit, initiate or encourage inquiries or proposals
concerning any merger, consolidation, business combination,
sale of all or substantially all of Watkins' assets, sale of
capital stock or similar transactions involving Watkins,
except that REXX may furnish information to, and enter into
negotiations with, any person who makes an unsolicited
proposal, if REXX's board of directors has withdrawn its
recommendation in favor of the Watkins transaction;
o take all reasonable actions necessary to comply with all legal
requirements necessary to consummate the Watkins transaction,
and will reasonably cooperate with and furnish information to
the buyers to permit the buyers to comply with all the legal
requirements;
o provide the buyers with all reasonable information concerning
Watkins' business and finances;
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o use its best efforts to maintain Watkins' relations and good
will with Watkins's suppliers, customers, landlords,
creditors, employees, agents and others having a business
relationship with Watkins;
o operate its business in the ordinary course of business; and
o not take any other action or fail to take any action which
would have a material adverse effect on Watkins':
o results of operations;
o gross margins on its projects;
o compliance with the financial covenants of its
financing agreements with Wells Fargo; or
o availability of credit from Wells Fargo.
Representations and Warranties. REXX has made certain customary
representations and warranties in the Watkins agreement as to the authorization,
validity and enforceability of the Watkins agreement and similar corporate
matters. REXX also has made certain representations and warranties relating,
among other things, to the completeness and accuracy of its filings with the
SEC, capitalization of Watkins, absence of any encumbrance on the Watkins common
stock being sold to the buyers, absence of undisclosed liabilities, absence of
material litigation and compliance with applicable laws. REXX's representations
and warranties contained in the Watkins agreement with respect to the
capitalization of Watkins, the absence of any encumbrance on the Watkins common
stock being sold to the buyers and certain tax matters will survive the
completion of the Watkins transaction and expire in accordance with the
applicable law.
The buyers also have made certain customary representations and
warranties in the Watkins agreement and other documents as to the authorization,
validity and enforceability of the Watkins agreement and similar matters. In
addition, buyers acknowledge that they are executive officers of Watkins and
that they are acquiring Watkins "as is."
Closing Date. The closing of the Watkins transaction will occur as soon
as possible following the approval of the Watkins transaction by the REXX
shareholders.
Termination. The Watkins agreement may be terminated and the Watkins
transaction abandoned at any time prior to the closing date, whether before or
after approval by the REXX shareholders:
o by mutual consent of REXX and the buyers;
o by the buyers, if REXX:
o fails to obtain the necessary shareholder approval of
the Watkins transaction by August 31, 2000; or
o ceases to use its best efforts to obtain shareholder
approval of the Watkins transaction; or
o by REXX or the buyers, if:
o the Watkins transaction is not consummated by August
31, 2000;
o the Watkins transaction is prohibited by a final
non-appealable order, decree or ruling of a court of
competent jurisdiction;
o any of the conditions to the party's obligations,
which have not been waived, to consummate the Watkins
transaction cannot be satisfied; or
o there has been a material breach by the other party
of any representation, warranty, covenant or
agreement, which breach cannot be cured prior to the
closing date.
Indemnification. REXX and the buyers are each obligated to indemnify
the other for, among other things, breaches of their respective representations,
warranties, covenants and agreements made under the Watkins agreement. In
addition, financial claims may not be made until the amount of damages for which
indemnification is sought exceeds $50,000. REXX's obligations to indemnify the
buyers is unlimited in amount. The buyers obligation to indemnify REXX is
limited to buyers' ownership interest in Watkins and the assets of Watkins.
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Expenses. The Watkins agreement provides that if the Watkins
transaction is completed, each party will pay its own expenses incurred in
connection with the Watkins transaction. If the Watkins agreement is terminated
by either party as a result of a material breach by the other, the breaching
party is required to reimburse the other party for its costs and expenses
reasonably incurred by the party due to such breach.
If the Watkins agreement is terminated by Watkins as a result of:
o the failure of the REXX shareholders to approve the Watkins
transaction at the annual meeting; or
o REXX ceasing to use its best efforts to obtain shareholder
approval,
then REXX is required to reimburse Watkins for all of their costs and expenses
reasonably incurred in connection with the Watkins transaction, as well as any
costs incurred by the buyers in obtaining a new loan for the purposes of the
purchase of Watkins from REXX and replacing Watkins current loan with Wells
Fargo which has been guaranteed by REXX.
Application of Sale Proceeds; Operations After the Watkins Transaction.
Upon consummation of the Watkins transaction, REXX will no longer have an
operating business. After payment of its expenses associated with the Watkins
transaction and the operation of Watkins prior to the closing of the Watkins
transaction, REXX estimates that it will have available cash resources of
approximately $800,000.
Following the closing of the Watkins transaction, REXX does not
anticipate making any distribution of assets to its shareholders. REXX has
entered into the Newtek/REXX merger agreement as a means of permitting the REXX
shareholders to gain an equity interest in another business in which REXX's
post-Watkins transaction assets may be used. If the Newtek/REXX merger is not
completed, REXX may take action to either:
o liquidate, any plan of liquidation would be submitted for REXX
shareholders approval; or
o evaluate possible alternative uses of its available cash
resources, including the acquisition or development of a new
business which could enable REXX to use its net operating loss
carryforwards for federal income tax purposes, which exceeded
$12,000,000 at December 31, 1999.
REXX intends to be engaged, as soon as is reasonably possible, and in
any event within one year after the closing date, primarily in a business other
than the business of investing, reinvesting, owning, holding or trading in
securities. Other than in connection with the Newtek/REXX merger, REXX has not
identified any specific business or line of business that it will acquire or
develop. REXX may not be able to acquire or develop a new business within this
one year period, if at all, and, if a new business is acquired, it may not be
profitable. The acquisition or development of this new business will be
dependent on the amount of cash available to REXX after consummation of the
Watkins transaction. Pending use of its cash assets, REXX will invest the
proceeds it receives from the Watkins transaction in U.S. government securities,
money market mutual funds or similar investments. If the Newtek/REXX merger is
not completed or REXX is not successful in acquiring or developing a new
business within one year after consummation of the Watkins transaction, it will
then invest any remaining proceeds from the Watkins transaction in U.S.
Government securities in order to avoid inadvertently becoming subject to the
reporting requirements of the Investment Company Act of 1940.
49
<PAGE>
Operations of REXX if the Watkins Transaction is Not Completed
In the event that the Watkins transaction is not completed, the
Newtek/REXX merger will not be consummated, unless Newtek waives the requirement
that the Watkins transaction be completed. REXX will explore all viable
alternatives, including attempting to locate another possible purchaser of some
or all of Watkins. However, a purchaser may not be located, or a suitable
transaction may not be negotiated on terms acceptable to REXX. Based upon its
and Watkins' current financial resources, competitive conditions in the asbestos
abatement, demolition and remediation services industries, and REXX's experience
with Watkins, REXX believes that Watkins will not be capable of producing
sufficient profits to generate an acceptable rate of return on REXX's investment
in Watkins, unless it obtains additional financing to expand Watkins operations.
REXX believes that it and Watkins will continue to be unable to obtain
appropriate institutional financing, but that other financing alternatives may
be available. However, these alternatives, if they can be located, probably will
involve above market rates, require personal guarantees and/or cause substantial
dilution of current shareholders' equity. In addition, financing may not be
available on terms acceptable to REXX or at all and personal guarantees may not
be obtained.
In order to meet its working capital needs at the corporate level, REXX
has negotiated a line of credit with HSBC Bank (USA) (formerly Republic National
Bank of New York). This line of credit currently provides for up to $600,000 in
borrowings, secured by REXX's assets. This HSBC Bank line of credit is evidenced
by a demand grid note in the maximum amount of $600,000. REXX's borrowings under
this line of credit have been guaranteed by its Chairman of the Board, Arthur L.
Asch and is secured by a certificate of deposit in the amount of $350,000
deposited by Mr. Asch with the bank. Mr. A. Asch is not being compensated by
REXX for providing the guarantee and additional collateral. REXX management
believes that, if the shareholders approve the Watkins transaction, and the sale
closes, this line of credit will be sufficient to provide REXX with the
necessary working capital to meet its needs through the completion of the
Watkins transaction. However:
o the line of credit may not, in fact, be sufficient to provide
for REXX's corporate level working capital needs until the
completion of the Watkins transaction;
o repayment of all or a portion of REXX's borrowings under this
line of credit may be demanded prior to September 30, 2000;
o HSBC Bank may not extend this line of credit beyond September
30, 2000, if requested by REXX; and o Mr. A. Asch may not
continue to provide his guarantee and collateral beyond
September 30, 2000.
The discontinuance of this line of credit, by any action of HSBC Bank,
as a result of Mr. Asch's failure to continue his guarantee or collateral beyond
September 30, 2000 or otherwise, could have a material adverse effect on REXX.
50
<PAGE>
Certain Regulatory Matters Regarding the Watkins Transaction
REXX does not currently believe that any regulatory licenses, permits
and/or governmental approvals and authorizations are required in order to
complete the Watkins transaction.
Tax Consequences of the Watkins Transaction
Tax Consequences to REXX. The aggregate amount REXX will be deemed to
have realized from the Watkins transaction will be equal to the $1,300,000 cash
purchase price paid at the closing, plus the fair market value of the REXX
common stock transferred and assigned to REXX by the buyers or $171,875 in cash
and the other consideration paid by the buyers.
REXX will recognize a loss in the Watkins transaction for federal and
state income tax purposes, which will be equal to the difference between the
amount realized by REXX from the Watkins transaction and REXX's tax basis in the
Watkins shares. The loss recognized on the Watkins transaction should be treated
as a long-term capital loss.
Any loss recognized by REXX in the Watkins transaction will be
increased by the costs incurred by REXX in connection with the Watkins
transaction, including legal and accounting fees and the cost of preparing and
circulating this proxy statement/prospectus. REXX estimates that its capital
loss on the sale of Watkins will be approximately $3,000,000. As of December 31,
1999, REXX had operating loss carryforwards, for federal purposes, which
exceeded $12 million, and this amount should be increased by the loss to be
realized by REXX upon completion of the Watkins transaction.
Tax Consequences to REXX Shareholders. REXX shareholders who do not
exercise these appraisal rights will not recognize any tax consequences upon
consummation of the Watkins transaction. REXX shareholders who duly exercise
appraisal rights generally will recognize capital gain or loss, long-term or
short-term, for federal and state income tax purposes measured by the difference
between the cash received through the appraisal proceedings and their aggregate
tax basis in their shares of REXX common stock. Shareholders who are considered
constructively to own shares of REXX common stock actually owned by other
persons may, under certain circumstances, recognize dividend income, taxable as
ordinary income, equal to the full amount they receive.
Tax Consequences of REXX Activities after Completion of the Watkins Transaction
Use of Net Operating Losses. It is anticipated that REXX's net
operating loss carryforward will be fully available to offset its income,
whether arising from passive investment or from an acquired or developed
business enterprise, for taxable periods ending after the closing date. REXX's
ability to fully utilize its net operating loss carryforward may be limited by
either or both of two anti-abuse rules.
The first of these rules would come into effect if REXX were to undergo
an "ownership change," that is, if more than a 50% change, by value, in the
beneficial ownership of REXX's capital stock were to occur over a three-year
period. In this event, REXX's use of its net operating loss carryover to offset
its income for any taxable year ending after this ownership change would be
limited and would be based on the equity value of REXX at the time of this
ownership change multiplied by a designated annual rate of return. REXX believes
that completion of the Newtek/REXX merger would result in this ownership change.
The second of these rules would come into effect if REXX were to
acquire control of another entity or were to acquire the assets of another
entity in a tax-free reorganization. In this case, REXX generally could not use
its net operating loss carryforward to offset any gain recognized on a
disposition, prior to the fifth anniversary of this acquisition, of any asset of
the controlled entity or any asset acquired in the tax-free reorganization,
except to the extent that the gain exceeded the unrealized appreciation that was
inherent in this asset at the time of acquisition.
51
<PAGE>
Penalty Tax on Personal Holding Companies. It is anticipated that
substantially all of the revenues derived by REXX in taxable years beginning
after the closing date and ending with or before the taxable year in which REXX
enters into a new business will consist of investment-type income, including
gains from the sale of marketable securities. REXX will be classified as a
personal holding company for any taxable year if more than 50% in value of its
outstanding capital stock is considered to be owned, whether directly or
indirectly and whether actually owned or owned through application of certain
statutorily prescribed constructive ownership rules, by five or fewer
individuals at any time during the last half of this taxable year. In this
event, REXX would be subject to a 39.6% penalty tax for the taxable year on its
"undistributed personal holding company income," which tax would be in addition
to the general corporate income tax and could not be offset by REXX's net
operating loss carryover. REXX's undistributed personal holding company income
for any taxable year would be the excess of:
o its taxable income for the year, recalculated for this purpose
by, among other things, allowing a deduction for federal
income taxes paid or incurred for the year, disregarding
capital gains for the year and the taxes allocable thereto and
disallowing the net operating loss deduction for the year, but
permitting a deduction for prior year losses; over
o the sum of the dividends paid, or deemed paid, for the year.
As of the record date, the five largest holders of REXX's capital stock
were believed to hold less than 36% of all outstanding capital stock.
Accumulated Earnings Tax. It is anticipated that REXX will have a
substantial deficit in accumulated earnings and profits at the close of its
taxable year that includes the closing date. For this reason, REXX does not
expect to be subject to the 39.5% accumulated earnings tax in the foreseeable
future.
Rights of Security Holders Following the Watkins Transaction
There will be no material differences in the rights of holders of REXX
common stock following the consummation of the Watkins transaction.
Rights of Dissenting Shareholders
Holders of REXX common stock who dissent from the proposal to approve
the Watkins transaction may be entitled to exercise appraisal rights. The rights
of holders of REXX common stock who dissent from the proposal to approve the
Watkins transaction and who seek appraisal rights are governed by Sections
910(a)(1)(B) and 623 of the NYBCL. The applicable provisions of Section 910 of
the NYBCL provide that a holder of REXX common stock who complies with Section
623 of the NYBCL shall have:
o the right to receive payment of the fair value of the holder's
shares of REXX common stock; and
o other rights and benefits provided by Section 623 of the
NYBCL, if the shareholder does not vote to approve the Watkins
transaction.
Certain REXX shareholders have agreed to vote their shares in favor of
the Watkins transaction and, therefore, these shareholders will be precluded
from perfecting dissenters' rights. The following discussion of the applicable
provisions of Section 623 of the NYBCL is not intended to be a complete
statement of these provisions and is qualified in its entirety by reference to
the full text of Section 623 of the NYBCL, which is set forth in full in
Appendix C to this proxy statement/prospectus.
52
<PAGE>
If you elect to exercise your dissenter's rights with respect to the
Watkins transaction, you must file with REXX, before or at the annual meeting,
but before the vote is taken, a written objection to the Watkins transaction.
This written objection must include:
o a notice of your election to dissent;
o your name and residence address;
o the number of shares of REXX common stock which you hold; and
o a demand for payment of the fair value of your shares of REXX
common stock if the Watkins transaction is consummated.
This objection is not required from you if REXX does not give you
notice of the annual meeting. This written objection to the Watkins transaction
must be in addition to, and separate from, any proxy or vote against the
proposal to approve the Watkins transaction. Under the NYBCL, neither voting
against, nor failure to vote in favor of, the proposal to approve the Watkins
transaction will constitute the written objection required to be filed by you
should you desire to exercise your dissenter's rights. Failure to vote against
the proposal to approve the Watkins transaction, however, will not constitute a
waiver of rights under Section 623 of the NYBCL, provided that a written
objection has been properly filed with REXX. If you vote to approve the Watkins
transaction, you will be deemed to have waived your appraisal rights under
Section 623 of the NYBCL.
If you previously had voted by proxy to approve the Watkins
transaction, you may revoke the proxy before it is voted by:
o delivering a written notice of revocation to the President of
REXX;
o executing a new proxy and presenting it to the President of
REXX prior to the annual meeting; or
o attending the annual meeting in person and voting against the
Watkins transaction.
You may not dissent as to less than all of your shares of REXX common
stock as which you have a right of dissent. A nominee or fiduciary may not
dissent on behalf of any beneficial owner as to less than all shares of REXX
common stock held on behalf of the owner, as to which this nominee or fiduciary
has a right to dissent. Furthermore, if the shares of REXX common stock are
owned of record in a fiduciary capacity, by a trustee, guardian or custodian,
the demand should be made in that capacity, and if the shares of REXX common
stock are owned of record by more than one person, as in a joint tenancy or
tenancy in common, the demand should be made by or for all owners of record. An
authorized agent, including one of two or more joint owners, may execute the
demand for appraisal for a holder of record; this agent, however, must identify
the record owner or owners and expressly state in this demand that the agent is
acting as agent for the record owner or owners of these shares.
All notices of election to dissent should be addressed to REXX at
445 Park Avenue, New York, New York 10022, Attention: President.
If the Watkins transaction is approved at the annual meeting by a vote
of the shareholders, REXX must, within ten days after the authorization, give
written notice of the authorization, by registered mail, to each dissenting
shareholder who timely filed a written objection to the Watkins transaction, or
from whom written notice of objection was not required because the shareholder
did not receive proper notice of the annual meeting, unless the shareholder
voted to approve the Watkins transaction. REXX shareholders from whom written
notice of objection was not required and who elect to dissent must file a
written notice of this election within twenty days after notice of approval of
the Watkins transaction. The notice must state the shareholder's name and
residence address, the number and class of shares as to which the shareholder
dissents and a demand for payment of the fair value of these shares.
At the time of filing a notice of election to dissent, or within one
month thereafter, you must submit the certificates representing your shares of
REXX common stock to REXX's transfer agent; the transfer agent, in turn, shall
then note conspicuously thereon that a notice of election to dissent has been
filed and shall return the certificates to you. Failure to timely submit the
certificates will result in the loss of your appraisal rights, unless otherwise
directed by a court after a showing to the court of good cause.
53
<PAGE>
Within fifteen days after the expiration of the period within which
dissenting shareholders are required to file their notices of election to
dissent, or within fifteen days after the date of completion of the Watkins
transaction, whichever is later, but in no event later than ninety days from the
date of the annual meeting at which the shareholders' vote to authorize the
Watkins transaction is taken, REXX shall make a written offer by registered
mail, which, if the Watkins transaction has not been completed within ninety
days after the date of the annual meeting, may be conditioned upon the
completion, to each dissenting shareholder who has filed a notice of election to
dissent, to pay for the dissenting shareholder's shares of REXX common stock at
a specified price which REXX considers to be the "fair value" thereof. This
offer shall be made at the same price per share to all dissenting shareholders.
If within thirty days after the making of this offer, REXX and any dissenting
shareholder agree upon the price to be paid for the shareholder's shares,
payment therefor shall be made within sixty days after the making of this offer
or the date of completion of the Watkins transaction, whichever is later, upon
the surrender of the certificates representing the dissenting shareholder's
shares of REXX common stock.
If REXX fails to make this offer within a period of fifteen days, or if
it makes this offer and any dissenting shareholder fails to agree with REXX
within the period of thirty days thereafter as to the price to be paid for the
shareholder's shares of REXX common stock, REXX must, within twenty days after
the expiration of the fifteen or thirty day period, as the case may be,
institute a special proceeding in the appropriate New York State court to
determine the rights of the dissenting shareholders and to fix the "fair value"
of their shares of REXX common stock. If REXX does not institute this proceeding
within the statutory time period, any dissenting shareholder may institute a
proceeding for the same purpose not later than thirty days after the expiration
of this period. If this proceeding is not instituted within the thirty day
period, all dissenters' rights will be lost, unless the court otherwise directs.
All dissenting shareholders, other than those who agreed with REXX as
to the price to be paid for their shares of REXX common stock, will be made
parties to the appraisal proceeding. The court shall fix the value of the shares
of REXX common stock which shall be the "fair value" as of the close of business
on the day prior to the date of the annual meeting. Within sixty days after the
final determination of the court proceeding, REXX will be required to pay to
each dissenting shareholder the amount found to be due to the shareholder, with
interest thereon from the date on which the Watkins transaction was approved by
the REXX shareholders to the date of payment, at a rate the court finds to be
equitable, upon surrender of the certificates representing the shareholder's
shares of REXX common stock. If the court finds that the refusal of any
dissenting shareholder to accept an offer of payment by REXX was arbitrary,
vexatious or otherwise not in good faith, no interest will be allowed the
shareholder.
Any dissenting shareholder who has filed a notice of election to
dissent will not, after the date of completion of the Watkins transaction, have
any of the rights of a shareholder with respect to the dissenting shareholder's
shares of REXX common stock, other than the right to be paid the "fair value"
for such shares under the NYBCL. Any notice of election to dissent may be
withdrawn by a dissenting shareholder at any time prior to the shareholder's
acceptance in writing of any offer of payment by REXX, but no withdrawal may be
made later than sixty days after the date of completion of the Watkins
transaction or, if REXX fails to make a timely offer to pay the shareholder the
"fair value" of the dissenting shareholder's shares of REXX common stock, at any
time within sixty days after any date on which an offer is made, or thereafter
with the written consent of REXX.
Any REXX shareholder contemplating the exercise of appraisal rights is
urged to review carefully the provisions of Section 623 of the NYBCL. Failure of
any shareholder to follow precisely and timely all of the steps required by
Section 623 of the NYBCL for perfecting appraisal rights will result in the loss
of these rights by the shareholder.
54
<PAGE>
Interests of Certain Persons in Matters to be Acted Upon
Pursuant to the terms of the Watkins agreement, REXX will sell to Greg
S. Watkins and a permitted assignee of Daren J. Barone all of the shares of
Watkins common stock presently owned by REXX. Messrs. Watkins and Barone were
the individuals from whom REXX acquired Watkins in October 1997. The purchase
price paid by REXX, among other consideration, was $3,600,000 in cash and
400,000 shares of REXX common stock. In addition, Messrs. Watkins and Barone are
executive officers of Watkins and, in these positions, have had the opportunity
to assess the causes for Watkins' recent losses and the future opportunities for
Watkins.
REXX believes that the terms of the Watkins agreement are no less
favorable to REXX than terms which could have been obtained from an unaffiliated
third party.
Required Vote
Under New York law, the affirmative vote of the holders of an aggregate
of 1,645,051 shares, constituting two-thirds of all outstanding shares entitled
to vote at the annual meeting, is required to approve the Watkins transaction.
On the record date, Arthur L. Asch, Chairman of the Board and Chief Executive
Officer of REXX, owned 371,051 shares of REXX common stock and Michael A. Asch,
President, Chief Operating Officer, Treasurer, Chief Financial Officer and a
director of REXX, owned 50,000 shares of REXX common stock, individually, and
26,000 shares of REXX common stock, as custodian for his minor children. Messrs.
A. and M. Asch have each agreed to vote all of their aggregate 447,051 shares of
REXX common stock for approval of the Watkins transaction pursuant to individual
shareholders voting agreements entered into with each of the buyers, and Tari
Watkins, as trustee under the Tari M. Watkins Revocable Trust, dated March 27,
1998. Ms. Watkins is the former spouse of one of the buyers. On the record date,
Hilltop Investment Co., Inc., an assignee of Mr. Barone, owned 200,000 shares of
REXX common stock, Mr. Watkins owned 100,000 shares of REXX common stock and the
trust owned 100,000 shares of REXX common stock.
The buyers and the trust have also each agreed to vote their aggregate
400,000 shares of REXX common stock, and have granted Messrs. A. and M. Asch
proxies to vote these shares, for approval of the Watkins transaction pursuant
to the shareholders agreement. Accordingly, an aggregate 847,051 shares of REXX
common stock are committed to vote for approval of the Watkins transaction. In
addition, James L. Hochfelder, a director of REXX, and the spouses and a
relative of Messrs. A. and M. Asch, who owned an aggregate 100,000 shares of
REXX common stock on the record date have indicated to REXX that they each
intend to vote for approval of the Watkins transaction. Thus, a total of 947,051
shares of REXX common stock, or approximately 38% of the shares entitled to vote
at the annual meeting, are either committed or likely to vote for approval of
the Watkins transaction.
Recommendation of the Board of Directors
The board of directors of REXX has determined that the Watkins
transaction is in the best interests of REXX and the REXX shareholders and is
fair to the REXX shareholders, has unanimously approved the Watkins transaction
and unanimously recommends that the REXX shareholders vote "FOR" approval of the
Watkins transaction.
55
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
REXX Environmental Corporation
Unaudited Condensed Consolidated Pro Forma Statements of Operations
The following unaudited condensed consolidated pro forma statements of
operations for the year ended December 31, 1999 and the three months ended March
31, 2000 give effect to the proposed sale of Watkins Contracting, Inc. as if the
sale had been consummated on January 1, 1999 and January 1, 2000, respectively.
These unaudited condensed consolidated pro forma statements and notes thereto
should be read in conjunction with the historical consolidated financial
statements and notes thereto, incorporated by reference in this proxy
statement/prospectus. These unaudited condensed consolidated pro forma
statements of operations are not necessarily indicative of the results that
actually would have been achieved if the proposed sale had taken place on the
dates indicated or which may be obtained in the future. The historical
statements of operations and these unaudited condensed consolidated pro forma
statements of operations do not reflect the gain or loss, if any, attributable
to the sale of Watkins.
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
Year Ended December 31, 1999
-----------------------------------------------------------------
Pro Forma Adjustments
-----------------------------------------------------------------
Pro Forma
Historical Continuing
Consolidated Debit Credit Operations
------------ --------- -------- ----------
<S> <C> <C> <C>
Revenues $ 15,895 $ 15,895 (a) -- $ --
Cost of construction 12,874 -- $ 12,874 (a) --
-------- --------- -------- ---------
Gross profit 3,021 15,895 12,874 --
Operating expenses 3,433 -- 2,622 (a) 600
211 (b)
-------- --------- -------- ---------
Loss from operations (412) 15,895 15,707 (600)
Other expenses (income):
Interest expense 253 -- 211 (a) --
42 (c)
Other expense 62 -- 62 (a) --
-------- --------- -------- ---------
Loss before provision for taxes (727) 15,895 16,022 (600)
Provision for taxes 9 -- -- 9
-------- --------- -------- ---------
Net loss $ (736) $ 15,895 $ 16,022 $ (609)
======== ========= ======== =========
Per share data:
Basic and diluted $ (0.30) $ (0.26)
========= ==========
Weighted average number of
shares outstanding -
basic and diluted 2,467,576 2,467,576
</TABLE>
See Notes to Unaudited Condensed Consolidated
Pro Forma Statements of Operations
56
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
Three Months Ended March 31, 2000
--------------------------------------------------------------------
Pro Forma Adjustments Pro Forma
Historical --------------------- Continuing
Consolidated Debit Credit Operations
------------ --------- -------- ----------
<S> <C> <C> <C> <C>
Revenues $ 4,007 $ 4,007 (a) -- $ --
Cost of construction 3,082 -- $ 3,082 (a) --
-------- --------- -------- ---------
Gross profit 925 4,007 3,082 --
Operating expenses 841 -- 602 (a) 186
53 (b)
-------- --------- -------- ---------
Income (loss) from operations 84 4,007 3,737 (186)
Other expenses (income):
Interest expense 62 -- 45 (a) --
17 (c)
Other expense 35 -- 35 (a) --
-------- --------- -------- ---------
Loss before provision for taxes (13) 4,007 3,799 (186)
Provision for taxes -- -- -- --
-------- --------- -------- ---------
Net loss $ (13) $ 4,007 $ 3,799 $ (186)
======== ========= ========= =========
Per share data:
Basic and diluted $ (0.01) $ (0.08)
======== =========
Weighted average number of
shares outstanding -
basic and diluted 2,467,576 2,467,576
</TABLE>
See Notes to Unaudited Condensed Consolidated
Pro Forma Statements of Operations
57
<PAGE>
REXX Environmental Corporation
Notes to Condensed Consolidated Pro Forma Statements of Operations
A description of pro forma adjustments follows:
(a) Eliminates the historical results of Watkins.
(b) Eliminates the amortization of goodwill associated with Watkins.
(c) If the Watkins transaction had been consummated on January 1, 1999 or
January 1, 2000, the proceeds from the sale would have been sufficient
to eliminate the debt on REXX's balance sheet at those dates.
Accordingly, this adjustment eliminates the historical interest expense
incurred in connection with that debt. No interest or investment
earnings have been imputed on excess cash generated by the transaction.
58
<PAGE>
REXX Environmental Corporation
Unaudited Condensed Consolidated Pro Forma Balance Sheet
The following unaudited condensed consolidated pro forma balance sheet as of
March 31, 2000 gives effect to the proposed sale of Watkins Contracting, Inc. as
if the sale had been consummated on March 31, 2000, the date of the balance
sheet presented. The unaudited condensed consolidated pro forma balance sheet
and notes thereto should be read in conjunction with the historical consolidated
balance sheets and notes thereto, incorporated by reference in this proxy
statement/prospectus. The unaudited condensed consolidated pro forma balance
sheet is not necessarily indicative of the financial position that actually
would have resulted if the proposed sale had taken place on March 31, 2000 or
which may result in the future. (In thousands, except share and per share data)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
Historical ------------------------- Continuing
Consolidated Debit Credit Operations
------------ --------- -------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 574 $ 1,472 (a) $ 563 (a) $397
300 (a)
786 (b)
Accounts receivable - net 3,399 -- 3,399 (a) --
Costs in excess of billings 594 -- 594 (a) --
Assets held for sale 780 -- 780
Other current assets 170 -- 99 (a) 71
------- ---------- -------- --------
Total current assets 5,517 1,472 5,741 1,248
Property and equipment - net 1,476 -- 1,463 (a) 13
Goodwill 2,650 -- 2,650 (a) --
Other assets 36 -- 36 (a) --
-------- ---------- -------- ---------
$ 9,679 $ 1,472 $ 9,890 $ 1,261
======== ========== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 627 $ 221 (a) $ -- $ --
406 (b)
Notes payable - bank 1,592 1,212 (a) -- --
380 (b)
Accounts payable 1,320 1,320 (a) -- --
Billings in excess of costs 809 809 (a) -- --
Accrued expenses 851 523 (a) -- 328
Income taxes payable 88 -- 88
-------- ---------- -------- ---------
Total current liabilities 5,287 4,871 -- 416
-------- ---------- -------- ---------
Long-term debt - net of current portion 498 498 (a) -- --
-------- ---------- -------- ---------
Shareholders' equity:
Preferred stock, $1.00 par value,
authorized 1,000,000 shares; -0-
shares issued
Common stock, $.02 par value,
authorized 12,000,000 shares;
5,279,828 shares issued 105 -- -- 105
Capital in excess of par value 27,925 -- -- 27,925
Accumulated deficit (7,128) 3,049 (a) -- (10,177)
Common stock held in treasury,
at cost (2,812,252 shares) (17,008) -- -- (17,008)
-------- ---------- -------- ---------
Total shareholders' equity 3,894 3,049 -- 845
-------- ---------- -------- --------
$ 9,679 $ 8,418 $ -- $ 1,261
======== ========== ======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Pro Forma Balance Sheet
59
<PAGE>
REXX Environmental Corporation
Notes to Unaudited Condensed Consolidated Pro Forma Balance Sheet
A description of the pro forma adjustments follows:
(a) Reflects the proposed sale of Watkins Contracting, Inc. and the costs
and expenses associated with the Watkins Transaction. See the Stock
Purchase Agreement included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
<S> <C>
Cash consideration to be received $ 1,300
Additional cash consideration to be received 172
---------
Total consideration to be received 1,472
Net assets (liabilities) to be sold to (assumed by) the purchaser:
Cash and cash equivalents $ 563
Accounts receivable - net 3,399
Costs in excess of billings 594
Other current assets 99
Property and equipment - net 1,463
Other assets 36
Current portion of long-term debt (221)
Notes payable to bank (1,212)
Accounts payable (1,320)
Billings in excess of costs (809)
Accrued expenses (523)
Long-term debt (498)
----------
(1,571)
Costs and expenses related to the proposed sale:
Elimination of goodwill related to Watkins Contracting, Inc. 2,650
Transaction costs 300
----------
(2,950)
Loss on proposed transaction $ (3,049)
==========
</TABLE>
The net assets (liabilities) to be sold (assumed) are shown as
if the proposed transaction had been consummated on March 31, 2000. The
actual net assets (liabilities) to be sold to (assumed) by the
purchasers at the closing of the proposed transaction may differ from
those shown above.
(b) Adjustments to record the use of proceeds from the proposed transaction
to reduce REXX's debt.
60
<PAGE>
PROPOSAL NUMBER 3 - ADOPTION OF THE NEWTEK/REXX MERGER AGREEMENT
THE MERGERS
The following chart shows the structure of Whitestone and REXX after
the proposed mergers. Entities inside dotted lines will disappear following the
mergers; BJB Holdings, Inc. and REXX Environmental Corporation will be
wholly-owned direct subsidiaries of Newtek Capital, Inc.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
---------------------------------------------
| |
| Newtek Capital, Inc. |
| |
---------------------------------------------
| | 100%
| 100% |
-------------- -------------- -------------- --------------
| BJB Holdings,| | Whitestone | | REXX | | REXX |
| Inc. | --------| Acquisition | | Acquisition |------>|Environmental |
-------------- | Corp. | | Corp. | | Corp. |
| | -------------- -------------- --------------
| |
| -------------
100% | 100% |
-------------- --------------
| Wilshire | | Wilshire |
| Holdings I, | | Holdings II, | ----------------------------------------------------------------------
| Inc. | | Inc. | | |
-------------- -------------- | |
| | | | |
| ---------------------------------------------- | |
| | | | | |
| | 100% | 75% | 100% | 1% |
| -------------- -------------- -------------- | |
| | Wilshire | | Wilshire | | The | | |
| | Advisers, | | Partners, | | Whitestone | | |
| | LLC | | LLC | | Group | | |
| -------------- -------------- -------------- | |
| | | |
| | -------------- |
| | 99% | Wilshire NY | |
| |------------------------| Partners III | |
| | | LLCp | |
| | -------------- |
| ---------------------------------------------------------------------- |
------------------------- | | | | | |
1% | | 99% | 65% | 100% | 96.5% | | 1%
-------------- -------------- -------------- | --------------
| Wilshire NY | | Wilshire | | Whitestone | | 49% | Wilshire |
| Advisers II, | | Investors, | | Capital | | | Louisiana |
| LLC | | LLC | | Markets, Inc.| | --| Advisers, |
-------------- -------------- -------------- | | | LLC |
| | --------------
| 51% |
--------------
| Wilshire |
| Louisiana |
| Partbers II, |
| LLC |
--------------
</TABLE>
61
<PAGE>
THE NEWTEK/REXX AND NEWTEK/BJB HOLDINGS MERGER AGREEMENTS
The following discusses the material information pertaining to the
Newtek/REXX and Newtek/BJB Holdings mergers. The discussion constitutes a
summary of the material terms of the mergers and is qualified by the more
detailed Appendices to this document which are incorporated in this section by
reference, including the Newtek/REXX merger agreement in Appendix B. We urge you
to read the Newtek/REXX merger agreement in its entirety.
The Newtek/REXX Merger
This merger agreement provides for a transaction in which REXX
Acquisition Corp. will merge into REXX and REXX will become a wholly-owned
subsidiary of Newtek. At the effective time of the Newtek/REXX merger, each
share of issued and outstanding REXX common stock will cease to be outstanding
and will be converted into the right to receive one share of Newtek common
stock.
Background of the Newtek/REXX Merger
As part of REXX's initial strategy to expand Watkins' asbestos
abatement, demolition and dismantling businesses, REXX's management met with
numerous third parties beginning in 1998 seeking acquisition candidates or other
means to increase Watkins' market share in the southern California area and to
open opportunities in other regions. Due to a net loss for the fourth quarter of
1998, which resulted in a net loss for the 1998 fiscal year, REXX management
believed that Watkins' value, and, thereby, REXX's value, decreased in the
perception of any acquisition target which REXX had previously identified. In
addition, financing for acquisitions was not available on terms acceptable to
REXX, if at all. REXX management ceased seeking external growth opportunities
for Watkins' business through acquisitions or the opening of additional regional
offices by February 1999.
As discussions commenced with third parties regarding the possible sale
of Watkins, REXX management began seeking a business combination with an entity
engaged in an industry other than the industries in which Watkins operates, with
a view towards enhancing shareholder value following the possible sale of
Watkins including possible transactions which would enable the acquirer to
derive value from REXX's net operating loss carryforwards. REXX management kept
the individual REXX directors advised of their searches and updated the full
board of directors at the board's March 17, 1999 meeting. The REXX board was
further advised that any business combination would likely entail a substantial
dilution to the REXX shareholders.
On March 19, 1999, the directors were advised of preliminary
discussions with two companies and were given summaries of these companies'
business plans. Subsequently, REXX management continued its due diligence
reviews of these companies. Neither company was executing their business plan on
a schedule that had been previously been presented to REXX management. Further
discussions with these companies revealed that neither of these companies were
appropriate business combination candidates for REXX.
In late March 1999, Michael A. Asch, President, Chief Operating Officer
and a director of REXX, initiated a conversation with Brian A. Wasserman, a REXX
director, concerning a possible merger involving REXX and the asset management,
merchant banking and financial advisory and consulting business which Mr.
Wasserman and his associates were developing. While not then in existence, the
consolidation of these businesses will be accomplished with the BJB/WAC merger
and for clarity are referred to herein as the Newtek businesses. Mr. Wasserman
advised Mr. M. Asch that this discussion would be premature, as he and his
associates were involved in several transactions that were close to being
consummated and, therefore, required them to devote their full attention to
these transactions.
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In April 1999, REXX held discussions with a development-stage company
intending to operate a health, fitness and nutrition products and services
discount card membership program. A non-binding preliminary understanding was
reached and publicly announced by REXX on May 13, 1999. REXX continued its due
diligence review of this company and the company's financing and business plan
following the public announcement. A presentation was made to REXX's board of
directors by REXX management and officers and representatives of the company at
the board's May 19, 1999 meeting. In the weeks following the May 19, 1999 board
meeting, this company underwent various changes to its business plan, personnel,
corporate structure and financing. Despite these changes, REXX continued holding
discussions with this company. However, negotiations relating to the structure,
pricing and documentation of the potential business combination proceeded slower
than anticipated due to changes at this company. As a result, REXX management
continued their search for an appropriate business combination candidate.
During May 1999, REXX management continued to explore various potential
transactions. However, REXX's capital constraints, the focus on selling Watkins
and potential environmental issues were impediments to definitive negotiations
with possible business combination candidates.
In May 1999, REXX management commenced acquisition discussions with
another third party. This acquisition by REXX would have required bridge
financing of at least $2,000,000, permanent acquisition financing of
approximately $1,000,000 plus working capital financing. This acquisition target
was a wholly-owned subsidiary of a Canadian company which was under the control
of a trustee under the bankruptcy laws of Canada. The REXX board of directors,
which had been informally advised of progress of the acquisition discussions,
was provided further information on this acquisition target prior to its July 6,
1999 meeting. At the meeting, the board discussed the business, prospects and
financial condition of the acquisition target and directed that a thorough due
diligence review be conducted by REXX management prior to any further
discussion. REXX management experienced great difficulty in attracting lenders
to provide the necessary bridge financing and permanent debt financing for the
transaction. Some lenders expressed concern that the funding of the loans and
the acquisition of the target company were to occur prior to the sale of Watkins
and, therefore, these lenders might incur certain environmental risks associated
with REXX's ownership of Watkins. In addition, REXX's management met with the
trustee in bankruptcy administering the sale of the target on behalf of the
bankrupt parent, and believed that the price REXX would consider paying for the
target would not be acceptable to the trustee. REXX management later learned
that a bid was accepted by the trustee which was significantly in excess of the
price REXX management was prepared to recommend to the board.
In late May 1999, Brian Wasserman telephoned Michael Asch to discuss
again a possible combination between REXX and the Newtek businesses developed by
Mr. Wasserman and his associates. Following several informal conversations
between Messrs. Wasserman and M. Asch, REXX management participated in a
conference call with Mr. Wasserman and Jeffrey Rubin on May 26, 1999. Messrs.
Wasserman and Rubin explained Newtek's various business segments in greater
detail and described their plans to form a broker-dealer focusing on private
placements conducted via a website. Initially Messrs. Wasserman and Rubin
proposed a business combination which would have excluded Newtek's existing
certified capital companies, which were owned, at the time, by Messrs. Wasserman
and Rubin along with their associate, Barry Sloane. REXX management informed
Messrs. Wasserman and Rubin that the transaction would be significantly more
attractive to REXX if the existing certified capital companies were included in
any potential business combination. This issue was the subject of continued
discussions between May 26, and early June, 1999.
On June 10, 1999, REXX management received a call from Newtek
management to report that they were prepared to commence negotiations with REXX
on the terms of a proposed business combination, and on June 14, 1999, Jeffrey
Rubin telephoned Arthur and Michael Asch and negotiations began in earnest. From
June 14, to June 16, 1999, several conversations between Mr. Rubin and Messrs.
A. and M. Asch continued the negotiations, which included discussions of
exchange ratios, employment and compensation issues for the Newtek principals
and the various manners in which Newtek could include certain minority
shareholders in a proposed transaction. Informal due diligence discussions
followed and, on June 21, 1999, REXX and Newtek began exchanging due diligence
documents.
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<PAGE>
On June 23, 1999, REXX and Newtek management agreed to proceed with
discussions for a business combination between these two entities, discussed
conversion ratios and requested their attorneys to commence preparing the
necessary documentation.
On June 30, 1999, REXX management provided the REXX board of directors
with information packages which included business summaries, preliminary
financial statements, a private placement memorandum for one of the capcos and a
preliminary summary of transaction terms.
REXX management updated the status of negotiating with Newtek to the
REXX board of directors at the board's July 6, 1999 meeting. The REXX board was
also informed that the structure of the transaction, as then contemplated, would
result in REXX issuing shares of REXX common stock. Brian A. Wasserman, a
founder and the Chief Financial Officer and Treasurer of Newtek as well as
director of REXX, excused himself from the board meeting. The board then
discussed this proposed transaction as then contemplated, together with the
business and financial condition of Newtek and its affiliates. The board then
invited Mr. Wasserman and Jeffrey Rubin, President of Newtek, to address the
board. Messrs. Wasserman and Rubin summarized their backgrounds and business
experience. They also explained the statutory requirements for qualifying and
operating as a certified capital company in the various states in which Newtek
had or intended to operate through its subsidiaries. They further disclosed
their plans for these capcos, other businesses within the Newtek group of
affiliated companies and the focus of the business upon the growth of
investments in high technology related businesses with particular emphasis on
internet related businesses.
Barry Sloane, a founder and the Chairman of the Board and Chief
Executive Officer of Newtek, addressed the entire REXX board at its July 7, 1999
meeting. Mr. Sloane described his background, business experience and role in
selling securities of Wilshire Advisers and Wilshire Partners to various
insurance companies. He reviewed the entities competitive positions in the two
states in which they operated and the capitalization of Newtek and its
affiliated companies. The board then reviewed and analyzed Newtek and its
individual affiliated companies.
Between July 9, and July 15, 1999, management of REXX and Newtek
determined that the transaction should be structured whereby REXX would merge
into a wholly-owned subsidiary of Newtek, with this subsidiary being the
surviving corporation, based primarily on environmental liability and corporate
law considerations. On July 26, 1999, it was determined to have this subsidiary
merge into REXX, with REXX being the surviving entity, and for other structural
changes so as to avail REXX and Newtek and their respective equity owners of the
provisions of Sections 351 and 353 of the Code. In this manner, the transaction
would not be recognized for federal income tax purposes.
Between July 26, 1999 and August 4, 1999, merger agreement drafts were
circulated between REXX and Newtek. The parties also held various discussions
and negotiation sessions in connection with the revised merger agreement.
On August 5, 1999, Newtek delivered to REXX draft employment and bonus
agreements to be entered into between Newtek and its proposed management team
following completion of the Newtek/REXX merger. Copies of these agreements were
provided to the REXX board of directors prior to its August 16, 1999 meeting.
On August 16, 1999, the REXX board of directors held a special meeting.
At this special meeting, with Brian Wasserman excusing himself from any part of
the discussion of the transaction, the REXX board reviewed the draft merger
agreement and certain financial data and accounting adjustments and other
financial information relating to Newtek. Following a review and lengthy
discussions, the REXX board authorized REXX officers to execute an agreement
containing the terms and provisions that are contained in the merger agreement.
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<PAGE>
On August 23, 24, and 25, 1999, REXX management updated the REXX board
of directors as to developments in Newtek's and management's research concerning
Newtek's financial statements' presentation and other financial and accounting
treatment issues.
During the period of September through mid-November, REXX management
and Newtek representatives continued to discuss various matters related to the
structure of Newtek and its business to result from the proposed merger. In
particular, due to the developments in the expansion of Newtek's business,
Newtek requested and REXX agreed to a reformulation of the exchange ratio for
the to be issued Newtek stock, with the effect that current REXX shareholders
would receive one share of Newtek common stock for each share of REXX common
stock, or 2,467,576 shares, and the BJB Holdings shareholders will receive a
total 18,514,285 million shares. This will result in a pro forma distribution of
approximately 12% to the former REXX shareholders and 88% to the former BJB
Holdings shareholders, primarily Messrs. Rubin, Sloane and Wasserman.
During the period of late August through October 1999, two Newtek
subsidiaries completed their organization and capitalization as certified
capital companies in the states of Louisiana and Wisconsin. Agreements were
negotiated and executed between these subsidiaries and seven institutional
investors in Louisiana, and nine institutional investors in Wisconsin, for total
securities offerings of $18,240,000 and $17,650,000, respectively. These
negotiations placed significant time limitations on Newtek management and,
partially due to these other activities, discussions with REXX were delayed. In
October, attention was again focused on the REXX transaction, resulting in
revision of the proposed employment agreements to be entered into between Newtek
and Messrs. Rubin, Sloane and Wasserman. In addition, three management services
agreements were prepared by Newtek and delivered to REXX to address services to
be provided by one of the Newtek subsidiaries, The Whitestone Group, LLC, to
companies owned and controlled by each of Messrs. Rubin, Sloane and Wasserman.
During the period from mid-November through early December 1999, REXX
management, Newtek representatives and their legal counsel revised, discussed
and finalized the merger documents which were executed on December 9, 1999. The
basic terms of the merger agreement, in addition to standard representations,
warranties and conditions to closing, are limited to the structure as a
stock-for-stock transaction and the exchange ratio, or relative price to be
assigned to the REXX assets and the Newtek assets and continuing businesses.
Given Newtek's objective of developing greater access to the capital markets to
facilitate the expansion of its business, a cash purchase of REXX would have
been counter productive. Once this requirement had been accepted for discussion
purposes by the REXX representatives in the merger discussions, considerable
attention was given to the valuation and business potential of Newtek as a basis
for establishing a fair and proper exchange ratio.
With respect to REXX, management representatives were able to project
with reasonable certainty the cash resources and few other assets which would be
present following the sale of Watkins. On March 31, 2000, on a pro forma basis
giving effect to the sale of Watkins, REXX had shareholders' equity of $845,000
and a loss for the three months then ended of $186,000. For their part,
representatives of Newtek stressed the results of operations to that point in
the history of the company and explained the projected results of operations and
expansion plans through year end 1999. Newtek would later report for the year
ended December 31, 1999 net income of $5,394,708 and equity of $8,251,351. The
merger discussions between representatives of REXX and Newtek occurred in a
number of face to face meetings and telephone conferences and continued over an
extended period from approximately May 26, 1999 to November 30, 1999. During
this period, in addition to raising an additional $35.9 million from insurance
companies for use in its capcos, Newtek was also able to demonstrate the
expansion of its ability to identify and acquire interests in new businesses
with high growth potential. It became apparent to both REXX and Newtek that
Newtek's business and projected financial results were improving, while REXX's
financial position had limited opportunities for improvement and some risk of
financial dilution. Despite the widening gap in the estimated financial position
of the two companies as of December 31, 1999 and thereafter, the parties agreed
that REXX's shareholder base and American Stock Exchange listing would be
valuable to Newtek and that REXX's shareholders should receive a larger
percentage of the combined company than REXX's relative earnings and equity
would suggest. Based on these discussions the parties were able to arrive at a
consensus as to the exchange ratio reflected in the merger agreement.
65
<PAGE>
Reasons of REXX for the Newtek/REXX Merger
In reaching its determination to approve the Newtek/REXX merger
agreement and to recommend to REXX shareholders that they adopt the agreement,
REXX's board consulted with REXX's management as well as its legal advisors and
considered a number of factors, including:
o Changing the strategic focus of REXX after concluding that
growth in Watkins' business operations cannot be achieved due
in large part to Watkins' and REXX's:
o operating losses;
o inability to obtain additional operating financing or
acquisition financing; and
o inability to obtain bid and performance bond
underwriting on acceptable terms.
o A review of the possible alternatives to the merger,
including:
o continuing to operate REXX as an independent entity;
o various potential strategic acquisitions and the
possible benefits of each alternative to REXX
shareholders; and
o the timing and likelihood of actually accomplishing
these alternatives.
o A review of the terms of the merger agreement.
In addition to the factors noted above, the REXX board considered the
following factors in its determination to approve the Newtek/REXX merger:
o the relatively high degree of risk associated with Newtek's
business plan which focuses on developing, operating and
investing in early-stage, high-growth, technology and internet
related businesses;
o the presence of approximately $15 million in net operating
loss carryforwards available to REXX following the Watkins
transaction and the means by which value might be derived from
these carryforwards;
o the effect of the possible delisting of REXX common stock
following the Watkins sale;
o Newtek's success in organizing its certified capital
companies, and its ability to raise significant funds from
insurance company investors for these capcos;
o the management and financial experience of Newtek's principals
in operating and investing in small and medium size, high
growth, early stage companies on a fee and equity basis;
o the business plan of Newtek to expand the certified capital
company aspect of its business as well as in related advisory
services;
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<PAGE>
o the opportunity to position Newtek/REXX to raise additional
equity or debt capital for future growth and development after
the sale of the Watkins business; and
o Newtek's management will be significant shareholders of Newtek
and their interest in Newtek's success will be closely aligned
with the interests of Newtek and its shareholders.
The above discussion of factors considered by the REXX board is not
intended to be exhaustive but includes all material factors considered by the
REXX board. In reaching the determination to approve the Newtek/REXX merger
agreement and recommend its adoption to REXX shareholders, the REXX board did
not assign any relative or specific weights to the various factors considered by
it; however, individual members of the REXX board may have assigned differing
weights to different factors. Brian Wasserman, a director of REXX since 1997,
and also one of the three controlling shareholders of Newtek, did not
participate in any of the deliberations of the REXX board regarding the merger.
The REXX board believes that the merger is in the best interests of
REXX and its shareholders. It unanimously, without the participation of Mr.
Wasserman, approved the merger and recommends that shareholders vote "FOR" the
Newtek/REXX merger. The REXX board believes that the Newtek/REXX merger will
enable shareholders to realize significant future value on a tax-free basis and
also will enable shareholders to acquire a more liquid stock in a financially
strong organization.
Reasons of Newtek for the Newtek/REXX Merger
The management and shareholders of Newtek initially determined to
proceed with exploratory discussions with REXX management due to the opportunity
presented to Newtek for a relatively expedited procedure for placing Newtek in a
form that would permit it to have access to the public capital markets. The
previous business of Newtek, conducted through various of its subsidiaries, as
well as the experience of its management, had demonstrated that the growth and
prosperity of Newtek's business would benefit from ready access to capital
markets and from the availability of a liquid and widely traded stock. Current
business plans of Newtek contemplate the expansion of both the business
development and the certified capital company aspects of its business. The
opportunity to join with REXX, following its divestiture of the Watkins
environmental remediation business, presented the opportunity to position
Newtek, its shareholders and those of REXX, so as to be able to raise as
necessary and with a minimum of difficulty, time and expense, equity or debt
capital as may be needed for the future growth and development of the Newtek
business.
Because of the role which Brian A. Wasserman, a principal management
official of Newtek and one of its primary shareholders, has played as a director
of REXX since 1997, he was familiar with issues related to the Watkins
transaction and, in particular, the manner in which REXX had been managed.
Newtek saw REXX as a company that, aside from Watkins and its associated
environmental liability and financial issues, presented little if any potential
for future problems. The results of the due diligence investigation conducted by
Newtek confirmed this conclusion.
In particular, management of Newtek conducted a legal review of the
liability insurance held by Watkins and REXX, the terms of the policies, the
absence of involvement of REXX in the environmental remediation business of
Watkins, and the legal liability potentially attributable to a parent
corporation, such as REXX or Newtek, for the environmental liabilities of a
subsidiary. Management of Newtek concluded that Newtek's exposure to loss, which
might not be covered by insurance, resulting from any currently known and
potential future environmental liability of Watkins, was sufficiently contained
and limited. In addition, management directed that additional steps be taken to
adjust the structure of the proposed combination of Newtek and REXX so as to
improve the degree of Newtek's post-transaction liability protection. There can
be no assurances, however, that any other environmental liability may not be
asserted against REXX or Newtek after the merger.
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The management of Newtek determined that the combination with REXX,
pursuant to the terms of the Newtek/REXX merger agreement would present Newtek
with a desirable way in which to facilitate the growth and profitability of its
businesses.
Effective Time of the Newtek/REXX Merger
The Newtek/REXX merger will be consummated if Newtek and REXX obtain
all required consents and approvals including that of the REXX shareholders, and
satisfy the other conditions to the obligations of the parties to consummate the
merger. The Newtek/REXX merger will become effective on the date and at the time
that a certificate of merger reflecting the merger is filed with the Secretary
of State of New York, or a later date or time that is indicated in the
certificate and articles.
Distribution of Newtek Certificates
Within three business days of the effective date, an agent of Newtek
will send transmittal materials to shareholders for use in exchanging
certificates representing shares of REXX common stock for shares of Newtek
common stock.
REXX shareholders should not surrender stock certificates for exchange
until they receive the letter of transmittal and instructions.
Newtek will deliver certificates for Newtek common stock once it
receives the REXX common stock certificates. No party will be liable to any
former REXX shareholder for any amount properly delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
Newtek is not required to pay any dividends or other distributions on
Newtek common stock with a record date occurring after the effective time to any
holder who has not exchanged certificates for Newtek common stock. Holders of
unexchanged REXX certificates will not be eligible to vote until those
certificates are exchanged for Newtek common stock certificates. All paid
dividends and other distributions and a check for any amount representing
fractional shares will be delivered to each shareholder who has exchanged
certificates, in each case without interest.
There will be no transfers of shares of REXX common stock on REXX stock
transfer books after the effective time. REXX common stock certificates
presented for transfer after the effective time will be canceled and exchanged
for Newtek common stock certificates.
Fractional Shares
Newtek will not pay cash in lieu of or issue any fractional shares of
Newtek common stock. Instead, shareholders will receive one additional share of
Newtek common stock for any fractional share they would be entitled to.
Shareholders will not be entitled to dividends, voting rights or any other
shareholder rights with respect to any fractional shares.
Termination, Amendment and Waiver
The Newtek/REXX merger agreement may be terminated at any time prior to
the effective time:
o by mutual written consent of REXX and Newtek; or
o by either non-breaching party if either party breaches or
fails to perform in any material respect any of its
representations, warranties, covenants or other agreements
contained in the agreement which is incapable of being cured
by either party or is not cured within 45 days of written
notice thereof;
o if the REXX shareholders fail to approve the merger agreement;
o if the Newtek common stock shall fail to be approved for
listing on the AMEX or Nasdaq Stock Market;
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<PAGE>
o if the WCI sale is not consummated; or
o if REXX does not distribute all assets and file all required
tax returns for its current defined contribution plans.
Newtek may modify the merger agreement prior to the effective time, and
REXX has generally agreed to any modifications, as long as:
o the consideration paid to REXX shareholders is not reduced;
o the modifications are not likely to cause a material delay or
jeopardize the receipt of any required regulatory clearances;
and
o the modifications will not effect the tax-deferred treatment
expected for the exchange by the REXX shareholders.
Termination Fee
If the Newtek/REXX merger agreement is terminated by Newtek because
REXX shareholders did not approve the merger, REXX will pay Newtek up to $85,000
for its actual and reasonable expenses, including reasonable attorney's fees,
incurred in connection with the merger.
Expenses and Fees
REXX will pay its costs and expenses associated with the Newtek/REXX
merger including:
o fees and expenses of its legal counsel;
o accountant and financial advisor's fees;
o costs and expenses of filing the proxy statement with the SEC;
and
o printing and mailing the proxy statement to its shareholders.
Newtek will pay its costs and expenses associated with the Newtek/REXX
merger including:
o fees and expenses of its legal counsel;
o accountants and financial advisor's fees; and
o costs and expenses of filing the registration statement with
the SEC.
Accounting Treatment
Newtek will account for the Newtek/REXX merger as a "purchase," as that
term is used under generally accepted accounting principles. The assets and
liabilities of REXX as of the effective time will be recorded at their
respective fair values and added to those of Newtek. Financial statements of
Newtek issued after the effective time would reflect these values and would not
be restated retroactively to reflect the historical financial position or
results of operations of REXX.
Stock Exchange Listing of Newtek Common Stock; Delisting and Deregistration
of REXX Common Stock
Newtek has agreed to use its reasonable best efforts to list the shares
of Newtek common stock to be issued to the holders of REXX common stock in the
Newtek/REXX merger on the American Stock Exchange or Nasdaq Stock Market before
the effective date. On May 25, 2000, the American Stock Exchange approved
Newtek's application for the listing of its common stock.
REXX common stock is currently listed on the American Stock Exchange
under the symbol "REX." See "Price Range of REXX Common Stock and Dividends."
Upon completion of the Newtek/REXX merger, REXX common stock will be delisted
from the American Stock Exchange and deregistered under the Securities Exchange
Act of 1934.
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<PAGE>
Resales of Newtek Common Stock
The shares of Newtek common stock to be issued in the Newtek/REXX and
Newtek/BJB Holdings mergers will be freely transferable under the Securities Act
of 1933. However, this will not be the case for shares issued to any shareholder
who may be deemed to be an "affiliate" of REXX or BJB Holdings for purposes of
Rule 145 under the Securities Act as of the date of the annual meeting.
"Affiliates" generally include directors, certain executive officers, and
beneficial owners of 10% or more of any class of capital stock. These affiliates
may not sell their shares of Newtek common stock acquired in the Newtek/REXX or
Newtek/BJB Holdings mergers except pursuant to an effective registration
statement under the securities law or other applicable securities law exemption
from the registration requirements. Newtek may place restrictive legends on
certificates representing Newtek common stock issued to all persons who are
deemed to be "affiliates" of REXX and BJB Holdings under Rule 145.
Treatment of Outstanding REXX Options
At the effective time, each outstanding option to purchase shares of
REXX pursuant to its stock option plan will be converted into an option to
purchase Newtek common stock. The new option allows its holder to acquire a
number of Newtek shares of common stock equal to the number of REXX shares of
common stock subject to the REXX stock option. The exercise price per share will
be equal to the per share exercise price under each REXX option and will not be
adjusted for the additional shares issued in connection with the Newtek/REXX and
Newtek/BJB Holdings mergers. The other terms and conditions for the purchase of
these options are also identical to those applicable under the REXX plan.
The Newtek/BJB Holdings Merger
Newtek has formed a wholly-owned subsidiary, Whitestone Acquisition
Corp., to merge into BJB Holdings to occur simultaneously with the closing of
the REXX merger. BJB Holdings is owned almost entirely by Jeffrey G. Rubin,
Brian A. Wasserman and Barry Sloane. In exchange for all the outstanding equity
securities of BJB Holdings, shareholders of BJB Holdings will receive 18,514,285
shares of Newtek common stock, which will represent approximately 88% of the
outstanding shares following the merger. Messrs. Rubin, Wasserman and Sloane own
and control 94% of BJB Holdings and this will result in control of approximately
83% of the outstanding shares of Newtek. On April 5, 2000, the board of
directors of BJB Holdings adopted an incentive stock plan and awarded options
for approximately 750,000 shares of BJB stock, which options will be assumed
under Newtek's 2000 Stock Incentive and Deferred Compensation Plan.
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Additional Share Issuance
Following the consummation of the REXX and Newtek mergers, management
of Newtek expects to raise additional capital or issue additional shares of
common stock.
Two individuals each loaned $125,000 to the Newtek subsidiaries in
exchange for a promissory note payable in 12-15 months at 6-7% interest. The
notes may be satisfied, at the holders' option, with shares of BJB Holdings
common stock. It is expected that these individuals will exercise their rights
to acquire up to 250,000 shares of BJB Holdings common stock before the
completion of the Newtek/REXX merger, which will thereafter be exchanged for an
equal number of Newtek shares. In addition, during the first five months of
2000, BJB Holdings privately placed a total of 264,285 shares of its common
stock with four persons to raise funds for general corporate purposes. Both of
the foregoing issuances have been reflected in all pro forma share calculations
in this proxy statement/prospectus.
In addition, Newtek management has held extensive discussions with a
number of securities underwriters with a view to undertaking a private placement
of up to 3.5 million shares of Newtek common stock with primarily institutional
investors. One firm has been identified as the likely lead manager of the
placement. This placement is conditioned upon the Newtek/REXX merger and would,
if concluded, likely occur within 90 days of the completion of the REXX merger
and would obligate Newtek to maintain an effective registration statement
covering the resale by these investors of the stock until the time when resale
restrictions on the stock expire. Capital raised though this private investment
would be used for additional investments in partner companies and other
investments and, to a lesser extent, for general corporate purposes. As of the
date of this proxy/prospectus, no agreements have been entered into by BJB
Holdings and no assurance is given that the transaction will occur, or if it
does, at what point in time or at what price for the shares to be issued. Any
additional share issuances will result in further dilution to Newtek's current
and future shareholders.
Newtek presently intends to explore within the next year the
possibility of the exchange of the outstanding warrants for equity interests in
its capcos held by the insurance company investors for warrants or capital stock
of Newtek. The ratio for an exchange would be subject to market conditions for
the Newtek stock at the time and negotiation with the insurance companies.
Newtek is also presently considering various transactions for the
acquisition of additional partner companies which may result in the issuance of
options by Newtek, either in exchange for previously issued BJB Holdings options
or directly in transactions following the completion of the mergers. Only one
transaction is currently in active negotiation, and this would result in the
issuance of options to acquire up to 85,000 BJB Holdings shares. These options,
if granted, would be assumed by Newtek after the merger. Any such additional
shares would represent additional possible dilution to Newtek's current and
future shareholders.
INFORMATION ABOUT NEWTEK CAPITAL, INC.
The following description of Newtek's business assumes that the
Newtek/BJB Holdings merger has occurred.
Overview and Business Strategy
Newtek's business originated in 1998 in the organization and operation
of what are now five certified capital companies (or "capcos"), which Newtek has
sponsored and are described below. From 1998 through late 1999, the business of
Newtek has focused on the deployment of these capco funds and the receipt of
related tax credit income also described below. In this process, the owners of
Newtek have determined that the capcos provide a base for the structuring,
development and acquisition of further businesses, particularly early-stage,
technology-oriented companies focused on Internet related commerce, or
"e-commerce." Since the last quarter of 1999, Newtek has been working to expand
its business development activities, and its goal is to be a premier business
partner for its partner companies by helping them implement their business
strategies in a manner consistent with Newtek's objectives. Through the capco
programs and otherwise, Newtek is in the early stages of operation as a holding
company for a network of partner companies in a collaborative and coordinated
effort to develop successful businesses in a number of emerging, technological
areas.
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The management of Newtek believes that there will be substantial growth
in business-to-business e-commerce and that this creates significant market
opportunities for well positioned, managed and funded emerging companies. Many
new companies, including spin-outs from traditional businesses, are currently
being formed and funded to develop technologies and solutions to support the new
business-to-business e-commerce market. Business-to-business solutions are being
rapidly adopted to facilitate the continuous exchange of information among
business partners, to large customer audiences, and to allow businesses to
interact more efficiently with suppliers, distributors, and service providers.
Newtek, through its network of partner companies, is participating in this
industry.
To date, the majority of Newtek's acquisitions and other business
development efforts have been undertaken through the capcos which Newtek
controls. As of March 31, 2000, Newtek had provided business development
services, including in some cases funding, for 14 companies, of which 4 are
majority owned or primarily controlled and represent approximately, on a fair
market value basis, 68% of its investments, other than Government securities.
See "Newtek Capital, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Certified Capital Companies
Overview. A capco is a "certified capital company," either a
corporation or a limited liability company, established in and chartered by one
of the five states currently with authorizing legislation (Florida, Louisiana,
Missouri, New York and Wisconsin). A capco will issue debt and equity
instruments exclusively to insurance companies, and the capcos then are
authorized, under the respective state statutes, to make targeted acquisitions
of interests in companies which may be majority owned or primarily controlled by
the capcos after the acquisition is consummated. For a description of the debt
instruments and warrants issued by the Newtek capcos, see "Newtek Capital, Inc.
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Notes 7 and 8 of Notes to Combined Financial Statements.
The Role of Capcos in Newtek's Business Strategy. Management of Newtek
has determined that the features of the capco programs facilitate the use of the
capco funds in the support of its development as the holding company for a
network of collaborative businesses focused on technology and e-commerce. For
example, the business plan for a capco in the State of Louisiana must contain a
mission statement described as follows.
"The mission statement shall state that the [capco's] purpose is to
encourage and assist in the creation, development, and expansion of
Louisiana businesses and to provide maximum opportunities for the
employment of Louisiana residents, by making equity investments, or
financing assistance as a licensed [capco], available to Qualified
Louisiana Businesses as stated under [applicable statutes]."
The authorizing statutes in each of the states in which Newtek operates
explicitly allow and encourage the capcos to take equity interests, which may
include majority or controlling interests, in companies pursuant to the
programs. Consequently, Newtek may, consistent with its business objectives,
acquire interests in companies through its capcos and provide management and
other services to these companies as parts of its collaborative network. Newtek
intends the interests of each of its capcos to consist mainly of interests in
majority owned or primarily controlled partner companies, as it does currently
with a substantial majority of its placed funds.
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The Capco Programs; Tax Credits. In return for making investments in
the targeted companies, the states provide tax credits which are available for
use by insurance companies that provide the funds to the capcos to reduce the
insurance companies' state tax liabilities. In order to maintain its status as a
capco, and to avoid the recapture or forfeiture of the tax credits, each capco
must meet a number of specific investment requirements, including a minimum
investment schedule. A final loss of capco status, that is decertification as a
capco, results in loss or possible recapture of the tax credit. The agreements
entered into by Newtek's capcos with their funding insurance companies provide,
in the event of decertification, for payments by the capco or, as described
below, by the capco insurer to the insurance companies in the nature of
compensatory payments to replace the lost tax credit. Investment Requirements.
Each of the state capco programs has a requirement that a capco, in order to
maintain its certified status, must meet certain investment benchmarks. For
example, the capco must invest at least 25% of its "certified capital" (the
amount of the original funding of the capco by the insurance companies) by 24
months from the initial investment date, and 40% by 36 months and 50% by 60
months. The various states, which administer these programs through their
insurance, banking or commerce departments, conduct periodic reviews and on site
examinations of the capcos in order to verify that the capcos have met
applicable investment requirements and are otherwise acting in conformance with
the statutes and rules. Requirements include limitations on the initial size of
the recipients of the capco funds, including the number of their employees, the
location within the respective state of the recipients and the recipients'
commitment to remain therein for a specified period of time, the types of
business conducted by the recipients (which generally exclude real estate,
financial services, and professional services such as medical or legal
practices), and the terms of the investments in the recipients. All of the capco
programs permit the capcos to take majority or controlling interests in
companies or joint ventures, as Newtek has done and intends to continue to do in
appropriate situations consistent with its strategy to invest in or acquire
companies which add to its collaborative network. Capcos are required to
maintain detailed records so as to demonstrate to state examiners compliance
with all applicable requirements.
Capco Insurance. Under the terms of the insurance purchased by the
capcos for the benefit of their insurance company investors, the capco insurer
assumes the obligation to repay the insurance companies the principal amount of
their debt as well as make compensatory payments in the event of a loss of the
availability of the related tax credits. The capco insurer, an international
insurance company with a AAA credit rating, would be authorized, in the event of
a threat of or final decertification by a state, to assume partial or complete
control of the business of the capco so as to ensure compliance with investment
requirements or other requirements. This would likely avoid final
decertification and the necessity of insurance or interest payments. However,
control by the insurer would also result in significant disruption of the
capco's business and likely result in significant financial loss to the capco.
Decertification would also likely impair Newtek's ability to obtain
certification for capcos in additional states as legislation makes other
opportunities available. In order to address this risk of decertification, which
may be eliminated entirely in all states in which Newtek now operates by meeting
a 100% of capital investment threshold, Newtek has structured its investment
program as aggressively as is consistent with safe and sound operations to meet
the investment benchmarks as early as possible. As of March 31, 2000, the two
capcos with the longest operating histories, New York and Florida, were
approximately three months and nine months, respectively, ahead of schedule in
meeting the five-year minimum investment schedules. The detail of these
investments is set out in the Notes to Newtek's financial statements, which are
included with this proxy statement/prospectus.
On March 20, 2000, Newtek established its latest capco, Wilshire New
York Advisors II, LLC. This company received $7.6 million of funding from seven
insurance companies during the second quarter of 2000. In July 2000, Newtek also
established Wilshire New York Partners III, LLC to participate in a third New
York capco program, and Wilshire Louisiana Partners II, LLC to participate in a
second Louisiana capco program. If completed, Newtek's sixth and seventh capcos
will likely be funded during the fourth quarter of 2000.
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Newtek's Ability to Compete. Newtek's capcos have competed in their
offerings with the four or five other capcos sponsored by various national
financial organizations as well as those locally sponsored companies in one or
another state. Newtek's management believes it has been successful in raising
funds because of:
o the manner in which it has structured the participation by the
insurance companies;
o the insurance which it has been able to obtain to cover the
loss of the tax credits and the obligation to repay principal;
o the previous business experience of its principals;
o the national marketing of its product; and
o the extensive contacts which its management has as a result of
previous experience in the financial community.
Newtek has structured these securities as debt instruments and warrants
for participation in the equity of the particular capco. The warrants issued by
each capco entitle the holders to between 4% and 20% of the equity of the
particular capco at a nominal exercise price. The warrants have a 10 year term
but are not exercisable for 5 years from issue and presently are not
exchangeable for any securities other than the particular capcos. The warrants
do not provide for any control over the capcos' operations; any such control by
an insurance company would be in violation of the state capco statutes.
These capco programs are, in the view of Newtek's management, a
complement to Newtek's long-term strategy to develop and hold a majority
position in or control of early-stage companies principally focused on
technology, particularly the Internet and e-commerce. A significant factor in
evaluating potential acquisition opportunities is a candidate's ability to
support and help other partner company operations. All current capco statutes
permit equity as well as debt investments, and seek to have the capco management
provide more than simply investment capital to the emerging businesses in the
state. Based upon the experience of it management, Newtek determined early in
the operations of the capcos that the targeted new and small businesses required
much more than just the funds available in the capcos. These businesses also
require and Newtek has provided administrative, managerial, technical, legal and
financial management help in structuring and building the businesses. All three
of the principal shareholders of Newtek have direct and in-depth experience with
early-stage businesses. This hands-on management approach of Newtek facilitates
the accomplishment of the general objectives of the capco programs of economic
development, while at the same time permitting Newtek, through its capcos, to
develop a network of long-term and synergistic investments in related, partner
companies.
Partner Companies
Majority owned or Primarily Controlled Partner Companies. Newtek refers
to its "partner companies" as those companies of which it owns 50% or more of
the outstanding voting securities, or "majority-owned partner companies," and
those companies of which it owns more than 25%-49% of the outstanding
securities, and exercises more control over the company than any other
shareholder, or "primarily controlled partner companies." Newtek provides its
partner companies business development services, funding and active
participation in management. However, Newtek does not act as an agent or legal
representative for any of its partner companies, Newtek does not have the power
or authority to bind them legally, and Newtek generally does not have the types
of liabilities for its partner companies that a general partner of a partnership
would have.
At March 31, 2000, Newtek had three majority owned partner companies,
all of which were as a result of investments through the capco programs. These
companies were BizBrokerNet, LLC, Merchant Data Systems Sales & Marketing, LLC
and DTE Technologies, LLC and represent a total investment as of March 31, 2000
of $7,500,000. In addition, Newtek considers its interest in CB Real Net, LLC to
be a primarily controlled partner company. Newtek contributed $2,500,000 to CB
Real Net, LLC during the quarter ended March 31, 2000. In addition to these four
partner companies, at March 31, 2000, Newtek had six other qualified investments
which were not partner companies and which represented a total investment of
$2,486,000. All qualified capco investments at March 31, 2000 totaled
$12,487,000.
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The following tables set forth unaudited revenue, expense and net loss
information for the fiscal year ended December 31, 1999, the three months ended
March 31, 2000 and the six months ended June 30, 2000 for each of BizBroker Net,
LLC, Merchant Data Systems Sales and Marketing, LLC, DTE Technologies, LLC and
CB Real Net, LLC.
<TABLE>
<CAPTION>
Biz Broker Net, LLC
-----------------------------------------------------------------------------------
Year Ended Three Months Ended Six Months Ended
December 31, 1999 March 31, 2000 June 30, 2000
----------------- -------------- -------------
<S> <C> <C> <C>
Revenue $ -- $ -- $ 68,014
Expenses -- 46,594 76,285
----------- --------- ----------
Net loss $ -- $ (46,594) $ (8,271)
=========== ========= ==========
Merchant Data Systems
Sales and Marketing, LLC
------------------- -----------------------------------------------------------------------------------
Year Ended Three Months Ended Six Months Ended
December 31, 1999 March 31, 2000 June 30, 2000
----------------- -------------- -------------
<S> <C> <C> <C>
Revenue $ 36,549 $ 57,317 $ 113,151
Expenses 129,575 15,907 207,521
--------- --------- ---------
Net loss $ (93,026) $ (100,590) $ (94,370)
=========== ========== ==========
DTE Technologies, LLC
------------------------- --------------------------------------------------------------------------------------------
Jan. 1-Dec. 15, Dec. 16-Dec. 31, Three Months Ended Six Months Ended
1999 1999 March 31, 2000 June 30, 2000
---------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 410,220 $ 20,992 $ 174,772 $ 429,030
Expenses 661,021 37,269 270,274 534,577
---------- -------- --------- ---------
Net loss $ (250,801) $ (16,277) $ (95,502) $ (105,547)
========== ========= ========== ==========
CB Real Net, LLC
------------------- -----------------------------------------------------------------------------------
Year Ended Three Months Ended Six Months Ended
December 31, 1999 March 31, 2000 June 30, 2000
----------------- -------------- -------------
<S> <C> <C> <C>
Revenue $ -- $ -- $ --
Expenses -- 32,000 86,489
----------- -------- ----------
Net loss $ -- $(32,000) $ (86,489)
=========== ======== ==========
</TABLE>
Newtek is not aware of any reason why its investments in the above
partner companies should have suffered a material decline in value since March
31, 2000.
For those partner companies in which Newtek's equity ownership and
voting power percentage is greater than 50%, Newtek will generally actively
direct much of their operating activities. For those partner companies in which
Newtek's equity ownership and voting power percentage is at least 25% but not
more than 50%, Newtek will generally have significant involvement in and
influence over their operating activities, including rights to participate in
material management decisions. For those companies in which Newtek's equity
ownership and voting power percentage is less than 25%, Newtek is generally not
actively involved in their management or day-to-day operations, but offers them
advisory services or assistance with particular projects, as well as the
collaborative services of its network of companies. In pursuing its revised
business objectives, Newtek intends to hold a decreasing portion of its total
assets in companies in which it has voting power less than 25%.
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Below is a description of Newtek's partner companies and the manner
which Newtek, its management and advisors have assisted them.
BizBrokerNet, LLC is based in south Florida and is a newly-organized
joint venture between Newtek's Florida capco and a business broker with 10 years
experience in providing acquisition and marketing assistance to small
businesses. Organized and funded in November 1999 in part with a $3.5 million
loan from Newtek's Florida capco to Transworld Business Brokers, Inc., a
co-joint venturer of BizBrokerNet, it is in the process of developing a number
of services to be marketed to business brokers and their small business clients
nationwide, which will bring e-commerce technology to an industry notably
without access to this technology today, and providing direct services in the
development and deployment of e-commerce tools to support the business broker
industry. Newtek participates directly in the day-to-day management of this
partner company, having appointed 2 of the 4 managers and actively assisted in
the screening and selection of key personnel. Newtek and its associates in this
business intend to participate in the operation of the business for the
foreseeable future to assist other partner companies in appropriate areas and to
benefit from the collaborative network.
Merchant Data Systems Sales & Marketing, LLC is also based in south
Florida and is a newly-organized joint venture between Newtek's Florida capco
and an established company providing credit card processing services to small
businesses. The newly-organized company was funded in October 1999 with $3.5
million from the capco and is focused on developing a means for the secure
processing of credit card transactions using e-commerce. Newtek has provided
assistance with the management of the technology development and the
negotiations with the financial institutions which will provide significant
related services. In addition, it has provided material support for the
development of a new marketing strategy focusing on e-commerce and in recruiting
personnel to implement the strategy. Newtek is assisting in the development of a
long-term, nationwide marketing program for this company.
DTE Technologies, LLC, which was named Down To Earth Distribution, Inc.
prior to its acquisition by Newtek, is an investment of $500,000 made in
December 1999 by Newtek's capco in Florida. This company, in which Newtek
personnel actively participate in assisting management, is developing the use of
Internet technology in the marketing of organic agricultural products to
large-scale agricultural and land owners. Newtek has provided significant
support in the design and implementation of financial management services,
product development, and the design of the e-commerce aspect of the marketing
program, and Newtek is currently assisting in the identification of additional
financing for the growth of the company. This investment is similarly intended
to be long-term.
CB Real Net, LLC is an investment of $2.5 million made in February 2000
by Newtek's Wisconsin capco. This company is considered a primarily controlled
partner company due to Newtek's ownership of 40% of the equity and day-to-day
participation in the management of the company. This company has a contract with
the franchiser of a real estate brokerage covering a multi-national market to
provide all "back office' administrative and technological support to the
franchiser and related services to the franchisees. Newtek is providing
significant support in administrative systems, financial management, executive
recruitment and technological design for CB Real Net's design and other areas,
as well as implementation of a major package of services for the franchiser
which will rely heavily on Internet technology.
Newtek is currently planning to add to these majority owned or
primarily controlled partner companies during 2000 at least three additional
companies which are expected to have significant potential to enhance the value
and results of the other partner companies. These are expected to be:
o an Internet website developer;
o an Internet-based advertising and media company; and
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o an online broker-dealer engaging in the placement of
investments with institutional and accredited investors
exclusively through Internet based services.
There are two prevailing themes in Newtek's philosophy for the
selection of partner companies. First, is to focus on the Internet and attempt
to integrate the technology into new areas of business which have thus far not
benefited in any meaningful fashion from the explosive growth of these
technologies over the past decade. The key to Newtek's selection process is an
effort to create opportunities for companies that embrace the new technologies
as well as companies that are innovators of the new technologies. Second, and of
equal importance, is the selection of companies which can provide goods or
services required for the success of the existing network of companies. In
particular, Newtek's acquisition of a website developer is expected to make
available to the other partners an important resource which is key to the
development of the partners' and Newtek's overall business strategy.
All of Newtek's partner companies either are in very early stages of
development or are small businesses. These companies will require material
resources, managerial strength and time to develop into profitable businesses.
Newtek does not now receive, nor does it expect to receive in the near future,
material revenue or profit from the operations of these companies. If the
companies succeed, it will take appreciable time for their shareholders and
Newtek's shareholders to see results.
Other Investments. Investments by Newtek that are not qualified
investments are classified as "other investments." At March 31, 2000, Newtek's
other investments were carried at their cost basis of $488,750. Included in
other investments is Newtek's interest in Envision Development Corporation at
its cost basis of $268,750. The Envision Development Corporation securities are
held by BizBrokerNet, LLC on behalf of Newtek for business advisory services
provided by Newtek to a third party. Newtek holds this asset as an other
investment. BizBrokerNet and Newtek entered into an agreement on January 12,
2000 whereby BizBrokerNet agreed to hold as record holder Newtek's 95%
beneficial interest in the securities received and to take no action with
respect to the securities, including specifically their disposition, except at
the direction or with the consent of Newtek. Under the agreement, Newtek may, at
its discretion, direct the transfer to it of its interest in the securities, at
which time the agreement will terminate. See "Newtek Capital, Inc. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
As Newtek pursues its business strategy and focuses on the acquisition
of majority or controlling positions in additional partner companies, it expects
other investments to comprise a shrinking portion of its overall income and
value. In addition, Newtek may to the extent possible increase its interests in
these companies so that it has an ownership interest sufficient to integrate
them within its network of partner companies. Alternatively, it may dispose of
some or all of the interests in other investments if, in the aggregate, they are
anticipated to constitute more than 30% of Newtek's non-consolidated total
assets (exclusive of Government securities and cash items) within the coming six
months. See "Government Regulation; Investment Company Act of 1940."
1-800 Gift Certificate (which recently changed its name to Incent One)
is a company which, while not a partner company as Newtek holds only a small
percentage of its equity, is a significant component of the Newtek network of
collaborative companies. This company designs and markets corporate incentive
and related gift programs, with particular focus on the e-commerce market.
Newtek personnel have provided material services to the company. In particular,
in order to complete a fulfillment arrangement with a national credit card
merchant, the company was required to qualify for and obtain material insurance
coverage. Newtek management personnel undertook this project on behalf of the
company and assisted in completing the transaction. Newtek views the company as
a potential key component of the marketing strategies of its current and future
partner companies.
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Execution; Regional Business Development Centers
A key to the implementation of Newtek's strategy is its emphasis on the
selection and developmental efforts of its existing five Regional Business
Development Centers, and three additional Centers Newtek currently plans to
establish within the next 18 months. These Regional Business Development Centers
have been and will continue to be placed in areas traditionally underserved by
business development firms, in areas away from "Silicon Valley" on the west
coast and "Silicon Alley" on the east coast. By focusing on these areas, Newtek
believes that it will locate the most favorable opportunities to create new and
innovative businesses. These offices are believed to be valuable because they
are staffed or associated with individuals with experience in working with small
business who are able to identify and evaluate potential partner companies and
other investments or acquisitions.
Once a company becomes associated with Newtek, it benefits not only
from access to financing that Newtek can make available or assist in finding,
but also from the synergistic business relationships among the other Newtek
partner companies, as well as the involvement of Newtek's senior management and
its Advisory Committee, all of whom have significant experience in meeting the
critical needs of early stage companies, including those in the fields of
technology, the Internet and e-commerce.
Newtek's regional management consists, in addition to the current
senior management based in New York, of the following six individuals.
Christopher Bauer, Wisconsin - Mr. Bauer has had over 28 years of
experience in commercial banking at Firstar Corporation, a $38 billion
diversified financial services company. For the last 10 years Mr. Bauer has
served as the President of Firstar Bank of Milwaukee. Firstar Bank of Milwaukee
is considered one of the region's leading banks in structuring and financing a
host of commercial products, including capital markets, structured finance,
mergers and acquisitions and venture equity investments, especially in small to
mid-ranged companies. Prior to serving as President, Mr. Bauer directed all
merger and acquisition activity for Firstar, following 15 years experience in
various capacities focused on consumer and small business banking. He was also a
director of the $10 million Wisconsin Venture Capital Fund, which assisted small
early-stage Wisconsin companies.
Charles W. Kearns, Wisconsin - Mr. Kearns has spent the last 16 years
working with both regional and national investment banking firms including E.F.
Hutton, Salomon Smith Barney, Cleary Gull, and B.C. Ziegler & Co. Mr. Kearns'
experience includes Manager of the Financial Institutions and Fixed Income
Departments, as well as serving on the Board of Directors at Cleary Gull. Mr.
Kearns is currently founder and Principal of Premier Financial Corporation, a
financial advisory firm. He has participated in raising venture capital for
several enterprises, including Internet and financial service companies, as well
as numerous private and public placements of debt and equity securities. Mr.
Kearns is also co-founder and owner of Klein Corporation, a manufacturing
company in the standby power industry.
Gregory L. Zink, Florida - Mr. Zink has been the investment advisor and
consultant to a private investment trust with assets in excess of $30,000,000.
Under Mr. Zink's management, the trust has invested in and operated a number of
early stage operating businesses, including start-ups such as Nautilus Group
Japan, Ltd., Heuristic Development Corp. (NASDAQ Symbol "IFIT") and Nekton
Diving Cruises, Inc. Mr. Zinc currently serves as Chief Operating Officer and
Director of Nautilus Group Japan, Ltd., President and Director of Heuristic
Development Corp. and previously served as the Chairman of the Board and Chief
Financial Officer of Nekton Diving Cruises, Inc. From April 1986 through March
1988, Mr. Zink was the Chief Financial Officer of Forway Industries, a
manufacturer of military spare parts. Mr. Zink was a Senior Consultant for
Touche Ross Consulting, providing various financial and "turn around" consulting
services from July 1983 through March 1986. From June 1979 through July 1981, he
participated in and completed the General Electric Company Financial Management
Program and held various finance and accounting positions.
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Jeff M. Schottenstein, Florida - During the past 30 years, Mr.
Schottenstein has been a Director of Schottenstein Investment, a diversified
investment holding company with $650 million in assets, Vice President of
Schottenstein Stores' Value City Stores Division (NYSE symbol VCD) and CEO of
Schottenstein Realty Company, which specializes in the investment and
restructuring of companies. Mr. Schottenstein has been involved in the
capitalization and restructuring of numerous retail enterprises, including
Weiboldts' Department Stores, Chicago, Illinois; Strauss Auto Parts, New York,
New York; Valley Fair Discount Stores, New Jersey; Steinbach Stores and others.
Along with his investors, Jeff Schottenstein has successfully acquired Bell
Supply Company (retail oil and gas equipment supply company based in Kilgore,
Texas) and Omni Exploration Company, the first successful Chapter 11
reorganization of an oil and gas service company in the United States.
F. Anderson Stone, Louisiana - Mr. Stone has more than 25 years of
institutional credit analysis and investment experience managing high-grade
public and private corporate, high yield public corporate, and mortgage-backed
fixed income; equity; limited partnership and alternative asset portfolios for
income and growth. Mr. Stone has held various life insurance investment
positions including Vice President, Corporate Securities at Pan-American Life
Insurance Company, and Senior Portfolio Manager at The Life Insurance Company of
Virginia and Second-Vice President-Investments at Shenandoah Life Insurance
Company. As a registered investment advisor and registered representative, he
has advised individuals and institutions in the formation and implementation of
portfolio strategies.
Russell Solomon, Louisiana - Mr. Solomon is the founder and President
of Solomon and Associates which concentrates on complex and unique litigation in
the areas of law including corporate, maritime, insurance, personal injury and
general business. Mr. Solomon was previously a founding member and managing
director of the law firm of Mcquaig and Solomon which exclusively represented
institutions such as K-Mart, Home Depot, General Motors Acceptance Corporation,
Orleans Lever Board, and numerous insurance companies such as Continental,
Boston Old Colony and Travelers. Mr. Solomon currently serves at the pleasure of
the Honorable Harry Connick, District Attorney For New Orleans, as a member of
the Board of Directors of the Voters Information League which is a political
organization and its stated purpose is to support any political measure that
will fight violent crime. Mr. Solomon is also a member of the Regional Board of
Directors of the Anti-Defamation League. Mr. Solomon is a member of the Tulane
University Law School faculty as an adjunct Professor of Law teaching trial
advocacy to third year law students. Born and raised in New Orleans, Louisiana,
Mr. Solomon went to Boston University School of Management and returned to
receive his law degree from Tulane University School of Law.
Newtek's Regional Business Development Centers are located as follows:
o Wisconsin o New York
--------- --------
1330 West Towne Square Road 845 Third Avenue, 8th Floor
Mequon, Wisconsin 53092 New York, New York 10022
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o Florida o New York II
------- -----------
1201 Brickell Avenue 1500 Hempstead Turnpike
Miami, Florida 33131 East Meadow, New York 11554
o Louisiana
228 St. Charles Street
New Orleans, Louisiana 70130
Newtek anticipates opening 3 new Regional Business Development Centers, probably
in conjunction with capcos in the states of Missouri and California and in
Albany, New York, prior to the end of 2001.
Advisory Committee
The Advisory Committee has been used as a direct extension of Newtek.
Advisory Committee members are a source of information and are used to focus on
specific technologies and industries where the highest level of sophistication
is required for business development. The Advisory Committee consists of
individuals from diverse backgrounds, but with specific knowledge regarding
different aspects of business development, technology and the Internet. Of the 8
current Advisory Committee members, 4 have been involved in e-commerce business
development and 2 are involved in the identification of management needs and
resources. The individuals include:
o David Simon - Director/Vice President, Business Development of
e-Citi/Citibank N.A.
o Hugh Crean - Vice President, Product Development of
Priceline.com
o Michael Balboni - New York State Senator
o Bruce Richards - President and Chief Executive Officer of
Marathon Asset Management Company
o Barry Simon - Vice President, Content Development - G.E. Small
Business.com
o Josh Grotstein - Former Division Executive/Vice President,
Commerce - e-Citi/Citibank N.A.
o Peter Fitzpatrick - Partner in Gunderson Partners, a global
executive search firm.
o Gary Goldstein - Chairman of The Whitney Group, a global
executive search firm.
These individuals were chosen because of their hands-on, line
management responsibility for the implementation of new business development in
e-commerce or their ability to provide advice or assistance in areas of
significant need to emerging businesses. Members of the Newtek Advisory
Committee have provided or are currently providing assistance in areas such as
the negotiation of a joint venture between a potential partner company and an
established Internet service provider, marketing analysis and advice to CB Real
Net, LLC and 1-800 Gift Certificate, and management recruitment assistance.
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Business Development Services
Essential to the success of any business venture is the formulation and
implementation of a sound business strategy. Newtek, through it senior
management, regional management, advisors and associated professionals, works
directly with its partner companies and other companies for which it provides
management, strategic planning, marketing and financing in order:
o to create and implement their business model;
o to recruit and locate key members for their senior management,
board of directors and board of advisors;
o to establish and coordinate strategic joint ventures in
distribution, marketing and finance;
o to reposition or augment existing platform companies with
e-commerce strategies;
o to coordinate and grow strategic relationships among all of
its partner companies;
o to offer its hands-on experience in all aspects of joint
venture and contract negotiation;
o to help secure additional financing;
o to identify and implement new technologies relying on the
Internet which can enhance the development of existing
businesses, including web site development; and
o to identify and implement marketing strategies which will
enable the developers of new technologies find acceptance for
their services among the partner companies or on a broader
basis.
Since its inception in 1998, and in addition to the resources in the
Regional Business Development Centers, Newtek has added personnel in various
employee or independent contractor capacities in order to meet the requirements
of serving its partner companies and other investments. At June 30, 2000, Newtek
had secured, in addition to its senior management, the services of 16
individuals in the areas of computer and Internet technology, financial
management, business management and analysis, contract finance and business
operations. While management of Newtek believes it has sufficient resources,
including the resources available through the Advisory Committee, for its
present needs, it is actively seeking to fill at least 3 additional positions to
supplement the services available. If Newtek is successful in adding a number of
additional partner companies to its network of companies, additional resources
are expected to be available for use by the network, but there will also be a
need to supplement the staff services which Newtek must provide.
Selection Strategies
In the selection of partner companies, Newtek relies on the contact
base and reputation of its management team and key professionals who represent
an aggregate of approximately 50 years providing various forms of assistance to
early stage businesses. The contacts and knowledge of the key personnel in the
Regional Business Development Centers are also valuable in identifying and
evaluating businesses with growth and profit potential. Newtek believes that
very attractive risk/reward ratios are found in partnering with very early stage
or start-up opportunities. which typically require investments in the range of
$300,000 to $5,000,000 increments, which fit well with the investment
limitations of the capco programs . Newtek seeks to apply its services at this
point in the development of the businesses and is able to assist in raising
additional financing as the companies meet or exceed their business plans and
expand their business goals and strategies. Newtek has developed and refined a
business selection strategy that emphasizes the following general principles:
o focusing on opportunities where companies show the potential
to develop into market leaders in rapidly growing industries;
o seeking to work with operations-oriented managers with
experience in industries in which they operate, and who have
previously succeeded in similar business endeavors, thereby
reducing the execution risk;
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o emphasizing low entry valuations and attractive acquisition
structures; and
o taking a pro-active approach to supporting the strategic
initiative, corporate development activities and financial
strategies of partner companies in order to maximize
shareholder value in both the short and long term. This
enables management of these companies to focus on what they do
best -- running the business with Newtek's support.
An important part of Newtek's strategy in selecting its partner
companies and in structuring investments in them is to rely on the skill and
judgment of its senior management. In particular, Newtek has adopted a committee
approach to investment or partner selection decisions, thereby tapping the
experience of all participants in the process. A key feature of Newtek's
decision-making process is its requirement that the selection of companies to
include within its collaborative network and other investments be made by the
senior management and the local participants in the involved Regional Business
Development Center. Newtek believes that this unanimity requirement ensures that
its decisions will continue to be well developed, sound and consensus oriented.
Government Regulation; Investment Company Act of 1940
Overview. Because of the nature of the business of Newtek in the period
ended in December 1999, and of the activities of Newtek's principal operating
company other than the capcos, The Whitestone Group, LLC, management of Newtek
has addressed the question of the application of the Investment Company Act of
1940, as amended, to the business of Newtek, both before and following the
proposed Newtek/REXX merger. As discussed below, the application of the
Investment Company Act to the business of Newtek would impose requirements and
limitations that are materially inconsistent with Newtek's current and intended
business strategy.
Companies that are publicly offered in the U.S. and which (1) are, or
hold themselves out as being, engaged primarily or proposing to engage primarily
in the business of investing, reinvesting or trading in securities, or (2) own
or hold investment securities exceeding 40% of the value of their total assets
(adjusted to exclude U.S. government securities and cash) and are engaged in the
business of investing, reinvesting, owning, holding or trading in securities,
are considered to be investment companies under the Investment Company Act.
Unless an exclusion from registration were available or obtained by grant of an
SEC order, these companies must register under this Act and, thus, become
subject to extensive regulation regarding several aspects of their operations.
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The SEC has adopted Rule 3a-1 that provides an exclusion from
registration as an investment company if a company meets both an asset and an
income test and is not otherwise primarily engaged in an investment company
business by, among other things, holding itself out to the public as such or by
taking controlling interests in companies with a view to realizing profits
through subsequent sales of these interests. A company satisfies the asset test
of Rule 3a-1 if it has no more than 45% of the value of its total assets
(adjusted to exclude U.S. government securities and cash) in the form of
securities other than interests in majority owned subsidiaries and companies
which it primarily and actively controls. A company satisfies the income test of
Rule 3a-1 if it has derived no more than 45% of its net income for its last four
fiscal quarters combined from securities other than interests in majority owned
subsidiaries and primarily and actively controlled companies.
Newtek's proposed business strategy and business activities at present
and subsequent to the REXX/Newtek merger involve taking mainly
majority-ownership and primary controlling interests in partner companies with a
view to participating actively in their management and development. Newtek
believes that this strategy and the scope of its business activities would not
cause it to fall within the definition of investment company or, if so, provide
it with a basis for an exclusion from the definition of investment company under
the Investment Company Act.
Asset and Income Composition. Newtek has determined that as of the end
of its most recent fiscal quarter, no more than 40% of the value of its total
assets (adjusted to exclude U.S. government securities and cash) consisted of
investment securities. The value of Newtek's holding of securities as of the
date, for purposes of the definition of investment company under the Investment
Company Act, consisted mainly of its interests in partner companies, which are
majority owned or primarily controlled subsidiaries of Newtek or its affiliated
companies. In addition, Newtek has determined that as of this date, no more than
45% of the value of its total assets (adjusted to exclude U.S. government
securities and cash) consisted of securities other than its interests in its
partner companies, and that for its most recent fiscal quarters, Newtek has not
derived more than 45% of its net income combined from securities other than its
interests in its partner companies. Consistent with Newtek's investment
strategy, Newtek intends to hold its interests in its partner companies
generally for the long-term, not with a view mainly to realize profits from
subsequent sales of interests in these companies.
The Investment and Valuation Committee has been directed by Newtek's
Board of Directors to monitor the value of Newtek's assets and the sources of
its income on at least a quarterly basis to ensure compliance with the
requirements of the Investment Company Act and rules.
To maintain compliance with Rule 3a-1, or otherwise to ensure that
Newtek does not fall within the definition of investment company, Newtek may be
unable to sell assets which Newtek would otherwise want to sell and may need to
sell assets which Newtek would otherwise want to retain. In addition, Newtek may
have to acquire additional income or loss generating assets that Newtek might
not otherwise have acquired and may need to forego opportunities to acquire
interests in attractive companies that might be important to its business
strategy. In addition, although Newtek's partner companies may be majority owned
subsidiaries or primarily controlled companies when Newtek acquires interests in
them, changes in the value of Newtek's interests in its partner companies and
the income/loss and revenue attributable to its partner companies could result
in these assets being treated as investment company assets.
"Holding Out" As An Investment Company. Notwithstanding the composition
of Newtek's assets or income, Newtek or any other company may be deemed to be an
investment company for purposes of the Investment Company Act as a result of the
manner in which it presents itself to the public and its shareholders. In
particular, public statements, securities filings or other actions may cause
Newtek or any other company to be perceived as an investment company regardless
of its asset and income composition. Because of the manner in which Newtek
originated, the structure of the capco funding, and the reduced but still
present activities related to previous venture capital approach of one of
Newtek's subsidiaries, management of Newtek has determined that the need exists
for a clear statement of the company's intent with respect to the Investment
Company Act. In June 2000, the Newtek Board of Directors adopted a resolution
stating, in part, that it is the determination of the Board that Newtek not be
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities, and that these activities may only be undertaken in a
manner consistent with the business strategy of Newtek to make its principal
business that of holding majority or primary controlling interests in a network
of early stage and emerging businesses focused on technology and e-commerce.
Management was directed to make periodic reports no less frequently than
quarterly as to the status of Newtek's operations and continued conformance with
the asset and income tests under the Investment Company Act and to determine and
take or recommend for Board approval actions necessary to maintain compliance,
including the acquisition or disposition of assets. A statement of intent by the
Board of Directors is not, however, dispositive of whether Newtek is "holding
out" as an investment company under the Investment Company Act.
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Consequences of Investment Company Regulation. Investment Company Act
regulations are inconsistent with Newtek's strategy of actively managing,
operating and promoting collaboration among its network of partner companies,
and it is not feasible for Newtek to operate its business as a registered
investment company. Newtek believes that because of the planned structure of
Newtek's interests in its partner companies and its business strategy, Newtek
will not be regulated under the Investment Company Act. However, Newtek cannot
assure you that the structure of its partner company interests and other
investments and its business strategy will preclude regulation under the
Investment Company Act, and Newtek may need to take specific actions which would
not otherwise be in its best interests to avoid such regulation.
If Newtek falls under the definition of an investment company, and is
unable to rely on an available exclusion or to obtain an order of the SEC
granting an exclusion, Newtek would have to register under the Investment
Company Act and comply with substantive requirements under the Investment
Company Act applicable to registered investment companies. These requirements
include:
o limitations on Newtek's ability to borrow;
o limitations on Newtek's capital structure;
o restrictions on acquisitions of interests in associated
companies;
o prohibitions on transactions with affiliates;
o restrictions on specific investments; and
o compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations.
These rules and regulations would significantly change Newtek's
operations and prevent Newtek from executing its business model.
Shareholder Value
Newtek's principal business objective is to promote longer-term
shareholder value for its shareholders and those of its partner companies. An
important component of the selection of each partner company by Newtek is an
analysis of the potential shareholder value that ultimately could be realized,
in most cases through a public offering of their stock. This enables management
and employees of the partner companies to realize the value they have created
and continue to create in the company, obtains an independent source of
financing for further growth and creates a valuable currency for making
strategic acquisitions. Following an initial public offering by a partner
company, Newtek generally expects to retain a majority or controlling interest
in the company and to benefit as a shareholder from the increased public company
value. While Newtek will continue to acquire interests in its partner companies
for long-term gain, and does not anticipate selling the interests in them in the
ordinary course of business, other than as part of the merger or sale of an
entire company, Newtek may, from time to time, undertake sales of its interests
when it believes the action to be in Newtek's and the shareholders' overall best
interests. Newtek's management has the experience and has taken an active role
in advising partner companies and others on strategies to maximize shareholder
value, including:
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o a public offering;
o joint ventures or merges with strategic partners;
o sales to financial buyers;
o recapitalization of the business;
o merger with a public company;
o private sale of an equity interest to investors; or
o a spin-off or sale of the company or individual business
segments.
Newtek's management has extensive experience with each of these techniques and
believes it will be of material assistance to its partner companies in selecting
and implementing the appropriate strategy.
Sources of Funding and Revenue
Funding. Since its inception, Newtek's source of funding and revenue
has been primarily derived from the creation and operation of certified capital
companies and, in particular, income generated by the tax credit aspect of the
capco programs. See "Newtek Capital, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations." For the foreseeable future,
Newtek anticipates that its funds for investment in partner companies will come
from:
o its own capital (including retained earnings);
o additional capital market financings; and
o funds provided through the capcos and other possible sources
of managed funds.
Newtek anticipates that, as a percentage of total funding, and relative
to current sources of funds including capcos, the amounts it invests
representing its own direct capital, will grow over time.
Revenue. Revenues to be derived from sources other than the capco
programs will be minimal until the partner company network has the time to
develop into profitable businesses. Newtek anticipates that additional revenue
will be derived from:
o retained earnings from its direct interests in partner
companies as well as the interests of partner companies held
by Newtek's capcos;
o market value gains from investments in partner companies, the
disposition of which are not anticipated to be made in the
ordinary course of Newtek's business; and
o fees and incentive participations from funds which are
invested for other institutions, such as investment advisory
fees paid to managers of private equity funds.
Newtek may determine to retain its interest in a partner company,
particularly one with publicly traded stock, despite an opportunity to make a
shorter-term gain if doing so would contribute to achievement of the company's
long-term strategy to develop its partner companies. Newtek does not view such
gains as a reliable or likely source of material revenue.
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Expanded Product and Service Offerings
Newtek intends to build on its demonstrated ability to introduce new
financial products and other services to meet partner company demands and
capitalize on market opportunities. For example, Newtek has responded to
solicitations for venture capital co-investment services by various governmental
agencies or pension fund management authorities and it intends to continue its
efforts to build its pool of investment capital and profit participations
income. These additional activities are anticipated to enhance the core strategy
of capco funding in the acquisition of partner companies by increasing capital,
exposure, experience and fee income.
Employees
As of March 31, 2000, Newtek employed a total of 22 people, of which 12
assist on an as-needed basis with the operation of capcos in Florida, Wisconsin
and Louisiana. Newtek believes its labor relations are good and none of its
employees are covered by a collective bargaining agreement.
Properties
Newtek maintains leased office space at 845 Third Avenue, 8th Floor,
New York, New York, 10022 and leases an additional office at 1500 Hempstead
Turnpike, East Meadow, New York. As of December 31, 1999 Newtek also leased
offices for the certified capital companies and other subsidiaries in the
following locations:
o Louisiana (1);
o Florida (1); and
o Wisconsin (1).
All office leases are on a month to month basis. Newtek believes that
its office space is satisfactory for its current needs.
Legal Proceedings
Newtek is not currently subject to any material legal proceedings.
Newtek may from time to time become a party to various legal proceedings arising
in the normal course of its business.
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NEWTEK CAPITAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited
financial statements of Newtek Capital, Inc. ("Newtek") for the period ended
December 31, 1998, for the year ended December 31, 1999 and for the three months
ended March 31, 1999 and 2000 and notes thereto included elsewhere in this proxy
statement/prospectus.
DECEMBER 31, 1999 AND 1998
Comparison of the Period March 17, 1998 (Commencement of Operations) to December
31, 1998 with year ended December 31, 1999
Newtek commenced operations on March 17, 1998. For the period March 17,
1998 to December 31, 1998, Newtek had gross revenues before interest income of
approximately $517,000 as compared to gross revenues before interest income of
approximately $11,092,411 for the year ended December 31, 1999. The increase in
revenue is primarily due to the recognition of approximately $10,964,000 of tax
credit revenues earned during the year ended December 31, 1999 reduced by a
decrease of approximately $310,000 in consulting revenues earned during the year
ended December 31, 1999 as compared to the period March 17, 1998 to December 31,
1998. See "Income from Capco Tax Credits" below for a description of Newtek's
revenue recognition policy. For the period March 17, 1998 to December 31, 1998,
Newtek had interest income of approximately $81,000 as compared to interest
income of approximately $790,000 for the year ended December 31, 1999. This
increase resulted from an increase in cash available for investment. For the
period March 17, 1998 to December 31, 1998, Newtek had operating expenses of
approximately $395,000 as compared to operating expenses of approximately
$1,421,000 for the year ended December 31, 1999. The increase in expenses for
the year ended in 1999 was due primarily to increases in operating overhead
relating to growth of Newtek's operations. Additionally, for the period March
17, 1998 to December 31, 1998, Newtek incurred interest expense of approximately
$160,000 as compared to $2,439,000 of interest expense for the year ended
December 31, 1999. This increase was primarily due to the interest expense
accrued relating to the issuance of debt securities and the capcos' obligations
for interest payments to the insurance company investors during the year ended
December 31, 1999.
Income from Capco Tax Credits
In general, the capcos issue debt and equity instruments, generally
warrants, to insurance company investors. For a description of the debt
instruments and warrants issued by the Newtek capcos, see Notes 7 and 8 of Notes
to Combined Financial Statements. The capcos then make targeted investments, as
defined under the respective state statutes, with the funds raised. Each capco
has a contractual arrangement with the particular state that legally entitles
the capco to receive (or, earn) tax credits from the state upon satisfying
quantified, defined investment percentage thresholds and time requirements. In
order for the capcos to maintain their state-issued certification, the capcos
must make targeted investments in accordance with these requirements, which
requirements are consistent with Newtek's overall business strategy of acquiring
controlling positions in a group of high growth early stage companies. Each
capco also has separate, contractual arrangements with the insurance company
investors obligating the capco to pay interest on the aforementioned debt
instruments. The capco may satisfy this interest obligation by delivering the
tax credits or paying cash. The capcos have the right to deliver the tax credits
to the insurance company investors. The insurance company investors have the
legal right to receive and use the tax credits and would, in turn, use these tax
credits to reduce their respective state tax liabilities in an amount usually
equal to 100% of their investments in the capcos. The tax credits can be
utilized over a ten-year period at a rate of 10% per year and in some instances
are transferable and can be carried forward.
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Following an application process, a state will notify a company that it
has been certified as a capco. The state then allocates an aggregate dollar
amount of tax credits to the capco. However, this amount is neither recognized
as income nor otherwise recorded in the financial statements since it has yet to
be earned by the capco. The capco is legally entitled to earn income related to
the tax credits upon satisfying defined investment percentage thresholds within
specified time requirements and corresponding non-recapture percentages. Each
statute requires that the capco invest a threshold percentage of its initial
funding in qualified businesses within the timeframes specified. As the capco
meets these requirements, it avoids grounds under the statute for its
disqualification for continued participation in the capco program. A
disqualification, or "decertification," of a capco results in a recapture of all
or a portion of the allocated tax credits; the proportion of the recapture is
reduced over time as the capco remains in general compliance with the program
rules and meets the progressively increasing investment benchmarks. As the capco
progresses in its investments in qualified businesses and, accordingly, places
an increasing proportion of the tax credits beyond recapture, it earns an amount
equal to the non-recapturable tax credits and records this amount as income,
with a corresponding asset called "credits in lieu of cash", on the balance
sheet.
The amount earned and recorded as income is determined by multiplying
the total amount of tax credits initially allocated to the capco by the
percentage of tax credits immune from recapture (the earned income percentage)
under the state statute. To the extent that the investment requirements are met
ahead of schedule, and the percentage of non-recapturable tax credits is
accelerated, the present value of the tax credit earned is recognized currently
and the asset, credits in lieu of cash, is accreted up to the amount of tax
credits available to the insurance company investors.
The total amount of tax credits allocated to each of the aforementioned
capcos, the required investment percentages, recapture percentages and related
earned income percentages, and pertinent dates are summarized as follows:
<TABLE>
<CAPTION>
The First to Occur
----------------------------
Investment Decertification Earned
State Total Tax Investment Benchmark Recapture Recapture Income
Capco Credits Allocated Benchmark Date Thresholds Percentage Percentage
----- ----------------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA $37,384,028 Prior to 20% 100% 0%
Wilshire 20% 12/31/00 After 20% before 30% 70% 30%
Partners (WP) 30% 12/31/01 After 30% before 40% 60% 40%
40% 12/31/02 After 40% before 50% 50% 50%
50% 12/31/03 After 50% 0% 100%
LOUISIANA $18,040,000 Prior to 30% 100% 0%
Wilshire LA 30% 10/14/02 After 30% before 50% 70% 30%
Advisers (WLA) 50% 10/14/04 After 50% 0% 100%
NEW YORK $ 2,673,797 Prior to 25% 100% 0%
Wilshire 25% 6/22/00 After 25% before 40% 85% 15%
Advisers (WA) 40% 6/22/01 After 40% before 50% 70% 30%
50% 6/22/02 After 50% 0% 100%
WISCONSIN $16,666,667 Prior to 30% 100% 0%
Wilshire 30% 10/25/02 After 30% before 50% 70% 30%
Investors (WI) 50% 10/25/04 After 50% 0% 100%
</TABLE>
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Under the various state capco provisions, there is a difference in the
amount of qualified investments made and the amount of income recognized by the
respective capcos upon satisfaction of the various benchmarks. The table below
relates the investments made, both as percentage of total funds and in dollar
amounts, to the income recognized as each benchmark is achieved. In all of these
programs, a majority of Newtek's income from the delivery of the tax credits
will be recognized no later than five years into the ten year programs.
<TABLE>
<CAPTION>
Allocated Investment Earned
State Tax Benchmark Income
Capco Credits Percent/Dollars Percent/Dollars
----- ------- --------------- ---------------
<S> <C> <C> <C>
FLORIDA
Wilshire $37,384,028 20% $7,476,806 30% $11,215,208
Partners (WP) 30% $11,215,208 40% $14,953,611
40% $14,953,611 50% $18,692,014
50% $18,692,014 100% $37,384,028
LOUISIANA
Wilshire LA $18,040,000 30% $5,412,000 30% $5,412,000
Advisers (WLA) 50% $9,020,000 100% $18,040,000
NEW YORK
Wilshire $2,673,797 25% $668,449 15% $401,070
Advisers (WA) 40% $1,069,519 30% $802,139
50% $1,336,899 100% $2,673,797
WISCONSIN
Wilshire $16,666,667 30% $5,000,000 30% $5,000,000
Investors (WI) 50% $8,333,334 100% $16,666,667
</TABLE>
During the year ended December 31, 1999, two capcos, WA (earned income
percentage of 15%) and WP (earned income percentage of 30%), satisfied the
initial investment benchmark and the related recapture percentage requirements
and, accordingly, earned a portion of the tax credits, aggregating approximately
$10,964,000 after applying a time value discount of $652,000 to the total earned
income amount of $11,616,000. See Note 9 of Notes to Combined Financial
Statements.
In April 2000, Newtek completed the organization and funding of
Wilshire New York Advisers II, LLC as a second capco located in New York State.
This capco raised a total of approximately $6,800,000 in debt funding in a
manner similar to that used in previous capco transactions. This capco has not
as yet made any investments in partner companies.
Liquidity and Capital Resources
During the period from March 17, 1998 to December 31, 1998 and the year
ended December 31, 1999, Newtek satisfied the cash requirements for its
operations principally through the following:
o the issuance of debt and equity securities;
o cash flows from consulting service operations;
o a loan from a bank;
o loans from employees; and
o capital contributions and loans from principal shareholders.
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These cash requirements consisted primarily of capital contributions
necessary in the organization of the certified capital companies and working
capital requirements.
During the year ended December 31, 1999, Newtek generated cash flow
principally from the following sources:
o the issuance of debt and equity securities to a total of
seventeen institutional investors, insurance companies doing
business in Florida, of approximately $39,231,000 in
conjunction with the capitalization of Wilshire Partners;
o the issuance of debt and equity securities to a total of nine
institutional investors, insurance companies doing business in
Wisconsin, of approximately $17,646,000 in conjunction with
the capitalization of Wilshire Investors;
o the issuance of debt and equity securities to a total of seven
institutional investors, insurance companies doing business in
Louisiana, of approximately $18,241,000 in conjunction with
the capitalization of Wilshire Louisiana Advisers;
o investment income of approximately $790,000 and investment
banking fees of approximately $129,000;
o bank borrowing of approximately $725,000 under a one year
revolving credit facility (maximum available credit under this
revolving credit facility is $750,000) bearing interest at the
prime rate plus 1/2 %;
o loans from consultants of $250,000;
o return of principal on investments at $250,000; and
o contributions from minority interest of $175,000.
This cash was primarily used to:
o purchase insurance coverage for the Florida Capco's
obligations for approximately $26,578,000;
o purchase insurance coverage for the Wisconsin Capco's
obligations for approximately $9,086,000;
o purchase insurance coverage for the Louisiana Capco's
obligations for approximately $9,176,000;
o acquire approximately $8,125,000 of interests in small or
early stage businesses;
o fund debt insurance costs of approximately $470,000 which
consisted primarily of professional fees;
o fund distributions to members of approximately $245,000; and
o fund working capital requirements of approximately $961,000.
For the period from March 17, 1998 (commencement of operations) to
December 31, 1998 Newtek generated cash flow primarily from:
o the issuance of debt and equity securities to one
institutional investor of approximately $2,700,000 in
conjunction with the capitalization of Wilshire Advisors, the
New York Capco;
o capital contributions of $1,100,000 by the principal
shareholders of Newtek;
o income of approximately $160,000 from investment income; and o
consulting fees of approximately $438,000.
The cash was primarily used to:
o provide initial capitalization of $500,000 to Wilshire
Advisers and initial capitalization of $600,000 to Wilshire
Partners;
o purchase insurance coverage for the New York Capco's
obligations for approximately $1,800,000;
o fund working capital requirements of approximately $395,000;
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<PAGE>
o invest $400,000 in small or early stage businesses; and
o fund deferred charges of approximately $56,000.
As of December 31, 1999, Newtek had $25,454,016 in cash of which
approximately $25,452,000 was restricted for use for capco activities including
Qualified Debt and Qualified Investments.
Newtek will have current working capital requirements associated with
operating its current businesses. It is Newtek's intention to acquire interest
in partner companies both through additional certified capital company programs
and through acquisitions made by Newtek. This participation will require
additional cash. In addition, Newtek anticipates that the cash obtained in the
merger with REXX will be approximately $800,000 which is anticipated to be
adequate to finance Newtek's operations.
Newtek's working capital requirements may increase in the future and
require additional external financing. Newtek in fact expects to finance its
participation in additional certified capital companies and other ventures
principally with externally generated funds, which may include:
o borrowings under future bank facilities; and/or
o the sale of equity, equity-related or debt securities.
However, financing may not be available in amounts, at rates or on
terms and conditions acceptable to Newtek.
Impact of Inflation
The impact of inflation on Newtek's results of operations is not
material.
MARCH 31, 2000 AND 1999
Liquidity and Capital Resources
Cash and cash equivalents were $20,994,022 at March 31, 2000 as
compared to $25,454,016 at December 31, 1999. The reduction was primarily due to
the increased qualified investments that were made in the quarter.
Credits in lieu of cash increased from $10,964,000 at December 31, 1999
to $11,074,000 at March 31, 2000, primarily due to the recognition of income
from tax credits. The increase in qualified business investments from $8,275,000
as of December 31, 1999 to $12,486,877 at March 31, 2000 was primarily due to
Newtek's increased activity in making qualified business investments.
Other Investments
Other investments include all investments which were not qualified
investments by the Newtek capcos and exclude majority owned or primarily
controlled partner companies. Other investments at March 31, 2000, were
$488,750.
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Results of Operations
Revenues were $601,000 in the quarter ended March 31, 2000, compared to
$437,000 in the comparable period in 1999. The increase was primarily due to
increases in interest income from qualified business investments, partially
offset by a decrease in income from tax credits.
The net loss for the three months ended March 31, 2000 was primarily
due to an increase in interest expense of approximately $1,089,000, as compared
to the three months ended March 31, 1999, which was attributed to the issuance
of notes to insurance company investors relating to the formation of capcos
during the prior 12 months. In addition, general and administrative expenses
increased by approximately $679,000, as compared to the three months ended March
31, 1999, due to increased staffing and professional fees attributable to the
increased size of the number of capcos.
RECENT DEVELOPMENTS
The following tables present selected financial data of Newtek and REXX
for the periods indicated. The selected financial and other data as of and for
the three months and six months ended June 30, 2000 are unaudited and are
derived from unaudited internal financial statements which, in the opinion of
management of each of Newtek and REXX, contain all adjustments which are
necessary for a fair presentation of the results for such periods. The
information set forth below should be read in conjunction with Newtek's
financial statements and notes thereto included elsewhere in this proxy
statement/prospectus and with REXX's financial statements incorporated herein by
reference.
Recent Developments - Newtek
Selected Consolidated Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C>
Revenues $ 601 $ 437 $ 1,269 $ 618
Net income (loss) (812) 216 (2,246) (142)
Per share-basic (.05) .01 (.12) (.00)
Per share-diluted (.05) .01 (.12) (.01)
</TABLE>
As of
June 30, 2000
-------------
Balance Sheet Data:
Working capital $27,938
Total assets 61,202
Shareholders' equity 7,658
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Liquidity and Capital Resources. Cash and cash equivalents were
$25,049,536 at June 30, 2000 as compared to $25,454,016 at December 31, 1999.
The reduction was primarily due to increased investment activity (approximately
$4,900,000), partially offset by Newtek's increased financing activities, of
approximately $3,500,000 in net proceeds from the issuance of long term debt and
approximately $1,850,000 in private placement of stock during the six months
ended June 30, 2000.
Credits in lieu of cash increased from $10,963,593 at December 31, 1999
to $11,180,348 at June 30, 2000 primarily due to the recognition of income from
tax credits. The increase in Qualified Investments from $8,275,000 as of
December 31, 1999 to $12,315,823 at June 30, 2000 was primarily due to Newtek's
increased activity in making investments (approximately $6,800,000), partially
offset by repayments of principal to Newtek of approximately $2,750,000. Prepaid
insurance increased from $7,971,000 at December 31, 1999 to $9,485,000 at June
30, 2000 due to the approximate $1,800,000 increase from the payment made for
the new capco formed by Newtek in the first half of the year. Structured
insurance product increased from $1,759,493 at December 31, 1999 to $2,482,354
at June 30, 2000 primarily due to the purchase of additional insurance.
Investments. In the second quarter of 2000, the Louisiana Capco made
approximately $1,170,000 of loans to Louisiana companies, of which 75%
(approximately $877,000) is guaranteed by the U. S Small Business Administration
and is expected to be sold in the secondary market and settle within 90 days of
the loan closings. The loans were primarily made to small companies in need of
expansion capital, with loan terms of prime plus one percent (net of servicing
fee), amortizing between approximately five and twenty years.
On June 14, 2000, the Louisiana Capco entered into a two year loan
agreement in the amount of $1,000,000 with Multi Media Distribution Corp.,
paying an annual interest rate of 10%. Multi Media Corp. is an Internet seller
of closeout merchandise, such as videos and DVD products. In addition, the
Louisiana Capco purchased 66,000 shares of common stock in Multi Media for
$200,000.
Other Investments. Other investments include all investments which were
not qualified investments by the Newtek capcos and exclude majority owned or
primarily controlled partner companies. Other investments at June 30, 2000, were
$469,750.
Issuance of Long Term Debt and Stock. In the second quarter of 2000,
Newtek received approximately $7,300,000 in gross proceeds from the issuance of
long term debt, through two separate transactions with two New York State
Capcos. In addition, $225,000 was received from a private placement of stock in
the second quarter.
Results of Operations. Revenues were $1,268,886 for the six months
ended June 30, 2000, compared to $618,014 in the comparable period in 1999. The
increase was primarily due to the approximately $750,000 interest and dividend
income increases which occurred due to the new capcos the Company began
operating in 2000.
Net loss was $142,476 for the six months ended June 30, 1999, while for
the same period in 2000, there was a net loss of $2,246,118. This was primarily
due to the increase in non-cash interest expense of approximately $1,700,000,
which was attributed to the issuance of notes to insurance company investors
relating to the formation of capcos. In addition, general and administrative
expenses were approximately $2,300,000 for six months ended June 30, 2000, an
increase of approximately $1,900,000 as compared to the same period in 1999.
This increase was primarily due to increased staffing and professional fees
attributable to the increased size of the number of capcos Newtek is operating,
as well as an approximate $300,000 increase in insurance amortization. These
increases in expenses are offset by the increase in revenues described above. In
addition, the minority interest absorbed $800,000 of the loss.
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Recent Developments - REXX
Selected Consolidated Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues $ 4, 931 $ 4,652 $ 8,938 $ 8,152
Net income (loss) 676 272 663 (344)
Per share-basic .27 .11 .27 (.14)
Per share-diluted .26 .11 .26 (.14)
As of
June 30, 2000
-------------
Balance Sheet Data:
Working capital $ 598
Total assets 10,155
Shareholders' equity 4,570
</TABLE>
Results of Operations. Revenues, which consisted of Watkins' contract
revenues, were $4,931,000 and $8,938,000 in the second quarter and six months
ended June 30, 2000, respectively, compared to $4,652,000 and $8,152,000 in the
comparable periods of 1999. The increase in both periods was mainly due to an
unusually high revenue project in the second quarter and six months ended June
30, 2000.
Gross profit in the six months ended June 30, 2000 amounted to
$2,433,000 compared to $1,613,000 in the same period of 1999. Gross profit in
the second quarter amounted to $1,508,000 compared to $1,199,000 in the second
quarter of 1999. The increase in gross profit in both periods of 2000 as
compared to 1999 was principally due to Watkins' work on an unusually high
revenue, high margin project during the quarter and six months ended June 30,
2000 as compared to historical results.
General and administrative expenses declined in the second quarter and
six months ended June 30, 2000 to $762,000 and $1,603,000, respectively, from
$816,000 and $1,776,000, respectively, in the comparable periods in 1999. The
decrease was achieved primarily at the corporate level and Watkins as a result
of lower compensation expense.
Interest expense-net decreased to $56,000 and $118,000 in the second
quarter and six months ended June 30, 2000 from $75,000 and $129,000 in the
comparable periods of 1999. The decreases were due to Watkins' lower borrowing
levels from its bank and equipment finance companies during the second quarter
and first half of 2000 compared to the comparable periods of 1999, offset in
part by higher borrowings at the corporate level during 2000.
Amortization of goodwill remained constant in the second quarter and
first half of 2000 compared to 1999 as REXX is utilizing straight line
amortization.
Provision for income taxes fell to $4,000 in the second quarter and six
months ended June 30, 2000 from $6,000 and $9,000 in the prior year periods. The
2000 and 1999 provisions represent state and local franchise taxes. In both
periods, REXX recorded no provision for federal or state income taxes as REXX
utilized net operating loss carryforwards in 2000 and recorded an operating loss
in the first half of 1999.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Brian A. Wasserman, an officer and director of Newtek has been a
director of REXX since 1997. As a result of the consummation of the Newtek/REXX
merger, Mr. Wasserman's REXX options will be converted into options to purchase
up to 15,000 shares of Newtek common stock. Mr. Wasserman will also enter into a
two-year employment agreement with Newtek with an annual base salary of
$300,000.
PRINCIPAL SHAREHOLDERS OF NEWTEK COMMON STOCK
The following table sets forth certain information known to Newtek with
respect to the beneficial ownership of Newtek common stock as of May 10, 2000
and as adjusted to reflect the shares issued in the proposed Newtek/REXX and
Newtek/BJB Holdings mergers by:
o each person known by Newtek to own beneficially more than five percent of
Newtek's outstanding common stock; o each of Newtek's directors; o each
executive officer named in the Summary Compensation Table; and o all of Newtek's
directors and officers as a group.
Unless otherwise indicated, the person or persons named have sole
voting and investment power. In determining the number and percentage of shares
beneficially owned by each person, shares that may be acquired by this person
pursuant to options or convertible stock exercisable or convertible within 60
days of the date hereof are deemed outstanding for purposes of determining the
total number of outstanding shares for this person and are not deemed
outstanding for this purpose for all other shareholders. The share ownership
reflects all shares to be issued in connection with the mergers. Except as
otherwise indicated, the address of each person is in care of Newtek Capital,
Inc. at its principal executive offices.
Number of Shares Percentage of
Name Beneficially Owned Class Owned
---- ----- -----
Jeffrey G. Rubin 5,789,000 (1) 27.6%
Barry Sloane 5,789,000 (1) 27.6%
Brian A. Wasserman 5,799,000 (1) (2) 27.6%
All executive officers and directors
as a group (3 persons) 17,377,000 82.8%
-----------------------
(1) Includes 1,000,000 shares, held by irrevocable trusts for the
individual's minor children, as to which each person disclaims
beneficial ownership.
(2) Includes options to purchase 10,000 shares of REXX common stock which
are exercisable within 60 days and which will be converted into options
to acquire Newtek common stock upon completion of the Newtek/REXX
merger. Excludes 5,000 options to purchase shares of REXX common stock
which are exercisable after 60 days.
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<PAGE>
DESCRIPTION OF NEWTEK CAPITAL STOCK
The descriptive information below outlines some provisions of Newtek's
articles of incorporation and by-laws. The information is only a summary and is
qualified by the more detailed provisions of Newtek's articles of incorporation
and by-laws, which are incorporated by reference as exhibits to this document.
You are urged to read these documents in their entirety.
General
The authorized capital stock of Newtek consists of 40,000,000 shares,
consisting of 39,000,000 shares of Newtek common stock and 1,000,000 shares of
Newtek preferred stock. As of June 30, 2000, Newtek had issued 30 shares common
stock, and no shares of Newtek preferred stock were issued and outstanding.
There is no current market for the shares of Newtek common stock.
Newtek expects that, upon completion of the Newtek/REXX and Newtek/BJB
Holdings mergers, there will be 20,981,861 shares of Newtek common stock issued
and outstanding. In addition, as a condition to completion of the Newtek/REXX
merger, the Newtek common stock will be listed on the American Stock Exchange or
the Nasdaq National Market. The American Stock Exchange has approved Newtek's
application for the listing of its common stock.
Common Stock
Subject to any prior rights of Newtek preferred shareholders, Newtek
common shareholders are entitled:
o to receive dividends as are declared by Newtek's board of directors out of
funds legally available; and o to full voting rights, each share being entitled
to one vote, subject to the rights of any outstanding Newtek preferred
shareholder.
The Newtek board of directors may issue additional authorized shares of
Newtek common stock without shareholder approval. Newtek common shareholders do
not have any cumulative voting rights or any preemptive rights to subscribe for
additional securities that Newtek may issue. Subject to any prior rights of the
holders of any Newtek preferred stock then outstanding, in the event of
liquidation, dissolution, or winding up of the company, Newtek common
shareholders would be entitled to receive, on a pro rata basis, any assets
distributable to shareholders in respect of shares held by them.
Preferred Stock
The Newtek certificate of incorporation authorizes the issuance by
Newtek of up to 1,000,000 shares of Newtek preferred stock, none of which was
issued and outstanding as of January 10, 2000. The Newtek board of directors may
issue its preferred stock in one or more series at a time or times and for
consideration or considerations as its board of directors may determine. The
board of directors is authorized by the Newtek certificate of incorporation to
provide at any time for the issuance of Newtek preferred stock with the rights,
preferences, and limitations as established by the board. The Newtek board of
directors is authorized to designate, among other things:
o the series and the number of shares comprising the series;
o the dividend rate;
o the redemption rights;
o purchase, retirement or sinking fund provisions; and
o conversion rights and voting rights.
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Shares Available for Future Issuance
Following the Newtek/REXX and Newtek/BJB Holdings mergers, Newtek will
have approximately 18,282,424 authorized and unissued shares of common stock and
all of its authorized shares of preferred stock remaining available for issuance
as the need arises in connection with:
o future acquisitions;
o combinations;
o equity financings;
o share distributions and dividends; and
o employee benefit plans and other corporate purposes.
The board of directors may pursuant to law issue additional shares of
common stock and preferred stock without shareholder approval on the terms as
the board may lawfully determine, subject to its fiduciary duty to the
shareholders. The effect of issuing additional shares of common stock, other
than on an equal basis among current holders of the shares, would dilute the
present voting power and, depending on the terms of issuance, possibly effect
the common stock's book or market value.
Newtek's ability to issue additional common or preferred shares, in
addition to the other corporate purposes described above, could make it more
difficult to replace incumbent directors or to accomplish certain business
combinations or takeover attempts opposed by the board of directors.
Transfer Agent and Registrar
Newtek has chosen American Stock Transfer and Trust Company, 40 Wall
Street, New York, NY 10005, (212) 936-5100 as its transfer agent and registrar.
This is the same firm currently performing such functions for REXX.
DESCRIPTION OF REXX CAPITAL STOCK
REXX's authorized capital stock currently consists of 12,000,000 shares
of common stock, $.02 par value per share, and 1,000,000 shares of serial
preferred stock, $1.00 par value per share.
REXX Common Stock
As of the date of this proxy statement/prospectus, there were 2,467,576
shares of REXX common stock outstanding. The REXX common stock is currently
listed on the American Stock Exchange under the trading symbol "REX." Holders of
REXX common stock do not have subscription, redemption, conversion or preemptive
rights. Each share of REXX common stock is entitled to participate pro rata in
any distribution upon liquidation, subject to the rights of holders of REXX
serial preferred stock, if any, and to one vote on all matters submitted to a
vote of shareholders. The holders of REXX common stock may receive cash
dividends as declared by the REXX board of directors out of funds legally
available therefor, subject to the rights of any holders of REXX serial
preferred stock, if any.
Holders of REXX common stock are entitled to elect all directors of
REXX. The REXX board of directors consists of no less than three nor more than
twelve members. The holders of REXX common stock do not have cumulative voting
rights, which means that the holders of more than half of the shares voting for
the election of directors can elect all of the directors and, in this event, the
holders of the remaining shares will not be able to elect any directors.
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Serial Preferred Stock
The REXX board of directors is authorized by REXX's certificate of
incorporation to issue up to 1,000,000 shares of one or more series of REXX
serial preferred stock. No shares of REXX serial preferred stock have been
authorized for future issuance by the REXX board, and REXX has no present plans
to issue any of these shares. In the event that the REXX board does issue shares
of REXX serial preferred stock, it may exercise its discretion in establishing
the terms of REXX serial preferred stock. In the exercise of its discretion, the
REXX board may determine the voting rights, if any, of the series of REXX serial
preferred stock being issued, which could include the right to vote separately
or as a single class with the REXX common stock and/or other series of REXX
serial preferred stock; to have more or less voting power per share than that
possessed by the REXX common stock or other series of REXX serial preferred
stock; and to vote on certain specified matters presented to the shareholders or
on all matters or upon the occurrence of any specified event or condition. On
liquidation, dissolution or winding up of REXX, the holders of REXX serial
preferred stock may be entitled to receive preferential cash distributions fixed
by the REXX board of directors when creating the particular series thereof
before the holders of the REXX common stock are entitled to receive anything.
REXX serial preferred stock authorized by the REXX board could be redeemable or
convertible into shares of any other class or series of stock of REXX.
The issuance of REXX serial preferred stock by the REXX board of
directors could adversely affect the rights of holders of the REXX common stock
by, among other things, establishing preferential dividends, liquidation rights
or voting powers. The issuance of REXX serial preferred stock could be used to
discourage or prevent efforts to acquire control of REXX through the acquisition
of shares of REXX common stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the REXX common stock is American
Stock Transfer and Trust Company, 40 Wall Street, New York, NY 10005, telephone
number: (212) 936-5100.
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PRICE RANGE OF REXX COMMON STOCK AND DIVIDENDS
The REXX common stock has been listed on The American Stock Exchange
since May 14, 1998 and traded under the symbol "REX." Prior to May 14, 1998, the
REXX common stock was traded on The Nasdaq National Market under the symbol
"REXX" ("OHSC" prior to February 19, 1998). The table below sets forth the high
and low reported closing sale prices per share for the REXX common stock as
reported by the AMEX and Nasdaq.
1998: High Low
---- ---- ---
First quarter 5 5/16 3 3/4
Second quarter 5 1/4 3 1/2
Third quarter 3 3/4 2 1/2
Fourth quarter 2 13/16 1 3/4
1999:
First quarter 2 1/2 1 3/8
Second quarter 2 1/16 7/16
Third quarter 1 9/16 3/4
Fourth quarter 4 3/16 11/16
2000:
First quarter 11 3/8 2 3/4
Second quarter 8 3 7/8
Third quarter (through August 8, 2000) 6 3 5/8
Based upon inquiries made by REXX in connection with the annual
meeting, REXX estimates that there are approximately 340 record holders of REXX
common stock.
REXX has not paid any cash dividends and it does not expect to in the
foreseeable future.
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NEWTEK CAPITAL, INC. AFTER THE MERGER
Management
The directors and executive officers of Newtek before the Newtek/REXX
merger will continue to be the directors and officers of Newtek after the
merger, until the time their successors are elected. In addition, Newtek has
selected two individuals to serve as independent directors.
Directors and Executive Officers of Newtek
Newtek's directors and executive officers and their respective ages and
positions following the consummation of the mergers are set forth below.
<TABLE>
<CAPTION>
Name Age (1) Position
---- ------- --------
<S> <C> <C>
Barry Sloane 40 Chairman, Chief Executive Officer and Secretary
Jeffrey G. Rubin 32 President, Chief Investment Officer and Director
Jeffrey G. Rubin President, Chief Operating Officer and Director
Brian A. Wasserman 34 Treasurer, Chief Financial Officer and Director
John Cox 63 Director
Steven A. Shenfeld 40 Director
</TABLE>
---------------
(1) At December 31, 1999.
Set forth below is the biographical information for our executive
officers and directors listed above.
Barry Sloane Mr. Sloane has been an executive officer of Wilshire
Investors, LLC, Wilshire Louisiana Advisers, LLC, Wilshire Advisers, LLC,
Wilshire New York Advisers II, LLC and Wilshire Partners, LLC, since their
formation in January 1998. He has been since January 1998 an executive officer
of The Whitestone Group, LLC. He has been since January 1995 the President of
the Sloane Organization, LLC, an investment banking, consulting and advisory
firm based in New York City.
From September 1993 through July 1995, Mr. Sloane was a Managing
Director of Smith Barney, Inc. While there, he directed the Commercial and
Residential Real Estate Securitization Unit and, prior to that, he was national
sales manager for institutional mortgage and asset backed securities sales. From
April 1991 through September 1993, he was founder and President of Aegis Capital
Markets, a consumer loan origination and securitization business which was
eventually taken public with the name of "Aegis Consumer Funding." From October
1988 through March 1991, Mr. Sloane was Senior Vice President of Donaldson,
Lufkin and Jenrette, where he was responsible for directing sales of
mortgage-backed securities. From August 1982 to September 1988 Mr. Sloane was a
senior mortgage security sales person and trader for Bear Stearns, L.F.
Rothschild, E.F. Hutton and Paine Webber.
Jeffrey G. Rubin Mr. Rubin is currently an executive officer of the
Wilshire Investors, LLC; Wilshire Louisiana Advisers, LLC; Wilshire Advisers,
LLC, Wilshire New York Advisers II, LLC and Wilshire Partners, LLC. He is also
since January 1998 been an executive officer of The Whitestone Group, LLC. In
June 1994, Mr. Rubin founded, financed and participated in the day-to-day
management of Optical Dynamics Corporation, formally known as Fastcast
Corporation, an early stage technology company. Mr. Rubin also served as an
officer of the company and a member of the board of directors until December
1997. Additionally, from January 1992 through January 1998, Mr. Rubin served as
a private venture capitalist, structuring, actively managing and financing
investments in a number of early-stage private and publicly traded companies
which have been focused predominately on technology and the internet. These
companies include: Autoskill Inc., a company focused on providing communication
and internet services to the automotive recycling and salvage industry; Century
Electronics Manufacturing Inc., a contract manufacturer for the networking and
telecommunications industry; Biz2Net Corporation, an internet fulfillment
company; and VerticalOne Corporation, an internet company which provides for the
aggregation of personal information from various websites. In addition, Mr.
Rubin serves on the board of directors of Siga Technologies, Inc. From September
1989 through January 1994, Mr. Rubin served as Vice President of American
European Corporation, an import/export company and participated in management in
various capacities.
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Brian A. Wasserman Mr. Wasserman is currently Chief Executive Officer
of Wilshire Investors, LLC, Wilshire Louisiana Advisers, LLC, Wilshire Advisers,
LLC, Wilshire New York Advisers II, LLC and Wilshire Partners, LLC. He has since
December 1997 been an executive officer of The Whitestone Group, LLC.
From December 1997 until December 1999, Mr. Wasserman was the general
partner of two private venture capital limited partnerships with very diverse
public and private investments. The partnerships had in excess of $30,000,000 in
partners' capital and investment holdings. From April 1992 through December
1997, Mr. Wasserman acted as an investment consultant/analyst for these
partnerships. From December 1997 until December 1999, Mr. Wasserman was also an
investment consultant/analyst for two other private venture capital partnerships
with very diverse public and private investments. These partnerships had in
excess of $20,000,000 of partners' capital and investment holdings.
From March 1996 until March 2000, Mr. Wasserman founded and was the
Chief Financial Officer of First Lawrence Capital Corp., an investment banking
firm specializing in mergers and acquisitions for small to medium-sized emerging
companies. From December 1997 until November 1999, Mr. Wasserman served on the
board of directors of Heuristic Development Group (now know as Virtual
Communities Inc.), a company which engaged in the development, marketing, sale
and licensing of the Intellifit System, a computerized system which generates
personalized exercise prescriptions. Mr. Wasserman currently serves on the board
of directors of REXX Environmental Corporation and since December 1997, been the
Managing Member of Sharp Management, LLC, a financial consulting company.
From April 1992 through September 1997, Mr. Wasserman was the Treasurer
of Engex, Inc., a closed-end mutual fund which makes early stage venture capital
investments in both public and private companies. The fund generally invests in
high technology, biotechnology and early stage pharmaceutical companies. From
April 1992 through December 1997, Mr. Wasserman acted as chief financial officer
of D.H. Blair Investment Banking Corp., a New York Stock Exchange and NASD
member firm, which is an investment banking and merchant banking firm which
specializes in public offerings and private placements of early stage and
emerging new companies. From September 1987 through April 1992, Mr. Wasserman
was an audit/tax manager and a staff investment analyst for
PricewaterhouseCoopers LLP. Mr. Wasserman is a Certified Public Accountant in
the state of New York and a member of the American Institute of Certified Public
Accountants and the New York State Society of Certified Public Accountants.
John Cox Mr. Cox was Associate Administrator for Financial Assistance
at the Small Business Administration. In this capacity, Mr. Cox was the Agency's
senior management official in charge of all SBA Business Loans nationwide. Mr.
Cox was responsible for all policy development and implementation, licensing of
lenders that participated in SBA lending, all lending activity amounting to
approximately $10 billion per year and collection activity for a portfolio of
approximately $33 billion. Mr. Cox was the senior agency program official for
the agency's securitization program and was responsible for oversight of finance
programs including the review of all lenders, and SBA field offices.
During his 30-year career with the SBA, Mr. Cox was instrumental in the
formation of the small business incubator industry and was awarded the Founders
Award in 1998 by the National Business Incubation Association. Mr. Cox was also
the recipient of several SBA agency awards including two Presidential Awards for
Excellence in Government Service, one presented by President Bush and the other
by President Clinton.
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Mr. Cox obtained an associate degree in accounting and finance from
Pierce College of Accounting and Finance. Mr. Cox is a graduate of the National
School of Commercial Lending, University of Oklahoma and the Graduate School of
Commercial Lending at the University of Oklahoma.
Steven A. Shenfeld Mr. Shenfeld has been a general partner and senior
managing director of Amroc Investments LLC since December 1999. Since December
1999, Mr. Shenfeld has also been a general partner of Avenue Capital Management,
LLC, a Texas Pacific Group affiliate. Mr. Shenfeld has been in the investment
banking and asset management business for 17 years. From April 1996 through
October 1999, Mr. Shenfeld worked for BancBoston Robertson Stephens where he was
on the management committee and ran the Debt Capital Markets. Mr. Shenfeld was
also a Board Member of BancBoston's Section 20, the broker dealer. Mr. Shenfeld
has extensive experience in capital markets and investment banking and has run
businesses including high yield securities, leveraged finance, private
placements, asset securitization and investment grade corporates. From April
1991 through March 1996, Mr. Shenfeld was Head of Sales and Trading in Global
Finance at Bankers Trust Securities. Previously, Mr. Shenfeld worked for
Donaldson, Lufkin, and Jenrette and Salomon Brothers.
Mr. Shenfeld is involved in many charitable organizations and has
served on the boards of various organizations, including Seeds of Peace, New
Leadership United Jewish Appeal, and The Leukemia Society of New York. Mr.
Shenfeld has a MBA in finance from the University of Michigan and a BA in
economics from Tufts University.
Composition of Newtek's Board and Committees
After the Newtek/REXX merger, Newtek's board of directors will consist
of one class. Directors will be elected at the annual meeting of shareholders
each year. Upon election, directors will serve thereafter for one year, and will
hold office until their successors are elected and qualified. There are expected
to be five members of the board of directors upon completion of the merger.
Newtek's board of directors has three standing committees: an Executive
Committee, an Audit Committee and a Compensation Committee.
The Executive Committee consists of Messrs. Rubin, Sloane and
Wasserman. It is responsible for overseeing the management of the affairs and
business of Newtek and has been delegated authority to exercise the powers of
the board during intervals between board meetings.
The Audit Committee consists of Messrs. Wasserman, Cox and Shenfeld,
and Newtek expects to add an additional independent director to the Audit
Committee during 2000 as well as adopt a written Audit Committee Charter. It is
responsible for:
o recommending the firm to be appointed as independent
accountants to audit Newtek's financial statements and to
perform services related to the audit;
o reviewing the scope and results of the audit with the
independent accountants;
o reviewing with the management and the independent accountant
Newtek's year end operating results;
o considering the adequacy of the internal accounting and
control procedures of Newtek; and
o reviewing the non-audit services to be performed by the
independent accountants, if any, and considering the effect of
this performance on the accountant's independence.
The Compensation Committee consists of Messrs. Sloane, Cox and
Shenfeld. It is responsible for:
o the review, recommendation and approval of compensation
arrangements for directors and executive officers;
o the approval of similar arrangements for other senior level
employees; and
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o the administration of certain benefit and compensation plans
and arrangements of Newtek.
Outside Director Compensation
Upon completion of the mergers, Newtek's outside directors will each
receive 45,000 options for Newtek common stock for their services and will be
reimbursed for their out-of-pocket expenses associated with attending board
meetings. The stock options vest in equal amounts over three years.
Executive Compensation
The information set forth below describes the components of the total
compensation of Newtek's Chief Executive Officer and its two other most highly
compensated executive officers, based on 1999 salary and bonuses.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Annual ------------
Compensation Awards
---------------
Securities
Underlying All Other
Name and Principal Position Year Salary($)(1) Bonus($) Options/SARs(#) Compensation($)
--------------------------- ---- ------------ -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Barry Sloane
Chairman and CEO 1999 150,000 ---- ---- ----
1998 150,000
Jeffrey G. Rubin
President and CIO 1999 150,000 ---- ---- ----
1998 150,000
Brian A. Wasserman
Treasurer and CFO 1999 150,000 ---- ---- ----
1998 150,000
</TABLE>
(1) During 1998 and 1999, these individuals did not receive any salary from
any of the Newtek companies. This amount represents distributions paid
by The Whitestone Group, LLC to its members.
Employment Agreements
Newtek will enter into separate employment agreements with:
o Barry Sloane, as Chairman and Chief Executive Officer;
o Jeffrey G. Rubin, as President and Chief Investment Officer;
and
o Brian A. Wasserman, as Treasurer and Chief Financial Officer.
Barry Sloane, as Chairman and Chief Executive Officer, is responsible
for implementing the policies adopted by Newtek's board of directors. Jeffrey
Rubin, as President and Chief Investment Officer is responsible for overseeing
all of Newtek's operations. Brian A. Wasserman, as Treasurer and Chief Financial
Officer, is responsible for overseeing Newtek's financial operations.
Each employment agreement provides for:
o a two year term at an annual base salary of $300,000;
o an automatic one-year extension on the agreement's
commencement anniversary date, unless either party provides
written notice 90 days before the expiration date;
o an annual 10% increase in base salary;
o at least one annual salary review by the board of directors;
o participation in a discretionary bonus plan;
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o retirement and medical plans, customary fringe benefits,
vacation and sick leave; and
o $2 million of split-dollar life insurance coverage.
Each agreement contains a noncompetition provision that requires the
employee to devote substantially his full business time and efforts to the
performance of the employee's duties under the agreement. The employee is not
prohibited, however, from:
o serving on the boards of directors of, and holding offices or
positions in, companies or organizations which, in the opinion
of the board of directors, will not present conflicts of
interest with Newtek; or
o investing in any business dissimilar from Newtek's or, solely
as a passive or minority investor, in any business.
In conjunction with the consolidation of the Newtek businesses, and in
order to free them to devote greater attention to the implementation of Newtek's
current business development and operation strategy, the three principal owners
and management officials, Messrs. Rubin, Sloane and Wasserman have determined to
incorporate the majority of the diminishing financial advisory and investment
management work they each perform through separate companies with the business
of Newtek. A principal subsidiary of Newtek, The Whitestone Group, LLC, will
enter into management services agreements with J R Group, LLC, The Sloane
Organization, LLC and Sharp Management, LLC, which are owned and controlled by
Messrs. Rubin, Sloane and Wasserman, respectively. These contracts provide for
payment to The Whitestone Group, LLC, of all income received by each of the
companies in excess of $70,000 per year, with two specific exceptions; in
exchange, The Whitestone Group, LLC, will assume responsibility for and will
perform the services required by the balance of the third party contracts under
which these related companies operate. It is expected that future activities or
contracts will be performed directly by Newtek. The employment agreements permit
the management officials to devote a reasonable amount of time to the duties
required pursuant to the third party contracts and require the use of a standard
form of services agreement.
Newtek may terminate an employee's employment for "just cause" as
defined in the agreement, and upon the termination, no severance benefits are
available. If Newtek terminates an employee without just cause, the employee
will be paid within 10 days of the termination a sum equal to 2.99 times the
average annual compensation he received during the five-year period immediately
prior to the date of his termination. If the employee voluntary terminates his
employment for "good reason" as defined in the agreement, or the employee's
employment terminates during the term of the agreement due to death, disability,
or retirement after age 62, the employee will be entitled to a continuation of
his salary and benefits from the date of termination through the remaining term
of the agreement. The employee is able to voluntarily terminate his agreement by
providing 60 days' written notice to the board of directors, in which case the
employee is entitled to receive only his compensation, vested rights, and
benefits up to the date of termination.
Each employment agreement contains provisions stating that in the event
of the employee's involuntary termination of employment in connection with, or
within one year after, any change in control of Newtek, the employee will be
paid within 10 days of the termination a sum equal to 2.99 times the average
annual compensation he received during the five-year period immediately prior to
the date of change in control. "Control" generally refers to the acquisition, by
any person or entity, of the ownership or power to vote more than 25% of Newtek
voting stock, or the control of the election of a majority of directors or the
exercise of a controlling influence over Newtek's management or policies.
The employment agreement also provides for a similar lump sum payment
to be made in the event of the employee's voluntary termination of employment
within 30 days of a change in control, or within 90 days thereafter, of certain
specified events following any change in control, whether approval by the board
of directors or otherwise which have not been consented to in writing by the
employee including:
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o requiring the employee to move his personal residence or
perform his principal executive functions more than 90 miles
from the employee's primary office;
o failing to maintain existing employee benefit plans, including
material vacation, fringe benefits, and retirement plans;
o assigning duties and responsibilities to the employee which
are other than those normally associated with his position;
o materially diminishing the employee's authority and
responsibility; and
o failing to elect or re-elect the employee to Newtek's board of
directors.
Each agreement provides that within three business days of a change in
control, Newtek shall fund, or cause to be funded, a trust in an amount equal to
2.99 times the average annual compensation the employee received during the
five-year period immediately prior to the date of change in control. These
provisions may have an anti-takeover effect by making it more expensive for a
potential acquirer to obtain control of Newtek. If Newtek loses a legal dispute
as to the employment agreement, Newtek will reimburse the employee's legal and
other expenses.
Cash Bonus Plan
Newtek will in conjunction with the completion of the mergers establish
the Newtek Capital, Inc. cash bonus plan for the purpose of providing its
employees with incentive compensation in the form of cash bonuses. All full-time
employees will be eligible to receive cash bonuses under the plan. If an
employee's employment is terminated for "cause" as defined in the plan, then the
employee shall be ineligible to receive a bonus, and an employee whose
employment otherwise terminates shall be eligible for a bonus that fiscal year,
pro rated to the number of days the employee was employed by us during our
fiscal year. A committee comprised of at least two Newtek independent directors
will administer the plan. Bonuses will be paid at the discretion of the
committee. Unless the committee establishes otherwise, the aggregate amount of
bonuses payable for any fiscal year shall not be less than 25 percent of Newtek
pre-tax net profit for that fiscal year. Bonuses will be payable within 90 days
after Newtek's fiscal year end.
Newtek Capital, Inc. 2000 Stock Plan
The Newtek Capital, Inc. 2000 Stock Incentive and Deferred Compensation
Plan will replace an identical plan adopted in 2000 by BJB Holdings, Inc. As a
result of the Newtek/BJB Holdings merger, Newtek will assume the
responsibilities of BJB Holdings under its plan and will exchange its options
for the approximately 750,000 options issued by BJB Holdings. The plan will be
renamed the Newtek 2000 Stock Incentive and Deferred Compensation Plan, and is
described below.
Purpose of the Plan
The purpose of the plan is to advance the interests of Newtek by
providing eligible directors and employees of Newtek and its affiliates with the
opportunity to acquire shares of common stock. By encouraging stock ownership,
Newtek seeks to attract, retain, and motivate the best available personnel for
positions of substantial responsibility and to provide additional incentive to
directors and employees of Newtek and its affiliates to promote the success of
the business. The plan also has deferred compensation features that are intended
to provide deferred income and retirement benefits for Newtek's directors and
any officers selected by its board of directors. The plan is not tax-qualified
under Section 401 of the Code, and the deferred compensation features of the
plan are unfunded and primarily for a select group of directors, management or
highly compensated employees.
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Description of the Plan
Effective Date. The Newtek Capital, Inc. 2000 Stock Incentive and
Deferred Compensation Plan will be effective as of April 5, 2000.
Administration. The plan is administered by the Compensation Committee,
appointed by the board of directors, and consisting of at least two directors of
Newtek who are "non-employee directors" within the meaning of the federal
securities laws. The Compensation Committee has discretionary authority to:
o select participants and grant awards;
o determine the form and content of any awards granted under the
plan;
o interpret the plan;
o prescribe, amend and rescind rules and regulations relating to
the plan; and
o make other decisions necessary or advisable for the
administration of the plan.
All decisions, determinations and interpretations of the Compensation
Committee are final and conclusive on all persons affected thereby. Members of
the Compensation Committee will be indemnified to the full extent permissible
under Newtek's governing instruments in connection with any claims or other
actions relating to any action taken under the plan. The Compensation Committee
currently consists of Messrs. Sloane, Cox and Shenfeld.
Eligible Persons; Types of Awards. Under the plan, the Compensation
Committee has discretionary authority to grant to employees and directors of
Newtek, including members of the Compensation Committee, the following awards:
o stock options ("Options");
o stock appreciation rights ("SARs");
o restricted share awards ("Restricted Stock Awards");
o and deferred shares ("Deferred Shares").
Shares Available for Grants. The plan reserves 2,250,000 shares of
common stock for issuance upon the exercise of options or SARs, as well as upon
the distribution of Deferred Shares and shares subject to Restricted Share
Awards. These shares may be:
o authorized but unissued shares;
o shares held in treasury; or
o shares held in a grantor trust.
In the event of any merger, consolidation, recapitalization,
reorganization, reclassification, stock dividend, split-up, combination of
shares, or similar event in which the number or kind of shares is changed
without receipt or payment of consideration by Newtek, the Compensation
Committee will adjust the number and kind of shares reserved for issuance under
the plan, the number of and kind of shares subject to outstanding awards, and
the exercise prices of Options or SARs. To the extent awards expire, become
unexercisable, or are forfeited for any reason without having resulted in the
issuance of common stock to award holders, those shares shall, unless the plan
shall have been terminated, be available for the grant of additional awards.
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Options; Exercise Price. Options may be either incentive stock options
("ISOs") as defined in Section 422 of the Internal Revenue Code, or Options that
are not ISOs ("Non-ISOs"). The exercise price as to any ISO may not be less than
the fair market value (determined under the plan) of the optioned shares on the
date of grant. In the case of a participant who owns more than 10% of the
outstanding common stock on the date of receiving an ISO grant, its exercise
price may not be less than 110% of fair market value of the shares. As required
by federal tax laws, to the extent that the aggregate fair market value
(determined when an ISO is granted) of the common stock with respect to which
ISOs are exercisable by a participant for the first time during any calendar
year (under all plans of Newtek and of any subsidiary) exceeds $100,000, the
ISOs granted in excess of $100,000 will be treated as Non-ISOs. The exercise
price as to any Non-ISO may not be less than 50 percent of the fair market value
of the optioned shares on the date of grant.
SARs. An SAR may be granted in tandem with all or part of any Option
granted under the plan, or without any relationship to any Option. An SAR
granted in tandem with an ISO must expire no later than the ISO, must have the
same exercise price as the ISO and may be exercised only when the ISO is
exercisable and when the fair market value of the shares subject to the ISO
exceeds the exercise price of the ISO. For SARs granted in tandem with Options,
the participant's exercise of the SAR cancels his or her right to exercise the
Option, and vice versa. Regardless of whether an SAR is granted in tandem with
an Option, exercise of the SAR will entitle the participant to receive, as the
Compensation Committee prescribes in the grant, all or a percentage of the
difference between:
o the fair market value of the shares of common stock subject to
the SAR at the time of its exercise; and
o the fair market value of the shares of common stock at the
time the SAR was granted (or, in the case of SARs granted in
tandem with Options, the exercise price).
The exercise price as to any particular SAR may not be less than the
fair market value of the optioned shares on the date of grant.
Exercise of Options and SARs. The exercise of Options and SARs will be
subject to terms and conditions as are established by the Compensation Committee
in a written agreement between the committee and the participant. Unless a
different vesting schedule is specified in the agreement, each Option granted
will be vested and exercisable with respect to 25% of the underlying shares
after each year of service (as defined in the plan). Only common stock is
subject to purchase upon exercise of the Options, and an Option may not be
exercised for a fractional share.
Method for Exercise. A participant may exercise Options and SARs,
subject to provisions relative to their termination and limitations on their
exercise, only by:
o written notice of intent to exercise the Option or SAR with
respect to a specified number of shares of common stock; and
o in the case of Options, payment to Newtek (contemporaneously
with delivery of written notice) in cash, in common stock, or
a combination of cash and common stock, of the amount of the
exercise price for the number of shares with respect to which
the Option is then being exercised.
Common stock utilized in full or partial payment of the exercise price
for Options shall be valued at its market value at the date of exercise.
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Effect of Termination of Service. In the absence of Compensation
Committee action to the contrary, an otherwise unexpired Option shall cease to
be exercisable upon:
o a participant's termination of employment for "just cause" as
defined in the plan;
o the date that is one year after a participant terminates
service for a reason other than just cause or death; or
o the date that is two years after a participant's death.
Reload Option. For each share of common stock purchased upon the
exercise of an Option within 2 years after the date on which the Option first
became exercisable, the participant will receive a new Option ("Reload Option")
to purchase an additional share of common stock. Reload Options vest and become
exercisable two years after the grant date, and the number of shares of common
stock subject to a Reload Option shall be reduced for each share of common stock
the participant sells or otherwise disposes of between the grant date and the
exercise date without prior Compensation Committee approval.
Deferred Compensation; Deferred Shares. The Compensation Committee may
permit Newtek's executive officers and directors to elect to defer the receipt
of their cash compensation. Deferred amounts are credited to a bookkeeping
account (the "Account") in the name of the participant. Participants may
irrevocably invest all or a portion of their Account in common stock, which case
the Compensation Committee shall credit the participant's Account with Deferred
Shares that have a fair market value equal to the compensation deferred. The
Compensation Committee may permit participants to elect to have their Account
credited with an alternative investment return in lieu of deferred shares. After
a participant terminates service, his or her Account balance will be distributed
in five annual installments, subject to the participant's right to elect a
different payout term and commencement date. Distributions of Deferred Share
shall be made in common stock. Any distribution of common stock will include
earnings that accrued after the date the participant's Account was initially
credited with Deferred Shares (with cash dividends being converted into Deferred
Shares at the end of each fiscal year).
Grantor Trust. Newtek may establish a grantor trust (the "Trust") and
contribute common stock to the Trust for the purpose of paying benefits under
the plan. The establishment of a Trust shall not effect the status of the plan
as mere unfunded promise to pay benefits in the future and the status of plan
participants as general unsecured creditors of Newtek. To the extent common
stock is held in a Trust, shall be voted by the trustee of the Trust in the
manner directed by Newtek's board of directors and, in the absence of direction,
the shares shall be voted in the discretion of the trustee.
Restricted Share Awards. The Compensation Committee has the discretion
to select employees and directors of Newtek who will receive discretionary
Restricted Stock Awards. Unless a different vesting schedule is specified by the
Compensation Committee, each Restricted Stock Award will vest with respect to
25% of the underlying shares after each year of service (as defined in the
plan). One share of common stock will be distributed for each restricted share
earned as soon as practical after the restricted shares have been earned.
Whenever shares of common stock are distributed pursuant to a Restricted Share
Award, the distribution shall include an amount equal to any cash dividends
(including special large and nonrecurring dividends, including one that has the
effect of a return of capital to Newtek's stockholders) and a number of shares
of common stock equal to any stock dividends, declared and paid with respect to
a share of common stock between the date the relevant Restricted Stock Award was
initially granted to the participant and the date the shares are being
distributed. There shall also be distributed an appropriate amount of net
earnings, if any, of the Trust with respect to any cash dividends so paid out.
Participants may irrevocably elect to defer the receipt of common stock and have
their Account credited with Deferred Shares equal to the common stock deferred.
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Conditions on Issuance of Shares. The Compensation Committee will have
the discretionary authority to impose, in agreements, restrictions on shares of
common stock issued pursuant to the plan as it may deem appropriate or
desirable, including but not limited to the authority to impose a right of first
refusal or to establish repurchase rights or both of these restrictions. In
addition, the Compensation Committee may not issue shares unless the issuance
complies with applicable securities laws, and to that end may require that a
participant make certain representations or warranties. In addition, Newtek may
cause the forfeiture of common stock that a participant receives pursuant to an
Award if the participant breaches any noncompetition agreement with Newtek. If
the participant has disposed of the shares, Newtek may seek compensatory
damages, including the sale to Newtek of other common stock owned by the
participant.
Nontransferability. Participants may transfer non-ISOs, SARs, and
Restricted Share Awards to family members or trusts under specified
circumstances. Awards may not otherwise be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by will or by
the laws of descent and distribution. In addition, common stock that is received
pursuant to an Award may not be sold within the six-month period following the
grant date of that Award, except in the event of the participant's death or
disability, or another event as the board of directors may specifically deem
appropriate. A participant may not assign his or her claim to deferred
compensation and associated earning during his or her lifetime. A participant's
right to deferred compensation and associated earning shall at all times
constitute an unsecured promise of Newtek to pay benefits as they come due.
Neither the participant nor his or her beneficiary will have any claim against
or rights in any specific assets of Newtek.
Effect of Dissolution and Related Transactions. Upon the earlier of a
change in control (as defined in the plan) or the execution of an agreement to
effect a change in control;
o all Awards will become fully vested; and
o Newtek will fund a Trust with an amount equal to the aggregate
Account balances under the plan.
All outstanding Awards, together with the exercise prices thereof, will
be equitably adjusted for any change or exchange of shares for a different
number or kind of shares or other securities which results from any of the
following Transactions (referred to herein as a "Transaction"):
o the liquidation or dissolution of Newtek;
o a merger or consolidation in which Newtek is not the surviving
entity; or
o the sale or disposition of all or substantially all of
Newtek's assets.
However, any adjustment will be made in a manner as to not constitute a
modification, within the meaning of Section 424(h) of the Internal Revenue Code,
of outstanding ISOs.
Duration of the Plan and Awards. The plan will remain in effect until
terminated by Newtek's board of directors, but Options may not be granted under
the plan ten years after the effective date. The maximum term for an Option or
SAR is 10 years from the date of grant, except that the maximum term of an ISO
(and an SAR granted in tandem with an ISO) may not exceed five years if the
participant owns more than 10% of the common stock on the date of grant. The
expiration of the plan, or its termination by the Compensation Committee, will
not affect any Award then outstanding.
Modification of Options. At any time, and from time to time, the board
may authorize the Compensation Committee to modify any outstanding Option,
provided that no modification may confer on the holder of the Option any right
or benefit which could not be conferred on him by the grant of a new Option, or
impair the Option without his consent.
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Amendment and Termination of the Plan. The board of directors may from
time to time amend the terms of the plan and, with respect to any shares at the
time not subject to Awards, suspend or terminate the plan. No amendment,
suspension, or termination of the plan will, without the consent of any affected
participant, alter or impair any rights or obligations under any Award
previously granted.
Financial Effects of Awards. Newtek will receive no monetary
consideration for the granting of Awards under the plan. It will receive no
monetary consideration other than the exercise price for shares of common stock
issued to participants upon the exercise of their Options, and will receive no
monetary consideration upon the exercise of SARs or the distribution of common
stock satisfying Deferred Shares, or Restricted Stock Awards. Cash proceeds from
the sale of common stock issued pursuant to the exercise of Options will be
added to the general funds of Newtek to be used for general corporate purposes.
Under the intrinsic value method that Newtek follows under applicable
accounting standards, recognition of compensation expense is not required when
Options are granted at an exercise price equal to or exceeding the fair market
value of the common stock on the date the Option is granted, but disclosure may
be required in financial statement footnotes regarding pro forma effects on
earnings and earnings per share of recognizing as a compensation expense an
estimate of the fair value of stock-based awards. If Newtek grants Non-ISOs with
an exercise price less than the fair market value of the common stock on the
date the Option is granted, the granting of the discounted Non-ISOs will require
charges to the income of Newtek based on the amount of the appreciation, if any,
in the average market price of the common stock to which the discounted Non-ISOs
relate over the exercise price of those shares. If the average market price of
the common stock declines subsequent to a charge against earnings due to
estimated appreciation in the common stock subject to the discounted Non-ISOs,
the amount of the decline will reverse the prior charges against earnings (but
not by more than the aggregate of the prior charges).
In March 1999, the Financial Accounting Standards Board ("FASB") issued
an exposure draft of a proposed interpretation of existing accounting treatment
for stock-based compensation to individuals who do not qualify as employees of
Newtek (including non-employee directors). Among other things, this change would
require recognition of compensation expense when Options are awarded to these
individuals. At its August 11, 1999 meeting, FASB reversed its position respect
to non-employee directors and stated that compensation expense would not be
recognized when Options are awarded to these individuals. A final FASB
interpretation of accounting treatment for stock-based compensation is expected
to be released in the first quarter of 2000.
The granting of SARs will require charges to the income of Newtek based
on the amount of the appreciation, if any, in the average market price of the
common stock to which the SARs relate over the exercise price of those shares.
If the average market price of the common stock declines subsequent to a charge
against earnings due to estimated appreciation in the common stock subject to
SARs, the amount of the decline will reverse the prior charges against earnings
(but not by more than the aggregate of the prior charges).
The granting of Deferred Shares will require charges to Newtek's income
(in an amount equal to the fair market value, on the date of award, of the
shares of common stock credited pursuant to the Deferred Shares).
When Restricted Share Awards are granted, Newtek must recognize
compensation expense based on the fair market value of the common stock on the
date the Restricted Share Awards are granted, with this amount being amortized
over the expected vesting period for the award.
Federal Income Tax Consequences
Summarized below are the federal income tax consequences that Newtek
expects (based on current tax laws, rules, and interpretations) with respect to
Awards.
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Date of Award. The recipient of an Award will not recognize taxable
income upon its grant. Nor will the grant entitle Newtek to a current deduction.
Subsequent Events. The subsequent tax consequences for Award recipients
differ, as follows, depending on the type of Award. In general, however, Newtek
will be entitled to a deduction for federal income tax purposes at the same time
and in the same amount as the ordinary income recognized by the Award holder.
ISOs. If an Award holder holds the shares purchased upon exercise of an
ISO for at least two years from the date the ISO is granted, and for at least
one year from the date the ISO is exercised, any gain realized on the sale of
the shares received upon exercise of the ISO is taxed as long-term capital gain.
However, the difference between the fair market value of the common stock on the
date of exercise and the exercise price of the ISO will be treated by the holder
as an item of tax preference in the year of exercise for purposes of the
alternative minimum tax. If a holder disposes of the shares before the
expiration of either of the two special holding periods noted above, the
disposition is a "disqualifying disposition." In this event, the holder will be
required, at the time of the disposition of the common stock, to treat the
lesser of the gain realized or the difference between the exercise price and the
fair market value of the common stock at the date of exercise as ordinary income
and the excess, if any, as capital gain.
Newtek will not be entitled to any deduction for federal income tax
purposes as the result of the grant or exercise of an ISO, regardless of whether
or not the exercise of the ISO results in liability to the holder for
alternative minimum tax. However, if a participant recognizes ordinary income
taxable as compensation as a result of a disqualifying disposition, Newtek will
be entitled to deduct an equivalent amount.
Non-ISOs. A holder will recognize ordinary income upon the exercise of
the Non-ISO in an amount equal to the difference between the fair market value
of the shares on the date of exercise and the option price. Upon a subsequent
disposition of these shares, any amount received by the holder in excess of the
fair market value of the shares as of the exercise will be taxed as capital
gain.
SARs. Upon exercise of the SARs, any cash or common stock received by
the SAR holder will be treated as compensation income to the holder.
Restricted Share Awards; Deferred Shares; Other Deferred Compensation. Whenever
Newtek transfers common stock, cash, or other property to an Award holder, the
holder will recognize ordinary income equal to the fair market value of the
property transferred.
COMPARISON OF SHAREHOLDER RIGHTS
General
Upon completion of the Newtek/REXX and Newtek/BJB Holdings mergers,
holders of REXX common stock, whose rights are presently governed by New York
law and the certificate of incorporation and bylaws of REXX, will become
shareholders of Newtek, which also is a New York corporation. Upon the
Newtek/REXX and Newtek/BJB Holdings mergers, the rights of the REXX shareholders
will continue to be governed by New York law; however, their rights will also be
subject to the provisions of the Newtek certificate of incorporation and bylaws.
The current rights of the REXX shareholders are similar in most respects to
their future rights as shareholders of Newtek. The material differences between
these rights, to the extent they exist, are set forth below.
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<PAGE>
Issuance of Capital Stock
The Newtek certificate of incorporation authorizes the issuance of
39,000,000 shares of common stock, par value $.02 per share, and 1,000,000
shares of preferred stock, par value $.02 per share. The REXX certificate of
incorporation authorizes the issuance of 12,000,000 shares of common stock, par
value $.02 per share, and 1,000,000 shares of preferred stock, par value $1.00
per share. At May 30, 2000, 30 shares of Newtek common stock and 2,467,576
shares of REXX common stock were issued and outstanding. No shares of preferred
stock of Newtek or REXX were outstanding at this date. Both Newtek and REXX have
the authority to issue additional shares of capital stock up to the authorized
amounts without shareholder approval.
Number and Term of Directors
Under the Newtek bylaws, the board of directors shall consist of not
less than three, and not more than 11, directors, with the specific number to be
fixed by the board. The Newtek board of directors currently consists of three
members and will be expanded to five members immediately upon completion of the
Newtek/REXX and Newtek/BJB Holdings mergers. Thereafter, Newtek expects to name
one additional independent director during 2000. Under the Newtek bylaws, the
directors of Newtek are elected at each annual meeting of shareholders and serve
for one-year terms.
The REXX bylaws provide that the board of directors of REXX shall
consist of not less than three and more than 12 members, with the specific
number to be fixed by the board. Currently, the REXX board of directors consists
of 5 members, who serve for terms of one year.
Indemnification
The Newtek certificate of incorporation provides that Newtek shall
indemnify, to the fullest extent permitted by the New York Business Corporation
law, any director of officer whom Newtek has the power to indemnify under the
Business Corporation Law and who was, or is, a party to or threatened to be made
a party to any threatened action, suit or proceeding of any kind, including an
action by or in the right of Newtek, against expenses and liabilities incurred
in connection therewith. The REXX bylaws contain a similar provision requiring
mandatory indemnification of officers and directors to the fullest extent
permitted under the Business Corporation Law.
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<PAGE>
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGERS
In the opinion of Kutak Rock LLP, the following are the material
federal income tax consequences applicable to the shareholders of REXX and to
the shareholders of BJB Holdings. This opinion and the following discussion are
based on and subject to the Internal Revenue Code of 1986, the regulations
promulgated thereunder, existing administrative interpretations and court
decisions, all of which are subject to change, possibly with retroactive effect,
and assumptions, limitations, representations and covenants, including those
contained in certifications of officers of Newtek, BJB Holdings and REXX
expected to be executed as of the completion of the mergers. This discussion
does not address all aspects of United States federal income taxation that may
be important to you in light of your particular circumstances or if you are
subject to special rules, such as rules relating to:
o shareholders who are not citizens or residents of the United
States
o financial institutions
o tax-exempt organizations
o insurance companies
o dealers in securities
o shareholders who acquired their shares of BJB Holdings common
stock or REXX common stock pursuant to the exercise of options
or similar derivative securities or otherwise as compensation
o shareholders who hold their shares of BJB Holdings common
stock or REXX common stock as part of a straddle or conversion
transaction
This discussion assumes that shares of REXX common stock and shares of
BJB Holdings common stock are held as capital assets within the meaning of
Section 1221 of the Internal Revenue Code.
The opinion of Kutak Rock LLP referred to above assumes the absence of
changes in existing facts and will rely on assumptions, representations and
covenants including those contained in certificates executed by officers of
Newtek, REXX and BJB Holdings dated as of the completion of the mergers. The
opinion of Kutak Rock LLP neither binds the IRS nor precludes the IRS from
adopting a position contrary to that expressed below, and no assurance can be
given that contrary positions will not be successfully asserted by the IRS or
adopted by a court if the issues are litigated. Neither Newtek, REXX nor BJB
Holdings intends to obtain a ruling from the IRS with respect to the tax
consequences of the mergers.
Tax Implications to Newtek, REXX and BJB Holdings. For federal income
tax purposes, the Newtek/REXX merger will be treated as a transfer of property
to Newtek by the holders of the REXX common stock, and the Newtek/BJB Holdings
merger will be treated as a transfer of property to Newtek by the holders of the
BJB Holdings common stock. The mergers will be governed by Section 351 of the
Internal Revenue Code. Newtek, REXX and BJB Holdings will not recognize any gain
or loss for federal income tax purposes as a result of their respective mergers.
Tax Implications to REXX Shareholders. You will not recognize gain or
loss for federal income tax purposes when you transfer your REXX common stock to
Newtek solely for Newtek common stock pursuant to the Newtek/REXX merger. The
aggregate tax basis of the Newtek common stock you receive as a result of the
Newtek/REXX merger will be the same as your aggregate tax basis in the REXX
common stock you transfer in the exchange. The holding period of the Newtek
common stock you receive as a result of the Newtek/REXX merger will include the
period during which you held the REXX common stock you transfer in the merger.
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<PAGE>
Tax Implications to BJB Holdings Shareholders. You will not recognize
gain or loss for federal income tax purposes when you transfer your BJB Holdings
common stock to Newtek solely in exchange for Newtek common stock pursuant to
the Newtek/BJB Holdings merger. The aggregate tax basis of the Newtek common
stock you receive as a result of the Newtek/BJB Holdings merger will be the same
as your aggregate tax basis in the BJB Holdings common stock you transfer in the
merger. The holding period of the Newtek common stock you receive as a result of
the Newtek/BJB Holdings merger will include the period during which you held the
BJB Holdings common stock you transfer in the merger.
The obligation of REXX to complete the Newtek/REXX merger is
conditioned on, subject to waiver by Newtek and REXX, the delivery of an opinion
to REXX from Kutak Rock LLP dated as of the effective time of the Newtek/REXX
merger regarding the material federal income tax consequences of the Newtek/REXX
merger to the REXX shareholders.
This foregoing discussion is not intended to be a complete analysis or
description of all potential federal income tax consequences or any other
consequences of the mergers. In addition, this discussion does not address tax
consequences which may vary with, or are contingent on, your individual
circumstances. Moreover, this discussion does not address any non-income tax or
any foreign, state or local tax consequences of the mergers. Accordingly, you
are strongly urged to consult with your tax advisor to determine the particular
United States federal, state, local or foreign income or other tax consequences
to you of the Newtek/REXX merger or the Newtek/BJB Holdings merger.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet
consolidates the pro forma consolidated balance sheet of REXX (which reflects
the proposed sale of Watkins Contracting, Inc. and the costs and expenses
associated with that transaction) and the historical audited combined balance
sheet of Newtek at March 31, 2000, giving effect to the Newtek/REXX and
Newtek/BJB Holdings mergers as if they had been effective on March 31, 2000.
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1999 consolidates the pro forma
condensed consolidated statement of operations of REXX (which reflects the
proposed sale of Watkins Contracting, Inc. and the costs and expenses associated
with that transaction) and the historical audited combined statement of
operations of Newtek for the year ended December 31, 1999. The following
unaudited pro forma condensed consolidated statement of operations for the
three-month period ended March 31, 2000 consolidates the unaudited pro forma
condensed consolidated statements of operations of REXX (which reflects the
aforementioned sale of Watkins Contracting, Inc.) for the three-month period
ended March 31, 2000 and the unaudited combined statement of operations of
Newtek for the three month period ended March 31, 2000, giving effect to the
aforementioned mergers as if they had been effective on January 1, 1999.
This information should be read together with the historical
consolidated financial statements and notes of REXX and the historical combined
financial statements of Newtek. The pro forma financial data presented below
does not necessarily indicate the actual financial position or results of
operations that would have resulted if the mergers had been completed on the
dates indicated, or that may result in the future. (In thousands, except share
and per share data)
114
<PAGE>
Newtek Capital, Inc. & REXX Environmental Corporation
Unaudited Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
REXX Newtek/REXX
Pro Forma Newtek Pro Forma Adjustments Pro Forma
Assets Continuing Historical ----------------------- Continuing
Operations(a) Consolidated Debit Credit Operations
------------- ------------ -------- ------ ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents............... $ 397 $ 20,994 $ -- $ -- $ 21,391
Structured insurance product............ -- 1,785 -- -- 1,785
Prepaid insurance....................... -- 7,763 -- -- 7,763
Other investments....................... -- 489 -- -- 489
Assets held for sale.................... 780 -- -- -- 780
Furniture, fixtures and equipment....... 13 12 -- -- 25
Investments in qualified businesses..... -- 12,487 -- -- 12,487
Credits in lieu of cash................. -- 11,074 -- -- 11,074
Prepaid expenses and other assets....... 71 216 -- -- 287
--------- -------- -------- -------- --------
$ 1,261 $ 54,820 $ -- $ -- $ 56,081
========= ======== ======== ======== =========
Liabilities and shareholders' equity
Accounts payable and accrued expenses... $ 328 $ 317 $ -- $ -- $ 645
Note payable - certified investors...... 2,620 -- -- 2,620
Deferred income taxes payable........... -- -- -- (b) 2,332 2,332
Loan payable - other.................... -- 870 -- -- 870
Income tax payable...................... 88 -- -- -- 88
Interest payable........................ -- 32,722 -- -- 32,722
Note payable - insurance................ -- 4,000 -- -- 4,000
--------- -------- -------- -------- --------
Total liabilities....................... $ 416 $ 40,529 $ -- $ 2,332 $ 43,277
========= ======== ======== ======== =========
Minority interest....................... -- 5,394 -- -- 5,394
-------- --------
Shareholders' equity
Members' equity......................... -- 8,896 (b) 2,332 -- --
(c) 6,564
Preferred stock, $1.00 par value,
authorized 1,000,000 shares; -0-
shares issued........................... -- -- -- -- --
Common stock, $.02 par value,
authorized 12,000,000 shares;
5,279,828 shares issued................. 105 -- (c) 105 -- --
Common stock, $.01 par value,
authorized 50,000,000; 18,482,142
shares -- -- -- 11 72
issued.................................. (c)
(c) 61
Capital in excess of par value.......... 27,925 -- (c) 27,925 (c) 7,338 7,338
Accumulated deficit/retained earnings... 10,177 -- -- (c) 10,177 --
Common stock held in treasury, at
cost, 2,812,252 shares.................. (17,008) -- -- (c) 17,008 --
--------- -------- -------- -------- --------
Total shareholders' equity.............. 845 8,896 36,927 34,595 7,410
--------- -------- -------- -------- --------
$ 1,261 $54,820 $ 36,927 $ 36,927 $ 56,081
========= ======== ======== ======== ========
</TABLE>
115
<PAGE>
NEWTEK CAPITAL, INC. AND REXX ENVIRONMENTAL CORPORATION
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
A description of the pro forma adjustments follows:
(a) Reflects the proposed sale of Watkins Contracting, Inc. and the costs
and expenses associated with the transaction. See "Proposal Number 2 -
Sale of Watkins Contracting, Inc." and "Unaudited Condensed
Consolidated Pro Forma Financial Information."
(b) Adjustment to record federal and state income tax liability.
(c) Adjustment to reflect the merger of REXX and Newtek.
116
<PAGE>
Newtek Capital, Inc. & REXX Environmental Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1999
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
REXX Newtek/REXX Pro
Pro Forma Newtek Pro Forma Adjustments Forma
Continuing Historical --------------------- Continuing
Operations(a) Consolidated Debit Credit Operations
------------- ------------ -------- ------ ---------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 11,890 $ -- -- $ 11,890
Operating expenses 600 1,538 -- -- 2,138
------- --------- -------- ------ ----------
Income (loss) from operations (600) 10,352 -- -- 9,752
Other expenses (income)
Interest expense -- 2,439 -- 2,439
------- --------- -------- ------ ----------
Income (loss) before extraordinary (600) 7,913 -- -- 7,313
gain on defeasance of debt
Extraordinary gain on defeasance -- 924 -- -- 924
of debt
Net income (loss) before provision (600) 8,837 -- -- 8,237
for taxes
Provision for taxes 9 -- (b) 2,170 -- 2,179
------- --------- -------- ------ ----------
Net income (loss) before minority (609) 8,837 2,170 -- 6,058
interest
Minority interest -- 3,443 -- 3,443
------- --------- -------- ------ ----------
Net income (loss) $ (609) $ 5,395 $ 2,170 $ -- $ 2,615
======= ========= ======== ====== ==========
Per share data:
Basic and diluted $ (0.26) $ 0.30 $ 0.13
======= ========= ==========
Weighted average number of shares
outstanding 2,467,576 18,250,000 20,717,576
</TABLE>
117
<PAGE>
NEWTEK CAPITAL, INC. AND REXX ENVIRONMENTAL CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
A description of pro forma adjustments follows:
(a) Reflects the proposed sale of Watkins Contracting, Inc. and the costs
and expenses associated with the transaction. See "Proposed Number 2 -
Sale of Watkins Contracting, Inc." and "Unaudited Condensed
Consolidated Pro Forma Financial Information."
(b) Adjustment to record federal and state income tax provisions.
118
<PAGE>
Newtek Capital, Inc. & REXX Environmental Corporation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Three Months Ended March 31, 2000
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
REXX Newtek/REXX Pro
Pro Forma Newtek Pro Forma Adjustments Forma
Continuing Historical --------------------- Continuing
Operations(a) Consolidated Debit Credit Operations
------------- ------------ -------- ------ ---------------
<S> <C> <C> <C> <C>
Revenue $ -- $ 601 $ -- $ -- $ 601
Operating expenses 186 801 -- -- (987)
------- --------- -------- ------ ----------
Income (loss) from operations (186) (200) -- -- (386)
Other expenses (income)
Interest expense -- 1,157 -- -- 1,157
------- --------- -------- ------ ----------
Income (loss) before unrealized gains (186) (1,357) -- -- (1,543)
on other investments
Net income (loss) before provision (186) (1,357) -- -- (1,543)
for taxes
Provision for taxes -- -- -- -- --
------- --------- -------- ------ ----------
Net income (loss) before minority interest (186) (1,357) -- -- (1,543)
Minority interest -- (545) -- -- (545)
------- --------- -------- ------ ----------
Net income (loss) $ (186) $ (812) $ -- $ -- $ (998)
======= ========= ======== ====== ==========
Per share data:
------- --------- ----------
Basic and diluted $(0.08) $ (0.04) $ (0.05)
======= ========= ==========
Weighted average number of shares
outstanding 2,467,576 18,482,142 20,949,718
</TABLE>
119
<PAGE>
NEWTEK CAPITAL, INC. AND REXX ENVIRONMENTAL CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
A description of pro forma adjustments follows:
(a) Reflects the proposed sale of Watkins Contracting, Inc. and the costs
and expenses associated with the transaction. See "Proposed Number 2 -
Sale of Watkins Contracting, Inc." and "Unaudited Condensed
Consolidated Pro Forma Financial Information."
(b) Adjustment to record federal and state income tax provisions.
120
<PAGE>
EXPERTS
REXX's consolidated financial statements incorporated in this proxy
statement/prospectus by reference to the Annual Report on Form 10-K for the year
ended December 31, 1999, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Newtek's combined financial statements as of and for the period ended
December 31, 1998 and for the year ended December 31, 1999 (which financial
statements are prior to any merger), included in this proxy statement/prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Down To Earth Distribution's financial statements for the period ended
December 15, 1999, and for the year ended December 30, 1998, included in this
proxy statement/prospectus have been so included in reliance on the report of
Daszkal Bolton Manela Devlin & Co., independent accountants, given on the
authority of said firm as experts in auditing and accounting. Subsequent to
December 15, 1999, the company changed its name to DTE Technologies, LLC.
Representatives of PricewaterhouseCoopers LLP are expected to be
present at the annual meeting. These representatives will have the opportunity
to make a statement if they so desire and will be available to respond to
appropriate questions.
LEGAL MATTERS
Kutak Rock LLP, Washington, D.C., special counsel to Newtek, will
deliver opinions regarding the validity of the issuance of shares of Newtek
common stock in the Newtek/REXX and Newtek/BJB Holdings mergers and with respect
to the material federal income tax consequences of the mergers.
OTHER MATTERS
REXX's board of directors does not know of any matters to be presented
to the annual meeting other than those set forth above. However, if other
matters come before the annual meeting, it is the intentions of the persons
named in the accompanying proxy to vote the proxy in accordance with the
recommendation of the REXX board of directors on these matters, and
discretionary authority to do so is included in the proxy.
WHERE YOU CAN FIND MORE INFORMATION
Newtek has filed with the SEC a registration statement under the
Securities Act that registers the distribution to REXX and BJB Holdings
shareholders of the shares of Newtek common stock to be issued in connection
with the Newtek/REXX and Newtek/BJB mergers. The registration statement,
including the attached exhibits and schedules, contains additional relevant
information about Newtek and Newtek common stock. The rules and regulations of
the SEC allow us to omit certain information included in the registration
statement from this proxy statement/prospectus.
In addition, REXX files reports, proxy statements and other
information with the SEC under the Exchange Act. You may read and obtain copies
of this information by mail from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You can also inspect reports, proxy statements and
other information about REXX at the offices of the American Stock Exchange, 86
Trinity Place, New York, NY 10006-1881.
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<PAGE>
The SEC also maintains an internet worldwide web site that contains
reports, proxy statements and other information about issuers, like REXX and
Newtek, who file electronically with the SEC. The address of the site is
http://www.sec.gov.
The SEC allows REXX to "incorporate by reference" information into this
proxy statement/prospectus. This means that the company can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered to be a part of
this proxy statement/prospectus, except for any information that is superseded
by information that is included directly in this document.
This proxy statement/prospectus incorporates by reference the documents
listed below that REXX has previously filed with the SEC. They contain important
information about REXX and its financial condition. REXX will mail to each
shareholder with the proxy statement a copy of its Annual Report on Form 10-K
for the fiscal year ended December 31, 1999, as amended by Form 10-K/A, and its
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000.
o REXX's Annual Report on Form 10-K, as amended by Form 10-K/A, for the fiscal
year ended December 31, 1999.
o REXX's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2000.
REXX has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to REXX, as well as all
pro forma financial information, and Newtek has supplied all the information
relating to Newtek.
122
<PAGE>
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
REXX
If, for any reason, the Newtek/REXX merger agreement is terminated or
the merger agreement is not adopted by the REXX shareholders at the annual
meeting, REXX will continue to hold its annual meetings of shareholders in the
normal course. REXX shareholders may present proposals for inclusion in the
proxy statement for the subsequent annual meeting of shareholders to be held
later in 2000. These proposals must be received by REXX no later than November
6, 2000 to be considered for inclusion in REXX's proxy statement for the 2000
annual meeting of shareholders.
Newtek
It is currently expected that the 2001 annual meeting of Newtek
shareholders will be held on or about May 17, 2001. Shareholder proposals must
be received by Newtek no later than December 18, 2000 in order to be considered
for inclusion in next year's annual meeting proxy statement. With respect to the
2001 annual meeting of shareholders and pursuant to SEC rules, if Newtek is not
provided notice of a shareholder proposal, which the shareholder has not
previously sought to include in a Newtek proxy statement and form of proxy, by
45 days before the anticipated mailing date for the proxy, or March 2, 2001,
management proxies will be allowed to use their discretionary authority to vote
on this proposal without any discussion of the matter in the proxy statement.
o If you would like to request documents, please do so by September 1,
2000 to receive them before the annual meeting. If you request any
incorporated documents from us, we will mail them to you by first class
mail, or another equally prompt means, within one business day after we
receive your request.
o We have not authorized anyone to give any information or make any
representation about the merger or our companies that is different
from, or in addition to, that contained in this proxy
statement/prospectus or in any of the materials that we have
incorporated into this document. Therefore, if anyone does give you
information of this sort, you should not rely on it.
o If you are in a jurisdiction where offers to exchange or sell, or
solicitations of offers to exchange or purchase, the securities offered
by this document or the solicitation of proxies is unlawful, or if you
are a person to whom it is unlawful to direct these types of
activities, then the offer presented in this document does not extend
to you.
The information contained in this document speaks only as of the date
of this document unless the information specifically indicates that another date
applies.
123
<PAGE>
INDEX TO NEWTEK CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Report of Independent Accountants F-2
Combined Balance Sheets as of December 31, 1999 and 1998 F-3
Combined Statements of Operations for the year ended December 31, 1999
and the period from March 17, 1998 (commencement of operations)
to December 31, 1998 F-4
Combined Statements of Changes in Members' Equity for the year ended
December 31, 1999 and the period from March 17, 1998 (commencement
of operations) to December 31, 1998 F-5
Combined Statements of Cash Flows for the year ended December 31, 1999
and the period from March 17, 1998 (commencement of operations) to
December 31, 1998 F-6
Notes to Combined Financial Statements F-8
Combined Balance Sheet (Unaudited) as of March 31, 2000 F-21
Combined Statements of Operations (Unaudited) for the three months ended
March 31, 2000 and 1999 F-22
Combined Statements of Changes in Members' Equity (Unaudited) for the three months
ended March 31, 2000 and 1999 F-23
Combined Statements of Cash Flows (Unaudited) for the three months ended
March 31, 2000 and 1999 F-24
Notes to Unaudited Combined Financial Statements F-25
INDEX TO DOWN TO EARTH DISTRIBUTION, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Report of Independent Accountants F-30
Balance Sheets as of December 15, 1999 and December 31, 1998 F-31
Statements of Operations for the period ended December 15, 1999 and the F-32
year ended December 31, 1998
Statements of Changes in Stockholders' Deficit for the period ended
December 15, 1999 and the year ended December 31, 1998 F-33
Statements of Cash Flows for the period ended December 15, 1999 F-34
and the year ended December 31, 1998
Notes to Financial Statements F-35
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Members of Newtek Capital, Inc.:
In our opinion, the accompanying combined balance sheets and the related
combined statements of income, changes in members' equity and cash flows present
fairly, in all material respects, the financial position of Newtek Capital, Inc.
and its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999 and the
period March 17, 1998 (commencement of operations) to December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 17, 2000
F-2
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
1999 1998
----------- -----------
A S S E T S
Cash and cash equivalents $25,454,016 $ 1,567,138
Credits in lieu of cash 10,963,593 --
Investments in qualified businesses 8,275,000 400,000
Structured insurance product 1,759,493 1,656,555
Prepaid insurance 7,971,411 149,399
Prepaid expenses and other assets 212,802 136,268
Furniture, fixtures and equipment, net 8,714 10,987
----------- -----------
Total assets $54,645,029 $ 3,920,347
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 1,220,479 $ 117,582
Notes payable - certified investors 2,618,716 2,612,216
Notes payable - insurance 4,000,000 --
Note payable - bank 725,358 --
Notes payable - other 250,000 --
Interest payable 31,583,438 160,428
----------- -----------
Total liabilities 40,397,991 2,890,226
Minority interest 5,938,111 189,566
Commitments and contingencies
Members' equity 8,308,927 840,555
----------- -----------
Total liabilities and members' equity $54,645,029 $ 3,920,347
=========== ===========
See accompanying notes to these combined financial statements.
F-3
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM MARCH 17, 1998
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Revenue:
<S> <C> <C>
Income from tax credits $10,963,593 $ --
Consulting fee income 128,818 38,331
Interest income 789,715 81,456
Realized gains on investment -- 78,548
----------- -----------
Total revenue 11,882,126 598,335
----------- -----------
Expenses:
General and administrative 1,420,735 395,490
Interest 2,438,908 160,428
----------- -----------
Total expenses 3,859,643 555,918
----------- -----------
Income before extraordinary gain on defeasance of debt
and minority interest 8,022,483 42,417
Extraordinary gain on defeasance of debt 924,120 --
----------- -----------
Income before minority interest 8,946,603 42,417
Minority interest in income (loss) 3,520,809 (33,883)
----------- -----------
Net income $ 5,425,794 $ 76,300
=========== ===========
</TABLE>
See accompanying notes to these combined financial statements.
F-4
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM MARCH 17, 1998
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
1999 1998
----------- -----------
Members' equity - beginning of period $ 840,555 $ --
Contributions:
Members 5,000 1,100,004
Minority interests 180,000 150,000
Issuance of warrants 4,369,696 65,000
Members' distributions (279,067) (327,300)
Net income before allocation to minority interest 8,946,603 42,417
Less: Minority interest (5,753,860) (189,566)
----------- -----------
Members' equity - end of period $ 8,308,927 $ 840,555
=========== ===========
See accompanying notes to these combined financial statements.
F-5
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM MARCH 17, 1998
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 5,425,794 $ 76,300
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Income from tax credits (10,963,593) --
Extraordinary gain on defeasance of debt (924,120) --
Depreciation and other amortization 2,273 3,548
Accretion of interest income (102,938) (8,650)
Accretion of interest expense 2,368,813 163,847
Minority interest included in income 3,520,809 (33,883)
Changes in assets and liabilities:
Prepaid insurance (2,726,287) (149,399)
Prepaid expenses and other assets (76,535) (139,437)
Accounts payable and accrued expenses 1,073,583 117,582
------------ ------------
Net cash (used in) provided by operating activities (2,402,201) 29,908
------------ ------------
Cash flows from investing activities:
Qualified investments (8,125,000) (400,000)
Return of principal - qualified investments 250,000 --
Purchase of structured insurance product -- (1,647,905)
Purchase of furniture, fixtures and equipment -- (11,366)
------------ ------------
Net cash used in investing activities (7,875,000) (2,059,271)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 71,844,056 2,608,797
Payments for defeasance of long-term debt (41,389,998) --
Proceeds from Note payable - bank 725,358 --
Proceeds from loan payable - other 250,000 --
Contributions from minority interest 175,000 150,000
Contributions from members -- 1,100,004
Distributions to members (245,067) (327,300)
Issuance of warrants 3,273,971 65,000
Payments for deferred financing costs (469,241) --
------------ ------------
Net cash provided by financing activities 34,164,079 3,596,501
------------ ------------
</TABLE>
See accompanying notes to these combined financial statements.
F-6
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
AND THE PERIOD FROM MARCH 17, 1998
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net increase in cash and cash equivalents 23,886,878 1,567,138
Cash and cash equivalents - beginning of period 1,567,138 --
----------- -----------
Cash and cash equivalents - end of period $25,454,016 $ 1,567,138
=========== ===========
Supplemental disclosure of non-cash financing activities:
Issuance of the following in partial payment for insurance:
Notes $ 4,000,000
Warrants 1,095,725 --
----------- -----------
$ 5,095,725 $ --
=========== ===========
Distribution of investments in limited partnerships to members $ 34,000 $ --
=========== ===========
</TABLE>
See accompanying notes to these combined financial statements.
F-7
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation and description of business
The following entities represent the principal businesses of
Newtek Capital, Inc. and Subsidiaries (the "Company") and their financial
statements are presented on a combined basis due to common ownership and
management of the underlying entities, which are expected to merge into the
Company during 2000. Accordingly they are termed herein as subsidiaries rather
than affiliates. The Company was formed on June 29, 1999 under the name
Whitestone Holdings, Inc. and changed its name to Newtek Capital, Inc. on
January 18, 2000, and the underlying entities comprise: BJB Holdings, Inc.
("BJB"), The Whitestone Group, LLC ("TWG"), Wilshire Advisers, LLC ("WA"), a
certified capital company ("Capco") in New York, Wilshire NY Advisers II, a
pending Capco in New York ("WAII"), Wilshire Partners, LLC ("WP") a Capco in
Florida, Wilshire Investors, LLC ("WI") a Capco in Wisconsin, and Wilshire
Louisiana Advisers, LLC ("WLA") a Capco in Louisiana (the Capco entities are,
collectively, the "Capcos"). TWG acts as an investment adviser and manager to
the aforementioned Capcos as well as a merchant bank and provides investment
banking services including general business consulting services and strategic
planning, due diligence and merger and acquisition analysis and litigation
support services. All significant intercompany balances and transactions are
eliminated in combination.
The following is a summary of each Capco, state of certification
and date of certification:
State of Date of
Capco Certification Certification
----- ------------- -------------
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WAII New York Pending
In general, the Capcos issue debt and equity instruments,
generally warrants ("Certified Capital"), to insurance company investors
("Certified Investors"). The Capcos then make targeted investments,
("Investments in Qualified Businesses", as defined under the respective state
statutes), with the Certified Capital raised. Such investments may be accounted
for as either consolidated subsidiaries, under the equity method or cost method
of accounting, or as notes receivable, depending upon the nature of the
investment and the Company's and/or the Capco's ability to control or otherwise
exercise significant influence over the investee. Each Capco has a contractual
arrangement with the particular state that legally entitles the Capco to receive
(or, earn) tax credits from the state upon satisfying quantified, defined
investment percentage thresholds and time requirements. In order for the Capcos
to maintain their state-issued certifications, the Capcos must make Investments
in Qualified Businesses in accordance with these requirements. Each Capco also
has separate, legal contractual arrangements with the Certified Investors
obligating the Capco to pay interest on the aforementioned debt instruments
whether or not it meets the statutory requirements for Investments in Qualified
Businesses. The Capco can satisfy this interest payment, at the Capco's
discretion, by delivering tax credits in lieu of paying cash. The Capcos legally
have the right to deliver the tax credits to the Certified Investors. The
Certified Investors legally have the right to receive and use the tax credits
and would, in turn, use these tax credits to reduce their respective state tax
liabilities in an amount usually equal to 100% of their certified investment.
The tax credits can be utilized over a ten-year period at a rate of 10% per year
and in some instances are transferable and can be carried forward.
F-8
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In December 1999, BJB entered into an agreement with Rexx
Environmental Corporation ("Rexx"), which provides for the acquisition of all
the common stock of Rexx. This transaction is subject to Rexx disposing of its
sole operating subsidiary. Such disposal is subject to the approval of Rexx's
shareholders.
Cash and cash equivalents
All highly liquid investments purchased with maturities of three
months or less are considered to be cash equivalents. The Company places its
temporary cash investments in high-grade instruments with high credit quality
financial institutions. The Company has bank balances in excess of the $100,000
of depository insurance provided by the Federal Deposit Insurance Corporation.
Revenue Recognition
The Company recognizes consulting revenues as earned. Consulting
revenues are earned at the time the related services are provided and when the
right to receive payment is assured. Realized gains on investments are earned at
the time the investments are sold.
Income from tax credits: Following an application process, a
state will notify a company that it has been certified as a Capco. The state
then allocates an aggregate dollar amount of tax credits to the Capco. However,
such amount is neither recognized as income nor otherwise recorded in the
financial statements since it has yet to be earned by the Capco. As described in
"Basis of presentation and description of business," earlier in this note, the
Capco is legally entitled to earn tax credits upon satisfying defined investment
percentage thresholds within specified time requirements and corresponding
non-recapture percentages. At December 31, 1999, as summarized earlier in this
note, the Company had Capcos in four states. Each statute requires that the
Capco invest a threshold percentage of Certified Capital in Qualified Businesses
within the timeframes specified. As the Capco meets these requirements, it
avoids grounds under the statute for its disqualification for continued
participation in the Capco program. Such a disqualification, or
"decertification" as a Capco results in a recapture of all or a portion of the
allocated tax credits; the proportion of the recapture is reduced over time as
the Capco remains in general compliance with the program rules and meets the
progressively increasing investment benchmarks. As the Capco progresses in its
investments in Qualified Businesses and, accordingly, places an increasing
proportion of the tax credits beyond recapture, it earns an amount equal to the
non-recapturable tax credits and records such amount as income, with a
corresponding asset called "credits in lieu of cash", in the balance sheet. The
amount earned and recorded as income is determined by multiplying the total
amount of tax credits allocated to the Capco by the percentage of tax credits
immune from recapture (the earned income percentage) under the state statute. To
the extent that the investment requirements are met ahead of schedule, and the
percentage of non-recapturable tax credits is accelerated, the present value of
the tax credit earned is recognized currently and the asset, credits in lieu of
cash, is accreted up to the amount of tax credits available to the Certified
Investors.
F-9
<PAGE>
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The total amount of tax credits allocated to each of the aforementioned
Capcos, the required investment percentages, recapture provisions, earned income
percentages and pertinent dates are summarized as follows:
<TABLE>
<CAPTION>
The First to Occur
Investment Decertification Earned
State Total Tax Investment Benchmark Recapture Recapture Income
Capco Credits Allocated Benchmark Date Thresholds Percentage Percentage
----- ----------------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA $37,384,028 Prior to 20% 100% 0%
Wilshire 20% 12/31/00 After 20% before 30% 70% 30%
Partners (WP) 30% 12/31/01 After 30% before 40% 60% 40%
40% 12/31/02 After 40% before 50% 50% 50%
50% 12/31/03 After 50% 0% 100%
LOUISIANA $18,040,000 Prior to 30% 100% 0%
Wilshire LA 30% 10/14/02 After 30% before 50% 70% 30%
Advisers (WLA) 50% 10/14/04 After 50% 0% 100%
NEW YORK $ 2,673,797 Prior to 25% 100% 0%
Wilshire 25% 6/22/00 After 25% before 40% 85% 15%
Advisers (WA) 40% 6/22/01 After 40% before 50% 70% 30%
50% 6/22/02 After 50% 0% 100%
WISCONSIN $16,666,667 Prior to 30% 100% 0%
Wilshire 30% 10/25/02 After 30% before 50% 70% 30%
Investors (WI) 50% 10/25/04 After 50% 0% 100%
</TABLE>
Under the various state Capco provisions, there is a difference in the
amount of qualified investments made and the amount of income recognized by the
respective Capcos upon satisfaction of the various benchmarks. The table below
relates the investments made, both as percentage of total funds and in dollar
amounts, to the income recognized as each benchmark is achieved. In all of these
programs, a majority of the Company's income from the delivery of the tax
credits will be recognized no later than five years into the ten year programs.
F-10
<PAGE>
<TABLE>
<CAPTION>
Allocated Investment Earned
State Tax Benchmark Income
Capco Credits Percent/Dollars Percent/Dollars
----- ------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
FLORIDA
Wilshire $37,384,028 20% $7,476,806 30% $11,215,208
Partners (WP) 30% $11,215,208 40% $14,953,611
40% $14,953,611 50% $18,692,014
50% $18,692,014 100% $37,384,028
LOUISIANA
Wilshire LA $18,040,000 30% $5,412,000 30% $5,412,000
Advisers (WLA) 50% $9,020,000 100% $18,040,000
NEW YORK
Wilshire $2,673,797 25% $668,449 15% $401,070
Advisers (WA) 40% $1,069,519 30% $802,139
50% $1,336,899 100% $2,673,797
WISCONSIN
Wilshire $16,666,667 30% $5,000,000 30% $5,000,000
Investors (WI) 50% $8,333,334 100% $16,666,667
</TABLE>
During the year ended December 31, 1999, two Capcos, WA (earned
income percentage of 15%) and WP (earned income percentage of 30%), satisfied
the initial investment benchmark and the related recapture percentage
requirements and, accordingly, earned a portion of the tax credits (see Note 9).
Furniture, fixtures and equipment
Furniture, fixtures and equipment, which is comprised primarily
of office equipment, are stated at cost, less accumulated depreciation.
Depreciation of furniture, fixtures and equipment is provided on a straight-line
basis using estimated useful lives of the related assets (five years).
Organization Costs
The Company has adopted the American Institute of Certified
Public Accountants' Statement of Position 98-5, "Reporting on the Costs of Start
Up Activities", which requires organization costs to be expensed when incurred.
The change did not have a material effect on the Company's results of operations
or financial position.
Income Taxes
Each of the aforementioned underlying entities is a Limited
Liability Company ("LLC"). In lieu of corporate taxes, the members of an LLC are
taxed on their proportionate share of the entity's taxable income. Accordingly,
no liability for federal, state and local income taxes has been recorded in the
accompanying combined financial statements.
F-11
<PAGE>
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 at
the date of the financial statements and the reported amounts of revenue and
expense during the reporting period. The most significant estimates are with
respect to valuation of investments, the credits receivable and payable, and
amounts ascribed to warrants. Actual results could differ from those estimates.
Fair values of financial instruments
The carrying values of cash and cash equivalents, other assets,
accounts payable and accrued expenses approximate fair value because of the
short term maturity of these instruments. The carrying value of qualified
investments, structured insurance product, notes and loans payable, tax credits
receivable and payable, and warrants approximate fair value based on
management's estimates.
NOTE 2 - INSURANCE:
On November 19, 1998, WA purchased a structured insurance product
covering a ten-year period (the "Capco Policy") from a AAA rated international
insurance company (the "Insurer"). This insurance provides for (i) the
repayment, on the maturity date, of the note payable issued by WA to the
Certified Investors in connection with the capitalization of WA ("Note") (see
Note 4) ("Coverage A") and (ii) the loss or recapture of the state tax credits
delivered to the Certified Investors (see Note 1) ("Coverage B").
Notwithstanding the Insurer's obligation, WA remains primarily liable for
repayment of the Note. Premiums for the Capco Policy have been paid in full at
inception and the Capco Policy is non-cancelable. The Company paid a total of
$1,805,599 for the Capco Policy. The costs of Coverages A and B were $1,647,905
and $157,694, respectively. Under Coverage A, the Insurer is required to pay the
principal amount of the Note (Note 4), $2,673,797, on the maturity date in June,
2008. Accordingly, the Company has recorded the Coverage A payment as an asset,
called structured insurance product, and has been increasing the recorded amount
via an accretion to interest income. For the year ended December 31, 1999 and
the period ended December 31, 1998, the Company recorded $102,938 and $8,650,
respectively, as interest income. At December 31, 1999, the amount recorded in
the balance sheet was $1,759,493. At the June, 2008 Note maturity date, the
asset balance will be $2,673,797, the Insurer will pay the Certified Investors,
and the Company will reverse this asset balance in full with a corresponding
reversal of the Note balance.
The amount paid for Coverage B has been recorded as prepaid
insurance and is being amortized to expense over the life of the Capco Policy.
The Company has also purchased (as well as financed, see Note 5) Coverage B
insurance in connection with transactions described in Note 7. Such amounts are
accounted for in the same manner as Coverage B insurance referred to in this
note. The prepaid insurance balance of $7,971,411 at December 31, 1999 is
comprised solely of the unamortized cost of Coverage B insurance.
F-12
<PAGE>
The Company's Coverages A and B purchases are summarized as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Premium Paid for Premium Paid for
Capco Date of Purchase Coverage A Coverage B (3)
<S> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------
WA November 1998 $1,647,905(1) $157,694
------------------------------------------------------------------------------------------------------------------
Total - 1998 $1,647,905 $157,694
========== ========
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
WP April 1999 $23,127,927(2) $3,998,948
------------------------------------------------------------------------------------------------------------------
WLA October 1999 $9,175,844(2) $2,193,741
------------------------------------------------------------------------------------------------------------------
WI October 1999 $9,086,227(2) $2,352,786
------------------------------------------------------------------------------------------------------------------
Total - 1999 $41,389,998 $8,545,475
=========== ==========
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Coverage A has been accounted for as a structured insurance product as
described previously in this note.
(2) Coverage A has been accounted for as described in Note 7.
(3) Coverage B has been accounted for as described previously in this Note.
Additionally, a portion of the premiums paid in 1999 were financed by notes
($4,000,000) and the issuance of warrants ($1,095,725).
F-13
<PAGE>
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
Investments in Qualified Businesses (Note 1) represent notes
receivable (debt investments) and investments in the equity of non-public
companies; such investments are accounted for under the cost method. The
following table is a summary of such investments as of December 31, 1999, shown
separately between their debt ($8,250,000) and equity ($25,000) components (for
a total non-consolidated Investment in Qualified Businesses of $8,275,000), and
all terms of each are summarized. There are no expiration dates on any of the
financial instruments, unless disclosed.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
DEBT Date of Maturity Principal Stated Interest Principal Amount
Investee Type Investment Date Amount Rate December 31, 1999
-------- ---- ---------- ---- ------ ---- -----------------
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cedric Kushner Boxing, Inc. Debt 11/17/98 01/31/00 $ 150,000 9.00% $150,000
----------------------------------------------------------------------------------------------------------------
4G's Truck Renting Co., Inc. Debt 01/15/99 07/15/00 $ 300,000 6.50% $300,000
----------------------------------------------------------------------------------------------------------------
1-800GiftCertificate Debt 07/15/99 09/15/00 $ 300,000 8.75% $300,000
----------------------------------------------------------------------------------------------------------------
Down to Earth Technologies Debt 12/15/99 02/16/01 $ 500,000 9.00% $500,000
----------------------------------------------------------------------------------------------------------------
Transworld Business
Brokers, Inc. Debt 11/23/99 11/23/01 $ 350,000 6.00% $350,000
----------------------------------------------------------------------------------------------------------------
Transworld Business
Brokers, Inc. Debt 11/23/99 11/23/01 $3,150,000 5.25% $3,150,000
----------------------------------------------------------------------------------------------------------------
Merchant Data Systems Sales
and Marketing Debt 10/25/99 04/15/01 $3,500,000 7.00%-9.00% $3,500,000
----------------------------------------------------------------------------------------------------------------
Total Debt Investments $8,250,000 $8,250,000
========== ==========
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
EQUITY Limited
Liability
Company Original Cost Basis
Date of Type of Common Stock Membership Investment December 31,
Investee Investment Investment Equivalents (1) Share Ratio Amount 1999
-------- ---------- ---------- --------------- ----------- ------ ----
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cedric Kushner Boxing, Options for
Inc. 11/17/98 Common Stock(2) 3 NA $0 $0
----------------------------------------------------------------------------------------------------------------------------
Class A
1800GiftCertificate 07/15/99 Preferred Stock 13,159 NA $2,604 $2,604
----------------------------------------------------------------------------------------------------------------------------
Class B
1800Gift Preferred
Certificate 07/15/99 Stock(3) 113,140 NA $22,396 $22,396
----------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems 10/21/99 Membership NA 50.00% $0 $0
Sales and Marketing Interests in
LLC
----------------------------------------------------------------------------------------------------------------------------
BizBroker Net 11/23/99 Membership NA 50.00% $0 $0
Interests in
LLC
----------------------------------------------------------------------------------------------------------------------------
Down to Earth 12/15/99 Membership NA 50.00% $0 $0
Technologies Interests in
LLC
----------------------------------------------------------------------------------------------------------------------------
Total Equity Investments $ 25,000 $ 25,000
=========== ============
Total Debt and Equity Investments $8,275,000 $8,275,000
=========== ============
</TABLE>
See Note 13 for an investment that was made subsequent to December 31, 1999.
(1) Common Stock Equivalents reflect conversion of all financial instruments
into common stock.
(2) Expires four years from date of investment.
(3) Expires six years from date of investment.
F-15
<PAGE>
Investments in equity interests of and notes receivable from affiliated
companies accounted for under the equity method amounted to $7,500,000 and $0 at
December 31, 1999 and 1998, respectively. Additionally, the Company's investment
balance in the equity of each of these investees is zero at December 31, 1999
and 1998. The Company has not recorded its share of the losses in these
investees because its investment account is zero. The Company has not guaranteed
any obligation of these investees, and the Company is not otherwise committed to
provide further financial support for the investees. The condensed unaudited
financial information of these investees is summarized as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Merchant Data
Systems Sales BizBroker Net, Down to Earth
and Marketing, LLC LLC Technologies, LLC
-------------------------------------------------------------------------------------------------------------------
Years Ended Years Ended Years Ended
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/99 12/31/98 12/31/99 12/31/98 12/31/99 12/31/98
-------------------------------------------------------------------------------------------------------------------
Revenue $ 36,549 -- -- -- $ 431,212 $ 233,874
-------------------------------------------------------------------------------------------------------------------
Expenses $ 129,575 -- -- -- $ 698,290 $ 646,592
-------------------------------------------------------------------------------------------------------------------
Net loss $ (93,026) -- -- -- $(267,078) $(412,718)
-------------------------------------------------------------------------------------------------------------------
Total assets $3,406,974 -- $3,150,000 -- $ 178,450 $ 179,232
-------------------------------------------------------------------------------------------------------------------
Total liabilities $3,500,000 -- $3,150,000 -- $ 965,966 $ 768,304
-------------------------------------------------------------------------------------------------------------------
</TABLE>
DTE Technologies, LLC is developing the use of satellite and Internet
technology to the marketing of high-quality and organic agricultural products to
major agricultural and land owners; Merchant Data Systems Sales and Marketing,
LLC provides credit card processing services to small businesses; and
BizBrokerNet is developing a large number of services to be marketed to business
brokers and their small business clients nationwide.
F-16
<PAGE>
NOTE 4 - NOTES PAYABLE - CERTIFIED INVESTORS:
In June 1998 WA issued a Note and a warrant to a Certified
Investor for a total amount of $2,673,797. The Company's interest obligations
under the Note are as described in Notes 1 and 7. The warrant entitles the
Certified Investor to purchase 13% of WA's member units at a purchase price of
$.01 per unit. The warrant can be exercised at any time during the 10-year term
of the Note.
Of the total proceeds, the Company allocated $2,608,797 to the
Note and $65,000 to the warrant. The Company initially recorded the Note at
$2,608,797 and has been increasing such amount via an accretion to interest
expense. For the year ended December 31, 1999 and the period ended December 31,
1998, the Company recorded $6,500 and $3,419, respectively, of interest expense
for such accretion. At December 31, 1999, the Note balance was $2,618,716. At
the maturity date in June 2008, the Note balance will be $2,673,716 and the
Insurer (Note 2) will pay such amount to the Certified Investor.
Under the terms of the Note, WA is required to maintain minimum
levels of working capital and tangible net worth, as defined. At December 31,
1999 WA was in compliance with such requirements.
NOTE 5 - NOTES PAYABLE - INSURANCE:
In October 1999, WI and WLA each borrowed $2,000,000 ($4,000,000
in total), from a financing company to finance a portion of the total premiums
due to an insurance company for Coverage B insurance. The notes bear interest at
8.5%, are payable in three installments beginning on April 1, 2001, with the
final payment due on October 24, 2002. Accrued interest at December 31, 1999
amounted to $50,922.
NOTE 6 - NOTES PAYABLE - OTHER:
During 1999, the Company borrowed $250,000 from two outside
consultants. Such amount was outstanding at December 31, 1999 and is due on May
10, 2000, or the closing of the Rexx merger (see Note 1), whichever is sooner.
The notes bear interest at 6% per annum and are convertible into 250,000 shares
of the Company's common stock. In August 1999, the Company entered into a
$750,000 one year revolving working capital loan with a bank bearing interest at
8.75% per annum. At December 31, 1999, the Company had borrowed $725,358 from
the bank. Such amount is due on August 30, 2000.
NOTE 7 - INTEREST PAYABLE AND DEFEASANCE OF DEBT:
As described in Note 1, each Capco has separate contractual
arrangements with the Certified Investors obligating the Capco to pay interest
on the aforementioned debt instruments.
During 1999, at the time the Capcos obtained the proceeds from the issuance of
the debt instruments and warrants to the Certified Investors, the Capcos also
purchased insurance contracts from the Insurer. These insurance contracts are
similar to those described in Note 2; however, the Coverage A portion of
F-17
<PAGE>
NOTE 7 - INTEREST PAYABLE AND DEFEASANCE OF DEBT: (CONTINUED)
these contracts fully defease the Capco's liability for the full amount of
proceeds obtained from the Certified Investors. The Insurer is primarily liable
to the Certified Investors for such amounts. The Capcos, however, are
secondarily, or contingently, liable for such payment, and remain primarily
liable for the interest obligation. The Coverage B portion of these contracts is
similar to such coverage described in Notes 2 and 4.
The Company has allocated the initial proceeds received from the
Certified Investors as follows:
Notes payable, including premiums $71,844,056
Warrants 3,273,971
-------------
$75,118,027
Concurrently, in 1999 the Company purchased Coverage A for a
total of $41,389,998. The Company defeased the $71,844,056 by obtaining Coverage
A. The resulting difference of $30,454,058, less the bond premiums of
$1,393,361, plus the December 31, 1998 balance of $160,428 represents the excess
of the initial liability under the debt instruments over the Coverage A
payments, and has been recorded as interest payable, representing the present
value of the Capcos total liability to pay interest to the Certified Investors.
Such amount will be increased via an accretion of interest expense during the
10-year period the Capcos are obligated to pay interest, and will decrease as
the Capcos pay interest via delivering the tax credits, or paying cash (Note 9).
At December 31, 1998 and 1999, such liability was $160,428 and $31,583,438,
respectively and related amounts charged to interest expense for the period
ended December 31, 1998 and the year ended December 31, 1999 were $160,428 and
$2,362,313, respectively. The total amount of interest payable to the Certified
Investors through the 10-year period is $74,764,492.
Under the Note agreements, no interest is paid in cash provided
that the Certified Investors receive tax credits. The Certified Investors
acknowledge that the Insurer is primarily responsible for the repayment of the
original proceeds on the maturity dates.
NOTE 8 - WARRANTS:
The warrants entitle the holders to purchase, for a $.01 exercise
price, an interest in each respective Capco. The values ascribed to the warrants
issued to the Certified Investors (Note 7) and the Insurer have been recorded as
minority interest. In addition, certain minority interests have already been
acquired by minority shareholders. The following is the aggregate percentage
interest of the minority shareholders in each respective Capco:
Capco % Interest
----- ----------
WA, New York 13%
WP, Florida 43%
WI, Wisconsin 53%
WLA, Louisiana 24%
F-18
<PAGE>
NOTE 9 - INCOME FROM TAX CREDITS:
As described in Note 1, each Capco has a contractual arrangement
with a particular state that legally entitles the Capco to earn tax credits from
the state upon satisfying certain criteria. In December, 1999 two Capcos
satisfied such criteria and, as a result, earned a portion of the tax credits.
The full amount of such portion is $11,616,278. As each Capco met the
requirements ahead of schedule, it has recorded the present value of the tax
credits, or $10,963,593, as income from tax credits with a corresponding asset,
called "credits in lieu of cash," in the combined balance sheet. As the tax
credits are utilized by the Certified Investors, the asset balance will be
offset against interest payable (Note 7).
NOTE 10 - COMMITMENTS:
A Capco is required to make investments in qualified businesses
under a qualified investment schedule, as defined, in order to remain certified
as a Capco. If the Company does not make such qualified investments within the
statutorily provided time frame, the Capco is subject to Decertification and
Revocation, as defined in the respective Capco agreements, of its certificate
and, accordingly, the Certified Investor could be subject to forfeiture or
recapture of its previously granted respective state tax credits. This risk has
been insured under Coverage B (Notes 2 and 7). Generally, a Capco must invest at
least 50% of its Certified Capital in qualified businesses within five years
after the certification date. At December 31, 1999, the Company had invested the
following percent of its certified capital:
Capco December 31, 1999
----- -----------------
WA, New York 38.34%
WP, Florida 20.06%
WI, Wisconsin 00%
WLA, Louisiana 00%
NOTE 11 - RELATED PARTY TRANSACTIONS:
The Company rents office space at $3,000 per month on a
month-to-month basis from a related party. In addition, for the year ended
December 31, 1999 and the period ended December 31, 1998, the Company incurred
financial consulting expenses of approximately $16,000 and $0, respectively,
from a related party. At December 31, 1999, the Company's members had advanced a
total of $21,000 to the Company. Such amount is included in accounts payable and
accrued expenses.
NOTE 12 - EXTRAORDINARY GAIN ON DEFEASANCE OF DEBT:
As a result of the debt defeasance described in Note 7 the
Company recognized income on the note premiums of $1,393,361 and wrote off the
debt issuance costs of $469,241, for a net gain of $924,120. This gain has been
classified as an extraordinary item in the income statement. Because the Capcos
are LLCs (see Note 1), no related provision for income taxes has been recorded.
F-19
<PAGE>
NOTE 13 - SUBSEQUENT EVENT:
On February 1, 2000, WI entered into a five year loan agreement
in the amount of $2,500,000 with CB Real Net ("CB"). The loan was reviewed and
approved by the Wisconsin Department of Insurance for its qualification as a
qualified investment. CB will make monthly interest payments at a rate of 7 1/2%
per annum for the first two years, increasing to 15% for years three through
five. Principal will be repaid as follows: $875,000 in 2002; $1,000,000 in 2003;
$312,500 in each of 2004 and 2005. In connection with this loan agreement, the
Company also received a 40% ownership interest in CB for no additional
consideration. Accordingly, WI will record the loan as a note receivable and
will account for its 40% ownership interest using the equity method of
accounting.
F-20
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEET (UNAUDITED)
March 31, 2000
A S S E T S
Cash and cash equivalents $20,994,022
Credits in lieu of cash 11,073,861
Investments in qualified businesses 12,486,877
Other investments 488,750
Structured insurance product 1,785,227
Prepaid insurance 7,762,774
Prepaid expenses and other assets 216,240
Furniture, fixtures and equipment, net 12,044
-----------
Total assets $54,819,795
===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 317,214
Notes payable - certified investors 2,620,341
Notes payable - insurance 4,000,000
Notes payable - other 518,750
Loans payable - members 351,000
Interest payable 32,722,497
-----------
Total liabilities 40,529,802
Minority interest 5,393,497
Commitments and contingencies
Members' equity 8,896,496
-----------
Total liabilities and members' equity $54,819,795
===========
See accompanying notes to these unaudited combined financial statements.
F-21
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
March 31,
--------------------------
2000 1999
----------- -----------
Revenue:
Income from tax credits $ 110,269 $ 355,173
Consulting fee income 14,300 35,380
Interest and dividend income 476,419 46,874
----------- -----------
Total revenue 600,988 437,427
----------- -----------
Expenses:
General and administrative 800,552 121,779
Interest 1,157,479 68,470
----------- -----------
Total expenses 1,958,031 190,249
----------- -----------
Income (loss) before minority interest (1,357,043) 247,178
Minority interest in income (loss) (544,614) 31,550
----------- -----------
Net income (loss) $ (812,429) $ 215,628
=========== ===========
See accompanying notes to these unaudited combined financial statements.
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Members' equity - beginning of period $ 8,308,927 $ 840,555
Issuance of common stock 1,625,000 --
Members' distributions (225,000) (10,000)
Net income (loss) before allocation to minority interest (1,357,043) 247,178
Less: minority interest 544,614 (31,550)
----------- -----------
Members' equity - end of period $ 8,896,496 $ 1,046,183
=========== ===========
</TABLE>
See accompanying notes to these unaudited combined financial statements.
F-23
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (812,429) $ 215,628
Adjustments to reconcile net income to net cash used in
operating activities:
Income from tax credits (110,269) (355,173)
Depreciation and other amortization 4,764 569
Accretion of interest income (25,734) (25,733)
Accretion of interest expense 1,140,685 68,470
Minority interest included in income (loss) (544,614) 31,550
Changes in assets and liabilities:
Prepaid insurance 208,637 3,942
Prepaid expenses and other assets (3,437) 9,320
Accounts payable and accrued expenses (901,640) 19,809
------------ ------------
Net cash used in operating activities (1,044,037) (32,187)
------------ ------------
Cash flows from investing activities:
Investments in qualified businesses (4,376,877) (300,000)
Return of principal - qualified investments 165,000 --
Other investments (220,000) --
Purchase of furniture, fixtures, and equipment (9,722) --
------------ ------------
Net cash used in investing activities (4,441,599) (300,000)
------------ ------------
Cash flows from financing activities:
Payment of note payable - bank (725,358) --
Newtek stock sale 1,625,000 --
Distributions to members (225,000) (10,000)
Loans payable - members 351,000 --
------------ ------------
Net cash provided by (used in) financing activities 1,025,642 (10,000)
------------ ------------
Net decrease in cash and cash equivalents (4,459,994) (342,187)
Cash and cash equivalents - beginning of period 25,454,016 1,567,138
------------ ------------
Cash and cash equivalents - end of period $ 20,994,022 $ 1,224,951
============ ============
</TABLE>
See accompanying notes to these unaudited combined financial statements.
F-24
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED COMBINED FINANCIAL STATEMENTS
Note 1 - Basis of presentation and description of business
The following entities represent the principal businesses of Newtek
Capital, Inc. and Subsidiaries (the "Company") and their financial statements
are presented on a combined basis due to common ownership and management of the
underlying entities, which are expected to merge into the Company during 2000.
Accordingly they are termed herein as subsidiaries rather than affiliates. The
Company was formed on June 29, 1999 under the name Whitestone Holdings, Inc. and
changed its name to Newtek Capital, Inc. on January 18, 2000, and the underlying
entities comprise: BJB Holdings, Inc. ("BJB"), The Whitestone Group, LLC
("TWG"), Wilshire Advisers, LLC ("WA"), a certified capital company ("Capco") in
New York, Wilshire NY Advisers II, a pending Capco in New York ("WAII"),
Wilshire Partners, LLC ("WP") a Capco in Florida, Wilshire Investors, LLC ("WI")
a Capco in Wisconsin, and Wilshire Louisiana Advisers, LLC ("WLA"), a Capco in
Louisiana (the Capco entities are, collectively, the "Capcos"). TWG acts as an
investment adviser and manager to the aforementioned Capcos as well as a
merchant bank and provides investment banking services including general
business consulting services and strategic planning, due diligence and merger
and acquisition analysis and litigation support services. All significant
intercompany balances and transactions are eliminated in combination.
The following is a summary of each Capco, state of certification and
date of certification:
State of Date of
Capco Certification Certification
----- ------------- -------------
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WAII New York April 2000
In general, the Capcos issue debt and equity instruments, generally
warrants ("Certified Capital"), to insurance company investors ("Certified
Investors"). The Capcos then make targeted investments, ("Investments in
Qualified Businesses", as defined under the respective state statutes), with the
Certified Capital raised. Such investments may be accounted for as either
consolidated subsidiaries, under the equity method or cost method of accounting,
or as notes receivable, depending upon the nature of the investment and the
Company's and/or the Capco's ability to control or otherwise exercise
significant influence over the investee. Each Capco has a contractual
arrangement with the particular state that legally entitles the Capco to receive
(or, earn) tax credits from the state upon satisfying quantified, defined
investment percentage thresholds and time requirements. In order for the Capcos
to maintain their state-issued certifications, the Capcos must make Investments
in Qualified Businesses in accordance with these requirements. Each Capco also
has separate, legal contractual arrangements with the Certified Investors
obligating the Capco to pay interest on the aforementioned debt instruments
whether or not it meets the statutory requirements for Investments in Qualified
Businesses. The Capco can satisfy this interest payment, at the Capco's
discretion, by delivering tax credits in lieu of paying cash. The Capcos legally
have the right to deliver the tax credits to the Certified Investors. The
Certified Investors legally have the right to receive and use the tax credits
and would, in turn, use these tax credits to reduce their respective state tax
liabilities in an amount usually equal to 100% of their certified investment.
The tax credits can be utilized over a ten-year period at a rate of 10% per year
and in some instances are transferable and can be carried forward.
F-24
<PAGE>
Note 2 - Private Placement of Common Stock
In the first quarter of 2000, the Company sold 232,142 shares of common
stock in private transactions, with net proceeds totaling $1,625,000.
Note 3 - Investments in Qualified Businesses
In March 2000, the Company, through WLA, made approximately $1,900,000
of loans to Louisiana companies, whereby 75% of the loans (approximately
$1,425,000) is guaranteed by the U.S. Small Business Administration and is
expected to be sold in the secondary market and settle within 90 days of the
loan closing. The loans were primarily made to small companies in need of
expansion capital, with loan terms as follows: interest at prime plus one (net
of servicing fee), amortizing between approximately five and twenty years.
On February 1, 2000, WI entered into a five year loan agreement in the
amount of $2,500,000 with CB Real Net ("CB"). The loan was reviewed and approved
by the Wisconsin Department of Insurance for its qualification as a qualified
investment. CB will make monthly interest payments at a rate of 7 1/2% per annum
for the first two years, increasing to 15% for years three through five.
Principal will be repaid as follows: $875,000 in 2002; $1,000,000 in 2003;
$312,500 in each of 2004 and 2005. In connection with this loan agreement, the
Company also received a 40% ownership interest in CB for no additional
consideration.
Investments in Qualified Businesses (Note 1) represent notes
receivable (debt investments) and investments in the equity of non-public
companies; such investments are accounted for under the cost method. The
following table is a summary of such investments as of March 31, 2000, shown
separately between their debt ($12,461,877) and equity ($25,000) components (for
a total non-consolidated Investment in Qualified Businesses of $12,486,877), and
all terms of each are summarized. There are no expiration dates on any of the
financial instruments, unless disclosed.
F-26
<PAGE>
<TABLE>
<CAPTION>
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Original Stated
DEBT Date of Maturity Principal Interest Principal Amount
Investee Type Investment Date Amount Rate March 31, 2000
-------- ---- ---------- ---- ------ ---- --------------
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Cedric Kushner Boxing, Inc. Debt 11/17/98 01/31/00 $ 150,000 9.00% $0
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
4G's Truck Renting Co., Inc. Debt 01/15/99 07/15/00 $ 300,000 6.50% $285,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
1-800GiftCertificate Debt 07/15/99 09/15/00 $ 300,000 8.75% $300,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Transworld Business
Brokers, Inc. Debt 11/23/99 11/23/01 $ 350,000 6.00% $350,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Transworld Business
Brokers, Inc. Debt 11/23/99 11/23/01 $3,150,000 5.25% $3,150,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Raising Cain Debt 03/01/00 Various $ 180,618 Prime + 1% $180,618
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Data-Tel of Louisiana Debt 03/01/00 Various $ 513,000 Prime + 1% $513,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Gino's Seafood Debt 03/01/00 Various $ 454,019 Prime + 1% $454,019
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Steve Kent Trucking Debt 03/01/00 Various $ 729,240 Prime + 1% $729,240
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
CB Real Net Debt 02/01/00 Various $ 2,500,000 Various $2,500,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Down to Earth Technologies Debt 12/15/99 02/16/01 $500,000 9.00% $500,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Merchant Data Systems Sales
and Marketing Debt 10/21/99 04/15/01 $3,500,000 9.00% $3,500,000
----------------------------- --------- --------------- ------------ --------------- ------------ ------------------
Total Debt Investments $12,626,877 $12,461,877
=========== ===========
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------- --------------------------------------------------- ----------------- -----------------
EQUITY Limited
Liability
Company Original Cost Basis
Date of Type of Common Stock Membership Investment March 31, 2000
Investee Investment Investment Equivalents (1) Share Ratio Amount
-------- ---------- ---------- --------------- ----------- ------
---------------------------------------- --------------------------------------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Cedric Kushner Boxing, Options for
Inc. 11/17/98 Common Stock(2) 3 NA $0 $0
---------------------------------------- --------------------------------------------------- ----------------- -----------------
Class A
Preferred Stock
1800GiftCertificate 07/15/99 13,159 NA $2,604 $2,604
---------------------------------------- --------------------------------------------------- ----------------- -----------------
Class B
1800Gift Preferred
Certificate 07/15/99 Stock(3) 113,140 NA $22,396 $22,396
---------------------------------------- --------------------------------------------------- ----------------- -----------------
CB Real Net 02/01/00 Warrants for
Membership
Interests(4) NA 40.00% $0 $0
---------------------------------------- --------------------------------------------------- ----------------- -----------------
Merchant Data Systems Membership
Sales and Marketing Interests in
10/21/99 LLC NA 50.00% $0 $0
---------------------------------------- --------------------------------------------------- ----------------- -----------------
Membership
Interests in
BizBroker Net 11/23/99 LLC NA 50.00% $0 $0
---------------------------------------- --------------------------------------------------- ----------------- -----------------
Membership
Down to Earth Interests in
Technologies 12/15/99 LLC NA 50.00% $0 $0
---------------------------------------- --------------------------------------------------- ----------------- -----------------
Total Equity Investments $ 25,000 $ 25,000
=========== ============
Total Debt and Equity Investments $12,651,877 $12,486,877
=========== ===========
</TABLE>
(1) Common Stock Equivalents reflect conversion of all financial instruments
into common stock.
(2) Expires four years from date of investment.
(3) Expires six years from date of investment.
(4) Expires five years from date of investment and has a $.01 exercise price.
F-29
<PAGE>
Investments in equity interests of and notes receivable from affiliated
companies accounted for under the equity method amounted to $10,000,000 and $0
at March 31, 2000 and 1999, respectively. Additionally, the Company's investment
balance in the equity of each of these investees is zero at March 31, 2000. The
Company has not recorded its share of the losses in these investees because its
investment account is zero. The Company has not guaranteed any obligation of
these investees, and the Company is not otherwise committed to provide further
financial support for the investees. The combined unaudited financial
information of these investees is as follows:
<TABLE>
<CAPTION>
------------------ ---------------------------- ------------------------ ---------------------- ----------------------
Merchant Data Down to Earth
Systems Sales BizBroker Net, Technologies, LLC CB Real Net,
and Marketing, LLC LLC LLC
------------------ ---------------------------- ------------------------ ---------------------- ----------------------
Three Months Three Months Ended Three Months Three Months
Ended Ended Ended
------------------ ---------------------------- ------------------------ ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
03/31/00 03/31/99 03/31/00 03/31/99 03/31/00 03/31/99 03/31/00 03/31/99
------------------ ----------------- ---------- ------------- ---------- ---------- ----------- ----------- ----------
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
Revenue $ 57,317 -- -- -- $174,772 $102,555 -- --
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
Expenses $ 157,907 -- $ 46,594 -- $270,274 $165,255 $ 33,368 --
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
Net loss $ (100,590) -- $ (46,594) -- $(95,502) $(62,700) $ (33,368) --
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
Assets $ 3,306,384 -- $3,103,406 -- $178,450 $179,232 $ 2,499,965 --
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
Liabilities $ 3,500,000 -- $3,150,000 -- $965,966 $768,304 $ 2,533,333 --
------------------ ----------------- ---------- -------------- --------- ---------- ----------- ------------ ---------
</TABLE>
Note 4- Subsequent Events
In April 2000, the Company received funding from certified investors of
approximately $7,690,000 from the creation and approval by New York State of a
newly formed CAPCO, Wilshire New York Advisers II.
Additionally, in April 2000, the Company sold 32,143 shares of common
stock in private transactions, with net proceeds totaling $225,000.
In June 2000, the Company, through its consolidated subsidiary Wilshire
Partners, LLC, invested $1,200,000 in Multi Media Distribution Corp., an
internet reseller of "closeout" merchandise (videos, cassettes, etc.).
F-29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Down to Earth Distribution, Inc.
West Palm Beach, Florida
We have audited the accompanying balance sheets of Down to Earth Distribution,
Inc., as of December 15, 1999 and December 31, 1998, and the related statements
of operations, changes in stockholders' deficit and cash flows for the period
ended December 15, 1999 and the year 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. 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 referred to above present fairly, in
all material respects, the financial position of Down to Earth Distribution,
Inc., as of December 15, 1999 and December 31, 1998, and the results of its
operations and its cash flows for the period ended December 15, 1999 and the
year ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company experienced a loss from operations
in 1999 and 1998 and had negative cash flows from operations for the year ended
December 31, 1998. These matters raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding those
matters are described in Note 10. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ DASZKAL BOLTON MANELA DEVLIN & CO.
Boca Raton, Florida
July 29, 2000
F-30
<PAGE>
DOWN TO EARTH DISTRIBUTION, INC.
BALANCE SHEETS
AS OF DECEMBER 15, 1999 AND DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
December 15 December 31
------------ ------------
1999 1998
----------- -----------
Current Assets:
<S> <C> <C>
Cash $ 3,128 $ --
Accounts receivable, net 12,822 9,087
Inventory -- 6,745
----------- -----------
Total current assets 15,950 15,832
----------- -----------
Property and equipment, net -- --
----------- -----------
Other assets:
Deposit 162,500 163,400
----------- -----------
Total assets $ 178,450 $ 179,232
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 312,608 $ 164,473
Royalties and commissions payable 345,890 273,333
Note Payable 8,160 9,442
Checks outstanding in excess of bank balance -- 3,437
Stockholders' loans 299,308 317,619
----------- -----------
Total current liabilities 965,966 768,304
----------- -----------
Commitments and contingencies -- --
----------- -----------
Stockholders' deficit:
Common stock, $1.00 par value; authorized 10,000 shares;
issued & outstanding 5,000 shares at December 15, 1999
and 1,045 shares at December 31, 1998 5,000 1,045
Additional paid in capital 229,607 181,205
Accumulated deficit (1,022,123) (771,322)
----------- -----------
Total stockholders' deficit (787,516) (589,072)
----------- -----------
Total liabilities and stockholders' deficit $ 178,450 $ 179,232
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
DOWN TO EARTH DISTRIBUTION, INC.
STATEMENTS OF OPERATIONS
PERIOD ENDED DECEMBER 15, 1999 AND YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Jan. 1- Dec. 15 Jan. 1-Dec. 31
1999 1998
----------------- ------------------
<S> <C> <C>
Sales $ 410,220 $ 233,874
Cost of sales 187,334 124,124
--------- ---------
Gross profit 222,886 109,750
--------- ---------
Selling, general, and administrative expenses 409,389 474,732
--------- ---------
Loss from operations (186,503) (364,982)
--------- ---------
Interest expense 64,298 47,736
--------- ---------
Net loss $(250,801) $(412,718)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
DOWN TO EARTH DISTRIBUTION, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
PERIOD ENDED DECEMBER 15, 1999 AND YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock
--------------------------------- Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
------------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 1,000 $ 1,000 $ 111,250 $ (358,604) $ (246,354)
Common stock issued 45 45 69,955 - 70,000
Net loss -- -- -- (412,718) (412,718)
------------- ----------- ------------ ------------- ------------
Balance, December 31, 1998 1,045 1,045 181,205 (771,322) (589,072)
Common stock issued for services 3,955 3,955 3,955
Contribution of services - - 48,402 -- 48,402
Net loss - - - (250,801) (250,801)
------------- ----------- ------------ ------------- ------------
Balance, December 15, 1999 5,000 $ 5,000 $ 229,607 $ (1,022,123) $ (787,516)
============= =========== ============ ============= ============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
DOWN TO EARTH DISTRIBUTION, INC.
STATEMENTS OF CASH FLOWS
PERIOD ENDED DECEMBER 15, 1999 AND YEAR ENDED DECEMBER 31, 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(250,801) $(412,718)
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization -- 2,277
Stock based compensation 3,460 --
(Increase) decrease in:
Accounts receivable (3,734) 40,300
Inventory 6,745 (4,532)
Deposit 900 (147,500)
Accounts payable, accrued expenses
& other liabilities 264,374 224,678
--------- ---------
Increase (decrease) in:
Net cash provided by (used in) operating activities (27,459) (297,495)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 495 70,000
Loans from stockholders (18,311) 226,707
--------- ---------
Net cash provided by (used in) financing activities (17,816) 296,707
--------- ---------
Net increase (decrease) in cash 3,128 (788)
Cash at beginning of period -- 788
--------- ---------
Cash at end of period $ 3,128 $ --
========= =========
Supplemental Information
Cash paid for:
Interest $ 8,393 $ 2,520
========= =========
Investing activities:
Common stock issued for services $ 3,460 $ --
========= =========
Contribution of services $ 48,402 $ --
========= =========
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
DOWN TO EARTH DISTRIBUTION, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Down To Earth Distribution, Inc., (the "Company"), was incorporated in the State
of Florida on October 30, 1996. The Company acquired the exclusive right to buy,
sell and distribute Bio-Earth, a biologically based and environmentally safe
product which promotes plant growth. Bio-Earth is used for soil treatment and
enhances the growth of plan root structure. The Company sells its product to
golf courses and sports facilities worldwide and to landscapers, municipalities
and school boards within the State of Florida.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventory
Inventory consists of merchandise held for sale and is stated at the lower of
cost or market as determined by the first-in, first-out (FIFO) method.
Property and Equipment
Fixed assets are recorded at cost. Depreciation and amortization are computed
using accelerated methods over the estimated useful lives of the related assets.
Depreciation expense was 0 and $1740 for the period ended December 15, 1999 and
year ended December 31, 1998, respectively.
Revenue Recognition
Revenue from the sale of the Company's products are recognized when such
products are shipped.
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 expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents
For the purpose of the statement of cash flows, the Company considers all highly
liquid investment purchases with an original maturity date of three months or
less to be cash equivalents.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the
Internal Revenue Code. Under those provisions, the Company does not pay federal
corporate income taxes on its taxable income or receive any benefit from its
losses. Instead, the stockholders are liable for reporting their respective
share of the corporate income or loss. Accordingly, no provision has been made
for federal income tax expense or benefit in the accompanying financial
statements.
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NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable are recorded net of allowances for doubtful accounts of
$9,087 and $9,087 for the period ended December 15, 1999 and year ended December
31, 1998, respectively.
NOTE 4 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, accounts receivable, accounts
payable, and notes payable approximates fair value due to their short-term
nature.
NOTE 5 - COMMITMENTS
Supplier Agreement
The Company purchases substantially its entire inventory from one supplier. The
Company entered into a five year "Exclusive Distribution Agreement" with this
supplier in 1997. Under the agreement, the Company agreed to purchase a minimum
amount of product annually, measured from the date of the signing of the
contract. Failure by the Company to meet the minimum purchase amounts resulted
in the loss of the exclusivity under the purchase agreement.
Endorsement Contract
In 1996, the Company entered into a licensing and endorsement agreement with a
major golf professional to promote the sale of its product. The agreement runs
for a period of five years. The agreement calls for minimum royalty amounts for
the years ending December 31, payable quarterly, as follows:
2000 145,152
2001 174,183
Under this agreement, the Company accrued $120,960 and $100,800 for the periods
ended December 15, 1999 and December 31, 1998, respectively.
In addition to the above minimum royalty, the Company is to pay a bonus royalty
amount which is calculated on a quarterly basis and is based on 3.5% of gross
sales, exclusive of products sold to large agricultural users and 3.5% of net
sales (deferred or gross sales less the direct cost of the products sold and
shipping costs) to large agricultural users, less the minimum royalties accrued.
During the periods ended December 15, 1999 and December 31, 1998, there was no
bonus royalties received.
Factoring Agreement
The Company entered into a factoring agreement with a major bank whereby certain
receivables of the Company may be sold to the bank for a price equal to 96.5% of
the face value of those receivables. The Company has agreed to tender sufficient
accounts receivable to the bank during each calendar month so that 3.5% of the
aggregate face amount of all receivables tendered (the "discount amount") will
equal or exceed $2,200 (the "minimum amount.") The Company is obligated to pay
the bank any short fall, if the discount amount is less than the minimum amount
in any month, not later than fifteen days after the end of each calendar month.
Lease Commitments
The Company leases its corporate office and warehouse facilities. The office
lease is an annual lease. It commenced February 1, 1997 and provided for a
monthly rent of $350 plus sales tax. The Company rents its warehousing
facilities under month-by-month lease arrangements. The rent at one of the
locations is determined based on the weight and number of pallets of product
stored. The rent at the other location is shared with another party and is $50
per month. Additionally, the Company leases equipment under operating lease
agreements. Rent expense was $12,929 and $11,824 for the periods ended December
15, 1999 and December 31, 1998, respectively.
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NOTE 6 - CONTINGENCIES
The Company is involved in a lawsuit regarding its deposits in Mexico arising in
the normal course of business. Management believes that amounts are collectible
and that settlement of such claims and lawsuits would not be material to the
Company's financial position. There can be no assurance that the outcome of the
litigation will be favorable to the Company. If the outcome of the litigation is
not favorable, such outcome could have a material adverse effect on the
financial condition of the Company.
NOTE 7 - STOCKHOLDER LOANS
Stockholder loans were $299,308 and $317,619 at December 15, 1999 and December
31, 1998, respectively. Interest on the stockholder loans has been accrued at 9%
per annum. The stockholder loans will be repaid as funds become available.
NOTE 8 CONCENTRATIONS
As noted above, the Company purchases substantially its entire inventory from
one supplier. The loss of the supplier could have a material adverse effect on
the Company.
NOTE 9- SALE OF COMMON STOCK
During the period ended December 15, 1999 and the year ended December 31, 1998,
the Company issued its common stock for cash and in exchange for services as
follows:
(a) The Company issued 45 shares of common stock for cash during
the year ended December 31, 1998. The total amount obtained
from the issuance was $70,000.
(b) In December 1999, 3,995 shares of common stock were issued for
services. This transaction resulted in $3,460 of professional
fees expense, which was included in the statement of
operations.
NOTE 10 GOING CONCERN
The accompanying financial statements have been prepared under the assumption
that the Company will continue as a going concern. The Company incurred a net
loss of $250,801 for the period ended December 15, 1999 and $412,718 for the
year ended December 31, 1998. The Company had negative working capital of
$297,495, as of December 31, 1998. The ability of the Company to continue as a
going concern is dependent upon its obtaining additional capital and increasing
revenues sufficiently to cover operating cost and commitments. Management has
secured financing of $500,000 and has pledged 5,000 shares of common stock as a
cost of financing received.
NOTE 11- SUBSEQUENT EVENT
On December 15, 1999, the Company entered into a security agreement with
Wilshire Partners, LLC. The Company entered into a term note of $500,000, due
February 16, 2001. Interest accrues at nine percent (9%) per annum and is
payable monthly. This note is personally guaranteed by a majority stockholder of
the Company and is secured by substantially all of the tangible and intangible
assets of the Company. The Company pledged 5,000 shares of common stock as a
cost of financing to Wilshire Partners, LLC.
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APPENDIX A
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement ("Agreement") is made as of June 10, 1999
(the "Effective Date"), by Greg S. Watkins, an individual resident in San Diego,
California ("Watkins") and Daren J. Barone ("Barone") (Barone and, collectively
with Watkins, the "Buyers"), on the one hand, and REXX Environmental
Corporation, a New York corporation (the "Seller"), on the other hand.
The Seller desires to sell, and the Buyers desire to purchase, all of
the issued and outstanding shares (the "Shares") of capital stock of Watkins
Contracting, Inc., a Nevada corporation (the "Company"), for the consideration
and on the terms set forth in this Agreement.
NOW, THEREFORE, the parties, intending to be legally bound, agree as
follows:
1. Definitions.
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"Best Efforts"-- the efforts that a prudent Person desirous of
achieving a result would use in similar circumstances to ensure that such result
is achieved as expeditiously as possible taking into account economic
limitations and practical business considerations that exist as of the date such
Best Efforts are required to be used, including, without limitation, the
Company's or the Seller's financial performance and condition and any limitation
on the availability of credit imposed by the Existing Lender.
"Breach"-- a "Breach" of a representation, warranty, covenant,
obligation, or other provision of this Agreement or any instrument delivered
pursuant to this Agreement will be deemed to have occurred if there is or has
been (a) any inaccuracy in or breach of, or any failure to perform or comply
with, such representation, warranty, covenant, obligation, or other provision,
or (b) any other occurrence or circumstance that is or was inconsistent with
such representation, warranty, covenant, obligation, or other provision, and the
term "Breach" means any such inaccuracy, breach, failure, occurrence, or
circumstance.
"Business"-- the business of providing asbestos abatement, hazardous
materials or soil remediation, demolition or services related thereto, to a
variety of Persons, including private or governmental clients. Specific services
include (without limitation) removal of asbestos containing materials (ACM),
lead paint, contaminated soils and polychlorinated biphenyls (PCB). Contaminated
soils remediation is related to material excavation. (The foregoing is referred
to in this Agreement as the "Business.")
"Buyers' Disclosure Letter"-- the disclosure letter delivered by the
Buyers to the Seller concurrently with the execution and delivery of this
Agreement.
"Buyers' Release" -- as defined in Section 2.5.
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"Closing Date"-- the date and time as of which the Closing actually
takes place.
"Commission" -- the Securities and Exchange Commission.
"Consent"-- any approval, consent, ratification, waiver, or other
authorization (including any Governmental Authorization).
"Contemplated Transactions"-- all of the transactions contemplated by
this Agreement, including:
(a) the sale of the Shares by the Seller to the Buyers;
(b) the execution, delivery, and performance of the
Noncompetition Agreements, the Seller's Release, and the Buyers' Release;
(c) the performance by the Buyers and the Seller of their
respective covenants and obligations under this Agreement; and
(d) the Buyers' acquisition and ownership of the Shares and
exercise of control over the Company.
"Contract"-- any agreement, contract, obligation, promise, or
undertaking (whether written or oral and whether express or implied) that is
legally binding.
"Damages"-- as defined in Section 10.2.
"Encumbrance"-- any charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal, or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income, or exercise of any other attribute of
ownership.
"Environmental Law"-- any Legal Requirement that requires or relates
to:
(a) advising appropriate authorities, employees, and the
public of intended or actual releases of pollutants or hazardous substances or
materials, violations of discharge limits, or other prohibitions and of the
commencements of activities, such as resource extraction or construction, that
could have significant impact on the Environment;
(b) preventing or reducing to acceptable levels the release of
pollutants or hazardous substances or materials into the Environment;
(c) reducing the quantities, preventing the release, or
minimizing the hazardous characteristics of wastes that are generated;
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(d) assuring that products are designed, formulated, packaged,
and used so that they do not present unreasonable risks to human health or the
Environment when used or disposed of;
(e) protecting resources, species, or ecological amenities;
(f) reducing to acceptable levels the risks inherent in the
transportation of hazardous substances, pollutants, oil, or other potentially
harmful substances;
(g) cleaning up pollutants that have been released, preventing
the threat of release, or paying the costs of such clean up or prevention; or
(h) making responsible parties pay private parties, or groups
of them, for damages done to their health or the Environment, or permitting
self-appointed representatives of the public interest to recover for injuries
done to public assets.
"ERISA"-- the Employee Retirement Income Security Act of 1974 or any
successor law, and regulations and rules issued pursuant to that Act or any
successor law.
"Exchange Act"-- the Securities Exchange Act of 1934, as amended, and
the rules and regulations issued pursuant thereto.
"Existing Lender" -- Wells Fargo Bank.
"GAAP"-- generally accepted United States accounting principles,
applied on a consistent basis.
"Governmental Authorization"-- any approval, consent, license, permit,
waiver, or other authorization issued, granted, given, or otherwise made
available by or under the authority of any Governmental Body or pursuant to any
Legal Requirement.
"Governmental Body"-- any:
(a) nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
(b) federal, state, local, municipal, foreign, or other
government;
(c) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(d) multi-national organization or body; or
(e) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.
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"Indemnified Persons"--as defined in Section 10.2.
"IRC"-- the Internal Revenue Code of 1986, as amended, or any successor
law, and regulations issued by the IRS pursuant to the Internal Revenue Code or
any successor law.
"IRS"-- the United States Internal Revenue Service or any successor
agency, and, to the extent relevant, the United States Department of the
Treasury.
"Knowledge"-- an individual will be deemed to have "Knowledge" of a
particular fact or other matter if:
(a) such individual is or was actually aware of such fact or
other matter ("Actual Knowledge"); or
(b) a prudent individual could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting
a reasonably comprehensive investigation concerning the existence of such fact
or other matter.
A Person (other than an individual) will be deemed to have "Knowledge"
of a particular fact or other matter if any individual who is serving, or who
has at any time served, as a director or officer of such Person (or in any
similar capacity) has, or at any time had, Knowledge of such fact or other
matter; provided, however, that no representation or warranty of the Seller
stated as made to as to its Knowledge will be subject to any Breach to the
extent the representation or warranty is based on a representation or warranty
of the Buyers in the Prior Acquisition Agreement (as seller thereunder) or any
written statement furnished by the Company to the Seller subsequent to October
22, 1997 and prior to or on the Closing (but excluding any written statements
constituting projections, estimates or forward looking statements) or on any
failure of an officer of the Company to furnish information in a circumstance
where the officer had a legal obligation to furnish information.
"Legal Requirement"-- any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
"Material Adverse Effect" -- any material adverse effect on the
business, assets, properties, operations, prospects, valuation or financial
condition of the Seller or the Company, taken as a whole, and taking into
account, with respect to the Seller and the Company, (a) losses attributable to
the Company's operations, (b) lower gross margins than anticipated by the
Company on certain of its jobs, and (c) the Company's noncompliance with certain
financial covenants of its line of credit with the Existing Lender and (d) the
limitations on the availability of credit that have been or may be required by
the Existing Lender.
"NASA Claim"-- the Company's claim for compensation from the National
Aeronautics and Space Administration with respect to work done at Edwards Air
Force Base on behalf of Innertex General Contractors.
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"Noncompetition Agreement"-- as defined in Section 2.5.
"Occupational Safety and Health Law"-- any Legal Requirement designed
to provide safe and healthful working conditions and to reduce occupational
safety and health hazards, and any program, whether governmental or private
(including those promulgated or sponsored by industry associations and insurance
companies), designed to provide safe and healthful working conditions.
"Order"-- any award, decision, injunction, judgment, order, ruling,
subpoena, or verdict entered, issued, made, or rendered by any court,
administrative agency, or other Governmental Body or by any arbitrator.
"Ordinary Course of Business"-- the ordinary course of business
consistent with the Company's past custom or practice (including with respect to
quantity and frequency).
"Organizational Documents"-- (a) the articles or certificate of
incorporation and the bylaws of a corporation; (b) the partnership agreement and
any statement of partnership of a general partnership; (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership; (d) any charter or similar document adopted or filed in connection
with the creation, formation, or organization of a Person; and (e) any amendment
to any of the foregoing.
"Person"-- 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.
"Prior Acquisition Agreement" - the Stock Purchase Agreement dated as
of October 21, 1997 between the Seller (then known as Oak Hill Sportswear
Corporation), as buyer, and the Buyers as sellers, together with the Seller's
Closing Documents and the Buyers' Closing Documents and the Put Agreement
referred to therein.
"Proceeding"-- any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any Governmental Body or arbitrator.
"Related Buyer Business" - any Related Person of a Buyer engaged in the
Business in Southern California (i.e., the area comprised of the greater Los
Angeles metropolitan area and all areas of California south thereof).
"Related Person"-- with respect to a particular individual:
(a) each other member of such individual's Family;
(b) any Person that is directly or indirectly controlled by
such individual or one (1) or more members of such individual's Family;
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(c) any Person in which such individual or members of such
individual's Family hold (individually or in the aggregate) a Material Interest;
and
(d) any Person with respect to which such individual or one
(1) or more members of such individual's Family serves as a director, officer,
partner, executor, or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is
directly or indirectly controlled by, or is directly or indirectly under common
control with such specified Person;
(b) any Person that holds a Material Interest in such
specified Person;
(c) each Person that serves as a director, officer, partner,
executor, or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material
Interest;
(e) any Person with respect to which such specified Person
serves as a general partner or a trustee (or in a similar capacity); and
(f) any Related Person of any individual described in clause
(b) or (c).
For purposes of this definition, (a) the "Family" of an individual
includes (i) the individual, (ii) the individual's spouse, (iii) any other
natural person who is related to the individual or the individual's spouse
within the second degree, and (iv) any other natural person who resides with
such individual, and (b) "Material Interest" means direct or indirect beneficial
ownership (as defined in Rule 13d-3 under the Securities Exchange Act of 1934)
of voting securities or other voting interests representing at least ten percent
(10%) of the outstanding voting power of a Person or equity securities or other
equity interests representing at least ten percent (10%) of the outstanding
equity securities or equity interests in a Person.
"Representative"-- with respect to a particular Person, any director,
officer, employee, agent, consultant, advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.
"Securities Act"-- the Securities Act of 1933 or any successor law, and
regulations and rules issued pursuant to that Act or any successor law.
"Seller's Disclosure Letter"-- the disclosure letter delivered by the
Seller to the Buyers concurrently with the execution and delivery of this
Agreement.
"Seller SEC Documents"-- all reports, schedules, forms, statements and
other documents filed by the Seller with the Commission since October 22, 1997.
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"Seller's Release"-- as defined in Section 2.5.
"Stockholder Approval" -- the affirmative approval of the stockholders
of the Seller holding at least two-thirds (2/3) of the voting power of all such
stockholders and otherwise in full compliance with the requirements of
applicable law and any stock exchange regulations to which the Seller is
subject.
"Subsidiary"-- with respect to any Person (the "Owner"), any
corporation or other Person of which securities or other interests having the
power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred) are held by the Owner or one (1) or more of its
Subsidiaries; when used without reference to a particular Person, "Subsidiary"
means a Subsidiary of the Company.
"Superior Proposal" - a bona fide proposal regarding an acquisition of
the Company or its assets made by a third Person that the Board of Directors of
the Seller determines in its good faith judgment to be more favorable on
financial terms to the Seller's stockholders than the Contemplated Transactions
and for which financing, to the extent required, is then committed or which, in
the good faith judgment of the Board of Directors of the Seller, is reasonably
capable of being obtained by such third Person.
"Tax"-- any tax (including any income tax, capital gains tax,
value-added tax, sales tax, property tax, gift tax, or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency, or other fee,
and any related charge or amount (including any fine, penalty, interest, or
addition to tax), imposed, assessed, or collected by or under the authority of
any Governmental Body or payable pursuant to any tax-sharing agreement or any
other Contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee.
"Tax Return"-- any return (including any information return), report,
statement, schedule, notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.
"Threatened"-- a claim, Proceeding, dispute, action, or other matter
will be deemed to have been "Threatened" if any demand or statement has been
made (orally or in writing) or any notice has been given (orally or in writing)
to the Seller.
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2. Sale and Transfer of Shares; Closing.
2.1 Shares. Subject to the terms and conditions of this Agreement, at
the Closing, the Seller will sell and transfer the Shares to the Buyers, and the
Buyers will purchase the Shares from the Seller.
2.2 Purchase Price.
(a) The purchase price (the "Purchase Price") for the Shares
will be $1,300,000 payable in cash, and delivery of 125,000 shares of Common
Stock of the Seller with an agreed upon fair market value of $1.375 per share or
the closing price of such Shares as of the day prior to the Closing, whichever
is less.
(b) The Seller shall have the option of having a third party
purchase all or any portion of 125,000 shares from the Buyers for a price of
$1.375 or more per share, and the Buyers shall deliver the net proceeds of such
sale after the payment of all applicable Taxes with respect to such sale to the
Seller at Closing. Notwithstanding the foregoing, the Buyers shall not be
required to sell any shares of the Seller's Common Stock to a third party
hereunder if such third party is not a "accredited investor" as defined in
Regulation D promulgated under the Securities Act and such sale is not otherwise
in full compliance with all applicable federal and state securities laws, as
reasonably determined by counsel for the Buyers.
2.3 Other Consideration.
(a) Concurrently with the Closing, the Buyers shall cause the
Company to pay in full the remaining balance of the inter-company loan by the
Seller to the Company in the amount of $6,001 (without any interest accrued upon
such amount).
(b) Prior to the Closing, the Buyers and the Company shall use
their Best Efforts to obtain or cause the Company to obtain and deliver to
Seller the release from and termination of all agreements, guarantees and other
instruments by the Seller to Safeco Credit Company, Inc., CAT Financial and
Reliance Insurance Companies (Reliance Surety Company, Reliance Insurance
Company, United Pacific Insurance Company and Reliance Surety Company). If the
Buyers do not obtain and deliver a release and termination of any such Persons
(a "Non-Releasing Person"), (x) on the Closing the Buyers will deliver (i) to
the Seller their agreement to guarantee, indemnify and hold the Seller harmless
with respect to any of the Seller's obligations or liabilities to such
Non-Releasing Persons in substantially the form previously delivered by Buyers
to Seller, (ii) to all such Non-Releasing Persons their guarantees in a form
reasonably acceptable to such Non-Releasing Persons, and furnish evidence to
Seller, reasonably satisfactory to it, of deliveries of such guarantees, and (y)
after the closing use their Best Efforts to obtain and deliver to Seller the
releases in a form reasonably acceptable to the Seller, from all such
Non-Releasing Persons.
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2.4 Closing. The purchase and sale (the "Closing") provided for in this
Agreement will take place at the offices of the Buyers' counsel at 101 West
Broadway, 17th Floor, San Diego, California at 10:00 a.m. (local time) as soon
as practicable following the receipt of (a) Stockholder Approval or (b) the
Certificate referred to in Section 7.2 hereof, or at such other time and place
as the parties may agree. The parties agree that neither the Seller, the Buyers
nor their representatives need attend the Closing in person and that the
execution and delivery of the documents to be delivered at Closing may take
place via facsimile with original signatures to follow via overnight courier.
2.5 Closing Obligations. At the Closing:
(a) The Seller will deliver to the Buyers:
(i) certificates representing the Shares, duly
endorsed (or accompanied by duly executed stock powers), with signatures
guaranteed by a commercial bank or by a member firm of the New York Stock
Exchange, for transfer to the Buyers;
(ii) a release in the form of Exhibit "A" executed by
the Seller (the "Seller's Release");
(iii) a noncompetition agreement in the form of
Exhibit "B" executed by the Seller (the "Noncompetition Agreement");
(iv) indemnification agreements in favor of each of
the Buyers in a form reasonably acceptable to the Buyers executed by the Seller
(the "Buyer Indemnification Agreements"); and
(v) a certificate executed by the Seller representing
and warranting to the Buyers that each of the Seller's representations and
warranties in this Agreement was accurate in all respects as of the date of this
Agreement and is accurate in all respects as of the Closing Date as if made on
the Closing Date (giving full effect to any supplements to the Seller's
Disclosure Letter that were delivered by the Seller to the Buyers prior to the
Closing Date in accordance with Section 5.6); and
(b) The Buyers will deliver to the Seller:
(i) the Purchase Price;
(ii) a release in the form of Exhibit "C" executed by
each of the Buyers (the "Buyers' Release");
(iii) a pay-off letter executed by the Existing
Lender confirming to Seller that all amounts due pursuant to the Company's
existing credit agreement with the Existing Lender have been paid in full; and
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(iv) a certificate executed by the Buyers to the
effect that, except as otherwise stated in such certificate, each of the Buyers'
representations and warranties in this Agreement were accurate in all respects
as of the date of this Agreement and are accurate in all respects as of the
Closing Date as if made on the Closing Date.
3. Representations and Warranties of the Seller. Except as set forth in
the Seller's Disclosure Letter delivered by the Seller to the Buyers, and which
exceptions to representations and warranties are applicable to the section of
this Agreement to which they expressly relate and no other representation and
warranty in this Agreement, the Seller represents and warrants to the Buyers as
follows:
3.1 Organization, Good Standing.
(a) The Seller is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, with full corporate power and authority to conduct its business
as it is now being conducted, to own or use the properties and assets that it
purports to own or use, and to perform all its obligations under Contracts.
(b) The Seller has delivered to the Buyers originals of the
Organizational Documents of the Company, as currently in effect.
3.2 Authority; No Conflict.
(a) This Agreement constitutes the legal, valid, and binding
obligation of the Seller, enforceable against the Seller in accordance with its
terms. The Noncompetition Agreement and the Seller's Release (collectively, with
this Agreement, the Seller's Disclosure Letter and all certificates of the
Seller delivered under this Agreement, the "Seller's Closing Documents")
constitute the legal, valid, and binding obligations of the Seller enforceable
against the Seller in accordance with their respective terms. The Seller has the
absolute and unrestricted right, power, authority, and capacity to execute and
deliver this Agreement and the Seller's Closing Documents and, subject solely to
Shareholder Approval or delivery of the certificate referred to in Section 7.2,
to perform its obligations under this Agreement and the Seller's Closing
Documents.
(b) Except as set forth in Part 3.2(b) of the Seller's
Disclosure Letter, neither the execution and delivery of this Agreement nor the
consummation or performance of any of the Contemplated Transactions will,
directly or indirectly (with or without notice or lapse of time):
(i) contravene, conflict with, or result in a
violation of (A) any provision of the Organizational Documents of the Seller, or
(B) any resolution adopted by the board of directors or the stockholders of the
Seller;
(ii) contravene, conflict with, or result in a
violation of, or give any Governmental Body or other Person the right to
challenge any of the Contemplated Transactions or to exercise any remedy or
obtain any relief under, any Legal Requirement or any Order to which the Seller
may be subject or Contract to which the Seller is a party; or
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(iii) contravene, conflict with, or result in a
violation of any of the terms or requirements of, or give any Governmental Body
the right to revoke, withdraw, suspend, cancel, terminate, or modify, any
Governmental Authorization that is held by the Seller.
(c) Except as set forth in Part 3.2(c) of the Seller's
Disclosure Letter, the Seller will not be required to give any notice to or
obtain any consent, from any Person in connection with its execution, delivery
or performance of this Agreement or a Seller's Closing Document or its
consummation or performance of any of the Contemplated Transactions.
3.3 Capitalization. Assuming the accuracy as of the Closing of the
Prior Acquisition Agreement of the representations in Section 3.3 of the Prior
Acquisition Agreement, (i) the authorized equity securities of the Company
consist of 2,500 shares of common stock, no par value, of which 2 shares are
issued and outstanding; (ii) the Seller is the record and beneficial owner and
holder of all the Shares, free and clear of all Encumbrances; (iii) no legend or
other reference to any purported Encumbrance appears upon any certificate
representing the Shares, and such Shares are subject to no Encumbrance other as
may be applicable to restricted securities under the Securities Act; (iv) all of
the outstanding shares of capital stock of the Company have been duly authorized
and validly issued and are fully paid and nonassessable; and (v) there are no
Contracts, other than this Agreement, relating to the issuance, sale, transfer
or voting of shares of capital stock or other securities of the Company.
3.4 Seller SEC Documents. The Seller has filed all the Seller SEC
Documents required to be filed by it. As of the respective dates, the Seller SEC
Documents complied in all material respects with the requirements of the
Securities Act and the Exchange Act, as the case may be, and the rules and
regulations thereunder, and when filed contained no untrue statement of material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that the Seller
makes no representation or warranty to the extent the Seller SEC Documents were
based upon representations and warranties of the Buyers in the Prior Acquisition
Agreement (as sellers thereunder) or any written statement furnished to the
Seller by the Company subsequent to October 22, 1997 and prior to the Closing.
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3.5 Taxes.
(a) Since October 22, 1997 through the Closing, the Company
has filed all Tax Returns that it was required to file. All such Tax Returns
were correct and complete in all respects. All Taxes owed by the Company
(whether or not shown on any Tax Return) with respect to the period since
October 22, 1997 through the Closing have been paid or reflected or reserved
against and shown on the face of the December 31, 1998 balance sheet of the
Company or, with respect to Tax with respect to a period after the date thereof
through the Closing, reflected or reserved against and shown on the face of the
last regularly prepared balance sheet of the Company. Except as set forth in
Part 3.5(a) of the Seller's Disclosure Letter, the Company is not currently the
beneficiary of any extension of time within which to file any Tax Return during
the period from October 22, 1997 to the date of this Agreement. No claim has
been made by any Government Body in a jurisdiction where the Company does not
file Tax Returns that it is or may be subject to taxation by that jurisdiction.
There are no Encumbrances on any of the assets of the Company that arose in
connection with any failure (or alleged failure) to pay any Tax during the
period from October 22, 1997 to the date of this Agreement.
(b) The Seller does not expect any authority to assess any
additional Taxes on the Company for the period for from October 22, 1997 to the
date of this Agreement. There is no dispute or claim concerning any Tax
Liability of the Company either (A) claimed or raised by any Governmental Body
in writing or (B) as to which the Seller has Knowledge based upon personal
contact with any agent or such Body.
(c) Part 3.5(c) of the Seller's Disclosure Letter lists all
federal, state, local and foreign income Tax Returns filed with respect to the
Company for all taxable periods since October 22, 1997 and indicates those Tax
Returns that currently are the subject of audit. The Seller has delivered to the
Buyers correct and complete copies of all federal, state and local income Tax
Returns, examination reports, and statements of deficiencies assessed against or
agreed by the Company since October 22, 1997.
(d) Except as set forth on Part 3.5(d) of the Seller's
Disclosure Letter, during the period from October 22, 1997 through the Closing
Date, the Company has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) During the period from October 22, 1997 through the
Closing Date, the Company is not a party to any Tax allocation or sharing
agreement. The Company has no liability for the Taxes of any Person (other than
the Company) under IRC Reg. ss.1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or otherwise.
3.6 Compliance With Legal Requirements; Governmental Authorizations.
(a) Except as set forth in Part 3.6(a) of the Seller's
Disclosure Letter:
(i) the Seller is in substantial compliance with each
Legal Requirement that is or was applicable to it that could adversely affect
the Contemplated Transactions or reasonably be expected to result in a Material
Adverse Effect or further materially deteriorate or exacerbate circumstances
referenced in subsections (a) through (d) of the definition of Material Adverse
Effect;
(ii) no event has occurred or circumstance exists
that (with or without notice or lapse to time) may constitute or result in a
violation by the Seller or a failure on the part of the Seller to comply with,
any Legal Requirement that could adversely affect the Contemplated Transactions
or reasonably be expected to result in a Material Adverse Effect or further
materially deteriorate or exacerbate circumstances referenced in subsections (a)
through (d) of the definition of Material Adverse Effect;
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(iii) the Seller, has not received, at any time since
October 22, 1997, any notice or other communication (whether oral or written)
sent by any Governmental Body regarding (A) any actual, alleged, possible, or
potential violation of, or failure to comply with, any Legal Requirement
applicable to the Seller, or (B) any actual, alleged, possible, or potential
obligation on the part of the Seller to undertake, or to bear all or any portion
of the cost of, any remedial action of any nature; and
(iv) the Seller has not received, at any time since
October 22, 1997, any notice or other communication (whether oral or written)
sent by any Governmental Body regarding (A) any actual, alleged, possible, or
potential violation of or failure to comply with any term or requirement of any
Governmental Authorization applicable to the Seller, or (B) any actual,
proposed, possible, or potential revocation, withdrawal, suspension,
cancellation, termination of, or modification by any Governmental Authorization
applicable to the Seller.
3.7 Legal Proceedings; Orders.
(a) Except as set forth in Part 3.7(a) of the Seller's
Disclosure Letter, there is no pending Proceeding against the Seller or any
Related Person:
(i) that reasonably may result in A Material Adverse
Effect or materially further deteriorate or exacerbate circumstances referenced
in subsections (a) through (d) of the definition of Material Adverse Effect; or
(ii) that challenges, or that may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions.
(b) To the Knowledge of the Seller, (1) no such Proceeding has
been Threatened, and (2) no event has occurred or circumstance exists that may
give rise to or serve as a basis for the commencement of any such Proceeding.
The Seller has made available to the Buyers copies of all pleadings,
non-privileged correspondence, and other non-privileged documents relating to
each Proceeding listed in Part 3.7 of the Seller's Disclosure Letter and (3) the
Proceedings listed in Part 3.7 of the Seller's Disclosure Letter will not have a
Material Adverse Effect.
(c) Except as set forth in Part 3.7(c) of the Seller's
Disclosure Letter, the Seller is not subject to any Order that relates to the
business of, or any of the assets owned or used by, the Company.
3.8 Environmental and Safety Matters. Except as set forth in Part 3.8
of the Seller's Disclosure Letter:
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(a) The Seller has no Actual Knowledge of any actual or
Threatened order, notice, or other communication from (i) any Governmental Body
or private citizen acting in the public interest, or (ii) the current or prior
owner or operator of any facilities of the Company, of any actual or potential
violation or failure to comply with any Environmental Law or Occupational Health
and Safety Law.
(b) The Seller has no Actual Knowledge of, nor has the Seller
received, any citation, directive, inquiry, notice, Order, summons, warning, or
other communication that relates to any alleged, actual, or potential violation
or failure to comply with any Environmental Law or Occupational Health and
Safety Law.
3.9 Disclosure.
(a) No representation or warranty of the Seller in this
Agreement and no statement in the Seller's Disclosure Letter omits to state a
material fact necessary to make the statements herein or therein, in light of
the circumstances in which they were made, not misleading.
(b) No notice given pursuant to Section 5.6 will contain any
untrue statement or omit to state a material fact necessary to make the
statements therein or in this Agreement, in light of the circumstances in which
they were made, not misleading.
3.10 Relationships with Related Persons. The Seller nor any Related
Person of the Seller has, or since October 22, 1997 has had, any interest in any
property (whether real, personal, or mixed and whether tangible or intangible),
used in or pertaining to the Company's businesses. Neither the Seller nor any
Related Person of the Seller owns, or since October 22, 1997 has owned (of
record or as a beneficial owner) an equity interest or any other financial or
profit interest in, a Person that has had business dealings or a material
financial interest in any transaction with the Company other than business
dealings or transactions conducted in the Ordinary Course of Business with the
Company at substantially prevailing market prices and on substantially
prevailing market terms. Except as set forth in Part 3.10 of the Seller's
Disclosure Letter, neither the Seller nor any Related Person of the Seller is a
party to any Contract with, or has any claim or right against, the Company
(other than statutory indemnification rights as a director). For purposes of
this Section 3.10, neither Buyer shall be considered a Related Person of the
Seller.
3.11 Brokers or Finders. Neither the Seller nor any agents have
incurred any obligation or liability, contingent or otherwise, for brokerage or
finders' fees or agents' commissions or other similar payment in connection with
this Agreement.
4. Representations and Warranties of the Buyers. Except as set forth in
the Buyers' Disclosure Letter delivered by the Buyers to the Seller, which
exceptions to representations and warranties are applicable solely to the
section of this Agreement to which they expressly relate to and no other
representation and warranty in this Agreement, the Buyers jointly and severally
represent and warrant to the Seller as follows:
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4.1 Authority; No Conflict.
(a) This Agreement, the Buyers' Release and the Buyers'
Indemnification (collectively, with the Buyers' Disclosure Letter and all of the
certificates of the Buyers delivered pursuant to this Agreement, the "Buyers'
Closing Documents") constitute the legal, valid, and binding obligations of the
Buyers, enforceable against the Buyers in accordance with their respective
terms. The Buyers have the absolute and unrestricted right, power, and authority
to execute and deliver this Agreement and the Buyers' Release and to perform
their obligations under this Agreement and the Buyers' Closing Documents.
(b) Neither the execution and delivery of this Agreement by
the Buyers nor the consummation or performance of any of the Contemplated
Transactions by the Buyers will give any Person the right to prevent, delay, or
otherwise interfere with any of the Contemplated Transactions pursuant to:
(i) any Legal Requirement or Order to which either
Buyer may be subject; or
(ii) any Contract to which either Buyer is a party or
by which either Buyer may be bound.
Neither Buyer is nor will be required to obtain any Consent from any Person in
connection with the execution and delivery of this Agreement or the consummation
or performance of any of the Contemplated Transactions.
4.2 Investment Intent. The Buyers are acquiring the Shares for their
own account and not with a view to their distribution within the meaning of
Section 2(11) of the Securities Act. Each Buyer is an accredited investor as
defined by Regulation D promulgated under the Securities Act. Buyers acknowledge
that the Shares are restricted securities under the Securities Act.
4.3 Certain Proceedings. There is no pending Proceeding that has been
commenced against either Buyer and that challenges, or may have the effect of
preventing, delaying, making illegal, or otherwise interfering with, any of the
Contemplated Transactions. To each Buyer's Knowledge, no such Proceeding has
been Threatened.
4.4 Brokers or Finders. The Buyers have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement.
4.5 Status of Company. Except as expressly provided herein, Buyers are
acquiring the Shares, the Business and the Company's assets and liabilities
represented thereby "as is." Buyers acknowledge that they are the principal
executive officers of the Company and are familiar with the Business and the
operations, conditions and prospects of the Company.
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4.6 Relationships with Related Persons. Except as set forth in Section
4.6 of the Buyers' Disclosure Letter, neither of the Buyers nor any Related
Person of either Buyer has, or has since October 22, 1997 to the Closing has
had, any interest in the property (whether real, personal, or mixed or whether
tangible or intangible) used in or pertaining to the Company's businesses
neither of the Buyers nor any Related Person of either of the Buyers owns, or
since October 22, 1997 has owned (of record or as beneficial owner) an equity
interest or any other financial or profit interest in, a Person that has had
business dealings or a material financial interest in any transaction with the
Company other than business dealings or transactions conducted in the Ordinary
Course of Business with the Company at substantially prevailing market prices or
on substantially prevailing market terms. Except as set forth in Section 4.6 of
the Buyers' Disclosure Letter, neither of the Buyers nor any Related Person of
either of the Buyers is a party to any Contract with, or has any claim or right
against, the Company.
4.7 Proceedings and Legal Compliance. Except as set forth on Part 4.7
of the Buyers' Disclosure Letter, to the Actual Knowledge of each of the Buyers:
(i) there is no Proceeding pending or threatened against the Seller; and (ii)
the Seller is in compliance with all Legal Requirements relating to the Company
and its operations.
4.8 Financial Information. The Buyers have delivered to the Seller all
written correspondence or Contracts between the Buyers and either the Existing
Lender or Scripps Bank.
4.9 Certain Claims. To either Buyer's Knowledge, no claim or threat of
a claim of the type referred to in Section 7.6 has been made.
5. Covenants of the Seller Prior to Closing Date.
5.1 Access and Investigation. Between the date of this Agreement and
the Closing Date, the Seller will, and will authorize and direct the Company and
its Representatives to, (a) afford the Buyers and their Representatives and the
Buyers' counsel and prospective lenders and their Representatives (collectively,
the "Buyers' Advisors") full and free access to the Company's personnel,
properties (including subsurface testing), contracts, books and records, and
other documents and data, (b) furnish the Buyers and the Buyers' Advisors with
copies of all such contracts, books and records, and other existing documents
and data as the Buyers may reasonably request, and (c) furnish the Buyers and
the Buyers' Advisors with such additional financial, operating, and other data
and information as the Buyers may reasonably request.
5.2 Operation of the Business of the Company. Between the date of this
Agreement and the Closing Date, the Seller will use its Best Efforts to, and
will its Best Efforts to cause the Company to:
(a) conduct its business only in the Ordinary Course of
Business; and
(b) maintain the relations and good will with suppliers,
customers, landlords, creditors, employees, agents, and others having business
relationships with the Company.
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5.3 Negative Covenants. Except as otherwise expressly permitted by this
Agreement, between the date of this Agreement and the Closing Date, the Seller
will not, and will not cause the Company to, without the prior consent of the
Buyers:
(a) take any affirmative action, or fail to use its Best
Efforts to take any reasonable action within its control that could reasonably
result in or further materially deteriorate or exacerbate circumstances
referenced in Sections (a) through (d) of the definition of Material Adverse
Effect; or
(b) pay or accrue salaries, draws, management fees or other
compensation or remuneration from the Company to Seller or any of its executive
officers or directors from March 1, 1999 through the Closing.
5.4 Required Approvals. As promptly as reasonably practicable after the
date of this Agreement, the Seller will, and will authorize and direct the
Company to, make all filings required by Legal Requirements to be made by them
in order to consummate the Contemplated Transactions. Between the date of this
Agreement and the Closing Date, the Seller will, and will authorize and direct
the Company to, cooperate with the Buyers with respect to all filings that the
Buyers elect to make or are required by Legal Requirements to make in connection
with the Contemplated Transactions. The Seller will cooperate with the Buyers
and the Company in all reasonable respects in obtaining all consents from third
parties which the Buyers deem necessary or appropriate in connection with the
Contemplated Transactions.
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5.5 Proxy Statement; Stockholder Approval.
(a) The Seller shall, as promptly as reasonably practicable
following the date of this Agreement, prepare and file with the Commission, and
will use its Best Efforts to have cleared by the Commission and thereafter shall
mail to its stockholders as promptly as reasonably practicable a proxy statement
(the "Proxy Statement") and a form of proxy in connection with, among other
things, the vote of the Company's stockholders to approve the Contemplated
Transactions. The Seller acknowledges that the preparation and filing of the
Proxy Statement shall not be delayed due to the pendency of negotiations by the
Seller of any other transaction. The Proxy Statement will contain the
affirmative recommendation of the Board of Directors of the Seller in favor of
adoption of this Agreement and the approval of the Contemplated Transactions;
provided, however, that nothing contained in this Agreement shall prohibit the
Board of Directors of the Seller from withdrawing its recommendation and
approving another transaction regarding the Company or its assets if, and only
to the extent that (a) the Board of Directors of the Seller concludes in good
faith that such other transaction would constitute a Superior Proposal, (b) the
Board of Directors of the Seller determines in good faith (after consultation
with independent legal counsel) that the failure to take such action would
result in a breach by the Board of Directors of the Seller of its fiduciary
duties to the Seller's stockholders under applicable law and (c) prior to
furnishing information to, or entering into discussions or negotiations with any
third party, the Seller provides prompt written notice to the Buyers to the
effect that it is furnishing information to, or entering into discussion or
negotiations with, such third party (which notice shall identify the nature and
material terms of the competing proposal). The Proxy Statement, and any
amendments thereof or supplements thereto, will not, at the time of the mailing
of the Proxy Statement or any amendments thereof or supplements thereto and at
the time of the Stockholders Meeting (as hereinafter defined), 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, except
that no representation is made by the Seller with respect to information
supplied in writing by the Buyers or the Company specifically for inclusion in
the Proxy Statement. The Proxy Statement will comply as to form in all material
respects with the provisions of the Exchange Act and the rule and regulations
promulgated thereunder.
(b) The Seller shall duly call, give notice of, convene and
hold its annual, or a special meeting of its stockholders (the "Stockholders
Meeting") and shall use its Best Efforts to obtain the requisite affirmative
approval of its stockholders at the Stockholders Meeting of the Contemplated
Transactions. Arthur Asch and Michael Asch shall be present, in person (or, if
either cannot attend because of exigent circumstances, by proxy), at the
Stockholders Meeting and shall vote or cause to be voted all shares of Common
Stock held of record or beneficially owned (with the power to vote or direct the
vote) by Arthur Asch and Michael Asch and eligible to vote as of the record date
for such meeting in favor of the proposal seeking such approval.
(c) The provisions of Sections 5.5(a) and 5.5(b) shall not
apply as of the date the Seller delivers the Certificate referred to in Section
7.2 hereof.
5.6 Notification. Between the date of this Agreement and the Closing
Date, the Seller will promptly notify the Buyers in writing if the Seller
becomes aware of any fact or condition that causes or constitutes a Breach of
any of the Seller's representations and warranties as of the date of this
Agreement, or if the Seller or the Company becomes aware of the occurrence after
the date of this Agreement of any fact or condition that would (except as
expressly contemplated by this Agreement) cause or constitute a Breach of any
such representation or warranty had such representation or warranty been made as
of the time of occurrence or discovery of such fact or condition. Should any
such fact or condition require any change in the Seller's Disclosure Letter if
the Seller's Disclosure Letter were dated the date of the occurrence or
discovery of any such fact or condition, the Seller will promptly deliver to the
Buyers a supplement to the Seller's Disclosure Letter specifying such change.
During the same period, the Seller will promptly notify the Buyers of the
occurrence of any Breach of any covenant of the Seller in this Section 5 or of
the occurrence of any event that may make the satisfaction of the conditions in
Section 7 impossible or unlikely.
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5.7 No Negotiation. Until such time, if any, as this Agreement is
terminated pursuant to Section 9, the Seller will not, and will cause the
Company and its Representatives not to, directly or indirectly solicit,
initiate, or encourage any inquiries or proposals from, discuss or negotiate
with, provide any non-public information to, or consider the merits of any
unsolicited inquiries or proposals from, any Person (other than the Buyers)
relating to any transaction involving the sale of the business or assets (other
than in the Ordinary Course of Business) of the Company, or any of the capital
stock of the Company, or any merger, consolidation, business combination, or
similar transaction involving the Company; provided, however, that the Seller
and the Company may negotiate an unsolicited proposal from a third Person
regarding the Company or its assets if the Board of Directors of the Seller has
withdrawn its recommendation in favor of the Contemplated Transactions in
compliance with Section 5.5(a) above.
5.8 Best Efforts. Between the date of this Agreement and the Closing
Date, the Seller will use its Best Efforts to cause the conditions in Sections 7
and 8 to be satisfied.
6. Covenants of the Buyers Prior to Closing Date.
6.1 Approvals. As promptly as practicable after the date of this
Agreement, the Buyers will make all filings required by Legal Requirements to be
made by them to consummate the Contemplated Transactions. Between the date of
this Agreement and the Closing Date, the Buyers will cooperate with the Seller
and the Company with respect to all filings that the Seller or the Company are
required by Legal Requirements to make in connection with the Contemplated
Transactions. Without limiting the generality of the foregoing, the Buyers will
provide the Seller whatever information and assistance in connection with the
filing of the Proxy Statement as the Seller reasonably may request. The Buyers
shall vote or cause to be voted all shares of Common Stock held of record or
beneficially owned by the Buyers and eligible to vote as of the record date for
the stockholder meeting held in connection with the Proxy Statement in favor of
the proposal seeking approval.
6.2 Notification. Between the date of this Agreement and the Closing
Date, the Buyers will promptly notify the Seller in writing if the Buyers become
aware of any fact or condition that causes or constitutes a Breach of any of the
Buyers' representations and warranties as of the date of this Agreement, or if
the Buyers become aware of the occurrence after the date of this Agreement of
any fact or condition that would (except as expressly contemplated by this
Agreement) cause or constitute a Breach of any such representation or warranty
had such representation or warranty been made as of the time of occurrence or
discovery of such fact or condition. Should any such fact or condition require
any change in the Buyers' Disclosure Letter if the Buyers' Disclosure Letter
were dated the date of the occurrence or discovery of any such fact or
condition, the Buyers will promptly deliver to the Seller a supplement to the
Buyers' Disclosure Letter specifying such change. During the same period, the
Buyers will promptly notify the Seller of the occurrence of any Breach of any
covenant of the Buyers in this Section 6 or of the occurrence of any event that
may make the satisfaction of the conditions in Section 7 impossible or unlikely.
6.3 Best Efforts. Between the date of this Agreement and the Closing
Date, each of the Buyers will use his Best Efforts to cause (i) the conditions
in Sections 7 and 8 to be satisfied and (ii) the loan referred to in the
commitment letter dated March 22, 1999 of Scripps Bank (which the Buyers will
use their Best Efforts to have extended through the Closing) or a commitment
which is superior from another bank or financial institution (the "Loan") to
close. The Buyers' efforts shall include, but not be limited to, cooperating
with prospective lender(s) in conducting due diligence and appraisals and
valuations of the property owned by the Buyers.
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7. Conditions Precedent to the Buyers' Obligation to Close. The Buyers'
obligation to purchase the Shares and to take the other actions required to be
taken by the Buyers at the Closing is subject to the satisfaction, at or prior
to the Closing, of each of the following conditions (any of which may be waived
by both of the Buyers, in whole or in part):
7.1 Accuracy of Representations. All representations and warranties of
the Seller in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement, and must be
accurate in all material respects as of the Closing Date as if made on the
Closing Date, without giving effect to any supplement to the Seller's Disclosure
Letter.
7.2 Stockholder Approval. The Seller shall have received Stockholder
Approval with respect to the Contemplated Transactions or, in the alternative,
shall have delivered to the Buyers a Certificate stating that Stockholder
Approval is not required to consummate the Contemplated Transaction and further
certifying that the Seller has consulted legal counsel with expertise in federal
and New York state corporate and securities laws to advise the Seller as to the
necessity of such Stockholder Approval.
7.3 Seller's Performance.
(a) All of the covenants and obligations that the Seller is
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been duly performed and
complied with in all material respects.
(b) Each document required to be delivered pursuant to Section
2.4 must have been delivered.
7.4 Additional Documents. Each of the following documents must have
been delivered to the Buyers:
(a) an opinion of Joseph Greenberger, dated the Closing Date,
in a form reasonably acceptable to Buyers and their counsel, which opinion,
solely if the certificate referenced in Section 7.2 has been delivered to the
Buyers, shall not be required to opine with respect to the necessity for
Stockholder Approval of the Contemplated Transactions; and
(b) such other documents as the Buyers may reasonably request
for the purpose of (i) enabling its counsel to provide the opinion referred to
in Section 8.3(a), (ii) evidencing the accuracy of any of the Seller's
representations and warranties, (iii) evidencing the performance by the Seller
of, or the compliance by the Seller with, any covenant or obligation required to
be performed or complied with by the Seller, (iv) evidencing the satisfaction of
any condition referred to in this Section 7, or (v) otherwise facilitating the
consummation or performance of any of the Contemplated Transactions.
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7.5 No Proceedings. Since the date of this Agreement, there must not
have been commenced or Threatened against either Buyer, or against any Person
affiliated with either Buyer, any Proceeding (other than a Proceeding initiated
by or on behalf of a spouse or former spouse or trust or other entity of which a
spouse or former spouse is an affiliate of either Buyer) (a) involving any
challenge to, or seeking damages or other relief in connection with, any of the
Contemplated Transactions, or (b) that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with any of the Contemplated
Transactions.
7.6 No Claim Regarding Stock Ownership or Sale Proceeds. There must not
have been made or Threatened by any Person against the Seller any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, any of the Company, or (b) is
entitled to all or any portion of the Purchase Price payable for the Shares.
7.7 No Prohibition. Neither the consummation nor the performance of any
of the Contemplated Transactions will, directly or indirectly (with or without
notice or lapse of time), materially contravene, or conflict with, or result in
a material violation of, or cause either Buyer or any Person affiliated with
either Buyer to suffer any material adverse consequence under any Legal
Requirement or Order that has been published, introduced, or otherwise formally
proposed by or before any Governmental Body after the Effective Date.
8. Conditions Precedent to the Seller's Obligation to Close. The
Seller's obligation to sell the Shares and to take the other actions required to
be taken by the Seller at the Closing is subject to the satisfaction, at or
prior to the Closing, of each of the following conditions (any of which may be
waived by the Seller, in whole or in part):
8.1 Accuracy of Representations. All of the Buyers' representations and
warranties in this Agreement (considered collectively), and each of these
representations and warranties (considered individually), must have been
accurate in all material respects as of the date of this Agreement and must be
accurate in all material respects as of the Closing Date as if made on the
Closing Date, without giving effect to any supplement to the Buyers' Disclosure
Letter.
8.2 The Buyers' Performance.
(a) All of the covenants and obligations that the Buyers are
required to perform or to comply with pursuant to this Agreement at or prior to
the Closing (considered collectively), and each of these covenants and
obligations (considered individually), must have been performed and complied
with in all material respects.
(b) The Buyers must have delivered each of the documents
required to be delivered by the Buyers pursuant to Section 2.4 and must have
paid the Purchase Price.
8.3 Additional Documents. The Buyers must have caused the following
documents to be delivered to the Seller:
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(a) an opinion of Zevnik Horton Guibord McGovern Palmer &
Fognani, L.L.P. dated the Closing Date, in a form reasonably acceptable to
Seller and its counsel;
(b) such other documents as the Seller may reasonably request
for the purpose of (i) enabling their counsel to provide the opinion referred to
in Section 7.4(a), (ii) evidencing the accuracy of any representation or
warranty of the Buyers, (iii) evidencing the performance by the Buyers of, or
the compliance by the Buyers with, any covenant or obligation required to be
performed or complied with by the Buyers, (iv) evidencing the satisfaction of
any condition referred to in this Section 8, or (v) otherwise facilitating the
consummation of any of the Contemplated Transactions.
8.4 No Proceedings. Since the date of this Agreement, there must not
have been commenced or Threatened against the Seller, or any Person affiliated
with the Seller, any Proceeding (other than a Proceeding initiated by or on
behalf of Arthur Asch or Michael Asch or a Related Person thereto) (a) involving
any challenge to, or seeking damages or other relief in connection with, any of
the Contemplated Transaction, or (b) that may have the effect of preventing,
delaying, making illegal, or other interfering with any of the Contemplated
Transactions.
8.5 No Prohibition. Neither the consummation nor the performance of any
of the Contemplated Transactions will, directly or indirectly (with or without
notice or lapse of time), materially contravene, or conflict with, or result in
a material violation of, or cause either the Seller or any Person affiliated
with the Seller to suffer any material adverse consequence under any Legal
Requirement or Order that has been published, introduced or otherwise formally
proposed by or before any Governmental Body after the Effective Date.
9. Termination.
9.1 Termination Events. This Agreement may, by notice given prior to or
at the Closing, be terminated:
(a) by either of the Buyers or the Seller if a material Breach
of any provision of this Agreement has been committed by the other party and
such Breach has not been waived;
(b) unless the Certificate referred to in Section 7.2 shall
have been given, by the Buyers if Stockholder Approval is not obtained at the
meeting referred to in Section 5.5 on or before November 30, 1999, or if Seller
ceases using its Best Effort to obtain Stockholder Approval;
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(c) (i) by the Buyers if any of the conditions in Section 7
has not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible (other than through the failure of the Buyers
to comply with their obligations under this Agreement) and the Buyers have not
waived such condition on or before the Closing Date; or (ii) by the Seller, if
any of the conditions in Section 8 has not been satisfied of the Closing Date or
if satisfaction of such a condition is or becomes impossible (other than through
the failure of the Seller to comply with its obligations under this Agreement)
and the Seller has not waived such condition on or before the Closing Date;
(d) by mutual consent of the Buyers and the Seller; or
(e) by either the Buyers or the Seller if the Closing has not
occurred (other than through the failure of any party seeking to terminate this
Agreement to comply fully with its obligations under this Agreement) on or
before November 30, 1999, or such later date as the parties may agree upon.
9.2 Effect of Termination. Each party's right of termination under
Section 9.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Section 9.1, all
further obligations of the parties under this Agreement will terminate, except
that the obligations in Sections 12.1 and 12.3 will survive; provided, however,
that if this Agreement is terminated by a party because of the Breach of the
Agreement by the other party or because one (1) or more of the conditions to the
terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
10. Indemnification; Remedies.
10.1 Survival; Right to Indemnification Not Affected by Knowledge. All
representations and warranties in this Agreement, the supplements to the
Disclosure Letters, the certificate delivered pursuant to Section 2.5(a)(v), or
in any other certificate or document delivered pursuant to this Agreement will
expire at the Closing, except for the Seller's representations and warranties in
Section 3.3 and 3.5, which will survive the Closing until the expiration of the
applicable statute of limitations. The right to indemnification, payment of
Damages or other remedy based on such representations, warranties, covenants,
and obligations will not be affected by any investigation conducted with respect
to, or any Knowledge acquired (or capable of being acquired) at any time,
whether before or after the execution and delivery of this Agreement or the
Closing Date, with respect to the accuracy or inaccuracy of or compliance with,
any such representation or warranty. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
10.2 Indemnification and Payment of Damages by the Seller. The Seller
will indemnify and hold harmless the Buyers, the Company, and their respective
Representatives, stockholders, controlling persons, and affiliates
(collectively, the "Indemnified Persons") for, and will pay to the Indemnified
Persons the amount of, any loss, liability, claim, damage (excluding incidental
and consequential damages), expense (including costs of investigation and
defense and reasonable attorneys' fees) or diminution of value, whether or not
involving a third-party claim (collectively, "Damages"), arising, directly or
indirectly, from or in connection with:
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(a) any Breach of any representation or warranty made by the
Seller in Sections 3.3 and 3.5 of this Agreement (without giving effect to any
supplement to the Seller's Disclosure Letter);
(b) any Breach by the Seller of any covenant or obligation of
the Seller in this Agreement;
(c) any and all liabilities or actions, suits, claims or
legal, administrative, arbitration, governmental or other proceedings or
investigations against either the Company or the Buyers in which the principal
event giving rise thereto is attributable to or arose out of any action or
inaction by the Seller, or any director, officer, employee, agent,
representative or subcontractor of the Seller (other than any director, officer,
employee, agent, representative or subcontractor of the Company or to the extent
arising out of an action or in action based upon written information supplied by
either Buyer and/or the Company prior to the Closing);
(d) any and all actions, suits, claims or legal,
administrative, arbitration, government or other proceedings or investigations
against the Company or the Buyers or other Damages that result from or arise out
of the Closing of the Contemplated Transactions without obtaining Stockholder
Approval;
(e) any liability for Taxes of the Company attributable to the
period from October 22, 1997 through and including the Closing Date and any
liability of the Company for Taxes of any Person other than the Company under
Treasury Regulation Section 1.5102-6 (or a similar provision of any state, local
or foreign law), as a transferee, successor, by contract or otherwise; and
(f) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with the Seller (or any Person
acting on their behalf) in connection with any of the Contemplated Transactions.
The remedies provided in this Section 10.2 will not be exclusive of or limit any
other remedies that may be available to the Buyers or the other Indemnified
Persons.
10.3 Indemnification and Payment of Damages by the Buyers. The Buyers
will, and shall cause the Company and each Related Buyer Business to indemnify
and hold harmless the Seller, and will pay to the Seller the amount of any
Damages arising, directly or indirectly, from or in connection with:
(a) any breach by the Buyers of any covenant or obligation of
the Buyers in this Agreement;
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(b) any and all actions, suits, claims or legal,
administrative, arbitration, governmental or other proceedings or investigations
against the Seller to the extent they result from or arise out of operation of
the Business (and are not subject to indemnification by the Seller Parties
pursuant to Section 10.2 above); or
(c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with the Buyers (or any Person acting
on its behalf) in connection with any of the Contemplated Transactions.
The remedies provided in this Section 10.3 will not be exclusive of or
limit any other remedies that may be available to the Seller or the other
Indemnified Persons.
10.4 Limitations. If the Closing occurs, the Seller will have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, other than those in Sections 3.3 and 3.5, which liability will
continue until the expiration of the applicable statutes of limitations. If the
Closing occurs, the Buyers will have no liability (for indemnification or
otherwise) with respect to any representation or warranty. No Related Buyer
Business in which the Buyers do not in the aggregate own a majority interest (a
"Minority Related Buyer Business") shall have any obligation to indemnify the
Seller for claims made on or after the third anniversary of the Closing.
10.5 Limitations on Amount -- Seller. The Seller will have no liability
(for indemnification or otherwise) with respect to the matters described in
clause (a) or clause (b) of Section 10.2 until the total of all Damages with
respect to such matters exceeds $50,000, at which time the Buyers shall be
indemnified for the full amount of such Damages. However, this Section 10.5 will
not apply to any Breach of the Seller's representations and warranties of which
the Seller had Actual Knowledge at any time prior to the date on which such
representation and warranty is made or any intentional Breach by the Seller of
any covenant or obligation, and the Seller will be liable for all Damages with
respect to such Breaches.
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10.6 Limitations on Amount and Recourse -- Buyers. The Buyers will have
no liability (for indemnification or otherwise) with respect to the matters
described in clause (a) or (b) of Section 10.3 until the total of all Damages
with respect to such matters exceeds $50,000, at which time the Seller shall be
indemnified for the full amount of such Damages. However, this Section 10.6 will
not apply to any Breach of any of the Buyers' representations and warranties of
which either Buyer had Actual Knowledge at any time prior to the date on which
such representation and warranty is made or any intentional Breach by the Buyers
of any covenant or obligation, and the Buyers will be jointly and severally
liable for all Damages with respect to such Breaches. The Seller's recourse (for
indemnification or otherwise) with respect to the matters in Section 10.3(a) and
(b) shall be limited in any event solely to (i) the ownership interests of the
Buyers or a Buyer or the transferee referred to in Section 12.10 hereof in the
Company and Related Buyer Businesses and (ii) the assets of the Company and such
Businesses. In no event shall the Seller have recourse for indemnification
against either of the Buyers' personal assets other than as set forth in the
prior sentence. This limitation as to recourse shall not limit the amount of
Damages for which an arbitral award in favor of the Seller may be entered
pursuant to Section 12.5. However, the Seller agrees that after it has satisfied
any such arbitral award for indemnification and any judgment entered thereon by
executing against those items against which it has recourse pursuant to the
terms of this Section 10.6, the Seller will promptly take all reasonable steps
legally necessary to extinguish any remaining award or judgment.
10.7 Procedure for Indemnification -- Third Party Claims.
(a) Promptly after receipt by an indemnified party under
Section 10.2 or 10.3, of notice of the commencement of any Proceeding against
it, such indemnified party will, if a claim is to be made against an
indemnifying party under such Section, give notice to the indemnifying party of
the commencement of such claim, but the failure to notify the indemnifying party
will not relieve the indemnifying party of any liability that it may have to any
indemnified party, except to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnifying party's
failure to give such notice.
(b) If any Proceeding referred to in Section 10.7(a) is
brought against an indemnified party and it gives notice to the indemnifying
party of the commencement of such Proceeding, the indemnifying party will,
unless the claim involves Taxes, be entitled to participate in such Proceeding
and, to the extent that it wishes (unless (i) the indemnifying party is also a
party to such Proceeding and the indemnified party determines in good faith that
joint representation would be inappropriate, or (ii) the indemnifying party
fails to provide reasonable assurance to the indemnified party of its financial
capacity to defend such Proceeding and provide indemnification with respect to
such Proceeding), to assume the defense of such Proceeding with counsel
reasonably satisfactory to the indemnified party and, after notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such Proceeding, the indemnifying party will not, as long as it
diligently conducts such defense, be liable to the indemnified party under this
Section 10 for any fees of other counsel or any other expenses with respect to
the defense of such Proceeding, in each case subsequently incurred by the
indemnified party in connection with the defense of such Proceeding, other than
reasonable costs of investigation. If the indemnifying party assumes the defense
of a Proceeding, (i) it will be conclusively established for purposes of this
Agreement that the claims made in that Proceeding are within the scope of and
subject to indemnification; (ii) no compromise or settlement of such claims may
be effected by the indemnifying party without the indemnified party's consent
unless (A) there is no finding or admission of any violation of Legal
Requirements or any violation of the rights of any Person and no effect on any
other claims that may be made against the indemnified party, and (B) the sole
relief provided is monetary damages that are paid in full by the indemnifying
party; and (iii) the indemnified party will have no liability with respect to
any compromise or settlement of such claims effected without its consent. If
notice is given to an indemnifying party of the commencement of any Proceeding
and the indemnifying party does not, within ten (10) days after the indemnified
party's notice is given, give notice to the indemnified party of its election to
assume the defense of such Proceeding, the indemnifying party will be bound by
any determination made in such Proceeding or any compromise or settlement
effected by the indemnified party.
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(c) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
(d) Each of the Seller and the Buyers hereby consents to the
non-exclusive jurisdiction of any court in which a Proceeding is brought against
any Indemnified Person for purposes of any claim that an Indemnified Person may
have under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on each of the Seller and the
Buyers with respect to such a claim anywhere in the world.
10.8 Procedure for Indemnification -- Other Claims. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
11. Post-Closing Covenants.
11.1 Transition. The Seller will not take any action that is designed
or intended to have the effect of discouraging any lessor, licensor, customer,
supplier or other business associate of the Company from maintaining the same
business relationships with the Buyers after the Closing as it maintained with
the Company prior to the Closing.
11.2 Insurance. The Seller and the Buyers shall cooperate with each
other in the handling of insurance claims relating to the Company that straddle
the Closing Date.
11.3 Books and Records; Information. After the Closing Date, the
Seller, on the one hand, and the Buyers, on the other hand, shall retain all
accounting, tax, payroll and similar books and records pertaining to the
Businesses for a period of at least seven (7) years after the annual period to
which they relate, and shall provide access to such books and records and
related information to the other party and its representatives, and allow them
to make copies thereof and extracts therefrom, upon their reasonable request and
at their expense. In addition, the Seller on one hand, and the Buyers, on the
other hand, shall on the request of the other party during said period provide
the other party with such information as the other party may reasonably request
in connection with any accounting, tax, Commission filing or legal requirement.
The Buyers shall use reasonable and diligent efforts to cause the Company to
provide any information necessary for the Seller to make required filings with
the Commission in a timely fashion. Such access and information shall be
provided reasonably promptly during normal business hours, and the requesting
party shall in good faith attempt to minimize any disruption to the other
party's business.
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11.4 Tax Matters.
(a) Tax Sharing Agreements. Any tax sharing agreement between
the Seller and the Company is terminated as of the date of this Agreement and
will have no further effect for any taxable year (whether the current year, a
future year, or a past year).
(b) Returns for Periods Through the Closing Date. The Seller
will include the income of the Company (including any deferred income triggered
into income by Reg. ss.1.1502-13 and Reg. ss.1.1502-14 and any excess loss
accounts taken into income under Reg. ss.1.1502-19) on the Seller's consolidated
federal income Tax Return and other Tax Returns for all periods from October 22,
1997 through the Closing Date and pay any Taxes attributable to such income. The
Company will furnish Tax information to the Seller for inclusion in the Seller's
Tax Returns for the period which includes the Closing Date in accordance with
the Company's past custom and practice. The Seller will allow the Buyers an
opportunity to review and comment upon such Tax Returns (including any amended
returns) to the extent that they relate to the Company. The Seller will take no
position on such returns that relate to the Company that would adversely affect
the Company after the Closing Date. The income of the Company will be
apportioned to the period from October 22, 1997 up to and including the Closing
Date and the period after the Closing Date by closing the books of the Company
as of the end of the Closing Date.
(c) Audits. The Seller will allow the Company and its counsel
to participate at their own expense in any audits of the Seller's Tax Returns to
the extent that such returns relate to the Company. The Seller will not settle
any such audit in a manner which would adversely affect the Company after the
Closing Date without the prior written consent of the Buyers, which consent
shall not unreasonably be withheld.
11.5 Indemnification and Insurance. The Seller agrees that all rights
to indemnification or exculpation now existing in favor of the employees,
agents, directors or officers of the Company (the "Company Indemnified Parties")
as provided in the Articles of Incorporation or Bylaws of the Seller or other
comparable governing documents (the "Governing Instruments"), or as provided in
the agreements referred to in Section 2.5(iv) (the "Indemnification Agreements")
shall continue in full force and effect for a period of not less than seven (7)
years from the Closing Date; provided, however, that, in the event any claim or
claims are asserted or made within such seven (7) year period, all rights to
indemnification in respect of any such claim or claims shall continue until
disposition of any and all such claims. Any determination required to be made
with respect to whether a Company Indemnified Party's conduct complies with the
standards set forth in the Governing Instruments or the Indemnification
Agreements shall be made by independent counsel selected by the Company
Indemnified Party reasonably satisfactory to the Seller (whose fees and expenses
shall be paid by the Seller). The Seller agrees to fully perform all obligations
to be performed by the Seller under the Governing Instruments and the
Indemnification Agreements. The Seller further agrees that, for so long as the
Seller shall maintain officers' and directors' liability insurance policies
indemnifying and holding harmless its officers, directors, employees and agents
with respect to any actions or omissions occurring prior to the Closing,
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providing insurance coverage on terms no less advantageous to the Company
Indemnified Parties than the Company's existing policy. In the event the Seller
or any of its successors or assigns (i) consolidates with or merges into any
other person and shall not be the continuing or surviving corporation or entity
of such consolidation or merger, or (ii) transfers all or substantially all of
its properties, assets or stock to any person, then and in each such case,
proper provision shall be made so that the successors and assigns of the Seller
(or their successors and assigns) shall assume the obligations set forth in this
Section 11.5.
11.6 Indemnification and Insurance. The Buyers agree to cause the
Company to provide that all rights to indemnification or exculpation now
existing in favor of the employees, agents, directors or officers of the Seller
(the "Seller Indemnified Parties") as provided in the Articles of Incorporation
or Bylaws of the Company or other comparable governing documents (the "Company
Governing Instruments"), or as provided in any agreements between a Seller
Indemnified Party and the Company (the "Company Indemnification Agreements")
shall continue in full force and effect for a period of not less than seven (7)
years from the Closing Date; provided, however, that, in the event any claim or
claims are asserted or made within such seven (7) year period, all rights to
indemnification in respect of any such claim or claims shall continue until
disposition of any and all such claims. Any determination required to be made
with respect to whether a Seller Indemnified Party's conduct complies with the
standards set forth in the Company Governing Instruments or the Company
Indemnification Agreements shall be made by independent counsel selected by the
Seller Indemnified Party reasonably satisfactory to the Company (whose fees and
expenses shall be paid by the Company). The Buyers agree to cause the Company to
fully perform all obligations to be performed by the Company under the Company
Governing Instruments and the Company Indemnification Agreements. In the event
the Company or any of its successors or assigns (i) consolidates with or merges
into any other person and shall not be the continuing or surviving corporation
or entity of such consolidation or merger, or (ii) transfers all or
substantially all of its properties, assets or stock to any person, then and in
each such case the Buyers shall cause the Company to make proper provision shall
be made so that the successors and assigns of the Company (or their successors
and assigns) shall assume the obligations set forth in this Section 11.6.
11.7 Post-Closing Operations of the Business. The Buyers will not
operate a Business in Southern California other than through the Company or a
Related Buyer Business and the Buyers will cause each Related Buyer Business to
perform all the obligations which the Buyers are required to cause the Company
to perform hereunder.
11.8 NASA Claim. The Buyers shall cause the Company to pay the Seller
fifty percent (50%) of all net recoveries to the Company as of the Closing and
thereafter with respect to the NASA Claim in a reasonably prompt fashion. This
obligation to cause payments to the Seller with respect to the NASA Claim is
expressly conditioned upon the Seller paying fifty percent (50%) of all costs
and expenses incurred by the Company by reason of its prosecuting or pursuing
the NASA Claim when due, and, if the Seller shall fail to pay any such costs or
expenses when due, shall irrevocably forfeit its right to be paid any portion of
the net recoveries with respect to the NASA Claim.
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11.9 Buyer Notification. As soon as practicable after the Closing, the
Buyers shall send notification to all vendors, customers or other third parties
to which the Company has a material relationship setting forth the fact that the
Buyers (or their permissible assignees) have acquired ownership of the Company
and that the Seller has no continuing right, title or interest in the Company or
involvement with its operations.
12. General Provisions.
12.1 Expenses. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution, and performance of this
Agreement and the Contemplated Transactions, including all fees and expenses of
agents, representatives, counsel, and accountants. Neither the Seller nor the
Buyers will cause the Company not to incur any fees or out-of-pocket expenses in
connection with this Agreement. In the event of termination of this Agreement,
the obligation of each party to pay its own expenses will be subject to any
rights of such party arising from a breach of this Agreement by another party.
In the event this Agreement is terminated by the Buyers pursuant to Section
9.1(b), the Seller shall promptly pay the Buyers all costs and expenses
(including reasonable legal fees and expenses) incurred by the Buyers in
connection with the Contemplated Transactions; including, without limitation,
all appraisal fees or other expenses incurred in connection with attempting to
obtain the Loan referred to in Section 6.3.
12.2 Public Announcements. Any public announcement or similar publicity
with respect to this Agreement or the Contemplated Transactions will be issued,
if at all, at such time and in such manner as are mutually agreed upon by the
Buyers and the Seller; provided, however, that the Seller may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement with the stock exchange or quotation system
concerning its publicly traded securities (in which case the Seller will use
Best Efforts to provide the Buyers with a copy of such communication prior to
making the disclosure). Unless consented to by the Buyers in advance or required
by Legal Requirements, prior to the Closing the Seller shall, and shall cause
the Company to, keep this Agreement strictly confidential and may not make any
disclosure of this Agreement to any Person. The Seller and the Buyers will
consult with each other concerning the means by which the Company's employees,
customers, and suppliers and others having dealings with the Company will be
informed of the Contemplated Transactions, and the Buyers will have the right to
be present for any such communication.
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12.3 Confidentiality. Between the date of this Agreement and the
Closing Date, the Buyers and the Seller will maintain in confidence, and will
cause the directors, officers, employees, agents, and advisors of the Seller and
the Company to maintain in confidence any written, oral, or other information
obtained in confidence from another party in connection with this Agreement or
the Contemplated Transactions, unless (a) such information is already known to
such party or to others not bound by a duty of confidentiality or such
information becomes publicly available through no fault of such party, (b) the
use of such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
Contemplated Transactions, and fulfilling Seller's periodic reporting
obligations to the Commission or to facilitate due diligence of any potential
acquirer of Seller (but not a potential acquirer of the Company) if such
potential acquirer is aware of and legally bound by the restrictions contained
in this Section 12.3, or (c) the furnishing or use of such information is
required by legal proceedings or the threat thereof. If the Contemplated
Transactions are not consummated, each party will return or destroy as much of
such written information as the other party may reasonably request.
12.4 Notices. All notices, consents, waivers, and other communications
under this Agreement must be in writing and will be deemed to have been duly
given when (a) delivered by hand (with written confirmation of receipt), (b)
sent by telecopier (with written confirmation of receipt), provided that a copy
is mailed by registered mail, return receipt requested, or (c) when received by
the addressee, if sent by a nationally recognized overnight delivery service
(receipt requested), in each case to the appropriate addresses and telecopier
numbers set forth below (or to such other addresses and telecopier numbers as a
party may designate by notice to the other parties):
To the Seller: REXX Environmental Corporation
Attention: Arthur Asch
350 Park Avenue
New York, New York 10022
Facsimile: (212) 750-3095
with a required copy to: Joseph Greenberger, Esq.
1370 Avenue of the Americas
New York, New York, 10019-4602
Facsimile: (212) 757-4053
To the Buyers: Greg S. Watkins
Daren J. Barone
5490 Complex Street, Suite 603
San Diego, California 92123
Facsimile: (619) 279-6332
with a required copy to: Zevnik Horton Guibord McGovern
Palmer & Fognani, L.L.P.
Attention: Steven G. Rowles, Esq.
101 West Broadway, 17th Floor
San Diego, California 92101
Facsimile: (619) 515-9629
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12.5 Arbitration.
(a) Any claims by the Company or the Buyers against the
Seller, or by the Seller against the Buyers arising out of or in connection with
this Agreement or the Seller's Closing Document shall be determined by
arbitration in Chicago, Illinois by an arbitrator appointed by JAMS/Endispute,
in accordance with the applicable rules of JAMS/Endispute, and as provided in
this Section 12.5. The arbitration may be commenced by a demand for arbitration
with notice of claims pursuant to Section 12.4, with a simultaneous copy thereof
to the JAMS/Endispute office in Chicago, Illinois. Except as otherwise provided
for herein, the arbitration shall be conducted in accordance with the
JAMS/Endispute Comprehensive Rules and Procedures then in effect. There shall be
one (1) arbitrator agreed upon by the parties, or if the parties cannot agree on
the identity of the arbitrator within five (5) days of the arbitration demand,
the arbitrator shall be selected by the JAMS/Endispute Administrator. Any issue
about whether a claim is covered by this Agreement to arbitrate shall be
determined by the arbitrator.
(b) The parties may perform reasonable discovery in such scope
as determined by the arbitrator. Depositions may be taken and discovery may be
obtained in any arbitration under this Agreement in accordance with said
statute, as amended or replaced as of the arbitration. The arbitrator shall not
be bound by rules of evidence, but may consider such writings and oral
presentations as reasonable business people would use in the conduct of their
day-to-day affairs, and may require the parties to submit some or all of their
case by written or such other manner of presentation as the arbitrator may
determine to be appropriate. Pre-trial memoranda shall be exchanged no later
than five (5) days before the hearing starts. The parties intend to limit live
testimony and cross-examination to the extent necessary to ensure a fair hearing
on material issues without unnecessarily prolonging the arbitration.
(c) The arbitrator shall take such steps as he or she may
consider necessary to start the hearing within sixty (60) days of the
appointment of the arbitrator and to conclude the hearing within twenty (20)
days; and the arbitrator's written decision shall be made not later than ten
(10) days after the conclusion of the hearing. A stenographic record shall be
kept of the hearing, except that the arbitrator may employ telephonic conference
calls with the parties' attorneys to decide discovery and procedural issues, and
no stenographic record shall be required thereof. The parties have included
these time limits in order to expedite the proceeding, but they are not
jurisdictional, and the arbitrator shall for good cause (including the inability
of a party to complete its discovery despite diligent efforts in connection
therewith) allow reasonable extensions or delays, which shall not affect the
validity of the award. The arbitrator's written decision shall contain a brief
statement of the claim(s) determined and the ward made on each claim. In making
the decision and award, the arbitrator shall apply applicable Delaware law,
without giving effect to its principles of conflicts of law. Absent fraud,
collusion or willful misconduct by the arbitrator, the award shall be final, and
judgment may be confirmed and entered in any court having jurisdiction thereof.
The arbitrator may ward injunctive relief or any other substantive or procedural
direction available from a judge in an action, in law or equity. The arbitrator
shall ward the predominantly prevailing party its reasonable attorneys' fees and
disbursements and expenses (including stenographic, witnesses', experts', and
investigation fees and expenses) in connection with the arbitration. Until the
arbitrator's award of costs, the fees and disbursements of JAMS/Endispute, the
arbitrator, stenographic recording expenses and similar arbitration expenses
shall be borne and paid fifty percent (50%) by the Seller and fifty percent
(50%) by the Buyers or the Company (whichever may be a party to the
arbitration).
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(d) Notwithstanding any term in this Agreement to the
contrary, each party hereto, on or prior to the commencement of arbitration
hereunder, shall first notify the other party in writing of its or his intention
to seek arbitration and the specific bases upon which its claims are made.
Within seven (7) days thereof, the party in receipt of such notification may
request that JAMS/Endispute provide mediation services with a mediator in
accordance with its Rules and as selected by the Administrator, and on such
request the other party shall submit to such mediation, the fees and
disbursements of said mediation shall be borne fifty percent (50%) by the Seller
and fifty percent (50%) by the Company or the Buyers (whichever may be a party
to the mediation). The pendency of a request for mediation, or of a mediation,
shall not stay a demand for arbitration pursuant to Section 12.5(a), or any
arbitration procedures, hearing or determination pursuant to Section 12.5(b),
12.5(c) or 12.5(d). Nothing herein shall limit the Company or the Buyers from
seeking or obtaining injunctive relief.
(e) For purposes of Section 12.5 hereof, the term "Buyers"
includes all Related Buyer Businesses and all permitted transferees referred to
in Section 12.10 hereof. The Buyers agree to cause such Related Buyer Businesses
and permitted transferees to execute and deliver to the Seller agreements in
form and substance reasonably satisfactory to the Seller so agreeing to such
arbitration provisions.
12.6 Further Assurances. The parties agree (a) to furnish upon request
to each other such further information, (b) to execute and deliver to each other
such other documents, and (c) to do such other acts and things, all as the other
party may reasonably request for the purpose of carrying out the intent of this
Agreement and the documents referred to in this Agreement.
12.7 Waiver. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one (1) party, in whole or in part, by a waiver or renunciation of the claim
or right unless in writing signed by the other party; (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given; and (c) no notice to or demand on one (1) party will be deemed to be a
waiver of any obligation of such party or of the right of the party giving such
notice or demand to take further action without notice or demand as provided in
this Agreement or the documents referred to in this Agreement.
12.8 Entire Agreement and Modification. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the party to be charged with the amendment.
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<PAGE>
12.9 Disclosure Letters.
(a) The disclosures in the Disclosure Letters, and those in
any Supplement thereto, must relate only to the representations and warranties
in the Section of the Agreement to which they expressly relate and not to any
other representation or warranty in this Agreement.
(b) In the event of any inconsistency between the statements
in the body of this Agreement and those in the Disclosure Letters (other than an
exception expressly set forth as such in the Disclosure Letters with respect to
a specifically identified representation or warranty), the statements in the
body of this Agreement will control.
12.10 Assignments, Successors, and No Third-Party Rights. No party may
assign any of its rights under this Agreement without the prior consent of the
other parties (which any party may withhold, in its sole and absolute
discretion) except that each of the Buyers may assign any of his right, title
and interest under this Agreement to any corporation or limited liability
company wholly-owned by the assigning Buyer without the need for consent by the
Seller; provided, however, that any such transferee shall assume in writing the
liabilities, obligations and duties of performance of the assigning Buyer under
this Agreement and the assigning Buyer shall remain jointly and severally liable
with such transferee with respect to the assigning Buyer's liability under this
Agreement. Subject to the preceding sentence, this Agreement will apply to, be
binding in all respects upon, and inure to the benefit of the successors and
permitted assigns of the parties. Nothing expressed or referred to in this
Agreement will be construed to give any Person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreement or any provision of this Agreement. This Agreement and all of
its provisions and conditions are for the sole and exclusive benefit of the
parties to this Agreement and their successors and assigns.
12.11 Severability. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
12.12 Section Headings, Construction. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All references to Buyers
herein include each Buyer, and all references to Buyer herein include both
Buyers. All words used in this Agreement will be construed to be of such gender
or number as the circumstances require. Unless otherwise expressly provided, the
word "including" does not limit the preceding words or terms.
12.13 Time of Essence. With regard to all dates and time periods set
forth or referred to in this Agreement, time is of the essence.
12.14 Joint and Several Liability. The obligations hereunder of the
Buyers, Related Buyer Businesses and transferees referred to in Section 12.10
shall be joint and several.
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12.15 Governing Law. This Agreement will be governed by the laws of the
State of Delaware without regard to conflicts of laws principles.
12.16 Counterparts; Facsimile. This Agreement may be executed in one
(1) or more counterparts, each of which will be deemed to be an original copy of
this Agreement and all of which, when taken together, will be deemed to
constitute one (1) and the same agreement. This Agreement may be executed by
facsimile (with originals to follow by United States mail), and such facsimile
shall be conclusive evidence of the consent and ratification of the signatories
hereto.
12.17 Minority Related Buyer Business Obligations. The obligations of
either Buyer hereunder to cause any Minority Related Buyer Business to
acknowledge, comply with or perform under the provisions of this Agreement shall
expire in their entirety on the third anniversary of the Closing.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
Buyers
/s/ Greg S. Watkins
-------------------------------
Greg S. Watkins
/s/ Daren J. Barone
-------------------------------
Daren J. Barone
Seller REXX ENVIRONMENTAL CORPORATION,
a New York corporation
By: /s/ Arthur L. Asch
-----------------------------
Name: Arthur L. Asch
----------------------------
Title: Chairman of the Board
---------------------------
[Signature Page to Stock Purchase Agreement]
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<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF MERGER
by and between
REXX ENVIRONMENTAL CORPORATION
and
TWG, INC.
Dated
December 9, 1999
To be Joined in by
REXX ACQUISITION CORP.
and
WHITESTONE ACQUISITION CORP.
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AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and
entered into effective as of December 9, 1999, between REXX Environmental
Corporation, a New York corporation ("REXX"), and TWG, Inc., a New York
corporation ("TWGI") (REXX and TWGI are sometimes hereinafter individually
referred to as a "Party" and collectively as the "Parties").
PRELIMINARY STATEMENTS
REXX and TWGI desire to combine their respective businesses and
holdings through the merger of REXX with REXX Acquisition Corp., with REXX as
the surviving corporation. Pursuant to the Merger, each share of common stock of
REXX, par value $0.02 per share ("REXX Common Stock") outstanding at the
Effective Time (as defined in Article II) will be converted into the right to
receive one share of TWGI Common Stock, par value $0.02 per share ("TWGI Common
Stock"), as more fully provided herein. Unless otherwise defined, capitalized
terms shall have the meanings assigned in Section 1.09.
The Parties intend that the Merger constitute a tax-deferred
transaction for purposes of the Internal Revenue Code of 1986, as amended (the
"Code").
The respective Boards of Directors of REXX and TWGI have determined the
Merger, in the manner contemplated herein, to be desirable and in the best
interests of their respective companies and shareholders and, by resolutions
duly adopted, have approved and adopted this Agreement.
As soon as practicable after the execution of this Agreement, REXX
shall notice a meeting of its shareholders and in connection therewith submit to
its shareholders the Proxy Statement related to (i) the approval of the Merger
and (ii) the approval of the Watkins Sale.
Concurrent with the execution of this Agreement and as an inducement to
TWGI to enter into this Agreement, certain affiliates of REXX who are
shareholders, officers or directors are entering into Voting Agreements (as
hereinafter defined) to vote the shares of REXX Common Stock owned by such
persons to approve (i) the Merger, (ii) the Watkins Sale, and (iii) such other
actions as shall be necessary to effectuate the Merger (collectively the "Proxy
Actions").
A stock purchase agreement for the sale of REXX's wholly-owned
subsidiary, Watkins Contracting, Inc., to Daren J. Barone and Greg S. Watkins
(the "Buyers") has been executed and, subject to the approval of REXX's
shareholders, will be consummated prior to the Merger. In addition, all of the
issued and outstanding equity securities of Wilshire Holdings I, Inc. and
Wilshire Holdings II, Inc. will have been contributed to BJB Holdings Corp.,
which will subsequently merge with Whitestone Acquisition Corp., with BJB
Holdings Corp. as the surviving corporation as a wholly-owned subsidiary of
TWGI.
As of the date of this Agreement, Messrs. Barry Sloane, Brian A.
Wasserman and Jeffrey G. Rubin own in the aggregate all of the membership
interests in The Whitestone Group, LLC , 87% of the membership interests in
Wilshire Advisers, LLC and 75% of the membership interests in Wilshire Partners,
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LLC. The Whitestone Group, LLC owns 65% of the membership interests in Wilshire
Investors, LLC, 100% of the membership interests in Wilshire Louisiana Advisers,
LLC and Wilshire New York Advisers II, LLC and 100% of the equity securities of
Whitestone Capital Markets, Inc. Prior to the Effective Time all membership
interests referenced above will be contributed to WI and WII, which will be
wholly-owned by Messrs. Sloane, Wasserman and Rubin who, in turn, will
contribute all of the outstanding equity securities of WI and WII to BJB
Holdings. BJB Holdings is and will remain as a wholly-owned subsidiary of TWGI.
AGREEMENT
Now, therefore, in consideration of the premises and the mutual and
dependent promises hereinafter set forth, the Parties hereby agree as follows:
ARTICLE I
MERGER
Section 1.01 Creation of RAC. In order to effect the Merger, TWGI shall
cause RAC to be organized as a New York corporation, all of the issued and
outstanding capital stock of which shall be owned by TWGI. As soon as practical
following its organization, TWGI shall cause RAC to ratify, approve and adopt
this Agreement.
Section 1.02 The Merger. Subject to the terms and conditions of this
Agreement and in accordance with the Business Corporation Law of New York
("BCL"), at the Effective Time, RAC will be merged with and into REXX, the
separate existence of RAC will cease and REXX will continue as the Surviving
Corporation.
Section 1.03 Effect of the Merger. In addition to the effects set forth
in this Agreement, the Merger will have the effects set forth in Section 906(b)
of the BCL.
Section 1.04 Certificate of Incorporation and By-Laws; Name. At the
Effective Time, the Certificate of Incorporation and the By-Laws of REXX prior
to the Effective Time, including all amendments thereto made prior to the
Effective Time, will be the Certificate of Incorporation and the By-Laws of the
Surviving Corporation.
Section 1.05 Directors. The directors of RAC will continue as the
directors of the Surviving Corporation in accordance with the Certificate of
Incorporation of the Surviving Corporation until their successors are duly
elected or appointed and qualified or until their earlier death, resignation or
removal.
Section 1.06 Officers. The persons serving as officers of RAC prior to
the Effective Time will continue as the officers of the Surviving Corporation,
each to hold office in accordance with the Certificate of Incorporation of the
Surviving Corporation until their respective successors are duly elected or
appointed and qualified or until their earlier death, resignation or removal.
Section 1.07 Merger Consideration: Conversion of Securities. Conversion
and Exchange of REXX Common Stock; Fractional Share Interests; REXX Stock
Options.
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(a) At the Effective Time, except as provided in Section
1.07(b) below, each share of REXX Common Stock issued and outstanding
immediately prior to the Effective Time shall thereupon and thereafter, by
virtue of the Merger becoming effective and without any action on the part of
the holder thereof or any other person, be converted into the right of the
registered holder thereof immediately prior to the Effective Time (such
registered holder being hereinafter referred to as a "Record Holder") to receive
an equal number of shares of TWGI Common Stock, and if appropriate one
additional share of TWGI Common Stock to be paid in lieu of a fractional share
pursuant to Section 1.07(g) hereof.
(b) At the Effective Time, all shares of REXX Common Stock (i)
held as treasury stock by REXX, (ii) owned beneficially by REXX or any REXX
Subsidiary other than in a fiduciary capacity or in connection with a debt
previously contracted, or (iii) owned beneficially by TWGI or any subsidiary of
TWGI other than in a fiduciary capacity or in connection with a debt previously
contracted shall be cancelled, and no cash, stock or other property shall be
delivered in exchange therefor.
(c) After the Effective Time, each Record Holder shall
surrender the certificate(s) that immediately prior to the Effective Time
evidenced and represented REXX Common Stock ("Certificate(s)") to the exchange
agent to be selected by TWGI and which shall be reasonably acceptable to REXX
(the "Exchange Agent"), and each Record Holder shall be entitled upon such
surrender to receive in exchange therefor certificate(s) representing the number
of whole shares of TWGI Common Stock to which such Record Holder is entitled as
provided herein and one (1) additional share of TWGI Common Stock in exchange
for any fraction of a share of REXX Common Stock, as provided under Section
1.07(g) hereof. Within five (5) business days after the Effective Time, the
Exchange Agent shall transmit by U.S. Mail a notice and appropriate transmittal
materials to each Record Holder whose shares of REXX Common Stock shall have
been converted into TWGI Common Stock advising such holder of the effectiveness
of the Merger and the procedure for surrendering outstanding Certificates.
Promptly after receipt of properly completed transmittal materials, together
with the Certificates that formerly evidenced and represented the Record
Holders' shares of REXX Common Stock, the Exchange Agent shall deliver the
consideration to which such Record Holders are entitled pursuant to Sections
1.07(a) and (g) hereof, and the surrendered Certificates shall forthwith be
cancelled. The Exchange Agent shall not be obligated to deliver the
consideration to which any Record Holder is entitled as a result of the Merger
until such Record Holder shall have surrendered the Certificate(s) that formerly
evidenced and represented shares of REXX Common Stock outstanding immediately
prior to the Effective Time for exchange as provided in this Section 1.07(c). In
the case of lost or stolen certificates, the Exchange Agent may require such
Record Holder to execute a bond of the kind and amount it deems necessary or
appropriate to indemnify the Exchange Agent in a manner reasonably satisfactory
to it against all such claims, expenses and liabilities as may arise out of its
payment to such registered holder in the absence of the surrender of a
certificate. After the Effective Time, each Certificate that evidenced and
represented shares of REXX Common Stock outstanding immediately prior to the
Effective Time shall be deemed for all corporate purposes to evidence and
represent only the right of the Record Holder to receive the consideration
provided in Section 1.07(a) hereof, upon compliance with the provisions of this
Section 1.07(c), and shall evidence and represent no further interest of any
kind or nature whatsoever in REXX.
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(d) Until surrendered as provided in Section 1.07(c) hereof,
each Certificate shall be deemed for all purposes to evidence ownership of the
number of shares of TWGI Common Stock into which the shares represented by such
Certificate have been converted; however, no dividend or other distribution
payable with respect to the shares of TWGI Common Stock shall be paid to a
Record Holder until such shareholder surrenders his or her Certificate(s) for
exchange as provided in Section 1.07(c), at which time, subject to Section
1.07(g) below, such shareholder shall receive all dividends and distributions,
without interest thereon, previously payable but withheld from such shareholder
pursuant to this Section 1.07(d). Certificates surrendered for exchange by any
person constituting an "affiliate" of REXX for purposes of Rule 145(c) under the
Securities Act shall contain any legends required by applicable law.
(e) As of the Effective Time, the stock transfer books of REXX
shall be closed, and no transfers of REXX Common Stock by such holder shall
thereafter be made or recognized. On the Closing Date (as hereinafter defined),
REXX shall deliver to TWGI a certified copy of its list of shareholders as of
such date.
(f) In the event that prior to the Effective Time the
outstanding shares of REXX Common Stock shall have been increased, decreased, or
changed into or exchanged for a different number or kind of shares or securities
by reorganization, recapitalization, reclassification, stock dividend, stock
split, or other like change in capitalization, then an appropriate and
proportionate adjustment shall be made in the number and kind of shares of TWGI
Common Stock to be thereafter delivered pursuant to this Agreement.
(g) Notwithstanding any other provision hereof, each holder of
REXX Common Stock who would otherwise have been entitled to receive a fraction
of a share of TWGI Common Stock (after taking into account all Certificates
delivered by such shareholder and aggregating all such fractional interests)
shall receive one (1) additional share of TWGI Common Stock. No such holder
shall be entitled to dividends, voting rights or any other shareholder right in
respect of any fractional share.
(h) The holders of the REXX Common Stock shall not have the
rights to payment for their shares, as provided by Section 623 of the BCL,
pursuant to the provisions of Section 910 of the BCL.
(i) At the Effective Time, each REXX Option whether or not
exercisable, shall be converted into and become an option with respect to TWGI
Common Stock, and TWGI shall assume each REXX Option, in accordance with the
terms of the REXX plan and stock option agreement by which it is evidenced,
except that from and after the Effective Time, (i) TWGI and a committee of its
Board of Directors shall be substituted for REXX and a committee of its Board of
Directors (including, if applicable, the entire Board of Directors of REXX)
administering the REXX stock option plan, (ii) each REXX Option assumed by TWGI
may be exercised solely for TWGI Common Stock, (iii) the number of shares of
TWGI Common Stock subject to each REXX Option shall be equal to the number of
shares of REXX Common Stock subject to such REXX Option immediately prior to the
Effective Time and (iv) the per share exercise price to purchase shares of TWGI
Common Stock shall be equal to the per share exercise price under each REXX
Option. Notwithstanding the foregoing, TWGI shall not be obligated to issue any
fraction of a share of TWGI Common Stock upon the exercise of a REXX Option
subsequent to the Effective Time. As soon as reasonably practicable after the
Effective Time, TWGI shall register on Form S-8 under the Securities Act of
1933, as amended (the "Securities Act"), shares of TWGI Common Stock which may
be acquired upon the exercise of the former REXX Option.
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(j) At the Effective Time, each share of common stock of RAC,
issued and outstanding at the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into one
outstanding share of REXX Common Stock. From and after the Effective Time, each
outstanding certificate previously representing shares of RAC Common Stock shall
be deemed for all purposes to evidence ownership of and to represent the number
of shares of REXX Common Stock into which such shares of RAC Common Stock shall
have been converted.
Section 1.08 Creation of Whitestone Acquisition Corp.. In order to
effectuate the combination of the non-REXX interests in the transactions
contemplated by this Agreement, TWGI shall cause WAC to be organized. As soon as
practical following its organization, TWGI shall cause WAC to ratify, approve
and adopt this agreement.
Section 1.09. Definitions. As used in this Agreement, the following
terms have the following meanings; those defined in the singular shall have the
same meaning when used in the plural and vice versa.
Action means any suit at law or equity, claim, proceeding or
investigation.
Affiliated Person means, with respect to a party, any shareholder,
member, director, officer, employee, manager, representative, Related Party or
entity or person controlling, controlled by or under common control with such
party.
Applicable Laws means, with respect to a party, all laws, statutes,
ordinances, orders, rules, regulations, policies, and guidelines promulgated,
and all judgments, decisions and orders entered by any federal, state, local or
foreign court or governmental authority or instrumentality which are applicable
or relate to either TWGI or REXX, respectively, or their respective businesses
or properties.
BJB Holdings means BJB Holdings Corp., a New York corporation.
Closing and Closing Date shall have the meanings assigned to such terms
by Article II.
Contracts means all enforceable contracts, agreements, leases,
arrangements and understandings, written or oral.
Effective Date and Effective Time shall have the meanings assigned to
such terms by Article II.
Material Adverse Effect means any change in REXX or TWGI, as the
context indicates, involving or affecting the general business affairs,
financial condition, management, stockholders' equity or results of operations
of such company which, individually or in combination with other changes, is
both material and adverse.
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Merger means the combination of REXX and RAC pursuant to New York law
with REXX as the Surviving Corporation.
Proxy Actions means the proposals to be voted upon by the REXX
shareholders at the next meeting of shareholders with respect to the Watkins
Sale and the Merger.
Proxy Statement means the document prepared by REXX and transmitted to
its shareholders in connection with the Watkins Sale and the Merger, as the same
shall be amended or supplemented.
RAC means REXX Acquisition Corp., a New York corporation to be at the
Effective Time wholly-owned by TWGI, created to effectuate the Merger.
RAC Common Stock means the common stock, no par value, of RAC.
Related Party means a current 5% or more shareholder, director,
officer, or any person related to such persons by blood or marriage.
REXX Options means those rights to purchase shares of REXX Common Stock
outstanding as of the Effective Time.
Surviving Corporation means REXX, the corporation resulting from the
combination of REXX and RAC pursuant to the Merger.
WA means Wilshire Advisers, LLC, a New York limited liability company.
WAC means Whitestone Acquisition Corp., a New York corporation
wholly-owned by TWGI and created to effectuate the merger with BJB Holdings and
the acquisition of BJB's subsidiaries.
Watkins means Watkins Contracting, Inc., a California corporation and
wholly-owned subsidiary of REXX.
Watkins Sale means the sale by REXX of Watkins pursuant to a stock
purchase agreement dated June 10, 1999.
W Capital means Whitestone Capital Markets, Inc., a New York
corporation.
WG means The Whitestone Group, LLC, a New York limited liability
company.
WI and WII mean, respectively, Wilshire Holdings I and Wilshire
Holdings II, both New York corporations which, at the Effective Time, will be
wholly-owned subsidiaries of BJB Holdings I.
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WIn means Wilshire Investors, LLC, a Wisconsin limited liability
company.
WLA means Wilshire Louisiana Advisers, LLC, a Louisiana limited
liability company.
WNY means Wilshire New York Advisers II, LLC, a New York limited
liability company.
WP means Wilshire Partners, LLC, a Florida limited liability company.
ARTICLE II
CONSUMMATION OF MERGER
The closing of the Merger ("Closing") will take place as soon as
practicable after the approval of the Proxy Actions by the shareholders of REXX
(the "Closing Date"), at the offices of Tashlik, Kreutzer & Goldwyn P.C., 833
Northern Boulevard, Great Neck, New York 11021, at 10:00 a.m. or at or on such
other time, date and place, or by facsimile or overnight delivery, as shall be
mutually agreed to by the Parties. At the time of the Closing, the parties will
cause the Merger to be consummated by filing a Certificate of Merger with the
Secretary of State of New York, in such form as required by and executed in
accordance with the BCL. The date and time of the filing of the Certificate of
Merger shall be the "Effective Date" or "Effective Time" as used herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF REXX
In order to induce TWGI to enter into this Agreement, REXX represents
and warrants to TWGI that the statements contained in this Article III are true,
correct and complete (except as otherwise indicated the statements contained in
this Article III do not relate to Watkins):
Section 3.01 Organization and Standing. REXX is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York with full power and authority (corporate and other) to own, lease, use
and operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. The name under which REXX was originally
incorporated was "Computronic Services, Inc." REXX is not in default in the
performance, observation or fulfillment of any provision of its Certificate of
Incorporation or its By-laws. REXX is qualified to do business in each
jurisdiction where the nature of its activities would require it to so qualify,
except where the failure to so qualify could not have a REXX Material Adverse
Effect.
Section 3.02 Corporate Power and Authority. REXX has all requisite
corporate power and authority to enter into this Agreement and to perform its
obligations under this Agreement. This Agreement and the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action on the part of REXX and the Agreement has been duly
executed and delivered by REXX and constitutes the legal, valid and binding
obligation of REXX, enforceable against REXX in accordance with its terms, which
in some cases are subject to the approval and adoption of those transactions
contemplated by this Agreement by REXX's shareholders.
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Section 3.03 Conflicts; Consents and Approvals. Except as set forth on
Schedule 3.03, neither the execution or delivery of this Agreement by REXX nor
the consummation of the transactions contemplated by this Agreement will:
(a) violate or result in a breach of any provision of, or
constitute a default (or an event which, with the giving of notice, the passage
of time, or both, would constitute a default) under, or entitle any third party
(with the giving of notice, the passage of time or both) to terminate,
accelerate or call a default under any of the terms, conditions or provisions of
the Certificate of Incorporation or By-laws of REXX, or any note, bond,
mortgage, indenture, deed of trust, license, contract, undertaking, agreement,
lease or other instrument or obligation of REXX filed as an exhibit to the REXX
SEC Documents (as defined in Section 3.07 of this Agreement);
(b) violate any order, writ, injunction, decree, statute,
rule, or regulation applicable to REXX or its properties or assets; or
(c) require REXX to obtain any action or consent or approval
of, or review by, or registration with any third party, court or governmental
body or other agency, instrumentally or authority except for (i) the filing of
the Certificate of Merger, together with the required officers' certificates;
(ii) the filing of a Form 8-K with the Securities and Exchange Commission
("SEC") and the American Stock Exchange within fifteen (15) days after the
Closing Date; (iii) any filings as may be required under applicable state
securities laws; and (iv) the filing of the Registration Statement (as defined
in Section 5.1(b) hereof) with the SEC in accordance with the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and clearance thereof by
the SEC to approve the Proxy Actions.
Section 3.04 Legal Proceeding. There is no Action pending or, to the
knowledge of REXX, threatened against REXX which could have a REXX Material
Adverse Effect or a material adverse effect on the ability of REXX to consummate
the transactions contemplated by this Agreement.
Section 3.05 Brokerage and Finder's Fees. Neither REXX nor any of its
directors, officers or employees has incurred, or will incur, any brokerage,
finder's or similar fee in connection with the transactions contemplated by this
Agreement.
Section 3.06 Authorization and Issuance of REXX Common Stock. The
authorized capital stock of REXX consists of 12,000,000 shares of REXX Common
Stock, of which 2,467,576 shares were issued and outstanding as of September 30,
1999, excluding treasury shares, and 1,000,000 shares of preferred stock, $1.00
par value per share, of which no shares are issued or outstanding. The aggregate
number of all outstanding REXX Options, REXX Options subject to grant, warrants
and other rights to receive shares of REXX Common Stock are set forth in Exhibit
B attached hereto. In connection with the Watkins Sale, REXX will acquire
125,000 currently issued and outstanding shares of REXX Common Stock. All of the
issued and outstanding shares of the REXX Common Stock were issued in compliance
in all material respects with the registration requirements of all applicable
federal and state securities laws or pursuant to valid exemptions therefrom.
Each outstanding share of REXX Common Stock has been duly authorized and validly
issued and is fully paid and nonassessable, and no share of REXX Common Stock
has been issued in violation of preemptive or similar rights.
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Section 3.07 SEC Documents; Absence of Changes. REXX has delivered to
TWGI REXX's Quarterly Reports on Form 10-Q for the quarters ended March 31, June
30 and September 30, 1999, its Annual Report on Forms 10-K and 10-K/A for the
fiscal year ended December 31, 1998, as amended, its Form 8-K dated June 15,
1999 and its Proxy Statement with respect to its 1998 Annual Meeting of
Shareholders (collectively, the "REXX SEC Documents"). The REXX SEC Documents
were true and complete in all material respects as at their respective dates,
and did not contain any untrue statement of a material fact nor omit to state
any material fact required to be stated therein or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading. Since the filing of its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, there has not been any REXX Material
Adverse Effect not reflected in the REXX SEC Documents.
Section 3.08 Voting Agreement. All of the persons and/or entities
deemed affiliates of REXX within the meaning of Rule 145 promulgated under the
Securities Act are listed on Exhibit C hereto (the "REXX Affiliates"), and all
except Messrs. Barone and Watkins have agreed in writing to vote for approval of
the Proxy Actions, pursuant to a Voting Agreement attached hereto or Exhibit D
("Voting Agreements").
Section 3.09 Complete Disclosure. No representation or warranty by REXX
in this Agreement or in any schedule delivered by or on behalf of REXX contains,
or will contain as of the Effective Time, any untrue statement of a material
fact or omits, or will omit as of the Effective Time, a material fact necessary
to make the statements contained herein or therein not misleading.
Section 3.10 Proxy Statement/Prospectus. The written information
supplied by REXX expressly for the purpose of inclusion in the proxy
statement/prospectus to be sent to the shareholders of REXX in connection with
the meeting of REXX's shareholders (the "REXX Shareholders Meeting") shall not,
on the date the Proxy Statement is first mailed to REXX's Shareholders or at the
time of the REXX Shareholders Meeting, contain any untrue statement of a
material fact, or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they were
made, not misleading. If at any time between the filing of the Registration
Statement and the Effective Time any event or information should be discovered
by REXX that should be set forth in a supplement to the Proxy Statement, REXX
shall promptly inform TWGI. Notwithstanding the foregoing, REXX makes no
representation, warranty or covenant with respect to any information supplied by
TWGI that is contained in any of the foregoing documents.
Section 3.11 Environmental Matters. REXX is operating and has at all
times operated its business in material compliance with all Environmental Laws,
and no material expenditures are or will be required in order to comply with
such Environmental Laws. Except as disclosed on Schedule 3.11 REXX has not
received any citation, inquiry or other communication, or is a party to any
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Action, that relates or alleges any actual or potential violation or failure to
comply with any Environmental Laws that will result in a REXX Material Adverse
Effect. To REXX's knowledge, Watkins is in material compliance with all
Environmental Laws, and no material expenditures are or will be required in
order to comply with such Environmental Laws. Except as disclosed in Schedule
3.11, to REXX's knowledge, Watkins has not received any citation, inquiry or
other communication, or is a party to any Action, that relates or alleges any
actual or potential violation or failure to comply with any Environmental Laws
that will result in a REXX Material Adverse Effect. "Environmental Laws" means
all applicable statutes, rules, regulations, ordinances, orders, decrees,
judgments, permits, licenses, consents, approvals, authorizations, and
governmental requirements or directives or other obligations lawfully imposed by
governmental authority under federal, state or local law pertaining to the
protection of the environment, protection of public health, protection of worker
health and safety, the treatment, emission and/or discharge of gaseous,
particulate and/or effluent pollutants, and/or the handling of hazardous
materials, including without limitation, the Clean Air Act, 42 U.S.C. ss. 7401,
et seq., the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), 42 U.S.C. ss. 9601, et seq., the Federal Water Pollution
Control Act, 33 U.S.C. ss. 1321, et seq., the Hazardous Materials Transportation
Act, 49 U.S.C. ss. 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. ss. 690-1, et seq. ("RCRA"), and the Toxic Substances Control Act, 15
U.S.C. ss. 2601, et seq.
Section 3.12 Insurance. REXX has been and is insured with respect to
its properties and the conduct of its business in such amounts and against such
risks as are sufficient for compliance with law and as are adequate to protect
the property and business of REXX in accordance with normal industry practice.
REXX has provided TWGI a true, correct and complete list of all insurance
policies and bonds in force in which REXX is named as an insured party, or for
which it has paid any premiums (the "Policies"), and such list correctly states
the name of the insurer, the name of each insured party, the type and amount of
coverage, deductible amount, if any, the expiration date and the premium amount
of each such policy or bond. All such Policies are currently in full force and
effect and no notice of cancellation or termination has been received by REXX
with respect to any such policy. REXX will continue all of such Policies in full
force and effect through the date of the Watkins Sale as they relate to Watkins,
and as to all other policies through the Closing Date. All premiums currently
due and payable on such Policies have been paid. REXX is not a co-insurer under
any term of any insurance policy except as set forth in the Policies.
Section 3.13 Officers and Employees of REXX. Except as disclosed in
Schedule 3.13, no present or former Related Party of REXX has any financial
interest, direct or indirect, in any vendor, client or account of, or other
outside business which has transactions in excess of $10,000 in the aggregate
with, REXX.
Section 3.14 Audited and Unaudited Financial Statements. REXX has
furnished to TWGI the unaudited financial statements for the period ended
September 30, 1999 and the audited financial statements for the fiscal year
ended December 31, 1998 (collectively, the "Financial Statements"). The
Financial Statements have been prepared in accordance with the books and records
of REXX, have been prepared in accordance with GAAP on a consistent basis for
all periods presented, are true and correct in all material respects and fairly
present the financial condition and results of operations of REXX as of the date
stated and the results of operations of REXX for the periods then ended in
accordance with such practices.
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Section 3.15 Undisclosed Liabilities. REXX has no liability or
obligation of any nature (whether liquidated, unliquidated, accrued, absolute,
contingent or otherwise and whether due or to become due) except:
(a) those disclosed on Schedule 3.15 hereto;
(b) those set forth in the Financial Statements which have not
been paid or discharged since the date thereof;
(c) those contractual obligations arising after the date of
this Agreement under agreements or other commitments specifically identified in
Schedule 3.24; and
(d) those current liabilities (including provisions for
current and deferred income tax) incurred since September 30, 1999, in
transactions entered into in the ordinary course of business consistent with
past practices which are properly reflected on its books and which are not
inconsistent with the other representations, warranties and agreements of REXX
set forth in this Agreement.
Section 3.16 Absence of Certain Changes. Since September 30, 1999,
other than as set forth on Schedule 3.16 attached hereto, there has not been:
(a) any REXX Material Adverse Effect, or any occurrence,
circumstance, or combination thereof which reasonably could be expected to
result in any such REXX Material Adverse Effect, including, without limitation,
any Material Adverse Effect relating to a relationship with any existing
investor, borrower, or existing agent of REXX;
(b) any declaration, setting aside or payment of any dividend
or any distribution (in cash or in kind) to any shareholder of REXX, or any
direct or indirect redemption, repurchase or other acquisition by REXX of any of
REXX capital stock or any options, warrants, rights or agreements to purchase or
acquire such stock;
(c) any transaction entered into or carried out by REXX other
than in the ordinary and usual course of REXX's business consistent with past
practices;
(d) any borrowing or agreement to borrow funds by REXX, any
incurring by REXX of any other obligation or liability (contingent or
otherwise), except liabilities incurred in the usual and ordinary course of
REXX's business consistent with past practices, or any endorsement, assumption
or guarantee of payment or performance of any loan or obligation of any other
person by REXX;
(e) any material change in REXX's accounting principles or
practices or its method of application of such principles or practices;
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(f) any mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be imposed on or
with respect to the property or assets of REXX;
(g) any sale, lease, transfer, abandonment, license,
assignment or other disposition of, or any agreement to sell, lease or otherwise
dispose of any of the properties, rights or assets of REXX;
(h) any loan or advance made by REXX to any person except in
the ordinary and usual course of business;
(i) any modification, waiver, change, amendment, release,
recision or termination of, or accord and satisfaction with respect to, any
term, condition or provision of any Contract, other than any satisfaction by
performance in accordance with the terms thereof in the usual and ordinary
course of business;
(j) any labor dispute or disturbance adversely affecting the
business operations or condition (financial or otherwise) of REXX, including,
with limitation, the filing of any petition or charge of unfair or
discriminatory labor practice with any governmental or regulatory authority,
efforts to effect a union representation election, actual or threatened employee
strike, work stoppage or slowdown;
(k) any material damage, destruction or property loss, whether
or not covered by insurance, affecting adversely the properties or business of
REXX; or
(l) any Contract entered into by REXX that is not able to be
terminated by REXX on 30 days or fewer advance notice without penalty or premium
or which is outside the ordinary and usual course of business.
Section 3.17 Taxes.
(a) Except as disclosed in Schedule 3.17(a), REXX has duly
paid or accrued all federal, state, local and foreign taxes, assessments, fees
and other governmental charges (hereinafter, "Taxes") when due and payable.
Except as disclosed in Schedule 3.17(a), REXX has duly filed all federal, state,
local and foreign tax returns and tax reports required to be filed by it, all
such returns and reports are true, correct and complete, none of such returns
and reports have been amended, and all Taxes arising under such returns and
reports (regardless of whether reflected thereon) have been fully paid or shall
be adequately reserved for in the Financial Statements, and shall be timely paid
when due. No claim has been made by authorities in any jurisdiction where REXX
did not file tax returns that it is or may be subject to taxation therein. All
tax payments relating to employees, including income tax withholding, FICA,
FUTA, unemployment and workers' compensation payments due and payable as of the
date hereof have been fully and timely paid or accrued.
(b) REXX has delivered copies of all federal, state, local,
and foreign income tax returns filed with respect to REXX for taxable periods
ended on or after December 31, 1997. Except as disclosed in Schedule 3.17(b),
there have been no audits conducted by taxing authorities with respect to any
tax year for which assessment is not barred by any applicable statute of
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limitations. No waivers of any applicable statute of limitations for the filing
of any tax returns or payment of any taxes or assessments of any deficient or
unpaid taxes are outstanding. All deficiencies proposed as a result of any
audits have been paid or settled. There is no pending or, to the knowledge of
REXX, threatened federal, state, local or foreign tax audit or assessment of
REXX and no agreement with any federal, state, local or foreign taxing authority
that may affect the subsequent tax liabilities of REXX.
(c) All Taxes attributable to the existence or operation of
REXX shall, to the extent not already paid, be properly reflected in the
Financial Statements as at or through the Closing Date in accordance with GAAP
consistently applied.
(d) Except as disclosed in Schedule 3.17(d), REXX has not been
a member of an affiliated, consolidated, combined or unitary group for purposes
of taxes and has no liability under Treasury Regulation 1.1502-6. There exists
no tax-sharing agreement or arrangement pursuant to which REXX is obligated to
pay the tax liability of any other person or to indemnify any other person with
respect to any tax.
Section 3.18 Compliance with Law. REXX has complied and is in
compliance in all material respects with all Applicable Laws except where the
failure to so comply would not have a REXX Material Adverse Effect. Except as
disclosed in Schedule 3.18, to REXX's knowledge, Watkins has complied and is in
compliance in all material respects with the Applicable Laws which are
applicable or relate to Watkins as its business or properties except where the
failure to so comply would not have a REXX Material Adverse Effect. REXX has all
governmental, self-regulatory and other non-governmental franchises, licenses,
permits, consents, authorizations, approvals and certifications necessary or
appropriate for the operation of its business or the ownership of its properties
(collectively, "Permits"). Schedule 3.18 includes a list of all Permits held by
REXX, each of which is currently valid and in full force and effect and, except
as set forth on Schedule 3.18, will continue to be valid and in full force and
effect immediately after the Effective Time. REXX is not in violation of any of
the Permits, and there is no pending or, to the knowledge of REXX, any
threatened proceeding which could result in the revocation, cancellation or
inability of REXX to renew any Permit.
Section 3.19 Proprietary Rights. (a) Schedule 3.19 sets forth:
(i) all names, patents, inventions, trade secrets, proprietary
rights, computer software, trademarks, trade names, service marks, logos,
copyrights and franchises and all applications therefor, registrations thereof
and licenses, sublicenses or agreements in respect thereof which REXX owns or
has the right to use or to which REXX is a party and the loss of which could
have a REXX Material Adverse Effect; and
(ii) all filings, registrations or issuances of any of the
foregoing with or by any federal, state, local or foreign regulatory,
administrative or governmental office or offices (all items in (i) and (ii) of
this Section 3.19 being sometimes hereinafter referred to collectively as the
"Proprietary Rights").
(b) Except as set forth in Schedule 3.19, REXX is the sole and
exclusive owner of all right, title and interest in and to all Proprietary
Rights free and clear of all liens, claims, charges, equities, rights of use,
encumbrances and restrictions whatsoever, and there is not pending or, to the
knowledge of REXX, threatened any investigation, proceeding, inquiry or other
review by any federal, state, local or foreign regulatory, administrative or
governmental office or offices with respect to REXX's right, title or interest
in any Proprietary Right.
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(c) Except as set forth on Schedule 3.19, none of the
Proprietary Rights (i) has been hypothecated, sold, assigned or licensed by
REXX, or to the knowledge of the undersigned officer of REXX, any person; (ii)
infringe upon or violate the proprietary rights of any person; (iii) to the
knowledge of the undersigned officer of REXX, are subject to challenge, claims
of infringement, unfair competition or other claims; or (iv) to the knowledge of
REXX, are being infringed upon or violated by any person. REXX has not given any
indemnification against patent, trademark or copyright infringement as to any
equipment, materials, products, services or supplies which REXX uses, licenses
or sells; and there is not pending or, to the knowledge of REXX, threatened any
claim or litigation against REXX contesting the right of REXX to sell, engage in
or employ any such product, process, method, or operation.
Section 3.20 Restrictive Documents or Laws. Other than as set forth on
Schedule 3.20 attached hereto, REXX is not a party to or bound under any
mortgage, lien, lease, agreement, Contract, instrument, law, order, judgment,
decree or any similar restriction not of general application which adversely
affects, or reasonably could be expected to so affect (a) the business,
operations, assets, properties, rights, or condition (financial or otherwise) of
REXX; (b) the continued operation of REXX's businesses immediately after the
Closing Date on substantially the same basis as such business is currently
operated; or (c) the consummation of the transactions contemplated by this
Agreement.
Section 3.21 Bank Accounts, Depositories, Power of Attorney. Set forth
in Schedule 3.21 is a true, correct and complete list of the names and locations
of all banks or other depositories in which REXX has accounts or safe deposit
boxes, and the names of the persons authorized to draw thereon, borrow therefrom
or have access thereto. Except as set forth in Schedule 3.21, no person has a
power of attorney from REXX.
Section 3.22 Title to and Condition of Properties. Except as set forth
in Schedule 3.22, REXX has good, valid and marketable title to all of its assets
and properties of every kind, nature and description, tangible or intangible,
wherever located, which constitute all of the property (including without
limitation property and assets shown or reflected on the Financial Statements)
now used in and necessary for the conduct of its business as presently conducted
and all such properties are owned free and clear of all mortgages, pledges,
liens, security interests, encumbrances and restrictions of any nature
whatsoever. All such properties are usable for their current uses without
violating any Applicable Laws, or any applicable private restrictions. Except as
set forth in Schedule 3.22, no financing statement under the Uniform Commercial
Code or similar law naming REXX or any of its predecessors has been filed in any
jurisdiction, and REXX is not a party to or bound under any agreement or legal
obligation authorizing any party to file any such financing statement. All
tangible personal property owned, leased or used by REXX is suitable for the
purpose or purposes for which it is being used and has been maintained in all
material respects in accordance with the terms of any lease applicable thereto.
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Section 3.23 ERISA.
(a) Except as set forth in Schedule 3.23 hereof, REXX is not a
party to an "employee benefit plan", as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974 ("ERISA") which (i) is subject to any
provision of ERISA and (ii) is or was at any time maintained, administered or
contributed to by REXX and covers any employee or former employee of REXX and
under which REXX or any Affiliate has any liability. Such plans are referred to
collectively herein as the "Employee Plans." For purposes of this section,
"Affiliate" of any person or entity includes any other person or entity which,
together with such person or entity, could be treated as a single employer under
Section 414 of the Code or is an "affiliate," whether or not incorporated, as
defined in Section 407(d)(7) of ERISA, of such person or entity.
(b) Schedule 3.23 identifies each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, severance benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation, or post-retirement
insurance, compensation or benefits which (i) is not an Employee Plan, (ii) is
entered into, maintained or contributed to, as the case may be, by REXX or any
of its Affiliates, and (iii) covers any employee or former employee of REXX or
any of its Affiliates. Such contracts, plans and arrangements as are described
above, copies or descriptions of all of which have been furnished or made
available previously to TWGI are referred to collectively herein as the "Benefit
Arrangements." Each Benefit Arrangement has been maintained in substantial
compliance with its terms and with requirements prescribed by any and all
statutes, orders, rules and regulations that are applicable to such Benefit
Arrangement.
(c) Except as set forth in Schedule 3.23, there is no
liability in respect of post-retirement health and medical benefits for retired
employees of REXX or any of its Affiliates other than such medical benefits
which are required to be continued under applicable law, determined using
assumptions that are reasonable in the aggregate, over the fair market value of
any fund, reserve or other assets segregated for the purpose of satisfying such
liability (including for such purposes any fund established pursuant to Section
401(h) of the Code). REXX has reserved its right to amend or terminate any
Employee Plan or Benefit Arrangement providing health or medical benefits in
respect of any active employee of REXX or Affiliates under the terms of any such
plan and written descriptions thereof given to employees. With respect to any of
REXX's Employee Plans which are "group health plans" under Section 4980B of the
Code and Section 607(1) of ERISA, there has been material compliance with all
requirements imposed thereunder so that REXX and its Affiliates have no (and
will not incur any) loss, assessment, tax penalty, or other sanction with
respect to any such plan.
(d) Except as set forth in Schedule 3.23, there has been no
amendment to, written interpretation or announcement (whether or not written) by
REXX or any of its Affiliates relating to any Employee Plan or Benefit
Arrangement which would increase the expense of maintaining such Employee Plan
or Benefit Arrangement above the level of the expense incurred in respect
thereof for the year ended immediately prior to the Closing Date.
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(e) Other than as set forth in Schedule 3.23, REXX is not a
party to or subject to any employment contract or arrangement providing for
annual future compensation, or the opportunity to earn annual future
compensation (whether through fixed salary, bonus, commission, options or
otherwise) of more than $25,000 to any officer, consultant, director or
employee.
(f) The execution and consummation of the Merger does not
constitute a triggering event under any Employee Plan, whether or not legally
enforceable, which (either alone or upon the occurrence of any additional or
subsequent event) will or may result in any payment (of severance pay or
otherwise), acceleration, increase in vesting, or increase in benefits to any
current or former participant, employee or director of REXX that has not been
specifically disclosed on Schedule 3.23 or which is not material to the
financial condition or business of REXX.
(g) Any reference to ERISA or the Code or any section thereof
shall be construed to include all amendments thereto and applicable regulations
and administrative rulings issued thereunder.
Section 3.24 Contracts. Schedule 3.24 lists all Contracts to which REXX
is a party which are material to the financial condition, operations, assets or
business of REXX or are with any Related Party or any person controlling,
controlled by or under common control with any such person, or with any
employee, agent or consultant of REXX. All of such Contracts are valid and
binding on REXX, in full force and effect, and enforceable in accordance with
their respective terms, except to the extent that the enforceability thereof may
be limited by (x) applicable bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance or similar laws in effect which affect the enforcement of
creditors' rights generally or (y) general principles of equity, whether
considered in a proceeding at law or in equity. To the knowledge of REXX, it is
not in violation of, or in default in respect of, nor has there occurred an
event or condition which, with the passage of time or giving of notice (or
both), would constitute a default under, any such Contract.
Section 3.25 Affiliated Transactions. Schedule 3.25 includes a list of
all amounts in excess of $10,000 in the aggregate payable to REXX by any
Affiliated Person of REXX (the "Related Party Receivables") and all such amounts
payable by REXX to any Affiliated Person of REXX (the "Related Party Payables")
as of the date of this Agreement, specifying the payer, payee, amount, terms of
repayment, maturity date and any contractual set off rights of the payer of each
Related Party Receivable and Related Party Payable. Except as disclosed in
Schedule 3.25 and subject to the $10,000 exclusion, no Related Party has any
financial interest, direct or indirect, in any vendor, client or account of, or
other outside business which has transactions with, REXX. REXX has no agreement
or understanding with any Related Party which would influence any such person
not to become associated with or employed by TWGI from and after the Closing or
from serving TWGI after the Closing in a capacity similar to the capacity
presently held with REXX.
Section 3.26 No Conflict or Default. Other than as set forth in
Schedule 3.26 attached hereto, neither the execution and delivery of this
Agreement by REXX, nor compliance by REXX with the terms and provisions of this
Agreement, including without limitation the consummation of the Merger, will
violate any Applicable Laws or Permits or conflict with or result in the breach
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of any term, condition or provision of the Certificate of Incorporation,
By-laws, or other organizational document of REXX, or of any material Contract,
writ, order, decree, restriction, legal obligation or instrument to which REXX
is a party or by which REXX or any of its assets or properties are or may be
bound or affected, or constitute a default (or an event which, with the giving
of notice, the passage of time, or both would constitute a default) thereunder,
or result in the creation or imposition of any lien, security interest, charge
or encumbrance, or restriction of any nature whatsoever with respect to any
properties or assets of REXX, or give to others any interest or rights,
including rights of termination, acceleration or cancellation in or with respect
to any of the properties, assets, Contracts or business of REXX, or violate any
judgment, order, injunction, decree or award of any court, arbitrator,
administrative agency or governmental or regulatory body against or binding
upon, REXX or any of its securities, properties, assets or business.
Section 3.27 Books of Account; Records. REXX's general ledgers, stock
record books, minute books and other records relating to the assets, properties,
contracts and outstanding legal obligations of REXX, as the case may be, are
complete and correct in all material respects and have been maintained in
accordance with good business practices.
Section 3.28 Subsidiaries. The only direct or indirect subsidiaries of
REXX are those named in Schedule 3.28 (individually, a "Subsidiary", and
collectively the "Subsidiaries") all of which are corporations duly organized,
validly existing and in good standing under the laws of the jurisdiction of
their incorporation, with full power and authority to carry on their respective
businesses as now conducted and to own or lease or operate their properties in
the places where their respective businesses are now conducted and such
properties are now owned, leased or operated. All of the issued and outstanding
voting securities of the Subsidiaries are owned, of record and beneficially, by
REXX, free and clear of any lien or encumbrance whatsoever, and are duly
authorized, validly issued, fully paid and non-assessable. There are no options,
convertible securities, warrants, or other rights (preemptive or otherwise) to
purchase or acquire any capital stock of any Subsidiary and no contracts to
which REXX or any of its affiliates is subject with respect to the issuance,
voting or sale of issued or unissued shares of the capital stock of any of the
Subsidiaries. Neither REXX nor any Subsidiary beneficially owns, directly or
indirectly, any equity securities, profit or loss interest, or capital interest
of any entity other than the Subsidiaries, the Joint Ventures described in
Section 3.29 below or as set forth in Schedule 3.28. Each of the Subsidiaries is
qualified to do business as a foreign corporation in each jurisdiction where the
business of or properties owned or leased by it requires such Subsidiary to be
so qualified.
Section 3.29 Joint Ventures. The only joint ventures or partnerships in
which REXX or any Subsidiary is a joint venturer or partner are those listed in
Schedule 3.29 (individually, a "Joint Venture", and collectively the "Joint
Ventures"). Each Joint Venture is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization, with full power
to carry on its business and to own or lease or operate its properties in the
places where such business is now conducted and such properties are now owned,
leased or operated. REXX has made available to TWGI complete and correct copies
of all instruments governing the Joint Ventures, as in effect on the date
hereof, including all amendments thereto. Except as set forth in Schedule 3.29
hereto:
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(a) the interests in the Joint Ventures owned by REXX or any
Subsidiary are duly authorized and issued, have received all necessary
governmental approvals and are held by REXX or such Subsidiary free and clear of
any liens, claims or encumbrances whatsoever;
(b) the properties and assets of the Joint Ventures are held
by them free and clear of any liens, claims or encumbrances whatsoever, other
than liens for current taxes which are not delinquent and liens securing debt to
REXX; and
(c) any and all loans made by REXX to such Joint Ventures are
valid and enforceable in accordance with their terms, and individually or in the
aggregate do not violate any restrictions or regulations established by law.
Section 3.30 Employment Agreements; Severance. Except for the
employment agreements set forth in Schedule 3.30, REXX is not a party to any
employment or severance agreement. Neither the consummation of the Merger nor
the passage of time following the consummation of the Merger will result in any
payment becoming due from REXX or any Subsidiary to any officer or employee
thereof.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TWGI
In order to induce REXX to enter into this Agreement, TWGI on behalf of
itself and the Affiliates, hereby represents and warrants to REXX that the
statements contained in this Article IV are true, correct, and complete (the
term "Affiliate" or "Affiliates" as used in this Article IV shall include WG,
WA, WP, WI, WII, WIn, WLA, WNY, W Capital, BJB Holdings, WAC and RAC):
Section 4.01 Organization and Standing of TWGI, BJB Holdings, WAC and
RAC. TWGI, and upon the completion of their organization and at the Effective
Time BJB Holdings, WAC and RAC will be corporations duly organized, validly
existing and in good standing under the laws of the State of New York, with full
power and authority (corporate and other) to own, lease, use and operate their
properties and to conduct their business as and where now owned, leased, used,
operated and conducted. TWGI, BJB Holdings, WAC and RAC are duly qualified to do
business and are in good standing in each jurisdiction where the nature of their
activities would require them to so qualify, except where the failure to so
qualify would not have a Material Adverse Effect on TWGI, BJB Holdings, WAC or
RAC. TWGI, BJB Holdings, WAC and RAC are not in default in the performance,
observation or fulfillment of any provision of their Certificates of
Incorporation or Bylaws.
Section 4.02 Organization and Standing of WA and WNY. WA and WNY are
limited liability companies duly organized, validly existing and in good
standing under the laws of the State of New York with full power and authority
to own, lease, use and operate their properties and to conduct their business as
and where now owned, leased, used, operated and conducted. WA and WNY are duly
qualified to do business and are in good standing in New York, are not qualified
to do business in any other jurisdiction and neither the nature of the business
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or other activities conducted by them nor the properties they own, lease or
operate requires them to qualify to do business as a foreign corporation in any
other jurisdiction. WA and WNY are not in default in the performance,
observation or fulfillment of any provision of their Certificate of Organization
or Operating Agreement. WA and WNY are registered certified capital companies
under Section 11 et seq. of the New York Tax Law and are in compliance with such
law and meets all the requirements to maintain such status.
Section 4.03 Organization and Standing of WG. WG is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of New York with full power and authority to own, lease, use and
operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. WG is duly qualified to do business and is
in good standing in New York and in all other jurisdictions where being so
qualified is material to its business, and neither the nature of the business or
other activities conducted by it nor the properties it owns, leases or operates
requires it to qualify to do business as a foreign corporation in any other
jurisdiction. WG is not in default in the performance, observation or
fulfillment of any provision of its Certificate of Organization or Operating
Agreement.
Section 4.04 Organization and Standing of WP. WP is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Florida with full power and authority to own, lease, use and
operate its properties and to conduct its business as and where now owned,
leased, used, operated and conducted. WP is duly qualified to do business and is
in good standing in the State of Florida, is not qualified to do business in any
other jurisdiction and neither the nature of the business or other activities
conducted by it nor the properties it owns, leases or operates requires it to
qualify to do business as a foreign corporation in any other jurisdiction. WP is
not in default in the performance, observation or fulfillment of any provision
of its Certificate of Organization or Operating Agreement. WP is a registered
certified capital company under the Florida Certified Capital Company Act and is
in compliance with such Act and meets all of the requirements to maintain such
status.
Section 4.05 Organization and Standing of W Capital and WI. WI and W
Capital are each a corporation duly organized, validly existing and in good
standing under the laws of the State of New York with full power and authority
to own, lease, use and operate its properties and to conduct its business as and
where now owned, leased, used, operated and conducted. WI and W Capital are each
duly qualified to do business and is in good standing in New York, is not
qualified to do business in any other jurisdiction and neither the nature of the
business or other activities conducted by it nor the properties it owns, leases
or operates requires it to qualify to do business as a foreign corporation in
any other jurisdiction. WI and W Capital are each not in default in the
performance, observation or fulfillment of any provision of its Articles of
Incorporation or By-laws. W Capital was formed for the purpose of initiating in
the near future the broker-dealer activities proposed for TWGI, although no
regulatory filings have been made as of the date hereof.
Section 4.06 Organization and Standing of WII. WII is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York with full power and authority to own, lease, use and operate
its properties and to conduct its business as and where now owned, leased, used,
operated and conducted. WII is duly qualified to do business and is in good
standing in New York, is not qualified to do business in any other jurisdiction
and neither the nature of the business or other activities conducted by it nor
the properties it owns, leases or operates requires it to qualify to do business
as a foreign corporation in any other jurisdiction. WII is not in default in the
performance, observation or fulfillment of any provision of its Articles of
Incorporation or By-laws.
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Section 4.07 Organization and Standing of WIn. WIn is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Wisconsin with full power and authority to own, lease,
use and operate its properties and to conduct its business as and where now
owned, leased, used, operated and conducted. WIn is duly qualified to do
business and is in good standing in Wisconsin, is not qualified to do business
in any other jurisdiction and neither the nature of the business or other
activities conducted by it nor the properties it owns, leases or operates
requires it to qualify to do business as a foreign corporation in any other
jurisdiction. WIn is not in default in the performance, observation or
fulfillment of any provision of its Certificate of Organization or Operating
Agreement. WIn is a registered certified capital company under Section 76.635
Wisconsin Statues (1999) and is in compliance with such law and meets all the
requirements to maintain such status.
Section 4.08 Organization and Standing of WLA. WLA is a limited
liability company duly organized, validly existing and in good standing under
the laws of the State of Louisiana with full power and authority to own, lease,
use and operate its properties and to conduct its business as and where now
owned, leased, used, operated and conducted. WLA is duly qualified to do
business and is in good standing in the State of Louisiana, is not qualified to
do business in any other jurisdiction and neither the nature of the business or
other activities conducted by it nor the properties it owns, leases or operates
requires it to qualify to do business as a foreign corporation in any other
jurisdiction. WLA is not in default in the performance, observation or
fulfillment of any provision of its Certificate of Organization or Operating
Agreement. WLA is a registered certified capital company under the Louisiana
Capital companies Tax Credit Program, La.R.S.51:1921, et seq., and is in
compliance with such law and meets all the requirements to maintain such status.
Section 4.09 Capitalization and Security Holders. The authorized
capital stock of TWGI consists of 30,000,000 shares of common stock, par value
$0.02 per share ("TWGI Common Stock") of which 18,250,000 shares are issued and
outstanding. Each share outstanding of TWGI Common Stock and each Affiliate
membership interest or equity security has been duly authorized and validly
issued and is fully paid and nonassessable, and no TWGI Common Stock has been
issued in violation of preemptive or similar rights. Except as set forth in
Schedule 4.09, there are no outstanding subscriptions, options, warrants, puts,
calls, agreements, understandings, claims, or other commitments or rights of any
type relating to the issuance, sale or transfer by TWGI or Affiliates or any of
their shareholders or members, respectively, of any securities or interests of
TWGI or Affiliates, nor are there outstanding any securities which are
convertible into or exchangeable for shares of capital stock of TWGI or for
membership interests of the Affiliates; and neither TWGI nor Affiliates have any
obligations of any kind to issue any additional securities or to pay for any
securities of TWGI or any predecessor. The issuance and sale of all securities
of TWGI and Affiliates have been in full compliance in all material respects
with the registration requirements of all applicable federal and state
securities laws or pursuant to valid exemptions therefrom.
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Section 4.10 Subsidiaries. Except as set forth in Schedule 4.10, TWGI
does not own, directly or indirectly, any equity or other ownership interest in
any limited liability company, corporation, partnership, joint venture or other
entity or enterprise. TWGI is not subject to any obligation or requirement to
provide funds to or make any investment (in the form of a loan, capital
contribution or otherwise) in any entity.
Section 4.11 Stock Ownership and Authority. At the Effective Time, all
outstanding shares of capital stock of BJB Holdings and RAC will be owned free
and clear of all liens, security interests, encumbrances, pledges, charges,
claims, voting trusts, and restrictions on transfer of any nature whatsoever
("Restrictions"), except Restrictions on transfer imposed by or pursuant to
federal or state securities laws or those set forth in Schedule 4.11. At the
Effective Time, (i) TWGI will own free of Restrictions all of the equity
securities of RAC and BJB Holdings, and (ii) BJB Holdings will own free of
Restrictions all of the equity securities of WI and WII, which corporations
will, in turn, own (a) all of the membership interests in WG, (b) 87% of the
membership interests in WA, (c) 56.88% of the membership interests in WP. In
connection with the Merger, holders of WG will own (x) all of the membership
interests in WLA, (y) 65% of the membership interests in WI and (z) all of the
capital stock of W Capital. The authorized capital stock of RAC consists of 200
shares of RAC Common Stock, which is the sole class entitled to vote. As of the
date of this Agreement, no shares of RAC Common Stock are issued and
outstanding; however, prior to the Effective Time, RAC will issue ten (10)
shares of RAC Common Stock to TWGI, which shares will constitute the sole
outstanding securities of RAC as of the Effective Time.
Section 4.12 Corporate Power and Authority. TWGI, BJB Holdings, WAC and
RAC have all requisite corporate power and authority to enter into and perform
this Agreement and to carry out their obligations under this Agreement. This
Agreement and the transactions contemplated by this Agreement have been duly and
validly authorized by all necessary corporate and shareholder action on the part
of TWGI, BJB Holdings, WAC and RAC. This Agreement has been duly executed and
delivered by, constitutes the legal, valid and binding obligation of and is
enforceable against TWGI, BJB Holdings, WAC and RAC in accordance with its
terms.
Section 4.13 Consents and Approvals. Except as set forth in Schedule
4.13 hereto, neither the execution and delivery of this Agreement by TWGI, BJB
Holdings, WAC and RAC nor the consummation of the transactions contemplated by
this Agreement requires or will require on behalf of TWGI or Affiliates any
action or consent or approval of, or review by, or registration with, any third
party, court or governmental body or other agency, instrumentality or authority.
Section 4.14 Audited and Unaudited Financial Statements. TWGI has
furnished to REXX the unaudited financial statements for the period ended
September 30, 1999 and the audited financial statements for the fiscal year
ended December 31, 1998 as specified in and attached to Schedule 4.14
(collectively, the "TWGI Financial Statements"). The TWGI Financial Statements
have been prepared in accordance with the books and records of TWGI and
Affiliates, as the case may be, have been prepared in accordance with GAAP on a
consistent basis for all periods presented, are true and correct in all material
respects and fairly present the financial condition and results of operations of
TWGI and Affiliates as of the date stated and the periods then ended in
accordance with such practices.
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Section 4.15 Undisclosed Liabilities. TWGI and Affiliates have no
liability or obligation of any nature (whether liquidated, unliquidated,
accrued, absolute, contingent or otherwise and whether due or to become due)
except:
(a) those disclosed on Schedule 4.15 hereto;
(b) those set forth in the TWGI Financial Statements which
have not been paid or discharged since the date thereof;
(c) those contractual obligations arising after the date of
this Agreement under agreements or other commitments specifically identified in
Schedule 4.25; and
(d) those current liabilities (including provisions for
current and deferred income tax) incurred since September 30, 1999, in
transactions entered into in the ordinary course of business consistent with
past practices which are properly reflected on their books and which are not
inconsistent with the other representations, warranties and agreements of TWGI
and Affiliates set forth in this Agreement.
Section 4.16 Absence of Certain Changes. Since September 30, 1999,
other than as set forth on Schedule 4.16 attached hereto, there has not been:
(a) any Material Adverse Effect upon TWGI or Affiliates or any
occurrence, circumstance, or combination thereof which reasonably could be
expected to result in any such material adverse change (a Material Adverse
Effect), including, without limitation, any Material Adverse Effect relating to
a relationship with any existing investor, borrower, or agent of TWGI or
Affiliates;
(b) any declaration, setting aside or payment of any dividend
or any distribution (in cash or in kind) to any shareholder or member of TWGI or
Affiliates, respectively, or any direct or indirect redemption, repurchase or
other acquisition by TWGI or Affiliates of any of their capital stock or
membership interests or any options, warrants, rights or agreements to purchase
or acquire such stock or interests;
(c) any transaction entered into or carried out by TWGI or
Affiliates other than in the ordinary and usual course of TWGI's or the
Affiliates' business consistent with past practices;
(d) any borrowing or agreement to borrow funds by TWGI or
Affiliates, any incurring by TWGI or Affiliates of any other obligation or
liability (contingent or otherwise), except liabilities incurred in the usual
and ordinary course of TWGI's or the Affiliates' business consistent with past
practices, or any endorsement, assumption or guarantee of payment or performance
of any loan or obligation of any other person by TWGI or Affiliates;
(e) any material change in TWGI's or Affiliates' accounting
principles or practices or its method of application of such principles or
practices;
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(f) any mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be imposed on or
with respect to the property or assets of TWGI or Affiliates;
(g) any sale, lease, transfer, abandonment, license,
assignment or other disposition of, or any agreement to sell, lease or otherwise
dispose of any of the properties, rights or assets of TWGI or Affiliates;
(h) any loan or advance made by TWGI or Affiliates to any
person except in the ordinary and usual course of business;
(i) any modification, waiver, change, amendment, release,
recision or termination of, or accord and satisfaction with respect to, any
term, condition or provision of any Contract, other than any satisfaction by
performance in accordance with the terms thereof in the usual and ordinary
course of business;
(j) any labor dispute or disturbance adversely affecting the
business operations or condition (financial or otherwise) of TWGI or Affiliates,
including, with limitation, the filing of any petition or charge of unfair or
discriminatory labor practice with any governmental or regulatory authority,
efforts to effect a union representation election, actual or threatened employee
strike, work stoppage or slowdown;
(k) any material damage, destruction or property loss, whether
or not covered by insurance, affecting adversely the properties or business of
TWGI or Affiliates; or
(l) any Contract entered into by TWGI or Affiliates that is
not able to be terminated by TWGI or Affiliates on 30 days or fewer advance
notice without penalty or premium or which is outside the ordinary and usual
course of business.
Section 4.17 Taxes.
(a) TWGI and Affiliates have duly paid all Taxes due and
payable by TWGI and Affiliates. TWGI and Affiliates have duly filed all federal,
state, local and foreign tax returns and tax reports required to be filed by it,
including any extensions related thereto, all such returns and reports are true,
correct and complete, none of such returns and reports have been amended, and
all Taxes arising under such returns and reports (regardless of whether
reflected thereon) have been fully paid or shall be adequately reserved for in
the Financial Statements, and shall be timely paid when due. No claim has been
made by authorities in any jurisdiction where TWGI or Affiliates did not file
tax returns that it is or may be subject to taxation therein. All tax payments
relating to employees, including income tax withholding, FICA, FUTA,
unemployment and workers' compensation payments due and payable as of the date
hereof have been fully and timely paid.
(b) TWGI has delivered to REXX copies of all federal, state,
local, and foreign income tax returns filed with respect to TWGI and Affiliates
for taxable periods ended on or after December 31, 1998. There have been no
audits conducted by taxing authorities prior to the date of this Agreement. No
waivers of any applicable statute of limitations for the filing of any tax
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returns or payment of any Taxes or assessments of any deficient or unpaid taxes
are outstanding. All deficiencies proposed as a result of any audits have been
paid or settled. There is no pending or, to the knowledge of TWGI or Affiliates,
threatened federal, state, local or foreign tax audit or assessment of TWGI or
Affiliates and no agreement with any federal, state, local or foreign taxing
authority that may affect the subsequent tax liabilities of TWGI or Affiliates.
(c) All Taxes attributable to the existence or operation of
TWGI and Affiliates shall, to the extent not already paid, be properly reflected
in the TWGI Financial Statements as at or through the Closing Date in accordance
with GAAP consistently applied.
(d) TWGI or Affiliates have never been a member of any
affiliated, consolidated, combined or unitary group for purposes of taxes and
TWGI has no liability under Treasury Regulation 1.1502-6. There exists no
tax-sharing agreement or arrangement pursuant to which TWGI or Affiliates is
obligated to pay the tax liability of any other person or to indemnify any other
person with respect to any tax.
Section 4.18 Compliance with Law. TWGI and Affiliates have complied and
are in compliance in all material respects with all Applicable Laws except where
the failure to so comply would not have a TWGI Material Adverse Effect. TWGI and
Affiliates have all Permits necessary or appropriate for the operation of their
businesses or the ownership of properties (collectively, the "Permits").
Schedule 4.18 includes a list of all Permits held by TWGI or Affiliates, each of
which is currently valid and in full force and effect and, except as set forth
on Schedule 4.18, will continue to be valid and in full force and effect
immediately after the Effective Time. TWGI or Affiliates is not in violation of
any of the Permits, and there is no pending or, to the knowledge of TWGI, any
threatened proceeding which could result in the revocation, cancellation or
inability of TWGI or Affiliates to renew any Permit.
Section 4.19 Proprietary Rights. Schedule 4.19 sets forth:
(a) all names, patents, inventions, trade secrets, proprietary
rights, computer software, trademarks, trade names, service marks, logos,
copyrights and franchises and all applications therefor, registrations thereof
and licenses, sublicenses or agreements in respect thereof which TWGI and
Affiliates own or have the right to use or to which TWGI or Affiliates is a
party; and
(b) all filings, registrations or issuances of any of the
foregoing with or by any federal, state, local or foreign regulatory,
administrative or governmental office or offices (all items in (a) and (b) of
this Section 4.19 being sometimes hereinafter referred to collectively as the
"Proprietary Rights").
(c) Except as set forth in Schedule 4.19, TWGI and Affiliates
are the sole and exclusive owners of all right, title and interest in and to all
Proprietary Rights free and clear of all liens, claims, charges, equities,
rights of use, encumbrances and restrictions whatsoever, and there is not
pending or, to the knowledge of TWGI threatened any investigation, proceeding,
inquiry or other review by any federal, state, local or foreign regulatory,
administrative or governmental office or offices with respect to TWGI's or
Affiliates' right, title or interest in any Proprietary Right.
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(d) Except as set forth on Schedule 4.19, none of the
Proprietary Rights (i) has been hypothecated, sold, assigned or licensed by TWGI
or Affiliates, or to the best knowledge of TWGI or Affiliates, any person; (ii)
to the knowledge of TWGI or Affiliates, infringe upon or violate the proprietary
rights of any person; (iii) to the knowledge of TWGI or Affiliates, are subject
to challenge, claims of infringement, unfair competition or other claims; or
(iv) to the knowledge of TWGI or Affiliates, are being infringed upon or
violated by any person. TWGI or Affiliates have not given any indemnification
against patent, trademark or copyright infringement as to any equipment,
materials, products, services or supplies which TWGI or Affiliates uses,
licenses or sells; and there is not pending or, to the best knowledge of TWGI or
Affiliates, threatened any claim or litigation against TWGI or Affiliates
contesting the right of TWGI or Affiliates to sell, engage in or employ any such
product, process, method, or operation.
Section 4.20 Restrictive Documents or Laws. Other than as set forth on
Schedule 4.20 attached hereto, TWGI or Affiliates is not a party to or bound
under any mortgage, lien, lease, agreement, Contract, instrument, law, order,
judgment, decree or any similar restriction not of general application which
adversely affects, or reasonably could be expected to so affect (a) the
business, operations, assets, properties, rights, or condition (financial or
otherwise) of TWGI or Affiliates; or (b) the consummation of the transactions
contemplated by this Agreement.
Section 4.21 Insurance. TWGI and Affiliates have been and are insured
with respect to its properties and the conduct of its business in such amounts
and against such risks as are sufficient for compliance with law and as are
adequate to protect the property and business of TWGI and Affiliates in
accordance with normal industry practice. TWGI has provided to REXX a true,
correct and complete list of all insurance policies and bonds in force in which
TWGI or Affiliates is named as an insured party, or for which they have paid any
premiums (the "Policies"), and such list correctly states the name of the
insurer, the name of each insured party, the type and amount of coverage,
deductible amount, if any, the expiration date and the premium amount of each
such policy or bond. All such Policies are currently in full force and effect
and no notice of cancellation or termination has been received by TWGI or
Affiliates with respect to any such policy. TWGI and Affiliates will continue
all of such Policies in full force and effect through the Closing Date. All
premiums currently due and payable on such Policies have been paid. TWGI or
Affiliates is not a co-insurer under any term of any insurance policy except as
set forth in the Policies.
Section 4.22 Power of Attorney. Set forth in Schedule 4.22 is a true,
correct and complete list of the names and locations of all banks or other
depositories in which TWGI and RAC have accounts or safe deposit boxes, and the
names of the persons authorized to draw thereon, borrow therefrom or have access
thereto. Except as set forth in Schedule 4.22, no person has a power of attorney
from TWGI , WAC or RAC.
Section 4.23 Title to and Condition of Properties. Except as set forth
in Schedule 4.23, TWGI and Affiliates have good, valid and marketable title to
all of their assets and properties of every kind, nature and description,
tangible or intangible, wherever located, which constitute all of the property
(including without limitation property and assets shown or reflected on the TWGI
Financial Statements) now used in and necessary for the conduct of their
business as presently conducted and all such properties are owned free and clear
of all mortgages, pledges, liens, security interests, encumbrances and
restrictions of any nature whatsoever. All such properties are usable for their
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current uses without violating any Applicable Laws, or any applicable private
restrictions. Except as set forth in Schedule 4.23, no financing statement under
the Uniform Commercial Code or similar law naming TWGI or Affiliates or any of
their predecessors has been filed in any jurisdiction, and TWGI or Affiliates is
not a party to or bound under any agreement or legal obligation authorizing any
party to file any such financing statement. All tangible personal property
owned, leased or used by TWGI or Affiliates is suitable for the purpose or
purposes for which it is being used and has been maintained in all material
respects in accordance with the terms of any lease applicable thereto.
Section 4.24 Brokerage and Finder's Fees. Neither any shareholder of
TWGI, TWGI nor any of the Affiliates, directors, officers or employees has
incurred or will incur any brokerage, finder's or similar fee in connection with
the transactions contemplated by this Agreement.
Section 4.25 Legal Proceedings. Except as described in Schedule 4.25,
(a) there are no Actions pending or, to the knowledge of TWGI, threatened
against or relating to TWGI or any of its Affiliates, officers, directors,
current or former shareholders, members or employees; and (b) to the knowledge
of TWGI, there exist no disputes, conflicts, or circumstances providing the
basis for a dispute or conflict which could result in any such Action. There are
no Actions pending or, to the knowledge of TWGI, threatened for the purpose of
enjoining or preventing this Agreement or any transaction contemplated by this
Agreement. TWGI or Affiliates are not subject to any judgment, order or decree,
or any governmental restriction, which could have a material adverse effect on
the ability of TWGI or Affiliates to acquire any property or conduct business as
presently conducted.
Section 4.26 ERISA.
(a) Except as set forth in Schedule 4.26 hereof, neither TWGI
nor the Affiliates is a party to an "employee benefit plan", as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA")
which (i) is subject to any provision of ERISA and (ii) is or was at any time
maintained, administered or contributed to by TWGI or any Affiliate and covers
any employee or former employee of TWGI or any Affiliate and under which TWGI or
any Affiliate has any liability. Such plans are referred to collectively herein
as the "Employee Plans." For purposes of this section, "Affiliate" of any person
or entity includes any other person or entity which, together with such person
or entity, could be treated as a single employer under Section 414 of the Code
or is an "affiliate," whether or not incorporated, as defined in Section
407(d)(7) of ERISA, of such person or entity.
(b) Schedule 4.26 identifies each employment, severance or
other similar contract, arrangement or policy and each plan or arrangement
(written or oral) providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, severance benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit-sharing, bonuses, stock options, stock
appreciation or other forms of incentive compensation, or post-retirement
insurance, compensation or benefits which (i) is not an Employee Plan, (ii) is
entered into, maintained or contributed to, as the case may be, by TWGI or any
of its Affiliates, and (iii) covers any employee or former employee of TWGI or
any of its Affiliates. Such contracts, plans and arrangements as are described
above, copies or descriptions of all of which have been furnished or made
available previously to REXX are referred to collectively herein as the "Benefit
Arrangements." Each Benefit Arrangement has been maintained in substantial
compliance with its terms and with requirements prescribed by any and all
statutes, orders, rules and regulations that are applicable to such Benefit
Arrangement.
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(c) Except as set forth in Schedule 4.26, there is no
liability in respect of post-retirement health and medical benefits for retired
employees of TWGI or any of its Affiliates other than such medical benefits
which are required to be continued under applicable law, determined using
assumptions that are reasonable in the aggregate, over the fair market value of
any fund, reserve or other assets segregated for the purpose of satisfying such
liability (including for such purposes any fund established pursuant to Section
401(h) of the Code). TWGI has reserved its right to amend or terminate any
Employee Plan or Benefit Arrangement providing health or medical benefits in
respect of any active employee of TWGI or Affiliates under the terms of any such
plan and written descriptions thereof given to employees. With respect to any of
TWGI's Employee Plans which are "group health plans" under Section 4980B of the
Code and Section 607(1) of ERISA, there has been material compliance with all
requirements imposed thereunder so that TWGI and its Affiliates have no (and
will not incur any) loss, assessment, tax penalty, or other sanction with
respect to any such plan.
(d) Except as set forth in Schedule 4.26, there has been no
amendment to, written interpretation or announcement (whether or not written) by
TWGI or any of its Affiliates relating to any Employee Plan or Benefit
Arrangement which would increase the expense of maintaining such Employee Plan
or Benefit Arrangement above the level of the expense incurred in respect
thereof for the year ended immediately prior to the Closing Date.
(e) Other than as set forth in Schedule 4.26, TWGI or
Affiliates is not a party to or subject to any employment contract or
arrangement providing for annual future compensation, or the opportunity to earn
annual future compensation (whether through fixed salary, bonus, commission,
options or otherwise) of more than Twenty-Five Thousand Dollars ($25,000) to any
officer, consultant, director or employee.
(f) The execution and consummation of the Merger does not
constitute a triggering event under any Employee Plan, whether or not legally
enforceable, which (either alone or upon the occurrence of any additional or
subsequent event) will or may result in any payment (of severance pay or
otherwise), acceleration, increase in vesting, or increase in benefits to any
current or former participant, employee or director of TWGI or Affiliates that
has not been specifically disclosed on Schedule 4.26 or which is not material to
the financial condition or business of TWGI or Affiliates.
(g) Any reference to ERISA or the Code or any section thereof
shall be construed to include all amendments thereto and applicable regulations
and administrative rulings issued thereunder.
Section 4.27 Contracts. Schedule 4.27 lists all Contracts, to which
TWGI and Affiliates are a party which are material to the financial condition,
operations, assets or business of TWGI or Affiliates or are with any present or
former Related Parties or any person controlling, controlled by or under common
control with any such person, or with any employee, agent or consultant of TWGI
or Affiliates. All of such Contracts are valid and binding on TWGI and
Affiliates, in full force and effect, and enforceable in accordance with their
respective terms, except to the extent that the enforceability thereof may be
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limited by (x) applicable bankruptcy, insolvency, moratorium, reorganization,
fraudulent conveyance or similar laws in effect which affect the enforcement of
creditors' rights generally or (y) general principles of equity, whether
considered in a proceeding at law or in equity. Neither TWGI or Affiliates, is
in violation of, or in default in respect of, nor has there occurred an event or
condition which, with the passage of time or giving of notice (or both), would
constitute a default under, any such Contract.
Section 4.28 Affiliated Transactions. Schedule 4.28 includes a list of
all amounts payable to TWGI or Affiliates by any Affiliated Person of TWGI or
Affiliates (the "Related Party Receivables") and all amounts payable by TWGI or
any Affiliate to any Affiliated Person of TWGI or Affiliates (the "Related Party
Payables") as of the date of this Agreement, specifying the payer, payee,
amount, terms of repayment, maturity date and any contractual set off rights of
the payer of each Related Party Receivable and Related Party Payable. Except as
disclosed in Schedule 4.28, no Related Party has any financial interest, direct
or indirect, in any vendor, client or account of, or other outside business
which has transactions with, TWGI or Affiliates.
Section 4.29 No Conflict or Default. Other than as set forth in
Schedule 4.29, neither the execution and delivery of this Agreement by TWGI, nor
compliance by TWGI with the terms and provisions of this Agreement, including
without limitation the consummation of the Merger, will violate any Applicable
Laws or Permits or conflict with or result in the breach of any term, condition
or provision of the Certificate of Incorporation, By-laws, or other
organizational document of TWGI or Affiliates, or of any material Contract,
writ, order, decree, restriction, legal obligation or instrument to which TWGI
or Affiliates is a party or by which TWGI or Affiliates or any of their
respective assets or properties are or may be bound or affected, or constitute a
default (or an event which, with the giving of notice, the passage of time, or
both would constitute a default) thereunder, or result in the creation or
imposition of any lien, security interest, charge or encumbrance, or restriction
of any nature whatsoever with respect to any properties or assets of TWGI or
Affiliates, or give to others any interest or rights, including rights of
termination, acceleration or cancellation in or with respect to any of the
properties, assets, Contracts or business of TWGI or Affiliates, or violate any
judgment, order, injunction, decree or award of any court, arbitrator,
administrative agency or governmental or regulatory body against or binding
upon, TWGI, the Affiliates or any of their securities, properties, assets or
business.
Section 4.30 Books of Account; Records. TWGI's and Affiliates' general
ledgers, stock record books, minute books and other records relating to the
assets, properties, contracts and outstanding legal obligations of TWGI and
Affiliates, as the case may be, are complete and correct in all material
respects and have been maintained in accordance with good business practices.
Section 4.31 Officers, Employees and Compensation. Schedule 4.31 sets
forth the names of all directors, officers and employees of TWGI and Affiliates,
the total salary, bonus, fringe benefits and perquisites each received in the
year ending December 31, 1998, and any changes to the foregoing which have
occurred subsequent to December 31, 1998. Except as disclosed in Schedule 4.31,
there are no other forms of compensation paid to any such director, officer or
employee of TWGI and Affiliates. Except as disclosed in Schedule 4.31, the
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amounts accrued on the Financial Statements for vacation pay, sick pay, and all
commissions and other fees payable to agents, salesmen and representatives of
TWGI and Affiliates will be adequate to cover TWGI's liabilities for all such
items. TWGI and Affiliates have not become obligated, directly or indirectly, to
any Related Party, except for current liability for such compensation. Except as
set forth in Schedule 4.31, to the knowledge of TWGI, no Related Party has any
financial interest, direct or indirect, in any vendor, client or account of, or
other outside business which has transactions with, TWGI or Affiliates.
Section 4.32 Proxy Statement Prospectus. The written information
supplied by TWGI or Affiliates for the purpose of inclusion in the Proxy
Statement to be sent to the shareholders of REXX in connection with the REXX
Shareholders Meeting shall not, on the date the Proxy Statement is first mailed
to REXX's Shareholders or at the time of the REXX Shareholders Meeting, contain
any untrue statement of a material fact, or omit to state any material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading. If at any time after
the Effective Time any event or information should be discovered by TWGI or
Affiliates that should be set forth in a supplement to the Proxy Statement, TWGI
or Affiliates shall promptly inform REXX. Notwithstanding the foregoing, TWGI
makes no representation, warranty or covenant with respect to any information
supplied by the REXX that is contained in any of the foregoing documents.
Section 4.33 Confidential Private Placement Memorandum. TWGI represents
and warrants that the Confidential Private Placement Memorandum of WP, dated
January 8, 1999, is true and complete and does not contain any untrue statement
of a material fact, or omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading.
Section 4.34 Complete Disclosure. No representation or warranty by TWGI
or Affiliates in this Agreement or in any Schedule delivered by or on behalf of
TWGI or Affiliates contains, or will contain as of the Closing Date, any untrue
statement of a material fact or omits, or will omit as of the Closing Date, a
material fact necessary to make the statements contained herein or therein not
misleading.
ARTICLE V
COVENANTS OF THE PARTIES
Section 5.01 Mutual Covenants
(a) General. Each Party shall use its best efforts to take all
actions promptly and do all things necessary, proper or advisable to consummate
the Merger and the other transactions contemplated by this Agreement, including
without limitation using all commercially reasonable efforts to cause the
satisfaction of the conditions set forth in Article VI of this Agreement for
which such Party is responsible as soon as reasonably practicable and to
prepare, execute, acknowledge or verify, deliver, and file such additional
documents, and take or cause to be taken such additional actions, as any Party
may reasonably request to carry out the purposes or intent of this Agreement.
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(b) REXX Proxy Statement; Registration Statement. TWGI and
REXX shall cooperate in the timely preparation and filing of a Registration
Statement on Form S-4 (the "Registration Statement") with the SEC, and TWGI
shall use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act. The Registration Statement, at the time it
becomes effective, and at the Effective Time, shall in all material respects
conform to the requirements of the Securities Act and the general rules and
regulations of the SEC thereunder. The Registration Statement shall include the
form of Proxy Statement for the REXX Shareholders Meeting. REXX shall cause the
Proxy Statement to be mailed to its shareholders. REXX will furnish to TWGI the
information required to be included in the Registration Statement and any
amendments thereto with respect to its business and affairs before it is filed
with the SEC and again before any amendment is filed, and shall have the right
to review and comment on the form of Proxy Statement included in the
Registration Statement and any amendments thereto prior to the filing with the
SEC. TWGI shall take all actions required to qualify or obtain exemptions from
such qualification for the TWGI Common Stock to be issued in connection with the
Merger under applicable state "Blue Sky" securities laws, as appropriate. The
Proxy Statement shall relate to the approval of (i) the Merger, (ii) the Watkins
Sale, and (iii) the election of a new board of directors, subject to the closing
of the Merger. REXX will, through its Board of Directors and REXX Affiliates,
unanimously recommend to its shareholders approval of such matters. REXX shall
use all reasonable efforts to solicit from its shareholders proxies voting in
favor of such matters.
(c) Approvals and Consents. Each Party shall use its best
efforts to take promptly any additional action that may be necessary, proper or
advisable in connection with any other notices to, filings with, and
authorizations, consents and approvals of any court, administrative agency or
commission, or other governmental authority or instrumentality or any other
third party that it may be required to give, make or obtain in connection with
this Agreement and the consummation of the transactions contemplated hereby.
(d) Cooperation. On and after the Closing, each Party hereto
agrees to execute any and all further documents and writings and to perform such
other commercially reasonable actions which may be or become necessary or
appropriate to effectuate and carry out the transactions contemplated by this
Agreement.
(e) Confidential Information. TWGI and REXX each agree that
each of them shall not at any time after the date of this Agreement directly or
indirectly copy, disseminate or use, for their personal benefit or the benefit
of any third party, any Confidential Information, regardless of how such
Confidential Information may have been acquired, except for the disclosure or
use of such Confidential Information as may be upon the advice of counsel
required by law or legal process, or authorized in writing by the Party from
whom the Confidential Information was obtained. Notwithstanding anything to the
contrary contained in the preceding sentence, Confidential Information shall not
include information (i) that is or becomes generally available to the public
other than as a direct or indirect result of a disclosure by a Party to and in
contravention of this Agreement; (ii) is in a Party's possession at the time of
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disclosure otherwise than as a result of such Party's or any third party's
breach of any legal obligation; (iii) becomes known to such Party through
disclosure by sources other than another Party having the legal right to
disclose such information; or (iv) is independently developed by such Party
without reference to or reliance upon the such information (as may be
demonstrated by such Party's written records). TWGI and REXX acknowledge that
all of the Confidential Information is and shall continue to be the exclusive
proprietary property of TWGI or REXX, as the case may be, whether or not
disclosed to or entrusted to the custody of each other in connection with this
transaction.
(f) Notices of Certain Events. Each Party shall promptly
notify the other of:
(i) any notice or other communication from any person or entity
alleging that the consent of such person or entity is or may be required in
connection with the Merger;
(ii) any notice or other communication from any governmental or
regulatory agency or authority in connection with the transactions contemplated
by this Agreement; and
(iii) any Action commenced or threatened against, relating to,
involving, or otherwise affecting, any Party hereto, or any of their property,
or any disputes, conflicts or circumstances providing the basis for any dispute
or conflict, which, if in existence on the date of this Agreement would have
been required to have been disclosed pursuant to this Agreement or which relate
directly or indirectly to the consummation of the Merger.
(g) Injunctive Relief. Each Party acknowledges and agrees that
remedies at law for any violation or attempted violation of any of the
obligations under this Article V would be inadequate and would cause immediate
irreparable harm to the other Parties, and agree that in the event of any such
violation or attempted violation, each be entitled to a temporary restraining
order, temporary and permanent injunctions, and other equitable relief, without
the necessity of posting any bond or proving any actual damage, in addition to
all other rights and remedies which may be available from time to time.
(h) Obligation to Update Schedules. Each Party shall promptly
disclose to the other any information contained in its representations and
warranties or Schedules which, because of an event occurring after the date
hereof, is materially incomplete or is no longer materially correct as of all
times after the date hereof until the Closing Date or any material adverse
development affecting the results of their respective operations; provided,
however, that none of such disclosures shall be deemed to modify, amend or
supplement the representations and warranties of each Party or the Schedules
attached hereto unless each Party shall have consented thereto in writing.
(i) Reasonable Access Pending Closing. Each Party will give to
the other Party, its counsel, accountants, financial advisers and lenders, and
other representatives, after reasonable notice, reasonable access, during normal
business hours, throughout the period prior to the Closing, to all of the
properties, books, contracts, commitments and records relating exclusively to
such Party's business, and each Party shall fully cooperate with the other and
its accountants in connection with the preparation of timely and complete
audited and unaudited financial statements relating to the financial disclosure
of the Merger in accordance with the rules under Regulation S-X and Form 8-K
promulgated under the Securities Exchange Act of 1934, as amended. Each Party
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agrees that any information provided pursuant to this Section will not be used
for any purpose other than in connection with the transactions contemplated by
this Agreement, will not be revealed to third parties but will be kept strictly
confidential, pursuant to the provisions of Section 5.01(e), above, and will be
returned, together with all copies of such information, to the other Party if,
for any reason, the Closing does not take place.
ARTICLE VI
CONDITIONS
Section 6.01 Mutual Conditions. The obligations of each of the Parties
to consummate the Merger and the other transactions contemplated by this
Agreement shall be subject to fulfillment of all of the following conditions:
(a) No Adverse Proceeding. No temporary restraining order,
preliminary or decree which prevents the consummation of the Merger or the other
transactions contemplated by this Agreement shall have been issued and remain in
effect, and no statute, rule or regulation shall have been enacted by any state
or federal government or governmental agency which would prevent the Merger or
the other transactions contemplated by this Agreement.
(b) Corporate Action. All corporate action necessary to
authorize the execution and delivery of this Agreement and consummation of the
Merger, including without limitation the approval of this Agreement by the
requisite vote of the shareholders of REXX, shall have been duly and validly
taken. The shareholders of TWGI, WAC and RAC shall have approved the execution
and delivery of this Agreement.
(c) Governmental Approvals. Any governmental or other
approvals or review of this Agreement or the transactions contemplated by this
Agreement required under any applicable laws, statutes, orders, rules,
regulations, or policies, or any guidelines promulgated thereunder, shall have
been received.
(d) Tax Opinion. REXX shall have received an opinion of
Messrs. Kutak Rock, in form and substance satisfactory to REXX, dated the
Effective Time, which opinion may be based on appropriate representations of
TWGI and REXX, to the effect that the Merger will be treated as a transaction
described in Section 351 of the Code and that no gain or loss is expected to be
recognized by the shareholders of REXX who exchange REXX Common Stock solely for
TWGI Common Stock pursuant to the Merger.
(e) Acquisition of REXX Stock. Within the thirty (30) days
prior to the Effective Time of the Merger, the shareholders of TWGI shall not
have sold, transferred or otherwise disposed of, or in any way reduced their
risk with respect to any shares of REXX Common Stock.
(f) Effective Registration Statement. The Registration
Statement (including any post-effective amendments thereto) shall be effective
under the Securities Act, and TWGI shall have received all state "Blue Sky"
securities permits or other authorizations, or confirmations as to the
availability of an exemption from state registration or qualification
requirements as may be necessary for consummation of the Merger, and no
proceedings shall be pending or to the knowledge of TWGI threatened by the SEC
or any state "Blue Sky" securities administration to suspend the effectiveness
of such Registration Statement or any state permit or authorization.
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Section 6.02 Conditions to Obligations of TWGI. The obligations of TWGI
to consummate the Merger and the other transactions contemplated by this
Agreement shall be subject to the fulfillment of all of the following
conditions, unless waived by TWGI in writing:
(a) Representations and Warranties. The representations and
warranties of REXX set forth in Article III of this Agreement shall be true and
correct as of the date of this Agreement and as of the Effective Time as though
made at and as of the Effective Time except where any untruth or inaccuracy
could not, either individually or in the aggregate, have a REXX Material Adverse
Effect.
(b) Performance of Agreement. REXX shall have performed and
observed in all material respects all obligations and conditions to be performed
or observed by it under this Agreement at or prior to the Effective Time.
(c) No Action. No Action before any court or governmental body
will be pending or threatened wherein a judgment, decree or order would prevent
any of the transactions contemplated hereby or cause such transactions to be
declared unlawful or rescinded.
(d) Consummation of Watkins Sale. REXX shall have consummated
the Watkins Sale in a manner materially consistent with the agreement between
REXX and the Buyers dated June 10, 1999. In addition, REXX shareholders holding
not more than seven percent (7%) of REXX Common Stock shall have elected
dissenters' rights as may be permitted by law in connection with the vote for
the approval of the Watkins Sale.
(e) Voting Agreements. The REXX Voting Agreements shall have
signed and delivered.
(f) Officers' Certificate. REXX shall have furnished to TWGI a
certificate, dated the Effective Date, signed by the President of REXX, to the
effect that all conditions set forth in Article VI, insofar as they relate to
REXX, have been fulfilled.
(g) Opinion of Counsel. TWGI shall have received an opinion,
addressed to it and dated the Effective Date, from Tashlik, Kreutzer & Goldwyn,
P.C., counsel for REXX, to the following effect:
(i) REXX is incorporated, validly existing and in good standing under
the laws of the State of New York, and has full power and authority to carry on
its business as now conducted and to own or lease or operate its properties;
(ii) this Agreement has been duly authorized by all necessary corporate
action on the part of REXX and constitutes a valid and binding obligation of
REXX;
(iii) the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with or result in a
violation of, or constitute a default under, any provision of the Certificate of
Incorporation and Bylaws of REXX, or any judgment, order or decree applicable to
REXX; and
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(iv) no consent, approval, order or authorization of, or declaration or
filing with, any governmental authority or other person is required in
connection with the execution and delivery of this Agreement by REXX or the
consummation on the part of REXX of the transactions contemplated by this
Agreement, except for such consents, approvals, orders or authorizations as
shall have been obtained or declarations and filings as shall have been made
prior to the Effective Time.
In rendering such opinion, such counsel may rely (without independent
investigation) to the extent such counsel deems reliance necessary or
appropriate, as to matters of fact, upon representations and certificates of
public officials and of any executive officer of REXX.
(h) Listing of Shares. TWGI shall have received the approval
from either the American Stock Exchange or The NASDAQ Stock Market for the
listing of the TWGI Common Stock as the successor issue to the REXX Common Stock
or pursuant to a new listing application.
(i) Defined Contribution Plans. Before the Effective Time,
REXX and its Affiliates shall distribute all assets of each retirement plan and
associated trust maintained for the benefit of their employees. In addition,
before the Effective Time, REXX shall prepare or cause to be prepared all
required final tax returns and file all such returns required by the Code .
(j) The note held by the Bank of Mississippi in the amount of
$456,068.83, secured by REXX's property in Mantachie, Mississippi, due on
February 10, 2000, shall have been renegotiated or extended for a minimum of 12
months beyond such due date upon terms and conditions no less favorable to REXX
as previously.
Section 6.03 Conditions to Obligations of REXX. The obligations of REXX
to consummate the Merger and the other transactions contemplated by this
Agreement shall be subject to the fulfillment of all of the following
conditions, unless waived by REXX in writing:
(a) Representations and Warranties. The representations and
warranties of TWGI set forth in Article IV of this Agreement shall be true and
correct as of the date of this Agreement and as of the Effective Time as though
made at and as of the Effective Time except where any untruth or inaccuracy
could not, either individually or in the aggregate, have a Material Adverse
Effect.
(b) Performance of Agreement. TWGI shall have performed and
observed in all material respects all obligations and conditions to be performed
or observed by them under this Agreement at or prior to the Effective Time.
(c) Financial Statements. TWGI shall have delivered to REXX
the TWGI Financial Statements.
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(d) Continuation of Business. Between the date hereof and the
Closing Date, except as otherwise provided herein, TWGI and Affiliates shall
have operated their businesses in the normal course, consistent with past
practice, and shall not have suffered any damage, destruction, loss or
occurrence, whether covered by insurance or not, which may result in a TWGI
Material Adverse Effect.
(e) Opinion of Counsel. REXX shall have received an opinion,
addressed to it and dated the Effective Date, from Kutak Rock, counsel for TWGI,
RAC, WAC, WI, WII, BJB Holdings, WA, WP, WG, W Capital, Win, WLA and WNY to the
following effect:
(i) each of TWGI, WI, WII, BJB Holdings, W Capital, WAC and RAC is
incorporated, validly existing and in good standing under the laws of the State
of New York. Each of TWGI and RAC has full power and authority to carry on its
business as now conducted and to own or lease its properties;
(ii) this Agreement has been duly authorized by all necessary corporate
action on the part of TWGI, WAC and RAC and constitutes a valid and binding
obligation of TWGI, WAC and RAC;
(iii) the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with or result in a
violation of, or constitute a default under, any provision of the Certificate of
Incorporation and Bylaws of TWGI, WAC or RAC or any judgment, order or decree
applicable to TWGI, WAC or RAC;
(iv) no consent, approval, order or authorization of, or declaration or
filing with, any governmental authority or other person is required in
connection with the execution and delivery of this Agreement by TWGI, WAC or RAC
or the consummation on the part of TWGI and RAC of the transactions contemplated
by this Agreement, except for such consents, approvals, orders or authorizations
as shall have been obtained or registrations, declarations and filings as shall
have been made prior to the Effective Time;
(v) each of WA, WP, WG, Win, WLA and WNY is a limited liability
company, validly existing and in good standing under the laws of the respective
states of its organization. Each of WA, WP, WG, WIn, WLA and WNY has full power
and authority to carry on its business as now conducted. To such counsel's
knowledge, each of WA,WP, WIn and WLA is certified as a certified capital
company pursuant to the laws of New York, Florida, Wisconsin and Louisiana,
respectively;
(vi) the execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby will not conflict with or result in a
violation of, or constitute a default under, any provision of the Articles of
Organization and Operating Agreements of WA, WP, WG, WIn, WLA and WNY or any
judgment, order or decree applicable to them; ; and
(vii) no consent, approval, order or authorization of, or declaration
or filing with, any governmental authority or other person is required in
connection with the consummation on the part of WA, and WP, WG, WIn, WLA and WNY
of the transactions contemplated by this Agreement, except for such consents,
approvals, orders or authorizations as shall have been obtained.
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In rendering such opinion, such counsel may rely (without independent
investigation) to the extent such counsel deems reliance necessary or
appropriate, as to matters of fact, upon representations and certificates of
public officials and of the officers of TWGI, RAC, WAC, BJB,WA, WP, WG, WIn, WLA
and WNY.
(f) Employment Agreements. Barry Sloane, Brian A. Wasserman
and Jeffrey G. Rubin shall each have executed an Employment Agreement,
substantially in the form of Exhibit E attached hereto.
(g) Contribution of WI and WII to BJB Holdings. All of the
outstanding equity securities of WI and WII shall have been contributed to BJB
Holdings.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.01 Termination. This Agreement may be terminated at any time
prior to the Effective Time, (a) by mutual written consent of REXX and TWGI; or
(b) by either non-breaching Party if either Party shall have breached or failed
to perform in any material respect any of its representations, warranties,
covenants or other agreements contained in this Agreement which is incapable of
being cured by either Party or is not cured within 45 days of written notice
thereof or (c) if the REXX shareholders fail to approve the Proxy Actions.
Section 7.02 Effect of Termination. In the event of termination of this
Agreement by either REXX or TWGI as provided in Section 7.01, this Agreement
shall except as provided in this Section forthwith become void and have no
effect, without any liability or obligation of the part of REXX, TWGI, WAC or
RAC; provided, however, that if this Agreement is terminated (a) due to the
failure of the REXX shareholders to approve the Proxy Actions, REXX shall
reimburse TWGI for its actual and reasonable expenses, including reasonable
attorney's fees, incurred in connection with the transactions contemplated by
this Agreement, in an amount not to exceed $85,000; or (b) by REXX due to the
failure of TWGI to obtain effectiveness from the SEC of the Registration
Statement within a commercially reasonable period (other than due to any action
or condition of REXX or any of its current or former officers, directors or
affiliates), TWGI shall reimburse REXX for its actual and reasonable expenses,
including reasonable attorney's fees, incurred in connection with the
transactions contemplated by this Agreement, in an amount not to exceed $50,000.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Notices. All notices and other communications under this
Agreement to any Party shall be in writing and shall be deemed given when
delivered personally to that Party, sent by facsimile transmission (with
electronic confirmation) to that Party at the facsimile number for that Party
set forth below, mailed by certified mail (postage prepaid and return receipt
requested) to that Party at the address for that Party set forth below, or
delivered by Federal Express or any similar express delivery service for
delivery to that Party at that address:
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If to REXX:
REXX Environmental Corporation
350 Park Avenue
New York, New York 10022
Phone: (212) 750-7755; Fax: (212) 750-2548
Attn: Arthur L. Asch, Chairman of the Board
Michael A. Asch, President
With a copy to:
Tashlik, Kreutzer & Goldwyn PC
833 Northern Blvd.
Great Neck, NY 11021
Phone: (516) 466-8006; Fax: (516) 829-6509
Attn: Theodore Wm. Tashlik, Esq.
Martin M. Goldwyn, Esq.
If to TWGI:
TWG, Inc.
1500 Hempstead Turnpike
East Meadow, NY 11554
Phone: (516) 390-2252; Fax: (516) 794-1185
Attn: Brian A. Wasserman
With a copy to:
Kutak Rock
1101 Connecticut Ave.
Washington, DC 20036-4374
Phone: (202) 828-2400; Fax: (202) 828-2488
Attn: Matthew G. Ash, Esq.
Edward B. Crosland, Esq.
Any Party may change its facsimile number or address for notices under this
Agreement at any time by giving the other Parties notice of such change.
Section 8.02 Non-Waiver. No failure by any Party to insist upon strict
compliance with any term or provision of this Agreement, to exercise any option,
to enforce any right, or to seek any remedy upon any default of any indemnifying
party shall affect, or constitute a waiver of, the first Party's right to insist
upon such strict compliance, exercise that option, enforce that right, or seek
that remedy with respect to that default or any prior, contemporaneous, or
subsequent default. No custom or practice of the Parties at variance with any
provisions of this Agreement shall affect or constitute a waiver of any Party's
right to demand strict compliance with all provisions of this Agreement.
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Section 8.03 Genders and Numbers. Where permitted by the context, each
pronoun used in this Agreement includes the same pronoun in other genders and
numbers, and each noun used in this Agreement includes the same noun in other
numbers.
Section 8.04 Headings. The headings of the various Articles and
Sections of this Agreement are not part of the context of this Agreement, are
merely labels to assist in locating such Articles and Sections, and shall be
ignored in construing this Agreement.
Section 8.05 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall constitute one and the same Agreement.
Section 8.06 Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all prior or contemporaneous discussions, negotiations,
agreements and understandings (both written and oral) among the Parties with
respect to the subject matter hereof and thereof.
Section 8.07 No Third-Party Beneficiaries. Nothing contained in this
Agreement, express or implied, is intended or shall be construed to confer upon
or give to any person, firm, corporation or legal entity, other than the
Parties, any rights, remedies or other benefits under or by reason of this
Agreement.
Section 8.08 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to principles of conflicts of law. REXX and TWGI hereby irrevocably submit to
the jurisdiction and venue of any Federal or State court located in New York or
Nassau County, New York, over any dispute arising out of this Agreement and
agree that all claims in respect of such dispute or proceeding may be heard and
determined in any such court. REXX and TWGI hereby irrevocably waive, to the
fullest extent permitted by applicable law, any objection which they may have to
the venue of any such dispute brought in any such court or any defense of
inconvenient forum for the maintenance of such dispute. REXX and TWGI hereby
consent to process being served by them in any site, action or proceeding by
delivering it in the manner specified by the provisions of Section 8.01 of this
Agreement. All rights and remedies of each Party under this Agreement shall be
cumulative and in addition to all other rights and remedies which may be
available to the Party from time to time, whether under this Agreement or
otherwise.
Section 8.09 Binding Effect; Assignment. This Agreement shall be
binding upon, inure to the benefit of and be enforceable by and against the
Parties and their respective heirs, personal representatives, successors and
assigns. Neither this Agreement nor any of the rights, interests or obligations
under this Agreement shall be transferred or assigned by any of the Parties
without the prior written consent of the other Parties.
Section 8.10 Expenses. Subject to the following paragraph, and except
as otherwise specifically provided in this Agreement:
(a) REXX shall pay its costs and expenses associated with the
transactions contemplated by this Agreement, including without limitation the
fees and expenses of its legal counsel, accountants and financial advisors, and
costs and expenses of filing the Proxy Statement with the SEC and printing and
mailing the Proxy Statement to REXX shareholders.
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(b) TWGI shall pay its own costs and expenses associated with
this Agreement, the Merger, and the other the transactions contemplated by this
Agreement, including without limitation the fees and expenses of its legal
counsel, accountants and financial advisors, and costs and expenses of filing
the Registration Statement with the SEC.
Section 8.11 Public Announcements. Neither REXX nor TWGI shall, without
the prior written consent of REXX and TWGI, make any public announcement or
statement with respect to the transactions contemplated in the Agreement, except
as may be necessary to comply with applicable requirements of the federal or
state securities laws or any governmental order or regulation or any obligations
pursuant to any listing agreement with any national securities exchange.
Section 8.12 Severability. With respect to any provision of this
Agreement finally determined by a court of competent jurisdiction to be
unenforceable, such court shall have jurisdiction to reform such provision so
that it is enforceable to the maximum extent permitted by applicable law, and
the Parties shall abide by such court's determination. In the event that any
provision of this Agreement cannot be reformed, such provision shall be deemed
to be severed from this Agreement, but every other provision of this Agreement
shall remain in full force and effect.
Section 8.13 Modification of Structure. Notwithstanding any provision
of this Agreement to the contrary, TWGI may prior to the Effective Time modify
the structure of the transactions contemplated by this Agreement provided that
REXX agrees to such changes; REXX agrees that its approval will not be
unreasonably withheld as long as (i) the consideration to be paid to holders of
REXX Common Stock under this Agreement is not thereby reduced, (ii) such
modification will not be likely materially to delay or jeopardize receipt of
required regulatory clearances, and (iii) such modification does not change the
tax-deferred status of the transactions contemplated pursuant to the Merger.
Section 8.14 The Sloane Organization, LLC. In all cases where reference
is made in this Agreement to Mr. Barry Sloane, the parties agree that such
reference shall also include The Sloane Organization, LLC, a New York limited
liability company, of which Mr. Sloane is the sole managing member.
* * * * * * *
[signature page follows)
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<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed as of the day and year first above written.
REXX ENVIRONMENTAL CORPORATION
By: /s/ Arthur L. Asch
------------------------------
Arthur L. Asch
Title: Chairman of the Board
TWG, INC.
By: /s/ Brian A. Wasserman
------------------------------
Brian A. Wasserman
Title: Treasurer, Chief Financial Officer
The undersigned hereby ratifies and adopts the foregoing Agreement,
effective as of the date set forth below.
REXX ACQUISITION CORP.
Date: By:
-------------------- -------------------------------
Title:
WHITESTONE ACQUISITION CORP.
Date: By:
-------------------- -------------------------------
Title:
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<PAGE>
APPENDIX C
Selected Provisions of New York Business Corporation Law
Section 623. Procedure to Enforce Shareholders' Right to Receive Payment for
Shares.
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the
meeting of shareholders at which the action is submitted to a vote, or at such
meeting but before the vote, written objection to the action. The objection
shall include a notice of his election to dissent, his name and residence
address, the number and classes of shares as to which he dissents and a demand
for payment of the fair value of his shares if the action is taken. Such
objection is not required from any shareholder to whom the corporation did not
give notice of such meeting in accordance with this chapter or where the
proposed action is authorized by written consent of shareholders without a
meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall
give written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to
the proposed action and who thereby is deemed to have elected not to enforce
his right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election
to dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any
beneficial owner as to less than all of the shares of such owner, as to which
such nominee or fiduciary has a right to dissent, held of record by such
nominee or fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his
acceptance in writing of an offer made by the corporation, as provided in
paragraph (g), but in no case later than sixty days from the date of
consummation of the corporate action except that if the corporation fails to
make a timely offer, as provided in paragraph (g), the time for withdrawing a
notice of election shall be extended until sixty days from the date an offer is
made. Upon expiration of such time, withdrawal of a notice of election shall
require the written consent of the corporation. In order to be effective,
withdrawal of a notice of election must be accompanied by the return to the
corporation of any advance payment made to the shareholder as provided in
paragraph (g). If a notice of election is withdrawn, or the corporate action is
rescinded, or a court shall determine that the shareholder is not entitled to
receive payment for his shares, or the shareholder shall otherwise lose his
dissenter's rights, he shall not have the right to receive payment for his
shares and he shall be reinstated to all his rights as a shareholder as of the
consummation of the corporate action, including any intervening preemptive
rights and the right to payment of any intervening dividend or other
distribution or, if any such rights have expired or any such dividend or
distribution other than in cash has been completed, in lieu thereof, at the
election of the corporation, the fair value thereof in cash as determined by
the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in
the interim.
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(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate
bearing such notation, each new certificate issued therefor shall bear a
similar notation together with the name of the original dissenting holder of
the shares and a transferee shall acquire no rights in the corporation except
those which the original dissenting shareholder had at the time of the
transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later
(but in no case later than ninety days from the shareholders' authorization
date), the corporation or, in the case of a merger or consolidation, the
surviving or new corporation, shall make a written offer by registered mail to
each shareholder who has filed such notice of election to pay for his shares at
a specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment
to each such shareholder who has submitted the certificates representing his
shares to the corporation, as provided in paragraph (f), of an amount equal to
eighty percent of the amount of such offer, or (2) as to each shareholder who
has not yet submitted his certificates a statement that advance payment to him
of an amount equal to eighty percent of the amount of such offer will be made
by the corporation promptly upon submission of his certificates. If the
corporate action has not been consummated at the time of the making of the
offer, such advance payment or statement as to advance payment shall be sent to
each shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does
not constitute a waiver of any dissenters' rights. If the corporate action has
not been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than
a twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the
foregoing, the corporation shall not be required to furnish a balance sheet or
profit and loss statement or statements to any shareholder to whom such balance
sheet or profit and loss statement or statements were previously furnished, nor
if in connection with obtaining the shareholders' authorization for or consent
to the proposed corporate action the shareholders were furnished with a proxy
or information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be
paid for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix
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the fair value of their shares. If, in the case of merger or consolidation,
the surviving or new corporation is a foreign corporation without an office
in this state, such proceeding shall be brought in the county where the
office of the domestic corporation, whose shares are to be valued, was
located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as to
whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such rate
as the court finds to be equitable, from the date the corporate action was
consummated to the date of payment. In determining the rate of interest,
the court shall consider all relevant factors, including the rate of
interest which the corporation would have had to pay to borrow money during
the pendency of the proceeding. If the court finds that the refusal of any
shareholder to accept the corporate offer of payment for his shares was
arbitrary, vexatious or otherwise not in good faith, no interest shall be
allowed to him.
(7) Each party to such proceeding shall bear its own costs and expenses,
including the fees and expenses of its counsel and of any experts employed
by it. Notwithstanding the foregoing, the court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including any who have
withdrawn their notices of election as provided in paragraph (e), if the
court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. The court may, in its discretion,
apportion and assess all or any part of the costs, expenses and fees
incurred by any or all dissenting shareholders who are parties to the
proceeding against the corporation if the court finds any of the following:
(A) that the fair value of the shares as determined materially exceeds the
amount which the corporation offered to pay; (B) that no offer or required
advanced payment was made by the corporation; (C) that the corporation
failed to institute the special proceeding within the
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<PAGE>
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined
exceeds the corporate offer.
(8) Within sixty days after final determination of the proceedings, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificate for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section
515 (Reacquired shares), except that, in the case of a merger or consolidation,
they may be held and disposed of as the plan of merger or consolidation may
otherwise provide.
(j) No payment shall be made to a dissenting shareholder under this
section at a time when the corporation is insolvent or when such payment would
make it insolvent. In such event, the dissenting shareholder shall, at his
option:
(1) Withdraw his notice of election, which shall in such event be deemed
withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in paragraph (e), and except that
this section shall not exclude the right of such shareholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as
provided in subparagraph (e)(2) of section 907 (Merger or consolidation of
domestic and foreign corporations).
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REXX ENVIRONMENTAL CORPORATION
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Arthur L. Asch and Michael A. Asch as
proxies, each with the power to appoint his substitute, and hereby authorizes
them to represent and to vote, as designated below, all the shares of Common
Stock of REXX Environmental Corporation held of record by the undersigned on
August 10, 2000 at the Annual Meeting of Shareholders to be held on September
19, 2000 and any adjournment thereof.
1. Election of Directors
[ ] FOR all nominees listed [ ] WITHHOLD AUTHORITY TO
below (except as marked to vote for all nominees listed
the contrary below) below
Arthur L. Asch, Michael A. Asch, Joseph Greenberger, James L. Hochfelder, Brian
A. Wasserman.
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
-----------------------------------------------------------------
2. Approval of the Stock Purchase Agreement, dated as of June 10, 1999, among
Greg S. Watkins, Daren J. Barone and REXX Environmental Corporation, pursuant to
which REXX will sell its sole operating business, Watkins Contracting, Inc.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. Approval of the Agreement and Plan of Merger among REXX Environmental
Corporation, Newtek Capital, Inc. and REXX Acquisition Corp. pursuant to which
REXX Acquisition Corp. will be merged with and into REXX Environmental
Corporation, REXX Environmental Corporation will become a wholly-owned
subsidiary of Newtek and the shareholders of REXX Environmental Corporation will
receive one share of Newtek Common Stock for each share of REXX Common Stock
owned.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
(Please sign and date on reverse side)
Unless you specify otherwise, this Proxy will be voted "FOR" the Election of
the Nominees as Directors and "FOR" Items 2 and 3.
This proxy when properly executed will be voted in the manner directed herein
by the undersigned shareholder. If no direction is made, the proxy will be voted
FOR the election of management's nominees for directors.
<PAGE>
When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title
as such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name by
authorized person.
Please sign exactly as name appears herein.
__________________________________
(Signature)
__________________________________
(Signature, if held jointly)
Dated: ___________________________
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
