UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _______________TO _______________
COMMISSION FILE NUMBER: 001-16123
NEWTEK BUSINESS SERVICES, INC.
NEW YORK 11-3504638
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(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
OR ORGANIZATION) NO.)
100 QUENTIN ROOSEVELT BOULEVARD SUITE 408
GARDEN CITY NY 11530
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 390-2260
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, PAR VALUE $0.02 PER SHARE
---------------------------------------
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
State the issuer's revenues for its most recent fiscal year:
$34,624,151 The aggregate market value of the voting stock held by
non-affiliates of the registrant computed by reference to the price at which the
common equity was sold on March 17, 2003, was approximately $44,851,144.
As of March 17, 2003 there were 25,410,844 shares issued and
outstanding of the registrant's Common Stock, par value $0.02 per share.
TABLE OF CONTENTS
ITEM 1 - Description of Business...............................................1
Certified Capital Companies - capcos...........................................4
Principal Business Activities: Partner Companies..............................10
Primarily Controlled Companies (accounted for under the equity method)........19
Other, Passive or Venture Capital Investments.................................21
Execution: Regional Business Development Centers..............................23
Government Regulation: Investment Company Act of 1940.........................28
Government Regulation: State Capco Regulation.................................29
Government Regulation: Sarbanes-Oxley Act of 2002.............................30
Shareholder Value.............................................................30
Risks Associated with Newtek's Business.......................................31
ITEM 6 - Management's Discussion and Analysis or Plan of Operation............34
Introduction and Certain Cautionary Statements................................34
Critical Accounting Policies..................................................33
New Accounting Pronouncements.................................................36
Comparison of the years ended December 31, 2002 and December 31, 2001.........38
Liquidity and Capital Resources...............................................41
Income from capco Tax Credits.................................................45
Impact of Inflation...........................................................48
ITEM 7 - Financial Statements................................................49
Notes to Financial Statements.................................................57
ITEM 12 - Certain Relationships and Related Transactions.....................109
Signatures...................................................................110
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
OVERVIEW. Newtek Business Services, Inc., which changed its name from
that of Newtek Capital, Inc. in November 2002 in order to emphasize its current
business objectives, is engaged in the business of
o owning, operating or coordinating 8 businesses lines which
serve small businesses and
o organizing certified capital companies ("capcos") and
investing funds made available under the capco programs in
small businesses including, those in which it holds an equity
position.
During 2002, direct business operations of its businesses resulted in
revenue of approximately $4 Million or 12% of total revenue and the operation of
the capcos resulted in non-cash revenues related to the capco tax credits of
approximately $30 Million, or 88% of total revenue. The chart on the following
page depicts how these revenues are generated. During the same period, Newtek
realized net income (exclusive of extraordinary gains) of approximately $4.5
Million, substantially all of which is attributable to the non-cash income
related to the capco programs. The revenue resulting from the capco tax credits
are non-cash and are used exclusively to satisfy obligations of the capcos to
deliver tax credits to their investors. Until Newtek's partner companies are
able to generate and distribute cash earnings to Newtek, it must rely on the
capco management fees as the sole source of cash to meet its non-capco expenses.
Newtek is a New York corporation organized in 1999 in conjunction with
the combination of the business of Newtek's predecessor, BJB Holdings, Inc., and
REXX Environmental Corporation which at that time was traded on the American
Stock Exchange.
BUSINESS & BUSINESS STRATEGY. Newtek's strategy is to operate the
capcos and utilize resources and funds available under the programs to develop
businesses that emphasize serving other small businesses. During 2002 Newtek has
reduced the number of business lines that it is investing in and operating and
as of year-end Newtek is placing primary emphasis on 8 such lines. Services to
small businesses which Newtek has emphasized during 2002 and expects to
emphasize into the future include:
NEWTEK SMALL BUSINESS FINANCE - small business loans available under
programs of the United States Small Business Administration
NEWTEK MERCHANT SOLUTIONS - small business electronic payment
processing
NEWTEK FINANCIAL INFORMATION SERVICES - small business financial and
management reporting and planning
NEWTEK TAX SERVICES - small business tax preparation services
(currently being organized)
Secondary emphasis has been placed on the following:
NEWTEK BUSINESS EXCHANGE -- small business brokerage and M & A services
NEWTEK IT SERVICES - software development and systems integration
NEWTEK SECURITIES - the capital formation assistance of a broker-dealer
NEWTEK STRATEGIES - small business strategic marketing planning and
advice
NEWTEK GENERATES REVENUE THROUGH THE OPERATION OF CAPCO'S AND
THROUGH EARNINGS AND RETURNS ON THE INVESTMENTS IT MAKES
----------------------------------- -------------------------------------
STATES ADOPT CAPCO PROGRAMS TO FUNDS REMAINING AFTER PAYMENT FOR
FOSTER JOB & SMALL BUSINESSES |-> CREDIT ENHANCEMENT PLUS OTHER FUNDS
GROWTH; INSURANCE COMPANIES GET | RAISED OUTSIDE CAPCO PROGRAMS ARE
TAX CREDITS FOR FUNDING. | INVESTED: $63.6 MILLION IN BUSINESSES
| THRU DECEMBER 31, 2002
----------------------------------- | -------------------------------------
| | |
| | |
\|/ | \|/
----------------------------------- | -------------------------------------
NEWTEK HAS ORGANIZED AND INVESTED | $43.7 MILLION INVESTED IN COMPANIES
$3,778,000 IN SEED CAPITAL FOR TEN | WHERE NEWTEK TAKES A VERY ACTIVE
CAPCOS | PARTICIPATION IN OWNERSHIP AND
| MANAGEMENT INCLUDING COST-FREE
| LICENSING OF NEWTEK BRAND NAME
----------------------------------- | -------------------------------------
| | |
| | |
| /|\ |
\|/ | \|/
----------------------------------- | -------------------------------------
NEWTEK'S CAPCOS HAVE BORROWED | INVESTMENTS ARE PRINCIPALLY DIRECTED
ABOUT $165 MILLION FROM INSURANCE | AT PROVIDING SERVICES NEEDED BY OTHER
COMPANIES THROUGH 2002; INSURANCE | SMALL BUSINESSES AND WHICH CAN BENEFIT
COMPANIES TREAT RECEIPT OF STATE | FROM CROSS MARKETING
TAX CREDITS AS INTEREST INCOME |
----------------------------------- | -------------------------------------
| | |
| | |
\|/ | \|/
----------------------------------- | -------------------------------------
ABOUT HALF OF AVAILABLE CASH USED | A SMALLER PORTION OF INVESTMENTS ARE
TO PURCHASE CREDIT EXTINGUISHMENT | VENTURE CAPITAL-TYPE OR PASSIVE
(REPAYMENT OF PRINCIPAL) AND <-| INVESTMENTS, BOTH DEBT AND EQUITY
ENHANCEMENT (PAYMENTS IF TAX
CREDITS ARE LOST)
----------------------------------- -------------------------------------
| |
| |
| |
\|/ \|/
--------------------------------------------------------------------------------
VESTING OF TAX CREDITS BY CAPCOS IN RESULTS RETURNS FROM INVESTMENTS
RECOGNITION OF REVENUE; IN 2002 THIS PRODUCE REVENUE FOR NEWTEK; IN 2002
RESULTED IN $30 MILLION, OR 88% OF THIS RESULTED IN $4 MILLION, OR 12%
NEWTEK'S GROSS REVENUE. OF GROSS REVENUE.
--------------------------------------------------------------------------------
2
Newtek's business originated in 1998 and initially focused exclusively on
developing income opportunities related to the capco programs. Through the end
of 2002, it has established and/or manages 10 capcos or capco funds and provided
the initial required capitalization for them of approximately $3.8 Million.
Conceived as venture capital funds, it has become very apparent both to Newtek
and state governments, that additional funds made available through the capco
programs are only one element of successful business strategies for new and
growing small businesses. After its first year of operations, Newtek determined
that it would take a "hands-on" approach to its investments and provide the
other elements necessary for the businesses to survive and succeed. Through 2001
and 2002, this trend to greater participation in the businesses in which it has
invested has led Newtek to the determination to focus on the types of businesses
in which it will primarily (but not exclusively) invest, as described above, and
to take a very active role in the management of these businesses. Newtek has
been able to manage its participation in the capco programs in a manner which
enables it to take advantage of the funds in the programs to support its
development of principally partner companies while at the same time conforming
to the spirit and legal requirements of the capco programs to create new
businesses and the jobs and economic growth that accompany such new businesses.
(See: "Certified Capital Companies - capcos - The Role of Capcos in Newtek's
Business Strategy.")
Newtek continues to distinguish between its partner companies (those
where it takes a greater role in ownership and management) and the other
investments (those where it has a lesser role, or lesser equity or only a debt
investment in the business). Marketing strategies have been developed during
2002 to enable the partner companies, operating in different markets and with
overlapping but not identical ownership and management, to benefit from the
unified market presence as a NEWTEK-branded business service or financial
product.
During 2002 Newtek completed the acquisition of a company that manages
an operating capco in New York and organized and marketed the notes of its ninth
and tenth capcos under new legislation in Colorado and Louisiana.* The entity
that manages and owns a minority interest in the operating capco, Exponential,
LLC, was acquired in January 2002 in an all stock transaction, and was a
partially-owned subsidiary of a private company, operating out of offices in
Albany and Syracuse, New York. The net current asset value of Exponential is
small but Newtek believes that the increased presence in the up-state New York
region will be beneficial to its overall business.
Subsequent to a capco investment made in September 2002 in a partner
company, SBA, Inc., in December Newtek added its own non-cash resources to those
of SBA, Inc. and facilitated the acquisition of Commercial Capital Corporation,
one of only 14 licensees of the US Small Business Administration permitted to
originate SBA guaranteed loans nationwide. This company had made approximately
$370 Million in such loans since its inception in 1994, and held a current SBA
loan servicing portfolio of approximately $196 Million including loans serviced
for others of $141 Million. Newtek has licensed the use of the "Newtek" brand
name at no cost and the acquired company now operates as "Newtek Small Business
Finance." In conjunction with Newtek's participation in the acquisition, and its
corporate guaranty, the principal warehouse lender for Commercial Capital, a
Deutsche Bank affiliate, agreed to renew
--------
* In Louisiana, due to the structure of the capco legislation, Newtek has one
capco which operates three separate funds. Because the funds are organized and
funded separately, Newtek considers them and here refers to them as three
separate capcos.
3
its $75 Million revolving credit facility and agreed to exchange $1.5 million of
borrowings for $1.5 Million in preferred stock in the lender. In addition, in
January 2003, Newtek was instrumental in arranging for the strategic investment
in Newtek Small Business Finance by an affiliate of Credit Suisse First Boston
Corporation of an additional $2 Million. Newtek completed the transaction with
an 80% ownership in the lender and its holding company, SBA, Inc., of which 60%
is held directly and 20% is held by the capco. Newtek received no other
consideration from any other party in this transaction. Newtek valued this
acquisition at $2 Million, representing the cash investment by Newtek's capco
plus approximately $1.1 Million in Newtek common stock issued, or $3.1 Million
in total. This addition to the business of Newtek will greatly supplement the
services which Newtek can provide to the small business market.
In 2002 all of the consolidated companies that Newtek's capcos invested
in generated a net loss of $3.4 Million on revenues of $3.7 Million. During the
year 2002, Newtek's capcos invested an aggregate of $16.2 Million and determined
that investments totaling $1.57 Million had incurred an other than temporary
impairment in value; since inception, Newtek's capcos have invested an aggregate
of $63.6 Million against which $3.14 Million has been determined to be impaired.
During the first six months of 2003, Newtek invested an additional $4,783,000
and determined the existence of $1,734,000 in other than temporary impairments
in its investments. During the same period, Newtek made one equity method
investment of $983,000 and experienced $118,000 in losses from previous equity
method investments.
Newtek and its capcos do not generate any revenue for goods or services
from the companies in which it invests. The partner companies and others in
which the capcos invest do provide services, and to a much lesser degree goods,
to each other. However, the effect of such inter-company revenues and expenses
are eliminated in consolidation of the financial results. Newtek relies on the
annual management fees of 2.5% of certified capital, as fixed by the capco
statutes, as its principal source of cash to cover its operating expenses. This
covers all supportive services generally provided by Newtek to its Partner
Companies and other investee companies, however, this fee is paid out of capco
cash on hand and is not set aside or reserved for payment out of the funds
received by the capcos. The services range from advice and assistance with
strategic relationships to direct and daily involvement in policy making and
management.
We describe below the requirements of the capco programs, the way in
which we use the capco insurance to attract investors and the cost of that
insurance. Because of this arrangement, in all of the capcos we have organized,
after payment of the organizational costs and the capco insurance premium, we
always have remaining cash equal to approximately 45% of the amount initially
raised. The critical feature of all capco programs is that a minimum of 50% of
initial investment in the capcos must be placed in qualified business
investments within a specified time, usually 5 years. As each capco receives
repayment of debt plus interest, as well as receives return of and on equity
investments, it is able to reinvest the funds in other qualified businesses
(which may be its partner companies or others). It is through this
"investment-return-and- reinvestment" process that Newtek's capcos are able to
meet the minimum investment requirements of the capco programs. In 2001 Newtek's
capcos received total repayments or returns of approximately $12.1 Million, and
in 2002 they received approximately $14 Million. These funds supplemented the
funds available for meeting minimum investment requirements.
4
CERTIFIED CAPITAL COMPANIES - CAPCOS
OVERVIEW. A capco is either a corporation or a limited liability
company, established in and chartered by one of the six states currently with
authorizing legislation (Florida, Louisiana, Missouri, Colorado, New York and
Wisconsin). Aside from seed capital provided by an organizer such as Newtek, 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, and
which may or may not be in conjunction with loans to such companies. In most
cases, the tax credits provided by the states are equal to the amount of
investment by the insurance companies in the securities of the capcos, which can
be utilized by them over no less than ten years, or approximately 10% per year.
These credits are unaffected by the returns or lack of returns on investments
made by the capcos.
During 2002 Newtek established two new capcos or capco funds; Wilshire
Colorado Partners, LLC which obtained approximately $22.7 Million in funding in
April 2002 and Wilshire Louisiana Partners III, LLC, which raised approximately
$8 Million in October 2002.
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 a holding company for a network
of small business service providers. While observing all requirements of the
capco programs, Newtek has simultaneously been able to use this funding source
as a means to facilitate the growth of its businesses focused on providing goods
and services to other small businesses.
The authorizing statutes in each of the states in which Newtek's capcos
operate explicitly allow and encourage the capcos to take equity interests,
which in some cases may include majority or controlling interests, in companies.
Consequently, Newtek may, consistent with its business objectives, acquire
interests in companies through the use of the funds in its capcos and provide
management and other services to these companies. The investments by the capcos
create jobs and foster economic development consistent with the objectives of
the programs as stated in most capco statutes. Furthermore, because Newtek's
capcos have arranged for the repayment of the principal portion of their notes
(by the AIG affiliate) and the interest payment of the notes is "paid" through
the use of tax credits, Newtek's capcos are under no pressure to generate
short-term profits and may invest for long-term profitability. All of Newtek's
current majority-owned companies are less than three years old, some are less
than one year old, and all but one have produced a loss for 2002. Because of the
nature of the capco program, Newtek may accept the higher level of losses common
to start up companies, as it has the ability to devote the time, attention and
resources to these companies which they require to become successful.
These capco programs are, in the view of Newtek's management, a
complement to Newtek's long-term strategy of acquiring, developing and operating
companies that provide business products and financial services to small
businesses. Based upon the experience of its 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 administrative, managerial, technical, legal and financial
management assistance that Newtek provided in structuring and building the
businesses. This hands-on management approach facilitates the general objectives
of the capco programs of economic development, while at the same time permitting
Newtek to develop its long-term investments.
5
Management of Newtek believes that it has built upon the resources of
the capco programs to enhance the development of small businesses by
significantly more than investing or loaning capco funds to an entrepreneur.
Passive investment may have worked often enough in the business climate of the
1990's, but businesses today, particularly small businesses, require much more
than funds to succeed. In order to make the capco investments successful, and
thus to fulfill the public policy objectives of the capco programs, Newtek has
attempted to take the next step with the active addition of management
resources, technical and professional expertise and non-capco funds. This has
included during 2002 the development of the zero-cost "NEWTEK" branding for the
partner companies, as well as the material and significant assistance that
Newtek provided to its partner company, Newtek Small Business Finance, in the
negotiation of an extension of a $75 Million credit line, which included an $3
Million debt forgiveness and conversion of $1.5 Million into preferred stock of
the partner company. This was followed by the subsequent sale in January 2003 by
the partner company of $2 Million in preferred stock to a unit of Credit Suisse
First Boston Corporation in conjunction with a referral agreement for lending
business. These are good examples of the other types of possible benefits
available to the partner companies by association with a larger business such as
Newtek.
THE CAPCO PROGRAMS; TAX CREDITS. The recognition of revenue by the
capcos organized by Newtek at present represents the largest single source of
revenue to Newtek, or approximately 88% of gross revenue in 2002. Such revenue
is the principal contribution to Newtek's net income in 2002 and 2001.
In return for the capcos making investments in the targeted companies,
the states provide tax credits, generally equal to funds invested in the capco
by insurance companies, that are available for use by insurance companies that
provide the funds to the capcos. In order to maintain its status as a capco, and
to avoid 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,
could result in loss or possible recapture of the tax credit. Newtek's capcos
have agreed with their funding insurance companies to provide, in the event of
decertification, 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 credits.
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 requirements, both qualitative and quantitative benchmarks.
Quantitative Requirements: For example in the state of New York, a
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, 40% by 36 months and 50% by 48 months. The minimum
investment requirements and time periods, along with the related tax credit
recapture requirements are set out in detail below. See, also, Management's
Discussion and Analysis -Income from Tax Credits and Note 1 of Notes to
Consolidated Financial Statements - Revenue Recognition. The minimum
requirements are calculated on a cumulative basis and allow the capcos to
receive a return of an investment and re-invest the funds for full additional
credit towards the minimum requirements.
Qualitative Requirements: These include limitations on the initial size
of the recipients of the capco funds, including the number of their employees,
the location within the respective
6
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, and
the terms of the investments in the recipients. Most significant for Newtek's
business is the fact that the capco programs generally do not pose any obstacle
to investments in qualified businesses which result in significant, majority or,
in some cases, controlling ownership positions. This enables Newtek to achieve
both public policy objectives of the capco programs, of increasing the number of
small businesses and job opportunities in the state, as well as its own
objectives of developing a number of small business service companies which may
become profitable and return a meaningful return both to Newtek's stockholders
and to the local participants in the businesses. In addition, because the
businesses that Newtek is building themselves provide needed, and in
management's judgment cost effective, goods and services to other small
businesses, the growth of this important segment of a state's economy may be
accelerated.
Enforcement of Requirements: 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. Capcos are required to maintain
detailed records so as to demonstrate to state examiners compliance with all
applicable requirements. A failure of a capco to meet one of the statutory
minimum quantitative investment benchmarks within the time specified would
constitute grounds for the loss of the capco's status, or its decertification,
and the loss and recapture of some or all of the tax credits previously passed
through the capco to its investors. A decertification of one of Newtek's capcos
would have a material adverse effect on the business of Newtek in that it would
require the capco insurer to make compensatory payments equal to the lost tax
credits and would permit the insurer to assume control over the assets of the
capco in order to cover its losses. Compliance with these requirements is
reflected in contractual provisions of the agreements between each capco and its
investors. The capcos covenant to their investors to use the funds only for
investments as permitted by the capco laws or for related expenses and to
refrain from taking any action which would cause the capco to fail to continue
in good standing. See, also, -- Government Regulation; State Capco Regulations,
below.
Newtek's Record of Compliance: As of the end of 2002, all of Newtek's
capcos were in material compliance with all applicable requirements and four of
the ten capcos had met their final, minimum 50 % thresholds. This achievement
eliminates entirely the risk of decertification and tax credit recapture or loss
for its insurance company investors in these capcos, and this represents
approximately $51.4 Million of tax credits, or about 35% of the tax credits
associated with Newtek's capcos.
CAPCO INSURANCE: CREDIT EXTINGUISHMENT & CREDIT ENHANCEMENT. Newtek has
purchased insurance to cover the risks associated with the operation of its
capcos from American International Specialty Lines Insurance Company and
National Union Fire Insurance Company of Pittsburgh, both subsidiaries of
American International Group, Inc. (AIG), a well respected international
insurer. Both AIG and the subsidiaries are AAA credit rated. Under the terms of
this insurance, which is for the benefit of the insurance company investors, the
capco insurer assumes the obligation to repay the insurance companies a
substantial portion of the principal amount of their debt (the extinguishment)
as well as to make compensatory payments in the event of a loss of the
availability of the related tax credits (the enhancement). In the event of
either a threat of or a final decertification by a state, the capco insurer
would be authorized to assume partial or complete control of the business of the
particular capco so as to ensure
7
compliance with investment or other requirements. This would likely avoid final
decertification and the necessity of insurance or cash interest payments.
However, control by the insurer would also result in significant disruption of
the particular capco's business and likely result in significant financial loss
to that capco. Decertification would also likely impair Newtek's ability to
obtain certification for capcos in additional states as new legislation makes
other opportunities available. The capcos are individually insured, and the
assets of one are not at risk for the obligations of the others. AIG itself has
not agreed to guarantee the obligations of the subsidiary insurers.
In addition, Newtek's capcos have the ability to borrow additional
funds, that is, to increase the amount of their uncertified capital, but Newtek
has no need for or anticipation of utilizing this capacity. Such an increase in
non-certified capital by a capco would have no effect on tax credit income or
investment benchmarks for the capco. The additional funds could, however, be
invested in qualified investments and speed the achievement of the benchmarks.
In order to address this risk of decertification, which may generally
be eliminated by meeting a 50% of capital investment threshold, Newtek's capcos
have structured their investment program, consistent with safe and sound
operations, so as to meet the investment benchmarks as early as possible. The
table below also presents the cash positions of each of Newtek's capcos at
organization:
o initial cash receipts from insurance companies (Certified
Capital),
o plus other cash receipts, consisting of
o initial seed money provided by Newtek: $3.8 Million
and
o premiums paid by investing insurance companies in
excess of the face amount of the capco notes to
adjust the instruments to the then current market
values: $16 Million
o plus amounts financed for the payment of insurance premiums,
o less payments for capco insurance policies.
The result, Net Cash Available for Investment, demonstrates that in all cases
except two, the amount of cash available for investment by the capcos exceeded
by minimal amounts the minimum 50% investment benchmarks. The final column
demonstrates the aggregate of investments by each of the capcos and indicates
the amount of minimum investment remaining to be made as of December 31, 2002.
At that date four of the capcos had exceed the 50% minimum. The six other capcos
had a total of $13.53 million of remaining minimum investment yet to be
satisfied; one was at 46% and another at 49%. For additional information, please
refer to the charts in Note 1 and Note 12 to the Financial Statements, at pages
55 and 77 respectively, and the related text.
8
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CAPCO & YEAR CERTIFIED OTHER CASH AI CREDIT PREMIUM PREMIUM NET CASH 50% MINIMUM MINIMUM
CAPITAL (1) PROCEEDS BORROWING COVERAGE A COVERAGE B AVAILABLE TO INVESTMENT REMAINING AT
INVEST 12/31/02
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1998
-------------------------------------------------------------------------------------------------------------------------------
WA (2) $ 2,673,797 $ 500,000 -- $ 1,647,905 $ 157,694 $ 1,368,198 $ 1,336,899 None
-------------------------------------------------------------------------------------------------------------------------------
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1999
-------------------------------------------------------------------------------------------------------------------------------
WP (2) 37,384,028 2,446,773 -- 23,127,927 3,998,948 12,703,926 18,692,011 None
-------------------------------------------------------------------------------------------------------------------------------
WLA (3) 16,400,000 2,051,020 $ 2,000,000 9,175,844 2,193,741 9,081,435 8,200,000 $ 721,600
-------------------------------------------------------------------------------------------------------------------------------
WI 16,666,667 1,479,236 2,000,000 9,086,227 2,352,786 8,706,890 8,333,334 3,166,667
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
2000
-------------------------------------------------------------------------------------------------------------------------------
WNYII (2) 6,807,866 1,380,000 1,500,000 5,019,803 504,745 4,163,318 3,403,933 None
-------------------------------------------------------------------------------------------------------------------------------
WA (2) 1,136,364 115,266 -- 661,432 160,068 430,130 568,182 None
-------------------------------------------------------------------------------------------------------------------------------
WLPII (2)(3) 3,050,000 1,248,274 300,000 2,456,565 319,958 1,821,751 1,525,000 None
-------------------------------------------------------------------------------------------------------------------------------
WNYIII 35,160,202 9,893,394 5,200,000 29,052,790 4,137,438 17,063,368 17,580,000 351,602
-------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
2002
-------------------------------------------------------------------------------------------------------------------------------
Wcol 22,057,767 $ 661,733 2,000,000 11,654,021 3,604,978 9,460,501 11,028,884 5,293,906
-------------------------------------------------------------------------------------------------------------------------------
WLPIII $ 8,000,000 -- $ 1,000,000 $ 2,859,644 $ 1,089,134 $ 5,051,222 $ 4,000,000 4,000,000
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(1) Newtek has invested a minimum of $500,000 in cash in six of the eight capcos
it has organized; in Louisiana, the second and third capcos (investment pools)
have been structured as permitted by the unique provisions of that state's
statute be able to utilize the capital of the first Louisiana capco organized by
Newtek to meet the initial capital requirements of the subsequent pools. "Other
Cash Proceeds" consist of this initial funding by Newtek out of cash on hand, a
total of $3,778,000, plus in some cases a market rate adjustment paid in cash by
the certified investors to conform the imputed return on the capco notes to then
current market rates, as negotiated on the closing of each of the capco
fundings.
(2) Indicates that, at December 31, 2002, four capcos have met their minimum
investment benchmark of 50 percent of Certified Capital and that, therefore, all
related tax credits are beyond recapture or forfeiture. The consequence of this
is that $51,052,055 in tax credits, or approximately 34% of the total, are
irrevocably beyond recapture or forfeiture. In all cases, the benchmarks were
met 12 months or more in advance of the statutory minimum investment benchmark
dates.
(3) Tax credits allocated in these two Louisiana programs were calculated at
110% of certified capital; the numbers presented here, however, are the amounts
of the Certified Capital (cash) actually received by the capco at funding.
Newtek manages a tenth capco, Exponential, LLC, which is structured
differently than Newtek's other capcos and is not covered by capco insurance as
are its other capcos. Newtek does not own this capco. Newtek acquired 100% of an
entity that has a less than 20% ownership in the Exponential Capco, and as such,
the cost method of accounting for this investment is utilized; the balance of
the equity of this one capco is owned by Utica Insurance Company.
The Exponential Capco did not purchase any insurance to extinguish any
of its obligations. Instead, it purchased and pledged discounted United States
Treasury obligations that will increase in value over ten years to equal the
amount of principal owed to Utica Insurance Company, in repayment of its initial
funding. At December 31, 2002 and 2001, respectively, Exponential LLC held total
assets of $9,700,361 and $7,522,911, and at the same dates it held $2,897,394
and $2,722,811 in Treasury obligations.
NEWTEK'S ABILITY TO COMPETE. Newtek's business now requires it to
compete at two basic levels. The capcos compete in their offerings with the
three or four other capcos sponsored by various national financial
organizations, as well as 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;
9
o the insurance which it has been able to obtain to cover any loss of the
tax credits and the obligation to repay principal, resulting in a
credit rating for the instruments of AAA;
o the previous business experience of its principals;
o the national marketing of its programs; and
o the extensive contacts that its management has as a result of previous
experience in the financial community.
Newtek has structured the capco securities as debt instruments and
either warrants for participation in the equity of the particular capco or,
during 2002, as a unit with shares of Newtek. Newtek's capco debt instruments
have all been rated AAA or the equivalent by Standard and Poor's or another
nationally recognized rating agency. The debt instruments and the tax credits
they are related to are in some but not all state programs transferable, but
such a transfer would have no effect on Newtek. In the past the individual
capcos issued warrants entitling the holders to between 4% and 20% of the equity
of the particular capco at a nominal exercise price. During 2002, Newtek has
negotiated the exchange of many of these warrants for stock of Newtek which has
the effect of reducing or eliminating the minority interests in the capcos and
permitting all of the profits or losses of the capcos' investments to flow up to
Newtek as the principal owner of the capcos. Future capco offerings will likely
not include capco warrants as part of the debt offering and will likely include
the sale of Newtek common stock.
In addition to competing for capco funds, which are integral to the
current state of the business, Newtek and particularly its partner companies
must also compete in a number of markets for the sale of services to other
businesses. Newtek has narrowed the focus of it's principal investments to that
of 8 business lines. Each of these require the partner companies to compete not
only against other suppliers in their particular state or region of the country,
but also against suppliers operating on a national and even a multi-national
scale. However, none of the markets in which the partner companies compete are
dominated by a small number of companies which could materially affect the
nature or terms of the competition. In addition, in many cases, the competitors
which the partner companies face are not as able as are the partner companies to
take advantage of changes in business practices due to technological
developments and, by their large size, are unable to offer the personalized
service that many small business owners and operators seem to want. Through the
resources available in Newtek, the Company is attempting to build the partner
companies into successful and profitable ventures. In 2002, the first of the
partner companies showed a net profit for the first time. Management of Newtek
is focused on improving these results of operations.
PRINCIPAL BUSINESS ACTIVITIES: PARTNER COMPANIES
MAJORITY-OWNED OR PRIMARILY CONTROLLED PARTNER COMPANIES. Newtek refers
to its partner companies as those companies in which it owns 50% or more of the
outstanding voting securities, or "majority-owned partner companies," and those
companies in which it owns more than 25% but less than 50% of the outstanding
securities, and exercises more control over Newtek than any other shareholder,
or "primarily controlled partner companies." Currently, fourteen (14) of the
investments in partner companies are accounted for as consolidated subsidiaries
and four (4) of the investments in the partner companies are accounted for under
the equity method of accounting. Of these, two have thus far primarily engaged
in business with
10
other partner companies and the others are engaged in business with third
parties. See Note 3 to Notes to Consolidated Financial Statements.
MAJORITY-OWNED COMPANIES (ACCOUNTED FOR UNDER THE CONSOLIDATION METHOD)
At December 31, 2002, Newtek had 14 majority-owned partner companies,
all of which were as a result of investments through the capco programs. The
majority-owned companies are grouped below by their business lines:
o Newtek Small Business Finance, Inc. - SBA Holdings, Inc.
o Newtek Merchant Solutions - Universal Processing Services -
Wisconsin, LLC
o Newtek Merchant Solutions - Universal Processing Services, LLC
(NY)
o Newtek Merchant Solutions - Universal Processing Services -
Louisiana, LLC
o Newtek Merchant Solutions - Universal Processing Services -
Colorado, LLC
o Newtek Financial Information Systems of Florida - Group
Management Technologies, LLC
o Newtek Financial Information Systems of Louisiana -- Group
Management Technologies of Louisiana, LLC
o Newtek Strategies - Harvest Strategies, LLC
o Newtek Business Exchange - Transworld Business Brokers of NY,
LLC
o Newtek Client Services - Global Small Business Services, LLC
o Newtek IT Services -- Advanced Internet Design & Applications,
LLC
o PPM Link, LLC - operating as Newtek Securities, LLC
o Exponential Business Development Corp.
o DC Media, LLC
For these majority-owned partner companies, Newtek will generally actively
direct much of their operations. These companies are described below and summary
financial information is also provided for each in the charts below. See also,
Management's Discussion and Analysis or Plan of Operation and Note 22 of the
Notes to Consolidated Financial Statements.
NEWTEK SMALL BUSINESS FINANCE, INC. ("NSBF"). This latest of Newtek's
principal investments was a major transaction for the company and holds much
potential for the future. John Cox, a former Deputy Administrator of the US
Small Business Administration with over 30 years experience, and until September
2002 a director of Newtek, following his resignation from the board of Newtek,
joined with another 25 year veteran of the SBA, Michael Dowd, and together they
organized and initially capitalized what became NSBF. One of Newtek's New York
capcos provided $2 Million in capital and additional capital of $3.5 Million was
raised from other institutional sources of which 2 million was subsequent to
December 31, 2002. NSBF and Newtek together acquired Comcap Holdings Corp., and
its subsidiary Commercial Capital Corporation, closing on the last day of 2002.
Commercial Capital had been an active participant in the SBA-guaranteed loan
market, having originated about $370 Million in loans and currently servicing
about $196 Million in loans including $141 Million of loans serviced for others.
11
Newtek was able to bring significant internal and external resources to
bear to the transaction, including the agreement to provide a corporate guaranty
of NSBF's bank debt, and issuing 380,471shares of its common stock as
consideration for the acquisition (an additional 82,980 shares will be issued in
the future if certain hurdles are met).
UNIVERSAL PROCESSING SERVICES - WISCONSIN, LLC D/B/A NEWTEK MERCHANT
SOLUTIONS OF WISCONSIN ("UPS-WI") provides credit card, debit card, gift card
and check processing services directly to merchants and also, on a wholesale
basis, acts as a processor for merchants that are brought to it through
unrelated, third-party marketing organizations. UPS-WI acquires the majority of
its merchant-customers through agreements with independent sales organizations
and associations throughout the country which then contract with UPS-WI to
provide processing services, and UPS-WI pays these organizations and
associations a percentage of the processing revenue derived from their
respective merchants. UPS-WI assists merchants with their initial installation
of equipment and initial and on-going service and any other special processing
needs that they may have. UPS-WI is continuing to enter into additional
independent sales agreements with organizations and associations and has grown
its customer base significantly during 2002.
Since inception in June 2001, UPS-WI has experienced operating losses
in each year of operations. These losses have been primarily related to general
corporate overhead and compensation paid to employees of UPS-WI, which together
have been greater than the revenues generated by the company on an annual basis.
The company is currently adding approximately 125 customers per month and has
reached a customer base of approximately 1,200 as of the end of 2002. Because of
the growth experienced in 2002 and early in 2003, management of Newtek expects
that this partner company may show positive cash flow and earnings by the end of
2003. In addition, the residual value of the current recurring revenue stream
could, in the judgment of management, be readily sold at a price approximately
equal to the company's accumulated losses.
UNIVERSAL PROCESSING SERVICES, LLC D/B/A NEWTEK MERCHANT SOLUTIONS OF
NY ("UPS") organized in March 2001 and based in New York, markets check, credit
and debit card processing services, as well as ancillary processing equipment
and software to merchants who accept credit cards, debit cards, and other
non-cash forms of payment, the company also markets its products to larger
national merchants with multiple locations. In addition to marketing these
services to local markets, UPS is currently establishing relationships with
local and regional banks that do not offer their own merchant processing, to
enable them to offer these services to their clients through UPS. UPS provides
direct merchant processing services, ancillary processing equipment and other
related services for merchants. UPS contracts for the actual processing services
provided to its merchants through an agreement with another Newtek partner
company, Universal Processing Services -- Wisconsin, LLC. UPS has steadily
increased the number of merchants under contract and has therefore experienced a
continued increase in its monthly residual payments that it receives.
Since inception UPS has experienced operating losses in each year of
operations. These losses have been primarily attributable to general corporate
overhead and compensation and commissions paid to employees of UPS, which
together have historically been greater than the revenues generated by the
company on an annual basis As with UPS-WI, the recurring revenue stream created
by the aggregation of processing customers will create a value to Newtek that
could be significant.
12
UNIVERSAL PROCESSING SERVICES - LOUISIANA, LLC D/B/A NEWTEK MERCHANT
SOLUTIONS OF LOUISIANA ("UPS-LA") is engaged in the same business line as the
previous partner company, UPS in New York. It too, has experienced a steady but
slow growth in its customer base since beginning operations in September 2001.
Since inception UPS-LA has experienced operating losses in each year of
operations. These losses have been primarily attributable to general corporate
overhead and compensation and commissions paid to employees of UPS, which
together have historically been greater than the revenues generated by the
company on an annual basis
UNIVERSAL PROCESSING SERVICES -COLORADO, LLC D/B/A NEWTEK MERCHANT
SOLUTIONS OF COLORADO ("UPS-CO") is based in Colorado was a start-up in December
2002 and is engaged in the same business line as the previous partner companies,
UPS in New York and UPS-LA. As a start-up, this Company has had no significant
business during 2002.
HARVEST STRATEGIES, LLC D/B/A NEWTEK STRATEGIES ("HARVEST") based in
New York provides business development and outsourced management services to
small and medium sized businesses. While many startup companies have viable
products and services with exciting potential, history has confirmed that most
will fail in a short period of time due to their lack of management expertise.
Unlike management consulting firms that leave it to management to implement
their suggestions, Harvest is distinguished by "rolling up its sleeves and
executing the plan" as a true operating partner. In addition, its principals
have experience in assisting companies implement large scale strategies. Harvest
is a provider of outsourced executive management and strategic business
development and implementation services to startup and early stage businesses.
This portion of the market of smaller businesses is, in the judgment of
management, largely untouched by the large management consulting firms that are
strictly focused on Fortune 1000 companies.
Harvest's areas of expertise include sales and marketing, strategy
formulation and implementation, financial services, internal control analysis
and information technology consulting in the areas of operations and systems
management. Upon engagement of Harvest as a strategic partner, each client
undergoes a comprehensive and detailed evaluation to determine the appropriate
level of involvement by Harvest. Factors considered in this assessment include:
o the overall viability, short and long term, of the client's
business;
o the market positioning of the client's product and/or service;
o the client's business planning capabilities in the areas of
marketing, sales and sales management, margin management human
resources and technical support;
o the core competencies, skill sets and management skills needed
to accomplish goals and objectives; and
o the financial controls and corporate governance policies in
place.
Harvest is most frequently retained to assist businesses in the following areas:
o business plan formulation and implementation;
o identification and execution of strategic business
initiatives;
13
o corporate governance assistance that formally sets forth all
the appropriate board, management and legal policies;
o financial management;
o development of product offerings, and recommendations
concerning sales and marketing initiatives;
o investor relations management;
o recruitment and training of employees; and
o participation in client board meetings as requested.
Since inception Harvest has experienced operating losses in each year
of operations. These losses have been primarily attributable to relatively large
general corporate overhead and the necessary compensation paid to its employees,
which together have historically been greater than the revenues generated.
Harvest has been working to improve its gross margins by engaging in consulting
agreements with clients that it believes will deliver higher gross margin
percentages, providing additional services to existing clients and better
overall utilization of its corporate resources and employee productivity.
TRANSWORLD BUSINESS BROKERS OF NEW YORK, LLC ("TRANSWORLD NY") D/B/A
NEWTEK BUSINESS EXCHANGE OF NEW YORK is based in New York and provides brokerage
and consulting services in the purchase and sale of small and medium-sized
businesses. Transworld NY focuses on marketing its services to businesses with
annual sales between 1 Million to 20 Million Dollars. Since Newtek's original
investment in March 2002, Transworld NY has gone through management changes and
has experienced operating losses since its inception. These losses have been
primarily attributable to general corporate overhead and compensation paid to
employees, which together have historically been greater than the revenues
generated by the company on an annual basis.
GROUP MANAGEMENT TECHNOLOGIES, LLC ("GMT") D/B/A NEWTEK FINANCIAL
INFORMATION SYSTEMS OF FLORIDA is based in Florida and provides administrative
and technological support for small businesses by designing and implementing
specialized financial. and management reporting systems and by providing
outsourced financial management functions hat reduce costs and management
requirements for its clientele. GMT targets the market segment of businesses
that are too small to afford a full time financial executive, but have grown to
the point where managerial and financial controls must be introduced in order to
grow the business to the next level. GMT's specialists work closely with
management to create budgets and forecasts that serve as planning tools as well
as performance evaluation and control benchmarks.
Since inception in November 1999, GMT has experienced operating losses
in each year of operations. These losses have been primarily attributable to
general corporate overhead and compensation and commissions paid to employees of
GMT, which together have historically been greater than the revenues generated
by the company on an annual basis.
GROUP MANAGEMENT TECHNOLOGIES OF LOUISIANA, LLC ("GMT-LA") D/B/A NEWTEK
FINANCIAL INFORMATION SYSTEMS OF LOUISIANA was organized in December 2002 and is
based in Louisiana; it is engaged in the same line of business as is GMT.
Management anticipates that in the future GMT-LA will contract with GMT for some
of the services that are supplied to its
14
clients. Since inception GMT-LA has experienced losses of which the majority are
related to the start up expenses of the company.
GLOBAL SMALL BUSINESS SERVICES, LLC ("GLOBAL") D/B/A NEWTEK CLIENT
SERVICES is based in Florida. The Company was organized in June 2002 and
provides marketing and database management services to small and mid-sized
businesses. Services provided include direct mail, direct response, inbound and
outbound targeted telephone marketing and marketing consultation on program
design and development. Since inception Global has experienced losses of which
the majority are related to the start up expenses of the company.
ADVANCED INTERNET DESIGN & APPLICATIONS, LLC ("AIDA") D/B/A NEWTEK IT
SERVICES was organized in western New York in 2000 and sells services to fulfill
the need of small businesses for internet website creation, design and hosting.
In particular, AIDA provides integrated and marketing internet portals on a
project basis for small businesses. Newtek originally had high expectations for
this company, but the developments in this area of business have made the
ability of small companies to market such services profitability much more
difficult. AIDA has experienced operating losses since inception. Newtek has
narrowed the focus of the business and is exploring other ways in which it can
improve the results of its operations.
PPM LINK, LLC ("PPM Link") based in New York City and operating through
its subsidiary NEWTEK SECURITIES, LLC, raises equity capital and debt for its
clients, which are predominately small to mid sized businesses which need
financing for the implementation of their business plan. PPM Link owns Newtek
Securities, a broker dealer registered with the National Association of Security
Dealers, and placed most efforts during 2002 into building a data base of
potential investors. Newtek Securities began in 2002 to market its services as a
placement agent for the securities of businesses across a number of industries.
In 2002 these have included companies that focus on the specialty finance
industry, the gaming industry and the transportation industry. Only one
transaction has been completed through December 31, 2002.
Since inception in March 2001, PPM Link has experienced operating
losses in each year of operations. These losses have been primarily attributable
to general corporate overhead and compensation and commissions paid to employees
of PPM Link, which together have historically been greater than the revenues
generated. In addition, general economic and market conditions during the past
year have made raising money for small and mid-sized companies quite difficult,
and this has had a negative effect on the performance of PPM Link.
EXPONENTIAL BUSINESS DEVELOPMENT COMPANY, INC. ("Exponential") was
originally organized in the mid-1990s to participate in the New York State capco
program (effectively, a competitor of Newtek). It had structured its capco
(Exponential, LLC) transactions differently than has Newtek with ownership being
sold to the insurance company investors and a small equity portion retained by
Exponential, the manager. The capco has made 11 small equity investments and 3
additional investments of both debt and equity. Exponential has also organized
another investment vehicle (Exponential of New York, LP) that has made 6 equity
investments and two others involving debt. Newtek's interest in this acquisition
was due to the high reputation of the individuals participating in the company
and the ability to identify and make investments in the northern and western
areas of New York State.
15
DC MEDIA FINANCE, LLC was organized in mid 2002 to engage in the
business of providing financing necessary for a number of small businesses
attempting to market a product through direct response television advertising.
This niche product enables such manufacturers or distributors to obtain
financing specifically structured for the acquisition of media time with
repayment also structured for the requirements of that function. DC Media has
completed one financing transaction and has shown a loss in its first half year
of operations.
The unaudited summary financials for the partner companies accounted
for as consolidated subsidiaries follow. These financial statements also reflect
the degree to which Newtek's partner companies interact with each other to
provide and market needed goods or, particularly, services from each other. The
income from services provided to other partner companies is shown as
"Intercompany Eliminated Revenue" and the cost of services acquired from other
partner companies is shown as "Intercompany Eliminated Expenses." All such
inter-partner company transactions were conducted on terms and conditions no
less favorable to each party than those available from third parties. See also
Note 22 to the Notes to the Consolidated Financial Statements.
CONSOLIDATED ENTITIES
NEWTEK
MERCHANT NEWTEK NEWTEK
NEWTEK SOLUTIONS - MERCHANT MERCHANT
STRATEGIES CO SOLUTIONS - NY SOLUTIONS - LA
(HARVEST) (UPC-CO) (UPS) (UPS-LA)
----------------------- ------------------- ------------------------ -----------------------
2002 2001 2002 2001 2002 2001 2002 2001
--------- ----------- ----------- ------ --------- ----------- --------- -----------
Cash $ 256,233 $ 1,638,703 $ 3,248,403 (a) $ 18,611 $ 2,969,784 $ 705,617 $ 1,259,089
Other Assets $ 207,801 $ 117,588 $ 2,662 (a) $ 417,956 $ 486,632 $ 26,485 $ 19,251
TOTAL ASSETS $ 464,034 $ 1,756,291 $ 3,251,065 (a) $ 436,567 $ 3,456,416 $ 732,102 $ 1,278,340
Current Liabilities $ 33,006 $ 53,026 $ 14,433 (a) $ 108,554 $ 51,630 $ 29,729 $ 7,251
TOTAL LIABILITIES $ 33,006 $ 1,002,978 $ 14,433 (a) $ 584,112 $ 3,451,640 $ 29,729 $ 7,251
TOTAL EQUITY (DEFICIT) $ 431,028 $ 753,313 $ 3,236,632 (a) $ (147,54) $ 4,776 $ 702,373 $ 1,271,089
--------- ----------- ----------- ------ --------- ----------- --------- -----------
NEWTEK
MERCHANT
SOLUTIONS - WI
(UPS-WI)
--------------------------
2002 2001
----------- -----------
Cash $ 445,686 $ 1,798,864
Other Assets $ 254,444 $ 46,722
TOTAL ASSETS $ 700,130 $ 1,845,586
Current Liabilities $ 118,670 $ 19,174
TOTAL LIABILITIES $ 1,588,670 $ 1,909,074
TOTAL EQUITY (DEFICIT) $ (888,540) $ (63,488)
----------- -----------
16
CONSOLIDATED ENTITIES
EXPONENTIAL NEWTEK NEWTEK N. FINANCIAL
BUSINESS SMALL BUSINESS IT INFORMATION
PPM DEVELOPMENT CO., FINANCE SERVICES SYSTEMS - FL
LINK INC. (NSBF) (AIDA) (GMT)
--------------------- -------------------- ------------------ --------------------- ---------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---------- ---------- --------- ---------- ----------- ------ --------- --------- ---------- ------
Cash $1,254,506 $1,700,109 $ 41,973 $ 106,642 $ 4,367,870 (a) $ 2,372 3,835,404 $ 70,034 17,799
Other Assets $ 61,686 $ 130,558 $ 25,551 $ 41,372 $ 59,296,476 (a) $ 64,910 170,464 $ 131,985 113,438
TOTAL ASSETS $1,316,192 $1,830,667 $ 67,524 $ 148,014 $ 63,664,346 (a) $ 67,282 4,005,868 $ 202,019 131,237
Current
Liabilities $1,069,144 $ 46,553 $ 59,996 $ 57,350 $ 2,704,417 (a) $ 103,655 60,673 $ 44,809 13,795
TOTAL LIABILITIES $1,919,144 $1,896,553 $ 59,996 $ 57,350 $ 58,028,909 (a) $ 158,260 3,575,323 $ 194,809 188,449
TOTAL EQUITY
(DEFICIT) $(602,952) $ (65,886) $ 7,528 $ 90,664 $ 5,635,437 (a) $ (90,978) 430,545 $ 7,210 (57,212)
N. FINANCIAL
INFORMATION N. BUSINESS NEWTEK CLIENT
SYSTEMS - LA EXCHANGE OF NY SERVICES DC MEDIA
(GMT-LA) (TRANSWORLD - NY) (GLOBAL) FINANCE TOTALS
------------------- ------------------ ----------------- ----------------- -------------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
----------- ------ ---------- ------ ---------- ----- ----------- ---- ------------ -----------
Cash $ 284,000 (a) $3,186,239 (a) $2,377,662 (a) $ 344,293 (a) $ 16,603,499 $13,326,394
Other Assets $ 500 (a) $ 55,005 (a) $ 1,415 (a) $ 385,063 (a) $ 60,931,939 $ 1,126,025
TOTAL ASSETS $ 284,500 (a) $3,241,244 (a) $2,379,077 (a) $ 729,356 (a) $ 77,535,438 $14,452,419
Current Liabilities $ 11,373 (a) $ 21,089 (a) $ 0 (a) $ 92,226 (a) $ 4,411,101 $ 309,452
TOTAL LIABILITIES $ 11,373 (a) $ 346,089 (a) $ 0 (a) $ 736,003 (a) $ 63,704,533 $12,088,618
TOTAL EQUITY
(DEFICIT) $ 273,127 (a) $2,895,155 (a) $2,379,077 (a) $ (6,647) (a) $ 13,830,905 $ 2,363,801
17
CONSOLIDATED ENTITIES
NEWTEK NEWTEK
NEWTEK MERCHANT MERCHANT NEWTEK NEWTEK
STRATEGIES SOLUTIONS - CO SOLUTIONS - NY MERCHANT MERCHANT
(HARVEST) (UPC-CO) (UPS) (UPS-LA) (UPS-WI) SOLUTIONS - LA SOLUTIONS - WI
--------------------- ---------------- --------------------- ------------------- ---------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
---------- ---------- --------- ----- ---------- --------- ---------- ----- ---------- ---------
Revenue $ 558,119 $ 167,256 $ 215 (a) $ 417,826 $ 219,809 $ 67,967 1,765 $1,180,648 $ 29,407
SG&A 835,247 393,976 72,258 (a) 631,432 259,092 547,589 80,676 1,903,475 39,340
Depreciation and
Amortization 8,886 488 0 (a) 43,564 1,818 2,974 0 11,761 11,761
Interest expense 35,624 19,479 0 (a) 30,188 154,123 0 0 84,875 41,854
INCOME/LOSS (321,638) (246,687) (72,043) (a) (287,358) (195,224) (482,596) (78,911) (819,463) (63,548)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 404,612 78,179 15 -- 42,129 2,394 11,984 0 31,964 --
SG&A 45,842 12,649 95 -- 138,180 54,054 92,399 12,522 149,422 1,574
Interest Expense 35,625 19,479 0 -- 30,188 154,123 -- (a) 84,875 41,854
18
CONSOLIDATED ENTITIES
NEWTEK N. FINANCIAL
EXPONENTIAL NEWTEK IT INFORMATION
PPM BUSINESS SMALL BUSINESS SERVICES SYSTEMS - FL
LINK DEVELOPMENT CO., INC. FINANCE (NSBF) (AIDA) (GMT)
--------------------- --------------------- ----------------- --------------------- ---------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
--------- ---------- ---------- ---------- ------- ------- ---------- ---------- ---------- ----------
Revenue $ 367,604 $ 35,000 $ 223,160 $ 253,160 $ 0 (a) $ 393,679 $ 257,437 $ 521,154 $ 281,319
SG&A 677,601 361,449 305,496 200,973 0 (a) 818,988 541,941 577,609 722,649
Depreciation and
Amortization 875 159 800 800 0 (a) 10,152 7,440 22,194 9,977
Interest expense 97,510 80,367 0 0 0 (a) 53,237 151,537 8,076 54,712
INCOME/LOSS (408,382) $ (406,975) (83,136) 51,387 0 (a) (488,698) (443,481) (86,725) (506,019)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 175,218 15,000 -- -- -- (a) 41,401 41,045 304,872 53,704
SG&A 36,923 8,690 -- -- -- (a) 102,741 42,565 34,352 28,154
Interest Expense 97,510 80,367 -- -- -- (a) 53,050 150,937 8,076 54,712
CONSOLIDATED ENTITIES
N. FINANCIAL
INFORMATION N. BUSINESS NEWTEK CLIENT
SYSTEMS - LA EXCHANGE OF NY SERVICES DC MEDIA
(GMT-LA) (TRANSWORLD - NY) (GLOBAL) FINANCE TOTALS
--------------- ---------------- ----------------- ---------------- ----------------------
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
-------- ----- --------- ----- --------- ----- --------- ----- ---------- ----------
Revenue $ 0 (a) $ 0 (a) $ 0 (a) $ 46,668 (a) $3,777,040 $1,245,153
SG&A 11,373 (a) 195,996 (a) 62,236 (a) 102,893 (a) 6,742,193 2,600,096
Depreciation and
Amortization 0 (a) 6,630 (a) 133 (a) 14,166 (a) 122,135 32,443
Interest expense 0 (a) 6,649 (a) 0 (a) 18,350 (a) 334,509 502,072
Income/Loss (11,373) (a) (209,275) (a) (62,369) (a) (88,741) (a) (3,421,79) (1,889,45)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 0 (a) -- (a) -- (a) -- (a) 1,012,195 190,322
SG&A 0 (a) 37,900 (a) 37,900 (a) 7,717 (a) 683,111 160,299
Interest Expense 0 (a) 6,094 (a) 6,094 (a) 3,573 (a) 325,085 501,472
(a) Not in existence or prior to acquisition
19
PRIMARILY CONTROLLED COMPANIES (ACCOUNTED FOR UNDER THE EQUITY METHOD)
At December 31, 2002, Newtek had four primarily controlled partner
companies, all of which were as a result of investments through the capco
programs. For primarily-controlled partner companies, Newtek will generally have
significant involvement in and influence over their operating activities,
including rights to participate in material management decisions. A description
of these partner companies and a summary of their financial results follows. See
also "Management's Discussion and Analysis" and Note 22 to the Consolidated
Financial Statements.
STARPHIRE TECHNOLOGIES, LLC, ("STARPHIRE"), located in Clearwater,
Florida, was organized to provide information technology and electronic commerce
services to small and mid-sized companies, including both software development
and consulting services. Starphire's flagship product, SiteSage(TM) is a suite
of web-site development, deployment and management software, consisting of an
editing environment from which technical users can build custom applications and
non-technical users can manage site content quickly and efficiently. Newtek
monitored this partner company closely over its first two years of operations
and determined late in 2002 that the resources and capital to Starphire would be
insufficient to permit it to compete effectively in a very dynamic market with
major, well funded competitors. As a result, the decision was made to wind-down
operations and focus on providing hardware and software products and services
provided by other larger scale providers. Starphire and Newtek are currently
exploring a strategic alliance, joint venture or private labeling arrangement
which would permit the company to market the services, which are in clear demand
by small businesses, of a larger company under the Newtek small business brand.
NICHEDIRECTORIES, LLC, ("NICHE"), a Florida-based company, was founded
in 1995. Niche is an online service provider and informational directory for the
summer camp industry. KidsCamps.com (www.kidscamps.com) their flagship brand, is
an online directory for information on over 1,400 summer camps and experiences
for children. The company entered into a joint marketing agreement with MBNA
America Bank, N.A. to provide what management believes to be the first consumer
credit facility specifically designed to finance children's tuition for summer
camp and related recreational and educational programs. The company also
publishes CampJobs.com (www.CampJobs.com), a job posting site for the camping
industry, GrownUpCamps.com (www.GrownUpCamps.com), a directory for recreational
and instructional programs for adults, RetreatSearch.com
(www.RetreatSearch.com), an online directory of alternative meeting sites for
seminars, reunions and picnics, and the e-commerce sites CampersMall.com. and
CampDirectorsMall.com. Newtek has also been instrumental in assisting Niche
enter into an agreement with American International Group for the marketing of
specialized insurance products to camp operators and attendees. Niche management
believes that at present it is the most popular internet site for camp related
information.
TRANSWORLD BUSINESS BROKERS, LLC ("TWBB") based in Florida, is engaged
in the marketing and sale of small to medium-sized businesses and serves as a
consultant in mergers and acquisitions of companies in this size range. TWBB
specializes in dealing with businesses in several categories including the
automotive, distribution, restaurant, manufacturing, medical, retail, service,
and franchise industries. TWBB's revenue in 2001 exceed $1 Million and in 2002
grew to $2.2 Million. The company was profitable in 2002 having brokered over
300 business transactions since inception in 2000. The company's goals include
maintaining increased revenues and profitability, and to geographically expand
to include all of Florida and
20
neighboring states, and to introduce new technological methods of evaluating and
facilitating transactions, and eventually to establish a dominant presence as a
business broker on a national basis.
COPIA TECHNOLOGY SERVICES, LLC ("COPIA") is a Wisconsin-based company
recently organized to provide billing management services. Newtek's equity
interest in Copia was obtained through a merger of into it of CB Real Net, LLC
(a former Newtek partner company which was not successful) Copia was organized
late in 2002 and as yet has no employees or assets. Newtek management and the
organizers of Copia are currently working on designing projects that would
provide outsourced services to municipalities for the collection and payment of
parking and traffic violations. Because it is initiating operations, no summary
financial statements are shown below for this company.
The former partner company, CB REAL NET, LLC, had been organized to
provide the design and implementation of a technology platform for an affiliated
entity which was in the process of establishing a real estate franchise network
in Europe, which for various reasons unrelated to the performance of Newtek's
partner company was unsuccessful. Newtek's capco had made a debt investment of
$2.5 Million and taken a 20% equity participation in CB Real Net; principal and
interest on the debt investment was paid in full and thereafter the company was
merged into Copia, in which Newtek retains its 20% interest.
The summary financials for these Partner companies accounted for
through the equity method follow. These unaudited summary financial statements
also reflect the degree to which Newtek's partner companies interact with each
other to provide and market needed goods or, particularly, services from each
other. The income from services provided to other partner companies is shown as
"Intercompany Eliminated Revenue" and the cost of services acquired from other
partner companies is shown as "Intercompany Eliminated Expenses." All such
inter-partner company transactions were conducted on terms and conditions no
less favorable to each party than those available from third parties. See also
Note 22 to the Notes to the Consolidated Financial Statements.
ENTITIES UNDER THE EQUITY METHOD (a)
TRANSWORLD BUSINESS
STARPHIRE NICHEDIRECTORIES BROKERS - FL TOTALS
---------------------- --------------------- --------------------- ------------------------
2002 2001 2002 2001 2002 2001 2002 2001
---------- ----------- ---------- ---------- ---------- ---------- ------------ -----------
Cash $ 14,653 $ 1,352,823 $ 212,409 $ 556,741 $ 153,087 $ 245,515 $ 380,149 $ 2,155,079
Other Assets 402,874 460,508 288,093 273,328 328,261 334,854 $ 1,019,228 $ 1,068,690
TOTAL ASSETS $ 417,527 $ 1,813,331 $ 500,502 $ 830,069 $ 481,348 $ 580,369 $ 1,399,377 $ 3,223,769
Current Liabilities $ 34,330 $ 85,652 $ 438,915 $ 354,861 $ 53,990 $ 22,457 $ 527,235 $ 462,970
TOTAL LIABILITIES $ 34,330 $ 1,085,652 $ 484,850 $ 354,861 $ 168,990 $ 262,457 $ 688,170 $ 1,702,970
TOTAL EQUITY (DEFICIT) $ 383,197 $ 727,679 $ 15,652 $ 475,208 $ 312,358 $ 317,912 $ 711,207 $ 1,520,799
21
TRANSWORLD BUSINESS
STARPHIRE NICHEDIRECTORIES BROKERS - FL TOTALS
---------------------- ------------------------ ------------------------ -------------------------
2002 2001 2002 2001 2002 2001 2002 2001
--------- ----------- ----------- ---------- ----------- ----------- ----------- ------------
Revenue $ 122,782 $ 359,675 $ 754,043 $ 614,701 $ 2,237,869 $ 1,066,495 $ 3,114,694 $ 2,040,871
SG&A 426,476 1,073,104 1,123,519 1,194,716 2,220,955 1,092,394 3,770,950 3,360,214
Depreciation and
Amortization 28,252 30,863 20,214 16,453 2,445 505 50,911 47,821
Interest expense 12,451 28,156 1,194 -- 10,125 6,000 23,770 34,156
INCOME/LOSS (344,397) (772,448) (390,884) (596,468) 4,344 (32,404) (730,937) (1,401,320)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue (17,127) 73,397 -- -- -- -- (17,127) 73,397
SG&A 28,578 46,107 66,908 1,014 21,740 8,028 117,226 55,149
Interest Expense 12,451 28,750 -- -- 10,125 6,000 22,576 34,750
(a) Copia Technology Services, LLC omitted due to lack of operations since
inception in 2002.
OTHER, PASSIVE OR VENTURE CAPITAL INVESTMENTS.
In addition to its principal business activities focused on the
provision of services to small and medium sized business, Newtek also has made
investments, usually smaller or in the form of debt, in a number of other
companies. For those companies in which Newtek's equity ownership and voting
power is less than 25% Newtek is generally not actively involved in the
management or day-to-day operations, but offers the businesses advisory services
or assistance with particular projects, as well as the collaborative services of
its partner companies. In pursuing business objectives, Newtek intends to hold a
decreasing portion of its total assets in companies in which it has voting power
of less than 25%, but these companies are an important part of the network that
Newtek is developing, as they provide access to markets and customer lists that
are valuable for all of the other partner companies in one manner or another.
As Newtek pursues its business strategy and focuses on the acquisition
of majority or controlling positions in additional partner companies, it expects
other company 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). See "Government Regulation; Investment Company Act of 1940."
22
A listing of all of the debt or equity investments in these and all
other companies is set forth in the Notes to the Consolidated Financial
Statements. The principal investments in this category are described below. Note
that each of these companies had received significant debt investments from
Newtek's capcos (other than MDS) and all have been repaid in full.
DISTRIBUTION VIDEO AND AUDIO, LLC is a seller of closeout VHS
videotapes, DVDs, video games and CD/cassette music units in the wholesale and
library markets. This company has built a large inventory of these media
products by purchasing on a liquidated basis from major studios and retailers,
and distributes these products to other distributors, public libraries, school
districts, US Embassies in 120 countries and other traditional means of
distribution.
1-800 GIFT CERTIFICATE, INC. ("1-800") sells corporate incentive
programs through proprietary Internet-based programs that are designed to
influence consumer and employee behavior by enabling them to select the award of
their choice. In conjunction with providing such programs, 1-800 builds a data
base of incentive program participants. By retaining the rights to this data
base, the company creates powerful revenue opportunities by developing these
data bases for third parties. 1-800 combines Internet-based solutions with gift
certificates from over 150 national retailers to create dynamic reward/incentive
programs. The company's web-based infrastructure provides participants real-time
access through multiple channels, both online and off. It also provides
administrators with a platform that is flexible, scalable and cost-effective.
DIRECT CREATIONS, LLC is a direct response marketing company that
develops and markets products for sale to consumers through short and long-term
television advertisement programs, electronic and traditional retail
distribution channels and the Internet. The Company launched its first
commercial product, the "Zen Oracle" golf putter in 2001,. The management of the
company has many years of experience in the direct response industry, with
expertise in the areas of manufacturing, marketing, "info-mercial" production,
advertising and intellectual property development.
MERCHANT DATA SYSTEMS, LLC ("MDS") (www.merchantdatasystems.com) offers
almost all types of businesses an array of services including credit and debit
card processing, electronic benefits transfer, electronic check services,
equipment sales, leasing and rental programs, 24-7 customer service, supplies
and technical support as well as other related payment processing products and
services. Through network resources, MDS can offer all the necessary credit card
services to meet the needs of almost any commercial establishment in the United
States and Canada. MDS relationships include some of the largest FDIC insured
banks in the United States.
BUYSEASONS, LLC, a Wisconsin based company, is a retailer of seasonal
merchandise and category-specific, informational content on the Internet. The
company creates category-specific and uniquely branded web sites that utilize
the same personnel and site infrastructure but serve different peak selling
periods, thereby leveraging fixed costs and expenses. By producing a "family" of
Internet sites that target specific markets, BuySeasons is able to provide a
multitude of products to an increasingly diverse customer base.
23
INVESTMENT SELECTION PHILOSOPHY.
There are currently four prevailing themes in the selection of partner
companies which play a guiding if not absolute role in the investments of
Newtek, its capcos and subsidiaries.
o First, service provider companies that are able to provide
business and management services to small and medium sized
businesses in a cost effective way. The service providers'
ability to construct innovative business models, target new
market opportunities, define growth plans and develop new
service offerings plays an important role in the overall
success of Newtek's partner companies as well as other small
businesses.
o Second, are small businesses that have developed a product or
service, sold this product or service to an existing, defined
customer base and have successfully captured a meaningful
segment of a market. These companies benefit from the other,
service provider partner companies' core competencies which
are used to support and supplement the existing management
skills. This structure lets the management teams exploit their
personal strengths as managers and supplement their needs
through an integrated network of service provider companies.
o Third, are strong management team members and core
competencies to add to the partner company network. Generally,
these partner company investments involve the replication of
an existing partner company's products and services in another
geographic region in which Newtek operates.
o Fourth, the ability of the business to add large numbers of
other small businesses to the marketing universe of affiliated
companies as to facilitate the cross marketing of many other
products and services. This ties in directly with Newtek's
overall objective of aggregating numerous small business
markets for purposes of cross marketing.
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 unanimously 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.
EXECUTION
REGIONAL BUSINESS DEVELOPMENT CENTERS. A key to the implementation of
Newtek's strategy is its emphasis on its eight Regional Business Development
Centers. These offices are staffed or associated with individuals with
experience in working with small businesses who are able to identify and
evaluate potential partner companies and particularly the local entrepreneurs
that Newtek will work with. They are also able to provide important services for
Newtek in its monitoring efforts and assist in the promotion and development of
the Newtek brands of small business products and services. In many cases, these
individuals have made substantial investments in the equity of the capcos
associated with their regional centers and retain
24
responsibility for local coordination of communications and compliance with
local capco programs.
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 involvement of Newtek's senior management and its Advisory
Committee, (described below), all of whom have significant experience in meeting
the critical needs of small businesses.
REGIONAL MANAGERS. Newtek's regional management consists of the
following 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 firm 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 over 20 years of broad based
international financial and managerial experience in public and private
corporations. Mr. Zink also has over 10 years experience in the venture capital
business including investing, structuring, consulting, and managing investments
in both early stage and mature private and public businesses. Mr. Zink has
previously served as the investment advisor and consultant to a private
investment trust with assets in excess of $30 Million as well as a Director,
President, CEO and CFO of Heuristic Development Group, Inc.("HDG"). Mr. Zink was
a founder and President at the time of HDG's initial public offering on NASDAQ.
He has also been the Chairman and CFO of Nekton Diving Cruises, Inc. and
currently serves as a Director, CEO and CFO of Nautilus Group Japan, Ltd.
("NGY). NGJ is the exclusive distributor and franchiser of Nautilus in Japan.
During Mr. Zink's tenure, he has negotiated several contracts and a leveraged
buyout with some of Japan's largest corporations, including Mitsubishi and
Sumitomo. Mr. Zink earned his MBA from the Wharton Business School at the
University of Pennsylvania in 1983 and his BS in Finance from Pennsylvania State
University in 1979. In 1981, he graduated from General Electric Corporation's
Financial Management Program after holding a variety of financial positions at
GE's Lighting Business Group in Cleveland, Ohio. Following graduate business
school, Mr.
25
Zink was employed as a Senior Consultant with Touche Ross (now merged as
Deloitte Consulting). During his three years, he worked on a variety of
financial, strategic and operational consulting assignments.
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. Mr.
Schottenstein also serves on the Board of Directors of Newtek.
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 register representative, he has
advised individuals and institutions in the formation and implementation of
portfolio strategies.
DIRK E. SONNEBORN, NEW YORK - Mr. Sonneborn organized and continues,
following Newtek's acquisition, managing and operating the Exponential capco.
Mr. Sonneborn has 25 years experience as a certified public accountant and,
while at a predecessor firm of PricewaterhouseCoopers, LLP, he was a manager in
the Emerging Business Service Group focused on new and emerging businesses. He
has managed the capco program and its investments for Exponential and has
participated as an investor in numerous technology oriented business ventures in
the upstate New York area. He was also a founding member in 1986 of the
Technology Business Advisory Group, a trade organization based in Syracuse. As a
resource within Newtek's network of companies, Mr. Sonneborn will be available
to assist other partner companies their business plans.
DOUG BAIRD, COLORADO - Mr. Baird is Vice President - Marketing for The
Stone Pine Companies, Denver, CO. Since 1997 Mr. Baird has identified
Colorado-based venture capital investments for Stone Pine and maintains strong
relationships within the state's venture community. He has built and maintains
Stone Pine's data base of active private equity funds, sponsors and private
equity advisors. Mr. Baird has developed long-standing relationships with senior
members of Hamilton Lane Advisors, Inc., the private equity advisor to several
large public employee pension systems. For 17 years prior to joining Stone Pine
Mr. Baird had developed and/or marketed financial and investment products to
institutional and retail clients including leasing portfolios, commercial real
estate, public securities and private equity venture transactions. With
associates and partners, he has been responsible for raising capital in excess
of
26
$100 Million. In 1991 Mr. Baird founded and served as Managing Director of
Golden State Financial Services, LLC, a Denver-based private investment banking
firm. Mr. Baird negotiated several private financing facilities including one
between a large Denver homebuilder & site developer and GE Capital. Mr. Baird
was Vice President and Regional Marketing Director for Franchise Finance
Corporation of America (FFCA) from 1988 through 1991. While at FFCA Mr. Baird
assisted in raising over $200 Million in private equity investments for issuers
in a variety of industry sectors. Mr. Baird received N.A.S.D. Series 7 and 63
licenses in 1980 and in 1983 began employment with PaineWebber, Inc.
The individuals managing the Regional Business Development Centers (the
"regional managers") have all participated in the capitalization and
organization of the capco located in their area. They serve a number of
functions within Newtek's business model. The regional management are the local
principals that satisfy any applicable capco requirements for the participation
of local parties with investment experience. In addition, each individual,
excluding Mr. Schottenstein, has consulting agreements with one of Newtek's
non-capco subsidiaries whereby they provide time and resources (office space,
telephones, supplies, clerical assistance) to the management of their respective
capco. Fees paid to the regional managers are a portion of the annual management
fee earned by Newtek for the management of the capco funds, and range in amount
from $77,000 to $115,000 per year. Two of the individuals devote a much greater
proportion of their time to the affairs of the respective capco and are employed
by Newtek's subsidiary at salaries of approximately $120,000 per year. These
costs are not paid or reimbursed by the capcos or the partner companies.
These consulting agreements require that the regional managers provide
a meaningful amount of their time, but none are on a full time basis and all
conduct other activities, and other investments, as well. Included within the
services provided are the services provided by Newtek to the investee companies
which receive funds from a capco. As the regional managers have been chosen
because they have many years of relevant experience, the investee and partner
companies are able to benefit from the availability of their experiences,
knowledge, contacts, resources and skills. Partner companies and other investees
who receive these services do not generally pay anything for them as they are
provided by Newtek to ensure the success of its acquisitions and investments.
However, when a partner company within Newtek's network purchases services from
another partner company, it pays the fair value for those services but because
of inter-company elimination, the effect on Newtek is nil.
Similarly, the capcos themselves require attention for the
identification of debt or equity investments in order to meet their respective
minimum investment goals under the programs. The regional managers are an
important part of Newtek's efforts to identify and screen appropriate
investments because of their deep knowledge of and participation in their
communities. The cost of these services are included in the consulting
agreements with the individuals. Finally, because of their stature in their
communities, the regional managers are able to assist Newtek in its newer
initiatives in non-capco areas.
27
Newtek's Regional Business Development Centers are located as follows:
o Wisconsin o New York
--------- --------
1330 West Towne Square Road 462 Seventh Avenue, 14th Floor
Mequon, Wisconsin 53902 New York, New York 10018
o Florida o New York
------- --------
1000 Brickell Avenue 100 Quentin Roosevelt Blvd.
Miami, Florida 33131 Garden City, New York 11550
o Florida o New York
------- --------
Boynton Beach, Florida 216 Walton Street
Syracuse, New York 13202
o Louisiana o Alabama
--------- -------
1 Canal Place 250 Commerce Street
New Orleans, Louisiana 70130 Montgomery, AL 36104
o Colorado
--------
1530 16th Street
Denver, Colorado 80202
ADVISORY COMMITTEE. The Advisory Committee has been used as a direct
extension of Newtek' management. 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 and
technology. The individuals include:
o Michael Balboni - New York State Senator
o Barry Simon - Vice President, Content Development - American
Express
o Thomas P. Falus - President, Strategic Ventures Group, and
Director, Cushman & Wakefield, Inc.
Members of the Newtek Advisory Committee have provided or are currently
providing assistance in areas such as the introduction and negotiation of
potential joint ventures, marketing analysis and strategic advice to Newtek and
the partner companies and management recruitment assistance. Specifically,
advisory members have provided assistance to partner companies in the area of
negotiating a consumer credit facility with a major national financial service
provider and have assisted in the solicitation of credit card processing
businesses. The members of Newtek's
28
Advisory Committee have made themselves available to consult with management or
partner companies on an as needed basis. The compensation provided to the
members of the Advisory Committee has been in the form of, generally 10,000,
stock options. Depending on the scope and extent of services provided by a
member of the Advisory Committee, Newtek may agree to enter into additional
compensation arrangements if so warranted. Newtek is not currently under
contract to any of the Advisory Committee members and is under no obligation to
make any future payments to any of them.
GOVERNMENT REGULATION; INVESTMENT COMPANY ACT OF 1940
OVERVIEW. Because of the nature of the business of Newtek, management
of Newtek has addressed the question of the application of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), to the business
of Newtek. As discussed below, the application of the Investment Company Act to
Newtek would impose requirements and limitations that are materially
inconsistent with Newtek's current and intended business strategy. However, with
the increase during 2001 and 2002 of investment focus on operating companies,
management believes that concern for unintended holding company status has been
decreased materially.
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 a
Securities and Exchange Commission ("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.
Newtek's business strategy and business activities 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.
29
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, it 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 that 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, it 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 it from executing its business model.
GOVERNMENT REGULATION; STATE CAPCO REGULATIONS
Each of the states which operate capco tax credit programs have
established administrative mechanisms to monitor compliance with the
requirements of the programs, that is to verify that the capcos have met
applicable minimum 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, and the terms of the investments
in the recipients. Capcos are required to maintain detailed records so as to
demonstrate to state examiners compliance with all applicable requirements.
Contrary to other programs, the regulatory requirements applicable to capcos
are, generally, limited to the minimum investment requirements. The capcos
operated by Newtek are currently in full compliance with all applicable
requirements and management anticipates no difficulty in maintaining that status
in the future.
30
GOVERNMENT REGULATION: SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President of the United States signed the
Sarbanes-Oxley Act of 2002 into law. The Sarbanes-Oxley Act provides for
sweeping changes with respect to corporate governance, accounting policies and
disclosure requirements for public companies, and also for their directors and
officers. Section 302 of the Sarbanes-Oxley Act ("Corporate Responsibility for
Financial Reports") required the SEC to adopt new rules to implement the
requirements of the Sarbanes-Oxley Act. These requirements include new financial
reporting requirements and rules concerning corporate governance. New SEC rules,
effective August 29, 2002, require a reporting company's chief executive and
chief financial officers to certify certain financial and other information
included in Newtek's quarterly and annual reports. The rules also require these
officers to certify that they are responsible for establishing, maintaining and
regularly evaluating the effectiveness of Newtek's disclosure controls and
procedures; that they have made certain disclosures to the auditors and to the
audit committee of the board of directors about Newtek's controls and
procedures; and that they have included information in their quarterly and
annual filings about their evaluation and whether there have been significant
changes to the controls and procedures or other factors which would
significantly impact these controls subsequent to their evaluation.
See "Certifications" for certifications by Newtek's Chief Executive
Officer and Chief Financial Officer of the financial statements and other
information included in this Annual Report on Form 10-KSB. See Item 14
("Controls and Procedures") below for Newtek's evaluation of disclosure controls
and procedures. The certifications required by Section 906 of the Sarbanes-Oxley
Act also accompany this Form 10-KSB.
SHAREHOLDER VALUE
Throughout its existence since 1998, Newtek's principal business
objective has been to promote longer-term shareholder value for its shareholders
and those of its partner companies. However, because of the way in which the
business has been focused beginning in 2001 and primarily in 2002, the manner in
which this value may be achieved has changed.
From 1998 through 2001, management expected that material shareholder
value ultimately would be realized through the growth of each individual partner
company leading to independent creation of value, possibly in the form of a
public offering of the stock of the partner companies. In the event of such a
public offering by a partner company, Newtek would generally expect to retain a
majority or controlling interest in such a partner company and to benefit as a
shareholder from the increased public company value. Other possible liquidity
events could be the merger or sale of an entire company.
Primary emphasis in now being placed by management on assisting the
Newtek partner companies to develop as successful and profitable businesses,
with earnings, surplus cash flow and the aggregation of other small business
customers enabling the cross-marketing of additional goods and services. The
"NEWTEK" branding strategy will help in consolidating the group of related small
business services. Ultimately, the greatest value to the shareholders of Newtek
will result from the profitability of the partner companies. The capco programs
enable Newtek to develop these companies through the early phases and, as they
mature and become profitable, the
31
value of Newtek's investments in them will likely increase in value. The degree
to which this strategy has been successful may be judged by the descriptions of
the results of operations for the partner companies. See, for example,
"--Principal Business Activities: Partner Companies" and Notes 3 and 24 to the
Financial Statements. As Newtek is successful in implementing this strategy,
this should, in the judgment of management, result in an increase in the value
of Newtek's stock and may lead to the possible combination of the company with a
larger company interested in gaining access to the markets and services
represented by the partner companies.
Because of this emphasis on the generation of profits, the likelihood
of a sale or public offering of one of the partner companies is smaller due to
the expectation of greater benefit to be gained by keeping all as part of the
whole. However, notwithstanding these objectives, Newtek may from time to time
undertake sales of its interests in partner companies when it believes the
action to be in Newtek's and the shareholders' overall best interests. Such
possible sales could be influenced in part by the need to monitor and control
the receipt of the type of income that would cause Newtek to be subject to
regulation as an investment company. See Government Regulation: Investment
Company Act of 1940 - Asset and Income Composition.
RISKS ASSOCIATED WITH NEWTEK'S BUSINESS
The following factors are important to understand management's current
assessment of the principal risks associated with Newtek's business.
1. There is a risk that Newtek and its partner companies may not be
profitable on a consolidated basis, or may never become profitable. Newtek's
partner companies are now and are expected to remain in early stages of
development and will have limited revenues. 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 hinder profitability. Newtek's short-term success
will depend heavily on the continued operations of its capcos which in 2002
produced 88% of revenues and were the principal reason Newtek generated net
income in 2002 and 2001.
2. The value of Newtek's common stock would be materially impacted by
the performance of the companies in which it invests, aspects of which may be
outside the control of Newtek. Each of the companies and their businesses may be
effected by economic, governmental, industrial and internal factors outside the
control of Newtek. If the companies do not succeed and generate income, the
value of Newtek's assets and the price of Newtek's stock would decline.
3. Because Newtek's capcos are subject to minimum investment and other
requirements under state law, a failure of any of them to meet these
requirements could subject the capco and Newtek's shareholders to the loss of
one or more capcos and would preclude participation in future capco programs. In
general, Newtek's capcos issue debt instruments 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
32
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.
Because each of Newtek's capcos utilizes a substantial portion of its
initial funding to pay for credit enhancement and capco insurance, its cash
available for investment to meet these minimum investment requirements is
reduced. Losses by the capcos on their investments would make it significantly
more difficult for the capcos to meet minimum state statutory investment
benchmarks. In all capco programs, the risk of decertification is not eliminated
until the capco meets a minimum 50% investment threshold.
4. 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 the obligation to make interest
payments under the capco insurance. 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.
5. We must rely on the capco programs for funding our investments: our
ability to invest in or acquire partner companies has in the past and is
expected to be in the future limited to investments permissible to the various
capcos. This limitation may require us to forego attractive or desirable
investments, which could adversely affect or prevent implementation of our
business strategy. In the programs under which the capcos operate, investments
by a capco 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.
6. A substantial portion of Newtek's 2002 and 2001 revenue 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 new revenue from this source. The
adoption of new state capco programs in the future could be materially and
adversely affected by the continuation of adverse economic conditions or changes
in the political acceptability of economic development or capco programs. If
adverse conditions continue, the willingness of state governments to provide
capco tax credits could be materially diminished. In the absence of income from
this source, Newtek would have only the income it derives from its current and
future investments.
7. Because Newtek's method of recognition of income derived from the
capco tax credits causes most or all such income to be recognized 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. Despite the cessation of
tax credit income, Newtek will continue to incur costs for the administration of
the capcos.
EMPLOYEES
As of December 31, 2002, Newtek and the companies in which it holds a
controlling interest had approximately 160 employees, independent
representatives and contract employees, of which 11 assist on an as-needed basis
with the operation of capcos in Florida, Wisconsin and
33
Louisiana. Newtek believes its labor relations are good and none of its
employees are covered by a collective bargaining agreement.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION INTRODUCTION
AND CERTAIN CAUTIONARY STATEMENTS
The following discussion and analysis of our financial condition and
results of operations focuses on and is intended to clarify the results of our
operations, certain changes in our financial position, liquidity, capital
structure and business development for the periods covered by the consolidated
financial statements included in this Annual Report. This discussion should be
read in conjunction with, and is qualified by reference to, the other related
information including, but not limited to, the audited consolidated financial
statements (including the notes thereto and the independent auditor's report
thereon), the description of our business, all as set forth in this filing, as
well as the risk factors discussed below.
The discussion set forth below, as well as other portions of this
filing, contains statements concerning potential future events. Readers can
identify these forward-looking statements by their use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such verbs. If any of
our assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, our actual results could materially differ
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors including, but not
limited to, those discussed below. Readers are strongly encouraged to consider
those factors when evaluating any such forward-looking statement. We will not
update any forward-looking statements in this filing.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. 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. The capco
is entitled to earn tax credits upon satisfying defined investment percentage
thresholds within specified time requirements. Newtek has capcos in five states.
Each statute requires that the capco invest a threshold percentage of "certified
capital" (the funds provided by the insurance company investors) in businesses
defined as qualified within the time frames 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 permanent recapture of all or a
portion of the allocated tax credits. The proportion of the possible 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.
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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) at that point. 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 deliverable to the Certified
Investors. The obligation to deliver tax credits to the Certified Investors is
recorded as interest payable. On the date the tax credits are utilizable by the
Certified Investors, the capco decreases credits in lieu of cash with a
corresponding decrease to interest payable.
Interest income on SBA loans is recognized as earned. When a SBA loan
is 90 days past due with respect to principal or interest and, in the opinion of
management, interest or principal on individual loans is not collectible, or at
such earlier time as management determines that the collectibility of such
principal or interest is unlikely, the accrual of interest is discontinued and
all accrued but uncollected interest income is reversed. Cash payments
subsequently received on nonaccrual loans are recognized as income only where
the future collection of the recorded value of the SBA loan is considered by
management to be probable. Certain related direct costs to originate loans
(including fees paid to SBA loan brokers) are deferred and amortized over the
contractual life of the SBA loan using a method that approximates the effective
interest method.
EXTINGUISHMENT OF DEBT. At the initiation of the transaction, the capco
issues notes to the insurance company investors and takes some of the cash
proceeds and purchases an insurance contract from American International
Specialty Lines Insurance Company and, in one case, National Union Fire
Insurance Company of Pittsburgh, Inc., both insurance company subsidiaries of
The American International Group, Inc. (AIG)
This transaction makes the insurer the primary obligor for the
substantial portion, if not all, of the principal (and all cash) payments on the
notes. The capco remains secondarily liable for such principal payment and must
periodically assess the likelihood that it will become primarily liable and, if
necessary, record a liability at that time. The parent company, AIG, has not
guaranteed the obligations of its subsidiary insurers.
INVESTMENT VALUATION. The various interests that the capcos and Newtek
acquire as a result of their investments are accounted for under three methods:
consolidation, equity method and cost method. The applicable accounting method
is generally determined based on Newtek's voting interest in a company, and
monthly valuations are performed so as to keep Newtek's records current in
reflecting the operations of all of its investments.
Companies in which Newtek directly or indirectly owns more than 50% of
the outstanding voting securities or those Newtek has effective control over are
generally accounted for under the consolidation method of accounting and are
referred to as Newtek's partner companies. Under this method, an investment's
results of operations are reflected within Newtek's Consolidated Statement of
Operations. All significant intercompany accounts and transactions are
eliminated. The results of operations and cash flows of a consolidated partner
company are included through the latest interim period in which Newtek owned a
greater than 50% direct or indirect voting interest for the entire interim
period or otherwise exercised control over the partner company. Upon dilution of
control at or below 50%, the accounting method is adjusted to the equity or cost
method of accounting, as appropriate, for subsequent periods.
35
Companies that are not consolidated, but over which Newtek exercises
significant influence, are accounted for under the equity method of accounting.
Whether or not Newtek exercises significant influence with respect to a company
depends on an evaluation of several factors including, among others,
representation on the board of directors and ownership level, which is generally
a 20% to 50% interest in the voting securities, including voting rights
associated with Newtek's holdings in common, preferred and other convertible
instruments. Under the equity method of accounting, a company's accounts are not
reflected within Newtek's Consolidated Statements of Operations; however,
Newtek's earnings or losses is reflected under the caption "Equity income
(loss)" in the Consolidated Statements of Operations.
Companies not accounted for under the consolidation or the equity
method of accounting are accounted for under the cost method of accounting, for
which monthly valuations are performed. Under this method, Newtek's share of the
earnings or losses of such companies is not included in the Consolidated
Statements of Operations, but the investment is carried at historical cost. In
addition, cost method impairment charges are recognized as necessary, in the
Consolidated Statement of Income if circumstances suggest that this is an "other
than temporary decline in" the value of the investment, particularly due to
losses. Subsequent increases in value, if any, of the underlying companies are
not reflected in Newtek's financial statements until realized in cash. Newtek
records as income amounts previously written off only when and if Newtek
receives cash in excess of its remaining investment balance.
On a monthly basis, the investment committee of each capco meets to
evaluate each of Newtek's investments. Newtek considers several factors in
determining whether an impairment exists on the investment, such as the
companies' net book value, cash flow, revenue growth and net income. In
addition, the investment committee looks at larger variables, such as the
economy and the particular company's industry, to determine if an other than
temporary decline in value exists in each capco's and Newtek's investment.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations and is effective for all business combinations after
June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and is effective for fiscal years
beginning after December 15, 2001. This statement requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized but
instead tested for impairment at least annually. Newtek has determined that no
impairment existed as of December 31, 2002. The adoption of these standards did
not have a material impact on Newtek's financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " and the
accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring
36
Events and Transactions", for the disposal of a segment of a business (as
previously defined). The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, with early
application encouraged and generally are to be applied prospectively. The
adoption of SFAS No. 144 did not have a material impact on Newtek's financial
position or results of operations.
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (FAS 145). This statement eliminates the requirement that gains and
losses from the extinguishment of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
However, an entity would not be prohibited from classifying such gains and
losses as extraordinary items so long as they are both unusual in nature and
infrequent in occurrence. This provision of FAS 145 will be effective for Newtek
as of the beginning of fiscal year 2004. This statement also amends FAS 13,
"Accounting for Leases" and certain other authoritative pronouncements to make
technical corrections or clarifications. FAS 145 will be effective related to
the amendment of FAS 13 for all transactions occurring after May 15, 2002. All
other provisions of FAS 145 will be effective for financial statements issued
after May 15, 2002. Newtek has determined that this Statement will have no
significant impact on Newtek's financial condition and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. The provisions of SFAS No. 146 will be adopted for exit or disposal
activities that are initiated after December 31, 2002. Newtek is currently
evaluating the impact of implementing FAS 146.
In October 2002, the FASB issued Statement No. 147 ("SFAS 147),
"Acquisitions of Certain Financial Institutions." SFAS 147 addresses financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual enterprises.
SFAS 147 also provides guidance on the accounting for the impairment or disposal
of acquired long-term customer-relationship intangible assets of financial
institutions, including those acquired in transactions between two or more
mutual enterprises. The provisions of the statement will be effective for
acquisitions on or after October 1, 2002. The adoption of SFAS No. 147 is not
expected to have a material impact on Newtek's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
37
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
adoption of SFAS No. 148 did not have a material impact on Newtek's financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5,
57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002; while, the
provisions of the disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15, 2002. In the normal
course of business, Newtek enters into contracts that contain a variety of
representations and warranties and provide general indemnifications. Newtek's
maximum exposure under these arrangements is unknown, as this would involve
future claims that may be made against Newtek that have not yet occurred. Based
on Newtek's experience, Newtek expects the risk of loss to be remote.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities", an interpretation of Accounting Research Bulletin No. 51.
FIN No. 46 requires that variable interest entities be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. FIN No. 46 also requires disclosures about
variable interest entities that companies are not required to consolidate but in
which a company has a significant variable interest. The consolidation
requirements of FIN No. 46 will apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements will apply to
entities established prior to January 31, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. The disclosure requirements will
apply in all financial statements issued after January 31, 2003. Newtek is
currently evaluating the impact of implementing FIN No. 46.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
Revenues increased by approximately $10,824,000 to $34,624,000 for the
year ended December 31, 2002, from $23,800,000 for the year ended December 31,
2001. Income from tax credits increased by approximately $9,105,000, from
$21,498,000 for the year ended December 31, 2001, to $30,603,000 for the year
ended December 31, 2002, due to Newtek's capcos achieving various additional
investment thresholds mandated by the various state capco statutes in 2002
versus 2001. Interest and dividend income decreased by approximately $945,000 to
$900,000 for the year ended December 31, 2002, from $1,845,000 for the year
ended December 31, 2001. Interest and dividends are generated from excess cash
balances that are invested in low risk, highly liquid securities (money market
accounts, federal government backed mutual funds, etc.), non-cash accretions of
structured insurance product, and on held to maturity investments. The income
generated from the low risk, highly liquid securities decreased by approximately
$680,000, from approximately $1,180,000 in 2001 to approximately $500,000 in
38
2002 and was due to lower bank interest rates and a decline in excess cash
balances outstanding. The remaining decrease of $265,000 in interest earned on
held to maturity investments was due to a decline in the average balance of
loans outstanding to qualified businesses during 2002 as compared to the prior
year. Consulting fee income increased by approximately $379,000 to $388,000 for
the year ended December 31, 2002, from $9,000 for the year ended December 31,
2001, due to one of Newtek's partner companies experiencing a significant
increase in consulting income. Other income increased by approximately
$2,285,000 to $2,733,000 for the year ended December 31, 2002 from $448,000 for
the year ended December 31, 2001. This increase was due to the consolidation of
revenues with additional partner companies (mostly credit card processing
entities, which increased by approximately $1,376,000 from approximately
$249,000 in 2001 to approximately $1,625,000 in 2002) now consolidated into
Newtek.
Interest expense decreased by approximately $92,000 to $11,485,000 for
the year ended December 31, 2002 from $11,577,000 for the year ended December
31, 2001. The decrease was due primarily to the reduction of interest payable
due to delivery of tax credits to certified investors. Payroll and consulting
fees increased by approximately $1,901,000 to $4,566,000 for the year ended
December 31, 2002 from $2,665,000 for the year ended December 31, 2001. The
increase was due to the consolidation of operating expenses with additional
partner companies now consolidated into Newtek. Professional fees increased by
approximately $1,084,000 to $3,145,000 for the year ended December 31, 2002 from
$2,061,000 for the year ended December 31, 2001. This increase is due to the new
capco and capco fund that were formed in the year. Insurance expense increased
by approximately $421,000 to $1,951,000 for the year ended December 31, 2002
from $1,530,000 for the year ended December 31, 2001. This increase is due to
the new prepaid insurance amortization on the newly formed capco and capco fund
that were formed in the year.
Other expenses increased by approximately $2,497,000 to $3,672,000 for
the year ended December 31, 2002 from $1,175,000 for the year ended December 31,
2001. The increase was due primarily to the consolidation of operating expenses
from additional partner companies now consolidated into Newtek.
Newtek considers several factors in determining whether an impairment
exists on the investment, such as the investee's net book value, cash flow,
revenue and net income. Newtek recognizes that in developing new and small
businesses, significant impairments in the value of the investments may occur.
Newtek had $1,574,000 of other than temporary impairments in 2002,
versus approximately $372,000 in 2001. Approximately $464,000 of the 2002
impairment was attributable to the investment by a Newtek capco in Direct
Creations, LLC, a direct response marketer. Approximately $728,000 of the 2002
impairment was attributable to Newtek's investment in Starphire Technologies,
LLC, a software development company. The products of these two companies were
not accepted by the market as we originally anticipated, and as such, Newtek
recorded the appropriate impairment. Approximately $245,000 of the 2002
impairment was attributable to capco loans (debt investments) to companies in
Louisiana. The results of some of these companies were also worse than
anticipated, and as such, we recorded impairment based upon an assessment of
their collectibility.
39
Newtek had a recovery of approximately $29,000 in its capco's debt
investment in Merchant Data Systems, Inc. That investment had been restructured,
and as such we have recorded a recovery for what is expected to be received.
In 2001, Newtek made $12,560,000 of held to maturity investments, while
during the same period in 2002, Newtek made only $2,335,000 held to maturity
investments. In 2001, Newtek made $11,128,000 of consolidated investments, while
during the same period in 2002, Newtek made $13,861,000 consolidated
investments. This decrease in held to maturity investments is a reflection of
the shift of Newtek's strategy to acquire predominately majority interests and
is also due to $217,000 other than temporary decline in value of its investments
in 2002 versus $372,000 in 2001.
Net income increased by approximately $7,238,000, to net income of
$8,168,000 for the year ended December 31, 2002, compared to net income of
$930,000 for the year ended December 31, 2001, due to the increases in revenue
and general and administrative expenses discussed above, offset by the increase
in other than temporary decline in investments of approximately $1,202,000,
decreased equity in losses of approximately $1,551,000 due to the consolidation
of certain investments previously accounted for under the equity method, an
increase in income taxes of approximately $2,122,000, and the extraordinary
gains of $3,643,000 (of which $2,735,000 is attributable to Newtek's acquisition
of Commercial Capital, and $908,000 to Newtek's acquisition of minority
interests).
PARTNER COMPANIES: At December 31, 2002, Newtek had fourteen
majority-owned partner companies, most of which were as a result of investments
through the capco programs. For the year ended December 31, 2002, these
companies represented approximately $3,508,000 in losses that are consolidated
in Newtek's results (net of inter-company eliminations of $1,012,000 in revenues
and $1,008,000 in expenses). For the year ended December 31, 2002, revenues from
consolidating partner companies, net of inter-company eliminations, amounted to
$2,908,000 and were generated from the following sources: credit card processing
($1,626,000), consulting ($789,000), outsourced bookkeeping ($218,000), and
other ($275,000). For the year ended December 31, 2002, expenses incurred by
consolidating partner companies, net of inter-company eliminations, amounted to
$6,416,000 and were incurred by the following sources: credit card processing
($2,885,000), consulting ($2,441,000), outsourced bookkeeping ($578,000), and
other ($512,000). For the year ended December 31, 2001, these companies
represented approximately $614,000 in losses that are consolidated in Newtek's
results (net of inter-company eliminations of $96,000 in revenues and $385,000
in expenses). For the year ended December 31, 2001, revenues from consolidating
partner companies, net of inter-company eliminations, amounted to $394,000 and
were generated from the following sources: credit card processing ($249,000) and
consulting ($146,000). For the year ended December 31, 2001, expenses incurred
by consolidating partner companies, net of inter-company eliminations, amounted
to $1,008,000 and were incurred by the following sources: credit card processing
($325,000) and consulting ($683,000).
At December 31, 2002, Newtek had four companies accounted for under the
equity method, all of which were as a result of investments through the capco
programs. For the year ended December 31, 2002, these companies represented
approximately $729,000 in losses that are shown on the consolidated statement of
income as equity in net losses of affiliates. For the
40
year ended December 31, 2001, these companies represented approximately
$2,280,000 in losses that are shown on the consolidated statement of income as
equity in net losses of affiliates.
LIQUIDITY AND CAPITAL RESOURCES
Newtek has funded its operations primarily through the issuance of
notes to insurance companies through the capco programs. Through December 31,
2002, Newtek has received approximately $166,700,000 in proceeds from the
issuance of long-term debt, Capco warrants, and Newtek common stock through the
capco programs. Newtek's principal capital requirements have been to fund the
extinguishment of the notes issued to the insurance companies (approximately
$94,081,000), the acquisition of capco insurance policies ($18,519,000), the
acquisition of partner companies interests, finding other capco-qualified
investments, and working capital needs resulting from operating and business
development activities of its partner companies.
Net cash used in operating activities for the twelve months ended
December 31, 2002 of approximately $9,908,000 resulted primarily from net income
of $8,168,000 adjusted for the non-cash interest expense of approximately
$10,733,000 and non-cash income tax expense of approximately $2,657,000. It was
also affected by the approximately $729,000 in equity in net losses of
affiliates and approximately $335,000 of minority interest. This was offset by
the approximately $30,603,000 in non-cash income from tax credits and $3,643,000
in extraordinary gains. In addition, Newtek had an increase in components of
working capital of approximately $118,000.
Net cash provided by investing activities for the year ended December
31, 2002 of approximately $9,266,000 resulted primarily from approximately
$16,196,000 in additional qualified investments made in the period offset by
repayments on debt instruments of $8,743,000, cash from consolidation of
entities of $14,173,000 and the $2,475,000 in cash received in connection with
the acquisitions of Exponential and Commercial Capital.
Net cash provided by financing activities for the year ended December
31, 2002 was approximately $10,642,000 primarily attributable to the
approximately $30,000,000 in proceeds from the issuance of long term debt, net
proceeds of approximately $720,000 from the issuance of common stock to
certified investors, and net proceeds of approximately $1,371,000 from the net
proceeds from issuance of stock during the twelve months ended December 31,
2002. This was offset by payments on a premium financing note payable-insurance
of approximately $7,034,000, debt extinguishment of approximately $14,514,000
and the full repayment of a mortgage obligation of approximately $307,000.
In November 2001, Newtek entered into a $1,500,000 one year revolving
working capital loan agreement with JP Morgan Chase, bearing interest at the
prime rate plus 0.25% per annum. The agreement expires in June 2003. At December
31, 2002 and December 31, 2001, Newtek had outstanding borrowings of $450,000
and $575,000, respectively, from the bank at an interest rate of 5.75%. All
assets of Newtek, except for all assets in the capco entities, collateralize
such outstanding borrowings.
LIQUIDITY RISK. Newtek believes that its cash and cash equivalents, its
anticipated cash flow from operations, its ability to access private and public
debt and equity markets, and the
41
availability of funds under its existing JP Morgan line of credit will provide
it with sufficient liquidity to meet its short and long-term capital needs. The
loss of any one or two of these liquidity sources would not present an
impossible obstacle to Newtek's operations. However, the failure of the insurer,
which is primarily liable for the repayment of the capco extinguished debt of
$149,337,000 would require the capcos to assume this repayment obligation upon
the maturity of the notes. Management has determined that the likelihood of the
capcos becoming primarily liable for a material portion of this debt due to the
failure of the insurers, which are subsidiaries of The American International
Group, Inc., and are currently rated as "AAA" for financial strength by Standard
& Poor's is remote. The parent company, AIG, has not agreed to guarantee the
obligations of the subsidiary insurers.
The following chart represents Newtek's obligations and commitments, as
of December 31, 2002, other than capco debt repayment discussed above for future
cash payments under debt, lease and employment agreements:
EMPLOYMENT
YEAR DEBT LEASES AGREEMENTS TOTAL
----- ----------- ----------- ----------- -----------
2003 $ 3,860,588 $ 752,149 $ 855,000 $ 5,467,737
2004 2,197,013 735,503 855,000 3,787,516
2005 1,184,567 374,769 855,000 2,414,336
2006 -- 345,534 -- 345,534
2007 -- 258,867 -- 258,867
2008+ 3,810,161 1,562,121 -- 5,372,282
----------- ----------- ----------- -----------
Total $11,052,329 $ 4,028,943 $ 2,565,000 $17,646,272
----------- ----------- ----------- -----------
This chart excludes the taxes due to capco minority owners (which can
not be anticipated).
Commercial Capital Corp. ("CCC"), at the time of its acquisition by
Newtek had a $10 Million line of credit with a bank. As of December 31, 2002,
the amount outstanding under this line of credit was $3,998,630 and was assumed
by Newtek in connection with its acquisition of CCC (included in Bank Notes
Payable on the accompanying consolidated balance sheet). The line of credit is
collateralized by loans made by CCC. The line of credit bears interest at the
prime interest rate plus 1% with interest payable monthly. The average rate for
the year ended December 31, 2002 was 5.76%. The rate at December 31, 2002 was
5.25%. There was no accrued interest payable under this line of credit as of
December 31, 2002. In addition, this line of credit requires that a percentage
of all advances made to CCC be deposited into an account in the name of the
bank. The balance in this account as of December 31, 2002 was $198,467 and is
included in receivable from bank on the accompanying consolidated balance sheet.
42
CCC also had a line of credit with another bank for $75,000,000. As of
December 31, 2002, the amount outstanding under this line of credit was
$51,325,862 and, less $1,500,000 which was converted into CCC Preferred Stock,
was assumed by Newtek in connection with its acquisition of CCC (included in
Bank Notes Payable on the accompanying consolidated balance sheet). The line of
credit bears interest at the one-month LIBOR rate plus 2.50%, and was
collateralized by the loans made by CCC. The average interest rate for the year
ended December 31, 2002 was 4.3%. The interest rate at December 31, 2002 was
3.88%. Interest on the line is payable monthly in arrears. In addition, this
line of credit required that a percentage of all advances made to CCC be
deposited into an account in the name of the bank. This line of credit required
CCC to meet certain administrative and financial covenants, including the
maintenance of a minimum net worth, ratio of total indebtedness to net worth,
limitation on permitted subordinated debt and profitability covenants as defined
in the agreement. Under the terms of an agreement between CCC and both of the
banks with which CCC maintains lines of credit, all payments received from CCC's
borrowers except for principal and interest on the guaranteed portion of the
loans are transferred into a restricted bank account. CCC cannot use these funds
until the end of a calendar month at which time the funds are used to pay
required principal and interest to the banks and certain other required
payments.
Effective with Newtek's acquisition of Commercial Capital, a new line
of credit was provided by Deutsche Bank to the successor to Commercial Capital,
Newtek Small Business Finance. The aforementioned CCC credit lines were
refinanced, with the aforementioned outstanding SBA loan balances aggregating,
after accounting for the conversion of $1,500,000 to preferred stock,
$53,824,492 at December 31, 2002. The new line of credit for $75 Million expires
March 31, 2004 and is guaranteed by Newtek. Newtek Small Business Finance may
request an increase in the line of credit, which Deutsche Bank, in its sole
discretion, may increase in total up to $100 Million. The new Deutsche Bank line
has terms and conditions similar to those contained in the Commercial Capital
line, described above.
During the year ended December 31, 2002 Newtek generated cash flow
primarily from the following sources.
o Common stock sales, netting $2,091,000;
o Proceeds from issuance of a long-term debt and warrants of
$30,000,000;
o return of investments of approximately $14,045,000, which was
held pending reinvestment;
o interest and dividend income of approximately $900,000;
o other income of approximately $2,733,000, which represents
revenue from Newtek's consolidated partner company entities; and
o cash received from acquired companies of approximately
$2,475,000.
The cash was primarily used to:
o invest approximately $16,196,000 (including approximately
$13,861,000 which was consolidated into Newtek's financial
statements) in small or early stage businesses;
o repayment of a "note payable-insurance" of approximately
$7,034,000; and
o purchase insurance coverage to extinguish the new capco and capco
fund debt obligations for approximately $14,514,000.
43
During the year ended December 31, 2001 Newtek generated cash flow
primarily from the following sources:
o private placement of common stock, netting $726,000;
o proceeds from issuance of note payable-insurance of $5,200,000;
o proceeds from a JP Morgan Chase line of credit of $575,000, with
a December 31, 2001 interest rate of 5%;
o return of investments of $12,072,000;
o investment income of approximately $1,845,000; and
o other income of approximately $448,000.
The cash was primarily used to:
o fund distributions to owners of the predecessors of Newtek in
lieu of compensation and related to passed-through tax
liabilities of $608,000
o invest $24,588,000 (less $10,893,000 which was consolidated into
Newtek's financial statements) in small or early stage
businesses; and
o repay to a finance company note payable insurance of
approximately $1,596,000.
As of December 31, 2002, Newtek had approximately $41,171,000 in cash
of which substantially all was restricted for use for capco activities.
Management of Newtek expects to have three basic working capital
requirements in the near term. These are:
o initial funding of new capcos;
o working capital for operating its current businesses; and
o funds for investment by the capcos in order to meet minimum
investment requirements.
Newtek expects to finance its participation in additional capcos and
other ventures principally with externally generated funds, which may include:
o borrowings under current or future bank facilities; and/or
o the sale of equity, equity-related or debt securities on terms
and conditions similar to those obtained for similar sales during
2002.
Newtek funds its current operations almost exclusively through the
receipt of annual management fees from the capcos equal to 2.5% of initial
funding. However, this does not represent revenues to Newtek on a consolidated
basis as this is a transfer of funds from Newtek's capcos to the management
entity of Newtek, and all intercompany transactions and balances are eliminated
in consolidation. These fees from current capcos are expected to decrease over
the next few years as the capcos mature in their business cycle. In the absence
of either new capcos or a material increase in the profitability of its partner
companies, Newtek will experience a decrease in its liquidity. Management
believes that numerous, realistic options are available to the company to
compensate for this, such as borrowings or additional offerings in the capital
markets. However, if new capcos are not created, and if the partner companies do
not begin to produce significant cash flow surpluses, and if the capital markets
should be inaccessible to Newtek and if other borrowings are unavailable, Newtek
would be forced to diminish materially
44
its operations so as to conform its expenditures to the cash then available.
Management cannot at this time foresee any realistic circumstance where such a
contraction of business would be necessary.
Management does not anticipate the need for additional funding in order
for its capcos to meet the minimum investment requirements imposed under the
capco programs. As detailed elsewhere, the record of Newtek's capcos in
progressing towards the minimum required investment levels is good and
management does not foresee any likely event which would preclude all of the
capcos meeting their respective requirements ahead of schedule.
INCOME FROM CAPCO TAX CREDITS
In general, the capcos issue debt and equity instruments, to insurance
company investors. For a description of the debt and equity instruments and
warrants issued by Newtek's capcos, see Newtek's Notes to the Consolidated
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 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
targeted investments in accordance with these requirements, which requirements
are consistent with Newtek's overall business strategy of acquiring controlling
positions in its partner 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 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,
usually, 10% per year and in some instances are transferable and can be carried
forward. Newtek's revenue from tax credits may be used solely for the purpose of
satisfying the capcos' obligations to the insurance company investors.
A description is set forth above of the manner in which Newtek and its
capcos account for the tax credit income. See, --Critical Accounting Policies -
Revenue Recognition.
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. The total amount of tax credits allocated to each of
the capcos, the required investment percentages, recapture percentages and
related earned income percentages, and pertinent dates are summarized as
follows:
45
THE FIRST TO OCCUR
------------------------------------------------------------------------------------------------------------------------------------
TOTAL TAX INVESTMENT EARNED
CREDITS INVESTMENT BENCHMARK DECERTIFICATION RECAPTURE INCOME
STATE CAPCO OR FUND ALLOCATED BENCHMARK DATE RECAPTURE THRESHOLDS PERCENTAGE PERCENTAGE
---------------------------- ----------------------------- ----------------- --------------------- -------------- --------------
FLORIDA $ 37,384,028 20% 12/31/00 Prior to 20% 100% 0%
WILSHIRE 30% 12/31/01 After 20 before 30% 70% 30%
PARTNERS (WP) 40% 12/31/02 After 30 before 40% 60% 40%
50% 12/31/03 After 40 before 50% 50% 50%
After 50% 0% 100%
NEW YORK $ 35,160,202 Prior to 25% 100% 0%
WILSHIRE 25% 12/21/02 After 25 before 40% 85% 15%
N.Y. PARTNERS III 40% 12/21/03 After 40 before 50% 70% 30%
(WNY III) 50% 12/21/04 After 50% 0% 100%
COLORADO $ 16,175,415 Prior to 30% 100% 0%
STATEWIDE POOL 30% 4/22/05 After 30 before 50% 70% 30%
WILSHIRE COLORADO 50% 10/25/07 After 50% 0% 100%
PARTNERS (WC) Prior to 30% 100% 0%
COLORADO $ 5,882,352 30% 4/22/05 After 30 before 50% 70% 30%
RURAL POOL 50% 10/25/07 After 50% 0% 100%
WILSHIRE COLORADO
PARTNERS (WC)
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%
46
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%
LOUISIANA $ 8,000,000 Prior to 30% 100% 0%
WILSHIRE 30% 10/15/05 After 30 before 50% 70% 30%
LA PARTNERS III 50% 10/13/07 After 50% 0% 100%
(WLPIII)
NEW YORK $ 6,807,866 Prior to 25% 100% 0%
WILSHIRE 25% 4/7/02 After 25 before 40% 85% 15%
N.Y. ADVISERS II 40% 4/7/03 After 40 before 50% 70% 30%
(WLA II) 50% 4/7/04 After 50% 0% 100%
NEW YORK $ 3,810,161 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%
LOUISIANA $ 3,355,000 Prior to 30% 100 0%
WILSHIRE After 30 before 50% 70% 30%
LA ADVISERS II After 50% 0% 100%
(WLA II)
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.
ALLOCATED INVESTMENT EARNED
STATE TAX BENCHMARK INCOME
CAPCO OR FUND CREDITS PERCENTAGE/DOLLARS PERCENTAGE/DOLLARS
------------------------- ------------- ------------------- ------------------
FLORIDA $ 37,384,028 20% $ 7,476,806 30% $ 11,215,208
WILSHIRE 30% $ 11,215,208 40% $ 14,953,611
PARTNERS (WP) 40% $ 14,953,611 50% $ 18,692,014
50% $ 18,692,014 100% $ 37,384,028
NEW YORK. $ 35,160,202 25% $ 8,790,051 15% $ 5,274,030
WILSHIRE N.Y 40% $ 14,064,080 30% $ 10,548,060
PARTNERS III (WNY III) 50% $ 17,580,101 100% $ 35,160,202
COLORADO $ 16,175,415 30% $ 4,852,625 20% $ 3,235,083
WILSHIRE COLORADO 50% $ 8,087,708 100% $ 16,175,415
PARTNERS (WC)
STATEWIDE POOL
47
COLORADO $ 5,882,352 30% $ 1,764,706 20% $ 1,176,470
WILSHIRE COLORADO 50% $ 2,941,176 100% $ 5,882,352
PARTNERS (WC)
RURAL POOL
LOUISIANA $ 18,040,000 30% $ 4,920,000 30% $ 5,412,000
WILSHIRE LA 50% $ 8,200,000 100% $ 18,040,000
ADVISERS (WLA)
WISCONSIN $ 16,666,667 30% $ 5,000,000 30% $ 5,000,000
WILSHIRE 50% $ 8,333,334 100% $ 16,666,667
INVESTORS (WI)
LOUISIANA $ 8,000,000 30% $ 2,400,000 30% $ 2,400,000
WILSHIRE LA 50% $ 4,000,000 100% $ 8,000,000
PARTNERS III (WLPIII)
NEW YORK. $ 6,807,866 25% $ 1,701,967 15% $ 1,021,180
WILSHIRE N.Y 40% $ 2,723,146 30% $ 2,042,360
ADVISERS II (WNY II) 50% $ 3,403,933 100% $ 6,807,866
NEW YORK $ 3,810,161 25% $ 952,540 15% $ 571,524
WILSHIRE 40% $ 1,524,064 30% $ 1,143,048
ADVISERS (WA) 50% $ 1,905,081 100% $ 3,810,161
LOUISIANA $ 3,355,000 30% $ 915,000 30% $ 1,006,500
WILSHIRE LA 50% $ 1,525,000 100% $ 3,355,000
ADVISERS II (WLA II)
During the years ended December 31, 2002 and 2001, the capcos satisfied
certain investment benchmarks and the related recapture percentage requirements
and accordingly, earned a portion of the tax credits. In addition, in both 2002
and 2001 Newtek recognized income from tax credits in prior years resulting from
the accretion of the discount attributable to tax credits earned in prior years.
See Newtek's Notes to Consolidated Financial Statements.
During 2002, Newtek established and received certification for two new
capcos, Wilshire Colorado and Wilshire Louisiana Partners III.
IMPACT OF INFLATION
The impact of inflation on Newtek's results of operations is not
material.
48
ITEM 7. FINANCIAL STATEMENTS
INDEX TO NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
AGE NO.
-------
Report of Independent Accountants 46
Consolidated Balance Sheets as of December 31, 2002 and 2001 47
Consolidated Statements of Income for the years ended December 31, 2002
and December 31, 2001 48
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2002 and December 2001 49
Consolidated Statements of Cash Flows for the years ended December 31, 2002
and December 31, 2001 50
Notes to Consolidated Financial Statements 53
49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Newtek Business Services, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Newtek
Business Services, Inc. and its subsidiaries at December 31, 2002 and 2001, and
the results of their operations and their cash flows for the years ended
December 31, 2002 and 2001 in conformity with accounting principles generally
accepted in the United States of America. 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 of America, 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 our opinion.
PRICEWATERHOUSECOOPERS LLP
/s/ PricewaterhouseCoopers LLP
---------------------------------
New York, New York
February 28, 2003
50
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
ASSETS
Cash and Cash equivalents $ 41,171,358 $ 31,171,966
Credits in lieu of cash 41,580,950 21,810,776
Loans receivable 56,073,016 --
Accounts receivable, (net of allowance of $34,466 in 2002) 661,351 198,572
Receivable from bank 2,938,309 --
Accrued interest receivable 285,151 --
Investments in qualified businesses - held to maturity investments 3,962,353 12,173,884
Investments in qualified businesses - equity method investments 1,091,110 2,276,344
Structured insurance product 2,893,301 2,731,894
Prepaid insurance 14,056,196 10,820,841
Prepaid expenses and other assets 932,447 754,570
Furniture, fixtures and equipment, (net of accumulated depreciation
of $190,590 and $18,957, respectively) 546,231 128,290
Goodwill 2,862,965 963,736
Asset held for sale -- 331,929
------------ ------------
Total assets $169,054,738 $ 83,362,802
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 4,218,367 $ 1,541,359
Notes payable - certified investors 3,844,181 3,858,389
Notes payable - insurance 5,369,896 9,404,032
Notes payable - other 480,500 --
Borrowings under line of credit 450,000 575,000
Bank notes payable 53,824,492 --
Notes payable in credits in lieu of cash 65,196,116 49,640,846
Mortgage payable -- 306,929
Deferred tax liability 3,726,151 1,563,018
------------ ------------
Total liabilities 137,109,703 66,889,573
------------ ------------
Minority interest 4,772,741 5,081,692
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock (par value $0.02 per share; authorized 39,000,000 shares,
Issued and outstanding 25,341,428 and 22,212,517) 506,828 444,250
Additional paid-in capital 20,992,827 13,442,899
Retained earnings (accumulated deficit) 5,672,639 (2,495,612)
------------ ------------
Total stockholders' equity 27,172,294 11,391,537
------------ ------------
Total liabilities and stockholders' equity $169,054,738 $ 83,362,802
------------ ------------
See accompanying notes to these consolidated financial statements.
51
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
2002 2001
------------ ------------
Revenue:
Income from tax credits $ 30,603,046 $ 21,497,956
Consulting fee income 387,604 9,236
Interest and dividend income 900,127 1,845,238
Gain on sale of property 16,841 --
Other Income 2,733,374 447,756
------------ ------------
Total revenue 34,640,992 23,800,186
------------ ------------
Interest 11,485,367 11,577,169
Payroll and consulting fees 4,565,954 2,664,716
Professional fees 3,145,246 2,060,635
Insurance 1,951,248 1,529,688
Write-down of asset held for sale to net realizable value -- 168,071
Other than temporary decline in value of investments (net of $28,635 recovery
in 2002) 1,573,730 371,645
Equity in net losses of affiliates 729,109 2,279,852
Other 3,672,362 1,175,451
------------ ------------
Total expenses 27,123,016 21,827,227
------------ ------------
Income before minority interest, provision for income taxes, extraordinary
gain on acquisition of minority interest and extraordinary gain on acquisition
of a business 7,517,976 1,972,959
------------ ------------
Minority interest (335,324) (508,783)
------------ ------------
Income before provision for income taxes, extraordinary gain on acquisition of
minority interest and extraordinary gain on acquisition of a business 7,182,652 1,464,176
Provision for income taxes (2,657,410) (534,616)
------------ ------------
Income before extraordinary gain on acquisition of minority interest and
extraordinary gain on acquisition of a business 4,525,242 929,560
Extraordinary gain on acquisition of minority interests 907,766 --
Extraordinary gain on acquisition of a business 2,735,243 --
------------ ------------
Net income $ 8,168,251 $ 929,560
------------ ------------
Weighted average common shares outstanding
Basic 24,183,501 21,889,958
Diluted 24,293,540 21,909,527
Income per share after extraordinary gain
Basic $ .34 $ .04
Diluted $ .34 $ .04
Income per share before extraordinary gain
Basic $ .19 $ .04
Diluted $ .19 $ .04
See accompanying notes to these consolidated financial statements.
52
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
(ACCUMULATED
ADDITIONAL DEFICIT)
COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 21,373,460 $ 427,469 $12,267,052 $(3,425,172) $ 9,269,349
Issuance of Common Stock and
Warrants 839,057 16,781 1,745,413 1,762,194
Distributions to Capco members (607,542) (607,542)
Issuance of stock options to
non-employees 37,976 37,976
Net Income 929,560 929,560
Balance at December 31, 2001 22,212,517 $ 444,250 $13,442,899 $(2,495,612) $11,391,537
Issuance of Common Stock 3,080,341 61,607 6,810,504 6,872,111
Issuance of stock options to
non-employees 89,134 89,134
Issuance of common stock to
employees and consultants 48,570 971 139,459 140,430
Issuance of warrants 510,831 510,831
Net income 8,168,251 8,168,251
Balance at December 31, 2002 25,341,428 $ 506,828 $20,992,827 $ 5,672,639 $27,172,294
See accompanying notes to these consolidated financial statements.
53
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 8,168,251 $ 929,560
Adjustments to reconcile net income to net cash used in operating
activities:
Other than temporary decline in value of investments 1,573,730 371,645
Write-down of asset held for sale to net realizable value -- 168,071
Equity in losses of affiliates 729,109 2,279,852
Extraordinary gain on acquisition of minority interests (907,766) --
Extraordinary gain on acquisition of subsidiary (2,735,243) --
Gain on sale of asset held for sale (16,841) --
Loss on disposition of assets 39,725 --
Income from tax credits (30,603,046) (21,497,956)
Deferred income taxes 2,657,410 534,616
Depreciation and amortization 147,681 74,054
Provision for doubtful accounts 34,466 --
Accretion of interest income (175,615) (161,407)
Accretion of interest expense 10,732,980 10,676,928
Issuance of stock for services performed 140,430 58,800
Non cash compensation 89,134 37,976
Minority interest 335,324 508,783
Changes in assets and liabilities, net of the effect of
business acquisitions:
Prepaid insurance 506,227 1,366,535
Prepaid expenses, accounts receivable and other assets (247,975) (179,231)
Accounts payable and accrued expenses (376,122) (1,005,441)
------------ ------------
Net cash used in operating activities (9,908,141) (5,837,215)
------------ ------------
Cash flows from investing activities:
Investments in qualified businesses (held to maturity investments) (2,334,724) (12,559,893)
Investments in qualified businesses (equity method investments) -- (900,000)
Investments in qualified businesses (consolidated entities) (13,860,832) (11,128,283)
Other investments -- (489,500)
Return of investments - held to maturity - investments 8,742,909 11,862,284
Return of investments - consolidated entities 5,302,583 210,000
Consolidation of majority owned entities 8,871,734 10,893,283
Cash received from Exponential acquisition 106,642 --
Cash received from Commercial Capital Corp. acquisition 2,367,870 --
Distributions from equity method investees -- 240,399
Purchase of furniture, fixtures and equipment (279,438) (107,361)
Proceeds from sale of property 348,770 --
------------ ------------
Net cash provided by (used in) investing activities 9,265,514 (1,979,071)
------------ ------------
See accompanying notes to these consolidated financial statements.
54
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
2002 2001
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 29,999,543 $ --
Payments for extinguishment of long-term debt (14,513,665) --
Proceeds from issuance of note payable-insurance -- 5,200,000
Principal payments of note payable-insurance (7,034,136) (1,595,968)
Proceeds from (payments of) note payable - bank (125,000) 575,000
Proceeds from issuance of notes - other 480,500 --
Purchase of minority interest from member -- (1,300)
Principal payment of mortgage payable (306,929) (62,410)
Contributions from minority members 50,500 57,000
Distributions to members -- (607,542)
Net proceeds from issuance of common stock 1,371,249 726,391
Proceeds from issuance of common stock to certified investors 719,957 --
------------ ------------
Net cash provided by financing activities 10,642,019 4,291,171
------------ ------------
Net increase (decrease) in cash and cash equivalents 9,999,392 (3,525,115)
Cash and cash equivalents - beginning of year 31,171,966 34,697,081
------------ ------------
Cash and cash equivalents - end of year $ 41,171,358 $ 31,171,966
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Cash paid for interest $ 953,073 $ 399,285
------------ ------------
Issuance of notes in partial payment for insurance $ 3,000,000 $ --
------------ ------------
Fixed assets acquired under capital lease obligations $ 147,738 $ --
------------ ------------
Reduction of credits in lieu of cash and notes payable in credits in lieu of cash
balances due to delivery of tax credits to Certified Investors $ 10,832,872 $ 17,183,989
------------ ------------
Issuance of common stock in connection with acquisition of Commercial Capital Corp. $ 900,194 $ --
------------ ------------
Issuance of common stock in connection with acquisition of Exponential $ 988,750 $ --
------------ ------------
Issuance of warrant in connection with purchase of Coverage A Insurance $ 510,831 $ --
------------ ------------
Consolidation of investments previously accounted for under the equity or cost method $ 537,083 $ --
------------ ------------
See accompanying notes to these consolidated financial statements.
55
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001
2002 2001
---------- ----------
Acquisition of Capcos minority interests resulting in goodwill:
Newtek Business Services common stock issued $1,951,168 $ 978,303
Less: Deferred tax benefit acquired 14,873 --
Less: Minority interests acquired 887,652 --
---------- ----------
Goodwill recognized $1,048,643 $ 978,303
---------- ----------
Acquisition of Capcos minority interests resulting in extraordinary gain:
Minority interests acquired $1,369,156 $ --
Add: Deferred tax benefit acquired 479,404 --
Less: Newtek Business Services common stock issued 940,794 --
---------- ----------
Extraordinary gain recognized $ 907,766 $ --
---------- ----------
See accompanying notes to these consolidated financial statements.
56
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Newtek Business Services, Inc. (Newtek), formerly named Newtek Capital,
Inc., is a holding company for the entities listed below and accordingly
consolidates the financial statements of these entities with its own: Newtek
Small Business Finance, Inc. ("NSBF"), DC Media, Inc., Exponential Business
Development Corp., BJB Holdings, Inc. ("BJB"), Wilshire Holdings I, Inc.,
Wilshire Holdings II, Inc., REXX Environmental Corp. ("REXX"), Whitestone
Capital Markets, Inc., The Whitestone Group, LLC ("TWG"); Wilshire Advisers, LLC
("WA"), Wilshire NY Advisers II ("WAII"), and Wilshire New York Partners III
("WNY III"), certified capital companies ("Capcos") in New York, Wilshire
Partners, LLC ("WP"), a capco in Florida, Wilshire Investors, LLC ("WI"), a
capco in Wisconsin, Wilshire Colorado Partners LLC ("WC"), a capco in Colorado,
and Wilshire Louisiana Advisers, LLC ("WLA"), a capco in Louisiana (the Capco
entities are, collectively, the "Capcos" and Newtek and all of these
aforementioned entities and Capcos are collectively the "Company"). TWG acts as
an investment adviser and manager to the aforementioned Capcos as well as a
merchant bank and provides investment banking and business development services
including general business consulting services, strategic planning, due
diligence, merger and acquisition analysis, technology design and implementation
support, joint venture negotiations and litigation support services. The Capcos
pay TWG an annual management fee of 2.5% of Certified Capital, as defined,
however, this fee is paid out of Capco cash on hand and is not set aside or
reserved for payment out of the funds raised by the Capcos. These inter-company
transactions, as are all significant inter-company balances and transactions,
eliminated in consolidation.
The following is a summary of each Capco or Capco fund, state of
certification and date of certification:
CAPCO STATE OF CERTIFICATION DATE OF CERTIFICATION
--------- ---------------------- ---------------------
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WA II New York April 2000
WNY III New York December 2000
WC Colorado October 2001
The State of Louisiana has three "capco funds" which are all a part of
and consolidated with the WLA Capco (the first fund). The second, Wilshire
Louisiana Partners II, LLC (WLPII), and the third, Wilshire Louisiana Partners
III, LLC (WLPIII), were formed in October 2001, and October 2002, respectively.
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
57
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
state statutes, or, "Qualified Businesses"), with the Certified Capital raised.
Such investments may be accounted for as either consolidated subsidiaries, under
the equity method or cost method of accounting, 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. Participation in each Capco
program 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. These state requirements are mirrored in the
limitations agreed to by each Capco in its written agreements with its Certified
Investors and limit the activities of the Capcos to conducting the business of a
capco. Each Capco also has separate, legal contractual arrangements with the
Certified Investors obligating the Capco to refrain from unauthorized
activities, to use the proceeds from the notes only for Capco-authorized (i.e.,
"qualified") investments, to limit fees for professional services related to
making, buying or selling investments to $200,000 per Capco annually; and 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% (WLA and WLPII - 110%) of their certified
investment. The tax credits can be utilized over a ten-year period at a rate of
10% (WLA and WLPII - 11%) per year and in some instances are transferable and
can be carried forward.
On December 31, 2002, the Company acquired a majority stake in a US
Small Business Administration ("SBA") lender and therefore the acquired assets
and liabilities are included in the Company's accounts (see Note 18). As a
nonbank SBA lender, the company (originally named Commercial Capital Corp., now
named Newtek Small Business Finance ("NSBF")) originates, sells (in whole or in
part) and services loans for qualifying small businesses, which are partially
guaranteed by the SBA. NSBF sells the SBA guaranteed portion of such loans to
third-party investors, retains the unguaranteed portion and continues to service
the loans. NSBF has the ability to originate loans throughout the United States.
Presently, the loans originated are primarily to customers in the Northeast
United States. The lender's competition for originating SBA loans comes
primarily from banking organizations and the other nonbank entities holding an
SBA license.
CASH AND CASH EQUIVALENTS
All highly liquid investments purchased with original maturities of
three months or less are considered to be cash equivalents. The Company has bank
balances in excess of the $100,000 of depository insurance provided by the
Federal Deposit Insurance Corporation. Substantially all of the cash and cash
equivalents as of December 31, 2002 and 2001, respectively, were restricted for
use in managing and operating the Capcos and qualified investments.
58
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In the Company's Statement of Cash Flows, cash invested in consolidated
entities is presented as a cash outflow, and cash in those entities is presented
as an inflow, "Consolidation of majority owned entities".
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
recognized only at the time the investments are sold. The Company also earns
revenues from its consolidated entities (partner companies).
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, 2002, as summarized earlier in this
note, the Company had Capcos in five states. Each statute requires that the
Capco invest a threshold percentage of Certified Capital in Qualified Businesses
within the time frames 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. If the tax
credits are earned before the state is required to make delivery (i.e.,
investment requirements are met ahead of schedule, but credits can only be used
at a rate of 10% per year), then the present value of the tax credits earned are
recorded upon completion of the requirements, in accordance with Accounting
Principles Board Opinion No. 21. The receivable (called "credits in lieu of
cash") is accreted to the annual deliverable amount which can then be delivered
to the insurance company investors in lieu of cash interest.
The allocation and utilization of Capco tax credits is controlled by
the state law. In general, the Capco applies for tax credits from the state and
is allocated a specific dollar amount of credits which are available to be
earned. The Capco provides the state with a list of the
59
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Certified Investors, who have contractually agreed to accept the tax credits in
lieu of cash interest payments on their notes. The tax credits are claimed by
Certified Investors on their state premium tax return as provided under each
state Capco and tax law. State regulations specify the amount of tax credits a
Certified Investor can claim and the period in which they can claim them. Each
state periodically reviews the Capco's operations to verify the amount of tax
credits earned. In addition, the state maintains a list of Certified Investors
and therefore has the ability to determine whether the Certified Investor is
allowed to claim this deduction.
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:
THE FIRST TO OCCUR
------------------------------------------------------------------------------------------------------------------
TOTAL EARNED
STATE CAPCO OR TAX CREDIT INVESTMENT INVESTMENT DECERTIFICATION RECAPTURE INCOME
FUND ALLOCATED BENCHMARK BENCHMARK DATE RECAPTURE THRESHOLDS PERCENTAGE PERCENTAGE
FLORIDA $ 37,384,028 20% 12/31/00 Prior to 20% 100% 0%
WILSHIRE 30% 12/31/01 After 20 before 30% 70% 30%
PARTNERS (WP) 40% 12/31/02 After 30 before 40% 60% 40%
50% 12/31/03 After 40 before 50% 50% 50%
After 50% 0% 100%
NEW YORK $ 35,160,202 Prior to 25% 100% 0%
WILSHIRE 25% 12/21/02 After 25 before 40% 85% 15%
N.Y. PARTNERS III 40% 12/21/03 After 40 before 50% 70% 30%
(WNY III) 50% 12/21/04 After 50% 0% 100%
COLORADO $ 16,175,415 Prior to 30% 100% 0%
STATEWIDE POOL 30% 4/22/05 After 30 before 50% 70% 30%
WILSHIRE
COLORADO 50% 10/25/07 After 50% 0% 100%
PARTNERS (WC) Prior to 30% 100% 0%
60
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COLORADO $ 5,882,352 30% 4/22/05 After 30 before 50% 70% 30%
RURAL POOL 50% 10/25/07 After 50% 0% 100%
WILSHIRE
COLORADO
PARTNERS (WC)
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%
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%
LOUISIANA $ 8,000,000 Prior to 30% 100% 0%
WILSHIRE 30% 10/15/05 After 30 before 50% 70% 30%
LA PARTNERS III 50% 10/13/07 After 50% 0% 100%
(WLPIII)
NEW YORK $ 6,807,866 Prior to 25% 100% 0%
WILSHIRE 25% 4/7/02 After 25 before 40% 85% 15%
N.Y. ADVISERS II 40% 4/7/03 After 40 before 50% 70% 30%
(WLA II) 50% 4/7/04 After 50% 0% 100%
NEW YORK $ 3,810,161 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%
LOUISIANA $ 3,355,000 Prior to 30% 100% 0%
WILSHIRE 30% 10/13/03 After 30 before 50% 70% 30%
LA ADVISERS II 50% 10/13/05 After 50% 0% 100%
(WLA II)
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, as a 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.
61
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
ALLOCATED INVESTMENT EARNED
STATE TAX BENCHMARK INCOME
CAPCO OR FUND CREDITS PERCENTAGE/DOLLARS PERCENTAGE/DOLLARS
---------------------- ------------- ------------------- ------------------
FLORIDA $ 37,384,028 20% $ 7,476,806 30%$ 11,215,208
WILSHIRE 30% $ 11,215,208 40%$ 14,953,611
PARTNERS (WP) 40% $ 14,953,611 50%$ 18,692,014
50% $ 18,692,014 100%$ 37,384,028
NEW YORK. $ 35,160,202 25% $ 8,790,051 15%$ 5,274,030
WILSHIRE N.Y 40% $ 14,064,080 30%$ 10,548,060
PARTNERS III (WNY III) 50% $ 17,580,101 100%$ 35,160,202
COLORADO $ 16,175,415 30% $ 4,852,625 20%$ 3,235,083
WILSHIRE COLORADO 50% $ 8,087,708 100%$ 16,175,415
PARTNERS (WC)
STATEWIDE POOL
COLORADO $ 5,882,352 30% $ 1,764,706 20%$ 1,176,470
WILSHIRE COLORADO 50% $ 2,941,176 100%$ 5,882,352
PARTNERS (WC)
RURAL POOL
LOUISIANA $ 18,040,000 30% $ 4,920,000 30%$ 5,412,000
WILSHIRE LA 50% $ 8,200,000 100%$ 18,040,000
ADVISERS (WLA)
WISCONSIN $ 16,666,667 30% $ 5,000,000 30%$ 5,000,000
WILSHIRE 50% $ 8,333,334 100%$ 16,666,667
INVESTORS (WI)
LOUISIANA $ 8,000,000 30% $ 2,400,000 30%$ 2,400,000
WILSHIRE LA 50% $ 4,000,000 100%$ 8,000,000
PARTNERS III (WLPIII)
NEW YORK. $ 6,807,866 25% $ 1,701,967 15%$ 1,021,180
WILSHIRE N.Y 40% $ 2,723,146 30%$ 2,042,360
ADVISERS II (WNY II) 50% $ 3,403,933 100%$ 6,807,866
NEW YORK $ 3,810,161 25% $ 952,540 15%$ 571,524
WILSHIRE 40% $ 1,524,064 30%$ 1,143,048
ADVISERS (WA) 50% $ 1,905,081 100%$ 3,810,161
LOUISIANA $ 3,355,000 30% $ 915,000 30%$ 1,006,500
WILSHIRE LA 50% $ 1,525,000 100%$ 3,355,000
ADVISERS II (WLA II)
62
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
During each of the years ended December 31, 2002 and 2001, certain
Capcos satisfied the required investment benchmarks and the related recapture
percentages requirements and, accordingly, earned a portion of the tax credits.
INTEREST AND SBA LOAN FEES - SBA LOANS
Interest income on loans is recognized as earned. When a SBA loan is 90
days past due with respect to principal or interest and, in the opinion of
management, interest or principal on individual loans is not collectible, or at
such earlier time as management determines that the collectibility of such
principal or interest is unlikely, the accrual of interest is discontinued and
all accrued but uncollected interest income is reversed. Cash payments
subsequently received on nonaccrual loans are recognized as income only where
the future collection of the recorded value of the SBA loan is considered by
management to be probable. Certain related direct costs to originate loans
(including fees paid to SBA loan brokers) are deferred and amortized over the
contractual life of the SBA loan using a method that approximates the effective
interest method.
ALLOWANCE FOR POSSIBLE SBA LOAN LOSSES
An allowance for possible SBA loan losses is established by a provision
for possible SBA loan losses charged to operations. Actual SBA loan losses or
recoveries are charged or credited directly to this allowance. The provision for
possible SBA loan losses is management's estimate of the amount required to
maintain an allowance adequate to reflect the risks in the SBA loan portfolio;
however, ultimate losses may vary from the current estimates. This estimate is
reviewed periodically and any necessary adjustments are made in the period in
which they become known.
On an individual basis, Newtek evaluates all non-performing loans for
possible impairment. The amount of impairment is determined by comparing the
carrying value of the SBA loan to the estimated fair market value of the
collateral Newtek holds and the difference is added to the Allowance for
Possible Losses. Newtek will have a new appraisal done on the collateral if
management feels it may have changed in value. If the carrying amount of the SBA
loan (net of the allowance for possible loss) is different than the actual net
recovery amount after liquidation of the collateral, then the company will
record a gain/loss in its Consolidated Statement of Income at the time of
disposition.
Additionally, all loans are also evaluated as a group, and Newtek uses
industry wide statistics of SBA loan losses and management's experience in the
industry to record reserves on its SBA loan portfolio.
SALES AND SERVICING OF SBA LOANS
NSBF originates loans to customers under the SBA program that generally
provides for SBA guarantees of 75% to 80% (85% for loans received by the SBA on
or after December 22, 2001) of each SBA loan, subject to a maximum guarantee
amount. NSBF sells the guaranteed portion of each SBA loan to a third party and
retains the unguaranteed principal portion in its own portfolio. A gain is
recognized on these loans through collection on sale of a premium over the
adjusted carrying value. Gain on sale of the guaranteed portion of the loans is
recognized at
63
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
the date of the sales agreement when control of the future economic benefits of
the SBA loan is surrendered. At December 31, 2002 NSBF had no outstanding
receivables from the sale of the guaranteed portion of loans sold.
NSBF accounts for its capitalized servicing rights and sales of finance
receivables in accordance with Statement of Financial Accounting Standards No.
140 (SFAS No. 140), "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities" a replacement of FASB Statement No. 125,
which became effective on April 1, 2001. In accordance with SFAS No. 140, upon
sale of the loans to third parties, NSBF's investment in an SBA loan is
allocated among the retained portion of the SBA loan (unguaranteed), the sold
portion of the SBA loan (guaranteed) and the value of SBA loan servicing
retained, based on the relative estimated fair market values of each at the sale
date. The difference between the proceeds received and the allocated carrying
value of the SBA loan sold is recognized as a gain on sale of loans. In each SBA
loan sale, NSBF retains servicing responsibilities and receives servicing fees
of 1% of the outstanding SBA loan balance. The purchasers of the loans sold have
no recourse to NSBF for failure of customers to pay amounts contractually due.
The servicing fees are reflected as an asset which is amortized over an
estimated life using a method approximating the effective interest method; in
the event future prepayments are significant or impairments are incurred and
future expected cash flows are inadequate to cover the unamortized servicing
asset, additional amortization or impairment charges would be recognized. In the
calculation of its servicing asset, NSBF is required to estimate its adequate
servicing compensation. At December 31, 2002, the balance of the servicing asset
was zero.
Capitalized servicing rights are recorded at the date of sale based on
the allocated carrying value (discussed above) and amortized into other revenue
in proportion to, and over the period of, the estimated future net servicing
income on the underlying financial assets. Impairment is recognized through a
valuation allowance, to the extent the fair value is less than the capitalized
amount.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents is included in the calculation of diluted earnings per
share only when the effect of their inclusion would be dilutive.
STOCK - BASED COMPENSATION
The Company has elected to continue using Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
employee stock options. No stock-based employee compensation cost is reflected
in net income, as all options granted under this plans had an exercise price
equal to the market value of the underlying common stock at the date of grant.
The following table summarizes the pro forma consolidated results of operations
of the Company as though the fair value based accounting method in SFAS 123
"Accounting for Stock-based Compensation" had been used in accounting for stock
options.
64
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK COMPENSATION
2002 2001
------------ ------------
As reported
Net income $ 8,168,251 $ 929,560
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (1,007,371) (554,266)
------------ ------------
Pro forma net income $ 7,160,880 $ 375,294
------------ ------------
Earnings per share:
Basic - as reported $ .34 $ .04
------------ ------------
Basic - pro forma $ .30 $ .02
------------ ------------
Diluted - as reported $ .34 $ .04
------------ ------------
Diluted net income per share $ .29 $ .02
------------ ------------
For 2002 and 2001, the weighted average fair value of each option
granted is estimated on the date of grant using the Black Scholes model with the
following assumptions: expected volatility of 85%, risk-free interest rate of
3.53% to 6.15%, expected dividends of $0 and expected terms of 1-6 years.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. The Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" ("SFAS
142") as of January 1, 2002. This statement requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually. Based upon the Company's
performance of the transitional impairment tests using the fair value approach
required by the standard, the Company has determined that no impairment existed
as of December 31, 2002 and December 31, 2001.
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).
INCOME TAXES
Deferred tax assets and liabilities are computed based upon the
differences between the financial statement and income tax basis of assets and
liabilities using the enacted tax rates in effect for the year in which those
temporary differences are expected to be realized or settled. If available
evidence suggests that it is more likely than not that some portion or all of
the deferred
65
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
tax assets will not be realized, a valuation allowance is required to reduce the
deferred tax assets to the amount that is more likely than not to be realized.
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
disclosures of contingent 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 in qualified businesses and loans receivable. Actual results could
differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of accounts payable and accrued expenses
approximate fair value because of the short term maturity of these instruments.
The carrying value of investments in qualified businesses, loans receivable,
structured insurance product, notes and loans payable, credits in lieu of cash,
interest payable in credits in lieu of cash, bank notes payable, and warrants
approximate fair value based on management's estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 addresses financial accounting and reporting
for business combinations and is effective for all business combinations after
June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and is effective for fiscal years
beginning after December 15, 2001. The adoption of these standards did not have
a material impact on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " and the
accounting and reporting provisions of Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business
(as previously defined). The provisions of SFAS No. 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
with early application encouraged and generally are to be applied prospectively.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial position or results of operations.
In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" (FAS 145). This statement eliminates the requirement that gains and
losses from the extinguishments of debt be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect.
However, an entity would not be prohibited from classifying such gains and
losses as
66
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
extraordinary items so long as they are both unusual in nature and infrequent in
occurrence. This provision of FAS 145 will be effective for the Company as of
the beginning of fiscal year 2004. This statement also amends FAS 13,
"Accounting for Leases" and certain other authoritative pronouncements to make
technical corrections or clarifications. FAS 145 will be effective related to
the amendment of FAS 13 for all transactions occurring after May 15, 2002. All
other provisions of FAS 145 will be effective for financial statements issued
after May 15, 2002. The Company has determined that this statement will not have
a significant impact on its financial condition and results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes EITF No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured and recorded at
fair value. The provisions of SFAS No. 146 will be adopted for exit or disposal
activities that are initiated after December 31, 2002. The Company is currently
evaluating the impact of implementing FAS 146.
In October 2002, the FASB issued Statement No. 147 ("SFAS 147),
"Acquisitions of Certain Financial Institutions." SFAS 147 addresses financial
accounting and reporting for the acquisition of all or part of a financial
institution, except for a transaction between two or more mutual enterprises.
SFAS 147 also provides guidance on the accounting for the impairment or disposal
of acquired long-term customer-relationship intangible assets of financial
institutions, including those acquired in transactions between two or more
mutual enterprises. The provisions of the statement will be effective for
acquisitions on or after October 1, 2002. The adoption of SFAS No. 147 did not
have a material impact on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of SFAS No.
123." This Statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation", to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The adoption
of SFAS No. 148 did not have a material impact on the Company's financial
position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others", an interpretation of FIN No. 5,
57 and 107, and rescission of FIN No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others". FIN 45 elaborates on the
67
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002; while, the provisions of the disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002. In the normal course of business, the Company
enters into contracts that contain a variety of representations and warranties
and provide general indemnifications. The Company's maximum exposure under these
arrangements is unknown, as this would involve future claims that may be made
against the Company that have not yet occurred. Based on the Company's
experience, the Company expects the risk of loss to be remote.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities", an interpretation of Accounting Research Bulletin No. 51.
FIN No. 46 requires that variable interest entities be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns or both. FIN No. 46 also requires disclosures about
variable interest entities that companies are not required to consolidate but in
which a company has a significant variable interest. The consolidation
requirements of FIN No. 46 will apply immediately to variable interest entities
created after January 31, 2003. The consolidation requirements will apply to
entities established prior to January 31, 2003 in the first fiscal year or
interim period beginning after June 15, 2003. The disclosure requirements will
apply in all financial statements issued after January 31, 2003. The Company is
currently evaluating the impact of implementing FIN No. 46.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current
year presentation.
NOTE 2 - INSURANCE:
On November 19, 1998, WA purchased a structured insurance product
covering a ten-year period (the "Capco Policy") from an 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")
("Coverage A") and (ii) the loss or recapture of the state tax credits delivered
to the Certified Investors ("Coverage B"). Notwithstanding the Insurer's
obligation, WA (alone among Newtek's Capcos) 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 Capco paid a total of
$1,805,599 for the Capco Policy. The costs of Coverage's 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
68
NOTE 2 - INSURANCE:
income. For the years ended December 31, 2002 and December 31, 2001 the Company
recorded $102,938 for each year, as interest income. 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.
On May 10, 2000, WA purchased another structured insurance product, or
Capco Policy, covering an eight-year period from an AAA rated international
insurance company. This insurance provides for the same terms and conditions as
the aforementioned initial insurance product as described above. The Company
paid a total of $821,500 for this additional Capco Policy. The costs of
Coverage's A and B were $661,432 and $160,068, respectively. Under Coverage A,
the Insurer is required to pay the principal amount of the Note (Note 4),
$1,136,364, 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 each of the years ended December 31, 2002 and December 31,
2001, the Company recorded $58,469 as interest income. At the June 2008 Note
maturity date, the asset balance will be $1,136,364, the Insurer will pay the
Certified Investors, and the Company will reverse this asset balance in fall
with a corresponding reversal of the Note balance.
For all other Capcos, at the time the Capcos obtained the proceeds from
the issuance of the debt instruments, Capco warrants or Company common stock to
the Certified Investors, the Capcos purchased insurance contracts from the
Insurer. These insurance contracts are similar to those described above,
however, the Coverage A portion of these contracts extinguishes all or, in some
cases, substantially all of the Capco's liability for the full amount of
proceeds obtained from the Certified Investors and, as such shifts such
liability to the Insurer. The structure of the Capco insurance is, with respect
to Coverage A (return of principal), that the insurer assumes the primary
obligation to make the repayment of principal of the Capco notes upon the
maturity dates (other than our first Capco, WA). The Insurer is primarily liable
to the Certified Investors for such amounts. The Capcos, however, are
secondarily, or contingently, liable for such payment.
For all Capcos (including WA), the Company has also purchased (as well
as financed) Coverage B insurance which provides for the payment of cash in lieu
of tax credits in the event the Capco becomes decertified. The Capcos remain
primarily liable for the tax credits representing the interest obligation on the
notes payable to certified investors. 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 prepaid insurance balance of $14,056,196 at December 31,
2002 and $10,820,841 at December 31, 2001 is comprised solely of the unamortized
cost of Coverage B insurance.
We are primarily liable for only the Wilshire Advisers note payable.
69
NOTE 2 - INSURANCE (CONTINUED):
The Company's Coverage A and B purchases are summarized as follows
(there were no such purchases in the year ended December 31, 2001):
PREMIUM PAID PREMIUM PAID
DATE OF FOR FOR
CAPCO OR CAPCO FUND PURCHASE COVERAGE A(3) COVERAGE B(3)
------------------- ------------- --------------- -------------
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
--------------- ------------
WNYII April 2000 $ 5,019,803(2) $ 504,745
WA May 2000 $ 661,432(1) $ 160,068
WLPII October 2000 $ 2,456,565(2) $ 319,958
WNYIII December 2000 $ 29,052,790(2) $ 4,137,438
TOTAL - 2000 $ 37,190,590 $ 5,122,209
--------------- ------------
WCOP April 2002 $ 11,654,021(2) $ 3,604,978
WLPIII October 2002 $ 2,859,644(2) $ 1,089,134
TOTAL 2002 $ 14,513,665 $ 4,694,112
--------------- ------------
(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 8.
(3) Coverage B has been accounted for as described previously in this Note.
Additionally, a portion of the premiums paid for Coverage's A and B were
financed by notes and the issuance of warrants.
The Company's Coverage B purchases and related amortization are summarized as
follows:
Prepaid Insurance as of 12/31/00 $ 12,187,376
Prepaid Insurance purchased for the year ended 12/31/01 0
Amortization of Prepaid Insurance for the year ended 12/31/01 (1,366,535)
----------
Prepaid Insurance as of 12/31/01 10,820,841
Prepaid Insurance purchased for the year ended 12/31/02 4,694,112
Additional Prepaid Insurance adjustment 169,284
Amortization of Prepaid Insurance for the year ended 12/31/02 (1,628,041)
-------------
Prepaid Insurance as of 12/31/02 $ 14,056,196
All Capcos receive funding from the Certified Investors for the sales
of notes, warrants or Company stock regardless of the accounting treatment of
the Capco insurance.
70
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
The following table is a summary of such investments as of December 31,
2002, shown separately between their debt and equity components, and all terms
of each are summarized. There are no expiration dates on any of the financial
instruments, unless disclosed.
The various interests that the Company acquires in its qualified
investments are accounted for under three methods: consolidation, equity method
and cost method. The applicable accounting method is generally determined based
on the Company's voting interest in an investee.
Consolidation Method. Investments in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities or those the
Company has effective control over are generally accounted for under the
consolidation method of accounting. Under this method, an investment's financial
position and results of operations are reflected within the Company's Balance
Sheet and Consolidated Statements of Income. All significant inter-company
accounts and transactions, including returns of principal, dividends, interest
received and investment redemptions have been eliminated. The results of
operations and cash flows of a consolidated Partner Company are included through
the latest interim period in which the Company owned a greater than 50% direct
or indirect voting interest for the entire interim period or otherwise exercised
control over the Partner Company. Upon dilution of control below 50%, the
accounting method is adjusted to the equity or cost method of accounting, as
appropriate, for subsequent periods.
Equity Method. Investees that are not consolidated, but over which the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence
with respect to an investee depends on an evaluation of several factors
including, among others, representation on the Company's Board of Directors and
ownership level, which is generally a 20% to 50% interest in the voting
securities of the Company, including voting rights associated with the Company's
holdings in common, preferred and other convertible instruments in the investee.
Under the equity method of accounting, an investee's accounts are not reflected
within the Company's Consolidated Balance Sheet and Consolidated Statements of
Income; however, the Company's share of the earnings or losses of the investee
is reflected in the caption "Equity income (loss)" in the Consolidated
Statements of Income.
Cost Method. Investees not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Balance Sheet and
Consolidated Statements of Income. However, cost method impairment charges are
recognized, as necessary, in the Consolidated Statement of Income. If
circumstances suggest that the value of the investee has subsequently recovered,
such recovery is not recorded until realized. In some of the entities which we
account for under the cost or equity method, the Company may own warrants that
if exercised, would cause the Company to use either the equity or consolidation
method. As of December 31, 2002, the Company does not expect these warrants to
be exercised in the near future.
71
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
The Company's debt and equity investments have in virtually all cases
been made with funds available to Newtek through the Capco programs. These
programs generally require that each Capco meet a minimum investment benchmark
within 5 years of initial funding. The investments listed below qualify for this
purpose. In addition, any funds received by a Capco as a result of a debt
repayment or equity return may, under the terms of the Capco programs, be
reinvested and this will be counted towards the Capcos' minimum investment
benchmarks.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investment in Debt and Equity
Securities", the Company classifies its debt investments as held-to-maturity and
such investments are initially recorded at amortized cost. On a monthly basis,
Newtek's Investment Committee meets to evaluate the Company's investments. The
Company considers several factors in determining whether an impairment exists on
the investment, such as the investee's net book value, cash flow, revenue growth
and net income. In addition, the Investment Committee considers other factors,
such as the economy and the investee company's industry, to determine if an
other than temporary decline in value exists in the Company's investment.
72
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
DEBT INVESTMENTS
NEWTEK IT DIRECT MERCHANT
SERVICES, CREATIONS, 1-800 GIFT STARPHIRE DATA DISTRIBUTION 4G's TRUCK
LLC LLC CERTIFICATES TECHNOLOGIES, SYSTEMS, VIDEO AND RENTING
INVESTEE MAR-01 SEP-01, JUL-99, LLC INC. AUDIO CORP. NOV99,DEC 00
INVESTMENT DATE(S) MAR-02 NOV-01 JUL-01 JUN-01 AUG-00 JUNE-00 JUN-02
MATURITY DATE 5.75% JUN-04, JUL-02 JUN-02 MAY-04 JUNE02 AUG-03
INTEREST RATE LIBOR VARIOUS 5.75% 0.00% 10.00% 7.40%
------------------- ------------ ----------- ------------ ------------ ------------ ------------- ------------
Principal
outstanding at
December 31, 2000 $ 100,000 $ 750,000 $ 244,928 $ 1,698,950 $ 1,000,000 $ 900,000
Debt investments
made in 2001 3,500,000 1,358,333 950,000 $ 1,000,000 400,000 100,000
Return of
principal - 2001 (750,000) (135,731) (1,998,950) (175,000) (525,000)
Other than
temporary
decline in value
of its
investments-2001 (86,044)
Converted from
debt to equity (100,000)
Converted from
equity to debt 900,000
Principal
outstanding at 475,000
December 31, 2001 3,500,000 1,358,333 1,059,197 1,000,000 913,956 825,000
Debt investments
made in 2002 100,000
Return of
principal - 2002 (3,500,000) (559,197) (1,000,000) (825,000) (475,000)
Other than
temporary
decline in
Value of its
investments-2002
(C) 28,635 Converted
from debt to equity (735,100) (500,000)
Converted from
Direct Creations
to DC Media
equity (86,723)
Converted from
Direct Creations
to DC Media sub
debt (163,277)
Principal
outstanding at
December 31, 2002 $ 373,233 $ 942,591 $ 100,000
73
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED)
DEBT INVESTMENTS
NEWTEK
TRANSWORLD FINANCIAL DOWN TO
BUSINESS BUY HYPER- INFO EARTH,
BROKERS, SEASONS, COSM SERVICES CB REAL INC. AUTOTASK
INVESTEE LLC INC. APR-01 OF FL NET, LLC DEC-99 GROUP
INVESTMENT DATE (S) JUN-01 JUN-01 APR-06 NOV-99 FEB-00 AUG-00 OCT-02
MATURITY DATE(S) JUN-04 JUN-06 (ORIGINAL) NOV-01 DEC-01 AUG-01 SEP-03
INTEREST RATE 5.00% 11.00% 10.00% 5.25% 8.00% 9.00% 7.75%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Principal outstanding at
December 31, 2000 $ 3,104,201 $ 2,500,000 $ 80,000
Debt investments made in 2001 $ 240,000 $ 200,000 $ 250,000
Return of principal - 2001 (20,000) (2,966,95) (2,500,000) (80,00)
Other than temporary decline
in value of its
investments-2001 (250,000) (35,601)
Principal outstanding at
December 31, 2001 240,000 180,000 101,641
Debt investments made in 2002 200,000
Investment consolidated with
parent (101,641)
Return of principal - 2002 (100,000) (180,000)
Other than temporary decline
in value of its
investments-2002 (C)
Principal outstanding at
December 31, 2002 $ 140,000 -- -- -- -- -- $ 200,000
LOUISIANA GULF
BIDCO COAST
INVESTEE LOANS BIDCO
INVESTMENT DATE (S) VARIOUS DEC-02
MATURITY DATE(S) VARIOUS VARIOUS
INTEREST RATE PRIME +1% VARIOUS
------------ -----------
Principal outstanding at
December 31, 2000 $ 669,841
Debt investments made in 2001 4,561,560
Return of principal - 2001 (2,710,644)
Other than temporary decline
in value of its
investments-2001
Principal outstanding at
December 31, 2001 2,520,757
Debt investments made in 2002 1,062,224 972,500
Investment consolidated with
parent
Return of principal - 2002 (2,103,712)
Other than temporary decline
in value of its
investments-2002 (C) (245,240)
Principal outstanding at
December 31, 2002 $ 1,234,029 $ 972,500
74
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED)
DEBT INVESTMENTS - SUMMARY
TOTAL
--------------------------------------------------------------------------------
Principal outstanding at December 31, 2000 $ 11,047,920
Debt investments made in 2001 12,559,893
Return of principal - 2001 (11,862,284)
Other than temporary decline in value of its investments-2001 (371,645)
Converted from debt to equity (100,000)
Converted from equity to debt 900,000
Principal outstanding at December 31, 2001 12,173,884
Debt investments made in 2002 2,334,724
Investment restructured and consolidated with parent (101,641)
Return of principal - 2002 (8,742,909)
Other than temporary decline in value of its investments-2002 (C) (216,605)
Converted from debt to equity (1,235,100)
Converted from Direct Creations to DC Media equity (86,723)
Converted from Direct Creations to DC Media sub debt (163,277)
Principal Outstanding at December 31, 2002 3,962,353
75
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
EQUITY INVESTMENT
DISTRIBUTION
DIRECT 1-800 GIFT STARPHIRE VIDEO AND NICHE
CREATIONS, CERTIFICATES TECHNOLOGIES MERCHANT AUDIO DIRECTORIES
INVESTEE LLC JUL-99 ,LLC DATA CORP. SEP-00,
INVESTMENT DATE(S) VARIOUS, COMMON AUG-00 SYSTEMS, JUN-00 DEC-00
TYPE OF INVESTMENT AUG-02 STOCK/ PREFERRED INC. COMMON PREFERRED
OWNERSHIP INTEREST AS OF WARRANTS WARRANTS MEMBERSHIP SEP-00 STOCK MEMBERSHIP
DECEMBER 31, 2002 <20% 7.14% 50.00% WARRANTS 0% <20.00% 37.50%
------------------------------ ------------- -------------- ------------- ------------- -------------- -------------
Total equity investments at
December 31, 2000 $ 25,000 $ 1,485,001 $ 785,181 $ 200,000 $ 1,317,357
Equity investments made in
2001
Equity in income (losses)
2001 (B) (757,322) (842,149)
Converted from equity to debt (785,181)
Converted from debt to equity
Total equity investments at
December 31, 2001 (A) 25,000 727,679 200,000 475,208
Equity investments made in
2002
Equity in income (losses)
2002 (431,484)
Return of Capital (25,000)
Converted from debt to equity $ 735,100 500,000
Other than temporary decline
in Value of its
investments-2002 (C) (464,277) (727,679) (43,724)
Investment consolidated with
parent
Total equity investments at
December 31, 2002 $ 270,823 $ 500,000 -- -- $ 200,000 --
NEWTEK IT
INVESTEE SERVICES,
INVESTMENT DATE(S) LLC
TYPE OF INVESTMENT OCT-00
OWNERSHIP INTEREST AS OF PREFERRED
DECEMBER 31, 2002 STOCK 50%
------------------------------ --------------
Total equity investments at
December 31, 2000 $ 793,044
Equity investments made in
2001
Equity in income (losses)
2001 (B) (462,499)
Converted from equity to debt
Converted from debt to equity 100,000
Total equity investments at
December 31, 2001 (A) 430,545
Equity investments made in
2002
Equity in income (losses)
2002
Return of Capital
Converted from debt to equity
Other than temporary decline
in Value of its
investments-2002 (C)
Investment consolidated with
parent (430,545)
Total equity investments at
December 31, 2002 --
76
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
EQUITY INVESTMENTS
NEWTEK TRANSWORLD
FINANCIAL SBA BUSINESS
BUYSEASONS, INFO SERVICES HOLDINGS, BROKERS,
INVESTEE INC OF FL, LLC INC LLC
INVESTMENT DATE(S) JUN-01 JUN-01 SEP-02 JUN-01
TYPE OF INVESTMENT COMMON COMMON PREFERRED PREFERRED
OWNERSHIP INTEREST AS OF STOCK STOCK STOCK MEMBERSHIP
DECEMBER 31, 2002 <20% 87.48% 90.00% 33.33% TOTAL
---------------------------------------- ----------- ------------- ----------- ------------ ------------
Total equity investments at December 31,
2000 $ 4,605,583
Equity investments made In 2001 $ 100,000 $ 450,000 $ 350,000 900,000
Equity in income (losses) 2001 (B) (507,212) (32,088) (2,601,270)
Converted from equity to debt (785,181)
Converted from debt to equity 100,000
Total equity investments at December 31,
2001 (A) 100,000 (57,212) 317,912 2,219,132
Equity investments made In 2002 2,000,000 2,000,000
Equity in income (losses) 2002 (297,625) (729,109)
Return of Capital (25,000)
Converted from debt to equity 1,235,100
Investment consolidated with parent 57,212 (2,000,000) (2,373,333)
Other than temporary decline in value of
its investments-2002 (C) (1,235,680)
Total equity investments at December 31,
2002 $ 100,000 -- -- $ 20,287 $ 1,091,110
(A) For 2001, the total amount per the balance sheet is $2,276,344, which is
approximately $57,000 higher than the amount shown on this schedule, due to
the Company's decision to fund the losses in excess of its book value. Such
$57,000 is recorded in accounts payable and accrued expenses in the
accompanying balance sheet as of December 31, 2001.
(B) For 2001, the total amount per the Company's Consolidated Statement of
Income is approximately $321,000 lower than the amount shown on this
schedule, due to the elimination of the activities between the Company and
these equity related investments
(C) For 2002, the total amount per the Statement of Income (for both equity and
debt investments) is approximately $150,000 higher than the amount shown on
this schedule, due to the permanent impairment of a "non-Capco" related
investment which is not shown on the statement.
77
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
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. However, from time-to-time, the Company may decide to provide
such additional financial support which, as of December 31, 2002, was not
significant. Should the Company determine that an impairment exists upon its
periodic review, and it is deemed to be other than temporary, the Company will
write down the recorded value of the asset to its estimated fair value and
record a corresponding charge in the Statement of Income.
All companies in which the Company has made equity investments provide
the Company with unaudited financial statements. For each equity method
investment, Newtek management reviews the facts and circumstances that are
apparent to ascertain if an adjustment is necessary to the books of the investee
to make its financial statements materially correct.
During the year ended December 31, 2002, the Company recorded an
additional $380,000 of equity investee losses. In the case of Transworld
Business Brokers, the company determined that there was approximately $290,000
of unrecorded deferred tax liabilities which the company computed. In addition,
Newtek determined approximately $90,000 of additional accounting and legal
accruals that were not recorded by NicheDirectories.
CONSOLIDATED DEBT INVESTMENTS
NEWTEK NEWTEK
MERCHANT NEWTEK NEWTEK FINANCIAL
SOLUTIONS MERCHANT NEWTEK BUSINESS INFO DC
OF SOLUTIONS OF PPM LINK, STRATEGIES, EXCHANGE OF SERVICES OF MEDIA
INVESTEE NY, LLC WI, LLC LLC LLC NY, LLC FL, LLC FINANCE
INVESTMENT DATE(S) MAR-01 JUN-01 MAR-01 AUG-01 MAR-02 NOV-99 OCT-02
MATURITY DATE NOV-05 JUN-06 SEP-02 OCT-02 MAR-05 NOV-01 OCT-03
INTEREST RATE 6.00% 5.00% 5.75% 5.00% 2.50% 5.25% 12.00%
-------------------- ----------- ------------- ------------ ----------- ------------ ------------- ---------
Total consolidated
debt investments
made in 2001 3,400,000 2,100,000 1,850,000 950,000
Return of
principal - 2001 (210,000) (25,000)
Total consolidated
debt investments
as of December
31, 2001 3,400,000 1,890,000 1.850,000 925,000
Total consolidated
debt investments
made in 2002 60,000 325,000
Investment
restructured and
consolidated
with parent 150,000
Return of
principal - 2002 (2,850,000) (385,000) (925,000)
Converted to
equity from
Debt - 2002 (850,000)
Converted to debt
from Equity -
2002 75,000 163,277
Total $685,000 $1,505,000 $1,000,000 -- $325,000 $150,000 $163,277
INVESTEE
INVESTMENT DATE(S)
MATURITY DATE
INTEREST RATE TOTAL
-------------------- ------------
Total consolidated
debt investments
made in 2001 $8,300,000
Return of
principal - 2001 (235,000)
Total consolidated
debt investments
as of December
31, 2001 8,065,000
Total consolidated
debt investments
made in 2002 385,000
Investment
restructured and
consolidated
with parent 150,000
Return of
principal - 2002 (4,160,000)
Converted to
equity from
Debt - 2002 (850,000)
Converted to debt
from Equity -
2002 238,277
Total $3,828,277
78
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
CONSOLIDATED EQUITY INVESTMENTS
NEWTEK NEWTEK
MERCHANT NEWTEK BUSINESS
SOLUTIONS MERCHANT NEWTEK PPM NEWTEK EXCHANGE
OF NY, SOLUTIONS MERCHANT LINK, STRATEGIES, OF NY,
LLC OF LA, SOLUTIONS LLC LLC LLC
INVESTEE-INVESTMENT MAR-01 LLC AUG-01 OF CO, MAR-01 AUG-01 MAR-02
DATE(S) PREFERRED PREFERRED LLC PREFERRED PREFERRED PREFERRED
TYPE OF INVESTMENT MEMBER MEMBER JUN 01 MEMBER MEMBER MEMBER
OWNERSHIP INTEREST 90.00% 95.00% 95.00% 67.00% 70.00% 94.14%
--------------------------- -------------- ---------------- --------------- -------------- -------------- ---------------
Total consolidated equity
investments -2001 $ 200,000 $ 1,350,000 $ 253,333 $ 999,950
Total consolidated equity
investment made in 2002 3,308,665 3,175,667
Investment consolidated
with parent
Converted from debt to
equity -2002 850,000
Converted from equity to
debt -2002 (75,000)
Preferred return-dividends (73,471)
Total consolidated equity
Investments - 2002 $ 125,000 $ 1,350,000 $ 3,308,665 $ 1,103,333 $ 999,950 $ 3,102,196
NEWTEK NEWTEK
FINANCIAL FINANCIAL WILSHIRE
SBA INFO INFO NEWTEK LOUISIANA
HOLDINGS, SERVICES SERVICES CLIENT CAPITAL NEWTEK IT
INC. OF LA, OF FL, SERVICES, MANAGEMENT SERVICES,
SEP-02 LLC LLC LLC FUND LLC
INVESTEE SERVICES DEC-03 JUN-01 JUN -03 DEC-02 OCT-00
INVESTMENT DATE(S) PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
TYPE OF INVESTMENT STOCK MEMBER MEMBERSHIP MEMBER MEMBERSHIP STOCK
OWNERSHIP INTEREST 90.00% 80.00% 87.48% 95.00% 100.00% 90.00%
--------------------------- -------------- ---------------- --------------- -------------- -------------- ---------------
Converted from equity
method to consolidation $ 430,545
Total consolidated equity
investments - 2001 430,545
Total consolidated equity
investments - 2002 $ 284,000 $ 185,000 $ 3,550,000 $ 972,500
Investment consolidated
with parent $ 2,000,000 (57,212)
Preferred return-dividends (27,405) (27,273)
Preferred return-
redemption (1,081,271)
Total consolidated equity
Investments - 2002 $ 2,000,000 $ 284,000 $ 100,383 $ 2,441,456 $ 972,500 $ 430,545
79
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
Investee Investment Date
Type of Investment
Ownership Interest Total
------------------------------ --------------
Converted from
equity method to consolidation $ 430,545
Total consolidated equity
investments 2001 2,803,283
Total consolidated equity
investment 2002 11,475,832
Investment consolidated
with Parent 1,942,788
Converted from debt to
equity 2002 850,000
Converted from equity to
debt - 2002 (75,000)
Preferred return - dividends (128,149)
Preferred returns -
redemption (1,081,271)
Total consolidated equity
Investments 2002 $ 16,648,573
The following analysis demonstrates the relationship of total
consolidated investment, funds returned by consolidated entities and results in
the net investments in consolidated entities.
--------------------------------------------------------------------------------
SUMMARY OF CONSOLIDATING INVESTMENT ACTIVITY
------------------------------------------------------------ -------------------
Consolidating Investments made in 2002
(Equity and Debt) $13,860,832
------------------------------------------------------------ -------------------
------------------------------------------------------------ -------------------
Less: Repayments from Consolidated Entities (5,302,583)
------------------------------------------------------------ -------------------
------------------------------------------------------------ -------------------
Plus: Cash Received from Consolidation of Entities
Formerly Accounted for Under the Equity Method 313,485
------------------------------------------------------------ -------------------
------------------------------------------------------------ -------------------
Consolidation of Majority Owned Subsidiaries $ 8,871,734
------------------------------------------------------------ -------------------
The Company recognizes income from tax credits as it's capcos make
qualified investments and satisfy statutory investment percentage thresholds
within specified time requirements. Newtek believes that the presentation in the
statement of cash flows of gross investments made is appropriate since it
provides disclosure of the aggregate amount of investment activity during the
reporting period, thus providing the information relative to achieving the
Company's investment thresholds and the corresponding recognition of income from
tax credits.
80
NOTE 4 - OTHER INVESTMENTS:
In the year 2000, the Company invested $195,000 in five different
internet startup companies, for minority stakes (the cost method was used since
the percentage owned by Newtek was less than 20% it did not exercise significant
influence over these entities). These investments were made from Newtek's
"non-Capco" funds (Capco funds have restrictions on where the business must be
located, the type of business that can be invested in, etc.). In 2001, the
Company made a follow on investment of $78,000 in one of the companies. These
investments were recorded as Other Assets on the Balance Sheet.
All the non-qualified investments have been written down in full at
December 31, 2002 due to charges recorded in 2001 ($75,000) and 2002 ($162,000).
These write-offs were recorded as an Other Than Temporary Decline in Value of
Investments on the Statement of Income.
NOTE 5 - 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 Capco's interest obligations under the note
are as described in Notes 1 and 8. 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 after the fifth year of the 10 year term of
the note. In 2002, the warrant was purchased by the Company for stock.
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, 2002 and 2001, the Company recorded $6,500 of
interest expense for such accretion. At the maturity date in June 2008, the note
balance will be $2,673,797 and the Insurer will pay such amount to the Certified
Investor.
In May 2000, WA issued an additional note to a Certified Investor for
total proceeds of $1,251,630. This note has been recorded at its face amount of
$1,136,364, which is the amount payable at maturity in 2008. The interest rate
on this note is 10%. The excess of the proceeds over the face amount, or
$115,266, will be amortized to income over the term of the note.
Under the terms of the notes, WA is required to maintain minimum levels
of working capital and tangible net worth, as defined. At December 31, 2002 and
2001 WA was in compliance with such requirements.
As discussed in Note 2, although WA purchased Coverage A, the note
purchase agreements were structured such that, for accounting purposes, WA
remained primarily liable for the repayment of principal on the notes payable to
the certified investors. As such, WA was unable to extinguish its liability
under the provisions of SFAS 140, Accounting for Transfer and Servicing of
Financial Assets and Extinguishments of Liabilities. All of Newtek's other
capcos effectively extinguished their notes payable to the certified investors
as more fully described in
81
NOTE 5 - NOTES PAYABLE - CERTIFIED INVESTORS (CONTINUED):
Note 10. Despite these accounting considerations, as both a legal and practical
matter, Newtek continues to rely on the provisions of the Capco insurance policy
for WA that requires the insurer to make the payment of the principal amount of
the certified investor notes at maturity.
Following is a summary of the Note Payable Certified Investor balance:
------------------------------------------------------------------
Balance -December 31, 2000 $3,861,220
------------------------------------------------------------------
Less: Amortization of premium to income (2,831)
------------------------------------------------------------------
Balance - December 31, 2001 3,858,389
------------------------------------------------------------------
Less: Amortization of premium to income (14,208)
------------------------------------------------------------------
Balance - December 31, 2002 $3,844,181
------------------------------------------------------------------
Set forth below is the total amount of principal repayments due to Certified
Investors for which the Company's capcos are secondarily liable:
Year Ending December 31
------ ------------------
2004 $3,695,940
2005 41,312,861
2006 3,102,659
2007 10,503,806
2008 4,337,136
2009 70,450,695
------------------
Total $133,403,096
NOTE 6 - NOTES PAYABLE - INSURANCE AND OTHER:
In October 1999, WI and WLA each borrowed $2,000,000 ($4,000,000 in
total), from a financing company, AI Credit, to finance a portion of the total
premiums due to an insurance company upon the creation of the two Capcos. The
notes bear interest at 8.5%, and were payable in three installments beginning on
April 1, 2001, with the final payment due on October 24, 2002. WI and WLA made
the April 1, 2001 payments in accordance with the terms of the agreements.
Accrued interest included in accounts payable and accrued expenses at December
31, 2001 amounted to $162,025. The entire balance was paid in its entirety
(including any accrued interest) in October 2002.
82
NOTE 6 - NOTES PAYABLE - INSURANCE AND OTHER (CONTINUED):
In April 2000, WNYII borrowed $1,500,000 from a financing company, AI
Credit, to finance a portion of the total premiums due to an insurance company
upon the creation of this Capco. The note bears interest at 9.5%, and is payable
in three installments beginning on October 13, 2001, with the final payment due
on April 13, 2003. WNYII made the October 13, 2001 payment in accordance with
the terms of the agreement. Accrued interest included in accounts payable and
accrued expenses at December 31, 2002 and December 31, 2001 amounted to
approximately $86,000 and $100,000, respectively.
In October 2000, WLPII borrowed $300,000 from a financing company, AI
Credit, to finance a portion of the total premiums due to an insurance company
upon the creation of this Capco. The note bears interest at 9.92%, and is
payable in three installments beginning on April 13, 2002, with the final
payment due on October 13, 2003. Accrued interest included in accounts payable
and accrued expenses at December 31, 2002 and December 31, 2001 amounted to
approximately $22,000 and $37,000, respectively.
In January 2001, WNYPIII borrowed $5,200,000 from a financing company,
AI Credit, to finance a portion of the total premiums due to an insurance
company upon the creation of this Capco. The notes bear interest at 9.4%, and
are payable in three installments beginning on July 31, 2002, with the final
payment due on January 31, 2004. Accrued interest included in accounts payable
and accrued expenses at December 31, 2002 and December 31, 2001amounted to
approximately $49,000 and $449,000, respectively.
In April 2002, WC borrowed $2,000,000 from a financing company, AI
Credit, to finance a portion of the total premiums due to an insurance company
upon the creation of this Capco. The notes bear interest at 7.9%, and are
payable in three installments beginning on October 22, 2003, with the final
payment due on April 22, 2005. Accrued interest included in accounts payable and
accrued expenses at December 31, 2002 amounted to approximately $115,000.
In October 2002, WLPIII borrowed $1,000,000 from a financing company,
AI Credit, to finance a portion of the total premiums due to an insurance
company upon the creation of this Capco. The notes bear interest at 7.4%, and
are payable in three installments beginning on April 15, 2003, with the final
payment due on October 15, 2005. Accrued interest included in accounts payable
and accrued expenses at December 31, 2002 amounted to approximately $16,000.
These notes are collateralized by the assets of the respective Capcos.
The aggregate amounts of principal payments on existing notes payable -
insurance maturing in each of the next three years are as follows (all are as of
December 31st):
2003 $ 2,080,608
2004 1,806,818
2005 1,482,470
-----------
$ 5,369,896
-----------
83
NOTE 6 - NOTES PAYABLE - INSURANCE AND OTHER (CONTINUED):
Following is a summary of the Notes Payable - Insurance balance:
-----------------------------------------------------
Balance -December 31, 2000 $ 5,800,000
-----------------------------------------------------
Less: Repayments made in 2001 (1,595,968)
-----------------------------------------------------
Add: Borrowings by Capcos in 2001 5,200,000
-----------------------------------------------------
Balance - December 31, 2001 9,404,032
-----------------------------------------------------
Less: Repayments made in 2002 (7,034,136)
-----------------------------------------------------
Add: Borrowings by Capcos in 2002 3,000,000
-----------------------------------------------------
Balance - December 31, 2002 $ 5,369,896
-----------------------------------------------------
In addition, during 2002, one of the Company's consolidated partner companies
issued approximately $481,000 in notes (12% interest per annum) which are due in
full in 2003.
The Capcos borrowed these funds to assist in paying the premiums for
the Capco insurance which included both Coverage A and Coverage B and thus
providing greater liquidity in the Capco. This additional borrowing enabled the
Capco to have more cash available to make more qualified investments. The
borrowings can be repaid from the proceeds of returns to the capcos through
principal and interest on debt investments and returns of or on equity from
investments made or cash flows from operations. AI Credit, as well as the
insurer for the Capco insurance policy, are subsidiaries of AIG.
NOTE 7 - LINES OF CREDIT:
In November 2001, the Company entered into a $1,500,000 one year
revolving working capital loan agreement with JP Morgan Chase, bearing interest
at the prime rate plus 0.25% per annum. The agreement expires in June 2003. At
December 31, 2002 and December 31, 2001, the Company had outstanding borrowings
of $450,000 and $575,000, respectively, from the bank at an interest rate of
5.75%. All assets of the Company, except for all assets in the Capco entities,
collateralize such outstanding borrowings.
Commercial Capital Corp. ("CCC") at the time of its acquisition by the
Company had a $10 Million line of credit with a bank. As of December 31, 2002,
the amounts outstanding under this line of credit were $3,998,630 and were
assumed by the Company in connection with its acquisition of CCC (included in
Bank Notes Payable on the accompanying consolidated balance sheet the aggregate
such amount reduced by $1,500,000 due to the conversion of such borrowings into
CCC preferred stock immediately prior to the acquisition). The line of credit is
collateralized by loans made by CCC. The line of credit bears interest at the
prime interest rate plus 1% with interest payable monthly. The average rate for
the year ended December 31, 2002 was 5.76%. The rate at December 31, 2002 was
5.25%. There was no accrued interest payable under this line of credit as of
December 31, 2002. In addition, this line of credit requires that a percentage
of all advances made to CCC be deposited into an account in the name of the
bank. The balance in this account as of December 31, 2002 was $198,467 and is
included in receivable from bank on the accompanying consolidated balance sheet.
84
NOTE 7 - LINES OF CREDIT (CONTINUED):
CCC also had a line of credit with another bank for $75,000,000. As of
December 31, 2002, the amount outstanding under this line of credit was
$51,325,862 and was assumed by the Company in connection with its acquisition of
CCC (included in Bank Notes Payable on the accompanying consolidated balance
sheet the aggregate such amount reduced by the aforementioned $1,500,000
preferred stock). The line of credit bears interest at the one-month LIBOR rate
plus 2.50%, and was collateralized by the loans made by CCC. The average
interest rate for the year ended December 31, 2002 was 4.3%. The interest rate
at December 31, 2002 was 3.88%. Interest on the line is payable monthly in
arrears. In addition, this line of credit required that a percentage of all
advances made to CCC be deposited into an account in the name of the bank. This
line of credit required CCC to meet certain administrative and financial
covenants, including the maintenance of a minimum net worth, ratio of total
indebtedness to net worth, limitation on permitted subordinated debt and
profitability covenants as defined in the agreement. Under the terms of an
agreement between CCC and both of the banks with which CCC maintains lines of
credit, all payments received from CCC's borrowers except for principal and
interest on the guaranteed portion of the loans are transferred into a
restricted bank account. CCC cannot use these funds until the end of a calendar
month at which time the funds are used to pay required principal and interest to
the banks and certain other required payments.
Effective with the Company's acquisition of Commercial Capital, a new
line of credit was provided by Deutsche Bank to the successor to Commercial
Capital, Newtek Small Business Finance. The aforementioned CCC credit lines were
refinanced, with the aforementioned outstanding SBA loan balances aggregating,
after accounting for the $1,500,000 conversion to preferred stock, $53,824,492
at December 31, 2002. The new line of credit for $75 Million expires March 31,
2004 and is guaranteed by the Company. Newtek Small Business Finance may request
an increase in the line of credit, for which Deutsche Bank, in its sole
discretion, may increase in total up to $100 Million. The new Deutsche Bank line
has terms and conditions similar to those contained in the Commercial Capital
line, described above.
NOTE 8 - LOANS RECEIVABLE (NON-CAPCO):
Loans receivable were generated by CCC prior to its acquisition by the
Company. Such loans are primarily related to entities in the Northeast region of
the United States with concentrations in the restaurant, manufacturing, hotel
and motel industries.
The unpaid principal amount of loans serviced for others is not
included in the accompanying consolidated balance sheet. The unpaid principal of
loans serviced for others was approximately $141,505,000 at December 31, 2002.
The following is a summary of Loans Receivable at December 31, 2002:
Due in one year or less $ 177,528
Due between one and five years 1,431,585
Due after five years 57,021,527
Less : Allowance as of December 31, 2002 (2,557,624)
------------
Balance - December 31, 2002 $ 56,073,016
============
85
NOTE 8 - LOANS RECEIVABLE (NON-CAPCO) (CONTINUED):
As of December 31, 2002, SBA loans due after one year that have
adjustable interest rates amount to $54,329,608, SBA loans that are on a
non-accrual basis amount to $2,914,767, and SBA loans that are past due more
than 90 days, but are still performing (accruing interest), amount to $293,800.
NOTE 9 - CREDITS IN LIEU OF CASH:
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. The Capco is entitled to earn tax credits upon
satisfying defined investment percentage thresholds within specified time
requirements. Each statute requires that the Capco invest a threshold percentage
of "certified capital" (the funds provided by the insurance company investors)
in businesses defined as qualified within the time frames 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 permanent
recapture of all or a portion of the allocated tax credits. The proportion of
the possible 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) at that point. 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 deliverable to the Certified Investors. The obligation to deliver tax
credits to the Certified Investors is recorded as interest payable. On the date
the tax credits are utilizable by the Certified Investors, the Capco decreases
credits in lieu of cash with a corresponding decrease to interest payable.
Following is a summary of the Credits in Lieu of Cash balance:
-------------------------------------------------------------
Balance - at December 31, 2000 $17,497,169
-------------------------------------------------------------
Less: Deliveries made in 2001 (17,183,989)
-------------------------------------------------------------
Add: Credits earned in 2001 21,497,596
-------------------------------------------------------------
Balance - December 31, 2001 21,810,776
-------------------------------------------------------------
Less: Deliveries made in 2002 (10,832,872)
-------------------------------------------------------------
Add: Credits earned in 2002 30,603,046
-------------------------------------------------------------
Balance - December 31, 2002 $41,580,950
-------------------------------------------------------------
86
NOTE 10 - NOTES PAYABLE AND EXTINGUISHMENT 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.
At the time the Capcos obtained the proceeds from the issuance of the
debt instruments, Capco warrants or Company common stock to the Certified
Investors, the Capcos also purchased insurance contracts from the Insurer. These
insurance contracts are similar to the coverage purchase by Wilshire Advisers
described in Note 2; however, the Coverage A portion of these contracts
extinguishes a substantial portion of the Capcos' liability for the repayment of
the funds obtained from the Certified Investors and, as such shifts such
liability to the Insurer. The structure of the Capco insurance is, with respect
to Coverage A (return of principal), that the insurer assumes the primary
obligation to make the repayment of principal of the Capco notes upon the
maturity dates. The Capcos, however, are secondarily, or contingently, liable
for such payment. The Company believes that the likelihood of one or more of the
Capcos becoming primarily liable for the payments required to be made by the
Insurer under Coverage A is remote, because the insurer, a subsidiary of a major
multi-national insurance company, has a claims paying ability having the rating
"AAA," the highest available. The Capcos 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. Based upon these events and facts,
each Capco has met the requirements under SFAS 140 to extinguish the principal
portion of the debt issued to the insurance company investors. The Capco, as a
secondary obligor, must assess whether it has a SFAS 5 contingency to record on
the date of extinguishment and at every reporting date thereafter until the
notes are repaid by the Insurer. At December 31, 2002, management has concluded
that the likelihood of the Capcos becoming primarily liable for the payments
required to be made by the Insurer under Coverage A on the Notes is remote
(i.e., the Insurer failing to make payment). SFAS 140 requires, however, that
the secondary obligation (the portion extinguished by the purchase of the
insurance) be recorded at fair value, which the Company has currently assessed
at zero at December 31, 2002.
The Company has allocated the initial proceeds received in 2002 from
the Certified Investors as follows:
Notes payable, including premiums $ 29,999,543
Company common stock 719,957
------------
$ 30,719,500
------------
The Company purchased Coverage A to extinguish a principal portion of
the Notes payable. The resulting difference, less the note premiums, represents
the excess of the initial liability under the debt instruments over the Coverage
A payments, and has been recorded as notes payable in credits in lieu of cash,
representing the present value of the Capcos' total liability it must pay to the
Certified Investors. Such amount will be increased by 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 by delivering the tax credits, or
paying cash.
The following is a summary of the extinguishment transactions and
reconciliation of notes payable in credits in lieu of cash balances at December
31, 2002 (exclusive of proceeds allocated to warrants as noted above):
87
NOTE 10 - NOTES PAYABLE AND EXTINGUISHMENT OF DEBT (CONTINUED):
----------------------------------------------------------------------------------------------------------------------------
CAPCO, DUE
DATE AND A
IMPUTED PAYMENT IN ACCRUED OBLIGATION DISCOUNT
INTEREST RATE ORIGINAL EXTINGUISHED REMAINING CREDIT IN INTEREST (@ AT REMAINING AMORTIZED
OF NOTE PRINCIPAL OBLIGATION OBLIGATION LIEU OF CASH STATED RATE) 12/31/02 OBLIGATION DISCOUNT
WI, due 2008,
21.9% $16,666,667 $(5,939,649) $10,727,018 $(5,000,000) $3,211,911 $8,938,929 $(3,146,579) $1,211,155
WLA, due
2008, 22.3% $16,400,000 $(4,810,015) $11,589,985 $(5,412,000) $3,454,292 $9,632,277 $(4,365,829) $1,870,427
WLA II, due
2009, 18.0%) $3,050,000 $(765,908) $2,284,092 $(922,595) $401,102 $1,762,599 $(699,097) $281,356
WP, due 2010
19.2%) $37,384,028 $(15,266,802) $22,117,226 $(10,280,607) $7,847,562 $19,684,181 $(7,861,123) $2,832,880
WNY II, due
2010, 27.9%) $6,807,866 $(2,929,053) $3,878,813 $(1,361,573) $1,132,496 $3,649,736 $(2,001,756) $510,455
WNY III, due
2011, 16.6%) $35,160,202 $(14,079,476) $21,080,726 $(3,516,020) $3,991,370 $21,556,076 $(6,608,240) $1,358,216
WLA III, due
2012, 8.7%) $8,000,000 $(2,000,921) $5,999,079 -- $66,679 $6,065,758 $(968,824) $24,452
WCOL, DUE
2013, 13.60%) $22,057,767 $(9,349,608) $12,708,159 -- $900,183 $13,608,342 $(2,234,795) $95,523
----------------------------------------------------------------------------------------------------------------------------
==============================================================================================================
TOTALS $145,526,530 $(55,141,432) $90,385,098 $(26,492,795) $21,005,595 $84,897,898 $(27,886,234) $8,184,464
==============================================================================================================
------------------------------------------
CAPCO, DUE
DATE AND B (A+B)=
IMPUTED DISCOUNT BALANCE OF
INTEREST RATE AT OBLIGATION
OF NOTE 12/31/02 @ 12/31/02
WI, due 2008,
21.9% $(1,935,424) $7,003,505
WLA, due
2008, 22.3% $(2,495,402) $7,136,875
WLA II, due
2009, 18.0%) $(417,741) $1,344,858
WP, due 2010
19.2%) $(5,028,243) $14,655,938
WNY II, due
2010, 27.9%) $(1,491,301) $2,158,435
WNY III, due
2011, 16.6%) $(5,250,024) $16,306,052
WLA III, due
2012, 8.7%) $(944,372) $5,121,386
WCOL, DUE
2013, 13.60%) $(2,139,272) $11,469,070
------------------------------------------
============================
TOTALS $(19,701,779) $65,196,119
============================
Under the note agreements, no interest is paid by the Capcos in cash provided
that the Certified Investors receive the uninterrupted use of the tax credits.
The Certified Investors acknowledge that the Insurer is primarily responsible
for the repayment of the original proceeds on the maturity dates.
NOTE 11 - WARRANTS:
The warrants entitle the holders to purchase, for a $.01 exercise
price, an interest in a Capco or Capco fund. The values ascribed to the warrants
issued to the Certified Investors and the Insurer have been recorded as minority
interests. In addition, certain minority interests have already been acquired by
minority shareholders. A portion of the initial proceeds received from the
Certified Investors is allocated to the warrants using a discounted cash flow
method. The following is the aggregate percentage interest of the minority
shareholders in each respective Capco or Capco fund as of December 31, 2002:
88
NOTE 11 - WARRANTS (CONTINUED):
CAPCO OR CAPCO FUND % INTEREST
WP, Florida 9.8%
WI, Wisconsin 2.8%
WLA, Louisiana 14.4%
WNYII, New York 24%
WLPII, Louisiana (a Capco fund) 4.5%
NYIII, New York 8.9%
WC, Colorado 15%
NOTE 12 - INCOME FROM TAX CREDITS:
As described in Note 1, each Capco has a contractual arrangement with a
particular state that legally entities the Capco to earn and deliver tax credits
(ranging from 10% to 11% per year) from the state upon satisfying certain
criteria. During the years ended December 31, 2002 and 2001, certain of the
Company's Capcos satisfied certain investment benchmarks and the related
recapture avoidance percentage requirements and accordingly, earned a portion of
the tax credits. In addition, in both 2002 and 2001, the Company recognized
income from tax credits resulting from the accretion of the discount
attributable to tax credits earned in prior years. As the tax credits are
delivered to the Certified Investors, the asset balance is offset against
interest payable in credits in lieu of cash (Note 10).
Below is a summary of Newtek's Income from tax credits, by Capco and by year.
TAX CREDIT AMOUNT AMOUNT TO BE TOTAL AMOUNT OF
REVENUE RECOGNIZED RECOGNIZED IN TAX CREDITS
RECOGNIZED: SINCE INCEPTION FUTURE PERIODS (c) ALLOCATED
--------------- ---------------- ------------------ ---------------
Wilshire Advisers, LLC
1999 371,228
2000 2,749,268
2001 94,742
2002 220,803 3,436,041 374,120 (a) 3,810,161
Wilshire Partners, LLC
1999 10,592,326
2000 3,783,949
2001 3,713,360
2002 15,246,878 33,336,513 4,047,515 (a) 37,384,028
Wilshire Investors, LLC
1999
2000
2001 5,000,000
2002 5,000,000 11,666,667 (a) 16,666,667
89
NOTE 12 - INCOME FROM TAX CREDITS (CONTINUED):
Wilshire Advisers, LLC
1999
2000
2001 5,412,000
2002 5,412,000 12,628,000 (a) 18,040,000
Wilshire LA Partners 2, LLC
1999
2000
2001
2002 2,879,389 2,879,389 475,611 (a) 3,355,000
Wilshire LA Partners 3, LLC
1999
2000
2001
2002 8,000,000 (b) 8,000,000
Wilshire NY Advisers II, LLC
1999
2000
2001 2,003,824
2002 3,838,946 5,842,770 965,096 (a) 6,807,866
Wilshire NY Partners III, LLC
1999
2000
2001 5,274,030
2002 5,274,030 10,548,060 24,612,142 (b) 35,160,202
Wilshire Colorado Partners
1999
2000
2001
2002 3,143,000 3,143,000 18,914,767 (b) 22,057,767
Total
1999 10,963,592
2000 6,533,217
2001 21,497,956
2002 30,603,046 69,597,773 81,683,918 151,281,691
(a) These Capcos have met the final state mandated investment threshold hurdle,
which means all of the tax credits have been earned. If the tax credits are
"earned" before the state is required to make delivery, then the present
value of the tax credit earned is recorded upon completion of the
requirements. The balance shown represents the discounted portion of the
tax credits which will be recognized in future periods.
(b) The respective Capco has NOT met the final state mandated investment
threshold hurdle, which means these tax credits have NOT been earned.
(c) Amounts will be recognized to the extent the related minimum investment
requirements are met.
90
NOTE 13 - INCOME TAXES:
Provision for income taxes for the years ended December 31, 2002 and
2001 is as follows (there was no current provision):
DEFERRED PROVISION:
2002 2001
----------- -----------
Federal $ 2,442,102 $ 497,998
State and local 287,306 58,588
Other (71,998) (21,970)
Provision for income taxes $ 2,657,410 $ 534,616
A reconciliation of income taxes computed at the U.S. federal statutory income
tax rate (34%) to the provision for income taxes for the years ended December
31, 2002 and 2001 is as follows:
2002 2001
----------- -----------
(BENEFIT) (BENEFIT)
PROVISION PROVISION
----------- -----------
Provision for income taxes at U.S. federal
statutory rate of 34% $ 2,442,102 $ 497,998
State and local taxes, net of federal benefit 287,306 58,588
Other (71,998) (21,970)
----------- -----------
$ 2,657,410 $ 534,616
Deferred tax assets and liabilities consisted of the following at December 31,
2002 and 2001:
Deferred tax assets: 2002 2001
------------ ------------
Net operating losses $ 10,397,582 $ 3,911,545
Interest payable in credits in lieu of cash 436,063 72,350
Investment losses 56,696 730,772
------------ ------------
Total deferred tax assets 10,890,341 4,714,667
------------ ------------
Deferred tax liabilities:
Credits in lieu of cash (14,616,492) (6,277,685)
Total deferred tax liabilities (14,616,492) (6,277,685)
------------ ------------
Net deferred tax liability $ (3,726,151) $ (1,563,018)
At December 31, 2002, the Company has net operating losses aggregating
approximately $27,552,000 which expire beginning in 2020. Realization of the
deferred tax assets is dependent on generating sufficient taxable income in
future years. Management has determined that a valuation allowance is not
required at December 31, 2002 and 2001 as it believes that it is more
91
NOTE 13 - INCOME TAXES (CONTINUED):
likely than not that the deferred tax assets will be realized. In addition, at
December 31, 2002, in connection with its acquisition of CCC, the Company
acquired net operating loss carryforwards of approximately $9,000,000 which
begin expiring at the end of 2020. In connection with the related purchase
accounting, the Company established a valuation allowance for the full amount of
the related net deferred tax asset acquired from CCC as management has
determined that it its uncertain as to whether such asset will be utilized in
the future.
NOTE 14 - COMMITMENTS AND CONTINGENCIES:
Capco or Capco fund 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 8). Generally, a Capco
or Capco fund must invest at least 50% of its Certified Capital in qualified
businesses within five years after the certification date. At December 31, 2002
and 2001, the Company had invested the percent of its Certified Capital as
follows:
DECEMBER DECEMBER
CAPCO OR CAPCO FUND 31, 2002 31, 2001
--------------------------------------------------------------------------------
WA, New York 59% 59%
WP, Florida 50% 40%
WI, Wisconsin 31% 31%
WLA, Louisiana 46% 35%
WNYII, New York 50% 40%
WLAPII, Louisiana 50% 24%
WNYIII, New York 49% 34%
WC, Colorado (statewide) 30% 0%
WC, Colorado (rural) 15% 0%
WLPIII, Louisiana 0% 0%
The Company has entered into employment agreements with three officers.
At December 31, 2002 the future minimum commitments are $855,000 for each of the
years ended December 31, 2003, 2004 and 2005.
92
NOTE 14 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
The following summarizes the Company's obligations and commitments, as
of December 31, 2002, for future minimum cash payments required under lease and
employment agreements:
OPERATING EMPLOYMENT
YEAR LEASES AGREEMENTS TOTAL
--------------------- ----------------- ----------------- ----------------
2003 $ 689,669 $ 855,000 $ 1,544,669
2004 684,642 855,000 1,539,642
2005 335,529 855,000 1,190,529
2006 345,534 -- 345,534
2007 258,867 -- 258,867
Thereafter 1,562,121 -- 1,562,121
----------------- ----------------- ----------------
Total $ 3,876,362 $ 2,565,000 $ 6,441,362
----------------- ----------------- ----------------
Rent expense for 2002 and 2001 was approximately $278,000 and $227,000,
respectively.
For certain Capcos, when 100% of the Certified Capital is invested in
qualified businesses as defined, the respective state is entitled to a
percentage of all appreciation of assets in excess of the amount required to
produce a specific internal rate of return.
From time to time the Company and its subsidiaries are parties to
various legal proceedings in the normal course of business. At December 31,
2002, there were no legal proceedings which management anticipates would have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
NOTE 15 - ASSETS HELD FOR SALE :
The Company owned a building and land in Mississippi which was held for
sale. The note was held by the Bank of Mississippi, and collateralized by the
property. At December 31, 2001, the Company determined there was a permanent
impairment on the property, and took an approximately $168,000 charge to
earnings. In March, 2002, the property was sold for an approximately $16,000
gain as compared to its book value at December 31, 2001. The Company received
payment on this asset held for sale, and the proceeds were used to fully pay the
outstanding mortgage.
NOTE 16 - RELATED PARTY TRANSACTIONS:
For the year ended December 31, 2001, the Company rented office space
at $3,000 per month on a month-to-month basis from a related party. In addition,
for the years ended December 31, 2002 and December 31, 2001, the Company
incurred financial consulting expenses of approximately $180,000 and
approximately $157,000 respectively, from a related party.
93
NOTE 17 - CONVERSION OF CAPCO MEMBERSHIP INTERESTS INTO NEWTEK STOCK:
In 2001, the Company issued 534,592 shares of its common stock to the
minority members of WI in exchange for substantially all of such members'
minority interests. This has been accounted for as a purchase transaction. The
fair value of the Company's common stock was determined based upon the quoted
market price of the Company's common stock, less a 45% discount due to certain
restrictions on the sale of the stock. Such value exceeded the book value of the
minority interest by approximately $978,000 and the Company has recorded such
amount as goodwill.
In 2002, the Company issued 1,505,338 shares of its common stock to the
minority members or warrant holders in various of its Capcos in exchange for all
of such minority interests. This has been accounted for as a purchase
transaction. The fair value of the Company's common stock was determined based
upon the quoted market price of the Company's common stock, less a 45% discount
due to certain restrictions on the sale of the stock. Such value exceeded the
book value of the minority interests by approximately $1,063,515 and the Company
has recorded such amount as goodwill.
In selling common stock in privately negotiated transactions, the
Company will generally apply a discount to current market value to reflect the
length and nature of resale restrictions. Where the only restrictions are those
resulting from the federal and state securities laws, the Company will discount
the issue price by 30 percent. In some cases, where the Company negotiates
additional contractual restrictions on the shares sold, restricting any
transfers from one to up to three years, an additional discount to current
market value of between 30% and 45% is used to determine the price paid for the
shares.
NOTE 18 - STOCK OPTIONS GRANTED TO DIRECTORS AND EMPLOYEES:
As of December 31, 2002, there were vested options outstanding to
purchase an aggregate of 801,329 shares of common stock at exercise prices
ranging from $3.05 to $10.00 per share, expiring through 2011.
As of December 31, 2002 the Company has granted a total of 2,456,837
options (included in this number are options of 224,500 issued to non-employees
and net of cancellations) to purchase shares of common stock to certain members
of management, employees and directors. The details of option activity since
adoption of the plan is as follows:
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
-------------- ------------
Outstanding at December 31, 2000 993,000 $ 7.08
Granted during 2001 701,000 $ 3.30
Exercised during year -- --
Cancelled during year (345,667) $ 7.00
-------------- ------------
Outstanding at December 31, 2001 1,348,333 $ 5.13
Granted during 2002 1,262,671 $ 3.61
94
NOTE 18 - STOCK OPTIONS GRANTED TO DIRECTORS AND EMPLOYEES (CONTINUED):
Exercised during year -- --
Cancelled during year (154,167) $ 5.65
-----------
Outstanding, December 31, 2002 2,456,837 $ 4.30
----------- ------------
Exercisable at December 31, 2002 801,329 $ 5.37
-----------
The following table summarizes information about stock options
exercisable at December 31, 2002:
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
----------------------------------------------- -----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
RANGE OF EXERCISES SHARES REMAINING EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------ ----------- ----------- -----------
$3.05 - $4.30 1,831,003 9.06 years $ 3.34 406,174 $ 3.31
$7.00 - $10.00 625,834 7.48 years $ 7.12 395,155 $ 7.12
NOTE 19 - EARNINGS PER SHARE:
Basic earnings per share is computed based on the weighted average number of
common shares outstanding during the period. The dilutive effect of common stock
equivalents is included in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive.
The calculations of Net Income Per Share were:
YEAR ENDED
DECEMBER 31,
-------------------------
2002 2001
----------- -----------
Numerator:
Numerator for Basic and Diluted EPS - income available to
common stock holders $ 8,168,251 $ 929,560
Numerator for basic and diluted EPS - extraordinary
item $ 3,643,009 $ --
Numerator for basic and diluted EPS-income before extraordinary item $ 4,525,242 $ 929,560
Denominator:
denominator for basic EPS - weighted average shares 24,183,501 21,889,958
Effect of dilutive securities (stock options) 110,039 19,569
Denominator for diluted EPS - weighted average shares 24,293,540 21,909,527
Net EPS: Basic $ .34 $ .04
Net EPS: Diluted $ .34 $ .04
Net EPS: Basic and Diluted before extraordinary gain $ .19 $ .04
95
NOTE 20 - ACQUISITIONS:
In January 2002, the Company acquired 100% of the outstanding common
stock of Exponential Business Development Company, Inc. (Exponential), of
Syracuse, NY. Exponential's primary business was to make non-controlling
investments in small and start-up companies. The purchase price consisted of
500,000 shares of Company common stock issued to the sellers. Under the terms of
the acquisition, an additional 500,000 shares will be issued over a seven year
period if acquired assets result in gains of $2 Million in excess of an initial
$1 Million recovery by the Company. The fair value of the 500,000 common shares
issued, $989,000, was determined based on the quoted market price of the
Company's common stock on the closing date, less a 35% discount due to certain
restrictions on the stock. Since Company management has determined that the
issuance of the additional 500,000 shares is currently unlikely due to
management's estimation that the payout provision will not be met, the Company
has not included the additional shares in the determination of the purchase
price. On a quarterly basis, management will assess the payout provision to
determine if it is likely it will be met in the future, and if so, the Company
will record the additional 500,000 shares as additional purchase price when
issued. Exponential directors and officers remain with that entity and received
a total of 365,000 options pursuant to the Company's stock option plan to
acquire Company common stock in exchange for future services.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Current assets (including cash of $106,642) $ 138,013
Other Assets 10,001
-------------
Total assets acquired 148,014
-------------
Current liabilities 52,350
-------------
Total liabilities assumed 52,350
-------------
Net assets acquired $ 95,664
-------------
The excess of the purchase consideration of $989,000 over the net
assets acquired amounts to approximately $893,000; such amount has been recorded
as goodwill.
On December 31, 2002, the Company and one of its Capcos acquired 94% of
the outstanding common stock of the holding company of Commercial Capital Corp.
(CCC). CCC was one of only 14 lenders licensed by the Small Business
Administration with authority to make SBA guaranteed loans nationwide. The
purchase price consisted of 380,471 shares of Company common stock issued to the
sellers. The Company's ownership was subsequently reduced in January 2003 due
the effect of the investment by an affiliate of CS First Boston of $2 Million.
Under the terms of the acquisition, an additional 82,980 shares will be issued
in the future if certain hurdles are met. The per share fair value of the
380,471 common shares issued, $3.38, was determined based on the five day
average of the quoted market price of the Company's common stock on the
announcement date, less a 30% discount due to certain restrictions on the stock.
Since Company management has determined that the issuance of the additional
shares is currently unlikely due to management's estimation that the payout
provision
96
NOTE 20 - ACQUISITIONS (CONTINUED):
will not be met, the Company has not included the additional shares in the
determination of the purchase price, and instead recognized a liability for
contingent consideration, amounting to approximately $196,000 and included in
accounts payable and accrued expenses on the balance sheet. On a quarterly
basis, management will assess the payout provision to determine if it is likely
it will be met in the future, and if so, the Company will record the additional
shares as additional purchase price when issued.
The transfer from CCC to the Company's subsidiary of CCC's license to
make SBA guaranteed small business loans in all jurisdictions nationwide was
approved by SBA on December 19, 2002. As a result of this transaction, all
future operations will be conducted under the name of Newtek Small Business
Finance, Inc., which is majority owned by the Company.
97
NOTE 20 - ACQUISITIONS (CONTINUED):
The allocation of the purchase price to the fair values of assets and
liabilities assumed is summarized below. The resulting excess of net assets
acquired over the consideration was allocated to non-financial assets and the
remaining excess was recorded as an extraordinary gain in accordance with SFAS
141.
FAIR VALUE OF ASSETS ACQUIRED
----------------------------------------------------------
Cash $ 2,367,870
Loans Receivable, net 56,073,016
Receivable from Bank 2,938,309
Accrued Interest Receivable 285,151
Servicing Asset 4,496,774 (c)
SBA License, net 159,917 (c)
Property & Equipment, net 272,925 (c)
Other Assets 515,805 (c)
-------------------
Total Assets $ 67,109,767
-------------------
FAIR VALUE OF LIABILITIES ASSUMED:
----------------------------------------------------------
Accounts payable and accrual $ 2,508,086
Line of credit 53,824,492
-----------------
Total liabilities 56,332,578
-----------------
Preferred Stock 1,500,000
-----------------
Net assets acquired 9,277,189
Less purchase price: Company common stock issued as (900,194)
consideration (see (a) below)
-----------------
Excess of net assets acquired over purchase price 8,376,995
Less, allocation of negative goodwill to non-financial (5,445,421)
assets (sum of (c) above)
Less, recognition of liability for contingent consideration (196,331) (see (b) below)
-------------------
Extraordinary gain on acquisition of business $ 2,735,243
-------------------
----------------------------------------------------------
(a)
Average share price five days before and five days after
the acquisition is announced (August 8, 2002) $ 3.38
Less, discount factor applied to above share price, based
upon restrictions on registration rights and resale
rights (30%) 70%
Value per share (rounded) used to compute purchase
consideration 2.37
Number of shares issued 380,471
Company common stock issued as consideration $ 900,194
-------------------
(b)
Average share price five days before and five days after
the acquisition is announced (August 8, 2002) $ 3.38
98
NOTE 20: ACQUISITIONS (CONTINUED):
Less, discount factor applied to above share price,
based upon restrictions on registration rights and
resale rights (30%) 70%
Value per share (rounded) used to compute purchase
consideration 2.37
Number of contingent shares 82,980
Company common stock issued as consideration $ 196,331
--------------
The accompanying consolidated statement of income for the year ended
December 31, 2002 includes the results of operations of Exponential from January
2002 through December 31, 2002 (since CCC was acquired on December 31, 2002, the
accompany consolidated statement of income include no activity for that entity).
The unaudited pro forma financial information set below is based upon the
Company's historical consolidated statement of income for the years ended
December 31, 2002 and December 31, 2001, adjusted to give effect to the
acquisition of Exponential and CCC as of the beginning of each period presented.
The unaudited pro forma financial information is presented for informational
purposes only and may not be indicative of what actual results of operations
would have been had the acquisition occurred on the dates indicated, nor does it
purport to represent the results of operations for future periods.
Pro forma (unaudited) for the years ended December 31:
2002 2001
-------------- --------------
Total revenues $ 40,521,000 $ 34,043,000
Income (loss) from continuing operations 2,811,000 (1,800,000)
-------------- --------------
Income (loss) per share - basic $ .11 $ (.08)
-------------- --------------
Income (loss) per share - diluted $ .11 $ (.08)
-------------- --------------
The fair value of securities traded in the market is normally more
clearly evident than the fair value of an acquired company. As a result, the
Company believes that the quoted market price of its stock issued to effect a
business combination is the best way to approximate the fair value of an
acquired company. The Company then applied a variable discount factor for each
transaction based upon the effects of legal restrictions and, in some cases,
contractual restrictions on resale. The greater the time the shareholders would
be required to hold the shares, the greater the discount utilized.
NOTE 21 - GOODWILL
Effective January 1, 2002, the Company adopted SFAS No.142. There was
no goodwill amortization expense for the year ended December 31, 2002. At
December 31, 2002, management determined that no write-down was needed based on
an evaluation for impairment under SFAS No. 142. Additions to goodwill in 2002
consist of approximately $893,000 related to the Exponential acquisition, and
approximately $1,049,000 from acquisitions of minority interests.
99
NOTE 21 - GOODWILL (CONTINUED):
The Company's net income for the year ended December 31, 2001 would
have increased from approximately $930,000 to $987,000, and basic and diluted
income per share would have increased from $.04 to $.05, if SFAS No. 142 had
been in effect.
NOTE 22 - SUBSEQUENT EVENTS:
In January, 2003, the Company sold in a private placement 55,718 shares
of stock, for net proceeds of approximately $216,000.
In January, 2003, the Company completed the sale of $2 Million of
preferred stock of NSBF to Credit Suisse First Boston Management Corporation
(CSFB). In addition, CSFB has a right to purchase all of the common stock in
NSBF at a significantly higher multiple as compared to the book value of NSBF at
December 31, 2002.
NOTE 23 - QUARTERLY INFORMATION (UNAUDITED):
THREE MONTHS ENDED
-----------------------------------------------------------------------
2001 3/31 6/30 9/30 12/31 FULL YEAR
--------------------------- ---------------- ---------------- ----------------- ----------------- -----------------
Total Revenue $ 6,721,551 $ 9,276,593 $ 6,317,486 $ 1,484,556 $ 23,800,186
Operating Income(Loss) $ 1,535,317 $ 4,507,990 $ 1,235,071 $ (2,485,851) $ 4,792,527
Income (Loss) Before
Extraordinary Gains $ 760,471 $ 1,224,424 $ 460,591 $ (1,515,926) $ 929,560
Net Income $ 760,471 $ 1,224,424 $ 460,591 $ (1,515,926) $ 929,560
EPS - Basic $ 0.04 $ 0.06 $ 0.02 $ (.08) $ 0.04
EPS - Diluted $ 0.04 $ 0.06 $ 0.02 $ (.08) $ 0.04
THREE MONTHS ENDED
-----------------------------------------------------------------------
2002 3/31 6/30 9/30 12/31 FULL YEAR
--------------------------- ---------------- ---------------- ----------------- ----------------- ------------------
Total Revenue $ 6,071,701 $ 5,350,857 $ 16,903,531 $ 6,298,062 $ 34,624,151
Operating Income (Loss) $ (260,637) $ (281,525) $ 8,827,290 $ 1,518,846 $ 9,803,974
Income (Loss) Before
Extraordinary Gains $ (159,605) $ (545,436) $ 5,453,038 $ (222,755) $ 4,525,242
Net Income $ 105,979 $ (545,436) $ 5,453,038 $ 3,154,670 $ 8,168,251
EPS - Basic $ .00 $ (.02) $ .22 $ .14 $ .34
EPS - Diluted $ .00 $ (.02) $ .22 $ .14 $ .34
100
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED):
PRINCIPLES OF ACCOUNTING FOR OWNERSHIP INTERESTS IN QUALIFIED
INVESTMENTS
The various interests that the Company acquires in its qualified
investments are accounted for under three methods: consolidation, equity method
and cost method. The applicable accounting method is generally determined based
on the Company's voting interest in a Partner Company.
Consolidation Method. Investments in which the Company directly or
indirectly owns more than 50% of the outstanding voting securities or those the
Company has effective control over are generally accounted for under the
consolidation method of accounting. Under this method, an investment's financial
position and results of operations are reflected within the Company's Balance
Sheet and Consolidated Statements of Income. All significant inter-company
accounts and transactions, including returns of principal, dividends, interest
received and investment redemptions have been eliminated. The results of
operations and cash flows of a consolidated Partner Company are included through
the latest interim period in which the Company owned a greater than 50% direct
or indirect voting interest for the entire interim period or otherwise exercised
control over the Partner Company. Upon dilution of control below 50%, the
accounting method is adjusted to the equity or cost method of accounting, as
appropriate, for subsequent periods. Because the minority ownership of the
capcos is so small, and in almost all cases the minority ownership of the
partner companies is similarly small, no amounts have been attributed to
minority interests.
Equity Method. Investees that are not consolidated, but over which the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence
with respect to an investee depends on an evaluation of several factors
including, among others, representation on the Company's Board of Directors and
ownership level, which is generally a 20% to 50% interest in the voting
securities of the Company, including voting rights associated with the Company's
holdings in common, preferred and other convertible instruments in the investee.
Under the equity method of accounting, an investee's accounts are not reflected
within the Company's Consolidated Balance Sheet and Consolidated Statements of
Income; however, the Company's share of the earnings or losses of the investee
is reflected in the caption "Equity income (loss)" in the Consolidated
Statements of Income.
Cost Method. Investees not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Balance Sheet and
Consolidated Statements of Income. However, cost method impairment charges are
recognized, as necessary, in the Consolidated Statement of Operations. If
circumstances suggest that the value of the investee has subsequently recovered,
such recovery is not recorded until realized.
101
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
On a monthly basis, the Company's Investment Committee meets to
evaluate the Company's investments. The Company considers several factors in
determining whether an impairment exists on the investment, such as the
investee's net book value, cash flow, revenue growth and net income. In
addition, the Investment Committee looks at larger variables, such as the
economy and the investee company's industry, to determine if an other than
temporary decline in value exists in the Company's investments.
The following table is an unaudited summary of the investments which
the Company accounts for under either the equity method or by consolidation.
These financial statements also reflect the degree to which the Company's
partner companies interact with each other to provide and market needed goods
or, particularly, services to each other. Such activity has been quantified
within the accompanying summary within the caption "intercompany items included
in above".
102
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
CONSOLIDATED ENTITIES (C)
NEWTEK NEWTEK MERCHANT NEWTEK MERCHANT
STRATEGIES SOLUTIONS - CO SOLUTIONS - NY
(HARVEST) (UPS-CO) (UPS)
---------------------------------- ----------------------------------- -----------------------------------
2002 2001 2002 2001 2002 2001
---------------- ---------------- ----------------- ----------------- ----------------- -----------------
Cash $ 256,233 $ 1,638,703 $ 3,248,403 (a) $ 18,611 $ 2,969,784
Other Assets $ 207,801 $ 117,588 $ 2,662 (a) $ 417,956 $ 486,632
TOTAL ASSETS $ 464,034 $ 1,756,291 $ 3,251,065 (A) $ 436,567 $ 3,456,416
Current Liabilities $ 33,006 $ 53,026 $ 14,433 (a) $ 108,554 $ 51,630
TOTAL LIABILITIES $ 33,006 $ 1,002,978 $ 14,433 (a) $ 584,112 $ 3,451,640
TOTAL EQUITY (DEFICIT) $ 431,028 $ 753,313 $ 3,236,632 (a) $ (147,545) $ 4,776
NEWTEK MERCHANT NEWTEK MERCHANT
SOLUTIONS - LA SOLUTIONS - W I
(UPS-LA) (UPS-WI)
----------------------------------- -----------------------------------
2002 2001 2002 2001
---------------- ----------------- ----------------- -----------------
Cash $ 705,617 $ 1,259,089 $ 445,686 $ 1,798,864
Other Assets $ 26,485 $ 19,251 $ 254,444 $ 46,722
TOTAL ASSETS $ 732,102 $ 1,278,340 $ 700,130 $ 1,845,586
Current Liabilities $ 29,729 $ 7,251 $ 118,670 $ 19,174
TOTAL LIABILITIES $ 29,729 $ 7,251 $ 1,588,670 $ 1,909,074
TOTAL EQUITY (DEFICIT) $ 702,373 $ 1,271,089 $ (888,540) $ (63,488)
PPM EXPONENTIAL BUSINESS NEWTEK SMALL BUSINESS
LINK DEVELOPMENT CO., INC. FINANCE (NSBF)
---------------------------------- ----------------------------------- -----------------------------------
2002 2001 2002 2001 2002 2001
---------------- ---------------- ----------------- ----------------- ----------------- -----------------
Cash $ 1,254,506 $ 1,700,109 $ 41,973 $ 106,642 $ 4,367,870 (a)
Other Assets $ 61,686 $ 130,558 $ 25,551 $ 41,372 $ 59,296,476 (a)
TOTAL ASSETS $ 1,316,192 $ 1,830,667 $ 67,524 $ 148,014 $ 63,664,346 (a)
Current Liabilities $ 1,069,144 $ 46,553 $ 59,996 $ 57,350 $ 2,704,417 (a)
TOTAL LIABILITIES $ 1,919,144 $ 1,896,553 $ 59,996 $ 57,350 $ 58,028,909 (a)
TOTAL EQUITY (DEFICIT) $ (602,952) $ (65,886) $ 7,528 $ 90,664 $ 5,635,437 (a)
NEWTEK
NEWTEK IT FINANCIAL INFORMATION
SERVICES SYSTEMS - FL --(GMT)
----------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Cash $ 2,372 3,835,404 $ 70,034 17,799
Other Assets $ 64,910 170,464 $ 131,985 113,438
Total Assets $ 67,282 4,005,868 $ 202,019 131,237
Current Liabilities $ 103,655 60,673 $ 44,809 13,795
Total Liabilities $ 158,260 3,575,323 $ 194,809 188,449
Total Equity (Deficit) $ (90,978) 430,545 $ 7,210 (57,212)
103
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
CONSOLIDATED ENTITIES (CONTINUED)
NEWTEK NEWTEK NEWTEK CLIENT
FINANCIAL INFORMATION BUSINESS EXCHANGE OF NY SERVICES
SYSTEMS - LA (GMT-LA) (TRANSWORLD - NY) (GLOBAL)
---------------------------------- ----------------------------------- -----------------------------------
2002 2001 2002 2001 2002 2001
--------------- -------------- --------------- --------------- --------------- ---------------
Cash $ 284,000 (a) $ 3,186,239 (a) $ 2,377,662 (a)
Other Assets $ 500 (a) $ 55,005 (a) $ 1,415 (a)
TOTAL ASSETS $ 284,500 (a) $ 3,241,244 (a) $ 2,379,077 (a)
Current Liabilities $ 11,373 (a) $ 21,089 (a) $ 0 (a)
TOTAL LIABILITIES $ 11,373 (a) $ 346,089 (a) $ 0 (a)
TOTAL EQUITY (DEFICIT) $ 273,127 (a) $ 2,895,155 (a) $ 2,379,077 (a)
DC MEDIA TOTALS
---------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- ---------------
Cash $ 344,293 (a) $ 16,603,499 $ 13,326,394
Other Assets $ 385,063 (a) $ 60,931,939 $ 1,126,025
TOTAL ASSETS $ 729,356 (a) $ 77,535,438 $ 14,452,419
Current Liabilities $ 92,226 (a) $ 4,411,101 $ 309,452
TOTAL LIABILITIES $ 736,003 (a) $ 63,704,533 $ 12,088,618
TOTAL EQUITY (DEFICIT) $ (6,647) (a) $ 13,830,905 $ 2,363,801
NEWTEK NEWTEK MERCHANT NEWTEK MERCHANT
STRATEGIES SOLUTIONS - CO SOLUTIONS -- NY
---------------------------------- ---------------------------------- ----------------------------------
2002 2001 2002 2001 2002 2001
---------------- ---------------- ----------------- ---------------- ---------------- ----------------
Revenue $ 558,119 $ 167,256 $ 215 (a) $ 417,826 $ 219,809
SG&A 835,247 393,976 72,258 (a) 631,432 259,092
Depreciation and
Amortization 8,886 488 0 (a) 43,564 1,818
Interest expense 35,624 19,479 0 (a) 30,188 154,123
Income/Loss (321,638) (246,687) (72,043) (a) (287,358) (195,224)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 404,612 78,179 15 -- 42,129 2,394
SG&A 45,842 12,649 95 -- 138,180 54,054
Interest Expense 35,625 19,479 0 -- 30,188 154,123
NEWTEK NEWTEK
MERCHANT MERCHANT
SOLUTIONS -- LA SOLUTIONS -- WI
---------------------------------- ----------------------------------
2002 2001 2002 2001
----------------- ---------------- ---------------- ----------------
Revenue $ 67,967 1,765 $ 1,180,648 $ 29,407
SG&A 547,589 80,676 1,903,475 39,340
Depreciation and Amortization 2,974 0 11,761 11,761
104
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
Interest expense 0 0 84,875 41,854
Income/Loss (482,596) (78,911) (819,463) (63,548)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 11,984 0 31,964 --
SG&A 92,399 12,522 149,422 1,574
Interest Expense -- (a) 84,875 41,854
CONSOLIDATED ENTITIES (CONTINUED)
PPM EXPONENTIAL BUSINESS NEWTEK SMALL BUSINESS
LINK DEVELOPMENT CO., INC. FINANCE
---------------------------------- ----------------------------------- -----------------------------------
2002 2001 2002 2001 2002 2001
---------------- ---------------- ----------------- ----------------- ----------------- -----------------
Revenue $ 367,604 $ 35,000 $ 223,160 $ 253,160 $ 0 (a)
SG&A 677,601 361,449 305,496 200,973 0 (a)
Depreciation and
Amortization 875 159 800 800 0 (a)
Interest expense 97,510 80,367 0 0 0 (a)
Income/Loss (408,382) $ (406,975) (83,136) 51,387 0 (a)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 175,218 15,000 -- -- (a)
SG&A 36,923 8,690 -- -- (a)
Interest Expense 97,510 80,367 -- -- (a)
NEWTEK IT NEWTEK FINANCIAL INFORMATION
SERVICES SYSTEMS - FL
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Revenue $ 393,679 $ 257,437 $ 521,154 $ 281,319
SG&A 818,988 541,941 577,609 722,649
Depreciation and Amortization 10,152 7,440 22,194 9,977
Interest expense 53,237 151,537 8,076 54,712
Income/Loss (488,698) (443,481) (86,725) (506,019)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 41,401 41,045 304,872 53,704
SG&A 102,741 42,565 34,352 28,154
Interest Expense 53,050 150,937 8,076 54,712
105
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
CONSOLIDATED ENTITIES (CONTINUED)
NEWTEK NEWTEK NEWTEK
FINANCIAL INFORMATION BUSINESS EXCHANGE CLIENT
SYSTEMS - LA OF NY SERVICES
---------------------------------- ---------------------------------- ----------------------------------
2002 2001 2002 2001 2002 2001
---------------- ---------------- ---------------- ---------------- ---------------- ----------------
Revenue $ 0 (a) $ 0 (a) $ 0 (a)
SG&A 11,373 (a) 195,996 (a) 62,236 (a)
Depreciation and
Amortization 0 (a) 6,630 (a) 133 (a)
Interest expense 0 (a) 6,649 (a) 0 (a)
Income/Loss (11,373) (a) (209,275) (a) (62,369) (a)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue 0 (a) -- (a) -- (a)
SG&A 0 (a) 37,900 (a) 37,900 (a)
Interest Expense 0 (a) 6,094 (a) 6,094 (a)
DC MEDIA
FINANCE TOTALS
---------------------------------- ----------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Revenue $ 46,668 (a) $ 3,777,040 $ 1,245,153
SG&A 102,893 (a) 6,742,193 2,600,096
Depreciation and
Amortization 14,166 (a) 122,135 32,443
Interest expense 18,350 (a) 334,509 502,072
Income/Loss (88,741) (a) (3,421,797) (1,889,458)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue -- (a) 1,012,195 190,322
SG&A 7,717 (a) 683,111 160,299
Interest Expense 3,573 (a) 325,085 501,472
ENTITIES UNDER THE EQUITY METHOD (b)
TRANSWORLD BUSINESS
STARPHIRE NICHEDIRECTORIES(d) BROKERS - FL (d)
-------------------------- -------------------------- --------------------------
2002 2001 2002 2001 2002 2001
------------ ------------ ------------ ------------- ------------ ------------
Cash $ 14,653 $ 1,352,823 $ 212,409 $ 556,741 $ 153,087 $ 245,515
Other Assets 402,874 460,508 288,093 273,328 328,261 334,854
TOTAL ASSETS $ 417,527 $ 1,813,331 $ 500,502 $ 830,069 $ 481,348 $ 580,369
Current Liabilities $ 34,330 $ 85,652 $ 438,915 $ 354,861 $ 53,990 $ 22,457
Total Liabilities $ 34,330 $ 1,085,652 $ 484,850 $ 354,861 $ 168,990 $ 262,457
TOTAL EQUITY (DEFICIT) $ 383,197 $ 727,679 $ 15,652 $ 475,208 $ 312,358 $ 317,912
TOTALS
---------------------------
2002 2001
------------ -------------
Cash $ 380,149 $ 2,155,079
Other Assets $ 1,019,228 $ 1,068,690
TOTAL ASSETS $ 1,399,377 $ 3,223,769
Current Liabilities $ 527,235 $ 462,970
Total Liabilities $ 688,170 $ 1,702,970
TOTAL EQUITY (DEFICIT) $ 711,207 $ 1,520,799
106
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
ENTITIES UNDER THE EQUITY METHOD (CONTINUED)
TRANSWORLD BUSINESS
7STARPHIRE NICHEDIRECTORIES(d) BROKERS - FL(d)
-------------------------- --------------------------- ---------------------------
2002 2001 2002 2001 2002 2001
------------ ------------- ------------- ------------- ------------- -------------
Revenue $ 122,782 $ 359,675 $ 754,043 $ 614,701 $ 2,237,869 $ 1,066,495
SG&A 426,476 1,073,104 1,123,519 1,194,716 2,220,955 1,092,394
Depreciation and
Amortization 28,252 30,863 20,214 16,453 2,445 505
Interest expense 12,451 28,156 1,194 -- 10,125 6,000
Income/Loss (344,397) (772,448) (390,884) (596,468) 4,344 (32,404)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue (17,127) 73,397 -- -- -- --
SG&A 28,578 46,107 66,908 1,014 21,740 8,028
Interest Expense 12,451 28,750 -- -- 10,125 6,000
TOTALS
----------------------------
2002 2001
------------- --------------
Revenue $ 3,114,694 $ 2,040,871
SG&A 3,770,950 3,360,214
Depreciation and
Amortization 50,911 47,821
Interest expense 23,770 34,156
Income/Loss (730,937) (1,401,320)
INTERCOMPANY ITEMS INCLUDED IN ABOVE
Revenue (17,127) 73,397
SG&A 117,226 55,149
Interest Expense 22,576 34,750
(a) No activity under the Company's ownership during this time period.
(b) The Company also owns 20% of Copia Technology, which had no operating
activity and no assets.
(c) Consolidated entities are classified as such as of December 31, 2002. The
results of operations for consolidated entities are shown for the entire
year regardless of changes in Newtek's ownership percentages during the
periods, and this results in minor discrepancies between the amounts shown
here and those included in the consolidated financial statements.
(d) The Company recorded an additional equity loss of $107,508 for
Nichedirectories and $270,104 for Transworld Business Brokers - FL during
the year ended December 31, 2002.
RECONCILIATION OF CONSOLIDATED ENTITIES
---------------------------------------------------------------------------------------------- ----------------------
PER CONSOLIDATED FINANCIAL STATEMENT PER PARTNER COMPANY SUMMARY RESULTS
---------------------------------------------------------------------------------------------- ----------------------
2002 2001 2002 2001
---------------------------------------------------------------------------------------------- ----------------------
Net revenues $2,764,845 a $489,962 c $2,764,645 a $1,054,831 c
---------------------------------------------------------------------------------------------- ----------------------
Net expenses 6,190,641 b 1,393,589 d 6,190,641 b 2,472,840 d
---------------------------------------------------------------------------------------------- ----------------------
Net loss (3,425,796) ($903,627) ($3,425,796) ($1,418,009)
---------------------------------------------------------------------------------------------- ----------------------
a. Of the total partner company revenues of $2.8 million (net of intercompany
eliminations), approximately $2.2 million is included in other income, $400,000
is included in consulting fee and $163,000 is included in interest and dividend
income line items in Newtek's consolidated statement of operations.
b. Of the total partner company expenses of $6.2 million (net of intercompany
eliminations), approximately $2.4 million is included in other expenses, $2.2
million is included in payroll and consulting expenses, $1.5 million is included
in professional fees, and approximately $16,000 is included in interest expense
line items in Newtek's consolidated statement of operations.
c. $489,962 of partner company revenues were recorded in the Company's
consolidated statement of operations due to the fact that the $1,054,831
reflects a full year activity, regardless of the ownership percentage and when
the entities were converted from the equity method to the consolidation method.
107
NOTE 24 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED) (CONTINUED):
Approximately $447,000 of the consolidated revenue is included in other income,
and approximately $43,000 is included in interest and dividend line items in
Newtek's consolidated statement of operations.
d. $1,393,589 of partner company expenses were recorded in the Company's
consolidated statement of operations due to the fact that the $2,472,840
reflects a full year activity, regardless of the ownership percentage and when
the entities were converted from the equity method to the consolidation method.
Approximately $582,000 of the consolidated expenses is included in other
expenses, and approximately $812,000 is included in payroll and consulting fee
expense line items in Newtek's consolidated statement of operations.
RECONCILIATION OF EQUITY IN LOSSES
TOTAL LOSSES LOSSES RECORDED
2002 OF ENTITY BY NEWTEK
Starphire (344,397) -- (a)
Niche (390,884) (431,484) (b)
TWBB 4,344 (297,625) (c)
------------ -----------
TOTAL EQUITY IN LOSSES
RECOGNIZED IN 2002 (729,109)
=========
2001
Starphire (772,448) (757,322)
Niche (596,468) (842,149)
TWBB (32,404) (32,088)
Newtek IT (443,481) (462,499)
NFIS-FL (506,019) (507,212)
------------ -----------
TOTAL (2,350,820) (2,601,270)
Less Intercompany Eliminations (321,418)
-----------
TOTAL EQUITY IN LOSSES
RECOGNIZED IN 2001 (2,279,852)
============
No intercompany eliminations in 2002
(a) Remaining balance was written off as an other than temporary decline in
investments.
(b) Approximately $80,000 of the losses recorded by Newtek reflect addition
liabilities (accounting and legal) not booked by the investee.
(c) Approximately $300,000 of the losses recorded by Newtek reflect addition
liabilities (deferred taxes) not booked by the investee.
108
PART III
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective September 30, 2002, the Company issued options for the
purchase of 211, 753 shares of the Company's common stock to Mr. Jeffrey M.
Schottenstein, a director of the Company, in exchange for his interest in one of
the Company's subsidiary certified capital companies. Mr. Schottenstein was a
participant in the organization and capitalization of the Capco and participates
in its operations, without compensation other than as a director of the Company.
The options are exercisable for $0.01 for ten years but may not be exercised
fully for the first three years. Due to the restrictions attached to the options
and the unregistered underlying securities, the parties negotiated a valuation
on the interest exchanged equal to the market price of the Company's common
stock at the time ($3.30), reduced by a 45% discount due to lack of liquidity,
times the number of shares. The price paid was, thus, $384,332. This exchange is
a part of the Company's program to reduce or eliminate minority interests in its
subsidiary companies. Mr. Schottenstein was throughout 2002 a director of the
Company but did not take part in the consideration or approval of the foregoing
transaction, which was negotiated by management and approved unanimously by the
remaining members of the board.
During the years ended December 31, 2002 and 2001, the Company obtained
financial consulting services from the firm of Janover Rubinroit, in the amounts
of $176,508 and $157,000, respectively. Two partners of Janover Rubinroit,
Michael Goodman and Mark Goodman, are related to Mr. Wasserman, one of the
Company's directors, as father-in-law and brother-in-law, respectively, and they
collectively hold approximately 49 percent of the ownership of Janover
Rubinroit.
During 2001 and part of 2002, the Company leased approximately 2,400
square feet of office space for its principal administrative office in East
Meadow, NY, from a company controlled by Mr. Robert Cohen, father-in-law to
Jeffrey G. Rubin, a director of the Company. The aggregate cost of the rental
was approximately $1,211 and $45,200 for 2002 and 2001 respectively.
109
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEWTEK BUSINESS SERVICES, INC.
Date: February 11, 2004 By:
------------------------------------------
BARRY SLOANE
(CHAIRMAN AND CHIEF EXECUTIVE OFFICER)
110
CERTIFICATION
I, Barry Sloane, Chief Executive Officer of Newtek Business Services, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-KSB/A of
Newtek Business Services, Inc.
2. Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly
during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the
"Evaluation Date"); and
c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 11, 2004 By: /s/ BARRY SLOANE
--------------------------------------
Barry Sloane
Chief Executive Officer
CERTIFICATION
I, Brian A. Wasserman, Chief Financial Officer of Newtek Business
Services, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Newtek
Business Services, Inc.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
6. All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
a. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
b. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 11, 2004 By: /s/ BRIAN A. WASSERMAN
--------------------------------
Brian A. Wasserman
Chief Financial Officer
CERTIFICATION
The undersigned hereby certifies that, to his knowledge, (i) the Form
10-KSB/A filed by Newtek Business Services, Inc. (the "Issuer") for the year
ended December 31, 2002, fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and (ii) the information
contained in that report fairly presents, in all material respects, the
financial condition and results of operations of the Issuer on the dates and for
the periods presented therein.
NEWTEK BUSINESS SERVICES, INC.
Date: February 11, 2004 By: /s/ BARRY SLOANE
---------------------------------
Barry Sloane, Chairman and
Chief Executive Officer
By: /s/ BRIAN WASSERMAN
---------------------------------
Brian Wasserman
Chief Financial Officer