SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-QSB/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-16123
-----------------
NEWTEK BUSINESS SERVICES, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-3504638
------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 QUENTIN ROOSEVELT BOULEVARD, GARDEN CITY, NY 11530
------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 390-2260
-
CHECK WHETHER THE REGISTRANT HAS (1) FILED ALL DOCUMENTS
AND REPORTS REQUIRED TO BE FILED BY SECTION 13 OR
15(D) OF THE EXCHANGE ACT DURING THE PRECEDING 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
NINETY DAYS.
YES NO
[X] [ ]
AS OF NOVEMBER 12, 2003, 25,097,485 SHARES OF COMMON STOCK WERE ISSUED
AND OUTSTANDING.
CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 3
Condensed Consolidated Statements of Income for the Three and Nine Month
Periods Ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 2003 and 2002 6
Notes to Unaudited Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 23
PART II - OTHER INFORMATION
Item 5. Other Information 28
Signatures 29
Exhibits 30
2
ITEM 1. FINANCIAL STATEMENTS
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Cash and cash equivalents $ 35,000,307 $ 41,171,358
Credits in lieu of cash 73,411,999 41,580,950
SBA loans receivable (net of reserve for possible SBA loan
losses of $1,690,964 as of September 30, 2003) 50,623,424 56,073,016
SBA loans held for sale 804,440 --
Accounts receivable (net of allowance of $169,798 and
$34,466, respectively) 664,107 661,351
Receivable from bank 2,489,608 2,938,309
Accrued interest receivable 215,877 285,151
Investments in qualified businesses - held to maturity investments 2,592,568 3,962,353
Investments in qualified businesses - equity investments 300,000 1,091,110
Structured insurance product 3,014,355 2,893,301
Prepaid insurance 12,673,214 14,056,196
Prepaid expenses and other assets 1,774,813 575,772
Furniture, fixtures and equipment (net of accumulated depreciation
of $327,926 and $190,590, respectively) 729,274 546,231
Customer merchant accounts 3,208,838 356,675
Goodwill 3,225,353 2,862,965
------------- -------------
Total assets $ 190,728,177 $ 169,054,738
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 5,178,789 $ 4,218,367
Notes payable - certified investors 3,833,525 3,844,181
Notes payable - insurance 3,881,803 5,369,896
Notes payable - other 2,365,183 480,500
Borrowings under line of credit -- 450,000
Bank notes payable 48,970,105 53,824,492
Notes payable in credits in lieu of cash 61,831,800 65,196,116
Deferred tax liability 12,582,824 3,726,151
------------- -------------
Total liabilities 138,644,029 137,109,703
------------- -------------
Minority interest 8,688,868 4,772,741
------------- -------------
Commitments and contingencies
Stockholders' equity:
Common Stock (par value $0.02 per share; authorized 39,000,000 shares, issued
and outstanding 25,948,889 and 25,341,428 not including 582,980 shares held
in escrow, as of September 30, 2003 and December 31, 2002, respectively) 518,978 506,828
Additional paid-in Capital 23,262,523 20,992,827
Unearned Compensation (98,334) --
Retained earnings 19,712,113 5,672,639
------------- -------------
Total stockholders' equity 43,395,280 27,172,294
------------- -------------
Total liabilities and stockholders' equity $ 190,728,177 $ 169,054,738
============= =============
See accompanying notes to these unaudited condensed consolidated financial
statements.
3
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Income from tax credits $ 22,067,285 $ 14,886,087 $ 43,926,619 $ 25,144,192
Credit card processing revenue 1,879,526 519,798 3,867,612 912,730
Interest and dividend income 921,507 78,329 3,005,227 683,016
Other income 1,141,963 1,250,581 2,815,815 1,318,098
Recovery of investment
permanently written off 350,000 -- 350,000 --
Gain on sale of property -- -- -- 16,841
Consulting fee income 68,353 168,736 102,953 268,053
------------ ------------ ------------ ------------
Total revenue 26,428,634 16,903,531 54,068,226 28,342,930
------------ ------------ ------------ ------------
Expenses:
Interest 3,322,298 3,090,193 10,526,385 8,658,556
Payroll and consulting fees 1,725,050 2,049,085 4,471,345 4,245,085
Credit card processing direct costs 870,932 318,675 2,393,580 521,313
Credit card processing administrative costs 1,227,443 431,202 2,252,204 1,341,503
Professional fees 691,991 902,837 2,748,647 2,427,007
Insurance 622,731 471,609 1,834,148 1,336,364
Other than temporary decline in value of
investments 257,339 601,025 1,991,040 1,588,630
Equity in net losses of affiliates -- 120,993 -- 793,868
Provision for SBA loan losses (7,429) -- 331,371 --
Other 955,093 812,640 2,898,486 1,511,133
------------ ------------ ------------ ------------
Total expenses 9,665,448 8,798,259 29,447,206 22,423,459
------------ ------------ ------------ ------------
Income before minority interest, provision for income
taxes, extraordinary gain on acquisition of minority
interest and extraordinary gain on acquisition
of a business 16,763,186 8,105,272 24,621,020 5,919,471
Minority interest in (loss) income (1,231,560) 689,952 (1,911,602) 1,738,590
------------ ------------ ------------ ------------
Income before provision for income taxes
and extraordinary gain 15,531,626 8,795,224 22,709,418 7,658,061
Provision for income taxes (6,057,334) (3,342,186) (8,856,673) (2,910,064)
------------ ------------ ------------ ------------
Income before extraordinary gain on acquisition
of minority interest and extraordinary gain
on acquisition of a business 9,474,292 5,453,038 13,852,745 4,747,997
Extraordinary gain on acquisition of minority
interest, net of taxes of $162,778 for 2002 -- -- -- 265,584
Extraordinary gain on acquisition of a business -- -- 186,729 --
------------ ------------ ------------ ------------
Net income $ 9,474,292 $ 5,453,038 $ 14,039,474 $ 5,013,581
============ ============ ============ ============
See accompanying notes to these unaudited condensed consolidated financial
statements.
4
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Weighted average common shares outstanding:
Basic 25,709,700 24,787,535 25,671,712 23,947,116
Diluted 26,110,536 24,847,408 26,016,931 24,052,620
Income per share:
Basic $ 0.37 $ 0.22 $ 0.55 $ 0.21
Diluted $ 0.36 $ 0.22 $ 0.54 $ 0.21
Income per share before extraordinary items:
Basic $ 0.37 $ 0.22 $ 0.54 $ 0.20
Diluted $ 0.36 $ 0.22 $ 0.53 $ 0.20
See accompanying notes to these unaudited condensed consolidated financial
statements.
5
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 14,039,474 $ 5,013,581
Adjustments to reconcile net income
to net cash used in operating activities:
Other than temporary decline in value of investments 1,991,040 1,588,630
Gain on sale of asset held for sale -- (16,841)
Equity in net losses of affiliates -- 793,868
Extraordinary gain on acquisition of minority interests -- (265,584)
Extraordinary gain on acquisition of a business (186,729) --
Income from tax credits (43,926,619) (25,144,192)
Deferred income taxes 8,856,673 2,910,064
Depreciation and amortization 258,940 90,922
Provision for SBA loan losses 331,371 --
Proceeds from sale of SBA loans 2,438,119 --
Accretion of interest income (121,054) (131,711)
Accretion of interest expense 8,642,249 8,066,217
Compensation expense for vested stock options 124,583 570,000
Issuance of stock for services received 58,388 80,789
Minority interest 1,911,602 (1,738,590)
Changes in assets and liabilities:
Prepaid insurance 1,471,982 100,336
Prepaid expenses, accounts receivable and other assets (348,270) (316,080)
Accounts payable and accrued expenses 585,422 591,119
------------ ------------
Net cash used in operating activities (3,872,829) (7,807,472)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of asset held for sale -- 348,770
Investments in cost method investments (55,000) --
Investments in qualified businesses (held to maturity) (300,000) (1,204,942)
Investments in qualified businesses (consolidated entities) (9,510,000) (9,295,667)
Return of principal - held to maturity - investments 469,855 4,902,566
Return of principal - consolidated entities 4,206,675 8,677,906
Consolidation of majority owned partner companies 5,303,325 2,838,519
SBA loans issued (3,724,500) --
Cash paid for acquisition of AMS (1,500,000) --
Repayments of SBA loans receivable 5,589,916 --
Cash received from AMS and Exponential acquisition, respectively 7,000 106,642
Purchase of furniture, fixtures and equipment (320,379) (223,590)
------------ ------------
Net cash provided by investing activities 166,892 6,150,204
------------ ------------
See accompanying notes to these unaudited condensed consolidated financial
statements.
6
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt $ 1,000,000 $ 21,548,698
Principal repayments of note payable insurance (1,488,093) (11,640,982)
Principal repayments of mortgage payable -- (306,929)
Net proceeds from issuance of common stock 1,393,641 1,898,499
Proceeds from exercise of stock options 243,042 --
Distributions to CAPCO members -- (7,867)
Contributions from members 6,000 --
Proceeds from sale of preferred stock of subsidiary 2,000,000 --
Principal repayment on notes payable to others (315,317) --
Proceeds from issuance of warrants -- 572,298
Principal repayments of bank notes payable (4,854,387) (4,813,955)
Principal repayments of line of credit (450,000) (575,000)
------------ ------------
Net cash (used in) provided by financing activities (2,465,114) 6,674,762
------------ ------------
Net (decrease) increase in cash and cash equivalents (6,171,051) 5,017,494
Cash and cash equivalents - beginning of period 41,171,358 31,171,966
------------ ------------
Cash and cash equivalents - end of period $ 35,000,307 $ 36,189,460
============ ============
Supplemental disclosure of non-cash financing activities:
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 $ 12,095,570 $ 7,589,449
============ ============
Consolidation of investments previously accounted for
under the equity method -- $ 537,083
============ ============
Acquisition of Exponential (net liabilities assumed) -- $ 10,978
============ ============
Acquisition of Automated Merchant Services (net liabilities assumed) -- $ --
============ ============
Issuance of common stock in connection with
acquisition of Exponential -- $ 920,000
============ ============
Goodwill recognized in connection with acquisition
of minority interests $ 362,388 $ 873,173
============ ============
Acquisition of five Capcos minority interests
Newtek Business Services common stock issued -- $ 1,868,583
Less, minority interests acquired -- 914,580
------------ ------------
Goodwill recognized -- $ 954,003
============ ============
Acquisition of three Capcos minority interests
Minority interests acquired -- $ 1,369,156
Less, Newtek Business Services common stock issued -- 940,794
------------ ------------
Extraordinary gain recognized -- $ 428,362
============ ============
Issuance of note in partial payment for insurance -- $ 2,000,000
============ ============
Details of AMS acquisition:
Assets acquired ( including customer merchant accounts valued
at approximately $2,910,000) $ 3,075,000
Less: Liabilities assumed 160,000
Less: Accrued acquisition costs (included in assets acquired) 215,000
Less: Notes issued to seller 1,200,000 --
------------ ------------
Cash paid for acquisition $ 1,500,000 --
============ ============
See accompanying notes to these unaudited condensed consolidated financial
statements.
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The unaudited condensed consolidated financial statements of Newtek
Business Services, Inc. and Subsidiaries (the "Company" or "Newtek") included
herein have been prepared by Newtek pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The unaudited condensed consolidated
financial statements of Newtek reflect, in the opinion of management, all
adjustments necessary to present fairly the financial position of Newtek at
September 30, 2003, the results of its operations for the three and nine month
periods ended September 30, 2003 and 2002, and its cash flows for the nine month
periods ended September 30, 2003 and September 30, 2002. All adjustments are of
a normal recurring nature. These financial statements should be read in
conjunction with the annual financial statements and notes thereto for the year
ended December 31, 2002. The results of operations for the three and nine months
ended September 30, 2003 are not necessarily indicative of the results of
operations to be expected for the year ending December 31, 2003.
The following is a summary of each certified capital company ("Capco"),
state of certification and date of certification:
CAPCO STATE OF CERTIFICATION DATE OF CERTIFICATION
----- ---------------------- ---------------------
WA (Wilshire Advisers) New York May 1998
WP (Wilshire Partners) Florida December 1998
WI (Wilshire Investors) Wisconsin October 1999
WLA (Wilshire Louisiana Advisers) Louisiana October 1999
WA II (Wilshire New York Advisers, II) New York April 2000
WNY III (Wilshire New York
Partners, III) New York December 2000
WC (Wilshire Colorado Partners) Colorado October 2001
The State of Louisiana has authorized three "Capco funds" which are all
a part of the WLA Capco (the first fund). The second, Wilshire Louisiana
Partners II (WLPII), and the third, Wilshire Louisiana Partners III (WLPIII),
were formed in October 2001, and October 2002, respectively and are treated by
Newtek as separate Capcos.
In general, the Capcos issue debt and equity instruments, generally
warrants ("Certified Capital"), to insurance company investors ("Certified
Investors"). The Capcos then make targeted investments ("Investments in
Qualified Businesses", as defined under the respective state statutes, 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. Each Capco has a contractual
arrangement with the particular state that legally entitles the Capco to receive
(or earn) tax credits from the state upon satisfying quantified, defined
investment percentage thresholds and time requirements. In order for the Capcos
to maintain their state-issued certifications, the Capcos must make Investments
in Qualified Businesses in accordance with these requirements. Each Capco also
has separate contractual arrangements with the Certified Investors obligating
the Capco to pay interest on the aforementioned debt instruments whether or not
it meets the
8
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
statutory requirements for Investments in Qualified Businesses. The Capco can
satisfy this interest payment obligation, at the Capco's discretion, by
delivering tax credits in lieu of paying cash. The Capcos have the right to
deliver the tax credits to the Certified Investors. The Certified Investors 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% (Louisiana Capco and the Louisiana second fund - 110%) of their
certified investment. The tax credits can be utilized over a ten-year period at
a rate of 10% (Louisiana Capco and Louisiana second fund- 11%) per year and in
some instances are transferable and all can be carried forward.
On December 31, 2002, Newtek acquired a majority stake in a nonbank
U.S. Small Business Administration ("SBA") lender. 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
SBA loans to qualifying small businesses, which are partially guaranteed by the
SBA. Newtek Small Business Finance sells the SBA guaranteed portion of such SBA
loans to third-party investors, retains the unguaranteed portion and continues
to service the SBA loans. Newtek Small Business Finance has the ability to
originate SBA loans throughout the United States. Presently, the SBA loans
originated by the company are primarily to customers in the Northeast United
States. The Company's competition for originating SBA loans comes primarily from
banking organizations and the other nonbank entities holding an SBA license.
SBA LOANS RECEIVABLE
As of December 31, 2002, SBA loans that are past due more than 90 days,
but were still performing (accruing interest), amounted to $293,800. Of this
amount, $175,000 became current, and $100,000 was moved to non-performing
status. As of September 30, 2003, SBA loans that are past due more than 90 days,
but are still performing (accruing interest), amount to $65,824.
As of December 31, 2002, SBA loans that are on a non-accrual basis
amounted to $2,914,767. As of September 30, 2003, SBA loans that are on a
non-accrual basis amount to $4,248,724. This increase was predominately due to
two SBA loans being downgraded to non-performing.
The Company originates loans to customers under the SBA program that
generally provides for SBA guarantees of 75% for loans greater than $250,000 and
50% for loans of less than $250,000, subject to a maximum guarantee amount. The
Company typically sells the guaranteed portion of each loan to a third party and
retains the unguaranteed principal portion in its portfolio. Loan losses are
shared pro rata between the guaranteed and unguaranteed portions.
STOCK - BASED COMPENSATION
Newtek 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 the Company's plan 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 Newtek as though the fair value based accounting method in SFAS
148 "Accounting for Stock-based Compensation-Transition and Disclosure- an
amendment of SFAS 123" had been used in accounting for stock options.
9
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
As reported
Net income $ 9,474,292 $ 5,453,038 $ 14,039,474 $ 5,013,581
Deduct: Total stock based employee
Compensation expense determined
under fair value based method for
all awards, net of related tax effects (217,945) (256,659) (646,065) (703,860)
-------------- -------------- -------------- --------------
Pro forma net income $ 9,256,347 $ 5,196,379 $ 13,393,409 $ 4,309,721
============== ============== ============== ==============
Earnings per share:
Basic - as reported $ .0.37 $ 0.22 $ 0.55 $ 0.21
============== ============== ============== ==============
Basic - pro forma $ .0.36 $ 0.21 $ 0.52 $ 0.18
============== ============== ============== ==============
Diluted - as reported $ .0.36 $ 0.22 $ 0.54 $ 0.21
============== ============== ============== ==============
Diluted - pro forma $ .0.35 $ 0.21 $ 0.51 $ 0.18
============== ============== ============== ==============
For 2003 and 2002, 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 60-85%, risk-free interest rate of
1.61% to 6.15%, respectively, expected dividends of $0 and expected terms of 1-6
years.
NOTE 2 - COMMON STOCK:
In the third quarter of 2003, Newtek sold 16,666 shares of common stock
in private transactions, with gross and net cash proceeds totaling $75,000.
During the same period there were approximately 37,000 stock options exercised,
with gross cash proceeds totaling approximately $108,000. In addition, 2,000
shares of common stock were issued in consideration for consulting services
rendered, valued at approximately $12,000.
During the third quarter of 2003, in connection with two employment
agreements, shares of restricted stock, valued at approximately $120,000 were
issued as part of total compensation. The shares vest over a one year period.
Total compensation expense for the third quarter was approximately $22,000.
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
The various interests that Newtek acquires in its 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 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 here as "Partner
Companies". 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
have been 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 below 50%, the accounting method is adjusted to the equity
or cost method of accounting, as appropriate, for subsequent periods.
10
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
Equity Method. Investees 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 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 in net losses of affiliates" 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, Newtek may own warrants that if
exercised, would cause Newtek to use either the equity or consolidation method.
As of December 31, 2002, Newtek does not expect these warrants to be exercised
in the near future.
During the nine month period ended September 30, 2003, Newtek
determined that there was approximately $943,000 of an other than temporary
decline in the value of its investments for Merchant Data Systems, Inc.,
$500,000 for 1-800 Gift Certificate, $271,000 for Direct Creations, LLC,
$145,000 for O.S. Johnson, LLC, $112,000 for Gerace Auto Parts, LLC, and $20,000
of an other than temporary decline in the value of its investments in Transworld
Business Brokers, LLC. These items aggregated approximately $1,991,000 which is
shown on the statement of income as other than temporary decline in value of
investments.
During the nine month period ended September 30, 2002, Newtek
determined that there was approximately $734,000 of an other than temporary
decline in the value of its investments for Starphire Technologies, LLC,
approximately $77,000 other than temporary decline in the value of its
investments for Embosser's Sales and Service, $100,000 for O.S. Johnson, LLC,
$458,000 other than temporary decline in the value of its investments for Direct
Creations, LLC, and an approximate $87,000 of an other than temporary decline in
the value of its investments for Gino's Seafood. In addition, Newtek determined
an impairment existed for a non-Capco investment (included in prepaid expenses
and other assets on the balance sheet), and recorded a charge of approximately
$162,000. In 2002, Newtek also recovered approximately $29,000 of cash on two of
its investments written down in 2000. These items aggregate approximately
$1,589,000 which is shown on the statement of income as other than temporary
decline in value of investments.
The following table is a summary of such investments as of September
30, 2003, 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.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investment in Debt and Equity
Securities", Newtek classifies its debt investments as held-to-maturity and such
investments are initially recorded at amortized cost. On a monthly basis, the
Company's Investment Committee meets to evaluate the Company's investments.
Newtek 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
11
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
DEBT INVESTMENTS
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
Investee Direct Merchant 4G's Transworld Autotask Louisiana Gulf
Creations, Data Truck Business Group BIDCO Coast
LLC Systems, Renting Brokers, Debt Bidco Total
Inc. LLC Invest
-ments
Sep-01, Aug-00 Nov-99, Jun-01 Oct -02 Various Dec-02
Investment Date (s) Nov-01 Jul- 00,
Jun-02
Maturity Date Jun-04 May-04 Aug-03 Jun-04 Sep-03 Various Various
Interest Rate LIBOR 0.00% 7.40% 5.00% 7.75% Prime +1% Various
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
Principal outstanding at
December 31, 2002 $373,233 $942,591 $100,000 $140,000 $200,000 $1,234,029 $972,500 $3,962,353
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
Return of principal -
2003 (61,923) - (100,000) (25,000) (200,000) (82,932) - (469,855)
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
Investments in 2003 - - - - 300,000 - - 300,000
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
Other than temporary
decline in value of its
investments - (942,591) - - - (257,339) - (1,199,930)
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
Principal outstanding at
September 30, 2003 $311,310 - - $115,000 $300,000 $893,758 $972,500 $2,592,568
--------------------------- ----------- ---------- ---------- ------------ ---------- ------------ --------- ---------------
EQUITY INVESTMENTS
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Investee Direct 1-800 Gift Distribution BuySeasons, Newtek Transworld
Creations, Certificates, Video and Inc. Financial Business
LLC LLC Audio Info Brokers, LLC
Services of
LA, LLC Total
Investment Date(s) Dec-00, Jul-99 Jun-00 Jun-01 Dec-02 Jun-01
Aug-02 Jul- 01
Common
Type of Investment Warrants Common Stock/ Stock Common Preferred Preferred
Warrants Stock Member Membership
Ownership Interest as of
September 30, 2003 3.84% <5% <5% <5% 49% 33%
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Total equity investments at
December 31, 2002 $270,823 $500,000 $200,000 $100,000 - $20,287 $1,091,110
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Investments in 2003 - - - - 710,000 - 710,000
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Reclassification of
consolidated investment - - - - 272,627 - 272,627
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Equity in losses 2003 - - - - (117,904) - (117,904)
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Reversal of equity in loss
due to consolidation as a
result of FIN 46 adoption - - - - 117,904 - 117,904
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Reclassification to
consolidated based on FIN 46
adoption - - - - (982,627) - (982,627)
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Other than temporary decline (270,823) (500,000) - - - (20,287) (791,110)
in value of its investments
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
Total equity investments at
September 30, 2003 $ - $ - $200,000 $100,000 $ - $ - $300,000
------------------------------ ----------- --------------- ------------- ------------ ------------- -------------- ------------
12
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
Newtek has not guaranteed any obligation of these investees, and Newtek
is not otherwise committed to provide further financial support for the
investees. However, from time-to-time, Newtek may decide to provide such
additional financial support which, as of September 30, 2003, was not
significant. Should Newtek determine that an impairment exists upon its periodic
review, and it is deemed to be other than temporary, Newtek will write down the
recorded value of the asset to its estimated fair value and record a
corresponding charge in the Statement of Income.
CONSOLIDATED DEBT INVESTMENTS
------------------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------ ------------
Investee Newtek Newtek PPM Link, Newtek Newtek DC Newtek
Merchant Merchant LLC Business Financial Media Strategies
Solutions Solutions Exchange Info Capital, - CO, LLC
of of WI, LLC of NY, LLC Services of LLC
NY, LLC FL, LLC Total
Investment Date(s) Mar-01 Jun-01 Mar-01 Mar-02 Nov-99 Oct-02 Jun-03
Mar-03
Maturity Date Jun-06
Interest Rate Nov-05 Mar-08 Sep-02 Mar-05 Nov-01 Oct-03 April - 04
6.00% 5.00-8.00% 5.75% 2.50% 5.25% 12.00% 3%
------------------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------ ------------
Total consolidated debt
investments as of
December 31, 2002 $685,000 $1,505,000 $1,000,000 $325,000 $150,000 $163,277 $ - $3,828,277
------------------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------ ------------
Total consolidated debt
investments made in 2003 - 1,000,000 - - - - 300,000 $1,300,000
------------------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------ ------------
Return of principal -
2003 - (363,334) (1,000,000) - - (80,083) - $(1,443,417)
------------------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------ ------------
Total consolidated debt
investments as of
September 30, 2003 $685,000 $2,141,666 $0 $325,000 $150,000 $83,194 $300,000 $3,684,860
------------------------- ------------ ------------- ------------- ------------ ------------- ------------ ------------ ------------
CONSOLIDATED EQUITY INVESTMENTS
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
Newtek Newtek Newtek PPM Wilshire Newtek Newtek SBA Automated
Investee Merchant Merchant Merchant Link, LLC Louisiana Strategies, Business Holdings, Merchant
Solutions Solutions Solutions Capital LLC Exchange Inc. Services,
of NY, of LA, LLC of CO, Management of NY, Inc.
LLC LLC Fund LLC
Investment Mar-01 Sep-01 Dec-02 Mar-01 Dec-02 Aug-01 Sep-02 Aug - 03
Date(s) Mar-02
Type of Preferred Preferred Preferred Preferred Preferred Preferred Common & Preferred Preferred
investment Member Member Member Member Membership Member Preferred Stock Stock
Member
Ownership interest 90.00% 95.00% 95.00% 90.00% 100.00% 70.00% 93.10% 80.00% 100%
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
Total consolidated
equity
Investments - 2002 $125,000 $1,350,000 $3,308,665 $1,103,333 $972,500 $999,950 $3,102,196 $2,000,000 $ -
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
Total consolidated
equity investments
made in 2003 - - - - - - - $2,000,000
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
Preferred return-
dividends - (50,625) (66,006) (3,950) - (71,438) - (3,333)
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
Preferred return -
redemption - (392,973) - - - - - -
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
Total consolidated $972,500
equity $125,000 $906,402 $3,242,659 $1,099,383 $972,500 $999,950 $3,030,758 $2,000,000 $1,996,667
-------------------------------- ------------ ------------ ---------- -------------- ------------ ----------- ----------- ----------
13
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
CONSOLIDATED EQUITY INVESTMENTS (CONTINUED)
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Newtek Newtek Newtek Global Newtek Newtek Newtek
Investee Financial Financial Client Business Louisiana Strategies Community
Info Info Services, Advisors, IT, LLC - CO, LLC Financial
Services Services LLC LLC
of LA, LLC of FL, LLC
Total
Investment Dec-02 Feb-02 Jun -02 Mar 03 July 03 June -03 July-03
Date(s)
Preferred
Type of Preferred Preferred Preferred Preferred Preferred Members Preferred
investment Member Members Member Members Members Members
Ownership interest 49% 87.48% 95.00% 90% 49% 75.00% 49%
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Total consolidated
equity
Investments - 2002 $ - $100,383 $2,441,456 $ - $ $ - $ - $15,503,483
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Total consolidated
equity investments
made in 2003 710,000 - - 2,200,000 1,500,000 300,000 1,500,000 $8,210,000
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Reclassification
from equity based
on adoption of
FIN 46 272,627 - - - - - - 272,627
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Preferred return-
dividends (9,434) (21,094) (24,226) (30,000) (7,500) (3,000) (7,500) $(298,106)
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Preferred return -
redemption - - (2,072,179) - - - - $(2,465,152)
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
Total consolidated
equity
Investments - 2003 $973,193 $79,289 $345,051 $2,170,000 $1,492,500 $297,000 $1,492,500 $21,222,852
-------------------- ----------- ------------ ----------- ----------- ------------- ---------- ----------- ------------
The foregoing 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 foregoing investments 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.
NOTE 4 - SBA LOANS RECEIVABLE:
Below is a summary of the SBA loan receivable balance, net of SBA loan loss
reserves for the nine-months ended September 30, 2003:
Balance at January 1, 2003 $ 56,073,016
SBA Loan originations 3,724,500
Sales of SBA loans (2,438,119)
Payments Received in 2003 (5,589,916)
Provision for SBA loan losses (331,371)
SBA loans held for sale (804,440)
Deferred Costs (10,246)
------------
Balance at September 30, 2003 $ 50,623,424
============
14
NOTE 4 - SBA LOANS RECEIVABLE: (CONTINUED)
Below is a summary of the reserve for possible SBA loan losses balance for the
nine months ended September 30, 2003:
Balance at January 1, 2003 $ 2,557,624
SBA Loan loss provision charged in 2003 331,371
Recoveries 73,853
Charge-offs (1,271,884)
-----------
Balance at September 30, 2003 $ 1,690,964
===========
Below is a summary of the SBA loans held for sale:
Balance at January 1, 2003 $ 0
Loans held for sale 3,242,559
Loans sold (2,438,119)
-----------
Balance at September 30, 2003 $ 804,440
===========
NOTE 5 - 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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator:
Numerator for basic and diluted EPS -
income available to common
stock holders $ 9,474,292 $ 5,453,038 $14,039,474 $ 5,013,581
Numerator for basic and diluted EPS -
extraordinary item and cumulative effect
of a change in accounting principle -- -- 186,729 265,584
Numerator for basic and diluted EPS -
income before extraordinary item 9,474,292 5,453,038 13,852,745 4,747,997
Denominator:
Denominator for basic EPS - weighted
average shares 25,709,700 24,787,535 25,671,712 23,947,116
Effect of dilutive securities (stock options) 400,836 59,873 345,219 105,504
Denominator for diluted EPS - weighted
average shares 26,110,536 24,847,408 26,016,931 24,052,620
Net EPS: Basic $ 0.37 $ 0.22 $ 0.55 $ 0.21
Net EPS: Diluted $ 0.36 $ 0.22 $ 0.54 $ 0.21
15
NOTE 5 - EARNINGS PER SHARE (CONTINUED):
Net EPS: Basic before extraordinary gain $ 0.37 $ 0.22 $ 0.54 $ 0.20
Net EPS: Diluted before extraordinary gain $ 0.36 $ 0.22 $ 0.53 $ 0.20
NOTE 6 - BUSINESS SEGMENTS:
Newtek's reportable segments are as follows: SBA lending, credit card
processing and Capcos and other.
Operating segments are organized internally primarily by the type of
services provided, and in accordance with SFAS No. 131, the Company has
aggregated similar operating segments into three reportable segments, SBA
lending, credit card processing and Capcos and other. The SBA lending segment is
NSBF, a licensed, Small Business Administration (SBA) lender that originates,
sells (in whole or in part) and services SBA loans to qualifying small
businesses, which are partially guaranteed by the SBA.
As an SBA lender, NSBF generates revenues from sales of SBA loans,
servicing income for those SBA loans retained to service by NSBF (included in
other income on the consolidated statements of income) and interest income
earned on available cash balances. The lender also generates expenses such as
interest, professional fees, payroll and consulting, and provision for SBA loan
losses, all of which are included in the respective caption on the consolidated
statement of income. NSBF also has expenses such as SBA loan recovery expenses,
SBA loan processing costs, depreciation and amortization, and other expenses
that are all included in the other expense caption on the consolidated
statements of income.
The credit card processing segment is a processor of credit cards, as
well as a marketer of credit card solutions to the small business market. The
Capcos and other segment represents Newtek's activities in the certified capital
company market as described in Note 1.
Management has considered the following characteristics when making its
determination of its operating and reportable segments:
a. the nature of the products and services,
b. the type or class of customer for products and services,
c. the methods used to distribute products or provide their
services, and
d. the nature of the regulatory environment, for example,
banking, insurance, or public utilities.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Inter-company activity is not
significant.
16
NOTE 6 - BUSINESS SEGMENTS (CONTINUED):
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue
SBA Lending $ 1,638,336 $ -- $ 4,643,831 $ --
Credit Card Processing 1,879,526 519,054 3,867,612 912,730
Capco & other 22,910,772 16,384,477 45,556,783 27,430,200
------------ ------------ ------------ ------------
TOTAL $ 26,428,634 $ 16,903,531 $ 54,068,226 $ 28,342,930
============ ============ ============ ============
Operating (Loss) Income
SBA Lending $ 377,603 $ -- $ (89,603) $ --
Credit Card Processing (218,849) (286,027) (778,172) (950,086)
Capco & other 16,604,451 8,391,299 25,488,795 6,869,557
------------ ------------ ------------ ------------
TOTAL $ 16,763,186 $ 8,105,272 $ 24,621,020 $ 5,919,471
============ ============ ============ ============
Depreciation and Amortization
SBA Lending $ 7,472 $ -- $ 13,301 $ --
Credit Card Processing 101,253 15,025 150,253 42,025
Capco & other 104,364 17,897 116,535 48,897
------------ ------------ ------------ ------------
TOTAL $ 213,089 $ 32,922 $ 280,089 $ 90,922
============ ============ ============ ============
Identifiable Assets AT SEPTEMBER 30, 2003 AT SEPTEMBER 30, 2002
------------------- ---------------------- ---------------------
SBA Lending $ 61,221,376 $ --
Credit Card Processing 7,788,718 2,315,137
Capco & other 121,718,083 99,822,596
------------ ------------
TOTAL $190,728,177 $102,137,733
============ ============
NOTE 7 - MINORITY INTEREST:
In January 2003 SBA, Inc. a partner company and a majority owned
subsidiary of the Company, issued preferred stock to Credit Suisse First Boston
Management Corporation for cash proceeds of $2,000,000. Newtek has accounted for
this issuance of preferred stock of a subsidiary as an increase to its minority
interest liability in the accompanying condensed consolidated balance sheet at
September 30, 2003.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities.
FIN 46 requires the primary beneficiary of a variable interest entity to
consolidate that entity. The primary beneficiary of a variable interest entity
is the party that absorbs a majority of the variable interest entity's expected
losses, receives a majority of the entity's expected residual returns, or both,
as a result of ownership, contractual, or other financial interests in the
entity. Prior to the issuance of FIN 46, an enterprise generally consolidated an
entity when the enterprise had a controlling financial interest in the entity
through ownership of a majority voting interest. Upon adoption, FIN 46 applied
immediately to variable interest entities created after January 31, 2003.
Pursuant to FASB staff position No. 46-6 ("FSP 46-6"), a public entity need not
apply the provisions of FIN 46 to an interest held in a variable interest entity
or potential variable interest entity until the end of the first interim or
annual period ending after December 15, 2003, if the variable interest entity
was created before February 1, 2003, and the public entity has not issued
financial statements reporting that variable interest entity in accordance with
FIN 46. The Company has elected not to defer the application of FIN 46 to its
interests in potential variable interest entities created prior to February 1,
2003 pursuant to FSP 46-6.
17
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED):
The Company determined that it is the primary beneficiary of a variable
interest entity in which it has made an investment. Accordingly, the Company has
consolidated such entity into the Company's financial statements, and the effect
of such consolidation at September 30, 2003 was the inclusion on the balance
sheet of $817,473 in assets, and $732,228 in liabilities.
NOTE 9 - ACQUISITION OF AUTOMATED MERCHANT SERVICES:
On August 7, 2003, a majority-owned subsidiary of Newtek, its
Florida-based certified capital company, completed the acquisition of
substantially all of the stock of Automated Merchant Services, Inc. ("AMS"), a
company engaged in the business of soliciting merchants and others for credit
card processing services. The acquisition brings to Newtek's credit card
processing business an additional 2,100 existing clients as well as 10 customer
representatives covering the Southern Florida market. In addition to gaining a
significant foothold in the Florida small to medium-sized business market,
Newtek will utilize this acquisition to cross-market other Newtek products and
services including its small business lending service, outsourced bookkeeping
service and tax and insurance services. Newtek plans on growing AMS beyond the
Florida market and expanding its product base to include everything that
Newtek's existing processing marketer, Newtek Merchant Solutions, offers.
Newtek's aggregate cost to acquire AMS was approximately $3.1 million, of
which $1.5 million was cash paid and $1.2 million in three year, 6 percent
promissory notes issued to the selling stockholders. Also included in the
aggregate cost is $160,000 of AMS liabilities assumed by Newtek and $215,000 of
accrued acquisition costs.
The results of AMS's operations and financial position have been included
in the accompanying consolidated condensed financial statements since the
acquisition date.
The following summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
Cash $ 7,000
Customer merchant accounts 2,910,000
Other Assets 158,000
----------
Total assets acquired 3,075,000
==========
Current liabilities (including accrued
acquisition costs) 375,000
Notes payable to seller 1,200,000
----------
Total liabilities assumed 1,575,000
==========
Cash paid $1,500,000
==========
The difference between the aggregate purchase price of $3,075,000
(including accrued acquisition costs of $215,000) and the fair value of the
assets acquired, $165,000, has been recorded as customer merchant accounts.
These customer accounts are being amortized over a sixty-six month period. For
the period ended September 30, 2003, amortization expense relating to the
customer merchant accounts totaled approximately $79,000.
NOTE 10 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS:
The following table is an unaudited summary of the investments which
Newtek 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. 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."
18
NOTE 10 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (CONTINUED):
Balance Sheet data is as of September 30, 2003 and December 31, 2002
CONSOLIDATED ENTITIES
------------------------------------ ----------------------- ----------------------- ---------------------- ------------------------
Newtek Newtek Newtek Newtek Newtek
Strategies Merchant Merchant Merchant Merchant
(Harvest) Solutions - CO Solutions - NY
Solutions - LA Solutions - WI
(UPS-CO) (UPS-NY) (UPS-LA)
(UPS-WI)
======================== =========== =========== =========== =========== =========== ========== =========== ============ ===========
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
Cash 94,832 256,233 2,952,464 3,248,403 26,649 18,611 141,313 705,617 259,679 445,686
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
Other Assets 189,240 207,801 65,442 2,662 380,717 417,956 35,416 26,485 544,769 254,444
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
TOTAL ASSETS $284,072 $464,034 $3,017,906 $3,251,065 $407,366 $436,567 $176,729 $732,102 $804,448 $700,130
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
Current
Liabilities 46,259 33,006 39,109 14,433 184,154 108,554 36,018 29,729 159,090 118,670
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
TOTAL
LIABILITIES $46,259 $33,006 $39,109 $14,433 $659,713 $584,112 $36,018 $29,729 $2,317,424 $1,588,670
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
TOTAL EQUITY
(DEFICIT) $237,813 $431,028 $2,978,797 $3,236,632 $(252,347) $(147,545) $140,711 $702,373 $(1,512,976) $(888,540)
------------------------ ----------- ----------- ----------- ----------- ----------- ---------- ----------- ------------ -----------
CONSOLIDATED ENTITIES
---------------- ---------------------- ------------------- ------------------------- -----------------------
PPM Exponential Newtek Newtek
Link Business Small Business Financial Information
Development Co., Finance Systems - FL
Inc. (NSBF) (GMT)
================ ====================== =================== ========================= =======================
2003 2002 2003 2002 2003 2002 2003 2002
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
Cash 53,754 1,254,506 29,017 41,973 5,737,794 4,367,870 41,921 70,034
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
Other Assets 105,936 61,686 71,357 25,551 55,483,582 59,296,476 129,759 131,985
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
TOTAL ASSETS $159,690 $1,316,192 $100,374 $67,524 $61,221,376 $63,664,346 $171,680 $202,019
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
Current
Liabilities 168,562 1,069,144 58,454 59,996 52,233,813 2,704,417 48,075 44,809
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
TOTAL
LIABILITIES $168,562 $1,919,144 $63,530 $59,996 $52,233,813 $58,028,909 $198,075 $194,809
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
TOTAL EQUITY
(DEFICIT) $(8,872) $(602,952) $36,844 $7,528 $8,987,563 $5,635,437 $(26,395) $7,210
---------------- ---------- ----------- --------- --------- ------------ ------------ ----------- -----------
CONSOLIDATED ENTITIES
---------------- ----------------------- ----------------------- ------------------------ -------------------- ---------------------
Newtek Newtek Client DC Media Newtek Tax Global Business
Business Exchange Services Capital Services Advisors
of NY (Global)
(Transworld - NY)
================ =========== =========== =========== =========== ============ =========== =========== ======== =========== =========
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
Cash 2,845,584 3,186,239 234,400 2,377,662 894,616 344,293 3,725 (a) 2,076,654 (a)
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
Other Assets 59,680 55,005 2,195 1,415 198,920 385,063 11,583 (a) 24,953 (a)
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
TOTAL ASSETS $2,905,264 $3,241,244 $236,595 $2,379,077 $1,093,536 $729,356 $15,308 (A) $2,101,607 (A)
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
Current
Liabilities 27,527 21,089 6,300 - 24,322 92,226 39,208 (a) 7,389 (a)
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
TOTAL
LIABILITIES $352,527 $346,089 $6,300 - $1,378,099 $736,003 $39,208 (A) $7,389 (A)
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
TOTAL EQUITY
(DEFICIT) $2,552,737 $2,895,155 $230,295 $2,379,077 $(284,563) $(6,647) $(23,900) (A) $2,094,218 (A)
---------------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- -------- ----------- ---------
CONSOLIDATED ENTITIES
----------------------------- ------------------ ------------------ ------------------ -------------------- ------------------------
Newtek Automated Newtek Newtek Newtek Totals
Strategies- Merchant Community Louisiana Financial
CO Services, Inc. Financial Technology Systems - LA
Services
====================== ====== =========== ====== =========== ====== =========== ====== ========== ========= ============ ===========
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
Cash 490,288 (a) 417,958 (a) 1,442,681 (a) 1,427,104 (a) 793,828 284,000 $19,964,261 16,601,127
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
Other Assets 7,996 (a) 2,964,311 (a) 7,316 (a) 6,252 (a) 23,646 500 60,313,070 60,867,029
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
TOTAL ASSETS $498,284 (A) $3,382,269 (A) $1,449,997 (A) $1,433,356 (A) $817,474 $284,500 $80,277,331 $77,468,156
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
Current
Liabilities 18,333 (a) 295,830 (a) 8,467 (a) 10,159 (a) 22,227 11,373 53,433,296 4,307,446
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
TOTAL
LIABILITIES $18,333 (A) $1,415,830 (A) $8,467 (A) $10,159 (A) $732,229 $11,373 $59,731,044 $63,546,273
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
TOTAL EQUITY
(DEFICIT) $479,951 (A) $1,966,439 (A) $1,441,530 (A) $1,423,197 (A) $85,245 $273,127 $20,546,287 $13,921,883
---------------------- ------ ----------- ------ ----------- ------ ----------- ------ ---------- --------- ------------ -----------
19
Income Statement data is for the nine months period ended September 30,
2003 and September 30, 2002
CONSOLIDATED ENTITIES
------------------ ----------------------- -------------------- ----------------------- ---------------------- --------------------
NEWTEK NEWTEK NEWTEK NEWTEK NEWTEK
STRATEGIES MERCHANT MERCHANT MERCHANT MERCHANT
SOLUTIONS - CO SOLUTIONS - NY SOLUTIONS - LA SOLUTIONS--WI
================== =========== =========== =========== ======== =========== =========== ========== =========== ========= ===========
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
REVENUE $552,275 $428,613 $71,653 (A) $296,502 $286,519 $53,969 $46,486 $3,474,184 $615,955
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
SG&A 736,857 636,930 262,133 (a) 346,734 462,033 171,739 457,021 3,986,121 1,153,390
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
Depreciation and
Amortization 8,634 6,246 1,349 (a) 33,174 32,506 3,063 2,052 33,018 7,467
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
Interest expense - 35,624 - (a) 21,394 18,767 - - 79,479 65,625
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
INCOME/LOSS $(193,216) $(250,187) $(191,829) (A) $(104,800) $(226,787) $(120,833) $(412,587) $(624,434) $(610,527)
------------------------------------------------------------------------------------------------------------------------------------
INTERCOMPANY ITEMS INCLUDED IN ABOVE
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
Revenue 445,724 289,935 41,145 (a) 113,615 18,139 27,522 2,115 59,528 15,976
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
SG&A 34,340 34,307 67,765 (a) 80,489 101,775 59,184 63,450 245,277 86,428
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
Interest Expense - 35,624 - (A) 21,394 18,767 - - 79,479 65,625
------------------ ----------- ----------- ----------- ------- ----------- ----------- ---------- ----------- ----------- ----------
CONSOLIDATED ENTITIES
------------------ ----------------------- -------------------- ----------------------- -----------------------
PPM EXPONENTIAL NEWTEK NEWTEK
LINK BUSINESS SMALL BUSINESS FINANCIAL INFORMATION
DEVELOPMENT CO., FINANCE SYSTEMS - FL
INC.
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2003 2002 2003 2002 2003 2002 2003 2002
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
REVENUE $183,720 $172,560 $174,645 (A) $4,643,831 (A) $513,083 $378,789
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
SG&A 438,863 456,338 145,171 (a) 4,891,860 (a) 500,654 401,845
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
Depreciation and
Amortization 1,639 299 - (a) 13,301 (a) 18,998 15,861
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
Interest expense 56 79,781 - (a) - (a) 5,941 6,107
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
INCOME/LOSS $(256,838) $(363,858) $29,474 (a) $(261,330) (A) $(12,510) $(45,024)
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INTERCOMPANY ITEMS INCLUDED IN ABOVE
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Revenue 8,565 99,300 - (a) - (a) 352,521 208,035
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
SG&A 49,459 24,623 24,639 (a) 171,727 (a) 31,760 24,636
------------------ ----------- ----------- --------- ---------- ----------- ----------- ----------- -----------
Interest Expense 56 79,781 - (a) - (a) 5,941 6,107
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CONSOLIDATED ENTITIES
------------------ ---------------------- ------------------- --------------------- ---------------- -----------------
NEWTEK NEWTEK DC MEDIA NEWTEK TAX GLOBAL BUSINESS
BUSINESS EXCHANGE CLIENT CAPITAL SERVICES ADVISORS
OF NY SERVICES OF WI
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2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
REVENUE $73,469 $0 $0 0 $32,695 $527,272 $47,695 (A) $80,900 (A)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
SG&A 327,508 143,660 50,880 34,721 212,334 539,538 71,595 (a) 156,537 (a)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
Depreciation and 10,597 4,015 678 - - - - (a) 145 (a)
Amortization
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
Interest expense 6,343 4,398 - - 47,894 4,268 - (a) - (a)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
INCOME/LOSS $(270,979) $(152,073) $(51,558) $(34,721) $(227,533) $(16,534) $(23,900) (A) $(75,782) (A)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
INTERCOMPANY ITEMS INCLUDED IN ABOVE
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
Revenue - - - - - - 0 25,929 (a) - (a)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
SG&A 63,966 21,169 39,875 14,500 20,529 - 7,000 (a) 24,768 (a)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
Interest Expense 6,343 4,062 - - 10,483 - - (a) - (a)
------------------ ---------- ----------- --------- --------- ----------- --------- ---------- ----- ---------- ------
20
NOTE 10 -SUMMARY RESULTS OF QUALIFIED INVESTMENTS: (CONTINUED)
CONSOLIDATED ENTITIES
------------------ ---------------- ---------------- ---------------- ---------------- ------------------ -------------------------
NEWTEK AUTOMATED NEWTEK NEWTEK NEWTEK FINANCIAL TOTALS
STRATEGIES - CO MERCHANT COMMUNITY LOUISIANA INFORMATION
SERVICES FINANCIAL TECHNOLOGY SYSTEMS-LA
SERVICES
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
Revenue $2,563 (a) $230,939 (a) $2,980 (a) $0 (a) $1,510 $0 $10,436,613 $2,456,194
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
SG&A 119,446 (a) 170,855 (a) 53,949 (a) 71,661 (a) 180,766 11,373 12,895,663 4,296,849
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
Depreciation and
Amortization 266 (a) 79,649 (a) - (a) 57 (a) 1,026 - 205,594 68,446
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
Interest expense - (a) 10,664 (a) - (a) (2,415) (a) (1,836) - 167,520 214,570
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
Income/Loss $(117,149) (a) $(30,229) (a) $(50,969) (a) $(69,303) (a) (178,446) (11,373) $(2,832,164) $(2,123,671)
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INTERCOMPANY ITEMS INCLUDED IN ABOVE
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
Revenue - (a) 17,826 (a) - (a) - (a) - - 1,092,375 633,500
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
SG&A 15,500 (a) - (a) 11,000 (a) 28,000 (a) 12,204 - 987,482 370,888
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
Interest Expense - - (a) - (a) - (a) - - 123,696 209,966
------------------ ---------- ----- ---------- ----- --------- ------ --------- ------ --------- -------- ------------ ------------
ENTITIES UNDER THE EQUITY METHOD (1)
----------------- --------------------- --------------------- --------------------- -----------------------
STARPHIRE NICHEDIRECTORIES TRANSWORLD BUSINESS TOTALS
BROKERS - FL
================= ========== ========== ========== ========== ========== ========== =========== ===========
2003 2002 2003 2002 2003 2002 2002
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Cash 3,552 14,653 63,808 212,409 190,939 153,087 $258,299 $380,149
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Other Assets 349,682 402,874 188,273 288,103 329,408 328,261 867,363 1,019,238
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
TOTAL ASSETS $ 353,234 $417,527 $252,081 $500,512 $520,347 $481,348 $1,125,662 $1,399,387
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
Current
Liabilities 65,052 34,330 311,460 438,915 27,355 53,990 403,867 527,235
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
TOTAL $ 65,052 $34,330 377,187 $484,850 $142,354 $168,990 $584,593 $688,170
LIABILITIES
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
TOTAL EQUITY $ 288,182 $383,197 $(125,106) $15,662 $312,358 $541,069 $711,217
(DEFICIT) $377,993
----------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
ENTITIES UNDER THE EQUITY METHOD (1)
----------------- --------------------- ---------------------- --------------------- ----------------------
STARPHIRE NICHEDIRECTORIES TRANSWORLD BUSINESS
BROKERS - FL TOTAL
================= ========== ========== ========== =========== ========== ========== =========== ==========
2003 2002 2003 2002 2003 2002 2003 2002
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
REVENUE $81,752 $76,440 $654,068 $544,272 $1,174,460 $1,581,034 $1,910,280 $2,201,746
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
SG&A 121,074 364,444 768,035 755,608 1,085,340 1,576,717 1,974,449 2,696,769
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
Depreciation and
Amortization 14,396 21,188 23,026 13,417 1,500 1,833 38,922 36,438
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
Interest expense (58) 12,451 3,643 (483) 8,063 3,102 20,514
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
INCOME/LOSS $(53,660) $(321,643) $(140,636) $(224,753) $88,103 $ (5,579)$ (106,193) $ (551,975)
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
INTERCOMPANY ITEMS INCLUDED IN ABOVE
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
Revenue 207 - - - - - 207 -
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
SG&A 3,750 27,330 35,956 56,420 12,750 17,550 52,456 101,300
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
Interest expense - 12,451 - - - 8,063 - 20,514
----------------- ---------- ---------- ---------- ----------- ---------- ---------- ----------- ----------
(a) No activity under Newtek 's ownership during this time period
(1) The company also owns 20% of Copia Technology, which had no operating
activity and no assets.
21
NOTE 11 - NOTES PAYABLE AND EXTINGUISHMENT OF DEBT:
The following is a summary of the extinguishment transactions and
reconciliation of notes payable in credits in lieu of cash balances at September
30, 2003 (exclusive of proceeds allocated to warrants as noted above). This
summary does not include $158,875 of accrued interest payable in credits in lieu
of cash for the Company's Wilshire Advisers Capco, which is reflected in the
balance of Notes Payable in Credits in lieu of cash on the balance sheet. That
Capco remains primarily liable for the notes payable to the Certified Investors
of this Capco.
------------------------------------------------------------------------------------------------------------------------
CAPCO, DUE
DATE AND A
IMPUTED PAYMENTS IN ACCRUED OBLIGATION
INTEREST RATE ORIGINAL EXTINGUISHED REMAINING CREDITS IN INTEREST (@ AT
OF NOTE PRINCIPAL OBLIGATION OBLIGATION LIEU OF CASH STATED RATE) 9/30/03
------------------------------------------------------------------------------------------------------------------------
WI, due 2008, 21.9% $ 16,666,667 $ (5,939,649) $ 10,727,018 $ (7,916,667) $ 3,797,742 $ 6,608,093
WLA, due 2008, 22.3% $ 16,400,000 $ (4,810,015) $ 11,589,985 $ (8,118,000) $ 4,125,461 $ 7,597,446
WLA II, due 2009, 18.0%) $ 3,050,000 $ (765,908) $ 2,284,092 $ 91,174,250) $ 519,319 $ 1,629,161
WP, due 2010 19.2%) $ 37,384,028 $(15,266,802) $ 22,117,226 $(13,084,410) $9,151,1998 $ 18,194,014
WNY II, due 2010, 27.9%) $ 6,807,866 $ (2,929,053) $ 3,878,813 $ (1,872,163) $ 1,414,950 $ 3,421,600
WNY III, due 2011, 16.6%) $ 35,160,202 $(14,079,476) $ 21,080,726 $ (6,153,035) $ 5,255,932 $ 20,183,623
WLA III, due 2012, 8.7%) $ 8,000,000 $ (2,000,921) $ 5,999,079 -- $ 309,366 $ 6,308,445
WCOL, DUE 2013, 13.60%) $ 22,057,767 $ (9,349,608) $ 12,708,159 -- $ 1,915,546 $ 14,623,705
------------ ------------ ------------ ------------ ------------ ------------
TOTALS $145,526,530 $(55,141,432) $ 90,385,098 $(38,318,525) $ 26,658,389 $ 78,724,962
============ ============ ============ ============ ============ ============
------------------------------------------------------------------------------------------
CAPCO, DUE (A+B)=
DATE AND B BALANCE
IMPUTED DISCOUNT ON DISCOUNT OF
INTEREST RATE REMAINING AMORTIZED AT OBLIGATION
OF NOTE OBLIGATION DISCOUNT 9/30/03 @9/30/03
------------------------------------------------------------------------------------------
WI, due 2008, 21.9% $ (3,146,579) $ 1,603,546 $ (1,543,033) $ 5,065,080
WLA, due 2008, 22.3% $ (4,365,829) $ 2,318,945 $ (2,046,884) $ 5,550,562
WLA II, due 2009, 18.0%) $ (699,097) $ 341,220 $ (357,877) $ 1,271,284
WP, due 2010 19.2%) $ (7,861,123) $ 3,546,137 $ (4,314,986) $ 13,879,028
WNY II, due 2010, 27.9%) $ (2,001,756) $ 675,318 $ (1,326,438) $ 2,095,162
WNY III, due 2011, 16.6%) $ (6,608,240) $ 2,092,413 $ (4,515,827) $ 15,667,796
WLA III, due 2012, 8.7%) $ (968,824) $ 124,508 $ (844,316) $ 5,464,129
WCOL, DUE 2013, 13.60%) $ (2,234,795) $ 290,994 $ (1,943,801) $ 12,679,904
------------ ------------ ------------ ------------
TOTALS $(27,886,234) $ 10,993,081 $(16,893,162) $ 61,672,905
============ ============ ============ ============
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 12 - SUBSEQUENT EVENTS:
In October of 2003, Newtek sold 125,000 shares of common stock in a
private transaction, with gross and net cash proceeds of approximately $477,000.
Also in October of 2003, Newtek raised $6,800,000 of certified capital
for another Capco fund, Wilshire Louisiana Partners IV, LLC.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION:
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues increased by approximately $9,525,000 to $26,429,000 for the
three months ended September 30, 2003, from $16,904,000 for the three months
ended September 30, 2002. Income from tax credits increased by approximately
$7,181,000 to $22,067,000 for the three months ended September 30, 2003, from
$14,886,000 for the three months ended September 30, 2002, due to Newtek meeting
different investment thresholds mandated by the various state Capco statutes in
the same three month period of 2003 versus 2002. Credit card processing revenue
increased by approximately $1,360,000 to $1,880,000 for the three months ended
September 30, 2003 from $520,000 for the three months ended September 30, 2002,
due to the Company's increase in credit card processing customers, as well as
the company's acquisition of Automated Merchant Services. Interest and dividend
income increased by approximately $844,000 to $922,000 for the three months
ended September 30, 2003, from $78,000 for the three months ended September 30,
2002. This increase was primarily due to the acquisition of Newtek Small
Business Finance ("NSBF"). Other income decreased by approximately $109,000 to
$1,142,000 for the three months ended September 30, 2003, from $1,251,000 for
the three months ended September 30, 2002. This decrease is primarily due to the
operating activities of consolidated partner companies other than credit card
processing and NSBF as described above. Consulting fee income decreased $100,000
to $68,000 for the three months ended September 30, 2003 from $168,000 for the
three months ended September 30, 2002. This decrease is a result of the
increased focus on the credit card and small business lending activities. During
the three months ended September 30, 2003, Newtek had a recovery of a previously
written off investment of $350,000 which represents the cash Newtek received for
the sale of its 33% interest in Transworld Business Brokers of Florida. The
Company used the equity method of accounting for this investment, and recorded
its share of the company's losses as "equity in net losses of affiliates". These
losses totaled approximately $33,000 in 2001, $297,000 in 2002 and $20,000 in
the first 9 months of 2003. Upon the completion of the sale and receipt of
$350,000 in cash proceeds, Newtek recorded a recovery of its previously
written-off investment.
Interest expense increased by approximately $232,000 to $3,322,000 for
the three months ended September 30, 2003 from $3,090,000 for the three months
ended September 30, 2002. The increase was due primarily to the increased number
of Capcos (Wilshire Colorado Partners and Wilshire Louisiana Partners III) in
2003, as well as the interest expense attributable to NSBF operations. Payroll
and consulting fees decreased by $324,000 to $1,725,000 for the three months
ended September 30, 2003 compared to $2,049,000 for the three months ended
September 30, 2002. The decrease was due to the Company's efforts to reduce
consulting fees. Credit card processing direct costs increased by $552,000 to
$871,000 for the three months ended September 30, 2003 from $319,000 for the
three months ended September 30, 2002. Credit card administrative costs
increased by approximately $796,000 to $1,227,000 for the three months ended
September 30, 2003 from $431,000 for the three months ended September 30, 2002.
These increases are due to the significant increase in the number of credit card
processing customers.
Professional fees decreased by approximately $211,000 to $692,000 for
the three months ended September 30, 2003 from $903,000 for the three months
ended September 30, 2002. The decrease was due primarily to a decrease in the
need for professional services in the three month period in 2003 versus the same
period in 2002. Insurance expense increased by approximately $151,000 to
$623,000 for the three months ended September 30, 2003 compared to $472,000 for
the three months ended September 30, 2002. The increase is due primarily to the
increased number of Capcos in the current period compared to the prior period.
Other expenses increased by $142,000 to $955,000 for the three months ended
September 30, 2003 from $813,000 for the three months ended September 30, 2002.
The increase was due primarily to expenses incurred by consolidated partner
companies.
Other than temporary decline in value of investments decreased by
approximately $344,000 from $601,000 for the three months ended September 30,
2002 to $257,000 for the three months ended September 30, 2003, due to the
Company's determination that fewer impairment charges were required in the
current period. Newtek determined that there was an other than temporary decline
in the value of two debt investments held by its Louisiana Capco of
approximately $257,000 for the three month period ended September 30, 2003. The
Company determined that the
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED)
collateral for these two investments (which are believed to be in liquidation)
would not be enough to satisfy its obligations.
For the three month period ended September 30, 2002, the Company
determined that there was approximately $100,000 of an other than temporary
decline in the value of its investments for O.S. Johnson, LLC, $329,000 for DC
Media, and an approximately $44,000 other than temporary decline in the value of
its investments for Gino's Seafood. In addition, the Company determined an
impairment existed for a non-Capco investment (included in prepaid expenses and
other assets on the balance sheet), and recorded a charge of approximately
$150,000. In 2002, the Company also recovered approximately $22,000 of cash on
two of its investments written down in 2000. These items aggregate approximately
$601,000 which is shown on the statement of income as other than temporary
decline in value of investments.
Equity in net losses of affiliates decreased by approximately $121,000
from $121,000 for the three months ended September 30, 2002 to zero for the
three months ended September 30, 2003. This decrease is due to additional equity
investments in 2002 compared to 2003, as well as additional losses incurred by
the equity investment companies in the three month period ended September 30,
2002 as compared to the three month period ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
Revenues increased by approximately $25,725,000 to $54,068,000 for the
nine months ended September 30, 2003, compared to $28,343,000 for the nine
months ended September 30, 2002. Income from tax credits increased by
approximately $18,783,000 to $43,927,000 for the nine months ended September 30,
2003, from $25,144,000 for the nine months ended September 30, 2002, due to
Newtek meeting different investment thresholds mandated by the various state
Capco statutes in the same nine month period of 2003 versus 2002. Credit card
processing revenue increased by approximately $2,955,000 to $3,868,000 for the
nine months ended September 30, 2003 from $913,000 for the nine months ended
September 30, 2002, due to the Company's increase in credit card processing
customers as well as two additional partner companies in the business. Interest
and dividend income increased by approximately $2,322,000 to $3,005,000 for the
nine months ended September 30, 2003, from $683,000 for the nine months ended
September 30, 2002. This increase was primarily due to the activities of Newtek
Small Business Finance ("NSBF"), which was acquired on December 31, 2002.
Consulting fee income decreased by approximately $165,000 to $103,000 for the
nine months ended September 30, 2003, from $268,000 for the nine months ended
September 30, 2002. This decrease is a result of the increased focus on the
credit card and small business lending activities. Other income increased by
approximately $1,498,000 to $2,816,000 for the nine months ended September 30,
2003, from $1,318,000 for the nine months ended September 30, 2002. This
increase is primarily due to the SBA loan servicing fee income and SBA loan
application fees of $1,796,000 earned by Newtek Small Business Finance during
the nine months ended September 30, 2003.
Interest expense increased by approximately $1,867,000 to $10,526,000
for the nine months ended September 30, 2003 from $8,659,000 for the nine months
ended September 30, 2002. The increase was due primarily to the increased number
of Capcos (Wilshire Colorado Partners and Wilshire Louisiana Partners III) in
2003, as well as the interest expense attributable to NSBF operations. Payroll
and consulting fees increased by approximately $226,000 to $4,471,000 for the
nine months ended September 30, 2003 compared to $4,245,000 for the nine months
ended September 30, 2002. The increase was due to the increased number of
partner companies. Credit card processing direct costs increased by $1,873,000
to $2,394,000 for the nine months ended September 30, 2003 from $521,000 for the
nine months ended September 30, 2002. Credit card processing administrative
costs increased by approximately $910,000 to $2,252,000 for the nine months
ended September 30, 2003 from $1,342,000 for the nine months ended September 30,
2002. The increases are due to the significant increase in the number of credit
card processing customers.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION: (CONTINUED)
Professional fees increased by $322,000 to $2,749,000 for the nine months ended
September 30, 2003 from $2,427,000 for the nine months ended September 30, 2002.
The increase was due primarily to additional legal fees incurred, which is
attributable to the increased size and number of Capcos in 2003 versus 2002, as
well as due to the increase in numbers of partner companies. Other expenses
increased by $1,387,000 to $2,898,000 for the nine months ended September 30,
2003 from $1,511,000 for the nine months ended was due primarily to expenses
incurred by consolidated partner companies other than credit card processing and
NSBF as described above.
Other than temporary decline in value of investments increased by
approximately $402,000 from $1,589,000 for the nine months ended September 30,
2002 to $1,991,000 for the nine months ended September 30, 2003, due to the
Company's determination that a greater amount of its investment values were
impaired in the first nine months of 2003 versus the same period of 2002. During
the nine month period ended September 30, 2003, Newtek determined that there was
an approximately $943,000 of an other than temporary decline in the value of its
investments for Merchant Data Systems, Inc., ("MDS") $500,000 for 1-800 Gift
Certificate, $271,000 for an equity investment in Direct Creations, LLC,
$145,000 for O.S. Johnson, LLC, $112,000 for Gerace Auto Parts, and $20,000 for
Transworld Business Brokers, LLC. These items aggregated approximately
$1,991,000 which is shown on the statement of income as other than temporary
decline in value of investments.
The Company also has a debt investment in Direct Creations ("DC") which
had produced a new infomercial for its only product the "Zen Oracle Training
Putter". DC was counting on a high response rate from its April, 2003 media
buys. The results from this airing of the infomercial were extremely
disappointing and accordingly, the investment committee has serious doubts as to
the market acceptability of the Zen Oracle and thus the viability of the
company. The debt that is owed by DC to Newtek's capco subsidiaries is
collateralized by the assets of DC (some inventory that would need to be
"closed-out") and a personal guarantee from the CEO. The Company believes that
the CEO has the financial capability to honor the guarantee and accordingly, the
investment committee has determined that there has not been an other than
temporary decline in the recorded value of its debt investment.
1-800 Gift Certificate has not provided a 2002 annual audited financial
statement. The audited financial statement was required to be delivered to
Newtek as of April 1, 2003. This constitutes a technical default of covenants
under the investment terms. 1-800's interim financial statements have indicated
an additional weakening of the balance sheet (which reflects a negative equity
position). The Company does not expect to recover this investment.
In March, 2003, Wilshire Partners (Newtek's Florida Capco) filed a law
suit in Florida state court claiming a default under the outstanding debt
investment to MDS. MDS counter-sued Wilshire Partners, and Newtek's CEO, COO and
CFO in April, 2003. Although the investment committee is confident that the
balance owed is appropriate and due, it does not expect to recover this
investment.
For the nine month period ended September 30, 2002, Newtek determined
that there was approximately $734,000 of an other than temporary decline in the
value of its investments for Starphire Technologies, LLC, approximately $87,000
other than temporary decline in the value of its investment for Gino's Seafood,
approximate $458,000 for Direct Creations, LLC, $100,000 for O.S. Johnson, LLC
and an approximate $77,000 other than temporary decline in the value of its
investments for Embosser's Sales and Service. In addition, Newtek determined an
impairment existed for a non-Capco investment (included in prepaid expenses and
other assets on the balance sheet), and recorded a charge of approximately
$162,000. In 2002, Newtek also recovered approximately $29,000 of cash on two of
its investments written down in 2000. These items aggregate approximately
$1,589,000 which is shown on the statement of income as other than temporary
decline in value of investments.
For the nine month period ended September 30, 2003, equity in net
losses of affiliates decreased by
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED):
approximately $794,000 to zero from $794,000 for the nine month period
ended September 30, 2002. This decrease is due to additional equity investments
in 2002 compared to 2003, as well as additional losses incurred by the equity
investment companies in the nine month period ended September 30, 2002 as
compared to the nine month period ended September 30, 2003.
At September 30, 2003, Newtek had nineteen majority-owned partner
companies, all of which were as a result of investments through the capco
programs. For the nine months ended September 30, 2003, these companies
represented approximately $2,813,000 in losses that are consolidated in Newtek's
results (net of inter-company eliminations of $1,092,000 in revenues and
$1,111,000 in expenses). For the nine months ended September 30, 2003, revenues
from consolidating partner companies, net of inter-company eliminations,
amounted to $9,344,000 and were generated from the following sources: SBA
lending ($4,644,000), credit card processing ($3,868,000), consulting
($463,000), outsourced bookkeeping ($162,000), and other ($207,000). For the
nine months ended September 30, 2003, expenses incurred by consolidating partner
companies, net of inter-company eliminations, amounted to $12,157,000 and were
incurred by the following sources: SBA lending ($4,733,000), credit card
processing ($4,646,000), consulting ($1,773,000), outsourced bookkeeping
($656,000), and other ($349,000). For the nine months ended September 30, 2002,
these companies represented approximately $2,176,000 in losses that are
consolidated in Newtek's results (net of inter-company eliminations of $634,000
in revenues and $581,000 in expenses). For the nine months ended September 30,
2002, revenues from consolidating partner companies, net of inter-company
eliminations, amounted to $1,823,000 and were generated from the following
sources: credit card processing ($913,000), consulting ($212,000), outsourced
bookkeeping ($171,000), and other ($527,000). For the nine months ended
September 30, 2002, expenses incurred by consolidating partner companies, net of
inter-company eliminations, amounted to $3,999,000 and were incurred by the
following sources: credit card processing ($1,863,000), consulting ($1,188,000),
outsourced bookkeeping ($404,000), and other ($544,000).
As of December 31, 2002, SBA loans that were past due more than 90
days, but was still performing (accruing interest), amounted to $293,800. Of
this amount, $175,000 became current, and $100,000 was moved to non-performing
status. As of September 30, 2003, SBA loans that are past due more than 90 days,
but are still performing (accruing interest), amount to $65,824.
As of December 31, 2002, SBA loans that are on a non-accrual basis
amounted to $2,914,767. As of September 30, 2003, SBA loans that are on a
non-accrual basis amount to $4,248,724. This increase was predominately due to
two loans being degraded to non-performing status. Charge offs are made due to
the decrease in asset quality of the receivables as a result of their poor
performance on repaying the SBA loan. Newtek considers the specific payback
performance of each SBA loan, as well as payback performance as a whole, to
determine if our provision is adequate.
LIQUIDITY AND CAPITAL RESOURCES
Newtek has funded its operations primarily through the issuance of
notes to Certified Investors through the Capco program. To date, Newtek has
received approximately $166,700,000 in proceeds from the issuance of long-term
debt, Capco warrants and the Company's common stock through the Capco programs.
The Company's principal capital requirements have been to fund the
extinguishment of the principal amount of notes issued to the Certified
Investors, the acquisition of Capco insurance policies, the acquisition of
partner companies interests, funding of other investments, and working capital
needs resulting from increased operating and business development activities of
its Partner Companies.
Net cash used in operating activities for the nine months ended
September 30, 2003 of approximately $3,873,000 resulted primarily from net
income of approximately $14,040,000, increased by the non-cash interest expense
of approximately $8,642,000. It was also affected by the approximately
$1,991,000 in other than temporary decline in value of investments,
approximately $1,912,000 in minority interest, the approximately $43,927,000 in
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION (CONTINUED):
income from tax credits, and the deferred income tax provision of $8,857,000. In
addition, Newtek had an increase in components of working capital of $1,709,000.
Net cash provided by investing activities for the nine months ended
September 30, 2003 of approximately $167,000 resulted primarily from returns of
principal of approximately $4,677,000, offset by approximately $9,810,000 in
additional qualified investments made in the period, $1,500,000 of cash paid for
the acquisition of AMS, and approximately $3,725,000 in SBA loans issued. Newtek
also received approximately $5,590,000 in repayments of its SBA loans receivable
and Newtek consolidated approximately $5,303,000 of cash of its majority owned
partner companies.
Net cash used in financing activities for the nine months ended
September 30, 2003 was approximately $2,465,000, primarily attributable to
approximately $1,637,000 from the private placement of common stock and exercise
of stock options, $1,000,000 in proceeds from issuance of debt, and $2,000,000
in proceeds from the sale of preferred stock of a consolidated subsidiary,
offset by approximately $4,854,000 in payments on SBA loans payable, and payment
of notes payable-insurance of $1,488,000, $315,000 of repayment to notes
payable-other, and repayment of a line of credit totaling $450,000.
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 availability of funds under its existing credit
agreements will provide it with sufficient liquidity to meet its short and
long-term capital needs.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10 Q/A contains forward-looking
statements. Additional written or oral forward-looking statements may be made by
Newtek from time to time in filings with the Securities and Exchange Commission
or otherwise. The words "believe," "expect," "seek," and "intend" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of income or loss, expenditures,
acquisitions, plans for future operations, financing needs or plans relating to
services of the Company, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by or
underlying the forward-looking statements.
Newtek does not undertake, and specifically disclaims, any obligation
to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after such statements.
27
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
Attached as EXHIBITS 31.1, 31.2 and 99.1 are, respectively, the
Certifications required by Rules 13a-14(a)/15d-14(a) and Section 906 of the
Sarbanes-Oxley Act of 2002.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWTEK BUSINESS SERVICES, INC.
Date: February 11, 2004 /s/ Barry Sloane
----------------------------------------------
Barry Sloane
Chairman of the Board, Chief Executive Officer
and Secretary
29