Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(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, 2004
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] [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT).
YES NO
[ ] [X]
AS OF NOVEMBER 12, 2004, 33,599,836 SHARES OF COMMON STOCK WERE ISSUED AND
OUTSTANDING.
CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 1
Consolidated Statements of Income for the Three and Nine Month
Periods Ended September 30, 2004 and 2003 2
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended September 30, 2004 and 2003 4
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits 31
Signatures 33
Certifications
Exhibits
ITEM 1. FINANCIAL STATEMENTS
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 (UNAUDITED) AND DECEMBER 31, 2003
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- -------------
A S S E T S
-----------
Cash and cash equivalents ...................................................................... $ 40,610,488 $ 33,444,611
Restricted cash ................................................................................ 1,692,601 2,107,471
Credits in lieu of cash ........................................................................ 79,362,061 71,294,083
SBA loans receivable, net of reserve for loan losses ........................................... 36,662,454 52,050,725
Accounts receivable (net of allowances of $31,607 and $96,480, respectively) ................... 1,456,228 469,768
Receivable from bank ........................................................................... 1,827,610 2,670,353
SBA loans held for sale ........................................................................ 1,892,407 3,619,582
Accrued interest receivable .................................................................... 271,247 281,072
Investments in qualified businesses - equity method investments ................................ 300,000 300,000
Investments in qualified businesses - held to maturity investments ............................. 1,714,492 1,420,179
Structured insurance product ................................................................... 3,175,760 3,054,705
Prepaid insurance .............................................................................. 13,604,829 13,282,630
Prepaid expenses and other assets (net of accumulated amortization of deferred financing
costs of $130,624 and $0, respectively) ...................................................... 4,269,407 1,907,132
Capitalized servicing assets (net of accumulated amortization of $308,134 and $24,545,
respectively) ................................................................................ 1,833,832 754,064
Fixed assets (net of accumulated depreciation and amortization of $712,656 and
$390,011, respectively) ...................................................................... 1,642,639 670,715
Customer accounts (net of accumulated amortization of $922,791 and $269,380, respectively) ..... 4,160,816 3,024,298
Goodwill ....................................................................................... 11,057,740 1,832,621
------------- -------------
Total assets ................................................................................... $ 205,534,611 $ 192,184,009
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses ......................................................... $ 7,367,080 $ 6,095,440
Notes payable - certified investors ........................................................... 3,819,317 3,829,973
Notes payable - insurance ..................................................................... 6,003,088 4,115,136
Notes payable - other ......................................................................... 640,000 1,000,000
Bank notes payable ............................................................................ 28,554,747 51,990,047
Deferred revenue .............................................................................. 824,455 --
Notes payable in credits in lieu of cash ...................................................... 67,820,564 65,697,050
Mandatorily redeemable preferred stock ........................................................ 1,500,000 --
Deferred tax liability ........................................................................ 13,369,480 10,815,790
------------- -------------
Total liabilities ............................................................................. 129,898,731 143,543,436
------------- -------------
Minority interest ............................................................................. 6,003,299 8,393,151
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock (par value $0.02 per share; authorized 1,000,000 shares, no shares issued
and outstanding) ............................................................................ -- --
Common stock (par value $0.02 per share; authorized 39,000,000 shares, issued and
outstanding 33,574,806 and 26,209,211, not including 582,980 shares held in escrow) ......... 671,496 524,184
Additional paid-in capital .................................................................... 50,907,164 26,588,400
Unearned compensation ......................................................................... (1,633,377) (2,106,588)
Retained earnings ............................................................................. 19,687,298 15,241,426
------------- -------------
Total shareholders' equity .................................................................... 69,632,581 40,247,422
------------- -------------
Total liabilities and shareholders' equity .................................................... $ 205,534,611 $ 192,184,009
============= =============
See accompanying notes to these unaudited consolidated financial statements.
1
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Income from tax credits ..................... $ 11,421,256 $ 22,067,285 $ 20,469,301 $ 43,926,619
Electronic payment processing ............... 5,126,320 1,879,526 12,429,454 3,867,612
Servicing fee and premium income ............ 1,009,132 567,916 4,263,244 1,289,376
Web hosting ................................. 2,204,026 -- 2,204,026 --
Insurance commissions ....................... 391,373 -- 391,373 --
Interest and dividend income ................ 864,741 921,507 2,935,904 3,005,227
Other income ................................ 581,604 992,400 1,257,978 1,979,392
------------ ------------ ------------ ------------
Total revenue ............................ 21,598,452 26,428,634 43,951,280 54,068,226
------------ ------------ ------------ ------------
Expenses:
Interest .................................... 3,290,296 3,333,030 10,533,093 10,537,117
Payroll and consulting fees ................. 2,997,239 1,950,755 7,543,713 5,243,819
Electronic payment processing costs ......... 3,344,545 873,827 8,024,280 2,393,580
Professional fees ........................... 1,825,563 1,040,753 4,115,222 3,682,456
Insurance ................................... 738,263 626,296 2,144,575 1,837,713
Other than temporary decline in value of
investments ................................. -- 257,339 -- 1,991,040
Equity in net losses of affiliates .......... -- (117,904) -- --
Provision for loan losses ................... 59,232 331,371 11,983 331,371
Other ....................................... 2,299,269 1,369,981 4,926,255 3,430,110
------------ ------------ ------------ ------------
Total expenses ........................... 14,554,407 9,665,448 37,299,121 29,447,206
------------ ------------ ------------ ------------
Income before minority interest, provision for
income taxes and extraordinary items ........ 7,044,045 16,763,186 6,652,159 24,621,020
Minority interest in loss (income) ............ 272,638 (1,231,560) 883,217 (1,911,602)
------------ ------------ ------------ ------------
Income before provision for income taxes and
extraordinary items ......................... 7,316,683 15,531,626 7,535,376 22,709,418
Provision for income taxes .................... (2,999,839) (6,057,334) (3,089,504) (8,856,673)
------------ ------------ ------------ ------------
Income before extraordinary items ............. 4,316,844 9,474,292 4,445,872 13,852,745
Extraordinary gain on acquisition of a business -- -- -- 186,729
------------ ------------ ------------ ------------
Net income .................................... $ 4,316,844 $ 9,474,292 $ 4,445,872 $ 14,039,474
------------ ------------ ------------ ------------
See accompanying notes to these unaudited consolidated financial statements.
2
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income per share :
Basic ........................................ $ 0.13 $ 0.37 $ 0.15 $ 0.55
Diluted ...................................... $ 0.13 $ 0.36 $ 0.15 $ 0.54
Income per share before extraordinary items
Basic ........................................ $ 0.13 $ 0.37 $ 0.15 $ 0.54
Diluted ...................................... $ 0.13 $ 0.36 $ 0.15 $ 0.53
Weighted average common shares outstanding
Basic .......................................... 33,308,929 25,709,700 28,854,029 25,671,712
Diluted ........................................ 33,420,377 26,110,536 29,247,416 26,016,931
See accompanying notes to these unaudited consolidated financial statements.
3
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
Cash flows from operating activities:
Net income ................................................... $ 4,445,872 $ 14,039,474
Adjustments to reconcile net income to net cash used in
operating activities:
Other than temporary decline in value of investments ....... -- 1,991,040
Extraordinary gain on acquisition of business .............. -- (186,729)
Income from tax credits .................................... (20,469,301) (43,926,619)
Deferred income taxes ...................................... 3,089,504 8,856,673
Depreciation and amortization .............................. 1,259,645 258,940
Amortization of SBA deferred financing costs .............. 130,624 --
Provision for SBA loan losses .............................. 11,983 331,371
SBA loans originated for sale .............................. (23,190,889) (2,772,747)
Proceeds from sale of SBA loans ............................ 24,918,064 2,438,119
Accretion of interest income ............................... (121,054) (121,054)
Accretion of interest expense .............................. 8,696,223 8,642,249
Non-cash compensation ...................................... 1,058,172 182,971
Minority interest .......................................... (883,217) 1,911,602
Premium income ............................................. (658,395) --
Changes in assets and liabilities, net of the effect of
business acquisitions:
Prepaid insurance ...................................... 313,910 1,471,982
Prepaid expenses and other assets, accounts receivable
and capitalized servicing assets .................... (2,836,338) (348,270)
Accounts payable and accrued expenses .................. (534,838) 585,422
------------ ------------
Net cash used in operating activities ....... (4,770,035) (6,645,576)
------------ ------------
Cash flows from investing activities:
Investments in qualified businesses - held to maturity ....... (1,908,500) (300,000)
Return of investments - held to maturity ..................... 1,614,187 469,855
Purchase of fixed assets ..................................... (845,962) (320,379)
SBA loans originated for investment, net of deferred loan fees (9,506,212) (951,753)
Proceeds from sale of SBA loans held for investment,
reclassified as loans held for sale ........................ 17,881,332 --
Payments received on SBA loans ............................... 7,659,563 5,589,916
Cash paid for acquisitions, net of cash acquired ............. (9,955,047) (1,493,000)
Other investments ............................................ (30,040) (55,000)
------------ ------------
Net cash provided by investing activities ... 4,909,321 2,939,639
------------ ------------
See accompanying notes to these unaudited consolidated financial statements.
4
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable to certified investors ........... $ 10,925,483 $ 1,000,000
Cash paid for Coverage A ................................................. (5,103,351) --
Proceeds from premium finance borrowing .................................. 3,000,000 --
Principal payments of note payable-insurance ............................. (1,112,048) (1,488,093)
Repayments of note payable - bank and other .............................. (360,000) (765,317)
Proceeds from sale of preferred stock of subsidiary ...................... -- 2,000,000
Change in restricted cash ................................................ 414,870 --
Contributions from members ............................................... -- 6,000
Net repayments on SBA bank notes payable ................................. (23,435,300) (4,854,387)
Net proceeds from exercise of stock options .............................. 533,118 243,042
Net proceeds from issuance of common stock ............................... 22,163,819 1,393,641
------------ ------------
Net cash provided by (used in) financing activities ....... 7,026,591 (2,465,114)
------------ ------------
Net increase (decrease) in cash and cash equivalents ..................... 7,165,877 (6,171,051)
Cash and cash equivalents - beginning of period ............................ 33,444,611 41,171,358
------------ ------------
Cash and cash equivalents - end of period .................................. $ 40,610,488 $ 35,000,307
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW 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 ................................................................ $ 12,401,323 $ 12,095,570
------------ ------------
Issuance of warrant in connection with purchase of
Coverage A Insurance ..................................................... $ 250,000 $ --
------------ ------------
Acquisition of minority interest resulting in goodwill:
Newtek Business Services common stock issued ........................... $ 786,115 $ 362,388
Less: minority interest acquired ....................................... -- --
------------ ------------
Goodwill recognized .................................................... $ 786,115 $ 362,388
------------ ------------
Conversion from minority interest to mandatorily redeemable
preferred stock ............................................................ $ 1,500,000 $ --
------------ ------------
See accompanying notes to these unaudited consolidated financial statements.
5
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements of Newtek Business Services, Inc.
and Subsidiaries (the "Company" or "Newtek") included herein have been prepared
by us pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and include all majority owned subsidiaries or those which
Newtek is considered to be the primary beneficiary of (as defined under FASB
Interpretation No. FIN 46 ("FIN 46")). All intercompany balances and
transactions have been eliminated in consolidation. The financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in our Form 10-K for the fiscal year ended December
31, 2003, as amended.
The unaudited consolidated financial statements of Newtek reflect, in
the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position of Newtek at
September 30, 2004, the results of operations and its cash flows for the nine
months ended September 30, 2004. Results of operations for the interim periods
may not be representative of results to be expected for a full year.
To conform to the current period presentation, certain
reclassifications were made to the prior periods consolidated financial
statements and accompanying notes.
Newtek is engaged in the business of providing financial products and
business services to small- and medium-sized businesses through ownership and/or
operation of specific primary lines of business as well as organizing certified
capital companies ("Capcos") and investing funds made available under the Capco
programs in small businesses.
The following is a summary of each Capco or Capco fund, state of
certification and date of certification:
CAPCO STATE OF CERTIFICATION DATE OF CERTIFICATION
----- ---------------------- ---------------------
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WA II New York April 2000
WNY III New York December 2000
WC Colorado October 2001
WAP Alabama February 2004
The State of Louisiana has four "Capco funds" which are all a part of
and consolidated with the WLA Capco (the first fund). The second, Wilshire
Louisiana Partners II, LLC (WLPII), and the third, Wilshire Louisiana Partners
III, LLC (WLPIII), were formed in October 2001 and October 2002, respectively.
The fourth, Wilshire Louisiana Partners IV, LLC (WLPIV), was formed in October
2003. 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 are,
"Qualified Businesses"), with the Certified Capital raised. Such investments may
be accounted for as either consolidated subsidiaries, or 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.
6
NOTE 1- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Participation in each Capco program legally entitles the Capco to
receive (or earn) tax credits from the state upon satisfying quantified, defined
investment percentage thresholds and time requirements. In order for the Capcos
to maintain their state-issued certifications, the Capcos must make Investments
in Qualified Businesses in accordance with these requirements. These state
requirements are mirrored in the limitations agreed to by each Capco in its
written agreements with its Certified Investors and limit the activities of the
Capcos to conducting the business of a Capco. Each Capco also has separate,
legal contractual arrangements with the Certified Investors obligating the Capco
to refrain from unauthorized activities, to use the proceeds from the notes only
for Capco-authorized (i.e., "qualified") investments, to limit fees for
professional services related to making, buying or selling investments to
$200,000 per Capco annually; and to pay interest on the aforementioned debt
instruments whether or not it meets the statutory requirements for Investments
in Qualified Businesses.
The Capco can satisfy this interest payment obligation, at the Capco's
discretion, by delivering tax credits in lieu of paying cash. The Capcos legally
have the right to deliver the tax credits to the Certified Investors. The
Certified Investors legally have the right to receive and use the tax credits
and would, in turn, use these tax credits to reduce their respective state tax
liabilities in an amount usually equal to 100% (WLA, WLPII, and WLPIII -110%) of
their Certified Capital. The tax credits can be utilized usually over a ten-year
period at a rate of 10% (WLA, WLPII, and WLPIII - 11%) per year and in some
instances are transferable and can be carried forward.
During February 2004, Newtek funded its eleventh Capco, Wilshire
Alabama Partners, LLC ("WAP"), for total certified capital of $11,111,111.
Newtek has organized and formed Wilshire DC Partners, LLC which was certified as
a Washington, D.C. Certified Capital Company on September 13, 2004. Wilshire DC
Partners, LLC has not raised any certified capital to date.
STOCK - BASED COMPENSATION
The Company has elected to continue using Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
employee and outside directors stock options. Under the intrinsic value method,
with regard to stock options, no stock-based employee compensation cost is
reflected in net income, as all options granted under the plan had an exercise
price equal to the market value of the underlying common stock at the date of
grant. Compensation expense on restricted shares granted to employees is
measured at the fair market value on the date of grant and recognized in the
consolidated statements of income on a pro-rata basis over the service period
which approximates the vesting period.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting method in
SFAS No. 148 "Accounting for Stock-based Compensation-Transition and
Disclosure-an amendment of SFAS 123" had been used in accounting for employee
stock options.
7
NOTE 1- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
As reported:
Net income $ 4,316,844 $ 9,474,292 $ 4,445,872 $ 14,039,474
Add: Total stock based employee
compensation expense recognized, net of
related tax effects 123,556 - 436,252 -
Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (126,937) (217,945) (528,143) (646,065)
-------------- -------------- ------------- -------------
Pro forma net income $ 4,313,463 $ 9,256,347 $ 4,353,981 $ 13,393,409
-------------- -------------- ------------- -------------
Earnings per share:
Basic - as reported $ 0.13 $ 0.37 $ 0.15 $ 0.55
-------------- -------------- ------------- -------------
Basic - pro forma $ 0.13 $ 0.36 $ 0.15 $ 0.52
-------------- -------------- ------------- -------------
Diluted - as reported $ 0.13 $ 0.36 $ 0.15 $ 0.54
-------------- -------------- ------------- -------------
Diluted - pro forma $ 0.13 $ 0.35 $ 0.15 $ 0.51
-------------- -------------- ------------- -------------
For the nine months ended September 30, 2004 and 2003, 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 59-85%, risk-free interest rate of 1.61% to 6.15%, respectively,
expected dividends of $0 and expected terms of 1-6 years.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the EITF reached consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" regarding disclosures about unrealized losses on available-for-sale
debt and equity securities accounted for under FASB Statements No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and No. 124,
"Accounting for Certain Investments Held by Not-for-Profit Organizations." The
guidance for evaluating whether an investment is other-than-temporarily impaired
should be applied in such evaluations made in reporting periods beginning after
June 15, 2004. The disclosures are effective in annual financial statements for
fiscal years ending after December 15, 2003, for investments accounted for under
Statements 115 and 124. For all other investments within the scope of this
Issue, the disclosures are effective in annual financial statements for fiscal
years ending after June 15, 2004. The additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004. We do not
expect that the implementation of EITF 03-1 will have a material effect on our
financial statements.
In March 2004, the EITF reached consensus on Issue No. 03-16,
"Accounting for Investments in Limited Liability Companies." EITF 03-16 provides
guidance for determining whether a non-controlling investment in a limited
liability company should be accounted for using the cost method or the equity
method of accounting. Companies will be required to adopt the provisions of this
consensus in reporting periods beginning after June 15, 2004. The adoption of
EITF 03-16 did not have a material effect on our financial statements.
8
NOTE 1- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
MAJOR ACCOUNTING POLICIES
Refer to the Company's 2003 Form 10-K for a description of major
accounting policies. There have been no material changes to these accounting
policies except for those pertaining to revenue recognition for the acquired
entities during 2004.
WEB HOSTING REVENUE RECOGNITION
The Company's revenues in this segment are primarily derived from
monthly recurring service fees for the use of its web hosting and software
support services. Customer set-up fees are billed upon service initiation and
are recognized as revenue over the estimated customer relationship period of 2.5
years. Payment for web hosting and related services is generally received one to
twelve months in advance. Such revenues are recognized as services are rendered,
provided that evidence of an arrangement exists, the price to the customer is
fixed or determinable, no significant Company obligations remain and collection
of the related receivable is reasonably assured.
The Company generates a limited amount of revenue from assisting
customers in registering their domain names. Due to the volume of customers, the
Company is able to obtain domain name registrations for its customers at
discounted rates. Customers may elect to use this service for a nominal service
fee.
INSURANCE BROKERAGE REVENUE RECOGNITION
Revenues are comprised of commissions earned on premiums paid for
insurance policies sold by Vistar and are recognized at the time the commission
is earned.
NOTE 2 - COMMON STOCK:
In the nine months ended September 30, 2004, Newtek sold 221,276 shares
of common stock in private transactions, with proceeds totaling approximately
$1,042,000. During the same period there were 178,992 stock options exercised,
with proceeds totaling approximately $533,000. In July 2004, the company
completed a secondary public offering selling 6,450,000 shares (including
450,000 shares pursuant to an over-allotment option) for net proceeds of
approximately $20,762,000. In connection with the funding in February 2004 of
Wilshire Alabama Partners, 85,500 shares of stock were issued for approximately
$359,000.
In May 2004, Newtek issued 144,458 shares of its common stock, valued
at approximately $521,000, in exchange for the minority interests in Wilshire
Colorado, Wilshire Alabama Partners, Wilshire Louisiana Partners III and
Wilshire Louisiana Partners IV. In August 2004, Newtek issued 74,850 shares
valued at approximately $145,000 in exchange for the remaining minority interest
in Wilshire Colorado. In September 2004, Newtek issued 30,000 shares valued at
approximately $120,000 in exchange for a minority interest in a subsidiary of
Wilshire Investors, LLC.
In connection with three employment agreements, 22,869 shares were
issued in consideration for services rendered, valued at approximately $118,000.
As part of the renewal of the SBA's line of credit with Deutsche Bank, 24,950
shares of common stock were issued, valued at approximately $125,000. During
August 2004, Newtek issued 57,256 shares of stock to the board of directors,
valued at approximately $308,000. In addition, 6,000 shares of common stock were
issued in consideration for consulting services rendered, valued at
approximately $32,000.
In connection with the acquisition of CrystalTech Web Hosting, Inc.,
("CrystalTech"), Newtek issued 69,444 shares of stock to the selling shareholder
of CrystalTech, valued at approximately $250,000 which is included in the
purchase price allocation for this acquisition.
9
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
The following table is a summary of investments as of September 30,
2004, shown separately between their debt and equity components.
The various interests that the Company acquires in its Qualified
Businesses 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 or the economics of the transaction if the
investee is determined to be a variable interest entity.
The manner of accounting for an investment in a Qualified Business is
determined based upon applicable accounting principles. These principles do not
necessarily coincide with concepts of "ownership" or "control" contained in some
of the Capco statutes and which impose various limitations on the degree to
which a Capco may "own" or "control" a Qualified Business. For example, current
Louisiana law prohibits a Capco from making an investment in a business "with
the intent to control" the business, and Colorado and New York place percentage
limitations on a Capco's level of "ownership" of a qualified businesses (among
other requirements). Newtek's Capcos of course conform to all applicable
requirements but these requirements do not necessarily control the accounting
treatment appropriate for a particular investment.
The following are our non-consolidated investments:
DEBT INVESTMENTS:
Debt investments at December 31, 2003 .......... $1,420,179
Debt issued - 2004 ............................. 1,908,500
Return of principal - 2004 ..................... (1,614,187)
-----------
Debt investments at September 30, 2004 ......... $ 1,714,492
-----------
EQUITY INVESTMENTS:
Equity investments at December 31, 2003......... $ 300,000
Return of Capital .............................. --
Equity investments made - 2004 ................. --
-----------
Equity investments at September 30, 2004........ $ 300,000
-----------
The Company has not guaranteed any obligation of these non-consolidated
investees, and the Company is not otherwise committed to provide further
financial support for the investees. However, from time-to-time, the Company may
decide to provide such additional financial support which, as of September 30,
2004, was assessed at zero. Should the Company determine that an impairment
exists upon its periodic review, and it is deemed to be other than temporary,
the Company will write down the recorded value of the asset to its estimated
fair value and record a corresponding charge in the Company's Consolidated
Statement of Income.
10
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
All companies in which the Company has made equity investments provide
the Company with unaudited financial statements. For each equity method
investment, Newtek management reviews the facts and circumstances that are
apparent to ascertain if an adjustment is necessary to the books of the investee
to make its financial statements materially correct.
NOTE 4 - LOANS RECEIVABLE (NON-CAPCO):
Loans receivable are made pursuant to U.S. Small Business
Administration license (SBA loans), are generated by Newtek Small Business
Finance ("NSBF") and are primarily related to entities in the Eastern region of
the United States with concentrations in the restaurant and hotel and motel
industries.
The unpaid principal amount of loans serviced for others of
approximately $143,360,000 and $123,832,000 at September 30, 2004 and December
31, 2003, respectively, are not included on the accompanying consolidated
balance sheets.
NSBF originates loans to small businesses under the SBA program that
provides a guaranty of 50% to 85% on the total amount of the loan up to a
maximum guaranty of $1,000,000 (at September 30, 2004). NSBF typically sells the
guaranteed portion of each SBA loan to a third party and retains the
unguaranteed principal portion in its portfolio for investment, or possible sale
in the future.
The following is a summary of SBA loans receivable at:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Due in one year or less ....................... $ 240,497 $ 168,292
Due between one and five years ................ 1,105,427 2,619,618
Due after five years .......................... 37,925,488 51,292,650
------------ ------------
Total ..................................... 39,271,412 54,080,560
Less : Reserve for loan losses ................ (1,622,186) (1,613,613)
Less: Deferred loan origination fees, net...... (986,772) (416,222)
------------ ------------
$ 36,662,454 $ 52,050,725
------------ ------------
Below is a summary of the activity of the SBA loan receivable account,
net of SBA loan loss reserves, for the nine months ended September 30, 2004:
Balance at December 31, 2003 .............. $ 52,050,725
SBA loans originated for investment ....... 10,076,762
Payments received in 2004 ................. (7,659,563)
SBA Loans held for investment, reclassified
as loans held for sale ................ (17,222,937)
Provision for SBA loan losses ............. (11,983)
Deferred loan originations fees, net ...... (570,550)
------------
Balance at September 30, 2004 ............. $ 36,662,454
------------
11
NOTE 4 - LOANS RECEIVABLE (NON-CAPCO): (CONTINUED)
Below is a summary of the activity of the reserve for SBA loan losses
account for the nine months ended September 30, 2004:
Balance at December 31, 2003 ........... $ 1,613,613
SBA loan loss provision charged in 2004 300,264
Recoveries ............................. 133,375
Reversals of reserve for loan losses for
unguaranteed portion of loans sold ..... (288,281)
Charge-offs ............................ (136,785)
-----------
Balance at September 30, 2004 .......... $ 1,622,186
-----------
Below is a summary of the SBA loans held for sale as of September 30,
2004:
Balance at December 31, 2003 .............. $ 3,619,582
Loan originations for sale ................ 23,190,889
SBA loans held for investment, reclassified
as loans held for sale ................. 17,222,937
Loans sold ................................ (42,141,001)
------------
Balance at September 30, 2004 ............. $ 1,892,407
------------
Below is a summary of the SBA capitalized servicing assets as of
September 30, 2004:
Balance at December 31, 2003 ........ $ 754,064
Servicing rights capitalized ........ 1,363,357
Servicing rights amortized .......... (283,589)
Valuation allowance recorded ........ --
-----------
Balance at September 30, 2004........ $ 1,833,832
-----------
As of September 30, 2004 and December 31, 2003, SBA loans that were not
accruing interest amounted to approximately $2,727,000 and $3,201,000,
respectively. As of September 30, 2004 and December 31,
12
2003, SBA loans due after one year that have adjustable interest rates amount to
approximately $38,792,000 and $51,321,000, respectively.
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 and income per share before
extraordinary items were:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Numerator: ........................................... $ 4,316,844 $ 9,474,292 $ 4,445,872 $14,039,474
Numerator for basic and diluted
EPS - income available to common shareholders
Numerator for basic and diluted
EPS - extraordinary item .................. -- -- -- 186,729
----------- ----------- ----------- -----------
Numerator for basic and diluted
EPS -income before extraordinary item ..... $ 4,316,844 $ 9,474,292 $ 4,445,872 $13,852,745
----------- ----------- ----------- -----------
Denominator: ......................................... 33,308,929 25,709,700 28,854,029 25,671,712
Denominator for basic
EPS - weighted average shares
Effect of dilutive securities (stock options
and restricted stock units) .............. 111,448 400,836 393,387 345,219
----------- ----------- ----------- -----------
Denominator for diluted
EPS - weighted average shares ............. $33,420,377 $26,110,536 $29,247,416 $26,016,931
----------- ----------- ----------- -----------
Net EPS: Basic ...................................... $ 0.13 $ 0.37 $ 0.15 $ 0.55
Net EPS: Diluted .................................... $ 0.13 $ 0.36 $ 0.15 $ 0.54
Net EPS : Basic before extraordinary gain ............ $ 0.13 $ 0.37 $ 0.15 $ 0.54
Net EPS : Diluted before extraordinary gain .......... $ 0.13 $ 0.36 $ 0.15 $ 0.53
The amount of shares/units excluded from above is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Stock options ................... 621,446 654,333 414,946 721,002
Warrants ........................ 5,516 -- 5,516 --
Contingently issuable shares .... 1,282,801 582,980 1,282,801 582,980
13
NOTE 6 - ACQUISITIONS:
MINORITY INTERESTS
In May 2004, Newtek issued 144,458 shares of its common stock in
exchange for the minority interests in Wilshire Colorado, Wilshire Alabama
Partners, Wilshire Louisiana Partners III and Wilshire Louisiana Partners IV.
These have been accounted for as a purchase transaction. In August 2004, Newtek
issued 74,850 shares of its common stock in exchange for the remaining minority
interests in Wilshire Colorado and has been accounted for as a purchase
transaction. In September, 2004, Newtek issued 30,000 shares valued at
approximately $120,000 in exchange for a minority interest in a subsidiary of
Wilshire Investors, LLC. The fair value of Newtek's common stock was determined
based upon the quoted market price of Newtek's common stock, less a discount
factor due to certain restrictions on the sale of the stock. Such value exceeded
the book values of the minority interests by approximately $786,000, and Newtek
has recorded such amount as goodwill.
CRYSTALTECH WEB HOSTING INC.
On July 8, 2004, Newtek completed the acquisition of CrystalTech Web
Hosting, Inc, a web hosting Company, for a purchase price of $9,362,000 in cash
and 69,444 shares of Newtek's common stock valued at $250,000. An equal number
of shares of Newtek's common stock were awarded as restricted stock to employees
who remain with the new company subsequent to the acquisition. These shares have
been included in unearned compensation in the accompanying consolidated balance
sheet. In addition, there is a contingent payment of $1,250,000 in cash and
486,111 shares of common stock if CrystalTech achieves certain profitability
goals, which shares have not been recorded in the financial statements.
The following summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Accounts receivable .................. $ 144,000
Customer accounts .................... 1,758,000
Goodwill ............................. 8,439,000
Fixed assets ......................... 415,000
Other assets ......................... 61,000
-----------
Total assets acquired ................ 10,817,000
-----------
Current liabilities (including accrued
acquisition costs) ................ 388,000
Deferred revenues .................... 817,000
-----------
Total liabilities assumed ............ 1,205,000
-----------
Purchase price ....................... $ 9,612,000
-----------
The difference between the aggregate purchase price and the fair value
of the liabilities assumed has been recorded as goodwill. The value ascribed to
the customer accounts are being amortized over a thirty month period. For the
period ended September 30, 2004, amortization expense relating to the customer
accounts totaled approximately $176,000.
14
NOTE 6 - ACQUISITIONS: (CONTINUED)
VISTAR INSURANCE AGENCY
On July 30, 2004, Colorado Outsourced Technology Solutions LLC (a
Newtek owned company) purchased Vistar Insurance Services, ("Vistar") a Maryland
Corporation. Vistar is an alternative insurance distributor helping financial
institutions and agents establish or expand insurance operations. It is licensed
to conduct insurance agency business in 49 states and has a complete line of
insurance products in the areas of life, health, property and casualty,
disability and employee benefits.
The following summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Cash ................................. $ 13,000
Accounts receivable .................. 126,000
Intangible ........................... 748,000
Fixed assets ......................... 34,000
Other assets ......................... 74,000
--------
Total assets acquired ................ 995,000
--------
Current liabilities (including accrued
acquisition costs) ................ 402,000
--------
Total liabilities assumed ............ 402,000
--------
Purchase price ....................... $593,000
--------
The difference between the aggregate purchase price and the fair value
of the liabilities assumed has been recorded as an intangible asset. The Company
is in the process of obtaining a third party valuation of certain intangible
assets, thus the allocation of the purchase price is subject to change.
The pro forma financial information set forth below is based upon the
Company's historical consolidated statements of income for the three and nine
month periods ended September 30, 2004, and 2003, adjusted to give effect to the
acquisition of CrystalTech and Vistar as of January 1, 2004. The pro forma
financial information is presented for informational purposes only and may not
be indicative of what actual results of operations would have been had the
acquisition occurred on the dates indicated, nor does it purport to represent
the results of operations for future periods.
PRO FORMA FOR THE
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
Total revenues $ 48,328,000 $ 58,674,000 $ 21,835,000 $ 23,136,000
Income before extraordinary items 6,033,000 14,648,000 4,324,000 4,649,000
Net income 6,033,000 14,834,000 4,342,000 4,649,000
Net income per share - basic $ 0.21 $ 0.58 $ 0.13 $ 0.18
15
Net income per share - diluted $ 0.21 $ 0.57 $ 0.13 $ 0.18
Income before extraordinary items-basic $ 0.21 $ 0.58 $ 0.13 $ 0.18
Income before extraordinary items- diluted $ 0.21 $ 0.57 $ 0.13 $ 0.18
NOTE 7 - NOTES PAYABLE:
Effective with the Company's acquisition of Commercial Capital Corp.
("CCC"), a new line of credit was provided by Deutsche Bank to NSBF. The line of
credit for $75 Million expired on June 30, 2004 at which time a twelve month
extension was entered into under revised terms. These revised terms include a
reduced advanced rate, minimum net worth thresholds and ratios, limitations on
permitted subordinated debt, in addition to profitability requirements. NSBF is
in compliance with all of the aforementioned covenants as of September 30, 2004.
The extension also requires NSBF to purchase 1,500,000 shares of preferred stock
owned by an affiliate of Deutsche Bank for $1,500,000 on the earlier of a) the
repayment in full of all obligations under the loan agreement and/or b) the
termination date. This preferred stock has been reclassified as mandatorily
redeemable preferred stock under the provisions of FASB Statement No. 150
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." The new line is guaranteed by the Company. As of
September 30, 2004, NSBF had $27,249,663 outstanding on the line of credit. The
line of credit bears interest at the prime interest rate minus .50%, and is
collateralized by the unguaranteed portions of the SBA loans receivable made by
NSBF. The interest rate at September 30, 2004 was 4.25%. Interest on the line is
payable monthly in arrears.
In addition, this line of credit requires that a percentage of all
advances made to NSBF be deposited into an account in the name of the bank. The
balance in this account as of September 30, 2004 was $1,827,610 and is included
in receivable from bank on the accompanying consolidated balance sheet.
In June 2004, NSBF entered into a $4 million revolving credit facility
with Banco Popular Dominica Bank to finance the origination of SBA loans. The
revolving credit facility bears interest at the prime interest rate and is
collateralized by the SBA loans made by NSBF. The agreement expires on December
31, 2004 and is renewable for successive twelve month periods thereafter. As of
September 30, 2004, the Company has $1,305,084 outstanding on this revolving
line of credit.
At September 30, 2004, Newtek has included approximately $510,000 in
other assets in the accompanying consolidated balance sheet for deferred
financing costs. Approximately $131,000 of amortization relating to such costs
for the period ending September 30, 2004 are included in the accompanying
consolidated statements of income.
NOTE 8 - SALE OF LOANS AND CUSTOMER ACCOUNTS:
SALE OF LOANS
In June 2004, NSBF sold to a bank approximately $17,022,000 of loans
previously classified as held for investment for aggregate proceeds of
approximately $17,661,000. This represented a portion of the unguaranteed piece
of 180 loans. The difference of $639,000 was recorded as premium income. Also
included in premium income is approximately $203,000 representing the allocated
portion of the remaining deferred loan fees recorded at the time of loan
origination. Additionally, in connection with this sale, NSBF reversed the
reserve for loan loss associated with these loans and recorded a benefit of
approximately $288,000, which is included in the provision for loan losses
caption on the accompanying consolidated statements of income.
In July 2004, NSBF sold $201,000 of loans previously classified as held
for investment for aggregate proceeds of approximately $220,000. This
represented a guaranteed portion of 1 loan. The difference of $19,000 was
recorded as premium income.
16
SALE OF CUSTOMER ACCOUNTS
In June 2004, our electronic payment processing segment sold
approximately 600 merchant accounts for gross and net proceeds of approximately
$147,000, which is included in electronic payment processing revenue on the
accompanying consolidated statements of income.
NOTE 9 - SEGMENT REPORTING:
Operating segments are organized internally primarily by the type of
services provided and in accordance with Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company has aggregated similar operating segments into five
reportable segments: SBA lending, electronic payment processing, web hosting,
insurance brokerage and Capcos and other.
The SBA lending segment is NSBF, a licensed, Small Business
Administration ("SBA") lender that originates, sells and services loans to
qualifying small businesses, which are partially guaranteed by the SBA.
As an SBA lender, NSBF generates revenues from sales of loans,
servicing income for those loans retained to be serviced by NSBF (included in
servicing fee and premium income on the consolidated statements of income) and
interest income earned on available cash balances and the loans themselves. NSBF
also generates expenses such as interest, professional fees, payroll and
consulting, and provision for loan losses, all of which are included in the
respective caption on the consolidated statements of income. NSBF also has
expenses such as loan recovery expenses, 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 electronic payment processing segment is a processor of credit card
transactions, as well as a marketer of credit card and check approval services
to the small business market. Revenue generated from electronic payment
processing is included on the consolidated statements of income as a separate
line item. Expenses include direct costs (included in a separate line captioned
electronic payment processing costs), professional fees, payroll and consulting,
and other expenses, all of which are included in the respective caption on the
consolidated statements of income.
The web hosting segment consists of CrystalTech, acquired in July 2004.
CrystalTech's revenues are derived primarily from web hosting services and set
up fees. CrystalTech generates expenses such as professional fees, payroll and
consulting, which are included in the respective caption on the accompanying
consolidated statements of income, as well as licenses and fees, depreciation
and amortization, and general office expenses, all of which are included in
other expenses in the respective caption on the consolidated statements of
income.
The insurance brokerage segment consists of Vistar, acquired in July
2004. Revenues are comprised of commissions earned on premiums paid for
insurance policies sold by Vistar and are included in the respective caption on
the accompanying consolidated statements of income. Expenses include
professional fees (which consist primarily of broker commission expense),
payroll and consulting and other expenses, all of which are included in the
respective caption on the accompanying consolidated statements of income.
The Capcos and other segment represents Newtek's activities in the
certified capital company market as described in Note 1, as well as investments
not included in the other two segments.
Management has considered the following characteristics when making its
determination of its operating and reportable segments:
o the nature of the products and services,
o the type or class of customer for their products and
services,
17
o the methods used to distribute their products or provide
their services, and
o the nature of the regulatory environment.
NOTE 9 - SEGMENT REPORTING (CONTINUED):
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenue
SBA lending ............................ $ 2,136,662 $ 1,638,336 $ 7,435,340 $ 4,643,831
Electronic payment processing .......... 5,126,320 1,879,526 12,429,454 3,867,612
Web hosting ............................ 2,204,026 -- 2,204,026 --
Insurance brokerage .................... 391,373 -- 391,373 --
Capco and other ........................ 11,740,071 22,910,772 21,491,087 45,556,783
------------ ------------ ------------ ------------
TOTAL ............................... $ 21,598,452 $ 26,428,634 $ 43,951,280 $ 54,068,226
------------ ------------ ------------ ------------
Income before provision for income taxes and
extraordinary items
SBA lending ............................ $ 246,749 $ 377,603 $ 1,966,695 $ (89,603)
Electronic payment processing .......... 155,717 (184,396) 261,356 (778,172)
Web hosting ............................ 1,066,934 -- 1,066,934 --
Insurance brokerage .................... (100,276) -- (126,834) --
Capco and other ........................ 5,947,559 15,338,419 4,367,225 23,577,193
------------ ------------ ------------ ------------
TOTAL ............................... $ 7,316,683 $ 15,531,626 $ 7,535,376 $ 22,709,418
------------ ------------ ------------ ------------
Depreciation and amortization
SBA lending ............................ $ 245,617 $ 7,472 $ 437,004 $ 13,301
Electronic payment processing .......... 178,750 101,253 519,419 150,253
Web hosting ............................ 288,268 -- 288,268 --
Insurance brokerage .................... 6,294 -- 6,294 --
Capco and other ........................ 53,748 104,364 139,284 116,535
------------ ------------ ------------ ------------
TOTAL ............................... $ 772,677 $ 213,089 $ 1,390,269 $ 280,089
------------ ------------ ------------ ------------
Intercompany revenue eliminated above
SBA lending ............................ $ -- $ -- $ -- $ --
Electronic payment processing .......... 253,708 96,643 705,005 259,636
Web hosting ............................ -- -- -- --
Insurance brokerage .................... -- -- -- --
Capco and other ........................ 664,847 263,915 1,570,071 883,699
------------ ------------ ------------ ------------
TOTAL ............................... $ 918,555 $ 360,558 $ 2,275,076 $ 1,143,335
------------ ------------ ------------ ------------
Intercompany expenses eliminated above
SBA lending ............................ $ 197,163 $ 58,254 $ 517,059 $ 171,727
Electronic payment processing .......... 380,310 102,174 1,038,848 452,715
18
Web hosting ............................ -- -- -- --
Insurance brokerage .................... 6,525 -- 33,232 --
Capco and other ........................ 334,557 200,130 685,937 518,893
------------ ------------ ------------ ------------
TOTAL ............................... $ 918,555 $ 360,558 $ 2,275,076 $ 1,143,335
------------ ------------ ------------ ------------
NOTE 9 - SEGMENT REPORTING (CONTINUED):
AT SEPTEMBER 30, AT DECEMBER 31,
2004 2003
---------------- ---------------
Identifiable assets
SBA lending ................. $ 47,853,865 $ 64,738,750
Electronic payment processing 7,208,467 7,308,940
Web hosting ................. 12,561,495 --
Insurance brokerage ......... 2,385,337 --
Capco and other ............. 135,525,447 120,136,319
------------ ------------
TOTAL .................... $205,534,611 $192,184,009
------------ ------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION:
Readers are cautioned that certain statements contained herein are
forward-looking statements and should be read in conjunction with the Company's
disclosures under the heading "Forward Looking Statements" below. The following
discussion should also be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The Company's significant accounting policies are described in Note 1
of the Notes to Consolidated Financial Statements included in its Form 10-K for
the fiscal year ended December 31, 2003. A discussion of the Company's critical
accounting policies, and the related estimates, are included in Management's
Discussion and Analysis of Results of Operations and Financial Position in its
Form 10-K for the fiscal year ended December 31, 2003. There have been no
significant changes in the Company's existing accounting policies or estimates
since its fiscal year ended December 31, 2003.
NEW ACCOUNTING PRONOUNCEMENTS:
In March 2004, the EITF reached consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" regarding disclosures about unrealized losses on available-for-sale
debt and equity securities accounted for under FASB Statements No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and No. 124,
"Accounting for Certain Investments Held by Not-for-Profit Organizations". The
guidance for evaluating whether an investment is other-than-temporarily impaired
should be applied in such evaluations made in reporting periods beginning after
June 15, 2004. The disclosures are effective in annual financial statements for
fiscal years ending after December 15, 2003, for investments accounted for under
Statements 115 and 124. For all other investments within the scope of this
Issue, the disclosures are effective in annual financial statements for fiscal
years ending after June 15, 2004. The additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004. We do not
expect that the implementation of EITF 03-1 will have a material effect on our
financial statements.
19
In March 2004, the EITF reached consensus on Issue No. 03-16,
"Accounting for Investments in Limited Liability Companies." EITF 03-16 provides
guidance for determining whether a non-controlling investment in a limited
liability company should be accounted for using the cost method or the equity
method of accounting. Companies will be required to adopt the provisions of this
consensus in reporting periods beginning after June 15, 2004. The adoption of
EITF 03-16 did not have a material effect on our financial statements.
GENERAL:
Operating results in all periods presented reflect the impact of
acquisitions. The timing of these acquisitions and the changing mix of revenue
may effect comparability of results from one period to another.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003:
Total revenues decreased by approximately $10,117,000 to $43,951,000
for the nine months ended September 30, 2004, from $54,068,000 for the nine
months ended September 30, 2003. The variance was due to the following changes
in revenues:
Income from tax credits decreased by approximately $23,458,000 from
$43,927,000 for the nine months ended September 30, 2003, to $20,469,000 for the
nine months ended September 30, 2004, due to Newtek's Capcos earning less tax
credits from the various state Capco programs in 2004 compared to 2003.
Electronic payment processing revenue increased by approximately
$8,561,000 to $12,429,000 for the nine months ended September 30, 2004, from
$3,868,000 for the nine months ended September 30, 2003, due to the Company's
increase in electronic payment processing customers, as well as the company's
acquisition of Automated Merchant Services in August, 2003. At September 30,
2004, we provided our payment services to approximately 6,900 small merchants
across the United States, compared to approximately 3,900 customers at September
30, 2003. Gross total processing volume increased to approximately $661,000,000
from all merchant portfolios (of this amount, approximately $246,000,000 of
processing volume generated revenues that were recorded net of interchange fees)
for the nine months ended September 30, 2004 from $172,000,000 of gross
processing volume for the nine months ended September 30, 2003. In addition, in
June 2004, our electronic payment processing segment sold approximately 600
merchant accounts for net proceeds of approximately $147,000.
Servicing fee and premium income increased by approximately $2,974,000
to $4,263,000 for the nine months ended September 30, 2004 from approximately
$1,289,000 for the nine months ended September 30, 2003 due to NSBF closing 112
loans for total originations of approximately $33,300,000 compared to 7 loans
for total originations of approximately $3,700,000 for the nine months ended
September 30, 2003. NSBF sold 104 guaranteed loans in the nine months ended
September 30, 2004, aggregating approximately $24,900,000 as compared to
$2,400,000 in the same period for the prior year. The premiums recognized in
connection with these sales were approximately $2,200,000 during the nine months
ended September 30, 2004 as compared with $224,000 in the same period for the
prior year.
In addition, in June 2004, NSBF sold to a bank approximately
$17,022,000 of loans previously classified as held for investment for aggregate
proceeds of approximately $17,661,000. This represented a portion of the
unguaranteed piece of 180 loans. The total proceeds received above the
$17,022,000 of loans previously classified as held for investment of $639,000
was recorded as premium income. Also, in connection with this sale, included in
premium income for the nine months ended September 30, 2004 is approximately
$203,000 representing the allocated portion of the remaining discount recorded
at the time of loan origination.
In July 2004, NSBF sold $201,000 of loans previously classified as held
for investment for aggregate proceeds of approximately $220,000. This
represented a guaranteed portion of 1 loan. The difference of $19,000 was
recorded as premium income.
20
Web hosting and insurance commissions for the nine months ended
September 30, 2004 increased to approximately $2,204,000 and $391,000,
respectively, from $0 and $0, respectively due to the acquisitions of
CrystalTech and Vistar in the third quarter of 2004.
Interest and dividends are generated from SBA lending activities,
excess cash balances that are invested in low risk, highly liquid securities
(money market accounts, federal government backed mutual funds, etc.), non-cash
accretions of structured insurance product and from held to maturity
investments. The following table details the changes in these different forms of
interest and dividend income for the nine month periods ending September 30:
2004 2003 CHANGE
---- ---- ------
SBA lending activities .......... $ 2,584,211 $ 2,623,535 $ (39,324)
Non-cash accretions ............. 121,054 121,054 --
Qualified investments ........... 50,869 67,925 (17,056)
Low-risk highly liquid securities 179,770 192,713 (12,943)
----------- ----------- -----------
$ 2,935,904 $ 3,005,227 $ (69,323)
----------- ----------- -----------
The decrease in interest income generated on qualified investments, low
risk securities, and SBA lending activities is attributable to a decline in the
average outstanding balances of these interest bearing cash accounts.
Other income decreased by approximately $721,000 to $1,258,000 for the
nine months ended September 30, 2004 from $1,979,000 for the nine months ended
September 30, 2003. In the nine months ended September 30, 2004, NSBF recovered
approximately $250,000 of income from the acquired CCC loan portfolio, compared
to approximately $330,000 for the nine months ended September 30, 2003. In
addition, in the third quarter of 2003, the Company recovered approximately
$350,000 of an investment previously written off.
Changes in interest expense are summarized as follows for the nine
month periods ended September 30:
2004 2003 CHANGE
---- ---- ------
Capco interest expense ........... $ 8,696,223 $ 8,642,249 $ 53,974
NSBF (SBA lender) interest expense 1,317,577 1,444,972 (127,395)
Other interest ................... 519,293 449,896 69,397
------------ ------------ ------------
$ 10,533,093 $ 10,537,117 $ (4,024)
------------ ------------ ------------
The approximately $54,000 net increase in Capco interest expense in the
nine months ended 2004 was attributable to a increase in the outstanding balance
of the Notes payable in credits in lieu of cash from the prior period due to the
Wilshire Louisiana Partners IV, LLC and Wilshire Alabama Partners LLC capco
closings in the fourth quarter 2003 and the first quarter 2004, respectively.
The approximately $69,000 net increase in other interest expense was
attributable to additional debt instruments associated with the financing of
insurance coverage purchased for the Wilshire Alabama Partners Capco during the
first quarter of 2004 and the acquisition of Automated Merchant Services during
the third quarter of 2003. NSBF interest decreased in the current period by
approximately $127,000 due to the decrease in the average balance of outstanding
borrowings.
Payroll and consulting fees increased by approximately $2,300,000 to
$7,544,000 for the nine months ended September 30, 2004 from $5,244,000 for the
nine months ended September 30, 2003. The increase was primarily due to the
stock based compensation relating to the restricted stock granted in October of
2003 of approximately $730,000, the payroll and consulting fees incurred by the
eleven additional operating entities consolidated into
21
Newtek in the nine months ended September 30, 2004 versus the same period in
2003, and the related payroll costs associated with additional employees being
hired in the SBA lending and merchant processing segments in the current period.
Electronic payment processing direct costs increased by approximately $5,630,000
to $8,024,000 for the nine months ended September 30, 2004 from $2,394,000 for
the nine months ended September 30, 2003, due to the significant increase in the
number of electronic payment processing customers as well as the acquisition of
Automated Merchant Services in August 2003.
Professional fees increased by approximately $433,000 to $4,115,000 for
the nine months ended September 30, 2004 from $3,682,000 for the nine months
ended September 30, 2003. This increase is primarily due to increased legal
expenses and commissions during the period ended September 30, 2004. Insurance
expense increased by approximately $307,000 to $2,145,000 for the nine months
ended September 30, 2004 from $1,838,000 for the nine months ended September 30,
2003. This increase is due to the additional insurance relating to the new Capco
funded in 2004, Wilshire Alabama Partners, LLC, and the new Capco funded in
October 2003, Wilshire Louisiana Partners IV, LLC.
Provision for loan losses decreased to approximately $12,000 for the
nine months ended September 30, 2004 from $331,000 for the nine months ended
September 30, 2003. This is attributable to NSBF selling loans to a bank in June
2004 that were previously classified as held for investment. In connection with
this sale, NSBF reversed the reserve for loan losses associated with these loans
and recorded a benefit of approximately $288,000, offset by $300,000 in loan
loss provisions.
Other expenses increased by approximately $1,496,000 to $4,926,000 for
the nine months ended September 30, 2004 from $3,430,000 for the nine months
ended September 30, 2003. The increase was due primarily to expenses incurred by
consolidated operating entities, other than electronic payment processing direct
costs as described above. Specifically, the amortization of customer merchant
accounts which were acquired in August 2003, and the customer accounts acquired
in July 2004, contributed approximately $653,000 to the increase in other
expenses in the nine months ended 2004 compared to $169,000 in the same period
in 2003. In addition, the acquisitions of CrystalTech and Vistar in the current
period contributed approximately $398,000 of other expenses, such as rent,
computer and office expenses.
Other than temporary decline in value of investments decreased by
approximately $1,991,000 to $0 for the nine months ended September 30, 2004 from
$1,991,000 for the nine months ended September 30, 2003, due to the Company's
determination that there were no other than temporary declines in the value of
investments for the period ended September 30, 2004. During the period ended
September 30, 2003, the Company determined that there was an approximate
$943,000 other than temporary decline in the value of its investments for
Merchant Data Systems, Inc., $500,000 for 1-800 Gift Certificate, an approximate
$20,000 decline for Transworld Business Brokers, $145,000 for O.S. Johnson
$112,000 for Gerace Auto Parts and an approximate $271,000 other than temporary
decline in the value of its investments for Direct Creations, LLC.
The Company's results of operations decreased by approximately
$9,593,000 from net income of $14,039,000 for the nine months ended September
30, 2003 to net income of $4,446,000 for the nine months ended September 30,
2004, due to the decreases in revenue of approximately $10,117,000 and the
increases in overall expenses of approximately $7,852,000 discussed above,
minority interest of approximately $2,795,000, offset by the decrease in the
provision for income taxes of approximately $5,767,000, and the decrease in
extraordinary gains of approximately $187,000.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER 30, 2003:
22
Total revenues decreased by approximately $4,831,000 to $21,598,000 for
the three months ended September 30, 2004, from $26,429,000 for the three months
ended September 30, 2003. The variance was due to the following changes in
revenues:
Income from tax credits decreased by approximately $10,646,000 from
$22,067,000 for the three months ended September 30, 2003, to $11,421,000 for
the three months ended September 30, 2004, due to Newtek's Capcos earning less
tax credits from the various state Capco programs in 2004 compared to 2003.
Electronic payment processing revenue increased by approximately
$3,246,000 to $5,126,000 for the three months ended September 30, 2004, from
$1,880,000 for the three months ended September 30, 2003, due to the Company's
increase in electronic payment processing customers, as well as the company's
acquisition of Automated Merchant Services in August, 2003. At September 30,
2004, we provided our payment services to approximately 6,900 small merchants
across the United States, compared to approximately 3,900 customers at September
30, 2003. Gross total processing volume increased to approximately $248,000,000
(of this amount, approximately $74,000,000 of processing volume generated
revenues that were recorded net of interchange fees) for the three months ended
September 30, 2004 from $103,000,000 of gross processing volume for the three
months ended September 30, 2003.
Servicing fee and premium income increased by approximately $441,000 to
$1,009,000 for the three months ended September 30, 2004 from approximately
$568,000 for the three months ended September 30, 2003 due to NSBF closing 38
loans for total originations of approximately $9,150,000 compared to 7 loans for
total originations of approximately $3,724,000 in the same period for the prior
year. We sold the guaranteed portions of 36 loans in the three months ended
September 30, 2004, aggregating approximately $7,495,000 as compared to
$2,438,000 in the same period for the prior year. The premiums recognized in
connection with these sales were approximately $607,000 during the three months
ended September 30, 2004 as compared with $224,000 in the same period for the
prior year.
Web hosting and insurance commissions for the three months ended
September 30, 2004 increased to approximately $2,204,000 and $391,000,
respectively, from $0 and $0, respectively due to the acquisitions of Crystal
Tech and Vistar in the third quarter of 2004.
Interest and dividends are generated from SBA lending activities,
excess cash balances that are invested in low risk, highly liquid securities
(money market accounts, government secured funds, etc.), non-cash accretions of
structured insurance product and from held to maturity investments. The
following table details the changes in these different forms of interest and
dividend income for the three months ended September 30:
2004 2003 CHANGE
---- ---- ------
SBA lending activities .............. $ 738,462 $ 803,317 $ (64,855)
Non-cash accretions ................. 33,246 33,246 --
Qualified investments ............... 15,581 17,198 (1,617)
Low-risk highly liquid securities ... 77,452 67,746 9,706
--------- --------- ---------
$ 864,741 $ 921,507 $ (56,766)
--------- --------- ---------
The decrease in interest income generated on SBA lending activities is
attributable to a decrease in the average outstanding balances on interest
bearing instruments during the period.
23
Other income decreased by approximately $410,000 to $582,000 for the
three months ended September 30, 2004 from $992,000 for the three months ended
September 30, 2003, due to one of the operating entities providing services
primarily to related entities in the current period compared to outside parties
in the prior period.
Changes in interest expense for the three months ended September 30
are summarized as follows:
2004 2003 CHANGE
---- ---- ------
Capco interest expense .............. $ 2,811,929 $ 2,729,910 $ 82,019
NSBF (SBA lender) interest expense .. 317,460 449,100 (131,640)
Other interest ...................... 160,907 154,020 6,887
----------- ----------- -----------
$ 3,290,296 $ 3,333,030 $ (42,734)
----------- ----------- -----------
The approximately $82,000 net increase in Capco interest expense in the
three months ended September 30, 2004 was attributable to the additional notes
payable for Wilshire Alabama Partners, LLC. The approximately $132,000 decrease
in NSBF interest expense was attributable to a reduction in outstanding
borrowings.
Payroll and consulting fees increased by approximately $1,046,000 to
$2,997,000 for the three months ended September 30, 2004 from $1,951,000 for the
three months ended September 30, 2003. The increase was primarily due to the
stock compensation related to the restricted stock granted in October of 2003,
the payroll and consulting fees incurred by the eleven additional operating
entities consolidated into Newtek in the three months ended September 30, 2004
versus the same period in 2003, and the related payroll costs associated with
additional employees being hired in the SBA lending and electronic payment
processing segments. Electronic payment processing direct costs increased by
approximately $2,471,000 to $3,345,000 for the three months ended September 30,
2004 from $874,000 for the three months ended September 30, 2003, due to the
significant increase in the number of electronic payment processing customers as
well as the acquisition of Automated Merchant Services in August 2003.
Professional fees increased by approximately $785,000 to $1,826,000 for
the three months ended September 30, 2004 from $1,041,000 for the three months
ended September 30, 2003. This increase is primarily due to increased legal
expenses and commissions during the three months ended September 30, 2004.
Insurance expense increased by approximately $112,000 to $738,000 for the three
months ended September 30, 2004 from $626,000 for the three months ended
September 30, 2003. This increase is due to the additional insurance relating to
the new Capco funded in 2004, Wilshire Alabama Partners, LLC, and the new Capco
funded in October 2003, Wilshire Louisiana Partners IV, LLC.
Provision for loan losses decreased by approximately $272,000 to
$59,000 for the three months ended September 30, 2004 from $331,000 for the
three months ended September 30, 2003. This occurred due to (1) managements
assessment that an increase to the reserve for the quarter ended September 30,
2003 was warranted, (2) recoveries during the three months ended September 30,
2004 exceeded those for the same three months ended September 30, 2003 and (3)
offset by the additional provision for loan losses provided based on the
increased loan activity during the quarter ended 2004 as compared to 2003.
Other expenses increased by approximately $929,000 to $2,299,000 for
the three months ended September 30, 2004 from $1,370,000 for the three months
ended September 30, 2003. The increase was due primarily to expenses incurred by
consolidated operating entities other than electronic payment processing as
described above. Specifically, the amortization of customer accounts which were
acquired in July 2004, and contributed approximately $176,000 to the increase in
other expenses in the three months ended 2004 compared to $0 in the same period
in 2003. In addition, the acquisitions of CrystalTech and Vistar in the current
period contributed approximately $398,000 of other expenses, such as rent,
computer and office expenses.
24
Other than temporary decline in value of investments decreased by
approximately $257,000 to $0 for the three months ended September 30, 2004 from
$257,000 for the three months ended September 30, 2003, due to the Company's
determination that there were no other than temporary declines in the value of
investments for the period ended September 30, 2004. During the period ended
September 30, 2003, the Company determined that there was an approximate
$145,000 other than temporary decline in the value of its investments for O.S.
Johnson and $112,000 for Gerace Auto Parts.
For the three months ended September 30, 2004, equity in net losses of
affiliates increased by approximately $118,000 to $0. This increase is
attributable to the investments accounted for under the equity method being
written down to $0 as of December 31, 2003.
The Company's results of operations declined by approximately
$5,157,000 from net income of $9,474,000 for the three months ended September
30, 2003 to $4,317,000 for the three months ended September 30, 2004, due to the
decreases in revenue of approximately $4,830,000 and the increases in overall
expenses of approximately $4,889,000 discussed above, minority interest of
approximately $1,504,000, offset by the decrease in the provision for income
taxes of approximately $3,057,000.
CONSOLIDATED OPERATING ENTITIES
At September 30, 2004, Newtek had twenty four majority-owned
consolidated operating entities, most of which were as a result of investments
through the Capco programs. For the nine months ended September 30, 2004, these
companies represented approximately $856,000 in income that is consolidated in
Newtek's results (net of inter-company eliminations of approximately $2,113,000
in revenues and $2,113,000 in expenses). For the nine months ended September 30,
2004, revenues from consolidated operating entities, net of inter-company
eliminations, amounted to $23,037,000 and were generated from the following
sources: SBA lending ($7,435,000) electronic payment processing ($12,429,000),
web hosting ($2,204,000), insurance brokerage ($391,000), and other ($578,000).
For the nine months ended September 30, 2004, expenses incurred by consolidated
operating companies, net of inter-company eliminations, amounted to $22,181,000
and were incurred by the following sources: SBA lending ($5,469,000) electronic
payment processing ($12,162,000), web hosting ($1,136,000), insurance brokerage
($521,000), and other ($2,893,000).
At September 30, 2003, Newtek had nineteen majority-owned consolidated
operating entities, most 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 consolidated operating entities, net of inter-company eliminations,
amounted to $9,344,000 and were generated from the following sources: SBA
lending ($4,644,000) electronic payment processing ($3,868,000), and other
($832,000). For the nine months ended September 30, 2003, expenses incurred by
consolidated operating companies, net of inter-company eliminations, amounted to
$12,157,000 and were incurred by the following sources: SBA lending ($4,733,000)
electronic payment processing ($4,646,000), and other ($2,778,000).
LIQUIDITY AND CAPITAL RESOURCES
Newtek has funded its operations primarily through the issuance by the
Capcos of notes to insurance companies through the Capco programs. Through
September 30, 2004, Newtek has received approximately $184,637,000 in proceeds
from the issuance of long-term debt, Capco warrants, and Newtek common stock
through the Capco programs. Newtek's principal capital requirements have been to
fund the purchase of Coverage A insurance related to the notes issued to the
insurance companies (approximately $102,381,000), the acquisition of Coverage B
Capco insurance policies ($21,255,000), the acquisition of consolidated
operating entity's interests, identifying other Capco-qualified investments, and
working capital needs resulting from operating and business
25
development activities of its consolidated operating entities. In July 2004, the
company completed a secondary public offering selling 6,450,000 of its shares
with net proceeds of approximately $20,762,000.
Net cash used in operating activities for the nine months ended
September 30, 2004 of approximately $4,770,000 resulted primarily from net
income of $4,446,000 adjusted for the non-cash interest expense of approximately
$8,696,000, proceeds from the sale of SBA loans of approximately $24,918,000,
and other non cash charges for stock compensation, depreciation and amortization
totaling approximately $2,448,000. Net cash used was also affected by the
approximately $3,090,000 of a deferred tax provision, offset by approximately
$883,000 of minority interest, approximately $20,469,000 in non-cash income from
tax credits, approximately $658,000 of premium income on sale of SBA loans, and
approximately $23,191,000 in SBA loans originated for sale. In addition, Newtek
had net cash outflows from the components of prepaid insurance, prepaid expenses
and other assets, accounts receivable and capitalized servicing assets, and
accounts payable and accruals of approximately $3,057,000.
Net cash used in operating activities for the nine months ended
September 30, 2003 of approximately $6,646,000 resulted primarily from net
income of approximately $14,039,000, 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 $2,438,000 of proceeds from the sale of SBA loans, approximately
$2,773,000 of SBA loans originated for sale, approximately $1,912,000 in
minority interest, the approximately $43,927,000 in income from tax credits, and
the deferred income tax provision of $8,857,000. In addition, Newtek had net
cash inflows in the components of prepaid insurance, prepaid expenses and other
assets, accounts receivable and capitalized servicing assets, and accounts
payable and accruals of approximately $1,709,000.
Net cash provided by investing activities for the nine months ended
September 30, 2004 of approximately $4,909,000 resulted primarily from proceeds
from the sale of SBA loans held for investment and reclassified as held for sale
of approximately $17,881,000, approximately $7,660,000 from repayment of SBA
loans, and $1,614,000 from returns of principal from qualified investments. This
was offset by acquisitions of $9,955,000, investments in qualified businesses
totaling $1,909,000, SBA loans originated for investment, net of deferred loan
fees of approximately $9,506,000, other investments of $30,000 and approximately
$846,000 of purchases of fixed assets.
Net cash provided by investing activities for the nine months ended
September 30, 2003 of approximately $2,940,000 resulted primarily from returns
of principal of approximately $470,000, offset by approximately $300,000 in
additional qualified investments made in the period and $1,493,000 for an
acquisition. Newtek also received approximately $5,590,000 in repayments of its
SBA loan receivables, offset by SBA loans originated for investment of
approximately $952,000.
Net cash provided by financing activities for the nine months ended
September 30, 2004 was approximately $7,027,000, primarily attributable to
proceeds from the Company's secondary public offering and private placements of
common stock of approximately $22,164,000, from the issuance of long term debt
and premium financing of approximately $13,925,000, approximately $533,000 from
the exercise of stock options and a change in restricted cash of approximately
$415,000. This was offset by approximately $5,103,000 in payments for Coverage A
insurance, $1,112,000 in payments on notes payable-insurance, $360,000 in
payments of notes payable-other and repayments on SBA bank notes payable of
$23,435,000.
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 from issuance of long term 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 bank notes payable, repayment of
notes payable-insurance of $1,488,000, repayment of notes payable- other of
$765,000.
Effective with the Company's acquisition of Commercial Capital Corp.
("CCC"), a new line of credit was provided by Deutsche Bank to NSBF. The line of
credit for $75 Million expired on June 30, 2004 at which time a twelve month
extension was entered into under revised terms. In June 2004, NSBF entered into
a $4 million revolving
26
credit facility with Banco Popular Dominica Bank to finance the origination of
SBA loans. The revolving credit facility bears interest at the prime interest
rate and is collateralized by the loans made by NSBF. The total debt outstanding
relating to these two facilities was approximately $28,555,000 at September 30,
2004.
During the nine months ended September 30, 2004 we and our consolidated
companies generated cash flow primarily from the following sources:
o proceeds from secondary offering of common stock of approximately
$20,762,000;
o private placement of common stock and exercise of stock options,
netting $1,935,000;
o proceeds from issuance of long-term debt and warrants of
$10,925,000;
o proceeds from premium financing of $3,000,000;
o interest and dividend income of approximately $2,936,000;
o returns of investments of approximately $1,614,000;
o other income of approximately $1,258,000, which represents revenue
from Newtek's consolidated operating entities;
o proceeds from sales of SBA loans of approximately $24,918,000;
o payments received on SBA loans of approximately $7,660,000; and,
o proceeds from sale of SBA loans held for investment, reclassified
as held for sale of approximately $17,881,000.
The cash was primarily used to:
o originate approximately $32,697,000 in SBA loans held for
investment and for sale;
o acquire CrystalTech and Vistar for approximately $9,955,000;
o invest in qualified businesses of approximately $1,909,000;
o repay SBA bank notes payable of approximately $23,435,000;
o repay notes payable-insurance of approximately $1,112,000; and,
o purchase of Coverage A and Coverage B insurance of approximately
$7,028,000.
During the nine months ended September 30, 2003 we generated cash flow
primarily from the following sources:
o private placement of common stock and exercise of options, netting
$1,637,000;
o returns of principal from qualified businesses of approximately
$470,000;
o interest and dividend income of approximately $3,005,000;
o proceeds from the sale of subsidiary preferred stock of $2,000,000;
o proceeds from issuance of long term debt of $1,000,000;
o other income of approximately $1,979,000, which represents revenue
from consolidated operating entities; and
o cash received from repayments on SBA loans of approximately
$5,590,000.
The cash was primarily used to:
27
o invest approximately $300,000 in small or early stage businesses;
o originate SBA loans of approximately $3,725,000;
o repay SBA bank notes and note payable-other of approximately
$5,620,000;
o acquire Automated Merchant Services for $1,500,000;
o repay notes-payable insurance of approximately $ 1,488,000; and,
o purchase fixed assets of approximately $320,000.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10 Q 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 ("SEC")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
our services, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
All of our business activities contain elements of risk. We consider
the principal types of risk to be fluctuations in loan portfolio valuations in
the SBA loans receivable and the risk associated with charge-back losses in the
merchant processing business. We consider the management of risk essential to
conducting our businesses. Accordingly, risk management systems and procedures
are designed to identify and analyze our risks, to set appropriate policies and
limits and to continually monitor these risks and limits by means of reliable
administrative and information systems and other policies and programs.
We transact business with merchants exclusively in the United States
and receive payment for our services exclusively in United States dollars. As a
result, our financial results are unlikely to be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets.
Our interest expense is sensitive to changes in the general level of
interest rates in the United States, because a majority of our indebtedness is
at variable rates. At September 30, 2004, $28.5 million of our outstanding
indebtedness was at variable interest rates based on the prime rate. A rise in
the prime rate of one percentage point would result in additional interest
expense of approximately $234,000. However, our interest income would also
increase by approximately the same amount, due to the variability of the
interest rates on our SBA loans receivable. Although management believes that
this measure is indicative of our sensitivity to interest rate changes, it does
not adjust for potential changes in credit quality, size and composition of the
assets on the balance sheet, and other
28
business developments that could affect net increase (decrease) in assets.
Accordingly, no assurances can be given that actual results would not differ
materially from the potential outcome simulated by this estimate.
We do not hold derivative financial or commodity instruments, nor
engage in any foreign currency denominated transactions, and all of our cash and
cash equivalents are held in money market and checking funds.
ITEM 4. CONTROLS AND PROCEDURES:
As of September 30, 2004, Newtek Business Services, Inc. carried out an
evaluation, under the supervision and with the participation of Newtek's
management, including Newtek's Chief Executive Officer and Newtek's Chief
Financial Officer, of the effectiveness of the design and operation of Newtek's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, Newtek's Chief Executive Officer and Newtek's Chief
Financial Officer concluded that Newtek's disclosure controls and procedures are
effective in alerting them in a timely manner to material information relating
to Newtek (including its consolidated subsidiaries) required to be included in
Newtek's periodic SEC filings. There has been no change in the Company's
internal control over financial reporting identified in connection with the
evaluation performed above that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed by Newtek under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to Newtek's management, including the Chief Executive Officer and
the Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Disclosure controls include internal controls that are
designed to provide reasonable assurance that transactions are properly
authorized, assets are safeguarded against unauthorized or improper use and
transactions are properly recorded and reported.
Any control system, no matter how well conceived and operated, can
provide only reasonable assurance that its objectives are achieved. The design
of a control system inherently has limitations, including the controls' cost
relative to their benefits. Additionally, controls can be circumvented. No
cost-effective control system can provide absolute assurance that all control
issues and instances of fraud, if any, will be detected.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following non-registered transactions in the securities of the
Registrant occurred in the three month period ending September 30, 2004. All
securities sold were shares of Newtek's common stock and all sales were to
accredited investors and in reliance on Section 4(2) of the Securities Act of
1933, as amended, and applicable New York State law. Shares issued to Mr.
Uzzanti were as a portion of the consideration paid by Newtek for the
acquisition of assets of CrystalTech by a wholly-owned direct subsidiary of
Newtek. Shares issued to Aurelius Consulting Group were in consideration for
various investor relations services.
29
NAME DATE SHARES PRICE
Tim Uzzanti July 9, 2004 69,444 $3.60
Aurelius Consulting July 1, 2004 2,000 $3.75
Group Inc.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
(a) On July 9, 2004 Newtek held its annual meeting of shareholders.
(b) All seven of the incumbent directors were reelected for one year
terms:
David C. Beck
Christopher G. Payan
Jeffrey G. Rubin
Jeffrey M. Schottenstein
Steven A. Shenfeld
Barry Sloane
Brian A. Wasserman
(c) With respect to the election of directors, for which a total of
16,863,209, or 62.3 percent of all outstanding shares were present in
person or by proxy, votes cast for each of the nominees were as
follows:
FOR WITHHOLD
--- --------
David C. Beck .............................. 16,727,262 135,947
Christopher G. Payan ....................... 16,855,539 7,670
Jeffrey G. Rubin ........................... 16,727,262 135,947
Steven A. Shenfeld ......................... 16,855,539 7,670
Jeffrey M. Schottensetin ................... 16,727,262 135,947
Barry Sloane ............................... 16,855,539 7,670
Brian A. Wasserman ......................... 16,855,539 7,670
(d) Also voted upon at the annual meeting was the ratification of the
adoption of a new stock incentive plan, the Newtek Business Services,
Inc. 2003 Stock Incentive Plan; the plan was ratified by the following
vote:
FOR AGAINST
--- .-------
16,171,199 689,235
ITEM 5. OTHER INFORMATION:
30
On November 3, Newtek issued a press release concerning the results of
its operations for the third quarter of 2004. It reported gross revenue of $21.6
Million and net earnings of $0.13 per share. Pursuant to the requirements of
Item 12 of Form 8-K, Newtek has furnished a copy of this press release by
attaching same to a Form 8-K current report filed November 4, 2004.
ITEM 6. EXHIBITS:
EXHIBIT 31.1 AND 31.2
Certification required by Rule 13a-14 of Newtek's Chief Executive and
Chief Financial Officers.
EXHIBIT 32
The Certification required of Newtek's Chief Executive and Chief
Financial Officers by section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 99.1
Press Releases:
July 9, 2004: Newtek Business Services Completes the Acquisition of
Crystal Tech Web Hosting, Inc.
July 15, 2004: Newtek Announces Exercise of Over-Allotment Options
July 16, 2004: New Research Reports Released on Newtek Business
Services, Inc.
July 22, 2004: Newtek Business Services to Hold Earnings Conference
Call August 5 at 4:15 PM EST
July 22, 2004: Newtek Business Services, Inc. Endorsed by 11 State
Credit Union Organizations
August 2, 2004: Newtek Business Services, Inc. Completes Acquisition of
Financial Keyosk
August 5, 2004: Newtek Business Services, Inc. Earns $0.07 per share
for Second Quarter Beats Wall Street Consensus by Approximately 40
Percent
31
August 23, 2004: Newtek Business Services, Inc. Earns $0.07 per share
for Second Quarter Beats Wall Street Consensus by Approximately 40
Percent
August 30, 2004: Newtek Business Services, Inc. to Present at the Roth
Capital Partners New York Conference
October 12, 2004: Financial Keyosk to be Endorsed by Butte Community
Bank
October 13, 2004: CrystalTech Looks to Bring.NET to the Masses
32
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: November 12, 2004 /s/ Barry Sloane
-----------------------------------
Barry Sloane
Chairman of the Board, Chief
Executive Officer and Secretary
Date: November 12, 2004 /s/ Brian A. Wasserman
-----------------------------------
Brian A. Wasserman
Treasurer, Chief Financial Officer
and Director
33