UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____________ TO _________________
COMMISSION FILE NUMBER: 001-16123
NEWTEK CAPITAL, INC.
New York 11-3504638
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1500 Hempstead Turnpike, East Meadow, New York 11554
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 390-2260
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Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.02 per share
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(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X NO _
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $8,710,242
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the price at which the common equity
was sold on February 28, 2001, was approximately $20,176,800.
As of February 28, 2001 there were 21,373,460 shares issued and outstanding
of the registrant's Common Stock, par value $0.02 per share.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
OVERVIEW AND BUSINESS STRATEGY. Newtek Capital, Inc. resulted from the
combination of the businesses previously owned by BJB Holdings, Inc. and REXX
Environmental Corporation. This combination was closed on September 19, 2000 and
followed the approval of the transaction by the shareholders of both companies.
Prior to the combination, the principal operating business of REXX was sold, and
the Company is the BJB businesses under its own name. For ease of reference in
this document, we refer to "Newtek" the "Company" to include both the business
of BJB prior to September 19, 2000 and of Newtek Capital, Inc. following that
date.
The Company's business originated in 1998 in the organization and operation
of what are now seven certified capital com7panies, or "capcos". Since 1998, the
business of Newtek has focused on the deployment of these capco funds and the
receipt of related tax credit income described below. In this process, has
determined that the capcos provide a base for the structuring, development and
acquisition of further businesses, particularly early-stage, technology-oriented
companies focused on Internet related commerce, or "e-commerce." Since the last
quarter of 1999, the Company has been working to expand its business development
activities, and its goal is to be a premier business partner for its acquired or
affiliated companies by helping them implement their business strategies in a
manner consistent with Newtek's objectives. Through the capco programs and
otherwise, the Company is operating as a holding company for a network of
partner companies in a collaborative and coordinated effort to develop
successful businesses in a number of existing as well as emerging, technological
business lines.
The management of the Company believes that there will be substantial
long-term growth in business-to-business e-commerce that creates significant
market opportunities for well positioned, managed and funded emerging companies.
Many new companies, including spin-offs from traditional businesses, are
currently being formed and funded to develop technologies and solutions to
support the new business-to-business e-commerce market. Business-to-business
solutions are being rapidly adopted to facilitate the continuous exchange of
information among business partners, to large customer audiences, and to allow
businesses to interact more efficiently with suppliers, distributors, and
service providers. The Company, through its network of partner companies, is
participating in this industry.
In addition, the Company seeks to identify business opportunities in less
technologically-oriented areas with strong fundamentals in products and or
markets. Particularly, those as to which the application of e-commerce
technology, or the other business development services which could be provided
by the Company, would provide a material improvement in results.
To date, the majority of Newtek's acquisitions and other business
development efforts have been undertaken through the capcos that the Company
controls. As of December 31, 2000, Newtek had provided business development
services, including in some cases funding, for 13 companies, of which nine are
majority owned or primarily controlled and represent $12,613,734 or 80% of its
investments other than Government securities.
CERTIFIED CAPITAL COMPANIES - CAPCOS
OVERVIEW. A capco is either a corporation or a limited liability company,
established in and chartered by one of the five states currently with
authorizing legislation (Florida, Louisiana, Missouri, New York and Wisconsin).
Aside from seed capital provided by on organizer, a capco will issue debt and
equity instruments exclusively to insurance companies, and the capcos then are
authorized, under the respective state statutes, to make targeted acquisitions
of interests in companies which may be majority owned or primarily controlled by
the capcos after the acquisition is consummated, which may or may not be in
conjunction with loans to such companies.
THE ROLE OF CAPCOS IN NEWTEK'S BUSINESS STRATEGY. Management of Newtek has
determined that the features of the capco programs facilitate the use of the
capco funds in the support of its development as the holding
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company for a network of collaborative businesses. In most cases, these
businesses will be either focused principally upon e-commerce or a similar
technology or otherwise fundamentally strong small businesses that have the
potential to be materially improved by the Company's technological or other
business development services. The authorizing statutes in each of the states in
which the Newtek capcos operate explicitly allow and encourage the capcos to
take equity interests, which may include majority or controlling interests, in
companies pursuant to the programs. Consequently, Newtek may, consistent with
its business objectives, acquire interests in companies through its capcos and
provide management and other services to these companies as parts of its
collaborative network. Newtek intends the interests of each of its capcos to
consist mainly of interests in majority owned or primarily controlled partner
companies, as it does currently with a substantial majority of its placed funds.
THE CAPCO PROGRAMS; TAX CREDITS. In return for making investments in the
targeted companies, the states provide tax credits that are available for use by
insurance companies that provide the funds to the capcos. In order to maintain
its status as a capco, and to avoid recapture or forfeiture of the tax credits,
each capco must meet a number of specific investment requirements, including a
minimum investment schedule. A final loss of capco status, that is
decertification as a capco, could result in loss or possible recapture of the
tax credit. The Company's capcos have agreed with their funding insurance
companies to provide, in the event of decertification, payments by the capco or,
as described below, by the capco insurer to the insurance companies in the
nature of compensatory payments, to replace the lost tax credit.
Investment Requirements. Each of the state capco programs has a requirement
that a capco, in order to maintain its certified status, must meet certain
investment benchmarks. For example, in the state of New York, the capco must
invest at least 25% of its "certified capital" (the amount of the original
funding of the capco by the insurance companies) by 24 months from the initial
investment date, 40% by 36 months and 50% by 48 months. The various states,
which administer these programs through their insurance, banking or commerce
departments, conduct periodic reviews and on site examinations of the capcos in
order to verify that the capcos have met applicable investment requirements and
are otherwise acting in conformance with the statutes and rules. Requirements
include limitations on the initial size of the recipients of the capco funds,
including the number of their employees, the location within the respective
state of the recipients and the recipients' commitment to remain therein for a
specified period of time, the types of business conducted by the recipients, and
the terms of the investments in the recipients. All of the capco programs permit
the capcos to take majority or controlling interests in companies or joint
ventures, as Newtek has done and intends to continue to do in appropriate
situations consistent with its strategy to invest in or acquire companies that
add to its collaborative network. Capcos are required to maintain detailed
records so as to demonstrate to state examiners compliance with all applicable
requirements.
Capco Insurance. Under the terms of the insurance purchased by the
Company's capcos for the benefit of their insurance company investors, the capco
insurer assumes the obligation to repay the insurance companies the principal
amount of their debt as well as to make compensatory payments in the event of a
loss of the availability of the related tax credits. The capco insurer, an
international insurance company with a AAA credit rating, would be authorized,
in the event of a threat of or final decertification by a state, to assume
partial or complete control of the business of the capco so as to ensure
compliance with investment or other requirements. This would likely avoid final
decertification and the necessity of insurance or interest payments. However,
control by the insurer would also result in significant disruption of the
capco's business and likely result in significant financial loss to the capco.
Decertification would also likely impair Newtek's ability to obtain
certification for capcos in additional states as new legislation makes other
opportunities available. In order to address this risk of decertification, which
may be eliminated entirely by meeting a 100% of capital investment threshold,
the Company's capcos have structured their investment program as aggressively as
is consistent with safe and sound operations to meet the investment benchmarks
as early as possible. As of December 31, 2000, the two capcos with the longest
operating histories, were approximately 18 months and 12 months, respectively,
ahead of schedule in meeting the five-year minimum investment schedules. See
Note 2 of Notes to Consolidated Financial Statements.
During 2000, Newtek established three new capcos, Wilshire New York
Advisors II, LLC, Wilshire Louisiana Partners II, LLC and Wilshire New York
Partners III, LLC. These companies received total funding of $56,490,000 million
from 13 insurance companies.
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Newtek's Ability to Compete. The Company's capcos have competed in their
offerings with the four or five other capcos sponsored by various national
financial organizations, as well as locally sponsored companies in one or
another state. The Company's management believes it has been successful in
raising funds because of:
* the manner in which it has structured the participation by the
insurance companies;
* the insurance which it has been able to obtain to cover any loss of
the tax credits and the obligation to repay principal;
* the previous business experience of its principals;
* the national marketing of its programs; and
* the extensive contacts that its management has as a result of previous
experience in the financial community.
Newtek has structured these securities as debt instruments and warrants for
participation in the equity of the particular capco. The warrants issued by each
capco entitle the holders to between 4% and 20% of the equity of the particular
capco at a nominal exercise price. The warrants have a 10-year term but are not
exercisable for 5 years from issue and presently are not exchangeable for any
securities other than the particular capcos. The warrants do not provide for any
control over the capcos' operations; any such control by an insurance company
would be in violation of the state capco statutes.
These capco programs are, in the view of Newtek's management, a complement
to Newtek's long-term strategy to develop and hold a majority position in or
control of early-stage companies principally focused on technology, particularly
the Internet and e-commerce. A significant factor in evaluating potential
acquisition opportunities is a candidate's ability to support and help other
partner company operations. All current capco statutes permit equity as well as
debt investments, and seek to have the capco management provide more than simply
investment capital to the emerging businesses in the state. Based upon the
experience of its management, Newtek determined early in the operations of the
capcos that the targeted new and small businesses required much more than just
the funds available in the capcos. These businesses also require administrative,
managerial, technical, legal and financial management assistance that the
Company provided in structuring and building the businesses. All three of the
principal shareholders of Newtek have direct and in-depth experience with
early-stage businesses. This hands-on management approach facilitates the
general objectives of the capco programs of economic development, while at the
same time permitting the Company to develop a network of long-term and
synergistic investments in related, partner companies.
PARTNER COMPANIES
MAJORITY-OWNED OR PRIMARILY CONTROLLED PARTNER COMPANIES. Newtek refers to
its "partner companies" as those companies in which it owns 50% or more of the
outstanding voting securities, or "majority-owned partner companies," and those
companies in which it owns more than 25%-but less than 50% of the outstanding
securities, and exercises more control over the company than any other
shareholder, or "primarily controlled partner companies." The Company provides
its partner companies business development services, funding and active
participation in management. However, the Company does not act as an agent or
legal representative for any of its partner companies, the Company have the
power or authority to bind them legally, and does not generally does not have
the types of liabilities for its partner companies that a general partner of a
partnership would have. Currently, all of the investments in the partner
companies are accounted for under the equity method of accounting. See Note 1 of
Notes to Consolidated Financial Statements.
At December 31, 2000, the Company had eight majority-owned partner
companies, all of which were as a result of investments through the capco
programs. The majority-owned companies were BizBrokerNet, LLC, Merchant Data
Systems Sales & Marketing, LLC, DTE Technologies, LLC, Merchant Data Systems,
Starphire, LLC, NicheDirectories, LLC, AIDA, LLC, and Direct Creations, LLC and
represent a total investment as of December 31, 2000 of $10,113,734, or 65% of
its capco qualified investments. In addition, the Company considers its interest
in CB Real Net, LLC to be a primarily controlled partner company. The Company's
capco contributed $2,500,000 to CB Real Net, LLC during the quarter ended March
31, 2000. In addition to these partner companies, at December 31, 2000, Newtek
had 14 other capco-qualified investments, which were not partner companies, and
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which represented a total investment of $3,030,781, or 20% of its capco
qualified investments. All qualified capco investments at December 31, 2000
totaled $15,644,515.
For majority-owned partner companies, Newtek will generally actively direct
much of their operating activities. For primarily-controlled partner companies,
Newtek will generally have significant involvement in and influence over their
operating activities, including rights to participate in material management
decisions. For those companies in which Newtek's equity ownership and voting
power is less than 25%, Newtek is generally not actively involved in their
management or day-to-day operations, but offers them advisory services or
assistance with particular projects, as well as the collaborative services of
its network of companies. In pursuing business objectives, Newtek intends to
hold a decreasing portion of its total assets in companies in which it has
voting power of less than 25%.
BELOW IS A DESCRIPTION OF THE COMPANY'S PARTNER COMPANIES AND THE MANNER
WHICH NEWTEK, ITS MANAGEMENT AND ADVISORS HAVE ASSISTED THEM.
BizBrokerNet, LLC is based in south Florida and is a joint venture between
the Company's Florida capco and a business broker with 10 years experience in
providing acquisition and marketing assistance to small businesses. Organized
and funded in November 1999 in part with a $3.5 million loan from Newtek's
Florida capco to Transworld Business Brokers, Inc., a co-joint venturer of
BizBrokerNet, it is in the process of developing a number of services to be
marketed to business brokers and their small business clients nationwide, which
will bring e-commerce technology to an industry notably without access to this
technology, and providing direct services in the development and deployment of
e-commerce tools to support the business broker industry. The Company
participates directly in the day-to-day management of this partner company,
having appointed two of the four managers and actively assisted in the screening
and selection of key personnel. Newtek and its associates in this business
intend to participate in the operation of the business for the foreseeable
future to assist other partner companies in appropriate areas and to benefit
from the collaborative network.
Merchant Data Systems Sales & Marketing, LLC is also based in south Florida
and is a joint venture between the Company's Florida capco and an established
company providing credit card processing services to small businesses. The
company was funded in October 1999 with $3.5 million from the capco and is
focused on developing a means for the secure processing of credit card
transactions using e-commerce. The Company has provided assistance with the
management of the technology development and the negotiations with the financial
institutions that will provide significant related services. In addition, it has
provided material support for the development of a new marketing strategy
focusing on e-commerce and in recruiting personnel to implement the strategy.
Newtek is assisting in the development of a long-term, nationwide marketing
program for this company.
DTE Technologies, LLC, is an investment of $500,000 made in December 1999
and January 2000 by the Company's capco in Florida. This company, in which
Newtek personnel actively participate in assisting management, is marketing
organic agricultural products to large-scale agricultural and other landowners.
Newtek has provided significant support in the design and implementation of
financial management services, product development, and the design of the
marketing program, and Newtek is currently assisting in the identification of
additional financing to support the growth of the company.
CB Real Net, LLC is an investment of $2.5 million made in February 2000 by
Newtek's Wisconsin capco. This company is considered a primarily controlled
partner company due to Newtek's ownership of 40% of the equity and day-to-day
participation in the management of the company. This company with assistance
from Newtek and another partner company provides all "back office'
administrative and technological support to the franchiser of a multi-national
real estate brokerage, as well as, related services to the franchisees. Newtek
is providing significant support in administrative systems, financial
management, executive recruitment and technological design for CB Real Net's
design and other areas, as well as implementation of a major package of services
for the franchiser that will rely heavily on Internet technology.
Starphire Technologies, LLC, Located in Clearwater, Florida, Starphire is a
provider of information technology and e-business solutions to small and
mid-sized companies. Its major software product, SiteSage(R), is a
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suite of web development, deployment and management software consisting of a
back office editing environment and a "run time" interpreter to present visible
pagers to web browsers. SiteSage(R) provides a common architecture for the
development of enhanced web functionality in a modular, object-oriented manner.
The software provides a development platform from which technical users can
build custom applications and a back-office editing environment allowing
non-technical users to manage site content quickly and efficiently. Starphire is
a start-up company which the Company has assisted in developing and implementing
its marketing strategy, by providing extensive internal financial management and
budgeting assistance and in locating potential value-added resellers to handle
its products. The Company has invested $1.4 million in Starphire and has
representatives on the Board of Directors.
Advanced Internet Design and Applications, LLC, or "AIDA", is a full
service marketing and Internet company whose focus is the management,
development and integration of Internet technology, software systems, site
design, networking and connectivity of middle market businesses. The Company has
assisted AIDA in its marketing strategy, internal budgeting and financial
management, the development of its business plan and have representatives on the
Board of Directors. AIDA creates a seamless system for planning and implementing
a company's successful venture into cyber space. AIDA will guide the development
of a "Strategic Information Technology Plan, the creation of the company's web
presence and their online marketing systems. Additionally, AIDA will create
collateral advertising materials, insure the functionality of Internet
connectivity, support the company's internal network and provide design,
manufacturing and marketing support for specific new product roll-outs. AIDA's
services are further enhanced by its Internet based training system and by
providing the client with direct control of their online content. The company
has invested $1,000,000 in AIDA and has representation on the board of
directors.
NicheDirectories, LLC was founded in 1995 and publishes online
family-oriented information directories. The company's first online directory,
KidsCamps.com, is a prominent destination portal in the summer camp industry. A
wholly-owned subsidiary, PayforCamp.com, has been formed to market a credit
facility for payment of camp charges. Newtek's Florida capco has funded this
investment and has provided assistance in such areas as budgeting and financial
management, direct assistance in the negotiation of the credit facility for camp
payments with a major, national consumer credit provider, other joint venture
opportunities, and holds 3 board seats. The company has invested $1,344,000 in
the company and has representation on the board of directors.
Direct Creations, LLC is 25% owned by Newtek's New York capco and is
engaged in the development and marketing, primarily direct marketing, through
television "infomercials", and traditional retail distribution channels various
consumer products. The company focuses on unique products to solve a common need
of a large target market and which have the potential to create an on-going
brand for multiple follow-on offerings. Newtek is providing financial management
assistance and development of an infrastructure for operation of the company,
assisting in developing a business plan for further capital raising for
expansion, assistance in the negotiation of various joint venture agreements
and, through another Newtek partner company, the development of the company's
entire e-commerce platform. The company has invested $750,000 in Direct
Creations and has representation on the board of directors.
Merchant Data Systems, Inc. is a processor of credit card transactions for
retail merchants and similar businesses. Newtek's Florida capco has invested $1
million and have representatives on the board of directors. Assistance has been
provided in such areas as the development of a business plan, financial modeling
and a system for the evaluating of credit risk in this phase of finance.
SELECTION PHILOSOPHY. There are two prevailing themes in philosophy for the
selection of partner companies. First, is to focus on those companies that are
integrating technology into new areas of business that have thus far not
benefited in any meaningful fashion from the explosive growth of these
technologies over the past decade. The key to the Company's selection process is
an effort to create opportunities for companies that embrace the new
technologies as well as companies that are innovators of the new technologies.
Second, and of equal importance, is the selection of companies that can provide
goods or services required for the success of the existing network of companies.
Consistent with these themes, there are two principles that often dictate
avoidance of an investment. The Company generally attempts to avoid investment
in companies that do not already have an existing,
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defined customer base. It also will generally avoid investments in companies
that clearly require yet additional financing to survive due in most cases to
severely negative cash flow.
All of the Company's partner companies either are in very early stages of
development or are small businesses. These companies will require material
resources, managerial strength and time to develop into profitable businesses.
Newtek does not now receive, nor does it expect to receive in the near future,
material revenue or profit from the operations of these companies. If the
companies succeed, it will take appreciable time, at least 18 to 36 months, or
more, for their shareholders and the Company's shareholders to see results.
OTHER INVESTMENTS. Investments by Newtek that are not qualified capco
investments are classified as "other investments." At December 31, 2000,
Newtek's other investments were carried at their cost basis of $195,000.
As Newtek pursues its business strategy and focuses on the acquisition of
majority or controlling positions in additional partner companies, it expects
other investments to comprise a shrinking portion of its overall income and
value. In addition, Newtek may, to the extent possible, increase its interests
in these companies so that it has an ownership interest sufficient to integrate
them within its network of partner companies. Alternatively, it may dispose of
some or all of the interests in other investments if, in the aggregate, they are
anticipated to constitute more than 30% of Newtek's non-consolidated total
assets (exclusive of Government securities and cash items). See "Government
Regulation; Investment Company Act of 1940."
1-800 Gift Certificate is a company that, while not a partner company as
Newtek holds 8.5% of its equity, is a significant component of the Newtek
network of collaborative companies. This company designs and markets corporate
incentive and related gift programs, with particular focus on sales to
businesses, employee groups associated with these businesses, as well as the
general e-commerce market. Newtek views the company as a potential key component
of the marketing strategies of its current and future partner companies.
EXECUTION; REGIONAL BUSINESS DEVELOPMENT CENTERS
A key to the implementation of Newtek's strategy is its emphasis on the
selection and developmental efforts of its existing five Regional Business
Development Centers, and three additional Centers Newtek currently plans to
establish within the next 18 months. These Regional Business Development Centers
have been and will continue to be placed in areas traditionally underserved by
business development firms, in areas away from "Silicon Valley" on the west
coast and "Silicon Alley" on the east coast. By focusing on these areas, Newtek
believes that it will locate the most favorable opportunities to create new and
innovative businesses. These offices are believed to be valuable because they
are staffed or associated with individuals with experience in working with small
businesses who are able to identify and evaluate potential partner companies and
other investments or acquisitions. In many cases, these individuals have made
substantial investments in the equity of the capcos associated with their
required center and are committed to the success of the Newtek program.
Once a company becomes associated with Newtek, it benefits not only from
access to financing that Newtek can make available or assist in finding, but
also from the synergistic business relationships among the other Newtek partner
companies, as well as the involvement of Newtek's senior management and its
Advisory Committee, (described below), all of whom have significant experience
in meeting the critical needs of early stage companies, including those in the
fields of technology, the Internet and e-commerce.
The Company's regional management consists, in addition to the current
senior management based in New York, of the following six individuals.
CHRISTOPHER BAUER, WISCONSIN - Mr. Bauer has had over 28 years of
experience in commercial banking at Firstar Corporation, a $38 billion
diversified financial services company. For the last 10 years Mr. Bauer has
served as the President of Firstar Bank of Milwaukee. Firstar Bank of Milwaukee
is considered one of the region's leading banks in structuring and financing a
host of commercial products, including capital markets, structured finance,
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mergers and acquisitions and venture equity investments, especially in small to
mid-ranged companies. Prior to serving as President, Mr. Bauer directed all
merger and acquisition activity for Firstar, following 15 years experience in
various capacities focused on consumer and small business banking. He was also a
director of the $10 million Wisconsin Venture Capital Fund, which assisted small
early-stage Wisconsin companies.
CHARLES W. KEARNS, WISCONSIN - Mr. Kearns has spent the last 16 years
working with both regional and national investment banking firms including E.F.
Hutton, Salomon Smith Barney, Cleary Gull, and B.C. Ziegler & Co. Mr. Kearns'
experience includes Manager of the Financial Institutions and Fixed Income
Departments, as well as serving on the Board of Directors at Cleary Gull. Mr.
Kearns is currently founder and Principal of Premier Financial Corporation, a
financial advisory firm. He has participated in raising venture capital for
several enterprises, including Internet and financial service companies, as well
as numerous private and public placements of debt and equity securities. Mr.
Kearns is also co-founder and owner of Klein Corporation, a manufacturing
company in the standby power industry.
GREGORY L. ZINK, FLORIDA - Mr. Zink has been the investment advisor and
consultant to a private investment trust with assets in excess of $30,000,000.
Under Mr. Zink's management, the trust has invested in and operated a number of
early stage operating businesses, including start-ups such as Nautilus Group
Japan, Ltd., Heuristic Development Corp. (NASDAQ Symbol "IFIT") and Nekton
Diving Cruises, Inc. Mr. Zinc currently serves as Chief Operating Officer and
Director of Nautilus Group Japan, Ltd., President and Director of Heuristic
Development Corp. and previously served as the Chairman of the Board and Chief
Financial Officer of Nekton Diving Cruises, Inc. From April 1986 through March
1988, Mr. Zink was the Chief Financial Officer of Forway Industries, a
manufacturer of military spare parts. Mr. Zink was a Senior Consultant for
Touche Ross Consulting, providing various financial and "turn around" consulting
services from July 1983 through March 1986. From June 1979 through July 1981, he
participated in and completed the General Electric Company Financial Management
Program and held various finance and accounting positions.
JEFF M. SCHOTTENSTEIN, FLORIDA - During the past 30 years, Mr.
Schottenstein has been a Director of Schottenstein Investment, a diversified
investment holding company with $650 million in assets, Vice President of
Schottenstein Stores' Value City Stores Division (NYSE symbol VCD) and CEO of
Schottenstein Realty Company, which specializes in the investment and
restructuring of companies. Mr. Schottenstein has been involved in the
capitalization and restructuring of numerous retail enterprises, including
Weiboldts' Department Stores, Chicago, Illinois; Strauss Auto Parts, New York,
New York; Valley Fair Discount Stores, New Jersey; Steinbach Stores and others.
Along with his investors, Jeff Schottenstein has successfully acquired Bell
Supply Company (retail oil and gas equipment supply company based in Kilgore,
Texas) and Omni Exploration Company, the first successful Chapter 11
reorganization of an oil and gas service company in the United States.
F. ANDERSON STONE, LOUISIANA - Mr. Stone has more than 25 years of
institutional credit analysis and investment experience managing high-grade
public and private corporate, high yield public corporate, and mortgage-backed
fixed income; equity; limited partnership and alternative asset portfolios for
income and growth. Mr. Stone has held various life insurance investment
positions including Vice President, Corporate Securities at Pan-American Life
Insurance Company, and Senior Portfolio Manager at The Life Insurance Company of
Virginia and Second-Vice President-Investments at Shenandoah Life Insurance
Company. As a registered investment advisor and registered representative, he
has advised individuals and institutions in the formation and implementation of
portfolio strategies.
RUSSELL SOLOMON, LOUISIANA - Mr. Solomon is the founder and President of
Solomon and Associates which concentrates on complex and unique litigation in
the areas of law including corporate, maritime, insurance, personal injury and
general business. Mr. Solomon was previously a founding member and managing
director of the law firm of Mcquaig and Solomon which exclusively represented
institutions such as K-Mart, Home Depot, General Motors Acceptance Corporation,
Orleans Lever Board, and numerous insurance companies such as Continental,
Boston Old Colony and Travelers. Mr. Solomon currently serves at the pleasure of
the Honorable Harry Connick, District Attorney For New Orleans, as a member of
the Board of Directors of the Voters Information League which is a political
organization and its stated purpose is to support any political measure that
will fight violent crime. Mr. Solomon is also a member of the Regional Board of
Directors of the Anti-Defamation League. Mr. Solomon is a
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member of the Tulane University Law School faculty as an adjunct Professor of
Law teaching trial advocacy to third year law students. Born and raised in New
Orleans, Louisiana, Mr. Solomon went to Boston University School of Management
and returned to receive his law degree from Tulane University School of Law.
Newtek's Regional Business Development Centers are located as follows:
* Wisconsin * New York
--------- --------
1330 West Towne Square Road 845 Third Avenue, 8th Floor
Mequon, Wisconsin 53092 New York, New York 10022
* Florida * New York II
------- -----------
1000 Brickell Avenue 1500 Hempstead Turnpike
Miami, Florida 33131 East Meadow, New York 11554
* Louisiana
1 Canal Place
New Orleans, Louisiana 70130
Newtek anticipates opening 3 new Regional Business Development Centers, probably
in conjunction with capcos in the states of Colorado and Arizona and in Buffalo,
New York, prior to the end of 2001.
ADVISORY COMMITTEE
The Advisory Committee has been used as a direct extension of Newtek.
Advisory Committee members are a source of information and are used to focus on
specific technologies and industries where the highest level of sophistication
is required for business development. The Advisory Committee consists of
individuals from diverse backgrounds, but with specific knowledge regarding
different aspects of business development, technology and the Internet. Of the
eight current Advisory Committee members, four have been involved in e-commerce
business development and two are involved in the identification of management
needs and resources. The individuals include:
* David Simon - Director/Vice President, Business Development of e-Citi/Citibank
N.A.
* Hugh Crean - Vice President, Product Development of Priceline.com
* Michael Balboni - New York State Senator
* Bruce Richards - President and Chief Executive Officer of Marathon
Asset Management Company
* Barry Simon - Vice President, Content Development - G.E. Small
Business.com
* Josh Grotstein - Former Division Executive/Vice President, Commerce -
e-Citi/Citibank N.A.
* Peter Fitzpatrick - Partner in Gunderson Partners, a global executive
search firm.
* Gary Goldstein - Chairman of The Whitney Group, a global executive
search firm.
These individuals were chosen because of their hands-on, line management
responsibility for the implementation of new business development in e-commerce
or their ability to provide advice or assistance in areas of significant need to
emerging businesses. Members of the Newtek Advisory Committee have provided or
are currently providing assistance in areas such as the negotiation of a joint
venture between a potential partner company
9
and an established Internet service provider, marketing analysis and advice to
CB Real Net, LLC and 1-800 Gift Certificate, and management recruitment
assistance. They have also provided assistance to a Niche Directories, LLC
company in negotiating a consumer credit facility with a major national
financial service provider and have assisted in the solicitation of credit care
processing businesses for another partner company. Because of the significant
resources available among the members of the Advisory Committee, management is
currently evaluating changes that could be made as so to improve.
BUSINESS DEVELOPMENT SERVICES
Essential to the success of any business venture is the formulation and
implementation of a sound business strategy. Newtek, through it senior
management, regional management, advisors and associated professionals, works
directly with its partner companies and other companies for which it provides
management, strategic planning, marketing and financing in order:
* to create and implement their business model;
* to recruit and locate key members for their senior management, board
of directors and board of advisors;
* to establish and coordinate strategic joint ventures in distribution,
marketing and finance;
* to reposition or augment existing platform companies with e-commerce
strategies;
* to coordinate and grow strategic relationships among all of its
partner companies;
* to offer its hands-on experience in all aspects of joint venture and
contract negotiation;
* to help secure additional financing;
* to identify and implement new technologies relying on the Internet
which can enhance the development of existing businesses, including
web site development; and
* to identify and implement marketing strategies that will enable the
developers of new technologies find acceptance for their services
among the partner companies or on a broader basis.
Since its inception in 1998, and in addition to the resources in the
Regional Business Development Centers, Newtek has added personnel in various
employee or independent contractor capacities in order to meet the requirements
of serving its partner companies and other investments. At December 31, 2000,
Newtek had secured, in addition to its senior management, the services of 22
individuals in the areas of computer and Internet technology, financial
management, business management and analysis, contract finance and business
operations. Management of Newtek believes it has sufficient resources, including
the resources available through the Advisory Committee, for its present needs.
If Newtek is successful in adding a number of additional partner companies to
its network of companies, additional resources are expected to be available for
use by the network, but there may also be a need to supplement the staff
services that Newtek must provide. The partner companies have developed into an
important source of business development support for each other, either through
the "cross-marketing" of essential goods or services, or through making
available the benefit of their experiences in addressing similar business
problems.
SELECTION STRATEGIES
In the selection of partner companies, the Company relies on the contact
base and reputation of its management team and key professionals who represent
an aggregate of approximately 50 years providing various forms of assistance to
early stage businesses. The contacts and knowledge of the key personnel in the
Regional Business Development Centers are also valuable in identifying and
evaluating businesses with growth and profit potential. Management believes that
very attractive risk/reward ratios are found in partnering with very early stage
or start-up opportunities, which typically require investments in the range of
$300,000 to $5,000,000 increments, and which fit well with the investment
limitations of the capco programs. The Company seeks to apply its services at
this point in the development of the businesses and is able to assist in raising
additional financing as the companies meet or exceed their business plans and
expand their business goals and strategies. The Company has developed and
refined a business selection strategy that emphasizes the following general
principles:
* focusing on opportunities where companies show the potential to
develop into market leaders in rapidly growing industries;
10
* seeking to work with operations-oriented managers with experience in
industries in which they operate, and who have previously succeeded in
similar business endeavors, thereby reducing the execution risk;
* emphasizing low entry valuations and attractive acquisition
structures; and
* taking a pro-active approach to supporting the strategic initiative,
corporate development activities and financial strategies of partner
companies in order to maximize shareholder value in both the short and
long term. This enables management of these companies to focus on what
they do best -- running the business with Newtek's support.
An important part of Newtek's strategy in selecting its partner companies
and in structuring investments in them is to rely on the skill and judgment of
its senior management. In particular, Newtek has adopted a committee approach to
investment or partner selection decisions, thereby tapping the experience of all
participants in the process. A key feature of Newtek's decision-making process
is its requirement that the selection of companies to include within its
collaborative network and other investments be made unanimously by the senior
management and the local participants in the involved Regional Business
Development Center. Newtek believes that this unanimity requirement ensures that
its decisions will continue to be well developed, sound and consensus oriented.
GOVERNMENT REGULATION; INVESTMENT COMPANY ACT OF 1940
OVERVIEW. Because of the nature of the business of Newtek and of the
activities of Newtek's principal operating company other than the capcos, The
Whitestone Group, LLC, management of Newtek has addressed the question of the
application of the Investment Company Act of 1940, as amended (the "Investment
Company Act"), to the business of Newtek. As discussed below, the application of
the Investment Company Act to Newtek would impose requirements and limitations
that are materially inconsistent with Newtek's current and intended business
strategy.
Companies that are publicly offered in the U.S. and which (1) are, or hold
themselves out as being, engaged primarily or proposing to engage primarily in
the business of investing, reinvesting or trading in securities, or (2) own or
hold investment securities exceeding 40% of the value of their total assets
(adjusted to exclude U.S. government securities and cash) and are engaged in the
business of investing, reinvesting, owning, holding or trading in securities,
are considered to be investment companies under the Investment Company Act.
Unless an exclusion from registration were available or obtained by grant of an
Securities and Exchange Commission order, these companies must register under
this Act and, thus, become subject to extensive regulation regarding several
aspects of their operations.
The SEC has adopted Rule 3a-1 that provides an exclusion from registration
as an investment company if a company meets both an asset and an income test and
is not otherwise primarily engaged in an investment company business by, among
other things, holding itself out to the public as such or by taking controlling
interests in companies with a view to realizing profits through subsequent sales
of these interests. A company satisfies the asset test of Rule 3a-1 if it has no
more than 45% of the value of its total assets (adjusted to exclude U.S.
government securities and cash) in the form of securities other than interests
in majority owned subsidiaries and companies which it primarily and actively
controls. A company satisfies the income test of Rule 3a-1 if it has derived no
more than 45% of its net income for its last four fiscal quarters combined from
securities other than interests in majority owned subsidiaries and primarily and
actively controlled companies.
Newtek's business strategy and business activities involve taking mainly
majority-ownership and primary controlling interests in partner companies with a
view to participating actively in their management and development. Newtek
believes that this strategy and the scope of its business activities would not
cause it to fall within the definition of investment company or, if so, provide
it with a basis for an exclusion from the definition of investment company under
the Investment Company Act.
11
ASSET AND INCOME COMPOSITION. Newtek has determined that as of the end of
its last fiscal year, no more than 40% of the value of its total assets
(adjusted to exclude U.S. government securities and cash) consisted of
investment securities. The value of Newtek's holding of securities as of the
date, for purposes of the definition of investment company under the Investment
Company Act, consisted mainly of its interests in partner companies, which are
majority owned or primarily controlled subsidiaries of Newtek or its affiliated
companies. In addition, Newtek has determined that as of that date, no more than
45% of the value of its total assets (adjusted to exclude U.S. government
securities and cash) consisted of securities other than its interests in its
partner companies, and that for its most recent fiscal quarters, Newtek has not
derived more than 45% of its net income combined from securities other than its
interests in its partner companies. Consistent with Newtek's investment
strategy, Newtek intends to hold its interests in its partner companies
generally for the long-term, not with a view mainly to realize profits from
subsequent sales of interests in these companies.
Newtek's Board of Directors has determined to monitor the value of the
Company's assets and the sources of its income on at least a quarterly basis to
ensure compliance with the requirements of the Investment Company Act and
related rules.
To maintain compliance with Rule 3a-1, or otherwise to ensure that Newtek
does not fall within the definition of investment company, Newtek may be unable
to sell assets which Newtek would otherwise want to sell and may need to sell
assets which Newtek would otherwise want to retain. In addition, Newtek may have
to acquire additional income or loss generating assets that Newtek might not
otherwise have acquired and may need to forego opportunities to acquire
interests in attractive companies that might be important to its business
strategy. In addition, although Newtek's partner companies may be majority owned
subsidiaries or primarily controlled companies when Newtek acquires interests in
them, changes in the value of Newtek's interests in its partner companies and
the income/loss and revenue attributable to its partner companies could result
in these assets being treated as investment company assets.
"HOLDING OUT" AS AN INVESTMENT COMPANY. Notwithstanding the composition of
Newtek's assets or income, Newtek or any other company may be deemed to be an
investment company for purposes of the Investment Company Act as a result of the
manner in which it presents itself to the public and its shareholders. In
particular, public statements, securities filings or other actions may cause
Newtek or any other company to be perceived as an investment company regardless
of its asset and income composition. Because of the manner in which Newtek
originated, the structure of the capco funding, and the reduced but still
present activities related to previous venture capital approach of one of
Newtek's subsidiaries, management of Newtek has determined that the need exists
for a clear statement of the company's intent with respect to the Investment
Company Act. In June 2000, the Newtek Board of Directors adopted a resolution
stating, in part, that it is the determination of the Board that Newtek not be
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities, and that these activities may only be undertaken in a
manner consistent with the business strategy of Newtek to make its principal
business that of holding majority or primary controlling interests in a network
of early stage and emerging businesses focused on technology and e-commerce.
Management was directed to make periodic reports no less frequently than
quarterly as to the status of Newtek's operations and continued conformance with
the asset and income tests under the Investment Company Act and to determine and
take or recommend for Board approval actions necessary to maintain compliance,
including the acquisition or disposition of assets. A statement of intent by the
Board of Directors is not, however, dispositive of whether Newtek is "holding
out" as an investment company under the Investment Company Act.
CONSEQUENCES OF INVESTMENT COMPANY REGULATION. Investment Company Act
regulations are inconsistent with Newtek's strategy of actively managing,
operating and promoting collaboration among its network of partner companies,
and it is not feasible for Newtek to operate its business as a registered
investment company. Newtek believes that because of the planned structure of
Newtek's interests in its partner companies and its business strategy, Newtek
will not be regulated under the Investment Company Act. However, Newtek cannot
assure you that the structure of its partner company interests and other
investments and its business strategy will preclude regulation under the
Investment Company Act, and Newtek may need to take specific actions that would
not otherwise be in its best interests to avoid such regulation.
12
If Newtek falls under the definition of an investment company, and is
unable to rely on an available exclusion or to obtain an order of the SEC
granting an exclusion, Newtek would have to register under the Investment
Company Act and comply with substantive requirements under the Investment
Company Act applicable to registered investment companies. These requirements
include:
* limitations on Newtek's ability to borrow;
* limitations on Newtek's capital structure;
* restrictions on acquisitions of interests in associated companies;
* prohibitions on transactions with affiliates;
* restrictions on specific investments; and
* compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations.
These rules and regulations would significantly change Newtek's operations
and prevent Newtek from executing its business model.
SHAREHOLDER VALUE
Newtek's principal business objective is to promote longer-term shareholder
value for its shareholders and those of its partner companies. An important
component of the selection of each partner company by Newtek is an analysis of
the potential shareholder value that ultimately could be realized, in most cases
through a public offering of their stock. This enables management and employees
of the partner companies to realize the value they have created and continue to
create in the company, obtains an independent source of financing for further
growth and creates a valuable currency for making strategic acquisitions.
Following an initial public offering by a partner company, Newtek generally
expects to retain a majority or controlling interest in the company and to
benefit as a shareholder from the increased public company value. While Newtek
will continue to acquire interests in its partner companies for long-term gain,
and does not anticipate selling the interests in them in the ordinary course of
business, other than as part of the merger or sale of an entire company, Newtek
may, from time to time, undertake sales of its interests when it believes the
action to be in Newtek's and the shareholders' overall best interests. Newtek's
management has the experience and has taken an active role in advising partner
companies and others on strategies to maximize shareholder value, including:
* a public offering;
* joint ventures or merges with strategic partners;
* sales to financial buyers;
* recapitalization of the business;
* merger with a public company;
* private sale of an equity interest to investors; or
* a spin-off or sale of the company or individual business segments.
Newtek's management has extensive experience with each of these techniques and
believes it will be of material assistance to its partner companies in selecting
and implementing the appropriate strategy.
SOURCES OF FUNDING AND REVENUE
FUNDING. Since its inception, Newtek's source of funding and revenue has
been primarily derived from the creation and operation of certified capital
companies and, in particular, income generated by the tax credit aspect of the
capco programs. For the foreseeable future, Newtek anticipates that its funds
for investment in partner companies will come from:
13
* its own capital (including retained earnings);
* funding provided by the U.S. Small Business Administration in
conjunction with the Company's establishment of one or more small
business investment companies ("SBIC");
* additional capital market financings; and
* funds provided through the capcos and other possible sources of
managed funds, including other state or federal governmental programs.
Newtek anticipates that, as a percentage of total funding, and relative to
current sources of funds including capcos, the amounts it invests representing
its own direct capital, will grow over time. In addition, Newtek management
anticipate likely approval and organization of at least one SBIC during 2001
which could make available to the SBIC up to $23 million in additional funding
for investment purposes.
REVENUE. Revenues to be derived from sources other than the capco programs
will be minimal until the partner company network has the time to develop into
profitable businesses. Newtek anticipates that additional revenue will be
derived from:
* retained earnings from its direct interests in partner companies as
well as the interests of partner companies held by Newtek's capcos;
* gains from sales of investments in partner companies, the disposition
of which are not anticipated to be made in the ordinary course of
Newtek's business; and
* fees and incentive participations from funds which are invested for
other institutions, such as investment advisory fees paid to managers
of private equity funds.
Newtek may determine to retain its interest in a partner company,
particularly one with publicly traded stock, despite an opportunity to make a
shorter-term gain if doing so would contribute to achievement of the company's
long-term strategy to develop its partner companies. The Company does not view
such gains as a reliable or likely source of material revenue.
EXPANDED PRODUCT AND SERVICE OFFERINGS
The Company intends to build on its demonstrated ability to introduce new
financial products and other services to meet partner company demands and
capitalize on market opportunities. For example, the Company has responded to
solicitations for venture capital co-investment services by various governmental
agencies or pension fund management authorities and it intends to continue its
efforts to build its pool of investment capital and profit participations
income. Similarly, the organization of one or more SBICs by the Company's capcos
will materially increase the funds available for investment. These additional
activities are anticipated to enhance the core strategy of capco funding in the
acquisition of partner companies by increasing capital, exposure, experience and
fee income.
EMPLOYEES
As of December 31, 2000, Newtek employed a total of 25 people, of which 11
assist on an as-needed basis with the operation of capcos in Florida, Wisconsin
and Louisiana. Newtek believes its labor relations are good and none of its
employees are covered by a collective bargaining agreement.
ITEM 2. DESCRIPTION OF PROPERTY
Newtek maintains leased office space at 845 Third Avenue, 8th Floor, New
York, New York, 10022 and leases an additional office at 1500 Hempstead
Turnpike, East Meadow, New York. As of December 31, 2000 Newtek also leased
offices for the certified capital companies and other subsidiaries in the
following locations:
* Louisiana (1);
* Florida (1); and
* Wisconsin (1).
All office leases are on a month-to-month basis. Newtek believes that its
office space is satisfactory for its current needs.
14
As a result of the acquisition of REXX on September 19, 2000, Newtek
acquired title to a warehouse previously used by REXX in a former business. The
Company is actively seeking a buyer for the property. See, also, Note 12 to the
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. At December 31, 2000, there were no
legal proceedings which management anticipates would have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(A) MARKET INFORMATION The following table sets forth, for the period
indicated, the range of high and low closing sale prices for the Company's
common stock on the American Stock Exchange ("AMEX"). The Company's common stock
trades under the symbol "NKC". The stock began trading on the AMEX on September
20, 2000.
CLOSING PRICE
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 HIGH LOW
------------------------------------------- ---- ---
Third Quarter (September 20, 2000 through September 30, 2000) $6.38 $6.00
Fourth Quarter (October 1, 2000 through December 31, 2000) $5.75 $2.88
HOLDERS
On February 28, 2001, as reported by the Company's transfer agent, shares
of common stock were held by approximately 437 people, based on the number of
record holders, including nominees for an undetermined number of beneficial
owners.
DIVIDENDS
To date, the Company has not paid any cash dividends on our common stock.
Any determination to pay dividends in the future will be at the discretion of
the Company's Board of Directors. The Board's determination whether to pay
dividends in the future will be at the discretion of the Company's Board of
Directors. The Board's determination whether to pay dividends will depend upon
the Company's earnings, if any, financial condition and capital requirements as
well as other relevant factors. The Board of Directors does not intend to
declare dividends in the foreseeable future, but instead intends to retain
earnings, if any, for use in the Company's business operations.
(B) SALES OF UNREGISTERED SECURITIES The following sets forth all of the
Company's sales of unregistered securities during 1999 and 2000.
Brief description of the purchaser and
Date Securities consideration therefore
--------- ---------- ------------------------------------------
September 8-12, 2000 Warrants to All sales were to accredited investors known
purchase to the company. Warrants were sold for
common stock $4.99 and had an exercise price of $0.01 per
share. The Warrants were all exercised prior
to October 21, 2000 and a total of 309,000
shares of Newtek Common Stock were issued.
15
The Company believes that reasonable steps were taken to ensure that each
of the offerees in this transactions was an accredited investor under Rule 501
of the Securities Act of 1933, as amended, and the Company claimed exemption
from registration under Section 4(2) of said Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the audited
financial statements of Newtek Capital, Inc. ("Newtek") for the years ended
December 31, 1999 and December 31, 2000 and notes thereto included elsewhere in
this Annual Report on Form 10-KSB.
DECEMBER 31, 2000 AND 1999
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 2000
Revenues decreased by approximately $3,172,000 to $8,710,000 for the 12
months ended December 31, 2000, from $11,882,000 for the 12 months ended
December 31, 1999. Income from tax credits decreased by approximately $4,430,000
due to the statutory timing variations in the capco statutes. Interest and
dividend income increased by approximately $1,328,000, to $2,118,000 for the 12
months ended December 31, 2000, from $790,000 for the 12 months ended December
31, 1999. This increase was primarily due to additional investments made and
additional cash balances over the comparable prior period. Consulting fee income
decreased by approximately $94,000 due to the decrease in consulting related
activity.
General and administrative expenses increased by approximately $3,495,000,
to $4,916,000 for the 12 months ended December 31, 2000, from $1,421,000 for the
12 months ended December 31, 1999, due to increased staffing and professional
fees (approximately $600,000 in legal and accounting fees) attributable to the
increased size and number of capcos and the acquisition of REXX. Interest
expense increased by approximately $4,841,000, to $7,280,000 for the 12 months
ended December 31, 2000, from $2,439,000 for the 12 months ended December 31,
1999, which was attributable to the issuance of notes to certified investors
relating to the formation of capcos during the prior 12 months, as well as
additional such activity in 2000.
The other than temporary decline in the value of the Company's investments
as of December 31, 2000 of $1,232,000, comprised $500,000 for Down To Earth
Technologies, $336,050 for Merchant Data Systems Sales and Marketing, and
$395,000 for Transworld Business Brokers. After its evaluation of these
investments, Newtek management concluded that it is unlikely it will be able to
recover these amounts.
Net income decreased by approximately $8,851,000, to a loss of $3,425,000
for the 12 months ended December 31, 2000, compared to net income of $5,426,000
for the 12 months ended December 31, 1999, due to the changes in revenue and
general and administrative expenses discussed above, other than temporary
decline in investments of $1,232,000, increased equity in losses of
approximately $163,000, an increase in minority interest in losses of
$5,755,000, and increased taxes of $1,381,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the issuance of
notes to insurance companies through the capco program. Through December 31,
2000, the Company has received approximately $135,468,000 in proceeds from the
issuance of long-term debt and warrants through the capco programs. The
Company's principal capital requirements have been to fund the defeasance of the
principal amount of notes issued to the insurance companies, the acquisition of
capco insurance policies, the acquisition of partner companies interests,
funding of other investments, and working capital needs resulting from operating
and business development activities of its partner companies.
16
Net cash used in operating activities for the 12 months ended December 31,
2000 of approximately $6,502,000 resulted primarily from cash revenues of
$2,018,000, offset by cash used for general and administrative expenses of
$3,624,000, and cash used for prepaid insurance of $5,210,000.
Net cash used in investing activities for the 12 months ended December 31,
2000 of approximately $9,650,000 resulted primarily from approximately
$14,287,000 in additional qualified investments made during the year and offset
by repayments on the debt instruments of approximately $5,523,000. The Company
also funded $320,000 in other investments, and paid approximately $661,000 for a
structured insurance product.
Net cash provided by financing activities for the 12 months ended December
31, 2000 was approximately $25,395,000, primarily attributable to the
approximately $20,729,000 in net proceeds from the issuance of long term debt
net of defeasance and approximately $3,556,000 in private placement of stock
during the 12 months ended December 31, 2000.
The Company believes that its cash and cash equivalents, its anticipated
cash flow from operations, its ability to access private and public debt and
equity markets, and the availability of funds under its existing credit
agreements will provide it with sufficient liquidity to meet its short and
long-term capital needs.
INCOME FROM CAPCO TAX CREDITS
In general, the capcos issue debt and equity instruments, generally
warrants, to insurance company investors. For a description of the debt
instruments and warrants issued by the Newtek capcos, see Notes 1, 7 and 8 to
the Consolidated Financial Statements. The capcos then make targeted
investments, as defined under the respective state statutes, with the funds
raised. Each capco has a contractual arrangement with the particular state that
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 targeted investments in accordance with
these requirements, which requirements are consistent with Newtek's overall
business strategy of acquiring controlling positions in a group of early stage
companies. Each capco also has separate, contractual arrangements with the
insurance company investors obligating the capco to pay interest on the
aforementioned debt instruments. The capco may satisfy this interest obligation
by delivering the tax credits or paying cash. The capcos have the right to
deliver the tax credits to the insurance company investors. The insurance
company investors have the legal right to receive and use the tax credits and
would, in turn, use these tax credits to reduce their respective state tax
liabilities in an amount usually equal to 100% of their investments in the
capcos. The tax credits can be utilized over a ten-year period at a rate of 10%
per year and in some instances are transferable and can be carried forward.
Following an application process, a state will notify a company that it has
been certified as a capco. The state then allocates an aggregate dollar amount
of tax credits to the capco. However, this amount is neither recognized as
income nor otherwise recorded in the financial statements since it has yet to be
earned by the capco. The capco is legally entitled to earn income related to the
tax credits upon satisfying defined investment percentage thresholds within
specified time requirements and corresponding non-recapture percentages. Each
statute requires that the capco invest a threshold percentage of its initial
funding in qualified businesses within the timeframes specified. As the capco
meets these requirements, it avoids grounds under the statute for its
disqualification for continued participation in the capco program. A
disqualification, or "decertification," of a capco results in a recapture of all
or a portion of the allocated tax credits; the proportion of the recapture is
reduced over time as the capco remains in general compliance with the program
rules and meets the progressively increasing investment benchmarks. As the capco
progresses in its investments in qualified businesses and, accordingly, places
an increasing proportion of the tax credits beyond recapture, it earns an amount
equal to the non-recapturable tax credits and records this amount as income,
with a corresponding asset called "credits in lieu of cash", on the balance
sheet.
The amount earned and recorded as income is determined by multiplying the
total amount of tax credits initially allocated to the capco by the percentage
of tax credits immune from recapture (the earned income percentage) under the
state statute. To the extent that the investment requirements are met ahead of
schedule, and the percentage of non-recapturable tax credits is accelerated, the
present value of the tax credit earned is recognized currently and the asset,
credits in lieu of cash, is accreted up to the amount of tax credits available
to the insurance company investors.
17
The total amount of tax credits allocated to each of the aforementioned
capcos, the required investment percentages, recapture percentages and related
earned income percentages, and pertinent dates are summarized as follows:
THE FIRST TO OCCUR
------------------
INVESTMENT DECERTIFICATION EARNED
STATE TOTAL TAX INVESTMENT BENCHMARK RECAPTURE RECAPTURE INCOME
CAPCO CREDITS ALLOCATED BENCHMARK DATE THRESHOLDS PERCENTAGE PERCENTAGE
----- ----------------- --------- ----------- ---------- ---------- ----------
FLORIDA $37,384,028 Prior to 20% 100% 0%
Wilshire 20% 12/31/00 After 20% before 30% 70% 30%
Partners (WP) 30% 12/31/01 After 30% before 40% 60% 40%
40% 12/31/02 After 40% before 50% 50% 50%
50% 12/31/03 After 50% 0% 100%
LOUISIANA $18,040,000 Prior to 30% 100% 0%
Wilshire LA 30% 10/14/02 After 30% before 50% 70% 30%
Advisers (WLA) 50% 10/14/04 After 50% 0% 100%
NEW YORK $ 3,810,161 Prior to 25% 100% 0%
Wilshire 25% 6/22/00 After 25% before 40% 85% 15%
Advisers (WA) 40% 6/22/01 After 40% before 50% 70% 30%
50% 6/22/02 After 50% 0% 100%
LOUISIANA $3,050,000 Prior to 30% 100% 0%
Wilshire 30% 10/13/03 After 30% before 50% 70% 30%
LA Advisors II 50% 10/13/05 After 50% 0% 100%
(WLA II)
NEW YORK $6,800,000 Prior to 25% 100% 0%
Wilshire 25% 4/7/02 After 25% before 40% 85% 15%
N.Y. Advisers II 40% 4/7/03 After 40% before 50% 70% 30%
(WNY II) 50% 4/7/04 After 50% 0% 100%
NEW YORK $35,160,202 Prior to 25% 100% 0%
Wilshire 25% 12/21/02 After 25% before 40% 85% 15%
N.Y. Partners III 40% 12/21/03 After 40% before 50% 70% 30%
(WNY III) 50% 12/21/04 After 50% 0% 100%
WISCONSIN $16,666,667 Prior to 30% 100% 0%
Wilshire 30% 10/25/02 After 30% before 50% 70% 30%
Investors (WI) 50% 10/25/04 After 50% 0% 100%
18
Under the various state capco provisions, there is a difference in the
amount of qualified investments made and the amount of income recognized by the
respective capcos upon satisfaction of the various benchmarks. The table below
relates the investments made, both as percentage of total funds and in dollar
amounts, to the income recognized as each benchmark is achieved. In all of these
programs, a majority of Newtek's income from the delivery of the tax credits
will be recognized no later than five years into the ten-year programs.
ALLOCATED INVESTMENT EARNED
STATE TAX BENCHMARK INCOME
CAPCO CREDITS PERCENT/DOLLARS PERCENT/DOLLARS
----- ------- --------------- ---------------
FLORIDA
Wilshire $37,384,028 20% $7,476,806 30% $11,215,208
Partners (WP) 30% $11,215,208 40% $14,953,611
40% $14,953,611 50% $18,692,014
50% $18,692,014 100% $37,384,028
LOUISIANA
Wilshire LA $18,040,000 30% $5,412,000 30% $5,412,000
Advisers (WLA) 50% $9,020,000 100% $18,040,000
NEW YORK
Wilshire $3,810,161 25% $952,540 15% $571,524
Advisers (WA) 40% $1,524,064 30% $1,143,048
50% $1,905,081 100% $3,810,161
WISCONSIN
Wilshire $16,666,667 30% $5,000,000 30% $5,000,000
Investors (WI) 50% $8,333,334 100% $16,666,667
LOUISIANA
Wilshire LA $3,050,000 30% $915,000 30% $915,000
Advisers II 50% $1,525,000 100% $3,050,000
(WLA II)
NEW YORK
Wilshire N.Y. $6,800,000 25% $1,700,000 15% $1,020,000
Advisers II 40% $2,720,000 30% $2,040,000
(WNY II) 50% $3,400,000 100% $6,800,000
NEW YORK
Wilshire N.Y. $35,160,202 25% $8,790,051 15% $5,274,030
Partners III 40% $1,406,408 30% $10,548,060
(WNY III) 50% $17,580,101 100% $35,160,202
During the year ended December 31, 1999, two capcos satisfied the initial
investment benchmark and the related recapture percentage requirements and,
accordingly, earned a portion of the tax credits, aggregating approximately
$10,964,000 after applying a time value discount of $652,000 to the total earned
income amount of $11,616,000. During the year ended December 31, 2000, the same
Capcos satisfied the investment benchmarks and the related recapture percentage
requirements (WA satisfied its final investment benchmark) and accordingly,
earned a portion of the tax credits, aggregating approximately $6,114,000 after
applying a time value discount of $844,000.
19
In addition, the Company recognized approximately $419,000 of income from tax
credits in prior years resulting from the accretion of the discount attributable
to tax credits earned in prior years. See Note 9 of Notes to Consolidated
Financial Statements.
During 2000, Newtek established three new capcos, Wilshire New York
Advisors II, LLC, Wilshire Louisiana Partners II, LLC and Wilshire New York
Partners III, LLC. In addition, the Company received additional funding for an
already existing Capco, Wilshire Advisers. These companies received
approximately $57,741,000 of funding from 13 insurance companies during 2000.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2000 Newtek generated cash flow
primarily from the following sources:
* the issuance of debt and equity securities (warrants) to insurance
company investors of approximately $57,741,000 in conjunction with the
capitalization of three Capcos;
* private placement of common stock, netting $3,556,000;
* return of investments of $5,522,000;
* investment income of approximately $1,960,000; and
* consulting fees of approximately $35,000.
The cash was primarily used to:
* purchase insurance coverage for the four new Capcos' obligations for
approximately $34,941,000;
* fund distributions to owners of the predecessors of the Company in
lieu of compensation and related to passed-through tax liabilities of
$903,000
* invest $14,287,000 in small or early stage businesses; and
* repay a bank loan of approximately $725,000.
During the year ended December 31, 1999, Newtek generated cash flow
primarily from the following sources:
* the issuance of debt and equity securities (warrants) to insurance
company investors of approximately $75,118,000 in conjunction with the
capitalization of three capcos.
* investment income of approximately $790,000 and investment banking
fees of approximately $129,000;
* bank borrowing of approximately $725,000;
* loans from consultants of $250,000;
* return of principal on investments of $250,000; and
* contributions from minority interest of $175,000.
This cash was primarily used to:
* purchase insurance coverage for the obligations of three capcos for
approximately $41,390,000;
* invest $8,125,000 in small or early stage businesses;
* fund debt issuance costs of approximately $469,000, which consisted
primarily of professional fees; and
* fund distributions to owners of the predecessors of the Company in
lieu of compensation and related to passed-through tax liabilities of
approximately $245,000.
As of December 31, 2000, Newtek had approximately $34,697,000 in cash of
which substantially all was restricted for use for capco activities.
The Company will have current working capital requirements associated with
operating its current businesses. It is Newtek's intention to acquire interests
in partner companies through additional capcos programs
20
and through acquisitions made by Newtek. The Company's working capital
requirements may increase in the future and require additional external
financing. Newtek expects to finance its participation in additional capcos and
other ventures principally with externally generated funds, which may include:
* borrowings under future bank facilities; and/or
* the sale of equity, equity-related or debt securities.
However, financing may not be available in amounts, at rates or on terms
and conditions acceptable to Newtek.
IMPACT OF INFLATION
The impact of inflation on Newtek's results of operations is not material.
21
ITEM 7. FINANCIAL STATEMENTS
INDEX TO NEWTEK CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
Report of Independent Accountants 23
Consolidated Balance Sheets as of December 31, 2000 and 1999 24
Consolidated Statements of Operations for the years ended
December 31, 2000 and December 31, 1999 25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000 and December 31, 1999 26
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and December 31, 1999 27
Notes to Consolidated Financial Statements 29
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Newtek Capital, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Newtek
Capital, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000 and 1999 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2001
23
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 2000 AND 1999
--------------------------
2000 1999
--------------- ------------
A S S E T S
-----------
Cash and cash equivalents $ 34,697,081 $ 25,454,016
Credits in lieu of cash 17,496,810 10,963,593
Investments in qualified businesses 15,644,515 8,275,000
Structured insurance product 2,570,487 1,759,493
Prepaid insurance 12,187,376 7,971,411
Prepaid expenses and other assets 411,195 212,802
Furniture, fixtures and equipment, net 31,462 8,714
Asset held for sale 500,000 --
------------ ------------
Total assets $ 83,538,926 $ 54,645,029
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 2,546,800 $ 1,220,479
Notes payable - certified investors 3,861,220 2,618,716
Notes payable - insurance 5,800,000 4,000,000
Note payable - bank -- 725,358
Notes payable - other -- 250,000
Mortgage payable 369,339 --
Interest payable 56,147,907 31,583,438
Deferred tax liability 1,381,258 --
------------ ------------
Total liabilities $ 70,106,524 $ 40,397,991
------------ ------------
Minority interest 4,163,053 5,938,111
------------ ------------
Commitments and contingencies --
Stockholders' equity:
Common stock (par value $0.02 per share:
authorized 39,000,000 shares,
issued and outstanding 21,373,460) 427,469 --
Additional paid-in capital 12,267,052 --
Accumulated deficit (3,425,172) --
Members' equity -- 8,308,927
------------ ------------
Total stockholders' equity 9,269,349 8,308,927
------------ ------------
Total liabilities and stockholders'equity $ 83,538,926 $ 54,645,029
============ ============
See accompanying notes to these consolidated financial statements.
24
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
-----------------------------------------------------------
2000 1999
--------------- -------------
Revenue:
Income from tax credits $ 6,533,217 $ 10,963,593
Consulting fee income 34,660 128,818
Interest and dividend income 2,118,365 789,715
Other Income 24,000 --
------------ ------------
Total revenue 8,710,242 11,882,126
------------ ------------
Expenses:
General and administrative 4,915,681 1,420,735
Interest 7,280,240 2,438,908
------------ ------------
Total expenses 12,195,921 3,859,643
------------ ------------
(Loss) income before other than temporary decline
in value of investments, equity in losses of affiliates,
provision for taxes, extraordinary gain on defeasance of debt
and minority interest (3,485,679) 8,022,483
Other than temporary decline in value of
investments (1,231,849) --
Equity in net losses of affiliates (163,416) --
------------ ------------
(Loss) income before provision for taxes, extraordinary gain on
defeasance of debt and minority interest (4,880,944) 8,022,483
Provision for taxes 1,140,092 --
------------ ------------
(Loss) income before extraordinary gain on
defeasance of debt and minority interest (6,021,036) 8,022,483
Extraordinary gain on defeasance of debt, net of taxes of $241,166, 361,750 924,120
for 2000
Minority interest in loss (income) 2,234,114 (3,520,809)
------------ ------------
Net (loss) income $ (3,425,172) $ 5,425,794
============ ============
Weighted average common shares outstanding
Basic 19,309,840 18,250,000
Diluted 19,309,840 18,250,000
(Loss) income per share after extraordinary gain on defeasance of debt
Basic $ (.18) $ .30
Diluted $ (.18) $ .30
(Loss) income per share before extraordinary gain on defeasance of debt
Basic $ (.20) $ .25
Diluted $ (.20) $ .25
See accompanying notes to these financial statements.
25
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
-----------------------------------------------------------
COMMON ADDITIONAL ACCUMULATED MEMBERS'
STOCK PAID-IN-CAPITAL DEFICIT EQUITY TOTAL
----- --------------- ------- ------ -----
Balance at January 1, 1999 - - - $840,555 $840,555
Contributions: 5,000 5,000
Members 180,000 180,000
Minority interest
Issuance of warrants 4,369,696 4,369,696
Distributions (279,067) (279,067)
Net income 8,946,603 8,946,603
Minority interest (5,753,860) (5,753,860)
----------------------------------------------------------------------------
Balance at December 31, 1999 - - - 8,308,927 8,308,927
Distributions (903,475) (903,475)
Issuance of common stock 3,805,670 3,805,670
Recapitalization of Company 427,469 10,783,653 (11,211,122) --
Acquisition of REXX 16,157 16,157
Issuance of warrants 1,931,298 1,931,298
Loss before minority interest (5,659,286) (5,659,286)
Additional minority interest (464,056) (464,056)
Minority interests in loss 2,234,114 2,234,114
----------------------------------------------------------------------------
Balance at December 31, 2000 $427,469 $12,267,052 $(3,425,172) -- $9,269,349
============================================================================
See accompanying notes to these consolidated financial statements.
26
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
-----------------------------------------------------------
2000 1999
` ---- ----
Cash flows from operating activities:
Net income $ (3,425,172) $ 5,425,794
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Other than temporary decline
in value of investments 1,231,849 --
Equity in losses of affiliates 163,416 --
Extraordinary gain on defeasance of debt (361,750) (924,120)
Income from tax credits (6,533,217) (10,963,593)
Deferred income taxes 1,140,092 --
Depreciation 6,151 2,273
Accretion of interest income (158,688) (102,938)
Accretion of interest expense 6,793,193 2,368,813
Minority interest included in income (loss) (2,234,114) 3,520,809
Changes in assets and liabilities:
Prepaid insurance (4,204,746) (2,726,287)
Prepaid expenses and other assets (8,388) (76,535)
Accounts payable and accrued expenses 1,089,800 1,073,583
------------ ------------
Net cash used in operating activities (6,501,574) (2,402,201)
------------ ------------
Cash flows from investing activities:
Qualified investments (14,287,442) (8,125,000)
Other investments (320,000) --
Return of principal - qualified investments 5,522,663 250,000
Return of principal - other investments 125,000 --
Purchase of structured insurance product (661,432) --
Purchase of furniture, fixtures and equipment (28,898) --
------------ ------------
Net cash used in investing activities (9,650,109) (7,875,000)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 55,008,122 71,844,056
Payments for defeasance of long-term debt (34,279,454) (41,389,998)
Proceeds from Notes payable - Certified Investors 1,251,630 --
(Payment of) proceeds from Note payable - bank (725,358) 725,358
Payment of loan payable - members (21,000) --
Proceeds from loan payable - other -- 250,000
Cash received from REXX merger 143,790 --
Net proceeds from issuance of common stock 3,555,670 --
Payment of mortgage payable (12,000) --
Contributions from minority interest -- 175,000
Distributions to members (903,475) (245,067)
Issuance of warrants 1,481,594 3,273,971
Payments for deferred financing costs (104,771) (469,241)
------------ ------------
Net cash provided by financing activities 25,394,748 34,164,079
------------ ------------
(cont.)
27
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
-----------------------------------------------------------
2000 1999
` ---- ----
Net increase in cash and cash equivalents 9,243,065 23,886,878
Cash and cash equivalents - beginning of period 25,454,016 1,567,138
------------ -----------
Cash and cash equivalents - end of period $34,697,081 $25,454,016
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
------------------------------------------------
Cash paid for interest $ 47,685 $ 9,168
============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
---------------------------------------------------------
Issuance of the following in partial payment for insurance:
Notes $ 1,800,000 $ 4,000,000
Warrants 449,704 1,095,725
------------ -----------
$ 2,249,704 $ 5,095,725
============ ===========
Conversion of Notes payable - other than to common stock $ 250,000 --
============
Acquisition of REXX (net assets) $ 16,157 --
============ ===========
Non-cash distribution of investments in limited
partnerships to members -- $ 34,000
============ ===========
See accompanying notes to these consolidated financial statements.
28
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
-------------------------------------------------
On September 20, 2000, Newtek Capital, Inc. (Newtek) acquired the
controlling interests in the underlying entities listed below and accordingly
consolidates the financial statements of these entities with its own.
Additionally, on September 20, 2000, Newtek's common stock began trading on the
American Stock Exchange under the symbol "NKC". Newtek was formed on June 29,
1999 under the name Whitestone Holdings, Inc. and changed its name to Newtek
Capital, Inc. on January 18, 2000, and the underlying entities comprise: BJB
Holdings, Inc. ("BJB"), Wilshire Holdings I, Inc., Wilshire Holdings II, Inc.,
Newtek Securities, LLC, REXX Environmental Corp. ("REXX"), Whitestone Capital
Markets, Inc., The Whitestone Group, LLC ("TWG"); Wilshire Advisers, LLC ("WA"),
Wilshire NY Advisers II ("WAII"), and Wilshire New York Partners III ("WNYIII"),
certified capital companies ("Capcos") in New York, Wilshire Partners, LLC
("WP"), a Capco in Florida, Wilshire Investors, LLC ("WI"), a Capco in
Wisconsin, Wilshire Louisiana Advisers, LLC ("WLA"), and Wilshire Louisiana
Partners II ("WLPII"), capcos in Louisiana (the Capco entities are,
collectively, the "Capcos" and Newtek and all of these aforementioned entities
and Capcos are collectively the "Company"). TWG acts as an investment adviser
and manager to the aforementioned Capcos as well as a merchant bank and provides
investment banking and business development services including general business
consulting services, strategic planning, due diligence, merger and acquisition
analysis, technology design and implementation support, joint venture
negotiations and litigation support services. All significant intercompany
balances and transactions are eliminated in consolidation.
As described above, Newtek acquired the controlling interests in the
underlying entities. In this connection, Newtek issued 18,823,285 shares of
common stock in exchange for 100% of BJB's shares and the member interests in
the underlying entities. The principal shareholders of Newtek were the principal
owners of BJB and the underlying entities. As a result, Newtek has recorded the
assets acquired and liabilities assumed at their historical values, with the net
asset value recorded as a credit to stockholders' equity.
Additionally, on September 19, 2000, Newtek completed its acquisition of
REXX. Pursuant to the acquisition, REXX stockholders received one share of
Newtek common stock in exchange for each share of REXX common stock held. The
Company issued 2,467,576 shares of common stock in exchange for 100% (2,467,576
shares) of REXX stock. This transaction has been accounted for as a
recapitalization, whereby Newtek has recorded the monetary assets and
liabilities of REXX at their historical values (which were not material to the
Company), with the net asset value recorded as a credit to stockholders' equity.
The following is a summary of each Capco, 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
WLAII Louisiana October 2000
WNYIII New York December 2000
In general, the Capcos issue debt and equity instruments, generally
warrants ("Certified Capital"), to insurance company investors ("Certified
Investors"). The Capcos then make targeted investments ("Investments in
Qualified Businesses", as defined under the respective state statutes), with the
Certified Capital raised. Such investments may be accounted for as either
consolidated subsidiaries, under the equity method or cost method of
29
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
accounting, or as notes receivable, depending upon the nature of the investment
and the Company's and/or the Capco's ability to control or otherwise exercise
significant influence over the investee. Each Capco has a contractual
arrangement with the particular state that legally entitles the Capco to receive
(or earn) tax credits from the state upon satisfying quantified, defined
investment percentage thresholds and time requirements. In order for the Capcos
to maintain their state-issued certifications, the Capcos must make Investments
in Qualified Businesses in accordance with these requirements. Each Capco also
has separate, legal contractual arrangements with the Certified Investors
obligating the Capco to pay interest on the aforementioned debt instruments
whether or not it meets the statutory requirements for Investments in Qualified
Businesses. The Capco can satisfy this interest payment, at the Capco's
discretion, by delivering tax credits in lieu of paying cash. The Capcos legally
have the right to deliver the tax credits to the Certified Investors. The
Certified Investors legally have the right to receive and use the tax credits
and would, in turn, use these tax credits to reduce their respective state tax
liabilities in an amount usually equal to 100% of their certified investment.
The tax credits can be utilized over a ten-year period at a rate of 10% per year
and in some instances are transferable and can be carried forward.
CASH AND CASH EQUIVALENTS
-------------------------
All highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents. The Company has bank
balances in excess of the $100,000 of depository insurance provided by the
Federal Deposit Insurance Corporation. Approximately $34,312,000 and $25,452,000
of the cash and cash equivalents as of December 31, 2000 and 1999, respectively,
were restricted for managing and operating the Capcos, including making
qualified investments.
REVENUE RECOGNITION
-------------------
The Company recognizes consulting revenues as earned. Consulting revenues
are earned at the time the related services are provided and when the right to
receive payment is assured. Realized gains on investments are earned at the time
the investments are sold.
Income from tax credits: Following an application process, a state will
notify a company that it has been certified as a Capco. The state then allocates
an aggregate dollar amount of tax credits to the Capco. However, such amount is
neither recognized as income nor otherwise recorded in the financial statements
since it has yet to be earned by the Capco. As described in "Basis of
presentation and description of business," earlier in this note, the Capco is
legally entitled to earn tax credits upon satisfying defined investment
percentage thresholds within specified time requirements and corresponding
non-recapture percentages. At December 31, 2000, and December 31, 1999 as
summarized earlier in this note, the Company had Capcos in four states. Each
statute requires that the Capco invest a threshold percentage of Certified
Capital in Qualified Businesses within the timeframes specified. As the Capco
meets these requirements, it avoids grounds under the statute for its
disqualification for continued participation in the Capco program. Such a
disqualification, or "decertification" as a Capco results in a recapture of all
or a portion of the allocated tax credits; the proportion of the recapture is
reduced over time as the Capco remains in general compliance with the program
rules and meets the progressively increasing investment benchmarks. As the Capco
progresses in its investments in Qualified Businesses and, accordingly, places
an increasing proportion of the tax credits beyond recapture, it earns an amount
equal to the non-recapturable tax credits and records such amount as income,
with a corresponding asset called "credits in lieu of cash", in the balance
sheet. The amount earned and recorded as income is determined by multiplying the
total amount of tax credits allocated to the Capco by the percentage of tax
credits immune from recapture (the earned income percentage) under the state
statute. To the extent that the investment requirements are met ahead of
schedule, and the percentage of non-recapturable tax credits is accelerated, the
present value of the tax credit earned is recognized currently and the asset,
credits in lieu of cash, is accreted up to the amount of tax credits available
to the Certified Investors.
30
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The total amount of tax credits allocated to each of the aforementioned
capcos, the required investment percentages, recapture percentages and related
earned income percentages, and pertinent dates are summarized as follows:
THE FIRST TO OCCUR
-----------------------------------
INVESTMENT DECERTIFICATION EARNED
STATE TOTAL TAX INVESTMENT BENCHMARK RECAPTURE RECAPTURE INCOME
CAPCO CREDITS ALLOCATED BENCHMARK DATE THRESHOLDS PERCENTAGE PERCENTAGE
----- ----------------- --------- ---------------- ---------------- ---------- ----------
FLORIDA $37,384,028 Prior to 20% 100% 0%
Wilshire 20% 12/31/00 After 20% before 30% 70% 30%
Partners (WP) 30% 12/31/01 After 30% before 40% 60% 40%
40% 12/31/02 After 40% before 50% 50% 50%
50% 12/31/03 After 50% 0% 100%
LOUISIANA $18,040,000 Prior to 30% 100% 0%
Wilshire LA 30% 10/14/02 After 30% before 50% 70% 30%
Advisers (WLA) 50% 10/14/04 After 50% 0% 100%
NEW YORK $ 3,810,161 Prior to 25% 100% 0%
Wilshire 25% 6/22/00 After 25% before 40% 85% 15%
Advisers (WA) 40% 6/22/01 After 40% before 50% 70% 30%
50% 6/22/02 After 50% 0% 100%
LOUISIANA $ 3,050,000 Prior to 30% 100% 0%
Wilshire 30% 10/13/03 After 30% before 50% 70% 30%
LA Advisors II 50% 10/13/05 After 50% 0% 100%
(WLA II)
NEW YORK $ 6,807,866 Prior to 25% 100% 0%
Wilshire 25% 4/7/02 After 25% before 40% 85% 15%
N.Y. Advisers II 40% 4/7/03 After 40% before 50% 70% 30%
(WNY II) 50% 4/7/04 After 50% 0% 100%
NEW YORK $35,160,202 Prior to 25% 100% 0%
Wilshire 25% 12/21/02 After 25% before 40% 85% 15%
N.Y. Partners III 40% 12/21/03 After 40% before 50% 70% 30%
(WNY III) 50% 12/21/04 After 50% 0% 100%
WISCONSIN $16,666,667 Prior to 30% 100% 0%
Wilshire 30% 10/25/02 After 30% before 50% 70% 30%
Investors (WI) 50% 10/25/04 After 50% 0% 100%
31
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Under the various state capco provisions, there is a difference in the
amount of qualified investments made and the amount of income recognized by the
respective capcos upon satisfaction of the various benchmarks. The table below
relates the investments made, both as percentage of total funds and in dollar
amounts, to the income recognized as each benchmark is achieved. In all of these
programs, a majority of Newtek's income from the delivery of the tax credits
will be recognized no later than five years into the ten year programs.
ALLOCATED INVESTMENT EARNED
STATE TAX BENCHMARK INCOME
CAPCO CREDITS PERCENT/DOLLARS PERCENT/DOLLARS
----- ------- --------------- ---------------
FLORIDA
Wilshire $37,384,028 20% $7,476,806 30% $11,215,208
Partners (WP) 30% $11,215,208 40% $14,953,611
40% $14,953,611 50% $18,692,014
50% $18,692,014 100% $37,384,028
LOUISIANA
Wilshire LA $18,040,000 30% $4,920,000 30% $5,412,000
Advisers (WLA) 50% $8,200,000 100% $18,040,000
NEW YORK
Wilshire $3,810,161 25% $952,540 15% $571,524
Advisers (WA) 40% $1,524,064 30% $1,143,048
50% $1,905,081 100% $3,810,161
WISCONSIN
Wilshire $16,666,667 30% $5,000,000 30% $5,000,000
Investors (WI) 50% $8,333,334 100% $16,666,667
LOUISIANA
Wilshire LA $3,050,000 30% $915,000 30% $915,000
Advisers II 50% $1,525,000 100% $3,050,000
(WLA II)
NEW YORK
Wilshire N.Y. $6,807,866 25% $1,701,967 15% $1,021,180
Advisers II 40% $2,723,146 30% $2,042,360
(WNY II) 50% $3,403,933 100% $6,807,866
NEW YORK
Wilshire N.Y. $35,160,202 25% $8,790,051 15% $5,274,030
Partners III 40% $1,406,408 30% $10,548,060
(WNY III) 50% $17,580,101 100% $35,160,202
32
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
During each of the years ended December 31, 2000 and 1999, certain capcos
satisfied the initial investment benchmarks and the related recapture
percentages requirements and, accordingly, earned a portion of the tax credits.
See Note 9.
FURNITURE, FIXTURES AND EQUIPMENT
---------------------------------
Furniture, fixtures and equipment, which is comprised primarily of office
equipment, are stated at cost, less accumulated depreciation. Depreciation of
furniture, fixtures and equipment is provided on a straight-line basis using
estimated useful lives of the related assets (five years).
INCOME TAXES
------------
For 1999, each of the aforementioned underlying entities is a Limited
Liability Company ("LLC"). In lieu of corporate taxes, the members of an LLC are
taxed on their proportionate share of the entity's taxable income. Accordingly,
no liability for federal, state and local income taxes has been recorded in the
accompanying consolidated financial statements as of and for the year ended
December 31, 1999.
In accordance with Financial Accounting Standards Board Statement on
Financial Accounting Standards ("SFAS") Statement No. 109, "Accounting for
Income Taxes" deferred tax assets and liabilities are computed based upon the
differences between the financial statement and income tax basis of assets and
liabilities using the enacted tax rates in effect for the year in which those
temporary differences are expected to be realized or settled. If available
evidence suggests that it is more likely than not that some portion or all of
the deferred tax assets will not be realized, a valuation allowance is required
to reduce the deferred tax assets to the amount that is more likely than not to
be realized. In connection with Newtek's acquiring the interests in the
underlying entities as described earlier in this note, Newtek has recorded
deferred tax assets and liabilities resulting from the cumulative temporary
book/tax differences from the underlying CAPCO subsidiaries' activities. See
Note 10.
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expense during the reporting period. The most significant
estimates are with respect to valuation of investments, credits in lieu of
cash,, and amounts ascribed to warrants. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying values of other assets, accounts payable and accrued expenses
approximate fair value because of the short term maturity of these instruments.
The carrying value of qualified investments, structured insurance product, notes
and loans payable, credits in lieu of cash, interest payable, and warrants
approximate fair value based on management's estimates.
EARNINGS PER SHARE
------------------
For the year ended December 31, 2000, net loss per share is based on the
weighted average number of shares of common stock outstanding. Since the effect
of common stock equivalents in 2000 was anti-dilutive, all such equivalents were
excluded from the calculation of net loss per share. There was no common stock
outstanding or common stock equivalents for the year ended December 31, 1999;
however, a computation has been provided for comparative purposes. See Note 16.
RECLASSIFICATIONS
-----------------
Certain 1999 amounts have been reclassified to conform to current year
presentation.
33
NOTE 2 - INSURANCE:
On November 19, 1998, WA purchased a structured insurance product covering
a ten-year period (the "Capco Policy") from a AAA rated international insurance
company (the "Insurer"). This insurance provides for (i) the repayment, on the
maturity date, of the note payable issued by WA to the Certified Investors in
connection with the capitalization of WA ("Note") (see Note 4) ("Coverage A")
and (ii) the loss or recapture of the state tax credits delivered to the
Certified Investors (see Note 1) ("Coverage B"). Notwithstanding the Insurer's
obligation, WA remains primarily liable for repayment of the Note. Premiums for
the Capco Policy have been paid in full at inception and the Capco Policy is
non-cancelable. The Company paid a total of $1,805,599 for the Capco Policy. The
costs of Coverages A and B were $1,647,905 and $157,694, respectively. Under
Coverage A, the Insurer is required to pay the principal amount of the Note
(Note 4), $2,673,797, on the maturity date in June, 2008. Accordingly, the
Company has recorded the Coverage A payment as an asset, called structured
insurance product, and has been increasing the recorded amount via an accretion
to interest income. For the years ended December 31, 2000 and December 31, 1999
the Company recorded $102,938 for each year, as interest income. At the June,
2008 Note maturity date, the asset balance will be $2,673,797, the Insurer will
pay the Certified Investors, and the Company will reverse this asset balance in
full with a corresponding reversal of the Note balance.
On May 10, 2000, WA purchased another structured insurance product covering
an eight-year period (the "Capco Policy") from a AAA rated international
insurance company (the "Insurer"). This insurance provides for the same terms
and conditions as the aforementioned initial insurance product as described
above. The Company paid a total of $821,500 for this additional Capco Policy.
The costs of Coverages A and B were $661,432 and $160,068, respectively. Under
Coverage A, the Insurer is required to pay the principal amount of the Note
(Note 4), $1,136,364, on the maturity date in June, 2008. Accordingly, the
Company has recorded the Coverage A payment as an asset, called structured
insurance product, and has been increasing the recorded amount via an accretion
to interest income. For the year ended December 31, 2000, the Company recorded
$46,627 as interest income. At the June, 2008 Note maturity date, the asset
balance will be $1,136,364, the Insurer will pay the Certified Investors, and
the Company will reverse this asset balance in full with a corresponding
reversal of the Note balance.
The amount paid for Coverage B has been recorded as prepaid insurance and
is being amortized to expense over the life of the Capco Policy. The Company has
also purchased (as well as financed, see Note 5) Coverage B insurance in
connection with transactions described in Note 7. Such amounts are accounted for
in the same manner as Coverage B insurance referred to in this Note. The prepaid
insurance balance of $12,187,376 at December 31, 2000 and $7,971,411 at December
31, 1999 is comprised solely of the unamortized cost of Coverage B insurance.
34
NOTE 2 - INSURANCE (CONTINUED):
The Company's Coverage A and B purchases are summarized as follows:
-------------------------------------------------------------------------------
PREMIUM PAID FOR PREMIUM PAID FOR
CAPCO DATE OF PURCHASE COVERAGE A(3) COVERAGE B (3)
-------------------------------------------------------------------------------
WA November 1998 $ 1,647,905 (1) $ 157,694
-------------------------------------------------------------------------------
TOTAL - 1998 $ 1,647,905 $ 157,694
========= =======
-------------------------------------------------------------------------------
WP April 1999 $23,127,927 (2) $ 3,998,948
-------------------------------------------------------------------------------
WLA October 1999 $ 9,175,844 (2) $ 2,193,741
-------------------------------------------------------------------------------
WI October 1999 $ 9,086,227 (2) $ 2,352,786
-------------------------------------------------------------------------------
TOTAL - 1999 $41,389,998 $ 8,545,475
========== =========
-------------------------------------------------------------------------------
WNYII April 2000 $ 5,019,803 (2) $ 504,745
-------------------------------------------------------------------------------
WA May 2000 $ 661,432 (1) $ 160,068
-------------------------------------------------------------------------------
WLPII October 2000 $ 2,456,565 (2) $ 319,958
-------------------------------------------------------------------------------
WNYIII December 2000 $29,052,790 (2) $ 4,137,438
-------------------------------------------------------------------------------
TOTAL - 2000 $37,190,590 $ 5,122,209
========== =========
-------------------------------------------------------------------------------
(1) Coverage A has been accounted for as a structured insurance product as
described previously in this Note.
(2) Coverage A has been accounted for as described in Note 7.
(3) Coverage B has been accounted for as described previously in this Note.
Additionally, a portion of the premiums paid in 1999 and 2000 for Coverages
A and B were financed by notes ($5,800,000) and the issuance of warrants
($1,545,429).
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
Investments in Qualified Businesses (Note 1) represent notes receivable
(debt investments) and investments in the equity of non-public companies; such
investments are accounted for under the cost method. The following table is a
summary of such investments as of December 31, 1999, shown separately between
their debt ($8,250,000) and equity ($25,000) components (for a total
non-consolidated Investment in Qualified Businesses of $8,275,000), and all
terms of each are summarized. There are no expiration dates on any of the
financial instruments, unless disclosed.
--------------------------------------------------------------------------------------------------------------------------------
DEBT Date of Maturity Principal Stated Principal Amount
Investee Type Investment Date Amount Interest Rate December 31, 1999
================================================================================================================================
Merchant Data Systems Sales and Debt 10/25/99 04/15/01 $3,500,000 7.00% - $3,500,000
Marketing 9.00%
--------------------------------------------------------------------------------------------------------------------------------
Transworld Business Brokers, Inc. Debt 11/23/99 11/23/01 $3,150,000 5.25% $3,150,000
--------------------------------------------------------------------------------------------------------------------------------
Down to Earth Technologies Debt 12/15/99 02/16/01 $ 500,000 9.00% $ 500,000
--------------------------------------------------------------------------------------------------------------------------------
Transworld Business Brokers, Inc. Debt 11/23/99 11/23/01 $ 350,000 6.00% $ 350,000
--------------------------------------------------------------------------------------------------------------------------------
1 800 GiftCertificate Debt 07/15/99 09/15/00 $ 300,000 8.75% $ 300,000
--------------------------------------------------------------------------------------------------------------------------------
4G's Truck Renting Co., Inc. Debt 01/15/99 07/15/00 $ 300,000 6.50% $ 300,000
--------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Boxing, Inc. Debt 11/17/98 01/31/00 $ 150,000 9.00% $ 150,000
--------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT INVESTMENTS $8,250,000 $8,250,000
========== ==========
35
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
----------------------------------------------------------------------------------------------------------------------------------
EQUITY Limited
Liability
Company Original Cost Basis
Date of Type of Common Stock Membership Investment December 31,
Investee Investment Investment Equivalents (1) Share Ratio Amount 1999
-------- ---------- ---------- --------------- ----------- ------ ----
----------------------------------------------------------------------------------------------------------------------------------
1 800 GiftCertificate 07/15/99 Class B 113,140 NA $22,396 $22,396
Preferred
Stock(3)
----------------------------------------------------------------------------------------------------------------------------------
07/15/99 Class A 13,159 NA $2,604 $2,604
1 800 GiftCertificate Preferred Stock
----------------------------------------------------------------------------------------------------------------------------------
Membership
Merchant Data Systems 10/21/99 Interests in NA 50.00% $0 $0
Sales and Marketing LLC
----------------------------------------------------------------------------------------------------------------------------------
Membership
11/23/99 Interests in NA 50.00% $0 $0
BizBroker Net LLC
----------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Boxing, 11/17/98 Options for 3 NA $0 $0
Inc. Common Stock(2)
----------------------------------------------------------------------------------------------------------------------------------
Down to Earth 12/15/99 Membership NA 50.00% $0 $0
Technologies Interests in
LLC
----------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INVESTMENTS $ 25,000 $ 25,000
========== ==========
TOTAL DEBT AND EQUITY INVESTMENTS DECEMBER 31, 1999 $8,275,000 $8,275,000
========== ==========
36
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
The following table is a summary of such investments as of December 31, 2000,
shown separately between their debt ($11,038,932) and equity ($4,605,583)
components (for a total non-consolidated Investment in Qualified Businesses of
$15,644,515), and all terms of each are summarized. There are no expiration
dates on any of the financial instruments, unless disclosed.
----------------------------------------------------------------------------------------------------------------------------
Principal
DEBT Original Amount
Date of Maturity Principal Stated December 31,
Investee Type Investment Date Amount Interest Rate 2000
============================================================================================================================
Transworld Business Brokers, Debt 11/99 11/23/01 $ 3,150,000 5.25% $ 2,854,201
Inc.
----------------------------------------------------------------------------------------------------------------------------
CB Real Net, LLC Debt 02/01/00 Various $ 2,500,000 Various $ 2,500,000
----------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems Sales Debt 10/99 04/15/01 $ 3,500,000 9.00% $ 1,598,950
and Marketing
----------------------------------------------------------------------------------------------------------------------------
Multi-Media Distribution Corp. Debt 06/00 06/14/02 $ 1,000,000 10.00% $ 1,000,000
----------------------------------------------------------------------------------------------------------------------------
4G's Truck Renting Debt 12/00 On demand $ 900,000 10.00% $ 900,000
----------------------------------------------------------------------------------------------------------------------------
Direct Creations, LLC Debt 9/00 3/9/02 $ 750,000 10.00% $ 750,000
----------------------------------------------------------------------------------------------------------------------------
Transworld Business Brokers, Debt 11/99 11/23/01 $ 350,000 6.00% $ 250,000
Inc.
----------------------------------------------------------------------------------------------------------------------------
1 800GiftCertificate Debt 07/99 09/15/01 $ 300,000 8.75% $ 244,928
----------------------------------------------------------------------------------------------------------------------------
Steve Kent Trucking(4) Debt 3/00, 5/00 Various $ 747,000 Prime + $ 122,309
1.00%
----------------------------------------------------------------------------------------------------------------------------
Gerace Auto Parts(4) Debt 4/00 Various $ 810,000 Prime + $ 131,276
1.00%
----------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems, Inc. Debt 8/00 1/11/02 $ 100,000 10.00% $ 100,000
----------------------------------------------------------------------------------------------------------------------------
AIDA, LLC Debt 8/00 On demand $ 100,000 10.00% $ 100,000
----------------------------------------------------------------------------------------------------------------------------
Gino's Seafood(4) Debt 3/00, 4/00 Various $ 517,942 Prime + $ 86,692
1.00%
----------------------------------------------------------------------------------------------------------------------------
Down to Earth Technologies, LLC Debt 12/99, 8/00 08/16/01 $ 580,000 9.00% $ 80,000
----------------------------------------------------------------------------------------------------------------------------
Embosser's Sales and Service(4) Debt 8/00 Various $ 495,000 Prime + $ 80,144
1.00%
----------------------------------------------------------------------------------------------------------------------------
St. Gabriel Hardware(4) Debt 11/00 Various $ 477,000 Prime + $ 79,500
1.00%
----------------------------------------------------------------------------------------------------------------------------
Data-Tel of Louisiana(4) Debt 03/00 Various $ 513,000 Prime + $ 75,326
1.00%
----------------------------------------------------------------------------------------------------------------------------
Raising Cain(4) Debt 3/00, 4/00, 5/00 Various $ 315,000 Prime + $ 48,606
1.00%
----------------------------------------------------------------------------------------------------------------------------
Tari's School of Dance(4) Debt 5/00 Various $ 189,000 Prime + $ 31,500
1.00%
----------------------------------------------------------------------------------------------------------------------------
BBQ West(4) Debt 10/00, 11/00 Various $ 49,500 Prime + $ 5,500
1.00%
----------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT INVESTMENTS $17,343,442 $11,038,932
=========== ===========
37
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
---------------------------------------------------------------------------------------------------------------------------------
EQUITY
Original Cost Basis
Date of Type of Common Stock Percentage of Investment December 31,
Investee Investment Investment Equivalents (1) Ownership Amount 2000
-------- ---------- ---------- --------------- --------- ------ ----
---------------------------------------------------------------------------------------------------------------------------------
Starphire Technologies, 08/25/00 Preferred N/A 50.00% $1,400,000 $1,485,001
LLC Membership
Interest w/
voting rights
---------------------------------------------------------------------------------------------------------------------------------
Preferred
09/25/00, Membership
Niche Directories, LLC 12/1/00 Interest w/ N/A 37.50% $1,344,000 $1,317,357
voting rights
---------------------------------------------------------------------------------------------------------------------------------
AIDA, LLC 10/00 Preferred Stock/ N/A 50% $900,000 $793,044
Common Stock
---------------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems, 9/13/00 Preferred Stock/ N/A 35% $900,000 $785,181
Inc. Common Stock
---------------------------------------------------------------------------------------------------------------------------------
Multi-Media Distribution 6/14/00 Common Stock 66,000 3% $200,000 $200,000
Corp.
---------------------------------------------------------------------------------------------------------------------------------
1800GiftCertificate 07/15/99 Class B 113,140 N/A $22,396 $22,396
Preferred Stock
---------------------------------------------------------------------------------------------------------------------------------
1800GiftCertificate 07/15/99 Class A 3,159 N/A $2,604 $2,604
Preferred Stock
---------------------------------------------------------------------------------------------------------------------------------
BizBroker Net, LLC 11/23/99 Membership N/A 50.00% $0 $0
Interest
---------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Boxing, 11/17/98 Options for 3 N/A $0 $0
Inc. Common Stock(2)
---------------------------------------------------------------------------------------------------------------------------------
Warrants for
CB Real Net, LLC 02/01/00 Membership N/A 40.00% $0 $0
Interest(3)
---------------------------------------------------------------------------------------------------------------------------------
Direct Creations 12/00 Membership N/A 25% $0 $0
Interest
---------------------------------------------------------------------------------------------------------------------------------
Down to Earth 12/15/99 Membership N/A 50.00% $0 $0
Technologies, LLC Interest
---------------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems 10/21/99 Membership N/A 50.00% $0 $0
Sales and Marketing, LLC Interest
---------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY INVESTMENTS $4,769,000 $ 4,605,583
========== ===========
TOTAL DEBT AND EQUITY INVESTMENTS DECEMBER 31, 2000 $22,112,442 $15,644,515
=========== ===========
(1) Common Stock Equivalents reflect conversion of all financial instruments
into common stock.
(2) Expires four years from date of investment, and has a $.01 exercise price.
(3) Expires six years from date of investment, and has a $.01 exercise price.
(4) Represents Louisiana Small Business Administration (SBA) loans. Wilshire
Louisiana's investment total for these types of loans was $4,113,472 as of
December 31, 2000. Of this amount, approximately 80% was guaranteed by the
SBA and was sold in the secondary market, while the remaining balance is
amortized over 5 to 20 years. Accordingly, the CAPCO had $660,853
outstanding and received approximately $2,262,000 (55%) of credits toward
the investment hurdle, based upon its agreement with the State of
Louisiana.
38
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (CONTINUED):
Investments in equity interests of and notes receivable from affiliated
companies accounted for under the equity method amounted to $12,613,734 and
$7,500,000 at December 31, 2000 and 1999, respectively. Additionally, the
Company's investment balance in the equity of each of these investees is
$4,580,583 and zero at December 31, 2000 and December 31, 1999, respectively.
The Company did not record its share of the losses in these investees in the
twelve months ended December 31, 1999 because its investment account was zero.
During 2000, the Company made investments accounted for under the equity method
aggregating $4,544,000. In the twelve months ended December 31, 2000, the
Company recorded approximately $163,416 in net losses of these investees,
pre-minority interest.
The Company has not guaranteed any obligation of these investees, and the
Company is not otherwise committed to provide further financial support for the
investees. Periodically, the Company evaluates each of its individual
investments for potential impairment in value. Should the Company determine that
an impairment exists and it is deemed to be other than temporary, the Company
will write down the recorded value of the asset to its estimated realizable
value and record a corresponding charge in the statement of operations. At
December 31, 2000, the Company has determined that there is an other than
temporary decline in the value of its investments in debt instruments of
$1,231,849, which represented approximately $500,000 for Down To Earth
Technologies, $336,050 for Merchant Data Systems Sales and Marketing, and
$395,950 for Transworld Business Brokers. After its evaluation of the
aforementioned investments, management concluded that it is unlikely it will be
able to recover these amounts. Accordingly, at December 31, 2000 and for the
year then ended, the Company has written down the value of these investments and
recorded a corresponding charge of $1,231,849.
NOTE 4 - NOTES PAYABLE - CERTIFIED INVESTORS:
In June 1998 WA issued a Note and a warrant to a Certified Investor for a
total amount of $2,673,797. The Company's interest obligations under the Note
are as described in Notes 1 and 7. The warrant entitles the Certified Investor
to purchase 13% of WA's member units at a purchase price of $.01 per unit. The
warrant can be exercised at any time during the 10-year term of the Note.
Of the total proceeds, the Company allocated $2,608,797 to the Note and
$65,000 to the warrant. The Company initially recorded the Note at $2,608,797
and has been increasing such amount via an accretion to interest expense. For
the year ended December 31, 2000 and 1999, the Company recorded $6,500 and
$6,500, respectively, of interest expense for such accretion. At the maturity
date in June 2008, the Note balance will be $2,673,797 and the Insurer (Note 2)
will pay such amount to the Certified Investor.
In May 2000, WA issued an additional Note to a Certified Investor for total
proceeds of $1,251,630. This Note has been recorded at its face amount of
$1,136,364, which is the amount payable at maturity in 2008. The interest rate
on this note is 10%. The excess of the proceeds over the face amount, or
$115,266, will be amortized to income over the term of the Note.
Under the terms of the Notes WA is required to maintain minimum levels of
working capital and tangible net worth, as defined. At December 31, 1999 and
2000 WA was in compliance with such requirements.
NOTE 5 - NOTES PAYABLE - INSURANCE:
In October 1999, WI and WLA each borrowed $2,000,000 ($4,000,000 in total),
from a financing company to finance a portion of the total premiums due to an
insurance company. The notes bear interest at 8.5%, and are payable in three
installments beginning on April 1, 2001, with the final payment due on October
24, 2002. Accrued interest at December 31, 2000 and December 31, 1999 amounted
to $403,000 and $50,922.
39
NOTE 5 - NOTES PAYABLE - INSURANCE (CONTINUED):
In April 2000, WNYII borrowed $1,500,000 from a financing company to
finance a portion of the total premiums due to an insurance company. The note
bears interest at 9.5%, and is payable in three installments beginning on
October 13, 2001, with the final payment due on April 13, 2003. Accrued interest
at December 31, 2000 amounted to $79,130.
In October 2000, WLPII borrowed $300,000 from a financing company to
finance a portion of the total premiums due to an insurance company. The note
bears interest at 9.92%, and is payable in three installments beginning on April
13, 2001, with the final payment due on October 13, 2003. Accrued interest at
December 31, 2000 amounted to $7,876.
NOTE 6- NOTES PAYABLE - BANK:
In August 1999, the Company entered into a $750,000 one year revolving
working capital loan with a bank bearing interest at 8.75% per annum. At
December 31, 1999, the Company had borrowed $725,358 from the bank. As of
December 31, 2000, the Company had repaid the loan along with any accrued
interest.
NOTE 7 - INTEREST PAYABLE AND DEFEASANCE OF DEBT:
As described in Note 1, each Capco has separate contractual arrangements
with the Certified Investors obligating the Capco to pay interest on the
aforementioned debt instruments.
During 2000 and 1999, at the time the Capcos obtained the proceeds from the
issuance of the debt instruments and warrants to the Certified Investors, the
Capcos also purchased insurance contracts from the Insurer. These insurance
contracts are similar to those described in Note 2; however, the Coverage A
portion of these contracts fully defeases the Capco's liability for the full
amount of proceeds obtained from the Certified Investors. The Insurer is
primarily liable to the Certified Investors for such amounts. The Capcos,
however, are secondarily, or contingently, liable for such payment, and remain
primarily liable for the interest obligation. The Coverage B portion of these
contracts is similar to such coverage described in Notes 2 and 4.
The Company has allocated the initial proceeds received from the Certified
Investors as follows:
2000 1999
---- ----
Notes payable, including premiums $55,008,122 $71,844,056
Warrants 1,481,594 3,273,971
----------- -----------
$56,489,716 $75,118,027
Concurrently, in 2000 and 1999, the Company purchased Coverage A to defease
principal portion of the Notes payable. The resulting difference, less the note
premiums, represents the excess of the initial liability under the debt
instruments over the Coverage A payments, and has been recorded as interest
payable, representing the present value of the Capco's total liability to pay
interest to the Certified Investors. Such amount will be increased via an
accretion of interest expense during the 10-year period the Capcos are obligated
to pay interest, and will decrease as the Capcos pay interest via delivering the
tax credits, or paying cash (Note 9).
40
NOTE 7 - INTEREST PAYABLE AND DEFEASANCE OF DEBT (CONTINUED):
The following is a summary of the defeasance transactions and
reconciliation of interest payable balances at December 31, 2000 and 1999
(exclusive of proceeds allocated to warrants as noted above):
2000 1999
--------------- -------------
Note payable, including premiums $ 55,008,122 $ 71,844,056
Less: purchase of coverage A (36,529,158) (41,389,998)
Less: note premiums allocated to defeasance (707,688) (1,393,361)
--------- ------------
Allocated to interest payable 17,771,276 29,060,697
Plus: interest payable, beginning of year 31,583,438 160,428
Plus: accretion of interest expense for the
year 6,793,193 2,362,313
--------------- -------------
Interest payable, end of year $ 56,147,907 $ 31,583,438
The total amount of interest payable to the Certified Investors through the ten
year period is approximately $117,414,000.
Under the note agreements, no interest is paid in cash provided that the
Certified Investors receive tax credits. The Certified Investors acknowledge
that the Insurer is primarily responsible for the repayment of the original
proceeds on the maturity dates.
NOTE 8 - WARRANTS:
The warrants entitle the holders to purchase, for a $.01 exercise price, an
interest in each respective Capco. The values ascribed to the warrants issued to
the Certified Investors (Note 7) and the Insurer have been recorded as minority
interests. In addition, certain minority interests have already been acquired by
minority shareholders. The following is the aggregate percentage interest of the
minority shareholders in each respective Capco:
Capco % Interest
----- ----------
WA, New York 13%
WP, Florida 43%
WI, Wisconsin 53%
WLA, Louisiana 24%
WNYII, New York 36%
WLPII, Louisiana 10.5%
WNYIII, New York 18.9%
41
NOTE 9 - INCOME FROM TAX CREDITS:
As described in Note 1, each Capco has a contractual arrangement with a
particular state that legally entitles the Capco to earn tax credits (normally
ranging from 10% to 11% per year) from the state upon satisfying certain
criteria. During the year ended December 31, 1999, two Capcos satisfied the
initial investment benchmark and the related recapture percentage requirements
and, accordingly, earned a portion of the tax credits, aggregating approximately
$10,964,000 after applying a time value discount of $652,000 to the total earned
income amount of $11,616,000. During the year ended December 31, 2000, the same
two Capcos satisfied the investment benchmarks and the related recapture
percentage requirements (WA satisfied its final investment benchmark) and,
accordingly, earned a portion of the tax credits, aggregating approximately
$6,114,000 after applying a time value discount of approximately $844,000 (the
full amount of such portion is approximately $6,958,000). In addition, the
Company recognized approximately $419,000 of income from the accretion of the
discount attributable to tax credits earned in 1999. As the tax credits are
utilized by the Certified Investors, the asset balance are offset against
interest payable (Note 7).
NOTE 10 - INCOME TAXES:
Provision for income taxes for the year ended December 31, 2000 is as follows
(there was no current provision):
Deferred provision:
Federal $1,070,475
State and local 310,783
----------
Provision for income taxes $1,381,258
==========
A reconciliation of income taxes computed at the U.S. federal statutory income
tax rate (34%) to the provision for income taxes for the year ended December 31,
2000 is as follows:
(Benefit)
Provision
---------
Benefit for income taxes at U.S.
federal statutory rate of 34% ($1,454,530)
State and local taxes, net of
federal benefit (256,681)
Non-deductible items 161,168
Cumulative true-up (Note 1) 2,931,301
---------
$1,381,258
Deferred tax assets and liabilities consisted of the following at December 31,
2000:
Deferred tax assets:
Net operating losses $2,149,464
Interest payable 635,237
Total deferred tax assets 2,784,701
---------
Deferred tax liabilities:
Credits in lieu of cash (4,165,959)
-----------
Total deferred tax liabilities (4,165,959)
-----------
Net deferred tax liability $ (1,381,258)
=============
42
NOTE 10 - INCOME TAXES (CONTINUED):
At December 31, 2000 the Company has net operating losses aggregating
approximately $5,374,000 which expire in 2020. Realization of the deferred tax
assets is dependent on generating sufficient taxable income in future years.
Management has determined that a valuation allowance is not required at December
31, 2000 as it believes that it is more likely than not that the deferred tax
asset will be realized.
NOTE 11 - COMMITMENTS AND CONTINGENNCIES:
A Capco is required to make Investments in Qualified Businesses under a
qualified investment schedule, as defined, in order to remain certified as a
Capco. If the Company does not make such qualified investments within the
statutorily provided time frame, the Capco is subject to Decertification and
Revocation, as defined in the respective Capco agreements, of its certificate
and, accordingly, the Certified Investor could be subject to forfeiture or
recapture of its previously granted respective state tax credits. This risk has
been insured under Coverage B (Notes 2 and 7). Generally, a Capco must invest at
least 50% of its Certified Capital in qualified businesses within five years
after the certification date. At December 31, 2000 and 1999, the Company had
invested the percent of its certified capital as follows:
Capco December 31, 2000 December 31, 1999
------------------- ----------------- -----------------
WA, New York 65% 38%
WP, Florida 34% 20%
WI, Wisconsin 15% 0%
WLA, Louisiana 23% 0%
WNYII, New York 6% N/A
WLAPII, Louisiana 0% N/A
WNYIII, New York 0% N/A
The Company has entered into employment agreements with certain officers.
Each employment agreement provides for a two year term at an annual base salary
of $300,000, an automatic one-year extension on the agreement's commencement
anniversary date, unless either party provides written notice 90 days before the
expiration date, an annual 10% increase in base salary and certain other terms.
At December 31, 2000 the future minimum commitments are $900,000 for each of the
years ended December 31, 2001 and 2002.
From time to time Newtek and its subsidiaries are parties to various legal
proceedings in the normal course of business. At December 31, 2000, there were
no legal proceedings which management anticipates would have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
NOTE 12 - ASSETS HELD FOR SALE:
The Company owns a building and land in Mississippi which is currently for
sale. The note held by the Bank of Mississippi, and collateralized by the
property, was due on February 10, 2001. The Company and the bank have negotiated
a three-year extension of the due date of the mortgage under the existing terms.
NOTE 13 - RELATED PARTY TRANSACTIONS:
For the years ended December 31, 2000 and December 31, 1999, the Company
rented office space at $3,000 per month on a month-to-month basis from a related
party. In addition, for the years ended December 31, 2000 and December 31, 1999,
the Company incurred financial consulting expenses of approximately $144,000 and
$16,000, respectively, from a related party. At December 31, 1999, the Company's
members had advanced a total of $21,000 to the Company. Such amount was repaid
in 2000.
43
NOTE 14 - EXTRAORDINARY GAIN ON DEFEASANCE OF DEBT:
As a result of the debt defeasance described in Note 7 the Company
recognized a pre-tax net gain of $602,916 and $924,120 for the years ended
December 31, 2000 and December 31, 1999, respectively. These gains have been
classified as an extraordinary item in the consolidated statements of
operations.
NOTE 15: STOCK OPTIONS GRANTED TO DIRECTORS AND EMPLOYEES
As of December 31, 1999, there were no stock options granted.
As of December 31, 2000, there were vested options outstanding to purchase
an aggregate of 29,708 shares of common stock at the exercise prices ranging
from $7.00 to $10.00 per share, expiring in 2010.
The Company has granted a total of 993,000 options to purchase shares of
Common Stock to management, employees and directors. Detail of option activity
is as follows:
Weighted
Number Average
of Exercise
Shares Price
Balance, December 31, 1999 0 $ 0
Expired during year -- --
Granted during year 993,000 $ 7.08
Exercised during year 0 $ 0
-------- ----------
Balance, December 31, 2000 993,000 $ 7.08
======== ==========
Exercisable at December 31, 2000 29,708 $ 7.08
======== ==========
The Company has elected to continue using Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
employee stock options.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting method in
SFAS 123 "Accounting for Stock-based Compensation" had been used in accounting
for stock options.
2000
Pro forma results of operations:
Net loss $ (4,867,008)
Basic and diluted net loss per share $(.25)
The weighted average fair value ($7.26) of each option granted is estimated
on the date of grant using the Black-Scholes model with the following
assumptions: expected volatility of 120.0%, risk-free interest rate of 5.69%,
expected dividends of $0 and expected terms of 3 years.
44
NOTE 16 - 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. There were no common stock
equivalents in 1999. The dilutive effect of common stock equivalents were
anti-dilutive for the year ended December 31, 2000 and, therefore, have been
excluded from the calculation of diluted earnings per share.
The calculations of Net Income (Loss) Per Share were:
Year ended
December 31,
-------------------------------------
2000 1999
---------------- -----------------
Basic
Net income (loss) $(3,425,122) $ 5,425,794
Weighted average shares 19,309,840 18,250,000
Basic and Diluted $(.18) $.30
NOTE 17 - DERIVATIVES AND HEDGING ACTIVITIES
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. In June 2000, Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133" ("SFAS 138") was issued. SFAS 133 and SFAS
138 address the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Company is required to adopt SFAS 133 and SFAS 138 in the first quarter of 2001.
The Company anticipates that the adoption of SFAS 133 and SFAS 138 as of January
1, 2001 will not have a material effect on its financial position or results of
operations.
NOTE 18 - SUBSEQUENT EVENT:
In February 2001, WNYIII borrowed $5,200,000 from a financing company to
finance a portion of the total premiums due to an insurance company. The note
bears interest at 8.92%, and is payable in three installments beginning in 2002.
45
NOTE 19 - QUARTERLY INFORMATION (UNAUDITED):
Three Months Ended
---------------------------------------------------------------------
2000 3/31 6/30 9/30 12/31 Full Year
Total Revenue $ 600,988 $ 667,898 $ 3,970,522 $ 3,470,834 $ 8,710,242
--------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (1,357,043) (1,969,972) (2,727,481) 2,568,817 (3,485,679)
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Gains (812,429) (1,820,445) (1,799,773) 404,559 (4,028,088)
--------------------------------------------------------------------------------------------------------------------------
Net Income (812,429) (1,388,564) (1,799,773) 575,594 (3,425,172)
--------------------------------------------------------------------------------------------------------------------------
Income (Loss) per share after extraordinary gain on defeasance of debt
--------------------------------------------------------------------------------------------------------------------------
($0.04) ($0.08) ($0.10) $0.03 ($0.18)
--------------------------------------------------------------------------------------------------------------------------
($0.04) ($0.08) ($0.10) $0.03 ($0.18)
--------------------------------------------------------------------------------------------------------------------------
Three Months Ended
---------------------------------------------------------------------
1999 3/31 6/30 9/30 12/31 Full Year
Total Revenue $ 437,427 $ 180,587 $ 249,125 $11,014,987 $11,882,126
-----------------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 247,178 (715,553) (725,230) 9,216,088 8,022,483
-----------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Gains 215,628 (341,285) (368,850) 4,996,181 4,501,674
-----------------------------------------------------------------------------------------------------------------------------
Net Income 215,628 (358,104) (368,850) 5,937,120 5,425,794
-----------------------------------------------------------------------------------------------------------------------------
Income (Loss) per share after extraordinary gain on defeasance of debt
-----------------------------------------------------------------------------------------------------------------------------
$0.01 ($0.02) ($0.02) $0.33 $0.30
-----------------------------------------------------------------------------------------------------------------------------
$0.01 ($0.02) ($0.02) $0.33 $0.30
-----------------------------------------------------------------------------------------------------------------------------
46
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by this item as to Newtek Capital, Inc.'s
directors, executive officers and control persons is contained in the Company's
proxy statement to be filed prior to April 1, 2001, under the captions,
"Election of Directors' and "Section 16(a) Beneficial Ownership Reporting
Compliance," and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item as to Newtek Capital, Inc.'s
executive compensation is contained in the Company's proxy statement to be filed
prior to April 1, 2001, under the caption "Executive Compensation" and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's proxy
statement to be filed prior to April 1, 2001, under the caption, "Voting
Securities and Principal Stockholders" and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's proxy
statement to be filed prior to April 1, 2001, under the captions, "Compensation
Committee Interlocks and Insider Participation" and "Executive Compensation,"
and is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Merger between REXX Environmental Corporation and
Newtek Capital, Inc. (formerly known as TWG, Inc.) dated December 9, 1999.
(Incorporated by Reference to Exhibit 2.1 to Registration Statement No.
333-43550).
2.2 Plan of Merger between BJB Holdings and Whitestone Acquisition Corp. dated
January 14, 2000. (Incorporated by reference to Exhibit No. 2.2 to
Registration Statement No. 333-43550).
2.3 Stock Purchase Agreement among Greg S. Watkins, Daren J. Barone and REXX
Environmental Corporation dated June 10, 1999. (Incorporated by reference
to Exhibit No. 2.3 to Registration Statement No. 333-43550).
2.4 Letter Agreements amending the term of the Stock Purchase Agreement dated
November 29, 1999, January 6, 2000, April 27, 2000 and June 28, 2000.
(Incorporated by reference to Exhibit No. 2.4 to Registration Statement No.
333-43550).
3.1 Certificate of Incorporation of Newtek Capital, Inc. (Incorporated by
reference to Exhibit No. 3.1 to Registration Statement No. 333-43550).
47
3.2 Bylaws of Newtek Capital, Inc. ( Incorporated by reference to Exhibit No.
3.2 to Registration Statement No. 3.2).
10.1 Form of Employment Agreement with Jeffrey G. Rubin (Incorporated by
reference to Exhibit No. 10.1 to Registration Statement No. 333-43550).
10.2 Form of Employment Agreement with Barry Sloane ((Incorporated by reference
to Exhibit No. 10.2 to Registration Statement No. 333-43550).
10.3 Form of Employment Agreement with Brian A. Wasserman (Incorporated by
reference to Exhibit No. 10.3 to Registration Statement No. 333-43550).
10.4 Management Services Agreement with JR Group, LLC (Incorporated by reference
to Exhibit No. 10.4 to Registration Statement No. 333-43550).
10.5 Management Services Agreement with The Sloane Organization, LLC
(Incorporated by reference to Exhibit No. 10.5 to Registration Statement
No. 333-43550).
10.6 Management Services Agreement with Sharp Management, LLC (Incorporated by
reference to Exhibit No. 10.6 to Registration Statement No. 333-43550).
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
(b) Reports on Form 8-K:
On October 4, 2000, Newtek reported the completion of its acquisition of
REXX on September 19, 2000 and the related issuance of 20,981,861 shares of its
common stock.
48
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEWTEK CAPITAL, INC.
Date: March 1, 2001 By: /s/ Barry Sloane
----------------------------------
Barry Sloane
(Chairman and Chief Executive Officer)
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ BARRY SLOANE
---------------------------
Barry Sloane Chairman of the Board and Chief March 1, 2001
Executive Officer and Secretary
/S/ Jeffrey G. Rubin
---------------------------
Jeffrey G. Rubin President, Chief Investment March 1, 2001
Officer and Director
/S/ BRIAN A. WASSERMAN
---------------------------
Brian A. Wasserman Treasurer, Chief Financial March 1, 2001
Officer and Director
/S/ JOHN COX
---------------------------
John Cox Director March 1, 2001
/S/ STEVEN A. SHENFELD
---------------------------
Steven A. Shenfeld Director March 1, 2001
/S/ MATTHEW BURNS
---------------------------
Matthew Burns Director March 1, 2001
/S/ GIUSEPPE SOCCODATO
---------------------------
Giuseppe Soccodato Controller and Chief Accounting March 1, 2001
Officer
49