SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16123
-----------------
NEWTEK CAPITAL, INC.
--------------------
(Exact name of registrant as specified in its charter)
New York 11-3504638
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Quentin Roosevelt Boulevard, Garden City, NY 11530
------------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 390-2260
Check whether the registrant has (1) filed all documents and reports
required to be filed by Section 13 or 15(d) of the Exchange Act
during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days.
Yes No
[X] [ ]
As of May 8, 2002, 24,698,542 shares of Common Stock were issued
and outstanding.
CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of March 31,
2002 and December 31, 2001 2
Condensed Consolidated Statements of Operations (Unaudited) for the
Three-Month Periods Ended March 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Three-Month Periods Ended March 31, 2002 and 2001 4
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 20
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use Proceeds 22
Item 5. Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits
1
ITEM 1. FINANCIAL STATEMENTS
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31 December 31,
2002 2001
------------ ------------
ASSETS
------
Cash and cash equivalents $ 35,263,256 $ 31,171,966
Credits in lieu of cash 27,197,603 21,810,776
Investments in qualified businesses 8,027,218 14,450,228
Structured insurance product 2,772,246 2,731,894
Prepaid insurance 10,320,795 10,820,841
Prepaid expenses and other assets 1,253,414 953,142
Furniture, fixtures and equipment, net 295,098 128,290
Goodwill 2,333,159 963,736
Asset held for sale -- 331,929
------------ ------------
Total assets $ 87,462,789 $ 83,362,802
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 2,291,338 $ 1,541,359
Notes payable - certified investors 3,854,837 3,858,389
Notes payable - insurance 8,940,821 9,404,032
Note payable - bank 575,000 575,000
Mortgage payable -- 306,929
Interest payable 52,095,632 49,640,846
Deferred tax liability 1,627,974 1,563,018
------------ ------------
Total liabilities 69,385,602 66,889,573
------------ ------------
Minority interest 2,093,731 5,081,692
------------ ------------
Stockholders' equity:
Common Stock (par value $0.02 per share:
authorized 39,000,000 shares, issued and
outstanding 24,198,542 as of March 31, 2002, not including
500,000 shares held in escrow, and
22,212,517 as of December 31, 2001) 483,971 444,250
Additional paid-in Capital 17,889,118 13,442,899
Accumulated deficit (2,389,633) (2,495,612)
------------ ------------
Total stockholders' equity 15,983,456 11,391,537
------------ ------------
Total liabilities and stockholders' equity $ 87,462,789 $ 83,362,802
============ ============
See accompanying notes to these condensed consolidated financial statements.
2
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
March 31, March 31,
2002 2001
------------ ------------
Revenue:
Income from tax credits $ 5,386,827 $ 6,030,103
Consulting fee income 46,700 8,000
Interest and dividend income 240,710 638,210
Other income 397,464 45,238
------------ ------------
Total revenue 6,071,701 6,721,551
------------ ------------
Expenses:
Interest 2,653,587 3,335,532
Payroll and consulting fees 1,756,412 815,634
Professional fees 739,968 470,814
Insurance 556,878 398,107
Other 625,493 166,148
------------ ------------
Total expenses 6,332,338 5,186,235
------------ ------------
(Loss) income before other than temporary decline
in value of investments, gain on sale of property,
equity in net losses of affiliates, minority interest,
extraordinary gain and provision for income taxes (260,637) 1,535,316
Other than temporary decline in value of investments
(net of $7,176 recovery in 2002) (617,913) --
Gain on sale of property 16,841 --
Equity in net losses of affiliates (601,244) (298,798)
------------ ------------
(Loss) income before provision for income taxes,
extraordinary gain and minority interest (1,462,953) 1,236,518
Minority interest in loss 1,205,526 18,561
------------ ------------
(Loss) income before provision for income taxes
and extraordinary gain (257,427) 1,255,079
(Benefit from) provision for income taxes 97,822 (494,608)
------------ ------------
(Loss) income before extraordinary gain on conversion
of minority interest into Newtek stock (159,605) 760,471
Extraordinary gain on acquisition of minority interest,
net of taxes of $162,778 for 2002 265,584 --
------------ ------------
Net income $ 105,979 $ 760,471
============ ============
Weighted average common shares outstanding:
Basic 22,825,191 21,382,586
Diluted 22,884,871 21,382,586
Income per share:
Basic $.00 $.04
Diluted $.00 $.04
(Loss) income per share before extraordinary items:
Basic ($.01) $.04
Diluted ($.01) $.04
See accompanying notes to these condensed consolidated financial statements.
3
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
March 31, March 31,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 105,979 $ 760,471
Adjustments to reconcile net income
to net cash used in operating activities:
Other than temporary decline in value of investments 617,913 --
Gain on sale of property (16,841) --
Equity in net losses of affiliates 601,244 298,798
Extraordinary gain (265,584) --
Income from tax credits (5,386,827) (6,030,103)
Deferred Income Taxes (97,822) 375,614
Depreciation and other amortization 23,945 2,013
Accretion of interest income (43,907) (25,734)
Accretion of interest expense 2,454,786 3,104,657
Issuance of stock options to non-employees 290,000 --
Issuance of stock for services performed 80,789 58,800
Minority interest included in loss (1,205,526) (18,561)
Changes in assets and liabilities:
Prepaid insurance 500,046 363,652
Prepaid expenses and other assets (47,006) 21,584
Accounts payable and accrued expenses 460,207 (1,291,266)
----------- -----------
Net cash used in operating activities (1,928,604) (2,380,075)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of asset held for sale 348,770 --
Investments in qualified businesses (4,558,427) (9,631,833)
Return of principal - qualified investments 5,696,133 6,245,320
Consolidation of majority owned investments 3,962,152 5,703,333
Purchase of furniture, fixtures and equipment (57,367) --
----------- -----------
Net cash provided by investing activities 5,391,261 2,316,820
----------- -----------
See accompanying notes to these condensed consolidated financial statements.
4
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
March 31, March 31,
2002 2001
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of note payable insurance $ -- $ 5,200,000
Payments of note payable insurance (463,211) (1,333,334)
Payments on mortgage payable (306,929) (12,522)
Net proceeds from issuance of common stock 1,299,999 726,391
Distributions to CAPCO members (7,868) (402,060)
Cash received from Exponential acquisition 106,642 --
------------ ------------
Net cash provided by financing activities 628,633 4,178,475
------------ ------------
Net increase in cash
and cash equivalents 4,091,290 4,115,220
Cash and cash equivalents -
beginning of period 31,171,966 34,697,081
------------ ------------
Cash and cash equivalents - end of period $ 35,263,256 $ 38,812,301
============ ============
Supplemental disclosure of non-cash financing activities:
--------------------------------------------------------
Reduction of credits in lieu of cash and interest payable
balances due to delivery of tax credits to certified investors: $ -- $ 3,908,599
============ ============
Consolidation of investments previously accounted
for under the equity method $ 537,083 $ --
============ ============
Acquisition of Exponential (net liabilities assumed) $ 10,978 $ --
============ ============
Issuance of common stock in connection with
acquisition of Exponential $ 920,000 $ --
============ ============
Acquisition of four Capcos minority interests
Newtek Capital common stock issued $ 954,358 $ --
Less, minority interests acquired 405,411 --
------------ ------------
Goodwill recognized $ 548,947 --
============ ============
Acquisition of three Capcos minority interests
Minority interests acquired $ 1,369,156 $ --
Less, Newtek Capital common stock issued 940,794 --
------------ ------------
Extraordinary gain recognized $ 428,362 --
============ ============
See accompanying notes to these condensed consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation and description of business
-------------------------------------------------
The unaudited condensed consolidated financial statements of Newtek
Capital, Inc. and Subsidiaries (the "Company") included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. The unaudited condensed consolidated financial statements
of the Company reflect, in the opinion of management, all adjustments necessary
to present fairly the financial position of the Company at March 31, 2002 and
the results of its operations and cash flows for the periods ended March 31,
2002 and March 31, 2001. All adjustments are of a normal recurring nature. These
financial statements should be read in conjunction with the annual financial
statements and notes thereto for the year ended December 31, 2001. The results
of operations for the three months ended March 31, 2002 are not necessarily
indicative of the results of operations to be expected for the year ending
December 31, 2002.
The following is a summary of each of the Company's certified capital
companies ("Capco"), state of certification and date of certification:
Capco State of Certification Date of Certification
----- ---------------------- ---------------------
Wilshire Advisers, LLC New York May 1998
Wilshire Partners, LLC Florida December 1998
Wilshire Investors, LLC Wisconsin October 1999
Wilshire Louisiana Advisers, LLC Louisiana October 1999
Wilshire New York Advisers II, LLC New York April 2000
Wilshire New York Partners III, LLC New York December 2000
Wilshire Colorado Partners, LLC Colorado October 2001
Exponential of New York, LLC New York April 1998
6
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In general, the capcos issue debt and equity instruments, generally
warrants ("Certified Capital"), to insurance company investors ("Certified
Investors"). The capcos then make targeted investments ("Investments in
Qualified Businesses", as defined under the respective state statutes, or,
"Qualified Businesses"), with the Certified Capital raised. Such investments may
be accounted for as either consolidated subsidiaries, under the equity method or
cost method of accounting, 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%
(Louisiana - 110%) of their certified investment. The tax credits can be
utilized over a ten-year period at a rate of 10% (Louisiana - 11%) per year and
in some instances are transferable and can be carried forward.
NOTE 2 - PRIVATE PLACEMENT OF COMMON STOCK:
In the first quarter of 2002, the Company sold 433,333 shares of common
stock in private transactions, with gross and net cash proceeds totaling
approximately $1,300,000. In addition, 14,546 shares of common stock were issued
in consideration of the provision of strategic and business consulting services
from Park Strategies, LLC valued at $48,000. Finally, an additional 3,600 shares
of common stock were issued in consideration of investor relations and
consulting services provided by Aurelius Consulting Group, Inc. valued at
$12,000.
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
The following table is a summary of Qualified Business investments as
of March 31, 2002, shown separately between their debt $7,365,739 and equity
$661,479 components (for a total non-consolidated investment in Qualified
Businesses of $8,027,218), and all terms of each are summarized. There are no
expiration dates on any of the financial instruments, unless disclosed.
In accordance with the provisions of "Financial Accounting Standards
Board No. 115", the Company's debt investments are considered held to maturity
and recorded at cost. The Company periodically assesses these investments for
impairment.
The investments are grouped by date of investment: those investments
which as of March 31, 2002 were made within the previous 18 months and those
investments made between 18 - 36 months prior to March 31, 2002.
7
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
DEBT INVESTMENTS MADE
IN THE LAST 18 MONTHS
------------------------------------------------------------------------------------------------------------------------------------
Cumulative
other than
temporary
decline in Cumulative
DEBT the value return of
of its Principal
Investee Original investments since Principal
Date of Maturity Stated Principal since original amount
Type Investment Date Interest Rate Amount original investment outstanding at
investment date March 31, 2002
date
====================================================================================================================================
Direct Creations, LLC Debt 11/01 12/02 10.00% $ 2,108,333 $ (750,000) $ 1,358,333
------------------------------------------------------------------------------------------------------------------------------------
1 800GiftCertificate(5) Debt 7/99, 7/01 7/03 8.75% $ 1,250,000 $ (226,821) $ 1,023,179
------------------------------------------------------------------------------------------------------------------------------------
Starphire Technologies, Debt 6/01 6/02 5.75% $ 1,000,000 $ (1,000,000) $ 0
LLC
------------------------------------------------------------------------------------------------------------------------------------
Scandinavia(4) Debt 12/01, Various Prime + 1.00% $ 1,108,130 $ (751,297) $ 356,833
2/02, 3/02
------------------------------------------------------------------------------------------------------------------------------------
12/01,
Pontchartain(4) Debt 1/02, 2/02, Various Prime +1.00% $ 955,800 $ (10,999) $ 944,801
3/02
------------------------------------------------------------------------------------------------------------------------------------
Sunshine Gardens Debt 2/02, 3/02 Various Prime +1.00% $ 40,527 $ 40,527
Special(4)
------------------------------------------------------------------------------------------------------------------------------------
11/99,
4G's Truck Renting Debt 12/00, 1/02 6/02 8.70% $ 1,300,000 $ (900,000) $ 400,000
------------------------------------------------------------------------------------------------------------------------------------
OS Johnson (4) Debt 9/01 Various Prime + 1.00% $ 750,000 $ (500,611) $ 249,389
------------------------------------------------------------------------------------------------------------------------------------
Transworld Business Debt 06/01, 3/02 6/02, 6.00% $ 240,000 $ 240,000
Brokers, LLC 6/04
------------------------------------------------------------------------------------------------------------------------------------
Drilling Productivity (4) Debt 12/01 Various Prime + 1.00% $ 1,199,700 $ (1,009,230) $ 190,470
------------------------------------------------------------------------------------------------------------------------------------
BuySeasons, Inc. Debt 6/01 6/06 11.00% $ 200,000 $ (30,000) $ 170,000
------------------------------------------------------------------------------------------------------------------------------------
St. Gabriel Hardware(4) Debt 11/00, 8/01 Various Prime +1.00% $ 792,000 $ (664,452) $ 127,548
------------------------------------------------------------------------------------------------------------------------------------
E&E Machine Shop(4) Debt 9/01 Various Prime + 1.00% $ 556,393 $ (475,263) $ 81,130
------------------------------------------------------------------------------------------------------------------------------------
Tsunami Restaurants(4) Debt 3/01 Various Prime +1.00% $ 328,500 $ (275,150) $ 53,350
------------------------------------------------------------------------------------------------------------------------------------
BBQ West(4) Debt 10/00, Various Prime +1.00% $ 49,500 $ (44,739) $ 4,761
11/00
------------------------------------------------------------------------------------------------------------------------------------
Amerimed (4) Debt 8/01, 9/01 Various Prime + 1.00% $ 179,999 $ (150,307) $ 29,692
------------------------------------------------------------------------------------------------------------------------------------
Hypercosm, Inc. Debt 4/01 4/02 8% $ 250,000 $ (250,000) $ 0
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 0 - 18 months $12,308,882 $ (250,000) $ (6,788,869) $ 5,270,013
Debt ----------- ----------- ------------ -----------
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
8
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
DEBT INVESTMENTS MADE
IN THE LAST 18-36 MONTHS
------------------------------------------------------------------------------------------------------------------------------------
Cumulative
other than
temporary
decline in Cumulative
DEBT the value return of
of its Principal
Investee Original investments since Principal
Date of Maturity Stated Principal since original amount
Type Investment Date Interest Rate Amount original investment outstanding at
investment date March 31, 2002
date
====================================================================================================================================
Gerace Auto Parts(4) Debt 4/00 Various Prime +1.00% $ 810,000 $ (689,739) $ 120,261
------------------------------------------------------------------------------------------------------------------------------------
Steve Kent Trucking(4) Debt 3/00, 5/00 Various Prime +1.00% $ 747,000 $ (635,907) $ 111,093
------------------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems, Debt 8/00 5/04 0% $ 4,900,000 $ (414,988) $ (3,563,950) $ 921,062
Inc.
------------------------------------------------------------------------------------------------------------------------------------
Multi-Media Distribution Debt 6/00 6/02 10.00% $ 1,000,000 $ (280,000) $ 720,000
Corp.
------------------------------------------------------------------------------------------------------------------------------------
Embosser's Sales and Debt 8/00 Various Prime +1.00% $ 495,000 $ (76,718) $ (418,282) $ 0
Service(4)
------------------------------------------------------------------------------------------------------------------------------------
Group Management Debt 11/99 11/01 5.25% $ 3,350,000 $ (447,443) $ (2,902,557) $ 0
Technologies, LLC (5)
------------------------------------------------------------------------------------------------------------------------------------
Gino's Seafood(4) Debt 3/00, 4/00 Various Prime +1.00% $ 517,942 $ (431,250) $ 86,692
------------------------------------------------------------------------------------------------------------------------------------
Data-Tel of Louisiana(4) Debt 3/00 Various Prime +1.00% $ 513,000 $ (452,145) $ 60,855
------------------------------------------------------------------------------------------------------------------------------------
Raising Cain(4) Debt 3/00, 4/00, Various Prime +1.00% $ 315,000 $ (270,389) $ 44,611
5/00
------------------------------------------------------------------------------------------------------------------------------------
Tari's School of Dance(4) Debt 5/00 Various Prime +1.00% $ 189,000 $ (157,848) $ 31,152
------------------------------------------------------------------------------------------------------------------------------------
CB Real Net, LLC Debt 2/00 Various 8% $ 2,500,000 $ (2,500,000) $ 0
------------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Boxing, Debt 11/98 1/00 9% $ 400,000 $ (400,000) $ 0
Inc.
------------------------------------------------------------------------------------------------------------------------------------
Down To Earth, Inc. Debt 12/99 Various 8% $ 580,000 $ (495,000) $ (85,000) $ 0
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 18-36 months - $16,316,942 $(1,434,149) $(12,787,067) $ 2,095,726
Debt ----------- ------------ ------------- -----------
------------------------------------------------------------------------------------------------------------------------------------
Total Debt Investments at $28,625,824 $(1,684,149) $(19,575,936) $ 7,365,739
March 31, 2002 =========== ============ ============= ===========
------------------------------------------------------------------------------------------------------------------------------------
9
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
EQUITY INVESTMENTS MADE IN THE LAST 18 MONTHS
------------------------------------------------------------------------------------------------------------------------------------
EQUITY Cumulative Equity in Income
Common other than (Losses) and/or
Investee Date of Type of Stock Percentage Original temporary Return of
Investment Investment Equivalent of Investment decline in the Capital since Equity method
s Ownership Amount value of its original investment
(1) investments investment date balance at
since original March 31, 2002
investment date
------------------------------------------------------------------------------------------------------------------------------------
Niche Directories, 12/00 Preferred N/A 37.50% $ 1,344,000 $(1,007,521) $ 336,479
LLC Membership
Interest
w/ voting
rights
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Transworld Membership
Business Brokers, 06/01, Interest N/A 33% $ 350,000 $ (350,000) $ 0
LLC 3/02 w/ voting
rights
------------------------------------------------------------------------------------------------------------------------------------
BuySeasons, Inc. 6/01 Common 18,182 3% $ 100,000 $ 100,000
Stock
------------------------------------------------------------------------------------------------------------------------------------
Warrant
for
Direct Creations 12/00 Membership N/A 28% $ 0 $ 0
Interest
------------------------------------------------------------------------------------------------------------------------------------
Warrants
Merchant Data for
Systems, Inc. 5/01 Membership N/A 20.00% $ 0 $ 0
Interest(3)
------------------------------------------------------------------------------------------------------------------------------------
Subtotal
0-18 months - $ 1,794,000 $(1,357,521) $ 436,479
Equity ----------- ----------- -----------
------------------------------------------------------------------------------------------------------------------------------------
10
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
EQUITY INVESTMENTS MADE IN THE LAST 18-36 MONTHS
------------------------------------------------------------------------------------------------------------------------------------
EQUITY Cumulative Equity in Income
Common other than (Losses) and/or
Investee Date of Type of Stock Percentage Original temporary Return of
Investment Investment Equivalent of Investment decline in the Capital since Equity method
s Ownership Amount value of its original investment
(1) investments investment date balance at
since original March 31, 2002
investment date
------------------------------------------------------------------------------------------------------------------------------------
1-800GiftCertificate 7/99 Class B 113,140 N/A $ 22,396 $ 22,396
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
Class A
1-800GiftCertificate 7/99 Preferred 3,159 N/A $ 2,604 $ 2,604
Stock
------------------------------------------------------------------------------------------------------------------------------------
Options
Cedric Kushner 11/98 for Common 3 N/A $ 0 $ 0
Boxing, Inc. (3) Stock(2)
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Membership
Starphire 8/00 Interest N/A 50.00% $ 1,400,000 $ (536,371) $ (863,629) $ 0
Technologies, LLC w/ voting
rights
------------------------------------------------------------------------------------------------------------------------------------
Multi-Media 6/00 Common 66,000 3% $ 200,000 $ 200,000
Distribution Corp. Stock
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 18-36 $ 1,625,000 $ (536,371) $ (863,629) $ 225,000
months - Equity ----------- -----------
------------------------------------------------------------------------------------------------------------------------------------
Total Equity Investments as of March 31, 2002 $ 3,419,000 $ (536,371) $(2,221,150) $ 661,479
=========== ===========
Total Debt and Equity Investments as of March 31, 2002 $32,044,824 $ 8,027,218
============ ===========
(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 Small Business Administration (SBA) loans made in Louisiana.
Wilshire Louisiana's investment total for these types of loans was $9,547,492 as
of March 31, 2002. Of this amount, approximately 75% 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 approximately $2,538,047
outstanding and received approximately $4,094,000 (55%) of credits toward the
investment hurdle, based upon its agreement with the State of Louisiana.
(5) This loan has been restructured, and the Company continues to receive
monthly principal payments.
11
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
The Company consolidates nine of its investments. All investments were
made within the past 18 months as of March 31, 2002, except for CB Real Net,
which was made between 18-36 months ago as of March 31, 2002. The following
tables are summaries of such investments:
------------------------------------------------------------------------------------------------------------------------------------
Cumulative
other than
temporary Cumulative Outstanding
DEBT decline in the return of Principal
Type Date of Maturity Original Stated value of its Principal Amount at
Investee Investment Date Principal Interest investments since March 31,
Amount Rate since investment 2002
investment date date
====================================================================================================================================
AIDA, LLC Debt 3/01 3/02 $ 3,500,000 7.00% $(3,499,981) $ 19
------------------------------------------------------------------------------------------------------------------------------------
Universal Processing Debt 3/01 3/02 $ 3,400,000 6.00% $(2,850,000) $ 550,000
Services, LLC
------------------------------------------------------------------------------------------------------------------------------------
Universal Processing Debt 6/01 6/06 $ 2,100,000 5.00% $ (280,000) $1,820,000
Services - Wisconsin, LLC
------------------------------------------------------------------------------------------------------------------------------------
Transworld Business Debt 3/02 3/05 $ 325,000 2.5% $ 325,000
Brokers, LLC
------------------------------------------------------------------------------------------------------------------------------------
Group Management Debt 11/99 11/01 $ 150,000 5.25% $ (57,061) $ (43,462) $ 49,477
Technologies, Inc.
------------------------------------------------------------------------------------------------------------------------------------
PPM Link, LLC Debt 3/01 9/02 $ 1,850,000 6.00% $1,850,000
------------------------------------------------------------------------------------------------------------------------------------
Harvest Strategies, LLC Debt 8/01 10/02 $ 975,000 5.00% $ (25,000) $ 950,000
------------------------------------------------------------------------------------------------------------------------------------
Total Consolidated Debt $12,300,000 $ (57,061) $(6,698,443) $5,544,496
Investments =========== ========== ============ ==========
------------------------------------------------------------------------------------------------------------------------------------
12
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
------------------------------------------------------------------------------------------------------
EQUITY
Original
Date of Type of Common Stock Percentage of Investment
Investee Investment Investment Equivalents Ownership Amount
------------------------------------------------------------------------------------------------------
Universal 9/01 Preferred N/A 95% $ 1,350,000
Processing Membership
Services - Interest w/
Louisiana, LLC voting rights
------------------------------------------------------------------------------------------------------
Preferred
Harvest Membership
Strategies, LLC 8/01 Interest w/ N/A 70% $ 999,950
voting rights
------------------------------------------------------------------------------------------------------
Preferred
Membership
PPM Link, LLC 3/01 Interest w/ N/A 67% $ 253,333
voting rights
------------------------------------------------------------------------------------------------------
Universal Preferred
Processing Membership
Services, New 3/01 Interest w/ N/A 66% $ 200,000
York, LLC voting rights
------------------------------------------------------------------------------------------------------
Universal Preferred
Processing Membership
Services - 3/01 Interest w/ N/A 82% $ 0
Wisconsin, LLC voting rights
------------------------------------------------------------------------------------------------------
CB Real Net, LLC 2/00 Membership N/A 100.00% $ 0
Interest(3)
------------------------------------------------------------------------------------------------------
Group Management 2/02 Options for N/A $ 635,000
Technologies, Inc. Common Stock
------------------------------------------------------------------------------------------------------
Transworld Preferred
Business Brokers, 3/02 Membership N/A 65% $ 3,175,000
LLC Interest
------------------------------------------------------------------------------------------------------
Transworld
Business Brokers, 3/02 Common Stock N/A 65% $ 667
LLC
------------------------------------------------------------------------------------------------------
Preferred
Membership
AIDA, LLC 10/00 Interest w/ N/A 50% $ 1,000,000
voting rights
------------------------------------------------------------------------------------------------------
Total Consolidated Equity Investments $ 7,613,950
===========
Total Consolidated Debt and Equity Investments $19,913,950
March 31, 2002 ===========
13
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES: (CONTINUED)
The Company has not guaranteed any obligation of these investees, and
the Company is not otherwise committed to provide further financial support for
the investees. However, from time-to-time the Company may decide to provide such
additional financial support which, as of March 31, 2002, was not significant.
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 fair value and record a
corresponding charge in the statement of operations. During the period ended
March 31, 2002, the Company determined that there was $536,371 of other than
temporary decline in the value of its investments for Starphire Technologies,
LLC, and a $76,718 other than temporary decline in the value of its investments
for Embosser's Sales and Service. In addition, the Company determined an
impairment existed for a non-capco investment (included in prepaid expenses and
other assets on the balance sheet), and recorded a charge of $12,000. In 2002,
the Company also recovered $7,176 of cash on two of its investments written down
in 2000. These items aggregate $617,913 which is shown on the statement of
operations as other than temporary decline in value of investments.
NOTE 4 - EARNINGS PER SHARE:
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents is included in the calculation of diluted earnings per
share only when the effect of their inclusion would be dilutive. The effect of
common stock equivalents were anti-dilutive for the three months ended March 31,
2001 and, therefore, have been excluded from the calculation of diluted earnings
per share for that period.
The calculations of Net Income (Loss) Per Share were:
Three months ended
March 31,
2002 2001
----------- -----------
Basic
Net income $ 105,979 $ 760,471
Weighted average shares - basic 22,825,191 21,382,586
Dilutive effect of stock options 59,680 --
Weighted average shares - diluted 22,884,871 21,382,586
Basic and diluted $ .00 $ .04
14
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS:
Principles of Accounting for Ownership Interests in Qualified
-------------------------------------------------------------
Investments
-----------
The various interests that the Company acquires in its qualified
investments are accounted for under three methods: consolidation, equity method
and cost method. The applicable accounting method is generally determined based
on the Company's voting interest in a Partner Company.
Investments in which the Company directly or indirectly owns more than
50% of the outstanding voting securities or those the Company has effective
control over are generally accounted for under the consolidation method of
accounting. Under this method, an investment's financial position and results of
operations are reflected within the Company's Consolidated Statements of
Operations. All significant inter-company accounts and transactions have been
eliminated. The results of operations and cash flows of a consolidated Partner
Company are included through the latest interim period in which the Company
owned a greater than 50% direct or indirect voting interest for the entire
interim period or otherwise exercised control over the Partner Company. Upon
dilution of control below 50%, the accounting method is adjusted to the equity
or cost method of accounting, as appropriate, for subsequent periods.
Equity Method. Investees that are not consolidated, but over which the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence
with respect to an investee depends on an evaluation of several factors
including, among others, representation on the Company's Board of Directors and
ownership level, which is generally a 20% to 50% interest in the voting
securities of the Company, including voting rights associated with the Company's
holdings in common, preferred and other convertible instruments in the investee.
Under the equity method of accounting, an investee's accounts are not reflected
within the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of the investee is reflected in the
caption "Equity income (loss)" in the Consolidated Statements of Operations.
Cost Method. Investees not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method impairment charges are recognized, as necessary, in the
Consolidated Statement of Operations. If circumstances suggest that the value of
the investee has subsequently recovered, such recovery is not recorded until
realized.
On a monthly basis, Newtek Capital Investment Committee meets to
evaluate the Company's investments. The Company considers several factors in
determining whether an impairment exists on the investment, such as the
investee's net book value, cash flow, revenue growth and net income. In
addition, the Investment Committee looks at larger variables, such as the
economy and the investee company's industry, to determine if an other than
temporary decline in value exists in the Company's investments.
The following table is an unauditied summary of the investments which
the Company accounts for under either the equity method or by consolidation.
These financial statements also reflect the degree to which the Company's
partner companies interact with each other to provide and market needed goods
or, particularly, services to each other. The income from services provided to
other partner companies is shown as "Intercompany Eliminated Revenue" and the
cost of services acquired from other partner companies is shown as "Intercompany
Eliminated Expenses."
15
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS:
CONSOLIDATED ENTITIES
------------------------------------------------------------------------------------------------------------------------------------
Harvest Strategies Universal Processing Universal Processing Universal Processing PPM Link
Services - NY Services - LA Services - WI
====================================================================================================================================
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Cash $1,560,301 $1,605,753 $ 80,468 $2,969,774 $1,072,718 $1,259,089 $1,506,328 $1,798,864 $1,493,294 $1,700,109
------------------------------------------------------------------------------------------------------------------------------------
Other Assets $ 136,359 $ 117,588 $ 485,477 $ 486,632 $ 47,520 19,251 $ 100,212 $ 46,722 $ 213,200 $ 130,558
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,696,660 $1,723,341 $ 565,945 $3,456,406 $1,120,238 $1,278,340 $1,606,540 $1,845,586 $1,706,494 $1,830,667
------------------------------------------------------------------------------------------------------------------------------------
Current $ 65,832 $ 53,026 $ 75,767 $ 51,630 $ 26,304 $ 7,251 $ 61,465 $ 19,174 $ 27,763 $ 46,553
Liabilities
------------------------------------------------------------------------------------------------------------------------------------
Total $1,015,832 $ 970,028 $ 625,767 $3,451,630 $ 26,304 $ 7,251 $1,846,464 $1,909,074 $1,877,762 $1,896,553
Liabilities
------------------------------------------------------------------------------------------------------------------------------------
Total Equity $ 680,828 $ 753,313 $ (59,822) $ 4,776 $1,093,934 $1,271,089 $ (239,924) $ (63,588) $ (171,268) $ (65,886)
------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED ENTITIES
--------------------------------------------------------------------------------------
Aida, LLC Group Management Transworld Business
Technologies Brokers - NY
======================================================================================
2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------
Cash $ 143,407 (a) $ 133,079 (a) $3,500,667 (a)
--------------------------------------------------------------------------------------
Other Assets $ 153,537 (a) $ 133,230 (a) -- (a)
--------------------------------------------------------------------------------------
Total Assets $ 296,944 (a) $ 266,309 (a) $3,500,667 (a)
--------------------------------------------------------------------------------------
Current $ 34,125 (a) $ 30,530 (a) -- (a)
Liabilities
--------------------------------------------------------------------------------------
Total $ 47,367 (a) $ 180,530 (a) $ 325,000 (a)
Liabilities
--------------------------------------------------------------------------------------
Total Equity $ 249,577 (a) $ 85,779 (a) $3,175,667 (a)
--------------------------------------------------------------------------------------
16
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED):
------------------------------------------------------------------------------------------------------------------------------------
Harvest Strategies Universal Processing Universal Processing Universal Processing PPM Link
Services - NY Services - LA Services - WI
====================================================================================================================================
2002 2001 2002 2001 2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------------------
Revenue $ 144,691 (a) $ 104,221 (a) $ 13,137 (a) $ 88,133 (a) $ 35,200 (a)
------------------------------------------------------------------------------------------------------------------------------------
Intercompany
Eliminated $ (104,811) (a) $ (5,000) (a) -- (a) -- (a) -- (a)
Revenue
------------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 39,880 (a) $ 99,221 (a) $ 13,137 (a) $ 88,133 (a) $ 35,200 (a)
Revenue
------------------------------------------------------------------------------------------------------------------------------------
Expenses $ 210,465 (a) $ 162,566 (a) $ 158,989 (a) $ 235,019 (a) $ 120,286 (a)
------------------------------------------------------------------------------------------------------------------------------------
Intercompany
Eliminated $ (7,344) (a) $ (24,812) (a) $ (20,193) (a) $ (24,231) (a) $ (5,216) (a)
Expenses
------------------------------------------------------------------------------------------------------------------------------------
Consolidated $ 203,121 (a) $ 137,754 (a) $ 138,796 (a) $ 210,788 (a) $ 115,070 (a)
Expenses
------------------------------------------------------------------------------------------------------------------------------------
Net Income $ (163,241) (a) $ (38,533) (a) $ (125,659) (a) $ (122,655) (a) $ (79,870) (a)
(Loss)
------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Aida, LLC Group Management Transworld Business
Technologies Brokers - NY
======================================================================================
2002 2001 2002 2001 2002 2001
--------------------------------------------------------------------------------------
Revenue $ 62,725 (a) $ 110,288 (a) (a) (a)
--------------------------------------------------------------------------------------
Intercompany
Eliminated $ 5,034 (a) $ (50,390) (a) (a) (a)
Revenue
--------------------------------------------------------------------------------------
Consolidated $ 67,759 (a) $ 59,898 (a) (a) (a)
Revenue
--------------------------------------------------------------------------------------
Expenses $ 158,645 (a) $ 145,025 (a) (a) (a)
--------------------------------------------------------------------------------------
Intercompany
Eliminated $ (22,621) (a) $ (3,247) (a) (a) (a)
Expenses
--------------------------------------------------------------------------------------
Consolidated $ 136,024 (a) $ 141,778 (a) (a) (a)
Expenses
--------------------------------------------------------------------------------------
Net Income $ (68,265) (a) $ (81,880) (a) (a) (a)
(Loss)
--------------------------------------------------------------------------------------
17
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED):
ENTITIES UNDER THE EQUITY METHOD
------------------------------------------------------------------------------------------
Transworld
Business
Starphire Nichedirectories Brokers - FL
==========================================================================================
2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------
Cash $ 5,012 $1,352,823 $ 510,532 $ 556,741 $ 187,131 $ 245,515
------------------------------------------------------------------------------------------
Other Assets $ 457,630 $ 460,508 $ 262,813 $ 273,328 $ 331,572 $ 334,854
------------------------------------------------------------------------------------------
Total Assets $ 462,642 $1,813,331 $ 773,345 $ 830,069 $ 518,703 $ 580,369
------------------------------------------------------------------------------------------
Current $ 51,939 $ 85,652 $ 436,866 $ 354,861 $ 33,307 $ 22,457
Liabilities
------------------------------------------------------------------------------------------
Total $ 51,939 $1,085,652 $ 436,866 $ 354,861 $ 273,306 $ 262,457
Liabilities
------------------------------------------------------------------------------------------
Total Equity $ 410,703 $ 727,679 $ 336,479 $ 475,208 $ 245,397 $ 317,912
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
Transworld
Starphire Nichedirectories Business
Brokers - FL
==========================================================================================
2002 2001 2002 2001 2002 2001
------------------------------------------------------------------------------------------
Gross Revenues $ 30,636 $ 166,271 $ 197,544 $ 161,343 $ 320,768 (a)
------------------------------------------------------------------------------------------
Intercompany
Eliminated $ (109) $ 0 $ 0 $ 0 $ 0 (a)
Revenue
------------------------------------------------------------------------------------------
Consolidated $ 30,527 $ 166,271 $ 197,544 $ 161,343 $ 320,768 (a)
Revenue
------------------------------------------------------------------------------------------
Expenses $ 140,651 $ 287,000 $ 283,177 $ 281,369 $ 382,099 (a)
------------------------------------------------------------------------------------------
Intercompany
Eliminated $ (22,464) $ (4,285) $ (26,316) $ (590) $ (4,985) (a)
Expenses
------------------------------------------------------------------------------------------
Consolidated $ 118,187 $ 282,715 $ 256,861 $ 320,095 $ 377,114 (a)
Expenses
------------------------------------------------------------------------------------------
Net (Loss) $ (87,660) $(116,444) $ (59,317) $(158,752) $ (56,346) (a)
------------------------------------------------------------------------------------------
(a) No activity under Newtek's ownership during this time period
18
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - ACQUISITION OF EXPONENTIAL BUSINESS DEVELOPMENT COMPANY, INC.:
In January 2002, the Company acquired 100% of the outstanding common
stock of Exponential Business Development Company, Inc. (Exponential), of
Syracuse, NY. Exponential's primary business was to make non-controlling
investments in high growth potential companies. The purchase price consisted of
500,000 shares of Company common stock issued to the sellers. Under the terms of
the acquisition, an additional 500,000 shares will be issued over a seven year
period if acquired assets result in gains of $2 million in excess of an initial
$1 million recovery by the Company. The fair value of the 500,000 common shares
issued, $920,000, was determined based on the quoted market price of the
Company's common stock on the closing date, less a discount due to certain
restrictions on the stock. Since Company management has determined that the
issuance of the additional 500,000 shares is currently unlikely due to
management's estimation that the payout provision will not be met, the Company
has not included the additional shares in the determination of the purchase
price. On a quarterly basis, management will assess the payout provision to
determine if it is likely it will be met in the future, and if so, the Company
will record the additional 500,000 shares as additional purchase price when
issued. Exponential directors and officers will remain with that entity and will
receive a total of 365,000 options pursuant to the Company's option plan to
acquire Company common stock in exchange for future services.
The results of Exponential's operations have been included in the
consolidated financial statements since the acquisition date.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Current assets (including cash of $106,642) $ 138,013
Other Assets 10,001
---------
Total assets acquired 148,014
=========
Current liabilities 52,350
---------
Total liabilities assumed 52,350
=========
Net assets acquired $ 95,664
=========
The difference between the fair value of the net assets acquired,
$95,664, and the value of the Company common stock, $920,000, has been recorded
as goodwill.
NOTE 7 - ACQUISITIONS OF CAPCO MINORITY INTERESTS:
In March 2002, the Company issued 1,028,576 shares of its common stock
to the minority members of certain Capcos in exchange for substantially all of
such members' minority interests. These have been accounted for as purchase
transactions. The fair value of the Company's common stock was determined based
upon the quoted market price of the Company's common stock, less a discount due
to certain restrictions on the stock. Such value exceeded the book value of the
minority interest by approximately $549,000 for four of the Capcos, and the
Company has recorded such amount as goodwill. For three other Capcos, the fair
value of the Company's common stock was less than the book value of the minority
interest by approximately $428,000, and the Company has recorded such amount as
an extraordinary gain.
19
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS:
In 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Intangible Assets" (SFAS 142). SFAS 142 includes
requirements to annually test goodwill and indefinite lived intangible assets
for impairment rather than amortize them; accordingly, the Company no longer
amortizes goodwill.
The Company did not record any transition intangible asset impairment
loss upon adoption of SFAS 142.
NOTE 9 - SUBSEQUENT EVENT:
The Company has raised $22.06 million of certified capital for another
Capco fund, Wilshire Colorado Partners, LLC. Newtek has established a Regional
Business Development Center in Denver in conjunction with a Colorado-based
investment and merchant banking concern.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Three Months Ended March 31, 2002 compared to Three Months Ended March
31, 2001
Revenues decreased by approximately $650,000, to $6,072,000 for the
three months ended March 31, 2002, from $6,722,000 for the three months ended
March 31, 2001. Income from tax credits decreased by approximately $643,000 to
$5,387,000 for the three months ended March 31, 2002, from $6,030,000 for the
three months ended March 31, 2001, attributable to the tax credits recognized in
2002, due to the Company's meeting different investment thresholds mandated by
the various state Capco statutes in 2002 versus 2001. Interest and dividend
income decreased by approximately $397,000 to $241,000 for the three months
ended March 31, 2002, from $638,000 for the three months ended March 31, 2001
This decrease was primarily due to additional investments made in consolidated
entities. The additional investments reduced cash available to earn interest and
dividends. Consulting fee income increased by approximately $38,000 due to the
increase in consulting related activity. Other income increased by approximately
$352,000 to $397,000 for the three months ended March 31, 2002, from $45,000 for
the three months ended March 31, 2001. This increase is primarily due to the
consolidated entities' activities.
Interest expense decreased by approximately $682,000 to $2,654,000 for
the three months ended March 31, 2002 from $3,336,000 for the three months ended
March 31, 2001. The decrease was due primarily to the reduction of interest
payable due to delivery of tax credits to certified investors. Payroll and
consulting fees increased by $940,000 to $1,756,000 for the three months ended
March 31, 2002 from $816,000 for the three months ended March 31, 2001. The
increase was due to the consolidation of expenses with additional entities now
consolidated into the Company.
Professional fees increased by approximately $269,000 to $740,000 for
the three months ended March 31, 2002 from $471,000 for the three months ended
March 31, 2001. The increase was due primarily to additional legal fees
incurred, which is attributable to the increased size and number of capcos, as
well as due to the increase in numbers of consolidated entities.
Other expenses increased by approximately $459,000 to $625,000 for the
three months ended March 31, 2002 from $166,000 for the three months ended March
31, 2001. The increase was due primarily to expenses from additional entities
now consolidated into the Company.
20
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the issuance of
notes to Certified Investors through the Capco program. To date, the Company has
received approximately $136,000,000 in proceeds from the issuance of long-term
debt 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
Certified Investors, the acquisition of Capco insurance policies, the
acquisition of partner companies interests, funding of other investments, and
working capital needs resulting from increased operating and business
development activities of its partner companies.
Net cash used in operating activities for the three months ended March
31, 2002 of approximately $1,929,000 resulted primarily from net income of
$106,000, increased by the non-cash interest expense of approximately
$2,455,000. It was also affected by the approximately $601,000 in non-cash
equity in net losses of affiliates, approximately $1,206,000 of minority
interest and the approximately $5,387,000 in non-cash income from tax credits,
and the non-cash income tax benefit of $98,000. In addition, the Company had an
increase in components of working capital of $913,000.
Net cash provided by investing activities for the three months ended
March 31, 2002 of approximately $5,391,000 resulted primarily from repayments on
the debt instruments of $5,696,000, offset by approximately $4,558,000 in
additional qualified investments made in the period. In addition, the Company
consolidated approximately $3,962,000 of its investments.
Net cash provided by financing activities for the three months ended
March 31, 2002 was approximately $629,000, primarily attributable to
approximately $1,300,000 from the private placement of common stock, offset by
approximately $307,000 in payments on a mortgage payable, and $463,000 in
payments on note payable - insurance during the three months ended March 31,
2002.
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.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10 QSB contains forward-looking
statements. Additional written or oral forward-looking statements may be made by
the Company from time to time in filings with the Securities and Exchange
Commission or otherwise. The words "believe," "expect," "seek," and "intend" and
similar expressions identify forward-looking statements, which speak only as of
the date the statement is made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but are not limited to, projections of income or loss,
expenditures, acquisitions, plans for future operations, financing needs or
plans relating to services of the Company, as well as assumptions relating to
the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by or underlying the forward-looking statements.
The Company does not undertake, and specifically disclaims, any
obligation to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the of such statements.
21
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On January 9, 2002 the Company concluded the acquisition of
Exponential Business Development Company, Inc. and its subsidiaries in a stock
for stock exchange, pursuant to an Agreement and Plan of Merger, dated January
9, 2002 (attached as a Exhibit). In consideration, the Company issued 500,000
shares of its common stock. The sale was in reliance on Section 4(2) of the
Securities Act of 1933, as amended. In connection with this sale, the Company
agreed to file and maintain the effectiveness of a registration statement under
the rules of the Securities and Exchange Commission to permit the resale of a
portion of the shares. An additional 500,000 shares of common stock were also
issued and are being held in escrow pending the realization of possible gain on
the assets acquired as part of the transaction. In the event there is a
realization of at least $2 million over seven years, the balance of the shares,
500,000, will be released; if the gain is less, the shares will be released on
a proportionate basis.
On January 15, 2002 and January 26, 2002, the Company entered into two
consulting agreements with independent parties for the provision of certain
consulting services to the Company. Pursuant to these contracts, the Company
issued 14,456 and 3,600 shares, respectively, which were valued at $3.30 per
share as of the date of issuance. Both transactions were made in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
On February 11, 2002 the Company completed the sale of 100,000 shares
of its common stock at a price of $3.00, cash, per share. The offering was to an
investor in reliance on Section 4(2) of the Securities Act of 1933, as amended.
The purchaser had agreed to serve on the Company's Advisory Board to assist in
business development efforts.
On March 28, 2002 the Company completed the sale of 333,333 shares of
common stock to a single investor at a price of $3.00, cash, per share. The
offering was to a single investor in reliance on Section 4(2) of the Securities
Act of 1933, as amended.
The same investor, along with two affiliated companies, and four other
investors, all of which are insurance companies, also agreed to exchange their
respective holdings of warrants for the purchase of membership interests in
certain of the Company's subsidiary certified capital companies. These interests
were acquired in connection with the initial funding of these entities in the
period of 1998 to 2001, and based on the valuation agreed to, were acquired by
the Company in exchange for 1,028,576 shares of common stock at a price of
$4.00. See, also, Note 7 to the Unaudited Condensed Consolidated Financial
Statements. The offerings were in reliance on Section 4(2) of the Securities Act
of 1933, as amended.
ITEM 5 - OTHER INFORMATION
Attached hereto as an Exhibit is the Agreement entered into by the
Company with Exponential Business Development Company, Inc., which is
incorporated herein by reference.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99.1 Agreement and Plan Merger between Newtek Capital, Inc.
Exponential Business Development Company, Inc., and the
Stockholders of Exponential Business Development Company, Inc.
dated January 9, 2002
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWTEK CAPITAL, INC.
Date: May 14, 2002 /s/ Barry Sloane
----------------
Barry Sloane
Chairman of the Board, Chief Executive Officer, and
Secretary
Date: May 14, 2002 /s/ Brian A. Wasserman
----------------------
Brian A. Wasserman
Treasurer, Chief Financial Officer, and Director
Date: May 14, 2002 /s/ Giuseppe Soccodato
----------------------
Giuseppe Soccodato
Controller and Chief Accounting Officer
23