SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] 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 small business issuer as specified in its charter)
New York 11-3504638
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Hempstead Tpke. 11554
-------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (516) 390-2260
--------------
Check the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act 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
------ ------
As of July 24, 2001, 22,212,517 shares of Common Stock were issued and
outstanding.
1
CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) as of June 30, 2001
and December 31, 2000......................................................... 2
Consolidated Statements of Operations (Unaudited) for the Three and Six Month
Periods Ended June 30, 2001 and 2000.......................................... 3
Consolidated Statements of Cash Flows (Unaudited) for the Six Month
Periods Ended June 30, 2001 and 2000.......................................... 4
Notes to Unaudited Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis or Plan of Operation...................... 11
PART II. OTHER INFORMATION
-----------------
Item 5. Other Information 14........................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................... 14
SIGNATURES.............................................................................. 15
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31,
2001 2000
----------- -----------
ASSETS
------
Cash and cash equivalents $33,173,865 $34,697,081
Credits in lieu of cash 28,239,429 17,496,810
Investments in qualified businesses 16,652,316 15,644,515
Structured insurance product 2,640,708 2,570,487
Prepaid insurance 11,517,124 12,187,376
Prepaid expenses and other assets 391,992 411,195
Furniture, fixtures and equipment, net 27,436 31,462
Asset held for sale 500,000 500,000
Goodwill 978,303 -
----------- -----------
Total assets $94,121,173 $83,538,926
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 1,449,609 $ 2,546,800
Notes payable- certified investors 3,859,049 3,861,220
Notes payable - insurance 9,666,666 5,800,000
Mortgage payable 344,293 369,339
Interest payable 57,901,042 56,147,907
Deferred tax liability 3,168,565 1,381,258
----------- -----------
Total liabilities 76,389,224 70,106,524
----------- -----------
Minority interest 5,092,700 4,163,053
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common Stock (par value $0.02 per share: authorized 39,000,000
shares, issued and outstanding 22,212,517 and 21,373,460) 444,250 427,469
Additional Paid-In Capital 13,635,276 12,267,052
Accumulated deficit (1,440,277) (3,425,172)
----------- -----------
Total stockholders' equity 12,639,249 9,269,349
----------- ----------
Total liabilities and stockholders' equity $94,121,173 $83,538,926
=========== ===========
See accompanying notes to these Consolidated financial statements.
2
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenue:
Income from tax credits $ 8,621,115 $ 106,487 $14,651,218 $ 216,756
Consulting fee income - 12,892 8,000 27,192
Interest and dividend income 574,875 548,519 1,213,085 1,024,938
Other Income 80,603 - 125,841 -
----------- ----------- ----------- -----------
Total revenue 9,276,593 667,898 15,998,144 1,268,886
----------- ----------- ----------- -----------
Expenses:
General and administrative 1,918,981 1,293,876 3,769,683 2,094,428
Interest 2,849,622 1,343,994 6,185,154 2,501,473
----------- ----------- ----------- -----------
Total expense 4,768,603 2,637,870 9,954,837 4,595,901
----------- ----------- ----------- -----------
Income (loss) before equity in net losses of affiliates,
other than temporary decline in investments,
provision for taxes, and minority interest 4,507,990 (1,969,972) 6,043,307 (3,327,015)
Equity in net losses of affiliates (661,938) - (960,736) -
Other than temporary decline
in investments, net of $100,000 recovery (225,000) (600,000) (225,000) (600,000)
----------- ----------- ----------- -----------
Income (loss) before provision for taxes,
extraordinary gain on defeasance of debt
and minority interest 3,621,052 (2,569,972) 4,857,571 (3,927,015)
Provision for taxes (1,448,421) - (1,943,029)
Extraordinary gain on
defeasance of debt - 431,881 - 431,881
----------- ----------- ----------- -----------
Income (loss) before minority interest 2,172,631 (2,138,091) 2,914,542 (3,495,134)
Minority interest in (income) loss (948,207) 749,527 (929,647) 1,294,141
----------- ----------- ----------- -----------
Net income (loss) $ 1,224,424 $(1,388,564) $ 1,984,895 $(2,200,993)
=========== =========== =========== ===========
Weighted average common shares outstanding
Basic 21,731,384 20,981,861 21,558,438 20,981,861
Diluted 21,731,384 20,981,861 21,558,438 20,981,861
Income (loss) per share
Basic $ .06 $ (.07) $ .09 $ (.10)
Diluted $ .06 $ (.07) $ .09 $ (.10)
See accompanying notes to these Consolidated financial statements.
3
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
Six Months Ended
June 30,
-------------------------------------
2001 2000
------------- -------------
Cash flows from operating activities:
Net income (loss) $ 1,984,895 $(2,200,993)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Extraordinary gain on defeasance of debt (431,881)
Other than temporary decline in investments 225,000 600,000
Equity in net losses of affiliates 960,736
Income from tax credits (14,651,218) (216,756)
Deferred income taxes 1,787,307
Depreciation and other amortization 4,026 2,123
Accretion of interest income (70,221) (61,429)
Accretion of interest expense 5,671,484 2,324,682
Issuance of warrants for services performed 58,800
Minority interest included in loss 929,647 (1,294,141)
Non-cash compensation - options vested 23,576
Changes in assets and liabilities:
Prepaid insurance 670,252 (458,405)
Prepaid expenses and other assets (25,723) 25,570
Accounts payable and accrued expenses (1,097,191) (516,282)
------------ -----------
Net cash used in operating activities (3,528,630) (2,227,512)
------------ -----------
Cash flows from investing activities:
Purchase of structured insurance product (661,432)
Investments in qualified businesses (14,721,833) (6,791,942)
Return of principal - qualified investments 6,899,963 2,751,120
Consolidation of majority owned investments 5,703,333
Other investments (42,000) (242,000)
Return of principal - other investments 125,000
Purchase of machinery and equipment - (28,898)
------------ -----------
Net cash used in investing activities (2,160,537) (4,848,152)
------------ -----------
See accompanying notes to these Consolidated financial statements.
4
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
-------------------------------------------------------------
Six Months Ended
June 30,
------------------------------------
2001 2000
----------- -----------
Cash flows from financing activities:
Payment of note payable - bank (725,358)
Proceeds from issuance of note payable-insurance 5,200,000 1,251,630
Proceeds from issuance of long-term debt 7,284,518
Payments from defeasance of long-term debt (3,228,175)
Issuance of warrants 403,348
Payments for deferred financing costs (44,771)
Repayments of principal of note payable-insurance (1,333,334)
Repayments of mortgage payable (25,046)
Net proceeds from issuance of common stock 726,391 1,849,992
Distributions to Capco members (402,060) (450,000)
Loans payable - members 330,000
----------- -----------
Net cash provided by
financing activities 4,165,951 6,671,184
----------- -----------
Net (decrease) in cash
and cash equivalents (1,523,216) (404,480)
Cash and cash equivalents -
beginning of period 34,697,081 25,454,016
----------- -----------
Cash and cash equivalents - end of period $33,173,865 $25,049,536
=========== ===========
Supplemental disclosure of non-cash financing activities:
---------------------------------------------------------
Issuance of the following in partial payment
for insurance:
Notes $1,500,000
==========
Warrants $ 56,020
==========
Reduction of credits in lieu of cash and interest payable
balances due to delivery of tax credits to certified
investors: $3,908,599
==========
Issuance of common stock in connection with acquisition of
minority interest In Wilshire Investors $ 978,303
==========
See accompanying notes to these Consolidated financial statements.
5
Notes to UNAUDITED 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 LLC ("WAII"), and Wilshire New York Partners III LLC
("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 LLC ("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
WAII New York April 2000
WLPII Louisiana October 2000
WNYIII New York December 2000
6
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 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% to 110% of their
certified investment. The tax credits can be utilized over a ten-year period at
a rate of generally between 10% and 11% per year and in some instances are
transferable and can be carried forward.
The accompanying financial statements have been prepared without audit and
do not include all footnotes and disclosures required under generally accepted
accounting principles. Management believes that the results herein reflect all
adjustments which are, in the opinion of management, necessary to fairly state
the results and current financial condition of the Company for the respective
periods. All such adjustments reflected herein are of a normal, recurring
nature. These financial statements should be read in conjunction with the
Company's financial statements contained in its Form 10K-SB for its year ended
December 31, 2000, and all other filings with the Securities and Exchange
Commission.
Note 2 - CONVERSION OF CAPCO MEMBERSHIP INTERESTS INTO NEWTEK STOCK
In June 2001, the Company issued 534,592 shares of its common stock to the
minority members of WI in exchange for substantially all of such members'
minority interest. This has been accounted for as a purchase transaction. The
fair value of the Company's common stock exceeded the book value of the minority
interest by approximately $978,000 and the Company has recorded such amount as
goodwill.
Note 3 - InVESTMENTS IN QUALIFIED BUSINESSES
The following table is a summary of investments as of June 30, 2001, shown
separately between their debt ($12,707,338) and equity ($3,944,978) components
for a total Investment in Qualified Businesses of $16,652,316. Terms of each
are summarized. There are no expiration dates on any of the financial
instruments, unless disclosed.
7
Outstanding
DEBT Original Principal
Date of Maturity Principal Stated Amount June 30,
Investee Type Investment Date Amount Interest Rate 2001
===================================================================================================================================
AIDA, LLC Debt 3/01 3/02 $ 3,500,000 7.00% $ 3,500,000
-----------------------------------------------------------------------------------------------------------------------------------
United Processing Services - Debt 6/01 6/06 $ 2,100,000 5.00% $ 2,100,000
Wisconsin, LLC
-----------------------------------------------------------------------------------------------------------------------------------
Multi-Media Distribution Debt 6/00 6/02 $ 1,000,000 10.00% $ 1,000,000
Corp.
-----------------------------------------------------------------------------------------------------------------------------------
Starphire Technologies, LLC Debt 6/01 6/02 $ 1,000,000 5.75% $ 1,000,000
-----------------------------------------------------------------------------------------------------------------------------------
4G's Truck Renting Debt 12/00, 1/01 6/02 $ 1,000,000 8.70% $ 960,000
-----------------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems, Inc. Debt 8/00 5/04 $ 1,000,000 0% $ 913,886
-----------------------------------------------------------------------------------------------------------------------------------
Direct Creations, LLC Debt 9/00 3/02 $ 750,000 10.00% $ 750,000
-----------------------------------------------------------------------------------------------------------------------------------
Group Management Debt 11/99 11/01 $ 3,150,000 5.25% $ 675,082
Technologies, LLC
-----------------------------------------------------------------------------------------------------------------------------------
MDS-SPC, Inc. Debt 5/01 5/06 $ 400,000 10.00% $ 400,000
-----------------------------------------------------------------------------------------------------------------------------------
Transworld Business Brokers, Debt 06/01 6/02, 6/04 $ 240,000 6.00% $ 240,000
LLC
-----------------------------------------------------------------------------------------------------------------------------------
1 800GiftCertificate Debt 7/99 9/01 $ 300,000 8.75% $ 201,525
-----------------------------------------------------------------------------------------------------------------------------------
BuySeasons, Inc. Debt 6/01 6/06 $ 200,000 11.00% $ 200,000
-----------------------------------------------------------------------------------------------------------------------------------
Gerace Auto Parts(4) Debt 4/00 Various $ 810,000 Prime + $ 126,547
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Steve Kent Trucking(4) Debt 3/00, 5/00 Various $ 747,000 Prime + $ 111,176
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Gino's Seafood(4) Debt 3/00, 4/00 Various $ 517,942 Prime + $ 86,692
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Down to Earth Distribution, Debt 12/99, 8/00 8/01 $ 580,000 9.00% $ 80,000
LLC
-----------------------------------------------------------------------------------------------------------------------------------
St. Gabriel Hardware(4) Debt 11/00 Various $ 477,000 Prime + $ 77,630
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Embosser's Sales and Debt 8/00 Various $ 495,000 Prime + $ 76,718
Service(4) 1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Data-Tel of Louisiana(4) Debt 3/00 Various $ 513,000 Prime + $ 70,074
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Tsunami Restaurants(4) Debt 3/01 Various $ 328,500 Prime + $ 54,511
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Raising Cain(4) Debt 3/00, 4/00, 5/00 Various $ 315,000 Prime + $ 46,807
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 + $ 5,190
1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Total Debt Investments $19,661,942 $12,707,338
=========== ===========
8
EQUITY Original
Date of Type of Common Stock Percentage of Investment Cost Basis
Investee Investment Investment Equivalents (1) Ownership Amount June 30, 2001
------------------------------------------------------------------------------------------------------------------------------------
Starphire 8/00 Preferred N/A 50.00% $ 1,400,000 $ 1,165,302
Technologies, LLC Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
Niche Directories, LLC 9/00, 12/00 Preferred N/A 37.50% $ 1,344,000 $ 1,051,069
Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
AIDA, LLC 10/00 Preferred N/A 50% $ 1,000,000 $ 682,160
Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
Group Management 6/01 Preferred N/A 47.5% $ 450,000 $ 371,447
Technologies, LLC Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
Transworld Business 06/01 Preferred N/A 33% $ 350,000 $ 350,000
Brokers, LLC Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
Multi-Media 6/00 Common Stock 66,000 3% $ 200,000 $ 200,000
Distribution Corp.
------------------------------------------------------------------------------------------------------------------------------------
BuySeasons, Inc. 6/01 Common Stock 18,182 3% $ 100,000 $ 100,000
------------------------------------------------------------------------------------------------------------------------------------
1800GiftCertificate 7/99 Class B Preferred 113,140 N/A $ 22,396 $ 22,396
Stock
------------------------------------------------------------------------------------------------------------------------------------
1800GiftCertificate 7/99 Class A Preferred 3,159 N/A $ 2,604 $ 2,604
Stock
------------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Boxing, 11/98 Options for 3 N/A $ 0 $ 0
Inc. (5) Common Stock(2)
------------------------------------------------------------------------------------------------------------------------------------
CB Real Net, LLC (5) 2/00 Membership N/A 100.00% $ 0 $ 0
Interest(3)
------------------------------------------------------------------------------------------------------------------------------------
Direct Creations (5) 12/00 Membership N/A 25% $ 0 $ 0
Interest
------------------------------------------------------------------------------------------------------------------------------------
Merchant Data 5/01 Warrants for N/A 10.00%- $ 0 $ 0
Sysytems, Inc. Membership 20.00%
Interest(3)
------------------------------------------------------------------------------------------------------------------------------------
Total Equity $ 4,869,000 $ 3,944,978
Investments =========== ===========
Total Debt and Equity Investments June 30, 2001 $24,530,942 $16,652,316
=========== ===========
(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.
(5) Represents additional equity interests received for making funds available
to qualified businesses through qualified debt.
9
The Company consolidates two of its investments. The following tables are
summaries of such investments:
Outstanding
DEBT Original Principal
Date of Maturity Principal Stated Amount June 30,
Investee Type Investment Date Amount Interest Rate 2001
===========================================================================================================================
Universal Processing Debt 3/01 3/02 $3,400,000 6.00% $3,400,000
Services, LLC
---------------------------------------------------------------------------------------------------------------------------
PPM Link, LLC Debt 3/01 9/02 $1,850,000 6.00% $1,850,000
---------------------------------------------------------------------------------------------------------------------------
Total Consolidated Debt $5,250,000 $5,250,000
Investments ========== ==========
EQUITY Original
Date of Type of Common Stock Percentage of Investment Cost Basis
Investee Investment Investment Equivalents (1) Ownership Amount June 30, 2001
-------------------------------------------------------------------------------------------------------------------------------
Universal Processing 3/01 Preferred N/A 60% $ 200,000 $ 200,000
Services, LLC Membership
Interest w/
voting rights
-------------------------------------------------------------------------------------------------------------------------------
PPM Link, LLC 3/01 Preferred N/A 67% $ 253,333 $ 253,333
Membership
Interest w/
voting rights
-------------------------------------------------------------------------------------------------------------------------------
Total Consolidated Equity Investments $ 453,333 $ 453,333
========== ==========
Total Consolidated Debt and Equity Investments June 30, 2001 $5,703,333 $5,703,333
========== ==========
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 fair
value and record a corresponding charge in the statement of operations. At June
30, 2001, the Company has determined that there was $250,000 of other than
temporary decline in the value of its investments for Hypercosm. In addition,
the Company determined an impairment existed for certain non-Capco investments,
and recorded a charge of $75,000.
The Company recovered $100,000 of cash on one of its investments previously
written down. This amount is shown on the statement of operations as a
component of other than temporary decline in 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
10
stock equivalents were anti-dilutive for the three and six months ended June 30,
2001 and the three and six months ended June 30, 2000 and, therefore, have been
excluded from the calculation of diluted earnings per share.
The calculations of Net Income (Loss) Per Share were:
Three months ended Six months ended
June 30, June 30,
------------------------------- ----------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Basic
Net income (loss) $ 1,224,424 $(1,388,564) $ 1,984,895 $(2,200,993)
Weighted average shares 21,731,384 20,981,861 21,558,438 20,981,861
Basic and diluted $ .06 $ (.07) $ .09 $ (.10)
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
During the second quarter of 2001 the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 141, Business
Combinations ("SFAS 141") and Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 is effective
for all business combinations initiated after June 30, 2001 and for all business
combinations accounted for by the purchase method for which the date of
acquisition is after June 30, 2001. The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001. However, early
adoption of SFAS 142 is permitted for companies with a fiscal year beginning
after March 15, 2001, provided their first quarter financial statements have not
been previously issued.
The Company has determined that the adoption of SFAS 141 and SFAS 142 is not
expected to have a significant impact on the Company's consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000
Revenues increased by approximately $8,609,000 to $9,277,000 for the three
months ended June 30, 2001, from $668,000 for the three months ended June 30,
2000. Income from tax credits increased by approximately $8,515,000 attributable
to the tax credits recognized in 2001, due to the Company's meeting investment
thresholds mandated by the various state Capco statutes.
General and administrative expenses increased by approximately $625,000, to
$1,919,000 for the three months ended June 30, 2001, from $1,294,000 for the
three months ended June 30, 2000, due to increased staffing and professional
fees (legal and accounting) attributable to the increased size and number of
capcos. Interest expense increased by approximately $1,506,000 to $2,850,000
for the three months ended June 30, 2001, from $1,344,000 for the three months
ended June 30, 2000, which was attributable to the issuance of notes to
Certified Investors relating to the formation of capcos during the prior 12
months.
11
Equity in net losses of affiliates increased by 662,000 for the three
months ended June 30, 2001, from $0 for the three months ended June 30, 2000 due
to the increased number in partner companies and the nature of the Company's
investments in them (more equity investments versus debt). Other than temporary
decline in investments decreased by approximately $375,000, to $225,000 for the
three months ended June 30, 2001, from $600,000 for the three months ended June
30, 2000, due partially to a recovery of $100,000 in cash related to an
investment written down in 2000. Extraordinary gain decreased by approximately
$432,000, to $0 for the three months ended June 30, 2001, from $432,000 for the
three months ended June 30, 2000, due to the $432,000 gain recognized on the
defeasance of the Company's liability of its NY II Capco in the second quarter
of 2000 versus no such activity in 2001.
Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000
Revenues increased by approximately $14,729,000 to $15,998,000 for the six
months ended June 30, 2001, from $1,269,000 for the six months ended June 30,
2000. Income from tax credits increased by approximately $14,434,000
attributable to the tax credits recognized in 2001, due to the Company's meeting
investment thresholds mandated by the various state Capco statutes.
General and administrative expenses increased by approximately $1,675,000,
to $3,770,000 for the six months ended June 30, 2001, from $2,094,000 for the
six months ended June 30, 2000, due to increased staffing and professional fees
(legal and accounting) attributable to the increased size and number of Capcos.
Interest expense increased by approximately $3,684,000 to $6,185,000 for the six
months ended June 30, 2001, from $2,501,000 for the six months ended June 30,
2000, which was attributable to the issuance of notes to Certified Investors
relating to the formation of capcos during the prior 12 months.
Equity in net losses of affiliates increased by 961,000 for the six months
ended June 30, 2001, from $0 for the six months ended June 30, 2000 due to the
increased number in partner companies and the nature of the Company's
investments in them (more equity investments versus debt). Other than temporary
decline in investments decreased by approximately $375,000, to $225,000 for the
six months ended June 30, 2001, from $600,000 for the six months ended June 30,
2000, due partially to a recovery of $100,000 in cash related to an investment
written down in 2000. Extraordinary gain decreased by approximately $432,000,
to $0 for the six months ended June 30, 2001, from $432,000 for the six months
ended June 30, 2000, due to the $432,000 gain recognized on the defeasance of
the Company's liability of its NY II Capco in the second quarter of 2000 versus
no such activity in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations primarily through the issuance of
notes and warrants 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 six months ended June 30,
2001 of approximately $3,529,000 resulted primarily from net income of
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$1,985,000, offset by the non-cash interest expense of approximately $5,671,000
and non-cash income tax expense of approximately $1,787,000. It was also
affected by the approximately $961,000 in non-cash equity in net losses of
affiliates, approximately $930,000 of minority interest and the approximately
$14,651,000 in non-cash income from tax credits. In addition, the Company had a
decrease in components of working capital of approximately $453,000 (resulting
primarily from the decrease in accounts payable and accruals of approximately
$1,097,000).
Net cash used in investing activities for the six months ended June 30,
2001 of approximately $2,161,000 resulted primarily from approximately
$14,722,000 in additional qualified investments (including $5,703,000 of
investments consolidated in the financial statements) made in the period and
offset by repayments on the debt instruments of $6,900,000.
Net cash provided by financing activities for the six months ended June 30,
2001 was approximately $4,166,000, primarily attributable to approximately
$5,200,000 from the issuance of notes payable and approximately $726,000 from
the private placement of common stock during the three months ended March 31,
2001, which was offset by approximately $1,333,000 in payments on notes payable.
In addition, the Company paid approximately $402,000 in distributions to CAPCO
members for taxes.
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 release publicly 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 date of such statements.
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PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On April 1, 2001 the Company sold 13, 714 shares of its Common
Stock to the firm which the Company utilizes for investor public relations
consulting. The sale was in consideration for services provided to the Company.
The sale was to an accredited investor 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 the
shares.
On April 12, 2001 the Company completed the sale of 250,750 shares of its
Common Stock at a price of $4.00, cash, per share. The offering was exclusively
to accredited investors in reliance on Section 4(2) of the Securities Act of
1933, as amended. The Company utilized the services of Stifel, Nicholaus &
Company in the private placement. In connection with the private offering, the
Company also undertook to file and maintain the effectiveness of a registration
statement under the rules of the Securities and Exchange Commission to permit
the purchasers to resell their shares.
ITEM 5 - OTHER INFORMATION
Attached hereto as Exhibits are seven press releases issued by the
Company with respect to various corporate developments, which are incorporated
herein by reference.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99.1 NEWTEK CAPITAL, INC. ACQUIRES MAJOR STAKE IN PPMLINK
Exhibit 99.2 GROUP MANAGEMENT TECHNOLOGIES SECURES $2.7 MILLION FROM NEWTEK
CAPITAL
Exhibit 99.3 NEWTEK INVESTS $3.6 MILLION IN UNIVERSAL PROCESSING SERVICES
Exhibit 99.4 NEWTEK PARTNER COMPANY FORMS ALLIANCE WITH CHASE MANHATTAN
BANK AND CHASE MERCHANT SERVICES TO TRANSACTON PROCESS
THOUGH FIRST DATA RESOURCES
Exhibit 99.5 NEWTEK INVESTS IN TRANSWORLD BUSINESS BROKERS - FLORIDA'S LARGEST
BUSINESS BROKER
Exhibit 99.6 NEWTEK ANNOUNCES MAJOR EXPANSION OF ITS BUSINESS DEVELOPMENT
CAPABILITIES
Exhibit 99.7 NEWTEK CAPITAL INVESTS $1.95 MILLION AND TAKES MAJOR STAKE IN
HARVEST STRATEGIES - FULL SERVICE BUSINESS DEVELOPMENT AND
MANAGEMENT FIRM
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEWTEK CAPITAL, INC.
Date: August 10, 2001 /s/ Barry Sloane
---------------------------------------
Barry Sloane
Chairman of the Board, Chief Executive
Officer, and Secretary
Date: August 10, 2001 /s/ Brian A. Wasserman
----------------------------------------
Brian A. Wasserman
Treasurer, Chief Financial Officer, and
Director
Date: August 10, 2001 /s/ Giuseppe Soccodato
---------------------------------------
Giuseppe Soccodato
Controller and Chief Accounting Officer
15