SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-16123
-----------------
NEWTEK BUSINESS SERVICES, INC.
--------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 11-3504638
------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
100 QUENTIN ROOSEVELT BOULEVARD, GARDEN CITY, NY 11530
-------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 390-2260
CHECK WHETHER THE REGISTRANT HAS (1) FILED ALL DOCUMENTS AND REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(D) OF THE EXCHANGE ACT DURING THE PRECEDING 12
MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST
NINETY DAYS.
YES NO
[X] [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES NO
[ ] [X]
AS OF MAY 12, 2004, 26,671,976 SHARES OF COMMON STOCK WERE ISSUED AND
OUTSTANDING.
CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 1
Consolidated Statements of Operations for the Three Month Periods
Ended March 31, 2004 and 2003 2
Consolidated Statements of Cash Flows for the Three Month
Periods Ended March 31, 2004 and 2003 3
Notes to Unaudited Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds and Issuer
Repurchase of Equity Securities 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 23
Certifications
Exhibits
ITEM 1. FINANCIAL STATEMENTS
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 (UNAUDITED) AND DECEMBER 31, 2003
MARCH 31, DECEMBER 31,
2004 2003
------------- -------------
A S S E T S
Cash and cash equivalents $ 42,564,071 $ 33,444,611
Restricted cash 2,680,680 2,107,471
Credits in lieu of cash 68,497,004 71,294,083
SBA loans receivable, net of reserve for loan losses 52,473,931 52,050,725
Accounts receivable (net of allowance of $38,523 and $96,480, respectively) 673,010 469,768
Receivable from bank 2,841,915 2,670,353
SBA loans held for sale 2,282,374 3,619,582
Accrued interest receivable 287,229 281,072
Investments in qualified businesses - equity method investments 300,000 300,000
Investments in qualified businesses - held to maturity investments 1,284,057 1,420,179
Structured insurance product 3,095,057 3,054,705
Prepaid insurance 14,655,535 13,282,630
Prepaid expenses and other assets 2,388,590 1,907,132
Capitalized servicing asset (net of accumulated amortization of $89,550 and $24,545,
respectively) 1,163,436 754,064
Furniture, fixtures and equipment (net of accumulated depreciation of $464,875 and
$390,011, respectively) 812,333 670,715
Customer merchant accounts (net of accumulated amortization of $419,832 and $269,380,
respectively) 2,889,295 3,024,298
Goodwill 1,832,621 1,832,621
------------- -------------
Total assets $ 200,721,138 $ 192,184,009
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 5,932,724 $ 6,095,440
Notes payable - certified investors 3,826,421 3,829,973
Notes payable - insurance 6,336,421 4,115,136
Notes payable - other 880,000 1,000,000
Bank notes payable 55,642,027 51,990,047
Note payable in credits in lieu of cash 69,726,477 65,697,050
Deferred tax liability 9,631,616 10,815,790
------------- -------------
Total liabilities 151,975,686 143,543,436
------------- -------------
Minority interest 8,092,837 8,393,151
------------- -------------
Commitments and contingencies
Shareholders' equity:
Common stock (par value $0.02 per share; authorized 39,000,000 shares, issued and
outstanding 26,651,976 and 26,209,211, not including 582,980 shares held in escrow) 533,040 524,184
Additional paid-in capital 28,449,520 26,588,400
Unearned compensation (1,867,315) (2,106,588)
Retained earnings 13,537,370 15,241,426
------------- -------------
Total shareholders' equity 40,652,615 40,247,422
------------- -------------
Total liabilities and shareholders' equity $ 200,721,138 $ 192,184,009
============= =============
See accompanying notes to these unaudited consolidated financial statements.
1
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004, AND 2003
2004 2003
------------ ------------
Revenue:
Income from tax credits $ 2,023,525 $ 10,388,583
Electronic payment processing 3,232,504 847,804
Servicing fee and premium income 1,112,367 368,447
Interest and dividend income 1,028,948 1,059,169
Other income 473,149 255,441
------------ ------------
Total revenue 7,870,493 12,919,444
------------ ------------
Expenses:
Interest 3,764,774 3,717,852
Payroll and consulting fees 2,185,449 1,664,064
Electronic payment processing costs 2,100,986 1,119,942
Professional fees 994,609 915,767
Insurance 714,962 573,293
Other than temporary decline in value of investments -- 1,713,414
Equity in net losses of affiliates -- 54,974
Provision for loan losses 104,681 --
Other 1,193,576 706,513
------------ ------------
Total expenses 11,059,037 10,465,819
------------ ------------
(Loss) income before minority interest, provision
for income taxes and extraordinary items (3,188,544) 2,453,625
Minority interest in income 300,314 288,337
------------ ------------
(Loss) income before provision for income taxes and
extraordinary items (2,888,230) 2,741,962
Benefit (provision) for income taxes 1,184,174 (1,069,365)
------------ ------------
(Loss) income before extraordinary items (1,704,056) 1,672,597
Extraordinary gain on acquisition of a business -- 186,729
------------ ------------
Net (loss) income $ (1,704,056) $ 1,859,326
------------ ------------
Weighted average common shares outstanding
Basic 26,471,248 25,409,868
Diluted 26,471,248 25,661,450
Net (loss) income per share
Basic $ (.06) $ .07
Diluted $ (.06) $ .07
(Loss) income per share before extraordinary items
Basic $ (.06) $ .07
Diluted $ (.06) $ .07
See accompanying notes to these unaudited consolidated financial statements.
2
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
----------- -----------
Cash flows from operating activities:
Net (loss) income $(1,704,056) 1,859,326
Adjustments to reconcile net (loss) income to net cash used
in operating activities:
Other than temporary decline in value of investments, net
of recoveries -- 1,713,414
Equity in losses of affiliates -- 54,974
Extraordinary gain on acquisition of business -- (186,729)
Income from tax credits (2,023,525) (10,388,583)
Deferred income taxes (1,184,174) 1,069,365
Depreciation and amortization 290,321 45,027
Provision for loan losses 104,681 --
SBA loans originated for sale (8,111,992) --
Proceeds from sale of SBA loans 9,449,200 --
Accretion of interest income (43,904) (43,904)
Accretion of interest expense 3,021,416 3,091,022
Non-cash compensation 261,588 104,925
Minority interest (300,314) (288,338)
Changes in assets and liabilities, net of the effect of
business acquisitions:
Prepaid insurance (122,312) 463,323
Discount on loan originations, net 256,269 --
Prepaid expenses, accounts receivable and other assets (1,336,796) 45,447
Accounts payable and accrued expenses (162,715) 128,763
----------- -----------
Net cash used in operating activities (1,606,313) (2,331,968)
----------- -----------
Cash flows from investing activities:
Investments in qualified businesses (consolidated entities) (282,352) (3,200,000)
Return of investments - held to maturity 136,122 58,052
Return of investments - consolidated entities 1,614,806 1,518,483
Consolidation of majority owned entities (1,332,454) 1,408,890
Purchase of furniture, fixtures and equipment (216,482) (12,478)
SBA Loans originated for investment (3,138,056) --
Payments received on SBA loans 2,353,900 2,307,414
Other investments (15,449) --
----------- -----------
Net cash (used in) provided by investing
activities (879,965) 2,080,361
----------- -----------
See accompanying notes to these unaudited consolidated financial statements.
3
NEWTEK BUSINESS SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (CONTINUED)
Cash flows from financing activities:
Proceeds from issuance of notes payable to certified investors $ 10,925,483 $ --
Cash paid for Coverage A (3,347,461) --
Principal payments of note payable-insurance (778,716) --
Repayments of note payable - bank and other (120,000) (1,016,847)
Proceeds from sale of preferred stock of subsidiary -- 2,000,000
Change in restricted cash (573,209) --
Proceeds from SBA bank notes payable 3,651,980 --
Net proceeds from exercise of stock options 546,069
Net proceeds from issuance of common stock 1,301,592 766,399
------------ ------------
Net cash provided by financing activities 11,605,738 1,749,552
------------ ------------
Net increase in cash and cash equivalents 9,119,460 1,497,945
Cash and cash equivalents - beginning of period 33,444,611 41,171,358
------------ ------------
Cash and cash equivalents - end of period $ 42,564,071 $ 42,669,303
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW ACTIVITIES:
Reduction of credits in lieu of cash and notes payable in credits in lieu of
cash balances due to delivery of tax
credits to Certified Investors $ 4,820,604 $ 3,908,666
------------ ------------
Issuance of notes in partial payment for insurance $ 3,000,000 $ --
------------ ------------
Issuance of warrant in connection with purchase of Coverage A
Insurance $ 250,000 $ --
------------ ------------
4
NEWTEK BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements of Newtek Business Services, Inc.
and Subsidiaries (the "Company" or "Newtek") included herein have been prepared
by us pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC") and include all majority owned subsidiaries or those which
Newtek is considered to be the primary beneficiary of (as defined under FASB
Interpretation No. FIN 46 ("FIN 46"). All intercompany balances and transactions
have been eliminated in consolidation. The financial statements should be read
in conjunction with the consolidated financial statements and footnotes thereto
included in our Form 10-K for the fiscal year ended December 31, 2003, as
amended.
The unaudited consolidated financial statements of Newtek, reflect, in
the opinion of management, all adjustments necessary to present fairly the
financial position of Newtek at March 31, 2004, the results of operations and
its cash flows for the three months ended March 31, 2004. Results of operations
for the interim periods may not be representative of results to be expected for
a full year. All adjustments are of a normal recurring nature.
Newtek Business Services, Inc., is engaged in the business of
providing financial products and business services to small and medium-sized
businesses through ownership and/or operation of specific primary lines of
business as well as organizing certified capital companies ("capcos") and
investing funds made available under the capco programs in small businesses.
The following is a summary of each Capco or Capco fund, state of
certification and date of certification:
CAPCO STATE OF CERTIFICATION DATE OF CERTIFICATION
---------- ---------------------- ---------------------
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WA II New York April 2000
WNY III New York December 2000
WC Colorado October 2001
WAP Alabama February 2004
The State of Louisiana has four "capco funds" which are all a part of
and consolidated with the WLA Capco (the first fund). The second, Wilshire
Louisiana Partners II, LLC (WLPII), and the third, Wilshire Louisiana Partners
III, LLC (WLPIII), were formed in October 2001, and October 2002, respectively.
The fourth, Wilshire Louisiana Partners IV, LLC (WLPIV) was formed in October
2003. In general, the Capcos issue debt and equity instruments, generally
warrants or shares of common stock ("Certified Capital"), to insurance company
investors ("Certified Investors"). The Capcos then make targeted investments
("Investments in Qualified Businesses", as defined under the respective state
statutes, or, "Qualified Businesses"), with the Certified Capital raised. Such
investments may be accounted for as either consolidated subsidiaries, under the
equity method or cost method of accounting, depending upon the nature of the
investment and the Company's and/or the Capco's ability to control or otherwise
exercise significant influence over the investee. Participation in each Capco
program legally
5
NOTE 1- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
entitles the Capco to receive (or earn) tax credits from the state upon
satisfying quantified, defined investment percentage thresholds and time
requirements. In order for the Capcos to maintain their state-issued
certifications, the Capcos must make Investments in Qualified Businesses in
accordance with these requirements. These state requirements are mirrored in the
limitations agreed to by each Capco in its written agreements with its Certified
Investors and limit the activities of the Capcos to conducting the business of a
capco. Each Capco also has separate, legal contractual arrangements with the
Certified Investors obligating the Capco to refrain from unauthorized
activities, to use the proceeds from the notes only for Capco-authorized (i.e.,
"qualified") investments, to limit fees for professional services related to
making, buying or selling investments to $200,000 per Capco annually; and to pay
interest on the aforementioned debt instruments whether or not it meets the
statutory requirements for Investments in Qualified Businesses.
The Capco can satisfy this interest payment, at the Capco's discretion,
by delivering tax credits in lieu of paying cash. The Capcos legally have the
right to deliver the tax credits to the Certified Investors. The Certified
Investors legally have the right to receive and use the tax credits and would,
in turn, use these tax credits to reduce their respective state tax liabilities
in an amount usually equal to 100% (WLA, WLPII, and WLPIII -110%) of their
certified investment. The tax credits can be utilized over a ten-year period at
a rate of 10% (WLA, WLPII, and WLPIII - 11%) per year and in some instances are
transferable and can be carried forward.
During February 2004, Newtek closed on its twelfth capco, Wilshire
Alabama Partners LLC, for total certified capital of $11,111,111.
CASH AND CASH EQUIVALENTS
In the Company's Statement of Cash Flows, cash invested in consolidated
entities is presented as a cash outflow, and cash in those entities is presented
as an inflow, "Consolidation of majority owned entities."
The Company recognizes income from tax credits as its capcos make
qualified investments and satisfy statutory investment percentage thresholds
within specified time requirements. Newtek believes that the presentation in the
statement of cash flows of gross investments made is appropriate since it
provides disclosure of the aggregate amount of investment activity during the
reporting period, thus providing the information relative to achieving the
Company's investment thresholds and the corresponding recognition of income from
tax credits.
STOCK - BASED COMPENSATION
The Company has elected to continue using Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
employee stock options. With regard to stock options, no stock-based employee
compensation cost is reflected in net (loss) income, as all options granted
under this plan had an exercise price equal to the market value of the
underlying common stock at the date of grant. Compensation expense on restricted
shares granted to employees is measured at the fair market value on the date of
grant and recognized in the consolidated statements of operations on a pro-rata
basis over the service period which approximates the vesting period.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting method in
SFAS 148 "Accounting for Stock-based Compensation-Transition and Disclosure- an
amendment of SFAS 123" had been used in accounting for employee stock options.
6
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2004 MARCH 31, 2003
------------------ ------------------
As reported
Net (loss) income $ (1,704,056) $ 1,859,326
dd: Total stock based employee compensation expense
A recognized, net of related tax effects 143,101 --
------------- -------------
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (208,262) (212,988))
------------- -------------
Pro forma net (loss) income $ (1,769,217) $ 1,646,338
------------- -------------
Earnings per share:
Basic - as reported $ (0.06) $ .07
------------- -------------
Basic - pro forma $ (0.07) $ .06
------------- -------------
Diluted - as reported $ (0.06) $ .07
------------- -------------
Diluted - pro forma $ (0.07) $ .06
------------- -------------
7
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
For the three months ended March 31, 2004 and 2003, the weighted
average fair value of each option granted is estimated on the date of grant
using the Black Scholes model with the following assumptions: expected
volatility ranging from 59-85%, risk-free interest rate ranging from 1.61% to
6.15%, respectively, expected dividends of $0 and expected terms ranging from
1-6 years.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expense during the
reporting period. The most significant estimates are with respect to valuation
of investments in qualified businesses, goodwill impairment valuation and loans
receivable. Actual results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the Emerging Issues Task Force ("EITF" or the "Task
Force") reached a final consensus on Issue 03-6 "Participating Securities and
the Two- Class Method under FASB Statement No. 128, Earnings per Share" which
addresses a number of questions regarding the computation of earnings per share
("EPS") by companies that have issued securities other than common stock that
contractually entitle the holder to participate in dividends and earnings of the
company when, and if, it declares dividends on its common stock. The issue also
provides further guidance in applying the two-class method of calculating EPS.
It clarifies what constitutes a participating security and how to apply the
two-class method of computing EPS once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. The Company does not anticipate that adoptions of this standard will
have a significant impact on the Company's financial position, results of
operations or cash flows.
In March 2004, the EITF reached consensus on Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" regarding disclosures about unrealized losses on available-for-sale
debt and equity securities accounted for under FASB Statements No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and No. 124,
"Accounting for Certain Investments Held by Not-for-Profit Organizations". The
guidance for evaluating whether an investment is other-than-temporarily impaired
should be applied in such evaluations made in reporting periods beginning after
June 15, 2004. The disclosures are effective in annual financial statements for
fiscal years ending after December 15, 2003, for investments accounted for under
Statements 115 and 124. For all other investments within the scope of this
Issue, the disclosures are effective in annual financial statements for fiscal
years ending after June 15, 2004. The additional disclosures for cost method
investments are effective for fiscal years ending after June 15, 2004. We do not
expect that the implementation of EITF 03-1 will have a material effect on our
financial statements.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to
current period presentation.
NOTE 2 - COMMON STOCK:
In the first quarter of 2004, Newtek sold 201,273 shares of common
stock in private transactions, with proceeds totaling approximately $942,000.
During the same period there were 153,992 stock options exercised, with proceeds
totaling approximately $547,000. In connection with the funding of the Wilshire
Alabama capco, 85,500 shares of stock were issued for approximately $359,000. In
addition, 2,000 shares of common stock were issued in consideration for
consulting services rendered, valued at approximately $14,000.
8
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
The following table is a summary of investments as of March 31, 2004,
shown separately between their debt and equity components, and all terms of each
are summarized. There are no expiration dates on any of the financial
instruments, unless disclosed.
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, or the economics of the transaction if the
investee is determined to be a variable interest entity.
DEBT INVESTMENTS
----------------
DIRECT AUTOTASK LOUISIANA BIDCO
INVESTEE CREATIONS, LLC GROUP LOANS TOTAL
-------------- ---------- ---------------- -----------
INVESTMENT DATE (S) EPT -01, NOV-01 OCT-02 VARIOUS
MATURITY DATE (S) JUNE-04 SEPT-3 VARIOUS
INTEREST RATE S LIBOR 7.75% PRIME +1%
------------------------ ----------------- ------------- -------------------- -----------
---------------------------------------------------------------------
Principal outstanding
at December 31, 2003 $ 269,387 $ 300,000 $ 850,792 $ 1,420,179
Return of principal -
2004 (62,495) - (73,627) (136,122)
------------------- ------------- ---------------- --------------
Principal outstanding
at March 31, 2004 $ 206,892 $ 300,000 $ 777,165 $ 1,284,057
------------------- ------------- ---------------- --------------
EQUITY INVESTMENTS
------------------
DISTRIBUTION
VIDEO AND
INVESTEE BUY SEASONS, INC. AUDIO CORP. TOTAL
----------------- ------------- --------------
INVESTMENT DATE (S) JUN-01 JUN-00
TYPE OF INVESTMENT COMMON STOCK COMMON STOCK
OWNERSHIP INTERST AS
OF DECEMBER 31, 2002 <20.00% <20.00%
----------------------------------------- ------------------ --------------
Total equity investments
at December 31, 2003 $ 100,000 $ 200,000 $ 300,000
Return of Capital - - -
Equity in income (losses)
2004 - - -
Total Equity investments
at March 31, 2004 $ 100,000 $ 200,000 $ 300,000
------------- ------------------ ---------------
9
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, 2004 was assessed at
zero. Should the Company determine that an impairment exists upon its periodic
review, and it is deemed to be other than temporary, the Company will write down
the recorded value of the asset to its estimated fair value and record a
corresponding charge in the Company's Consolidated Statement of Income.
All companies in which the Company has made equity investments provide
the Company with unaudited financial statements. For each equity method
investment, Newtek management reviews the facts and circumstances that are
apparent to ascertain if an adjustment is necessary to the books of the investee
to make its financial statements materially correct.
NOTE 4 - LOANS RECEIVABLE (NON-CAPCO):
Loans receivable are generated by Newtek Small Business Finance
("NSBF") and are primarily related to entities in the Northeast region of the
United States with concentrations in the restaurant and hotel and motel
industries.
The unpaid principal amount of loans serviced for others of
approximately $127,768,000 and $123,832,000 at March 31, 2004 and December 31,
2003, respectively, is not included on the accompanying consolidated balance
sheets.
Below is a summary of the activity of the SBA loan receivable account,
net of SBA loan loss reserves for the three months ended March 31, 2004:
Balance at December 31, 2003 $ 52,050,725
SBA Loans originated for investment 3,138,056
Payments received in 2004 (2,353,900)
Provision for SBA loan losses (104,681)
Discount on loan originations, net (256,269)
---------------
Balance at March 31, 2004 $ 52,473,931
===============
Below is a summary of the activity of the reserve for loan losses
account for the three months ended March 31, 2004:
Balance at December 31, 2003 $ 1,613,613
SBA Loan loss provision charged in 2004 104,681
Recoveries 16,438
Charge-offs -
---------------
Balance at March 31, 2004 $ 1,734,732
===============
10
NOTE 4 - LOANS RECEIVABLE (NON-CAPCO) (CONTINUED):
Below is a summary of the SBA loans held for sale as of March 31, 2004:
Balance at December 31, 2003 $ 3,619,582
Loan originations for sale 8,111,992
Loans sold (9,449,200)
----------------
Balance at March 31, 2004 $ 2,282,374
===============
Below is a summary of the SBA capitalized servicing assets as of March
31, 2004:
Balance at December 31, 2003 $ 754,064
Additions 474,377
Amortization (65,005)
----------------
Balance at March 31, 2004 $ 1,163,436
===============
As of March 31, 2004 and December 31, 2003, SBA loans that were on a
non-accrual basis amounted to approximately $3,181,000 and $3,201,000,
respectively. As of March 31, 2004 and December 31, 2003, SBA loans due after
one year that have adjustable interest rates amount to approximately $54,293,000
and $51,321,000, respectively.
The Company originates loans to small businesses under the SBA program
that provides a guaranty from 50% to 85% on the total amount of the loan.
Although the legislation under which the SBA guaranty program operates has a
maximum loan amount of $2 million, the Agency administratively placed a
temporary loan maximum of $750,000 due to the lack of congressional budget
approval that was subsequently removed after March 31, 2004. The Company
typically sells the guaranteed portion of each loan to a third party and retains
the unguaranteed principal portion in its portfolio. Loan losses are shared pro
rata between the guaranteed and unguaranteed portions.
The following is a summary of SBA loans receivable at:
MARCH 31, DECEMBER 31,
2004 2003
-------------- -----------
Due in one year or less $ 163,342 $ 168,292
Due between one and five years
2,538,331 2,619,618
Due after five years 52,179,481 51,292,650
---------------- ---------------
Total 54,881,154 54,080,560
Less: Allowance (1,734,732) (1,613,613)
Less: Discount on loan originations, net (672,491) (416,222)
---------------- ---------------
Net Balance $52,473,931 $52,050,725
---------------- ---------------
11
NOTE 5 - EARNINGS PER SHARE:
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents is included in the calculation of diluted earnings per
share only when the effect of their inclusion would be dilutive.
The calculations of Net (Loss) Income Per Share were:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
Numerator:
Numerator for basic and diluted EPS -
income available to common stock holders $ (1,704,056) $ 1,859,326
Numerator for basic and diluted EPS -
extraordinary item -- 186,729
-------------- -----------
Numerator for basic and diluted EPS - $ (1,704,056) $ 1,672,597
income before extraordinary item
============== ===========
Denominator:
Denominator for basic EPS -
weighted average shares 26,471,248 25,409,868
Effect of dilutive securities (stock options and
restricted stock units) -- 251,582
-------------- -----------
Denominator for diluted EPS - 26,471,248 25,661,450
weighted average shares
============== ===========
Net EPS: Basic $ (0.06) $ .07
Net EPS: Diluted $ (0.06) $ .07
Net EPS: Basic before extraordinary gain $ (0.06) $ .07
Net EPS: Diluted before extraordinary gain $ (0.06) $ .07
12
NOTE 6 - SEGMENT REPORTING:
Newtek's reportable segments are as follows: SBA lending, electronic
payment processing and Capcos and other.
Operating segments are organized internally primarily by the type of
services provided, and in accordance with Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" the Company has aggregated similar operating segments into three
reportable segments, SBA lending, electronic payment processing and Capcos and
other.
The SBA lending segment is NSBF, a licensed, Small Business
Administration (SBA) lender that originates, sells and services loans to
qualifying small businesses, which are partially guaranteed by the SBA.
As an SBA lender, NSBF generates revenues from sales of loans,
servicing income for those loans retained to service by NSBF (included in
servicing fee and premium income on the consolidated statements of operations)
and interest income earned on available cash balances and the loans themselves.
The lender also generates expenses such as interest, professional fees, payroll
and consulting, and provision for loan losses, all of which are included in the
respective caption on the consolidated statements of operations. NSBF also has
expenses such as loan recovery expenses, loan processing costs, depreciation and
amortization, and other expenses that are all included in the other expense
caption on the consolidated statements of operations.
The electronic payment processing segment is a processor of credit card
transactions, as well as a marketer of credit card and check approval services
to the small business market. Revenue generated from electronic payment
processing is included on the consolidated statements of operations as a
separate line item. Expenses include direct costs (included in a separate line
captioned electronic payment processing costs), professional fees, payroll and
consulting, and other expenses, all of which are included in the respective
caption on the consolidated statements of operations.
The Capcos and other segment represents Newtek's activities in the
certified capital company market as described in Note 1, as well as investments
not included in the other two segments.
Management has considered the following characteristics when making its
determination of its operating and reportable segments:
o the nature of the products and services,
o the type or class of customer for their products and services,
o the methods used to distribute their products or provide their
services, and
o the nature of the regulatory environment.
13
NOTE 6 - SEGMENT REPORTING (CONTINUED):
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
------------- -------------
Revenue
SBA lending $ 2,140,053 $ 1,322,061
Electronic payment processing 3,232,504 847,804
Capco and other 2,497,936 10,749,579
------------- -------------
TOTAL $ 7,870,493 $ 12,919,444
------------- -------------
(Loss) income before provision for
income taxes and extraordinary items
SBA lending $ 288,761 $ (292,832)
Electronic payment processing 10,573 (375,091)
Capco and other (3,187,564) 3,409,885
------------- -------------
TOTAL $ (2,888,230) $ 2,741,962
------------- -------------
Depreciation and amortization
SBA lending $ 79,204 $ --
Electronic payment processing 168,604 16,674
Capco and other 42,513 28,353
------------- -------------
TOTAL $ 290,321 $ 45,027
------------- -------------
Intercompany Revenue eliminated
above SBA lending $ -- $ --
Electronic payment processing 214,932 92,644
Capco and other 416,532 376,956
------------- -------------
TOTAL $ 631,464 $ 469,600
------------- -------------
Intercompany Expenses eliminated
above SBA lending $ 158,113 $ --
Electronic payment processing 320,656 215,566
Capco and other 152,695 254,034
------------- -------------
TOTAL $ 631,464 $ 469,600
------------- -------------
Identifiable Assets AT MARCH 31, AT DECEMBER 31,
2004 2003
------------- -------------
SBA lending $ 68,293,531 $ 64,738,750
Electronic payment processing 7,213,673 7,308,940
Capco and other 125,213,934 120,136,319
----------- -----------
TOTAL $ 200,721,138 $ 192,184,009
------------- -------------
14
NOTE 7 - SUBSEQUENT EVENT:
On April 28th 2004, Newtek signed an agreement to acquire CrystalTech Web
Hosting, Inc, one of the largest Microsoft Windows-only hosting companies in the
world, with 26,000 customers, 80 percent of which are small to medium-sized
businesses, and an impressive growth of approximately 1,100 new hosting accounts
per month. The agreement with CrystalTech is subject to a number of conditions,
primarily financing. This acquisition greatly enhances the ability of Newtek to
cross-market its menu of business and financial services to a large pre-existing
customer base.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION:
Readers are cautioned that certain statements contained herein are
forward-looking statements and should be read in conjunction with the Company's
disclosures under the heading "Forward-Looking Statements" below. The following
discussion should also be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere herein.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's significant accounting policies are described in note 1
of the Notes to Consolidated Financial Statements included in its Form 10-K for
the fiscal year ended December 31, 2003. A discussion of the Company's critical
accounting policies, and the related estimates, are included in Management's
Discussion and Analysis of Results of Operations and Financial Position in its
Form 10-K for the fiscal year ended December 31, 2003. There have been no
significant changes in the Company's existing accounting policies or estimates
since its fiscal year ended December 31, 2003.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
Revenues decreased by approximately $5,049,000 to $7,870,000 for the
three months ended March 31, 2004, from $12,919,000 for the three months ended
March 31, 2003. Income from tax credits decreased by approximately $8,365,000
from $10,389,000 for the three months ended March 31, 2003, to $2,024,000 for
the three months ended March 31, 2004, due to Newtek's capcos achieving less
investment thresholds mandated by the various state capco statutes in 2004
compared to 2003. Electronic payment processing revenue increased by
approximately $2,385,000 to $3,233,000 for the three months ended March 31,
2004, from $848,000 for the three months ended March 31, 2003, due to the
Company's increase in electronic payment processing customers, as well as the
company's acquisition of Automated Merchant Services in August, 2003.
Servicing fee and premium income increased by approximately $744,000 to
$1,112,000 for the three months ended March 31, 2004 from $368,000 for the three
months ended March 31, 2003 due to the fact that NSBF, the SBA lender,
experienced significant growth in the business.
Interest and dividends are generated from SBA lending activities,
excess cash balances that are invested in low risk, highly liquid securities
(money market accounts, federal government backed mutual funds, etc.), non-cash
accretions of structured insurance product and on held to maturity investments.
The following table details the changes in these different forms of interest and
dividend income:
2004 2003 CHANGE
------ ------ --------
SBA lending activities $ 925,003 $ 915,176 $ 9,827
Non-cash accretions 43,904 43,904 -
Qualified investments 20,829 22,975 (2,146)
Low-risk highly liquid securities 39,212 77,114 (37,902)
------------- ---------- -------------
$ 1,028,948 $1,059,169 $ (30,221)
============= ========== =============
15
The decrease in interest income generated on qualified investments and
low-risk highly liquid securities is attributable to a decline in the average
outstanding balances of held to maturity investments and reduced short term
interest rates on interest bearing cash accounts.
Other income increased by approximately $218,000 to $473,000 for the
three months ended March 31, 2004 from $255,000 for the three months ended March
31, 2003. Other than electronic payment processing and NSBF, this increase is
due to the increased number of consolidating operating entities in the three
months ended March 31, 2004 as compared to the same period in 2003 coupled with
the increase in revenues from existing consolidated operating entities, as they
continue to transition from start up operations.
Changes in interest expense are summarized as follows:
2004 2003 CHANGE
------ ------ --------
Capco interest expense $ 3,021,416 $ 3,001,543 $ 19,873
NSBF (SBA Lender) Interest Expense 501,873 504,586 (2,713)
Other interest 241,485 211,723 29,762
------------- ------------ ------------
$ 3,764,774 $ 3,717,852 $ 46,922
============= ============ ============
The approximately $20,000 increase in Capco interest expense in the
three months ended 2004 was attributable to the new borrowings associated with
the new capco, Wilshire Alabama, funded in February 2004, as well as Wilshire
Louisiana Partners IV, funded in October 2003. The approximately $30,000
increase in other interest expense was attributable to the fact that there were
additional debt instruments associated with the financing of insurance coverage
purchased for the Wilshire Alabama Partners capco during the first quarter of
2004 and the acquisition of Automated Merchant Services during the third quarter
of 2003.
Payroll and consulting fees increased by approximately $521,000 to
$2,185,000 for the three months ended March 31, 2004 from $1,664,000 for the
three months ended March 31, 2003. The increase was primarily due to the
increased number of operating entities consolidated into Newtek in the three
months ended March 31, 2004 versus the same period in 2003. Electronic payment
processing direct costs increased by approximately $981,000 to $2,101,000 for
the three months ended March 31, 2004 from $1,120,000 for the three months ended
March 31, 2003, due to the significant increase in the number of electronic
payment processing customers as well as the acquisition of Automated Merchant
Services in August 2003.
Professional fees increased by approximately $79,000 to $995,000 for
the three months ended March 31, 2004 from $916,000 for the three months ended
March 31, 2003. This increase is primarily due to the increased legal and
accounting services provided due to the significant growth in the company in the
three months ended March 31, 2004 as compared to the three months ended March
31, 2003 . Insurance expense increased by approximately $142,000 to $715,000 for
the three months ended March 31, 2004 from $573,000 for the three months ended
March 31, 2003. This increase is due to the additional insurance relating to the
new capco funded in 2004, Wilshire Alabama Partners, and the new capco funded in
October 2003, Wilshire Louisiana Partners IV.
Provision for loan losses increased to approximately $105,000 for the
three months ended March 31, 2004 from zero for the three months ended March 31,
2003. This is due to the fact that NSBF was acquired on December 31, 2002 and
there were no new loans during the comparable three months ended March 31, 2003.
16
Other expenses increased by approximately $487,000 to $1,194,000 for
the three months ended March 31, 2004 from $707,000 for the three months ended
March 31, 2003. The increase was due primarily to expenses incurred by
consolidated operating entities other than electronic payment processing as
described above. Specifically, the amortization of customer merchant accounts
which were acquired in August 2003 contributed approximately $132,000 to the
increase in other expenses in the three months ended 2004 compared to zero in
the same period in 2003.
Other than temporary decline in value of investments decreased by
approximately $1,713,000 to zero for the three months ended March 31, 2004 from
$1,713,000 for the three months ended March 31, 2003, due to the Company's
determination that there were no other than temporary declines in the value of
investments for the period ended March 31, 2004. During the period ended March
31, 2003, the Company determined that there was an approximately $943,000 other
than temporary decline in the value of its investments for Merchant Data
Systems, Inc., $500,000 for 1-800 Gift Certificate and an approximately $270,000
other than temporary decline in the value of its investments for Direct
Creations, LLC.
For the three months ended March 31, 2004, equity in net losses of
affiliates decreased by approximately $55,000 to $0. This decrease is due to the
fact that the investments accounted for under the equity method were written
down to $0 as of December 31, 2003.
The Company's results of operations declined by approximately
$3,563,000 from net income of $1,859,000 for the three months ended March 31,
2003 to a net loss of $1,704,000 for the three months ended March 31, 2004, due
to the decreases in revenue of approximately $5,049,000 and the increases in
overall expenses of approximately $593,000 discussed above., offset by the
decrease in the taxes of approximately $2,254,000, and the decrease in
extraordinary gains of approximately $187,000.
CONSOLIDATED OPERATING ENTITIES
At March 31, 2004, Newtek had nineteen majority-owned consolidated
operating entities, most of which were as a result of investments through the
capco programs. For the three months ended March 31, 2004, these companies
represented approximately $215,000 in losses that are consolidated in Newtek's
results (net of inter-company eliminations of $631,000 in revenues and $631,000
in expenses). For the three months ended March 31, 2004, revenues from
consolidating operating entities, net of inter-company eliminations, amounted to
$5,723,000 and were generated from the following sources: SBA lending
($2,140,000) electronic payment processing ($3,233,000), outsourced financial
information systems ($97,000), and other ($253,000). For the three months ended
March 31, 2004, expenses incurred by consolidating operating companies, net of
inter-company eliminations, amounted to $5,938,000 and were incurred by the
following sources: SBA lending ($1,851,000) electronic payment processing
($3,224,000), outsourced financial information systems ($156,000), and other
($707,000).
At March 31, 2003, Newtek had fourteen majority-owned consolidated
operating entities, most of which were as a result of investments through the
capco programs. For the three months ended March 31, 2003, these companies
represented approximately $1,036,000 in losses that are consolidated in Newtek's
results (net of inter-company eliminations of $470,000 in revenues and $470,000
in expenses). For the three months ended March 31, 2003, revenues from
consolidating operating entities, net of inter-company eliminations, amounted to
$2,352,000 and were generated from the following sources: SBA lending
($1,322,000) electronic payment processing ($848,000), outsourced financial
information systems ($53,000), and other ($129,000). For the three months ended
March 31, 2003, expenses incurred by consolidating operating companies, net of
inter-company eliminations, amounted to $3,388,000 and were incurred by the
following sources: SBA lending ($1,615,000) electronic payment processing
($1,095,000), outsourced financial information systems ($180,000), and other
($498,000).
17
LIQUIDITY AND CAPITAL RESOURCES
Newtek has funded its operations primarily through the issuance of
notes to insurance companies through the capco programs. Through March 31, 2004,
Newtek has received approximately $184,637,000 in proceeds from the issuance of
long-term debt, Capco warrants, and Newtek common stock through the capco
programs. Newtek's principal capital requirements have been to fund the purchase
of Coverage A insurance related to the notes issued to the insurance companies
(approximately $102,381,000), the acquisition of Coverage B capco insurance
policies ($21,255,000), the acquisition of consolidated operating entity's
interests, identifying other capco-qualified investments, and working capital
needs resulting from operating and business development activities of its
consolidated operating entities.
Net cash used in operating activities for the three months ended March
31, 2004 of approximately $1,606,000 resulted primarily from a net loss of
$1,704,000 adjusted for the non-cash interest expense of approximately
$3,021,000, proceeds from sale of SBA loans held for sale of approximately
$9,449,000, and other non cash charges for stock compensation, depreciation and
amortization, and provision for loan losses totaling approximately $657,000. It
was also affected by the approximately $1,184,000 of a deferred tax benefit,
$256,000 of discount on loan originations, approximately $300,000 of minority
interest, approximately $2,024,000 in non-cash income from tax credits, and
approximately $8,112,000 in SBA loans originated for sale. In addition, Newtek
had a net decrease in components of prepaid insurance, prepaid expenses,
accounts receivable and other assets, and accounts payable and accruals of
approximately $1,622,000.
Net cash used in operating activities for the three months ended March
31, 2003 of approximately $2,332,000 resulted primarily from net income of
approximately $1,859,000, increased by the non-cash interest expense of
approximately $3,091,000. It was also affected by the approximately $1,713,000
in other than temporary decline in value of investments, approximately $288,000
in minority interest, the approximately $10,389,000 in income from tax credits,
and the deferred income tax provision of $1,069,000. In addition, the Company
had an increase in components of prepaid insurance, prepaid expenses, accounts
receivable and other assets, and accounts payable and accruals of approximately
$638,000.
Net cash used in investing activities for the three months ended March
31, 2004 of approximately $880,000 resulted primarily from repayments on SBA
loans of approximately $2,354,000, and approximately $216,000 of purchase of
furniture, fixtures and equipment, offset by approximately $3,138,000 from SBA
loans originated for investment, $136,000 from returns of held to maturity
investments.
Net cash provided by investing activities for the three months ended
March 31, 2003 of approximately $2,080,000 resulted primarily from returns of
principal of approximately $1,518,000, offset by approximately $3,200,000 in
additional qualified investments made in the period. We also received
approximately $2,307,000 in repayments on our loan receivable and we
consolidated approximately $1,409,000 of our investments.
Net cash provided by financing activities for the three months ended
March 31, 2004 was approximately $11,606,000, primarily attributable to proceeds
from the issuance of long term debt of approximately $10,925,000, approximately
$1,848,000 from the private placement of common stock and exercise of stock
options, and proceeds from SBA bank notes of approximately $3,652,000. This was
offset by approximately $3,348,000 in payments for Coverage A insurance,
$779,000 in payments on notes payable-insurance, $120,000 in payments of notes
payable-other, and a change in restricted cash of approximately $573,000.
18
Net cash provided by financing activities for the three months ended
March 31, 2003 was approximately $1,750,000, primarily attributable to
approximately $766,000 from the private placement of common stock, offset by
approximately $1,017,000 in payments on loans payable, and $2,000,000 in
proceeds from the sale of preferred stock of a consolidated entity.
During the three months ended March 31, 2004 we and our affiliated
companies generated cash flow primarily from the following sources:
o private placement of common stock and exercise of stock options,
netting $1,848,000;
o proceeds from issuance of a long-term debt and warrants of
$10,925,000;
o interest and dividend income of approximately $1,029,000;
o proceeds from sales of SBA loans of approximately $9,449,000;
o other income of approximately $473,000, which represents revenue
from Newtek's consolidated operating entities;
o cash received from repayments of SBA loans receivable of
approximately $2,354,000; and
o proceeds from SBA bank notes payable of approximately $3,652,000.
The cash was primarily used to:
o originate approximately $11,250,000 in SBA loans held for
investment and for sale;
o repay "note payable-insurance" of approximately $779,000; and
o purchase of Coverage A insurance of approximately $3,348,000.
During the three months ended March 31, 2003 we generated cash flow
primarily from the following sources:
o private placement of common stock, netting $766,000;
o interest and dividend income of approximately $1,059,000;
o proceeds from the sale of subsidiary preferred stock of
$2,000,000;
o other income of approximately $255,000, which represents revenue
from consolidated operating entities; and
o cash received repayments on SBA loans of approximately
$2,307,000.
The cash was primarily used to:
o invest approximately $3,200,000 in small or early stage
businesses; and
o repay a note payable-other of approximately $1,017,000.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements.
Additional written or oral forward-looking statements may be made by Newtek from
time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "expect," "seek," and "intend" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of income or loss, expenditures,
acquisitions, plans for future operations, financing needs or plans relating to
our services, as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements.
19
Newtek does not undertake, and specifically disclaims, any obligation
to publicly release the results of revisions which may be made to
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
All of our business activities contain elements of risk. We consider
the principal types of risk to be fluctuations in interest rates and loan
portfolio valuations. We consider the management of risk essential to conducting
our businesses. Accordingly, risk management systems and procedures are designed
to identify and analyze our risks, to set appropriate policies and limits and to
continually monitor these risks and limits by means of reliable administrative
and information systems and other policies and programs.
We transact business with merchants exclusively in the United States
and receive payment for our services exclusively in United States dollars. As a
result, our financial results are unlikely to be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets.
Our interest expense is sensitive to changes in the general level of
interest rates in the United States, because a majority of our indebtedness is
at variable rates. At March 31, 2004, $55.6 million of our outstanding
indebtedness was at variable interest rates based on the prime rate. A rise in
the prime rate of one percentage point would result in additional interest
expense of approximately $600,000. However, our interest income would also
increase by approximately the same amount, due to the variability of the
interest rates on our SBA loans receivable. Although management believes that
this measure is indicative of our sensitivity to interest rate changes, it does
not adjust for potential changes in credit quality, size and composition of the
assets on the balance sheet, and other business developments that could affect
net increase (decrease) in assets. Accordingly, no assurances can be given that
actual results would not differ materially from the potential outcome simulated
by this estimate.
We do not hold derivative financial or commodity instruments, nor
engage in any foreign currency denominated transactions, and all of our cash and
cash equivalents are held in money market and checking funds.
ITEM 4. CONTROLS AND PROCEDURES
As of the three months ended March 31, 2004, Newtek Business Services,
Inc. carried out an evaluation, under the supervision and with the participation
of the Newtek's management, including the Newtek's Chief Executive Officer and
the Newtek's Chief Financial Officer, of the effectiveness of the design and
operation of Newtek's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based upon that evaluation, Newtek's Chief Executive Officer
and Newtek's Chief Financial Officer concluded that Newtek's disclosure controls
and procedures are effective in alerting them in a timely manner to material
information relating to Newtek (including its consolidated subsidiaries)
required to be included in Newtek's periodic SEC filings. There have been no
changes in Newtek's internal controls or in other factors that could
significantly affect these controls subsequent to the date Newtek conducted its
evaluation.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed by Newtek under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. Disclosure controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to Newtek's management, including the Chief Executive Officer and
the Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. Disclosure controls include internal controls that are
20
designed to provide reasonable assurance that transactions are properly
authorized, assets are safeguarded against unauthorized or improper use and
transactions are properly recorded and reported.
Any control system, no matter how well conceived and operated, can
provide only reasonable assurance that its objectives are achieved. The design
of a control system inherently has limitations, including the controls' cost
relative to their benefits. Additionally, controls can be circumvented. No
cost-effective control system can provide absolute assurance that all control
issues and instances of fraud, if any, will be detected.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We entered into the following transactions during the three months
ended March 31, 2004 in connection with the sale of our common stock.
------------------------ ---------- --------- --------
Name Date Shares Price
------------------------ ---------- --------- --------
Vincent Negra 1/7/04 9,524 $5.25
------------------------ ---------- --------- --------
Thomas Festa 1/7/04 4,762 $5.25
------------------------ ---------- --------- --------
Bella Borg 1/15/04 50,000 $5.56
------------------------ ---------- --------- --------
Stephen Brenner 1/15/04 18,750 $5.60
------------------------ ---------- --------- --------
Brian Flax 2/3/04 500 $4.68
------------------------ ---------- --------- --------
Jon Schmidt 2/3/04 1,000 $4.68
------------------------ ---------- --------- --------
Josh Solomon 2/4/04 3,200 $4.68
------------------------ ---------- --------- --------
Robert Cohen 2/5/04 50,000 $4.75
------------------------ ---------- --------- --------
Christopher Payne 2/6/04 5,592 $4.47
------------------------ ---------- --------- --------
Robert Cohen 3/18/04 25,000 $4.00
------------------------ ---------- --------- --------
Jeffrey Cohen 3/18/04 25,000 $4.00
------------------------ ---------- --------- --------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits attached to this Quarterly Report on Form 10-Q are:
Exhibit 3(i).1, the Certificate of Incorporation of Newtek Business
Services, Inc., as fully restated to incorporate all amendments through
November 25, 2002.
Exhibits 31.1 and 31.2, Certifications of the Chief Executive Officer
and the Chief Financial Officer.
Exhibit 32.1, Certification pursuant to 18 USC ss.1350.
(b) During the quarter ended March 31, 2004 we filed the following
Current Reports on Form 8-K:
On February 26, 2004, Newtek announced that it had entered into
marketing alliances for the distribution of one or more of its business products
and services with Merrill Lynch Financial Services and CBW Financial Services,
Inc. and announced its plans for the initiation of business by its newly formed
subsidiary, Newtek Insurance Agency.
21
On March 2, 2004, Newtek announced that it had entered into a marketing
alliance agreement with the Navy Federal Credit Union, one of the largest in the
country, for the provision of small business loans for the credit union's
members. Newtek also announced the results of its operations for the year ended
December 31, 2003.
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 BUSINESS SERVICES, INC.
Date: May 14, 2004 /s/ Barry Sloane
-----------------------------------------------
Barry Sloane
Chairman of the Board, Chief Executive Officer
and Secretary
Date: May 14, 2004 /s/ Brian A. Wasserman
-----------------------------------------------
Brian A. Wasserman
Treasurer, Chief Financial Officer and Director
Date: May 14, 2004 /s/ Giuseppe Soccodato
-----------------------------------------------
Giuseppe Soccodato
Controller and Chief Accounting Officer
23