UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from________________ to _________________
Commission file number: 001-16123
NEWTEK CAPITAL, INC.
New York 11-3504638
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Quentin Roosevelt Boulevard
Suite 408
Garden City NY 11530
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 390-2260
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Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.02 per share
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(Title of class)
Securities Registered Pursuant to Section 12(g) of the Act:
None
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X NO
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year:
$23,800,186
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the price at which the common equity
was sold on March 18, 2002, was approximately $16,362,558.
As of March 18, 2002 there were 23,012,517 shares issued and
outstanding of the registrant's Common Stock, par value $0.02 per share.
1
PART I
Item 1. DESCRIPTION OF BUSINESS
The Company
Overview and Business Strategy. Newtek Capital, Inc.
(www.newtekcapital.com) operates as a holding company for a network of its
acquisitions and investments in "partner" companies in a collaborative and
coordinated effort to develop successful businesses in a number of emerging and
small business markets. The management of the Company (which we here refer to as
including both Newtek Capital, Inc. and its affiliated capcos)believes that,
because of the size and strength of the small business market, there will be
substantial long-term growth in being a specialist in acquiring and operating a
network of companies that primarily provide sophisticated business products and
financial services to small, high growth businesses. These companies are focused
on providing financial, business, technological and management services to small
and medium-sized businesses, including each other. Services include financial
and management reporting and planning, back-office data processing, software
development and systems integration, merchant credit card processing, small
business brokerage services, specialized directories to serve various markets
through various media, assistance in capital formation through the help of a
registered broker-dealer, strategic marketing planning and advice, and the
design and implementation of "e-commerce infrastructure" solutions for small and
medium-sized businesses.
As these small businesses proliferate and grow, they create within the
network the opportunity for each of the companies to market their respective
products to each other and each others' customers. This cross marketing has
played a small role thus far, as the Company's businesses are just emerging from
the "start up" stage. However, the Company is working now to create, maintain
and expand a data base of the customers of each business and their clients.
During the coming year, the Company expects to place a major emphasis on this
cross marketing as a key element in its strategy for growth of its businesses in
a manner. In addition, in January 2002 the Company signed a letter of intent to
acquire one of only 14 licensees of the US Small Business Administration
permitted to originate SBA guaranteed loans nationwide. If this acquisition,
which must be approved by the SBA, is completed as now expected by mid-2002, it
will supplement the services which the Company can provide to the small business
market and will enhance the market penetration available through the Company's
network of partner companies.
The Company originated in 1998 through the organization of what are now
nine certified capital companies, or "capcos." To date, the majority of the
Company's acquisitions and other business development efforts have been
undertaken through the nine1 capcos that the Company owns and controls. Prior to
December 31, 2001, the Company had organized and arranged the funding of seven
capcos. During the first quarter of 2002, the Company completed the acquisition
of an eighth, operating, capco in New York and organized and arranged the
funding for the ninth capco under new legislation in Colorado. As of December
31, 2001, the Company had acquired and or provided business development
services, and in most cases funding, for 36 companies. Eleven of these companies
are referred to as our "partner" companies as they are majority owned or
primarily controlled and represent $17,715,170 of investments by the capcos
including investments in consolidated entities. The other investments include
equity investments of lesser percentages or debt investments which are made on a
revolving basis.
The ability of small businesses generally, including these service
providers, to construct and implement innovative business models is critical to
the success of any business, but particularly small businesses. In order to
address this, the Company's business is distinguished from passive investment
and venture capitalists by its direct involvement in the strategic and, in some
cases, day-to-day business decisions and activities of its partner companies.
The Company's principals and staff provide the "hands on" management expertise
typically lacking in the small business environment, initially to the partner
companies and, through them, to other businesses generally. With the aid of the
service providers, both the Company's partner companies and other clients are
able to focus on their core competencies and markets to grow their business. It
is the long-term goal of the Company to become a premier source of the goods and
services that small businesses need to succeed.
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/1/ Pursuant to the law in Louisiana, the Company operates two capco
investments, with funds raised by two separate legal entities, at different
times and with different investors, both under one capco license. The Company,
thus has received only seven (7) actual capco certifications. In addition, it
acquired an additional capco in New York State in early 2002.
2
New technologies have played an important role in the Company's
selection of investments and acquisitions. However, rather than attempting to
acquire and exploit an individual technological concept or product, the emphasis
of the Company has been on providing small businesses with state of the art
technological resources to grow and compete in today's marketplace. Rather than
attempting to speculate on the next technological breakthrough, the Company has
taken the position that the best manner in which to participate in the evolving
technologies is to create and back service and product provider ventures who are
marketing directly to other small businesses. These service providers both
benefit from, and market services based on, the latest technologies, including
information technology and the Internet.
Certified Capital Companies - capos
Overview. A capco is either a corporation or a limited liability
company, established in and chartered by one of the six states currently with
authorizing legislation (Florida, Louisiana, Missouri, Colorado, New York and
Wisconsin). Aside from seed capital provided by an organizer, a capco will issue
debt and equity instruments exclusively to insurance companies, and the capcos
then are authorized under the respective state statutes to make targeted
acquisitions of interests in companies which may be majority owned or primarily
controlled by the capcos after the acquisition is consummated, and which may or
may not be in conjunction with loans to such companies. In most cases, the tax
credits provided by the states are equal to the amount of investment by the
insurance companies in the securities of the capcos, which can be utilized by
them over no less than ten years, or approximately 10 percent (and Louisiana
11%) per year. These credits are unaffected by the returns or lack of returns on
investments made by the capcos.
The Role of Capcos in Newtek's Business Strategy. Management of the
Company has determined that the features of the capco programs facilitate the
use of the capco funds in the support of its development as the holding company
for a network of small businesses. The authorizing statutes in each of the
states in which the Company's capcos operate explicitly allow and encourage the
capcos to take equity interests, which may include majority or controlling
interests, in companies pursuant to the programs. Consequently, the Company may,
consistent with its business objectives, acquire interests in companies through
its capcos and provide management and other services to these companies as parts
of its collaborative network. The Company expects that most investments will
consist mainly of interests in majority owned or primarily controlled partner
companies. The states' objectives of job creation and economic development are
unquestionably met, and since participation in these programs does not require
or encourage short-term profitability, the Company is able to use these funds in
a patient manner. All of the Company's current majority-owned companies are less
than two years old, and all have produced a loss for 2001. Because of the nature
of the capco program, the Company may accept a "normal" level of start up loss,
as it has the ability to devote the time, attention and resources to these
companies which they require to become successful.
The Capco Programs; Tax Credits. In return for making investments in
the targeted companies, the states provide tax credits that are available for
use by insurance companies that provide the funds to the capcos. In order to
maintain its status as a capco, and to avoid recapture or forfeiture of the tax
credits, each capco must meet a number of specific investment requirements,
including a minimum investment schedule. A final loss of capco status, that is
decertification as a capco, could result in loss or possible recapture of the
tax credit. The Company's capcos have
3
agreed with their funding insurance companies to provide, in the event of
decertification, payments by the capco or, as described below, by the capco
insurer to the insurance companies in the nature of compensatory payments, to
replace the lost tax credit.
Investment Requirements. Each of the state capco programs has a
requirement that a capco, in order to maintain its certified status, must meet
certain investment benchmarks. For example, in the state of New York, the capco
must invest at least 25% of its "certified capital" (the amount of the original
funding of the capco by the insurance companies) by 24 months from the initial
investment date, 40% by 36 months and 50% by 48 months. The various states,
which administer these programs through their insurance, banking or commerce
departments, conduct periodic reviews and on site examinations of the capcos in
order to verify that the capcos have met applicable investment requirements and
are otherwise acting in conformance with the statutes and rules. Requirements
include limitations on the initial size of the recipients of the capco funds,
including the number of their employees, the location within the respective
state of the recipients and the recipients' commitment to remain therein for a
specified period of time, the types of business conducted by the recipients, and
the terms of the investments in the recipients. All of the capco programs permit
the capcos to take majority or controlling interests in companies or joint
ventures, as the Company has done and intends to continue to do in appropriate
situations consistent with its strategy to invest in or acquire companies that
add to its collaborative network. Capcos are required to maintain detailed
records so as to demonstrate to state examiners compliance with all applicable
requirements. A failure of a capco to meet one of the statutory minimum
investment benchmarks within the time specified would constitute grounds for the
loss of the capco's status, or its decertification, and the loss and recapture
of some or all of the tax credits previously passed through the capco to its
investors. The minimum investment requirements and time periods, along with the
related tax credit recapture requirements are set out in detail below. See,
also, Management's Discussion and Analysis - Income from Tax Credits and Note 1
to Notes to Consolidated Financial Statements - Revenue Recognition. A
decertification of one of the Company's capcos would have a material adverse
effect on the business of the Company in that it would require the capco insurer
to make compensatory payments equal to the lost tax credits and would permit the
insurer to assume control over the assets of the capco in order to cover its
losses.
Capco Insurance. Under the terms of the insurance purchased by the
Company's capcos for the benefit of their insurance company investors, the capco
insurer assumes the obligation to repay the insurance companies the principal
amount of their debt as well as to make compensatory payments in the event of a
loss of the availability of the related tax credits. The capco insurer, an
international insurance company with a AAA credit rating, would be authorized,
in the event of a threat of or final decertification by a state, to assume
partial or complete control of the business of the capco so as to ensure
compliance with investment or other requirements. This would likely avoid final
decertification and the necessity of insurance or interest payments. However,
control by the insurer would also result in significant disruption of the
capco's business and likely result in significant financial loss to the capco.
Decertification would also likely impair the Company's ability to obtain
certification for capcos in additional states as new legislation makes other
opportunities available. In order to address this risk of decertification, which
may be eliminated entirely by meeting a 100% of capital investment threshold,
the Company's capcos have structured their investment program, consistent with
safe and sound operations, so as to meet the investment benchmarks as early as
possible. The table below presents the dates and amounts paid for the capco
insurance related to the repayment of principal to the insurance company
investors (Coverage A) and the compensatory payments in the event of a loss of
tax credits (Coverage B). See, also, Note 2 of Notes to Consolidated Financial
Statements.
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Premium Paid for Premium Paid for
Capco Date of Purchase Coverage A Coverage B
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WA November 1998 $ 1,647,905 $ 157,694
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Total - 1998 $ 1,647,905 $ 157,694
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WP April 1999 $ 23,127,927 $ 3,998,948
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WLA October 1999 $ 9,175,844 $ 2,193,741
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WI October 1999 $ 9,086,227 $ 2,352,786
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4
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Total - 1999 $ 41,389,998 $ 8,545,475
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WNYII April 2000 $ 5,019,803 $ 504,745
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WA May 2000 $ 661,432 $ 160,068
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WLPII October 2000 $ 2,456,565 $ 319,958
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WNYIII December 2000 $ 29,052,790 $ 4,137,438
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Total - 2000 $ 37,190,590 $ 5,122,209
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During 2001, the Company established Wilshire Colorado Partners, LLC as
a certified capital company in Colorado. It is anticipated that this entity will
receive certified capital from qualified insurance company investors during
April, 2002.
The Company's Ability to Compete. The Company's capcos have competed in
their offerings with the three or four other capcos sponsored by various
national financial organizations, as well as locally sponsored companies in one
or another state. The Company's management believes it has been successful in
raising funds because of:
o the manner in which it has structured the participation by the
insurance companies;
o the insurance which it has been able to obtain to cover any loss of
the tax credits and the obligation to repay principal, resulting in
a credit rating for the instruments of AAA;
o the previous business experience of its principals;
o the national marketing of its programs; and
o the extensive contacts that its management has as a result of
previous experience in the financial community.
The Company has structured these securities as debt instruments and
warrants for participation in the equity of the particular capco. The debt
instruments are supported by the obligations of the capco insurer under Coverage
A, such that the insurer has assumed the primary obligation to make the
repayment of principal upon maturity. The Company's capco debt instruments have
all been rated AAA or the equivalent by Standard and Poor's or another
nationally recognized rating agency. The debt instruments and the tax credits
they are related to are in some but not all state programs transferable, but
such a transfer would have no effect on the Company. The warrants issued by each
capco entitle the holders to between 4% and 20% of the equity of the particular
capco at a nominal exercise price. The warrants have a 10-year term but are not
exercisable for 5 years from issue and presently are not exchangeable for any
securities other than the particular capcos. The warrants do not provide for any
control over the capcos' operations; any such control by an insurance company
would be in violation of the state capco statutes.
These capco programs are, in the view of the Company's management, a
complement to the Company's long-term strategy of being a specialist in
acquiring, developing and operating a network of companies that provide
sophisticated business products and financial services to small, high growth
businesses A significant factor in evaluating potential acquisition
opportunities is a candidate's ability to support and help other partner company
operations. All current capco statutes permit equity as well as debt
investments, and seek to have the capco management provide more than simply
investment capital to the emerging businesses in the state. Based upon the
experience of its management, the Company determined early in the operations of
the capcos that the targeted new and small businesses required much more than
just the funds available in the capcos. These businesses also require
administrative, managerial, technical, legal and financial management assistance
that the Company provided in structuring and building the businesses. All three
of the principal shareholders of the Company have direct and in-depth experience
with early-stage businesses. This hands-on management approach facilitates the
general objectives of the capco programs of economic development, while at the
same time permitting the Company to develop a network of long-term and
synergistic investments in related, partner companies.
Acquisition of Exponential Business Development Company, Inc. On
January 9, 2002, the Company closed the acquisition of all of the stock of
Exponential Business Development Company, Inc., which operates and
5
participates in a private investment partnership and a capco participating in
the New York State capco program. A strategic acquisition to the Company, due to
the high reputations and investment records of its one full time executive
officer and five directors in the Syracuse - Albany area of New York,
Exponential is not a major acquisition due to its small size. The Company issued
a total of 500,000 shares of its common stock to the former owners of
Exponential and is obligated to distribute up to 500,000 additional shares if
the recovery on investments and other assets of Exponential exceeds $1 million,
ratably up to an additional $2 million.
Principal Business Activities: Partner Companies
Majority-owned or Primarily Controlled Partner Companies. The Company
refers to its "partner companies" as those companies in which it owns 50% or
more of the outstanding voting securities, or "majority-owned partner
companies," and those companies in which it owns more than 25%-but less than 50%
of the outstanding securities, and exercises more control over the company than
any other shareholder, or "primarily controlled partner companies." The Company
provides its partner companies business development services, funding and active
participation in management. However, the Company does not act as an agent or
legal representative for any of its partner companies, the Company have the
power or authority to bind them legally, and does not generally does not have
the types of liabilities for its partner companies that a general partner of a
partnership would have. Currently, six of the investments in partner companies
are accounted for as consolidated subsidiaries and five of the investments in
the partner companies are accounted for under the equity method of accounting.
See Note 1 of Notes to Consolidated Financial Statements.
Majority-owned Companies (accounted for under the consolidation method)
At December 31, 2001, the Company had six majority-owned partner
companies, all of which were as a result of investments through the capco
programs. The majority-owned companies were Harvest Strategies, LLC, Universal
Processing Services, LLC , Universal Processing Services - Wisconsin, LLC ,
Universal Processing Services - Louisiana, LLC, PPM Link, LLC., and CB Real Net,
LLC. For these majority-owned partner companies, the Company will generally
actively direct much of their operations. A description of the partner companies
and a summary of their financial results follows; see also "Management's
Discussion and Analysis" and Note 20 the Consolidated Financial Statements.
Harvest Strategies, LLC ("Harvest") provides business development and
outsourced management services to the small and medium sized business market in
the United States. While many startup companies have viable products and
services with exciting potential, history has confirmed that most will fail in a
short period of time due to their lack of management expertise. Unlike
management consulting firms that leave it to management to implement their
suggestions, Harvest is distinguished for "rolling up its sleeves and executing
the plan" as a true operating partner. In addition, its principals have
experience in assisting companies implement multi-national and global
strategies. Harvest has positioned itself as a provider of outsourced executive
management and strategic business development and implementation services to
startup and early stage businesses. This underserved and underdeveloped market
of smaller businesses is largely untouched by the EDS's, Accenture's, and other
large management consulting firms that are strictly focused on Fortune 1000
companies.
Harvest's areas of expertise include sales and marketing, strategy
formulation and implementation, financial services, internal control analysis
and information technology consulting in the areas of operations and systems
management. Upon engagement of Harvest as a strategic partner, each client
undergoes a comprehensive and detailed evaluation to determine the appropriate
level of involvement by Harvest. Factors considered in this assessment include:
o the overall viability, short and long term, of the client's
business;
o the market positioning of the client's product and/or service;
o the client's business planning capabilities in the areas of
marketing, sales and sales management, margin management, human
resources, and technical support;
o the core competencies, skill sets and management skills needed to
accomplish goals and objectives; and
o the financial controls and corporate governance policies in place.
6
Harvest is most frequently retained to assist businesses in the following
areas:
o business plan formulation and implementation
o identification and execution of strategic business initiatives
o corporate governance assistance that formally sets forth all the
appropriate board, management and legal policies
o financial management
o development of product offerings, and recommendations concerning
sales and marketing initiatives
o investor relations management
o recruitment and training of employees, and
o participation in client board meetings as requested.
Universal Processing Services, LLC ("UPS") is based in New York and
markets check, credit and debit card processing services, as well as ancillary
processing equipment and software to merchants who accept credit cards. UPS
focuses on high volume retailers and restaurants by creating strategic alliances
with real estate developers and merchant or tenant associations. In addition,
the company is pursuing partnerships with large nationally established product
and service providers who have similar target markets; merchants who do high
volumes of credit card sales. The company provides merchants credit and debit
card processing, ancillary processing equipment and other related services
through a partnership with a back end processor. Through its processing
relationship, UPS is able to offer its customers highly competitive transaction
fee rates, state of the art equipment and superior customer service. The ability
to target, reach and provide these services to high-end customers will afford
UPS a significant advantage in this highly fragmented marketplace.
Universal Processing Services - Wisconsin, LLC is based in Wisconsin,
and is currently working on transitioning its business from solely a marketing
driven entity that supplies merchant payment services to businesses (like UPS-NY
described above), to both a marketing company and a provider of back end
processing services. This will allow UPS Wisconsin to become a more vertically
integrated player in the marketplace and will ultimately lead to greater
distribution and profit margins. This strategy is being developed and integrated
by a management team led by David Beck, who has had a successful history of
building and selling, Universal Savings Bank, which is a similar business in
this industry.
Universal Processing Services - Louisiana, LLC is currently building
its sales force to market merchant payment services to various types of
businesses in Louisiana and surrounding states. Because of the experience and
local relationships of the management team, the Company believes that it has the
opportunity to successfully market these products to various larger customers
that would often look to a traditional bank to provide these services. The
company is headed by Paul Tompkins, a seasoned business executive who previously
worked for Source Data Systems and American Express.
PPM Link, LLC, ("PPMlink") PPMlink was organized and capitalized in
2001 to raise equity capital for its clients and to supplement the services of
the other Newtek companies in serving the small business market. PPMlink also
owns Newtek Securities, a broker dealer registered with the National Association
of Security Dealers, and placed most efforts into building a data base of
potential investors. Value will be offered to `Investor Members' (both
individual and institutional), by identifying pre-screened, high quality
opportunities that match their pre-specified investment criteria. PPMLink
expects to launch a personalized, confidential web page where investors will be
able to keep track of the investments they have received via email notification,
as well a conduct new searches that are customized for the investor's specific
investment criteria. In addition, Newtek Securities has begun to market its
services as a placement agent for the securities of new and small businesses.
CB Real Net, LLC ("CBRN") was formed to acquire the exclusive rights to
the Coldwell Banker brand name and to organize and sell residential and
commercial real estate brokerage franchises in its exclusive area of
thirty-three European countries. CBRN has made initial sales and is coordinating
sales and marketing strategies and the design and implementation of a
comprehensive advertising strategy involving the broadcast, print and Internet
mediums. In addition, CBRN provides all information technology support to the
franchisees by creating,
7
implementing and maintaining all Internet proprietary systems, including the
design and creation of a web site geared towards disseminating news and
information to consumers, strategic partners and franchisees.
The unadudited summary financials for the Partner companies accounted
for through consolidation follow. These financial statements also reflect the
degree to which the Company's partner companies interact with each other to
provide and market needed goods or, particularly, services from each other. The
income from services provided to other partner companies is shown as
"Intercompany Eliminated Revenue" and the cost of services acquired from other
partner companies is shown as "Intercompany Eliminated Expenses." All such
inter-partner company transactions were conducted on terms and conditions no
less favorable to each party than those available from third parties. See also
Note 21 to the Notes to the Consolidated Financial Statements.
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Universal Processing Universal Processing Universal Processing
Harvest Strategies Services - NY Services - Louisiana Services - Wisconsin PPM Link
===================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
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Cash $1,638,703 (a) $2,969,774 (a) $1,259,089 (a) $1,798,864 (a) $1,700,109 (a)
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Other Assets $117,588 (a) $486,632 (a) $19,251 (a) $46,722 (a) $130,558 (a)
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Total Assets $1,756,261 (a) $3,456,406 (a) $1,278,340 (a) $1,845,586 (a) $1,830,667 (a)
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Current $53,026 (a) $51,630 (a) $7,251 (a) $19,174 (a) $46,553 (a)
Liabilities
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Total Liabilities $970,028 (a) $3,451,630 (a) $7,251 (a) $1,909,074 (a) $1,896,553 (a)
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Total Equity $753,313 (a) $4,776 (a) $1,271,089 (a) $(63,588) (a) $(65,886) (a)
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Universal Processing Universal Processing Universal Processing
Harvest Strategies Services - NY Services - Louisiana Services - Wisconsin PPM Link
===================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
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Revenue $167,256 (a) $219,809 (a) $1,765 (a) $29,407 (a) $71,725 (a)
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Intercompany $(89,077) (a) $(2,394) (a) -- (a) -- (a) -- (a)
Eliminated
Revenue
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Consolidated $78,179 (a) $217,415 (a) $1,765 (a) $29,407 (a) $71,725 (a)
Revenue
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Expenses $413,943 (a) $415,033 (a) $80,676 (a) $92,955 (a) $390,944 (a)
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Intercompany $(22,834) (a) $(54,054) (a) $(12,522) (a) $(1,574) (a) -- (a)
Eliminated
Expenses
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Consolidated $391,109 (a) $360,979 (a) $68,154 (a) $91,381 (a) $390,944 (a)
Expenses
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Net Income $(312,930) (a) $(143,564) (a) $(66,389) (a) $(61,974) (a) $(319,219) (a)
(Loss)
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(a) Company was not yet formed in 2000.
Primarily Controlled Companies (accounted for under the equity method)
At December 31, 2001, the Company had five primarily controlled partner
companies, all of which were as a result of investments through the capco
programs. The companies were Group Management Technologies, LLC, Starphire
Technologies, LLC. Nichedirectories, LLC, AIDA, LLC, and Transworld Business
Brokers, LLC. For
8
primarily-controlled partner companies, the Company will generally have
significant involvement in and influence over their operating activities,
including rights to participate in material management decisions. A description
of these partner companies and a summary of their financial results follows; see
also "Management's Discussion and Analysis" and Note 20 the Consolidated
Financial Statements.
Group Management Technologies, LLC ("GMT") is based in south Florida
and provides "back office' administrative and technological support for small
businesses by building and implementing specialized financial and management
reporting systems and by providing management functions that reduce costs and
management requirements for its clientele. GMT targets the market segment of
businesses that are to small to afford a full time financial executive, but have
grown to the point where managerial and financial controls must be introduced in
order to grow the business to the next level. GMT's specialists work closely
with management to create budgets and forecasts that serve as planning tools as
well as performance evaluation and control benchmarks.
Starphire Technologies, LLC, ("Starphire"), located in Clearwater,
Florida, is a provider of information technology and eBusiness solutions to
small and mid-sized companies. Starphire's flagship product, SiteSage(TM) is a
suite of web development, deployment and management software consisting of a
back office editing environment and a "run time" interpreter to present visible
pages to web browsers. SiteSage(TM) provides a common architecture for the
development of enhanced web functionality in a modular, object-oriented manner.
The software provides a development platform from which technical users can
build custom applications and a back-office editing environment allowing
non-technical users to manage site content quickly and efficiently. Starphire's
niche is to provide software for the "E-nablement" of small to medium sized
businesses, as well as providing customized Internet, intranet and extranet
business solutions
NicheDirectories, LLC, ("Niche") a Florida-based company was founded in
1995. Niche is an online service provider and informational directory for the
summer camp industry. KidsCamps.com (www.kidscamps.com), their flagship brand,
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is an online directory for information on over 1,400 summer camps and
experiences for children. During 2001, the company entered into a joint
marketing agreement with MBNA America Bank, N.A. to provide what management
believes to be the first consumer credit facility specifically designed to
finance children's tuition for summer camp and related recreational and
educational programs. The company also publishes CampJobs.com
(www.CampJobs.com), a job posting site for the camping industry,
----------------
GrownUpCamps.com, (www.GrownUpCamps.com), a directory for recreational and
--------------------
instructional programs for adults, RetreatSearch.com, (www.RetreatSearch.com),an
---------------------
online directory of alternative meeting sites for seminars, reunions and
picnics, and the e-commerce sites CampersMall.com and CampDirectorsMall.com. In
addition, Niche has been recognized by the editors of the Spring 2001 edition of
Forbes Magazine as a "Best of the Web" and the Forbes favorite in the summer
---------------
camp industry for their KidsCamps.com web site and other online publications
Advanced Internet Design and Applications, LLC, ("AIDA") is a
full-service Internet and marketing company which plans and manages the
integration of information technology systems and marketing for small and medium
sized businesses. AIDA guides the development of a `Strategic Information
Technology Plan' that identifies the client's needs from web site development
and networking requirements, through collateral advertising material, to full
service print and ad specialties. Through it's suite of services, AIDA
effectively offers a turnkey solution to small and medium sized businesses who
are ready to launch a presence in cyberspace. Services that are available to
AIDA's Main Street clientele include:
o Strategic Planning
o Website design and production
o Digital imaging services
o Custom software development
o Networking and hosting
o Advertising and marketing
o Print and ad specialty
o Web based staff training
9
Transworld Business Brokers, LLC ("TWBB") is a leader in the marketing
and sale of small to medium sized businesses, and also serves as a consultant in
mergers and acquisitions, in South Florida. TWBB acts as an intermediary between
business buyers and sellers, offering a host of professional services geared
towards facilitating the successful completion of transactions. TWBB specializes
in dealing with businesses in several categories including the automotive,
distribution, restaurant, manufacturing, medical, retail, service, and franchise
industries. TWBB's revenue in 2001 exceed $1,000,000. The Company's goals
include maintaining increased revenues and profitability, and to geographically
expand to include all of Florida and neighboring states, and to introduce new
technological methods of evaluating and facilitating transactions, and
eventually to establish a dominant presence as a business broker on a national
basis.
The summary financials for these Partner companies accounted for
through the equity method follow. These unaudited summary financial statements
also reflect the degree to which the Company's partner companies interact with
each other to provide and market needed goods or, particularly, services from
each other. The income from services provided to other partner companies is
shown as "Intercompany Eliminated Revenue" and the cost of services acquired
from other partner companies is shown as "Intercompany Eliminated Expenses." All
such inter-partner company transactions were conducted on terms and conditions
no less favorable to each party than those available from third parties. See
also Note 21 to the Notes to the Consolidated Financial Statements.
--------------------------------------------------------------------------------------------------------------------------------
Transworld
Group Management Business
Starphire AIDA Technologies Nichedirectories Brokers
================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
Cash $1,352,823 $1,186,430 $3,835,404 $873,219 $17,799 (a) $556,741 $1,091,830 $245,515 (a)
--------------------------------------------------------------------------------------------------------------------------------
Other Assets $460,508 $407,493 $170,464 $89,455 $113,438 (a) $273,328 $242,620 $334,854 (a)
--------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,813,331 $1,593,923 $4,005,868 $962,674 $131,237 (a) $830,069 $1,334,450 $580,369 (a)
--------------------------------------------------------------------------------------------------------------------------------
Current $85,652 $21,129 $60,673 $69,631 $13,795 (a) $354,861 $262,775 $22,457 (a)
Liabilities
--------------------------------------------------------------------------------------------------------------------------------
Total $1,085,652 $21,129 $3,575,323 $69,631 $188,449 (a) $354,861 $262,775 $262,457 (a)
Liabilities
--------------------------------------------------------------------------------------------------------------------------------
Total Equity $727,679 $1,572,794 $430,545 $893,043 $(57,212) (a) $475,208 $1,071,675 $317,912 (a)
--------------------------------------------------------------------------------------------------------------------------------
10
--------------------------------------------------------------------------------------------------------------------------------
Transworld
Group Management Business
Starphire AIDA Technologies Nichedirectories Brokers
================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
--------------------------------------------------------------------------------------------------------------------------------
Gross Revenues $359,761 $158,022 $257,437 $28,085 $281,319 (a) $614,701 $497,194 $1,066,495 (a)
--------------------------------------------------------------------------------------------------------------------------------
Intercompany $(73,397) -- $(41,095) -- $(53,704) (a) -- -- -- (a)
Eliminated
Revenue
--------------------------------------------------------------------------------------------------------------------------------
Consolidated $289,364 $158,022 $216,342 $28,085 $227,615 (a) $614,701 $497,194 $1,066,495 (a)
Revenue
--------------------------------------------------------------------------------------------------------------------------------
Expenses $1,132,209 $283,766 $700,918 $156,036 $787,338 (a) $1,211,169 $592,207 $1,098,683 (a)
--------------------------------------------------------------------------------------------------------------------------------
Intercompany $(46,107) -- $(42,565) -- $(28,154) (a) $(1,014) -- $(8,028) (a)
Eliminated
Expenses
--------------------------------------------------------------------------------------------------------------------------------
Consolidated $1,086,102 $283,766 $658,353 $156,036 $759,184 (a) $1,160,155 $592,207 $1,097,655 (a)
Expenses
--------------------------------------------------------------------------------------------------------------------------------
Net Income $(796,738) $(125,744) $(442,011) $(127,951) $(531,569) (a) $(545,454) $(95,013) $(24,160) (a)
(Loss)
--------------------------------------------------------------------------------------------------------------------------------
(a) Company was not yet formed in 2000.
(b) The Company's investment occurred during the year. As such, the results
represent the company's activity prior to Newtek's involvement, as well as after
Newtek's investment. See "Note 3 - Investments in Qualified Businesses" for
investment dates.
Other Companies In addition to its principal business activities
focused on the provision of services to small and medium sized business, the
Company also has made investments, usually smaller or in the form of debt, in a
number of other companies. In particular, the Company operates as a small
business lender through its Louisiana capco and plans to expand this lending in
the future. For those companies in which the Company's equity ownership and
voting power is less than 25%, excluding the lending activity, the Company is
generally not actively involved in the management or day-to-day operations, but
offers them advisory services or assistance with particular projects, as well as
the collaborative services of its partner of companies. In pursuing business
objectives, The Company intends to hold a decreasing portion of its total assets
in companies in which it has voting power of less than 25%, but these companies
are an important part of the network that the Company is developing, as they
supplement the services available to the other companies and they provide access
to markets and customer lists that are valuable for all of the other
Company-related entities in one manner or another.
As the Company pursues its business strategy and focuses on the
acquisition of majority or controlling positions in additional partner
companies, it expects other company investments to comprise a shrinking portion
of its overall income and value. In addition, the Company may, to the extent
possible, increase its interests in these companies so that it has an ownership
interest sufficient to integrate them within its network of partner companies.
Alternatively, it may dispose of some or all of the interests in other
investments if, in the aggregate, they are anticipated to constitute more than
30% of the Company's non-consolidated total assets (exclusive of Government
securities and cash items). See "Government Regulation; Investment Company Act
of 1940.
A listing of all of the debt or equity investments in these and all
other companies is set forth in Note 3 to the Consolidated Financial Statements.
The principal investments in this category are described below.
Distribution Video and Audio, LLC is a seller of closeout VHS
videotapes, DVDs, video games and CD/cassette music units in the wholesale and
library markets. This company has built a large inventory of these media
products by purchasing on a liquidated basis from major studios and retailers,
and distributes these products to
11
other distributors, public libraries, school districts, US Embassies in 120
countries and other traditional means of distribution.
1-800 Gift Certificate, Inc. ("1-800") is a provider of corporate
incentive solutions through proprietary Internet-based programs that attempt to
influence consumer and employee behavior by enabling them to select the award of
their choice. In conjunction with providing solutions, 1-800 builds a data base
of incentive program participants. By retaining the rights to this database, the
company creates powerful revenue opportunities by developing these databases for
third parties. 1-800 combines Internet-based solutions with gift certificates
from over 150 national retailers to create dynamic reward/incentive programs.
The company's web-based infrastructure provides participants real-time access
through multiple channels, both online and off. It also provides administrators
with a platform that is flexible, scalable and cost-effective.
Direct Creations, LLC is a direct response marketing company that
develops and markets innovative products for sale to consumers through short and
long-term television advertisements, electronic and traditional retail
distribution channels and the Internet. The Company has launched the "Zen
Oracle" golf-training putter and signed Jesper Parnevik, one of the PGA Tour's
elite players, to endorse the new golf putter. The company has several other
innovative products currently in its pipeline. The principals of the company
have over twenty-five years of experience in the direct response industry, with
expertise in the areas of manufacturing, marketing, infomercial production,
advertising and intellectual property development. Additionally, the company
just formed a wholly owned subsidiary to provide media financing for other
direct marketing products.
Merchant Data Systems, LLC ("MDS") (www.merchantdatasystems.com) offers
almost all types of businesses an array of services including credit and debit
card processing, electronic benefits transfer, electronic check services,
equipment sales, leasing and rental programs, 24-7 customer service, supplies
and technical support, as well as other related payment processing products and
services. Through network resources, MDS can offer all the necessary credit card
services to meet the needs of almost any commercial establishment in the United
States and Canada. MDS relationships include some of the largest FDIC insured
banks in the United States.
BuySeasons, LLC, a Wisconsin based company, is a retailer of seasonal
merchandise and category specific, informational content on the Internet. The
company creates category-specific and uniquely branded web sites that utilize
the same personnel and site infrastructure but serve different peak selling
periods, thereby leveraging fixed costs and expenses. By producing a "family" of
Internet sites that target specific markets, BuySeasons is able to provide a
multitude of products to an increasingly diverse customer base.
Selection Philosophy. There are currently four prevailing themes in the
selection of partner companies which play a guiding if not absolute role in the
investments of the Company, its capcos and subsidiaries.
o First, service provider companies that are able to provide business
and management services to small and medium sized businesses in a
cost effective way. The service providers' ability to construct
innovative business models, target new market opportunities, define
growth plans and develop new service offerings plays an important
role in the overall success of the Company's partner companies as
well as other small businesses.
o Second, are small businesses that have developed a product or
service, sold this product or service to an existing, defined
customer base and have successfully captured a meaningful segment of
a market. These companies benefit from the other, service provider
partner companies' core competencies which are used to support and
supplement the existing management skills. This structure lets the
management teams exploit their personal strengths as managers and
supplement their needs through an integrated network of service
provider companies.
o Third, are strong management team members and core competencies to
add to the partner company network. Generally, these partner company
investments involve the replication of an existing partner company's
products and services in another geographic region in which the
Company operates.
12
o Fourth, the ability of the business to add large numbers of other
small businesses to the marketing universe of affiliated companies
as to facilitate the cross marketing of many other products and
services. This ties in directly with the Company's overall objective
of aggregating numerous small business markets for purposes of
cross marketing.
The Company has adopted a committee approach to investment or partner
selection decisions, thereby tapping the experience of all participants in the
process. A key feature of the Company's decision-making process is its
requirement that the selection of companies to include within its collaborative
network and other investments be made unanimously by the senior management and
the local participants in the involved Regional Business Development Center. The
Company believes that this unanimity requirement ensures that its decisions will
continue to be well developed, sound and consensus oriented.
Other Investments. Investments by the Company that are not qualified
capco investments are included on the Company's balance sheet in "prepaid
expenses and other assets". At December 31, 2001, the Company's other
investments were carried at their cost basis of $567,000.
Execution
Regional Business Development Centers. A key to the implementation of
the Company's strategy is its emphasis on the selection and developmental
efforts of its existing eight Regional Business Development Centers. These
Regional Business Development Centers have been and will continue to be placed
in areas traditionally underserved by business development firms, in areas away
from "Silicon Valley" on the west coast and "Silicon Alley" on the east coast.
These offices are valuable because they are staffed or associated with
individuals with experience in working with small businesses who are able to
identify and evaluate potential partner companies and other investments or
acquisitions and they are also able to provide important services for the
Company in its monitoring and acquisition efforts. In many cases, these
individuals have made substantial investments in the equity of the capcos
associated with their regional centers and are committed to the success of the
Company's program.
Once a company becomes associated with Newtek, it benefits not only
from access to financing that the Company can make available or assist in
finding, but also from the synergistic business relationships among the other
partner companies, as well as the involvement of the Company's senior management
and its Advisory Committee, (described below), all of whom have significant
experience in meeting the critical needs of small businesses.
Business Development Services. Essential to the success of any business
venture is the formulation and implementation of a sound business strategy. The
Company, through it senior management, regional management, advisors and
associated professionals, works directly with its partner companies and other
companies for which it provides management, strategic planning, marketing and
financing in order:
o to create and implement their business model;
o to recruit and locate key members for their senior management, board
of directors and board of advisors;
o to establish and coordinate strategic joint ventures in
distribution, marketing and finance;
o to coordinate and grow strategic relationships among all of its
partner companies;
o to offer its hands-on experience in all aspects of joint venture and
contract negotiation;
o to help secure additional financing;
o to identify and implement new technologies which can enhance the
development of existing businesses, including web site development;
o to identify and implement marketing strategies that will enable the
developers of new technologies to find acceptance for their services
among the partner companies or on a broader basis; and,
o to reposition or augment existing platform companies with e-commerce
strategies.
Since its inception in 1998, the Company has added personnel in
employee or independent contractor capacities in order to meet the requirements
of monitoring and serving its partner companies and other investments. Through
these resources, supplemented by the resources of the Regional Business
Development Centers, the Company has secured the services of individuals in the
areas of financial management, business management and
13
analysis, contract finance, general business operations and computer and
Internet technology. Management of the Company believes it currently has
sufficient resources, including the resources available through the Advisory
Committee, for its present needs. The partner companies have developed into an
important source of business development support for each other, either through
the "cross-marketing" of essential goods or services, or through making
available the benefit of their experiences in addressing similar business
problems.
Regional Managers. The Company's regional management consists of the
following individuals.
Christopher Bauer, Wisconsin - Mr. Bauer has had over 28 years of
experience in commercial banking at Firstar Corporation, a $38 billion
diversified financial services company. For the last 10 years Mr. Bauer has
served as the President of Firstar Bank of Milwaukee. Firstar Bank of Milwaukee
is considered one of the region's leading banks in structuring and financing a
host of commercial products, including capital markets, structured finance,
mergers and acquisitions and venture equity investments, especially in small to
mid-ranged companies. Prior to serving as President, Mr. Bauer directed all
merger and acquisition activity for Firstar, following 15 years experience in
various capacities focused on consumer and small business banking. He was also a
director of the $10 million Wisconsin Venture Capital Fund, which assisted small
early-stage Wisconsin companies.
Charles W. Kearns, Wisconsin - Mr. Kearns has spent the last 16 years
working with both regional and national investment banking firms including E.F.
Hutton, Salomon Smith Barney, Cleary Gull, and B.C. Ziegler & Co. Mr. Kearns'
experience includes Manager of the Financial Institutions and Fixed Income
Departments, as well as serving on the Board of Directors at Cleary Gull. Mr.
Kearns is currently founder and Principal of Premier Financial Corporation, a
financial advisory firm. He has participated in raising venture capital for
several enterprises, including Internet and financial service companies, as well
as numerous private and public placements of debt and equity securities. Mr.
Kearns is also co-founder and owner of Klein Corporation, a manufacturing
company in the standby power industry.
Gregory L. Zink, Florida - Mr. Zink has over 20 years of broad based
international financial and managerial experience in public and private
corporations. Mr. Zink also has over 10 years experience in the venture capital
business including investing, structuring, consulting, and managing investments
in both early stage and mature private and public businesses. Mr. Zink has
previously served as the investment advisor and consultant to a private
investment trust with assets in excess of $30 million as well as a Director,
President, CEO and CFO of Heuristic Development Group, Inc.("HDG"). Mr. Zink was
a founder and President at the time of HDG's initial public offering on NASDAQ.
He has also been the Chairman and CFO of Nekton Diving Cruises, Inc. and
currently serves as a Director, CEO and CFO of Nautilus Group Japan, Ltd.
("NGJ"). NGJ is the exclusive distributor and franchiser of Nautilus in Japan.
During Mr. Zink's tenure, he has negotiated several contracts and a leveraged
buyout with some of Japan's largest corporations, including Mitsubishi and
Sumitomo. Mr. Zink earned his MBA from the Wharton Business School at the
University of Pennsylvania in 1983 and his BS in Finance from Pennsylvania State
University in 1979. In 1981, he graduated from General Electric Corporation's
Financial Management Program after holding a variety of financial positions at
GE's Lighting Business Group in Cleveland, Ohio. Following graduate business
school, Mr. Zink was employed as a Senior Consultant with Touche Ross (now
merged as Deloitte Consulting). During his three years, he worked on a variety
of financial, strategic and operational consulting assignments.
Jeff M. Schottenstein, Florida - During the past 30 years, Mr.
Schottenstein has been a Director of Schottenstein Investment, a diversified
investment holding company with $650 million in assets, Vice President of
Schottenstein Stores' Value City Stores Division (NYSE symbol VCD) and CEO of
Schottenstein Realty Company, which specializes in the investment and
restructuring of companies. Mr. Schottenstein has been involved in the
capitalization and restructuring of numerous retail enterprises, including
Weiboldts' Department Stores, Chicago, Illinois; Strauss Auto Parts, New York,
New York; Valley Fair Discount Stores, New Jersey; Steinbach Stores and others.
Along with his investors, Jeff Schottenstein has successfully acquired Bell
Supply Company (retail oil and gas equipment supply company based in Kilgore,
Texas) and Omni Exploration Company, the first successful Chapter 11
reorganization of an oil and gas service company in the United States. Mr.
Schottenstein also serves on the Board of Directors of the Company.
14
F. Anderson Stone, Louisiana - Mr. Stone has more than 25 years of
institutional credit analysis and investment experience managing high-grade
public and private corporate, high yield public corporate, and mortgage-backed
fixed income; equity; limited partnership and alternative asset portfolios for
income and growth. Mr. Stone has held various life insurance investment
positions including Vice President, Corporate Securities at Pan-American Life
Insurance Company, and Senior Portfolio Manager at The Life Insurance Company of
Virginia and Second-Vice President-Investments at Shenandoah Life Insurance
Company. As a registered investment advisor and registered representative, he
has advised individuals and institutions in the formation and implementation of
portfolio strategies.
Dirk E. Sonneborn, New York - Mr. Sonneborn organized and operates the
Exponential Business Development Company, Inc., ("Exponential") which the
Company acquired in January 2002. Mr. Sonneborn has 25 years experience as a
certified public accountant and, while at a predecessor firm of
PricewaterhouseCoopers, LLP, he was a manager in the Emerging Business Service
Group focused on new and emerging businesses. He has managed the capco program
and its investments for Exponential and has participated as an investor in
numerous technology oriented business ventures in the upstate New York area. He
was also a founding member in 1986 of the Technology Business Advisory Group, a
trade organization based in Syracuse. As a resource within the Company's network
of companies, Mr. Sonneborn will be available to assist other partner companies
their business plans.
Doug Baird, Colorado - Mr. Baird is Vice President - Marketing for The
Stone Pine Companies, Denver, CO. Since 1997 Mr. Baird has sourced
Colorado-based venture transaction-flow for Stone Pine and maintains strong
relationships within the state's venture community. He has built and maintains
Stone Pine's database of active private equity funds, sponsors and private
equity advisors. Mr. Baird has developed long-standing relationships with senior
members of Hamilton Lane Advisors, Inc., the private equity advisor to several
of the US's largest public employee pension systems. For 17 years prior to
joining Stone Pine Mr. Baird had developed and/or marketed finance and
investment products to institutional and retail clients including leasing
portfolios, commercial real estate transaction, public securities as well as
private equity venture transactions. With associates and partners he has been
responsible for capital raises in excess of $100 million. In 1991 Mr. Baird
founded and served as Managing Director of Golden State Financial Services, LLC,
a Denver-based private investment banking firm. Mr. Baird negotiated several
private financing facilities including one between a large Denver homebuilder /
site developer and GE Capital. That relationship has grown significantly beyond
the initial $20 million. Subsequently, he sold his share of Golden State to
partners and outside investors. Mr. Baird was Vice President and Regional
Marketing Director for Franchise Finance Corporation of America (FFCA) from 1988
through 1991. He was responsible for implementing marketing strategies and goals
developed by Chairman Paul Bagley and National Marketing Director Wayne Harber.
While at FFCA Mr. Baird assisted in raising over $200 million in private equity
investments for issuers in a variety of industry sectors, including FFCA's
flagship fund, Fiduciary Capital Partners, L.P. Mr. Baird received N.A.S.D.
Series 7 and 63 licenses in 1980 and began his NYSE career in 1983 at the member
firm PaineWebber, Inc. He received a Bachelor of Science in Behavioral
Psychology and Economics from Western Michigan University in 1979.
The individuals managing the Regional Business Development Centers (the
"regional managers") have all participated in the capitalization and
organization of the capco located in their area. They serve a number of
functions within the Company's business model. The regional management are the
local principals that satisfy any applicable capco requirements for the
participation of local parties with investment experience. In addition, each
individual, excluding Mr. Schottenstein, have consulting agreements with one of
the Company's non-capco subsidiaries whereby they provide time and resources
(office space, telephones, supplies, clerical assistance) to the management of
their respective capco. Fees paid to the regional managers are a portion of the
management fee earned by the Company for the management of the capco funds, and
range in amount from $77,000 to $115,000 per year. Two of the individuals devote
a much greater proportion of their time to the affairs of their capco and are
employed by the Company's subsidiary at salaries of approximately $120,000 per
year. These costs are not paid or reimbursed by the capcos or the partner
companies.
These consulting agreements require that the regional managers provide
a meaningful amount of their time, but none are on a full time basis and all
conduct other activities, and other investments, as well. Included within the
services provided are the business development services provided by the Company
to the investee companies which receive funds from a capco. As the regional
managers have been chosen because they have many years of relevant experience,
the investee companies are able to benefit from the availability of their
experiences, knowledge, contacts, resources and skills. Partner companies and
other investees who receive these services do not generally pay anything for
them as they are provided by the Company to ensure the success of its
acquisitions and investments.
15
However, when a partner company within the Company's network purchase services
from another partner company, it pays the fair value for those services but,
because of inter-company eliminations, the effect on the Company is nil.
Similarly, the capcos themselves require attention for the
identification of debt or equity investments in order to meet their respective
minimum investment goals under the programs. The regional managers are an
important part of the Company's efforts to identify and screen appropriate
investments because of their deep knowledge of and participation in their
communities. The cost of these services are included in the consulting
agreements with the individuals. Finally, because of their stature in their
communities, the regional managers are able to assist the Company in its newer
initiatives in non-capco areas. The most notable example is the role which the
managers of the Regional Business Development Center in Wisconsin have played in
the organization and initial funding commitments for a new Small Business
Investment Company to be operated, subsequent to SBA approval, by a subsidiary
of the Company and to be funded jointly by the Company's capco and numerous
local community banks. As the regional managers will be devoting additional time
to these projects, they will be provided additional compensation and will share
in the equity of the program.
The Company's Regional Business Development Centers are located as
follows:
o Wisconsin o New York
--------- --------
1330 West Towne Square Road 845 Third Avenue, 8th Floor
Mequon, Wisconsin 53092 New York, New York 10022
o Florida o New York
------- --------
1000 Brickell Avenue 100 Quentin Roosevelt Blvd
Miami, Florida 33131 Garden City, New York 11550
o Louisiana o New York
--------- --------
1 Canal Place 300 Pearl Street, 10th Floor
New Orleans, Louisiana 70130 Olympic Towers
Buffalo, New York 14202
o Colorado o New York
-------- --------
1530 16th Street 216 Walton Street
Denver, Colorado 80202 Syracuse, New York 13202
Advisory Committee. The Advisory Committee has been used as a direct
extension of the Company. Advisory Committee members are a source of information
and are used to focus on specific technologies and industries where the highest
level of sophistication is required for business development. The Advisory
Committee consists of individuals from diverse backgrounds, but with specific
knowledge regarding different aspects of business development, technology and
the Internet. The individuals include:
o Alfonse D'amato - Former United States Senator
o Michael Balboni - New York State Senator
o David Simon - Director/Vice President of Business Development of
e-Citi/Citibank N.A.
o Bruce Richards - President and Chief Executive Officer of Marathon
Asset Management Company
o Barry Simon - Vice President, Content Development - American Express
o Peter Fitzpatrick - Partner in Gunderson Partners, a global
executive search firm.
16
Members of the Newtek Advisory Committee have provided or are currently
providing assistance in areas such as the introduction and negotiation of
potential joint ventures, marketing analysis and strategic advice to the Company
and the partner companies and management recruitment assistance. Specifically,
advisory members have provided assistance to partner companies in the area of
negotiating a consumer credit facility with a major national financial service
provider and have assisted in the solicitation of credit card processing
businesses. The members of the Company's Advisory Committee have made themselves
available to consult with management or partner companies on an as needed basis.
The compensation provided to the members of the Advisory Committee has been in
the form of, generally 10,000, stock options. Depending on the scope and extent
of services provided by a member of the Advisory Committee, the Company may
agree to enter into additional compensation arrangements if so warranted; in
January 2002, it entered into a six month consulting agreement with one of the
current Advisory Directors
Government Regulation; Investment Company Act of 1940
Overview. Because of the nature of the business of the Company and of
the activities of the Company's principal operating company other than the
capcos, The Whitestone Group, LLC, management of the Company has addressed the
question of the application of the Investment Company Act of 1940, as amended
(the "Investment Company Act"), to the business of the Company. As discussed
below, the application of the Investment Company Act to the Company would impose
requirements and limitations that are materially inconsistent with the Company's
current and intended business strategy.
Companies that are publicly offered in the U.S. and which (1) are, or
hold themselves out as being, engaged primarily or proposing to engage primarily
in the business of investing, reinvesting or trading in securities, or (2) own
or hold investment securities exceeding 40% of the value of their total assets
(adjusted to exclude U.S. government securities and cash) and are engaged in the
business of investing, reinvesting, owning, holding or trading in securities,
are considered to be investment companies under the Investment Company Act.
Unless an exclusion from registration were available or obtained by grant of an
Securities and Exchange Commission order, these companies must register under
this Act and, thus, become subject to extensive regulation regarding several
aspects of their operations.
The SEC has adopted Rule 3a-1 that provides an exclusion from
registration as an investment company if a company meets both an asset and an
income test and is not otherwise primarily engaged in an investment company
business by, among other things, holding itself out to the public as such or by
taking controlling interests in companies with a view to realizing profits
through subsequent sales of these interests. A company satisfies the asset test
of Rule 3a-1 if it has no more than 45% of the value of its total assets
(adjusted to exclude U.S. government securities and cash) in the form of
securities other than interests in majority owned subsidiaries and companies
which it primarily and actively controls. A company satisfies the income test of
Rule 3a-1 if it has derived no more than 45% of its net income for its last four
fiscal quarters combined from securities other than interests in majority owned
subsidiaries and primarily and actively controlled companies.
The Company's business strategy and business activities involve taking
mainly majority-ownership and primary controlling interests in partner companies
with a view to participating actively in their management and development. The
Company believes that this strategy and the scope of its business activities
would not cause it to fall within the definition of investment company or, if
so, provide it with a basis for an exclusion from the definition of investment
company under the Investment Company Act.
Asset and Income Composition. The Company has determined that as of the
end of its last fiscal year, no more than 40% of the value of its total assets
(adjusted to exclude U.S. government securities and cash) consisted of
investment securities. The value of the Company's holding of securities as of
the date, for purposes of the definition of investment company under the
Investment Company Act, consisted mainly of its interests in partner companies,
which are majority owned or primarily controlled subsidiaries of the Company or
its affiliated companies. In addition, the Company has determined that as of
that date, no more than 45% of the value of its total assets (adjusted to
exclude U.S. government securities and cash) consisted of securities other than
its interests in its partner companies, and that for its most recent fiscal
quarters, the Company has not derived more than 45% of its net income combined
from securities other than its interests in its partner companies. Consistent
with the Company's investment
17
strategy, the Company intends to hold its interests in its partner companies
generally for the long-term, not with a view mainly to realize profits from
subsequent sales of interests in these companies.
The Company's Board of Directors has determined to monitor the value of
the Company's assets and the sources of its income on at least a quarterly basis
to ensure compliance with the requirements of the Investment Company Act and
related rules.
To maintain compliance with Rule 3a-1, or otherwise to ensure that the
Company does not fall within the definition of investment company, the Company
may be unable to sell assets which it would otherwise want to sell and may need
to sell assets which it would otherwise want to retain. In addition, the Company
may have to acquire additional income or loss generating assets that it might
not otherwise have acquired and may need to forego opportunities to acquire
interests in attractive companies that might be important to its business
strategy. In addition, although the Company's partner companies may be majority
owned subsidiaries or primarily controlled companies when it acquires interests
in them, changes in the value of the Company's interests in its partner
companies and the income/loss and revenue attributable to its partner companies
could result in these assets being treated as investment company assets.
"Holding Out" As An Investment Company. Notwithstanding the composition
of the Company's assets or income, Newtek or any other company may be deemed to
be an investment company for purposes of the Investment Company Act as a result
of the manner in which it presents itself to the public and its shareholders. In
particular, public statements, securities filings or other actions may cause the
Company or any other company to be perceived as an investment company regardless
of its asset and income composition. Because of the manner in which the Company
originated, the structure of the capco funding, and the reduced but still
present activities related to previous venture capital approach of one of the
Company's subsidiaries, management of the Company has determined that the need
exists for a clear statement of the company's intent with respect to the
Investment Company Act. In June 2000, the Company's Board of Directors adopted a
resolution stating, in part, that it is the determination of the Board that the
Company not be engaged primarily in the business of investing, reinvesting,
owning, holding or trading in securities, and that these activities may only be
undertaken in a manner consistent with the business strategy of the Company to
make its principal business that of holding majority or primary controlling
interests in a network of early stage and emerging businesses. Management was
directed to make periodic reports no less frequently than quarterly as to the
status of the Company's operations and continued conformance with the asset and
income tests under the Investment Company Act and to determine and take or
recommend for Board approval actions necessary to maintain compliance, including
the acquisition or disposition of assets. A statement of intent by the Board of
Directors is not, however, dispositive of whether the Company is "holding out"
as an investment company under the Investment Company Act.
Consequences of Investment Company Regulation. Investment Company Act
regulations are inconsistent with the Company's strategy of actively managing,
operating and promoting collaboration among its network of partner companies,
and it is not feasible for the Company to operate its business as a registered
investment company. The Company believes that because of the planned structure
of the Company's interests in its partner companies and its business strategy,
it will not be regulated under the Investment Company Act. However, the Company
cannot assure you that the structure of its partner company interests and other
investments and its business strategy will preclude regulation under the
Investment Company Act, and the Company may need to take specific actions that
would not otherwise be in its best interests to avoid such regulation.
If the Company falls under the definition of an investment company, and
is unable to rely on an available exclusion or to obtain an order of the SEC
granting an exclusion, it would have to register under the Investment Company
Act and comply with substantive requirements under the Investment Company Act
applicable to registered investment companies. These requirements include:
o limitations on the Company's ability to borrow;
o limitations on the Company's capital structure;
o restrictions on acquisitions of interests in associated companies;
o prohibitions on transactions with affiliates;
18
o restrictions on specific investments; and
o compliance with reporting, record keeping, voting, proxy disclosure
and other rules and regulations.
These rules and regulations would significantly change the Company's
operations and prevent it from executing its business model.
Government Regulation; State Capco Regulations
Each of the states which operate capco tax credit programs have
established administrative mechanisms to monitor compliance with the
requirements of the programs, that is to verify that the capcos have met
applicable minimum investment requirements and are otherwise acting in
conformance with the statutes and rules. Requirements include limitations on the
initial size of the recipients of the capco funds, including the number of their
employees, the location within the respective state of the recipients and the
recipients' commitment to remain therein for a specified period of time, the
types of business conducted by the recipients, and the terms of the investments
in the recipients. Capcos are required to maintain detailed records so as to
demonstrate to state examiners compliance with all applicable requirements.
Contrary to other programs, the regulatory requirements applicable to capcos
are, generally, limited to the minimum investment requirements. The capcos
operated by the Company are currently in full compliance with all applicable
requirements and management anticipates no difficulty in maintaining that status
in the future.
Shareholder Value
The Company's principal business objective is to promote longer-term
shareholder value for its shareholders and those of its partner companies. An
important component of the selection of each partner company is an analysis of
the potential shareholder value that ultimately could be realized, in most cases
through a public offering of their stock. This enables management and employees
of the partner companies to realize the value they have created and continue to
create in the company, obtains an independent source of financing for further
growth and creates a valuable currency for making strategic acquisitions. In the
event of an initial public offering by a partner company, the Company would
generally expect to retain a majority or controlling interest in the company and
to benefit as a shareholder from the increased public company value. While the
Company will continue to acquire interests in its partner companies for
long-term gain, and does not anticipate selling the interests in them in the
ordinary course of business, other than as part of the merger or sale of an
entire company, the Company may, from time to time, undertake sales of its
interests when it believes the action to be in the Company's and the
shareholders' overall best interests. Such possible sales will be influenced in
part by the need to monitor and control the receipt of the type of income that
would cause the Company to be subject to regulation as an investment company.
See Government Regulation: Investment Company Act of 1940 - Asset and Income
Composition. The Company's management has the experience and has taken an active
role in advising partner companies and others on strategies to maximize
shareholder value, including:
o a public offering;
o joint ventures or merges with strategic partners;
o sales to financial buyers;
o recapitalization of the business;
o merger with a public company;
o private sale of an equity interest to investors; or
o a spin-off or sale of the company or individual business segments.
The Company's management has extensive experience with each of these techniques
and believes it will be of material assistance to its partner companies in
selecting and implementing the appropriate strategy.
Risks Associated with the Company's Business
The following factors are important to understand management's current
assessment of the principal risks associated with the Company's business.
19
1. There is a risk that the Company and its partner companies may not
be profitable on a consolidated basis, or may never become profitable. The
Company's partner companies are and are expected to remain in early stages of
development and will have limited revenues. Further, the income, if any,
generated by partner companies will be offset by losses of other partner
companies. Moreover, the Company's continuing acquisition of interests in early
stage partner companies may further hinder profitability. The Company's
short-term success will depend heavily on the continued operations of its
capcos.
2. If the Company cannot acquire interests in attractive partner
companies on reasonable terms, the Company's business strategy may not succeed.
The Company may be unable to acquire an interest in businesses for a number of
reasons, including:
o a lack of capital sufficient to acquire an interest in the company;
o incompatibility of vision and strategy between the Company and a
business;
o a failure to agree on terms of the acquisition, such as extent or
price of acquisition;
o competition from other acquirers; or
o the unwillingness of the target to partner with the Company.
These factors create the possibility that the Company may not be able to compete
effectively with current or future competitors, and these competitors may limit
the Company's opportunities to acquire interests in new partner companies.
3. The value of the Company's common stock could be adversely impacted
by the performance of its partner companies, aspects of which may be outside the
control of the Company. Each of the partner companies may be impacted by
economic, governmental, industrial and internal company factors outside the
control of the Company. If the partner companies do not succeed, the value of
the Company's assets and the price of the Company's stock would decline.
4. Because the Company's capcos are subject to various state law
requirements, a failure of any of them to meet these requirements could subject
the capco and the Company's shareholders to serious financial consequences. In
general, the Company's capcos issue debt instruments to insurance company
investors and the capcos then acquire interests in companies in accordance with
applicable state statutes. In return, the states issue tax credits to the
capcos, which are available to and used by the insurance company investors to
reduce their state tax liabilities. In order to maintain its status as a capco
and to avoid the recapture of the tax credits granted, each capco must meet a
number of state requirements. A key requirement in order to continue capco
certification is that a capco must comply with minimum investment schedules that
benchmark both the timing and type of required investments. A final loss of
capco status, that is decertification as a capco, results in loss of the tax
credits. Losses by the capcos due to investments in riskier early stage, start
up and high growth businesses could make it significantly more difficult for the
capcos to meet minimum state statutory investment benchmarks and thus subject
the capcos to decertification as a capco and further financial loss. In
accordance with the Company's investment objectives, it and the capcos will
acquire interests in early stage companies which are riskier than some other
investments.
5. Under the terms of insurance purchased by the capcos for the benefit
of the investors, the capco insurer would be authorized, in the event of a
threat of decertification by a state, to assume up to complete control of a
capco so as to avoid final decertification and interest payments. While avoiding
final decertification, control by the insurer would result in significant
disruption of the capco's business and likely result in financial loss to the
capco and possibly the Company and its shareholders.
6. Virtually all of the Company's 2001 income was derived from the
recognition of income related to tax credits available under current certified
capital company programs in which it participates. The Company will recognize
additional income over the next four to ten years from these programs.
Thereafter, unless additional capco programs are adopted and the Company is able
to participate in them, the Company will derive no new income from this source.
The adoption of new state capco programs in the future could be materially and
adversely affected by
20
the continuation of current adverse economic conditions. If adverse conditions
continue, the willingness of state governments to provide capco tax credits
could be materially diminished.
7. Because the Company's method of recognition of income derived from
the capco tax credits causes most or all such income to be received in early
years of the programs, in the absence of income from other sources, the Company
and its capcos could sustain material losses in later years. In the absence of
income from other sources, the Company and its capcos could sustain material
losses. Despite the cessation of tax credit income, the Company will continue to
incur costs for the administration of the capcos.
8. To the extent that the Company's partner companies grow rapidly, and
as the Company acquires more and larger interests in partner companies, the
resources the Company allocates to assist its partner companies may become
strained.
Sources of Funding and Revenue
Funding. Since its inception, the Company's source of funding and
revenue has been primarily derived from the creation and operation of certified
capital companies and, in particular, income generated by the tax credit aspect
of the capco programs. For the foreseeable future, the Company anticipates that
its funds for investment in partner companies will come from:
o its own capital (including retained earnings);
o funding provided by the U.S. Small Business Administration in
conjunction with the Company's establishment of one or more small
business investment companies ("SBIC");
o additional capital market financings; and
o funds provided through the capcos and other possible sources of
managed funds, including other state or federal governmental
programs.
The Company anticipates that, as a percentage of total funding, and
relative to current sources of funds including capcos, the amounts it invests
representing its own direct capital, will grow over time.
During 2001 the Company's management in conjunction with its Wisconsin
Business Development Center completed the planning for a small business
investment company, or SBIC. the Company's capco entered into agreements with
the Community Bankers of Wisconsin, the principal community banking trade
organization in Wisconsin, to co-sponsor and fund the SBIC, which will be
managed by the Company and its principals in the state. Various of the members
of the association of Community Bankers have invested approximately $7 million
and the capco has committed $3 million; these funds will be used to obtain 2 for
1 matching funds from the U.S. Small Business Administration, if and when it
approves the application filed with the Administration. The Company's Wisconsin
capco regulators have approved the capco's participation in the program due to
the fact that the program will make available an additional $27 million in
venture capital funding in the state, which will be invested under the direction
and on behalf of the Company's capco as well as the participating community
banks.
The participation in such a SBIC program by the capco is possible due
to the significant overlap in the investments possible under each program. As
such, when and if the Wisconsin capco's participation is successful, management
of the Company intends explore the possibility of replicating the program in
other states where it operates capcos.
Revenue. Revenues to be derived from sources other than the capco
programs will be minimal until the partner company network has the time to
develop into profitable businesses. The Company anticipates that additional
revenue will be derived from:
o retained earnings from its direct interests in partner companies as
well as the interests of partner companies held by the Company's
capcos;
o gains from sales of investments in partner companies, the
disposition of which are not anticipated to be made in the ordinary
course of the Company's business; and
21
o fees and incentive participations from funds which are invested for
other institutions, such as investment advisory fees paid to
managers of private equity funds.
Currently, all of the Company's partner companies and other capco
investments are either in very early stages of development or are small
businesses. These companies will require material resources, managerial strength
and time to develop into profitable businesses. The Company does not now
receive, nor does it expect to receive in the near future, material revenue or
profit from the operations of these companies. If the companies succeed, it will
take appreciable time, at least 18 to 36 months, or more, for their shareholders
and the Company's shareholders to see results. The Company may determine to
retain its interest in a partner company, particularly one with publicly traded
stock, despite an opportunity to make a shorter-term gain if doing so would
contribute to achievement of the company's long-term strategy to develop its
partner companies. The Company does not view such gains as a reliable or likely
source of material revenue.
Employees
As of December 31, 2001, the Company employed a total of 60 people, of
which 11 assist on an as-needed basis with the operation of capcos in Florida,
Wisconsin and Louisiana. The Company believes its labor relations are good and
none of its employees are covered by a collective bargaining agreement.
Item 2. DESCRIPTION OF PROPERTY
The Company maintains leased office space at 845 Third Avenue, 8th
Floor, New York, New York, 10022 and leases an additional office at 100 Quentin
Roosevelt Blvd, Garden City, New York. As of December 31, 2001 The Company also
leased offices for the certified capital companies and other subsidiaries in the
following locations:
o Buffalo, New York
o Syracuse, New York
o New Orleans, Louisiana;
o Miami, Florida;
o Milwaukee, Wisconsin; and,
o Denver, Colorado
All office leases are on a month-to-month basis. The Company believes
that its office space is satisfactory for its current needs.
As a result of the acquisition of REXX on September 19, 2000, the
Company acquired title to a warehouse previously used by REXX in a former
business. In March, 2002, the property was sold for the book value as of
December 31, 2001 and the Company received payment and applied the proceeds to
pay off the outstanding mortgage. See, also, Note 12 to the Notes to
Consolidated Financial Statements.
Item 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to
various legal proceedings incident to its business. At December 31, 2001, there
were no legal proceedings which management anticipates would have a material
adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2001.
22
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information The following table sets forth, for the period
indicated, the range of high and low closing sale prices for the Company's
common stock on the American Stock Exchange ("AMEX"). The Company's common stock
trades under the symbol "NKC". The stock began trading on the AMEX on September
20, 2000.
Closing Price
-------------
For the Fiscal Year Ended December 31, 2001 High Low
------------------------------------------- ---- ---
First Quarter (January 1, 2001 through March 31, 2001) $5.75 $2.00
Second Quarter (April 1, 2001 through June 30, 2001) $4.00 $2.75
Third Quarter (July 1, 2001 through September 30, 2001) $3.60 $3.00
Fourth Quarter (October 1, 2001 through December 31, 2001) $3.49 $3.00
Holders
On March 18, 2002, as reported by the Company's transfer agent, shares
of common stock were held by approximately 437 people, based on the number of
record holders, including nominees for an undetermined number of beneficial
owners.
Dividends
To date, the Company has not paid any cash dividends on our common
stock. Any determination to pay dividends in the future will be at the
discretion of the Company's Board of Directors. The Board's determination
whether to pay dividends in the future will be at the discretion of the
Company's Board of Directors. The Board's determination whether to pay dividends
will depend upon the Company's earnings, if any, financial condition and capital
requirements as well as other relevant factors. The Board of Directors does not
intend to declare dividends in the foreseeable future, but instead intends to
retain earnings, if any, for use in the Company's business operations.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction and Certain Cautionary Statements
The following discussion and analysis of our financial condition and
results of operations focuses on and is intended to clarify the results of our
operations, certain changes in our financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included in this Annual Report. This discussion should be
read in conjunction with, and is qualified by reference to, the other related
information including, but not limited to, the audited consolidated financial
statements (including the notes thereto and the independent auditor's report
thereon), the description of our business, all as set forth in this filing, as
well as the risk factors discussed below.
The discussion set forth below, as well as other portions of this
filing, contains statements concerning potential future events. Readers can
identify these forward-looking statements by their use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such verbs. If any of
our assumptions on which the statements are based prove incorrect or should
unanticipated circumstances arise, our actual results could materially differ
from those anticipated by such forward-looking statements. The differences could
be caused by a number of factors or combination of factors including, but not
limited to, those discussed below. Readers are strongly encouraged to consider
those factors when evaluating any such forward-looking statement. We will not
update any forward-looking statements in this filing.
23
Critical Accounting Policies
Revenue Recognition Income from tax credits: Following an application
process, a state will notify a company that it has been certified as a capco.
The state then allocates an aggregate dollar amount of tax credits to the capco.
However, such amount is neither recognized as income nor otherwise recorded in
the financial statements since it has yet to be earned by the capco. The capco
is legally entitled to earn tax credits upon satisfying defined investment
percentage thresholds within specified time requirements. The Company has capcos
in four states. Each statute requires that the capco invest a threshold
percentage of Certified Capital in Qualified Businesses within the timeframes
specified. As the capco meets these requirements, it avoids grounds under the
statute for its disqualification for continued participation in the capco
program. Such a disqualification, or "decertification" as a capco results in a
permanent recapture of all or a portion of the allocated tax credits. The
proportion of the possible recapture is reduced over time as the capco remains
in general compliance with the program rules and meets the progressively
increasing investment benchmarks. As the capco progresses in its investments in
Qualified Businesses and, accordingly, places an increasing proportion of the
tax credits beyond recapture, it earns an amount equal to the non-recapturable
tax credits and records such amount as income, with a corresponding asset called
"credits in lieu of cash", in the balance sheet.
The amount earned and recorded as income is determined by multiplying
the total amount of tax credits allocated to the capco by the percentage of tax
credits immune from recapture (the earned income percentage) under the state
statute. To the extent that the investment requirements are met ahead of
schedule, and the percentage of non-recapturable tax credits is accelerated, the
present value of the tax credit earned is recognized currently and the asset,
credits in lieu of cash, is accreted up to the amount of tax credits deliverable
to the Certified Investors. The obligation to deliver tax credits to the
Certified Investors is recorded as interest payable. On the date the tax credits
are utilizable by the Certified Investors, the capco decreases credits in lieu
of cash with a corresponding decrease to interest payable.
Defeasance of Debt At the initiation of the transaction, the capco
issues notes to the insurance company investors and takes some of the cash
proceeds and purchases an "insurance" contract in legal form from an insurance
company (the "Insurer").
This transaction makes the Insurer the primary obligor for the
principal payment at maturity (i.e., the Insurer must repay the principal at
maturity). As a result, no liability is recorded on the Company's books.
However, the Company remains secondarily liable for such principal payment and
must periodically assess the likelihood that it will become primarily liable
and, as such, record a liability.
Investment Valuation The various interests that the Company acquires
as a result of its investments are accounted for under three methods:
consolidation, equity method and cost method. The applicable accounting method
is generally determined based on the Company's voting interest in a company, and
monthly valuations are performed so as to keep the Company's records current in
reflecting the operations of all of its investments.
Companies in which the Company directly or indirectly owns more than
50% of the outstanding voting securities or those the Company has effective
control over are generally accounted for under the consolidation method of
accounting. Under this method, an investment's results of operations are
reflected within the Company's Consolidated Statement of Operations. All
significant intercompany accounts and transactions are eliminated. The results
of operations and cash flows of a consolidated partner company are included
through the latest interim period in which the Company owned a greater than 50%
direct or indirect voting interest for the entire interim period or otherwise
exercised control over the partner company. Upon dilution of control at or below
50%, the accounting method is adjusted to the equity or cost method of
accounting, as appropriate, for subsequent periods.
Companies that are not consolidated, but over which the Company
exercises significant influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant influence with
respect to an investee depends on an evaluation of several factors including,
among others, representation on the board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities, including
voting rights associated with the Company's holdings in common, preferred and
other convertible instruments. Under the equity method of accounting, a
company's accounts are not reflected within the Company's Consolidated
24
Statements of Operations; however, the company's earnings or losses is reflected
under the caption "Equity income (loss)" in the Consolidated Statements of
Operations.
Companies not accounted for under the consolidation or the equity
method of accounting are accounted for under the cost method of accounting, for
which monthly valuations are performed. Under this method, the Company's share
of the earnings or losses of such companies is not included in the Consolidated
Statements of Operations, but the investment is carried at historical cost. In
addition, cost method impairment charges are recognized as necessary, in the
Consolidated Statement of Operations if circumstances suggest that the value of
the investment has diminished, particularly due to losses. Subsequent increases
in value, if any, of the underlying investees does not impact the Company's
accounting. The Company records as income amounts previously written off only
when and if the Company receives cash in excess of its remaining investment
balance.
On a monthly basis, the Investment Committee of the Company meets to
evaluate each of the Company's investments. The Company considers several
factors in determining whether an impairment exists on the investment, such as
the investee's net book value, cash flow, revenue growth and net income. In
addition, the Investment Committee looks at larger variables, such as the
economy and the investee company's industry, to determine if an other than
temporary decline in value exists in the Company's investment.
DECEMBER 31, 2001 AND 2000
Comparison of the years ended December 31, 2001 and December 31, 2000
Newtek Capital, Inc.
--------------------
Revenues increased by approximately $15,090,000 to $23,800,000 for the
year ended December 31, 2001, from $8,710,000 for the year ended December 31,
2000. Income from tax credits increased by approximately $14,965,000, due to the
achievement of certain investment benchmarks in connection with specific capco
statutes. Interest and dividend income decreased by approximately $273,000 to
$1,845,000 for the year ended December 31, 2001, from $2,118,000 for the year
ended December 31, 2000. This decrease was primarily due to additional
investments made with lower interest rates. Consulting fee income decreased by
approximately $25,000 due to the decrease in paid consulting related activity.
General and administrative expenses increased by approximately
$2,514,000, to $7,430,000 for the year ended December 31, 2001, from $4,916,000
for the year ended December 31, 2000, due to increased staffing and professional
fees attributable to the increased size and number of capcos. In addition to the
larger legal and accounting fees that occur with additional capcos, the Company
also consolidates some of its investments, which results in the investments'
general and administrative expenses are included in the Company's consolidated
results.
Interest expense increased by approximately $4,297,000, to $11,577,000
for the year ended December 31, 2001, from $7,280,000 for the year ended
December 31, 2000, which was attributable to increased size and number of capcos
in existence for a full year. Substantially all of the Company's interest
expense is non-cash. See Note 7 to the Consolidated Financial Statements.
The other than temporary decline in the value of the Company's
investments as of December 31, 2001 of $372,000, net of recovery, is comprised
of $250,000 of its investments for Hypercosm and $152,000 for Group Management
Technologies. In addition, the Company determined an impairment existed for
certain non-capco investments (included in prepaid expenses and other assets on
the balance sheet), and recorded a charge of $75,000. The Company also recovered
$105,000 of cash on two of its debt investments previously written down.
Net income increased by approximately $4,355,000, to net income of
$930,000 for the year ended December 31, 2001, compared to net loss of
$3,425,000 for the year ended December 31, 2000, due to the changes in revenue
and general and administrative expenses discussed above, decrease in other than
temporary decline in
25
investments of $860,000, increased equity in losses of approximately $2,280,000,
a decrease in minority interest in losses of $2,390,000 and decreased income
taxes of $253,000.
Partner Companies
-----------------
At December 31, 2001, the Company had six majority-owned partner
companies, all of which were as a result of investments through the capco
programs. The majority-owned companies were Harvest Strategies, Universal
Processing Services - New York, , Universal Processing Services - Wisconsin, ,
Universal Processing Services - Louisiana, PPM Link, LLC., and CB Real Net, LLC.
For the year ended December 31, 2001, these companies represented approximately
$904,000 in losses that are consolidated in the Company's results, versus zero
for the year ended December 31, 2000.
At December 31, 2001, the Company had five companies accounted for
under the equity method, all of which were as a result of investments through
the capco programs. The companies were Group Management Technologies, Starphire,
LLC, AIDA, LLC, Transworld Business Brokers, LLC, and Direct Creations, LLC. For
the year ended December 31, 2001, these companies represented approximately
$2,280,000 in losses that are shown on the consolidated statement of operations
as equity in net losses of affiliates, versus $163,000 in losses for the year
ended December 31, 2000.
Liquidity and Capital Resources
The Company has funded its operations primarily through the issuance of
notes to insurance companies through the capco program. Through December 31,
2001, the Company has received approximately $135,468,000 in proceeds from the
issuance of long-term debt and warrants through the capco programs. The
Company's principal capital requirements have been to fund the defeasance of the
principal amount of notes issued to the insurance companies ($37,190,590), the
acquisition of capco insurance policies ($5,122,209), the acquisition of partner
companies interests, funding of other capco-qualified investments, and working
capital needs resulting from operating and business development activities of
its partner companies.
Net cash used in operating activities for the twelve months ended
December 31, 2001 of approximately $5,837,000 resulted primarily from net income
of $930,000, adjusted for the non-cash interest expense of approximately
$10,677,000 and non-cash income tax expense of approximately $535,000. It was
also affected by the approximately $2,280,000 in non-cash equity in net losses
of affiliates and approximately $509,000 of minority interest. This was offset
by the approximately $21,498,000 in non-cash income from tax credits. In
addition, the Company had an increase in components of working capital of
approximately $1,185,000.
Net cash used in investing activities for the year ended December 31,
2001 of approximately $1,979,000 resulted primarily from approximately
$24,588,000 in additional qualified investments (inclusive of $10,893,000 of
investments consolidated in the financial statements) made in the period offset
by repayments on debt instruments of $12,072,000 (the Company makes debt
investments, some of which are paid off in a short period of time).
Net cash provided by financing activities for the year ended December
31, 2001 was approximately $4,291,000, primarily attributable to the
approximately $5,200,000 in proceeds from the issuance of note payable-
insurance, the $575,000 in proceeds from the Company's bank line of credit, and
net proceeds of approximately $726,000 from the private placement of stock
during the twelve months ended December 31, 2001. This was offset by payments on
a premium financing note payable-insurance of approximately $1,596,000 and tax
distributions to members of the capcos of approximately $608,000.
Liquidity Risk. 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 JP Morgan line of credit will provide it with sufficient liquidity
to meet its short and long-term capital needs. In addition, the Company's capcos
have the ability to increase the amount of their debt, but the Company has no
need for or anticipation of utilizing this capacity. The loss of any one or two
of these liquidity sources would not present an impossible obstacle to the
Company's operations. However, the failure of the Insurer, which is primarily
liable for the repayment of the capco debt of $119,280,000 would require the
capcos to assume this repayment
26
obligation upon the maturity of the notes. Management has determined that the
likelihood of the capcos becoming primarily liable for a material portion of
this debt due to the failure of the Insurer, which is currently credit rated as
"AAA," is remote.
The following chart represents the Company's obligations and
commitments, as of December 31, 2001, for future cash payments under debt, lease
and employment agreements:
Year Debt Leases Employment Agreements Total
---- ---- ------ --------------------- -----
2002 $6,170,108 $68,640 $900,000 $7,138,748
2003 2,862,740 71,042 -- 2,933,782
2004 2,129,665 73,528 -- 2,203,193
2005 -- 76,101 -- 76,101
2006 -- 78,786 -- 78,786
2007+ 3,810,161 -- -- 3,810,161
----------- -------- -------- -----------
Total $14,972,674 $368,097 $900,000 $16,240,771
=========== ======== ======== ===========
This chart excludes the mortgage payments on the company's asset held
for sale (which was sold and repaid in March of 2002) and the taxes due to capco
minority owners (which can not be anticipated).
During the year ended December 31, 2001 the Company generated cash flow
primarily from the following sources:
o private placement of common stock, netting $726,000;
o proceeds from issuance of a "note payable-insurance" of $5,200,000
from the premium finance company, AI Credit, see Note 5 to the
Consolidated Financial Statements;
o proceeds from a Chase Manhattan Bank line of credit of $575,000,
with a December 31, 2001 interest rate of 5% ($925,000 still
available and not used, terms are twelve months at prime plus a
quarter point);
o return of investments of $12,072,000, which was held pending
reinvestment;
o investment income of approximately $1,845,000; and
o other income of approximately $448,000.
The cash was primarily used to:
o fund distributions to owners of the predecessors of the Company in
lieu of compensation and related to passed-through tax liabilities
of $608,000
o invest $24,588,000 (less $10,893,283 which was consolidated into the
Company's financial statements) in small or early stage businesses;
and
o repay to AI Credit on a "note payable-insurance" of approximately
$1,596,000.
During the year ended December 31, 2000 the Company generated cash flow
primarily from the following sources:
o the issuance of debt and equity securities (warrants) to insurance
company investors of approximately $57,741,000 in conjunction with
the capitalization of three capcos ($34,941,000 of these proceeds
was used to purchase insurance coverage);
o private placement of common stock, netting $3,556,000;
o return of investments of $5,522,000, which was held pending
reinvestment;
o investment income of approximately $1,960,000; and
o consulting fees of approximately $35,000.
The cash was primarily used to:
o purchase insurance coverage for the four new capcos' obligations for
approximately $34,941,000;
o fund distributions to owners of the predecessors of the Company in
lieu of compensation and related to passed-through tax liabilities
of $903,000;
o invest $14,287,000 in small or early stage businesses; and
27
o repay a bank loan of approximately $725,000.
As of December 31, 2001, the Company had approximately $21,343,000 in
cash of which substantially all was restricted for use for capco activities.
The Company will have current working capital requirements associated
with operating its current businesses. It is the Company's intention to acquire
interests in partner companies through additional capcos programs and through
acquisitions made by the Company directly. The Company's working capital
requirements may, therefore, increase in the future and require additional
external financing. The Company expects to finance its participation in
additional capcos and other ventures principally with externally generated
funds, which may include:
o borrowings under current or future bank facilities; and/or
o the sale of equity, equity-related or debt securities.
There can be no assurance, however, financing will be available in amounts, at
rates or on terms and conditions acceptable to the Company.
Income from Capco Tax Credits
In general, the capcos issue debt and equity instruments, generally
warrants, to insurance company investors. For a description of the debt
instruments and warrants issued by the Company's capcos, see Notes 1, 7 and 8 to
the Consolidated Financial Statements. The capcos then make targeted
investments, as defined under the respective state statutes, with the funds
raised. Each capco has a contractual arrangement with the particular state that
legally entitles the capco to receive (or, earn) tax credits from the state upon
satisfying quantified, defined investment percentage thresholds and time
requirements. In order for the capcos to maintain their state-issued
certifications, the capcos must make targeted investments in accordance with
these requirements, which requirements are consistent with the Company's overall
business strategy of acquiring controlling positions in a group of early stage
companies. Each capco also has separate, contractual arrangements with the
insurance company investors obligating the capco to pay interest on the
aforementioned debt instruments. The capco may satisfy this interest obligation
by delivering the tax credits or paying cash. The insurance company investors
have the legal right to receive and use the tax credits and would, in turn, use
these tax credits to reduce their respective state tax liabilities in an amount
usually equal to 100% of their investments in the capcos. The tax credits can be
utilized over a ten-year period at a rate of, usually, 10% per year and in some
instances are transferable and can be carried forward.
Accordingly, the capco recognizes the "income from tax credits" as they
are "earned." If the tax credits are "earned" before the State is required to
make delivery (i.e., investment requirements are met ahead of schedule, but
credits are capped at 10% per year), then the present value of the tax credit
earned is recorded at a discounted value upon achievement of the requirements
and be accreted up to the full tax credit upon their availability for
utilization by the insurance company investors. The insurance company investors
use the tax credits as they become available by state law.
While utilizable by the insurance company investors at 10% per year,
the capco income is not "earned" at the same rate. Following an application
process, a state will notify a company that it has been certified as a capco.
The state then allocates an aggregate dollar amount of tax credits to the capco.
However, this amount is neither recognized as income nor otherwise recorded in
the financial statements since it has yet to be earned by the capco. Each
statute requires that the capco invest a threshold percentage of its initial
funding in qualified businesses within the timeframes specified. As the capco
meets these requirements, it avoids grounds under the statute for its
disqualification for continued participation in the capco program. A
disqualification, or "decertification," of a capco results in a recapture of all
or a portion of the allocated tax credits; the proportion of the recapture is
reduced over time as the capco remains in general compliance with the program
rules and meets the progressively increasing investment benchmarks. As the capco
progresses in its investments in qualified businesses and, accordingly, places
an increasing proportion of the tax credits beyond recapture, it "earns" an
amount equal to the non-recapturable tax credits and records this amount as
income, with a corresponding asset called "credits in lieu of cash," on the
balance sheet.
28
The amount earned and recorded as income is determined by multiplying
the total amount of tax credits initially allocated to the capco by the
percentage of tax credits immune from recapture (the earned income percentage)
under the state statute. The total amount of tax credits allocated to each of
the capcos, the required investment percentages, recapture percentages and
related earned income percentages, and pertinent dates are summarized as
follows:
The First to Occur
------------------
Investment Decertification Earned
State Total Tax Investment Benchmark Recapture Recapture Income
Capco Credits Allocated Benchmark Date Thresholds Percentage Percentage
----- ----------------- --------- ----------- ---------- ---------- ----------
FLORIDA $37,384,028 Prior to 20% 100% 0%
Wilshire 20% 12/31/00 After 20% before 30% 70% 30%
Partners (WP) 30% 12/31/01 After 30% before 40% 60% 40%
40% 12/31/02 After 40% before 50% 50% 50%
50% 12/31/03 After 50% 0% 100%
LOUISIANA $18,040,000 Prior to 30% 100% 0%
Wilshire LA 30% 10/14/02 After 30% before 50% 70% 30%
Advisers (WLA) 50% 10/14/04 After 50% 0% 100%
NEW YORK $ 3,810,161 Prior to 25% 100% 0%
Wilshire 25% 6/22/00 After 25% before 40% 85% 15%
Advisers (WA) 40% 6/22/01 After 40% before 50% 70% 30%
50% 6/22/02 After 50% 0% 100%
LOUISIANA $3,355,000 Prior to 30% 100% 0%
Wilshire 30% 10/13/03 After 30% before 50% 70% 30%
LA Advisors II 50% 10/13/05 After 50% 0% 100%
(WLA II)
NEW YORK $6,807,866 Prior to 25% 100% 0%
Wilshire 25% 4/7/02 After 25% before 40% 85% 15%
N.Y. Advisers II 40% 4/7/03 After 40% before 50% 70% 30%
(WNY II) 50% 4/7/04 After 50% 0% 100%
NEW YORK $35,160,202 Prior to 25% 100% 0%
Wilshire 25% 12/21/02 After 25% before 40% 85% 15%
N.Y. Partners III 40% 12/21/03 After 40% before 50% 70% 30%
(WNY III) 50% 12/21/04 After 50% 0% 100%
WISCONSIN $16,666,667 Prior to 30% 100% 0%
Wilshire 30% 10/25/02 After 30% before 50% 70% 30%
Investors (WI) 50% 10/25/04 After 50% 0% 100%
29
Under the various state capco provisions, there is a difference in the
amount of qualified investments made and the amount of income recognized by the
respective capcos upon satisfaction of the various benchmarks. The table below
relates the investments made, both as percentage of total funds and in dollar
amounts, to the income recognized as each benchmark is achieved. In all of these
programs, a majority of the Company's income from the delivery of the tax
credits will be recognized no later than five years into the ten-year programs.
Allocated Investment Earned
State Tax Benchmark Income
Capco Credits Percent/Dollars Percent/Dollars
----- ------- --------------- ---------------
FLORIDA
Wilshire $37,384,028 20% $7,476,806 30% $11,215,208
Partners (WP) 30% $11,215,208 40% $14,953,611
40% $14,953,611 50% $18,692,014
50% $18,692,014 100% $37,384,028
LOUISIANA
Wilshire LA $18,040,000 30% $4,920,000 30% $5,412,000
Advisers (WLA) 50% $8,200,000 100% $18,040,000
NEW YORK
Wilshire $3,810,161 25% $952,540 15% $571,524
Advisers (WA) 40% $1,524,064 30% $1,143,048
50% $1,905,081 100% $3,810,161
WISCONSIN
Wilshire $16,666,667 30% $5,000,000 30% $5,000,000
Investors (WI) 50% $8,333,334 100% $16,666,667
LOUISIANA
Wilshire LA $3,355,000 30% $915,000 30% $1,006,500
Advisers II 50% $1,525,000 100% $3,355,000
(WLA II)
NEW YORK
Wilshire N.Y. $6,807,866 25% $1,701,967 15% $1,021,180
Advisers II 40% $2,723,146 30% $2,042,360
(WNY II) 50% $3,403,933 100% $6,807,866
NEW YORK
Wilshire N.Y. $35,160,202 25% $8,790,051 15% $5,274,030
Partners III 40% $14,064,080 30% $10,548,060
(WNY III) 50% $17,580,101 100% $35,160,202
During the years ended December 31, 2001 and 2000, the capcos satisfied
certain investment benchmarks and the related recapture percentage requirements
and accordingly, earned a portion of the tax credits. In addition, in both 2001
and 2000 the Company recognized income from tax credits in prior years resulting
from the accretion of the discount attributable to tax credits earned in prior
years. See Note 9 of Notes to Consolidated Financial Statements.
30
During 2000, the Company established three new capcos, Wilshire New
York Advisors II, LLC, Wilshire Louisiana Partners II, LLC and Wilshire New York
Partners III, LLC. In addition, the Company received additional funding for an
already existing capco, Wilshire Advisers. These companies received
approximately $57,741,000 of funding from 13 insurance companies during 2000,
and incurred expenses for the defeasance of the principal repayment of
$37,190,590, and for the capco insurance of $5,122,209.
During 2001, the Company established one new capco, Wilshire Colorado
Partners, which is anticipating funding in April 2002.
Impact of Inflation
The impact of inflation on the Company's results of operations is not
material.
31
Item 7. FINANCIAL STATEMENTS
INDEX TO NEWTEK CAPITAL, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
PAGE NO.
Report of Independent Accountants 33
Consolidated Balance Sheets as of December 31, 2001 and 2000 34
Consolidated Statements of Operations for the years ended
December 31, 2001 and December 31, 2000 35
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001 and December 31, 2000 36
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and December 31, 2000 37
Notes to Consolidated Financial Statements 39
32
Report of Independent Accountants
To the Board of Directors and Stockholders of Newtek Capital, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Newtek
Capital, Inc. and its subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years ended December
31, 2001 and 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
New York, New York
February 22, 2002
33
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31, 2001 AND 2000
--------------------------
2001 2000
----------- -----------
ASSETS
------
Cash and cash equivalents $31,171,966 $34,697,081
Credits in lieu of cash 21,810,776 17,496,810
Investments in qualified businesses 14,450,228 15,644,515
Structured insurance product 2,731,894 2,570,487
Prepaid insurance 10,820,841 12,187,376
Prepaid expenses and other assets 953,142 411,195
Furniture, fixtures and equipment, net 128,290 31,462
Goodwill 963,736 --
Asset held for sale 331,929 500,000
----------- -----------
Total assets $83,362,802 $83,538,926
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Accounts payable and accrued expenses $ 1,541,359 $ 2,546,800
Notes payable - certified investors 3,858,389 3,861,220
Notes payable - insurance 9,404,032 5,800,000
Note payable - bank 575,000 --
Mortgage payable 306,929 369,339
Interest payable 49,640,846 56,147,907
Deferred tax liability 1,563,018 1,028,402
----------- -----------
Total liabilities 66,889,573 69,753,668
----------- -----------
Minority interest 5,081,692 4,515,909
----------- -----------
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 13,442,899 12,267,052
Accumulated deficit (2,495,612) (3,425,172)
----------- -----------
Total stockholders' equity 11,391,537 9,269,349
----------- -----------
Total liabilities and stockholders' equity $83,362,802 $83,538,926
=========== ===========
See accompanying notes to these consolidated financial statements.
34
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
-----------------------------------------------------------
2001 2000
----------- -----------
Revenue:
Income from tax credits $21,497,956 $ 6,533,217
Consulting fee income 9,236 34,660
Interest and dividend income 1,845,238 2,118,365
Other Income 447,756 24,000
----------- -----------
Total revenue 23,800,186 8,710,242
----------- -----------
Expenses:
Interest 11,577,169 7,280,240
Payroll and consulting fees 2,664,716 1,294,420
Professional fees 2,060,635 1,844,495
Insurance 1,529,688 1,005,628
Other 1,175,451 771,138
----------- -----------
Total expenses 19,007,659 12,195,921
----------- -----------
Income (loss) before other than temporary decline in value of investments,
write-down of asset held for sale to net realizable value, equity in net losses
of affiliates, minority interest, provision
for income taxes, and extraordinary gain on defeasance of debt 4,792,527 (3,485,679)
Other than temporary decline in value of investments (net of $105,000 recovery in 2001) (371,645) (1,231,849)
Write-down of asset held for sale to net realizable value (168,071) --
Equity in net losses of affiliates (2,279,852) (163,416)
----------- -----------
Income (loss) before provision for income taxes, extraordinary gain on
defeasance of debt and minority interest 1,972,959 (4,880,944)
Minority interest in (income) loss (508,783) 1,881,258
----------- -----------
Income (loss) before provision for income taxes and extraordinary gain on defeasance of debt 1,464,176 (2,999,686)
Provision for income taxes (534,616) (787,236)
----------- -----------
Income (loss) before extraordinary gain on defeasance of debt 929,560 (3,786,922)
Extraordinary gain on defeasance of debt, net of taxes of $241,166, for 2000 -- 361,750
----------- ------------
Net income (loss) $ 929,560 $ (3,425,172)
=========== ============
Weighted average common shares outstanding
Basic 21,889,958 19,309,840
Diluted 21,909,527 19,309,840
Income (loss) per share after extraordinary gain on defeasance of debt
Basic $ .04 $(.18)
Diluted $ .04 $(.18)
Income (loss) per share before extraordinary gain on defeasance of debt
Basic $ .04 $(.20)
Diluted $ .04 $(.20)
See accompanying notes to these consolidated financial statements.
35
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
-----------------------------------------------------------
Common Additional Accumulated Members'
Shares Stock Paid-in-capital Deficit Equity Total
-----------------------------------------------------------------------------------------
Balance at December 31, 1999 -- $ -- $ -- $ -- $ 8,308,927 $8,308,927
Distributions (903,475) (903,475)
Issuance of common stock 3,805,670 3,805,670
Recapitalization of Company 21,373,460 427,469 10,783,653 (11,211,122) --
Acquisition of REXX 16,157 16,157
Issuance of warrants 1,931,298 1,931,298
Additional minority interest (464,056) (464,056)
Net loss (3,425,172) (3,425,172)
-----------------------------------------------------------------------------------------
Balance at December 31, 2000 21,373,460 427,469 12,267,052 (3,425,172) -- 9,269,349
-----------------------------------------------------------------------------------------
Issuance of Common Stock and
Warrants 839,057 16,781 1,745,413 1,762,194
Distributions to Capco members (607,542) (607,542)
Issuance of stock options to
non-employees 37,976 37,976
Net Income 929,560 929,560
-----------------------------------------------------------------------------------------
Balance at December 31, 2001 22,212,517 $444,250 $13,442,899 $(2,495,612) -- $11,391,537
-----------------------------------------------------------------------------------------
See accompanying notes to these consolidated financial statements.
36
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
-----------------------------------------------------------
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 929,560 $ (3,425,172)
Adjustments to reconcile net income to net cash
used in operating activities:
Other than temporary decline
in value of investments 371,645 1,231,849
Write-down of asset held for sale to net realizable value 168,071 --
Equity in losses of affiliates 2,279,852 163,416
Extraordinary gain on defeasance of debt -- (361,750)
Income from tax credits (21,497,956) (6,533,217)
Deferred income taxes 534,616 787,236
Depreciation and amortization 74,054 6,151
Accretion of interest income (161,407) (158,688)
Accretion of interest expense 10,676,928 6,793,193
Issuance of warrants for services performed 58,800 --
Issuance of stock options to non-employees 37,976 --
Minority interest included in (income) loss 508,783 (1,881,258)
Changes in assets and liabilities:
Prepaid insurance 1,366,535 (4,204,746)
Prepaid expenses and other assets (179,231) (8,388)
Accounts payable and accrued expenses (1,005,441) 1,089,800
------------ ------------
Net cash used in operating activities (5,837,215) (6,501,574)
------------ ------------
Cash flows from investing activities:
Investments in qualified businesses (24,588,176) (14,287,442)
Other investments (489,500) (320,000)
Return of principal - qualified investments 12,072,284 5,522,663
Return of principal - other investments -- 125,000
Consolidation of majority owned partner companies 10,893,283 --
Distributions from equity method investees 240,399 --
Purchase of structured insurance product -- (661,432)
Purchase of furniture, fixtures and equipment (107,361) (28,898)
------------ ------------
Net cash used in investing activities (1,979,071) (9,650,109)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 55,008,122
Payments for defeasance of long-term debt -- (34,279,454)
Proceeds from issuance of note payable-insurance 5,200,000 --
Principal payments of note payable-insurance (1,595,968) --
Proceeds from Notes payable - certified investors -- 1,251,630
Proceeds from (payments of) note payable - bank 575,000 (725,358)
Payment of loan payable - members -- (21,000)
Purchase of minority interest from member (1,300) --
Cash received from REXX merger -- 143,790
Net proceeds from issuance of common stock 726,391 3,555,670
Principal payment of mortgage payable (62,410) (12,000)
Contributions from minority interest 57,000 --
Distributions to members (607,542) (903,475)
37
Issuance of warrants -- 1,481,594
Payments for deferred financing costs -- (104,771)
------------ ------------
Net cash provided by financing activities 4,291,171 25,394,748
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,525,115) 9,243,065
Cash and cash equivalents - beginning of year 34,697,081 25,454,016
------------ ------------
Cash and cash equivalents - end of year $31,171,966 $34,697,081
============ ============
Supplemental disclosure of cash flow activities:
------------------------------------------------
Cash paid for interest $ 399,285 $ 47,685
============ ============
Issuance of the following in partial payment for insurance:
Notes $ -- $ 1,800,000
Warrants -- 449,704
------------ ------------
$ -- $ 2,249,704
============ ============
Conversion of Notes payable - other than to common stock $ -- 250,000
============ ============
Acquisition of REXX (net assets) -- 16,157
============ ============
Reduction of credits in lieu of cash and interest payable balances
due to delivery of tax credits to Certified Investors: $17,183,989
============
Issuance of common stock in connection with acquisition of minority
interest In Wilshire Investors $ 978,303
============
See accompanying notes to these consolidated financial statements.
38
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
-------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
Basis of presentation and description of business
-------------------------------------------------
On September 20, 2000, Newtek Capital, Inc. (Newtek) acquired the
controlling interests in the underlying entities listed below and accordingly
consolidates the financial statements of these entities with its own.
Additionally, on September 20, 2000, Newtek's common stock began trading on the
American Stock Exchange under the symbol "NKC". Newtek was formed on June 29,
1999 under the name Whitestone Holdings, Inc. and changed its name to Newtek
Capital, Inc. on January 18, 2000, and the underlying entities comprise: BJB
Holdings, Inc. ("BJB"), Wilshire Holdings I, Inc., Wilshire Holdings II, Inc.,
REXX Environmental Corp. ("REXX"), Whitestone Capital Markets, Inc., The
Whitestone Group, LLC ("TWG"); Wilshire Advisers, LLC ("WA"), Wilshire NY
Advisers II ("WAII"), and Wilshire New York Partners III ("WNYIII"), certified
capital companies ("capcos") in New York, Wilshire Partners, LLC ("WP"), a capco
in Florida, Wilshire Investors, LLC ("WI"), a capco in Wisconsin, Wilshire
Colorado Partners LLC ("WC"), a capco in Colorado, and Wilshire Louisiana
Advisers, LLC ("WLA"), capcos in Louisiana (the capco entities are,
collectively, the "capcos" and Newtek and all of these aforementioned entities
and capcos are collectively the "Company"). TWG acts as an investment adviser
and manager to the aforementioned capcos as well as a merchant bank and provides
investment banking and business development services including general business
consulting services, strategic planning, due diligence, merger and acquisition
analysis, technology design and implementation support, joint venture
negotiations and litigation support services. All significant intercompany
balances and transactions are eliminated in consolidation.
As described above, Newtek acquired the controlling interests in the
underlying entities. In this connection, Newtek issued 18,823,285 shares of
common stock in exchange for 100% of BJB's shares and the member interests in
the underlying entities. The principal shareholders of Newtek were the principal
owners of BJB and the underlying entities. As a result, Newtek has recorded the
assets acquired and liabilities assumed at their historical values, with the net
asset value recorded as a credit to stockholders' equity.
Additionally, on September 19, 2000, Newtek completed its acquisition
of REXX. Pursuant to the acquisition, REXX stockholders received one share of
Newtek common stock in exchange for each share of REXX common stock held. The
Company issued 2,467,576 shares of common stock in exchange for 100% (2,467,576
shares) of REXX stock. This transaction has been accounted for as a
recapitalization, whereby Newtek has recorded the monetary assets and
liabilities of REXX at their historical values (which were not material to the
Company), with the net asset value recorded as a credit to stockholders' equity.
The following is a summary of each capco, state of certification and
date of certification:
Capco State of Certification Date of Certification
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WA II New York April 2000
WNYIII New York December 2000
WC Colorado October 2001
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
39
Qualified Businesses", as defined under the respective state statutes, or,
"Qualified Businesses"), with the Certified Capital raised. Such investments may
be accounted for as either consolidated subsidiaries, under the equity method or
cost method of accounting, or as notes receivable, depending upon the nature of
the investment and the Company's and/or the capco's ability to control or
otherwise exercise significant influence over the investee. Each capco has a
contractual arrangement with the particular state that legally entitles the
capco to receive (or earn) tax credits from the state upon satisfying
quantified, defined investment percentage thresholds and time requirements. In
order for the capcos to maintain their state-issued certifications, the capcos
must make Investments in Qualified Businesses in accordance with these
requirements. Each capco also has separate, legal contractual arrangements with
the Certified Investors obligating the capco to pay interest on the
aforementioned debt instruments whether or not it meets the statutory
requirements for Investments in Qualified Businesses. The capco can satisfy this
interest payment, at the capco's discretion, by delivering tax credits in lieu
of paying cash. The capcos legally have the right to deliver the tax credits to
the Certified Investors. The Certified Investors legally have the right to
receive and use the tax credits and would, in turn, use these tax credits to
reduce their respective state tax liabilities in an amount usually equal to 100%
(Louisiana - 110%) of their certified investment. The tax credits can be
utilized over a ten-year period at a rate of 10% (Louisiana - 11%) per year and
in some instances are transferable and can be carried forward.
Cash and cash equivalents
-------------------------
All highly liquid investments purchased with original maturities of
three months or less are considered to be cash equivalents. The Company has bank
balances in excess of the $100,000 of depository insurance provided by the
Federal Deposit Insurance Corporation. Approximately $21,343,000 and $34,312,000
of the cash and cash equivalents as of December 31, 2001 and 2000, respectively,
were restricted for managing and operating the capcos, including making
investments in qualified businesses.
Revenue Recognition
-------------------
The Company recognizes consulting revenues as earned. Consulting
revenues are earned at the time the related services are provided and when the
right to receive payment is assured. Realized gains on investments are earned at
the time the investments are sold.
Income from tax credits: Following an application process, a state will
notify a company that it has been certified as a capco. The state then allocates
an aggregate dollar amount of tax credits to the capco. However, such amount is
neither recognized as income nor otherwise recorded in the financial statements
since it has yet to be earned by the capco. As described in "Basis of
presentation and description of business," earlier in this note, the capco is
legally entitled to earn tax credits upon satisfying defined investment
percentage thresholds within specified time requirements and corresponding
non-recapture percentages. At December 31, 2001 as summarized earlier in this
note, the Company had capcos in five states. Each statute requires that the
capco invest a threshold percentage of Certified Capital in Qualified Businesses
within the timeframes specified. As the capco meets these requirements, it
avoids grounds under the statute for its disqualification for continued
participation in the capco program. Such a disqualification, or
"decertification" as a capco results in a recapture of all or a portion of the
allocated tax credits; the proportion of the recapture is reduced over time as
the capco remains in general compliance with the program rules and meets the
progressively increasing investment benchmarks. As the capco progresses in its
investments in Qualified Businesses and, accordingly, places an increasing
proportion of the tax credits beyond recapture, it earns an amount equal to the
non-recapturable tax credits and records such amount as income, with a
corresponding asset called "credits in lieu of cash", in the balance sheet. The
amount earned and recorded as income is determined by multiplying the total
amount of tax credits allocated to the capco by the percentage of tax credits
immune from recapture (the earned income percentage) under the state statute. To
the extent that the investment requirements are met ahead of schedule, and the
percentage of non-recapturable tax credits is accelerated, the present value of
the tax credit earned is recognized currently and the asset, credits in lieu of
cash, is accreted up to the amount of tax credits available to the Certified
Investors.
40
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
The total amount of tax credits allocated to each of the aforementioned
capcos, the required investment percentages, recapture percentages and related
earned income percentages, and pertinent dates are summarized as follows:
The First to Occur
-------------------------------
Investment Decertification Earned
State Total Tax Investment Benchmark Recapture Recapture Income
Capco Credits Allocated Benchmark Date Thresholds Percentage Percentage
----- ----------------- --------- ---------------- ---------------- ---------- ----------
FLORIDA $37,384,028 Prior to 20% 100% 0%
Wilshire 20% 12/31/00 After 20% before 30% 70% 30%
Partners (WP) 30% 12/31/01 After 30% before 40% 60% 40%
40% 12/31/02 After 40% before 50% 50% 50%
50% 12/31/03 After 50% 0% 100%
LOUISIANA $18,040,000 Prior to 30% 100% 0%
Wilshire LA 30% 10/14/02 After 30% before 50% 70% 30%
Advisers (WLA) 50% 10/14/04 After 50% 0% 100%
NEW YORK $ 3,810,161 Prior to 25% 100% 0%
Wilshire 25% 6/22/00 After 25% before 40% 85% 15%
Advisers (WA) 40% 6/22/01 After 40% before 50% 70% 30%
50% 6/22/02 After 50% 0% 100%
LOUISIANA $3,355,000 Prior to 30% 100% 0%
Wilshire 30% 10/13/03 After 30% before 50% 70% 30%
LA Advisors II 50% 10/13/05 After 50% 0% 100%
(WLA II)
NEW YORK $6,807,866 Prior to 25% 100% 0%
Wilshire 25% 4/7/02 After 25% before 40% 85% 15%
N.Y. Advisers II 40% 4/7/03 After 40% before 50% 70% 30%
(WNY II) 50% 4/7/04 After 50% 0% 100%
NEW YORK $35,160,202 Prior to 25% 100% 0%
Wilshire 25% 12/21/02 After 25% before 40% 85% 15%
N.Y. Partners III 40% 12/21/03 After 40% before 50% 70% 30%
(WNY III) 50% 12/21/04 After 50% 0% 100%
WISCONSIN $16,666,667 Prior to 30% 100% 0%
Wilshire 30% 10/25/02 After 30% before 50% 70% 30%
Investors (WI) 50% 10/25/04 After 50% 0% 100%
COLORADO Allocation expected Prior to 30% 100% 0%
Wilshire Col. in April 2002 30% After 30% before 50% 70% 30%
Partners (WC) 50% After 50% 0% 100%
41
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
Under the various state capco provisions, there is a difference in the
amount of qualified investments made and the amount of income recognized by the
respective capcos upon satisfaction of the various benchmarks. The table below
relates the investments made, both as percentage of total funds and in dollar
amounts, to the income recognized as each benchmark is achieved. In all of these
programs, a majority of Newtek's income from the delivery of the tax credits
will be recognized no later than five years into the ten year programs.
Allocated Investment Earned
State Tax Benchmark Income
Capco Credits Percent/Dollars Percent/Dollars
----- ------- --------------- ---------------
FLORIDA
Wilshire $37,384,028 20% $7,476,806 30% $11,215,208
Partners (WP) 30% $11,215,208 40% $14,953,611
40% $14,953,611 50% $18,692,014
50% $18,692,014 100% $37,384,028
LOUISIANA
Wilshire LA $18,040,000 30% $4,920,000 30% $5,412,000
Advisers (WLA) 50% $8,200,000 100% $18,040,000
NEW YORK
Wilshire $3,810,161 25% $952,540 15% $571,524
Advisers (WA) 40% $1,524,064 30% $1,143,048
50% $1,905,081 100% $3,810,161
WISCONSIN
Wilshire $16,666,667 30% $5,000,000 30% $5,000,000
Investors (WI) 50% $8,333,334 100% $16,666,667
LOUISIANA
Wilshire LA $3,355,000 30% $915,000 30% $1,006,500
Advisers II 50% $1,525,000 100% $3,355,000
(WLA II)
NEW YORK
Wilshire N.Y. $6,807,866 25% $1,701,967 15% $1,021,180
Advisers II 40% $2,723,146 30% $2,042,360
(WNY II) 50% $3,403,933 100% $6,807,866
NEW YORK
Wilshire N.Y. $35,160,202 25% $8,790,051 15% $5,274,030
Partners III 40% $14,064,080 30% $10,548,060
(WNY III) 50% $17,580,101 100% $35,160,202
COLORADO
Wilshire Col. Allocation 30% 30%
expected
Partners April 2002 50%
42
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued):
During each of the years ended December 31, 2001 and 2000, certain
capcos satisfied the required investment benchmarks and the related recapture
percentages requirements and, accordingly, earned a portion of the tax credits.
See Note 9.
Furniture, fixtures and equipment
---------------------------------
Furniture, fixtures and equipment, which is comprised primarily of
office equipment, are stated at cost, less accumulated depreciation.
Depreciation of furniture, fixtures and equipment is provided on a straight-line
basis using estimated useful lives of the related assets (five years).
Income Taxes
------------
Deferred tax assets and liabilities are computed based upon the
differences between the financial statement and income tax basis of assets and
liabilities using the enacted tax rates in effect for the year in which those
temporary differences are expected to be realized or settled. If available
evidence suggests that it is more likely than not that some portion or all of
the deferred tax assets will not be realized, a valuation allowance is required
to reduce the deferred tax assets to the amount that is more likely than not to
be realized. In connection with Newtek's acquiring the interests in the
underlying entities as described earlier in this note, Newtek has recorded
deferred tax assets and liabilities resulting from the cumulative temporary
book/tax differences from the underlying CAPCO subsidiaries' activities. See
Note 10.
Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
period. The most significant estimates are with respect to valuation of
investments, credits in lieu of cash and amounts ascribed to warrants. Actual
results could differ from those estimates.
Fair value of financial instruments
-----------------------------------
The carrying values of other assets, accounts payable and accrued
expenses approximate fair value because of the short term maturity of these
instruments. The carrying value of qualified investments, structured insurance
product, notes and loans payable, credits in lieu of cash, interest payable, and
warrants approximate fair value based on management's estimates.
Earnings per share
------------------
For the years ended December 31, 2001 and December 31, 2000, net income
(loss) per share is based on the weighted average number of shares of common
stock outstanding. Since the effect of common stock equivalents in 2000 was
anti-dilutive, all such equivalents were excluded from the calculation of net
loss per share.
Reclassifications
-----------------
Certain 2000 amounts have been reclassified to conform to current year
presentation.
43
NOTE 2 - INSURANCE:
On November 19, 1998, WA purchased a structured insurance product
covering a ten-year period (the "Capco Policy") from a AAA rated international
insurance company (the "Insurer"). This insurance provides for (i) the
repayment, on the maturity date, of the note payable issued by WA to the
Certified Investors in connection with the capitalization of WA ("Note") (see
Note 4) ("Coverage A") and (ii) the loss or recapture of the state tax credits
delivered to the Certified Investors (see Note 1) ("Coverage B").
Notwithstanding the Insurer's obligation, WA remains primarily liable for
repayment of the Note. Premiums for the Capco Policy have been paid in full at
inception and the Capco Policy is non-cancelable. The Company paid a total of
$1,805,599 for the Capco Policy. The costs of Coverage's A and B were $1,647,905
and $157,694, respectively. Under Coverage A, the Insurer is required to pay the
principal amount of the Note (Note 4), $2,673,797, on the maturity date in June,
2008. Accordingly, the Company has recorded the Coverage A payment as an asset,
called structured insurance product, and has been increasing the recorded amount
via an accretion to interest income. For the years ended December 31, 2001 and
December 31, 2000 the Company recorded $102,938 for each year, as interest
income. At the June, 2008 Note maturity date, the asset balance will be
$2,673,797, the Insurer will pay the Certified Investors, and the Company will
reverse this asset balance in full with a corresponding reversal of the Note
balance.
On May 10, 2000, WA purchased another structured insurance product, or
Capco Policy, covering an eight-year period from a AAA rated international
insurance company (the "Insurer"). This insurance provides for the same terms
and conditions as the aforementioned initial insurance product as described
above. The Company paid a total of $821,500 for this additional Capco Policy.
The costs of Coverage's A and B were $661,432 and $160,068, respectively. Under
Coverage A, the Insurer is required to pay the principal amount of the Note
(Note 4), $1,136,364, on the maturity date in June, 2008. Accordingly, the
Company has recorded the Coverage A payment as an asset, called structured
insurance product, and has been increasing the recorded amount via an accretion
to interest income. For the years ended December 31, 2001 and December 31, 2000,
the Company recorded $58,469 and $46,627 as interest income. At the June, 2008
Note maturity date, the asset balance will be $1,136,364, the Insurer will pay
the Certified Investors, and the Company will reverse this asset balance in full
with a corresponding reversal of the Note balance.
The amount paid for Coverage B has been recorded as prepaid insurance
and is being amortized to expense over the life of the Capco Policy. The Company
has also purchased (as well as financed, see Note 5) Coverage B insurance in
connection with transactions described in Note 7. Such amounts are accounted for
in the same manner as Coverage B insurance referred to in this Note. The prepaid
insurance balance of $10,820,841 at December 31, 2001 and $12,187,376 at
December 31, 2000 is comprised solely of the unamortized cost of Coverage B
insurance.
44
NOTE 2 - INSURANCE (Continued):
The Company's Coverage A and B purchases are summarized as follows:
---------------------------------------------------------------------------
Premium Paid for Premium Paid for
Capco Date of Purchase Coverage A(3) Coverage B (3)
---------------------------------------------------------------------------
WA November 1998 $ 1,647,905(1) $ 157,694
---------------------------------------------------------------------------
Total - 1998 $ 1,647,905 $ 157,694
========= =======
---------------------------------------------------------------------------
WP April 1999 $ 23,127,927(2) $ 3,998,948
---------------------------------------------------------------------------
WLA October 1999 $ 9,175,844(2) $ 2,193,741
---------------------------------------------------------------------------
WI October 1999 $ 9,086,227(2) $ 2,352,786
---------------------------------------------------------------------------
Total - 1999 $ 41,389,998 $ 8,545,475
========== =========
---------------------------------------------------------------------------
WNYII April 2000 $ 5,019,803(2) $ 504,745
---------------------------------------------------------------------------
WA May 2000 $ 661,432(1) $ 160,068
---------------------------------------------------------------------------
WLPII October 2000 $ 2,456,565(2) $ 319,958
---------------------------------------------------------------------------
WNYIII December 2000 $ 29,052,790(2) $ 4,137,438
---------------------------------------------------------------------------
Total - 2000 $ 37,190,590 $ 5,122,209
========== =========
---------------------------------------------------------------------------
(1) Coverage A has been accounted for as a structured insurance product as
described previously in this Note.
(2) Coverage A has been accounted for as described in Note 7.
(3) Coverage B has been accounted for as described previously in this Note.
Additionally, a portion of the premiums paid in 1999 and 2000 for Coverage's
A and B were financed by notes ($5,800,000) and the issuance of warrants
($1,545,429).
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES:
AS OF DECEMBER 31, 2000
-----------------------
The following table is a summary of Qualified Business investments as
of December 31, 2000, shown separately between their debt ($11,038,931) and
equity ($4,605,584) components (for a total non-consolidated Investment in
Qualified Businesses of $15,644,515), and all terms of each are summarized.
There are no expiration dates on any of the financial instruments, unless
disclosed.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investment in Debt and Equity
Securities", the Company classifies its debt investments as held-to-maturity and
such investments are initially recorded at amortized cost. On a monthly basis,
the Company's Investment Committee meets to evaluate the Company's investments.
The Company considers several factors in determining whether an impairment
exists on the investment, such as the investee's net book value, cash flow,
revenue growth and net income. In addition, the Investment Committee considers
other factors, such as the economy and the investee company's industry, to
determine if an other than temporary decline in value exists in the Company's
investment.
All investments were made within 18 months of December 31, 2000, except
for Cedric Kushner Boxing, which was funded 18-36 months from December 31, 2000.
45
-------------------------------------------------------------------------------------------------------------------------------
Cumulative
other than
temporary
decline in
the value Cumulative
of its return of
investments Principal
since since
Stated Original investment original Outstanding
Date of Maturity Interest Principal original investment principal amount
Investee Type Investment Date Rate Amount date date December 31, 2000
======================= ====== ============= ========== ========== ============== ============= ============ ==================
TWBB (dba Group Debt 11/99 11/23/01 5.25% $3,150,000 ($295,799) $ 2,854,201
Management), Inc.
-------------------------------------------------------------------------------------------------------------------------------
CB Real Net, LLC Debt 02/01/00 Various Various $2,500,000 $0 $0 $ 2,500,000
-------------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems Debt 10/99 04/15/01 9.00% $3,500,000 ($336,050) ($1,565,000) $ 1,598,950
Sales and Marketing
-------------------------------------------------------------------------------------------------------------------------------
Multi-Media Debt 06/00 06/14/02 10.00% $1,000,000 $0 $0 $ 1,000,000
Distribution Corp.
-------------------------------------------------------------------------------------------------------------------------------
4G's Truck Renting Debt 1/99, 12/00 On demand 10.00% $1,200,000 $0 $(300,000) $ 900,000
-------------------------------------------------------------------------------------------------------------------------------
Direct Creations, LLC Debt 9/00 3/9/02 10.00% $ 750,000 $0 $0 $ 750,000
-------------------------------------------------------------------------------------------------------------------------------
Transworld Business Debt 11/99 11/23/01 6.00% $ 350,000 ($100,000) $0 $ 250,000
Brokers, Inc.
-------------------------------------------------------------------------------------------------------------------------------
1 800GiftCertificate Debt 07/99 09/15/01 8.75% $ 300,000 $0 $(55,072) $ 244,928
-------------------------------------------------------------------------------------------------------------------------------
Steve Kent Trucking(4) Debt 3/00, 5/00 Various Prime + $ 747,000 $0 $(624,692) $ 122,308
1.00%
-------------------------------------------------------------------------------------------------------------------------------
Gerace Auto Parts(4) Debt 4/00 Various Prime + $ 810,000 $0 $(678,724) $ 131,276
1.00%
-------------------------------------------------------------------------------------------------------------------------------
Merchant Data Debt 8/00 1/11/02 10.00% $ 100,000 $0 $0 $ 100,000
Systems, Inc.
-------------------------------------------------------------------------------------------------------------------------------
AIDA, LLC Debt 8/00 On demand 10.00% $ 100,000 $0 $0 $ 100,000
-------------------------------------------------------------------------------------------------------------------------------
Gino's Seafood(4) Debt 3/00, 4/00 Various Prime + $ 517,942 $0 $(431,250) $ 86,692
1.00%
-------------------------------------------------------------------------------------------------------------------------------
Down to Earth Debt 12/99, 8/00 08/16/01 9.00% $ 580,000 ($500,000) $0 $ 80,000
Technologies, LLC
-------------------------------------------------------------------------------------------------------------------------------
Embosser's Sales and Debt 8/00 Various Prime + $ 495,000 $0 $(414,856) $ 80,144
Service(4) 1.00%
-------------------------------------------------------------------------------------------------------------------------------
St. Gabriel Debt 11/00 Various Prime + $ 477,000 $0 $(397,500) $ 79,500
Hardware(4) 1.00%
-------------------------------------------------------------------------------------------------------------------------------
Data-Tel of Debt 03/00 Various Prime + $ 513,000 $0 $(437,674) $ 75,326
Louisiana(4) 1.00%
-------------------------------------------------------------------------------------------------------------------------------
Raising Cain(4) Debt 3/00, 4/00, Various Prime + $ 315,000 $0 $(266,394) $ 48,606
5/00 1.00%
-------------------------------------------------------------------------------------------------------------------------------
Tari's School of Debt 5/00 Various Prime + $ 189,000 $0 $(157,500) $ 31,500
Dance(4) 1.00%
-------------------------------------------------------------------------------------------------------------------------------
BBQ West(4) Debt 10/00, 11/00 Various Prime + $ 49,500 $0 $(44,000) $ 5,500
1.00%
-------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Debt 11/17/98 01/31/00 9.00% $400,000 $0 $(400,000) $0
Boxing, Inc.
-------------------------------------------------------------------------------------------------------------------------------
Total Debt $18,043,442 $(1,231,849) $(5,772,662) $11,038,931
Investments at =========== ============ =========== ===========
December 31, 2000
46
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (Continued):
----------------------------------------------------------------------------------------------------------------
EQUITY
Investee Equity
-------- method
Common Equity in investment
Stock Percentage Original Income balance at
Date of Type of Equivalents of Investment (Losses) December
Investment Investment $ (1) Ownership Amount and/or Return 31,2000
----------------------------------------------------------------------------------------------------------------
Preferred
Membership
Starphire 08/25/00 Interest N/A 50.00% $1,400,000 $85,001 $1,485,001
Technologies, LLC w/ voting
rights
----------------------------------------------------------------------------------------------------------------
Preferred
Membership
Niche 09/25/00, Interest N/A 37.50% $1,344,000 $(26,642) $1,317,358
Directories, LLC 12/1/00 w/ voting
rights
----------------------------------------------------------------------------------------------------------------
Preferred
Stock/
AIDA, LLC 10/00 Common N/A 50% $900,000 $(106,956) $793,044
Stock
----------------------------------------------------------------------------------------------------------------
Preferred
Merchant Data Stock/
Systems, Inc. 9/13/00 Common N/A 35% $900,000 $(114,819) $785,181
Stock
----------------------------------------------------------------------------------------------------------------
Multi-Media 6/14/00 Common 66,000 3% $200,000 $200,000
Distribution Corp. Stock $0
----------------------------------------------------------------------------------------------------------------
Class B
1-800Gift 07/15/99 Preferred 113,140 N/A $22,396 $0 $22,396
Certificate Stock
----------------------------------------------------------------------------------------------------------------
Class A
1-800Gift 07/15/99 Preferred 13,159 N/A $2,604 $0 $2,604
Certificate Stock
----------------------------------------------------------------------------------------------------------------
BizBroker Net, LLC 11/23/99 Membership N/A 50.00% $0 $0
Interest $0
----------------------------------------------------------------------------------------------------------------
Options
Cedric Kushner for
Boxing, Inc. 11/17/98 Common 3 N/A $0 $0 $0
Stock(2)
----------------------------------------------------------------------------------------------------------------
Warrants
for
CB Real Net, LLC 02/01/00 Membership N/A 40.00% $0 $0 $0
Interest(3)
----------------------------------------------------------------------------------------------------------------
Direct Creations 12/00 Membership N/A 25% $0 $0
Interest $0
----------------------------------------------------------------------------------------------------------------
Down to Earth 12/15/99 Membership N/A 50.00% $0 $0
Technologies, LLC Interest $0
----------------------------------------------------------------------------------------------------------------
Merchant Data 10/21/99 Membership N/A 50.00% $0 $0
Systems Sales and Interest $0
Marketing, LLC
----------------------------------------------------------------------------------------------------------------
Total Equity Investments at December 31, 2000 $4,769,000 $ (163,417) $ 4,605,584
Total Debt and Equity Investments at December 31, 2000 $22,812,442 $15,644,515
=========== ===========
(1) Common Stock Equivalents reflect conversion of all financial instruments
into common stock.
(2) Expires four years from date of investment, and has a $.01 exercise price.
(3) Expires six years from date of investment, and has a $.01 exercise price.
(4) Represents Louisiana Small Business Administration (SBA) loans. WLA's
investment total for these types of loans was $4,113,472 as of December 31,
2000. Of this amount, approximately 75% was guaranteed by the SBA and was sold
in the secondary market, while the remaining balance is amortized over 5 to 20
years. Accordingly, the CAPCO had $660,853 outstanding and received
approximately $2,262,000 (55%) of credits toward the investment hurdle, based
upon its agreement with the State of Louisiana.
Investments in equity interests of and notes receivable from affiliated
companies accounted for under the equity method amounted to $12,613,734 at
December 31, 2000. Additionally, the Company's investment balance in
47
the equity of each of these investees is $4,605,584 December 31, 2000. During
2000, the Company made investments accounted for under the equity method
aggregating $4,544,000. In the twelve months ended December 31, 2000, the
Company recorded approximately $163,417 in net losses of these investees,
pre-minority interest.
The Company has not guaranteed any obligation of these investees, and
the Company is not otherwise committed to provide further financial support for
the investees. However, from time-to-time the Company may decide to provide such
additional financial support which, as of December 31, 2000, was not
significant. Periodically, the Company evaluates each of its individual
investments for potential impairment in value. Should the Company determine that
an impairment exists and it is deemed to be other than temporary, the Company
will write down the recorded value of the asset to its estimated realizable
value and record a corresponding charge in the statement of operations. At
December 31, 2000, the Company has determined that there is an other than
temporary decline in the value of its investments in debt instruments of
$1,231,849, which represented approximately $500,000 for Down To Earth
Technologies, $336,050 for Merchant Data Systems Sales and Marketing, and
$395,799 for Transworld Business Brokers. After its evaluation of the
aforementioned investments, management concluded that it is unlikely it will be
able to recover these amounts. Accordingly, at December 31, 2000 and for the
year then ended, the Company has written down the value of these investments and
recorded a corresponding charge of $1,231,849.
48
NOTE 3 - INVESTMENTS IN QUALIFIED BUSINESSES (Continued):
AS OF DECEMBER 31, 2001
-----------------------
The following table is a summary of Qualified Business investments as of
December 31, 2001, shown separately between their debt ($12,173,884) and equity
($2,276,344) components (for a total non-consolidated Investment in Qualified
Businesses of 14,450,228), and all terms of each are summarized. There are no
expiration dates on any of the financial instruments, unless disclosed.
In accordance with the provisions of "Financial Accounting Standards Board No.
115", the following debt investments are considered held to maturity and
recorded at cost. The Company periodically assesses these investments for
impairment.
The investments are grouped by date of investment: those investments which as of
December 31, 2001 were made within the previous 18 months and those investments
made between 18 - 36 months from December 31, 2001.
DEBT INVESTMENTS MADE
IN THE LAST 18 MONTHS
------------------------------------------------------------------------------------------------------------------------
Cumulative
other than
temporary
decline in the
value of its Cumulative
investments return of
DEBT Original since original Principal since
Date of Maturity Stated Interest Principal investment original
Investee Type Investment Date Rate Amount date investment date
========================================================================================================================
AIDA, LLC Debt 3/01 3/02 7.00% $ 3,500,000
------------------------------------------------------------------------------------------------------------------------
Direct Creations, LLC Debt 9/00, 3/02 10.00% $2,108,333 ($750,000)
11/01
------------------------------------------------------------------------------------------------------------------------
1 800GiftCertificate(5) Debt 7/99, 7/03 8.75% $1,250,000 ($190,803)
7/01
------------------------------------------------------------------------------------------------------------------------
Starphire Technologies, Debt 6/01 6/02 5.75% $1,000,000
LLC
------------------------------------------------------------------------------------------------------------------------
Scandinavia(4) Debt 12/01 Various Prime + 1.00% $996,700 ($70)
------------------------------------------------------------------------------------------------------------------------
Merchant Data Systems, Debt 8/00 5/04 0% $4,900,000 (422,094) ($3,563,950)
Inc.
------------------------------------------------------------------------------------------------------------------------
Multi-Media Distribution Debt 6/00 6/02 10.00% $1,000,000 ($175,000)
Corp.
------------------------------------------------------------------------------------------------------------------------
11/99,
4G's Truck Renting Debt 12/00, 6/02 8.70% $1,300,000 ($825,000)
1/01
------------------------------------------------------------------------------------------------------------------------
OS Johnson (4) Debt 9/01 Various Prime + 1.00% $750,000 ($500,137)
------------------------------------------------------------------------------------------------------------------------
Transworld Business Debt 06/01 6/02, 6.00% $240,000
Brokers, LLC 6/04
------------------------------------------------------------------------------------------------------------------------
Pontchartain(4) Debt 12/01 Various Prime + 1.00% $235,197
------------------------------------------------------------------------------------------------------------------------
Drilling Productivity (4) Debt 12/01 Various Prime + 1.00% $1,199,700 ($1,000,921)
------------------------------------------------------------------------------------------------------------------------
BuySeasons, Inc. Debt 6/01 6/06 11.00% $200,000 ($20,000)
------------------------------------------------------------------------------------------------------------------------
St. Gabriel Hardware(4) Debt 11/00, Various Prime + $792,000 ($663,144)
8/01 1.00%
------------------------------------------------------------------------------------------------------------------------
E&E Machine Shop(4) Debt 9/01 Various Prime + 1.00% $556,393 ($474,241)
------------------------------------------------------------------------------------------------------------------------
----------------------------------------------
DEBT Principal amount
outstanding at
Investee December 31, 2001
==============================================
AIDA, LLC $ 3,500,000
----------------------------------------------
Direct Creations, LLC $ 1,358,333
----------------------------------------------
1 800GiftCertificate(5) $ 1,059,197
----------------------------------------------
Starphire Technologies, $ 1,000,000
LLC
----------------------------------------------
Scandinavia(4) $ 996,630
----------------------------------------------
Merchant Data Systems, $ 913,956
Inc.
----------------------------------------------
Multi-Media Distribution $ 825,000
Corp.
----------------------------------------------
4G's Truck Renting $ 475,000
----------------------------------------------
OS Johnson (4) $ 249,863
----------------------------------------------
Transworld Business $ 240,000
Brokers, LLC
----------------------------------------------
Pontchartain(4) $ 235,197
----------------------------------------------
Drilling Productivity (4) $ 198,779
----------------------------------------------
BuySeasons, Inc. $ 180,000
----------------------------------------------
St. Gabriel Hardware(4) $ 128,856
----------------------------------------------
E&E Machine Shop(4) $ 82,152
----------------------------------------------
49
------------------------------------------------------------------------------------------------------------------------
Embosser's Sales and Debt 8/00 Various Prime + $495,000
Service(4) 1.00% ($418,282)
------------------------------------------------------------------------------------------------------------------------
Tsunami Restaurants(4) Debt 3/01 Various Prime + $328,500
1.00% ($274,676)
------------------------------------------------------------------------------------------------------------------------
BBQ West(4) Debt 10/00, Various Prime + $49,500
11/00 1.00% ($44,573)
------------------------------------------------------------------------------------------------------------------------
Amerimed (4) Debt 8/01, Various Prime + 1.00% $179,999
9/01 ($150,004)
------------------------------------------------------------------------------------------------------------------------
Hypercosm, Inc. Debt 4/01 4/02 8% $250,000 (250,000)
------------------------------------------------------------------------------------------------------------------------
Subtotal 0- 18 months - $21,331,322 ($672,094) ($9,050,801)
-Debt =========== ========== ===========
------------------------------------------------------------------------------------------------------------------------
----------------------------------------------
Embosser's Sales and $ 76,718
Service(4)
----------------------------------------------
Tsunami Restaurants(4) $ 53,824
----------------------------------------------
BBQ West(4) $ 4,927
----------------------------------------------
Amerimed (4) $ 29,995
----------------------------------------------
Hypercosm, Inc. $0
----------------------------------------------
Subtotal 0- 18 months - $11,608,427
-Debt ===========
----------------------------------------------
DEBT INVESTMENTS MADE WITHIN
18-36 MONTHS
-----------------------------------------------------------------------------------------------------------------------------------
Gerace Auto Parts(4) Debt 4/00 Various Prime + $810,000 $ 122,920
1.00% (687,080)
-----------------------------------------------------------------------------------------------------------------------------------
Steve Kent Trucking(4) Debt 3/00, Various Prime + $747,000 $ 113,969
5/00 1.00% ($633,031)
-----------------------------------------------------------------------------------------------------------------------------------
Group Management Debt 11/99 11/01 5.25% $ 3,500,000 ($447,444) $ 101,641
Technologies, LLC (5) (2,950,915)
-----------------------------------------------------------------------------------------------------------------------------------
Gino's Seafood(4) Debt 3/00, Various Prime + $517,942 $ 86,692
4/00 1.00% ($431,250)
-----------------------------------------------------------------------------------------------------------------------------------
Data-Tel of Louisiana(4) Debt 3/00 Various Prime + $513,000 $ 63,335
1.00% ($449,665)
-----------------------------------------------------------------------------------------------------------------------------------
3/00,
Raising Cain(4) Debt 4/00, Various Prime + $315,000 ($269,357) $ 45,643
5/00 1.00%
-----------------------------------------------------------------------------------------------------------------------------------
Tari's School of Dance(4) Debt 5/00 Various Prime + $189,000 $ 31,257
1.00% ($157,743)
-----------------------------------------------------------------------------------------------------------------------------------
CB Real Net, LLC Debt 2/00 Various 8% $2,500,000 (2,500,000) $0
-----------------------------------------------------------------------------------------------------------------------------------
Cedric Kushner Boxing, Debt 11/98 1/00 9% $400,000 ($400,000) $0
Inc.
-----------------------------------------------------------------------------------------------------------------------------------
Down To Earth, Inc. Debt 12/99 Various 8% $580,000 ($500,000) ($80,000) $0
-----------------------------------------------------------------------------------------------------------------------------------
Subtotal 18-36 months - $10,071,942 ($947,444) ($8,559,041) $565,457
Debt ----------- ========== ============ --------
-----------------------------------------------------------------------------------------------------------------------------------
Total Debt Investments at $31,403,264 ($1,619,538) ($17,609,842) $12,173,884
December 31, 2001 =========== ============ ============= ===========
EQUITY INVESTMENTS MADE
IN THE PREVIOUS 18 MONTHS
------------------------------------------------------------------------------------------------------------------------------------
EQUITY
Common Equity in Income
Stock (Losses) and/or Equity method
Investee Equivalents Original Return of Capital investment
-------- Date of Type of ----------- Percentage of Investment since original balance at
Investment Investment (1) Ownership Amount investment date (6) December 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
Niche Directories, LLC 9/00, Preferred N/A 37.50% $1,344,000 (868,792) $475,208
12/00 Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
50
------------------------------------------------------------------------------------------------------------------------------------
Starphire 8/00 Preferred N/A 50.00% $1,400,000 (672,321) $727,679
Membership
Technologies, LLC Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
AIDA, LLC 10/00 Preferred N/A 50% $1,000,000 ($569,455) $430,545
Membership
Interest w/
voting rights
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Transworld Business Membership
Brokers, LLC 06/01 Interest w/ N/A 33% $350,000 ($32,088) $317,912
voting rights
------------------------------------------------------------------------------------------------------------------------------------
Multi-Media 6/00 Common Stock 66,000 3% $200,000 $200,000
Distribution Corp.
------------------------------------------------------------------------------------------------------------------------------------
Preferred
Group Management Membership
Technologies, LLC 6/01 Interest w/ N/A 47.5% $450,000 ($450,000) $0
voting rights
------------------------------------------------------------------------------------------------------------------------------------
BuySeasons, Inc. 6/01 Common Stock 18,182 3% $100,000 $100,000
------------------------------------------------------------------------------------------------------------------------------------
Direct Creations (5) 12/00 Warrant for N/A 28% $0 $0
Membership
Interest
------------------------------------------------------------------------------------------------------------------------------------
Merchant Data 5/01 Warrants for N/A 20.00% $0 $0
Systems, Inc. Membership
Interest(3)
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 0-18 months $4,844,000 ($2,592,656) $2,251,344
- Equity ========== ============ ==========
------------------------------------------------------------------------------------------------------------------------------------
EQUITY INVESTMENTS MADE
WITHIN 18-36 MONTHS
------------------------------------------------------------------------------------------------------------------------------------
1-800GiftCertificate 7/99 Class B 113,140 N/A $22,396 $22,396
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
1-800GiftCertificate 7/99 Class A 3,159 N/A $2,604 $2,604
Preferred
Stock
------------------------------------------------------------------------------------------------------------------------------------
Options
Cedric Kushner Boxing, 11/98 for Common 3 N/A $0 $0
Inc. (5) Stock(2)
------------------------------------------------------------------------------------------------------------------------------------
Subtotal 18-36
months - Equity $25,000 $25,000
------------------------------------------------------------------------------------------------------------------------------------
Total Equity Investments as of December 31, 2001 $4,869,000 $2,276,344
========== =============
Total Debt and Equity Investments as of December 31, 2001 $36,272,264 $14,450,228
=========== =============
(1) Common Stock Equivalents reflect conversion of all financial instruments
into common stock.
(2) Expires four years from date of investment, and has a $.01 exercise price.
(3) Expires six years from date of investment, and has a $.01 exercise price.
(4) Represents Small Business Administration (SBA) loans made in Louisiana.
Wilshire Louisiana's investment total for these types of loans was $7,443,035 as
of December 31, 2001. Of this amount, approximately 75% was guaranteed by the
SBA and was sold in the secondary market, while the remaining balance is
amortized over 5 to 20 years. Accordingly, the CAPCO had approximately
$1,289,000 outstanding and received approximately $4,094,000 (55%) of credits
toward the investment hurdle, based upon its agreement with the State of
Louisiana.
(5) This loan has been restructured, and the Company continues to receive
monthly principal payments.
51
The Company consolidates six of its investments. All investments were
made within the past 18 months as of December 31, 2001, except for CB Real Net,
which was made between 18-36 months ago as of December 31, 2001. The following
tables are summaries of such investments:
---------------------------------------------------------------------------------------------------------------------
Other than
DEBT temporary decline in
Original Stated the value of its Return of
Date of Maturity Principal Interest investment since Principal since
Investee Type Investment Date Amount Interest Rate investment date investment date
=====================================================================================================================
Universal Processing Debt 3/01 3/02 $3,400,000 6.00%
Services, LLC
---------------------------------------------------------------------------------------------------------------------
Universal Processing Debt 6/01 6/06 $2,100,000 5.00% ($210,000)
Services - Wisconsin, LLC
---------------------------------------------------------------------------------------------------------------------
PPM Link, LLC Debt 3/01 9/02 $1,850,000 6.00%
---------------------------------------------------------------------------------------------------------------------
Harvest Strategies, LLC Debt 8/01 10/02 $975,000 5.00% ($25,000)
---------------------------------------------------------------------------------------------------------------------
Total Consolidated Debt $8,325,000 ($215,000)
Investments ========== ==========
--------------------------------------------------
Outstanding Principal
Amount at December 31,
Investee 2001
==================================================
Universal Processing $3,400,000
Services, LLC
--------------------------------------------------
Universal Processing $1,890,000
Services - Wisconsin, LLC
--------------------------------------------------
PPM Link, LLC $1,850,000
--------------------------------------------------
Harvest Strategies, LLC $ 950,000
--------------------------------------------------
Total Consolidated Debt $8,090,000
Investments ==========
------------------------------------------------------------------------------------------------------------
EQUITY
Original
Date of Type of Common Stock Percentage of Investment
Investee Investment Investment Equivalents (1) Ownership Amount
============================================================================================================
Universal Processing 9/01 Preferred N/A 95% $1,350,000
Membership
Services - La Interest w/
voting rights
------------------------------------------------------------------------------------------------------------
Preferred
Harvest Strategies, Membership
LLC 8/01 Interest w/ N/A 70% $999,950
voting rights
------------------------------------------------------------------------------------------------------------
Preferred
Membership
PPM Link, LLC 3/01 Interest w/ N/A 67% $253,333
voting rights
------------------------------------------------------------------------------------------------------------
Preferred
Universal Processing Membership
Services, LLC 3/01 Interest w/ N/A 66% $200,000
voting rights
------------------------------------------------------------------------------------------------------------
Preferred
Universal Processing Membership
Services - 3/01 Interest w/ N/A 82% $0
Wisconsin, LLC voting rights
------------------------------------------------------------------------------------------------------------
CB Real Net, LLC 2/00 Membership N/A 100.00% $0
Interest(3)
------------------------------------------------------------------------------------------------------------
Total Consolidated Equity Investments $ 2,803,283
===========
Total Consolidated Debt and Equity Investments December 31, 2001 $11,128,283
===========
52
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 December 31, 2001, was not
significant. Periodically, the Company evaluates each of its individual
investments for potential impairment in value. Should the Company determine that
an impairment exists and it is deemed to be other than temporary, the Company
will write down the recorded value of the asset to its estimated fair value and
record a corresponding charge in the statement of operations. During the year
ended December 31, 2001, the Company determined that there was $250,000 of other
than temporary decline in the value of its investments for Hypercosm, and a
$151,645 other than temporary decline in the value of its investments for Group
Management Technologies. In addition, the Company determined an impairment
existed for certain non-capco investments (included in prepaid expenses and
other assets on the balance sheet), and recorded a charge of $75,000. In 2001,
the Company also recovered $105,000 of cash on two of its investments written
down in 2000. These items aggregate $371,645 which is shown on the statement of
operations as other than temporary decline in value of investments.
NOTE 4 - NOTES PAYABLE - CERTIFIED INVESTORS:
In June 1998 WA issued a note and a warrant to a Certified Investor for
a total amount of $2,673,797. The Company's interest obligations under the note
are as described in Notes 1 and 7. The warrant entitles the Certified Investor
to purchase 13% of WA's member units at a purchase price of $.01 per unit. The
warrant can be exercised at any time after the fifth year of the 10-year term of
the note.
Of the total proceeds, the Company allocated $2,608,797 to the note and
$65,000 to the warrant. The Company initially recorded the note at $2,608,797
and has been increasing such amount via an accretion to interest expense. For
the year ended December 31, 2001 and 2000, the Company recorded $6,500 of
interest expense for such accretion. At the maturity date in June 2008, the note
balance will be $2,673,797 and the Insurer (see Note 2) will pay such amount to
the Certified Investor.
In May 2000, WA issued an additional note to a Certified Investor for
total proceeds of $1,251,630. This note has been recorded at its face amount of
$1,136,364, which is the amount payable at maturity in 2008. The interest rate
on this note is 10%. The excess of the proceeds over the face amount, or
$115,266, will be amortized to income over the term of the note.
Under the terms of the notes, WA is required to maintain minimum levels
of working capital and tangible net worth, as defined. At December 31, 2001 and
2000 WA was in compliance with such requirements.
NOTE 5 - NOTES PAYABLE - INSURANCE:
In October 1999, WI and WLA each borrowed $2,000,000 ($4,000,000 in
total), from a financing company, AI Credit, to finance a portion of the total
premiums due to an insurance company upon the creation of the two capcos. The
notes bear interest at 8.5%, and were payable in three installments beginning on
April 1, 2001, with the final payment due on October 24, 2002. WI and WLA made
the April 1, 2001 payments in accordance with the terms of the agreements.
Accrued interest included in accounts payable and accrued expenses at December
31, 2001 and December 31, 2000 amounted to $162,025 and $403,000, respectively
53
In April 2000, WNYII borrowed $1,500,000 from a financing company, AI
Credit, to finance a portion of the total premiums due to an insurance company
upon the creation of this capco. The note bears interest at 9.5%, and is payable
in three installments beginning on October 13, 2001, with the final payment due
on April 13, 2003. WNYII made the October 13, 2001 payment in accordance with
the term of the agreement. Accrued interest included in accounts payable and
accrued expenses at December 31, 2001 and December 31, 2000 amounted to
approximately $100,000 and $79,130, respectively.
In October 2000, WLPII borrowed $300,000 from a financing company, AI
Credit, to finance a portion of the total premiums due to an insurance company
upon the creation of this capco. The note bears interest at 9.92%, and is
payable in three installments beginning on April 13, 2002, with the final
payment due on October 13, 2003. Accrued interest included in accounts payable
and accrued expenses at December 31, 2001 and December 31, 2000 amounted to
approximately $37,000 and $7,876.
In January 2001, WNYPIII borrowed $5,200,000 from a financing company,
AI Credit, to finance a portion of the total premiums due to an insurance
company upon the creation of this capco. The notes bear interest at 9.4%, and
are payable in three installments beginning on July 31, 2002, with the final
payment due on January 31, 2004. Accrued interest included in accounts payable
and accrued expenses at December 31, 2001 amounted to approximately $449,000.
These notes are collateralized by the assets of the respective capcos.
NOTE 6 - NOTES PAYABLE - BANK:
In November 2001, the Company entered into a $1,500,000 one year
revolving working capital loan agreement with The Chase Manhattan Bank, bearing
interest at the prime rate plus 0.25% per annum. At December 31, 2001, the
Company had outstanding borrowings of $575,000 from the bank at an interest rate
of 5.75%. All assets of the Company, except for all assets in the capco
entities, collateralize such outstanding borrowings.
NOTE 7 - INTEREST PAYABLE AND DEFEASANCE OF DEBT:
As described in Note 1, each capco has separate contractual
arrangements with the Certified Investors obligating the capco to pay interest
on the aforementioned debt instruments.
During 2000, at the time the capcos obtained the proceeds from the
issuance of the debt instruments and warrants to the Certified Investors, the
capcos also purchased insurance contracts from the Insurer. These insurance
contracts are similar to those described in Note 2; however, the Coverage A
portion of these contracts fully defeases the capco's liability for the full
amount of proceeds obtained from the Certified Investors and, as such shifts
such liability to the Insurer. The Insurer is primarily liable to the Certified
Investors for such amounts. The capcos, however, are secondarily, or
contingently, liable for such payment, and at December 31, 2001, Company
management has determined that the likelihood of the Company or the capcos
becoming primarily liable for the full amount of the proceeds is remote. The
capcos remain primarily liable for the interest obligation. The Coverage B
portion of these contracts is similar to such coverage described in Notes 2
and 4.
The Company has allocated the initial proceeds received from the
Certified Investors as follows:
2000
Notes payable, including premiums $55,008,122
Warrants 1,481,594
-----------
$56,489,716
===========
Concurrently, in 2000, the Company purchased Coverage A to defease the
principal portion of the Notes payable. The resulting difference, less the note
premiums, represents the excess of the initial liability under the debt
54
instruments over the Coverage A payments, and has been recorded as interest
payable, representing the present value of the capcos' total liability to pay
interest to the Certified Investors. Such amount will be increased by an
accretion of interest expense during the 10-year period the capcos are obligated
to pay interest, and will decrease as the capcos pay interest by delivering the
tax credits, or paying cash (Note 9).
55
NOTE 7 - INTEREST PAYABLE AND DEFEASANCE OF DEBT (Continued):
The following is a summary of the defeasance transactions and
reconciliation of interest payable balances at December 31, 2001 and 2000
(exclusive of proceeds allocated to warrants as noted above):
2001 2000
-------------- --------------
Note payable, including premiums $ -- $ 55,008,122
Less: purchase of coverage A -- (36,529,158)
Less: note premiums allocated to defeasance -- (707,688)
-- ---------
Allocated to interest payable -- 17,771,276
Plus: interest payable, beginning of year 56,147,907 31,583,438
Less: tax credits delivered-Certified Investors (17,183,989) --
Plus: accretion of interest expense for the
year 10,676,928 6,793,193
-------------- --------------
Interest payable, end of year $ 49,640,846 $ 56,147,907
============== ==============
The total amount of interest payable to the Certified Investors through the ten
year period, less the tax credits already delivered as of December 31, 2001 is
approximately $100,230,000.
Under the note agreements, no interest is paid in cash
provided that the Certified Investors receive the uninterrupted use of the tax
credits. The Certified Investors acknowledge that the Insurer is primarily
responsible for the repayment of the original proceeds on the maturity dates.
NOTE 8 - WARRANTS:
The warrants entitle the holders to purchase, for a $.01 exercise
price, an interest in each of the first seven (7) respective capco. The values
ascribed to the warrants issued to the Certified Investors (Note 7) and the
Insurer have been recorded as minority interests. In addition, certain minority
interests have already been acquired by minority shareholders. The following is
the aggregate percentage interest of the minority shareholders in each
respective capco:
Capco % Interest
----- ----------
WA, New York 13%
WP, Florida 43%
WI, Wisconsin 29.1%
WLA, Louisiana 24%
WNYII, New York 36%
WLPII, Louisiana 10.5%
WNYIII, New York 18.9%
56
NOTE 9 - INCOME FROM TAX CREDITS:
As described in Note 1, each capco has a contractual arrangement with a
particular state that legally entitles the capco to earn and deliver tax credits
(ranging from 10% to 11% per year) from the state upon satisfying certain
criteria. During the years ended December 31, 2001 and 2000, certain of the
Company's capcos satisfied certain investment benchmarks and the related
recapture avoidance percentage requirements and accordingly, earned a portion of
the tax credits. In addition, in both 2001 and 2000, the Company recognized
income from tax credits in prior years resulting from the accretion of the
discount attributable to tax credits earned in prior years. As the tax credits
are delivered to the Certified Investors, the asset balance is offset against
interest payable (Note 7).
NOTE 10 - INCOME TAXES:
Provision for income taxes for the year ended December 31, 2001 is as
follows (there was no current provision):
Deferred provision: 2001 2000
---- ----
Federal $497,998 $797,012
State and local 36,618 231,390
Provision for income taxes $534,616 $1,028,402
======== ==========
A reconciliation of income taxes computed at the U.S. federal statutory income
tax rate (34%) to the provision for income taxes for the years ended December
31, 2001 and 2000 is as follows:
2001 2000
-------- ----------
(Benefit) (Benefit)
Provision Provision
-------- ----------
Benefit/Provision for income
taxes at U.S. federal statutory
rate of 34% $497,998 ($814,902)
State and local taxes, net of
federal benefit/provision 58,588 (95,871)
Other - Rate Change (21,970) --
Cumulative true-up (Note 1) -- 1,939,175
-------- ----------
$534,616 $1,028,402
========= ==========
Deferred tax assets and liabilities consisted of the following at December 31,
2001 and 2000:
Deferred tax assets: 2001 2000
----------- ------------
Net operating losses $3,911,545 $2,268,996
Interest payable 72,350 593,248
Investment Losses 730,772 --
----------- ------------
Total deferred tax assets 4,714,667 2,863,244
----------- ------------
Deferred tax liabilities:
Credits in lieu of cash (6,277,685) (3,891,646)
Total deferred tax liabilities (6,277,685) (3,891,646)
----------- ------------
Net deferred tax liability $(1,563,018) $ (1,028,402)
=========== ============
57
NOTE 10 - INCOME TAXES (Continued):
At December 31, 2001 the Company has net operating losses aggregating
approximately $10,293,540 which expire beginning in 2020. Realization of the
deferred tax assets is dependent on generating sufficient taxable income in
future years. Management has determined that a valuation allowance is not
required at December 31, 2001 and 2000 as it believes that it is more likely
than not that the deferred tax assets will be realized.
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
A capco is required to make Investments in Qualified Businesses
under a qualified investment schedule, as defined, in order to remain certified
as a capco. If the Company does not make such qualified investments within the
statutorily provided time frame, the capco is subject to Decertification and
Revocation, as defined in the respective capco agreements, of its certificate
and, accordingly, the Certified Investor could be subject to forfeiture or
recapture of its previously granted respective state tax credits. This risk has
been insured under Coverage B (Notes 2 and 7). Generally, a capco must invest at
least 50% of its Certified Capital in qualified businesses within five years
after the certification date. At December 31, 2001 and 2000, the Company had
invested the percent of its Certified Capital as follows:
Capco December 31, 2001 December 31, 2000
------------------- ----------------- -----------------
WA, New York 65% 54%
WP, Florida 40% 34%
WI, Wisconsin 31% 15%
WLA, Louisiana 35% 23%
WNYII, New York 40% 6%
WLAPII, Louisiana 24% 0%
WNYIII, New York 34% 0%
The Company has entered into employment agreements with certain
officers. Each employment agreement provides for a two year term at an annual
base salary of $300,000, an automatic one-year extension on the agreement's
commencement anniversary date, unless either party provides written notice 90
days before the expiration date, an annual 10% increase in base salary and
certain other terms. At December 31, 2001 the future minimum commitments are
$900,000 for each of the years ended December 31, 2002 and 2003.
In addition, subsequent to December 31, 2001, the Company entered into
a five year lease for office space, minimum payments due are $68,640 in 2002,
$71,042 in 2003, $73,528 in 2004, $76,101 in 2005 and $78,786 in 2006.
For certain capcos, when 100% of the Certified Capital is invested in
qualified businesses as defined, the respective state is entitled to a
percentage (normally 25%) of all appreciation of assets in excess of the amount
required to produce a specific internal rate of return (normally 15%).
As described in Note 3, the Company is not obligated to provide
additional financial support to its investees, however, from time-to-time the
Company may decide to provide such support At December 31, 2001, for the
Company's equity investment in Group Management Technologies, the Company's
investment balance has been written down to zero and the Company has recorded
additional losses of approximately $57,000. Such amount has been recorded in
accounts payable and accrued expenses.
From time to time Newtek and its subsidiaries are parties to various
legal proceedings in the normal course of business. At December 31, 2001, there
were no legal proceedings which management anticipates would have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
58
NOTE 12 - ASSETS HELD FOR SALE:
The Company owns a building and land in Mississippi which is currently
held for sale. The note is held by the Bank of Mississippi, and collateralized
by the property. At December 31, 2001, the Company determined there was a
permanent impairment on the property, and took an approximately $168,000 charge
to earnings. In March, 2002, the property was sold for the book value as of
December 31, 2001. In March 2002, the Company received payment on this asset
held for sale, and the proceeds were used to fully pay the outstanding mortgage.
NOTE 13 - RELATED PARTY TRANSACTIONS:
For the years ended December 31, 2001 and December 31, 2000, the
Company rented office space at $3,000 per month on a month-to-month basis from a
related party. In addition, for the years ended December 31, 2001 and December
31, 2000, the Company incurred financial consulting expenses of approximately
$157,000 and approximately $144,000 respectively, from a related party.
NOTE 14 - EXTRAORDINARY GAIN ON DEFEASANCE OF DEBT:
As a result of the debt defeasance described in Note 7 the Company
recognized a pre-tax net gain of $602,916 for the year ended December 31, 2000,
respectively. This gain has been classified as an extraordinary item in the
consolidated statements of operations.
NOTE 15: STOCK OPTIONS GRANTED TO DIRECTORS AND EMPLOYEES
As of December 31, 2000, there were vested options outstanding to
purchase an aggregate of 29,708 shares at a weighted average exercise price of
$7.08 of common stock at exercise prices ranging from $7.00 to $10.00 per share,
expiring in 2010.
As of December 31, 2001, there were vested options outstanding to
purchase an aggregate of 324,128 shares of common stock at the exercise prices
ranging from $3.05 to $10.00 per share, expiring in 2011.
As of December 31, 2001 the Company has granted a total of 1,694,000
options (included in this number are options of 451,500 issued to non-employees,
of which 278,000 were canceled) to purchase shares of Common Stock to management
(other than Messrs. Sloane, Rubin and Wasserman who have received no awards),
employees and directors. The details of option activity since adoption of the
plan is as follows:
Weighted
Number Average
of Exercise
Shares Price
------ -----
Outstanding January 1, 2000 -- --
Granted during 2000 993,000 $7.08
Exercised during year -- --
-- --
Cancelled during year --
Outstanding at December 31, 2000 993,000 $7.08
Granted during 2001 701,000 $3.30
Exercised during year -- --
Cancelled during year (345,667) $7.00
--------- -----
Balance, December 31, 2001 1,348,333 $5.13
========= =====
Exercisable at December 31, 2001 324,128 $6.10
======= =====
59
The Company has elected to continue using Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for
employee stock options.
The following table summarizes the pro forma consolidated results of
operations of the Company as though the fair value based accounting method in
SFAS 123 "Accounting for Stock-based Compensation" had been used in accounting
for stock options.
2001 2000
As reported
Net income (loss) $929,560 $(3,425,172)
Basic and diluted net income (loss) per
share $.04 $(.18)
Pro forma results of operations:
Net income (loss) $375,294 $(4,867,008)
Basic and diluted net income (loss)
per share $.02 $(.25)
The weighted average fair value of each option granted is estimated on
the date of grant using the Black-Scholes model with the following assumptions:
expected volatility of 85%, risk-free interest rate of 3.53% to 6.15%, expected
dividends of $0 and expected terms of 1-6 years.
NOTE 16 - EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the period. The dilutive effect of
common stock equivalents is included in the calculation of diluted earnings per
share only when the effect of their inclusion would be dilutive. The dilutive
effect of common stock equivalents were anti-dilutive for the year ended
December 31, 2000 therefore, have been excluded from the calculation of diluted
earnings per share.
The calculations of Net Income (Loss) Per Share were:
Year ended
December 31,
-------------------------------
2001 2000
------------- --------------
Basic
Net income (loss) $929,560 $ (3,425,172)
Weighted average shares - basic 21,889,958 19,309,840
Weighted average shares - diluted 21,909,527 19,309,840
Basic and Diluted $.04 $(.18)
Note 17 - 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.
60
NOTE 18 - 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. 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 material impact on the Company's consolidated
financial position, results of operations or cash flows.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 143
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," and addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company does not expect the
adoption of SFAS No. 143 and 144 to have a material impact on its consolidated
financial position, results of operations or cash flows.
NOTE 19 - SUBSEQUENT EVENTS:
In January 2002, the Company acquired Exponential Business Development
Company, Inc., of Syracuse, NY. The transaction involved the issuance by the
Company of 500,000 shares of its common stock, with an additional 500,000 shares
to be issued over a seven year period if acquired assets result in gains of $2
million in excess of an initial $1 million recovery by the Company. Since
Company management has determined that the additional issuance of 500,000 shares
is currently unlikely due to management's estimation that the payout provision
will not be met, the Company has not included the additional shares in the
determination of the purchase price. On a quarterly basis, management will
assess the payout provision to determine if it is likely it will be met in the
future, and if so, the Company will record the additional 500,000 shares as
additional purchase price. Exponential directors and officers will remain with
that entity and will receive a total of 365,000 options pursuant to the
Company's option plan to acquire Company common stock in exchange for future
services.
In January 2002, the Company signed a letter of intent to acquire
Comcap Holdings Corp. and its principal operating subsidiary, Commercial Capital
Corporation ("CCC"), a nationwide small business lending company that is
authorized to conduct US Small Business Administration lending in 50 states.
Formed as a non-bank lender in 1994, CCC originates, sells and services small
business loans partially guaranteed by the SBA. In 1996 CCC was approved as an
SBA Preferred Lender which allowed it to originate SBA guaranteed loans on an
expedited basis. Terms have not been finalized.
In February 2002, the Company sold in a private placement 100,000
shares of stock for $3.00 a share, for net proceeds of $300,000.
61
NOTE 20 - QUARTERLY INFORMATION (UNAUDITED):
Three Months Ended
--------------------------------------------------------
3/31 6/30 9/30 12/31 Full Year
2000
Total Revenue $ 600,988 $ 667,898 $ 3,970,522 $ 3,470,834 $ 8,710,242
-----------------------------------------------------------------------------------------------------
Operating Income (Loss) $(1,357,043) $(1,969,972) $(2,727,481) $ 2,568,817 $(3,485,679)
-----------------------------------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Gains $ (812,429) $(1,820,445) $(1,799,773) $ 404,559 $(4,028,088)
-----------------------------------------------------------------------------------------------------
Net Income $ (812,429) $(1,388,564) $(1,799,773) $ 575,594 $(3,425,172)
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
EPS - Basic $ (0.04) $ (0.08) $ (0.10) $ 0.03 $ (0.18)
-----------------------------------------------------------------------------------------------------
EPS - Diluted $ (0.04) $ (0.08) $ (0.10) $ 0.03 $ (0.18)
-----------------------------------------------------------------------------------------------------
Three Months Ended
--------------------------------------------------------
3/31 6/30 9/30 12/31 Full Year
2001
Total Revenue $ 6,721,551 $ 9,276,593 $ 6,317,486 $ 1,484,556 $ 23,800,186
-----------------------------------------------------------------------------------------------------
Operating Income (Loss) $ 1,535,317 $ 4,507,990 $ 1,235,071 $(2,485,851) $ 4,792,527
-----------------------------------------------------------------------------------------------------
Income (Loss) Before
Extraordinary Gains $ 760,471 $ 1,224,424 $ 460,591 $(1,515,926) $ 929,560
-----------------------------------------------------------------------------------------------------
Net Income $ 760,471 $ 1,224,424 $ 460,591 $(1,515,926) $ 929,560
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
EPS - Basic $ 0.04 $ 0.06 $ 0.02 $ (.08) $ $0.04
-----------------------------------------------------------------------------------------------------
EPS - Diluted $ 0.04 $ 0.06 $ 0.02 $ (.08) $ $0.04
-----------------------------------------------------------------------------------------------------
NOTE 21 - SUMMARY RESULTS OF QUALIFIED INVESTMENTS (UNAUDITED):
Principles of Accounting for Ownership Interests in Qualified
-------------------------------------------------------------
Investments
-----------
The various interests that the Company acquires in its qualified
investments are accounted for under three methods: consolidation, equity method
and cost method. The applicable accounting method is generally determined based
on the Company's voting interest in a Partner Company.
Investments in which the Company directly or indirectly owns more than
50% of the outstanding voting securities or those the Company has effective
control over are generally accounted for under the consolidation method of
accounting. Under this method, a investment's results of operations are
reflected within the Company's Consolidated Statements of Operations. All
significant intercompany accounts and transactions have been eliminated. The
results of operations and cash flows of a consolidated Partner Company are
included through the latest interim period in which the Company owned a greater
than 50% direct or indirect voting interest for the entire interim period or
otherwise exercised control over the Partner Company. Upon dilution of control
below 50%, the accounting method is adjusted to the equity or cost method of
accounting, as appropriate, for subsequent periods.
62
Equity Method. Investees that are not consolidated, but over which the
Company exercises significant influence, are accounted for under the equity
method of accounting. Whether or not the Company exercises significant influence
with respect to an investee depends on an evaluation of several factors
including, among others, representation on the Company's Board of Directors and
ownership level, which is generally a 20% to 50% interest in the voting
securities of the Company, including voting rights associated with the Company's
holdings in common, preferred and other convertible instruments in the investee.
Under the equity method of accounting, an investee's accounts are not reflected
within the Company's Consolidated Statements of Operations; however, the
Company's share of the earnings or losses of the investee is reflected in the
caption "Equity income (loss)" in the Consolidated Statements of Operations.
Cost Method. Investees not accounted for under the consolidation or the
equity method of accounting are accounted for under the cost method of
accounting. Under this method, the Company's share of the earnings or losses of
such companies is not included in the Consolidated Statements of Operations.
However, cost method impairment charges are recognized, as necessary, in the
Consolidated Statement of Operations. If circumstances suggest that the value of
the investee has subsequently recovered, such recovery is not recorded.
On a monthly basis, Newtek Capital Investment Committee meets to
evaluate the Company's investments. The Company considers several factors in
determining whether an impairment exists on the investment, such as the
investee's book net value, cash flow, revenue growth and net income. In
addition, the Investment Committee looks at larger variables, such as the
economy and the investee company's industry, to determine if an other than
temporary decline in value exists in the Company's investments.
The following table is an unauditied summary of the investments which
the Company accounts for under either the equity method or by consolidation.
These financial statements also reflect the degree to which the Company's
partner companies interact with each other to provide and market needed goods
or, particularly, services to each other. The income from services provided to
other partner companies is shown as "Intercompany Eliminated Revenue" and the
cost of services acquired from other partner companies is shown as "Intercompany
Eliminated Expenses." All such inter-partner company transactions were conducted
on terms and conditions no less favorable to each party than those available
from third parties.
CONSOLIDATED ENTITIES
---------------------------------------------------------------------------------------------------------------------------------
Universal Processing Universal Processing Universal Processing
Harvest Strategies Services - NY Services - Louisiana Services - Wisconsin PPM Link
==================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Cash $1,638,703 (a) $2,969,774 (a) $1,259,089 (a) $1,798,864 (a) $1,700,109 (a)
---------------------------------------------------------------------------------------------------------------------------------
Other Assets $117,588 (a) $486,632 (a) $19,251 (a) $46,722 (a) $130,558 (a)
---------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,756,261 (a) $3,456,406 (a) $1,278,340 (a) $1,845,586 (a) $1,830,667 (a)
---------------------------------------------------------------------------------------------------------------------------------
Current $53,026 (a) $51,630 (a) $7,251 (a) $19,174 (a) $46,553 (a)
Liabilities
---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities $970,028 (a) $3,451,630 (a) $7,251 (a) $1,909,074 (a) $1,896,553 (a)
---------------------------------------------------------------------------------------------------------------------------------
Total Equity $753,313 (a) $4,776 (a) $1,271,089 (a) $(63,588) (a) $(65,886) (a)
---------------------------------------------------------------------------------------------------------------------------------
63
---------------------------------------------------------------------------------------------------------------------------------
Universal Processing Universal Processing Universal Processing
Harvest Strategies Services - NY Services - Louisiana Services - Wisconsin PPM Link
=================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Revenue $167,256 (a) $219,809 (a) $1,765 (a) $29,407 (a) $71,725 (a)
---------------------------------------------------------------------------------------------------------------------------------
Intercompany
Eliminated $(89,077) (a) $(2,394) (a) -- (a) -- (a) -- (a)
Revenue
---------------------------------------------------------------------------------------------------------------------------------
Consolidated $78,179 (a) $217,415 (a) $1,765 (a) $29,407 (a) $71,725 (a)
Revenue
---------------------------------------------------------------------------------------------------------------------------------
Expenses $413,943 (a) $415,033 (a) $80,676 (a) $92,955 (a) $390,944 (a)
---------------------------------------------------------------------------------------------------------------------------------
Intercompany
Eliminated $(12,649) (a) $(54,054) (a) $(12,522) (a) $(1,574) (a) -- (a)
Expenses
---------------------------------------------------------------------------------------------------------------------------------
Consolidated $401,294 (a) $360,979 (a) $68,154 (a) $91,381 (a) $390,944 (a)
Expenses
---------------------------------------------------------------------------------------------------------------------------------
Net Income $(323,115) (a) $(143,564) (a) $(66,389) (a) $(61,974) (a) $(319,219) (a)
(Loss)
---------------------------------------------------------------------------------------------------------------------------------
(a) Company was not yet formed in 2000.
ENTITIES UNDER THE EQUITY METHOD
---------------------------------------------------------------------------------------------------------------------------------
Transworld
Group Management Business
Starphire AIDA Technologies Nichedirectories Brokers
================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
----------------- ----------- ----------- ----------- ------------ ---------- ------- ---------- ----------- ----------- -------
Cash $1,352,823 $1,186,430 $3,835,404 $873,219 $17,799 (a) $556,741 $1,091,830 $245,515 (a)
---------------------------------------------------------------------------------------------------------------------------------
Other Assets $460,508 $407,493 $170,464 $89,455 $113,438 (a) $273,328 $242,620 $334,854 (a)
---------------------------------------------------------------------------------------------------------------------------------
Total Assets $1,813,331 $1,593,923 $4,005,868 $962,674 $131,237 (a) $830,069 $1,334,450 $580,369 (a)
---------------------------------------------------------------------------------------------------------------------------------
Current $85,652 $21,129 $60,673 $69,631 $13,795 (a) $354,861 $262,775 $22,457 (a)
Liabilities
---------------------------------------------------------------------------------------------------------------------------------
Total $1,085,652 $21,129 $3,575,323 $69,631 $188,449 (a) $354,861 $262,775 $262,457 (a)
Liabilities
---------------------------------------------------------------------------------------------------------------------------------
Total Equity $727,679 $1,572,794 $430,545 $893,043 $(57,212) (a) $475,208 $1,071,675 $317,912 (a)
---------------------------------------------------------------------------------------------------------------------------------
64
---------------------------------------------------------------------------------------------------------------------------------
Transworld
Group Management Business
Starphire AIDA Technologies Nichedirectories Brokers
=================================================================================================================================
2001 2000 2001 2000 2001 2000 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------------------------------
Gross Revenues $359,761 $158,022 $257,437 $28,085 $281,319 (a) $614,701 $497,194 $1,066,495 (a)
---------------------------------------------------------------------------------------------------------------------------------
Intercompany
Eliminated $(73,397) -- $(41,095) -- $(53,704) (a) -- -- -- (a)
Revenue
---------------------------------------------------------------------------------------------------------------------------------
Consolidated $289,364 $158,022 $216,342 $28,085 $227,615 (a) $614,701 $497,194 $1,066,495 (a)
Revenue
---------------------------------------------------------------------------------------------------------------------------------
Expenses $1,132,209 $283,766 $700,918 $156,036 $787,338 (a) $1,211,169 $592,207 $1,098,683 (a)
---------------------------------------------------------------------------------------------------------------------------------
Intercompany
Eliminated $(46,107) -- $(42,565) -- $(28,154) (a) $(1,014) -- $(8,028) (a)
Expenses
---------------------------------------------------------------------------------------------------------------------------------
Consolidated $1,086,102 $283,766 $658,353 $156,036 $759,184 (a) $1,160,155 $592,207 $1,097,655 (a)
Expenses
---------------------------------------------------------------------------------------------------------------------------------
Net Income $(796,738) $(125,744) $(442,011) $(127,951) $(531,569) (a) $(545,454) $(95,013) $(24,160) (a)
(Loss)
---------------------------------------------------------------------------------------------------------------------------------
(a) Company was not yet formed in 2000.
(b) Newtek's investment occurred during the year. As such, the results represent
the company's activity prior to Newtek's involvement, as well as after Newtek's
investment. See "Note 3 - Investments in Qualified Businesses" for investment
dates.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by this item as to Newtek Capital, Inc.'s
directors, executive officers and control persons is contained in the Company's
proxy statement to be filed prior to April 19, 2002, under the captions,
"Election of Directors' and "Section 16(a) Beneficial Ownership Reporting
Compliance," and is incorporated herein by reference.
Item 10. EXECUTIVE COMPENSATION
The information required by this item as to Newtek Capital, Inc.'s
executive compensation is contained in the Company's proxy statement to be filed
prior to April 19, 2002, under the caption "Executive Compensation" and is
incorporated herein by reference.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's
proxy statement to be filed prior to April 19, 2002, under the caption, "Voting
Securities and Principal Stockholders" and is incorporated herein by reference.
65
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained in the Company's
proxy statement to be filed prior to April 19, 2002, under the captions,
"Compensation Committee Interlocks and Insider Participation" and "Executive
Compensation," and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
2.1 Agreement and Plan of Merger between REXX Environmental Corporation and
Newtek Capital, Inc. (formerly known as TWG, Inc.) dated December 9,
1999. (Incorporated by Reference to Exhibit 2.1 to Registration
Statement No. 333-43550).
2.2 Plan of Merger between BJB Holdings and Whitestone Acquisition Corp.
dated January 14, 2000. (Incorporated by reference to Exhibit No. 2.2
to Registration Statement No. 333-43550).
2.3 Stock Purchase Agreement among Greg S. Watkins, Daren J. Barone and
REXX Environmental Corporation dated June 10, 1999. (Incorporated by
reference to Exhibit No. 2.3 to Registration Statement No. 333-43550).
2.4 Letter Agreements amending the term of the Stock Purchase Agreement
dated November 29, 1999, January 6, 2000, April 27, 2000 and June 28,
2000. (Incorporated by reference to Exhibit No. 2.4 to Registration
Statement No. 333-43550).
3.1 Certificate of Incorporation of Newtek Capital, Inc. (Incorporated by
reference to Exhibit No. 3.1 to Registration Statement No. 333-43550).
3.2 Bylaws of Newtek Capital, Inc. ( Incorporated by reference to Exhibit
No. 3.2 to Registration Statement No. 3.2).
10.1 Form of Employment Agreement with Jeffrey G. Rubin (Incorporated by
reference to Exhibit No. 10.1 to Registration Statement No. 333-43550).
10.2 Form of Employment Agreement with Barry Sloane ((Incorporated by
reference to Exhibit No. 10.2 to Registration Statement No. 333-43550).
10.3 Form of Employment Agreement with Brian A. Wasserman (Incorporated by
reference to Exhibit No. 10.3 to Registration Statement No. 333-43550).
10.4 Management Services Agreement with JR Group, LLC (Incorporated by
reference to Exhibit No. 10.4 to Registration Statement No. 333-43550).
10.5 Management Services Agreement with The Sloane Organization, LLC
(Incorporated by reference to Exhibit No. 10.5 to Registration
Statement No. 333-43550).
10.6 Management Services Agreement with Sharp Management, LLC (Incorporated
by reference to Exhibit No. 10.6 to Registration Statement No.
333-43550).
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
(b) Reports on Form 8-K:
Not applicable.
66
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NEWTEK CAPITAL, INC.
Date: March 29, 2002 By: /s/ Barry Sloane
----------------------------------------
Barry Sloane
(Chairman and Chief Executive Officer)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Barry Sloane
------------------------------ Chairman of the Board and Chief March 29, 2002
Barry Sloane Executive Officer and Secretary
/s/ Jeffrey G. Rubin
------------------------------ President, Chief Investment Officer and March 29, 2002
Jeffrey G. Rubin Director
/s/ Brian A. Wasserman
------------------------------ Treasurer, Chief Financial Officer and March 29, 2002
Brian A. Wasserman Director
/s/ John Cox
------------------------------ Director March 29, 2002
John Cox
/s/ Steven A. Shenfeld
------------------------------ Director March 29, 2002
Steven A. Shenfeld
/s/ Jeffrey M. Schottenstein
------------------------------ Director March 29, 2002
Jeffrey M. Schottenstein
/s/ Giuseppe Soccodato
------------------------------ Controller and Chief Accounting Officer March 29, 2002
Giuseppe Soccodato
67