WASHINGTON,
D.C. 20549
_______________________
FORM
10-Q
(Mark
One)
x QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended September 30, 2005
OR
o TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number: 001-16123
NEWTEK
BUSINESS SERVICES, INC.
(Exact
name of registrant as specified in its charter)
New
York
|
|
11-3504638
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
|
|
|
462
Seventh Avenue, New York, New York
|
|
10018
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (212) 356-9500
Check
whether the registrant has (1) filed all documents and reports required to
be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
ninety days.
Yes
No
|X|
|_|
Indicate
by check mark whether the registrant is an accelerated filer (as defined
in Rule
12b-2 of the Exchange Act).
Yes No
|X|
|_|
As
of November 11, 2005, 34,629,175 Common shares were issued and
outstanding.
CONTENTS
PART
I - FINANCIAL INFORMATION
|
PAGE
|
|
|
Item
1.Financial Statements (Unaudited)
|
|
|
|
Consolidated
Statements of Operations for the Three and Nine Month Periods
|
|
Ended
September 30, 2005 and 2004
|
3
|
|
|
Consolidated
Balance Sheets as of September 30, 2005 and December 31,
2004
|
4
|
|
|
Consolidated
Statements of Cash Flows for the Nine Month
|
|
Periods
Ended September 30, 2005 and 2004
|
5
|
|
|
Notes
to Unaudited Consolidated Financial Statements
|
7
|
|
|
Item
2.Management's Discussion and Analysis of Financial Condition
and
|
|
Results
of Operations
|
19
|
|
|
Item
3.Quantitative and Qualitative Disclosures about Market
Risk
|
28
|
|
|
Item
4.Controls and Procedures
|
29
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
6.Exhibits
|
29
|
|
|
Signatures
|
31
|
|
|
Certifications
|
32
|
Exhibits
|
|
ITEM
1. FINANCIAL STATEMENTS
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2005 AND
2004
(In
Thousands except for Per Share Data)
|
|
THREE
MONTHS ENDED
SEPTEMBER
30,
|
|
NINE
MONTHS ENDED
SEPTEMBER
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Electronic
payment processing
|
|
$
|
8,435
|
|
$
|
5,126
|
|
$
|
21,955
|
|
$
|
12,430
|
|
Income
from tax credits
|
|
|
5,905
|
|
|
11,421
|
|
|
17,303
|
|
|
20,469
|
|
Web
hosting
|
|
|
2,769
|
|
|
2,204
|
|
|
7,680
|
|
|
2,204
|
|
Interest
income
|
|
|
1,237
|
|
|
865
|
|
|
3,566
|
|
|
2,936
|
|
Premium
fee income
|
|
|
827
|
|
|
607
|
|
|
3,345
|
|
|
3,073
|
|
Servicing
fee income
|
|
|
539
|
|
|
402
|
|
|
1,477
|
|
|
1,190
|
|
Insurance
commissions
|
|
|
273
|
|
|
391
|
|
|
991
|
|
|
391
|
|
Other
income
|
|
|
477
|
|
|
582
|
|
|
3,683
|
|
|
1,258
|
|
Total
revenue
|
|
|
20,462
|
|
|
21,598
|
|
|
60,000
|
|
|
43,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
payment processing costs
|
|
|
6,143
|
|
|
3,598
|
|
|
16,094
|
|
|
8,729
|
|
Payroll
and consulting fees
|
|
|
3,996
|
|
|
2,997
|
|
|
12,307
|
|
|
7,544
|
|
Interest
|
|
|
4,208
|
|
|
3,290
|
|
|
11,785
|
|
|
10,533
|
|
Professional
fees
|
|
|
1,902
|
|
|
1,573
|
|
|
5,442
|
|
|
3,410
|
|
Depreciation
and amortization
|
|
|
1,171
|
|
|
773
|
|
|
3,445
|
|
|
1,390
|
|
Insurance
|
|
|
856
|
|
|
738
|
|
|
2,319
|
|
|
2,145
|
|
Provision
for loan losses
|
|
|
1,082
|
|
|
59
|
|
|
2,183
|
|
|
12
|
|
Goodwill
impairment
|
|
|
822
|
|
|
—
|
|
|
822
|
|
|
—
|
|
Other
than temporary decline in value of investments
|
|
|
321 |
|
|
— |
|
|
321 |
|
|
— |
|
Other
|
|
|
2,298
|
|
|
1,526
|
|
|
5,853
|
|
|
3,536
|
|
Total
expenses
|
|
|
22,799
|
|
|
14,554
|
|
|
60,571
|
|
|
37,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before minority interest, and benefit (provision) for income
taxes
|
|
|
(2,337
|
)
|
|
7,044
|
|
|
(571
|
)
|
|
6,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
258
|
|
|
273
|
|
|
630
|
|
|
883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before benefit (provision) for income taxes
|
|
|
(2,079
|
)
|
|
7,317
|
|
|
59
|
|
|
7,535
|
|
Benefit
(provision) for income taxes
|
|
|
102
|
|
|
(3,000
|
)
|
|
(948
|
)
|
|
(3,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(1,977
|
)
|
$
|
4,317
|
|
$
|
(889
|
)
|
$
|
4,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
Diluted
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
34,453,748
|
|
|
33,308,929
|
|
|
34,104,827
|
|
|
28,854,029
|
|
Diluted
|
|
|
34,453,748
|
|
|
33,420,377
|
|
|
34,104,827
|
|
|
29,247,416
|
|
See
accompanying notes to these unaudited consolidated financial
statements.
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2005 (UNAUDITED) AND DECEMBER 31, 2004
(In
Thousands except for Share Data)
|
|
September
30,
2005
|
|
December
31, 2004
|
|
A
S S E T S
|
|
|
|
|
|
Cash
and cash equivalents
|
$
|
53,719
|
|
$
|
50,922
|
|
Restricted
cash
|
|
2,871
|
|
|
2,182
|
|
Credits
in lieu of cash
|
|
93,940
|
|
|
88,883
|
|
SBA
loans receivable (net of reserve for loan losses of $2,464
and $1,621, respectively)
|
|
31,587
|
|
|
34,186
|
|
Accounts
receivable (net of allowance of $172 and $72,
respectively)
|
|
1,400
|
|
|
1,561
|
|
Receivable
from bank
|
|
-
|
|
|
1,800
|
|
SBA
loans held for sale
|
|
6,145
|
|
|
2,262
|
|
Accrued
interest receivable
|
|
479
|
|
|
375
|
|
Investments
in qualified businesses - cost method investments
|
|
100
|
|
|
300
|
|
Investments
in qualified businesses -held to maturity debt investments
|
|
3,498
|
|
|
2,909
|
|
Structured
insurance product
|
|
3,337
|
|
|
3,216
|
|
Prepaid
insurance
|
|
16,522
|
|
|
15,505
|
|
Prepaid
expenses and other assets (net of accumulated amortization of
deferred
financing costs and other intangibles of $977 and $404,
respectively)
|
|
8,273
|
|
|
4,709
|
|
Servicing
asset (net of accumulated amortization and allowances of $1,286
and $489,
respectively)
|
|
2,658
|
|
|
2,085
|
|
Furniture,
fixtures and equipment (net of accumulated depreciation and amortization
of $2,015 and $1,026, respectively)
|
|
3,768
|
|
|
1,959
|
|
Customer
accounts (net of accumulated amortization of $2,493 and $1,227,
respectively)
|
|
6,287
|
|
|
4,394
|
|
Goodwill
|
|
8,671
|
|
|
11,150
|
|
Total
assets
|
$
|
243,255
|
|
$
|
228,398
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
$
|
8,827
|
|
$
|
9,726
|
|
Notes
payable - certified investors
|
|
3,941
|
|
|
3,926
|
|
Notes
payable - insurance
|
|
8,250
|
|
|
7,877
|
|
Notes
payable - other
|
|
8,009
|
|
|
520
|
|
Bank
notes payable
|
|
23,721
|
|
|
27,988
|
|
Deferred
revenue
|
|
1,392
|
|
|
1,160
|
|
Notes
payable in credits in lieu of cash
|
|
87,530
|
|
|
76,259
|
|
Mandatorily
redeemable preferred stock
|
|
—
|
|
|
1,500
|
|
Deferred
tax liability
|
|
17,759
|
|
|
16,626
|
|
Total
liabilities
|
|
159,429
|
|
|
145,582
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
5,055
|
|
|
5,721
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
Preferred
stock (par value $0.02 per share; authorized 1,000,000 shares,
no shares
issued and outstanding)
|
|
|
|
|
|
|
Common
stock (par value $0.02 per share; authorized 54,000,000 shares,
issued and
outstanding 34,534,499 and 33,873,333 not including 582,980 shares
held in
escrow)
|
|
691
|
|
|
677
|
|
Additional
paid-in capital
|
|
55,280
|
|
|
52,858
|
|
Unearned
compensation
|
|
(2,168
|
)
|
|
(2,297
|
)
|
Retained
earnings
|
|
24,968
|
|
|
25,857
|
|
Total
shareholders’ equity
|
|
78,771
|
|
|
77,095
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
$
|
243,255
|
|
$
|
228,398
|
|
See
accompanying notes to these unaudited consolidated financial
statements
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In
Thousands except for Share Data)
|
|
2005
|
|
2004
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(889
|
)
|
$
|
4,446
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Income
from tax credits
|
|
|
(17,303
|
)
|
|
(20,469
|
)
|
Deferred
income taxes
|
|
|
1,133
|
|
|
3,089
|
|
Depreciation
and amortization
|
|
|
2,828
|
|
|
1,106
|
|
Amortization
of servicing asset
|
|
|
617
|
|
|
284
|
|
Provision
for loan losses
|
|
|
2,183
|
|
|
12
|
|
Servicing
asset valuation allowance
|
|
|
180
|
|
|
—
|
|
Other
than temporary decline in value of investments
|
|
|
321
|
|
|
|
|
Goodwill
impairment
|
|
|
822
|
|
|
|
|
SBA
loans originated for sale
|
|
|
(36,098
|
)
|
|
(23,191
|
)
|
Proceeds
from sale of SBA loans held for sale
|
|
|
32,215
|
|
|
24,918
|
|
Gain
on sale of loans held for investment
|
|
|
(305
|
)
|
|
(658
|
)
|
Amortization
of deferred loan origination fees, net
|
|
|
(151
|
)
|
|
(45
|
)
|
Accretion
of interest income
|
|
|
(132
|
)
|
|
(132
|
)
|
Accretion
of interest expense
|
|
|
9,336
|
|
|
8,696
|
|
Stock
compensation
|
|
|
1,110
|
|
|
1,058
|
|
Minority
interest
|
|
|
(630
|
)
|
|
(883
|
)
|
Equity
in earnings in investee
|
|
|
(887
|
)
|
|
|
|
Changes
in assets and liabilities, net of purchase price
reallocation:
|
|
|
|
|
|
|
|
Prepaid
insurance
|
|
|
(1,017
|
)
|
|
404
|
|
Prepaid
expenses and other assets, accounts receivable, receivable from
bank and
servicing assets
|
|
|
(3,071
|
)
|
|
(2,836
|
)
|
Accounts
payable and accrued expenses
|
|
|
(237
|
)
|
|
(539
|
)
|
Net
cash used in operating activities
|
|
|
(9,975
|
)
|
|
(4,740
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Investment
in qualified businesses- held to maturity debt investments
|
|
|
(4,368
|
)
|
|
(1,909
|
)
|
Return
of investments - held to maturity debt investments
|
|
|
3,658
|
|
|
1,614
|
|
Purchase
of furniture, fixtures and equipment
|
|
|
(2,424
|
)
|
|
(846
|
)
|
Purchase
of customer merchant accounts
|
|
|
(1,078
|
)
|
|
—
|
|
SBA
Loans originated for investment
|
|
|
(11,483
|
)
|
|
(9,461
|
)
|
Proceeds
from sale of SBA loans held for investment
|
|
|
8,827
|
|
|
17,881
|
|
Payments
received on SBA loans
|
|
|
3,528
|
|
|
7,660
|
|
Cash
paid for acquisitions, net of cash received
|
|
|
|
|
|
(9,955
|
)
|
Distribution
from investee
|
|
|
820
|
|
|
|
|
Acquisition
of minority interest resulting in goodwill
|
|
|
(100
|
)
|
|
|
|
Contingent
consideration for acquisition (Note 6)
|
|
|
(750
|
)
|
|
|
|
Other
investments
|
|
|
(36
|
)
|
|
(30
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(3,406
|
)
|
|
4,954
|
|
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(CONTINUED)
(In
Thousands except for Share Data)
|
|
|
|
2005
|
|
2004
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
Proceeds
from issuance of notes payable to certified investors
|
|
$
|
23,458
|
|
$
|
10,896
|
|
Cash
paid for coverage A (syndication of notes)
|
|
|
(6,250
|
)
|
|
(2,150
|
)
|
Principal
payments of note payable-insurance
|
|
|
(2,776
|
)
|
|
(1,112
|
)
|
Proceeds
from note payable- other
|
|
|
8,014
|
|
|
|
|
Repayments
of note payable - other
|
|
|
(525
|
)
|
|
(360
|
)
|
Repayments
of mandatorily redeemable preferred stock
|
|
|
(1,500
|
)
|
|
|
|
Change
in restricted cash
|
|
|
(689
|
)
|
|
415
|
|
Net
repayments from SBA bank notes payable
|
|
|
(4,267
|
)
|
|
(23,435
|
)
|
Net
proceeds from exercise of stock options
|
|
|
—
|
|
|
533
|
|
Net
proceeds from issuance of common stock
|
|
|
713
|
|
|
22,164
|
|
Net
cash provided by financing activities
|
|
|
16,178
|
|
|
6,951
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,797
|
|
|
7,165
|
|
Cash
and cash equivalents - beginning of period
|
|
|
50,922
|
|
|
33,445
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
53,719
|
|
$
|
40,610
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow activities:
|
|
|
|
|
|
|
|
Reduction
of credits in lieu of cash and notes payable in credits in lieu
of cash
balances due to delivery of tax credits to Certified
Investors
|
|
$
|
12,246
|
|
$
|
12,401
|
|
|
|
|
|
|
|
|
|
Issuance
of notes in partial payment for insurance
|
|
$
|
3,000
|
|
$
|
3,000
|
|
|
|
|
|
|
|
|
|
Issuance
of warrant in connection with purchase of Coverage
A Insurance
|
|
$
|
|
|
$
|
250
|
|
|
|
|
|
|
|
|
|
CrystalTech
Final Purchase Price Allocations to Goodwill
|
|
|
|
|
|
|
|
Additions
to customer accounts
|
|
$
|
2,082
|
|
$
|
|
|
Additions
to intangibles
|
|
|
560
|
|
|
|
|
Additions
to furniture and fixtures
|
|
|
375
|
|
|
|
|
Net
deductions to goodwill
|
|
|
(3,258
|
)
|
|
|
|
Net
additions to assets and liabilities
|
|
|
241
|
|
|
|
|
Net
effect on purchase price
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration for acquisition (Note 6)
|
|
$
|
750
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of minority interest resulting in goodwill:
|
|
|
|
|
|
|
|
Newtek
Business Services common stock issued
|
|
$
|
|
|
$
|
786
|
|
Less:
minority interest acquired
|
|
|
|
|
|
|
|
Goodwill
recognized
|
|
$
|
|
|
$
|
786
|
|
|
|
|
|
|
|
|
|
Conversion
of minority interest to mandatorily redeemable preferred
stock
|
|
|
|
|
$
|
1,500
|
|
See
accompanying notes to these unaudited consolidated financial
statements.
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES (Unaudited)
Basis
of presentation and description of business
The
unaudited consolidated financial statements of Newtek Business Services,
Inc.
and Subsidiaries (the “Company” or “Newtek”) included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”) and include all wholly- and majority-owned
subsidiaries, and several portfolio companies in which the certified capital
companies own non-controlling minority interest, or those which Newtek is
considered to be the primary beneficiary of (as defined under FIN 46 and
FIN
46R). All inter-company balances and transactions have been eliminated in
consolidation.
Currently,
the Company is absorbing losses attributable to certain of its minority interest
holders. Once these entities return to profitability, the losses will be
restored to the Company prior to allocation of profits to all minority holders.
Newtek
is
engaged in the business of providing financial products and business services
to
small- and medium-sized businesses through ownership and/or operation of
specific primary lines of business as well as organizing certified capital
companies (“Capco” or “Capcos”) and investing funds made available under the
Capco programs in small businesses.
The
unaudited consolidated financial statements of Newtek reflect, in the opinion
of
management, all adjustments necessary for a fair statement of financial position
of Newtek at September 30, 2005, the results of operations for the three
and
nine months ended September 30, 2005 and 2004 and its cash flows for the
nine
months ended September 30, 2005 and 2004. Results of operations for the interim
periods may not be representative of results to be expected for a full year.
All
adjustments are of a normal recurring nature.
Reference
is made to the Company’s Annual Report on Form 10-K, as amended filed with the
Securities and Exchange Commission for the year ended December 31, 2004,
for a
complete set of financial notes including the Company’s significant accounting
policies.
The
following is a summary of each Capco or Capco fund, state or jurisdiction
of
certification and date of certification:
Capco
|
|
State/Jurisdiction
of Certification
|
|
Date
of Certification
|
|
WA
|
|
New
York
|
|
May
1998
|
|
WP
|
|
Florida
|
|
December
1998
|
|
WI
|
|
Wisconsin
|
|
October
1999
|
|
WLA
|
|
Louisiana
|
|
October
1999
|
|
WA
II
|
|
New
York
|
|
April
2000
|
|
WNY
III
|
|
New
York
|
|
December
2000
|
|
WC
|
|
Colorado
|
|
October
2001
|
|
WAP
|
|
Alabama
|
|
February
2004
|
|
WDC
|
|
District
of Columbia
|
|
November
2004
|
|
WNY
IV
|
|
New
York
|
|
December
2004
|
|
WTX
I
|
|
Texas
|
|
March
2005
|
In June
2005, Newtek funded its fourteenth Capco, Wilshire Texas Partners I, LLC
(WTX I)
for total certified capital of $22,793,000. A second allocation in August
2005
added $620,000 for total certified capital of $23,413,000.
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (Unaudited)
The
State
of Louisiana has four “capco funds” which are all a part of and consolidated
with the WLA Capco. The second, Wilshire Louisiana Partners II, LLC (WLPII),
and
the third, Wilshire Louisiana Partners III, LLC (WLPIII), were formed in
October
2001, and October 2002, respectively. The fourth, Wilshire Louisiana Partners
IV, LLC (WLPIV) was formed in October 2003.
In
general, the Capcos issue debt and equity instruments, (“Certified Capital”), to
insurance company investors (“Certified Investors”). The Capcos then make
targeted investments (“Investments in Qualified Businesses”, as defined under
the respective state statutes, or, “Qualified Businesses”) with the Certified
Capital raised, which in most cases may be majority-owned or primarily
controlled by the Capcos after the investments are consummated (excluding
investments made by the Louisiana, Colorado, Texas and recent New York Capcos).
Participation in each Capco program 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. These state requirements
are
mirrored in the limitations agreed to by each Capco in its written agreements
with its Certified Investors and limit the activities of the Capcos to
conducting the business of a Capco. Each Capco also has separate, legal
contractual arrangements with the Certified Investors obligating the Capco
to
refrain from unauthorized activities, to use the proceeds from the notes
only
for Capco-authorized (i.e., “qualified”) investments, and to pay interest on the
aforementioned debt instruments.
The
Capco
can satisfy the interest payment obligations, at the Capco’s discretion, by
delivering tax credits in lieu of paying cash. The Capcos legally have the
right
to deliver the tax credits to the Certified Investors. The Certified Investors
legally have the right to receive and use the tax credits and would, in turn,
use these tax credits to reduce their respective state tax liabilities in
an
amount usually equal to 100% (WLA and WLPII, -110%) of their Certified
investment. The tax credits can be utilized over a four to ten-year period
at an
annual percentage rate established by each separate Capco legislation, and
in
some instances are transferable and can be carried forward.
Restricted
Cash
Under
the
terms of the prior agreement with Deutsche Bank, and the current agreement
between Newtek Small Business Finance, Inc.(“NSBF”) and General Electric Capital
Corporation, (“GE”), all payments received from NSBF’s borrowers are transferred
into a restricted bank account. NSBF uses these funds to pay required principal
and interest to the lender, amounts due to third party participants and certain
other required payments. As of September 30, 2005 and December 31, 2004,
restricted cash was $2,871,000 and $2,182,000 respectively.
Under
the
terms of the processing agreement between Universal Processing Services of
WI
(d/b/a Newtek Merchant Solutions of WI, “NMS-WI”), and its primary processing
bank, NMS-WI maintains a cash account as a reserve against chargeback losses.
As
processing fees are received, a certain percentage is allocated to the cash
reserve account. Total restricted cash held at the processing bank at September
30, 2005 and December 31, 2004 totaled $125,000 and is included in prepaid
expenses and other assets in the consolidated balance sheets.
Stock
- Based Compensation
The
Company has elected to continue using Accounting Principles Board Opinion
No.
25, “Accounting for Stock Issued to Employees,” and related interpretations in
accounting for employee stock options. With regard to stock options, no
stock-based employee compensation cost is reflected in net loss or income,
as
all options granted had an exercise price equal to the market value of the
underlying common stock at the date of grant. Compensation expense on restricted
shares granted to employees is measured at the fair market value on the date
of
grant and recognized in the consolidated statements of operations on a pro-rata
basis over the service period which approximates the vesting
period.
The
following table summarizes the pro forma consolidated statement of operations
of
the Company as though the fair value based accounting method in Statement
of
Financial Accounting Standard (“SFAS”) No. 148 “Accounting for Stock-based
Compensation-Transition and Disclosure- an amendment of SFAS 123” had been used
in accounting for employee stock options.
|
|
In
Thousands, except per share data
|
|
In
Thousands, except per share data
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income, as reported
|
|
$
|
(1,977
|
)
|
$
|
4,317
|
|
$
|
(889
|
)
|
$
|
4,446
|
|
Add:
Total stock based employee compensation expense recognized, net
of related
tax effects
|
|
|
110
|
|
|
123
|
|
|
576
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total pro forma stock based employee compensation expense determined
under
fair value based method for all awards, net of related tax
effects
|
|
|
(126
|
)
|
|
(127
|
)
|
|
(669
|
)
|
|
(528
|
)
|
`
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net (loss) income
|
|
$
|
(1,993
|
)
|
$
|
4,313
|
|
$
|
(982
|
)
|
$
|
4,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- pro forma
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- pro forma
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
For
the
nine months ended September 30, 2005 the weighted average fair value of the
options granted was estimated on the date of grant using the Black Scholes
model
with the following assumptions: expected volatility range of 42-48%, risk-free
interest rate of 1.98%, expected dividends of $0 and an expected term of
1
year.
Use
of Estimates
The
preparation of unaudited consolidated financial statements in conformity
with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expense during the reporting period. The
level
of uncertainty in estimates and assumptions increases with the length of
time
until the underlying transactions are complete. The most significant estimates
are with respect to valuation of investments in qualified businesses, asset
impairment valuation, loans receivable and tax valuation allowances. Actual
results could differ from those estimates.
New
Accounting Pronouncements
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error
Corrections (SFAS 154), which replaces Accounting Principles Board Opinion
(“APB”) No. 20 Accounting Changes, and SFAS No. 3 Reporting Changes in Interim
Financial Statements. SFAS 154 changes the requirements for the accounting
for
and reporting of a change in accounting principle, and applies to all voluntary
changes in accounting principles, as well as changes required by an accounting
pronouncement in the unusual instance that it does not include specific
transition provisions. Specifically, SFAS 154 requires retrospective application
to prior periods financial statements, unless it is impracticable to determine
the period-specific effects or the cumulative effect of the change. SFAS
154
does not change the transition provisions of any existing pronouncement.
SFAS
154 is effective for the Company for all accounting changes and corrections
of
errors made beginning January 1, 2006.
In
April
2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation
(“FIN”) No. 47, “Accounting for Conditional Asset Retirement Obligations, an
interpretation of FASB Statement No. 143”. This interpretation clarifies that an
entity is required to recognize a liability for the fair value of a conditional
asset retirement obligation when incurred if the liability’s fair value can be
reasonably estimated. It also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN No. 47 is effective no later than the end of fiscal years
ending
after December 15, 2005. The Company does not believe that the adoption of
FIN
No. 47 will have a material impact on the Company’s consolidated financial
statements.
In
April
2005, the Securities and Exchange Commission approved a new rule that delays
the
effective date of SFAS No. 123 (revised 2004), Share-Based Payments, which
requires companies to expense the value of employee and director stock options
and similar awards. SFAS 123 (R) is now effective January 1, 2006 for Newtek.
The Company is currently evaluating the impact of SFAS 123 (R).
In
March
2005, the FASB issued Interpretation No. 46 (R ) -5 (“FIN 46(R )-5”),
Implicit
Variable Interests under FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities”. FIN
46-(R
) is effective for the first reporting period beginning after March 3, 2005,
however earlier application is permitted.
Reclassifications
Certain
prior period amounts have been reclassified to conform to current period
presentation.
NOTE
2 - COMMON SHARES:
In
the
nine months ended September 30, 2005, Newtek issued 81,000 common shares
to
employees for total stock compensation of $131,000 and 208,000 common shares
to
the CEO of Crystal Tech pursuant to the purchase agreement which was recorded
as
an addition to goodwill of $750,000. The Company issued 38,000 common shares
to
the board of directors for $150,000 worth of services rendered. In addition,
5,000 common shares were issued in consideration for consulting services
rendered, valued at $19,000. In connection with the funding of the Wilshire
Texas Capco, 329,000 common shares (of which 122,000 common shares were issued
to an insurance company and the remainder to certified investors) were issued
for $713,000 in cash.
NOTE
3 - INVESTMENTS IN QUALIFIED BUSINESSES:
The
following table is a summary of investments as of September 30, 2005, shown
separately between their debt and equity components, and all terms of each
are
summarized. The various interests that the Company acquires in its Qualified
Businesses are accounted for under three methods: consolidation, equity method
and cost method. The applicable accounting method is generally determined
based
on the Company’s voting interest or the economics of the transaction if the
investee is determined to be a variable interest entity.
The
manner of accounting for an investment in a Qualified Business is determined
based upon applicable accounting principles. These principles do not necessarily
coincide with concepts of “ownership” or “control” contained in some of the
Capco statutes and which impose various limitations on the degree to which
a
Capco may “own” or “control” a Qualified Business. For example, current
Louisiana law prohibits a Capco from making an investment in a business “with
the intent to control” the business, and Colorado, Texas, and New York place
percentage limitations on a Capco’s level of “ownership” of a qualified business
(among other requirements). Newtek’s Capcos conform to all applicable
requirements but these requirements do not necessarily control the accounting
treatment appropriate for a particular investment.
The
following is a summary of our non-consolidated investments at September 30,
2005:
Debt
Investments (Dollars
in thousands):
Debt
investments at December 31, 2004
|
|
$
|
2,909
|
|
Debt
issued
|
|
|
4,368
|
|
Return
of principal
|
|
|
(3,658
|
)
|
Other
than temporary decline in value of investments
|
|
|
(121
|
)
|
Debt
investments at September 30, 2005
|
|
$
|
3,498
|
|
Cost
Investments (Dollars
in thousands):
Cost
investments at December 31, 2004
|
|
$
|
300
|
|
Other
than temporary decline in value of investments
|
|
|
(200
|
)
|
Cost
investments at September 30, 2005
|
|
$
|
100
|
|
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 September 30, 2005, was assessed at zero.
During
the current period, the Company determined that an impairment existed due
to
hurricane Katrina for certain debt investments, and accordingly wrote these
investments off. Also in connection with the Company’s review of its cost
investments, it was determined that due to certain events that the recovery
of
its investment was unlikely and recorded it as an impairment loss in the
accompanying consolidated statements of operations.
NOTE
4 - LOANS RECEIVABLE (NON-CAPCO):
In
the
third quarter of 2005, management recorded an additional $900,000 in reserves,
of which $300,000 is associated with hurricane Katrina. The $300,000 reserve
was
established to cover known and probable future losses due to business
interruptions and material property losses, as well as indirect economic
effects
outside of the hurricane region which could result in decreases in revenue
to
some of our other borrowers. The remaining $600,000 reserve was established
due
to current economic conditions, specifically the rising interest rate
environment and the high price of oil and gas, in addition to the potential
economic impact to those small businesses in Louisiana, Alabama, Mississippi
and
other parts of the country that were not directly impacted by the storm and
addressed in the reserves above. Consideration in this evaluation includes
past
and anticipated loss experience, current portfolio composition and the
evaluation of real estate collateral as well as current and anticipated economic
conditions. Management believes that such additional reserves will be adequate
to absorb future probable loan losses inherent in the Company’s entire loan
portfolio.
Below
is
a summary of the Small Business Administration (“SBA”) loan receivable balance,
net of SBA loan loss reserves as of September 30, 2005: (Dollars
in thousands)
Balance
at December 31, 2004
|
|
$
|
34,186
|
|
SBA
loans originated for investment
|
|
|
11,887
|
|
Payments
received
|
|
|
(3,528
|
)
|
SBA
loans held for investment, reclassified as held for sale
|
|
|
(8,522
|
)
|
Provision
for SBA loan losses
|
|
|
(2,183
|
)
|
Deferred
loan origination costs, net
|
|
|
(253
|
)
|
Balance
at September 30, 2005
|
|
$
|
31,587
|
|
Below
is
a summary of the reserve for loan losses balance as of September 30, 2005:
(Dollars
in thousands)
Balance
at December 31, 2004
|
|
$
|
1,621
|
|
Provision
for SBA loan losses
|
|
|
2,183
|
|
Recoveries
|
|
|
48
|
|
Loan
charge-offs
|
|
|
(1,388
|
)
|
Balance
at September 30, 2005
|
|
$
|
2,464
|
|
Below
is
a summary of the SBA loans held for sale as of September 30, 2005:
(Dollars
in thousands)
Balance
at December 31, 2004
|
|
$
|
2,262
|
|
Loan
originations for sale
|
|
|
36,098
|
|
SBA
loans held for investment, reclassified as held for sale
|
|
|
8,522
|
|
Loans
sold
|
|
|
(40,737
|
)
|
Balance
at September 30, 2005
|
|
$
|
6,145
|
|
Below
is
a summary of the servicing asset as of September 30, 2005:
(Dollars
in thousands)
Balance
at December 31, 2004
|
|
$
|
2,085
|
|
Servicing
rights capitalized
|
|
|
1,370
|
|
Servicing
rights amortized
|
|
|
(617
|
)
|
Valuation
allowance
|
|
|
(180
|
)
|
Balance
at September 30, 2005
|
|
$
|
2,658
|
|
The
unpaid principal amount of loans serviced for others of $176,573,000 and
$157,380,000 at September
30, 2005
and December 31, 2004, respectively, is not included on the accompanying
consolidated balance sheets.
All
loans
are priced at the prime interest rate plus approximately 2.75% to 3.75%.
The
only loans with a fixed interest rate are defaulted loans that are repurchased
from the secondary market by the SBA. As of September 30, 2005 and December
31,
2004, the amount of NSBF’s net loans receivable with adjustable interest rates
was $34,082,000 and $35,178,000, respectively.
As
of
September
30, 2005
and December 31, 2004, $41,600,000 and $36,297,000 respectively, of loans,
including loans held for sale, made by NSBF are pledged as collateral against
the outstanding balances on NSBF’s existing lines of credit.
Accruing
loans past due ninety days or more as of September
30, 2005
and December 31, 2004, amounted to $253,000 and $0, respectively.
As
of
September
30, 2005
and December 31, 2004, total impaired non-accrual loans amounted to $3,786,000
and $2,791,000 respectively. Approximately $1,131,000 and $507,000 of the
allowance for loan losses were allocated against such impaired non-accrual
loans, respectively, in accordance with SFAS No. 114.
The
following is a summary of SBA loans receivable
at:
(Dollars
in thousands) |
|
September
30, 2005
|
|
December
31, 2004
|
|
Due
in one year or less
|
|
$
|
7
|
|
$
|
241
|
|
Due
between one and five years
|
|
|
727
|
|
|
968
|
|
Due
after five years
|
|
|
34,721
|
|
|
35,749
|
|
Total
|
|
|
35,455
|
|
|
36,958
|
|
Less
: Allowance for loan losses
|
|
|
(2,464
|
)
|
|
(1,621
|
)
|
Less:
Deferred origination fees, net
|
|
|
(1,404
|
)
|
|
(1,151
|
)
|
|
|
|
|
|
|
|
|
Balance
|
|
$
|
31,587
|
|
$
|
34,186
|
|
Sale
of loans
In
September 2005, NSBF sold $2,458,000 of loans previously classified as held
for
investment for aggregate proceeds of $2,513,000. This represented a portion
of
the unguaranteed piece of 18 loans. The difference of $55,000 was recorded
as
premium income. Also included in premium income is $91,000 representing the
allocated portion of the remaining deferred loan origination costs.
In
June
2005, NSBF sold $6,064,000 of loans previously classified as held for investment
for aggregate proceeds of $6,314,000. This represented a portion of the
unguaranteed piece of 95 loans. The difference of $250,000 was recorded as
premium income. Also included in premium income is $337,000 representing
the
allocated portion of the remaining deferred loan origination costs.
NOTE
5 - EARNINGS PER SHARE:
Basic
earnings per share is computed based on the weighted average number of common
shares outstanding during the period. The dilutive effect of common stock
equivalents is included in the calculation of diluted earnings per share
only
when the effect of their inclusion would be dilutive.
The
calculations of net (loss) income per share were:
|
|
(In
thousands, except per share data)
Three
months ended
September
30,
|
|
(In
thousands, except per share data)
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Numerator
:
Numerator
for basic and diluted EPS -(loss) income available to common
shareholders
|
|
|
(1,977
|
)
|
|
4,317
|
|
$
|
(889
|
)
|
$
|
4,446
|
|
Denominator:
Denominator
for basic
EPS
-weighted average
Shares
|
|
|
34,454
|
|
|
33,309
|
|
|
34,105
|
|
|
28,854
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
111
|
|
|
—
|
|
|
393
|
|
Denominator
for diluted
EPS
- weighted
average
shares
|
|
|
34,454
|
|
|
33,420
|
|
$
|
34,105
|
|
$
|
29,247
|
|
Net
EPS: Basic
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
Net
EPS: Diluted
|
|
$
|
(0.06
|
)
|
$
|
0.13
|
|
$
|
(0.03
|
)
|
$
|
0.15
|
|
The
following equity instruments are excluded from above as follows:
|
|
Three
months ended
September
30,
|
|
Nine
months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Anti-dilutive
stock options
|
|
|
*
|
|
|
642
|
|
|
*
|
|
|
480
|
|
Restricted
stock units
|
|
|
66
|
|
|
4
|
|
|
70
|
|
|
4
|
|
Warrants
|
|
|
6
|
|
|
6
|
|
|
6
|
|
|
6
|
|
Contingently
issuable shares
|
|
|
791
|
|
|
1,213
|
|
|
791
|
|
|
1,213
|
|
*
All
options are anti-dilutive as the Company is in a net loss position.
NOTE
6 - GOODWILL AND INTANGIBLES:
During
the nine month period ended September 30, 2005, the Company finalized the
purchase price allocation of the CrystalTech Web Hosting Inc. acquisition.
The
following summarizes the final fair values of the assets acquired and the
liabilities assumed at the date of acquisition:
(Dollars
in thousands)
Accounts
receivable
|
|
$
|
68
|
|
Customer
accounts
|
|
|
4,382
|
|
Trademark
|
|
|
550
|
|
Software
|
|
|
483
|
|
Non
compete
|
|
|
11
|
|
Goodwill
|
|
|
4,999
|
|
Fixed
assets
|
|
|
189
|
|
Other
assets
|
|
|
10
|
|
Total
assets acquired
|
|
$
|
10,692
|
|
Current
liabilities (including accrued acquisition costs)
|
|
$
|
384
|
|
Deferred
revenues
|
|
|
802
|
|
Total
liabilities assumed
|
|
|
1,186
|
|
Purchase
price, net of cash acquired
|
|
$
|
9,506
|
|
The
difference between the aggregate purchase price and the fair value of the
assets
acquired and the liabilities assumed has been recorded as goodwill. Customer
accounts, software and the non-compete are being amortized over a five year
period. The trademark has an indefinite life, and accordingly is not being
amortized. For the period ended September 30, 2005, amortization expense
relating to the intangible assets totaled approximately $725,000.
During
August 2005, CrystalTech’s CEO earned an additional $1,500,000 ($750,000 each in
stock and cash) pursuant to the asset purchase agreement. Such payments have
been recorded as additions to goodwill.
Also
during the quarter ended June 30, 2005 one of our subsidiaries, First Bankcard
Alliance, LLC, purchased customer merchant account portfolios for $692,000
in
cash. The Company has allocated the entire purchase price to customer merchant
accounts and is amortizing these accounts over on an estimated useful life
of 66
months. Total amortization related to such assets was $63,000 and is included
in
the accompanying statements of operations for the nine months ended September
30, 2005. The Company is currently in the process of obtaining a valuation
on
this acquisition. In addition, the Company made smaller acquisitions of customer
merchant accounts, aggregating $386,000 and is amortizing these accounts
over an
estimated useful life of 66 months.
In
accordance with the provisions of Statements of Financial Accounting Standards
No. 142 “Goodwill and other Intangible Assets” (“SFAS 142”), Newtek assessed the
carrying value of goodwill recorded on the consolidated balance sheet and
determined that the fair values of certain underlying entities to which goodwill
was attributable were less than the carrying values of those entities. As
a
result, the Company completed the impairment analysis required by SFAS 142
and
recorded $822,000 of an impairment charge in the accompanying consolidated
statements of operations for the three and nine months ended September 30,
2005.
The impairments were due to operating losses of certain of the consolidated
operating entities underlying the goodwill.
NOTE
7 - NOTES PAYABLE-OTHER:
CrystalTech
entered into an agreement on March 28, 2005 with Technology Investment Capital
Corp. (“TICC”) to borrow $8,000,000 to be repaid over 5 years, maturing March
28, 2010 with a principal repayment of $2,000,000 due on March 28, 2008,
$3,000,000 due on March 28, 2009 and March 28, 2010. Interest on the note
is 10%
for the first year, adjustable thereafter based on 6.35% plus the treasury
rate
(limited to a 1% increase or decrease in any one adjustment year) with a
minimum
interest rate of 8.5% and maximum of 12.0%. Newtek has agreed to pay TICC
additional interest on each anniversary date of 2% of the average outstanding
balance during the year in Newtek common shares. The loan can be prepaid
without
any penalty after 18 months. The note is collateralized by a first priority
security interest in all the assets of CrystalTech. The note contains financial
covenants, such as minimum revenues and minimum EBITDA thresholds. The Company
has capitalized $431,000 of deferred financing costs, which is included in
prepaid expenses and other assets in the accompanying consolidated balance
sheet, and will be amortized over a period of 5 years. Amortization expenses
included in the accompanying statements of operations for the nine months
ended
September 30, 2005 totaled $43,000.
NOTE
8 - BANK NOTES PAYABLE:
In
June
2004, NSBF executed an amendment to its existing credit agreement with Deutsche
Bank whereby the $75,000,000 line of credit was extended through June
2005. This amendment required NSBF to purchase $1,500,000 shares
of Series
A Preferred Stock on the earlier of a) the repayment in full of all obligations
under the loan agreement or b) the termination date. In connection
with
the termination date on June 30, 2005 and the subsequent three month extension
entered into on June 30, 2005, NSBF repurchased the $1,500,000 in Series
A
Preferred Stock from Deutsche Bank.
In
September 2005, NSBF closed a three year, $75,000,000 senior revolving loan
transaction with GE. This new facility will be primarily utilized to originate
and warehouse the unguaranteed portions of loans under the SBA 7(a) loan
program
and for other working capital purposes. The facility refinances the previous
facility with a Deutsche Bank affiliate and the $4,000,000 revolving credit
facility with Banco Popular Dominica Bank. As of September 30, 2005, NSBF
had
$23,721,000 outstanding on the line of credit. The line of credit bears interest
at the prime interest rate plus .50% with the option of purchasing LIBOR
contracts at LIBOR plus 2.75%. These rates may be increased or decreased
by .25%
based on certain thresholds. The line is collateralized by the unguaranteed
portions and the guaranteed portions of the held for sale of the SBA loans
receivable made by NSBF in addition to all assets of NSBF. The interest rate
at
September 30, 2005 was 7.25%. Interest on the line is payable monthly in
arrears. The Company has capitalized $1,717,000 of deferred financing costs
attributable to the GE facility, which is included in prepaid expenses and
other
assets in the accompanying consolidated balance sheet, and will
be
amortized over a period of three years. Amortization expense relating to
this
facility included in the accompanying consolidated statements of operations
for
the nine months ended September 30, 2005 was $48,000. The agreement includes
minimum net worth thresholds and fixed charge ratios, limitations on capital
expenditures and charge-offs, in addition to loan loss reserve
requirements.
The
company was in violation of the Minimum Net Worth and Fixed Charge Coverage
Ratio (FCCR) tests as of September 30, 2005. The Company has obtained
a
waiver from its lenders, with an effective date of September 30, 2005, to
waive
the covenant violation as of September 30, 2005, by agreeing not to test
the
Minimum Net Worth and FCCR for the month ended September 30, 2005.
However, management expects that NSBF will violate the Minimum Net
Worth
test at October 31, 2005 and the FCCR test at December 31, 2005.
Management is currently working with its lenders to obtain a waiver
of the
Net Worth test at October 31, 2005 and anticipates that such covenant will
be
met by November 30, 2005.
Under
the
credit agreement, NSBF has agreed to provide the lenders an updated business
plan by December 1, 2005 and management is currently working with its lenders
to
negotiate by December 31, 2005 a revised FCCR based on such business
plan.
If
NSBF
fails a test and a waiver is not obtained or its lenders fail to agree on
amending the FCCR test then an event of default under the Credit Agreement
will
occur. Management believes that it will be successful in its negotiations
with its lenders to revise the financial covenants to levels that are attainable
by NSBF. However, there can be no assurance that an agreement will
be
reached. If an agreement cannot be reached or if an agreement is reached
but the
covenants are not attainable and the lenders were to exercise their rights,
NSBF
may experience severe liquidity problems which would have a material adverse
effect on the Company and NSBF, unless the lenders agree to additional waivers,
forbearance or restructuring of the debt or unless NSBF can refinance the
debt.
NOTE
9 - OTHER INCOME:
Included
in other income in the accompanying consolidated statements of operations
for
the nine months ended September 30, 2005 is $425,000 recorded by NSBF as
a
receivable from the SBA, $887,000 of equity earnings from Exponential Business
Development, L.P. (both received in March 2005) and a $900,000 recovery from
the
Merchant Data Systems legal settlement (received in April 2005).
NOTE
10 - TAXES:
The
effective tax rates for the three and nine months ended September 30, 2005,
were
a benefit of 5% and a provision of 1,607%, respectively, compared to the
effective tax rates of 41% for the same periods of 2004.
In
the
three and nine months ended September 30, 2005, the effective tax rate was
materially higher due to the inability of NSBF to utilize a portion of the
its
current net loss of $495,000 and $976,000, respectively. NSBF is, however,
recording a benefit for the quarter by filing a federal NOL carryback, which
will enable it to utilize $1,177,000 of the current year tax loss to offset
prior year taxable income, resulting in a federal refund of $388,000. In
addition, in the three and nine months ended September 30, 2005, Newtek had
a
non-deductible permanent difference of $822,000, which further increased
the
effective tax rate.
NOTE
11 - SEGMENT REPORTING:
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with SFAS No. 131, the Company has aggregated similar
operating segments into four reportable segments, SBA lending, electronic
payment processing, web hosting and Capcos and other. All sales are derived
in
the United States, except a small percentage of foreign sales amount recognized
from the web hosting segment.
The
SBA
lending segment is NSBF, a licensed, U.S. Small Business Administration lender
that originates, sells and services loans to qualifying small businesses,
which
are partially guaranteed by the SBA.
As
an SBA
lender, NSBF generates revenues from sales of loans, servicing income for
those
loans retained to service by NSBF and interest income earned on available
cash
balances and the loans themselves. The lender also generates expenses such
as
interest, professional fees, payroll and consulting, depreciation and
amortization and provision for loan losses, all of which are included in
the
respective caption on the consolidated statements of operations. NSBF also
has
expenses such as loan recovery expenses, loan processing costs, and other
expenses that are all included in the other expense caption on the consolidated
statements of operations.
The
electronic payment processing segment is a processor of credit card
transactions, as well as a marketer of credit card and check approval services
to the small business market. Revenue generated from electronic payment
processing is included on the consolidated statements of operations as a
separate line item. Expenses include direct costs (included in a separate
line
captioned electronic payment processing costs), professional fees, payroll
and
consulting, depreciation and amortization, and other expenses, all of which
are
included in the respective captions on the consolidated statements of
operations.
The
web
hosting segment consists of CrystalTech, acquired in July 2004. CrystalTech’s
revenues are derived primarily from web hosting services and set up fees.
CrystalTech generates expenses such as professional fees, payroll and
consulting, and depreciation and amortization which are included in the
respective captions on the accompanying consolidated statements of operations,
as well as licenses and fees and general office expenses, all of which are
included in other expenses in the respective caption on the consolidated
statements of operations.
The
Capcos and other represents Newtek’s activities in the certified capital company
market as described in Note 1, as well as activities not included in the
other
three segments.
(Dollars
in Thousands)
|
|
For
the Three months ended
September
30,
|
|
For
the Nine months ended
September
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
Revenue
from External Customers
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
2,284
|
|
$
|
2,136
|
|
$
|
8,219
|
|
$
|
7,435
|
|
Electronic
payment processing
|
|
|
8,386
|
|
|
5,126
|
|
|
22,811
|
|
|
12,429
|
|
Web
hosting
|
|
|
2,780
|
|
|
2,204
|
|
|
7,702
|
|
|
2,204
|
|
Capco
and other
|
|
|
7,012
|
|
|
12,132
|
|
|
21,268
|
|
|
21,883
|
|
Total
|
|
$
|
20,462
|
|
$
|
21,598
|
|
$
|
60,000
|
|
$
|
43,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-Segment
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Electronic
payment processing
|
|
|
84
|
|
|
6
|
|
|
215
|
|
|
6
|
|
Web
hosting
|
|
|
13
|
|
|
—
|
|
|
66
|
|
|
—
|
|
Capco
and other
|
|
|
1,258
|
|
|
858
|
|
|
3,695
|
|
|
2,331
|
|
Total
|
|
$
|
1,355
|
|
$
|
864
|
|
$
|
3,976
|
|
$
|
2,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before benefit (provision) for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
(1,138
|
)
|
$
|
247
|
|
$
|
(656
|
)
|
$
|
1,966
|
|
Electronic
payment processing
|
|
|
330
|
|
|
156
|
|
|
1,436
|
|
|
261
|
|
Web
hosting
|
|
|
881
|
|
|
1,066
|
|
|
2,743
|
|
|
1,066
|
|
Capco
and other
|
|
|
(2,152
|
)
|
|
5,848
|
|
|
(3,464
|
)
|
|
4,242
|
|
Total
|
|
$
|
(2,079
|
)
|
$
|
7,317
|
|
$
|
59
|
|
$
|
7,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
2005
|
|
December
31,
2004
|
|
Identifiable
Assets
|
|
|
|
|
|
SBA
lending
|
|
$
|
49,457
|
|
$
|
48,840
|
|
Electronic
payment processing
|
|
|
6,451
|
|
|
3,507
|
|
Web
hosting
|
|
|
16,527
|
|
|
12,368
|
|
Capco
& other
|
|
|
170,820
|
|
|
163,683
|
|
Total
|
|
$
|
243,255
|
|
$
|
228,398
|
|
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis of our financial condition and results
of
operations is intended to assist in the understanding and assessment of
significant changes and trends related to the results of operations and
financial position of the Company together with its subsidiaries. This
discussion and analysis should be read in conjunction with the unaudited
consolidated financial statements and the accompanying notes.
The
statements in this Quarterly Report may contain forward-looking statements
relating to such matters as anticipated future financial performance, business
prospects, legislative developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, we note
that a
variety of factors could cause our actual results to differ materially from
the
anticipated results expressed in the forward looking statements such as
intensified competition and/or operating problems on its operating business
projects and their impact on revenues and profit margins or additional factors
as described in Newtek Business Services' previously filed registration
statements.
We
also need to point out that our Capcos operate under a different set of rules
in
each of the 8 jurisdictions and that these place varying requirements on
the
structure of our investments. In some cases, particularly in Louisiana, we
don’t
control the equity or management of a qualified business but that cannot
always
be presented orally or in written presentations.
Critical
Accounting Policies and Estimates:
The
Company’s significant accounting policies are described in note 1 of the Notes
to Consolidated Financial Statements included in its Form 10-K, as amended,
for
the fiscal year ended December 31, 2004. A discussion of the Company’s
critical accounting policies, and the related estimates, are included in
Management’s Discussion and Analysis of Results of Operations and Financial
Position in its Form 10-K for the fiscal year ended December 31,
2004. There have been no significant changes in the Company’s existing
accounting policies or estimates since its fiscal year ended December 31,
2004.
Comparison
of the nine months ended September 30, 2005 and September 30, 2004
Total
revenues increased by $16,049,000 to $60,000,000 for the nine months ended
September 30, 2005, from $43,951,000 for the nine months ended September
30,
2004. Income from tax credits decreased by $3,167,000 for the nine months
ended
September 30, 2005 compared to the nine months ended September 30, 2004,
primarily due to Newtek’s capco’s, Wilshire DC Partners and Wilshire Louisiana
Partners IV achieving the 50% hurdles in the nine months ended September
30,
2005 and recognizing $13,945,000 compared to the hurdles hit in the same
period
in the prior year for Wilshire Louisiana III, IV and Wilshire Colorado totaling
$17,885,000. This decrease was partially offset by 2 additional capcos recording
income from accretion of tax credits in the nine months ended September 30,
2005
compared to the prior comparative period.
Electronic
payment processing revenue increased by $9,525,000 to $21,955,000 for the
nine
months ended September 30, 2005, from $12,430,000 for the nine months ended
September 30, 2004, due to the Company’ increase in electronic payment
processing customers, as well as an additional qualified business formed
in
Alabama in August 2004. At September 30, 2005, we provided our payment services
to 12,000 small merchants across the United States, compared to 7,000 customers
at September 30, 2004. Gross total processing volume increased to $1,050,000,000
from all merchant portfolios (of this amount, $239,473,000 of processing
volume
generated revenues that were recorded net of interchange fees) for the nine
months ended September 30, 2005 from $661,353,000 of gross processing volume
(of
this amount, $245,621,000 of processing volume generated revenues that were
recorded net of interchange fees) for the nine months ended September 30,
2004.
Servicing
fee income increased by $287,000 to $1,477,000 for the nine months ended
September 30, 2005 from $1,190,000 for the nine months ended September 30,
2004.
The increase in servicing fee income was attributable to the servicing
portfolio’s growth year over year. The servicing portfolio at September 30, 2005
aggregated $176,573,000 as compared with $143,360,000 at September 30, 2004.
Premium
income increased by $272,000 to $3,345,000 for the nine months ended September
30, 2005 from $3,073,000 for the nine months ended September 30, 2004. The
increase in premium income was attributable to NSBF selling 121 guaranteed
loans
in the nine months ended September 30, 2005, aggregating $32,215,000 as compared
to 104 loans sold aggregating $24,918,000 in the same period for the prior
year.
The premiums recognized in connection with these sales were $2,612,000 during
the nine months ended September 30, 2005 as compared with $2,231,000 in the
same
period for the prior year. In addition, in the nine months ended September
30,
2005, NSBF sold to three financial institutions $8,522,000 of loans previously
classified as held for investment for aggregate proceeds of $8,827,000. This
represented a portion of the unguaranteed piece of 113 loans. The carrying
value
above the $8,522,000 of loans previously classified as held for investment
of
$305,000 was recorded as premium income. Also, in connection with this sale,
included in premium income for the nine months ended September 30, 2005 is
approximately $428,000 representing the allocated portion of the remaining
discount recorded at the time of loan origination. During the nine months
ended
September 30,2004, NSBF sold to a bank $17,022,000 of loans previously
classified as held for investment for aggregate proceeds of $17,661,000.
This
represented a portion of the unguaranteed piece of 180 loans. The carrying
value
above the $17,022,000 of loans previously classified as held for investment
of
$639,000 was recorded as premium income. Also, in connection with this sale,
included in premium income for the nine months ended September 30, 2004 is
approximately $203,000 representing the allocated portion of the remaining
discount recorded at the time of loan origination. Additionally, In July
2004,
NSBF sold $201,000 of loans previously classified as held for investment
for
aggregate proceeds of approximately $220,000. This represented a guaranteed
portion of one loan. The difference of $19,000 was recorded as premium
income.
Interest
is generated from SBA lending activities, excess cash balances that are invested
in low risk, highly liquid securities (money market accounts, federal government
backed mutual funds, etc.) non-cash accretions of structured insurance product
and on held to maturity investments. The following table details the changes
in
these different forms of interest income for the nine month periods ended
September 30:
(Dollars
in Thousands)
|
|
2005
|
|
2004
|
|
Change
|
|
SBA
lending activities
|
|
$
|
2,658
|
|
$
|
2,584
|
|
$
|
74
|
|
Non-cash
accretions
|
|
|
132
|
|
|
132
|
|
|
—
|
|
Qualified
investments
|
|
|
67
|
|
|
51
|
|
|
16
|
|
Low-risk
highly liquid securities
|
|
|
709
|
|
|
169
|
|
|
540
|
|
|
|
$
|
3,566
|
|
$
|
2,936
|
|
$
|
630
|
|
The
$540,000 increase in interest income generated from low-risk highly liquid
securities is attributable to an increase in the average outstanding balances
and increased interest rates on interest bearing cash accounts for the nine
months ended September 30, 2005 compared to the same period in the prior
year.
Web
hosting income for the nine months ended September 30, 2005 increased by
$5,476,000 primarily due to the growth in the business as well as the nine
months in the current period compared to only 3 months in the prior period,
as
Crystal Tech was acquired in July 2004. As of September 30, 2005, over 44,000
sites were hosted compared to only 32,000 as of September 30, 2004.
Insurance
commissions for the nine months ended September 30, 2005 increased to $991,000
from $391,000 due to the full nine months of Newtek Insurance Agency in 2005,
compared to the two months in 2004 as Newtek Insurance Agency was acquired
on
July 30, 2004, as well as the additional company in 2005, National Insurance
Solutions, LLC.
Other
income increased by $2,425,000 to $3,683,000 for the nine months ended September
30, 2005 from $1,258,000 for the nine months ended September 30, 2004. Included
in other income for the nine months ended September 30, 2005 is a
$900,000 recovery
of an investment in Merchant Data Systems received from a legal settlement,
$887,000 of equity earnings from Exponential Business Development, L.P.,
as well
as $425,000 of other income from the settlement of loan recovery costs from
the
Small Business Administration.
Changes
in interest expense are summarized as follows for the nine months periods
ended
September 30:
(Dollars
in Thousands)
|
|
2005
|
|
2004
|
|
Change
|
|
Capco
interest expense
|
|
$
|
9,024
|
|
$
|
8,696
|
|
$
|
328
|
|
NSBF
(SBA Lender) interest expense
|
|
|
1,519
|
|
|
1,318
|
|
|
201
|
|
Other
interest
|
|
|
1,242
|
|
|
519
|
|
|
723
|
|
|
|
$
|
11,785
|
|
$
|
10,533
|
|
$
|
1,252
|
|
The
$328,000 net increase in Capco interest expense in the nine months ended
September 30, 2005 was attributable to the expense incurred by the three
additional Capcos in the current period versus the same period in 2004, offset
by earlier Capcos having less interest expense under the effective interest
method. The $723,000 net increase in other interest expense was primarily
attributable to $493,000 of interest on the TICC note that CrystalTech financed
on March 28, 2005, as well as an additional $110,000 of interest on insurance
coverage for the two capco’s formed in the fourth quarter 2004 and the one capco
formed in June 2005.
Payroll
and consulting fees increased by $4,763,000 to $12,307,000 for the nine months
ended September 30, 2005 from $7,544,000 for the nine months ended September
30,
2004. The increase was primarily due to the significant growth in the merchant
processing segment and the seven additional operating entities consolidated
into
Newtek in the nine months ended September 30, 2005 versus the same period
in
2004. In particular, CrystalTech and Newtek Insurance Agency’s payroll and
consulting fees increased $1,858,000 for the nine months ended September
30,
2005 over the prior period.
Electronic
payment processing direct costs increased by $7,365,000 to $16,094,000 for
the
nine months ended September 30, 2005 from $8,729,000 for the nine months
ended
September 30, 2004, due to the significant increase in the volume of processed
transactions due to an increase in the number of electronic payment processing
customers as well as an increase in interchange fees.
Professional
fees increased by $2,032,000 to $5,442,000 for the nine months ended September
30, 2005 from $3,410,000 for the nine months ended September 30, 2004. This
increase is primarily due to the increased legal and accounting services
provided due to the significant growth in the company in the nine months
ended
September 30, 2005 as compared to the nine months ended September 30, 2004.
The
capco’s formed subsequent to September 30, 2004 have related professional fee
expenses of $257,000. Total professional fees incurred by CrystalTech and
Newtek
Insurance Agency were $509,000 for the nine months ended September 30, 2005
compared to $201,000 for the period from acquisition (July) through September
30, 2004.
Provision
for loan losses increased to $2,183,000 for the nine months ended September
30,
2005 from $12,000 for the nine months ended September 30, 2004. This $2,171,000
increase is attributable to NSBF recording $800,000 in additional reserves
associated with the Commercial Capital Corporation (CCC) portfolio which
was
acquired on December 31, 2002. Due to charge offs of certain CCC loans in
the
second quarter of 2005, the allowance for loan loss reserve was depleted
to a
level that management determined would require additional reserves to cover
the
remaining CCC portfolio balance.
Additionally,
in the third quarter of 2005, management recorded an additional $900,000
in
reserves, of which $300,000 is associated with hurricane Katrina. The $300,000
reserve was established to cover known and probable future losses due to
business interruptions and material property losses, as well as indirect
economic effects outside of the hurricane region which could result in decreases
in revenue to some of our other borrowers. The remaining $600,000 reserve
was
established due to current economic conditions, specifically the rising interest
rate environment and the high price of oil and gas, in addition to the potential
economic impact to those small businesses in Louisiana, Alabama, Mississippi
and
other parts of the country that were not directly impacted by the storm as
addressed in the reserves above. Consideration in this evaluation includes
past
and anticipated loss experience, current portfolio composition and the
evaluation of real estate collateral as well as current and anticipated economic
conditions. Management believes that such additional reserves will be adequate
to absorb future potential loan losses inherent in the Company’s entire loan
portfolio. The remaining increase of $471,000 is attributable to general
reserves being recorded on newly originated loans. Additionally, in June
2004,
NSBF sold loans to a bank previously classified as held for investment. In
connection with this sale, NSBF reversed the reserve for loan losses associated
with these loans and recorded a benefit of $300,000, offset by $241,000 in
loan
loss provisions.
In
accordance with the provisions of Statements of Financial Accounting Standards
No. 142 “Goodwill and other Intangible Assets” (“SFAS 142”), Newtek assessed the
carrying value of goodwill recorded on the consolidated balance sheet and
determined that the fair values of certain underlying entities to which goodwill
was attributable were less than the carrying values of those entities. As
a
result, the Company completed the impairment analysis required by SFAS 142
and
recorded $822,000 of an impairment charge in the accompanying consolidated
statement of operations for the nine months ended September 30, 2005. The
impairments were due to operating losses of certain of the consolidated
operating entities underlying the goodwill.
Depreciation
and amortization increased by $2,055,000 to $3,445,000 for the nine months
ended
September 30, 2005 from $1,390,000 for the nine months ended September 30,
2004.
Of this increase, $1,256,000 is due to the increase in depreciation and
amortization of fixed assets, customer accounts and intangibles for CrystalTech
and Newtek Insurance Agency. In addition, NSBF’s amortization of the servicing
assets
and
deferred financing costs increased by $484,000 due to the servicing assets
growth year over year as well as the increased amortization of costs associated
with the July 1, 2004 Deutsche Bank amendment to NSBF’s then existing credit
agreement.
Other
expenses increased by $2,639,000 to $6,175,000 for the nine months ended
September 30, 2005 from $3,536,000 for the nine months ended September 30,
2004.
The increase relates to the additional seven operating companies, and is
for
expenses such as rent, utilities and general office expenses. Specifically,
the
operations of CrystalTech and Newtek Insurance Agency contributed an increase
of
$1,182,000 in other expenses for the nine month period ended September 30,
2005
compared to the same period in the prior period. NSBF had an increase in
other
expenses of $497,000 due to bank fees ($200,000 increase) associated with
the
Deutsche Bank extension fees and the negotiation of a new lending facility
and
$180,000 increase for servicing asset impairment.
The
effective tax rate for the nine months ended September 30, 2005, was 1,607%
compared to the effective tax rate of 41% for the same period in 2004. In
the
nine months ended September 30, 2005, the effective tax rate was materially
higher due to the inability of NSBF to utilize a portion of their current
net
loss of $976,000. In addition, in the nine months ended September 30, 2005,
Newtek, had a non-deductible permanent difference of $822,000, which further
increased the effective tax rate.
The
effective tax rate for the nine months ended September 30, 2004, was calculated
using a 41% effective tax rate. The rate was calculated based on the rate
used
to value the prior year deferred assets and liabilities. There were no permanent
differences that would have impacted the rates during the three and nine
month
periods ending September 30, 2004, nor was there a net loss from NSBF that
would
have been added to the consolidated net income of Newtek to arrive at the
provision.
The
Company’s net loss for the nine months ended September 30, 2005 was $889,000, a
decrease of $5,335,000 from net income of $4,446,000 for the nine months
ended
September 30, 2004 due to the increase in total revenues of $16,049,000 offset
by the increases in overall expenses of $23,272,000 discussed above, offset
by
the decrease in taxes of $2,142,000 and the decrease in minority interest
of
$254,000.
Comparison
of the three months ended September 30, 2005 and September 30,
2004
Revenues
decreased by $1,136,000 to $20,462,000 for the three months ended
September 30, 2005, from $21,598,000 for the three months ended September
30, 2004. Income from tax credits decreased by $5,516,000 from $11,421,000
for
the three months ended September 30, 2004, to $5,905,000 for the three months
ended September 30, 2005, due to the additional income recognized in achieving
investment thresholds in the Wilshire Colorado statewide capco in the three
months ended September 30, 2004 of $10,493,000 compared to the Wilshire
Louisiana IV capco program in the three months ended September 30, 2005 of
$4,676,000. This was offset by the two additional capco’s recording income tax
credit accretions in the current period compared to the prior period.
Electronic
payment processing revenue increased by $3,308,000 to $8,435,000 for the
three
months ended September 30, 2005 due to the Company’s increase in electronic
payment processing customers, and an additional qualified business formed
in
Alabama in August 2004. At September 30, 2005, we provided our payment services
to 12,000 small merchants across the United States, compared to 7,000 customers
at September 30, 2004. Gross total processing volume increased to $400,866,000
from all merchant portfolios (of this amount, approximately $86,889,000 of
processing volume generated revenues that were recorded net of interchange
fees)
for the three months ended September 30, 2005 from $248,000,000 of gross
processing volume (of this amount, approximately $74,000,000 of processing
volume generated revenues that were recorded net of interchange fees) for
the
three months ended September 30, 2004.
Servicing
fee income increased by $137,000 to $539,000 for the three months ended
September 30, 2005 from $402,000 for the three months ended September 30,
2004.
The increase in servicing fee income of $137,000 was attributable to the
servicing portfolio’s growth year over year. The servicing portfolio at
September 30, 2005 aggregated $176,573,000 as compared with $143,360,000
at
September 30, 2004.
Premium
income increased by $220,000 to $827,000 for the three months ended September
30, 2005 from $607,000 for the three months ended September 30, 2004. The
increase in premium income is attributable to selling 37 guaranteed loans
in the
three months ended September 30, 2005, aggregating $9,276,000 as compared
to 36
loans aggregating $7,495,000 in the same period for the prior year. The premiums
recognized in connection with these sales were approximately $681,000 during
the
three months ended September 30, 2005 as compared with approximately $607,000
in
the same period for the prior year. In addition, in September 2005, NSBF
sold to
a financial institution $2,458,000 of loans previously classified as held
for
investment for aggregate proceeds of $2,513,000. This represented a portion
of
the unguaranteed piece of 18 loans. The carrying value above the $2,458,000
of
loans previously classified as held for investment of $55,000 was recorded
as
premium income. Also, in connection with this sale, included in premium income
for the three months ended September 30, 2005 is $91,000 representing the
allocated portion of the remaining discount recorded at the time of loan
origination
Web
hosting increased by $565,000 to $2,769,000 for the three months ended September
30, 2005 due to 3,000 net sites added this quarter compared to only 2,000
in the
same quarter 2004.
Interest
is generated from SBA lending activities, excess cash balances that are invested
in low risk, highly liquid securities (money market accounts, federal government
backed mutual funds, etc.), non-cash accretions of structured insurance product
and on held to maturity investments. The following table details the changes
in
these different forms of interest and dividend income:
(Dollars
in Thousands)
|
|
2005
|
|
2004
|
|
Change
|
|
SBA
lending activities
|
|
$
|
867
|
|
$
|
738
|
|
$
|
129
|
|
Non-cash
accretions
|
|
|
44
|
|
|
44
|
|
|
—
|
|
Qualified
investments
|
|
|
17
|
|
|
16
|
|
|
1
|
|
Low-risk
highly liquid securities
|
|
|
309
|
|
|
67
|
|
|
242
|
|
|
|
$
|
1,237
|
|
$
|
865
|
|
$
|
372
|
|
The
$242,000 increase in interest income generated from low-risk highly liquid
securities is attributable to an increase in the average outstanding balances
and increased interest rates on interest bearing cash accounts.
Changes
in interest expense are summarized as follows:
(Dollars
in Thousands)
|
|
2005
|
|
2004
|
|
Change
|
|
Capco
interest expense
|
|
$
|
2,958
|
|
$
|
2,812
|
|
$
|
146
|
|
NSBF
(SBA Lender) interest expense
|
|
|
531
|
|
|
317
|
|
|
214
|
|
Other
interest
|
|
|
719
|
|
|
161
|
|
|
558
|
|
|
|
$
|
4,208
|
|
$
|
3,290
|
|
$
|
918
|
|
The
$214,000 increase in NSBF interest expense in the three months ended September
30, 2005 was attributable to the blended interest rate on the current and
former
credit facility (6.25%) compared to prior period’s average effective interest
rate of 3.91%. The $558,000 net increase in other interest expense was
attributable to $244,000 of interest on the TICC note that CrystalTech financed
on March 28, 2005, as well as an increase in interest expense on insurance
coverage.
Payroll
and consulting fees increased by $999,000 to $3,996,000 for the three months
ended September 30, 2005 from $2,997,000 for the three months ended September
30, 2004. The increase was primarily due to the increased number of operating
entities consolidated into Newtek in the three months ended September 30,
2005
versus the same period in 2004. Electronic payment processing costs increased
by
$2,546,000 to $6,143,000 for the three months ended September 30, 2005 from
$3,597,000 for the three months ended September 30, 2004, due to the
significant increase in the volume of processed transactions due to an increase
in the number of electronic payment processing customers as well as an increase
in interchange fees.
Professional
fees increased by $329,000 to $1,902,000 for the three months ended September
30, 2005 from $1,573,000 for the three months ended September 30, 2004. This
increase is primarily due to the increased legal and accounting services
provided due to the significant growth in the company in the three months
ended
September 30, 2005 as compared to the three months ended September 30, 2004.
Provision
for loan losses increased to $1,082,000 for the three months ended September
30,
2005 from $59,000 for the three months ended September 30, 2004. This $1,023,000
increase is attributable to management recording an additional $900,000 in
reserves, of which $300,000 is associated with hurricane Katrina. This
additional $300,000 reserve was established to cover known and reasonably
probable future losses due to business interruptions and material property
losses, as well as indirect economic effects outside of the hurricane region
which could result in decreases in revenue to some of our other borrowers.
The
$600,000 reserve was established due to current economic conditions,
specifically the rising interest rate environment and the high price of oil
and
gas, in addition to the potential economic impact to those small businesses
in
Louisiana, Alabama, Mississippi and other parts of the country that were
not
directly impacted by the storm and addressed in the reserves above.
Consideration in this evaluation includes past and anticipated loss experience,
current portfolio composition and the evaluation of real estate collateral
as
well as current and anticipated economic conditions. Management believes
that
such additional reserves will be adequate to absorb future potential loan
losses
inherent in the Company’s entire loan portfolio. Of the remaining increase,
$123,000 is attributable to general reserves being recorded on newly originated
loans.
Depreciation
and amortization increased by $398,000 to $1,171,000 for the three months
ended
September 30, 2005 from $773,000 for the three months ended September 30,
2004.
Of this increase, $267,000 is due to the additional depreciation and
amortization of fixed assets, customer accounts and intangibles for CrystalTech
and Newtek Insurance Agency in the three months ended September 30, 2005
compared to the three months ended September 30, 2004.
In
accordance with the provisions of Statements of Financial Accounting Standards
No. 142 “Goodwill and other Intangible Assets” (“SFAS 142”), Newtek assessed the
carrying value of goodwill recorded on the consolidated balance sheet and
determined that the fair values of certain underlying entities to which goodwill
was attributable were less than the carrying values of those entities. As
a
result, the Company completed the impairment analysis required by SFAS 142
and
recorded $822,000 of an impairment charge in the accompanying consolidated
statement of operations for the three months ended September 30, 2005. The
impairments were due to operating losses of certain of the consolidated
operating entities underlying the goodwill.
Other
expenses increased by $1,093,000 to $2,620,000 for the three months ended
September 30, 2005 from $1,527,000 for the three months ended September 30,
2004. Specifically, $321,000 of the increase relates to the write offs of
loan
impairments ($121,000 of which is due to hurricane Katrina). The remaining
increase relates to the operations of CrystalTech ($118,000 increase) and
the
additional operating entities in the three months ended September 30, 2005
compared to the same period in the prior year.
The
effective tax rate for the three months ended September 30, 2005, was a benefit
of 5 % compared to the effective tax rate provision of 41% for the same period
in 2004. In the three months ended September 30, 2005, the effective tax
rate
was materially higher due to the inability of NSBF to utilize a portion of
their
current net loss of $495,000. In addition, in the three months ended September
30, 2005, Newtek had a non-deductible permanent difference of $822,000, which
further increased the effective tax rate.
The
effective tax rate for the three months ended September 30, 2004, was calculated
using a 41% effective tax rate. The rate was calculated based on the rate
used
to value the prior year deferred assets and liabilities. There were no permanent
differences, nor was there a net loss from NSBF that would have impacted
the
rate during the three months ended September 30, 2004.
The
Company’s net loss for the three months ended September 30, 2005 was $1,977,000,
a decrease of $6,294,000 from net income of $4,317,000 for the three months
ended September 30, 2004 due to the decrease in overall revenues of $1,136,000
discussed above, by increases in expenses of $8,245,000 offset by a decrease
in
the provision for income taxes of $3,102,000.
Liquidity
and Capital Resources
Newtek
has funded its operations primarily through the issuance of notes to insurance
companies through the Capco programs. Through September 30, 2005, Newtek
has
received $227,880,000 in proceeds from the issuance of long-term debt, Capco
warrants, and Newtek common shares through the Capco programs. In 2004, Newtek
raised $20,762,000 (net of related offering costs) in a secondary public
offering. Newtek’s principal capital requirements have been to fund the purchase
of Coverage A insurance related to the notes issued to the insurance companies
($120,135,000), the acquisition of Coverage B Capco insurance policies
($26,911,000), the acquisitions of CrystalTech and Newtek Insurance Agency
($9,836,000) and the acquisition of consolidated operating entities’ interests,
identifying other Capco-qualified investments, and working capital needs
resulting from operating and business development activities of its consolidated
operating entities.
Net
cash used in operating activities:
Net
cash
used in operating activities in the nine months ended September 30, 2005
was
considerably lower than in the prior comparative period primarily due to
the net
loss in the current period of $889,000 compared to net income of $4,446,000
in
the prior period (a change of $5,335,000), offset by the significant non
cash
charges in the current period totaling $18,529,000 compared to only $14,245,000
in the nine months ended September 30, 2004.
Net
cash used in investing activities:
Net
cash
used in investing activities of $3,406,000 in the nine months ended September
30, 2005 compared to net cash provided by investing activities of $4,954,000
in
the same period in the prior year decreased significantly due to the proceeds
from sales of SBA loans held for investment of $17,881,000 in the prior period
compared to only $8,827,000 in the current period. Additionally, payments
received on SBA loans was $4,132,000 lower in the current period attributable
to
the sale of loans held for investment, reclassified as held for sale. Also
affecting the decrease is an additional $2,656,000 in acquiring fixed assets
and
customer merchant accounts in the nine months ended 2005 verse 2004, offset
by
the purchase price of CrystalTech and Newtek Insurance Agency of $9,955,000
in
the prior period.
Net
cash provided by financing activities:
Net
cash
provided by financing activities was $9,227,000 higher in 2005 verse 2004,
primarily due to the net proceeds from Wilshire Texas capco closing in the
nine
months ended September 30, 2005 being $12,562,000 greater than the closing
for
the Wilshire Alabama capco closing in the same period in the prior year,
and the
$8,000,000 in proceeds from the TICC note payable. Offsetting this is additional
cash paid for Coverage A of $4,140,000 in 2005, and an additional $1,664,000
repaid in notes payable insurance.
Net
repayments on SBA bank notes payable incorporates the new financing from
GE and
paydown of the previous facilities of Deutsche Bank and Banco
Popular.
Summary
During
the nine months ended September 30, 2005 we and our affiliated companies
generated cash flow primarily from the following sources:
· |
proceeds
from issuance of long-term debt and common shares of
$24,171,000;
|
· |
interest
income of $3,566,000;
|
· |
proceeds
from sales of SBA loans held for sale and loans held for investment,
reclassified as held for sale of
$41,042,000;
|
· |
other
income of $3,683,000, which represents revenue from Newtek’s consolidated
operating entities;
|
· |
repayments
from qualified investments of
$3,658,000;
|
· |
proceeds
from note payable-other of
$8,014,000;
|
· |
cash
received from repayments of SBA loans receivable of $3,528,000;
and
|
· |
distribution
from an investee of $820,000.
|
The
cash
was primarily used to:
· |
originate
$47,581,000 in SBA loans originated for sale and held for
investment:
|
· |
purchase
Coverage A insurance of $6,250,000;
|
· |
repurchase
mandatorily redeemable preferred stock of
$1,500,000;
|
· |
invest
in Qualified Businesses of
$4,368,000;
|
· |
repay
bank notes payable of $4,267,000
|
· |
repay
note payable-insurance of $2,776,000;
|
· |
repay
notes payable other of $525,000;
|
· |
purchase
customer merchant accounts of $1,078,000;
and
|
· |
acquire
furniture, fixtures and equipment of
$2,424,000.
|
During
the nine months ended September 30, 2004 we and our affiliated companies
generated cash flow primarily from the following sources:
· |
secondary
public offering and private placement of common shares, and exercise
of
stock options, netting $22,697,000;
|
· |
proceeds
from issuance of a long-term debt and warrants of
$10,896,000;
|
· |
interest
income of $2,936,000;
|
· |
other
income of approximately $1,258,000 which represents revenue from
Newtek’s
consolidated operating entities;
|
· |
proceeds
from sales of SBA loans held for sale and loans held for investment,
reclassified as held for sale of
$42,799,000;
|
· |
payments
received on SBA loans of $7,660,000;
and
|
· |
repayments
from qualified investments of
$1,614,000.
|
The
cash
was primarily used to:
· |
originate
$32,652,000 in SBA loans held for investment and for
sale;
|
· |
invest
in qualified businesses of
$1,909,000;
|
· |
repay
SBA bank notes payable of
$23,435,000;
|
· |
repay
note payable-insurance of $1,112,000;
and
|
· |
purchase
of Coverage A insurance of
$2,150,000.
|
In
September 2005, NSBF closed a three year, $75,000,000 senior revolving loan
transaction with GE. This new facility will be primarily utilized to originate
and warehouse the unguaranteed portions of loans under the SBA 7(a) loan
program
and for other working capital purposes. The facility refinances the previous
facility with a Deutsche Bank affiliate and the $4,000,000 revolving credit
facility with Banco Popular Dominica Bank. As of September 30, 2005, NSBF
had
$23,721,000 outstanding on the line of credit. The line of credit bears interest
at the prime interest rate plus .50% with the option of purchasing LIBOR
contracts at LIBOR plus 2.75%. These rates may be increased or decreased
by .25%
based on certain thresholds. The line is collateralized by the unguaranteed
portions and the guaranteed portions held for sale of the SBA loans receivable
made by NSBF in addition to all of the assets of NSBF. The interest rate
at
September 30, 2005 was 7.25%. Interest on the line is payable monthly in
arrears. The Company has capitalized $1,717,000 of deferred financing costs
attributable to the GE facility, which will be amortized over a period of
three
years. Amortization expense relating to this facility included in the
accompanying consolidated statements of operations for the nine months ended
September 30, 2005 was $48,000. The agreement includes minimum net worth
thresholds and fixed charge ratios, limitations on capital expenditures and
charge-offs, in addition to loan loss reserve requirements.
The
company was in violation of the Minimum Net Worth and Fixed Charge Coverage
Ratio (FCCR) tests as of September 30, 2005. The Company has obtained
a
waiver from its lenders, with an effective date of September 30, 2005, to
waive
the covenant violation as of September 30, 2005, by agreeing not to test
the
Minimum Net Worth and FCCR for the month ended September 30, 2005.
However, management expects that NSBF will violate the Minimum Net
Worth
test at October 31, 2005 and the FCCR test at December 31, 2005.
Management is currently working with its lenders to obtain a waiver
of the
Net Worth test at October 31, 2005 and anticipates that such covenant will
be
met by November 30, 2005.
Under
the
credit agreement, NSBF has agreed to provide the lenders an updated business
plan by December 1, 2005 and management is currently working with its lenders
to
negotiate by December 31, 2005 a revised FCCR based on such business
plan.
If
NSBF
fails a test and a waiver is not obtained or its lenders fail to agree on
amending the FCCR test then an event of default under the Credit Agreement
will
occur. Management believes that it will be successful in its negotiations
with its lenders to revise the financial covenants to levels that are attainable
by NSBF. However, there can be no assurance that an agreement will
be
reached. If an agreement cannot be reached or if an agreement is reached
but the
covenants are not attainable and the lenders were to exercise their rights,
NSBF
may experience severe liquidity problems which would have a material adverse
effect on the Company and NSBF, unless the lenders agree to additional waivers,
forbearance or restructuring of the debt or unless NSBF can refinance the
debt.
For
additional information regarding liquidity and capital resources, please
refer
to the Company’s Annual Report on Form 10-KA for the year ended December 31,
2004.
FORWARD-LOOKING
STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements. Additional
written or oral forward-looking statements may be made by Newtek from time
to
time in filings with the Securities and Exchange Commission or otherwise.
The
words "believe," "expect," "seek," and "intend" and similar expressions identify
forward-looking statements, which speak only as of the date the statement
is
made. Such forward-looking statements are within the meaning of that term
in
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the
Securities Exchange Act of 1934, as amended. Such statements may include,
but
are not limited to, projections of income or loss, expenditures, acquisitions,
plans for future operations, financing needs or plans relating to our services,
as well as assumptions relating to the foregoing. Forward-looking statements
are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements.
We
do not
undertake, and specifically disclaim, any obligation to publicly release
the
results of revisions which may be made to forward-looking statements to reflect
the occurrence of anticipated or unanticipated events or circumstances after
such statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK:
All
of
our business activities contain elements of risk. We consider the
principal types of risk to be fluctuations in interest rates and loan portfolio
valuations. We consider the management of risk essential to conducting
our
businesses. Accordingly, risk management systems and procedures are
designed to identify and analyze our risks, to set appropriate policies and
limits and to continually monitor these risks and limits by means of reliable
administrative and information systems and other policies and
programs.
We
transact business with merchants exclusively in the United States and receive
payment for our services exclusively in United States dollars. As a result,
our
financial results are unlikely to be affected by factors such as changes
in
foreign currency exchange rates or weak economic conditions in foreign
markets.
Our
interest expense is sensitive to changes in the general level of interest
rates
in the United States, because a majority of our indebtedness is at variable
rates. At September 30, 2005, $23.7 million of our outstanding indebtedness
was
at variable interest rates based on the prime rate. A rise in the prime rate
of
one percentage point would result in additional interest expense of $237,000.
However, our interest income would also increase by approximately the same
amount, due to the variability of the interest rates on our SBA loans
receivable. Although management believes that this measure is indicative
of our
sensitivity to interest rate changes, it does not adjust for potential changes
in credit quality, size and composition of the assets on the balance sheet,
and
other business developments that could affect net increase (decrease) in
assets. Accordingly, no assurances can be given that actual results
would
not differ materially from the potential outcome simulated by this
estimate.
We
do not
hold derivative financial or commodity instruments, nor engage in any foreign
currency denominated transactions, and all of our cash and cash equivalents
are
held in money market and checking funds.
ITEM
4. CONTROLS AND PROCEDURES
Newtek
Business Services, Inc., or Newtek, conducted an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of
the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14 as of September 30, 2005. Based upon that evaluation,
our Chief Executive Officer and Chief Financial Officer in consultation with
the
Audit Committee of the Board of Directors concluded that our disclosure controls
and procedures were effective to ensure that material information relating
to
Newtek (including its consolidated subsidiaries) required to be included
in our
periodic SEC filings is recorded, processed, summarized and reported within
the
required time period. There was no change in the Company’s internal control over
financial reporting that occurred during the Company’s most recent fiscal
quarter that has materially affected or is reasonably likely to materially
effect the Company’s internal controls over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
(a) |
Exhibits
attached to this Quarterly Report on Form 10-Q
are:
|
Exhibit
31.1: Certification of the Chief Executive Officer
Exhibit
31.2: Certification of the Chief Financial
Officer
Exhibit
32.1: Certification pursuant to 18 USC (Section) 1350.
Exhibit
99.1: Press Release, August 22, 2005
Exhibit
99.2: Press Release, August 23, 2005.
Exhibit
99.3: Press Release, September 7, 2005.
Exhibit
99.4: Press Release, October 3, 2005.
(b) |
During
the quarter ended September 30, 2005 we filed the following Current
Reports on Form 8-K:
|
August
22, 2005: On August 16, 2005, Newtek Business Services, Inc., or Newtek,
concluded that the financial statements in its previously filed Form 10-Q
for
the quarter ended March 31, 2005 and the operational results for the previously
released quarter ended June 30, 2005 should no longer be relied
upon.
August
23, 2005: Effective on August 16, 2005, Newtek Business Services, Inc., or
Newtek, has elected two new directors to fill vacancies due to the departure
of
Steven A. Shenfeld effective as of the same date and another which arose
due to
the resignation of Brian A. Wasserman in mid-June. Michael Schwartz and Sal
Mulia were elected to the balance of the one-year terms which expire at the
next
annual meeting of shareholders in May 2006.
September
7, 2005: Effective on September 1, 2005, Newtek Business Services, Inc.,
or
Newtek, and its subsidiary, Newtek Small Business Finance, Inc., or NSBF,
have
entered into a $75 million revolving loan agreement with GE Commercial Finance
to be used by NSBF to fund its US Small Business Administration guaranteed
small
business lending including warehousing the unguaranteed portions of such
loans.
Newtek pledged its equity interest in NSBF and issued a full guarantee of
the
three year loan.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
NEWTEK
BUSINESS SERVICES, INC. |
|
|
|
Date: November
14, 2005 |
By: |
/s/ Barry
Sloane |
|
Barry
Sloane Chairman of the Board, Chief Executive Officer and
Secretary |
|
|
|
|
|
|
|
|
|
|
Date: November
14, 2005 |
By: |
/s/ Michael
J. Holden |
|
Michael
J. Holden Chief Financial Offer |
|
|