Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the
quarterly period ended September 30, 2006
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the
transition period from_____ to _____
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 incorporation or
organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
462
Seventh Avenue, 14th
floor, New York, NY
|
|
10018
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (212) 356-9500
Indicate
by checkmark 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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
Accelerated Filer o
|
Accelerated
Filer o
|
Non-Accelerated
Filer x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of November 7, 2006, there were 36,291,052 of the Company’s Common Shares issued
and outstanding.
CONTENTS
PART
I - FINANCIAL INFORMATION
|
PAGE
|
|
|
Item
1. Financial Statements (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended
September 30, 2006 and 2005
|
3
|
|
|
Condensed
Consolidated Balance Sheets as of September 30, 2006 and December
31,
2005
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2006 and 2005
|
5
|
|
|
Notes
to Unaudited Condensed 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
|
29
|
|
|
Item
4. Controls and Procedures
|
29
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
2. Unregistered Sales of Equity Securities
|
31
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
32
|
|
|
Item
6. Exhibits
|
32
|
|
|
Signatures
|
33
|
|
|
Exhibits
|
|
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2005
(In
Thousands, except for Per Share Data)
|
|
Three
Months ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Electronic
payment processing
|
|
$
|
11,022
|
|
$
|
8,435
|
|
$
|
31,148
|
|
$
|
21,955
|
|
Web
hosting
|
|
|
3,479
|
|
|
2,769
|
|
|
9,953
|
|
|
7,680
|
|
Interest
income
|
|
|
1,230
|
|
|
1,237
|
|
|
4,566
|
|
|
3,566
|
|
Income
from tax credits
|
|
|
1,304
|
|
|
5,905
|
|
|
4,584
|
|
|
17,303
|
|
Premium
income
|
|
|
1,071
|
|
|
827
|
|
|
2,448
|
|
|
3,345
|
|
Servicing
fee income
|
|
|
473
|
|
|
539
|
|
|
1,459
|
|
|
1,477
|
|
Insurance
commissions
|
|
|
210
|
|
|
273
|
|
|
642
|
|
|
991
|
|
Other
income
|
|
|
2,846
|
|
|
477
|
|
|
4,980
|
|
|
3,683
|
|
Total
revenue
|
|
|
21,635
|
|
|
20,462
|
|
|
59,780
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic
payment processing costs
|
|
|
7,919
|
|
|
6,143
|
|
|
22,381
|
|
|
16,094
|
|
Interest
|
|
|
3,587
|
|
|
4,208
|
|
|
12,531
|
|
|
11,785
|
|
Consulting,
payroll and benefits
|
|
|
4,373
|
|
|
3,996
|
|
|
12,708
|
|
|
12,307
|
|
Professional
fees
|
|
|
2,133
|
|
|
1,902
|
|
|
6,153
|
|
|
5,442
|
|
Depreciation
and amortization
|
|
|
1,728
|
|
|
1,171
|
|
|
4,740
|
|
|
3,445
|
|
Insurance
|
|
|
790
|
|
|
856
|
|
|
2,579
|
|
|
2,319
|
|
Provision
for loan losses
|
|
|
51
|
|
|
1,082
|
|
|
405
|
|
|
2,183
|
|
Goodwill
impairment
|
|
|
—
|
|
|
822
|
|
|
—
|
|
|
822
|
|
Other
than temporary decline in value of investments
|
|
|
—
|
|
|
321
|
|
|
—
|
|
|
321
|
|
Other
|
|
|
2,846
|
|
|
2,298
|
|
|
7,784
|
|
|
5,853
|
|
Total
expenses
|
|
|
23,427
|
|
|
22,799
|
|
|
69,281
|
|
|
60,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before minority interest and benefit (provision) for income
taxes
|
|
|
(1,792
|
)
|
|
(2,337
|
)
|
|
(9,501
|
)
|
|
(571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
70
|
|
|
258
|
|
|
329
|
|
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before benefit for income taxes
|
|
|
(1,722
|
)
|
|
(2,079
|
)
|
|
(9,172
|
)
|
|
59
|
|
Benefit
(provision) for
income
taxes
|
|
|
668
|
|
|
102
|
|
|
3,103
|
|
|
(948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,054
|
)
|
$
|
(1,977
|
)
|
$
|
(6,069
|
)
|
$
|
(889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
34,883
|
|
|
34,454
|
|
|
34,805
|
|
|
34,105
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.17
|
)
|
$
|
(0.03
|
)
|
See accompanying notes to these unaudited condensed
consolidated financial statements
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2006 AND DECEMBER 31, 2005
(In
Thousands, except for Per Share Data)
|
|
September
30,
2006
|
|
December
31,
2005
|
|
|
|
(Unaudited)
|
|
(Note 1)
|
|
ASSETS
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
30,150
|
|
$
|
23,940
|
|
Restricted
cash
|
|
|
12,558
|
|
|
20,067
|
|
Certificates
of deposit
|
|
|
—
|
|
|
4,000
|
|
U.S.
Treasury notes
|
|
|
4,825
|
|
|
4,449
|
|
Marketable
securities
|
|
|
—
|
|
|
10,350
|
|
Credits
in lieu of cash
|
|
|
99,967
|
|
|
109,475
|
|
SBA
loans receivable (net of reserve for loan losses of $2,408
and $2,304, respectively)
|
|
|
26,106
|
|
|
32,028
|
|
Accounts
receivable (net of allowance of $182 and $50,
respectively)
|
|
|
2,084
|
|
|
2,109
|
|
SBA
loans held for sale
|
|
|
1,618
|
|
|
1,155
|
|
Accrued
interest receivable
|
|
|
535
|
|
|
416
|
|
Investments
in qualified businesses - cost method investments
|
|
|
50
|
|
|
150
|
|
Investments
in qualified businesses - held to maturity debt
investments
|
|
|
3,399
|
|
|
3,596
|
|
Structured
insurance product
|
|
|
3,470
|
|
|
3,377
|
|
Prepaid
insurance
|
|
|
14,719
|
|
|
16,946
|
|
Prepaid
expenses and other assets (net of accumulated amortization of deferred
financing costs of $1,427 and $805, respectively)
|
|
|
6,784
|
|
|
7,036
|
|
Servicing
assets (net of accumulated amortization of $1,600 and $952,
respectively)
|
|
|
3,156
|
|
|
3,197
|
|
Fixed
assets (net of accumulated depreciation and amortization of $3,957
and
$2,302, respectively)
|
|
|
5,921
|
|
|
6,587
|
|
Intangible
assets (net of accumulated amortization of $5,277 and $3,457,
respectively)
|
|
|
9,708
|
|
|
6,697
|
|
Goodwill
|
|
|
10,599
|
|
|
9,438
|
|
Total
assets
|
|
$
|
235,649
|
|
$
|
265,013
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
8,966
|
|
$
|
10,313
|
|
Notes
payable - certified investors
|
|
|
3,982
|
|
|
3,947
|
|
Notes
payable - insurance
|
|
|
7,312
|
|
|
9,250
|
|
Notes
payable - other
|
|
|
1,886
|
|
|
9,880
|
|
Bank
notes payable
|
|
|
14,609
|
|
|
21,287
|
|
Deferred
revenue
|
|
|
1,826
|
|
|
1,459
|
|
Notes
payable in credits in lieu of cash
|
|
|
87,772
|
|
|
92,048
|
|
Deferred
tax liability
|
|
|
21,707
|
|
|
24,271
|
|
Total
liabilities
|
|
|
148,060
|
|
|
172,455
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
4,609
|
|
|
5,033
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock (par value $0.02 per share; authorized 1,000 shares, no shares
issued and outstanding)
|
|
|
—
|
|
|
—
|
|
Common
stock (par
value $0.02 per share; authorized 54,000 shares, issued and outstanding
35,336 |
|
|
|
|
|
|
|
and 34,809 not including 583 shares held in escrow)
|
|
|
707
|
|
|
696
|
|
Additional
paid-in capital
|
|
|
54,812
|
|
|
53,737
|
|
Unearned
compensation
|
|
|
—
|
|
|
(492
|
)
|
Retained
earnings
|
|
|
27,515
|
|
|
33,584
|
|
Treasury
stock, at cost (31,500 shares in September 2006) |
|
|
(54
|
) |
|
—
|
|
Total
shareholders’ equity
|
|
|
82,980
|
|
|
87,525
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
235,649
|
|
$
|
265,013
|
|
See
accompanying notes to these unaudited condensed consolidated financial
statements
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In
Thousands)
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,069
|
)
|
$
|
(889
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Amortization
of deferred loan origination fees, net
|
|
|
(201
|
)
|
|
(151
|
)
|
Capitalization
of servicing assets
|
|
|
(606
|
)
|
|
(1,370
|
)
|
Income
from tax credits
|
|
|
(4,584
|
)
|
|
(17,303
|
)
|
Deferred
income taxes
|
|
|
(3,103
|
)
|
|
1,133
|
|
Depreciation
and amortization
|
|
|
4,740
|
|
|
3,445
|
|
Provision
for loan losses
|
|
|
405
|
|
|
2,183
|
|
Servicing
asset valuation allowance
|
|
|
—
|
|
|
180
|
|
Other
than temporary decline in value of investments
|
|
|
—
|
|
|
321
|
|
Goodwill
impairment
|
|
|
—
|
|
|
822
|
|
Accretion
of interest income
|
|
|
(103
|
)
|
|
(132
|
)
|
Accretion
of interest expense
|
|
|
9,845
|
|
|
9,336
|
|
Equity
in earnings of investee
|
|
|
(96
|
)
|
|
(887
|
)
|
Stock-based
compensation
|
|
|
463
|
|
|
1,110
|
|
Gain
on sale of loans held for investment
|
|
|
(370
|
)
|
|
(305
|
)
|
Gain
on sale of investment in qualified business
|
|
|
(1,706
|
)
|
|
—
|
|
Premium
on repurchase of portfolio
|
|
|
44
|
|
|
—
|
|
Gain
on sale of land and building
|
|
|
(308
|
)
|
|
—
|
|
Loss
on disposal of fixed assets
|
|
|
44
|
|
|
—
|
|
Minority
interest
|
|
|
(329
|
)
|
|
(630
|
)
|
Changes
in assets and liabilities, net of the effect of business
acquisitions:
|
|
|
|
|
|
|
|
SBA
loans originated for sale
|
|
|
(22,759
|
)
|
|
(36,098
|
)
|
Proceeds
from sale of SBA loans held for sale
|
|
|
22,296
|
|
|
32,215
|
|
Prepaid
insurance
|
|
|
2,227
|
|
|
(1,017
|
)
|
Change
in restricted cash
|
|
|
2,834
|
|
|
(1,079
|
)
|
Prepaid
expenses, accounts receivable and other assets
|
|
|
1
|
|
|
(1,701
|
)
|
Accounts
payable, accrued expenses and deferred revenue
|
|
|
(1,212
|
)
|
|
(237
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
1,453
|
|
|
(11,054
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Investments
in qualified businesses
|
|
|
(7,588
|
)
|
|
(4,368
|
)
|
Return
of investments in qualified businesses
|
|
|
7,497
|
|
|
3,658
|
|
Purchase
of fixed assets
|
|
|
(2,099
|
)
|
|
(2,424
|
)
|
Purchase
of customer merchant accounts
|
|
|
(2,755
|
)
|
|
(1,078
|
)
|
Acquisition
of minority interest
|
|
|
(750
|
)
|
|
—
|
|
SBA
loans originated for investment
|
|
|
(7,323
|
)
|
|
(11,483
|
)
|
Cash
paid for repurchase of SBA loans
|
|
|
(1,214
|
)
|
|
—
|
|
Proceeds
from sale of SBA loans held for investment
|
|
|
8,863
|
|
|
8,827
|
|
Payments
received on SBA loans
|
|
|
5,503
|
|
|
3,528
|
|
Proceeds
from sale of land and building
|
|
|
1,300
|
|
|
—
|
|
Distribution
from investee
|
|
|
—
|
|
|
820
|
|
Proceeds
from sale of investment in qualified business
|
|
|
2,094
|
|
|
—-
|
|
Acquisition
of minority interest resulting in goodwill
|
|
|
—
|
|
|
(100
|
)
|
Contingent
consideration for acquisition
|
|
|
(500
|
)
|
|
(750
|
)
|
Change
in restricted cash
|
|
|
4,675
|
|
|
—
|
|
Proceeds
from sale of marketable securities and certificates of
deposit
|
|
|
13,973
|
|
|
—
|
|
Other
investments
|
|
|
(5
|
)
|
|
(36
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
21,671
|
|
|
(3,406
|
)
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(CONTINUED)
(In
Thousands)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
Proceeds
from issuance of notes payable to certified investors
|
|
|
—
|
|
|
23,458
|
|
Cash
paid for Coverage A (syndication of notes)
|
|
|
—
|
|
|
(6,250
|
)
|
Repayment
of mandatorily redeemable preferred stock
|
|
|
—
|
|
|
(1,500
|
)
|
Repayments
of note payable - other
|
|
|
(8,293
|
)
|
|
(525
|
)
|
Principal
repayments of note payable-insurance
|
|
|
(1,938
|
)
|
|
(2,776
|
)
|
Proceeds
from note payable - other
|
|
|
300
|
|
|
8,014
|
|
Change
in restricted cash relating to NSBF financing
|
|
|
—
|
|
|
390
|
|
Net
repayments on SBA bank notes payable
|
|
|
(6,679
|
)
|
|
(4,267
|
)
|
Purchase
of treasury shares
|
|
|
(54
|
)
|
|
—
|
|
Other
|
|
|
(250
|
)
|
|
713
|
|
Net
cash (used in) provided by financing activities
|
|
|
(16,914
|
)
|
|
17,257
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
6,210
|
|
|
2,797
|
|
Cash
and cash equivalents - beginning of period
|
|
|
23,940
|
|
|
50,922
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
30,150
|
|
$
|
53,719
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
14,091
|
|
$
|
12,246
|
|
Stock
issued in exchange for minority interest
|
|
$
|
500
|
|
|
—
|
|
Issuance
of notes in partial payment for insurance
|
|
|
—
|
|
$
|
3,000
|
|
CrystalTech
Web Hosting, Inc. final purchase price allocations to
goodwill
|
|
|
|
|
|
|
|
Additions
to customer accounts
|
|
|
—
|
|
$
|
2,082
|
|
Additions
to intangibles
|
|
|
—
|
|
|
560
|
|
Additions
to furniture and fixtures
|
|
|
—
|
|
|
375
|
|
Deductions
to goodwill
|
|
|
—
|
|
|
(3,258
|
)
|
Net
additions to assets and liabilities
|
|
|
—
|
|
|
241
|
|
Net
effect on purchase price
|
|
|
—
|
|
$
|
—
|
|
Acquisition
of minority interest resulting in goodwill:
|
|
|
|
|
|
|
|
Newtek
Business Services, Inc. common stock issued
|
|
$
|
186
|
|
|
—
|
|
Less:
minority interest acquired
|
|
|
—
|
|
|
—
|
|
Goodwill
recognized
|
|
$
|
186
|
|
|
—
|
|
NMS
- Wisconsin purchase of minority interest allocation:
|
|
|
|
|
|
|
|
Additions
to customer merchant accounts
|
|
$
|
1,271
|
|
|
—
|
|
Amount
payable to parent for stock issued to minority member
|
|
|
(500
|
)
|
|
—
|
|
Increase
in deferred tax liability
|
|
|
(771
|
)
|
|
—
|
|
Net
effect on purchase price
|
|
|
—
|
|
|
—
|
|
Contingent
consideration for acquisition
|
|
$
|
475
|
|
$
|
750
|
|
See
accompanying notes to these unaudited condensed consolidated financial
statements
NEWTEK
BUSINESS SERVICES, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE
1 - SIGNIFICANT ACCOUNTING POLICIES:
Basis
of presentation and description of business
The
unaudited condensed consolidated financial statements of Newtek Business
Services, Inc. and Subsidiaries (the “Company” or “Newtek”) included herein have
been prepared by the Company in accordance with accounting principles generally
accepted in the United States of America and include all wholly and majority
owned subsidiaries, and several portfolio companies in which the certified
capital companies (“Capco” or “Capcos”) own non-controlling minority interest or
those of which Newtek is considered to be the primary beneficiary. All
inter-company balances and transactions have been eliminated in consolidation.
The minority interests are held by members of limited liability companies,
which
are non-tax paying entities. Accordingly, the minority interest is calculated
before income taxes.
The
accompanying notes to condensed consolidated financial statements should be
read
in conjunction with Newtek’s 2005 Annual Report on Form 10-K. These financial
statements have been prepared in accordance with instructions to Form 10-Q
and
Article 10 of Regulations S-X and, therefore, omit or condense certain footnotes
and other information normally included in the financial statements prepared
in
accordance with accounting principles generally accepted in the United States.
The results of operations for an interim period may not give true indication
of
the results for the entire year.
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 the 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 Capcos and investing
funds made available under the Capco programs in small businesses.
The
unaudited condensed consolidated financial statements of Newtek reflect, in
the
opinion of management, all adjustments necessary to present fairly the financial
position of Newtek at September 30, 2006 and its results of operations and
cash
flows for the three months and nine months ended September 30, 2006. All
adjustments are of a normal recurring nature.
The
following is a summary of each Capco 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
|
|
December
2001
|
WAP
|
|
Alabama
|
|
November
2003
|
WDC
|
|
District of Columbia
|
|
November
2004
|
WNY IV
|
|
New
York
|
|
December
2004
|
WTX I
|
|
Texas
|
|
June
2005
|
WNY V
|
|
New
York
|
|
November 2005
|
*
Includes three additional Capco funds: WLPII, WLPIII, WLPIV
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 many cases may be majority-owned or primarily
controlled by the Capcos after the investments are consummated. Some Capco
programs limit the ownership or control which a Capco may acquire in a Qualified
Business, Louisiana and the more recent New York programs for example.
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. These legal contractual arrangements with
the Certified Investors obligate the Capco to refrain from unauthorized
activities, to use the proceeds from the notes only for Capco-authorized (i.e.,
“qualified”) investments and to limit fees for professional services related to
making, buying or selling investments.
The
Capco
can satisfy the interest obligations on the debt instruments issued to Certified
Investors, at the Capco’s discretion, by delivering tax credits in lieu of
paying cash. The Capcos legally have the right to deliver the tax credits to
the
Certified Investors. The Certified Investors legally have the right to receive
and use the tax credits and would, in turn, use these tax credits to reduce
their respective state tax liabilities in an amount usually equal to 100% (WLA,
WLPII, and WLPIII -110%) of their Certified Capital. The tax credits can be
utilized over a four to ten-year period at an annual percentage rate established
by each Capco legislation, and in some instances are transferable and can be
carried forward.
Restricted
Cash
Under
the
terms of the Line of Credit Agreement between Newtek Small Business Finance,
Inc. (“NSBF”) , a wholly- owned subsidiary of the Company, 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 amounts due to third party participants and certain other required
payments. As of September 30, 2006 and December 31, 2005, NSBF restricted cash
was $1,204,000 and $4,038,000, respectively.
The
cash
held by the Capcos is restricted for use in managing and operating the Capcos,
making Investments in Qualified Businesses and for the payment of income taxes.
Total restricted cash held by the Capcos as of September 30, 2006 and
December 31, 2005 was $11,229,000 and $15,904,000,
respectively.
Under
the
terms of the processing agreement between Universal Processing Services of
WI,
LLC (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 by the processing bank, a certain
percentage is allocated to the cash reserve account. Total restricted cash
held
at the processing bank at September 30, 2006 and December 31, 2005 totaled
$125,000, respectively.
Stock
- Based Compensation
Prior
to
January 1, 2006, the Company applied the disclosure-only provisions of SFAS
123,
“Accounting for Stock-Based Compensation” (“SFAS 123”). In accordance with the
provisions of SFAS 123, the Company applied APB 25, “Accounting for Stock Issued
to Employees” (“APB 25”) and related interpretations in accounting for
stock-based compensation plans and, accordingly, did not recognize compensation
expense for stock options because we issued options at exercise prices equal
to
the market value at date of grant.
Effective
January 1, 2006, the Company adopted SFAS 123 (revised 2004), “Share-Based
Payment” (“SFAS 123R”), which revises SFAS 123 and supersedes APB 25. SFAS 123R
requires all share-based payments to employees to be recognized in the financial
statements based on their fair values using an option-pricing model at the
date
of grant. The Company has elected to use the modified prospective method for
adoption, which requires compensation expense to be recorded for all unvested
stock options and restricted shares beginning in the first quarter of adoption,
based on the fair value at the original grant date. Prior year financial
statements have not been restated.
In
November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. FAS 123R-3, "Transition Election Related to Accounting for
the Tax Effects of Share-Based Payment Awards." The Company has elected to
adopt
the alternative transition method provided in the FASB Staff Position for
calculating the tax effects of share-based compensation pursuant to SFAS 123R.
The alternative transition method includes a simplified method to establish
the
beginning balance of the additional paid-in capital pool related to the tax
effects of employee share-based compensation, which is available to absorb
tax
deficiencies subsequent to the adoption of SFAS 123R.
The
Newtek Business Services, Inc. 2000 Stock Incentive and Deferred Compensation
Plan, as amended in 2006 (the “2000 Plan”), currently provides for the issuance
of awards of restricted shares or options for up to a maximum of 4,250,000
common shares. All restricted shares or options have been issued at the fair
market value on the date of grant. Options issued generally have a maximum
term
that ranges from 2 to 10 years and vesting provisions that range from 0 to
3
years.
The
Newtek Business Services, Inc. 2003 Stock Incentive Plan (the “2003 Plan”)
provides for the issuance of awards of restricted shares or options for up
to a
maximum of 1,000,000 common shares. All restricted shares or options have been
issued at the fair market value on the date of grant. Options issued generally
have a maximum term that ranges from 2 to 10 years and vesting provisions that
range from 0 to 3 years.
A
summary
of stock option activity under the 2000 and 2003 Plans as of September 30,
2006
and changes during the period then ended is presented below:
Stock
Options
|
|
Shares
(in
thousands)
|
|
Weighted
Average Exercise Price
|
|
Weighted
Average Remaining Term
(in
years)
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Outstanding
December 31, 2005
|
|
|
2,067
|
|
$
|
3.23
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(324
|
)
|
|
3.49
|
|
|
|
|
|
|
|
Outstanding
September 30, 2006
|
|
|
1,743
|
|
$
|
3.18
|
|
|
4.49
|
|
$
|
0
|
|
Exercisable
September 30, 2006
|
|
|
1,693
|
|
$
|
3.22
|
|
|
4.56
|
|
$
|
0
|
|
There
were no options granted during the nine months ended September 30, 2006. The
weighted average fair market value of options granted during the nine months
ended September 30 2005, estimated as of the grant date using the Black Scholes
Model, was $1.23. There were no options exercised during the nine months ended
September 30, 2006 and 2005.
A
summary
of the status of Newtek’s non-vested restricted shares as of September 30, 2006
and changes during the period then ended is presented below:
Non-vested
Restricted Shares
|
|
Number
of Shares
(in
thousands)
|
|
Weighted
Average Grant Date Fair Value
|
|
Non-vested
at December 31, 2005
|
|
|
179
|
|
$
|
4.22
|
|
Granted
|
|
|
101
|
|
$
|
1.87
|
|
Exercised
and vested
|
|
|
(112
|
)
|
$
|
2.46
|
|
Forfeited
|
|
|
(10
|
)
|
$
|
4.94
|
|
Non-vested
at September 30, 2006
|
|
|
158
|
|
$
|
4.00
|
|
As
of
September 30, 2006, there was $195,000 of total unrecognized compensation costs
related to non-vested share-based compensation arrangements granted under the
2000 and 2003 Plans. That cost is expected to be recognized ratably through
the
year ending December 31, 2009. The total fair market value of restricted shares
vested during the nine months ended September 30, 2006 and 2005 was $207,000
and
$284,000, respectively. The Company recognized an income tax benefit of $83,000
and $114,000 in connection with these vested shares.
The
adoption of SFAS 123R during the first half of 2006 did not have a material
impact, as all options were fully vested by December 31, 2005, except for one
option grant in 2005 which yielded $26,000 of share-based compensation expense
for the nine months ended September 30, 2006. The Company recognized an income
tax benefit of $10,400 in connection with these options.
Under
the
accounting treatment used through December 31, 2005, the net income for the
three and nine months ended September 30, 2005 does not include any compensation
charges related to options granted to employees. The following table illustrates
the proforma effect on Net loss and Loss per share assuming the Company had
applied the fair value recognition provisions of SFAS 123 instead of the
intrinsic value method under APB 25 to stock - based employee compensation
for
the three and nine months ended September 30, 2005:
|
|
Three
Months
Ended
September
30, 2005
|
|
Nine
Months
Ended
September
30, 2005
|
|
|
|
(in
thousands)
|
|
(in
thousands)
|
|
As
reported
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,977
|
)
|
$
|
(889
|
)
|
Add:
Total stock-based employee compensation expense recognized, net of
related
tax effects
|
|
|
110
|
|
|
576
|
|
Deduct:
Total stock based employee compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(126
|
)
|
|
(669
|
)
|
|
|
|
|
|
|
|
|
Pro
forma net loss
|
|
$
|
(1,993
|
)
|
$
|
(982
|
)
|
|
|
|
|
|
|
|
|
Net
loss per share
|
|
|
|
|
|
|
|
Basic
and diluted - as reported
|
|
$
|
(0.06
|
)
|
$
|
(0.03
|
)
|
Basic
and diluted - pro forma
|
|
$
|
(0.06
|
)
|
$
|
(0.03
|
)
|
The
fair value of each option granted was estimated using the Black-Scholes Model
in
2005 with the following assumptions: expected volatility of 42-48%, risk-free
interest rate of 1.98%, respectively, expected dividends of $0 and expected
terms of 1-6 years.
Use
of Estimates
The
preparation of 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 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, allowance
for
loan losses, valuation of servicing asset and tax valuation allowances. Actual
results could differ from those estimates.
Fair
value of financial instruments
SFAS
No. 107, “Disclosures about Fair Value of Financial Instruments,” (“SFAS
107”) requires the disclosure of the estimated fair values of financial
instruments. Excluding property and equipment, substantially all of the
Company’s assets and liabilities are considered financial instruments as defined
by SFAS 107. Fair value is defined as the price at which a financial instrument
could be liquidated in an orderly manner over a reasonable time period under
present market conditions. Fair value estimates are subjective in nature and
are
dependent on a number of significant assumptions associated with each instrument
or group of similar instruments, including estimates of discount rates, risks
associated with specific financial instruments, estimates of future cash flows
and relevant available market information. Fair value information is supposed
to
represent estimates of the amounts at which financial instruments could be
exchanged in current transactions between willing buyers and sellers engaging
in
exchange transactions. However, since there are no established trading markets
for a significant portion of the Company’s financial instruments, the Companies
may not be able to settle their financial instruments immediately; as such,
the
fair values are not necessarily indicative of the amounts that could be realized
through immediate settlements. In addition, the majority of the Company’s
financial instruments, such as loans receivable held for investment and bank
notes payable, are held to maturity and are realized or paid according to the
contractual agreements with the customers or counterparties.
SFAS 107
requires that, where available, quoted market prices are used to estimate fair
values. However, because of the nature of the Company’s financial instruments,
in many instances quoted market prices are not available. Accordingly, the
Companies have estimated fair values on the basis of other valuation techniques
permitted by SFAS 107, such as discounting estimated future cash flows at
rates commensurate with the risks involved, or other acceptable methods. Fair
values are required to be estimated without regard to any premium or discount
that may result from concentrations of ownership of a financial instrument,
possible income tax ramifications, or estimated transaction costs. Fair values
are also estimated at a specific point in time and are based on interest rates
and other assumptions at that date. As the assumptions underlying these
estimates change, the fair values of financial instruments will
change.
Because
SFAS 107 permits many alternative calculation techniques and because numerous
assumptions have been used to estimate the Company’s fair values, reasonable
comparisons of the Company’s fair value information with other financial
institutions’ fair value information cannot necessarily be made.
The
methods and assumptions used to estimate fair values are set forth in the
following paragraphs for each major grouping of the Companies’ financial
instruments.
The
carrying values of the following balance sheet items approximate their fair
values primarily due to their liquidity and short-term or adjustable yield
nature:
|
·
|
Cash
and cash equivalents
|
|
|
|
|
·
|
Bank
notes payable
|
|
|
|
|
·
|
Accrued
interest receivable and payable
|
The
carrying value of accounts payable and accrued expenses approximate fair value
because of the short term maturity of these instruments. The carrying value
of
Investments in Qualified Businesses, loans receivable, structured insurance
product, notes and loans payable, credits in lieu of cash, and notes payable
in
credits in lieu of cash approximate fair value based on management’s
estimates.
New
Accounting Pronouncements
In
March
2006, the FASB issued Statement of Financial Accounting Standard No. 156
“Accounting for Servicing of Financial Assets—an amendment of FASB Statement No.
140 (“SFAS 156”) which amends FASB Statement No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,” with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS 156 requires an entity to recognize a servicing
asset or servicing liability each time it undertakes an obligation to service
a
financial asset by entering into a servicing contract in certain situations,
requires all separately recognized servicing assets and servicing liabilities
to
be initially measured at fair value, if practicable, and permits an entity
to
choose subsequent measurement methods for each class of separately recognized
servicing assets and servicing liabilities. SFAS 156 also requires separate
presentation of servicing assets and servicing liabilities subsequently measured
at fair value in the balance sheet and additional disclosures for all
separately recognized servicing assets and servicing liabilities. The Company
is
currently evaluating the impact of adoption of SFAS 156, which is required
to be
adopted January 1, 2007.
In
June
2006, the FASB issued interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an interpretation of FAS No.
109
(“FIN
48”), which clarifies the accounting for uncertainty in income taxes. Currently,
the accounting for uncertainty in income taxes is subject to significant and
varied interpretations that have resulted in diverse and inconsistent accounting
practices and measurements. Addressing such diversity, FIN 48 prescribes a
consistent recognition threshold and measurement attribute, as well as clear
criteria for subsequently recognizing, derecognizing and measuring changes
in
such tax positions for financial statement purposes. FIN 48 is effective for
fiscal years beginning after December 15, 2006. We have not yet determined
the
impact of FIN 48 on our consolidated financial position, results of operations,
cash flows or financial statement disclosures.
In
September 2006, the FASB issued FASB Statement No.
157 (SFAS 157), "Fair Value Measurements." SFAS 157 establishes a framework
for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS 157 is effective for all
financial statements issued for fiscal years beginning after November 15, 2007.
The Company has not completed an anlysis as to the impact of this statement
on
its financial statements.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation.
NOTE
2 - COMMON STOCK:
Pursuant
to the terms of the Company’s directors’ compensation program, in the nine
months ended September 30, 2006, Newtek issued an aggregate of 68,155 common
shares to the board of directors, valued at $126,750. The fair market values
of
these grants were determined using the fair value of the common shares at each
grant date.
Pursuant
to the 2000 and 2003 Plans, in the nine months ended September 30, 2006, the
Company issued 54,409 common shares to employees valued at $113,000 Newtek
also
issued 90,000 common shares to various subsidiaries of Genworth Financial in
exchange for warrants they held in certain Capcos owned by Newtek. These shares
were valued at $186,000 and were accounted for as goodwill.
In
the
first nine months of 2006, Newtek also granted three employees an aggregate
of
33,354 shares of restricted shares valued at $63,000. The grants vest in one
year. The fair market values of these grants were determined using the fair
value of the common shares at the grant date. The restricted shares are
forfeitable upon early voluntary or involuntary termination of the employee.
Upon vesting, the grantee will receive one common share for each restricted
share vested.
NOTE
3—TREASURY STOCK:
Shares
of
common stock repurchased by us are recorded at cost as treasury stock and result
in a reduction of shareholders’ equity in our Consolidated Balance Sheet. From
time to time, treasury shares may be reissued as part of our stock based
compensation programs. When shares are reissued, we use the weighted average
cost method for determining cost. The difference between the cost of the shares
and the issuance price is charged to compensation expense and added or deducted
from additional contributed capital.
In
March
2006, the Newtek Board of Directors adopted a stock buy-back program authorizing
management to enter the market to re-purchase up to 1,000,000 of the Company's
common shares. As of September 30, 2006, the Company purchased 31,500 treasury
shares under that authorization.
NOTE
4—INVESTMENTS IN QUALIFIED BUSINESSES:
The
various interests that the Company acquires in its Investments in Qualified
Business are accounted for under three methods: consolidation, equity 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.
Consolidation
Method.
Investments in which the Company directly or indirectly owns more than 50%
of
the outstanding voting securities, those the Company has effective control
over,
or those deemed to be a variable interest entity in which the Company is the
primary beneficiary under the provisions of FIN 46R are generally accounted
for
under the consolidation method of accounting. Under this method, an investment’s
financial position and results of operations are reflected within the Company’s
Consolidated Balance Sheets and Consolidated Statements of Operations. All
significant inter-company accounts and transactions, including returns of
principal, dividends, interest received and investment redemptions have been
eliminated. The results of operations and cash flows of a consolidated operating
entity are included through the latest interim period in which the Company
owned
a greater than 50% direct or indirect voting interest, exercised control over
the entity for the entire interim period or was otherwise designated as the
primary beneficiary. Upon dilution of control below 50%, or upon occurrence
of a
triggering event requiring reconsideration as to the primary beneficiary of
a
variable interest entity, the accounting method is adjusted to the equity or
cost method of accounting, as appropriate, for subsequent periods.
Equity
Method.
Investees that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of accounting.
Whether or not the Company exercises significant influence with respect to
an
investee depends on an evaluation of several factors including, among others,
representation on the investee’s Board of Directors and ownership level, which
is generally a 20% to 50% interest in the voting securities of the investee,
including voting rights associated with the Company’s holdings in common,
preferred and other convertible instruments in the investee.
Under
the
equity method of accounting, an investee’s accounts are not reflected within the
Company’s Consolidated Balance Sheets and Consolidated Statements of Income;
however, the Company’s share of the earnings or losses of the investee is
reflected in the caption “Other income” in the Consolidated Statements of
Operations.
Cost
Method.
Investees not accounted for under the consolidation or the equity method of
accounting are accounted for under the cost method of accounting. Under this
method, the Company’s share of the earnings or losses of such companies is not
included in the Consolidated Balance Sheets and Consolidated Statements of
Operations. However, cost method impairment charges are recognized, as
necessary, in the Consolidated Statement of Operations. If circumstances suggest
that the value of the investee has subsequently recovered, such recovery is
not
recorded until realized.
The
Company’s debt and equity investments have substantially been made with funds
available to Newtek through the Capco programs. These programs generally require
that each Capco meet a minimum investment benchmark within 5 years of initial
funding. The investments listed below qualify for this purpose. In addition,
any
funds received by a Capco as a result of a debt repayment or equity return
may,
under the terms of the Capco programs, be reinvested and this will be counted
towards the Capcos’ minimum investment benchmarks.
In
accordance with the provisions of Statement of Financial Accounting Standards
No. 115 “Accounting for Certain Investments in Debt and Equity Securities,”
the Company classifies its debt investments as held-to-maturity and such
investments are initially recorded at amortized cost. The Company considers
several factors in determining whether an impairment exists on the investment,
such as the investee’s net book value, cash flow, revenue growth and net income.
In addition, the Investment Committee considers other factors, such as the
economy and the investee company’s industry, to determine if an other than
temporary decline in value exists in the Company’s investment.
HELD
TO MATURITY DEBT INVESTMENTS—Summary (in thousands)
|
|
Total
|
|
|
|
|
|
Principal
Outstanding at December 31, 2005
|
|
$
|
3,596
|
|
Debt
investments made
|
|
|
7,300
|
|
Return
of principal
|
|
|
(7,497
|
)
|
Principal
Outstanding at September 30, 2006
|
|
$
|
3,399
|
|
COST
INVESTMENTS—Summary (in thousands)
|
|
Total
|
|
|
|
|
|
Total
cost investments at December 31, 2005
|
|
$
|
150
|
|
Cost
investments made
|
|
|
289
|
|
Return
of investment
|
|
|
(389
|
)
|
Total
cost investments at September 30, 2006
|
|
$
|
50
|
|
The
Company has not guaranteed any obligation of these investees (other than that
of
its subsidiary, NSBF), 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, 2006 was zero. Should the Company determine that an impairment
exists upon its periodic review, and it is deemed to be other than temporary,
the Company will write down the recorded value of the asset to its estimated
fair value and record a corresponding charge in the Consolidated Statements
of
Operations.
NOTE
5 - LOANS RECEIVABLE (NON-CAPCO):
Loans
receivable are generated by NSBF and are primarily related to entities in the
Eastern region of the United States with concentrations in the restaurant and
hotel and motel industries.
Below
is
a summary of the activity in the SBA loan receivable balance, net of SBA loan
loss reserves for the nine months ended September 30, 2006 (in
thousands):
Balance
at December 31, 2005
|
|
$
|
32,028
|
|
SBA
loans originated for investment
|
|
|
7,470
|
|
Payments
received
|
|
|
(5,503
|
)
|
SBA
loans held for investment, reclassified as held for sale
|
|
|
(7,324
|
)
|
Loans
foreclosed into real estate owned
|
|
|
(215
|
)
|
Provision
for SBA loan losses
|
|
|
(405
|
)
|
Discount
on loan originations, net
|
|
|
55
|
|
Balance
at September 30, 2006
|
|
$
|
26,106
|
|
Below
is
a summary of the activity in the reserve for loan losses balance for the nine
months ended September 30, 2006 (in thousands):
Balance
at December 31, 2005
|
|
$
|
2,304
|
|
Provision
for SBA loan losses
|
|
|
405
|
|
Recoveries
|
|
|
75
|
|
Loan
charge-offs
|
|
|
(376
|
)
|
Balance
at September 30, 2006
|
|
$
|
2,408
|
|
Below
is
a summary of the activity in the SBA loans held for sale for the nine months
ended September 30, 2006 (in thousands):
|
|
$
|
1,155
|
|
Loan
originations for sale
|
|
|
22,759
|
|
SBA
loans held for investment, reclassified as held for sale
|
|
|
7,324
|
|
Loans
sold
|
|
|
(29,620
|
)
|
Balance
at September 30, 2006
|
|
$
|
1,618
|
|
All
loans
are priced at the prime interest rate plus approximately 2.75% to 3.75%. As
of
September 30, 2006 and December 31, 2005, NSBF loans receivable held for
investment with adjustable interest rates amounted to $25,577,000 and
$34,200,000, respectively.
The
only
loans with a fixed interest rate are defaulted loans of which the guaranteed
portion sold is repurchased from the secondary market by the SBA, while the
unguaranteed portion of the loans still remains with NSBF. As of September
30,
2006 and December 31, 2005, NSBF loans receivable held for investment with
fixed
interest rates amounted to $4,510,000 and $1,759,000, respectively.
The
GE
Line of Credit Agreement is collateralized by all the loans receivable held
for
investment and held for sale, in addition to all assets of NSBF.
The
outstanding balances of loans past due ninety days or more and still accruing
interest as of September 30, 2006 and December 31, 2005 amounted to $0 and
$7,300, respectively.
At
September 30, 2006 and December 31, 2005, total impaired loans which are
not accruing interest amounted to $4,107,000 and $3,693,000, respectively.
Approximately $1,261,000 and $907,000 of the allowance for loan losses were
allocated against such impaired nonaccrual loans, respectively, in accordance
with SFAS 114, “Accounting by Creditors for Impairment of a Loan-An
Amendment of FASB No. 5 and 43.”
The
following is a summary of SBA loans receivable (in thousands) at:
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Due
in one year or less
|
|
$
|
16
|
|
$
|
24
|
|
Due
between one and five years
|
|
|
1,854
|
|
|
1,807
|
|
Due
after five years
|
|
|
28,217
|
|
|
34,129
|
|
Total
|
|
|
30,087
|
|
|
35,960
|
|
Less
: Allowance for loan losses
|
|
|
(2,408
|
)
|
|
(2,304
|
)
|
Less:
Deferred origination fees, net
|
|
|
(1,573
|
)
|
|
(1,628
|
)
|
|
|
|
|
|
|
|
|
Balance
(net)
|
|
$
|
26,106
|
|
$
|
32,028
|
|
NOTE
6—SERVICING ASSETS:
NSBF
reviews capitalized servicing rights for impairment. This review is performed
based on risk strata, which are determined on a disaggregated basis given the
predominant risk characteristics of the underlying loans. The predominant risk
characteristics are loan term and year of loan origination.
The
following summarizes the activity pertaining to servicing assets for the nine
months ended September 30, 2006 (in thousands):
Balance
at December 31, 2005
|
|
$
|
3,376
|
|
|
|
|
|
|
Servicing
assets capitalized
|
|
|
606
|
|
Servicing
assets amortized
|
|
|
(647
|
)
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
3,335
|
|
|
|
|
|
|
Reserve
for impairment of servicing assets:
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
(179
|
)
|
Additions
|
|
|
-
|
|
|
|
|
|
|
Balance
at September 30, 2006
|
|
|
(179
|
)
|
|
|
|
|
|
Balance
at September 30, 2006 (net of reserve)
|
|
$
|
3,156
|
|
For
the
nine months ended September 30, 2006 and 2005, servicing fees received amounted
to $1,459,000 and $1,477,000, respectively.
The
estimated fair value of capitalized servicing rights was $3,156,000 and
$3,197,000 at September 30, 2006 and December 31, 2005, respectively. The
estimated fair value of servicing assets at both balance sheet dates was
determined using a discount rate of 13.5%, weighted average prepayment speeds
ranging from 1% to 19%, weighted average life of 3.9 years, and an average
default rate of 3%.
Amortization
of servicing assets for the year ended December 31, 2005 on the
accompanying Condensed Consolidated Statements of Operations included a
cumulative adjustment of approximately $184,000 (a reduction of amortization
expenses) due to a change in NSBF’s amortization method. Although this
adjustment relates to prior periods, the amount of the adjustment attributable
to any prior year would not have been material to Newtek's or NSBF’s financial
condition or results of operations as reported for that year.
NOTE
7 - GOODWILL:
In
Septembert 2006, CrystalTech’s former CEO earned an additional $975,000
($500,000 cash and 277,776 shares of Newtek common stock valued at $475,000)
pursuant to the asset purchase agreement governing the purchase of CrystalTech
in 2004. The fair market value of the shares issued was determined using the
fair value of the common shares on September 1, 2006. Such payments have been
recorded as additions to goodwill.
NOTE
8 - CUSTOMER ACCOUNTS:
On
April
13, 2006, a subsidiary of Newtek purchased a merchant processing credit card
portfolio with 3,100 customers from Midwest Transaction Group, L.L.C., for
a
purchase price of $2,500,000. This portfolio has annual processing volume of
approximately $240,000,000. The purchase price has been allocated to customer
merchant accounts and is being amortized over 66 months.
NOTE
9 - 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 share
equivalents is included in the calculation of diluted earnings per share only
when the effect of their inclusion would be dilutive.
The
denominator for basic EPS - weighted average shares below does not include
583,000 shares being held in escrow as well as 473,000 shares issued to a
subsidiary of Newtek.
The
calculations of net loss per share were:
|
|
Three
Months Ended
September
30, 2006
|
|
Three
Months Ended
September
30, 2005
|
|
Nine
Months
Ended
September
30, 2006
|
|
Nine
Months
Ended
September
30, 2005
|
|
|
|
(in
thousands)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Numerator
for basic and diluted EPS - loss available to common
shareholders
|
|
$
|
(1,054
|
)
|
|
(1,977
|
)
|
$
|
(6,069
|
)
|
$
|
(889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS- weighted average shares
|
|
|
34,883
|
|
|
34,454
|
|
|
34,805
|
|
|
34,105
|
|
Effect
of dilutive securities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Denominator
for diluted EPS- weighted average shares
|
|
|
34,883
|
|
|
34,454
|
|
|
34,805
|
|
|
34,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
Basic
|
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.17
|
)
|
$
|
(0.03
|
)
|
EPS:
Diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.17
|
)
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of anti-dilutive shares/units excluded from above is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options and restricted stock grants
|
|
|
1,743
|
|
|
66
|
|
|
1,743
|
|
|
70
|
|
Warrants
|
|
|
216
|
|
|
258
|
|
|
216
|
|
|
258
|
|
Contingently
issuable shares
|
|
|
583
|
|
|
791
|
|
|
583
|
|
|
791
|
|
NOTE
10 - NOTES PAYABLE-OTHER:
In
March
2006, CrystalTech Web Hosting, Inc. (“CrystalTech”), a wholly owned subsidiary
of the Company, prepaid $4,000,000 of the note payable to Technology Investment
Capital Corp. (“TICC”). In conjunction with the prepayment, CrystalTech paid
$127,000 in additional interest. In June and September 2006, CrystalTech prepaid
an additional $2,100,000 and $500,000, respectively, of the note payable to
TICC. The remaining principal payment of $1,400,000 is due in March
2008.
NOTE
11—SBA LINE OF CREDIT:
In
February 2006, GE and NSBF entered into a First Amendment to the GE Line of
Credit Agreement. The amendment made adjustments to various financial covenants,
including a net-worth maintenance level that NSBF had breached. GE has waived,
upon the effectiveness of the amendment, specific defaults that would have
resulted from the terms of the original agreement.
NOTE
12 - ACQUISITION OF MINORITY INTEREST:
In
September 2006 NMS-WI purchased the interest of its minority shareholder for
$1,250,000 ($750,000 cash and 292,377 shares of Newtek stock valued at
$500,000). Under FAS 141 the acquisition resulted in the purchase price being
fully assignable to customer merchant accounts owned by NMS-WI (less $44,000
in
minority interest previously recorded) and will be subject to amortization
over
a period of 66 months.
Under
FAS
109, Accounting
for Income Taxes,
a
deferred tax liability of $770,882 was recorded in conjunction with the
transaction as the purchase price is allocable to intangibles, and not goodwill.
NOTE
13 - SEGMENT REPORTING:
Operating
segments are organized internally primarily by the type of services provided,
and in accordance with SFAS 131, “Disclosures About Segments of an
Enterprise and Related Information,” the Company has aggregated similar
operating segments into six reportable segments: SBA lending, electronic payment
processing, web hosting, Capcos, corporate activities and all
other.
Effective
in the fourth quarter of 2005, the Company increased the number of operating
segments from four to six. Historically a substantial amount of resources were
dedicated to new Capcos and the investment of the proceeds in Qualified
Businesses and the managing of many of these businesses. Since management does
not anticipate any new Capcos in the foreseeable future, the Company has changed
its internal reporting to better evaluate and manage the existing Capco
business, its corporate activities and its portfolio of small businesses
included in the all other segment. The segment previously called Capco and
other, which management previously evaluated as one integrated segment, is
now
being evaluated as three segments—Capcos, corporate activities and all other.
The segment information for prior periods has been restated to conform to the
current disclosure.
The
SBA
lending segment is NSBF, a licensed, U. S. Small Business Administration (SBA)
lender that originates, sells and services loans to qualifying small businesses,
which are partially guaranteed by the SBA.
As
an SBA
lender, NSBF generates revenues from sales of loans, servicing income for those
loans retained to service by NSBF and interest income earned on 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
condensed consolidated statement of operations. NSBF also has expenses such
as
loan recovery expenses, loan processing costs, and other expenses that are
all
included in the other expenses caption on the condensed consolidated statements
of operations.
The
electronic payment processing segment is a marketer of credit card and
check approval services to the small business market. Revenue generated from
electronic payment processing is included on the condensed consolidated
statements of income as a separate line item. Expenses include direct costs
(included in a separate line captioned electronic payment processing direct
costs), professional fees, payroll and consulting, and other expenses, all
of
which are included in the respective caption on the condensed consolidated
statements of operations.
The
web
hosting segment consists of CrystalTech, acquired in July 2004. CrystalTech’s
revenues are derived primarily from web hosting and related 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 caption on the accompanying condensed consolidated statements of
operations, as well as licenses and fees, rent, and general office expenses,
all
of which are included in other expenses in the respective caption on the
condensed consolidated statements of operations.
The
Capco
segment, which consists of the fifteen Capcos, generates non-cash income from
tax credits, interest income and gains from Investments in Qualified Businesses
which are included in other income. Expenses primarily include non-cash interest
and insurance expense, professional fees consisting of management fees paid
to
Newtek, legal and auditing fees and losses from Investments in Qualified
Businesses.
The
all
other segment includes revenue and expenses from businesses formed from
Investments in Qualified Investments made through the Capco programs which
cannot be aggregated with other operating segments.
Corporate
activities represent revenue and expenses not allocated to our segments. Revenue
includes interest income and management fees earned from Capcos. Expenses
primarily include corporate operations related to broad-based sales and
marketing, legal, finance, information technology, corporate development and
additional costs associated with administering the Capcos.
Management
has considered the following characteristics when making its determination
of
its operating and reportable segments:
|
|
the
nature of the product and services,
|
|
|
|
|
|
the
type or class of customer for their products and
services,
|
|
|
|
|
|
the
methods used to distribute their products or provide their services,
and
|
|
|
|
|
|
the
nature of the regulatory environment, for example, banking, insurance,
or
public utilities.
|
The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
The
following table highlights certain financial information about each of the
Company's business segments for the three and nine months ended September 30,
2006 and 2005 as required by SFAS 131 pertaining to our business
segments:
(in
thousands) |
|
For
the three
months
ended
September
30,
2006
|
|
For
the three
months
ended
September
30,
2005
|
|
For
the nine
months
ended
September
30,
2006
|
|
For
the nine
months
ended
September
30,
2005
|
|
Third
Party Revenue
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
2,783
|
|
$
|
2,284
|
|
$
|
7,266
|
|
$
|
8,218
|
|
Electronic
payment processing
|
|
|
11,236
|
|
|
8,280
|
|
|
31,273
|
|
|
22,836
|
|
Web
hosting
|
|
|
3,481
|
|
|
2,781
|
|
|
10,001
|
|
|
7,703
|
|
Capcos
|
|
|
1,743
|
|
|
6,140
|
|
|
5,687
|
|
|
17,984
|
|
All
other
|
|
|
2,663
|
|
|
1,126
|
|
|
5,892
|
|
|
3,004
|
|
Corporate
activities
|
|
|
993
|
|
|
1,158
|
|
|
3,499
|
|
|
3,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
reportable segments
|
|
|
22,899
|
|
|
21,769
|
|
|
63,618
|
|
|
63,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(1,264
|
)
|
|
(1,307
|
)
|
|
(3,838
|
)
|
|
(3,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
|
|
21,635
|
|
|
20,462
|
|
|
59,780
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-Segment
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Electronic
payment processing
|
|
|
106
|
|
|
740
|
|
|
290
|
|
|
875
|
|
Web
hosting
|
|
|
15
|
|
|
13
|
|
|
47
|
|
|
66
|
|
Capcos
|
|
|
338
|
|
|
18
|
|
|
975
|
|
|
296
|
|
All
other
|
|
|
362
|
|
|
415
|
|
|
1,010
|
|
|
728
|
|
Corporate
activities
|
|
|
531
|
|
|
748
|
|
|
1,600
|
|
|
1,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
reportable segments
|
|
|
1,352
|
|
|
1,934
|
|
|
3,922
|
|
|
3,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations
|
|
|
(1,352
|
)
|
|
(1,934
|
)
|
|
(3,922
|
)
|
|
(3,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
totals
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before provision (benefit) for income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
510
|
|
$
|
(1,135
|
)
|
$
|
352
|
|
$
|
(653
|
)
|
Electronic
payment processing
|
|
|
935
|
|
|
160
|
|
|
2,072
|
|
|
1,264
|
|
Web
hosting
|
|
|
996
|
|
|
949
|
|
|
3,047
|
|
|
2,810
|
|
Capcos
|
|
|
(3,572
|
)
|
|
(183
|
)
|
|
(10,899
|
)
|
|
1,553
|
|
All
other
|
|
|
1,086
|
|
|
(295
|
)
|
|
185
|
|
|
(1,819
|
)
|
Corporate
activities
|
|
|
(1,677
|
)
|
|
(1,575
|
)
|
|
(3,929
|
)
|
|
(3,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
(1,722
|
)
|
$
|
(2,079
|
)
|
$
|
(9,172
|
)
|
$
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA
lending
|
|
$
|
419
|
|
$
|
256
|
|
$
|
1,229
|
|
$
|
1,001
|
|
Electronic
payment processing
|
|
|
395
|
|
|
241
|
|
|
1,034
|
|
|
653
|
|
Web
hosting
|
|
|
676
|
|
|
495
|
|
|
1,848
|
|
|
1,341
|
|
Capcos
|
|
|
28
|
|
|
2
|
|
|
80
|
|
|
2
|
|
All
other
|
|
|
47
|
|
|
(85
|
)
|
|
125
|
|
|
114
|
|
Corporate
activities
|
|
|
163
|
|
|
262
|
|
|
424
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,728
|
|
$
|
1,171
|
|
$
|
4,740
|
|
$
|
3,445
|
|
|
|
As
of
September
30,
2006
|
|
As
of
December
31,
2005
|
|
SBA
lending
|
|
$
|
37,438
|
|
$
|
46,501
|
|
Electronic
payment processing
|
|
|
12,052
|
|
|
9,664
|
|
Web
hosting
|
|
|
14,549
|
|
|
17,101
|
|
Capcos
|
|
|
146,289
|
|
|
156,216
|
|
All
other
|
|
|
20,006
|
|
|
28,845
|
|
Corporate
activities
|
|
|
5,315
|
|
|
6,686
|
|
Consolidated
totals
|
|
$
|
235,649
|
|
$
|
265,013
|
|
In
February 2006, in connection with the signing of the First Amendment to the
GE
Line of Credit Agreement, the board of NSBF authorized the issuance of 300
shares of a newly designated Series B Preferred Stock. The shares, valued at
$10,000 each, were issued to the Company in exchange for the cancellation of
$3,000,000 of subordinated debt owed to the Company. The Company assessed
the fair value of the Preferred Stock based on the fair value of the
intercompany note extinguished since the transaction was not executed with
a
third party on an arms length basis. Accordingly, no gain or loss on
extinguishment is included in the segment data.
The
following discussion of our financial condition and results of operations should
be read together with our consolidated financial statements and the related
notes thereto included in another part of this Quarterly Report. This discussion
contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, that involve substantial risks and
uncertainties. When used in this report the words “anticipate,” “believe,”
“estimate,” “expect” and similar expressions as they relate to our management or
us are intended to identify such forward-looking statements. Our actual results,
performance or achievements could differ materially from those expressed in,
or
implied by, these forward-looking statements. Historical operating results
are
not necessarily indicative of the trends in operating results for any future
period.
Our
Capcos operate under a different set of rules in each of the 8 jurisdictions
and
these place varying requirements on the structure of our investments. In some
cases, particularly in Louisiana and New York, we don’t control the equity or
management of a qualified business although at times we don’t always make that
distinction.
We
are a
holding company for several wholly- and majority-owned subsidiaries, including
15 certified capital companies which we refer to as Capcos, and several
portfolio companies in which the Capcos own non-controlling minority interests.
We are a direct distributor of business services to the small-and medium-sized
business market. Our target market represents a very significant marketplace
in
the US GDP, since approximately 51% of the GDP in the United States comes from
small-to medium-size businesses and nine out of ten businesses in the United
States fit into this market segment. As of September 30, 2006, we had over
70,000 customers. We use state of the art Web-based proprietary technology
to be a low cost provider of products and services to our small and medium
size
business clients. We partner with Merrill Lynch, Morgan Stanley, UBS, the Credit
Union National Association with its 8,700 credit unions and 80 million members,
the Navy Federal Credit Union with 2.5 million members, General Motors Minority
Dealers Association, The Veterans Corporation, National Physician’s Care, Inc.
and the US Women’s Chamber of Commerce all of whom have elected to
outsource their business services and financial products to us rather than
try
to provide it for their customers themselves. We are deemphasizing our Capco
business in favor of growing our operating businesses.
The
Company’s reportable business segments are:
SBA
Lending:
Newtek
Small Business Finance, 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.
Electronic
Payment Processing:
A
marketer of credit card processing and check approval services to the small-
and
medium-sized business market.
Web
Hosting:
CrystalTech Web Hosting, Inc. which offers shared and dedicated web hosting
and
related services to the small- and medium-sized business market.
Capcos:
Fifteen
certified capital companies which invest in small- and medium-sized businesses.
They generate non-cash income from tax credits and non-cash interest and
insurance expenses.
All
Other:
Includes
results from businesses formed from Investments in Qualified Businesses made
through Capco programs which cannot be aggregated with other operating
segments.
Corporate
Activities:
Revenue
and expenses not allocated to our other segments, including interest income,
Capco management fee income and corporate operations expenses.
Business
Segments:
The
following discussion reviews and analyzes certain
financial information from our reportable business segments for the nine
and the
three months ended September 30, 2006 and 2005.
Nine
months ended September 30, 2006
SBA
Lending:
Revenues
decreased by $952,000, or 12% compared to the prior year corresponding
period and were primarily affected by a decrease in premium income of $897,000
as a result of originating and selling fewer loans.
Income
before income taxes was $352,000 compared to a loss of $653,000 in the
corresponding period of 2005 and was primarily affected by:
|
· |
A $1,778,000
decrease in the provision for loan losses which in 2005 included
a
$550,000 increase in the provision to cover losses associated
with the
Commercial Capital Corporation portfolio acquired in 2002 as
well as a
$900,000 increase associated with Hurricane Katrina,
and
|
|
· |
A
reduction of $234,000 in professional fees and $220,000 in line
of credit
fees, partially offset
by:
|
|
· |
An $897,000
decrease in premium on sale income and a net reduction of $402,000
in
recoveries of loan liquidation
costs.
|
Electronic
Payment Processing:
Revenues
increased $8,437,000, or 37%, compared to the prior year corresponding period
and were primarily affected by:
|
· |
A
38% growth in customers from 8,900 to 12,300 as a result of our
marketing efforts and acquisition of certain merchant portfolios
in 2005
and 2006, which included approximately 2,700 customers, which
generated
$580,000 of additional revenue in 2006, partially offset
by:
|
|
· |
A
one time recovery of $900,000 in 2005 of an investment in Merchant
Data
Systems received from a legal
settlement.
|
Income
before income taxes was $2,072,000, compared to $1,264,000 in the corresponding
period in 2005 and was primarily affected by:
|
· |
A
substantial increase in revenue and the leverage of fixed costs,
offset in
part by:
|
|
· |
A
one time recovery of $900,000 in 2005 of an investment in Merchant
Data
Systems received from a legal
settlement.
|
Web
Hosting:
Revenues
increased $2,298,000, or 30%, compared to the corresponding period in the
prior
year and were primarily affected by:
|
· |
An
increase in clients accounts from 43,000 to 55,000 due to our
increased marketing and sales efforts,
and
|
|
· |
An
increase in dedicated hosting customers which generate higher
revenue per
customer.
|
Income
before income taxes was $3,047,000 compared to $2,810,000 in the corresponding
period of 2005 and was primarily affected by:
|
· |
An
increase in revenues and a $50,000 decrease in interest expense,
partially
offset by:
|
|
· |
A
decrease in the revenue per shared web hosting customer due to
competitive
pressures;
|
|
· |
Increased
technology costs and payroll necessary to service the increased
base of
customers;
|
|
· |
Increased
depreciation due to capital invested in additional servers to
support the
growth in shared and dedicated web hosting
customers.
|
Capcos:
Revenues
decreased $12,297,000, or 68% compared to the prior year corresponding period
and were primarily affected by:
|
· |
A
decrease in income from tax credits totaling $12,719,000 from
$17,303,000
in 2005 to $4,584,000 in 2006. The Company achieved the 25% investment
benchmark in the WNY IV Capco in 2006 and the 50% investment
benchmark in
the WDC and WLA IV Capcos in 2005. The Company continues to earn
revenue
through accretion from Capcos which achieved benchmarks in prior
periods.
Income from tax credits are as
follows:
|
(in
thousands)
|
|
2006
|
|
2005
|
|
Change
|
|
WNY
IV 25% threshold
|
|
$
|
746
|
|
$
|
-
|
|
$
|
746
|
|
WDC
50% threshold
|
|
|
-
|
|
|
9,259
|
|
|
(9,259
|
)
|
WLP
IV 50% threshold
|
|
|
-
|
|
|
4,676
|
|
|
(4,676
|
)
|
Income
from tax credit accretion
|
|
|
3,838
|
|
|
3,368
|
|
|
470
|
|
|
|
$
|
4,584
|
|
$
|
17,303
|
|
$
|
(12,719
|
)
|
Loss
before income taxes was $10,899,000, compared to income of $1,553,000 in
the
corresponding period of 2005 and was primarily affected by a decrease in
revenue
and an increase in interest expense, insurance expense and management fees
associated with two additional Capcos.
All
Other:
The
all
other segment includes revenue and expenses from businesses formed from
Investments in Qualified Businesses made through the Capco programs which
cannot
be aggregated with other operating segments.
Revenues
increased $2,888,000 or 96% compared to the prior year corresponding period
and
were primarily affected by:
|
· |
An
increase in revenue totaling $1,716,000 derived from an investment
in the
fourth quarter of 2005 in Phoenix Development Group, which provides
services to and reconstruction of New Orleans, primarily in the
form of
temporary housing and related services;
|
|
· |
A
gain on the sale of a qualified Capco investment of $1,706,000,
partially
offset by:
|
|
· |
A
decrease in revenue from Exponential Business Development, Inc.
of
$650,000, due to a one time gain in the prior period from the
sale of an
investment.
|
Income
before income taxes was $185,000 compared to a loss of $1,819,000 in the
corresponding period of 2005 and was primarily affected by:
|
· |
A
gain on the sale of a qualified Capco investment of
$1,706,000;
|
|
· |
A
profit of $532,000, including a gain on the sale of property
of $310,000
in Phoenix Development Group;
|
|
· |
A
net reduction in losses for a number of smaller investments,
partially
offset by:
|
|
· |
A
$519,000 loss in Where Eagles Fly, a Washington D.C. Capco investment
in a
play, and
|
|
· |
A
decrease in profit of $785,000 from Exponential Business Development
Company, Inc. due to a one time gain in the prior year from the
sale of an
investment.
|
Corporate
Activities:
Revenues
decreased $396,000, or 10%, compared to the prior year corresponding
period. The decrease is primarily due to the Company discontinuing the accrual
of management fees from two of its Capcos due to limited available
cash.
Loss
before income taxes was $3,929,000, compared to $3,096,000 in the
corresponding period of 2005 and was due primarily to an increase in
professional fees and costs associated with a legal settlement.
Three
months ended September 30, 2006
SBA
Lending:
Revenues
increased by $499,000, or 22%, compared to the prior year corresponding period
and were primarily affected by an increase in premium income of $244,000
as a
result of selling more unguaranteed loans as well as an increase in other
income
of $192,000 attributable to greater prepayment and late fee income and an
increase in recoveries on liquidation expenses .
Income
before income taxes was $510,000, compared to a loss of $1,135,000 in the
corresponding period of 2005 and was primarily affected by:
|
· |
A $244,000
increase in premium on sale
|
|
· |
A
decrease in provision for loan loss and line of credit related
fees.
|
|
· |
A decrease
in interest expense
|
Electronic
Payment Processing:
Revenues
increased by $2,956,000, or 36%, compared to the prior year corresponding
period
and were primarily affected by:
|
· |
A
38% growth in total customers from 8,900 to 12,300 as a result of our
acquisitions of merchant portfolios and marketing
efforts;
|
|
· |
Merchant
portfolios, which included approximately 2,700 customers purchased in
2005 and 2006 which generated $220,000 of additional revenue
in
2006.
|
Income
before income taxes was $935,000, compared to income of $160,000 in the
corresponding period in 2005 and was primarily affected by a substantial
increase in revenue and the leverage of fixed costs.
Web
Hosting:
Revenues
increased $700,000, or 25% compared to the corresponding period in the prior
year and were primarily affected by:
|
· |
An
increase in client accounts from 43,000 to 55,000
and:
|
|
· |
An
increase in dedicated hosting customers which generate higher
revenue per
customer.
|
Income
before income taxes was $996,000 compared to $949,000 in the corresponding
period of 2005 and was primarily affected by:
|
· |
An
increase in revenues and:
|
|
· |
A
$187,000 decrease in interest expense due to a decrease in borrowings
during the period, partially offset
by:
|
|
· |
A
decrease in the revenue per shared web hosting customer due to
competitive
pressures;
|
|
· |
Increased
payroll necessary to service the increased base of
customers;
|
|
· |
Increased
technology costs and depreciation due to capital invested in
additional
servers to support the growth in shared and dedicated web hosting
customers.
|
Capcos:
Revenues
decreased $4,397,000, or 72% compared to the prior year corresponding period
and
were primarily affected by:
|
· |
A
decrease in income from tax credits totaling $4,601,000 from
$5,905,000 in
2005 to $1,304,000 in 2006. The Company achieved the 50% investment
benchmark in the WLA IV Capco in 2005. The Company continues
to earn
income through accretion from Capcos which achieved benchmarks
in prior
periods. Income from tax credits are as follows:
|
(in
thousands)
|
|
2006
|
|
2005
|
|
Change
|
|
WLP
IV 50% threshold
|
|
$
|
-
|
|
$
|
4,676
|
|
$
|
(4,676
|
)
|
Income
from tax credit accretion
|
|
|
1,304
|
|
|
1,229
|
|
|
75
|
|
|
|
$
|
1,304
|
|
$
|
5,905
|
|
$
|
(4,601
|
)
|
Loss
before income taxes was $3,572,000, compared to $183,000 in the
corresponding period of 2005 and was primarily affected by a decrease in
revenue
and an increase in interest expense, insurance expense and management fees
associated with two additional Capcos.
All
Other:
The
all
other segment includes revenue and expenses from businesses from Investments
in
Qualified Businesses made through the Capco programs which cannot be aggregated
with other operating segments.
Revenues
increased $1,537,000, or 137% compared to the prior year corresponding period
and were primarily affected by:
|
· |
A
gain on the sale of a qualified Capco investment of $1,706,000
in the
current period 2006.
|
Income
before income taxes was $1,086,000 compared to a loss of $295,000 in
the corresponding period of 2005 and was primarily affected by:
|
· |
A
gain on the sale of a qualified Capco investment of $1,706,000
in the
current period 2006 and,
|
|
· |
A
net reduction in losses for a number of smaller entities, many
of which
have been closed in the past
year.
|
Corporate
Activities:
Revenues
decreased $165,000, or 14% compared to the prior year corresponding period
and
were primarily affected by a decrease in other income, offset by an
increase in management fee income from two additional Capcos (WTX1 and WNY5)
compared to the prior year corresponding period, and an increase in interest
income in the current period.
The
loss
before income taxes was $1,677,000, compared to $1,575,000 in the
corresponding period of 2005.
The
following discussion reviews and analyzes the consolidated statements of
operations for the nine and three months ended September 30, 2006 and 2005
and
other key factors that may affect future performance. This discussion should
be
read in conjunction with the Consolidated Financial
Statements.
Comparison
of the nine months ended September 30, 2006 and September 30,
2005
Revenues
decreased by $220,000, or .4%, to $59,780,000 for the nine months ended
September 30, 2006, from $60,000,000 for the nine months ended September
30,
2005. Income from tax credits from our Capco business decreased by $12,719,000
to $4,584,000 for the nine months ended September 30, 2006 from $17,303,000
for
the nine months ended September 30, 2005.
Electronic
payment processing revenue increased by $9,193,000, or 42%, to $31,148,000
for
the nine months ended September 30, 2006 from $21,955,000 for the nine months
ended September 30, 2005 due to the increase in electronic payment processing
customers as a result of our increased sales and marketing efforts. At September
30, 2006, we provided our payment services to over 12,300 customers across
the
United States, compared to 8,900 customers at September 30, 2005, an increase
of
38%. Gross total processing volume increased by 40% to $1,468,000,000 for
the
nine months ended September 30, 2006 from $1,052,000,000 for the nine months
ended September 30, 2005.
Web
hosting revenue increased by $2,273,000, or 30%, to $9,953,000 for the nine
months ended September 30, 2006 from $7,680,000 for the nine months ended
September 30, 2005. At September 30, 2006 and 2005, CrystalTech was
providing services to 55,000 and 43,000 client accounts, respectively, an
increase of 25%. The increase in revenue is due to the number of customers
the
Company provided services to and an increase in dedicated hosting customers
which generate higher revenue per customer. The increase in revenue due to
growth in customers was offset, in part, by a decrease in the revenue per
shared
web hosting customer due to competitive pressures.
NSBF
(SBA
Lender) interest income represents earnings on SBA loan receivables. Other
interest income consists of investment income on money market accounts,
certificate of deposits, U.S. Treasury notes, marketable securities, non-cash
accretions of structured products and interest income on qualified investments.
The following table details the changes in these different forms of interest
income:
(in
thousands)
|
|
2006
|
|
2005
|
|
Change
|
|
NSBF
(SBA Lender)
|
|
$
|
2,831
|
|
$
|
2,658
|
|
$
|
173
|
|
Other
interest income
|
|
|
1,735
|
|
|
908
|
|
|
827
|
|
|
|
$
|
4,566
|
|
$
|
3,566
|
|
$
|
1,000
|
|
The
28%
increase in interest income is generally due to an increase in interest rates
on
investments and loans for the nine months ended September 30, 2006 compared
to
the same period in 2005.
Income
from tax credits from our Capco business decreased by $12,719,000 to $4,584,000
for the nine months ended September 30, 2006 from $17,303,000 for the nine
months ended September 30, 2005. In the current period the Company achieved
the
25% investment in the WNYIV Capco generating $746,000 in income from tax
credits. In the prior period, the Company achieved the 50% investment threshold
in both the WDC and WLA IV Capcos generating $9,259,000 and $4,636,000,
respectively, in income from tax credits. Offsetting this decrease is a net
increase of $470,000 from other Capcos who achieved investment benchmarks
in
prior periods.
Premium
income decreased by $897,000 to $2,448,000 for the nine months ended
September 30, 2006 from $3,345,000 for the nine months ended
September 30, 2005. The decrease in premium income was attributable to NSBF
selling 92 guaranteed loans in the nine months ended September 30, 2006,
aggregating $22,296,000 as compared to 121 loans sold aggregating $32,215,000
in
the same period for the prior year. The premiums recognized in connection
with
these sales were $1,767,000 for the nine months ended September 30, 2006 as
compared with $2,612,000 in the same period for the prior year.
In
addition, in the nine months ended September 30, 2006, NSBF sold $7,324,000
of
loans previously classified as held for investment as compared with $8,522,000
in the prior period, for aggregate proceeds of $7,650,000 and $8,827,000,
respectively. The carrying value above the amounts sold of $326,000 and $305,000
was recorded as premium income. Also, in connection with these sales, included
in premium income for the nine months ended September 30, 2006 and 2005 is
approximately $355,000 and $428,000, respectively, representing the allocated
portion of the remaining discount recorded at the time of loan origination.
Servicing
fee income related to SBA loans decreased by $18,000 to $1,459,000 for the
nine
months ended September 30, 2006 from $1,477,000 for the nine months ended
September 30, 2005. The decrease in servicing fee income was attributable
to reconciling certain discrepancies with the fiscal transfer agent regarding
the amounts owed participants. The amount of these discrepancies
approximated $169,000 and was offset by the average servicing portfolio’s growth
year over year. The average servicing portfolio for the nine months ending
September 30, 2006 was $148,000,000 as compared with an average of $136,000,000
for the nine months ending September 30, 2005
Other
income increased by $1,297,000 to $4,980,000 for the nine months ended
September 30, 2006 from $3,683,000 for the nine months ended
September 30, 2005. Other income for the nine months ended September 30,
2006 included $1,716,000 of revenues from Phoenix Development Group, which
provides services to and reconstruction of New Orleans, primarily in the
form of
temporary housing and related services, a gain on the sale of an investment
of
$1,706,000, and the recovery of an investment from two of our Capcos of $161,000
For the nine months ended September 30, 2005, other income included a $900,000
recovery of an investment in Merchant Data Systems received from a legal
settlement, $749,000 of equity earnings from Exponential Business Development,
L.P., as well as approximately $475,000 of other income from the settlement
of
loan recovery costs from the SBA.
Electronic
payment processing direct costs increased by $6,287,000 to $22,381,000 for
the
nine months ended September 30, 2006 from $16,094,000 for the nine months
ended September 30, 2005, an increase of 39%, which correlates to the
significant increase in this business.
Changes
in interest expense are summarized as follows:
(in
thousands)
|
|
2006
|
|
2005
|
|
Change
|
|
Capco
interest expense
|
|
$
|
9,845
|
|
$
|
9,024
|
|
$
|
821
|
|
NSBF
(SBA lender) interest expense
|
|
|
1,618
|
|
|
1,519
|
|
|
99
|
|
Other
interest expense
|
|
|
1,068
|
|
|
1,242
|
|
|
(174
|
)
|
|
|
$
|
12,531
|
|
$
|
11,785
|
|
$
|
746
|
|
The
increase in Capco expense relates to the two new Capcos formed in June and
December 2005 (WTXI and WNYV) which had a full nine months of expense in
2006.
The $99,000 increase in SBA interest expense is attributable to the increase
in
the prime rate as well as an increase in the lending rate. Under the previous
lines of credit with Deutsche Bank and Banco Popular, NSBF’s lending rate was
prime minus 50 basis points and prime, respectively. Under the current Line
of
Credit Agreement with GE, the weighted average lending rate is prime plus
58
basis points or Base LIBOR plus 283 basis points. These increases were offset
by
the decrease in the average outstanding lines of credit from $32,038,000
during
the nine months ended September 30, 2005 to $22,483,000 during the nine months
ended September 30, 2006.
Consulting,
payroll and benefits increased by $401,000 to $12,708,000 for the nine months
ended September 30, 2006 from $12,307,000 for the nine months ended
September 30, 2005.
Professional
fees increased by $711,000 to $6,153,000 for the nine months ended
September 30, 2006 from $5,442,000 for the nine months ended
September 30, 2005.
Depreciation
and amortization expense increased by $1,295,000 to $4,740,000 for the nine
months ended September 30, 2006 from $3,445,000 for the nine months ended
September 30, 2005. This is due to the purchase of $3,509,000 of fixed
assets since September 30, 2005.
Insurance
expense increased by $260,000 to $2,579,000 for the nine months ended
September 30, 2006 from $2,319,000 for the nine months ended
September 30, 2005. This increase is primarily due to the additional
insurance relating to the new Capcos formed in June and December 2005 (WTXI
and
WNYV, respectively).
Provision
for loan losses decreased by $1,778,000 to $405,000 for the nine months ended
September 30, 2006 from $2,183,000 for the nine months ended September 30,
2005.
This decrease was due to NSBF experiencing significant charge-offs in the
first
nine months of 2005, which required management to establish an additional
provision in order to maintain its allowance for loan losses at a level which
management believed adequately covered inherent losses in the existing loan
portfolio. NSBF’s charges-offs, in both the acquired CCC portfolio as well as
newly originated loans, were $301,000 in the nine months ended September
30,
2006 as compared to $1,340,000 in the comparable period in 2005. The higher
amount in 2005 was due to the completion of the liquidation process on certain
loans from the acquired CCC portfolio and unexpected credit events from the
acquired portfolio and newly originated loans.
Additionally,
in the third quarter of 2005, management recorded an additional $900,000
in
reserves, of which $300,000 was 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 economic conditions in 2005, 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.
Management’s
ongoing estimates of the allowance for loan losses are particularly affected
by
the changing composition of the loan portfolio over the last few years. The
loans acquired from CCC in December 2002, which are more seasoned than those
originated by NSBF, comprise 25% of total loans held for investment as of
September 30, 2006. Other portfolio characteristics, such as industry
concentrations and loan collateral, which also impacts management’s estimates of
the allowance for loan losses, have also changed since the acquisition. The
changing nature of the portfolio and the limited past loss experience on
the
newly originated portfolio has resulted in management’s estimates of the
allowance for loan losses being based more on subjective factors and less
on
empirically derived loss rates. Such estimates could differ from actual results,
which may have a material effect on the Company’s results of operations or
financial condition.
Other
expenses increased by $1,931,000 to $7,784,000 for the nine months ended
September 30, 2006 from $5,853,000 for the nine months ended September 30,
2005.
The
effective tax benefit and provision for the nine months ended September 30,
2006
and 2005 were 34% and 1,607%, respectively. In both years no tax benefit
was
recorded for the taxable losses of NSBF as it is not included in the
consolidated tax group. In addition, for the nine months ended September
30,
2005, Newtek had a permanent difference of $822,000, which further increased
the
effective rate.
Net
loss
increased by $5,180,000 resulting in a net loss of $6,069,000 for the nine
months ended September 30, 2006 from a net loss of $889,000 for the nine
months ended September 30, 2005, due to the decreases in revenue of
$220,000, increases in total expenses of $8,710,000 and a decreased benefit
from
minority interest of $301,000, offset by the net increase in the tax benefit
of
$4,051,000.
Comparison
of the three months ended September 30, 2006 and September 30,
2005
Revenues
increased by $1,173,000, or 5.7%, to $21,635,000 for the three months ended
September 30, 2006, from $20,462,000 for the three months ended September
30,
2005. Income from tax credits from our Capco business decreased by $4,601,000
to
$1,304,000 for the three months ended September 30, 2006 from $5,905,000
for the
three months ended September 30, 2005.
Electronic
payment processing revenue increased by $2,587,000, or 31%, to $11,022,000
for
the three months ended September 30, 2006 from $8,435,000 for the three months
ended September 30, 2005 due to the increase in electronic payment processing
customers. At September 30, 2006, we provided our payment services to over
12,300 customers across the United States, compared to 8,900 customers at
September 30, 2005, an increase of 38%. Gross total processing volume increased
by 42% to $545,000,000 for the three months ended September 30, 2006 from
$383,000,000 for the three months ended September 30, 2005.
Web
hosting income increased by $710,000, or 26%, to $3,479,000 for the three
months
ended September 30, 2006 from $2,769,000 for the three months ended
September 30, 2005. The increase is due to the number of customers the
Company provided services to and an increase in dedicated hosting customers
which generate higher revenue per customer. At September 30, 2006 and 2005,
CrystalTech was providing services to 55,000 and 43,000 client accounts,
respectively.
NSBF
(SBA
Lender) interest income represents earnings on SBA loan receivables. Other
interest income consists of investment income on money market accounts,
certificate of deposits, U.S. treasury notes, marketable securities, non-cash
accretions of structured products and interest income on qualified investments.
Interest income decreased by $7,000 to $1,230,000 for the three months ended
September 30, 2006 from $1,237,000 for the three months ended September 30,
2005.
Income
from tax credits from our Capco business decreased by $4,601,000 to $1,304,000
for the three months ended September 30, 2006 from $5,905,000 for the three
months ended September 30, 2005. In the prior period, the Company achieved
the
investment threshold in the Wilshire Louisiana IV Capco program generating
$4,676,000 in income from tax credits. Offsetting this decrease, is a net
increase of $75,000 from other Capcos recording income tax credit accretions
in
the current period compared to the prior period.
Premium
income increased by $244,000 to $1,071,000 for the three months ended
September 30, 2006 from $827,000 for the three months ended
September 30, 2005. The increase in premium income was attributable to NSBF
selling $4,510,000 of loans previously classified as held for investment
as
compared with $2,458,000 in the same period in 2005, for aggregate proceeds
of
$4,690,000 and $2,513,000, respectively. The carrying value above the amounts
sold of $180,000 and $55,000 was recorded as premium income. Also, in connection
with these sales, included in premium income for the three months ended
September 30, 2006 and 2005 is $335,000 and $91,000, respectively, representing
the allocated portion of the remaining discount recorded at the time of loan
origination. This increase in premium recognized was offset by NSBF selling
32
guaranteed loans in the three months ended September 30, 2006, aggregating
$7,970,000 as compared to 37 loans sold aggregating $9,276,000 in the same
period for the prior year. The premiums recognized in connection with these
sales were $556,000 for the three months ended September 30, 2006 as
compared with $681,000 in the same period for the prior year.
Servicing
fee income related to SBA loans decreased by $66,000 to $473,000 for the
three
months ended September 30, 2006 from $539,000 for the three months ended
September 30, 2005. The decrease in servicing fee income was attributable
to reconciling certain discrepancies with the fiscal transfer agent regarding
the amounts owed participants as well as the average servicing portfolio’s
decrease year over year. The amount of these discrepancies approximated
$34,000. The average servicing portfolio for the three months ending September
30, 2006 was $144,000,000 as compared with an average of $147,000,000 for
the
three months ending September 30, 2005.
Other
income increased by $2,369,000 to $2,846,000 for the three months ended
September 30, 2006 from $477,000 for the three months ended
September 30, 2005. Other income for the three months ended September 30,
2006 included $143,000 of revenues from Phoenix Development Group, a gain
on the
sale of an investment of $1,706,000 and the recovery of an investment from
two
of our Capcos of $161,000.
Electronic
payment processing direct costs increased by $1,776,000 to $7,919,000 for
the
three months ended September 30, 2006 from $6,143,000 for the three months
ended September 30, 2005, an increase of 29%, which correlates to the
significant increase in this business.
Interest
expense decreased by $621,000 to $3,587,000 for the three months ended September
30, 2006 from $4,208,000 for the three months ended September 30, 2005. Capco
interest expense increased due to the two new Capcos formed in June and December
2005 (WTXI and WNYV) which had a full three months of expense in 2006. Other
interest expense decreased due to prepayments on the TICC debt as well as
payments on the notes payable - insurance during the year. A decrease in
SBA
interest expense is attributable to the average outstanding lines of credit
decreasing from $28,109,000 during the three months ended September 30, 2005
to
$18,671,000 during the three months ended September 30, 2006. This was partially
offset by the increase in the prime rate as well as an increase in the lending
rate. Under the previous lines of credit with Deutsche Bank and Banco Popular,
NSBF’s lending rate was prime minus 50 basis points and prime, respectively.
Under the current credit agreement with GE, the lending rate is prime plus
75
basis points or Base LIBOR plus 300 basis points.
Consulting,
payroll and benefits increased by $377,000 to $4,373,000 for the three months
ended September 30, 2006 from $3,996,000 for the three months ended
September 30, 2005.
Professional
fees increased by $231,000 to $2,133,000 for the three months ended
September 30, 2006 from $1,902,000 for the three months ended
September 30, 2005.
Depreciation
and amortization expense increased by $549,000 to $1,720,000 for the three
months ended September 30, 2006 from $1,171,000 for the three months ended
September 30, 2005. This is due to the purchase of $3,509,000 of fixed
assets since September 30, 2005.
Insurance
expense decreased by $66,000 to $790,000 for the three months ended
September 30, 2006 from $856,000 for the three months ended
September 30, 2005.
Provision
for loan losses decreased by $1,031,000 to $51,000 for the three months ended
September 30, 2006 from $1,082,000 for the three months ended September 30,
2005. This decrease was due to NSBF’s management recording an additional
$900,000 in reserves in 2005, of which $300,000 was 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 economic conditions in 2005, 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.
Management’s
ongoing estimates of the allowance for loan losses are particularly affected
by
the changing composition of the loan portfolio over the last few years. The
loans acquired from CCC in December 2002, which are more seasoned than those
originated by NSBF, comprise 25% of total loans held for investment as of
September 30, 2006. Other portfolio characteristics, such as industry
concentrations and loan collateral, which also impacts management’s estimates of
the allowance for loan losses, have also changed since the acquisition. The
changing nature of the portfolio and the limited past loss experience on
the
newly originated portfolio has resulted in management’s estimates of the
allowance for loan losses being based more on subjective factors and less
on
empirically derived loss rates. Such estimates could differ from actual results,
which may have a material effect on the Company’s results of operations or
financial condition.
Other
expenses increased by $548,000 to $2,846,000 for the three months ended
September 30, 2006 from $2,298,000 for the three months ended
September 30, 2005.
The
effective tax benefit for the three months ended September 30, 2006 and 2005
were 39% and 5%, respectively. In both years no tax benefit was recorded
for the
taxable losses of NSBF as it is not included in the consolidated tax group.
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.
Net
loss
decreased by $923,000, or 47%, resulting in a net loss of $1,054,000 for
the three months ended September 30, 2006 from a net loss of $1,977,000 for
the three months ended September 30, 2005, due to the increases in revenue
of $1,174,000, increases in total expenses of $628,000 and a decreased benefit
from minority interest of $188,000, offset by the net increase in the tax
benefit of $565,000.
Our
operating businesses are dependent on the health of the small- and medium-sized
segments of the U.S. economy. The continuing rise in interest rates,
along with the rise in commodity prices, could have a negative impact on
consumer spending which could adversely impact our small business customers.
This could also negatively impact the value of commercial and residential
real
estate, which could adversely impact the loan portfolio of our SBA Lending
segment. The inverted yield curve has also made it difficult to originate
prime
based floating rate SBA loans in our SBA lending segment.
Critical
Accounting Policies and Estimates:
The
Company’s significant accounting policies are described in Note 1 of the Notes
to Consolidated Financial Statements included in its Form 10-K for the fiscal
year ended December 31, 2005. 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, 2005. There have
been no significant changes in the Company’s existing accounting policies or
estimates since its fiscal year ended December 31, 2005.
Liquidity
and Capital Resources
(Dollars
in thousands)
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
1,453
|
|
$
|
(11,054
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
21,671
|
|
|
(3,406
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(16,914
|
)
|
|
17,257
|
|
Net
increase in cash and cash equivalents
|
|
|
6,210
|
|
|
2,797
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
23,940
|
|
|
50,922
|
|
Cash
and cash equivalents, end of period
|
|
$
|
30,150
|
|
$
|
53,719
|
|
Cash
requirements and liquidity needs are primarily funded through our capacity
to
borrow from our $75 million GE line of credit to originate and warehouse
the
guaranteed and unguaranteed portion of loans of our SBA lending unit and
available cash and cash equivalents. The availability of the lending facility
is
subject to the compliance with certain covenants and collateral requirements
as
set forth in the agreement. At September 30, 2006, our unused sources of
liquidity consisted of unrestricted cash and cash equivalents of $30,150,000
and
$3,677,000 available through the GE lending facility.
In
addition, the Company held $4,825,000 in U.S. Treasury Notes which are
classified as held for sale and could be converted to cash and cash equivalents.
Restricted cash totaling $11,229,000 which is held in Capcos can be used
in
managing and operating the Capcos, making qualified investments, to repay
debt
obligations and for the payment of income taxes.
Net
cash
used in operating activities is affected by noncash revenues and expenses
associated with our Capco segments. In the period ended September 30, 2006,
noncash interest accretion associated with notes payable in credits in lieu of
cash totaled $9,845,000 while the noncash expensing of insurance purchased
at
the time Capcos were formed totaled $2,227,000. This offset noncash income
from
tax credits of $4,584,000, thereby generating a noncash loss of $7,488,000.
In
2005, interest accretion totaled $9,336,000, the expensing of insurance totaled
$1,017,000 and income from tax credits totaled $17,303,000, thereby generating
noncash income of $6,950,000.
Net
cash
provided by investing activities primarily includes the purchase or sale
of
fixed assets and customer accounts, activity regarding the unguaranteed portions
of SBA loans and changes in restricted cash and investments. During 2006,
cash
was used to purchase $2,099,000 in fixed assets primarily to support increased
customers in our web hosting segment and to acquire $2,755,000 in customer
merchant accounts. A net decrease in the unguaranteed portion of SBA loans
provided $5,829,000. We also received net proceeds of $13,973,000 from the
sale
of certificates of deposit and marketable securities and $4,675,000 through
a
reduction in restricted cash held by our Capcos. In addition, cash proceeds
of
$2,094,000 were received from the sale of an Investment in a Qualified Business.
Net
cash
used in financing activities primarily includes changes in notes payable
-
insurance, the proceeds of which were used to finance Capco activities, notes
payable - other which were funds borrowed by CrystalTech Web Hosting, Inc.
from
TICC and the GE line of credit which is the lending facility for our SBA
lending
operation.
Notes
payable-insurance repayments were $1,938,000 in 2006 and $2,776,000 in 2005.
In
2005, the Company borrowed $8,000,000 from TICC, $6,600,000 of which was
prepaid
through September 30, 2006. In 2006 Phoenix Development Group repaid $1,685,000
in notes payable-other. In the same period last year, $520,000 of notes payable
- other was repaid to the former stockholders of a subsidiary. The GE line
of
credit payable decreased by $6,679,000 in 2006 and by $4,267,000 in 2005.
Historically
Newtek has funded its operations through the issuance of notes to insurance
companies through the Capco programs. We do not believe there are any new
Capco
programs currently being formed and as such are not anticipating any cash
flow
from new Capco programs for the foreseeable future.
We
believe our operating cash flow, available borrowing capacity, existing cash
and
cash equivalents and other investments should provide adequate funds for
continuing operations, investments required under our Capco programs and
principal and interest payments on our debt.
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.
Newtek
does not undertake, and specifically disclaims, any obligation to publicly
release the results of revisions which may be made to forward-looking statements
to reflect the occurrence of anticipated or unanticipated events or
circumstances after such statements.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
All
of
our business activities contain elements of risk. We consider the
principal types of risk to be fluctuations in interest rates and loan portfolio
valuations. We consider the management of risk essential to conducting our
businesses. Accordingly, risk management systems and procedures are
designed to identify and analyze our risks, to set appropriate policies and
limits and to continually monitor these risks and limits by means of reliable
administrative and information systems and other policies and
programs.
Because
Newtek Small Business Finance, Inc., our SBA lender, borrows money to make
loans
and investments, our net operating income is dependent upon the difference
between the rate at which we borrow funds and the rate at which we invest
these
funds. The Company had approximately $14,609,000 at September 30, 2006
outstanding on the GE line of credit. Interest rates on such notes are variable
at prime plus 0.75 or base LIBOR plus 3.00%. As a result, there can be no
assurance that a significant change in market interest rates will not have
a
material adverse effect on our interest income. In periods of sharply
rising interest rates, our cost of funds would increase, which would reduce
our
net operating income. We have analyzed the potential impact of changes in
interest rates on interest income net of interest expense. Assuming that
the balance sheet were to remain constant and no actions were taken to alter
the
existing interest rate sensitivity, a hypothetical immediate 1% change in
interest rates would have the effect of a net increase (decrease) in assets
by
less than 1% for the first nine months of 2006. 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 a 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.
Additionally,
we do not have significant exposure to changing interest rates on invested
cash
and cash equivalents, U.S. Treasury notes and marketable securities which
was
approximately $47,533,000 and $62,506,000 at September 30, 2006 and December
31,
2005, respectively. Newtek invests cash mainly in money market accounts and
other investment-grade securities and does not purchase or hold derivative
financial instruments for trading purposes.
Item
4. Controls and Procedures.
(a) |
Evaluation
of Disclosure Controls and Procedures.
As of the end of the period covered by this report, our management,
under
the supervision and with the participation of our Chief Executive
Officer
and Chief Financial Officer, evaluated the effectiveness of the
design and
operation of our disclosure controls and procedures pursuant to
Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer have concluded that our disclosure
controls
and procedures as of the end of the period covered by this report
have
been designed and are functioning effectively to provide reasonable
assurance that the information we (including our consolidated
subsidiaries) are required to disclose in reports filed under the
Exchange
Act is recorded, processed, summarized and reported within the
time
periods specified in the Securities and Exchange Commission’s rules and
forms. However, because we had previously determined the existence of
a material weakness in our disclosure controls and procedures as
of
December 31, 2005 and March 31, 2006, and despite the remediation
efforts
discussed below, and given the relatively short time since the
remediation
efforts have taken place,
there can be no assurance that we have identified and corrected
all
matters which would constitute, or might lead to future, disclosure
control weaknesses.
|
(b)
|
Changes
in Internal Controls. We
have placed significant emphasis on remediation of the previously
disclosed material weakness and have added a senior legal officer
primarily responsible for internal control development and three
professional positions in our accounting and finance staff during
the
quarters ended June 30, 2006 and September 30,
2006.
|
(c)
|
Limitations.
A
control system, no matter how well designed and operated, can provide
only
reasonable, not absolute, assurances that the control system’s objectives
will be met. Further, the design of a control system must reflect
the fact
that there are resource constraints, and the benefits of controls
must be
considered relative to their costs. Because of the inherent limitations
in
all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within
the Company have been detected. These inherent limitations include
the
realities that judgments in decision-making can be faulty, and
that
breakdowns can occur because of simple errors or mistakes. Controls
can
also be circumvented by the individual acts of some persons, by
collusion
of two or more people, or by management override of the controls.
The
design of any system of controls is based in part upon certain
assumptions
about the likelihood of future events, and there can be no assurance
that
any design will succeed in achieving its stated goals under all
potential
future conditions. Over time, controls may become inadequate because
of
changes in conditions or deterioration in the degree of compliance
with
its policies or procedures. Because of the inherent limitations
in a
cost-effective control system, misstatements due to error or fraud
may
occur and not be detected. We periodically evaluate our internal
controls
and make changes to improve them.
|
PART
II - OTHER INFORMATION
Item
2. Unregistered Sales of Equity Securities
(a) On
September 8, 2006, the Company issued 292,397 unregistered common shares
to
Tracy A. Schmidt, President and Chief Operating Officer of UPS Wisconsin
with a
market valuation as of that date of approximately $500,000. The shares were
issued in consideration for the exchange of the purchase of 3% of the equity
of
NMS-WI in reliance on Section 4(2) of the Securities Act of 1933, as
amended.
On
September 1, 2006, the Company issued 277,778 unregistered common shares
to Tim
Uzzanti valued at that date at $475,000 pursuant to the terms of the
CryastalTech Acquisition Agreement. The shares were issued in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
On
September 20, 2006, pursuant to the terms of the Company’s directors’
compensation program, the Company issued to its four independent directors
a
total of 23,025 unregistered common shares with a market valuation as of
that
date of $42,250. The shares were issued in exchange for the services of the
directors on the Board of Directors and its committees in reliance on Section
4(2) of the Securities Act of 1933, as amended.
(b) In
March
2006, the Newtek Board of Directors adopted a stock buy-back program authorizing
management to enter the market to re-purchase up to 1,000,000 of the Company's
common shares. As of September 30, 2006, the Company purchased 31,500 treasury
shares under that authorization.
The
following table summarizes the repurchase of common stock under the stock
buy-back program:
Period
|
|
Total
number of
shares
purchased
(1)
|
|
Average
price paid per share
|
|
Total
number of shares purchased as part of publicly announced plans
or
programs
|
|
Maximum
number of shares that may yet be purchased under the
program
|
|
8-1-06
through
8-31-06
|
|
|
31,500
|
|
$
|
1.70
|
|
|
31,500
|
|
|
968,500
|
|
(1)
All
shares were purchased pursuant to the publicly announced Stock Buy-Back Program,
which was effective as of March 2006 and has no set expiration. We are
authorized to purchase up to 1 million shares of our common stock under the
Program.
Item
4.
Submission
of Matters to a Vote of Security Holders.
The
results of the Annual Shareholders’ Meeting on June 23, 2006, were previously
reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2006 filed July 14, 2006.
Item
6. Exhibits
Exhibit
No.
|
|
Description
|
31.1
|
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
|
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, 2006 |
By: |
/s/ Barry
Sloane
|
|
Barry
Sloane |
|
Chairman
of the Board, Chief Executive Officer and
Secretary
|
|
|
|
Date: November
14, 2006 |
By: |
/s/ Michael
J. Holden |
|
Michael
J. Holden, Treasurer,
|
|
Chief
Financial Officer, Chief Accounting
Officer
|