<PAGE>
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 June 30, 2000
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-16123
-----------------
NEWTEK CAPITAL, INC.
(Exact name of registrant as specified in its charter)
New York 11-3504638
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 Hempstead Turnpike, East Meadow, New York 11554 10022
---------------------------------------------------- --------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 390-2260
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes x No
------ -------
As of September 20, 2000, 20,981,861 shares of Common Stock were issued
and outstanding.
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Combined Balance Sheets (Unaudited) as of June 30, 2000
and December 31, 1999................................................................... 2
Combined Statements of Operations (Unaudited) for the Three-Month and Six-Month
Periods Ended June 30, 2000 and 1999.................................................... 3
Combined Statements of Changes in Members' Equity (Unaudited) for the Three-Month
and Six-Month Periods Ended June 30, 2000 and 1999...................................... 4
Combined Statements of Cash Flows (Unaudited) for the Three-Month and Six-Month
Periods Ended June 30, 2000 and 1999.................................................... 5
Notes to Unaudited Combined Financial Statements................................................. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................................................... 15
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8-K................................................................ 15
SIGNATURES............................................................................................... 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------ -----------------
<S> <C>
ASSETS (unaudited)
------
Cash and cash equivalents $25,049,536 $25,454,016
Credits in lieu of cash 11,180,348 10,963,593
Investments in Qualified Businesses 11,715,823 8,275,000
Other investments 469,750 -
Structured insurance product 2,482,354 1,759,493
Prepaid insurance 8,485,836 7,971,411
Prepaid expenses and other assets 183,482 212,802
Furniture, fixtures and equipment, net 35,489 8,714
-------------- ------------
Total assets $59,602,618 $54,645,029
============== ============
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
Liabilities:
Accounts payable and accrued expenses $ 704,351 $ 1,199,479
Notes payable - certified investors 3,873,596 2,618,716
Notes payable - insurance 5,500,000 4,000,000
Note payable - bank - 725,358
Notes payable- other 602,750 250,000
Loans payable - members 351,000 21,000
Interest payable 35,959,032 31,583,438
-------------- ------------
Total liabilities 46,990,729 40,397,991
Minority interest 4,809,970 5,938,111
Commitments and contingencies
Members' equity 7,801,919 8,308,927
-------------- ------------
Total liabilities and members' equity $59,602,618 $54,645,029
============== ============
</TABLE>
See accompanying notes to these combined financial statements.
2
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------
2000 1999 2000 1999
-------------- ------------- ------------- -----------
<S> <C>
Revenue:
Income from credits in lieu of cash $ 106,487 $ 5,157 $ 216,756 $ 360,330
Consulting fee income 12,892 34,297 27,192 69,677
Interest and dividend income 548,519 141,133 1,024,938 188,007
------------ ----------- ------------ -----------
Total revenue 667,898 180,587 1,268,886 618,014
------------ ----------- ------------ -----------
Expenses:
General and administrative 1,293,876 295,702 2,094,428 417,481
Interest 1,343,994 600,438 2,501,473 668,908
------------ ----------- ------------ -----------
Total expense 2,637,870 896,140 4,595,901 1,086,389
------------ ----------- ------------ -----------
Loss before other than temporary decline
in value of investments, extraordinary gain (loss)
on defeasance of debt, and minority interest (1,969,972) (715,553) (3,327,015) (468,375)
Other than temporary decline
in investments (600,000) - (600,000) -
Extraordinary gain (loss) on
defeasance of debt 431,881 (16,819) 431,881 (16,819)
------------ ----------- ------------ -----------
Loss before minority interest (2,138,091) (732,372) (3,495,134) (485,194)
Minority interest in loss 749,527 374,268 1,294,141 342,718
------------ ----------- ------------ -----------
Net loss $ (1,388,564) $ (358,104) $ (2,200,993) $ (142,476)
============ =========== ============ ===========
</TABLE>
See accompanying notes to these combined financial statements.
3
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CHANGES IN MEMBERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------ ------------ ------------
<S> <C>
Members' equity - beginning of period $ 8,896,498 $1,046,183 $ 8,308,927 $ 840,555
Issuance of common stock 224,992 - 1,849,992 -
Members' distributions (225,000) (9,007) (450,000) (19,007)
Issuance of warrants 459,369 2,249,569 459,369 2,249,569
Net loss before allocation
to minority interest (2,138,091) (732,372) (3,495,134) (485,194)
Less: minority interest 584,151 (698,416) 1,128,765 (729,966)
----------- ---------- ----------- ----------
Members' equity - end of period $ 7,801,919 $1,855,957 $ 7,801,919 $1,855,957
=========== ========== =========== ==========
</TABLE>
See accompanying notes to these combined financial statements.
4
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2000 1999 2000 1999
--------------- -------------- ------------- -------------
<S> <C>
Cash flows from operating activities:
Net loss $ (1,388,564) $ (358,104) $(2,200,993) $ (142,476)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary gain (loss) on defeasance
of debt (431,881) 16,819 (431,881) 16,819
Other than temporary decline
in value of investments 600,000 - 600,000 -
Income from tax credits (106,487) (5,157) (216,756) (360,330)
Depreciation and other amortization 1,062 568 2,123 1,137
Accretion of interest income (35,695) (25,734) (61,429) (51,467)
Accretion of interest expense 1,183,997 600,438 2,324,682 668,908
Minority interest included in
loss (749,527) (374,268) (1,294,141) (342,718)
Changes in assets and liabilities:
Prepaid insurance (667,042) (3,353,828) (458,405) (3,349,886)
Prepaid expenses and other assets 25,304 46,642 25,570 55,962
Accounts payable and accrued expenses 364,358 101,363 (516,282) 120,603
----------- ------------ ----------- ------------
Net cash used in operating activities (1,204,475) (3,351,261) (2,227,512) (3,383,448)
----------- ------------ ----------- ------------
Cash flows from investing activities:
Purchase of structured insurance product (661,432) - (661,432) -
Investments in Qualified Businesses (2,415,065) - (6,791,942) (300,000)
Return of principal - qualified investments 2,586,120 - 2,751,120 -
Other investments (22,000) - (242,000) -
Return of principal - other investments 125,000 - 125,000 -
Purchase of machinery and equipment (19,176) - (28,898) -
----------- ------------ ----------- ------------
Net cash used in investing activities (406,553) - (4,848,152) (300,000)
----------- ------------ ----------- ------------
</TABLE>
See accompanying notes to these combined financial statements.
5
<PAGE>
NEWTEK CAPITAL, INC. AND SUBSIDIARIES
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------
2000 1999 2000 1999
--------------- ------------ ---------- -----------
<S> <C>
Cash flows from financing activities:
Payment of note payable - bank - - (725,358) -
Proceeds from issuance of note payable -
Certified Investors 1,251,630 - 1,251,630 -
Proceeds from issuance of long-term debt 7,284,518 37,530,430 7,284,518 37,530,430
Payments for defeasance of long-term debt (3,228,175) (23,127,927) (3,228,175) (23,127,927)
Issuance of warrants 403,348 1,700,371 403,348 1,700,371
Payments for deferred financing costs (44,771) (163,221) (44,771) (163,221)
Net proceeds from issuance of common stock 224,992 - 1,849,992 -
Distributions to members (225,000) (9,007) (450,000) (19,007)
Loans payable - members - - 330,000 -
----------- ------------ ------------ -----------
Net cash provided by
financing activities 5,666,542 15,930,646 6,671,184 15,920,646
----------- ------------ ------------ -----------
Net increase (decrease) in cash
and cash equivalents 4,055,514 12,579,385 (404,480) 12,237,198
Cash and cash equivalents -
beginning of period 20,994,022 1,224,951 25,454,016 1,567,138
----------- ------------ ------------ -----------
Cash and cash equivalents - end of period $25,049,536 13,804,336 $25,049,536 $13,804,336
=========== ============ ============ ===========
Supplemental disclosure of non-cash financing activities:
Issuance of the following in partial payment for insurance:
Notes $ 1,500,000 $ - $ 1,500,000 $ -
=========== ============ ============ ===========
Warrants $ 56,020 $ 549,198 $ 56,020 $ 549,198
=========== ============ ============ ===========
</TABLE>
See accompanying notes to these combined financial statements.
6
<PAGE>
Notes to UNAUDITED COMBINED Financial Statements
Note 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The following entities represent the principal businesses of Newtek Capital,
Inc. and Subsidiaries (the "Company"). Their financial statements are presented
on a combined basis due to common ownership and management of the underlying
entities, which merged into the Company in September 2000 (see Note 7).
Accordingly, they are termed as subsidiaries rather than affiliates. The Company
was formed on June 29, 1999 under the name Whitestone Holdings, Inc. and changed
its name to Newtek Capital, Inc. on January 18, 2000. The subsidiaries are: BJB
Holdings, Inc. ("BJB"), The Whitestone Group, LLC ("TWG"), Wilshire Advisers,
LLC ("WA") and Wilshire NY Advisers II ("WAII"), certified capital companies
("Capco") in New York, Wilshire Partners, LLC ("WP"), a Capco in Florida,
Wilshire Investors, LLC ("WI"), a Capco in Wisconsin, and Wilshire Louisiana
Advisers, LLC ("WLA"), a Capco in Louisiana (the Capco entities are,
collectively, the "Capcos"). TWG acts as an investment adviser and manager to
the aforementioned Capcos as well as a merchant bank and provides investment
banking services including general business consulting services and strategic
planning, due diligence and merger and acquisition analysis and litigation
support services. All significant intercompany balances and transactions are
eliminated in combination.
The following is a summary of each Capco, state of certification and
date of certification:
Capco State of Certification Date of Certification
----- ---------------------- ---------------------
WA New York May 1998
WP Florida December 1998
WI Wisconsin October 1999
WLA Louisiana October 1999
WA II New York April 2000
In general, the Capcos issue debt and equity instruments, generally warrants
("Certified Capital"), to insurance company investors ("Certified Investors").
The Capcos then make targeted investments, ("Investments in Qualified
Businesses", as defined under the respective state statutes), with the Certified
Capital raised. Such investments may be accounted for as either consolidated
subsidiaries, under the equity method or cost method of accounting, or as notes
receivable, depending upon the nature of the investment and the Company's and/or
the Capco's ability to control or otherwise exercise significant influence over
the investee. Each Capco has a contractual arrangement with the particular state
that legally entitles the Capco to receive (or, earn) tax credits from the state
upon satisfying quantified, defined investment percentage thresholds and time
requirements. In order for the Capcos to maintain the validity of the tax
credits and their state-issued certifications, the Capcos must make Investments
in Qualified Businesses in accordance with these requirements. Each Capco also
has separate, legal contractual arrangements with the Certified Investors
obligating the Capco to pay interest on the aforementioned debt instruments
whether or not it meets the statutory requirements for Investments in Qualified
Businesses. The Capco can satisfy this interest payment, at the Capco's
discretion, by delivering tax credits in lieu of paying cash. The Capcos legally
have the right to deliver the tax credits to the Certified Investors. The
Certified Investors legally have the right to receive and use the tax credits
and would, in turn, use these tax credits to reduce their respective state tax
liabilities in an amount generally between 100% and 110% of their certified
investment. The tax credits can be utilized over a ten-year period at a rate of
10% per year and in some instances are transferable and can be carried forward.
7
<PAGE>
The accompanying financial statements have been prepared without audit and do
not include all footnotes and disclosures required under generally accepted
accounting principles. Management believes that the results herein reflect all
adjustments which are necessary to state fairly the results and current
financial condition of the Company for the respective periods. All such
adjustments reflected herein are of a normal, recurring nature. These financial
statements should be read in conjunction with the Company's financial statements
for its year ended December 31, 1999 contained in its Registration Statement on
Form S-4 (SEC File No. 333-43550).
Note 2 - Private Placement of Common Stock
In the second quarter of 2000, the Company sold 32,142 shares of common stock in
private transactions, with net proceeds totaling approximately $225,000.
Note 3 - InVESTMENTS IN QUALIFIED BUSINESSES
Investments in Qualified Businesses represent notes receivable (debt
investments) and investments in the equity of non-public companies. Debt
investments are accounted for as held-to-maturity securities and are recorded at
amortized cost, less any write-downs for other than temporary declines in the
value of such investments. Investments in the equity of non-public companies are
accounted for under the equity or cost method, as appropriate. The following
table is a summary of such investments as of June 30, 2000, shown separately
between their debt ($11,490,823) and equity ($225,000) components (for a total
non-consolidated Investment in Qualified Businesses of $11,715,823), and all
terms of each are summarized. There are no expiration dates on any of the
financial instruments, unless disclosed.
8
<PAGE>
<TABLE>
<CAPTION>
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Original
DEBT Maturity Principal Stated Principal Amount
Type Date of Investment Date Amount Interest Rate June 30 2000
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
<S> <C>
4G's Truck Renting Co., Inc. Debt 01/99 07/15/00 $ 300,000 6.50% $ 285,000
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
1-800GiftCertificate Debt 07/99 09/15/00 $ 300,000 8.75% $ 300,000
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Transworld Business Brokers, Debt 11/99 11/23/01 $ 350,000 6.00% $ 250,000
Inc.
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Transworld Business Brokers, Debt 11/99 11/23/01 $ 3,150,000 5.25% $ 3,150,000
Inc.
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Raising Cain Debt 3/00, 4/00, 5/00 Various $ 315,000 Prime + $ 49,744
1.00%
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Data-Tel of Louisiana Debt 03/00 Various $ 513,000 Prime + $ 78,978
1.00%
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Gino's Seafood Debt 3/00, 4/00 Various $ 517,942 Prime + $ 86,692
1.00%
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Steve Kent Trucking Debt 3/00, 5/00 Various $ 747,000 Prime + $ 124,458
1.00%
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Gerace Auto Parts Debt 4/00 Various $ 810,000 Prime + $ 134,449
1.00%
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Tari's School of Dance Debt 5/00 Various $ 189,000 Prime + $ 31,500
1.00%
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
CB Real Net Debt 02/01/00 Various $ 2,500,000 Various $ 2,500,000
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Down to Earth Technologies Debt 12/99 02/16/01 $ 500,000 9.00% $ 0
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Merchant Data Systems Sales Debt 10/99 04/15/01 $ 3,500,000 9.00% $ 3,500,000
and Marketing
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Multi-Media Distribution Corp. Debt 06/00 06/14/02 $ 1,000,000 10.00% $ 1,000,000
-------------------------------- ---------- ------------------- ------------ ----------------- -------------- ---------------------
Total Debt Investments $14,691,942 $11,490,823
=========== ===========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
EQUITY Limited
Liability
Company Original
Date of Type of Common Stock Membership Investment Cost Basis
Investment Investment Equivalents (1) Share Ratio Amount June 30, 2000
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
<S> <C>
Options for
Cedric Kushner Boxing, 11/17/98 Common Stock(2) 3 N/A $ 0 $ 0
Inc.
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Class A
1800GiftCertificate 07/15/99 Preferred Stock 3,159 N/A $ 2,604 $ 2,604
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Class B
1800GiftCertificate 07/15/99 Preferred Stock 113,140 N/A $ 22,396 $ 22,396
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Warrants for
CB Real Net 02/01/00 Membership NA 40.00% $ 0 $ 0
Interests(3)
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Merchant Data Systems Membership
Sales and Marketing 10/21/99 Interests in LLC NA 50.00% $ 0 $ 0
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Membership
BizBroker Net 11/23/99 Interests in LLC NA 50.00% $ 0 $ 0
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Membership
Down to Earth 12/15/99 Interests in LLC NA 50.00% $ 0 $ 0
Technologies
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Multi-Media Distribution Common Stock
Corp 6/14/00 66,000 N/A $ 200,000 $ 200,000
-------------------------- --------------- ------------------ ------------------- ---------------- -------------- -----------------
Total Equity Investments $ 225,000 $ 225,000
============= =================
Total Debt and Equity Investments $14,916,942 $11,715,823
============= =================
</TABLE>
(1) Common Stock Equivalents reflect conversion of all financial instruments
into common stock.
(2) Expires four years from date of investment and has a $.01 exercise price.
(3) Expires five years from date of investment and has a $.01 exercise price.
10
<PAGE>
Investments in notes receivable (debt investments) from affiliated companies
accounted for under the equity method amounted to $9,400,000 and $0 at June 30,
2000 and 1999, respectively. Additionally, the Company's investment in the
equity of each of these Qualified Businesses is zero at June 30, 2000. The
Company has not recorded its share of the losses in these Qualified Businesses
because its investment account is zero. The Company has not guaranteed any
obligation of these Qualified Businesses, and the Company is not otherwise
committed to provide further financial support for the Qualified Businesses. The
unaudited financial information of these Qualified Businesses is as follows:
<TABLE>
<CAPTION>
---------------- ------------------------------ --------------------------- ----------------------------- --------------------------
Merchant Data
Systems Sales BizBroker Net, Down to Earth CB Real Net,
and Marketing, LLC LLC Technologies, LLC LLC
---------------- ------------------------------ --------------------------- ----------------------------- --------------------------
Six Months Ended Six Months Ended Six Months Ended Six Months Ended
---------------- ------------------------------ --------------------------- ----------------------------- --------------------------
06/30/00 06/30/99 06/30/00 06/30/99 06/30/00 06/30/99 06/30/00 06/30/99
---------------- ----------------- ------------ -------------- ------------ --------------- ------------- ------------- ------------
<S> <C>
---------------- ----------------- ------------ --------------- ----------- --------------- ------------- ---------------- ---------
Revenue $ 113,151 -- $ 68,014 -- $ 429,030 $ 204,000 -- --
---------------- ----------------- ------------ --------------- ----------- --------------- ------------- ---------------- ---------
Expenses $ 207,521 -- $ 76,285 -- $ 534,577 $ 368,000 $ 86,489 --
---------------- ----------------- ------------ --------------- ----------- --------------- ------------- ---------------- ---------
Net loss $ (94,370) -- $ (8,271) -- $(105,547) $(164,700) $ (86,489) --
---------------- ----------------- ------------ --------------- ----------- --------------- ------------- ---------------- ---------
Assets $ 3,200,000 -- $ 3,010,406 -- $ 148,450 $ 194,232 $2,459,965 --
---------------- ----------------- ------------ --------------- ----------- --------------- ------------- ---------------- ---------
Liabilities $ 3,500,000 -- $ 3,150,000 -- $ 985,966 $ 800,304 $2,533,333 --
---------------- ----------------- ------------ --------------- ----------- --------------- ------------- ---------------- ---------
</TABLE>
Periodically, the Company evaluates each of its individual investments for
potential impairment in value. Should the Company determine that an impairment
exists and it is deemed to be other than temporary, the Company will write down
the recorded value of the asset to its estimated fair value and record a
corresponding charge in the statement of operations. At June 30, 2000, the
Company has determined that there is an other than temporary decline in the
value of its investments in debt instruments issued by Down To Earth
Technologies and Transworld Business Brokers, Inc. of $500,000 and $100,000,
respectively. Accordingly, at June 30, 2000 and for the three-month period then
ended, the Company has written down the value of these investments and recorded
a corresponding reduction of $600,000.
NOTE 4 - Formation of new capco
In April 2000 the Company received funding from Certified Investors of
approximately $7,690,000 for a newly formed CAPCO, Wilshire New York Advisers
II. In this connection, the Company issued notes and warrants to the Certified
Investors and allocated the proceeds received to such instruments.
NOTE 5 - EXTRAORDINARY GAIN ON DEFEASANCE OF DEBT
In connection with the transaction described in Note 4, the Company defeased the
notes issued to the Certified Investors. As a result, the Company recognized
income on the note premiums of $476,652 and wrote off the debt issuance costs of
$44,771, for a net gain of approximately $432,000. This gain has been classified
as an extraordinary item in the statement of operations. Because the Capcos are
LLCs (see Note 1), no related provision for income taxes has been recorded.
11
<PAGE>
NOTE 6 - additional funding for existing capco
In June 2000, one of the Company's Capcos received approximately $1,250,000 in
exchange for notes issued to Certified Investors.
NOTE 7 - Subsequent events
In September, the Company through one of its Capcos, invested $1,400,000 in
Starphire Technologies, a Florida based software/Internet development company.
On September 19, 2000, the Company completed its acquisition of REXX
Environmental Corp. On September 20, 2000, the Company's common stock began
trading on the American Stock Exchange under the symbol "NKC". The acquisition
of REXX was completed immediately following REXX's sale of Watkins Contracting,
Inc., its sole operating business. The sale of Watkins Contracting and the
acquisition of REXX by the Company were approved by REXX's shareholders on
September 19, 2000. Pursuant to the merger, REXX shareholders received one share
of the Company's common stock in exchange for each share of REXX common stock
held.
In addition, on the same date, the Company completed a similar transaction
whereby it acquired all of the 18,514,285 outstanding shares of BJB Holdings
Corp. common stock in exchange for an equal number of shares of the Company's
common stock. Prior to this transaction, all of the subsidiaries and Capcos of
the Company had been owned and operated by BJB Holdings Corp. The Company will,
effective as of September 20, 2000, consolidate the financial statements of the
underlying subsidiaries as described in Note 1 with its own. As a result, for
the quarter ending September 30, 2000, the Company expects to record a
significant tax liability in connection with this transaction.
On September 8, 2000, the Company and BJB Holdings Corp. authorized and
initiated a sale of up to 400,000 warrants for the sale of common stock at a
price of $4.99 per share, and exercisable at a price of $0.01 per share. The
sale of a total of 314,000 warrants of BJB Holdings, Inc. was concluded on
September 18, 2000 and the warrants, by their terms, were exchanged for an equal
number of warrants of the Company. The warrants must be exercised prior to the
end of October 2000, and the Company expects that 314,000 shares of the
Company's common stock will be issued with net proceeds of approximately $1.55
million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999
Revenues increased by approximately $490,000, to $670,000 for the three months
ended June 30, 2000, from $180,000 for the three months ended June 30, 1999.
Income from credits in lieu of cash increased by approximately $101,000. This
increase was attributable to the accretion of income from tax credits. Interest
and dividend income increased by approximately $410,000, to $550,000 for the
three months ended June 30, 2000, from $140,000 for the three months ended June
30, 1999. This increase was primarily due to the earnings on increased cash
balances from receipt of Certified Capital from July 1, 1999 to June 30, 2000.
General and administrative expenses increased by approximately $990,000 to
$1,290,000 for the three months ended June 30, 2000, from $300,000 for the three
months ended June 30, 1999, due to increased staffing and professional fees
12
<PAGE>
(legal and accounting) attributable to the increased size and number of Capcos.
Interest expense increased by approximately $740,000, to $1,340,000, for the
three months ended June 30, 2000, from $600,000 for the three months ended June
30, 1999, which was primarily attributable to notes issued to Certified
Investors in connection with the formation of additional Capcos.
Extraordinary gain/(loss) for the three months ended June 30, 2000 was
approximately $430,000, compared to $(20,000) for the three months ended June
30, 1999, due primarily to the $430,000 gain recognized on the defeasance of the
Company's liability of its second New York Capco (WAII) in April 2000.
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Revenues increased by approximately $650,000, to $1,270,000 for the six months
ended June 30, 2000, from $620,000 for the six months ended June 30, 1999.
Income from credits in lieu of cash decreased by approximately $140,000. This
decrease was attributable to the recognition of the tax credit revenue in the
first quarter of 1999 of approximately $360,000 due to the accretion of income
from tax credits. Interest and dividend income increased by approximately
$830,000, to $1,020,000 for the six months ended June 30, 2000, from $190,000
for the six months ended June 30, 1999. This increase was primarily due to the
earnings on increased cash balances from receipt of Certified Capital from July
1, 1999 to June 30, 2000. Consulting fee income decreased by approximately
$40,000 due to the decrease in consulting related activity.
General and administrative expenses increased by approximately $1,670,000, to
$2,090,000 for the six months ended June 30, 2000, from $420,000 for the six
months ended June 30, 1999, due to increased staffing and professional fees
(legal and accounting) attributable to the increased size and number of Capcos.
Interest expense increased by approximately $1,830,000, to $2,500,000 for the
six months ended June 30, 2000, from $670,000 for the six months ended June 30,
1999. Of such $2,500,000 interest expense, approximately $2,300,000 of non-cash
interest expense was attributable to notes issued to Certified Investors in
connection with the formation of additional Capcos.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations and those of its subsidiaries primarily
through the issuance of notes to Certified Investors through the Capco programs.
To date, the Company subsidiaries have received approximately $87,000,000 in
proceeds from the issuance of long-term debt and warrants through the Capco
programs. The Company's principal capital requirements have been to fund
acquisitions and working capital needs resulting from increased managing and
developing activities of its partner companies.
Net cash used in operating activities for the six months ended June 30, 2000 of
approximately $2,227,000 resulted primarily from net losses of $2,201,000,
offset by the non-cash interest expense of approximately $2,320,000 and non-cash
gain of approximately $431,000, and the non-cash $600,000 other than temporary
decline in value of investments. It was also partially offset by the
approximately $1,300,000 portion of the minority interest loss, and the
approximately $220,000 in non-cash income from tax credits. In addition, the
Company had a decrease in components of working capital of $950,000 (primarily
the increase in prepaid insurance of $460,000 and a decrease in accounts payable
and accruals of $520,000).
Net cash used in investing activities for the six months ended June 30, 2000 of
approximately $4,848,000 resulted primarily from repayments on the Company's
loans of $2,751,120, offset by approximately $6,800,000 in additional
Investments in Qualified Businesses made in the period. The Company also made
$242,000 in other investments and paid approximately $660,000 for the purchase
of a structured insurance product.
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Net cash provided by financing activities for the six months ended June 30, 2000
was approximately $5,650,000, primarily attributable to the approximately
$3,500,000 in net proceeds from the issuance of long term debt and approximately
$1,850,000 ($225,000 in the second quarter of 2000) in private placement of the
stock of one of the subsidiaries, BJB Holdings Corp., during the six months
ended June 30, 2000.
The Company believes that its cash and cash equivalents, its anticipated cash
flow from operations and its ability to access private and public debt and
equity markets will provide it with sufficient liquidity to meet its short and
long-term capital needs.
In the second quarter of 2000 the Louisiana Capco made approximately $1,170,000
of loans to Louisiana companies, of which 75% (approximately $877,000) is
guaranteed by the U.S. Small Business Administration and is expected to be sold
in the secondary market and settle within 90 days of the loan closings. The
loans were primarily made to small companies in need of expansion capital, with
terms of prime plus one percent (net of servicing fee), amortizing between
approximately five and twenty years.
On June 14, 2000, the Florida Capco entered into a two-year loan agreement in
the amount of $1,000,000 with Multi Media Distribution Corp., with an annual
interest rate of 10%. Multi Media Distribution Corp. is an Internet seller of
closeout merchandise, such as videos and DVD products. In addition, the Florida
Capco purchased a five-year warrant for 66,000 shares of common stock in the
company for $200,000, with an exercise price of 1 cent per share.
All investments made by the Company's Capcos are Investments in Qualified
Businesses, and those where the Company holds a majority or
primarily-controlling equity interest are "Partner Companies." Other investments
of the Company and its Capcos, that are not in Partner Companies, were, at June
30, 2000, a total of $469,750.
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 the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "expect," "seek," and "intend" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement is made. Such forward-looking statements are within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements may
include, but are not limited to, projections of income or loss, expenditures,
acquisitions, plans for future operations, financing needs or plans relating to
services of the Company, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by or
underlying the forward-looking statements.
The Company does not undertake, and specifically disclaims, any obligation to
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 the date of such statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company monitors whether material changes in market risk have
occurred since year-end. Although the Company is unable to predict future
changes in market rates and their impact on the Company's profitability, the
Company does not believe that a decrease in market rates of interest would have
a material effect on its assets.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule (SEC use only)
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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 CAPITAL, INC.
Date: September 27, 2000 /s/ Barry Sloane
-----------------
Barry Sloane
Chairman of the Board, Chief
Executive Officer and Secretary
Date: September 27, 2000 /s/ Brian A. Wasserman
-----------------------
Brian A. Wasserman
Treasurer, Chief Financial Officer
and Director
Date: September 27, 2000 /s/ Giuseppe Soccodato
-----------------------
Giuseppe Soccodato
Controller and Chief Accounting
Officer
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