Edgar Filing: NEWTEK BUSINESS SERVICES INC

NEWTEK BUSINESS SERVICES

PROSPECTUS

Filed pursuant to Rule 424(b)(4)

SEC File No. 333-115615

6,000,000 Shares

LOGO

Common Stock

We are offering 6,000,000 shares of our common stock. Our common stock is traded on the Nasdaq National Market under the symbol “NKBS.” On June 28, 2004, the last reported sale price of our common stock was $3.99 per share.

This prospectus contains important information that you should know before investing. Please read it before you invest and keep it for future reference.

Investing in our common stock involves risks. See “ Risk Factors” beginning on page 7.


	Per Share		Total ⁽¹⁾
Public offering price	$	3.60	$	21,600,000
Underwriting discount	$	0.216	$	1,296,000
Proceeds, before expenses, to us⁽²⁾	$	3.384	$	20,304,000

⁽¹⁾

We and the selling shareholders named in this prospectus have granted the underwriters a 30-day option to purchase up to an additional 900,000 shares of our common stock at the public offering price, less the underwriting discount. If this over-allotment option is exercised in full, the total public offering price will be $24,840,000, the total underwriting discount will be $1,490,400 and the total proceeds, before expenses, to us would be $23,349,600. For all shares sold pursuant to the over-allotment option, 50% will be sold by us on a first priority basis; and 50% will be sold by three of our principal shareholders, all of whom are executive officers, on the same terms and conditions as us, but on a second priority basis.

⁽²⁾	We estimate that we will incur approximately $955,000 in offering expenses in connection with this offering.

This is a firm commitment underwriting. The underwriters have the option to purchase up to 450,000 shares of common stock from us and thereafter an additional 450,000 shares from the three selling shareholders on the same basis as the shares sold by us within 30 days from the date of this prospectus to cover over-allotments, if any. The underwriters expect to deliver the shares on or about July 2, 2004.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


Roth Capital Partners		Maxim Group LLC

The date of this prospectus is June 28, 2004.

You should rely only on the information contained in this prospectus or any supplement. We have not authorized anyone to provide you with any different information. You should not consider any statement modified or superceded, except as so modified or superceded by any supplement to this prospectus, to constitute a part of this prospectus.

Unless otherwise indicated, all information in this prospectus assumes that the underwriters will not exercise their option to purchase shares to cover over-allotments.

To understand this offering fully, you should read this entire document carefully, including, in particular, the “Risk Factors” section beginning on page 7 as well as the documents identified in the section entitled “Where You Can Find More Information” on page 88.

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It is not complete and does not contain all of the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the “Risk Factors” section, our consolidated financial statements and the related notes before investing in our common stock.

Our Business

Newtek Business Services, Inc. is a holding company for several wholly and majority-owned operating subsidiaries and certified capital companies, or capcos. Our major focus is to provide high value and cost efficient services to small and medium-sized businesses. We currently operate in three principal lines of business and expect to add a fourth upon the conclusion of this offering. These four lines of business are as follows:

•

Certified capital companies. A capco is a company we form pursuant to a state-sponsored program which is designed to encourage investment in small and new businesses and to create economic activity and jobs in the sponsoring state. To induce investors to participate in capco programs, the state provides a capco with tax credits to issue to its investors, all of which must be insurance companies. After it is capitalized, the capco is obligated to invest its funds in small and new businesses within the state in accordance with statutory requirements relating to such matters as the size of the business, location and number of employees. We have used our capcos to finance our SBA, payment processing and financial reporting businesses. To date, our primary source of cash has been the statutorily fixed annual management fees of 2.5% of each capco’s initial capital.

•

Small business loans. Through our majority-owned subsidiary, Newtek Small Business Finance, Inc., or NSBF, we make small business loans guaranteed by the U.S. Small Business Administration, or SBA, under the section 7(a) loan program and related section 504 business real estate loan program. NSBF is one of 14 companies licensed to provide SBA loans nationwide under the section 7(a) loan program and the related section 504 real estate loan program. The SBA definition of eligible small businesses is based on standard industry codes and generally includes businesses with less than $25,000,000 in revenues and no more than 1,500 employees.

•

Payment processing. Newtek Merchant Solutions, or NMS, offers credit card, debit card and gift card processing services and check approval services to approximately 6,000 small and medium-sized businesses as of March 31, 2004 through its four payment processing companies and its full-service processing center in Milwaukee, Wisconsin. NMS also provides these services to local and regional banks and credit unions that do not offer their own payment processing services so that these banks may offer these services to their merchant clients through us.

•

Website hosting. On April 28, 2004, we signed a definitive agreement to acquire CrystalTech Web Hosting, Inc., or CrystalTech. Netcraft, an independent consultant, has cited CrystalTech as the world’s third largest website hosting enterprise utilizing exclusively Microsoft Hosting 2003^®. As of April 2004, CrystalTech had approximately 26,000 active accounts in approximately 80 countries, approximately 80% of which are located in the United States. Completion of the acquisition is contingent upon our arrangement for financing through this offering or otherwise, obtaining certain consents and approvals, and other customary conditions. If we do not acquire CrystalTech, we will have full discretion to utilize the proceeds of this offering which would have been used to acquire CrystalTech to pursue our general growth strategy.

Our Strategy

Through our business relationships, we continually assess new product offerings and services for our small and medium-sized business customers. As we seek to enhance our position as a leading provider of business services to our marketplace, we have implemented the following strategies:

•

Aggressively focus our business model to provide products and services to the small and medium-sized business market. Over the last three years, we have refined our business model to focus on developing and marketing products and services aimed at small and medium-sized businesses like those we fund through our capco programs. As our product and service offerings grow and diversify, we intend to continue to reduce our dependence on the capco programs as a source of funding and revenue.

•

Further develop national recognition of the “Newtek” brand through marketing alliances. We have formed key marketing alliances with national business organizations such as Merrill Lynch and Cendant Corporation, business and trade organizations such as the Credit Union National Association and the Community Bankers of Wisconsin, and affinity organizations such as Revelation Corporation of America, Navy Federal Credit Union and the semi-public Veterans’ Corporation of America. These strategic partners, through their customers, members and participants, generate small business lending and payment processing business for us and build awareness of our brand name. We intend to develop further our “Newtek” brand by seeking out and entering into new marketing alliances.

•

Cross-sell additional products and services to small and medium-sized businesses. Our web-based, proprietary referral system is a custom designed customer relationship management tool which allows us to utilize our marketing alliance partners’ client base efficiently and cost effectively and assures our alliance partners full transaction transparency with the highest level of customer service. We intend to expand the use of this tool to cross-sell our products and services to our customer base, the customers we acquire through acquisitions, including those of CrystalTech and our alliance partners.

•

Opportunistically acquire companies or assets to provide complementary products and services to small and medium-sized businesses. By strategically acquiring companies or assets in our primary product and service markets, we can expand our customer base and create cross-selling opportunities for our growing suite of complementary goods and services. We believe that the acquisition of CrystalTech furthers this objective.

•

Focus our cross marketing and acquisition strategies on the addition of small and medium-sized business customers. We plan to grow the marketing programs of our current businesses and acquire other complementary businesses to build a large unified base of small and medium-sized business customers.

•

Continue to develop our technology to process new business and financial transactions. Our applications processing technology allows us to process new business received by our small and medium-sized business customers utilizing a web-based system and a centralized processing point. Our trained representatives use these web-based applications as a tool to acquire and process data, eliminating the need for our customers to complete multiple paper forms in face-to-face meetings. We will continue to develop this system because we believe it is customer friendly, allows us to process applications efficiently and allows us to store client information for further processing and future cross-selling efforts.

•

Continue to access the capco market as capco opportunities arise. We believe there is continued opportunity to use the capco programs as a funding source to facilitate the growth of our businesses.

Pending Acquisition of CrystalTech

On April 28, 2004 we signed a definitive agreement to acquire the business of CrystalTech, a Phoenix-based company engaged in the business of providing website hosting services to over 26,000 customers. The aggregate purchase price for CrystalTech consists of $10,000,000 in cash and $250,000 in our common stock and additional payments of up to a total of $1,250,000 in cash and $1,750,000 in our common stock would be made if the business meets certain profitability benchmarks. One condition of the closing of this acquisition is the completion of this offering or the completion of an alternative financing resulting in minimum net proceeds to us of $12,000,000, of which $10,000,000 is the cash portion of the purchase price. As part of our agreement with the underwriters of this offering, we have agreed to use our commercially reasonable best efforts to consummate this transaction within eight days of the closing of the offering.

About Us

We were incorporated in 1999 in New York and changed our name from Newtek Capital, Inc. to Newtek Business Services, Inc. in November 2002. Our principal executive offices are located at 100 Quentin Roosevelt Boulevard, Suite 408, Garden City, New York 11530, and our telephone number is (516) 794-0100. Our website address is www.NewtekBusinessServices.com. Information contained on our website or any other website is not a part of this prospectus.

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The Offering

Common stock offered by us

6,000,000 shares

Common stock to be outstanding after this offering

33,401,988 shares

Over-Allotment Option

We have granted to the underwriters an option for 30 days to purchase up to 450,000 additional shares of common stock to cover over-allotments, if any.

In addition, three of our principal shareholders, who are all executive officers, have also granted a similar option to the underwriters to cover over-allotments and will sell up to an aggregate of 450,000 shares of their respective common stock subsequent to our shares being sold.

Nasdaq National Market symbol

NKBS

Use of proceeds

We intend to use the net proceeds of this offering to pay the cash portion of the purchase price of CrystalTech and, whether or not the CrystalTech transaction closes, for working capital and general corporate purposes, including potential future acquisitions of complementary businesses and technologies and providing additional capital or liquidity to our current or future operating subsidiaries.

Risk Factors

See “Risk Factors” beginning on page 7 for a discussion of factors you should carefully consider before deciding to invest in our common stock.

The number of shares to be outstanding after this offering is based on 26,846,433 shares outstanding as of June 28, 2004. The number of shares to be outstanding after the offering excludes 3,612,621 shares (of which 419,458 shares relates to restricted share grants) reserved for issuance under our 2000 Stock Incentive and Deferred Compensation Plan and our 2003 Stock Incentive Plan, of which options to purchase 1,637,379 shares at a weighted average exercise price of $4.51 per share were outstanding as of June 28, 2004. The number of shares to be outstanding after this offering also excludes up to 450,000 shares that may be sold pursuant to the over-allotment option to the underwriters, but includes up to 555,555 shares to be issued as a part of the consideration for CrystalTech (assuming that all potential contingent share consideration is ultimately earned and issued). Our 2003 Stock Incentive Plan is subject to shareholder approval at our upcoming annual meeting.

Summary Selected Consolidated Financial Data

We derived the following summary selected consolidated financial data from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent accountants and from our unaudited consolidated financial statements for the period ending March 31, 2004. Historical results are not necessarily indicative of the results to be expected in the future. You should read the summary selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those financial statements appearing elsewhere in this prospectus. For a review of the possible effect of the acquisition of CrystalTech, see the “Pro Forma Financial Information” section of this prospectus.


	Years Ended December 31,															Three Months Ended March 31, (unaudited)
	1999			2000			2001			2002			2003			2003			2004
	(in thousands)
Statement of Operations Data:
Revenue	$	11,882		$	8,710		$	23,905		$	34,670		$	60,493		$	12,919		$	7,870
Expenses		3,859			13,591			21,932			27,152			42,423			10,466			11,059

Income (loss) before minority interest, (provision) benefit for income taxes and extraordinary items		8,023			(4,881	)		1,973			7,518			18,070			2,453			(3,189	)

Minority interest		(3,521	)		2,234			(509	)		(335	)		(1,598	)		288			300

Income (loss) before (provision) benefit of income taxes and extraordinary items		4,502			(2,647	)		1,464			7,183			16,472			2,741			(2,889	)
(Provision) benefit for income taxes		—			(1,140	)		(534	)		(2,658	)		(7,090	)		(1,069	)		1,185

Income (loss) before extraordinary items		4,502			(3,787	)		930			4,525			9,382			1,672			(1,704	)
Extraordinary gain on acquisition of minority interests		—			—			—			908			—			—			—
Extraordinary gain on acquisition of a business		924			362			—			2,735			187			187			—

Net Income (loss)	$	5,426		$	(3,425	)	$	930		$	8,168		$	9,569		$	1,859		$	(1,704	)


	Years ended December 31,											Three Months Ended March 31, (unaudited)
	1999		2000			2001		2002		2003		2003		2004
	(in thousands except per share data)
Weighted average common shares outstanding:
Basic		18,250		19,310			21,890		24,184		25,777		25,410		26,471
Diluted		18,250		19,310			21,910		24,294		26,177		25,661		26,471
Income (loss) per share after extraordinary gain:
Basic	$	.30	$	(.18	)	$	.04	$	.34	$	.37	$	.07	$	(.06	)
Diluted	$	.30	$	(.18	)	$	.04	$	.34	$	.37	$	.07	$	(.06	)
Income (loss) per share before extraordinary gain:
Basic	$	.25	$	(.20	)	$	.04	$	.19	$	.36	$	.07	$	(.06	)
Diluted	$	.25	$	(.20	)	$	.04	$	.19	$	.36	$	.07	$	(.06	)



	As of December 31, 2003						As of March 31, 2004
	Actual		As Adjusted⁽¹⁾		Pro Forma As Adjusted⁽²⁾		Actual		As Adjusted⁽¹⁾		Pro Forma As Adjusted⁽²⁾
Balance Sheet Data:
Cash	$	33,444,611	$	53,208,611	$	42,557,304	$	42,564,071	$	62,328,071	$	51,676,764
Total assets	$	192,184,009	$	211,948,009	$	215,609,349	$	200,721,138	$	220,485,138	$	224,477,144
Note payable in credits in lieu of cash	$	65,697,050	$	65,697,050	$	65,697,050	$	69,726,477	$	69,726,477	$	69,726,477
Minority interest	$	8,393,151	$	8,393,151	$	8,393,151	$	8,092,837	$	8,092,837	$	8,092,837
Total liabilities	$	143,543,436	$	143,543,436	$	146,954,776	$	151,975,686	$	151,975,686	$	155,717,692
Stockholders’ equity	$	40,247,422	$	60,011,422	$	60,261,422	$	40,652,615	$	60,416,615	$	60,666,615

⁽¹⁾

As adjusted to reflect the sale of 6,000,000 shares of common stock offered hereby at a public offering price of $3.60 per share, after deducting the underwriters’ discount and the underwriters’ expenses but excluding all other offering-related and acquisition expenses. Does not include shares issuable by us pursuant to the over-allotment option.

⁽²⁾

Pro forma as adjusted to reflect: (i) the sale of 6,000,000 shares of common stock offered hereby at a public offering price of $3.60 per share, (ii) the application of the estimated net proceeds as set forth in “Use of Proceeds,” after deducting the underwriters’ discount, the underwriters’ expenses and all other offering-related and acquisition expenses and (iii) the issuance of 69,444 shares in connection with the CrystalTech acquisition (but does not include 486,111 shares which may be earned as contingent consideration). Does not include shares issuable by us pursuant to the underwriters’ over-allotment option.

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RISK FACTORS

Investing in our common stock involves risks. Before you invest in our common stock, you should carefully consider the following risks as well as the other information included in this prospectus. These risks set out below are not the only risks we face. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the value of our common stock could decline and you may lose all or part of your investment.

RISKS RELATING TO OUR BUSINESS GENERALLY

Our business focuses on the investment in and acquisition of small businesses, which typically have a high rate of failure, may take some time to become profitable and may never become profitable.

We place primary emphasis on the investment in and acquisition of small businesses with the objective of developing a network of profitable businesses, most of which will principally serve the small and medium-sized business market. Early stage businesses historically have a higher rate of failure than larger businesses, and many that do not fail will have only limited profitability. Moreover, profit generated by any of our majority-owned companies or other investments could be offset by losses generated by others. Our profitability resulting from the operations of our businesses may be delayed for the foreseeable future.

For example, our consolidated subsidiaries experienced aggregate net losses of approximately $2,700,000 for the year ended December 31, 2003, aggregate net losses of approximately $3,591,000 for the year ended December 31, 2002, and aggregate net losses of approximately $215,000 for the first quarter ended March 31, 2004. We recorded no net losses from equity method investees in 2003 and approximately $729,000 in 2002. In addition, during 2003 we wrote off approximately $1,996,000 of investments in small businesses, compared to approximately $1,602,000 in 2002, representing management’s best estimate as to the amount of the other than temporary decline in the value of the investments. During the first quarter of 2004 we had $0 in write offs.

We have generated and carry goodwill as an asset resulting from some of our acquisition transactions and expect to do so as well in the CrystalTech transaction. In 2003, we determined to write down the value of our goodwill by approximately $1,435,000. We can make no assurance that our current or future additional goodwill will not be written down pursuant to applicable accounting standards. A significant write down of a major asset, such as goodwill, could have a material adverse effect on our business, a negative impact on earnings and the value of our common stock.

Each of our major investments and affiliated companies may be impacted by a variety of adverse economic, governmental, industrial and internal company factors unique to that business and outside our control. If our investments and affiliated companies do not succeed in overcoming these adverse factors, the value of our assets and the price of our stock would fall.

In the past few years we have increasingly concentrated our investments in companies participating in small business lending and electronic payment processing, and we plan to make significant investments in a new insurance agency, the Newtek Insurance Agency, and CrystalTech, following its acquisition by us, in the near future. Each of these businesses has numerous risks associated with them and you should read the specific risk factors set forth below with respect to each of these businesses.

As we have concentrated our investments, typically made through the capco programs, in companies which are part of our nationwide marketing strategy of providing a variety of services to small and medium-sized businesses, our exposure and that of our affiliated companies to risks specific to these business lines has increased. We discuss below some of the risks of our significant operations in government-guaranteed small business lending and acting as an independent sales organization in the electronic card processing business. If we are not successful in implementing this business strategy and developing and marketing our new products and services, our results of operations will be negatively impacted.

We rely on our capcos to fund our investments and our capcos are limited by regulations in the types of investments they can make.

Our ability to invest in or acquire companies has in the past and is expected to be in the future significantly reliant on investments permissible under the capco programs in which we participate. In the programs under which the capcos operate, investments by a capco may only be made in the state in which the particular capco operates and the target company must meet certain requirements as to size, employment of state residents and possible restrictions on the ability to relocate. These limitations may require us to forego attractive or desirable investments, which could adversely affect or prevent implementation of our business strategy.

If we do not manage our growth effectively, our financial performance could be harmed.

Our rapid revenue growth has placed, and will continue to place, certain pressures on our management, administrative, operational and financial infrastructure. As we continue to grow our business, such growth could require capital, systems development and human resources beyond current capacities. As evidence of our internal growth, on December 31, 2001, we and all of our consolidated and majority-owned affiliates had approximately 20 employees, and on December 31, 2003 we had approximately 100 employees, without consideration of independent contractors. The increase in the size of our operations may make it more difficult for us to ensure that we execute our present businesses and future strategies. The failure to manage our growth effectively could have a material adverse effect on our financial condition and results of operations.

Because expenses are expected to increase as we build an infrastructure and implement our business strategy, we may incur additional losses in the future.

Because our expenses are expected to increase more quickly than our revenue as we build our infrastructure and implement our business strategy, we will likely incur additional losses in the near future. We expect the additional expenses to result primarily from our plans to:

•

expand existing systems;

•

broaden affiliated company support capabilities;

•

continue to explore acquisition opportunities and alliances; and

•

facilitate business arrangements among affiliated companies.

If we are unable to obtain the resources required for the growth and development of our affiliated companies, they will be highly susceptible to failure, which would directly affect our profitability and value.

Early-stage businesses often fail due to their limited capital and human resources. The effective implementation of our business model is dependent upon the ability of the affiliated companies, with assistance from us, to arrange for the managerial, capital and other resources which they usually require in order to become and remain profitable.

We may not be able to integrate acquired companies into our company and, as we acquire more and larger interests in affiliated companies, our resources available to assist our affiliated companies may be insufficient.

We have made strategic acquisitions and we intend to continue to make acquisitions in accordance with our business plan. Each acquisition involves a number of risks, including:

•

the diversion of our management’s attention to the assimilation and ongoing assistance with the operations and personnel of the acquired business, which could strain the management resources we have available;

•

the potential for our affiliated companies to grow rapidly and adversely affect our ability to assist our affiliated companies as intended;

•

possible adverse effects on our results of operations and cash flows; and

•

possible inability by us to achieve the intended objective of the acquisition.

Any strain on our ability to assist our affiliated companies as intended or to acquire and integrate businesses under our business plan could have a negative impact on our operations, financial results and cash flows.

Our business may be adversely affected by the highly regulated industries in which we operate.

Many of the industries in which we operate are highly regulated and we cannot assure you that we or our affiliated companies are, or that we will continue to be, in full compliance with current laws, rules and regulations. If we or our affiliated companies are unable to comply with applicable laws or regulations or if new laws limit or eliminate some of the benefits of our business lines, our financial condition, results of operations and our cash flows could be materially adversely affected.

If we lose our key personnel, we may not be able to find and hire experienced replacements.

Our business relies heavily on the expertise of our senior management, particularly Messrs. Barry Sloane, Brian A. Wasserman and Jeffrey G. Rubin, our CEO, CFO and President, respectively. These individuals currently serve pursuant to employment agreements which expire on June 30, 2005. The loss of the services of these individuals could have a material adverse effect on our financial condition, results of operations and cash flows and it is likely that it will be difficult to find adequate replacements.

We and our affiliated companies depend on our ability to attract and retain key personnel and any loss of ability to attract these personnel could adversely affect us.

Our success depends upon the ability of our affiliated companies and other investments to attract and retain qualified personnel and our ability to supplement those capabilities with our senior management personnel. Competition for qualified employees is intense. If our affiliated companies lose the services of key personnel, or are unable to attract additional qualified personnel, the business, financial condition, results of operations and cash flows of us or one or more of our affiliated companies could be materially adversely affected. It can take a significant period of time to identify and hire personnel with the combination of skills and attributes required in carrying out our strategy.

Our success depends on our ability to compete effectively in the highly competitive industries in which we operate.

We face intense competition in organizing capcos, originating SBA loans, processing electronic payments and offering insurance, as well as in the other industries in which we or our affiliated companies operate. Low barriers to entry often result in a steady stream of new competitors entering certain of these businesses. Current and potential competitors are or may be better established, substantially larger and have more capital and other resources than we do. If we expand into additional geographical markets, we will face competition from others in those markets as well.

A major feature of our business strategy is the development of opportunities for our service and product provider businesses to market to the customers of our other business lines and to the customer bases of our alliance partners.

Although the business strategy of management contemplates the referring of prospects between wholly-owned and partially owned companies in our network, there is no history of such cross-selling and there can be no assurances that any effort to make referrals across our network of affiliated companies will result in additional revenue opportunities. In order for our referral network to achieve the desired result, each of the constituent

companies must have proper incentives and feel comfortable making such introduction, and furthermore, the service provider receiving such referral must properly service such referred client. Instituting a corporate culture conducive to sending and receiving referrals is difficult and may not yield the results anticipated by us. In addition, our marketing alliances are terminable and, if we make serious errors or fail to produce sufficient revenues for our alliance partners, we are at risk of losing these relationships.

The inability of any one of our business segments to service customers adequately referred to it from within our other companies could impair our overall relationship with such customers.

A significant benefit of our structure and strategy is the ability to cross market between our SBA, electronic payment processing and other business customers, including potentially those of CrystalTech. However, should the business relationship between one of our business segments and customers deteriorate for any reason, such customers may opt to withdraw their business from our other businesses. Such a loss of business could negatively impact our results of operations and cash flows.

We rely on information processing systems, and our strategy of cross marketing to customers among our majority-owned subsidiaries will increase this reliance; the interruption, loss or failure of which would materially and adversely affect our business.

Our ability to provide business services depends, and will increasingly depend, on our capacity to store, retrieve, process and manage significant amounts of data and expand and upgrade our information processing capabilities. Interruption or loss of our information processing capabilities through loss of stored data, breakdown or malfunctioning of computer equipment and software systems, telecommunications failure or damage caused by acts of god or other disruption, could have a material adverse effect on our business, financial condition and results of operations. Although we have disaster recovery procedures in place and insurance to protect against such contingencies, we cannot be certain that our disaster recovery systems or insurance will continue to be available at reasonable prices, cover all our losses or compensate us for the possible loss of clients occurring during any period that we are unable to provide outsourced business services.

We are attempting to build a national “Newtek” brand for services and products marketed to small and medium-sized businesses, but we are unable to obtain a significantly high level of protection for the brand name due to its previous usage in other contexts.

The current and past usage by others of names similar to “Newtek” may make obtaining a significant level of protection for the use of such name very costly. We cannot assure you that we will be able to prevent competitors from using the name “Newtek” in other contexts or even in competition with us. In the event of such an infringement, we would attempt to vigorously defend our rights to the name, but we can give no assurance that we will be successful in doing so. We have not registered the mark “Newtek” with the United States Patent and Trademark Office.

RISKS RELATED TO OUR CAPCO BUSINESS

Because our capcos are subject to minimum investment and other requirements under state law, a failure of any of them to meet these requirements could subject the capco and our shareholders to the loss of one or more capcos and would preclude participation in future capco programs.

Involuntary decertification of all or substantially all of our capcos would result in material loss to us and our shareholders. In general, capcos issue debt and equity instruments, such as warrants, to insurance company investors and the capcos then acquire interests in companies in accordance with applicable state statutes. In return, the states issue tax credits to the capcos, which are available to and used by the insurance company investors to reduce their state tax liabilities. In order to maintain its status as a capco and to avoid the recapture of the tax credits granted, each capco must meet a number of state requirements. A key requirement in order to maintain capco certification is

that a capco must comply with minimum investment schedules that benchmark both the timing and type of required investments. Although to date we have met all applicable benchmarks, we may not do so in the future. A final involuntary loss of capco status, referred to as a decertification as a capco, will result in a loss of the tax credits for us and our insurance company investors; it would also enable the capco insurer, which has the obligation to make compensatory payments to offset the lost tax credits, to take control of one or more capcos and manage or liquidate the capco investments to offset its losses. This would deprive us of the value of the investments and make participation in future capco programs highly unlikely.

The ability of our capcos to meet minimum investment requirements is materially and adversely affected by the cost of capco insurance.

Each of our capcos, following its organization and payment for capco insurance, begins operations with cash approximately equal to 50% of its initial funding (inclusive of any funds obtained from the capco insurer as premium financing), or “certified capital,” the amount on which the minimum investment requirement is based. In order to avoid decertification and remain in compliance with applicable rules, each capco must invest an amount equal to at least 50% of certified capital in qualified investments. The capcos receive full credit in the minimum investment calculation for the reinvestment of funds returned to the capco by the repayment, sale or liquidation of investments. However, each capco’s ability to meet its minimum investment requirement could be adversely effected by:

•

the cost of insurance at the beginning of the capco’s investment cycle;

•

the ability to obtain the premium financing from the capco insurer;

•

the transfer of 2.5% of certified capital per year as management fees to us;

•

the direct costs and expenses of operating the capco, including legal and accounting fees;

•

the payment of taxes due by the capco; and

•

losses by the capco, which are common on investments in riskier early-stage, start up and potentially high growth businesses.

As of March 31, 2004 seven of our eleven operating capcos have met the minimum investment requirements (the capco managed by Exponential Business Development, Inc., or Exponential, is not included as we only manage but do not own it). The eleventh capco, in Alabama, was funded and began operations in January, 2004 and is at the beginning of its business cycle, with the entire amount of its certified capital yet to be invested. However, the remaining four capcos must invest an aggregate of approximately $14,000,000 within the varying time frames prescribed by the capcos’ respective states. Failure of one of these capcos to make the minimum investments within the prescribed time frames would lead to decertification of a capco.

The capco programs and the tax credits they provide are created by state legislation, and such laws are subject to possible action to repeal or retroactively revise the programs for political, economic or other reasons. Such an attempted repeal would create substantial difficulty for the capco programs and could, if ultimately successful, cause us material financial harm.

The tax credits associated with the capco programs and provided to our capcos’ investors are to be utilized by the investors over a period of time, typically ten years. Much can change during such a period and it is possible that one or more states may revise or eliminate the tax credits. Any such revision or repeal could have a material adverse economic impact on our capco, either directly or as a result of the capco’s insurer’s actions. During 2002 a single legislator in Louisiana did introduce such a proposed bill, on which no action was taken, and in Colorado in 2003 and 2004 bills to modify (not repeal) its capco program were introduced; the 2002 legislation was defeated in a legislative committee. The 2004 Colorado legislation could have a material and adverse impact on the potential profitability of our Colorado capco if some of the proposed provisions are adopted.

In the event of a threat of decertification by a state, the capco insurer is authorized to assume partial or complete control of a capco which would likely result in financial loss to the capco and possibly us and our shareholders.

Under the terms of insurance policies purchased by all but one of our capcos for the benefit of the investors, the capco insurer is authorized, in the event of a formal written threat of decertification by a state and absent appropriate corrective action by the capco, to assume partial or complete control of a capco in order to avoid final decertification and the requirement to pay compensatory interest to the certified investors under the policies. While avoiding final decertification, control by the insurer would result in significant disruption of the capco’s business and likely result in financial loss to the capco and our business.

In the absence of the adoption of new capco programs, we will be unable to derive any new income from tax credits, which to date represents substantially all of our income.

Virtually all of our net income for each of the years since inception was derived from the recognition of income related to tax credits available under current capco programs. We will recognize additional income related to tax credits from the current capco programs over the next ten years. Thereafter, unless additional capco programs are adopted and we are able to participate in them, we will derive no income from additional capco programs. The adoption of new state capco programs could be materially and adversely affected by adverse economic conditions or a change in the political acceptability of economic development or capco programs.

Our method of income recognition derived from the capco tax credits causes most of such income to be received in the first five years of the programs. In the absence of income from our investments or other sources, we would sustain material losses in later years.

In our capco programs we recognize the majority of our income from the tax credits in the early years of the programs because income recognition is tied to the schedule by which the tax credits become irrevocable and beyond recapture (approximately five years). We recognize the majority of our income from ten year capco programs in the first five years. In the absence of income from other sources, such as our investments in small businesses and affiliated companies, our income would decrease materially and we would likely sustain material losses in later years. Although we will not be recognizing significant tax credit income in the latter part of the program, we will continue to incur costs for the administration of the capcos, insurance expenses for the capcos and interest expenses on the capco notes. In the absence of our participation in new capco programs, income from tax credits will remain stagnant or decrease as the capcos reach maturity beginning in 2004.

If we are deemed to be an investment company under the Investment Company Act of 1940, we will not be able to execute our business strategy.

Because capcos can operate in a manner similar to venture capital funds, there is a risk that the Securities and Exchange Commission, or the SEC, or a court might conclude that we fall within the definition of investment company, and unless an exemption is available, we would be required to register under the Investment Company Act of 1940. Compliance with the Investment Company Act as a registered investment company would cause us to alter significantly our business strategy of participating in the management and development of affiliated companies, impair our ability to operate as planned and seriously harm our business. In addition, our contracts would be voidable and a court could appoint a receiver to take control of and liquidate our business.

The SEC has adopted Rule 3a-1 that provides an exemption from registration as an investment company if a company meets both an asset and an income test and is not otherwise primarily engaged in an investment company business by, among other things, holding itself out to the public as such or by taking controlling interests in companies with a view to realizing profits through subsequent sales of these interests. A company satisfies the asset test of Rule 3a-1 if it has no more than 45% of the value of its total assets (adjusted to exclude U.S. Government securities and cash) in the form of securities other than interests in majority-owned subsidiaries and companies which it primarily and actively controls. A company satisfies the income test of Rule 3a-1 if it has derived no more than 45% of its net income for its last four fiscal quarters combined from securities other than interests in majority owned subsidiaries and primarily and actively controlled companies.

RISKS RELATING TO OUR SBA LENDING BUSINESS

We have specific risks associated with small business administration loans.

We have generally sold the guaranteed portion of SBA loans in the secondary market. There can be no assurance that we will be able to continue originating these loans, or that a secondary market will exist for, or that we will continue to realize premiums upon the sale of, the guaranteed portions of the SBA loans.

We believe that our SBA loan portfolio does not involve more than a normal risk of collection. However, since we have sold the guaranteed portion of substantially all of our SBA loan portfolio, we incur a pro rata credit risk on the non-guaranteed portion of the SBA loans since we share pro rata with the SBA in any recoveries. In the event of default on an SBA loan, our pursuit of remedies against a borrower is subject to SBA approval, and where the SBA establishes that its loss is attributable to deficiencies in the manner in which the loan application has been prepared and submitted, the SBA may decline to honor its guarantee with respect to our SBA loans or it may seek the recovery of damages from us. If we should experience significant problems with our underwriting of SBA loans, such failure to honor a guarantee or the cost to correct the problems could have a material adverse effect on us. Although the SBA has never declined to honor its guarantees with respect to SBA loans made by us since our acquisition of the lender, no assurance can be given that the SBA would not attempt to do so in the future.

Curtailment of the government guaranteed loan programs could cut off an important segment of our business.

There can be no assurance that the federal government will maintain the SBA program, or that it will continue to guarantee loans at current levels. If we cannot continue making and selling government guaranteed loans, we will generate fewer origination fees and our ability to generate gains on sale of loans will decrease. From time to time, the government agencies that guarantee these loans reach their internal budgeted limits and cease to guarantee loans for a stated time period. In addition, these agencies may change their rules for loans. Also, Congress may adopt legislation that would have the effect of discontinuing or changing the programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. If these changes occur, the volume of loans to small business and industrial borrowers of the types that now qualify for government guaranteed loans could decline, as could the profitability of these loans.

Changing interest rates may reduce our income from lending.

Fluctuations in interest rates may affect customer demand for our loans and other products and services. Our lending business will likely increase during times of falling interest rates and, conversely, decrease during times of significantly higher interest rates. Significant fluctuations in interest rates and loan demand could have a potentially adverse effect on our results of operations and cash flows.

Our ability to participate in the SBA government-guaranteed loan program depends on our ability to obtain sufficient warehouse or similar lending facilities, on sufficiently attractive terms, to enable us to make profitable loans.

In conjunction with the acquisition of our SBA lending affiliate, we were able to assist in the renegotiation and extension of a major warehouse loan facility from an affiliate of Deutsche Bank. This warehouse line enables NSBF to fund loans and repay the line at the time all or a portion of the loan is sold, as is typically the case.

On June 22, 2004, NSBF executed an amendment to such warehouse facility to provide for an extension of the warehouse credit line to June 30, 2005 and a possible increase of such line from the current $75 million up to $100 million under certain conditions. The credit facility had been scheduled to terminate on June 30, 2004.

The amended warehouse line contains adjustments to the terms of the advances and required reserves, additional financial and non-financial covenants and a commitment from NSBF to obtain $10 million in additional funding by August 2, 2004. In addition, the amended agreement requires, among other terms and conditions, that: (1) Newtek continue its previous guaranty of all of NSBF’s obligations under the credit line (including the possible expanded facility), (2) Newtek conform to maximum debt and minimum equity requirements, (3) Newtek not pay dividends for the one year term of the facility and (4) in the absence of funding from other sources, Newtek make a debt or equity infusion of at least $10 million to support the lending activities of NSBF. While there can be no assurance that the additional third party funding will be available, NSBF has had numerous discussions with additional lenders and has signed a non-binding letter of intent with one possible lender for $12 million. The failure to arrange the additional funding would be treated as a default under the credit line. However Newtek currently anticipates that NSBF will be able to enter into a third party loan agreement on or before August 2, 2004 or , alternatively, secure from Newtek the required debt or equity infusion by that date, the funds for which may come, in whole or in part, from the proceeds of this offering.

In the absence of NSBF’s warehouse line of credit, or some other comparable credit facility, NSBF would be unable to make any material number of loans without finding a replacement lending facility. Furthermore, our interest spread and net earnings from this segment of our business would be directly effected by the terms and conditions of the replacement lending facilities.

An increase in non-performing assets would reduce our income and increase our expenses.

If our level of non-performing assets in our SBA lending business rises in the future, it could adversely affect our revenue and earnings. Non-performing assets are primarily loans on which borrowers are not making their required payments. Non-performing assets also include loans that have been restructured to permit the borrower to have smaller payments and real estate that has been acquired through foreclosure of unpaid loans. To the extent that our loan assets are non-performing, we will have less cash available for lending and other activities.

RISKS RELATING TO OUR ELECTRONIC PAYMENT PROCESSING BUSINESS

We rely currently on a single bank sponsor, which has substantial discretion with respect to certain elements of our business practices, in order to process bankcard transactions. If this sponsorship is terminated and we are not able to secure or migrate merchant portfolios to new bank sponsors, we will not be able to conduct our electronic payment processing business.

Because we are not a bank, we are unable to belong to and directly access the Visa and MasterCard bankcard associations. The Visa and MasterCard operating regulations require us to be sponsored by a bank in order to process bankcard transactions. We are currently registered with Visa and MasterCard through the sponsorship of one bank that is a member of the card associations. If this sponsorship is terminated and we are unable to secure a bank sponsor, we will not be able to process bankcard transactions. Furthermore, our agreement with our sponsoring bank gives the sponsoring bank substantial discretion in approving certain elements of our business practices, including our solicitation, application and qualification procedures for merchants, the terms of our agreements with merchants, the processing fees that we charge, our customer service levels and our use of independent sales organizations. We cannot guarantee that our sponsoring bank’s actions under these agreements will not be detrimental to us.

If we or our bank sponsor fail to adhere to the standards of the Visa and MasterCard credit card associations, our registrations with these associations could be terminated and we could be required to stop providing payment processing services for Visa and MasterCard.

Substantially all of the transactions we process involve Visa or MasterCard. If we or our bank sponsor fail to comply with the applicable requirements of the Visa and MasterCard credit card associations, Visa or MasterCard could suspend or terminate our registration. The termination of our registration or any changes in the

Visa or MasterCard rules that would impair our registration could require us to stop providing payment processing services, which would have a material adverse effect on our business.

We and our electronic payment processing subsidiaries rely on other card payment processors and service providers. If they no longer agree to, or are unable to, provide their services, our merchant relationships could be adversely affected and we could lose business.

Our electronic payment processing business relies on agreements with several other large payment processing organizations to enable us to provide card authorization, data capture, settlement and merchant accounting services and access to various reporting tools for the merchants we serve. We also rely on third parties to whom we outsource specific services, such as reorganizing and accumulating daily transaction data on a merchant-by-merchant and card issuer-by-card issuer basis and forwarding the accumulated data to the relevant bankcard associations. Many of these organizations and service providers are our competitors. The termination by our service providers of these arrangements with us or their failure to perform these services efficiently and effectively may adversely affect our relationships with the merchants whose accounts we serve and may cause those merchants to terminate their processing agreements with us.

On occasion, we experience increases in interchange and sponsorship fees. If we cannot pass these increases along to our merchants, our profit margins will be reduced.

Our electronic payment processing subsidiaries pay interchange fees or assessments to card associations for each transaction we process using their credit, debit and gift cards. From time to time, the card associations increase the interchange fees that they charge processors and the sponsoring banks. At their sole discretion, our sponsoring banks have the right to pass any increases in interchange fees on to us. In addition, our sponsoring banks may increase their Visa and MasterCard sponsorship fees, all of which are based upon the dollar amount of the payment transactions we process. If we are not able to pass these fee increases along to merchants through corresponding increases in our processing fees, our profit margins in this line of business will be reduced.

Unauthorized disclosure of merchant or cardholder data, whether through breach of our computer systems or otherwise, could expose us to liability and business losses.

Through our electronic payment processing subsidiaries, we collect and store sensitive data about merchants and cardholders and we maintain a database of cardholder data relating to specific transactions, including payment, card numbers and cardholder addresses, in order to process the transactions and for fraud prevention and other internal processes. If anyone penetrates our network security or otherwise misappropriates sensitive merchant or cardholder data, we could be subject to liability or business interruption. We cannot guarantee that our systems will not be penetrated in the future. If a breach of our system occurs, we may be subject to liability, including claims for unauthorized purchases with misappropriated card information, impersonation or other similar fraud claims.

We have potential liability if our merchants refuse or cannot reimburse charge-backs resolved in favor of their customers.

If a billing dispute between a merchant and a cardholder is not ultimately resolved in favor of the merchant, the disputed transaction is “charged back” to the merchant’s bank and credited to the account of the cardholder. If we or our processing banks are unable to collect the charge-back from the merchant’s account, or if the merchant refuses or is financially unable due to bankruptcy or other reasons to reimburse the merchant’s bank for the charge-back, we bear the loss for the amount of the refund paid to the cardholder’s bank.

We face potential liability for customer or merchant fraud.

Credit card fraud occurs when a merchant’s customer uses a stolen card (or a stolen card number in a card-not-present transaction) to purchase merchandise or services. In a traditional card-present transaction, if the

merchant swipes the card, receives authorization for the transaction from the card issuing bank and verifies the signature on the back of the card against the paper receipt signed by the customer, the card issuing bank remains liable for any loss. In a fraudulent card-not-present transaction, even if the merchant receives authorization for the transaction, the merchant is liable for any loss arising from the transaction. Many of our business customers are small and transact a substantial percentage of their sales over the Internet or by telephone or mail orders. Because their sales are card-not-present transactions, these merchants are more vulnerable to customer fraud than larger merchants and we could experience charge-backs arising from cardholder fraud more frequently with these merchants.

Merchant fraud occurs when a merchant, rather than a customer, knowingly uses a stolen or counterfeit card or card number to record a false sales transaction or intentionally fails to deliver the merchandise or services sold in an otherwise valid transaction. Anytime a merchant is unable to satisfy a charge-back, we are responsible for that charge-back. We have established systems and procedures to detect and reduce the impact of merchant fraud, but we cannot assure you that these measures are or will be effective. Failure to effectively manage risk and prevent fraud could increase our charge-back liability.

RISKS RELATING TO OUR ACQUISITION AND OPERATION OF A WEBSITE HOSTING BUSINESS

The closing of the CrystalTech acquisition is contingent on our receiving net proceeds from this offering or a similar financing. Even if this offering is completed, we may still not be able to consummate the acquisition. In such a case, we would not be able to acquire the website hosting business.

Under the terms of our agreement with CrystalTech, our obligation to consummate this acquisition is conditioned upon our receiving sufficient financing to fund the cash portion of the purchase price of $10,000,000 plus an additional amount of $2,000,000. Moreover, some of the other closing conditions are not within our control. Absent fulfillment of all material conditions, we may be unable to complete the transaction. In addition, we have agreed with the underwriters for this offering that we will use our commercially reasonable best efforts to consummate the transaction with CrystalTech within eight days of closing this offering.

CrystalTech operates in a competitive industry where technological change can be rapid.

The website hosting business and its related technology involve a broad range of rapidly changing technologies. CrystalTech’s equipment and the technologies on which it is based may not remain competitive over time, and others may develop superior technologies that render CrystalTech’s products non-competitive without significant additional capital expenditures.

CrystalTech’s website hosting business depends on the efficient and uninterrupted operation of its computer and communications hardware systems and infrastructure.

Despite precautions taken by CrystalTech against possible failure of its systems, interruptions could result from natural disasters, power loss, the inability to acquire fuel for our backup generators, telecommunications failure, terrorist attacks and similar events. CrystalTech also leases telecommunications lines from local, regional and national carriers whose service may be interrupted. Our business, financial condition and results of operations could be harmed after our acquisition of CrystalTech by any damage or failure that interrupts or delays our operations.

Of primary importance to CrystalTech’s website hosting customers is the integrity of its infrastructure and the privacy of confidential information.

CrystalTech’s infrastructure is potentially vulnerable to physical or electronic break-ins, viruses or similar problems. If a person circumvents CrystalTech’s security measures, he or she could jeopardize the security of confidential information stored on CrystalTech’s systems, misappropriate proprietary information or cause interruptions in CrystalTech’s operations. We may be required to make significant additional investments and

efforts to protect against or remedy security breaches. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. The security services that CrystalTech offers in connection with customers’ networks cannot assure complete protection from computer viruses, break-ins and other disruptive problems. Although CrystalTech attempts to limit contractually its liability in such instances, the occurrence of these problems may result in claims against CrystalTech or us or liability on our part. These claims, regardless of their ultimate outcome, could result in costly litigation and could harm our business and reputation and impair CrystalTech’s ability to attract and retain customers.

CrystalTech’s business depends on Microsoft Corporation for the license to use software as well as other intellectual property in its website hosting business.

CrystalTech’s website hosting business is built on a technological platform relying on the Microsoft Windows^® products that CrystalTech currently licenses. As a result, if we are unable to continue to have the benefit of that licensing arrangement or if the Microsoft Windows^® products upon which CrystalTech’s platform is built become obsolete, our business could be materially and adversely affected.

CrystalTech depends on the services of a few key personnel in managing its website hosting business, and the loss of one or more of them could materially impair its ability to maintain current levels of customer service and the proper technical operations of its business.

After we acquire CrystalTech we will depend upon the continued management by Tim Uzzanti of the operations of CrystalTech’s website hosting business, along with two or three other individuals to supervise CrystalTech’s technical operations and the customer technical service response. If we were to lose the services of one or more of these persons, our website hosting business could be significantly diminished.

RISKS RELATING TO OUR NEW BUSINESSES

The new businesses we plan to develop or organize, namely insurance sales, tax preparation services and financial information services will be businesses which are new to us and we may incur significant losses prior to becoming profitable if ever.

We do not have any experience in conducting our proposed new businesses in any meaningful manner in the past. Our investment in and operation of these businesses may result in losses due to our lack of knowledge and experience.

We cannot assure that the insurance, tax preparation or financial information services we plan to offer will be price competitive or accepted by our customers.

Despite our efforts to design, market and deliver integrated services to our customers, our proposed new services may not be widely accepted and we may not be able to compete with other larger and better capitalized providers of such services.

We will depend on third parties, particularly property and casualty insurance companies, to supply the products marketed by our agents.

Our future contracts with property and casualty insurance companies typically will provide that the contracts can be terminated by the supplier without cause. Our inability to enter into satisfactory arrangements with these suppliers or the loss of these relationships for any reason would adversely affect the results of our new insurance business.

Termination of our professional liability insurance policy may adversely impact our financial prospects and our ability to continue our relationships with insurance companies.

We will need to obtain professional liability insurance in connection with the operation of this business. If we are unable to obtain or if we lose such insurance after we obtain it, it is unlikely that our relationships with

insurance companies would continue. We are currently in the process of obtaining professional liability insurance to cover the operations of the insurance agency and meet applicable state licensing requirements but no assurances can be given that we will be able to obtain such insurance. Once obtained, our failure to maintain this insurance would have a material adverse impact on the business.

If we fail to comply with government regulations, our insurance agency business could be adversely affected.

Our insurance agency business will be subject to comprehensive regulation in the various states in which we plan to conduct business. Our success will depend in part upon our ability to satisfy these regulations and to obtain and maintain all required licenses and permits. Our failure to comply with any statutes and regulations could have a material adverse effect on us. Furthermore, the adoption of additional statutes and regulations, changes in the interpretation and enforcement of current statutes and regulations or the expansion of our business into jurisdictions that have adopted more stringent regulatory requirements than those in which we currently conduct business could have a material adverse effect on us.

We do not have any control over the commissions our insurance agency expects to earn on the sale of insurance products which are based on premiums and commission rates set by insurers and the conditions prevalent in the insurance market.

Our insurance agency expects to earn commissions on the sale of insurance products. Commission rates and premiums can change based on the prevailing economic and competitive factors that affect insurance underwriters. In addition, the insurance industry has been characterized by periods of intense price competition due to excessive underwriting capacity and periods of favorable premium levels due to shortages of capacity. We cannot predict the timing or extent of future changes in commission rates or premiums or the effect any of these changes will have on the operations of our insurance agency.

RISKS RELATING TO OUR COMMON STOCK AND THIS OFFERING

Three of our shareholders, all of whom are executive officers and directors, will beneficially own approximately 42% of our common stock after completion of this offering (including the exercise of the over-allotment option) and the acquisition of Crystal Tech (assuming all contingent share payments are earned and issued), and will be able to control the outcome of most shareholder actions.

Because of their ownership of our stock, Messrs. Sloane, Wasserman and Rubin will be able to control or have significant influence over all actions requiring shareholder approval, including the election of directors, the adoption of amendments to the certificate of incorporation, approval of stock incentive plans and approval of major transactions such as a merger or sale of assets. This could delay or prevent a change in control of our company, deprive our shareholders of an opportunity to receive a premium for their shares of common stock as part of a change in control and have a negative effect on the market price of our common stock.

There is a limited trading market for our common stock, and you may not be able to resell your shares at or above the price you pay for them.

The price of our common stock is subject to fluctuations based on, among other things, economic and market conditions for companies in similar industries to ours and the stock market in general, as well as changes in investor perceptions of us. While we are a publicly-traded company, the volume of trading activity in our stock is relatively small. The current public float of our common stock is approximately 11,600,000 shares, and the average daily trading volume of our common stock from January 1, 2004 through March 31, 2004 was approximately 63,000 shares. Even if a more active market develops, there can be no assurance that such a market will continue or that our shareholders will be able to sell their shares at or above the offering price.

Our management will have broad discretion over the use of the net proceeds of this offering, and you may not agree with the way the proceeds are used.

While we currently intend to use the net proceeds of this offering for the CrystalTech acquisition, capital or liquidity in connection with NSBF’s warehouse credit facility, potential future acquisitions, working capital and other general purposes, we may subsequently choose to use the net offering proceeds for different purposes or not at all. In addition, the CrystalTech acquisition may fail to close for a reason or reasons which we cannot now contemplate. The effect of the offering will be to increase capital resources available to our management, and our management will allocate these capital resources as it determines is necessary. You will be relying on the judgment of our management with regard to the use of the net proceeds of this offering. See “Use of Proceeds.”

Future issuances of our common stock or other securities, including preferred stock, may dilute the per share book value of our common stock or have other adverse consequences to our common shareholders.

Following the completion of this offering, our board of directors has the authority, without the action or vote of our shareholders, to issue all or part of the approximately 5,800,000 authorized but unissued shares of our common stock. If issued, these common shares would represent approximately 17% of our outstanding common stock. Our business strategy relies upon investment in and acquisition of businesses using the resources available to us, including our common stock. We have made acquisitions during 2002 and 2003 involving the issuance of our common stock, and we expect to make additional acquisitions in the future using our common stock. Additionally, we anticipate granting additional options or restricted stock awards to our employees and directors in the future. We may also issue additional securities, through public or private offerings, in order to raise capital to support our growth, including in connection with possible acquisitions or in connection with purchases of minority interests in affiliated companies or capcos. Future issuances of our common stock will dilute the percentage of ownership interest of current shareholders and could decrease the per share book value of our common stock. In addition, option holders may exercise their options at a time when we would otherwise be able to obtain additional equity capital on more favorable terms.

Pursuant to our certificate of incorporation, our board of directors is authorized to issue, without action or vote of our shareholders, up to 1,000,000 shares of “blank check” preferred stock, meaning that our board of directors may, in its discretion, cause the issuance of one or more series of preferred stock and fix the designations, preferences, powers and relative participating, optional and other rights, qualifications, limitations and restrictions thereof, including the dividend rate, conversion rights, voting rights, redemption rights and liquidation preference, and to fix the number of shares to be included in any such series. The preferred stock so issued may rank superior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding-up, or both. In addition, the shares of preferred stock may have class or series voting rights.

The authorization and issuance of “blank check” preferred stock could have an anti-takeover effect detrimental to the interests of our shareholders.

Our certificate of incorporation allows our board of directors to issue preferred stock with rights and preferences set by the board without further shareholder approval. The issuance of shares of this “blank check” preferred stock could have an anti-takeover effect detrimental to the interests of our shareholders. For example, in the event of a hostile takeover attempt, it may be possible for management and the board to impede the attempt by issuing the preferred shares, thereby diluting or impairing the voting power of the other outstanding shares of common stock and increasing the potential costs to acquire control of us. Our board has the right to issue any new shares, including preferred shares, without first offering them to the holders of common stock as they have no preemptive rights.

We know of no other publicly-held company that sponsors and operates capcos as a material part of its business. As such, there are, to our knowledge, no other companies against which investors may compare our capco business, operations, results of operations and financial and accounting structures.

In the absence of any meaningful peer group comparisons for our capco business, investors may have a difficult time understanding and judging the strength of our business. This, in turn, may have a depressing effect on the value of our stock.

Substantial sales of shares may impact the market price of our common stock.

If our shareholders sell substantial amounts of our common stock, the market price of our common stock may decline. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. We are unable to predict the effect that sales may have on the then prevailing market price of our common stock. This risk is compounded by the fact that Messrs. Sloane, Rubin and Wasserman, each of whom are executive officers and directors, will own approximately 42% of our common stock after completion of this offering (including the exercise of the over-allotment option) and the acquisition of CrystalTech (assuming all contingent share payments are earned and issued), and sales by any one of them of substantial numbers of shares, or the perception that such sales could occur, could adversely affect the market price. Further, these three shareholders, as well as all of our other directors, have entered into lock-up agreements with the underwriters in which they have agreed to refrain from selling their shares for a period of 9 months after the date of this prospectus (which period may be reduced to 6 months under certain circumstances). Increased sales of our common stock in the market after the expiration of these lock up agreements could exert significant downward pressure on our stock price.

Provisions of our certificate of incorporation and New York law place restrictions on our shareholders’ ability to recover from our directors.

As permitted by New York law, our amended and restated certificate of incorporation limits the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of these provisions and New York law, shareholders have restrictions and limitations upon their rights to recover from directors for breaches of their duties. In addition, our certificate of incorporation provides that we must indemnify our directors and officers to the fullest extent permitted by law.

We may not be able to comply in a timely manner with all of the recently enacted or proposed corporate governance requirements.

Beginning with the enactment of the Sarbanes-Oxley Act of 2002, in July 2002, a significant number of new corporate governance requirements have been adopted or proposed by the SEC and the Nasdaq Stock Market. Although we currently expect to comply with all current and future requirements, we may not be successful in complying with these requirements in the future. In addition, certain of these requirements may require us to make changes to our corporate governance.

There are risks associated with one of our underwriter’s lack of recent experience in public offerings.

Although certain principals of Maxim Group LLC have extensive experience in the securities industry, Maxim Group LLC itself is newly formed and has acted as an underwriter in only one prior public offering. This lack of operating history may have an adverse effect on this offering. Maxim Group LLC was formed in October 2002 and is a member of the National Association of Securities Dealers and the Securities Investor Protection Corporation.

NOTE ON FORWARD-LOOKING STATEMENTS

Certain statements included in this prospectus reflect assumptions, expectations, projections, intentions or beliefs about future events. These statements, which may relate to such matters as the CrystalTech acquisition, other potential acquisitions and current and potential joint ventures, industry conditions, revenue and net income, future capital expenditures, fulfillment of working capital needs and future acquisition plans, are “forward-looking statements” within the meaning of the federal securities laws. These statements are not statements of historical fact. The words “anticipate,” “estimate,” “expect,” “forecast,” “goal,” “objective,” “projection,” or similar words are intended to identify forward-looking statements. Forward-looking statements are based on our management’s beliefs, assumptions and expectations of our future economic performance, taking into account the information currently available to them. Forward-looking statements involve risks and uncertainties that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition we express or imply in any forward-looking statements. In addition to the specific factors we discuss in the “Risk Factors” section of this prospectus, the following are among the important factors that could cause our actual results, performance or financial condition to differ materially from the forward-looking statements:

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The performance of our subsidiaries, including NSBF, and affiliated companies, aspects of which are outside our control.

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Losses by the capcos due to investments in riskier early-stage and start up businesses which could make it significantly more difficult for the capcos to meet minimum state statutory investment benchmarks and thus subject the capcos to decertification and further financial loss.

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The degree and nature of our competition and that of our affiliated companies.

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The lack of widespread acceptance of the commercial use of the Internet, which may be material to one or more of our affiliated companies.

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Our ability, and that of our affiliated companies, to attract and retain key managerial and technical personnel.

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Changes in government regulation of our business and those of our affiliated companies.

Any forward-looking statements should be considered in light of such important factors.

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of 6,000,000 shares of common stock by us in this offering will be approximately $18,809,000, based on a public offering price of $3.60 per share. We expect to use the net proceeds as follows:

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$10,000,000 to pay the cash portion of the purchase price of CrystalTech; and

•

the balance for working capital and general corporate purposes, including potential future acquisitions of complementary businesses and technologies and providing additional capital or liquidity to our current or future operating subsidiaries. We are not currently engaged in any material discussions regarding any material or significant potential acquisitions other than the CrystalTech acquisition. See “CrystalTech Acquisition.”

On April 28, 2004, we signed a definitive agreement to acquire CrystalTech. In the event that the CrystalTech acquisition fails to close, the $10,000,000 in proceeds allocated for the CrystalTech purchase price will be used for working capital and general corporate purposes as described above and we will have full discretion over the use of this portion of the proceeds as well as the balance of the proceeds. As part of our agreement with the underwriters of this offering, we have agreed to use our commercially reasonable best efforts to consummate this transaction within eight days of the closing of the offering.

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CAPITALIZATION

The following table describes our capitalization as of March 31, 2004:

•

on an actual basis;

•

on an as adjusted basis to reflect our sale of 6,000,000 shares of common stock in this offering at a public offering price of $3.60 per share, after deducting the underwriters’ discount and the underwriters’ expenses but excluding all other offering-related and acquisition expenses; and

•

on a pro forma as adjusted basis to reflect our sale of 6,000,000 shares of common stock in this offering at a public offering price of $3.60 per share and the application of the estimated net proceeds as described in “Use of Proceeds,” after deducting the underwriters’ discount, the underwriters’ expenses and all other offering-related acquisition and after an assumed issuance of 69,444 shares of common stock in connection with the CrystalTech acquisition (but does not include 486,111 shares which may be earned as contingent consideration).

You should read the following table in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this prospectus.


	As of March 31, 2004
	Actual			As Adjusted⁽²⁾			Pro Forma As Adjusted⁽³⁾
Cash and cash equivalents	$	42,564,071		$	62,328,071		$	51,676,764
Notes payable and acquisition related payable		136,411,346			136,411,346			139,411,346
Stockholders’ equity:
Preferred stock, $.02 par value; 1,000,000 shares authorized; no shares issued and outstanding, actual and as adjusted		—			—			—
Common stock, $.02 par value; 39,000,000 shares authorized; 26,651,976 shares issued and outstanding—actual⁽¹⁾; 32,651,976 shares issued and outstanding—as adjusted⁽²⁾; 32,721,420 shares issued and outstanding—proforma as adjusted⁽³⁾		533,040			653,040			654,429
Additional paid-in capital		28,449,520			48,093,520			48,592,131
Unearned compensation		(1,867,315	)		(1,867,315	)		(2,117,315	)
Retained earnings		13,537,370			13,537,370			13,537,370
Total stockholders’ equity		40,652,615			60,416,615			60,666,615
Total capitalization	$	177,063,961		$	196,827,961		$	200,077,961

⁽¹⁾

The number of actual and as adjusted outstanding shares of common stock as of March 31, 2004 excludes 1,637,379 shares reserved for issuance under our stock option plans, at a weighted average exercise price of $4.51 per share, and also excludes 419,458 shares of restricted stock previously issued to employees and the shares issuable to the underwriters in the over-allotment option. See “Underwriting.”

⁽²⁾	Assumes the completion of this offering.

⁽³⁾	Assumes the completion of this offering and that CrystalTech was acquired at March 31, 2004, not including 486,111 contingently issuable shares.

DILUTION

If you invest in our common stock, your investment will be diluted to the extent of the excess of the offering price per share of our common stock over the net tangible book value per share of our common stock immediately after this offering and the completion of the CrystalTech acquisition.

The net tangible book value of our common stock at March 31, 2004 was approximately $37,891,536 or $1.42 per share. The net tangible book value per share represents the amount of our total tangible assets less our liabilities.

After giving effect to the assumed issuance and sale of 6,000,000 shares of our common stock in this offering and our receipt of approximately $19,764,000 in net proceeds from that sale, based on a public offering price of $3.60 per share and after deducting the underwriters’ discount and the underwriters’ expenses but excluding all other offering-related and acquisition expenses (estimated to be $955,000), and after giving effect to the assumed acquisition of CrystalTech (payment of the cash purchase price and the allocation of tangible and intangible assets and the issuance of 69,444 shares of common stock in connection therewith (but excluding 486,111 shares which may be earned as contingent consideration)), our as adjusted net tangible book value as of March 31, 2004 would have been approximately $43,737,224, or $1.32 per share. This amount represents an immediate decrease in the net tangible book value of ($0.10) to existing shareholders and an immediate dilution of $2.28 per share to purchasers of our common stock in this offering. Dilution is determined by subtracting the net tangible book value per share as adjusted for this offering and the acquisition of CrystalTech from the amount of cash paid by a new investor for a share of our common stock. The following table illustrates the per share dilution.


Public offering price per share				$	3.60

Pro forma net tangible book value per share as of March 31, 2004 assuming completion of this offering	$	1.74

Decrease in pro forma net tangible book value per share assuming acquisition of CrystalTech	$	(0.42	)

Pro forma net tangible book value per share assuming completion of this offering and the CrystalTech acquisition				$	1.32

Pro forma dilution per share to investors in this offering				$	2.28

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PRICE RANGE OF COMMON STOCK

Our common stock has been traded on the Nasdaq National Market under the symbol “NKBS” since December 30, 2003. Our common stock previously traded on the American Stock Exchange. The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock as reported on the American Stock Exchange (under the symbol “NKC”) and, since December 30, 2003, on the Nasdaq National Market.


	Common Stock Price Per Share
Year ended December 31, 2002:		High		Low

First Quarter:	$	3.95	$	3.00
Second Quarter:	$	5.20	$	3.20
Third Quarter:	$	4.24	$	3.15
Fourth Quarter:	$	4.39	$	3.20

Year ended December 31, 2003:
First Quarter:	$	5.30	$	3.80
Second Quarter:	$	6.29	$	3.90
Third Quarter:	$	5.75	$	4.65
Fourth Quarter:	$	7.00	$	4.83

Year ending December 31, 2004:
First Quarter:	$	7.95	$	4.34
Second Quarter (through June 28, 2004):	$	6.15	$	3.99

On June 28, 2004, the last sale price of our common stock on the Nasdaq National Market was $3.99 per share. As of June 28, 2004, there were approximately 265 record holders and approximately 1,211 beneficial owners of our common stock, which excludes the shares to be issued pursuant to this offering and the CrystalTech transaction.

DIVIDEND POLICY

We have not declared or paid any dividends on our common stock since our inception in 1998. We currently anticipate that we will retain all of our earnings for the continued development and expansion of our business and do not anticipate declaring or paying any cash or non-cash dividends in the foreseeable future. In addition, terms of the June 22, 2004 extension of NSBF’s credit line with Deutsche Bank requires that we agree to a limitation on our ability to pay dividends through June 30, 2005. See “Business—Our Principal Operating Businesses—Small Business Lending.”

SELECTED CONSOLIDATED FINANCIAL DATA

We derived the following selected consolidated financial data from our consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, independent accountants and from our unaudited consolidated financial statements as of March 31, 2004. In the opinion of management, the unaudited financial data for the three month periods ended March 31, 2004 and 2003 includes all adjustments (consisting of any normal recurring adjustments) necessary to present the financial data for such periods. Historical results are not necessarily indicative of the results to be expected in the future. You should read the selected consolidated financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those financial statements appearing elsewhere in this prospectus. For a review of the possible effect of the acquisition of CrystalTech, see the “Pro Forma Financial Information” section of this prospectus.


	Years Ended December 31,															Three Months Ended March 31, (unaudited)
	1999			2000			2001			2002			2003			2003			2004
	(in thousands)
Statement of Operations Data:
Revenue:
Income from tax credits	$	10,964		$	6,533		$	21,498		$	30,603		$	44,933		$	10,389		$	2,024
Electronic payment processing		—			—			121			1,584			6,297			848			3,233
Servicing fee and premium income		—			—			—			—			2,702			368			1,112
Recovery of investment		—			—			105			29			350			—			—
Interest and dividend income		—			2,118			1,845			900			4,059			1,059			1,029
Gain on sale of property		—			—			—			16			—			—			—
Other income		918			59			336			1,538			2,152			255			472

Total revenue		11,882			8,710			23,905			34,670			60,493			12,919			7,870

Expenses:
Interest		2,439			7,280			11,577			11,485			13,879			3,718			3,764
Payroll and consulting fees		254			1,294			2,665			4,565			8,407			1,664			2,185
Electronic payment processing costs		—			—			42			632			3,685			1,120			2,101
Professional fees		460			1,844			2,061			3,145			5,328			916			995
Insurance		410			1,006			1,530			1,951			2,469			573			715
Write-down of asset held for sale to net realizable value		—			—			168			—			—			—			—
Other than temporary decline in value of investments		—			1,232			477			1,602			1,996			1,713			—
Provision for loan losses		—			—			—			—			473			—			105
Goodwill impairment		—			—			—			—			1,435			—			—
Equity in net losses of affiliates		—			163			2,280			729			—			55			—
Other		296			772			1,132			3,043			4,751			707			1,194

Total expenses		3,859			13,591			21,932			27,152			42,423			10,466			11,059

Income (loss) before minority interest, (provision) benefit for income taxes and extraordinary items		8,023			(4,881	)		1,973			7,518			18,070			2,453			(3,189	)

Minority interest		(3,521	)		2,234			(509	)		(335	)		(1,598	)		288			300

Income (loss) before (provision) benefit for income taxes and extraordinary items		4,502			(2,647	)		1,464			7,183			16,472			2,741			(2,889	)
(Provision) benefit for income taxes		—			(1,140	)		(534	)		(2,658	)		(7,090	)		(1,069	)		1,185

Income (loss) before extraordinary items		4,502			(3,787	)		930			4,525			9,382			1,672			(1,704	)
Extraordinary gain on acquisition of minority interests		—			—			—			908			—			—			—
Extraordinary gain on acquisition of a business		924			362			—			2,735			187			187			—

Net income (loss)	$	5,426		$	(3,425	)	$	930		$	8,168		$	9,569		$	1,859		$	(1,704	)


	Years ended December 31,											Three Months Ended March 31, (unaudited)
	1999		2000			2001		2002		2003		2003		2004
	(In thousands except per share data)
Weighted average common shares outstanding:
Basic		18,250		19,310			21,890		24,184		25,777		25,410		26,471
Diluted		18,250		19,310			21,910		24,294		26,177		25,661		26,471
Income (loss) per share after extraordinary gain:
Basic	$	.30	$	(.18	)	$	.04	$	.34	$	.37	$	.07	$	(.06	)
Diluted	$	.30	$	(.18	)	$	.04	$	.34	$	.37	$	.07	$	(.06	)
Income (loss) per share before extraordinary gain:
Basic	$	.25	$	(.20	)	$	.04	$	.19	$	.36	$	.07	$	(.06	)
Diluted	$	.25	$	(.20	)	$	.04	$	.19	$	.36	$	.07	$	(.06	)


	As of December 31,										As of March 31, (unaudited)
	1999		2000		2001		2002		2003		2004
Balance Sheet Data:
Cash	$	25,454,016	$	34,697,081	$	31,171,966	$	41,171,358	$	33,444,611	$	42,564,071
Total Assets	$	54,645,029	$	83,538,926	$	83,362,802	$	169,054,738	$	192,184,009	$	200,721,138
Note payable in credits in lieu of cash	$	31,583,438	$	56,147,907	$	49,640,846	$	65,196,116	$	65,697,050	$	69,726,477
Total liabilities	$	40,397,991	$	70,106,524	$	66,889,573	$	137,109,703	$	143,543,436	$	151,975,686
Minority interest	$	5,938,111	$	4,163,053	$	5,081,692	$	4,772,741	$	8,393,151	$	8,092,837
Stockholders’ equity	$	8,308,927	$	9,269,349	$	11,391,537	$	27,172,294	$	40,247,422	$	40,652,615

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis may contain forward-looking statements that involve risk and uncertainty, such as our anticipated future financial performance, business prospects, expectations regarding our ability to begin to cross-sell services among our small business customers, future liquidity and ability to access capital markets, as well as legislative developments and other similar matters. A variety of factors could cause our actual results to differ materially from the anticipated results expressed in the forward-looking statements, such as intensified competition and problems in our majority-owned businesses and their impact on revenues and profit margins. Some of the factors that could cause actual results to differ from those in the forward-looking statements are identified below in “Liquidity and Capital Resources—Liquidity Risk” and “Critical Accounting Policies and Estimates” as well as “Risk Factors” and other sections of this prospectus. You should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. See also the “Note On Forward Looking Statements” and the “Pro Forma Financial Information” sections of this prospectus.

Results of Operations

Consistent with managements focus, the revenue and expenses from the consolidated operating entities, specifically the SBA lending and merchant processing companies continue to increase as a percentage of revenue, with a correlating decrease in revenues from capco-derived tax credits. The following table sets forth certain data from our statements of income, expressed as a percentage of total revenues, for each of the periods presented.


	Years Ended December 31,						Three Months Ended March 31, (unaudited)
	2001		2002		2003		2003		2004
Statement of Operations Data:
Revenue:
Income from tax credits	90.0	%	88.2	%	74.3	%	80.4	%	25.7	%
Electronic payment processing	0.5	%	4.6	%	10.4	%	6.6	%	41.1	%
Servicing fee and premium income	0.0	%	0.0	%	4.5	%	2.8	%	14.1	%
Interest and dividend income	7.7	%	2.6	%	6.7	%	8.2	%	13.1	%
Recovery of investment	0.4	%	0.1	%	0.6	%	0.0	%	0.0	%
Gain on sale of property	0.0	%	0.1	%	0.0	%	0.0	%	0.0	%
Other income	1.4	%	4.4	%	3.5	%	2.0	%	6.0	%

Total revenue	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Expenses:
Interest	48.4	%	33.1	%	22.9	%	28.8	%	47.8	%
Payroll and consulting fees	11.2	%	13.2	%	13.9	%	12.9	%	27.8	%
Electronic payment processing costs	0.2	%	1.8	%	6.1	%	8.7	%	26.7	%
Professional fees	8.6	%	9.1	%	8.8	%	7.1	%	12.6	%
Insurance	6.4	%	5.6	%	4.1	%	4.4	%	9.1	%
Write-down of asset held for sale to net realizable value	0.7	%	0.0	%	0.0	%	0.0	%	0.0	%
Other than temporary decline in value of investments	2.0	%	4.6	%	3.3	%	13.3	%	0.0	%
Equity in net losses of affiliates	9.5	%	2.1	%	0.0	%	0.3	%	0.0	%
Provision for loan losses	0.0	%	0.0	%	0.8	%	0.0	%	1.3	%
Goodwill impairment	0.0	%	0.0	%	2.4	%	0.0	%	0.0	%
Other	4.7	%	8.8	%	7.8	%	5.5	%	15.2	%

Total expenses	91.7	%	78.3	%	70.1	%	81.0	%	140.5	%

Income (loss) before minority interest, provision or (benefit) for income taxes and extraordinary items	8.3	%	21.7	%	29.9	%	19.0	%	(40.5	)%
Minority interest	(2.1	)%	(1.0	)%	(2.6	)%	2.2	%	3.8	%

Income (loss) before provision or (benefit) for income taxes, and extraordinary items	6.2	%	20.7	%	27.3	%	21.2	%	(36.7	)%
(Provision) benefit for income taxes	(2.3	)%	(7.7	)%	(11.8	)%	(8.2	)%	15.0	%

Income (loss) before extraordinary items	3.9	%	13.0	%	15.5	%	13.0	%	(21.7	)%

Extraordinary items	0.0	%	10.6	%	0.3	%	1.4	%	0.0	%

Net income (loss)	3.9	%	23.6	%	15.8	%	14.4	%	(21.7	)%

Comparison of the Three Months Ended March 31, 2004 and March 31, 2003

Revenues decreased by approximately $5,049,000 to $7,870,000 for the three months ended March 31, 2004, from approximately $12,919,000 for the three months ended March 31, 2003. Income from tax credits decreased by approximately $8,365,000 from $10,389,000 for the three months ended March 31, 2003, to $2,024,000 for the three months ended March 31, 2004, due to our capcos achieving less investment thresholds mandated by the various state capco statutes in 2004 compared to 2003. Electronic payment processing revenue increased by approximately $2,385,000 to $3,233,000 for the three months ended March 31, 2004, from $848,000 for the three months ended March 31, 2003, due the increase in our electronic payment processing customers, as well as our acquisition of Automated Merchant Services in August, 2003.

Servicing fee and premium income increased by approximately $744,000 to $1,112,000 for the three months ended March 31, 2004 from $368,000 for the three months ended March 31, 2003 due to the fact that NSBF experienced significant growth in the business. Interest and dividends are generated from SBA lending activities, excess cash balances that are invested in low risk, highly liquid securities (money market accounts, federal government backed mutual funds, etc.), non-cash accretions of structured insurance product and on held to maturity investments. The following table details the changes in these different forms of interest and dividend income:


	Three Months Ended March 31,				Change
	2003		2004		Change
SBA lending activities	$	915,176	$	925,003	$	9,827
Non-cash accretions		43,904		43,904		—
Qualified investments		22,975		20,829		(2,146	)
Low-risk highly liquid securities		77,114		39,212		(37,902	)

	$	1,059,169	$	1,028,948	$	(30,221	)

The decrease in interest income generated on qualified investments and low-risk highly liquid securities is attributable to a decline in the average outstanding balances of held to maturity investments and reduced short term interest rates on interest bearing cash accounts.

Changes in interest expense are summarized as follows:


	Three Months Ended March 31,				Change
	2003		2004		Change
Capco interest expense	$	3,001,543	$	3,021,416	$	19,873
NSBF (SBA lender) interest expense		504,586		501,873		(2,713	)
Other interest		211,723		241,485		29,762

	$	3,717,852	$	3,764,774	$	46,922

Provision for loan losses increased to approximately $105,000 for the three months ended March 31, 2004 from $0 for the three months ended March 31, 2003. This is due to the fact that NSBF was acquired on December 31, 2002 and there were no new loans during the comparable three months ended March 31, 2003.

Other than temporary decline in value of investments decreased by approximately $1,713,000 to $0 for the three months ended March 31, 2004 from $1,713,000 for the three months ended March 31, 2003, due to our determination that there were $0 in other than temporary declines in the value of investments for the period ended March 31, 2004. During the period ended March 31, 2003, we determined that there was an approximately $943,000 other than temporary decline in the value of its investments for Merchant Data Systems, Inc., approximately $500,000 for 1-800 Gift Certificate and an approximately $270,000 other than temporary decline in the value of its investments for Direct Creations, LLC.

Our results of operations declined by approximately $3,563,000 from net income of $1,859,000 for the three months ended March 31, 2003 to a net loss of $1,704,000 for the three months ended March 31, 2004, due to the decreases in revenue of approximately $5,049,000 and the increases in overall expenses of approximately

$593,000 discussed above, offset by the decrease in the taxes of approximately $2,254,000, and the decrease in extraordinary gains of approximately $187,000.

Comparison of the Years Ended December 31, 2003 and December 31, 2002

Revenues increased by approximately $25,823,000 to $60,493,000 for the year ended December 31, 2003, from $34,670,000 for the year ended December 31, 2002. Income from tax credits increased by approximately $14,330,000, from $30,603,000 for the year ended December 31, 2003, to $44,933,000 for the year ended December 31, 2002, due to our capcos achieving various additional investment thresholds mandated by the various state capco statutes in 2003 versus 2002. Electronic payment processing revenue increased by approximately $4,713,000 to $6,297,000 for the year ended December 31, 2003, from $1,584,000 for the year ended December 31, 2002, due to an increase in electronic payment processing customers, as well as our acquisition of Automated Merchant Services, Inc., or AMS, on August 7, 2003.

Servicing fee and premium income increased by approximately $2,702,000 to $2,702,000 for the year ended December 31, 2003 from $0 for the year ended December 31, 2002 due to the fact that Commercial Capital Corp., or CCC and now NSBF, the SBA lender, was acquired on December 31, 2002.

Interest and dividends are generated from SBA lending activities, excess cash balances that are invested in low risk, highly liquid securities (money market accounts, federal government backed mutual funds, etc.), non-cash accretions of structured insurance product and on held to maturity investments. The following table details the changes in these different forms of interest and dividend income:


	Year Ended December 31,				Change
	2002		2003		Change
SBA lending activities	$	—	$	3,542,830	$	3,542,830
Non-cash accretions		175,612		175,612		—
Qualified investments		224,260		123,295		(100,965	)
Low-risk highly liquid securities		500,255		217,584		(282,671	)

	$	900,127	$	4,059,321	$	3,159,194

The acquisition of NSBF contributed approximately $3,543,000 of additional interest income in 2003, generated on SBA lending activities. This increase in interest income was offset by corresponding decreases in income generated on qualified investments and low-risk highly liquid securities which is attributable to a decline in the average outstanding balances of held to maturity investments and interest bearing cash accounts.

Other income increased by approximately $614,000 to $2,151,000 for the year ended December 31, 2003 from $1,537,000 for the year ended December 31, 2002. Other than electronic payment processing and NSBF as described above, this increase is due to the increased number of consolidating operating entities in 2003 as compared to 2002 coupled with the increase in revenues from existing consolidated operating entities, as they continue to transition from start up operations. For the year ended December 31, 2003, there was $350,000 of income from recovery of an investment previously written off, compared to approximately $29,000 of a recovery of investment previously written off for the year ended December 31, 2002. During 2003, Transworld Business Brokers LLC repurchased their equity interest in the business for $350,000, resulting in the recovery of income in the accompanying consolidated statement of income.

Changes in interest expense are summarized as follows:


	Year Ended December 31,				Change
	2002		2003		Change
Capco interest expense	$	10,732,980	$	11,596,998	$	864,018
NSBF (SBA lender) interest expense		—		1,915,527		1,915,527
Other interest		752,387		366,431		(385,956	)

	$	11,485,367	$	13,878,956	$	2,393,589

The approximately $864,000 increase in capco interest expense in 2003 was attributable to the new borrowings associated with the new capco, as well as the fact that Wilshire Colorado and Wilshire Louisiana Partners III had a full year of expense in 2003 compared to a partial year in 2002. The acquisition of NSBF contributed approximately $1,916,000 of additional interest expense in 2003, generated by SBA lending activities. The approximately $386,000 decrease in other interest expense was attributable to reductions in borrowings under line of credit and notes payable.

Payroll and consulting fees increased by approximately $3,842,000 to $8,407,000 for the year ended December 31, 2003 from $4,565,000 for the year ended December 31, 2002. The increase was primarily due to the acquisition of NSBF on December 31, 2002, which contributed approximately $2,098,000 of payroll and consulting fees. In addition, the increase was also due to approximately $700,000 of compensation to board members (approximately $200,000) and executive management (approximately $500,000) awarded in 2003, as well as the increased number of operating entities consolidated into us in 2003 versus 2002. Electronic payment processing direct costs increased by approximately $3,053,000 to $3,685,000 for the year ended December 31, 2003 from $632,000 for the year ended December 31, 2002, due to the significant increase in the number of electronic payment processing customers as well as the acquisition of AMS in August 2003.

Professional fees increased by approximately $2,183,000 to $5,328,000 for the year ended December 31, 2003 from $3,145,000 for the year ended December 31, 2002. This increase is primarily due to the increased number of capcos and consolidated operating entities in 2003 as compared to 2002. Insurance expense increased by approximately $518,000 to $2,469,000 for the year ended December 31, 2003 from $1,951,000 for the year ended December 31, 2002. This increase is due to the additional insurance relating to the new capco in 2003, as well as the fact that two capcos (Wilshire Colorado and Wilshire Louisiana Partners III) had a full year of expense in 2003 compared to a partial year in 2002. Provision for loan losses increased by approximately $473,000 to $473,000 for the year ended December 31, 2003 from $0 for the year ended December 31, 2002. This is due to the fact that NSBF was acquired on December 31, 2002.

Other expenses increased by approximately $1,709,000 to $4,750,000 for the year ended December 31, 2003 from $3,041,000 for the year ended December 31, 2002. The increase was due primarily to expenses incurred by consolidated operating entities other than electronic payment processing as described above. Specifically, the operations of NSBF contributed approximately $905,000 to the increase in other expenses in 2003 compared to $0 in 2002.

In accordance with the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and other Intangible Assets,” or SFAS 142, we assessed the carrying value of goodwill recorded on the consolidated balance sheet and determined that the fair values of the underlying entities to which goodwill was attributable were less than the carrying values of those entities. As a result, we completed the impairment analysis required by SFAS 142 and recorded approximately $1,435,000 of an impairment charge in the accompanying consolidated statement of income for the year ended December 31, 2003.

We consider several factors in determining whether an impairment exists on our investments, such as the investee’s net book value, cash flow, revenue and net income. We recognize that in developing new and small businesses, significant impairments in the value of the investments may occur.

Other than temporary decline in value of investments increased by approximately $394,000 to $1,996,000 for the year ended December 31, 2003 from $1,602,000 for the year ended December 31, 2002, due to our determination that a greater amount of our investment values were impaired in 2003 versus 2002. During the year ended December 31, 2003, we determined that there was approximately $943,000 of an other than temporary decline in the value of our investments for Merchant Data Systems, Inc., or MDS, $500,000 for 1-800 Gift Certificate, $271,000 for Direct Creations, LLC, $145,000 for O.S. Johnson, LLC, $112,000 for Gerace Auto Parts, $20,000 for Transworld Business Brokers, LLC and $5,000 for CB Real Net (non-capco investment). These items aggregated approximately $1,996,000 which is shown on the statement of income as other than temporary decline in value of investments.

1-800 Gift Certificate has not provided a 2002 annual audited financial statement. The audited financial statement was required to be delivered to us as of April 1, 2003. This constitutes a technical default of covenants under the investment terms. 1-800’s interim financial statements have indicated an additional weakening of the balance sheet (which reflects a negative equity position). We do not expect to recover this investment.

In March, 2003, Wilshire Partners (our Florida capco) filed a lawsuit in Florida state court claiming a default under the outstanding loan to MDS. MDS counter-sued Wilshire Partners, and our CEO, COO and CFO in April, 2003. Although the management of Wilshire Partners is confident that the balance owed is appropriate and due, it does not expect to recover this investment, and our management concurs in this.

For the year ended December 31, 2002, we determined that there was approximately $728,000 of an other than temporary decline in the value of our investments for Starphire Technologies, LLC, approximately $87,000 other than temporary decline in the value of our investment for Gino’s Seafood, approximately $464,000 for Direct Creations, LLC, $100,000 for O.S. Johnson, LLC and an approximate $77,000 other than temporary decline in the value of our investments for Embosser’s Sales and Service. In addition, we determined an impairment existed for a non-capco investment (included in prepaid expenses and other assets on the consolidated balance sheet), and recorded a charge of approximately $146,000. These items aggregate approximately $1,602,000 which is shown on the statement of income as other than temporary decline in value of investments.

For the year ended December 31, 2003, equity in net losses of affiliates decreased by approximately $729,000 to $0 from $729,000 for the year ended December 31, 2002. This decrease is due to the fact that the investments accounted for under the equity method were written down to $0 as of December 31, 2002.

Net income increased by approximately $1,401,000, to net income of $9,569,000 for the year ended December 31, 2003, compared to net income of $8,168,000 for the year ended December 31, 2002, due to the increases in revenue of approximately $25,823,000 offset by general and administrative expenses of approximately $15,271,000 discussed above, offset by the increase in the taxes of approximately $4,432,000, and the decrease in extraordinary gains of approximately $3,456,000.

Consolidated Operating Entities. At December 31, 2003, we had 19 majority-owned consolidated operating entities, most of which were as result of investments through the capco programs. For the year ended December 31, 2003, these companies represented approximately $2,700,000 in losses that are consolidated in our results (net of inter-company eliminations of $1,761,000 in revenues and $1,688,000 in expenses). For the year ended December 31, 2003, revenues from consolidating operating entities, net of inter-company eliminations, amounted to $14,689,000 and were generated from the following sources: SBA lending ($7,390,000), electronic payment processing ($6,297,000), outsourced financial information systems ($223,000), and all other consolidated subsidiaries ($779,000). For the year ended December 31, 2003, expenses incurred by consolidating operating companies, net of inter-company eliminations, amounted to $17,389,000 and were incurred by the following sources: SBA lending ($6,639,000), electronic payment processing ($7,218,000), outsourced financial information systems ($824,000), and all other consolidated subsidiaries ($2,708,000).

At December 31, 2003, we had four companies accounted for under the equity method, all of which were as a result of investments through the capco programs. During the year ended December 31, 2002, approximately $729,000 of losses were shown on the consolidated statement of income as equity in net losses of affiliates. There were no additional losses recorded in the year ended December 31, 2003 as all equity method investments were written down to $0.

Comparison of the Years Ended December 31, 2002 and December 31, 2001

Revenues increased by approximately $10,765,000 to $34,670,000 for the year ended December 31, 2002, from $23,905,000 for the year ended December 31, 2001. Income from tax credits increased by approximately $9,105,000, from $21,498,000 for the year ended December 31, 2001, to $30,603,000 for the year ended

December 31, 2002, due to our capcos achieving various additional investment thresholds mandated by the various state capco statutes in 2002 versus 2001. Electronic payment processing revenue increased by approximately $1,463,000 from $121,000 for the year ended December 31, 2001 to $1,584,000 for the year ended December 31, 2002 due to additional electronic payment processing companies and customers. Interest and dividend income decreased by approximately $945,000 to $900,000 for the year ended December 31, 2002, from $1,845,000 for the year ended December 31, 2001.

Interest and dividends are generated from excess cash balances that are invested in low risk, highly liquid securities (money market accounts, federal government backed mutual funds, etc.), non-cash accretions of structured insurance product, and held to maturity investments. The income generated from the low risk, highly liquid securities decreased by approximately $680,000, from approximately $1,180,000 in 2001 to approximately $500,000 in 2002 and was due to lower bank interest rates and a decline in excess cash balances outstanding. The remaining decrease of $265,000 in interest earned on held to maturity investments was due to a decline in the average balance of loans outstanding to qualified businesses during 2002 as compared to the prior year. Other income increased by approximately $1,201,000 to $1,537,000 for the year ended December 31, 2002 from $336,000 for the year ended December 31, 2001. This increase was due to the consolidation of revenues with additional consolidated operating entities other than electronic payment processing. For the year ended December 31, 2002, there was $29,000 of income from an investment previously written off, compared to approximately $105,000 for the year ended December 31, 2001.

Interest expense decreased by approximately $92,000 to $11,485,000 for the year ended December 31, 2002 from $11,577,000 for the year ended December 31, 2001. The decrease was due primarily to the reduction of activity associated with notes payable in credits in lieu of cash. Payroll and consulting fees increased by approximately $1,900,000 to $4,565,000 for the year ended December 31, 2002 from $2,665,000 for the year ended December 31, 2001. The increase was due to the consolidation of operating expenses with additional operating entities consolidated into Newtek, other than electronic payment processing. Electronic payment processing direct costs increased by approximately $590,000 to $632,000 for the year ended December 31, 2002 from $42,000 for the year ended December 31, 2001, as a result of the additional electronic payment companies, as well as significant growth within the existing electronic payment processing companies. Professional fees increased by approximately $1,084,000 to $3,145,000 for the year ended December 31, 2002 from $2,061,000 for the year ended December 31, 2001. This increase is due to the new capco and capco fund that were formed in 2002. Insurance expense increased by approximately $421,000 to $1,951,000 for the year ended December 31, 2002 from $1,530,000 for the year ended December 31, 2001. This increase is due to the prepaid insurance amortization on the newly formed capco and capco fund that were formed in 2002.

Other expenses increased by approximately $1,908,000 to $3,041,000 for the year ended December 31, 2002 from $1,133,000 for the year ended December 31, 2001. The increase was due primarily to the consolidation of operating expenses from additional companies now consolidated into Newtek, other than electronic payment processing as described above.

We consider several factors in determining whether an impairment exists on an investment, such as the investee’s net book value, cash flow, revenue and net income. We recognize that in developing new and small businesses, significant impairments in the value of the investments may occur.

We had $1,602,000 of other than temporary impairments in 2002, versus approximately $477,000 in 2001. For the year ended December 31, 2002, we determined that there was approximately $728,000 of an other than temporary decline in the value of our investments for Starphire Technologies, LLC, approximately $87,000 other than temporary decline in the value of our investment for Gino’s Seafood, approximately $464,000 for Direct Creations, LLC, $100,000 for O.S. Johnson, LLC and an approximate $77,000 other than temporary decline in the value of our investment for Embosser’s Sales and Service. In addition, we determined an impairment existed for a non-capco investment (included in prepaid expenses and other assets on the consolidated balance sheet), and recorded a charge of approximately $146,000. These items aggregate approximately $1,602,000 which is shown on the statement of income as other than temporary decline in value of investments.

We had a recovery of approximately $29,000 in our capco’s debt investment in MDS for the year ended December 31, 2002. For the year ended December 31, 2001, we had recoveries of approximately $100,000 from Transworld Business Brokers LLC and $5,000 from Down to Earth, LLC.

Net income increased by approximately $7,238,000, to net income of $8,168,000 for the year ended December 31, 2002, compared to net income of $930,000 for the year ended December 31, 2001, due to the increases in revenue and general and administrative expenses discussed above, offset by the increase in other than temporary decline in investments of approximately $1,126,000, decreased equity in losses of approximately $1,551,000 due to the consolidation of certain investments previously accounted for under the equity method, an increase in income taxes of approximately $2,123,000, and the extraordinary gains of $3,643,000 (of which $2,735,000 is attributable to our acquisition of CCC, and $908,000 to our acquisition of minority interests.)

Consolidated Operating Entities. At December 31, 2002, Newtek had 14 majority-owned consolidated operating entities, most of which were as a result of investments through the capco programs. For the year ended December 31, 2002, these companies represented approximately $3,591,000 in losses that are consolidated in our results (net of inter-company eliminations of $1,012,000 in revenues and $1,009,000 in expenses). For the year ended December 31, 2002, revenues from consolidating partner companies, net of inter-company eliminations, amounted to $2,866,000 and were generated from the following sources: electronic payment processing ($1,584,000), outsourced financial information systems ($218,000), and other ($1,064,000). For the year ended December 31, 2002, expenses incurred by consolidating partner companies, net of inter-company eliminations, amounted to $6,457,000 and were incurred by the following sources: electronic payment processing ($2,926,000), outsourced financial information systems ($578,000), and all other consolidated entities ($2,953,000). For the year ended December 31, 2001, these companies represented approximately $614,000 in losses that are consolidated in our results (net of inter-company eliminations of $96,000 in revenues and $385,000 in expenses). For the year ended December 31, 2001, revenues from consolidating operating entities, net of inter-company eliminations, amounted to $267,000 and were generated from the following sources: electronic payment processing ($121,000) and other ($146,000). For the year ended December 31, 2001, expenses incurred by consolidating partner companies, net of inter-company eliminations, amounted to $881,000 and were incurred by the following sources: electronic payment processing ($197,000) and all other consolidated entities ($684,000).

At December 31, 2002, we had four companies accounted for under the equity method, all of which were as a result of investments through the capco programs. For the year ended December 31, 2002, these companies represented approximately $729,000 in losses that are shown on the consolidated statement of income as equity in net losses of affiliates. For the year ended December 31, 2001, these companies represented approximately $2,280,000 in losses that are shown on the consolidated statement of income as equity in net losses of affiliates.

Liquidity and Capital Resources

Newtek has funded its operations primarily through the issuance of notes to insurance companies through the capco programs. Through March 31, 2004, Newtek has received approximately $185,000,000 in proceeds from the issuance of long-term debt, capco warrants, and Newtek common stock through the capco programs. Newtek’s principal capital requirements have been to fund the purchase of Coverage A insurance related to the notes issued to the insurance companies (approximately $102,381,000), the acquisition of Coverage B capco insurance policies ($21,255,000), the acquisition of consolidated operating entity’s interests, identifying other capco-qualified investments, and working capital needs resulting from operating and business development activities of its consolidated operating entities.

Net cash used in operating activities for the three months ended March 31, 2004 of approximately $1,606,000 resulted primarily from a net loss of approximately $1,704,000 adjusted for the non-cash interest expense of approximately $3,021,000, proceeds from sale of SBA loans held for sale of approximately $9,449,000, and other non cash charges for stock compensation, depreciation and amortization, and provision for loan losses totaling approximately $657,000. It was also affected by the approximately $1,184,000 of a deferred

tax benefit, $256,000 of discount on loan originations, approximately $300,000 of minority interest, approximately $2,024,000 in non-cash income from tax credits, and approximately $8,112,000 in SBA loans originated for sale. In addition, we had a net decrease in components of prepaid insurance, prepaid expenses, accounts receivable and other assets, and accounts payable and accruals of approximately $1,622,000.

Net cash used in operating activities for the three months ended March 31, 2003 of approximately $2,332,000 resulted primarily from net income of approximately $1,859,000, increased by the non-cash interest expense of approximately $3,091,000. It was also affected by the approximately $1,713,000 in other than temporary decline in value of investments, approximately $288,000 in minority interest, the approximately $10,389,000 in income from tax credits, and the deferred income tax provision of $1,069,000. In addition, we had an increase in components of prepaid insurance, prepaid expenses, accounts receivable and other assets, and accounts payable and accruals of approximately $638,000.

Net cash used in investing activities for the three months ended March 31, 2004 of approximately $880,000 resulted primarily from repayments on SBA loans of approximately $2,354,000, and approximately $216,000 of purchase of furniture, fixtures and equipment, offset by approximately $3,138,000 from SBA loans originated for investment, $136,000 from returns of held to maturity investments.

Net cash provided by investing activities for the three months ended March 31, 2003 of approximately $2,080,000 resulted primarily from returns of principal of approximately $1,518,000, offset by approximately $3,200,000 in additional qualified investments made in the period. We also received approximately $2,307,000 in repayments on our loan receivable and we consolidated approximately $1,409,000 of our investments.

Net cash provided by financing activities for the three months ended March 31, 2004 was approximately $11,606,000, primarily attributable to proceeds from the issuance of long term debt of approximately $10,925,000, approximately $1,848,000 from the private placement of common stock and exercise of stock options, and proceeds from SBA bank notes of approximately $3,652,000. This was offset by approximately $3,348,000 in payments for Coverage A insurance, $779,000 in payments on notes payable-insurance, $120,000 in payments of notes payable-other, and a change in restricted cash of approximately $573,000.

Net cash provided by financing activities for the three months ended March 31, 2003 was approximately $1,750,000, primarily attributable to approximately $766,000 from the private placement of common stock, offset by approximately $1,017,000 in payments on loans payable, and $2,000,000 in proceeds from the sale of preferred stock of a consolidated entity.

During the three months ended March 31, 2004 we and our affiliated companies generated cash flow primarily from the following sources:

•

private placement of common stock and exercise of stock options, netting $1,848,000;

•

proceeds from issuance of a long-term debt and warrants of $10,925,000;

•

interest and dividend income of approximately $1,029,000;

•

proceeds from sales of SBA loans of approximately $9,449,000;

•

other income of approximately $473,000, which represents revenue from Newtek’s consolidated operating entities;

•

cash received from repayments of SBA loans receivable of approximately $2,354,000; and

•

proceeds from SBA bank notes payable of approximately $3,652,000.

The cash was primarily used to:

•

originate approximately $11,250,000 in SBA loans held for investment and for sale;

•

repay “note payable-insurance” of approximately $779,000; and

•

purchase of Coverage A insurance of approximately $3,348,000.

During the three months ended March 31, 2003 we generated cash flow primarily from the following sources:

•

private placement of common stock, netting $766,000;

•

interest and dividend income of approximately $1,059,000;

•

proceeds from the sale of subsidiary preferred stock of $2,000,000;

•

other income of approximately $255,000, which represents revenue from consolidated operating entities; and

•

cash received repayments on SBA loans of approximately $2,307,000.

The cash was primarily used to:

•

invest approximately $3,200,000 in small or early stage businesses; and

•

repay a note payable-other of approximately $1,017,000.

Through December 31, 2003, we have received approximately $173,148,000 in proceeds from the issuance of long-term debt, capco warrants, and our common stock through the capco programs. Our principal capital requirements have been to fund the purchase of Coverage A insurance related to the notes issued to the insurance companies (approximately $97,276,000), the acquisition of Coverage B capco insurance policies ($19,613,000), the acquisition of consolidated operating entity’s interests, identifying other capco-qualified investments, and working capital needs resulting from operating and business development activities of our consolidated operating entities.

Net cash used in operating activities for the year ended December 31, 2003 of approximately $11,977,000 resulted primarily from net income of $9,569,000 adjusted for the non-cash interest expense of approximately $11,597,000, proceeds from sale of SBA loans held for sale of approximately $15,065,000, non-cash income tax expense of approximately $7,090,000 and other non cash charges for stock compensation, depreciation and amortization, and provision for loan losses totaling approximately $1,528,000. It was also affected by the approximately $1,646,000 of other than temporary decline in the value of investments (net of recoveries of $350,000), $416,000 of discount on loan originations, and approximately $1,598,000 of minority interest. This was offset by the approximately $44,933,000 in non-cash income from tax credits, approximately $18,685,000 in SBA loans originated for sale and $187,000 in extraordinary gains. In addition, we had a net increase in components of prepaid insurance, prepaid expenses and other assets, and accounts payable and accruals of approximately $2,059,000.

Net cash used in operating activities for the year ended December 31, 2002 of approximately $9,908,000 resulted primarily from net income of $8,168,000 adjusted for the non-cash interest expense of approximately $10,733,000 and non-cash income tax expense of approximately $2,657,000. It was also affected by the approximately $729,000 in equity in net losses of affiliates, $1,574,000 of other than temporary decline in value of investments (net of recoveries of $29,000), and approximately $335,000 of minority interest. This was offset by the approximately $30,603,000 in non-cash income from tax credits and $3,643,000 in extraordinary gains. In addition, we had a net decrease in components of prepaid insurance, prepaid expenses and other assets, and accounts payable and accruals of approximately $83,000.

Net cash used in operating activities for the year ended December 31, 2001 of approximately $5,837,000 resulted primarily from net income of $930,000 adjusted for the non-cash interest expense of approximately $10,677,000 and non-cash income tax expense of approximately $535,000. It was also affected by the approximately $2,280,000 in equity in net losses of affiliates, $372,000 of other than temporary decline in value of investments (net of recoveries of $105,000), and approximately $509,000 of minority interest. This was offset by the approximately $21,498,000 in non-cash income from tax credits. In addition, we had a net increase in components of prepaid insurance, prepaid expenses and other assets, and accounts payable and accruals of approximately $182,000.

Net cash provided by investing activities for the year ended December 31, 2003 of approximately $2,704,000 resulted primarily from returns of investments of approximately $5,976,000, offset by approximately

$10,710,000 in additional qualified investments made in the period, $1,708,000 of cash paid for the acquisition of AMS including acquisition costs, $324,000 for the purchase of property and equipment, and approximately $6,417,000 in proceeds from SBA loans originated for investment. We also received approximately $9,549,000 in repayments of our SBA loans receivable, $350,000 of recovery of previously written off investments, and approximately $5,992,000 of cash from consolidation of our majority owned companies. In 2003, we made $1,200,000 of held to maturity investments while during the same period in the prior year we made $2,335,000 of held to maturity investments. The decrease in held to maturity investments is a reflection of the shift of our strategy to acquire predominately majority interests. In 2003, we made $9,510,000 of consolidated investments while during the same period in 2002, we made $13,861,000 of consolidated investments.

Net cash provided by investing activities for the year ended December 31, 2002 of approximately $9,266,000 resulted primarily from approximately $16,196,000 in additional qualified investments made in the period offset by returns of investments of $14,045,000, cash from consolidation of majority owned companies of $8,872,000, and $2,475,000 in cash received in connection with the acquisitions of Exponential and CCC. This decrease in held to maturity investments is a reflection of the shift of our strategy to acquire predominately majority interests.

Net cash used in investing activities for the year ended December 31, 2001 of approximately $1,979,000 resulted primarily from approximately $24,588,000 in additional qualified investments made in the period, $490,000 of other investments, and purchase of furniture, fixtures and equipment of approximately $107,000. This was offset by repayments on debt instruments of $11,757,000, return of previously written off investments of $105,000, returns of principal of $210,000, cash from consolidation of majority owned companies of $10,893,000, and distributions from equity method investees of approximately $240,000.

Net cash provided by financing activities for the year ended December 31, 2003 was approximately $1,547,000, primarily attributable to proceeds from the issuance of long term debt of approximately $6,658,000, approximately $2,463,000 from the private placement of common stock and exercise of stock options, and $2,000,000 in proceeds from the sale of preferred stock of a consolidated subsidiary. This was offset by approximately $2,534,000 in payments for Coverage A insurance, $2,255,000 in payments on notes payable-insurance, $450,000 in payments on a line of credit, $416,000 in payments of notes payable-other, $1,834,000 in repayments on bank notes payable, and a change in restricted cash of approximately $2,107,000.

Net cash provided by financing activities for the year ended December 31, 2002 was approximately $10,642,000, primarily attributable to the approximately $30,000,000 in proceeds from the issuance of long term debt, and net proceeds of approximately $2,091,000 from the issuance of stock during the twelve months ended December 31, 2002. This was offset by payments on a premium financing note payable-insurance of approximately $7,034,000, payments for Coverage A insurance of approximately $14,514,000 and the full repayment of a mortgage obligation of approximately $307,000.

Net cash provided by financing activities for the year ended December 31, 2001 was approximately $4,291,000 primarily attributable to the approximately $5,200,000 of proceeds from issuance of notes payable-insurance, and other of $575,000 and approximately $726,000 from the issuance of common stock. This was offset by payments on a premium financing note payable-insurance of approximately $1,596,000 and distributions to members of approximately $609,000.

During the year ended December 31, 2003 we and our affiliated companies generated cash flow primarily from the following sources:

•

private placement of common stock, netting $2,463,000;

•

proceeds from issuance of long-term debt and warrants of $6,658,000;

•

proceeds from sale of preferred stock of a subsidiary of $2,000,000;

•

return of investments of approximately $5,976,000, which was held pending reinvestment;

•

interest and dividend income of approximately $4,059,000;

•

other income of approximately $2,151,000, which represents revenue from our consolidated operating entities; and

•

cash received from repayments of SBA loans receivable of approximately $9,549,000.

The cash was primarily used to:

•

invest approximately $10,710,000 (including approximately $9,510,000 which was consolidated into our financial statements) in small or early stage businesses;

•

originate approximately $25,101,000 in SBA loans held for investment and for sale;

•

repay a “note payable-insurance” of approximately $2,255,000;

•

purchase of Coverage A insurance of approximately $2,534,000; and

•

pay the line of credit and other payables of approximately $866,000.

During the year ended December 31, 2002 we generated cash flow primarily from the following sources:

•

private placement of common stock, netting $2,091,000;

•

proceeds from issuance of a long-term debt and warrants of $30,000,000;

•

return of investments of approximately $14,045,000, which were held pending reinvestment;

•

interest and dividend income of approximately $900,000;

•

other income of approximately $1,537,000, which represents revenue from consolidated operating entities; and

•

cash received from acquired companies of approximately $2,475,000.

The cash was primarily used to:

•

invest approximately $16,196,000 (including approximately $13,861,000 which was consolidated into our financial statements) in small or early stage businesses;

•

repay a “note payable-insurance” of approximately $7,034,000; and

•

purchase Coverage A insurance for approximately $14,514,000.

During the year ended December 31, 2001 we generated cash flow primarily from the following sources:

•

proceeds from issuance of a note payable-insurance of $5,200,000;

•

proceeds from a line of credit of $575,000;

•

private placement of common stock, netting $726,000;

•

return of investments of $12,072,000;

•

interest and dividend income of approximately $1,845,000; and

•

other income of approximately $336,000.

The cash was primarily used to:

•

fund distributions to owners of the predecessors of Newtek in lieu of compensation and related to passed-through tax liabilities of $608,000;

•

invest $24,588,000 (less $11,128,000 which was consolidated into our financial statements) in small or early stage businesses; and

•

repay a “note payable-insurance” of approximately $1,596,000.

SBA loans. As of December 31, 2003 and 2002, SBA loans that were past due more than 90 days, but were still performing (accruing interest), amounted to approximately $97,000 and $294,000, respectively.

As of December 31, 2003 and 2002, SBA loans that were on a non-accrual basis amounted to $3,201,000 and $2,915,000, respectively. This $286,000 increase was predominantly due to two loans being downgraded to nonperforming status. Such charge offs are made due to the decrease in asset quality of the receivables based on performance. We consider the specific payback performance of each SBA loan, as well as payback performance as a whole, to determine if our provision for write-offs is adequate.

Liquidity Risk. We believe that our cash and cash equivalents, our anticipated cash flow from operations, and our ability to access private and public debt and equity markets will provide sufficient liquidity to meet our short and long-term capital needs. The loss of any one or two of these liquidity sources would not present an impossible obstacle to our operations. However, the failure of the capco insurers, which are primarily liable for the repayment of the capco debt of $152,327,000, would require the capcos to assume this cash repayment obligation of the notes. Management has determined that the likelihood of the capcos becoming primarily liable for a material portion of this debt due to the failure of the insurers, which are subsidiaries of American International Group, Inc., or AIG, and are both currently rated as AAA for financial strength by Standard & Poor’s, is remote. The parent company, AIG, has not agreed to guarantee the obligations of the subsidiary insurers, but it has provided written assurance that, in the event a capco insurer experiences a downgrade in its credit rating, it will transfer the policy obligations to a strong affiliate, if possible.

The following chart represents our obligations and commitments, as of December 31, 2003, other than capco debt repayment discussed above for future cash payments under debt, lease and employment agreements for the years indicated:


Year	Debt		Leases		Employment Agreements		Total
2004	$	2,747,813	$	399,283	$	855,000	$	4,002,096
2005		2,441,656		413,684		855,000		3,710,340
2006		430,785		412,303		—		843,088
2007		—		261,814		—		261,814
2008		—		294,969		—		294,969
2009		3,810,161		1,242,633		—		5,052,794

Total	$	9,430,415	$	3,024,686	$	1,710,000	$	14,165,101

This chart excludes distributions for taxes due to capco minority owners (which can not be anticipated).

CCC, at the time of its acquisition by us had a $10,000,000 line of credit with a bank. As of December 31, 2002, the amount outstanding under this line of credit was $3,998,630 and was paid off with the proceeds of the Deutsche Bank line of credit in connection with our acquisition of CCC (included in Bank Notes Payable on the accompanying consolidated balance sheet). CCC also had a line of credit with another bank for $75,000,000. As of December 31, 2002, the amount outstanding under this line of credit was $51,325,862 and, less $1,500,000 which was converted into NSBF preferred stock, was assumed by us in connection with our acquisition of CCC (included in Bank notes payable on the accompanying consolidated balance sheet).

Effective with our acquisition of CCC, a new line of credit was provided by Deutsche Bank to the successor to CCC, NSBF. The aforementioned CCC credit lines were refinanced, with the aforementioned outstanding SBA loan balances aggregating, after accounting for the conversion of $1,500,000 to preferred stock, $53,824,492 at December 31, 2002. The new line of credit of $75,000,000, which was to expire on June 30, 2004 and is guaranteed by Newtek.

See “Risk Factors—Risks Related To Our SBA Lending Business.”

Under the terms of the credit line, NSBF must meet certain administrative and financial covenants, including the maintenance of a minimum net worth, ratio of total indebtedness to net worth, limitation on permitted subordinated debt and profitability covenants as defined in the agreement. NSBF is in compliance with all covenants as of March 31, 2004.

As of March 31, 2004, NSBF had $55,642,027 outstanding on the Deutsche Bank line of credit, which bears interest at the prime interest rate minus .50%, and is collateralized by the loans made by NSBF. The interest rate at March 31, 2004 was 3.50%. Interest on the line is payable monthly in arrears. This line of credit, as amended, requires that a percentage of all advances made to NSBF be deposited into an account in the name of the bank. The balance in this account as of March 31, 2004 was $2,841,915 and is included in receivable from bank on the accompanying consolidated balance sheet.

Under the terms of the credit line, all payments received from NSBF’s borrowers except for principal and interest on the guaranteed portion of the loans are transferred into a restricted bank account. NSBF cannot use these funds until the end of a calendar month at which time the funds are used to pay required principal and interest to the bank and certain other required payments. As of March 31, 2004, restricted cash totaled $2,680,680.

As of March 31, 2004, we had approximately $42,600,000 in cash of which substantially all was either restricted for use for capco activities or on hand in investee companies.

Management expects to have three basic working capital requirements in the near term. These are:

•

initial funding of new capcos;

•

working capital for operating its current businesses; and

•

funds for investment by the capcos in order to meet minimum investment requirements.

We expect to finance our participation in additional capcos and other ventures principally with externally generated funds, which may include:

•

the proceeds from this offering;

•

borrowings under current or future bank facilities; and/or

•

the sale of equity, equity-related or debt securities on terms and conditions similar to those obtained for similar sales during 2003.

We fund our current operations almost exclusively through the receipt of annual management fees from the capcos equal to 2.5% of initial funding, as well as periodic private placements of our common stock. However, the management fees do not represent revenues to us on a consolidated basis as this is a transfer of funds from our capcos to our management entity, and all intercompany transactions and balances are eliminated in consolidation. These fees from current capcos are expected to decrease over the next few years as the capcos mature in their business cycle. In the absence of either new capcos or a material increase in the profitability of our partner companies, we will experience a decrease in liquidity. Management believes that numerous, realistic options are available to compensate for this, such as borrowings or additional offerings in the capital markets. However, if new capcos are not created, if the partner companies do not begin to produce significant cash flow surpluses, if the capital markets should be inaccessible and if other borrowings are unavailable, we would be forced to diminish materially our operations so as to conform our expenditures to the cash then available. Management cannot at this time foresee any realistic circumstance where such a contraction of business would be necessary.

Management does not anticipate the need for additional funding in order for our existing capcos to meet the minimum investment requirements imposed under the capco programs. As detailed elsewhere, the record of our capcos in progressing towards the minimum required investment levels is good and management does not foresee any likely event which would preclude all of the capcos meeting their respective requirements ahead of schedule.

Income from Capco Tax Credits

In general, the capcos issue debt and equity instruments, to insurance company investors. For a description of the debt and equity instruments and warrants issued by our capcos, see the Notes to our Consolidated Financial Statements. The capcos then make targeted investments, as defined under the respective state statutes, with the funds raised. Each capco has a contractual arrangement with the particular state that entitles the capco to receive (or, earn) tax credits from the state upon satisfying quantified, defined investment percentage thresholds and time requirements. In order for the capcos to maintain their state-issued certifications, the capcos must make targeted investments in accordance with these requirements, which requirements are consistent with our overall business strategy of acquiring controlling positions in our partner companies. Each capco also has separate, contractual arrangements with the insurance company certified investors obligating the capco to pay interest on the aforementioned debt instruments. The capco may satisfy this interest obligation by delivering the tax credits or paying cash. The insurance company investors have the legal right to receive and use the tax credits and would, in turn, use these tax credits to reduce their respective state tax liabilities in an amount usually equal to 100% of their investments in the capcos. The tax credits can be utilized over a ten-year period at a rate of, usually, 10% per year and in some instances are transferable and can be carried forward. Our revenue from tax credits may be used solely for the purpose of satisfying the capcos’ obligations to the insurance company investors.

A description of the manner in which we and our capcos account for the tax credit income is set forth at “Critical Accounting Policies and Estimates—Revenue Recognition.”

The amount earned and recorded as income is determined by multiplying the total amount of tax credits allocated to the capco by the percentage of tax credits immune from recapture (the earned income percentage) at that point. To the extent that the investment requirements are met ahead of schedule, and the percentage of non-recapturable tax credits is accelerated, the present value of the tax credit earned is recognized currently and the asset, credits in lieu of cash, is accreted up to the amount of tax credits deliverable to the insurance company investors, or certified investors. The obligation to deliver tax credits to the certified investors is recorded as notes payable in credits in lieu of cash. On the date the tax credits are utilizable by the certified investors, the capco decreases credits in lieu of cash with a corresponding decrease to notes payable in credits in lieu of cash.

The total amount of tax credits allocated to each of the capcos, the required investment percentages, recapture percentages and related earned income percentages, and pertinent dates are summarized as follows:


	The First to Occur
State Capco or Fund	Total Tax Credits Allocated		Investment Benchmark		Investment Benchmark Date	Decertification Recapture Thresholds	Recapture Percentage		Earned Income Percentage
FLORIDA	$	37,384,028	20	%	12/31/00	Prior to 20%	100	%	0	%
Wilshire Partners (WP)			30	%	12/31/01	After 20 before 30%	70	%	30	%
			40	%	12/31/02	After 30 before 40%	60	%	40	%
			50	%	12/31/03	After 40 before 50%	50	%	50	%
						After 50%	0	%	100	%

NEW YORK	$	35,160,202				Prior to 25%	100	%	0	%
Wilshire N.Y.			25	%	12/21/02	After 25 before 40%	85	%	15	%
Partners III (WNY III)			40	%	12/21/03	After 40 before 50%	70	%	30	%
			50	%	12/21/04	After 50%	0	%	100	%

COLORADO	$	16,175,415				Prior to 30%	100	%	0	%
Statewide Pool			30	%	4/22/05	After 30 before 50%	80	%	20	%
Wilshire Colorado			50	%	10/25/07	After 50%	0	%	100	%
Partners (WC)						Prior to 30%	100	%	0	%

COLORADO	$	5,882,352	30	%	4/22/05	After 30 before 50%	80	%	20	%
Rural Pool Wilshire			50	%	10/25/07	After 50%	0	%	100	%
Colorado Partners (WC)

LOUISIANA	$	18,040,000				Prior to 30%	100	%	0	%
Wilshire LA			30	%	10/14/02	After 30 before 50%	70	%	30	%
Advisers (WLA)			50	%	10/14/04	After 50%	0	%	100	%

WISCONSIN	$	16,666,667				Prior to 30%	100	%	0	%
Wilshire Investors (WI)			30	%	10/25/02	After 30 before 50%	70	%	30	%
			50	%	10/25/04	After 50%	0	%	100	%

LOUISIANA	$	8,000,000				Prior to 30%	100	%	0	%
Wilshire LA			30	%	10/15/05	After 30 before 50%	87.5	%	12.5	%
Partners III (WLPIII)			50	%	10/15/07	After 50%	0	%	100	%

NEW YORK	$	6,807,866				Prior to 25%	100	%	0	%
Wilshire N.Y.			25	%	4/7/02	After 25 before 40%	85	%	15	%
Advisers II (WLA II)			40	%	4/7/03	After 40 before 50%	70	%	30	%
			50	%	4/7/04	After 50%	0	%	100	%

LOUISIANA	$	6,800,000	30	%	10/16/06	Prior to 30%	100	%	0	%
Wilshire LA			50	%	10/16/08	After 30 before 50%	87.5	%	12.5	%
Partners IV (WLA IV)						After 50%	0	%	100	%

NEW YORK	$	3,810,161				Prior to 25%	100	%	0	%
Wilshire Advisers (WA)			25	%	6/22/00	After 25 before 40%	85	%	15	%
			40	%	6/22/01	After 40 before 50%	70	%	30	%

LOUISIANA	$	3,355,000	30	%	10/13/03	Prior to 30%	100	%	0	%
Wilshire LA			50	%	10/13/05	After 30 before 50%	70	%	30	%
Partners II (WLP II)						After 50%	0	%	100	%

Under the various state capco provisions there is a difference in the amount of qualified investments made and the amount of income recognized by the respective capcos upon satisfaction of the various benchmarks. The table below relates the investments made, both as percentage of total funds and in dollar amounts, to the income recognized as each benchmark is achieved. In all of these programs, a majority of our income from the delivery of the tax credits will be recognized no later than five years into the ten-year programs.


State Capco or Fund	Allocated Tax Credits		Investment Benchmark Percentage/Dollars			Earned Income Percentage/Dollars
FLORIDA	$	37,384,028	20%	$	7,476,806	30%	$	11,215,208
Wilshire Partners (WP)			30%	$	11,215,208	40%	$	14,953,611
			40%	$	14,953,611	50%	$	18,692,014
			50%	$	18,692,014	100%	$	37,384,028

NEW YORK	$	35,160,202	25%	$	8,790,051	15%	$	5,274,030
Wilshire N.Y. Partners III (WNY III)			40%	$	14,064,080	30%	$	10,548,060
			50%	$	17,580,101	100%	$	35,160,202
COLORADO	$	16,175,415	30%	$	4,852,625	20%	$	3,235,083
Wilshire Colorado Partners (WC)			50%	$	8,087,708	100%	$	16,175,415
Statewide Pool

COLORADO	$	5,882,352	30%	$	1,764,706	20%	$	1,176,470
Wilshire Colorado Partners (WC)			50%	$	2,941,176	100%	$	5,882,352
Rural Pool

LOUISIANA	$	18,040,000	30%	$	4,920,000	30%	$	5,412,000
Wilshire LA Advisers (WLA)			50%	$	8,200,000	100%	$	18,040,000

WISCONSIN	$	16,666,667	30%	$	5,000,000	30%	$	5,000,000
Wilshire Investors (WI)			50%	$	8,333,334	100%	$	16,666,667

LOUISIANA	$	8,000,000	30%	$	2,400,000	12.5%	$	1,000,000
Wilshire LA Partners III (WLPIII)			50%	$	4,000,000	100%	$	8,000,000

NEW YORK.	$	6,807,866	25%	$	1,701,967	15%	$	1,021,180
Wilshire N.Y. Advisers II (WNY II)			40%	$	2,723,146	30%	$	2,042,360
			50%	$	3,403,933	100%	$	6,807,866

LOUISIANA	$	6,800,000	30%	$	2,040,000	12.5%	$	850,000
Wilshire LA Partners IV (WLP IV)			50%	$	3,400,000	100%	$	6,800,000

NEW YORK	$	3,810,161	25%	$	952,540	15%	$	571,524
Wilshire Advisers (WA)			40%	$	1,524,064	30%	$	1,143,048
			50%	$	1,905,081	100%	$	3,810,161

LOUISIANA	$	3,355,000	30%	$	915,000	30%	$	1,006,500
Wilshire LA Partners II (WLP II)			50%	$	1,525,000	100%	$	3,355,000

During the years ended December 31, 2003, 2002 and 2001, the capcos satisfied certain investment benchmarks and the related recapture percentage requirements and accordingly, earned a portion of the tax credits. In addition, in 2003, 2002 and 2001 we recognized income from the accretion of the discount attributable to tax credits earned in prior years. See the Notes to our Consolidated Financial Statements contained elsewhere in this prospectus.

During 2003, we established and received certification for one new capco, Wilshire Louisiana Partners IV and formed and funded Wilshire Alabama Partners in the first quarter of 2004. Both of these new capcos have a number of years until their first investment benchmarks occur.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that effect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. The most significant estimates include:

•

allowance for possible loan losses;

•

valuation of intangible assets and goodwill including the values assigned to acquired intangible assets;

•

stock-based compensation; and

•

income tax valuation allowance.

Management continually evaluates our accounting policies and the estimates it uses to prepare the Consolidated Financial Statements. In general, the estimates are based on historical experience, on information from third party professionals and on various other sources and assumptions that are believed to be reasonable under the facts and circumstances at the time such estimates are made. Management considers an accounting estimate to be critical if:

•

it requires assumptions to be made that were uncertain at the time the estimate was made; and

•

changes in the estimate, or the use of different estimating methods, could have a material impact on our consolidated results of operations, financial condition or cash flows.

Actual results could differ from those estimates. Significant accounting policies are described in Note 1 to the consolidated financial statements, which are included elsewhere in this prospectus. In many cases, the accounting treatment of a particular transaction is specifically indicated by GAAP. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Certain of our accounting policies are deemed “critical,” as they require management’s highest degree of judgment, estimates and assumptions. The following critical accounting policies are not intended to be a comprehensive list of all of our accounting policies or estimates.

Revenue Recognition. Following an application process, a state will notify a company that it has been certified as a capco. The state then allocates an aggregate dollar amount of tax credits to the capco. However, such amount is neither recognized as income nor otherwise recorded in the financial statements since it has yet to be earned by the capco. The capco is entitled to earn tax credits upon satisfying defined investment percentage thresholds within specified time requirements. We have capcos in six states. Each statute requires that the capco invest a threshold percentage of “certified capital” (the funds provided by the insurance company investors) in businesses defined as qualified within the time frames specified. As the capco meets these requirements, it avoids grounds under the statute for its disqualification for continued participation in the capco program. Such a disqualification, or “decertification” as a capco results in a permanent recapture of all or a portion of the allocated tax credits. The proportion of the possible recapture is reduced over time as the capco remains in general compliance with the program rules and meets the progressively increasing investment benchmarks. As the capco progresses in its investments in qualified businesses and, accordingly, places an increasing proportion of the tax credits beyond recapture, it earns an amount equal to the non-recapturable tax credits and records such amount as income, with a corresponding asset called “credits in lieu of cash” in the consolidated balance sheet.

obligation to deliver tax credits to the certified investors is recorded as notes payable in credits in lieu of cash. On the date the tax credits are utilizable by the certified investors, the capco decreases credits in lieu of cash with a corresponding decrease to notes payable in credits in lieu of cash.

SBA Lending. Interest income on SBA loans is recognized as earned. When a SBA loan is 90 days past due with respect to principal or interest and, in the opinion of management, interest or principal on individual loans is not collectible, or at such earlier time as management determines that the collectibility of such principal or interest is unlikely, the accrual of interest is discontinued and all accrued but uncollected interest income is reversed. Cash payments subsequently received on nonaccrual loans are recognized as income only where the future collection of the recorded value of the SBA loan is considered by management to be probable. Certain related direct costs to originate loans (including fees paid to SBA loan brokers) are deferred and amortized over the contractual life of the SBA loan using a method that approximates the effective interest method.

Electronic Payment Processing Revenue. Electronic payment processing and fee income is derived from electronic processing of credit, charge and debit card transactions that are authorized and captured through third-party networks. Certain merchant customers are charged a flat fee per transaction, while others may also be charged miscellaneous fees, including fees for handling chargebacks, association bank fees as well as interchange and assessments paid to electronic payment associations (MasterCard and Visa) pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants. Revenues derived from the processing of transactions are recognized at the time the merchants’ transactions are processed. Related interchange and assessment costs and bank processing fees are also recognized at that time. Interchange and bank processing fees include costs directly attributable to the furnishing of transaction processing and other services to our merchant customers. The most significant components of cost of service include interchange and assessment costs, which are set by the credit card associations. Interchange is passed on to the entity issuing the credit card used in the transaction and assessments are retained by the credit card associations. Interchange and assessment fees are billed primarily as a percent of dollar volume processed and, to a lesser extent, as a per-transaction fee.

Capco Debt Issuance. The capco notes require, as a condition precedent to the funding of the notes, that insurance be purchased to cover the risks associated with the operation of our capcos. This insurance is purchased from American International Specialty Lines Insurance Company and National Union Fire Insurance Company of Pittsburgh, both subsidiaries of AIG, an international insurer. In order to comply with this condition precedent to the funding, the notes closing is structured as follows: (1) the certified investors wire their funds directly into an escrow account; (2) the escrow agent, pursuant to the requirements under the note and escrow agreement, automatically and simultaneously funds the purchase of the insurance contact from the proceeds received. Our capco is not entitled to the use and benefit of the net proceeds received until the escrow agent has completed the purchase of the insurance. AIG and its subsidiaries noted above are AAA credit rated.

Under the terms of this insurance, which is for the benefit of the certified investors, the capco insurer incurs the primary obligation to repay the certified investors a substantial portion of the debt (including all cash payments) as well as to make compensatory payments in the event of a loss of the availability of the related tax credits. The capco remains secondarily liable for such payments and must periodically assess the likelihood that it will become primarily liable and, if necessary, record a liability at that time. The parent company, AIG, has not guaranteed the obligations of its subsidiary insurers, although it has provided written assurances to transfer the policy obligations to an affiliated company, if possible, in the event the capco insurer is materially downgraded in its credit rating.

Investment Accounting and Valuation. The various interests that the capcos and we acquire as a result of their investments are accounted for under three methods: consolidation, equity method and cost method. The applicable accounting method is generally determined based on our voting interest in a company, and monthly valuations are performed so as to keep our records current in reflecting the operations of all of our investments.

Companies in which we directly or indirectly own more than 50% of the outstanding voting securities or those we have effective control over, or are deemed as a variable interest entity that needs to be consolidated

under the provisions of Financial Accounting Series Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN 46) are generally accounted for under the consolidation method of accounting. Under this method, an investment’s results of operations are reflected within our consolidated statement of operations. All significant intercompany accounts and transactions are eliminated. The results of operations and cash flows of a consolidated entity are included through the latest interim period in which we 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 voting interest at or 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.

Companies that are not consolidated, but over which we exercise significant influence, are accounted for under the equity method of accounting. Whether or not we exercise significant influence with respect to a company depends on an evaluation of several factors including, among others, representation on the board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities, including voting rights associated with our holdings in common, preferred and other convertible instruments. Under the equity method of accounting, a company’s accounts are not reflected within our consolidated statement of income; however, our share of the investee’s earnings or losses are reflected under the caption “Equity income (loss)” in the consolidated statement of income.

Companies not accounted for under the consolidation or the equity method of accounting are accounted for under the cost method of accounting, for which monthly valuations are performed. Under this method, our share of the earnings or losses of such companies is not included in the consolidated statements of income, but the investment is carried at historical cost. In addition, cost method impairment charges are recognized as necessary, in the consolidated statement of income if circumstances suggest that this is an “other than temporary decline” in the value of the investment, particularly due to losses. Subsequent increases in value, if any, of the underlying companies are not reflected in our financial statements until realized in cash. We record as income amounts previously written off only when and if we receive cash in excess of our remaining investment balance.

On a monthly basis, the investment committee of each capco meets to evaluate each of our investments. We consider several factors in determining whether an impairment exists on the investment, such as the companies’ net book value, cash flow, revenue growth and net income. In addition, the investment committee looks at larger variables, such as the economy and the particular company’s industry, to determine if an other than temporary decline in value exists in each capco’s and our investment.

Impairment of Goodwill. Management considers the following to be some examples of important indicators that may trigger an impairment review outside our annual goodwill impairment review under the provisions of Financial Accounting Statement No. 142, or FAS 142: (i) significant under-performance or loss of key contracts acquired in an acquisition relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of the acquired assets or in our overall strategy with respect to the manner or use of the acquired assets or changes in our overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in our stock price for a sustained period of time; and (vi) regulatory changes. In assessing the recoverability of the our goodwill and intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. The fair value of an asset could vary, depending upon the estimating method employed, as well as assumptions made. This may result in a possible impairment of the intangible assets and/or goodwill, or alternatively an acceleration in amortization expense. During the year ended December 31, 2003, management determined that impairment of goodwill was triggered as a result of the annual impairment test and appropriately recorded a charge in the accompanying consolidated statement of income.

Allowance for Possible SBA Loan Losses. An allowance for possible SBA loan losses is established by a provision for possible SBA loan losses charged to operations. Actual SBA loan losses or recoveries are charged or credited directly to this allowance. The provision for possible SBA loan losses is management’s estimate of

the amount required to maintain an allowance adequate to reflect the risks in the SBA loan portfolio; however, ultimate losses may vary from the current estimates. This estimate is reviewed periodically and any necessary adjustments are made in the period in which they become known.

On an individual basis, we evaluate all non-performing loans for possible impairment. The amount of impairment is determined by comparing the carrying value of the SBA loan to the estimated fair market value of the collateral we hold and the difference is added to the Allowance for Possible Loan Losses. We will have a new appraisal done on the collateral if management feels it may have changed in value. If the carrying amount of the SBA loan (net of the allowance for possible loss) is different than the actual net recovery amount after liquidation of the collateral, then we will record a gain/loss in our consolidated statement of income at the time of disposition.

Additionally, all loans are also evaluated as a group, and we use industry wide statistics of SBA loan losses and management’s experience in the industry to record reserves on our SBA loan portfolio.

Stock Based Compensation. We have elected to continue using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for employee stock options. With regard to stock options, no stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock at the date of grant. Compensation expense on restricted shares granted to employees is measured at the fair market value on the date of grant and recognized in the consolidated statement of income on a pro-rata basis over the service period, which approximates the vesting period.

Income Taxes. Deferred tax assets and liabilities are computed based upon the differences between the financial statement and income tax basis of assets and liabilities using the enacted tax rates in effect for the year in which those temporary differences are expected to be realized or settled. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized.

New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to our existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. We have has not entered into any financial instruments within the scope of SFAS No. 150 since May 31, 2003, nor does it currently hold any financial instruments within its scope.

In January of 2003, the FASB issued FIN 46, which requires a variable interest entity to be consolidated by the primary beneficiary of the entity, which represents the company that is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns, or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The provisions of FIN 46 are effective immediately for those variable interest entities created after January 31, 2003. On December 24, 2003, the FASB issued a revision to FIN 46, which among other things deferred the effective date for certain variable interests. Application is required for interests in special-purpose entities in the

period ending after December 15, 2003 and application is required for all other types of variable interest entities in the period ending after March 31, 2004. We have elected not to defer the application of FIN 46 and FIN 46R to its interests in potential variable interest entities created prior to February 1, 2003.

As a result of adoption of FIN 46 and FIN 46R during the current year, we determined that we are the primary beneficiary of two variable interest entities in which we previously had accounted for under the equity method or cost method of accounting. Accordingly, we have consolidated such entities into our financial statements, and the net effect of such consolidation at December 31, 2003 was not significant to our financial position. Additionally, we evaluated investments made after January 31, 2003 and determined that several entities were variable interest entities which were consolidated under the provisions of FIN 46.

Quantitative And Qualitative Disclosures About Market Risk

All of our business activities contain elements of market risk. We consider the principal types of risk to be fluctuations in interest rates and loan portfolio valuations. We consider the management of risk to be 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 the 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. 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 2003. 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 effect 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.

We have market risk sensitive instruments related to interest rates. We have outstanding bank notes payable of approximately $55,600,000 at March 31, 2004. Interest rates on such notes are variable at prime minus 0.5%.

We do not believe that we have significant exposure to changing interest rates on our line of credit because the line expires on June 30, 2004, and due to the short term nature of the borrowings. We have not undertaken any additional actions to cover interest rate market risk and are not a party to any other interest rate market risk management activities.

Additionally, we do not have significant exposure to changing interest rates on invested cash, which was approximately $33.4 million and $41.2 million at December 31, 2003 and 2002, respectively. We invest cash on a short term basis in money market accounts and other investment-grade securities and do not purchase or hold derivative financial instruments for trading purposes.

BUSINESS

Overview

Newtek Business Services, Inc. is a holding company for several wholly and majority-owned operating subsidiaries and capcos. The major focus of our businesses is to provide high value and cost efficient services to small and medium-sized businesses. We currently operate in three principal lines of business and will add a fourth upon the conclusion of this offering. These four lines of business are as follows:

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We use a substantial portion of our initial proceeds from the insurance company investors to purchase insurance for repayment of principal and for the protection of the investors, should the tax credits become voided or forfeited. In all of the capcos we have organized, after payment of the organizational costs and the capco insurance premium, the remaining cash, plus the proceeds of any premium financing we do, is equal to approximately 50% of the amount initially raised. To date, the primary source of cash for Newtek itself has been the statutorily fixed, annual management fees of 2.5% of each capco’s initial capital. Most of our revenue, income and cash flow has come from state-sponsored capco programs and other related investments and operations. However, the revenue to us resulting from the capco tax credits is non-cash and is used exclusively to satisfy obligations of the capcos to deliver tax credits to their investors. Moreover, the terms of the capco programs will not allow the distribution of profits from the capco to us until our capcos have completed their business cycles and invested all of their funds. Until we are able to distribute cash earnings of our capco businesses to the holding company, we must rely on relatively small management fees received from the capcos and future earnings of non-capco investments, if any, as the sources of cash to meet our expenses.

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Small business loans. Through our majority-owned subsidiary NSBF we make small business loans guaranteed by the SBA under the section 7(a) loan program and related section 504 business real estate loan program. The SBA definition eligible small businesses based on standard industry codes and generally includes business with less than $25,000,000 in revenues and no more than 1,500 employees.

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Payment processing. Newtek Merchant Solutions offers credit card, debit card and gift card processing services and check approval services to approximately 6,000 small and medium-sized businesses as of March 31, 2004 through its four payment processing companies and its full-service processing center in Milwaukee, Wisconsin. Newtek Merchant Solutions also provides these services to local and regional banks and credit unions that do not offer their own payment processing services so that these banks may offer these services to their merchant clients through us.

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Website hosting. On April 28, 2004, we signed a definitive agreement to acquire CrystalTech. Netcraft, an independent consultant has cited CrystalTech as the world’s third largest website hosting enterprise utilizing exclusively Microsoft Hosting 2003^®. As of December 31, 2003, CrystalTech had approximately 26,000 active accounts in approximately 80 countries (although over 80% of such accounts are generated in the United States). Completion of the acquisition is contingent upon our arrangement for financing through this offering or otherwise, obtaining certain consents or approvals, and other customary closing conditions. In addition, we have agreed with the underwriters for this offering that we will use our commercially reasonable best efforts to consummate the transaction with CrystalTech within eight days of closing this offering. See “CrystalTech Acquisition.”

During the three month period ending March 31, 2004, we had revenues of approximately $7,870,000, of which the operation of the capcos resulted in non-cash revenues related to the capco tax credits of approximately $2,024,000, or 26% of total revenue. During the fiscal year ended December 31, 2003, we had revenues of

approximately $60,493,000, of which the operation of the capcos resulted in non-cash revenues related to the capco tax credits of approximately $44,933,000, or 74% of total revenue. During 2002, the operation of the capcos resulted in non-cash revenues related to the capco tax credits of approximately $30,603,000, or 88% of total revenue. Our net income for 2003 and 2002 was approximately $9,569,000 and $8,168,000, respectively. Our assets at March 31, 2004 were approximately $200,700,000, up from $169,055,000 as of December 31, 2002.

Our Industries in General

Certified Capital Companies

A capco is either a corporation or a limited liability company established in and chartered by one of the nine jurisdictions currently with authorizing legislation: Alabama, Colorado, District of Columbia, Florida, Louisiana (sometimes referred to as a capco fund in this jurisdiction), Missouri, New York, Texas and Wisconsin. Aside from seed capital provided by an organizer such as Newtek, a capco will issue debt and equity instruments exclusively to insurance companies, and the capcos are then authorized under the respective state statutes to make targeted equity or debt investments in qualified companies, which in most cases may be majority-owned or primarily controlled by the capcos after the investments are consummated. In conjunction with the investment in these companies, the capcos may also provide loans to the companies. In most cases, the tax credits provided by the states are equal to the amount of investment by the insurance companies in the notes of the capcos, which can be utilized by them over no less than ten years, or approximately 10% per year. These credits are unaffected by the returns or lack of returns on investments made by the capcos.

The first capco program was enacted in Louisiana in 1984 but did not become a popular vehicle for investment until the program was modified to its current form in 1994. Participation in capco programs as an organizer is open to any investor or venture capital company. In each of the states, capcos have been organized either by a local company operating in that state or by one of the four companies such as us which participate in most capco programs. With the exception of Newtek, these national companies, to our knowledge, are all privately-held and operating as venture capital investment firms. Capcos operate as a private sector mechanism to channel funds from insurance companies to support small and medium-sized businesses and rely on the ability of the managers of the capcos to find, evaluate and make the investments within the terms of the programs.

Small Business Lending

The Small Business Act of 1953 created the SBA to provide management and financial assistance to small businesses. We participate in two loan programs managed by the SBA: the section 7(a) loan program and the section 504 loan program. Section 7(a) of that Act established this loan program to encourage lenders to provide loans to qualifying small businesses. The section 504 program provides growing businesses with long-term, fixed-rate financing for major fixed assets.

The section 7(a) program is the SBA’s largest lending program, representing over 80% of all SBA lending. The SBA can guarantee up to 85% of loans of $150,000 or less, and up to 75% of loans in excess of $150,000, generally subject to a maximum guaranty of $1,500,000 per borrower. Loans originated under the section 7(a) program can bear either fixed or adjustable rates of interest, as negotiated between the lender and the borrower at origination.

The section 504 program is different from the section 7(a) program in that the lender makes a 50% first-lien loan, the SBA makes a 40% second-lien loan, and the borrower provides 10% equity. The SBA provides its 40% through the sale of SBA guaranteed debentures.

During the past ten years, the SBA has facilitated approximately 380,000 loans totaling over $85 billion under the section 7(a) program. Loans are generally limited to the amount of federal guarantee authorization available. For the federal fiscal year ending September 30, 2004, the SBA has been authorized to issue guarantees to cover up to $12.5 billion of loans. For fiscal years 2005, authorizations are in place for approximately $12.5 billion.

In 1975, a secondary market was created through which broker/dealers could sell the government-guaranteed portions of their loans to institutional investors. Because the government guarantees a portion of each loan, these loan portions are typically sold for premiums up to 110% of the principal amount, with a servicing fee retained by the lender.

While there are numerous participants in the small business lending market, and particularly in the SBA-guaranteed loan programs, including national depository institutions such as Bank of America and Wachovia Bank, there are only 14 nationwide SBA-licensed small business lending companies.

Electronic Payment Processing

The use of card-based forms of payment, such as credit and debit cards, by consumers in the United States has steadily increased since 1991. According to the Federal Reserve, electronic payments in the U.S. grew fivefold from 1979 to 2000, while the number of paper checks circulated fell by 10 billion between 1995 and 2002. In addition, the Nilson Report predicts that credit, debit and stored value card transactions will surpass cash and checks combined in 2009.

The proliferation of credit and debit cards has made the acceptance of card-based payment a necessity for businesses, both large and small, in order to remain competitive. Small businesses are a vital component of the U.S. economy and are expected to contribute to the increased use of card-based payment methods. The lower costs associated with card-based payment methods today are making these services more affordable to a larger segment of the small business market. By accepting card-based payments, merchants can access a broader universe of consumers, enjoy faster settlement times and reduce transaction errors. We believe these businesses are experiencing increased pressure to accept card-based payment methods in order to remain competitive and to meet consumer expectations. As a result, significant opportunities exist for continued growth in the application of card-based transaction processing services to the small business market.

Website Hosting

Upon our acquisition of CrystalTech, we will be engaged in the business of web hosting. The dramatic growth in Internet usage and the enhanced functionality, accessibility, cost effectiveness, and security of Internet-enabled applications have made it attractive for small and medium-sized companies to conduct business on the Internet. However, we believe that many of small and medium-sized companies lack the resources and expertise to develop, maintain and enhance, on a cost-effective basis, the necessary Internet capabilities. An increasing number of businesses are choosing to outsource the hosting and management of their information technology applications.

Although the demand for Internet services has increased over the past three years, the number of providers has decreased because of industry consolidation and bankruptcies. We believe this trend will continue and will benefit a small number of service providers that have the infrastructure and distribution capabilities to cost effectively provide scalability, performance and reliability. Furthermore, the website hosting industry has struggled to effectively market to small and medium-sized businesses due to the relatively high cost of marketing a single product or service line to a large, untapped market. The higher costs are typically passed on to the end user in the form of higher service fees or other add-ons. We believe that by marketing website hosting with a variety of other business services to the small and medium-sized business market through our cost effective marketing distribution channel, we will not need to increase the pricing or sacrifice the quality to our website hosting services.

Our Solutions

In order to compete effectively, we believe small and medium-sized businesses need to obtain reliable, flexible financing and to access business services that will enable and automate transactions with their customers. Additionally, we believe small businesses have begun to use the Internet to cost effectively penetrate their market and more broadly distribute their products and services. We have built a company that serves the financial and business needs of small and medium-sized businesses. Key elements of our solutions include:

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Investing in companies that serve the small business market through funding from the capco programs. Currently we participate in eleven capco programs (and manage a twelfth, Exponential, which we acquired in 2002) in various states, making investments in companies that serve the small and medium-sized business market and attempting to foster economic growth and development within these states. Management has a proven track record of raising capco funds, raising approximately $185,000,000 over the past four years, and maintaining compliance within the state programs. Our capco debt instruments have all been rated AAA or the equivalent by Standard and Poor’s or another nationally recognized rating agency. As of the end of 2003, all of our capcos were in material compliance with all applicable requirements and seven of the ten operational capcos (an eleventh was formed in January 2004 in Alabama and is not as yet subject to any investment requirement) had met their statutory minimum investment thresholds. The capcos compete with the other participants in their respective state programs for the allocation of tax credits based on obtaining investment commitments from insurance company investors. Companies such as us, which can demonstrate a track record of being able to design and implement capco programs, have an advantage over the new and local capco competitors. We began operations in 1998 and have since that time maintained a market share of allocated tax credits and funds of approximately 25% of total allocations. We believe that the reasons we have been able to compete in this business line are the strengths of our management, the experience we have had in structuring and marketing the tax credit programs to insurance company investors and our ability to operate our business in the full disclosure environment of a public company.

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Providing credit through our participation in the SBA small business loan guarantee programs. Through NSBF, we specialize in making small business loans guaranteed by the SBA for the purpose of acquiring commercial real estate, machinery, equipment and inventory and refinancing debt and funding franchises and for working capital and business acquisitions. NSBF is one of 14 companies licensed to provide SBA loans nationwide under the section 7(a) loan program for small businesses and the related section 504 business real estate loan program. Historically, these programs account for approximately $10 billion and $3 billion of loans each year. From our date of acquisition through March 31, 2004, NSBF had funded 73 loans for a total of approximately $36,350,000, and was servicing a portfolio of loans for others in the principal amount of approximately $127,768,000.

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Offering a full suite of payment processing capabilities to our small and medium-sized merchants. Newtek Merchant Solutions offers credit card, debit card and gift card processing services and check approval services to approximately 6,000 small and medium-sized businesses as of March 31, 2004 through our full service processing center in Wisconsin. During 2003, we processed approximately $215,000,000 in credit, debit and gift card transactions for our merchant customers.

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Establishing marketing alliances with national business organizations and credit unions to identify business needs of small companies and broadly deliver our services. We have formed key marketing alliances with national business organizations, such as Merrill Lynch and Cendant Corporation, business and trade organizations such as the Credit Union National Association and the Community Bankers of Wisconsin, and affinity organizations such as Revelation Corporation of America, Navy Federal Credit Union and Veterans’ Corporation of America. Through the use of the data collected on our small and medium-sized business customers as well as our ability to access data on the customers, members and participants of our marketing partners, we can cross-sell our business services to a wider audience.

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Providing website hosting services through our recently announced acquisition of CrystalTech. Our proposed acquisition of CrystalTech will enable us to provide website hosting services to the small and medium-sized business marketplace. Upon consummation of this offering and the acquisition, we will be able to offer website hosting services to our existing customers as well as provide complementary business services to CrystalTech’s existing 26,000 customers.

Our Strategy

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Cross-sell additional products and services to small and medium-sized businesses. Our web-based, proprietary referral system is a custom-designed customer relationship management tool which allows us to utilize our marketing alliance partners’ client base efficiently and cost effectively and assures our alliance partners full transaction transparency with the highest level of customer service. We will seek to expand the use of this tool to cross-sell our products and services to our customer base and the customers we acquire through acquisitions, including those of CrystalTech and our alliance partners.

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Continue to develop our state-of-the-art technology to process new business and financial transactions. Our applications processing technology allows us to process new business received by our small and medium-sized business customers utilizing a web-based system and a centralized processing point. Our trained representatives use these web-based applications as a tool to acquire and process data, eliminating the need for our customers to complete multiple paper forms in face-to-face meetings. We will continue to develop this system because it is customer friendly, allows us to process applications efficiently and allows us to store client information for further processing and future cross-selling efforts.

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Our Capco Business

The authorizing statutes in each of the states in which our capcos operate explicitly allow and encourage the capcos to make equity interests in companies, which in most cases may include majority or controlling interests. Consequently, we may, consistent with our business objectives, acquire equity interests in companies through the

use of the capco funds and provide management and other services to these companies. The investments by the capcos create jobs and foster economic development by directing capital from insurance companies to growing and early-stage companies in need of financing. These investments are consistent with the objectives of the programs as stated in most capco statutes.

Because our capcos have arranged for the repayment of a portion of the capco notes through insurance policies issued by The National Union Fire Insurance Company of Pittsburgh or American International Specialty Lines Insurance Company, both affiliates of AIG, and a portion of the capco notes is “paid” through the delivery of tax credits, our capcos are under no pressure to generate short-term profits and may invest for long-term profitability. As a result, we have the ability to devote the necessary time, attention and resources to these companies which they require. All but one of our current majority-owned companies produced a loss for 2003.

Currently, seven of our capcos have been in operation for three or four years, and four have been formed in the last two years, including one which was formed in Alabama in January 2004 (in Louisiana, three of our capcos are organized as separate funds under the one capco license). In all of the capcos we have organized, after payment of the organizational costs and the capco insurance premium, the remaining cash, plus the proceeds of premium financing, if any, is equal to approximately 50% of the amount initially raised. Where the structure of a particular capco program requires the use of a significant portion of our cash for the insurance premium, we typically rely on a premium financing arrangement with an affiliate of the capco insurer in order to supplement our initial cash position. An important feature of all capco programs is that a minimum of 50% of the initial investment in the capcos must be placed in qualified business investments within a specified time, usually five years. As each capco receives repayment of debt, including interest, as well as the return of and on equity investments, from its investees, it is able to reinvest the funds in other qualified businesses, which may be its affiliated companies or others. It is through this “investment-return-and-reinvestment” process that our capcos are able to meet the minimum investment requirements of the capco programs.

In 2003, our capcos received total repayments or returns of approximately $6,300,000, in 2002 they received approximately $14,000,000 and in 2001 they received approximately $12,100,000. These funds supplemented the funds available from investors for meeting minimum investment requirements. At March 31, 2004, seven of our eleven operating capcos had met their respective minimum investment requirements (the capco managed by Exponential is not included, as we only manage but do not own it). The eleventh capco, in Alabama, was funded and began operations in January 2004 and is at the beginning of its business cycle, with the entire amount of its certified capital yet to be invested. On a cumulative basis through March 2004, our capcos have received insurance company investment funds of approximately $185,000,000. As of March 31, 2004, we were in full compliance with all of our current capco funding requirements but have yet to invest approximately $14,000,000 in the aggregate, which we will be required to invest in order to satisfy all minimum investment requirements. The period remaining for the investment of the balance of these funds ranges from one to four years, depending on the program.

Revenue generated by our capcos represents our largest single source of revenue, equal to approximately 74% of our gross revenue in 2003, 88% in 2002 and 90% in 2001. During the three month period ended March 31, 2004, the capco revenue was approximately $2,024,000, or 26% of gross revenue. This revenue was the principal source of our net income in 2003, 2002 and 2001.

We and our capcos do not generate any revenue for goods or services from the companies in which we invest. The companies in which the capcos invest do provide services, and to a much lesser degree goods, to each other. However, the effect of such inter-company revenues and expenses are eliminated in consolidation of the financial results. We rely on the annual management fees of 2.5% of certified (initial) capital, as fixed by the capco statutes, as our principal source of cash to cover our operating expenses. This covers all supportive services generally provided by us; however, these fees are paid out of capco cash on hand and are not set aside or reserved for payment out of the funds received by the capcos. As the capcos reach the end of their business cycle, and have achieved investment of the full amount of their respective certified capital, cash distributions out of the capcos become possible, subject to certain limitations on sharing formulas pursuant to the various statutes.

We believe small businesses need active management as well as capital investments to succeed. In order to make the capco investments successful, and thus to fulfill the public policy objectives of the capco programs, we have enhanced the capco funding mechanism by actively adding management resources, technical, operational and professional expertise and non-capco funds. The services range from advice and assistance with strategic relationships to direct and daily involvement in policy making and management. This has included, for example, the development of the “NEWTEK” branding for each of the majority-owned companies without charge, as well as the significant assistance that we provided to NSBF in the negotiation of an extension of a $75,000,000 credit line with an affiliate of Deutsche Bank, expiring on March 31, 2004 (and subsequently extended through June 30, 2005), which included a $3,000,000 debt forgiveness and conversion of $1,500,000 of debt into preferred stock of NSBF. Such $1,500,000 of preferred stock may be redeemed at any time at the face value and, pursuant to NSBF’s amended credit facility, must be redeemed by June 30, 2005 at the latest. This was followed by our arranging the subsequent sale in January 2003 of $2,000,000 in preferred stock to a unit of Credit Suisse First Boston Corporation in conjunction with a referral agreement between Credit Suisse First Boston and NSBF.

Capco Tax Credits. In return for the capcos making investments in the targeted companies, the states provide tax credits to insurance companies which provide funds to the capcos. The tax credits are available to offset state taxes levied on gross annual insurance premium income. In most cases, the tax credits provided by the states are equal to the amount of investment by the insurance companies in the notes of the capcos. In order to maintain its status as a capco and to avoid recapture or forfeiture of the tax credits, each capco must meet a number of specific investment requirements, including a minimum investment schedule. The occurrence of a final loss of capco status, referred to as decertification as a capco, could result in loss or possible recapture of the tax credits. To protect against such losses, our capcos have agreed with their funding insurance companies to provide, in the event of decertification, payments by the capco or, as described below, by the capco insurer to the funding insurance companies in the nature of compensatory payments to replace the lost tax credits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Income From Capco Tax Credits.”

Capco Investment Requirements. Each of the state capco programs has a requirement that a capco, in order to maintain its certified status, must meet certain investment requirements, both qualitative and quantitative.

Quantitative Requirements. The quantitative requirements on capco investments include minimum investment amounts within certain time periods, or milestones, for investment of “certified capital” (the amount of the original funding of the capco by the insurance companies). For example in the state of New York, a capco must invest at least 25% of its certified capital by 24 months from the initial investment date, 40% by 36 months and 50% by 48 months. The minimum investment requirements and time milestones, along with the related tax credit recapture requirements, are set out in detail elsewhere in this prospectus. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Income from Capco Tax Credits” and Note 1 of “Notes to Consolidated Financial Statements – Revenue Recognition.” The minimum requirements are calculated on a cumulative basis and allow the capcos to receive a return of an investment and re-invest the funds for full additional credit towards the minimum requirements.

Qualitative Requirements. The qualitative requirements applicable to capco investments include limitations on the initial size of the recipients of the capco funds, including the number of their employees, the location within the respective state of the recipients and the recipients’ commitment to remain therein for a specified period of time, the types of business conducted by the recipients, and the terms of the investments in the recipients. Most significant for our business is the fact that the capco programs generally do not pose any obstacle to investments in qualified businesses which result in significant, majority or, in some cases, controlling ownership positions. This enables us to achieve both the public policy objectives of the capco programs of increasing the number of small businesses and job opportunities in the state, as well as our own objectives of developing a number of small business service companies which may become profitable and return a meaningful return to our shareholders and to the local participants in the businesses. In addition, because the businesses that we are building provide needed and, in our judgment, cost effective goods and services to other small businesses, the growth of this important segment of a state’s economy may be accelerated.

Enforcement of Requirements. The various states, which administer these programs through their insurance, banking or commerce departments, conduct periodic reviews and on-site examinations of the capcos in order to verify that the capcos have met applicable investment requirements and are otherwise acting in conformance with the statutes and rules. Capcos are required to maintain detailed records so as to demonstrate to state examiners compliance with all applicable requirements. The failure of a capco to meet one of the statutory minimum quantitative investment benchmarks within the time specified would constitute grounds for the loss of the capco’s status, or its decertification, and the loss and recapture of some or all of the tax credits previously passed through the capco to its investors. A decertification of one of our capcos would have a material adverse effect on our business in that it would require the capco insurer to make compensatory payments equal to the lost tax credits and, in the case of an actual or threatened decertification, would permit the insurer to assume partial or complete control over the assets of the capco in order to cover its losses. Compliance with these requirements is reflected in contractual provisions of the agreements between each capco and its investors. The capcos covenant to their investors to use the funds only for investments as permitted by the capco laws or for related expenses and to refrain from taking any action which would cause the capco to fail to continue in good standing.

Compliance. As of March 31, 2004, all of our capcos were in compliance with all applicable requirements and seven of eleven capcos with any operational history had met their minimum 50% investment thresholds. This eliminates any material risk of decertification and tax credit recapture or loss for its insurance company investors in these capcos. This represents approximately $121,200,000 of tax credits, or about 73% of the tax credits associated with all of our capcos.

Capco Insurance. The capco notes require, as a condition precedent to the funding of the notes, that insurance be purchased to cover the risks associated with the operation of the capcos. This insurance is purchased from two AAA credit-rated insurers, American International Specialty Lines Insurance Company and National Union Fire Insurance Company of Pittsburgh, both subsidiaries of AIG, an international insurer. In order to comply with this condition to the funding, the closings on the capco notes are structured as follows: (1) the investors wire the cash proceeds from the notes issuance directly into an escrow account, and (2) the escrow agent, pursuant to the requirements under the notes and escrow agreement, automatically and simultaneously funds the purchase of the capco insurance from the proceeds received. We are not entitled to the use and benefit of the net proceeds received until the escrow agent has completed the purchase of the insurance.

Under the terms of this insurance, which is for the benefit of the investors, the capco insurer incurs the primary obligation to repay the investors a substantial portion of the debt as well as to make compensatory payments in the event of a loss of the availability of the related tax credits. In the event of either a threat of or a final decertification by a state, the capco insurer would be authorized to assume partial or complete control of the business of the particular capco so as to ensure compliance with investment or other requirements. This would likely avoid final decertification and the necessity of insurance or cash payments in lieu of forfeited or recaptured tax credits. However, control by the capco insurer would also result in significant disruption of the particular capco’s business and likely result in significant financial loss to that capco. Decertification would also likely impair our ability to obtain certification for capcos in additional states as new legislation makes other opportunities available. The capcos are individually insured, and the assets of one are not at risk for the obligations of the others. AIG itself has not agreed to guarantee the obligations of its subsidiary insurers.

The following chart describes the role of capcos in our business and the major sources of our revenue and income:

LOGO

⁽¹⁾	We have invested approximately $3,900,000 in seed capital for 11 capcos through March 31, 2004.

⁽²⁾	Our capcos (in conjunction with our capco insurer) have raised approximately $185,000,000 from insurance company investors through March 31, 2004.

⁽³⁾	Approximately $74,600,000 invested in businesses through March 31, 2004.

⁽⁴⁾	Approximately $53,500,000 actually invested in such companies through March 31, 2004.

⁽⁵⁾	A smaller portion of investments are venture capital-type or passive investments, both debt and equity.

⁽⁶⁾	Our non-capco revenue increased by over four times from 2002 to 2003 and increased from 8% to 24% of total revenue.

Our Principal Operating Businesses

The structures through which we own and manage our operating, or non-capco, lines of business can be divided broadly into two categories: (1) those which are majority-owned and (2) those which we either primarily control through lesser equity positions or contractual rights or in which we have a passive or venture-type investment. At March 31, 2004, we had 19 majority-owned companies through which we conduct our principal business activities, all of which were as a result of investments through the capco programs. All of these businesses were initially financed primarily by capco funding and are located and operated by business professionals located in the respective states.

Small Business Lending

We acquired a majority interest in NSBF on December 31, 2002 using a combination of capco funding and cash and non-cash resources. NSBF specializes in making small business loans guaranteed by the SBA for the purpose of acquiring commercial real estate, machinery, equipment and inventory, refinancing debt and funding franchises and for working capital and business acquisitions. This lending is both direct and through various financing partners. NSBF is one of 14 companies licensed to provide loans nationwide under the section 7(a) loan program for small businesses and the related section 504 business real estate loan program.

Prior to our acquisition and recapitalization of NSBF, it had been poorly managed and plagued by bad loans. When we purchased NSBF, it had a negative shareholders’ equity. During the course of the year prior to our acquisition, we and the new NSBF management team had carefully reviewed the problems and prepared a detailed plan for the operations of the company following the acquisition. As a part of the reorganization, we assisted NSBF to arrange a strategic investment of $2,000,000 by an affiliate of Credit Suisse First Boston, which they obtained in exchange for preferred stock representing a 20% equity interest in NSBF and other basic rights typical of a preferred stock. At the same time, NSBF entered into a referral agreement, to permit the cross referral of loan prospects, between NSBF and another affiliate, Column Financial, Inc.

During 2003, NSBF focused on integrating into Newtek and developing a technologically advanced loan application and processing program along with Harvest Strategies, LLC (or Newtek Strategies), another of our affiliated companies. This program guides business owners step-by-step through the loan application process and enables them to be pre-qualified for a small business loan by completing an on-line application. These program tools are distinguishable from competitive products because they can be private-labeled and utilized on the websites of third parties. NSBF’s private label on-line application system is a strong marketing tool, providing advantages in penetrating the customer bases of our marketing alliance partners. These marketing alliances with strategic partners are an essential part of our business strategy to open up broad groups of small and medium-sized businesses to our principal operating businesses. We have partnerships with national business organizations such as Merrill Lynch and Cendant Corporation, business and trade organizations such as the Credit Union National Association and the Community Bankers of Wisconsin, and affinity organizations such as Revelation Corporation of America, Navy Federal Credit Union and the semi-public Veterans’ Corporation of America.

In conjunction with the acquisition of NSBF, we were able to assist in the renegotiation and extension of a major warehouse loan facility from an affiliate of Deutsche Bank. This warehouse line enables our SBA lender to fund loans and repay the line at the time all or a portion of the loan is sold, as is typically the case.

(including the possible expanded facility), (2) Newtek conform to maximum debt and minimum equity requirements, (3) Newtek not pay dividends for the one year term of the facility and (4) in the absence of funding from other sources, Newtek make a debt or equity infusion of at least $10 million to support the lending activities of NSBF. While there can be no assurance that the additional third party funding will be available, NSBF has had numerous discussions with additional lenders and has signed a non-binding letter of intent with one possible lender for $12 million. The failure to arrange the additional funding would be treated as a default under the credit line. However Newtek currently anticipates that NSBF will be able to enter into a third party loan agreement on or before August 2, 2004 or , alternatively, secure from Newtek the required debt or equity infusion by that date, the funds for which may come, in whole or in part, from the proceeds of this offering.

During 2003, NSBF developed an expanded management team with significant experience in the small business lending market. John Cox, NSBF’s Chairman and Chief Executive Officer, worked for the SBA for 30 years and was previously Associate Administrator for Financial Assistance. In this capacity, Mr. Cox was the senior management official in charge of all SBA business lending. Michael Dowd, NSBF’s Chief Operating Officer, worked for the SBA for 25 years and was National Director for Loan Programs where he was responsible for formulation of all policies and procedures governing the implementation of the section 7(a) and section 504 loan programs, including all loan making, loan servicing, loan monitoring and review functions. During 2003, NSBF hired Peter Downs to serve as NSBF’s President. Mr. Downs spent 16 years in various small business lending positions within the banking industry, most recently as National Director of SBA lending for Citibank, coordinating SBA underwriting and sales for Citibank nationwide.

From the date we acquired NSBF through March 31, 2004, NSBF had funded 73 loans for a total of approximately $36,350,000, all of which had floating interest rates, and was servicing a portfolio of loans for others in the principal amount of $127,768,000. NSBF was our only majority controlled company showing pre-tax income for 2003, which was approximately $751,000.

Electronic Payment Processing

We conduct our electronic payment processing business nationwide through five majority-owned companies which offer credit card, debit card and gift card processing services and check approval services to approximately 6,000 small and medium-sized businesses. These five subsidiaries are described below.

Universal Processing Services—Wisconsin, LLC, or Newtek Merchant Solutions of Wisconsin, or UPS-WI, provides credit card, debit card and gift card processing and check approval services directly to merchants. UPS-WI obtains the majority of its merchant customers through agreements with independent sales organizations, including our other four subsidiaries, and other associations throughout the country which then contract with UPS-WI to provide processing services. UPS-WI pays these organizations and associations a percentage of the processing revenue derived from their respective merchants. UPS-WI assists merchants with their initial installation of processing equipment and initial and on-going service needs. On a wholesale basis, UPS-WI acts as a processor for merchants that are brought to it through our affiliated companies and other third-party marketing organizations. UPS-WI had contracts with 100 independent sales consultants as of December 31, 2003, and has grown its customer base significantly during 2002 and 2003. UPS-WI is currently adding approximately 225 electronic payment processing customers per month and has reached a customer base of approximately 2,500 as of December 31, 2003. Because of the growth experienced in 2003, UPS-WI had positive cash flow and earnings for the last quarter of 2003.

The following three subsidiaries operate under the name “Newtek Merchant Solutions”—

•

Universal Processing Services, LLC, or Newtek Merchant Solutions of New York, was organized in March 2001 and is based in New York City.

•

Universal Processing Services—Louisiana, LLC, or Newtek Merchant Solutions of Louisiana, was organized in March 2001 and is based in New Orleans.

•

Universal Processing Services—Colorado, LLC, or Newtek Merchant Solutions of Colorado, was organized in December 2002 and is based in Evergreen, Colorado.

Each of these subsidiaries markets credit, debit and gift card processing services, check approval services and ancillary processing equipment and software to merchants who accept credit cards, debit cards, gift cards, checks and other non-cash forms of payment. In addition to marketing these services directly to businesses, each company is currently establishing relationships with local and regional banks that do not offer their own merchant processing in order to enable them to offer these services to their clients through Newtek Merchant Solutions. Each subsidiary contracts for the actual processing services provided to its merchants and customers through an agreement with UPS-WI. Each of the Newtek Merchant Solutions companies has seen an increase in customers and monthly residual payments.

Since inception, each of these Newtek Merchant Solutions affiliates have all experienced operating losses in each year of operations. These losses have been primarily attributable to general corporate overhead and compensation and commissions paid, which together have been greater than the revenues generated on an annual basis. Based upon the continued growth of the customer bases of these companies, we expect all will turn profitable due to increases in monthly residual payments in the next 12 months.

AMS, based in Coral Springs, Florida, was acquired by our Florida capco and us in August 2003 for a combination of cash and stock. AMS provides electronic payment services, hardware and software to approximately 2,500 businesses and government agencies through ten sales representatives covering the Florida market. During 2003, AMS added 60-70 new clients every month. We plan to grow AMS beyond the Florida market and to expand its product base to include all of the products and services that our existing processor, UPS-WI, offers. Over time, AMS will be re-branded as a part of Newtek Merchant Solutions and marketed in conjunction with our other business services and financial products.

Website Hosting Services

Upon the completion of this offering and the consummation of the acquisition of CrystalTech, we will be engaged in the business of providing website hosting services to more than 26,000 current customers of CrystalTech. Founded in 1997, CrystalTech provides simple shared hosting plans and more complex dedicated hosting plans. The core of the business is a suite of software developed in-house for a fully integrated and automated control center which monitors and crosschecks all internal and external activities of clients’ websites. According to its management, CrystalTech has sufficient employees and technical capabilities to double its current customer base with little or no additional capital expenditures.

CrystalTech’s dedication to superior customer service is reflected in the growth of its customer base, from approximately 3,900 net new customers in 2001 to approximately 9,600 net new customers in 2003. Gross revenue increased by almost 90% in each of the years 2002, 2001 and 2000 and 45% in 2003. CrystalTech uses only Microsoft Windows^® technology. Netcraft, a prominent independent Internet consulting firm, has described CrystalTech as the third largest hosting service in the world providing exclusively Microsoft Hosting 2003^® hosting. Because of the efficiency of CrystalTech’s operations and its firm commitment to customer service, CrystalTech has been able to build a business with significant growth in its customer base and increasing positive cash flow and profitability.

Our Emerging Businesses

Financial Information Systems

We have three majority-owned subsidiaries which design and implement financial and management reporting systems and provide outsourced financial management functions:

Group Management Technologies, LLC, or Newtek Financial Information Systems of Florida, or GMT, is based in Florida and provides administrative and technological support for small and medium-sized businesses by designing and implementing specialized financial and management reporting systems and by providing outsourced financial management functions that reduce costs and management requirements for its clientele. GMT targets the market segment of businesses that are too small to afford a full time financial executive but have grown to the point where managerial and financial controls must be introduced in order to effectively grow the business. GMT’s specialists work closely with management to create budgets and forecasts that serve as planning tools as well as performance evaluation and control benchmarks.

Since its formation in November 1999, GMT has experienced operating losses in each year of operations. While GMT has been unable to build a client base beyond the Newtek affiliated companies, we believe that our financial information system offerings are well designed and technologically advanced and will, with proper management and marketing which we are currently implementing, be able to contribute both revenue and profit to us in the future.

Group Management Technologies of Louisiana, LLC, or Newtek Financial Information Systems of Louisiana, or GMT-LA, was organized in December 2002 and is based in Louisiana. GMT-LA is engaged in the same line of business as GMT. We anticipate that in the future GMT-LA will contract with GMT for some of the consulting and bookkeeping services that are supplied to its clients. Since its inception, GMT-LA has experienced losses, and accordingly we are restructuring both its business plan and management team.

Global Business Advisors of Wisconsin, LLC, or Newtek Capital Advisers of Wisconsin, or GMT-WI, was organized in March 2003 and is based in Wisconsin. GMT-WI is engaged in the same line of business as GMT. We anticipate that in the future GMT-WI will contract with GMT and other affiliated entities for some of the services that are supplied to its clients.

Small Business Tax Services

Newtek Tax, LLC was formed in 2003 without the use of capco funds to provide tax filing, preparation and advisory services to small and medium-sized businesses. Newtek Tax will provide comprehensive tax services that are customized to fit each client. With specialists available in many different areas of taxation, Newtek Tax will offer a wide breath of significant tax-related expertise. Because Newtek Tax was formed during the latter portion of 2003, it did not provide any material financial results for the year ended December 31, 2003. Newtek Tax will market its products to customers of all our affiliated companies utilizing our proprietary referral system.

Small Business Insurance Products and Services

We formed Newtek Insurance Agency, LLC in Washington, D.C. in 2003 without using capco funds, and it has yet to begin operations and has no employees. Newtek Insurance Agency will serve as a retail agency and will market its products to the customers of all our affiliated companies. It will provide customized business insurance products for small and medium-sized businesses, including key-man life, accident and health, business owners’ protection and property and casualty insurance. It is currently fully licensed in 40 states, with the intention of being licensed in all 50 states by the end of 2004. We anticipate that this business will also use our web-based centralized processing system. Newtek Insurance Agency is expected to commence insurance brokerage operations in the second half of 2004.

Our Secondary Business Lines

Exponential was originally organized in the mid-1990s to participate in the New York State capco program (as a competitor of Newtek). This capco has made five small equity investments and three additional investments of both debt and equity. Exponential has also organized another investment vehicle, Exponential of New York, LP, that has made five equity investments and two others involving debt investments. Our interest in Exponential was due to the high reputation of its management and its ability to identify and make investments in the northern and western areas of New York State.

We also own a majority interest in the three companies listed below which to date have not contributed materially to our operations or results. These companies continue to operate at modest levels with de-emphasized product offerings. Due to limited management talent, limited capital and/or low levels of business activity, these ventures are not expected to produce any material revenue or profitability in the near future. These companies accounted for approximately $321,000 in revenue and $512,000 in losses in 2003, net of intercompany activity. These companies are:

•

Newtek Securities, LLC;

•

Transworld Business Brokers of New York, LLC, or/ Newtek Business Exchange; and

•

Global Small Business Services, LLC, or Newtek Client Services.

In addition, we formed the two companies described below during 2003, and we have begun the process of integrating these companies into our Newtek-branded product offering. For these majority-owned companies, we typically take an active role in managing their operations. These companies accounted for approximately $16,000 in revenue and $170,000 in losses in 2003, net of inter-company activity.

Louisiana IT Specialists, LLC, or Newtek IT Services Louisiana, or NITS, provides data mining services and database analysis to small and medium-sized businesses to help them solve business problems and make strategic decisions. NITS utilizes data mining tools to predict future trends and behaviors, allowing clients to make proactive, knowledge-driven decisions. By scouring databases for hidden patterns and predictive information, NITS can answer business questions that traditionally have been too time-consuming to resolve.

Louisiana Community Financial Services, LLC, or Newtek Community Financial Services, or LCFS, was organized in response to the specific needs of small community banks and their small business customers in Louisiana. LCFS has developed a suite of small business products and services specifically tailored to be marketed and sold as ancillary service offerings alongside traditional community banking services as a part of an affinity marketing program. These products and services serve the dual purpose of improving the operations and performance of the small and medium-sized business end-client, as well as providing a method by which small local and community banks can effectively compete with larger national banking franchises, by referring customers to providers of non-core services without having to allocate the resources to provide those services. This strategy allows the local bank to maintain its close relationship with its small business customer without having to add significant infrastructure to expand its product/service offering.

We primarily control two entities in which we have less than majority investments through the capco programs – NicheDirectories, LLC and Starphire Technology, LLC. These entities are accounted for under the equity method. For primarily controlled companies, we generally have significant involvement in and influence over their operating activities, including rights to participate in material management decisions. Because of the determination to focus our business on our principal business lines, we treat these investments as secondary to our principal businesses. While these investments are monitored and some time, attention and resources are provided to the companies as necessary to preserve the investments and meet minimum management commitments, we do not expect any of these investments to result in any meaningful returns to us. All of these investments were written down to $0 at the end of 2002.

We have also made investments, usually smaller or in the form of debt, in a number of other companies. We are generally not actively involved in the management or day-to-day operations of companies in which our equity ownership and voting power is less than 25%. Instead, we offer these businesses advisory services or assistance with particular projects, as well as the collaborative services of our affiliated companies. In pursuing business objectives, we intend to hold a decreasing portion of our total assets in companies in which we have voting power of less than 25%, and as of December 31, 2003, such passive investments had either repaid debt, been liquidated or written off.

Description of Properties

We conduct all of our business activities in facilities leased from unrelated parties at market rates. We maintain offices in Garden City, New York of 2,000 square feet, and New York, New York, of approximately 10,000 square feet. Our annual base rental cost for these facilities for the year ended December 31, 2003 was approximately $84,000 and $240,000, respectively. In addition, our capcos maintain offices in each of the states in which they operate; the costs of the capco facilities are covered by the agreements with the regional managers who operate the capcos. We believe that our present facilities are adequate for our current level of operations.

Employees

As of March 31, 2004, we had 100 employees in our consolidated companies.

Legal Proceedings

From time to time we and our subsidiaries are parties to various legal proceedings in the normal course of business. At March 31, 2004, we are not involved in any material pending litigation other than one routine lawsuit incidental to seeking repayment of funds loaned and related counterclaims. We anticipate that the ultimate resolution of such matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

CRYSTALTECH ACQUISITION

On April 28, 2004 we entered into an agreement to purchase certain assets and assume certain liabilities of CrystalTech Web Hosting, Inc., an Internet website hosting company for $10,000,000 in cash and shares of our common stock equal in market value to $250,000, plus additional shares of our common stock equal to up to $250,000 of restricted stock to be awarded to employees who remain with CrystalTech. In addition, we have agreed to make additional payments to the seller of up to $1,250,000 in cash and up to $1,750,000 worth of our common stock based on the achievement of certain profitability benchmarks. We will acquire the “CrystalTech Web Hosting” name, and we plan to operate the business with the current management team.

Headquartered in Phoenix, Arizona, CrystalTech serves customers in the United States and throughout the world. Netcraft, a prominent independent Internet consulting firm in the United Kingdom, publicly described CrystalTech in late 2002 as the eighth largest website hosting business utilizing exclusively Microsoft Windows^®. More recently, Netcraft described CrystalTech as the third largest provider of website hosting utilizing exclusively Microsoft Hosting 2003^®, with approximately 26,000 customers. CrystalTech’s leased Phoenix facility consists of 13,000 square feet occupying the entire ground floor of a new two story building. CrystalTech boasts a 70% rate of new customers indicating they were referred by another customer and low attrition rates of approximately 20% in 2002 and 2003, compared to an industry attrition rate of 25% for the same periods. Over the past two years, CrystalTech has consistently added to its customer base. During the first three months of 2004, CrystalTech added over 1,100 new customers in each month.

CrystalTech’s core competency is its ability to offer a variety of secure and reliable website hosting options to a diverse client base through a proprietary integrated software infrastructure and control center. According to CrystalTech, its fully automated control center replaces over 90% of typical help center requirements, allowing a client to solve issues online without extensive staffing. The integrated control center monitors and crosschecks all internal and external activities and ensures that clients are billed for each and every service used. The center has historically had a 99.5% uptime rate and the ability to serve clients 24 hours a day. The system has given CrystalTech a reputation of excellent service and support.

CrystalTech is currently owned and operated by its founder and Chief Executive Officer, Tim Uzzanti. Mr. Uzzanti and the current management team have been responsible for the development of CrystalTech’s integrated software infrastructure that is so vital to the company’s profitability. Mr. Uzzanti has agreed to enter into a two-year employment agreement conditioned upon the closing of the acquisition and the two other top managers have agreed to stay as well.

Strategic Rationale

The CrystalTech acquisition is consistent with our strategy to pursue acquisitions of complementary business lines focused on providing financial services to small and medium-sized businesses. We believe that CrystalTech will provide us with a solid base for continued growth and further development of our strategy of cost-effective distribution of financial and business services by our owned or affiliated companies. The acquisition will enable us to offer website hosting and related services to our small and medium-sized business customers and cross-market our products and services to CrystalTech’s 26,000 existing customers. We anticipate these synergies will increase the revenue of both CrystalTech and our other business lines, but we do not expect to create any substantial cost savings. For the year ended December 31, 2003, CrystalTech earned approximately $2,300,000 on revenues of approximately $5,524,000.

Completion of the CrystalTech Acquisition

Our obligation to consummate the CrystalTech acquisition is subject to a number of customary conditions that must be satisfied by CrystalTech or waived by us. We have received the consent of Microsoft Corporation to the assignment of CrystalTech’s license as required by Microsoft’s agreement with CrystalTech. In addition, the following conditions must be met in order to consummate the transaction. We must:

•

obtain financing of at least $12,000,000, of which $10,000,000 is to be used as the cash portion of the purchase price, which condition will be satisfied upon the completion of this offering;

•

execute a two year employment agreement with Mr. Uzzanti and two other managers; and

•

receive any material consents from third parties required to consummate the CrystalTech acquisition.

In addition, we have agreed with the underwriters for this offering that we will use our commercially reasonable best efforts to consummate the transaction with CrystalTech within eight days of closing this offering.

Termination of the Asset Purchase Agreement

We and CrystalTech may mutually agree to terminate the asset purchase agreement at any time prior to the closing of the acquisition. In addition, the asset purchase agreement provides that either of us can unilaterally terminate the asset purchase agreement if:

•

the acquisition is not completed by July 19, 2004, unless the acquisition does not occur by that date due to the failure of the terminating party to perform its obligations under the asset purchase agreement; or

•

the other party materially breaches any of its representations, warranties or covenants under the asset purchase agreement and the breach is not cured within ten days after notice of breach is given.

As permitted by our agreement with CrystalTech, we have previously exercised two $100,000 options to extend the closing date of the acquisition, first from May 17 to June 17, 2004, and again from June 17 to July 19, 2004. We have no additional options to extend the closing date. These option payments are non-refundable. If the acquisition closes prior to the expiration of the extended closing period, the deposits will be credited to the purchase price payable to seller at closing. However, if the acquisition does not close prior to the expiration of the extended closing period, or if we terminate the asset purchase agreement (other than due to the failure of the seller to perform its obligations under the asset purchase agreement), we will forfeit the deposits paid to the seller.

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PRO FORMA FINANCIAL INFORMATION

We have prepared the unaudited pro forma combined consolidated financial data set forth below to show the effect on us of the acquisition by our subsidiary acquisition corporation of substantially all of the assets and specified liabilities of CrystalTech, under the purchase accounting method in accordance with GAAP. The unaudited pro forma combined consolidated financial statements combine the historical consolidated financial statements of us and CrystalTech. The unaudited pro forma combined consolidated balance sheet as of March 31, 2004 gives effect to the acquisition as if it had been completed on March 31, 2004. The unaudited pro forma combined consolidated statement of operations for the year ended December 31, 2003, and the three months ended March 31, 2004, give effect to the CrystalTech acquisition as if it had been completed on January 1, 2003.

We derived the information for the year ended December 31, 2003 from (1) the audited financial statements, including the related notes, of CrystalTech for the year ended December 31, 2003, which have been included in a filing by us with the SEC on Form 8-K and are included in the financial statements of this prospectus, and (2) our audited Consolidated Financial Statements, including the related notes, set forth elsewhere in this prospectus.

We have included in the pro forma combined consolidated financial statements all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results of the historical periods. Additionally, we expect to incur reorganization and restructuring expenses as a result of the CrystalTech acquisition. The effect of these estimated expenses has been reflected in the unaudited pro forma combined consolidated balance sheet. We also anticipate that the acquisition will provide us with the opportunity to earn more revenue. However, we do not reflect these anticipated benefits in the pro forma financial information. While the pro forma financial information is helpful in showing the expected financial effect of the CrystalTech acquisition, it is not intended to show how we and CrystalTech would have actually performed had the CrystalTech acquisition been completed prior to the historical periods or how the companies will perform in the future.

The actual consolidated financial position and results of operations of the combined companies following the CrystalTech acquisition will differ, perhaps even significantly, from the pro forma amounts reflected below because, among other things:

•

the assumptions used in preparing the pro forma financial information may be revised in the future due to changes in values of assets or liabilities, including changes in operating results between the dates of the unaudited pro forma financial information and the date on which the acquisition is completed; and

•

adjustments may need to be made to the unaudited historical financial information upon which such pro forma information was based.

Unaudited Pro Forma Condensed Consolidated Balance Sheet

March 31, 2004


	Newtek Business Services, Inc. Historical Consolidated			CrystalTech Web Hosting, Inc. Historical			Pro Forma Adjustments			Pro Forma Consolidated
ASSETS
Cash	$	42,564,071		$	691,556		$	8,421,137	^(a)	$	51,676,764
Restricted cash		2,680,680			—			—			2,680,680
Credits in lieu of cash		68,497,004			—			—			68,497,004
Investments in qualified businesses		1,584,057			—			—			1,584,057
SBA loans receivable, net		52,473,931			—			—			52,473,931
Structured insurance product		3,095,057			—			—			3,095,057
Accounts receivable		673,010			118,909			(118,909	)^(b)		673,010
Receivable from bank		2,841,915			—			—			2,841,915
Software development costs		—			28,816			—	^(c)		28,816
SBA loans held for sale		2,282,374			—			—			2,282,374
Prepaid insurance & expenses		14,655,535			59,423			—	^(c)		14,714,958
Property & equipment, net		812,333			372,910			—	^(c)		1,185,243
Customer accounts		2,889,295			—			1,757,550	^(c)		4,646,845
Goodwill		1,832,621			—			12,410,762	^(c)		14,243,383
Other assets		3,839,255			13,852			—	^(c)		3,853,107

Total assets	$	200,721,138		$	1,285,466		$	22,470,540		$	224,477,144
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable & accrued liabilities	$	5,932,724		$	137,178			—	^(c)	$	6,069,902
Contingent purchase price payable		—			—			3,000,000	^(g)		3,000,000
Note payable in credits in lieu of cash		69,726,477			—			—			69,726,477
Bank notes payable		55,642,027			—			—			55,642,027
Notes payable		11,042,842			631,250			(631,250	)^(b)		11,042,842
Deferred tax liabilities		9,631,616			—			—			9,631,616
Deferred revenues		—			874,697			(269,869	)^(c)		604,828

Total liabilities		151,975,686			1,643,125			2,098,881			155,717,692

Minority interest		8,092,837			—			—			8,092,837

STOCKHOLDERS’ EQUITY
Common stock		533,040			—			121,389	^(d)		654,429
Additional paid-in capital		28,449,520			—			20,142,611	^(d)		48,592,131
Unearned compensation		(1,867,315	)					(250,000	)^(h)		(2,117,315	)
Retained earnings (Accumulated deficit)		13,537,370			(357,659	)		357,659	^(d)		13,537,370

Total stockholders’ equity		40,652,615			(357,659	)		20,371,659			60,666,615

Total liabilities and stockholders’ equity	$	200,721,138		$	1,285,466		$	22,470,540		$	224,477,144

Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheet

^(a)	Adjustment to reflect cash received in offering, and the cash paid to the sellers at the closing date:


Amount received in offering	$	19,764,000
Cash paid to seller		(10,000,000	)
Acquisition costs		(955,000	)
Cash on hand not purchased		(691,556	)
Purchase price adjustment		303,693		See (c)

Total	$	8,421,137

^(b)	Asset not purchased or liability not assumed.

^(c)	Reconciliation of net assets acquired, amounts paid or payable, and allocation of excess purchase price:


Fair value of assets acquired:
Cash			$	303,693		See (e)
Software development costs				28,816
Prepaid insurance and expenses				59,423
Property & equipment, net				372,910
Other assets				13,852

			$	778,694

Fair value of liabilities assumed:
Accounts payable and accrued liabilities			$	137,178
Deferred revenues – fees received in advance				874,697
Deferred revenues – set-up fees				(269,869	)

Total liabilities			$	742,006

Net assets acquired			$	36,688
Less purchase price paid:
Cash paid at closing	(10,000,000	)
Stock issued at closing	(250,000	)
Contingent purchase price	(3,000,000	)
Acquisition costs	(955,000	)	$	(14,205,000	)

Excess of purchase price over net assets acquired			$	(14,168,312	)

Allocated to customer merchant accounts and other intangibles			$	1,757,550		See (f)
Allocated to goodwill				12,410,762

			$	14,168,312

^(d)	Adjustment to reflect additional paid-in capital as follows:


Common stock issued	$	121,389	See (h)
Additional paid-in capital resulting from issuance of Newtek common stock		20,142,611	See (h)
Elimination of CrystalTech accumulated deficit		357,659

^(e)	The asset purchase agreement, paragraph 1(c), provides that $303,693 will be an adjustment to the purchase price and accordingly will remain as cash in CrystalTech.

^(f)	The value of the customer accounts is based directly on an valuation preformed by Maxim Group LLC. We reviewed both the detail of the valuation and the details of the asset being considered and determined that the estimated fair valued stated was reasonable.

^(g)	The asset purchase agreement, paragraph 2(e), provides for contingent payments of $1,250,000 in cash and $1,750,000 in our stock based on certain earnings hurdles. We have determined that the payment of these amounts currently appears likely.

^(h)


Cash proceeds received in this offering	$	19,764,000
Add: value of shares issued in CrystalTech acquisition		250,000
Add: unearned compensation on restricted shares issued to employees of CrystalTech		250,000
Less: par value of shares issued in this offering and CrystalTech acquisition		(121,389	)

Total	$	20,142,611

Unaudited Pro Forma Condensed Consolidated Statement of Income

For the Year Ended December 31, 2003


	Newtek Business Services, Inc. Historical Consolidated			CrystalTech Web Hosting, Inc. Historical		Pro Forma Adjustments			Pro Forma Consolidated
Revenue	$	60,492,800		$	5,524,165	$	—		$	66,016,965
Operating expenses		42,423,063			3,224,425		786,354	^(a)		46,433,842

Income (loss) before minority interest and (provision for) taxes		18,069,737			2,299,740		(786,354	)		19,583,123
Minority interest in income		(1,598,040	)		—		—			(1,598,040	)
Income (loss) before (provision) for taxes		16,471,697			2,299,740		(786,354	)		17,985,083
(Provision) for taxes		(7,089,639	)		—		(620,488	)^(b)		(7,710,127	)

Net income (loss) from continuing operations	$	9,382,058		$	2,299,740	$	(1,406,842	)	$	10,274,956

Weighted average number of shares (basic)		25,777,147					6,069,444	^(c)		31,846,591
Weighted average number of shares (diluted)		26,177,274					6,555,555	^(c)		32,732,829
Income per share (basic)	$	0.36							$	0.32
Income per share (diluted)	$	0.36							$	0.31

Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income

^(a)	Adjustments to operating expenses assuming the acquisition had been consummated on January 1, 2003:


Amortization of deferred compensation	$	83,334
Amortization of customer merchant accounts		703,020

	$	786,354

Customer accounts represent the portfolio of accounts that were purchased in the acquisition (approximately 26,000 customer accounts) which will be providing most of CrystalTech’s revenues. Based on our experience, we have determined that a 30 month period is appropriate for amortization. In addition, this amortization period is within the industry standard.

^(b)	Adjustment to reflect a pro forma effective tax rate of 41% based on our historical effective tax rate.

^(c)	Share reconciliation:


Secondary offering of $21,600,000 at a price of $3.60 a share		6,000,000
$250,000 of our common stock at a price of $3.60 a share to be paid at closing (excludes an additional equal amount of stock to be issued to CrystalTech employees as restricted shares subject to three year vesting)		69,444
$750,000 and $1,000,000 contingent payments in stock due if earnings hurdles are met		486,111

(not included in weighed average number of shares (basic)).

Unaudited Pro Forma Condensed Consolidated Statement of Income

For the Three Months Ended March 31, 2004


	Newtek Business Services, Inc. Historical Consolidated			CrystalTech Web Hosting, Inc. Historical		Pro Forma Adjustments			Pro Forma Consolidated
Revenue	$	7,870,493		$	1,777,362	$	—		$	9,647,855
Operating expenses		11,059,037			781,713		196,588	^(a)		12,037,338

Income (loss) before minority interest and (provision) benefit for taxes		(3,188,544	)		995,649		(196,588	)		(2,389,483	)
Minority interest in income		300,314			—		—			300,314

Income (loss) before (provision) benefit for taxes		(2,888,230	)		995,649		(196,588	)		(2,089,169	)
(Provision) benefit for taxes		1,184,174			—		(327,615	)^(b)		856,559

Net income (loss) from continuing operations	$	(1,704,056	)	$	995,649	$	(524,203	)	$	(1,232,610	)

Weighted average number of shares (basic)		26,471,248					6,069,444	^(c)		32,540,692
Weighted average number of shares (diluted)		26,471,248					6,069,444	^(c)		32,540,692
Income per share (basic)	$	(0.06	)						$	(0.04	)
Income per share (diluted)	$	(0.06	)						$	(0.04	)

Notes to Unaudited Pro Forma Condensed Consolidated Statement of Income

^(a)	Adjustments to operating expenses assuming the acquisition had been consummated on January 1, 2004:


Amortization of deferred compensation	$	20,833
Amortization of customer merchant accounts and other intangibles		175,755

	$	196,588

Customer accounts represent the portfolio of accounts that were purchased in the acquisition, (26,000 customer accounts) which will be providing most of CrystalTech’s revenues. Based on our experience, we have determined that a 30 month period is appropriate for amortization. In addition, this amortization period is within the industry standard.

^(b)	Adjustment to reflect a pro forma effective tax rate of 41% based on our historical effective tax rate.

^(c)	Share reconciliation:


Secondary offering of $21,600,000 at a price of $3.60 a share		6,000,000
$250,000 of our common stock at a price of $3.60 a share to be paid at closing (excludes an additional equal amount of stock to be issued to CrystalTech employees as restricted shares subject to three year vesting)		69,444

CrystalTech’s revenues increased by approximately $380,000 to $1,777,000 for the three months ended March 31, 2004, from approximately $1,397,000 for the three months ended March 31, 2003, due to the significant increase in the number of website hosting customers and increased fees. CrystalTech’s revenues are primarily derived from set-up charges to establish a customer’s account and monthly recurring service fees for the use of CrystalTech’s web hosting and software support services. Payment for website hosting and related services is generally received one to twelve months in advance and revenues are recognized as services are rendered.

Cost of revenues increased by approximately $7,000 to $374,000 for the three months ended March 31, 2004 from approximately $367,000 for the three months ended March 31, 2003 due to the increase in website hosting customers, offset by more favorable contracts with vendors for cost of services. General and administrative expenses decreased by approximately $315,000 to $292,000 for the three months ended March 31, 2004 from $607,000 for the three months ended March 31, 2003, primarily due to the effects of the decision to reduce overhead expenses, particularly its employee count.

Depreciation and amortization expenses increased by approximately $86,000 to $102,000 for the three months ended March 31, 2004 from approximately $16,000 for the three months ended March 31, 2003, due to the increase in the property and equipment purchased.

CrystalTech’s revenues increased by approximately $1,762,000 to $5,524,000 for the year ended December 31, 2003, from $3,762,000 for the year ended December 31, 2002, due to the significant increase in the number of website hosting customers and increased fees; this was offset somewhat by an increase in marketing expenses. CrystalTech’s revenues are primarily derived from set-up charges to establish a customer’s account and monthly recurring service fees for the use of CrystalTech’s web hosting and software support services. Payment for website hosting and related services is generally received one to twelve months in advance and revenues are recognized as services are rendered. The following table details the changes in the deferred revenue accounts:


	2002		2003		Change
Service fees received in advance	$	264,000	$	327,000	$	63,000
Deferred set-up fees		212,000		296,000		84,000

	$	476,000	$	623,000	$	147,000

Cost of revenues decreased by approximately $94,000 to $1,564,000 for the year ended December 31, 2003 from $1,658,000 for the year ended December 31, 2002, primarily due to the more favorable website hosting contracts CrystalTech negotiated with its vendors. General and administrative expenses decreased by approximately $351,000 to $1,231,000 for the year ended December 31, 2003 from $1,582,000 for the year ended December 31, 2002, primarily due to the effects of the decision to reduce overhead expenses, particularly its employee count.

Sales and marketing expenses increased by approximately $35,000 to $73,000 for the year ended December 31, 2003 from $38,000 for the year ended December 31, 2002, due to management’s decision to try new marketing initiatives throughout the year in an effort to increase revenues. Depreciation and amortization expenses increased by approximately $109,000 to $357,000 for the year ended December 31, 2003 from $248,000 for the year ended December 31, 2002, due to the increase in the property and equipment purchased.

MANAGEMENT

Directors, Executive Officers and Key Employees

Our business and affairs are under the direction of our board of directors. There are currently seven members of the board, of which four qualify as “independent” directors under applicable rules. Each director is elected by the shareholders annually for a one year term. Officers are elected by the board and, except as provided in the employment agreements we have with each of our three executive officers, serve at the discretion of the board. The following table provides information about our directors and executive officers as of the date of this prospectus, including their business backgrounds and the names of public companies and other selected entities for which they also serve as directors. Our board of directors has determined that Messrs. Beck, Payan, Schottenstein and Shenfeld each meet the requirement of “independence” under applicable rules of the SEC and the Nasdaq National Market.


Name	Age	Position
Barry Sloane⁽¹⁾	44	Chairman of the Board of Directors, Chief Executive Officer and Secretary
Jeffrey G. Rubin⁽¹⁾	37	President and Director
Brian A. Wasserman⁽¹⁾	38	Treasurer, Chief Financial Officer and Director
David C. Beck⁽²⁾⁽³⁾	61	Director
Christopher G. Payan^(2)(3)(4)	29	Director
Jeffrey M. Schottenstein⁽²⁾⁽⁴⁾	63	Director
Steven A. Shenfeld⁽³⁾⁽⁴⁾	44	Director
John R. Cox	67	Chairman and Chief Executive Officer of Newtek Small Business Finance, Inc.
T. Alan Schmidt	44	President of Universal Processing Services – Wisconsin, LLC
Tim Uzzanti*	31	President and Chief Executive Officer of CrystalTech Web Hosting, Inc.

*	Mr. Uzzanti’s position is contingent upon the completion of the CrystalTech acquisition.

⁽¹⁾	Member of Executive Committee.

⁽²⁾	Member of Audit Committee.

⁽³⁾	Member of Compensation Committee.

⁽⁴⁾	Member of Corporate Governance and Nominating Committee.

Barry Sloane has been our Chairman of the Board, Chief Executive Officer and Secretary since inception in 1999. From July 1995 to January 1999, Mr. Sloane was the founder and principal of The Sloane Organization, LLC, engaged in financial consulting and investment banking. From September 1993 through July 1995, Mr. Sloane was a Managing Director of Smith Barney, Inc. where he directed the Commercial and Residential Real Estate Securitization Unit and, prior to that, he was national sales manager for institutional mortgage and asset backed securities sales. From April 1991 through September 1993, he was founder and President of Aegis Capital Markets, a consumer loan origination and securitization business which was eventually taken public with the name of “Aegis Consumer Funding.” From October 1988 through March 1991, Mr. Sloane was Senior Vice President of Donaldson, Lufkin and Jenrette, where he was responsible for directing sales of mortgage-backed securities.

Jeffrey G. Rubin has been our President and a Director since February 1999. In June 1994, Mr. Rubin founded, financed and participated in the day-to-day management of Optical Dynamics Corporation, formally known as Fastcast Corporation, an early stage technology company. Mr. Rubin served as an officer of that company and a member of the board of directors until December 1997. From January 1992 through January 1998, Mr. Rubin served as a private venture capitalist. From September 1989 through January 1994, Mr. Rubin served as Vice President of American European Corporation, an import/export company, and participated in management in various capacities. Mr. Rubin also has served as a director of BRT Realty Trust, a New York Stock Exchange listed company, since March 2004.

Brian A. Wasserman has been our Chief Financial Officer, Treasurer and a Director since 1999. From December 1997 until December 1999, Mr. Wasserman was the general partner of two private venture capital limited partnerships with diverse public and private investments. From December 1997 until November 1999, Mr. Wasserman was a directors of Heuristic Development Group (subsequently, Virtual Communities, Inc.), a publicly-traded company engaged in the development, marketing, sale and licensing of the Intellifit System, a computerized system which generates personalized exercise prescriptions. From 1997 to November 1999 Mr. Wasserman was a director of REXX Environmental Corporation, a publicly-traded holding company in the environmental remediation business which, following the sale of its entire business to third parties, merged with us in 2000. Previously, Mr. Wasserman was an audit and tax manager with Coopers & Lybrand, LLP. Mr. Wasserman is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants.

David C. Beck has been Managing Director of Copia Capital, LLC, a private equity investment firm, since September 1998. Prior to joining Copia, Mr. Beck was Chairman and Chief Executive Officer of Universal Savings Bank, Milwaukee and First Interstate Corporation of Wisconsin, a publicly traded company. He is a certified public accountant and has served on a number of boards of both publicly-held and private corporations. Mr. Beck joined our board in 2002.

Christopher G. Payan has been Senior Vice President, Chief Financial Officer, Co-Chief Operating Officer, Secretary and Treasurer of Emerging Visions, Inc., a publicly traded company. From 1995 through July 2001 Mr. Payan worked for Arthur Anderson LLP, where he provided various audit, accounting, operating, consulting and advisory services to numerous small and mid-sized private and public corporations in various industries. Mr. Payan is a certified public accountant and joined our board in 2003.

Jeffrey M. Schottenstein has specialized in the investment and restructuring of diverse companies since 1974. He has served since 1983 as an executive officer and as a director of Schottenstein Investment, a diversified investment holding company with $650,000,000 in assets. Previously he served as Vice President of Schottenstein Store’s Value City Stores Division and Chief Executive Officer of Schottenstein Realty Company, which specializes in the investment and restructuring of companies. Mr. Schottenstein has been involved in the capitalization and restructuring of numerous retail enterprises. Mr. Schottenstein joined our board in 2001.

Steven A. Shenfeld has been general partner of M.D. Sass Financial Strategies, LP, a private equity fund focused on the acquisition of investment management companies and hedge funds since 2002. From December 1999 to 2001, he was senior managing director of Amroc Investments LLC. From December 1999 until 2002, Mr. Shenfeld was a general partner of Avenue Capital Management, LLC, a multi-billion dollar hedge fund. From April 1996 through October 1999, Mr. Shenfeld was on the management committee of BancBoston Robertson Stephens where he managed the Debt Capital Markets Division. Mr. Shenfeld has extensive experience in capital markets and investment banking and has managed investment businesses including high yield securities, leveraged finance, private placements, asset securitization and investment grade corporates. From April 1991 through March 1996, Mr. Shenfeld was Head of Sales and Trading in Global Finance at Bankers Trust Securities. Previously, Mr. Shenfeld worked for Donaldson, Lufkin and Jenrette and Salomon Brothers. Mr. Shenfeld joined our board in 2000.

John R. Cox has been Chairman and Chief Executive Officer of Newtek Small Business Finance since its acquisition and reorganization by us in December 2002. Prior to joining Newtek, he was a principal of JRC Consulting, LLC, specializing in small business loan programs. In 1997 Mr. Cox, after 30 years at the U.S. Small Business Administration, retired as Associate Administrator for Financial Assistance, where he was responsible for the administration of all SBA loan programs nationwide.

T. Alan Schmidt is the President and Chief Operating Officer of Universal Processing Services—Wisconsin, LLC, or Newtek Merchant Solutions of Wisconsin. In January 2001, Mr. Schmidt founded and

served as President of American Merchant Services, an independent sales organization targeting small businesses for merchant credit, debit, check and gift card processing, which was acquired by Newtek Merchant Services in December 2001. From February 1994 to October 1999, Mr. Schmidt was the Vice President of Business of Business Integration at Universal Payment Processing, a part of Universal Savings Bank, Milwaukee, where he was responsible for establishing a complete credit card processing operation. Previously, Mr. Schmidt served as the Vice President of Operations at Fist Interstate Bank of South Dakota, a merchant processing division, subsequently acquired by First Data Corporation in October 1992.

Tim Uzzanti will join our management team upon the completion of the CrystalTech acquisition. Currently he is the President and Chief Executive Officer of CrystalTech. Mr. Uzzanti founded CrystalTech in 1997 and is currently the Chief Executive Officer. In addition, he has also founded SmarterTools, Inc., which is engaged in the software development business, and concurrently serves as the Chief Executive Officer. From 1997 to 1999, Mr. Uzzanti worked for Honeywell International, Inc., where he was in charge of the development of the “Pilot Internet Practice Service,” an Internet-based flight simulator.

Our board of directors maintains four committees: an executive committee, an audit committee, a compensation committee and a corporate governance and nominating committee, and may establish others or reconstitute the current committees in the future.

Executive Committee

The members of the executive committee are Messrs. Sloane, Rubin and Wasserman, each of whom are executive officers. The executive committee is able to act in the place of the full board in matters requiring immediate attention.

Audit Committee

The members of the audit committee are Mr. Beck, as chair, and Messrs. Schottenstein and Payan, each of whom are independent directors. The audit committee is, generally, responsible for selection and retention of our independent auditors, reviewing with our independent auditors the plans and results of the audit engagement, approving professional services provided by our independent auditors, reviewing the independence of our independent auditors and reviewing the adequacy of our internal accounting controls. In addition, the audit committee has established a communications channel independent of management to permit employees or other interested parties to raise questions about accounting practices directly with the chair of the committee. The board of directors and the audit committee have adopted a written charter to govern its operations.

Compensation Committee

The members of the compensation committee are Mr. Shenfeld, as chair, and Messrs. Beck and Payan, each of whom are independent directors. The compensation committee is generally responsible for general oversight and implementation of our two stock incentive plans for recommending to the board the compensation of the three executive officers and the terms of their respective employment. The board of directors has adopted a written charter for the compensation committee.

Corporate Governance and Nominating Committee

The members of the corporate governance and nominating committee are Mr. Schottenstein, as chair, and Messrs. Shenfeld and Payan, each of whom are independent directors. The corporate governance and nominating committee is generally responsible for identifying corporate governance issues, creating corporate governance policies and identifying and recommending potential candidates for election to the board and reviewing director compensation and performance. The corporate governance and nominating committee was created pursuant to the adoption by the board of written corporate governance guidelines.

Directors’ Compensation

Our board has adopted a plan for compensation of non-employee directors, for the years ending December 31, 2003 and 2004, which gives effect to the time and effort required of each of them in the performance of their duties. The plan approved by the board provides annual compensation, paid quarterly in our common stock:

•

for participation on the board: $25,000;

•

for acting as chair of the compensation committee or the corporate governance and nominating committee: $15,000;

•

for acting as chair of the audit committee: $60,000; and

•

for acting as “lead” independent director: $15,000.

As a result of this plan, our independent directors each received common stock in the following amounts for 2003 and are expected to receive a similar amount in 2004, based on the closing price of our common stock on the last trading day of each quarter:


• David C. Beck	$	100,000
• Steven A. Shenfeld	$	40,000
• Jeffrey M. Schottenstein	$	40,000
• Christopher G. Payan	$	25,000

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EXECUTIVE COMPENSATION

The information set forth below describes the components of the total compensation of our Chief Executive Officer and our other applicable executive officers for services rendered in all capacities during the years ended December 31, 2001, 2002 and 2003.


		Annual Compensation				Long-Term Compensation Awards
Name and Principal Position	Year	Salary ($)		Bonus⁽¹⁾ ($)		Securities Underlying Options/SARs (#)	All Other Compensation⁽²⁾ ($)
Barry Sloane, Chairman, CEO and Secretary	2003	$	286,668	$	250,000	—	$	2,860
	2002	$	313,750		—	—	$	3,135
	2001	$	250,000		—		$	2,860
Jeffrey G. Rubin, President	2003	$	286,668	$	125,000	—	$	1,380
	2002	$	313,750		—	—	$	1,045
	2001	$	250,000		—	—	$	1,380
Brian A. Wasserman, Treasurer and CFO	2003	$	286,668	$	125,000	—	$	1,380
	2002	$	330,000		—	—	$	1,070
	2001	$	250,000		—	—	$	1,380
John R. Cox, Chairman and CEO of Newtek Small Business Finance	2003	$	250,000		—	—		—

T. Alan Schmidt, President, Newtek Merchant Services	2003	$	81,662		—	—		—

⁽¹⁾	Represents the value of cash compensation which the named individuals have deferred receipt of and directed that eventual payment be in the form of shares of our common stock.

⁽²⁾

Represents the amount of premium paid by us on term life insurance for the named executive for the periods shown. None of the named individuals have any interest in the cash surrender value of the respective insurance policies, nor is there any understanding or agreement whereby the individuals are to be given any such interest.

Employment Agreements

We have entered into employment agreements with:

•

Barry Sloane, as Chairman and Chief Executive Officer;

•

Jeffrey G. Rubin, as President; and

•

Brian A. Wasserman, as Treasurer and Chief Financial Officer.

Each employment agreement provides for:

•

a term ending June 30, 2005;

•

an annual salary of $350,000 for Mr. Sloane;

•

an annual base salary of $285,000 for Messrs Rubin and Wasserman;

•

at least one annual salary review by the board of directors;

•

participation in any discretionary bonus plan established for senior executives;

•

retirement and medical plans, customary fringe benefits, vacation and sick leave; and

•

$2,000,000 of split-dollar life insurance coverage.

In addition, NSBF has entered into a two year employment agreement with John Cox in his capacity as chief executive officer of our SBA lender which runs through December 31, 2004. It provides for an annual salary of $250,000 and participation in discretionary bonus and benefit plans as are generally available to all of our executives.

Each of the foregoing four agreements contains a non-competition provision (during the term of the employment agreement) that requires the executive to devote substantially all of his business time and efforts to the performance of his duties under the agreement. The executive is not prohibited, however, from:

•

serving on the boards of directors of, and holding offices or positions in, companies or organizations which, in the opinion of the board of directors, will not present conflicts of interest with us; or

•

investing in any business dissimilar from ours or, solely as a passive or minority investor, in any business.

The respective board may terminate an executive’s employment for just cause as defined in the agreement, and upon the termination, no severance benefits are available. If the board terminates an executive without just cause, or the executive terminates his employment with good reason as defined in the agreement, or if the term of the agreement is not extended for an additional year, the executive will be paid severance benefits in an amount equal to six months’ compensation. If the executive’s employment terminates during the term of the agreement due to death, disability, or retirement after age 62, the executive will be entitled to his compensation, vested rights and benefits through the date of termination. The executive is able to voluntarily terminate his agreement by providing 60 days’ written notice to the board of directors, in which case the executive is entitled to receive only his compensation, vested rights, and benefits up to the date of termination.

Each employment agreement, other than Mr. Cox’s, contains provisions stating that in the event of the executive’s involuntary termination of employment (other than for just cause) in connection with, or within six months after, any change in control of the company, the executive will be paid within ten days of the termination a sum equal to 2.99 times the average annual compensation he received during the five-year period immediately prior to the date of change in control. “Control” generally refers to the acquisition, by any person or entity, of the ownership or power to vote more than 25% of our voting stock, or the control of the election of a majority of directors or the exercise of a controlling influence over our management or policies.

Each employment agreement also provides for a similar lump sum payment to be made in the event of the executive’s voluntary termination of employment within 30 days of a change in control, or within 90 days of a “trigger event,” certain specified events following any change in control, whether approved by the board of directors or otherwise, which have not been consented to in writing by the executive including:

•

requiring the executive to move his personal residence or perform his principal executive functions more than 50 miles from he executive’s primary office;

•

failing to maintain existing employee benefit plans, including material vacation, fringe benefits, and retirement plans;

•

assigning duties and responsibilities to the executive which are other than those normally associated with his position;

•

materially diminishing the executive’s authority and responsibility; and

•