<PAGE>
FORM 10-K
Securities and Exchange Commission
Washington, DC 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------- ---------------
Commission File Number 33-02105
----------------------------
Newman Financial Corporation
(Exact name of Registrant as specified in its charter)
Delaware 84-1007510
(State or other Jurisdiction of (IRS Employer
incorporation) Identification Number)
1801 California Street, Suite 3700; Denver, Colorado
(Address of principal executive offices)
80202-2637
(Zip Code)
(303) 293-8500
(Registrant's telephone number, including area code)
Indicate by checkmark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period of time that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes XX No
---- ---
(2) Yes XX No
---- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock: 1,000 shares
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document, which are specifically referred to in
the following parts of this Form 10-K, are incorporated by reference into
such parts.
DOCUMENT INCORPORATED INTO:
- -------- ------------------
Applicable portion of the Rule 424(c) Parts I and II
prospectus, dated June 10, 1986, relating
to Registrant's Registration Statement on
Form S-11 (Registration Number 33-02105)
(the "Prospectus").
<PAGE>
PART I
ITEM 1. BUSINESS
Newman Financial Corporation ("Company") was incorporated in the State
of Delaware on August 30, 1985 as a limited purpose finance
corporation. The Company was organized to provide financing to owners
and developers of multifamily residential housing projects. Under its
charter, the Company's business is limited to issuing bonds ("Bonds")
principally secured by, or with interests in, mortgage collateral,
which may include mortgage loans and deed of trust loans secured by
real estate and certificates ("Mortgage Collateral") insured by the
Federal Housing Administration ("FHA") or guaranteed by the Government
National Mortgage Association ("GNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association
("FNMA"). The Company's activities in connection with such
transactions may include holding, transferring, assigning, pledging,
financing, refinancing, and otherwise dealing with mortgage loans and
mortgage certificates and any activities incident to, or necessary or
convenient to accomplish the foregoing purposes.
Each series of Bonds was secured by separate collateral that does not
serve as security for any other series of Bonds. The collateral for a
series of Bonds consisted primarily of the Mortgage Collateral
specifically pledged to that series and amounts deposited in various
accounts. The Mortgage Collateral for each series was pledged to a
trustee on behalf of the holders of the Bonds of such series, and was
not available for payments of Bonds of any other series or any other
liabilities of the Company. The Mortgage Collateral pledged to the
trustee securing each series of Bonds was projected to produce a cash
flow sufficient, together with reinvestment earnings thereon at an
assumed annual rate and assuming timely payment of distributions on
the Mortgage Collateral, to make principal and interest payments
required to be made on the outstanding Bonds of that series until the
earlier of the maturity of such Bonds or their redemption.
The Company filed a Registration Statement (No. 33-02105) under the
Securities Act of 1933 (the "Act") with the Securities and Exchange
Commission ("SEC"), pursuant to which $250,000,000 in aggregate
principal amount of the Bonds were registered pursuant to Rule 415
(commonly known as a "shelf" registration). This Registration
Statement was declared effective by the SEC on June 10, 1986. The
Company had issued two series of bonds pursuant to the Registration
Statement: the Series 1986-A Bonds on July 25, 1986 with an aggregate
principal amount of $6,128,400 and the Series 1986-B Bonds on August
26, 1986 with an aggregate principal amount of $7,380,000. During the
year ended June 30, 1991, the GNMA security collateralizing the 1986-A
Bonds was prepaid and the 1986-A Bonds were redeemed.
On February 23, 1996, the Registrant defeased its Series 1986-B bonds
by depositing into escrow with the bond trustee two (2) United States
Government Treasury Bills and a minor amount of cash, together
sufficient to pay bond debt service on March 20, 1996, and to redeem
all remaining bonds at a price of 100% of par value (accreted value in
the case of compound interest bonds), plus accrued interest on August
20, 1996. The proceeds for this deposit were received from a short-
term letter of credit which was repaid from the proceeds on the sale
of the GNMA securities.
Further description of the business of the Company may be found in the
Company's Prospectus under the caption "The Issuer," which description
is incorporated herein by reference.
<PAGE>
ITEM 2. PROPERTIES
The Company has no material physical properties.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
All of the Company's outstanding Common Stock is owned by Newman
Financial Services, Inc. Accordingly, there is no market for the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The following data are for the years ended June 30, 1992, 1993, 1994,
1995, and 1996, and are summarized from the Company's financial
statements included in Item 8.
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues $392,788 $667,293 $673,691 $670,374 $679,885
Net earnings before
extraordinary item 3,996 8,410 11,481 10,694 13,617
Net earnings (loss) after
extraordinary item (63,348) 8,410 11,481 10,694 13,617
Net earnings per share
before extraordinary item 4.00 8.41 11.48 10.69 13.62
Net earnings (loss) per share
after extraordinary item (63.35) 8.41 11.48 10.69 13.62
Total assets $ 8,485 $7,190,930 $7,239,270 $7,280,631 $7,334,010
GNMA securities owned $ 0 $6,885,247 $6,937,228 $6,978,391 $7,021,674
Bond related debt
Bonds payable $ 0 $3,488,551 $4,075,168 $4,611,785 $5,108,402
Accrued Interest $ 0 $3,392,846 $2,857,250 $2,370,121 $1,926,278
---------- ---------- ---------- ---------- ----------
$ 0 $6,881,397 $6,932,418 $6,981,906 $7,034,680
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto.
BACKGROUND AND LIQUIDITY
The Registrant had issued two series of its Collateralized Multifamily
Housing Bonds ("Bonds") pursuant to an Indenture ("Indenture"), dated
as of July 1, 1986, between the Registrant and First Interstate Bank
of Denver, National Association, as trustee ("Trustee"). On July 25,
1986, the Registrant issued $6,128,400 principal amount of its Bonds,
Series 1986-A (GNMA security) (the "Series 1986-A Bonds") pursuant to
the Indenture and a Series 1986-A Supplement. On August 26, 1986, the
Registrant issued $7,380,000 principal amount of its Collateralized
Multifamily Housing Bonds, Series 1986-B (GNMA Security) (the "Series
1986-B Bonds") pursuant to the Indenture and a Series 1986-B
Supplement. The proceeds of the offerings were used to acquire
certificates ("GNMA Certificates") in the principal amount of
$6,128,400 and $7,365,000 guaranteed by the Government National
Mortgage Association. The Series 1986-A Bonds were redeemed in full
on August 3, 1990.
On February 23, 1996, the Registrant defeased its Series 1986-B bonds
by depositing into escrow with the bond trustee two United States
Government Treasury Bills and a minor amount of cash, together
sufficient to pay bond debt service on March 20, 1996, and to redeem
all remaining bonds at a price of 100% of par value (accreted value in
the case of compound interest bonds), plus accrued interest on August
20, 1996. The proceeds for this deposit were received from a short-
term letter of credit which was repaid from the proceeds on the sale
of the GNMA securities. Accordingly, the Series 1986-B bonds are now
considered extinguished. All Series 1986-B bonds will be called for
redemption on August 20, 1996, and will cease to accrue interest (or
compound) thereafter. The GNMA mortgage-backed security underlying
the Series 1986-B bonds was released to the Registrant upon defeasance
of the Series 1986-B bonds, and the GNMA mortgage-backed security was
sold by the Registrant. As a result of the above actions, the
Registrant has effectively disposed of its only significant asset and
extinguished its only significant liability.
BUSINESS ENVIRONMENT AND EVENTS
The Registrant competed with the GNMA whole loan market to provide
funding for FHA insured multifamily housing project loans. During
periods when interest rate yield curves are relatively steep, the
Registrant has a competitive advantage over the GNMA whole loan market
because it can structure debt as a combination of serial bonds, term
bonds, and deferred interest bonds, thereby taking advantage of lower
interest rates on the "low end" of the yield curve. Conversely,
during periods when interest rate yield curves are relatively flat,
the Registrant has no advantage over the GNMA whole loan market and is
actually at a disadvantage because of legal and underwriting costs
associated with issuing a series of bonds under the Indenture.
<PAGE>
For the past several years, the interest rate yield curve has been
relatively flat and the Registrant has been unable to compete
efficiently with the GNMA whole loan market. As a consequence, the
Registrant has not issued Bonds since the initial two series of Bonds
in 1986.
RESULTS OF OPERATIONS AND TRENDS
Generally, revenues and expenses are relatively constant as a result
of fixed rate GNMA securities producing revenue to pay fixed rate bond
interest. However, unanticipated events such as the prepayment of a
GNMA security, can produce significant variations between reporting
periods. Revenue from GNMA securities represents virtually 100% of
all revenues. Bond interest and the amortization of organization
costs represent 97% of all expenses.
During the years ended June 30, 1996, 1995 and 1994, the revenues for
the Registrant were $392,788, $667,293, and $673,691, respectively,
which consisted primarily of interest received from the GNMA
Certificates, amortization of discounts on the GNMA Certificates and
interest earned on temporary cash investments. Revenues decreased
from 1995 to 1996 as a result of the Series 1986-B Bond defeasance
during February 1996, and decreased slightly from 1994 to 1995 as a
result of some miscellaneous income present in 1994, not in 1995.
Payment of interest on the outstanding Bonds and the amortization of
organization costs were the major sources of costs and expenses, which
also decreased substantially in fiscal 1996 versus fiscal 1995 related
to the defeasance transaction during February 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in Appendix A.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are the directors and executive officers of the
Company and have held such positions since the Company's organization
in 1985.
NAME AGE TITLE
---- --- -----
Scot B. Barker 47 Chairman of the Board/Director
Bradley B. James 51 President and Director
David C. Smith 47 Executive Vice President/Director
Helen M. Gair 47 Vice President
<PAGE>
R. Kent Erickson 55 Secretary, Assistant Treasurer/Director
David W. Curtiss 44 Treasurer and Assistant Secretary
All of the Company's outstanding Common Stock is owned by Newman
Financial Services, Inc. Newman and Associates, Inc., a Colorado
corporation formed in 1979, is a wholly-owned subsidiary of Newman
Financial Services, Inc., a privately held corporation. Newman and
Associates, Inc. is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended. The principal business activity of
Newman and Associates, Inc. is the underwriting and trading of debt
securities with special emphasis on multifamily housing bonds.
Scot B. Barker, Chairman of the Board of Directors, has been President
of Newman and Associates, Inc. since 1984, having previously served as
vice president.
Bradley B. James, President and Director, has been Senior Vice
President of Newman and Associates, Inc. since 1984, having previously
served as vice president.
David C. Smith, Executive Vice President and Director, has been
Executive Vice President of Newman and Associates, Inc. since 1984,
having previously served as vice president.
Helen M. Gair, Vice President, has been Senior Vice President of
Newman and Associates, Inc. since 1984, having previously served as
vice president.
R. Kent Erickson, Secretary, Assistant Treasurer and Director, has
been Senior Vice President since 1984 and Secretary/Treasurer since
1979 of Newman and Associates, Inc.
David W. Curtiss, Treasurer and Assistant Secretary, has been Vice
President of Newman and Associates, Inc. since 1983.
ITEM 11. EXECUTIVE COMPENSATION
The Company has no salaried employees and does not compensate its
directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All shares of the Company's Common Stock are owned by Newman Financial
Services, Inc.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the incorporation of the Company, an affiliate of Newman
Financial Services, Inc. has paid the Company's out-of-pocket costs in
conjunction with the offering of Bonds. The payment of these expenses
is reflected on the Company's financial statements as a capital
contribution from Newman Financial Services, Inc. Newman Financial
Services, Inc. provides the Company with office space and office
supplies and the Company has no salaried employees.
In addition, Newman and Associates, Inc. acted as managing underwriter
for the Company's issuance of the Series 1986-A Bonds and co-managing
underwriter for the Company's issuance of the Series 1986-B Bonds, for
which the underwriting discount for all members of the underwriting
group aggregated $121,638 and $118,402, respectively.
In connection with the defeasance of the Series 1986-A bonds, the
Company paid Newman and Associates, Inc. a $100,000 investment banking
fee.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) -- Report of Independent Public Accountants
Financial Statements
Notes to Financial Statements
(3) Exhibits -- See Exhibit Index immediately preceding exhibits.
(b) Reports on Form 8-K. The Registrant has filed a Form 8-K (Items
2 and 5) dated March 6, 1996.
(c) Exhibits -- See Exhibit Index immediately preceding exhibits.
(d) Financial Statement Schedules -- None. Information required by
such schedules is contained in the body of and footnotes to the
Financial Statements.
SUPPLEMENTAL INFORMATION FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The Company has not sent an annual report or proxy materials to its
security holders and does not intend to distribute such information.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
NEWMAN FINANCIAL CORPORATION
By: /s/ Scot B. Barker
-------------------
Scot B. Barker
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
August 14, 1996 /s/ Scot B. Barker
-------------------
Scot B. Barker
Chairman of the Board and Director
(Principal Executive Officer)
August 14, 1996 /s/ Bradley B. James
---------------------
Bradley B. James
President and Director
August 14, 1996 /s/ R. Kent Erickson
---------------------
R. Kent Erickson
Secretary, Assistant Treasurer and Director
August 14, 1996 /s/ David C. Smith
-------------------
David C. Smith
Executive Vice President and Director
August 14, 1996 /s/ Helen M. Gair
------------------
Helen M. Gair
Vice President
August 14, 1996 /s/ David W. Curtiss
---------------------
David W. Curtiss
Treasurer and Assistant Secretary
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
3.1 Articles of Incorporation, previously filed as Exhibit 3.1 to the Company's
Registration Statement on Form S-11, Registration No. 33-02105 and
incorporated by reference.
3.2 Articles of Amendment to the Company's Articles of Incorporation,
previously filed as Exhibit 3.2 to the Company's Amendment No. 2 on Form
S-11, Registration No. 33-02105 and incorporated by reference.
3.3 Bylaws of the Company, previously filed as Exhibit 3.4 to the Company's
Registration Statement on Form S-11, Registration No. 33-02105 and
incorporated by reference.
4.1 Indenture dated as of July 1, 1986 (the "Indenture") between the Company
and First Interstate Bank of Denver National Association, as Trustee (the
"Trustee"), previously filed as Exhibit 4.1 to the Company's Post-Effective
Amendment No. 1 to Form S-11, Registration No. 33-02105 and incorporated by
reference.
4.2 Series Supplement to the Indenture, dated as of July 1, 1986, relating to
Series 1986-A Bonds, previously filed as Exhibit 4 to the Company's Form
8-K filed on August 6, 1986 and incorporated by reference.
4.3 Series Supplement to the Indenture, dated as of August 1, 1986, relating to
Series 1986-B Bonds, previously filed as Exhibit 4 to the Company's Form
8-K filed on September 3, 1986 and incorporated by reference.
<PAGE>
NEWMAN FINANCIAL CORPORATION
ITEM 8 - FINANCIAL STATEMENTS
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
BALANCE SHEETS - JUNE 30, 1996 AND 1995 F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JUNE 30, 1996, 1995 AND 1994 F-4
STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS
ENDED JUNE 30, 1996, 1995 AND 1994 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 1996, 1995 AND 1994 F-6
NOTES TO FINANCIAL STATEMENTS F-7
All schedules of the Registrant are omitted because the required information is
included elsewhere in the financial statements or in the notes thereto or the
schedule is not applicable.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Newman Financial Corporation:
We have audited the accompanying balance sheets of NEWMAN FINANCIAL CORPORATION
as of June 30, 1996 and 1995, and the related statements of operations, changes
in stockholder's equity and cash flows for each of the three-years in the period
ended June 30, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Newman Financial Corporation as
of June 30, 1996 and 1995, and the results of its operations and its cash flows
for each of the years in the three-year period ended June 30, 1996, in
conformity with generally accepted accounting principles.
Denver, Colorado Arthur Andersen LLP
August 14, 1996
F-2
<PAGE>
NEWMAN FINANCIAL CORPORATION
BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS 1996 1995
--------- -----------
Cash $ 5,312 $ 4,240
Restricted assets (Note B)
Cash and temporary cash investments -0- 244,409
Investment in governmental
security, net of discount of $123,890 in
1995 (Note A2) -0- 6,885,247
Accrued interest receivable -0- 53,734
--------- -----------
-0- 7,183,390
Organization costs, net of accumulated
amortization (Note A4) 3,173 3,300
--------- -----------
$ 8,485 $ 7,190,930
--------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable $ 1,675 $ 4,144
Accrued interest payable -0- 23,000
Payable to parent company -0- 16,936
Bonds payable, including accrued interest
of $3,392,846 in 1995, net of discount of
$88,238 in 1995. (Notes A2, A3 and C) -0- 6,881,397
--------- -----------
Total liabilities 1,675 6,925,477
Stockholder's equity (Note A1)
Common stock - authorized 5,000 shares
of $.10 par value; issued and
outstanding 1,000 shares 100 100
Capital in excess of par value 42,493 254,343
Retained earnings (deficit) (35,783) 27,565
--------- -----------
6,810 282,008
Less note receivable - parent company (Note D) -0- (16,555)
--------- -----------
6,810 265,453
--------- -----------
$ 8,485 $ 7,190,930
--------- -----------
--------- -----------
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
NEWMAN FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
------- ------- -------
Revenues
Interest income $392,788 $667,293 $673,691
------- ------- -------
Costs and expenses
Interest expense 376,684 645,199 644,457
Amortization of organization
costs (Note A4) 127 127 127
General and administrative expenses 10,306 11,557 9,926
------- ------- -------
387,117 656,883 654,510
------- ------- -------
Earnings before income taxes and
extraordinary loss 5,671 10,410 19,181
Income tax expense (Note F) (1,675) (2,000) (7,700)
------- ------- -------
Earnings before extraordinary item 3,996 8,410 11,481
Extraordinary loss on extinguishment of
debt (net of applicable income tax benefit
of $37,500) (Note A2)
(67,344) -0- -0-
Net earnings (loss) $(63,348) $ 8,410 $ 11,481
------- ------- -------
------- ------- -------
Earnings per common share before
extraordinary item $ 4.00 $ 8.41 $ 11.48
------- ------- -------
------- ------- -------
Extraordinary loss per common share $ (67.35) -0- -0-
------- ------- -------
------- ------- -------
Net earnings (loss) per common share $ (63.35) $ 8.41 $ 11.48
------- ------- -------
------- ------- -------
Weighted average number of common
shares outstanding 1,000 1,000 1,000
------- ------- -------
------- ------- -------
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
NEWMAN FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
Capital Note
Common Stock in Excess Retained Receivable
-------------- of Par Earnings From Parent
Shares Amount Value (Deficit) Company
-------------- --------- --------- -----------
Balance at June 30, 1993 1,000 $100 $254,343 $ 7,674 $(16,555)
Net earnings -- -- -- 11,481 --
----- ---- -------- -------- --------
Balance at June 30, 1994 1,000 100 254,343 19,155 (16,555)
Net earnings -- -- -- 8,410 --
----- ---- -------- -------- --------
Balance at June 30, 1995 1,000 100 254,343 27,565 (16,555)
Net loss -- -- -- (63,348) --
Dividend -- -- (211,850) -- 16,555
----- ---- -------- -------- --------
Balance at June 30, 1996 1,000 $100 $ 42,493 $(35,783) $ --
----- ---- -------- -------- --------
----- ---- -------- -------- --------
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
NEWMAN FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (63,348) $ 8,410 $ 11,481
Adjustments required to reconcile net earnings (loss)
to net cash provided by operating activities:
Amortization of GNMA discounts (Note A2) (2,762) (4,735) (4,735)
Amortization of organization costs (Note A4) 127 127 127
Amortization of bond discount 1,973 3,383 3,383
(Increase) decrease in accrued interest receivable 53,734 (255) 407
Increase (decrease) in accounts payable (2,469) (1,376) 1,357
Increase in accrued interest payable 334,361 521,596 475,129
----------- --------- ---------
Net cash provided by operating activities 321,616 527,150 487,149
----------- --------- ---------
Cash flows from investing activities:
Net (increase)decrease in restricted cash 244,409 17 (1,731)
Principal payments on GNMA security 40,903 56,716 45,898
Sale of GNMA securities 7,125,979 -- --
Net advances from (to) parent (33,500) 9,647 8,363
----------- --------- ---------
Net cash provided by investing activities 7,377,791 66,380 52,530
----------- --------- ---------
Cash flows from financing activities:
Payment of bond principal (315,000) (590,000) (540,000)
Escrow deposit with trustee to defease bonds payable (7,204,605) -- --
Borrowing under letter of credit 7,204,605 -- --
Payment of letter of credit (7,204,605) -- --
Dividends paid (178,730) -- --
----------- --------- ---------
Net cash used in financing activities (7,698,335) (590,000) (540,000)
----------- --------- ---------
NET INCREASE (DECREASE) IN UNRESTRICTED CASH 1,072 3,530 (321)
Unrestricted cash at beginning of year 4,240 710 1,031
---------- -------- --------
Unrestricted cash at end of year $ 5,312 $ 4,240 $ 710
---------- -------- --------
---------- -------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies applied in the
preparation of the accompanying financial statements follows.
1. ORGANIZATION
Newman Financial Corporation (the "Company") was incorporated in the State
of Delaware on August 30, 1985 and is a wholly-owned subsidiary of Newman
Financial Services, Inc. ("NFSI"). NFSI contributed approximately $250,000
for the initial capitalization of the Company. The Company was organized
for the sole purpose of issuing and selling bonds, notes and other
obligations which would be collateralized by certain mortgage collateral
guaranteed by the Government National Mortgage Association ("GNMA") or
mortgage notes that are insured by the United States Department of Housing
and Urban Development acting through the Federal Housing Administration
pursuant to the National Housing Act, as amended, together with certain
funds and other collateral. In June 1986, a shelf registration statement
filed with the Securities and Exchange Commission became effective
authorizing the Company to issue up to $250,000,000 in Collateralized
Multifamily Housing Bonds.
2. EXTINQUISHMENT OF BONDS PAYABLE AND SALE OF GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION OBLIGATION ("GNMA")
On February 23, 1996, the Company legally defeased its Series 1986-B bonds
by depositing into escrow with the bond trustee two United States
Government Treasury Bills and a minor amount of cash, together sufficient
to pay bond debt service on March 20, 1996, and to redeem all remaining
bonds at a price of 100% of par value (accreted value in the case of
compound interest bonds), plus accrued interest on August 20, 1996. The
funds to purchase this deposit were received from a draw on a short-term
letter of credit from a commercial bank. All Series 1986-B bonds will be
called for redemption on August 20, 1996, and will cease to accrue
interest (or compound) thereafter.
The GNMA mortgage-backed security underlying the Series 1986-B bonds was
released to the Company upon defeasance of the Series 1986-B bonds, and the
GNMA mortgage-backed security was sold by the Company and its proceeds
were used to repay the commercial bank immediately for the draw on its
letter of credit advance.
As a result of the above actions, the Company disposed of its only
significant asset and extinguished its only significant liability.
3. BOND DISCOUNTS
Discounts on bonds payable were amortized over the lives of the bonds using
the straight-line method which approximated the effective interest method.
All unamoritized discounts were recognized upon defeasance in February
1996.
F-7
<PAGE>
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
4. AMORTIZATION OF ORGANIZATIONAL COSTS
Organizational costs are amortized over a 35-year life.
5. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates may affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
NOTE B - RESTRICTED ASSETS
The Company was required to maintain reserve funds under the terms of the bond
indentures for the outstanding bonds payable. Prior to the legal defeasance
of the Series 1986-B Bonds (see Note A2), these funds, as well as other
investments, including investment in GNMA, were held by a trustee bank for the
benefit of the owners of the outstanding bonds.
Investment in GNMA security, with a principal amount of $7,009,137 at June 30,
1995, bore interest at 9.25%. At June 30, 1995 the net book value of this
security was $6,885,247 and the market value approximated $7,223,000.
NOTE C - BONDS PAYABLE
The Company had one series outstanding of its Collateralized Multifamily Housing
Bonds ("Bonds") at June 30, 1995. These Bonds bore interest at varying coupon
rates, ranging from 8.2% to 9.625%. The Bonds were collateralized by a GNMA
security owned by the Company (Note B). The outstanding bond balances as of
June 30, 1995, excluding discount were as follows:
1995
----
Current Interest Bonds $ 980,000
Compound Interest Bonds Plus
Accreted Interest 5,989,635
---------
Total $6,969,635
---------
---------
These bonds were legally defeased during February 1996 (See Note A).
F-8
<PAGE>
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
NOTE D - NOTE RECEIVABLE - PARENT COMPANY
NFSI initially contributed additional capital of $80,410 in the form of a demand
note receivable. The demand note receivable is non-interest bearing and is
reflected as a reduction in stockholder's equity. The demand note is reduced as
NFSI pays certain out-of-pocket bond issuance and other costs that would
normally be paid with cash from the Company. At June 30, 1996 and 1995, the
balance of the note receivable from the parent was $-0- and $16,555,
respectively.
NOTE E - RELATED PARTY TRANSACTION
The Company paid Newman and Associates, Inc. a $100,000 fee in connection with
the defeasance of the Series 1986-A bonds and the sale of the GNMA security (See
Note A2).
NOTE F - INCOME TAXES
As of July 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under SFAS
109, the current provision for income taxes represents actual or estimated
amounts payable or refundable based on tax returns filed or to be filed for
each year. Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax basis of assets
and liabilities and amounts reported for financial reporting purposes. The
overall change in deferred tax assets and liabilities for the period measures
the deferred tax provision or benefit for the period. Effects of changes in
enacted tax laws on deferred tax assets and liabilities are reflected as
adjustments to the tax provision in the period of enactment. The measurement
of deferred tax assets may be reduced by a valuation allowance based on
judgmental assessment of available evidence if deemed more likely than not
that some or all of the deferred tax assets will not be realized.
The Company is included in the consolidated income tax return of NFSI. The
Company's current year income tax benefit was realized through a deemed
distribution to NFSI.
A reconciliation of the statutory federal income tax rate to the effective tax
rate follows:
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory rate $(33,825) $1,500 $6,500
State income taxes and other items, net (2,000) 500 1,200
------ ------ ------
$(35,825) $2,000 $7,700
------- ----- -----
------- ----- -----
</TABLE>
F-9
<PAGE>
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996 AND 1995
NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
For purposes of the statements of cash flows, the Company defines cash as all
unrestricted cash on deposit subject to immediate withdrawal.
For the years ended June 30, 1996, 1995 and 1994, cash payments for interest and
income taxes are as follows:
1996 1995 1994
------ ------- -------
Interest paid $41,493 $123,603 $165,945
Noncash investing and financing activities for the years ended June 30, 1996,
1995 and 1994, are as follows:
1996 1995 1994
------ ------- -------
Deemed dividend to parent in
elimination of receivables due from
Parent $33,120 $ -- $ --
NOTE H - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Company, as conduit issuer of collateralized multifamily housing bonds until
February 1996 (Note A2), was a party to financial instruments with off-balance
sheet risk. These instruments involve, in a technical sense, elements of credit
and market risk in excess of the amounts recognized in the balance sheet.
Credit risk is defined as the possibility that a loss may occur from the failure
of another party to perform according to the terms of a contract. Market risk
arises due to the possibility that future changes in market prices may make a
financial instrument less valuable or more onerous.
The GNMA security was guaranteed by the United States of America and, by
definition, among the lowest possible credit risks. Because the GNMA security
was to be held to maturity, or prepaid at par, market risk is slight. The GNMA
security represented approximately 96% of the Company's assets and was,
therefore, a concentration of credit risk. However, the GNMA security was sold
during the year ended June 30, 1996, and the proceeds were indirectly utilized
to defease certain outstanding bonds (See Note A2).
F-10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 5,312
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,312
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,485
<CURRENT-LIABILITIES> 1,675
<BONDS> 0
0
0
<COMMON> 100
<OTHER-SE> 6,710
<TOTAL-LIABILITY-AND-EQUITY> 6,810
<SALES> 0
<TOTAL-REVENUES> 392,788
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 376,684
<INCOME-PRETAX> 5,671
<INCOME-TAX> 1,675
<INCOME-CONTINUING> 3,996
<DISCONTINUED> 0
<EXTRAORDINARY> (67,344)
<CHANGES> 0
<NET-INCOME> (63,348)
<EPS-PRIMARY> (63.35)
<EPS-DILUTED> 0
</TABLE>
