FORM 10-K
Securities and Exchange Commission
Washington, D.C. 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, 1995
-------------
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 (I.R.S. 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
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").
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 is secured by separate collateral that does not
serve as security for any other series of Bonds. The collateral for a
series of Bonds consists primarily of the Mortgage Collateral
specifically pledged to that series and amounts deposited in various
accounts. The Mortgage Collateral for each series is pledged to a
trustee on behalf of the holders of the Bonds of such series, and is
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 is 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 has 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. As of June 30,
1995, the Series 1986-B Bonds remain outstanding.
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.
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, 1991, 1992, 1993,
1994 and 1995, and are summarized from the Company's financial
statements included in Item 8.
June 30,
------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
Revenues $ 667,293 $ 673,691 $ 670,374 $ 679,885 $ 707,795
Net earnings(loss) before
extraordinary item 8,410 11,481 10,694 13,617 (34,361)
Net earnings after
extraordinary item 8,410 11,481 10,694 13,617 19,779
Net earnings(loss) per share
before extraordinary item 8.41 11.48 10.69 13.62 (34.36)
Net earnings per share
after extraordinary item 8.41 11.48 10.69 13.62 19.78
Total assets $7,190,930 $7,239,270 $7,280,631 $7,334,010 $7,388,255
GNMA securities owned $6,885,247 $6,937,228 $6,978,391 $7,021,674 $7,060,622
Bond related debt
Bonds payable $3,488,551 $4,075,168 $4,611,785 $5,108,402 $5,570,019
Accrued Interest $3,392,846 $2,857,250 $2,370,121 $1,926,278 $1,592,818
---------- ---------- ---------- ---------- ----------
$6,881,397 $6,932,418 $6,981,906 $7,034,680 $7,162,837
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
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 has 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. In 1990, the mortgage loan underlying the
Series 1986-A bonds defaulted and the related GNMA security was
prepaid in fiscal 1991. The Series 1986-A bonds were then redeemed
with proceeds of the GNMA security prepayment. At this time, only the
Series 1986-B bonds remain outstanding.
Cash flow from payments on the GNMA Certificates, together with
reinvestment earnings thereon, is anticipated to provide cash
sufficient to make all required payments on the Bonds. Consequently,
the registrant anticipates that it will have no additional cash
requirements with respect to its outstanding Bonds.
BUSINESS ENVIRONMENT AND EVENTS
The registrant competes 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 costs associated with issuing a
series of bonds under the Indenture.
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 98% of all expenses.
During the years ended June 30, 1995, 1994 and 1993, the revenues for
the registrant were $667,293, $673,691 and $670,374, 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 1%
from 1995 to 1994 as a result of a lower average GNMA principal
balance and increased slightly from 1993 to 1994 as a result of some
miscellaneous income. Payment of interest on the outstanding Bonds
and the amortization of organization costs were the major sources of
costs and expenses. Costs and expenses remained relatively constant
from 1993 to 1995.
Both future interest earnings and future interest expense should be
expected to reflect current levels.
The registrant's ongoing costs and expenses will be paid from interest
income from the GNMA security underlying the Series 1986-B Bonds and
interest earnings thereon after payment of amounts required to be
deposited into the Collection Account for the Series 1986-B Bonds.
The registrant anticipates that amounts not required to be deposited
into the Collection Account will be sufficient to pay costs and
expenses of the Trustee and other related expenses of the Bonds if the
interest income from the GNMA Certificate can be invested at a rate of
not less than three percent (3%) per year during the term of the
Bonds. In addition, amounts released to the registrant from the lien
of the Indenture and not distributed to its shareholder will be
available to pay unanticipated expenses in connection with the
administration of the Bonds and other expenses incurred by the
registrant, and taxes, as needed or required.
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 46 Chairman of the
Board and Director
Bradley B. James 50 President and Director
David C. Smith 46 Executive Vice President
and Director
Helen M. Gair 46 Vice President
R. Kent Erickson 54 Secretary, Assistant Treasurer and
Director
David W. Curtiss 43 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.
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) -- Report of Independent Certified Public Accountants
Financial Statements
Notes to Financial Statements
(3) Exhibits -- See Exhibit Index immediately preceding exhibits.
(b) Exhibits -- See Exhibit Index immediately preceding exhibits.
(c) 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.
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.
September 9, 1995 /s/ Scot B. Barker
----------------------------
Scot B. Barker
Chairman of the Board and Director
(Principal Executive Officer)
September 9, 1995 /s/ Bradley B. James
----------------------------
Bradley B. James
President and Director
September 9, 1995 /s/ R. Kent Erickson
----------------------------
R. Kent Erickson
Secretary, Assistant Treasurer and
Director
September 9, 1995 /s/ David C. Smith
----------------------------
David C. Smith
Executive Vice President and Director
September 9, 1995 /s/ Helen M. Gair
----------------------------
Helen M. Gair
Vice President
September 9, 1995 /s/ David W. Curtiss
----------------------------
David W. Curtiss
Treasurer and Assistant Secretary
(Principal Financial Officer and
Principal Accounting Officer)
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.
NEWMAN FINANCIAL CORPORATION
ITEM 8 - FINANCIAL STATEMENTS
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
BALANCE SHEETS - JUNE 30, 1995 AND 1994 F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
JUNE 30, 1995, 1994 AND 1993 F-4
STATEMENTS OF STOCKHOLDER'S EQUITY FOR THE YEARS
ENDED JUNE 30, 1995, 1994 AND 1993 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
JUNE 30, 1995, 1994 AND 1993 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.
ARTHUR ANDERSON LLP
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, 1995 and 1994, and the related statements of operations, changes
in stockholder's equity and cash flows for each of the years in the three-year
period ended June 30, 1995. 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, 1995 and 1994, and the results of its operations and its cash flows
for each of the years in the three-year period ended June 30, 1995, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
August 4, 1995
F-2
NEWMAN FINANCIAL CORPORATION
BALANCE SHEETS
JUNE 30, 1995 AND 1994
ASSETS 1995 1994
---------- ----------
Cash $ 4,240 $ 710
Restricted assets (note B)
Cash and temporary cash investments 244,409 244,426
Investment in governmental
security, net of discount of
$123,890 and $128,625 in 1995
and 1994, respectively (note A2) 6,885,247 6,937,228
Accrued interest receivable 53,734 53,479
---------- ----------
7,183,390 7,235,133
Organization costs, net of accumulated
amortization (note A4) 3,300 3,427
---------- ----------
$7,190,930 $7,239,270
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable $ 4,144 $ 5,520
Accrued interest payable 23,000 37,000
Payable to parent company 16,936 7,289
Bonds payable, including accrued interest
of $3,392,846 and $2,857,250 in 1995 and
1994, net of discount of $88,238 and $91,621 in
1995 and 1994, respectively (notes A3 and C) 6,881,397 6,932,418
---------- ----------
Total liabilities 6,925,477 6,982,227
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 254,343 254,343
Retained earnings 27,565 19,155
---------- ----------
282,008 273,598
Less note receivable - parent company (note D) (16,555) (16,555)
---------- ----------
265,453 257,043
---------- ----------
$7,190,930 $7,239,270
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
statements.
F-3
NEWMAN FINANCIAL CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
1995 1994 1993
-------- -------- --------
Revenues
Interest income $667,293 $673,691 $670,374
-------- -------- --------
Costs and expenses
Interest expense 645,199 644,457 643,573
Amortization of organization
costs (note A4) 127 127 127
General and administrative expenses 11,557 9,926 10,480
-------- -------- --------
656,883 654,510 654,180
-------- -------- --------
Earnings before income taxes 10,410 19,181 16,194
Income tax expense (note E) (2,000) (7,700) (5,500)
-------- -------- --------
Net earnings $ 8,410 $ 11,481 $ 10,694
-------- -------- --------
-------- -------- --------
Net earnings per common share $ 8.41 $11.48 $10.69
-------- -------- --------
-------- -------- --------
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
NEWMAN FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
Capital Note
Common Stock in Excess Retained Receivable
----------------- of Par Earnings From Parent
Shares Amount Value (Deficit) Company
----- ---- -------- -------- --------
Balance at June 30, 1992 1,000 $100 $254,343 $ (3,020) $(16,555)
Net earnings -- -- -- 10,694 --
----- ---- -------- -------- --------
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)
----- ---- -------- -------- --------
----- ---- -------- -------- --------
The accompanying notes to financial statements are an integral part of these
statements.
F-5
NEWMAN FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1995, 1994 AND 1993
1995 1994 1993
--------- --------- ---------
Cash flows from operating activities:
Net earnings $ 8,410 $ 11,481 $ 10,694
Adjustments required to reconcile net earnings
to net cash provided by operating activities:
Amortization of GNMA discounts (Note A2) (4,735) (4,735) (4,735)
Amortization of organization costs (Note A4) 127 127 127
Amortization of bond discount 3,383 3,383 3,383
(Increase) decrease in accrued interest receivable (255) 407 370
Increase (decrease) in accounts payable (1,376) 1,357 1
Increase in accrued interest payable 521,596 475,129 432,543
--------- --------- ---------
Net cash provided by operating activities 527,150 487,149 442,383
--------- --------- ---------
Cash flows from investing activities:
Net (increase)decrease in restricted cash 17 (1,731) (16,082)
Principal payments on GNMA security 56,716 45,898 48,018
--------- --------- ---------
Net cash provided by investing activities 56,733 44,167 31,936
--------- --------- ---------
Cash flows from financing activities:
Payment of bond principal (590,000) (540,000) (500,000)
Net advances from parent 9,647 8,363 20,450
--------- --------- ---------
Net cash used in financing activities (580,353) (531,637) (479,550)
--------- --------- ---------
NET INCREASE (DECREASE) IN UNRESTRICTED CASH 3,530 (321) (5,231)
Unrestricted cash at beginning of year 710 1,031 6,262
--------- --------- ---------
Unrestricted cash at end of year $ 4,240 $ 710 $ 1,031
--------- --------- ---------
--------- --------- ---------
The accompanying notes to financial statements are an integral part of these
statements.
F-6
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1994
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. INVESTMENT IN GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATION ("GNMA")
The investment in the GNMA security is recorded at amortized cost. The
difference between the cost of the GNMA security and its face value was
recorded as a discount and amortized over the life of the GNMA security (35
years).
Gains or losses on the portfolio are recognized upon disposition or at such
time as a permanent decline in value exists.
Effective July 1, 1994, the Company classified its investment securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
Under SFAS No. 115, debt securities that are not held-to-maturity are
classified as trading securities or available-for-sale and recorded at
estimated market value, with the resulting adjustment reflected as a
separate component of income for trading securities or stockholder's
investment, net of tax, for available-for-sale securities. Debt securities
which are classified as held-to-maturity are carried at amortized cost. At
June 30, 1995, the Company's portfolio included only one security which was
classified as held-to-maturity as the company is restricted from selling
the security.
F-7
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1994
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
3. BOND DISCOUNTS
Discounts on bonds payable are amortized over the lives of the bonds using
the straight-line method which approximates the effective interest method.
4. AMORTIZATION OF ORGANIZATIONAL COSTS
Organizational costs are amortized over the 35-year life of the GNMA.
NOTE B - RESTRICTED ASSETS
The Company is required to maintain reserve funds under the terms of the bond
indentures for the outstanding bonds payable. These funds, as well as other
investments, including investment in GNMA, are 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 and
$7,065,853 at June 30, 1995 and 1994, respectively, bear interest at 9.25% and
mature in August 2021. At June 30, 1995 and 1994, the net book value of this
security was $6,885,247 and $6,937,228, respectively; and the market value
approximated $7,223,000 and $7,211,000, respectively.
NOTE C - BONDS PAYABLE
The Company has one series outstanding of its Collateralized Multifamily Housing
Bonds ("Bonds"), which mature semiannually through 2021. These Bonds bear
interest at varying coupon rates, ranging from 8.2% to 9.625%. The Bonds are
collateralized by a GNMA security owned by the Company (Note B). The
outstanding bond balances as of year end excluding discount are as follows:
1995 1994
---------- ----------
Current Interest Bonds $ 980,000 $1,570,000
Compound Interest Bonds Plus
Accreted Interest 5,989,635 5,454,039
---------- ----------
Total $6,969,635 $7,024,039
---------- ----------
---------- ----------
F-8
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1994
NOTE C - BONDS PAYABLE (CONTINUED)
The aggregate amount of required future debt service related to the Bonds at
June 30, 1995 is as follows:
Year ending June 30,
1996 $ 640,000
1997 695,000
1998 710,000
1999 710,000
2000 715,000
Thereafter 30,880,000
-----------
34,350,000
Less amount representing interest (27,380,365)
-----------
Total (excluding unamortized bond
discount of $88,238) $ 6,969,635
-----------
-----------
The amount representing interest above includes interest on Compound Interest
Bonds, which compound interest semiannually and pay the interest at stated
maturity. The Series 1986-B Bonds consist of two types of bonds: Current
Interest Bonds and Compound Interest Bonds. Principal and interest payments on
the Current Interest Bonds are made semiannually on each March 20 and September
20 through September of 1996. The original principal amount plus accrued but
unpaid interest ("accreted value") of the Compound Interest Bonds will be paid
semiannually from March 1997 through March 2000, with the remaining term bonds
paid at their stated maturities, September 2005 and September 2021.
The Bonds are subject to redemption, at any time on or after August 20, 1996, in
whole at the option of the Company and to mandatory redemption in whole from the
proceeds of any optional prepayment from the mortgage collateral at the
redemption price, as defined in the bond indenture. The redemption price is
defined as the principal amount plus accrued interest from any Current Interest
Bond and the accreted value for any Compound Interest Bond.
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, 1995 and 1994, the
balance of the note receivable from the parent was $16,555.
F-9
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1994
NOTE E - 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. However,
for financial reporting purposes, the Company presents income tax information as
if it filed a separate company income tax return.
A reconciliation of the statutory federal income tax rate to the effective tax
rate follows:
Year Ended June 30,
--------------------------
1995 1994 1993
------ ------ ------
Income tax expense at federal statutory
rate $1,500 $6,500 $5,500
State income taxes and other items, net 500 1,200 --
------ ------ ------
$2,000 $7,700 $5,500
------ ------ ------
------ ------ ------
F-10
NEWMAN FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1995 AND 1994
NOTE F - 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, 1995, 1994 and 1993, cash payments for interest and
income taxes are as follows:
1995 1994 1993
-------- -------- --------
Interest paid $123,603 $165,945 $207,643
Income taxes paid to parent company -- -- --
NOTE G - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS
OF CREDIT RISK
The Company, as conduit issuer of collateralized multifamily housing bonds, is a
party to financial instruments with off-balance sheet risk. At present, the
financial instruments are limited to a GNMA security and various forms of cash
equivalent securities. 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 is guaranteed by the United States of America and, by
definition, among the lowest possible credit risks. Because the GNMA security
is to be held to maturity, or prepaid at par, market risk is slight. The GNMA
security represents 96% of the Company's assets and is, therefore, a
concentration of credit risk. Should GNMA default in the payment of the GNMA
security and the United States of America default on its guaranty of the GNMA
security, the Company would be unable to make its bond payments.
NOTE H - ACCOUNTING PRONOUNCEMENTS
In December 1991, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments". SFAS No. 107
extends existing fair value disclosure practices for some instruments by
requiring all entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized in the balance sheet, for
which it is practicable to estimate fair value. If estimating fair value is not
practicable, SFAS No. 107 requires disclosure of descriptive information
pertinent to estimating the value of a financial instrument. SFAS No. 107 is
effective for financial statements issued for fiscal years ending after December
15, 1992, except for entities with less than $150 million in total assets. For
those entities (which include the Company), the effective date is for fiscal
years ending after December 15, 1995.
F-11