<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities
---
Exchange Act of 1934
For the quarterly period ended June 30, 1995
--------------------
___ Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from __________ to __________
Commission file number l-9224
------
HELMSTAR GROUP, INC.
---------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-2689850
----------------------------------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2 World Trade Center, Suite 2112, New York, N.Y. 10048
---------------------------------------------------------------------------
(Address of Principal Executive Offices)
212-775-0400
---------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No __
-
The number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at July 31, 1995
----- ----------------------------
Common stock - par value $.10 5,938,195 shares
----------------------------- ----------------
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM L. FINANCIAL STATEMENTS.
The following consolidated financial statements of Helmstar Group,
Inc. and subsidiaries (collectively referred to as the "Company," unless
the context requires otherwise) are prepared in accordance with the rules
and regulations of the Securities and Exchange Commission for Form l0-QSB
and reflect all adjustments (consisting of normal recurring accruals) and
disclosures which, in the opinion of management, are necessary for a fair
statement of results for the interim periods presented. It is suggested
that these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Form l0-KSB for
the fiscal year ended December 31, 1994, which was filed with the
Securities and Exchange Commission.
The results of operations for the three months and six months ended
June 30, 1995 are not necessarily indicative of the results to be
expected for the entire fiscal year.
<PAGE>
2
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1995 1994
------------ -------------
<S> <C> <C>
Cash and cash equivalents............. $ 748,119 $ 739,624
Marketable securities................. 2,070,738 508,907
Joint ventures including advances..... 1,426,399 3,675,971
Mortgage servicing rights - net of
accumulated amortization of
$1,487,579 in 1995 and $1,289,410
in 1994............................. 1,929,914 2,077,108
Other investments..................... 426,753 397,126
Mortgage loans held for sale.......... 2,091,218 30,000
Due for mortgage loans sold........... 33,315 54,554
Furniture, equipment and
leasehold improvements - at cost,
less accumulated depreciation and
amortization of $332,698 in
1995 and $316,507 in 1994........... 228,048 256,526
Other assets.......................... 626,154 786,849
----------- -----------
TOTAL............................ $ 9,580,658 $ 8,526,665
=========== ===========
LIABILITIES
Notes payable......................... $ 379,479
Accrued expenses and other
liabilities......................... $ 1,680,454 1,510,946
----------- -----------
Total liabilities................ 1,680,454 1,890,425
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - authorized
10,000,000 shares, par value
$.10; issued 6,749,600 shares....... 674,960 674,960
Paid-in surplus....................... 14,984,510 14,984,510
Unrealized gain on securities
available for sale.................. 47,409
(Deficit)............................. (5,280,569) (6,504,307)
----------- -----------
Total............................ 10,426,310 9,155,163
Less treasury stock, at cost -
796,405 shares in 1995 and 783,905
shares in 1994...................... (2,526,106) (2,518,923)
----------- -----------
Total stockholders' equity....... 7,900,204 6,636,240
----------- -----------
TOTAL............................ $ 9,580,658 $ 8,526,665
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
3
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Profit from joint ventures...... $ 332,263 $ 139,521 $1,779,872 $ 280,900
Financial consulting fees....... 290,000 175,000 290,000 355,500
Loan servicing fees net of
guarantor fees............... 209,548 246,589 427,801 501,102
Loan origination fees........... 150,381 75,731 231,723 196,032
Interest income................. 104,575 40,307 160,838 87,934
Investment income............... 629,190 73,459 631,310 365,413
Other income.................... 10,583 25,688 26,887 56,646
---------- ---------- ---------- ----------
Total revenues............... 1,726,540 776,295 3,548,431 1,843,527
---------- ---------- ---------- ----------
Expenses:
Compensation and related costs.. 822,990 574,726 1,337,046 1,170,912
Occupancy cost.................. 124,733 95,940 223,252 189,167
Amortization of mortgage
servicing rights............. 97,867 114,816 198,169 259,507
General and administrative...... 218,303 176,961 395,450 362,797
Professional fees and
litigation expenses.......... 61,050 74,008 106,698 111,008
Interest........................ 2,252 (10,721) 3,946 15,201
---------- ---------- ---------- ----------
Total Expenses............... 1,327,195 1,025,730 2,264,561 2,108,592
---------- ---------- ---------- ----------
Profit (loss) before taxes 399,345 (249,435) 1,283,870 (265,065)
Income tax (benefit) 2,223 (1,123) 60,132 33,005
---------- ---------- ---------- ----------
NET PROFIT (LOSS) $ 397,122 $ (248,312) $1,223,738 $(298,070)
========== ========== ========== ==========
Net profit (loss)
per common share $ .07 $ (.04) $ .21 $ (.05)
====== ======= ====== =======
Weighted average number of
common shares outstanding 5,953,195 6,005,495 5,955,241 6,005,495
========== ========== ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
4
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 1,223,738 $(298,070)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization........................... 245,234 305,784
Unrealized (gain) on joint ventures
and other investments.................................... (485,823) (374,281)
(Gain) on sale or disposal of investments............... (1,276,267) (115,898)
Loss on sale of fixed assets............................ 1,912
Changes in operating assets and liabilities:
(Increase) decrease in mortgage loans held for sale...... (2,061,218) 753,450
Decrease in due for mortgage loans sold.................. 21,239 235,287
Decrease (increase) in other assets...................... 143,557 (109,003)
Increase (decrease) in accrued expenses.................. 169,508 (271,037)
----------- ---------
Net cash provided by (used in) operating activities....... (2,018,120) 126,232
----------- ---------
Cash flows from investing activities:
(Purchase) sale of investment securities - net:
U.S. Government obligations............................. (1,561,831) 288,013
Purchase of interest in joint venture.................... (500)
Distributions from joint ventures and other investments.. 2,347,822 199,519
Purchase of mortgage servicing rights.................... (50,975) (127,381)
Proceeds from the sale joint ventures.................... 1,681,622
Proceeds from sale or disposal of fixed assets........... 8,752
Purchase of fixed assets................................. (12,113) (19,728)
----------- ---------
Net cash provided by (used in) investing activities....... 2,413,277 339,923
----------- ---------
Cash flows from financing activities:
Repayment of short term borrowings - net:................ (379,479) (746,134)
Purchase of treasury stock............................... (7,183) (81)
----------- ---------
Net cash provided by (used in) financing activities....... (386,662) (746,215)
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 8,495 (280,060)
Cash and cash equivalents at beginning of period.......... 739,624 840,367
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 748,119 $ 560,307
=========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 2,252 $ 15,201
Taxes................................................... 10,693
Non-cash increase in value of securities
available for sale.................................... 47,409
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
<PAGE>
5
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
l. SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The accounting policies followed by the Company are set forth in the
notes to the Company's financial statements included in its Form l0-KSB,
for the fiscal year ended December 3l, 1994, which was filed with the
Securities and Exchange Commission (the "SEC").
The Company accounts for investment securities in accordance with
Statement of Financial Accounting Standards No. 115. The Company records
the change in market value of investments "available for sale" in an
equity account.
2. JOINT VENTURES
--------------
On February 22, 1995, First Highpoint Limited Partnership sold its
principal asset, an apartment project located in Plano, Texas. The
partnership had owned such project throughout 1994. The Company
recognized a gain of $1,260,871 in the three months ended March 31, 1995
and an additional amount of $3,902 in this period.
On April 11, 1995, Blowing Rock Outlet Partners refinanced its
principal asset, a manufacturers outlet shopping center, located in
Blowing Rock, North Carolina. The Company's share of the proceeds
distributed after the refinancing was in excess of the carrying amount of
the Company's interest in such venture prior to the distribution.
<PAGE>
6
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. JOINT VENTURES (continued)
--------------
Summary combined operating results of the joint ventures in which
the Company is a co-venturer are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Rental income.................... $ 499,539 $ 754,226
Operating expenses............... (42,254) (161,999)
---------- ----------
Net operating income............. 457,285 592,227
Other income (expense)........... (363,076) (483,133)
---------- ----------
Net income....................... $ 94,209 $ 109,094
========== ==========
Company's share of profit
from joint ventures............. $ 75,812 $ 139,521
Adjustment to Company's
share of gain on sale of
an apartment project............ 3,902
Gain from receiving cash
distributions in excess of the
book value of the Company's
interest in a joint venture..... 253,178
----------
Profit from joint ventures....... $ 332,892 $ 139,521
========== ==========
<CAPTION>
Six Months Ended June 30
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Rental income.................... $1,310,633 $1,586,341
Operating expenses............... (177,253) (291,540)
---------- ----------
Net operating income............. 1,133,380 1,294,801
Other income (expense)........... (754,678) (953,784)
---------- ----------
Net income....................... $ 378,702 $ 341,017
========== ==========
Company's share of profit
from joint ventures............. $ 261,920 $ 280,900
Company's share of gain on
sale of an apartment project.... 1,264,773
Gain from receiving cash
distributions in excess of the
book value of the Company's
interest in a joint venture..... 253,178
----------
Profit from joint ventures....... $1,779,871 $ 280,900
========== ==========
</TABLE>
<PAGE>
7
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. JOINT VENTURES (continued)
--------------
Pro forma summary combined operating results of the joint ventures in
which the Company is a co-venturer, excluding First Highpoint Limited
Partnership, are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Rental income.............. $ 499,539 $ 473,199
Operating expenses......... (42,254) (30,566)
---------- ----------
Net operating income....... 457,285 442,633
Other income (expense)..... (363,076) (346,012)
---------- ----------
Net income................. $ 94,209 $ 96,621
========== ==========
Company's share of profit
from joint ventures....... $ 75,812 $ 127,048
========== ==========
<CAPTION>
Three Months Ended June 30
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Rental income.............. $1,121,208 $1,029,395
Operating expenses......... (70,784) (43,978)
---------- ----------
Net operating income....... 1,050,424 985,417
Other income (expense)..... (683,215) (680,245)
---------- ----------
Net income................. $ 367,209 $ 305,172
========== ==========
Company's share of profit
from joint ventures....... $ 250,427 $ 245,055
========== ==========
</TABLE>
3. INCOME (LOSS) PER SHARE
-----------------------
Income (loss) per share is based on the weighted average number of
common shares outstanding during each period. The assumed exercise of
stock options relating to the Company's incentive compensation plan have
not been included in the computation, because the effect of their
inclusion would not be dilutive.
<PAGE>
8
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. LITIGATION
----------
The Company is a defendant in various lawsuits. In those instances
in which liability can be estimated, provisions have been reflected in
the financial statements. The ultimate outcome of the remaining lawsuits
cannot presently be determined, and no provision for any liability that
may result has been made in the financial statements, since the amounts,
if any, cannot be determined.
For an update to the litigation described in the notes to the
Company's financial statements included in its Form 10-KSB for the fiscal
year ended December 31, 1994, which was filed with the SEC, see Item 1,
"Legal Proceedings," on page 22 of this Form 10-QSB.
<PAGE>
9
Item 2. Management's Discussion and Analysis of Financial Condition and
------ ---------------------------------------------------------------
Results of Operations
---------------------
A. Three Months Ended June 30, 1995 Compared
-----------------------------------------
with Three Months Ended June 30, 1994
-------------------------------------
Total revenues increased to $1,726,540 for the three months
ended June 30, 1995 from $776,295 for the three months ended
June 30, 1994.
Profit from joint ventures increased to $332,263 for the three
months ended June 30, 1995 from $139,521 for the three months
ended June 30, 1994. This classification represents the
Company's share of income and losses, computed in accordance
with the equity method of accounting, from various joint
ventures in which the Company is participating.
Profit for the three months ended June 30, 1995 includes a
gain of approximately $250,000 from receiving cash
distributions from Blowing Rock Outlet Partners ("Blowing
Rock") in excess of the Company's carrying amount of its
interest in such venture. The venture made a substantial cash
distribution in April 1995 after refinancing its mortgage.
Additionally, profit for such period includes a slight
adjustment to the Company's share of gain from the sale of an
apartment complex. The apartment project was sold by First
Highpoint Limited Partnership ("First Highpoint") in February
1995. Profit for the three months ended June 30, 1994
included $12,473 from First Highpoint.
Notwithstanding improved operating results at the venture, the
Company's share of income from Blowing Rock should be lower in
future periods, due in part to the substantial increase in
interest expense, as a result of refinancing the venture's
mortgage debt from $3,757,828 to $6,550,000 in April 1995.
Furthermore, the partnership agreement provides that the
Company's share of income and cash flow would decline, once
the Company recovered its entire capital contribution from
certain events including the refinancing of the venture's
debt. The Company received a distribution in excess of its
capital contribution from the refinancing proceeds. The
venture's cash flow, at current interest rates, was not
impacted negatively because debt service for the new loan is
approximately $4,000 less per month than the old loan. The
old loan required
<PAGE>
10
principal amortization payments of $40,000 per month.
Although operating results continue to improve as the ventures
mature, some variation in profit or loss for a specific
interim period may result due to such factors as receiving
annual payments of percentage rent; incurring periodic
operating expenses which will occur only every few years, such
as painting the entire project; accounting adjustments between
interim periods; lost rent due to the turnover of a tenant
notwithstanding that a new tenant has been secured at a higher
rent; etc.
Financial consulting fees increased to $290,000 for the three
months ended June 30, 1995 from $175,000 for the three months
ended June 30, 1994. The Company provides financial
structuring advice to clients on a fee basis. Typically, an
engagement is based on a specific assignment to assist a
client to lower its cost of capital. Due to the transactional
nature of this business, significant variations in revenue are
likely.
Loan servicing fees decreased to $209,548 for the three months
ended June 30, 1995 from $246,589 for the three months ended
June 30, 1994. The decrease largely is attributable to a
decline in the average size of the Company's mortgage
servicing portfolio during the three months ended June 30,
1994 versus the three months ended June 30, 1995. Low
interest rates in 1993 and early 1994 spurred a great number
of mortgage refinancings. Even though interest rates began to
rise sharply beginning in February 1994, many loan
refinancings closed during the three months ended June 30,
1994 pursuant to pre-existing loan commitments. Furthermore,
the Company's mortgage servicing portfolio decreased as a
result of the bulk sale of approximately $25 million in
mortgage servicing rights during the third quarter of 1994.
The Company was able to cushion the effect of the decline in
servicing revenue with loan origination fees reflecting the
increased level of new business completed by the Company.
Most of the Company's loan originations [i.e., fixed rate
mortgages underwritten in accordance with Federal National
Mortgage Association ("FNMA") or Federal Home Loan Mortgage
Corporation ("FHLMC") standards] have an annual servicing fee
of .0025% of the unamortized principal balance. Older loans,
many of which have been refinanced, often have higher
servicing fees.
<PAGE>
11
Loan origination fees increased to $150,381 for the three
months ended June 30, 1995 from $75,731 for the three months
ended June 30, 1994.
The Company has taken significant steps to expand its
origination activities. In late 1993, branch offices were
opened in New Jersey and Delaware to expand the Company's
retail origination capacity.
Interest income increased to $104,575 for the three months
ended June 30, 1995 from $40,307 for the three months ended
June 30, 1994, due in large part to a change in the way the
Company funds mortgage loans originated for resale. In the
three months ended June 30, 1994, the Company relied more
heavily on its "warehouse facility" to fund such loans. Under
the terms of the "warehouse facility," the Company foregoes
both interest income on mortgage loans originated for resale
and virtually all interest expense, since the provider of such
facility earns interest income on the mortgage loans prior to
completing the sale thereof to investors. In addition to
utilizing the "warehouse facility," the Company funds mortgage
loans originated for resale by borrowing from its "credit
facility" or using its own cash. When either the "credit
facility" or its own cash is used, the Company earns interest
income on the mortgage loans until the time of completing the
sale thereof to investors. The Company incurs interest
expense when using the "credit facility." During the three
months ended June 30, 1995, the Company relied more heavily on
its own cash to fund mortgage loans originated for resale and
earned interest on mortgages prior to completing the sale
thereof to investors.
Investment income increased to $629,190 for the three months
ended June 30, 1995 from $73,459 for the three months ended
June 30, 1994. This category includes: net profit or loss
from investing in futures, puts, calls, equities and other
securities activities which included participation in an
investment partnership in 1994.
Other income decreased to $10,583 for the three months ended
June 30, 1995 from $25,688 for the three months ended June 30,
1994. This category consists primarily of sundry fees and
revenues earned in connection with the Company's mortgage
banking business other than loan servicing or origination
fees.
<PAGE>
12
Total expenses increased to $1,327,195 for the three months
ended June 30, 1995 from $1,025,730 for the three months ended
June 30, 1994.
Compensation and related costs increased to $822,990 for the
three months ended June 30, 1995 from $574,726 for the three
months ended June 30, 1994, due principally to the accrual of
an incentive bonus relating to the profit from the Company's
joint ventures and to higher commission payments to loan
originators as a result of an increase in mortgage loan
originations.
Occupancy costs increased to $124,733 for the three months
ended June 30, 1995 from $95,940 for the three months ended
June 30, 1994. This increase is due principally to a payment
made when the Company exercised its right to cancel the lease
on its executive offices, effective February 29, 1996.
Management believes that it can procure executive offices on
more favorable terms. The Company currently is reviewing
space alternatives.
Amortization of mortgage service rights decreased to $97,867
for the three months ended June 30, 1995 from $114,816 for the
three months ended June 30, 1994. The carrying amount of
purchased servicing rights must be amortized over the period
of the estimated, future net servicing income associated
therewith. The Company reviews the carrying amount of each
portfolio for possible impairment. If estimated future
servicing costs exceed revenues, the Company will recognize a
loss equal to any excess. Future amortization expense will be
adjusted accordingly.
General and administrative expenses increased to $218,303 for
the three months ended June 30, 1995 from $176,961 for the
three months ended June 30, 1994, principally due to greater
activity in the Company's loan origination area.
Professional fees decreased to $61,050 the three months ended
June 30, 1995 from $74,008 for the three months ended June 30,
1994.
Interest expense was $2,252 for the three months ended June
30, 1995. Interest expense was a credit balance of $10,721
for the three months ended June 30, 1994 as a result of an
accounting adjustment to an interest expense accrual in excess
of actual interest expense incurred.
<PAGE>
13
Interest expense is incurred in connection with the Company's
mortgage banking activities.
On a pre-tax basis, the Company had a profit of $399,345 for
the three months ended June 30, 1995 compared with a loss of
$249,435 for the three months ended June 30, 1994. Provision
for income taxes for the three months ended June 30, 1995 was
$2,223 compared with a benefit of $1,123 for the three months
ended June 30, 1994. These provisions consist solely of state
and local taxes. For Federal income tax purposes, as of
December 31, 1994, the Company has net operating loss
carryforwards aggregating approximately $11,400,000 available
to reduce future taxable income. These carryforwards expire
in the years 2006 through 2009.
The Company's net profit for the three months ended June 30,
1995 was $397,122 compared with a net loss of $248,312 for the
three months ended June 30, 1994. On a per share basis, the
profit was $.07 for the three months ended June 30, 1995,
compared with a net loss of $(.04) for the three months ended
June 30, 1994. Earnings or loss per share are based on the
weighted average number of shares outstanding (5,953,195 for
the three months ended June 30, 1995 and 6,005,495 for the
three months ended June 30, 1994). The assumed exercise of
stock options relating to the Company's incentive compensation
plan were not included in the computation, because the effect
of their inclusion would be not be dilutive.
Six Months Ended June 30, 1995 Compared
---------------------------------------
with Six Months Ended June 30, 1994
-----------------------------------
Total revenues increased to $3,548,431 for the six months
ended June 30, 1995 from $1,843,527 for the six months ended
June 30, 1994.
Profit from joint ventures increased to $1,779,872 for the six
months ended June 30, 1995 from $280,900 for the six months
ended June 30, 1993. This classification represents the
Company's share of income and losses, computed in accordance
with the equity method of accounting, from various joint
ventures in which the Company is participating.
Profit for the six months ended June 30, 1995 includes the
Company's share of gain from the sale of an apartment project
by First Highpoint in February 1995. Such amount was
approximately
<PAGE>
14
$1,260,000. Profit for the six months ended June 30, 1994
included $35,845 representing the Company's share of income
from First Highpoint's operations.
The Company realized a gain of approximately $250,000 from
receiving cash distributions from Blowing Rock in excess of
the Company's carrying amount of its interest in such venture.
The venture made a substantial cash distribution in April
1995, after refinancing its mortgage.
Notwithstanding improved operating results at the venture, the
Company's share of income from Blowing Rock should be lower in
future periods, due in part to the substantial increase in
interest expense, as a result of refinancing the venture's
mortgage debt from $3,757,828 to $6,550,000 in April 1995.
Furthermore, the partnership agreement provides that the
Company's share of income and cash flow would decline, once
the Company recovered its entire capital contribution from
certain events including the refinancing of the venture's
debt. The Company received a distribution in excess of its
capital contribution from the refinancing proceeds. The
venture's cash flow, at current interest rates, was not
impacted negatively because debt service for the new loan is
approximately $4,000 less per month than the old loan. The
old loan required principal amortization payments of $40,000
per month.
Although operating results continue to improve as the ventures
mature, some variation in profit or loss for a specific
interim period may result due to such factors as receiving
annual payments of percentage rent; incurring periodic
operating expenses which will occur only every few years, such
as painting the entire project; accounting adjustments between
interim periods; lost rent due to the turnover of a tenant
notwithstanding that a new tenant has been secured at a higher
rent; etc.
Financial consulting fees decreased to $290,000 for the six
months ended June 30, 1995 from $355,500 for the six months
ended June 30, 1994. The Company provides financial
structuring advice to clients on a fee basis. Typically, an
engagement is based on a specific assignment to assist a
client to lower its cost of capital. Due to the transactional
nature of this business, significant variations in revenue are
likely.
<PAGE>
15
Loan servicing fees decreased to $427,801 for the six months
ended June 30, 1995 from $501,102 for the six months ended
June 30, 1994. This decrease is largely attributable to a
decline in the average size of the Company's mortgage
servicing portfolio during the six months ended June 30, 1994
versus the six months ended June 30, 1995. The Company's
mortgage servicing portfolio was impacted negatively by a high
level of prepayments. Low interest rates in 1993 and early
1994 spurred a great number of mortgage refinancings. Even
though interest rates began to rise sharply beginning in
February 1994, many loan refinancings closed after such time
at lower rates pursuant to pre-existing loan commitments.
Furthermore, the Company's mortgage servicing portfolio
decreased as a result of the bulk sale of approximately $25
million in mortgage servicing rights during the third quarter
of 1994.
The Company was able to cushion the effect of the decline in
servicing revenue with loan origination fees reflecting the
high level of refinancings completed by the Company. Most of
the Company's new loan originations [i.e., fixed rate
mortgages underwritten in accordance with FNMA or FHLMC
standards] have an annual servicing fee of .0025% of the
unamortized principal balance. Older loans, many of which
have been refinanced, often have higher servicing fees.
Loan origination fees increased to $231,723 for the six months
ended June 30, 1995 from $196,032 for the six months ended
June 30, 1995.
The Company has taken significant steps to expand its
origination activities. In late 1993, branch offices were
opened in New Jersey and Delaware to expand the Company's
retail origination capacity.
Interest income increased to $160,838 for the six months ended
June 30, 1995 from $87,934 for the six months ended June 30,
1994, due in large part to a change in the way the Company
funds mortgage loans originated for resale. In the six months
ended June 30, 1994, the Company relied more heavily on its
"warehouse facility" to fund such loans. Under the terms of
the "warehouse facility," the Company foregoes both interest
income on mortgage loans originated for resale and virtually
all interest expense, since the provider of such facility
earns interest income on the mortgage loans prior to
completing the sale thereof to investors. In addition to
utilizing
<PAGE>
16
the "warehouse facility," the Company funds mortgage loans
originated for resale by borrowing from its "credit facility"
or using its own cash. When either the "credit facility" or
its own cash is used, the Company earns interest income on the
mortgage loans until the time of completing the sale thereof
to investors. The Company incurs interest expense when using
the "credit facility." During the six months ended June 30,
1995, the Company relied more heavily on its own cash to fund
mortgage loans originated for resale and earned interest on
mortgages prior to completing the sale thereof to investors.
Investment income increased to $631,310 for the six months
ended June 30, 1995 from $365,413 for the six months ended
June 30, 1994. This category includes: (1) net profit or loss
from investing in futures, puts, calls, equities and other
securities activities including participation in an investment
partnership; (2) receipts pursuant to a settlement agreement
on a receivable which had been fully reserved in a prior
period; and (3) the value of stock in a public company
received in payment of certain contingent consideration
pursuant to the terms of the sale of the Company's interest in
a joint venture in 1992.
Other income decreased to $26,887 for the six months ended
June 30, 1995 from $56,646 for the six months ended June 30,
1994. This category consists primarily of sundry fees and
revenues earned in connection with the Company's mortgage
banking business other than loan servicing or origination
fees.
Total expenses increased to $2,264,561 for the six months
ended June 30, 1995 from $2,108,592 for the six months ended
June 30, 1994.
Compensation and related costs increased to $1,337,046 for the
six months ended June 30, 1995 from $1,170,912 for the six
months ended June 30, 1994. The increase is due principally
to the accrual of an incentive bonus relating to the profit
from the Company's joint ventures and to higher commission
payments to loan originators as a result of an increase in
mortgage loan originations.
Occupancy costs increased to $223,252 for the six months ended
June 30, 1995 from $189,167 for the six months ended June 30,
1994. This increase is due principally to a payment made when
the Company
<PAGE>
17
exercised its right to cancel the lease on its executive
offices, effective February 29, 1996. Management believes that
it can procure executive offices on more favorable terms. The
Company currently is reviewing space alternatives.
Amortization of mortgage service rights decreased to $198,169
for the six months ended June 30, 1995 from $259,507 for the
six months ended June 30, 1994. The carrying amount of
purchased servicing rights must be amortized over the period
of the estimated, future net servicing income associated
therewith. The Company reviews the carrying amount of each
portfolio for possible impairment. If estimated future
servicing costs exceed revenues, the Company will recognize a
loss equal to any excess. Future amortization expense will be
adjusted accordingly.
General and administrative expenses increased to $395,450 for
the six months ended June 30, 1995 from $362,797 for the six
months ended June 30, 1994. This increase was due principally
to higher expenses incurred in connection with the Company's
loan origination area and an increase in insurance coverage.
Professional fees decreased to $106,698 for the six months
ended June 30, 1995 from $111,008 for the six months ended
June 30, 1994.
Interest expense decreased to $3,946 for the six months ended
June 30, 1995 from $15,201 for the six months ended June 30,
1994. Interest expense is incurred in connection with the
Company's mortgage banking activities.
On a pre-tax basis, the Company had a profit of $1,283,870 for
the six months ended June 30, 1995 compared with a loss of
$265,065 for the six months ended June 30, 1994. Provision
for income taxes for the six months ended June 30, 1995 was
$60,132 compared with $33,005 for the six months ended June
30, 1994. These provisions consist solely of state and local
taxes. For Federal income tax purposes, as of December 31,
1994, the Company has net operating loss carryforwards
aggregating approximately $11,400,000 available to reduce
future taxable income. These carryforwards expire in the
years 2006 through 2008.
The Company's net profit for the six months ended June 30,
1995 was $1,223,738 compared with a net loss of $298,070 for
the six months ended June 30,
<PAGE>
18
1994. On a per share basis, net profit was $.21 for the six
months ended June 30, 1995, compared with a net loss of $(.05)
for the six months ended June 30, 1994. Earnings or loss per
share are based on the weighted average number of shares
outstanding (5,955,241 for the six months ended June 30, 1995
and 6,005,495 for the six months ended June 30, 1994). The
assumed exercise of stock options relating to the Company's
incentive compensation plan were not included in the
computation, because the effect of their inclusion would not
be dilutive.
B. Liquidity and Capital Resources
-------------------------------
Management of the Company believes that funds generated from
operations, its credit and warehouse facilities, working
capital line and cash distributions from joint ventures,
supplemented by its available assets, will provide it with
sufficient resources to meet all present and reasonably
foreseeable future capital needs. A significant portion of the
Company's assets are readily convertible into cash.
The Company invests excess funds in liquid, short- term
financial instruments in order to maximize its current cash
return with minimum interest rate risk, while preserving the
ability to move quickly in funding attractive merchant banking
ventures. Such investments include U.S. Government
obligations, commodity futures contracts and money market
funds. Additionally, since commencing the mortgage loan
origination business, the Company may use its own cash to
carry a portion of its inventory of mortgage loans originated
for resale. Prior to funding any loans, the Company procures
firm commitments from investors to purchase such loans.
Fifteen days is the typical time between funding a mortgage
loan and receiving payment from an investor.
The Company's primary financing needs are in its mortgage
banking activities. In addition to its own cash resources,
the Company meets its mortgage funding requirements by
borrowing the necessary amounts from a $2 million "credit
facility" maintained with a savings bank. After funding an
individual loan, the Company can replenish its cash position
or available borrowing capacity under the credit facility by
utilizing a separate, $10 million mortgage "warehouse
facility." The Company can draw down up to 98% of the face
amount of an individual mortgage loan from the "warehouse
<PAGE>
19
facility." This facility is replenished from the purchase
price paid by the investor who had committed to purchase such
loan.
The Company also has a $350,000 revolving credit line with the
bank which provides the "warehouse facility." This line
carries interest at prime plus 1%. It can be used only in
connection with the Company's mortgage banking activities.
Sales of mortgage servicing rights among mortgage servicers is
rather routine. Prices that servicers are willing to pay for
the same package may vary, due to various factors including
the potential purchaser's internal cost of servicing each
loan, access to capital, cost of capital, prepayment
assumptions and opportunities for cross-selling other products
to mortgagors.
The carrying amount reflected in the consolidated balance
sheets for mortgage servicing rights acquired from third
parties may not be representative of the realizable value of
the bulk sale of all or a portion of such portfolio. The
Company treats the acquisition of mortgage servicing rights as
part of its investing activities in the consolidated
statements of cash flows.
In connection with its interests in real estate, the Company
uses separate subsidiaries for each venture. The Company
utilizes the equity method of accounting for its interests in
real estate joint ventures. Accordingly, the assets and
liabilities of such ventures are not included in the Company's
consolidated balance sheets.
The two operating real estate projects in which the Company is
a co-venturer, currently have strong occupancies and positive
cash flow. Cash maintained by each partnership, supplemented
with cash flow from operations, should be sufficient to cover
all operating costs and debt service requirements of each
venture, so that additional cash contributions from the
Company or its co-venturers would not be necessary. Facts and
circumstances, however, are subject to change for reasons
beyond the Company's control. Based on current estimates, the
Company expects to continue to receive cash distributions from
its real estate joint venture activities during 1995.
In April 1993, one of the Company's real estate joint ventures
entered into a modification
<PAGE>
20
agreement with the lender holding the venture's mortgage loan.
The lender converted the loan from a short-term, variable rate
loan into a four-year, fixed rate loan. Interest is payable at
8.5% per annum. The lender charged an extension fee which was
paid as follows: (1) $15,000 at the time the extension was
consummated; (2) $15,000 on April 1, 1994; and $33,818 (an
amount equal to the product of the outstanding principal
balance $4,609,079 multiplied by .0075) on April 1, 1995.
Regular amortization is determined on a 20-year schedule for
the first year and then on a 15-year self-liquidating basis.
Additional amortization payments equal to 25% of "excess cash
flow" were paid during the second 12-month period. Thereafter,
50% of "excess cash flow" is due as additional amortization.
The loan matures on April 1, 1997.
In April 1995, the Company's other real estate joint venture
refinanced the mortgage loan on its project. The principal
amount of the new, nonrecourse loan is $6,550,000; the
interest rate equals Citibank's six-month LIBOR rate plus
3.10% and the interest rate resets each September and March;
the maximum interest rate is 13.5375% and the current rate
through August 31, 1995 is 9.5375%; principal amortization is
based on a 25-year schedule; and the loan matures on May 1,
2002. The principal balance of the refinanced loan was
$3,757,828. The proceeds from refinancing, net of expenses
including points, fees, title insurance, escrows, etc., was
approximately $2.5 million. The Company received a
distribution from the joint venture of approximately $2.2
million.
Prior to the distribution of the net proceeds from
refinancing, the Company received a preferred return equal to
10% of its original capital contribution. Distributions from
sales or refinancing proceeds were to be applied, pursuant to
the partnership agreement, first to the Company to pay any
preferred return due and then in an amount equal to the
Company's original capital contribution. The Company received
55% of cash distributions in excess of the preferred return.
Since the Company recovered its entire original capital
contribution, it will no longer receive a preferred return.
If the project is sold or refinanced in the future, the
Company will receive 70% of distributable net proceeds.
<PAGE>
21
Although the venture's outstanding debt was increased
substantially, at current interest rates, monthly debt service
decreased slightly because the old loan required monthly
principal payments of $40,000 through its maturity in July
1995. In addition to principal and interest payments, debt
service for the new loan includes contributions to various
reserve accounts. The funds from such reserve accounts may be
used, in accordance with the loan agreement, to offset future
expenses, if any, for structural repairs, tenant improvements,
leasing commissions, and interest expense.
The carrying amounts reflected on the Company's consolidated
balance sheets for its various joint venture interests is
determined in accordance with the equity method of accounting.
Such carrying amounts may not be representative of the
realizable value on a sale of those interests. Management
reviews the carrying amount of each venture to determine if an
adjustment for any impairment other than a temporary decline
is required. If management believes in good faith that any
impairment is other than temporary, a loss provision equal to
such amount will be charged against the Company's consolidated
results of operations.
Cash distributions from joint ventures are reflected in
investing activities in the Company's consolidated statements
of cash flows. Equity contributions to joint ventures as well
as any advances to joint ventures also are reflected in
investing activities in the Company's consolidated statements
of cash flows.
While the Company believes that currently available funds will
provide it with sufficient resources to meet all present and
reasonably foreseeable future capital needs, the Company may
seek various forms of credit in order to finance its merchant
banking, mortgage banking or other activities in the future.
The Company does not have any material commitments for capital
expenditures as of June 30, 1995.
The Company is a defendant in various lawsuits. Although the
Company has reached settlements in some instances, an
unfavorable result in those remaining could have a significant
adverse effect upon the Company's liquidity and capital
resources.
<PAGE>
22
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
The Multi-District Litigation ("MDL"), MDL No. 739, U.S.
--------------------------------------------------------
District Court for the Eastern District of Pennsylvania
-------------------------------------------------------
In May 1995, the Court preliminarily approved the proposed
settlement agreement and directed that notice of the proposed
settlement be sent to the class members. A hearing is
scheduled for August 9, 1995 to determine whether the Court
will give final approval to the proposed settlement.
Eddie Jo Hurley and All Others Similarly Situated v. Citizens
-------------------------------------------------------------
Mortgage Service Company, N.Y. Supreme Court (Monroe County)
------------------------
(Index No. 9862/93)
In July 1995, counsel for the respective parties entered into
a proposed settlement. On July 28, 1995, the Court
preliminarily approved the proposed settlement agreement and
directed that notice of proposed settlement be sent to the
class members. A hearing is scheduled for October 20, 1995 to
determine whether the Court will give final approval to the
proposed settlement.
Joseph B. Gould Trust v. Premier Bank of Louisiana, et. al,
----------------------------------------------------------
U.S. District Court, District of CO, Civil Action No. 94-M-
2464
In June 1995, the plaintiff filed an amended complaint to
include the Company in this lawsuit against multiple
defendants. Plaintiff maintains that it had purchased certain
bonds issued by the Industrial Development Board of the
Metropolitan Government of Nashville and Davidson County for
the Woodlands Apartment Complex underwritten by certain
underwriters, including the Company, in December 1985. Such
bonds purportedly were purchased in a secondary market
transaction in August 1991. Plaintiff asserts that the
Internal Revenue Service (the "IRS") notified it that the
bonds were taxable. Plaintiff maintains that it paid the IRS
$15,414.26 for additional tax and interest relating to its
1991 tax liability and $36,828 for additional tax relating to
its 1993 tax liability. Plaintiff alleges it anticipates with
reasonable certainty that the IRS will assess additional tax
of $33,480 plus interest and penalties for 1992. Plaintiff is
seeking actual
<PAGE>
23
and punitive damages, costs, attorney fees and other relief
the Court deems just and proper.
Cross-claims and third party claims are pending against the
Company. The Company believes that all claims in this action
are without merit and will defend its position vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of Helmstar Group, Inc. was
held on June 7, 1995 at the offices of Richard A. Eisner &
Company, 575 Madison Avenue, New York, New York. 5,058,837
votes were present at the meeting either personally or by
proxy. The results of the matters submitted to a vote of
stockholders at the Annual Meeting were as follows:
(a) Election of Directors
---------------------
George W. Benoit was reelected as director for a term of
three years. 5,050,741 shares were voted for the
reelection of Mr. Benoit, 800 shares were voted against
his reelection and 7,296 shares abstained. Joseph G.
Anastasi, Roger J. Burns, Charles W. Currie and James J.
Murtha continued their terms of office as directors after
the meeting.
(b) Appointment of Auditors
-----------------------
The appointment of Richard A. Eisner & Company as
independent public accountants to audit the Company's
1995 financial statements was ratified at the Annual
Meeting. 5,052,287 shares were voted in favor of the
proposal, 1,550 shares were voted against it, and 5,000
shares abstained.
<PAGE>
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: A statement regarding the computation of per
share earnings is omitted because the computation is
described in Note 3 of the Notes to Condensed
Consolidated Financial Statements (Unaudited) on page 7
of this Form 10-QSB.
Exhibit 27 - Financial Date Schedule -- See below.
(b) Reports on Form 8-K:
-- The Company did not file any reports on Form 8-K
during the three months ended June 30, 1995.
<PAGE>
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HELMSTAR GROUP, INC.
s/ George W. Benoit
---------------------------
Date: August 9, 1995 George W. Benoit, Chairman of the Board of
Directors, President, Chief Executive
Officer
s/ Roger J. Burns
---------------------------
Date: August 9, 1995 Roger J. Burns, First Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HELMSTAR
GROUP, INC. AND SUBSIDIARIES' CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AND CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE SIX
MONTH PERIOD ENDED JUNE 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 748,119
<SECURITIES> 2,070,738
<RECEIVABLES> 33,315
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 560,746
<DEPRECIATION> 332,698
<TOTAL-ASSETS> 9,580,658
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 674,960
0
0
<OTHER-SE> 7,225,244
<TOTAL-LIABILITY-AND-EQUITY> 9,580,658
<SALES> 0
<TOTAL-REVENUES> 3,548,431
<CGS> 0
<TOTAL-COSTS> 2,264,561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,946
<INCOME-PRETAX> 1,283,870
<INCOME-TAX> 60,132
<INCOME-CONTINUING> 1,223,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,223,738
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
