<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 September 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 October 31, 1995
----- -------------------------------
Common stock - par value $.10 5,548,373 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 nine months ended
September 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>
Sept 30, December 31,
ASSETS 1995 1994
----------- ------------
<S> <C> <C>
Cash and cash equivalents............ $ 1,196,329 $ 739,624
Marketable securities................ 890,883 508,907
Joint ventures including advances.... 1,465,513 3,675,971
Mortgage servicing rights - net of
accumulated amortization of
$1,585,173 in 1995 and $1,289,410
in 1994............................ 1,859,768 2,077,108
Other investments.................... 734,979 397,126
Mortgage loans held for sale......... 1,751,203 30,000
Due for mortgage loans sold.......... 155,449 54,554
Furniture, equipment and
leasehold improvements - at cost,
less accumulated depreciation and
amortization of $348,576 in
1995 and $316,507 in 1994.......... 217,583 256,526
Other assets......................... 736,935 786,849
---------- ----------
TOTAL........................... $ 9,008,642 $ 8,526,665
========== ==========
LIABILITIES
Notes payable........................ $ 379,479
Accrued expenses and other
liabilities........................ $ 1,111,715 1,510,946
---------- ----------
Total liabilities............... 1,111,715 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................. 355,635
(Deficit)............................ (5,214,468) (6,504,307)
---------- ----------
Total........................... 10,800,637 9,155,163
Less treasury stock, at cost -
1,201,227 shares in 1995 and
783,905 shares in 1994............. (2,903,710) (2,518,923)
---------- ----------
Total stockholders' equity...... 7,896,927 6,636,240
---------- ----------
TOTAL........................... $ 9,008,642 $ 8,526,665
========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
<PAGE>
3
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
------------------------- -----------------------
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Revenues:
Profit from joint ventures...... $ 137,288 $ 107,104 $ 1,917,160 $ 388,004
Financial consulting fees....... 170,000 100,000 460,000 455,500
Loan servicing fees net of
guarantor fees............... 213,793 229,871 641,594 730,973
Loan origination fees........... 151,421 63,116 383,144 259,148
Interest income................. 118,208 37,040 279,066 124,974
Investment income............... 60,547 (127,380) 691,857 238,033
Other income.................... 226,132 116,287 263,589 172,933
---------- --------- ---------- ----------
Total Revenues............... 1,077,389 526,038 4,636,410 2,369,565
---------- --------- ---------- ----------
Expenses:
Compensation and related costs.. 604,401 480,269 1,941,447 1,651,181
Occupancy cost.................. 96,930 95,569 320,182 284,736
Amortization of mortgage
servicing rights............. 97,594 105,488 295,763 364,995
General and administrative...... 189,474 141,129 584,924 503,926
Professional fees and
litigation expenses.......... 19,929 57,297 137,127 168,305
Interest........................ 1,160 6,584 5,106 21,785
---------- --------- ---------- ----------
Total Expenses............... 1,009,488 886,336 3,284,549 2,994,928
---------- --------- ---------- ----------
Profit (loss) before taxes........ 67,901 (360,298) 1,351,861 (625,363)
Income tax (benefit).............. 1,800 (13,110) 62,022 19,895
--------- --------- ---------- ----------
NET PROFIT (LOSS)................. $ 66,101 $ (347,188) $ 1,289,839 $ (645,258)
========= ========= ========== ==========
Net profit (loss)
per common share................ $ .01 $ (.06) $ .22 $ (.11)
====== ======= ====== =======
Weighted average number of
common shares outstanding....... 5,808,254 6,005,495 5,906,025 6,005,495
========= ========= ========= ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
<PAGE>
4
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months Ended
September 30,
-------------------------
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ 1,289,839 $ (645,258)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization........................... 367,270 435,141
Unrealized (gain) on joint ventures
and other investments.................................... (623,111) (292,515)
(Gain) on sale or disposal of investments............... (1,276,267) (115,898)
(Gain) on sale of mortgage rights....................... (93,873)
Loss on sale of fixed assets............................ 1,912
Changes in operating assets and liabilities:
(Increase) decrease in mortgage loans held for sale...... (1,721,203) 533,450
(Increase) decrease in due for mortgage loans sold....... (100,895) 249,562
Decrease (increase) in other assets...................... 24,208 (246,409)
(Decrease) in accrued expenses........................... (399,231) (417,005)
---------- ---------
Net cash provided by (used in) operating activities....... (2,437,478) (592,805)
---------- ---------
Cash flows from investing activities:
(Purchase) sale of investment securities - net:
U.S. Government obligations............................. (381,976) 246,237
Purchase of interest in joint venture.................... (500)
Distributions from joint ventures and other investments.. 2,445,996 244,519
Purchase of mortgage servicing rights.................... (78,423) (133,706)
Proceeds from the sale of joint ventures................. 1,681,622
Proceeds from the sale of mortgage servicing rights...... 320,994
Proceeds from the sale or disposal of fixed assets....... 8,752
Purchase of fixed assets................................. (17,522) (25,408)
---------- ---------
Net cash provided by (used in) investing activities....... 3,658,449 652,136
---------- ---------
Cash flows from financing activities:
Repayment of short term borrowings - net:................ (379,479) (527,853)
Purchase of treasury stock............................... (384,787) (81)
---------- ---------
Net cash provided by (used in) financing activities....... (764,266) (527,934)
---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 456,705 (468,603)
Cash and cash equivalents at beginning of period.......... 739,624 840,367
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 1,196,329 $ 371,764
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 59,116 $ 6,584
Taxes................................................... 10,693 19,255
Non-cash increase in value of securities
available for sale.................................... 355,635
</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 September 30,
----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Rental income..................... $ 531,957 $ 791,413
Operating expenses................ 40,196 (203,414)
----------- -----------
Net operating income.............. 491,761 587,999
Other income (expense)............ (399,201) (465,769)
----------- -----------
Net income....................... $ 92,560 $ 122,230
=========== ===========
Company's share of profit
from joint ventures.............. $ 81,380 $ 107,104
Gain from receiving cash
distributions in excess of
the book value of the Company's
interest in a joint venture...... 55,908
----------- -----------
Profit from joint ventures........ $ 137,288 $ 107,104
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1994
--------- ---------
<S> <C> <C>
Rental income..................... $ 1,842,590 $ 2,377,754
Operating expenses................ (217,449) (494,954)
---------- ----------
Net operating income.............. 1,625,141 1,882,800
Other income (expense)............ (1,153,879) (1,419,553)
---------- ----------
Net income........................ $ 471,262 $ 463,247
========== ==========
Company's share of profit
from joint ventures.............. $ 343,300 $ 388,004
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...... 309,087
---------- ----------
Profit from joint ventures........ $ 1,917,160 $ 388,004
========== ==========
</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 September 30,
----------------------------------
1995 1994
--------- --------
<S> <C> <C>
Rental income.................... $ 531,957 $ 508,707
Operating expenses............... (40,196) (68,277)
---------- ----------
Net operating income............. 491,761 440,480
Other income (expense)........... (399,201) (334,047)
---------- ----------
Net income....................... $ 92,560 $ 106,433
========== ==========
Company's share of profit
from joint ventures............. $ 81,380 $ 91,307
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1994
-------- --------
<S> <C> <C>
Rental income.................... $ 1,653,165 $ 1,538,102
Operating expenses............... (110,980) (112,205)
---------- ----------
Net operating income............. 1,542,185 1,425,897
Other income (expense)........... (1,082,416) (1,014,292)
---------- ----------
Net income....................... $ 459,769 $ 411,605
========== ==========
Company's share of profit
from joint ventures............. $ 331,807 $ 336,362
========== ==========
</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 23 of this Form 10-QSB.
5. SUBSEQUENT EVENT
----------------
On November 6, 1995, the Company entered into an agreement to sell
substantially all of its mortgage servicing rights for approximately $2.4
million. The closing is expected to occur in December 1995.
<PAGE>
9
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations
---------------------
A. Three Months Ended September 30, 1995 Compared
----------------------------------------------
with Three Months Ended September 30, 1994
------------------------------------------
Total revenues increased to $1,077,389 for the three months ended
September 30, 1995 from $526,038 for the three months ended September
30, 1994.
Profit from joint ventures increased to $137,288 for the three months
ended September 30, 1995 from $107,104 for the three months ended
September 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 September 30, 1994
included $15,797 from First Highpoint Limited Partnership ("First
Highpoint"). Since First Highpoint sold its apartment complex in
February 1995, the Company did not realize any profit or loss from such
venture during the three months ended September 30, 1995. The Company's
share of the gain from such sale was reflected in profit from joint
ventures for the nine months ended September 30, 1995.
Profit for the three months ended September 30, 1995 includes a gain of
approximately $55,000 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.
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 on the new loan is lower than on the old loan. In
<PAGE>
10
addition to interest, 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 increased to $170,000 for the three months
ended September 30, 1995 from $100,000 for the three months ended
September 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 $213,793 for the three months ended
September 30, 1995 from $229,871 for the three months ended September
30, 1994. This decrease largely is attributable to a decline in the
size of the Company's mortgage servicing portfolio as a result of an
increase in prepayments spurred by lower interest rates.
On November 6, 1995, the Company entered into an agreement to sell
substantially all of its mortgage servicing rights for approximately
$2.4 million. The closing is expected to occur in December 1995.
The Company was able to cushion the effect of the decline in servicing
revenue with loan origination fees reflecting the increased level of
new originations 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.
Loan origination fees increased to $151,421 for the three months ended
September 30, 1995 from
<PAGE>
11
$63,116 for the three months ended September 30, 1994. The Company has
taken significant steps to expand its origination business. This
included opening branches in late 1993 and adding experienced
originators. During mid-1994 until early 1995, many of the Company's
competitors were scaling down origination departments, while the
Company was enhancing its own. Recent declines in interest rates have
improved the number of mortgage refinancings and housing sales. As a
result of the steps taken to expand its origination business, the
Company was poised to capture a larger share of an improving market.
Interest income increased to $118,208 for the three months ended
September 30, 1995 from $37,040 for the three months ended September
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
September 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 September 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 $60,547 for the three months ended
September 30, 1995 from a negative $127,380 for the three months ended
September 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 increased to $226,132 for the three months ended September
30, 1995 from $116,287 for
<PAGE>
12
the three months ended September 30, 1994, principally as a result of
the payment of an item which was previously considered uncollectible.
This category also consists 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 $1,009,488 for the three months ended
September 30, 1995 from $886,336 for the three months ended September
30, 1994.
Compensation and related costs increased to $604,401 for the three
months ended September 30, 1995 from $480,269 for the three months
ended September 30, 1994, due in large part to higher commission
payments to loan originators and hiring additional processing staff as
a result of the increase in mortgage loan originations.
Occupancy costs increased slightly to $96,930 for the three months
ended September 30, 1995 from $95,569 for the three months ended
September 30, 1994.
Amortization of mortgage service rights decreased to $97,594 for the
three months ended September 30, 1995 from $105,488 for the three
months ended September 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 $189,474 for the three
months ended September 30, 1995 from $141,129 for the three months
ended September 30, 1994, due in part to greater activity in the
Company's loan origination business.
Professional fees decreased to $19,929 the three months ended September
30, 1995 from $57,297 for the three months ended September 30, 1994,
reflecting a decline in the level of activity in various litigations in
which the Company is involved.
<PAGE>
13
Interest expense decreased to $1,160 for the three months ended
September 30, 1995 from $6,584 for the three months ended September 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 $67,901 for the three
months ended September 30, 1995 compared with a loss of $360,2980 for
the three months ended September 30, 1994. Provision for income taxes
for the three months ended September 30, 1995 was $1,800 compared with
a benefit of $13,110 for the three months ended September 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 income for the three months ended September 30, 1995
was $66,101 compared with a net loss of $347,188 for the three months
ended September 30, 1994. On a per share basis, the profit was $.01 for
the three months ended September 30, 1995, compared with a net loss of
$(.06) for the three months ended September 30, 1994. Earnings or loss
per share are based on the weighted average number of shares
outstanding (5,808,254 for the three months ended September 30, 1995
and 6,005,495 for the three months ended September 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.
Nine months Ended September 30, 1995 Compared
---------------------------------------------
with Nine months Ended September 30, 1994
-----------------------------------------
Total revenues increased to $4,636,410 for the nine months ended
September 30, 1995 from $2,369,565 for the nine months ended September
30, 1994.
Profit from joint ventures increased to $1,917,160 for the nine months
ended September 30, 1995 from $388,004 for the nine months ended
September 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.
<PAGE>
14
Profit for the nine months ended September 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 $1,260,000.
The Company's share of income from First Highpoint's operations for the
nine months ended September 30, 1995 were $11,493 compared with $51,642
for the nine months ended September 30, 1994.
The Company realized a gain of approximately $310,000 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 on the new loan is lower than on the old loan. In addition to
interest, 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 increased to $460,000 for the nine months
ended September 30, 1995 from $455,500 for the nine months ended
September 30, 1994. The Company provides financial structuring
<PAGE>
15
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 $641,594 for the nine months ended
September 30, 1995 from $730,973 for the nine months ended September
30, 1994. This decrease is largely attributable to a decline in the
average size of the Company's mortgage servicing portfolio during the
nine months ended September 30, 1995 versus the nine months ended
September 30, 1994. The Company's mortgage servicing portfolio was
impacted negatively by a high level of prepayments. Lower interest
rates in 1993, early 1994 and mid-1995 spurred a great number of
mortgage refinancings. 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.
On November 6, 1995, the Company entered into an agreement to sell
substantially all of its mortgage servicing rights for approximately
$2.4 million. The closing is expected to occur in December 1995.
The Company was able to cushion the effect of the decline in servicing
revenue with loan origination fees reflecting the increased level of
new originations 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 $383,144 for the nine months ended
September 30, 1995 from $259,148 for the nine months ended September
30, 1995. The Company has taken significant steps to expand its
origination business. This included opening branches in late 1993 and
adding experienced originators. During mid-1994 until early 1995, many
of the Company's competitors were scaling down origination departments,
while the Company was enhancing its own. Recent declines in interest
rates have improved the number of mortgage refinancings and housing
sales. As a result of the steps taken to expand its
<PAGE>
16
origination business, the Company was poised to capture a larger share
of an improving market.
Interest income increased to $279,066 for the nine months ended
September 30, 1995 from $124,974 for the nine months ended September
30, 1994, due in large part to a change in the way the Company funds
mortgage loans originated for resale. In the nine months ended
September 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 nine
months ended September 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 $691,857 for the nine months
ended September 30, 1995 from $238,033 for the nine months
ended September 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 increased to $263,589 for the nine months ended
September 30, 1995 from $172,933 for the nine months ended
September 30, 1994, principally as a result of the collection
of an item which was previously considered uncollectible.
This category also consists of sundry fees and revenues earned
in connection with
<PAGE>
17
the Company's mortgage banking business other than loan servicing or
origination fees.
Total expenses increased to $3,284,549 for the nine months ended
September 30, 1995 from $2,994,928 for the nine months ended September
30, 1994.
Compensation and related costs increased to $1,941,447 for the nine
months ended September 30, 1995 from $1,651,181 for the nine months
ended September 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
and hiring additional processing staff as a result of the increase in
mortgage loan originations.
Occupancy costs increased to $320,182 for the nine months ended
September 30, 1995 from $284,736 for the nine months ended September
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 $295,763 for the
nine months ended September 30, 1995 from $364,995 for the nine months
ended September 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 $584,924 for the nine
months ended September 30, 1995 from $503,926 for the nine months ended
September 30, 1994. This increase was due principally to greater
activity in the Company's loan origination business and an increase in
insurance coverage.
Professional fees decreased to $137,127 for the nine months ended
September 30, 1995 from $168,305 for the nine months ended September
30, 1994, reflecting a decline in the level of activity in
<PAGE>
18
various litigations in which the Company is involved.
Interest expense decreased to $5,106 for the nine months ended
September 30, 1995 from $21,785 for the nine months ended September 30,
1994, principally as a result of greater utilization of its own cash
and the "warehouse facility" in funding loans originated for resale.
On a pre-tax basis, the Company had a profit of $1,351,861 for the nine
months ended September 30, 1995 compared with a loss of $625,363 for
the nine months ended September 30, 1994. Provision for income taxes
for the nine months ended September 30, 1995 was $62,022 compared with
$19,895 for the nine months ended September 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 income for the nine months ended September 30, 1995
was $1,289,839 compared with a net loss of $645,258 for the nine months
ended September 30, 1994. On a per share basis, net profit was $.22 for
the nine months ended September 30, 1995 compared with a net loss of
$(.11) for the nine months ended September 30, 1994. Earnings or loss
per share are based on the weighted average number of shares
outstanding (5,906,025 for the nine months ended September 30, 1995 and
6,005,495 for the nine months ended September 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.
<PAGE>
19
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 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
<PAGE>
20
servicing rights as part of its investing activities in the
consolidated statements of cash flows.
On November 6, 1995, the Company entered into an agreement to sell
substantially all of its mortgage servicing rights.
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 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
<PAGE>
21
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%; principal amortization is based on a
25-year schedule; and the loan matures on May 1, 2992. The current
interest rate through February 29, 1996 is 9.0063%. The interest rate
had been 9.5375% through August 31, 1995. 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.
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
<PAGE>
22
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 September 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>
23
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
-------------------------------------------------------
On August 9, 1995, the Court approved a class-wide settlement agreement
of claims asserted in six separate lawsuits.
Eddie Jo Hurley and All Others Similarly Situated v. Citizens Mortgage
----------------------------------------------------------------------
Service Company, N.Y. Supreme Court (Monroe County) (Index No. 9862/93)
----------------
On October 20, 1995 the Court approved a class-wide settlement
agreement.
<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 Data Schedule -- See below.
(b) Reports on Form 8-K:
-- August 11, 1995, Press Release announcing that the U.S.
District Court for the Eastern District of Pennsylvania had
approved a class-wide settlement agreement of six separate class
action lawsuits.
<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: November 14, 1995 George W. Benoit, Chairman of
the Board of Directors,
President, Chief Executive
Officer
/s/ Roger J. Burns
---------------------------
Date: November 14, 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 NINE
MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 1,196,329
<SECURITIES> 890,883
<RECEIVABLES> 155,449
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 566,159
<DEPRECIATION> 348,576
<TOTAL-ASSETS> 9,008,642
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 674,960
0
0
<OTHER-SE> 7,221,967
<TOTAL-LIABILITY-AND-EQUITY> 9,008,642
<SALES> 0
<TOTAL-REVENUES> 4,636,410
<CGS> 0
<TOTAL-COSTS> 3,284,549
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,106
<INCOME-PRETAX> 1,351,861
<INCOME-TAX> 62,022
<INCOME-CONTINUING> 39
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,289,839
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
