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, 1996
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from to
Commission file number 1-9224
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, 1996
----- ----------------------------
Common stock - par value $.10 5,544,173 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 10-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 10-KSB for the fiscal year ended December 31, 1995, which was
filed with the Securities and Exchange Commission.
The results of operations for the three months and six months ended
June 30, 1996 are not necessarily indicative of the results to be expected for
the entire fiscal year.
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 1,293,212 $ 1,358,730
Marketable securities ...................... 466,386 3,805,767
Joint ventures ............................. 1,445,645 1,324,023
Mortgage servicing rights - net of
accumulated amortization of
$4,045 in 1996 and
$1,371 in 1995 ......................... 44,211 46,886
Mortgage loans held for sale ............... 2,860,228 1,541,640
Due from mortgage investors ................ 228,676 52,179
Furniture, equipment and
leasehold improvements - at cost,
less accumulated depreciation and
amortization of $394,876 in
1996 and $363,901 in 1995 .............. 258,051 203,373
Other assets ............................... 2,046,717 1,654,068
------------ ------------
TOTAL ............................. $ 8,643,126 $ 9,986,666
============ ============
LIABILITIES
Notes payable .............................. $ 1,223,694 $ 943,743
Accrued expenses and other
liabilities ............................ $ 1,202,437 1,608,193
------------ ------------
Total liabilities ................. 2,426,131 2,551,936
------------ ------------
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
(Accumulated deficit) ...................... (6,536,041) (5,319,638)
------------ ------------
Total ............................. 9,123,429 10,339,832
Less treasury stock, at cost -
1,204,927 shares in 1996 and
1,203,227 shares in 1995 ............... (2,906,434) (2,905,102)
------------ ------------
Total stockholders' equity ........ 6,216,995 7,434,730
------------ ------------
TOTAL ............................. $ 8,643,126 $ 9,986,666
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Profit from joint ventures ................... $ 253,352 $ 332,263 $ 420,745 $ 1,779,872
Financial consulting fees .................... -- 290,000 -- 290,000
Loan servicing fees net of
guarantor fees .......................... 15,995 209,548 28,167 427,801
Loan origination fees ........................ 424,438 150,381 611,494 231,723
Interest income .............................. 91,108 104,575 207,202 160,838
Investment income (loss)...................... (9,981) 629,190 191,594 631,310
Other income (loss)........................... (335) 10,583 2,426 26,887
----------- ----------- ----------- -----------
Total revenues .......................... 774,577 1,726,540 1,461,628 3,548,431
----------- ----------- ----------- -----------
Expenses:
Compensation and related costs ............... 981,243 822,990 1,732,993 1,337,046
Occupancy cost ............................... 93,788 124,733 185,959 223,252
Amortization of mortgage
servicing rights ........................ 1,335 97,867 2,674 198,169
General and administrative ................... 336,903 218,303 589,728 395,450
Professional fees and
litigation expenses ..................... 26,426 61,050 80,570 106,698
Interest ..................................... 41,459 2,252 64,788 3,946
----------- ----------- ----------- -----------
Total Expenses .......................... 1,481,154 1,327,195 2,656,712 2,264,561
----------- ----------- ----------- -----------
Profit (loss) before taxes ....................... (706,577) 399,345 (1,195,084) 1,283,870
Income tax (benefit) ............................. 9,500 2,223 21,319 60,132
----------- ----------- ----------- -----------
NET (LOSS) PROFIT ................................ $ (716,077) $ 397,122 $(1,216,403) $ 1,223,738
=========== =========== =========== ===========
Net profit (loss)
per common share ............................. $ (.13) $ .07 $ (.22) $ .21
=========== =========== =========== ===========
Weighted average number of
common shares outstanding .................... 5,545,806 5,953,195 5,608,592 5,955,241
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ..................................... $(1,216,403) $ 1,223,738
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ....................... 50,788 245,234
Unrealized (gain) on joint ventures
and other investments .............................. (220,745) (485,823)
(Gain) on settlement, sale or disposal of investments (200,000) (1,276,267)
Loss on sale of fixed assets ........................ -- 1,912
Changes in operating assets and liabilities:
(Increase) in mortgage loans held for sale ......... (1,318,588) (2,061,218)
(Increase) decrease in due for mortgage loans sold . (176,497) 21,239
(Increase) decrease in other assets ................ (409,787) 143,557
(Decrease) increase in accrued expenses ............ (405,756) 169,508
----------- -----------
Net cash provided by (used in) operating activities ..... (3,896,988) (2,018,120)
----------- -----------
Cash flows from investing activities:
Sale (purchase) of investment securities - net: ....... 3,339,381 (1,561,831)
Distributions from joint ventures and other investments 99,123 2,347,822
Purchase of mortgage servicing rights ................. -- (50,975)
Proceeds from the settlement or sale of joint ventures 200,000 1,681,622
Proceeds from sale or disposal of fixed assets ........ -- 8,752
Purchase of fixed assets .............................. (85,653) (12,113)
----------- -----------
Net cash provided by (used in) investing activities ..... 3,552,851 2,413,277
----------- -----------
(Continued)
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
Six Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds (repayment) of short term borrowings - net: .. 279,951 (379,479)
Purchase of treasury stock ............................ (1,332) (7,183)
----------- -----------
Net cash provided by (used in) financing activities ..... 278,619 (386,662)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .... (65,518) 8,495
Cash and cash equivalents at beginning of period ........ 1,358,730 739,624
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 1,293,212 $ 748,119
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................ $ 64,788 $ 2,252
Taxes ............................................... 6,578 10,693
Non-cash increase in value of securities
available for sale ................................ -- 47,409
</TABLE>
See Notes to Condensed Consolidated Financial Statements (Unaudited).
<PAGE>
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 10-KSB, for the
fiscal year ended December 3l, 1995, which was filed with the Securities and
Exchange Commission (the "SEC").
2. JOINT VENTURES
In June 1996, the Company received $200,000 in connection with
Stoneledge Associates, a general partnership. The partnership was developing an
industrial/warehouse business park. In 1991, the construction loan matured and
the partnership was not successful in negotiating an extension of such loan. The
lender completed its foreclosure in 1992. In 1991, the Company had created a
loss provision equal to the full carrying amount of the partnership interest.
The amount received in June 1996 was from certain individuals who had guaranteed
the obligations of the other partner in Stoneledge Associates. Such amount was
paid in satisfaction of the other partner's existing obligations to the Company.
Since the Company had created a loss provision equal to its entire investment,
the $200,000 receipt constitutes income.
On February 22, 1995, First Highpoint Limited Partnership sold its
principal asset, an apartment project located in Plano, Texas. Subsequently, the
partnership was dissolved.
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>
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
---------------------------
1996 1995
--------- ---------
<S> <C> <C>
Rental income ................................ $ 517,007 $ 499,539
Operating expenses ........................... (80,563) (42,254)
--------- ---------
Net operating income ......................... 436,444 457,285
Other income (expense) ....................... (363,424) (363,076)
--------- ---------
Net income ................................... $ 73,020 $ 94,209
========= =========
Company's share of profit
from joint ventures ....................... $ 53,352 $ 75,812
Receipt from the guarantors
of a co-venturer's
obligations in connection
with the development of a
project which had been sold at
a foreclosure sale in 1992 ................ 200,000 --
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 ................... $ 253,352 $ 332,892
========= =========
</TABLE>
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. JOINT VENTURES (continued)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Rental income .............................. $ 1,136,065 $ 1,310,633
Operating expenses ......................... (89,471) (177,253)
----------- -----------
Net operating income ....................... 1,046,594 1,133,380
Other income (expense) ..................... (737,198) (754,678)
----------- -----------
Net income ................................. $ 309,396 $ 378,702
=========== ===========
Company's share of profit
from joint ventures ..................... $ 220,745 $ 261,920
Receipt from the guarantors
of a co-venturer's
obligations in connection
with the development of a
project which had been sold at
a foreclosure sale in 1992 .............. 200,000 --
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 ................. $ 420,745 $ 1,779,871
=========== ===========
</TABLE>
<PAGE>
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 the effects of Stoneledge
Associates, First Highpoint Limited Partnership, and the gain from receiving
cash distributions in excess of the book value of the Company's interest in
Blowing Rock Outlet Partners, are as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30
----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Rental income ............................ $ 517,007 $ 499,539
Operating expenses ....................... (80,563) (42,254)
--------- ---------
Net operating income ..................... 436,444 457,285
Other income (expense) ................... (363,424) (363,076)
--------- ---------
Net income ............................... $ 73,020 $ 94,209
========= =========
Company's share of profit
from joint ventures ................... $ 53,352 $ 75,812
========= =========
<CAPTION>
Six Months Ended June 30
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Rental income .......................... $ 1,136,065 $ 1,121,208
Operating expenses ..................... (89,471) (70,784)
----------- -----------
Net operating income ................... 1,046,594 1,050,424
Other income (expense) ................. (737,198) (683,215)
----------- -----------
Net income ............................. $ 309,396 $ 367,209
=========== ===========
Company's share of profit
from joint ventures ................. $ 220,745 $ 250,427
=========== ===========
</TABLE>
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. INCOME (LOSS) PER SHARE
Income (loss) per share is computed based on the weighted average
number of common shares outstanding during each period. Common share equivalents
relating to the Company's incentive compensation plan have been excluded from
the computation for the three months and six months ended June 30, 1996 because
the effect of their inclusion would be antidilutive.
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, 1995, which was filed with the SEC, see Item 1, "Legal
Proceedings," of this Form 10-QSB.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
In May 1995, the Company began a new business of arranging viatical settlements.
A viatical settlement is the payment of a discounted death benefit on an
insurance policy to the insured while the insured is still living. The insured
transfers ownership of the policy to the entity that makes the payment. The
insured must be critically ill, i.e., have a life threatening disease with a
limited life expectancy. The Company would receive a fee from the purchaser of
the life insurance policy. Historically, many critically ill persons who chose
to enter into viatical settlements had AIDS. Considering the breakthroughs in
life extending medication now available to AIDS patients, the Company is
reviewing its options regarding viatical settlements.
A. Three Months Ended June 30, 1996 Compared
with Three Months Ended June 30, 1995
Total revenues decreased to $774,577 for the three months ended June 30, 1996
from $1,726,540 for the three months ended June 30, 1995.
Profit from joint ventures decreased to $253,352 for the three months ended
June 30, 1996 from $332,263 for the three months ended June 30, 1995. 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. During the three months ended
June 30, 1996, this category included $200,000 received from certain
individuals who had guaranteed the obligations of the co-venturer in
Stoneledge Associates ("Stoneledge") with respect to a project which had been
sold at a foreclosure sale in 1992. The guarantors made such payment in
satisfaction of the co-venturer's existing obligations to the Company. In
1991, the Company had created a loss provision equal to the full carrying
amount of the partnership interest. In contrast, during the three months
ended June 30, 1995, this category included a gain of approximately $250,000
as a result of the Company's receipt of cash distributions in excess of the
book value of its interest in a joint venture. In April 1995, Blowing Rock
Outlet Partners ("Blowing Rock") refinanced its mortgage debt to $6,550,000
from $3,757,828. The amount for the three months ended June 30, 1995 also
included a modest adjustment to the gain on the sale of the apartment project
formerly owned by First Highpoint Limited Partnership ("First Highpoint").
The Project had been sold in February 1995.
Excluding the effects of Stoneledge, the Blowing Rock refinancing, and First
Highpoint, the Company's share of profit from joint ventures declined from
$75,812 for the three months ended June 30, 1995 to $53,352 for the three
months ended June 30, 1996. The decline is attributable, in part, to
increased interest expense at Blowing Rock as well as a reduction in the
Company's percentage share of income in such venture. The Company's share of
income and cash declined, in accordance with Blowing Rock's partnership
agreement, following the Company's receipt of a distribution from refinancing
proceeds in excess of its capital contribution.
Although rental income and operating expenses were both higher for the three
months ended June 30, 1996 than the three months ended June 30, 1995, the
increase in operating expenses exceeded the increase in rental income. This
resulted from having certain repairs performed during the three months ended
June 30, 1996, rather than an overall increase in normal operating expenses.
<PAGE>
Although operating results should improve as a result of increased rents,
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 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.
The Company did not realize any financial consulting fees for the three
months ended June 30, 1996 compared to $290,000 for the three months ended
June 30, 1995. Although providing financial structuring advice to clients on
a fee basis remains an integral component of the Company's merchant banking
business, significant variations in revenues are likely because of the
trans-actional nature of this business. Typically, an engagement is based on
a specific assignment to assist a client to lower its cost of capital. The
Company currently is engaged in advising clients with respect to the
structuring of transactions which are expected to generate fees later in
1996.
Loan servicing fees were $15,995 for the three months ended June 30, 1996
compared with $209,548 for the three months ended June 30, 1995. In December
1995, the Company sold substantially all of its mortgage servicing rights for
approximately $2.3 million and realized a gain of approximately $380,000. The
Company has repositioned its mortgage banking operation to originate
residential mortgage loans and sell the servicing rights to other mortgage
banking companies. The Company has entered into contracts to sell the balance
of its mortgage servicing rights in the near future. Such disposition is not
expected to have a material impact on the Company's results from operations.
Loan origination fees increased to $424,438 for the three months ended June
30, 1996 compared with $150,381 for the three months ended June 30, 1995.
This category includes fees earned in connection with making mortgage loans
and net profit or loss from sales of such loans to investors. This increase
reflects the expansion of the Company's sales force.
Interest income decreased to $91,108 for the three months ended June 30, 1996
from $104,575 for the three months ended June 30, 1995, due in part to the
large decline in interest earning escrow deposits as a result of the sale of
substantially all of the Company's mortgage servicing portfolio in December
1995.
Investment income decreased dramatically to a negative $9,981 for the three
months ended June 30, 1996 from $629,190 for the three months ended June 30,
1995. This category principally consists of net profit or loss from hedging
and investing in futures, puts, calls, equities, municipal securities, and
other securities activities. Large swings can occur due to volatility in the
financial markets.
Other income was negative $335 for the three months ended June 30, 1996
compared with $10,583 for the three months ended June 30, 1995.
Total expenses increased to $1,481,154 for the three months ended June 30,
1996 from $1,327,195 for the three months ended June 30, 1995.
<PAGE>
Compensation and related costs increased to $981,243 for the three months
ended June 30, 1996 from $822,990 for the three months ended June 30, 1995.
This increase principally was attributable to the addition of professional
staff; higher commission expense for mortgage loan originators as a result of
the increased volume of originations; additional salaried employees in the
mortgage loan origination area to support the higher level of production; and
salaries incurred in connection with the Company's viatical settlements
business which had commenced in May 1995. Increased compensation in mortgage
loan originations partially was offset by salary savings from a reduction in
mortgage servicing personnel as a result of the sale of substantially all of
the Company's mortgage servicing portfolio.
Occupancy costs decreased to $93,788 for the three months ended June 30, 1996
from $124,733 for the three months ended June 30, 1995. Effective March 1,
1996, the Company entered into a new lease for its executive offices at a
significantly lower rent. This was the primary reason for the substantial
decrease in rent expense for the period.
Amortization of mortgage servicing rights decreased to $1,335 for the three
months ended June 30, 1996 from $97,867 for the three months ended June 30,
1995. The carrying amount of purchased mortgage servicing rights must be
amortized over the period of the estimated future net servicing income
associated therewith. For fiscal years beginning after December 15, 1995,
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights ("SFAS 122"), requires that servicing rights also must be
capitalized and subsequently amortized in the same manner as purchased
servicing rights, if the servicing rights were acquired in connection with
originating mortgage loans with respect to which the originator has a
definitive plan to sell or securitize the loans and retain the servicing
rights. In these instances, under SFAS 122, a portion of the cost of
originating a mortgage loan must be allocated to the right to service such
loan.
The Company reviews the carrying amount of its capitalized servicing rights.
If an impairment exists, the amount thereof will be recognized through a
valuation allowance. When the Company's withdrawal from mortgage servicing as
a separate activity is completed, the Company will no longer have a mortgage
servicing portfolio to amortize. Management believes that SFAS 122 does not
have a material effect on the Company's financial statements.
General and administrative expenses increased to $336,903 for the three
months ended June 30, 1996 from $218,303 for the three months ended June 30,
1995. This increase reflects higher mortgage loan origination activity;
promotion expenses incurred in connection with the Company's financial
consulting activities; and expenses related to the Company's viatical
settlements business.
Professional fees decreased to $26,426 for the three months ended June 30,
1996 from $61,050 for the three months ended June 30, 1995.
Interest expense was $41,459 for the three months ended June 30, 1996
compared with $2,252 for the three months ended June 30, 1995. This increase
was due in part to greater use of the Company's credit facilities to fund
mortgage loans held for sale. Additionally, the Company incurred interest
expense in connection with its hedging and investing activities.
<PAGE>
On a pre-tax basis, the Company had a loss of $706,577 for the three months
ended June 30, 1996 compared with a profit of $399,345 for the three months
ended June 30, 1995. Provision for income taxes for the three months ended
June 30, 1996 was $9,500 compared with $2,223 for the three months ended June
30, 1995. These provisions consist solely of state and local taxes. For
Federal income tax purposes, as of December 31, 1995, the Company had net
operating loss carryforwards of approximately $10,211,000 available to reduce
future taxable income. These carryforwards expire in the years 2006 through
2009.
The Company's net loss for the three months ended June 30, 1996 was $716,077
compared with net income of $397,122 for the three months ended June 30,
1995. On a per share basis, the net loss was $(.13) for the three months
ended June 30, 1996, compared with net income of $.07 for the three months
ended June 30, 1995. Income per share for the three months ended June 30,
1995 was computed based on the weighted average number of common shares
actually outstanding plus the shares that would be outstanding assuming the
exercise of stock options relating to the Company's incentive compensation
plan which are considered to be common stock equivalents. The assumed
exercise of stock options relating to the Company's incentive compensation
plan were not included in the computation of the loss per share for the three
months ended June 30, 1996, because the effect of their inclusion would be
antidilutive. The number of shares used in the computations were 5,545,806 in
1996 and 5,953,195 in 1995.
Six Months Ended June 30, 1996 Compared
with Six Months Ended June 30, 1995
Total revenues decreased to $1,461,628 for the six months ended June 30, 1996
from $3,548,431 for the six months ended June 30, 1995.
Profit from joint ventures decreased to $420,745 for the six months ended
June 30, 1996 from $1,779,872 for the six months ended June 30, 1995. 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. During the six months ended
June 30, 1996, this category included $200,000 received from certain
individuals who had guaranteed the obligations of the co-venturer in
Stoneledge with respect to a project which had been sold at a foreclosure
sale in 1992. The guarantors made such payment in satisfaction of the
co-venturer's existing obligations to the Company. In 1991, the Company had
created a loss provision equal to the full carrying amount of the partnership
interest. In contrast, during the six months ended June 30, 1995, this
category included a gain of approximately $1,260,000 from the sale of First
Highpoint's apartment project and $250,000 as a result of the Company's
receipt of cash distributions in excess of the book value of its interest in
Blowing Rock. In April 1995, Blowing Rock refinanced its mortgage debt to
$6,550,000 from $3,757,828.
Excluding the effects of Stoneledge, First Highpoint, and the Blowing Rock
refinancing, the Company's share of profit from joint ventures declined from
$250,427 for the six months ended June 30, 1995 to $220,745 for the six
months ended June 30, 1996. The decline is attributable, in part, to
increased interest expense at Blowing Rock as well as a reduction in the
Company's percentage share of income in such venture. The Company's share of
income and cash declined, in accordance with Blowing Rock's partnership
agreement, following the Company's receipt of a distribution from refinancing
proceeds in excess of its capital contribution.
<PAGE>
Although rental income and operating expenses were higher for the six months
ended June 30, 1996 than the six months ended June 30, 1995, the increase in
operating expenses exceeded the increase in rental income. This resulted from
having certain repairs performed during the six months ended June 30, 1996,
rather than an overall increase in normal operating expenses.
Although operating results should improve as a result of increased rents,
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 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.
The Company did not realize any financial consulting fees for the six months
ended June 30, 1996 compared to $290,000 for the six months ended June 30,
1995. Although providing financial structuring advice to clients on a fee
basis remains an integral component of the Company's merchant banking
business, significant variations in revenues are likely because of the
trans-actional nature of this business. Typically, an engagement is based on
a specific assignment to assist a client to lower its cost of capital. The
Company currently is engaged in advising clients with respect to the
structuring of transactions which are expected to generate fees later in
1996.
Loan servicing fees decreased to $28,167 for the six months ended June 30,
1996 from $427,801 for the six months ended June 30, 1995. In December 1995,
the Company sold substantially all of its mortgage servicing rights for
approximately $2.3 million and realized a gain of approximately $380,000. The
Company has repositioned its mortgage banking operation to originate
residential mortgage loans and sell the servicing rights to other mortgage
banking companies. The Company has entered into contracts to sell the balance
of its mortgage servicing rights in the near future. Such disposition is not
expected to have a material impact on the Company's results from operations.
Loan origination fees increased to $611,494 for the six months ended June 30,
1996 from $231,723 for the six months ended June 30, 1995. This increase
reflects the expansion of the Company's sales force.
Interest income increased to $207,202 for the six months ended June 30, 1996
from $160,838 for the six months ended June 30, 1995, due in large part to
interest earned on securities held from its investing activity.
Investment income decreased to $191,594 for the six months ended June 30,
1996 from $631,310 for the six months ended June 30, 1995. This category
principally consists of net profit or loss from hedging and investing in
futures, puts, calls, equities, municipal securities, and other securities
activities.
Other income decreased to $2,426 for the six months ended June 30, 1996 from
$26,887 for the six months ended June 30, 1995.
Total expenses increased to $2,656,712 for the six months ended June 30, 1996
from $2,264,561 for the six months ended June 30, 1995.
<PAGE>
Compensation and related costs increased to $1,732,993 for the six months
ended June 30, 1996 from $1,337,046 for the six months ended June 30, 1995.
The increase is due principally to the higher commission payments to loan
originators as a result of an increase in mortgage loan originations and the
hiring of additional support staff to process and close loans.
Occupancy costs decreased to $185,959 for the six months ended June 30, 1996
from $223,252 for the six months ended June 30, 1995. Effective March 1,
1996, the Company entered into a new lease for its executive offices at a
significantly lower rent. This was the primary reason for the substantial
decrease in rent expense for the period.
Amortization of mortgage service rights decreased to $2,674 for the six
months ended June 30, 1996 from $198,169 for the six months ended June 30,
1995. The carrying amount of purchased mortgage servicing rights must be
amortized over the period of the estimated future net servicing income
associated therewith. For fiscal years beginning after December 15, 1995,
Statement of Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights ("SFAS 122"), requires that servicing rights also must be
capitalized and subsequently amortized in the same manner as purchased
servicing rights, if the servicing rights were acquired in connection with
originating mortgage loans with respect to which the originator has a
definitive plan to sell or securitize the loans and retain the servicing
rights. In these instances, under SFAS 122, a portion of the cost of
originating a mortgage loan must be allocated to the right to service such
loan.
The Company reviews the carrying amount of its capitalized servicing rights.
If an impairment exists, the amount thereof will be recognized through a
valuation allowance. When the Company's withdrawal from mortgage servicing as
a separate activity is completed, the Company will no longer have a mortgage
servicing portfolio to amortize. Management believes that SFAS 122 does not
have a material effect on the Company's financial statements.
General and administrative expenses increased to $589,728 for the six months
ended June 30, 1996 from $395,450 for the six months ended June 30, 1995.
This increase reflects higher mortgage loan origination activity; promotion
expenses incurred in connection with the Company's financial consulting
activities; and expenses related to the Company's viatical settlements
business.
Professional fees decreased to $80,570 for the six months ended June 30, 1996
from $106,698 for the six months ended June 30, 1995.
Interest expense increased to $64,788 for the six months ended June 30, 1996
from $3,946 for the six months ended June 30, 1995. The increase in interest
expense was due in part to greater use of the Company's credit facilities to
fund mortgage loans held for sale. Additionally, the Company incurred
interest expense in connection with its hedging and investing activities.
On a pre-tax basis, the Company had a loss of $1,195,084 for the six months
ended June 30, 1996 compared with a profit of $1,283,870 for the six months
ended June 30, 1995. Provision for income taxes for the six months ended June
30, 1996 was $21,319 compared with $60,132 for the six months ended June 30,
1995. These provisions consist solely of state and local taxes. For Federal
income tax purposes, as of December 31, 1995, the Company has net operating
loss carryforwards aggregating approximately $10,211,000 available to reduce
future taxable income. These carryforwards expire in the years 2006 through
2009.
<PAGE>
The Company's net loss for the six months ended June 30, 1996 was $1,216,403
compared with a net profit of $1,223,738 for the six months ended June 30,
1995. On a per share basis, the net loss was $(.22) for the six months ended
June 30, 1996, compared with a net profit of $.21 for the six months ended
June 30, 1995. Income per share for the six months ended June 1995 was
computed based on the weighted number of common shares actually outstanding
plus the shares that would be outstanding assuming the exercise of stock
options relating to the Company's incentive compensation plan which are
considered to be common stock equivalents. The assumed exercise of stock
options relating to the Company's incentive compensation plan were not
included in the computation of the loss per share for the six months ended
June 30, 1996, because the effect of their inclusion would be antidilutive.
The number of shares used in computations were 5,608,592 in 1996 and
5,955,241 in 1995.
B. Liquidity and Capital Resources
Management of the Company believes that funds generated from operations, its
credit and warehouse facilities, 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
to preserve the ability to move quickly in funding attractive merchant
banking ventures. Such investments primarily include U.S. Government
obligations, municipal securities, 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. Typically, prior to
funding any loans, the Company procures firm commitments from investors to
purchase such loans. Fifteen days is the usual time between funding a
mortgage loan and receiving payment from an investor. The Company utilizes
hedging strategies to minimize the interest rate risk associated with: (1)
its mortgage loan origination activities; (2) its share of income and cash
flow from the real estate joint venture which has a variable rate loan; and
(3) its ownership of fixed rate financial instruments.
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 either from a $2.25 million
"credit facility" maintained with a savings bank or a $5 million "credit
facility" maintained with a finance company. The $5 million facility was
opened in June 1996.
After funding an individual loan, the Company can replenish its cash position
or available borrowing capacity under its credit facilities or by utilizing a
separate, $11 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.
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.
<PAGE>
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. 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 ventures during 1996.
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 and regular
principal amortization is determined on a 15-year schedule. Additional
amortization payments equal to 50% of "excess cash flow" also are required.
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 interest rate equals Citibank's six-month
LIBOR rate plus 3.10% and 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, 2002. The current interest rate
through August 31, 1996 is 8.3%.
The carrying amounts reflected on the Company's consolidated balance sheet
for its 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 included in the Company's consolidated statement
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.
<PAGE>
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, 1996.
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>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Joseph B. Gould Trust v. Stubbeman, McRae, Sealy, Laughlin & Browder,
et al., Civil Action No. 94-M-2464 (U.S. District Court, District of
Colorado)
On May 28, 1996, the court entered an order dismissing the complaint,
all claims, all cross-claims, all third-party claims, and the civil
action with prejudice. Shortly before such date, the parties had
entered into an agreement settling all claims, cross-claims, and third
party claims. The Company's share of the settlement costs has been
included in its consolidated financial statements.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders of Helmstar Group, Inc. was held on
June 5, 1996 at the offices of Richard A. Eisner & Company, LLP, 575
Madison Avenue, New York, New York. 4,202,551 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
Joseph G. Anastasi and James J. Murtha were reelected as directors
for a term of three years and David W. Dube was elected for a term
of two years. 4,193,751 shares were voted for each director. George
W. Benoit, Roger J. Burns, and Charles W. Currie continued their
terms of office as directors after the meeting.
(b) Approval of the Amendment to the 1990 Incentive Compensation Plan
The Amendment to the 1990 Incentive Compensation Plan was approved.
4,077,386 shares were voted in favor of the amendment and 123,665
shares were voted against it. 1,500 shares abstained.
(c) Appointment of Auditors
The appointment of Richard A. Eisner & Company, LLP, as independent
auditors to audit the Company's 1996 financial statements was
ratified at the Annual Meeting. 4,127,636 shares were voted in
favor of the proposal, 73,315 shares were voted against it, and
1,600 shares abstained.
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) of this Form 10-QSB.
Exhibit 27 - Financial Data 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, 1996.
<PAGE>
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 14, 1996 George W. Benoit, Chairman of the Board of
Directors, President, Chief Executive Officer
/s/ Roger J. Burns
------------------------------------------------
Date: August 14, 1996 Roger J. Burns, First Vice President,
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HELMSTAR
GROUP, INC. AND SUBSIDIARIES' CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE INTERIM
PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,293,212
<SECURITIES> 466,386
<RECEIVABLES> 228,676
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 652,927
<DEPRECIATION> 394,876
<TOTAL-ASSETS> 8,643,126
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 674,960
<OTHER-SE> 5,542,035
<TOTAL-LIABILITY-AND-EQUITY> 8,643,126
<SALES> 0
<TOTAL-REVENUES> 1,461,628
<CGS> 0
<TOTAL-COSTS> 2,656,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,627
<INCOME-PRETAX> (1,195,084)
<INCOME-TAX> 21,319
<INCOME-CONTINUING> (1,216,403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (1,216,403)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
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