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, 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 October 30, 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 nine months ended
September 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)
September 31, December 31,
1996 1995
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents .................. $ 1,247,138 $ 1,358,730
Marketable securities ...................... 7,604,246 3,805,767
Joint ventures ............................. 1,490,556 1,324,023
Mortgage servicing rights
net of accumulated
amortization of $1,371 ................. 46,886
Mortgage loans held for sale ............... 4,336,204 1,541,640
Due from mortgage investors ................ 69,210 52,179
Furniture, equipment and
leasehold improvements - at cost,
less accumulated depreciation and
amortization of $415,249 in
1996 and $363,901 in 1995 .............. 268,165 203,373
Other assets ............................... 646,001 1,654,068
------------ ------------
TOTAL ............................. $ 15,661,520 $ 9,986,666
============ ============
LIABILITIES
Notes payable .............................. $ 9,090,433 $ 943,743
Accrued expenses and other
liabilities ............................ 1,082,320 1,608,193
------------ ------------
Total liabilities ................. 10,172,753 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) ...................... (7,263,872) (5,319,638)
------------ ------------
Total ............................. 8,395,598 10,339,832
Less treasury stock, at cost -
1,205,427 shares in 1996 and
1,203,227 shares in 1995 ............... (2,906,831) (2,905,102)
------------ ------------
Total stockholders' equity ........ 5,488,767 7,434,730
------------ ------------
TOTAL ............................. $ 15,661,520 $ 9,986,666
============ ============
See Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Profit from joint ventures ................... $ 109,465 $ 137,288 $ 530,210 $ 1,917,160
Financial consulting fees .................... -- 170,000 -- 460,000
Loan servicing fees net of
guarantor fees .......................... 7,351 213,793 35,518 641,594
Loan origination fees ........................ 619,075 151,421 1,230,569 383,144
Interest income .............................. 94,997 118,208 302,199 279,066
Investment (loss) income ..................... (64,049) 60,547 127,545 691,857
Gain on disposal of
servicing rights ........................ 126,281 -- 126,281 --
Other income ................................. 9,514 226,132 11,939 263,589
----------- ----------- ----------- -----------
Total Revenues .......................... 902,634 1,077,389 2,364,261 4,636,410
----------- ----------- ----------- -----------
Expenses:
Compensation and related costs ............... 1,057,995 604,401 2,790,988 1,941,447
Occupancy cost ............................... 95,167 96,930 281,126 320,182
Amortization of mortgage
servicing rights ........................ 1,847 97,594 4,521 295,763
General and administrative ................... 399,905 189,474 989,632 584,924
Professional fees and
litigation expenses ..................... 55,210 19,929 135,780 137,127
Interest ..................................... 42,979 1,160 107,767 5,106
----------- ----------- ----------- -----------
Total Expenses .......................... 1,653,103 1,009,488 4,309,814 3,284,549
----------- ----------- ----------- -----------
(Loss) profit before taxes ....................... (750,469) 67,901 (1,945,553) 1,351,861
Income tax (benefit) ............................. (22,638) 1,800 (1,319) 62,022
----------- ----------- ----------- -----------
NET (LOSS) PROFIT ................................ $ (727,831) $ 66,101 $(1,944,234) $ 1,289,839
=========== =========== =========== ===========
Net (loss) profit
per common share ............................. $ (.13) $ .01 $ (.35) $ .22
=========== =========== =========== ===========
Weighted average number of
common shares outstanding .................... 5,544,174 5,808,254 5,545,452 5,906,025
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................... $(1,944,234) $ 1,289,839
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ....................... 73,007 367,270
Unrealized (gain) on joint ventures
and other investments .............................. (330,210) (623,111)
(Gain) on sale or disposal of investments ........... (200,000) (1,276,267)
(Gain) on sale of mortgage loans held for sale ...... (126,281)
Loss on sale of fixed assets ........................ 1,912
Changes in operating assets and liabilities:
(Increase) in mortgage loans held for sale ......... (2,794,564) (1,721,203)
(Increase) in due for mortgage loans sold .......... (17,031) (100,895)
Decrease in other assets ........................... 990,929 24,208
(Decrease) in accrued expenses ..................... (525,873) (399,231)
----------- -----------
Net cash (used in) operating activities ................. (4,874,257) (2,437,478)
----------- -----------
Cash flows from investing activities:
(Purchase) of investment securities - net:
U.S. Government obligations ......................... (3,798,479) (381,976)
Distributions from joint ventures and other investments 163,677 2,445,996
Purchase of mortgage servicing rights ................. (78,423)
Proceeds from the settlement or sale of joint ventures 200,000 1,681,622
Proceeds from the sale or disposal of fixed assets .... 168,646 8,752
Purchase of fixed assets .............................. (116,140) (17,522)
----------- -----------
Net cash (used in) provided by investing activities ..... (3,382,296) 3,658,449
----------- -----------
Cash flows from financing activities:
Proceeds (repayment) of short term borrowings - net: .. 8,146,690 (379,479)
Purchase of treasury stock ............................ (1,729) (384,787)
----------- -----------
Net cash provided by (used in) financing activities ..... 8,144,961 (764,266)
----------- -----------
<PAGE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(CONTINUED)
Nine Months Ended
September 30
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS .... (111,592) 456,705
Cash and cash equivalents at beginning of period ........ 1,358,730 739,624
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 1,247,138 $ 1,196,329
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................ $ 107,767 $ 5,106
Taxes ............................................... 16,415 10,693
Non-cash increase in value of assets available for sale 355,635
See Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
<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
September 30,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
Rental income ................................ $ 564,682 $ 531,957
Operating expenses ........................... 42,539 40,196
--------- ---------
Net operating income ......................... 522,143 491,761
Other income (expense) ....................... (370,428) (399,201)
--------- ---------
Net income ................................... $ 151,715 $ 92,560
========= =========
Company's share of profit
from joint ventures ....................... $ 109,465 $ 81,380
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 ................... $ 109,465 $ 137,288
========= =========
</TABLE>
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. JOINT VENTURES (continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Rental income ................................ $ 1,700,747 $ 1,842,590
Operating expenses ........................... (132,010) (217,449)
----------- -----------
Net operating income ......................... 1,568,737 1,625,141
Other income (expense) ....................... (1,107,626) (1,153,879)
----------- -----------
Net income ................................... $ 461,111 $ 471,262
=========== ===========
Company's share of profit
from joint ventures ....................... $ 330,210 $ 343,300
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 ............... -- 309,087
----------- -----------
Profit from joint ventures ................... $ 530,210 $ 1,917,160
=========== ===========
</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 First Highpoint Limited Partnership, are
as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
1996 1995
--------- ---------
<S> <C> <C>
Rental income ............................ $ 564,682 $ 531,957
Operating expenses ....................... (42,539) (40,196)
--------- ---------
Net operating income ..................... 522,143 491,761
Other income (expense) ................... (370,428) (399,201)
--------- ---------
Net income ............................... $ 151,715 $ 92,560
========= =========
Company's share of profit
from joint ventures ................... $ 109,465 $ 81,380
========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1996 1995
----------- ------------
<S> <C> <C>
Rental income .......................... $ 1,700,747 $ 1,653,165
Operating expenses ..................... (132,010) (110,980)
----------- -----------
Net operating income ................... 1,568,737 1,542,185
Other income (expense) ................. (1,107,626) (1,082,416)
----------- -----------
Net income ............................. $ 461,111 $ 459,769
=========== ===========
Company's share of profit
from joint ventures ................. $ 330,210 $ 331,807
=========== ===========
</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 nine months ended September 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.
There were no significant changes in the status of litigation during
the three months ended September 30, 1996.
<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 has
decided to curtail this line of business and is currently seeking a marketing
arrangement with some outside party.
The Company has undertaken a cost containment program at Citizens
Mortgage Service Company ("Citizens"), in conjunction with its loan origination
operations. The program includes reevaluating the procedures for processing
loans to increase efficiency and to reduce the cost per loan, as well as
revising product pricing criteria and product offerings to return a greater
gross profit per loan. Cost reductions may be accomplished by consolidating
functions, requiring loan originators to more efficiently present loans, and
possibly by adjusting the staffing levels of certain departments. By adjusting
the pricing criteria of loans to better reflect the cost of producing that
particular loan type, the Company hopes to increase gross profits and to adjust
its product offering to take better advantage of niche market opportunities.
While this pricing method may result in a slight decline in loan origination
volume, it is anticipated that the greater profits per loan, combined with
reduced costs, would increase profitability. In addition, the Company will be
increasing the resources available to the non-conforming market, which has
higher profit margins than the traditional conforming credit market.
A. Three Months Ended September 30, 1996 Compared with Three Months Ended
September 30, 1995
Total revenues decreased to $902,634 for the three months ended
September 30, 1996 from $1,077,389 for the three months ended September 30,
1995.
Profit from joint ventures decreased to $109,465 for the three months
ended September 30, 1996 from $137,288 for the three months ended September 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.
The decline is attributable to the reduction in the Company's
percentage share of income in the Blowing Rock 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 during 1995.
At the partnership level, rental income increased slightly while
operating expenses remained constant for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995, resulting in a
small increase in profit.
<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 September 30, 1996 compared to $170,000 for the three months ended
September 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
transactional 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, or early 1997.
Loan servicing fees decreased to $7,351 for the three months ended
September 30, 1996 compared with $213,793 for the three months ended September
30, 1995. The decrease is the result of the sale of substantially all of the
Company's mortgage servicing portfolio in December 1995 for approximately $2.3
million. The balance of the mortgage servicing portfolio was sold in the quarter
just ended for approximately $170,000. The Company has repositioned its mortgage
banking operation to originate residential mortgage loans and sell the servicing
rights to other mortgage banking companies.
Loan origination fees increased to $619,075 for the three months ended
September 30, 1996 from $151,421 for the three months ended September 30, 1995,
as a result of the increased origination volume. This category includes fees
earned in connection with the origination of mortgage loans and the profit or
loss from sales of mortgage loans to permanent investors. The increase is the
result of the Company's expanded loan origination efforts.
Interest income decreased to $94,997 for the three months ended
September 30, 1996 from $118,208 for the three months ended September 30, 1995,
due in part to the large decline in interest earning escrow deposits, resulting
from the sale of substantially all of the Company's mortgage servicing portfolio
in December 1995 and the balance of the portfolio during the third quarter of
1996. This decline was somewhat mitigated by increased earnings in the Company's
hedging activities.
Investment income decreased dramatically to a negative $64,049 for the
three months ended September 30, 1996 from $60,547 for the three months ended
September 30, 1995. This category principally consists of net profit or loss
from hedging and investing in futures, puts, calls, equities, U.S. government
securities, municipal securities, and other securities activities. Large swings
can occur due to volatility in the financial markets.
Gain on the sale of mortgage servicing rights was $126,281 for the
three months ended September 30, 1996 compared to nil for the three months ended
September 30, 1995. The Company sold substantially all of its mortgage servicing
in December 1995 for approximately $2.3 million, realizing a profit of
approximately $380,000; the balance was sold in the third quarter 1996 for
approximately $170,000. The Company has exited the mortgage servicing business
as a separate activity.
<PAGE>
Other income declined to $9,514 for the three months ended September
30, 1996 from $226,132 for the three months ended September 30, 1995. During the
third quarter of 1995, the Company received 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 servicing or origination fees.
Total expenses increased to $1,653,103 for the three months ended
September 30, 1996 from $1,009,488 for the three months ended September 30,
1995.
Compensation and related costs increased to $1,057,995 for the three
months ended September 30, 1996 from $604,401 for the three months ended
September 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; and additional salaried
employees in the mortgage loan origination area to support the higher level of
production. 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 $95,167 for the three months ended
September 30, 1996 from $96,930 for the three months ended September 30, 1995.
Amortization of mortgage servicing rights decreased to $1,847 for the
three months ended September 30, 1996 from $97,594 for the three months ended
September 30, 1995, as the result of the sale of the majority of the servicing
portfolio in December 1995 and the sale of the remaining portfolio in July and
August 1996.
General and administrative expenses increased to $399,905 for the three
months ended September 30, 1996 from $189,474 for the three months ended
September 30, 1995. This increase reflects higher mortgage loan origination
activity; bad debt reserves in connection with the mortgage activity; and
expenses related to the Company's viatical settlements business.
Professional fees increased to $55,210 for the three months ended
September 30, 1996 from $19,929 for the three months ended September 30, 1995.
This increase is principally due to consulting expenses incurred in upgrading
the Company's computer facilities.
Interest expense was $42,979 for the three months ended September 30,
1996 compared with $1,160 for the three months ended September 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.
On a pre-tax basis, the Company had a loss of $750,469 for the three
months ended September 30, 1996 compared with a profit of $67,901 for the three
months ended September 30, 1995. Provision for income taxes for the three months
ended September 30, 1996 was a benefit of $22,638 compared with a provision of
$1,800 for the three months ended September 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.
<PAGE>
The Company's net loss for the three months ended September 30, 1996
was $727,831 compared with net income of $66,101 for the three months ended
September 30, 1995. On a per share basis, the net loss was $(.13) for the three
months ended September 30, 1996, compared with net income of $.01 for the three
months ended September 30, 1995. Income per share for the three months ended
September 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
September 30, 1996, because the effect of their inclusion would be antidilutive.
The number of shares used in the computations were 5,544,174 in 1996 and
5,808,254 in 1995.
Nine Months Ended September 30, 1996 Compared with Nine Months Ended
September 30, 1995
Total revenues decreased to $2,364,261 for the nine months ended
September 30, 1996 from $4,636,410 for the nine months ended September 30, 1995.
Profit from joint ventures decreased to $530,210 for the nine months
ended September 30, 1996 from $1,917,160 for the nine months ended September 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 nine months ended
September 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 nine months ended September 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 $331,807 for the nine months ended September 30, 1995 to $330,210 for the
nine months ended September 30, 1996. 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 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.
<PAGE>
The Company did not realize any financial consulting fees for the nine
months ended September 30, 1996 compared to $460,000 for the nine months ended
September 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
transactional 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, or early 1997.
Loan servicing fees decreased to $35,518 for the nine months ended
September 30, 1996 from $641,594 for the nine months ended September 30, 1995.
The decrease is the result of the sale of substantially all of the Company's
mortgage servicing portfolio in December 1995 for approximate $2.3 million. The
balance of the mortgage servicing portfolio was sold in the third quarter just
ended for approximately $170,000. The Company has repositioned its mortgage
banking operation to originate residential mortgage loans and sell the servicing
rights to other mortgage banking companies.
Loan origination fees increased to $1,230,569 for the nine months ended
September 30, 1996 from $383,144 for the nine months ended September 30, 1995.
This increase is the result of the expanded loan origination efforts.
Interest income increased to $302,199 for the nine months ended
September 30, 1996 from $279,066 for the nine months ended September 30, 1995,
due in large part to interest earned on securities held in its investing
activity.
Investment income decreased to $127,545 for the nine months ended
September 30, 1996 from $691,857 for the nine months ended September 30, 1995.
This category primarily consists of: net profit or loss from hedging and
investing in futures, puts, calls, equities, U.S. government securities,
municipal securities and other securities activities.
Gain on the sale of mortgage servicing rights was $126,281 for the nine
months ended September 30, 1996 compared to nil for the nine months ended
September 30, 1995. The Company sold substantially all of its mortgage servicing
in December 1995 for approximately $2.3 million, realizing a profit of
approximately $380,000; the balance was sold in the third quarter of 1996 for
approximately $170,000. The Company has exited the mortgage servicing business
as a separate activity.
Other income decreased to $11,939 for the nine months ended September
30, 1996 from $263,589 for the nine months ended September 30, 1995. During the
third quarter of 1995, the Company received 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 and origination fees.
Total expenses increased to $4,309,814 for the nine months ended
September 30, 1996 from $3,284,549 for the nine months ended September 30, 1995.
Compensation and related costs increased to $2,790,988 for the nine
months ended September 30, 1996 from $1,941,447 for the nine months ended
September 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.
<PAGE>
Occupancy costs decreased to $281,126 for the nine months ended
September 30, 1996 from $320,182 for the nine months ended September 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 $4,521 for the
nine months ended September 30, 1996 from $295,763 for the nine months ended
September 30, 1995 as the result of the sale of the majority of the mortgage
servicing portfolio in December 1995, and the sale of the remaining portfolio in
July and August 1996.
General and administrative expenses increased to $989,632 for the nine
months ended September 30, 1996 from $584,924 for the nine months ended
September 30, 1995. This increase reflects higher mortgage loan origination
activity; bad debt reserve in connection with the mortgage activity; and
expenses related to the Company's viatical settlements business.
Professional fees decreased to $135,780 for the nine months ended
September 30, 1996 from $137,127 for the nine months ended September 30, 1995.
Interest expense increased to $107,767 for the nine months ended
September 30, 1996 from $5,106 for the nine months ended September 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 $1,945,553 for the nine
months ended September 30, 1996 compared with a profit of $1,351,861 for the
nine months ended September 30, 1995. The benefit for income taxes for the nine
months ended September 30, 1996 was $1,319 compared with a provision of $62,022
for the nine months ended September 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.
The Company's net loss for the nine months ended September 30, 1996 was
$1,944,234 compared with a net profit of $1,289,839 for the nine months ended
September 30, 1995. On a per share basis, the net loss was $(.35) for the nine
months ended September 30, 1996, compared with a net profit of $.22 for the nine
months ended September 30, 1995. Income per share for the nine months ended
September 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 nine months ended
September 30, 1996, because the effect of their inclusion would be antidilutive.
The number of shares used in computations were 5,545,452 in 1996 and 5,906,025
in 1995.
<PAGE>
B. Liquidity and Capital Resources
Management of the Company believes that funds generated from
operations, its credit facility, warehouse line of credit, and cash
distributions from joint ventures, supplemented by its available assets and
hedging activities, 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, 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 from one of
two $5 million mortgage warehouse lines of credit with two mortgage warehouse
lenders. One $5 million line was opened in June 1996, and the other in September
1996.
Under the terms of these mortgage warehouse lines of credit, the
Company can draw down up to 98% of the face amount of an individual mortgage
loan. Borrowings under these facilities are repaid from the purchase price paid
by the investor who had committed to purchase the loan.
Through September 30, 1996, the Company had a separate $11 million
warehouse facility with a bank that participated in a mortgage warehouse
facility sponsored by the Federal Home Loan Bank of Pittsburgh. On August 29,
1996, the bank notified the Company that it was withdrawing its participation in
this program. Other lenders were available, but the Company opted not to
participate in the program any longer. This warehouse facility was replaced with
the latter mortgage warehouse line of credit mentioned above.
The mortgage warehouse lines of credit now utilized by the Company are
to fund loans from the time of settlement with the homeowner through payment by
the investor. In the past, the warehouse facility used in conjunction with the
participation in the Federal Home Loan Bank program was 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. The partnership is currently exploring various
refinancing options.
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 February 28, 1997
is 8.85%.
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.
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, 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 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 September 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: November 14, 1996 George W. Benoit
Chairman of the Board of Directors,
President, Chief Executive Officer
/s/ Roger J. Burns
------------------
Date: November 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 September 30, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,247,138
<SECURITIES> 7,604,246
<RECEIVABLES> 69,210
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 683,414
<DEPRECIATION> 415,249
<TOTAL-ASSETS> 15,661,520
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 674,960
<OTHER-SE> 5,488,767
<TOTAL-LIABILITY-AND-EQUITY> 15,661,520
<SALES> 0
<TOTAL-REVENUES> 2,364,261
<CGS> 0
<TOTAL-COSTS> 4,309,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,767
<INCOME-PRETAX> (1,945,553)
<INCOME-TAX> (1,319)
<INCOME-CONTINUING> (1,944,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,944,234)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
