SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Fee required)
For the fiscal year ended December 31, 1995
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No fee required)
For the transition period from __________ to __________
Commission file number l-9224
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HELMSTAR GROUP, INC.
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(Name of Small Business Issuer in Its Charter)
DELAWARE 13-2689850
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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2 World Trade Center, Suite 2112, New York, N.Y. 10048
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(Address of Principal Executive Offices) (Zip Code)
212-775-0400
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(Issuer's Telephone Number, including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common stock - par value $.10 American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
None
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(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
<PAGE>
Issuer's revenues for 1995, its most recent fiscal year, were
$6,202,459.
As of February 29, 1996, the aggregate market value of voting stock
held by non-affiliates of the Issuer was approximately $3,712,672.
The number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at February 29, 1996
Common stock - par value $.10 5,546,373 shares
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DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form l0-KSB incorporates by reference from the
issuer's definitive proxy statement for the annual meeting of stockholders to be
held on June 5, l996.
<PAGE>
PART I
Item l. Description of Business.
Background and History
Helmstar Group, Inc., ("Group"), through its
subsidiaries (collectively referred to as the "Company" unless
the context requires otherwise), is engaged in merchant
banking and mortgage banking. During 1995, the Company
commenced a business to arrange viatical settlements.
Merchant Banking - General
Joint Venture Criteria
Since 1988, the Company has engaged in merchant
banking activities primarily concentrating on real estate
projects and real estate-related services companies. The
Company seeks projects that offer strong upside potential
because of high short-term risk, albeit manageable risk, and
financial leverage. Although real estate development,
rehabilitation or "value-added" transactions are of primary
interest, the Company will consider most industries with the
exception of those requiring a highly specialized scientific
analysis.
The Company's exacting standards of selecting
ventures and co-venturers are directed toward middle-market
oriented activities. Co-venturers must be thoroughly
experienced and financially stable, as well as having a
demonstrated track record in the particular business activity.
Talented co-venturers are expected to execute each venture's
day-to-day management plan developed through the combined
efforts of the Company and the co-venturers.
The Company does not intend to take excessive risk in
its joint venture activities either through a single venture
or a series of interdependent ventures which result in
excessive risk when taken in the aggregate. The Company
intends to consider the risks of any potential undertaking
independently as well as how the risks of the proposed venture
impact on the Company in light of its other ventures. This
risk evaluation is based on a facts and circumstances analysis
at the time the feasibility of a potential joint venture is
being evaluated. Facts and circumstances are subject to change
over time. Accordingly, the Company has established flexible
criteria in selecting its venture activities to meet changing
market conditions.
The Company plans to limit its equity infusion in any
single transaction to a maximum of $3 million. Also, a
predetermined exit strategy is paramount. The holding period
for a particular venture will be based on facts and
circumstances, including maximizing the Company's potential
return and other opportunities available at the time of a
possible disposition.
Beginning in 1990, drawing on its experience in real
estate project finance, the Company began to offer financial
consulting services to clients on a fee basis. This permits
the Company to increase its revenue by utilizing its merchant
banking expertise without deploying a significant amount of
capital. The Company's primary focus in this area has been
assisting clients in realizing lower cost of capital through
creative financial structuring. This business is transaction
oriented, and potential revenue therefrom is subject to wide
variation. During 1995, 1994, 1993 and 1992 approximately 12%,
20%, 8% and 19% of the Company's total revenues in each year
were realized in connection with providing financial
consulting services to a single financial institution in
several transactions.
The joint ventures in which the Company participates
are described below:
1. Shopping Center - Blowing Rock, N.C.
In August 1988, the Company, through its wholly-owned
subsidiary, Burrows, Hayes Company, Inc. ("Burrows"), funded
$1,450,000 for a 50% voting interest and a majority financial
interest in a general partnership which in turn acquired a 50%
voting interest and a majority financial interest in a second
general partnership that developed and now operates a
manufacturers outlet center consisting of approximately 98,000
net rentable square feet in Blowing Rock, North Carolina.
In March 1992, Burrows purchased the entire interest
of the other partner in the first general partnership for
$245,000. Accordingly, the first partnership was dissolved,
and Burrows now is a partner in the project partnership.
This project opened in May 1989 and is currently
96.39% leased. It is expected that the center will be 100%
leased in the near future. A small amount of surplus land
remains for potential development in the future. An affiliate
of Burrows' co-venturer is responsible for the day-to-day
property management function. This entity also acts as leasing
broker for the partnership. The partnership does not have any
employees.
2. Mortgage Unemployment Insurance
In December 1988, the Company through its
wholly-owned subsidiary, Dover, Sussex Company, Inc.
("Dover"), purchased a 50% interest in Morgard, Inc. for
$300,000. Morgard developed a mortgage unemployment insurance
product to cover a homeowner's mortgage payments during
periods of involuntary unemployment.
In March 1992, Dover sold its entire interest in
Morgard to SCOR U.S. Corporation, the shares of which were
listed on the New York Stock Exchange, for a combination of
cash, common stock of SCOR and the right to receive additional
consideration based on the future performance of Morgard. In
addition, Dover, agreed not to compete with Morgard for a
three-year period. The gain on the sale was approximately $1.2
million. In 1994, the Company received additional SCOR shares
having a fair market value of $115,000 at the time of receipt.
The Company may receive additional consideration based on the
financial results of Morgard, Inc. through 1999. In December
1995, the Company tendered its entire interest in SCOR U.S.
Corporation when such corporation went private.
3. Apartment Complex - Plano, TX
In April 1989, the Company through its wholly-owned
subsidiary, Shaw Realty Company, Inc. ("Shaw"), acquired a 50%
voting interest and a majority financial interest in a general
partnership formed to acquire 120 condominium units of a total
of 140 units in an apartment complex located in Plano, Texas.
Shaw's capital contribution was $1,050,000 During November
1989, Shaw transferred its partnership interest to Randel,
Palmer & Co., Inc. ("Randel"), another wholly-owned subsidiary
of the Company.
The partnership acquired these units from a thrift
which had converted the property to a condominium project
following the default of the previous owner. An affiliate of
one of the co-venturers assumed the day-to-day property
management function for the project, and the partnership
implemented an aggressive management and leasing program. Due
to the success of these efforts, the project was turned
around.
In 1991, the partnership acquired the 20 units it had
not owned previously and terminated the condominium regime.
Also in 1991, the partnership was restructured as a limited
partnership with Randel retaining the same economic interest
it had as a general partner. Although Randel converted its
interest to a limited partner, it retained a 50% voting
interest in all significant and/or major decisions.
In February 1995, the project was sold. Approximately
$1.6 million was distributed to Randel as its share of the
sales proceeds. Randel's gain was approximately $1.2 million.
4. Shopping Center - Nags Head, N.C.
In December 1989, the Company through its
wholly-owned subsidiary, Parker, Reld & Co., Inc. ("Parker"),
acquired a 50% voting interest and a majority financial
interest in a general partnership formed to develop and
operate a manufacturers outlet shopping center in Nags Head,
North Carolina. Parker funded $1,500,000 toward the
development of this project consisting of approximately 82,500
net rentable square feet. An affiliate of Parker's co-venturer
is responsible for the day-to-day property management
function. This entity also acts as leasing broker for the
partnership. It also provides the same services for the
shopping center in Blowing Rock, North Carolina.
Located in an oceanside resort, the center opened
during the 1990 summer season. Currently, it is 95.77% leased.
It is expected that the center will be 100% leased in the near
future. The partnership does not have any employees.
Real Estate Trends
Occupancy averaged 100% at the manufacturers outlet
center in Blowing Rock and 99.17% at the one in Nags Head
during 1995. Retail sales were higher than 1994 levels at both
centers. At Blowing Rock, retail sales per square foot for
tenants who had been open for all of 1995 and 1994 increased
to $268 from $261. Aggregate retail sales per square foot for
the entire project increased to $250 from $239. At Nags Head,
retail sales per square foot for tenants who had been open for
all of 1995 and 1994 increased to $218 from $215. Aggregate
retail sales per square foot for the entire project increased
to $214 from $212. Average annual base rent (recomputed on a
monthly basis) also increased from $11.86 (January 1995) to
$11.97 (December 1995) per square foot at Blowing Rock and
$10.88 (January 1995) to $12.00 (December 1995) at Nags Head,
as tenants renewed expiring leases and/or new tenants paid
higher rates. Percentage rent based on sales above specified
targets totalled $76,406 for 1995 versus $85,445 for 1994 at
Blowing Rock and $36,688 for 1995 versus $23,374 for 1994 at
Nags Head. Specified targets for determining percentage rent
typically rise when a tenant's base rent increases after
exercising a renewal option.
Mortgage Banking
On June 30, 1991, McAdam, Taylor & Co., Inc.
("McAdam"), a wholly-owned subsidiary of the Company, acquired
all of the stock of Citizens Mortgage Service Company
("Citizens") for approximately $1,585,000 in cash. At such
time, Citizens was primarily engaged in servicing residential
mortgage loans. During 1992, Citizens expanded its activities
to include mortgage loan origination and marketing certain
financial products to mortgagors, the loans of whom are
serviced by Citizens.
Citizens focuses on first mortgage loans on
residences containing four or fewer dwelling units. It is
approved to originate and service loans for the Federal
National Mortgage Association ("FNMA") and the Federal Home
Loan Mortgage Corporation ("FHLMC"). It also can originate and
service loans insured by the Federal Housing Administration
("FHA") and loans partially guaranteed by the Veterans
Administration ("VA"). Citizens is authorized to issue and
service mortgage-backed securities insured by the Government
National Mortgage Association ("GNMA"). It has mortgage
banking licenses for Pennsylvania, Delaware, Maryland and New
Jersey. Citizens may seek to procure additional licenses in
the future.
Mortgage Servicing
During 1995, management reassessed the Company's
mortgage banking business. Secondary market prices for
mortgage servicing rights had soared. The increase was
attributable in part to higher interest rates for much of
1995. Higher interest rates resulted in lower prepayment rates
of existing mortgage loans and declining originations of new
mortgage loans. Furthermore, technology advances had lowered
the cost of servicing for very large mortgage servicers that
had invested heavily in new hardware and systems. With low
origination volume, these large servicers bid up secondary
market prices because they needed to maintain large portfolios
to justify their investment in hardware and systems.
Management decided to exit mortgage servicing as a
separate activity and focus on mortgage loan originations. In
December 1995, Citizens sold substantially all of its mortgage
servicing rights for approximately $2.3 million. Such sale
resulted in a gain of approximately $380,000. Citizens will
continue to service mortgage loans for a brief period
following the closing of a loan. The servicing rights may be
sold to the investor or to other mortgage servicers. Citizens
no longer will market financial products to mortgagors, since
it is exiting mortgage servicing as a separate business.
Mortgage servicing consists of handling the general
administrative affairs associated with owning mortgage loans
encompassing such activities as collecting and remitting loan
payments; accounting for the various elements of mortgage loan
payments including principal, interest and escrowed amounts
such as taxes and insurance; maintaining escrow accounts and
making payments therefrom for such items as taxes and
insurance; contacting delinquent borrowers; making inspections
of the mortgaged properties as required by each investor; and
supervising foreclosures and other dispositions in the event
of default. For providing these services, Citizens received
fees ranging from .25% to 1.42% per annum of the unamortized
principal balance. As of November 30, 1995, the weighted
average fee earned by Citizens was approximately .3594%. Such
fees are retained out of the monthly mortgage payments
collected. Additionally, Citizens derived revenues from sundry
fees charged for such items as late payments and loan payoffs.
The mortgage servicer bears any economic risk of loss
in connection with loans serviced on a recourse basis.
Nonrecourse servicing, the vast majority of Citizens' mortgage
servicing activities, generally shifts any economic risk of
loss to the investors. Defaults relating to underwriting
errors or omissions as well as fraud, however, would remain
the responsibility of the mortgage servicer vis-a-vis
investors. If a loss results with respect to either recourse
or nonrecourse servicing, the mortgage servicer may be able to
seek indemnification or contribution from (1) a third party
loan originator, if an underwriting problem had occurred; (2)
a previous mortgage servicer, if the right to service the loan
had been purchased from another servicer; or (3) other third
parties including title insurers, appraisers, mortgage
insurers, etc.
In connection with the mortgage servicing rights it
sold, Citizens may be liable to subsequent purchasers either
as a predecessor servicer or originator. In some instances, as
outlined above, Citizens may have recourse against other
parties.
The following table sets forth an analysis of the
carrying amount of the Company's mortgage servicing portfolio:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Purchased Mortgage
Servicing Rights -
Beginning Balance $2,077,108 $2,632,657 $2,018,464 $1,284,806 $1,407,109
Add: Purchases 96,357 151,513 1,016,284 1,086,905 --
Less: Sales (1,765,218) (227,121) -- -- --
Less: Post Closing
Adjustments
Relating to
Original
Acquisition and
Bulk Purchases -- (12,848) -- -- (36,649)
Amortization
Expense (361,361) (467,093) (402,091) (353,247) (85,654)
--------- --------- ---------- ---------- ----------
Ending Balance $ 46,886 $2,077,108 $2,632,657 $2,018,464 $1,284,806
=========== =========== =========== =========== ===========
</TABLE>
The table set forth below is an analysis of the
Company's mortgage servicing portfolio based on the
unamortized principal balance of all loans being serviced.
"Runoff" includes regular principal payments as well as
prepayments for any reason.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993 1992 1991
Dollars in Thousands ---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Mortgage
Servicing Portfolio:
Beginning Balance $217,327 $263,089 $236,552 $205,447 $220,230
Add: Loan Production 38,916 31,581 49,530 17,128 -
Bulk Servicing
Acquired 9,274 845 69,616 84,450 -
Less: Servicing Sales (215,690) (32,809) (4,127) (1,324) -
Runoff (27,202) (45,379) (88,482) (69,149) (14,783)
--------- -------- -------- -------- --------
Ending Balance $ 22,625 $217,327 $263,089 $236,552 $205,447
========= ======== ======== ======== ========
</TABLE>
The remaining mortgage servicing portfolio consists
of servicing rights to be sold in 1996 and loans in
foreclosure. As of December 31, 1995, the principal balance of
loans in foreclosure is $1,892,069. Citizens will continue to
service these loans until the foreclosures are completed. It
does not bear any significant risk of loss in connection with
the foreclosures pending. In some cases, Citizens has made
advances and incurred certain expenses in connection with
those foreclosures. In most instances, such advances and any
uncollected servicing fees should be received in full from the
sale proceeds of the underlying collateral. The investors
would be liable for any shortfall.
Mortgage Loan Origination
The Company's primary objective, prior to the sale of
substantially all of its mortgage servicing portfolio, was to
sell mortgage loans it originated on a nonrecourse basis and
retain the mortgage servicing rights on a nonrecourse basis.
Even before exiting the mortgage servicing business, Citizens
sold certain types of mortgages to other mortgage bankers on a
"servicing released basis." The sponsoring mortgage banker
would acquire the right to service such loans. Citizens'
offered these products in an attempt to remain competitive in
originations with larger mortgage bankers that offered types
of mortgages which Citizens did not service.
After interest rates rose rapidly in early 1994,
origination volume dramatically slowed down. Accordingly, for
competitive reasons, Citizens expanded its offerings of other
mortgage bankers' products to be sold on a servicing released
basis. In 1994, Citizens sold approximately 28% of the
mortgage loans it originated on a servicing released basis.
This increased to 39.6% in 1995. Instead of selling mortgage
loans on a servicing released basis to an investor, Citizens
may sell such rights in a separate transaction to a different
party. Citizens remains responsible for servicing a loan until
such loan is delivered to an investor servicing released or
until Citizens sells the servicing rights to another party.
Citizens closed mortgage loans having principal
balances of $38,916,362, $31,581,135, $49,530,475 and
$17,128,250 during 1995, 1994, 1993 and 1992. Retail
originations were $28,433,496, $17,977,540 and $30,466,985 in
1995, 1994 and 1993. In 1992, all originations were done on a
retail basis from a single office in suburban Philadelphia.
Since it was successful in attracting business from nearby
parts of New Jersey and Delaware, during 1993 Citizens opened
a retail origination office in New Jersey and another in
Delaware. In 1995, 1994 and 1993, the balance of $10,482,865,
$13,603,595 and $19,063,490 of loan originations were
originated through correspondents on a "wholesale" basis.
Currently, Citizens' marketing strategy has been
newspaper advertising and referrals by real estate agents and
attorneys. Commission-based account executives typically visit
a prospective applicant at the real estate agent's office or
in the applicants home. Accordingly, the size of Citizens'
offices are not an impediment to increasing the volume of
originations within certain limits. If market conditions
justify it, Citizens may open additional branch origination
offices in the future.
Mortgage loan origination is a highly cyclical
business. Many mortgage bankers incur high fixed charges by
maintaining a network of origination offices in different
geographic markets. In good times, such companies are poised
to capture a solid share of the market. In poor times,
however, the high fixed charges can cause severe cash flow
squeezes.
The Company recognizes the need for a local presence,
and has a network of independent mortgage brokers and smaller
mortgage bankers to generate mortgage loan originations on a
"wholesale" basis. Through correspondents, Citizens receives
the benefits of a local office without incurring the fixed
overhead of developing and maintaining a branch office. In
1993, the first year in which Citizens began a wholesale
business, it had 17 correspondents. In 1994, the number of
correspondents increased to 25. It remained at that level
during 1995.
"Wholesaling" in effect means that Citizens will
commit in advance of settlement with a homeowner to purchase
loans from a correspondent that meet Citizens' standards.
Citizens in turn commits to sell those loans in the same
manner as it sells loans originated on a "retail" basis.
Each correspondent must be "approved" by management
and enter into a formal agreement providing indemnity to
Citizens in the event of fraud or misrepresentation in the
application and underwriting processes. Citizens will review
each loan prior to acceptance to ensure that it meets the same
quality standards and underwriting criteria used in Citizens'
retail origination activities.
During 1995, 1994, 1993 and 1992, Citizens' loan
origination production consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Conventional Loans
Number of Loans 256 332 499 190
Dollar Volume $27,128,418 $31,487,045 $48,330,475 $17,000,250
Percent of
Total Dollar Volume 69.71% 99.70% 97.58% 99.25%
FHA Insured Loans
Number of Loans 136 1 20 2
Dollar Volume $11,787,944 $94,090 $1,200,000 $128,000
Percent of
Total Dollar Volume 30.29% .30% 2.42% .75%
Total Loans
Number of Loans 392 333 519 192
Dollar Volume $38,916,362 $31,581,135 $49,530,475 $17,128,250
Average Loan Amount $99,276 $94,838 $95,434 $89,210
</TABLE>
Adjustable rate mortgages ("ARMS") represented
approximately 18%, 19%, 3% and 6% of the conventional loan
production for 1995, 1994, 1993 and 1992, respectively. The
balance was fixed rate loans.
Loan sales generally are made on a nonrecourse basis,
except for losses arising from certain deficiencies in the
underwriting of the loan. Citizens would remain liable for
such losses to an investor, even if it had not originated the
loan, but serviced it. The investor would seek recovery first
from the servicer, and the servicer, in turn, from any third
parties including the originator or prior owner of the loan
(or prior servicer) if the servicer had purchased the
servicing separately or as part of the acquisition of the loan
itself. Citizens' obligations with respect to foreclosure
losses on FHA or VA loans included in mortgage-backed
securities pools would be the same as an originator which
sells such loans or as a servicer of such loans, unless
modified by the sales or servicing contract with a party
financially capable of performing any indemnity or
contribution requirements.
Citizens funds loan production with its own cash or
with proceeds from various credit and warehouse facilities.
After a loan closes, it generally takes 10 days until all of
the documents are assembled, packaged and delivered to an
investor and 5 days until the investor pays for the loan. In
some instances, Citizens retains any interest earned on the
mortgage loan until the investor buys such loan. Citizens'
interest cost, in some cases, is less than the rate realized
while Citizens earns interest on the mortgage loan.
Oftentimes, interest rates vary between the time that Citizens
issues a commitment to make a loan to an applicant (or
purchases a loan at a set price from a correspondent) and the
time at which payment is due from an investor.
Citizens offers mortgage loan applicants, directly
through its retail operation and indirectly through its
correspondents, the option of fixing an interest rate at any
time prior to 10 days before settlement. Obviously, all
applications and commitments do not generate a closed loan,
and Citizens is exposed to an interest rate risk, if it
commits to fund a mortgage at a certain rate and an investor
is only willing to buy the loan at a much higher rate.
Application fees, paid at the time of application, and
origination fees, paid at the time of an applicant's
acceptance of a commitment or "financed" through a higher loan
balance, however, offset some of the potential loss. In the
case of certain refinancings of loans on owner-occupied
residences, Federal law requires that a total refund of all
fees be made, if the mortgagor rescinds the transaction within
3 business days of closing. Obviously, no disbursement of loan
proceeds is made until the expiration of such period.
To further mitigate these risks, Citizens typically
enters into forward delivery commitments with various
investors to sell a portion of the loans in process depending
on its estimate of such factors including changing interest
rates, the percentage of loans which will close, and the
timing of loan closings. Management closely monitors these
factors as well as the composition of loans in process, and
adjusts Citizens' commitments accordingly.
If a commitment to fund or purchase a loan is not
used, Citizens, in turn, would not be able to satisfy its
forward commitment to deliver such loan to an investor.
Typically, Citizens can substitute another loan, possibly at a
gain or loss, on the delivery date or enter into an
"offsetting" transaction by buying a forward commitment to
purchase a loan based on the same terms as contemplated in the
forward delivery commitment. The offsetting transaction also
could generate a gain or loss, depending on movements in
interest rates.
In some instances, however, Citizens may be able to
negotiate a "best efforts" delivery with an investor.
Accordingly, if a loan fails to close, Citizens will not have
to enter into an "off-setting" transaction, as noted above.
Citizens typically will receive a lower price for loans
delivered on "best efforts" bases because the investor has
retained the interest rate risk.
Viatical Settlements
In May 1995, the Company began a new business of
arranging "viatical settlements." Helmstar Funding, Inc.
("Funding") arranges for the sale of a life insurance policy
for a critically ill individual. The insured receives a
discounted payment representing all of, or a predetermined
portion of, the death benefit while that person is alive. The
purchaser maintains the policy and collects the death benefit
when the insured dies. Funding does not purchase the policy;
rather, it will receive a commission from the purchaser when a
transaction is completed.
Funding works with hospital social workers, discharge
planners, hospice professionals, and employee benefits
managers to assist critically ill persons and their families
meet their financial challenges. The insured can use the
proceeds in any manner such person deems fit. The discounted
amount depends on a number of factors including life
expectancy.
Funding did not derive any revenue in 1995 and
incurred an immaterial amount of operating expenses.
General
The Company was incorporated under the laws of the
State of Delaware in 1968. It maintains offices at 2_World
Trade Center, Suite 2112, New York, New York 10048 and its
telephone number is (2l2) 775-0400. Unless the context
requires otherwise, the term "Company" refers to Helmstar
Group, Inc. ("Group") and its wholly-owned subsidiaries:
Matthews & Wright, Inc. ("Matthews & Wright"); Snider,
Williams & Co., Inc. ("Snider"); Randolph, Hudson & Co., Inc.
("Randolph"); Eden Consulting, Inc. ("Eden"); Shaw Realty
Company, Inc. ("Shaw"); Helmstar Funding, Inc. ("Funding,"
formerly CMS Insurance Agency, Inc.); Burrows, Hayes Company,
Inc. ("Burrows"); Dover, Sussex Company, Inc. ("Dover");
Housing Capital Corporation ("Housing"); Randel, Palmer & Co.,
Inc. ("Randel"); Parker, Reld & Co., Inc. ("Parker") and
McAdam, Taylor & Co., Inc. ("McAdam"). Additionally, unless
the context requires otherwise, "Company" includes all
wholly-owned subsidiaries of Group including Citizens Mortgage
Service Company ("Citizens"), a wholly-owned subsidiary of
McAdam.
As of March l, 1996, the Company had 52 employees of
whom 47 were full time employees.
Financial Information Relating to Industry Segments
The Company's operations are classified into two
principal industry segments: merchant banking and mortgage
banking. The Company first engaged in mortgage banking in 1991
with its acquisition of Citizens on June 30, 1991. Since the
Company's new business of viatical settlements did not
generate any revenue and its expenses and identified assets
are immaterial, the Company included such expenses and
identified assets as part of the amounts for "general
corporate."
Year Ended December 31,
-----------------------
1995 1994
---- ----
Revenue from unaffiliated customers:
Merchant banking ....................... $ 2,711,078 $ 935,045
Mortgage banking ....................... 2,094,400 1,594,103
Other corporate income ................. 1,396,981 413,898
----------- -----------
Total revenues ......................... $ 6,202,459 $ 2,943,046
=========== ===========
Income (loss) from
operations:
Merchant banking ....................... $ 1,437,920 $ (305,089)
Mortgage banking ....................... (349,200) (578,434)
----------- -----------
Income (loss) from
operations ............................. 1,088,720 (883,623)
General corporate
income (expense) ....................... 133,560 (198,578)
----------- -----------
Income (loss) before
income tax ............................. $ 1,222,280 $(1,082,201)
=========== ===========
Identifiable assets:
Merchant banking ....................... $ 1,324,023 $ 3,675,971
Mortgage banking ....................... 3,840,700 2,919,473
General corporate ...................... 4,821,943 1,931,221
----------- -----------
$ 9,986,666 $ 8,526,665
=========== ===========
Competition
Competition in the Company's business of merchant
banking focusing on middle market oriented, real estate and
other businesses is widespread and highly fragmented. In its
activities as a co-venturer with a focus on smaller, more
specialized ventures having defined markets, institutional
joint venturers including large public real estate or venture
capital partnerships and real estate investment trusts should
not be significant competitors. Likely competition will be
encountered from small syndicators; individual investors,
typically from the local market; smaller insurance companies;
and participating mortgage lenders. Many of the Company's
likely competitors have greater access to capital than the
Company. Similarly, the Company encounters stiff competition
from a broad range of financial services firms when seeking
financial consulting assignments.
The Company encounters fierce competition in its
mortgage banking business from numerous sources including
banks, thrifts and independent mortgage companies. The Company
tries to differentiate itself through prompt and efficient
service to the borrower. Companies with greater access to
capital at lower cost, however, may be able to offer more
varied mortgage loan products, possibly even at lower rates,
than the Company. This is especially true of banks and
thrifts. Furthermore, many larger mortgage bankers may offer
correspondents lower cost mortgages, higher profit margins and
more diversified products than the Company.
Viatical settlements is a relatively new industry.
The Company estimates that there are more than 50 companies
offering viatical settlements in the United States. Most of
these companies are small and serve local or regional markets.
Major insurance companies, however, have commenced or are
studying the possible commencement of viatical settlements
businesses.
Regulation
In the course of conducting its business of merchant
banking, the Company may acquire interests in regulated
activities. Such regulation may be either directly or
indirectly related to the Company's interest.
With respect to its real estate joint ventures, the
Company may encounter Federal, state and local regulation in
connection with land use, building code requirements,
environmental, and similar restrictions on development and/or
operations.
Mortgage banking is a highly regulated businesses.
Citizens has mortgage banking licenses in Pennsylvania,
Delaware, Maryland and New Jersey. Approvals are required to
originate and service loans purchased or guaranteed by FNMA,
FHLMC, FHA, GNMA and the VA. Maintenance of state licenses may
be required as well. Citizens may have to procure additional
licenses in order to expand its mortgage banking business.
Viatical settlements are subject to regulation in
certain states. The National Association of insurance
Commissioners has adopted the Viatical Settlements Model Act,
and legislation to enact laws substantially similar to the
Model Act is pending in several states. Additional regulation
of this industry should occur as the industry matures.
Item 2. Description of Property.
The Company leases approximately 7,000 square feet of
office space at 2 World Trade Center, New York, New York
10048. This lease expired on February 29, 1996 since the
Company had exercised a cancellation option in April 1995 by
paying the landlord $70,000. The Company is negotiating a new
lease on the same space, and it expects that such new lease
will be made on more favorable terms. The landlord has
permitted the Company to remain in possession of the premises
at a recently negotiated, lower rent pending the finalization
of a new lease. This office is utilized as the Company's
executive office in addition to housing its merchant banking
activities.
Citizens leases approximately 6,500 square feet of
office space at 500 Office Center Drive, Fort Washington,
Pennsylvania 19034. This lease expires on March 31, 1998. This
office is utilized in the Company's mortgage banking
activities. Citizens also leases branch offices in New Jersey
and Delaware. These leases expire in 1999 and 1996,
respectively.
Funding maintains a small office in Philadelphia. The
lease expires in August 1996.
The future minimum annual base rental commitments
under these leases are reflected in the amounts provided in
Note F[1] in Notes to Financial Statements included in Part
II, Item 7 of this Form 10-KSB.
Item 3. Legal Proceedings.
In addition to the litigations described below, there
are various claims against the Company with respect to matters
arising out of the ordinary conduct of its business. Outside
counsel for the Company has advised that at this time they
cannot offer an opinion as to the probable outcome of any of
these matters. In the opinion of management, the resolution of
these matters will not have a material adverse effect on the
Company's financial position or the results of operations.
The Multi-District Litigation ("MDL"), MDL No. 739,
U.S. District Court for the Eastern District of Pennsylvania
Between June 1987 and October 1988 six separate class
action lawsuits were filed against Group, Matthews & Wright,
certain current or former officers and directors of each
company and others relating to bonds underwritten by Matthews
& Wright and issued by the City of Chester, the City of East
St. Louis, County of St. Louis, and the Territory of Guam, or
other entities affiliated therewith. The complaints in all six
cases allege, among other things, violations of Federal
securities rules and violations of the Racketeer Influenced
and Corrupt Organizations Act ("RICO").
In January 1995, the Court granted defendants'
motions for summary judgment in all of the lawsuits. Following
the entry of these judgments, the parties, represented by lead
and liaison counsel, entered into a proposed settlement
agreement. This agreement was approved by the Court in August
1995. The Company's share of the settlement costs has been
reflected in its consolidated financial statements.
Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
et al., Claimants v. A. Webster Dougherty & Co., Inc., et al.,
Respondents
An arbitration was commenced in 1989 by the senior
managing underwriters ("Claimants") against certain syndicate
members ("Respondents"), including Matthews & Wright, of
various Washington Public Power Supply System bond syndicates
that sold certain tax-exempt bonds. Claimants alleged that
Respondents, including Matthews & Wright, were responsible for
a share of settlement costs and legal fees incurred to settle
bondholder claims.
In January 1992, the National Association of
Securities Dealers' Arbitration Panel determined the liability
of the Respondents. In October 1992, the New York State
Supreme Court entered judgment on the award against Matthews &
Wright. In November 1993, the Appellate Division affirmed the
lower court's decision. Matthews & Wright's motion for leave
to appeal to the New York Court of Appeals was denied in
September 1994.
In January 1994, Claimants filed an action against
Group in the New York State Supreme Court. In such action,
Claimants maintain that Group should pay the amount due from
Matthews & Wright. Claimants allege that Matthews & Wright
functioned as an instrumentality of Group, and Group's assets
should be treated as if they were assets of Matthews & Wright.
Alternatively, Claimants maintain that Group and Matthews &
Wright engaged in various fraudulent activities to frustrate
collection of a judgment by a judgment creditor.
All matters relating to the Company's liability to
Claimants were settled in March 1996. Provision for the
Company's liability had been reflected previously in its
consolidated financial statements.
Cross Creek Village v. Housing Authority of the
County of Riverside, et al., Case No. 236813
This action was filed in the Superior Court of the
State of California, County of Riverside, in July 1993, and a
summons was served on Matthews & Wright in September 1993. It
was indexed as Case No. 93-7732. The complaint asserts
numerous claims against multiple defendants arising out of the
issuance of $13,000,000 Housing Authority of the County of
Riverside, Multi-Family Housing Revenue Bonds, Series 1985A
(Ironwood Apartments Project), issued by the Housing Authority
of the County of Riverside, California ("Housing Authority")
and underwritten by Matthews & Wright for the construction of
the Ironwood Apartments project. The complaint alleges that
the bonds were issued pursuant to a "sham closing" in 1985
when in fact the bonds were not actually issued until 1986,
resulting in an assertion by the Internal Revenue Service (the
"IRS") that the interest on the bonds is not tax-exempt. The
plaintiff in this action is Cross Creek Village, a partnership
which allegedly acquired the project from the original
developer. The plaintiff maintains that the Housing Authority
claimed to have incurred more than $500,000 in legal costs in
contesting the IRS' assertion for which the Housing Authority
seeks indemnity from the plaintiff.
The original complaint in this action asserted claims
against Matthews & Wright for equitable indemnity, fraud, and
negligent misrepresentation. In September 1993, the plaintiff
dismissed the complaint without prejudice against Matthews &
Wright and others. In October 1993, the plaintiff filed a
First Amended Complaint arising out of the same facts as the
initial complaint, and named Group as the
successor-in-interest to Matthews & Wright among the
defendants. The First Amended Complaint alleged the same
claims against Group as had formerly been alleged against
Matthews & Wright. In November 1993, Group filed an answer
denying all liability.
In addition, cross-claims have been filed by certain
co-defendants in this action against Group and Matthews &
Wright. One co-defendant, legal counsel to the Housing
Authority, filed a cross-complaint for indemnification and
apportionment of fault against multiple parties including
Group. In addition, the County of Riverside, California and
the Housing Authority, two other co-defendants filed a
cross-complaint that, in addition to alleging claims arising
out of the Ironwood Apartments bonds, adds claims arising out
of the issuance of $17,500,000 Housing Authority of the County
of Riverside, Multi-Family Housing Revenue Bonds, Series 1985A
(Whitewater Garden Apartments Project), issued by the Housing
Authority and underwritten by Matthews & Wright. The claims in
the second cross-complaint arise out of allegations concerning
the manner in which the closings on both bond issues were
conducted. The second cross-complaint alleges claims against
"Matthews & Wright, Inc., dba Helmstar" for equitable
indemnity, intentional misrepresentation, negligent
misrepresentation, fraudulent concealment of material facts,
negligence, breach of fiduciary duty, RICO, and conspiracy to
make intentional or negligent misrepresentations. Both
cross-complaints assert claims against defendants already in
the case as well as against new defendants. By a standstill
agreement dated January 21, 1994, cross-claimants and certain
other parties, including Group and Matthews & Wright, have
agreed not to pursue cross-claims against one another at this
time. The parties also agreed to extend the time to respond to
the pending cross-claims until 30 days after termination of
the agreement.
In December 1993, this action was removed by another
defendant, the Federal Deposit Insurance Corporation ("FDIC"),
to the U.S. District Court for the Central District of
California. On January 7, 1994, the FDIC moved to transfer the
venue of this action to the U.S. District Court for the
Southern District of Texas. The Court severed and transferred
claims involving the FDIC to the U.S. District Court for the
Southern District of Texas. All other claims were remanded to
the Superior Court of California, County of Riverside, as Case
No. 236813.
The plaintiff seeks compensatory and punitive damages
as well as indemnification and equitable relief. In four
counts, two of which involve the Company as well as other
defendants, the plaintiff seeks compensatory damages plus
interest estimated to be not less than $5 million. It is too
early to assess the potential for, and the amount of, any
damages in connection with this action. A status conference in
this action has been continued until June 7, 1996.
In October 1995, the United States Tax Court held in
Harbor Bancorp v. Commissioner, 105 T.C. No. 19, that the
interest on the bonds forming the basis of the Cross Creek
Village case was not excludable from the bondholders' taxable
income. In January 1996, the petitioners appealed the Tax
Court's decision to the U.S. Court of Appeals for the Ninth
Circuit.
Eddie Jo Hurley and All Others Similarly Situated, v.
Citizens Mortgage Service Company, N.Y. Supreme Court, Monroe
County (Index No. 9862/93).
In October 1993, a class action was commenced in the
New York State Supreme Court against the Company alleging that
the Company routinely holds more funds in its mortgage escrow
accounts than allowed under law or the homeowners' mortgage
contracts. These escrow accounts were maintained in connection
with the Company's mortgage servicing activities to pay taxes
and insurance on behalf of individual mortgagors. The Company
believed its method of calculating required escrow payments
was in accordance with applicable rules and regulations and
this lawsuit was without merit.
In October 1995, the Court approved a class-wide
settlement agreement. The cost of the settlement has been
reflected in the Company's consolidated financial statements.
Joseph B. Gould Trust v. Stubbleman, McRae, Sealy,
Laughlin & Browder, et al., Civil Action No. 94-M-2464
In June 1995, the plaintiff filed a second amended
complaint against multiple parties, including Group and
Matthews & Wright, pending in the United States District
Court, District of Colorado. The plaintiff, James B. Gould
Trust, purportedly purchased bonds in a secondary market
transaction in August 1991. Such bonds allegedly were issued
by the Industrial Development Board of the Metropolitan
Government of Nashville and Davidson for the Woodlands
Apartments Project. The plaintiff asserted claims for
misrepresentation, breach of contract, and federal securities
law violations in connection with the issuance of the bonds.
The plaintiff contends the IRS notified it that interest on
the bonds was not tax-exempt. Allegedly, the plaintiff paid
the IRS $15,414.26 for additional tax and interest relating to
its 1991 tax liability and $36,828 for additional tax relating
to its 1993 tax liability. The plaintiff asserts it
anticipates with reasonable certainty that the IRS will assess
additional tax of $33,480 plus interest and penalties for
1992. The plaintiff is seeking actual and punitive damages,
costs, attorney fees and other relief the Court deems just and
proper. Group and Matthews & Wright filed answers denying all
liability. It is too early to assess the potential for, and
the amount of, any damages in connection with this action.
Although this action had been commenced in 1994,
Group and Matthews & Wright were not named as defendants until
June 1995. In November 1994, one of the other defendants filed
a third-party complaint against Group. This defendant,
Donaldson, Lufkin & Jenrette Securities Corporation, an
alleged underwriter of the bonds, maintains that it entered
into a memorandum of understanding on December 31, 1985 with
Matthews & Wright in which Matthews & Wright assumed all
rights, benefits, fees, claims and liabilities of certain
financings including the subject bonds. This defendant alleged
that Group formerly was known as Matthews & Wright.
Furthermore, this defendant alleged that it would be entitled
to indemnification or contribution if it were adjudged to be
liable to the plaintiff. Group filed an answer to the
third-party complaint denying all liability.
After the plaintiff amended its complaint to include
Group and Matthews & Wright, the third-party plaintiff filed
cross-claims against Group and Matthews & Wright. The
cross-claims are substantially identical to the third-party
complaint except for the allegation in the cross-complaint
that Group should be liable for the actions of Matthews &
Wright because Matthews & Wright was the alter ego of Group.
Group and Matthews & Wright filed answers to the cross-claims
denying all liability.
Written discovery has been taken. Factual discovery
is scheduled to conclude on May 8, 1996.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
<PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Exchange Listing:
The common stock of Helmstar Group, Inc. is listed on the
American Stock Exchange (trading symbol HLM).
The approximate number of recordholders of Common Stock as of
February 29, 1996 was 304.
Equity Sale Prices:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
1995 9/16 7/16 3/4 3/8 1 1/4 1/2 1 3/16 11/16
1994 7/8 9/16 5/8 9/16 9/16 1/2 3/4 1/2
Dividends:
The Company has not previously paid cash dividends on its
common stock. The Board of Directors does not presently intend
to pay cash dividends on the outstanding shares of common
stock in the foreseeable future. The payments of future
dividends and the amount thereof will depend upon the
Company's earnings, financial condition, capital requirements
and such other factors as the Board of Directors may consider
relevant.
Item 6. Management's Discussion and Analysis.
A. Results of Operations
1. 1995 Compared to 1994
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 had made
the payment. The insured must be critically ill, i.e., have a
life threatening disease with a limited life expectancy. The
Company will receive fees from the purchaser of the life
insurance policy.
The Company is educating social services
professionals and employee benefit managers about viatical
settlements. The Company expects to receive referrals from
such persons. The Company did not earn any fees from arranging
viatical settlements in 1995. It incurred total expenses in
this new business in an amount which management considers to
be immaterial.
Total revenue increased to $6,202,459 for 1995 from
$2,943,046 for 1994.
Profit from joint ventures increased to $1,939,087
for 1995 from $339,317 for 1994. This classification
represents the Company's share of income and losses, computed
in accordance with the equity method of accounting, from
various joint ventures in which the Company is participating.
The types of ventures being pursued typically require several
years of careful management before they provide the projected
returns envisioned.
Profit for the year ended December 31, 1995 includes
the Company's share of the gain from the sale of an apartment
project by First Highpoint Limited Partnership in February
1995. Such amount was approximately $1,275,000. The Company's
share of income from First Highpoint's operations for 1995
were $11,493 compared with $4,021 for 1994.
The Company realized a gain of $328,269 from
receiving cash distributions from Blowing Rock Outlet Partners
("Blowing Rock") in excess of the Company's carrying amount of
its interest in such venture. The Company had received
approximately $2.2 million in April 1995 when Blowing Rock
refinanced its debt.
Notwithstanding improved operating results at the
venture, the Company's share of income from Blowing Rock
should be lower in future periods, due in part to the
substantial increase in interest expense, as a result of
refinancing the venture's mortgage debt from $3,757,828 to
$6,550,000 in April 1995. Furthermore, the partnership
agreement provides that the Company's share of income and cash
flow would decline, once the Company recovered its entire
capital contribution from certain events including the
refinancing of the venture's debt. The Company received a
distribution in excess of its capital contribution from the
refinancing proceeds. The venture's cash flow, at current
interest rates, was not impacted negatively because debt
service on the new loan is lower than on the old loan. In
addition to interest, the old loan required principal
amortization payments of $40,000 per month.
Although operating results continue to improve as the
ventures mature, some variation in profit or loss for a
specific interim period may result due to such factors as
receiving annual payments of percentage rent; incurring
periodic operating expenses which will occur only every few
years, such as painting the entire project; accounting
adjustments between interim periods; lost rent due to the
turnover of a tenant notwithstanding that a new tenant has
been secured at a higher rent; etc.
Financial consulting fees increased to $766,500 for
1995 from $599,700 for 1994. The Company provides financial
structuring advice on a fee basis. Typically, an engagement is
based on a specific assignment to assist a client to lower its
cost of capital. Due to the transactional nature of this
business, significant variations in revenue are likely.
Loan servicing fees decreased to $800,197 for 1995
from $951,710 for 1994. This category includes fees earned in
processing residential mortgage payments and servicing loans
on behalf of various investors. Substantially all of the
Company's mortgage servicing rights were sold in December 1995
for a total of $2,317,700. The Company intends to sell the
balance of its mortgage servicing rights in 1996. Such
disposition is not expected to result in a significant gain or
loss. The Company has repositioned its mortgage banking
operation to originate residential mortgage loans and sell the
servicing right to other mortgage banking companies.
Loan origination fees increased to $596,941 for 1995
from $319,146 in 1994. This category includes fees earned in
connection with making mortgage loans and net profit or loss
from sales of such loans to investors.
Interest income increased to $362,906 for 1995 from
$156,015 for 1994, due to an increase in the Company's
interest earning assets principally as a result of
distributions from First Highpoint and Blowing Rock; an
increase in the volume of mortgage loans originated for resale
on which, in some instances, the Company earns interest
income; and a change in the way the Company funds mortgage
loans originated for resale.
During 1995, the Company relied heavily on its own
cash to fund mortgage loans originated for resale and earned
interest on mortgages prior to completing the sale of the
investors. In 1994, the Company relied more heavily on its
"warehouse facility" to fund mortgage loans originated for
resale. Under the terms of the "warehouse facility," the
Company foregoes both interest income on mortgage loans
originated for resale and virtually all interest expense,
since the provider of such facility earns interest income on
the mortgage loans prior to completing the sale thereof to
investors. In addition to utilizing its own cash and the
"warehouse facility," the Company funds mortgage loans
originated for resale by borrowing from its "credit facility."
When the Company uses its own cash or the "credit facility" it
earns interest income on the mortgage loans until the time of
completing the sale thereof to investors. The Company incurs
interest expense only when using the "credit facility."
Investment income increased to $1,083,884 for 1995
from $380,962 for 1994. This category includes: (1) net profit
or loss from investing in futures, puts, calls, municipal
bonds, equities and other securities activities including
participation in an investment partnership; (2) receipts
pursuant to a settlement agreement on a receivable which had
been fully reserved in a prior period; and (3) the gain on the
sale of stock in a public company received in connection with
the sale of the Company's interest in a joint venture in a
prior period.
Other income increased to $273,239 for 1995 from
$102,323 for 1994, largely as a result of the collection of an
item which was previously considered uncollectible. This
category also consists of sundry fees and revenues earned in
connection with the Company's mortgage banking business other
than loan servicing or origination fees.
Gain on the sale of mortgage servicing rights
increased to $379,705 for 1995 compared to $93,873 for 1994.
The Company sold substantially all of its mortgage servicing
for approximately $2.3 million in 1995. In 1994, the Company
sold approximately $25 million of mortgage servicing rights
for approximately $300,000. As noted above, the Company is
exiting the mortgage servicing business as a separate
activity. The gain from the sale of mortgage servicing rights
in 1994 had been included in "other income" in the Company's
consolidated statement of operations for 1994. The Company
expects to sell the balance of its mortgage servicing rights
in early 1996. Such disposition is not expected to result in a
significant gain or loss.
Total expenses increased to $4,980,179 for 1995 from
$4,025,247 for 1994.
Compensation and related costs increased to
$2,678,293 for 1995 from $2,142,891 for 1994. The increase is
due principally to the accrual of an incentive bonus relating
to the profit from the Company's joint ventures; higher
commission payments to account executives as a result of
higher production; the hiring of additional processing staff
as a result of the increase in mortgage loan originations; and
payroll incurred in connection with the Company's new business
of arranging viatical settlements.
Occupancy costs increased to $423,321 for 1995 from
$380,773 for 1994. This increase is due principally to a
payment made when the Company exercised its right to cancel
the lease on its executive offices, effective February 29,
1996. The Company is negotiating a new lease on the same
space, and it expects that such new lease will be made on more
favorable terms. The landlord has permitted the Company to
remain in possession of the premises at the recently
negotiated, lower rent pending the finalization of a new
lease.
Amortization of mortgage servicing rights decreased
to $361,422 for 1995 from $467,093 for 1994. The carrying
amount of purchased servicing rights must be amortized over
the period of the estimated future net servicing income
associated therewith. The Company reviews the carrying amount
of each portfolio for possible impairment. If estimated future
servicing costs exceed revenues, the Company will recognize a
loss equal to any excess and future amortization expense will
be adjusted accordingly. With its withdrawal from mortgage
servicing as a separate activity, the Company will no longer
have a mortgage servicing portfolio to amortize. Since the
Company intends to sell the mortgage servicing rights on loans
it originates in the future either to the purchaser of such
loans or to third parties in independent transactions,
management believes that Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights,"
effective for fiscal years beginning after December 15, 1995,
will not have a material effect on the Company's financial
statements. The Company expects to dispose of the balance of
its mortgage servicing rights during the early part of 1996.
General and administrative expenses increased to
$905,145 for 1995 from $692,296 for 1994. This increase was
due principally to greater activity in the Company's loan
origination business; a loss reserve relating to mortgage
foreclosures; an increase in insurance coverage; and expenses
incurred in the viatical settlement business.
Professional fees and litigation settlements
increased to $605,371 for 1995 from $311,846 for 1994. This
increase was due principally to the settlement of certain
litigation as well as the provision of an additional
contingency reserve for outstanding litigation and the
Internal Revenue Service's audit of the Company's tax returns
for the years 1985 through 1989.
Interest expense decreased to $6,627 for 1995 from
$30,348 principally as a result of greater utilization of the
Company's own cash to fund mortgage loans originated for
resale and limited use of its revolving credit line for daily
operations of its mortgage banking business.
On a pre-tax basis, the Company had a profit of
$1,222,280 for 1995 compared with a loss of $1,082,201 for
1994. In 1995, the Company had a tax expense of $37,611
compared to a tax benefit of $32,457 for 1994. These items
consist solely of state and local taxes and various
adjustments. For Federal income tax purposes, as of December
31, 1995, the Company has net operating loss carryforwards of
approximately $10,200,000 available to reduce future taxable
income. These carryforwards expire in the years 2006 through
2009.
The Company's net income for 1995 was $1,184,669
compared with a net loss of $1,049,744 for 1994. On a per
share basis, the net income was $.20 for 1995 compared with a
net loss of $(.18) for 1994. Income per share for 1995 is
computed based on the weighted average number of 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 for 1994, because the
effect of their inclusion would be antidilutive. The number of
shares used in the computations were 5,820,800 in 1995 and
5,997,171 in 1994.
Inflation
---------
Inflation may affect the Company in certain areas of
both its merchant banking and mortgage banking activities.
Changes in interest rates typically follow actual or expected
changes in the inflation rate. Accordingly, interest rates
usually increase during periods of high inflation and decrease
during periods of low inflation. The volume of loan
originations usually increases during periods of low interest
rates and decreases during periods of high interest rates.
The Company has interests in two joint ventures which
developed and now operate manufacturers outlet shopping
centers. One joint venture has a mortgage loan with a variable
interest rate equal to Citibank's six-month LIBOR rate plus
3.10%. The interest rate resets on March 1 and September 1
each year until maturity on May 1, 2002. The maximum interest
rate is 13.5375% under the terms of the loan. The current rate
through August 31, 1996 is 8.3%.
Virtually all of the leases at the two shopping
centers require tenants to pay a proportionate share of normal
operating expenses including taxes and insurance with respect
to their premises as well as for common areas. Similarly, most
leases provide for percentage rents in excess of specified
targets. Percentage rent based on increasing retail sales
attributable to inflation alone would generate additional cash
flow. Furthermore, most leases have an initial term of five or
fewer years, so increases in base rents are possible. Many
tenants have renewal options providing for higher rent based
on changes in the Consumer Price Index. Each venture would be
responsible for any applicable increased costs associated with
structural repairs or vacancies.
As with all real estate projects, however, there is
no assurance that rents can be increased quickly enough, while
maintaining a high occupancy level, to mitigate escalating
operating costs as well as necessary capital repairs and
improvements.
B. Liquidity and Capital Resources
Management of the Company believes that funds
generated from operations, its credit and warehouse
facilities, working capital line and cash distributions from
joint ventures, supplemented by its available assets, will
provide it with sufficient resources to meet all present and
reasonably foreseeable future capital needs. A significant
portion of the Company's assets are readily convertible into
cash.
The Company invests excess funds in liquid, short-
term financial instruments in order to maximize its current
cash return with minimum interest rate risk, while preserving
the ability to move quickly in funding attractive merchant
banking ventures. Such investments include U.S. Government
obligations, commodity futures contracts and money market
funds. Additionally, since commencing the mortgage loan
origination business, the Company may use its own cash to
carry a portion of its inventory of mortgage loans originated
for resale. Prior to funding any loans, the Company procures
firm commitments from investors to purchase such loans.
Fifteen days is the typical time between funding a mortgage
loan and receiving payment from an investor.
The Company's primary financing needs are in its
mortgage banking activities. In addition to its own cash
resources, the Company meets its mortgage funding requirements
by borrowing the necessary amounts from a $2 million "credit
facility" maintained with a savings bank. After funding an
individual loan, the Company can replenish its cash position
or available borrowing capacity under the credit facility by
utilizing a separate, $10 million mortgage "warehouse
facility." The Company can draw down up to 98% of the face
amount of an individual mortgage loan from the "warehouse
facility." This facility is replenished from the purchase
price paid by the investor who had committed to purchase such
loan.
The Company also has a $350,000 revolving credit line
with the bank which provides the "warehouse facility." This
line carries interest at prime plus 1%. It can be used only in
connection with the Company's mortgage banking activities.
This revolving credit line expires on April 1, 1996. The
Company is in the process of renegotiating this credit line.
In connection with its interests in real estate, the
Company uses separate subsidiaries for each venture. The
Company utilizes the equity method of accounting for its
interests in real estate joint ventures. Accordingly, the
assets and liabilities of such ventures are not included in
the Company's consolidated balance sheets.
The two operating real estate projects in which the
Company is a co-venturer, currently have strong occupancies
and positive cash flow. Cash maintained by each partnership,
supplemented with cash flow from operations, should be
sufficient to cover all operating costs and debt service
requirements of each venture, so that additional cash
contributions from the Company or its co-venturers would not
be necessary. Facts and circumstances, however, are subject to
change for reasons beyond the Company's control. Based on
current estimates, the Company expects to continue to receive
cash distributions from its real estate joint venture
activities during 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. The
lender charged an extension fee which was paid as follows: (1)
$15,000 at the time the extension was consummated; (2) $15,000
on April 1, 1994; and $33,818 (an amount equal to the product
of the outstanding principal balance $4,609,079 multiplied by
.0075) on April 1, 1995. Regular amortization is determined on
a 20-year schedule for the first year and then on a 15-year
self-liquidating basis. Additional amortization payments equal
to 25% of "excess cash flow" were paid during the second
12-month period. Thereafter, 50% of "excess cash flow" is due
as additional amortization. The loan matures on April 1, 1997.
In April 1995, the Company's other real estate joint
venture refinanced the mortgage loan on its project. The
principal amount of the new, nonrecourse loan is $6,550,000;
the interest rate equals Citibank's six-month LIBOR rate plus
3.10% and the interest rate resets each September and March;
the maximum interest rate is 13.5375%; 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 interest rate had been 9.5375% through August 31,
1995 and 9.0063% from September 1, 1995 through February 29,
1996. The principal balance of the refinanced loan was
$3,757,828. The proceeds from refinancing, net of expenses
including points, fees, title insurance, escrows, etc., was
approximately $2.5 million. The Company received a
distribution from the joint venture of approximately $2.2
million.
Prior to the distribution of the net proceeds from
refinancing, the Company received a preferred return equal to
10% of its original capital contribution. Distributions from
sales or refinancing proceeds were to be applied, pursuant to
the partnership agreement, first to the Company to pay any
preferred return due and then in an amount equal to the
Company's original capital contribution. The Company received
55% of cash distributions in excess of the preferred return.
Since the Company recovered its entire original capital
contribution, it will no longer receive a preferred return. If
the project is sold or refinanced in the future, the Company
will receive 70% of distributable net proceeds.
Although the venture's outstanding debt was increased
substantially, at current interest rates, monthly debt service
decreased slightly because the old loan required monthly
principal payments of $40,000 through its maturity in July
1995. In addition to principal and interest payments, debt
service for the new loan includes contributions to various
reserve accounts. The funds from such reserve accounts may be
used, in accordance with the loan agreement, to offset future
expenses, if any, for structural repairs, tenant improvements,
leasing commissions, and interest expense.
The carrying amounts reflected on the Company's
consolidated balance sheet for its various joint venture
interests is determined in accordance with the equity method
of accounting. Such carrying amounts may not be representative
of the realizable value on a sale of those interests.
Management reviews the carrying amount of each venture to
determine if an adjustment for any impairment other than a
temporary decline is required. If management believes in good
faith that any impairment is other than temporary, a loss
provision equal to such amount will be charged against the
Company's consolidated results of operations.
Cash distributions from joint ventures are reflected
in investing activities in the Company's consolidated
statements of cash flows. Equity contributions to joint
ventures as well as any advances to joint ventures also are
reflected in investing activities in the Company's
consolidated statements of cash flows.
While the Company believes that currently available
funds will provide it with sufficient resources to meet all
present and reasonably foreseeable future capital needs, the
Company may seek various forms of credit in order to finance
its merchant banking, mortgage banking or other activities in
the future. The Company does not have any material commitments
for capital expenditures as of December 31, 1995.
The Company is a defendant in various lawsuits.
Although the Company has reached settlements in some
instances, an unfavorable result in those remaining could have
a significant adverse effect upon the Company's liquidity and
capital resources.
Item 7. Financial Statements.
The Company's financial statements to be filed
hereunder follow, beginning with page F. Following such
financial statements, are the financial statements for each of
the operating real estate joint ventures in which the Company
is a joint venturer.
<PAGE>
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND DECEMBER 31, 1994
<PAGE>
Richard A. Eisner & Company, LLP
- - --------------------------------------------------------------------------------
Accountants & Consultants
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Helmstar Group, Inc.
New York, New York
We have audited the consolidated balance sheet of Helmstar Group, Inc.
and subsidiaries as at December 31, 1995, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the two-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1995 and 1994 financial statements of the real
estate joint ventures described in Note B. The Company's equity in these joint
ventures aggregated $1,324,024 at December 31, 1995 and they account for
$1,939,088 and $339,317 of income included in income (loss) before taxes for the
years ended December 31, 1995 and December 31, 1994, respectively. The financial
statements of these entities were audited by other auditors whose reports have
been furnished to us, and our opinion insofar as it relates to these entities is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements enumerated above present fairly, in all material
respects, the consolidated financial position of Helmstar Group, Inc. and
subsidiaries at December 31, 1995, and the consolidated results of their
operations and their consolidated cash flows for each of the years in the
two-year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As described more fully in Note G to the consolidated financial
statements, the Company was a defendant in various lawsuits, some of which have
been settled during the year ended December 31, 1995.
/s/Richard A. Eisner & Company, LLP
New York, New York
February 28, 1996
With respect to Note G[2]
March 25, 1996
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 1995
A S S E T S
-----------
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 1,358,730
Marketable securities (Note A). . . . . . . . . . . . . . . 3,805,767
Joint ventures including advances (Notes A and B) . . . . . 1,324,023
Mortgage servicing rights - net of accumulated
amortization of $1,371 (Note A). . . . . . . . . . . . . 46,886
Mortgage loans held for sale (Notes A and C). . . . . . . . 1,541,640
Due from mortgage investors (Notes A and C) . . . . . . . . 52,179
Furniture, equipment and leasehold improvements - at
cost, less accumulated depreciation and amortization
of $363,901 (Note A) . . . . . . . . . . . . . . . . . . 203,373
Other assets (Note F) . . . . . . . . . . . . . . . . . . . 1,654,068
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . $ 9,986,666
===========
L I A B I L I T I E S
---------------------
Notes payable (Note C). . . . . . . . . . . . . . . . . . . $ 943,743
Accrued expenses and other liabilities (Note A) . . . . . . 1,608,193
-----------
Total liabilities . . . . . . . . . . . . . . . . 2,551,936
-----------
Commitments, contingencies and other matters (Notes B, F, G, H and I)
STOCKHOLDERS' EQUITY
--------------------
(Note E)
Common stock - authorized 10,000,000 shares,
par value $.10; issued 6,749,600 shares. . . . . . . . . 674,960
Paid-in surplus . . . . . . . . . . . . . . . . . . . . . . 14,984,510
(Accumulated deficit) . . . . . . . . . . . . . . . . . . . (5,319,638)
T o t a l . . . . . . . . . . . . . . . . . . . . 10,339,832
Less treasury stock, at cost - 1,203,227 shares in 1995 . . (2,905,102)
Total stockholders' equity. . . . . . . . . . . . 7,434,730
-----------
T O T A L . . . . . . . . . . . . . . . . . . . . $ 9,986,666
===========
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1995 1994
---- ----
Revenues:
Profit from joint ventures (Note B) . . . . $1,939,087 $ 339,317
Financial consulting fees . . . . . . . . . 766,500 599,700
Loan servicing fees (Notes A and J) . . . . 800,197 951,710
Loan origination fees (Note A). . . . . . . 596,941 319,146
Interest income . . . . . . . . . . . . . . 362,906 156,015
Investment income . . . . . . . . . . . . . 1,083,884 380,962
Other income. . . . . . . . . . . . . . . . 273,239 102,323
Gain on sale of mortgage servicing rights
(Note J). . . . . . . . . . . . . . . . . 379,705 93,873
--------- ---------
Total revenues . . . . . . . . . . . 6,202,459 2,943,046
--------- ---------
Expenses:
Compensation and related costs. . . . . . . 2,678,293 2,142,891
Occupancy cost. . . . . . . . . . . . . . . 423,321 380,773
Amortization of mortgage servicing rights . 361,422 467,093
General and administrative. . . . . . . . . 905,145 692,296
Professional fees and provision for
contingencies and settlements . . . . . . 605,371 311,846
Interest. . . . . . . . . . . . . . . . . . 6,627 30,348
--------- ---------
Total expenses . . . . . . . . . . . 4,980,179 4,025,247
--------- ---------
Profit (loss) before taxes . . . . . . . . . . 1,222,280 (1,082,201)
Income tax provision (benefit) (Note D). . . . 37,611 (32,457)
--------- ---------
NET INCOME (LOSS). . . . . . . . . . . . . . . $1,184,669 $(1,049,744)
========== ===========
Net income (loss) per common share (Note A). . $.20 $(.18)
========== ===========
Weighted average number of
common shares outstanding . . . . . . . . . 5,820,800 5,997,171
========== ===========
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ Paid-in (Accumulated --------------
Shares Amount Surplus Deficit) Shares Amount Total
--------- ------------ ------------ ------------ ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1,
1994 .................. 6,749,600 $ 674,960 $ 14,984,510 $ (5,454,563) 744,105 $ 2,494,280 $ 7,710,627
Treasury stock acquired 39,800 24,643 (24,643)
Net (loss) ............ (1,049,744) (1,049,744)
--------- ------------ ------------ ------------ ------- ------------ ------------
Balance - December 31,
1994 .................. 6,749,600 674,960 14,984,510 (6,504,307) 783,905 2,518,923 6,636,240
Treasury stock acquired 419,322 386,179 (386,179)
Net income ............ 1,184,669 1,184,669
--------- ------------ ------------ ------------ ------- ------------ ------------
BALANCE - DECEMBER 31,
1995 .................. 6,749,600 $ 674,960 $ 14,984,510 $ (5,319,638) 1,203,227 $ 2,905,102 $ 7,434,730
========= ============ ============ ============ ========= ============ ============
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . $ 1,184,669 $(1,049,744)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . 456,722 561,671
Share of (profit) from joint ventures less
distributions. . . . . . . . . . . . . . . . . . . (281,299) (339,317)
Realized (gain) on sale of joint venture . . . . . . (1,276,267)
Share of loss from other investments . . . . . . . . 214,025
Realized (gain) on sale or disposal of investments . (325,999) (115,898)
Unrealized (gain) from trading securities. . . . . . (27,523)
(Gain) on sale of mortgage loans held for sale . . . (379,505) (93,873)
Loss on sale of fixed assets . . . . . . . . . . . . 1,912
Changes in operating assets and liabilities:
Decrease (increase) in mortgage loans held for
sale . . . . . . . . . . . . . . . . . . . . . . (1,511,640) 723,450
Decrease in due from mortgage investors. . . . . . 2,375 214,009
(Purchases) of trading securities. . . . . . . . . (3,541,756)
Sales of trading securities. . . . . . . . . . . . 1,456,610
(Increase) in other assets . . . . . . . . . . . . (907,900) (425,036)
Increase (decrease) in accrued expenses and
other liabilities. . . . . . . . . . . . . . . . 97,247 (226,520)
--------- ---------
Net cash (used in) operating activities. . . . . (5,052,354) (537,233)
--------- ---------
Cash flows from investing activities:
(Purchase) of investment securities. . . . . . . . . . . (1,686,692)
Sale of investment securities. . . . . . . . . . . . . . 508,907 70,964
(Purchase) of interest and advances to joint ventures. . (500)
Distributions from joint ventures - refinancing. . . . . 2,227,892 392,190
Proceeds from sale of interest in joint venture. . . . . 1,681,622
Proceeds from sale of other investment . . . . . . . . . 723,125 561,130
Acquisition of mortgage servicing rights . . . . . . . . (96,357) (138,665)
Proceeds from sale of mortgage service rights. . . . . . 2,144,763 320,994
(Purchase) of fixed assets . . . . . . . . . . . . . . . (18,637) (28,325)
Proceeds from sale of fixed assets . . . . . . . . . . . 8,752
--------- ---------
Net cash provided by investing activities. . . . 5,493,375 1,177,788
--------- ---------
Cash flows from financing activities:
Proceeds (payments) from short term borrowings . . . . . 564,264 (716,655)
(Purchase) of treasury stock . . . . . . . . . . . . . . (386,179) (24,643)
--------- ---------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . 178,085 (741,298)
--------- ---------
<PAGE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Continued
Year Ended December 31,
-----------------------
1995 1994
---- ----
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS. . . . 619,106 (100,743)
Cash and cash equivalents at beginning of year. . . . . . . 739,624 840,367
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR. . . . . . . . . . $ 1,358,730 $ 739,624
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $ 6,627 $ 30,348
Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 35,828 19,455
</TABLE>
Attention is directed to the foregoing accountants' report and to the
accompanying notes to financial statements.
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(NOTE A) - The Company and its Significant Accounting Policies:
The Company is in the merchant banking business and it has an interest
in two operating real estate joint ventures. In 1991, it entered the mortgage
servicing business through the acquisition of Citizens Mortgage Service Company
("Citizens").
During 1992, Citizens began originating mortgage loans and became a
full service mortgage banker. During 1995, Citizens sold substantially all of
its mortgage servicing portfolio and will concentrate on mortgage loan
originations.
[1] Principles of consolidation:
The accompanying consolidated financial statements include the
accounts of Helmstar Group, Inc. and its wholly-owned subsidiaries (the
"Company").
All significant intercompany balances and transactions have
been eliminated.
[2] Joint ventures and other investments:
Joint ventures, with a 20% to 50% voting interest and limited
partnership investments in investment partnerships are accounted for under the
equity method. If management believes in good faith that the fair value of an
interest in a joint venture or limited partnership interest is less than the
carrying amount thereof, determined in accordance with the equity method of
accounting, and such decline in value is other than temporary, the Company will
establish a loss reserve equal to the amount of such decline. The carrying
amount of this asset is presented net of any reserve in the Company's
consolidated balance sheet. Each interest is reviewed separately,
notwithstanding that all interests are combined for financial statement
presentation purposes.
[3] Mortgage servicing rights:
Prior to the sale of substantially all of its mortgage
servicing portfolio, the Company capitalized an amount equal to the lesser of
the cost of bulk servicing rights acquired or the excess of the present value of
the estimated revenues over the present value of the estimated costs associated
with each portfolio acquired. The capitalized amount was amortized in proportion
to, and over the period of, estimated net servicing income.
When the Company sold mortgage loans and retained the
servicing rights, the gain or loss on such sales was adjusted to provide for
recognition of normal servicing fees over the estimated servicing lives of the
related mortgage loans. The adjustment equals the present value of the
difference between the actual servicing fee rate and the normal servicing fee
rate. Such adjustment is determined as of the date the mortgage loans are sold
(the day that mortgage loan documents are shipped to investors pursuant to
existing sales commitments). To the extent that the actual servicing fee rate
exceeds the normal servicing fee rate, a receivable results and such receivable
was realized through receipt of the actual servicing fee rate. If the normal
servicing fees were expected to be less than estimated servicing costs over the
estimated lives of the loans, the expected loss also was recognized as of the
date of sale.
The Company reviewed the carrying amount of each portfolio of
mortgage servicing rights for possible impairment. If the estimated future
servicing costs exceeded the estimated future servicing revenues, the Company
recognized a loss equal to such excess, and reduced its future amortization
expense accordingly.
Purchased mortgage servicing rights transactions as at
December 31, 1995 are as follows:
Mortgage servicing rights:
Beginning of period. . . . . $ 2,077,108
Purchases - net. . . . . . . 96,357
Sales. . . . . . . . . . . . (1,765,218)
Amortization . . . . . . . . (361,361)
-----------
Balance, end of year. . . . . . $ 46,886
===========
[4] Mortgage loans held for sale:
Mortgage loans held for sale are reported at the lower of cost
or fair value (as determined in good faith by management). The aggregate method
is used whereby unrealized losses are offset by unrealized gains.
The Company recognizes gain or loss on the sale of mortgage
loans on the day of which the mortgage loan documents are shipped to investors
pursuant to existing sales commitments.
[5] Deferred loan fees:
Loan origination fees and direct loan origination costs are
deferred and recognized as income or expense when loans are sold to the
permanent investors (the day mortgage loan documents are shipped).
[6] Depreciation and amortization:
Furniture, fixtures and equipment are being depreciated using
both straight-line and accelerated methods over estimated lives of five to seven
years. Leasehold improvements are amortized on a straight-line basis over the
term of the lease.
[7] Statements of cash flows:
For the purpose of the statements of cash flows, the Company
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents.
[8] Income (loss) per share:
Income (loss) per share is computed based upon the weighted
average number of common shares outstanding during each year. Common share
equivalents relating to the Company's incentive compensation plan have been
excluded from the computation in 1994 as they are antidilutive.
[9] Change in accounting principle and recently
issued accounting pronouncements:
In 1993 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), which the Company
adopted in 1994. SFAS 115 requires, among other things, the classification of
investments in one of three categories based on the Companies' intent: trading,
available-for-sale and held-to- maturity, with trading and available-for-sale
securities carried at fair value and held-to-maturity securities carried at
amortized cost.
The cumulative effect of adopting SFAS 115 is considered
immaterial.
The Company has investments in marketable securities
consisting of U.S. T-Bills and municipal securities. The U.S. T-Bills mature in
less than one year. The municipal securities are bought and held principally for
the purpose of selling them in the near future and are carried at market value.
U.S. T-Bills are classified as securities that are held to maturity.
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), and Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 121 requires, among
other things, that entities identify events or changes in circumstances which
indicate that the carrying amount of an asset may not be recoverable. SFAS 123
requires, among other things, that companies establish a fair value based method
of accounting for stock-based compensation plans.
The Company does not expect that the financial statement
effects of adopting SFAS 121 and SFAS 123 will be material.
[10] Financial instruments with off-balance sheet risk:
In the normal course of business, the Company enters into
transactions in derivative financial instruments which contain off- balance
sheet risk whereby changes in market values may be in excess of amounts
recognized in the financial statements.
Substantially all the Company's cash and securities positions
are deposited with clearing brokers for safekeeping purposes. The brokers are
highly capitalized and are members of major securities exchanges.
(NOTE B) - Joint Ventures:
[1] Joint ventures as at December 31, 1995 consist of the
following:
Real estate joint ventures - 50% voting interest with majority
financial interest in partnerships:
Blowing Rock
Outlet Partners Shopping Center $ 8,518
Nags Head Outlet
Partners Shopping Center 1,315,005
Other 500
----------
Total real estate joint
ventures $1,324,023
==========
[2] Summary combined financial information of the real estate joint
ventures as at December 31, 1995, are as follows:
Operating properties. . . . . . . . $11,765,488
Other assets. . . . . . . . . . . . 400,583
-----------
Total assets. . . . . . . 12,166,071
-----------
Notes payable . . . . . . . . . . . 10,806,790
Other liabilities . . . . . . . . . 218,591
-----------
Total liabilities . . . . 11,025,381
-----------
Net assets. . . . . . . . $ 1,140,690
===========
Company's investment. . . . . . . . $ 1,324,023 (b)
===========
Year Ended December 31,
-----------------------
1995 1994
---- ----
Rental income. . . . . . . . $2,176,689 $ 3,170,786
Operating expenses . . . . . (830,730) (1,639,453)
Other expense. . . . . . . . (876,476) (1,063,995)
---------- -----------
Net income . . . . $ 469,483 $ 467,338
========== ===========
Company's share. . . . . . . $ 334,551 $ 339,317
Adjustment for distribution
in excess of basis. . . . 328,269
---------- -----------
662,820 339,317
Company's share of gain on
sale of assets of a
joint venture (a) . . . . 1,276,267
---------- -----------
Profit from joint ventures . $1,939,087 $ 339,317
========== ===========
(a) First Highpoint Limited Partnership, a partnership in
which the Company had a majority financial interest,
sold a 140 unit apartment project, located in Plano,
Texas, to an insurance company. The all cash sale
closed on February 22, 1995.
(b) During 1995 the Company received extraordinary
distributions, as defined, in excess of basis of
investment in joint venture due to a refinancing of
the joint venture's debt.
[3] A reconciliation of the Company's investment in real estate joint
ventures as at December 31, 1995 is as follows:
Balance, beginning of year. . . . . $ 3,675,971
Net income. . . . . . . . . . . . . 662,820
Gain on sale of assets of a joint
venture. . . . . . . . . . . . . 1,276,267
Distributions . . . . . . . . . . . (4,291,035)
----------
Balance, end of year. . . . . . . . $ 1,324,023
===========
[4] 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:
For the
Year Ended
December 31,
1994
------------
Rental income . . . . . . . . . . . $2,046,469
Operating expenses. . . . . . . . . (871,647)
Other expense . . . . . . . . . . . (711,505)
------------
Net income. . . . . . . . $ 463,317
==========
Company's share of profit from
joint ventures . . . . . . . . . $ 335,297
==========
(NOTE C) - Notes Payable:
Notes payable as at December 31, 1995 consist of the following:
Advance under a $350,000 line of credit collateralized by all future
mortgage servicing fees and bears interest at 1%
above the prime rate. Expires April 1996 (a) $350,000
Advances under a securities brokerage account
agreement, the terms of which provide that
securities held by the brokerage firm
collateralize such advances (b) . . . . . . . 593,743
--------
T o t a l. . . . . . . . . . . . . . . $943,743
========
(a) The line of credit includes covenants requiring that the
Company maintain a mortgage servicing portfolio with mortgage
principal of at least $200,000,000 (Note J). The bank waived
this requirement through March 31, 1996.
(b) Under the warehouse line of credit, the Company may borrow the
lesser of $2,000,000 or 98% of the sum of the mortgage loans
held for sale and amounts due from mortgage investors.
(NOTE D) - Income Taxes:
The Company and its subsidiaries file consolidated federal income tax
returns.
The provisions (benefits) for income taxes consist of state and local
taxes of $37,611 and ($32,457) for the years ended December 31, 1995 and
December 31, 1994, respectively.
At December 31, 1995 the Company has net operating loss carryforwards
for federal income tax purposes of approximately $10,211,000, which expire from
2006 through 2009. The difference between the accumulated loss for financial
reporting purposes and that for federal income tax purposes is primarily due to
a provision which has been established for litigation losses which is currently
not deductible for tax purposes.
The Company has not recorded the $3,700,000 benefit from either its net
operating loss carryforward of $3,471,000 or litigation provision of $229,000,
because realization of the benefit is uncertain and therefore a valuation
allowance (decreased by approximately $500,000 for 1995) has been provided.
The Internal Revenue Service ("IRS") is examining the Company's federal
income tax returns for the years 1985 through 1989. The IRS has proposed certain
adjustments to the returns for possible additional income tax due in the amount
of approximately $958,000 (exclusive of interest and penalties.) The Company
does not agree with the proposed adjustments and has engaged tax counsel to
protest them. (See Note F[4].)
The effective tax rate varied from the statutory federal income tax
rate as follows:
For the
Year Ended
December 31,
------------
1995 1994
---- ----
Statutory rate . . . . . . . . . . . . 34.0 % 34.0 %
State and local taxes, net of federal
income tax. . . . . . . . . . . . . 2.0 (3.0)
Nondeductible expenses . . . . . . . . 4.8
Nonutilization of net operating loss
carryforwards . . . . . . . . . . . (34.0)
Decrease of valuation allowance. . . . (37.7)
----- -----
Effective rate . . . . . . . . . . . . 3.1 % (3.0)%
===== =====
(NOTE E) - Incentive Compensation Plan:
Under the Company's 1990 Incentive Compensation Plan (the "Plan"), the
Company has reserved an aggregate of 500,000 shares of its common stock for
issuance to officers and other key employees in the form of incentive or
nonqualified stock options, stock appreciation rights, or restricted stock
awards. Incentive stock options granted under the Plan must be exercisable at a
price per share not less than 100% (110% in the case of a 10% stockholder) of
the fair market value of the Company's common stock on the date of grant.
Options cannot be exercised after ten years (five years in the case of a 10%
stockholder) from the date of grant. Nonqualified stock options cannot be
exercised prior to one year or after ten years from the date of grant. During
1992, options to purchase 150,000 shares were granted at an exercise price of
$.5625 per share. These are the only options outstanding, 75,000 of which are
exercisable, as of December 31, 1995.
(NOTE F) - Commitments, Contingencies and Other Matters:
[1] In 1995, the Company, per the terms of its lease, paid a penalty of
$70,000 to cancel the lease on its corporate headquarters in early 1996. The
Company is currently in the process of negotiating a lease on the same space.
Rental expense was $319,500 and $348,000 for the years ended December 31, 1995
and December 31, 1994, respectively.
Minimum future annual rental payments are as follows:
1996 . . . . . . . . . . . . . $127,000
1997 . . . . . . . . . . . . . 66,000
1998 . . . . . . . . . . . . . 16,500
[2] The Company has a Retirement Savings Plan for its employees,
pursuant to Section 401(k) of the Internal Revenue Code. The Company matched 25%
of employee contributions for the entire year 1994 and a portion of the 1995
year. Employees vest immediately in their own and employer matching
contributions. The Company's contribution to the plan in 1995 and 1994 was
approximately $9,300 and $46,000, respectively.
[3] During 1995 and 1994 consulting fees from one financial institution
accounted for approximately 12% and 20%, respectively, of total revenue.
[4] In certain instances the Company provided reserves for unsettled
lawsuits and other matters when the potential contingent liability could be
reasonably quantified and a negative outcome is probable. Provision for such
contingent liabilities are included in the Company's financial statements. When
the potential contingent liability could not be reasonably quantified and the
ultimate outcome presently cannot be determined, no provision for any liability
that may result has been made in the Company's financial statements.
(NOTE G) - Litigation:
[1] In June, July and August 1987 three separate class action lawsuits
were filed against the Company, certain current or former officers and directors
of the Company, and others in the U.S. District Court for the Eastern District
of Pennsylvania. The three cases, which have been consolidated by the
multidistrict panel for the purpose of discovery, were filed on behalf of
bondholders who purchased the City of Chester, Pennsylvania Resource Recovery
Revenue Bonds ("Chester Bonds"); City of East St. Louis, Illinois, Port
Facilities Development Revenue Bonds; and City of East St. Louis, Illinois
Resource Recovery Bonds.
Three additional independent bondholder actions were filed as separate
suits relating to Guam Economic Development Authority, Multifamily Mortgage
Revenue Bonds; County of St. Louis, Missouri, Multi-Family Housing Revenue
Bonds; and Chester Bonds. These actions were joined as "tag-along" actions in
the multidistrict litigation.
In January 1995, the Court granted defendants' motions for summary
judgment in all of the actions. Thereafter, the parties entered into a
class-wide settlement agreement. The settlement agreement was approved by the
Court in August 1995. The Company's share of the settlement costs have been
provided in the Company's consolidated financial statements. (See Note F[4].)
[2] In 1989, an arbitration was commenced by the senior managing
underwriters ("Claimants"), against syndicate members, including the Company
("Respondents"), of various Washington Public Power Supply System ("WPPSS") bond
syndicates that sold certain tax-exempt bonds to the public in a series of
offerings in the period 1978 through 1981.
In January 1992, the National Association of Securities Dealers'
Arbitration Panel determined the liability of the Respondents. The New York
State Supreme Court entered judgment on the award against the Company in October
1992. With the New York State Court of Appeals' denial of the Company's motion
for leave to appeal in September 1994, the judgment is final.
In a related matter, the Claimants assert that Respondents, including
the Company, are responsible for a share of costs in settling claims relating to
WPPSS bond underwritings which the Claimants could not recover from syndicate
members that were bankrupt, liquidated, dissolved or otherwise out of business.
The Claimants assert that the Company is liable for approximately $39,000 plus
interest thereon from August 14, 1992. The arbitration panel did not consider
whether solvent Respondents would have to bear such costs.
All matters relating to the Company's liability to Claimants were
settled in March 1996. Provision for the Company's liability previously had been
made in the Company's consolidated financial statements. (See Note F[4].)
[3] In July 1993, an action was commenced against multiple defendants,
including the Company, in the California Superior Court. The plaintiff asserts
numerous claims in connection with the issuance of Housing Authority of the
County of Riverside, Multi-Family Housing Revenue Bonds, Series 1985A ("Ironwood
Bonds"). The Company was the underwriter of the Ironwood Bonds.
This lawsuit had been transferred to the U.S. District Court for the
Central District of California. Certain claims against one defendant were
severed and transferred to the U.S. District Court for the Southern District of
Texas. The other claims, including those against the Company, were remanded to
the Superior Court of California, County of Riverside.
The plaintiff allegedly acquired an apartment project financed with the
proceeds of such bond issue from the original developer. The Housing Authority
sought indemnity from the plaintiff for expenses it allegedly incurred in
contesting the IRS' assertion that the Ironwood Bonds were not tax-exempt.
A cross-claim was filed against multiple defendants, including the
Company, by one co-defendant for indemnification and apportionment of fault. Two
other co-defendants filed a cross-complaint alleging claims in connection with
the Ironwood Bonds and another bond issue, Housing Authority of the County of
Riverside, Multi-Family Housing Revenue Bonds, Series 1985A ("Whitewater Bonds")
against multiple defendants, including the Company. By a standstill agreement
dated January 21, 1994, cross-claimants and certain parties, including the
Company, have agreed not to pursue cross-claims against one another at this
time.
The plaintiff seeks compensation and punitive damages as well as
indemnification and equitable relief. In four counts, two of which involve the
Company as well as other defendants, the plaintiff seeks compensatory damages
plus interest estimated to be no less than $5 million per count.
A status conference in this action has been continued until June 7,
1996. The Company believes that the action is without merit and is vigorously
defending its position. It is too early to assess the potential for, and the
amount of, any damage in connection with this lawsuit.
In October 1995, the United States Tax Court determined that interest
earned on the Ironwood Bonds and the Whitewater Bonds was not tax-exempt. The
petitioners, who are not related to the plaintiff in this litigation, have
appealed the Tax Court's decision to the United States Court of Appeals for the
Ninth Judicial Circuit.
[4] In October 1993, a class action was commenced in the New York State
Supreme court against the Company alleging that the Company routinely held more
funds in its mortgage escrow accounts than allowed under law or the homeowners'
mortgage contracts. These escrow accounts were maintained in connection with the
Company's mortgage servicing activities to pay taxes and insurance on behalf of
individual mortgagors. The Company believes its method of calculating required
escrow payments was in accordance with applicable rules and regulations in
effect during the period covered by this litigation.
In October 1995, the Court approved a class-wide settlement agreement.
The cost of the settlement has been provided in the Company's consolidated
financial statements. (See Note F[4].)
[5] In June 1995, a second amended complaint was filed against multiple
parties, including the Company, in a case pending in the U.S. District Court,
District of Colorado. The plaintiff purchased bonds in a secondary market
transaction in August 1991. Such bonds allegedly were issued by the Industrial
Development Board of the Metropolitan Government of Nashville and Davidson for
the Woodlands Apartments Project. The plaintiff asserted claims for
misrepresentation, breach of contract, and federal securities law violations in
connection with the issuance of the bonds. The plaintiff contends that the IRS
notified it that the interest on the bonds was not tax-exempt. Allegedly, the
plaintiff paid the IRS $15,414.26 for additional tax and interest relating to
its 1991 tax liability and $36,828 for additional tax relating to its 1993 tax
liability. The plaintiff asserts it anticipates with reasonable certainty that
the IRS will assess additional tax of $33,480 plus interest and penalties for
1992. The plaintiff is seeking actual and punitive damages, costs, attorney fees
and other relief the Court deems just and proper.
In November 1994, one of the defendants filed a third party complaint
against the Company. This defendant, an alleged underwriter of the bonds,
asserts that it would be entitled to indemnification or contribution from the
Company if such defendant is adjudged to be liable to the plaintiff.
The Company has filed answers denying all claims. Factual discovery is
scheduled to end in May 1996. It is too early to assess the potential for, and
the amount of, any damages in connection with this lawsuit. (See Note F[4].)
[6] There are various claims against the Company with respect to
matters arising out of the ordinary conduct of its business. Outside counsel for
the Company has advised that at this time they cannot offer an opinion as to the
probable outcome of any of these matters. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the
Company's financial position or the results of operations.
(NOTE H) - Financial Information Relating to Industry Segments:
The Company's operations are classified into two principal
industry segments: merchant banking and mortgage banking.
Year Ended December 31,
-----------------------
1995 1994
---- ----
Revenues from unaffiliated customers:
Merchant banking . . . . . . . . . . $2,711,078 $ 935,045
Mortgage banking . . . . . . . . . . 2,094,400 1,594,103
Other corporate income . . . . . . . 1,396,981 413,898
---------- -----------
Total revenues. . . . . . . . $6,202,459 $ 2,943,046
========== ===========
Income (loss) from operations:
Merchant banking . . . . . . . . . . $1,437,920 $ (305,089)
Mortgage banking . . . . . . . . . . (349,200) (578,534)
---------- -----------
Income (loss) from operations 1,088,720 (883,623)
General corporate income (expenses) -
net. . . . . . . . . . . . . . . . . 133,560 (198,578)
---------- -----------
Income (loss) before taxes. . . . . . . $1,222,280 $(1,082,201)
========== ===========
Identifiable assets:
Merchant banking . . . . . . . . . . $1,324,023 $ 3,675,971
Mortgage banking . . . . . . . . . . 3,840,700 2,919,473
General corporate. . . . . . . . . . 4,821,943 1,931,221
---------- -----------
T o t a l. . . . . . . . $9,986,666 $ 8,526,665
========== ===========
In the normal course of business, the Company is a party to financial
instruments which have off-balance sheet risk. The Company's risk of accounting
loss due to the credit risks and market risks associated with these off-balance
sheet instruments varies with the type of financial instrument and principal
amounts and are not necessarily indicative of the degree of exposure involved.
Credit risk represents the possibility of a loss occurring from the failure of
another party to perform in accordance with the terms of a contract. Market risk
represents the possibility that future changes in market prices may make a
financial instrument more or less valuable.
(NOTE I) - Financial Instruments With Off-Balance Sheet Risk or Concentration
of Credit Risk:
[1] The following table summarizes the Company's significant financial
instruments at December 31, 1995:
Commitments to extend credit for
mortgage loans. . . . . . . . . . . $ 3,123,400
Commitments to sell mortgage loans . . 2,757,200
Forward contracts to sell mortgage
loans . . . . . . . . . . . . . . . 10,071,000
The Company's predominant focus in mortgage loan origination has been
to finance residential real estate in greater Philadelphia.
Foreclosure losses on mortgage loans serviced on a nonrecourse basis
usually are the responsibility of the permanent investor, as the owner of the
loans, not the Company, as mortgage servicer. With respect to loans serviced on
a recourse basis, however, such losses usually are the responsibility of the
Company, as mortgage servicer. The Company, however, may have claims against
other parties for contribution or indemnification. The Company's maximum
liability in connection with servicing loans on a recourse basis is equal to the
unamortized principal balance of such loans plus related costs of collection and
any other unrecovered advances.
In the normal course of its mortgage banking activities, the Company
enters into both optional and mandatory commitments to sell mortgage loans that
it originates. The Company commits to sell the loans at specified prices in a
future period ranging from 30 to 120 days from the date of commitment directly
to mortgage investors. Market risk is associated with these financial
instruments which result from movements in interest rates, and is reflected by
gains or losses on the sale of the mortgage loans determined by the difference
between the price of the loan and the price guaranteed in the commitment. In
certain instances, the Company is liable to certain investors for losses
incurred. Losses historically have been minimal.
[2] At December 31, 1995, the Company was long 100 muni indexes at fair
value, which approximates average fair value of $12,103,125, and short 71
treasury bond futures at fair value which approximates average fair value of
$8,625,281.
Net realized gains on these financial instrument transactions for the
year ended December 31, 1995 were $711,180.
(NOTE J) - Sale of Mortgage Servicing Rights:
Substantially all of the servicing rights were sold in December 1995
for a total of $2,317,700. The Company intends to sell any mortgage loan
servicing rights in 1996 which were not previously sold. The Company does not
expect a loss on this disposition.
<PAGE>
BLOWING ROCK OUTLET PARTNERS
FINANCIAL STATEMENTS AND AUDIT REPORT
December 31, 1995
<PAGE>
BLOWING ROCK OUTLET PARTNERS
CONTENTS
REPORT OF INDEPENDENT ACCOUNTANTS
BALANCE SHEET
STATEMENTS OF INCOME AND VENTURERS' EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
<PAGE>
Joseph Decosimo
and Company
Certified Public Accountants
A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP
- - --------------------------------------------------------------------------------
Private Companies Practice Section Member AICPA Division for CPA Firms
SEC Practice Section
REPORT OF INDEPENDENT ACCOUNTANTS
To the Co-Venturers
Blowing Rock Outlet Partners
Nashville, Tennessee
We have audited the accompanying balance sheet of Blowing Rock Outlet Partners
(a joint venture) as of December 31, 1995, and the related statements of income
and venturers' equity and cash flows for each of the two years in the period
ended December 31, 1995. These financial statements are the responsibility of
the joint venture's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Blowing Rock Outlet Partners as
of December 31, 1995, and the results of its operations and its cash flows for
each of the two years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.
/s/ Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
January 16, 1996
<PAGE>
BLOWING ROCK OUTLET PARTNERS
BALANCE SHEET
December 31, 1995
ASSETS
Land $ 1,658,000
Building and Improvements 5,065,701
Construction-In-Progress 8,579
Fixtures 7,551
-----------
6,739,831
Accumulated Depreciation (1,170,204)
-----------
5,569,627
Cash and Cash Equivalents 24,327
Receivables 1,655
Prepaid Expenses 71,102
Intangible Assets, net 201,815
-----------
TOTAL ASSETS $ 5,868,526
===========
LIABILITIES AND VENTURERS' DEFICIT
LIABILITIES
Note Payable $ 6,501,041
Accounts Payable and Deferred Revenue 30,949
Tenant Deposits 29,938
Due to Related Parties 39,742
State Income Taxes Payable 31,065
-----------
Total Liabilities 6,632,735
VENTURERS' DEFICIT ( 764,209)
-----------
TOTAL LIABILITIES AND VENTURERS' DEFICIT $ 5,868,526
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
BLOWING ROCK OUTLET PARTNERS
STATEMENTS OF INCOME AND VENTURERS' EQUITY
Years Ended December 31, 1995 and 1994
1995 1994
REVENUES
Rental Revenue $ 1,243,504 $ 1,168,446
--------- ---------
EXPENSES
Management Fees 62,175 58,422
Leasing Commissions 22,469 12,886
Professional Services 8,250 5,610
Common Area Maintenance, net of
recoveries from tenant 9,077 ( 11,774)
Landlord Repairs 15,425 15,865
Bad Debt Expense (Recoveries) ( 315) 17,581
Other 47 187
--------- ---------
117,128 98,777
--------- ---------
INCOME FROM OPERATIONS 1,126,376 1,069,669
--------- ---------
OTHER INCOME (EXPENSE)
Interest Income 7,262 5,338
Interest Expense ( 506,455) ( 318,283)
Depreciation ( 201,759) ( 202,057)
Amortization ( 49,851) ( 78,410)
State Income Tax ( 31,051) ( 37,795)
Real Estate Taxes ( 2,198) ( 4,358)
--------- ---------
( 784,052) ( 635,565)
--------- ---------
NET INCOME 342,324 434,104
VENTURERS' EQUITY - beginning of year 1,834,880 1,575,494
Distributions (2,941,413) ( 174,718)
--------- ---------
VENTURERS' EQUITY
(DEFICIT) - end of year $( 764,209) $ 1,834,880
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
BLOWING ROCK OUTLET PARTNERS
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 342,324 $ 434,104
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities -
Depreciation and Amortization 251,610 280,467
Bad Debt Expense (Recoveries) ( 315) 17,581
Changes in Operating Assets
and Liabilities -
Decrease (Increase) in -
Receivables 2,534 6,312
Prepaid Expenses 39,311 ( 45,709)
Deferred Leasing Fees ( 3,511) ( 13,179)
Increase (Decrease) in -
Accounts Payable and Deferred
Revenue 15,313 ( 24,699)
Accrued Interest 51,171 683
Tenant Deposits ( 3,409) ( 10,440)
Due to Related Parties 173 351
State Income Taxes Payable ( 7,287) 7,513
--------- ---------
Net Cash Provided by Operating
Activities 687,914 652,984
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures ( 34,825) ( 68,530)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Proceeds from Issuance of
Long-Term Debt 2,551,413 -
Repayment of Notes Payable ( 168,959) ( 445,000)
Distributions to Venturers (2,941,413) ( 174,718)
Loan Fees Paid ( 90,895) -
--------- ---------
Net Cash Used by Financing
Activities ( 649,853) ( 619,718)
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 3,236 ( 35,264)
CASH AND CASH EQUIVALENTS -
beginning of year 21,091 56,355
--------- ---------
CASH AND CASH EQUIVALENTS -
end of year $ 24,327 $ 21,091
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
BLOWING ROCK OUTLET PARTNERS
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
1995 1994
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During the Year for -
Interest $ 455,284 $ 317,600
Income Taxes $ 38,338 $ 30,282
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES
Issuance of Note Payable $ 6,550,000 $ -
Intangible Assets Paid at Closing ( 106,103) -
Prepaid Assets Paid at Closing ( 56,656) -
Interest Paid at Closing ( 78,000) -
Repayment of Note Payable
at Closing (3,757,828) -
----------- -----------
NET PROCEEDS FROM ISSUANCE OF
LONG-TERM DEBT $ 2,551,413 $ -
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
BLOWING ROCK OUTLET PARTNERS
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the joint venture
are as follows:
DESCRIPTION OF BUSINESS - Blowing Rock Outlet Partners is a joint venture
engaged in the business of renting retail space to manufacturers' outlet stores
in Watauga County, North Carolina.
RENTAL INCOME - Rent is reported as income over the lease term as it is earned.
Rent received from tenants in advance is accounted for as deferred revenue.
CASH EQUIVALENTS - The venture considers all money market accounts and highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Expenditures
for repairs and maintenance are charged to expense as incurred and additions and
improvements that significantly extend the lives of assets are capitalized. Upon
sale or other retirement of depreciable property, the cost and accumulated
depreciation are removed from the related accounts and any gain or loss is
reflected in operations.
Depreciation is provided on the straight-line method over the estimated useful
lives of the depreciable assets.
INTANGIBLE ASSETS - Developmental and other costs incurred before operations
commenced are capitalized as start-up costs. Initial and renewal leasing
commissions are amortized over the remaining lease periods. The cost of
intangible assets is amortized using the straight-line method over the following
estimated useful lives:
Years
Organization and Start-Up Costs 5
Deferred Leasing Fees 5
Loan Fees 7
INCOME TAXES - No provision for federal income taxes is reflected in the
financial statements since the tax effects of the venture's income or loss are
passed through to the individual venturer. State income taxes in the State of
North Carolina are paid by the venture on behalf of the venturers.
ESTIMATES AND UNCERTAINTIES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ORGANIZATION
Blowing Rock Outlet Partners was organized under the laws of the State of North
Carolina on June 10, 1988, for the purpose of acquiring, developing and
operating a shopping center in Watauga County, North Carolina. The two venturers
are Burrows, Hayes Company, Inc. (BHC) and Company Stores Management Corp.
(CSMC).
The joint venture agreement provides that net cash flow, as defined therein, is
allocated and distributed first to BHC up to the amount of the current year
preferred return and any unpaid preferred return from prior years. Any remaining
balance is allocated 55% to BHC and 45% to CSMC. The preferred return is equal
to 10% per annum of BHC's capital contribution of $1,449,000 less any
distributions in excess of the preferred return paid from sale or refinancing
proceeds. In April 1995, the joint venture refinanced the rental property and
BHC received a distribution from loan proceeds in excess of $1,449,000.
Accordingly, the joint venture no longer has to make a preferred return
allocation. All net cash flow is distributable 55% to BHC and 45% to CSMC.
Taxable income is allocated first to BHC to the extent of all distributions of
the preferred return for the current year and for all prior years, less all
prior allocations of taxable income relating to the preferred return
distributions made in previous years. Thereafter, taxable income is allocated
55% to BHC and 45% to CSMC.
INTANGIBLE ASSETS
Intangible assets consist of the following:
1995
Deferred Leasing Fees $ 39,977
Loan Fees 196,997
---------
236,974
Accumulated Amortization ( 35,159)
---------
$ 201,815
=========
NOTE PAYABLE
The note payable is a LIBOR plus 3.10% note collateralized by real estate and
the assignment of leases and rents. The interest rate is determined semiannually
as the lesser of LIBOR plus 3.10%, 13.5375% or the maximum legal rate. Monthly
payments are $55,757 including interest as of December 31, 1995, and are reset
semiannually to reflect changes in the interest rate. The remaining principal
balance and accrued interest are due May 1, 2002. The venture is also required
under the note agreement to make monthly payments totaling $3,500 to establish
reserves which may be drawn against under certain restrictions for interest
payments, leasing commissions and certain improvements and maintenance
expenditures.
The note is dated April 11, 1995, and the proceeds from this borrowing were used
to satisfy by direct payment at closing all remaining indebtedness under the
note payable to NationsBank of North Carolina.
Aggregate maturities of long-term debt for the five years subsequent to December
31, 1995, are as follows:
Year Ending
December 31, 1996 $ 97,123
December 31, 1997 $ 95,301
December 31, 1998 $ 104,248
December 31, 1999 $ 114,034
December 31, 2000 $ 124,739
RELATED PARTY TRANSACTIONS
Effective April 1, 1995, CS Partners (CSP) began managing the rental property
for 5% of total rents collected. CSP is an affiliate of CSMC, one of the
venturers. Prior to such time, CSMC managed the rental property for 5% of total
rents collected. Management fees paid totaled $62,175 for 1995 and $58,422 for
1994.
CSP also assumed leasing agent responsibilities on April 1, 1995. The joint
venture pays CSP an initial fee of 12.5% of the total base rental dollars
accruing for the first year of new leases and 3% of the base and percentage
rents each year thereafter for the term of said lease. In addition, the venture
pays a 2% commission on any leases which are renewed. Prior to April 1, 1995, a
different affiliate of CSMC acted as leasing agent for the same commission
arrangement as outlined above. Leasing commissions paid totaled $25,980 for 1995
and $26,065 for 1994.
LEASES
Minimum future rentals to be received by the joint venture under noncancelable
operating leases as of December 31, 1995, consist of the following:
Year Ending
December 31, 1996 $ 1,008,796
December 31, 1997 886,095
December 31, 1998 807,887
December 31, 1999 397,990
December 31, 2000 24,586
-----------
$ 3,125,354
===========
The joint venture receives rents from tenants under noncancelable operating
leases typically with five year lease terms. Virtually all tenants pay a minimum
guaranteed rental based on square footage and a percentage rental based on a
percentage of gross sales over a certain sales level per year. Percentage rents
totaled $76,406 for 1995 and $85,445 for 1994.
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Contents
Independent auditors' report
Financial statements
Balance sheets
Statements of operations
Statements of changes in partners' equity
Statements of cash flows
Summary of accounting policies
Notes to financial statements
<PAGE>
[GRAPHIC -- COMPANY LOGO]
BDO Seidman, LLP 2400 Plaza of the Americas
Accountants and Consultants 600 North Pearl Street
Dallas, Texas 75201-2828
Telephone: (214) 220-3131
Fax: (214) 969-9057
Independent Auditors' Report
To the Partners
First Highpoint Limited Partnership
Dallas, Texas
We have audited the accompanying balance sheets of First Highpoint Limited
Partnership (a Texas limited partnership) as of December 31, 1994 and 1993, and
the related statements of operations, changes in partners' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is express an
opinion on these financial statements based on our audit. The financial
statements of First Highpoint Limited Partnership for the year ended December
31, 1992 were audited by other auditors whose report dated February 12, 1993,
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Highpoint Limited
Partnership as of December 31, 1994 and 1993, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/BDO Seidman, LLP
February 7, 1995
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Balance Sheets
<TABLE>
<CAPTION>
December 31, 1994 1993
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Land, buildings, and equipment (Note 2) $ 4,371,411 $ 4,530,107
Cash 47,853 30,741
Escrow deposits 147,829 156,306
Prepaid insurance and other assets 28,333 25,309
Intangible assets (Note 3) 46,582 68,631
- - ---------------------------------------------------------------------------------------------------
Total assets $ 4,642,008 $ 4,811,094
===================================================================================================
Liabilities and Partners' Equity
Mortgage note payable (Note 4) $ 4,353,127 $ 4,389,230
Accounts payable - trade and accrued liabilities 127,771 96,723
Accrued interest payable 32,648 32,919
Accounts payable - affiliates 2,001 593
Tenants security deposits 18,860 15,049
- - ---------------------------------------------------------------------------------------------------
Total liabilities 4,534,407 4,534,514
- - ---------------------------------------------------------------------------------------------------
Partners' equity 107,601 276,580
- - ---------------------------------------------------------------------------------------------------
Total liabilities and partners' equity $ 4,642,008 $ 4,811,094
===================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Statements of Operations
<TABLE>
<CAPTION>
For the years ended December 31, 1994 1993 1992
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Rental revenue $ 1,124,317 $ 1,082,992 $ 948,722
Miscellaneous income 30,805 24,591 14,832
- - -------------------------------------------------------------------------------------------------------------------
Total Revenue 1,155,122 1,107,583 963,554
- - -------------------------------------------------------------------------------------------------------------------
Expenses:
Interest 393,295 396,414 352,616
Depreciation and amortization 217,272 238,821 200,939
Salaries and wages 110,386 99,890 96,301
Taxes and insurance 142,347 135,139 135,261
Leasing and make ready expense 49,780 42,567 56,984
Management fees (Note 5) 57,740 55,170 48,166
Repairs and maintenance 46,294 44,351 42,283
Other operating expense 133,987 114,549 109,663
- - -------------------------------------------------------------------------------------------------------------------
Total Expenses 1,151,101 1,126,901 1,042,213
- - -------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 4,021 $ (19,318) $ (78,659)
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Statement of Changes in Partners' Equity
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1991 (100,751) 760,566 659,815
Capital distributions (31,379) (143,879) (175,258)
Net loss (19,665) (58,994) (78,659)
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 (151,795) 557,693 405,898
Capital distributions - (110,000) (110,000)
Net loss (4,830) (14,488) (19,318)
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 (156,625) 433,205 276,580
Capital distributions - (173,000) (173,000)
Net income 1,005 3,016 4,021
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ (155,620) $ 263,221 $ 107,601
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended December 31, 1994 1993 1992
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 4,021 $ (19,318) $ (78,659)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 217,272 238,821 200,939
Change in operating assets and liabilities:
Prepaid insurance and other assets (3,024) (14,954) (1,798)
Receivable - general partner - - 35,307
Escrow deposits 8,477 7,119 83,870
Accounts payable 32,455 47,305 10,312
Tenant security deposits 3,811 (3,660) 2,702
Accrued interest payable (271) (248) (15,990)
- - -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 262,741 255,065 236,683
- - -------------------------------------------------------------------------------------------------------------------
Investing Activities -
Purchase of fixed assets (36,526) (103,586) (126,974)
- - -------------------------------------------------------------------------------------------------------------------
Financing Activities:
Capital distributions (173,000) (110,000) (175,258)
Payment of mortgage note payable (36,103) (30,368) (30,402)
Refund of loan costs - - 89,000
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (209,103) (140,368) (116,660)
- - -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 17,112 11,111 (6,951)
Cash and cash equivalents at beginning of period 30,741 19,630 26,581
- - -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 47,853 $ 30,741 $ 19,630
===================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Summary of Accounting Policies
Organization First Highpoint Limited Partnership (the Partnership), a
Texas limited partnership, was originally formed as
Highpoint Joint Venture on April 28, 1989 to acquire and
operate 120 condominium units in the Highpoint Town Home
Project, a 140 unit complex located in Plano, Collin
County, Texas. In December 1991, the remaining 20 units
were acquired, Highpoint Joint Venture was formally
terminated, and First Highpoint Limited Partnership was
formed.
Land, Buildings, Land, buildings, and equipment are stated at cost.
and Equipment Depreciation is computed using straight-line and
accelerated methods over the estimated useful lives of the
assets ranging from 5 to 27.5 years.
Intangible Assets Intangible assets are stated at cost and are being
amortized using the straight-line method. Syndication fees
are being amortized over a 5 year period and loan costs are
being amortized over the life of the loan.
Revenue Recognition Rental revenue is presented net of vacancies, concessions,
and bad debt expense.
Income Taxes No provision or liability for income taxes is recorded by
the Partnership as the partners are taxed on their share of
the Partnership's income as defined in the partnership
agreement.
Cash and Cash For the purpose of the statements of cash flows, cash and
Equivalents cash equivalents do not include escrow deposits due to
their restricted nature.
<PAGE>
FIRST HIGHPOINT LIMITED PARTNERSHIP
Notes to Financial Statements
1. Allocation of The profits or losses from operations, and cash to the
Income, Loss, extent available from operations of the partnership, will
and Cash be allocated in accordance with the partnership
Distributions agreement.
The following is a reconciliation of the Partnership's 1994 net income per the
statement of operations to the net loss for tax purposes:
Net income per statement of operations $ 4,021
Book/tax differences:
Amortization of syndication costs 10,000
Other (15,049)
- - ---------------------------------------------------------
Net loss for tax purposes $ (1,028)
=========================================================
The following is a reconciliation of the 1994 statement of changes in partners'
equity to partners' equity per the 1994 tax return:
General Limited
Partner Partners Total
- - --------------------------------------------------------------------------------
Balance per statement
of changes in partners'
equity $ (155,620) $ 263,221 $ 107,601
Syndication costs 12,500 37,500 50,000
IRC Section 754 adjustment 100,297 - 100,297
Reallocation of loss per
IRC Section 704(b) 54,893 (54,893) -
Other (3,937) 3,937 -
- - --------------------------------------------------------------------------------
Balance per tax return $ 8,133 $ 249,765 $ 257,898
================================================================================
2. Land, Buildings, Land, buildings, and equipment consisted of the
and Equipment following at December 31:
1994 1993
- - --------------------------------------------------------------------------------
Land $ 400,000 $ 400,000
Buildings and improvements 4,873,301 4,844,941
Equipment 49,850 41,684
- - --------------------------------------------------------------------------------
Total cost 5,323,151 5,286,625
Less accumulated depreciation 951,740 756,518
- - --------------------------------------------------------------------------------
Net land, buildings and improvements $ 4,371,411 $ 4,530,107
================================================================================
<PAGE>
3. Intangible Intangible assets consisted of the following at December 31:
Assets
1994 1993
- - --------------------------------------------------------------------------------
Syndication fees $ 50,000 $ 50,000
Loan costs 81,850 81,850
Other 4,325 4,325
- - --------------------------------------------------------------------------------
Total cost 136,175 136,175
Less accumulated amortization 89,593 67,544
- - --------------------------------------------------------------------------------
Net intangible assets $ 46,582 $ 68,631
================================================================================
4. Mortgage Note The mortgage note payable bears interest at nine (9)
Payable percent and requires monthly payments of $35,806,
including interest, and matures January 1, 1999.
Required principal payments are as follows:
Year Amount
- - --------------------------------------------------------------------------------
1995 $ 39,490
1996 43,194
1997 47,246
1998 51,678
1999 4,171,519
- - --------------------------------------------------------------------------------
Total $ 4,353,127
================================================================================
5. Related Party The Partnership paid management fees to affiliates of
Transactions $57,740, $55,170 and $48,166 for the years ended
December 31, 1994, 1993 and 1992, respectively. The
management fees are approximately five percent of net
revenue.
The Partnership incurred the following expenses, payable to affiliates of the
general partner, for the year ended December 31, 1994:
Management fees $ 57,740
Landscape services 29,313
- - --------------------------------------------------------------------------------
Total $ 87,053
================================================================================
An affiliate of the general partner billed approximately $96,000 for services as
the primary contractor related to building improvements in 1993. Such amounts
were capitalized as additions to fixed assets.
6. Statement of Interest paid during the years ended December 31, 1994
Cash Flows 1993, and 1992 was $393,566, $396,662, and $368,606
respectively.
<PAGE>
NAGS HEAD OUTLET PARTNERS,
A NORTH CAROLINA JOINT VENTURE
FINANCIAL STATEMENTS AND AUDIT REPORT
December 31, 1995
<PAGE>
NAGS HEAD OUTLET PARTNERS,
A NORTH CAROLINA JOINT VENTURE
CONTENTS
REPORT OF INDEPENDENT ACCOUNTANTS
BALANCE SHEET
STATEMENTS OF INCOME AND VENTURERS' EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
<PAGE>
Joseph Decosimo
and Company
A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP
Private Companies Practice Section Member AICPA Division for CPA Firms
SEC Practice Section
REPORT OF INDEPENDENT ACCOUNTANTS
To the Co-Venturers
Nags Head Outlet Partners,
a North Carolina Joint Venture
Nags Head, North Carolina
We have audited the accompanying balance sheet of Nags Head Outlet Partners, a
North Carolina Joint Venture as of December 31, 1995, and the related statements
of income and venturers' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of the venture's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nags Head Outlet Partners, a
North Carolina Joint Venture as of December 31, 1995, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Joseph Decosimo and Company, LLP
Chattanooga, Tennessee
January 16, 1996
<PAGE>
NAGS HEAD OUTLET PARTNERS,
A NORTH CAROLINA JOINT VENTURE
BALANCE SHEET
December 31, 1995
ASSETS
Land $ 1,273,072
Building and Improvements 6,200,594
-----------
7,473,666
Accumulated Depreciation (1,277,805)
-----------
6,195,861
Cash and Cash Equivalents 29,793
Receivables, net 8,813
Prepaid Expenses 14,861
Intangible Assets, net 48,217
-----------
TOTAL ASSETS $ 6,297,545
===========
LIABILITIES AND VENTURERS' EQUITY
LIABILITIES
Note Payable $ 4,305,749
Accounts Payable and Deferred Revenue 11,496
Accrued Interest 17,283
Tenant Deposits 37,446
Due to Related Parties 3,914
State Income Taxes Payable 16,758
-----------
Total Liabilities 4,392,646
VENTURERS' EQUITY 1,904,899
-----------
TOTAL LIABILITIES AND VENTURERS' EQUITY $ 6,297,545
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
NAGS HEAD OUTLET PARTNERS,
A NORTH CAROLINA JOINT VENTURE
STATEMENTS OF INCOME AND VENTURERS' EQUITY
Years Ended December 31, 1995 and 1994
1995 1994
REVENUES
Rental Revenue $ 933,185 $ 878,023
--------- ---------
EXPENSES
Management Fees 46,659 43,901
Leasing Commissions 8,260 940
Professional Services 5,750 9,525
Common Area Maintenance, net of
recoveries from tenant ( 8,600) ( 7,637)
Landlord Repairs 9,596 45,666
Tenant Improvements 859 -
Bad Debt Expense 4,852 8,102
Other 4,259 182
--------- ---------
71,635 100,679
--------- ---------
INCOME FROM OPERATIONS 861,550 777,344
--------- ---------
OTHER INCOME (EXPENSE)
Interest Income 5,913 2,857
Interest Expense ( 383,196) ( 401,417)
Depreciation ( 285,256) ( 284,280)
Amortization ( 54,301) ( 56,347)
State Income Tax ( 17,551) ( 8,944)
--------- ---------
( 734,391) ( 748,131)
--------- ---------
NET INCOME 127,159 29,213
VENTURERS' EQUITY - beginning of year 1,937,740 1,958,527
Distributions ( 160,000) ( 50,000)
--------- ---------
VENTURERS' EQUITY - end of year $ 1,904,899 $ 1,937,740
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
NAGS HEAD OUTLET PARTNERS,
A NORTH CAROLINA JOINT VENTURE
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995 and 1994
1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 127,159 $ 29,213
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation and Amortization 339,557 340,627
Bad Debt Expense 4,852 8,102
Changes in Operating Assets and Liabilities -
Decrease (Increase) in -
Receivables ( 10,220) ( 7,446)
Prepaid Expenses 12,911 3,990
Deferred Leasing Fees ( 6,435) ( 9,207)
Increase (Decrease) in -
Accounts Payable and Deferred Revenue ( 1,813) ( 81,666)
Accrued Interest ( 1,045) ( 668)
Tenant Deposits 14,540 ( 21,642)
Due to Related Parties 415 152
State Income Taxes Payable 8,880 4,130
--------- ---------
Net Cash Provided by Operating Activities 488,801 265,585
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures ( 35,770) ( 5,163)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Note Payable ( 260,325) ( 166,443)
Distributions to Venturers ( 160,000) ( 50,000)
Loan Fees Paid ( 33,817) ( 15,000)
--------- ---------
Net Cash Used by Financing Activities ( 454,142) ( 231,443)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ( 1,111) 28,979
CASH AND CASH EQUIVALENTS - beginning of year 30,904 1,925
--------- ---------
CASH AND CASH EQUIVALENTS - end of year $ 29,793 $ 30,904
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid During the Year for -
Interest $ 384,241 $ 402,085
Income Taxes $ 8,671 $ 4,814
The accompanying notes are an integral part of the financial statements.
<PAGE>
NAGS HEAD OUTLET PARTNERS,
A NORTH CAROLINA JOINT VENTURE
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the venture are as
follows:
DESCRIPTION OF BUSINESS - Nags Head Outlet Partners, a North Carolina Joint
Venture, is engaged in the business of renting retail space to manufacturers'
outlet stores in Nags Head, North Carolina.
RENTAL INCOME - Rent is reported as income over the lease term as it is earned.
Rent received from tenants in advance is accounted for as deferred revenue.
CASH EQUIVALENTS - The venture considers all money market accounts and highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
LAND, BUILDINGS AND IMPROVEMENTS - Land, buildings and improvements are stated
at cost. Expenditures for repairs and maintenance are charged to expense as
incurred and additions and improvements that significantly extend the lives of
assets are capitalized. Upon sale or other retirement of depreciable property,
the cost and accumulated depreciation are removed from the related accounts and
any gain or loss is reflected in operations.
Depreciation is provided on the straight-line method over the estimated useful
lives of the depreciable assets.
INTANGIBLE ASSETS - Developmental and other costs incurred before operations
commenced are capitalized as start-up costs. Initial and renewal leasing
commissions are amortized over the remaining lease periods. The cost of
intangible assets is amortized using the straight-line method over the following
estimated useful lives:
Years
Organization and Start-Up Costs 5
Deferred Leasing Fees 5
Loan Fees 4
INCOME TAXES - No provision for federal income taxes is reflected in the
financial statements since the tax effects of the venture's income or loss are
passed through to the individual venturers. State income taxes in the State of
North Carolina are paid by the venture on behalf of the venturers.
ESTIMATES AND UNCERTAINTIES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ORGANIZATION
Nags Head Outlet Partners, a North Carolina Joint Venture was organized under
the laws of the State of North Carolina on December 6, 1989, for the purpose of
acquiring, developing and operating a shopping center in Nags Head, North
Carolina. The two venturers are Parker, Reld & Co., Inc. (JV) and Company Stores
Capital Corp. (CSCC).
Net cash flow, as defined in the joint venture agreement, is allocated and
distributed first to JV up to the amount of the current year preferred return
and any unpaid preferred return from prior years. Any remaining balance is
allocated 63% to JV and 37% to CSCC.
Taxable income is allocated first to JV to the extent of all distributions of
the preferred return for the current year and for all prior years, less all
prior allocations of taxable income relating to the preferred return
distributions made in previous years. Thereafter, taxable income is allocated
63% to JV and 37% to CSCC.
Taxable losses, should they occur, are allocated to JV up to its capital
contribution of $1,500,000. Any remaining taxable loss is allocated 63% to JV
and 37% to CSCC.
INTANGIBLE ASSETS
1995
Intangible assets consist of the following:
Organization and Start-Up Costs $ -
Deferred Leasing Fees 23,962
Loan Fees 63,818
---------
87,780
Accumulated Amortization ( 39,563)
---------
$ 48,217
=========
NOTE PAYABLE
The note payable is an 8.5% note payable to First American National Bank
collateralized by real estate. The note requires monthly payments of $46,365
including principal and interest beginning April 1, 1994. Additionally, the note
requires monthly principal payments of 25% of the prior month's excess cash flow
plus interest payments through March 15, 1995, and 50% of the prior month's
excess cash flow plus interest payments through April 1, 1997, at which time the
principal balance plus accrued interest is due and payable in full.
Aggregate maturities of long-term debt for the two years subsequent to December
31, 1995, are $197,987 for the year ending December 31, 1996, and $4,107,762 for
the year ending December 31, 1997.
RELATED PARTY TRANSACTIONS
Effective April 1, 1995, CS Partners (CSP) began managing the rental property
for 5% of total rents collected. CSP is an affiliate of CSCC, one of the
venturers. Prior to such time, a different affiliate of CSCC managed the rental
property for 5% of total rents collected. Management fees paid totaled $46,659
for 1995 and $43,901 for 1994.
CSP also assumed leasing agent responsibilities on April 1, 1995. The joint
venture pays CSP an initial fee of 12.5% of the total base rental dollars
accruing for the first year of new leases and 3% of the base and percentage
rents each year thereafter for the term of said lease. In addition, the venture
pays a 2% commission on any leases which are renewed. Prior to April 1, 1995, a
different affiliate of CSCC acted as leasing agent for the same commission
arrangement as outlined above. Leasing commissions paid totaled $14,695 for 1995
and $10,111 for 1994.
LEASES
Minimum future rentals to be received by the venture under noncancelable
operating leases as of December 31, 1995, consist of the following:
Year Ending
December 31, 1996 $ 868,775
December 31, 1997 802,488
December 31, 1998 749,854
December 31, 1999 618,499
December 31, 2000 343,722
Later Years 138,249
-----------
$ 3,521,587
===========
The joint venture receives rents from tenants under noncancelable operating
leases typically with five year lease terms. Virtually all tenants pay a minimum
guaranteed rental based on square footage and a percentage rental based on a
percentage of gross sales over a certain sales level per year. Percentage rents
totaled $36,688 for 1995 and $23,374 for 1994.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required to be furnished pursuant to
this item is set forth under the caption "Management" in the
registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days of the end
of the fiscal year ended December 31, 1995, the period covered
by this Form 10-KSB, and is incorporated herein by reference.
Item 10. Executive Compensation.
The information required to be furnished pursuant to
this item is set forth under the caption "Executive
Compensation" in the registrant's definitive proxy statement
to be filed with the Securities and Exchange Commission within
120 days of the end of the fiscal year ended December 31,
1995, the period covered by this Form 10-KSB, and is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required to be furnished pursuant to
this item is set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" in the
registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days of the end
of the fiscal year ended December 31, 1995, the period covered
by this Form 10-KSB, and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required to be furnished pursuant to
this item is set forth under the caption "Certain
Relationships and Related Transactions" in the registrant's
definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days of the end of the fiscal
year ended December 31, 1995, the period covered by this Form
10-KSB, and is incorporated herein by reference.
Item 13. Exhibits, List and Reports on Form 8-K.
(a) Exhibits
Certain of the following exhibits, as indicated
parenthetically, were previously filed as exhibits to other
reports or registration statements filed by the Registrant
under the Securities Act of 1933 or under the Securities
Exchange Act of 1934 and are hereby incorporated by reference.
3.1 Restated Certificate of Incorporation of the
Registrant filed on July 31, 1987 and
amendments thereto filed on June 8, 1989,
September 14, 1991 and December 2, 1991.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1992.)
3.2 Amended and Restated By-Laws of the
Registrant.
10.0 40l(k) Savings Plan of the Company as
amended and restated as of January 1, 1993.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1993.)
10.1 Lease of Citizens Mortgage Service Company's
office, dated November 30, 1992.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1992.)
10.2 Joint Venture Agreement of Blowing Rock
Outlet Partners dated June 10, 1988; First
Amendment to Joint Venture Agreement of
Blowing Rock Outlet Partners dated August
19, 1988; and certain ancillary agreements
and acknowledgments. (Incorporated by
reference to the Registrant's Annual Report
on Form 10-KSB for the year ended December
31, 1992.)
10.3 Second Amendment to Joint Venture Agreement
of Blowing Rock Outlet Partners dated as of
March 4, 1992.
10.4 Third Amendment to Joint Venture Agreement
of Blowing Rock Outlet Partners dated as of
January 1, 1996.
10.5 Stock Purchase Agreement dated as of
February 21, 1992 among SCOR U.S.
Corporation, Dover, Sussex Co., Inc.,
Richard T. Harris and Helmstar Group, Inc.
and certain ancillary agreements.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.6 First Amended and Restated Agreement of
Highpoint Limited Partnership dated October
18, 1991. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.7 First Amendment to First Amended and
Restated Agreement of Highpoint Limited
Partnership dated December 19, 1991.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.8 Joint Venture Agreement dated December 6,
1989 between Parker, Reld & Co., Inc. and
Company Stores Capital Corp. (Incorporated
by reference to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1994.)
10.9 First Amendment to Joint Venture Agreement
of Nags Head Outlet Partners dated as of
January 1, 1996.
10.10 Helmstar Group, Inc. 1990 Incentive
Compensation Plan.
10.11 Stock Acquisition Agreement dated June 20,
1991 by and between Citizens Savings
Association and McAdam, Taylor & Co., Inc.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.12 Agreement between McAdam, Taylor & Co.,
Inc., Citizens Savings Association and
Citizens Mortgage Service Company dated
September 12, 1991 regarding purchase price
adjustments in connection with the purchase
of Citizens Mortgage Service Company.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.13 Servicing Agreement between First Mortgage
Service Co. (now known as Citizens Mortgage
Service Company) and Citizens Savings & Loan
Association of Scranton (now known as
Citizens Savings Association) dated April
11, 1975 and Amended Agreement dated June
11, 1991 related thereto. (Incorporated by
reference to the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1991.)
10.14 Mortgage Selling and Servicing Contract
between Citizens Mortgage Service Company
and the Federal National Mortgage
Association dated November 12, 1986.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.15 Letter dated January 10, 1980 from the
Federal Home Loan Mortgage Corporation
("FHLMC") to First Mortgage Service Company
(now known as Citizens Mortgage Service
Company) approving Citizens Mortgage Service
Company's application for FHLMC
Seller/Servicer Status for conventional one
to four family and FHA/VA loans.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.16 Loan Servicing Purchase and Sale Agreement
dated November 6, 1995 by and between
Atlantic Mortgage & Investment Corporation
and Citizens Mortgage Service Company.
10.17 Employment Contract of Eric Fishman with
Citizens Mortgage Service Company dated
January 17, 1996.
22.0 Subsidiaries of the Registrant.
(b)No reports on Form 8-K have been filed during the last
quarter covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 29th day of March,
1996.
Helmstar Group, Inc.
- - --------------------
/s/George W. Benoit
- - -----------------------------------------------
George W. Benoit, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on the 29th day of March, 1996.
Signature Title
/s/George W. Benoit Chairman of the Board, President,
- - ------------------- Chief Executive Officer
(George W. Benoit)
/s/Roger J. Burns Director, First Vice President,
- - ----------------- Chief Financial Officer, Secretary
(Roger J. Burns)
/s/Joseph G. Anastasi Director
- - ---------------------
(Joseph G. Anastasi)
/s/Charles W. Currie Director
- - --------------------
(Charles W. Currie)
/s/James J. Murtha Director
- - ------------------
(James J. Murtha)
<PAGE>
Helmstar Group, Inc.
- - --------------------
- - --------------------------------------------------------------------------------
INDEX TO EXHIBITS
EXHIBIT NO.
- - -----------
3.1 Restated Certificate of Incorporation of the
Registrant filed on July 31, 1987 and
amendments thereto filed on June 8, 1989,
September 14, 1991 and December 2, 1991.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1992.)
3.2 Amended and Restated By-Laws of the
Registrant.
10.0 40l(k) Savings Plan of the Company as
amended and restated as of January 1, 1993.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1993.)
10.1 Lease of Citizens Mortgage Service Company's
office, dated November 30, 1992.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 1992.)
10.2 Joint Venture Agreement of Blowing Rock
Outlet Partners dated June 10, 1988; First
Amendment to Joint Venture Agreement of
Blowing Rock Outlet Partners dated August
19, 1988; and certain ancillary agreements
and acknowledgments. (Incorporated by
reference to the Registrant's Annual Report
on Form 10-KSB for the year ended December
31, 1992.)
10.3 Second Amendment to Joint Venture Agreement
of Blowing Rock Outlet Partners dated as of
March 4, 1992.
10.4 Third Amendment to Joint Venture Agreement
of Blowing Rock Outlet Partners dated as of
January 1, 1996.
10.5 Stock Purchase Agreement dated as of
February 21, 1992 among SCOR U.S.
Corporation, Dover, Sussex Co., Inc.,
Richard T. Harris and Helmstar Group, Inc.
and certain ancillary agreements.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.6 First Amended and Restated Agreement of
Highpoint Limited Partnership dated October
18, 1991. (Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.7 First Amendment to First Amended and
Restated Agreement of Highpoint Limited
Partnership dated December 19, 1991.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.8 Joint Venture Agreement dated December 6,
1989 between Parker, Reld & Co., Inc. and
Company Stores Capital Corp. (Incorporated
by reference to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1994.)
10.9 First Amendment to Joint Venture Agreement
of Nags Head Outlet Partners dated as of
January 1, 1996.
10.10 Helmstar Group, Inc. 1990 Incentive
Compensation Plan.
10.11 Stock Acquisition Agreement dated June 20,
1991 by and between Citizens Savings
Association and McAdam, Taylor & Co., Inc.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.12 Agreement between McAdam, Taylor & Co.,
Inc., Citizens Savings Association and
Citizens Mortgage Service Company dated
September 12, 1991 regarding purchase price
adjustments in connection with the purchase
of Citizens Mortgage Service Company.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.13 Servicing Agreement between First Mortgage
Service Co. (now known as Citizens Mortgage
Service Company) and Citizens Savings & Loan
Association of Scranton (now known as
Citizens Savings Association) dated April
11, 1975 and Amended Agreement dated June
11, 1991 related thereto. (Incorporated by
reference to the Registrant's Annual Report
on Form 10-K for the year ended December 31,
1991.)
10.14 Mortgage Selling and Servicing Contract
between Citizens Mortgage Service Company
and the Federal National Mortgage
Association dated November 12, 1986.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.15 Letter dated January 10, 1980 from the
Federal Home Loan Mortgage Corporation
("FHLMC") to First Mortgage Service Company
(now known as Citizens Mortgage Service
Company) approving Citizens Mortgage Service
Company's application for FHLMC
Seller/Servicer Status for conventional one
to four family and FHA/VA loans.
(Incorporated by reference to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1991.)
10.16 Loan Servicing Purchase and Sale Agreement
dated November 6, 1995 by and between
Atlantic Mortgage & Investment Corporation
and Citizens Mortgage Service Company.
10.17 Employment Contract of Eric Fishman with
Citizens Mortgage Service Company dated
January 17, 1996.
22.0 Subsidiaries of the Registrant.
AMENDED AND RESTATED
BY-LAWS
HELMSTAR GROUP, INC.
ARTICLE I
Meetings of Stockholders
Section 1.1 Annual Meetings. The annual meeting of the stockholders for
the election of directors and for the transaction of such other business as
properly may come before such meeting shall be held on such date and at such
time and place within or without the State of Delaware as may be designated by
the Board of Directors.
Section 1.2 Special Meetings. Special meetings of the stockholders for
any proper purpose or purposes may be called at any time by the Board of
Directors, the Chairman of the Board, or the President to be held on such date
and at such time and place within or without the State of Delaware as the Board
of Directors, the Chairman of the Board or the President, whichever has called
the meeting, shall direct. A special meeting of the stockholders shall be called
by the Chairman of the Board or the President whenever stockholders owning at
least 33% of the shares of the Corporation then issued and outstanding and
entitled to vote on matters to be submitted to stockholders of the Corporation
shall make application therefor in writing. Any such written request shall state
a proper purpose or purposes of the meeting and shall be delivered to the
Chairman of the Board or the President.
Section 1.3 Notice of Meeting. Written notice, signed by the Chairman
of the Board, the President, or the Secretary or an Assistant Secretary, of
every meeting of stockholders stating the purpose or purposes for which the
meeting is called, and the date and time when, and the place where, it is to be
held shall be given either personally or by mail, to each stockholder entitled
to vote at such meeting not less than ten (10) nor more than sixty (60) days
before the meeting, except as otherwise provided by statute. If mailed, such
notice shall be directed to a stockholder at his address as it shall appear on
the stock books of the Corporation, unless he shall have filed with the
Secretary a written request that notices intended for him be mailed to some
other address, in which case it shall be mailed to the address designated in
such request. Only such business may be conducted as is (i) specified in the
written notice of meeting or (ii) brought before the meeting at the direction of
the Board of Directors.
Section 1.3 Quorum. The presence at any meeting, in person or by proxy,
of the holders of record of a majority of the shares then issued and outstanding
and entitled to vote shall be necessary and sufficient to constitute a quorum
for the transaction of business, except where proved otherwise by statute.
Section 1.5 Adjournments. In the absence of a quorum, a majority in
interest of the stockholders entitled to vote, present in person or by proxy,
or, if no stockholder entitled to vote is present in person or by proxy, any
officer entitled to preside or act as secretary of such meeting, may adjourn the
meeting from time to time until a quorum shall be present.
Section 1.6 Voting. Directors shall be chosen in accordance with
Section 2.2 thereof, and, except where otherwise provided by statute, all other
questions shall be determined by a majority of the votes cast on such question.
Section 1.7 Proxies. Any stockholder entitled to vote may vote by
proxy, provided that the instrument authorizing such proxy to act, shall have
been executed in writing (which shall include telegraphing or cabling) by the
stockholder himself or by his duly authorized attorney.
Section 1.8 Judges of Election. The Board of Directors may appoint
Judges of Election to serve any election of directors and at balloting on any
other matter that may properly come before a meeting of stockholders. If no such
appointment shall be made, or if any of the Judges so appointed shall fail to
attend, or refuse to be unable to serve, then such appointment may be made by
the presiding officer at the meeting.
ARTICLE II
Board of Directors
Section 2.1 Number. The number of directors which shall constitute the
whole Board of Directors shall be established from time to time by vote of the
entire Board of Directors or by action of the stockholders but shall not be less
than three (3) nor more than ten (10).
Section 2.2 Term of Office. Directors shall be classified by dividing
them into three classes, each consisting as nearly as possible of an equal
number of members. At each annual meeting of stockholders, one class of
directors shall be elected by a majority of the votes cast to hold office for a
term of three years, and until their successors are elected or until their
resignation under the provisions of Section 2.7 hereof or their removal under
the provisions of Section 2.8 hereof, or their ineligibility under the
provisions of Section 2.10 hereof.
Section 2.3 Chairman of the Board of Directors. At the first meeting of
the Board of Directors at which a quorum thereof shall be present after the
election of Directors at the annual meeting of stockholders, a Chairman of the
Board of Directors shall be elected from the members thereof by a vote of the
majority of those Directors present. The term of the Chairman of the Board of
Directors shall be for one year except that he shall serve until his successor
has been duly elected and qualified.
The Chairman of the Board may be removed from the Chairmanship at any
time, either with or without cause, by a vote of a majority of all the directors
then in office. Such removal shall not affect his status as a member of the
Board.
The Chairman of the Board shall preside at all meetings of the
stockholders and of the Board of Directors. By virtue of his office he shall be
a member of the Executive Committee. He shall make reports to the directors and
stockholders and shall perform all such other duties as are incident to his
office or required of him by the Board of Directors and by the Executive
Committee.
Section 2.4 Vacancies and Additional Directorships. If any vacancy
shall occur among the directors by reason of death, resignation, removal or
ineligibility, or as the result of an increase in the number of directorships,
the directors then in office shall continue to act and may fill any such vacancy
by a vote of the directors then in office, though less than a quorum. Any
director elected to fill a vacancy on the Board shall serve for the balance of
the term of the replaced director.
Section 2.5 Meetings. A meeting of the Board of Directors shall be held
for organization, for election of officers and for the transaction of such other
business as may properly come before the meeting, within sixty (60) days after
each annual election of directors.
The Board of Directors by resolution may provide for the holding of
regular meetings and may fix the times and places at which such meeting shall be
held. Notice of regular meetings shall not be required to be given, provided
that whenever the time or place of regular meetings shall be fixed or changed,
notice of such action shall be mailed promptly to each director who shall not
have been present at the meeting at which such action was taken, addressed to
him at his residence or usual place of business.
Special meetings of the Board of Directors may be called by the
Chairman of the Board, the President, or any two (2) directors. Except as
otherwise required by statute, notice of each special meeting shall be mailed to
each director, addressed to him at his residence or usual place of business, or
shall be sent to him at such place by telegram, radio or cable, telephone or
delivered to him personally, not later than two (2) days before the day on which
the meeting is to be held. Such notice shall state the time and place of such
meeting, but unless otherwise required by statute, the Certificate of
Incorporation of the Corporation or these By-Laws, need not state the purposes
thereof.
Notice of any meeting need not be given to any director who shall
attend such meeting in person or who shall waive notice thereof, before or after
such meeting, in writing or by telegram, radio or cable.
Section 2.6 Quorum. One-third of the total number of members of the
Board of Directors as constituted from time to time, but not less than three
(3), shall be necessary and sufficient to constitute a quorum for the
transaction of business. In the absence of a quorum, a majority of those present
at the time and place of any meeting may adjourn the meeting form time to time
until a quorum shall be present and the meeting may be held as adjourned without
further notice or waiver. A majority of those present at any meeting at which a
quorum is present may decide any question brought before such meeting, except as
otherwise provided by law, the Certificate of Incorporation or by these By-Laws.
Section 2.7 Resignation of Directors. Any director may resign at any
time by giving written notice of such resignation to the Board of Directors, the
Chairman of the Board, the President, or the Secretary. Any such resignation
shall take effect at the time specified therein or, if no time be specified,
upon receipt thereof by the Board of Directors or one of the above-named
officers; and, unless specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
Section 2.8 Removal of Directors. At any special meeting of the
stockholders, duly called as provided in these By-Laws, any director or
directors including the Chairman of the Board may be removed from office only
with the approval and the affirmative vote of the holders of not less than 60%
of the voting power of the Corporation entitled to vote generally in the
election of directors unless such removal is approved by a majority of
Disinterested Directors (as defined in the Restated Certificate of Incorporation
of the Corporation). At such meeting a successor or successors may be elected in
the manner provided in Section 1.6; or if any such vacancy is not so filled, it
may be filled by the directors as provided in Section 2.4.
Section 2.9 Compensation of Directors. Directors shall receive such
reasonable compensation for their services as such, whether in the form of
salary or a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any directors from serving the Corporation in any
other capacity and receiving compensation therefor.
Section 2.10 Age of Directors. No person shall be eligible to hold the
office of director before he shall have attained the age of twenty-one hears or
after he has attained the age of seventy years.
ARTICLE III
Committees of the Board
Section 3.1 Executive Committees. There shall be an Executive Committee
which shall consist of the Chairman of the Board, and not less than two other
members of the Board of Directors, as may be fixed from time to time by the
Board of Directors with respect to such Committee, which members shall be
elected at the next regular meeting of the Board of Directors after the annual
meeting of the stockholders, to serve for a period of one year, or until their
successors shall be elected and qualify or until their removal from said
Committee. The Board of Directors may elect such number of alternates from among
the other members of the Board of Directors as it shall deem appropriate and any
such alternate shall, upon designation of the Chairman of the Board or upon call
by the Secretary, be authorized to act at any meeting for any absent regular
member of such Committee. The Board of Directors at any meeting may fill any
vacancy or vacancies on such Committee, whether created by death, resignation,
removal, ineligibility, increase in the number of the members of such Committee
or otherwise.
The Executive Committee shall have and may exercise the powers of the
Board of Directors to the maximum extent provided by law during the intervals
between meetings of the Board of Directors including, without limitation, the
power to (i) authorize the Seal of the Corporation to be affixed to all papers
which may require a seal, (ii) declare a dividend, (iii) authorize the issuance
of stock and (iv) adopt a Certificate of Ownership and Merger pursuant to
Section 253 of the Delaware General Corporation Law.
Said Committee may adopt its own rules of procedure, elect their own
respective Chairman, and may hold their respective meetings at such times and at
such place or places as it may find convenient.
Section 3.2 Special Committees. The Board of Directors and Executive
Committee shall have power to constitute and appoint such Special Committees
from their members as in its judgment may be advantageous or desirable for the
transaction of the business of the Corporation.
Section 3.3 Removal. Any member of any Committee may be removed at any
time by the Board of Directors with or without cause.
Section 3.4 Compensation. Committee members shall receive such
reasonable compensation for their services as such, whether in the form of
salary or a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any committee member from serving the Corporation
any other capacity and receiving compensation therefor.
ARTICLE IV
Officers
Section 4.1 Election. The elected officers of the Corporation shall be
a Chairman of the Board, a President, a Treasurer, a Secretary, and, at the
discretion of the Board of Directors, one or more Vice Presidents and one or
more Assistant Secretaries.
All elected officers except the Chairman of the Board shall hold office
for one year and until their successors shall be elected and qualify or until
their death, resignation or removal. The tenure of office by the Chairman of the
Board is set forth in Article II hereof. One person may hold more than one
office except that the offices of Chairman of the Board and Secretary or
President and Secretary may not be held by the same person. A vacancy in any
office may be filled for the unexpired term by the directors at any regular
meeting of either the Board of Directors or by the Executive Committee at any
regular meeting or at any special meeting of either the Board of Directors or
the Executive Committee called for that purpose. The Chairman of the Board and
the President shall be directors, but the other officers need not be directors.
The Board of Directors or the Executive Committee may from time to time appoint
one or more Vice Presidents, one of whom may be designated as Executive Vice
President, and one or more of whom may be designated as Senior Vice President or
Senior Vice Presidents, and one or more of whom may be designated as First Vice
President or First Vice Presidents, and one or more of whom may be designated as
Assistant Vice President or Assistant Vice Presidents, who shall hold office at
the pleasure of the Board of Directors, and shall perform such duties as may be
designated by these By-Laws, or by the Board of Directors. The Board of
Directors or the Executive Committee may also appoint a Comptroller who shall
hold office at the pleasure of the Board of Directors and shall perform such
duties as may be designated by the Board of Directors or Executive Committee.
The Chief Executive Office may from time to time appoint other officers who
shall hold office at his pleasure and shall perform such duties as he may
designate. Whenever in these By-Laws the terms Secretary shall be used, it shall
be deemed to apply to the elected Secretary unless the context shall clearly
otherwise indicate.
Section 4.2 Chairman of the Board. The Chairman of the Board shall be
Chief Executive Officer of the Corporation and shall see that all resolutions of
the Board and Committees are carried out.
Section 4.3 President. The President shall be a director. He shall be
subject to the direction and supervision of the Chairman of the Board, exercise
general supervision with respect to the operations of the Corporation and shall
perform such specific executive and administrative duties as shall be assigned
to him by the Chairman of the Board. In the absence or incapacity of the
Chairman of the Board, he shall perform the duties of the Chairman of the Board.
Section 4.4 Vice Presidents. The Vice Presidents and each of them shall
aid the Chairman of the Board, and the President, in their duties and advise
with them regarding the general interests of the Corporation, and shall perform
all such other duties as are incident to the office of Vice President, or
required of them by the Chairman of the Board or the President. In the absence
or incapacity of the Chairman of the Board and the President, the Board of
Directors or the Executive Committee shall designate one of the Vice Presidents
who shall discharge the duties of the President with the same force and effect
as if performed by the President.
Section 4.5 Secretary. The Secretary shall give, or cause to be given,
notice of all meetings of the stockholders, directors and committees, and all
other notices required by law or by these By-Laws, and in case of his absence or
refusal or neglect to do so any such notice may be given by any person thereunto
directed by the Chairman of the Board, or by the President, or by the directors
or stockholders upon whose requisition the meeting is called as provided in
these By-Laws. He shall record or cause to be recorded all proceedings of the
meetings of the stockholders and of the directors, and of the various
committees. He shall have custody of the corporate seal, and shall affix the
same to all instruments requiring it when authorized by the Board of Directors,
the Chairman of the Board, the President or the Executive Committee. He shall
perform such other duties as may be assigned to him from time to time by the
Chairman of the Board or the President. If any additional Secretaries are
appointed by the Board of Directors pursuant to the provision of Article IV,
Section 1, such Secretaries shall have the power to perform any or all of the
duties of the elected Secretary and their actions in so doing shall be binding
on the Corporation. They shall in addition perform such duties as may be
assigned to them from time to time by the Chairman of the Board or the
President.
Section 4.6 Assistant Secretaries. The Assistant Secretaries and each
of them may in the absence of the Secretary, exercise the powers of the
Secretary.
Section 4.7 Treasurer. Subject to the authority and control of the
Board of Directors or of the Chairman of the Board, the Treasurer shall have
supervision of the custody of the funds of the corporation, and of all bonds,
mortgages, notes, securities and other effects of the Corporation, and shall
deposit the same or cause the same to be deposited to the credit of the
Corporation in such depositories as may be designated by the Board of Directors
or the Executive Committee. He shall have charge of the books of account and the
accounting records and statements of the Corporation with respect to all of its
business and affairs. He shall perform such other duties as may be assigned to
him from time to time by the Chairman of the Board or the President.
Section 4.8 Removal. Any officer specifically designated in Section 4.1
except the Chairman of the Board may be removed at any time, either with or
without cause, at any meeting of the Board of Directors by the vote of a
majority of all the directors then in office. Any officer or agent appointed in
accordance with the provisions of Section 4.1 may be removed, either with or
without cause, by the Board of Directors at any meeting, by the vote of a
majority of the directors present at such meeting, or by any superior officer or
agent upon whom such power of removal shall be been conferred by the Board of
Directors.
Section 4.9 Vacancies. A vacancy in any office by reason of death,
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed by these By-Laws for
regular election or appointment to such office.
ARTICLE V
Indemnification of Officers, Directors, Employees and Agents
Section 5.1 This Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of this Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
this Corporation or is or was serving at the request of this Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of this Corporation and, with respect to any criminal action
or proceedings, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of this Corporation, and with respect to any criminal action or
proceedings, had reasonable cause to believe that his conduct was unlawful.
Section 5.2 This Corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of this Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of this Corporation, or is or was serving at the
request of this Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of this Corporation and except that no indemnification shall be
made in respect to a claim, issue or matter as to which such person shall have
been adjudged to be liable for negligence or misconduct in the performance of
his duty to this Corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 5.3 To the extent that such director, officer, employee or
agent has been successful on the merits or otherwise in defense of any action,
suit or proceeding referred to in Section 5.1 and 5.2, or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 5.4 Any indemnification under Section 5.1 and 5.2 (unless
ordered by a court) shall be made by this Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 5.1 and 5.2. Such
determination shall be made (1) by the Board of Directors by a majority vote of
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion or (3) by the stockholders.
Section 5.5 Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by this Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors, in the specific case upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by this
Corporation as authorized in this By-Law.
Section 5.6 The indemnification provided by this By-Law shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 5.7 This Corporation, when authorized by the Board of
Directors, shall purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the Corporation, of is or was
serving at the request of this Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not this
Corporation would have the power to indemnify him against such liability under
the provisions of this By-Law.
ARTICLE VI
Execution of Instruments and Deposit of Corporate Funds
Section 6.1 Execution of Instruments Generally. The Chairman of the
Board, the President, any Vice President, the Secretary or the Treasurer may
enter into any contract or execute and deliver any instrument in the name and on
behalf of the Corporation. The Board of Directors may authorize any officer or
officers, or agent or agents, to enter into any contract or execute and deliver
any instrument in the name and on behalf of the Corporation, and such
authorization may be general or confined to specific instances.
Section 6.2 Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to its credit in such banks or
trust companies or with such bankers or other depositories as the Board of
Directors may select, or as may be selected by any officer or officers or agent
or agents authorized so to do by the Board of Directors. Endorsements for
deposit to the credit of the Corporation in any of its duly authorized
depositories shall be made in such manner as the Board of Directors from time to
time may determine.
Section 6.3 Checks, Drafts, etc. All checks, drafts or other orders for
the payment of money, and all notes or other evidences of indebtedness issued in
the name of the Corporation, shall be signed by such officer or officers or
agent or agents of the Corporation, and in such manner, as from time to time
shall be determined by the Board of Directors.
Section 6.4 Proxies. Proxies to vote with respect to shares of stock of
other corporations owned by or standing in the name of the Corporation may be
executed and delivered from time to time on behalf of the Corporation by the
Chairman of the Board, the President or a Vice President or by any other person
or persons thereunto authorized by the Board of Directors.
ARTICLE VII
Record Dates
Section 7.1 In order that the Corporation may determine the
stockholders entitled to notice of, or to vote at any meeting of stockholder or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date which shall not be more than sixty (60) nor less than ten (10) days before
the date of such meeting, nor more than sixty (60) days prior to any such
action. Only those stockholders of record on the date so fixed shall be entitled
to any of the foregoing rights, notwithstanding the transfer of any such stock
on the books of the Corporation after any such record date fixed by the Board of
Directors.
ARTICLE VIII
Corporate Seal
Section 8.1 The corporate seal shall be circular in form and shall bear
the name of the Corporation and words and figures denoting its organization
under the laws of the State of Delaware and the year thereof and otherwise shall
be in such form as shall be approved from time to time by the Board of
Directors.
ARTICLE IX
Fiscal Year
Section 9.1 The fiscal year of the Corporation shall be the calendar
year.
ARTICLE X
Amendments
Section 10.1 With the exception of Sections 1.2, 2.1, 2.2, 2.4 and 2.8,
all By-Laws of the Corporation may be amended, altered or repealed and new
By-Laws may be made by the affirmative vote of the holders of record of a
majority of the outstanding shares of stock of the Corporation entitled to vote,
cast at any annual or special meeting, or by the affirmative vote of a majority
of the directors, cast at any regular or special meeting at which a quorum is
present. Sections 1.2, 2.1, 2.2, 2.4 and 2.8 of these By-Laws may only be
amended, altered or repealed by the affirmative vote of the holders of record of
at least 60% of the outstanding shares of stock of the Corporation entitled to
vote, cast at any annual or special meeting.
SECOND AMENDMENT
TO
JOINT VENTURE AGREEMENT
OF
BLOWING ROCK OUTLET PARTNERS
AGREEMENT made as of March 4, 1992 Company Store Management Corp.
("CMSC"), a Tennessee corporation, Burrows, Hayes Company, Inc. ("Burrows
Hayes"), a New York corporation, and ITD-MW Blowing Rock Associates ("IMBRA"), a
New York general partnership.
RECITALS:
R-1. CSMC and IMBRA are all of the partners of Blowing Rock Outlet Partners (the
"Company"), a North Carolina general partnership.
R-2. Burrows, Hayes and ITD Blowing Rock, Inc. ITD were the sole partners of
IMBRA. By Assignment and Assumption of Interests Agreement dated March 4, 1992,
Burrows Hayes acquired all of ITD's interests in IMBRA.
R-3. Burrows Hayes, as the owner of all of the partnership interests in IMBRA,
has elected to dissolve IMBRA, transfer IMBRA's partnership interest in the
Company to Burrows Hayes, and to become a substitute partner in the Company in
place of IMBRA.
NOW, THEREFORE, in consideration of the premises, the parties agree as follows:
1. IMBRA hereby assigns its entire partnership interest in the Company to
Burrows Hayes, and Burrows Hayes accepts said assignment.
2. IMBRA resigns as a partner of the Company, effective immediately,
simultaneously therewith, the Company hereby admits Burrows Hayes substitute
partner of the Company in place of IMBRA, and Burrows Hayes assumes the
obligation of IMBRA as a partner of the Company.
IN WITNESS THEREOF, the parties have executed this agreement as of the day and
year first above written.
COMPANY STORES MANAGEMENT CORP.
By: /s/Lynn S. Ellsworth
Lynn S. Ellsworth, President
ITD-MW BLOWING ROCK ASSOCIATES
(Withdrawing Partner)
By: Burrows, Hayes Company, Inc.
(Partner)
By: /s/Nicholas J. Letizia
Nicholas J. Letizia, V.P.
BURROWS, HAYES COMPANY, INC.
(Entering Partner)
By: /s/Nicholas J. Letizia
Nicholas J. Letizia, V.P.
THIRD AMENDMENT
TO
JOINT VENTURE AGREEMENT
OF
BLOWING ROCK OUTLET PARTNERS
Agreement made as of January 1, 1996 between Company Stores Management
Corp. (CSMC), a Tennessee corporation, and Burrows, Hayes Company, Inc. (BHCI),
a New York corporation.
RECITALS:
R-1. CSMC and BHCI are all of the partners of Blowing Rock Outlet Partners
(the Company), a North Carolina general partnership.
R-2. The parties wish to amend the Joint Venture Agreement with respect to
the allocation of taxable loss set forth in Section 8.4.2(a) of the
Joint Venture Agreement dated June 10, 1988 and amended by Section 3.3.
of the First Amendment to Joint Venture Agreement of Blowing Rock
Outlet Partners dated August 19, 1988.
R-3. Since BHCI received a distribution from mortgage proceeds received in
1995 in excess of its capital contribution of $1,449,000, the parties
agree that to continue allocating taxable loss first to BHCI to the
extent of such capital contribution no longer would have economic
justification.
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. Section 8.4.2 of the Joint Venture Agreement, as amended, hereby is deleted
in its entirety and replaced with the following:
Section 8.4.2. Taxable Loss for each fiscal year shall be allocated 55%
to ITD and 45% to CS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY STORES MANAGEMENT CORP.
By: /s/Lynn S. Ellsworth
Lynn S. Ellsworth, President
BURROWS, HAYES COMPANY, INC.
By: /s/Nicholas J. Letizia
Nicholas J. Letizia, Vice President
FIRST AMENDMENT
TO
JOINT VENTURE AGREEMENT
OF
NAGS HEAD OUTLET PARTNERS
Agreement made as of January 1, 1996 between Company Stores Capital
Corp. (CSCC), a Tennessee corporation, and Parker, Reld & Co., Inc. (PRCI), a
New York corporation.
RECITALS:
R-1. CSCC and PRCI are all of the partners of Nags Head Outlet Partners (the
Company), a North Carolina general partnership.
R-2. The parties wish to amend the Joint Venture Agreement with respect to
the allocation of taxable loss set forth in Section 8.4.2(a) of the
Joint Venture Agreement dated December 6, 1989 to provide that CSCC and
PRCI will share taxable loss in accordance with their profit sharing
percentages after PRCI recovered its capital contribution from Net
Extraordinary Cash Flow.
R-3. The parties agree that it would be without economic justification to
continue to allocate 100% of any taxable loss to PRCI up to a
cumulative amount of its capital contribution after PRCI recovered an
equal sum from Net Extraordinary Cash Flow.
NOW, THEREFORE, in consideration of the premises, the parties agree as
follows:
1. Section 8.4.2(a) of the Joint Venture Agreement hereby is deleted in its
entirety and replaced with the following:
(a) First to JV up to the cumulative amount of the sum of $1,500,000
plus any additional capital contributions made by JV less all
distributions to JV pursuant to Subsection 8.3.1.(b), and
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY STORES CAPITAL CORP.
By: /s/Lynn S. Ellsworth
Lynn S. Ellsworth, President
PARKER, RELD & CO., INC.
By:/s/Nicholas J. Letizia
Nicholas J. Letizia, Vice President
HELMSTAR GROUP, INC.
1990 INCENTIVE COMPENSATION PLAN
ARTICLE I - GENERAL
1. PURPOSES
The purposes of the Helmstar Group, Inc. (the "Company") 1990 Incentive
Compensation Plan (the "Plan") are (i) to provide incentives to officers and
other key employees whose performance will contribute to the long-term success
and growth of the Company, (ii) to strengthen the ability of the Company to
attract and retain employees of high competence, (iii) to increase the identity
of interests of such key employees with those of the Company's stockholders, and
(iv) to help build loyalty to the Company through recognition and the
opportunity for stock ownership.
2. THE PLAN
This Plan shall consist of:
(a) The Incentive Stock Option Plan (Article II);
(b) The Long-Term Incentive Plan (Article III); and
(c) The Restricted Stock Plan (Article IV).
Unless otherwise indicated, each such Plan shall be subject to the terms and
conditions of this Article I and to the terms and conditions of Article V
hereof.
3. SHARES SUBJECT TO THE PLAN
The maximum aggregate number of shares as to which awards or options may at any
time be granted under this Plan shall be 500,000 shares of the Company's Common
Stock, par value $.10 per share (the "Common Shares"), subject to adjustment as
provided in Section 2 of Article V hereof. Such Common Shares may be either
authorized but unissued shares, or shares previously issued and reacquired by
the Company. If and to the extent options granted under the Plan terminate,
expire or are cancelled without having been exercised, or shares awarded under
the Restricted Stock Plan shall be forfeited, new options may be granted with
respect to the shares covered by the terminated, expired or cancelled options
and forfeited shares may be reissued under the Restricted Stock Plan.
4. ADMINISTRATION
The Plan shall be administered by the Company's Board of Directors (the "Board")
which may delegate any of its authority to an Incentive Compensation Committee
which shall consist of at least three members of the Board. No member of the
Incentive Compensation Committee shall be eligible to participate in any of the
Plans described in Article I, Section 2, if authority to administer such Plan
has been delegated to the Committee (any references herein to the "Committee"
shall be deemed to refer to either the Board or, if established, the Incentive
Compensation Committee). The Committee shall have the sole authority to
determine (a) the employees to be granted awards under the Plan; (b) the type,
size and terms of the awards to be made to each employee selected; (c) the time
when awards will be granted; and (d) any performance objectives required for
earning out any award made hereunder. The Committee shall have full power and
authority to administer and interpret the Plan and to adopt such rules,
regulations, agreements and instruments for implementing the Plan and for
conduct of its business as it deems necessary or advisable. The Committee's
interpretations of the Plan, and all determinations made by the Committee
pursuant to the powers vested in it hereunder, shall be conclusive and binding
on all persons having any interest in the Plan or in any awards granted
hereunder.
5. ELIGIBILITY FOR PARTICIPATION
Officers and other key employees of the Company or its subsidiaries (as defined
in Section 425(f) of the Code) shall be eligible to participate in the Plan (the
"Participants").
6. AMENDMENT AND TERMINATION
The Board may at any time and from time to time terminate, modify or amend the
Plan in any respect; provided, however, that unless also approved or ratified by
a vote of the majority of the holders of the outstanding shares of the capital
stock of the Company entitled to vote thereon, any such modification or
amendment shall not (subject, however, to the provisions of Section 2 of Article
V and Section 4(c) of Article III hereof): (i) increase the maximum number of
shares for which options and awards may be granted under the Plan; (ii) reduce
the option price at which options may be granted; (iii) extend the period during
which options may be granted or exercised beyond the times originally
prescribed; (iv) change the persons eligible to participate in the Plan; or (v)
increase the number of options or awards that may be granted to a Participant.
No such termination, modification or amendment may affect the rights of an
optionee under an outstanding option or the grantee of an award. Nevertheless,
with the consent of the Participant affected, the Committee may amend
outstanding options or awards in a manner not inconsistent with the terms of the
Plan.
7. EFFECTIVE DATE
This Plan, having been approved by the Board of Directors of the Company on
April 2, 1990, shall become effective immediately upon approval by the holders
of a majority of the shares of the Company entitled to vote at the next annual
meeting of the Company and shall continue in effect thereafter until terminated
or suspended by the Board.
<PAGE>
ARTICLE II - INCENTIVE STOCK OPTION PLAN
1. GRANTING OF INCENTIVE STOCK OPTIONS
(a) The purchase price of each Common Share subject to an Incentive Stock Option
shall be the Fair Market Value of a share of such stock on the date the
Incentive Stock Option is granted; provided, however, that any Incentive Stock
Option granted to a Participant who owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or any
subsidiary corporation (as defined in Section 425(f) of the Code) shall not be
less than 110% of such Fair Market Value.
(b) Incentive Stock Options shall be exercisable over an exercise period which
shall be determined by the Committee but which shall not exceed ten years from
the date the Incentive Stock Option was granted; provided, however, that any
Incentive Stock Option granted to a Participant who owns stock possessing more
than 10% of the total combined voting power of all classes of stock of the
Company or any subsidiary corporation (as defined in Section 425(f) of the Code)
shall not exceed five years from the date the Incentive Stock Option was granted
(the "Termination Date").
(c) The Committee, in its sole discretion, shall determine at the time of grant
whether any particular Incentive Stock Option shall become exercisable in one or
more installments and may prescribe such other terms as it deems desirable or as
may be necessary to qualify its grants under the provisions of Section 422A of
the Code. The Committee may also, in its sole discretion, authorize acceleration
of the exercise of an option or installment thereof.
(d) The Committee may grant at any time new Incentive Stock Options to a
Participant who has previously received Incentive Stock Options or other options
whether such prior Incentive Stock Options or other options are still
outstanding, have previously been exercised in whole or in part, or are
cancelled in connection with the issuance of new Incentive Stock Options.
2. EXERCISE OF INCENTIVE STOCK OPTIONS
(a) An Incentive Stock Option may be exercised, as to any and all shares granted
thereunder, by giving notice of such exercise to the Company, provided that an
option may not be exercised at any one time as to less than 100 shares (or such
number of shares as to which the option is then exercisable if less than 100).
(b) A Participant's Incentive Stock Option agreement may provide for payment to
be in cash, stock, promissory notes or any other manner the Committee deems
acceptable.
(c) An Incentive Stock Option shall be exercisable during a Participant's
lifetime only by the Participant.
<PAGE>
3. SUBSTITUTION OF OPTIONS
In the event of a corporate merger or consolidation, or the acquisition by the
Company of property or stock of another corporation or any reorganization or
other transaction qualifying under Section 425(a) of the Code, the Committee
may, in accordance with the provisions of that Section of the Code, substitute
options under this Plan for options under the plan of the acquired corporation
provided that (a) the excess of the aggregate Fair Market Value of the shares
subject to option immediately after the substitution over the aggregate option
price of such shares is not more than the similar excess immediately before such
substitution and (b) the new option does not give the Participant additional
benefits, including any extension of the exercise period.
4. TERMINATION OF EMPLOYMENT
If a Participant ceases to be an employee (other than by reason of death or
disability within the meaning of Section 105(d)(4) of the Code) any unexercised
portion of his Incentive Stock Option shall terminate. If, prior to the
Termination Date, a Participant shall cease to be an employee by reason of death
or disability within the meaning of Section 105(d)(4) of the Code, he (or, in
the event of the Participant's death, his estate) may exercise any Incentive
Stock Options he holds for a period of twelve months after the date of cessation
of employment to the extent that it was exercisable at the time of such
cessation. Thereafter, any unexercised portion of the option shall terminate. In
no event shall Incentive Stock Options be exercised after the Termination Date.
ARTICLE III - LONG-TERM INCENTIVE PLAN
1. AWARDS
Awards under this Plan may be of:
(a) NON-QUALIFIED STOCK OPTIONS ("Non-Qualified Stock Options") which are rights
to purchase Common Shares on the terms and conditions set forth herein.
(b) STOCK APPRECIATION RIGHTS ("Stock Appreciation Rights") which are rights to
receive, without payment to the Company, cash and/or Common Shares in lieu of
the purchase of shares under a related Non-Qualified Stock Option.
Non-qualified Stock Options and Stock Appreciation Rights may be granted in
conjunction with each other under terms whereby exercise of the Non-Qualified
Stock Option or Stock Appreciation Rights will proportionately reduce the number
of shares available under the related Non-Qualified Stock Option or Stock
Appreciation Rights. Non-Qualified Stock Options may also be granted alone and
not in conjunction with Stock Appreciation Rights, but Stock Appreciation Rights
may only be granted in conjunction with Non-Qualified Stock Options.
2. NON-QUALIFIED STOCK OPTIONS
All Non-Qualified Stock Options under this Plan shall be granted on the
following terms and conditions:
(a) Price. The purchase price per Common Share covered by each Non-Qualified
Stock Option shall be an amount determined by the Committee in its sole
discretion.
(b) Number of Shares. The number of shares subject to an outstanding
Non-Qualified Stock Option will be reduced on a share-for-share basis to the
extent that shares under such Non-Qualified Stock Option are used to calculate
the cash and/or shares to be received pursuant to exercise of a related Stock
Appreciation Right.
(c) Term and Exercise Dates. The Committee shall determine at the time of grant
the term during which each Non-Qualified Stock Option may be exercised (which
shall not exceed 10 years from the date of grant) and whether any such option
shall be exercisable in one or more installments. No Non-Qualified Stock Option
shall be exercisable prior to one year after the date on which such option was
granted.
To the extent that a Non-Qualified Stock Option is not exercised when it becomes
initially exercisable, it shall be carried forward and be exercisable until the
expiration of the term of such option. No partial exercise of a Non-Qualified
Stock Option may be for less than 100 shares of Common Stock (or such number of
shares as to which the option is then exercisable if less than 100).
(d) Termination of Employment or Death.
(i) In the event that a Participant terminates employment prior to the
expiration of his Non-Qualified Stock Option by reason of retirement at or after
age 65 or Disability, any unexercised portion of his Non-Qualified Stock Option
shall expire three months after such retirement or such Disability, as the case
may be, and during such three months' period the optionee shall have the same
rights to exercise the unexercised portion of his Non-Qualified Stock Option as
he would have had if he were an employee of the Company.
(ii) If prior to the expiration of any Non-Qualified Stock Option, a Participant
shall die while an employee of the Company, any unexercised portion of his
option shall expire one year after his death and during such one-year period his
legal representatives, heirs or legatees shall have the same rights to exercise
the unexercised portion of the option as the Participant would have had if he
were an employee of the Company.
(iii) Except as provided in clauses (i) and (ii) of this Section 2(d), if a
Participant terminates employment for any reason prior to the expiration of any
Non-Qualified Stock Option, the unexercised portion of such option shall
automatically terminate, unless the Committee in its sole discretion shall
determine otherwise.
(e) Payment.
A Participant's Non-Qualified Stock Option agreement may provide for payment to
be in cash, stock, promissory notes or any other manner the Committee deems
acceptable.
(f) Substitution of Options.
In the event of a corporate merger or consolidation, or the acquisition by the
Company of property or stock of another corporation or any reorganization, the
Committee may, substitute options under this Plan for options under the plan of
the acquired corporation provided (i) the excess of the aggregate Fair Market
Value of the shares subject to option immediately after the substitution over
the aggregate option price of such shares is not more than the similar excess
immediately before such substitution and (ii) the new option does not give a
Participant additional benefits, including any extension of the exercise period.
3. STOCK APPRECIATION RIGHTS
Concurrently with each Non-Qualified Stock Option granted under this Plan, the
Committee may grant a Participant Stock Appreciation Rights which shall relate
to such Non-Qualified Stock Option. All Stock Appreciation Rights granted under
this Plan shall be on the following terms and conditions:
(a) Exercise. Stock Appreciation Rights shall be exercisable to the extent and
upon the same conditions that the related Non-Qualified Stock Option is
exercisable under Section 2(c). A Participant wishing to exercise a Stock
Appreciation Right shall give written notice of such exercise to the Company.
(b) Amount of Cash or Number of Shares. The amount to which a Participant shall
be entitled upon the exercise of any Stock Appreciation Right shall be
determined by multiplying (i) that portion, as elected by the Participant, of
the total number of shares which the Participant is entitled to purchase as of
the exercise date under the related Non-Qualified Stock Option, by (ii) the
amount, if any, by which the Fair Market Value of a Common Share on the exercise
date exceeds the Fair Market Value of a Common Share on the date the related
Non-Qualified Stock Option was granted.
Payment of the amount to which a Participant is entitled, as determined under
the above formula, upon the exercise of Stock Appreciation Rights shall be made
in cash, Common Shares, or partly in cash and partly in Common Shares, as the
Committee in its sole discretion shall determine. To the extent that payment is
to be made in Common Shares, the number of such shares to be paid shall be
determined by dividing the amount of such payment by the Fair Market Value of a
Common Share on the exercise date.
(c) Effect of Exercise. The exercise of any Stock Appreciation Right shall
reduce the number of shares subject to the related Non-Qualified Stock Option as
provided in clause (i) of Section 2(b).
(d) Termination of Employment or Death. In the event that a recipient of Stock
Appreciation Rights ceases to be employed by the Company for any reason, his
Stock Appreciation Rights shall be exercisable only to the extent and upon the
same conditions as the related Non-Qualified Stock Option is exercisable under
Section 2(d).
ARTICLE IV - RESTRICTED STOCK PLAN
1. AWARDS
(a) Awards under this Restricted Stock Plan shall be granted in the form of
Common Shares.
(b) Common Shares awarded under this Plan may not be sold, transferred or
otherwise disposed of and shall not be pledged or otherwise hypothecated by a
Participant, except as provided in Section 2 below. As a condition to the
receipt of any shares awarded under this Plan, a Participant shall execute and
deliver to the Company an instrument in writing, in form approved by the
Committee, wherein he agrees to the above restrictions and the legending of his
shares with respect thereto. Notwithstanding such restrictions, however, a
Participant shall be entitled to receive all dividends declared on and to vote
any Common Shares held by him and to all other rights of a shareholder with
respect thereto.
2. RELEASE OF RESTRICTIONS ON SHARES
Subject to the provisions of Section 3 and any written agreement between the
Participant and the Company relating to the award of Common Shares hereunder,
the restrictions set forth in Section l(b) on the sale, transfer or other
disposition and on pledge or other hypothecation of Common Shares awarded under
this Plan shall lapse within a period of years and at a rate determined by the
Committee in its sole discretion.
3. TERMINATION OF EMPLOYMENT
If a Participant terminates his employment for any reason, his rights with
respect to any Common Shares which remain subject to the restrictions set forth
in Section l(b) hereof shall be as provided in a written agreement between the
Participant and the Company relating to the award and forfeiture of shares
hereunder.
ARTICLE V - MISCELLANEOUS; PROVISIONS
1. OTHER PROVISIONS
(a) Notwithstanding any other provision of this Plan, no payment of any unpaid
award shall be made and any and all unexercised options and all rights under the
Plan of a Participant who received such award or option grant (or his designated
beneficiary or legal representatives) to the payment or exercise thereof shall
be forfeited if, prior to the time of such payment or exercise the Participant
shall (i) be employed by a competitor of, or shall be engaged in any activity in
competition with the Company without the Company's consent, (ii) divulge without
the consent of the Company any secret or confidential information belonging to
the Company, or (iii) engage in any other activities which would constitute
grounds for his discharge by the Company for cause.
(b) If a former Participant whose employment has been terminated dies before
receiving full payment of all amounts to which he is entitled under this Plan,
the remaining payments shall be paid when due to his designated beneficiary or,
in the absence of such designation, to his estate.
(c) A Participant's rights and interests under the Plan (including the right to
payment of unpaid installments of awards or the exercise of unexercised options)
may not be assigned or transferred except, in the case of a Participant's death,
to his designated beneficiary as provided in the Plan or, in the absence of such
designation, by will or the laws of descent and distribution.
(d) This Plan shall be unfunded. The Company shall not be required to establish
any special or separate fund or to make any other segregation of assets to
assure the payment of any award under this Plan and payment of awards shall be
subordinate to the claims of the Company's general creditors. In no event shall
interest be paid or accrued on any award, including unpaid installments of
awards.
(e) No Participant or other person shall have any claim or right to be granted
an award under this Plan. Neither this Plan nor any action taken hereunder shall
be construed as giving any Participant any rights to be retained in the employ
of the Company.
(f) The Company shall have the right to deduct from all awards paid in cash any
federal, state or local taxes required by law to be withheld with respect to
such cash awards and, in the case of awards paid in Common Shares, the
Participant or other person receiving such shares shall be required to pay to
the Company the amount of any such taxes which the Company is required to
withhold with respect to such stock awards.
(g) Each award or grant made under this Plan shall be evidenced by a written
instrument containing such terms and conditions, not inconsistent with the Plans
set forth in Articles II through V, as the Committee shall approve.
(h) No Common Shares shall be issued or transferred upon payment of any award
payable hereunder unless and until all legal requirements applicable to the
issuance or transfer of such shares have been complied with to the satisfaction
of the Committee. The Committee shall have the right to condition any award or
issuance of Common Shares made to any Participant hereunder on such
Participant's undertaking in writing to comply with such restrictions on his
subsequent disposition of such shares as the Committee or the Company shall deem
necessary or advisable as a result of any applicable law, regulation or official
interpretation thereof, and certificates representing such shares may be
legended to reflect any such restrictions.
(i) As used in this Plan, the following terms shall have the following meanings:
"Code" shall mean the Internal Revenue Code of 1954, as it may be amended from
time to time.
"Disability" shall mean the total disability of a Participant, as determined by
the Committee in accordance with uniform principles consistently applied, upon
the basis of such evidence as the Committee deems necessary and desirable.
"Dividend Equivalent" means an amount equal to the amount per share of any cash
dividend declared on the Common Shares.
"Fair Market Value" of a Common Share on any date shall mean the closing price
of a Common Share on such date as reported in the Wall Street Journal for the
national securities exchanges and other securities markets which at the time are
included in the Wall Street Journal's principal stock price quotations.
2. EFFECT OF CERTAIN CHANGES
(a) If there is any change in the number of Common Shares through the
declaration of stock dividends, or through recapitalization resulting in stock
splits, or combinations or exchanges of such shares, the number of Common Shares
available for options or awards and the number of such shares covered by
outstanding options or awards, and the price per share of such options or the
applicable market value of awards, shall be proportionately adjusted by the
Committee to reflect any increase or decrease in the number of issued Common
Shares; provided, however, that any fractional shares resulting from such
adjustment shall be eliminated.
(b) In the event of a dissolution or liquidation of the Company, or in the event
of any corporate separation or division, including, but not limited to,
split-up, split-off or spin-off, the Committee may provide that the holder of
each option or award then exercisable shall have the right to exercise such
option (at its then option price) or award solely for the kind and amount of
shares of stock and other securities, property, cash or any combination thereof
receivable upon such dissolution, liquidation, or corporate separation or
division by a holder of the number of shares of Common Shares for which such
option or award might have been exercised immediately prior to such dissolution,
liquidation, or corporate separation or division; or the Committee may provide,
in the alternative, that each option and award granted under the Plan shall
terminate as of a date to be fixed by the Board; provided, however, that not
less than thirty (30) days written notice of the date so fixed shall be given to
each Participant and each Participant shall have the right, during the period of
thirty (30) days preceding such termination (i) to exercise the options as to
all or any part of the Common Shares covered thereby, including shares as to
which such options would not otherwise be exercisable, and (ii) to exercise any
or all of such awards, including awards which would not otherwise be
exercisable.
3. HEADINGS
Section headings are for reference only. In the event of a conflict between a
title and the content of a Section, the content of the Section shall control.
4. GOVERNING LAW
Except as otherwise required under the laws of the United States, this Plan
shall be construed in accordance with and governed by the laws of the State of
New York.
LOAN SERVICING PURCHASE AND SALE AGREEMENT
AGREEMENT, DATED THIS 6th day of November, 1995, between Citizens
Mortgage Service Company (the "Seller"), whose address is 500 Office Center
Drive, #120, Ft. Washington, PA 19034 and Atlantic Mortgage & Investment
Corporation (the "Purchaser"), whose address is 4348 Southpoint Boulevard, Suite
101, Jacksonville, Florida 32216.
WITNESSETH
WHEREAS, Seller is the owner of unencumbered servicing rights to
approximately 3,996 FHLMC, FNMA, GNMA, Private and Bond ("the Investors") loans
with an aggregate outstanding principal balance of approximately $211 million
with the characteristics described in Exhibit "A" which is attached hereto; and
WHEREAS, Purchaser desires to acquire all of Seller's right, title and
interest in and to the Servicing and Related Escrow Items in accordance with
this Agreement; and
WHEREAS, it is contemplated that the Investors will consent to the
transfer of the servicing of the Mortgages as provided in this Agreement and to
Seller's transfer or assignment of such servicing to Purchaser as provided
herein.
NOW, THEREFORE, in consideration of the mutual covenants herein, the
parties hereto agree as follows:
1.0 DEFINITIONS. As used in this Agreement, the following terms have
the meanings here below specified:
1.1 Business Day. The term Business Day means any day other than a
Saturday, Sunday or a day on which commercial or savings banks in the State of
Florida are required or authorized by law to close.
1.2 Investor. The term Investor means FHLMC (Federal Home Loan
Mortgage Corporation), FNMA (Federal National Mortgage Association), GNMA
(Government National Mortgage Association) and Private Investors.
1.3 Mortgages. This term shall include all mortgages, deeds of trust,
deeds to secure debt or other instruments which have been taken in connection
with loans made or serviced by Seller or with respect to which Seller owns the
Servicing secured by one to four family housing units, consisting of
approximately 3,996 loans (the "Loans" and individually, a "Loan") with the
characteristics described in Exhibit A, however, no particular Loan shall be
deemed a Mortgage or have servicing purchased hereunder if such Loan is 90 or
more days delinquent or in the process of foreclosure at the Sale Date
("Foreclosure Loans") or if it is a Loan which is in bankruptcy or in other
litigation at the Sale Date ("Bankruptcy Loans").
1.4 Mortgage Portfolio. This term refers to all documents, agreements
or instruments relating to a particular Loan, including the Title Insurance
Policy, Fire and Casualty Insurance Policy, Flood Insurance Policy, Hazard
Insurance Policy, Mortgage Insurance Policy, and all other documents or
agreements under which legal obligations or rights are created under that
particular Loan.
1.5 Related Escrow Items. This term refers to all mortgage escrow
accounts maintained by Seller which relate to the Servicing, including items
escrowed for mortgage insurance, property taxes (either real or personal),
hazard insurance, or any other items required by any Investor or by any
Mortgage, but specifically excluding principal and interest escrows.
1.6 Sale Date. This term refers to the date(s) Purchaser assumes all
right, title and interest in the Servicing. There will be two Sale Dates. The
First Sale Date will be December 1, 1995 for the FNMA, GNMA, Private and Bond
Loans. The Second Sale Date will be December 18, 1995 for the FHLMC Loans.
1.7 Servicing Agreements. This term shall mean the rules and
regulations of the Investors relating to the servicing of the loans and Related
Escrow Items between the Seller and the Investors, all of which are specified in
the Investors' Servicing Guides and/or various Private Investor agreements and
the Hurley Settlement Agreement, a copy of which is attached as Exhibit D.
1.8 Servicing. This term shall refer to the rights and
responsibilities of the Seller under the various Servicing Agreements covering
the Loans and the maintenance and servicing of the Related Escrow Items, all of
which are, subject to agreement by the Investors, being transferred by this
Agreement to Purchaser.
1.9 Transfer Date(s). This term refers to the date(s) Seller will
transfer to Purchaser and Purchaser will accept the responsibilities for
servicing the Loans. There will be two Transfer Dates. The first Transfer Date
will be December 1, 1995 with respect to approximately 2,538 FNMA, GNMA, Private
Investor and Bond loans with an aggregate outstanding principal balance of $115
million (Part A). The second Transfer Date will be December 18, 1995 with
respect to approximately 1,458 FHLMC loans with an aggregate outstanding
principal balance of $97 million (Part B).
2.0 SALE OF SERVICING AND RELATED ITEMS
2.1 Items to be Sold. Seller hereby assigns, sets over to and conveys
to Purchaser all right, title and interest as of the Sale Date, in and to (a)
the Servicing, (b) the Related Escrow Items, and (c) all documents, files, and
any other underlying documentation relating to the Servicing and the Loans
and/or the Mortgage Portfolio. Physical delivery of such items set forth above
shall be made to Purchaser at a location within the United States that Purchaser
shall designate in writing at least five (5) days prior to the applicable
Transfer Date, at Seller's expense, all in accordance with the provisions of
Section 6.7 hereof.
2.2 Evidence of Sale. After the Sale Date, Seller shall deliver to
Purchaser documents required in the form reasonably satisfactory to Purchaser
with respect to each portion of the Servicing, and the other items being sold or
assigned pursuant to the terms of this Agreement, and such other documents to
evidence the transaction contemplated hereby as Purchaser or Seller may
reasonably require.
3.0 CONSIDERATION
3.1 Purchase Price. In full consideration for the sale of the
Servicing as specified in Article 2 hereof, and upon the terms and conditions of
this Agreement, Purchaser shall pay to Seller on the dates described below a
purchase price in an amount equal to 1.20% of the aggregate outstanding
principal balance of the Mortgages as of the Sale Date, (the "Purchase Price"),
for which Investor approval has been received. The form and method of payment
hereunder is set forth in Article 3.2. Any Private Investor Servicing for which
Investor approval has not been obtained shall not be transferred and will be
retained by Seller.
3.2 Payment Terms. The foregoing consideration shall be paid by
Purchaser to Seller as follows:
(a) Cash Deposit. On the First Sale Date, Purchaser shall pay 11% of
the estimated final Purchase Price to Seller in cash via wire transfer. On the
Second Sale Date, Purchaser shall pay 9% of the estimated Final Purchase Price
to Seller in cash via wire transfer.
(b) Cash at Settlement Date. Within five (5) Business Days of the
applicable Transfer Date, provided the transfer of Documents and Escrows as
outlined in 6.7 has been satisfied in all material respects and the Schedule of
Servicing, as outlined in 6.6, has been received by Purchaser. Purchaser shall
pay to Seller in cash via wire transfer an amount that, when added to the
prorated Deposit, is equal to the difference between the prorated Purchase Price
and the prorated Hold-Back Amount (the "Settlement Date(s)").
(c) Subsequent Adjustment. If, subsequent to the payment of the entire
Purchase Price, the outstanding principal balance of any Mortgage Loan used to
calculate such Purchase Price is found to be in error, or any mathematical error
is found in the calculation of the Purchase Price, the party benefiting from the
error shall pay over to the other party an amount sufficient to reconcile the
Purchase Price and deliver a reconciliation statement and sufficient
documentation reasonably necessary to justify such adjustment.
3.3 Hold-Back Amount. The Hold-Back Amount shall be equal to $100,000,
which approximates the cost to process assignments. The Hold-Back Amount will be
released by Purchaser to Seller as true and certified copies of the assignments
submitted for recording are delivered to Purchaser. The amount to be released on
the fifth day of each month shall be calculated by multiplying the Hold-Back
Amount by the percentage of the assignments received the previous month, plus
accrued interest thereon calculated at an annual rate of 4%. Such percentage
shall be calculated by dividing the number of assignments which were received as
of month-end by the number of assignments outstanding on each Transfer Date. In
the event any assignments remain incomplete as of March 1, 1996, Purchaser may
arrange for the completion of such assignments and the cost for such arrangement
will be paid by Purchaser from the Hold-Back Amount.
3.4 ADJUSTMENTS
(a) Advances. In connection with the Loans transferred, the Purchaser
shall deliver to Seller funds within one (1) Business Day after the Transfer
Date sufficient to reimburse Seller for (l) any advances made by Seller for the
payment of real estate taxes and insurance premiums; (2) any advances of
principal and interest payments made by Seller in order to make payments to the
Investors; and (3) any advances made by Seller for the protection of any
property as required by the Servicing Agreements. Notwithstanding the foregoing,
advances on Foreclosure Loans and Bankruptcy Loans will be reimbursed by
Purchaser to Seller as advances are collected by Purchaser. Purchaser shall use
all reasonable efforts to collect all such advances. Purchaser shall provide
Seller with a monthly statement as to the status of all such advances. Seller
shall have reasonable access to Purchaser's books and records to confirm
Purchaser's collection efforts and monthly statement information.
(b) As of the Transfer Date, Seller will transfer to Purchaser and
Purchaser will accept the responsibilities for servicing Foreclosure Loans and
Bankruptcy Loans, although such loans will not be included in the Purchase Price
calculation.
(c) If any check presented to Seller by a mortgagor on a Loan prior to
the Sale Date is returned unpaid for any reason, and if the Loan as a result of
such becomes three (3) payments or more past due, then Seller shall immediately
forward the unpaid check to Purchaser, and reimburse Purchaser for the Purchase
Price allocable to said Loan. Within five (5) Business Days of receipt by
Purchaser, it shall reimburse Seller for the amount of check.
4.0 WARRANTIES AND REPRESENTATIONS OF SELLER. Seller warrants and
represents to Purchaser the following:
4.1 Due Incorporation and Good Standing. Seller is a Corporation duly
organized, validly existing and in Good Standing under the laws of the
Commonwealth of Pennsylvania.
4.2 Authority and Capacity. Seller has all requisite corporate power,
authority and capacity to enter into this Agreement, and to perform the
obligations required hereunder, and in particular Seller has the corporate power
and authority to transfer all its right, title and interest in the Servicing and
Related Escrow Items.
4.3 Effective Agreement. The execution and performance of this
Agreement by Seller, its compliance with the terms hereof, and the consummation
of the transaction contemplated (assuming receipt of the various consents
required pursuant to this Agreement) will not conflict with any of the terms of
its Articles of Incorporation, By-Laws or (assuming receipt of the consent of
the Investors) with any other governing instrument relating to the conduct of
business or the ownership of its properties, or any other agreement to which
Seller is a party.
4.4 Compliance with Contracts and Regulations. On or before the Sale
Date, Seller will have complied with all of its obligations under all other
contracts to which it is a party and with all applicable laws and regulations
only to the extent that failure to do so might materially adversely affect any
of the Servicing and assets being purchased by Purchaser hereunder, and Seller
has not done and will not do any act or thing which may cause the cancellation
of or otherwise materially adversely affect any of the Servicing or the mortgage
insurance or guaranty with respect to any of the Loans, the servicing of which
is being transferred to Purchaser.
4.5 Filing of Reports. Seller has filed or will have filed by the
Transfer Date all material reports required by all governmental agencies having
jurisdiction over the Servicing being purchased by Purchaser hereunder, and has
and will have complied with all applicable federal, state and municipal laws,
regulations and ordinances affecting the Servicing being purchased by Purchaser
hereunder. Seller shall have requested appropriate Social Security numbers from
all mortgagors for purposes of complying with applicable regulations of the
Internal Revenue Service, and will provide them to Purchaser to the extent that
such numbers were received.
4.6 Title to the Servicing and Related Escrow Accounts. Seller is the
lawful owner of the Servicing, and the transfer, assignment and delivery of the
Servicing and of the Related Escrow Items to the Purchaser are in accordance
with the terms and conditions of this Agreement, and all rights in such
Servicing will be vested in Purchaser upon the applicable Sale Date, free and
clear of any and all claims, charges, defenses, offsets and encumbrances of any
kind or nature whatsoever, including but not limited to those of Seller. Seller
shall retain issuer responsibility until the transfer of such issuer
responsibility to Purchaser has been approved by the Investors.
4.7 Related Escrow Items. All Related Escrow Items are being, and
until transfer shall be, maintained in accordance with applicable law and the
terms of the Loans related thereto, and, where applicable, in accordance with
the regulations of the Investor and other state, local or federal governmental
agencies having jurisdiction. Except as to payments which are past due under the
terms of a Loan, all escrow balances required by the Loans and paid to Seller
for the account of the mortgagors and Seller are on deposit in the appropriate
escrow account, all escrow items which are due to be paid prior to the Transfer
Date will be paid if a bill for said escrow items has been received. Seller has
provided or will provide forced place insurance coverage for all Mortgage
properties that would have been otherwise uninsured during any period prior to
the Transfer Date. Hazard insurance, homeowners insurance, (fire, hazard, and
extended coverage), Private Mortgage Insurance, flood insurance, and all other
insurance premiums due to be paid within thirty (30) calendar days after the
Transfer Date shall be paid by Seller prior to such Date, provided Seller
receives notification of the renewal premium on or before five (5) Business Days
prior to the Transfer Date. Any losses or penalties as a direct result of lapsed
insurance coverage on any Loan for which insurance is not current thirty (30)
calendar days subsequent to the Transfer Date shall be borne by the Seller
provided Seller received notification of renewal premium within the time frame
described above.
Seller will retain a copy of all insurance policies, notices, and
other insurance documentation generated until the Transfer Date. Tax bills,
transmittal lists, or any other information relating to tax payments shall be
promptly forwarded by Seller to Purchaser by overnight mail, if received by
Seller within sixty (60) days after the Transfer Date. If Purchaser has not
received the above information in a manner to ensure timely payment by
Purchaser, Seller shall bear all penalties and interest due on any Loan for
which Seller failed to pay tax bills due prior to the Transfer Date or for which
Seller failed to forward tax information to Purchaser, as required by this
paragraph, except to the extent that such penalties and interest are liabilities
of the Tax Servicer.
It is understood that Seller contracts the services of a Tax Service
firm for the purpose of paying real estate taxes for certain loans and will
cause such firm to transfer such contracts to Purchaser. Seller will pay up to
$8.00 per loan for the cost of transferring such contracts. Transfer costs above
$8.00 per loan will be paid by Purchaser. Seller shall cause such firm at or
prior to the Transfer Date, to provide Purchaser with a tape which includes the
necessary and accurate tax information. Purchaser will obtain tax contracts for
those loans where none currently exist. Seller will reimburse to Purchaser the
cost, up to $8.00 per loan, of placing each loan on a tax service upon receipt
of a copy of an invoice therefor. Additionally, Seller has, within the last
twelve (12) months, analyzed the payments due under the respective Mortgages for
escrow items required to be deposited into the Escrow accounts maintained under
HUD rules, and if a deficiency is noted, Seller has adjusted the amount of each
payment such that the deficiency will be corrected.
4.8 Servicing Agreements. With respect to the Loans, the Servicing of
which is being transferred to and assumed by Purchaser, all matters required to
be done by the Servicing Agreements have been or will have been done by Seller
prior to the Transfer Date.
4.9 Litigation, Compliance with Laws. There is no litigation,
proceeding, or governmental investigation, existing or pending, or to the
knowledge of the Seller threatened, or any order, injunction or decree
outstanding, against or relating to the Loans, the Servicing or the Seller,
except as set forth in Exhibit C, that may result in any material adverse change
in the business, operations, or financial condition of Seller that has not been
disclosed by Seller to Purchaser or its counsel in writing as provided below,
nor does Seller know of any basis for any such litigation, proceeding, or
governmental investigation. Seller has not and pending the Transfer Date will
not, violate any applicable law (including, but not limited to, usury laws, the
Truth-In-Lending Act, and the Equal Credit Opportunity Act), regulation,
ordinance, order, injunction or decree, or any other requirements of any
governmental body or court, which may materially adversely affect any of the
Loans under the Servicing being purchased by Purchaser hereunder.
4.10 Statements Made. No representation, warranty or written statement
made by Seller in this Agreement or in any schedule, exhibit, appendix, written
statement or certificate furnished to Purchaser in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
4.11 Loans by Seller. Seller warrants that any and all Loans, the
Servicing of which is being sold to Purchaser, were and will continue to be
fully disbursed and made and/or consummated in accordance with regulations of
the Investors and other governmental agencies and applicable law, that each
Mortgage represents a security for a valid and enforceable Note, except as such
enforcement may be affected by bankruptcy or other laws generally applicable to
creditors and that the net servicing fees to Seller on the Loans are as stated
in Exhibit A.
4.12 No Accrued Liabilities. Except as disclosed herein there are no
accrued liabilities of Seller with respect to the Loans or the Servicing, or
circumstances under which such accrued liabilities will arise against Purchaser
as successor to the Servicing, with respect to occurrences prior to the Transfer
Date.
4.13 Obligations of Seller until the Transfer Date. Seller warrants
that as of the Transfer Date it will have paid, performed and discharged all of
its liabilities and obligations under the Servicing Agreements in the same
manner and with the same quality of service as if it were not selling the
Servicing and that it will continue to service the Loans until the Transfer Date
in accordance with prescribed Investor procedures such that there is no
deterioration in the quality of the portfolio.
4.14 Investor Approval. Seller will use its best reasonable efforts to
obtain approval of the Investors for the transfer of Issuer responsibility to
the Purchaser and, further, that it will do nothing which would in any way
adversely affect the Investors' approval hereto.
4.15 Enforceability of Mortgages. To the best of Seller's knowledge
all documents, agreements and instruments contained in the Mortgage Portfolio
are valid and enforceable in accordance with their respective terms and meet all
requirements under Investor rules, regulations and guidelines.
4.16 Title Insurance. To the best of Seller's knowledge, with respect
to each Loan, there is contained in each Loan file a valid, binding and
enforceable policy of title insurance issued in an amount at least equal to the
principal balance underlying each Loan, and all premiums related to such title
insurance policies have been paid in full. Seller knows of no reason why the
title insurance policies are not valid and enforceable in accordance with their
terms.
4.17 Casualty Insurance. Each building or improvement on the property
which is the security for any Loan is properly insured, with a standard
mortgagee loss payable clause acceptable under prudent mortgage banking
practices, against loss or damage by fire or other insurable risks and hazards
as required by the Investor. Such insurance is in an amount not less than the
replacement cost coverage or the remaining unpaid principal balance of the
respective Loan. Seller has not received any notice that the properties which
are the subject of any Loan have been damaged by uninsured loss.
5.0 WARRANTIES AND REPRESENTATIONS OF PURCHASER
Purchaser warrants and represents to Seller the following, all of
which is and shall be binding on Purchaser through the Transfer Date:
5.1 Due Incorporation and Good Standing. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Florida.
5.2 Authority and Capacity. Purchaser has all requisite corporate
power, authority and capacity to enter into this Agreement and to perform the
obligations required of it hereunder.
5.3 Effective Agreement. The execution and performance of this
Agreement by Purchaser, its compliance with the terms hereof, and the
consummation of the transactions contemplated hereby on the Sale Date and on the
Transfer Date will not violate any provision of law applicable to it and will
not conflict with the terms or provisions of its Certificate of Incorporation,
By-Laws, or any other instrument relating to the conduct of its business, or the
ownership of its property, or any other agreement to which Purchaser is a party.
5.4 Statements Made. No representation, warranty or statement made by
Purchaser in this Agreement or financial statements of Purchaser furnished to
Seller in connection with the transaction contemplated hereby, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make any statement or representation made by
Purchaser not misleading.
5.5 Approved Servicer. Purchaser is an approved servicer of FHLMC,
FMNA, and GNMA in good standing. No actions, suits or proceedings are pending or
threatened against the Purchaser in any court or before any administrative
agency, the outcome of which would have an adverse effect on Purchaser's ability
to service the Loans under this Agreement. Purchaser will do nothing which would
in any way adversely affect the Investors' approval hereto.
6.0 COVENANTS
6.1 Continued Operations. (a) Except as otherwise provided, Seller
covenants and warrants that it will maintain a sufficient level of operations,
including, but not limited to, personnel, custodial functions and data
processing, necessary to assure that there is no deterioration in the quality in
the Mortgages, the Servicing, or the Related Escrow Items, or in the quality of
the Servicing being sold to Purchaser pending the Transfer Date. All monies
received by Seller after the Transfer Date relating to the Loans and Servicing
shall inure to and be considered to be under the control of Purchaser and shall
be transferred to Purchaser promptly.
6.2 Notification of Mortgagors, Taxing Authorities, Insurance
Companies, etc. On or before the Transfer Date, unless otherwise agreed by the
parties, Seller shall, in coordination with Purchaser and at Seller's expense,
transmit to the mortgagors whose loans are to be serviced pursuant to the
Servicing Agreements and which are the subject of this Agreement, the requisite
taxing authorities, applicable Private Mortgage Insurance companies and/or
agents, insurance companies and/or agents, the banks at which Related Escrow
Items are maintained, notification, in required form, if applicable, of the
assignment of the Servicing of the Mortgages and of the escrow deposits and
instructions to deliver all payments, notices, tax bills, insurance statements
and the escrow account statements, as the case may be, to Purchaser from and
after the Transfer Date. All notifications, including certified and true copies
of assignments submitted for recording, will be in a form and content reasonably
acceptable to Purchaser. The Seller shall, at its own expense, deliver a
separate recorded assignment for each Loan, in such form as is appropriate and
typical in the jurisdiction in which the real property described in the mortgage
securing the Loan is located. Additionally, Seller shall bear all expenses
relative to the recording of the assignments of the mortgages in the applicable
Public Registry where each mortgage is filed. As promptly as practicable, but in
no event later than March 1, 1996, Seller shall provide Purchaser with a copy of
aforementioned notifications, including copies of assignments submitted for
recording, certified as true copies by an officer of the Seller. Seller warrants
that each FNMA and GNMA pool will be certified and will be recertifiable.
6.3 Supplementary Information. From time to time prior to and after
the Transfer Date, Seller shall furnish Purchaser such incidental information
supplementary to the information contained in the documents and schedules
delivered pursuant hereto and file such reports as Purchaser may reasonably
request and which are reasonably available to Seller.
6.4 Access to Information. (a) Seller shall give to Purchaser and its
counsel, accountants, and other representatives reasonable access to all of
Seller's files, books and records of any kind relating to the Servicing and
Related Escrow Items being transferred, assigned and delivered to Purchaser
pursuant hereto. Additionally, Seller shall cause any third party in possession
of any books, records or documents pertaining to the Servicing or the Loans to
allow Purchaser access to said records for the purposes stated herein. Whether
or not the transactions contemplated by this Agreement are consummated,
Purchaser and its representatives and affiliates shall treat all information
obtained in such investigation, not otherwise in the public domain, as
confidential and shall not use such information except in connection with the
transaction contemplated herein, (b) Purchaser shall give to Seller and its
counsel, accountants and other representatives reasonable access during normal
business hours to all of Purchaser's files, books and records relating to the
Servicing and Related Escrow Items and in connection with all matters pertaining
to any claim of Purchaser for indemnification by Seller under Section 8.1
hereof.
6.5 Fees and Expenses. (a) Seller hereby acknowledges that it shall be
responsible for any fees imposed by, and incurred in connection with, the
securing of Investors' approval to this Agreement. (b) Seller shall pay mortgage
insurance premiums on the Loans for the premium due in the same calendar month
as the Transfer Date and will be responsible for the penalties, if any, incurred
due to late payment. (c) Except as otherwise provided herein, each party shall
bear its own expenses in connection with this Agreement.
6.6 Schedule of Servicing. Purchaser shall receive from Seller, within
three (3) Business Days of the applicable Transfer Date, a schedule or written
statement, certified as being true and correct, on behalf of Seller, by an
authorized officer thereof, that the Servicing information with respect to the
Mortgages and Related Escrow Accounts set forth in Exhibit "B" has been
delivered to Purchaser and that such information is true and correct. Such
information may be in original form or in readable microfiche, which, if on
microfiche, Seller warrants is acceptable to any applicable third party.
6.7 Transfer of Documents and Escrows. Within three (3) Business Days
after the Transfer Date, Seller shall, at Seller's expense, transfer to
Purchaser and Purchaser shall have received the items and information, including
all original Mortgages, Mortgage Portfolio and other documents (except for those
Mortgages or other documents which must, under the Servicing Agreements or
applicable law, be maintained by a third party, in which event Purchaser shall
designate, to the extent permissible under the Servicing Agreement, the third
party to receive such) relating to the Loans and the Servicing as set forth in
Exhibit "B". Within one (1) Business Day after the Transfer Date, Seller shall
transfer to Purchaser and Purchaser shall have received the Escrow funds,
including principal and interest escrows, relating to the Loans and the
Servicing.
6.8 No Solicitation. For as long as Purchaser services any of the
Loans hereunder, Seller covenants that it shall not directly solicit or provide
information for any other party to directly solicit for refinancing any
borrowers with Loans for which Servicing has been transferred hereunder. In the
event the Seller does refinance any such Loan as a result of such direct
solicitation, Seller hereby agrees to pay Purchaser 1.20% times the then
outstanding principal balance of such Loan. It is understood that promotions
undertaken by Seller which are directed to the general public at large (i.e.,
newspaper advertisements, radio and T.V. ads, etc.) and not directed to the
borrowers herein individually shall not constitute direct solicitation as
referred to herein.
6.9 Hurley Case. Seller shall be responsible for the payment of legal
fees of both its own and, to the extent required by the Hurley Settlement
Agreement, plaintiff's counsel, as well as rebates as outlined in the Hurley
Settlement Agreement, attached as Exhibit D.
6.10 Servicing Assignments. To the extent that servicing for any of
the Loans was purchased by Seller, Seller will assign to Purchaser any of its
rights to indemnification under those purchase agreements to the extent
permitted pursuant to such agreements. Seller makes no representation that any
such assignment is permitted or that Purchaser will receive any rights pursuant
to such assignment. Purchaser may only utilize such assignment to the extent
that Purchaser incurred a loss to which it is entitled to indemnification
hereunder and Seller has not provided such indemnification.
6.11 REO Loans. In the event Seller is unable to procure the approval
of any of FHLMC, FNMA, GNMA or any Private Investor because the servicing on any
Loans classified as Real Estate Owned ("REO Loans") are being retained by
Seller, Purchaser agrees to assume responsibility for servicing such REO Loans.
Seller will pay Purchaser $1,750 for each REO Loan so assumed; and, as between
Seller and Purchaser, Seller will be responsible for any and all losses and
out-of-pocket expenses incurred by Purchaser in connection therewith, except to
the extent that such loss was caused by Purchaser.
6.12 Undertakings of Purchaser. On and after the Transfer Date,
Purchaser shall assume and be responsible for all Servicing related to the
Loans, except as may otherwise specifically be provided for herein. Purchaser
covenants and agrees with Seller that it will service the Loans and the Related
Escrow Items in accordance with the terms and conditions of the Servicing
Agreements.
7.0 CONDITIONS PRECEDENT.
Purchaser's obligation to service the Loans from and after the
applicable Transfer Date is subject to the satisfaction of the following
conditions, and if any of such conditions are not satisfied, all Deposits paid
by Purchaser to Seller shall be refunded to Purchaser and any assets transferred
by Seller to Purchaser shall be returned to Seller, whereupon Purchaser shall
have no further obligation to Seller hereunder.
7.1 Investor Approval. (a) Seller shall have procured, at its expense,
the approval of FNMA, GNMA and Private Investors representing at least 70% of
the Principal balance of the Private Investor Loans as of the First Sale Date to
the transfer of issuer responsibility. (b) Seller shall have procured, at its
expense, the approval of FHLMC as of the Second Sale Date to the transfer of
issuer responsibility; provided that if the transfer of any of the FNMA, GNMA
and Private Investor Servicing shall have occurred on the First Sale Date, then
failure to procure FHLMC approval shall not effect such transfer.
7.2 Quality of Portfolio. Prior to the Transfer Date, there shall not
have been a material deterioration in the overall quality of the Servicing and
the Loans. For purposes of determining whether such a deterioration has
occurred, normal and prudent mortgage banking standards shall apply. Changes in
general interest rates will not be considered a material deterioration in the
overall quality of the Servicing for the purposes of this paragraph.
7.3 Compliance by Seller. The representations and warranties of Seller
contained in this Agreement shall be true and correct when made and as of the
Transfer Date, and Seller shall have performed and complied with each and every
covenant and condition required by this Agreement to be performed or complied
with by Seller on or prior to the Transfer Date.
8.0 MISCELLANEOUS
8.1 Indemnification.
(a) Provided that Purchaser notifies Seller in accordance with
paragraph (b) of this Section 8.1, Seller shall indemnify and hold Purchaser
harmless from, and will reimburse Purchaser for, any actual losses, damages,
deficiencies, penalties or expenses of any nature (including reasonable
attorney's fees and court costs incurred in connection therewith or in enforcing
Purchaser's right to indemnification hereunder) incurred by Purchaser after the
Sale Date which:
(i) Result from any material misrepresentation made by Seller in
this Agreement, or in any schedule, statement, certificate or document furnished
pursuant to or with this Agreement;
(ii) Result from any material breach of warranty by Seller, or
the non-fulfillment of any covenant of Seller contained in this Agreement, or in
any schedule, statement or certificate furnished pursuant to or with this
Agreement;
(iii) Result from any defect in or lack of documentation related
to any Loan existing as of the Sale Date (including those defects subsequently
discovered), or result from any act or omission of Seller prior to the Transfer
Date or
(iv) Result from errors in originating or servicing any of the
Mortgages prior to the Transfer Date or result from Seller's act or omission
thereafter.
(v) Result from a difference between the remaining principal
balance of any Loan, upon Mortgagor payoff or Loan maturity, and the Calculated
Loan Balance (as defined below) where the remaining principal balance exceeds
the Calculated Loan Balance by $100 or more, and where such difference arose on
account of the servicing of such Loan prior to the applicable Transfer Date. The
Calculated Loan Balance will be zero at Loan maturity and at any other time will
be equal to the original Loan balance plus any additions thereto that were
permitted by the terms of the Loan note or any other documentation applicable to
such Loan less payments made thereon. Purchaser will have no claim with respect
to the failure of the servicing file with respect to any such Loan to contain
any documentation necessary to support any additions to the original Loan
balance unless, on or before April 1, 1996, Purchaser shall have notified Seller
in writing that such documentation does not exist.
(b) PURCHASER agrees to promptly notify SELLER in writing of the
existence of any fact actually known to an officer of PURCHASER giving rise to
any obligation of SELLER under this Paragraph 8.1 and, in the case of any claim
or any litigation brought by a third party (a "Third Party Claim") which may
give rise to any such obligation, Purchaser agrees to promptly notify SELLER of
the making of such claim or the commencement of such action by a third party as
and when the same shall become known to an officer of PURCHASER. SELLER shall be
entitled to employ counsel in its own name and at its own expense with respect
to SELLER's interest in such claim or litigation and shall cooperate fully with
PURCHASER in the handling and disposition of such claim or litigation. In
furtherance of SELLER's mitigation efforts, PURCHASER agrees (i) to give SELLER
and its agents and employees access to PURCHASER's books and records at
Purchaser's location relating to any such claim or action, including without
limitation all applicable Loan files and (ii) to cooperate fully with SELLER
with respect to any reasonable request made by SELLER in connection with such
review, investigation and action. SELLER may, with PURCHASER's permission, not
to be unreasonably withheld, with respect to any such obligation, communicate
and deal directly with the applicable Investors (or any successor owner of the
Loan), any regulatory agency or instrumentality or any insurance company.
Nothing contained in this Paragraph 8.1(b) shall relieve SELLER of its
indemnification obligations hereunder; provided, however, that PURCHASER's
failure to comply with the terms and conditions relating to it herein will
reduce the amount of SELLER's obligations to the extent PURCHASER's failure
restricts SELLER's ability to mitigate its losses.
(c) Purchaser herewith agrees to indemnify and hold harmless SELLER
against, and will reimburse Seller for, any actual claims, demands, liabilities,
losses or causes of action against SELLER (including, without limitation, all
related costs, expenses and reasonable attorneys' fees and costs incurred by
SELLER) which result from or arise out of (i) any breach by PURCHASER of any
representation, covenant or warranty or other term or condition of this
Agreement, which representations, covenants, warranties and terms and conditions
shall survive the Sale Date and acceptance of the Servicing by PURCHASER or (ii)
Purchaser's servicing of Loans after the Transfer Date, provided such loss was
not a direct result of Seller's servicing activities prior to the Transfer Date.
(d) Indemnification for Repurchase of Mortgages. Purchaser understands
that, aside from approximately 157 FNMA MBS Loans with an aggregate outstanding
principal balance of $6 million, the Loans were sold to the Investor on a
non-recourse basis. In the event that it is subsequently discovered that a Loan
was not sold under such option, Seller or its successors and/or assigns will
reimburse Purchaser for any monies which would have been paid to Purchaser by
Investor if the Loan had been sold on a non-recourse basis. In the event that an
Investor, through any right of recourse it may have against the Issuer/Servicer
of any mortgage, requests Purchaser to repurchase a mortgage or reimburse
Investor for any expenses associated with any mortgage, unless the same results
from the actions or omissions of Purchaser in servicing the Loan on or after the
Sale Date, Seller will hold Purchaser harmless against such actions and will
repurchase such mortgages and will reimburse Purchaser for any reasonable
associated out-of-pocket expenses.
For FHLMC Loan Number 708414818, a Repurchase Agreement exists between
FHLMC and the Seller. In the event that FHLMC requests Purchaser to repurchase
Loan Number 708414818 or reimburse FHLMC for any expenses associated with Loan
Number 708414818, unless same results from the actions or omissions of Purchaser
in servicing the Loan on or after Sale Date, Seller will hold Purchaser harmless
against such actions and will repurchase such Loan and will reimburse Purchaser
for any reasonable associated out-of-pocket expenses.
8.2 Survival of Warranties and Representations. Each party hereto
covenants and agrees that the warranties and representations in this Agreement,
and in any document delivered or to be delivered pursuant hereto, and
particularly the confidentiality requirements of Section 6.4, shall survive the
Sale Date for a period of five (5) years.
8.3 Notices. All notices, requests, demands and other communications
which are required or permitted to be given under this Agreement shall be in
writing and shall be deemed to have been duly given upon the delivery there of,
if hand delivered or if sent by registered or certified mail, return receipt
requested, postage prepaid:
(a) If to the Purchaser, to:
Atlantic Mortgage & Investment Corporation
4348 Southpoint Blvd., Suite 101
Jacksonville, FL 32216
Attention: Joseph L. McDaniels
President
(b) If to the Seller, to:
Citizens Mortgage Service Company
500 Office Center Drive #120
Ft. Washington, PA 19034
Attention: James A. Rogers
Chairman
with a copy to:
McAdams, Taylor & Co., Inc.
2 World Trade Center, Suite 2112
New York, NY 10048
Attention: Nicholas J. Letizia
Vice President
or to such other address as Purchaser or Seller shall have specified in writing
to the other.
8.4 Waivers. Either Purchaser or Seller may, by written notice to the
other:
(a) Extend the time for the performance of any of the obligations or
other transactions of the other;
(b) Waive compliance with any of the terms, conditions or covenants
required to be complied with by the other hereunder; and
(c) Waive or modify performance of any of the obligations of the other
hereunder.
The Waiver by any party hereto of a breach of any provisions of this
Agreement shall not operate or be construed as a waiver of any other or
subsequent breach.
8.5 Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the sale of the Servicing.
8.6 Binding Effect. This Agreement shall inure to the benefit of and be
binding upon the parties hereto and their successors and assigns. Nothing in
this Agreement, express or implied, is intended to confer on any person other
than the parties hereto and their successors and assigns, any rights,
obligations, remedies or liabilities.
8.7 Headings. Headings on the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
8.8 Applicable Laws. This Agreement shall be construed in accordance
with the laws of the State of New York.
8.9 Attorney's Fees. In the event of any dispute arising out
of this Agreement, the prevailing party shall be entitled to an award by the
court against the losing party of the costs of litigation, including reasonable
attorney's fees (whether incurred before trial, at trial, on appeal or in
insolvency proceedings).
<PAGE>
IN WITNESS WHEREOF, each of the undersigned parties to this Agreement
has caused this Agreement to be duly executed in its corporate name by one of
its duly authorized officers, all as of the date first above written.
PURCHASER
ATLANTIC MORTGAGE &
INVESTMENT CORPORATION
(Corporate Seal)
/s/J. MARK KENNEDY
By: J. MARK KENNEDY
Its: VICE PRESIDENT FINANCE
ATTEST:
/s/JOSEPH L. McDANIELS
By: JOSEPH L. McDANIELS
Its: PRESIDENT
SELLER
(Corporate Seal)
/s/JAMES A. ROGERS
By: JAMES A. ROGERS
Its: CHAIRMAN & CEO
ATTEST:
/s/JOSEPH B. McDADE
By: JOSEPH B. McDADE
Its: SECRETARY
CITIZENS MORTGAGE SERVICE COMPANY
Suite 120, 500 Office Center Drive
PO Box 1299
Fort Washington, PA 19034-3212
Tel: (215) 540-0320 Fax: (215) 540-0919
January 16, 1996
Mr. Eric M. Fishman
3236 Ayr Lane
Dresher, PA 19025
RE: Citizens Mortgage Service Company
Dear Eric:
This Letter Agreement is to confirm that Citizens Mortgage Service
Company (the "Company") will employ you as President and Chief Operating Officer
or Chief Executive Officer of Citizens Mortgage Service Company in accordance
with the following terms and conditions:
1. The commencement date of employment will be January 23, 1996.
2. The initial term of employment will be three (3) years.
3. Compensation will be as follows:
A. $150,000 per year payable biweekly less any required
withholding under federal, state, or local law and elective deferrals pursuant
to a deferred compensation arrangement such as the Company's 401(k) plan or any
replacement thereof.
B. Commissions at normal rates on your own loan production.
C. Bonus equal to ten percent (10%) of the Company's annual
net income before income taxes, as determined in accordance with GAAP, adjusted
for a management fee and capital charge. In determining net income before income
taxes for purposes of calculating this bonus, the bonus will not be deducted.
The bonus will commence for calendar year 1996 and will be paid annually in
arrears.
D. You will be eligible to participate in all benefit plans
offered to senior executives of the Company.
4. All compensation payable pursuant to Paragraph 3 above is guaranteed
for the entire term of this Agreement and is payable to you if this Agreement is
terminated by the Company except as provided below. Notwithstanding anything to
the contrary, the obligation of the Company or the undersigned guarantor to pay
the compensation enumerated in Sec. 3 shall cease upon the Company terminating
your employment for any of the following reasons: (A) your failure to devote
substantially all of your time and best efforts to fulfilling your duties as
President and Chief Operating Officer or Chief Executive Officer of the Company,
provided such failure continues for fiteen (15) days after notice of such
failure is given to you in writing by the Company, or (B) your proven
dishonesty, or (C) your illness or injury preventing you from performing your
customary duties for a period of six (6) consecutive months, or (D) your death,
or (E) any determination by a court, government agency, Federal National
Mortgage Association, Federal Home Loan Mortgage Corporation, or arbitration
panel, or your plea of "no contest" in any proceeding, with respect to a felony,
fraud, embezzlement, or any other activity involving either your moral turpitude
or your unjust personal enrichment.
5. You hereby accept the employment offered on the terms herein and you agree
that for a period of three years beginning with the commencement date of
employment, indicated above, that you will not compete either directly or
indirectly with the Company. Notwithstanding anything to the contrary, you will
not be prohibited from competing either directly or indirectly with the Company
if: (A) the Company directly or through the undersigned guarantor breaches any
of its obligations hereunder and such breach is not cured within five (5)
business days after you have given written notice both to the Company and the
undersigned guarantor of such breach, or (B) this Letter Agreement is terminated
by the unanimous consent of the parties hereto. Furthermore, you agree that you
will devote substantially all of your time and best efforts to fulfilling your
duties as President and Chief Operating Officer or Chief Executive Officer of
the Company.
Please confirm your acceptance by signing below and returning the
duplicate original to me.
Very truly yours,
/s/James A. Rogers
James A. Rogers, Chairman & CEO
Citizens Mortgage Service Company
The financial obligations of this
agreement set forth in Sec. 3 are
guaranteed by Helmstar Group, Inc.,
its successors and/or assigns
/s/ George W. Benoit
George W. Benoit, Chairman
Helmstar Group, Inc.
Agreed and Accepted
as of this 17th day
of January 1996
/s/Eric M. Fishman
Eric M. Fishman
EXHIBIT 22.0
List of Subsidiaries
First Tier
Matthews & Wright, Inc. (Delaware)
Snider, Williams & Co., Inc. (Delaware)
Randolph, Hudson & Co., Inc. (Delaware)
Eden Consulting, Inc. (New York)
Shaw Realty Company, Inc. (New York)
Burrows, Hayes Company, Inc. (New York)
Dover, Sussex Company, Inc. (New York)
Housing Capital Corporation (New York)
Randel, Palmer & Co., Inc. (New York)
Parker, Reld & Co., Inc. (New York)
McAdam, Taylor & Co., Inc. (New York)
Helmstar Funding, Inc. (formerly CMS Insurance Agency, Inc.) (Pennsylvania)
Second Tier - Subsidiary of McAdam, Taylor & Co., Inc.
Citizens Mortgage Service Company (Pennsylvania)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HELMSTAR
GROUP, INC. AND SUBSDIAIRIES' CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE YEAR
ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,358,730
<SECURITIES> 3,805,767
<RECEIVABLES> 52,179
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 567,274
<DEPRECIATION> 363,901
<TOTAL-ASSETS> 9,986,666
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 674,960
<OTHER-SE> 6,759,770
<TOTAL-LIABILITY-AND-EQUITY> 9,986,666
<SALES> 0
<TOTAL-REVENUES> 6,202,459
<CGS> 0
<TOTAL-COSTS> 4,980,179
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,627
<INCOME-PRETAX> 1,222,280
<INCOME-TAX> 37,611
<INCOME-CONTINUING> 1,184,669
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,184,669
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
