U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1997
[ ] Transition report under Section 13 or 15(d) of the Exchange Act of 1934
For the transition period from to
Commission file number 1-9224
HELMSTAR GROUP, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-2689850
- ----------------------------------------- ------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2 World Trade Center, Suite 2112, New York, N.Y. 10048
---------------------------------------------------------------------------
(Address of Principal Executive Offices)
212-775-0400
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at April 30, 1997
----- -------------------------------
Common stock - par value $.10 5,521,373 shares
- ----------------------------- ----------------
<PAGE>
PART I
FINANCIAL INFORMATION
Item l. Financial Statements.
The following consolidated financial statements of Helmstar Group, Inc.
and subsidiaries (collectively referred to as the "Company," unless the context
requires otherwise) are prepared in accordance with the rules and regulations of
the Securities and Exchange Commission for Form 10-QSB and reflect all
adjustments (consisting of normal recurring accruals) and disclosures which, in
the opinion of management, are necessary for a fair statement of results for the
interim periods presented. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's Form 10-KSB for the year ended December 31, 1996, which was filed
with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results to be expected for the entire fiscal
year.
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................ $ 769,371 $ 1,679,454
Marketable securities .................... 4,715,062 1,350,441
Joint ventures ........................... 1,605,301 1,418,383
Mortgage loans held for sale ............. 1,448,175 2,647,692
Due from mortgage investors .............. 4,123
Furniture, equipment and
leasehold improvements - at cost,
less accumulated depreciation and
amortization of $435,411 in
1997 and $415,504 in 1996 ............ 262,252 237,673
Other assets ............................. 719,443 951,132
------------ ------------
TOTAL ........................... $ 9,519,604 $ 8,288,898
============ ============
LIABILITIES
Notes payable ............................ $ 3,213,853 $ 2,246,672
Accrued expenses and other
liabilities .......................... 1,206,492 979,298
------------ ------------
Total liabilities ............... 4,420,345 3,225,970
------------ ------------
STOCKHOLDERS' EQUITY
Common stock - authorized
10,000,000 shares, par value
$.10; issued 6,749,600 shares ........ 674,960 674,960
Paid-in surplus .......................... 14,984,510 14,984,510
(Deficit) ................................ (7,643,444) (7,683,718)
------------ ------------
Total ........................... 8,016,026 7,975,752
Less treasury stock, at cost -
1,218,227 shares in 1997 and
1,213,227 shares in 1996 ............. (2,916,767) (2,912,824)
------------ ------------
Total stockholders' equity ...... 5,099,259 5,062,928
------------ ------------
TOTAL ........................... $ 9,519,604 $ 8,288,898
============ ============
See Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Profit from joint ventures ............ $ 186,918 $ 167,393
Financial Consulting Fees ............. 90,000
Loan origination fees ................. 383,991 187,056
Loan servicing fees ................... 37 12,172
Interest income ....................... 63,806 116,094
Investment income ..................... 544,564 201,575
Other income .......................... 1,568 2,761
----------- -----------
Total revenues ................... 1,270,884 687,051
----------- -----------
Expenses:
Compensation and related costs ........ 785,112 751,750
Occupancy cost ........................ 78,569 92,171
Amortization of mortgage
servicing rights ................. 1,339
General and administrative ............ 292,768 252,825
Professional fees ..................... 26,081 54,144
Interest .............................. 38,300 23,329
----------- -----------
Total expenses ................... 1,220,830 1,175,558
----------- -----------
Income (loss) before taxes ................ 50,054 (488,507)
Provision for income taxes ................ 9,780 11,819
----------- -----------
NET INCOME (LOSS) ......................... $ 40,274 $ (500,326)
=========== ===========
Net income (loss) per common share ........ $ .01 $ (.09)
=========== ===========
Weighted average number of
common shares outstanding ............. 5,559,707 5,546,373
=========== ===========
See Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................... $ 40,274 $ (500,326)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ....................... 27,045 25,253
Unrealized (gain) on joint ventures
and other investments .............................. (186,918) (167,393)
Changes in operating assets and liabilities:
Purchase of marketable securities - net ............ (3,364,621)
Decrease in mortgage loans held for sale ........... 1,199,517 196,541
Decrease (increase) in due from mortgage investors . 4,123 (5,160)
Decrease in other assets ........................... 224,551 641,649
Increase (decrease) in accrued expenses ............ 227,194 (136,918)
----------- -----------
Net cash provided by (used in) operating activities ..... (1,828,835) 53,646
----------- -----------
Cash flows from investing activities:
Sale of investment securities - net ................... 677,931
Distributions from joint ventures and other investments 46,500
Purchase of fixed assets .............................. (44,486) (28,376)
----------- -----------
Net cash (used in) provided by investing activities ..... (44,486) 696,055
----------- -----------
Cash flows from financing activities:
Proceeds (repayment) of short term borrowings - net: .. 967,181 (943,743)
Purchase of treasury stock ............................ (3,943)
----------- -----------
Net cash provided by (used in) financing activities ..... 963,238 (943,743)
----------- -----------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS ............. (910,083) (194,042)
Cash and cash equivalents at beginning of period ........ 1,679,454 1,358,730
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 769,371 $ 1,164,688
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................ $ 38,300 $ 23,329
Taxes ............................................... 688 6,278
See Notes to Condensed Consolidated Financial Statements (Unaudited).
</TABLE>
<PAGE>
HELMSTAR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
l. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in the
notes to the Company's financial statements included in its Form 10-KSB, for the
year ended December 3l, 1996, which was filed with the Securities and Exchange
Commission.
2. JOINT VENTURES
Summary combined operating results of the joint ventures in which the
Company is a co-venturer are as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Rental income .......................... $ 656,115 $ 619,058
Operating expenses ..................... (32,774) (8,908)
--------- ---------
Net operating income ................... 623,341 610,150
Other (expense) ........................ (363,734) (373,774)
--------- ---------
Net income ............................. $ 259,607 $ 236,376
========= =========
Company's share of profit
from joint ventures .................... $ 186,918 $ 167,393
========= =========
</TABLE>
3. INCOME (LOSS) PER SHARE
Income (loss) per share is based on the weighted average number of
common shares outstanding and common stock equivalents based on the treasury
stock method when dilutive.
4. LITIGATION
The Company is a defendant in various lawsuits. In those instances in
which any liability can be estimated, provisions have been reflected in the
financial statements. The ultimate outcome of the remaining lawsuits cannot
presently be determined, and no provision for any liability that may result has
been made in the financial statements, since the amounts, if any, cannot be
determined.
For an update to the litigation described in the notes to the Company's
Financial Statements included in its Form 10-KSB for the fiscal year ended
December 31, 1996, which was filed with the SEC, see Item 1, "Legal
Proceedings."
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
A. Three Months Ended March 31, 1997 Compared
with Three Months Ended March 31, 1996
Total revenues increased to $1,270,884 for the three months
ended March 31, 1997 from $687,051 for the three months ended
March 31, 1996.
Profit from joint ventures increased to $186,918 for the three
months ended March 31, 1997 from $167,393 for the three months
ended March 31, 1996. 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.
Operating results of the two real estate ventures in which the
Company participates continue to improve. Rental income at
both projects and the Company's share of income at both
projects was higher for the quarter ended March 31, 1997 as
compared with the quarter ended March 31, 1996.
Although operating results continue to improve, 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 were $90,000 for the quarter ended
March 31, 1997 compared with nil for the quarter ended March
31, 1996. The Company provides financial structuring advice to
clients on a fee basis and significant variations in revenues
are likely because of the transactional nature of this
business. Typically, an engagement is based on a specific
assignment to assist a client to lower its cost of capital or
structure the financing of capital assets. The Company
currently is engaged in advising clients with respect to
transactions which are expected to generate fees later in
1997.
Loan origination fees increased to $383,991 for the three
months ended March 31, 1997 compared with $187,056 for the
three months ended March 31, 1996. This category includes fees
earned in connection with making mortgage loans and net profit
or loss from sales of such loans to investors. This increase
was attributable to the Company's expanded loan origination
efforts. In 1996, the Company repositioned its mortgage
banking operation to originate residential mortgage loans and
sell them with their servicing rights to permanent investors.
<PAGE>
Loan servicing fees decreased to $37 for the three months
ended March 31, 1997 compared with $12,172 in the three months
ended March 31, 1996. The decrease is the result of the sale
of substantially all of the Company's mortgage servicing
portfolio in December 1995 and the sale of the balance of the
portfolio in July and August 1996. This category includes fees
earned in processing residential mortgage payments and
servicing loans on behalf of various investors.
Interest income decreased to $63,806 for the three months
ended March 31, 1997 from $116,094 for the three months ended
March 31, 1996, due in large part to the loss of interest
earning escrow deposits as a result of the sale of the
Company's mortgage servicing portfolio. In addition, the
Company has reduced the time a mortgage loan remains in
inventory before being delivered to an investor and thus
reduced the interest earning period on mortgages held in
inventory.
Investment income increased to $544,564 for the three months
ended March 31, 1997 from $201,575 for the three months ended
March 31, 1996. This category principally consists of net
profit or loss from investing in futures, puts, calls,
equities, municipal bonds, and other securities for cash
management, trading and risk management purposes relating to
the Company's interest fluctuation exposure in its mortgage
banking operation.
Other income was $1,568 for the three months ended March 31,
1997 compared with $2,761 for the three months ended March 31,
1996. This category consisted primarily of sundry fees and
revenues earned in connection with the Company's mortgage
banking business other than loan origination fees.
Total expenses increased to $1,220,830 for the three months
ended March 31, 1997 from $1,175,558 for the three months
ended March 31, 1996.
Compensation and related costs increased to $785,112 for the
three months ended March 31, 1997 from $751,750 for the three
months ended March 31, 1996. This increase principally was
attributable to the addition of professional staff, higher
commission expense for mortgage loan originators as a result
of the increased volume of originations, and additional
salaried employees in the mortgage loan origination area to
support the higher level of production. Increased compensation
in mortgage loan originations was partially offset by salary
savings from a reduction in mortgage servicing personnel as a
result of the sale of substantially all of the Company's
mortgage servicing portfolio and the curtailment of the
viatical settlement business which had commenced in May 1995.
Occupancy costs decreased to $78,569 for the three months
ended March 31, 1997 from $92,171 for the three months ended
March 31, 1996. This decrease is due principally to the new
lease entered into by the Company for its existing executive
offices at a significantly lower rent and the termination of
the lease for a small office for the viatical settlement
activity.
<PAGE>
Amortization of mortgage servicing rights decreased to zero
for the three months ended March 31, 1997 from $1,339 for the
three months ended March 31, 1996 as a result of the sale of
the mortgage servicing portfolio in 1996.
General and administrative expenses increased to $292,768 for
the three months ended March 31, 1997 from $252,825 for the
three months ended March 31, 1996. This increase was due
principally to greater activity in the Company's loan
origination business including such direct expenses as
appraisal fees, tax service fees, funding fees and warehouse
expenses.
Professional fees decreased to $26,081 for the three months
ended March 31, 1997 from $54,144 for the three months ended
March 31, 1996.
Interest expense was $38,300 for the three months ended March
31, 1997 compared with $23,329 for the three months ended
March 31, 1996. This increase is the result of greater loan
origination activity being financed through the Company's
lines of credit.
On a pre-tax basis, the Company had a profit of $50,054 for
the three months ended March 31, 1997 compared with a loss of
$488,507 for the three months ended March 31, 1996. Provision
for income taxes for the three months ended March 31, 1997 was
$9,780 compared with $11,819 for the three months ended March
31, 1996. These provisions consist solely of state and local
taxes. For Federal income tax purposes, as of December 31,
1996, the Company had net operating loss carryforwards of
approximately $13,750,000 available to reduce future taxable
income. These carryforwards expire in the years 2005 through
2011.
The Company's net profit for the three months ended March 31,
1997 was $40,274 compared with net loss of $500,326 for the
three months ended March 31, 1996. On a per share basis, the
net profit was $.01 for the three months ended March 31, 1997,
compared with net loss of $(.09) for the three months ended
March 31, 1996. Income per share for the three months ended
March 31, 1997 is computed based on the weighted average
number of common shares actually outstanding plus the shares
that would be outstanding assuming the exercise of stock
options relating to the Company's incentive compensation plan
which are considered to be common stock equivalents. The
assumed exercise of stock options relating to the Company's
incentive compensation plan were not included in the
computation of the loss per share for the three months ended
March 31, 1996, because the effect of their inclusion would be
antidilutive. The number of shares used in the computations
were 5,559,707 in 1997 and 5,546,373 in 1996.
<PAGE>
B. Liquidity and Capital Resources
Management of the Company believes that funds generated from
operations, its warehouse facilities, and cash distributions
from joint ventures, supplemented by its available assets,
will provide it with sufficient resources to meet all present
and reasonably foreseeable future capital needs. A significant
portion of the Company's assets are readily convertible into
cash.
The Company invests excess funds in liquid securities in order
to preserve the ability to move quickly in funding attractive
merchant banking ventures. Such investments include U.S.
Government and municipal obligations, futures contracts and
money market funds. In order to maximize its return, the
Company frequently leverages security purchases under a
securities brokerage account agreement, the terms of which
provide that inventory held by the brokerage firm
collateralize its advances.
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. Fourteen
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 three separate warehouse bank lines
aggregating $8,250,000, down from the $12,250,000 available at
December 31, 1996. This decline since year end results from a
warehouse lender notifying the Company that it was reducing
the line available from $5 million to $1 million, since the
Company was not using the amount allotted. At March 31, 1997,
approximately $1,200,000 had been borrowed against these
lines. The Company can draw down up to 98% of the face amount
of an individual mortgage loan from the warehouse bank which
is replenished from the purchase price paid by the investor
who had committed to purchase such loan.
In connection with its interests in real estate, the Company
uses separate subsidiaries for each venture. The Company
utilizes the equity method of accounting for its interests in
real estate joint ventures. Accordingly, the assets and
liabilities of such ventures are not included in the Company's
consolidated balance sheets.
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
<PAGE>
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 1997.
On April 1, 1997, one of the Company's real estate joint
ventures entered into an agreement with the bank holding the
venture's mortgage loan. The lender converted the loan from a
short-term, fixed rate loan into a ninety day variable rate
loan. Interest is computed at the bank's index rate plus 1%
and is payable monthly with the principal balance of
approximately $3,900,000 due at maturity on July 1, 1997. The
Company is currently considering its options regarding this
refinancing.
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, 1997 is
8.788%. The interest rate had been 8.3% through August 31,
1996 and 8.85% from September 1, 1996 through February 28,
1997. 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.
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.
<PAGE>
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 March 31, 1997.
The Company is a defendant in various lawsuits. Although the
Company has reached settlements in some instances, an
unfavorable result in those remaining could have a significant
adverse effect upon the Company's liquidity and capital
resources.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Cross Creek Village v. Housing Authority of the County of
Riverside, et al., Case No. 236813
At a status conference held on March 25, 1997, the Court
vacated its dismissal of the plaintiff's Complaint because the
plaintiff had not received notice of the order to show cause
regarding dismissal. The next status conference in the case is
now scheduled for September 22, 1997.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: -- A statement regarding the computation of per
share earnings is omitted because the computation is described
in Note 3 of the Notes to Consolidated Financial Statements
(Unaudited) in this Form 10-QSB.
Exhibit 27 -- Financial Data Schedule - see below
(b) Reports on Form 8-K:
-- The Company did not file any reports on Form 8-K during the
three months ended March 31, 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HELMSTAR GROUP, INC.
s/ George W. Benoit
-------------------
Date: May 15, 1997 George W. Benoit, Chairman of the
Board of Directors, President,
Chief Executive Officer
s/ Roger J. Burns
-----------------
Date: May 15, 1997 Roger J. Burns, First Vice
President, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HELMSTAR
GROUP, INC. AND SUBSIDIARIES' CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AND CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE INTERIM
PERIOD ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 769,371
<SECURITIES> 4,715,062
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 697,663
<DEPRECIATION> 435,411
<TOTAL-ASSETS> 9,519,604
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 674,960
<OTHER-SE> 4,424,298
<TOTAL-LIABILITY-AND-EQUITY> 5,099,259
<SALES> 0
<TOTAL-REVENUES> 1,270,884
<CGS> 0
<TOTAL-COSTS> 1,220,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,300
<INCOME-PRETAX> 50,054
<INCOME-TAX> 9,780
<INCOME-CONTINUING> 40,274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,274
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
