U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
For the quarterly period ended May 31, 1995
Commission file number 33-65292C
HEARTLAND GROUP OF COMPANIES, INC.
(Exact name of small business issuer as
specified in its charter)
FLORIDA 65-0190407
(State of incorporation) (IRS Employer Identification No.)
6230 BUSCH BOULEVARD, COLUMBUS, OHIO 43229
(Address of principal executive offices)
(614) 848-5100
(Issuer's telephone number)
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
State the number of shares outstanding of each of the issuer's
classes of common equity, as of June 30, 1996:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 7,811,677
Class C shares, No Par Value 600,000
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
Yes X No
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
INDEX
PAGE
Part I Financial Information:
Item 1. Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17-20
Part II Other Information:
Item 1 through Item 6 21
Signatures 22
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying consolidated financial statements of Heartland Group of
Companies, Inc. are unaudited but, in the opinion of management, reflect all
adjustments (which include only normal recurring accruals) necessary to
present fairly such information for the periods and at the dates indicated
and to make the consolidated financial statements not misleading. The
results of operations for the three months ended May 31, 1996 may not be
indicative of the results of operations for the year ending February 28,
1997. Since the accompanying consolidated financial statements have been
prepared in accordance with Item 310 of Regulation S-B, they do not contain
all information and footnotes normally contained in annual consolidated
financial statements; accordingly, they should be read in conjunction with
the consolidated financial statements and notes thereto appearing in the
Company's Annual Report.
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF MAY 31, 1996
(UNAUDITED)
ASSETS
Cash $ 82,818
Securities owned:
Marketable equity securities, at market value 6,391,516
Not readily marketable equity securities
Banc Stock Exchange of America, at tangible net book value 450,510
Other, at estimated fair value 793,981
Accounts receivable:
Brokers and other 15,649
Affiliates 32,311
Pending securities settlements 52,742
Notes and interest receivable:
Former officer 62,661
Brokers 143,413
Property and equipment, net of accumulated depreciation of $15 83,812
Goodwill, net of accumulated amortization of $167,780 462,186
Deposits and other 80,987
Total assets $ 8,652,586
LIABILITIES
Margin accounts payable to broker-dealers $ 432,124
Accounts payable to broker-dealers and other 10,070
Accrued expenses 117,953
Total liabilities 560,147
SHAREHOLDERS' EQUITY
Preference stock, 50,000,000 shares authorized, -
none issued or outstanding
Common stock:
Class A, no par value, 149,280,000 shares
authorized, 8,114,762 shares issued
and 7,811,677 shares outstanding 9,102,556
Class C, no par value, 600,000 shares
authorized, issued and outstanding -
Treasury stock, at cost
(303,085 Class A shares) (385,454)
Retained deficit (624,663)
Total shareholders' equity 8,092,439
Total liabilities and shareholders' equity $ 8,652,586
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
FOR THE QUARTERS ENDED MAY 31, 1996 and 1995
1996 1995
REVENUES:
Principal transactions:
Trading portfolio $ 400,783 $ 239,706
Banc Stock Exchange of America (2,930) (5,240)
Commission revenue 238,040 125,601
Dividends 21,573 36,959
Interest and other 9,431 11,540
Total revenues 666,897 408,566
EXPENSES:
Brokers' commission 120,494 41,976
Salaries, benefits and payroll taxes 95,670 103,367
Interest 6,307 45,242
General and administrative 193,170 300,720
Total expenses 415,641 491,305
INCOME (LOSS) BEFORE TAXES 251,256 (82,739)
INCOME TAX PROVISION - -
NET INCOME (LOSS) $ 251,256 $ (82,739)
WEIGHTED AVERAGED SHARES,
COMMON AND COMMON
STOCK EQUIVALENTS 8,411,677 8,393,365
PRIMARY AND FULLY DILUTED
NET INCOME (LOSS) PER COMMON SHARE $ 0.03 (0.01)
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
FOR THE QUARTER ENDED MAY 31, 1996
Retained
Treasury Earnings
Class A Class C Stock (Deficit) Total
Balance February 29, 1996 $9,102,556 - ($385,454) ($875,919) $7,841,183
Net income - - - 251,256 251,256
Balance at May 31, 1996 $9,102,556 - ($385,454) ($624,663) $8,092,439
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE QUARTERS ENDED MAY 31, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 251,256 $ (82,739)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 15,477 33,257
Unrealized loss on investment in Banc Stock
Exchange of America 2,930 5,240
(Increase) decrease in certain assets-
Accounts receivable (6,441) (122,717)
Investments, net (885,271) 651,363
Other assets 1,807 4,763
Increase (decrease) in certain liabilities-
Accounts payable to broker-dealers and other (22,835) (200,064)
Accrued expenses and other (65,573) (20,454)
Securities sold under agreement to repurchas - (188,765)
Securities sold, not yet purchased - (4,942)
Net cash provided by (used in) operating a (708,650) 74,942
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 10,650 5,237
Issuance of notes receivable (3,659) (44,404)
Redemption (purchase) of certificate of deposit - (103,809)
Purchase of property and equipment (3,989) (12,976)
Net cash (used) provided by investing acti 3,002 (155,952)
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin accounts payable to broker-dealers 375,296 (212,332)
Sale (purchase) of treasury stock - 34,500
Proceeds (repayment) of bank debt - (148,314)
Advances from affiliates 34,449 166,662
Advances to affiliates (26,616) (12,737)
Net cash (used) provided by financing acti 383,129 (172,221)
NET DECREASE IN CASH (322,520) (253,231)
CASH, BEGINNING OF PERIOD 405,338 267,762
CASH, END OF PERIOD $ 82,818 $ 14,531
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
Cash paid during the period for:
Interest $ 6,307 $ 45,242
The accompanying notes are an integral part of these consolidated
financial statements
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996
(1) ORGANIZATION AND NATURE OF BUSINESS
Heartland Group of Companies, Inc. (the Company or HGC) is a Florida
corporation incorporated in April, 1990. The Company was organized for
the purpose of investing in financial services companies (such as stock
brokerage companies) as well as trading and investing in minority
interests of independent bank stocks.
Buckeye Bancstocks, Inc., an Ohio corporation established in 1977, is a
wholly-owned subsidiary of HGC and acts as an intrastate broker-dealer
trading primarily in Ohio bank stocks.
Heartland Advisory Group, Inc. (HAG), an Ohio corporation, a wholly-owned
subsidiary of HGC, is a registered investment advisor and provides
money management services to its customers.
Banc Stock Financial Services, Inc. (BSFS), an Ohio corporation, is a
wholly-owned subsidiary of HAG and is an NASD registered broker-dealer
specializing in the trading of bank stocks and other investment
vehicles. BSFS is also registered with the Securities and Exchange
Commission and the securities commissions of fourteen states, including
Ohio. BSFS trades securities on a fully-disclosed basis and clears
customer transactions through an unaffiliated broker-dealer which also
maintains the customer accounts. BSFS derives a significant portion of
its revenues from providing private portfolio management and brokerage
services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 the reported amounts of revenues and expenses for the period.
Actual results could differ from those estimates.
The following is a summary of the Company's significant accounting
policies:
<PAGE>
Principles of Consolidation
The accompanying consolidated financial statements include the
operations of HGC, Buckeye Bancstocks, HAG and BSFS. All intercompany
transactions and balances have been eliminated in consolidation.
Cash
The Company has defined cash as demand deposits and money market
accounts.
Valuation of Securities Owned
Bank securities and related options traded on national securities
markets and securities not traded on national securities markets, but
with readily ascertainable market values, are valued at market value.
Other bank securities for which market quotations are not readily
available, due to infrequency of transactions, are valued at fair value
as determined in good faith by the management of the Company. Realized
and unrealized gains and losses are included in principal transactions.
The investment in The Banc Stock Exchange of America (BSA) is valued by
management based on the tangible net book value per share of BSA.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated lives of five to seven years.
Goodwill
The excess purchase price over the fair market value of the net assets
acquired from Buckeye Bancstocks and BSFS is being amortized on a
straight line basis over 20 years.
Revenues
Securities transactions and commissions are accounted for on the trade
date basis. Dividend income is recorded on the ex-dividend date and
interest income is accrued as earned. Realized gains and losses from
sales of securities are determined utilizing the first-in, first-out
method (FIFO).
Earnings Per Share
Primary and fully diluted earnings per common share were computed by
dividing net income by the weighted average number of shares of common
stock outstanding during the periods.
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments, except
shares of The Banc Stock Exchange of America, are carried at fair value or
amounts approximating fair value. Assets, including cash, receivables
and investments are carried at amounts which approximate fair value.
Similarly, liabilities, including margin accounts payable to
broker-dealers, accounts payable and accrued expenses are carried at
amounts approximating fair value.
The Banc Stock Exchange of America is a Development Stage Enterprise.
Because there are no quoted market prices and there are no established
cash flows, a reasonable estimate of fair value could not be made
without incurring excessive costs. The investment in BSA is carried at
tangible book value in the Consolidated Statement of Financial
Condition. BSA is more fully discussed in Note 6, Related Party
Transactions.
(3) CAPITAL STOCK
Common Stock
Commencing December 1, 1991, shares of Class C common stock
automatically convert to Class A common stock at an annual rate of 10%
of the original amount issued. The Class C common shares are subordinate
to Class A common stock in that Class A common stock has a liquidation
preference over the Class C common stock equal to $1.50 per share. In all
other respects, Class A and Class C common stock have equal rights.
Treasury Stock
As of May 31, 1996, Buckeye Bancstocks held 206,240 HGC Class A shares.
These shares are treated as treasury stock for financial reporting
purposes.
<PAGE>
Authorization of Preference Stock
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of "blank check" preference stock with such
designations, rights and preferences as may be determined from time to
time by the Company's Board of Directors. The Board of Directors is
empowered, without shareholder approval, to issue preference stock with
dividend, liquidation, conversion, voting, or other rights which could
adversely affect the voting or other rights of the holders of the
common stock.
(4) SECURITIES OWNED
Marketable equity securities at May 31, 1996 consist of bank stocks at
market value, as follows:
Traded on national securities markets $4,268,043
Not traded on national securities
markets, but with readily ascertainable
market value 2,123,473
Total marketable equity
securities $6,391,516
The Company, at any given time, may have a significant amount of its
securities owned and related income generated from a few specific bank
stocks. As of May 31, 1996 the Company had investments in one bank stock
amounting to 12% of its marketable equity securities.
Securities not readily marketable include securities for which there is
no market on a securities exchange and no independent publicly quoted
market. These securities at May 31, 1996 were as follows:
Fair Value Cost
Banc Stock Exchange of America $ 450,510 $ 75,000
Bank stocks not readily marketable 793,981 664,490
$1,244,491 $739,490
As of May 31, 1996, the Company had investments in three bank stocks
amounting to 43%, 17%, and 12%, respectively, of its Bank Stocks not
readily marketable.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company maintains margin account balances due to unaffiliated
broker-dealers bearing interest at variable rates which averaged 7.7% at
May 31, 1996. These margin accounts are secured by the respective
securities held by broker-dealers. The market value of the securities
held as collateral was $3,613,822 at May 31, 1996.
(6) RELATED PARTY TRANSACTIONS
Receivables from Officer
At May 31, 1996, the Company has a demand note receivable from a former
officer which is collateralized by stock of HGC. Under a Trust
established by this former officer, collateralized stock is being
liquidated to repay the debt. In addition, the Company has accounts
receivable due from officers and affiliates which are non-interest
bearing.
Securities Transactions
The Company purchases from and sells securities owned to The Banc Stock
Exchange of America (BSA) at the prevailing market price at the time of
the transaction. However, there were no purchases from or sales to
BSA for the quarters ended May 31, 1996 or 1995.
Operating Expenses
The Company and BSA are under common management. Certain expenses are
paid by the Company and allocated to BSA based upon predetermined
percentages as approved by the officers of the Companies. Operating
expenses in the allocation are primarily salaries and benefits. Total
expenses allocated to BSA were $20,230 and $22,487 for the quarters
ended May 31, 1996 and 1995, respectively.
<PAGE>
Banc Stock Exchange of America
In 1992 The Banc Stock Exchange of America (BSA) was organized to study
the feasibility of establishing a stock exchange specializing in bank
stocks. Most likely, the initial structure of the exchange will be an
electronic information exchange. BSA is under common management with
HGC. HGC currently holds 16% of the outstanding Class A shares of BSA.
HGC values their investment in BSA at BSA's tangible net book value.
BSA's primary asset is a portfolio of bank stocks.
(7) INCOME TAXES
The Company files a consolidated Federal income tax return. It is the
policy of the Parent to allocate the consolidated tax provision to
subsidiaries as if each subsidiary's tax liability or benefit were
determined on a separate company basis. As part of the consolidated
group, subsidiaries transfer to the Parent their current Federal tax
liability or assets.
There are no consolidated tax provisions for the quarters ended May 31,
1996 and 1995, due to utilization of NOL carryforwards.
As of February 29, 1996, the Company and its subsidiaries had deferred
tax liabilities of approximately $660,000. Deferred tax liabilities
result from differences in bases of assets and liabilities for financial
reporting and income tax purposes. The bases differences are
attributable to temporary differences related to unrealized gains, which
are not taxable until realized, for non-broker-dealer entities and the
application of tax mark to market rules for broker-dealer subsidiaries.
As of February 29, 1996 the Company and its subsidiaries had net
operating loss (NOL) carryforwards for tax purposes of approximately
$3,500,000 resulting in a deferred tax benefit of approximately
$1,230,000. These NOL's will expire in 2002 through 2010. Any future
changes in control may limit the availability of NOL carryforwards. The
net deferred benefit related to the net operating loss carryforwards has
been fully offset by a valuation allowance of $570,000.
<PAGE>
(8) OPERATING LEASES
The Company leases certain facilities, vehicles and office equipment
under operating leases. Total lease expenses were approximately
$95,000 in fiscal year 1996 and $105,000 in 1995. The future minimum
lease payments under these leases are as follows:
Amount
1997 $ 65,000
1998 52,000
1999 34,000
$151,000
(9) EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
In August 1994, the Company amended the Heartland Incentive Compensation
Plan (the Plan). All full-time executive employees of the Company are
eligible to participate in the Plan. The Plan provides that a bonus
fund will be established in an amount equal to 20% of the pre-tax
realized profits of the Company in excess of a 15% pre-tax return on
equity. The amount of the bonus fund will be calculated each fiscal
quarter on a cumulative basis. The allocation of the bonus fund is to
be made by the Executive Committee of the Board of Directors.
Stock Option Plan
In September 1994, shareholders approved the 1993 Non-Qualified and
Incentive Stock Option Plan. The Plan authorizes the grant of options to
purchase an aggregate of 1,000,000 shares of the Company's Class A Common
Stock. The Plan provides that the Board of Directors, or a committee
appointed by the Board, may grant options and otherwise administer the
Option Plan. The exercise price of each incentive stock option or
non-qualified stock option must be at least 100% of the fair market
value of the Class A Shares at the date of grant, and no such option may
be exercisable for more than 10 years after the date of grant. However,
the exercise price of each incentive stock option granted to any
shareholder possessing more than 10% of the combined voting power of all
classes of capital stock of the Company on the date of grant must not be
less than 110% of the fair market value on that date, and no such option
may be exercisable more than 5 years after the date of grant.
Effective September 28, 1995, the following options and warrants were
granted under this plan with a ten year term and exercise price of
$2.875.
(a) 154,000 non-qualified stock options granted to employees with
immediate vesting.
(b) 55,000 non-qualified stock options granted to brokers with
immediate vesting.
(c) 145,000 non-qualified stock options granted to brokers, vesting
over five years.
(d) 121,000 qualified stock options granted to employees, vesting
over five years.
(e) 105,000 stock warrants granted to directors and an officer with
immediate vesting.
Effective February 29, 1996, 25,000 options were granted under this plan
to the President of the Company with a ten year term and exercise price
of $2.875.
Statement of Financial Accounting Standards (FAS) 123, Accounting for
Stock-Based Compensation, is effective for the Company's fiscal year
ending February 28, 1997. The Company has not decided whether to adopt
the cost recognition provisions of FAS 123 and the effect of adopting
the cost recognition provisions has not been determined.
(10) REGULATORY REQUIREMENTS
BSFS is subject to the uniform net capital rule of the Securities and
Exchange Commission (Rule 15c3-1), which requires that the ratio of
"aggregate indebtedness" to "net capital" not exceed 15 to 1 (as those
terms are defined by the Rule). BSFS had net capital of $401,181 as of
May 31, 1996, which was in excess of its required minimum net capital of
$100,000. The ratio of aggregate indebtedness to net capital was .08
to 1 as of May 31, 1996. BSFS is also subject to regulations of the
District of Columbia and fourteen states in which it is registered as a
licensed broker-dealer.
Buckeye Bancstocks is required by the Ohio Division of Securitiesto
maintain an "allowable net worth" of $25,000. HGC has guaranteed this
allowable net worth.
HAG is a Registered Investment Advisor and is subject to regulation by
the SEC pursuant to the Investment Advisors Act of 1940.
(11) CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company's NASD broker-dealer subsidiary under the correspondent
agreement with its clearing broker, has agreed to indemnify the
clearing broker from damages or losses resulting from customer
transactions. The Company is, therefore, exposed to off-balance sheet
risk of loss in the event that customers are unable to fulfill
contractual obligations. The Company manages this risk by requiring
customers to have sufficient cash in their account before a buy order is
executed and to have the subject securities in their account before a
sell order is executed. The Company has not incurred any losses from
customers unable to fulfill contractual obligations.
In the normal course of business, the Company periodically sells
securities not yet purchased (short sales) for its own account and
writes options. The establishment of short positions and option
contracts expose the Company to off-balance sheet market risks in the
event prices change, as the Company may be obligated to cover such
positions at a loss. A short security position does not expose the
Company to credit risk since the counterparty is not obligated to
perform. At May 31, 1996, the Company had no short security positions.
At May 31, 1996, the Company had no option contracts. When the Company
writes option contracts the market risk is usually hedged by
countervailing contracts which limit the off-balance sheet market risk
to an amount established by management. The option written does not
expose the Company to credit risk since the counterparty is not
obligated to perform.
The Company's risk of loss in the event of counterparty default is
limited to the fair value or the replacement cost on contracts in which
the counterparty fails to perform. The Company further limits its
exposure to loss on option contracts by only contracting with Options
Clearing Corporation as the counterparty. The Company did not
experience any credit losses due to the failure of any counterparties
to perform during the quarter ended May 31, 1996. Senior management of
the Company is responsible for reviewing trading positions, exposures,
profits and losses, trading strategies and hedging strategies on a
daily basis.
The Company's significant industry concentrations, which arises within
its normal course of business activities, are with financial institutions
for bank securities transactions and with Options Clearing Corporation
for option contracts. Significant concentrations of financial
instruments are in Midwest and California bank stocks.
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended May 31, 1996, Compared to the Quarter Ended May 31, 1995
Revenues for the quarter ended May 31, 1996 increased to $666,897 compared to
$408,566 for the quarter ended May 31, 1995, an increase of 63%. This increase
results primarily from increases in revenue from principal transactions and
commission and management fee revenue.
Revenues from principal transactions involving the trading portfolio were
$400,783 for the quarter ended May 31, 1996 compared to 239,706 for the
quarter ended May 31, 1995, an increase of 67%. This represents an annual
rate of return on the average portfolio of 27% for the quarter ended May 31,
1996 compared to 13% for the quarter ended May 31, 1995 due to increases in
market values.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $238,040 for the quarter ended
May 31, 1996 compared to $125,601 for the quarter ended May 31, 1995, an
increase of 89%. BSFS continues to make a concerted effort to increase its
level of business activity, especially portfolio management services.
In 1992 the Banc Stock Exchange of America, Inc. (BSA) was organized to study
the feasibility of establishing a stock exchange specializing in bank stocks.
BSA is separately owned but under common management with the Company. The
Company currently holds 16% of the outstanding common stock of BSA. The
Company values its investment in BSA at BSA's tangible net book value since
BSA is a development stage enterprise. The unrealized loss on this
investment was $2,930 for the quarter ended May 31, 1996 compared to an
unrealized loss of $5,240 for the quarter ended May 31, 1995. These losses
in BSA's tangible net book value results from BSA spending more on its
feasibility study than it earned from principal transactions involving its
portfolio of bank stocks.
Operating expenses for the quarter ended May 31, 1996 decreased to $415,642
compared to $491,305 for the quarter ended May 31, 1995, a decrease of 15%.
Brokers' commission expenses increased to $120,495 for the quarter ended May
31, 1996 compared to $41,976 for the quarter ended May 31, 1995, an increase
of 187%. This increase reflects management's decision to increase
commissions paid to brokers to provide incentives to increase the level of
business activity. Salaries, benefits, and payroll taxes decreased to
$95,670 for the quarter ended May 31, 1996 compared to $103,367 for the
quarter ended May 31, 1995, a decrease of 7%. This decrease reflects
management restructuring which occurred in May 1995. Interest expense
decreased to $6,307 for the quarter ended May 31, 1996 compared to $45,242
for the quarter ended May 31, 1995, a decrease of 86%. This decrease was
achieved by reducing margin positions with broker-dealers and by repaying
bank debt in August 1995. General and administrative expenses decreased to
$193,170 for the quarter ended May 31, 1996 compared to $300,720 for the
quarter ended May 31, 1995, a decrease of 36%. This decrease is primarily
the result of reductions in fees for professional services and the
elimination of certain promotional programs in conjunction with the
management restructuring effective in May, 1995.
Liquidity and Capital Resources
Approximately 10% of the value of the Company's trading portfolio is
comprised of small bank stocks which are thinly traded and there can be no
assurance that active markets will develop. The failure of such markets to
develop could negatively affect the Company's operations and financial
condition. Approximately 90% of the Company's trading portfolio is readily
marketable, providing a high degree of liquidity. Investments in bank
securities traded on national securities markets and securities not traded on
national securities markets, but with readily ascertainable market values are
valued at market value. Other bank securities for which market quotations
are not readily available, due to infrequency of transactions, are valued at
fair value as determined in good faith by management of the Company. While
management employs objective criteria to ascertain these values, there is no
independent benchmark by which the values assigned by management can be
judged.
As of May 31, 1996 the Company had working capital of approximately $7,465,000
compared to approximately $6,400,000 as of May 31, 1995. Working capital
includes cash, securities owned and accounts and notes receivable, net of all
liabilities. The Company has no long term debt.
The Company's NASD broker-dealer subsidiary under the correspondent agreement
with its clearing broker, has agreed to indemnify the clearing broker from
damages or losses resulting from customer transactions. The Company is,
therefore, exposed to off-balance sheet risk of loss in the event that
customers are unable to fulfill contractual obligations. The Company manages
this risk by requiring customers to have sufficient cash in their account
before a buy order is executed and to have the subject securities in their
account before a sell order is executed. The Company has not incurred any
losses from customers unable to fulfill contractual obligations.
In the normal course of business, the Company periodically sells securities
not yet purchased (short sales) for its own account and writes options. The
establishment of short positions and option contracts expose the Company to
off-balance sheet market risks in the event prices change, as the Company may
be obligated to cover such positions at a loss.
At May 31, 1996 the Company had no short security positions. Short security
positions do not expose the Company to credit risk since the counterparty is
not obligated to perform.
At May 31, 1996 the Company had not written any option contracts. Short
option positions do not expose the Company to credit risk since the
counterparty is not obligated to perform.
The Company did not own any options as of May 31, 1996. The Company did not
experience any credit losses due to the failure of any counterparties to
perform during the quarter ended May 31, 1996. Senior management of the
Company is responsible for reviewing trading positions, exposures, profits
and losses, trading strategies and hedging strategies on a daily basis.
The Company's most significant industry concentration, which arises within
its normal course of business activities, is with financial institutions for
bank securities transactions and with Options Clearing Corporation for option
contracts. The most significant concentration of financial instruments is in
Midwest and California bank stocks and option contracts in bank indices.
Historically, the operations of the Company have been funded by returns on
investments, raising of capital, and limited bank financing. Management
believes that the Company's existing resources, including available cash and
cash provided by operating activities, will be sufficient to satisfy its
working capital requirements in the foreseeable future. However, no
assurance can be given that additional funds will not be required. To the
extent that returns on investments are less than or expenses are greater than
anticipated, the Company may be required to reduce its activities, liquidate
inventory or seek additional financing. This financing may not be available
on acceptable terms, if at all. No significant capital expenditures are
expected in the foreseeable future, except that the Company is committed to
upgrading its portfolio management software. The license fee, installation
consulting and sales taxes for this software will cost $36,000 with an annual
maintenance fee of $6,000. Working capital will be used to fund these
expenditures.
Impact of Inflation and Other Factors
The Company's operations have not been significantly affected by inflation.
The Revenue Reconciliation Act of 1993 includes Mark-to-Market Rules
which essentially require dealers in securities to include unrealized gains
on the trading portfolio, in taxable income for income tax purposes. The
Revenue Reconciliation Act of 1993 was effective for the Company's tax year
beginning March 1, 1993. Unrealized gains on inventory as of February 28,
1993 will be reported as taxable income over five years. Securities held for
investment rather than inventory are not subject to the Mark-to- Market
Rules. In light of the Company's net operating loss carried forward, the
Mark-to-Market Rules currently are not expected to have a significant impact
on operations. However, after the net operating loss carried forward,
currently available to the Company, is fully utilized, these Rules could have
a materially adverse impact on the Company's cash flow.
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of
Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Furnish the exhibits required by
Item 601 of Regulation S-B - None
b) Reports on Form 8-K - None
<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.
HEARTLAND GROUP OF COMPANIES, INC.
(Registrant)
Date July 3, 1996 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and Chief
Executive Officer
Date July 3, 1996 /S/ Jeffrey C. Barton
Jeffrey C. Barton
Chief Financial Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> BD
<LEGEND> 0
<NAME> 0
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-START> MAR-01-1996
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> MAY-31-1996
<EXCHANGE-RATE> 1
<CASH> 82,818
<RECEIVABLES> 306,776
<SECURITIES-RESALE> 0
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<INSTRUMENTS-OWNED> 7,636,007
<PP&E> 83,812
<TOTAL-ASSETS> 8,652,586
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0
0
<COMMON> 8,717,102
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<TOTAL-LIABILITY-AND-EQUITY> 8,652,586
<TRADING-REVENUE> 400,783
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<COMMISSIONS> 180,690
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<INCOME-PRETAX> 251,256
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