U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended February 29, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 33-65292C
Heartland Group of Companies, Inc.
(Name of small business issuer in its charter)
Florida 65-0190407
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6230 Busch Boulevard, Columbus, Ohio 43229
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (614) 848-5100
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on
which registered
Securities registered under Section 12(g) of the Exchange Act:
(Title of class)
(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 [ ]
<PAGE>
State issuer's revenues for its most recent fiscal year
$2,589,021
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days. (See
definition of affiliate in Rule 12b-2 of the Exchange Act.)
As of March 31, 1996: 6,728,548 Class A shares
@ Bid of $2.75 = $18,503,507
@ Asked of $2.875 = $19,344,576
State the number of shares outstanding of each of the issuer's
classes of common equity, as of March 31, 1996:
Class A Shares: 7,811,677
Class C Shares: 600,000
<PAGE>
PART I
ITEM 1: Description of Business
General
Heartland Group of Companies, Inc. (the "Company") 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) and to acquire
minority interests in independent community banks. Initially, the
Company focused its efforts primarily on Ohio bank stocks.
Pursuant to a merger effective as of May 31, 1991, the Company
acquired all of the issued and outstanding stock of the First
Scioto Company. First Scioto Company is an Ohio corporation
established in 1977 to act as a broker/dealer trading in Ohio bank
stocks. First Scioto Company's activity in many cases has helped
to establish a market by educating investors and brokers interested
in buying recommended bank stocks. Effective January 8, 1996 the
name of First Scioto Company was changed to Buckeye Bancstocks,
Inc.
Pursuant to a merger effective February 11, 1993, the Company
acquired all of the issued and outstanding stock of Heartland
Advisory Group, Inc., an Ohio corporation ("HAG"). Like the
Company, HAG was organized primarily for the purpose of investing
in financial services companies, to acquire minority interests in
community banks, as well as to act as a Registered Investment
Advisor offering managed accounts to qualified investors. Unlike
the Company, HAG initially concentrated its efforts in the States
of California, Indiana, Illinois, Michigan, Minnesota, Missouri,
Wisconsin and other Midwestern states. In November, 1992, HAG
acquired Banc Stock Financial Services, Inc. (BSFS), an Ohio
corporation, which is an NASD broker/dealer specializing in the
trading of bank stocks nationwide. BSFS is registered with the SEC
and the Securities Commissions in California, Florida, Georgia,
Illinois, Indiana, Kentucky, Maryland, New Jersey, New York, North
Carolina, Ohio, Pennsylvania, Virginia, West Virginia and the
District of Columbia. BSFS trades securities on a fully-disclosed
basis (i.e., BSFS does not hold customer securities or funds but,
rather, "clears" each transaction through a clearing broker). BSFS
clears its transactions through Mesirow Financial, Inc., Chicago,
Illinois.
<PAGE>
While the Company, HAG, BSFS, and Buckeye Bancstocks all had
separate ownership at one time, they shared a common management
team. Through the consolidation of these businesses, the Company
has increased its ability to make markets and trade in bank stocks
and increased its marketable inventory. The Company now operates
primarily as a holding company with broker/dealer operations
conducted by BSFS and Buckeye Bancstocks and investment advisory
services provided by HAG. References to the Company also include
references to BSFS, Buckeye Bancstocks and HAG.
Market Making and Brokerage Activities
The primary business of the Company is the marketing and
trading of bank stocks through its brokerage subsidiaries. For the
foreseeable future, the Company intends to utilize the experience
of its management to acquire and market a diversified portfolio of
small and medium cap bank stocks. While the Company intends to
acquire and market a diversified portfolio of small and medium cap
bank stocks, at any given time the Company may have a significant
amount of its investments and related income generated from a few
specific bank stocks. As of February 29, 1996, the Company had an
investment in North Valley Bancorp, Redding, California, amounting
to 14% of its marketable equitable securities. No other bank stock
amounted to more than 10% of the marketable equitable securities of
the Company at that time.
Historically, through its brokerage subsidiaries, the Company
has recommended that its customers purchase those bank stocks which
the Company believes to be most likely to show an increase in value
over both the short and the long term. Market making and trading
in Ohio bank stocks has been done primarily through Buckeye
Bancstocks and market making and trading in non-Ohio bank stocks
has been done primarily through BSFS.
Management of the Company believes that the bank stocks which
have historically shown the largest long term market value
increases have certain characteristics in common. These include:
(a) county seat banks with more than $50,000,000 but less than
$5,000,000,000 in assets; (b) banks with strong capital
(capital/assets ratios of 8% or more); (c) banks with high earnings
(return on equity of 12% or more); and (d) banks with low loan
losses (less than .5% of loans declared uncollectible and lost each
year). Through its brokerage subsidiaries and its research
capabilities and experience, the Company endeavors to identify
banks meeting this profile. Although these stocks are listed on a
variety of over-the-counter markets, including the National
Quotation Bureau "Pink Sheets", NASD Bulletin Board, NASDAQ Small-
Cap Issues, NASDAQ National Market System, AMEX and NYSE, there can
be no assurances that the stock of such banks will be available for
sale or show price increases if they are acquired.
<PAGE>
The rate of mergers of banks have accelerated during the last
ten years, partially as a result of statewide branching and
nationwide branching law changes in the Midwest since 1983. For
example, the number of commercial banks in Ohio has been reduced
from over 500 in the 1960's to approximately 200 at present. Ohio
first authorized statewide branching in 1983 and nationwide
branching on a reciprocal basis in 1988. Many mergers have
occurred since that time, to some degree as a result of such
banking law changes. Bank stock prices in the open market have
also increased significantly.
In Illinois, until recently, commercial banks were not
permitted to have branches or to form bank holding companies. As
a result, there are currently approximately 627 banks in Illinois.
Recently adopted banking law changes may result in mergers of
Illinois banks at an accelerated pace. Many mergers are
accomplished at prices which represent a premium over the trading
price of the stock. Most other Midwestern states are in similar
circumstances. As a result, many investment professionals have
begun to notice and purchase these bank stocks, resulting in
substantial increases in the trading volume for these securities.
In June 1993, the Company began to switch the emphasis of its
brokerage activities from sales driven activities through Buckeye
Bancstocks to retail sales and money management activities through
BSFS. While BSFS has had this capability for some time, the
Company began to actively market the establishment of discretionary
client accounts with BSFS, which enables the Company to more
quickly move client funds in response to changes in the market for
bank stocks. The Company believes that by administering
discretionary accounts, it will be able to better serve its
clientele by more rapidly responding to market fluctuations while
at the same time continuing to generate significant fee income for
the Company from both discretionary and non-discretionary accounts.
There can be no assurance that the Company will be successful
in predicting increases or in evaluating and recommending bank
stocks.
<PAGE>
Market Research
The Company s brokerage subsidiaries compile extensive
research on small and medium cap banks. The Company evaluates
profit potential of these banks stocks over one, three, five, and
ten year horizons. The Company develops a Bank Presentation or
Profile which highlights: financial performance, peer group
comparison, and geographic and demographic market factors. The
criteria utilized to evaluate these stocks include, but are not
limited to:
1. Return on Equity: Net income (loss) before extraordinary
items and other adjustments divided by average total
equity. This return should be fairly constant at 12% -
20% per year. The company seeks opportunities where ROE
is above 12%.
2. Return on Assets: This is calculated by using income
(loss) before extraordinary items and other adjustments
divided by average total assets. The Company seeks
opportunities where ROA is above 1.2%.
3. Price to Earnings Ratio: P/E is calculated by taking
the current price of the stock and dividing it by the
earnings per share. The company seeks opportunities
where the P/E is below 11.5.
4. Stock Price: The Company seeks to purchase stocks that
are priced under comparably priced stocks based upon past
earnings records.
5. Risk: Limiting, not eliminating risk is an important
consideration. The Company seeks the shares of banks
that experience low loan losses, has strict loan
guidelines, and make an effort to know their clients.
6. Ownership: The Company seeks well run bank franchises
where there is significant insider ownership. The
Company believes that ten to forty percent ownership in
the hands of management, the Board, and local
shareholders, encourages market share growth,
responsibility to the bottom line, and a customer
oriented culture.
<PAGE>
7. Dividends: Generally, the Company does not seek high
dividend returns with its investments. However, it
occasionally invests in preferred issues that achieve a
higher than average return compared to national or
regional returns.
8. Market Area: The Company seeks stable and growing
market areas across the United States. Community
oriented banks are found in areas of population from as
small as 25,000 MSA (metropolitan statistical area) to 3-
5 million MSA in some urban/suburban areas.
9. Markets: The Company s portfolio is generally made up
of stocks that trade on the National Quotation Bureau
"Pink Sheets", NASD Bulletin Board, NASDAQ Small-Cap
Issues, NASDAQ National Market System, and occasionally
the AMEX and NYSE.
Competition
National and large regional brokers tend not to emphasize the
markets in which the Company specializes because of the relatively
small size of the banks and the towns in which they are
headquartered and because the stock of those institutions is
usually thinly covered by researchers and inactively traded.
Consequently, the major competition in the area of bank stock
marketing has been the brokerage companies which have offices in
the small towns in the Midwest. These are primarily regional and
local brokers. The major regional brokers encountered by the
Company in Ohio are McDonald & Company, Sweeney Cartwright,
Community Banc Investments, and The Ohio Company.
The Company experiences competition for its brokerage
subsidiaries from similar, small regional brokers in its market
states. These include: Elmer E. Powell, Hoefer & Arnett, Sutro &
Co., Howe Barnes, Ferris Baker, Stifel Nicolas, Ryan Beck, and Hill
Thompson. The Company s extensive experience in Ohio, the large
number of prospects banks in other states, and its unique method of
retail marketing causes the Company's management to believe that
the Company will continue to be successful in identifying and
acquiring stock portfolios which match its targets.
<PAGE>
Historically, the Company s brokerage subsidiaries have been
consulted by banks primarily as stock marketing problem solvers and
are now being invited into markets as market makers. Although the
Company probably has more competition to buy and sell stock now
than at any time in its history, management believes that, because
of the experience of the brokerage subsidiaries in this specialized
market, the Company will continue to experience success in its
areas of operations.
Accounts
Through its brokerage subsidiaries, the Company establishes
both trading accounts and buy-hold accounts. In the trading
accounts, the Company buys positions in four to ten banks at any
given time with an intent to resell such shares. Any stock bought
for the trading account will typically be resold within nine to
twenty-four months after its acquisition, whether at wholesale (to
other brokers) or at retail to the Company's clients. The Company
also establishes buy-hold accounts in which it acquires positions
in bank stocks that are held while the Company assists the bank in
developing a market for such stocks. Market development usually
takes from nine to twenty-four months or more. After the
development of a market, stocks held in the buy-hold account are
sold either at retail or at wholesale or held for long term
investment. The Company acquires securities from a variety of
sources including other brokers, individuals and estates. The
Company maintains margin account balances due to broker/dealers
bearing interest at variable rates which, at February 29, 1996,
averaged 8.4%. These margin accounts are secured by the respective
securities held by broker/dealers. The market value of the
securities held as collateral was approximately $6,300,000 at
February 29, 1996.
In June 1993, the Company, through BSFS, began establishing
discretionary accounts with its customers through which the Company
is empowered to direct the investment of funds. Previously, the
Company would acquire a position in a bank stock and then call upon
its customers to determine whether or not they had an interest in
acquiring a personal position. Through its discretionary accounts,
the Company is now able to directly invest customer funds in bank
stocks. This enables the Company to respond to market changes more
rapidly.
<PAGE>
Regulation
The securities industry is subject to extensive regulation
under both federal and state laws. The principal purpose of
regulation of broker/dealers and investment advisors is the
protection of retail investors in the securities markets rather
than protection of creditors and stockholders of broker/dealers and
investment advisors. The SEC is the federal agency charged with
the administration of federal securities laws. The Ohio Division
of Securities is a corresponding state regulatory agency. Much of
the regulation of broker/dealers who do business on an interstate
basis has been delegated by the SEC to self-regulatory
organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules (which
are subject to approval by the SEC) which govern the industry and
conduct periodic examinations of member broker/dealers. The SEC
retains primary authority for regulation of investment advisors.
Securities firms are also subject to regulation by state securities
commissions in the states in which they are registered and, in
Ohio, the Division of Securities regulates the activities of
broker/dealers which only do business within that State.
The regulations to which broker/dealers are subject cover all
aspects of the securities business, including sales methods,
trading practices among broker/dealers, capital structure of
securities firms, record keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules
promulgated by regulatory organizations or changes in the
interpretation or enforcement of existing laws and rules often
affect directly the method of operation and profitability of
broker/dealers. In addition, securities regulators may conduct
administrative proceedings which can result in censure, fine,
suspension or expulsion of a broker/dealer, its officers or
employees.
The Company's subsidiaries, BSFS, Buckeye Bancstocks and HAG,
each operate in highly regulated industries and are subject to
examination and licensing requirements by federal and state
authorities and subject to a variety of special rules and
regulations. Buckeye Bancstocks' activities are subject to
examination and licensure by the Ohio Department of Commerce and,
in particular, the Division of Securities. BSFS is subject to
regulation by the SEC and the state securities regulatory agencies
in the states in which it operates and is a member of NASD.
Buckeye Bancstocks is an Ohio broker/dealer operating solely within
that State. HAG is a registered investment advisory and subject to
regulation by the SEC pursuant to the Investment Advisors Act of
1940.
<PAGE>
Due to a recent change in the Ohio Securities Laws, beginning
October 11, 1994, all broker/dealers registered in Ohio, with total
revenues of $150,000 or more during any twelve (12) month period
and more than one hundred (100) retail securities customers, must
also register as a broker/dealer with the SEC (i.e. New York Stock
Exchange, American Stock Exchange, or NASD). Buckeye Bancstocks
has historically been an Ohio broker/dealer operating solely within
that state. As such, Buckeye Bancstocks has been exempt from
registration with the SEC and subject to regulation by the Ohio
Department of Commerce. While Buckeye's business, as historically
conducted, will be affected, management believes that Buckeye
Bancstocks can continue to operate under these restrictions. In
June of 1993 management of the Company elected to switch the
emphasis of its brokerage activities from the sales driven
activities of Buckeye Bancstocks to money management activities
through BSFS (which is an SEC registered broker/dealer and a member
of the NASD). Additionally, Buckeye Bancstocks has applied for an
exemption from the Ohio requirements for SEC registration. This
application is pending. As a result of these various
considerations, management believes that these changes will not
have a material adverse effect on the Company's financial prospects
as a whole.
Companies that control banking subsidiaries must register as
Bank Holding Companies, pursuant to the Bank Holding Company Act of
1956 (the "Bank Holding Company Act"). A company is considered to
be in control of a bank if (a) the company directly or indirectly
controls or has the power to vote 25% or more of any class of
voting securities of a bank; (b) the company controls in any manner
the election of a majority of directors or trustees of a bank; or
(c) the Federal Reserve Board determines, after notice and
opportunity for hearing, that the company directly or indirectly
exercises a controlling influence over the management or policy of
a bank. Companies that hold less than 5% of the stock of a bank
are deemed not to be in control of such bank. Neither the Company
nor any of its subsidiaries controls the election of any directors
or trustees to any of the banks in which they own an interest, nor
do they own in excess of 5% of the voting securities in any bank in
which they make a market. Should the Company or one of its
subsidiaries acquire more than 5% of the voting securities of a
bank, such entity could become subject to fines and penalties. The
Company will endeavor to remain outside of the purview of the Bank
Holding Company Act.
Employees
The Company currently has 8 full-time employees, 7 of which
are salaried employees and none of which are members of a union.
The Company generally believes that its relationship with employees
is good.
<PAGE>
ITEM 2: Description of Property
The Company leases a total of approximately 4,750 square feet
of office space in an office complex from an unaffiliated third
party for an aggregate current monthly rental of approximately
$4,700.
HAG owns five acres of land in the Naples, Florida area,
available for use as a sales office.
ITEM 3: Legal Proceedings
The Company is not engaged in any material litigation.
ITEM 4: Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of
the fiscal year to a vote of security holders.
PART II
ITEM 5: Market for Common Equity and Related Stockholder
Matters
The Company's Class A Common Stock is traded in the over-the-
counter market under the symbol HGRC and is not listed on an
exchange. These securities were first publicly traded during the
fourth fiscal quarter ended February 28, 1995. On March 31, 1996
a bid price of $2.75 and asked price of $2.875 were quoted by two
market makers. These quotations reflect inter-dealer prices,
without retail markup, markdown or commissions and may not
represent actual transactions. In addition, due to the relatively
"thin" market in the Company's Class A Common Stock, quoted prices
cannot be considered indicative of any viable market for such
stock.
Class C shares are restricted and therefore, are not traded.
As of February 29, 1996, there were approximately 870 holders
of record of Class A shares and five holders of Class C shares.
Dividends have not been declared on any class of equity securities.
<PAGE>
ITEM 6: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Fiscal Year Ended February 29, 1996, Compared to Fiscal Year Ended
February 28, 1995
Revenues for the year ended February 29, 1996 increased to
$2,589,021 compared to $1,774,324 for the year ended February 28,
1995, an increase of 46%. This increase results primarily from the
performance of the Company's portfolio of bank stocks. Revenue
from principal transactions involving the trading portfolio were
$1,557,927 for the year ended February 29, 1996 compared to
$329,783 for the year ended February 28, 1995, an increase of 372%.
This represents an annual rate of return on the average portfolio
of 23% for the year ended February 29, 1996 compared to 5% for the
year ended February 28, 1995.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD
broker-dealer subsidiary, generated commission revenue of $795,157
for the year ended February 29, 1996 compared to $503,314 for the
year ended February 28, 1995, an increase of 58%. BSFS was
acquired by Heartland Advisory Group, Inc. (HAG) in November 1992
and HAG merged with the Company in February 1993. BSFS has been
increasing its level of business activity, especially portfolio
management services, since it was acquired by HAG.
Buckeye Bancstocks, the Company's intrastate broker-dealer
subsidiary, generated agency fees of $760,044 for the year ended
February 28, 1995. These funds were earned by Buckeye in its
capacity as agent for investors desiring to acquire HGC stock or
warrant holders desiring to sell their warrants. As an agent,
Buckeye matched corresponding buyers or sellers. These fees were
earned prior to October 11, 1994 when state regulations went into
effect which limit the activity levels of Buckeye Bancstocks.
There were no comparable fees for the year ended February 29, 1996.
Buckeye does not expect to generate significant agency fees in the
foreseeable future.
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 Class A shares of BSA. The Company values
its investment in BSA at BSA's tangible net book value since BSA is
currently in the start-up phase. The unrealized gain on this
<PAGE>
investment was $38,310 for the year ended February 29, 1996. The
unrealized loss on this investment was $33,480 for the year ended
February 28, 1995. BSA's tangible net book value increases from
earnings from principal transactions involving its portfolio of
bank stocks and decreases because of expenditures for its
feasibility study, pre-operating costs and investment expenses.
Operating expenses for the year ended February 29, 1996 decreased
to $1,950,969 compared to $2,009,879 for the year ended February
28, 1995, a decrease of 3%. Brokers' commission expenses decreased
to $392,213 for the year ended February 29, 1996 compared to
$460,326 for the year ended February 28, 1995, a decrease of 15%.
Even though commission revenue increased 58% over the prior year,
there were no agency fee revenues in fiscal 1996 resulting in the
net decrease in Brokers' commission expense of 15%. Salaries,
benefits, and payroll taxes decreased to $404,946 for the year
ended February 29, 1996 compared to $438,977 for the year ended
February 28, 1995, a decrease of 8%. This decrease reflects a
management restructuring. Interest expense decreased to $86,336 for
the year ended February 29, 1996 compared to $205,759 for the year
ended February 28, 1995, a decrease of 58%. Interest expense
decreased because of management's decision to reduce margin
balances. General and administrative expenses increased to
$1,067,474 for the year ended February 29, 1996 compared to
$904,817 for the year ended February 28, 1995, an increase of 18%.
This increase is primarily the result of the management
restructuring, increased legal costs and tax assessments for Ohio
property taxes and Florida intangibles taxes. These increases were
partially offset by decreased clearing costs achieved by
establishing a correspondent arrangement with a different clearing
broker.
The increase in the weighted average shares, common and common
stock equivalents to 8,404,711 for the year ended February 29, 1996
from 8,009,887 for the year ended February 28, 1995 is primarily
the result of warrants exercised primarily in May 1994 being
outstanding for the entire fiscal year.
Liquidity and Capital Resources
Approximately 11% 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 89% of
the Company's trading portfolio is readily marketable, providing a
high degree of liquidity. Investments in bank securities traded on
<PAGE>
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 February 29, 1996, the Company had working capital of
approximately $7,200,000 compared to $6,433,000 as of February 28,
1995. Working capital includes cash, investments, prepaid interest
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. A short security position does not
expose the Company to credit risk since the counterparty is not
obligated to perform. At February 29, 1996 the Company had no
short security positions.
At February 29, 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
<PAGE>
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 year ended February 29, 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.
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.
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 of the Company's
broker-dealer subsidiaries, as of February 28, 1993, are being
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 carry
forward, the Mark-to-Market Rules currently are not expected to
have a significant impact on operations. However, after the net
operating loss carry forward currently available to the Company is
fully utilized, these Rules could have a materially adverse impact
on the Company's cash flow.
<PAGE>
New Accounting Pronouncements
The Financial Accounting standards Board issued Statement of
Financial Accounting Standards No. 123 in October 1995. This
statement is effective for the Company's fiscal year ending
February 28, 1997. The statement establishes accounting and
reporting standards for employee stock option plans.
The Statement defines a fair value based method of accounting for
an employee stock option. However, it also allows an entity to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. Entities electing to remain with the accounting in
Opinion 25 must make pro forma disclosures of net income and
earnings per share, as if the fair value based method of accounting
had been applied.
Under the fair value based method, compensation cost is measured at
the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period.
Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at grant
date over the amount an employee must pay to acquire the stock.
Most fixed stock option plans have no intrinsic value at grant
date, and under Opinion 25 no compensation cost is recognized for
them.
For stock options, fair value is determined using an option-pricing
model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividends on it, and the
risk-free interest rate over the expected life of the option. The
fair value of an option estimated at the grant date is not
subsequently adjusted for changes in the price of the underlying
stock or its volatility, the life of the option, dividends on the
stock, or the risk-free interest rate.
The fair value of a share of nonvested stock is measured at the
market price of a share of nonrestricted stock on the grant date.
The Statement requires that an employer's financial statements
include certain disclosures about stock-based compensation
arrangements regardless of the method used to account for them.
<PAGE>
The pro forma amounts required to be disclosed by an employer that
continues to apply the accounting provisions of Opinion 25 will
reflect the difference between compensation cost, if any, included
in net income and the related cost measured by the fair value based
method defined in the Statement, including tax effects, if any,
that would have been recognized in the income statement if the fair
value based method had been used. The required pro forma amounts
will not reflect any other adjustments to reported net income or
earnings per share.
Management is in the process of trying to locate, and evaluating
the acquisition of, software necessary to make the computations
required by this pronouncement. Management has not determined
which of the acceptable methods will be adopted by the Company.
<PAGE>
ITEM 7: Financial Statements
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED February 29, 1996 AND February 28,1995
TOGETHER WITH REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
April 3, 1996
To the Shareholders and Board of Directors of
Heartland Group of Companies, Inc. and Subsidiaries
In our opinion, the accompanying consolidated statement of
financial condition and the related consolidated statements of
operations, of changes in shareholders' equity, and of cash flows
present fairly, in all material respects, the financial position
of Heartland Group of Companies, Inc. and Subsidiaries at
February 29, 1996 and the results of their operations and their
cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles. 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 conducted our
audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF FEBRUARY 29, 1996
ASSETS
Cash 405,338
Securities owned:
Marketable equity securities, at market value 5,616,154
Not readily marketable equity securities
Banc Stock Exchange of America, at tangible net book value 453,440
Other, at estimated fair value 684,072
Accounts receivable:
Brokers and other 13,536
Affiliates 39,875
Pending securities settlements 48,414
Notes and interest receivable:
Former officer 62,661
Brokers 150,404
Property and equipment
net of accumulated depreciation of $144,639 86,578
Goodwill, net of accumulated amortization of $159,059 470,907
Deposits and other 82,794
----------
Total assets 8,114,173
==========
LIABILITIES
Margin accounts payable to broker-dealers 56,828
Accounts payable to broker-dealers and other 32,636
Accrued expenses 183,526
----------
Total liabilities 272,990
----------
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 (875,919)
----------
Total shareholders' equity 7,841,183
----------
Total liabilities and shareholders' equity 8,114,173
==========
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
1996 1995
REVENUES:
Principal transactions:
Trading portfolio 1,557,927 329,783
Banc Stock Exchange of America 38,310 (33,480)
Commission revenue 795,157 503,314
Agency fees - 760,044
Dividends 155,973 189,271
Interest and other 41,654 25,392
----------- ----------
Total revenues 2,589,021 1,774,324
----------- ----------
EXPENSES:
Brokers' commission 392,213 460,326
Salaries, benefits and payroll taxes 404,946 438,977
Interest 86,336 205,759
General and administrative 1,067,474 904,817
----------- ----------
Total expenses 1,950,969 2,009,879
----------- ----------
INCOME (LOSS) BEFORE TAXES 638,052 (235,555)
INCOME TAX PROVISION - -
----------- ----------
NET (LOSS) INCOME 638,052 (235,555)
=========== ==========
WEIGHTED AVERAGED SHARES,
COMMON AND COMMON
STOCK EQUIVALENTS 8,404,711 8,009,887
=========== ==========
PRIMARY AND FULLY DILUTED
NET INCOME (LOSS) PER COMMON SHARE 0.08 (0.03)
=========== ==========
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
Class A
-------------------------
Shares
Outstanding Amount
Balance at February 28, 1994 5,752,825 $6,449,720
Purchase of treasury stock (44,063) -
Stock issuance and registration costs - (142,089)
Shares issued from exercise of warrants 1,490,048 2,502,743
Sale of FSC owned shares 129,173 286,190
Conversion of Class B to Class A (25% per year) 219,694 5,992
Conversion of Class C to Class A (10% per year) 120,000 -
Net loss - -
-------------------------
Balance at February 28, 1995 7,667,677 9,102,556
Treasury stock transactions, net 24,000 -
Conversion of Class C to Class A (10% per year) 120,000 -
Net income - -
-------------------------
Balance at February 29, 1996 7,811,677 $9,102,556
=========================
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
Class B
--------------------
Balance at February 28, 1994 219,694 $5,992
Purchase of treasury stock - -
Stock issuance and registration costs - -
Shares issued from exercise of warrants - -
Sale of FSC owned shares - -
Conversion of Class B to Class A (25% per year) (219,694) (5,992)
Conversion of Class C to Class A (10% per year) - -
Net loss - -
--------------------
Balance at February 28, 1995 - -
Treasury stock transactions, net - -
Conversion of Class C to Class A (10% per year) - -
Net income - -
--------------------
Balance at February 29, 1996 - $ -
====================
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
Class C
------------------------
Shares
Outstanding Amount
-------------------------
Balance at February 28, 1994 840,000 $ -
Purchase of treasury stock - -
Stock issuance and registration costs - -
Shares issued from exercise of warrants - -
Sale of FSC owned shares - -
Conversion of Class B to Class A (25% per year) - -
Conversion of Class C to Class A (10% per year) (120,000) -
Net loss - -
------------------------
Balance at February 28, 1995 720,000 -
Treasury stock transactions, net - -
Conversion of Class C to Class A (10% per year) (120,000) -
Net income - -
------------------------
Balance at February 29, 1996 600,000 $ -
========================
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
Treasury
Stock
-----------
Balance at February 28, 1994 ($452,093)
Purchase of treasury stock (125,000)
Stock issuance and registration costs -
Shares issued from exercise of warrants -
Sale of FSC owned shares 156,046
Conversion of Class B to Class A (25% per year) -
Conversion of Class C to Class A (10% per year) -
Net loss -
-----------
Balance at February 28, 1995 (421,047)
Treasury stock transactions, net 35,593
Conversion of Class C to Class A (10% per year) -
Net income -
-----------
Balance at February 29, 1996 ($385,454)
===========
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
Retained
Earnings
(Deficit) Total
-------------------------
Balance at February 28, 1994 ($1,278,416) $4,725,203
Purchase of treasury stock - (125,000)
Stock issuance and registration costs - (142,089)
Shares issued from exercise of warrants - 2,502,743
Sale of FSC owned shares - 442,236
Conversion of Class B to Class A (25% per year) - -
Conversion of Class C to Class A (10% per year) - -
Net loss (235,555) (235,555)
-------------------------
Balance at February 28, 1995 (1,513,971) 7,167,538
Treasury stock transactions, net - 35,593
Conversion of Class C to Class A (10% per year) - -
Net income 638,052 638,052
-------------------------
Balance at February 29, 1996 ($875,919) $7,841,183
=========================
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 YEARS ENDED FEBRUARY 29, 1996 and FEBRUARY 28, 1995
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 638,052 (235,555)
Adjustments to reconcile net income (loss)
to net cash provided by
(used in) operating activities:
Depreciation and amortization 81,603 95,594
Loss on equipment disposals 18,214 19,583
Other 16,160 -
Unrealized (gain) loss on investment
in Banc Stock Exchange of America (38,310) 33,480
(Increase) decrease in certain assets-
Accounts receivable (34,104) 24,679
Investments, net 1,553,073 (2,556,183)
Other assets 8,616 (15,597)
Increase (decrease) in certain liabilities-
Accounts payable to broker-dealers and other (191,805) 148,162
Accrued expenses and other 73,191 39,608
Securities sold under agreement to repurchase (188,765) (195,079)
Securities sold, not yet purchased (164,800) 47,051
----------- -----------
Net cash provided by
(used in) operating activities 1,771,125 (2,594,257)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 140,181 434,533
Issuance of notes receivable (99,040) (210,391)
Redemption (purchase) of certificate of deposit 102,700 (102,700)
Purchase of property and equipment (14,515) (70,324)
----------- -----------
Net cash provided by investing activities 129,326 51,118
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin accounts payable to broker-dealers (1,250,536) (485,184)
Proceeds from issuance of common stock - 2,944,979
Stock issuance costs - (142,089)
Sale (purchase) of treasury stock 35,593 (125,000)
Proceeds (repayment) of bank debt (654,107) 654,107
Advances from affiliates 470,147 440,740
Advances to affiliates (261,272) (737,206)
----------- -----------
Net cash (used)
provided by financing activities (1,660,175) 2,550,347
----------- -----------
NET INCREASE IN CASH 240,276 7,208
CASH, BEGINNING OF PERIOD 165,062 157,854
----------- -----------
CASH, END OF PERIOD 405,338 165,062
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
----------- -----------
Cash paid during the period for:
Interest 86,336 205,759
The accompanying notes are an integral part of
these consolidated financial statements
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 29, 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. Effective January 8, 1996, Buckeye changed its name
from The First Scioto Company.
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. Effective
September 1, 1994, BSFS changed its name from First Scioto
Financial Services. 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.
<PAGE>
The following is a summary of the Company's significant
accounting policies:
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.
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 loss by the weighted average number
of shares of common stock outstanding during the periods.
<PAGE>
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 - Class A
Effective March 24, 1994, the Company registered its Class A
Common Shares and Class B and C warrants with the Securities
and Exchange Commission.
Common Stock - Class B and C
Commencing December 1, 1991, shares of Class B common stock
automatically converted to shares of Class A common stock at
an annual rate of 25% of the original amount issued.
Conversion of the last 25% occurred on December 1, 1994.
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
During the year ended February 29, 1996, the Company sold
26,750 shares from treasury and repurchased 2,750 shares.
During the year ended February 28, 1995, the Company
repurchased 44,063 shares as treasury shares and Buckeye
Bancstocks sold 129,173 shares that were treated as treasury
shares for financial reporting purposes.
<PAGE>
As of February 29, 1996, Buckeye Bancstocks held 206,240 HGC
Class A shares. These shares are treated as treasury stock for
financial reporting purposes.
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 February 29, 1996 consist of
bank stocks at market value, as follows:
Traded on national securities markets $3,493,736
Not traded on national securities
markets, but with readily ascertainable
market value 2,122,418
Total marketable equity
securities $5,616,154
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 February 29, 1996 the Company
had investments in one bank stock amounting to 14% 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 February 29, 1996
were as follows:
Fair Value Cost
Banc Stock Exchange of America $ 453,440 $ 75,000
Bank stocks not readily marketable 684,072 619,138
$1,137,512 $694,138
<PAGE>
As of February 29, 1996, the Company had investments in three
bank stocks amounting to 45%, 20%, and 11% of its not readily
marketable securities.
(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 8.4% at February 29, 1996. These margin
accounts are secured by the respective securities held by
broker-dealers. The market value of the securities held as
collateral was $6,300,226 at February 29, 1996.
(6) RELATED PARTY TRANSACTIONS
Agency Fees
Buckeye Bancstocks, acting in an agency capacity, has
performed the service, for individual investors desiring to
acquire HGC stock or warrant holders desiring to sell their
warrants, of matching corresponding buyers or sellers.
Buckeye received agency fees for these services of $760,044
for the year ended February 28, 1995.
Receivables from Officer
At February 29, 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. Activity is summarized
below:
Year ended Purchases Sales
February 29, 1996 $ 29,500 None
February 28, 1995 $289,922 $196,640
<PAGE>
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 $85,740 and $98,764 for the years ended February 29,
1996 and February 28, 1995, respectively.
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. 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 years ended
February 29, 1996 and February 28, 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. The net deferred
tax benefit and valuation allowance were both reduced by
$130,000 during the year ended February 29, 1996.
<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.
<PAGE>
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.
(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 $430,720 as of February 29,
1996, which was in excess of its required minimum net capital
of $100,000. The ratio of aggregate indebtedness to net
capital was .09 to 1 as of February 29, 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
Securities to 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
<PAGE>
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 February 29, 1996, the Company had no short
security positions.
At February 29, 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 year ended February 29,
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 8: Changes In and Disagreements With Accountants or
Accounting and Financial Disclosures
None
<PAGE>
PART III
ITEM 9: Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of
the Exchange Act
As of February 29, 1996, the members of the Company's Board of
Directors, each of whom serves until the next annual meeting of the
shareholders, and the Company's executive officers, each of whom
serves at the direction of the Board, were as follows:
Name Age Position
Michael E. Guirlinger 48 Director, President, Treasurer
Michael J. McKenzie 57 Executive Vice President
Sandra L. Quinn 29 Director, Secretary, Vice President-
Human Resources, and Executive
Administrator
Jeffrey C. Barton 49 Chief Financial Officer
Larry A. Beres 49 Director
Robert K. Butner 74 Director
James G. Mathias 43 Director
J. David Smith 49 Director
Harvey J. Thatcher 62 Director
L. Jean Thiergartner 63 Director
Michael E. Guirlinger was elected President, Chief Executive
Officer and Treasurer by the Board of Directors effective May 18,
1995. Mr Guirlinger is a member of the Board of Directors for HGC
and BSA.
Mr. Guirlinger had been Vice President and Chief Operating Officer
of the Company since December, 1992 and a Director since June,
1993. Since 1992, Mr. Guirlinger has also been Vice President of
The Banc Stock Exchange of America, Inc. From 1991 to December,
1992, Mr. Guirlinger was Director of Development for Foxgate Farms,
Inc., a residential home builder. In that same period, Mr.
Guirlinger was also Vice President of Northwest Passage Trading
Co., a national and international trading company. In 1990, Mr.
Guirlinger, along with two other individuals, founded Spectrum
Mortgage Co., a real estate mortgage broker, with which he was
involved until 1991. From 1986 to 1990, Mr. Guirlinger was
Director of Development and Finance for Investment Resources, Inc.,
an intrastate broker/dealer. Mr. Guirlinger received a B.A. Degree
from Aquinas College in 1970 and an M.B.A. Degree from the Ohio
State University in 1986. Mr. Guirlinger has Series 7, 24 & 63
securities licenses and is also a member of the International
Association of Financial Planners.
<PAGE>
Michael J. McKenzie is a former director of the company and
for the past five years has been Vice President and Director of MSP
Financial Corporation. MSP Financial Corporation is an Ohio
corporation which was hired by Buckeye Bancstocks as an independent
contractor to provide certain financial consulting services to the
Company and its subsidiaries. Since October 1996, Mr. McKenzie has
served as Vice President of Marketing of AdCare Health Systems,
Inc. and served as a director of this company in 1992. Mr.
McKenzie is a security salesman licensed with the Ohio Division of
Securities and has been involved in the securities industry since
1966.
Sandra L. Quinn is Secretary of the Company, Vice President of
Human Resources, and Executive Administrator. Since 1992, Ms.
Quinn has also been Secretary of The Banc Stock Exchange of
America, Inc. and Banc Stock Financial Services, Inc. She has been
a Director of the Company and The Banc Stock Exchange of America,
Inc. since 1993. She was also a Director of Heartland Advisory
Group. Effective October 1995 Ms. Quinn was designated Principal
of Buckeye Bancstocks, Inc. Ms. Quinn has Series 65, 63 and Series
62 securities licenses and is a member of the American Society of
Corporate Secretaries. From 1985 to 1990, Ms. Quinn was employed
by UDF retail stores and worked in their corporate office in
Columbus. She was responsible for training personnel for their 52
stores located in Columbus and supervising the district managers.
Ms. Quinn graduated valedictorian from Bradford Business School.
She began her employment with the Company in May, 1991.
Jeffrey C. Barton has been Chief Financial Officer of the
Company since October, 1992. Since 1990, Mr. Barton has also been
Chief Financial Officer of Saunders Pearson Company, a contract
financial management company. From 1987 to 1989, Mr. Barton served
as Chief Financial Officer of a financial service subsidiary of
First Chicago Corporation and a business advisor to a number of
companies. Prior to 1987, Mr. Barton spent 13 years with Price
Waterhouse in public accounting. Mr. Barton received a B.B.A.
Degree from Ohio University in 1969 and an M.B.A. Degree from Ohio
University in 1972.
Larry A. Beres became a Director of the Company in 1995. He
is Chief Operating Officer of Electra Form, Inc., the country's
largest manufacturer of tooling for the plastic beverage bottle
industry and President of Formex, Division of Electra Form, a
supplier of machine systems to the plastics industry. He has been
associated with these companies for more than five years. He is a
member of the Society of Plastics Engineers and Who's Who in
American Business and Industry. Mr. Beres graduated from Kent
State University with a Bachelor of Science Degree in Chemistry and
attended the K.S.U MBA Program.
<PAGE>
Robert K. Butner is a Director of the Company (since 1993) and
a Director of HAG from 1990 to February, 1992. Mr. Butner is
retired from the faculty of Ohio University where he was a
Professor of Mathematics for 39 years and Chairman of the
Mathematics Department. Upon retirement, Mr. Butner was confirmed
Emeritus Professor of Mathematics. Mr. Butner received a B.S.
Degree in 1943 with Phi Beta Kappa honors and an M.S. Degree in
1949 and a Ph.D. Degree in 1952 from the State University of Iowa.
From 1943 to 1946, Dr. Butner served as an officer in the United
States Navy.
Dr. James G. Mathias is a Director of the Company (since 1993)
and a Director of HAG from 1990 to February, 1993. Since 1988, Dr.
Mathias has been a veterinarian practicing in Tipp City, Ohio,
where he is the owner of the Tipp City Animal Hospital. Dr.
Mathias attended the University of Texas and completed his
education at the Ohio State University, graduating from the College
of Veterinary Medicine in 1978. He was a member of the Honor
Society of Phi Zeta, a Veterinary Honor Society. Dr. Mathias is
also founder and president of the Dayton North Womens' Center and
is a speaker on Ratite Medicine.
J. David Smith became a Director of the Company in 1995. He
is President and CEO of James W. Smith Lumber Co. in Piketon, Ohio;
President of Wilco, Inc., a pallet manufacturing facility in Spring
Valley, Ohio; and President of Mid America Lumber Co. in Piketon,
Ohio. He has been involved in lumber manufacturing for over 25
years. Mr Smith graduated with honors from Ohio University with a
Bachelor of Science in Education Degree and a minor in Business
Administration. Mr. Smith received a Ministerial Degree from
Circleville Bible College receiving a Bachelor of Sacred Literature
Degree with honors. Mr. Smith is involved in Church work as a
Minister of Christ.
Harvey J. Thatcher is a Director of the Company (since 1991)
and President of Thatcher Insurance Agency, Inc. and Thatcher
Lands, Inc., Van Wert, Ohio, which he formed in 1976. He is also
director of German Mutual Insurance Company and Director of Tri-
State Venture Group.
Jean Thiergartner is a Director of the Company (since 1991)
and Secretary-Treasurer of Thiergartner Farms, Inc., for which she
worked for more than forty years. She is past Treasurer of the
Ohio Beef Council, past President of the Ohio Cattle Womens'
Association, has been a member and past President of the Union
County Health Board for over 14 years and is a past delegate to the
State Convention for the Ohio Farm Bureau. She is a member of St.
Paul Lutheran Church and active on many committees, including the
Parsonage Building Committee.
<PAGE>
Based solely upon a review of Forms 3 and 4 furnished to the
Company under Rule 16a-3(d), the following officers and/or
directors filed reports late during the fiscal year ended February
29, 1996. Jeffrey C. Barton filed one report covering one
transaction; Robert K. Butner filed three reports covering four
transactions; Michael E. Guirlinger filed one report covering one
transaction; Michael J. McKenzie filed one report covering six
transactions; Sandra L. Quinn filed one report covering one
transaction; J. David Smith filed two reports covering one
transaction; Harvey J. Thatcher filed one report covering two
transactions; L. Jean Thiergartner filed two reports covering two
transactions.
<TABLE>
ITEM 10: Executive Compensation
Summary Compensation Table
<CAPTION>
Name of Principal Year Salary Bonus Other* Awards Awards Payouts All Other
And Position Stock Options
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael E. Guirlinger 1995 76,830 0 0 0 73,600 sh 0 0
President (A)
Bradley T. Smith 1995 43,874 0 0 0 0 0 0
Former President
Bradley T. Smith 1994 104,000 7,500 75,502 0 0 0 0
Former President
Bradley T. Smith 1993 104,000 5,000 22,876 0 0 0 0
Former President
<FN>
* Commissions
</TABLE>
(A) Mr. Guirlinger's options which are currently exercisable
represent 20% of all options and warrants granted to all employees,
officers, Directors and independent contractors during the fiscal year
ended February 29, 1996 which are currently exercisable. Mr. Guirlinger
was granted 26,400 additional options which vest over five years. This
represents 12% of all options granted to all employees and independent
contractors during the fiscal year ended February 29, 1996 which vest
over five years. All of the options have an exercise price of $2.875
and expire on September 28, 2005.
No other officer of the Company received in excess of $100,000 compensation.
Director Compensation
Each director who is not an employee of the Company is entitled to receive a
fee of $250 plus travel expenses for each directors' meeting attended.
<PAGE>
ITEM 11: Security Ownership of Certain Beneficial Owners and Management
The following sets forth, as of March 31, 1996, certain information concerning
stock ownership of all persons known by the Company to own beneficially five
percent or more of the outstanding shares of the Company's Class A Common Stock,
each director and all officers and directors of the Company as a group, and the
percentage of voting power (assuming exercise of all options which are
currently exercisable):
<TABLE>
<CAPTION>
Class A Options or
Shares(A) Warrants Total
Number Number Number Percentage
<S> <C> <C> <C> <C>
Larry A. Beres 40,000 0 40,000 *
7811 Winding Way South
Tipp City, Ohio 45371
Robert K. Butner 378,861 25,000 403,861 4.9%
12 McGuffey Lane
Athens, Ohio 45701
James G. Mathias 80,700 25,000 105,700 1.3%
7702 Winding Way South
Tipp City, Ohio 45371
J. David Smith 85,794 0 85,794 1.0%
526 Waldren Hills Road
Piketon, Ohio 45661
Harvey J. Thatcher 96,853 25,000 124,128 1.5%
135 East Central
Van Wert, Ohio 45891
L. Jean Thiergartner 288,172 25,000 315,172 3.8%
10461 Streng Road
Milford Center, OH 43045
Michael E. Guirlinger 35,127 73,600 108,977 1.3%
6230 Busch Blvd.
Columbus, Ohio 43229
Michael J. McKenzie 56,122(B) 15,000 71,122(B) *
1040 Jennings Street
Van Wert, Ohio 45891
Sandra L. Quinn 16,500 4,500 21,000 *
6230 Busch Blvd.
Columbus, Ohio 43229
Jeffrey C. Barton 5,000 5,000 10,000 *
290 E. Kossuth Street
Columbus, Ohio 43206
__________ ________ ___________ _______
Directors and 1,083,129 198,100 1,281,229 15.7%
Officers as a
Group (10 persons)
<FN>
*less than 1% of Class
</TABLE>
(A) Unless otherwise indicated, the sole voting and investment
power is held by the persons named.
(B) Mr. McKenzie disclaims beneficial ownership of 56,122 shares
of Class A stock held in the name of the Kathy McKenzie Trust.
<PAGE>
The following sets forth, as of March 31, 1996, certain
information concerning stock ownership of all persons known by the
Company to own beneficially five percent or more of the outstanding shares
of the Company's Class C Common Stock and the percentage of voting power:
<TABLE>
<CAPTION>
Class C Shares
Number Percentage
<S> <C> <C>
First Eldarado Bancshares, Inc. 219,915 36.6%
946 Fourth Street
Eldorado, IL 62930
John W. Walden 108,600 18.1%
1132 Broadway
Columbus, Georgia 31901
James T. Coppage 54,300 9.1%
6001 River Road, Suite 402
Columbus, Georgia 31904
Carol A. Wright 54,300 9.1%
755 Wagon Wheel Drive
Northport, MI 49670
Phoenix Scioto Company 162,885 27.1%
850 Old Woods Road
Columbus, OH 43235
__________ ______
Total 600,000 100.0%
</TABLE>
<PAGE>
ITEM 12: Certain Relationships and Related Transactions
On May 31, 1991, the Company completed a merger with Buckeye
Bancstocks, formerly First Scioto Company, pursuant to which
Buckeye Bancstocks merged with a subsidiary of the Company and
thereby became a wholly-owned subsidiary of the Company. Pursuant
to the merger, Phoenix Scioto Company received 1,200,000 shares of
Class C Common Stock of the Company together with options to
purchase 1,000,000 shares of Class A Common Stock. Ten percent of
the original amount of Class C Shares convert to Class A Shares on
December 1 of each year. Bradley T. Smith, former President and
Director of the Company owns one-third of Phoenix Scioto Company.
None of the options were exercised and all have now expired or been canceled.
Michael J. McKenzie, an officer and formerly a director of the Company, is
Vice President and Director of MSP Financial Corporation. MSP Financial
Corporation is an Ohio corporation which was hired by Buckeye Bancstocks as an
independent contractor to provide certain financial consulting services to the
Company and its subsidiaries. On behalf of MSP Financial Corporation,
Mr. McKenzie received $37,354 and $177,391 for services performed in
fiscal 1996 and February 29, 1996, respectively.
As of February 29, 1996, Bradley T. Smith owed $62,661 to the Company
pursuant to a demand note and $13,204 as an account receivable.
Mr. Smith has placed 67,443 shares of the Company's stock in a Trust to be
liquidated to pay this debt. As of February 29, 1996, Michael J. McKenzie,
an officer and former director of the Company, owed $34,594 to the Company,
pursuant to a demand note bearing interest at the rate of 10.25 percent per
annum. The loan to Mr. McKenzie is secured by a pledge of 25,000 shares of
the Company's stock owned by the Kathy McKenzie Trust.
Management believes in general that past transactions between the Company
and any of its officers, directors, 5% shareholders and affiliates have been
on terms no less favorable than the Company could have obtained from
unaffiliated third parties. Any future transactions between the Company and
any officer, director, 5% shareholder or affiliate of the Company will be
arranged on terms no less favorable to the Company than could be obtained
from unaffiliated third parties. Moreover, any future advances and loans by
the Company to any such person must be approved by a disinterested majority
of the Company's directors.
<PAGE>
ITEM 13: Exhibits and Reports on Form 8-K
(a) Index of Exhibits
Exhibit
*2.01 Plan and Agreement of Reorganization between
the Company and First Scioto Company.
*2.02 Agreement dated November 4, 1992 for purchase
of First Scioto Financial Services Stock by HAG.
*2.03 Agreement and Plan of Reorganization, dated
January 7, 1993 between the Company and HAG.
*3.01 Amended and Restated Articles of Incorporation
of Heartland Financial Group, Inc.
*3.02 Bylaws of the Heartland Financial Group, Inc.
*4.01 Specimen Class A Common Stock Certificate.
*10.01 Property Lease between the First Scioto Company
and The Continent JV326128.
*10.03 The Heartland Incentive Compensation Plan.
*10.04 1993 Non-Qualified and Incentive Stock Option Plan.
*22.01 List of Subsidiaries
(b) Reports on Form 8-K: None
* Indicates Exhibits previously filed with the Securities
and Exchange Commission and incorporated herein by reference.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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.
/S/Michael E. Guirlinger
By Michael E. Guirlinger
April 25, 1996
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature Title Date
/S/Michael E. Guirlinger President, Treasurer, April 25, 1996
Michael E. Guirlinger CEO and Director
/S/Sandra L. Quinn Secretary and Director April 25, 1996
Sandra L. Quinn
/S/Jeffrey C. Barton Chief Financial Officer April 25, 1996
Jeffrey C. Barton
/S/Larry A. Beres Director April 25, 1996
Larry A. Beres
/S/Robert K. Butner Director April 25, 1996
Robert K. Butner
/S/James G. Mathias Director April 25, 1996
James G. Mathias
/S/J. David Smith Director April 25, 1996
J. David Smith
/S/Harvey Thatcher Director April 25, 1996
Harvey Thatcher
/S/Jean Thiergartner Director April 25, 1996
L. Jean Thiergartner
