U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1996
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 September 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 8-17
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 18-23
Part II Other Information:
Item 1 through Item 6 24
Signatures 25
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 six months ended August 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.
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF AUGUST 31, 1996
(UNAUDITED)
ASSETS
Cash $ 94,479
Securities owned:
Marketable equity securities, at market value 6,759,275
Not readily marketable equity securities
Banc Stock Exchange of America, at tangible net book value 457,410
Other, at estimated fair value 876,123
Accounts receivable:
Brokers and other 13,896
Affiliates 18,494
Pending securities settlements 100,866
Notes and interest receivable:
Former officer 62,661
Brokers 121,174
Property & equipment, net of accumulated depreciation $159,300 100,905
Goodwill, net of accumulated amortization of $176,416 453,465
Deposits and other 85,750
Total assets $ 9,144,497
LIABILITIES
Margin accounts payable to broker-dealers $ 555,671
Accounts payable to broker-dealers and other 6,176
Accrued expenses 211,458
Total liabilities 773,305
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 (345,910)
Total shareholders' equity 8,371,192
Total liabilities and shareholders' equity $ 9,144,497
The accompanying notes are an integral part of these consolidated financial
statements
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
FOR THE THREE MONTHS and SIX MONTHS ENDED AUGUST 31, 1996 and 1995
(UNAUDITED)
6 Months Ended 3 Months Ended
AUGUST 1996 AUGUST 1995 AUGUST 1996 AUGUST 1995
REVENUES:
Principal transactions:
Trading portfolio $ 762,938 $ 646,844 $ 362,155 $ 407,138
Banc Stock Exchange of America 3,970 8,640 6,900 13,880
Commission revenue 663,683 389,741 425,643 264,140
Agency Fees 14,270 - 14,270 -
Dividends 66,278 73,836 44,705 36,877
Interest 18,480 22,383 9,049 10,843
Total revenues 1,529,619 1,141,444 862,722 732,878
EXPENSES:
Brokers' commission 357,264 185,972 236,770 143,996
Salaries, benefits & payroll tax 185,145 205,144 89,475 101,777
Interest 20,056 71,396 13,749 26,154
General and administrative 437,145 548,946 243,975 248,226
Total expenses 999,610 1,011,458 583,969 520,153
INCOME BEFORE TAXES 530,009 129,986 278,753 212,725
INCOME TAX PROVISION - - - -
NET INCOME $ 530,009 $ 129,986 $ 278,753 $ 212,725
WEIGHTED AVERAGED SHARES,
COMMON AND COMMON
STOCK EQUIVALENTS 8,411,677 8,401,547 8,411,677 8,410,250
PRIMARY AND FULLY DILUTED
EARNINGS
PER COMMON SHARE $ 0.06 $ 0.02 $ 0.03 $ 0.03
The accompanying notes are an integral part of these consolidated financial
statements
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 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 - - - 530,009 530,009
Balance August 31, 1996 $9,102,556 - ($385,454) ($345,910) $8,371,192
The accompanying notes are an integral part of these consolidated financial
statements
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 530,009 $ 129,986
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 32,104 55,625
Unrealized gain on investment in Banc Stock
Exchange of America (3,970) (8,640)
(Increase) decrease in certain assets-
Accounts receivable (52,812) (177,302)
Investments, net (1,335,172) 1,864,565
Other assets (2,956) 3,864
Increase (decrease) in certain liabilities-
Accounts payable to broker-dealers and other (26,955) (194,441)
Accrued expenses and other 27,932 1,245
Securities sold under agreement to repurchase - (188,765)
Securities sold, not yet purchased - (164,800)
Net cash provided by (used in) operations (831,819) 1,321,337
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 36,300 90,979
Issuance of notes receivable (7,070) (53,919)
Purchase of property and equipment (28,989) (20,089)
Net cash provided by investing activities 241 16,971
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin accounts payable to broker-dealers 498,843 (1,018,382)
Sale of treasury stock - 30,830
Repayment of bank debt - (654,108)
Advances from affiliates 333,153 372,803
Advances to affiliates (311,277) (133,728)
Net cash (used) provided by financing 520,719 (1,402,585)
NET DECREASE IN CASH (310,859) (64,277)
CASH, BEGINNING OF PERIOD 405,338 267,762
CASH, END OF PERIOD $ 94,479 $ 203,485
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
Cash paid during the period for:
Interest $ 20,056 $ 71,396
The accompanying notes are an integral part of these consolidated financial
statements
HEARTLAND GROUP OF COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 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 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 is
licensed to provide money management services.
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 sixteen 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 revenue
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:
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 Banc Stock Exchange of America (BSA) is establishing 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.
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.
(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 August 31, 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 August 31, 1996 consist of bank stocks
at market value, as follows:
Traded on national securities markets $4,313,948
Not traded on national securities
markets, but with readily ascertainable
market value 2,445,327
Total marketable equity
securities $6,759,275
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 August 31, 1996 the Company had investments in one bank
stock amounting to 13% 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 August 31, 1996 were as follows:
Value Cost
Banc Stock Exchange of America $ 457,410 $ 75,000
Bank stocks not readily marketable 876,123 746,159
$1,333,533 $821,159
As of August 31, 1996, the Company had investments in two bank stocks
amounting to 42% and 15%, 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 7.5%
at August 31, 1996. These margin accounts are secured by the respective
securities held by broker-dealers. The market value of the securities
held by broker-dealers was $3,330,535 at August 31, 1996.
(6) RELATED PARTY TRANSACTIONS
Receivables from Officer
At August 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 will be
liquidated to repay the debt. In addition, the Company has accounts
receivable due from a former officer and affiliates which are non-
interest bearing.
Securities Transactions
The Company purchases from and sells securities owned, to BSA at the
prevailing market price at the time of the transaction. For the six
months ended August 31, 1996 the Company made purchases of $33,875 from
BSA and sales of $239,042 to BSA. There were no purchases from or sales
to BSA for the six months ended August 31, 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 $40,006 and $45,380 for the six months
ended August 31, 1996 and 1995, respectively.
(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 six months ended
August 31, 1996 and 1995, due to utilization of NOL carryforwards, for
which a valuation allowance had been previously provided.
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office equipment
under operating leases. Total lease expenses were approximately $45,000
for the six months ended August 31, 1996 and $48,000 for the six months
ended August 31, 1995. The future minimum lease payments under these
leases are as follows:
Amount
Year ending February 29, 1998 $ 58,000
Year ending February 28, 1999 13,000
$ 71,000
(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 $639,725 as of
August 31, 1996, which was in excess of its required minimum net capital
of $100,000. The ratio of aggregate indebtedness to net capital was
.19 to 1 as of August 31, 1996. BSFS is also subject to regulations of
the District of Columbia and sixteen 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 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 August 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 six months ended August 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 concentration, which arises within
its normal course of business activities, are with financial institutions
for bank securities transactions. 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
Six Months Ended August 31, 1996, Compared to the Six Months Ended
August 31, 1995
Revenues for the six months ended August 31, 1996 increased to $1,529,619
compared to $1,141,444 for the six months ended August 31, 1995, an increase
of 34%. 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
$762,938 for the six months ended August 31, 1996 compared to $646,844 for the
six months ended August 31, 1995, an increase of 18%. This represents an
annual rate of return on the average portfolio of 22% for the six months
ended August 31, 1996 compared to 18% for the six months ended August 31,
1995 due to strong performance of the trading portfolio during the first
fiscal quarter ended May 31, 1996. Management believes these are normal
fluctuations and do not necessarily indicate future trends.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $663,683 for the six months ended
August 31, 1996 compared to $389,741 for the six months ended August 31,
1995, an increase of 70%. BSFS continues to make a concerted effort to
increase its level of business activity, especially portfolio management
services.
Buckeye Bancstocks, the Company's intrastate broker-dealer subsidiary,
generated agency fees of $14,270 for the six months ended August 31, 1996.
These funds were earned by Buckeye in its capacity as agent for investors
desiring to acquire BSA stock or shareholders desiring to sell their BSA
shares. As an agent, Buckeye matched corresponding buyers or sellers. There
were no comparable fees for the six months ended August 31, 1995. Buckeye
does not expect to generate significant agency fees in the foreseeable
future.
The Banc Stock Exchange of America, Inc. (BSA) is establishing an electronic
information exchange. 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
gain on this investment was $3,970 for the six months ended August 31, 1996
compared to an unrealized gain of $8,640 for the six months ended August 31,
1995. These gains in BSA's tangible net book value result from BSA incurring
fewer expenses on its feasibility study than it earned from principal
transactions involving its portfolio of bank stocks.
Operating expenses for the six months ended August 31, 1996 decreased to
$999,610 compared to $1,011,458 for the six months ended August 31, 1995, a
decrease of 1%. Brokers' commission expenses increased to $357,264 for the
six months ended August 31, 1996 compared to $185,972 for the six months
ended August 31, 1995, an increase of 92%. This percentage increase compares
to the percentage increase in commission revenue of 70% and 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 $185,145 for the six months ended August 31,
1996 compared to $205,144 for the six months ended August 31, 1995, a
decrease of 10%. This decrease reflects management restructuring which
occurred in May 1995. Interest expense decreased to $20,056 for the six
months ended August 31, 1996 compared to $71,396 for the six months ended
August 31, 1995, a decrease of 72%. 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 $437,145 for the six
months ended August 31, 1996 compared to $548,946 for the six months ended
August 31, 1995, a decrease of 20%. 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.
Quarter Ended August 31, 1996, Compared to the Quarter Ended August 31, 1995
Revenues for the quarter ended August 31, 1996 increased to $862,722 compared
to $732,878 for the quarter ended August 31, 1995, an increase of 18%. This
increase results primarily from an increases in commission and management fee
revenue, offset by a decrease in revenue from principal transactions.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $425,643 for the quarter ended
August 31, 1996 compared to $264,140 for the quarter ended August 31, 1995,
an increase of 61%. BSFS continues to make a concerted effort to increase its
level of business activity, especially portfolio management services.
Revenues from principal transactions involving the trading portfolio were
$362,155 for the quarter ended August 31, 1996 compared to $407,138 for the
quarter ended August 31, 1995, a decrease of 11%. This represents an annual
rate of return on the average portfolio of 20% for the quarter ended August
31, 1996 compared to 24% for the quarter ended August 31, 1995. Management
believes these are normal fluctuations and do not necessarily indicate future
trends.
Buckeye Bancstocks, the Company's intrastate broker-dealer subsidiary,
generated agency fees of $14,270 for the quarter ended August 31, 1996.
These funds were earned by Buckeye in its capacity as agent for investors
desiring to acquire BSA stock or shareholders desiring to sell their BSA
shares. As an agent, Buckeye matched corresponding buyers or sellers. There
were no comparable fees for the quarter ended August 31, 1995. Buckeye does
not expect to generate significant agency fees in the foreseeable future.
The Banc Stock Exchange of America, Inc. (BSA) is establishing an electronic
information exchange. 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 gain
on this investment was $6,900 for the quarter ended August 31, 1996 compared
to an unrealized gain of $13,880 for the quarter ended August 31, 1995.
These gains in BSA's tangible net book value result from BSA incurring fewer
expenses on its feasibility study than it earned from principal transactions
involving its portfolio of bank stocks.
Operating expenses for the quarter ended August 31, 1996 increased to
$583,969 compared to $520,153 for the quarter ended August 31, 1995, an
increase of 12%. Brokers' commission expenses increased to $236,770 for the
quarter ended August 31, 1996 compared to $143,996 for the quarter ended
August 31, 1995, an increase of 64%. This percentage increase compares to the
percentage increase in commission revenue of 61% and 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 $89,475 for the quarter ended August 31, 1996 compared to
$101,777 for the quarter ended August 31, 1995, a decrease of 12%. This
decrease reflects management restructuring which occurred in May 1995.
Interest expense decreased to $13,749 for the quarter ended August 31, 1996
compared to $26,154 for the quarter ended August 31, 1995, a decrease of 47%.
This decrease was achieved by reducing margin positions with broker-dealers
and by repaying bank debt in August 31, 1995.
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 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 August 31, 1996 the Company had working capital of approximately
$7,730,000 compared to approximately $6,600,000 as of August 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 August 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 August 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 August 31, 1996. The Company did
not experience any credit losses due to the failure of any counterparties to
perform during the six months ended August 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. 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 $30,000 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 of the Company's broker-dealer
subsidiaries, 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.
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 -
The Annual Meeting of Shareholders was held June 6, 1996. The Shareholders
voted on the following issues:
a. Election of the Board of Directors. The following individuals were
elected to serve on the board:
Name of Director Votes for Votes withheld
Larry A. Beres 7,702,898 64,100
Robert K. Butner 7,704,098 62,900
Michael E. Guirlinger 7,704,098 62,900
James G. Mathias 7,704,098 62,900
Sandra L. Quinn 7,704,098 62,900
J. David Smith 7,704,098 62,900
Harvey Thatcher 7,658,398 108,600
L. Jean Thiergartner 7,672,785 94,213
b. The election of Price Waterhouse LLP to serve as independent
accountants. This issue was approved with 7,692,410 votes for,
7,400 votes against and 67,188 votes withheld.
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
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 October 7, 1996 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and Chief
Executive Officer
Date October 7, 1996 /S/ Jeffrey C. Barton
Jeffrey C. Barton
Chief Financial Officer
Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND> 0
<RESTATED>
<CIK> 0
<NAME> 0
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-START> JUN-01-1996
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1996
<EXCHANGE-RATE> 1
<CASH> 94,479
<RECEIVABLES> 317,091
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 8,092,808
<PP&E> 100,905
<TOTAL-ASSETS> 9,144,497
<SHORT-TERM> 0
<PAYABLES> 561,847
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,717,102
<OTHER-SE> (345,910)
[TOTAL-LIABILITIES-AND-EQUITY] 9,144,497
<TRADING-REVENUE> 762,938
<INTEREST-DIVIDENDS> 84,758
<COMMISSIONS> 543,619
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 120,064
<INTEREST-EXPENSE> 20,056
<COMPENSATION> 185,145
<INCOME-PRETAX> 530,009
<INCOME-PRE-EXTRAORDINARY> 530,009
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 530,009
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
