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 May 31, 1997
Commission file number 33-65292C
Heartland Group of Companies, Inc., dba, THE BANC STOCK GROUP
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0190407
(State of incorporation) (IRS Employer Identification No.)
6230 BUSCH BOULEVARD, COLUMBUS, OHIO 43229
(Address of principal executive offices)
(614) 848-5100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's classes of
common equity, as of June 30, 1997:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 7,931,717
Class C shares, No Par Value 480,000
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
Yes X No
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
DBA, THE BANC STOCK GROUP
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 18-21
Part II Other Information:
Item 1 through Item 6 22
Signatures 23
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
DBA, THE BANC STOCK GROUP
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying consolidated financial statements of Heartland Group of
Companies, Inc., dba The Banc Stock Group, are unaudited but, in the opinion of
management, reflect all adjustments (which include only normal recurring
accruals) necessary to present fairly such information for the periods and at
the dates indicated and to make the consolidated financial statements not
misleading. The results of operations for the three months ended May 31, 1997
may not be indicative of the results of operations for the year ending
February 28, 1998. 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, DBA,
THE BANC STOCK GROUP
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF MAY 31, 1997
(UNAUDITED)
ASSETS
Cash $ 35,185
Securities owned:
Marketable equity securities, at market value 9,500,847
Not readily marketable equity securities at estimate 743,357
Mortgage participation notes 100,000
Accounts receivable:
Affiliates 27,159
Pending securities settlements 79,113
Notes and interest receivable 18,011
Equity investment in Banc Stock Exchange of America 500,240
Property and equipment, net of accumulated depreciatio 89,733
Goodwill, net of accumulated amortization of $202,665 427,302
Deposits and other 96,837
Total assets $ 11,617,784
LIABILITIES
Margin accounts payable to broker-dealers $ 891,350
Unearned commisions 34,560
Accounts payable to broker-dealers and other 31,003
Accrued expenses 507,903
Total liabilities 1,464,816
SHAREHOLDERS' EQUITY
Preference stock, 50,000,000 shares authorized, -
none issued or outstanding
Common stock:
Class A, no par value, 149,400,000 shares
authorized, 8,234,762 shares issued
and 7,931,717 shares outstanding 9,102,556
Class C, no par value, 480,000 shares
authorized, issued and outstanding -
Treasury stock, at cost
(303,045 Class A shares) (385,403)
Retained earnings 1,435,815
Total shareholders' equity 10,152,968
Total liabilities and shareholders' equity $ 11,617,784
The accompanying notes are an integral part of these consolidated financial
statements.
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES, DBA,
THE BANC STOCK GROUP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE QUARTERS ENDED MAY 31, 1997 and 1996
(UNAUDITED)
1997 1996
REVENUES:
Principal transactions $ 835,326 $ 400,783
Commission revenue 270,178 238,040
Dividends 37,164 21,573
Interest and other 10,249 9,431
Total revenues 1,152,917 669,827
EXPENSES:
Brokers' commission 193,231 120,494
Salaries, benefits and payroll taxes 123,569 95,670
Interest 20,805 6,307
General and administrative 265,075 193,170
Total expenses 602,680 415,641
INCOME BEFORE TAXES 550,237 254,186
PROVISION FOR INCOME TAXES - -
INCOME BEFORE EQUITY IN NET EARNINGS
OF AFFILIATED COMPANY 550,237 254,186
Equity in net earnings of Banc Stock Exchange 11,080 (2,930)
NET INCOME $ 561,317 $ 251,256
WEIGHTED AVERAGED SHARES,
COMMON AND COMMON
STOCK EQUIVALENTS 8,411,717 8,411,677
PRIMARY AND FULLY DILUTED
NET INCOME PER COMMON SHARE $ 0.07 $ 0.03
The accompanying notes are an integral part of these consolicated financial
statements.
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES, DBA,
THE BANC STOCK GROUP
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
FOR THE QUARTER ENDED MAY 31, 1997
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance at 2/28/97 $9,102,556 - ($385,403) $874,498 $9,591,651
Net income - - - 561,317 561,317
Balance 5/31/1997 $9,102,556 - ($385,403) $1,435,815 $10,152,968
The accompanying notes are an integral part of these consolidated financial
statements.
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES, DBA,
THE BANC STOCK GROUP
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE QUARTERS ENDED MAY 31, 1997 and 1996
(UNAUDITED)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 561,317 $ 251,256
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 17,624 15,477
Equity in earnings of Banc Stock Exchange of
America (11,080) 2,930
(Increase) decrease in certain assets-
Accounts receivable (34,820) (6,441)
Securities owned, net (768,679) (885,271)
Other assets (10,720) 1,807
Increase (decrease) in certain liabilities-
Accounts payable broker-dealers & other 10,036 (22,835)
Unearned commissions 34,560 -
Accrued expenses and other (61,067) (65,573)
Net cash used in operating activities (262,829) (708,650)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 9,138 10,650
Issuance of notes receivable (4,304) (3,659)
Purchase of property and equipment (10,623) (3,989)
Net cash (used in) provided by investin (5,789) 3,002
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin accounts payable to broker-dealers 165,893 375,295
Advances from affiliates 61,454 34,449
Advances to affiliates (83,970) (26,616)
Net cash provided by financing activities 143,377 383,128
NET DECREASE IN CASH (125,241) (322,520)
CASH, BEGINNING OF PERIOD 160,426 405,338
CASH, END OF PERIOD $ 35,185 $ 82,818
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1997 1996
Cash paid during the period for:
Interest $ 20,805 $ 6,307
The accompanying notes are an integral part of these consolidated financial
statements.
HEARTLAND GROUP OF COMPANIES, INC.
DBA, THE BANC STOCK GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1997
(1) ORGANIZATION AND NATURE OF BUSINESS
Heartland Group of Companies, Inc., dba, The Banc Stock Group, (the Company)
is a Florida corporation incorporated in April, 1990. At the Annual Meeting
of Shareholders held on June 19, 1997, the Shareholders amended the Articles
of Incorporation to change the name of the corporation to The Banc Stock Group,
Inc. 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. The Company has
three wholly-owned subsidiary operating companies.
Banc Stock Financial Services, Inc. (BSFS), an Ohio corporation, is an NASD
registered broker-dealer specializing in the trading of bank stocks nationwide.
BSFS is registered with the Securities and Exchange Commission and the
securities commissions of seventeen 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.
Heartland Advisory Group, Inc. (HAG), is a registered investment advisor
offering advisory accounts to qualified investors.
Buckeye Bancstocks, Inc., is an Ohio corporation established in 1977, to act
as an intrastate broker-dealer trading primarily in Ohio bank stocks.
(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 the
Company, BSFS, HAG and Buckeye Bancstocks. 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.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over 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.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which supersedes
existing standards for determining earnings per share. The statement will be
effective for the Company for the year ending February 28, 1998. Primary
earnings per share will be replaced by "basic earnings per share," which will
be determined solely by the weighted average number of shares outstanding for
the period. Fully diluted earnings per share will be replaced by "diluted
earnings per share, " which will reflect the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the Company. The statement will also require
a reconciliation of the numerator and denominator of basic earnings per share
with the numerator and denominator of diluted earnings per share. Management
does not believe the new statement will result in a significant difference in
amounts per share reported in these financial statements.
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including cash, accounts
receivable, mortgage participation notes, notes and interest receivable and
securities owned 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.
Equity Investment in Banc Stock Exchange of America
The Banc Stock Exchange of America (BSA) is establishing an electronic bank
stock information exchange. BSA is under common management with the Company.
The Company currently holds 16% of the outstanding common stock of BSA. The
Company's investment in BSA is accounted for on the equity method. The
difference between the carrying amount of the investment accounted for under
the equity method and the underlying equity in net assets results from the
Company's policy of expensing pre-operating costs as incurred.
(3) CAPITAL STOCK
Common Stock
Class A Common shares have been registered with the Securities and Exchange
Commission since March 24, 1994. Commencing December 1, 1991, shares of Class
C common stock automatically convert to Class A common stock at the rate of
120,000 shares per year. The Class C common shares are subordinate to Class A
common stock in that Class A common stock has a liquidation preference over the
Class C common stock equal to $1.50 per share. In all other respects, Class A
and Class C common stock have equal rights.
Treasury Stock
As of May 31, 1997, Buckeye Bancstocks held 206,240 Class A shares of the
Company. 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 May 31, 1997 consist of bank stocks at market
value, as follows:
Traded on national securities markets $6,559,579
Not traded on national securities
markets, but with readily ascertainable
market value 2,941,268
Total marketable equity securities $9,500,847
The Company, at any given time, may have a significant amount of its securities
owned and related income generated from a few specific bank stocks. As of
May 31, 1997, the Company had no single investment representing more than 10%
of its marketable equity securities.
Securities not readily marketable include securities for which there is no
market on a securities exchange and no independent publicly quoted market.
These securities at May 31, 1997 were $743,357 at fair value with a cost of
$649,160. As of May 31, 1997, the Company had investments in one bank stock
amounting to 62% 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 7.5% at May 31, 1997. These
margin accounts are secured by the respective securities held by broker-dealers.
The market value of the securities held by broker-dealers with margin account
balances was approximately $4,917,000 at May 31, 1997.
(6) RELATED PARTY TRANSACTIONS
Securities Transactions
The Company purchases from and sells securities owned to BSA at the prevailing
market price at the time of the transaction. However, during the quarters ended
May 31, 1997 and 1996 no purchases were made from, nor sales made to, BSA.
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 $24,457 and $20,230 for the quarters ended May 31, 1997 and 1996,
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.
The provision for income taxes for the quarter ended May 31, 1997 is composed of
the following:
Current Federal income taxes $ -
Deferred Federal income taxes 190,000
Change in valuation allowance (190,000)
Provision for income taxes $ -
Deferred tax assets and liabilities consist of the following at May 31, 1997:
Deferred tax benefit of NOL carryforward $1,040,000
Deferred tax liabilities on unrealized gains
on securities owned (940,000)
Net deferred tax benefit 100,000
Valuation allowance (100,000)
Deferred taxes $ -
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office equipment under
operating leases. Total lease expenses were approximately $87,000 in fiscal
year ended February 28, 1997. As of May 31, 1997 the future minimum lease
payments under existing leases are as follows:
Amount
1998 $ 116,000
1999 118,000
2000 88,200
2001 92,500
2002 94,300
2003 39,300
$ 548,300
(9) EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
All full-time executive employees of the Company are eligible to participate
in the Heartland Incentive Compensation 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 is calculated each fiscal quarter on a cumulative
basis. The allocation of the bonus fund is to be made by the President of
the Company. The Company incurred an expense of $93,000 under the Plan for
the year ended February 28, 1997.
Stock Option Plan
The Company has a Non-Qualified and Incentive Stock Option Plan which 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 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.
Effective March 7, 1997, the following options and warrants were granted under
this plan with a ten year term and exercise price of $2.125.
(a) 61,000 non-qualified stock options granted to employees with immediate
vesting.
(b) 47,500 non-qualified stock options granted to brokers with immediate
vesting.
(c) 32,500 non-qualified stock options granted to brokers, vesting over five
years.
(d) 61,000 qualified stock options granted to employees, vesting over five
years.
(e) 65,000 warrants granted to directors and an officer with immediate vesting.
Effective May 4, 1997, 7,500 options which vest immediately and 7,500 options
which vest over five years, were granted under this plan to an employee with
a ten year term and exercise price of $2.375.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans and warrants. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value , as computed in accordance with Statement
of Financial Accounting Standards No. 123 (FAS 123), at the grant dates for
awards under those plans, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Quarter Ended
May 31, 1997 May 31, 1996
Net income As reported $ 561,317 $ 251,256
Pro forma $ 216,016 $ 204,970
Primary and fully diluted
earnings per share As reported $ 0.07 $ 0.03
Pro forma $ 0.03 $ 0.02
To make the computations of pro forma results under FAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: no
dividend yield for all years; expected volatility of 31.5% and 61%; and
expected lives of ten years. The assumed risk-free interest rates for the
September 28, 1995 grants is 5.83%; 6.79% for the February 29, 1996 grant;
7.03% for the March 7, 1997 grants; and 6.82% for the May 4, 1997 grants. The
options and warrants granted under these plans are not registered and
accordingly, there is no quoted market price.
A summary of the status of the Company's stock option and warrants plans as of
May 31, 1997 and changes during the quarter is presented below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1997 480,000 $2.875 105,000 $2.875
Granted 232,000 $2.141 65,000 $2.125
Outstanding May 31, 1997 712,000 $2.636 170,000 $2.588
Exercisable May 31, 1997 395,200 $2.660 170,000 $2.588
Weighted-average fair value
of options and warrants
granted during the quarter,
computed in accordance
with FAS 123 $1.651 N/A
The following table summarizes information about fixed stock options and
warrants outstanding at May 31, 1997:
Options Warrants
Number outstanding 712,000 170,000
Weighted-average remaining
contractual life in years 8.80 8.88
Weighted-average exercise price $2.660 $2.588
Number exercisable 395,200 170,000
(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 $794,310 as of May 31, 1997, which was
in excess of its required minimum net capital of $100,000. The ratio of
aggregate indebtedness to net capital was .39 to 1 as of May 31, 1997. BSFS
is also subject to regulations of the District of Columbia and seventeen 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. The Company 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. At May 31, 1997, the Company
had no short security positions, the Company had not written any option
contracts and did not own any options. The Company did not experience any
credit losses due to the failure of any counterparties to perform during the
quarter ended May 31, 1997. 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, is with financial institutions for bank
securities transactions. The most significant concentrations of financial
instruments are in Midwest and California bank stocks.
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended May 31, 1997, Compared to the Quarter Ended May 31, 1996
Revenues for the quarter ended May 31, 1997 increased to $1,152,919 compared to
$669,827 for the quarter ended May 31, 1996, an increase of 72%. This increase
results primarily from increases in revenue from principal transactions.
Revenues from principal transactions involving the trading portfolio were
$835,326 for the quarter ended May 31, 1997 compared to $400,783 for the
quarter ended May 31, 1996, an increase of 108%. This represents an annual
rate of return on the average portfolio of 34% for the quarter ended May 31,
1997 compared to 27% for the quarter ended May 31, 1996 due to increases in
market values.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $270,178 for the quarter ended
May 31, 1997 compared to $238,040 for the quarter ended May 31, 1996, an
increase of 14%. BSFS continues to make a concerted effort to increase its
level of business activity, especially portfolio management services.
Operating expenses for the quarter ended May 31, 1997 increased to $602,680
compared to $415,641 for the quarter ended May 31, 1996, an increase of 45%.
Brokers' commission expenses increased to $193,231 for the quarter ended May 31,
1997 compared to $120,494 for the quarter ended May 31, 1996, an increase of
60%. This increase reflects management's decision to increase commissions
paid to brokers to provide incentives to increase the level of business
activity. Salaries, benefits, and payroll taxes increased to $123,569 for the
quarter ended May 31, 1997 compared to $95,670 for the quarter ended May 31,
1996, an increase of 29%. This increase reflects management's decision to
add three additional employees to establish additional revenue sources in the
future. Interest expense increased to $20,805 for the quarter ended May 31,
1997 compared to $6,307 for the quarter ended May 31, 1996, an increase of 230%.
This increase results from additional margin positions with broker-dealers
established to buy additional securities to take advantage of favorable market
conditions. General and administrative expenses increased to $265,075 for the
quarter ended May 31, 1997 compared to $193,170 for the quarter ended May 31,
1996, an increase of 37%. This increase is primarily the result of marketing
costs incurred to launch The Banc Stock Group Fund, a mutual fund investing in
community bank stocks, which is sponsored by a subsidiary of the Company and
will be launched in August.
The Banc Stock Exchange of America, Inc. (BSA) has established an electronic
bank stock 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's investment in BSA is accounted
for on the equity method. Equity in BSA's earnings was $11,080 for the quarter
ended May 31, 1997 compared to a loss of $2,930 for the quarter ended May 31,
1996. BSA was a development stage enterprise through February 28, 1997,
however, operations began March 1, 1997.
Liquidity and Capital Resources
Approximately 7% 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 93% of the Company's trading portfolio is readily marketable,
providing a high degree of liquidity. Investments in bank securities traded on
national securities markets and securities not traded on national securities
markets, but with readily ascertainable market values are valued at market
value. Other bank securities for which market quotations are not readily
available, due to infrequency of transactions, are valued at fair value as
determined in good faith by management of the Company. While management
employs objective criteria to ascertain these values, there is no independent
benchmark by which the values assigned by management can be judged.
As of May 31, 1997 the Company had working capital of approximately $9,000,000
compared to approximately $7,465,000 as of May 31, 1996. Working capital
includes cash, securities owned and accounts and notes receivable, net of all
liabilities. The Company has no long term debt.
The Company's NASD broker-dealer subsidiary under the correspondent agreement
with its clearing broker, has agreed to indemnify the clearing broker from
damages or losses resulting from customer transactions. The Company is,
therefore, exposed to off-balance sheet risk of loss in the event that customers
are unable to fulfill contractual obligations. The Company manages this risk
by requiring customers to have sufficient cash in their account before a buy
order is executed and to have the subject securities in their account before a
sell order is executed. The Company has not incurred any losses from customers
unable to fulfill contractual obligations.
In the normal course of business, the Company periodically sells securities
not yet purchased (short sales) for its own account and writes options. The
establishment of short positions and option contracts expose the Company to
off-balance sheet market risks in the event prices change, as the Company may
be obligated to cover such positions at a loss.
At May 31, 1997 the Company had no short security positions. Short security
positions do not expose the Company to credit risk since the counterparty is not
obligated to perform.
At May 31, 1997 the Company had not written any option contracts. Short option
positions do not expose the Company to credit risk since the counterparty is not
obligated to perform.
The Company did not own any options as of May 31, 1997. The Company did not
experience any credit losses due to the failure of any counterparties to
perform during the quarter ended May 31, 1997. 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.
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, however, the Company is moving its offices during the second
fiscal quarter. The cost of this move is expected to approximate $75,000 and
the new space will increase annual lease cost approximately 12%. The new space
is approximately 25% larger than the previous space. Working capital will be
used to fund these expenditures.
Impact of Inflation and Other Factors
The Company's operations have not been significantly affected by inflation. The
Revenue Reconciliation Act of 1993 includes Mark-to-Market Rules which
essentially require dealers in securities to include unrealized gains on the
trading portfolio, in taxable income for income tax purposes. The Revenue
Reconciliation Act of 1993 was effective for the Company's tax year beginning
March 1, 1993. Unrealized gains on inventory as of February 28, 1993 will be
reported as taxable income over five years. Securities held for investment
rather than inventory are not subject to the Mark-to-Market Rules. In light of
the Company's net operating loss carried forward, the Mark-to-Market Rules
currently are not expected to have a significant impact on operations. However,
after the net operating loss carried forward, currently available to the
Company, is fully utilized, these Rules could have a materially adverse impact
on the Company's cash flow.
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES
DBA, THE BANC STOCK GROUP
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of
Security Holders - None
Item 5. Other Information - At the Annual Meeting of Shareholders held on
June 19, 1997, the Shareholders amended the Articles of Incorporation
to change the name of the corporation to The Banc Stock Group, Inc.
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., DBA THE BANC STOCK GROUP
(Registrant)
Date July 11, 1997 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and Chief
Executive Officer
Date July 11, 1997 /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> MAR-01-1996
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 35,185
<RECEIVABLES> 124,283
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 10,344,204
<PP&E> 89,733
<TOTAL-ASSETS> 11,617,784
<SHORT-TERM> 0
<PAYABLES> 922,353
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,717,153
<OTHER-SE> 1,435,815
[TOTAL-LIABILITIES-AND-EQUITY] 11,617,784
<TRADING-REVENUE> 835,326
<INTEREST-DIVIDENDS> 47,413
<COMMISSIONS> 147,363
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 122,815
<INTEREST-EXPENSE> 20,805
<COMPENSATION> 123,569
<INCOME-PRETAX> 550,237
<INCOME-PRE-EXTRAORDINARY> 550,237
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 561,317
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>