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 November 30, 1996
Commission file number 33-65292C
HEARTLAND GROUP OF COMPANIES, INC., dba, 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 December 31, 1996:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 7,931,677
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
BANC STOCK GROUP
INDEX
PAGE
Part I Financial Information:
Item 1. Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 17-20
Part II Other Information:
Item 1 through Item 6 21
Signatures 22
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES, DBA
BANC STOCK GROUP
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying consolidated financial statements of Heartland Group of
Companies, Inc., dba, 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 nine months ended November 30,
1996 may not be indicative of the results of operations for the year ending
February 28, 1997. Since the accompanying consolidated financial statements
have been prepared in accordance with Item 310 of Regulation S-B, they do not
contain all information and footnotes normally contained in annual
consolidated financial statements; accordingly, they should be read in
conjunction with the consolidated financial statements and notes thereto
appearing in the Company's Annual Report.
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES, DBA,
BANC STOCK GROUP
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF NOVEMBER 30, 1996
(UNAUDITED)
ASSETS
Cash $ 61,750
Securities owned:
Marketable equity securities, at market value 7,862,320
Not readily marketable equity securities
Banc Stock Exchange of America, at tangible net book value 471,250
Other, at estimated fair value 673,251
Accounts receivable:
Brokers and other 14,057
Affiliates 24,006
Pending securities settlements 267,430
Notes and interest receivable:
Former officer 62,661
Brokers 91,524
Property and equipment, net of accumulated depreciation
of $167,935 94,446
Goodwill, net of accumulated amortization of $185,222 444,744
Deposits and other 83,788
Total assets $ 10,151,226
LIABILITIES
Margin accounts payable to broker-dealers $ 897,902
Accounts payable to broker-dealers and other 52,188
Accrued expenses 283,256
Total liabilities 1,233,346
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 earnings 200,778
Total shareholders' equity 8,917,880
Total liabilities and shareholders' equity $ 10,151,226
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES,DBA
BANC STOCK GROUP
CONSOLIDATED STATEMENTS of OPERATIONS
FOR THE THREE MONTHS and NINE MONTHS ENDED NOVEMBER 30, 1996 and 1995
(UNAUDITED)
TO
9 Months Ended 3 Months Ended
NOV 1996 NOV 1995 NOV 1996 NOV 1995
REVENUES:
Principal transactions:
Trading portfolio $1,527,413 $1,072,529 $764,475 $425,685
Banc Stock Exchange
of America 17,810 21,050 13,840 12,410
Commission revenue 870,702 635,601 207,019 245,860
Agency Fees 14,430 - 160 -
Dividends 93,936 95,492 27,658 21,656
Interest 27,058 31,702 8,578 9,319
Total revenues 2,551,349 1,856,374 1,021,730 714,930
EXPENSES:
Brokers' commission 511,625 314,911 154,361 128,939
Salaries, benefits and
payroll taxes 284,781 294,708 99,636 89,564
Interest 33,505 79,563 13,449 8,167
General and administrative 644,741 798,923 207,596 249,977
Total expenses 1,474,652 1,488,105 475,042 476,647
INCOME BEFORE TAXES 1,076,697 368,268 546,688 238,282
INCOME TAX PROVISION - - - -
NET INCOME $1,076,697 $368,268 $546,688 $238,282
WEIGHTED AVERAGED SHARES,
COMMON AND COMMON
STOCK EQUIVALENTS 8,411,677 8,403,651 8,411,677 8,409,484
PRIMARY AND FULLY DILUTED
EARNINGS
PER COMMON SHARE $ 0.13 $ 0.04 $ 0.06 $ 0.03
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES, DBA
BANC STOCK GROUP
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996
(UNAUDITED)
Retained
Treasury Earnings
Class A Class C Stock (Deficit) Total
Balance Feb 29, 1996 $9,102,556 - ($385,454) ($875,919) $7,841,183
Net income - - - 1,076,697 1,076,697
Balance Nov 30, 1996 $9,102,556 - ($385,454) $200,778 $8,917,880
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HEARTLAND GROUP of COMPANIES, INC. and SUBSIDIARIES, DBA
BANC STOCK GROUP
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996 and 1995
(UNAUDITED)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,076,697 $ 129,986
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 49,459 55,625
Unrealized gain on investment in Banc Stock
Exchange of America (17,810) (8,640)
(Increase) decrease in certain assets-
Accounts receivable (219,537) (177,302)
Investments, net (2,235,345) 1,864,565
Other assets (994) 3,864
Increase (decrease) in certain liabilities-
Accounts payable to broker-dealers and other 19,552 (194,441)
Accrued expenses and other 99,730 1,245
Securities sold under agreement to repurchase - (188,765)
Securities sold, not yet purchased - (164,800)
Net cash provided by (used in) operating
activities (1,228,248) 1,321,337
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 68,345 90,979
Issuance of notes receivable (9,465) (53,919)
Purchase of property and equipment (31,163) (20,089)
Net cash provided by investing activities 27,717 16,971
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin accounts payable to broker-dealers 841,074 (1,018,382)
Sale of treasury stock - 30,830
Repayment of bank debt - (654,108)
Advances from affiliates 652,914 372,803
Advances to affiliates (637,045) (133,728)
Net cash (used) provided by financing
activities 856,943 (1,402,585)
NET DECREASE IN CASH (343,588) (64,277)
CASH, BEGINNING OF PERIOD 405,338 267,762
CASH, END OF PERIOD $ 61,750 $ 203,485
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1996 1995
Cash paid during the period for:
Interest $ 33,505 $ 71,396
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC., DBA,
BANC STOCK GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1996
(1) ORGANIZATION AND NATURE OF BUSINESS
Heartland Group of Companies, Inc., dba, Banc Stock Group (the Company or
BSG) 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 BSG and an intrastate broker-dealer trading
primarily in Ohio bank stocks.
Heartland Advisory Group, Inc. (HAG), an Ohio corporation, a wholly-owned
subsidiary of BSG, 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 eighteen states, including
Ohio. BSFS trades securities on a fully-disclosed basis and clears
customer transactions through an unaffiliated broker-dealer which also
maintains the customer accounts. BSFS derives a significant portion of
its revenues from providing private portfolio management and brokerage
services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the reported amounts of revenues and expenses for the period.
Actual results could differ from those estimates.
The following is a summary of the Company's significant accounting
policies:
Principles of Consolidation
The accompanying consolidated financial statements include the
operations of BSG, 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 BSG. BSG
currently holds 16% of the outstanding Class A shares of BSA. BSG 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 November 30, 1996, Buckeye Bancstocks held 206,240 BSG 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 November 30, 1996 consist of bank stocks at
market value, as follows:
Traded on national securities markets $5,581,833
Not traded on national securities
markets, but with readily ascertainable
market value 2,280,487
Total marketable equity
securities $7,862,320
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 November 30, 1996 the Company had investments in one bank
stock amounting to 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 November 30, 1996 were as follows:
Value Cost
Banc Stock Exchange of America $ 471,250 $ 75,000
Bank stocks not readily marketable 673,251 573,154
$1,144,501 $648,154
As of November 30, 1996, the Company had investments in two bank stocks
amounting to 40% and 17%, 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
November 30, 1996. 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 $4,296,024 at
November 30, 1996.
(6) RELATED PARTY TRANSACTIONS
Receivables from Officer
At November 30, 1996, the Company has a demand note receivable from a
former officer which is collateralized by stock of BSG. 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 nine
months ended November 30, 1996 the Company made purchases of $325,482
from BSA and sales of $353,572 to BSA. There were $29,500 in purchases
from BSA with no sales to BSA for the nine months ended November 30,
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 $56,971 and $66,137 for the nine months
ended November 30, 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 nine months ended
November 30, 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 $74,000
for the nine months ended November 30, 1996 and $69,000 for the nine
months ended November 30, 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 $725,407 as of
November 30, 1996, which was in excess of its required minimum net
capital of $100,000. The ratio of aggregate indebtedness to net capital
was .3 to 1 as of November 30, 1996. BSFS is also subject to
regulations of the District of Columbia and eighteen 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. BSG 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 November 30, 1996, the Company had no short security
positions, the Company had not written any option contracts, and the
Company did not own any options. 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 nine months ended November 30, 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, is with financial institutions for
bank securities transactions. Significant concentrations of financial
instruments are in Midwest and California bank stocks.
<PAGE>
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Nine Months Ended November 30, 1996, Compared to the Nine Months Ended
November 30, 1995
Revenues for the nine months ended November 30, 1996 increased to $2,551,349
compared to $1,856,373 for the nine months ended November 30, 1995, an increase
of 37%. 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
$1,527,413 for the nine months ended November 30, 1996 compared to $1,072,529
for the nine months ended November 30, 1995, an increase of 42%. This
represents an annual rate of return on the average portfolio of 27% for the
nine months ended November 30, 1996 compared to 21% for the nine months ended
November 30, 1995 due to strong performance of the trading portfolio. The
portfolio performance achieved in the past may not necessarily be indicative
of future performance.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $870,702 for the nine months ended
November 30, 1996 compared to $635,601 for the nine months ended November 30,
1995, an increase of 37%. 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 $14,430 for the nine months ended November 30, 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.
Agency Fees revenue received by the Company corresponds to payments made to
Brokers classified as Brokers' commission. There were no comparable fees for
the nine months ended November 30, 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 $17,810 for the nine months ended November 30, 1996
compared to an unrealized gain of $21,050 for the nine months ended November
30, 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.
Operating expenses for the nine months ended November 30, 1996 decreased to
$1,474,652 compared to $1,488,105 for the nine months ended November 30, 1995,
a decrease of 1%. Brokers' commission expenses increased to $511,625 for the
nine months ended November 30, 1996 compared to $314,912 for the nine months
ended November 30, 1995, an increase of 62%. This percentage increase
compares to the percentage increase in commission revenue of 37% 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 $284,781 for the nine months ended November
30, 1996 compared to $294,708 for the nine months ended November 30, 1995, a
decrease of 3%. This decrease reflects management restructuring which
occurred in May 1995. Interest expense decreased to $33,505 for the nine
months ended November 30, 1996 compared to $79,563 for the nine months ended
November 30, 1995, a decrease of 58%. 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 $644,741 for the
nine months ended November 30, 1996 compared to $798,923 for the nine months
ended November 30, 1995, a decrease of 19%. 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 November 30, 1996, Compared to the Quarter Ended November 30,
1995
Revenues for the quarter ended November 30, 1996 increased to $1,021,730
compared to $714,930 for the quarter ended November 30, 1995, an increase of
43%. This increase results primarily from increases in revenue from principal
transactions involving the trading portfolio.
Revenues from principal transactions involving the trading portfolio were
$764,475 for the quarter ended November 30, 1996 compared to $425,685 for the
quarter ended November 30, 1995, an increase of 80%. This represents an
annual rate of return on the average portfolio of 38% for the quarter ended
November 30, 1996 compared to 27% for the quarter ended November 30, 1995 due
to strong performance of the trading portfolio. The portfolio performance
achieved in the past may not necessarily be indicative of future performance.
Operating expenses for the quarter ended November 30, 1996 decreased to
$475,042 compared to $476,647 for the quarter ended August 31, 1995, a
decrease of less than 1%. Brokers' commission expenses increased to $154,361
for the quarter ended November 30, 1996 compared to $128,939 for the quarter
ended November 30, 1995, an increase of 20%. This increase was offset by
decreases in general and administrative expenses. General and administrative
expenses decreased to $207,596 for the quarter ended November 30, 1996
compared to $249,977 for the quarter ended November 30, 1995, a decrease of
17%. This decrease was achieved by passing clearing costs to clients that
were formerly absorbed by the Company and reductions in legal fees and
consulting costs.
Liquidity and Capital Resources
Approximately 8% 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 92% 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 November 30, 1996 the Company had working capital of approximately
$8,290,000 compared to approximately $6,885,000 as of November 30, 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 November 30, 1996 the Company had no short security positions, the Company
had not written any option contracts, and the Company did not own any
options. The Company did not experience any credit losses due to the failure
of any counterparties to perform during the nine months ended November 30,
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.
The operations of the Company are funded primarily by revenue from the trading
portfolio and commission revenue. 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, will be reported as taxable income
over five years. Securities held for investment rather than inventory are
not subject to the Mark-to-Market Rules. In light of the Company's net
operating loss carried forward, the Mark-to-Market Rules currently are not
expected to have a significant impact on operations. However, after the net
operating loss carried forward, currently available to the Company, is fully
utilized, these Rules could have a materially adverse impact on the Company's
cash flow.
<PAGE>
HEARTLAND GROUP OF COMPANIES, INC. AND SUBSIDIARIES, DBA
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 - None
Item 6. Exhibits and Reports on Form 8-K
a) Furnish the exhibits required by
Item 601 of Regulation S-B - None
b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
HEARTLAND GROUP OF COMPANIES, INC., DBA, BANC STOCK GROUP
(Registrant)
Date January 13, 1996 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and Chief
Executive Officer
Date January 13, 1996 /S/ Jeffrey C. Barton
Jeffrey C. Barton
Chief Financial Officer
<PAGE>
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> SEP-01-1996
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> NOV-30-1996
<EXCHANGE-RATE> 1
<CASH> 61,750
<RECEIVABLES> 459,678
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 9,006,821
<PP&E> 94,446
<TOTAL-ASSETS> 10,151,226
<SHORT-TERM> 0
<PAYABLES> 950,090
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,717,102
<OTHER-SE> 200,778
[TOTAL-LIABILITIES-AND-EQUITY] 10,151,226
<TRADING-REVENUE> 1,527,413
<INTEREST-DIVIDENDS> 120,994
<COMMISSIONS> 676,681
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 194,021
<INTEREST-EXPENSE> 33,505
<COMPENSATION> 284,781
<INCOME-PRETAX> 1,076,697
<INCOME-PRE-EXTRAORDINARY> 1,076,697
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,076,697
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
