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, 1998
Commission file number 33-65292C
THE BANC STOCK GROUP, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0190407
(State of incorporation) (IRS Employer Identification No.)
1105 SCHROCK ROAD, 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, 1998:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 8,089,417
Class C shares, No Par Value 360,000
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
Yes X No
THE BANC STOCK GROUP, 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 25
Signatures 26
<PAGE>
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying consolidated financial statements of The Banc Stock Group,
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 period ended August 31, 1998 may not be indicative of the results of
operations for the year ending February 28, 1999. 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.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF AUGUST 31, 1998
(UNAUDITED)
ASSETS
Cash $ 77,308
Trading portfolio:
Marketable equity securities, at market value 12,533,962
Not readily marketable equity securities, at estimated
fair value 208,367
Mortgage participation notes, at market value 140,000
Accounts receivable:
Affiliates 107,380
Clients 21,101
Clearing organization and other 40,818
Notes and interest receivable 11,189
Equity investment in Banc Stock Exchange of America 469,990
Property and equipment, net of accumulated depreciation
of $129,543 198,837
Goodwill, net of accumulated amortization of $246,269 383,698
Deposits and other 249,430
Total assets $ 14,442,080
LIABILITIES
Margin accounts payable to broker-dealers $ 182,667
Unearned commisions 220,850
Accounts payable to broker-dealers and other 68,987
Accrued expenses 379,564
Deferred taxes 1,100,000
Total liabilities 1,952,068
SHAREHOLDERS' EQUITY
Preference stock, 50,000,000 shares authorized, -
none issued or outstanding
Common stock:
Class A, no par value, 149,640,000 shares
authorized, 8,392,462 shares issued
and 8,089,417 shares outstanding 9,188,293
Class C, no par value, 360,000 shares
authorized, issued and outstanding -
Treasury stock, at cost
(303,045 Class A shares) (385,403)
Retained earnings
3,687,122
Total shareholders' equity 12,490,012
Total liabilities and shareholders' equity $ 14,442,080
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 1998 and 1997
(UNAUDITED)
6 Months Ended 3 Months Ended
AUGUST 1998 AUGUST 1997 AUGUST 1998 AUGUST 1997
REVENUES:
Trading profits (losses) $ (1,009,970)$ 2,291,974 $(2,396,244)$ 1,456,648
Management fees and commissions1,978,229 888,396 974,124 618,218
Investment banking 920,867 - 472,413 -
Dividends 94,157 85,445 48,711 48,281
Interest & other 18,143 16,725 8,573 6,476
Total revenues 2,001,426 3,282,540 (892,423) 2,129,623
EXPENSES:
Brokers' commission 1,448,859 507,803 689,146 314,572
Salaries, benefits and
payroll taxes 338,403 239,602 178,146 120,883
Accrued incentive compensation - 251,479 (174,000) 246,629
Professional fees 216,709 161,106 106,128 54,260
Interest 32,795 40,180 17,307 19,375
General and administrative 418,457 396,761 206,104 238,532
Total expenses 2,455,223 1,596,931 1,022,831 994,251
INCOME (LOSS) BEFORE TAXES (453,797) 1,685,609 (1,915,254) 1,135,372
INCOME TAX PROVISION (CREDIT) (100,000) 300,000 (600,000) 300,000
INCOME (LOSS) BEFORE EQUITY IN NET
EARNINGS OF AFFILIATED COMPANY (353,797) 1,385,609 (1,315,254) 835,372
Equity in net earnings or losses
of Banc Stock Exchange of
America (109,000) 36,850 (136,740) 25,770
NET INCOME (LOSS) $ (462,797) $1,422,459$(1,451,994) $ 861,142
BASIC EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.17 $ (0.17) $ 0.10
DILUTED EARNINGS (LOSS) PER SHARE $ (0.05) $ 0.17 $ (0.17) $ 0.10
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP,INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 31, 1998
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance at 2/28/98 $9,120,368 - ($385,403) $4,149,919 $12,884,884
Exercise of stock options 67,925 - - - 67,925
Net income (loss) - - - (462,797) (462,797)
Balance at 8/31/98 $9,188,293 - ($385,403) $3,687,122 $12,490,012
The accompanying notes are an integral part of theseconsolidated financial
statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1998 and 1997
(UNAUDITED)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (462,797)$ 1,422,459
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating
activities:
Depreciation and amortization 45,526 36,838
Deferred taxes (150,000) 300,000
Equity in undistributed earnings of Banc Stock
Exchange of America 109,000 (36,850)
Unrealized loss (gain) 2,102,402 (1,153,578)
(Increase) decrease in certain assets-
Trading profits, net (1,305,675) (218,689)
Mortgage participation notes (40,000) -
Accounts receivable clients (21,101) -
Other accounts receivable 60,935 (64,417)
Other assets (27,160) (129,248)
Increase (decrease) in certain liabilities-
Margin accounts payable to broker-dealers (84,240) (145,740)
Unearned commissions 43,550 83,300
Accounts payable to broker-dealers and other 9,287 31,875
Accrued expenses and other (745,649) 105,329
Net cash (used in) provided by operating
activities (465,922) 231,279
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 1,650 15,153
Issuance of notes receivable (7,610) (48,306)
Collection of dividends receivable 25,000 -
Purchase of property and equipment (43,716) (96,579)
Sale of property 8,827 -
Net cash used in investing activities (15,849) (129,732)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 67,925 -
Advances from affiliates 76,789 131,530
Advances to affiliates (57,391) (274,864)
Net cash provided by (used in) financing
activities 87,323 (143,334)
NET DECREASE IN CASH (394,448) (41,787)
CASH, BEGINNING OF PERIOD 471,756 160,426
CASH, END OF PERIOD $ 77,308 $ 118,639
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1998 1997
Cash paid during the period for:
Interest $ 32,795 $ 40,180
Taxes 50,000 10,000
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1998
(1) ORGANIZATION AND NATURE OF BUSINESS
The Banc Stock Group, Inc. (the Company) is a Florida corporation incorporated
in April, 1990. 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 twenty-six 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 is also a registered investment adviser offering advisory accounts to
qualified investors. 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 adviser. HAG
is the Investment Adviser to The Banc Stock Group Fund, a diversified, open-end
mutual fund.
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 material 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 trading profits.
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
Basic and diluted earnings per common share are computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." A
reconciliation of the numerators and denominators used in these calculations
is shown below:
For the Six Months Ended August 31,1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($462,797) 8,424,959 ($.05)
Diluted Earnings (Loss) ($462,797) 8,424,959 ($.05)
Stock options and warrants have not been included in the denominator of the
diluted per-share computation because the effect of their inclusion would be
antidilutive.
For the Quarter Ended August 31, 1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($1,451,994) 8,430,635 ($.17)
Diluted Earnings (Loss) ($1,451,994) 8,430,635 ($.17)
Stock options and warrants have not been included in the denominator of the
diluted per-share computation because the effect of their inclusion would be
antidilutive.
For the Six Months Ended August 31,1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $1,422,459 8,411,717 $ .17
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 132,064 (.00)
Warrants 34,365 (.00)
Diluted Earnings $1,422,459 8,578,146 $ .17
For the Quarter Ended August 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $ 861,142 8,411,717 $ .10
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 266,533 (.00)
Warrants 65,562 (.00)
Diluted Earnings $ 861,142 8,743,812 $ .10
Equity Investment in Banc Stock Exchange of America
The Banc Stock Exchange of America (BSA) is establishing an electronic bank
stock information service. 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.
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 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.
(3) CAPITAL STOCK
Common Stock
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
Buckeye Bancstocks holds 206,240 Class A shares of the Company. These
shares, along with shares held directly by the Company, 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) TRADING PORTFOLIO
Marketable equity securities at August 31, 1998 consist of bank stocks at
market value, as follows:
Traded on national securities markets $ 7,972,235
Not traded on national securities
markets, but with readily ascertainable
market value 4,561,727
Total marketable equity securities $12,533,962
As of August 31, 1998, 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 August 31, 1998 were $208,367 at fair value with a cost
of $199,105.
(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 7.8% at August
31, 1998. 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 $7,264,000 at
August 31, 1998.
(6) RELATED PARTY TRANSACTIONS
Securities Transactions
The Company purchases from and sells securities to BSA at the prevailing
market price at the time of the transaction. However, during the
periods ended August 31, 1998 and 1997 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 $89,787 and $71,578 for the six months ended August 31, 1998 and 1997,
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 six months ended August
31, 1998 is composed of the following:
Current income taxes $ 50,000
Deferred income taxes (150,000)
Provision for income taxes ($ 100,000)
Deferred tax assets and liabilities consist of the following at
August 31, 1998:
Deferred tax benefit of NOL carryforward $ 10,000
Deferred tax liabilities on unrealized gains
on securities owned (1,110,000)
Deferred taxes $(1,100,000)
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office equipment under
operating leases. Total lease expenses were approximately $103,000 in the
fiscal year ended February 28, 1998. The future minimum lease payments under
existing leases are as follows:
Amount
1999 $ 121,400
2000 110,500
2001 101,800
2002 94,300
2003 39,300
$467,300
(9) EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
All full-time executive employees of the Company are eligible to participate
in the Banc Stock Group 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 $600,000 under the Plan for
the year ended February 28, 1998. No expense has been provided for the six
months ended August 31, 1998.
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 2,500,000 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 March 2, 1998, 1,500 options which vest immediately and 1,500
options which vest over five years, were granted under this plan to newly
hired employees with ten year terms and exercise prices of $16.875.
Effective May 12, 1998, 117,505 options which vest immediately and 137,505
options which vest over five years, were granted under this plan to employees
and independent contractors with ten year terms and exercise prices of $14.75.
Effective May 12, 1998, 70,000 warrants which vest immediately were granted
to directors and an officer with ten year terms and exercise prices of $14.75.
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans and warrants. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value, as computed in accordance with Statement
of Financial Accounting Standards No. 123 (FAS 123), at the grant dates for
awards under those plans, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
Six Months Ended
August 31, 1998
August 31,
1997
Net income (loss) As reported ($ 462,797) $ 1,422,459
Pro forma ($2,794,479) $ 1,022,424
Basic earnings per share
As reported ($ 0.05) $0.17
Pro forma ($ 0.33) $0.12
Diluted earnings per share
As reported ($ 0.05) $0.17
Pro forma ($ 0.33) $0.12
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 and expected lives of ten years. For fiscal 1999,
the average expected volatility is 52%, and the average assumed risk-free
interest rate is 5.88%. 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
August 31, 1998 and changes during the six months then ended, is presented
below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1998 721,500 $ 2.782 170,000 $ 2.588
Granted 261,510 $ 14.774 70,000 $14.750
Exercised (30,200) $ 2.249
Forfeited (800) $ 2.125
Outstanding August 31, 1998 952,010 $ 6.094 240,000 $ 6.135
Exercisable August 31, 1998 571,605 $ 5.560 240,000 $ 6.135
Weighted-average fair value
of options and warrants
granted during the six months,
computed in accordance
with FAS 123 $10.383 $10.363
The following table summarizes information about fixed stock options and
warrants outstanding at August 31, 1998:
Options Warrants
Number outstanding 952,010 240,000
Weighted-average remaining
contractual life in years 8.130 8.229
Weighted-average exercise price $6.094 $6.135
Number exercisable 571,605 240,000
(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 $1,117,248 as of August 31, 1998,
which was in excess of its required minimum net capital of $100,000. The
ratio of aggregate indebtedness to net capital was 10 to 1 as of August 31,
1998. BSFS is also subject to regulations of the District of Columbia and
twenty-six 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 and BSFS are Registered Investment Advisers and 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.
The Company's NASD broker-dealer subsidiary provides investment management
services to an agency of the State of Ohio. In conjunction with these services
the subsidiary has agreed to indemnify the agency against losses resulting
from violation of the investment management agreement or violation of
fiduciary duties under applicable law.
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, 1998, 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 six months ended August 31, 1998. 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.
Management has initiated a program to evaluate continuity of the Company's
information systems and application software for the year 2000. Critical
application software utilized by the Company is furnished primarily by
third-party vendors. Management is working with these vendors to evaluate
these systems. No significant incremental costs are expected to be incurred
in connection with this process. Additionally, management is involved in a
program to evaluate personal computer applications for year 2000 compliance.
The cost of this program is not expected to be material and will utilize
existing information technology resources. If critical information systems
fail to distinguish the year 2000 from 1900, the Company's normal operations
could be disrupted. The Company is continuing to develop contingency plans
in an attempt to reduce the impact of any disruptions. However, such
disruptions could materially and adversely affect the Company's financial
results. Management believes its year 2000 compliance program and related
contingency plans will provide reasonable, but not absolute, assurance that
information systems will function adequately in the year 2000.
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Six Months Ended August 31, 1998, Compared to the Six Months Ended August
31, 1997
Revenues for the six months ended August 31, 1998 decreased to $2,001,426
compared to $3,282,540 for the six months ended August 31, 1997, a decrease
of 39%. This decrease results from decreases in trading profits.
Trading losses were $1,009,970 for the six months ended August 31, 1998
compared to trading profits of $2,291,974 for the six months ended August 31,
1997, a decrease of 144%. This represents an annual rate of return on the
average portfolio of negative 14% for the six months ended August 31, 1998
compared to positive 45% for the six months ended August 31, 1997. This
trading loss is a direct result of the correction in market values which
started late in the first fiscal quarter and continued throughout the second
fiscal quarter, with major corrections at the end of August 1998. These
corrections affected equity markets around the world. While management of
the Company believes that its investment strategies remain sound, the
Company's trading portfolios are subject to fluctuations based on world wide
equity markets, and specifically, to volatility in the banking sector.
Management is unable to predict how future fluctuations will impact the
performance of its trading portfolios.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated management fees and commission revenue of $1,978,229
for the six months ended August 31, 1998 compared to $888,396 for the six
months ended August 31, 1997, an increase of 123%. BSFS continues to make a
concerted effort to increase its level of business activity, especially
portfolio management services.
On March 11, 1998, the Company formed a specialized investment banking
division dedicated to the expansion of independent community banks. During the
six months ended August 31, 1998 the Company generated revenue of $920,867
from investment banking activities. There was no comparable revenue for the
six months ended August 31, 1997.
Operating expenses for the six months ended August 31, 1998 increased to
$2,455,223 compared to $1,596,931 for the six months ended August 31, 1997,
an increase of 54%. Brokers' commission expenses increased to $1,448,859 for
the six months ended August 31, 1998 compared to $507,803 for the six months
ended August 31, 1997, an increase of 185%. This increase results from
commission expenses related to investment banking activities and the management
fees and commission revenue discussed above. Salaries, benefits, and payroll
taxes increased to $338,403 for the six months ended August 31, 1998 compared
to $239,602 for the six months ended August 31, 1997, an increase of 41%.
This increase reflects management's decision to increase staffing levels to
establish additional revenue sources in the future. Accrued incentive
compensation decreased to zero for the six months ended August 31, 1998
compared to $251,479 for the six months ended August 31, 1997, a decrease of
100%. Incentive compensation was not accrued because of the year-to-date loss.
Professional fees increased to $216,709 for the six months ended August 31,
1998 compared to $161,106 for the six months ended August 31, 1997, an
increase of 35%. This increase relates to services provided to The Banc Stock
Group Fund, a mutual fund investing in community bank stocks, which is
sponsored by a subsidiary of the company. The Fund was launched August 1,
1997. Interest expense decreased to $32,795 for the six months ended August
31, 1998 compared to $40,180 for the six months ended August 31, 1997, a
decrease of 18%. This decrease results from a reduction of margin positions
with broker-dealers. General and administrative expenses increased to
$418,457 for the six months ended August 31, 1998 compared to $396,761 for
the six months ended August 31, 1997, an increase of 5%.
The Banc Stock Exchange of America, Inc. (BSA) is establishing an electronic
bank stock information service. 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 a loss of
$109,000 for the six months ended August 31, 1998 compared to earnings of
$36,850 for the six months ended August 31, 1997. BSA's loss is attributable
to the correction in market values which started late in the first fiscal
quarter and continued throughout the second fiscal quarter, with major
corrections at the end of August 1998. These corrections affected equity
markets around the world and specifically affected the market value of BSA's
portfolio of community bank stocks.
Quarter Ended August 31, 1998, Compared to the Quarter Ended
August 31, 1997
Revenues for the quarter ended August 31, 1998 decreased to negative revenues
of $892,423 compared to positive revenues of $2,129,623 for the quarter ended
August 31, 1997, a decrease of 142%. This decrease results from decreases in
revenue from trading profits.
Trading losses were $2,396,244 for the quarter ended August 31, 1998 compared
to trading profits of $1,456,648 for the quarter ended August 31, 1997, a
decrease of 265%. This represents an annual rate of return on the average
portfolio of negative 67% for the quarter ended August 31, 1998 compared to
positive 55% for the quarter ended August 31, 1997 due primarily to the
correction in market values which occurred throughout the second fiscal
quarter, with major corrections at the end of August 1998. These corrections
affected equity markets around the world. While management of the Company
believes that its investment strategies remain sound, the Company's trading
portfolios are subject to fluctuations based on world wide equity markets, and
specifically, to volatility in the banking sector. Management is unable to
predict how future fluctuations will impact the performance of its trading
portfolios.
The Company generated management fees and commission revenue of $974,124
for the quarter ended August 31, 1998 compared to $618,218 for the quarter
ended August 31, 1997, an increase of 58%. The increase is primarily
attributable to management fees generated by Banc Stock Financial Services,
Inc. (BSFS), the Company's NASD broker-dealer subsidiary. BSFS is also a
registered investment adviser offering advisory accounts to qualified
investors. BSFS derives a significant portion of its revenues from providing
private portfolio management and brokerage services. BSFS has continued to
make a concerted effort to increase its level of business activity,
especially portfolio management services.
On March 11, 1998, the Company formed a specialized investment banking
division dedicated to the expansion of independent community banks. During
the quarter ended August 31, 1998, the Company generated revenue of
$472,413 from investment banking activities. There was no comparable
revenue for the quarter ended August 31, 1997.
Operating expenses for the quarter ended August 31, 1998 increased to
$1,022,831 compared to $994,251 for the quarter ended August 31, 1997, an
increase of 3%. Brokers' commission expenses increased to $689,146 for the
quarter ended August 31, 1998 compared to $314,572 for the quarter ended
August 31, 1997, an increase of 119%. This increase results from commission
expenses related to investment banking activities and the management fees and
commission revenue discussed above. Salaries, benefits, and payroll taxes
increased to $178,146 for the quarter ended August 31, 1998 compared to
$120,883 for the quarter ended August 31, 1997, an increase of 47%. This
increase reflects management's decision to increase staffing levels to
establish additional revenue sources in the future. Accrued incentive
compensation was a negative adjustment of $174,000 for the quarter ended
August 31, 1998 compared to $246,629 for the quarter ended August 31, 1997, a
decrease of 171%. The incentive compensation accrual was reversed because of
the year-to-date loss. Professional fees increased to $106,128 for the
quarter ended August 31, 1998 compared to $54,260 for the quarter ended
August 31, 1997, an increase of 96%. This increase relates primarily to
services provided to The Banc Stock Group Fund, a mutual fund investing in
community bank stocks, which is sponsored by a subsidiary of the Company.
The Fund was launched August 1, 1997. Interest expense decreased to $17,307
for the quarter ended August 31, 1998 compared to $19,375 for the quarter
ended August 31, 1997, a decrease of 11%. This decrease results from a
reduction of margin positions with broker-dealers. General and administrative
expenses decreased to $206,104 for the quarter ended August 31, 1998 compared
to $238,532 for the quarter ended August 31, 1997, a decrease of 14%. This
decrease is primarily the result of marketing costs incurred in 1997 to
launch The Banc Stock Group Fund.
The Banc Stock Exchange of America, Inc. (BSA) is establishing 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 a loss of
$136,740 for the quarter ended August 31, 1998 compared to earnings of
$25,770 for the quarter ended August 31, 1997. BSA's loss is attributable to
the correction in market values which occurred throughout the second
fiscal quarter, with major corrections at the end of August 1998. These
corrections affected equity markets around the world and specifically
affected the market value of BSA's portfolio of community bank stocks.
Liquidity and Capital Resources
Approximately 2% 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 98% 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, 1998, and 1997, the Company had working capital of
approximately $12,000,000. 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.
The Company's NASD broker-dealer subsidiary provides investment management
services to an agency of the State of Ohio. In conjunction with these
services, the subsidiary has agreed to indemnify the agency against losses
resulting from violation of the investment management agreement or violation
of fiduciary duties under applicable law.
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, 1998, 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, 1998, 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, 1998. The Company did
not experience any credit losses due to the failure of any counterparties to
perform during the quarter ended August 31, 1998. 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 net cash balance decreased $394,448 during the six months ended August 31,
1998. Net cash used in operating activities was $465,922. The primary use of
this cash flow was to acquire securities in the trading portfolio offset by
the result of unrealized losses which are included in the net loss but do
not use cash.
Investing activities used $15,849 of cash during the six months ended August
31, 1998, with the primary use being the purchase of computer equipment.
Financing activities provided $87,323 of cash during the six months ended
August 31, 1998, primarily from the exercise of stock options.
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, as part of
its strategic and operational planning, continues to explore options to
expand its capital base to support market making activities.
Impact of Inflation and Other Factors
The Company's operations have not been significantly affected by inflation.
The Company's trading portfolios of equity securities, primarily in the
community banking sector, are carried at current market values. Therefore,
the Company's profitability is affected by general economic and market
conditions, including volatility in the banking sector, the volume of
securities trading and fluctuations in interest rates.
The Company's business is also subject to government regulation and changes in
legal, accounting, tax and other compliance requirements. Changes in these
regulations may have a significant effect on the Company's operations.
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. 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.
Management has initiated a program to evaluate continuity of the Company's
information systems and application software for the year 2000. Critical
application software utilized by the Company is furnished primarily by
third-party vendors. Management is working with these vendors to evaluate
these systems. No significant incremental costs are expected to be incurred
in connection with this process. Additionally, management is involved in a
program to evaluate personal computer applications for year 2000 compliance.
The cost of this program is not expected to be material and will utilize
existing information technology resources. If critical information systems
fail to distinguish the year 2000 from 1900, the Company's normal operations
could be disrupted. The Company is continuing to develop contingency plans
in an attempt to reduce the impact of any disruptions. However, such
disruptions could materially and adversely affect the Company's financial
results. Management believes its year 2000 compliance program and related
contingency plans will provide reasonable, but not absolute, assurance that
information systems will function adequately in the year 2000.
THE BANC STOCK GROUP, 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 August 6, 1998. The
Shareholders voted on the following issues:
a. Election of Directors. The following individuals were elected to
serve on the board until the Annual Meeting of Shareholders
in 2001:
Name of Director Votes for Votes withheld
L. Jean Thiergartner 7,685,169 7,640
John Rettig 7,685,169 7,640
b. The selection of PricewaterhouseCoopers LLP to serve as
independent auditors. This issue was approved with 7,682,350 votes
for and 9,520 votes withheld.
c. The Company's 1993 non-qualified and incentive stock option plan
was amended to increase the total number of shares subject to the
Plan from 1,000,000 to 2,500,000. The amendment was approved
with 4,972,589 votes in favor, and 85,691 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.
THE BANC STOCK GROUP, INC.
(Registrant)
Date October 14, 1998 /S/ Michael E.Guirlinger
Michael E. Guirlinger
President, Treasurer and Chief
Executive Officer
Date October 14, 1998 /S/ Jeffrey C.Barton
Jeffrey C. Barton
Vice President and
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-01-1998
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> AUG-31-1998
<EXCHANGE-RATE> 1
<CASH> 77,308
<RECEIVABLES> 169,299
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 12,882,329
<PP&E> 198,837
<TOTAL-ASSETS> 14,442,080
<SHORT-TERM> 0
<PAYABLES> 251,654
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,802,890
<OTHER-SE> 3,687,122
[TOTAL-LIABILITIES-AND-EQUITY] 14,442,080
<TRADING-REVENUE> (2,396,244)
<INTEREST-DIVIDENDS> 57,284
<COMMISSIONS> 165,680
<INVESTMENT-BANKING-REVENUES> 472,413
<FEE-REVENUE> 808,404
<INTEREST-EXPENSE> 17,307
<COMPENSATION> 178,146
<INCOME-PRETAX> (1,915,254)
<INCOME-PRE-EXTRAORDINARY> (1,915,254)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,451,994)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.16)
</TABLE>
