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, 1997
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, Suite 437, 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, 1997:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 8,051,717
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 24
Signatures 25
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., formerly, Heartland Group of Companies, Inc., are unaudited
but, in the opinion of management, reflect all adjustments (which include
only normal recurring accruals) necessary to present fairly such
information for the periods and at the dates indicated and to make the
consolidated financial statements not misleading. The results of
operations for the nine months ended November 30, 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.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF NOVEMBER 30, 1997
(UNAUDITED)
ASSETS
Cash $ 481,397
Securities owned:
Marketable equity securities, at market value 11,712,022
Not readily marketable equity securities at
estimated fair value 871,308
Mortgage participation notes 100,000
Accounts receivable:
Affiliates 335,086
Clearing organization and other 50,751
Notes and interest receivable 53,750
Equity investment in Banc Stock Exchange of America 567,470
Property and equipment, net of accumulated
depreciation of $121,380 197,454
Goodwill, net of accumulated amortization of $220,105 409,862
Deposits and other 213,497
Total assets $ 14,992,597
LIABILITIES
Margin accounts payable to broker-dealers $ 1,028,968
Unearned commisions 132,500
Accounts payable to broker-dealers and other 74,600
Deferred taxes 800,000
Accrued expenses 857,444
Total liabilities 2,893,512
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 3,381,932
Total shareholders' equity 12,099,085
Total liabilities and shareholders' equity $ 14,992,597
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of INCOME
FOR THE THREE MONTHS and NINE MONTHS ENDED NOVEMBER 30, 1997 and 1996
(UNAUDITED)
9 Months Ended 3 Months Ended
NOVEMBER 1997 NOVEMBER 1996 NOVEMBER 1997 NOVEMBER 1996
REVENUES:
Principal transactions: $4,100,224 $1,527,413 $1,808,250 $ 764,475
Commission revenue 1,645,918 870,702 757,522 207,019
Agency Fees _ 14,430 _ 160
Dividends 129,440 93,936 43,995 27,658
Interest 30,923 27,058 14,198 8,578
Total revenues 5,906,505 2,533,539 2,623,965 1,007,890
EXPENSES:
Brokers' commission 892,919 511,625 385,116 154,361
Salaries, benefits and
payroll taxes 836,875 284,781 345,794 99,636
Interest 65,649 33,505 25,469 13,449
General and administrative 781,938 644,741 224,071 207,596
Total expenses 2,577,381 1,474,652 980,450 475,042
INCOME BEFORE TAXES 3,329,124 1,058,887 1,643,515 532,848
INCOME TAX PROVISION 900,000 - 600,000 -
INCOME BEFORE EQUITY IN NET
EARNINGS OF AFFILIATE 78,310 17,810 41,460 13,840
NET INCOME $2,507,434 $1,076,697 $1,084,975 $ 546,688
WEIGHTED AVERAGED SHARES,
COMMON AND COMMON
STOCK EQUIVALENTS 8,855,714 8,411,677 9,020,572 8,411,677
PRIMARY AND FULLY DILUTED
EARNINGS
PER COMMON SHARE $ 0.28 $ 0.13 $ 0.12 $ 0.06
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 NINE MONTHS ENDED NOVEMBER 30, 1997
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance 2/28/97 $9,102,556 - ($385,403) $ 874,498 $ 9,591,651
Net income - - - 2,507,434 2,507,434
Balance 11/30/97 $9,102,556 - ($385,403) $3,381,932 $12,099,085
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1997 and 1996
(UNAUDITED)
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,507,434 $ 530,009
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 59,323 32,104
Loss on equipment disposals 4,930
Deferred taxes 800,000 -
Equity in earnings of Banc Stock Exchange of
America (78,310) (3,970)
(Increase) decrease in certain assets-
Accounts receivable (6,458) (52,812)
Securities owned, net (3,107,805) (1,335,172)
Other assets (127,380) (2,955)
Increase (decrease) in certain liabilities-
Accounts payable to broker-dealers and other 53,633 (26,955)
Unearned commissions 132,500 -
Accrued expenses and other 288,474 27,932
Net cash provided by (used in) operating
activities 526,341 (831,819)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 21,280 36,300
Issuance of notes receivable (52,185) (7,070)
Purchase of property and equipment (147,533) (28,989)
Net cash (used in) provided by investing
activities (178,438) 241
CASH FLOWS FROM FINANCING ACTIVITIES:
Margin accounts payable to broker-dealers 303,510 498,843
Advances from affiliate 142,324 333,153
Advances to affiliate (472,766) (311,277)
Net cash (used in) provided by financing
activities (26,933) 520,719
NET INCREASE (DECREASE) IN CASH 320,971 (310,859)
CASH, BEGINNING OF PERIOD 160,426 405,338
CASH, END OF PERIOD $ 481,397 $ 94,479
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1997 1996
Cash paid during the period for:
Interest $ 65,649 $ 33,505
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1997
(1) ORGANIZATION AND NATURE OF BUSINESS
The Banc Stock Group, Inc. (the Company), formerly, Heartland Group of
Companies, Inc., 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 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 advisor.
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
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 and common stock equivalents 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) has established 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 November 30, 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 November 30, 1997 consist of bank stocks
at market value, as follows:
Traded on national securities markets $ 7,960,342
Not traded on national securities
markets, but with readily ascertainable
market value 3,751,680
Total marketable equity securities $11,712,022
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, 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 November 30, 1997 were $871,308 at fair
value with a cost of $691,063. As of November 30, 1997, the Company
had investments in one bank stock amounting to 61% 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 7.7% at
November 30, 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 $7,740,662 at November 30, 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
nine months ended November 30, 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 $111,402 and $66,137 for the nine
months ended November 30, 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 nine months ended November 30,
1997 is composed of the following:
Current Federal, state & local income taxes $ 100,000
Deferred Federal income taxes 1,090,000
Change in valuation allowance (290,000)
Provision for income taxes $ 900,000
Deferred tax assets and liabilities consist of the following at November 30,
1997:
Deferred tax benefit of NOL carryforward $ 700,000
Deferred tax liabilities on unrealized gains
on securities owned (1,500,000)
Net deferred tax liability (800,000)
Valuation allowance -
Deferred taxes $ (800,000)
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office equipment
under operating leases. Total lease expenses were approximately
$87,000 in the fiscal year ended February 28, 1997. As of November 30,
1997 the future minimum lease payments under existing leases are as
follows:
Amount
1998 $ 96,600
1999 99,200
2000 88,200
2001 92,500
2002 94,300
2003 39,300
$ 510,100
(9) EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
All full-time executive employees of the Company are eligible to participate
in the 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 and has provided $380,000 for
the nine months ended November 30, 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:
Nine Months Ended
November 30, 1997 November 30, 1996
Net income As reported $ 2,507,434 $ 1,076,697
Pro forma $ 2,073,074 $ 951,353
Primary and fully diluted
earnings per share As reported $ 0.28 $ 0.13
Pro forma $ 0.23 $ 0.11
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 November 30, 1997 and changes during the nine months then
ended 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 November 30, 1997 712,000 $2.636 170,000 $2.588
Exercisable November 30, 1997 445,400 $2.684 170,000 $2.588
Weighted-average fair value
of options and warrants
granted during the nine months,
computed in accordance
with FAS 123 $1.651
The following table summarizes information about fixed stock options and
warrants outstanding at November 30, 1997:
Options Warrants
Number outstanding 712,000 170,000
Weighted-average remaining
contractual life in years 8.30 8.38
Weighted-average exercise price $2.636 $2.588
Number exercisable 445,400 170,000
(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 $1,068,229 as of
November 30, 1997, which was in excess of its required minimum net
capital of $100,000. The ratio of aggregate indebtedness to net capital
was .35 to 1 as of November 30, 1997. 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.
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, 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 nine months ended
November 30, 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.
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Nine Months Ended November 30, 1997, Compared to the Nine Months
Ended November 30, 1996
Revenues for the nine months ended November 30, 1997 increased to
$5,906,505 compared to $2,533,539 for the nine months ended
November 30, 1996, an increase of 133%. This increase results primarily
from increases in revenue from principal transactions.
Revenues from principal transactions involving the trading portfolio were
$4,100,224 for the nine months ended November 30, 1997 compared to
$1,527,413 for the nine months ended November 30, 1996, an increase
of 168%. This represents an annualized rate of return on the average
portfolio of 51% for the nine months ended November 30, 1997
compared to 27% for the nine months ended November 30, 1996 due to
increases in market values.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $1,645,918 for the
nine months ended November 30, 1997 compared to $870,702 for the
nine months ended November 30, 1996, an increase of 89%. 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. There were no comparable fees for the nine months ended
November 30, 1997. Buckeye does not expect to generate significant
agency fees in the foreseeable future.
Operating expenses for the nine months ended November 30, 1997
increased to $2,577,381 compared to $1,474,652 for the nine months
ended November 30, 1996, an increase of 75%. Brokers' commission
expenses increased to $892,919 for the nine months ended November 30,
1997 compared to $511,625 for the nine months ended November 30,
1996, an increase of 75%. 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 $836,875 for the nine months ended November 30, 1997
compared to $284,781 for the nine months ended November 30, 1996,
an increase of 194%. This increase reflects accruals for the Incentive
Compensation Plan for employees and management's decision to add four
additional employees to establish additional revenue sources in the future.
Interest expense increased to $65,649 for the nine months ended
November 30, 1997 compared to $33,505 for the nine months ended
November 30, 1996, an increase of 96%. 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 $781,938 for the nine
months ended November 30, 1997 compared to $644,741 for the nine
months ended November 30, 1996, an increase of 21%. 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 was launched August 1,1997.
The Banc Stock Exchange of America, Inc. (BSA) has established 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 $78,310 for the nine months ended November 30,
1997 compared to $17,810 for the nine months ended November 30,
1996. BSA was a development stage enterprise through February 28,
1997, however, operations began March 1, 1997.
Quarter Ended November 30, 1997, Compared to the Quarter Ended
November 30, 1996
Revenues for the quarter ended November 30, 1997 increased to
$2,623,965 compared to $1,007,890 for the quarter ended November
30, 1996, an increase of 160%. This increase results primarily from
increases in revenue from principal transactions.
Revenues from principal transactions involving the trading portfolio were
$1,808,250 for the quarter ended August 31, 1997 compared to
$764,475 for the quarter ended November 30, 1996, an increase of
136%. This represents an annualized rate of return on the average
portfolio of 62% for the quarter ended November 30, 1997 compared to
38% for the quarter ended November 30, 1996 due to increases in market
values.
Banc Stock Financial Services, Inc. (BSFS), the Company's NASD broker-dealer
subsidiary, generated commission revenue of $757,522 for the
quarter ended November 30, 1997 compared to $207,019 for the quarter
ended November 30, 1996, an increase of 266%. BSFS continues to
make a concerted effort to increase its level of business activity, especially
portfolio management services.
Operating expenses for the quarter ended November 30, 1997 increased
to $980,450 compared to $475,042 for the quarter ended November 30,
1996, an increase of 106%. Brokers' commission expenses increased to
$385,116 for the quarter ended November 30, 1997 compared to
$154,361 for the quarter ended November 30, 1996, an increase of
149%. 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
$345,794 for the quarter ended November 30, 1997 compared to
$99,636 for the quarter ended November 30, 1996, an increase of 247%.
This increase reflects accruals for the Incentive Compensation Plan for
employees and management's decision to add four additional employees to
establish additional revenue sources in the future. Interest expense
increased to $25,469 for the quarter ended November 30, 1997
compared to $13,449 for the quarter ended November 30, 1996, an
increase of 89%. 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 $224,071 for the quarter ended November 30,
1997 compared to $207,596 for the quarter ended November 30, 1996,
an increase of 8%. 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
was launched August 1, 1997.
The Banc Stock Exchange of America, Inc. (BSA) has established 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 $41,460 for the quarter ended November 30, 1997
compared to $13,840 for the quarter ended November 30, 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 November 30, 1997 the Company had working capital of
approximately $11,500,000 compared to approximately $8,290,000 as of
November 30, 1996. Working capital includes cash, securities owned and
accounts and notes receivable, net of all current 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, 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 November 30, 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 November 30, 1997. The
Company did not experience any credit losses due to the failure of any
counterparties to perform during the nine months ended November 30,
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 net cash balance increased $320,971 during the nine months ended
November 30, 1997. Net cash provided by operating activities was
$526,341. The primary source of this cash flow was net income,
including realized gains from the sale of securities.
Investing activities used $178,438 of cash during the nine months ended
November 30, 1997 with the primary use being the purchase of office
equipment.
Financing activities used $26,933 of cash during the nine months ended
November 30, 1997 to make advances to an affiliate in excess of borrowing
on margin accounts payable to Broker-Dealers and advances received from an
affiliate.
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 moved its offices during the second fiscal quarter.
The cost of this move was approximately $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 was
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. 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.
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
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.
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 - 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
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 January 12, 1998 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and
Chief Executive Officer
Date January 12, 1998 /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> 0000909108
<NAME> 0
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-START> SEP-01-1997
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<CASH> 481,397
<RECEIVABLES> 439,587
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 12,683,330
<PP&E> 197,454
<TOTAL-ASSETS> 14,992,597
<SHORT-TERM> 0
<PAYABLES> 1,103,568
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,717,153
<OTHER-SE> 3,381,932
[TOTAL-LIABILITIES-AND-EQUITY] 14,992,597
<TRADING-REVENUE> 4,100,224
<INTEREST-DIVIDENDS> 160,363
<COMMISSIONS> 658,505
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 987,413
<INTEREST-EXPENSE> 65,649
<COMPENSATION> 836,875
<INCOME-PRETAX> 3,329,124
<INCOME-PRE-EXTRAORDINARY> 3,329,124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,507,434
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
