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, 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 December 31, 1998:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 8,209,417
Class C shares, No Par Value 240,000
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 18-24
Part II Other Information:
Item 1 through Item 6 25
Signatures 26
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 November 30, 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 NOVEMBER 30, 1998
(UNAUDITED)
ASSETS
Cash $ 473,811
Trading portfolio:
Marketable equity securities, at market value 12,363,314
Not readily marketable equity securities, at estimated fair 270,399
Mortgage participation notes, at market value 185,000
Accounts receivable:
Affiliates 104,987
Clients 45,535
Clearing organization and other 316,638
Notes and interest receivable 14,407
Equity investment in Banc Stock Exchange of America 489,640
Property and equipment, net of accumulated
depreciation of $144,521 206,430
Goodwill, net of accumulated amortization of $254,990 374,977
Deposits and other 201,883
Total assets $ 15,047,021
LIABILITIES
Margin accounts payable to broker-dealers $ 936,897
Unearned commisions 152,000
Accounts payable to broker-dealers and other 7,331
Accrued expenses 401,272
Deferred taxes 1,100,000
Total liabilities 2,597,500
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 3,646,631
Total shareholders' equity 12,449,521
Total liabilities and shareholders' equity $ 15,047,021
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(UNAUDITED)
9 Months Ended 3 Months Ended
NOV 1998 NOV 1997 NOV 1998 NOV 1997
REVENUES:
Trading profits (losses) $(1,036,735)$4,100,224 $(26,765)$1,808,250
Management fees and commissions 2,700,575 1,645,918 722,346 757,522
Investment banking 949,982 - 29,115 -
Dividends 134,294 129,440 40,137 43,995
Interest & other 29,806 30,923 11,663 14,198
Total revenues 2,777,922 5,906,505 776,496 2,623,965
EXPENSES:
Brokers' commission 1,680,694 892,919 231,835 385,116
Salaries, benefits and payroll taxes 460,281 386,098 147,767 146,496
Accrued incentive compensation - 450,777 - 199,298
Professional fees 323,568 265,274 106,859 104,168
Interest 48,650 65,649 15,855 25,469
General and administrative 713,667 516,664 269,321 119,903
Total expenses 3,226,860 2,577,381 771,637 980,450
INCOME (LOSS) BEFORE TAXES (448,938) 3,329,124 4,859 1,643,515
INCOME TAX PROVISION (CREDIT) (35,000) 900,000 65,000 600,000
INCOME (LOSS) BEFORE EQUITY IN NET
EARNINGS OF AFFILIATED COMPANY (413,938) 2,429,124 (60,141) 1,043,515
Equity in net earnings (losses) of (89,350) 78,310 19,650 41,460
Banc Stock Exchange of America
NET INCOME (LOSS) $ (503,288)$2,507,434 $(40,491)$1,084,975
BASIC EARNINGS (LOSS) PER SHARE $ (0.06)$ 0.30 $ 0.00 $ 0.13
DILUTED EARNINGS (LOSS) PER SHARE $ (0.06)$ 0.28 $ 0.00 $ 0.12
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, 1998
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance 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) - - - (503,288) (503,288)
Balance 11/30/98 $9,188,293 - ($385,403) $3,646,631 $12,449,521
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, 1998 and 1997
(UNAUDITED)
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (503,288)$ 2,507,434
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Depreciation and amortization 69,225 59,323
Deferred taxes (150,000) 800,000
Equity in undistributed earnings (losses) of Banc 89,350 (78,310)
Stock Exchange of America
Unrealized loss (gain) 2,185,284 (1,990,452)
(Increase) decrease in certain assets-
Trading profits, net (1,279,941) (1,117,353)
Mortgage participation notes (85,000) -
Accounts receivable clients (45,535) -
Other accounts receivable (214,885) (6,458)
Other assets 20,387 (127,380)
Increase (decrease) in certain liabilities-
Margin accounts payable to broker-dealers 669,990 303,510
Unearned commissions (25,300) 132,500
Accounts payable to broker-dealers and other (52,369) 53,633
Accrued expenses and other (723,941) 288,474
Net cash (used in) provided by operating
activities (46,023) 824,921
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 2,200 21,280
Issuance of notes receivable (11,379) (52,185)
Collection of dividends receivable 25,000 -
Purchase of property and equipment (66,286) (147,533)
Sale of property 8,827 4,930
Net cash used in investing activities (41,638) (173,508)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 67,925 -
Advances from affiliates 83,540 142,324
Advances to affiliates (61,749) (472,766)
Net cash provided by (used in) financing
activities 89,716 (330,442)
NET INCREASE IN CASH 2,055 320,971
CASH, BEGINNING OF PERIOD 471,756 160,426
CASH, END OF PERIOD $ 473,811 $ 481,397
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1998 1997
Cash paid during the period for:
Interest $ 48,650 $ 65,649
Taxes 50,000 30,539
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 thirty
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 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 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 Nine Months Ended November 30, 1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($503,288) 8,433,052 ($ .06)
Diluted Earnings (Loss) ($503,288) 8,433,052 ($ .06)
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 November 30, 1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($40,491) 8,449,417 ($ .00)
Diluted Earnings (Loss) ($40,491) 8,449,417 ($ .00)
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 Nine Months Ended November 30, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $2,507,434 8,411,717 $ .30
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 336,816 (.02)
Warrants 81,528 (.00)
Diluted Earnings $2,507,434 8,830,061 $ .28
For the Quarter Ended August 31, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $ 1,084,975 8,411,717 $ .13
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 496,010 (.01)
Warrants 118,131 (.00)
Diluted Earnings $ 1,084,975 9,025,858 $ .12
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 November 30, 1998 consist of bank
stocks at market value, as follows:
Traded on national securities markets $8,167,486
Not traded on national securities
markets, but with readily ascertainable
market value 4,195,828
Total marketable equity securities $12,363,314
As of November 30, 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 November 30, 1998 were
$270,399 at fair value with a cost of $221,105.
(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
7.3% at November 30, 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 $8,600,000 at November 30, 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 November 30, 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
$149,315 and $111,402 for the nine months ended November 30, 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 nine months ended November
30, 1998 is composed of the following:
Current income taxes $ 115,000
Deferred income taxes (150,000)
Provision for income taxes ($ 35,000)
Deferred tax assets and liabilities consist of the following at
November 30, 1998:
Deferred tax liabilities on unrealized gains
on securities owned $(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 $150,200
2000 153,600
2001 132,700
2002 122,800
2003 51,100
$610,400
(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 nine months ended November 30, 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 $14.75.
The Company applies Accounting Principles Board Opinion 25 and
related Interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its fixed stock option
plans and warrants. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair
value, as computed in accordance with Statement of Financial
Accounting Standards No. 123 (FAS 123), at the grant dates for
awards under those plans, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated
below:
Nine Months Ended
November 30, 1998 November 30, 1997
Net income (loss) As reported ($ 503,288) $2,507,434
Pro forma ($3,018,479) $2,073,074
Basic earnings per share
As reported ($ 0.06) $ 0.30
Pro forma ($ 0.36) $ 0.25
Diluted earnings per share
As reported ($ 0.06) $ 0.28
Pro forma ($ 0.36) $ 0.23
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 November 30, 1998 and changes during the nine 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 November 30, 1998 952,010 $ 6.094 240,000 $ 6.135
Exercisable November 30, 1998 621,805 $ 5.343 240,000 $ 6.135
Weighted-average fair value
of options and warrants
granted during the nine months,
computed in accordance
with FAS 123 $10.383 $10.363
The following table summarizes information about fixed stock
options and warrants outstanding at November 30, 1998:
Options Warrants
Number outstanding 952,010 240,000
Weighted-average remaining
contractual life in years 7.881 7.980
Weighted-average exercise price $6.094 $6.135
Number exercisable 621,805 240,000
(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 $1,299,060 as of November 30, 1998, which was in excess
of its required minimum net capital of $100,000. The ratio of
aggregate indebtedness to net capital was .8 to 1 as of November
30, 1998. BSFS is also subject to regulations of the District of
Columbia and thirty 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 November 30, 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 nine months ended November 30,
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.
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine Months Ended November 30, 1998, Compared to the Nine Months
Ended November 30, 1997
Revenues for the nine months ended November 30, 1998 decreased to
$2,777,922 compared to $5,906,505 for the nine months ended
November 30, 1997, a decrease of 53%. This decrease results from
decreases in trading profits.
Trading losses were $1,036,735 for the nine months ended November
30, 1998 compared to trading profits of $4,100,224 for the nine
months ended November 30, 1997, a decrease of 125%. This
represents an annual rate of return on the average portfolio of
negative 10% for the nine months ended November 30, 1998 compared
to positive 51% for the nine months ended November 30, 1997. This
trading loss is a direct result of the depressed market values in
the small-capitalization banking sector which started late in the
first fiscal quarter and continued throughout the third fiscal
quarter, with major corrections at the end of August 1998. 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 $2,700,575 for the nine months ended November 30, 1998
compared to $1,645,918 for the nine months ended November 30, 1997,
an increase of 64%. 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 nine months ended November 30, 1998,
the Company generated revenue of $949,982 from investment banking
activities. There was no comparable revenue for the nine months
ended November 30, 1997. The Company expects to expand investment
banking services as it continues to establish a national reputation
for raising capital for community banks. This division anticipates
completing two additional initial public offering underwritings
before the fiscal year-end.
Operating expenses for the nine months ended November 30, 1998
increased to $3,226,860 compared to $2,577,381 for the nine months
ended November 30, 1997, an increase of 25%. Brokers' commission
expenses increased to $1,680,694 for the nine months ended November
30, 1998 compared to $892,919 for the nine months ended November
30, 1997, an increase of 88%. 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 $460,281 for the
nine months ended November 30, 1998 compared to $386,098 for the
nine months ended November 30, 1997, an increase of 19%. 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 nine months ended
November 30, 1998 compared to $450,777 for the nine months ended
November 30, 1997. Incentive compensation was not accrued because
of the year-to-date loss. Professional fees increased to $323,568
for the nine months ended November 30, 1998 compared to $265,274
for the nine months ended November 30, 1997, an increase of 22%.
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 $48,650 for the nine
months ended November 30, 1998 compared to $65,649 for the nine
months ended November 30, 1997, a decrease of 26%. This decrease
results from a reduction of margin positions with broker-dealers.
General and administrative expenses increased to $713,667 for the
nine months ended November 30, 1998 compared to $516,664 for the
nine months ended November 30, 1997, an increase of 38%. This
increase relates to promotional activities for the Banc Stock Group
Fund.
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 $89,350 for the nine months
ended November 30, 1998 compared to earnings of $78,310 for the
nine months ended November 30, 1997. BSA's loss is attributable to
the depressed market values in the small-capitalization banking
sector which started late in the first fiscal quarter and continued
throughout the third fiscal quarter, with major corrections at the
end of August 1998. These conditions affected the market value of
BSA's portfolio of community bank stocks.
Quarter Ended November 30, 1998, Compared to the Quarter Ended
November 30, 1997
Revenues for the quarter ended November 30, 1998 decreased to
$776,496 compared to $2,623,965 for the quarter ended November 30,
1997, a decrease of 70%. This decrease results from decreases in
revenue from trading profits.
Trading losses were $26,765 for the quarter ended November 30, 1998
compared to trading profits of $1,808,250 for the quarter ended
November 30, 1997, a decrease of 101%. This represents an annual
rate of return on the average portfolio of negative 1% for the
quarter ended November 30, 1998 compared to positive 62% for the
quarter ended November 30, 1997 due primarily to the depressed
market values in the small-capitalization banking sector which
continued throughout the third fiscal quarter. 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
$722,346 for the quarter ended November 30, 1998 compared to
$757,522 for the quarter ended November 30, 1997, a decrease of 5%.
The decrease is primarily attributable to a decrease in 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.
On March 11, 1998, the Company formed a specialized investment
banking division dedicated to the expansion of independent
community banks. During the quarter ended November 30, 1998, the
Company generated revenue of $29,115 from investment banking
activities. There was no comparable revenue for the quarter ended
November 30, 1997. The Company expects to expand investment
banking services as it continues to establish a national reputation
for raising capital for community banks. This division anticipates
completing two additional initial public offering underwritings
next quarter.
Operating expenses for the quarter ended November 30, 1998
decreased to $771,637 compared to $980,450 for the quarter ended
November 30, 1997, a decrease of 21%. Brokers' commission expenses
decreased to $231,835 for the quarter ended November 30, 1998
compared to $385,116 for the quarter ended November 30, 1997, a
decrease of 40%. This decrease results from the absence of
incentives for portfolio performance. Salaries, benefits, and
payroll taxes increased to $147,767 for the quarter ended November
30, 1998 compared to $146,496 for the quarter ended November 30,
1997, an increase of 1%. Accrued incentive compensation was zero
for the quarter ended November 30, 1998 compared to $199,298 for
the quarter ended November 30, 1997. There was no incentive
compensation accrual because of the year-to-date loss.
Professional fees increased to $106,859 for the quarter ended
November 30, 1998 compared to $104,168 for the quarter ended
November 30, 1997, an increase of 3%. Interest expense decreased
to $15,855 for the quarter ended November 30, 1998 compared to
$25,469 for the quarter ended November 30, 1997, a decrease of 38%.
This decrease results from a reduction of margin positions with
broker-dealers. General and administrative expenses increased to
$269,321 for the quarter ended November 30, 1998 compared to
$119,903 for the quarter ended November 30, 1997, an increase of
125%. This increase is primarily the result of holding a
shareholder convention in the third quarter this year compared to
the fourth quarter last year and promotional costs incurred to
support The Banc Stock Group Fund and the Company's internet sites.
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 $19,650 for the quarter ended
November 30, 1998 compared to earnings of $41,460 for the quarter
ended November 30, 1997. The decrease in BSA's earnings is
attributable to the depressed market values in the small-capitalization
banking sector which continued throughout the third
fiscal quarter. These conditions affected the market value of
BSA's portfolio of community bank stocks.
Liquidity and Capital Resources
Approximately 35% 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 65% 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, 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, except deferred taxes. 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 November 30, 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 November 30, 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 November 30, 1998. The
Company did not experience any credit losses due to the failure of
any counterparties to perform during the quarter ended November 30,
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 increased $2,055 during the nine months ended
November 30, 1998. Net cash used in operating activities was
$46,023. 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, in addition to the payment of previously accrued expenses.
Investing activities used $41,638 of cash during the nine months
ended November 30, 1998, with the primary use being the purchase of
computer equipment.
Financing activities provided $89,716 of cash during the nine
months ended November 30, 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 - 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 13, 1999 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and
Chief Executive Officer
Date January 13, 1999 /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> SEP-01-1998
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1
<CASH> 473,811
<RECEIVABLES> 467,160
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 12,818,713
<PP&E> 206,430
<TOTAL-ASSETS> 15,047,021
<SHORT-TERM> 0
<PAYABLES> 944,228
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,802,890
<OTHER-SE> 3,646,631
[TOTAL-LIABILITIES-AND-EQUITY] 15,047,021
<TRADING-REVENUE> (26,765)
<INTEREST-DIVIDENDS> 51,800
<COMMISSIONS> 66,796
<INVESTMENT-BANKING-REVENUES> 29,115
<FEE-REVENUE> 655,550
<INTEREST-EXPENSE> 15,855
<COMPENSATION> 147,767
<INCOME-PRETAX> 4,859
<INCOME-PRE-EXTRAORDINARY> 4,859
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,491)
<EPS-PRIMARY> (.005)
<EPS-DILUTED> (.005)
</TABLE>
