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, 1999
Commission file number 000-24498
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, 1999:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 8,216,817
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 8-20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 21-27
Part II Other Information:
Item 1 through Item 6 28
Signatures 29
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, 1999 may not be indicative of the
results of operations for the year ending February 29, 2000. 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, 1999
(UNAUDITED)
ASSETS
Cash $ 3,765,628
Trading portfolio:
Marketable equity securities, at market value 8,489,411
Not readily marketable equity securities, at estimated fair 439,281
value
Mortgage participation notes, at market value 163,000
Accounts receivable:
Affiliates 55,428
Clients 140,084
Clearing organization and other 67,669
Notes and interest receivable 5,100
Equity investment in Shareholderdirect.com 513,910
Property and equipment, net of accumulated depreciation of $186,793 221,650
Goodwill, net of accumulated amortization of $281,153 348,814
Deposits and other 203,694
Total assets $ 14,413,669
LIABILITIES
Unearned commissions $ 124,000
Accounts payable to broker-dealers and other 51,185
Securities sold not yet purchased 25,683
Accrued expenses 509,747
Deferred taxes 651,000
Total liabilities 1,361,615
SHAREHOLDERS' EQUITY
Preference stock, 50,000,000 shares authorized, -
none issued or outstanding
Common stock:
Class A, no par value, 149,760,000 shares authorized,
8,519,862 shares issued and 8,216,817 shares outs 9,271,646
Class C, no par value, 240,000 shares
authorized, issued and outstanding
Treasury stock, at cost
(303,045 Class A shares) (385,403)
Retained earnings 4,165,811
Total shareholders' equity 13,052,054
Total liabilities and shareholders' equity $ 14,413,669
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, 1999 and 1998
(UNAUDITED)
6 Months Ended 3 Months Ended
AUGUST 1999 AUGUST 1998 AUGUST 1999 AUGUST 1998
REVENUES:
Trading profits $ 748,063 $ (1,009,970) $ 287,493 $ (2,396,244)
(losses)
Management fees 1,445,442 1,978,229 681,053 974,124
and Commissions
Investment banking 312,127 920,867 - 472,413
Dividends 117,667 94,157 68,676 48,711
Interest & other 21,163 18,143 10,108 8,573
Total revenues 2,644,462 2,001,426 1,047,330 (892,423)
EXPENSES:
Brokers' commission 595,898 1,448,859 248,500 689,146
Salaries, benefits 515,153 338,403 281,278 178,146
and payroll taxes
Accrued incentive - - - (174,000)
compensation
Professional fees 233,256 216,709 85,465 106,128
Interest 1,521 32,795 301 17,307
General and 612,572 418,457 271,027 206,104
administrative
Total expenses 1,958,400 2,455,223 886,571 1,022,831
INCOME (LOSS) BEFORE 686,062 (453,797) 160,759 (1,915,254)
TAXES
INCOME TAX PROVISION 210,000 (100,000) 45,000 (600,000)
(CREDIT)
INCOME (LOSS) BEFORE
EQUITY IN NET EARNINGS 476,062 (353,797) 115,759 (1,315,254)
OF AFFILIATED COMPANY
Equity in net earnings (13,010) (109,000) (8,810) (136,740)
(losses) of Shareholderdirect.com
NET INCOME (LOSS) $ 463,052 $ (462,797) $ 106,949 $(1,451,994)
BASIC EARNINGS $ 0.05 $ (0.05) $ 0.01 $ (0.17)
(LOSS) PER SHARE
DILUTED EARNINGS $ 0.05 $ (0.05) $ 0.01 $ (0.17)
(LOSS) PER SHARE
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, 1999
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance at 02/28/99 $9,190,419 - ($385,403) $3,702,759 $12,507,775
Exercise of stock 13,600 - - - 13,600
options
Issuance of 67,627 - - - 67,627
warrants
Net income - - - 463,052 463,052
Balance at 08/31/99 $9,271,646 - ($385,403) $4,165,811 $13,052,054
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 SIX MONTHS ENDED AUGUST 31, 1999 and 1998
(UNAUDITED)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 463,052 $ 989,197
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 49,054 22,244
Warrants granted to consultants 67,627 -
Deferred taxes (415,000) 490,000
Equity in undistributed earnings 13,010 (27,740)
(losses) of Shareholderdirect.com
Unrealized loss (gain) 1,231,182 (1,132,315)
(Increase) decrease in certain assets-
Trading profits, net 2,080,166 (1,211,742)
Mortgage participation notes 14,000 -
Accounts receivable clients (77,132) (513,265)
Other accounts receivable 200,036 10,778
Other assets 11,203 (52,028)
Increase (decrease) in certain liabilities-
Securities sold not yet purchased 25,683 -
Margin accounts payable to broker-dealers - 1,175,391
Unearned commissions (143,300) 49,450
Accounts payable to broker-dealers 44,598 233,526
and other
Accrued expenses and other (80,363) (412,788)
Net cash provided by (used in) 3,483,816 (379,292)
operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable - 825
Issuance of notes receivable (2,000) (3,815)
Collection of dividends receivabl - 25,000
Purchase of property and equipment (47,592) (12,850)
Net cash (used in) provided by (49,592) 9,160
investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 13,600 1,426
Advances from affiliates 10,140 69,840
Advances to affiliates (24,668) (123,700)
Net cash used in financing activities (928) (52,434)
NET INCREASE (DECREASE) IN CASH 3,433,296 (422,566)
CASH, BEGINNING OF PERIOD 332,332 471,756
CASH, END OF PERIOD $ 3,765,628 $ 49,190
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1999 1998
Cash paid during the period for:
Interest $ 1,521 $ 15,488
Income Taxes 450,000 50,000
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1999
(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 and investment banking
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 31,1999
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $463,052 8,453,737 $ .05
Effect of Dilutive
Securities:
Assumed exercise of:
Stock Options 282,040 (.00)
Warrants 74,963 (.00)
Diluted Earnings $463,052 8,810,740 $ .05
For the Quarter Ended August 31, 1999
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $106,949 8,456,159 $ .01
Effect of Dilutive
Securities:
Assumed exercise of:
Stock Options 253,983 (.00)
Warrants 67,148 (.00)
Diluted Earnings $106,949 8,777,290 $ .01
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.
Equity Investment in Shareholderdirect.com, Inc.
Shareholderdirect.com, Inc., (SDDC) is an Ohio corporation
establishing an electronic stock information service and
alternative trading system. SDDC is under common management with
the Company. The Company currently holds 16% of the outstanding
common stock of SDDC. The Company's investment in SDDC is
accounted for on the equity method. Shareholderdirect.com was
formerly named The Banc Stock Exchange of America, Inc.
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, 1999 consist of bank
stocks at market value, as follows:
Traded on national securities markets $ 5,007,237
Not traded on national securities
markets, but with readily ascertainable
market value 3,482,174
Total marketable equity securities $ 8,489,411
As of August 31, 1999, the Company had one investment representing
12% 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, 1999 were
$439,281 at fair value with a cost of $383,560.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company had no margin accounts payable to broker-dealers as of
August 31, 1999, but had $182,667 payable as of August 31, 1998.
The variable rates of interest on these accounts averaged 7.8% at
August 31, 1998. These margin accounts were secured by the
respective securities held by broker-dealers.
(6) RELATED PARTY TRANSACTIONS
The Company and Shareholderdirect.com (SDDC) are under common
management. Certain expenses are paid by the Company and allocated
to SDDC 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
SDDC were $81,870 and $89,787 for the six months ended August 31,
1999 and 1998, 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,
1999 and 1998 are composed of the following:
1999 1998
Current income taxes $625,000 $50,000
Deferred income taxes (415,000) (150,000)
Provision for income taxes $210,000 ($100,000)
Deferred tax assets and liabilities consist of the following at
August 31, 1999 and 1998:
1999 1998
Deferred tax benefit of NOL carryforward $1,500 $10,000
Deferred tax liabilities on
unrealized gains on securities owned (652,500) (1,110,000)
Deferred taxes ($651,000) ($1,100,000)
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office
equipment under operating leases. Total lease expenses were
approximately $158,000 in the fiscal year ended February 28, 1999.
The future minimum lease payments under existing leases are as
follows:
Amount
2000 $169,200
2001 142,400
2002 122,800
2003 51,100
$485,500
(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 did not incur any expense under the Plan
for the year ended February 28, 1999 and no expense has been
provided for the six months ended August 31, 1999.
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 29, 1999, 2,000 warrants which vest immediately
were granted to consultants to the Company with ten year terms and
exercise prices of $4.44.
Effective May 14, 1999, 83,250 options which vest immediately and
83,250 options which vest over five years, were granted under this
plan to employees and brokers with ten year terms and exercise
prices of $4.50.
Effective May 14, 1999, 80,000 warrants which vest immediately were
granted to directors and a consultant with ten year terms and
exercise prices of $4.50.
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, except for warrants issued to consultants. 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, 1999 August 31, 1998
Net income (loss)
As reported $463,052 ($462,797)
Pro forma ($ 29,455) ($2,794,479)
Basic Earnings per share
As reported $ 0.05 ($ 0.05)
Pro forma $ 0.00 ($ 0.33)
Diluted earnings per share
As reported $ 0.05 ($ 0.05)
Pro forma $ 0.00 ($ 0.33)
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 2000, the average expected
volatility is 49%, and the average assumed risk-free interest rate
is 5.97%. 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, 1999 and changes during the six months then
ended, is presented below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1999 951,010 $6.098 243,000 $6.118
Granted 167,500 $4.499 82,000 $4.499
Exercised (6,400) $2.125
Forfeited (2,500) $4.145
Expired unexercised (600) $14.750
Outstanding August 31, 1999 1,109,010 $5.879 325,000 $5.710
Exercisable August 31, 1999 749,256 $5.520 323,800 $5.713
Weighted-average fair
value of options and
warrants granted during
the six months, computed
in accordance with FAS 123 $3.083 $3.081
The following table summarizes information about fixed stock
options and warrants outstanding at August 31, 1999:
Options Warrants
Number outstanding 1,109,010 325,000
Weighted-average
remaining contractual
life in years 7.514 7.871
Weighted-average exercise price $5.879 $5.710
Number exercisable 749,256 323,800
(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 $1,782,946 as of August 31, 1999, which was in excess of
its required minimum net capital of $112,500. The ratio of
aggregate indebtedness to net capital was .3 to 1 as of August 31,
1999. 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's NASD broker-dealer
subsidiary is a market maker for a limited number of community bank
stocks and quotes bid and ask prices for those stocks. In the
event of sudden price movements, the subsidiary may be required to
honor a quote at an undesirable price. The subsidiary controls
this risk by monitoring markets closely and updating quotes as
required and generally limits its quotes to 100 or 200 shares of a
given bank stock.
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, 1999, the Company had
$25,683 in short security positions, the Company had purchased
option put contracts but had not written any option contracts. The
Company did not experience any credit losses due to the failure of
any counterparties to perform during the six months ended August
31, 1999. 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.
(12) SEGMENT INFORMATION
Description of the types of services from which each reportable
segment derives its revenues
The Banc Stock Group, Inc., has five reportable segments: Research,
Mutual Fund Advisor, Brokerage, Investment Banking and Trading
Portfolio. Research provides bank valuation services and financial
research of small-capitalization community bank stocks. The Mutual
Fund Advisor is the investment advisor to The Banc Stock Group
Fund, a diversified, open-end mutual fund. Brokerage provides
private portfolio management and brokerage services to individual
and institutional investors. The investment banking division
raises capital via underwritings for de novo banks and initial
public offerings (IPO's) for established community banks. Trading
Portfolio is a segment designed to isolate the market volatility of
community bank stocks from the performance of other business
segments to aid the operating decision makers in deciding how to
allocate resources and in assessing performance. Revenue is
generated in the Trading Portfolio from trading profits and losses
on the Company's portfolios of community bank stocks.
Measurement of segment profit or loss and segment assets
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The
Banc Stock Group, Inc., evaluates performance based on profit or
loss from operations before income taxes. The Company focuses its
attention on providing services to external customers. Operating
segments provide services and support to each other but there is no
formal transfer pricing structure for inter-segment services.
Factors management used to identify the enterprises's reportable
segments
The Company's reportable segments are strategic business units that
offer different services to different target customers. They are
managed separately because each business requires different
marketing strategies.
Financial information for the six months ended August 31, 1999
Financial information for each reportable segment is shown below.
The Company does not operate, or hold assets, in any foreign
country. The Company does not have any single customer generating
10% or more of revenue.
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from
external customers:
Trading Profits
(Losses) $231,654 $516,409 $748,063
Fees & Commissions $169,270 1,262,655 13,515 1,445,440
Investment banking $2,500 164,995 $144,632 312,127
Dividends 9,014 108,653 117,667
Intersegment revenues None
Interest revenue 11,619 9,544 21,163
Interest expense 835 686 1,521
Depreciation and
amortization 7,903 7,903 25,165 8,083 49,054
Segment income (loss)
before taxes (182,096)(221,370) 637,418 (173,418) 625,528 686,062
Equity in net
earnings of
affiliated company (13,010) (13,010)
Segment assets 59,413 117,476 2,822,588 199,497 11,214,695 14,413,669
Expenditures for
segment assets 5,947 5,947 5,947 5,947 23,788
Financial information for the quarter ended August 31, 1999
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from
external customers:
Trading Profits
(Losses) ($17,749) $305,242 $287,493
Fees & Commissions $73,196 601,015 6,842 681,053
Investment banking (16,919) $16,919
Dividends 4,440 64,236 68,676
Intersegment revenues None
Interest revenue 5,383 4,725 10,108
Interest expense 96 205 301
Depreciation and
amortization 3,986 3,986 12,617 4,076 24,665
Segment income(loss)
before taxes (79,732)(109,446) 101,293 (116,768) 365,412 160,759
Equity in net
earnings of
affiliated company (8,810) (8,810)
Segment assets 59,413 117,476 2,822,588 199,497 11,214,694 14,413,668
Expenditures for
segment assets 3,212 3,212 3,213 3,213 12,850
Financial information for the six months ended August 31, 1998
Financial information for each reportable segment is shown below.
The Company does not operate, or hold assets, in any foreign
country. The Company does not have any single customer generating
10% or more of revenue.
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from external
customers:
Trading Profits
(Losses) ($291,116) ($718,854)($1,009,970)
Fees & Commissions $240,988 1,721,181 16,060 1,978,229
Investment banking $51,732 525,621 $343,514 920,867
Dividends 16,420 77,737 94,157
Intersegment revenues None
Interest revenue 10,529 7,614 18,143
Interest expense 19,174 13,621 32,795
Depreciation and
amortization 7,021 7,021 24,463 7,021 45,526
Segment income (loss)
before taxes (34,726) (7,647) 736,021 (516,382) (631,063) (453,797)
Equity in net
earnings of
affiliated company (109,000) (109,000)
Segment assets 58,706 128,137 2,271,567 79,807 11,903,863 14,442,080
Expenditures for
segment assets 10,929 10,929 10,929 10,929 43,716
Financial information for the quarter ended August 31, 1998
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from
external customers:
Trading Profits
(Losses) ($570,533) ($1,825,711)($2,396,244)
Fees & Commissions $129,761 843,029 1,334 974,124
Investment banking $43,382 254,788 $174,243 472,413
Dividends 8,451 40,260 48,711
Intersegment revenues None
Interest revenue 4,778 3,795 8,573
Interest expense 9,886 7,421 17,307
Depreciation and
amortization 3,640 3,640 12,362 3,640 23,282
Segment income (loss)
before taxes 25,728 14,723 14,413 (182,375)(1,787,743)(1,915,254)
Equity in net
earnings of
affiliated company (136,740) (136,740)
Segment assets 58,706 128,137 2,271,567 79,807 11,903,863 14,442,080
Expenditures for
segment assets 7,717 7,717 7,716 7,716 30,866
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Six Months Ended August 31, 1999, Compared to the Six Months Ended
August 31, 1998
Revenues for the six months ended August 31, 1999 increased to
$2,644,462 compared to $2,001,426 for the six months ended August
31, 1998, an increase of 32%. This increase results from increases
in trading profits.
Trading profits were $748,063 for the six months ended August 31,
1999 compared to trading losses of $1,009,970 for the six months
ended August 31, 1998, an increase of 174%. This represents an
annual rate of return on the average portfolio of 14% for the six
months ended August 31, 1999 compared to negative 14% for the six
months ended August 31, 1998. These trading profits result from
recovery in the equity markets, specifically the small
capitalization banking sector. 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
$1,445,442 for the six months ended August 31, 1999 compared to
$1,978,229 for the six months ended August 31, 1998, a decrease of
27%. The decrease is primarily attributable to depressed market
values in the community banking sector which reduces asset values
on which management fees are based and reduces the buying and
selling activity in commission generating retail accounts.
Revenues from investment banking for the six months ended August
31, 1999 decreased to $312,127 compared to $920,867 for the six
months ended August 31, 1998, a decrease of 66%. Investment
banking revenue is recorded upon completion of the underwriting.
Therefore, the revenue for the two six-month-periods reflect the
transactions completed during the respective periods.
Operating expenses for the six months ended August 31, 1999
decreased to $1,958,400 compared to $2,455,223 for the six months
ended August 31, 1998, a decrease of 20%. Brokers' commission
expenses decreased to $595,898 for the six months ended August 31,
1999 compared to $1,448,859 for the six months ended August 31,
1998, a decrease of 59%. This decrease 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 $515,153 for the
six months ended August 31, 1999 compared to $338,403 for the six
months ended August 31, 1998, an increase of 52%. This increase
reflects management's decision to increase staffing levels to
establish additional revenue sources in the future. Professional
fees increased to $233,256 for the six months ended August 31, 1999
compared to $216,709 for the six months ended August 31, 1998, an
increase of 8%. This increase is the result of the award of stock
warrants to certain consultants to the Company. These stock
warrants were expensed at the date of grant based on the fair value
determined by the Black-Scholes option-pricing model. Interest
expense decreased to $1,521 for the six months ended August 31,
1999 compared to $32,795 for the six months ended August 31, 1998,
a decrease of 95%. This decrease results from the elimination of
margin positions with broker-dealers. General and administrative
expenses increased to $612,572 for the six months ended August 31,
1999 compared to $418,457 for the six months ended August 31, 1998,
an increase of 46%. This increase relates to additional
expenditures for data information services, printing and
advertising.
Shareholderdirect.com, Inc., is an Ohio corporation establishing an
electronic stock information service and alternative trading
system. It is separately owned but under common management with
the Company. The Company currently holds 16% of the outstanding
common stock. The name of the company was changed to
Shareholderdirect.com effective June 24, 1999. The Company's
investment is accounted for on the equity method. Equity in
Shareholderdirect.com's earnings was a loss of $13,010 for the six
months ended August 31, 1999 compared to a loss of $109,000 for the
six months ended August 31, 1998.
Quarter Ended August 31, 1999, Compared to the Quarter Ended August
31, 1998
Revenues for the quarter ended August 31, 1999 increased to
positive revenues of $1,047,330 compared to negative revenues of
$892,423 for the quarter ended August 31, 1998, an increase of
217%. This increase results from increases in revenue from trading
profits.
Trading profits were $287,493 for the quarter ended August 31, 1999
compared to trading losses of $2,396,244 for the quarter ended
August 31, 1998, an increase of 112%. This represents an annual
rate of return on the average portfolio of 11% for the quarter
ended August 31, 1999 compared to a negative return of 67% for the
quarter ended August 31, 1998 due primarily to recovery in market
values in the small capitalization banking sector. 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
$681,053 for the quarter ended August 31, 1999 compared to $974,124
for the quarter ended August 31, 1998, a decrease of 30%. The
decrease is primarily attributable to depressed market values in
the community banking sector which reduces asset values on which
management fees are based and reduces the buying and selling
activity in commission generating retail accounts.
Revenues from investment banking for the quarter ended August 31,
1999 decreased to zero compared to $472,413 for the quarter ended
August 31, 1998, a decrease of 100%. Investment banking revenue is
recorded upon completion of the underwriting. There were no
investment banking transactions completed during the quarter ended
August 31, 1999.
Operating expenses for the quarter ended August 31, 1999 decreased
to $886,571 compared to $1,022,831 for the quarter ended August 31,
1998, a decrease of 13%. Brokers' commission expenses decreased to
$248,500 for the quarter ended August 31, 1999 compared to $689,146
for the quarter ended August 31, 1998, a decrease of 64%. This
decrease 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 $281,278 for the quarter ended August 31, 1999 compared to
$178,146 for the quarter ended August 31, 1998, an increase of 58%.
This increase reflects management's decision to increase staffing
levels to establish additional revenue sources in the future.
Professional fees decreased to $85,465 for the quarter ended August
31, 1999 compared to $106,128 for the quarter ended August 31,
1998, a decrease of 19%. This decrease relates primarily to
services previously provided by consultants which are now provided
in-house. Interest expense decreased to $301 for the quarter ended
August 31, 1999 compared to $17,307 for the quarter ended August
31, 1998, a decrease of 98%. This decrease results from the
elimination of margin positions with broker-dealers. General and
administrative expenses increased to $271,027 for the quarter ended
August 31, 1999 compared to $206,104 for the quarter ended August
31, 1998, an increase of 32%. This increase relates to additional
expenditures for data information services, printing and
advertising.
Shareholderdirect.com, Inc., is an Ohio corporation establishing an
electronic stock information service and alternative trading
system. It is separately owned but under common management with
the Company. The Company currently holds 16% of the outstanding
common stock. The name of the company was changed to
Shareholderdirect.com effective June 24, 1999. The Company's
investment is accounted for on the equity method. Equity in
Shareholderdirect.com's earnings was a loss of $8,810 for the
quarter ended August 31, 1999 compared to a loss of $136,740 for
the quarter ended August 31, 1998.
Liquidity and Capital Resources
Approximately 44% 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 56% of the
Company's trading portfolio is readily marketable. 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, 1999, and 1998, 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's NASD broker-dealer
subsidiary is a market maker for a limited number of community bank
stocks and quotes bid and ask prices for those stocks. In the
event of sudden price movements, the subsidiary may be required to
honor a quote at an undesirable price. The subsidiary controls
this risk by monitoring markets closely and updating quotes as
required and generally limits its quotes to 100 or 200 shares of a
given bank stock.
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, 1999, the Company had $25,683 invested in 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, 1999, the Company had purchased option put contracts
but 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 experience any
credit losses due to the failure of any counterparties to perform
during the quarter ended August 31, 1999. 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 $3,433,296 during the six months
ended August 31, 1999. Net cash provided by operating activities
was $3,483,816. The Company has accumulated cash in anticipation
of opportunities to by community bank stocks at bargain prices
later in the year.
Investing activities used $49,592 of cash during the six months
ended August 31, 1999, with the primary use being the purchase of
computer equipment.
Financing activities used $928 of cash during the six months ended
August 31, 1999, as advances to affiliates exceeded advances from
affiliates and proceeds from the exercise of stock options.
The operations of the Company are funded primarily by returns on
investments and other operating revenues. 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. In the past, because of the Company's net
operating loss carry forward, the Mark-to-Market Rules did not have
a significant impact on operations. However, now that the net
operating loss carry forward has been 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 worked with
these vendors to evaluate these systems. No significant
incremental costs were incurred in connection with this process.
Additionally, management evaluated personal computer applications
for Year 2000 compliance. The cost of this program was not
material and utilized existing information technology resources.
There may be providers of significant services on which the Company
relies, such as utilities, which are unwilling or unable to provide
information regarding their Year 2000 preparedness. 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, including procedures for
alternative processing and communications, 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 Company maintains substantial trading portfolios, primarily of
community bank stocks. In addition, the Company or one of its
subsidiaries, serves as investment advisor to The Banc Stock Group
Fund, a diversified, open-end mutual fund investing primarily in
community bank stocks; manages discretionary investment authority
over investment accounts comprised of community bank stocks for
individual and institutional investors; recommends community bank
stock investments to retail customers; and manages an Ohio limited
liability company investing primarily in community bank stocks.
Therefore, the Year 2000 preparedness of these investee banks is
important to these client investors and to the Company's trading
portfolios. A critical part of the Year 2000 Compliance Program is
determining the extent to which the Company or its clients are at
risk because of the failure of these third-party investee
community banks to address their own system requirements for the
Year 2000. The Company communicated with these third-party banks
to ascertain that they are addressing Year 2000 issues and are
either Year 2000 compliant or expect to be compliant on a timely
basis. At present, the Company has not been advised by any third-
party bank of any Year 2000 problems likely to materially interfere
with the bank's operations. However, not all third-party banks
have been responsive to the Company's inquiries. To the extent
that third-party banks did not provide satisfactory responses and
the Company was unable to satisfy itself through alternative means,
the Company decided to sell certain securities for portfolios under
its control and recommend the same action to other clients that
owned the securities. These third-party banks operate in a
regulatory environment. Bank regulators generally established June
30, 1999 as a deadline for banks to have achieved Year 2000
compliance. Management believes its Year 2000 compliance program
will provide reasonable, but not absolute, assurance that third-
party banks with information systems unable to function adequately
in the Year 2000 have been identified and removed from client and
Company portfolios.
Forward-looking Statements
From time to time, the Company may publish forward-looking
statements relating to such matters as anticipated operating
results, prospects for new lines of business, technological
developments, economic trends (including interest rates and market
volatility), expected transactions and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements, and the purpose of this
paragraph is to secure the use of the safe harbor. While the
Company believes that the assumptions underlying its forward-
looking statements are reasonable, any of the assumptions could
prove to be inaccurate, and accordingly, actual results and
experiences could differ materially from the anticipated results or
other expectations expressed by the Company in its forward-looking
statements. Factors that could cause actual results or experiences
to differ from results discussed in the forward-looking statements
include, but are not limited to: economic conditions; volatility
and direction of interest rates or market values of trading
securities; governmental legislation and regulation; and other
risks identified, from time-to-time in the Company's other public
documents on file with the SEC.
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 June 24, 1999. 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 2002:
Name of Director Votes for Votes withheld
Roger Blackwell 7,602,967 6,800
Sandra L. Quinn 7,606,917 2,850
Harvey J. Thatcher 7,607,067 2,700
The following individual was elected to serve on the
board until the Annual Meeting of Shareholders in 2001:
Name of Director Votes for Votes withheld
Robert K. Butner 7,607,067 2,700
b. Ratification of PricewaterhouseCoopers LLP to serve as
independent auditors. This issue was approved with
7,608,267 votes for and 1,500 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 13, 1999 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and
Chief Executive Officer
Date October 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.
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<ARTICLE> BD
<LEGEND> 0
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<CURRENCY> U.S. DOLLARS
<PERIOD-START> JUN-01-1998
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 3,765,628
<RECEIVABLES> 263,181
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 9,091,692
<PP&E> 221,650
<TOTAL-ASSETS> 14,413,669
<SHORT-TERM> 0
<PAYABLES> 710,615
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0
0
<COMMON> 8,886,243
<OTHER-SE> 4,165,811
[TOTAL-LIABILITIES-AND-EQUITY] 14,413,669
<TRADING-REVENUE> 287,493
<INTEREST-DIVIDENDS> 78,784
<COMMISSIONS> 184,591
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 496,462
<INTEREST-EXPENSE> 301
<COMPENSATION> 248,500
<INCOME-PRETAX> 160,759
<INCOME-PRE-EXTRAORDINARY> 160,759
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