U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended February 28, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 000-24498
THE BANC STOCK GROUP, INC.
(Name of small business issuer in its charter)
Florida 65-0190407
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1105 Schrock Road, Suite 437, Columbus, Ohio 43229
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (614)848-5100
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, no par value
(Title of class)
(Title of class)
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
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B is not contained in this form, and
no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB [x]
State issuer's revenues for its most recent fiscal year $3,802,353
State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such
stock, as of a specified date within the past 60 days. (See
definition of affiliate in Rule 12b-2 of the Exchange Act.)
As of March 31, 1999: 8,210,417 Class A shares
@ Bid of $4.375 = $35,920,574
@ Asked of $5.000 = $41,052,085
State the number of shares outstanding of each of the issuer's
classes of common equity, as of March 31, 1999:
Class A Shares: 8,210,417
Class C Shares: 240,000
PART I
ITEM 1: Description of Business
General
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 a NASD (National Association of Securities Dealers) 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, brokerage and investment banking services. BSFS
maintains a trading portfolio of community bank stocks to support
its various activities.
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. Buckeye Bancstocks maintains a trading
portfolio of Ohio community bank stocks to support its
activities.
The Company operates primarily as a holding company with
broker/dealer operations conducted by BSFS and Buckeye Bancstocks
and investment advisory services provided by HAG and BSFS. The
Company serves as the Manager of Four Points Limited I, an Ohio
Limited Liability Company, which invests in community bank
stocks. The Company maintains a trading portfolio of community
bank stocks to support the various activities of its
subsidiaries. References to the Company also include references
to BSFS, HAG and Buckeye Bancstocks.
Market Making and Brokerage Activities
The primary business of the Company is advisory services through
its registered investment advisers and the marketing and trading
of bank stocks through its brokerage subsidiaries. For the
foreseeable future, the Company intends to utilize the experience
of its management to recommend, acquire and market a diversified
portfolio of bank stocks with small and medium market
capitalization. The Company has no single investment
representing more than 10% of the marketable equitable securities
of the Company.
Historically, through its brokerage subsidiaries, the Company has
recommended that its customers purchase those bank stocks which
the Company believes to be most likely to show an increase in
value over both the short and the long term. Market making and
trading has been done primarily through BSFS.
Management of the Company believes that the bank stocks which
have historically shown the largest long term market value
increases have certain characteristics in common. These include:
(a) county seat banks with more than $50,000,000 but less than
$10,000,000,000 in assets; (b) banks with strong capital
(capital/assets ratios of 8% or more); banks with high earnings
(return on equity of 12% or more); and (d) banks with low loan
losses (less than 1% of loans declared uncollectible and lost
each year). Through its brokerage subsidiaries and its research
capabilities and experience, the Company endeavors to identify
banks meeting this profile. The Company researches the entire
U.S. market for these bank stocks. Although these stocks are
listed on a variety of over-the-counter markets, including the
National Quotation Bureau "Pink Sheets", NASD Bulletin Board,
NASDAQ Small-Cap Issues, NASDAQ National Market System, AMEX and
NYSE, there can be no assurances that the stock of such banks
will be available for sale or show price increases if they are
acquired.
The rate of mergers of banks has accelerated during the last ten
years, partially as a result of statewide branching and
nationwide branching law changes. Many mergers have occurred to
some degree as a result of such banking law changes.
The Company began to actively market the establishment of
discretionary client accounts with BSFS in 1997. This enables
the Company to more quickly move client funds in response to
changes in the market for bank stocks. The Company believes that
by administering discretionary accounts, it will be able to
better serve its clientele by more rapidly responding to market
fluctuations while at the same time continuing to generate
significant fee income for the Company from discretionary and
non-discretionary accounts and advisory accounts.
There can be no assurance that the Company will be successful in
predicting increases or in evaluating and recommending bank
stocks.
Market Research
The Company's brokerage subsidiaries compile extensive research
on small and medium cap banks. The Company evaluates profit
potential of these banks stocks over one, three, five, and ten
year horizons. The Company develops a Bank Presentation or
Profile which highlights: financial performance, peer group
comparison, and geographic and demographic market factors. The
criteria utilized to evaluate these stocks include, but are not
limited to:
1. Return on Equity: Net income (loss) before
extraordinary items and other adjustments divided by
average total equity. This return should be fairly
constant at 12% - 20% per year. The Company seeks
opportunities where ROE is above 12%.
2. Return on Assets: This is calculated by
using income (loss) before extraordinary
items and other adjustments divided by
average total assets. The Company seeks
opportunities where ROA is above 1.2%.
3. Price to Earnings Ratio: P/E is calculated
by taking the current price of the stock and
dividing it by the earnings per share. The
Company seeks opportunities where the P/E is
below 13.
4. Stock Price: The Company seeks to purchase
stocks that are priced under comparably
priced stocks based upon past earnings
records.
5. Risk: Limiting, not eliminating risk is an
important consideration. The Company seeks
the shares of banks that experience low loan
losses, has strict loan guidelines, and makes
an effort to know their customers.
6. Ownership: The Company seeks well run banks
where there is significant insider ownership.
The Company believes that ten to forty
percent ownership in the hands of management,
the Board, and local shareholders, encourages
market share growth, responsibility to the
bottom line, and a customer oriented culture.
7. Dividends: Generally, the Company does not
seek high dividend returns with its
investments. However, it occasionally
invests in preferred issues that achieve a
higher than average return compared to
national or regional returns.
8. Market Area: The Company seeks stable and
growing market areas across the United
States. Community oriented banks are found
in areas of population from as small as
25,000 MSA (metropolitan statistical area) to
3-5 million MSA in some urban/suburban areas.
9. Markets: The Company's portfolio is
generally made up of stocks that trade on the
National Quotation Bureau "Pink Sheets", NASD
Bulletin Board, NASDAQ Small-Cap Issues,
NASDAQ National Market System, and
occasionally the AMEX and NYSE.
Competition
National and large regional brokers tend not to emphasize the
markets in which the Company specializes because of the
relatively small size of the banks and the towns in which they
are headquartered and because the stock of those institutions is
usually thinly covered by researchers and inactively traded.
Consequently, the major competition in the area of bank stock
marketing has been the regional brokers in its market states.
These include: Elmer E. Powell, Hoefer & Arnett, Sutro & Co.,
Howe Barnes, Ferris Baker, Stifel Nicolas, Ryan Beck, and Hill
Thompson. The Company's extensive experience, the large number
of independent community banks, and its unique method of retail
marketing causes the Company's management to believe that the
Company will continue to be successful in identifying and
acquiring stock portfolios which match its targets.
Historically, the Company's brokerage subsidiaries have been
consulted by banks primarily as stock marketing problem solvers
and are now being invited into markets as market makers.
Although the Company probably has more competition to buy and
sell stock now than at any time in its history, management
believes that, because of the experience of the brokerage
subsidiaries in this specialized market, the Company will
continue to experience success in its areas of operations.
Trading Portfolio
Through its brokerage subsidiaries, the Company buys positions in
several banks at any given time with an intent to resell such
shares. Any stock bought for the trading portfolio will
typically be resold, either at wholesale (to other brokers) or at
retail to the Company's clients. The Company acquires securities
from a variety of sources including other brokers, individuals,
estates and bank trust departments. The Company maintains margin
account balances due to broker/dealers. These margin accounts
are secured by the respective securities held by broker/dealers.
Investment Banking
Investment banking services are provided by the Company's NASD
Broker-Dealer subsidiary, Banc Stock Financial Services, Inc. We
specialize in working closely with a select number of banks for
new formations or re-capitalization in the $1 million to $15
million range. Investment banking services are a part of
management's strategy to diversify revenue sources.
Regulation
The securities industry is subject to extensive regulation under
both federal and state laws. The principal purpose of regulation
of broker/dealers and investment advisors is the protection of
retail investors in the securities markets rather than protection
of creditors and stockholders of broker/dealers and investment
advisors. The SEC is the federal agency charged with the
administration of federal securities laws. The Ohio Division of
Securities is a corresponding state regulatory agency. Much of
the regulation of broker/dealers who do business on an interstate
basis has been delegated by the SEC to self-regulatory
organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules
(which are subject to approval by the SEC) which govern the
industry and conduct periodic examinations of member
broker/dealers. The SEC retains primary authority for regulation
of investment advisors. Securities firms are also subject to
regulation by state securities commissions in the states in which
they are registered and, in Ohio, the Division of Securities
regulates the activities of broker/dealers which only do business
within that State.
The regulations to which broker/dealers are subject cover all
aspects of the securities business, including sales methods,
trading practices among broker/dealers, capital structure of
securities firms, record keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules
promulgated by regulatory organizations or changes in the
interpretation or enforcement of existing laws and rules often
affect directly the method of operation and profitability of
broker/dealers. In addition, securities regulators may conduct
administrative proceedings which can result in censure, fine,
suspension or expulsion of a broker/dealer, its officers or
employees.
The Company's subsidiaries, BSFS, HAG and Buckeye Bancstocks,
each operate in highly regulated industries and are subject to
examination and licensing requirements by federal and state
authorities and subject to a variety of special rules and
regulations. BSFS is subject to regulation by the SEC and the
state securities regulatory agencies in the states in which it
operates and is a member of NASD. HAG and BSFS are registered
investment advisers and subject to regulation by the SEC pursuant
to the Investment Advisers Act of 1940. Buckeye Bancstocks is an
Ohio broker/dealer operating solely within that State. Buckeye
Bancstocks' activities are subject to examination and licensure
by the Ohio Department of Commerce and, in particular, the
Division of Securities.
Due to a change in the Ohio Securities Laws, since October 11,
1994, all broker/dealers registered in Ohio, with total revenues
of $150,000 or more during any twelve (12) month period and more
than one hundred (100) retail securities customers, must also
register as a broker/dealer with the Securities and Exchange
Commission (SEC). Buckeye Bancstocks has historically been an
Ohio broker/dealer operating solely within that state. As such,
Buckeye Bancstocks was previously exempt from registration with
the SEC but subject to regulation by the Ohio Department of
Commerce. Management believes that Buckeye Bancstocks can
continue to operate under these restrictions. Additionally,
Buckeye Bancstocks has applied for an exemption from the Ohio
requirements for SEC registration. This application is pending.
As a result of these various considerations, management believes
that these changes have not had a material adverse effect on the
Company's financial prospects as a whole.
Companies that control banking subsidiaries must register as Bank
Holding Companies, pursuant to the Bank Holding Company Act of
1956 (the "Bank Holding Company Act"). A company is considered
to be in control of a bank if (a) the company directly or
indirectly controls or has the power to vote 25% or more of any
class of voting securities of a bank; (b) the company controls in
any manner the election of a majority of directors or trustees of
a bank; or the Federal Reserve Board determines, after notice
and opportunity for hearing, that the company directly or
indirectly exercises a controlling influence over the management
or policy of a bank. Companies that hold less than 5% of the
stock of a bank are deemed not to be in control of such bank.
Neither the Company nor any of its subsidiaries controls the
election of any directors or trustees to any of the banks in
which they own an interest, nor do they own in excess of 5% of
the voting securities in any bank in which they make a market.
Violation of the Bank Holding Company Act could subject the
Company to fines and penalties. The Company will endeavor to
remain outside of the purview of the Bank Holding Company Act.
Employees
The Company currently has 16 full-time employees, none of which
are members of a union. The Company generally believes that its
relationship with employees is good.
ITEM 2: Description of Property
The Company leases a total of approximately 7,600 square feet of
office space in an office complex from an unaffiliated third
party for an aggregate current monthly rental of approximately
$9,515.
ITEM 3: Legal Proceedings
The Company is not engaged in any material litigation.
ITEM 4: Submission of Matters to a Vote of Security Holders
There were no matters submitted during the fourth quarter of the
fiscal year to a vote of security holders.
PART II
ITEM 5: Market for Common Equity and Related Stockholder Matters
Effective April 12, 1999 the Company's Class A Common Stock began
trading on the NASDAQ SmallCap Market under the symbol BSGK.
Prior to that date it traded in the over-the-counter market under
the symbol BSGK. On March 31, 1999, a bid price of $4.375 and
asked price of $5.00 were quoted. There are approximately nine
market makers of BSGK. These quotations reflect inter-dealer
prices, without retail markup, markdown or commissions and may
not represent actual transactions. In addition, due to the
relatively "thin" market in the Company's Class A Common Stock,
quoted prices cannot be considered indicative of any viable
market for such stock. During the fiscal year ended February 28,
1999, approximately 2.5 million shares of the Company's Class A
Common Stock were traded in the over-the-counter market.
Class C shares are restricted and therefore, are not traded.
As of February 28, 1999, there were approximately 1,350 holders
of record of Class A shares and 35 holders of Class C shares.
Dividends have not been declared on any class of equity
securities.
ITEM 6: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Fiscal Year Ended February 28, 1999, Compared to Fiscal Year
Ended February 28, 1998
Revenues for the year ended February 28, 1999 decreased to
$3,802,353 compared to $8,450,937 for the year ended February 28,
1998, a decrease of 55%. This decrease results primarily from
the performance of the Company's trading portfolio of bank
stocks. Trading losses were $824,710 for the year ended February
28, 1999 compared to trading profits of $5,584,373 for the year
ended February 28, 1998, a decrease of 115%. This represents an
annual rate of return on the average portfolio of negative 6% for
the year ended February 28, 1999 compared to positive 49% for the
year ended February 28, 1998. 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.
Commission revenue of $3,411,890 was generated for the year ended
February 28, 1999, primarily by Banc Stock Financial Services,
Inc. (BSFS), the Company's NASD broker-dealer subsidiary. This
compares to $2,567,507 of commission revenue for the year ended
February 28, 1998, an increase of 33%. BSFS has been increasing
its level of business activity as part of an ongoing effort to
diversify revenue streams, especially portfolio management
services. Incentive programs have been established for brokers
to increase the amount of funds under management. This has
increased fee income from managed accounts which is included in
commission revenue.
On March 11, 1998, the Company formed a specialized investment
banking division dedicated to the expansion of independent
community banks. During the year ended February 28, 1999, the
Company generated revenue of $971,158 from investment banking
activities. There was no comparable revenue for the year ended
February 28, 1998. The Company expects to expand investment
banking services as it continues to establish a national
reputation for raising capital for community banks.
Operating expenses for the year ended February 28, 1999 increased
to $4,229,443 compared to $3,835,346 for the year ended February
28, 1998, an increase of 10%. Brokers' commission expenses
increased to $1,910,160 for the year ended February 28, 1999
compared to $1,328,904 for the year ended February 28, 1998, an
increase of 44%. Brokers' commission expenses represent 56% of
Commission revenue for the year ended February 28, 1999 compared
to 52% for the year ended February 28, 1998. The increase in
commission expenses is related to investment banking activities
and the management fees and commission revenue discussed above.
Salaries, benefits, and payroll taxes increased to $678,786 for
the year ended February 28, 1999 compared to $567,116 for the
year ended February 28, 1998, an increase of 20%. This increase
reflects management's decision to increase staffing levels to
diversify revenue sources in the future. Accrued incentive
compensation decreased to zero for the year ended February 28,
1999 compared to $617,566 for the year ended February 28, 1998.
Incentive compensation was not accrued because of the year-to-date loss.
Professional fees increased to $468,550 for the year
ended February 28, 1999 compared to $392,912 for the year ended
February 28, 1998, an increase of 19%. 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 $57,135 for the year ended February
28, 1999 compared to $94,615 for the year ended February 28,
1998, a decrease of 40%. This decrease results from a reduction
of margin positions with broker-dealers. General and
administrative expenses increased to $1,114,812 for the year
ended February 28, 1999 compared to $834,233 for the year ended
February 28, 1998, an increase of 34%. This increase relates
primarily to state taxes, provided as a dealer in intangibles,
and promotional activities for The Banc Stock Group Fund. For
the year ended February 28, 1998, state taxes were provided for
franchise tax based on income and therefore were included in
income taxes rather than general and administrative expenses.
The Banc Stock Exchange of America, Inc. (BSA) is establishing an
electronic bank stock information service. In addition, BSA has
received a no-action letter from the SEC allowing BSA to proceed
with a computerized indication system which will allow investors
and broker-dealers to indicate their interest to buy or sell
securities. BSA is currently modifying this system to make it
available on the internet and expects to have the system
operational by the end of the second fiscal quarter. 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 $52,070
for the year ended February 28, 1999 compared to earnings of
$89,830 for the year ended February 28, 1998. 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.
Liquidity and Capital Resources
Approximately 34% of the value of the Company's trading portfolio
is comprised of small bank stocks which are not traded on
national securities markets and there can be no assurance that
more active markets will develop. The failure of such markets to
develop could negatively affect the Company's operations and
financial condition. Approximately 66% of the Company's trading
portfolio is readily marketable, providing a reasonable 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 February 28, 1999, the Company had working capital of
approximately $12,260,000 compared to $11,490,000 as of February
28, 1998. Working capital includes cash, investments and
accounts and interest 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.
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 February 28, 1999, 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 year ended February
28, 1999. Senior management of the Company is responsible for
reviewing trading positions, exposures, profits and losses,
trading strategies and hedging strategies daily.
The Company's most significant industry concentration, which
arises within its normal course of business activities, is with
financial institutions for bank securities transactions.
The net cash balance decreased $139,424 during the year ended
February 28, 1999. Net cash used in operating activities was
$244,246. The primary use of this cash flow was for payment of
accrued expenses, to pay down margin balances and trading losses.
Investing activities used $51,107 of cash during the year ended
February 28, 1999 with the primary use being the purchase of
office equipment and furniture.
Financing activities provided $155,929 of cash during the year
ended February 28, 1999 primarily due to advances from affiliates
and the exercise of stock options.
The operations of the Company are funded primarily by revenue
from the trading portfolio and commission revenue. Management
believes that the Company's existing resources, including
available cash, and cash provided by operating activities will be
sufficient to satisfy its working capital requirements in the
foreseeable future. However, no assurance can be given that
additional funds will not be required. To the extent that
returns on investments are less than, or expenses are greater
than anticipated, the Company may be required to reduce its
activities, liquidate inventory or seek additional financing.
This financing may not be available on acceptable terms, if at
all. No significant capital expenditures are expected in the
foreseeable future, 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
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 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. 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 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 is
communicating 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 do not provide satisfactory responses and the Company
is unable to satisfy itself through alternative means, the
Company will evaluate whether to sell or retain the corresponding
securities for portfolios under its control and recommend the
same action to other clients that own the securities. These
third-party banks operate in a regulatory environment. Bank
regulators have 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 will be identified and removed from client and Company
portfolios before the Year 2000.
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.<PAGE>
ITEM 7: Financial Statements
THE BANC STOCK GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED FEBRUARY 28, 1999 AND 1998
TOGETHER WITH REPORT OF INDEPENDENT ACCOUNTANTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Banc Stock Group, Inc.
In our opinion, the accompanying consolidated statement of
financial condition, the related consolidated statements of
income, of changes in shareholders' equity and of cash flows
present fairly, in all material respects, the financial position
of The Banc Stock Group, Inc. and Subsidiaries at February 28,
1999 and the results of their operations and their cash flows for
each of the two years in the period then ended in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
/s/PricewaterhouseCoopers LLP
April 21, 1999
Columbus, Ohio
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF FEBRAURY 28,1999
ASSETS
Cash $ 332,332
Trading portfolio:
Marketable equity securities, at market value 11,857,387
Not readily marketable equity securities,
at estimated fair value 382,653
Mortgage participation notes, at market value 177,000
Accounts receivable:
Affiliates 40,900
Clients 62,952
Clearing organization and other 267,705
Interest receivable 3,100
Equity investment in Banc Stock Exchange of America 526,920
Property and equipment, net of accumulated depreciation
of $160,331 205,670
Goodwill, net of accumulated amortization of $263,711 366,256
Deposits and other 214,897
Total assets $ 14,437,772
LIABILITIES
Unearned commisions $ 267,300
Accounts payable to broker-dealers and other 6,587
Accrued expenses 590,110
Deferred taxes 1,066,000
Total liabilities 1,929,997
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,
8,513,462 shares issued and 8,210,417 shares outstanding 9,190,419
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 3,702,759
Total shareholders' equity 12,507,775
Total liabilities and shareholders' equity $ 14,437,772
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 YEARS ENDED FEBRUARY 28, 1999 and 1998
1999 1998
REVENUES:
Trading profits $ (824,710) $ 5,584,373
Management fees and commissions 3,411,890 2,567,507
Investment banking 971,158 -
Dividends 193,339 244,395
Interest and other 50,676 54,662
Total revenues 3,802,353 8,450,937
EXPENSES:
Brokers' commission 1,910,160 1,328,904
Salaries, benefits and payroll taxes 678,786 567,116
Accrued incentive compensation - 617,566
Professional fees 468,550 392,912
Interest 57,135 94,615
General and administrative 1,114,812 834,233
Total expenses 4,229,443 3,835,346
INCOME (LOSS) BEFORE TAXES (427,090) 4,615,591
PROVISION FOR INCOME TAXES (32,000) 1,430,000
INCOME (LOSS) BEFORE EQUITY IN NET EARNINGS
OF AFFILIATED COMPANY (395,090) 3,185,591
Equity in net earnings (losses) of Banc Stock
Exchange of America (52,070) 89,830
NET INCOME (LOSS) $ (447,160) $ 3,275,421
BASIC EARNINGS PER SHARE $ (0.05) $ 0.39
DILUTED EARNINGS PER SHARE $ (0.05) $ 0.36
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 YEARS ENDED FEBRUARY 28, 1999 and 1998
Retained
Class A Class C Treasury Earnings Total
Amount Amount Stock (Deficit)
Balance 2/28/97 $9,102,556 $ - ($385,403) $874,498 $9,591,651
Exercise options 17,812 17,812
Net income 3,275,421 3,275,421
Balance 2/28/98 9,120,368 - (385,403) 4,149,919 12,884,884
Exercise options 70,051 70,051
Net loss (447,160) (447,160)
Balance 2/28/99 $9,190,419 $ - ($385,403) $3,702,759 $12,507,775
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 YEARS ENDED FEBRUARY 28, 1999 and 1998
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (447,160) $ 3,275,421
Adjustments to reconcile net (loss) income
to net cash (used in) provided by
operating activities:
Depreciation and amortization 60,023 81,857
Write off of assets 59,446 -
Deferred taxes (184,000) 1,250,000
Equity in undistributed (earnings)
losses of Banc Stock Exchange 52,070 (89,830)
of America
Unrealized loss (gain) 2,213,775 (3,106,147)
(Increase) decrease in certain assets-
Trading profits (914,759) (957,384)
Mortgage participation notes (77,000) -
Accounts receivable clients (62,952) -
Other accounts receivable (165,952) (57,460)
Other assets (12,614) (136,153)
Increase (decrease) in certain liabilities-
Margin accounts payable to
broker-dealers (266,907) (458,550)
Unearned commissions 90,000 177,300
Accounts payable to broker-dealers
and other (53,113) 38,733
Accrued expenses and other (535,103) 556,243)
Net cash (used in) provided by
operating activities (244,246) 574,030)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable 20,697 77,100
Issuance of notes receivable (18,568) (59,484)
Collection of dividends receivable 25,000 (25,000)
Purchase of property and equipment (81,336 (155,923)
Sale of property 3,100 4,930
Net cash used in investing activities (51,107) (158,377)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 70,051 17,812
Advances from affiliates 571,228 602,783
Advances to affiliates (485,350) (724,918)
Net cash provided by (used in)
financing activities 155,929 (104,323)
NET (DECREASE) INCREASE IN CASH (139,424) 311,330
CASH, BEGINNING OF PERIOD 471,756 160,426
CASH, END OF PERIOD $ 332,332 $ 471,756)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1999 1998
Cash paid during the period for:
Interest $ 57,135 $ 94,615
Taxes 50,000 45,539
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1999
(1) ORGANIZATION AND NATURE OF BUSINESS
The Banc Stock Group, Inc., (the Company) is a Florida
corporation incorporated in April, 1990. At the Annual Meeting
of Shareholders held on June 19, 1997, the Shareholders amended
the Articles of Incorporation to change the name of the
corporation from Heartland Group of Companies, Inc. The Company
has three wholly-owned subsidiary operating companies.
Banc Stock Financial Services, Inc. (BSFS), an Ohio corporation,
is an NASD registered broker-dealer specializing in the trading
of bank stocks nationwide.
BSFS is registered with the Securities and Exchange Commission
and the securities commissions of 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 presentation of certain prior year numbers has been changed
to conform to the current year presentation. 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 the Trading Portfolio
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). Investment banking revenue is
recorded upon completion of the underwriting.
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 Year Ended February 28, 1999
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings per Share $(447,160) 8,437,139 $(.05)
Diluted Earnings per Share $(447,160) 8,437,139 $(.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 Year Ended February 28, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings per Share $3,275,421 8,412,342 $ .39
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 471,078 (.02)
Warrants 112,210 (.01)
Diluted Earnings per Share $3,275,421 8,995,630 $ .36
Stock options to purchase 10,000 shares at $13.37 per share were
outstanding since January 12, 1998, but were not included in the
computation of diluted earnings per share for the year ended
February 28, 1998 because the option's exercise price was greater
than the average market price of the common stock.
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, except
the equity investment in BSA, are carried at fair value or
amounts approximating fair value. Assets, including accounts
receivable, mortgage participation notes, interest receivable
and the trading portfolio are carried at amounts which
approximate fair value. Similarly, liabilities, including
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
As of February 28, 1999, Buckeye Bancstocks held 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 February 28, 1999 consist of bank
stocks at market value, as follows:
Traded on national securities markets $8,085,780
Not traded on national securities
markets, but with readily ascertainable
market value 3,771,607
Total marketable equity securities $11,857,387
As of February 28, 1999, 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 February 28, 1999
were $382,653 at fair value with a cost of $305,060.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company had no margin accounts payable to broker-dealers as
of February 28, 1999, but had $266,907 payable as of February 28,
1998. These accounts bear interest at variable rates which
averaged approximately 7.0% and 8.0% at February 28, 1999 and
1998, respectively. These margin accounts are secured by the
securities held by broker-dealers. The market value of the
securities held by broker-dealers with margin account balances
was approximately $9,344,000 at February 28, 1998.
(6) RELATED PARTY TRANSACTIONS
Securities Transactions
The Company purchases from and sells securities owned to BSA at
the prevailing market price at the time of the transaction.
There were no purchases or sales to BSA for the years ended
February 28, 1999 and 1998.
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
$208,016 and $154,778 for the years ended February 28, 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 provisions for income taxes for the years ended February 28,
1999 and 1998 are composed of the following:
1999 1998
Current Federal income taxes $ 152,000 $ 35,000
Deferred Federal income taxes (184,000) 1,540,000
State and local income taxes - 145,000
Change in valuation allowance - (290,000)
Provision for income taxes $ (32,000) $1,430,000
For the year ended February 28, 1999, state taxes were provided
primarily as a dealer in intangibles. For the year ended
February 28, 1998, state taxes were provided primarily for
franchise taxes based on income. Because of this change in
circumstances state and local taxes were reported as general and
administrative expenses for the year ended February 28, 1999 and
were included in the provision for income taxes for the year
ended February 28, 1998.
The following schedule reconciles the statutory Federal income
tax rate to the Company's effective tax rate for the years ended
February 28, 1999 and 1998:
1999 1998
Statutory Federal income tax rate (34)% 34%
Prior year provision adjustment 23 -
Dividends received deduction (11) (1)
State and local taxes - (1)
Goodwill amortization 3 -
Change in valuation allowance - (6)
Other, net 12 1
Effective Federal income tax rate (7)% 27%
Deferred tax assets and liabilities consist of the following at
February 28, 1999 and 1998:
1999 1998
Deferred tax benefit of NOL carryforward $ 1,000 $ 440,000
Deferred tax liabilities on unrealized gains
on securities owned (1,067,000) (1,690,000)
Deferred taxes, net $(1,066,000) $(1,250,000)
As of February 28, 1999, the Company and its subsidiaries had net
operating loss (NOL) carry forwards for tax purposes of
approximately $4,000. These NOL's will expire in 2008 through
2009. Any future changes in control may limit the availability
of NOL carryforwards.
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office
equipment under operating leases. Total lease expenses were
approximately $158,000 in fiscal year 1999 and $103,000 in 1998.
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 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 but incurred expense of
$600,000 for the year ended February 28, 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, 130,005 options which vest immediately
and 128,505 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.
Effective December 16, 1998, 3,000 warrants which vest
immediately were granted to a consultant with a ten year term and
exercise price of $4.75.
The Company applies Accounting Principles Board Opinion 25 (APB
25) and related Interpretations in accounting for its plans. In
accordance with APB 25, 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:
February 28, 1999 February 29,1998
Net income (loss) As reported $ (447,160) $3,275,421
Pro forma $(3,167,681) $2,744,312
Basic earnings per share As reported $(.05) $.39
Pro forma $(.38) $.33
Diluted earnings per share As reported $(.05) $.36
Pro forma $(.38) $.31
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 5.87%. 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 February 28, 1999 and 1998 and changes
during the years ending on those dates is presented below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1997 480,000 $ 2.875 105,000 $ 2.875
Granted 249,000 $ 2.592 65,000 $ 2.125
Exercised (7,500) $ 2.375
Outstanding February 28, 1998 721,500 $ 2.782 170,000 $ 2.588
Exercisable February 28, 1998 446,400 $ 2.804 170,000 $ 2.588
Outstanding March 1, 1998 721,500 $ 2.782 170,000 $ 2.588
Granted 261,510 $14.774 73,000 $14.339
Exercised (31,200) $ 2.245
Forfeited (800) $ 2.125
Outstanding February 28, 1999 951,010 $ 6.098 243,000 $ 6.118
Exercisable February 28, 1999 621,805 $ 5.361 243,000 $ 6.118
Weighted-average fair value
of options and warrants
granted during the year,
computed in accordance
with FAS 123 $10.383 $10.067
The following table summarizes information about fixed stock
options and warrants outstanding at February 28, 1999:
Options Warrants
Number outstanding 951,010 243,000
Weighted-average remaining
contractual life in years 7.634 7.759
Weighted-average exercise price $6.098 $6.118
Number exercisable 621,805 243,000
(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 $1,239,864 as of February 28, 1999, which was in
excess of its required minimum net capital of $100,000. The
ratio of aggregate indebtedness to net capital was 1.1 to 1 as of
February 28, 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.
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 February 28, 1999, 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 year ended February
28, 1999. Senior management of the Company is responsible for
reviewing trading positions, exposures, profits and losses,
trading and hedging strategies on a daily basis.
The Company's significant industry concentrations, which arise
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. 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
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) (97,375) ($727,335) ($824,710)
Fees &
Commissions $30,051 $444,637 $2,937,202 3,441,890
Investment
banking 70,847 $900,311 971,158
Dividends 13,006 180,333 193,339
Intersegment revenues _
Interest revenue 42,482 8,194 50,676
Interest expense 22,870 34,265 57,135
Depreciation and
amortization 14,540 34,884 43,619 93,043
Segment income(loss)
before taxes (315,938) 104,825 778,018 135,959 (1,129,954) (427,090)
Equity in net
earnings of
affiliated company (52,070) (52,070)
Segment assets 55,417 95,273 2,240,322 118,370 11,928,390 14,437,772
Expenditures for
segment assets 20,000 20,000 21,336 20,000 81,336
Reconciliation to Consolidated Financial Statements
Revenues from external customers for reportable segments:
Trading Profits (Losses) ($824,710)
Fees & Commissions 3,411,890
Investment banking 971,158
Dividends 193,339
Interest revenue 50,676
Total revenues - Consolidated $3,802,353
Income (Loss) before taxes:
Income (Loss) for reportable segments ($427,090)
Income (Loss) - Consolidated ($427,090)
Total Assets:
Assets for reportable segments $14,437,772
Total assets - Consolidated $14,437,772
ITEM 8: Changes In and Disagreements With Accountants or
Accounting and Financial Disclosures
None
PART III
ITEM 9: Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act
As of February 28, 1999, the members of the Company's Board of
Directors, and the Company's executive officers, each of whom
serves at the direction of the Board, were as follows:
Term
Name Age Expires Position
Michael E. Guirlinger 51 2000 Director, President, CEO & Treasurer
Jeffrey C. Barton 52 Vice President & Chief Financial Officer
Mark A. Davis 47 Vice President & Director of Research
Sandra L. Quinn 33 1999 Director, Vice President & Corp. Secretary
Harry J. Ryan 54 Vice President & Director of Marketing
Edward E. Schmidt 52 Executive Vice President
Larry A. Beres 52 2000 Director
Roger D. Blackwell 58 2002 Director
Robert K. Butner 77 1999 Director
James G. Mathias 46 2000 Director
John Rettig 58 2001 Director
Harvey J. Thatcher 65 1999 Director
L. Jean Thiergartner 66 2001 Director
Michael E. Guirlinger was elected President, Chief Executive
Officer and Treasurer by the Board of Directors effective May 18,
1995. Mr. Guirlinger is a member of the Board of Directors for
the Company and BSA.
Mr. Guirlinger had been Vice President and Chief Operating
Officer of the Company since December, 1992 and a Director since
June, 1993. Since 1995, Mr. Guirlinger has also been President
and CEO of BSA and was Vice President from 1992 to 1995. He is
also President and Treasurer of Buckeye Bancstocks and HAG and
Vice President and Treasurer of BSFS. From 1991 to December
1992, Mr. Guirlinger was a Director of Development for Foxgate
Farms, Inc., a residential home builder. During that same
period, Mr. Guirlinger was also Vice President of Northwest
Passage Trading Co., a national and international trading
company. In 1990, Mr. Guirlinger, along with two other
individuals, founded Spectrum Mortgage Co., a real estate
mortgage broker, with which he was involved until 1991. From
1986 to 1990, Mr. Guirlinger was Director of Development and
Finance for Investment Resources, Inc., an intrastate broker-dealer.
Mr. Guirlinger received a B.A. Degree from Aquinas
College in 1970 and an M.B.A. Degree from the Ohio State
University in 1986. Mr. Guirlinger I licensed as a General
Securities Representative (Series 7), General Securities
Principal ( Series 24), and a Uniform Securities Agent (Series
63).
Jeffrey C. Barton has been Chief Financial Officer of the
Company since October, 1992. He is also Vice President & CFO of
the Company's subsidiaries and of BSA. Effective January 1999
Mr. Barton was designated Principal of Buckeye Bancstocks, Inc.
From 1990 through 1998, Mr. Barton was also CFO of Saunders
Pearson Company, a contract financial management company. Mr.
Barton received a B.B.A. Degree from Ohio University in 1969 and
an M.B.A. Degree from Ohio University in 1972. Mr. Barton is a
Certified Public Accountant and is licensed as a Uniform
Securities Agent (Series 63).
Mark A. Davis is Vice President and Director of Research for
the Company and its subsidiaries. He is also Vice President of
BSA. He is a former Vice President of The Phoenix Scioto
Company, FS Management Company and Buckeye Bancstocks, Inc. Mr.
Davis is currently a registered principal for BSFS. He attended
Yale College, New Haven, Connecticut. Mr. Davis is licensed as a
Registered Options Principal (Series 4), Uniform Securities Agent
(Series 63), Municipal Securities Principal (Series 53), General
Securities Principal (Series 24), and General Securities
Representative (Series 7).
Sandra L. Quinn is a Director of the Company and Vice
President & Corporate Secretary. She is also Vice President &
Corporate Secretary of the Company's subsidiaries and of BSA.
She has been a Director of the Company and of BSA since 1993.
From October 1995 through 1998, Ms. Quinn served as Principal of
Buckeye Bancstocks, Inc. Ms. Quinn is a member of the American
Society of Corporate Secretaries. Ms. Quinn graduated
valedictorian from Bradford Business School. She began her
employment with the Company in May, 1991, and is licensed as a
Uniform Securities Agent (Series 63), Corporate Securities
Representative (Series 62), Uniform Investment Adviser
Representative (Series 65), and as an Investment Company/Variable
contracts Limited representative (Series 6).
Harry J. Ryan is Vice President & Director of Marketing of
the Company and of BSA. He joined the Company in January 1997.
Prior to his employment by the Company, he was the Vice President
of Marketing for LifeLine Shelter Systems, an Ohio based
manufacturer of mobile medical and dental clinics with clients
worldwide. Prior to his career in private sector marketing, Mr.
Ryan served for fourteen years as the Director of several
departments, for the Ohio Attorney General. Prominent among
these was his position as Director of Program Development, the
public relations and educational arm of the office, and chief
administrator of the Ohio Medical Fraud Department. He also
provided political direction to the Attorney General as his
Deputy Campaign Director. Prior to this, he served with the U.S.
Army and U.S. State Department in the American Embassy in
Teheran, Iran. Mr. Ryan holds a Bachelor of Arts degree from
Ohio Dominican College and a Master's of Business degree from
Central Michigan University. He is licensed as a Uniform
/Securities Agent (Series 63), and a General Securities
Representative (Series 7).
Edward E. Schmidt is Executive Vice President of the Company
and of BSA. Mr. Schmidt joined the Company in May 1997.
Previously, he served as President, CEO and Director of Capital
West Group, Inc., subsidiary of Capital Corp of the West, holding
the additional position of Senior Vice President. Prior to that
he served as Director of The Finley Group, Inc. Mr. Schmidt is a
Certified VIA consultant, holds a BS Business Administration
degree and is a graduate of the Pacific Coast Banking School,
University of Washington, Seattle, Washington. Mr. Schmidt is
licensed as a Corporate Securities Representative (Series 62),
and as a Uniform Securities Agent (Series 63).
Larry A. Beres became a Director of the Company in 1995. He
was formerly President of Formex, Inc., of Dayton, Ohio, a
supplier of systems to the plastics Industry. In 1999, Mr. Beres
accepted a position as Executive Vice President of Tooling
Technology Group of Dayton, Ohio. The firm is a supplier of
tooling to the plastics industry. Mr. Beres graduated from Kent
State University with a Bachelor of Science Degree in Chemistry
and attended the K.S.U MBA Program.
Roger D. Blackwell was elected to serve on the Company's
Board in February 1999. Dr. Blackwell is a Professor of
Marketing at The Fisher College of Business at The Ohio State University.
He is also president of Blackwell Associates, Inc., a consulting firm in
Columbus, Ohio, through which he works with many of America's most successful
companies.
Roger Blackwell was named "Outstanding Marketing Educator in
America" by Sales and Marketing Executives International and
"Marketer of the Year" by the American Marketing Association. He
also received the "Alumni Distinguished Teaching Award", the
highest award given by The Ohio State University. He was
cited by The New York Times in 1995 as one of the top
speakers on the lecture circuit, and is regularly quoted in publications;
such as, Business Week, USA Today, Forbes, and The Wall Street
Journal, and has appeared on numerous television programs
including CBS This Morning.
Dr. Blackwell received his B.S. and M.S. degrees from The
University of Missouri and his Ph.D. from Northwestern
University. He also received an honorary doctorate degree from
The Cincinnati College of Mortuary Science. He serves on
numerous boards of both privately and publicly held corporations
including Airnet Systems, Applied Industrial Technologies
(formerly Bearings, Inc.), Checkpoint Systems, Flex-Funds, Max & Erma's
Restaurants, Worthington Foods, and Intimate Brands.
Robert K. Butner became a Director of the Company in 1993.
Mr. Butner is also a Director of BSA. Mr. Butner is retired from
the faculty of Ohio University where he was a Professor of
Mathematics for 39 years and Chairman of the Mathematics
Department. Upon retirement, Mr. Butner was confirmed Emeritus
Professor of Mathematics. Mr. Butner received a B.S. Degree in
1943 with Phi Beta Kappa honors and an M.S. Degree in 1949 and a
Ph.D. Degree in 1952 from the State University of Iowa. From
1943 to 1946, Dr. Butner served as an officer in the United
States Navy. Since retirement, Dr. Butner has continued his
long-term involvement with the Independent Study Program at Ohio
University, writing a number of Study Guides for correspondence
courses in Mathematics.
Dr. James G. Mathias became a Director of the Company in
1993. Dr. Mathias is also a Director of BSA. Since 1988, Dr.
Mathias has been a veterinarian practicing in Tipp City, Ohio,
where he is the owner of the Tipp City Animal Hospital and
Wellness Center. Dr. Mathias attended the University of Texas
and completed his education at the Ohio State University,
graduating from the College of Veterinary Medicine in 1978. He
was a member of the Honor Society of Phi Zeta, a Veterinary Honor
Society. Dr. Mathias is also founder and president of the Dayton
North Women's Center and is a speaker on Ratite Medicine. He is
currently on the Veterinary Advisory Board of the Iams Company.
John Rettig was elected to the Board of Directors of Company
in August 1998. He has been owner and operator of The Quality
Cleaners since 1970. The volume Dry-cleaning Company does
residential, commercial and fires restoration cleaning. Mr.
Rettig has achieved the recognized Certified Environmental Dry
cleaner status. Mr. Rettig attended Bowling Green State
University from 1960 through 1961 studying Business
Administration. In 1961, Mr. Rettig volunteered for the US Army
draft and served in the Adjutant General Corps. until 1963.
During his tenure in the service, Mr. Rettig served as team chief
in a Chemical, Biological and Radiological Warfare Team. During
his service, he continued his education with a US Army
Correspondence School Business Course. From 1988 until 1998, Mr.
Rettig served as Chairman of Sandusky county Republican Party.
Mr. Rettig has also served on many boards and county service
organizations.
Harvey J. Thatcher became a Director of the Company in 1991.
He was formerly President of Thatcher Insurance Agency, Inc.
Since retirement from Thatcher Insurance, Inc., he is engaged in
the refinancing of homes as a Mortgage Broker. He also serves as
Director of the following organizations: BSA (since 1991),
Thatcher Lands, Inc., (since 1976), German Mutual Insurance
Company (since 1987), Tri-State Venture Group (since 1994), and
Tendasoft, Inc. (Since 1998).
Jean Thiergartner became a Director of the Company in 1991,
as well as a Director of BSA. Ms. Thiergartner is also the
Secretary-Treasurer of Thiergartner Farms, Inc., for which she
worked for more than 30 years. She is past Treasurer of the Ohio
Beef Council, past President of the Ohio Cattle Womens'
Association, has been a member and past President of the Union
County Health Board for over 14 years and is a past delegate to
the State Convention for the Ohio Farm Bureau. She is a member
of St. Paul Lutheran Church and active on many committees,
including the Parsonage Building Committee. She is presently
serving on the Advisory Board for Ohio Hi-Point and Clark Tech
Adult Education.
Based solely upon a review of Forms 3 and 4 furnished to the
Company under Rule 16a-3(d), there were no reports filed late
during the fiscal year ended February 28, 1999.
ITEM 10: Executive Compensation
Summary Compensation Table
Name of
Principal Year Salary Bonus(B) Other* Awards Awards LTIP All
& Position Stock Options(A) Payouts Other
Michael E.
Guirlinger,
President 1998 100,000 91,812 46,828 81,010 sh
Mark A. Davis,
VP 1998 85,000 90,406 62,589 40,000 sh
Edward E.
Schmidt, EVP 1998 75,000 20,870 4,905 6,000 sh
Michael E.
Guirlinger,
President 1997 80,455 36,861 35,202 45,000 sh
Mark A. Davis,
VP 1997 61,923 58,890 61,066 30,000 sh
Edward E.
Schmidt, EVP 1997 62,019 3,140 15,000 sh 94,102(A)
Michael E.
Guirlinger,
President 1996 75,000 11,752 1,655 25,000 sh
* Commissions
(A) During the fiscal year ended February 28, 1999, options were
granted, based on financial performance for the year ended
February 28, 1998, with terms of ten years and exercise prices of
$14.75 to employees and independent contractors including Msrs.
Guirlinger, Davis and Schmidt. Mr. Guirlinger was awarded 40,505
stock options which vested immediately and 40,505 stock options
which vest over five years. Mr. Davis was awarded 20,000 stock
options which vested immediately and 20,000 stock options which
vest over five years. Mr. Schmidt was awarded 3,000 stock
options which vested immediately and 3,000 stock options which
vest over five years. During the fiscal year ended February 28,
1998, Mr. Guirlinger was awarded 22,500 stock options which
vested immediately and 22,500 stock options which vest over five
years, at an exercise price of $2.125. These stock options
expire on March 7, 2007. Mr. Davis was awarded 15,000 stock
options which vested immediately and 15,000 stock options which
vest over five years, at an exercise price of $2.125. Mr.
Schmidt was awarded 7,500 stock options which vested immediately
and 7,500 stock options which vest over five years, at an
exercise price of $2.375. Mr. Schmidt exercised 7,500 of his
options resulting in compensation of the difference between the
exercise price and fair market value at date of exercise of
$94,102. During the fiscal year ended February 28, 1997, Mr.
Guirlinger was awarded 25,000 stock options effective February
29, 1996 which vested immediately. These stock options expire
February 28, 2006, with an exercise price of $2.875. At February
28, 1999 Mr. Guirlinger has 179,305 stock options which are
exercisable and 71,705 stock options which vest over five years.
Mr. Davis has 124,800 stock options which are exercisable and
45,200 stock options which vest over five years. Mr. Schmidt has
4,500 stock options which are exercisable and 9,000 stock options
which vest over five years.
(B) Bonuses paid in each year are based on financial performance
for the previous year. Therefore, bonuses paid during calendar
year 1998 are based on financial performance for the year ended
February 28, 1998.
No other officer of the Company received in excess of $100,000
compensation.
Director Compensation
Each director who is not an employee of the Company is entitled
to receive a fee of $500 plus travel expenses for each directors'
meeting attended.
ITEM 11: Security Ownership of Certain Beneficial Owners
and Management
The following sets forth, as of March 31, 1999, certain
information concerning stock ownership of all persons known
by the Company to own beneficially five
percent or more of the outstanding shares of any class of the
Company's Common Stock, each director and all officers and
directors of the Company as a group, and the percentage of voting
power (assuming exercise of all options which are
currently exercisable):
Class A Options/ Class A Class C
Shares(A) Warrants Total Class A Shares Class C Combined
Number Number Number % Number % %
Jeffrey C. Barton 5,000 20,000 25,000 * *
290 E. Kossuth Street
Columbus, Ohio 43206
Larry A. Beres 40,000 20,000 60,000 * *
7811 Winding Way South
Tipp City, Ohio 45371
Robert K. Butner 371,579 45,000 416,579 4.6% 4.4%
12 McGuffey Lane
Athens, Ohio 45701
James T. Coppage 78,280 78,280 * 21,720 9.1% 1.1%
6001 River Road,
Suite 402
Columbus, Georgia 31904
Mark A. Davis 31,728 131,800 163,528 1.8% 1.7%
6215 Northgate Rd. Apt.D
Columbus, Ohio 43229
First Eldorado 317,034 317,034 3.5% 87,966 36.7% 4.3%
Bancshares
946 Fourth Street
Eldorado, IL 62930
Michael E. Guirlinger
5321 C Drumcally Lane
Dublin, Ohio 43017
22,017 191,904 213,931 2.3% 2.3%
James G. Mathias 94,360 45,000 139,360 1.5% 4,340 1.8% 1.5%
7707 Winding Way South
Tipp City, Ohio 45371
Sandra L. Quinn 10,500 24,500 35,000 * *
6288 Chelmsford Sq. E.
Columbus, Ohio 43229
John Rettig 30,290 30,290 * *
826 Third Avenue
P.O. Box 972
Fremont, Ohio 43420
Harry J. Ryan 13,500 6,000 19,500 * *
3888 James River Road
New Albany, Ohio 43054
Edward E. Schmidt 6,600 6,600 * *
5544 Turnberry Drive
Westerrville, Ohio 43082
Harvey J. Thatcher
135 East Central
Van Wert, Ohio 45891
57,692 45,000 102,692 1.1% 1.1%
L. Jean Thiergartner
20896 Orchard Road
P.O. Box 387
Milford Center, OH 43045
250,500 45,000 295,500 3.2% 3.2%
John W. Walden 156,560 156,560 1.7% 43,440 18.1% 2.1%
1132 Broadway
Columbus, Georgia 31901
Carol A. Wright 82,253 82,253 * 22,822 9.5% 1.1%
755 Wagon Wheel Drive
Northport, MI 49670
Directors and Officers as a
Group (12 persons)
927,176 580,804 1,507,980 16.5% 4,340 1.8% 16.1%
*less than 1% of Class
(A) Unless otherwise indicated, the sole voting and investment
power is held by the persons named. Mr. Butner disclaims
beneficial ownership of 130,000 Class A shares held in trust for
Phyllis F. Butner.
ITEM 12: Certain Relationships and Related Transactions - None
ITEM 13: Exhibits and Reports on Form 8-K
(a) Index of Exhibits
Exhibit
*2.01 Plan and Agreement of Reorganization between the
Company and First Scioto Company.
*2.02 Agreement dated November 4, 1992 for purchase of First
Scioto Financial Services Stock by HAG.
*2.03 Agreement and Plan of Reorganization, dated January 7,
1993 between the Company and HAG.
*3.01 Amended and Restated Articles of Incorporation of
Heartland Financial Group, Inc.
*3.02 Bylaws of the Heartland Financial Group, Inc.
*4.01 Specimen Class A Common Stock Certificate.
*10.03 The Heartland Incentive Compensation Plan.
*10.04 1993 Non-Qualified and Incentive Stock Option Plan.
*22.01 List of Subsidiaries
(b) Reports on Form 8-K: None
* Indicates Exhibits previously filed with the Securities and
Exchange Commission and incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) 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.
/S/Michael E. Guirlinger
By Michael E. Guirlinger May 4, 1999
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
/S/Michael E. Guirlinger President, Treasurer, May 4, 1999
Michael E. Guirlinger CEO and Director
/S/Sandra L. Quinn Secretary and Director May 4, 1999
Sandra L. Quinn
/S/Jeffrey C. Barton Chief Financial Officer May 4, 1999
Jeffrey C. Barton
/S/Larry A. Beres Director May 4, 1999
Larry A. Beres
/S/Robert K. Butner Director May 4, 1999
Robert K. Butner
/S/James G. Mathias Director May 4, 1999
James G. Mathias
/S/John Rettig Director May 4, 1999
John Rettig
/S/Harvey Thatcher Director May 4, 1999
Harvey Thatcher
/S/Jean Thiergartner Director May 4, 1999
L. Jean Thiergartner
Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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