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 May 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 June 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 8-19
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 20-25
Part II Other Information:
Item 1 through Item 6 26
Signatures 27
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 three months ended May 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 MAY 31, 1999
(UNAUDITED)
ASSETS
Cash $ 1,662,122
Trading portfolio:
Marketable equity securities, at market value 10,923,898
Not readily marketable equity securities,
at estimated fair value 439,266
Mortgage participation notes, at market value 70,000
Accounts receivable:
Affiliates 47,447
Clients 87,101
Clearing organization and other 128,096
Notes and interest receivable 750
Equity investment in Shareholderdirect.com 522,720
Property and equipment, net of accumulated
depreciation of $175,999 213,790
Goodwill, net of accumulated amortization of $272,432 357,535
Deposits and other 202,915
Total assets $ 14,655,640
LIABILITIES
Unearned commisions $ 117,900
Accounts payable to broker-dealers and other 21,210
Accrued expenses 598,713
Deferred taxes 981,000
Total liabilities 1,718,823
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 9,263,359
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 4,058,861
Total shareholders' equity 12,936,816
Total liabilities and shareholders' equity $ 14,655,640
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MAY 31, 1999 and 1998
(UNAUDITED)
1999 1998
REVENUES:
Trading profits $ 460,570 $ 1,386,274
Management fees and commissions 764,387 1,004,105
Investment banking 312,127 448,454
Dividends 48,991 45,446
Interest and other 11,055 9,570
Total revenues 1,597,130 2,893,849
EXPENSES:
Brokers' commission 347,398 759,713
Salaries, benefits and payroll taxes 233,875 134,348
Accrued incentive compensation - 199,909
Professional fees 147,791 110,581
Interest 1,220 15,488
General and administrative 341,545 212,353
Total expenses 1,071,828 1,432,392
INCOME BEFORE TAXES 525,302 1,461,457
PROVISION FOR INCOME TAXES 165,000 500,000
INCOME BEFORE EQUITY IN NET EARNINGS
OF AFFILIATED COMPANY 360,302 961,457
Equity in net earnings (losses) of
Shareholderdirect.com (4,200) 27,740
NET INCOME $ 356,102 $ 989,197
BASIC EARNINGS PER SHARE $ 0.04 $ 0.12
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.11
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 THREE MONTHS ENDED MAY 31, 1999
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance 2/28/99 $9,190,419 - ($385,403) $3,702,759 $12,507,775
Exercise of stock options 5,313 - - - 5,313
Issuance of warrants 67,627 - - - 67,627
Net income - - - 356,102 356,102
Balance 5/31/99 $9,263,359 - ($385,403) $4,058,861 $12,936,816
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 THREE MONTHS ENDED MAY 31, 1999 and 1998
(UNAUDITED)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 356,102 $ 989,197
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Depreciation and amortization 24,389 22,244
Deferred taxes (85,000) 490,000
Equity in undistributed earnings (losses) of
Shareholderdirect.com 4,200 (27,740)
Unrealized loss (gain) 219,851 (1,132,315)
(Increase) decrease in certain assets-
Trading profits, net 657,025 (1,211,742)
Mortgage participation notes 107,000
Accounts receivable clients (24,149) (513,265)
Other accounts receivable 139,608 10,778
Other assets 11,982 (52,028)
Increase (decrease) in certain liabilities-
Margin accounts payable to broker-dealers 1,175,391
Unearned commissions (149,400) 49,450
Accounts payable to broker-dealers and other 14,623 233,526
Accrued expenses and other 8,603 (412,788)
Net cash (used in) provided by operating activities 1,284,834 (379,292)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable - 825
Issuance of notes receivable 2,350 (3,815)
Collection of dividends receivable - 25,000
Purchase of property and equipment (23,788) (12,850)
Net cash (used in) provided by investing activities (21,438) 9,160
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 5,313 1,426
Issuance of warrants 67,627 -
Advances from affiliates 5,126 69,840
Advances to affiliates (11,672) (123,700)
Net cash provided by (used in) financing activities 66,394 (52,434)
NET INCREASE (DECREASE) IN CASH 1,329,789 (422,566)
CASH, BEGINNING OF PERIOD 332,332 471,756
CASH, END OF PERIOD $ 1,662,121 $ 49,190
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1999 1998
Cash paid during the period for:
Interest $ 1,220 $ 15,488
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 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, brokerage 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). 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 Quarter Ended May 31, 1999
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $356,102 8,451,341 $ .04
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 306,003 (.00)
Warrants 80,043 (.00)
Diluted Earnings $356,102 8,837,386 $ .04
Stock options and warrants to purchase 10,000 shares at an exercise
price of $13.37 per share, 328,110 shares at an exercise price of
$14.75 per share and 3,000 shares at an exercise price of $16.875
per share were not included in the computation of diluted earnings
per share for the quarter ended May 31, 1999 because the options'
exercise prices were greater than the average market price of the
common stock, and therefore, their inclusion would have been anti-dilutive.
For the Quarter Ended May 31, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $989,197 8,419,283 $ .12
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 599,394 (.01)
Warrants 141,959 (.00)
Diluted Earnings $989,197 9,160,636 $ .11
Stock options to purchase 3,000 shares at an exercise price of
$16.875 per share were not included in the computation of diluted
earnings per share for the quarter ended May 31, 1998 because the
options' exercise prices were greater than the average market price
of the common stock, and therefore, their inclusion would have been
anti-dilutive.
Equity Investment in Shareholderdirect.com, Inc.
Shareholderdirect.com, Inc., is an Ohio corporation establishing an
electronic stock information service and alternative trading
system. Shareholderdirect.com is under common management with the
Company. The Company currently holds 16% of the outstanding common
stock of Shareholderdirect.com. The Company's investment in
Shareholderdirect.com 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 May 31, 1999 consist of bank stocks
at market value, as follows:
Traded on national securities markets $ 7,636,733
Not traded on national securities
markets, but with readily ascertainable
market value 3,287,165
Total marketable equity securities $10,923,898
As of May 31, 1999, the Company had one investment representing
10.4% 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 May 31, 1999 were
$439,266 at fair value with a cost of $380,060.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company had no margin accounts payable to broker-dealers as of
May 31, 1999, but had $1,442,298 payable as of May 31, 1998. These
accounts bear interest at variable rates which averaged
approximately 7.8% at May 31, 1998. These margin accounts were
secured by the securities held by broker-dealers.
(6) RELATED PARTY TRANSACTIONS
Operating Expenses
The Company and Shareholderdirect.com are under common management.
Certain expenses are paid by the Company and allocated to
Shareholderdirect.com 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 Shareholderdirect.com were $38,000 and $46,991 for the
quarters ended May 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 provisions for income taxes for the quarters ended May 31, 1999
and 1998 are composed of the following:
1999 1998
Current income taxes $ 250,000 $ 10,000
Deferred income taxes (85,000) 490,000
Provision for income taxes $ 165,000 $ 500,000
Deferred tax assets and liabilities consist of the following at May
31, 1999 and 1998:
1999 1998
Deferred tax benefit of NOL carryforward $ 1,500 $ 260,000
Deferred tax liabilities on unrealized gains
on securities owned (982,500) (2,000,000)
Deferred taxes $(981,000) $(1,740,000)
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office
equipment under operating leases. Total lease expenses were
approximately $158,000 in 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 quarter ended May 31, 1999 but provided $115,000 for the
quarter ended May 31, 1998.
Stock Option Plan
The Company has a Non-Qualified and Incentive Stock Option Plan
which authorizes the grant of options to purchase an aggregate of
2,500,000 shares of the Company's Class A Common Stock. The Plan
provides that the Board of Directors, or a committee appointed by
the Board, may grant options and otherwise administer the Option
Plan. The exercise price of each incentive stock option or
non-qualified stock option must be at least 100% of the fair market
value of the Class A Shares at the date of grant, and no such
option may be exercisable for more than 10 years after the date of
grant. However, the exercise price of each incentive stock option
granted to any shareholder possessing more than 10% of the combined
voting power of all classes of capital stock of the Company on the
date of grant must not be less than 110% of the fair market value
on that date, and no such option may be exercisable more than 5
years after the date of grant.
Effective March 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 for warrants issued to directors. Compensation expense
is recorded for warrants issued to consultants based on the fair
value of the warrants, as computed in accordance with Statement of
Financial Accounting Standards No. 123 (FAS 123). Had compensation
cost for all of the Company's stock-based compensation plans been
determined in accordance with 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:
Quarter Ended
May 31, 1999 May 31, 1998
Net income (loss)
As reported $356,102 $ 989,197
Pro forma ($252,659) ($1,154,471)
Basic earnings per share
As reported $ 0.04 $ 0.12
Pro forma ($ 0.03) ($0.14)
Diluted earnings per share
As reported $ 0.04 $ 0.11
Pro forma ($ 0.03) ($0.13)
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 May 31, 1999 and changes during the quarter is
presented below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1999 951,010 $ 6.098 243,000 $ 6.118
Granted 166,500 $ 4.500 82,000 $ 4.499
Exercised (2,500) $ 2.125
Forfeited (2,500) $ 2.125
Outstanding May 31, 1999 1,112,510 $ 5.872 325,000 $ 5.710
Exercisable May 31, 1999 753,256 $ 5.511 323,800 $ 5.713
Weighted-average fair value
of options and warrants
granted during the quarter,
computed in accordance
with FAS 123 $ 3.083 $ 3.081
The following table summarizes information about fixed stock
options and warrants outstanding at May 31, 1999:
Options Warrants
Number outstanding 1,112,510 325,000
Weighted-average remaining
contractual life in years 7.76 8.12
Weighted-average exercise price $5.872 $5.710
Number exercisable 753,256 323,800
(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 $1,765,898 as of May 31, 1999, which was in excess of
its required minimum net capital of $100,000. The ratio of
aggregate indebtedness to net capital was 0.6 to 1 as of May 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 May 31, 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 quarter ended May 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 quarter ended May 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) $249,403 $211,167 $460,570
Fees & Commissions $96,074 661,641 6,672 764,387
Investment banking $2,500 181,914 $127,713 312,127
Dividends 4,574 44,417 48,991
Intersegment revenues _
Interest revenue 6,236 4,819 11,055
Interest expense 739 481 1,220
Depreciation and
amortization 3,917 3,917 12,548 4,007 24,389
Segment income
(loss) before taxes(102,364)(111,924) 536,125 (56,650) 260,115 525,302
Equity in net
earnings of
affiliated company (4,200) (4,200)
Segment assets 57,448 102,309 3,095,471 144,418 11,255,994
14,655,640
Expenditures for
segment assets 5,947 5,947 5,947 5,947 23,788
Financial information for the quarter ended May 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) $279,417 $1,106,857 $1,386,274
Fees & Commissions $111,227 878,152 14,726 1,004,105
Investment banking $8,350 270,833 $169,271 448,454
Dividends 7,969 37,477 45,446
Intersegment revenues _
Interest revenue 5,751 3,819 9,570
Interest expense 9,288 6,200 15,488
Depreciation and
amortization 3,381 3,381 12,101 3,381 22,244
Segment income
(loss) before taxes (60,454) (22,370) 721,608 (334,007) 1,156,679 1,461,457
Equity in net earnings of
affiliated company 27,740 27,740
Segment assets 56,836 109,887 2,332,685 570,101 15,220,696 18,290,206
Expenditures for
segment assets 3,212 3,212 3,213 3,213 12,850
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Quarter Ended May 31, 1999, Compared to the Quarter Ended May 31, 1998
Revenues for the quarter ended May 31, 1999 decreased to $1,597,130
compared to $2,893,849 for the quarter ended May 31, 1998, a
decrease of 45%. This decrease results primarily from decreases in
revenue from trading profits, management fees and commissions and
investment banking.
Revenues from trading profits were $460,570 for the quarter ended
May 31, 1999 compared to $1,386,274 for the quarter ended May 31,
1998, a decrease of 67%. This represents an annual rate of return
on the average portfolio of 16% for the quarter ended May 31, 1999
compared to 38% for the quarter ended May 31, 1998 due primarily to
decreases in market values. Market values in the small-capitalization
banking sector experienced a significant correction
in the second fiscal quarter of 1998 and have not recovered
significantly through May 31, 1999. 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 fluctuations
will impact the performance of its trading portfolios.
The Company generated management fees and commission revenue of
$764,387 for the quarter ended May 31, 1999 compared to $1,004,105
for the quarter ended May 31, 1998, a decrease of 24%. 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 May 31, 1999
decreased to $312,127 compared to $448,454 for the quarter ended
May 31, 1998, a decrease of 30%. Investment banking revenue is
recorded upon completion of the underwriting. Therefore, the
revenue for the two quarters reflect the transactions completed
during the respective quarters.
Operating expenses for the quarter ended May 31, 1999, decreased to
$1,071,828 compared to $1,432,392 for the quarter ended May 31,
1998, a decrease of 25%. Brokers' commission expenses decreased to
$347,398 for the quarter ended May 31, 1999 compared to $759,713
for the quarter ended May 31, 1998, a decrease of 54%. This
decrease results from commission expenses related to management
fees and commission revenue discussed above. Salaries, benefits,
and payroll taxes increased to $233,875 for the quarter ended May
31, 1999 compared to $134,348 for the quarter ended May 31, 1998,
an increase of 74%. This increase reflects management's decision
to increase staffing levels to establish additional revenue sources
in the future. Accrued incentive compensation decreased to zero
for the quarter ended May 31, 1999 compared to $199,909 for the
quarter ended May 31, 1998, a decrease of 100%. Incentive
compensation was not accrued because year to date profit does not
exceed a 15% return on shareholders' equity, the threshold for
accruals under the plan. Professional fees increased to $147,791
for the quarter ended May 31, 1999 compared to $110,581 for the
quarter ended May 31, 1998, an increase of 34%. 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. General and administrative expenses
increased to $341,545 for the quarter ended May 31, 1999 compared
to $212,353 for the quarter ended May 31, 1998, an increase of 61%.
This increase is primarily the result of costs incurred to
establish the Company's world wide web site on the Internet, and
advertising and printing costs.
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 $4,200 for the
quarter ended May 31, 1999 compared to earnings of $27,740 for the
quarter ended May 31, 1998.
Liquidity and Capital Resources
Approximately 33% 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 67% of the
Company's trading portfolio is readily marketable, providing a high
degree of liquidity. Investments in bank securities traded on
national securities markets and securities not traded on national
securities markets, but with readily ascertainable market values
are valued at market value. Other bank securities for which market
quotations are not readily available, due to infrequency of
transactions, are valued at fair value as determined in good faith
by management of the Company. While management employs objective
criteria to ascertain these values, there is no independent
benchmark by which the values assigned by management can be judged.
As of May 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 May 31, 1999, the Company had no short security positions.
Short security positions do not expose the Company to credit risk
since the counterparty is not obligated to perform.
At May 31, 1999, the Company had not written any option contracts.
Short option positions do not expose the Company to credit risk
since the counterparty is not obligated to perform.
The Company did not own any options as of May 31, 1999. The
Company did not experience any credit losses due to the failure of
any counterparties to perform during the quarter ended May 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 $1,329,789 during the quarter ended
May 31, 1999. Net cash provided by operating activities was
$1,352,461. The primary source of this cash flow was liquidation
of certain securities in the trading portfolio and the result of
unrealized losses which are included in net income but do not use
cash. These sources of cash flow were offset by operating
activities, primarily a decrease in unearned commissions.
Investing activities used $21,438 of cash during the quarter ended
May 31, 1999, with the primary use being the purchase of computer
equipment.
Financing activities used $1,234 of cash during the quarter ended
May 31, 1999, primarily to make advances to affiliates.
Historically, the operations of the Company have been funded by
returns on investments, raising of capital, and limited bank
financing. Recently, the Company has diversified its revenue
sources primarily by adding an investment banking division and
market making activities. 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, 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 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.
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of
Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a) Furnish the exhibits required by
Item 601 of Regulation S-B - None
b) Reports on Form 8-K - None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE BANC STOCK GROUP, INC.
(Registrant)
Date July 13, 1999 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and
Chief Executive Officer
Date July 13, 1999 /S/ Jeffrey C. Barton
Jeffrey C. Barton
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
<RESTATED>
<CIK> 0000909108
<NAME> 0
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-START> MAR-01-1999
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,662,122
<RECEIVABLES> 262,644
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 11,433,164
<PP&E> 213,790
<TOTAL-ASSETS> 14,655,640
<SHORT-TERM> 0
<PAYABLES> 737,823
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,877,956
<OTHER-SE> 4,058,861
[TOTAL-LIABILITIES-AND-EQUITY] 14,655,640
<TRADING-REVENUE> 460,570
<INTEREST-DIVIDENDS> 60,046
<COMMISSIONS> 244,784
<INVESTMENT-BANKING-REVENUES> 312,127
<FEE-REVENUE> 519,603
<INTEREST-EXPENSE> 1,220
<COMPENSATION> 233,875
<INCOME-PRETAX> 525,302
<INCOME-PRE-EXTRAORDINARY> 356,102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 356,102
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
