U.S. Securities and Exchange Commission
Washington D.C. 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2000
Commission file number 000-24498
THE BANC STOCK GROUP, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0190407
(State of incorporation) (IRS Employer Identification No.)
1105 SCHROCK ROAD, COLUMBUS, OHIO 43229
(Address of principal executive offices)
(614) 848-5100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of September 30, 2000:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 8,267,612
Class C shares, No Par Value 120,000
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
Yes No X
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 8-21
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 22-28
Part II Other Information:
Item 4 and Item 6 28
Signatures 29
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying consolidated financial statements of The Banc
Stock Group, Inc. (the "Company") 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 six months ended August 31, 2000 may not be
indicative of the results of operations for the year ending
February 28, 2001. Since the accompanying consolidated financial
statements have been prepared in accordance with Item 310 of
Regulation S-B, they do not contain all information and footnotes
normally contained in annual consolidated financial statements;
accordingly, they should be read in conjunction with the
consolidated financial statements and notes thereto appearing in
the Company's Annual Report.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF AUGUST 31, 2000
(UNAUDITED)
ASSETS
Cash $ 7,664,927
Trading portfolio:
Marketable equity securities, at market value 2,612,241
Not readily marketable equity securities, at
estimated fair value 230,288
Mortgage participation notes, at market value 284,600
Accounts receivable:
Affiliates 86,196
Pending settlements and other 164,224
Refundable income taxes 539,000
Equity investment in ShareholderOnline, Inc. 290,200
Property & equipment, net of accumulated depreciation of $247,299 160,456
Deposits and other 157,601
Total assets $ 12,189,733
LIABILITIES
Accounts payable to broker-dealers and other $ 122,874
Secuities sold not yet purchased 1,072,616
Accrued expenses 476,874
Total liabilities 1,672,364
SHAREHOLDERS' EQUITY
Preference stock, 50,000,000 shares authorized,
none issued or outstanding -
Common stock:
Class A, no par value, 149,880,000 shares authorized,
8,639,862 shares issued and 8,267,612 shares outstanding 9,467,203
Class C, no par value, 120,000 shares
authorized, issued and outstanding -
Treasury stock, at cost
(372,250 Class A shares) (489,256)
Deferred compensation (89,451)
Retained earnings 1,628,873
Total shareholders' equity 10,517,369
Total liabilities and shareholders' equity $ 12,189,733
The accompanying notes are an inteegral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
FOR THE SIX MONTHS ENDED AUGUST 31, 2000 and 1999
(UNAUDITED)
6 Months Ended 3 Months Ended
AUGUST 2000 AUGUST 1999 AUGUST 2000 AUGUST 1999
REVENUES AND TRADING GAINS and LOSSES:
Trading profits (losses) $(938,331) $748,063 $(184,128) $287,493
Management fees and commissions 722,122 1,445,442 267,315 681,053
Investment banking 32,982 312,127 - -
Dividends 165,392 117,667 105,641 68,676
Interest & other 28,380 21,163 15,247 10,108
Total revenues and trading
gains and losses 10,545 2,644,462 204,075 1,047,330
EXPENSES:
Brokers' commission 380,627 595,898 181,717 248,500
Salaries, benefits and
payroll taxes 693,503 515,153 339,381 281,278
Professional fees 224,066 233,256 102,878 85,465
Interest 3,897 1,521 266 301
Write off of goodwill of
liquidated subsidiary 309,745 - - -
General and administrative 498,842 612,572 173,485 271,027
Total expenses 2,110,680 1,958,400 797,727 886,571
INCOME (LOSS) BEFORE TAXES (2,100,135) 686,062 (593,652) 160,759
INCOME TAX PROVISION (CREDIT) (632,500) 210,000 (482,000) 45,000
INCOME (LOSS) BEFORE EQUITY IN
NET EARNINGS OF AFFILIATED
COMPANY (1,467,635) 476,062 (111,652) 115,759
Equity in net losses of (60,680) (13,010) - (8,810)
ShareholderOnline, Inc.
NET INCOME (LOSS) $ (1,528,315) $ 463,052 $(111,652) $106,949
BASIC EARNINGS (LOSS) PER SHARE $(0.18) $ 0.05 $(0.01) $ 0.01
DILUTED EARNINGS (LOSS) PER SHARE $(0.18) $ 0.05 $(0.01) $ 0.01
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED AUGUST 31, 2000
(UNAUDITED)
Treasury Deferred Retained
Class A Class C Stock Compensation Earnings Total
Balance 2/29/00 $9,317,203 - $(385,403) $(22,778) $3,157,188 $12,066,210
Stock options and
warrants compensation
expense 68,500 - - - - 68,500
Deferred compensation
related to stock options
and warrants 81,500 - - (81,500) - -
Amortization of deferred
compensation - - - 14,827 - 14,827
Purchase of treasury stock (103,853) (103,853)
Net loss - - - - (1,528,315) (1,528,315)
Balance 8/31/00 $9,467,203 - $(489,256) $(89,451) $1,628,87 $10,517,370
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 2000 and 1999
(UNAUDITED)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,528,315) $ 463,052
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization 39,589 49,054
Write off of goodwill of liquidated subsidiary 309,745 -
Stock options and warrants compensation expense 68,500 67,627
Amortization of deferred compensation 14,827 -
Deferred taxes (150,500) (415,000)
Equity in undistributed losses of
ShareholderOnline, Inc. 60,680 13,010
Unrealized loss 322,300 1,231,182
(Increase) decrease in certain assets-
Trading profits, net 4,261,774 2,080,166
Mortgage participation notes (35,000) 14,000
Accounts receivable clients 62,922 (77,132)
Other accounts receivable 854,858 200,036
Refundable income taxes (282,000) -
Other assets 74,650 11,203
Increase (decrease) in certain liabilities-
Securities sold not yet purchased 1,072,616 25,683
Unearned commissions (94,800) (143,300)
Accounts payable to broker-dealers and other 43,140 44,598
Accrued expenses and other (168,356) (80,363)
Net cash provided by operating activities 4,926,630 3,483,816
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of notes receivable - (2,000)
Purchase of property and equipment (13,649) (47,592)
Disposal of property 22,634 -
Net cash provided by (used in)
investing activities 8,985 (49,592)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - 13,600
Purchase of treasury stock (103,853) -
Advances from affiliates - 10,140
Advances to affiliates (68,106) (24,668)
Net cash used in financing activities (171,959) (928)
NET INCREASE IN CASH 4,763,656 3,433,296
CASH, BEGINNING OF PERIOD 2,901,271 332,332
CASH, END OF PERIOD $7,664,927 $3,765,628
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,897 $ 1,521
Income taxes - 450,000
The accompanying notes are an integral part of these consolidated
financial statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2000
(1) ORGANIZATION AND NATURE OF BUSINESS
The Banc Stock Group, Inc. (the Company) is a Florida corporation
incorporated in April, 1990. The Company has two subsidiary
operating companies.
Diamond Hill Capital Management, Inc., (DHCM), formerly Heartland
Advisory Group, Inc., is a wholly-owned subsidiary of the Company
and a registered investment adviser. DHCM is the Investment
Adviser to the Diamond Hill Focus Fund and The Banc Stock Group
Fund, open-end mutual funds, and offers advisory accounts to
qualified investors.
Banc Stock Financial Services, Inc. (BSFS), an Ohio corporation, is
a wholly-owned subsidiary of DHCM and 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 and offers advisory accounts
to qualified investors.
Buckeye Bancstocks, Inc., was an Ohio corporation established in
1977, to act as an intrastate broker-dealer trading primarily in
Ohio bank stocks until May 31, 2000, when it was liquidated.
(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, DHCM 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 Trading Portfolio
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 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 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 Six Months Ended August 31, 2000
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings ($1,528,315) 8,446,071 ($ .18)
Diluted Earnings ($1,528,315) 8,446,071 ($ .18)
For the Quarter Ended August 31, 2000
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings ($111,652) 8,435,324 ($ .01)
Diluted Earnings ($111,652) 8,435,324 ($ .01)
For the Six Months Ended August 31, 1999
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $463,052 8,453,737 $ .05
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 282,040 (.00)
Warrants 74,963 (.00)
Diluted Earnings $463,052 8,810,740 $ .05
For the Quarter Ended August 31, 1999
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $106,949 8,456,159 $ .01
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 253,983 (.00)
Warrants 67,148 (.00)
Diluted Earnings $106,949 8,777,290 $ .01
Equity Investment in ShareholderOnline, Inc.
ShareholderOnline, Inc., an Ohio corporation establishing an
electronic stock information service and alternative trading
system, was under common management with the Company through April
27, 2000. Because of the common management, the Company's 16%
ownership investment in ShareholderOnline, Inc., was accounted for
on the equity method of accounting through the end of April 2000.
During 1999, ShareholderOnline, Inc., formalized its plans to raise
additional capital to launch its operations. Also, the Boards of
Directors of the Company and ShareholderOnline, Inc., recognized
that separate management was required to effectively execute
ShareholderOnline Inc.'s business plan, and on April 27, 2000, the
President and CEO of ShareholderOnline, Inc., resigned his
positions with the Company to devote his full attention to
ShareholderOnline, Inc. During 2000, ShareholderOnline, Inc.,
began pursuing separate investment and financing alternatives. The
use of the equity method of accounting for the investment in
ShareholderOnline, Inc., was discontinued as of May 1, 2000.
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
On July 17, 2000, the Company announced a program to repurchase up
to 2,000,000 shares of its common stock through open market
purchases and privately negotiated transactions, if any. During
the quarter ended August 31, 2000, the Company purchased 69,205
shares for $103,853.
Authorization of Preference Stock
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of "blank check" preference stock with such
designations, rights and preferences as may be determined from time
to time by the Company's Board of Directors. The Board of
Directors is empowered, without shareholder approval, to issue
preference stock with dividend, liquidation, conversion, voting, or
other rights which could adversely affect the voting or other
rights of the holders of the common stock.
(4) TRADING PORTFOLIO
Marketable equity securities at August 31, 2000 consist of bank
stocks at market value, as follows:
Traded on national securities markets $ 946,746
Not traded on national securities
markets, but with readily ascertainable
market value 1,665,495
Total marketable equity securities $ 2,612,241
As of August 31, 2000, the Company had three investments
representing 18%, 17% and 12% of its marketable equity securities.
Securities not readily marketable include securities for which
there is no market on a securities exchange and no independent
publicly quoted market. These securities at August 31, 2000 were
$230,288 at fair value with a cost of $266,060.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company had no margin accounts payable to broker-dealers as of
August 31, 2000. Margin accounts bear interest at variable rates
which approximate the Broker Call Rate. Margin accounts are
secured by the securities held by the respective broker-dealers.
(6) RELATED PARTY TRANSACTIONS
Operating Expenses
The Company and ShareholderOnline, Inc., were under common
management through April 27, 2000. Certain expenses are paid by
the Company and allocated to ShareholderOnline, Inc., 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
ShareholderOnline, Inc., were $62,157 and $81,870 for the six
months ended August 31, 2000 and 1999, respectively.
(7) INCOME TAXES
The Company files a consolidated Federal income tax return. It is
the policy of the Company 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 six months ended August 31,
2000 and 1999 are composed of the following:
2000 1999
Current income taxes $ (482,000) $ 625,000
Deferred income taxes $ (150,500) (415,000)
Provision for income taxes $ (632,500) $ 210,000
Deferred tax assets and liabilities consist of the following at
August 31, 2000 and 1999:
2000 1999
Deferred tax benefit of NOL carryforward $ 63,000 $ 1,500
Deferred tax benefit of stock options and
Warrants compensation 59,000 -
Deferred tax benefit (liabilities) on unrealized
gains on securities owned (81,000) (652,500)
Valuation allowance (41,000) -
Deferred taxes $ - $(651,000)
(8) OPERATING LEASES
The Company leases office space and a vehicle under operating
leases. Total lease expenses were approximately $123,000 in the
fiscal year ended February 29, 2000. The future minimum lease
payments under existing leases are as follows:
Amount
2001 $ 127,900
2002 129,700
2003 51,900
$ 309,500
(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 six months ended August 31, 2000 or 1999.
Stock Option Plan and Stock Warrants
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 May 11, 2000, one million warrants to purchase Class A
shares were granted to the newly recruited President & CEO of the
Company with exercise prices of $1.60 which vest, 20% immediately
and 20% each year over four years, and ten thousand warrants were
granted to a Director with exercise prices of $1.75 which vest
immediately. All of these warrants have ten year terms.
Effective August 10, 2000, 100,000 stock options were issued to the
President of BSFS with exercise prices of $1.60 which vest, 20%
immediately and 20% each year over four years, and 100,000 stock
options were issued to two new employees with exercise prices of
$1.59 which vest 20% each year over five years. All of these stock
options have ten year terms.
The Company applies Accounting Principles Board Opinion 25 and
related Interpretations (APB 25) in accounting for stock options
and warrants issued to employees and Directors. Accordingly,
compensation cost is recognized based on the intrinsic value of the
stock options or warrants.
Because stock options and warrants issued to independent contractor
representatives and consultants, do not fall within the scope of
APB 25, compensation expense is recorded for these instruments
based on the fair value method, 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 awards
been determined in accordance with FAS 123, the Company's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Six Months Ended
August 31, 2000 August 31, 1999
Net income (loss) As reported ($1,528,315) $ 463,052
Pro forma ($2,106,947) ($ 29,455)
Basic earnings per share
As reported ($ 0.18) $ 0.05
Pro forma ($ 0.25) $ 0.00
Diluted earnings per share
As reported ($ 0.18) $ 0.05
Pro forma ($ 0.25) $ 0.00
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 2001, the average expected
volatility is 47.33%, and the average assumed risk-free interest
rate is 6.56%. The options and warrants granted under these plans
are not registered and, accordingly, there is no quoted market
price.
A summary of the status of the Company's stock option and warrants
plans as of August 31, 2000 and 1999 and changes during the six
months is presented below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1999 951,010 $ 6.098 243,000 $ 6.118
Granted 167,500 $ 4.499 82,000 $ 4.499
Exercised (6,400) $ 2.125
Forfeited (2,500) $ 4.145
Expired unexercised (600) $14.750
Outstanding August 31, 1999 1,109,010 $ 5.879 325,000 $ 5.710
Exercisable August 31, 1999 749,256 $ 5.520 323,800 $ 5.713
Outstanding March 1, 2000 1,174,010 $ 5.559 392,000 $ 5.099
Granted 200,000 $ 1.595 1,010,000 $ 1.601
Expired unexercised (14,150) $ 6.588
Forfeited (8,850) $ 5.462
Outstanding August 31, 2000 1,351,010 $ 4.960 1,402,000 $ 2.579
Exercisable August 31, 2000 940,810 $ 5.411 602,000 $ 3.881
Weighted-average fair value
of options and warrants
granted during the six months,
computed in accordance
with FAS 123 $ 1.092 $ 1.231
The following table summarizes information about fixed stock
options and warrants outstanding at August 31, 2000:
Options Warrants
Range of exercise prices $14.750 - $16.875 $14.750
Number outstanding 252,510 70,000
Weighted-average remaining
contractual life in years 7.692 7.693
Weighted-average exercise price $14.758 $14.750
Number exercisable 201,510 70,000
Range of exercise prices $4.375 - $4.500 $4.440 - $4.500
Number outstanding 160,500 82,000
Weighted-average remaining
contractual life in years 8.699 8.696
Weighted-average exercise price $4.499 $4.499
Number exercisable 96,300 82,000
Range of exercise prices $1.590 - $2.875 $1.600 - $2.875
Number outstanding 938,000 1,250,000
Weighted-average remaining
contractual life in years 5.691 9.128
Weighted-average exercise price $2.402 $1.772
Number exercisable 643,150 450,000
(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 $797,772 as of August 31, 2000, which was in excess of
its required minimum net capital of $100,000. The ratio of
aggregate indebtedness to net capital was 0.8 to 1 as of August 31,
2000. BSFS is also subject to regulations of the District of
Columbia and thirty states in which it is registered as a licensed
broker-dealer.
DHCM 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 exposes the Company to off-balance sheet market risks in
the event prices change, as the Company may be obligated to cover
such positions at a loss. At August 31, 2000, the Company had short
security positions of $1,072,616, and 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 six months ended August 31,
2000. 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
With the change in top management in May of this year, the company
has shifted its emphasis from its traditional investment related
activities at its Bank Stock Financial Services subsidiary, to the
investment advisory services of its Diamond Hill Capital Management
subsidiary. In conjunction with this change in emphasis, the
Company redefined its operating segments effective June 1, 2000.
These segments have been designed to aid the operating decision
makers in deciding how to allocate resources and in assessing
performance. Segment information for prior periods has been
restated to conform to the new segments.
Description of the types of services from which each reportable
segment derives its revenues
The Company has three reportable segments: Diversified Investment
Advisory Services, Brokerage and Bank Stock Investment Advisory
Services and Corporate Portfolio. The Diversified Investment
Advisory Services segment provides investment advisory services to
the Diamond Hill Focus Fund and The Banc Stock Group Fund, open-end
mutual funds, and offers investment advisory services and accounts
to institutional and individual investors, specializing in
diversified, domestic securities. The Brokerage and Bank Stock
Investment Advisory Services segment offers brokerage, investment
banking and investment advisory services and accounts to
institutional and individual investors, specializing in regional
and community bank stocks. The Corporate Portfolio segment is
represented by revenue generating investments unrelated to the
other operating segments.
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
Company evaluates performance based on profit or loss from
operations before income taxes. The Company focuses its attention
on providing services to external customers.
Factors management used to identify the enterprises's reportable
segments
The Company's reportable segments are primarily defined by legal
entities that specialize in different financial products and
services. Diversified Investment Advisory Services are provided by
Diamond Hill Capital Management, Inc. Brokerage and Bank Stock
Investment Advisory Services are provided primarily by Banc Stock
Financial Services, Inc., however, this segment also includes the
results of Buckeye Bancstocks, Inc., an intrastate broker-dealer
subsidiary that was liquidated May 31, 2000. The Corporate
Portfolio segment is managed by the parent Company. These segments
are managed separately because each entity operates in a different
regulatory environment.
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.
Financial information for the six months ended August 31, 2000
Brokerage &
Diversified Bank Stock
Investment Investment
Advisory Advisory Corporate
Services Services Portfolio Combined
Revenue from external
customers:
Trading Profits (Losses) ($184,502) ($753,829) ($938,331)
Fees & Commissions $73,106 637,333 11,683 722,122
Investment banking 32,982 32,982
Dividends 9,587 155,805 165,392
Intersegment revenues
Interest revenue 10,084 18,296 28,380
Interest expense 492 3,405 3,897
Depreciation and amortization 12,200 21,179 6,210 39,589
Segment income (loss)
before taxes (357,128) (992,883) (545,823) (1,895,834)
Segment assets 113,330 2,680,155 9,952,748 12,746,233
Expenditures for
segment assets 5,460 5,460 2,729 13,649
Reconciliation to Consolidated Financial Statements
Income (loss) before taxes for reportable segments ($1,895,834)
Other corporate expenses 204,301
Income (loss) before taxes - Consolidated ($2,100,135)
Financial information for the quarter ended August 31, 2000
Brokerage &
Diversified Bank Stock
Investment Investment
Advisory Advisory Corporate
Services Services Portfolio Combined
Revenue from external
customers:
Trading Profits (Losses) ($222,181) $38,053 ($184,128)
Fees & Commissions $36,008 225,613 5,694 267,315
Investment banking
Dividends 4,349 101,292 105,641
Intersegment revenues
Interest revenue 5,882 9,365 15,247
Interest expense 228 38 266
Depreciation and amortization 6,159 6,416 3,190 15,765
Segment income (loss)
before taxes (234,734) (570,718) 259,849 (545,603)
Segment assets 113,330 2,680,155 9,952,748 12,746,233
Expenditures for
segment assets 3,034 3,034 1,515 7,583
Reconciliation to Consolidated Financial Statements
Income (loss) before taxes for reportable segments ($545,603)
Other corporate expenses 48,049
Income (loss) before taxes - Consolidated ($593,652)
Financial information for the six months ended August 31, 1999
Brokerage &
Diversified Bank Stock
Investment Investment
Advisory Advisory Corporate
Services Services Portfolio Combined
Revenue from external
customers:
Trading Profits (Losses) $231,654 $516,409 $748,063
Fees & Commissions $169,270 1,262,655 13,515 1,445,440
Investment banking 312,127 312,127
Dividends 9,014 108,653 117,667
Intersegment revenues
Interest revenue 11,619 9,544 21,163
Interest expense 835 686 1,521
Depreciation and amortization 7,903 37,199 3,952 49,054
Segment income (loss)
before taxes (221,370) 285,856 621,576 686,062
Segment assets 117,476 3,081,498 11,214,695 14,413,669
Expenditures for
segment assets 5,947 14,867 2,974 23,788
Financial information for the quarter ended August 31, 1999
Brokerage &
Diversified Bank Stock
Investment Investment
Advisory Advisory Corporate
Services Services Portfolio Combined
Revenue from external
customers:
Trading Profits (Losses) ($17,749) $305,242 $287,493
Fees & Commissions $73,196 601,015 6,842 681,053
Investment banking
Dividends 4,440 64,236 68,676
Intersegment revenues
Interest revenue 5,383 4,725 10,108
Interest expense 96 205 301
Depreciation and amortization 3,986 18,686 1,993 24,665
Segment income (loss)
before taxes (109,446) (93,214) 363,419 160,759
Segment assets 117,476 3,081,498 11,214,695 14,413,669
Expenditures for
segment assets 3,212 8,032 1,606 12,850
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
With the change in executive management in May of 2000, the Company
has shifted its emphasis from its traditional investment related
activities through its BSFS subsidiary, to the investment advisory
services of its DHCM subsidiary. DHCM manages portfolios of stocks
representing interests in entities operating in various economic
sectors, as opposed to a portfolio of bank stocks only. Staffing
and costs associated with this shift and the various marketing
initiatives at DHCM will negatively impact the Company for the
remainder of 2000 calendar year, and most likely the entire 2001
calendar year. Management believes that this process is necessary
in order to achieve a critical threshold of assets under management
to support operations in the future. However, there can be no
assurance that the Company will be able to achieve the critical
threshold of assets under management necessary to support the
Company's operations in the future.
Forward-looking Statements
Throughout this discussion, the Company may make 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. 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, the actual results and
experiences of the Company could differ materially from the
anticipated results or other expectations expressed by the Company
in its forward-looking statements. Factors that could cause such
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.
Six Months Ended August 31, 2000, Compared to the Six Months Ended
August 31, 1999
Revenues and trading gains and losses for the six months ended
August 31, 2000 decreased to $10,545 compared to $2,644,462 for the
six months ended August 31, 1999. This decrease results primarily
from decreases in revenue from trading profits (losses), management
fees and commissions and investment banking.
Revenues from trading profits were a loss of $938,331 for the six
months ended August 31, 2000 compared to profits of $748,063 for
the six months ended August 31, 1999, a decrease of 225%. These
trading losses result primarily from 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 through August 31, 2000. The
Company has appointed a new President. One of his responsibilities
is to institute new investment policies for the Company. The
trading portfolios have been reduced significantly by liquidation
and management is unable to predict how future fluctuations in
market values will impact the performance of the Company's
remaining trading portfolios.
The Company generated management fees and commission revenue of
$722,122 for the six months ended August 31, 2000 compared to
$1,445,442 for the six months ended August 31, 1999, a decrease of
50%. The decrease is primarily attributable to depressed market
values in the community banking sector which reduced asset values
on which management fees are based. Depressed market values also
caused some customers to close their accounts and reduced the
buying and selling activity in commission generating retail
accounts.
Revenues from investment banking for the six months ended August
31, 2000 decreased to $32,982 compared to $312,127 for the six
months ended August 31, 1999, a decrease of 89%. Because of
weakness in the regional and community banking sector, there are no
investment banking engagements in progress and none are being
pursued.
Operating expenses for the six months ended August 31, 2000,
increased to $2,110,680 compared to $1,958,400 for the six months
ended August 31, 1999, an increase of 8%. A large portion of this
increase results from the write-off of goodwill related to Buckeye
Bancstocks, Inc., a wholly-owned subsidiary that was liquidated
during the first fiscal quarter. Brokers' commission expenses
decreased to $380,627 for the six months ended August 31, 2000
compared to $595,898 for the six months ended August 31, 1999, a
decrease of 36%. This decrease results from commission expenses
related to management fees and commission revenue discussed above.
Salaries, benefits, and payroll taxes increased to $693,503 for the
six months ended August 31, 2000 compared to $515,153 for the six
months ended August 31, 1999, an increase of 35%. Salaries include
compensation expense relating to stock warrants issued to the newly
recruited President of the Company of $78,125 for the period. In
addition, an analyst was hired to research the diversified equities
managed by DHCM. Professional fees decreased to $224,066 for the
six months ended August 31, 2000 compared to $233,256 for the six
months ended August 31, 1999, a decrease of 4%. This decrease is
the result of the award of stock warrants to certain consultants to
the Company in the prior year. 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 decreased to $498,842 for the six months ended August 31,
2000 compared to $612,572 for the six months ended August 31, 1999,
a decrease of 19%. This decrease results primarily from reductions
of advertising and printing costs.
ShareholderOnline, Inc., an Ohio corporation establishing an
electronic stock information service and alternative trading
system, was under common management with the Company through April
27, 2000. Because of the common management, the Company's 16%
ownership investment in ShareholderOnline, Inc., was accounted for
on the equity method of accounting through the end of April 2000.
During 1999, ShareholderOnline, Inc., formalized its plans to raise
additional capital to launch its operations. Also, the Boards of
Directors of the Company and ShareholderOnline, Inc., recognized
that separate management was required to effectively execute
ShareholderOnline Inc.'s business plan, and on April 27, 2000, the
President and CEO of ShareholderOnline, Inc., resigned his
positions with the Company to devote his full attention to
ShareholderOnline, Inc. During 2000, ShareholderOnline, Inc.,
began pursuing separate investment and financing alternatives. The
use of the equity method of accounting for the investment in
ShareholderOnline, Inc., was discontinued as of May 1, 2000. The
Company recognized equity in the net losses of ShareholderOnline,
Inc., of $60,680 for the six months ended August 31, 2000, compared
to losses of $13,010 for the six months ended August 31, 1999.
Quarter Ended August 31, 2000, Compared to the Quarter Ended August
31, 1999
Revenues and trading gains and losses for the quarter ended August
31, 2000 decreased to $204,075 compared to revenues and trading
gains and losses of $1,047,330 for the quarter ended August 31,
1999, a decrease of 81%. This decrease results primarily from
decreases in revenue from trading profits (losses) and management
fees and commissions.
Revenues from trading profits were a loss of $184,128 for the
quarter ended August 31, 2000 compared to profits of $287,493 for
the quarter ended August 31, 1999, a decrease of 164%. These
trading losses result primarily from 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 through August 31, 2000. The
Company has appointed a new President. One of his responsibilities
is to institute new investment policies for the Company. The
trading portfolios have been reduced significantly by liquidation
and management is unable to predict how future fluctuations in
market values will impact the performance of the Company's
remaining trading portfolios.
The Company generated management fees and commission revenue of
$267,315 for the quarter ended August 31, 2000 compared to $681,053
for the quarter ended August 31, 1999, a decrease of 61%. The
decrease is primarily attributable to depressed market values in
the community banking sector which reduced asset values on which
management fees are based. Depressed market values also caused
some customers to close their accounts and reduced the buying and
selling activity in commission generating retail accounts.
Operating expenses for the quarter ended August 31, 2000, decreased
to $797,727 compared to $886,571 for the quarter ended August 31,
1999, a decrease of 10%. Brokers' commission expenses decreased to
$181,717 for the quarter ended August 31, 2000 compared to $248,500
for the quarter ended August 31, 1999, a decrease of 27%. This
decrease results from commission expenses related to management
fees and commission revenue discussed above. Salaries, benefits,
and payroll taxes increased to $339,381 for the quarter ended
August 31, 2000 compared to $281,278 for the quarter ended August
31, 1999, an increase of 21%. Salaries include compensation
expense relating to stock warrants issued to the newly recruited
President of the Company of $9,625 for the quarter. In addition,
an analyst was hired to research the diversified equities managed
by Diamond Hill Capital Management, Inc. Professional fees
increased to $102,878 for the quarter ended August 31, 2000
compared to $85,465 for the quarter ended August 31, 1999, an
increase of 20%. This increase results from legal and consulting
services associated with creating the Diamond Hill Focus Fund, a
diversified mutual fund. General and administrative expenses
decreased to $173,485 for the quarter ended August 31, 2000
compared to $271,027 for the quarter ended August 31, 1999, a
decrease of 36%. This decrease results primarily from reductions
of advertising and printing costs.
ShareholderOnline, Inc., an Ohio corporation establishing an
electronic stock information service and alternative trading
system, was under common management with the Company through April
27, 2000. Because of the common management, the Company's 16%
ownership investment in ShareholderOnline, Inc., was accounted for
on the equity method of accounting through the end of April 2000.
During 1999, ShareholderOnline, Inc., formalized its plans to raise
additional capital to launch its operations. Also, the Boards of
Directors of the Company and ShareholderOnline, Inc., recognized
that separate management was required to effectively execute
ShareholderOnline Inc.'s business plan, and on April 27, 2000, the
President and CEO of ShareholderOnline, Inc., resigned his
positions with the Company to devote his full attention to
ShareholderOnline, Inc. During 2000, ShareholderOnline, Inc.,
began pursuing separate investment and financing alternatives. The
use of the equity method of accounting for the investment in
ShareholderOnline, Inc., was discontinued as of May 1, 2000.
Therefore, the Company did not recognize any equity in the losses
of ShareholderOnline, Inc., for the quarter ended August 31, 2000,
compared to losses of $8,810 for the quarter ended August 31, 1999.
Liquidity and Capital Resources
Approximately 67% of the value of the Company's trading portfolio
is comprised of small capitalization 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 33% of the Company's trading portfolio is readily
marketable. Investments in 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 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. Accordingly, the
value of these securities may be overstated.
As of August 31, 2000, the Company had working capital of
approximately $9,900,000. Working capital includes cash,
securities owned and accounts and notes receivable, net of all
liabilities. The Company has no long term debt.
The Company's NASD broker-dealer subsidiary, under the
correspondent agreement with its clearing broker, has agreed to
indemnify the clearing broker from damages or losses resulting from
customer transactions. The Company is, therefore, exposed to off-balance sheet
risk of loss in the event that customers are unable
to fulfill contractual obligations. The Company manages this risk
by requiring customers to have sufficient cash in their account
before a buy order is executed and to have the subject securities
in their account before a sell order is executed. The Company has
not incurred any losses from customers unable to fulfill
contractual obligations.
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 attempts to
control 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 may sell securities
it has not yet purchased (short sales) for its own account and may
write options. The establishment of short positions and option
contracts exposes the Company to off-balance sheet market risks in
the event prices change, as the Company may be obligated to cover
such positions at a loss. At August 31, 2000, the Company had
$1,072,616 of short security positions.
At August 31, 2000, 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 six months ended August 31,
2000. 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 securities transactions.
The net cash balance increased $4,763,656 during the six months
ended August 31, 2000. Net cash provided by operating activities
was $4,926,630. The primary source of this cash flow results from
the sale of securities in the trading portfolio.
Investing activities provided $8,985 of cash during the six months
ended August 31, 2000, primarily from the disposal of computer
equipment.
Financing activities used $171,959 of cash during the six months
ended August 31, 2000, primarily from the purchase of treasury
stock.
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.
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. These Rules have a materially
adverse impact on the Company's cash flow.
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders -
The Annual Meeting of Shareholders was held August 10, 2000.
The Shareholders voted on the following issues:
a. Election of Directors.
The following individuals were elected to serve on
the board until the Annual Meeting of Shareholders
in 2003:
Name of Director Votes for Votes withheld
James G. Mathias 7,884,400 92,310
Larry Beres 7,887,400 89,310
Richard Desich 7,923,650 53,060
b. Ratification of PricewaterhouseCoopers LLP to serve
as independent auditors. This issue was approved
with 7,885,903 votes for and 3,625 votes against
and 87,182 abstained.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27 - Financial Data Schedule
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE BANC STOCK GROUP, INC.
(Registrant)
Date October 13, 2000 /S/Roderick H. Dillon, Jr.
Roderick H. Dillon, Jr.
President
Date October 13, 2000 /S/ Jeffrey C. Barton
Jeffrey C. Barton
Chief Financial Officer
(chief financial and chief
accounting officer)
Financial Data Schedule
