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, 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 June 30, 1999:
CLASS NUMBER OF SHARES
Class A shares, No Par Value 8,336,817
Class C shares, No Par Value 120,000
TRADITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE)
Yes X No
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
INDEX
PAGE
Part I Financial Information:
Item 1. Consolidated Financial Statements 3-7
Notes to Consolidated Financial Statements 8-20
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 21-25
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, 2000 may not be indicative of the results
of operations for the year ending February 29, 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 MAY 31, 2000
(UNAUDITED)
ASSETS
Cash $ 6,589,771
Trading portfolio:
Marketable equity securities, at market value 3,591,778
Not readily marketable equity securities,
at estimated fair value 222,323
Mortgage participation notes, at market value 249,600
Accounts receivable:
Affiliates 44,034
Pending settlements and other 139,144
Refundable income taxes 57,000
Equity investment in ShareholderOnline, Inc. 290,200
Property and equipment, net of accumulated depreciation of $231,791 168,382
Deposits and other 218,953
Total assets $ 11,571,185
LIABILITIES
Unearned commisions $ 70,300
Accounts payable to broker-dealers and other 4,608
Secuities sold not yet purchased 223,357
Accrued expenses 552,272
Total liabilities 850,537
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 8,336,817 shares outstanding 9,467,203
Class C, no par value, 120,000 shares
authorized, issued and outstanding
Treasury stock, at cost
(303,045 Class A shares) (385,403)
Deferred compensation (101,677)
Retained earnings 1,740,525
Total shareholders' equity 10,720,648
Total liabilities and shareholders' equity $ 11,571,185
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED MAY 31 , 2000 and 1999
(UNAUDITED)
2000 1999
REVENUES AND TRADING GAINS and LOSSES:
Trading profits (losses) $ (754,203) $ 460,570
Management fees and commissions 454,807 764,387
Investment banking 32,982 312,127
Dividends 59,751 48,991
Interest and other 13,133 11,055
Total revenues and trading gains and losses (193,530) 1,597,130
EXPENSES:
Brokers' commission 198,910 347,398
Salaries, benefits and payroll taxes 354,122 233,875
Professional fees 121,188 147,790
Interest 3,631 1,220
Write off of goodwill of liquidated subsidiary 309,745 -
General and administrative 325,357 341,545
Total expenses 1,312,953 1,071,828
INCOME (LOSS) BEFORE TAXES (1,506,483) 525,302
INCOME TAX PROVISION (CREDIT) (150,500) 165,000
INCOME (LOSS) BEFORE EQUITY IN NET EARNINGS
OF AFFILIATED COMPANY (1,355,983) 360,302
Equity in net losses of ShareholderOnline, Inc. (60,680) (4,200)
NET INCOME (LOSS) $(1,416,663) $ 356,102
BASIC EARNINGS (LOSS) PER SHARE $ (0.17) $ 0.04
DILUTED EARNINGS (LOSS) PER SHARE $ (0.17) $ 0.04
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 PERIOD ENDED MAY 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 - - - 2,601 - 2,601
Net loss - - - - (1,416,663) (1,416,663)
Balance 5/31/00 $9,467,203 - ($385,403)($101,677) $1,740,525 $10,720,648
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 PERIOD ENDED MAY 31, 2000 and 1999
(UNAUDITED)
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,416,663) $ 356,102
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 23,823 24,389
Write off of goodwill of liquidated subsidiary 309,745
Stock options and warrants compensation expense 68,500 67,627
Amortization of deferred compensation 2,601 -
Deferred taxes (150,500) (85,000)
Equity in undistributed losses of
ShareholderOnline, Inc. 60,680 4,200
Unrealized loss 526,272 219,851
(Increase) decrease in certain assets-
Trading profits, net 3,086,230 657,025
Mortgage participation notes - 107,000
Accounts receivable clients 62,922 (24,149)
Other accounts receivable 879,938 139,608
Refundable income taxes 200,000 -
Other assets 13,555 11,982
Increase (decrease) in certain liabilities-
Securities sold not yet purchased 223,357 -
Unearned commissions (24,500) (149,400)
Accounts payable to broker-dealers and other (75,126) 14,623
Accrued expenses and other (92,958) 8,603
Net cash provided by operating activities 3,697,876 1,352,461
CASH FLOWS FROM INVESTING ACTIVITIES:
Issuance of notes receivable - 2,350
Purchase of property and equipment (6,066) (23,788)
Disposal of property 22,634 -
Net cash provided by (used in) investing activities 16,568 (21,438)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - 5,313
Advances from affiliates 1,510 5,126
Advances to affiliates (27,454) (11,672)
Net cash used in financing activities (25,944) (1,233)
NET INCREASE IN CASH 3,688,500 1,329,790
CASH, BEGINNING OF PERIOD 2,901,271 332,332
CASH, END OF PERIOD $ 6,589,771 $ 1,662,122
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 3,631 $ 1,220
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 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 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 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, 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 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 Quarter Ended May 31, 2000
Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings ($1,416,663) 8,456,817 ($ .17)
Diluted Earnings ($1,416,663) 8,456,817 ($ .17)
Stock options and warrants have not been included in the denominator of the
diluted per-share computations because the effect of their inclusion would be
antidilutive.
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.
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.
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, 2000 consist of bank stocks at market
value, as follows:
Traded on national securities markets $ 1,714,137
Not traded on national securities
markets, but with readily ascertainable
market value 1,877,641
Total marketable equity securities $3,591,778
As of May 31, 2000, the Company had one investment representing 20.6% 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, 2000 were $222,323 at fair value with a cost of
$262,760.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company had no margin accounts payable to broker-dealers as of May 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 were 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 were
primarily salaries and benefits. Total expenses allocated to
ShareholderOnline, Inc., were $60,680 and $38,000 for the quarters ended
May 31, 2000 and 1999, 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, 2000 and 1999 are
composed of the following:
2000 1999
Current income taxes - $ 250,000
Deferred income taxes $ (150,000) (85,000)
Provision for income taxes $ (150,000) $ 165,000
Deferred tax assets and liabilities consist of the following at May 31, 2000
and 1999:
2000 1999
Deferred tax benefit of NOL carryforward $ 234,000 $ 1,500
Deferred tax benefit of stock options and
Warrants compensation 55,000 -
Deferred tax benefit (liabilities) on unrealized
gains on securities owned 26,000 (982,500)
Valuation allowance (315,000) -
Deferred taxes $ - $(981,000)
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office equipment 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 quarters ended May 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 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.
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:
Quarter Ended
May 31, 2000 May 31, 1999
Net income (loss) As reported ($1,416,663) $ 356,102
Pro forma ($1,764,131) ($252,659)
Basic earnings per share
As reported ($ 0.17) $ 0.04
Pro forma ($ 0.21) ($ 0.03)
Diluted earnings per share
As reported ($ 0.17) $ 0.04
Pro forma ($ 0.21) ($ 0.03)
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%, and the average assumed risk-free
interest rate is 6.67%. 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, 2000 and 1999 and changes during the quarters 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
Outstanding March 1, 2000 1,174,010 $ 5.559 392,000 $ 5.099
Granted 1,010,000 $ 1.601
Expired unexercised (1,200) $ 4.500
Forfeited (800) $ 4.500
Outstanding May 31, 2000 1,172,010 $ 5.561 1,402,000 $ 2.579
Exercisable May 31, 2000 933,810 $ 5.513 602,000 $ 3.881
Weighted-average fair value
of options and warrants
granted during the quarter,
computed in accordance
with FAS 123 $1.231
The following table summarizes information about fixed stock options and
warrants outstanding at May 31, 2000:
Options Warrants
Range of exercise prices $14.750 - $16.875 $14.750
Number outstanding 258,510 70,000
Weighted-average remaining
contractual life in years 7.944 7.945
Weighted-average exercise price $14.758 $14.750
Number exercisable 205,710 70,000
Range of exercise prices $4.375 - $4.500 $4.440 - $4.500
Number outstanding 165,500 82,000
Weighted-average remaining
contractual life in years 8.951 8.948
Weighted-average exercise price $4.499 $4.499
Number exercisable 99,200 82,000
Range of exercise prices $2.125 - $2.875 $1.600 - $2.875
Number outstanding 748,000 1,250,000
Weighted-average remaining
contractual life in years 6.158 9.381
Weighted-average exercise price $2.617 $1.772
Number exercisable 628,900 450,000
(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 $1,583,763 as of May 31, 2000, which
was in excess of its required minimum net capital of $100,000. The ratio of
aggregate indebtedness to net capital was 0.25 to 1 as of May 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.
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, 2000, the Company
had short security positions of $223,357, 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, 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
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, 2000
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) $37,679 ($791,882) ($754,203)
Fees & Commissions $37,098 411,720 5,989 454,807
Investment
banking $27,000 $5,982 32,982
Dividends 5,237 54,514 59,751
Intersegment revenues -
Interest revenue 4,203 8,930 13,133
Interest expense 230 3,401 3,631
Depreciation and
amortization 3,775 3,775 322,153 3,865 333,568
Segment income (loss)
before taxes (170,140)(104,997) (331,611)(163,006) (736,729) (1,506,483)
Equity in net earnings of
affiliated company (60,680) (60,680)
Segment assets 46,095 53,472 2,451,697 45,066 8,974,855 11,571,185
Expenditures for
segment assets 1,516 1,516 1,518 1,516 6,066
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
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Quarter Ended May 31, 2000, Compared to the Quarter Ended May 31, 1999
Revenues and trading gains and losses for the quarter ended May 31, 2000
decreased to negative $193,530 compared to positive revenues and trading gains
and losses of $1,597,130 for the quarter ended May 31, 1999, a decrease of
112%. 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 $754,203 for the quarter ended
May 31, 2000 compared to profits of $460,570 for the quarter ended May 31,
1999, a decrease of 264%. 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 May 31, 2000. The Company has appointed a new
President & CEO. One of his responsibilities is to institute new investment
policies for the Company. Management is unable to predict how future
fluctuations in market values will impact the performance of its trading
portfolios.
The Company generated management fees and commission revenue of $454,807 for
the quarter ended May 31, 2000 compared to $764,387 for the quarter ended May
31, 1999, a decrease of 41%. The decrease is primarily attributable to depressed
market values in the community banking sector which reduces asset values on
which management fees are based, caused some customers to close their accounts
and reduces the buying and selling activity in commission generating retail
accounts.
Revenues from investment banking for the quarter ended May 31, 2000 decreased to
$32,982 compared to $312,127 for the quarter ended May 31, 1999, a decrease of
89%. Investment banking has been substantially curtailed because of weakness
in the regional and community banking sector.
Operating expenses for the quarter ended May 31, 2000, increased to $1,394,453
compared to $1,071,828 for the quarter ended May 31, 1999, an increase of 30%.
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 quarter. Brokers' commission expenses decreased to $198,910 for
the quarter ended May 31, 2000 compared to $347,398 for the quarter ended May
31, 1999, a decrease of 43%. This decrease results from commission expenses
related to management fees and commission revenue discussed above. Salaries,
benefits, and payroll taxes increased to $354,122 for the quarter ended May 31,
2000 compared to $233,875 for the quarter ended May 31, 1999, an increase of
51%. Salaries includes compensation expense relating to stock warrants issued
to the newly recruited President and CEO of the Company of $68,500 for the
quarter. Professional fees decreased to $121,188 for the quarter ended May 31,
2000 compared to $147,791 for the quarter ended May 31, 1999, a decrease of
18%. 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 $325,357 for the quarter ended May 31, 2000 compared to $341,545
for the quarter ended May 31, 1999, a decrease of 5%. This decrease results
primarily from reductions of advertising and printing costs.
Because of the change in the top management of the Company, the business
philosophies and strategies are changing. As the Company is repositioned to
support strategies emphasizing advisory services, certain fee reductions will
take place to reflect these changes. Management expects this process to
negatively impact operating results over the next eighteen months. Management
believes this process will enable the Company to achieve a critical threshold
of assets under management to support successful operations in the future.
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.
Liquidity and Capital Resources
Approximately 55% of the value of the Company's trading portfolio is comprised
of small capitalization 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 45% 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.
As of May 31, 2000 and 1999, the Company had working capital of approximately
$10,000,000. 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 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, 2000, the Company had $223,357 of 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, 2000, 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, 2000. The Company did not
experience any credit losses due to the failure of any counterparties to
perform during the quarter ended May 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 $3,688,500 during the quarter ended May 31,
2000. Net cash provided by operating activities was $3,697,876. The primary
source of this cash flow results from the sale of securities in the trading
portfolio.
Investing activities provided $16,568 of cash during the quarter ended May 31,
2000, primary primarily from the disposal of computer equipment.
Financing activities used $25,944 of cash during the quarter ended May 31, 2000,
primarily to make advances to affiliates.
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.
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 14, 2000 /S/ Roderick H. Dillon, Jr.
Roderick H. Dillon, Jr.
President, and Chief Executive Officer
Date July 14, 2000 /S/ Jeffrey C. Barton
Jeffrey C. Barton
Chief Financial Officer
(chief financial and chief
accounting officer)
Financial Data Schedule
