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 November 30, 1999
Commission file number 000-24498
THE BANC STOCK GROUP, INC.
(Exact name of small business issuer as specified in its charter)
FLORIDA 65-0190407
(State of incorporation) (IRS Employer Identification No.)
1105 SCHROCK ROAD, COLUMBUS, OHIO 43229
(Address of principal executive offices)
(614) 848-5100
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
State the number of shares outstanding of each of the issuer's
classes of common equity, as of December 31, 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 21-27
Part II Other Information:
Item 1 through Item 6 28
Signatures 29
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
ITEM 1.Financial Statements
The accompanying consolidated financial statements of The Banc
Stock Group, Inc. are unaudited but, in the opinion of management,
reflect all adjustments (which include only normal recurring
accruals) necessary to present fairly such information for the
periods and at the dates indicated and to make the consolidated
financial statements not misleading. The results of operations for
the period ended November 30, 1999, may not be indicative of the
results of operations for the year ending February 29, 2000. Since
the accompanying consolidated financial statements have been
prepared in accordance with Item 310 of Regulation S-B, they do not
contain all information and footnotes normally contained in annual
consolidated financial statements; accordingly, they should be read
in conjunction with the consolidated financial statements and notes
thereto appearing in the Company's Annual Report.
THE BANC STOCK GROUP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF NOVEMBER 30, 1999
(UNAUDITED)
ASSETS
Cash $ 3,957,158
Trading portfolio:
Marketable equity securities, at market value 7,599,181
Not readily marketable equity securities, at estimated fair value 494,771
Mortgage participation notes, at market value 249,600
Accounts receivable:
Affiliates 95,150
Clients 76,019
Clearing organization and other 164,324
Interest receivable 10,500
Equity investment in Shareholderonline 463,470
Property and equipment, net of accumulated depreciation of $207,836 215,321
Goodwill, net of accumulated amortization of $289,874 340,093
Deposits and other 174,443
Total assets $ 13,840,030
LIABILITIES
Unearned commissions $ 103,000
Accounts payable to broker-dealers and other 21,646
Securities sold not yet purchased 55,214
Accrued expenses 378,649
Deferred taxes 567,000
Total liabilities 1,125,509
SHAREHOLDERS' EQUITY
Preference stock, 50,000,000 shares authorized, -
none issued or outstanding
Common stock:
Class A, no par value, 149,760,000 shares authorized,
8,519,862 shares issued and 8,216,817 shares outstanding 9,271,646
Class C, no par value, 240,000 shares
authorized, issued and outstanding
Treasury stock, at cost
(303,045 Class A shares) (385,403)
Retained earnings 3,828,278
Total shareholders' equity 12,714,521
Total liabilities and shareholders' equity $ 13,840,030
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 NINE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(UNAUDITED)
9 Months Ended 3 Months Ended
NOV. 1999 NOV. 1998 NOV. 1999 NOV. 1998
REVENUES:
Trading profits (losses) $ 406,347 $(1,036,735) $(341,716) $ (26,765)
Management fees & commissions 1,983,572 2,700,575 538,130 722,346
Investment banking 649,736 949,982 337,609 29,115
Dividends 195,614 134,294 77,947 40,137
Interest & other 34,042 29,806 12,879 11,663
Total revenues 3,269,311 2,777,922 624,849 776,496
EXPENSES:
Brokers' commission 941,371 1,680,694 345,473 231,835
Salaries, benefits & payroll taxes 796,564 460,281 281,411 147,767
Professional fees 307,187 323,568 73,931 106,859
Interest 2,031 48,650 510 15,855
General and administrative 992,189 713,667 379,617 269,321
Total expenses 3,039,342 3,226,860 1,080,942 771,637
INCOME (LOSS) BEFORE TAXES 229,969 (448,938) (456,093) 4,859
INCOME TAX PROVISION (CREDIT) 41,000 (35,000) (169,000) 65,000
INCOME (LOSS) BEFORE EQUITY IN NET
EARNINGS OF AFFILIATED COMPANY 188,969 (413,938) (287,093) (60,141)
Equity in net earnings (losses) of (63,450) (89,350) (50,440) 19,650
Shareholderonline
NET INCOME (LOSS) $ 125,519 $ (503,288) $(337,533) $ (40,491)
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.06) $ (0.04) $ 0.00
DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.06) $ (0.04) $ 0.00
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 NINE MONTHS ENDED NOVEMBER 30, 1999
(UNAUDITED)
Treasury Retained
Class A Class C Stock Earnings Total
Balance at Feb. 28, 1999 $9,190,419 - ($385,403) $3,702,759 $12,507,775
Exercise of stock options 13,600 - - - 13,600
Issuance of warrants 67,627 - - - 67,627
Net income - - - 125,519 125,519
Balance at Nov. 30, 1999 $9,271,646 - ($385,403) $3,828,278 $12,714,521
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 NINE MONTHS ENDED NOVEMBER 30, 1999 and 1998
(UNAUDITED)
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 125,519 $ (503,288)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 73,668 69,225
Warrants granted to consultants 67,627 -
Deferred taxes (499,000) (150,000)
Equity in undistributed earnings (losses) of 63,450 89,350
Shareholderonline
Unrealized loss 1,696,135 2,185,284
(Increase) decrease in certain assets-
Trading profits, net 2,449,953 (1,279,941)
Mortgage participation notes (72,600) (85,000)
Accounts receivable clients (13,067) (45,535)
Other accounts receivable 95,981 (214,885)
Other assets 40,454 20,387
Increase (decrease) in certain liabilities-
Securities sold not yet purchased 55,214 -
Margin accounts payable to broker-dealers - 669,990
Unearned commissions (164,300) (25,300)
Accounts payable to broker-dealers and other 15,059 (52,369)
Accrued expenses and other (211,461) (723,941)
Net cash provided by (used in) operating activities 3,722,632 (46,023)
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections of notes receivable - 2,200
Issuance of notes receivable - (11,379)
Collection of dividends receivable - 25,000
Purchase of property and equipment (57,156) (66,286)
Sale of property - 8,827
Net cash used in investing activities (57,156) (41,638)
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options 13,600 67,925
Advances from affiliates 12,405 83,540
Advances to affiliates (66,655) (61,749)
Net cash (used in) provided by financing activities (40,650) 89,716
NET INCREASE IN CASH 3,624,826 2,055
CASH, BEGINNING OF PERIOD 332,332 471,756
CASH, END OF PERIOD $ 3,957,158 $ 473,811
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
1999 1998
Cash paid during the period for:
Interest $ 2,031 $ 48,650
Income Taxes 530,000 50,000
The accompanying notes are an integral part of these consolidated financial
statements.
THE BANC STOCK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1999
(1) ORGANIZATION AND NATURE OF BUSINESS
The Banc Stock Group, Inc. (the Company) is a Florida corporation
incorporated in April 1990. The Company has three wholly-owned
subsidiary operating companies.
Banc Stock Financial Services, Inc. (BSFS), an Ohio corporation, is
an NASD registered broker-dealer specializing in the trading of
bank stocks nationwide. BSFS is registered with the Securities and
Exchange Commission and the securities commissions of thirty
states, including Ohio. BSFS trades securities on a
fully-disclosed basis and clears customer transactions through an
unaffiliated broker-dealer which also maintains the customer
accounts. BSFS is also a registered investment adviser offering
advisory accounts to qualified investors. BSFS derives a
significant portion of its revenues from providing private
portfolio management and brokerage services and investment banking
services.
Heartland Advisory Group, Inc. (HAG), is a registered investment
adviser. HAG is the Investment Adviser to The Banc Stock Group
Fund, a diversified, open-end mutual fund.
Buckeye Bancstocks, Inc., is an Ohio corporation established in
1977 to act as an intrastate broker-dealer trading primarily in
Ohio bank stocks.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and
expenses for the period. Actual results could differ from those
estimates.
The following is a summary of the Company's significant accounting
policies:
Principles of Consolidation
The accompanying consolidated financial statements include the
operations of the Company, BSFS, HAG and Buckeye Bancstocks. All
material intercompany transactions and balances have been
eliminated in consolidation.
Cash
The Company has defined cash as demand deposits and money market
accounts.
Valuation of Securities Owned
Bank securities and related options traded on national securities
markets and securities not traded on national securities markets,
but with readily ascertainable market values, are valued at market
value. Other bank securities for which market quotations are not
readily available, due to infrequency of transactions, are valued
at fair value as determined in good faith by the management of the
Company. Realized and unrealized gains and losses are included in
trading profits.
Property and Equipment
Property and equipment is carried at cost less accumulated
depreciation. Depreciation is calculated using the straight-line
method over estimated lives of five to seven years.
Goodwill
The excess purchase price over the fair market value of the net
assets acquired from Buckeye Bancstocks and BSFS is being amortized
on a straight line basis over 20 years.
Revenues
Securities transactions and commissions are accounted for on the
trade date basis. Dividend income is recorded on the ex-dividend
date and interest income is accrued as earned. Realized gains and
losses from sales of securities are determined utilizing the
first-in, first-out method (FIFO).
Earnings Per Share
Basic and diluted earnings per common share are computed in
accordance with Statement of Financial Accounting Standards No.
128, "Earnings per Share." A reconciliation of the numerators and
denominators used in these calculations is shown below:
For the Nine Months Ended November 30, 1999
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings $125,519 8,454,767 $ .01
Effect of Dilutive Securities:
Assumed exercise of:
Stock Options 237,180 (.00)
Warrants 63,004 (.00)
Diluted Earnings $125,519 8,754,951 $ .01
For the Quarter Ended November 30, 1999
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($337,533) 8,456,817 ($ .04)
Diluted Earnings (Loss) ($337,533) 8,456,817 ($ .04)
For the Nine Months Ended November 30, 1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($503,288) 8,433,052 ($ .06)
Diluted Earnings (Loss) ($503,288) 8,433,052 ($ .06)
For the Quarter Ended November 30, 1998
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
Basic Earnings (Loss) ($40,491) 8,449,417 ($ .00)
Diluted Earnings (Loss) ($40,491) 8,449,417 ($ .00)
Stock options and warrants have not been included in the
denominator of the diluted per-share computation, for the quarters
ended November 30, 1999, and 1998 and for the nine months ended
November 30, 1998, because the effect of their inclusion would be
antidilutive.
Equity Investment in Shareholderonline, Inc.
ShareholderOnline, Inc., is an Ohio corporation establishing an
electronic stock information service and alternative trading
system. ShareholderOnline is under common management with the
Company. The Company currently holds 16% of the outstanding common
stock. The Company's investment is accounted for on the equity
method. Effective December 2, 1999, the name was changed from
Shareholderdirect.com, Inc. to ShareholderOnline, Inc.
Fair Value of Financial Instruments
Substantially all of the Company's financial instruments are
carried at fair value or amounts approximating fair value. Assets,
including accounts receivable, mortgage participation notes, notes
and interest receivable and securities owned are carried at amounts
which approximate fair value. Similarly, liabilities, including
margin accounts payable to broker-dealers, accounts payable and
accrued expenses are carried at amounts approximating fair value.
(3) CAPITAL STOCK
Common Stock
Commencing December 1, 1991, shares of Class C common stock
automatically convert to Class A common stock at the rate of
120,000 shares per year. The Class C common shares are subordinate
to Class A common stock in that Class A common stock has a
liquidation preference over the Class C common stock equal to $1.50
per share. In all other respects, Class A and Class C common stock
have equal rights.
Treasury Stock
Buckeye Bancstocks holds 206,240 Class A shares of the Company.
These shares, along with shares held directly by the Company, are
treated as treasury stock for financial reporting purposes.
Authorization of Preference Stock
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of "blank check" preference stock with such
designations, rights and preferences as may be determined from time
to time by the Company's Board of Directors. The Board of
Directors is empowered, without shareholder approval, to issue
preference stock with dividend, liquidation, conversion, voting, or
other rights which could adversely affect the voting or other
rights of the holders of the common stock.
(4) TRADING PORTFOLIO
Marketable equity securities at November 30, 1999, consist of bank
stocks at market value, as follows:
Traded on national securities markets $ 4,259,636
Not traded on national securities
markets, but with readily ascertainable
market value 3,339,545
Total marketable equity securities $ 7,599,181
As of November 30, 1999, the Company had one investment
representing 12% of its marketable equity securities.
Securities not readily marketable include securities for which
there is no market on a securities exchange and no independent
publicly quoted market. These securities at November 30, 1999, were
$494,771 at fair value with a cost of $433,708.
(5) MARGIN ACCOUNTS PAYABLE TO BROKER-DEALERS
The Company had no margin accounts payable to broker-dealers as of
November 30, 1999, but had $936,897 payable as of November 30,
1998. The variable rates of interest on these accounts averaged
7.3% at November 30, 1998. These margin accounts were secured by
the respective securities held by broker-dealers.
(6) RELATED PARTY TRANSACTIONS
The Company and Shareholderonline, Inc. are under common
management. Certain expenses are paid by the Company and allocated
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 were $124,780 and $149,315 for the nine months
ended November 30, 1999 and 1998, respectively.
(7) INCOME TAXES
The Company files a consolidated Federal income tax return. It is
the policy of the Parent to allocate the consolidated tax provision
to subsidiaries as if each subsidiary's tax liability or benefit
were determined on a separate company basis. As part of the
consolidated group, subsidiaries transfer to the Parent their
current Federal tax liability or assets.
The provision for income taxes for the nine months ended November 30, 1999
and 1998 are composed of the following:
1999 1998
Current income taxes $ 540,000 $115,000
Deferred income taxes (499,000) (150,000)
Provision for income taxes $ 41,000 ($35,000)
Deferred tax assets and liabilities consist of the following at
November 30, 1999, and 1998:
1999 1998
Deferred tax benefit of NOL carryforward $1,500
Deferred tax liabilities on unrealized gains on
securities owned (568,500) (1,100,000)
Deferred taxes ($567,000)($1,100,000)
(8) OPERATING LEASES
The Company leases certain facilities, a vehicle and office
equipment under operating leases. Total lease expenses were
approximately $158,000 in the fiscal year ended February 28, 1999.
The future minimum lease payments under existing leases are as
follows:
Amount
2000 $169,200
2001 142,400
2002 122,800
2003 51,100
$485,500
(9) EMPLOYEE INCENTIVE PLANS
Incentive Compensation Plan
All full-time executive employees of the Company are eligible to
participate in the Banc Stock Group Incentive Compensation Plan.
The Plan provides that a bonus fund will be established in an
amount equal to 20% of the pre-tax realized profits of the Company
in excess of a 15% pre-tax return on equity. The amount of the
bonus fund is calculated each fiscal quarter on a cumulative basis.
The allocation of the bonus fund is to be made by the President of
the Company. The Company did not incur any expense under the Plan
for the year ended February 28, 1999 and no expense has been
provided for the nine months ended November 30, 1999.
Stock Option Plan
The Company has a Non-Qualified and Incentive Stock Option Plan
which authorizes the grant of options to purchase an aggregate of
2,500,000 shares of the Company's Class A Common Stock. The Plan
provides that the Board of Directors, or a committee appointed by
the Board, may grant options and otherwise administer the Option
Plan. The exercise price of each incentive stock option or
non-qualified stock option must be at least 100% of the fair market
value of the Class A Shares at the date of grant, and no such
option may be exercisable for more than 10 years after the date of
grant. However, the exercise price of each incentive stock option
granted to any shareholder possessing more than 10% of the combined
voting power of all classes of capital stock of the Company on the
date of grant must not be less than 110% of the fair market value
on that date, and no such option may be exercisable more than 5
years after the date of grant.
Effective March 29, 1999, 2,000 warrants which vest immediately
were granted to consultants to the Company with ten year terms and
exercise prices of $4.44.
Effective May 14, 1999, grants of 83,250 options which vest
immediately and 83,250 options which vest over five years, were
granted under this plan to employees and brokers with ten year
terms and exercise prices of $4.50.
Effective May 14, 1999, grants of 80,000 warrants which vest
immediately were granted to directors and a consultant with ten
year terms and exercise prices of $4.50.
The Company applies Accounting Principles Board Opinion 25 and
related Interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its fixed stock option
plans and warrants, except for warrants issued to consultants. Had
compensation cost for the Company's stock-based compensation plans
been determined based on the fair value, as computed in accordance
with Statement of Financial Accounting Standards No. 123 (FAS 123),
at the grant dates for awards under those plans, the Company's net
income and earnings per share would have been reduced to the pro
forma amounts indicated below:
Nine Months Ended
Nov. 30, 1999 Nov. 30, 1998
Net income (loss)
As reported $125,519 ($503,288)
Pro forma ($753,278) ($3,018,479)
Basic Earnings per share
As reported $ 0.01 ($ 0.06)
Pro forma ($ 0.09) ($ 0.36)
Diluted earnings per share
As reported $ 0.01 ($ 0.06)
Pro forma ($ 0.09) ($ 0.36)
To make the computations of pro forma results under FAS 123, the
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: no dividend yield for all years and
expected lives of ten years. For fiscal 2000, the average expected
volatility is 49%, and the average assumed risk-free interest rate
is 5.97%. The options and warrants granted under these plans are
not registered and, accordingly, there is no quoted market price.
A summary of the status of the Company's stock option and warrants
plans as of November 30, 1999, and changes during the nine months
then ended, is presented below:
Options Warrants
Exercise Exercise
Shares Price Shares Price
Outstanding March 1, 1999 951,010 $6.098 243,000 $6.118
Granted 167,500 $4.499 82,000 $4.499
Exercised (6,400) $2.125
Forfeited (2,500) $4.145 (3,000) $4.750
Expired unexercised (600)$14.750 _______ _______
Outstanding Nov. 30,1999 1,109,010 $5.879 322,000 $5.719
Exercisable Nov. 30,1999 799,456 $5.354 322,000 $5.719
Weighted-average fair
value of options and
warrants granted during
the nine months,
computed in accordance
with FAS 123 $3.083 $3.081
The following table summarizes information about fixed stock
options and warrants outstanding at November 30, 1999:
Options Warrants
Number outstanding 1,109,010 322,000
Weighted-average
remaining contractual
life in years 7.264 7.609
Weighted-average exercise price $5.879 $5.719
Number exercisable 799,456 322,000
(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 $1,783,599 as of November 30, 1999, which was in excess
of its required minimum net capital of $122,500. The ratio of
aggregate indebtedness to net capital was .3 to 1 as of November
30, 1999. BSFS is also subject to regulations of the District of
Columbia and thirty states in which it is registered as a licensed
broker-dealer.
Buckeye Bancstocks is required by the Ohio Division of Securities
to maintain an "allowable net worth" of $25,000. The Company has
guaranteed this allowable net worth.
HAG and BSFS are Registered Investment Advisers and subject to
regulation by the SEC pursuant to the Investment Advisors Act of
1940.
(11) CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Company's NASD broker-dealer subsidiary, under the
correspondent agreement with its clearing broker, has agreed to
indemnify the clearing broker from damages or losses resulting from
customer transactions. The Company is, therefore, exposed to
off-balance sheet risk of loss in the event that customers are
unable to fulfill contractual obligations. The Company manages
this risk by requiring customers to have sufficient cash in their
account before a buy order is executed and to have the subject
securities in their account before a sell order is executed. The
Company has not incurred any losses from customers unable to
fulfill contractual obligations.
The Company's NASD broker-dealer subsidiary provides investment
management services to an agency of the State of Ohio. In
conjunction with these services the subsidiary has agreed to
indemnify the agency against losses resulting from violation of the
investment management agreement or violation of fiduciary duties
under applicable law.
In the normal course of business, the Company's NASD broker-dealer
subsidiary is a market maker for a limited number of community bank
stocks and quotes bid and ask prices for those stocks. In the
event of sudden price movements, the subsidiary may be required to
honor a quote at an undesirable price. The subsidiary controls
this risk by monitoring markets closely and updating quotes as
required and generally limits its quotes to 100 or 200 shares of a
given bank stock.
In the normal course of business, the Company periodically sells
securities not yet purchased (short sales) for its own account and
writes options. The establishment of short positions and option
contracts expose the Company to off-balance sheet market risks in
the event prices change, as the Company may be obligated to cover
such positions at a loss. At November 30, 1999, the Company had
$55,214 in short security positions, the Company had purchased
option put contracts but had not written any option contracts. The
Company did not experience any credit losses due to the failure of
any counterparties to perform during the nine months ended November
30, 1999. Senior management of the Company is responsible for
reviewing trading positions, exposures, profits and losses, trading
strategies and hedging strategies on a daily basis.
The Company's significant industry concentration, which arises
within its normal course of business activities, is with financial
institutions for bank securities transactions.
(12) SEGMENT INFORMATION
Description of the types of services from which each reportable
segment derives its revenues
The Banc Stock Group, Inc., has five reportable segments: Research,
Mutual Fund Advisor, Brokerage, Investment Banking and Trading
Portfolio. Research provides bank valuation services and financial
research of small-capitalization community bank stocks. The Mutual
Fund Advisor is the investment advisor to The Banc Stock Group
Fund, a diversified, open-end mutual fund. Brokerage provides
private portfolio management and brokerage services to individual
and institutional investors. The investment banking division
provides investment banking services to de novo banks and
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 nine months ended November 30, 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) $256,079 $150,268 $406,347
Fees & Commissions $226,146 1,737,378 20,048 1,983,572
Investment banking $10,000 364,229 $275,507 649,736
Dividends 11,400 184,214 195,614
Intersegment revenues None
Interest revenue 17,300 16,742 34,042
Interest expense 1,346 685 2,031
Depreciation and
amortization 11,876 11,876 37,769 12,147 73,668
Segment income (loss)
before taxe (258,839)(324,845) 735,483 (264,372) 342,542 229,969
Equity in net
earnings of
affiliated company (63,450) (63,450)
Segment assets 57,830 121,611 2,923,672 133,849 10,603,068 13,840,030
Expenditures for
segment assets 14,289 14,289 14,289 14,289 57,156
Financial information for the quarter ended November 30, 1999
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from
external customers:
Trading Profits
(Losses) $24,425 ($366,141) ($341,716)
Fees & Commissions $56,876 474,722 6,532 538,130
Investment banking $7,500 199,234 $130,875 337,609
Dividends 2,386 75,561 77,947
Intersegment revenues None
Interest revenue 5,681 7,198 12,879
Interest expense 510 510
Depreciation and
amortization 3,973 3,973 12,605 4,064 24,615
Segment income (loss)
before taxes (76,743)(103,475) 98,065 (90,954) (282,986) (456,093)
Equity in net
earnings of
affiliated company (50,440) (50,440)
Segment assets 57,830 121,611 2,923,672 133,849 10,603,068 13,840,030
Expenditures for
segment assets 2,392 2,391 2,391 2,391 9,565
Financial information for the nine months ended November 30, 1998
Financial information for each reportable segment is shown below.
The Company does not operate, or hold assets, in any foreign
country. The Company does not have any single customer generating
10% or more of revenue.
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from
external customers:
Trading Profits
(Losses) ($233,561) ($803,174) ($1,036,735)
Fees & Commissions $341,038 2,336,612 22,925 2,700,575
Investment
banking $70,847 527,481 $351,654 949,982
Dividends 25,733 108,561 134,294
Intersegment
revenues None
Interest revenue 18,423 11,383 29,806
Interest expense 23,477 25,173 48,650
Depreciation and
amortization 10,766 10,766 36,929 10,764 69,225
Segment income
(loss) before
taxes (59,587) (29,645) 1,080,240 (754,789) (685,157) (448,938)
Equity in net
earnings of
affiliated company (89,350) (89,350)
Segment assets 51,608 141,728 2,200,294 97,143 12,556,248 15,047,021
Expenditures for
segment assets 16,571 16,571 16,572 16,572 66,286
Financial information for the quarter ended November 30, 1998
Mutual
Fund Investment Trading
Research Advisor Brokerage Banking Portfolio Combined
Revenue from
external customers:
Trading Profits
(Losses) $57,555 ($84,320) ($26,765)
Fees & Commissions $100,050 615,431 6,865 722,346
Investment banking $19,115 1,860 $8,140 29,115
Dividends 9,313 30,824 40,137
Intersegment revenues None
Interest revenue 7,894 3,769 11,663
Interest expense 4,303 11,552 15,855
Depreciation and
amortization 3,745 3,745 12,466 3,743 23,699
Segment income
(loss) before taxes (24,861)(21,998) 344,219 (238,407) (54,094) 4,859
Equity in net
earnings of
affiliated company 19,650 19,650
Segment assets 51,608 141,728 2,200,294 97,143 12,556,248 15,047,021
Expenditures for
segment assets 5,642 5,642 5,643 5,643 22,570
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
Nine Months Ended November 30, 1999, Compared to the Nine Months
Ended November 30, 1998
Revenues for the nine months ended November 30, 1999 increased to
$3,269,311 compared to $2,777,922 for the nine months ended
November 30, 1998, an increase of 18%. This increase results from
increases in trading profits.
Trading profits were $406,347 for the nine months ended November
30, 1999 compared to trading losses of $1,036,735 for the nine
months ended November 30, 1998, an increase of 139%. This
represents an annual rate of return on the average portfolio of 5%
for the nine months ended November 30, 1999 compared to negative
10% for the nine months ended November 30, 1998. These trading
profits are the net result from price increases in some equity
securities in the small capitalization banking sector, while the
prices other securities have eroded. While management of the
Company believes that its investment strategies remain sound, the
Company's trading portfolios are subject to fluctuations based on
world wide equity markets, and specifically, to volatility in the
banking sector. Management is unable to predict how future
fluctuations will impact the performance of its trading portfolios.
The Company generated management fees and commission revenue of
$1,983,572 for the nine months ended November 30, 1999 compared to
$2,700,575 for the nine months ended November 30, 1998, a decrease
of 27%. The decrease is primarily attributable to depressed market
values in the community banking sector which reduces asset values
on which management fees are based and reduces the buying and
selling activity in commission generating retail accounts.
Revenues from investment banking for the nine months ended November
30, 1999, decreased to $649,736 compared to $949,982 for the nine
months ended November 30, 1998, a decrease of 32%. Investment
banking revenue is recorded upon completion of the underwriting.
Therefore, the revenue for the two nine-month-periods reflect the
transactions completed during the respective periods. Management
expects investment banking revenue to fluctuate from period to
period.
Operating expenses for the nine months ended November 30, 1999
decreased to $3,039,343 compared to $3,226,860 for the nine months
ended November 30, 1998, a decrease of 6%. Brokers' commission
expenses decreased to $941,371 for the nine months ended November
30, 1999, compared to $1,680,694 for the nine months ended November
30, 1998, a decrease of 44%. This decrease results from commission
expenses related to investment banking activities and the
management fees and commission revenue discussed above.
Salaries, benefits, and payroll taxes increased to $796,564 for the
nine months ended November 30, 1999 compared to $460,281 for the
nine months ended November 30, 1998, an increase of 73%. This
increase reflects management's decision to increase staffing levels
to establish additional revenue sources in the future.
Professional fees decreased to $307,187 for the nine months ended
November 30, 1999, compared to $323,568 for the nine months ended
November 30, 1998, a decrease of 5%. The expense in the prior year
included the award of stock warrants to certain consultants to the
Company. The value of these warrants was determined using the
Black-Scholes option-pricing model and expensed on the date of
grant. These stock warrants were expensed at the date of grant
based on the fair value determined by the Black-Scholes option-
pricing model. Interest expense decreased to $2,031 for the nine
months ended November 30, 1999 compared to $48,650 for the nine
months ended November 30, 1998, a decrease of 96%. This decrease
results from the elimination of margin positions with broker-
dealers. General and administrative expenses increased to $992,189
for the nine months ended November 30, 1999 compared to $713,667
for the nine months ended November 30, 1998, an increase of 39%.
This increase relates to additional expenditures for data
information services, printing and advertising.
ShareholderOnline, Inc., is an Ohio corporation establishing an
electronic stock information service and alternative trading
system. It is separately owned but under common management with
the Company. The Company currently holds 16% of the outstanding
common stock. The name of the company was changed to
ShareholderOnline effective December 2, 1999. The Company's
investment is accounted for on the equity method. Equity in
Shareholderonline's earnings was a loss of $63,450 for the nine
months ended November 30, 1999, compared to a loss of $89,350 for
the nine months ended November 30, 1998.
Quarter Ended November 30, 1999, Compared to the Quarter Ended
November 30, 1998
Revenues for the quarter ended November 30, 1999 decreased to
$624,849 compared to $776,496 for the quarter ended November 30,
1998, a decrease of 20%. This decrease results from increases in
losses from trading activities and decreases in management fees and
commissions.
Trading losses were $341,716 for the quarter ended November 30,
1999 compared to trading losses of $26,765 for the quarter ended
November 30, 1998. This represents an annual rate of return on the
average portfolio of negative 16% for the quarter ended November
30, 1999 compared to a negative return of 1% for the quarter ended
November 30, 1998 due primarily to the ongoing erosion of market
values in the small capitalization banking sector. While
management of the Company believes that its investment strategies
remain sound, the Company's trading portfolios are subject to
fluctuations based on world wide equity markets, and specifically,
to volatility in the banking sector. Management is unable to
predict how future fluctuations will impact the performance of its
trading portfolios.
The Company generated management fees and commission revenue of
$538,130 for the quarter ended November 30, 1999, compared to
$722,346 for the quarter ended November 30, 1998, a decrease of
26%. The decrease is primarily attributable to depressed market
values in the community banking sector which reduces asset values
on which management fees are based and reduces the buying and
selling activity in commission generating retail accounts.
Revenues from investment banking for the quarter ended November 30,
1999, increased to $337,609 compared to $29,115 for the quarter
ended November 30, 1998. Investment banking revenue is recorded
upon completion of the underwriting. There was only minor
investment banking activity during the quarter ended November 30,
1998.
Operating expenses for the quarter ended November 30, 1999,
increased to $1,080,942 compared to $771,637 for the quarter ended
November 30, 1998, an increase of 40%. Brokers' commission
expenses increased to $345,473 for the quarter ended November 30,
1999, compared to $231,835 for the quarter ended November 30, 1998,
an increase of 49%. This increase results from commission expenses
related to investment banking activities discussed above.
Salaries, benefits, and payroll taxes increased to $281,411 for the
quarter ended November 30, 1999 compared to $147,767 for the
quarter ended November 30, 1998, an increase of 90%. This increase
reflects management's decision to increase staffing levels to
establish additional revenue sources in the future. Professional
fees decreased to $73,931 for the quarter ended November 30, 1999
compared to $106,859 for the quarter ended November 30, 1998, a
decrease of 31%. This decrease relates primarily to services
previously provided by consultants which are now provided in-house.
Interest expense decreased to $510 for the quarter ended November
30, 1999, compared to $15,855 for the quarter ended November 30,
1998, a decrease of 97%. This decrease results from the
elimination of margin positions with broker-dealers. General and
administrative expenses increased to $379,617 for the quarter ended
November 30, 1999 compared to $269,321 for the quarter ended
November 30, 1998, an increase of 41%. This increase relates to
additional expenditures for data information services, printing and
advertising.
ShareholderOnline, Inc., is an Ohio corporation establishing an
electronic stock information service and alternative trading
system. It is separately owned but under common management with
the Company. The Company currently holds 16% of the outstanding
common stock. The name of the company was changed to
ShareholderOnline, Inc. effective December 2, 1999. The Company's
investment is accounted for on the equity method. Equity in
ShareholderOnline's earnings was a loss of $50,440 for the quarter
ended November 30, 1999 compared to a gain of $19,650 for the
quarter ended November 30, 1998.
Liquidity and Capital Resources
Approximately 47% of the value of the Company's trading portfolio
is comprised of small bank stocks which are thinly traded and there
can be no assurance that active markets will develop. The failure
of such markets to develop could negatively affect the Company's
operations and financial condition. Approximately 53% of the
Company's trading portfolio is readily marketable. Investments in
bank securities traded on national securities markets and
securities not traded on national securities markets, but with
readily ascertainable market values are valued at market value.
Other bank securities for which market quotations are not readily
available, due to infrequency of transactions, are valued at fair
value as determined in good faith by management of the Company.
While management employs objective criteria to ascertain these
values, there is no independent benchmark by which the values
assigned by management can be judged.
As of November 30, 1999, and 1998, the Company had working capital
of approximately $12,000,000. Working capital includes cash,
securities owned and accounts and notes receivable, net of all
liabilities except deferred taxes. The Company has no long term
debt.
The Company's NASD broker-dealer subsidiary, under the
correspondent agreement with its clearing broker, has agreed to
indemnify the clearing broker from damages or losses resulting from
customer transactions. The Company is, therefore, exposed to off-
balance sheet risk of loss in the event that customers are unable
to fulfill contractual obligations. The Company manages this risk
by requiring customers to have sufficient cash in their account
before a buy order is executed and to have the subject securities
in their account before a sell order is executed. The Company has
not incurred any losses from customers unable to fulfill
contractual obligations.
The Company's NASD broker-dealer subsidiary provides investment
management services to an agency of the State of Ohio. In
conjunction with these services, the subsidiary has agreed to
indemnify the agency against losses resulting from violation of the
investment management agreement or violation of fiduciary duties
under applicable law.
In the normal course of business, the Company's NASD broker-dealer
subsidiary is a market maker for a limited number of community bank
stocks and quotes bid and ask prices for those stocks. In the
event of sudden price movements, the subsidiary may be required to
honor a quote at an undesirable price. The subsidiary controls
this risk by monitoring markets closely and updating quotes as
required and generally limits its quotes to 100 or 200 shares of a
given bank stock.
In the normal course of business, the Company periodically sells
securities not yet purchased (short sales) for its own account and
writes options. The establishment of short positions and option
contracts expose the Company to off-balance sheet market risks in
the event prices change, as the Company may be obligated to cover
such positions at a loss.
At November 30, 1999, the Company had $55,214 invested in short
security positions. Short security positions do not expose the
Company to credit risk since the counterparty is not obligated to
perform.
At November 30, 1999, the Company had purchased option put
contracts but had not written any option contracts. Short option
positions do not expose the Company to credit risk since the
counterparty is not obligated to perform. The Company did not
experience any credit losses due to the failure of any
counterparties to perform during the quarter ended November 30,
1999. Senior management of the Company is responsible for
reviewing trading positions, exposures, profits and losses, trading
strategies and hedging strategies on a daily basis.
The Company's most significant industry concentration, which arises
within its normal course of business activities, is with financial
institutions for bank securities transactions.
The net cash balance increased $3,624,826 during the nine months
ended November 30, 1999. Net cash provided by operating activities
was $3,722,632. The Company has accumulated cash in anticipation
of opportunities to by community bank stocks at bargain prices
later in the year.
Investing activities used $57,156 of cash during the nine months
ended November 30, 1999, for the purchase of computer equipment.
Financing activities used $40,650 of cash during the nine months
ended November 30, 1999, as advances to affiliates exceeded
advances from affiliates and proceeds from the exercise of stock
options.
The operations of the Company are funded primarily by returns on
investments and other operating revenues. Management believes that
the Company's existing resources, including available cash and cash
provided by operating activities, will be sufficient to satisfy its
working capital requirements in the foreseeable future. However,
no assurance can be given that additional funds will not be
required. To the extent that returns on investments are less than
or expenses are greater than anticipated, the Company may be
required to reduce its activities, liquidate inventory or seek
additional financing. This financing may not be available on
acceptable terms, if at all. No significant capital expenditures
are expected in the foreseeable future, except that the Company, as
part of its strategic and operational planning, continues to
explore options to expand its capital base to support market making
activities.
Impact of Inflation and Other Factors
The Company's operations have not been significantly affected by
inflation. The Company's trading portfolios of equity securities,
primarily in the community banking sector, are carried at current
market values. Therefore, the Company's profitability is affected
by general economic and market conditions, including volatility in
the banking sector, the volume of securities trading and
fluctuations in interest rates.
The Company's business is also subject to government regulation and
changes in legal, accounting, tax and other compliance
requirements. Changes in these regulations may have a significant
effect on the Company's operations.
The Revenue Reconciliation Act of 1993 includes Mark-to-Market
Rules which essentially require dealers in securities to include
unrealized gains on the trading portfolio, in taxable income for
income tax purposes. In the past, because of the Company's net
operating loss carry forward, the Mark-to-Market Rules did not have
a significant impact on operations. However, now that the net
operating loss carry forward has been utilized, these Rules could
have a materially adverse impact on the Company's cash flow.
Management has initiated a program to evaluate continuity of the
Company's information systems and application software for the Year
2000. Critical application software utilized by the Company is
furnished primarily by third-party vendors. Management worked with
these vendors to evaluate these systems. No significant
incremental costs were incurred in connection with this process.
Additionally, management evaluated personal computer applications
for Year 2000 compliance. The cost of this program was not
material and utilized existing information technology resources.
There may be providers of significant services on which the Company
relies, such as utilities, which are unwilling or unable to provide
information regarding their Year 2000 preparedness. If critical
information systems fail to distinguish the Year 2000 from 1900,
the Company's normal operations could be disrupted. The Company is
continuing to develop contingency plans, including procedures for
alternative processing and communications, in an attempt to reduce
the impact of any disruptions. However, such disruptions could
materially and adversely affect the Company's financial results.
Management believes its Year 2000 compliance program and related
contingency plans will provide reasonable, but not absolute,
assurance that information systems will function adequately in the
Year 2000.
The Company maintains substantial trading portfolios, primarily of
community bank stocks. In addition, the Company or one of its
subsidiaries, serves as investment advisor to The Banc Stock Group
Fund, a diversified, open-end mutual fund investing primarily in
community bank stocks; manages discretionary investment authority
over investment accounts comprised of community bank stocks for
individual and institutional investors; recommends community bank
stock investments to retail customers; and manages an Ohio limited
liability company investing primarily in community bank stocks.
Therefore, the Year 2000 preparedness of these investee banks is
important to these client investors and to the Company's trading
portfolios. A critical part of the Year 2000 Compliance Program is
determining the extent to which the Company or its clients are at
risk because of the failure of these third-party investee
community banks to address their own system requirements for the
Year 2000. The Company communicated with these third-party banks
to ascertain that they are addressing Year 2000 issues and are
either Year 2000 compliant or expect to be compliant on a timely
basis. At present, the Company has not been advised by any third-
party bank of any Year 2000 problems likely to materially interfere
with the bank's operations. However, not all third-party banks
have been responsive to the Company's inquiries. To the extent
that third-party banks did not provide satisfactory responses and
the Company was unable to satisfy itself through alternative means,
the Company decided to sell certain securities for portfolios under
its control and recommend the same action to other clients that
owned the securities. These third-party banks operate in a
regulatory environment. Bank regulators generally established June
30, 1999, as a deadline for banks to have achieved Year 2000
compliance. Management believes its Year 2000 compliance program
will provide reasonable, but not absolute, assurance that third-
party banks with information systems unable to function adequately
in the Year 2000 have been identified and removed from client and
Company portfolios.
Forward-looking Statements
From time to time, the Company may publish forward-looking
statements relating to such matters as anticipated operating
results, prospects for new lines of business, technological
developments, economic trends (including interest rates and market
volatility), expected transactions and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements, and the purpose of this
paragraph is to secure the use of the safe harbor. While the
Company believes that the assumptions underlying its forward-
looking statements are reasonable, any of the assumptions could
prove to be inaccurate, and accordingly, actual results and
experiences could differ materially from the anticipated results or
other expectations expressed by the Company in its forward-looking
statements. Factors that could cause actual results or experiences
to differ from results discussed in the forward-looking statements
include, but are not limited to: economic conditions; volatility
and direction of interest rates or market values of trading
securities; governmental legislation and regulation; and other
risks identified from time-to-time in the Company's other public
documents on file with the SEC.
THE BANC STOCK GROUP, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of
Security Holders - 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 January 12, 2000 /S/ Michael E. Guirlinger
Michael E. Guirlinger
President, Treasurer and
Chief Executive Officer
Date January 12, 2000 /S/ Jeffrey C. Barton
Jeffrey C. Barton
Vice President and
Chief Financial Officer
Financial Data Schedule
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND> 0
<RESTATED>
<CIK> 0
<NAME> 0
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<PERIOD-START> SEP-01-1999
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 3,957,158
<RECEIVABLES> 345,993
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 8,343,552
<PP&E> 215,321
<TOTAL-ASSETS> 13,840,030
<SHORT-TERM> 0
<PAYABLES> 503,295
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 8,886,243
<OTHER-SE> 3,828,278
[TOTAL-LIABILITIES-AND-EQUITY] 13,840,030
<TRADING-REVENUE> (341,716)
<INTEREST-DIVIDENDS> 90,826
<COMMISSIONS> 90,826
<INVESTMENT-BANKING-REVENUES> 337609
<FEE-REVENUE> 447,304
<INTEREST-EXPENSE> 510
<COMPENSATION> 281,411
<INCOME-PRETAX> (456,093)
<INCOME-PRE-EXTRAORDINARY> (456,093)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (337,533)
<EPS-BASIC> (.04)
<EPS-DILUTED> (.04)
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