As filed with the Securities and Exchange Commission on November 16, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
X Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1998
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From _____________ to ____________
For Quarter Ended September 30, 1998 Commission File Number 0-9667
BULL & BEAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1897916
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11 Hanover Square, New York, New York 10005
(Address of principal executive offices) (Zip Code)
212-785-0900
(Company's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d)of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares outstanding of each of the registrant's classes of common
stock, as of October 31, 1998, were as follows:
Class A Common Stock non-voting, par value $.01 per share - 1,350,017 shares
Class B Common Stock voting, par value $.01 per share - 20,000 shares
1
<PAGE>
BULL & BEAR GROUP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
- (Unaudited) September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income (Loss)
- (Unaudited) Three and Nine Months Ended
September 30, 1998 and September 30, 1997 4
Consolidated Statements of Changes in Shareholders' Equity
- (Unaudited) Nine Months Ended
September 30, 1998 and September 30, 1997 5
Consolidated Statements of Cash Flows
- (Unaudited) Nine Months Ended
September 30, 1998 and September 30, 1997 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Management's Representation and Signatures 17
2
<PAGE>
<TABLE>
<CAPTION>
BULL & BEAR GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 257,979 $ 312,633
Marketable securities (Note 2) 1,576,358 1,846,028
Management, distribution and service fees receivable 251,882 268,984
Interest, dividends and other receivables 138,397 187,954
Prepaid expenses and other assets 406,963 411,821
------------- -------------
Total Current Assets 2,631,579 3,027,420
------------ ------------
Real estate held for investment, net 1,167,313 632,682
Furniture and fixtures, net 194,066 196,416
Excess of cost over net book value of
subsidiaries, net 698,358 727,373
Other 267,935 243,183
------------- -------------
2,327,672 1,799,654
------------ ------------
Total Assets $ 4,959,251 $ 4,827,074
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 76,068 $ 160,849
Accrued professional fees 134,089 93,335
Accrued other expenses 23,479 45,225
Current portion of capitalized lease obligation 8,350 13,644
Accrued payroll and other 61,122 41,042
Current liabilities 9,836 10,408
------------- -------------
Total Current Liabilities 312,944 364,503
Capitalized lease obligation -- 7,460
Shareholders' Equity: (Notes 4, 5, and 6)
Common Stock, $.01 par value
Class A, 10,000,000 shares authorized;
1,350,017 shares issued and outstanding 13,501 13,501
Class B, 20,000 shares authorized;
20,000 shares issued and outstanding 200 200
Additional paid-in capital 6,240,179 6,236,077
Retained earnings (deficit) (1,617,632) (1,836,753)
Unrealized gains on marketable securities (Notes 1 and 4) 10,059 42,086
------------- -----------
Total Shareholders' Equity 4,646,307 4,455,111
------------ -----------
Total Liabilities and Shareholders' Equity $ 4,959,251 $ 4,827,074
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
BULL & BEAR GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Management, distribution and service fees $ 811,817 $1,053,299 $2,691,468 $3,371,701
Brokerage fees and commissions 560,946 594,629 1,735,151 1,811,152
Realized gains from investments -- -- -- 86,458
Dividends, interest and other 28,768 36,204 100,675 92,707
---------- ---------- ------------- -----------
1,401,531 1,684,132 4,527,294 5,362,018
--------- --------- --------- ---------
Expenses:
General and administrative 825,458 782,487 2,488,768 2,448,435
Marketing 241,622 220,937 753,506 733,120
Clearing and brokerage charges 174,266 159,345 461,654 463,027
Expense reimbursements to the Funds (note 9) 56,612 132,427 106,258 594,496
Subadvisory fees 44,056 88,254 181,873 297,497
Amortization and depreciation 44,367 36,164 122,467 99,991
Professional fees 54,189 33,974 165,421 197,372
---------- --------- ------------ -----------
1,440,570 1,453,588 4,279,947 4,833,938
--------- --------- ---------- ----------
Income (loss) before income taxes (39,039) 230,544 247,347 528,080
Income taxes (note 8) 18,326 14,800 28,226 33,094
----------- ----------- ----------- -----------
Net income (loss) $ (57,365) $ 215,744 $ 219,121 $494,986
=========== ========= ========= ========
Per share data:
Basic $(.04) $.16 $.16 $.36
====== ==== ==== ====
Diluted $(.04) $.15 $.15 $.34
====== ==== ==== ====
Average shares outstanding:
Basic 1,370,017 1,370,017 1,370,017 1,370,017
========= ========= ========= =========
Diluted 1,415,805 1,452,019 1,453,331 1,464,172
========= ========= ========= =========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
BULL & BEAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Additional Retained Gains on Total
Class A Class B Class A Class B Paid-in- Earnings Marketable Shareholders'
Common Common Common Common Capital (Deficit) Securities Equity
------ ------ ------ ------ ---------- --------- ---------- -------------
Nine Months Ended
September 30, 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,350,017 20,000 $13,501 $200 $6,236,077 $(2,462,478) $ 130,586 $3,917,886
Net income -- -- -- -- -- 494,986 -- 494,986
Change in unrealized gains
on marketable securities -- -- -- -- -- -- (89,210) (89,210)
---------- -------- -------- ----- ----------- ------------ ---------- -----------
Balance, September 30, 1997 1,350,017 20,000 $13,501 $200 $6,236,077 $(1,967,492) $ 41,376 $4,323,662
========= ====== ======= ==== ========== ============ ========= ==========
Nine Months Ended
September 30, 1998
Balance, January 1, 1998 1,350,017 20,000 $13,501 $200 $6,236,077 $(1,836,753) $ 42,086 $4,455,111
Net income -- -- -- -- -- 219,121 -- 219,121
Contribution to additional
paid-in-capital -- -- -- -- 4,102 -- -- 4,102
Change in unrealized gains
on marketable securities -- -- -- -- -- -- (32,027) (32,027)
---------- -------- -------- ----- ---------- ------------ ---------- ----------
Balance, September 30, 1998 1,350,017 20,000 $13,501 $200 $6,240,179 $(1,617,632) $ 10,059 $4,646,307
========= ====== ======= ==== ========== ============ ======== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
BULL & BEAR GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------ ------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income $ 219,121 $ 494,986
------------ ------------
Adjustments to reconcile net income to net cash
provided by (used in) Operating Activities:
Depreciation and amortization 122,467 99,991
Increase in cash value of life insurance (24,500) (24,083)
Change in unrealized gains and realized gains on investments 16,136 (86,458)
Other -- (11,775)
(Increase) decrease in:
Management, distribution and service fees receivable 17,102 (72,459)
Interest, dividends and other receivables 49,557 (14,555)
Prepaid expenses and other assets 4,858 (42,674)
Other (252) (5,774)
Increase (decrease) in:
Accounts payable (84,781) 15,822
Accrued professional fees 40,754 23,621
Accrued other expenses (21,746) (4,680)
Accrued payroll and other costs 20,080 7,606
Other (572) 23,263
------------- --------------
Total adjustments 139,103 (92,155)
----------- ------------
Net cash provided by Operating Activities 358,224 402,831
----------- -------------
Cash Flows from Investing Activities:
Proceeds from sales of investments 424,920 547,129
Purchases of investments (203,412) (98,040)
Capital expenditures (562,249) (168,785)
Purchases of equipment (63,485) (23,161)
------------ -------------
Net cash provided by (used in) Investing Activities (404,226) 257,143
----------- -------------
Cash Flows from Financing Activities:
Capitalized lease obligations (12,754) (9,633)
Contribution to additional paid-in-capital 4,102 --
Net cash used for Financing Activities (8,652) (9,633)
------------ --------------
Net increase (decrease) in cash and cash equivalents (54,654) 650,341
Cash and cash equivalents:
At beginning of period 312,633 747,444
---------- ------------
At end of period $ 257,979 $1,397,785
========= ==========
</TABLE>
Supplemental disclosure: The Company paid $8,990 and $0 in Federal
income taxes during the nine months ended September
30, 1998 and 1997, respectively.
The Company paid approximately $700 and $900 in
interest expense during the nine months ended
September 30, 1998 and 1997, respectively.
See accompanying notes to the consolidated financial statements.
6
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Bull & Bear Group, Inc. ("Company") is a holding company. Its
subsidiaries' businesses consist of providing investment management,
distribution and shareholder administration services for the Bull &
Bear Funds, Midas Fund, and Rockwood Fund ("Funds") and discount
brokerage services.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Bull &
Bear Group, Inc. and all of its subsidiaries. Substantially all
intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES
In preparing financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, and accrued expenses and other
liabilities approximate fair value because of the short maturity of
these items. Marketable securities are recorded at market value
which represents the fair value of the securities.
CASH AND CASH EQUIVALENTS
Investments in money market funds are considered to be cash
equivalents. At September 30, 1998 and December 31, 1997, the
Company and subsidiaries had invested approximately $197,600 and
$260,300, respectively, in an affiliated money market fund.
MARKETABLE SECURITIES
The Company and its non-broker/dealer subsidiaries' marketable
securities are considered to be "available-for-sale" and recorded at
market value, with the unrealized gain or loss included in
stockholders' equity. Marketable securities for the broker/dealer
subsidiaries are valued at market with unrealized gains and losses
included in earnings.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Company's activities involve
the execution and settlement of customer transactions. These
activities may expose the Company to risk of loss in the event the
customer is unable to fulfill its contracted obligations, in which
case the Company may have to purchase or sell financial instruments
at prevailing market prices. Any loss from such transactions is not
expected to have a material effect on the Company's financial
statements.
BROKERAGE INCOME AND EXPENSES
Brokerage commission and fee income and clearing and brokerage
expenses are recorded on a settlement date basis. The difference
between recording such income and expenses on a settlement date
basis as opposed to trade date, as required by generally accepted
accounting principles, is not material to the consolidated financial
statements.
7
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
INCOME TAXES
The Company and its wholly-owned subsidiaries file consolidated
income tax returns. The Company's method of accounting for income
taxes conforms to Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes". This method requires the
recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the
financial reporting basis and the tax basis of assets and
liabilities.
RECLASSIFICATIONS
Certain reclassifications of the 1997 financial statements have been
made to conform to the 1998 presentation.
REAL ESTATE HELD FOR INVESTMENT AND EQUIPMENT
Real estate held for investment is recorded at cost and is
depreciated on a straight-line basis over its estimated useful life.
At September 30, 1998 and December 31, 1997, accumulated
depreciation amounted to $79,200 and $51,600, respectively.
Equipment, furniture and fixtures are recorded at cost and are
depreciated on the straight-line basis over their estimated useful
lives, 3 to 10 years. At September 30, 1998 and December 31, 1997,
accumulated depreciation amounted to $848,700 and $818,900,
respectively.
EXCESS OF COST OVER NET BOOK VALUE OF SUBSIDIARIES
The excess of cost over net book value of subsidiaries is
capitalized and amortized over fifteen and forty years using the
straight-line method. At September 30, 1998 and December 31, 1997,
accumulated amortization amounted to $652,500 and $623,400,
respectively. Periodically, the Company reviews its intangible
assets for events or changes in circumstances that may indicate that
the carrying amounts of the assets are not recoverable.
EARNINGS PER SHARE
The Company applies Statement of Financial Accounting Standards No.
128 "Earnings Per Share". The earnings per share for 1997 have been
restated to conform to the provisions of this statement. Basic
earnings per share is computed using the weighted average number of
shares outstanding. Diluted earnings per share is computed using the
weighted average number of shares outstanding adjusted for the
incremental shares attributed to outstanding options to purchase
common stock. The following table sets forth the computation of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
3 months ended Sept. 30, 9 months ended Sept. 30,
1998 1997 1998 1997
Numerator for basic and diluted earnings per share:
<S> <C> <C> <C> <C>
Net income ($ 57,365) $ 215,744 $ 219,121 $ 494,986
========== ========= ========= =========
Denominator:
Denominator for basic earnings per share -
weighted-average shares 1,370,017 1,370,017 1,370,017 1,370,017
Effect of dilutive securities:
Employee Stock Options 45,788 82,002 83,314 94,155
--------- --------- --------- ---------
Denominator for diluted earnings per share -
adjusted weighted - average shares and
assumed conversions 1,415,805 1,452,019 1,453,331 1,464,172
=========== =========== ========== ===========
</TABLE>
8
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
2. MARKETABLE SECURITIES
At September 30, 1998, marketable securities consisted of:
Market Value
Broker/dealer securities - at market
<S> <C>
U.S. Treasury Notes due 6/30/99 to 9/30/00 $1,207,394
Affiliated mutual funds 115,045
Total broker/dealer securities (cost $1,336,035) 1,322,439
-----------
Other companies
Available-for-sale securities - at market
Equity securities 210,254
Unaffiliated mutual funds 41,235
Affiliated mutual funds 2,430
-------------
Total available-for-sale securities (cost $243,860) 253,919
------------
$1,576,358
At December 31, 1997, marketable securities consisted of:
Broker/dealer securities - at market
U.S. Treasury Notes due 6/30/99 to 9/30/00 (cost $1,260,380) $ 1,265,943
-----------
Other companies
Available-for-sale securities - at market
U.S. Treasury Notes due 9/30/00 353,720
Equity securities 186,884
Unaffiliated mutual funds 36,324
Affiliated mutual funds 3,157
----------
Total available-for-sale securities (cost $537,999) 580,085
---------
$1,846,028
</TABLE>
3. LEASE COMMITMENTS
The Company has a lease for approximately 11,400 square feet of office
space. The rent is approximately $144,000 per annum plus $32,550 per annum
for electricity. The lease expires December 31, 1998 and is cancelable at
the option of the Company on three months' notice. In addition, the
Company's discount broker/dealer has a branch office in Boca Raton,
Florida consisting of approximately 2,000 square feet. The rent is
approximately $55,000 per annum and expires on August 30, 1999.
The Company leases office equipment under capital leases expiring in 1999.
The related property is included in furniture and equipment at a cost of
$45,457 at September 30, 1998. Depreciation expense of approximately
$40,400 has been recognized on this property as of September 30, 1998.
Future annual minimum lease payments under the capital leases together
with the present value of the net minimum lease payments are as follows:
Year Ending December 31,
1998 14,188
1999 7,586
----------
Total minimum lease payments 21,774
Less: amount representing interest and executory costs 670
----------
Present value of minimum lease payments $ 21,104
========
4. SHAREHOLDERS' EQUITY
The Class A and Class B Common Stock are identical in all respects except
for voting rights, which are vested solely in the Class B Common Stock.
The Company also has 1,000,000 shares of Preferred Stock, $.01 par value,
authorized. As of September 30, 1998 and December 31, 1997, none of the
Preferred Stock was issued.
9
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
5. NET CAPITAL REQUIREMENTS
The Company's broker/dealer subsidiaries are member firms of the National
Association of Securities Dealers, Inc. and are registered with the
Securities and Exchange Commission as broker/dealers. Under the Uniform
Net Capital Rule (Rule 15c3- 1 under the Securities Exchange Act of 1934),
a broker/dealer must maintain minimum net capital, as defined, of not less
than (a) $250,000 or, when engaged solely in the sale of redeemable shares
of registered investment companies, $25,000, or (b) 6-2/3% of aggregate
indebtedness, whichever is greater; and a ratio of aggregate indebtedness
to net capital, as defined, of not more than 15 to 1. At September 30,
1998, these subsidiaries had net capital of approximately $365,000 and
$636,000; net capital requirements of approximately $250,000 and $25,000;
excess net capital of approximately $115,000 and $611,000; and the ratios
of aggregate indebtedness to net capital were approximately 1.21 to 1 and
.17 to 1, respectively.
6. STOCK OPTIONS
On December 6, 1995, the Company adopted a Long-Term Incentive Plan which
provides for the granting of 300,000 options to purchase Class A Common
Stock to directors, officers and key employees of the Company or its
subsidiaries. The plan was amended on February 5, 1996 and October 29,
1997 increasing the maximum number of options to 450,000. With respect to
non-employee directors, only grants of non-qualified stock options and
awards of restricted shares are available. The current two non-employee
directors were granted 10,000 options each on December 6, 1995 and 5,000
options each on October 29, 1997. A third non employee director was
granted 10,000 options on September 8, 1998. The option price per share
may not be less than the fair value of such shares on the date the option
is granted, and the maximum term of an option may not exceed ten years
except as to non-employee directors for which the maximum term is five
years. If the recipient of any option owns 10% or more of the Class B
shares, the option price must be at least 110% of the fair market value
and the option must be exercised within five years of the date the option
is granted.
The 1990 Incentive Stock Option Plan provided for the granting of a
maximum of 500,000 options to purchase Class A Common Stock to directors,
officers and key employees of the Company. The option price per share may
not be less than the greater of 100% of the fair market value or the par
value of such shares on the date the option is granted, and the maximum
term of an option may not exceed ten years. If the recipient of any option
owns 10% or more of the total combined voting power of all classes of
stock, the option price must be at least 110% of the fair market value and
the option must be exercised within five years of the date the option is
granted.
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost
has been recognized for its stock option plans. Proforma compensation cost
for the Company's plan is required by Financial Accounting Standards
No.123 "Accounting for Stock-Based Compensation (SFAS 123) and has been
determined based on the fair value at the grant dates for awards under the
plans consistent with the method of SFAS 123. For purposes of proforma
disclosure, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's proforma
information follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income: As reported $(57,365) $215,744 $219,121 $494,986
Proforma $(64,923) $168,505 $179,701 $356,458
Earnings per share
Basic: As reported $(.04) $.16 $.16 $.36
Proforma $(.05) $.12 $.13 $.26
Diluted: As reported $(.04) $.15 $.15 $.34
Proforma $(.05) $.12 $.12 $.24
</TABLE>
10
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
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 used for grants in 1998 and 1997; expected volatility
of 73.95% and 92.83%; risk-free interest rate of 5.11% and 5.85% and
expected life of three years.
A summary of the status of the Company's stock option plans as of
September 30, 1998 and December 31, 1997, and changes during the periods
ending on those dates is presented below:
Number Weighted Average
of Exercise
Stock Options Shares Price
Outstanding at December 31, 1996 249,000 $2.00
Granted 167,000 $2.53
Canceled (34,000) $1.97
--------
Outstanding at December 31, 1997 382,000 $2.23
Granted 12,000 $1.81
Canceled (16,000) $2.55
--------
Outstanding at September 30, 1998 378,000 $2.21
========
There were 352,000 and 146,000 options exercisable at September 30, 1998
and December 31, 1997. The weighted-average fair value of options granted
was $0.94 for the nine months ended September 30, 1998 and $1.41 for the
year ended December 31, 1997.
The following table summarizes information about stock options outstanding
at September 30, 1998:
Options Outstanding
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices At 9/30/98 Contractual Life Exercise Price
----------------- ----------- ----------------- ----------------
$1.50 - $1.875 67,000 2.6 years $1.79
$2.0625- $2.475 287,000 3.2 years $2.25
$2.75 - $3.00 24,000 3.2 years $2.90
In addition, there were 30,000 non-qualified stock options with a range of
exercise prices of $1.75 - $2.25 outstanding and exercisable as of
September 30, 1998.
7. PENSION PLAN
The Company has a 401(k) retirement plan for substantially all of its
qualified employees. Contributions to this plan are based upon a
percentage of earnings of eligible employees and are accrued and funded on
a current basis. Total pension expense for the nine months ended September
30, 1998 and September 30, 1997 was $37,706 and $34,810, respectively.
11
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
8. INCOME TAXES
The provision for income taxes charged to operations for the nine
months ended September 30, 1998 and 1997 was as follows:
1998 1997
---- ----
Current
State and local $19,236 $33,094
Federal 8,990 -
-------- -----------
$28,226 $33,094
======= =======
Deferred tax assets (liabilities) are comprised of the following at
September 30, 1998 and December 31, 1997:
1998 1997
---- ----
Unrealized loss (gain) on investments $ (3,000) $ (16,200)
Net operating loss carryforwards 193,000 277,100
---------- --------
Total deferred tax assets 190,000 260,900
Deferred tax asset valuation allowance (190,000) (260,900)
---------- ----------
Net deferred tax assets $ - $ -
============ ==========
The change in the valuation allowance for the nine months ended September
30, 1998 was due to net income earned during the period and a decrease in
unrealized gain on investments.
The provision for income taxes differs from the amount of income taxes
determined by applying the applicable U.S. statutory Federal tax rates to
pre-tax income as a result of utilization of net operating loss
carryforwards.
At December 31, 1997, the Company had net operating loss carryforwards for
Federal income tax purposes of approximately $815,000, of which $298,600,
$187,800, $62,700 and $265,900 expire in 2004, 2005, 2006 and 2011,
respectively.
9. RELATED PARTIES
All management and distribution fees are from providing services to the
Funds. All such services are provided pursuant to written agreements that
set forth the fees to be charged for these services. These agreements are
subject to annual review and approval by each Fund's Board of Directors
and a majority of the Fund's non- interested directors. Shareholder
administration fees represent reimbursement of costs incurred by
subsidiaries of the Company on behalf of the open-ended Funds. Such
reimbursement amounted to $168,731 and $212,103 for the nine months ended
September 30, 1998, and 1997, respectively.
In connection with management services, the Company's investment managers
waived or reimbursed management fees to the Funds in the amount of
$106,258 and $594,496 for the nine months ended September 30, 1998 and
1997, respectively.
Certain officers of the Company also serve as officers and/or directors of
the Funds.
Commencing August 1992, the Company obtained a key man life insurance
policy on the life of the Company's Chairman which provides for the
payment of $1,000,000 to the Company upon his death. As of September 30,
1998, the policy had a cash surrender value of approximately $125,508 and
is included in other assets in the balance sheet.
The Company's discount brokerage subsidiary received brokerage commissions
of approximately $85,022 and $174,297 from the Funds for the nine months
ended September 30, 1998 and 1997, respectively.
12
<PAGE>
BULL & BEAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1997
(Unaudited)
10. COMMITMENTS AND CONTINGENCIES
The Company and its directors are defendants in a lawsuit brought on April
24, 1995 by Maxus Investment Group, Maxus Capital Partners, Maxus Asset
Management, Inc., and Maxus Securities Corp. (collectively "Maxus"), which
as of August 19, 1998 claim to collectively own or control 12,000 shares,
or approximately 0.9% of the Class A Common stock of the Company. The
action, seeking declaratory and injunctive relief, was filed in the
federal district court for the Southern District of New York and purports
to be brought on the plaintiffs' own behalf and derivatively on behalf of
the Company. On April 11, 1996, the district court dismissed as a matter
of law all claims brought by the plaintiffs except those relating to the
voiding of 1993 exercises, the exercise of certain 1990 stock options and
plaintiffs' request for attorneys' fees from the Company. Defendants
thereafter filed answers denying liability. By stipulation dated August
19, 1998, Maxus agreed to a proposed settlement of the action, subject to
the approval of the district court. The proposed settlement is fully
described in the Important Notice of Proposed Derivative Action
Settlement, dated September 25, 1988, which was issued by the district
court and mailed to all Class A shareholders in September 1998. Additional
copies of the Notice may be obtained from the Company. The proposed
settlement was approved without objection on November 12, 1998 and will be
consummated upon expiration of applicable appeal periods.
From time to time, the Company and/or its subsidiaries are threatened or
named as defendants in litigation arising in the normal course of
business. As of September 30, 1998, neither the Company nor any of its
subsidiaries was involved in any other litigation that, in the opinion of
management, would have a material adverse impact on the consolidated
financial statements.
Although a group called Karpus Investment Management ("KIM") previously
failed to elect its slate of nominees in opposition to management at the
1997 annual meeting of stockholders of Bull & Bear U.S. Government
Securities Fund, Inc. ("BBG"), a closed-end fund managed by Bull & Bear
Advisers, Inc. ("BBAI"), another BBG annual meeting is scheduled for 1998.
In addition, on February 19, 1998, BBG filed a lawsuit against KIM in the
United States District Court for the Southern District of New York, 98
Civ. 1190. KIM filed a lawsuit against BBG in the Circuit Court for
Baltimore City, Maryland, Case No. 9805005, which was dismissed with
prejudice. KIM has stated in filings with the SEC that it wants
shareholders to terminate the investment management contract of BBAI with
BBG. The outcome of these matters and their effect on the Company or
BBAI's management agreement with BBG cannot be predicted with certainty.
BBG's net assets at September 30, 1998 amounted to approximately $11.3
million.
In July 1994, the Company entered into a Death Benefit Agreement
("Agreement") with the Company's Chairman. Following his death, the
Agreement provides for annual payments to his wife until her death
amounting to 80% of his average annual salary for the three year period
prior to his death subject to certain adjustments. The Company's
obligations under the Agreement are not secured and will terminate if he
leaves the Company's employ under certain conditions.
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 1998 compared to Three Months Ended
September 30, 1997
Drastic declines in the securities markets can have a significant effect
on the Company's business. Volatile stock markets may affect management and
distribution fees earned by the Company's subsidiaries. If the market value of
securities owned by the Funds declines, shareholder redemptions may occur,
either by transfer out of the equity Funds and into the money market fund, which
has lower management and distribution fee rates than the equity Funds, or by
transfer out of the Funds entirely. Lower asset levels in the Funds may also
cause or increase reimbursements to the Funds pursuant to expense limitations as
described in Note 9 of the financial statements. In addition, volatile stock
markets could have a significant effect on the brokerage commissions earned by
BBSI by affecting the number of transactions processed.
Total revenues decreased $282,601 or 17% which was primarily due to a
decrease in management, distribution and shareholder administration fees.
Management, distribution and shareholder administration fees decreased $241,482
or 23% because of a lower level of net assets under management. While the volume
of discount brokerage customers transactions for the quarter was 29% higher than
a year ago, brokerage fees and commissions decreased by $33,683 or 6% due to a
rapid increase in lower-priced Internet trading activity, which accounted for
39% and 2% of the volume of discount brokerage customer transactions for the
three months ended September 30, 1998 and 1997, respectively. Discount brokerage
customers' equity decreased to $248 million or 1%. Net assets under management
were approximately $328 million at June 30, 1997, $353 million at September 30,
1997, $278 million at June 30, 1998 and $261 million at September 30, 1998.
Dividends, interest and other income decreased $7,436 due to lower earnings on
the Company's investments.
Total expenses decreased $13,018 or 1% as a result of a decrease in
expense reimbursements to the funds. Expense reimbursements to the Funds
decreased $75,815 or 57% due to the expiration of the contractual expense
reimbursement on August 29, 1997 for the Midas Fund. General and administrative
expenses increased $42,971 or 5%. Marketing expenses increased $20,685 or 9%.
Clearing and brokerage charges increased $14,921 or 9%. Professional fees
increased $20,215 or 60%. Subadvisory fees decreased $44,198 or 50% because of
lower net assets and lower subadvisory fee rates with respect to Midas Fund. The
net loss for the period was $57,365 or $.04 per share as compared to net income
of $215,744 or $.15 diluted earnings per share for 1997.
Nine Months Ended September 30, 1998 compared to Nine Months Ended
September 30, 1997
Total revenues decreased $834,724 or 16% which was primarily due to a
decrease in management, distribution and shareholder administration fees.
Management, distribution and shareholder administration fees decreased $680,233
or 20% because of a lower level of net assets under management. While the volume
of discount brokerage customers transactions for the period was 25% higher than
a year ago, brokerage fees and commissions decreased by $76,001 or 4% due to a
rapid increase in lower-priced Internet trading activity, which accounted for
34% and 1% of the volume of discount brokerage customer transactions for the
nine months ended September 30, 1998 and 1997, respectively. Discount brokerage
customers' equity decreased to $248 million or 1%. Net assets under management
were approximately $401 million at December 31, 1996, $359 million at March 31,
1997, $328 million at June 30, 1997, $353 million at September 30, 1997, $274
million at December 31, 1997, $301 million at March 31, 1998, $278 million at
June 30, 1998 and $261 million at September 30, 1998. In 1997, the Company had
$86,458 in realized gains from the sale of investments in certain equity
positions. Dividends, interest and other income increased $7,968 due to higher
earnings on the Company's investments.
Total expenses decreased $553,991 or 11% as a result of a decrease in the
expense reimbursements to the funds and subadvisory fees. Expense reimbursements
to the Funds decreased $488,238 or 82% due to the expiration of the contractual
expense reimbursement on August 29, 1997 for the Midas Fund. Marketing expenses
increased $20,386 or 3%. General and administrative expenses increased $40,333
or 2%. Clearing and brokerage charges decreased $1,373 or 1%. Professional fees
decreased $31,951 or 16% due to lower litigation costs relating to the Maxus
lawsuit. Subadvisory fees decreased $115,624 or 39% because of lower net assets
and lower subadvisory fee rates with respect to Midas Fund. Net income for the
period was $219,121 or $.15 diluted earnings per share as compared to net income
of $494,986 or $.34 diluted earnings per share for 1997.
14
<PAGE>
Liquidity and Capital Resources
The following table reflects the Company's consolidated working capital,
total assets, long term debt and shareholders' equity as of the dates indicated:
September 30, 1998 December 31, 1997
------------------ -----------------
Working Capital $2,318,635 $2,662,917
Total Assets $4,959,251 $4,827,074
Long Term Debt $ -- $ 7,460
Shareholders' Equity $4,646,307 $4,455,111
Working capital decreased $344,282 due to expenditures in capital
improvements on the real estate held for investment. Total assets and
shareholders' equity increased $132,177 and $191,196, respectively for the nine
months ended September 30, 1998 primarily as a result of net income of $219,121
earned during the period.
As discussed previously, significant changes in the securities markets can
have a dramatic effect on the Company's results of operations. Based on current
information available, management believes that current resources are sufficient
to meet its liquidity needs.
Effects of Inflation and Changing Prices
Since the Company derives most of its revenues from acting as the manager
and distributor of mutual funds, discount brokerage services and from general
investments, it is not possible for it to discuss or predict with accuracy the
impact of inflation and changing prices on its revenue from continuing
operations.
Forward Looking Information
Information or statements provided by or on behalf of the Company from
time to time, including those within this Form 10-Q Quarterly Report, may
contain certain "forward-looking information", including information relating to
anticipated growth in revenues or earnings per share, anticipated changes in the
amount and composition of assets under management and discount brokerage
customers' equity and trading, anticipated expense levels, and expectations
regarding financial market conditions. The Company cautions readers that any
forward-looking information provided by or on behalf of the Company is not a
guarantee of future performance and that actual results may differ materially
from those in forward-looking information as a result of various factors,
including but not limited to those discussed below. Further, such
forward-looking statements speak only as of the date on which such statements
are made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
The Company's future revenues may fluctuate due to factors such as: the
total value and composition of assets under management and discount brokerage
customers' equity and trading, and related cash inflows or outflows in mutual
funds and discount brokerage firms; fluctuations in the financial markets
resulting in appreciation or depreciation of assets under management and
discount brokerage customers' equity and trading; the relative investment
performance of the Company's sponsored investment products as compared to
competing products and market indices; the expense ratios and fees of the
Company's sponsored products and services; investor sentiment and investor
confidence in mutual funds and discount brokerage firms; the ability of the
Company to maintain investment management fees and brokerage commissions at
current levels; competitive conditions in the mutual funds and discount
brokerage industries; the introduction of new mutual funds and investment
products and new discount brokerage services; the ability of the Company to
contract with the Funds for payment for administrative services offered to the
Funds and Fund shareholders; the continuation of trends in the retirement plan
marketplace favoring defined contribution plans and participant-directed
investments; and the amount and timing of income from the Company's investment
portfolio.
The Company's future operating results are also dependent upon the level
of operating expenses, which are subject to fluctuation for the following or
other reasons: changes in the level of advertising expenses in response to
market conditions or other factors; variations in the level of compensation
expense incurred by the Company, including performance-based compensation based
on the Company's financial results, as well as changes in response to the size
of the total employee population, competitive factors, or other reasons;
expenses and capital costs, including depreciation, amortization and other
non-cash charges, incurred by the Company to maintain its administrative and
service infrastructure; and unanticipated costs that may be incurred by the
Company from time to time to protect investor accounts and client goodwill.
15
<PAGE>
The Company's revenues are substantially dependent on revenues from the
Funds, which could be adversely affected if the independent directors of one or
more of the Funds determined to terminate or renegotiate the terms of one or
more investment management agreements.
The Company's business is also subject to substantial governmental
regulation, and changes in legal, regulatory, accounting, tax, and compliance
requirements may have a substantial effect on the Company's business and results
of operations, including but not limited to effects on the level of costs
incurred by the Company and effects on investor interest in mutual funds in
general or in particular classes of mutual funds.
Year 2000
Many companies and organizations have computer programs that use only two digits
to identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, this could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions.
In addressing the Year 2000 issue, the Company has substantially completed an
inventory of its computer programs and assessed its Year 2000 readiness. The
Company's computer programs include internally developed programs, third-party
purchased programs and third-party custom developed programs. For programs which
were identified as not being Year 2000 ready, the Company is in the process of
implementing a remedial plan which includes repairing or replacing the programs
and appropriate testing for Year 2000. In addition, the Company has initiated
communications with third parties to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 issues.
If such modifications and conversions are not made, or are not timely completed,
or if the systems of the companies on which the Company's interface system
relies are not timely converted, the Year 2000 issue could have a material
impact on the operations of the Company. However, the Company believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems.
In the opinion of management, the cost of addressing the Year 2000 issue is not
expected to have a material adverse effect on the Company's financial condition
or its results of operations.
16
<PAGE>
MANAGEMENT'S REPRESENTATION
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to a fair statement of the results
of the period.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BULL & BEAR GROUP, INC.
Dated: November 16, 1998 By: /s/ Joseph Leung
------------------------
Joseph Leung
Treasurer, Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the date indicated.
Dated: November 16, 1998
----------------------
Bassett S. Winmill
Chairman of the Board,
Director
Dated: November 16, 1998 /s/ Robert D. Anderson
------------------------
Robert D. Anderson
Vice Chairman, Director
Dated November 16, 1998 /s/ Mark C. Winmill
-----------------------
Mark C. Winmill
Co-President,
Chief Financial Officer, Director
Dated: November 16, 1998 /s/ Thomas B. Winmill
------------------------
Thomas B. Winmill, Esq.
Co-President,
General Counsel, Director
Dated: November 16, 1998
------------------------------
Charles A. Carroll, Director
Dated: November 16, 1998
------------------------------
Edward G. Webb, Jr., Director
Dated: November 16, 1998 By:
---------------------
Mark C. Jones, Director
17
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<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 257,979
<SECURITIES> 1,576,358
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