------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 June 30, 2000 or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to_________________
Commission file number: 811-02144
BKF CAPITAL GROUP, INC.
----------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0767530
------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Rockefeller Plaza, New York, New York 10020
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(212) 332-8400
--------------
(Registrant's telephone number, including area code)
--------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ( )
There were 6,504,852 shares of the registrant's Common Stock
outstanding as of July 31, 2000.
<PAGE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS AT JUNE 30, 2000
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 16,179
Investment advisory fees receivable 15,310
Prepaid expenses and other current assets 1,513
----------
Total current assets 33,002
----------
NONCURRENT ASSETS:
Investments in affiliated partnerships 6,720
Fixed assets-net 2,939
Other assets 633
Deferred tax asset (net of allowance of $5,170) --
INTANGIBLE ASSETS:
Goodwill 23,363
Employment contracts 23,363
Investment advisory contracts 70,088
Accumulated amortization (55,759)
----------
Total assets $ 104,349
==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accrued expenses $ 2,215
Accrued bonuses 11,395
Accrued incentive compensation 250
Income taxes payable 937
Other liabilities 344
----------
Total current liabilities 15,141
----------
Other liabilities 403
----------
Total liabilities 15,544
----------
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, authorized--60,000,000
Shares; issued and outstanding--6,504,852 shares 6,505
Additional paid-in capital 50,260
Retained earnings 32,040
----------
Total stockholders' equity 88,805
----------
Total liabilities and stockholders' equity $ 104,349
==========
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
<TABLE>
<CAPTION>
BKF Capital Pro forma Pro forma
Group, Inc. LEVCO adjustments and Consolidated
December 31, December 31, Intercompany December 31,
1999 1999 elimination 1999
------------------- --------------------- ---------------- --------------
<S> <C> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 481,988 $ 12,431 (a) $ (480,058) $ 14,361
Investment advisory fees
receivable(h) 12,460 (f) (10) 12,450
Prepaid expenses and
other current assets 858 485 1,343
-------------------- --------------------- ---------------
Total current assets 482,846 25,376 28,154
-------------------- --------------------- ---------------
Noncurrent assets:
Investments in affiliated
partnerships 7,633 7,633
Fixed assets-net 3,154 3,154
Other assets 912 912
Investments (e) 1,000 1,000
Investment in LEVCO 92,000 (c) (3,611) -
(g) (88,389)
Intangible assets:
Goodwill (c) 23,363 23,363
Employment contracts (c) 23,363 23,363
Investment advisory contracts (c) 70,088 70,088
Accumulated amortization (c) (49,812) (49,812)
-------------------- --------------------- ---------------
Total assets $ 575,846 $ 37,075 $ 107,855
==================== ===================== ===============
Liabilities and stockholders' equity:
Current liabilities:
Accrued expenses $ 2,718 $ 2,036 (b) $ (10) $ 4,744
Accrued bonuses(h) 13,346 13,346
Income taxes payable(h) 306 306
-------------------- --------------------- ---------------
Total liabilities 2,718 15,688 18,396
-------------------- --------------------- ---------------
Stockholders' equity:
Common stock, $1 par value,
authorized--60,000,000 shares;
issued and outstanding--6,504,852
shares 39,029 (d) (32,524) 6,505
Additional paid-in capital 463,426 55,517 (a) (422,115) 50,092
(c) (39,018)
(b) 10
(c) (3,611)
(d) 32,524
(a) 51,748
(g) (88,389)
Undistributed net realized gains 57,943 (a) (57,943) -
Unrealized depreciation of
investments Retained earnings(h) (39,018) (c) 39,018 -
51,748 (34,130) (a) (51,748) 32,862
(f) (10)
(c) 67,002
-------------------- --------------------- ---------------
Total stockholders' equity 573,128 21,387 89,459
-------------------- --------------------- ---------------
Total liabilities and
stockholders' equity $ 575,846 $ 37,075 $ 107,855
==================== ===================== ===============
</TABLE>
(a) - To record final distribution made to shareholders on January 7, 2000.
(b) - To reflect reversal of advisory fee payable to LEVCO.
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(c) - To record the initial acquisition by BKF under purchase accounting and
the reversal of the intercompany loan.
(d) - To record the reverse stock split (6,504,852 shares
are issued and outstanding after the reverse split).
(e) - Represents investments in two private placement securities. The Company
intends to liquidate these positions as appropriate on reasonable terms.
(f) - To reverse advisory fee receivable from BKF.
(g) - To eliminate the intercompany investment (LEVCO) in consolidation.
(h) - Reflects the retroactive effect of the accrual of incentive fees of $375
and the related effect to accrued bonuses, income taxes payable and retained
earnings of $235, $66 and $74, respectively.
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
<TABLE>
<CAPTION>
PRO FORMA
CONSOLIDATED
FOR THE
SIX MONTHS SIX MONTHS
ENDED PRO FORMA ENDED
JUNE 30, 2000 ADJUSTMENTS(A) JUNE 30, 2000
--------------- ---------------- --------------
<S> <C> <C> <C>
REVENUES:
Investment advisory fees $ 20,444 $ 20,444
Incentive fees and general partner allocations 10,952 10,952
Commission income - net 783 783
--------------- ---------------- --------------
Total revenues 32,179 - 32,179
--------------- ---------------- --------------
EXPENSES:
Employee compensation and benefits 17,999 17,999
Occupancy & equipment rental 1,094 1,094
Other operating expenses 3,729 3,729
Amortization of intangibles 2,385 2,385
--------------- ---------------- --------------
Total expenses 25,207 - 25,207
--------------- ---------------- --------------
Operating Income 6,972 - 6,972
Other Income(expense):
Net realized and unrealized loss on investments (608) 228 (380)
Interest income 1,041 (406) 635
Interest expense (33) (33)
--------------- ---------------- --------------
Income before taxes and cumulative effect of
change in accounting principle 7,372 (178) 7,194
--------------- ---------------- --------------
Provision for income taxes 4,466 4,466
Deferred tax (benefit) (5,170) (5,170)
Valuation allowance 5,170 5,170
--------------- ---------------- --------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,906 (178) 2,728
--------------- ---------------- --------------
Cumulative effect to April 18, 2000 of
change in accounting principle (53,374) (53,374)
--------------- ---------------- --------------
NET (LOSS) $ (50,468) $ (178) $ (50,646)
=============== ================ ==============
Basic and diluted earnings (loss) per share(b):
Income before cumulative effect of accounting change $ 0.42
Cumulative effect of accounting change (8.21)
--------------
Net (loss) $ (7.79)
==============
Weighted average shares outstanding basic and diluted(b) 6,504,852
==============
</TABLE>
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(a) To reverse the investment company specific income and expenses of BKF
Capital Group, Inc. for the period January 1, 2000 to April 18, 2000.
(b) Calculation reflects the reverse stock split (which was effectuated
January 7, 2000).
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
<TABLE>
<CAPTION>
BKF CAPITAL PRO FORMA
GROUP, INC. LEVCO CONSOLIDATED
SIX MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, PRO FORMA JUNE 30,
1999 1999 ADJUSTMENTS 1999
------------------- ------------------ ------------- ------------------
<S> <C> <C> <C>
REVENUES:
Investment advisory fees $ - $ 18,773 (a) (781) $ 17,992
Incentive fees and general partner
allocations(f) - 5,255 5,255
Commission income - net - 754 754
------------------- ------------------ ------------------
Total revenues - 24,782 24,001
------------------- ------------------ ------------------
EXPENSES:
Employee compensation and benefits(f) $ 800 $ 13,171 (b) (800) 12,258
(a) (913)
Occupancy & equipment rental 487 1,064 (b) (487) 1,064
Other operating expenses 1,616 2,455 (b) (1,616) 3,159
(a) 704
Investment advisory fees 781 - (a) (781) -
Amortization of intangibles - - (c) 5,948 5,948
------------------- ------------------ ------------------
Total expenses 3,684 16,690 22,429
------------------- ------------------ ------------------
Operating Income(loss) (3,684) 8,092 1,572
Other Income(expense):
Net realized and unrealized
gains from investments 73,365 - (b) (73,365) -
Interest income 1,758 121 (b) (1,758) 121
Dividend income 5,863 - (b) (5,863) -
Interest income (expense)-
Intercompany 3,304 (3,304) -
------------------- ------------------ ------------------
Income before taxes 80,606 4,909 1,693
------------------- ------------------ ------------------
Provision for income taxes(f) - 2,258 (d ) 1,257 3,516
------------------- ------------------ ------------------
Net income (loss) $ 80,606 $ 2,651 $ (1,823)
=================== ================== ==================
Net (loss) per share:
Basic and diluted (e) $ (0.28)
==================
Weighted average shares
outstanding-basic and
diluted (e) 6,504,852
==================
</TABLE>
(a) To adjust the advisory fee for the revenue earned by LEVCO for the
management of the BKF public portfolio, record additional operating
expenses to be borne by LEVCO and the corresponding reduction in employee
bonuses.
(b) To reverse the investment company specific income and expenses of BKF
Capital Group, Inc. for the period.
(c) To record the amortization of the intangible assets using purchase
accounting for the original acquisition of LEVCO by BKF.
(d) To record additional taxes for the pro forma adjustments.
(e) Basis of calculation reflects the reverse stock split (which was
effectuated January 7, 2000).
(f) Reflects the net retroactive effect of the accrual of incentive fees of
($372) and the related effect to employee compensation expense and
provision for income taxes of ($229) and ($66), respectively.
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
QUARTER ENDED
JUNE 30,
2000 (A)
----------------
REVENUES:
Investment advisory fees $ 10,860
Incentive fees and general partner allocations 5,712
Commission income - net 334
----------------
Total revenues 16,906
----------------
EXPENSES:
Employee compensation and benefits 9,880
Occupancy & equipment rental 551
Other operating expenses 1,850
Amortization of intangibles 2,385
----------------
Total expenses 14,666
----------------
Operating Income 2,240
Other Income(expense):
Interest income 319
Interest expense (17)
----------------
Income before taxes and cumulative effect of
change in accounting principle 2,542
----------------
Provision for income taxes 2,280
----------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 262
----------------
Cumulative effect to April 18, 2000 of
change in accounting principle (53,374)
----------------
NET (LOSS) $ (53,112)
================
Basic and diluted earnings (loss) per share(b):
Income before cumulative effect of accounting change $ 0.04
Cumulative effect of accounting change (8.21)
----------------
Net (loss) $ (8.17)
================
Weighted average shares outstanding basic and diluted(b) 6,504,852
================
(a) BKF Capital Group, Inc. (the former registered investment company) had no
operations for the period April 1, 2000 to April 18, 2000.
(b) Calculation reflects the reverse stock split (which was effectuated January
7, 2000).
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
<TABLE>
<CAPTION>
BKF CAPITAL PRO FORMA
GROUP, INC. LEVCO CONSOLIDATED
QUARTER ENDED QUARTER ENDED QUARTER ENDED
JUNE 30, JUNE 30, PRO FORMA JUNE 30,
1999 1999 ADJUSTMENTS 1999
------------------- ------------------ ------------- ---------------
<S> <C> <C> <C>
REVENUES:
Investment advisory fees $ - $ 9,383 (a) $ (402) $ 8,981
Incentive fees and general partner
allocations(f) - 3,241 3,241
Commission income - net - 374 374
------------------- ------------------ ---------------
Total revenues - 12,998 12,596
------------------- ------------------ ---------------
EXPENSES: - -
Employee compensation and benefits(f) 387 6,936 (b) (387) 6,474
- (a) (462)
Occupancy & equipment rental 214 551 (b) (214) 551
Other operating expenses 815 1,242 (b) (815) 1,594
- (a) 352
Investment advisory fees 402 - (a) (402) -
Amortization of intangibles - - (c) 2,974 2,974
------------------- ------------------ ---------------
Total expenses 1,818 8,729 11,593
------------------- ------------------ ---------------
-
Operating Income(loss) (1,818) 4,269 1,003
-
Other Income(expense): - -
Net realized and unrealized gains from
investments 66,400 - (b) (66,400) -
Interest income 1,093 59 (b) (1,093) 59
Dividend income 1,746 - (b) (1,746) -
Interest income (expense)- Intercompany 1,638 (1,638) -
-
------------------- ------------------ ---------------
Income before taxes 69,059 2,690 1,062
------------------- ------------------ ---------------
-
Provision for income taxes(f) - 1,237 (d) 619 1,856
-
------------------- ------------------ ---------------
Net income (loss) $ 69,059 $ 1,453 $ (795)
=================== ================== ===============
Net (loss) per share:
Basic and diluted (e) $ (0.12) (e)
===============
Weighted average shares outstanding-basic and
diluted (e) 6,504,852 (e)
===============
</TABLE>
(a) To adjust the advisory fee for the revenue earned by LEVCO for the
management of the BKF public portfolio, record additional operating
expenses to be borne by LEVCO which had previously been borne by BKF and
the corresponding reduction in employee bonuses.
(b) To reverse the investment company specific income and expenses of BKF
Capital Group, Inc. for the period.
(c) To record the amortization of the intangible assets using purchase
accounting for the original acquisition of LEVCO by BKF.
(d) To record additional taxes for the pro forma adjustments.
(e) Basis of calculation reflects the reverse stock split (which was
effectuated January 7, 2000).
(f) Reflects the effect of the accrual of incentive fees of ($207) and the
related effect to employee compensation expense and provision for income
taxes of ($127) and ($37), respectively.
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)
<TABLE>
<CAPTION>
2000 1999
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Pro forma net loss $ (50,646) $ (1,823)
Adjustments to reconcile pro forma net loss to net cash
provided by operations:
Depreciation and amortization 56,159 6,307
Compensation expense for vesting of restricted stock units 250 -
Realized loss on investment 108 -
(Increase) in investment advisory fees receivable (2,860) (898)
Decrease in prepaid expenses and other current assets 740 35
(Increase) Decrease in investments in affiliated investment partnerships 913 (473)
Decrease in other assets 279 641
Increase (Decrease) in accrued expenses and accounts payable (2,529) 117
(Decrease) in accrued bonuses (1,951) (3,591)
Increase in income taxes payable 631 608
--------------- --------------
Net cash provided by operating activities 1,094 923
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed asset additions (183) (313)
Proceeds from sale of investments 892 -
--------------- --------------
Net cash provided by (used in) investing activities 709 (313)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of loan principal (163) -
Cash included in deemed contribution (distribution) 178 (2,523)
--------------- --------------
--------------- --------------
Net cash provided by (used in) financing activities 15 (2,523)
--------------- --------------
Net Increase (decrease) in cash and cash equivalents 1,818 (1,913)
Cash and cash equivalents at the beginning of the period 14,361 10,779
--------------- --------------
Cash and cash equivalents at the end of the period $ 16,179 $ 8,866
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 33 $ 3,304
=============== ==============
Cash paid for taxes $ 3,907 $ 2,929
=============== ==============
</TABLE>
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BKF CAPITAL GROUP, INC.
STATEMENT OF CASH FLOWS-HISTORICAL
SIX MONTHS ENDED JUNE 30
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSAND)
(SEE NOTE 1)
<TABLE>
<CAPTION>
2000(a) 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations $ (53,318) $ 80,606
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Depreciation and amortization 55,961 -
Net realized and unrealized (gain) loss on investments 401 (73,365)
Compensation expense for vesting of restricted stock units 125 -
Decrease in receivable for securities sold - 132
(Increase) in investment advisory fees receivable (3,719) -
Decrease in dividends and interest receivable - 147
Decrease in prepaid expenses and other current assets 712 -
Decrease other assets 137 75
(Increase) in investments in affiliated investment partnerships (2,203) -
(Decrease) in accrued expenses and accounts payable (2,202) (33)
Increase in accrued bonuses 6,658 -
(Decrease) in income taxes payable (659) -
Increase in payable for investment management fee - 3
Increase in payable for securities purchased - 2,848
Net amortization of discounts - (304)
------------ ------------
Net cash provided by operating activities 1,893 10,109
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities - (208,458)
Proceeds from sales of portfolio securities - 247,986
Sales/maturities of money market securities,net - 12,992
Fixed asset additions (35) -
Proceeds from sale of investments 599 -
Cash from previously unconsolidated subsidiary 11,873 -
------------ ------------
Net cash provided by investing activities 12,437 52,520
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends and capital gain distributions (480,058) (11,709)
Payment of loan principal (81) -
------------ ------------
Net cash (used in) financing activities (480,139) (11,709)
------------ ------------
Net Increase (decrease) in cash and cash equivalents (465,809) 50,920
Cash and cash equivalents at the beginning of the period 481,988 42,351
------------ ------------
Cash and cash equivalents at the end of the period $ 16,179 $ 93,271
============ ============
</TABLE>
<PAGE>
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<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<S> <C>
Cash paid for interest $ 22
============
Cash paid for taxes $ 2,992
============
(a) - The cash flow represents the historical cash flows of BKF Capital Group,
Inc. (the former registered investment company) for the period January 1,
2000 to April 18, 2000 and the combined cash flows of the holding company
for the period April 19, 2000 to June 30, 2000.
</TABLE>
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Organization
BKF Capital Group, Inc. (formerly Baker, Fentress & Company, herein referred to
as "BKF" or the "Company") operated under the Investment Company Act of 1940 as
a non-diversified closed-end management investment company. In August 1999, the
Board of Directors and shareholders of BKF adopted and implemented a Plan for
Distribution of Assets ("Plan"), pursuant to which substantially all of BKF's
investment securities were sold. The cash proceeds, as well as shares of
Consolidated-Tomoka Land Company ("CTO"), were subsequently distributed to
shareholders by January 7, 2000. The Company received a deregistration order
from the Securities and Exchange Commission ("SEC") on April 18, 2000,
effectively completing its evolution from an investment company to a holding
company whose primary business now operates through a wholly owned subsidiary,
Levin Management Co., Inc. and its subsidiaries, all of which are referred to as
"Levco." As of April 2000, financial reporting of BKF and Levco will be on a
consolidated basis.
The Unaudited Pro Forma Condensed Consolidated Financial Statements of Levco
include its wholly owned subsidiary, John A. Levin & Co., Inc., ("JALCO") and
JALCO's two wholly owned subsidiaries LEVCO GP Inc. ("LEVCO GP") and LEVCO
Securities, Inc. ("LEVCO Securities"). All intercompany transactions have been
eliminated in consolidation.
JALCO is an investment advisor registered under the Investment Advisers Act of
1940 which provides investment advisory services to its clients which include
U.S. and foreign corporations, mutual funds, limited partnerships, universities,
pension and profit sharing plans, individuals, trusts, not-for-profit
organizations and foundations. JALCO also participates in broker consults
programs (Wrap Accounts) with three nationally recognized financial
institutions. LEVCO Securities is registered with the SEC as a broker-dealer and
is a member of the National Association of Securities Dealers, Inc. LEVCO GP
acts as the general partner of seven affiliated investment partnerships and is
registered with the Commodities Futures Trading Commission as a commodity pool
operator.
Levco provides all administrative support services to its subsidiaries,
including, among other things, employee services, office space, equipment and
administrative support.
The BKF Unaudited Pro Forma Condensed Consolidated Statement of Financial
Condition at December 31, 1999, reflects the historical accounting treatment of
the Company as a registered investment company. Therefore, BKF accounted for
Levco as an investment carried at fair value, and the two companies were not
consolidated.
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The pro forma adjustments account for the liquidation of substantially all of
the private and public portfolios of BKF, the distribution of cash as well as
shares of CTO, and the recasting of the June 1996 acquisition of Levco using
purchase accounting (thereby taking into account intangible assets and
amortization thereon).
The Unaudited Pro Forma Condensed Consolidated Statements of Income for the
three and six months ended June 30, 1999 and for the six months ended June 30,
2000 present the historical results of BKF and Levco. The pro forma adjustments
reflect:
--elimination of the intercompany investment management fee revenues
resulting from the liquidation of the BKF public portfolio, which had
been managed by Levco;
--operating expenses attributable to operating a publicly traded
company that were previously borne by BKF;
--reduction of Levco's 1999 compensation expense based on the reduction
of revenue and increase in expenses;
--reversal of all investment company specific components of BKF revenue
and expenses since it will have no ongoing operations other than that
of Levco;
--elimination of the intercompany interest expense due to the
reclassification of the BKF loan to Levco's equity (which was
effectuated in December 1999);
--amortization expense on intangible assets based on the recasting of
the June 1996 acquisition of Levco by BKF using the purchase method of
accounting. This item is non-deductible for income tax purposes;
--income tax effect of pro forma adjustments;
--deferred tax benefit and related valuation allowance; and
--the 1 for 6 reverse stock split effectuated on January 7, 2000
The Unaudited Pro Forma Condensed Consolidated Statements of Cash Flows for the
six month periods ended June 30, 2000 and June 30, 1999 reflect the pro forma
cash flows of the combined companies as if BKF had received its deregistration
order effective January 1, 1999. Thus, BKF and Levco financial information would
have been presented on a consolidated basis.
THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ARE
PRESENTED SINCE THEY ARE MORE REPRESENTATIVE OF THE COMPANY'S OPERATIONS AFTER
THE IMPLEMENTATION OF THE PLAN.
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited pro forma financial data does not purport to represent the results
of operations or the financial position of the Company which actually would have
occurred had the proposed transaction been previously consummated or project the
results of operations or the financial position of the Company for any future
date or period. The SEC approved the application for deregistration of the
Company as a registered investment company on April 18, 2000. Therefore, the
Unaudited Condensed Consolidated Statements of Income for the quarter ended June
30, 2000 and for the six months ended June 30, 2000 reflect the non-recurring
charge relating to the change in accounting method for the cumulative effect of
the amortization of intangible assets resulting from recording the Levco
transaction under purchase accounting.
BASIS OF PRESENTATION
The Unaudited Interim Pro Forma Condensed Consolidated Financial Statements of
the Company included herein have been prepared in accordance with generally
accepted accounting principles for interim financial information and Rule 10-01
of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles. The Unaudited
Interim Pro Forma Condensed Consolidated Financial Statements reflect all
adjustments, which are of a normal recurring nature, necessary for a fair
presentation of financial position, results of operations and cash flows of the
Company for the interim periods presented and are not necessarily indicative of
a full year's results.
REVENUE RECOGNITION
Generally, investment advisory fees are calculated quarterly, in arrears, and
are based upon a percentage of the market value of each account at the end of
the quarter. Wrap account fees are calculated quarterly in advance based upon a
percentage of the market value of each account as of the previous calendar
quarter end. Incentive fees and general partner incentive allocations earned
from affiliated investment partnerships and incentive fees from other accounts
are currently accrued on a quarterly basis and are billed at the end of their
respective contract year. Such accounting practice has been retroactively
applied to the prior periods presented. Commissions earned on securities
transactions executed by LEVCO Securities, and related expenses, are recorded on
a trade-date basis.
CASH AND CASH EQUIVALENTS
The Company treats all highly liquid instruments with maturities at acquisition
of three months or less as cash equivalents. The Company maintained
substantially all of its cash and equivalents invested in interest bearing
instruments at two nationally recognized financial institutions.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS
Investments in affiliated investment partnerships are held through LEVCO GP and
are recorded based upon the equity method of accounting. The investment amount
equals the sum of LEVCO GP's capital accounts in the partnerships obtained from
financial statements that were prepared in accordance with accounting principles
generally accepted in the United States. LEVCO GP is also entitled to a special
allocation of income from the applicable affiliated investment partnerships
based on their performance.
INCOME TAXES
The Company intends to file consolidated federal, state and local income tax
returns. Historically, since BKF was a Regulated Investment Company ("RIC"),
which distributed all of its income, it was generally not subject to income
taxes and, therefore, no tax provision was previously recorded on the BKF
financial statements. Levco, an operating company, has been subject to federal,
state and local taxes on income. The Unaudited Pro Forma Condensed Consolidated
Statements of Income for the six months ended June 30, 2000 and June 30, 1999
reflect a tax provision on the pro forma consolidated income.
Principally due to state and local taxes, the Company's provision for income
taxes differs from the amount of income tax determined by applying the
applicable U.S. federal statutory income tax rate. The total tax provision is
based on an overall federal, state and local effective rate of approximately 47%
for the three and six months ended June 30, 2000, and 46% for the three and six
months ended June 30, 1999, respectively. The Company has determined that the
amortization expense on intangible assets is not tax deductible since the June
1996 purchase method of accounting has been retroactively applied.
The Company accounts for income taxes under the liability method prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
basis. Future tax benefits are recognized only to the extent that realization of
such benefits is more likely than not. For the quarter ended March 31, 2000, a
pro forma deferred tax benefit and related valuation allowance of $5.17 million
were recorded. The ultimate utilization of the tax benefit due to a capital loss
carry-forward is dependent on the character and amount of the partnership
incentive allocation income.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
In preparing the Unaudited Interim Pro Forma Condensed Consolidated Financial
Statements, management is required to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual results could differ
from those estimates. During the second quarter of 2000, the Compensation
Committee of BKF ("Committee") approved the compensation plan for the year ended
December 31, 2000. The change in estimate is reflected in the Statement of
Income for the three month period ended June 30, 2000 and the Pro Forma
Statement of Income for the six month period then ended. The change in estimate
resulted in an increase in compensation expense of approximately $530,000. The
bonus accrual for the three and six months ended June 30, 1999 reflects an
amount based on the Incentive Compensation Plan approved by the Committee (see
Note 7). These estimated amounts represent a change from previous assumptions
used by management.
FIXED ASSETS
Furniture, fixtures, office and computer equipment and leasehold improvements
are carried at cost. Depreciation of furniture, fixtures, office and computer
equipment is provided on the accelerated method over the estimated useful lives
of the respective assets. Leasehold improvements are amortized over the shorter
of the economic life or the term of the lease.
OTHER ASSETS
Included in other assets is a security deposit ($432,000 at June 30, 2000 and
$807,000 at December 31, 1999) required pursuant to the Company's office space
lease agreement. This deposit is held at a nationally recognized financial
institution. Investments in private placements for which market values are not
readily ascertainable are stated at their estimated fair values as determined by
the Company's management. During the quarter ended March 31, 2000, the Company
recorded a permanent write down of $401,000 for one of the investments. As of
June 30, 2000, the Company has completed the sale of the remaining private
placements which were made by BKF when it was a registered investment company.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
The cost in excess of net assets of Levco acquired by BKF in June 1996 is
reflected as goodwill, employment contracts, and investment advisory contracts
in the Condensed Consolidated Statement of Financial Condition at June 30, 2000
and the Pro Forma Condensed Consolidated Statement of Financial Condition at
December 31, 1999. Goodwill is amortized straight line over 15 years and
investment contracts over 10 years. Employment contracts are amortized over the
life of the contract or shorter period if the employee has subsequently left the
Company. Pro forma accumulated amortization at December 31, 1999 was $49.8
million. Whereas the Unaudited Pro Forma Condensed Consolidated Financial
Statements reflect these intangible assets recorded under the purchase
accounting method, the retroactive income effect of the recasting of this
transaction has been recorded in the second quarter of 2000 as a one time charge
to income for all accumulated amortization from June 1996 through April 18,
2000. The cumulative effect of the amortization was recorded in the second
quarter upon receiving approval of the Company's deregistration order as an
investment company from the SEC.
EARNINGS PER SHARE
The Company has not presented historical earnings per share due to the
significant changes in its operations, which are not reflected in the historical
financial statements. BKF, as a registered investment company, presented its net
asset value ("NAV") per share. The unaudited pro forma earnings per share are
shown using the actual BKF shares outstanding (adjusted for the 1 to 6 reverse
stock split effectuated in January 2000).
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" in the second quarter of 2000. Pro forma net income is
divided by the weighted average number of common shares outstanding during the
quarter and for the six month period ended to calculate basic earnings per
share. Pro forma diluted earnings per share are computed by dividing pro forma
net income by the total of the weighted average number of shares of common stock
outstanding and common stock equivalents. Diluted earnings per share are
computed using the treasury stock method. Restricted stock units and non
qualified stock options outstanding during the periods were anti-dilutive,
therefore basic and diluted earnings per share are the same. There were no
options granted prior to January 2000.
BUSINESS SEGMENTS
The Company has not presented business segment data, in accordance with SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information,"
because it operates predominantly in one business segment, the investment
advisory and asset management business.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation," and
has adopted the intrinsic value method for all arrangements under which
employees receive shares of stock or other equity instruments of the Company or
if the Company incurs liabilities to employees in amounts based on the price of
its stock. Fair value disclosures are included in the notes to the Unaudited Pro
Forma Condensed Consolidated Financial Statements.
2. RECEIVABLE FROM CLEARING BROKER
LEVCO Securities acts as an introducing broker and all transactions for its
customers are cleared through and carried by a major U.S. securities firm on a
fully disclosed basis. LEVCO Securities has agreed to indemnify its clearing
broker for losses that the clearing broker may sustain from the customer
accounts introduced by LEVCO Securities. In the event a customer is unable to
fulfill its contractual obligation to the clearing broker, LEVCO Securities may
be exposed to off-balance sheet risk.
3. RELATED PARTY TRANSACTIONS
TERM LOAN AND OTHER BORROWING FROM BKF
In June 1996, Levco borrowed $65 million under a term loan agreement (as
amended) with BKF. The loan bore interest at 10.25% per annum during 1999. The
loan was originally due on June 28, 1999 and was subsequently extended to
December 15, 1999 with an interest rate of LIBOR plus 3.5%. On December 15,
1999, Levco's loan due to BKF matured and BKF's Board of Directors approved the
reclassification of the loan to the capital of Levco on that date. Subsequent to
December 15, 1999, Levco has not and will not incur any interest expense on this
loan.
INVESTMENT ADVISORY FEES FROM BKF
Levco managed the publicly traded portion of BKF's investment portfolio (see
Note 1). Advisory fees earned from this relationship for the three and six month
periods ended June 30, 1999 were approximately $402,000 and $781,000,
respectively. Pursuant to BKF's Plan and liquidation of its public portfolio
which was managed by Levco, subsequent to December 31, 1999 Levco no longer
received any advisory fees from BKF.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS AND RELATED REVENUE
The Company earned investment advisory fees and general partner allocations
(inclusive of an incentive fee) from affiliated investment partnerships of
approximately $2.6 million and $2.1 million, respectively, for the three month
periods ended June 30, 2000 and June 30, 1999 and $5.1 million and $3.8 million
for the six month periods ended June 30, 2000 and June 30, 1999, respectively.
Included in investments in affiliated partnerships at June 30, 2000 and December
31, 1999 are approximately $4.3 million and $5.4 million, respectively, of
incentive allocations. LEVCO GP has general partner liability with respect to
its interest in each of the affiliated investment partnerships and has no assets
other than its interest in these partnerships and certain cash and cash
equivalents.
COMMISSION REVENUES
All commission revenues reflected on the Unaudited Pro Forma Condensed
Consolidated Statements of Income have been generated by transactions introduced
to a clearing broker by LEVCO Securities, which acts as a broker for certain
investment advisory accounts of the Company. Commission revenues have been
presented net of the related clearing expenses.
4. COMMITMENT
The Company has office space obligations that require monthly payments plus
escalations through January 2008. At June 30, 2000 the minimum annual rental
commitments under the operating lease are as follows:
July through December 31, 2000 $ 675,000
2001 1,403,000
2002 1,423,000
2003 1,483,000
2004 1,484,000
2005 to 2008 4,581,000
---------------
Total minimum payments required $ 11,049,000
==================
5. NET CAPITAL REQUIREMENT
LEVCO Securities is subject to the SEC's Uniform Net Capital Rule 15c3-1
("Rule"), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. At June 30, 2000 and December 31, 1999, LEVCO Securities was
in compliance with this Rule.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
6. EMPLOYEE BENEFIT PLAN
Levco has adopted a Section 401(k) plan. All employees with six months or more
of service are eligible to participate in the plan. Eligible participants may
contribute up to 15% of their earnings, subject to statutory limitations. The
Company may match employee contributions, up to 100%, subject to statutory
limitations.
7. INCENTIVE COMPENSATION PLAN
In December 1998, the shareholders of BKF approved an Incentive Compensation
Plan ("Compensation Plan") that allows the Company to pay officers and employees
a part of their compensation in restricted stock units ("RSU") and other forms
of equity-based compensation, including stock options. The total number of
shares of BKF common stock that may be issued under the Compensation Plan is
650,000 shares, giving effect to the 1 to 6 reverse stock split effectuated in
January 2000. On April 18, 2000, the Compensation Plan was amended to increase
the number of shares that may be issued to 1,300,000. In addition, the
Compensation Plan permits employees to borrow amounts from the Company in order
to purchase BKF stock or exercise options.
On January 20, 2000, the Committee authorized the issuance of 76,855 RSU's and
183,178 non-qualified stock options to purchase BKF shares under the
Compensation Plan as a component of the 1999 year-end bonuses. Those employees
electing to receive RSU's and non-qualified options forfeited their rights to
the cash equivalent portion of their bonus in return for the RSU's and options
received. In return, these employees received an additional 20% of equity based
on the amount exchanged.
The RSU's granted in exchange for a portion of the original cash bonus vest
pro-rata over a two-year period ending on December 31, 2001. The RSU's require
future services as a condition to the ultimate receipt of the underlying number
of shares of BKF common stock. The Company's policy is to expense these amounts
ratably over the required service period. The expense for the three and six
month periods ended June 30, 2000 relating to the vesting of the RSU's was
$125,000 and $250,000, respectively.
With respect to the non-qualified stock options, the Committee granted 183,178
non-qualified stock options to purchase BKF shares at a strike price of
$13.03125 (the average market price on the date of grant). These options are
exercisable in equal annual installments in December 2000 and December 2001
subject to satisfying employment conditions, with exceptions for termination due
to death, retirement or a change in control of the ownership of BKF. Once the
service requirements have been met, these options will remain outstanding and
exercisable until the tenth anniversary of the date of grant, subject to earlier
expiration upon termination of employment. On January 20, 2000, the Committee
granted an additional 103,098 non-qualified options that will expire in January
2010. These options also have an exercise price of $13.03125 and vest over one
to three years. In 1999, Levco did not incur any compensation expense related to
the Compensation Plan.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
7. INCENTIVE COMPENSATION PLAN (CONTINUED)
Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the Company
has elected to account for its stock option plan under APB Opinion 25,
"Accounting for Stock Issued to Employees," and adopt the disclosure only
provisions for SFAS No. 123. Under APB 25, no compensation costs were recognized
related to the Award Plan because the exercise price of the options awarded was
equal to the fair market price of the common stock on the date of the grant.
Under SFAS No. 123, net income would have been reduced by $222,000 and $443,000,
respectively, for the three and six month periods ended June 30, 2000. Basic and
diluted earnings per share would have been reduced by $.03 and $.07,
respectively, for the three and six month periods ended June 30, 2000.
The fair value of each option granted in 2000 was estimated using the
Black-Scholes option-pricing model with following assumptions:
Expected dividend yield 0.00%
Expected volatility 15.45%
Risk-free interest 6.35%
Expected term 7 years
Fair value $4.97
None of the options were vested or exercisable as of June 30, 2000.
8. DEFERRED COMPENSATION PLAN
On April 18, 2000 the Company adopted a Long Term Deferred Compensation Plan to
provide a competitive long-term incentive for key officers and employees. The
awards of RSU's vesting in 2000 may be deferred into this plan and will be
expensed on a straight-line method over the respective vesting periods. As of
June 30, 2000 none of the deferred compensation has been converted to shares of
common stock.
9. OTHER LIABILITIES
During 2000, the Company financed a portion of its Directors and Officers/Errors
and Omissions insurance policy (premium $910,000). The financed amount is
payable in 30 equal monthly installments of approximately $32,000.
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
BKF Capital Group, Inc. ("BKF") operates entirely through John A. Levin & Co.,
Inc., an investment adviser registered with the U.S. Securities and Exchange
Commission that was acquired by BKF in June 1996. The investment adviser is a
wholly owned subsidiary of Levin Management Co., Inc., which in turn is a wholly
owned subsidiary of BKF. Levin Management Co., Inc. and its subsidiaries are
referred to collectively as "Levco." Levco specializes in managing equity
portfolios for institutional and individual investors primarily in the United
States. Most accounts are managed pursuant to a large cap value strategy; Levco
also offers an event-driven, risk arbitrage product as well as other more
specialized investment programs.
Levco acts as the general partner of a number of investment partnerships and
also acts as an adviser to private investment vehicles organized outside the
United States.
With respect to accounts managed pursuant to its large cap value strategy, Levco
generally receives advisory fees based on a percentage of the market value of
assets under management, including market appreciation or depreciation and
client contributions and withdrawals. With respect to private investment
vehicles and separate accounts managed pursuant to similar strategies, Levco is
generally entitled to receive both a fixed management fee based on a percentage
of the assets under management and a share of net profits.
Levco obtains some of its clients for its large cap value product through wrap
fee programs sponsored by major financial services companies. In these programs,
clients pay the sponsoring broker an asset-based fee that covers brokerage
commissions, advisory services, custodial fees, and other reporting and
administrative services. Investors are able to select Levco from among a limited
number of managers participating in the program, and Levco receives a portion of
the wrap fee paid by the clients who select Levco to manage their accounts
through the program.
Levco also has a wholly-owned broker-dealer subsidiary that clears through
Correspondent Services Corporation, a PaineWebber company, on a fully disclosed
basis. Generally, the customers of the broker-dealer subsidiary are advisory
clients of Levco, and the trades executed through the broker-dealer are
generally placed by Levco in its capacity as investment adviser.
The following discussion and analysis of the results of operations is based on
the actual and pro forma Condensed Consolidated Statements of Income and
Condensed Consolidated Statements of Financial Condition for BKF Capital Group,
Inc. and Subsidiaries. In light of the evolution of BKF from a closed-end
management investment company to a holding company whose primary asset is the
investment management business of Levco, pro forma financial statements have
been included in Part I - Item 1 of this Quarterly Report on Form 10-Q in order
to provide meaningful comparisons of financial information for the periods ended
June 30, 2000, December 31, 1999 and June 30, 1999. Management has not included
a discussion of historical financial results of BKF as a closed-end management
investment company since it completed the distribution of substantially all of
its assets on January 7, 2000 pursuant to a Plan of Distribution of Assets
approved by shareholders on August 19, 1999 and ceased to be registered as an
investment company on April 18, 2000.
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Certain statements under this caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. See
"Part II - Other Information."
PRO FORMA RESULTS OF OPERATIONS
Three Months Ended June 30, 2000 as Compared to Three Months Ended June 30,
1999.
Revenues
Total revenues for the second quarter of 2000 rose to $16.91 million, reflecting
an increase of 34.2% from the $12.60 million in revenues generated in the same
period in 1999. This increase was attributable to (i) a 20.9% increase in
investment advisory fees (excluding incentive fees and general partner
allocations) from $8.98 million (excluding investment advisory fees received
with regard to the portfolio of BKF managed by Levco) to $10.86 million and (ii)
a 76.2% increase in incentive fees and general partner allocations from $3.24
million to $5.71 million. The increase in investment advisory fees is primarily
attributable to the increase in assets under management in the large cap value
strategy, which experienced a significant increase in assets managed in wrap fee
programs. The increase in incentive fees and general partner allocations is
primarily attributable to the increase in assets under management in the risk
arbitrage product. Incentive fees and general partner allocations are accrued on
a quarterly basis but are primarily earned and billed at the end of the
applicable contract year.
Commission income generated by the broker-dealer business fell 10.7% to $334,000
from $374,000.
Assets Under Management
At June 30, 2000, assets under management were $9.549 billion, up from $8.788
billion a year earlier (including $575 million in BKF assets formerly managed by
Levco, the proceeds from the sale of which were distributed to shareholders as
part of the plan of distribution). Following is a comparison of Levco assets
under management as defined by product and client type:
June 30, 2000 June 30, 1999
------------- -------------
(In millions)
Institutional $ 4,495 $ 4,617
Non-institutional 1,998 1,929
Arbitrage 828 433
Partnerships 156 119
Wrap 2,072 1,115
BKF 0 575
---------- ---------
TOTAL $ 9,549 $ 8,788
========== =========
Expenses
Total expenses for the second quarter of 2000 rose 26.5% from $11.59 million to
$14.67 million. Excluding the amortization of intangibles expense, which
decreased in the second quarter of 2000 because the portion of the expense
attributable to the period from April 1, 2000 through April 18, 2000 was
included in the cumulative effect of the change in accounting principle, total
expenses
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rose 42.5%. The largest component of this increase was a 52.7% increase in
compensation expense, which went from $6.47 million to $9.88 million. This
increase in compensation expense is attributable to the increase in revenues and
the implementation of the compensation plan for 2000.
For purposes of accruing the compensation expense, management has assumed that a
portion of the 2000 year end bonus compensation to employees will be paid in the
form of options, restricted stock units or other equity-based instruments. In
April 2000, BKF shareholders approved an amendment to the 1998 Incentive
Compensation Plan authorizing the issuance of up to 1,300,000 shares of common
stock pursuant to the plan. Management anticipates that a very substantial
portion of this authorized amount may be utilized in connection with the payment
of 2000 bonuses.
Other operating expenses of BKF rose 16.3% from $1.59 million to $1.85 million,
primarily reflecting an increase in promotional expenses relating to marketing
efforts and in portfolio management and trading system costs.
Operating Income
Operating income rose to $2.24 million for the second quarter of 2000, up 124%
from $1.0 million for the same period in 1999, reflecting the increase in
revenues which exceeded the increase in expenses. Excluding the amortization of
intangibles expense, operating income was $4.63 million, up 16.3% from $3.98
million for the same period in 1999.
Interest Income
Interest income increased by 440.7%, from $59,000 to $319,000. This increase in
interest income resulted from three major factors: (i) the final payment of
interest by the issuer of a debt security that had been a part of BKF's private
placement portfolio; (ii) the shift of a portion of 1999 compensation from cash
to equity-based instruments; and (iii) the reclassification of the $65 million
BKF loan to Levin Management Co., Inc. to equity in December 1999. This
reclassification enabled Levin Management Co., Inc. to cease making interest
payments to BKF, resulting in higher cash balances for Levco.
Income Taxes
The 22.6% rise in the provision for income taxes from $1.86 million in the
second quarter of 1999 to $2.28 million in the second quarter of 2000 reflects
the increase in income before taxes (as determined without a deduction for the
amortization of intangibles). An effective tax rate of 47% was used to make the
determination with respect to the provision for taxes at June 30, 2000, while an
effective tax rate of 46% was used to calculate the provision for taxes at June
30, 1999. The differential in tax rates is due to state allocations.
Change in Accounting Principle
A change in accounting principle that became effective on April 18, 2000 upon
the de-registration of BKF as an investment company resulted in a cumulative
amortization expense deriving from the 1996 acquisition of Levco by BKF. The
de-registration of BKF transformed BKF into an operating company and caused the
1996 transaction to become subject to purchase accounting rules. This
amortization expense is non-deductible for income tax purposes because the
purchase accounting method is being applied retroactively. A one-time non-cash
charge to income in the
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amount of $53.37 million for accumulated amortization from June 1996 through
April 18, 2000 was recorded in the second quarter of 2000 in addition to the
amortization expense for the period from April 19, 2000 to June 30, 2000.
Six Months Ended June 30, 2000 as Compared to Six Months Ended June 30, 1999.
Revenues
Total revenues for the first half of 2000 rose to $32.18 million, reflecting an
increase of 34.2% from the $24.0 million in revenues generated in the same
period in 1999. This increase was attributable to (i) a 13.6% increase in
investment advisory fees (excluding incentive fees and general partner
allocations) from $17.99 million (excluding investment advisory fees received
with regard to the portfolio of BKF managed by Levco) to $20.44 million and (ii)
a 108.2% increase in incentive fees and general partner allocations from $5.26
million to $10.95 million. The increase in investment advisory is primarily
attributable to the increase in assets under management in the large cap value
strategy. The increases in incentive fees and general partner allocations is
primarily attributable to the increase in assets under management in the risk
arbitrage product. Incentive fees and general partner allocations are accrued on
a quarterly basis but are primarily earned and billed at the end of the
applicable contract year.
Commission income generated by the broker-dealer business rose 3.8% to $783,000
from $754,000.
Expenses
Total expenses for the first half of 2000 rose 12.4% from $22.43 million to
$25.21 million. Excluding the amortization of intangibles expense, which
decreased in the first half of 2000 because the portion of the expense
attributable to the period from January 1, 2000 through April 18, 2000 was
included in the cumulative effect of the change in accounting principle, total
expenses rose 38.47%. The largest component of this increase was a 46.8%
increase in compensation expense, which went from $12.26 million to $18.0
million.
Other operating expenses of BKF rose 18.0% from $3.16 million to $3.73 million,
reflecting increases in professional fees relating to the implementation of the
equity compensation plan and the evolution of BKF from an investment company to
a holding company, an increase in insurance expense due to an increase in policy
limits, an increase in expenses relating to marketing efforts, and increased
costs relating to portfolio management and trading systems.
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Operating Income
Operating income rose to $6.97 million for the first half of 2000, up 343.6%
from $1.57 million for the same period in 1999, reflecting the increase in
revenues which exceeded the increase in expenses. Excluding the amortization of
intangibles expense, operating income was $9.36 million, up 24.4% from $7.52
million for the first half of 1999.
Loss on Investments
In the first half of 2000, BKF realized a net loss of $380,000 primarily as the
result of the permanent write down of a historical private placement position
that had been part of BKF's portfolio when it was an investment company.
Interest Income
Interest income increased by 424.8%, from $121,000 to $635,000. This increase in
interest income resulted from three major factors: (i) the final payment of
interest by the issuer of a debt security that had been a part of BKF's private
placement portfolio; (ii) the shift of a portion of 1999 compensation from cash
to equity-based instruments; and (iii) the reclassification of the $65 million
BKF loan to Levin Management Co., Inc. to equity in December 1999. This
reclassification enabled Levin Management Co., Inc. to cease making interest
payments to BKF, resulting in higher cash balances for Levco.
Income Taxes
The 27.0% rise in the provision for income taxes from $3.52 million in the first
half of 1999 to $4.47 million in the first half of 2000 reflects the increase in
income before taxes (as determined without a deduction for the amortization of
intangibles). An effective tax rate of 47% was used to make the determination
with respect to the provision for taxes at June 30, 2000, while an effective tax
rate of 46% was used to calculate the provision for taxes at June 30, 1999. The
differential in tax rates is due to state allocations.
Change in Accounting Principle
A change in accounting principle that became effective on April 18, 2000 upon
the de-registration of BKF as an investment company resulted in a cumulative
amortization expense deriving from the 1996 acquisition of Levco by BKF. The
de-registration of BKF transformed BKF into an operating company and caused the
1996 transaction to become subject to purchase accounting rules. This
amortization expense is non-deductible for income tax purposes because the
purchase accounting method is being applied retroactively. A one-time non-cash
charge to income in the amount of $53.37 million for accumulated amortization
from June 1996 through April 18, 2000 was recorded in the second quarter of 2000
in addition to the amortization expense for the period from April 19, 2000 to
June 30, 2000.
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LIQUIDITY AND CAPITAL RESOURCES
June 30, 2000 as Compared to December 31, 1999
BKF's current assets as of June 30, 2000 consist primarily of cash, short term
investments and advisory fees receivable.
Levco has historically met its cash and liquidity needs through cash generated
by operating activities. At June 30, 2000, BKF had cash and cash equivalents of
$16.18 million, compared to $14.36 million at December 31, 1999. This increase
in cash and cash equivalents reflects the sale of the historical private
placement position, the collection of receivables and the annual withdrawal of
incentive allocations from the investment partnerships, which were partially
offset by the payment of bonuses in 2000 that were accrued in 1999. The
distributions of the incentive allocations from the partnerships also account
for the decrease in investments in affiliated investment partnerships from $7.63
million at December 31, 1999 to $6.72 million at June 30, 2000, which
distributions were partially offset by the accrual of incentive allocations for
the six month period ended June 30, 2000.
Prepaid expenses rose 12.7% from $1.34 million at December 31, 1999 to $1.51
million at June 30, 2000 as the result of the purchase of a new, three year
Directors and Officers/Errors and Omissions Liability insurance policy. The
premium for the policy is being financed by BKF over a 30-month period,
resulting in an insurance payable of $747,000.
The elimination of $1.0 million in investments reflects the payment of $892,000
in principal and interest with respect to historical private placements position
that had been part of BKF's portfolio when it was an investment company. At
March 31, 2000, the valuation of these investments had been written down to
$599,000 (excluding accrued interest of $178,000). This interest amount was
included in the $1.0 million valuation of the investments at December 31, 1999.
Accrued expenses decreased by (53.2%) to $2.22 million from $4.74 million,
principally as the result of the payment of non-recurring expenses in connection
with the closing of the Chicago office of BKF. The decrease in accrued bonuses
from $13.35 million to $11.40 million reflects the cash payment of 1999 bonuses,
which was partially offset by the accrual for 2000 bonuses.
Based upon BKF's current level of operations and anticipated growth, BKF expects
that cash flows from operating activities will be sufficient to finance its
working capital needs for the foreseeable future. BKF has no material
commitments for capital expenditures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Since BKF's revenues are largely driven by the market value of Levco's assets
under management, these revenues are exposed to fluctuations in the equity
markets. Management fees for most accounts are determined based on the market
value of the account on the last day of the quarter with respect to which the
investment advisory fee is charged, so any significant increases or decreases in
market value occurring on or shortly before the last day of a quarter may
materially impact revenues for the quarter. Furthermore, since Levco manages
most of its assets in a large cap value style, a general decline in the
performance of value stocks could have an adverse impact on Levco's revenues.
Similarly, a lack of opportunity to implement, or a failure to successfully
implement, Levco's event-driven, risk arbitrage strategy, could reduce
performance based incentive fees and allocations and thereby negatively impact
BKF's revenues.
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PART II. OTHER INFORMATION
This Quarterly Report on Form 10-Q contains certain statements that are not
historical facts, including, most importantly, information concerning possible
or assumed future results of operations of BKF and statements preceded by,
followed by or that include the words "may," "believes," "expects,"
"anticipates," or the negation thereof, or similar expressions, which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). For those statements, we claim
the protection of the safe harbor for forward-looking statements contained in
the Reform Act. These forward-looking statements are based on our current
expectations and are susceptible to a number of risks, uncertainties and other
factors, and our actual results, performance and achievements may differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Such factors include the following:
competition; the existence or absence of adverse publicity; changes in business
strategy; quality of management; availability, terms and deployment of capital;
business abilities and judgment of personnel; availability of qualified
personnel; labor and employee benefit costs; changes in, or failure to comply
with, government regulations; the costs and other effects of legal and
administrative proceedings; and other risks and uncertainties referred to in
this document and in our other current and periodic filings with the Securities
and Exchange Commission, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. We will not undertake and
specifically decline any obligation to publicly release the result of any
revisions which may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events. In addition, it is our policy generally
not to make any specific projections as to future earnings, and we do not
endorse any projections regarding future performance that may be made by third
parties.
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Effective July 21, 2000, Jeffrey A. Kigner resigned as a Director and Vice
Chairman of BKF and as Co-Chairman and Chief Investment Officer for the large
cap value product of John A. Levin & Co., Inc.
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Item 6. Exhibits and Reports on Form 8-K
Exhibits
Exhibit No. Description
3(i) Articles of Incorporation
3(ii) By-laws
27.1 Financial Data Schedule
Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BKF CAPITAL GROUP, INC.
Date: August 14, 2000
By: /s/ John A. Levin
------------------
John A. Levin
Chairman, Chief Executive Officer
and President
By: /s/ Glenn A. Aigen
------------------
Glenn A. Aigen
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
3(i) Articles of Incorporation
3(ii) By-laws
27.1 Financial Data Schedule
