------------------------------------------------------------
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 September 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: 1-10024
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 October 31, 2000.
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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 SEPTEMBER 30, 2000
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(SEE NOTE 1)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 21,841
Investment advisory fees receivable 18,418
Prepaid expenses and other current assets 2,003
---------------
Total current assets 42,262
---------------
NONCURRENT ASSETS:
Investments in affiliated partnerships 9,532
Fixed assets-net 2,843
Other assets 602
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 (58,368)
---------------
Total assets $ 113,685
===============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accrued expenses $ 2,086
Accrued bonuses 21,680
Accrued incentive compensation 376
Income taxes payable 882
Other liabilities 351
---------------
Total current liabilities 25,375
Other liabilities 313
---------------
Total liabilities 25,688
---------------
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 31,232
---------------
Total stockholders' equity 87,997
---------------
Total liabilities and stockholders' equity $ 113,685
===============
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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> <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 (39,018) (c) 39,018 -
Retained earnings(h) 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.
(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).
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(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
NINE MONTHS NINE MONTHS
ENDED PRO FORMA ENDED
SEPTEMBER 30, 2000 ADJUSTMENTS(A) SEPTEMBER 30, 2000
------------------ ---------------- -------------------
<S> <C> <C> <C>
REVENUES:
Investment advisory fees $ 32,155 $ 32,155
Incentive fees and general partner allocations 17,669 17,669
Commission income - net 1,220 1,220
------------------ ---------------- -------------------
Total revenues 51,044 - 51,044
------------------ ---------------- -------------------
EXPENSES:
Employee compensation and benefits 31,548 31,548
Occupancy & equipment rental 1,698 1,698
Other operating expenses 5,759 5,759
Amortization of intangibles 4,994 4,994
------------------ ---------------- -------------------
Total expenses 43,999 - 43,999
------------------ ---------------- -------------------
Operating Income 7,045 - 7,045
Other Income(expense):
Net realized and unrealized loss on investments (608) 228 (380)
Interest income 1,350 (406) 944
Interest expense (47) (47)
------------------ ---------------- -------------------
Income before taxes and cumulative effect of
change in accounting principle 7,740 (178) 7,562
------------------ ---------------- -------------------
Provision for income taxes 5,641 5,641
Deferred tax (benefit) (5,170) (5,170)
Valuation allowance 5,170 5,170
------------------ ---------------- -------------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 2,099 (178) 1,921
------------------ ---------------- -------------------
Cumulative effect to April 18, 2000 of
change in accounting principle (53,374) (53,374)
------------------ ---------------- -------------------
NET (LOSS) $ (51,275) $ (178) $ (51,453)
================== ================ ===================
Basic income (loss) per share (b):
Income before cumulative effect of accounting change 0.30
Cumulative effect of accounting change (8.21)
-------------------
Net (loss) $ (7.91)
===================
Diluted income (loss) per share (b):
Income before cumulative effect of accounting change $ 0.29
Cumulative effect of accounting change (8.17)
--------------------
Net (loss) $ (7.88)
====================
Weighted average shares outstanding (b):
Basic 6,504,852
Diluted 6,534,700
</TABLE>
(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).
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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
NINE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1999 1999 ADJUSTMENTS 1999
------------------ ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
REVENUES:
Investment advisory fees $ - $ 28,451 (a) (1,066) $ 27,385
Incentive fees and general partner allocations(f) - 7,846 7,846
Commission income - net - 1,035 1,035
------------------ ----------------- ------------------
Total revenues - 37,332 36,266
------------------ ----------------- ------------------
EXPENSES:
Employee compensation and benefits(f) $ 1,215 $ 19,834 (b) (1,215) 18,524
(a) (1,310)
Occupancy & equipment rental 684 1,576 (b) (684) 1,576
Other operating expenses 4,356 3,814 (b) (4,356) 4,870
(a) 1,056
Investment advisory fees 1,066 - (a) (1,066) -
Amortization of intangibles - (c) 8,922 8,922
------------------ ----------------- ------------------
Total expenses 3,684 25,224 33,892
------------------ ----------------- ------------------
Operating Income(loss) (7,321) 12,108 2,374
Other Income(expense):
Net realized and unrealized gains from investments 251,291 - (b) (251,291) -
Interest income 4,857 251 (b) (4,857) 251
Dividend income 7,881 - (b) (7,881) -
Interest income (expense)- Intercompany 4,804 (4,804) -
------------------ ----------------- ------------------
Income before taxes 261,512 7,555 2,625
------------------ ----------------- ------------------
Provision for income taxes(f) - 3,475 (d) 1,837 5,313
------------------ ----------------- ------------------
Net income (loss) $ 261,512 $ 4,080 $ (2,688)
================== ================= ==================
Net (loss) per share:
Basic and diluted (e) $ (0.41)
==================
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
($281) and the related effect to employee compensation expense and
provision for income taxes of ($173) and ($50), 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
SEPTEMBER 30,
2000
------------------
REVENUES:
Investment advisory fees $ 11,711
Incentive fees and general partner allocations 6,717
Commission income - net 437
-----------------
Total revenues 18,865
-----------------
EXPENSES:
Employee compensation and benefits
(see Note 1 - Use of Estimates) 13,549
Occupancy & equipment rental 604
Other operating expenses 2,030
Amortization of intangibles 2,609
-----------------
Total expenses 18,792
-----------------
Operating Income 73
Other Income(expense):
Interest income 309
Interest expense (14)
-----------------
Income before taxes 368
Provision for income taxes 1,175
-----------------
NET (LOSS) $ (807)
=================
Basic and diluted (loss) per share(a):
Net (loss) $ (0.12)
=================
Weighted average shares outstanding basic and diluted(a) 6,504,852
=================
(a) Calculation reflects the reverse stock split (which was effectuated January
7, 2000).
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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
SEPTEMBER 30, SEPTEMBER 30, PRO FORMA SEPTEMBER 30,
1999 1999 ADJUSTMENTS 1999
------------------- ------------------ ------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Investment advisory fees $ - $ 9,678 (a) $ (285) $ 9,393
Incentive fees and general partner allocations(f) - 2,591 2,591
Commission income - net - 281 281
------------------ ----------------- --------------
Total revenues - 12,550 12,265
------------------ ----------------- --------------
EXPENSES:
Employee compensation and benefits(f) 415 6,663 (b) (415) 6,266
(a) (397)
Occupancy & equipment rental 197 512 (b) (197) 512
Other operating expenses 2,740 1,359 (b) (2,740) 1,711
(a) 352
Investment advisory fees 285 - (a) (285) -
Amortization of intangibles - - (c) 2,974 2,974
------------------ ----------------- --------------
Total expenses 3,637 8,534 11,463
------------------ ----------------- --------------
Operating Income(loss) (3,637) 4,016 802
Other Income(expense):
Net realized and unrealized gains from investments 177,926 - (b) (177,926) -
Interest income 3,099 130 (b) (3,099) 130
Dividend income 2,018 - (b) (2,018) -
Interest income (expense)- Intercompany 1,500 (1,500) -
------------------ ----------------- --------------
Income before taxes 180,906 2,646 932
------------------- ----------------- --------------
Provision for income taxes(f) - 1,217 (d) 580 1,797
------------------ ----------------- --------------
Net income (loss) $ 180,906 $ 1,429 $ (865)
================== ================= ==============
Net (loss) per share:
Basic and diluted (e) $ (0.13)(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 ($91) and the
related effect to employee compensation expense and provision for income
taxes of ($56) and ($16), respectively.
<PAGE>
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 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 $ (51,453) $ (2,688)
Adjustments to reconcile pro forma net loss to net cash
provided by operations:
Depreciation and amortization 58,979 9,470
Compensation expense for vesting of restricted stock units 376 -
Realized loss on investment 108 -
(Increase) in investment advisory fees receivable (5,968) (1,822)
(Increase) decrease in prepaid expenses and other current assets 250 (49)
(Increase) in investments in affiliated investment partnerships (1,899) (1,780)
Decrease in other assets 310 608
Increase (decrease) in accrued expenses and accounts payable (2,658) 649
Increase (decrease) in accrued bonuses 8,334 (99)
Increase in income taxes payable 576 1,342
-------------- -------------
Net cash provided by operating activities 6,955 5,631
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed asset additions (299) (774)
Proceeds from sale of investments 892 -
-------------- -------------
Net cash provided by (used in) investing activities 593 (774)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of loan principal (246) -
Cash included in deemed contribution (distribution) 178 (3,619)
-------------- -------------
Net cash (used in) financing activities (68) (3,619)
-------------- -------------
Net Increase in cash and cash equivalents 7,480 1,238
Cash and cash equivalents at the beginning of the period 14,361 10,779
-------------- -------------
Cash and cash equivalents at the end of the period $ 21,841 $ 12,017
============== =============
Supplemental disclosure of cash flow information
Cash paid for interest $ 49 $ -
============== =============
Cash paid for taxes $ 5,143 $ 3,976
============== =============
</TABLE>
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BKF CAPITAL GROUP, INC.
STATEMENT OF CASH FLOWS-HISTORICAL
NINE MONTHS ENDED SEPTEMBER 30
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
(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 $ (54,125) $ 261,512
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by (used in) operating activities:
Depreciation and amortization 58,780 -
Net realized and unrealized (gain) loss on investments 401 (251,291)
Compensation expense for vesting of restricted stock units 251 -
(Increase) in receivable for securities sold - (25,261)
(Increase) in investment advisory fees receivable (6,827) -
Decrease in dividends and interest receivable - 362
Decrease in prepaid expenses and other current assets 222 -
(Increase) decrease other assets 168 (5)
(Increase) in investments in affiliated investment partnerships (5,015) -
Increase (decrease) in accrued expenses and accounts payable (2,331) 1,735
Increase in accrued bonuses 16,943 -
(Decrease) in income taxes payable (714) -
(Decrease) in payable for investment management fee - (115)
Increase in payable for securities purchased - 223
Net amortization of discounts - (409)
----------- -----------
Net cash provided by (used in) operating activities 7,753 (13,249)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities - (246,387)
Proceeds from sales of portfolio securities - 826,713
Purchases of money market securities, net - (358,459)
Fixed asset additions (150) -
Proceeds from sale of investments 599 -
Cash from previously unconsolidated subsidiary 11,873 -
----------- -----------
Net cash provided by investing activities 12,322 221,867
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends and capital gain distributions (480,058) (236,575)
Payment of loan principal (164) -
----------- -----------
Net cash (used in) financing activities (480,222) (236,575)
----------- -----------
Net (decrease) in cash and cash equivalents (460,147) (27,957)
Cash and cash equivalents at the beginning of the period 481,988 42,351
----------- -----------
Cash and cash equivalents at the end of the period $ 21,841 $ 14,394
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 37
===========
Cash paid for taxes $ 4,247
===========
</TABLE>
(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 September 30, 2000.
<PAGE>
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
BKF Capital Group, Inc. (formerly Baker, Fentress & Company, hereto 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 is 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, reflected 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.
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).
<PAGE>
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Unaudited Pro Forma Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 1999 and for the nine months ended
September 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
which 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 to 6 reverse stock split effectuated on January 7, 2000
The Unaudited Pro Forma Condensed Consolidated Statement of Cash Flows for the
nine month periods ended September 30, 2000 and September 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.
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 Pro
<PAGE>
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Forma Condensed Consolidated Statement of Income for the nine months ended
September 30, 2000 reflects 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 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.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company has adopted SAB No. 101 as required in the
first quarter of 2000. The adoption of SAB No. 101 has not had a material effect
on the Company's Unaudited Pro Forma Condensed Consolidated Statements of Income
and Financial Condition.
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.
<PAGE>
14 of 31
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 three and nine-month periods ended September 30,
2000 and September 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 nine months ended September 30, 2000, and 46% for the three
and nine months ended September 30, 1999. 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 is dependent on the
character and amount of the calendar year 2000 partnership incentive allocation
income as well as the ability to carry back any capital loss not utilized in
2000.
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 quarter ended September 30, 2000, the
Compensation Committee of BKF ("Committee") approved revised compensation
guidelines for the year ended December 31, 2000. The guidelines provide for
payment of
<PAGE>
15 of 31
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
bonuses in cash only rather than cash and stock equivalents (which would have
vested over a three year period with a corresponding expense each year) (see
Note 10). The change in estimate resulting from the revised guidelines is
reflected in the Statement of Income for the three-month period ended September
30, 2000 and the Unaudited Pro Forma Condensed Consolidated Statement of Income
for the nine months period then ended. This change in estimate resulted in an
increase in compensation expense of approximately $2.8 million of which $1.8
million relates to the six month period ended June 30, 2000. The bonus accrual
for the three and nine month periods ended September 30, 1999, reflects an
amount based on the incentive compensation guidelines approved by the Committee
(see Note 7).
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 September 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 completed the sale of the remaining private
placements which were made by BKF when if was a registered investment company.
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 Unaudited Condensed Consolidated Statement of Financial Condition at
September 30, 2000 and the Unaudited 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 was 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
<PAGE>
16 of 31
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 nine month periods ended September 30, 2000 and 1999 to
calculate basic earnings per share. Pro forma diluted earnings per share is
computed by dividing net pro forma 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. There
were no options granted prior to January 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
PRO FORMA PRO FORMA PRO FORMA
2000 1999 2000 1999
--------------------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect
of accounting change $ (807) $ (865) $ 1,921 $ (2,688)
Net (loss) - - (53,374) -
--------------------------------------------------
$ (807) $ (865) $ (51,453) $ (2,688)
==================================================
Basic weighted-average shares outstanding 6,504,852 6,504,852 6,504,852 6,504,852
Dilutive potential shares from stock
options (see note #7) - - 29,848 -
--------------------------------------------------
Dilutive weighted-average shares outstanding 6,504,852 6,504,852 6,534,700 6,504,852
==================================================
Basic earnings (loss) per share:
Income (loss) before cumulative effect
of account change $ (0.12) $ (0.13) $ 0.30) $ (0.41)
Cumulative effect of accounting change - - (8.21) -
--------------------------------------------------
Net (loss) $ (0.12) $ (0.13) $ (7.91) $ (0.41)
==================================================
Diluted earnings (loss) per share:
Income (loss) before cumulative effect
of accounting change $ (0.12) $ (0.13) $ 0.29 (0.41)
Cumulative effect of accounting change - - (8.17) -
--------------------------------------------------
Net (loss) $ (0.12) $ (0.13) $ (7.88) $ (0.41)
--------------------------------------------------
</TABLE>
<PAGE>
17 of 31
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 Note 7 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 nine
month periods ended September 30, 1999 were approximately $285,000 and
$1,066,000, 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 receives any advisory fees from BKF.
<PAGE>
18 of 31
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 $3.0 million and $1.5 million, respectively, for the three month
periods ended September 30, 2000 and September 30, 1999 and $8.1 million and
$5.3 million for the nine month periods ended September 30, 2000 and September
30, 1999, respectively. Included in investments in affiliated partnerships at
September 30, 2000 and December 31, 1999 are approximately $7.0 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 September 30, 2000 the minimum annual
rental commitments under the operating lease are as follows:
October through December 31, 2000 $ 351,000
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 $ 10,725,000
=============
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 September 30, 2000 and December 31, 1999, LEVCO
Securities was in compliance with this Rule.
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
<PAGE>
19 of 31
6. EMPLOYEE BENEFIT PLAN (CONTINUED)
to 100%, subject to statutory limitations. Approximately $300,000 has been
expensed to reflect the employer match.
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. In 1999, Levco did not incur any compensation expense
related to the Compensation Plan.
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 nine
month periods ended September 30, 2000 relating to the vesting of the RSU's was
$125,000 and $375,000, respectively.
With respect to the non-qualified stock options, the Committee granted 183,178
non-qualified stock options to purchase BKF shares with an exercise 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 130,098 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 July 2000, the Committee granted 73,179 non-qualified stock options to
purchase BKF shares at a price of $15.875 (the average market price on the date
of grant). The options are exercisable in three
<PAGE>
20 of 31
7. INCENTIVE COMPENSATION PLAN (CONTINUED)
equal installments commencing July 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.
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 relating to the option
grants because the exercise price of the options awarded were equal to the fair
market price of the common stock on the dates of the grants. Under SFAS No. 123,
net loss would have been increased by $260,000 and $703,000, respectively, for
the three and nine month periods ended September 30, 2000. Basic and diluted
loss per share would have been increased by $.04 and $.11, respectively, for the
three and nine month periods ended September 30, 2000.
The fair value of each option granted in 2000 was estimated using the
Black-Scholes option-pricing model with the following assumptions:
JANUARY JULY
------- ----
Expected dividend yield 0.00% 0.00%
Expected volatility 15.45% 19.37%
Risk-free interest 6.35% 6.07%
Expected term 7 years 7 Years
Fair value $4.97 $6.23
None of the options were vested or exercisable as of September 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. As of September
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.
<PAGE>
21 of 31
10. SUBSEQUENT EVENT
In November 2000, the Compensation Committee granted 448,265 RSU's to key
employees of the Company. The common stock underlying the RSU's will be
deliverable on the third anniversary date of the grant, although the common
stock may be deliverable earlier in the event of a change in control, death or
disability, or electively deferred by employees under certain circumstances.
While no additional service will be required to obtain delivery of the
underlying common stock (i.e., the award is "vested"), delivery of the common
stock will be conditioned on the grantee's satisfying certain requirements,
including not being terminated for cause and not violating any policy of the
Company or otherwise acting in a manner detrimental to the Company (including
violating noncompetition or nonsolicitation provisions of the award). These
amounts will be recorded as compensation expense even though the underlying
shares of common stock have not been issued. Pursuant to APB Opinion No. 25, the
Company will record a non-cash compensation expense of approximately $8.1
million in the quarter ended December 31, 2000 related to the deferred shares
awarded based on the date of grant (November 16, 2000), since future service is
not required as a condition to the delivery of the underlying shares of common
stock. For purposes of calculating both basic earnings per share (pursuant to
Statement of Financial Accounting Standards No. 128) and book value per share,
the shares of common stock underlying the deferred shares awarded will be
included in common stock outstanding for the reason described above.
Certain executive officers of the Company who are subject to performance based
criteria with regard to their compensation may be granted RSU's in the first
quarter of 2001 subject to the same terms and accounting treatment described
above. Compensation expense relating to such RSU's, if granted, would be
attributable to the year ended December 31, 2000. The number of such RSU's to be
granted in the first quarter of 2001 to such executives are not expected to
exceed 202,220.
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
<PAGE>
22 of 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
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
September 30, 2000, December 31, 1999 and September 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. Particular attention
should be paid to the fact that a change in accounting principle was effected on
April 18, 2000 resulting in an amortization expense that has been reflected in
the actual and pro forma financial statements, and it should also be noted that
a change in estimates related in a revision to compensation guidelines has
resulted in a significant increase in compensation expense that has been
attributed to the third quarter of 2000 but reflects an increase in accruals for
the nine month period.
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 SEPTEMBER 30, 2000 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999.
Revenues
Total revenues for the third quarter of 2000 rose to $18.87 million, reflecting
an increase of 53.8% from the $12.27 million in revenues generated in the same
period in 1999. This increase was attributable to (i) a 24.7% increase in
investment advisory fees (excluding incentive fees and general partner
allocations)
<PAGE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
from $9.39 million (excluding investment advisory fees received with regard to
the portfolio of BKF managed by Levco) to $11.71 million and (ii) a 159.2%
increase in incentive fees and general partner allocations from $2.59 million to
$6.72 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, and in the risk arbitrage product. 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
determined and billed at the end of the applicable contract year or upon
withdrawal.
Commission income generated by the broker-dealer business rose 55.5% from
$281,000 to $437,000.
Assets Under Management
At September 30, 2000, assets under management were $10.5 billion, up from $7.86
billion a year earlier (including $50 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 (in millions) as defined by product and client type:
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
Institutional $ 4,774 $ 4,127
Non-institutional 2,104 1,803
Arbitrage 955 559
Partnerships 163 125
Wrap 2,509 1,193
BKF 0 50
-------- --------
TOTAL $10,505 $ 7,857
======== ========
Expenses
Total expenses for the third quarter of 2000 rose 63.9% from $11.46 million to
$18.79 million. The largest component of this increase was a 116.2% increase in
compensation expense, which went from $6.27 million to $13.55 million. This
increase in compensation expense is attributable to the increase in revenues and
the implementation of the revised compensation guidelines approved by the
Compensation Committee in the third quarter. Prior to the approval of the
revised guidelines, a certain percentage of bonus compensation was to have been
paid in the form of equity-based instruments such as stock options and
restricted stock units, which compensation would not be reflected as an expense
in 2000. Under the revised guidelines, this portion of compensation will be paid
in cash, resulting in increased compensation expenses of approximately $2.8
million for the nine months ended September 30, 2000, all of which is reflected
in the third quarter compensation expense. The Company expects that compensation
expense as a percentage of pre-tax, pre-compensation profits will increase
beginning in 2001.
<PAGE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On November 16, 2000, the Compensation Committee approved a grant of 448,265
restricted stock units to employees of the firm. It is anticipated that a grant
of up to 202,220 restricted stock units will be made in the first quarter of
2001 to certain executive officers who are subject to performance based
guidelines with regard to their compensation. The granting of the restricted
stock units on November 16, 2000, which was not made in lieu of cash
compensation, will result in additional compensation expense of $8.1 million in
the fourth quarter of 2000. The anticipated grant in 2001 will, if made, result
in additional compensation expense in the fourth quarter of 2000 as well. Since
the November grant and the anticipated grant in the first quarter of 2001 will
utilize a significant portion of the equity available under the 1998 Incentive
Compensation Plan, which allows for the issuance of up to 1,300,000 shares under
the plan, BKF anticipates that shareholders may be requested to approve an
amendment to the plan to allow for the issuance of a greater number of shares.
Other operating expenses of BKF rose 18.6% from $1.71 million to $2.03 million,
primarily reflecting an increase in promotional expenses relating to marketing
efforts and an increase in portfolio management and trading system costs.
Operating Income
Operating income fell to $73,000 for the third quarter of 2000, down 90.9% from
$802,000 for the same period in 1999, reflecting the increase in expenses, as
discussed above, which exceeded the increase in revenues.
Interest Income
Interest income increased by 137.7%, from $130,000 to $309,000. This increase in
interest income resulted from three major factors: (i) increased cash generated
by operations; (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 Levco to equity in December 1999. This reclassification enabled Levco to
cease making interest payments to BKF, resulting in higher cash balances for
Levco.
Income Taxes
The 34.6% decline in the provision for income taxes to $1.18 million in the
third quarter of 2000 from $1.80 million in the third quarter of 1999 reflects
(i) the decrease in income before taxes (as determined without a deduction for
the amortization of intangibles) and (ii) a reduction of $271,000 to compensate
for the overaccrual made with respect to the provision for taxes for 1999. An
effective tax rate of 47% (before amortization and the adjustment for the
overaccrual) was used to make the determination with respect to the provision
for taxes at September 30, 2000, while an effective tax rate of 46% (before
amortization) was used to calculate the provision for taxes at September 30,
1999. The differential in tax rates is due to state allocations.
<PAGE>
25 of 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999.
Revenues
Total revenues for the first nine months of 2000 rose to $51.04 million,
reflecting an increase of 40.7% from the $36.27 million in revenues generated in
the same period in 1999. This increase was attributable to (i) a 17.4% increase
in investment advisory fees (excluding incentive fees and general partner
allocations) from $27.39 million (excluding investment advisory fees received
with regard to the portfolio of BKF managed by Levco) to $32.16 million and (ii)
a 125.2% increase in incentive fees and general partner allocations from $7.85
million to $17.67 million. The increase in investment advisory fees is primarily
attributable to the increase in assets under management in the large cap value
strategy and the risk arbitrage product. 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
determined and billed at the end of the applicable contract year or upon
withdrawal.
Commission income generated by the broker-dealer business rose 17.9% to $1.22
million from $1.04 million.
Expenses
Total expenses for the first nine months of 2000 rose 29.8% from $33.89 million
to $44.0 million. Excluding the amortization of intangibles expense, which
decreased in the first nine months 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 56.2%. The largest component of this increase was a 70.3% increase
in compensation expense, which went from $18.52 million to $31.55 million. This
increase in compensation expense is attributable to the increase in revenues and
the implementation of the revised compensation guidelines approved by the
Compensation Committee in the third quarter. Prior to the approval of the
revised guidelines, a certain percentage of bonus compensation was to have been
paid in the form of equity-based instruments such as stock options and
restricted stock units, which compensation would not be reflected as an expense
in 2000. Under the revised guidelines, this portion of compensation will be paid
in cash, resulting in increased compensation expenses of approximately $2.8
million for the nine months ended September 30, 2000. The grant of 448,265
restricted stock units to employees of the firm on November 16, 2000, which was
not made in lieu of cash compensation, will result in an additional compensation
expense of $8.1 million in the fourth quarter of 2000. A potential grant in the
first quarter of 2001 of up to 202,220 restricted stock units to certain
executive officers of the firm who are subject to performance guidelines with
regard to their compensation will, if made, result in additional compensation
expense attributable to the fourth quarter of 2000. The Company expects that
compensation expense as a percentage of pre-tax, pre-compensation profits will
increase beginning in 2001.
Other operating expenses of BKF rose 18.3% from $4.87 million to $5.76 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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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Operating Income
Operating income rose to $7.05 million for the first nine months of 2000, up
196.8% from $2.37 million for the same period in 1999, reflecting the increase
in revenues which exceeded the increase in expenses, as discussed above.
Excluding the amortization of intangibles expense, operating income was $12.04
million, up 6.6% from $11.30 million for the first nine months of 1999.
Loss on Investments
In the first nine months 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 276.1%, from $251,000 to $944,000. This increase in
interest income resulted from four major factors: (i) increased cash generated
by operations; (ii) the final payment of interest by the issuer of a debt
security that had been a part of BKF's private placement portfolio; (iii) the
shift of a portion of 1999 compensation from cash to equity-based instruments;
and (iv) the reclassification of the $65 million BKF loan to Levco to equity in
December 1999. This reclassification enabled Levco to cease making interest
payments to BKF, resulting in higher cash balances for Levco.
Income Taxes
The 6.2% rise in the provision for income taxes from $5.31 million in the first
nine months of 1999 to $5.64 million in the first nine months of 2000 reflects
(i) the increase in income before taxes (as determined without a deduction for
the amortization of intangibles) and (ii) a reduction of $271,000 to compensate
for the overaccrual made with respect to the provision for taxes for 1999. An
effective tax rate of 47% (before amortization and the adjustment for the
overaccrual) was used to make the determination with respect to the provision
for taxes at September 30, 2000, while an effective tax rate of 46% (before
amortization] was used to calculate the provision for taxes at September 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
SEPTEMBER 30, 2000 AS COMPARED TO DECEMBER 31, 1999
BKF's current assets as of September 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 September 30, 2000, BKF had cash and cash
equivalents of $21.84 million, compared to $14.36 million at December 31, 1999.
This increase in cash and cash equivalents reflects the sale of historical
private placement positions, the collection of receivables and the annual
withdrawal of incentive allocations from the investment partnerships, which were
partially offset by the payment of cash bonuses in 2000 which were accrued in
1999. The increase in investments in affiliated investment partnerships from
$7.63 million at December 31, 1999 to $9.53 million at September 30, 2000
reflects the accrual of incentive allocations for the nine month period ended
September 30, 2000, which was partially offset by withdrawals of incentive
allocations from the partnerships relating to 1999. The decrease in other assets
is primarily attributable to the return of a portion ($375,000) of the security
deposit under the terms of Levco's lease agreement.
Prepaid expenses and other current assets rose 49.1% from $1.34 million at
December 31, 1999 to $2.0 million at September 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 $664,000 at
September 30, 2000.
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 56.0% to $2.09 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 increase in accrued bonuses
from $13.35 million to $21.68 million reflects the accrual for 2000 bonuses,
which was partially offset by the cash payment of 1999 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
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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.
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
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ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 1998 Incentive Compensation Plan
10.2 Deferred Compensation Plan
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: November 17, 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
----------- -----------
10.1 1998 Incentive Compensation Plan
10.2 Deferred Compensation Plan
27.1 Financial Data Schedule
