BKF CAPITAL GROUP, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One) |
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 |
(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
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Or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 |
(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission file number: 1-10024
BKF Capital Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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36-0767530 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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One Rockefeller Plaza,
New York, New York
(Address of principal executive offices) |
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10020
(Zip Code) |
(212) 332-8400
(Registrants telephone number, including area code)
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 o No þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes þ No o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
As of September 30, 2005, 7,834,829 shares of the
registrants common stock, $1.00 par value, were
outstanding.
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands)
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December 31, | |
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2004 | |
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June 30, | |
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as Restated, | |
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2005 | |
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See Note 1 | |
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(Unaudited) | |
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(Audited) | |
Assets
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Cash and cash equivalents
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$ |
5,990 |
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$ |
3,582 |
|
U.S. Treasury bills
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|
34,562 |
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|
|
40,466 |
|
Investment advisory and incentive fees receivable
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|
28,130 |
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40,009 |
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Investments in securities, at value (cost $6,546 and $5,426,
respectively)
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6,847 |
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5,788 |
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Investments in affiliated partnerships
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8,849 |
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17,362 |
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Prepaid expenses and other assets
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|
7,049 |
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7,048 |
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Fixed assets (net of accumulated depreciation of $6,971 and
$6,756, respectively)
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6,254 |
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6,812 |
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Deferred tax asset
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7,010 |
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8,391 |
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Goodwill (net of accumulated amortization of $8,566)
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14,796 |
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14,796 |
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Investment advisory contracts (net of accumulated amortization
of $63,080 and $59,576, respectively)
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7,009 |
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10,513 |
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Consolidated affiliated partnerships:
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Due from broker
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10,571 |
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|
952 |
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Investments in securities, at value (cost $8,803 and $5,877,
respectively)
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9,274 |
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6,517 |
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Total assets
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$ |
146,341 |
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$ |
162,236 |
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Liabilities, minority interest and stockholders
equity
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Accrued expenses
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$ |
2,924 |
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$ |
4,084 |
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Accrued bonuses
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|
32,021 |
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42,686 |
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Accrued lease amendment expense
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|
3,631 |
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3,843 |
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Consolidated affiliated partnerships:
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Securities sold short, at value (proceeds of $3,869 and $1,065,
respectively)
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3,982 |
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1,299 |
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Total liabilities
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42,558 |
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51,912 |
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Minority interest in consolidated affiliated partnerships
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6,810 |
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2,478 |
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Stockholders equity
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Common stock, $1 par value, authorized
15,000,000 shares, issued and outstanding
7,528,162 and 7,274,779 shares, respectively
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7,528 |
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7,275 |
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Additional paid-in capital
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90,027 |
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|
88,458 |
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Retained earnings
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|
5,231 |
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|
17,508 |
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Unearned compensation restricted stock and
restricted stock units
|
|
|
(5,813 |
) |
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|
(5,395 |
) |
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|
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|
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|
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Total stockholders equity
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96,973 |
|
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|
107,846 |
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Total liabilities, minority interest and stockholders
equity
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$ |
146,341 |
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$ |
162,236 |
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3
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
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June 30, | |
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2005 | |
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2004 | |
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2005 | |
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2004 | |
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Revenues:
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Investment advisory fees
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$ |
19,142 |
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$ |
19,558 |
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$ |
39,342 |
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$ |
38,144 |
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Incentive fees and allocations
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9,256 |
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4,259 |
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21,074 |
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14,350 |
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Commission income (net) and other
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|
183 |
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|
320 |
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|
377 |
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|
798 |
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Net realized and unrealized gain on investments
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228 |
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|
191 |
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|
349 |
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|
400 |
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Interest income
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|
265 |
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|
94 |
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|
465 |
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|
172 |
|
From consolidated affiliated partnerships:
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Net realized and unrealized gain on investments
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588 |
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|
177 |
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|
914 |
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|
568 |
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Interest and dividend income
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|
64 |
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|
20 |
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|
89 |
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|
33 |
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|
|
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Total revenues
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29,726 |
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|
24,619 |
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62,610 |
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|
54,465 |
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Expenses:
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Employee compensation and benefits
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23,053 |
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|
17,339 |
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|
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46,944 |
|
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|
38,429 |
|
Employee compensation relating to equity grants
|
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|
1,600 |
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|
|
2,241 |
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|
2,912 |
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|
4,404 |
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Occupancy & equipment rental
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1,723 |
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|
1,562 |
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|
3,311 |
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2,918 |
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Other operating expenses
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|
3,573 |
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|
|
3,142 |
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|
|
6,769 |
|
|
|
6,771 |
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Amortization of intangibles
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|
|
1,752 |
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|
|
1,752 |
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|
|
3,504 |
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|
|
3,504 |
|
Interest expense
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|
|
20 |
|
|
|
28 |
|
|
|
40 |
|
|
|
89 |
|
Other operating expenses from consolidated affiliated
partnerships
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|
39 |
|
|
|
11 |
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|
|
61 |
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|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
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Total expenses
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|
|
31,760 |
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|
|
26,075 |
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|
|
63,541 |
|
|
|
56,135 |
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|
|
|
|
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|
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Operating income (loss)
|
|
|
(2,034 |
) |
|
|
(1,456 |
) |
|
|
(931 |
) |
|
|
(1,670 |
) |
Minority interest in consolidated affiliated partnerships
|
|
|
(234 |
) |
|
|
(163 |
) |
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|
(393 |
) |
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|
(541 |
) |
|
|
|
|
|
|
|
|
|
|
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Income (loss) before taxes
|
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|
(2,268 |
) |
|
|
(1,619 |
) |
|
|
(1,324 |
) |
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|
(2,211 |
) |
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Income tax expense
|
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|
(91 |
) |
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|
80 |
|
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|
1,004 |
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|
546 |
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|
|
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|
|
|
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Net (loss)
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|
$ |
(2,177 |
) |
|
$ |
(1,699 |
) |
|
$ |
(2,328 |
) |
|
$ |
(2,757 |
) |
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(Loss) per share:
|
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|
|
|
|
|
|
|
|
|
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|
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Basic and Diluted
|
|
$ |
(0.29 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.40 |
) |
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Weighted average shares outstanding
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Basic and Diluted
|
|
|
7,529,850 |
|
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|
6,908,415 |
|
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|
7,487,399 |
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6,881,352 |
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4
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)
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Six Months Ended | |
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June 30, | |
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| |
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|
2005 | |
|
2004 | |
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| |
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| |
Cash flows from operating activities
|
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|
|
|
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|
Net (loss)
|
|
$ |
(2,328 |
) |
|
$ |
(2,757 |
) |
Adjustments to reconcile net (loss) to net cash provided by
operations:
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Depreciation and amortization
|
|
|
4,598 |
|
|
|
4,518 |
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|
Expense for vesting of restricted stock and stock units
|
|
|
3,071 |
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|
4,542 |
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|
Tax benefit related to employee compensation plans
|
|
|
2,518 |
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|
|
177 |
|
|
Change in deferred tax asset
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|
1,381 |
|
|
|
(508 |
) |
|
Unrealized (gain) loss on investments in securities
|
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|
61 |
|
|
|
(109 |
) |
|
Changes in operating assets and liabilities:
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|
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|
(Increase) decrease in U.S. treasury bills
|
|
|
5,904 |
|
|
|
(13,401 |
) |
|
|
Decrease in investment advisory and incentive fees receivable
|
|
|
11,879 |
|
|
|
15,407 |
|
|
|
(Increase) decrease in prepaid expenses and other assets
|
|
|
(1 |
) |
|
|
(592 |
) |
|
|
Decrease in investments in affiliated investment partnerships
|
|
|
8,513 |
|
|
|
9,624 |
|
|
|
(Increase) in investments in securities
|
|
|
(1,120 |
) |
|
|
(1,077 |
) |
|
|
(Decrease) in accrued expenses
|
|
|
(1,160 |
) |
|
|
(551 |
) |
|
|
(Decrease) in accrued bonuses
|
|
|
(10,665 |
) |
|
|
(14,296 |
) |
|
|
(Decrease) in accrued lease amendment expense
|
|
|
(212 |
) |
|
|
(465 |
) |
|
Changes in operating assets and liabilities from consolidated
affiliated partnerships:
|
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|
|
|
|
|
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|
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|
Minority interest in income
|
|
|
393 |
|
|
|
541 |
|
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|
Effect on cash of partnership previously consolidated
|
|
|
|
|
|
|
(16 |
) |
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|
(Increase) in due from broker
|
|
|
(9,619 |
) |
|
|
(6,093 |
) |
|
|
(Increase) in securities
|
|
|
(2,757 |
) |
|
|
(4,144 |
) |
|
|
Increase in securities sold short
|
|
|
2,683 |
|
|
|
3,228 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
13,139 |
|
|
|
(5,972 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Fixed asset additions
|
|
|
(536 |
) |
|
|
(1,310 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(536 |
) |
|
|
(1,310 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
(4,187 |
) |
|
|
145 |
|
Dividends paid to shareholders
|
|
|
(9,953 |
) |
|
|
(858 |
) |
Consolidated affiliated partnerships:
|
|
|
|
|
|
|
|
|
|
|
Partner subscriptions
|
|
|
3,945 |
|
|
|
6,450 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(10,195 |
) |
|
|
5,737 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,408 |
|
|
|
(1,545 |
) |
Cash and cash equivalents at the beginning of the year
|
|
|
3,582 |
|
|
|
4,947 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period
|
|
$ |
5,990 |
|
|
$ |
3,402 |
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
40 |
|
|
$ |
89 |
|
|
|
|
|
|
|
|
Cash paid for taxes
|
|
$ |
47 |
|
|
$ |
1,863 |
|
|
|
|
|
|
|
|
5
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
Six Months Ended June 30, 2005
(Amounts in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional | |
|
|
|
|
|
|
|
|
Common | |
|
Paid-In | |
|
Retained | |
|
Unearned | |
|
|
|
|
Stock | |
|
Capital | |
|
Earnings | |
|
Compensation | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2004 as restated
|
|
$ |
7,275 |
|
|
$ |
88,458 |
|
|
$ |
17,508 |
|
|
$ |
(5,395 |
) |
|
$ |
107,846 |
|
Grants of restricted stock units and restricted stock
|
|
|
85 |
|
|
|
3,405 |
|
|
|
|
|
|
|
(418 |
) |
|
|
3,072 |
|
Issuance of common stock
|
|
|
168 |
|
|
|
(4,354 |
) |
|
|
|
|
|
|
|
|
|
|
(4,186 |
) |
Tax benefit related to employee compensation plans
|
|
|
|
|
|
|
2,518 |
|
|
|
|
|
|
|
|
|
|
|
2,518 |
|
Dividends, net of compensation expense(1)
|
|
|
|
|
|
|
|
|
|
|
(9,949 |
) |
|
|
|
|
|
|
(9,949 |
) |
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
(2,328 |
) |
|
|
|
|
|
|
(2,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2005
|
|
$ |
7,528 |
|
|
$ |
90,027 |
|
|
$ |
5,231 |
|
|
$ |
(5,813 |
) |
|
$ |
96,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
compensation expense incurred relating to dividend of $32. |
6
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1. |
Organization and Summary of Significant Accounting
Policies |
|
|
|
Organization and Basis of Presentation |
The consolidated interim financial statements of BKF Capital
Group, Inc. (BKF or the Company) and its
subsidiaries 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 for complete financial statements. These
consolidated financial statements are unaudited and should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys
Annual Report on Form 10-K/ A for the year ended
December 31, 2004. The Company follows the same accounting
policies in the preparation of interim reports. In the opinion
of management, the consolidated financial statements reflect all
adjustments, which are of a normal recurring nature, necessary
for a fair presentation of the financial condition, results of
operations and cash flows of the Company for the interim periods
presented and are not necessarily indicative of a full
years results. BKF Capital Group, Inc. (the
Company) operates through a wholly-owned subsidiary,
Levin Management Co., Inc. and its subsidiaries, all of which
are referred to as Levco. The Company trades on the
New York Stock Exchange, Inc. (NYSE) under the
symbol (BKF).
The Consolidated Financial Statements of Levco include its
wholly-owned subsidiaries LEVCO Europe Holdings, Ltd.
(LEVCO Holdings) and its wholly-owned subsidiary,
LEVCO Europe, LLP (LEVCO Europe), John A.
Levin & Co., Inc., (JALCO), JALCOs
two wholly-owned subsidiaries, Levco GP Inc. (Levco
GP) and LEVCO Securities, Inc. (LEVCO
Securities) and certain affiliated investment partnerships
for which the Company is deemed to have a controlling interest
in the applicable partnership. Three investment partnerships
were consolidated at June 30, 2005 and one at
December 31, 2004. In addition, the operations of three
investment partnerships were included in the statements of
operation and cash flows for the six-months ended June 30,
2005 while one investment partnership was consolidated for the
six-months ended June 30, 2004. All intercompany
transactions have been eliminated in consolidation.
JALCO is an investment advisor registered under the Investment
Advisers Act of 1940, as amended, 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 consulting programs (Wrap Accounts) with
several 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 managing general partner of several
affiliated investment partnerships and is registered with the
Commodities Futures Trading Commission as a commodity pool
operator.
During a review of the Companys equity compensation plan,
it was determined that certain RSU grants under the plan should
have been accounted for as equity instruments. Previously, the
Company accounted for these RSU as a liability on the
Consolidated Statement of Financial Condition. RSU awards where
employees can compel the Company to settle the award by
transferring cash or other assets to employees rather than by
issuing equity instruments would result in the Companys
incurring a liability. In contrast, if the Company is not
compelled to settle the RSU award by transferring assets other
then its own stock and has the intent to settle the RSU award
with its own stock then the RSU award should be accounted for as
an equity instrument. The Company settles these RSU in equity.
The Company has determined that the RSU awards should have been
classified as additional paid-in capital on the date of grant
with a corresponding increase to unearned compensation, with
compensation expense charged over the vesting period reducing
the unearned compensation balance. Previously the RSU
7
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards were accounted for as an increase to accrued incentive
compensation and incentive compensation expense over the vesting
period. The effect of this change will be to increase
stockholders equity by $16.0 million as of
December 31, 2004 and reduce liabilities by the same
amounts. This change did not result in any adjustment to the
Consolidated Statements of Operations.
|
|
|
Consolidation Accounting Policies |
Operating Companies. Financial Accounting Standards Board
(FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities an
interpretation of Accounting Research Bulletin No. 51
(ARB 51), Consolidated Financial
Statements, to variable interest entities
(VIE), (FIN 46), which was issued
in January 2003 and revised in December 2003
(FIN 46R), defines the criteria necessary to be
considered an operating company (i.e., voting interest entity)
for which the consolidation accounting guidance of Statement of
Financial Accounting Standards (SFAS) No. 94,
Consolidation of All Majority-Owned Subsidiaries,
(SFAS 94) should be applied. As required by
SFAS 94, the Company consolidates operating companies in
which BKF has a controlling financial interest. The usual
condition for a controlling financial interest is ownership of a
majority of the voting interest. FIN 46R defines operating
companies as businesses that have a sufficient legal equity to
absorb the entities expected losses and, in each case, for
which the equity holders have substantive voting rights and
participate substantively in the gains and losses of such
entities. Operating companies in which the Company is able to
exercise significant influence but do not control are accounted
for under the equity method. Significant influence generally is
deemed to exist when the Company owns 20% to 50% of the voting
equity of an operating entity. The Company has determined that
it does not have any VIE. Entities consolidated are based on
equity ownership of the entity by the Company and its affiliates.
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Generally, investment advisory fees are billed 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
billed quarterly based upon a percentage of the market value of
each account as of the previous quarter end. Incentive fees,
general partner incentive allocations earned from affiliated
investment partnerships, and incentive fees from other accounts
are accrued on a quarterly basis and are billed quarterly or at
the end of their respective contract year, as applicable. Such
accruals may be reversed as a result of subsequent investment
performance prior to the conclusion of the applicable contract
year.
Commissions earned on securities transactions executed by LEVCO
Securities and related expenses are recorded on a trade-date
basis net of any sales credits.
Commissions earned on distribution of an unaffiliated investment
advisors funds are recorded once a written commitment is
obtained from the investor.
8
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Revenue Recognition Policies for Consolidated Affiliated
Partnerships (CAP) |
Marketable securities owned and securities sold short, are
valued at independent market prices with the resultant
unrealized gains and losses included in operations.
Security transactions are recorded on a trade date basis.
Interest income and expense are accrued as earned or incurred.
Dividend income and expense are recorded on the ex-dividend date.
|
|
|
Investments in Affiliated Investment Partnerships |
Levco GP serves as the managing general partner for several
affiliated investment partnerships (AIP), which
primarily engage in the trading of publicly traded equity
securities, and in the case of one partnership, distressed
corporate debt. The assets and liabilities and results of
operations of the AIP are not included in the Companys
consolidated statements of financial condition with the
exception of Levco GPs equity ownership and certain AIP
whereby Levco GP is deemed to have a controlling interest in the
partnership (see Note 4). The limited partners of the AIP
have the right to redeem their partnership interests at least
quarterly.
Additionally, the unaffiliated limited partners of the AIP may
terminate Levco GP as the general partner of the AIP at any
time. Levco GP does not maintain control over the unconsolidated
AIP, has not guaranteed any of the AIP obligations, nor does it
have any contractual commitments associated with them.
Investments in the unconsolidated AIP held through Levco GP, are
recorded based upon the equity method of accounting.
Levco GPs investment amount in the unconsolidated AIP
equals the sum total of its capital accounts, including
incentive allocations, in the AIP. Each AIP values its
underlying investments in accordance with policies as described
in its audited financial statements and underlying offering
memoranda. It is the Companys general practice to withdraw
the incentive allocations earned from the AIP within three
months after the year end. Levco GP has general partner
liability with respect to its interest in each of the AIP and
has no investments in the AIP other than its interest in these
partnerships. See Note 5 Related Transactions.
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 to occur.
The Company files consolidated Federal and combined state and
local income tax returns.
Long-lived assets are accounted for in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires impairment
losses to be recognized on long-lived assets used in operations
when an indication of an impairment exists. If the expected
future undiscounted cash flows are less than the carrying amount
of the assets, an impairment loss would be recognized to the
extent the carrying value of such asset exceeded its fair value.
The cost in excess of net assets of Levco acquired by BKF in
June 1996 is reflected as goodwill, investment advisory
contracts, and employment contracts in the Consolidated
Statements of Financial Condition. Through December 31,
2001, goodwill was amortized straight line over 15 years.
Effective
9
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
January 1, 2002 the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets. Under
SFAS No. 142, goodwill is no longer amortized but is
subject to an impairment test at least annually or when
indicators of potential impairment exist. Other intangible
assets with finite lives are amortized over their useful lives.
Investment contracts are amortized straight line over
10 years. These contracts will be fully amortized by
June 30, 2006.
The Company accounts for Earnings Per Share under
SFAS No. 128, Earnings Per Share. Basic
earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares
outstanding during the year. Diluted earnings (loss) per share
is computed by dividing net income (loss) by the total of the
weighted average number of shares of common stock outstanding
and common stock equivalents. Diluted earnings (loss) per share
is computed using the treasury stock method.
The following table sets forth the computation of basic and
diluted (loss) per share (dollar amounts in thousands, except
per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Net (loss)
|
|
$ |
(2,177 |
) |
|
$ |
(1,699 |
) |
|
$ |
(2,328 |
) |
|
$ |
(2,757 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
7,529,850 |
|
|
|
6,908,415 |
|
|
|
7,487,399 |
|
|
|
6,881,352 |
|
Dilutive potential shares from equity grants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares outstanding
|
|
|
7,529,850 |
|
|
|
6,908,415 |
|
|
|
7,487,399 |
|
|
|
6,881,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$ |
(0.29 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.31 |
) |
|
$ |
(0.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
In calculating diluted (loss) per share for the three and
six-months ended June 30, 2005 and 2004 common stock
equivalents of 995,007 and 1,892,610, respectively, were
excluded due to their anti-dilutive effect on the calculation.
SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) established
financial accounting and reporting standards for equity-based
and non-employee compensation. SFAS 123 permits companies
to account for equity-based employee compensation using the
intrinsic value method prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, or using the fair-value method
under SFAS 123. The company has adopted APB 25 and its
related interpretations to account for equity-based employee
compensation. Accordingly, no compensation expense was
recognized for stock option awards because the exercise price
equaled or exceeded the market value on the Companys
common stock on the grant date. Compensation expense for
restricted stock units (RSU) or restricted stock
with future service requirements is recognized over the relevant
service periods. In December 2002, the FASB Issued
SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures about
the method of accounting for stock-based compensation. All stock
options are fully vested for the applicable periods therefore,
disclosure provisions for SFAS No. 123 are not
applicable. In December 2004,
10
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the FASB issued SFAS No. 123R, Share-Based
Payment. This statement is a revision to
SFAS No. 123, Accounting for Stock-Based
Compensation and supercedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees. This statement establishes standards for the
accounting for transactions in which an entity exchanges its
equity instruments for goods or services, primarily focusing on
the accounting for transactions in which an entity obtains
employee services in share-based payment transactions. Entities
will be required to measure the cost of employee services
received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during
which an employee is required to provide service, the requisite
service period (usually the vesting period), in exchange for the
award. The grant-date fair value of employee share options and
similar instruments will be estimated using option-pricing
models. If an equity award is modified after the grant date,
incremental compensation cost will be recognized in an amount
equal to the excess of the fair value of the modified award over
the fair value of the original award immediately before the
modification. As amended by Securities and Exchange Commission
(SEC) Interpretive Release 33-8568, Amendment
to Rule 4-01(a) of Regulation S-X Regarding the
Compliance Date for Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share Based Payment, this
statement is effective as of the beginning of the first interim
or annual reporting period of the Companys first fiscal
year beginning after June 15, 2005. In accordance with the
SFAS 123R, as amended, the Company will adopt
SFAS No. 123R effective January 1, 2006.
All of the Companys remaining stock options are fully
vested as of June 30, 2005. Therefore, the Company does not
expect the adoption of SFAS 123R to have a material effect
on the Companys financial statements.
Certain prior period amounts reflect reclassifications to
conform with the current years presentation.
|
|
|
Significant Accounting Policies of Consolidated Affiliated
Partnerships (CAP) |
Securities sold short represent obligations to deliver the
underlying securities sold at prevailing market prices and
option contracts written represent obligations to purchase or
deliver the specified security at the contract price. The future
satisfaction of these obligations may be at amounts that are
greater or less than that recorded on the consolidated
statements of financial condition. The CAP monitors their
positions continuously to reduce the risk of potential loss due
to changes in market value or failure of counterparties to
perform.
Minority interests in the accompanying consolidated statements
of financial condition represent the minority owners share
of the equity of consolidated investment partnerships. Minority
interest in the accompanying consolidated statements of
operations represents the minority owners share of the
income or loss of consolidated investment partnerships.
|
|
|
Partner Contributions and Withdrawals |
Typically, contributions are accepted monthly and withdrawals
are made quarterly upon the required notification period having
been met. The notification period ranges from thirty to sixty
days.
|
|
2. |
Off-Balance Sheet Risk |
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
11
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
introduced by LEVCO Securities. In the ordinary course of its
business, however, LEVCO Securities does not accept orders with
respect to client accounts if the funds required for the client
to meet its obligations are not on deposit in the client account
at the time the order is placed.
In the normal course of business, the CAP enter into
transactions in various financial instruments, including
derivatives, for trading purposes, in order to reduce their
exposure to market risk. These transactions include option
contracts and securities sold short.
Substantially all of the CAP cash and securities positions are
deposited with one clearing broker for safekeeping purposes. The
broker is a member of major securities exchanges.
|
|
3. |
Investment Advisory Fees Receivable |
Included in investment advisory fees receivable are
approximately $14.9 million and $768,000 of accrued
incentive fees as of June 30, 2005 and December 31,
2004, respectively, for which the full contract measurement
period has not been reached. The Company has provided for the
applicable expenses relating to this revenue. If the accrued
incentive fees are not ultimately realized, a substantial
portion of the related accrued expenses will be reversed.
As required by SFAS 94, the Company consolidates AIP in
which the Company has a controlling financial interest. The
consolidation of these partnerships does not impact the
Companys equity or net income. Levco GP has general
partner liability with respect to its interest in each of the
CAP.
12
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the consolidation of the CAP with
BKF as of June 30, 2005. The consolidating statements of
financial condition have been included to assist investors in
understanding the components of financial condition and
operations of BKF and the CAP. A significant portion of the
results of operations have been separately identified in the
consolidated statements of operations (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 | |
|
|
| |
|
|
BKF | |
|
CAP | |
|
Eliminations | |
|
Consolidated | |
|
|
| |
|
| |
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
5,990 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,990 |
|
U.S. Treasury bills
|
|
|
34,562 |
|
|
|
|
|
|
|
|
|
|
|
34,562 |
|
Investment advisory and incentive fees receivable
|
|
|
28,132 |
|
|
|
|
|
|
|
(2 |
) |
|
|
28,130 |
|
Investments in securities, at value (cost $6,546)
|
|
|
6,847 |
|
|
|
|
|
|
|
|
|
|
|
6,847 |
|
Investments in affiliated partnerships
|
|
|
17,895 |
|
|
|
|
|
|
|
(9,046 |
) |
|
|
8,849 |
|
Prepaid expenses and other assets
|
|
|
7,032 |
|
|
|
17 |
|
|
|
|
|
|
|
7,049 |
|
Fixed assets (net of accumulated depreciation of $6,971)
|
|
|
6,254 |
|
|
|
|
|
|
|
|
|
|
|
6,254 |
|
Deferred tax asset
|
|
|
7,010 |
|
|
|
|
|
|
|
|
|
|
|
7,010 |
|
Goodwill (net of accumulated amortization of $8,566)
|
|
|
14,796 |
|
|
|
|
|
|
|
|
|
|
|
14,796 |
|
Investment advisory contracts (net of accumulated amortization
of $63,080)
|
|
|
7,009 |
|
|
|
|
|
|
|
|
|
|
|
7,009 |
|
Consolidated affiliated partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from broker
|
|
|
|
|
|
|
10,571 |
|
|
|
|
|
|
|
10,571 |
|
|
Investments in securities, at value (cost $8,803)
|
|
|
|
|
|
|
9,274 |
|
|
|
|
|
|
|
9,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
135,527 |
|
|
$ |
19,862 |
|
|
$ |
(9,048 |
) |
|
$ |
146,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, minority interest and stockholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$ |
2,902 |
|
|
$ |
24 |
|
|
$ |
(2 |
) |
|
$ |
2,924 |
|
Accrued bonuses
|
|
|
32,021 |
|
|
|
|
|
|
|
|
|
|
|
32,021 |
|
Accrued lease amendment expense
|
|
|
3,631 |
|
|
|
|
|
|
|
|
|
|
|
3,631 |
|
Consolidated affiliated partnerships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold short, at value (proceeds of $3,869)
|
|
|
|
|
|
|
3,982 |
|
|
|
|
|
|
|
3,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
38,554 |
|
|
|
4,006 |
|
|
|
(2 |
) |
|
|
42,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interest in CAP
|
|
|
|
|
|
|
|
|
|
|
6,810 |
|
|
|
6,810 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized
15,000,000 shares, issued and outstanding
7,528,162
|
|
|
7,528 |
|
|
|
|
|
|
|
|
|
|
|
7,528 |
|
Additional paid-in capital
|
|
|
90,027 |
|
|
|
|
|
|
|
|
|
|
|
90,027 |
|
Retained earnings
|
|
|
5,231 |
|
|
|
|
|
|
|
|
|
|
|
5,231 |
|
Unearned compensation restricted stock
|
|
|
(5,813 |
) |
|
|
|
|
|
|
|
|
|
|
(5,813 |
) |
Capital from consolidated affiliated partnerships
|
|
|
|
|
|
|
15,856 |
|
|
|
(15,856 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
96,973 |
|
|
|
15,856 |
|
|
|
(15,856 |
) |
|
|
96,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and stockholders
equity
|
|
$ |
135,527 |
|
|
$ |
19,862 |
|
|
$ |
(9,048 |
) |
|
$ |
146,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5. |
Investments in Affiliated Investment Partnerships and Related
Revenue |
Summary financial information, including the Companys
carrying value and income from the unconsolidated AIP is as
follows (dollar amounts in thousands):
|
|
|
|
|
|
|
June 30, | |
|
|
2005 | |
|
|
| |
Total AIP assets
|
|
$ |
676,451 |
|
Total AIP liabilities
|
|
|
(184,434 |
) |
Total AIP capital balance
|
|
|
492,017 |
|
AIP net earnings
|
|
|
12,114 |
|
Companys carrying value (including incentive allocations)
|
|
|
8,849 |
|
Companys income on invested capital (excluding accrued
incentive allocations)
|
|
|
207 |
|
Included in the carrying value of investments in AIP at
June 30, 2005 and December 31, 2004 are accrued
incentive allocations approximating $2.4 million and
$6.5 million, respectively.
Included in the Companys incentive fees and general
partner incentive allocations are approximately $964,000 and
$300,000 payable directly to employee owned and controlled
entities (Employee Entities) for the three months
ended June 30, 2005 and 2004, and $1.9 million and
$2.1 million for the six months ended June 30, 2005
and 2004, respectively. These amounts are included in the
Companys carrying value of the AIP at the end of the
applicable period. These Employee Entities, which serve as
non-managing general partners of several AIP, also bear the
liability for all compensation expense relating to the allocated
revenue, amounting to approximately $964,000 and $300,000 for
the three months ended June 30, 2005 and 2004, and
$1.9 million and $2.1 million for the six months ended
June 30, 2005 and 2004, respectively. These amounts are
included in the Consolidated Statement of Operations.
The Company recorded investment advisory fees and incentive
allocations/fees from unconsolidated affiliated domestic
investment partnerships and affiliated offshore investment
vehicles of approximately $18.2 million and
$11.9 million for the three months ended June 30, 2005
and 2004, and $37.3 million and $29.9 million for the
six months ended June 30, 2005 and 2004, respectively.
Included in investment advisory and incentive fees receivable at
June 30, 2005 and December 31, 2004 are
$4.0 million and $4.0 million, respectively, of
advisory fees from AIP and sponsored investment offshore
vehicles. Also included in investment advisory and incentive
fees receivable are $13.4 million and $26.7 million of
incentive fees from sponsored offshore investment vehicles at
June 30, 2005 and December 31, 2004, respectively.
|
|
6. |
Contractual Obligations |
In the ordinary course of business, the Company enters into
contracts with third parties pursuant to which BKF or the third
party provides services to the other. In many of the contracts,
the Company agrees to indemnify the third party under certain
circumstances. The terms of the indemnity vary from contract to
contract and the amount of the indemnification liability, if
any, cannot be determined.
First Quarter 2004:
|
|
|
|
|
Certain executive officers of the Company, who are subject to
performance based criteria with regard to their 2003
compensation, and several employees were granted
56,105 shares of restricted stock with a value of
approximately $1.4 million, which vest over a three-year
period. The amount unearned as of |
14
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
March 31, 2004 is recorded as unearned compensation in the
consolidated statement of financial condition. |
|
|
|
The Company withheld 2,389 shares of common stock for
required withholding taxes in connection with the delivery of
7,002 RSU. |
|
|
|
The Company withheld 3,111 shares of common stock for
required withholding taxes in connection with the exercise of
15,049 stock options. |
Second Quarter 2004:
|
|
|
|
|
9,600 shares of restricted stock were granted to
non-employee Directors for 2004 Directors fees with a value
of approximately $275,000. |
|
|
|
4,500 RSU and 437 shares of Restricted Stock, which were
unvested, were forfeited. |
First Quarter 2005:
|
|
|
|
|
Certain executive officers of the Company, who are subject to
performance based criteria with regard to their 2004
compensation, and several employees were granted
75,344 shares of restricted stock with a value of
approximately $3.2 million, which vest over a three-year
period. The amount unearned as of March 31, 2005 is
recorded as unearned compensation in the consolidated statement
of financial condition. |
|
|
|
The Company withheld 112,874 shares of common stock for
required withholding taxes in connection with the delivery of
280,854 RSU. |
|
|
|
5,000 unvested RSU were forfeited |
|
|
|
The restriction on 9,600 shares of restricted stock was
lifted and delivered. |
|
|
|
9,000 shares of restricted stock were granted to
non-employee Directors for 2005 Directors fees with a value
of approximately $360,000. |
Second Quarter 2005:
|
|
|
|
|
The restriction on 4,800 shares of restricted stock was
lifted and delivered. |
|
|
|
3,433 shares of restricted stock were granted to several
employees with a value of approximately $132,000, of which 1,174
unvested shares were forfeited. |
The Companys provision (benefit) for income taxes differs
from the amount of income tax determined by applying the
applicable U.S. federal statutory income tax rate
principally due to state and local taxes and non-deductible
amortization. The Company has determined that the amortization
expense on intangible assets is non-deductible since the
purchase method of accounting has been applied retroactive to
June 1996.
Deferred tax assets arise from the future tax benefit on
deferred and non-cash compensation, lease amendment loss,
unrealized losses on investment, and depreciation. Deferred tax
liabilities arise from deferred revenues, unrealized gains on
investments, and state and local taxes.
On March 23, 2005, the Company declared a dividend of
$0.125 per share payable on April 15, 2005.
On April 5, 2005, the Company declared a special dividend
of $0.925 per share payable on April 29, 2005.
15
BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 5, 2005, the Company declared a quarterly dividend
of $0.125 per share payable on July 29, 2005 to
shareholders of record as of July 15, 2005. Included in the
$0.125 per share dividend will be the $.01 per share
redemption price payable on July 29, 2005 to holders of
record as of July 15, 2005.
On September 22, 2005, the Company declared a dividend of
$0.125 per share payable on October 28, 2005.
The Board of Directors of BKF elected on July 5, 2005 to
redeem all of the outstanding Common Share Purchase Rights (the
Rights) issued under the Rights Agreement, dated as
of June 8, 2001, by and between the Company and Mellon
Investor Services LLC, as Rights Agent, effective immediately,
pursuant to Section 23 of the Rights Agreement. The
redemption price of $.01 per Right (the
Redemption Price) was paid on July 29,
2005 to holders of record of the redeemed Rights on
July 15, 2005. From and after the effectiveness of the
redemption of the Rights, the holders of the redeemed Rights are
entitled to no rights as such except to receive payment of the
Redemption Price.
On August 4, 2005, 1,800 shares of restricted stock
were granted to non-employee Directors for 2005 Directors
fees with a value of approximately $61,000.
The restriction on 2,100 shares of restricted stock was
lifted and delivered and 747 shares of restricted stock
were forfeited.
In August 2005, 94,000 shares of restricted stock were
granted to several employees with a value of approximately
$3.2 million.
On September 28, 2005, Mr. John Levin resigned as the Chief
Executive Officer of BKF. Following his departure date, which is
expected to be December 31, 2005, Mr. Levin will act as a
consultant to the firm, as Chairman Emeritus (a non-voting
advisor to the Board of Directors) and will lead his own asset
management firm. Under the terms of the arrangement between Mr.
Levin and BKF, Mr. Levin will be able to solicit certain clients
of the firm and a limited number of firm employees, and BKF will
have an economic stake equal to 15% of the revenues generated
for Mr. Levins firm by the clients who move their accounts
from BKF. Mr. Levins departure will result in the
termination of the short-biased alternative investment strategy.
Mr. Levin will be subject to non-hire and non-solicit
arrangements with respect to all other employees and clients of
the firm for periods of 15 or 36 months. As part of the
separation agreement with John A. Levin 161,725 RSU and
46,786 shares of restricted stock have been forfeited with
approximate values of $2.6 million and $1.6 million,
respectively.
On September 28, 2005, the Companys hired a new Chief
Executive Officer. As part of the agreement the Company granted
250,000 shares of restricted stock with an approximate
value of $8.0 million which vest 20% on December 30,
2005 and the remaining 80% shall vest ratably in 20% (i.e. 25%
of the invested 80%) installments on the first through fourth
anniversaries of the grant date. In addition, 250,000 stock
options will be granted on December 30, 2005 equal to the
fair market value on the grant date and will vest over the same
terms as the restricted stock. The stock options will be
accounted for under SFAS 123R upon grant.
On October 18, 2005, the Company announced that it was not
able to reach an agreement with the portfolio management team
managing its event-driven strategies. As a consequence, the
investment vehicles being managed pursuant to this strategy are
being liquidated and the proceeds returned to investors.
16
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
INTRODUCTION
BKF operates entirely through Levco, an investment adviser
registered with the Securities and Exchange Commission. Levco
specializes in managing equity portfolios for institutional and
individual investors. Levco offers long-only equity strategies
and a range of alternative investment products and other more
specialized investment programs. Most clients are based in the
United States, though a significant portion of investors in the
alternative investment products are located outside the United
States.
Levco acts as the managing 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 long-only
equity strategies, 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. In some cases, Levco receives
performance-based fees from accounts pursuing long-only equity
strategies. 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.
At June 30, 2005, assets under management at Levco were
$12.4 billion, down from $13.1 billion a year earlier.
(See The Month Ended June 30, 2005 as Compared to The
Month Ended June 30, 2004 Significant
Developments Since June 30, 2005) Following is a
comparison of Levcos assets under management as defined by
product and client type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, | |
|
March 31, | |
|
December 31, | |
|
September 30, | |
|
June 30, | |
|
|
2005 | |
|
2005 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Long-Only Accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional
|
|
$ |
2,457 |
|
|
$ |
2,723 |
|
|
$ |
2,964 |
|
|
$ |
2,802 |
|
|
$ |
2,692 |
|
Sub-Advisory
|
|
|
2,534 |
|
|
|
2,744 |
|
|
|
2,641 |
|
|
|
2,362 |
|
|
|
2,491 |
|
Non-Institutional
|
|
|
1,708 |
|
|
|
1,671 |
|
|
|
1,713 |
|
|
|
1,651 |
|
|
|
1,667 |
|
Wrap
|
|
|
2,143 |
|
|
|
2,225 |
|
|
|
2,319 |
|
|
|
2,216 |
|
|
|
2,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Only
|
|
|
8,842 |
|
|
|
9,363 |
|
|
|
9,637 |
|
|
|
9,031 |
|
|
|
9,131 |
|
Alternative Strategies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Event-Driven
|
|
|
2,098 |
|
|
|
2,262 |
|
|
|
2,568 |
|
|
|
2,599 |
|
|
|
2,678 |
|
Long-Short Accounts
|
|
|
768 |
|
|
|
849 |
|
|
|
792 |
|
|
|
752 |
|
|
|
722 |
|
Short-Biased
|
|
|
460 |
|
|
|
423 |
|
|
|
422 |
|
|
|
510 |
|
|
|
497 |
|
Other Private Investment Funds
|
|
|
215 |
|
|
|
193 |
|
|
|
185 |
|
|
|
150 |
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Alternative Strategies
|
|
|
3,541 |
|
|
|
3,727 |
|
|
|
3,967 |
|
|
|
4,011 |
|
|
|
3,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
12,383 |
|
|
$ |
13,090 |
|
|
$ |
13,604 |
|
|
$ |
13,042 |
|
|
$ |
13,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Levco also has a wholly-owned broker-dealer subsidiary that
clears through Bear Stearns Securities Corp. 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.
RISK FACTORS AND RECENT EVENTS
The following risks, among others, sometimes have affected, and
in the future could affect BKFs business, financial
condition or results of operations. The risks described below
are not the only ones facing BKF. Additional risks not presently
known to BKF or that BKF currently deems insignificant may also
impact its business.
17
|
|
|
Levco is dependent on key personnel |
Levco is largely dependent on the efforts of its senior
investment professionals. The loss of the services of key
investment personnel could have a material adverse effect on
Levco because it could jeopardize its relationships with clients
and result in the loss of those accounts. The loss of the senior
investment professionals managing a particular strategy could
result in the discontinuation of that strategy by Levco. (See
Three Months Ended June 30, 2005 as Compared to Three
Months Ended June 30, 2004 Significant
Developments Since June 30, 2005.)
On September 28, 2005, Mr. John Levin resigned as the
Chief Executive Officer of BKF. Following his resignation as
Chief Executive Officer, Mr. Levin will remain as an
employee of the firm through December 31, 2005. Commencing
January 1, 2006, Mr. Levin will act as a consultant to
the firm, as Chairman Emeritus (a non-voting advisor to the
Board of Directors) and will lead his own asset management firm.
Under the terms of the arrangement between Mr. Levin and
BKF, Mr. Levin will be able to solicit certain clients of
the firm (who represented approximately $2.5 billion in
assets under management as of June 30, 2005) and a limited
number of firm employees, and BKF will have an economic stake in
the revenues generated for Mr. Levins firm by the
clients who move their accounts from BKF. Mr. Levin will be
subject to non-hire and non-solicit arrangements with respect to
all other employees and clients of the firm for periods of 15 or
36 months. The announcement of Mr. Levins
resignation may result in the loss of accounts (in addition to
those he will be able to solicit) and could impact BKFs
ability to attract new accounts. (See Risk
Factors Adverse Developments with Regard to
Significant Customers or Relationships could Adversely Affect
Levcos Revenues and Managements
Discussion and Analysis of Results of Operations for
recent developments with respect to account terminations.) BKF
will discontinue its current short-biased alternative investment
strategy once Mr. Levin ceases to be an employee of the
Company.
On September 28, 2005, John C. Siciliano became Chief
Executive Officer and President of BKF and John A.
Levin & Co., Inc. and a director of BKF. Anson M.
Beard, Jr., who has been a director since 2000, has
succeeded Mr. Levin as Chairman of the Board.
In August 2005, the Board of Directors approved a compensation
program designed to retain personnel through the end of the
year. During the remaining portion of the year, BKF will seek to
develop compensation arrangements for future periods. There can
be no assurance that agreements on such arrangements will be
reached. None of Levcos key investment personnel are
subject to employment contracts whose economic terms extend
beyond December 31, 2005.
On October 18, 2005, the Company announced that it was not
able to reach an agreement with the portfolio management team
managing its event-driven strategies. As a consequence, the
investment vehicles being managed pursuant to this strategy are
being liquidated and the proceeds returned to investors. As of
June 30, 2005, the event-driven strategies represented 17%
of BKFs assets under management and 44% of total advisory
revenues for the six months ended June 30, 2005.
Levcos future success depends on its ability to retain and
attract qualified personnel to conduct its investment management
business. To the extent that Levco loses key personnel or seeks
to diversify its products and strategies, BKF anticipates that
it will be necessary for Levco to replace or add portfolio
managers and investment analysts. No assurance can be given that
Levco will succeed in its efforts to recruit and retain the
required personnel. Because of its relatively smaller size,
Levco may have relatively fewer resources with which to recruit
and retain personnel. The loss of key personnel or the inability
to recruit and retain qualified portfolio managers, business and
marketing personnel could have a material adverse effect on
Levcos business.
18
In December 1998, BKF adopted an incentive compensation plan
(most recently amended in 2001) to give Levco the ability to
attract and retain talented professionals with equity-based and
cash compensation. Determinations with regard to the
implementation of this plan are made by the Compensation
Committee of the board of directors of BKF on a regular basis.
Because BKF is a relatively small public company, the value of
the equity awards that may be offered to professionals may be
limited relative to what competitors may offer. If the price of
BKF stock decreases, no assurance can be given that the
equity-based compensation will serve its purpose to attract and
retain talented professionals.
|
|
|
Levco is dependent on a limited number of investment
strategies |
Levco currently derives most of its revenues from three
investment offerings a large cap value strategy, an
event-driven investment strategy, and an actively traded
long-short US equity strategy. The event-driven strategy is in
the process of being terminated. Adverse developments with
regard to any of these strategies will have a material adverse
effect on Levcos business.
|
|
|
Adverse developments with regard to significant customers
or relationships could adversely affect Levcos
revenues |
As of June 30, 2005, the ten largest customers of
Levcos long-only equity strategies (counting as single
customers each wrap fee program and related family and
institutional accounts) generated approximately
$10.4 million of revenues for Levco in the first six months
of 2005 (including incentive fees), or approximately 17.1% of
BKFs total fees for the period. Excluding the impact of
incentive fees on BKFs business, the ten largest customers
for long-only equity products accounted for approximately 21.5%
of all asset-based investment advisory fees earned in the first
six months of 2005. Since June 30, 2005, Levco has received
notices of termination from three of such customers who had
approximately $1.8 billion in assets under management as of
their termination dates and who generated $2.4 million of
revenues for Levco in the first six months of 2005. In addition,
it is expected that two customers with approximately
$670 million in assets under management as of
September 30, 2005 who generated $1.2 million of
revenues in the first six months of 2005 will move their
accounts to the business to be launched by John Levin. Under the
transition agreement with Mr. Levin, BKF will receive 15%
of the revenues generated by these customers for a five year
period. Another customer is a pension plan that has been taken
over by the Pension Benefits Guarantee Corporation. Since
June 30, 2005, this pension plan account has experienced
withdrawals of approximately $140 million, and it is
expected that this account will terminate as well. This account
generated $376,000 in fees in the first six months of 2005. In
total, these terminations and anticipated terminations will have
an adverse effect on Levcos revenues.
In the institutional marketplace, consultants play a key role in
selecting investment managers for their clients. In the event
that a consultant advising current clients of Levco takes a
negative view of Levco, Levco could lose a number of accounts
related to that consultant. Since June 30, 2005, a
consultant with respect to which Levco manages approximately
$430 million pursuant to long-only strategies (including
proprietary investment vehicles of the consultant) reduced
Levcos rating to retain, so that it was no longer
recommending Levco for new searches but was not advising that
Levco be terminated by clients as an investment manager. Other
consultants have indicated they are monitoring the present
situation closely. In an effort to retain clients in the
institutional marketplace, Mr. Siciliano has been actively
meeting with clients and consultants and keeping them informed
of firm developments.
|
|
|
A decline in the performance of the securities markets
could have an adverse effect on Levcos revenues |
Levcos operations are affected by many economic factors,
including the performance of the securities markets. Declines in
the securities markets, in general, and the equity markets, in
particular, would likely reduce Levcos assets under
management and consequently reduce its revenues. In addition,
any continuing decline in the equity markets, failure of these
markets to sustain their prior rates of growth, or continued
volatility in these markets could result in investors
withdrawing from the equity markets or decreasing their rate of
investment, either of which would likely adversely affect Levco.
Levcos rates of growth in assets under management and
revenues have varied from year to year, and there can be no
assurance that the growth rates
19
sustained in the past will continue. Levco is generally a
value manager, and a general decline in the
performance of value securities could have an
adverse effect on Levcos revenues. Levco also offers
alternative investment strategies. The failure to implement
these strategies effectively could likewise impact Levcos
revenues.
|
|
|
Poor investment performance could adversely affect
Levcos financial condition |
Success in the investment management industry depends largely on
investment performance. Good performance generally stimulates
sales of services and investment products and tends to keep
withdrawals and redemptions low. This generates higher
management fees, which are based on the amount of assets under
management and sometimes on investment performance. If Levco
experiences poor performance, this will likely result in
decreased sales, decreased assets under management and the loss
of accounts, with corresponding decreases in revenue.
|
|
|
A decrease in Levcos management fees, the
cancellation of investment management agreements or poor
investment performance by the Levco private investment funds
could adversely affect Levcos results |
Management Fees. Some segments of the investment
management industry have experienced a trend toward lower
management fees. Levco must maintain a level of investment
returns and service that is acceptable to clients given the fees
they pay. No assurance can be given that Levco will be able to
maintain its current fee structure or client base. Reduction of
the fees for new or existing clients could have an adverse
impact on Levcos profits.
Cancellation of Investment Management Agreements. Levco
derives almost all of its revenue from investment management
agreements. For registered investment companies, a majority of
the disinterested members of each funds board must approve
these agreements at least annually and the agreements are
terminable without penalty on 60 days notice. The
agreements with Levcos separately-managed account clients
generally are terminable by the client without penalty and with
little or no notice. Any failure to renew, or termination of, a
significant number of these agreements could have an adverse
effect on Levco. (See Risk Factors Adverse
Developments with Regard to Significant Customers or
Relationships could Adversely Affect Levcos
Revenuesand Managements Discussion and
Analysis of Results of Operations for recent developments
with respect to account terminations.)
Poor Investment Performance of the Private Investment
Funds. BKF derives revenue from incentive fees and general
partner incentive allocations earned with respect to its
proprietary unregistered investment funds. Stronger positive
performance by these funds generates higher incentive fees and
incentive allocations because those fees and allocations are
based on the performance of the assets under management. On the
other hand, relatively poor performance will result in lower or
no incentive fees or allocations, and will tend to lead to
decreased assets under management and the loss of accounts, with
corresponding decreases in revenue.
|
|
|
Levco is a relatively small public company in a highly
competitive business |
Levco competes with a large number of domestic and foreign
investment management firms, commercial banks, insurance
companies, broker-dealers and other firms offering comparable
investment services. Many of the financial services companies
with which Levco competes have greater resources and assets
under management than Levco does and offer a broader array of
investment products and services.
Management believes that the most important factors affecting
Levcos ability to attract and retain clients are the
abilities, performance records and reputations of its portfolio
managers, the ability to hire and retain key investment
personnel, the attractiveness of investment strategies to
potential investors and competitive fees and investor service.
Levcos ability to increase and retain client assets could
be adversely affected if client accounts underperform client
expectations or if key investment personnel leave Levco.
Levcos ability to compete with other investment management
firms also depends, in part, on the relative attractiveness of
its investment philosophies and methods under prevailing market
conditions. The absence of significant barriers to entry by new
investment management firms in the institutional managed
accounts business increases competitive pressure. Since Levco is
a relatively smaller asset management company,
20
changes in customers, personnel and products and other business
developments may have a greater impact on Levco than they would
have on larger, more diversified asset management companies.
|
|
|
Levco is dependent on information systems and
administration, back-office and trade execution functions |
Levco is highly dependent on information systems and technology
and depends, to a great extent, on third parties who are
responsible for managing, maintaining and updating these
systems. No assurance can be given that Levcos current
systems will continue to be able to accommodate its growth or
that the costs of its outsourcing arrangements will not
increase. The failure to accommodate growth or an increase in
costs could have an adverse effect on Levco.
Success in the investment management industry also depends on
the ability of an investment manager, and third parties with
whom the investment manager contracts, to successfully perform
administrative, back-office and trade execution functions. A
failure by Levco or a third party contracted by Levco to perform
such functions could adversely impact Levcos revenues.
|
|
|
Conflicts of interest may arise and adversely affect
Levco |
From time to time, Levcos officers, directors and
employees may own securities which one or more of its clients
also own. Although Levco maintains internal policies regarding
individual investments by its officers, directors and employees
which require them to report securities transactions and
restrict certain transactions so as to minimize possible
conflicts of interest, possible conflicts of interest may arise
that could have adverse effects on Levco. Similarly, conflicting
investment positions may develop among various investment
strategies managed by Levco. Although Levco has internal
policies in place to address such situations, such conflicts
could have adverse effects on Levco.
|
|
|
Government regulations may adversely affect Levco and
BKF |
Virtually all aspects of Levcos business are subject to
various federal and state laws and regulations. Levco is
registered with the Securities and Exchange Commission under the
Investment Advisers Act of 1940, as amended. The Investment
Advisers Act imposes numerous obligations on registered
investment advisers, including fiduciary, recordkeeping,
operational and disclosure obligations. John A. Levin &
Co. is also registered with the Commodity Futures Trading
Commission as a commodity trading advisor and a commodity pool
operator, and Levco GP is registered with that agency as a
commodity pool operator. John A. Levin & Co. and Levco
GP are members of the National Futures Association. LEVCO
Securities is registered as a broker-dealer under the Securities
Exchange Act of 1934, is a member of the National Association of
Securities Dealers, Inc. and is a member of the Municipal
Securities Rulemaking Board. In addition, Levco is subject to
the Employee Retirement Income Security Act of 1974 and its
regulations insofar as it is a fiduciary with
respect to certain clients. Furthermore, BKF, as a publicly
traded company listed on the New York Stock Exchange, is
subject to the federal securities laws, including the Securities
Exchange Act of 1934, as amended, and the requirements of the
exchange.
These laws and regulations generally grant supervisory agencies
and bodies broad administrative powers, including the power to
limit or restrict Levco or BKF from conducting its business if
it fails to comply with these laws and regulations. If Levco or
BKF fails to comply with these laws and regulations, these
agencies may impose sanctions, including the suspension of
individual employees, limitations on business activities for
specified periods of time, revocation of registration, and other
censures and fines. Even if in compliance with all laws and
regulations, changes in these laws or regulations could
adversely affect BKFs profitability and operations and its
ability to conduct certain businesses in which it is currently
engaged.
|
|
|
Terrorist attacks could adversely affect BKF |
Terrorist attacks, including biological or chemical weapons
attacks, and the response to such terrorist attacks, could have
a significant impact on New York City, the local economy, the
United States economy, the global economy, and global financial
markets. It is possible that the above factors could have a
material
21
adverse effect on BKFs business, especially given the fact
that all operations are conducted from a single location in New
York City and BKF has incurred lease obligations with regard to
this location through September 2011. BKF maintains a business
continuity facility in Stamford, Connecticut.
Certain statements under this caption Managements
Discussion and Analysis of Financial Condition and Results of
Operations constitute forward-looking
statements under the Private Securities Litigation Reform
Act of 1995 (the Reform Act). See
Part II Other Information.
RESULTS OF OPERATIONS
The following discussion and analysis of the results of
operations is based on the Consolidated Statements of Financial
Condition and Consolidated Statements of Operations for BKF
Capital Group, Inc. and Subsidiaries. It should be noted that
certain affiliated investment partnerships in which BKF may be
deemed to have a controlling interest have been consolidated.
The number and identity of the partnerships being consolidated
may change over time as the percentage interest held by BKF and
its affiliates in affiliated partnerships changes. The assets,
liabilities and related operations of these partnerships and
related minority interest have been reflected in the
consolidated financial statements for the three and six month
periods ended June 30, 2005 and June 30, 2004. The
consolidation of the partnerships does not impact BKFs
equity or net income.
|
|
|
Three Months Ended June 30, 2005 as Compared to Three
Months Ended June 30, 2004 |
Total revenues for the second quarter of 2005 were
$29.73 million, reflecting an increase of 20.7% from
$24.62 million in revenues in the same period in 2004. This
increase is primarily attributable to a 117.3% increase in
incentive fees and allocations from $4.26 million in the
second quarter of 2004 to $9.26 million in the second
quarter of 2005. The revenues generated by the various
investment strategies were as follows (all amounts are in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
June 30, 2005 | |
|
June 30, 2004 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
Investments Management Fees (IMF):
|
|
|
|
|
|
|
|
|
Long-Only
|
|
$ |
8,061 |
|
|
$ |
8,747 |
|
Event-Driven
|
|
|
6,409 |
|
|
|
7,180 |
|
Long-Short
|
|
|
3,019 |
|
|
|
2,311 |
|
Short-Biased
|
|
|
1,130 |
|
|
|
1,190 |
|
Other
|
|
|
523 |
|
|
|
130 |
|
|
|
|
|
|
|
|
|
Total IMF Fees
|
|
|
19,142 |
|
|
|
19,558 |
|
|
|
|
|
|
|
|
Incentive Fees and Allocations:
|
|
|
|
|
|
|
|
|
Long-Only
|
|
|
1,038 |
|
|
|
1,087 |
|
Event-Driven
|
|
|
7,443 |
|
|
|
(837 |
) |
Long-Short
|
|
|
(86 |
) |
|
|
3,988 |
|
Short-Biased
|
|
|
(109 |
) |
|
|
(2 |
) |
Other
|
|
|
970 |
|
|
|
23 |
|
|
|
|
|
|
|
|
|
Total Incentive Fees
|
|
|
9,256 |
|
|
|
4,259 |
|
|
|
|
|
|
|
|
|
Total Fees
|
|
|
28,398 |
|
|
|
23,817 |
|
Broker Dealer Revenue-Net
|
|
|
183 |
|
|
|
320 |
|
|
|
|
|
|
|
|
Total Advisory Revenue
|
|
|
28,581 |
|
|
|
24,137 |
|
Investment and Interest Income
|
|
|
493 |
|
|
|
285 |
|
22
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended | |
|
|
| |
|
|
June 30, 2005 | |
|
June 30, 2004 | |
|
|
| |
|
| |
Investment Income from Consolidated Affiliated Partnerships
|
|
|
652 |
|
|
|
197 |
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
29,726 |
|
|
$ |
24,619 |
|
|
|
|
|
|
|
|
The increase in asset-based advisory fees with respect to the
firms largest long-short equity strategy was attributable
to net contributions and appreciation through performance. In
the case of the event-driven strategies, the decline in
asset-based advisory fees resulted from a decrease in assets
under management, which was partly offset by an increased
allocation to BKF under the revenue sharing arrangement between
BKF and the other participant in the joint venture that serves
as the management company to the non-US investment vehicle
holding a large majority of the assets in the event-driven
strategy. With respect to long-only investment strategies, the
decrease in assets under management that was generated by net
withdrawals, combined with a lower average fee, resulted in
lower revenues.
The increase in incentive fees and allocations was primarily
attributable to an increase in the performance of the
event-driven strategies, which was partly offset by a decline in
the performance of the long-short equity strategy. An increase
in the performance of the small-mid cap long-short equity
strategy also contributed to the increase in incentive fees and
allocations.
Incentive fees and general partner allocations are accrued on a
quarterly basis but are primarily determined or billed and
allocated, as the case may be, at the end of the applicable
contract year or upon investor withdrawal. Such accruals may be
reversed prior to being earned or allocated as the result of
investment performance.
In the second quarter of 2005, the event-driven strategies
experienced net redemptions of approximately $198 million.
With respect to the long-only investment strategies, net
withdrawals and terminations for the six months ended
June 30, 2005 were in excess of $700 million.
Revenue generated by the broker-dealer business (net of clearing
charges) declined 42.8% to $183,000 in the second quarter of
2005 from $320,000 in the second quarter of 2004. This decline
was primarily the result of a decrease in the number of accounts
maintained at the broker-dealer and reduced trading activity in
such accounts.
Net realized and unrealized gain on investments and interest and
dividend income from consolidated affiliated partnerships
increased 231.0% to $652,000 in the second quarter of 2005 from
$197,000 in the same period in 2004. This increase primarily
reflects the investment performance of investment partnerships
that were launched and consolidated subsequent to June 30,
2004. The gains/losses on investments and dividend and interest
income from consolidated investment partnerships include
minority interests, i.e., the portion of the gains or
losses generated by the partnerships allocable to all partners
other than Levco GP, Inc., which are separately identified on
the consolidated statements of operations.
Total expenses for the second quarter of 2005 were
$31.76 million, reflecting an increase of 21.8% from
$26.08 million in expenses in the same period in 2004.
Total expenses excluding amortization of finite life intangibles
were $30.01 million in the second quarter of 2005,
reflecting an increase of 23.4% from $24.32 million for the
second quarter of 2004.
Employee compensation and benefit expense (including grants of
equity awards), was $24.65 million in the second quarter of
2005, reflecting an increase of 25.9% from $19.58 million
in the second quarter of 2004. These results reflect the
implementation of the 2005 compensation program adopted by the
Board of Directors in August 2005 that seeks to retain employees
through December 31, 2005. The program is geared to
maintain compensation levels for the majority of the
Companys personnel at levels comparable to those earned in
2004. It is anticipated that longer-term arrangements will
include an emphasis on equity awards and performance incentives.
The 2005 compensation program is expected to result in decreased
cash flow and increased reported losses in 2005.
23
Occupancy and equipment rental was $1.72 million in the
second quarter of 2005, reflecting a 10.3% increase from
$1.56 million in the same period in 2004, primarily as the
result of escalations under the lease.
Other operating expenses were $3.57 million in the second
quarter of 2005, reflecting a 13.7% increase from
$3.14 million in the same period in 2004, primarily as the
result of increased expenses relating to (i) the proxy
contest and (ii) expense reimbursements to affiliated
investment funds, which were partly offset by decreased
communication and portfolio management system expenses.
Operating loss for the second quarter of 2005 was
$2.03 million, as compared to an operating loss of
$1.46 million in the same period in 2004. Operating loss
excluding the amortization of finite life intangibles and the
total income from consolidated affiliated partnerships was
$934,000 in the second quarter of 2005, as compared to operating
income of $99,000 in the same period in 2004.
Total income tax benefit was $91,000 in the second quarter of
2005, as compared to an income tax expense of $80,000 for the
same period in 2004. The tax benefit primarily reflects the
change from book income to a book loss before taxes (as
determined without a deduction for the amortization of
intangibles). An effective net tax benefit rate of approximately
17.7% (before amortization) was used to make the determination
with respect to the provision for taxes at June 30, 2005,
while an effective tax rate of approximately 60.9% (before
amortization) was used to calculate the provision for taxes at
June 30, 2004. The lower effective rate for the quarter
2005 reflects the tax benefit on the current loss offset by
state and local taxes on capital.
|
|
|
Significant Developments Since June 30, 2005 |
Since June 30, 2005, BKF has experienced significant
withdrawals and terminations by clients following long-only and
alternative investment strategies. Approximately
$580 million in additional redemption were experienced by
the event-driven strategies during the period from July 1,
2005 through October 1, 2005. Overall, redemptions from
alternative investment strategies during the period from
July 1, 2005 through October 1, 2005 were
approximately $925 million. During the period from
July 1, 2005 to October 1, 2005, approximately
$36.6 million in subscriptions were received with respect
to alternative investment strategies from unaffiliated
investors. With respect to the long-only investment strategies,
since June 30, 2005 the Company has experienced or received
notification of net withdrawals and terminations of
approximately $2.7 billion.
Since the vast majority of these terminations took place in
September and the redemptions from the alternative strategies
were mostly effective as of October 1, 2005, the major
impact of this anticipated decline in assets under management
will first appear in the fourth quarter of 2005. In the first
six months of 2005, the terminated accounts following long-only
strategies generated approximately $3.1 million in
asset-based management fees.
In addition, on September 28, 2005, Mr. John Levin
resigned as the Chief Executive Officer of BKF. Following his
departure date which is expected to be December 31, 2005,
Mr. Levin will act as a consultant to the firm, as Chairman
Emeritus (a non-voting advisor to the Board of Directors) and
will lead his own asset management firm. Under the terms of the
arrangement between Mr. Levin and BKF, Mr. Levin will
be able to solicit certain clients of the firm (who represented
approximately $2.5 billion in assets under management as of
June 30, 2005) and a limited number of firm employees, and
BKF will have an economic stake equal to 15% of the revenues
generated for Mr. Levins firm by the clients who move
their accounts from BKF. Mr. Levin will be subject to
non-hire and non-solicit arrangements with respect to all other
employees and clients of the firm for periods of 15 or
36 months. Mr. Levin will be continuing as an employee
of the firm through December 31, 2005 and will launch his
new firm in 2006. As a result, it is expected that the decline
in assets under management and revenues that can be expected
pursuant to the agreement with Mr. Levin will begin
impacting the firm in the first quarter of 2006.
24
Mr. Levins departure will result in the termination
of the short-biased alternative investment strategy (which had
$460 million in assets under management as of June 30,
2005), and his resignation may result in the loss of accounts
(in addition to those he will be able to solicit) and could
impact BKFs ability to attract new accounts.
On September 28, 2005, John C. Siciliano became the Chief
Executive Officer and President of BKF and John A.
Levin & Co., Inc. While net withdrawals are
attributable to a range of factors, BKF believes its selection
of a new chief executive officer can be an important factor in
its efforts to reverse the current trend. Following the
appointment of Mr. Siciliano, Philip Friedman, a Senior
Portfolio Manager with the respect to the long-only strategies,
was named Chief Investment Officer of John A.
Levin & Co., Inc.
On October 18, 2005, the Company announced that it was not
able to reach an agreement with the portfolio management team
managing its event-driven strategies. As a consequence, the
investment vehicles being managed pursuant to this strategy are
being liquidated and the proceeds returned to investors. As of
June 30, 2005, the event-driven strategies represented 17%
of BKFs assets under management and 44% of total advisory
revenues for the six months ended June 30, 2005.
BKF remains committed to offering a range of long-only and
alternative investment strategies to its clients and potential
clients. BKF is in discussions with investment team leaders
regarding compensation arrangements for 2006 and beyond and is
currently seeking to attract additional investment professionals
who may add to the firms investment capabilities.
|
|
|
Six Months Ended June 30, 2005 as Compared to Six
Months Ended June 30, 2004 |
Total revenues for the six months ended June 30, 2005 were
$62.61 million, reflecting an increase of 15.0% from
$54.47 million in revenues in the same period in 2004. This
increase is primarily attributable to a 46.9% increase in
incentive fees and allocations from $14.35 million in the
six months ended June 30, 2004 to
25
$21.07 million in the same period in 2005. The revenues
generated by the various investment strategies were as follows
(all amounts are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended | |
|
|
| |
|
|
June 30, 2005 | |
|
June 30, 2004 | |
|
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
Investments Management Fees (IMF):
|
|
|
|
|
|
|
|
|
Long-Only
|
|
$ |
16,606 |
|
|
$ |
17,668 |
|
Event-Driven
|
|
|
13,403 |
|
|
|
13,981 |
|
Long-Short
|
|
|
6,081 |
|
|
|
4,145 |
|
Short-Biased
|
|
|
2,199 |
|
|
|
2,122 |
|
Other
|
|
|
1,053 |
|
|
|
228 |
|
|
|
|
|
|
|
|
|
Total IMF Fees
|
|
|
39,342 |
|
|
|
38,144 |
|
|
|
|
|
|
|
|
Incentive Fees and Allocations:
|
|
|
|
|
|
|
|
|
Long-Only
|
|
|
2,062 |
|
|
|
1,368 |
|
Event-Driven
|
|
|
13,006 |
|
|
|
8,061 |
|
Long-Short
|
|
|
5,025 |
|
|
|
4,752 |
|
Short-Biased
|
|
|
|
|
|
|
|
|
Other
|
|
|
981 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
Total Incentive Fees
|
|
|
21,074 |
|
|
|
14,350 |
|
|
|
|
|
|
|
|
|
Total Fees
|
|
|
60,416 |
|
|
|
52,494 |
|
Broker Dealer Revenue-Net
|
|
|
377 |
|
|
|
798 |
|
|
|
|
|
|
|
|
Total Advisory Revenue
|
|
|
60,793 |
|
|
|
53,292 |
|
Investment and Interest Income
|
|
|
814 |
|
|
|
572 |
|
Investment Income from Consolidated Affiliated Partnerships
|
|
|
1,003 |
|
|
|
601 |
|
|
|
|
|
|
|
|
Total Revenue
|
|
$ |
62,610 |
|
|
$ |
54,465 |
|
|
|
|
|
|
|
|
The increase in asset-based advisory fees with respect to the
firms largest long-short equity strategy was attributable
to net contributions and appreciation through performance. In
the case of the event-driven strategies, the decline in
asset-based advisory fees resulted from a decrease in assets
under management, which was partly offset by an increased
allocation to BKF under the revenue sharing arrangement between
BKF and the other participant in the joint venture that serves
as the management company to the non-US investment vehicle
holding a large majority of the assets in the event-driven
strategy. With respect to long-only investment strategies, the
decrease in assets under management that was generated by net
withdrawals, combined with a lower average fee, resulted in
lower revenues.
The increase in incentive fees and allocations was primarily
attributable to an increase in the performance of the
event-driven strategies. An increase in the performance of the
small-mid cap long-short equity strategy also contributed to the
increase in incentive fees and allocations.
Incentive fees and general partner allocations are accrued on a
quarterly basis but are primarily determined or billed and
allocated, as the case may be, at the end of the applicable
contract year or upon investor withdrawal. Such accruals may be
reversed prior to being earned or allocated as the result of
investment performance.
Revenue generated by the broker-dealer business (net of clearing
charges) declined 52.8% to $377,000 in the six months ended
June 30, 2005 from $798,000 in the same period in 2004.
This decline was primarily the result of a decrease in the
number of accounts maintained at the broker-dealer and reduced
trading activity in such accounts.
26
Net realized and unrealized gain on investments and interest and
dividend income from consolidated affiliated partnerships
increased 66.9% to $1.00 million in the six months ended
June 30, 2005 from $601,000 in the same period in 2004.
This increase primarily reflects the investment performance of
investment partnerships that were launched and consolidated
subsequent to June 30, 2004. The gains/losses on
investments and dividend and interest income from consolidated
investment partnerships include minority interests, i.e.,
the portion of the gains or losses generated by the
partnerships allocable to all partners other than Levco GP,
Inc., which are separately identified on the consolidated
statements of operations.
Total expenses for the six months ended June 30, 2005 were
$63.54 million, reflecting an increase of 13.2% from
$56.14 million in expenses in the same period in 2004.
Total expenses excluding amortization of finite life intangibles
were $60.04 million in the six months ended June 30,
2005, reflecting an increase of 14.1% from $52.63 million
for the same period in 2004.
Employee compensation and benefit expense (including grants of
equity awards), was $49.86 million for the six months ended
June 30, 2005, reflecting an increase of 16.4% from
$42.83 million in the same period in 2004. These results
reflect the implementation of the 2005 compensation program
adopted by the Board of Directors in August 2005 that is geared
towards retaining employees through December 31, 2005 in
order to maintain appropriate levels of client service and
provide management with an opportunity to develop long-term,
stable arrangements with key personnel. The program is geared to
maintain compensation levels for the majority of the
Companys personnel at levels comparable to those earned in
2004. It is anticipated that longer-term arrangements will
include an emphasis on equity awards and performance incentives.
The 2005 compensation program is expected to result in decreased
cash flow and increased reported losses in 2005.
Occupancy and equipment rental was $3.31 million for the
six months ended June 30, 2005, reflecting a 13.5% increase
from $2.92 million in the same period in 2004, primarily as
the result of escalations under the lease.
Other operating expenses were $6.77 million for the six
months ended June 30, 2005, remaining flat with the same
period in 2004, primarily as the result of increased expenses
relating to professional fees (many of which were related to the
proxy contest) being offset by reductions in fees paid to third
party marketers and in communications and portfolio management
system expenses.
Operating loss for the six months ended June 30, 2005 was
$931,000, as compared to an operating loss of $1.67 million
in the same period in 2004. Operating income excluding the
amortization of finite life intangibles and the total income
from consolidated affiliated partnerships was $1.57 million
for the six months ended June 30, 2005, as compared to
operating income of $1.23 million in the same period in
2004.
Total income tax expense was $1.00 million for the six
months ended 2005, as compared to an income tax expense of
$546,000 for the same period in 2004. This increase primarily
reflects the larger book loss before taxes (as determined
without a deduction for the amortization of intangibles). An
effective tax rate of approximately 46.0% (before amortization)
was used to make the determination with respect to the provision
for taxes at June 30, 2005, while an effective tax rate of
approximately 42.2% (before amortization) was used to calculate
the provision for taxes at June 30, 2004. The higher
effective tax rate of the six months ended 2005 is a result of
offsets to the tax benefit on the year to date book loss for
state and local taxes on capital and a state tax reserve based
on an ongoing examination of a prior year.
LIQUIDITY AND CAPITAL RESOURCES
BKFs current assets as of June 30, 2005 consist
primarily of cash, short-term investments and investment
advisory and incentive fees receivable. In addition to using
capital to fund daily operations, BKF utilizes
27
capital to develop and seed new investment products. The
development of new products is an important element of
BKFs business plan, and such seed capital investments can
require substantial financial resources. While BKF has
historically met its cash and liquidity needs through cash
generated by operating activities, because of the liquidation of
the event-driven investment vehicles in 2005 and the overall
decrease in revenues expected as the result of terminations and
withdrawals, it is anticipated that cash flow from operating
activities will not be sufficient to fund operations in 2006,
and that BKF will use a portion of its existing working capital
for such purposes.
At June 30, 2005, BKF had cash, cash equivalents and
U.S. Treasury bills of $40.55 million, compared to
$44.05 million at December 31, 2004. This decrease
primarily reflects the payment of dividends and the payment of
cash bonuses in 2005 which were accrued in 2004, which were
partly offset by the collection of receivables and the annual
withdrawal of general partner incentive allocations from
affiliated investment partnerships. The decrease in investment
advisory and incentive fees receivable from $40.01 million
at December 31, 2004 to $28.13 million at
June 30, 2005 primarily reflects the receipt of incentive
fees earned in 2004. The decrease in investments in affiliated
investment partnerships from $17.36 million at
December 31, 2004 to $8.85 million at June 30,
2005 primarily reflects the withdrawal of general partner
incentive allocations from the partnerships earned with respect
to 2004, which was partially offset by the accrual of incentive
allocations for the three month period ended June 30, 2005
and reflects the increased number of affiliated partnerships
consolidated as of June 30, 2005 as compared to
June 30, 2004. Incentive allocations typically are
withdrawn within three months following the end of the calendar
year to pay compensation and other expenses.
The decrease in the deferred tax asset to $7.01 million at
June 30, 2005 from $8.39 million at December 31,
2004, are both the result of tax deductions taken in 2005 based
on the fair market value of stock delivered pursuant to
restricted stock unit awards. Due to the amount of the
deduction, 2005 will reflect, for tax purposes, a net operating
loss that may be carried back to prior years with respect to
federal tax and carried forward with respect to state and local
taxes.
The increase in due from broker from consolidated affiliated
partnerships to $10.57 million at June 30, 2005 from
$952,000 at December 31, 2004 and the increase in
investments in securities from consolidated affiliated
partnerships to $9.27 million at June 30, 2005 from
$6.52 million at December 31, 2004 reflects the number
of affiliated partnerships consolidated as of June 30, 2005
as compared to June 30, 2004.
Accrued expenses were $2.92 million at June 30, 2005,
as compared to $4.08 million at December 31, 2004.
Such expenses were comprised primarily of accruals for third
party marketing fees and professional fees relating to public
company expenses. Third party marketing fees are based on a
percentage of accrued revenue, and such accruals may be reversed
based on the subsequent investment performance of the relevant
accounts through the end of the applicable performance
measurement period. The payment of third party marketing fees
was partly offset by the expenses accrued during the six months
ended June 30, 2005.
Accrued bonuses were $32.02 million at June 30, 2005,
as compared to $42.69 million at December 31, 2004,
reflecting the payment of 2004 bonuses and the accrual for 2005
bonuses.
On July 5, 2005, the Company also declared a quarterly
dividend of $0.125 per share payable on July 29, 2005
to shareholders of record as of July 15, 2005. Included in
the $0.125 per share dividend will be the $.01 per
share redemption price payable on July 29, 2005 to holders
of record as of July 15, 2005. On September 22, 2005,
the Company declared a quarterly dividend of $0.125 per
share payable on October 28, 2005 to shareholders of record
as of October 14, 2005.
Based on the impact of the liquidation of the event-driven
investment vehicles and the overall decrease in revenues
expected as the result of terminations and withdrawals, it is
anticipated that cash flow from operating activities will not
meet BKFs cash and liquidity needs in 2006, and that BKF
will use a portion of its existing working capital to fund
operations. Cash and cash equivalents, U.S. Treasury bills,
investment advisory and incentive fees receivable, investments
in securities and investments in affiliated partnerships
aggregated $93.4 million at June 30, 2005. BKF also
had approximately $38.6 million of total liabilities at
such date.
28
These totals exclude the effects of consolidated affiliated
partnerships (see Note 4 of Notes to Consolidated Financial
Statements).
In addition, the loss of accounts and cost cutting measures to
be implemented by BKF in 2005 may result in charges relating to
the impairment of intangible assets (investment advisory
contracts) and to lease and personnel costs. Except for its
lease commitments, which are discussed in Note 10 in the
Notes to Consolidated Financial Statements in BKFs Annual
Report on Form 10-K/A for the year ended December 31,
2004, BKF has no material commitments for capital expenditures.
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Item 3. |
Quantitative and Qualitative Disclosures About Market
Risk |
Since BKFs revenues are largely driven by the market value
of Levcos 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, so any significant
increases or decreases in market value occurring on or shortly
before the last day of a quarter may materially impact revenues
of the current quarter or the following quarter (with regard to
wrap program accounts). 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
Levcos revenues. Similarly, a lack of opportunity to
implement, or a failure to successfully implement, Levcos
event-driven, long/short and short-biased strategies could
reduce performance based incentive fees and allocations and
thereby negatively impact BKFs revenues. Because BKF is
primarily in the asset management business and manages equity
portfolios, changes in interest rates, foreign currency exchange
rates, commodity prices or other market rates or prices impact
BKF only to the extent they are reflected in the equity markets.
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Item 4. |
Controls and Procedures |
An evaluation was performed under the supervision and with the
participation of BKFs management, including the CEO and
CFO, of the effectiveness of the design and operation of
BKFs disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended). Based on that evaluation, BKFs
management, including the CEO and CFO, concluded that BKFs
disclosure controls and procedures were effective as of the end
of the period covered by this report. There have been no changes
in BKFs internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) that occurred
during BKFs most recent quarter that has materially
affected, or is reasonably likely to materially affect,
BKFs internal control over financial reporting.
It should be noted that any system of controls, however well
designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system are met.
In addition, the design of any control system is based in part
upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control
systems, there is only reasonable assurance that BKFs
controls will succeed in achieving their stated goals under all
potential future conditions.
29
PART II. OTHER INFORMATION
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Item 1. |
Legal Proceedings |
None
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds |
None
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Item 3. |
Defaults Upon Senior Securities |
None
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Item 4. |
Submission of Matters to a Vote of Security Holders |
On June 23, 2005, BKF commenced its Annual Meeting of
Stockholders. The meeting was adjourned until July 21, 2005
solely with respect to voting on Proposals 2 and 3 below.
In a contested election, Warren G. Lichtentstein, Kurt N.
Schacht and Ronald LaBow were elected to serve as directors of
BKF. Anson M. Beard, Jr., Barton M. Biggs, Peter J.
Solomon, Dean J. Takahashi and James S. Tisch continued as
directors following the Annual Meeting. At the Annual Meeting,
the stockholders also approved: Proposal 2, amending the
Restated Certificate of Incorporation to eliminate the
classified board of directors; Proposal 3, amending the
Restated Certificate of Incorporation to eliminate the
supermajority vote requirements for fundamental transactions;
Proposal 4, ratifying the appointment of Grant Thornton LLP
as BKFs independent auditors; Proposal 5, a
stockholder proposal requesting the engagement of an investment
banking firm to pursue a sale of the Company; Proposal 6, a
stockholder proposal requesting the declassification of the
board of directors; and Proposal 7, a shareholder proposal
requesting that the board of directors redeem the Common Share
Purchase Rights issued pursuant to the Rights Agreement dated
June 8, 2001 (the Plan), unless the holders of
a majority of the outstanding shares approve the issuance at a
meeting of stockholders held as soon as practical.
The voting on the above matters is set forth below:
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Nominee |
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Votes For | |
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Votes Withheld | |
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| |
|
| |
J. Barton Goodwin
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1,990,949 |
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21,738 |
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John A. Levin
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|
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1,990,913 |
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21,774 |
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Burton G. Malkiel
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|
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1,991,463 |
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21,224 |
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Warren G. Lichtenstein
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|
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3,904,863 |
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213,228 |
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Ronald LaBow
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|
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3,648,551 |
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|
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469,540 |
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Kurt N. Schacht
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|
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3,891,682 |
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|
|
226,409 |
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Proposal 2 There were 7,104,832 votes for,
40,702 votes against, and 12,473 abstentions. |
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Proposal 3 There were 6,768,960 votes for,
51,178 votes against, and 337,868 abstentions. |
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Proposal 4 There were 6,093,407 votes for,
23,695 votes against, and 13,674 abstentions. |
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Proposal 5 There were 3,021,020 votes for,
2,260,407 votes against, and 849,351 abstentions. |
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Proposal 6 There were 4,436,947 votes for,
1,625,941 votes against, and 67,890 abstentions. |
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Proposal 7 There were 4,720,626 votes for,
1,330,661 votes against, and 79,490 abstentions. |
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Item 5. |
Other Information |
On July 12, 2005, Barton M. Biggs submitted his resignation
as a director of BKF Capital Group, Inc. This information was
disclosed in the Report on Form 8-K filed on July 13,
2005.
30
On October 27, 2005, the Company received a letter from the
United States Securities and Exchange Commission (the
SEC) notifying the Company that the staff of the SEC
is conducting an informal investigation of the Company. The
staff requested that the Company provide certain information and
produce certain documents relating to (i) the restatement
of the Companys financial statements in its Annual Report
on Form 10-K for year ended December 31, 2004 and in
its Quarterly Report for the quarter ended March 31, 2005
and (ii) the anticipated departure of the senior portfolio
managers for its event-driven investment business and the
related decision to liquidate the portfolios of the event-driven
investment vehicles. The Company intends to fully cooperate with
the SEC.
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 Reform Act. For those
statements, BKF claims the protection of the safe harbor for
forward-looking statements contained in the Reform Act. These
forward-looking statements are based on BKFs current
expectations and are susceptible to a number of risks,
uncertainties and other factors, including the risks
specifically enumerated in Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations, and BKFs 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:
retention and ability of qualified personnel; the performance of
the securities markets and of value stocks in particular; the
investment performance of client accounts; the retention of
significant client and/or distribution relationships;
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; 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 BKFs 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 BKFs control. BKF will not
undertake and specifically declines 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
BKFs policy generally not to make any specific projections
as to future earnings, and BKF does not endorse any projections
regarding future performance that may be made by third parties.
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31 |
.1 |
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Section 302 Certification of Chief Executive Officer |
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31 |
.2 |
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Section 302 Certification of Chief Financial Officer |
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32 |
.1 |
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Section 906 Certification of Chief Executive Officer |
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32 |
.2 |
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Section 906 Certification of Chief Financial Officer |
31
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.
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By: |
/s/ John C. Siciliano
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John C. Siciliano |
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Chief Executive Officer |
|
and President |
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Glenn A. Aigen |
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Senior Vice President and |
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Chief Financial Officer |
Date: November 3, 2005
32