UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

 

Form 10-Q

 

(Mark One)

 

Commission file number: 1-10024

 

BKF Capital Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

(212) 332-8400
(Registrant’s 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 þ     No o

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o      Accelerated filer o     Non-accelerated filer þ

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes þ      No o

 

 

As of November 1, 2007, 7,973,216 shares of the registrant’s common stock, $1.00 par value, were outstanding.

 

 

TABLE OF CONTENTS

 

 

PART I. FINANCIAL INFORMATION

 

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollar amounts in thousands)

 

 

See accompanying notes

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(Unaudited)

 

 

See accompanying notes

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(Unaudited)

 

 

See accompanying notes

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
September 30, 2007
(Amounts in thousands)

 

 

See accompanying notes

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Organization and Basis of Presentation

 

The consolidated interim financial statements of BKF Capital Group, Inc. and its subsidiaries (“BKF” or the “Company”) included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles 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 Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company follows the same accounting policies in the preparation of interim reports. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of BKF Capital Group, Inc. and its subsidiaries at September 30, 2007 and the results of operations for the nine months and three months ended September 30, 2007 and 2006 and cash flows for the nine months ended September 30, 2007 and 2006 subject to the organization’s ability to continue as a going concern.

 

The consolidated financial statements of BKF include its wholly-owned subsidiaries, BKF Asset Management, Inc., (“BAM”), BKF’s two wholly-owned subsidiaries, BKF GP Inc. (“BKF 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. There were, however, no investment partnerships included in the consolidated statements of financial position as of September 30, 2007 or December 31, 2006, nor were there any included in statements of operation and cash flows for either of the 2007 periods. For the nine month and three month periods ended September 30, 2006 three investment partnerships were included in the statements of operation and cash flow. All intercompany transactions have been eliminated in consolidation. The Company trades on the over the counter market under the symbol (“BKFG”).

 

BAM is an investment advisor which was registered under the Investment Advisers Act of 1940, as amended; it withdrew its registration on December 19, 2006. Prior to that time BAM provided investment advisory services to its clients which included U.S. and foreign corporations, mutual funds, limited partnerships, universities, pension and profit sharing plans, individuals, trusts, not-for-profit organizations and foundations. BAM also participated in broker consulting programs (Wrap Accounts) with several nationally recognized financial institutions. LEVCO Securities was registered with the SEC as a broker- dealer and was a member of the National Association of Securities Dealers, Inc.; it withdrew its registration on November 30, 2006. BKF GP acts as the managing general partner of several affiliated investment partnerships and was previously registered with the Commodities Futures Trading Commission as a commodity pool operator.

 

Going Concern

 

The Company’s financial statements have been presented on the basis that it is a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. During 2006 and 2005, the company experienced a total loss of assets under management and as a result, the Company has had a significant decline in revenues and no longer has an operating business. The Company continues to evaluate strategic alternatives: either commence a new business or liquidate. Historically, the Company has funded its cash and liquidity needs through cash generated from operations. Accordingly the cash projected to be generated from operations will not be sufficient to fund operations and the Company will need to use its existing working capital to fund operations. As a result there is substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not reflect any adjustment for the outcome of this uncertainty.

 

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

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

2003 and revised in December 2003 (“FIN 46R”), defines the criteria necessary to be considered an operating company (i.e., variable 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.

 

Use of Estimates

 

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.

 

Revenue Recognition

 

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 advisor’s funds are recorded once a written commitment is obtained from the investor.

 

Interest income is recognized as earned.

 

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

 

BKF GP serves as the managing general partner for several affiliated investment partnerships (“AIP”), which previously engaged 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 Company’s consolidated statements of financial condition with the exception of BKF GP’s equity ownership and certain AIP

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

whereby BKF 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 BKF GP as the general partner of the AIP at any time. BKF 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 BKF GP are recorded based upon the equity method of accounting.

 

BKF GP’s 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 Company’s general practice to withdraw the incentive allocations earned from the AIP within three months after the fiscal year end. BKF 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 — Investments in Affiliated Investment Partnerships and Related Revenue.

 

Long-Lived Assets

 

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.

 

During the first quarter of calendar year 2006, the Company completed the amortization of certain long-lived assets (investment advisory contracts). These investment advisory contracts relate to cost in excess of the net assets acquired by BKF in June, 1996 and were reflected as goodwill, investment advisory contracts, and employment contracts in the Consolidated Statements of Financial Condition. The Company performed a valuation of the intangible assets (under SFAS No. 144) and determined that the estimated discounted cash flows for the remaining investment advisory accounts acquired by the Company in 1996 was less than the carrying value of the related assets as determined using the Income approach. As a result, the Company recorded a charge of $1.1 million in the first quarter of 2006 to fully amortize these contracts. Such amount is reflected in amortization expense in the Consolidated Statement of Operations.

 

Intangible Assets

 

The cost in excess of net assets of BKF acquired by the company in June 1996 was 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 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. During the second and third quarters of 2006 Goodwill of $14.8 million was fully written off.

 

Earnings Per Share

 

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.

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The following table sets forth the computation of basic and diluted (loss) per share (dollar amounts in thousands, except per share data):

 

 

In calculating diluted (loss) per share for the three-months ended September 30, 2007 and 2006 common stock equivalents of 200,000 and 300,000, respectively, and for the nine months ended September 30, 2007 and 2006 common stock equivalents of 200,000 and 300,000, respectively were excluded due to their anti-dilutive effect on the calculation.

 

Business Segments

 

The Company has not presented business segment data, in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information,” because it, has historically operated in one business segment, the investment advisory and asset management business.

 

Stock Options

 

The Company complies with SFAS No. 123R using the modified prospective method.

 

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 Interest

 

Minority interest in the accompanying consolidated statements of operations represents the minority owners’ share of the income or loss of consolidated investment partnerships.

 

Recent Accounting Developments

 

In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 in the first quarter of 2007. The impact of the adoption of FIN 48 resulted in an increase to beginning accumulated deficit and an increase to liabilities for taxes and interest of approximately $562,000. See Note 8 to the Consolidated Financial Statements for further information.

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

In September 2006, The FASB issued SFAS 158, Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans, which requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. SFAS 158 has no effect on the Company’s financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which permits certain financial assets and financial liabilities to be measured at fair value, using an instrument-by-instrument election. The initial effect of adopting SFAS 159 must be accounted for as a cumulative-effect adjustment to opening retained earnings for the fiscal year in which we apply SFAS 159. Retrospective application of SFAS 159 to fiscal years preceding the effective date is not permitted. SFAS 159 has no effect on the Company’s financial statements.

 

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, codified as SAB Topic 1.N, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 describes the approach that should be used to quantify the materiality of a misstatement and provides guidance for correcting prior-year errors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006 and accordingly the Company follows its requirements when quantifying financial statement misstatements. The adoption of SAB No. 108 did not require any changes to the company’s Consolidated Financial Statements.

 

 

LEVCO Securities acted as an introducing broker and all transactions for its customers were cleared through and carried by a major U.S. securities firm on a fully disclosed basis. LEVCO Securities had agreed to indemnify its clearing broker for losses that the clearing broker sustained from the customer accounts introduced by LEVCO Securities. In the ordinary course of its business, however, LEVCO Securities did not accept orders with respect to client accounts if the funds required for the client to meet its obligations were not on deposit in the client account at the time the order was placed.

 

 

Included in investment advisory trailer fees and other receivables are primarily trailer fees receivable from former portfolio managers and does not include any accrued incentive fees as of September 30, 2007 or December 31, 2006, respectively.

 

 

As required by SFAS 94, the Company consolidated AIP in which the Company has a controlling financial interest. The consolidation of these partnerships does not impact the Company’s equity or net income. BKF GP has general partner liability with respect to its interest in each of the CAP. At September 30, 2007 and December 31, 2006 there were no consolidated AIP.

 

 

As of September 30, 2007 the Company has no remaining investments in its unconsolidated Affiliated Investment Partnerships. Nor were there any AIP net earnings included in the Statement of Operations for the nine months or three months ended September 30, 2007. For the period ended September 30, 2006 the Company’s AIP net loss was approximately $7,000.

 

Included in the Company’s incentive fees and general partner incentive allocations are approximately $755,000 and $0 payable directly to employee owned and controlled entities (“Employee Entities”) for the nine months and three months ended September 30, 2006, respectively. There were no such amounts for the periods ended September 30, 2007. These amounts are included in the Company’s 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

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

the liability for all compensation expense relating to the allocated revenue, amounting to approximately $755,000 and $0 for the nine months and three months ended September 30, 2006, respectively. These amounts are included in the Consolidated Statement of Operations. There were no such amounts in the 2007 periods.

 

The Company recorded investment advisory fees and incentive allocations/fees from unconsolidated affiliated domestic investment partnerships and affiliated offshore investment vehicles of approximately $0 and $0 million for the three months ended September 30, 2007 and 2006, respectively and $0 and $7.2 million for the nine months ended September 30, 2007 and 2006, respectively.

 

 

Third Quarter 2007:

 

There were no material non-cash transactions.

 

Second Quarter 2007:

 

 

First Quarter 2007:

 

 

Third Quarter 2006:

 

 

Second Quarter 2006:

 

 

First Quarter 2006:

 

 

 

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (SFAS No. 123R) requiring that compensation cost

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

relating to share-based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award). Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), and related interpretations. The Company also followed the disclosure requirements of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. The Company adopted SFAS 123R using the modified prospective method.

 

There was $76,000 and $686,000 of compensation cost related to non-qualified stock options recognized in operating results (included in selling, general and administrative expenses) during the nine months ended September 30, 2007 and 2006, respectively.

 

The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model. Expected volatility is based on implied volatilities from the public trading price of BKF stock. We used a 10 year option life as the expected term. The expected term represents an estimate of the time options are expected to remain outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at the time of grant. The following table sets forth the assumptions used to determine compensation cost for our non-qualified stock options consistent with the requirements of SFAS No. 123R.

 

 

The following table summarizes the information about stock option activity for the three months ended June 30, 2007:

 

 

At September 30, 2007 there was $162,000 of total unrecognized compensation cost related to non-vested stock options,which is expected to be recognized over a weighted-average period of less than 1 year. The intrinsic value of options vested during the three months ended September 30, 2007 was zero. There were no options granted during the three months ended September 30, 2007.

 

 

The Company accounts for income taxes under the liability method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, Accounting for Income Taxes (FIN48) as of January 1, 2007. As a result the Company recognized an increase to beginning accumulated deficit and an increase to the liability for taxes and interests of approximately $562,000. The

 

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

liability is a result of exposure to state income reallocation exposure for years still subject to audit and based on the results of a recent audit of previous years.

 

Interest costs and penalties related to income taxes are classified as interest expense and general and administrative costs, respectively, in the Company’s consolidated financial statements.

 

The Company and its subsidiaries file consolidated Federal and combined state and local tax returns. The Company is currently subject to a three year statue of limitations by major tax jurisdictions. Recently the Company settled an examination issue with New York State and New York City related to income allocation for the years 1999, 2000 and 2001. New York State has recently commenced an audit of the years 2002, 2003 and 2004.

 

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 has recorded a valuation reserve of approximately $22.8 and $20.4 million against its net deferred tax asset as of September 30, 2007 and December 31, 2006, respectively. The Company believes that it is not more likely than not that this deferred tax benefit will be utilized in the foreseeable future.

 

The tax receivable of approximately $1.2 million as of September 30, 2007, represents cash refunds due with respect to the federal carry back claims for 2004 and 2003 taxes paid and is included in other assets.

 

 

During the first nine months of 2007 the Company had $1.1 million of restructuring costs as follows (in 000,000’s):

 

 

 

The Company is involved in a variety of claims, suits, and proceedings that arise from time to time, including actions with respect to contracts, employment, regulatory compliance and public disclosure. These actions may be commenced by a number of different constituents, including vendors, former employees, regulatory agencies, and stockholders. The following is a discussion of the more significant legal matters involving the Company.

 

The Company was a defendant in a lawsuit filed in The United States District Court for the Southern District of New York (Court) by a former employee. On June 22, 2007, the case was dismissed pursuant to a settlement agreement between the parties under which Eckenberger, as plaintiff, released all claims against the Company. Settlement costs in excess of previous accruals are included in other expenses for nine months ended September 30, 2007.

 

 

On November 12, 2007 the Company’s Board of Directors agreed to retain the Chairman, the President and the CFO for specified terms providing cash and equity compensation for their services. The aggregate annual cash compensation will approximate $500,000 and the aggregate equity compensation is equal to 250,000 options to purchase the Company’s stock at the current market price on the date of grant.

 

 

OVERVIEW

 

Historically BKF Capital operated entirely through BKF Asset Management, Inc. (“BKF”), previously a registered investment adviser with the Securities and Exchange Commission. BKF specialized in managing equity portfolios for institutional investors through its long-only equity and alternative investment strategies. It also acted as the managing general partner of a number of investment partnerships through it’s subsidiary BKF GP Inc.

 

During 2006 the Company ceased operating its investment advisory business. At September 30, 2007, it has no operating business and no assets under management. The Company’s principal assets consist of a significant cash position, sizable net operating tax losses to potentially carry forward, its status as an Exchange Act Reporting Company and a small revenue stream consisting of interest and fee sharing payments from departed portfolio managers. This revenue stream will be insufficient to cover operating expenses.

 

As previously disclosed, the Company has been evaluating strategic alternatives. Currently, the Company has two options:

 

 

The Company continues to evaluate opportunities within these strategic alternatives.

 

RISK FACTORS

 

The following risks, among others, sometimes have affected, and in the future could affect BKF’s 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.

 

BKF does not believe it is an investment company under the Investment Company Act of 1940, as amended (“1940 Act”).

 

BKF’s primary business historically has been providing investment advice and asset management, and not acting or proposing to act as an investment company as the term is defined in the 1940 Act. A company may inadvertently be deemed an investment company, however, by virtue of its asset composition. A company generally is considered an “investment company” if it owns “investment securities” (as defined in the 1940 Act) that exceed 40% of its total assets, exclusive of assets held in cash, money-market mutual funds and government securities. The significant reduction in BKF’s assets under management has substantially reduced its total assets, with the remaining assets being concentrated in cash, cash equivalents and U.S. treasury bills. Although the Company does not believe it is or was an investment company (and has no intent to become an investment company) the Company made an election under Rule 3a-2 of the 1940 Act as a protective measure. Under Rule 3a-2, a company that may otherwise meet the definition of an investment company is exempted from investment company status for up to one year, so long as it has a bona fide intent to promptly (in any event within a one year period) return to compliance with the numeric asset and/or income tests which form the investment company definition. The Company made the Rule 3a-2 election as of June 30, 2006, but since that date has taken steps to eliminate the circumstances that might have caused it to be considered an investment company subject to the 1940 Act registration and regulatory requirements. As a result, BKF does not believe it is an investment company, and does not believe it is subject to the attendant limitations, restrictions and regulation applicable to investment companies.

 

The Company could incur material liabilities in connection with a recently filed lawsuit.

 

In May 2007, a class action lawsuit was commenced in the United States District Court of the Southern District of New York, on behalf of certain persons who purchased or otherwise acquired publicly traded securities of the Company. The lawsuit was filed against the Company and two former executives of the Company, Glenn A. Aigen and John A. Levin (“Defendants”). The complaint alleges that Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. A notice of voluntary dismissal by plaintiff was filed with the court on October 5, 2007.

The ability of BKF to continue as an operating company and a going concern is dependent on its ability to consummate a merger or an acquisition and/or to raise additional capital.

 

The Company’s available options include merging with or acquiring a third party or liquidating. The Company has no pending transactions. Any such transaction will be subject to identifying a suitable business and negotiating definitive agreements. Furthermore, any definitive agreement could be subject to various conditions, including regulatory approvals. Therefore, there can be no assurance that the Company will be able to effect any such transaction. Furthermore, although the Company’s cash position is sufficient to allow it to operate for a protracted period, the Company believes that it will need to raise debt or equity capital to finance any such transaction. The ability to raise additional capital is subject to market conditions, the willingness of investors in invest in a new or startup business and other factors. Furthermore, certain common stock offerings may require stockholder approval. Also, an equity or rights offering could be dilutive to the existing stockholders of the Company. There can be no assurance that the Company will be able to raise any additional capital on favorable terms at all. If the Company is unable to effect a transaction or to raise additional capital, the Company would expect to be dissolved and liquidated. Furthermore, even if a transaction or financing occurs, the terms of the transaction or financing may not be favorable to the Company and its stockholders and could result in a decline in the stock price of the Company.

 

If we do complete a merger or other transaction you may not have basis on which to assess the merits or risks of the acquired business.

 

Since we have not yet identified a potential target or business partner, investors have no current basis to evaluate the possible merits or risks of the target or business’ operations. Although we will endeavor to evaluate the risks inherent in a particular target business, we can not assure you that we will properly assess all of the significant risk factors and accordingly, you may lose your investment in the Company.

 

If the Company is liquidated, the stockholders of the Company may not receive cash proceeds equal to the current stock price or book value of the Company.

 

If the Company is dissolved and liquidated, the creditors of the Company will be paid prior to any distribution to the stockholders. Furthermore, the Company expects to reserve a significant portion of its cash to pay for future liabilities, such as rental expenses, employment termination costs and other contractual obligations and contingencies. As a result, the cash remaining to be distributed to stockholders is expected to be significantly less than the Company’s current cash position and could be less than the stock price or book value of the Company.

 

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.

 

Three Months Ended September 30, 2007 as Compared to Three Months Ended September 30, 2006

 

Revenues

 

Total revenues for the third quarter of 2007 were $0.7 million, reflecting a decrease of 66.8% from $2.2 million in revenues in the same period in 2006. This decrease is attributable to the closing of the Company’s business.

 

The revenues for the three months ended September 30, 2007 are a result of interest earned on treasury bills and money market funds and trailer fees from departed portfolio managers.

 

Expenses

 

Total expenses for the third quarter of 2007 were approximately $1.3 million, reflecting a decrease of 92.9% from $18.6 million in expenses in the same period in 2006.

 

Employee compensation and benefit expense (including grants of equity awards) was higher in the third quarter of 2007 as compared to the same period of 2006 as a result of the substantial restricted stock forfeitures in the 2006 period.

 

Occupancy and equipment rental was $0.1 million in the third quarter of 2007, reflecting a 91.5% decrease from $1.3 million in the same period in 2006, primarily as the result of subleasing of excess office space.

 

The three months of 2006 restructuring costs included amortization of goodwill, severances and lease write off costs.

Other operating expenses were $0.73 million in the third quarter of 2007, reflecting a 59.6% decrease from $1.8 million in the same period in 2006 due primarily to reduced business operational costs.

 

Operating Loss

 

Operating loss for the third quarter of 2007 was $0.6 million, as compared to operating loss of $16.4 million in the same period in 2006.

 

Nine Months Ended September 30, 2007 as Compared to Nine Months Ended September 2006

 

Revenues

 

Total revenues for the first nine months of 2007 were $2.5 million, reflecting a decrease of 89.4% from $23.2 million in revenues in the same period in 2006. This decrease is attributable to the closing of the Company’s business. During the 2007, there were no assets under management. The revenues for the nine months ended June 2007 are a result of interest earned on treasury bills and money market funds and trailer fees from departed portfolio managers, in addition to the collection of some previously unbilled aged advisory fees.

 

Expenses

 

Total expenses for the first nine months of 2007 were $7.8 million, reflecting a decrease of 87.6% from $62.8 million in expenses in the same period in 2006.

 

Employee compensation and benefit expense (including grants of equity awards) was $1.2 million in the first nine months of 2007, reflecting a decrease of 94.8% from $22.7 million in the first nine months of 2006. These results primarily reflect the reduction of personnel relating to the loss of the business.

 

Occupancy and equipment rental was $0.65 million in the first nine months of 2007, reflecting a 85.3% decrease from $4.4 million in the same period in 2006, primarily as the result of subleasing of excess office space.

 

Restructuring expenses of $1.1 million included primarily severance costs and losses incurred to settle long term office space and a long term telecommunication leases.

 

Other operating expenses were $4.2 million in the first nine months of 2007, reflecting a 37.2% decrease from $6.7 million in the same period in 2006. Despite severely reduced business operational costs legal fees were high due to the employee litigation and the amortization of insurance premiums which increased during 2007.

 

Operating Loss

 

Operating loss for the first nine months of 2007 was $5.3 million, as compared to operating loss of $39.7 million in the same period in 2006.

 

LIQUIDITY AND CAPITAL RESOURCES

 

BKF’s current assets as of September 30, 2007 consist primarily of cash, short-term investments and receivables.

 

While BKF has historically met its cash and liquidity needs through cash generated by operating activities, cash flow from current activities will not be sufficient to fund operations in the future. BKF will use a portion of its existing working capital for such purposes.

 

At September 30, 2007, BKF had cash, cash equivalents and U.S. Treasury bills of $24.4 million, compared to $31.1 million at December 31, 2006. This decrease in cash and cash equivalents reflects the loss of the operating activities as described above, litigation and other settlements and the Directors and Officers Liability Insurance creating the resulting funding shortfall. Since approximately 50% of over revenue is derived from interest income the operating short fall may worsen as rates decline.

 

OFF BALANCE SHEET RISK

 

There has been no material change with respect to the off balance sheet risk incurred by BKF Capital since December 31, 2006.

 

 

Currently the Company has no assets under management and is not subject to market risk.

 

 

An evaluation was performed under the supervision and with the participation of BKF’s management, including the CEO and CFO, of the effectiveness of the design and operation of BKF’s 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, BKF’s management, including the CEO and CFO, concluded that BKF’s disclosure controls and procedures were effective as of the end of the period covered by this report. There have been no changes in BKF’s 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 BKF’s most recent quarter that has materially affected, or is reasonably likely to materially affect, BKF’s 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 BKF’s controls will succeed in achieving their stated goals under all potential future conditions.

 

PART II. OTHER INFORMATION

 

 

The Company was a defendant in a lawsuit filed in The United States District Court for the Southern District of New York (Court) by a former employee. On June 22, 2007, the case was dismissed pursuant to a settlement agreement between the parties under which Eckenberger, as plaintiff, released all claims against the Company.

 

The Company was sued in a putative class action securities fraud case during the second quarter. Also named as defendants are John A. Levin and Glenn Aigen, former senior executives of the Company. A notice of voluntary dismissal by plaintiff was filed with the court on October 5, 2007.

 

 

See “Part I. Financial Information. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors and Recent Events.” These risk factors reflect adverse material developments that have taken place since the filing of the Annual Report on Form 10-K for the year ended December 31, 2006.

 

 

None

 

 

None

 

 

None

 

 

On November 12, 2007, the Board of Directors and Compensation Committee unanimously approved the terms of employment agreements for each of Marvin Olshan, Chairman of the Board, and Harvey Bazaar, Chief Executive Officer and President. The terms of each of Messrs. Olshan’s and Bazaar’s employment agreement provide for an initial term of two years, terminable earlier after one year upon 90 days written notice by either party, at a base annual salary of $150,000. The employment agreements also provide that upon consummation of a material acquisition or other strategic transaction by the company, each of Messrs. Olshan and Bazaar would be eligible for a bonus in an amount in accordance with parameters to be reasonably determined by the compensation committee of the company. These employment agreements will become effective as of January 1, 2008. In connection with such employment, each of Messrs. Olshan and Bazaar were granted options to purchase an aggregate of 100,000 shares of the company’s common stock. The options will be evidenced by a stock option agreement in form satisfactory to the Compensation Committee. The options are immediately vested and exercisable and remain exercisable through the tenth anniversary of the date of grant. The exercise price per share of the options is $2.25, which is equal to the last sale price of a share of the company’s common stock as of the close of trading on November 12, 2007, the date of grant. In addition, the vesting of existing options held by each of Messrs. Olshan and Bazaar to purchase 100,000 shares of the company was immediately accelerated and such previously granted option are exercisable for the same ten year as the new options granted to each of them.

 

On November 12, 2007, the Board of Directors and Compensation Committee unanimously approved the terms of an employment agreement for J. Clarke Gray, Chief Financial Officer. The terms of Mr. Gray’s employment agreement provide for an initial term of six months, terminable earlier upon 60 days notice by either party, at a monthly salary of $20,000. The employment agreement also provides that upon consummation of a material acquisition or other strategic transaction by the company, Mr. Gray would be eligible for a bonus in an amount in accordance with parameters to be reasonably determined by the compensation committee of the company. This employment agreement is effective as of October 1, 2007. In connection with such employment, Mr. Gray was granted options to purchase an aggregate of 50,000 shares of the company’s common stock. The options will be evidenced by a stock option agreement in form satisfactory to the compensation committee. The options are immediately vested and exercisable and remain exercisable through the tenth anniversary of the date of grant. The

exercise price per share of the options is $2.25, which is equal to the last sale price of a share of the company’s common stock as of the close of trading on November 12, 2007, the date of grant.

 

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 BKF’s current expectations and are susceptible to a number of risks, uncertainties and other factors, including the risks specifically enumerated in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and BKF’s 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: changes in business strategy; 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; 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 BKF’s 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 BKF’s 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 BKF’s 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.

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

BKF Capital Group, Inc.

 

Harvey J. Bazaar

Chief Executive Officer

and President

 

J. Clarke Gray

Senior Vice President and

Chief Financial Officer

 

Date: November 12, 2007