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TMCNet:  BKF CAPITAL GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[March 31, 2014]

BKF CAPITAL GROUP INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Currently, the Company has no business operations, except for maintaining its status as an Exchange Act reporting company and winding down certain investment partnerships for which BKF acts as general partner. The Company is seeking to consummate an acquisition, merger or other business combination with an operating entity to enhance BKF's revenues and increase shareholder value.


Current Plan of Operations Background BKF was incorporated in Delaware in 1954. The Company's securities trade on the over the counter market under the symbol "BKFG." During the third quarter of 2006, the Company ceased all operations, except for maintaining its status as an Exchange Act reporting company and winding down certain investment partnerships for which BKF acts as general partner. Currently, the Company is seeking to consummate an acquisition, merger or other business combination with an operating entity to enhance BKF's revenues and increase shareholder value.

17 The Company operates through its wholly-owned subsidiaries, BKF Investment Group, Inc., formerly known as BKF Management Co., Inc. ("BIG") and BKF Asset Holdings, Inc. ("BKF Holdings") all of which are collectively referred to herein as the "Company" or "BKF." The consolidated financial statements of BKF, BIG and BIG's two wholly owned subsidiaries BKF Advisors, Inc. ("BKF Advisors") and BKF Asset Management, Inc., ("BAM") and BAM's two wholly-owned subsidiaries and BKF GP, Inc. ("BKF GP").

On August 2, 2012, the Company issued a press release disclosing that the Company plans to create an asset management platform with investment vehicles that focus on areas of portfolio management that typically receive less attention from investors but also present unique investment opportunities. The Company is also engaged in seeking to arrange an acquisition, with an operating business with revenues, at least three years of operating history and unique value opportunities. The Press Release is attached as an exhibit to the Company's Current Report on Form 8-K, dated August 3, 2012.

In September 2012, the Company changed the name of its subsidiary BKF Management Co., Inc. to BKF Investment Group, Inc. and formed a wholly owned subsidiary, BKF Advisors that registered as an investment advisor with the State of Florida and the State of California. The Company expects that BKF Advisors will act as the investment advisor to the BKF Income Fund, L.P., a newly formed Delaware limited partnership that plans to engage as an investment fund (the "Partnership"). BAM is the general partner of the Partnership. The Company expects to seed the Partnership which expects to focus on small-cap and micro-cap companies with a value based approach to investing. Thereafter, the Company intends to grow its asset management business by acquiring or seeding other alternative investment funds with unique investment strategies and/or emerging portfolio managers. The Company's goal is to grow revenues and income over time and achieve valuation multiples in line with other publicly-traded comparable companies. The Company expects to create value for its shareholders by rebuilding its asset management operations, and expects to earn fee income for assets under management, performance fees upon successfully liquidating investments and from its proprietary capital investments in the investment funds for which BKF acts as the general partner. Moreover, the Company has substantial net operating loss carry-forwards that it may be able to use to offset future profits and thereby minimize tax liabilities.

The Company is also seeking to arrange for a merger, acquisition, business combination or other arrangement by and between the Company and a viable operating entity. The Company shall endeavor to utilize some or all of the Company's net operating loss carryforwards in connection with a business combination transaction; however, there can be no assurance that the Company will be able to utilize any of its net operating loss carryforwards. The Company has not identified a viable operating entity for a merger, acquisition, business combination or other arrangement, and there can be no assurance that the Company will ever successfully arrange for a merger, acquisition, business combination or other arrangement by and between the Company and a viable operating entity.

The Company anticipates that the selection of a business opportunity will be a complex process and will involve a number of risks, because potentially available business opportunities may occur in many different industries and may be in various stages of development. Due in part to depressed economic conditions in a number of geographic areas and shortages of available capital, management believes that there are numerous firms seeking either the additional capital which the Company has or the benefits of a publicly traded corporation, or both. The perceived benefits of a publicly traded corporation may include facilitating or improving the terms upon which additional equity financing may be sought, providing liquidity for principal shareholders, creating a means for providing incentive stock options or similar benefits to key employees, providing liquidity for all shareholders and other factors.

18 In some cases, management of the Company will have the authority to effect acquisitions without submitting the proposal to the shareholders for their consideration. In some instances, however, the proposed participation in a business opportunity may be submitted to the shareholders for their consideration, either voluntarily by the Board of Directors to seek the shareholders' advice and consent, or because of a requirement of State law to do so.

In seeking to arrange a merger, acquisition, business combination or other arrangement by and between the Company and a viable operating entity, the Company's objective will be to obtain long-term capital appreciation for the Company's shareholders. There can be no assurance that the Company will be able to complete any merger, acquisition, business combination or other arrangement by and between the Company and a viable operating entity.

The Company may need additional funds in order to effectuate a merger, acquisition or other arrangement by and between the Company and a viable operating entity, although there is no assurance that the Company will be able to obtain such additional funds, if needed. Even if the Company is able to obtain additional funds there is no assurance that the Company will be able to effectuate a merger, acquisition or other arrangement by and between the Company and a viable operating entity.

BKF, through BKF GP, Inc., a wholly owned subsidiary, acts as the managing general partner of three investment partnerships which are in the process of being liquidated and dissolved.

Qualstar Investment On December 17, 2010, the Company purchased 1,500,000 shares of Qualstar Corporation ("Qualstar") common stock in a privately negotiated transaction at the price of $1.55 per share or the total aggregate amount of $2,325,000 (the "2010 Purchase"). Qualstar is a diversified electronics manufacturer specializing in data storage, power supplies and computer pointing devices.

Qualstar's products are known throughout the world for high quality and Simply Reliable designs that provide years of trouble-free service. The securities of Qualstar are traded on NASDAQ under the symbol "QBAK." The registrant purchased the Qualstar shares from Richard A. Nelson and Kathleen R. Nelson as Co-Trustees of the Nelson Family Trust U/A DTD 01/19/2000. Richard A. Nelson is an officer and director of Qualstar. Following the 2010 Purchase, BKF owned approximately 12.2% of issued and outstanding shares of Qualstar. The Company previously disclosed its acquisition of shares of Qualstar in Current Report on Form 8-K filed on December 23, 2010. Following the December 17, 2010 transaction BKF increased its Qualstar holdings through open market transactions.

On February 15, 2012 BKF sent a letter to the Qualstar board of director, which was attached as an exhibit to the Company's Schedule 13D filing on February 21, 2012. In the February 15, 2012 letter, BKF suggested steps that the Qualsar board can and should take to maximize shareholder value. The Qualstar board did not discuss the February 15, 2012 letter with BKF and it failed to take any of the requested actions. In or about May 2012, the BKF launched a proxy contest to remove and replace the board of directors of Qualstar. See BKF's Definitive Proxy Statement on Schedule 14A, filed on June 6, 2012, which is incorporated herein by reference. The special meeting of the shareholders of Qualstar occurred on June 20, 2012. While BKF's proposals did receive approval of the majority of the votes cast at the meeting, they did not receive approval from a majority of the outstanding shares, which was required to remove the incumbent Qualstar board.

19 On January 17, 2013, BKF sent a letter (the "Notice") to the Qualstar Board, notifying the Qualstar Board that in accordance with Section 6 of Article II of Qualstar's Bylaws, as amended and restated as of March 24, 2011, BKF Capital intends to nominate six (6) directors to serve on Qualstar's Board of Directors at the 2013 Annual Meeting of Shareholders. Specifically, in the Notice, BKF nominated the following persons for election to Qualstar's Board of Directors at the 2013 Annual Meeting of Shareholders: Steven N. Bronson, Edward J. Fred, Sean M. Leder, David J. Wolenski, Alan B. Howe and Maria Fregosi.

On January 30, 2013, BKF announced a partial tender offer to purchase up 3,000,000 shares of Qualstar's common stock at a purchase price of $1.65 per share (the "PTO"), which was a 19% increase above the share price of Qualstar's common stock on the day before the offering was announced. The PTO provided that BKF would purchase a minimum of 1,000,000 shares in the PTO. In connection with the PTO, BKF filed a Scheduled TO on January 30, 2013, which is incorporated herein by reference. On February 5, 2013, the board of directors of Qualstar adopted a poison pill in the form of a rights plan that would be triggered in the event that BKF purchased any additional shares. After analyzing the poison pill adopted by the Qualstar board of directors and the likelihood that a court would strike down the poison pill, on February 11, 2013, BKF announced that it would withdraw and terminate the PTO. In connection with the termination of the PTO, BKF filed a Schedule 14A on February 11, 2013, which is incorporated herein by reference.

On June 6, 2013, BKF filed its definitive proxy statement for Qualstar's 2013 Annual Meeting of Shareholders (the "Qualstar Meeting") to be held on June 28, 2013. In its proxy statement BKF nominated five (5) persons to be elected to the board of directors of Qualstar. Specifically, BKF nominated Steven N. Bronson, Sean M. Leder, David J. Wolenski, Alan B. Howe and Dale E. Wallis. At the Qualstar Meeting, the shareholders of Qualstar voted to elect BKF Capital's nominees to the board of directors of Qualstar. Specifically, the Qualstar shareholders elected the following persons to serve on the Qualstar board of directors: Steven N. Bronson, Sean M. Leder, David J. Wolenski, Alan B. Howe and Dale E. Wallis. On July 3, 2013, Steven N. Bronson, our Chairman, CEO and President, was appointed to serve as Qualstar's Chairman and interim CEO and President. In August 2013, Qualstar reimbursed BKF for the costs and expenses incurred in connection with the 2012 proxy contenst and the 2013 proxy contest in the aggregate amount of $356,000.

At December 30, 2013 the Company held 2,594,748 common shares of Qualstar representing approximately 21.2% of the issued and outstanding shares of Qualstar. The Company holds the shares of Qualstar for investment purposes and is currently considering its options. The Company is in the process of transferring its holdings of Qualstar shares into its wholly owned subsidiary BKF Asset Holdings, Inc.

Results of Operations Income Total income for 2013 was $43,000, reflecting a decrease of 22% from 55,000 in 2012. The decrease in income was a result of a decrease in interest income.

Expenses Total expenses for 2013 were $708,000, reflecting a 19% decrease from $878,000 in 2012. The decrease is primarily attributable to professional fees related to the proxy filings for Qualstar and decrease in management salary as a result of the Chief Executive Officer voluntarily taking a salary reduction from $150,000 to $90,000 effective August 2012.

20 Other income and Losses Other income during December 31, 2013, amounted to $395,000, which was attributable to a one time reimbursement from Qualstar in the aggregate amount of $395,000 for the professional fees and expenses incurred by BKF in connection with the proxy contests concerning Qualstar.

Loss on equity investment for 2013 was approximately $2,073,000 compared to a loss $1,064,000 in 2012. The increase is primarily attributable to the continued losses experienced by Qualstar.

At December 31, 2013, BKF had cash and cash equivalents of $5.9 million, as compared to cash and cash equivalents of $6.6 million at December 31, 2012. This decrease in cash and cash equivalents primarily reflects the purchase of Qualstar and Interlink Electronics shares which amounted to approximately $433,000.

Accrued expenses were $33,000 at December 31, 2013, as compared to $35,000 at December 31, 2012.

Over the next twelve months the Company plans to meet its current obligations from interest on its cash, to the extent such interest earned is insufficient to pay expenses, the Company shall utilize its cash on hand to meet its obligations.

Off Balance Sheet Risk BKF GP served as the managing general partner for several affiliated investment partnerships which traded primarily in equity securities. As of December 31, 2013 and 2012 virtually all of these partnerships' investments have been fully liquidated and the proceeds distributed. There is no general partner or limited partners' capital remaining in these partnerships unless certain illiquid portfolio positions eventually realize a value. BKF GP has not guaranteed any of the affiliated investment partnerships' obligations, nor does it have any contractual commitments associated with them.

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