| BKF CAPITAL GROUP INC ITEM 1A RISK FACTORS In addition to the risks referred to elsewhere in this Annual Report on Form 10-K, the following risks, among others, sometimes have affected, and in the future could affect, BKFapstas 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 IS DEPENDENT ON KEY PERSONNEL BKF 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 BKF because it could jeopardize its 6 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 BKF (See "e Item 7 |
| ) In August 2005, the Board of Directors approved a compensation program designed to retain personnel through the end of the year |
| BKF is seeking to develop longer term compensation arrangements for future periods |
| In November 2005, Philip Friedman, who was appointed Chief Investment Officer of BKF in October 2005, entered into a compensation arrangement that extends through December 2006 the 2005 economic arrangement for the long-only investment team and teams managing certain alternative investment strategies |
| The senior portfolio managers for BKFapstas largest long-short equity strategy have also entered into an extension that defines their economic arrangements through December 2006 |
| These extensions contemplate that a superseding, longer-term economic arrangement can be reached in the first quarter of 2006 |
| There can be no assurance that agreements on a superseding arrangement will be reached or that in the event such a superseding arrangement is not reached in the first quarter of 2006, the investment professionals will remain through 2006 |
| BKFapstas future success depends on its ability to retain and attract qualified personnel to conduct its investment management business |
| To the extent that BKF loses key personnel or seeks to diversify its strategies, BKF anticipates that it will be necessary for BKF to replace or add portfolio managers and investment analysts |
| Because of its relatively smaller size, BKF 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 BKFapstas business |
| In December 1998, BKF adopted an incentive compensation plan (most recently amended in 2001) to give BKF 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 |
| BKF IS DEPENDENT ON A LIMITED NUMBER OF INVESTMENT STRATEGIES In 2005, BKF derived most of its revenues from three investment offerings -- a large cap value strategy, an event-driven alternative investment strategy, and an actively traded long-short US equity strategy |
| Over the course of 2005, the event-driven alternative investment strategy was terminated and the large cap value strategy experienced significant withdrawals (See "e Item 7 |
| Managementapstas Discussion and Analysis of Operations -- Results of Operations -- Year Ended December 31, 2005 as Compared to Year Ended December 31, 2004 "e ) |
| While investment strategies may often perform differently in a given investment environment, adverse developments with regard to any material strategy could have a material adverse effect on BKFapstas business |
| ADVERSE DEVELOPMENTS WITH REGARD TO SIGNIFICANT CUSTOMERS OR RELATIONSHIPS COULD ADVERSELY AFFECT BKF &apos S REVENUES Fifteen customers of BKFapstas long-only equity strategies (counting as single customers each wrap fee program and related family and institutional accounts) generated approximately dlra19dtta8 million of revenues for BKF in 2005 (including incentive fees), or approximately 17prca of BKFapstas total fees for the period (see "e Item 6 -- Selected Financial Data "e ) |
| Excluding the impact of incentive fees on BKFapstas business, fifteen customers for long-only equity products accounted for approximately 25dtta5prca of all asset-based investment advisory fees earned in 2005 |
| In total, these terminations will have an adverse effect on BKFapstas revenues |
| In addition, in excess of 50prca of the long-only assets under management were held in wrap fee accounts as of December 31, 2005, and the vast majority of the accounts were held with a single wrap fee sponsor |
| 7 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 BKF takes a negative view of BKF, BKF could lose a number of accounts related to that consultant |
| Since June 30, 2005, a consultant with respect to which BKF manages approximately dlra407 million pursuant to long-only strategies (including proprietary investment vehicles of the consultant) reduced BKFapstas rating to retain, so that it was no longer recommending BKF for new searches but was not advising that BKF be terminated by clients as an investment manager |
| Other consultants have indicated they are monitoring the present situation closely |
| A DECLINE IN THE PERFORMANCE OF THE SECURITIES MARKETS COULD HAVE AN ADVERSE EFFECT ON BKF &apos S REVENUES BKFapstas 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 BKFapstas 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 &apos withdrawing from the equity markets or decreasing their rate of investment, either of which would likely adversely affect BKF BKFapstas rates of growth in assets under management and revenues have varied from year to year |
| BKFapstas current long-only investment strategies are "e value "e oriented, and a general decline in the performance of "e value "e securities could have an adverse effect on BKFapstas revenues |
| BKF also offers alternative investment strategies |
| The failure to implement these strategies effectively could likewise impact BKFapstas revenues |
| Good performance generally stimulates sales of services and investment strategies 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 BKF 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 BKF &apos S MANAGEMENT FEES, THE CANCELLATION OF INVESTMENT MANAGEMENT AGREEMENTS OR POOR INVESTMENT PERFORMANCE BY THE BKF PRIVATE INVESTMENT FUNDS COULD ADVERSELY AFFECT BKF &apos S RESULTS Management Fees |
| Some segments of the investment management industry have experienced a trend toward lower management fees |
| BKF 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 BKF 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 BKFapstas results |
| Cancellation of Investment Management Agreements |
| It is expected that BKF will derive almost all of its revenue from investment management agreements |
| The agreements with BKFapstas 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 BKF 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 |
| In addition, the private investment funds generally operate under "e high water mark "e provisions, which reduce the incentive fees and general partner incentive allocations earned in periods of positive performance to the extent that prior losses experienced by the fund have not yet been recouped |
| BKF IS A RELATIVELY SMALL PUBLIC COMPANY IN A HIGHLY COMPETITIVE BUSINESS BKF 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 8 the financial services companies with which BKF competes have greater resources and assets under management than BKF does and offer a broader array of investment products and services |
| Management believes that the most important factors affecting BKFapstas 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 |
| BKFapstas ability to increase and retain client assets could be adversely affected if client accounts underperform client expectations or if key investment personnel leave BKF BKFapstas 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 BKF is a relatively smaller asset management company, changes in customers, personnel and strategies and other business developments may have a greater impact on BKF than they would have on larger, more diversified asset management companies |
| BKF IS DEPENDENT ON INFORMATION SYSTEMS AND ADMINISTRATIVE, BACK-OFFICE AND TRADE EXECUTION FUNCTIONS BKF 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 BKFapstas 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 BKF 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 BKF or a third party contracted by BKF to perform such functions could adversely impact BKFapstas revenues |
| CONFLICTS OF INTEREST MAY ARISE AND ADVERSELY AFFECT BKF From time to time, BKFapstas officers, directors and employees may own securities which one or more of its clients also own |
| Although BKF 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 BKF Similarly, conflicting investment positions may develop among various investment strategies managed by BKF Although BKF has internal policies in place to address such situations, such conflicts could have adverse effects on BKF GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT BKF AND BKF CAPITAL Virtually all aspects of BKFapstas business are subject to various federal and state laws and regulations |
| BKF 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 |
| BKF Asset Management is also registered with the Commodity Futures Trading Commission as a commodity trading advisor and a commodity pool operator, and BKF GP is registered with that agency as a commodity pool operator |
| BKF Asset Management and BKF 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, BKF is subject to the Employee Retirement Income Security Act of 1974 and its regulations insofar as it is a "e fiduciary "e with respect to certain clients |
| Furthermore, BKF Capital, 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 BKF or BKF Capital from conducting its business if it fails to comply with these laws and regulations |
| If BKF or BKF Capital fails to comply with these laws and regulations, these agencies may impose sanctions, including the suspension of individual employees, limitations on business 9 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 BKFapstas 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 adverse effect on our business, especially given the fact that all operations are conducted from a single location in New York City and BKF has lease obligations with regard to this location through September 2011 |