BKF CAPITAL GROUP INC - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 1-10024

BKF CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 36-0767530
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE ROCKEFELLER PLAZA, 10020
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)

(212) 332-8400
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

As of July 31, 2002, 6,633,223 shares of the registrant's common stock,
$1.00 par value, were outstanding.
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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLAR AMOUNTS IN THOUSANDS)

See accompanying notes
2

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes
3

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)

NON-CASH TRANSACTIONS:

During January 2002, the Company granted a total of 168,213 restricted stock
units to employees with a value of $4,718.

During March 2001, the Company granted a total of 7,000 restricted stock units
to the Nonemployee Directors of the Company with a value of $146. This amount
will be used to reduce cash payments to Directors for future Board of Directors
and Committee meetings.

See accompanying notes
4

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.
(formerly Baker, Fentress & Company, hereto referred to as "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 Company's Annual Report
on Form 10-K for the year ended December 31, 2001. 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 year's
results.

In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the amounts reported in the
financial statements. Actual results could differ from those estimates.

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
subsidiary, John A. Levin & Co., Inc., ("JALCO") and JALCO's two wholly-owned
subsidiaries, Levco GP Inc. ("Levco GP") and LEVCO Securities, Inc. ("LEVCO
Securities"). All intercompany transactions have been eliminated in
consolidation.

JALCO is an investment advisor registered under the Investment Advisers Act
of 1940, 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.

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS

Levco GP serves as the managing general partner for several affiliated
investment partnerships ("AIP"), each of which is primarily engaged in the
trading of equity securities or, in the case of one partnership, distressed
corporate debt. The financial condition and results of operations of the AIP are
not included in the Company's consolidated statements of financial condition
with the exception of Levco GP's equity ownership. The limited partners of the
AIP have the right to redeem their partnership interests at least quarterly.
Levco GP does not maintain control over the AIP, has not guaranteed any of the
AIPs' obligations, nor does it have any contractual commitments associated with
them. Investments in AIP held through Levco GP are recorded based upon the
equity method of accounting. This investment amount equals the sum total of
Levco GP's capital accounts in the AIP. It is the Company's general practice to
withdraw the incentive allocations earned from the AIP within three months after
the fiscal year end. Levco GP has general partner liability with respect to its
interest in each of the AIP and has no assets other than its interest in these
partnerships (see note 5a).

5

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES

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.

INTANGIBLE ASSETS

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 January 1,
2002 the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets".
Under the new rules, goodwill will no longer be amortized but will be subject to
an annual impairment test in accordance with SFAS No. 142. Other intangible
assets with finite lives will continue to be amortized over their useful lives
(see note 4). Investment contracts are amortized straight line over 10 years.
Employment contracts were amortized over the life of the contracts. Such
intangible assets and related amortization have been eliminated in the
Consolidated Statement of Financial Condition as of December 31, 2001.

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 period.
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
earnings (loss) per share (in thousands, except per share data):
..

In calculating diluted (loss) per share for the three and six months ended
June 30, 2002, common stock equivalents of 1,480,922 were excluded due to their
anti-dilutive effect on the calculations.

6

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 introduced by LEVCO Securities. In the ordinary course of its business,
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.

3. INVESTMENT ADVISORY FEES RECEIVABLE

Included in investment advisory fees receivable are approximately $3.3
million and $2.2 million of accrued incentive fees as of June 30, 2002 and
December 31, 2001, 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
(see note 5b).

4. INTANGIBLE ASSETS

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets". The effect of adopting SFAS No. 142 was as follows:

EFFECT OF NON-AMORTIZATION OF GOODWILL ON THE CONSOLIDATED STATEMENTS OF
OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)

EXPECTED AMORTIZATION EXPENSE (IN THOUSANDS)

Remainder of 2002................................... $ 779
2003................................................ 1,558
2004................................................ 1,558
2005................................................ 1,558
2006................................................ 1,558

7

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INVESTMENTS IN AFFILIATED PARTNERSHIPS ("AIP") AND RELATED PARTY
TRANSACTIONS

a) Summary financial information, including the Company's carrying value
and income from the AIP at June 30, 2002 and for the six months then ended, is
as follows (in thousands):

Total partnerships' assets.................................. $ 852,185
Total partnerships' liabilities............................. (250,265)
Total partnerships' equity balance.......................... 601,920
Net partnerships' earnings.................................. 8,047
Company's carrying value.................................... 18,443
Company's income on invested capital (excluding accrued
incentive fees)........................................... (363)

The Company earned investment advisory fees and general partner allocations
(inclusive of incentive fees) from affiliated domestic investment partnerships
and affiliated offshore investment vehicles of approximately $9.7 million and
$8.3 million for the six months ended June 30, 2002, and 2001, respectively.

Included in investments in AIP at June 30, 2002 and December 31, 2001 are
incentive allocations approximating $2.8 million and $8.0 million.

Included in the Company's incentive fees and general partner incentive
allocations are approximately $1.6 million and $2.4 million and $3.6 million and
$7.5 million payable directly to employee owned and controlled entities
("Employee Entities") for the three and six month periods ended June 30, 2002
and 2001, respectively. These amounts are included in the Company's carrying
value of the AIP's at 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 $1.6 million and $2.4 million and $3.6 million and $7.5 million
for the three and six month periods ended June 30, 2002 and 2001, respectively.
These amounts are included in the Consolidated Statements of Operations.

b) Included in investment advisory fees receivable are $5.6 million and
$14.4 million of incentive fees from sponsored offshore investment vehicles
(similar to several domestic AIP) at June 30, 2002 and December 31, 2001,
respectively (see note 3).

6. 2002 RESTRICTED STOCK UNITS ("RSU") GRANT

In January 2002, the Company issued 168,213 RSU's to seven employees of the
Company. The RSU's will vest in three equal amounts over a three-year period.

7. INCOME TAXES

The Company's provision for income taxes differs from the amount of income
tax determined by applying the applicable U.S. federal statutory income tax rate
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 and utilization of capital losses. Deferred tax
liabilities arise from deferred revenues, unrealized gains on investments, and
state and local taxes.

8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

BKF Capital Group, Inc. ("BKF") operates entirely through John A. Levin &
Co., Inc., an investment adviser registered with the U.S. Securities and
Exchange Commission that was acquired by BKF in June 1996. The investment
adviser is a wholly owned subsidiary of Levin Management Co., Inc., which in
turn is a wholly owned subsidiary of BKF. Levin Management Co., Inc. and its
subsidiaries are referred to collectively as "Levco." Levco specializes in
managing equity portfolios for institutional and individual investors. Most
accounts are managed pursuant to value equity strategies; Levco also offers a
range of alternative investment products as well as 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 value 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 value 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.

Levco obtains some of its clients for its large cap value products through
wrap fee programs sponsored by major financial services companies. In these
programs, clients pay the sponsoring broker an asset-based fee that covers
brokerage commissions, advisory services, custodial fees, and other reporting
and administrative services. Investors are able to select Levco from among a
limited number of managers participating in the program, and Levco receives a
portion of the wrap fee paid by the clients who select Levco to manage their
accounts through the program.

At June 30, 2002, assets under management were $13.02 billion, down from
$13.17 billion a year earlier. Following is a comparison of assets under
management (in millions) as defined by product and client type:

Levco also has a wholly-owned broker-dealer subsidiary that clears through
Correspondent Services Corporation, a UBS/PaineWebber company, on a fully
disclosed basis. Generally, the customers of the broker-dealer subsidiary are
advisory clients of Levco, and the trades executed through the broker-dealer are
generally placed by Levco in its capacity as investment adviser.

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
immaterial may also impact its business.

9

LEVCO IS DEPENDENT ON KEY PERSONNEL

Levco is dependent on the efforts of its senior investment professionals
managing the value equity strategies and the event driven products. Levco is
also dependent on the efforts of Mr. John A. Levin, the chairman and chief
executive officer of BKF. The loss of the services of key investment personnel,
including Mr. Levin, could have a material adverse effect on Levco because it
could jeopardize its relationships with clients and result in the loss of those
accounts. Levco's key investment personnel, including Mr. Levin, are not subject
to employment contracts.

Levco's future success depends on its ability to retain and attract
qualified personnel to conduct its investment management business. The market
for qualified portfolio managers is highly competitive and has grown more so in
recent years as the entire industry has experienced growth. To the extent that
Levco further diversifies its products and strategies, BKF anticipates that it
will be necessary for Levco to 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 investment teams or the inability to recruit and retain
qualified portfolio managers, business and marketing personnel could have a
material adverse effect on Levco's business.

In December 1998, BKF adopted an incentive compensation plan 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. 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 PRODUCTS

Levco currently derives most of its revenues from two particular investment
products -- a large cap value strategy and an event-driven alternative
investment product. Adverse developments with regard to either of these products
could have a material adverse effect on Levco's business.

A DECLINE IN THE PERFORMANCE OF THE SECURITIES MARKETS COULD HAVE AN ADVERSE
EFFECT ON LEVCO'S REVENUES

Levco's 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 Levco's
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. Levco's
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 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 Levco's
revenues. Since April 2000, the equity markets have been in the midst of their
longest and most significant decline since the 1973-1974 period.

POOR INVESTMENT PERFORMANCE COULD ADVERSELY AFFECT LEVCO'S 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. In
2002, value equity products managed by Levco have declined more than their
relevant benchmarks.

Levco also offers an event-driven product and other alternative investment
strategies. The failure to implement these strategies effectively could likewise
impact Levco's revenues.

10

THE LOSS OF SIGNIFICANT CUSTOMERS COULD ADVERSELY AFFECT LEVCO'S REVENUES

As of December 31, 2001, Levco had approximately 350 relationships
(counting as single relationships each wrap fee program and related family and
institutional accounts and excluding proprietary pooled investment vehicles), of
which the ten largest relationships generated approximately $29.1 million of
revenues for Levco in 2001 (including incentive fees), or approximately 31.8% of
BKF's total revenues. As of June 30, 2002, the five largest relationships
accounted for approximately 36.1% of all investment advisory fees (excluding
incentive fees) for the six month period ended June 30, 2002. The loss of any of
these relationships could have an adverse effect on BKF's revenues.

A DECREASE IN LEVCO'S MANAGEMENT FEES, THE CANCELLATION OF INVESTMENT
MANAGEMENT AGREEMENTS OR POOR INVESTMENT PERFORMANCE BY THE LEVCO PRIVATE
INVESTMENT FUNDS COULD ADVERSELY AFFECT LEVCO'S PROFITS

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 Levco's profits.

Cancellation of Investment Management Agreements. It is expected that
Levco will derive almost all of its revenue from investment management
agreements. For investment companies, a majority of the disinterested members of
each fund's board must approve these agreements at least annually and the
agreements are terminable without penalty on 60 days' notice. The agreements
with Levco's 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.

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.

BKF IS A SMALLER 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 Levco's
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. Levco's ability to increase
and retain client assets could be adversely affected if client accounts
underperform client expectations or if key investment personnel leave Levco.
Levco's 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, 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 ADMINISTRATIVE, 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 Levco's
current systems will continue to be able to accommodate its growth or that the
costs of its

11

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 Levco's revenues.

CONFLICTS OF INTEREST MAY ARISE AND ADVERSELY AFFECT LEVCO

From time to time, Levco's 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, conflicts of interest that may arise among various investment
strategies managed by Levco could have adverse effects on Levco, despite the
internal policies maintained to address such potential conflicts.

GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT LEVCO'S BUSINESS

Virtually all aspects of Levco's 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. 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.

These laws and regulations generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict Levco from
conducting its business if it fails to comply with these laws and regulations.
If Levco 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
Levco's profitability, operations and its ability to conduct certain businesses
in which it is currently engaged.

TERRORIST ATTACKS COULD ADVERSELY AFFECT OUR COMPANY

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, 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
incurred lease obligations with regard to this location through September 2011.

Certain statements under this caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). See "Part II -- Other Information."

12

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 JUNE 30, 2002 AS COMPARED TO THREE MONTHS ENDED JUNE 30,
2001.

Revenues

Total revenues for the second quarter of 2002 were $22.74 million,
reflecting a decrease of 0.8% from $22.93 million in revenues in the same period
in 2001. This decrease was attributable to a 24.4% decrease in incentive fees
and general partner incentive allocations to $5.64 million in the second quarter
of 2002 from $7.47 million in the same period in 2001. Incentive fees and
general partner allocations are accrued on a quarterly basis but are primarily
determined and billed or 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. The decrease in incentive fees and general partner incentive
allocations is attributable to a decrease in the performance of certain event
driven and value equity accounts paying performance-based compensation,
including, in the case of certain value equity accounts, negative performance
resulting in the reversal of accruals made in prior periods. The short-biased
alternative investment strategy generated incentive fees and general partner
incentive allocations that partially offset the decline in such revenues from
the event driven and value equity accounts. The overall decrease in incentive
fees and general partner incentive allocations was partially offset by a 10.4%
increase in other investment advisory fees to $16.46 million in the second
quarter of 2002 from $14.91 million in the same period in 2001. This increase in
advisory fees (excluding incentive fees) is primarily attributable to an
increase in assets managed (as the result of new investments and asset
appreciation) for event driven accounts and other private investment funds. In
addition, advisory fees with regard to assets held in wrap fee programs are
generally billed quarterly in advance, and assets under management in wrap
programs were approximately $4.7 billion as of the beginning of the second
quarter (as opposed to $3.9 billion at June 30, 2002).

Net commission income generated by the broker-dealer business rose 13.8% to
$629,000 in the second quarter of 2002 from $553,000 in the second quarter of
2001.

Expenses

Total expenses for the second quarter of 2002 were $22.64 million,
reflecting an increase of 4.9% from $21.59 million in expenses in the same
period in 2001. Total expenses excluding amortization of intangibles were $20.88
million in the second quarter of 2002, reflecting an increase of 10.0% from
$18.98 million for the second quarter of 2001. Compensation expense was $15.36
million, reflecting a decline of 0.1% from $15.37 million in the second quarter
of 2001. This decrease in compensation expense is attributable to the decrease
in revenues. The effect of this decrease in revenues was partially offset by an
increase in compensation expense related to new product development and the
expansion of the investment teams involved in managing alternative investment
strategies.

Occupancy and equipment rental was $1.48 million in the second quarter of
2002, reflecting a 126.6% increase from $654,000 in the same period in 2001.
This increase is attributable to the lease amendments entered into in 2001,
which added approximately 38,000 square feet to BKF's facilities. In light of
current conditions, BKF is currently seeking to sublease a portion of its
facilities. Since the commercial real estate market has declined since BKF
entered into its lease, such a sublease may result in losses to BKF during all
or a portion of such sublease period.

Other operating expenses were $4.04 million in the second quarter of 2002,
reflecting a 37.1% increase from $2.95 million in the same period in 2001. The
increase was primarily attributable to increases in (i) professional fees
relating to investment and technology consultants and third party marketers,
(ii) professional and consulting fees relating to BKF's public company structure
and (iii) telecommunications and portfolio management software expense, which
increases as the number of wrap accounts increases.

13

Amortization of intangibles was $1.75 million in the second quarter of
2002, reflecting a decrease of 32.8% from $2.61 million in the same period in
2001. This decrease is attributable to (i) the fact that goodwill is no longer
being amortized, pursuant to Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," and (ii) the expiration in the
second of quarter of 2001 of employment agreements that were being amortized
under the purchase method of accounting in connection with the acquisition of
Levco by BKF in 1996.

Operating Income

Operating income for the second quarter of 2002 was $100,000, reflecting a
92.6% decline from $1.34 million in the same period in 2001, as there was an
increase in expenses and a decrease in revenues. Operating income excluding the
amortization of intangibles was $1.85 million in the second quarter of 2002,
reflecting a decrease of 53.1% from $3.95 million in the same period in 2001.

Gain (Loss) on Investments

In the second quarter of 2002, BKF had a net realized and unrealized loss
on investments of $605,000 derived from its seed capital investments in a range
of long only and alternative investment strategies. Such investments yielded a
net realized and unrealized gain of $683,000 in the second quarter of 2001.

Interest and Dividend Income

Interest and dividend income in the second quarter of 2002 was $166,000,
reflecting a 45.7% decrease from $305,000 in the same period in 2001. This
decrease is primarily attributable to a decrease in interest rates.

Income Taxes

Income tax expense was $654,000 in the second quarter of 2002, reflecting a
decrease of 70.5% from $2.21 million for the same period in 2001. This decrease
primarily reflects the decrease in income before taxes (as determined without a
deduction for the amortization of intangibles). An effective tax rate of 46.4%
(before amortization) was used to make the determination with respect to the
provision for taxes at June 30, 2002, while an effective tax rate of 47.5%
(before amortization) was used to calculate the provision for taxes at June 30,
2001. The differential in tax rates is due to state allocations and decrease in
the statutory rate.

SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001.

Revenues

Total revenues for the six months ended June 30, 2002 were $43.87 million,
reflecting a decrease of 7.0% from $47.17 million in revenues in the same period
in 2001. This decrease was attributable to a 47.6% decrease in incentive fees
and general partner incentive allocations to $9.04 million in the six months
ended June 30, 2002 from $17.24 million in the same period in 2001. Incentive
fees and general partner allocations are accrued on a quarterly basis but are
primarily determined and billed or 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. The decrease in incentive fees and general partner incentive
allocations is attributable to a decrease in the performance of certain event
driven and value equity accounts paying performance-based compensation,
including, in the case of certain value equity accounts, negative performance
resulting in the reversal of accruals made in prior periods. The short-biased
alternative investment strategy generated incentive fees and general partner
incentive allocations that partially offset the decline in such revenues from
the event driven and value equity accounts. The overall decrease in incentive
fees and general partner incentive allocations was partially offset by a 15.8%
increase in other investment advisory fees to $33.42 million in the six months
ended June 30, 2002 from $28.85 million in the same period in 2001. This
increase in advisory fees (excluding incentive fees) is primarily attributable
to an increase in assets managed in wrap fee programs and for event driven
accounts and other private investment funds. Advisory fees with regard to assets
held in wrap fee programs are generally billed quarterly in advance, and

14

assets under management in wrap programs were approximately $4.7 billion as of
the beginning of the second quarter (as opposed to $3.9 billion at June 30,
2002).

Net commission income generated by the broker-dealer business rose 31.2% to
$1.41 million in the six months ended June 30, 2002 from $1.07 million in the
same period in 2001.

Expenses

Total expenses for the six months ended June 30, 2002 were $43.39 million,
reflecting a decrease of 1.1% from $43.87 million in expenses in the same period
in 2001. Total expenses excluding amortization of intangibles were $39.89
million for the six months ended June 30, 2002, reflecting an increase of 3.2%
from $38.66 million for the same period in 2001. Compensation expense was $29.84
million, reflecting a decline of 4.6% from $31.29 million for the six months
ended June 30, 2001. This decrease in compensation expense is attributable to
the decrease in revenues. The effect of this decrease in revenues was partially
offset by an increase in compensation expense related to new product development
and the expansion of the investment teams involved in managing alternative
investment strategies.

Occupancy and equipment rental was $2.90 million for the six months ended
June 30, 2002, reflecting a 128.8% increase from $1.27 million in the same
period in 2001. This increase is attributable to the lease amendments entered
into in 2001, which added approximately 38,000 square feet to BKF's facilities.
In light of current conditions, BKF is currently seeking to sublease a portion
of its facilities. Since the commercial real estate market has declined since
BKF entered into its lease, such a sublease may result in losses to BKF during
all or a portion of such sublease period.

Other operating expenses were $7.14 million for the six months ended June
30, 2002, reflecting a 17.2% increase from $6.09 million in the same period in
2001. The increase was primarily attributable to increases in (i) professional
fees relating to investment and technology consultants and third party
marketers, (ii) professional and consulting fees relating to BKF's public
company structure and (iii) telecommunications and portfolio management software
expense, which increases as the number of wrap accounts increases. These
increases were partially offset by a decrease in reimbursements to certain
client accounts in connection with trading activities during 2001.

Amortization of intangibles was $3.50 million for the six months ended June
30, 2002, reflecting a decrease of 32.8% from $5.22 million in the same period
in 2001. This decrease is attributable to (i) the fact that goodwill is longer
being amortized, pursuant to Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," and (ii) the expiration in the
second of quarter of 2001 of employment agreements that were being amortized
under the purchase method of accounting in connection with the acquisition of
Levco by BKF in 1996.

Operating Income

Operating income for the six months ended June 30, 2002 was $478,000,
reflecting an 85.5% decline from $3.29 million in the same period in 2001, as
the decrease in revenues exceeded the decrease in expenses. Operating income
excluding the amortization of intangibles was $3.98 million for the six months
ended June 30, 2002, reflecting a decrease of 53.2% from $8.51 million in the
same period in 2001.

Gain (Loss) on Investments

For the six months ended June 30, 2002, BKF had a net realized and
unrealized loss on investments of $501,000 derived from its seed capital
investments in a range of long only and alternative investment strategies. Such
investments yielded a net realized and unrealized gain of $693,000 for the same
period in 2001.

Interest and Dividend Income

Interest and dividend income for the six months ended June 30, 2002 was
$321,000, reflecting a 51.7% decrease from $664,000 in the same period in 2001.
This decrease is primarily attributable to a decrease in interest rates.

15

Income Taxes

Income tax expense was $1.70 million for the six months ended June 30,
2002, reflecting a decrease of 63.0% from $4.60 million for the same period in
2001. This decrease primarily reflects the decrease in income before taxes (as
determined without a deduction for the amortization of intangibles). An
effective tax rate of 44.8% (before amortization) was used to make the
determination with respect to the provision for taxes at June 30, 2002, while an
effective tax rate of 47.5% (before amortization) was used to calculate the
provision for taxes at June 30, 2001. The differential in tax rates is due to
state allocations and decrease in the statutory rate.

LIQUIDITY AND CAPITAL RESOURCES

BKF's current assets as of June 30, 2002 consist primarily of cash, short
term investments and advisory fees receivable.

While BKF's daily business operations are not generally capital intensive,
BKF utilizes capital to develop and seed new investment products. The
development of new products is an important element in BKF's business plan, and
such seed capital investments may require substantial financial resources. Due
to its relatively small size, BKF may consider a number of options to obtain
such seed capital. BKF has historically met its cash and liquidity needs through
cash generated by operating activities. At June 30, 2002, BKF had cash and cash
equivalents of $33.68 million, compared to $41.83 million at December 31, 2001.
This decrease primarily reflects the payment of cash bonuses in 2002 which were
accrued in 2001 and the use of cash to invest in affiliated investment
partnerships, which payment and investments were partially offset by the
collection of receivables and the annual withdrawal of general partner incentive
allocations from affiliated investment partnerships. The decrease in investment
advisory fees receivable from $27.83 million at December 31, 2001 to $17.62
million at June 30, 2002 primarily reflects the receipt of incentive fees earned
in 2001. The increase in investments in affiliated investment partnerships from
$17.53 million at December 31, 2001 to $18.44 million at June 30, 2002 primarily
reflects (i) the $6.2 million of seed capital investments made in alternative
investment strategies during the period and (ii) the accrual of general partner
incentive allocations for the six month period ended June 30, 2002. These
amounts were partially offset by the withdrawal of general partner incentive
allocations from the affiliated investment partnerships earned with respect to
2001. Incentive allocations typically are withdrawn within three months
following the end of the calendar year to pay compensation and other expenses.

Investments in securities at June 30, 2002 were $1.21 million, as compared
to $2.78 million at December 31, 2001. This decrease is primarily attributable
to the liquidation of the long only financial services seed capital portfolio in
the first quarter of 2002 as well as to the negative performance of BKF's seed
capital portfolios.

Accrued expenses were $3.45 million at June 30, 2002, as compared to $4.39
million at December 31, 2001. This decrease is primarily the result of the
payment of accrued third party marketing fees that were contingent on the
receipt of incentive fees and general partner incentive allocations. These
payments were partially offset by accruals for third party marketing fees
contingent on the receipt of incentive fees and general partner incentive
allocations determined with respect to performance in the six month period ended
June 30, 2002.

Accrued bonuses were $18.47 million at June 30, 2002, as compared to $37.61
million at December 31, 2001, reflecting the payment of 2001 bonuses and the
accrual for 2002 bonuses.

Based upon BKF's current level of operations and anticipated growth, BKF
expects that cash flows from operating activities will be sufficient to finance
its working capital needs for the foreseeable future. Except for its lease
commitments, which were discussed in Note 7 in the Notes to Consolidated
Financial Statements in BKF's Annual Report on Form 10-K for the period ended
December 31, 2001, BKF has no material commitments for capital expenditures. BKF
does anticipate incurring costs in connection with improving its facilities
currently under lease, which costs will be amortized over the life of the lease.

16

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Since BKF's revenues are largely driven by the market value of Levco's
assets under management, these revenues are exposed to fluctuations in the
equity markets. Management fees for most accounts are determined based on the
market value of the account on the last day of the quarter, 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 regards to wrap). Furthermore, since Levco manages most
of its assets in a large cap value style, a general decline in the performance
of value stocks could have an adverse impact on Levco's revenues. Similarly, a
lack of opportunity to implement, or a failure to successfully implement,
Levco's event-driven strategy, could reduce performance based incentive fees and
allocations and thereby negatively impact BKF's 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 16, 2002, BKF held its Annual Meeting of Stockholders. At the Annual
Meeting, J. Barton Goodwin, John A. Levin and Burton G. Malkiel were elected to
serve as directors of BKF. Anson M. Beard, Jr., David D. Grumhaus, 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, ratifying the appointment of Ernst & Young LLP as BKF's independent
auditors, and proposal 3, 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 board of directors recognizes the stockholder vote in
favor of proposal 3 and continues to believe that the Plan supports the
objectives of preserving and maximizing the Company's value for all
stockholders.

The voting on the above matters is set forth below:

Proposal 1

Proposal 2 -- There were 5,951,471 votes for, 7,549 votes against, and 31,821
abstentions.

Proposal 3 -- There were 2,895,816 votes for, 1,485,334 votes against, and
17,191 abstentions.

ITEM 5. OTHER INFORMATION

This Quarterly Report on Form 10-Q contains certain statements that are not
historical facts, including, most importantly, information concerning possible
or assumed future results of operations of BKF and

17

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: 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 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.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

None

(b) Reports on Form 8-K

None

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SIGNATURES

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

BKF CAPITAL GROUP, INC.

By: /s/ JOHN A. LEVIN
------------------------------------
John A. Levin
Chairman, Chief Executive Officer
and President

By: /s/ GLENN A. AIGEN
------------------------------------
Glenn A. Aigen
Senior Vice President and
Chief Financial Officer

Date: August 14, 2002

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