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 SEPTEMBER 30, 2003

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)

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 [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

As of October 31, 2003, 6,678,602 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
1

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

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

See accompanying notes
2

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

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

See accompanying notes
3

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, 2002. 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"), JALCO's two wholly-owned
subsidiaries, Levco GP Inc. ("Levco GP") and LEVCO Securities, Inc. ("LEVCO
Securities") and certain affiliated investment partnerships for which the
Company is deemed to have controlling interest of the applicable partnership.
Three investment partnerships were consolidated at September 30, 2003 and five
were consolidated at December 31, 2002. In addition, the operations of two
investment partnerships (which were terminated in March 2003) were included in
the consolidated statements of operations and cash flows for the nine month
period ended September 30, 2003. The operations of one additional investment
partnership (which was terminated in September 2002) was included in the
consolidated statement of operations and cash flows for the nine months ended
September 30, 2002. 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.

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

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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

applicable. Such accruals may be reversed as the 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.

REVENUE RECOGNITION POLICIES FROM 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.

COMPREHENSIVE INCOME

The Company has not presented consolidated statements of comprehensive
income in accordance with SFAS No. 130 "Reporting Comprehensive Income," because
it does not have any items of "other comprehensive income".

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS

Levco GP serves as the managing general partner for several affiliated
investment partnerships ("AIP"), which primarily engage in the trading of
publicly traded equity securities. 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 and
certain partnerships whereby Levco GP is deemed to have a controlling interest
in the partnership (see note 4). The limited partners of the AIP have the right
to redeem their partnership interests at least quarterly. Additionally, the
unaffiliated limited partners of the AIP may terminate Levco GP as the general
partner of the AIP at any time. Levco GP does not maintain control over the
unconsolidated AIP, has not guaranteed any of the AIP obligations, nor does it
have any contractual commitments associated with them. Investments in
unconsolidated AIP held through Levco GP, are recorded based upon the equity
method of accounting. This investment amount in the unconsolidated AIP equals
the sum total of Levco GP's capital accounts, including incentive allocations,
in the AIP. Each AIP values their underlying investments in accordance with
policies as described in each of their 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. Levco GP has general partner liability with respect to its
interest in each of the AIP and has no assets in the AIP other than its interest
in these partnerships.

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
(which have been fully amortized) in the
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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 is no longer amortized but is subject to an impairment
test at least annually or when indicators of potential impairment exist in
accordance with SFAS No. 142. Other intangible assets with finite lives are
amortized over their useful lives.

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 earnings (loss) per share for the three and nine
months ended September 30, 2003, common stock equivalents of 2,211,136 were
excluded due to their anti-dilutive effect on the calculations, while 536,520
and 1,503,922 common stock equivalents were excluded due to their anti-dilutive
effect on the calculations for the corresponding periods in 2002.

STOCK-BASED COMPENSATION

The Company follows SFAS No. 123, "Accounting for Stock-Based
Compensation," and has adopted the intrinsic value method under APB Opinion No.
25, "Accounting for Stock Issued to Employees," for all arrangements under which
employees receive shares of stock or other equity instruments of the Company, or
if the Company incurs liabilities to employees in amounts based on the price of
its stock. Under APB Opinion No. 25, no compensation costs were recognized
relating to the option grants because the exercise prices of the options awarded
were equal to the fair market price of the common stock on the dates of the
grants.

In December 2002, the Financial Accounting Standards Board ("FASB") Issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures about
the method of accounting for stock-based

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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

compensation. The Company has elected to apply the disclosure provisions of SFAS
No. 123. See note 7 for 2003 Restricted Stock Units ("RSU") activity.

The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 (dollar amounts in thousands, except per share amounts):

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.

INVESTMENTS IN UNAFFILIATED INVESTMENT PARTNERSHIPS

The Company's investments in unaffiliated investment partnerships result
from the consolidation of an affiliated investment partnership that invests in
unaffiliated investment partnerships. Investments in unaffiliated investment
partnerships are recorded at fair value, which generally is equal to the CAP pro
rata interest in the net assets of each unaffiliated investment partnership
(based upon the net asset values reported by the unaffiliated investment
partnerships).

MINORITY INTEREST

Minority interests in the accompanying consolidated statements of financial
condition represent the minority owners' share of the equity of consolidated
investment partnerships as of the consolidated statements of financial condition
dates. Minority interest in the accompanying consolidated statements of
operations represents the minority owners' share of the income or loss of
consolidated investment partnerships.

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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PARTNER CONTRIBUTIONS AND WITHDRAWALS

Typically, contributions are accepted monthly and withdrawals are made
quarterly upon the required notification period having been met. The
notification period ranges from thirty to sixty days.

RECLASSIFICATIONS

Certain prior period amounts reflect reclassifications to conform to
current period presentation.

RECENT ACCOUNTING DEVELOPMENTS

In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and hedging
relationships designated after June 30, 2003. The Company though its CAP has
adopted this statement, which does not have a material impact on the Company's
financial statements.

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
after June 15, 2003. Under SFAS No. 150 certain financial instruments shall be
classified as a liability on the issuer's financials statements. The Company has
adopted this statement, which does not have a material impact on the Company's
financial statements.

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,
however, LEVCO Securities does not accept orders with respect to client accounts
if the funds required for the client to meet its obligations are not on deposit
in the client account at the time the order is placed. In the event a customer
is unable to fulfill its contractual obligation to the clearing broker, LEVCO
Securities may be exposed to off-balance sheet risk.

In the normal course of business, the consolidated affiliated investment
partnerships enter into transactions in various financial instruments, including
derivatives, for trading purposes, in order to reduce their exposure to market
risk. These transactions include option contracts and securities sold short.

Substantially all of the CAP cash and securities positions are deposited
with one clearing broker for safekeeping purposes. The broker is a member of
major securities exchanges.

3. INVESTMENT ADVISORY AND INCENTIVE FEES RECEIVABLE

Included in investment advisory and incentive fees receivable are
approximately $19.1 million and $2.9 million of accrued incentive fees as of
September 30, 2003 and December 31, 2002, 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.

4. CONSOLIDATION OF CAP

In January 2003, the FASB issued Financial Interpretation No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 addresses the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to variable interest entities ("VIE"). The interpretation provides
a framework for determining whether an entity should be evaluated for
consolidation based on voting interests or significant
8

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial support provided to the entity ("variable interests"). FIN 46
generally would require that the assets, liabilities and results of operations
of a VIE be consolidated into the financial statements of the enterprise that is
the primary beneficiary.

An entity is classified as a VIE if (a) total equity is not sufficient to
permit the entity to finance its activities without additional subordinated
financial support or (b) its equity investors lack (i) the direct or indirect
ability to make decisions about an entity's activities through voting rights or
absorb the expected losses of the entity if they occur or (ii) the right to
receive the expected residual returns of the entity if they occur. Once an
entity is determined to be a VIE, its assets, liabilities and results of
operations should be consolidated with those of its primary beneficiary. The
primary beneficiary of a VIE is the entity which either will absorb a majority
of the VIE's expected losses or has the right to receive a majority of the VIE's
expected residual returns. The expected losses and residual returns of a VIE
include expected variability in its net income or loss, fees to decision makers
and fees to guarantors of substantially all VIE assets or liabilities.

A public enterprise with a variable interest in a VIE created before
January 31, 2003, shall apply FIN No. 46 to that VIE as of the beginning of the
first interim or annual reporting period beginning after June 15, 2003. The
Company has adopted FIN No. 46 for the applicable periods presented. In the
context of making determinations pursuant to FIN No. 46, BKF has also decided to
consolidate certain affiliated investment partnerships in which it may be deemed
to have a controlling interest (see note 1). The consolidation of these
partnerships does not impact the Company's equity or net income. Levco GP has
general partner liability with respect to its interest in each of the CAP.

9

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following tables represent the consolidation of the CAP with BKF as of
September 30, 2003 and December 31, 2002 (dollar amounts in thousands):

10

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS AND RELATED REVENUE

Summary financial information, including the Company's carrying value and
income from the non-consolidated AIP is as follows (dollar amounts in
thousands):

Included in investments in AIP at September 30, 2003 are accrued but
unearned incentive allocations approximating $6.5 million and $7.4 million of
earned incentive allocations at December 31, 2002.

Included in the Company's incentive fees and general partner incentive
allocations are approximately $1.9 million and $3.3 million payable directly to
employee owned and controlled entities ("Employee Entities") for the three
months ended September 30, 2003 and 2002, and $5.2 million and $5.6 million for
the nine months ended September 30, 2003 and 2002, respectively. 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 the liability for all compensation expense
relating to the allocated revenue, amounting to approximately $1.9 million and
$3.3 million for the three months ended September 30, 2003 and 2002, and $5.2
million and $5.6 million for the nine months ended September 30, 2003 and 2002,
respectively. These amounts are included in the Consolidated Statement of
Operations.

The Company recorded investment advisory fees and incentive
allocations/fees from affiliated domestic investment partnerships and affiliated
offshore investment vehicles of approximately $15.5 million and $15.7 million
for the three months ended September 30, 2003, and 2002, and $39.8 million and
$30.9 million for the nine months ended September 30, 2003 and 2002,
respectively.

Included in investment advisory and incentive fees receivable at September
30, 2003 and December 31, 2002 are $2.6 million and $2.7 million, respectively,
of advisory fees from AIP and sponsored offshore vehicles. Also included in
investment advisory and incentive fees receivable are $18.5 million and $13.1
million of incentive fees from sponsored offshore investment vehicles (similar
to several domestic AIP) at September 30, 2003 and December 31, 2002,
respectively.

6. 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, unrealized losses on investments, depreciation, accrued
lease amendment expense, and utilization of capital losses. Deferred tax
liabilities arise from deferred revenues, unrealized gains on investments, and
state and local taxes.

12

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. NON-CASH TRANSACTIONS (INCLUDING RSU ACTIVITY)

On December 11, 2002 the Company commenced a tender offer to exchange
333,308 outstanding options for RSU, on a three for one exchange basis. On
January 10, 2003 the tender offer was completed, with a total of 111,105 RSU
being granted in exchange for the options tendered. The RSU will vest in two
annual installments with fifty percent (50%) vesting on December 31, 2003 and
fifty percent (50%) vesting on December 31, 2004. The Company will recognize
$2.0 million of compensation expense related to the RSU over the two-year
vesting period.

In January 2002, the Company granted a total of 168,213 RSU to employees
with a value of approximately $4.7 million.

In January 2003, the Company granted 10,500 RSU to non-employee directors
of the Company with a value of approximately $192,000. This was granted in lieu
of cash payments for Board of Directors and Committee meetings.

In March 2003, certain executive officers of the Company, who are subject
to performance based criteria with regard to their 2002 compensation, and
several employees were granted 347,365 RSU with a value of approximately $5.7
million.

In May 2003, the Company granted 165,700 RSU to several employees with a
value of approximately $2.7 million. In addition, the Company granted 1,125 RSU
to a newly elected non-employee director of the Company with a value of
approximately $18,000. This was granted in lieu of cash payments for Board of
Directors and Committee meetings.

After giving effect for the 2003 RSU activity, the Company has
approximately 228,000 shares available for future grants under the Incentive
Compensation plan as of September 30, 2003. In addition, the Company has the
authority to buy back up to 700,000 shares of BKF stock in the open market which
may be used as compensation under the Incentive Compensation plan (subject to
Board approval).

In November 2003 and January 2004, 635,257 RSU are due to be delivered of
which 383,881 were elected to be deferred until November 2004 and January 2005
under the Company's employee compensation plan.

8. LEASE AMENDMENT

The Company accrued a $5 million expense for a lease amendment related to
the surrender of approximately 21,000 square feet (see note 9). The expense will
be paid out over the remaining life of the Company's primary office lease, which
expires on September 30, 2011. The expense was calculated by taking the total
estimated future obligations and discounting it by an imputed interest rate of
6%. The estimated monthly payments will be approximately $65,000.

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BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. SUBSEQUENT EVENTS

On October 10, 2003, the Company entered a lease amendment surrendering
approximately 21,000 square feet, effective November 1, 2003, and assumed rental
obligations for approximately 7,000 square feet for the period March 1, 2004
through November 30, 2008. In connection with this amendment the Company accrued
expenses related to the space surrendered (see note 8). The amended office space
obligations require monthly payments plus escalations through September 2011. At
September 30, 2003, the minimum annual rental commitments under the Company's
operating leases are as follows (dollar amounts in thousands):

2003 remainder.............................................. $ 784
2004........................................................ 2,968
2005........................................................ 3,002
2006........................................................ 3,019
2007........................................................ 3,086
Thereafter.................................................. 13,831

14

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. 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 several 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 asset-based fee paid by the clients who select Levco to manage
their accounts through the program.

At September 30, 2003, assets under management were $11.67 billion, up from
$10.97 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 subsidiary of National Financial Services,
LLC, 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.

15

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.

LEVCO IS DEPENDENT ON KEY PERSONNEL

Levco is largely dependent on the efforts of its senior investment
professionals managing the value equity strategies and the event driven and
short-biased 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. 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 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, as amended, are made by the Compensation Committee of the board of
directors of BKF on a regular basis. Because BKF is a relatively small public
company, the value of the equity awards that may be offered to professionals may
be limited relative to what competitors may offer. If the price of BKF stock
decreases, no assurance can be given that the equity-based compensation will
serve its purpose to attract and retain talented professionals.

LEVCO IS DEPENDENT ON A LIMITED NUMBER OF INVESTMENT PRODUCTS

Levco currently derives most of its revenues from three particular
investment products -- a large cap value strategy, an event-driven alternative
investment product and a short-biased alternative investment product. While the
large cap value strategy and the short-biased alternative investment products
may often perform differently in a given investment environment, adverse
developments with regard to any 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.

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

16

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.

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

ADVERSE DEVELOPMENTS WITH REGARD TO SIGNIFICANT CUSTOMERS OR RELATIONSHIPS
COULD ADVERSELY AFFECT LEVCO'S REVENUES

As of September 30, 2003, Levco's value equity strategies had approximately
280 customers (counting as single customers each wrap fee program and related
family and institutional accounts), of which the ten largest customers generated
approximately $13.3 million of investment advisory fees in the first nine months
of 2003, or approximately 30% of BKF's asset-based investment advisory fees.

The five largest value equity customers accounted for approximately 25% of
all asset-based investment advisory fees earned in the first nine months of
2003. The loss of any of these customers could have an adverse effect on BKF's
revenues.

In the institutional marketplace, consultants play a key role in selecting
investment managers for their clients. In the event that a consultant advising
current clients of Levco takes a negative view of Levco, Levco could lose a
number of accounts related to that consultant.

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 registered 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 subject to
termination 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.

LEVCO IS A RELATIVELY SMALL PUBLIC COMPANY IN A HIGHLY COMPETITIVE BUSINESS

Levco competes with a large number of domestic and foreign investment
management firms, commercial banks, insurance companies, broker-dealers and
other firms offering comparable investment services. Many of the financial
services companies with which Levco competes have greater resources and assets
under management than Levco does and offer a broader array of investment
products and services.

Management believes that the most important factors affecting 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

17

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 their relevant benchmarks 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 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, conflicting investment positions may develop among various investment
strategies managed by Levco. Although Levco has internal policies in place to
address such situations, such conflicts could have adverse effects on Levco.

GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT LEVCO'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, as amended. The
Investment Advisers Act imposes numerous obligations on registered investment
advisers, including fiduciary, recordkeeping, operational and disclosure
obligations. John A. Levin & Co. is also registered with the Commodity Futures
Trading Commission as a commodity trading advisor and a commodity pool operator,
and Levco GP, Inc. 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, Inc. 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 and operations and its ability to conduct certain
businesses in which it is currently engaged.

18

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, 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
incurred lease obligations with regard to this location through September 2011.
BKF does have a business continuity facility in Stamford, Connecticut
encompassing approximately 5,000 square feet.

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."

RESULTS OF OPERATIONS

The following discussion and analysis of the results of operations is based
on the Consolidated Statements of Financial Condition and Consolidated
Statements of Operations for BKF Capital Group, Inc. and Subsidiaries. It should
be noted that certain affiliated investment partnerships in which BKF may be
deemed to have a controlling interest have been consolidated. The number and
identity of the partnerships being consolidated may change over time as the
percentage interest held by BKF and its affiliates in affiliated partnerships
changes. The assets, liabilities and related operations of these partnerships
and related minority interest have been reflected in the consolidated financial
statements for the three and nine month periods ended September 30, 2003 and
September 30, 2002, respectively. The consolidation of the partnerships does not
impact BKF's equity or net income.

THREE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002

Revenues

Total revenues for the third quarter of 2003 were $26.92 million,
reflecting an increase of 1.2% from $26.60 million in revenues in the same
period in 2002. This increase was primarily attributable to (i) a net realized
and unrealized gain on investments from consolidated investment partnerships of
$596,000 in the third quarter of 2003 as compared to a loss of $1.29 million in
the same period in 2002. The gains/losses on investments from consolidated
investment partnerships include minority interests, i.e., the portion of the
gains or losses generated by the partnerships allocable to all partners other
than Levco GP, Inc., which are separately identified on the consolidated
statements of operations.

Investment advisory fees were $15.58 million in the third quarter of 2003,
reflecting a 7.8% increase from $14.45 million in the same period in 2002. The
increase in asset-based advisory fees is primarily attributable to the increase
in assets managed pursuant to event driven and long/short equity strategies,
which was partly offset by a decrease in assets managed in value equity
strategies (primarily as a result of the decline in assets managed in wrap
programs).

Incentive fees and allocations were $9.89 million in the third quarter of
2003, reflecting an 18.2% decrease from $12.09 million in the same period in
2002. This decrease was primarily attributable to a decrease in the performance
of accounts managed according to short-biased equity strategies, which was
partly offset by increased incentive fees and general partner incentive
allocations generated by event-driven and long/short equity accounts. 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.

Management believes that with regard to the value equity strategies, their
underperformance relative to their benchmarks in 2002 has adversely affected
BKF's ability to retain existing accounts and attract new accounts with respect
to its value equity products. In April 2003, Levco was notified that as of June
20, 2003 it would no longer be able to participate in a wrap fee program. As a
result, Levco lost approximately

19

$175 million in wrap program assets from such program in May and June 2003. In
addition, in June 2003, the wrap program through which Levco managed
approximately 83% of its wrap program assets as of September 30, 2003 changed
the status of Levco so that Levco may continue to accept additional
contributions from existing accounts but may not open new accounts in the
program. The duration of this change in status is indefinite.

Net commission income generated by the broker-dealer business declined
48.1% to $481,000 in the third quarter of 2003 from $927,000 in the third
quarter of 2002, primarily as the result of a decrease in the number of accounts
at the broker-dealer and a decrease in commission rates.

In the third quarter of 2003, BKF had a net realized and unrealized gain on
investments of $200,000 derived from its seed capital investments in
non-consolidated investment vehicles pursuing alternative investment strategies.
In the third quarter of 2002, BKF had a net realized and unrealized gain of
$8,000 on investments in various long only and alternative investment strategies
(excluding investments in consolidated investment partnerships).

Interest income in the third quarter of 2003 (excluding consolidated
investment partnerships) was $99,000, reflecting a 38.5% decrease from $161,000
in the same period in 2002. This decrease is primarily attributable to a
decrease in interest rates.

Interest and dividend income from consolidated investment partnerships in
the third quarter of 2003 was $81,000, reflecting a 68.6% decrease from $258,000
in the same period in 2002. This decrease is primarily attributable to the
decrease in the number, and the corresponding decrease in the assets under
management, of the affiliated partnerships being consolidated.

Expenses

Total expenses for the third quarter of 2003 were $32.92 million,
reflecting an increase of 26.2% from $26.09 million in expenses in the same
period in 2002. Total expenses excluding amortization of finite life intangibles
were $31.17 million in the third quarter of 2003, reflecting an increase of
28.1% from $24.33 million for the third quarter of 2002. This increase in
expenses resulted primarily from a $5.13 million expense taken in the third
quarter of 2003 related to a lease amendment that was probable and estimable as
of September 30, 2003 (and entered into in October 2003). Under the amendment,
BKF relinquished space and reduced its rent expense by approximately $4.4
million over the remaining term of the lease. Through a lease amendment dated
September 28, 2001, BKF took the opportunity to obtain an additional 16,000
square feet of space on a floor that was contiguous with its investment and
trading operations. Believing that such space provided BKF with important
advantages in developing its business, BKF sought to relinquish non-contiguous
space elsewhere in the building. The expense accrual was calculated based on the
net present value of the payments representing the difference between the
amounts that BKF was obligated for on the space it relinquished and the amounts
the landlord will receive from the tenant succeeding BKF in the relinquished
space.

Compensation expense was $21.31 million in the third quarter of 2003,
reflecting an increase of 15.6% from $18.43 million in the same period in 2002.
This increase in compensation expense is primarily attributable to an increase
in the percentage of revenues paid as compensation with respect to certain
alternative investment products, restricted stock units granted in 2002 and 2003
(including restricted stock units granted in exchange for options), and an
increase in the percentage of revenues attributable to alternative investment
strategies. Compensation with regard to alternative investment products is
determined on a different basis than compensation with regard to value equity
products. Compensation expense accruals were made in accordance with
compensation guidelines most recently approved by the board of directors in
2001, but in view of market and business conditions, it is anticipated that such
compensation guidelines will be reviewed. Such review could result in changes in
the manner in which bonus compensation is determined in 2003.

Occupancy and equipment rental was $1.62 million in the third quarter of
2003, reflecting a 10.7% increase from $1.46 million in the same period in 2002.
This increase is attributable to (i) escalations in the

20

lease for the facilities at One Rockefeller Plaza, (ii) real estate tax
increases, and (iii) the lease for a business continuity facility in Stamford,
Connecticut that commenced in September 2002.

Other operating expenses were $3.08 million in the third quarter of 2003,
reflecting a 28.7% decrease from $4.32 million in the same period in 2002. This
decrease was primarily attributable to (i) a decrease in fees to third party
marketers for alternative investment products (reflecting a corresponding
decrease in revenues attributable to assets raised by such third party
marketers) and (ii) decreases in technology and other consulting fees. These
decreases were partly offset by increased insurance premiums.

Other operating expenses from consolidated limited partnerships were
$39,000 in the third quarter of 2003, reflecting a 66.9% decrease from $118,000
in the same period in 2002. These expenses are primarily comprised of auditing,
tax preparation and legal fees borne directly by the consolidated investment
partnerships, and the decrease in such expenses primarily reflects the decrease
in the number of partnerships being consolidated during the respective periods.

Operating Income (Loss)

Operating loss for the third quarter of 2003 was $6.00 million, as compared
to operating income of $514,000 in the same period in 2002. Excluding (i) net
realized and unrealized gain on investments and interest and dividend income
(including the portions attributable to consolidated investment partnerships),
(ii) the amortization of finite life intangibles, and (iii) lease amendment
expense, there was an operating loss in the third quarter of 2003 of $95,000, as
compared to operating income of $3.13 million in the same period in 2002.

Income Taxes

BKF received an income tax benefit of $2.17 million in the third quarter of
2003, as compared to income tax expense of $1.53 million for the same period in
2002. This tax benefit reflects the loss (as determined without a deduction for
the amortization of intangibles) primarily generated by the lease amendment
expense accrual. An effective tax rate of 46.1% (before amortization) was used
to make the determination with respect to the provision for taxes for the three
months ended September 30, 2003, while an effective tax rate of 44.4% (before
amortization) was used to calculate the provision for taxes for the three months
ended September 30, 2002. The differential in tax rates is primarily due to
differences in state allocations.

NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002

Revenues

Total revenues for the nine months ended September 30, 2003 were $73.84
million, reflecting an increase of 9.4% from $67.48 million in revenues in the
same period in 2002. This increase was primarily attributable to a net realized
and unrealized gain on investments from consolidated investment partnerships of
$1.76 million in the nine months ended September 30, 2003 as compared to a loss
of $5.00 million in the same period in 2002. The gains/losses on investments in
consolidated investment partnerships include minority interests, i.e., the
portion of the gains or losses generated by the partnerships allocable to all
partners other than Levco GP, Inc., which are separately identified on the
consolidated statements of operations.

Investment advisory fees in the nine months ended September 30, 2003 were
$43.83 million, reflecting an 8.4% decrease from $47.85 million in the same
period in 2002. This decrease in asset-based advisory fees is primarily
attributable to a decrease in assets managed for value equity accounts (as the
result of net withdrawals and investment performance), which was partly offset
by an increase in assets under management and investment advisory fees for event
driven and long/short equity strategies.

Incentive fees and allocations in the nine months ended September 30, 2003
were $25.45 million, reflecting a 20.5% increase from $21.13 million in the same
period in 2002. This increase was primarily attributable to increased assets
under management in event driven and long/short equity strategies.

21

Net commission income generated by the broker-dealer business declined
37.1% to $1.47 million for the nine months ended September 30, 2003 from $2.34
million in the same period in 2002, primarily as the result of a decrease in the
number of accounts at the broker-dealer and a decrease in commission rates.

In the nine months ended September 30, 2003, BKF had a net realized and
unrealized gain on investments of $706,000 primarily derived from its seed
capital investments in non-consolidated investment vehicles pursuing alternative
investment strategies. In the nine months ended September 30, 2002, BKF had a
net realized and unrealized loss of $102,000 on investments in various long only
and alternative investment strategies (excluding investments in consolidated
investment partnerships).

Interest income in the nine months ended September 30, 2003 (excluding
consolidated investment partnerships) was $328,000, reflecting a 31.2% decrease
from $477,000 in the same period in 2002. This decrease is primarily
attributable to a decrease in interest rates.

Interest and dividend income from consolidated investment partnerships in
the nine months ended September 30, 2003 was $295,000, reflecting a 62.5%
decrease from $786,000 in the same period in 2002. This decrease is primarily
attributable to the decrease in the number, and the corresponding decrease in
the assets under management, of the affiliated partnerships being consolidated.

Expenses

Total expenses for the nine months ended September 30, 2003 were $80.39
million, reflecting an increase of 15.4% from $69.65 million in expenses in the
same period in 2002. Total expenses excluding amortization of finite life
intangibles were $75.14 million in the nine months ended September 30, 2003,
reflecting an increase of 16.7% from $64.39 million in the same period in 2002.
This increase in expenses resulted primarily from a $7.53 million increase in
compensation expense and a $5.13 million lease amendment expense taken in the
third quarter of 2003.

Compensation expense was $55.80 million for the nine months ended September
30, 2003, reflecting an increase of 15.6% from $48.27 million in the same period
in 2002. This increase in compensation expense is primarily attributable to an
increase in the percentage of revenues paid as compensation with respect to
certain alternative investment products, restricted stock units granted in 2002
and 2003 (including restricted stock units granted in exchange for options), an
increase in the percentage of revenues attributable to alternative investment
strategies, and the expansion of the investment teams involved in managing
alternative investment strategies. Compensation with regard to alternative
investment products is determined on a different basis than compensation with
regard to value equity products. Compensation expense accruals were made in
accordance with compensation guidelines most recently approved by the board of
directors in 2001, but in view of market and business conditions, it is
anticipated that such compensation guidelines will be reviewed. Such review
could result in changes in the manner in which bonus compensation is determined
in 2003.

Occupancy and equipment rental was $4.79 million in the first nine months
of 2003, reflecting a 9.9% increase from $4.36 million in the same period in
2002. This increase is attributable to (i) escalations in the lease for the
facilities at One Rockefeller Plaza, (ii) real estate tax increases, and (iii)
the lease for a business continuity facility in Stamford, Connecticut that
commenced in September 2002.

Other operating expenses were $9.27 million in the first nine months of
2003, reflecting a 19.2% decrease from $11.47 million in the same period in
2002. The decrease was primarily attributable to (i) a decrease in fees to third
party marketers for alternative investment products (reflecting a corresponding
decrease in revenues attributable to assets raised by such third party
marketers) and (ii) decreases in technology and other consulting fees. These
decreases were offset by increased insurance premiums.

Other operating expenses from consolidated limited partnerships were
$146,000 in the nine months ended September 30, 2003, reflecting a 49.5%
decrease from $289,000 in the same period in 2002. These expenses are primarily
comprised of auditing, tax preparation and legal fees expenses borne directly by
the consolidated investment partnerships. The decrease resulted primarily from
the decrease in the number of partnerships being consolidated during the
respective periods.

22

Operating Loss

Operating loss for the nine months ended September 30, 2003 was $6.55
million, as compared to an operating loss of $2.17 million in the same period in
2002. Excluding (i) net realized and unrealized gain on investments and interest
and dividend income (including the portions attributable to consolidated
investment partnerships), (ii) the amortization of finite life intangibles, and
(iii) lease amendment expense, there was operating income in the nine months
ended September 30, 2003 of $742,000, reflecting an 89.3% decrease from
operating income of $6.92 million in the same period in 2002.

Income Taxes

BKF received an income tax benefit of $1.18 million in the nine months
ended September 30, 2003, as compared to income tax expense of $3.23 million for
the same period in 2002. This tax benefit reflects the loss (as determined
without a deduction for the amortization of intangibles) primarily generated by
the lease amendment expense. An effective tax rate of 45.9% (before
amortization) was used to make the determination with respect to the provision
for taxes for the nine months ended September 30, 2003, while an effective tax
rate of 44.6% (before amortization) was used to calculate the provision for
taxes for the nine months ended September 30, 2002. The differential in tax
rates is due to state allocations.

LIQUIDITY AND CAPITAL RESOURCES

BKF's current assets as of September 30, 2003 consist primarily of cash,
short term investments and investment advisory and incentive 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 September 30, 2003, BKF had cash and cash
equivalents of $45.86 million, compared to $39.15 million at December 31, 2002.
This increase primarily reflects the withdrawal of seed capital from affiliated
investment partnerships, the collection of receivables and the annual withdrawal
of general partner incentive allocations from affiliated investment
partnerships, which were partly offset by payment of cash bonuses in 2003 which
were accrued in 2002. The increase in investment advisory and incentive fees
receivable from $24.15 million at December 31, 2002 to $29.06 million at
September 30, 2003 primarily reflects the accrual of incentive fees, which was
partly offset by the receipt in 2003 of incentive fees earned in 2002.

The decrease in investments in securities from $1.05 million at December
31, 2002 to $377,000 at September 30, 2003 reflects the return of capital
relating to the liquidation of the Van Eck Levin Mid Cap Value Fund during the
second quarter, as BKF ceased the development of its mid cap value effort. The
decrease in investments in securities from consolidated limited partnerships
from $17.81 million at December 31, 2002 to $14.65 million at September 30,
2003, and the decrease in due from broker from consolidated limited partnerships
from $31.75 million at December 31, 2002 to zero at September 30, 2003 reflects
(i) the liquidation in the first quarter of 2003 of two investment partnerships
and (ii) the de-consolidation of an investment partnership as of January 1,
2003. The increase in prepaid expenses and other assets to $2.49 million at
September 30, 2003 from $2.12 million at December 31, 2002 primarily reflects
the prepayment of insurance policies. The increase in investments in affiliated
investment partnerships from $9.38 million at December 31, 2002 to $16.59
million at September 30, 2003 primarily reflects the de-consolidation of an
affiliated investment partnership and the accrual of incentive allocations for
the nine months ended September 30, 2003, which were partly offset by the
withdrawal of general partner incentive allocations from the unconsolidated,
affiliated investment partnerships earned with respect to 2002. Incentive
allocations typically are withdrawn within three months following the end of the
calendar year to pay compensation and other expenses. Investments in
unaffiliated partnerships from consolidated limited partnerships, which rose
from $4.28 million at December 31, 2002 to $5.34 million at September 30, 2003
reflects investments made by a consolidated multi-manager, multi-strategy
investment partnership.

23

Accrued expenses were $3.65 million at September 30, 2003, as compared to
$5.21 million at December 31, 2002. The largest component of such expenses is
the accrual for third party marketing fees. Such fees are based on a percentage
of accrued revenue, and such accruals may be reversed based on the subsequent
investment performance of the relevant accounts through the end of the
applicable performance measurement period. Expenses accrued during the nine
months ended September 30, 2003 were offset primarily by the payment of accrued
third party marketing fees.

Accrued bonuses were $33.49 million at September 30, 2003, as compared to
$31.51 million at December 31, 2002, reflecting the payment of 2002 bonuses and
the accrual for 2003 bonuses.

The decrease in securities sold short from consolidated limited
partnerships from $9.40 million at December 31, 2002 to $365,000 at September
30, 2003 reflects (i) the liquidation in the first quarter of 2003 of two
investment partnerships and (ii) the de-consolidation of an investment
partnership as of January 1, 2003.

The increase in accrued incentive compensation to $8.00 million at
September 30, 2003 from $2.31 million at December 31, 2002 reflects the granting
of restricted stock units during the period.

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 are discussed in Note 9 in the Notes to the Consolidated
Financial Statements in BKF's Annual Report on Form 10-K for the year ended
December 31, 2002 and in Notes 8 and 9 in this Quarterly Report on Form 10-Q,
BKF has no material commitments for capital expenditures. BKF has capitalized
expenses of approximately $1.1 million in connection with improving its
facilities currently under lease and expects to spend approximately $1.5 million
more in connection with such improvements, which expenditures will be amortized
over the life of the lease.

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 regard to wrap program accounts). Furthermore, since
Levco manages most of its assets in a large cap value style, a general decline
in the performance of value stocks could have an adverse impact on Levco's
revenues. Similarly, a lack of opportunity to implement, or a failure to
successfully implement, Levco's event-driven and short-biased strategies 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.

ITEM 4. CONTROLS AND PROCEDURES

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

24

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

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

None

ITEM 5. OTHER INFORMATION

The Summary Compensation Table in the proxy statement filed under Schedule
14A by BKF with the Securities and Exchange Commission on April 16, 2003, and
incorporated by reference into the Company's Annual Report on Form 10-K for the
year ended December 31, 2002, understated the bonus compensation received by
Messrs. Levin, Rogers and Aigen by $491,846, $126,711 and $120,358,
respectively. A restated Summary Compensation Table follows:

SUMMARY COMPENSATION TABLE

- ---------------

(1) With respect to each of the Named Executive Officers, perquisites and other
benefits did not exceed the lesser of $50,000 or 10% of the total of annual
salary and bonus.

(2) All option grants were made under the Company's 1998 Incentive Compensation
Plan.

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(3) Represents grant date value of 161,725 RSUs granted on March 12, 2003 with
respect to 2002 bonus compensation. With respect to 71,320 of these RSUs,
one third will vest on each of December 31, 2003, December 31, 2004 and
December 31, 2005, but the delivery of the shares of common stock
underlying the RSUs will not occur until December 31, 2005, and delivery
can be deferred by the Named Executive Officer. With respect to the other
90,405 RSUs, such RSUs will vest on December 3, 2005, but the delivery of
shares of common stock underlying the RSUs may be deferred by the Named
Executive Officer.

As of December 31, 2002, Mr. Levin held an additional 85,917 RSUs with an
aggregate value of $1,516,435.

(4) Represents the grant date value of 71,413 restricted stock units ("RSUs")
granted on January 12, 2001 with respect to 2000 bonus compensation. The
shares underlying such RSUs may not be delivered prior to January 12, 2004.

(5) Represents grant date value of 41,573 RSUs granted on March 12, 2003 with
respect to 2002 bonus compensation. With respect to 13,240 of these RSUs,
one third will vest on each of December 31, 2003, December 31, 2004 and
December 31, 2005, but the delivery of the shares of common stock
underlying the RSUs will not occur until December 31, 2005, and delivery
can be deferred by the Named Executive Officer. With respect to the other
28,333 RSUs, such RSUs will vest on December 3, 2005, but the delivery of
shares of common stock underlying the RSUs may be deferred by the Named
Executive Officer.

In addition, as of December 31, 2002, Mr. Rogers held 65,048 RSUs with an
aggregate value of $1,148,097.

(6) Represents the grant date value of 65,048 RSUs granted on January 12, 2001
with respect to 2000 bonus compensation. The shares underlying such RSUs
may not be delivered prior to January 12, 2004.

(7) Represents grant date value of 26,110 RSUs granted on March 12, 2003 with
respect to 2002 bonus compensation. With respect to 6,110 of these RSUs,
one third will vest on each of December 31, 2003, December 31, 2004 and
December 31, 2005, but the delivery of the shares of common stock
underlying the RSUs will not occur until December 31, 2005, and delivery
can be deferred by the Named Executive Officer. With respect to the other
20,000 RSUs, such RSUs will vest on December 3, 2005, but the delivery of
shares of common stock underlying the RSUs may be deferred by the Named
Executive Officer.

As of December 31, 2002, Mr. Aigen held an additional 66,430 RSUs with an
aggregate value of $1,172,490.

(8) Represents the grant date value of 65,048 RSUs granted on January 12, 2001
with respect to 2000 bonus compensation. The shares underlying such RSUs
may not be delivered prior to January 12, 2004.

(9) Represents grant date value of 4,867 RSUs granted on March 12, 2003 with
respect to 2002 bonus compensation. The RSUs will vest on December 3, 2005,
but the delivery of shares of common stock underlying the RSUs may be
deferred by the Named Executive Officer.

As of December 31, 2002, Mr. Nissim held an additional 5,000 RSUs with an
aggregate value of $88,250.

(10) Represents the grant date value of 5,000 RSU's granted on January 12, 2001
with respect to 2000 bonus compensation. The shares underlying such RSU's
may not be delivered prior to January 12, 2004.

(11) Represents amounts contributed to the Company's 401(k) plan by the Company.
---------------------
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
26

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

31.1 Section 302 Certification of Chief Executive Officer

31.2 Section 302 Certification of Chief Financial Officer

32.1 Section 906 Certification of Chief Executive Officer

32.2 Section 906 Certification of Chief Financial Officer

(b) Reports on Form 8-K

None.

27

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: November 14, 2003

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