BKF CAPITAL GROUP INC - 10-K Annual Report

Back to GetFilings.com

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

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

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

FOR THE TRANSITION PERIOD FROM TO ,
.

COMMISSION FILE NO. 1-10024
BKF CAPITAL GROUP, INC.
(Exact name of registrant as specified in its charter)

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

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

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2004 was $177,639,472 (based on the closing sale price
of $29.05 on June 30, 2004 as reported by the New York Stock Exchange-Composite
Transactions). For this computation, the registrant has excluded the market
value of all shares of its Common Stock reported as beneficially owned by
executive officers and directors of the registrant; such exclusion shall not be
deemed to constitute an admission that any such person is an "affiliate" of the
registrant.

At March 1, 2005, 7,442,759 shares of BKF Capital Group, Inc. common stock,
par value $1.00 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K incorporate by
reference portions of an amendment to this Form 10-K or portions of the
definitive Proxy Statement (the "Proxy Statement") of the registrant for its
2005 Annual Meeting of Stockholders to be held on May 18, 2005, which in either
case will be filed with the Securities and Exchange Commission within 120 days
after the end of its fiscal year ended December 31, 2004.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART I

ITEM 1. BUSINESS

INTRODUCTION

BKF Capital Group, Inc. ("BKF") operates entirely through John A. Levin &
Co., Inc. ("John A. Levin & Co."), an SEC-registered investment adviser, and its
related entities. John A. Levin & Co. owns 100% of LEVCO Securities, Inc.
("LEVCO Securities"), a registered broker-dealer, and Levco GP, Inc. ("Levco
GP"), which is the general partner of several investment partnerships managed by
Levco, which are referred to as the "Levco Partnerships." Levin Management Co.,
Inc. ("Levin Management"), which is 100% owned by BKF and in turn owns 100% of
John A. Levin & Co., provides administrative and management services to John A.
Levin & Co. and its related companies. Levin Management and all its subsidiaries
are referred to collectively herein as "Levco."

BKF was incorporated in Delaware in 1954. Its executive offices are located
at One Rockefeller Plaza, New York, New York 10020. Its telephone number is
(212) 332-8400, and its website address is www.bkfcapital.com. BKF makes
available its annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to such reports, free of charge, on
its website as soon as reasonably practicable after such reports are
electronically filed with, or furnished to, the Securities and Exchange
Commission.

Flow Chart

SERVICES

Levco is an investment adviser registered under the Investment Advisers Act
of 1940, as amended, that specializes in managing equity portfolios for
institutional and individual investors primarily in the United States. Levco
offers long-only equity strategies and a range of alternative investment
products and other more specialized investment programs. As of December 31,
2004, assets under management were approximately $13.6 billion.

Through Levco GP, Levco acts as the managing general partner of several
private investment partnerships, and through John A. Levin & Co. serves directly
as an adviser to private investment vehicles organized outside the United
States. For managing these vehicles, John A. Levin & Co. and Levco GP are
entitled to receive both a fixed management fee based on a percentage of the
assets managed and a share of the net profits of the investment vehicles.

LEVCO Securities clears through Bear Stearns Securities Corp. ("Bear
Stearns") on a fully disclosed basis. Generally, LEVCO Securities' clients are
advisory clients of John A. Levin & Co., and the trades executed through it are
generally placed by John A. Levin & Co. in its capacity as investment adviser.

Levco Europe, LLP is a UK entity formed in 2004 that will provide
investment management services from London in connection with the event driven
strategies. This entity is currently in the process of registering with the
United Kingdom Financial Services Authority. Levco Europe Holdings, Ltd., a
wholly-owned subsidiary of Levin Management Co., Inc., manages Levco Europe,
LLP.

1

The following chart summarizes the assets under management of Levco as of
December 31, 2004.

(PIE CHART)

Institutional and Individual Separate Accounts. As of December 31, 2004,
directly managed institutional accounts represented approximately 22% of Levco's
total assets under management, with a total market value of approximately $3.0
billion. As of such date, Levco served as investment adviser to in excess of 95
separate institutional accounts. The average institutional account value at
December 31, 2004 was approximately $30 million.

Levco also directly manages accounts for individuals, which comprised
approximately 13% of Levco's total assets under management as of December 31,
2004, with a total market value of approximately $1.7 billion. As of December
31, 2004, Levco's individual client base represented approximately 390 accounts,
the average value of which was approximately $4 million.

Sub-Advisory Relationships. Levco has established a number of
relationships in which it acts as a sub-adviser to a financial intermediary.
These financial intermediaries include defined contribution plan platform
providers, sponsors of registered investment fund complexes and sponsors of
other commingled vehicles. As of December 31, 2004, assets managed pursuant to
such sub-advisory relationships totaled approximately $2.6 billion, representing
approximately 19% of Levco's total assets under management. The single largest
sub-advisory relationship totaled approximately $1.2 billion, representing
approximately 9% of Levco's total assets under management. Registered investment
funds to which Levco acted as an adviser or sub-adviser as of December 31, 2004
accounted for approximately $1.2 billion, or approximately 9%, of assets under
management. Also included in this category of sub-advisory relationships is
Levco Series Trust, a proprietary mutual fund available to insurance company
separate accounts and qualified benefit plans that was formed in 1997 and that
as of December 31, 2004 had approximately $33 million in assets under
management.

Wrap Fee Accounts. Levco participates in a number of wrap fee programs
sponsored by financial institutions. In such 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.
With approximately $2.3 billion of managed assets as of December 31, 2004, wrap
fee accounts represented approximately 17% of Levco's total assets under
management. Of this total, approximately $1.9 billion, or approximately 14% of
Levco's total assets under management, were with a single sponsor. As of
December 31, 2004, Levco had approximately 9,400 wrap fee accounts, the average
value of which was approximately $230,000.

2

Event-Driven Accounts. As of December 31, 2004, event-driven accounts,
with a total market value of approximately $2.6 billion, represented
approximately 19% of Levco's total assets under management. These accounts
invest in event-driven situations, including (i) merger arbitrage and event
arbitrage transactions, (ii) corporate restructuring and other event-driven
situations, (iii) convertible securities on an outright and hedged basis, (iv)
subordinated debt, debt claims, bank debt and other loans that are potentially
volatile, including securities in undervalued, vulnerable, distressed and
bankrupt entities, and (v) other securities or instruments in which the strategy
may realize value based on fundamental factors.

Long-Short Equity Accounts. In May 2002, Levco launched a fundamental,
trading-oriented long-short equity strategy which, as of December 31, 2004, had
approximately $792 million in assets under management. These accounts, which
include proprietary private investment vehicles and separately managed accounts,
represent approximately 6% of Levco's total assets under management.

Short-Biased Accounts. As of December 31, 2004, short-biased accounts,
with a total market value of approximately $422 million, represented
approximately 3% of Levco's total assets under management. These accounts
comprise a number of proprietary unregistered investment funds and other
accounts that employ a short-biased alternative investment strategy.

Other Private Investment Funds. As of December 31, 2004, proprietary
unregistered investment funds following a variety of alternative investment
strategies, with a total market value of approximately $185 million (excluding
the event driven, short-biased and certain long-short vehicles), represented
approximately 1% of Levco's total assets under management.

The table below shows the assets under management of Levco at the dates
indicated:

ASSETS UNDER MANAGEMENT

The growth in assets under management between 2000 and 2001 was generated
by maintaining a relatively stable client base, attracting new clients, entering
the wrap fee business, and developing the event-driven product, as well as
through market appreciation of assets under management. The decline experienced
in 2002 resulted from a decline in the market value of the long-only portfolios
as well as net outflows with regard to such portfolios. The growth experienced
in 2003 and 2004 reflected market appreciation of assets under management and
net inflows into alternative investment strategies, which was partially offset
by net outflows from the long-only strategies.

3

DISTRIBUTION

As of December 31, 2004, Levco employed 26 marketing and client service
professionals. This group includes field forces focused on attracting assets
through wrap fee programs and institutional accounts, internal marketing
personnel, a client servicing team, a portfolio specialist, a private client
group and additional marketing support and information resource staff. These
groups are responsible for communications with clients, consultants and
financial intermediaries, as well as for the production of marketing materials.
Senior investment professionals assist in the marketing effort by taking part in
client presentations or meetings.

Levco also has solicitation arrangements with third parties whereby such
third parties, in accordance with applicable laws and regulations, solicit
clients for Levco investment products (primarily alternative investment
strategies) and are compensated by Levco for such services.

With respect to the long-only strategies, distribution efforts are focused
mainly in the United States. With respect to the event-driven strategies and
alternative investment strategies generally, extensive marketing efforts are
directed towards U.S. and non-U.S. clients.

PORTFOLIO PERFORMANCE INFORMATION

Success in the investment management industry depends in large part on
performance. Shown below is historical information relating to the performance
of accounts managed by Levco in its large cap value style as compared to the S&P
500 Index and the Russell 1000 Value Index. The S&P 500 Index is a broad-based,
unmanaged market-weighted index of 500 U.S. companies. The Russell 1000 Value
Index measures the performance of those companies in the Russell 1000 Index
(which include the 1,000 largest U.S. companies based on market capitalization)
with lower price/book ratios and lower forecasted growth rates.

COMPARISON OF ANNUAL RETURNS
(AS OF DECEMBER 31, 2004)*

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

* Periods greater than 1 Yr are annualized

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE.

NOTES TO COMPARISON OF ANNUAL RETURNS

Composite: All accounts managed pursuant to a Large Cap Value strategy on
a fully discretionary basis, including taxable and tax-exempt accounts, are
included in the composite after the account has been managed for one full
calendar quarter, with the following exceptions:

- Immediate family and related accounts.

- Accounts with assets under $1,000,000.

- One account for which only the equity portion of the portfolio is
managed.

- Certain investment funds and managed accounts with different investment
strategies.

- Accounts managed under a broker-sponsored wrap-fee program.

(A complete list and description of the firm's composites is available upon
request.)

4

Calculation of Performance: The Company computes its Rate of Return on a
"time weighted" basis for each eligible account. The composite performance is
time weighted and is equal to the change in the value of the portfolio,
including capital appreciation, depreciation and income, as a percentage of the
beginning market value of the portfolio adjusted for contributions and
withdrawals. Beginning in 1999, the rates of return are compiled monthly and
linked to obtain a quarterly return. Prior to 1999, the rates of return were
compiled quarterly. Gross of fees investment results are net of broker
commissions and expenses related to trading, and net results are further reduced
by the investment management fees. For the periods from 1986 through 1990, the
net results reflect the deduction of a 1% investment management fee payable
quarterly at the rate of .25% of ending market value. This is the maximum
investment management fee charged by the firm. These results do not reflect
actual fees charged. For the period from January 1, 1991 through December 31,
2004, the net results shown reflect the deduction of the dollar-weighted fee
rate paid by all accounts in the composite. The dollar-weighted fee rate has
been calculated by dividing the quarterly investment management fees paid by the
accounts in the composite by the total composite asset value. This
dollar-weighted fee rate also includes the performance fees paid by certain
accounts. Inclusion of the performance-based fees does not materially affect the
dollar-weighted fee rate. For accounts up to $100 million, the firm's
asset-based fee schedule is: 1% of asset value of accounts of less than $5
million; .75% of asset value for accounts $5 million to $15 million; for
accounts greater than $15 million, the fee is .75% on the first $15 million and
..50% on the balance up to $100 million. For accounts in excess of $100 million,
the firm's asset-based fee schedule is: .425% on the first $100 million, .25% on
the next $200 million, and .20% thereafter. The minimum blended fee rate is
..25%. The firm does offer performance-based fees. The investment management fees
are described in Part II of the Company's Form ADV.

CONTRACTUAL ARRANGEMENTS

Levco enters into investment advisory and management agreements with, or
for the benefit of, each of its clients. Levco bases its management fees, other
than incentive allocations from the Levco Partnerships, performance-based fees
and certain fixed dollar amount arrangements (generally with family members of
employees), on a percentage of assets under management and scales these fees
according to the size of each account. Generally, either party may terminate
these agreements at any time upon written notice. In cases in which Levco serves
as an adviser or sub-adviser for a mutual fund client, the mutual fund client or
the investment adviser generally may terminate the relevant advisory or
sub-advisory agreement on relatively short notice.

In connection with Levco's activities as a broker-dealer, Levco maintains a
contractual relationship with Bear Stearns for clearance services. The agreement
is a standard clearing agreement that either party may terminate upon 30 days'
prior written notice (or immediately for cause). The agreement assigns account
supervisory responsibility to Levco and grants Bear Stearns the authority to
execute and report securities transactions for Levco's clients.

EMPLOYEES

As of December 31, 2004, BKF and its subsidiaries employed 151 people,
including 51 investment professionals, of whom 21 were primarily portfolio
managers, 23 were primarily securities analysts and 7 were traders.

BUSINESS STRATEGY

The achievement of strong performance returns is the foundation on which
Levco's business strategy is based. Levco seeks to capitalize on the strength of
its long-term performance record and its experienced investment and professional
staff to increase its assets under management. Its business strategy contains
the following key elements:

Attracting and Retaining Experienced Professionals. As an investment
management firm focused on active portfolio management, fundamental research and
superior client service, Levco's goal is to attract and retain the talent
necessary to implement its investment strategies and service its clients. Each
of the other

5

elements of its business strategy is highly dependent on the attraction and
retention of qualified personnel. Management believes that allowing employees to
develop important economic stakes in the success of the particular products to
which they contribute and of BKF as a whole will be a key factor in the
achievement of its business objectives.

Development of Complementary Long-Only Strategies. In addition to its
large cap value strategy, Levco has developed equity income, all cap and
concentrated strategies. In 2004, Levco began developing a small cap product.
Management believes the continued development of long-only strategies, including
through the addition of skilled investment personnel through recruitment and
lift-outs of portfolio management teams, will make Levco more attractive to
existing and potential clients by enabling it to offer a wider range of
products.

Development of Alternative Investment Strategies. The development of
alternative investment strategies has added depth and breadth to Levco's
research efforts and allowed for a broader range of investment offerings. The
event driven strategies have significantly increased their assets under
management over the past five years and, since it receives incentive fees, BKF
has seen its revenues from these strategies increase dramatically. A
fundamental, trading-oriented long-short strategy has also grown rapidly since
its inception in May 2002. During the bear market in 2001 and 2002, Levco's
short-biased alternative investment strategy also enjoyed significant growth in
assets and revenues. Alternative investment strategies, however, do face
capacity constraints. Levco is seeking to increase its ability to manage assets
in alternative investment strategies through the addition of skilled investment
personnel, increased marketing of existing alternative investment strategies
that have significant unused capacity, and the development of new alternative
investment products. In 2001, Levco hired personnel to manage portfolios focused
on distressed debt, and in July 2001 two private investment vehicles were
launched to pursue this strategy (whose assets are included within our
event-driven product). In 2002, Levco hired personnel to manage a long-short
trading oriented alternative investment strategy, and two private investment
vehicles were launched to pursue this strategy. In 2003, Levco hired a portfolio
manager who is managing a vehicle that is pursuing a fundamentally based,
long-short strategy focused on the small/mid cap equity sector. In 2004, Levco
launched a long-short equity strategy under the management of an investment
professional who had formerly been affiliated with the short-biased investment
team.

Strengthen Presence in Target Markets. Levco intends to devote sufficient
resources to maintain its existing relationships with target client segments,
including institutions, sub-advisers, financial intermediaries, funds of funds
and private clients. The required efforts include maintaining a field force and
strong client servicing efforts with respect to each of these target segments.

Development of Operational Infrastructure. Levco has developed an
operational infrastructure featuring dedicated portfolio administration,
technology and legal/compliance teams. Management believes that the maintenance
of a strong infrastructure that creates operational efficiencies is an essential
aspect of its plan to grow and develop multiple long-only and alternative
investment strategies.

COMPETITION

Levco competes with investment management firms, mutual fund complexes,
insurance companies, banks, brokerage firms and other financial institutions
that offer products that are similar to, or are alternatives to, those offered
by Levco. Many of the investment management firms with which Levco competes are
subsidiaries of larger financial institutions or are significantly larger in
terms of assets under management or revenues. Levco has historically competed on
the basis of its long-term investment record and the quality of its personnel,
investment process and level of client service. In order to stay competitive,
Levco will need to increase its assets under management and revenues so that it
can attract and retain quality personnel and devote the required resources to
its distribution efforts.

REGULATION

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,

6

including fiduciary, recordkeeping, operational and disclosure obligations.
Levco 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. Levco 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. As a public company, BKF is
subject to provisions of the Securities Exchange Act of 1934, as amended, and
the rules applicable to companies listed on the New York Stock Exchange.

The regulations to which Levco is subject are primarily designed to protect
investment advisory clients, and the rules to which BKF is subject are primarily
designed to protect stockholders, and the agencies implementing such regulations
have broad administrative powers, including the power to limit, restrict or even
prohibit entities from carrying on their business in the event of a failure to
comply. Possible sanctions for significant failures include the suspension of
individual employees, limitations on engaging in certain lines of business for
specified periods of time, revocation of investment adviser, broker-dealer or
other registrations, suspension or revocation of listing privileges, censures
and fines.

RISK FACTORS

In addition to the risks referred to elsewhere in this Annual Report on
Form 10-K, the following risks, among others, sometimes have affected, and in
the future could affect, BKF's business, financial condition or results of
operations. The risks described below are not the only ones facing BKF.
Additional risks not presently known to BKF or that BKF currently deems
insignificant may also impact its business.

LEVCO IS DEPENDENT ON KEY PERSONNEL

Levco is largely dependent on the efforts of its senior investment
professionals managing the long-only strategies and the event-driven,
short-biased and long-short equity strategies. 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. In the case
of alternative investment strategies, the loss of the senior investment
professionals managing the strategy could result in the discontinuance of the
strategy by Levco.

In 2004, the event-driven strategies, which have been led for an extended
period of time by two Senior Portfolio Managers, represented approximately 37%
of the asset-based investment advisory fees, approximately 70% of the incentive
fees and approximately 48% of BKF's total fees (see Item 6 -- Selected Financial
Data). As is noted in "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations," Mr. Frank Rango, one of the two
Senior Portfolio Managers of the event-driven group, has announced his intention
to relinquish such position as of the conclusion of 2005. Mr. Henry Levin will
continue as the sole Senior Portfolio Manager for the group period.

As a result of this dependence on key personnel, and the ability of
investment personnel or groups of investment personnel to start their own
independent businesses, management may be constrained in its ability to
negotiate compensation with senior personnel. 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. The implementation of BKF's business strategy requires the addition of
a senior executive officer. 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.

7

In December 1998, BKF adopted an incentive compensation plan (most recently
amended in 2001) 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. 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 STRATEGIES

Levco currently derives most of its revenues from three investment
offerings -- a large cap value strategy, an event-driven alternative investment
strategy, and an actively traded long-short US equity strategy. While these
strategies may often perform differently in a given investment environment,
adverse developments with regard to any of these strategies 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 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 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 December 31, 2004, Levco had approximately 240 customers (counting as
single customers each wrap fee program and related family and institutional
accounts and excluding proprietary pooled investment vehicles and other accounts
following alternative investment strategies), of which the ten largest customers
generated approximately $19.4 million of revenues for Levco in 2004 (including
incentive fees), or approximately 16.3% of BKF's total fees (see Item
6 -- Selected Financial Data).

The five largest customers for long-only equity products accounted for
approximately 38.9% of all asset-based investment advisory fees earned in 2004
with respect to such products. 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.

8

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 RESULTS

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 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. In addition, the private investment funds generally
operate under "high water mark" provisions, which reduce the incentive fees and
general partner incentive allocations earned in periods of positive performance
to the extent that prior losses experienced by the fund have not yet been
recouped.

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 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 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-

9

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 AND BKF

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 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.
Furthermore, BKF, as a publicly traded company listed on the New York Stock
Exchange, is subject to the federal securities laws, including the Securities
Exchange Act of 1934, as amended, and the requirements of the exchange.

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

TERRORIST ATTACKS COULD ADVERSELY AFFECT BKF

Terrorist attacks, including biological or chemical weapons attacks, and
the response to such terrorist attacks, could have a significant impact on New
York City, the local economy, the United States economy, the global economy, and
global financial markets. It is possible that the above factors could have a
material adverse effect on our business, especially given the fact that all
operations are conducted from a single location in New York City and BKF has
incurred lease obligations with regard to this location through September 2011.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements made in this Annual Report on Form 10-K, including
statements under "Item 1. Business" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations," that are not
historical facts, including, most importantly, those statements preceded by,
followed by, or that include the words "may," "believes," "expects,"
"anticipates," or the negation thereof, or similar expressions constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. 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

10

expectations and are susceptible to a number of risks, uncertainties and other
factors, 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 2. PROPERTIES

BKF's executive offices are located at One Rockefeller Plaza, New York, New
York. BKF's offices currently encompass approximately 56,000 square feet and are
governed by a lease which expires September 30, 2011 (except for approximately
7,000 square feet for which the lease will expire on November 30, 2008). The
majority of BKF's operations are conducted at this location. BKF believes that
these facilities are adequate for its current and anticipated levels of
operation. BKF also maintains a business continuity facility located at Five
River Bend, Stamford, Connecticut. This facility encompasses approximately 5,000
square feet and is governed by a lease which expires September 30, 2011.

In February 2005, Levco Europe, LLP entered into a lease for approximately
1,600 square feet at 29-30 St. James Street, London, United Kingdom. This lease
will expire in December 2012 and may be terminated by Levco Europe, LLP on 6
months written notice as of December 25, 2007. Levco Europe, LLP will operate
from this location and provide investment services to clients following
event-driven strategies.

ITEM 3. LEGAL PROCEEDINGS

Neither BKF, Levco nor their affiliates are currently involved in any
material legal proceedings.

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

No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 2004.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

BKF's common stock trades on the New York Stock Exchange (the "NYSE") under
the symbol "BKF". At the close of business on March 1, 2005, there were 721
holders of record of BKF's common stock.

11

The following table sets forth for the periods indicated (i) the high and
low reported sale prices per share for the common stock as reported on the NYSE
and (ii) cash dividends per share of common stock declared during the period:

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

(a) reflects dividends of $0.10 declared on July 9, 2004 and $0.125 declared on
September 23, 2004.

BKF declared and paid $2,799,000 in cash dividends in 2004. BKF did not
declare or pay any dividends in 2003. A dividend of $0.125 was declared on
January 18, 2005. The declaration and payment of dividends by BKF is in the
discretion of the board of directors. BKF is a holding company, and its ability
to pay dividends is subject to the ability of its subsidiaries to provide cash
to BKF. BKF expects to continue its policy of paying regular cash dividends,
though there can be no assurance as to future dividends because they are
dependent on the results of operations, financial condition, capital
requirements and other circumstances.

The following table provides information about purchases by BKF during the
periods indicated of equity securities that are registered by BKF pursuant to
Section 12 of the Exchange Act.

The purchases described below relate to the withholding of shares from
employees in order to satisfy statutory withholding requirements in connection
with the delivery of common stock underlying Restricted Stock Units.

ISSUER PURCHASES OF EQUITY SECURITIES

12

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data has been derived in part from BKF's audited
2004, 2003, 2002, 2001 and 2000 unaudited consolidated pro forma statements of
operations and should be read in conjunction with such statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Annual Report on Form 10-K. All amounts
are in millions, excluding share and per share data.

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

(1)- Gives effect for reverse stock split of 1 for 6 effectuated January 7,
2000. Assumes same amount of shares were outstanding throughout period.

(a) The amounts reflect Pro forma income of the Company assuming that the
Company had de-registered as an investment company and distributed all of it's
assets as of December 31, 1995 and recasts the acquisition of Levco using
purchase accounting with the cumulative effect of accounting change recorded in
2000.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

BKF operates entirely through Levco, an investment adviser registered with
the Securities and Exchange Commission. Levco specializes in managing equity
portfolios for institutional and individual investors. Levco offers long-only
equity strategies and a range of alternative investment products and 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 long-only 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 long-only 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.

At December 31, 2004, assets under management at Levco were $13.6 billion,
compared to $12.7 billion a year earlier. Following is a comparison of Levco's
assets under management as defined by product and client type:

Levco also has a wholly-owned broker-dealer subsidiary that clears through
Bear Stearns 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.

The following discussion and analysis of the results of operations is based
on the Consolidated Statements of Financial Condition at December 31, 2004 and
2003, and the Consolidated Statements of Operations for the years ended December
31, 2004, 2003 and 2002 of BKF Capital Group, Inc. and Subsidiaries (which are
included elsewhere herein) and should be read in conjunction with such financial
statements. 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 investment partnerships changes. These partnerships and the related
minority interests have been reflected in the consolidated financial

15

statements for the annual periods ended December 31, 2004, 2003 and 2002. The
consolidation of the partnerships does not impact BKF's equity or net income.

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. See
"Special Note Regarding Forward Looking Statements."

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2004 AS COMPARED TO YEAR ENDED DECEMBER 31, 2003.

Revenues

Total revenues for 2004 were $123.49 million, reflecting an increase of
20.2% from $102.74 million in revenues in 2003. This increase was primarily
attributable to (i) a 29.8% increase in asset-based management fees from $60.32
million in 2003 to $78.32 million in 2004 and (ii) a 12.8% increase in incentive
fees and allocations from $36.29 million to $40.93 million. The increase in
asset-based management fees was generated by the growth in average assets under
management of the event-driven and long-short equity strategies. These
strategies experienced both positive performance and net inflows in 2003 and
2004. In 2004, incentive fees and allocations generated by the largest
long-short alternative strategy and certain long-only accounts increased, while
incentive fees and allocations from accounts following event-driven strategies
decreased. In addition, the increase from 2003 to 2004 was partly driven by the
reversal in 2003 of an accrual made with respect to an investment vehicle
following a short-biased investment strategy that had a June 30, 2003 fiscal
year end.

Frank Rango, one of the two Senior Portfolio Managers for the event-driven
strategies, has announced his intention to step down from such position at the
conclusion of 2005. Henry Levin will continue as the sole Senior Portfolio
Manager for the group. Henry Levin will continue to be supported by four other
Portfolio Managers for the event-driven strategies and two Portfolio Managers
focused on investments in distressed debt. The change in responsibilities for
Mr. Rango may impact the ability of Levco to retain and attract clients with
respect to its event-driven strategies and may impact the revenues generated by
the event-driven accounts. The event-driven accounts generated 48% of the
Company's total fees in 2004.

Net commission income generated by the broker-dealer business fell 28.8% to
$1.44 million in 2004 from $2.02 million in 2003, primarily as the result of a
decrease in trading volume and an increase in the charges payable to the
clearing broker following the retention of Bear Stearns for such services in May
2004. The retention of Bear Stearns was precipitated by the sale by UBS of its
affiliated clearing subsidiary, Correspondent Services Corporation.

Net realized and unrealized gain on investments and interest and dividend
income from consolidated affiliated partnerships decreased 55.2% to $1.18
million in 2004 from $2.63 million in 2003. The gains/losses on investments and
dividend and interest income 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.

Expenses

Total expenses for 2004 were $120.43 million, reflecting an increase of
9.0% from $110.48 million in 2003. Excluding amortization of finite life
intangibles and the 2003 loss on the lease amendment, total expenses were
$113.42 million, reflecting an increase of 15.3% from $98.35 million in 2003.
The largest component of this increase was a 22.2% increase in employee
compensation and benefits (excluding grants of equity awards) to $85.09 million
in 2004 from $69.63 million in 2003. This increase in compensation expense is
primarily attributable to an increase in fee revenues. Compensation with regard
to alternative investment products is determined on a different basis than
compensation with regard to long-only products. In December 2004, the
Compensation Committee of the Board of Directors, taking into consideration
business conditions relating to the long-only products and the competition for
investment personnel, determined to allow bonus payments (primarily in the form
of equity awards to be granted in 2005) in excess of those that would have been
permitted pursuant to the compensation guidelines established in 2001 with
regard to long-only products.

16

The number of awards to be granted was determined based on the value of BKF
stock at the time of the Compensation Committee meeting held in December 2004,
but the awards were made in March 2005 and had a value of $3.2 million as of the
March 10, 2005 grant date, reflecting a significant increase in the stock price
during the intervening period. The expense associated with such awards will be
amortized over the period from the grant date through December 31, 2007.
Investments made with respect to strategies that have not yet reached critical
mass and that are reflected in compensation expense increased to $2.5 million in
2004, as compared to $1.9 million in 2003. The primary new investment in 2004
was in a small cap value strategy, while the fund of funds offering was no
longer included in this category in 2004, as compensation by members of this
group with respect to marketing activities offset losses from the strategy.

Expenses associated with employee equity grants increased 6.6% to $8.66
million in 2004 from $8.13 million in 2003 as the result of the vesting of the
grants. BKF has not issued any options since December 2001, and all options
granted have vested; all expenses relating to equity awards relate to grants of
restricted stock units and restricted stock.

Occupancy and equipment rental decreased 5.3% to $5.99 million in 2004 from
$6.32 million in 2003. This decrease resulted primarily from the relinquishment
of space at BKF's headquarters in 2003, which was partly offset by an increase
in depreciation and amortization expense resulting from fixed asset additions
made in 2003 and 2004 relating to leasehold improvements and computer network
upgrades.

Other operating expenses of BKF for 2004 were $13.53 million, reflecting a
decrease of 4.0% from $14.09 million in 2003. This decrease primarily reflected
(i) a decrease in portfolio management and trading system costs (which bear a
correlation to the number of accounts managed in wrap fee programs) and (ii) a
decrease in consulting fees paid in connection with the establishment of Levco
Europe, LLP (as the consultant established an employee relationship so that
compensation for 2004 was reflected in employee compensation and benefits),
which decreases were partly offset by increases in expenses relating to (i) the
implementation of the requirements of the Sarbanes-Oxley Act and (ii) increased
premiums for directors and officers/errors and omissions insurance coverage. It
should also be noted that a significant portion of management's time was spent
on the implementation of the requirements of the Sarbanes-Oxley Act.

Other operating expenses from consolidated affiliated partnerships
decreased to $26,000 from $177,000 primarily as the result of the decrease in
the number and size of the affiliated partnerships being consolidated.

The $118,000 interest expense reflects imputed interest relating to
payments being made in connection with the relinquishment of space pursuant to
the lease amendment entered into during the fourth quarter of 2003.

Operating Income (Loss)

BKF had operating income of $3.06 million in 2004, as compared to an
operating loss of $7.75 million in 2003. Excluding amortization of finite life
intangibles, the loss on the lease amendment, and gains and losses and interest
and dividend income relating to the consolidated affiliated partnerships,
operating income was $8.90 million in 2004, as compared to $1.77 million in
2003.

Income Taxes

BKF recorded an income tax expense of $4.08 million in 2004, as compared to
an income tax benefit of $1.08 million in 2003. The deferred tax asset/income
tax benefit recorded in 2003 was primarily attributable to future tax benefits
relating to (i) future compensation deductions in connection with the delivery
of stock underlying restricted stock unit awards and (ii) the loss on the lease
amendment. The tax expense recorded in 2004 is primarily due to the increase in
pre-tax book income in 2004 as compared to a pre-tax book loss in 2003.

Excluding the non-deductible amortization expense, BKF had an effective tax
rate of 43.74% in 2004, as compared to an effective tax rate of 43.96% in 2003.
The difference in effective tax rates in 2004 and 2003 is primarily attributable
to state and local taxes due to changes in the allocated income among various
taxing jurisdictions.

17

YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO YEAR ENDED DECEMBER 31, 2002.

Revenues

Total revenues for 2003 were $102.74 million, reflecting an increase of
17.5% from $87.41 million in revenues in 2002. This increase was primarily
attributable to (i) a 47.6% increase in incentive fees and allocations from
$24.59 million to $36.29 million and (ii) a net realized and unrealized gain on
investments from consolidated investment partnerships of $2.32 million in 2003
as compared to a loss of $3.54 million 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. These gains were partly offset by a 2.4%
decrease in investment advisory fees (excluding incentive fees and allocations)
to $60.32 million in 2003 from $61.83 million in 2002.

The increase in incentive fees primarily resulted from an increase in
assets under management in the event-driven and long-short equity products.
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. In 2003, incentive fees were reduced by the reversal of accruals
made in 2002 with respect to an account following a short-biased strategy that
had a June 30 fiscal year end. The decrease in investment advisory fees was
attributable to (1) a decrease in the average assets under management pursuant
to the long-only strategies and (2) a decrease in the average fees paid with
respect to accounts managed pursuant to such strategies, which decrease was
partially offset by the increase in investment advisory fees attributable to
event-driven and long-short equity strategies.

The percentage of total fees attributable to event-driven strategies
increased to approximately 53% in 2003 from 35% in 2002.

Net commission income generated by the broker-dealer business fell 31.3% to
$2.02 million in 2003 from $2.94 million 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 2003, BKF had realized and unrealized gains on investments (excluding
consolidated affiliated partnerships) of $1.02 million, comprised primarily of
(1) the receipt of approximately $189,000 from the settlement of class action
suits relating to investments made by BKF during the time it was a registered
investment company and (2) net gains of $785,000 in its investments in a range
of alternative investment strategies (excluding $8.93 million in incentive
allocations from affiliated partnerships). As of year end, approximately $8.10
million (excluding incentive allocations) was invested in such strategies. In
2002, BKF had realized and unrealized gains on investments (excluding
consolidated affiliated partnerships) of $31,000, reflecting (1) the receipt of
approximately $185,000 from the settlement of class action suits relating to
investments made by BKF during the time it was a registered investment company
and (2) the net losses in its investments in a range of long only and
alternative investment strategies (excluding $7.50 million in incentive
allocations from affiliated partnerships). As of year end 2002, approximately
$1.83 million (excluding incentive allocations) was invested in such strategies.
Realized and unrealized gains and losses on investments in affiliated,
non-consolidated investment partnerships are recorded by BKF under the equity
method of accounting based on BKF's proportionate share of the income or loss
earned or incurred by the partnerships.

Interest income in 2003 (excluding consolidated affiliated partnerships)
was $453,000, reflecting a 30.8% decrease from $655,000 in 2002. This decrease
is primarily attributable to a decrease in interest rates.

Interest and dividend income from consolidated affiliated partnerships in
2003 was $309,000, reflecting a 65.8% decrease from $904,000 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 2003 were $110.48 million, reflecting an increase of
23.5% from $89.46 million in 2002. Excluding amortization of finite life
intangibles and the loss on the lease amendment, total expenses

18

were $98.35 million, reflecting an increase of 19.3% from $82.45 million in
2002. The largest component of this increase was a 16.1% increase in employee
compensation and benefits (excluding grants of equity awards) to $69.63 million
in 2003 from $59.97 million 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 and an
increase in the percentage of total revenues attributable to alternative
investment strategies. Compensation with regard to alternative investment
products is determined on a different basis than compensation with regard to
long-only products. In December 2003, the Compensation Committee of the Board of
Directors, taking into consideration market and business conditions relating to
the long-only strategies, determined to allow bonus payments (partly in the form
of equity awards to be granted in 2004) in excess of those that would have been
permitted pursuant to the compensation guidelines established in 2001 with
regard to long-only products.

Expenses associated with the grant of employee equity awards increased
339.1% to $8.13 million in 2003 from $1.85 million in 2002, primarily as the
result of equity awards granted in both 2002 and 2003 (including restricted
stock units granted in exchange for options).

Occupancy and equipment rental increased 7.7% to $6.32 million in 2003 from
$5.87 million in 2002. This increase resulted primarily from depreciation
expense relating to capital expenditures made in connection with the development
of the technological infrastructure and the construction of the office facility.

In 2003, BKF recorded a $5.13 million loss related to a lease amendment
that was 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.

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.

Other operating expenses of BKF for 2003 were $14.09 million, reflecting a
decrease of 2.1% from $14.39 million in 2002. This decrease primarily reflected
(i) a decrease in portfolio management and trading system costs (which bear a
correlation to the number of accounts managed in wrap fee programs) and (ii) the
reversal of an accrual made with respect to payments to third party marketers
(as the result of the reversal of accrued incentive fees with regard to
short-biased products), which were partly offset by increased insurance premiums
for directors and officers/errors and omissions coverage.

Other operating expenses from consolidated affiliated partnerships
decreased by 51.2% to $177,000 from $363,000 primarily as the result of the
decrease in the number of the affiliated partnerships being consolidated.

Operating Loss

BKF had an operating loss of $7.75 million in 2003, as compared to an
operating loss of $2.05 million in 2002. Excluding amortization of finite life
intangibles, the loss on the lease amendment, and gains and losses and interest
and dividend income relating to the consolidated affiliated partnerships,
operating income was $1.77 million in 2003, as compared to $7.60 million in
2002. As discussed above, the largest factor in this decrease was the increase
in employee compensation and benefits (including expenses relating to equity
awards), which exceeded the increase in incentive fees and allocations.

Income Taxes

BKF recorded an income tax benefit of $1.08 million in 2003, as compared to
an income tax expense of $3.69 million (net of a deferred tax benefit of
$793,000) in 2002. The deferred tax asset is primarily attributable to future
tax benefits relating to (i) future compensation deductions in connection with
the delivery of stock underlying restricted stock unit awards and (ii) the loss
on the lease amendment.

Excluding the non-deductible amortization expense, BKF had an effective tax
rate of 43.96% in 2003, as compared to an effective tax rate of 44.7% in 2002.
The difference in effective tax rates in 2003 and 2002 is

19

primarily attributable to state and local taxes due to changes in the allocated
income among various taxing jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

BKF's current assets as of December 31, 2004 consist primarily of cash, US
Treasury bills, advisory fees receivable and marketable equity securities. 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 December 31, 2004, BKF had cash, cash
equivalents and US Treasury bills of $44.05 million, as compared to $37.44
million at December 31, 2003. This increase primarily reflects the collection of
fees and receivables during 2004 and the annual withdrawal of general partner
incentive allocations from affiliated investment partnerships, which was partly
offset by the payment of dividends, the purchases of fixed assets and the
investment of capital in affiliated investment partnerships. The increase in
investment advisory and incentive fees receivable from $37.84 million at
December 31, 2003 to $40.01 million at December 31, 2004 primarily reflects the
accrual of incentive fees (which are primarily earned as of the conclusion of
the calendar year) , which was partly offset by the receipt in 2004 of incentive
fees earned in 2003.

The increase in investments in securities to $5.79 million at December 31,
2004 from $4.38 million at December 31, 2003, primarily reflects an additional
investment in an affiliated non-US private investment vehicle. The increase in
prepaid expenses and other assets to $7.05 million at December 31, 2004 from
$3.89 million at December 31, 2003 primarily reflects a tax receivable and the
subscription in advance for interests in an unaffiliated investment fund.

The decrease in deferred tax assets to $8.39 million in 2004 from $8.67
million in 2003 is primarily attributable to the delivery of shares of stock
underlying restricted stock unit awards and the exercise of stock options for
which deferred tax assets were set up in the year the awards and options vested.

The increase in investments in securities from consolidated affiliated
partnerships to $6.52 million at December 31, 2004 from $3.93 million at
December 31, 2003, and the decrease in due from broker from consolidated
affiliated partnerships from $4.25 million at December 31, 2003 to $952,000 at
December 31, 2004 reflects the numbers and size of the funds consolidated.

Accrued expenses were $4.29 million at December 31, 2004, as compared to
$3.56 million at December 31, 2003. The largest component of such expenses is
the accrual for third party marketing fees. Expenses accrued during 2004 were
offset primarily by the payment of accrued third party marketing fees.

Accrued bonuses were $42.69 million at December 31, 2004, as compared to
$39.73 million at December 31, 2003, reflecting the payment of 2003 bonuses and
the accrual for 2004 bonuses.

The increase in accrued incentive compensation to $15.77 million at
December 31, 2004 from $10.29 million at December 31, 2003 reflects the vesting
of equity awards, which was partly offset by the delivery of the common stock
underlying equity awards and the forfeiture of such awards by departing
employees.

The decrease in accrued lease amendment expenses to $3.84 million at
December 31, 2004 from $4.54 million at December 31, 2003 reflects payments made
pursuant to the lease amendment under which space was surrendered.

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. BKF's business is not
seasonal. Except for the lease commitments and related expenditures described
below, BKF has no material commitments for capital expenditures. The Company has
office space obligations that require monthly payments plus escalations through
September 2011.

20

OFF BALANCE SHEET RISK

Levco GP serves as the managing general partner for several affiliated
investment partnerships which trade primarily in equity securities or, in the
case of one partnership, in distressed corporate debt. As of December 31, 2004,
total partners' capital in these partnerships was approximately $614.13 million.
As of December 31, 2004, the sum total of Levco GP's capital accounts in the
affiliated investment partnerships was approximately $17.36 million. The
financial condition and results of operations of certain of these affiliated
investment partnerships are not included in BKF's consolidated statements of
financial condition (except to the extent of Levco GP's equity ownership). Levco
GP has not guaranteed any of the affiliated investment partnerships'
obligations, nor does it have any contractual commitments associated with them.

CONTRACTUAL OBLIGATIONS

As of December 31, 2004, the Company's contractual obligations, including
payments due by period, are as follows ($ in thousands):

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION AND RELATED EXPENSES

With respect to incentive fees and allocations, BKF has elected to accrue
income on a quarterly basis, though such fees and allocations are determined and
billed or allocated at the end of the applicable measurement period. Such
accruals, as well as related compensation and third party referral fees, may be
reversed as the result of subsequent investment performance prior to the
conclusion of the applicable contract year or investor withdrawal.
Alternatively, BKF could have adopted a policy of not recognizing such fees or
allocations until the respective payments are fixed at the end of the
performance measurement period. Since most incentives fees or allocations are
determined as of the end of the calendar year, the adoption of a revenue
recognition policy that defers recognition of incentive fees or allocations and
associated expenses could result in much lower levels of income, and associated
compensation expenses, for periods prior to the fourth quarter. BKF's annual
financial results would not be materially affected, as most of the performance
measurement periods conclude on December 31.

PURCHASE PRICE ALLOCATION

In order to account for the acquisition of Levco by BKF in 1996 utilizing
the purchase method of accounting, Levco's cost in excess of net assets was
reflected in the following intangible items: goodwill, employment contracts for
key personnel and investment advisory contracts. The total value of these
intangibles at the time of the acquisition was $116.8 million. BKF determined
that 20% of that amount was attributable to goodwill, 20% to the employment
contracts and 60% to the investment contracts. BKF amortizes the value of the
investment contracts over a ten year period, and amortized the employment
contracts, which have all expired, over their respective terms. Pursuant to
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," commencing in 2002, the net carrying value of the goodwill
of $14.8 million at December 31, 2001, ceased to be amortized. Goodwill is
subject to an annual impairment test.

21

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS

Levco GP serves as the managing general partner for several affiliated
investment partnerships which are not consolidated with BKF. These general
partnerships are periodically assessed to determine whether the underlying
assets and liabilities should be consolidated. See "Item 7 -- Off Balance Sheet
Risk."

ITEM 7A. 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 with respect to which
the investment advisory fee is charged, so any significant increases or
decreases in market value occurring on or shortly before the last day of a
quarter may materially impact revenues for the quarter. 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 strategies, could reduce performance based
incentive fees and allocations and thereby negatively impact BKF's revenues. In
addition, as of December 31, 2004 and 2003, BKF had invested (1) $1.34 million
and $1.05 million, respectively, in seed capital for long-only equity products,
which investments could be similarly impacted by a decline in the performance of
value stocks, and (2) $18.95 million and $13.36 million (excluding accrued
incentive allocations), respectively, in proprietary alternative investment
strategies, which are also exposed to market fluctuations.

The following table (dollars in thousands) summarizes our investments as of
December 31, 2004 and December 31, 2003 in long-only equity products and
alternative investment strategies (excluding incentive allocations) and provides
a sensitivity analysis assuming a 10% increase or decrease in the value of these
investments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The independent auditor's reports and financial statements listed in the
accompanying index are included in Item 15 of this Annual Report on Form 10-K.
See Index to Financial Statements on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no disagreements on accounting or financial disclosure
matters.

ITEM 9A. CONTROLS AND PROCEDURES

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

BKF's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer,
BKF conducted an evaluation of the effectiveness of its internal control over
financial reporting based on the framework in Internal Control -- Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO Framework"). Based on our evaluation under the COSO Framework,
management concluded that BKF's internal control over financial reporting was
effective as of December 31, 2004.

22

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in BKF's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) that occurred during BKF's most recent quarter
that has materially affected, or is reasonably likely to materially affect,
BKF's internal control over financial reporting.

It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there is
only reasonable assurance that BKF's controls will succeed in achieving their
stated goals under all potential future conditions.

BKF's Chief Executive Officer and Chief Financial Officer have furnished in
this Annual Report on Form 10-K the certifications required under Sections 306
and 902. In addition, BKF's Chief Executive Officer has certified to the New
York Stock Exchange that he is not aware of any violations by BKF of the
corporate governance listing standards of the NYSE.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
BKF CAPITAL GROUP, INC.

We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A., that BKF Capital Group, Inc. (a Delaware corporation) maintained
effective internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control -- Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO"). BKF Capital Group, Inc.'s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could
have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

23

In our opinion, management's assessment that BKF Capital Group, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Also in our opinion, BKF
Capital Group, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission ("COSO").

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statement of
financial condition of BKF Capital Group, Inc. and Subsidiaries of December 31,
2004, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the year then ended and our report
dated March 10, 2005 expressed an unqualified opinion on those financial
statements.

/s/ GRANT THORNTON LLP

New York, New York
March 10, 2005

PART III

ITEMS 10, 11, 12, 13 AND 14.

The information required by Items 10, 11, 12, 13 and 14 will be furnished
on or prior to April 30, 2005 (and is hereby incorporated by reference) by an
amendment hereto or pursuant to a definitive proxy statement pursuant to
Regulation 14A which will contain such information.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this Form 10-K:

(1) Financial Statements

The following financial statements of BKF Capital Group, Inc. and
Subsidiaries are filed as part of this report under Item 8-Financial Statements
and Supplementary Data:

(2) Financial Data Schedules

All schedules are omitted, as the required information is inapplicable or
is included in the financial statements or related notes.

(3) Exhibits

24

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

* Filed herewith

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the last quarter of the period
covered by this report.

25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ GLENN A. AIGEN
------------------------------------
Glenn A. Aigen
Senior Vice President and Chief
Financial Officer

Date: March 17, 2005

Each person whose signature appears below hereby constitutes and appoints
John A. Levin, Glenn A. Aigen and Norris Nissim and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution, for him in
any and all capacities, to execute and cause to be filed with the Securities and
Exchange Commission any and all amendments to the Annual Report on Form 10-K,
with exhibits thereto and other documents connected therewith and to perform any
acts necessary to be done in order to file such documents, and hereby ratifies
and confirms all that said attorney-in-fact or their substitute or substitutes
may do or cause to be done by virtue hereof.

26

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
BKF CAPITAL GROUP, INC.

We have audited the consolidated statement of financial condition of BKF Capital
Group, Inc. and Subsidiaries (a Delaware corporation) as of December 31, 2004,
and the related consolidated statements of operations, changes in stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. We did not audit
the financial statements of one consolidated affiliated partnership (the "2004
CAP"), which statements reflect total assets constituting 5 percent as of
December 31, 2004, and total revenues of 0.5 percent for the year then ended.
Those statements were audited by another auditor whose report thereon has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for the 2004 CAP, is based solely on the report of the other auditor.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and the report of
the other auditor provide a reasonable basis for our opinion.

In our opinion, based on our audit and the report of the other auditor, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of BKF Capital Group,
Inc. and Subsidiaries as of December 31, 2004, and the consolidated results of
their operations, changes in stockholders' equity and their consolidated cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of BKF Capital
Group, Inc.'s and Subsidiaries' internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"), and our report dated March
10, 2005 expressed an unqualified opinion on management's assessment.

/s/ GRANT THORNTON LLP

New York, New York
March 10, 2005

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
BKF Capital Group, Inc.

We have audited the accompanying consolidated statement of financial
condition of BKF Capital Group, Inc. as of December 31, 2003, and the
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the two year period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of two consolidated
affiliated partnerships (collectively the "2003 CAP"), majority-owned
investments, which statements reflect total assets constituting 5 percent of the
related consolidated totals as of December 31, 2003 and which statements reflect
total revenues constituting 2 percent of the related consolidated totals for the
year ended December 31, 2003. We did not audit the financial st