BKF CAPITAL GROUP INC - 10-K Annual Report

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

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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 or (I.R.S. Employer Identification No.)
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 [ ].

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 25, 2002 was $180,842,742 (based on the closing sale
price of $29.95 on March 25, 2002 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
named 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 25, 2002, 6,617,045 shares of BKF Capital Group, Inc. common
stock, par value $1.00 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Form 10-K incorporates by reference portions of the
definitive Proxy Statement (the "Proxy Statement") of the registrant for its
2002 Annual Meeting of Stockholders to be held on May 16, 2002, which will be
filed with the Securities and Exchange Commission within 120 days after the end
of its fiscal year ended December 31, 2001 pursuant to Regulation 14A.
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PART I

ITEM 1. BUSINESS

INTRODUCTION

BKF Capital Group, Inc. ("BKF" or the "Company", formerly Baker, Fentress &
Company) was formerly a non-diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended. Pursuant to a Plan
for Distribution of Assets adopted on August 19, 1999, BKF sold substantially
all of its investment securities and distributed the cash proceeds, along with
shares of Consolidated-Tomoka Land Company, to its stockholders. These
distributions were completed by January 7, 2000. On April 18, 2000, BKF received
a deregistration order from the Securities and Exchange Commission, which
completed BKF's transformation from an investment company to an operating
company.

BKF now operates entirely through John A. Levin & Co., Inc. ("John A. Levin
& Co."), an asset management business acquired by BKF in June 1996, and its
related entities. As part of the acquisition, BKF formed Levin Management Co.,
Inc. ("Levin Management"), to provide 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". 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."

BKF was incorporated in Delaware in 1954. Its executives 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.

[FLOW CHART]

PRODUCTS AND 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. Most
accounts are managed pursuant to a large cap value strategy; Levco also offers a
range of alternative investment products and other more specialized investment
programs. As of December 31, 2001, assets under management were approximately
$14.3 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.

In July 1996, Levco began participating in its first wrap fee program with
a major financial institution. Since then, it has joined other such programs. In
wrap fee 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

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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.

LEVCO Securities clears through Correspondent Services Corporation, a
UBS/PaineWebber affiliated company ("CSC"), 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.

The following chart summarizes the assets under management of Levco as of
December 31, 2001.

[PIE CHART]

Private Investment Funds 2.4
Institutional Accounts 26.7
Individual Accounts 14
Sub-Advisory Relationships 15
Wrap Fee Accounts 31.2
Event-Driven Accounts 10.7

Institutional and Individual Separate Accounts. As of December 31, 2001,
directly managed institutional accounts represented 26.7% of Levco's total
assets under management, with a total market value of approximately $3.8
billion. As of such date, Levco served as investment adviser to more than 160
separate institutional accounts. The average institutional account value at
December 31, 2001 was approximately $23.6 million.

Levco also directly manages accounts for individuals, which comprised
approximately 14.0% of Levco's total assets under management as of December 31,
2001, with a total market value of approximately $2.0 billion. As of December
31, 2001, Levco's individual client base represented more than 550 accounts, the
average value of which was approximately $3.6 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 sponsors of registered investment fund
complexes, other commingled vehicles and defined contribution plan platforms. As
of December 31, 2001, assets managed pursuant to such sub-advisory relationships
totaled approximately $2.1 billion, representing 15.0% of Levco's total assets
under management. Registered investment funds to which Levco acted as an adviser
or sub-adviser as of December 31, 2001 include: Levco Equity Value Fund,
Vanguard Equity Income Fund, MainStay Research Value Fund, the Large Company
Stock Value Fund in the Charter Funds Series of the CIGNA Funds Group and the
CIF Core Equity Fund of the Commonfund Institutional Funds.

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Wrap Fee Accounts. With approximately $4.4 billion of managed assets as of
December 31, 2001, wrap fee accounts represented 31.2% of Levco's total assets
under management. As of December 31, 2001, Levco had approximately 21,000 wrap
fee accounts, the average value of which was approximately $210,000.

Event-Driven Accounts. As of December 31, 2001, event-driven accounts,
with a total market value of approximately $1.5 billion, represented 10.7% of
Levco's total assets under management. These accounts invest in event-driven
situations, such as merger arbitrage and distressed companies.

Private Investment Funds. As of December 31, 2001, proprietary
unregistered investment funds following a variety of alternative investment
strategies, with a total market value of $344 million (excluding the event
driven vehicles), represented 2.4% of Levco's total assets under management.

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

ASSETS UNDER MANAGEMENT

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(a) Includes $505 million and $491 million in BKF assets managed by Levco at
December 31, 1998 and 1997, respectively. The BKF portfolio managed by Levco
was liquidated during the period between August 19, 1999 and December 31,
1999.

Levco's assets under management have increased over each of the periods
indicated. This growth has been 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.

DISTRIBUTION

As of December 31, 2001, Levco employed 21 marketing and client service
professionals. The field force includes five regional marketing directors
focused on attracting assets through wrap fee programs and from smaller
institutional accounts and two institutional salespeople. In addition, Levco has
a client servicing team of four employees and an information resources group of
ten employees. 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. BKF expects that the
number of marketing and client service professionals will increase in 2002 as
Levco continues to expand its distribution efforts.

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 and are compensated by Levco for such
services.

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

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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
Russell 1000 Value Index and the S&P 500 Index. 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. The S&P 500 Index is
a broad-based, unmanaged market-weighted index of 500 U.S. companies.

COMPARISON OF ANNUAL RETURNS

PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE PERFORMANCE.

NOTES TO COMPARISON OF ANNUAL RETURNS

BASIS OF PRESENTATION: Richard A. Eisner & Company, LLP examined the
investment performance results for the Levco composite for the years 1986
through 1995 and 1998 through 2000. Ernst & Young LLP examined the investment
performance results for the period January 1, 1996 through December 31, 1997.
Performance for 2001 will be examined by Richard A. Eisner & Company, LLP.

The investment performance results have been prepared in compliance with
the Association for Investment Management and Research ("AIMR") Performance
Presentation Standards from January 1, 1993 through December 31, 2001. The full
period is not in compliance because, for periods prior to January 1, 1993,
size-weighted composite returns were calculated using end-of-period market
values rather than the beginning-of-period market values required by AIMR. AIMR
has not been involved with the preparation or review of this report.

MANAGED ACCOUNTS: Levco's composite includes all fee paying accounts
managed on a fully discretionary basis, including taxable and tax-exempt
accounts, except: accounts managed for immediate family of employees, accounts
with assets under $1,000,000, one account for which only the equity portion of
the portfolio is managed, accounts for pooled vehicles and similarly managed
accounts utilizing investment strategies different from the strategy utilized by
the accounts included in the composite, and accounts managed under a
broker-sponsored wrap-fee program.

CALCULATION OF PERFORMANCE: For the period from January 1, 1986 through
December 31, 1989, the results reflect the deduction of a 1% investment
management fee payable quarterly at a rate of 0.25% of ending market value. This
is the maximum investment management fee charged by Levco. These results do not
reflect actual fees charged. For the periods beginning January 1, 1990 and
thereafter, the net results reflect the deduction of the actual dollar-weighted
fee rate paid by all accounts in the composite. Levco has calculated the
dollar-weighted rate 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 included the performance fees paid by certain
accounts. Inclusion of the performance-based fee does not materially affect the
dollar-weighted fee rate.

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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 sub-advisory
agreement on relatively short notice.

In connection with Levco's activities as a broker-dealer, Levco maintains a
contractual relationship with CSC for clearance services. The agreement is a
standard clearing agreement that either party may terminate upon 60 days prior
written notice (or immediately for cause). The agreement assigns account
supervisory responsibility to Levco and grants CSC the authority to execute and
report securities transactions for Levco's clients.

EMPLOYEES

As of December 31, 2001, BKF and its subsidiaries employed 118 people,
including 30 investment professionals, of whom 12 were primarily portfolio
managers, 11 were primarily securities analysts and 7 were traders or trading
associates.

BUSINESS STRATEGY

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 elements of its business strategy is highly dependent on the
attraction and retention of qualified personnel. Management believes that the
ongoing implementation of Levco's compensation and equity award program, whereby
employees will continue to develop an important stake in the success of BKF,
will be a key factor in the achievement of its business objectives.

Increasing Marketing for Institutional Separate Accounts. The majority of
Levco's institutional separate account business has been developed without the
benefit of a sales force in the field dedicated to the solicitation of
institutional separate accounts. In 2001, Levco began the process of increasing
its presence in the institutional account marketplace through the addition of
marketing and client service personnel and increasing its level of contact with
pension plan sponsors, corporations, industry consultants and financial
intermediaries. BKF expects to continue these substantial hiring and marketing
efforts in 2002.

Increasing Distribution Through Financial Intermediaries. Clients obtained
through wrap fee programs have made a significant contribution to assets under
management since Levco joined its first such program in 1996. Levco is also
managing a significant amount of assets for mutual funds and through a 401(k)
platform sponsored by a major insurance company. Levco intends to devote
sufficient resources to maintain its existing relationships with financial
intermediaries and to develop new relationships with major financial
institutions.

Development of Complementary Value Strategies. In 2001, Levco increased
its distribution of its "traditional" large cap value strategy (which has a
greater income orientation than the large cap value strategy pursuant to which
most accounts are managed) and its all cap value strategy. In addition, Levco
was selected to be the sub-adviser to two mid-cap portfolios in a mutual fund
complex, effective January 1, 2002. Management believes the continued
development of these products will make Levco more attractive to existing and
potential clients by enabling it to offer a wider range of products in the value
equity area.

5

Development of Alternative Investment Strategies. The event driven product
has significantly increased its assets under management over the past four years
and, since it receives incentive fees, BKF has seen its revenues increase
dramatically. 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 addition, in 2001, Levco hired personnel to develop
multi-manager alternative investment products and assist in the marketing of
other alternative investment strategies. Levco launched multi-manager investment
products as of January 2, 2002. Levco's short-biased alternative investment
strategy also enjoyed significant growth in 2001.

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, 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.

The regulations to which Levco is subject are primarily designed to protect
investment advisory clients, 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, 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
immaterial may also impact its business.

LEVCO IS DEPENDENT ON KEY PERSONNEL

Levco is dependent on the efforts of its senior investment professionals
managing the large cap value strategy and the event driven product. Levco is
also dependent on the efforts of Mr. John A. Levin, the

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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 future success depends on its ability to retain and attract
qualified personnel to conduct its investment management business. The market
for qualified portfolio managers is highly competitive and has grown more so in
recent years as the entire industry has experienced growth. To the extent that
Levco further diversifies its products and strategies, BKF anticipates that it
will be necessary for Levco to add portfolio managers and investment analysts.
No assurance can be given that Levco will succeed in its efforts to recruit and
retain the required personnel. The loss of key personnel or the inability to
recruit and retain qualified portfolio managers and marketing personnel could
have a material adverse effect on Levco's business.

In December 1998, BKF adopted an incentive compensation plan to give Levco
the ability to attract and retain talented professionals with equity-based and
cash compensation. Determinations with regard to the implementation of this plan
are made by the Compensation Committee of the board of directors of BKF on a
regular basis. If the price of BKF stock decreases, no assurance can be given
that the equity-based compensation will serve its purpose to attract and retain
talented professionals.

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

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.

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.

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

As of December 31, 2001, Levco had approximately 350 customers (counting as
single customers each wrap fee program and excluding proprietary pooled
investment vehicles), of which the ten largest customers generated approximately
$29.1 million of revenues for Levco in 2001 (including incentive fees), or
approximately 31.8% of BKF's total revenues. The loss of any of these customers
could have an adverse effect on BKF's revenues.

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

Management Fees. Some segments of the investment management industry have
experienced a trend toward lower management fees. Levco must maintain a level of
investment returns and service that is acceptable to clients given the fees they
pay. No assurance can be given that Levco will be able to maintain its current
fee structure or client base. Reduction of the fees for new or existing clients
could have an adverse impact on Levco's profits.

Cancellation of Investment Management Agreements. It is expected that
Levco will derive almost all of its revenue from investment management
agreements. For investment companies, a majority of the disinterested members of
each fund's board must approve these agreements at least annually and the
agreements are terminable without penalty on 60 days' notice. The agreements
with Levco's separately-managed account clients generally are terminable by the
client without penalty and with little or no notice. Any failure to renew, or
termination of, a significant number of these agreements could have an adverse
effect on Levco.

Poor Investment Performance of the Private Investment Funds. BKF derives
revenue from incentive fees and general partner incentive allocations earned
with respect to its proprietary unregistered investment funds. Stronger positive
performance by these funds generates higher incentive fees and incentive
allocations because those fees and allocations are based on the performance of
the assets under management. On the other hand, relatively poor performance will
result in lower or no incentive fees or allocations, and will tend to lead to
decreased assets under management and the loss of accounts, with corresponding
decreases in revenue.

LEVCO IS SUBJECT TO COMPETITION IN THE INVESTMENT MANAGEMENT BUSINESS

The investment management business is highly competitive. 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.

LEVCO IS DEPENDENT ON INFORMATION SYSTEMS

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.

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.

8

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 is registered with that agency as a commodity pool operator. John
A. Levin & Co. and Levco GP are members of the National Futures Association.
LEVCO Securities is registered as a broker-dealer under the Securities Exchange
Act of 1934, is a member of the National Association of Securities Dealers, Inc.
and is a member of the Municipal Securities Rulemaking Board. In addition, Levco
is subject to the Employee Retirement Income Security Act of 1974 and its
regulations insofar as it is a "fiduciary" with respect to certain clients.

These laws and regulations generally grant supervisory agencies and bodies
broad administrative powers, including the power to limit or restrict Levco from
conducting its business if it fails to comply with these laws and regulations.
If Levco fails to comply with these laws and regulations, these agencies may
impose sanctions, including the suspension of individual employees, limitations
on business activities for specified periods of time, revocation of
registration, and other censures and fines. Changes in these laws or regulations
could adversely affect Levco's profitability and operations.

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 the 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 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 72,000 square feet and are
governed by a lease which expires September 30, 2011. The majority of BKF's
operations are conducted at this location, and BKF believes that these
facilities are adequate for its current and anticipated levels of operation. BKF
does not currently intend to sublease any significant portion of this space. In
2002, BKF may also lease additional facilities outside of New York City as an
extension of its disaster recovery plan.
9

ITEM 3. LEGAL PROCEEDINGS

Neither BKF, Levco nor their affiliates are currently involved in any 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, 2001.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS

BKF's common stock trades on the New York Stock Exchange (the "NYSE") under
the symbol "BKF". At the close of business of March 25, 2002, there were 1,241
holders of record of BKF's common stock.

The following table sets forth for the periods indicated the high and low
reported sale prices per share for the common stock as reported on the NYSE:

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

(a) The public market for BKF's common stock prior to January 7, 2000 was based
on BKF's net assets and operations as a closed-end investment company. For
this reason, the stock prices before and after January 7, 2000 are not
comparable.

DIVIDENDS

BKF did not declare or pay any dividends in 2000 or 2001, other than a
distribution made on January 7, 2000. On such date, BKF paid a cash distribution
of $73.80 per share (adjusted to reflect the 1 for 6 reverse stock split
effected on January 7, 2000). This amount includes the cash proceeds from the
sale of investment securities pursuant to the Plan for Distribution of Assets
effected by BKF in 1999 and 2000. BKF intends to retain future earnings, if any,
for the development of its business, and it is not anticipated that the board of
directors will declare or pay any dividends on the common stock in the
foreseeable future. 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. The board of directors will determine future dividend policy based on
the results of operations, financial condition, capital requirements and other
circumstances.

10

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data has been derived in part from BKF's audited
2001 and previous years' 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.

(2) 1997 amortization includes a write-off of $4.6 of an employment contract for
termination of an employee.

11

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 that was acquired by BKF in June 1996.
Levco specializes in managing equity portfolios for institutional and individual
investors primarily in the United States. Most accounts are managed pursuant to
a large cap value strategy; Levco also offers a range of alternative investment
products and other more specialized investment programs.

Levco acts as the managing general partner of a number of investment
partnerships and also acts as an adviser to private investment vehicles
organized outside the United States.

With respect to accounts managed pursuant to its value equity strategies,
Levco generally receives advisory fees based on a percentage of the market value
of assets under management, including market appreciation or depreciation and
client contributions and withdrawals. In some cases, Levco receives
performance-based fees from accounts pursuing value equity strategies. With
respect to private investment vehicles and separate accounts managed pursuant to
similar strategies, Levco is generally entitled to receive both a fixed
management fee based on a percentage of the assets under management and a share
of net profits.

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

At December 31, 2001, assets under management at Levco were $14.3 billion,
compared to $11.5 billion a year earlier. Following is a comparison of Levco
assets under management (in millions) as defined by product and client type:

Levco also has a wholly-owned broker-dealer subsidiary that clears through
CSC 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, 2001 and
2000, the Consolidated Statement of Operations for the year ended December 31,
2001 and the Pro Forma Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999 of BKF Capital Group, Inc. and Subsidiaries (which
are included elsewhere herein) and should be read in conjunction with such
financial statements. In light of the evolution of BKF from a closed-end
management investment company to a holding company whose primary asset is the
investment management business of Levco, pro forma consolidated financial
statements have been included in this Annual Report on Form 10-K in order to
provide meaningful comparisons of financial information for the years ended
December 31, 2001, 2000 and 1999. A discussion of historical financial results
of BKF as a closed-end management investment company has not been included
because BKF completed the distribution of substantially all of its assets on
January 7, 2000 pursuant to a Plan of Distribution of Assets approved by

12

stockholders on August 19, 1999 and ceased to be registered as an investment
company on April 18, 2000. Particular attention should be paid to the fact that
a change in accounting principle was effected on April 18, 2000 resulting in an
amortization expense that has been reflected in the pro forma consolidated
financial statements. This amortization expense has been reflected on a pro
forma basis in the consolidated financial statements for 1999, and the
consolidated financial statements for 2000 reflect the actual cumulative
amortization charge absorbed by BKF in 2000 as the result of the change in
accounting principle.

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, 2001 AS COMPARED TO PRO FORMA YEAR ENDED DECEMBER 31,
2000.

Revenues

Total revenues for 2001 were $91.46 million, reflecting an increase of
18.7% from $77.04 million in revenues in 2000. This increase was primarily
attributable to a 32.4% increase in investment advisory fees (excluding
incentive fees and general partner incentive allocations) from $45.61 million to
$60.40 million, which increase was partly offset by a 4.0% decline in incentive
fees and general partner incentive allocations from $29.70 million to $28.52
million. The increase in investment advisory fees is primarily attributable to
the increase in assets under management in (1) the large cap value strategy,
which experienced a significant increase in assets managed in wrap fee programs,
and (2) the event driven product. The decrease in incentive fees and general
partner incentive allocations is primarily attributable to a decrease in the
performance of the accounts paying performance-based compensation. 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.

Other income, which is primarily net commission income generated by the
broker-dealer business, rose 46.5% from $1.74 million in 2000 to $2.54 million
in 2001. This increase was primarily attributable to an increase in the assets
under management of accounts that trade through LEVCO Securities.

Expenses

Total expenses for 2001 were $84.99 million, reflecting an increase of
10.9% from $76.65 million in 2000. Excluding amortization of intangibles and
restricted stock units granted and vested in 2000, total expenses were $75.49
million, reflecting an increase of 31.8% from $57.28 million in 2000. The
largest component of this increase was a 30.6% increase in compensation expense,
which went from $45.61 million (excluding grants of restricted stock units) to
$59.57 million. The increase in compensation expense is primarily attributable
to (1) the increase in revenues and (2) the increase in compensation expense as
a percentage of pre-tax, pre-compensation profits (excluding certain costs
incurred in connection with new product development) under the compensation
guidelines approved by the board of directors effective as of the beginning of
2001. Such compensation guidelines were approved by the board of directors
following consultation with independent compensation consultants.

Occupancy and equipment rental for 2001 was $3.03 million, reflecting an
increase of 32.7% from $2.29 million in 2000. This increase resulted from lease
amendments entered in the latter part of 2000 and in 2001, which added a total
of approximately 39,000 square feet and resulted in an additional rental expense
of approximately $455,000 in 2001. BKF does not currently anticipate subleasing
a significant portion of this additional space, as the Company's management
foresees continued growth in investment management and other personnel over the
term of the lease.

Other operating expenses of BKF for 2001 were $12.16 million, reflecting an
increase of 29.7% from $9.38 million in 2000. This increase primarily reflected
an increase in (1) portfolio management and trading system costs (which bear a
correlation to the number of accounts managed in wrap fee programs),

13

(2) professional and consulting fees paid to third parties providing marketing,
legal and investment related services, and (3) reimbursements to client accounts
in connection with trading activities.

Operating Income

Operating income rose to $6.47 million, up from $388,000 for 2000,
reflecting the increase in revenues, which exceeded the increase in expenses.
Excluding the amortization of intangibles expense and the grant of restricted
stock units in 2000, operating income in 2001 was $15.97 million, reflecting a
decline of 19.2%, from $19.76 million in 2000.

Net Realized and Unrealized Gain/Loss on Investments

In 2001, BKF had realized and unrealized gains on investments of $1.62
million, reflecting (1) the receipt of approximately $915,000 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 gains in its seed
capital investments in a range of long only and alternative investment
strategies (excluding investments in affiliated partnerships). As of year end,
approximately $2.78 million was invested in such strategies. In 2000, BKF had a
net realized and unrealized loss on investments of $228,000 primarily as the
result of the permanent write down of a historical private placement position
that had been part of BKF's portfolio when it was an investment company. This
loss was partly offset by net gains in small cap (which was terminated in August
2001), small/mid cap, and financial services long only equity value portfolios
funded by BKF in the fourth quarter of 2000 in order to establish track records
for developing products.

Interest and Dividend Income

Interest and dividend income was $1.30 million in 2001, reflecting a
decline of 4.3% from $1.36 million in 2000. This decline resulted from a
significant decline in interest rates, which was only partially offset by higher
cash balances.

Income Taxes

BKF recorded an income tax expense of $7.85 million, net of a deferred tax
benefit of ($377,000), in 2001, as compared to an income tax benefit of
($665,000) in 2000.

In 2000, BKF realized a $10.9 million capital loss for book purposes
relating to an investment that was made when BKF was still an investment
company; $4.53 million of this loss was used in 2000 to offset taxable capital
gains. The balance of the unused capital loss was carried back to previous
taxable years for federal income tax purposes to offset prior taxable capital
gains. Such carry back resulted in a federal income tax refund of $2.2 million,
which is not reflected in the Consolidated Statements of Operations, but is
reflected in the reduction of the deferred tax asset in 2001. The deferred tax
asset in 2001 is primarily attributable to future tax benefits relating to
future compensation deductions and unrealized partnership losses.

Absent the non-deductible amortization expense, BKF had an effective tax
rate of 42% in 2001. Absent the non-deductible amortization expense and the
realization of the capital loss previously recorded as an unrealized loss by the
investment company, BKF would have had an effective tax rate of 47% in 2000. For
the period ended December 31, 2000, application of a 47% effective tax rate
would have resulted in a provision for taxes of $5.75 million. This amount was
offset by ($6.4) million in future tax benefits primarily attributable to ($3.0)
million in future tax benefits from the unused portion of the capital loss,
($5.6) million in future tax benefits relating to future compensation deductions
attributable to the grant of restricted stock units (as the compensation expense
is not deductible for tax purposes until the delivery of the underlying stock)
and $2.2 million in future taxable income attributable to deferred revenue and
unrealized gain on investments. The difference in effective tax rates in 2001
and 2000 is primarily attributable to state and local taxes due to changes in
the allocated income among various taxing jurisdictions.

14

PRO FORMA YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1999.

Revenues

Total revenues for 2000 were $77.04 million, reflecting an increase of
58.3% from $48.66 million in 1999. This increase was attributable to (1) a 23.5%
increase in investment advisory fees (excluding incentive fees and general
partner incentive allocations) from $36.93 million (excluding investment
advisory fees received for managing the portfolio of BKF) to $45.61 million and
(2) a 188.2% increase in incentive fees and general partner incentive
allocations from $10.31 million to $29.70 million. The increase in investment
advisory fees is primarily attributable to the increase in assets under
management in (1) the large cap value strategy, which experienced a significant
increase in assets managed in wrap fee programs, and (2) the event driven
product. The increase in incentive fees and general partner incentive
allocations is primarily attributable to (1) the increase in assets under
management in the event driven product and (2) approximately $5.1 million in
incentive fees and general partner incentive allocations from accounts or
vehicles following the large cap value strategy or specialized investment
strategies (other than the event driven product) which had not produced
incentive fees or allocations in 1999. 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.

Other income, which is primarily net commission income generated by the
broker-dealer business, rose 22.3% from $1.42 million to $1.74 million.

Expenses

Total expenses for 2000 were $76.65 million, reflecting an increase of
63.0% from $47.01 million in 1999. Excluding amortization of intangibles, total
expenses were $69.05 million, reflecting an increase of 96.6% from $35.11
million in 1999. The largest component of this increase was a 118.2% increase in
compensation expense, which increased from $26.30 million to $57.38 million.
This increase in compensation expense is primarily attributable to (1) the
increase in revenues and (2) grants of restricted stock units to employees of
the firm.

In connection with 2000 compensation and as part of broader incentive
compensation program meant to retain and attract key employees, the compensation
committee of BKF's board of directors approved grants of 650,485 restricted
stock units to BKF employees. These grants vested immediately and resulted in
compensation expense of $11.77 million in 2000. Under the terms of the stock
award agreements relating to the grants, the actual delivery of shares of stock
will not take place for three years from the date of grant and will be subject
to the satisfaction of certain conditions by the recipients.

Other operating expenses of BKF in 2000 were $9.38 million, reflecting an
increase of 40.1% from $6.70 million in 1999. This increase primarily reflected
an increase in marketing fees paid to third parties for soliciting investors on
behalf of Levco. Other factors contributing to the rise were increased
promotional expenses relating to internal marketing efforts and an increase in
portfolio management and trading system costs.

Operating Income

Operating income for 2000 was $388,000, reflecting a decline of 76.5% from
$1.65 million for 1999. This decline reflected the increase in expenses,
including the restricted stock unit grants, which exceeded the increase in
revenues. Excluding the amortization of intangibles and the grant of restricted
stock units, operating income was $20.26 million, reflecting an increase of
49.6% from $13.55 million in 1999.

Interest and Dividend Income

Interest and dividend income in 2000 was $1.36 million, reflecting an
increase of 214.3% from $431,000 in 1999. This increase in interest income
resulted from four major factors: (1) increased cash generated by operations;
(2) the shift of a portion of 1999 compensation from cash to equity-based
instruments; (3) a

15

reduction in estimated tax payments resulting from the utilization of a portion
of a capital loss; and (4) the reclassification of the $65 million BKF loan to
Levco to equity in December 1999. This reclassification enabled Levco to cease
making interest payments to BKF, resulting in higher cash balances for Levco.

Loss on Investments

In 2000, BKF had a net realized and unrealized loss on investments of
$228,000 primarily as the result of the permanent write down of a historical
private placement position that had been part of BKF's portfolio when it was an
investment company. This loss was partly offset by net gains in small cap,
small/mid cap, and financial services long only value equity portfolios funded
by BKF in the fourth quarter of 2000 in order to establish track records for
developing products. A pro forma adjustment to the 1999 financial statements
eliminating investment company specific income resulted in there being no pro
forma net loss or gain on investments in 1999.

Income Taxes

BKF recorded an income tax benefit of ($665,000) in 2000, as compared to a
tax provision of $6.46 million in 1999.

In 2000, BKF realized a $10.9 million capital loss for book purposes
relating to an investment that was made when BKF was still an investment
company; $4.53 million of this loss was used in 2000 to offset taxable capital
gains.

Absent the non-deductible amortization expense and the realization of the
capital loss previously recorded as an unrealized loss by the investment
company, BKF would have had an effective tax rate of 47%, which would have
resulted in a provision for taxes of $5.75 million. This amount was offset by
($6.4) million in future tax benefits primarily attributable to ($3.0) million
in future tax benefits from the unused portion of the capital loss, ($5.6)
million in future tax benefits relating to future compensation deductions
attributable to the grant of restricted stock units (as the compensation expense
is not deductible for tax purposes until the delivery of the underlying stock)
and $2.2 million in future taxable income attributable to deferred revenue and
unrealized gain on investments. An effective tax rate of 46% (before
amortization) was used to calculate the provision for taxes at December 31,
1999.

Change in Accounting Principle

A change in accounting principle that became effective on April 18, 2000
upon the de-registration of BKF as an investment company resulted in a
cumulative amortization expense derived from the 1996 acquisition of Levco by
BKF. The de-registration of BKF transformed BKF into an operating company and
caused the 1996 transaction to become subject to purchase accounting rules. This
amortization expense is non-deductible for income tax purposes because the
purchase accounting method is being applied retroactively. A one-time charge to
income in the amount of $53.37 million for accumulated amortization from June
1996 through April 18, 2000 was recorded in the second quarter of 2000. This was
a non-cash charge.

LIQUIDITY AND CAPITAL RESOURCES

BKF's current assets as of December 31, 2001 consist primarily of cash,
short term investments, advisory fees receivable and marketable equity
securities.

While BKF utilizes capital to develop and seed new investment products,
BKF's business is not generally capital intensive. BKF has historically met its
cash and liquidity needs through cash generated by operating activities. At
December 31, 2001, BKF had cash and cash equivalents of $41.83 million, compared
to $22.27 million at December 31, 2000. This increase in cash and cash
equivalents primarily reflects the retention of operating income. Investment
advisory fees receivable were $27.83 million at December 31, 2001 and $27.84
million at December 31, 2000, as an increase in assets under management was
offset by a decrease in incentive fees. The increase in investments in
affiliated investment partnerships to $17.53 million at December 31, 2001 from
$11.86 million at December 31, 2000 primarily reflects the investment by BKF of

16

$6.9 million in conjunction with the development of four affiliated investment
partnerships. This amount was partially offset by the decrease in incentive
allocations to Levco GP, Inc. These incentive allocations typically are
withdrawn within three months following the end of the calendar year to pay
compensation and other expenses.

The decrease in deferred tax assets to $4.89 million in 2001 from $6.71
million in 2000 is primarily attributable to the $2.2 million federal income tax
refund received in 2001 as the result of the carryback of a portion of a $10.9
million capital loss realized for book purposes in 2000.

Prepaid expenses and other assets declined to $2.56 million at December 31,
2001 from $3.04 million at December 31, 2000 as the result of the amortization
of the pre-paid premium on the three year Directors and Officers/Errors and
Omissions Liability insurance policy which is being financed by BKF over a
30-month period.

Investments in securities of $2.78 million at December 31, 2001, as
compared to $2.62 million at December 31, 2000, represent investments made by
the Company to seed small/mid cap and financial services long only equity value
products and shares purchased in an affiliated offshore investment company.

Accrued expenses were $4.39 million at December 31, 2001, as compared to
$3.39 million at December 31, 2000. This increase is primarily attributable to
increases in sales commissions payable to Levco salespeople and in referral fees
payable to third parties.

Accrued bonuses were at $37.61 million at December 31, 2001, as compared to
$28.06 million at December 31, 2000. This increase is primarily attributable to
(1) the increase in revenues during 2001 and (2) the increase in compensation
expense as a percentage of pre-tax, pre-compensation profits under the
compensation guidelines approved by the board of directors effective as of
January 2001.

Other liabilities decreased to $221,000 at December 31, 2001 from $974,000
at December 31, 2000, primarily as the result of (1) payments made on a loan
used to finance BKF's Directors and Officers/Errors and Omissions Liability
insurance coverage, and (2) a reduction in the amounts due with regard to
pending trades in the seed capital portfolios.

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. At December 31, 2001, the minimum annual rental commitments
under the operating lease are as follows:

2002........................................................ $ 3,807,000
2003........................................................ 3,867,000
2004........................................................ 3,870,000
2005........................................................ 3,879,000
2006........................................................ 3,943,000
Thereafter.................................................. 22,347,000
-----------
Total minimum payments required............................. $41,713,000
===========

In addition, BKF anticipates that it will incur at least $2.5 million in
costs in connection with the expansion of its facilities, which costs will be
amortized over the life of the lease.

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, 2001,
total partners' capital in these partnerships was approximately $510.0 million.
As of December 31, 2001, the sum total of Levco GP's capital accounts in the
affiliated investment partnerships

17

was approximately $17.5 million. The financial condition and results of
operations of these affiliated investment partnerships are not included in BKF's
consolidated statement of financial condition (except to the extent of Levco
GP's equity ownership). Levco GP does not maintain control over the affiliated
investment partnerships, has not guaranteed any of the affiliated investment
partnerships' obligations, and does not have any contractual commitments
associated with them. In addition, limited partners in the affiliated investment
partnerships have the right to make withdrawals on a quarterly basis.

RELATED PARTY TRANSACTIONS

Levco earned investment advisory fees from accounts for which four current
members of BKF's Board of Directors (of which one is an officer of the Company)
have controlling discretion. The amounts earned from these accounts were $2.8
million and $2.6 million for the years ended December 31, 2001 and 2000,
respectively. These accounts are managed in Levco's routine course of business
and do not and will not impact BKF's current and prospective financial position
and operating results any differently than similarly sized managed accounts.

CRITICAL ACCOUNTING POLICIES

REVENUE RECOGNITION

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 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 has
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 goodwill over a 15 year period, 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, will cease to be amortized. Goodwill will be subject to an
annual impairment test. Other intangible assets with finite lives, such as
investment contracts, will continue to be amortized over their useful lives.

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

18

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, 2001 and 2000, BKF had invested (1) $2.99 and $2.62
million, respectively, in seed capital for long only value equity products,
which investments could be similarly impacted by a decline in the performance of
value stocks, and (2) $9.32 and $2.63 million, respectively, in proprietary
alternative investment strategies, which are also exposed to market
fluctuations.

The following table (dollars in thousands) summarizes our seed capital
investments as of December 31, 2001 in long only value equity products and
alternative investment strategies and provides a sensitivity analysis assuming a
10% increase or decrease in the value of these seed capital 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 14 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.

PART III

ITEMS 10, 11, 12 AND 13.

The information required by Items 10, 11, 12 and 13 will be furnished on or
prior to April 30, 2002 (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 14. 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

Included herein at pages F-1 through F-23.

(2) Financial Data Schedules

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

19

(3) Exhibits

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

* Filed herewith

(b) Reports on Form 8-K

BKF Capital Group, Inc. filed reports on Form 8-K on May 30, 2001 and June
11, 2001. Item 5 on each such Form 8-K was completed in connection with the
adoption of the Rights Agreement dated as of June 8, 2001 between BKF and Mellon
Investor Services LLC (as Rights Agent).

20

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: April 1, 2002

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.

21

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated statements of financial
condition of BKF Capital Group, Inc. (formerly known as Baker, Fentress &
Company) as of December 31, 2001 and 2000, and the consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the years
in the three year period ended December 31, 2001. 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 conducted our audits in accordance with auditing standards generally
accepted in the 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 audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BKF Capital Group, Inc. at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the years in the three
year period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 1 to the financial statements, in 2000, BKF Capital
Group, Inc. changed its method of accounting for its acquisition of Levin
Management Co., Inc. in 1996.

/s/ ERNST & YOUNG LLP

February 15, 2002

F-2

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the pro forma adjustments reflecting the transaction
described in Note 1 and the application of those adjustments to the historical
amounts in the accompanying pro forma consolidated statements of operations and
cash flows for each of the years in the two year period ended December 31, 2000
of BKF Capital Group, Inc. (formerly known as Baker, Fentress & Company). The
historical financial statements are derived from the historical financial
statements of BKF Capital Group, Inc. and Levin Management Co., Inc., which were
both audited by us. Such pro forma adjustments are based on management's
assumptions described in Note 1. Our review was conducted in accordance with
standards established by the American Institute of Certified Public Accountants.

A review is substantially less in scope than an examination, the objective
of which is the expression of an opinion on management's assumptions, the pro
forma adjustments, and the application of those adjustments to historical
financial information. Accordingly, we do not express such an opinion.

The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the transaction occurred at an earlier date. However, the pro forma financial
statements are not necessarily indicative of the results of operations and cash
flows that would have been attained had the above-mentioned transaction actually
occurred earlier.

Based on our review, nothing came to our attention that caused us to
believe that management's assumptions do not provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
transaction described in Note 1, that the related pro forma adjustments do not
give appropriate effect to those assumptions, or that the pro forma column does
not reflect the proper application of those adjustments to the historical
financial statement amounts in the pro forma consolidated statements of
operations and cash flows for each of the years in the two year period ended
December 31, 2000.

/s/ ERNST & YOUNG LLP

February 15, 2002

F-3

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(AUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(SEE NOTE 1)

See accompanying notes

F-4

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(SEE NOTE 1)

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

(a) Pro forma results have been adjusted for the investment company specific
income and expenses of BKF Capital Group, Inc. for the period January 1,
2000 to April 18, 2000 of interest income ($228) and interest expense
($406).

(b) Calculation reflects the reverse stock split (which was effectuated January
7, 2000).

(c) Refer to page F-10 for a summary of the pro forma adjustments.
See accompanying notes
F-5

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(SEE NOTE 1)

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

(a) To adjust the advisory fee for the revenue earned by Levco for the
management of the BKF public portfolio, record additional operating
expenses to be borne by Levco which had been previously borne by BKF and
the corresponding reduction in employee bonuses.

(b) To reverse the investment company specific income and expenses of BKF
Capital Group, Inc. for the period.

(c) To record the amortization of the intangible assets using purchase
accounting for the original acquisition of Levco by BKF.

(d) To record additional taxes for the pro forma adjustments.

(e) Basis of calculation reflects the reverse stock split (which was
effectuated January 7, 2000).

(f) Reflects the accrual of incentive fees of ($204) and the related effect to
employee compensation expense and provision for income taxes of ($121) and
($36), respectively.
See accompanying notes
F-6

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

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

(a) - Includes cumulative effect of change in accounting principle in 2000.

See accompanying notes

F-7

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- HISTORICAL
(AUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

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

NON-CASH TRANSACTIONS:

During the quarter ended March 2000, the Company financed a portion of its
Directors and Officers / Errors and Omissions insurance policy (premium $910).

(a) Includes cumulative effect of change in accounting principle in 2000.

(b) The cash flow represents the historical cash flows of BKF Capital Group,
Inc. (the former registered investment company) for the period January 1,
2000 to April 18, 2000 and the combined cash flows of the holding company
for the period April 19, 2000 to December 31, 2000.
See accompanying notes

F-8

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(AUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
(SEE NOTE 1)

See accompanying notes

F-9

BKF CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION

BKF Capital Group, Inc. (formerly Baker, Fentress & Company, hereto
referred to as "BKF" or the "Company") operated under the Investment Company Act
of 1940 as a non-diversified closed-end management investment company. In August
1999, the Board of Directors and shareholders of BKF adopted and implemented a
Plan for Distribution of Assets ("Plan"), pursuant to which substantially all of
BKF's investment securities were sold. The cash proceeds, as well as shares of
Consolidated-Tomoka Land Company ("CTO"), were subsequently distributed to
shareholders by January 7, 2000. The Company received a deregistration order
from the Securities and Exchange Commission ("SEC") on April 18, 2000,
effectively completing its evolution from an investment company to a holding
company whose primary business now operates through a wholly-owned subsidiary,
Levin Management Co., Inc. and its subsidiaries, all of which are referred to as
"Levco." As of April 2000, financial reporting of BKF and Levco is on a
consolidated basis. The Company trades on the New York Stock Exchange, Inc.
("NYSE") under the symbol ("BKF").

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

JALCO is an investment advisor registered under the Investment Advisers Act
of 1940, as amended, which provides investment advisory services to its clients
which include U.S. and foreign corporations, mutual funds, limited partnerships,
universities, pension and profit sharing plans, individuals, trusts,
not-for-profit organizations and foundations. JALCO also participates in broker
consulting programs (Wrap Accounts) with several nationally recognized financial
institutions. LEVCO Securities is registered with the SEC as a broker-dealer and
is a member of the National Association of Securities Dealers, Inc. Levco GP
acts as the managing general partner of several affiliated investment
partnerships and is registered with the Commodities Futures Trading Commission
as a commodity pool operator.

The Pro Forma Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999 present the historical results of BKF and Levco,
giving effect to the following pro forma adjustments:

- elimination of the intercompany investment management fee revenues in
1999 resulting from the liquidation of the BKF public portfolio, which
had been managed by Levco;

- inclusion of operating expenses attributable to operating a publicly
traded company, which were previously borne by BKF;

- reduction of Levco's 1999 compensation expense based on the reduction of
revenue and increase in expenses;

- reversal of all investment company specific components of BKF revenue and
expenses since the Company will have no ongoing operations other than
that of Levco;

- elimination of the intercompany interest expense due to the
reclassification of the BKF loan to Levco's equity (which was effectuated
in December 1999);

- inclusion of amortization expense on intangible assets based on the
recasting of the June 1996 acquisition of Levco by BKF using the purchase
method of accounting. This item is non-deductible for income tax
purposes;

F-10

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- adjustment for income tax effect of pro forma adjustments; and

- the 1 to 6 reverse stock split effectuated on January 7, 2000

The Pro Forma Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999 reflect the pro forma cash flows of the combined
companies as if BKF had received its deregistration order effective January 1,
1999. BKF and Levco financial information is being presented on a consolidated
basis.

THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PRESENTED SINCE THEY ARE
MORE REPRESENTATIVE OF THE COMPANY'S OPERATIONS AFTER THE IMPLEMENTATION OF THE
PLAN.

The Pro Forma Consolidated Financial Statements do not necessarily
represent the results of operations or the financial position of the Company
which actually would have occurred had the proposed transaction been previously
consummated or project the results of operations or the financial position of
the Company for any future date or period. The SEC approved the application for
deregistration of the Company as a registered investment company on April 18,
2000. Therefore, the Pro Forma Consolidated Statement of Operations for the year
ended December 31, 2000 reflects the non-recurring charge relating to the change
in accounting method for the cumulative effect of the amortization of intangible
assets resulting from recording the Levco transaction under purchase accounting.

All numerical information presented in the notes to the consolidated
financial statements has been rounded to the nearest thousand dollars, unless
otherwise noted.

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
and 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 applicable.

Commissions and related clearing charges earned on securities transactions
executed by LEVCO Securities, and related expenses, are recorded on a trade-date
basis.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. The Company adopted SAB No. 101 as required in the
first quarter of 2000. The adoption of SAB No. 101 has not had a material effect
on the Company's consolidated results of operations or financial position.

CASH AND CASH EQUIVALENTS

The Company treats all highly liquid instruments with maturities at
acquisition of six months or less as cash equivalents. The Company maintained
substantially all of its cash and equivalents invested in interest bearing
instruments at two nationally recognized financial institutions to which the
Company is exposed to market and credit risk.

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS

Levco GP serves as the managing general partner for several affiliated
investment partnerships, each of which is primarily engaged in the trading of
equity securities or, in the case of one partnership, in distressed corporate
debt. At December 31, 2001, total partners' capital in the affiliated investment
partnerships aggregated approximately $510.0 million. The financial condition
and results of operations of the affiliated
F-11

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

investment partnerships are not included in the Company's consolidated statement
of financial condition with the exception of Levco GP's equity ownership. The
limited partners of the affiliated investment partnerships have the right to
redeem their partnership interests quarterly. Levco GP does not maintain control
over the affiliated investment partnerships, has not guaranteed any of the
affiliated investment partnerships' obligations, nor does it have any
contractual commitments associated with them. Investments in affiliated
investment partnerships held through Levco GP, which amounted to approximately
$17.5 million at December 31, 2001, are recorded based upon the equity method of
accounting. This investment amount equals the sum total of Levco GP's capital
accounts in the affiliated investment partnerships.

INVESTMENTS IN SECURITIES

Investments in securities consist primarily of equity securities and shares
in an affiliated offshore investment company which invests in equity securities.
Investments in securities are accounted for as "trading securities." Equity
securities are stated at quoted market values and shares in the affiliated
offshore investment company are stated at net asset value. The resulting
unrealized gains and losses are included in net realized and unrealized gain
(loss) from investments. Realized gains and losses are recorded on the
identified cost basis. Dividend income is included in interest and dividend
income in the Consolidated Statements of Operations.

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.

The Company filed consolidated Federal and combined state and local income
tax returns for the year ended December 31, 2000 and intends to file in the same
manner in subsequent years. Prior to April 18, 2000, BKF was a Regulated
Investment Company ("RIC"), which distributed all of its income. It was
generally not subject to income taxes and, therefore, no tax provision was
previously recorded. Levco, an operating company, is subject to federal, state
and local taxes on income. The Pro Forma Consolidated Statements of Operations
for the years ended December 31, 2000 and 1999 reflect a tax provision on the
pro forma consolidated results of operations.

USE OF ESTIMATES

The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.

LONG-LIVED ASSETS

Long-lived assets are accounted for in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," which requires impairment losses to be recognized on long-lived
assets used in operations when indication of an impairment exists.

F-12

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FIXED ASSETS

Furniture, fixtures, office and computer equipment and leasehold
improvements are carried at cost less accumulated depreciation/amortization.
Depreciation of furniture, fixtures, office and computer equipment is provided
over the estimated useful lives of the respective assets. Leasehold improvements
are amortized over the shorter of the economic life or the term of the lease.

INTANGIBLE ASSETS

The cost in excess of net assets of Levco acquired by BKF in June 1996 is
reflected as goodwill, employment contracts, and investment advisory contracts
in the Consolidated Statements of Financial Condition. Goodwill is amortized
straight line over 15 years and investment contracts over 10 years. Employment
contracts were amortized over the life of the contracts. Such intangible assets
and related amortization have been eliminated in the Consolidated Statement of
Financial of Condition as of December 31, 2001. Whereas the Pro Forma
Consolidated Financial Statements reflect these intangible assets under the
purchase accounting method, the retroactive income effect of recasting this
transaction was recorded in 2000 as a one-time change in accounting principle
charge to income for all accumulated amortization from June 1996 through April
18, 2000.

EARNINGS PER SHARE

The Company has not presented historical earnings per share for the years
ended December 31, 2000 and 1999 due to the significant changes in its
operations, which are not reflected in the historical financial statements. BKF,
as a registered investment company, presented its net asset value ("NAV") per
share. The pro forma earnings per share for 2000 and 1999 are shown using the
actual BKF shares outstanding (adjusted for the 1 to 6 reverse stock split
effectuated in January 2000).

The Company adopted SFAS No. 128, "Earnings Per Share" in the second
quarter of 2000. Basic earnings (loss) per share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the year. 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. There were no common stock equivalents
granted prior to January 2000.

F-13

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table sets forth the computation of basic and diluted
earnings (loss) per share (all amounts in thousand, except per share data):

In calculating diluted income (loss) per share for the years ended December
31, 2001 and 2000, 400,537 and 786,706 common stock equivalents were excluded
due to their anti-dilutive effect on the calculation.

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".

FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amounts of all assets and liabilities, other than goodwill and
fixed assets, in the Consolidated Statements of Financial Condition approximate
their fair values.

BUSINESS SEGMENTS

The Company has not presented business segment data, in accordance with
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," because it operates predominantly in one business segment, the
investment advisory and asset management business.

F-14

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

STOCK-BASED COMPENSATION

The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation"
and has adopted the intrinsic value method 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. Fair value disclosures are included in Note 10.

RECLASSIFICATIONS

Certain amounts in the 2000 and 1999 consolidated financial statements have
been reclassified to conform with current year classifications.

RECENT ACCOUNTING PRONOUNCEMENTS

In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts and for hedging
activities. SFAS No. 133 generally requires an entity to recognize all
derivatives as either assets or liabilities in the consolidated statements of
financial condition and measure those investments at fair value. SFAS No. 133,
as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133," and SFAS
No. 138, "Accounting for Certain Derivative and Certain Hedging Activities, an
amendment to FASB Statement No. 133," was required to be adopted for fiscal
years beginning after June 15, 2000. The Company adopted the new standard
effective January 1, 2001. The adoption of the new standard has not had a
material effect on the Company's consolidated results of operations or financial
position.

In June 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. Under the
new rules, goodwill will no longer be amortized but will be subject to an annual
impairment test in accordance with the Statement. Other intangible assets with
finite lives will continue to be amortized over their useful lives.

The Company will apply the new rules beginning in the first quarter of
2002. Application of the non-amortization provisions is expected to result in an
increase in net income of approximately $1.6 million per year. During 2002, the
Company will perform the first of the required impairment tests of goodwill as
of January 1, 2002. The Company does not anticipate any impairment charges
during 2002.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The primary objectives of this
statement were to establish a single accounting model for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired, and
to broaden the presentation of discontinued operations to include more disposal
transactions. Although this statement supersedes SFAS No. 121 on impairment of
long-lived assets, many of the requirements of SFAS No. 121 regarding the test
for and measurement of impairment losses of long-lived assets were retained. The
Company will adopt SFAS No. 144 on January 1, 2002. The adoption of this
statement is not expected to have a material impact on the Company's
consolidated results of operations or financial position.

2. OFF-BALANCE SHEET RISK

LEVCO Securities acts as an introducing broker and all transactions for its
customers are cleared through and carried by a major U.S. securities firm on a
fully disclosed basis. LEVCO Securities has agreed to indemnify its clearing
broker for losses that the clearing broker may sustain from the customer
accounts introduced by LEVCO Securities. In the ordinary course of its business,
LEVCO Securities does not accept orders with respect to client accounts if the
funds required for the client to meet its obligations are not on

F-15

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

3. INVESTMENT ADVISORY FEES RECEIVABLE

Included in investment advisory fees receivable are approximately $2.2
million and $2.4 million of accrued incentive fees as of December 31, 2001 and
2000, 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. SIGNIFICANT CUSTOMERS

The Company recorded revenue from one of its broker consults programs of
approximately $14.6 million, $9.6 million and $5.1 million and from two of its
affiliated investment vehicles of $27.4 million, $25.4 million and $11.0 million
for the years ended December 31, 2001, 2000 and 1999, respectively.

5. RELATED PARTY TRANSACTIONS

INVESTMENT ADVISORY FEES FROM RELATED PARTIES

The Company earned investment advisory fees from accounts for which four
current members of the Company's Board of Directors (of which one is an officer
of the Company) have controlling discretion. The amounts earned from these
accounts were $2.8 million, $2.6 million and $2.3 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

INVESTMENTS IN AFFILIATED INVESTMENT PARTNERSHIPS AND RELATED REVENUE

The Company earned investment advisory fees and general partner allocations
(inclusive of incentive fees) from affiliated domestic investment partnerships
and offshore investment vehicles of approximately $32.5 million, $28.9 million
and $12.2 million, for the years ended December 31, 2001, 2000 and 1999,
respectively.

Included in investments in affiliated investment partnerships at December
31, 2001 and 2000 are incentive allocations approximating $8.0 million,
including approximately $5.0 million payable to employee controlled entities,
and $9.2 million, respectively. It is the Company's general practice to withdraw
the incentive allocations earned from the affiliated investment partnerships
within three months after the fiscal year. Levco GP has general partner
liability with respect to its interest in each of the affiliated investment
partnerships and has no assets other than its interest in these partnerships and
certain cash and cash equivalents, which aggregate approximately $17.5 million
and $12.0 million at December 31, 2001 and 2000, respectively. Included in
investment advisory fees receivable are $14.4 million and $13.0 million of
incentive fees from sponsored offshore investment vehicles at December 31, 2001
and 2000, respectively.

Included in the Company's incentive fees and general partner incentive
allocations are approximately $5.0 million payable directly to employee owned
and controlled entities ("Employee Entities") for the year ended December 31,
2001. These Employee Entities, which serve as non-managing general partners of
several affiliated investment partnerships, also bear the liability for all
compensation expense relating to the allocated revenue, amounting to
approximately $5.0 million for the year ended December 31, 2001. These amounts
are included in the Consolidated Statement of Operations.

F-16

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

COMMISSION REVENUES

All commission revenues reflected on the Consolidated Statements of
Operations have been generated by transactions introduced to a clearing broker
by LEVCO Securities, which acts as a broker for certain investment advisory
accounts of the Company. Commission revenues have been presented net of the
related clearing expenses.

6. STOCKHOLDERS' EQUITY

The Company effectuated a 1 to 6 reverse stock split on January 7, 2000.
All share numbers and per share amounts in the Company's consolidated financial
statements reflect the reverse split.

The Company adopted a Share Purchase Rights Plan on May 29, 2001 (The
"Rights Plan"). The Rights Plan was implemented by declaring a dividend,
distributable to stockholders of record on June 18, 2001. With certain
exceptions, the rights become exercisable if a person or group acquires 10% or
more of the Company's outstanding common stock. Such an acquisition causes each
right to be adjusted to permit the holder (other than such person or any member
of such group) to buy a number of additional shares of common stock of the
Company having a market value of twice the exercise price of the rights. In
addition, if the Company is involved in a merger or other business combination
at any time after a person or group has acquired 10% or more of the Company's
shares, the Rights will entitle the holder to buy a number of shares of common
stock of the acquiring company having a market value of twice the exercise price
of each right. Rights held by the acquiring person or group become void. The
Company may also redeem the rights for $.01 per right or may exchange each right
for one share of common stock, subject to restrictions set forth in the Rights
Plan. The rights expire on June 17, 2011.

7. COMMITMENT

The Company has office space obligations that require monthly payments plus
escalations through September 2011. At December 31, 2001, the minimum annual
rental commitments under the operating lease are as follows:

2002........................................................ $ 3,807,000
2003........................................................ 3,867,000
2004........................................................ 3,870,000
2005........................................................ 3,879,000
2006........................................................ 3,943,000
Thereafter.................................................. 22,347,000
-----------
Total minimum payments required............................. $41,713,000
===========

Rent expense was $1.7 million, $1.1 million and $1.1 million net of
subrental income of $144,000, $264,000 and $110,000 for the years ended December
31, 2001, 2000, and 1999, respectively. The subrental agreement expired on June
30, 2001.

8. NET CAPITAL REQUIREMENT

LEVCO Securities is subject to the SEC's Uniform Net Capital Rule 15c3-1
("Rule"), which requires the maintenance of minimum net capital and requires
that the ratio of aggregate indebtedness to net capital, both as defined, shall
not exceed 15 to 1. At December 31, 2001 and 2000, LEVCO Securities was in
compliance with this Rule.

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BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EMPLOYEE BENEFIT PLANS

Levco has adopted a Section 401(k) plan. All employees with six months or
more of service are eligible to participate in the plan. Eligible participants
may contribute up to 15% of their earnings, subject to statutory limitations.
Levco may match employee contributions, up to 100%, subject to statutory
limitations. Included in employee compensation and benefits was $492,000,
$446,000, and $428,000 of the employee match contributions for the years ended
December 31, 2001, 2000, and 1999, respectively.

As of January 1, 2000, the Company froze its target Benefit Plan (the
"Benefit Plan"), which covered all employees who reached the age of 20.5 and had
completed nine months of service to the Company. Contributions were made by the
Company based on the employee's age and compensation. As of December 31, 1999,
the Benefit Plan was fully funded and the Company has no further liability. The
Company incurred expenses of $299,000 for the year ended December 31, 1999.

10. STOCK-BASED COMPENSATION PLANS (INCLUDING 2002 RSU GRANT)

A. RESTRICTED STOCK UNITS

In December 1998, the shareholders of BKF approved an Incentive
Compensation Plan ("Compensation Plan") that allows the Company to pay officers
and employees part of their compensation in restricted stock units ("RSU") and
other forms of equity-based compensation, including stock options. At December
31, 2001, the awards authorized and available for future grants under the
Compensation Plan were 2,600,000 and 1,160,578, respectively. All awards are
issued at the discretion of BKF's Compensation Committee.

RSU activity for the years ended December 31, 2000 and 2001 is summarized
below:

During 2000, the Company issued 727,340 RSU's to employees of the Company;
76,855 of the awards vested through December 31, 2001 and were expensed on a
straight-line method over the vesting period. The remaining awards vested and
were expensed on the date of grant.

During 2001, the Company issued 16,000 RSU's to employees and Directors of
the Company which vested on the dates of grant and, pursuant to Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," were expensed or capitalized as prepaid Directors fees, as
appropriate, on the dates of grant based on the value of the RSU's on such date.
Compensation expense and Directors fee expense related to the RSU's for the year
ended December 31, 2001 were approximately $166,000 and $56,000, respectively.

Compensation expense related to the RSU's for the years ended December 31,
2001 and 2000 was approximately $557,000 and $12.3 million, respectively. See
Note 11 -- Non-Cash Transactions.

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BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Compensation Plan also permits employees to borrow from the Company,
subject to approval of the Compensation Committee of the board of directors, in
order to purchase BKF stock or exercise options. As of December 31, 2001, no
employee has borrowed any amount under the Plan.

B. NON-QUALIFIED STOCK OPTIONS

Stock option activity for the years ended December 31, 2000 and 2001 is
summarized below:

Stock options outstanding and exercisable at December 31, 2001 are as
follows:

During 2000, the Company granted 386,455 non-qualified stock options, with
a weighted-average exercise price of $13.57. These options have a ten-year life,
vest ratably over periods ranging from one to four years and become exercisable
upon vesting.

During 2001, the Company granted 335,308 non-qualified stock options to
employees with an exercise price of $28.27. These options have a ten-year life,
vest over a three-year period and become exercisable upon vesting.

Pursuant to SFAS No. 123, the Company has elected to account for its stock
options under APB Opinion No. 25 and adopt the disclosure only provisions for
SFAS No. 123. 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. Under SFAS No. 123, the net income (loss) would have decreased by
$779,000 and increased by $963,000 for the years ended December 31, 2001 and
2000, respectively. Basic and diluted earnings (loss) per share would have been
decreased by $.12 and increased by $.15 for the years ended December 31, 2001
and 2000, respectively.

F-19

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the
years ended December 31, 2001 and 2000, respectively:

C. DEFERRED COMPENSATION PLAN

On April 18, 2000, the Company adopted a Long Term Deferred Compensation
Plan to provide a competitive long-term incentive for key officers and
employees. RSU's vesting in a given year are eligible to be deferred into this
plan. As of December 31, 2001, 49,229 of vested RSU's were deferred pursuant to
the plan.

D. 2002 RSU GRANT

In January 2002, the Company issued 154,212 RSU's to three employees of the
Company. The RSU's will vest in three equal amounts over a three-year period.

11. NON-CASH TRANSACTIONS

During 2000, the Company financed a portion of its Directors and
Officers/Errors and Omissions insurance policy (premium $910,000). The financed
amount is payable in 30 equal monthly installments of approximately $32,000.

The Company issued 13,813 shares of common stock in lieu of cash
compensation aggregating $180,000 in each of the years ended December 31, 2001
and 2000. In 2001, 5,435 of such shares were withheld to cover required
withholding taxes.

In 2001, the Company withheld 8,971 shares of common stock in connection
with the delivery of 18,813 RSU's for required withholding taxes.

During 2001, the Company granted a total of 14,000 RSU's to non-employee
directors of the Company with a value of $337,000. Of this amount $166,000 has
been used to reduce cash payments for Board of Directors and Committee meetings.
In addition, 2,000 RSU's were granted to an employee with a value of $56,000.
This amount was expensed in 2001.

12. INCOME TAXES

The Company's provision (benefit) for income taxes differs from the amount
of income tax determined by applying the applicable U.S. federal statutory
income tax rate principally due to state and local taxes and non-deductible
amortization. The Company has determined that the amortization expense on
intangible assets is non-deductible since the purchase method of accounting has
been applied retroactive to June 1996.

Deferred tax assets arise from the future tax benefit on deferred and
non-cash compensation and utilization of capital losses. Deferred tax
liabilities arise from deferred revenues, unrealized gains on investments, and
state and local taxes.

F-20

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The provision (benefit) for income taxes consists of the following:

The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities, shown net in the deferred tax
asset on the Consolidated Statements of Financial Condition, consisted of the
following:

F-21

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of income tax expense (benefit) with expected federal
income tax expense computed at the applicable federal tax rate of 35% is as
follows:

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

(1) The difference between 2000 and 1999 is attributable to the effect of the
accounting change discussed in Note 1.

(2) Primarily, the effect of the recognition of a capital loss related to
certain private portfolio investments held by BKF when it operated as an
investment company.

13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth the selected quarterly financial data (all
amounts in thousands, except per share data):

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

(a) Revenues earned during the quarter ended March 31, 2001 have been increased
by $3,987 to conform to the current presentation for the Employee Entities.

F-22

BKF CAPITAL GROUP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

F-23