<PAGE>
Baker, Fentress & Company
Report to Shareholders
1999 MIDYEAR REPORT
<PAGE>
Directors and Officers
BOARD OF DIRECTORS
Frederick S. Addy Jeffrey A. Kigner
Bob D. Allen John A. Levin
Eugene V. Fife Burton G. Malkiel
J. Barton Goodwin David D. Peterson
James P. Gorter William H. Springer
David D. Grumhaus Dean J. Takahashi
OFFICERS
James P. Gorter Chairman of the Board
John A. Levin President and Chief Executive Officer
James P. Koeneman Executive Vice President and Secretary
Scott E. Smith Executive Vice President
Julie A. Heironimus Treasurer and Assistant Secretary
Beverly J. Friedberg Assistant Treasurer
Corporate Data
Transfer and Dividend Disbursing Agent
ChaseMellon Shareholder Services
1-800-719-9058
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Address of Company
200 West Madison Street
Suite 590
Chicago, Illinois 60606
312-236-9190 or 800-BKF-1891
Web Site
www.bakerfentress.com
[RECYCLE LOGO]
The Company's Midyear Report is printed on recycled paper.
We encourage recycling and use of recycled products.
<PAGE>
To Our Shareholders
In May, BKF's board of directors made a significant announcement concerning a
Plan for Distribution of Assets of Baker, Fentress & Company. More information
about the board's adoption of the Plan can be found in the box on page three.
RESULTS THROUGH JUNE 30, 1999
Baker, Fentress & Company (NYSE: BKF) total net assets at June 30, 1999 were
$840.2 million, or $21.53 per share, compared with $771.3 million, or $19.76 per
share, at December 31, 1998. Our net asset value total return was 11.0% for the
six months ended June 30, 1999, and shareholder return, which is based on market
value, was 26.1%. This compares to total returns of 12.4% for the S&P 500 Index
and 12.0% for the Russell 1000 Value Index, respectively. The market value of
BKF shares increased at a greater rate than net asset value as our discount
narrowed from 22.5% at the end of 1998 to 11.7% as of June 30, 1999. The
narrowing of the discount occurred after the announcement made by the board on
May 6, 1999 concerning the Plan for Distribution of Assets.
As of June 30, 1999, the Company's assets were allocated as follows:
Portfolio Sector Weightings
As of June 30, 1999
<TABLE>
<CAPTION>
<S> <C>
Public............. 71.7%
Levco.............. 14.3%
CTO................ 9.1%
Private............ 4.9%
</TABLE>
COST BASIS INFORMATION
If you need more information to compute the cost basis of your BKF shares, go to
the Company web site at www.bakerfentress.com. Information on the web site
includes per share ordinary income dividends, capital gain distributions and
reinvestment prices. It also provides amounts which can be added to your cost
basis for periods in which the Company retained all or a portion of realized
capital gains.
ADDRESS CHANGE
On July 1, 1999, Baker Fentress moved to smaller office space in our present
building. Our new address is Suite 590, 200 West Madison Street, Chicago,
Illinois 60606. The telephone and fax numbers remain the same.
PUBLIC PORTFOLIO COMMENTARY
The second quarter witnessed a return to favor of value stocks, as the S&P 500
Index rose 7.1% while the Russell 1000 Value Index rose by 10.8%. For the same
period, the BKF public portfolio total return was 13.4%. Comparable total
returns for the six months ended June 30, 1999 were as follows:
BKF Public Portfolio 14.0%
Russell 1000 Value 12.0
S&P 500 Index 12.4
The resurgence of value stocks was highlighted by strength in a number of
cyclical groups, such as basic materials and capital goods. At the same time,
financials, consumer staples and healthcare stocks went through a period of
relative weakness, as interest rate fears drove the market down for the month of
May. The market rise was more broadly based than it had been in the recent past
and growth stocks trading at very high multiples were not driving the market.
Our investment philosophy, with its focus on
Baker, Fentress & Company Midyear Report 1999 1
<PAGE>
To Our Shareholders (continued)
fundamental value, diversification and capital preservation, served us well in
this environment.
Looking ahead, a number of economic signs bode well for the stock market,
including an increase in the rate of growth of corporate profits, high levels of
consumer confidence and consumer spending, and the initial stage of the economic
recoveries in the Far East and Latin America. On the negative side, wage
inflation remains a concern, although competitive pressures and increases in
productivity may limit the impact of wage inflation on prices and on margins.
With respect to the market itself, while the rebound of value stocks has been
encouraging, the market continues to see precariously high relative valuations
(although this factor is not in itself a catalyst for a market retreat).
In short, even though every environment poses a set of market risks, we
believe our stock selection and portfolio construction process is geared to
perform well relative to the market in both broadly advancing and declining
environments.
LEVCO COMMENTARY
As of June 30, 1999, total assets under management at John A. Levin & Co., Inc.
(Levco) were $8.7 billion, as compared to $8.3 billion at the end of 1998. In a
market cycle that until recently has been marked by the historically
unprecedented disparity between the performance of value and growth stocks,
value managers have been in a challenging environment, as many individuals and
institutional committees have re-evaluated their asset allocation strategies.
While Levco continues to experience some withdrawals, its institutional
marketing efforts have also begun to pay dividends. On the retail side, accounts
brought in through the broker consulting area continue at a strong pace, helped
in part by solid 1999 performance and the resurgence of value stocks in the
second quarter.
CTO COMMENTARY
Consolidated-Tomoka Land Co. (AMEX:CTO) reported excellent financial results for
the second quarter primarily due to the sale of 228 acres
of land for approximately $6.6 million.
The cash proceeds from the previously reported sale of CTO's citrus division
continue to be invested in short-term instruments. CTO's board has announced
that they intend to use these and other funds to repurchase up to 25% of CTO's
outstanding shares.
PRIVATE PLACEMENT PORTFOLIO COMMENTARY
Substantial progress was made toward liquidating the remaining private placement
portfolio assets in the second quarter. In May, we sold our remaining investment
in the Phillips-Smith limited partnership to the general partner. We expect to
receive a final distribution from our other partnership investment, Golder
Thoma, before year end. In June, Citadel Communications Corporation (CITC)
completed a secondary stock offering in which we sold a total of 982,660 CITC
shares, recognizing a gain of $26.8 million. Our remaining 830,357 CITC shares
will become freely tradable in mid-September and the trading liquidity of CITC
stock suggests we can easily sell these securities by year end.
Also in June, we sold our entire position in Security Capital US Realty in
two privately negotiated transactions for total proceeds of $9.5 million,
resulting in a modest loss of $0.5 million. We continue to explore ways to
achieve liquidity in our Durolite International investment either through a
recapitalization of the company
2 Baker, Fentress & Company Midyear Report 1999
<PAGE>
or a negotiated sale of our securities. As Durolite remains a privately held
company, our options are somewhat limited over a relatively short time frame. To
reflect this fact, we reduced the carrying value of the investment by $2.0
million, to $8.0 million, as of June 30. Overall, we remain encouraged by
progress made to date in liquidating private placement portfolio assets and
remain focused on completing this task by year end.
CLOSING COMMENTS
We are pleased with our results for the most recent six months. We also believe
that our Plan for Distribution of Assets is in the best interests of our
shareholders and will maximize shareholder value. The board urges all
shareholders to vote to approve this Plan.
/s/ James P. Gorter
- -------------------
James P. Gorter
Chairman of the Board
/s/ John A. Levin
- -------------------
John A. Levin
President and CEO
PROXY STATEMENT INFORMATION
SPECIAL SHAREHOLDERS' MEETING
If you were a shareholder on June 30, 1999, you should already have received the
proxy statement for the special meeting of shareholders that will be held on
August 19, 1999. If you did not receive a proxy statement, please call
ChaseMellon at (212) 273-8048, or if you hold your shares through a brokerage
firm, call your broker. Complete details of the Plan are in the proxy and should
be considered carefully before you vote.
SUMMARY OF PROXY STATEMENT
The proxy statement asks you to vote for the Plan for Distribution of Assets. If
the Plan is approved, the Company will sell its public and private portfolio
securities and distribute the net proceeds and the Company's CTO shares to
shareholders. The Company will de-register as an investment company, but remain
in business as a holding company with one principal asset--Levco and its related
companies.
SPECIAL SHAREHOLDERS' MEETING
The special meeting of shareholders will be held in Chicago at the Chicago
Hilton and Towers on August 19, 1999 at 10:30 am central daylight time. For
interested shareholders on the East Coast, an information meeting will be held
in New York City on August 20, 1999 at the Waldorf Astoria at 8:00 am eastern
daylight time. All official business and proxy voting will be conducted at the
Chicago meeting.
DISTRIBUTION PLAN PAYMENT SCHEDULE
If shareholders approve the Plan, the board of directors expects to meet after
the special shareholders' meeting to finalize the timing of the distribution of
assets. Shareholders are likely to receive a capital gain distribution in late
September 1999. At the same time, the Company intends to distribute its shares
of Consolidated-Tomoka Land Co. to BKF shareholders. Final distributions will
follow in late December 1999, and/or in early January 2000. All these dates are
tentative and the board may change them.
If you have any questions call the Company at 1-800-BKF-1891 or Corporate
Investor Communications, Inc. at 1-201-896-1900.
Baker, Fentress & Company Midyear Report 1999 3
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
June 30, 1999
(Unaudited)
-------------
<S> <C>
Assets
Investments, at Value:
Portfolio securities:
Unaffiliated issuers (cost $397,282,153).................. $515,022,363
Controlled affiliates (cost $137,256,517)................. 196,392,500
Non-controlled affiliates (cost $690,097)................. 30,048,529
Money market securities (cost $11,988,933).................... 11,988,750
------------
Total Investments (cost $547,217,700)................. 753,452,142
Cash and Cash Equivalents..................................... 93,270,450
Receivable for Securities Sold................................ 968,679
Dividends and Interest Receivable............................. 664,169
Other Assets.................................................. 605,220
------------
Total Assets.......................................... 848,960,660
------------
LIABILITIES
Bank Borrowing................................................ 5,000,000
Payable for Securities Purchased.............................. 2,848,302
Payable to Affiliate for Investment Management Fee............ 130,000
Accounts Payable and Accrued Liabilities...................... 762,592
------------
Total Liabilities..................................... 8,740,894
------------
NET ASSETS.............................................................. $840,219,766
============
ANALYSIS OF NET ASSETS
Common Stock, $1 par value, authorized--60,000,000 shares;
issued and outstanding--39,029,101 shares................. $ 39,029,101
Capital Surplus............................................... 463,425,243
Undistributed Net Realized Gain from Investment Transactions.. 80,916,439
Other Retained Earnings (a)................................... 50,614,541
Net Unrealized Appreciation of Investments.................... 206,234,442
------------
NET ASSETS.............................................................. $840,219,766
============
NET ASSET VALUE PER SHARE............................................... $ 21.53
============
</TABLE>
------------
(a) Prior to January 1, 1970, operating and other non-portfolio
activities were included in other retained earnings.
See accompanying Notes to Financial Statements
4 Baker, Fentress & Company Midyear Report 1999
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Year Ended
(Unaudited) December 31, 1998
--------------- -----------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends from:
Unaffiliated issuers............................ $ 4,112,771 $ 8,557,407
Affiliate....................................... 1,750,000 3,500,000
----------- ------------
5,862,771 12,057,407
----------- ------------
Interest from:
Unaffiliated issuers............................. 1,462,724 3,546,104
Affiliates....................................... 3,599,509 5,223,808
----------- ------------
5,062,233 8,769,912
----------- ------------
Total Income............................... 10,925,004 20,827,319
=========== ============
EXPENSES:
Investment management fee.......................... 780,685 1,508,711
Administration and operations...................... 791,663 1,447,660
Interest on bank borrowing......................... 147,799 339,521
Investment research................................ 218,370 875,113
Professional fees.................................. 860,310 369,758
Directors' fees and expenses....................... 243,579 391,499
Rent............................................... 152,809 341,514
Reports to shareholders............................ 141,153 322,771
Custodian and transfer agent fees.................. 77,243 149,206
Taxes other than income............................ 68,572 83,173
Other.............................................. 201,917 408,522
----------- ------------
Total Expenses............................. 3,684,100 6,237,448
----------- ------------
Net Investment Income.............. 7,240,904 14,589,871
----------- ------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain on sales of investments.......... 78,175,867 80,093,075
Change in net unrealized appreciation.............. (4,810,499) (20,884,833)
----------- ------------
Net Realized and Unrealized Gain........... 73,365,368 59,208,242
----------- ------------
Net Increase in Net Assets Resulting from Operations......... $80,606,272 $ 73,798,113
=========== ============
</TABLE>
See accompanying Notes to Financial Statements
Baker, Fentress & Company Midyear Report 1999 5
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Year Ended
(Unaudited) December 31, 1998
---------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations................... $ 80,606,272 $ 73,798,113
Adjustments to reconcile net increase in
net assets resulting from operations to net cash
provided by operating activities:
Net realized and unrealized (gain) on investments.................... (73,365,368) (59,208,242)
Decrease in receivable for securities sold........................... 131,613 911,430
Decrease in dividends and interest receivable........................ 147,201 2,383,008
(Increase) decrease in other assets.................................. 74,872 (69,962)
Increase (decrease) in accounts payable and accrued liabilities...... (32,849) (1,260,179)
Increase (decrease) in payable for investment management fee......... 3,000 (8,000)
Increase (decrease) in payable for securities purchased.............. 2,848,302 (6,502,179)
Net amortization of (discounts)...................................... (304,215) (504,621)
------------- -------------
Net cash provided by operating activities.......................... 10,108,828 9,539,368
------------- -------------
Cash Flows from Investing Activities:
Purchases of portfolio securities and closing
of short positions................................................... (208,457,544) (421,721,571)
Proceeds from sales of portfolio securities
and securities sold short............................................ 247,985,772 502,011,542
Net realized gain on financial futures transactions.................... -- 324,058
(Purchases) and sales/maturities of money
market securities, net............................................... 12,991,622 4,767,157
------------- -------------
Net cash provided by investing activities.......................... 52,519,850 85,381,186
------------- -------------
Cash Flows from Financing Activities:
Dividends and capital gain distributions............................... (11,708,730) (86,193,112)
------------- -------------
Net cash used in financing activities................................ (11,708,730) (86,193,112)
------------- -------------
Net Increase in Cash and Cash Equivalents........................................ 50,919,948 8,727,442
Cash and Cash Equivalents at the
Beginning of the Period........................................................ 42,350,502 33,623,060
------------- -------------
Cash and Cash Equivalents at the
End of the Period.............................................................. $ 93,270,450 $ 42,350,502
============= =============
Supplemental Disclosure of Noncash Financing Activities:
Capital gain distribution reinvestments................................ $ -- $ 52,060,630
============= =============
</TABLE>
See accompanying Notes to Financial Statements
6 Baker, Fentress & Company Midyear Report 1999
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Year Ended
(Unaudited) December 31, 1998
---------------- -----------------
<S> <C> <C>
Operations:
Net investment income........................................ $ 7,240,904 $ 14,589,871
Net realized gain............................................ 78,175,867 80,093,075
Change in net unrealized appreciation........................ (4,810,499) (20,884,833)
------------ -------------
Net increase in net assets resulting from operations....... 80,606,272 73,798,113
------------ -------------
Distributions to Shareholders from:
Net investment income........................................ (4,683,492) (14,347,947)
Net realized gain............................................ (7,025,238) (123,905,795)
------------ -------------
Total distributions to shareholders........................ (11,708,730) (138,253,742)
------------ -------------
Net increase (decrease) in net assets from
operations after distributions......................... 68,897,542 (64,455,629)
------------ -------------
Capital Share Transactions-Net Increase................................ -- 52,060,630
------------ -------------
Total Increase (Decrease) in Net Assets................................ 68,897,542 (12,394,999)
Net Assets at the Beginning of the Period.............................. 771,322,224 783,717,223
------------ -------------
Net Assets at the End of the Period.................................... $840,219,766 $ 771,322,224
============ =============
Undistributed Net Investment Income
at the End of the Period............................................. $ 2,799,336 $ 241,924
============ =============
</TABLE>
See accompanying Notes to Financial Statements
Baker, Fentress & Company Midyear Report 1999 7
<PAGE>
Statement of Investments
<TABLE>
<CAPTION>
June 30, 1999 - Unaudited Shares Value
------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS -- 61.30%
Common Stock -- 54.39%
Basic Materials -- 2.35%
E.I. du Pont de Nemours and Company..................................... 65,000 $ 4,440,313
Minerals Technologies Inc............................................... 14,700 820,444
Monsanto Company........................................................ 328,500 12,996,281
Placer Dome Inc......................................................... 65,905 774,384
Solutia Inc............................................................. 34,000 724,625
-----------
19,756,047
-----------
Capital Goods -- 6.83%
The Boeing Company...................................................... 96,436 4,243,184
Cable Design Technologies Corporation (b)............................... 95,940 1,481,074
Cordant Technologies Inc................................................ 17,100 772,706
General Electric Company................................................ 109,000 12,317,000
IDEX Corporation........................................................ 23,000 756,125
Owens-Illinois, Inc. (b)................................................ 280,000 9,152,500
Raychem Corporation..................................................... 23,300 862,100
Tenneco Inc............................................................. 166,600 3,977,575
Tyco International Ltd.................................................. 63,300 5,997,675
United Technologies Corporation......................................... 157,483 11,338,776
Xerox Corporation....................................................... 100,300 5,923,969
York International Corporation.......................................... 14,000 599,340
-----------
57,422,024
-----------
Communication Services -- 3.71%
Bell Atlantic Corporation............................................... 222,000 14,513,250
BellSouth Corporation................................................... 256,500 11,831,063
Loral Space & Communications Ltd. (b)................................... 266,375 4,794,750
-----------
31,139,063
-----------
Consumer Cyclical -- 4.68%
Beazer Homes USA, Inc. (b).............................................. 33,000 763,125
The Black & Decker Corporation.......................................... 202,300 12,770,188
Meredith Corporation.................................................... 20,000 692,500
Tribune Company......................................................... 279,800 24,377,575
Valuevision International, Inc. (b)..................................... 35,000 695,625
-----------
39,299,013
-----------
Consumer Staples -- 6.09%
Chancellor Media Corporation (b)........................................ 188,800 10,407,600
Cumulus Media Inc., Class A (b)......................................... 70,000 1,531,250
The Walt Disney Company................................................. 164,500 5,068,656
Fox Entertainment Group, Inc. (b)....................................... 227,800 6,136,363
Interstate Bakeries Corporation......................................... 31,900 715,756
Loews Cineplex Entertainment Corporation (b)............................ 90,000 978,750
Nabisco Holdings Corp................................................... 269,120 11,572,160
PepsiCo, Inc............................................................ 35,100 1,357,931
Ralston Purina Company.................................................. 441,300 13,432,069
-----------
51,200,535
-----------
</TABLE>
See accompanying Notes to Statement of Investments
8 Baker, Fentress & Company Midyear Report 1999
<PAGE>
Statement of Investments
<TABLE>
<CAPTION>
June 30, 1999 - Unaudited Shares Value
------------ ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED)
Energy -- 2.77%
Conoco Inc. (b)............................................ 200,200 $ 5,580,575
Schlumberger N.V........................................... 128,400 8,177,475
Unocal Corporation......................................... 239,200 9,478,300
-----------
23,236,350
-----------
Financials -- 9.30%
Ace Ltd.................................................... 216,800 6,124,600
Aetna Life Insurance and Annuity Company................... 68,600 6,135,413
Annuity and Life RE (Holdings), Ltd........................ 32,700 733,706
BankAmerica Corporation.................................... 60,987 4,471,109
The Bank of New York Company, Inc.......................... 268,600 9,854,263
W.R. Berkley Corporation................................... 65,500 1,637,500
Crescent Real Estate Equities Company...................... 35,000 831,250
CRIIMI MAE Inc............................................. 193,600 435,600
Fairfax Financial Holdings Ltd. (Stock Purchase Rights).... 78,000 9,750
Financial Federal Corporation.............................. 36,000 792,000
First Investors Financial Services Group, Inc. (b)......... 292,600 1,755,600
Horace Mann Educators Corporation.......................... 31,000 842,813
Indymac Mortgage Holdings, Inc............................. 147,250 2,356,000
Kennedy-Wilson, Inc. (b)................................... 90,000 804,375
Mellon Bank Corporation.................................... 10,600 385,575
Northern Trust Corporation................................. 41,800 4,054,600
PartnerRe Ltd.............................................. 135,800 5,075,525
Prison Realty Trust, Inc................................... 52,100 511,231
Pxre Corporation........................................... 51,000 924,375
Risk Capital Holdings, Inc. (b)............................ 14,200 191,700
Scottish Annuity & Life Holdings, Ltd. (b)................. 146,550 1,575,413
Superior National Insurance Group, Inc. (b)................ 49,200 1,340,700
Terra Nova Holdings Ltd., Class A.......................... 59,800 1,610,863
Tokio Marine & Fire Insurance Company, Limited (ADR)....... 125,000 7,015,625
UICI (b)................................................... 96,500 2,665,813
Vail Banks, Inc. (b)....................................... 26,000 269,750
XL Capital Ltd., Class A................................... 277,875 15,699,935
-----------
78,105,084
-----------
Health Care -- 5.11%
Carematrix Corporation (b)................................. 45,000 559,688
Haemonetics Corporation (b)................................ 50,000 1,003,125
Johnson & Johnson.......................................... 142,100 13,925,800
McKesson HBOC, Inc......................................... 228,130 7,342,934
Paracelsus Healthcare Corporation (b)(c)(e)................ 535,443 562,225
Pfizer Inc................................................. 64,000 6,976,000
Warner-Lambert Company..................................... 182,200 12,594,575
-----------
42,964,347
-----------
See accompanying Notes to Statement of Investments
Baker, Fentress & Company Midyear Report 1999 9
</TABLE>
<PAGE>
Statement of Investments
<TABLE>
<CAPTION>
June 30, 1999 - Unaudited Shares, Contracts, or
Principal Amount Value
---------------------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED)
Technology -- 10.32%
Compaq Computer Corporation................................ 99,100 $ 2,347,431
First Data Corporation..................................... 217,700 10,653,694
International Business Machines Corporation................ 151,600 19,594,300
Koninklijke Philips Electronics N.V........................ 139,840 14,106,360
Metamor Worldwide, Inc. (b)................................ 30,000 721,875
Schawk, Inc................................................ 72,100 644,394
Seagate Technology, Inc. (b)............................... 467,400 11,977,125
Symantec Corporation (b)................................... 33,000 841,500
Texas Instruments Incorporated............................. 179,300 25,819,200
-------------
86,705,879
-------------
Utilities -- 3.23%
KeySpan Energy Corporation................................. 563,620 14,865,478
The Williams Companies, Inc................................ 288,900 12,296,306
-------------
27,161,784
-------------
Total common stock (Cost $348,840,269).................. 456,990,126
-------------
Preferred Stock -- 3.76%
Crown Cork & Seal Company, Inc., 4.50%..................... 188,300 5,048,794
Loral Space & Communications Ltd. (b)...................... 63,100 3,178,663
The News Corporation Limited............................... 534,100 16,857,530
Owens-Illinois, Inc., 4.75%................................ 148,500 6,534,000
-------------
Total preferred stock (Cost $28,745,151)................ 31,618,987
-------------
Convertible Bonds -- 2.01%
Hewlett-Packard Company, Zero Coupon Bond
due 10/14/2017 (f)....................................... $22,785,000 14,895,694
Hewlett-Packard Company, Zero Coupon Bond
due 10/14/2017........................................... $ 3,000,000 1,961,250
-------------
Total convertible bonds (Cost $14,555,928)............. 16,856,944
-------------
Limited Partnerships -- 1.14%
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d).. 307,326
Penta Japan Domestic Partners, L.P......................... 9,248,980
-------------
Total limited partnerships (Cost $5,140,805)............ 9,556,306
-------------
Total investments in unaffiliated issures
(Cost $397,282,153)..................................... 515,022,363
------------
</TABLE>
See accompanying Notes to Statement of Investments
10 Baker, Fentress & Company Midyear Report 1999
<PAGE>
Statement of Investments
<TABLE>
<CAPTION>
June 30, 1999 - Unaudited Shares or
Principal Amount Value
---------------- ------------
<S> <C> <C>
INVESTMENTS IN CONTROLLED AFFILIATES -- 23.37%
Wholly-Owned Subsidiary -- 13.69%
Levin Management Co., Inc - investment management
Common Stock (b)(c)(d)........................................................ 1,000 $ 50,000,000
9.23% Notes due 12/31/1999 (c)(d)............................................. $65,000,000 65,000,000
------------
Total wholly-owned subsidiary (Cost $120,645,890).......................... 115,000,000
------------
Publicly Traded -- 8.66%
Consolidated-Tomoka Land Co., Common Stock (majority-owned)
development of Florida real estate (Cost $5,030,627).......................... 5,000,000 72,812,500
------------
Other -- 1.02%
DuroLite International, Inc. - manufacturer and distributor of
specialized lighting products
Convertible Preferred Stock (b)(c)(d)......................................... 2,500 --
12% Subordinated Note due 11/03/2004 (c)(d)................................... $ 8,000,000 7,501,105
DuroLite Europe Holdings, Inc. - subsidiary of DuroLite International, Inc.
23% Promissory Note due 08/20/1999 (c)(d)..................................... $ 498,895 498,895
Stock Purchase Warrant expiring 08/20/2008 (b)(c)(d).......................... 1 --
E-Sales, Inc. - diversified environmental services marketing organization
Convertible Preferred Stock (b)(c)(d)......................................... 500,000 500,000
E-Sales, Inc. - diversified environmental services marketing organization
8% Line of Credit due 12/31/1999 (c)(d)....................................... 80,000 80,000
------------
Total other (Cost $11,580,000)............................................. 8,580,000
------------
Total investments in controlled affiliates (Cost $137,256,517)................. 196,392,500
------------
INVESTMENTS IN NON-CONTROLLED AFFILIATES -- 3.58%
Publicly Traded
Citadel Communications Corporation - radio broadcasting
Common Stock (b)(c)........................................................... 830,357 30,048,529
------------
Total investments in non-controlled affiliates (Cost $690,097)................. 30,048,529
------------
MONEY MARKET SECURITIES -- 1.43%
U.S. Treasury bills - 4.324% due 07/08/1999.................................... $12,000,000 11,988,750
------------
Total investments in money market securities (Cost $11,988,933)................ 11,988,750
------------
TOTAL INVESTMENTS -- 89.68% (Cost $547,217,700)........................................... 753,452,142
------------
Cash and Other Assets, Less Liabilities -- 10.32%......................................... 86,767,624
------------
NET ASSETS -- 100.00%..................................................................... $840,219,766
============
</TABLE>
See accompanying Notes to Statement of Investments
Baker, Fentress & Company Midyear Report 1999 11
<PAGE>
Notes to Statement of Investments
- ----------------------
(a) Based on the cost of investments of $496,313,018, for federal income
tax purposes at June 30, 1999, net unrealized appreciation was
$257,139,125, which consisted of gross unrealized appreciation of
$273,146,601 and gross unrealized depreciation of $16,007,476.
(b) Non-income producing security.
(c) Subject to legal or contractual restrictions on sale. They are valued
at cost on the dates of acquisition and at a fair value as determined
in good faith by the board of directors of the Company as of June 30,
1999, based upon all factors deemed relevant by the board. The
quantitative and qualitative factors considered by the board of
directors may include, but are not limited to, type of securities,
nature of business, marketability, restrictions on disposition, market
price of unrestricted securities of the same issue (if any),
comparative valuation of securities of publicly-traded companies in
the same or similar industries, valuation of recent mergers and
acquisitions of similar companies, current financial condition and
operating results, sales and earnings growth, operating revenues,
competitive conditions, and current and prospective conditions in the
overall stock market.
The values determined by the board of directors may not reflect
amounts that could be realized upon immediate sale, nor amounts that
ultimately may be realized. Accordingly, the fair values included in
the statement of investments may differ from the values that would
have been used had a ready market existed for these securities, and
such differences could be significant. The aggregate value of
restricted securities was $154,498,080 or 18.4% of net assets, at
June 30, 1999.
(d) There were no unrestricted securities of the same issue outstanding on
June 30, 1999 or the dates of acquisition.
(e) Represents 80% of the current market price of unrestricted common
stock of Paracelsus Healthcare Corporation.
(f) Security exempt from registration requirements under Rule 144A of the
Securities Act of 1933 which permits resales of eligible securities
issued in private placements and other transactions to "Qualified
Institutional Investors."
12 Baker, Fentress & Company Midyear Report 1999
<PAGE>
Notes to Financial Statements -- (Unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of 1940 as a non-
diversified closed-end management investment company. The Company invests for
total return with an emphasis on capital appreciation.
Investment valuation
Investments are stated at "value." Securities traded on securities exchanges or
on the Nasdaq National Market are valued at the last reported sales prices on
the day of valuation; listed and Nasdaq securities for which no sales were
reported on that day and other securities traded in the over-the-counter market
are valued at the mean of closing bid and asked prices on that day. Money market
securities are valued at market value. Options traded on an exchange are valued
using the last sale price on the day of valuation or, if the last sale price
falls outside the range of the bid and asked prices, at the bid or asked price
in the case of long options and short options, respectively. Restricted
securities and other securities for which prices are not readily available, or
for which market quotations are considered not to reflect fair value, are valued
at a fair value as determined by the board of directors as explained in Note (c)
in the Notes to Statement of Investments. The values determined by the board of
directors, including the values of the Company's investments in Consolidated-
Tomoka Land Co. (CTO) and Levin Management Co., Inc. (Levco), discussed below,
may not reflect amounts that could be realized upon immediate sale, nor amounts
that ultimately may be realized. Accordingly, the fair values included in the
Company's financial statements may differ from the values that would have been
used had a ready market existed for these securities, and such differences could
be significant.
The Company may be considered to be a "controlling person" of CTO and Levco
within the meaning of the Securities Act of 1933. A public sale of shares of
these companies would require registration under the Securities Act. The shares
of CTO are valued by the board of directors at the closing price as reported by
the American Stock Exchange on the day of valuation. The shares of Levco are not
publicly-traded and are valued at a fair value as determined by the board of
directors.
Investment transactions
Investment transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Investment income
The Company records dividends on the ex-dividend date. Interest income is
recorded on an accrual basis and includes amortization of premium and discount.
Such income is classified based on the affiliation status of the issuer as of
the date of the financial statements.
Cash equivalents
The Company includes cash balances at its custodian bank in an interest-bearing
demand deposit account and other short-term investments.
Federal income taxes, dividends, and
distributions to shareholders
In order to qualify as a regulated investment company and avoid being subject to
federal income or excise taxes, the Company intends to distribute substantially
all of its taxable net investment income (including net realized short-term
capital gain, if any) within the time limits prescribed by the Internal Revenue
Code. Accordingly, no provision has been made for federal income or excise tax
on such income.
Dividends and distributions payable to shareholders are recorded by the
Company on the ex-dividend date.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
Baker, Fentress & Company Midyear Report 1999 13
<PAGE>
Notes to Financial Statements -- (Unaudited) (continued)
NOTE 2. CAPITAL STOCK
Transactions in capital stock for the first six months of 1999 and for the year
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Shares Amount
-------------------- --------------------
1999 1998 1999 1998
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions......... -- 3,046,020 $ -- $ 3,046,020
Increase in
capital surplus....... -- 49,014,610
-------- ----------
Net increase.......... $ -- $52,060,630
-------- ----------
</TABLE>
The Company may purchase shares of its own stock in open market or private
transactions from time to time and at such prices and amounts as management may
deem advisable. Since such purchases are made at prices below net asset value,
they increase the net asset value per share of the remaining shares outstanding.
The Company made no such purchases for the first six months of 1999 and for the
year ended December 31, 1998.
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the first six months of 1999 and
for the year ended December 31, 1998 to officers of the Company amounted to
$269,732 and $880,750, respectively. Fees, excluding expenses, of $206,000 and
$337,000 were incurred during the first six months of 1999 and for the year
ended December 31, 1998, respectively, for directors who were not officers of
the Company.
NOTE 4. FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
In December of each year, the Company distributes to its shareholders all or a
portion of its net long-term capital gain realized during the year. The capital
gain distribution is paid in additional shares of the Company's stock, or in
cash if so elected by individual shareholders.
In 1998, the Company made a long-term capital gain distribution of $3.25
per share. Approximately 76.0% of the $0.52 per share of ordinary income
dividends paid during 1998 qualified for the corporate dividends received
deduction, and 7.2% represented income earned on U.S. government obligations.
NOTE 5. INVESTMENT TRANSACTIONS
The cost of securities purchased and proceeds from securities sold during the
first six months of 1999, excluding money market investments, aggregated
$204,625,247 and $247,985,772, respectively.
NOTE 6. RETIREMENT PLANS AND POST-RETIREMENT HEALTH CARE BENEFITS
The Company maintains a non-contributory money purchase pension plan covering
all employees. Company contributions are based on compensation. Total plan
contributions for 1998 were $140,030.
The Company also provides certain health care benefits for retired
employees. All of the Company's employees become eligible for these benefits
upon retirement and the coverage is provided on a contributory basis. These
benefits are subject to deductible and co-payment provisions, medicare
supplements and other limitations. The net expense for post-retirement health
care benefits for 1998 was $75,270.
NOTE 7. BANK BORROWING AND LINE OF CREDIT
On June 24, 1996, the Company entered into a $40 million revolving credit
agreement with the Northern Trust Company. The facility expires on January 15,
2000. Borrowings outstanding are at the :London Interbank Offered Rate (LIBOR)
plus 0.35%. The commitment fee associated with the unused portion of the
revolving credit agreement is 0.08% per annum.
The amount outstanding at June 30, 1999 was $5.0 million. The interest rate
is reset periodically under the revolving credit facility and the fair value of
the debt at June 30, 1999 approximates its carrying value. The maximum borrowing
and
14 Baker, Fentress & Company Midyear Report 1999
<PAGE>
the average daily borrowing balances during the period for which borrowings were
outstanding were $5.0 million and $5.0 million, respectively. The interest rate
at June 30, 1999 and the weighted average interest rate during the first six
months of 1999 were 5.4% and 5.4%, respectively.
NOTE 8. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
Agreements:
The Company has an investment advisory contract with John A. Levin & Co., Inc.,
a wholly-owned subsidiary of Levin Management Co., Inc., and an indirect wholly-
owned subsidiary of the Company, which provides for payment of a fee at an
annual rate of 0.30%, based on the value of the assets of the public portfolio
of the Company. For the six months ended June 30, 1999, the Company incurred
management fees of $760,685.
The Company's investments, other than the public portfolio, are managed by
the Company's officers under the supervision of its board of directors.
A summary of transactions with affiliated companies during the six months
ended June 30, 1999 follows:
<TABLE>
<CAPTION>
Purchases Realized
(Sales) Gain (Loss) Income
----------- ----------- ----------
<S> <C> <C> <C>
Citadel Communications
Corporation
Common stock............... $(1,170,899) $37,593,605 $ --
Consolidated-Tomoka
Land Co....................... -- -- 1,750,000
DuroLite International
Note....................... -- -- 240,000
DuroLite Europe Holdings, Inc.
Note....................... -- -- 55,253
Warrant.................... -- -- --
Levin Management Co., Inc.
Common stock............... -- -- --
Note due 12/28/1999........ -- 3,303,625
E-Sales Inc.
Convertible Preferred...... -- -- --
Line of Credit............. 80,000 -- 631
----------- ----------- ----------
$(1,090,899) $37,593,605 $5,349,509
=========== =========== ==========
</TABLE>
NOTE 9. PLAN FOR DISTRIBUTION OF ASSETS
The Company has called a special meeting of shareholders to be held on August
19, 1999 to vote on the Plan for Distribution of Assets. If approved, the
Company will sell its public and private portfolio securities and distribute the
net proceeds to shareholders. In addition, the Company will distribute the
shares of Consolidated-Tomoka Land Co. it owns to shareholders.
After the distribution of assets is completed, the Company will de-register as
an investment company, but remain in business as a holding company with one
principal asset -- Levco and its related companies.
The proxy statement for this special shareholders' meeting contains more
detailed information.
NOTE 10. YEAR 2000
The Company could be adversely affected if the computer systems used by the
Company and its service providers, including John A. Levin & Co., Inc., do not
properly process and calculate date-related information relating to the Year
2000. The Company is taking steps that it believes are reasonably designed to
address the Year 2000 problem with respect to the computer systems it uses and
to obtain satisfactory assurances that comparable steps are being taken by each
of the Company's other major service providers. The Company does not expect to
incur any significant costs in order to address the Year 2000 problem. However,
at this time, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Company. In addition, there can be no assurances
that the Year 2000 issue will not have an adverse effect on the companies whose
securities are held by the Company or on global markets or economies generally.
Baker, Fentress & Company Midyear Report 1999 15
<PAGE>
Portfolio Changes Exceeding $2.5 Million
<TABLE>
<CAPTION>
Quarter Ended June 30, 1999 - Unaudited
Purchases Cost
- --------- -----------
<S> <C>
Warner-Lambert Company.......................... $ 11,983,799
McKesson HBOC, Inc.............................. 8,038,936
Seagate Technology, Inc......................... 7,150,323
Xerox Corporation............................... 5,745,898
Tyco International Ltd.......................... 5,534,904
Schlumberger N.V................................ 5,437,100
BellSouth Corporation........................... 5,158,341
Johnson & Johnson............................... 4,685,536
Monsanto Company................................ 3,722,137
Fox Entertainment Group, Inc.................... 3,697,140
Engelhard Corporation........................... 3,196,050
The News Corporation Limited.................... 2,967,231
General Electric Company........................ 2,962,417
Nabisco Holdings Corp........................... 2,667,117
Compaq Computer Corporation..................... 2,600,560
------------
$ 75,547,489
============
Sales Proceeds
- ----- ------------
<C> <C>
Citadel Communications Corporation.............. $ 28,462,491
MediaOne Group, Inc............................. 27,394,547
Potomac Electric Power Company.................. 17,837,095
Sempra Energy................................... 11,829,084
Tribune Company................................ 10,316,146
Security Capital U.S. Realty.................... 9,480,313
Sundstrand Corporation.......................... 9,046,066
Duke Energy Corporation......................... 8,489,100
TRW Inc......................................... 8,193,491
Lockheed Martin Corporation..................... 5,074,779
Engelhard Corporation........................... 3,784,783
United Technologies Corporation................. 3,132,022
------------
Total................................. $143,039,917
============
</TABLE>
Top Ten Holdings
Our top ten holdings as a percent of net assets at June 30, 1999 were:
<TABLE>
<CAPTION>
<S> <C>
1. Levin Management (with its subsidiaries, including Levco) Investment advisor........ 13.7%
2. Consolidated-Tomoka, Florida real estate............................................ 8.7
3. Citadel Communications, Radio broadcasting.......................................... 3.6
4. Texas Instruments, Electronic components and semiconductors......................... 3.1
5. Tribune, Publishing and broadcasting................................................ 2.9
6. International Business Machines, Computer technology................................ 2.3
7. The News Corp, Publishing and broadcasting.......................................... 2.0
8. Hewlett-Packard, Computer technology................................................ 2.0
9. XL Capital, Insurance............................................................... 1.9
10. KeySpan Energy, Electric and gas utility............................................ 1.8
----
Total............................................................... 42.0%
====
</TABLE>
16 Baker, Fentress & Company Midyear Report 1999
<PAGE>
Financial Highlights
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for the six months ended June 30, 1999 and
for each year in the five-year period ended December 31, 1998.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1999 Year Ended December 31,
(Unaudited) 1998 1997 1996 1995 1994
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year.. $ 19.76 $ 21.78 $ 21.77 $ 21.75 $ 17.47 $ 20.42
-------- -------- -------- -------- -------- --------
Net investment income.......................... .37 0.53 0.72 0.37 0.35 0.35
Net realized gain (loss) and
net change in unrealized appreciation
and other changes............................. 1.70 1.50 2.26 3.31 5.67 (1.36)
-------- -------- -------- -------- -------- --------
Total investment operations......................... 2.07 2.03 2.98 3.68 6.02 (1.01)
Less distributions:
Dividends from net investment
income........................................ (.30) (0.52) (0.54) (0.78) (0.35) (0.35)
Distribution from net realized
gain.......................................... -- (3.25) (2.23) (1.78) (1.20) (1.46)
-------- -------- -------- -------- -------- --------
Total distributions................................. (.30) (3.77) (2.77) (2.56) (1.55) (1.81)
-------- -------- -------- -------- -------- --------
Dilution (a) resulting from:
Shares issued in acquisition of
Levin Management Co., Inc.................... -- -- -- (0.90) -- --
Reinvestment of capital gain
distribution................................. -- (0.28) (0.20) (0.20) (0.19) (0.13)
-------- -------- -------- -------- -------- --------
Total dilution...................................... -- (0.28) (0.20) (1.10) (0.19) (0.13)
-------- -------- -------- -------- -------- --------
Net asset value, end of period...................... $ 21.53 $ 19.76 $ 21.78 $ 21.77 $ 21.75 $ 17.47
======== ======== ======== ======== ======== ========
Per share market price, end of
period............................................. $ 19.00 $ 15.313 $ 18.25 $ 16.875 $ 16.75 $ 13.75
Total Investment Return-
Shareholder Return................................ 26.07% 3.45% 25.17% 15.48% 33.20% (7.51)%
Ratios to Average Net Assets
Expenses............................................ .94% .80% .87% .90%(b) .78% .75%
Expenses before interest expense.................... .90% .76% .74% .77% .78% .75%
Net investment income............................... 1.82% 1.87% 2.07% 1.53% 1.79% 1.38%
Supplemental Data
Net assets, end of period (000's
omitted)........................................... 840,220 771,322 783,717 741,146 599,182 461,931
Portfolio turnover.................................. 56.00% 53.72% 33.72% 59.78% 35.89% 41.63%
Shares outstanding, end of period
(000's omitted)................................... 39,029 39,029 35,983 34,042 27,544 26,442
</TABLE>
----------
(a) Effect of the Company's issuance of shares at a price below net asset
value.
(b) The expense ratio before severance-related expenses was .82% for 1996.
Baker, Fentress & Company Midyear Report 1999 17
<PAGE>
[INSERT PICTURE]
Baker, Fentress & Company
Established 1891
SUITE 590, 200 WEST MADISON STREET
CHICAGO, ILLINOIS 60606
(312) 236-9190 FAX (312) 236-6772
