BAKER FENTRESS & CO, 40-8F-2, 1999-09-08

BAKER FENTRESS & CO
40-8F-2, 1999-09-08

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

In the Matter of

BAKER, FENTRESS & COMPANY

200 West Madison Street, #590

Chicago, Illinois 60606

File No. 811-2144

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

Application

pursuant to Section 8(f) of the Investment Company Act of 1940

for Order Declaring that Baker, Fentress & Company

Has Ceased to be an Investment Company.

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

Communications regarding this Application

should be addressed to:

Janet D. Olsen
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison
Chicago, Illinois 60602
(312) 807-4311

1
<PAGE>

UNITED STATES OF AMERICA
BEFORE THE
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

<TABLE>
<CAPTION>
<S> <C>
- -------------------------------
IN THE MATTER OF

BAKER, FENTRESS & COMPANY Application pursuant to Section 8(f) of
the Investment Company Act of 1940 for
200 West Madison Street, #590 Order Declaring that Baker, Fentress &
Chicago, Illinois 60606 Company Has Ceased to be an Investment
Company.
File No. 811-2144
Investment Company Act of 1940
- -------------------------------
</TABLE>

Baker, Fentress & Company (the "Company") hereby applies pursuant to
Section 8(f) of the Investment Company Act of 1940 (the "1940 Act") for an order
of the Securities and Exchange Commission (the "Commission") declaring that the
Company has ceased to be an investment company. The Company will qualify for the
order upon completion of the implementation of the Plan For Distribution of
Assets of Baker, Fentress & Company (the "Plan"), because at that time it no
longer will be an "investment company" within the meaning of Section 3(a) of the
1940 Act. Under the Plan, the Company will distribute the Company's shares of
Consolidated-Tomoka Land Co. ("CTO") to the Company's shareholders, sell all of
the Company's publicly-traded securities and all or most of the Company's
private placement securities and distribute the net proceeds (less certain
expenses) to the Company's shareholders. The Company will continue in business
as a holding company that owns Levin Management Co., Inc. ("Levin Management")
and its subsidiaries.

I. Background

A. Historical Development of the Company
-------------------------------------

The Company currently is a non-diversified, closed-end management
investment company registered with the Commission under the 1940 Act. The
Company began doing business in 1891 and the present Company was incorporated
under the laws of Delaware in 1954. The Company conducted business as an
investment banker and a broker-dealer in securities until 1960, when it became a
private investment company.

2
<PAGE>

Act. The Company's shares trade under the symbol "BKF" on the New York Stock
Exchange (the "NYSE").

The Company's investment objective is total return with an emphasis on
capital appreciation. The Company also invests for the purpose of controlling
and managing portfolio companies. For internal management purposes, the Company
has divided its investment portfolio into four segments:

. a diversified portfolio of investments in publicly-traded, predominantly
large-cap companies with a focus on long-term appreciation and capital
preservation;

. investments in private placement securities generally acquired directly
from issuing companies;

. Levin Management and its subsidiaries, including John A. Levin & Co.,
Inc. ("Levco"), a registered investment adviser that manages the
Company's public portfolio; and

. a 78.5% interest in CTO.

The Company's investment portfolio is ordinarily substantially fully
invested in common stocks and other equity-related securities such as preferred
stock, debt securities convertible into, or, for private placements, accompanied
by options or warrants to purchase equity securities, and stock-index options
and stock-index futures.

The Company acquired Levco in June 1996 as a vehicle through which the
Company believed it could develop a broader financial services business. As part
of the acquisition, the Company formed Levin Management to provide
administrative and management services to Levco and its subsidiaries. The
Company owns 100% of Levin Management, which in turn owns 100% of Levco. Levco
owns 100% of LEVCO GP, Inc., which is the general partner of several investment
partnerships managed by Levco, and LEVCO Securities, Inc., a registered broker-
dealer. Levin Management, Levco and Levco's subsidiaries collectively are called
the "Levco Companies" in this Application.

Until the Company's acquisition of the Levco Companies in 1996, the
Company's officers managed the Company's investments under the supervision of
the Company's Board of Directors (the "Board"), without an investment adviser.
Since June 1996, Levco has managed the Company's public portfolio and the
Company's officers have continued to manage the Company's other investments.

B. Why the Company Will Not Be An Investment Company Upon Completion of
--------------------------------------------------------------------
the Plan
- --------

In 1998, the Board established a strategic planning committee to explore
ways to develop the Company's financial services business through Levco. This
process later evolved into

3
<PAGE>

exploring the strategic alternatives that might be available to the Company for
all of its assets and operations.

In January 1999, the Company retained Lazard Freres & Co. LLC to provide
advice to the Board and to develop a series of strategic alternatives to grow
and strengthen the Company's assets and operations, and to enhance shareholder
value.

The Board met in February 1999 to discuss the strategic alternatives that
Lazard Freres had developed, including the proposal that became the Plan.
Several months later, the Board convened a special meeting at which the
Company's advisors presented historical information to the Board about the
Company, including detailed performance and discount information. Because the
Levco Companies would be the Company's principal asset upon consummation of the
Plan, the Board reviewed information about the Levco Companies, including
information related to Levco's assets under management, Levco's investment
performance and a variety of statistical and other data on Levin Management's
consolidated financial condition. In May 1999, the Board preliminarily approved
the Plan and issued a press release describing the Plan and its consequences to
the Company's shareholders.

On June 17, 1999, the Board met and unanimously concluded that the Plan was
advisable and in the best interests of the Company's shareholders. The Board,
including those directors who are not "interested persons" of the Company under
the 1940 Act (who constitute a majority of the Board), considered and
unanimously approved the Plan and authorized its submission to the Company's
shareholders. A copy of the plan is attached hereto as Exhibit A. On July 22,
1999, the Company mailed proxy materials seeking shareholder approval of the
Plan to the Company's shareholders. A copy of the proxy statement is attached
hereto as Exhibit B.

On August 19, 1999, the Company held a Special Meeting of Shareholders to
vote on the Plan. Approval of the Plan required the affirmative vote of the
holders of more than 50% of the Company's outstanding common stock. At the
record date for the shareholders' meeting, the Company had 39,029,101 shares of
common stock outstanding. The vote of the Company's shareholders on the Plan was
as follows:

<TABLE>
<CAPTION>
For Against Abstain
---------------------------------------------------------
<S> <C> <C>
27,162,378 (69.60%) 960,767 (2.46%) 203,488 (0.52%)
</TABLE>

C. The Plan for Distribution of Assets and Deregistration of the Company
---------------------------------------------------------------------

1. Liquidation of the Company's Private and Public Portfolios and
Distribution of Proceeds

In accordance with the Plan, the Company's officers have begun their
efforts to sell the securities in the private placement portfolio and Levco has
begun selling the securities in the Company's public portfolio in an orderly
manner, in each case, at prices and on terms and conditions the Company's
officers and Levco believe are reasonable and in the best interests of the
shareholders and the Company. As portfolio securities are sold, the Company's
officers have invested the proceeds in short-term, high quality investments that
the Company expects to sell

4
<PAGE>

just prior to a distribution so that it can include the sale proceeds with the
distribution. The Company will keep enough cash to meet certain expenses and any
securities that it cannot sell on terms it considers reasonable, until the
Company can sell them at appropriate terms, at which time the Board will
determine the disposition of the net proceeds.*

As of June 30, 1999, the total value of the Company's public portfolio and
private placement securities was approximately $614.6 million. Included in these
totals are private placement securities (including publicly-traded securities
that the Company had purchased as private placement securities) that the Board
determined had fair values in the aggregate of approximately $39.5 million. The
amount of proceeds from the sales of securities that the Company will distribute
to shareholders will depend on, among other things, the values of the securities
when they are sold and the costs the Company incurs, including commissions, to
sell the securities. The final amounts the Company will distribute to
shareholders may be more or less than the values of the Company's securities
noted above. The Company will retain some of the sale proceeds to pay for the
expenses of implementing the Plan, for a reverse stock split approved by the
Company's shareholders, for operating the Company's Chicago office until it is
closed, for on-going costs of the Company and for other expenses in connection
with the Plan, including severance and other employee-related matters.

2. Distribution of CTO Shares

The Plan also includes a special dividend to Company shareholders of all of
the CTO shares owned by the Company. As a result of the distribution of CTO
shares, Company shareholders will own the CTO shares directly and will enjoy
greater flexibility in making investment decisions regarding CTO. After the
distribution of the CTO shares, shareholders will own directly the same economic
interest in CTO they now own through ownership of shares of the Company's stock.
Company shareholders will receive 1 CTO share for each 7.8058 Company shares
owned. On the distribution date, the Company will deliver all of the outstanding
CTO shares that it owns to ChaseMellon Shareholder Services, LLC, the
Distribution Agent. The Distribution Agent will cause the CTO shares to be re-
registered and will then mail the certificates for (or otherwise deliver) the
CTO shares to the Company shareholders entitled to receive them as of such
record date.

3. Manner of Effecting the Distributions

At a meeting on August 19, 1999, the Board determined that the Company will
make its first distribution of cash and its in-kind distribution of CTO shares
on September 24, 1999, to shareholders of record on August 30, 1999. The Company
expects to distribute the balance of the net cash proceeds of the sales of the
Company's securities investments (less the expenses

- --------------------------
* At the date of this application, the Company believes that it is highly
likely that all its private placement investments except one will be sold
before year-end. The Company does not yet know whether it will be able to
sell the remaining investment (valued at $8 million at June 30, 1999) by
year-end.

<PAGE>

described above) in one or two additional distributions (to shareholders of
record at dates the Board will determine), with the final distribution on or
about January 7, 2000. After its last distribution, except for any private
placement securities that the Company may not be able to sell at acceptable
prices, the Levco Companies will be the Company's principal remaining asset.

Until the Company completes the distributions contemplated by the Plan and
the order requested by this application is entered, the Board has the power to
abandon, defer or modify the distributions or any other matter the Plan
contemplates. The Board will take such an action only if it concludes that doing
so will be in the best interests of the Company and its shareholders. The Board
considers it very unlikely that it will take any such action.

D. The Company's Representations to its Shareholders and the Public
----------------------------------------------------------------

In its representations to the public and its shareholders, the Company has
consistently made clear its intention to seek to increase the value to
shareholders of their investment in the Company by distributing substantially
all of its assets, with the exception of the Levco Companies, ceasing to operate
as an investment company and seeking an order from the Commission terminating
the Company's registration as an investment company.

On May 6, 1999, the Company publicly announced the Board's approval of a
preliminary plan intended to increase shareholder value and continue the
existence of the Company as a non-investment company that provided investment
management services through Levco. The announcement stated that the Company
would distribute substantially all of the assets of the Company, with the
exception of the Levco Companies, seek an order terminating the Company's
registration as an investment company and continue the existence of the Company
as a non-investment company.

On June 18, 1999, the Company issued a press release announcing that the
Board had called a special meeting of the shareholders to vote on the Plan. The
Company again stated its intention to cease operating as an investment company,
distribute substantially all of its assets, and amend its Certificate of
Incorporation to provide for a reverse split of the Company's common stock.

In the Company's Proxy Statement relating to its Special Meeting of
Shareholders held on August 19, 1999, the Company made the following statements
regarding its intentions:

1. Upon approval of the Plan by the Company's shareholders, the
Company will stop investing in accordance with the Company's
current investment objectives, restrictions and policies,
liquidate the securities held in the public portfolio and
continue liquidating the private portfolio.

2. The Company will invest the proceeds of the sale of its
investment securities in short-term, liquid investments.

6
<PAGE>

3. The Company will distribute the proceeds of the sale of its
investment securities and the Company's shares of CTO to the
Company's shareholders no later than early January 2000.

4. The Company will prepare and file the documents necessary to
deregister the Company as an investment company, and will close
the Company's Chicago office after the Company has deregistered.

5. The Company will continue in business as a holding company, the
principal asset of which will be the Levco Companies.

The Company's officers reaffirmed those intentions during presentations and
in responses to questions to shareholders at the Special Meeting of Shareholders
on August 19, 1999 in Chicago and at an informational meeting for shareholders
in New York on August 20, 1999.

The Company issued a press release on August 19, 1999 announcing that the
Company's shareholders had approved the Plan and that the Board had authorized
the first distribution of assets pursuant to the Plan.

E. Nature of the Company's Current Assets and Liabilities and Sources of
---------------------------------------------------------------------
the Company's Current Income
----------------------------

1. Nature of the Company's Assets and Liabilities Prior to
-------------------------------------------------------
Shareholder Approval of the Plan
--------------------------------

The expected nature of the Company's assets and liabilities and the sources
of its income after the consummation of the Plan will demonstrate that the
Company no longer will be an investment company. At December 31, 1998 and
through June 30, 1999, the Company's assets and liabilities were as follows:

7
<PAGE>

<TABLE>
<CAPTION>
12/31/98 6/30/99
(Audited) (Unaudited)
------------ ------------
<S> <C> <C>
Assets
Investments:
Portfolio Securities:
Unaffiliated Issuers $450,717,807 $515,022,363
Controlled Affiliates 198,663,895 196,392,500
Non-controlled affiliates 57,940,221 30,048,529
Money market securities 24,980,556 11,988,750
Cash 42,350,502 93,270,450
Receivables 1,100,292 968,679
Dividends and Interest Receivable 811,370 664,169
Other assets 680,022 605,220
------------ ------------
Total Assets 777,244,665 848,960,660
Liabilities
Bank Borrowing 5,000,000 5,000,000
Payable for Securities Purchased 0 2,848,302
Payable to Affiliate for Investment 127,000 130,000
Management Fee
Accounts payable and accrued 795,441 762,592
liabilities
------------ ------------
Total Liabilities 5,922,441 8,740,894
------------ ------------

Net Assets $771,322,224 840,219,766
======================================================================================
</TABLE>

The Company's audited financial statements at and for the year ended
December 31, 1998, and unaudited financial statement at and for the period ended
June 30, 1999 are attached hereto as Exhibit C.

As of June 30, 1999, the Company's assets included its public and private
portfolios, its interests in CTO and the Levco Companies, and cash and cash
equivalents. The Company's public portfolio included investments in publicly-
traded securities (which were predominantly in large-cap companies). The
Company's private portfolio at that time included equity and equity-related
securities of only three issuers, having a total fair value (as determined by
the Board) of approximately $8.9 million and representing 1% of the Company's
total net assets.

At June 30, 1999, the Company owned 78.5% of the outstanding common stock
of CTO. The Company's investment in CTO had a value of about $73 million at that
date (based on the closing price of CTO's common stock on the American Stock
Exchange that day) and represented 8.7% of the Company's total net assets.

The Company's liabilities as of June 30, 1999 included a $5,000,000 bank
borrowing and $2,848,302 payable for securities purchased. Also, the Company
owed Levco $130,000 for investment management services provided, and had other
accounts payable and accrued liabilities of $762,592.

8
<PAGE>

2. Projected Nature of the Company's Assets and Liabilities Upon
-------------------------------------------------------------
Completion of the Plan
----------------------

The accompanying unaudited pro forma consolidated statement of financial
condition presents the balance sheets of the Company on a pro forma basis upon
consummation of the Plan. After the Company's final distribution pursuant to the
Plan (expected to be on or about January 7, 2000) the Company will have no
operations other than as a holding company of the Levco Companies. The
Consolidated Statement of Financial Condition presents, on a pro forma basis,
the Company adjusted for the liquidation of substantially all of its private and
public portfolios, the distribution of cash, the distribution of CTO shares and
the recasting of the June 1996 acquisition of Levco as a purchase, taking into
account intangible assets. The pro forma equity section has been adjusted to
reflect a proposed contribution to equity of $45,000,000 of a $65,000,000
intercompany loan from the Company to Levin Management*, as well as the 6:1
reverse stock split that will occur as part of the Plan.

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

* As of the date of this application, the Board has not yet decided whether or
not to cause Levin Management to borrow from a third party lender to repay
$20,000,000 of the intercompany loan. If the Board decides not to require
that repayment, the entire $65,000,000 will be contributed to equity.

9
<PAGE>

Baker, Fentress & Company
Unaudited Pro Forma Statement of Financial Condition
(amounts in '000s, except share data)

<TABLE>
<CAPTION>
Pro forma Pro forma
December 31, 1998 adjustments December 31, 1998
----------------- ----------- -----------------
<S> <C> <C> <C>
Assets:
------
Portfolio securities:
---------------------
Unaffiliated issuers $450,718 (c) $(450,718) -
Controlled affiliates other than LEVCO 10,539 (c) (10,539) -
Investment in CTO 70,625 (c) (70,625) -
Investment in Levin Management 117,500 (b) (20,000) $76,036
(e) (21,464)
Non-controlled affiliates 57,940 (c) (57,940) -
------------- -----------------
Total investments 707,322 76,036
------------- -----------------

Cash and cash equivalents 67,331 (a) 1,912 5,800
(b) 15,000
(c) (78,443)
Receivables and other assets 2,591 (a) (2,591) -
------------- -----------------
Total assets $777,244 $81,836
============= =================

Liabilities and stockholders' equity:
------------------------------------
Bank borrowing $ 5,000 (b) $ (5,000) -
Accounts payable and accrued liabilities 922 (a) 4,873 $ 5,795
------------- -----------------
Total liabilities 5,922 5,795
------------- -----------------

-------------
Net assets $771,322
-------------

Common stock,$1 par value, authorized-- 39,029 (d) (32,524) 6,505
60,000,000 shares; issued and outstanding-
39,029,101 shares; 6,504,850 shares pro forma
Capital surplus--additional paid in capital 463,425 (c) (423,268) 69,536
(d) 32,524
(e) (3,145)
Undistributed net realized gains 9,766 (c) (9,766) -
Other retained earnings 48,057 (a) (5,553) -
(c) (21,040)
(e) (21,464)
Unrealized appreciation of investments 211,045 (c) (214,190) -

(e) 3,145
------------- -----------------
Total stockholders' equity 771,322 76,041
------------- -----------------

------------- -----------------
Total liabilities and stockholders' equity $777,244 $81,836
============= =================
</TABLE>

- ---------------------------------
(a) To reflect the collection of receivables, reversal of advisory fee payable
to LEVCO ($127) and accrual of costs in connection with the proposed plan
($5,000).
(b) To record the repayment of bank borrowing ($5,000), receipt of proposed
partial loan repayment from LEVCO ($20,000) and contribution of the
remainder of the loan to LEVCO's equity ($45,000). BKF has not yet
determined whether LEVCO will repay such amount.
(c) To record the distribution of the investment in CTO, the sale of the
portfolio securities and distribution of substantially all cash and cash
equivalents of the Company.
(d) To record the proposed reverse stock split (6,504,850 shares will be issued
and outstanding after the reverse split).
(e) To record the retroactive effect of accounting for the LEVCO transaction
under purchase accounting.

10
<PAGE>

Levin Management Co., Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Financial Condition
(amounts in `000s, except share data)

<TABLE>
<CAPTION>
Pro forma Pro forma
December 31, 1998 adjustments December 31, 1998
----------------- ----------- -----------------
Assets:
- -------
Current assets:
- ---------------
<S> <C> <C> <C>
Cash and cash equivalents $ 8,849 (a) $ 20,000 $ 8,849
(b) (20,000)
Investment advisory fees receivable 9,296 (c) (127) 9,169
Prepaid expenses and other current assets 598 598
----------------- -----------------
Total current assets 18,743 18,616
----------------- -----------------

Investments in affiliated partnerships 4,883 4,883
Fixed assets-net 2,987 2,987
Other assets 1,454 1,454
Intangible assets: -
- ------------------
Goodwill (d) 23,721 23,721
Employment contracts (d) 23,721 23,721
Investment advisory agreements (d) 71,164 71,164
Accumulated amortization (d) (38,498) (38,498)
-
----------------- -----------------
Total assets $ 28,067 $ 108,048
================= =================

Liabilities and stockholder's equity (deficit):
- -----------------------------------------------
Current liabilities:
- --------------------
Accrued expenses $ 1,376 $ 1,376
Accrued bonuses 10,151 10,151
Income taxes payable 251 251
Loan Payable-Baker, Fentress & Company 65,000 (e) $ (45,000)
(b) (20,000) -
----------------- -----------------
Total current liabilities 76,778 11,778
----------------- -----------------

Accrued rent 234 234
Loan payable (a) (20,000) 20,000
----------------- -----------------
Total current liabilities 77,012 32,012
----------------- -----------------

Stockholder's equity (deficit)
- ------------------------------
Common stock, $.01 par value: 1,000 shares
authorized issued and outstanding
Additional paid in capital 55,517 - 55,517
Retained earnings(Accumulated deficit) (104,462) (c) (127) 20,519
(e) 45,000
(d) 80,108
----------------- -----------------
Total stockholder's equity (deficit) (48,945) 76,036
----------------- -----------------
Total liabilities and stockholder's equity $ 28,067 $ 108,048
================= =================
</TABLE>
------------------------
(a) To record maximum amount of proposed loan from third party lender. BKF
has not yet determined whether LEVCO will borrow any such amount from
a third party lender.
(b) To record the maximum proposed repayment of a portion of the loan
payable to BKF.
(c) To reverse advisory fee receivable from BKF.
(d) To record the initial acquisition by BKF under purchase accounting.

11
<PAGE>

Baker, Fentress & Company and Subsidiary
Unaudited Pro Forma Consolidated Statement of Financial Condition
(amounts in '000s, except share data)

<TABLE>
<CAPTION>
Pro forma Pro forma Pro forma
Baker, Fentress & Company Levin Management Co., Inc. Intercompany Consolidated
December 31, 1998 December 31, 1998 elimination (a) December 31, 1998
------------------------- ------------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Assets:
- ------
Current assets:
- --------------
Cash and cash equivalents $ 5,800 $ 8,849 $ 14,649
Investment advisory fees receivable 9,169 9,169
Prepaid expenses and other current 598 598
assets
------- -------- --------
Total current assets 5,800 18,616 24,416
------- -------- --------

Noncurrent assets:
- -----------------
Investments in affiliated partnerships 4,883 4,883
Fixed assets-net 2,987 2,987
Other assets 1,454 1,454
Intangible assets:
- -----------------
Goodwill 23,721 23,721
Employment contracts 23,721 23,721
Investment advisory agreements 71,164 71,164
Accumulated amortization (38,498) (38,498)
Investment in Levin Management 76,036 $(76,036) -
------- -------- --------
Total assets $81,836 $108,048 $113,848
======= ======== ========

Liabilities and stockholders' equity
- ------------------------------------
Current liabilities:
- -------------------
Accrued expenses $ 5,795 $ 1,376 $ 7,171
Accrued bonuses 10,151 10,151
Income taxes payable 251 251
------- -------- --------
Total current liabilities 5,795 11,778 17,573
------- -------- --------

Accrued rent 234 234
Loan payable 20,000 20,000
-
------- -------- --------
Total liabilities 5,795 32,012 37,807
------- -------- --------

Stockholders' equity:
- ---------------------
Common stock, $1 par value, 6,505 6,505
authorized-
60,000,000 shares; issued and
outstanding-
6,504,850 shares
Additional paid in capital 69,536 55,517 $(76,036) 49,017
Retained earnings 20,519 20,519
------- -------- --------
Total stockholders' equity 76,041 76,036 76,041
------- -------- --------

------- -------- --------
Total liabilities and stockholders'
equity $81,836 $108,048 $113,848
======= ======== ========
</TABLE>

(a)-To eliminate the investment in LEVCO.

----------------------------------------------------------------------------
(c) To record the maximum contribution of the remainder of the loan payable
to equity.

12
<PAGE>

3. Income of the Company Following Consummation of the Plan
--------------------------------------------------------

The Company currently derives its income from its investments. As evident
from the unaudited pro forma financial statements, after completion of
implementation of the Plan, the Company will have only one significant source of
income -- its investment advisory business operated through the Levco Companies.

After consummation of the Plan, the Company does not expect to receive
income from investment securities* or to invest its net income in investment
securities within the meaning of Section 3(a)(2) of the 1940 Act, except as
discussed below. The Company expects that it may invest in short-term debt
securities as a cash management tool. The Company intends to manage its cash and
its investments in such a way as to avoid again coming within the definition of
an investment company under the 1940 Act.

Shown below is the Levin Management Co., Inc. and Subsidiaries pro forma
Consolidated Statement of Income, which is presented since it is representative
of the Company's operations anticipated pursuant to the Plan. The Levin
Management Co., Inc. and Subsidiaries pro forma Consolidated Statement of Income
presents the pro forma results of operations adjusted for the decreased
investment management fee revenue resulting from the liquidation of the
Company's public portfolio and related receivables and adjusted for the
amortization expense on intangible assets based on the recasting of the June
1996 acquisition of Levco using purchase accounting. The Unaudited Pro Forma
Consolidated Statement of Income does not reflect the non-recurring charge
relating to the change in accounting to record the Levco transaction under
purchase accounting. This charge will be reflected in the Company's consolidated
statement of income in the first quarter following this change in accounting
principle.

After completion of all distributions, expected to occur on or about
January 7, 2000, and the entry of the order requested by this application, the
Company will become a regular operating company subject to corporate level
income taxes.

- --------------------
* The single private placement investment the Company believes it may have
after the distributions pursuant to the Plan have been completed is not
income-producing.

13
<PAGE>

Levin Management Co., Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Statement of Income
(amounts in 000s, except share and per share data)

<TABLE>
<CAPTION>
Pro forma
Year Ended Pro forma Year Ended
December 31, 1998 Adjustments December 31, 1998
<S> <C> <C> <C> <C>
Revenues:
- ---------

Investment advisory fees $35,453 (a) $(1,525) $33,928
Incentive fees 4,531 -- 4,531
Commission income--net 1,395 -- 1,395
------- ---------

Total revenues 41,379 39,854
------- ---------

Expenses:
- ---------

Employee compensation and benefits 21,561 (a) (750) 20,811
Occupancy & equipment rental 1,614 -- 1,614
Other operating expenses 4,499 (b) 1,408 5,907
------- ---------

Total expense 27,674 28,332
------- ---------

Income before interest, taxes
and amortization 13,705 (2,183) 11,522
Interest income 351 -- 351
Interest expense--BKF 6,391 (c) (6,391) --
Interest expense--bank loan -- (d) 1,314 1,314
Amortization of intangibles -- (e) 12,078 12,078
------- ---------

Income (loss) before taxes 7,665 (1,519)
------- ---------

Provision for income taxes 3,322 (f) 1,244 4,566
------- ---------
Net income (loss) $ 4,343 $ (6,085)
------- ---------
Net (loss) per share:
Basic and diluted (g) $ (0.94)
---------

Weighted average shares
outstanding--basic and diluted (g) 6,504,850
=========
</TABLE>

- -----------------------
(a) To adjust the advisory fee for the revenue earned by LEVCO for the
management of the BKF public portfolio and the corresponding reduction in
employee bonuses.
(b) To record additional operating expenses to be borne by LEVCO which had
previously been borne by BKF.
(c) To reverse the interest paid to BKF on the loan, assuming that a portion
will be repaid ($20,000) and the remainder will be contributed to LEVCO's
capital ($45,000).
(d) To record the estimated interest expense on the proposed $20,000 bank loan
from a third party lender; BKF has not yet determined whether LEVCO will
borrow such amount.
(e) To record the amortization of the intangible assets which were recorded
under the original acquisition of LEVCO by BKF.
(f) To record additional taxes for the pro forma adjustments.

14
<PAGE>

F. Activities of the Company's Officers and Directors
--------------------------------------------------

Before implementation of the Plan, the Company's officers and directors
spent the largest portion of their time in the management of the Company's
investment portfolios and the general business and affairs of the Company. After
completion of the Plan, the Company's officers and directors will not spend any
part of their time managing the Company's investment portfolio. Instead, the
Company's officers and directors will manage the affairs of the Company as an
operating company (which primarily will include managing the assets of
investment advisory clients). In addition, during the second quarter of 2000 the
Company will close its Chicago office and release all but one of the Company's
officers and employees who currently work out of that office. The Company
expects to appoint new officers from among the officers and employees of Levin
Management, whose duties relate to the operation of the Levco Companies.

G. The Company's Decision to Deregister as an Investment Company
-------------------------------------------------------------

The Company believes that it cannot continue to be registered under the
1940 Act given the decision to discontinue the Company's investment operations
and focus on potential further expansion of the investment advisory business.

The Company's common stock historically has traded at a larger, more
persistent discount than the common stock of many other closed-end equity funds.
In an analysis by Lazard Freres, Lazard Freres noted that (based on values as of
April 30, 1999) after completion of the Plan, the assets distributed to the
shareholders would have an estimated aggregate after-tax value of $606.8
million, or $15.55 per share, comprised of $541.8 million in cash, or $13.88 per
share, and $65.0 million in CTO Shares, or $1.67 per share of Company stock.
Lazard Freres further noted that, following completion of the Plan, the
Company's shareholders would retain an interest in the Levco Companies through
their ownership of Company shares and that the distributed assets included no
value for such interest other than the proposed $20.0 million from partial
repayment of the Company's $65.0 million loan to Levin Management. Lazard Freres
compared the aggregate of the after-tax amount set forth above and the estimated
post-Plan value of the Company shares to the April 30, 1999 market price of
$15.44 for the Company shares. Assuming the Levco Companies borrow $20 million
of debt, with the proceeds used in partial repayment of the Company's $65
million loan to Levin Management and the remainder of the loan converted by the
Company to equity of Levin Management. Lazard Freres noted that the Company's
shareholders would receive distributed assets with an estimated after-tax value
of $17.98 per Company share, representing a premium of 16.5% over the April 30,
1999 market price for the Company shares.

- --------------------
* As noted above, it is possible that the Board will decide to contribute the
entire $65,000,000 to Levin Management's capital. Lazard Freres noted that,
if that were the case, the assets distributed to shareholders would have an
estimated aggregate after-tax value of $586.8 million, or $15.04 per share,
with a corresponding increase in the asset value of the Levin Companies, so
that the total estimated after-tax value would be unchanged at $17.98 per
share.

15
<PAGE>

The Board believes further that the Company will enjoy greater flexibility
and freedom to devote its attention to running its businesses as an operating
company if it is no longer subject to the bookkeeping, recordkeeping and
compliance provisions of the 1940 Act.

H. The Company's Business Plan
---------------------------

The principal asset of the Company following consummation of the Plan will
be the Levco Companies. The Company believes that implementing the Plan will
provide the Levco Companies with opportunities for growth by eliminating the
restrictions on its activities that the 1940 Act imposes.

Levco is a registered investment adviser that specializes in managing
equity portfolios for institutional and individual investors primarily in the
United States. Levco manages most accounts pursuant to a large cap value
strategy, but the firm also offers an event-driven, risk arbitrage product and
other more specialized investment programs.

In addition to serving as investment adviser to the Company for its public
portfolio, Levco also serves as an adviser or subadviser to other registered
investment companies. Through its wholly-owned subsidiary, LEVCO GP, Inc., Levco
acts as the general partner of a number of private investment partnerships and
serves directly as an adviser to private investment vehicles organized outside
the United States. For managing these vehicles, Levco and LEVCO GP, Inc. are
entitled to receive both a fixed management fee based on a percentage of the
assets and a share of net profits.

I. Other Information
-----------------

The Company is not a party to any litigation or any other administrative
proceeding.

The Company has only one class of equity securities outstanding, its common
stock, par value $1.00 per share. At August 19, 1999 (the date of the Special
Meeting of Shareholders), there were 39,029,101 shares of the Company's common
stock outstanding. The Company had 2,301 shareholders of record at August 19,
1999.

At June 30, 1999, the Company had total assets of $848,960,660, net assets
of $840,219,766, and a net asset value per share of $21.53.

The Company has not, within the last 18 months, for any reason transferred
any of its assets to a separate trust, the beneficiaries of which were or are
securityholders of the Company.

II. Applicable Statutory Provisions

Section 8(f) of the 1940 Act provides that "whenever the Commission, on its
own motion or upon application, finds that a registered investment company has
ceased to be an investment company, it shall so declare by order and upon the
taking effect of such order the registration of such company shall cease to be
in effect." The Company will qualify for an order under Section

16
<PAGE>

8(f) because, upon the completion of the Plan, it no longer will meet the
definition of an investment company under the 1940 Act.

Section 3(a)(1)(A) of the 1940 Act defines an investment company as an
issuer which "is or holds itself out as being engaged primarily . . . in the
business of investing, reinvesting or trading in securities."

Section 3(a)(1)(C) of the 1940 Act defines an investment company as an
issuer which "is engaged or proposed to engage in the business of investing,
reinvesting, owning, holding, or trading in securities, and owns or proposes to
acquire investment securities having a value exceeding 40 per centum of the
value of such issuer's total assets (exclusive of Government securities and cash
items) on an unconsolidated basis."

Section 3(a)(2) provides, in pertinent part, that, "As used in this
section, `investment securities' includes all securities except (A) Government
securities, . . . and (C) securities issued by majority-owned subsidiaries of
the owner which: (i) are not investment companies..."

Section 3(b)(1) of the 1940 Act provides that, "Notwithstanding paragraph
(1)(C) of subsection (a), none of the following persons is an investment company
within the meaning of [the 1940 Act]: (1) Any issuer primarily engaged,
directly, or through a wholly-owned subsidiary or subsidiaries, in a business or
businesses other than that of investing, reinvesting, owning, holding, or
trading in securities."

III. Discussion

Upon completion of the Plan, the Company no longer will meet the definition
of an investment company under the 1940 Act, and continued registration as an
investment company under the 1940 Act no longer will be necessary to provide
sufficient protection of the shareholders of the Company.

A. The Company Will Not Be a Section 3(a)(1)(C) Investment Company
---------------------------------------------------------------

The Company no longer will qualify as an investment company as defined in
Section 3(a)(1)(C) of the 1940 Act once the Company has completed the Plan. To
come within the definition of Section 3(a)(1)(C), an issuer must both be
engaged, or propose to engage, in the business of investing and reinvesting in
securities and own or propose to acquire investment securities with a value
exceeding 40% of the value of the issuer's total assets (exclusive of Government
securities and cash items) on an unconsolidated basis.

As shown by the Company's pro forma statement of assets and liabilities
after completion of the Plan, the Company will not own, and the Company
represents that it does not and will not propose to acquire, "investment
securities" having a value exceeding 40% of the value of its total assets, as
calculated for purposes of Section 3(a)(1)(C). A summary comparison of the
composition of the Company's assets at December 31, 1998 and January 7, 2000
after completion of the Plan appears below:

17
<PAGE>

<TABLE>
<CAPTION>
pro forma After
12/31/98 adjustments 1/7/2000
------------------------------------
<S> <C> <C> <C>
Investments at Value (000's):
Unaffiliated issuers $450,718 $(450,718) -
Controlled affiliates other than LEVCO 10,539 (10,539) -
Investment in CTO 70,625 (70,625) -
Investment in Levin Management 117,500 (20,000) $76,036
(21,464)
Non-controlled affiliates 57,940 (57,940) -

Total investments 707,322 76,036

Cash and cash equivalents 67,331 1,912 5,800
15,000
(78,443)
Receivables and other assets 2,591 (2,591) -
-------------------------------------
Total assets $777,244 $81,836
=====================================
</TABLE>

Because Levin Management is a wholly-owned subsidiary of the Company, the
common stock of Levin Management owned by the Company is not an "investment
security" within the meaning of Section 3(a)(2). Thus, giving effect to the Plan
when it is completed on or about January 7, 2000, the Company's "investment
securities" for purposes of the Section 3(a)(1)(C) definition will have a value
of $0. The Company's total investments at that date, giving effect to the Plan
and excluding cash and government securities, will have a value of $76,036,000.
The Company's investment securities therefore will represent 0% of the Company's
total assets (net of cash and government securities) upon completion of the
Plan, on an unconsolidated basis.

The Company intends to continue to develop and expand its operating
business or businesses as a holding company to an investment advisory firm. The
Company has no intention to increase the number of investment securities held by
it.

Because the Company's investment securities will represent less than 40% of
the value of its total assets after it completes the distributions to
shareholders, the Company no longer will be an investment company under Section
3(a)(1)(C) of the 1940 Act.

B. The Company Will Not Be a Section 3(a)(1)(A) Investment Company
---------------------------------------------------------------

The Company no longer will be an investment company as defined in Section
3(a)(1)(A) of the 1940 Act after completion of the Plan. Once the Company
completes the final distributions to shareholders, the Company no longer will
primarily be engaged in the business of investing and reinvesting in securities
and no longer will hold itself out as being so engaged. Rather, the Company will
simply be a holding company that owns the Levco Companies.

Whether an issuer is primarily engaged in the business of investing and
reinvesting in securities is a question of fact. In analyzing that question, the
Commission and the courts have

<PAGE>

generally referred to the following factors: (1) its public representations of
policy; (2) the activity of its officers and directors; (3) the nature of its
present assets; (4) the sources of its present income; and (5) the issuer's
historical development. Although the Commission and the courts developed those
factors primarily in analyses under Section 3(b)(2) of the 1940 Act, they apply
equally to analyses under Section 3(a)(1)(A). Tonopah Mining Company of Nevada,
26 SEC 426 (1947); Certain Prima Facie Investment Companies, Investment Company
Act Release No. 10937 (November 13, 1979), [1979-80] Fed. Sec. L. Rep. (CCH) (P)
82,465, n. 24. See also, Amendment No. 3 to Application for an Order pursuant to
Section 8(f) of the Investment Company Act of 1940 Declaring that IIC Industries
Inc. (formerly Israel Investors Corporation) Has Ceased to be an Investment
Company, filed with the Commission on June 23, 1992. In Tonopah, the Commission
gave the most weight to the nature of present assets and the sources of present
income.

Under the five factor test from Tonopah, after the Company completes the
Plan, it will not be primarily engaged in the business of investing and
reinvesting securities. First, once the Company completes the Plan, it expects
to have only one small traditional securities investment, which it will dispose
of as soon as it believes it can do so on acceptable terms, and does not expect
to have any additional such investments. Thereafter, the Company will not have
any "investment securities" and, accordingly, will generate all of its income
from its holding in the Levco Companies.

The Company's officers and directors will not spend any significant part of
their time in connection with managing the Company's investment portfolio once
the Plan is completed. All but one of the Company's employees and officers in
Chicago will lose their jobs as a result of implementation of the Plan. The
Company expects to name as its officers persons who are employees of Levin
Management and whose primary duties relate, and will relate, to management of
the Levco Companies. After completion of the Plan, the Company's officers and
directors will manage the affairs of the Company as an operating company. (See
Section I.F. "Activities of the Company's Officers and Directors on page 15
herein).

In addition, promptly after the Company's shareholders approved the Plan,
the Company began to sell the securities in its public and private portfolios,
evidencing its desire no longer to operate as a registered investment company.
(See Section I.C. "The Plan for Distribution of Assets and Deregistration of the
Company" on page 4 herein).

Finally, although the Company has been a registered investment company
since 1970, the Company clearly indicated to the public and its shareholders its
intention to cease operating as a registered investment company in its press
releases dated May 6, 1999 and June 18, 1999, and in its proxy statement dated
July 22, 1999. Consequently, the Company no longer will hold itself out as being
engaged in the business of investing, reinvesting, or trading in securities
within the meaning of Section 3(a)(1)(A) of the 1940 Act. For example, in the
Company's proxy statement dated July 22, 1999, the Company stated:

The Plan provides for the sale of the securities in the public and private
portfolios. . . The Company will distribute the net cash proceeds of the
sales of the

<PAGE>

Company's securities investments to shareholders on a proportionate basis,
based upon the number of shares each shareholder owns at various record
dates that the Company will determine and announce.

The Company also stated in the proxy statement: "The Plan provides for the
eventual cessation of the Company's investment activities and its deregistration
under the Investment Company Act, which requires the SEC to enter an order
declaring that the Company has ceased to be an investment company." (See Section
I.D. "The Company's Representations to its Shareholders and the Public" on page
7 herein). For the foregoing reasons, after the completion of the Plan, the
Company no longer will be an investment company under Section 3(a)(1)(A) of the
1940 Act.

C. Shareholders Will Retain the Protections Afforded by the 1934 Act

After entry of the order requested by this Application, the Company will
continue as a publicly-held company subject to the reporting and other
requirements of the Securities Exchange Act of 1934 (the "1934 Act"). The
Company believes that its compliance with the requirements of the 1934 Act will
provide for sufficient protection of its shareholders to make continued
registration as an investment company under the 1940 Act unnecessary.

IV. Additional Representations

1. After completion of the Plan, the Company will not operate its
business so as to be an investment company required to be registered
under the 1940 Act.

2. After completion of the Plan, the Company will not hold itself out as
being engaged primarily in the business of investing, reinvesting or
trading in securities.

3. Once deregistered, Levco, located at One Rockefeller Plaza, New York,
NY 10020, (212-332-8400), will be responsible for the maintenance and
preservation of the Company's records in accordance with Rules 31a-1
and 31a-2 under the 1940 Act.

V. Conclusion

The Company qualifies for an order of the Commission pursuant to Section
8(f) of the 1940 Act declaring that, upon completion of the Plan, the Company
has ceased to be an investment company because the Company no longer will be,
nor will it hold itself out as, a company primarily engaged in the business of
investing, reinvesting, owning, holding or trading in securities and no longer
will own investment securities that have a value exceeding 40% of its total
assets.

VI. Procedural Matters Relating to the Application

Pursuant to Rule 0-2(c) under the 1940 Act, the Company states that the
Board, by resolution duly adopted and attached hereto as Exhibit D, has
authorized any officer of the

<PAGE>

Company to prepare, or cause to be prepared, and to execute and file with the
Commission, this Application.

The verification required by Rule 0-2(d) under the 1940 Act is attached
hereto as Exhibit E. All other requirements for the execution and filing of this
Application in the name of, and on behalf of, the Company by the undersigned
officer of the Company have been complied with and such officer is fully
authorized to do so.

Pursuant to Rule 0-2(f) under the 1940 Act, the Company states that its
address is 200 West Madison Street, Suite 590, Chicago, Illinois 60606, and the
Company further states that all communications or questions concerning this
Application or any amendment thereto should be directed to Janet D. Olsen or
Alan Goldberg, Bell, Boyd & Lloyd, Three First National Plaza, Chicago, Illinois
60602, (312) 372-1121.

It is desired that the Commission issue an Order pursuant to Rule 0-5 under
the 1940 Act without a hearing being held.

The proposed notice of the filing of this Application required by Rule
0-2(g) under the 1940 Act is attached hereto as Exhibit F and incorporated
herein by reference.

[The remainder of this page intentionally left blank.]

<PAGE>

The Company has caused this Application to be duly signed on its behalf on
the date and year set forth below.

BAKER, FENTRESS & COMPANY

By: /s/ James P. Gorter
James P. Gorter
Chairman of the Board

Date: September 2, 1999

<PAGE>

Index to Exhibits

Exhibit A Plan For Distribution of Assets of Baker, Fentress & Company

Exhibit B Proxy Statement for Special Meeting of Shareholders of Baker,
Fentress & Company dated July 22, 1999

Exhibit C The Company's audited financial statements at and for the year
ended December 31, 1998, and unaudited financial statements at
and for the period ended June 30, 1999

Exhibit D Board of Directors Resolution as Required by Rule 0-2(c)

Exhibit E Verification as Required by Rule 0-2(d)

Exhibit F Proposed Form of Notice
<PAGE>

EXHIBIT A
---------

Plan for distribution of assets of Baker, Fentress & Company
<PAGE>

APPENDIX A: Plan for Distribution of Assets for Baker, Fentress & Company

PLAN FOR DISTRIBUTION OF ASSETS
OF
BAKER, FENTRESS & COMPANY

WHEREAS, Baker, Fentress & Company (the "Company"), a Delaware corporation,
is a closed-end management investment company registered as such under the
Investment Company Act of 1940, as amended (the "1940 Act"); and

WHEREAS, the Company's investments consist of (i) a portfolio of publicly
traded securities (the "Public Portfolio") managed by John A. Levin & Co. Inc.
("LEVCO") pursuant to a portfolio management agreement dated December 30, 1998
(the "Management Agreement") with the Company; (ii) certain private placement
investments (the "Private Portfolio"); (iii) shares of Levin Management Co.,
Inc., a wholly-owned subsidiary of the Company and the parent company of
LEVCO; and (iv) shares of Consolidated-Tomoka Land Co. ("CTO"), a majority-
owned subsidiary of the Company; and

WHEREAS, the Board has determined that distribution to the Company's
shareholders, in cash or in kind, of substantially all the Company's assets
other than the Company's shares of Levin Management Co., Inc. is in the best
interests of the Company's shareholders;

WHEREAS, the Board has directed that this Plan be submitted to the holders
of the Company's outstanding shares of common stock for their approval or
disapproval at a special meeting of stockholders in accordance with the
requirements of the Delaware General Corporation Law (the "DGCL") and the
Company's Articles of Incorporation, as amended (the "Articles") and has
authorized the filing with the Securities and Exchange Commission (the
"Commission") and distribution of a proxy statement (the "Proxy Statement") in
connection with the solicitation of proxies for such meeting;

NOW, THEREFORE, the Board hereby adopts and sets forth this Plan for
Distribution of Assets of Baker, Fentress & Company as follows:

1.Effective Date of Plan. The effective date of this Plan (the "Effective
Date") shall be the date on which this Plan is approved by the
stockholders of the Company in accordance with the DGCL.

2.Private Portfolio. The officers of the Company shall continue their efforts
to sell or otherwise liquidate the Company's investments in its
Private Portfolio, consisting of the securities listed on Appendix A,
at the date of adoption of the Plan by the Board and as previously
authorized by the Board.

3.Management of the Public Portfolio. From the date of adoption of the Plan by
the Board through the Effective Date, the Company's Public Portfolio
shall continue to be managed by LEVCO pursuant to the Company's
existing investment objective, policies and restrictions. After the
Effective Date, LEVCO shall cease to manage the Public Portfolio in
accordance with the Company's current investment objectives,
restrictions and policies and shall begin an orderly liquidation of
the securities held in the Public Portfolio pursuant to the Plan.

4.Management of Cash. Cash received from the sale of Public Portfolio and
Private Portfolio securities shall be managed by the officers of the
Company under the supervision of the Board and shall not be part of
the Public Portfolio subject to the Management Agreement.

5.Sale or Liquidation of Assets. As of the Effective Date, the Company and
LEVCO, under the supervision of the Board, shall have the authority
to, and as soon as practicable after the Effective Date, but in no
event later than December 31, 2000, sell and liquidate the securities
held in the Public Portfolio and, to the maximum extent possible, the
securities remaining in the Company's Private Portfolio, and engage in
such other transactions as may be appropriate to the disposition of
those securities, including, without limitation, consummation of the
transactions described in the Proxy Statement.

A-1
<PAGE>

6.Provisions for Liabilities. The Company shall pay or discharge or set aside
a reserve fund for, or otherwise provide for the payment or discharge
of, any liabilities and obligations, including, without limitation,
contingent liabilities.

7.Distribution of CTO Shares. The Company's shares of CTO shall be distributed
to the Company's shareholders upon such specific terms, including
record date, payment date and provision for fractional shares, as the
Board declares by resolution.

8.Distributions to Stockholders. The net proceeds of the sales of securities
as provided in paragraph 5 shall be distributed to the Company's
shareholders at such dates and times, to shareholders of record at
such dates and times, as the Board declares by resolution.

9.Filings. As soon as practicable, the Company shall prepare and file Form N-
8F under the 1940 Act and any other documents as are necessary to
effect the de-registration of the Company in accordance with the 1940
Act and any other applicable securities laws, and any rules and
regulations of the Commission.

10. Expenses of the Sales and Distributions. The Company shall bear all of the
expenses incurred by it in carrying out this Plan, including, but not
limited to, all printing, legal, investment banking, accounting,
custodian and transfer agency fees, and the expenses of any reports
to, or meeting of, stockholders whether or not the transactions
contemplated by this Plan are effected.

11. Amendment or Abandonment of Plan. The Board may modify or amend this Plan
at any time without stockholder approval if it determines that such
action would be advisable and in the best interests of the Company and
its stockholders. If any amendment or modification to this Plan
appears necessary and in the judgment of the Board will materially and
adversely affect the interests of the stockholders, such an amendment
or modification will be submitted to the stockholders for approval. In
addition, the Board may abandon this Plan without stockholder approval
at any time if it determines that abandonment would be advisable and
in the best interests of the Company and its stockholders.

12. Powers of Board and Officers. The Board and the officers of the Company
are authorized to approve such changes to the terms of any of the
transactions referred to herein, to interpret any of the provisions of
this Plan, and to make, execute and deliver such other agreements,
conveyances, assignments, transfers, certificates and other documents
and take such other action as the Board and the officers of the
Company deem necessary or desirable in order to carry out the
provisions of this Plan and effect the transactions described in the
Plan in accordance with the Code, the DGCL and any rules and
regulations of the U.S. Securities and Exchange Commission, or any
state securities commission, including, without limitation, any
Articles of Amendment, Articles Supplementary, or other documents, and
deregistering the Company under the 1940 Act, as well as the
preparation and filing of any tax returns.

13. Appraisal rights. Stockholders will not be entitled to appraisal rights
under Delaware law in connection with the Plan.

IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Plan to be executed by the Company as of this 17th day of June, 1999.

BAKER, FENTRESS & COMPANY

By: /s/ John A. Levin

John A. Levin
President

A-2
<PAGE>

Appendix A

<TABLE>
<S> <C>
Citadel Communications
Paracelsus
Security Capital
Durolite
Durolite International Conv. Preferred
Durolite International Sub. Note
Durolite Europe Holdings Warrants
Durolite Europe Holdings Prom. Note
E-Sales
Golder, Thoma Cressey Fund II L.P.
Phillips Smith Spec. Retail Group L.P.
</TABLE>

A-3
<PAGE>

EXHIBIT B
---------

Proxy statement for special meeting of shareholders of Baker, Fentress & Company
dated July 22, 1999.
<PAGE>

Baker, Fentress & Company

Established 1891
200 WEST MADISON STREET . CHICAGO, ILLINOIS 60606 . (800) BKF-1891

July 22, 1999

To Our Fellow Shareholders:

Baker, Fentress & Company will hold a Special Meeting of Shareholders on
August 19, 1999 in Chicago. The purpose of the meeting is to give you the
chance to vote on the proposed Plan For Distribution of Assets of Baker,
Fentress & Company. The accompanying proxy statement provides a detailed
discussion of the Plan and the proposed changes to the Company. Please read it
carefully before you vote your shares. This list of questions and answers is
meant to provide you with a helpful summary of some of the information
contained in the proxy statement.

Q: WHY IS THE COMPANY SENDING ME A PROXY STATEMENT?

As a shareholder, you have the right to vote on major policy decisions, such
as those included in the Plan. The proxy statement explains the changes
contemplated by the proposed Plan, why the Board believes the Plan is
appropriate and in the best interests of shareholders and what will happen to
the Company if shareholders approve the Plan.

Q: WHAT AM I BEING ASKED TO VOTE ON AT THE MEETING?

The Company is asking shareholders to approve the Plan. If shareholders
approve the Plan, the Company will:

. sell all the Company's publicly-traded securities and all or most of the
Company's private placement securities and distribute the proceeds (less
incurred and anticipated expenses of the Plan) to the Company's
shareholders;

. distribute the Company's shares of Consolidated-Tomoka Land Co. to the
Company's shareholders; and

. deregister as an investment company under the Investment Company Act of
1940 after the asset distributions are complete, and become an operating
company with its principal asset being its indirect investment in the
John A. Levin & Co. Inc., a registered investment adviser, and its
related companies.

The Company is also asking shareholders to approve a reverse stock split of
the Company's common stock to reduce the number of shares outstanding and
increase the per share price of the Company's stock after the Company
completes the proposed distribution of most of its assets.

Q: WHY IS THE BOARD RECOMMENDING THIS COURSE OF ACTION?

The Company's stock has historically traded at a larger, more persistent
discount to net asset value than many other closed-end funds. The Board
believes the Plan is an effective way to maximize shareholder value by
allowing the Company's shareholders to realize the value of a large part of
that discount and is in the best interests of the Company's shareholders.
<PAGE>

Q: HAS THERE BEEN ANY CHANGE IN HOW THE COMPANY'S INVESTMENTS HAVE BEEN
MANAGED AS A RESULT OF THE BOARD'S ADOPTION OF THE PLAN?

No. The Company and John A. Levin & Co., Inc. have been managing the
Company's investments in the same fashion as they did prior to the Board's
adoption of the Plan.

Q: WHEN WILL THE PLAN TAKE EFFECT?

The Plan will become effective immediately after the Company's shareholders
approve the Plan, although the Company will not complete implementing the Plan
for several months. Until the Plan has been completely implemented, the Board
has the power to change or modify the Plan if it concludes that doing so will
be in the best interests of the Company and its shareholders.

Q: WHEN WILL THE COMPANY PAY THE DISTRIBUTIONS CONTEMPLATED UNDER THE PLAN?

The Company believes that it will make a distribution from realized capital
gains on or about September 24, 1999, and expects to distribute its CTO Shares
to shareholders about the same time. The Company plans to distribute the
balance of the net cash proceeds in one or two additional distributions. If
the Company decides to make one additional distribution, the Company believes
it will be on or about January 7, 2000. However, if the Company decides to
make two additional distributions, the Company believes the second
distribution will occur in late December 1999, with a final distribution on or
about January 7, 2000. These dates are tentative and the Board may change
them. Please refer to page 12 of the attached proxy statement for a full
description of the proposed distributions.

Q: WHAT ARE THE TAX CONSEQUENCES OF THE PLAN?

The Company's distribution (estimated at about 88.5% of net assets as of May
31, 1999) will have tax consequences to the Company's shareholders. The
distributions of cash from the sale of the Company's securities will be
taxable. The taxable amounts will depend on the amounts received by the
Company for the securities sold, the Company's basis in those securities, and
your basis in your Company Shares. The distribution of the CTO Shares also
will be taxable and will depend on the number of CTO Shares you receive from
the Company, the Company's basis in such shares and the market value of the
CTO Shares on the date of the distribution. We strongly urge you to carefully
review all of these tax consequences, which are described in the attached
proxy statement. We also suggest that you consult Appendix E in the Proxy
Statement, which provides shareholders with some examples of the financial and
tax results of the Plan.

Q: WILL THE PLAN CHANGE THE COMPANY'S CURRENT DISTRIBUTION POLICY?

Yes. The distributions described in the previous question will be a
significant portion of the Company's net assets (estimated at about 88.5% as
of May 31, 1999). The 8% distribution policy will no longer be in effect after
completion of the Plan.

Q: WHAT SECURITIES WILL I BE LEFT WITH AFTER THE DISTRIBUTIONS UNDER THE
PROPOSED PLAN ARE COMPLETED?

After the various distributions described above, you will own a pro rata
share of the common stock of CTO distributed as part of the Plan. In addition,
you will be left with a pro rata share of the Company, whose principal asset
will be an indirect investment in John A. Levin & Co., Inc. and its related
companies.
<PAGE>

Q: WHY NOT CONVERT THE COMPANY INTO AN OPEN-END FUND?

Although the Board considered converting the Company into an open-end fund,
the Board rejected this course of action because the Company's asset
composition would make compliance with the regulatory requirements applicable
to open-end companies difficult or impossible, and because the Board
anticipated that the level of redemptions immediately following open-ending
likely would be quite high, which could significantly disadvantage
shareholders who chose not to redeem.

Q: HOW DO THE DIRECTORS RECOMMEND THAT I VOTE?

The directors recommend that you vote "For" (in favor of) these proposals.

Q: WHAT IF I HAVE QUESTIONS?

If you have questions about the Plan, or anything else in the proxy
statement, you may call the Company at 1-800-BKF-1891, or Corporate Investor
Communications, Inc. at 1-201-896-1900.

James P. Gorter John A. Levin
Chairman of the Board President
<PAGE>

Baker, Fentress & Company
Established 1891

200 WEST MADISON STREET CHICAGO, ILLINOIS 60606 (800) BKF-1891

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on August 19, 1999

Fellow Shareholders:

A special meeting of the shareholders of Baker, Fentress & Company, a
Delaware corporation (the "Company"), will be held at the Chicago Hilton and
Towers, 720 South Michigan Avenue, Chicago, IL 60605, on Thursday, August 19,
1999, at 10:30 a.m., Chicago time, for the following purposes:

1.To approve the Plan For Distribution of Assets of Baker, Fentress & Company
pursuant to which the Company will distribute or liquidate
substantially all of its assets, with the exception of Levin
Management Co., Inc. and its subsidiaries, and change the nature of
the Company's business so that it will cease to be a registered
investment company;

2.To amend the Company's Certificate of Incorporation to provide for a reverse
stock split of shares of the Company's common stock; and

3.To transact such other business as may properly come before the meeting or
any adjournment.

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

Shareholders of record at the close of business on June 30, 1999, the record
date for this proxy solicitation, are entitled to notice of and to vote at the
Special Meeting, or at any postponements or adjournments of that meeting.

By Order of the Board of Directors
James P. Koeneman
Secretary

Chicago, Illinois
July 22, 1999

Please indicate your voting instructions and whether you will be attending
the meeting in person on the enclosed proxy card, date and sign it, and return
it in the enclosed envelope. Please mail your proxy card promptly to help save
the cost of additional solicitations.
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
APPROVAL OF THE PLAN FOR DISTRIBUTION OF ASSETS OF BAKER, FENTRESS &
COMPANY.................................................................. 1
Background of the Company............................................... 1
Why the Board is Recommending the Plan.................................. 5
Lazard Freres' Analysis and Opinion................................... 7
Conclusion............................................................ 11
Summary of the Plan..................................................... 11
Plan Description...................................................... 11
Liquidation of Private and Public Portfolios and Distribution of
Proceeds............................................................. 12
Distribution of CTO Shares............................................ 13
Deregistration as Investment Company.................................. 15
Structure of the Company After the Distributions........................ 15
The Levco Companies................................................... 15
Levco's Clients....................................................... 16
Financial Information about the Levco Companies....................... 18
Levco's Contractual Arrangements...................................... 19
Levco's Directors and Officers........................................ 19
Levco's Employees..................................................... 20
Levco's Properties.................................................... 20
Changes that Will Result from Implementing the Plan..................... 20
Federal Income Tax Consequences......................................... 21
Risk Factors Relating to The Consummation of the Transactions
Contemplated by the Plan............................................... 25
Trading of Company Shares After the Distribution...................... 25
Dependence on Key Personnel........................................... 25
Potential Adverse Effects on the Company's Performance Prospects from
a Decline in the Performance of the Securities Markets............... 26
Future Investment Performance......................................... 26
Loss of Significant Accounts.......................................... 27
Levco's Fees and Investment Contracts................................. 27
Competition........................................................... 28
Dependence on Information Systems; Year 2000.......................... 28
Conflicts of Interest................................................. 29
Regulation............................................................ 29
Certain Legal Requirements............................................ 29
Plan Effective Date; Modification of Plan; Shareholder Approval......... 30
Recommendation.......................................................... 30
APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF BAKER,
FENTRESS & COMPANY....................................................... 30
General................................................................. 30
Reasons for the Reverse Stock Split..................................... 31
Principal Effects of the Reverse Stock Split............................ 32
Exchange of Stock Certificates and Elimination of Fractional Share
Interests.............................................................. 32
Federal Income Tax Consequences......................................... 33
Recommendation.......................................................... 34
OTHER MATTERS............................................................. 34
INTERESTS IN STOCK........................................................ 35
EXECUTIVE OFFICERS........................................................ 36
COMPENSATION.............................................................. 37
Incentive Compensation Plan............................................. 37
Directors' Compensation................................................. 37
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
Officers' Compensation--Summary Table.................................... 38
Employment Contracts..................................................... 40
Pension Plan............................................................. 40
Compensation Committee Report on Executive Compensation.................. 40
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS........................... 41
PROXY SOLICITATION; VOTING; ADJOURNMENT.................................... 42
AVAILABLE INFORMATION...................................................... 43

APPENDIX:

A.Plan For Distribution of Assets of Baker, Fentress & Company............. A-1
B.Lazard Freres & Co. LLC Opinion.......................................... B-1
C.Levin Management Co., Inc. Consolidated Financial Statements............. C-1
D.Condensed Pro Forma Consolidated Financial Information................... D-1
E.Examples of Financial and Tax Results.................................... E-1
F.Proposed Amendment to the Certificate of Incorporation................... F-1
</TABLE>
<PAGE>

Baker, Fentress & Company

PROXY STATEMENT

SPECIAL MEETING OF SHAREHOLDERS

August 19, 1999

PROXY STATEMENT

- -------------------------------------------------------------------------------
The Board of Directors of the Company is soliciting proxies from
shareholders for use at the Special Meeting of shareholders that will be held
on August 19, 1999 and at any adjournment of that meeting.

This proxy statement describes each of the matters on which the Board is
asking you to vote. The Board recommends that you vote in favor of each of
these proposals.

APPROVAL OF THE PLAN FOR DISTRIBUTION OF ASSETS OF BAKER, FENTRESS & COMPANY

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

We are asking you to vote to approve the Plan For Distribution of Assets of
Baker, Fentress & Company (called the "Plan" in this proxy statement), by
which the Company will--

. distribute the Company's shares of Consolidated-Tomoka Land Co. to the
Company's shareholders;

. continue in business as a holding company (not an investment company)
that owns Levin Management Co., Inc. and its subsidiaries.

The Board believes the Plan is in the best interests of shareholders. This
proxy statement explains how the Plan will work and the consequences of
implementing the Plan.

If shareholders approve the Plan (and you continue to own your Company
shares through the record dates of each anticipated distribution), you will
receive cash and shares of Consolidated-Tomoka Land Co. These distributions
will be taxable to you. Information about the Plan's tax consequences appears
later in this proxy statement under the heading "Federal Income Tax
Consequences".

The Company intends to maintain the listing of its shares on The New York
Stock Exchange (the "NYSE") and expects that its shares will continue to trade
without interruption.

If you have questions about the Plan, or anything else in this proxy
statement, you may call the Company at 1-800-BKF-1891, or Corporate Investor
Communications, Inc. at 1-201-896-1900.

Background of the Company

An understanding of the Company's history, including how it invested in the
past and how it came to acquire John A. Levin & Co., Inc. (called Levco, and
with its parent, Levin Management Co., Inc., and related companies called the
Levco Companies, in this proxy statement), will assist you in understanding
the Plan and the Board's reasons for approving the Plan. The Company is a
closed-end management investment company. The Company began doing business in
1891 and the present Company was incorporated under the laws of Delaware in
1954. The Company conducted business as an investment banker and a broker-
dealer in securities until 1960, when it became a private investment company.

Plan for Distribution of Assets-- Background of the Company
<PAGE>

Since 1960, the Company's principal business has been the ownership and
management of its investment portfolio, consisting predominantly of equity
securities, both publicly-traded and privately-held. In 1970, the Company
registered as an investment company under the Investment Company Act of 1940.
The Company's shares trade under the symbol "BKF" on the NYSE, and will
continue to trade under "BKF" if shareholders approve the Plan. In this proxy
statement, the Company's shares of common stock are referred to as Company
Shares.

The Company's investment objective is total return with an emphasis on
capital appreciation. The Company is non-diversified, meaning that the Company
is not required to, nor does it, limit the amount of assets it invests in the
securities of one or more companies. Unlike most investment companies, the
Company also invests for the purpose of controlling and managing portfolio
companies (like Consolidated-Tomoka Land Co., which is called CTO in this
proxy statement, and Levco). For internal management purposes, the Company has
divided its investment portfolio into four segments:

. a diversified portfolio of investments in publicly-traded, predominantly
large-cap companies with a focus on long-term appreciation and capital
preservation;

. investments in private placement securities generally acquired directly
from issuing companies;

. Levco, which manages the Company's public portfolio, and the other Levco
Companies; and

. a 78.5% interest in CTO.

The Company's investment portfolio is ordinarily substantially fully
invested in common stocks and other equity-related securities such as
preferred stock, debt securities convertible into, or, for private placements,
accompanied by options or warrants to purchase, equity securities, and stock-
index options and stock-index futures.

Until the Company's acquisition of the Levco Companies in 1996, the
Company's officers managed the Company's investments under the supervision of
the Board, without an investment adviser. Since June 1996, Levco has managed
the Company's public portfolio and the Company's officers have continued to
manage the other investments.

The Company generally provides shareholders with two measures of past
performance--stockholder return and portfolio performance. Stockholder return
is the actual return you, as a shareholder, would have achieved assuming
reinvestment of all distributions at the actual reinvestment price on the
payment date of the distribution and is based on the market value of the
Company Shares. The Company deducts expenses in the calculation of stockholder
return. The Company's average annual compounded stockholder return for the
year ended December 31, 1998, and for the 3-, 5- and 10-year periods ended
December 31, 1998 was 3.5%, 14.4%, 13.0%, and 12.0%, respectively. Stockholder
return for the five-month period ended May 31, 1999 (which included the period
after the Company announced the proposed Plan) was 21.1%.

The Company also provides shareholders with information about portfolio
performance. Portfolio performance is the time weighted total return of the
Company's net assets. This total return calculation assumes monthly
compounding of total net assets, with purchases and sales of portfolio
securities assumed to occur at mid-month. Dividend income is treated as earned
on the ex-date and interest income is accrued monthly. Calculations reflect
adjustments for capital gain distributions, treasury stock purchases and taxes
paid by the Company in years when a portion of net realized capital was
retained, but before deduction of expenses. The Company's total return based
on net asset value for the year ended December 31, 1998 was 10.9%. The
Company's average annual compounded total return based on net asset value for
the 3-, 5- and 10-year periods ended December 31, 1998 was 15.3%, 14.9% and
12.1%, respectively, and its total return for the five-month period ended May
31, 1999 was 7.0%.

Background of theCompany
<PAGE>

Set forth below is a chart showing how the Company's investment portfolio
was divided among sectors as of May 31, 1999 and a short description of each
sector:

Portfolio Market Value (Actual as of May 31, 1999)

<TABLE>
<S> <C>
Former Private Placement Securities 7.4%
Public Portfolio 67.8%
CTO 9.3%
Levco 14.2%
Private Placement Portfolio 1.3%
</TABLE>

Public Portfolio. The Company's investments in publicly-traded securities
(which predominantly are in large-cap companies) emphasize high quality, long-
term holdings. In managing the Company's public portfolio, Levco seeks total
return through capital appreciation and asset protection.

As of May 31, 1999, the Company's public portfolio was comprised of
securities of 94 issuers, having a total market value of $548 million and
representing 67.8% of the Company's total investment portfolio.

Private Portfolio. In the past, the Company had acquired private placement
securities directly from issuing companies under negotiated terms and
conditions. Typically, the Company invested $8 to $10 million per transaction
(although the Company sometimes made larger or smaller investments) in
established companies with strong businesses, proven managements and positive
cash flows. The types of investments the Company made are sometimes called
mezzanine level financing. This is a form of investing done with the
expectation that, if the investment was successful, the portfolio company
would offer its securities publicly or would itself be sold, or there would be
some other event that would allow the Company to sell its interest. These
types of investments have the potential for high returns, but generally
involve greater risks than investing in the types of securities that comprise
the public portfolio.

In 1997, the Company announced its decision not to pursue further private
investment opportunities. The Board made this decision because it concluded
that the market had been flooded with new capital during the preceding two
years and that intense competition for mezzanine level transactions had driven
up the prices for these opportunities. Due to the risk and illiquidity of
these investments, and the market conditions, the Board made the decision not
to make additional private placement investments. As the remaining private
placement investments have matured, the Company has invested the proceeds in
publicly-traded securities.

Two former private placement securities, Citadel Communications Corporation
and Paracelsus Healthcare Corporation, currently are publicly traded. As of
June 30, 1999, these securities had a total market value of $30.6 million.
Because the Company originally held them in its private portfolio, the Company
does not take these securities into account in the calculation of Levco's fee
for managing the public portfolio.

As of May 31, 1999, the Company's private placement portfolio consisted of
equity and equity-related securities of 4 issuers, having a total fair value
(as determined by the Board) of $11 million and representing 1% of the
Company's total investment portfolio. The Board has determined in good faith
that the valuations of the securities in the private placement portfolio are
fair. The Board has based its

Background of theCompany
<PAGE>

determinations of fair value on factors the Board deems relevant. For more
information on the factors the Board considers in making its determinations,
see "Levco Companies" below.

Levco Companies. The Company acquired Levco in June 1996 as a vehicle
through which the Company believed it could develop a broader financial
services business. As part of the acquisition, the Company formed Levin
Management Co., Inc. (called Levin Management in this proxy statement) to
provide administrative and management services to Levco and its related
companies. The Company owns 100% of Levin Management, which in turn owns 100%
of Levco. Levco is a registered investment adviser that, as part of its
regular investment management business, manages the Company's public
portfolio. Levco owns 100% of LEVCO GP, Inc., which is the general partner of
several investment partnerships managed by Levco, and LEVCO Securities, Inc.,
a registered broker-dealer. The organizational structure of the Company and
the Levco Companies is (and will be after implementation of the Plan) as shown
below:

-----------
The Company
-----------
|
------- 100% stock ownership
|
-----------
Levin
Management
-----------
|
------- 100% stock ownership
|
-----------
Levco
-----------
|
------- 100% stock ownership
|
---------------- | ------------------
LEVCO GP -------------- LEVCO Securities
---------------- ------------------

More information about the business of the Levco Companies is provided later
under the heading "Structure of the Company After the Distribution--The Levco
Companies".

As of May 31, 1999, the Board determined in good faith that the fair value
of the Company's investment in the Levco Companies was $115 million. The
Company valued the Levco Companies at $116 million on the date the agreement
to acquire Levco was signed in November 1995 and at $131.1 million at the
acquisition date in June 1996. The Company loaned Levin Management $65 million
in connection with the acquisition. Levin Management used that money to fund
the cash portion of the purchase price for the acquisition (about $38 million)
and the balance to buy from the Company some of the stock that was also part
of the consideration. The Company has received approximately $18.9 million in
interest income from Levin Management from June 1996 through May 31, 1999 The
notes for this loan originally were due on June 28, 1999 and carried an
initial interest rate of 9.75%. The interest rate was raised to 10.25% for the
period from November 1, 1998 through June 15, 1999 because Levin Management,
as a result of significant investments it was making in additional senior
personnel and expanded facilities, failed to meet one of the financial
covenants in the loan agreement. Compliance with that covenant has been waived
and in June 1999, the Company extended this loan through December 31, 1999, at
an interest rate of LIBOR plus 350 basis points (9.23% as of June 30, 1999),
in anticipation that all or a substantial part of the debt would be converted
to equity in connection with implementation of the Plan. See "Changes that
will Result from Implementing the Plan" for information about how the Company
expects to handle this loan in connection with the Plan.

Background of the Company
<PAGE>

In valuing the Levco Companies or any other security for which market
quotations are not readily available, the quantitative and qualitative factors
that the Board considers may include:

. the type of security and the nature of the company's business;

. the security's marketability and restrictions on its disposition;

. the market price of unrestricted securities of the same issuer (if any),
comparative valuation of securities of publicly traded companies in the
same or similar industries, and the valuation of recent mergers and
acquisitions of similar companies;

. the current financial condition and operating results, sales and earnings
growth, and operating revenues of the company; and

. competitive conditions and current and prospective conditions in the
overall stock market.

The value the Board determines in good faith may not reflect amounts that the
Company could realize upon immediate sale, nor the amounts that the Company
ultimately may realize, and may differ from the value that the Company would
have used had a ready market existed for the security. Those differences could
be significant.

CTO. The Company owns 78.5% of the outstanding common stock of CTO (called
the "CTO Shares" in this proxy statement), which are listed on the American
Stock Exchange (the "AMEX"). CTO's primary operating business is real estate
development. As of May 31, 1999, the Company's investment in CTO had a value
of $76 million (based on the closing price of CTO's common stock on the AMEX
that day) and represented 9.3% of the Company's total investment portfolio.
See "Summary of the Plan--Distribution of CTO Shares" below for a more
complete description of CTO.

Why the Board is Recommending the Plan

In 1998, the Board established a strategic planning committee of the Board.
At that time, the members of the strategic planning committee were Jessica M.
Bibliowicz (who resigned from Levco and as a member of the Board on April 7,
1999 for reasons unrelated to the transactions contemplated by the Plan),
Eugene V. Fife, J. Barton Goodwin, James P. Gorter, David D. Grumhaus, John A.
Levin, Burton G. Malkiel and Dean J. Takahashi. The committee commenced its
strategic planning process by focusing on plans to grow the Company's
financial services business through Levco. However, the process evolved into
exploring the strategic alternatives that might be available to the Company
for all of its assets and operations.

In January 1999, the Company retained Lazard Freres & Co. LLC to provide
advice to the Board and to develop a series of strategic alternatives for all
of the Company's assets and operations. Lazard Freres presented the results of
its study to the strategic planning committee on February 11, 1999. In its
presentation, representatives of Lazard Freres noted that the Company's common
stock has historically traded at a larger, more persistent discount than the
common stock of many other closed-end equity funds. Lazard Freres reported to
the Board that it believed that, for the Company to reduce the discount and
enhance shareholder value, the Company would have to address three issues:

. the composition of the Company's portfolio of investments and valuation
concerns relating to large, controlling positions in portfolio companies;

. the potential value of the Levco Companies, taking into account the
desirability of expanding Levco's business; and

. the Company's investment in CTO.

Lazard Freres then presented several strategic alternatives available to the
Company. Lazard Freres noted that these alternatives were not an exhaustive
list of all the possible courses of action, but were alternatives that, based
on business rationale, qualitative factors, legal and regulatory issues, and
financial impact, the Company might reasonably expect to complete. The
alternatives included transactions in which the Company would combine its
investment in CTO and the Levco Companies, leaving the Company as an
investment company, and transactions in which the Company would sell

Why the Board is Recommending the Plan
<PAGE>

Levco or seperate itself from Levco and in which the Company might or might
not continue to operate as an investment company. The Board also considered
the proposal to liquidate the Company's portfolio of publicly-traded and
private placement securities, distribute the proceeds to the Company's
shareholders and relinquish the Company's status as an investment company. The
committee discussed the potential benefits and disadvantages to the Company's
shareholders of each alternative Lazard Freres had presented and also
discussed additional possibilities, including converting the Company to an
open-end investment company.

On February 24, 1999, the Board met to discuss the strategic alternatives
that Lazard Freres had proposed. The Board discussed the pros and cons of each
alternative, including particularly the alternative that became the Plan. As
part of their discussion, the Board specifically considered anticipated
shareholder reaction to the Plan, the viability of the Company after the
consummation of the Plan, the economic (including tax-related) effects on the
Company and its shareholders and other relevant factors. The directors
discussed how the Company could accomplish the series of transactions
contemplated by the Plan and reviewed a preliminary analysis of the magnitude
of the distributions that the Company might make to shareholders.

At the meeting, the Board also considered and rejected the possibility of
converting the Company to an open-end investment company. The Board determined
that conversion to an open-end format was not appropriate because the
Company's asset composition would make compliance with the regulatory
requirements applicable to open-end companies difficult or impossible, and
because the Board anticipated that the level of redemptions immediately
following open-ending likely would be quite high, which could significantly
disadvantage shareholders who chose not to redeem.

Finally, the Board discussed a number of other potential steps the Company
might take, including increasing the frequency of dividends paid by the
Company, implementing a focused public and investor relations program, and
commencing a stock buyback program.

The Board met again on April 22, 1999. After reviewing the strategic
alternatives available to the Company, the Board preliminarily determined that
the Plan was in the best interests of the Company's shareholders because it
had the greatest likelihood of maximizing shareholder value. Because of the
complexity of the proposed Plan, the Board asked its advisors to prepare a
detailed timetable and a summary of the actions that the Company would have to
take and an analysis of the questions that the Company would have to address
if the Board chose to pursue those transactions. The Board further requested
that the Company's advisors present the Board with historical performance and
other analytical information on the Company, detailed information on the Levco
Companies, and a financial analysis of the Company upon completion of the
Plan.

At a special meeting of the Board held on May 6, 1999, the Company's
advisors presented historical information to the Board about the Company,
including detailed performance and discount information. Because the Levco
Companies would be the Company's principal asset upon consummation of the
Plan, the Board reviewed information about Levco and its related companies,
including information related to Levco's assets under management, Levco's
investment performance and a variety of statistical and other data on the
consolidated financial condition of the Levco Companies. The Board also
considered an analysis of the Company's ability to sell the Company's
portfolio of publicly-traded securities and private securities as part of the
Plan and reviewed a proposed outline of the mechanics of the Plan.

In addition, the Board considered information about CTO, particularly
information relating to the historical market price and volume of trading in
CTO Shares. Bob D. Allen, who is the chairman, president and chief executive
officer of CTO, as well as a director of the Company, advised the directors
that the CTO board had met on the afternoon of May 5, 1999 and that Mr. Gorter
had confidentially advised the CTO board of the possibility that the Company
might distribute the Company's CTO Shares to the Company's shareholders. Mr.
Allen stated that the CTO board had concluded that this would be a positive
development for CTO and its other shareholders, and that the CTO board was
continuing to consider implementing a self-tender offer or other stock buyback
program which, if approved by the CTO board, would take place after the
Company completed the distribution of CTO Shares.

Why the Board is Recommending the Plan
<PAGE>

On June 17, 1999, the Board met and approved the Plan in the form attached
hereto as Appendix A and the amendment to the Company's Certificate of
Incorporation needed to effect the reverse stock split in the form attached
hereto as Appendix F, and directed that they be submitted to the Company's
shareholders.

Prior to approving the Plan, the Board reviewed, among other things, a
detailed analysis of the material differences in the tax consequences to the
Company's shareholders of adopting a plan of partial liquidation (as
contemplated by the Plan) versus the tax consequences to shareholders of
adopting a plan of complete liquidation of the Company. Under a complete
liquidation, all of the Company's assets, including the shares of Levin
Management owned by the Company, would be distributed to the Company's
shareholders. The Board's analyses included estimates of the after-tax
outcomes to shareholders under each type of liquidation plan that could result
from the interaction between the tax consequences of such plan and a
particular shareholder's basis in his Company Shares, the shareholder's
effective tax rate on ordinary income, and the period during which the
shareholder retains his Company Shares after the liquidation. In reviewing
such analyses, the Board was aware that certain of the directors would receive
a higher after-tax return in a complete liquidation, while others would
receive a higher after-tax return if the Company adopted the Plan.

After considering these matters, the Board unanimously concluded that
maintaining the Plan as a plan of partial liquidation was advisable and in the
best interests of the Company's shareholders. In reaching this conclusion, the
Board determined that it could not obtain all of the information necessary to
fully assess the tax consequences of a partial liquidation versus a complete
liquidation to all shareholders, including information concerning each
shareholder's taxable status, tax basis in its Company Shares, effective tax
rate on ordinary income, and intentions with respect to the long-term holding
of the Company Shares. In light of both the unavailability of information and
the absence of an objectively demonstrable advantage associated with a partial
or a complete liquidation for all shareholders under all sets of assumptions,
the Board determined that it was appropriate to give considerable weight to
several other matters implicated by the choice of a partial liquidation versus
a complete liquidation, including the following: (i) a delay would be
occasioned by changing the Plan to a plan of complete liquidation as a result
of additional or different regulatory and other requirements, and the
Company's shareholders would be exposed to additional market risk during the
period of such delay; (ii) a complete liquidation would require Levin
Management to be newly listed on the New York Stock Exchange and in the event
of changing market conditions, it might not be possible for Levin Management
to meet the requirements for such listing, which the Board believed could
result in a loss of liquidity to the Company's shareholders; (iii) a partial
liquidation would better preserve continuity in the Company's board of
directors; and (iv) a partial liquidation would afford flexibility in
permitting the Company to retain private placement securities that the Board
believed might not be sold on favorable terms during the time frame
contemplated by the Plan.

Lazard Freres' Analysis and Opinion

At the May 6th meeting, Lazard Freres presented to the Board an analysis of
the expected financial consequences of implementing the Plan and rendered an
oral opinion, subsequently confirmed in writing, that, as of May 6, 1999, the
receipt by the Company's shareholders of the distribution of cash and
securities as part of the Plan, and the retention of the Company Shares by
such holders immediately following that distribution, taken in the aggregate,
is fair to the Company's shareholders from a financial point of view.

The full text of the written opinion of Lazard Freres, which sets forth
assumptions made, matters considered and limitations on the review undertaken
in connection with the opinion, is attached to this proxy statement as
Appendix B and is incorporated herein by reference. Shareholders of the
Company are urged to, and should, read the opinion in its entirety.

Why the Board is Recommending the Plan
<PAGE>

In connection with rendering its opinion, Lazard Freres, among other things,
performed the following:

. held discussions with members of the Company's senior management with
respect to the financial terms and conditions of the proposed Plan;

. reviewed certain historical business and financial information relating
to each of the Company, CTO and the Levco Companies;

. reviewed various financial forecasts and other data provided to Lazard
Freres by each of CTO and the Levco Companies relating to their
businesses;

. held discussions with members of senior management of each of the
Company, CTO and the Levco Companies with respect to past and current
business operations and financial condition, regulatory relationships,
strategic objectives and the future prospects of their respective
companies;

. reviewed public information with respect to certain other publicly-
traded, closed-end, registered investment companies and certain other
publicly-traded investment management companies;

. reviewed the historical stock prices and trading volumes of the Company
Shares and the CTO Shares; and

. conducted such other financial studies, analyses and investigations as it
deemed appropriate.

Lazard Freres relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and did not assume any
responsibility for any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities or the
solvency of the Company, including the assets or liabilities or the solvency
of the Levco Companies. In that regard, Lazard Freres also assumed that all of
the securities to be liquidated pursuant to the Plan, other than certain
privately issued securities identified by management (the "Exception
Securities"), will be sold at prices equal to the market prices in effect at
April 30, 1999; with respect to the Exception Securities, Lazard Freres
applied discounts to the asset values that were specified by the Company's
management and assumed such Exception Securities will be sold at such
discounted values. Lazard Freres assumed that financial forecasts have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective managements of each of the Company, CTO and
the Levco Companies. Lazard Freres assumed no responsibility for and expressed
no view as to such forecasts or valuations or the assumptions on which they
were based. In addition, Lazard Freres assumed that the distribution of the
Company's investment in CTO to the Company's shareholders would have no effect
upon the market for CTO's securities.

Pursuant to the direction of the Company's legal and tax advisors, Lazard
Freres also assumed, for purposes of its analysis, that each shareholder of
the Company is subject to income tax at an aggregate effective state and
federal rate of 45% on ordinary income and short-term capital gains and 25% on
long-term capital gains. These assumptions may not be correct for each
individual shareholder, as each shareholder will have tax considerations
unique to its own position and status. In addition, Lazard Freres assumed that
the Plan would not result in a return of capital to any shareholder in excess
of such shareholder's tax basis in the Company Shares. Lazard Freres also
assumed that the Plan will be consummated on the terms described to it by the
Company's management and that obtaining the necessary approvals for the Plan
will not have an adverse effect on the Company or the Levco Companies.

Lazard Freres' engagement by the Company and its opinion are for the benefit
of the Board and were rendered to the Board in connection with its
consideration of the Plan. Lazard Freres' opinion does not constitute a
recommendation as to how any Company shareholder should vote with respect to
the Plan.

The following is a summary of certain of the financial analyses used by
Lazard Freres in connection with providing its opinion to the Board on May 6,
1999.

Historical Stock Trading Analysis. Lazard Freres reviewed the historical
trading prices and volumes for Company Shares on a weekly basis from April 29,
1994 through April 30, 1999. This

Why the Board is Recommending the Plan
<PAGE>

analysis showed that the average discount to net asset value for the Company
Shares was 18.5% over the past five years and 19.1% over the past year, with a
discount of 26.1% on April 30, 1999. Lazard Freres also compared the price
performance of Company Shares on a weekly basis from April 29, 1994 to April
30, 1999 with the performance of a group of two "value" investment style
closed-end funds, including Central Securities Corporation and Zweig Fund,
Inc. (the "Value Peers"), a group of six "blend" investment style closed-end
funds, including the Adams Express Company, Gabelli Equity Trust Inc., General
American Investors Company, Inc., Liberty All-Star Equity Fund, Salomon
Brothers Fund, Inc. and Tri-Continental Corporation (the "Blend Peers"), the
Russell 1000 Value Index and the S&P 500 Index over the same period. This
analysis indicated that the price of Company Shares decreased 4.9% over the
past five years, while the Value Peers index increased 4.6%, the Blend Peers
index increased 40.1%, the Russell 1000 Value Index increased 153.7% and the
S&P 500 Index increased 204.5% over the same period. The analyses above relate
solely to stock price and do not take into account capital gains or other
distributions made by any of the above companies, including the Company, or
any of the companies included in the indices above. In addition, Lazard Freres
compared the discount or premium to net asset value at which Company Shares
traded on a weekly basis from April 29, 1994 through April 30, 1999 to the
discounts or premiums at which the Value Peers and the Blend Peers traded over
the same period. This analysis indicated that Company Shares traded at a
discount ranging from 12.4% to 27.5%, while the Value Peers trading prices
ranged from a 10.7% premium to a 17.4% discount, and the Blend Peers traded at
a discount ranging from 4.6% to 14.8% of net asset value.

Portfolio Overview. Lazard Freres noted that cash, cash equivalents and
publicly-traded investments represented, as of April 30, 1999, $694.0 million,
or $17.78 per Company Share, of the Company's $815.4 million, or $20.89 per
Company Share, total net asset value. Lazard Freres used market prices to
determine the values of the assets included in the Company's publicly-traded
investments.

Projected Assets to be Distributed to the Company's Shareholders Pursuant to
the Plan. Lazard Freres considered the net assets projected to be distributed
to the Company's shareholders pursuant to the Plan (such net assets are
referred to as the "Distributed Assets"). According to management's estimates
of the values of Company's assets and liabilities as of April 30, 1999, the
Distributed Assets would have an aggregate pre-tax value of $712.6 million, or
$18.26 per Company Share. Making certain assumptions regarding tax rates
applicable to the Company's shareholders outlined above, Lazard Freres noted
that such holders would be subject to an aggregate tax of $105.8 million, or
$2.71 per Company Share. Lazard Freres further noted that the Distributed
Assets would have an aggregate after-tax value of $606.8 million, or $15.55
per Company Share, comprised of $541.8 million in cash, or $13.88 per Company
Share, and $65.0 million in CTO Shares, or $1.67 per Company Share. Lazard
Freres further noted that, following completion of the Plan, the Company's
shareholders would retain an interest in the Levco Companies through their
ownership of Company Shares and that no value for such interest was included
in the Distributed Assets other than the proposed $20.0 million from partial
repayment of the Company's $65.0 million loan to Levin Management.

Interests of Company Shareholders. Lazard Freres compared the aggregate of
the after-tax amount set forth above and the estimated post-Plan value of the
Company Shares to the April 30, 1999 market price of $15.44 for the Company
Shares. In conducting these analyses, Lazard Freres reviewed two cases: (i)
the Levco Companies borrow $20.0 million of debt, with the proceeds used in
partial repayment of the Company's $65 million loan to Levin Management and
the remainder of the loan converted by the Company to equity of Levin
Management; and (ii) the entire $65 million loan is converted by the Company
to equity of Levin Management. For purposes of these analyses, Lazard Freres
assumed that, since the Levco Companies would represent the principal asset of
the Company after the Company completes the Plan, the estimated post-Plan
value of the Company Shares, prior to any indebtedness, would be $115.0
million, or $2.95 per Company Share, which is the April 30, 1999 fair value
for the Levco Companies as determined by the Board and as reflected on the
Company's statement of assets and liabilities as of that date.

Why the Board is Recommending the Plan
<PAGE>

In the first case, Lazard Freres noted that the Company's shareholders would
receive Distributed Assets with an estimated after-tax value of $606.8
million, or $15.55 per Company Share, and $95.0 million in post-Plan Company
Shares, or $2.43 per Company Share, for a cumulative value of $701.8 million,
or $17.98 per Company Share, representing a premium of 16.5% over the April
30, 1999 market price for the Company Shares. In the second case, Lazard
Freres noted that the Company's shareholders would receive Distributed Assets
with an estimated after-tax value of $586.8 million, or $15.04 per Company
Share, and $115.0 million in post-Plan Company Shares, or $2.95 per Company
Share, for a cumulative value also of $701.8 million, or $17.98 per Company
Share, also representing a premium of 16.5% over the April 30, 1999 market
price for the Company Shares.

Break-even Analysis. Lazard Freres also conducted a break-even analysis,
consistent with the cases detailed above, to estimate the minimum implied
valuation required for the Levco Companies in order for the estimated combined
value of after-tax Distributed Assets and post-Plan Company Shares to be equal
to the April 30, 1999 market price for the Company Shares. In the first case,
Lazard Freres noted that the Company's shareholders would receive Distributed
Assets with an estimated after-tax value of $606.8 million, or $15.55 per
Company Share, an amount in excess of the April 30, 1999 market value for the
Company Shares prior to any value being ascribed to the post-Plan Company
Shares. In the second case, Lazard Freres noted that the Company's
shareholders would receive Distributed Assets with an estimated after-tax
value of $586.8 million, or $15.04 per Company Share; for the combined value
of after-tax Distributed Assets and post-Plan Company Shares to be equal to
the April 30, 1999 market price for the Company Shares would imply a multiple
of the Levco Companies' firm value (which is equal to the market value of the
firm's outstanding shares plus long-term indebtedness less excess cash) to the
last-twelve-months' operating income ("Firm Value/LTM Operating Income") as of
March 31, 1999 the 1.3x and a multiple of the Levco Companies' equity value
(which is equal to the market value of the firm's outstanding shares) to 1999
estimated cash net income ("Equity Value/1999E Cash Net Income"), projected by
the Levco Companies' management as of April 30, 1999, of 2.0x. Lazard Freres
compared these multiples with those of certain publicly-traded asset
management companies including Conning Corporation, Eaton Vance Corporation,
Gabelli Asset Management, Inc., Federated Investors, Inc., Franklin Resources,
Inc., John Nuveen Company, Phoenix Investment Partners, Ltd., T. Rowe Price
Associates, Inc., United Asset Management Corp. and Waddell & Reed Financial,
Inc. These companies were chosen because they are publicly-traded companies
with operations that, for purposes of this analysis, may be considered similar
to the Levco Companies. Lazard Freres noted that the median Firm Value/LTM
Operating Income multiple for these companies was 9.8x, with the lowest at
7.4x. Lazard Freres further noted that the median Equity Value/1999E Cash Net
Income multiple for these companies was 11.9x, with the lowest at 6.9x.

The preparation of a fairness opinion is a complex process and is not
necessarily susceptible of partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Lazard Freres' opinion. In arriving at its fairness
determination, Lazard Freres considered the results of all these analyses. No
company or transaction used in the above analyses as a comparison is directly
comparable to the Company, CTO, the Levco Companies or the contemplated
transaction. Lazard Freres prepared the analyses solely for purposes of
providing its opinion to the Board as to the fairness, from a financial point
of view, of the receipt of the distribution of cash and securities to the
Company's shareholders pursuant to the Plan and the analyses do not purport to
be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold. Analyses based upon forecasts of future
results are not necessarily indicative of actual future results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of the parties or their respective
advisors, neither the Company, Lazard Freres nor any other person assumes
responsibility if future results are materially different from those
contemplated. As described above, Lazard Freres' opinion to the Board was one
of many factors taken into consideration by the Board in making its
determination to approve the Plan. This summary does not

Why the Board is Recommending the Plan
<PAGE>

purport to be a complete description of the analyses performed by Lazard Freres
and is qualified by reference to the written opinion of Lazard Freres set forth
in Appendix B to the proxy statement.

Lazard Freres is an internationally recognized investment banking and
advisory firm. Lazard Freres, as part of its investment banking business, is
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
leveraged buyouts and valuations for estate, corporate and other purposes.
Lazard Freres was selected to act as investment banker to the Company in
connection with the Plan because of its reputation as an internationally
recognized investment banking and advisory firm. In the past, Lazard Freres has
provided investment banking services to the Company, including services related
to the Company's acquisition of the Levco Companies, for which Lazard Freres
was paid customary fees.

In the ordinary course of business, Lazard Freres and its affiliates may
actively trade in the securities of the Company or CTO for their own account
and for the accounts of their customers, and, accordingly, may at any time hold
a long or short position in such securities. As of the date hereof, Lazard
Freres holds no Company Shares or CTO Shares for its own account; Lazard Freres
holds 1,250 Company Shares in customer and employee accounts.

Pursuant to letter agreements dated February 10, 1999 and April 29, 1999
(collectively, the "Engagement Letter"), the Company engaged Lazard Freres to
act as investment banker to the Board in connection with the Plan. In the
Engagement Letter, the Company agreed to pay to Lazard Freres (i) a fee of
$250,000 upon execution of the Engagement Letter, (ii) a fee of $250,000 upon
public announcement of the Plan, (iii) a fee of $250,000 upon publication of
this proxy statement and (iv) an additional fee of $1,750,000, less any fees
previously paid pursuant to clauses (ii) and (iii), upon consummation of the
Plan. The Company also agreed to reimburse Lazard Freres for certain out-of-
pocket expenses in connection with its engagement and to indemnify Lazard
Freres and certain related persons against certain liabilities, including
liabilities arising under the Federal securities laws, relating to or arising
out of its engagement.

Conclusion

After extensive discussion on the information presented to the Board,
consideration of the performance of the Company's portfolio and common stock,
including the discount to net asset value, the strategic posture of a closed-
end investment company owning an investment adviser, the mechanics of effecting
the Plan and the consequences to the Company's shareholders, the Board
unanimously concluded that the proposed Plan was in the best interests of the
Company's shareholders. The Board preliminarily adopted the Plan on May 6, 1999
and adopted the final form of the Plan on June 17, 1999.

Summary of the Plan

The text of the Plan is attached to this Proxy Statement as Appendix A. The
information below is only a summary and is qualified in its entirety by
reference to the Plan.

Plan Description

The Plan authorizes the Company to:

. stop investing in accordance with the Company's current investment
objectives, restrictions and policies, liquidate the securities held in
the public portfolio and continue liquidating the private portfolio;

. invest the proceeds of the liquidation in short-term, liquid investments;

. distribute the proceeds of the liquidation and the Company's shares of
CTO to the Company's shareholders;

Why the Board is Recommending the Plan
<PAGE>

. prepare and file the documents necessary to deregister the Company as an
investment company and close the Company's Chicago office after the
Company has deregistered; and

. continue in business as a holding company, the principal asset of which
will be the Levco Companies.

The Plan will become effective immediately upon approval by the Company's
shareholders, although the Company will not complete implementing the Plan for
several months. Until the Plan has been completely implemented--that is, until
the Company has completed the distributions contemplated by the Plan and
deregistration as an investment company has occurred--the Board has the power
to abandon, defer or modify the distributions or any other matter the Plan
contemplates. The Board will take such an action only if it concludes that
doing so will be in the best interests of the Company and its shareholders.

Liquidation of Private and Public Portfolios and Distribution of Proceeds

The Plan provides for the sale of the securities in the public and private
portfolios. Under the Plan, the Company's officers will continue their efforts
to sell the securities in the private placement portfolio and Levco will sell
the securities in the Company's public portfolio in an orderly manner over a
period of time, in each case, at prices and on terms and conditions as the
Company's officers and Levco believe are reasonable and in the best interests
of the shareholders and the Company. As portfolio securities are sold, the
Company's officers will invest the proceeds in short-term, high quality
investments that the Company will then sell just prior to a distribution so
that it can include the sale proceeds with the distribution. Securities that
cannot be sold on terms the Company considers reasonable, if any, will be kept
by the Company until they can be sold at appropriate terms, at which time the
Board will determine the disposition of the net proceeds.

As of May 31,1999, the total value of the Company's public portfolio and
private placement securities was approximately $619 million, and the Company's
tax basis in those securities totaled approximately $477 million. Included in
these totals are private placement securities whose values, totaling about $11
million, were determined by the Board. The amount of proceeds from the
liquidation the Company will distribute to shareholders will depend on the
values of the securities when they are sold and the costs the Company incurs,
including commissions, to sell the securities. The final amounts the Company
will distribute to shareholders may be more or less than the values of the
Company's securities noted above. The public announcement and the timing of
the commencement of the Plan's implementation may also affect the prices at
which the Company sells these securities. The Company will retain some of the
sale proceeds to pay for the expenses of implementing the Plan, the reverse
stock split (see "Approval of Amendment to the Certificate of the
Incorporation of Baker, Fentress & Company" for information on the reverse
stock split), for operating the Chicago office until it is closed, for on-
going costs of the Company and for other expenses in connection with the Plan,
including severance and other employee-related matters.

The Company will distribute 100% of the net cash proceeds of the sales of
the Company's securities investments (less the expenses described above) to
shareholders on a proportionate basis, based upon the number of shares each
shareholder owns at various record dates that the Company will determine and
announce. The Company has not yet finalized the schedule for making the
distributions. However, at this time, the Company believes it will make its
first distribution of cash (which will consist of an initial capital gain
distribution) on or about September 24, 1999 (to shareholders of record at a
date the Board will determine). This distribution probably will occur about
the same time the Company distributes its CTO Shares to shareholders (see
"Distribution of CTO Shares" below). The Company plans to distribute the
balance of the net cash proceeds in one or two additional distributions
(again, to shareholders of record at a date the Board will determine). If the
Company decides to make only one additional distribution (which would consist
of an ordinary income dividend, a long-term capital gain distribution, a
distribution of earnings and profits and a return of capital), the Company
believes it would make that final distribution on or about January 7, 2000.
However, if the Company decides to make two additional distributions, the
Company believes the first additional distribution (which would consist of an
ordinary income dividend and a long-term capital gain

Summary of the Plan--
Liquidation of Private and Public Portfolios
<PAGE>

distribution) would occur in late December 1999, and the final distribution
(which would consist of a distribution of earnings and profits and a return of
capital) would occur on or about January 7, 2000. These dates and proposed
distributions are tentative and the Board may change them.

Federal Income Tax Consequences of the Liquidation and Distribution. The
distributions of cash from the sale of the Company's securities will be
taxable. The taxable amounts will depend on the amounts received by the
Company for the securities sold, the Company's basis in such securities and
your basis in your Company shares. See "Federal Income Tax Consequences" for
more information on the tax consequences of the distribution.

Distribution of CTO Shares

The Plan includes a special dividend to Company shareholders of all of the
CTO Shares owned by the Company. As a result of the distribution of CTO
Shares, Company shareholders will own the CTO Shares directly and will enjoy
greater flexibility in making investment decisions regarding CTO. Shareholders
may incur costs, including brokerage commissions, in making investment
decisions regarding CTO. Your proportionate ownership interest in CTO will not
change (except as affected by fractions--see "Partial or Fractional Shares"
below). After the distribution of the CTO Shares, you will own directly the
same economic interest in CTO you now own through your ownership of shares of
the Company's stock.

Manner of Effecting the Distribution. If shareholders approve the Plan and
all other conditions to the distribution are satisfied (or waived by the
Board), the Company currently anticipates that it will distribute the CTO
Shares on September 24, 1999 (to shareholders of record at a date the Board
will determine). This date is tentative and the Board may change it. At or
about the time the Board sets the record date and the date for the
distribution of the CTO Shares, it will determine the number of CTO Shares it
will distribute in proportion to each Company Share. The Board will base this
determination on the number of Company Shares and CTO Shares outstanding. The
Company currently estimates that you will receive 1 CTO Share for each 7.8058
Company Shares you own, based on the number of Company Shares and CTO Shares
outstanding on May 31, 1999. On the distribution date, the Company will
deliver all of the outstanding CTO Shares that it owns to ChaseMellon
Shareholder Services, LLC, the Distribution Agent. The Distribution Agent will
then mail the certificates for the CTO Shares to Company shareholders who are
entitled to receive them as of such record date. All the CTO Shares will be
fully paid and nonassessable. CTO shareholders will not be entitled to
preemptive rights, which means that CTO shareholders will not have the right
to buy additional shares of a new issue to preserve their equity before others
have a right to purchase shares of the new issue. See "Description of CTO
Capital Stock" below.

Company shareholders do not have to exchange their Company Shares for CTO
Shares. DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.

Partial or Fractional Shares. The ratio of CTO Shares to Company Shares that
the Company will use to determine the number of CTO Shares to give to each
shareholder will result in Company shareholders being entitled to partial CTO
Shares. The Company will not send out certificates for partial CTO Shares.
Instead, the Distribution Agent will pool all the fractional shares together
and sell them at the prevailing market price, at such times and in such
amounts as the Distribution Agent shall determine, and distribute the net cash
proceeds (after deduction of brokerage fees) to the Company shareholders who
would have received the partial CTO Shares. The Company will pay the fees and
expenses of the Distribution Agent.

Federal Income Tax Consequences of the Distribution. The distribution of CTO
Shares will be taxable. The taxable amount will depend on the number of CTO
shares you receive from the Company, the Company's basis in such securities
and the market value of the CTO Shares on the date of distribution. See
"Federal Income Tax Consequences" for more information on the tax consequences
of the distribution.

Summary of the Plan--
Liquidation of Private and Public Portfolios
<PAGE>

Listing and Trading of CTO Shares. CTO Shares are currently traded on the
AMEX under the symbol "CTO." For a description of CTO Shares see "Description
of CTO Capital Stock" below. It is expected that CTO Shares will continue to
be listed and traded on the AMEX after the distribution. The distribution will
cause a significant number of additional CTO Shares to be available for
trading, and there can be no assurance as to the prices at which trading in
CTO Shares will occur after the distribution. The prices at which the CTO
Shares trade may fluctuate significantly until the Company fully distributes
the CTO Shares, the Distribution Agent concludes its sales of fractional CTO
Shares and an orderly market develops. The marketplace will determine the
prices at which the CTO Shares ultimately trade. The price may be influenced
by, among other factors, the depth and liquidity of the market for the CTO
Shares, investor perception of CTO and the industry in which CTO participates,
CTO's operating results, CTO's dividend policy and general economic and market
conditions. The Company cannot assure you that the CTO Shares distributed will
trade at a price equal to or above the price at which they were included in
calculations of the Company's net asset value--in other words, the price could
go up or down.

CTO Shares have experienced substantial and lengthy periods of illiquidity
in the past. Although the CTO board has stated that it is continuing to
consider implementing a self-tender offer or other stock buyback program,
there can be no assurance that an active or liquid trading market will
develop, or that if one develops, that it will continue. A public market
having the desirable characteristics of depth, liquidity and orderliness
depends on the simultaneous presence in the market of both willing buyers and
sellers of CTO Shares, which is not within the control of the Company or CTO.

Relationship Between CTO and the Company after the Distribution. Mr. Allen,
Mr. Goodwin, Mr. Gorter, Mr. Levin and Mr. Peterson, each of whom are officers
and/or directors of the Company, are also direct shareholders of CTO. Certain
of Levco's clients are also shareholders of CTO. Each of the officers and
directors of the Company and Levco's clients who own Company Shares will
receive CTO Shares in the distribution, on exactly the same terms as every
other Shareholder. See "Manner of Effecting the Transaction".

Following the distribution, Mr. Allen will continue to be CTO's Chairman,
President and Chief Executive Officer and will also serve as a director of the
Company. Mr. Peterson will also continue to serve as a director of CTO. No
other person will hold a position with both the Company and CTO at that time.

Although the Company has controlled CTO for many years, CTO operates
autonomously and there have not been interested transactions or affiliated
relationships between the Company and CTO that materially impact CTO's
business operations. As a result, the Company does not expect that CTO's
business will be significantly affected if the Company is no longer its
majority shareholder.

CTO Dividend Policy. CTO has paid dividends annually on a continuous basis
since 1976. Nevertheless, the determination of the amount of future cash
dividends, if any, that CTO will declare and pay is in the sole discretion of
CTO's board and will depend on CTO's financial condition, earnings and funds
from operations, the level of its capital expenditures, dividend restrictions
in its financing agreements, its future business prospects and other matters
as CTO's board deems relevant.

Description of CTO Capital Stock. At the date hereof, the authorized capital
stock of CTO is 10,050,000 shares, consisting of 10,000,000 shares of common
stock and 50,000 shares of preferred stock. There are a total of 6,371,833
shares of CTO outstanding as of May 31, 1999 (of which the Company owns, and
will distribute, 5,000,000). No shares of preferred stock are currently
outstanding.

Publicly Available Documents. The SEC allows us to provide information about
CTO by referring you to the documents that CTO files under the Securities
Exchange Act of 1934. CTO has informed the Company that it is current in its
reporting obligations. For details about CTO, its business, management,
capital structure and current happenings at CTO, you may wish to review the
documents listed below. Each document is available on the SEC's website
(www.sec.gov) or may be obtained without charge by contacting Consolidated-
Tomoka Land Co., 149 South Ridgewood Avenue, Daytona Beach, Florida 32114, or
by calling (904) 255-7558:

. Annual Report on Form 10-K for the year ended December 31, 1998.

Summary of the Plan--
Distribution of CTO Shares
<PAGE>

. Annual Report to Shareholders for the year ended December 31, 1998.

. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.

. Current Reports on Form 8-K dated May 10, 1999 and April 22, 1999.

Deregistration as Investment Company

The Plan provides for the eventual cessation of the Company's investment
activities and its deregistration under the Investment Company Act, which
requires the SEC to enter an order declaring that the Company has ceased to be
an investment company. The Company plans to apply for deregistration promptly
and will seek to have the order entered as soon as practicable after the date
of the last distribution. The Company anticipates that the SEC will issue an
order approving the deregistration of the Company when the Company is no
longer doing business as an investment company.

Until the SEC issues the deregistration order, the Company and its
investment activities will continue to be subject to, and the Company intends
to comply with, the Investment Company Act. After the issuance of the
deregistration order, the Company no longer will be governed by the Investment
Company Act, but will be subject to the rules and regulations applicable to
public operating companies. The Company will file with the SEC an annual
report on Form 10-K, quarterly reports on Form 10-Q and other reports required
of public companies, and will continue to hold its annual meeting of
shareholders.

In connection with the cessation of investment company activities and
deregistration of the Company, the Company will close its Chicago office.
Currently, the Chicago office employs 10 people, five of whom are also
officers of the Company. The Company intends to retain these employees through
about June 30, 2000, so that they can assist in the ongoing business of the
Company and the distribution and liquidation of the Company's assets.

The following discussion is intended only to aid shareholders in assessing
the Plan. Employees of the Chicago office may receive year-end bonuses for
1999 and salary increases for 2000 consistent with past practice. Employees
who leave the Company prior to the actual closing of the Chicago office will
receive certain benefits, including full vesting of the Baker Fentress Money
Purchase Pension Plan (see "COMPENSATION--Pension Plan" for a description of
the Pension Plan) to the date of leaving, certain health insurance coverage
and payment for unused vacation days. Employees who stay through the date of
the closing of the Chicago office or until the Company's need for their
services has ceased will receive additional benefits, including a tenure
payment equal to a portion of the employee's salary multiplied by the number
of years employed by the Company; a termination bonus equal to the employee's
1998 bonus times a factor of five; and extended health insurance coverage. The
Company estimates that the aggregate costs of these benefits will be
approximately $1,210,000.

Structure of the Company After the Distributions

The Levco Companies

Background. If the Company's shareholders approve the Plan, the principal
asset of the Company following consummation of the Plan will be the Levco
Companies.

As a shareholder of the Company, you already own an interest in the Levco
Companies. However, after liquidation of the private and public portfolios of
the Company and the distribution of CTO shares, your interest in the Company
will be comprised solely of an interest in the Levco Companies and in whatever
private placement securities the Company does not sell prior to the
distribution under the Plan. Because your investment in the Company will
change, set forth below is a description of the Levco Companies' primary
business and a discussion of the principal risks of investing in an investment
adviser (which is what the primary business of the Company will become after
consummation of the Plan).

The Company believes that implementing the Plan will provide the Levco
Companies with opportunities for growth by eliminating the restrictions on
their activities that the Investment Company Act imposes and by enhancing its
ability to attract and retain professionals. There can be no assurance,
however, that the Levco Companies will be successful in capitalizing on
available growth opportunities. The Company is currently exploring whether to
change the name of its investment management business.

Summary of the Plan--
Deregistration as Investment Company
<PAGE>

Description of Levco. Levco is a registered investment adviser 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, but the firm also offers an event-driven, risk
arbitrage product and other more specialized investment programs.

In addition to serving as investment adviser to the Company for its public
portfolio, Levco also serves as an adviser or subadviser to other registered
investment companies, including the Levco Equity Value Fund, the MainStay
Research Value Fund and a portion of the portfolio of the Vanguard Equity
Income Fund.

Levco also acts through its wholly-owned subsidiary, LEVCO GP, Inc., as the
general partner of a number of private investment partnerships and serves
directly as an adviser to private investment vehicles organized outside the
United States. For managing these vehicles, Levco and LEVCO GP, Inc. are
entitled to receive both a fixed management fee based on a percentage of the
assets and a share of net profits.

Since July 1996, Levco has participated in a wrap fee program sponsored by a
major brokerage firm. In 1999, Levco began participating in a wrap fee program
with another major brokerage firm. In these programs, clients pay the sponsor
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 the 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. As of
May 31, 1999, Levco had approximately 4,200 wrap fee accounts for which it
receives a fixed asset-based fee from the sponsor.

LEVCO Securities, Inc., a wholly-owned subsidiary of Levco, is a registered
broker-dealer that clears through Correspondent Services Corporation, a
PaineWebber company, on a fully-disclosed basis. Generally, LEVCO Securities'
clients are advisory clients of Levco, and the trades executed through it are
generally placed by Levco in its capacity as investment adviser.

Levco's Clients

Levco's investment advisory business includes services provided to
institutional and individual accounts, wrap fee accounts, partnership accounts
and subadvisory accounts.
<TABLE>
<CAPTION>
Detail of Institutional
Types of Clients Clients
---------------- -----------------------
<S> <C> <C> <C>
Arbitrage 5% Insurance and Other 23%
Individual 22% Taft-Hartley 17%
Investment Companies 14% Corporation and 25%
WRAP 12% Public
Partnerships 1% Foundation and 35%
Institutional 45% Endowment
</TABLE>

Total Assets Under Management--All Total Assets Under Management--
Clients: Institutional:
$8,271 million $3,661 million
- --------
Data as of 5/31/99. Numbers have been rounded.

Structure of Company After the Distributions--
The Levco Companies
<PAGE>

Institutional and Individual Accounts. Institutional accounts represented
45% of Levco's total assets under management, with a total market value of
$3,661 million at May 31, 1999. Currently, Levco serves as investment adviser
to more than 130 separate institutional accounts. The average institutional
account value at May 31, 1999 was approximately $28 million.

Levco also manages accounts for individuals, which comprised approximately
23% of Levco's total assets under management as of May 31, 1999. Levco's
individual client base represented more than 480 accounts, the average value
of which at May 31, 1999 was approximately $4 million.

Investment companies represented 14% of Levco's total assets under
management, with a total market value of $1,142 million as of May 31, 1999.
Currently, Levco serves as investment adviser or subadviser to four investment
companies: Levco Equity Value Fund, Vanguard Equity Income Fund, MainStay
Research Value Fund and the Company. As of May 31, 1999, Levco managed $548
million of assets for the Company, which represented 48% of the total assets
of the advised and sub-advised investment companies. If shareholders approve
the Plan, Levco will no longer manage the Company's assets.

Wrap Fee Accounts. With approximately $1,005 million of managed assets as of
May 31, 1999, wrap fee accounts represented 12% of Levco's total assets under
management. Levco had more than 4,200 wrap fee accounts which had an average
value as of May 31, 1999 of approximately $231,000.

Levco Partnerships. The Levco Partnerships represented approximately 1.5% of
Levco's total assets under management, with a total market value of $121
million as of May 31, 1999 (excluding the arbitrage partnership).

Arbitrage Accounts. Arbitrage accounts represented 5% of Levco's total
assets under management with a total market value of $378 million as of May
31, 1999.

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

Assets Under Management (in millions)

<TABLE>
<CAPTION>
At December 31,
At May 31, ----------------------------------
Advisory Accounts 1999 1998 1997 1996 1995 1994
- ----------------- ---------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Institutional and Individual
Accounts*...................... $6,767 $7,184 $6,711 $6,097 $5,037 $3,505
Levco Partnerships.............. 121 127 158 224 221 190
Arbitrage Accounts.............. 378 245 139 123 129 120
Wrap Fee Accounts............... 1,005 757 351 45 0 0
------ ------ ------ ------ ------ ------
TOTAL......................... $8,271 $8,313 $7,359 $6,489 $5,387 $3,815
====== ====== ====== ====== ====== ======
</TABLE>
- --------
* Includes the Company's assets under management for periods after June 1996,
which assets the Company will sell, and Levco no longer will manage, if
shareholders approve the Plan.

Levco's assets under management have increased over each of the periods
indicated. The growth has been generated by maintaining a relatively stable
client base, attracting new clients, entering the wrap fee business, and
market appreciation of assets under management. Levco's wrap fee business,
which Levco began in 1996, has attracted net "new business"--meaning that the
assets under management of new clients and additional contribution of assets
by existing clients have exceeded withdrawals of assets by clients. In 1997
and 1998, Levco's separate account business grew overall, although the level
of redemptions from separate account clients was higher than the amount of new
assets Levco obtained. Increases in assets from market appreciation more than
offset the net withdrawals. During the first five months of 1999, market
appreciation approximately offset net withdrawals by clients.

Structure of Company after the Distributions--
The Levco Companies
<PAGE>

Financial Information about the Levco Companies

The consolidated revenues of the Levco Companies consist principally of
investment management fees (called "IMF") based on the value of assets under
management from separately managed accounts, wrap fee accounts and the Levco
Partnerships, as well as incentive allocations to Levco GP from the Levco
Partnerships and performance fees from certain managed accounts.

The table below shows the consolidated revenues and operating income of
Levco and its related companies for the periods indicated. For pro forma
financial information about the Company and Levco, see Appendix D.

Revenues and Operating Income (in millions) (unaudited)

<TABLE>
<CAPTION>
For Three Months For Years Ended
Ended March 31, December 31,
----------------- ----------------------
1999 1998 1998 1997 1996(a)
-------- -------- ----- ----- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Advisory Fees:
IMF Advisory...................... $ 8.2 $ 8.5 $32.3 $33.6 $29.1
IMF WRAP.......................... 1.0 0.7 3.6 1.2 0.0
Other............................. 0.2 0.0 0.3 0.0 0.0
-------- -------- ----- ----- -----
Total Advisory Fees............. 9.4 9.2 36.2 34.8 29.1
Arbitrage and Partnership
Incentive Fees 2.6 1.2 4.3 2.8 4.7
-------- -------- ----- ----- -----
Total Fees...................... 12.0 10.4 40.5 37.6 33.8
Other............................. 0.4 0.4 1.5 1.6 1.3
-------- -------- ----- ----- -----
Total Revenues.................. 12.4 10.8 42.0 39.2 35.1
Expenses:
Salaries and Benefits............... 2.9 2.2 8.7 7.1 6.6
Bonus (incl. guaranteed)............ 3.5 3.2 13.6 10.4(c) 7.9(b)
-------- -------- ----- ----- -----
Total Compensation.............. 6.4 5.4 22.3 17.5 14.5
Non-Compensation Expenses........... 1.7 1.0 6.0 4.1 4.1
-------- -------- ----- ----- -----
Total Expenses.................. 8.1 6.4 28.3 21.6 18.6
-------- -------- ----- ----- -----
Operating Income(d)................. $ 4.3 $ 4.4 $13.7 $17.6 $16.5
======== ======== ===== ===== =====
</TABLE>
- --------
(a) The information shown for 1996 includes the period before the Company's
acquisition of Levco on June 28, 1996.
(b) Pro forma for agreed-upon revenue split pursuant to the bonus plan
approved by shareholders in 1996.
(c) Excludes $1.6 million of non-recurring bonus expense.
(d) Operating income as shown excludes interest income, interest expense and
taxes on income.

Management fees for all periods include the fees the Company paid to Levco,
which will not continue after the Company sells its public portfolio
securities. The Company's fees to Levco for the first quarter of 1999 were
$300,000 (approximately 2.4% of total revenues), for 1998 were $1.5 million
(about 3.6% of total revenues), for 1997 were $1.5 million (about 3.8% of
total revenues) and for the six-month period ended December 31, 1996 were
$750,000 (about 2.1% of total revenues).

Levin Management's largest expense is salary and bonus for its employees.
Levin Management's expenses relating to Levco's salary and bonus increased
significantly over the periods indicated. During that time, Levco made
significant investments in developing its client servicing and marketing
areas. It hired additional employees, including more senior employees, such as
senior portfolio managers and a Director of Institutional Marketing. The
institutional marketing group focuses on serving and attracting institutional
clients such as corporations, pension plans, university endowments,

Structure of Company After the Distribution--
The Levco Companies
<PAGE>

and non-profit foundations. Levco has also launched an effort to enhance its
institutional client relationships and raise its profile in the consultant
community. It is also beginning to target public employee and labor union
pension plans. In 1996, Levco had 53 employees, of whom 16 were portfolio
managers, traders and analysts. As of May 31, 1999, Levco employed 79 people,
of whom 22 were portfolio managers, traders and analysts. Although this
increase in the number of employees, especially the number of professional
employees, has led to an increase in recruiting expenses and other expenses
relating to salaries and bonuses, Levco believes the addition of these
employees will permit it to provide superior service to its clients and to be
positioned to further develop its business. Levco also increased the level of
investment in promotional spending and expanded its office space, each of
which increased Levco's expenses.

The Levco Companies' audited financial statements at and for the years ended
December 31, 1998 and December 31, 1997 are attached to this proxy statement
as Appendix C. The condensed pro forma financial statements of the Company,
including the Levco Companies, are attached to this proxy statement as
Appendix D.

Levco's Contractual Arrangements

Levco has entered 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. Either the client or Levco
generally may terminate these contracts without penalty within five business
days of the date of acceptance. Thereafter, either party typically may
terminate the agreement at any time upon written notice. In cases in which
Levco serves as an adviser or sub-adviser for a mutual fund client, the fund
or the investment adviser generally may terminate the relevant sub-advisory
agreement on relatively short notice.

In connection with LEVCO Securities' activities as a broker-dealer, it
maintains a contractual relationship with Correspondent Services Corp., a
PaineWebber company, 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). It assigns account supervisory
responsibility to Levco and grants the clearing agent the authority to execute
and report securities transactions for Levco's clients.

Directors and Officers of Levco

Shown below is a list of each current director and officer of Levco, his or
her present position, age at June 23, 1999, and principal occupations during
the last five years. Messrs. Levin and Gorter are also officers and directors
of the Company. Mr. Kigner is also a director of the Company. All Levco
directors serve until the election of their successors.

John A. Levin, 60, Director, Chairman and Chief Executive Officer. Chairman
and Chief Executive Officer of Levin Management and Levco since June 1996;
prior thereto, President and Securities Analyst/Portfolio Manager of the
predecessor to Levco.

Jeffrey A. Kigner, 38, Director, Co-Chairman and Chief Investment Officer.
Co-Chairman of Levin Management and Levco since July 1997 and Chief Investment
Officer of Levco since September 1997; prior thereto, Executive Vice President
of Levco from June 1996 to June 1997; prior thereto, Securities
Analyst/Portfolio Manager of the predecessor to Levco.

Glenn A. Aigen, 36; Director, Vice President and Chief Financial Officer.
Vice President and Chief Financial Officer of Levin Management and Levco since
June 1996; prior thereto, Director of Operations of the predecessor to Levco
from November 1993 to June 1996.

James P. Gorter, 69, Director. Director of Levin Management and Levco since
June 1996; Chairman of the Board of the Company; limited partner of Goldman
Sachs & Co. until May 1999.

Structure of Company After the Distribution--
The Levco Companies
<PAGE>

Anson M. Beard, Jr., 63, Director. Director of Levin Management and Levco
since July 1997 and Advisory Director at Morgan Stanley Dean Witter & Co.
since July 1997; prior thereto, Managing Director at Morgan Stanley & Co.

Carol L. Novak, 51, Vice President and Secretary. Vice President and
Secretary of Levin Management and Levco since June 1996; prior thereto,
Secretary and Treasurer of the predecessor to Levco.

Levco is currently engaged in a search for a chief operating officer whose
responsibilities would include internal administration and the development and
implementation of business strategy.

Levco's Employees

At May 31, 1999, Levco employed 79 people, including 22 investment
professionals of whom 11 were primarily portfolio managers, seven were
primarily securities analysts and four were traders or trading associates. The
22 investment professionals have more than 275 years of collective experience
in finance, with an average of 13 years in the industry, and five years at
Levco or its predecessor. The senior investment professionals have an average
of eight years at Levco or its predecessor.

Levco's Properties

Levco's executive offices are located at One Rockefeller Plaza, New York,
New York 10020. Levco's offices currently encompass approximately 33,000
square feet and are governed by a 10-year lease which expires in January 2008.
The majority of Levco's operations are conducted at this location and the
Company's business will be conducted at this location after the Company closes
its Chicago office. Levco expanded its space to its current configuration in
1998 and Levco believes that its facilities are adequate for its current level
of operations and the anticipated level of operations should the Company's
shareholders approve the Plan.

Changes that Will Result from Implementing the Plan

There are several changes that will occur as a result of the Company
implementing the Plan:

. Levco will no longer manage the Company's public portfolio. This will
reduce Levco's revenues by the amount of the fees the Company has paid to
Levco, which totaled $1.5 million in 1998 (approximately 3.6% of total
revenues) and $1.5 million in 1997 (approximately 3.8% of total
revenues).

. Levin Management owes the Company $65 million, which was incurred in
connection with the acquisition of Levco. Levin Management currently is
exploring relationships with unrelated lenders that could enable it to
borrow, during the fourth quarter of 1999, up to $20 million to use to
repay part of its debt to the Company. To the extent that borrowings are
not available on terms that the Board deems advisable, or not used to
repay debt, the Company expects to contribute the remaining debt to Levin
Management's capital, which means that Levin Management will not repay
such debt. The Board currently is considering the final treatment of the
debt owed to the Company and will make its final determination in the
best interests of the Company's shareholders based upon the condition of
the Company and prevailing market and business conditions.

. If the Company were not an investment company, it would have been
required to account for the 1996 acquisition of Levco using purchase
accounting. The effect of that would have been that the excess of the
purchase price over the fair value of the assets acquired would have
appeared on Levin Management's balance sheet as goodwill and other
intangible assets, such as employment contracts and advisory agreements.
These intangibles would have been allocated to the various acquired
assets and amortized (reducing the Company's earnings) over the useful
life of each asset.

When the Company ceases to be an investment company, it will have to
account for the acquisition in this way. The Company will then prepare
consolidated financial statements (including the Company and the Levco
Companies) to give effect to that acquisition. The consolidated balance
sheet will include an amount of goodwill and other intangibles equal to
the amount of goodwill and other intangibles that the Company would have
included at the time of

Changes that will Result
from Implementing the Plan
<PAGE>

the acquisition had it been subject to these rules, less the amount that
the Company would have amortized from the time of the acquisition through
the date of the new financial statements. This will be reflected in the
Company's statement of income in the first quarter following the change
in accounting principles.

The amortization of the goodwill and intangibles will have the effect of
reducing the Company's reported earnings, but will not reduce the
Company's cash flow.

. Initially, the Company does not expect to pay significant dividends, if
any, to its shareholders and the Company will not have an income,
dividend or capital gain reinvestment plan.

. A daily net asset value will no longer be applicable; instead, the
Company's value will be reflected in its stock price.

. Shareholders will have a direct interest in CTO.

These changes, and others, are reflected in the pro forma condensed balance
sheet and statement of income that are attached to this proxy statement as
Appendix D. The pro forma statements are based on the audited financial
statements of the Company and Levin Management as of December 31, 1998, with
the adjustments described in Appendix D.

Federal Income Tax Consequences

Under current Federal tax law, the following are the Federal income tax
consequences generally arising with respect to the Plan. This discussion is
intended for your information in considering how to vote on the proposals and
not as tax guidance to shareholders.

This summary of federal tax consequences of the Plan is based on the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated under the Code, and judicial and administrative interpretations of
the Code and regulations, all as in effect on the date of this Proxy
Statement. These laws, regulations, and interpretations all are subject to
change and those changes may be retroactive. This summary does not discuss tax
consequences under state, local, or foreign tax laws or tax consequences to
persons that are subject to special tax rules, such as banks, insurance
companies, regulated investment companies, personal holding companies, foreign
entities, nonresident alien individuals, broker-dealers and tax-exempt
entities. You should consult with your own tax advisors to determine the tax
effect of the proposed transactions and, specifically, the tax effect of the
application of United States federal income tax laws, as well as the laws of
any state, local, or foreign taxing jurisdictions, to your particular
situation.

Status of the Company as Regulated Investment Company

The Company has operated for federal income tax purposes as a regulated
investment company under Subchapter M of the Code and intends to continue to
qualify as a regulated investment company through December 31, 1999.
Thereafter the Company intends to be treated for federal tax purposes as a C
corporation--that is, a corporation subject to the general rules of corporate
taxation. (See "Termination of Regulated Investment Company Status" below.)

As part of the Plan, the Company intends to sell substantially all of its
investments, except for its stock in CTO and Levco. These sales will be
taxable transactions for the Company, with gain or loss measured by the
excess, or deficit, as the case may be, of the amount received for the
securities minus their adjusted federal tax basis in the hands of the Company.
The character of such gain as short-term or long-term will be determined by
the period for which the Company has held the securities, rather than the
period for which you have held your Company Shares. For federal tax purposes,
the distribution of CTO Shares by the Company to its shareholders will be
treated as a sale by the Company of its CTO Shares for fair market value,
causing the Company to realize a long-term capital gain equal to the excess of
such value over the Company's adjusted tax basis in its CTO Shares.

As long as it continues to comply with the distribution and diversification
requirements applicable to regulated investment companies, the Company itself
will not be liable for federal taxes on its sales

Changes that Will Result
from Implementing the Plan
<PAGE>

of securities or its distribution of CTO Shares pursuant to the Plan; rather
you will include in your income the amount of net investment income and net
realized capital gain that is distributed to you. (See "Treatment of Company
Shareholders.") The Plan contemplates that the Company will make distributions
of cash and CTO Shares that you will be required to include in your income
with respect to the year ended December 31, 1999. These distributions will
include substantially all of the income and gain recognized by the Company in
1999 from its sales of securities as part of the Plan as well as the gain
required to be recognized by the Company with respect to the distribution of
CTO Shares. However, in order to comply with the requirement that a regulated
investment company not have more than 25% of the total value of its assets
invested in securities of a single issuer (other than of the United States
government) as of the end of a calendar quarter, the Company will retain a
significant portion of the cash proceeds from sales of securities through
December 31, 1999, and not distribute such retained amount until January 2000.
Dividends and capital gain distributions that the Company declares in the
fourth quarter of 1999 but does not distribute to you until January 2000, will
nevertheless be treated for federal tax purposes as though you received them
on December 31, 1999.

The Company will send to you information in early 2000 describing the amount
of net investment income and net realized capital gain that will have been
distributed to you with respect to the taxable year ending December 31, 1999.
At that time the Company will also identify the amounts of distributions made
in January 2000 that will be treated as having been received by you on
December 31, 1999.

Treatment of Company Shareholders

In carrying out the Plan, the Company expects to make the following
distributions: (i) a distribution of cash and CTO Shares on or about September
24, 1999 and (ii) one or two additional distributions of cash in December and
January (if two distributions) or in January 2000 (if one distribution). The
Company will send you information concerning the record date for each
distribution, the amount of each distribution, its status for federal income
tax purposes, and the taxable year to which it relates. This section
summarizes the general effects of this series of distributions.

As a shareholder of a regulated investment company, you will be required to
include in your income the amount of Company net investment income and net
realized capital gain that is distributed to you by the Company with respect
to the taxable year ending December 31, 1999. This amount will include your
share of income and gains attributable to the Company's sales of substantially
all its securities in 1999, the gain realized by the Company on CTO Shares
distributed in 1999, and other net investment income or net realized capital
gain of the Company for 1999. Any portion of the distribution of net
investment income and net realized capital gains you receive in January 2000,
that represents a dividend declared in the fourth quarter of 1999 will be
deemed to be received by you on December 31, 1999.

Your basis in CTO Shares distributed by the Company to you will be equal to
their total fair market value on the date of distribution. Your tax holding
period for CTO Shares distributed to you by the Company will commence on the
date of distribution.

Any amounts that are distributed to you in excess of the Company's net
investment income and net realized capital gain will be treated as dividends
and taxed as ordinary income, to the extent of the Company's accumulated
earnings and profits from periods before it qualified as a regulated
investment company. The amount of such earnings and profits per Company Share
is estimated to be $1.59. If the Company distributes in 1999 an amount in
excess of its 1999 net investment income and net realized capital gain, then
you will be treated as receiving in 1999 a dividend to the extent you receive
a distribution of such accumulated earnings and profits in 1999. On the other
hand, to the extent that all or a portion of the Company's accumulated
earnings and profits is not distributed in 1999 but rather in January 2000,
then you will be treated as receiving a dividend in 2000.

Federal Income Tax Consequences
<PAGE>

If you receive distributions that are in excess of the Company's net
investment income, net realized capital gain, and accumulated earnings and
profits, then such excess distributions may produce additional gain with
respect to your stock in the Company. The amount of such excess distributions
will first reduce your adjusted federal tax basis in your Company Shares (but
not below zero). The amount by which the excess distributions are greater than
your adjusted basis in your Company Shares will be treated as gain with
respect to your Company Shares, which will be capital gain if you hold such
stock as a capital asset and will be long-term or short-term depending on
whether you have held such stock for more than one year as of the date of
distribution.

You should consult with your individual tax advisors to make sure that the
number you are using for your federal adjusted tax basis in your Company
Shares accurately reflects all relevant items. In particular, the tax basis in
your Company Shares will generally have been increased by any amounts
reinvested by you, including capital gains that were designated by the Company
for inclusion in your income but not actually distributed to you; such
designated capital gains are deemed to be reinvested by you. The table below
shows the amounts per share (adjusted for the 1983 and 1988 stock splits) that
the Company designated as capital gains for the years 1971 through 1987; since
1988 the Company has not designated any such capital gains.

<TABLE>
<CAPTION>
Year Per Share
---- ----------
<S> <C>
1971.......................... $0.0748528
1972.......................... 0.0437261
1973.......................... 0.0572323
1974.......................... 0.0193103
1975.......................... 0.0172390
1976.......................... 0.0157778
1977.......................... 0.0127930
1978.......................... --
1979.......................... 0.1071930
1980.......................... 0.1022223
1981.......................... 0.1042167
1982.......................... 0.3931667
1983.......................... 0.6660500
1984.......................... 1.2952000
1985.......................... 0.9652000
1986.......................... 1.3163500
1987.......................... 1.3997000
</TABLE>

After the Company has made all distributions as part of the Plan, you will
own stock in the Company, which intends to be treated for tax purposes as a C
corporation after December 31, 1999. The principal asset of the Company after
the Plan has been completed is expected to be Levco, the fair value of which
as of May 31, 1999 has been determined by the Company's board of directors to
be $95 million, or about $2.43 per share, assuming the proposed repayment of
$20 million of Levco's debt to the Company. At that point, your adjusted
federal tax basis in your Company Shares will have been reduced, as described
above, by the amounts of cash and CTO Shares received by you to the extent
such amounts are greater than the Company's net investment income and net
realized capital gain and its accumulated earnings and profits.

A subsequent sale or exchange of Company Shares will produce taxable gain or
loss measured by the excess, or deficit, as the case may be, of the amount
realized minus your adjusted tax basis in such stock. Such gain or loss will
be long-term capital gain if the stock has been held as a capital asset for
more than one year. However, if you receive a capital gain distribution that
includes long-term capital gains, and you have held Company Shares for 6
months or less, then any loss on the sale or exchange of your Company Shares
will be treated as long-term capital loss to the extent of the long-term
capital gain that was distributed to you.

Federal Income Tax Consequences
<PAGE>

Termination of Regulated Investment Company Status

The Company intends to be treated as a C corporation after December 31,
1999. For tax periods beginning after that date, it will cease complying with
the special tax rules applicable to regulated investment companies, including
the requirements that have caused it to make distributions of substantially
all of its net investment income and net realized capital gain in prior
taxable years. Thus, the Company does not expect to pay significant dividends,
if any, to its shareholders in taxable years after December 31, 1999.

Among other things, treatment as a C corporation means that the Company will
be taxable on its income and gains regardless of whether it distributes
dividends to you. Furthermore, any distributions by the Company to you with
respect to tax periods after December 31, 1999, will be treated as dividends
to the extent of the Company's current or accumulated earnings and profits at
such time, then as a return of capital to the extent of your basis in Company
stock, and finally as an amount received by you in exchange for your Company
stock which will be capital gain if you hold such stock as a capital asset and
will be long-term or short-term depending on whether you have held such stock
for more than one year as of the date of distribution.

Examples

The following examples show the effects of certain hypothetical
distributions and subsequent sales with respect to two shareholders, one
having an adjusted tax basis in Company Shares in the amount of $4.00 at the
commencement of the distributions, and the other with an adjusted tax basis in
the amount of $18.00. The adjusted tax basis in Company Shares will include
amounts distributed (or deemed distributed) that were reinvested in the
Company. In each case below, the shareholder is assumed to be subject to an
effective combined 25% rate of tax (federal and state) with respect to long-
term capital gains and an effective combined 45% rate of tax (federal and
state) with respect to ordinary income and short-term capital gains. However,
the amount distributed by the Company to a shareholder arising out of the
Company's sales of securities will reflect the character of such sales in the
Company's hands, and will be a mixture of short-term and long-term capital
gains and losses taxed accordingly. The examples are illustrative only and
have been prepared using the number of shares and the amounts of per-share
distributions assuming the Company's securities were sold at their estimated
values as of June 11, 1999, before the proposed reverse stock split. The
amounts actually distributed will depend on each security's value as of the
date of its sale or, in the case of CTO, distribution. You should consult your
own tax advisor to determine the federal, state, and local tax consequences of
receiving distributions as part of the Plan and holding Company Shares in
light of your unique circumstances.

<TABLE>
<S> <C> <C> <C>
Shareholder basis in BKF stock..................... $ 4.00 $18.00

Cash distributed................................. $16.86
CTO Shares distributed........................... +1.92
------
Total cash and CTO shares distributed.............. 18.78 18.78

Gains from sales of securities................... 5.83
Gain from CTO distribution....................... 1.79
Earnings and profits ("E&P")..................... +1.59
------
Total gain and E&P distributed..................... -9.21 -9.21
------ ------

Excess of distribution over gain and E&P........... 9.57 9.57
Excess of distribution over basis.................. 5.57 N/A

Shareholder taxes with respect to:
Gains from securities sales...................... 1.87 1.87
Gains from CTO Shares distribution............... 0.45 0.45
E&P.............................................. 0.71 0.71
Excess of distribution over tax basis............ +1.39 +0.00
------ ------
Total tax from distributions....................... 4.42 3.03

Basis in BKF stock after distributions (original
basis minus "Excess of distribution over gain
and E&P" above, but not less than zero)......... 0.00 8.43
Value of BKF (Levco)............................... 2.43 2.43
Gain or loss upon later sale....................... 2.43 (6.00)
</TABLE>

The table in Appendix E extrapolates parts of this example for a wider range
of shareholder bases.

Federal Income Tax Consequences
<PAGE>

Risks Relating to the Consummation of the Transactions Contemplated by the
Plan

Trading of Company Shares After the Distribution

The Company Shares currently trade on the NYSE under the trading symbol
"BKF". After the liquidation of the private and public portfolios of the
Company and the distributions of the net proceeds of these sales and of the
CTO Shares, the Company's value will be substantially lower. Accordingly, the
Company expects that the trading price range of the Company Shares immediately
after each distribution will be substantially lower than the trading price
range of the Company Shares prior to the distribution. (This may be true even
if shareholders approve the reverse stock split. For more information on this
proposal, see "Approval of Amendment to the Certificate of Incorporation of
Baker, Fentress & Company".)

The combined trading prices of the Company Shares and the CTO Shares held by
Company shareholders after the distribution plus the cash the Company has
distributed to shareholders may be less than or greater than the trading price
of the Company Shares prior to the distribution, and may be less than the per
share value at which the Company has included Levin Management in computations
of net asset value per share. The marketplace will determine the prices at
which the Company Shares trade before and after the distribution. The depth
and liquidity of the market for the Company Shares, investor perception of the
Company, Levco and the investment management industry, the Company's operating
results (which will be almost entirely a function of Levco's operating
results), the Company's dividend policy and general economic and market
conditions may or may not influence the market's determination of the price of
the Company Shares.

Dependence on Key Personnel

Levco is dependent on the efforts of Mr. Levin, its chairman and chief
executive officer, and Mr. Kigner, its co-chairman and chief investment
officer and principal portfolio manager for a majority of Levco's assets under
management. The loss of Mr. Levin's or Mr. Kigner's services, or their
incapacitation, could have a material adverse effect on Levco and the Company
because it could jeopardize Levco's relationships with its clients and result
in the loss of those accounts.

Mr. Levin has an employment contract with the Company and Levin Management
and Mr. Kigner has an employment contract with Levin Management. Messrs. Levin
and Kigner entered into their employment contracts at the time the Company
acquired Levco. Mr. Levin's and Mr. Kigner's contracts began on June 27, 1996
and continue for a term of five years. Each of the employment contracts
contains confidentiality and noncompetition provisions (the non-competition
provision in Mr. Kigner's agreement runs for four years, through June 28,
2000). Each contract also contains provisions that require the Company or
Levin Management to pay either individual if the Company or Levin Management
terminates his employment without cause (as defined in the contract). The
Company, Levin Management and Messrs. Levin and Kigner must seek arbitration
for any disputes brought under the contracts. There can be no assurance that
either Mr. Levin or Mr. Kigner will renew his contract after the expiration of
the terms and the loss of either could have a material adverse effect on Levco
and the Company.

Levco's future success also depends on its ability to retain and attract
other 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, Levco
anticipates that it will be necessary for it to add portfolio managers and
investment analysts. There can be no assurance 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 the Company's
business.

In December 1998, the Company (after approval by shareholders) adopted an
incentive compensation plan to give the Company and Levco the ability to
attract and retain talented professionals with equity-based and cash
compensation. If the price of Company shares decreases

Risks Relating to the Plan
<PAGE>

after the consummation of the Plan, there can be no assurance that the equity-
based compensation will serve its purpose to attract and keep these
professionals. In addition, any equity-based compensation that the Company
awards under the incentive compensation plan could have the effect of diluting
current shareholders' interests in the Company. Currently, there is no equity-
based compensation outstanding.

Potential Adverse Effects on the Company's Performance Prospects from a
Decline in the Performance of the Securities Markets

Levco's operations are affected by many economic factors, including the
performance of the securities markets. During recent years, unusually
favorable and sustained performance of the U.S. securities markets, and the
U.S. equity market in particular, has attracted substantial inflows of new
investments in these markets and has contributed to significant market
appreciation. This, in turn, has led to an increase in assets under management
and revenues for Levco. More recently, the securities markets have experienced
significant volatility. Declines in the securities markets, in general, and
the equity markets, in particular, would likely reduce Levco's assets under
management and consequently reduce Levco's 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,
meaning that its primary investment strategy is to invest in stocks it
believes are relatively undervalued. A general decline in the performance of
value securities could have an adverse effect on Levco's revenues, and, in
turn, impact the revenues of the Company. In addition, in recent years value
stocks have underperformed other types of securities and there can be no
assurance that this trend will not continue or worsen. Levco also offers an
event-driven, risk arbitrage product. A failure to effect its risk arbitrage
strategy in an efficient manner could likewise impact the revenues of the
Company.

Future Investment Performance

Success in the investment management industry depends largely on investment
performance. Good performance generally stimulates sales of Levco's services
and investment products and tends to keep withdrawals and redemptions low.
This generates higher management fees because such fees are based on the
amount of assets under management, and sometimes on investment performance. On
the other hand, relatively poor performance tends to result in decreased
sales, decreased assets under management, and the loss of accounts, with
corresponding decreases in revenue.

Shown below is historical information about the performance that Levco's
accounts have achieved as a whole as compared to the Russell 1000 Value Index
and the Standard & Poor's 500 Stock Index. The Russell 1000 Value Index
measures the performance of those companies in the Russell 1000 Index (which
includes the largest 1,000 U.S. companies based on total 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

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Levco Composite (net)....... 15.87% 22.99% 21.02% 32.64% 0.90% 13.62% 14.06%
Russell 1000 Value Index.... 15.63 35.18 21.64 38.35 (1.99) 18.12 13.81
S&P 500 Index............... 28.58 33.36 22.96 37.58 1.30 10.06 7.62
<CAPTION>
Since
1991 1990 1989 1988 1987 1986 1986
----- ----- ----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Levco Composite (net)....... 24.89% (3.08)% 29.71% 22.47% 12.77% 14.79% 644.60%
Russell 1000 Value Index.... 24.61 (8.08) 25.19 23.16 0.50 19.98 638.00
S&P 500 Index............... 30.45 (3.14) 31.65 16.57 5.22 18.70 742.90
</TABLE>
- --------
Past performance is not indicative of future results.
The Notes are an integral part hereof.

Risks Relating to the Plan
<PAGE>

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. Ernst & Young LLP examined the investment performance
results for the period 1/1/96 through 12/31/97. For the periods through
6/30/96, performance is that of Levco's predecessor.

The investment performance results have been prepared and presented in
compliance with the Association for Investment Management and Research
("AIMR") Performance Presentation Standards from January 1, 1993 through
December 31, 1998. 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. Additionally, the presentation does not
include the standard deviation measure of dispersion for periods prior to
January 1, 1993. AIMR has not been involved with the preparation or review of
this report.

Managed Accounts: Levco's composite includes all accounts managed on a fully
discretionary basis, including taxable and tax-exempt accounts, except:
immediate family and related accounts, accounts with assets under $1,000,000,
one account for which only the equity portion of the portfolio is managed, all
investment partnerships of which affiliates serve as general partners and
similarly managed accounts which utilize investment strategies different from
the accounts included in the composite and accounts managed under a broker
sponsored wrap-fee program. The excluded accounts comprise 35% of Levco's
assets under management. A complete list and description of all of Levco's
composite accounts is available upon request.

Calculation of Performance: For the period from 1986 through 1989, the results
shown above 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 from January 1, 1990, the net results
shown above reflect the deduction of the actual dollar-weighted fee rate paid
by all accounts in the composite. Levco has calculated the dollar-weighted fee
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 includes the performance fees paid by certain accounts. Inclusion of
the performance-based fees does not materially affect the dollar-weighted fee
rate.

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 impact the revenues of Levco, which, in turn,
could impact the revenues of the Company.

Loss of Significant Accounts

Levco had approximately 640 accounts (counting each wrap fee program as a
single account) as of May 31, 1999, of which the ten largest accounts,
excluding the Company, generated approximately $13.4 million of revenues for
Levco in 1998, or approximately 35.4% of Levin Management's total revenues
during 1998. The portion of the Company's assets that comprised the public
portfolio generated approximately $1.5 million in revenues for Levco in 1998,
which was approximately 3.6% of total revenues. Levco has been notified that
one of its ten largest accounts is withdrawing capital from all of its
managers, including Levco. Levco expects that, at present market values,
approximately $350 million will be withdrawn from this account. The timing of
the withdrawal is uncertain, but the bulk of the assets are likely to be
withdrawn during the fourth quarter of 1999. Revenues from the assets expected
to be withdrawn were approximately $1.05 million, or about 2.5% of Levco's
total revenues, in 1998. Except as described above, Levco has no knowledge of
any further withdrawals planned from any of these accounts. The withdrawal of
all or a significant part of the assets of such an account, if it should
occur, would have an adverse effect on Levco's revenues, which, in turn, would
affect adversely the Company.

Levco's Fees and Investment Contracts

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 current fees they
pay Levco. There can be no assurance that, after the Company completes the
transactions the Plan contemplates, 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 and, as a result,
adversely impact the Company's results.

Moreover, Levco derives 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

Risks Relating to the Plan
<PAGE>

these agreements at least annually and the agreements are terminable without
penalty on 60 days' notice. Levco's agreements with its 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 a material adverse effect on
Levco and the Company.

Levco, through Levco GP, also derives revenue from the Levco Partnerships'
incentive fees. Good performance of the Levco Partnerships generates higher
incentive fees because those fees 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, and will tend to lead to decreased assets under
management and the loss of accounts, with corresponding decreases in revenue.

Competition

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 and offer a broader array of investment products and services.

Levco believes that the most important factors affecting its 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 competitiveness in 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. The ability of Levco 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.

Dependence on Information Systems; Year 2000

Levco is highly dependent on information systems and technology. It depends,
to a great extent, on third parties who are responsible for managing,
maintaining and updating the systems. There can be no assurance that Levco's
current systems will continue to be able to accommodate Levco's growth or that
the costs of its outsourcing arrangements will not increase. Such a failure to
accommodate growth or an increase in costs could have a material adverse
effect on Levco and the Company.

Some of today's computer systems cannot process date-related information
because they are not programmed to distinguish between the year 2000 and the
year 1900 (commonly referred to as the Year 2000 problem or Y2K). Because
Levco is highly dependent on its information systems and technology, the
failure of its internal computer systems to be Year 2000 compliant could have
a material adverse impact on Levco and the Company. For example, such a
failure could lead to incomplete or inaccurate recording of trades in
securities or result in the generation of erroneous financial reports. This,
if not remedied, could cause business interruptions, financial loss,
regulatory actions, reputational harm and legal liability.

Levco also depends on the proper functioning of third-party computer and
non-information technology systems. These third parties include financial
intermediaries, such as stock exchanges, depositories, clearing agencies,
clearing houses and commercial banks. If these third parties have Year 2000
problems that are not remedied, Levco could experience numerous operating
difficulties, including, for example: disruption of critical administration
and record-keeping services, disruptions of electrical services or
telecommunications capabilities, receipt of inaccurate data information which
may lead to inaccurate pricing of securities, failed trade settlements,
inability to trade in certain markets, disruption of capital flows resulting
in a stress on liquidity, financial and accounting difficulties that expose
the Company to increased credit risk and loss of business.

Risks Relating to the Plan
<PAGE>

In seeking to become Year 2000 compliant, Levco has been implementing a
written compliance plan involving (i) a full assessment of computer hardware
and software, electronic equipment and physical facilities, (ii) the
correction of deficiencies, (iii) the testing of systems and (iv) the
development of contingency plans. Both the development and implementation of
the plan have been executed by firm personnel working with external
consultants. Although Levco has taken numerous steps toward becoming Year 2000
compliant in its own technology systems and has taken steps to ensure that its
vendors and service providers are also Year 2000 compliant, there can be no
assurance that the Year 2000 program will be effective. Levco and LEVCO
Securities have each filed reports with the Securities and Exchange Commission
regarding the status of their Year 2000 compliance program on Form ADV-Y2K and
on Form BD-Y2K, respectively.

The Company's distributions under the Plan likely will occur during late
1999 and early 2000. Due to the uncertainties surrounding the Year 2000
problem, the prices of the Company's portfolio securities may fluctuate
greatly in response to increasing concerns about the Year 2000 problem and the
possible movement by investors into more liquid assets (such as cash). Thus,
there can be no assurance that the Year 2000 problem will not negatively
impact the prices at which the Company sells its portfolio securities.

Conflicts of Interest

Levco's officers, directors and employees may from time to time own
securities which one or more of its clients also own. Levco maintains internal
policies with respect to 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.

Regulation

Virtually all aspects of the Levco Companies' business are subject to
various federal and state laws and regulations. Levco is registered with the
Commission under the Investment Advisers Act of 1940 (the "Advisers Act"), and
believes it is in compliance with applicable state securities notification
requirements. The Advisers Act imposes numerous obligations on registered
investment advisers, including fiduciary, recordkeeping, operational and
disclosure obligations. In addition, Levco is 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 Exchange Act, 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, as amended ("ERISA") and
its regulations insofar as it is a "fiduciary" under ERISA 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 the
Levco Companies from conducting their business if they fail to comply with
these laws and regulations. If the Levco Companies fail to comply with the
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 have a material adverse
affect on the profitability and mode of operations of the Levco Companies.

Certain Legal Requirements

The Board and management believe that the Company will be solvent at the
time of the distribution of cash and CTO Shares, will be able to repay its
debts as they mature and will have sufficient capital to carry on its
businesses. However, if as a result of a legal action by an unpaid creditor, a
court were to find that, at the time the Company effected the distribution,
the Company (i) was insolvent, (ii) was rendered insolvent by reason of the
distribution, or (iii) believed it would incur

Risks Relating to the Plan
<PAGE>

debts beyond its ability to pay the debts as they matured, such court could
void the distribution of cash or CTO Shares (in whole or in part) and require
that the shareholders return the special dividend of cash or CTO Shares (in
whole or in part) to the Company, or require the Company, as the case may be,
to fund certain liabilities for the benefit of creditors. In addition, the
Board also believes that the distributions of cash and CTO Shares will comply
with applicable dividend laws. However, if, as a result of a legal action, a
court were to find that the Company made the distributions in violation of
laws restricting dividends, consequences similar to those described above
could result.

Plan Effective Date; Modification of Plan; Shareholder Approval

The Board preliminarily adopted the outline of the Plan on May 6, 1999 and
approved the final form of the Plan on June 17, 1999. If the Company's
shareholders approve the Plan, the Board will take the steps necessary to
implement the Plan. If shareholders do not approve the Plan, the Board will
continue to operate the Company as a closed-end investment company in
accordance with the Company's current investment restrictions.

Conditions; Termination. Shareholders must approve the Plan in its entirety.
In addition, the Company's Board has retained discretion, even if shareholder
approval of the Plan is obtained, to abandon, defer or modify the Plan or any
matter contemplated by the Plan. However, if the Board takes any such action,
it will do so on the basis that such action will be in the best interests of
the Company and its shareholders.

Recommendation

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PLAN FOR DISTRIBUTION OF
ASSETS OF BAKER, FENTRESS & COMPANY.

APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF BAKER, FENTRESS &
COMPANY
- -------------------------------------------------------------------------------

The Board has approved a proposal to amend the Company's Restated
Certificate of Incorporation authorizing the Company, subject to shareholder
approval, to effect a reverse stock split of the Company's outstanding shares
of common stock, by reclassifying each six outstanding shares of common stock
held (your "Company Shares") into one share of new common stock (called the
"New Common Stock"). The proposed certificate of amendment is in the form
attached to this Proxy Statement as Appendix F. Approval of the amendment to
the Certificate of Incorporation by shareholders requires the affirmative vote
of the holders of a majority of the outstanding shares of the common stock.

General

The Company is currently authorized to issue up to 60,000,000 shares of
common stock, par value $1.00 per share. This proposal will effect a reverse
stock split on the basis of one share of New Common Stock for each six
outstanding Company Shares.

The proposal is conditioned upon shareholder approval and consummation of
the Plan. If shareholders do not approve the Plan or the Plan is not otherwise
consummated, the Company will not amend the Certificate of Incorporation to
effect the reverse stock split. The amendment to the Certificate of
Incorporation will not occur until after the Company has completed the final
distribution under the Plan. The Company expects that this will occur during
the first quarter of 2000. Pending this reverse stock split, the Company
anticipates that the net asset value and the trading price of the Company
Shares will decline as a result of the distributions of cash and CTO Shares.

Reverse Stock Split
<PAGE>

Reasons for the Reverse Stock Split

If shareholders approve the Plan set forth under the first proposal, the
Company's market price per share will decline, approximately in proportion to
the amount of assets that the Company distributes. For example, if the
Company's stock trades in the market after the distribution at exactly the
value at which the Company valued the Levco Companies as of May 31, 1999, the
per share price will be $2.43 (if the Levco Companies borrow $20 million of
debt, with the proceeds used in partial repayment of the Company's loan to
Levin Management and the remainder of the loan converted by the Company to
equity of Levin Management) or $2.95 (if the entire loan is converted by the
Company to equity of Levin Management). This is an illustration only--not a
prediction or a promise, and is subject to change based on the amount of
leverage to which the Company is subject. As described above, the market will
determine the trading price for the Company's stock, which may be less or more
than this amount.

The Board believes the reverse stock split is desirable for several reasons.
The reverse stock split is intended to increase the acceptance of the
Company's stock by the financial community and the investing public and,
accordingly, could enhance your value.

The reverse stock split will decrease the number of shares outstanding and
presumably increase the per-share market price for the New Common Stock. The
Company is currently quoted on the NYSE, which has adopted certain criteria
that the Company is required to meet. Although the Company currently meets all
criteria applicable to it, if its price falls below a certain level, the NYSE
could consider delisting the Company.

Theoretically, the per-share market price should not, by itself, affect the
marketability of the stock, the type of investor who acquires it, or the
Company's reputation in the financial community, but in practice this is not
necessarily the case. Many institutional and other investors look upon stocks
trading below $10.00 as being unduly speculative in nature or having greater
volatility or larger bid/ask spreads as a percentage of value and, as a matter
of policy, avoid investment in those stocks.

Moreover, some brokerage firms are reluctant to recommend lower-priced
securities to their clients or lend money to their clients to purchase low-
priced securities. Certain brokerage house policies also may tend to
discourage individual brokers within firms from dealing in lower-priced
stocks. Some of those policies and practices pertain to the payment of
brokers' commissions and to time-consuming procedures that make the handling
of lower-priced stocks unattractive to brokers from an economic standpoint. In
addition, the structure of trading commissions tends to have an adverse impact
upon retail holders of lower-priced stocks because the brokerage commission on
a sale of a lower-priced stock generally represents a higher percentage of the
sales price than the commission on a relatively higher-priced issue.

Although there can be no assurance that the price of the Company's shares
after the reverse split will actually increase in an amount proportionate to
the decrease in the number of outstanding shares, the proposal is intended to
result in a price level for the New Common Stock that will broaden investor
interest and provide a market that will reflect more closely the Company's
underlying value.

There can be no assurance that any or all of these results will occur,
including, without limitation, that the market price per share of New Common
Stock after the reverse stock split will be six times the market price per
share of Company Shares before the reverse stock split, or that the new price
will either exceed or remain in excess of the current market price. Further,
there is no assurance that the market for the New Common Stock will reflect
more closely the Company's underlying value. You should note that the Board
cannot predict how the reverse stock split will affect the market price of
Company Shares. If shareholders approve the Plan but do not approve this
proposal to amend the Certificate of Incorporation, there can be no assurance
that the price of the Company's stock will remain high enough to prevent the
effects outlined above.

Reasons for Reverse Stock Split
<PAGE>

Company Shares currently are listed for trading on the NYSE under the
trading symbol "BKF", and the New Common Stock is expected to be listed for
trading on the NYSE under the same symbol.

Principal Effects of the Reverse Stock Split

The principal effects of the reverse stock split will be:

1. Based upon the 39,029,101 Company Shares currently outstanding (which
is likely to be unchanged as of the record date), the adoption of the
reverse stock split proposal will decrease the outstanding shares of common
stock by approximately 84% and thereafter approximately 6.5 million shares
of New Common Stock will be outstanding. However, the actual numbers may
change because the Company will not effect the reverse split until after it
completes its distribution of assets under the Plan.

2. The Company will not decrease the amount of its authorized common
stock. If shareholders adopt this proposal, the New Common Stock issued and
outstanding will represent approximately 11% of the Company's authorized
common stock, whereas Company Shares currently issued and outstanding
represent approximately 65% of the authorized common stock. After giving
effect to this proposal, the Board will be able to issue approximately 53.5
million shares of New Common Stock in the future without further action by
the shareholders. The Company does not currently plan to issue shares of
common stock except in connection with employee incentive compensation
plans and possible acquisitions; however, any such issuance likely will
have the effect of diluting current shareholders' proportionate interest in
the Company.

3. Unissued and unreserved New Common Stock will enable the Board to
issue shares to persons friendly to current management. This could render
more difficult or discourage an attempt to obtain control of the Company by
means of a merger, tender offer, proxy contest or otherwise, and thereby
protect the continuity of the Company's management and possibly deprive the
shareholders of opportunities to sell their shares of the Company at prices
higher than prevailing market prices. Such additional shares also could be
used to dilute the stock ownership of current and future shareholders of
the Company.

4. If approved and implemented, the proposal is likely to leave some
shareholders with "odd lots" of New Common Stock (i.e., stock in amounts of
less than 100 shares). These odd lots may be more difficult to sell, or
require greater transaction costs per share to sell, than shares in even
multiples of 100.

If this proposal is approved, the Company will file the Certificate of
Amendment amending the Certificate of Incorporation with the Secretary of
State of Delaware as soon as practicable after the date of the Company's last
distribution under the Plan. The reverse stock split will become effective as
of the close of business on the date of such filing.

Exchange of Stock Certificates and Elimination of Fractional Share Interests

As soon as practicable after the Certificate of Amendment is filed with the
Secretary of State of Delaware (called the "Effective Time"), the Company will
notify you and request that you surrender your Company Shares for new
certificates that will represent the number of shares of New Common Stock
after the reverse stock split. Until so surrendered, each current certificate
representing shares of Company Shares will be deemed for all corporate
purposes after such Effective Time to evidence ownership of shares of New
Common Stock in the appropriately reduced number. However, until you exchange
your certificates, as described below, the Company (or its exchange agent)
will hold all dividends or other distributions that may be payable to holders
of record and will not pay any interest on these held dividends or
distributions.

ChaseMellon Shareholder Services, LLC will be appointed exchange agent (the
"Exchange Agent") to act for you in effecting the exchange of your
certificates. The Exchange Agent will furnish shareholders of record at the
Effective Time with the necessary materials and instructions advising

Principal Effects of Reverse Stock
Split and Exchange of Certificates
<PAGE>

them of the procedure for surrendering stock certificates in exchange for new
certificates representing the ownership of New Common Stock. You will not have
to pay a transfer fee or other fee in connection with the exchange of
certificates unless, possibly, you ask for your certificates to be registered
in another name. YOU SHOULD NOT SUBMIT ANY CERTIFICATES FOR EXCHANGE UNTIL
REQUESTED TO DO SO.

The Company will not issue any fractional shares of New Common Stock. In
cases in which the reverse split will otherwise result in you holding a
fraction of a share, the Company will pay you for such fractional interest on
the basis of the average closing market price of the New Common Stock on the
NYSE for the ten trading days immediately following the day of the Effective
Time. Because the price of the Company Shares fluctuates, the Company cannot
determine the amount we will pay you for your fractional shares until the ten
trading day period after the Effective Time has elapsed.

Upon your surrender of stock certificates representing Company Shares, the
Company will deliver certificates representing New Common Stock to you. At the
same time or as soon as possible thereafter, we will pay you cash (without
interest) for your fractional shares, if any.

If you have lost your certificate for Company Shares or it has been
destroyed or stolen, you will be entitled to issuance of a certificate
representing the shares of New Common Stock into which such shares will have
been converted upon compliance with such requirements as the Company and the
Exchange Agent customarily apply in connection with lost, stolen or destroyed
certificates.

Shares held without certificates in Dividend Reinvestment Plan accounts will
be automatically exchanged for New Common Stock and cash for fractional shares
without your taking any action.

There were 2,437 shareholders of record of the Company as of the Record
Date. This proposal, if adopted, is not expected to cause a significant change
in the number of shareholders. The Company has no plans for the cancellation
or purchase of its shares from individuals holding odd lots or a nominal
number of such shares if shareholders adopt the proposal.

Federal Income Tax Consequences

The following is a summary of the material federal income tax consequences
of the proposed reverse stock split, which will not occur until after the
Company has completed all distributions under the Plan. This summary does not
purport to be complete and does not address the tax consequences to holders
that are subject to special tax rules, such as banks, insurance companies,
regulated investment companies, personal holding companies, foreign entities,
nonresident alien individuals, broker-dealers and tax-exempt entities. This
summary is based on the Code, Treasury regulations promulgated under the Code,
and judicial and administrative interpretations of the Code and regulations,
all as in effect on the date of this Proxy Statement. These laws, regulations,
and interpretations all are subject to change and those changes may be
retroactive. This summary also assumes that the New Common Stock will be held
as a "capital asset" (generally, property held for investment) as defined in
the Code. You are advised to consult your own tax advisor regarding the
federal income tax consequences of the proposed reverse stock split in light
of your personal circumstances and the consequences under state, local and
foreign tax laws.

1. The reverse split will qualify as a recapitalization described in
Section 368(a)(1)(E) of the Code.

2. The Company will not recognize any gain or loss in connection with the
reverse split.

3. You will not recognize any gain or loss when you exchange all of your
Company Shares solely for shares of New Common Stock.

4. The aggregate basis of the shares of New Common Stock you will receive
in the reverse split (including any fractional share deemed received) will
be the same as the aggregate basis of the Company Shares surrendered in
exchange for the New Common Stock.

Exchange of Stock Certificates
<PAGE>

5. The holding period of the shares of New Common Stock you will receive
in the reverse split (including any fractional share deemed received) will
include the holding period of the Company Shares surrendered in exchange
for the New Common Stock.

6. If you receive cash in lieu of a fractional share, you will be treated
as receiving the payment in connection with a redemption of the fractional
share, and the IRS will determine the tax consequences of the redemption
under Section 302 of the Code.

The foregoing summary is included for general information only. Accordingly,
you are urged to consult with your own tax advisor with respect to the tax
consequences of the proposed reverse stock split, including the application
and effect of the laws of any state, municipal, foreign or other taxing
jurisdiction.

Recommendation

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE
CERTIFICATE OF INCORPORATION.

OTHER MATTERS

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

The management of the Company does not intend to bring any other matters
before the meeting, and it does not know of any proposals to be presented to
the meeting by others. If any other matter properly comes before the meeting,
however, the persons named in the proxy solicited by the Board will vote
thereon in accordance with their judgment.

Federal Income Tax
Consequences
<PAGE>

INTERESTS IN STOCK

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

The table below contains information as of May 31, 1999 on the number of
shares of common stock of the Company and of its controlled affiliate,
Consolidated-Tomoka Land Co., as to which each named officer of the Company
and all directors and officers of the Company as a group, had outright
ownership, or, alone or with others, any power to vote or dispose of the
shares, or to direct the voting or disposition of the shares by others, and
the percentage of the aggregate of such shares to all of the outstanding
shares of the respective companies.

<TABLE>
<CAPTION>
Shares of Baker, Fentress & Company
--------------------------------------------
Power Over
Voting
or Disposition
of
Outright Other Shares(a) Aggregate
Ownership ---------------- -----------------
of Shares Alone Shared Shares Percent
--------- ------ --------- --------- -------
<S> <C> <C> <C> <C> <C>
Frederick S. Addy............. 4,272 -- -- 4,272 0.01%
Bob D. Allen.................. 3,051 -- -- 3,051 0.01
Eugene V. Fife................ 6,145 -- -- 6,145 0.02
J. Barton Goodwin............. -- -- 750,418 750,418 1.92
James P. Gorter............... 129,332 21,805 430,900 582,037 1.49
David D. Grumhaus............. 7,992 5,315 489,865 503,172 1.28
Jeffrey A. Kigner............. 333,892 -- -- 333,892 0.86
John A. Levin................. 3,602,133 -- 123,299 3,725,432 9.55
Burton G. Malkiel............. -- -- 8,000 8,000 0.02
David D. Peterson............. 26,926 -- -- 26,926 0.07
William H. Springer........... 5,000 -- -- 5,000 0.01
Dean J. Takahashi............. 1,097 -- -- 1,097 0.00
James P. Koeneman............. 1,326 1,230 454 3,010 0.01
Julie A. Heironimus........... -- -- 20 20 0.00
Scott E. Smith................ 1,848 -- 4,075 5,923 0.02
--------- ------ --------- --------- -----
Directors and officers as a
group (15 persons)........... 4,123,014 28,350 1,807,031 5,958,395 15.26%(b)
</TABLE>

<TABLE>
<CAPTION>
Shares of Consolidated-Tomoka Land Co.
-------------------------------------------
Power Over
Voting or
Disposition
of Other
Outright Shares(a) Aggregate
Ownership ------------ ------------------
of Shares Alone Shared Shares Percent
--------- ----- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Bob D. Allen...................... 111,540(c) -- -- 111,540(c) 1.72%
J. Barton Goodwin................. -- -- 800 800 .01
James P. Gorter................... 2,400 -- 4,000 6,400 .10
John A. Levin..................... -- -- 36,844 36,844 .58
David D. Peterson................. 4,000 -- -- 4,000 .06
------- ---- ------ ------- ----
Directors and officers as a group
(15 persons)..................... 117,940(c) 41,644 159,584(c) 2.47%
</TABLE>
- --------
Notes to Tables:
(a) Each person disclaims beneficial ownership of such shares.
(b) Number has been rounded.
(c) Includes 42,400 shares subject to options held by Mr. Allen that were
exercisable within 60 days of May 31, 1999.

The following table contains information with respect to the "beneficial
ownership" (as defined by the Securities and Exchange Commission) of Company
Shares, as of May 31, 1999, by each person (other than Mr. Levin whose share
ownership information is shown above) who is known by management of the
Company to beneficially own more than five percent of such stock.

Interests in Stock
<PAGE>

Except as otherwise indicated by footnote, the person below has sole voting
and investment power over its shares.

<TABLE>
<CAPTION>
Shares
Beneficially
Name and Address Owned Percent
---------------- ------------ -------
<S> <C> <C>
Yale University, Investments Office........................ 2,101,814* 5.39%
230 Prospect Street
New Haven, CT 06511-2107
Attn: Dean J. Takahashi, Senior Director
</TABLE>
- --------
*Does not include 1,097 shares owned by Mr. Takahashi, a Yale University
employee who is a member of the Board of Directors of the Company.

EXECUTIVE OFFICERS

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

The current executive officers of the Company are listed below. The Company
expects that these persons will remain executive officers until it has
completed implementation of the Plan. At or before that time, the Company
expects that certain of the executive officers of Levco will become executive
officers of the Company.

<TABLE>
<CAPTION>
Name, Age, and Principal Occupation Year First
Since January 1, 1993 Office(a) Elected
----------------------------------- --------- ----------
<S> <C> <C>
James P. Gorter--age 69 Chairman of the Board 1987
Chairman of the Board of the Company; limited
partner of Goldman Sachs & Co. until May 1999.

John A. Levin--age 60 President and Chief 1996
President and Chief Executive Officer of the Executive Officer
Company and Chairman and Chief Executive Officer
of Levin Management and Levco since June 1996;
prior thereto, President and Securities
Analyst/Portfolio Manager at John A. Levin & Co.,
Inc., the predecessor to Levco

James P. Koeneman--age 51 Executive Vice President 1983
Executive Vice President and Secretary of the and Secretary
Company (principal administrative and financial
officer)

Scott E. Smith--age 45 Executive Vice President 1989
Executive Vice President of the Company (portfolio
manager--private placement and small cap
portfolios)

Julie Heironimus--age 40 Treasurer and Assistant 1998
Treasurer and Assistant Secretary of the Company Secretary
since April 1998; prior thereto, senior accountant
of the Company
</TABLE>
- --------
(a) Each officer of the Company generally holds office until the first meeting
of the Board after the annual meeting of shareholders and until his or her
successor is elected and qualified.

Interests in Stock
<PAGE>

COMPENSATION

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

Incentive Compensation Plan

On December 30, 1998, the shareholders of the Company approved an incentive
compensation plan to give the Company and Levco the ability to pay certain
individuals equity-based compensation. The new compensation plan allows the
Company and Levco to offer compensation based on the Company's stock and/or
Levin Management's stock, in addition to cash incentives and other
performance-based compensation. Excluding the automatic non-interested
director options (described below at "Directors' Compensation" and which each
non-interested Board member has forfeited), the Company has not granted any
stock-based compensation under the incentive compensation plan. It also does
not intend to grant any such stock-based compensation until after the
consummation of the transactions contemplated by the Plan or until after the
date of the Special Meeting if the shareholders do not approve the Plan.

Directors' Compensation

Company employees who serve as directors of the Company receive no
additional compensation for such services. The Company pays non-employee
directors, including Levin Management employees or officers, an annual
retainer of $20,000 (the Chairman receives $32,000), payable in quarterly
installments. Non-employee directors receive $1,500 for each Board meeting and
$500 for each meeting of a committee of the Board that they attend in person
or by telephone. The Company also reimburses directors for their out-of-pocket
expenses they incur in connection with such meetings.

Under the incentive compensation plan, on December 30, 1998, the Company
granted each non-interested director a stock option to purchase 1,000 shares
of the Company. On April 22, 1999, the Company granted another option to each
non-interested director to purchase 250 shares of the Company. The Board
believes that the two grants of options, although automatic under the
incentive compensation plan, were inappropriate in light of the proposal to
adopt the Plan, so each director of the Company voluntarily terminated his or
her rights to such shares of Company stock. No other options or equity-based
compensation have been granted to directors, and the Company does not intend
to grant any equity-based compensation under the incentive compensation plan
until after the consummation of the transactions contemplated by the Plan or
until after the date of the Special Meeting if the shareholders do not approve
the Plan.

The following table sets forth compensation paid by the Company during 1998
to each of the directors of the Company for serving as directors of the
Company.

<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total
Compensation Benefits Accrued Compensation
from the as Part of the from the
Name of Person, Position Company Company's Expenses Company
- ------------------------ ------------ --------------------- ------------
<S> <C> <C> <C>
Frederick S. Addy............ $29,000 none $29,000
Director

Bob D. Allen................. 26,000(a) none(a) 26,000(a)
Director

Jessica M. Bibliowicz........ 27,000(c) none(c) 27,000(c)
Former Director

Eugene V. Fife............... 28,500 none 28,500
Director

J. Barton Goodwin............ 27,000 none 27,000
Director

</TABLE>

Compensation
<PAGE>

<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total
Compensation Benefits Accrued Compensation
from the as Part of the from the
Name of Person, Position Company Company's Expenses Company
- ------------------------ ------------ --------------------- ------------
<S> <C> <C> <C>
James P. Gorter................ $46,000(b) none $46,000(b)
Chairman of the Board and
Director

David D. Grumhaus.............. 28,000 none 28,000
Director

Jeffrey A. Kigner.............. 26,000(c) none(c) 26,000(c)
Director

John A. Levin.................. 0(c) none(c) 0(c)
President, Chief Executive
Officer and Director

Burton G. Malkiel.............. 28,500 none 28,500
Director

David D. Peterson.............. 29,500(b) none 29,500(b)
Director

William H. Springer............ 28,500 none 28,500
Director

Dean J. Takahashi.............. 26,000 none 26,000
Director
</TABLE>
- --------
Notes to Directors' Compensation Table:
(a) In addition to the amounts shown, Mr. Allen receives compensation from
CTO, of which he is chairman of the board and president. Mr. Allen
participates in the CTO defined benefit pension plan funded by CTO.
Pension benefits payable under the CTO plan are based primarily on years
of service and the average compensation for the highest five years during
the final 10 years of employment. The benefit formula generally provides
for a life annuity benefit. The estimated annual benefit payable under the
Consolidated-Tomoka Land Co. plan upon retirement at age 65 to a person
with final average earnings of $160,000 or more and 10 years of service
would be approximately $27,042 annually. At December 31, 1998, Mr. Allen
was expected to be credited with eight years of service.
(b) Mr. Gorter received compensation from CTO as a director of that company
until April 1999, when he ceased to be a CTO director. Mr. Peterson
receives compensation from CTO as a director of that company which is in
addition to the amounts shown.
(c) As described below in the Officers' Compensation--Summary Table, Mr. Levin
receives compensation from the Company for his services as an officer of
the Company, Mr. Kigner and Mr. Levin receive compensation from Levin
Management for their services as officers and employees of that company
and its subsidiaries, and Ms. Bibliowicz received compensation from Levin
Management for her services as an officer and employee of that company and
its subsidiaries, all of which is in addition to the amounts shown in the
Directors' Compensation Table.

Officers' Compensation--Summary Table

The following table sets forth compensation for the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996 received, from the
Company, Levin Management, and CTO by the Company's Chief Executive Officer,
the Company's four other most highly compensated executive officers serving at
the end of fiscal year 1998 (each of whom was paid in excess of $60,000 in
aggregate compensation by the Company and Levin Management) and Janet Sandona
Jones and Todd H. Steele for whom disclosure would have been required but for
the fact that each resigned from the Company in 1998.

Compensation
<PAGE>

<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------
Name and Principal All Other
Position Year Salary Bonus Compensation
------------------ ---- ------ ----- ------------
<S> <C> <C> <C> <C>
John A. Levin 1998 $990,748(a) $1,614,706(b) $30,000(c)
Chief Executive Officer 1997 783,912(a) 1,711,658(b) 30,000(c)
and President 1996 375,177(a) 1,400,000(b) 30,000(c)

James P. Gorter 1998 0 0 64,000(d)
Chairman of the Board 1997 0 0 55,450(d)
1996 0 0 46,150(d)

James P. Koeneman 1998 160,000 85,000 36,126(e)
Executive Vice 1997 155,000 72,000 36,126(e)
President and Secretary 1996 149,000 74,450 36,068(e)

Scott E. Smith 1998 155,000 300,000 35,168(f)
Executive Vice 1997 150,000 125,000 35,168(f)
President 1996 145,400 82,270 35,168(f)

Janet Sandona Jones 1998 28,007 0 10,522(g)
Former Vice President 1997 81,000 32,000 31,940(g)
and Treasurer 1996 77,700 38,885 32,730(g)

Todd H. Steele 1998 26,042 0 6,868(h)
Former Vice President 1997 125,000 75,000 26,051(h)
1996 12,500 25,000 148(h)
</TABLE>
- --------
(a) In 1998, Mr. Levin received $50,000 from the Company for serving as an
officer of the Company and $940,748 from Levin Management for serving as
an officer and director of that company; in 1997, Mr. Levin received
$50,000 from the Company for serving as an officer of the Company and
$733,912 from Levin Management for serving as an officer and director of
that company; in 1996, Mr. Levin received $25,000 from the Company for
serving as an officer of the Company and $350,177 from Levin Management
for serving as an officer and director of that company.
(b) Amounts reported as bonuses for Mr. Levin are bonuses Levin Management
paid to Mr. Levin for serving as an officer and director of that company
and its subsidiaries.
(c) Amounts reported reflect contributions Levin Management paid to the Levin
Management Co., Inc. retirement plan, a money purchase pension plan funded
by employer contributions in which Mr. Levin participates. The amount of
the contribution made for each employee is determined by a formula that
takes into account, among other things, the age of the employee for whom
the contribution is made. The benefit received under the Levin Management
Co., Inc. retirement plan upon retirement depends on the aggregate
contributions to the plan for the participant and the investment
performance of those assets.
(d) The amount reported reflects the compensation Mr. Gorter received from the
Company for serving as a director of the Company ($46,000 in 1998, $39,450
in 1997 and $30,150 in 1996) and compensation received for serving as a
director of Consolidated-Tomoka Land Co ($18,000 in each of 1998, 1997 and
1996). See Directors' Compensation Table, above.
(e) The amount reported reflects the sum Mr. Koeneman received from Company
contributions to the money purchase pension plan ($30,000 in each year),
Company contributions to the defined benefit pension plan ($4,478 in 1998,
$4,478 in 1997 and $4,478 in 1996) and Company contributions to the life
and disability plans ($1,648 in 1998, $1,648 in 1997 and $1,590 in 1996).
(f) The amount reported reflects the sum Mr. Smith received from Company
contributions to the money purchase pension plan ($30,000 in each year),
Company contributions to the defined benefit pension plan ($3,664 in 1998,
$3,664 in 1997 and $3,664 in 1996) and Company contributions to the life
and disability plans ($1,504 in 1998, $1,504 in 1997 and $1,504 in 1996).
(g) The amount reported reflects the sum Ms. Jones received from Company
contributions to the money purchase pension plan ($7,002 in 1998, $28,250
in 1997 and $29,146 in 1996), Company

Compensation
<PAGE>

contributions to the defined benefit pension plan ($2,804 in 1998, $2,804
in 1997 and $2,804 in 1996) and Company contributions to the life and
disability plans ($716 in 1998, $886 in 1997 and $780 in 1996).
(h) The amount reported reflects the sum Mr. Steele received from Company
contributions to the money purchase pension plan ($6,510 in 1998, $25,000
in 1997 and $0 in 1996) and Company contributions to the life and
disability plans ($358 in 1998, $1,051 in 1997 and $148 in 1996).

Employment Contracts

Mr. Levin and Mr. Kigner each have employment contracts with the Company or
Levin Management, or both. These employment contracts are described under the
heading "Risk Factors Relating to The Consummation of the Transactions
Contemplated by the Plan--Dependence on Key Personnel."

Pension Plan

The Company's officers and employees participate in the Company's retirement
plan, contributions to which are included in the cash compensation table. The
Company's retirement plan is a trusteed money purchase pension plan funded by
Company contributions equal to 25% of the compensation paid or accrued to
participating employees, subject to a $30,000 annual contribution limitation
per participant. The benefit received under the retirement plan upon
retirement depends on the aggregate contributions to the plan for the
participant and the investment performance of those assets.

<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Accrued
(as of 12/31/98)
as Part of the
Name of Person Company's Exenses
- -------------- -----------------
<S> <C>
James P. Gorter............................................... none
John A. Levin................................................. none(a)
James P. Koeneman............................................. $30,000
Scott E. Smith................................................ 30,000
Janet Sandona Jones........................................... 7,002
Todd H. Steele................................................ 6,510
</TABLE>
- --------
(a) Does not include Mr. Levin's participation in the Levin Management Co.,
Inc. Retirement Plan. See Note (c) under "Officers' Compensation--Summary
Table".

Compensation Committee Report on Executive Compensation

The Compensation Committee of the Board makes decisions on compensation of
the Company's executives. Each member of the Compensation Committee is a non-
employee director. The Committee establishes the compensation of John A.
Levin, Chief Executive Officer. His bonus is based on its evaluation of Mr.
Levin's performance in accordance with the requirements of the tax laws
contained in the Internal Revenue Code. It establishes the compensation of the
other officers of the Company in consultation with Mr. Levin. The full Board
reviews all decisions by the Compensation Committee relating to the
compensation of all the Company's officers.

The Company's executive compensation program reflects the philosophy that
compensation should reward executives for outstanding individual performance
and, at the same time, align the interests of executives closely with those of
shareholders. To implement that philosophy, the Company offers each of its
executives a combination of base salary and annual cash bonuses. Each
executive officer, with the exception of Mr. Levin, also participates in the
Company's Money Purchase Pension Plan. Through this compensation structure,
the Company aims to reward above-average corporate performance and recognize
individual initiative and achievements.

Compensation
<PAGE>

Base salaries reflect individual positions, responsibilities, experience,
and potential contribution to the success of the Company. Actual salaries vary
according to the Compensation Committee's subjective assessment of a number of
factors in its review of base salaries of Company executives. The Committee
conducts annual reviews to ensure that base salaries are competitive, that
they reflect the specific responsibilities of individual executives and that
they appropriately reward individual executives for their contributions to the
Company's performance.

At the Committee's sole discretion, the Committee may pay each executive
officer a cash bonus based on the Compensation Committee's assessment of the
executive officer's individual performance and the performance of the Company.
In its evaluation of the performance of the officer and the determination of
incentive bonuses, the Committee does not assign quantitative relative weights
to different factors or follow mathematical formulas. Rather, the Committee
makes its determination in each case after considering the factors it deems
relevant at the time.

The executive compensation committee establishes the annual base salary of
the Chief Executive Officer. For 1998, the Company paid Mr. Levin $50,000 to
serve as the Company's Chief Executive Officer. Unlike the other executive
officers, Mr. Levin receives most of his compensation from Levin Management
and does not receive a cash bonus from the Company based on his individual or
the Company's performance.

For corporate income tax purposes, neither the Company nor Levin Management
may deduct executive compensation for certain persons in excess of $1 million,
unless it is performance-based compensation and is paid pursuant to a plan
meeting certain requirements of the Code. The Committee currently anticipates
that, to the extent practicable and in the Company's best interest, both the
Company and Levin Management will pay executive compensation in a manner that
satisfies the requirements of the Code to permit deduction of the
compensation.

The Committee was responsible during 1998 for administering the Levin
Management Co., Inc. and Subsidiaries Key Employee Incentive Bonus Plan,
pursuant to which the Committee could award cash bonuses based on attainment
of specified performance goals. The Committee based Mr. Levin's bonus for
1998, as reflected in the Officers' Compensation--Summary Table, on Levco's
attainment of any one of the following performance goals, relating to (i) the
increase of Levco's market share through the addition of new assets under
management, (ii) revenue less non-compensation related expenses, and (iii)
performance of the Levco core accounts compared to Standard & Poor's 500 Stock
Index. During 1998, Levco met two of the three performance goals.

Compensation Committee Members
William H. Springer (Chairman)
Frederick S. Addy
David D. Peterson

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS

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

In 1998, stockholder total return, which is based on the market price of
Company Shares, was 3.5%. Stockholder total return is the actual return if all
distributions had been reinvested during the year. It is based on the
Company's stock market price and calculated on a per share basis. During 1998,
stockholder return did not correlate with the Company's portfolio performance
based on the Company's net asset value, reflecting the widening of the
discount. The chart below sets forth a comparison of the Company's annual
stockholder return with (i) the annual stockholder return of closed-end
investment companies ("Closed-End Funds") reported by Morningstar, Inc.; and
(ii) the annual stockholder return of the S&P 500 Index. The chart is based on
an investment of $100 on December 31, 1993, and assumes that all dividends and
capital gain distributions were reinvested. The chart is not an indicator of
the future performance of the Company. You should be particularly wary of

Compensation
<PAGE>

extrapolating from this information because, if shareholders approve the Plan,
the Company will no longer be an investment company. Thus, it should not be
used to predict the future performance of the Company's stock.

[PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
Baker, Fentress & Co. Closed-End Funds S&P 500 Index
<S> <C> <C> <C>
12/31/93 100 100 100
12/31/94 93 94 101
12/31/95 123 123 139
12/31/96 142 146 171
12/31/97 178 196 229
12/31/98 184 220 294
6/30/99 232 242 330
</TABLE>

Comparison of Cumulative Five Year Total Return

<TABLE>
<CAPTION>
12/31/93 12/31/94 12/30/95 12/29/96 12/31/97 12/31/98 6/30/99
-------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Baker, Fentress &
Company................ $100 $ 93 $123 $142 $178 $184 $232
- ----------------------------------------------------------------------------------------
Closed-End Funds........ $100 $ 94 $123 $146 $196 $220 $242
- ----------------------------------------------------------------------------------------
S&P 500 Index........... $100 $101 $139 $171 $229 $294 $330
</TABLE>

Total returns assume that dividends and capital gain distributions are
reinvested.

PROXY SOLICITATION; VOTING; ADJOURNMENT

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

If you properly sign your proxy and return it on time, your shares will be
voted at the Special Meeting in accordance with the directions you mark on your
proxy card. If you properly sign and return your proxy, but don't mark any
directions on it, your shares will be voted for the Plan for Distribution of
Assets of Baker, Fentress & Company and for the amendment to the Company's
Certificate of Incorporation.

You may revoke your proxy at any time before it is voted, either in person at
the meeting, by written notice to the Company, or by delivery of a later dated
proxy. You will not be entitled to appraisal rights for any action proposed to
be taken at the Special Meeting.

Shareholders of record at the close of business on June 30, 1999 are entitled
to participate in the meeting and to cast one vote for each share held. The
Company had 39,029,101 shares of common stock outstanding on the record date.
There is no other class of stock outstanding. Proxy material is first being
mailed to shareholders on or about July 22, 1999.

Total Returns
<PAGE>

Approval of each of the proposals requires the affirmative vote of more than
50% of the outstanding shares.

Proxies will be solicited by mail. Proxies may be solicited by directors,
officers, and a small number of regular employees, personally or by telephone,
telegraph or mail, but such persons will not be specially compensated for such
services. In addition, the Company has engaged Corporate Investor
Communications, Inc. to render proxy solicitation services at a cost estimated
at $5,000. The Company will inquire of any shareholder of record known to be a
broker, dealer, bank, or other nominee as to whether other persons were the
beneficial owners of shares held of record by such persons. If so, the Company
will supply additional copies of solicitation materials for forwarding to
beneficial owners and will make reimbursement for reasonable out-of-pocket
costs. The Company will bear all costs of solicitation and related actions.

ChaseMellon Shareholder Services, LLC, the Company's transfer agent,
tabulates the proxies. Under Delaware law (under which the Company is
organized) and the Company's bylaws, a majority of the shares outstanding on
the Record Date, excluding shares held in the Company's treasury, must be
present at the meeting in person or by proxy to constitute a quorum for the
transaction of business. Shares abstaining from voting or present but not
voting, including broker non-votes, are counted as "present" for purposes of
determining the existence of a quorum. Broker non-votes are shares held by a
broker or nominee for which an executed proxy is received by the Company, but
which are not voted as to one or more proposals because instructions have not
been received from the beneficial owners or persons entitled to vote and the
broker or nominee does not have discretionary voting power. For Proposals 1
and 2, a broker non-vote will have the effect of a vote against these
proposals.

Any decision to adjourn the meeting will be made by vote of the shares
present at the meeting, in person or by proxy. Proxies will be voted in favor
of adjournment if there are not enough shares present at the meeting to
constitute a quorum. If sufficient shares are present to constitute a quorum,
but insufficient votes have been cast in favor of an item to approve it,
proxies will be voted in favor of adjournment only if the Board determines
that adjournment and additional solicitation is reasonable and in the best
interest of shareholders, taking into account the nature of the proposals, the
percentage of votes actually cast, the percentage of negative votes, the
nature of any further solicitation that might be made and the information
provided to shareholders about the reasons for additional solicitation.

The Company must receive any shareholder proposal to be considered for
inclusion in proxy material for the Company's annual meeting of shareholders
in April 2000 at the principal executive office of the Company (200 West
Madison Street, Chicago, Illinois 60606) no later than November 10, 1999.
Submission of a proposal does not guarantee inclusion of the proposal in the
proxy statement or its presentation at the meeting since shareholders must
satisfy certain rules under the federal securities laws.

AVAILABLE INFORMATION

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

The Company is subject to the informational requirements of the Exchange Act
and files reports, proxy statements and other information with the Commission.
Those reports, proxy statements and other information are available on the
Commission's website at www.sec.gov or may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Chicago Regional Office, 500 West Madison Street, Chicago,
Illinois 60661; and New York Regional Office, Seven World Trade Center, New
York, New York 10048. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.

Shareholders of the Company may obtain, without charge, copies of the
Company's most recent annual report, semi-annual report and quarterly report
by writing to the Company at 200 West Madison Street, Chicago, IL 60606, or by
calling (800) BKF-1891, or by accessing the Company's website at
www.bakerfentress.com.

July 22, 1999

Proxy Solicitation; Voting; Adjournment
<PAGE>

APPENDIX A: Plan for Distribution of Assets for Baker, Fentress & Company

PLAN FOR DISTRIBUTION OF ASSETS
OF
BAKER, FENTRESS & COMPANY

NOW, THEREFORE, the Board hereby adopts and sets forth this Plan for
Distribution of Assets of Baker, Fentress & Company as follows:

1.Effective Date of Plan. The effective date of this Plan (the "Effective
Date") shall be the date on which this Plan is approved by the
stockholders of the Company in accordance with the DGCL.

A-1
<PAGE>

13. Appraisal rights. Stockholders will not be entitled to appraisal rights
under Delaware law in connection with the Plan.

IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Plan to be executed by the Company as of this 17th day of June, 1999.

BAKER, FENTRESS & COMPANY

By: /s/ John A. Levin

John A. Levin
President

A-2
<PAGE>

Appendix A

A-3
<PAGE>

Lazard Freres & Co. LLC
30 Rockefeller Plaza
New York, N.Y. 10020
----- New York
Telephone (212) 632-6000
Facsimile (212) 632-6060

May 6, 1999

The Board of Directors
Baker, Fentress & Company
200 West Madison Street
Suite 3510
Chicago, IL 60606

Dear Members of the Board:

We understand that Baker, Fentress & Company (the "Company") plans to
undertake a series of steps (taken together, the "Plan") intended by the Company
to address the persistent discount to net asset value represented by market
prices for the shares of common stock of the Company (the "Company Shares"). The
Plan is to comprise the following steps:

(i) liquidation of substantially all of the Company's portfolio of public
and private investments (other than majority-owned or wholly-owned
subsidiaries) (the "Liquidation Securities") and distribution of the
net proceeds to the Company's shareholders;

(ii) distribution in-kind of the Company's approximately 79% interest in
Consolidated-Tomoka Land Company ("CTO") to the Company's
shareholders; and

(iii) termination of the Company's status as a registered investment
company under the Investment Company Act of 1940.

As a result of the Plan, we understand that each holder of a Company Share would
(a) receive a pro rata share of the cash proceeds of the Liquidation Securities;
(b) receive a pro rata share of the Company's holdings of CTO; and (c) retain
such Company Share. Following completion of these steps, we understand that the
Company would continue to exist as a non-investment company, engaged in the
provision of investment management services through Levin Management Co., Inc.
(with its subsidiaries, including John A. Levin & Co., Inc., the "Levco
Companies"), the stock of which is expected to be the Company's sole remaining
asset. We further understand that the liquidation of the Liquidation Securities
and subsequent distribution of cash proceeds, as well as the distribution
in-kind of the CTO investment would be a taxable event to the Company's
shareholders, generating a tax liability (ordinary income and short- and
long-term capital gains) for the Company's taxable shareholders.

You have requested our opinion as to the fairness, from a financial point
of view, to the holders of Company Shares of the receipt of the distribution of
cash and securities as part of the Plan, and the retention of the Company Shares
immediately following that distribution, taken in the aggregate. In connection
with this opinion, we have:

(i) held discussions with members of the Company's senior management with
respect to the financial terms and conditions of the proposed Plan;

B-1
<PAGE>

LAZARD FRERES & CO. LLC

(ii) reviewed certain historical business and financial information
relating to each of the Company, CTO and the Levco Companies;

(iii) reviewed various financial forecasts and other data provided to us
by each of CTO and the Levco Companies relating to their businesses;

(iv) held discussions with members of the senior managements of each of
the Company, CTO and the Levco Companies with respect to past and
current business operations and financial condition, regulatory
relationships, strategic objectives and the future prospects of
their respective companies;

(v) reviewed public information with respect to certain other publicly-
traded, closed-end, registered investment companies and certain
other publicly-traded investment management companies;

(vi) reviewed the historical stock prices and trading volumes of the
Company Shares and CTO's common stock; and

(vii) conducted such other financial studies, analyses and investigations
as we deemed appropriate.

We have relied upon the accuracy and completeness of the information
reviewed by us, and have not assumed any responsibility for any independent
verification of such information or any independent valuation or appraisal of
any of the assets, liabilities or solvency of the Company, including the assets,
liabilities or solvency of the Levco Companies. We also have assumed that all
Liquidation Securities, other than certain privately issued securities
identified by management (the "Exception Securities"), will be sold at prices
equal to the market prices in effect at April 30, 1999; with respect to the
Exception Securities, we have applied discounts to the asset values that have
been specified by management of the Company and assumed such Exception
Securities will be sold at such discounted values. With your approval, we also
have assumed the distribution of the Company's investment in CTO to the
Company's shareholders will have no effect upon the market for CTO's securities.
With respect to financial forecasts, we have assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the respective managements of each of the Company, CTO and the
Levco Companies. We assume no responsibility for and express no view as to such
forecasts or valuations or the assumptions on which they are based.

Further, our opinion is necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. In that regard, we are expressing no opinion as to the
prices at which the securities of CTO or the Company will trade following
completion of the Plan.

In rendering our opinion, we have assumed that each shareholder of the
Company is subject to income tax at an effective combined state and federal rate
of 45% on ordinary income and short-term capital gains and 25% on long-term
capital gains. In addition, we have assumed that the Plan will not result in a
return of capital to any shareholder in excess of such shareholder's basis in
the Company Shares for income tax purposes.

In rendering our opinion, we have also assumed that the Plan will be
consummated on the terms described to us by the Company's management. We also
have assumed that obtaining the necessary regulatory approvals for the Plan will
not have an adverse effect on the Company or the Levco Companies.

B-2
<PAGE>

Lazard Freres & Co. LLC

Lazard Freres & Co. LLC is acting as investment banker to the Company in
connection with the Plan and will receive a fee for our services. We have in
the past provided investment banking services to the Company, including with
respect to the acquisition of the Levco Companies, for which we have been paid
customary fees.

Our opinion does not address the relative merits of the Plan as compared to
any alternative business transaction that might be available to the Company.

Our engagement and the opinion expressed herein are provided for the
benefit of the Company's Board of Directors. Further, our opinion does not
constitute a recommendation as to how any holder of Company Shares should vote
with respect to the Plan. It is understood that this letter may not be
disclosed or otherwise referred to without our prior consent, except as may
otherwise be required by law or by a court of competent jurisdiction or as
otherwise provided for in our engagement letter.

Based on the subject to the foregoing, we are of the opinion that the
receipt by the holders of Company Shares of the distribution of cash and
securities as part of the Plan, and the retention of Company Shares by such
holders immediately following that distribution, taken in the aggregate, is fair
to holders of Company Shares from a financial point of view.

Very truly yours,

LAZARD FRERES & CO. LLC

By: /s/ Gary S. Shedlin
------------------------------------
Gary S. Schedlin
Managing Director

B-3
<PAGE>

APPENDIX C: Levin Management Co., Inc. Consolidated Financial Statements

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

Year ended December 31, 1997

Contents

<TABLE>
<S> <C>
Report of Independent Auditors.............................................. C-2
Consolidated Balance Sheet.................................................. C-3
Consolidated Statement of Income............................................ C-4
Consolidated Statement of Changes in Stockholder's Deficit.................. C-5
Consolidated Statement of Cash Flows........................................ C-6
Notes to Consolidated Financial Statements.................................. C-7
</TABLE>

Year ended December 31, 1998

Contents

<TABLE>
<S> <C>
Report of Independent Auditors............................................. C-10
Consolidated Balance Sheet................................................. C-11
Consolidated Statement of Income........................................... C-12
Consolidated Statement of Changes in Stockholder's Deficit................. C-13
Consolidated Statement of Cash Flows....................................... C-14
Notes to Consolidated Financial Statements................................. C-15
</TABLE>

C-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Stockholder of
Levin Management Co., Inc.

We have audited the accompanying consolidated balance sheet of Levin
Management Co., Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, changes in stockholder's deficit and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Levin
Management Co., Inc. and Subsidiaries at December 31, 1997, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

February 27, 1998

C-2
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1997

<TABLE>
<S> <C>
Assets
<CAPTION>
Current assets:
<S> <C>
Cash and cash equivalents..................................... $ 8,122,000
Investment advisory fees receivable........................... 8,057,000
Prepaid expenses.............................................. 798,000
Receivable from broker........................................ 172,000
-------------
Total current assets........................................ 17,149,000
-------------
Investments in affiliated investment partnerships............... 4,219,000
Fixed assets (net of accumulated depreciation of $407,000)...... 657,000
Other assets.................................................... 1,282,000
-------------
6,158,000
-------------
Total assets................................................ $ 23,307,000
=============
Liabilities and stockholder's deficit
Current liabilities:
Accrued expenses and accounts payable......................... $ 697,000
Accrued bonuses............................................... 9,734,000
Income taxes payable, current................................. 1,164,000
-------------
Total current liabilities................................... 11,595,000
Term loan....................................................... 65,000,000
-------------
Total liabilities........................................... 76,595,000
-------------
Stockholder's deficit:
Common stock, $.01 par value; 1,000 shares authorized,issued
and outstanding
Additional paid-in capital.................................... 55,517,000
Accumulated deficit........................................... (108,805,000)
-------------
Total stockholder's deficit................................. (53,288,000)
-------------
Total liabilities and stockholder's deficit................. $ 23,307,000
=============
</TABLE>
See notes to consolidated financial statements.

C-3
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Revenues
<CAPTION>
Investment advisory fees............................................. $34,587,000
<S> <C>
Incentive fees and general partner allocations....................... 2,831,000
Commission income--net............................................... 1,385,000
Increase in equity in investments in limited partnerships............ 165,000
Interest............................................................. 223,000
-----------
Total revenues..................................................... 39,191,000
-----------
Expenses
Employee compensation and benefits................................... 18,916,000
Communications and portfolio systems expense......................... 466,000
Occupancy and equipment rental....................................... 846,000
Professional, legal and accounting fees.............................. 992,000
Promotional costs.................................................... 556,000
Other operating expenses............................................. 1,214,000
-----------
Total expenses..................................................... 22,990,000
-----------

Income before interest and taxes..................................... 16,201,000
Interest expense..................................................... 6,484,000
-----------
Income before taxes.................................................. 9,717,000
Provision for taxes on income, current............................... 4,523,000
-----------
Net income......................................................... $ 5,194,000
===========
</TABLE>
See notes to consolidated financial statements.

C-4
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT

YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficit
------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of year.. $ -- $55,517,000 $(113,999,000) $(58,482,000)
Net income.................... -- -- 5,194,000 5,194,000
---- ----------- ------------- ------------
Balance at end of year........ $ -- $55,517,000 $(108,805,000) $(53,288,000)
==== =========== ============= ============
</TABLE>
See notes to consolidated financial statements.

C-5
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1997

<TABLE>
<S> <C>
Cash flows from operating activities
Net income....................................................... $ 5,194,000
Adjustments to reconcile net income to net cash provided by
operations:
<CAPTION>
Depreciation and amortization.................................. 267,000
<S> <C>
Increase in investment advisory fees receivable................ (431,000)
Increase in prepaid expenses................................... (585,000)
Increase in receivable from broker............................. (77,000)
Decrease in investments in affiliated investment partnerships.. 222,000
Decrease in accrued expenses and accounts payable.............. (190,000)
Increase in accrued bonuses.................................... 6,275,000
Increase in income taxes payable............................... 689,000
-----------
Net cash provided by operating activities........................ 11,364,000
-----------
Cash flows from investing activities
Increase in other assets......................................... (1,143,000)
Fixed asset additions............................................ (276,000)
-----------
Net cash used in investing activities............................ (1,419,000)
-----------
Cash flows from financing activities
Repayment of note payable........................................ (3,000,000)
-----------
Net increase in cash and cash equivalents........................ 6,945,000
Cash and cash equivalents at the beginning of year............... 1,177,000
-----------
Cash and cash equivalents at the end of year..................... $ 8,122,000
===========
Supplemental disclosure of cash flow information
Cash paid for interest........................................... $ 6,484,000
===========
Cash paid for taxes.............................................. $ 3,834,000
===========
</TABLE>
See notes to consolidated financial statements.

C-6
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1997

1. Organization and Summary of Significant Accounting Policies

Organization and Basis of Presentation

The consolidated financial statements of Levin Management Co., Inc. (the
"Company") include its wholly-owned subsidiary (John A. Levin & Co., Inc.,
"LEVCO") and its two indirect subsidiaries (which are subsidiaries of LEVCO),
LEVCO GP Inc. ("LEVCO GP") and LEVCO Securities, Inc. ("LEVCO Securities").
All intercompany transactions have been eliminated in consolidation.

LEVCO is an investment advisor registered under the Investment Advisers Act
of 1940 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. LEVCO Securities is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. LEVCO GP acts as the general
partner of four affiliated investment partnerships and is registered with the
Commodities Futures Trading Commission as a commodity pool operator.

The Company provides all administrative support services to its
subsidiaries, including, among other things, employee services, office space,
equipment and administrative support.

The Company is incorporated in the state of Delaware and is a wholly-owned
subsidiary of Baker, Fentress & Company ("BKF"), a closed-end fund listed on
the New York Stock Exchange.

All numerical information presented in the consolidated financial statements
and notes to the consolidated financial statements has been rounded to the
nearest thousand dollars.

Revenue Recognition

Generally, investment advisory fees are calculated quarterly, in arrears,
and are based upon a percentage of the market value of each account at the end
of the quarter. Incentive fees, general partner allocations of income earned
from affiliated investment partnerships and incentive fees from other accounts
are calculated at the end of their respective contract year.

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

Cash and Cash Equivalents

The Company treats all highly liquid instruments that mature within three
months as cash equivalents. At December 31, 1997, the Company maintained
approximately $1,130,000 in cash at two nationally recognized financial
institutions and approximately $6,992,000 in cash equivalents at one of the
above nationally recognized financial institutions.

Investments in Affiliated Investment Partnerships

Investments in affiliated investment partnerships are held through LEVCO GP
and are recorded based upon the equity method of accounting, which results in
an amount equal to the sum of LEVCO GP's capital accounts in the partnerships.
LEVCO GP is entitled to a special allocation of income from some of the
affiliated investment partnerships.

C-7
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Tax

The Company files consolidated federal and combined state and local income
tax returns. The difference between the provision for income taxes and a
provision computed at the statutory federal tax rate is principally due to
state and local taxes.

The provision for federal, state and local income taxes included in the
consolidated statement of income consists of the following for the year ended
December 31, 1997:

<TABLE>
<S> <C>
Federal........................................................ $2,791,000
State and local................................................ 1,732,000
----------
$4,523,000
==========
</TABLE>

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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

Fixed Assets

Furniture, fixtures, office and computer equipment and leasehold
improvements are carried at cost. Depreciation of furniture, fixtures, office
and computer equipment is provided on the accelerated method 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.

Other Assets

Included in other assets is a security deposit, approximately $1,021,000 at
December 31, 1997, required pursuant to the Company's office space lease
agreement. This deposit is held at a nationally recognized financial
institution in the Company's name.

2. Receivable from Clearing Broker

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 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. Related Party Transactions

Term Loan and Other Borrowing from BKF

The Company has borrowed $65,000,000 under a term loan agreement with BKF.
The loan is due on or before June 28, 1999 and bears interest at an annual
rate of 9.75%. The loan restricts the Company from entering into additional
borrowing. In June 1997, the Company repaid a note payable to BKF in the
amount of $3,000,000. For the year ended December 31, 1997, the Company
incurred interest expense of approximately $6,484,000 related to these
borrowings.

C-8
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investment Advisory Fees from BKF

LEVCO manages the publicly traded portion of BKF's investment portfolio.
Advisory fees earned from this relationship for the year ended December 31,
1997 were approximately $1,530,000.

Investments in Affiliated Investment Partnerships and Related Revenue

The Company earned investment advisory fees and general partner allocations
(inclusive of an incentive fee) from affiliated investment partnerships of
approximately $1,477,000 and $2,343,000, respectively, for the year ended
December 31, 1997.

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.

Commission Revenues

All commission revenues reflected on the consolidated statement of income
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.

4. Commitment

The Company has office space obligations which require monthly payments plus
escalations through January 2008. This rental obligation is guaranteed by the
Company's wholly-owned subsidiary. The minimum annual rental commitments under
the operating lease are as follows:

<TABLE>
<S> <C>
1998......................................................... $ 909,000
1999......................................................... 1,193,000
2000......................................................... 1,244,000
2001......................................................... 1,244,000
2002......................................................... 1,264,000
Thereafter................................................... 7,269,000
-----------
Total minimum payments required............................ $13,123,000
===========
</TABLE>

5. Net Capital Requirement

LEVCO Securities is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1) (the "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 8 to 1. At
December 31, 1997, LEVCO Securities was in compliance with the Rule.

6. Pension Plans

The Company maintains a target benefit pension plan covering all employees
who have reached the age of 20.5 and have completed nine months of service to
the Company. Contributions are made by the Company and are based on current
compensation. The Company incurred an expense of $295,000 related to
contributions to the plan for the year ended December 31, 1997.

The Company has also adopted a Section 401(k) plan. All employees with six
months or more of service to the Company are eligible to participate in the
plan. Eligible participants may contribute up to 15% of their earnings,
subject to statutory limitations. The Company may match employee
contributions, up to 100%, subject to statutory limitations, and accordingly
incurred an expense of $213,000 related to contributions to the plan for the
year ended December 31, 1997.

C-9
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Stockholder of
Levin Management Co., Inc.

We have audited the accompanying consolidated balance sheet of Levin
Management Co., Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of income, changes in stockholder's deficit and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Levin
Management Co., Inc. and Subsidiaries at December 31, 1998, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with generally accepted accounting principles.

/s/ Ernst & Young LLP

February 12, 1999

C-10
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

December 31, 1998

<TABLE>
<S> <C>
Assets
Current assets:
Cash and cash equivalents..................................... $ 8,849,000
Investment advisory fees receivable........................... 9,296,000
Prepaid expenses.............................................. 502,000
Receivable from broker........................................ 96,000
-------------
Total current assets........................................ 18,743,000
-------------
Investments in affiliated investment partnerships............... 4,883,000
Fixed assets (net of accumulated depreciation of $2,186,000).... 2,987,000
Other assets.................................................... 1,454,000
-------------
9,324,000
-------------
Total assets................................................ $ 28,067,000
=============
Liabilities and stockholder's deficit
Current liabilities:
Accrued expenses and accounts payable......................... $ 1,376,000
Accrued bonuses............................................... 10,151,000
Income taxes payable, current................................. 251,000
Loan payable--due June 28, 1999............................... 65,000,000
-------------
Total current liabilities................................... 76,778,000
Accrued rent.................................................... 234,000
-------------
Total liabilities........................................... 77,012,000
-------------
Stockholder's deficit:
Common stock, $.01 par value; 1,000 shares authorized, issued
and outstanding.............................................. --
Additional paid-in capital.................................... 55,517,000
Accumulated deficit........................................... (104,462,000)
-------------
Total stockholder's deficit................................. (48,945,000)
-------------
Total liabilities and stockholder's deficit................. $ 28,067,000
=============
</TABLE>

See notes to consolidated financial statements.

C-11
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

Year ended December 31, 1998

<TABLE>
<S> <C>
Revenues
Investment advisory fees........................................... $35,453,000
Incentive fees and general partner allocations..................... 4,371,000
Commission income--net............................................. 1,395,000
Increase in equity in investments in limited partnerships.......... 160,000
Interest........................................................... 351,000
-----------
Total revenues................................................... 41,730,000
-----------
Expenses
Employee compensation and benefits................................. 21,984,000
Communications and portfolio systems expense....................... 621,000
Occupancy and equipment rental..................................... 1,614,000
Professional, legal and accounting fees............................ 939,000
Promotional costs.................................................. 867,000
Other operating expenses........................................... 1,649,000
-----------
Total expenses................................................... 27,674,000
-----------

Income before interest and taxes................................... 14,056,000
Interest expense................................................... 6,391,000
-----------
Income before taxes................................................ 7,665,000
Provision for taxes on income, current............................. 3,322,000
-----------
Net income....................................................... $ 4,343,000
===========
</TABLE>

See notes to consolidated financial statements.

C-12
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT

Year ended December 31, 1998

<TABLE>
<CAPTION>
Additional Total
Common Paid-in Accumulated Stockholder's
Stock Capital Deficit Deficit
------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of year.. $ -- $55,517,000 $(108,805,000) $(53,288,000)
Net income.................... -- -- 4,343,000 4,343,000
----- ----------- ------------- ------------
Balance at end of year........ $ -- $55,517,000 $(104,462,000) $(48,945,000)
===== =========== ============= ============
</TABLE>

See notes to consolidated financial statements.

C-13
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended December 31, 1998

<TABLE>
<S> <C>
Cash flows from operating activities
Net income....................................................... $ 4,343,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 370,000
Increase in investment advisory fees receivable................ (1,239,000)
Decrease in prepaid expenses................................... 296,000
Decrease in receivable from broker............................. 76,000
Increase in investments in affiliated investment partnerships.. (664,000)
Increase in accrued expenses and accounts payable.............. 913,000
Increase in accrued bonuses.................................... 417,000
Decrease in income taxes payable............................... (913,000)
-----------
Net cash provided by operating activities........................ 3,599,000
-----------
Cash flows from investing activities
Increase in other assets......................................... (172,000)
Fixed asset additions............................................ (2,700,000)
-----------
Net cash used in investing activities............................ (2,872,000)
-----------
Net increase in cash and cash equivalents........................ 727,000
Cash and cash equivalents at beginning of year................... 8,122,000
-----------
Cash and cash equivalents at end of year......................... $ 8,849,000
===========
Supplemental disclosure of cash flow information
Cash paid for interest........................................... $ 6,391,000
===========
Cash paid for taxes.............................................. $ 4,208,000
===========
</TABLE>

See notes to consolidated financial statements.

C-14
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1998

1. Organization and Summary of Significant Accounting Policies

Organization and Basis of Presentation

LEVCO is an investment advisor registered under the Investment Advisers Act
of 1940 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. LEVCO Securities is registered with the
Securities and Exchange Commission as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. LEVCO GP acts as the general
partner of five affiliated investment partnerships and is registered with the
Commodities Futures Trading Commission as a commodity pool operator.

The Company provides all administrative support services to its
subsidiaries, including, among other things, employee services, office space,
equipment and administrative support.

The Company is incorporated in the state of Delaware and is a wholly-owned
subsidiary of Baker, Fentress & Company ("BKF"), a closed-end fund listed on
the New York Stock Exchange.

All numerical information presented in the consolidated financial statements
and notes to the consolidated financial statements has been rounded to the
nearest thousand dollars.

Revenue Recognition

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

Cash and Cash Equivalents

The Company treats all highly liquid instruments that mature within three
months as cash equivalents. At December 31, 1998, the Company maintained
substantially all of its cash and equivalents at one nationally recognized
financial institution.

Investments in Affiliated Investment Partnerships

C-15
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Tax

The provision for federal, state and local income taxes included in the
consolidated statement of income consists of the following for the year ended
December 31, 1998:

<TABLE>
<S> <C>
Federal........................................................ $2,005,000
State and local................................................ 1,317,000
----------
$3,322,000
==========
</TABLE>

Use of Estimates

Fixed Assets

Other Assets

Included in other assets is a security deposit, approximately $807,000 at
December 31, 1998, required pursuant to the Company's office space lease
agreement. This deposit is held at a nationally recognized financial
institution in the Company's name.

2. Receivable from Clearing Broker

3. Related Party Transactions

Term Loan and Other Borrowing from BKF

The Company has borrowed $65,000,000 under a term loan agreement with BKF
which is due on or before June 28, 1999. The original loan had an interest
rate of 9.75% per annum. The loan restricts the Company from entering into
additional borrowings and has certain covenant requirements including a fixed
charge ratio (as defined). For the quarter ended September 30, 1998, the
Company was in violation of the fixed charge covenant. In connection
therewith, the Company amended the loan

C-16
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

agreement in which they received a waiver of the fixed charge covenant through
June 28, 1999 (the term of the loan). In return, the interest rate on the loan
was increased to 10.25% per annum.

Investment Advisory Fees from BKF

LEVCO manages the publicly traded portion of BKF's investment portfolio.
Advisory fees earned from this relationship for the year ended December 31,
1998 were approximately $1,525,000.

Investments in Affiliated Investment Partnerships and Related Revenue

The Company earned investment advisory fees and general partner allocations
(inclusive of an incentive fee) from affiliated investment partnerships of
approximately $1,088,000 and $2,846,000, respectively, for the year ended
December 31, 1998.

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.

Commission Revenues

4. Commitment

<TABLE>
<S> <C>
1999......................................................... $ 1,193,000
2000......................................................... 1,244,000
2001......................................................... 1,244,000
2002......................................................... 1,264,000
2003......................................................... 1,324,000
Thereafter................................................... 5,945,000
-----------
Total minimum payments required............................ $12,214,000
===========
</TABLE>

5. Net Capital Requirement

LEVCO Securities is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1) (the "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, 1998, LEVCO Securities was in compliance with the Rule.

6. Pension Plans

The Company maintains a target benefit pension plan covering all employees
who have reached the age of 20.5 and have completed nine months of service to
the Company. Contributions are made by the Company and are based on current
compensation. The Company incurred an expense of $264,000 related to
contributions to the plan for the year ended December 31, 1998.

C-17
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company has also adopted a Section 401(k) plan. All employees with six
months or more of service to the Company are eligible to participate in the
plan. Eligible participants may contribute up to 15% of their earnings,
subject to statutory limitations. The Company may match employee
contributions, up to 100%, subject to statutory limitations and, accordingly,
incurred an expense of $322,000 related to contributions to the plan for the
year ended December 31, 1998.

7. Year 2000 (Unaudited)

The Company could be adversely affected if the computer systems used by the
Company and its service providers 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.

C-18
<PAGE>

APPENDIX D: Baker, Fentress & Company and Subsidiaries Unaudited Pro Forma
Consolidated Financial Statements

A. Reorganization

The accompanying unaudited pro forma statements present the Consolidated
Statements of Financial Condition of Baker, Fentress & Company ("BKF" or the
"Company"), which will become the holding company for Levin Management Co.,
Inc. and its subsidiaries, and Levin Management Co., Inc. and Subsidiaries
("LEVCO"), each on a pro forma basis. BKF will have no operations other than
as a holding company. The Consolidated Statement of Financial Condition
presents, on a pro forma basis, the Company adjusted for the liquidation of
substantially all of its private and public portfolios, the distribution of
cash, the distribution of CTO and the recasting of the June 1996 acquisition
of LEVCO using purchase accounting, taking into account intangible assets. The
pro forma equity section has been adjusted to reflect the proposed
contribution to equity of $45,000,000 of the $65,000,000 intercompany loan as
well as the 6:1 reverse stock split anticipated as part of the Plan.

The Levin Management Co., Inc. and Subsidiaries Pro Forma Consolidated
Statement of Income is presented since it is representative of the Company's
operations anticipated pursuant to the Plan. The Levin Management Co., Inc.
and Subsidiaries Pro Forma Consolidated Statement of Income presents the pro
forma results of operations adjusted for the maximum interest expense from the
proposed third party loan to be used for the repayment of a portion of the
Levin Management/Baker Fentress loan, adjusted for the decreased investment
management fee revenue resulting from the liquidation of the BKF public
portfolio and related receivables and adjusted for the amortization expense on
intangible assets based on the recasting of the June 1996 acquisition of LEVCO
using purchase accounting.

After completion of all distributions, expected to occur in January 2000,
the Company expects to deregister with the SEC as a registered investment
company and will become a regular operating company subject to corporate level
income taxes.

The unaudited pro forma financial data does not purport to 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 Unaudited Proforma Consolidated Statement
of Income does not reflect the non recurring charge relating to the change in
accounting to record the LEVCO transaction under purchase accounting. This
charge will be reflected in the Company's consolidated statement of income in
the first quarter following this change in accounting principle.

D-1
<PAGE>

BAKER, FENTRESS & COMPANY

UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION

(amounts in 000, except share data)

<TABLE>
<CAPTION>
Pro forma
December 31, Pro forma December 31,
1998 adjustments 1998
------------ ----------- ------------
Assets:
- -------
Portfolio securities:
- ---------------------
<S> <C> <C> <C> <C>
Unaffiliated issuers............... $450,718 (c) $ (450,718) $ --
Controlled affiliates other than
LEVCO............................. 10,539 (c) (10,539) --
Investment in CTO.................. 70,625 (c) (70,625) --
Investment in Levin Management..... 117,500 (b) (20,000) 76,036
(e) (21,464)
Non-controlled affiliates.......... 57,940 (c) (57,940) --
-------- -------
Total investments................ 707,322 76,036
-------- -------
Cash and cash equivalents.......... 67,331 (a) 1,912 5,800
(b) 15,000
(c) (78,443)
Receivables and other assets....... 2,591 (a) (2,591) --
-------- -------
Total assets..................... $777,244 $81,836
======== =======
<CAPTION>
Liabilities and stockholders'
equity:
- -----------------------------
<S> <C> <C> <C> <C>
Bank borrowing..................... $ 5,000 (b) $ (5,000) $ --
Accounts payable and accrued
liabilities....................... 922 (a) 4,873 5,795
-------- -------
Total liabilities................ 5,922 5,795
-------- -------
--------
Net assets..................... $771,322
--------
Common stock,$1 par value,
authorized--60,000,000 shares;
issued and outstanding-39,029,101
shares; 6,504,850 shares pro
forma............................. 39,029 (d) (32,524) 6,505
Capital surplus-additional paid in
capital........................... 463,425 (c) (423,268) 69,536
(d) 32,524
(e) (3,145)
Undistributed net realized gains... 9,766 (c) (9,766) --
Other retained earnings............ 48,057 (a) (5,553) --
(c) (21,040)
(e) (21,464)
Unrealized appreciation of
investments....................... 211,045 (c) (214,190) --
(e) 3,145
-------- -------
Total stockholders' equity....... 771,322 76,041
======== =======
======== =======
Total liabilities and stockholders'
equity............................ $777,244 $81,836
======== =======
</TABLE>
- --------
(a) To reflect the collection of receivables, reversal of advisory fee payable
to LEVCO ($127) and accrual of costs in connection with the proposed plan
($5,000).
(b) To record the repayment of bank borrowing ($5,000), receipt of proposed
partial loan repayment from LEVCO ($20,000) and contribution of the
remainder of the loan to LEVCO's equity ($45,000). BKF has not yet
determined whether LEVCO will repay such amount.
(c) To record the distribution of the investment in CTO, the sale of the
portfolio securities and distribution of substantially all cash and cash
equivalents of the Company.
(d) To record the proposed reverse stock split (6,504,850 shares will be
issued and outstanding after the reverse split).
(e) To record the retroactive effect of accounting for the LEVCO transaction
under purchase accounting.

D-2
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

(amounts in 000, except share data)

<TABLE>
<CAPTION>
Pro forma
December 31, Pro forma December 31,
1998 adjustments 1998
------------ ----------- ------------
Assets:
- -------
Current assets:
- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 8,849 (b) $ 20,000 $ 8,849
(c) (20,000)
Investment advisory fees
receivable......................... 9,296 (a) (127) 9,169
Prepaid expenses and other current
assets............................. 598 598
--------- --------
Total current assets.............. 18,743 18,616
--------- --------
Investments in affiliated
partnerships....................... 4,883 4,883
Fixed assets--net................... 2,987 2,987
Other assets........................ 1,454 1,454
<CAPTION>
Intangible assets:
- ------------------
<S> <C> <C> <C> <C>
Goodwill............................ (d) 23,721 23,721
Employment contracts................ (d) 23,721 23,721
Investment advisory agreements...... (d) 71,164 71,164
Accumulated amortization............ (d) (38,498) (38,498)
--------- --------
Total assets...................... $ 28,067 $108,048
========= ========
<CAPTION>
Liabilities and stockholder's equity
(deficit):
- ------------------------------------
Current liabilities:
- --------------------
<S> <C> <C> <C> <C>
Accrued expenses.................... $ 1,376 $ 1,376
Accrued bonuses..................... 10,151 10,151
Income taxes payable................ 251 251
Loan Payable-Baker, Fentress &
Company............................ 65,000 (e) $(45,000) --
(c) (20,000)
--------- --------
Total current liabilities......... 76,778 11,778
--------- --------
Accrued rent........................ 234 234
Loan payable (b) 20,000 20,000
--------- --------
Total liabilities................. 77,012 32,012
--------- --------
<CAPTION>
Stockholder's equity (deficit):
- -------------------------------
<S> <C> <C> <C> <C>
Common stock, $.01 par value: 1,000
shares authorized issued and
outstanding........................
Additional paid in capital.......... 55,517 -- 55,517
Retained earnings (Accumulated
deficit)........................... (104,462) (a) (127) 20,519
(e) 45,000
(d) 80,108
--------- --------
Total stockholder's equity
(deficit)........................ (48,945) 76,036
--------- --------
Total liabilities and stockholder's
equity............................. $ 28,067 $108,048
========= ========
</TABLE>
- --------
(a) To reverse advisory fee receivable from Baker, Fentress & Company ("BKF").
(b) To record maximum amount of proposed loan from third party lender. BKF has
not yet determined whether LEVCO will borrow any such amount from a third
party lender.
(c) To record the maximum proposed repayment of a portion of the loan payable
to BKF.
(d) To record the initial acquisition by BKF under purchase accounting.
(e) To record the minimum contribution of the remainder of the loan payable to
equity.

D-3
<PAGE>

BAKER, FENTRESS & COMPANY AND SUBSIDIARY

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

(amounts in 000, except share data)

<TABLE>
<CAPTION>
Pro forma
Pro forma Levin Management Pro forma
Baker, Fentress & Co., Inc Consolidated
Company December 31, Intercompany December 31,
December 31, 1998 1998 elimination (a) 1998
----------------- ---------------- -------------- ------------
Assets:
- -------
Current assets:
- ---------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 5,800 $ 8,849 $ 14,649
Investment advisory fees
receivable............. 9,169 9,169
Prepaid expenses and
other current assets... 598 598
------- -------- --------
Total current assets.. 5,800 18,616 24,416
------- -------- --------
<CAPTION>
Noncurrent assets:
- ------------------
<S> <C> <C> <C> <C>
Investments in
affiliated
partnerships........... 4,883 4,883
Fixed assets-net........ 2,987 2,987
Other assets............ 1,454 1,454
<CAPTION>
Intangible assets:
- ------------------
<S> <C> <C> <C> <C>
Goodwill................ 23,721 23,721
Employment contracts.... 23,721 23,721
Investment advisory
agreements............. 71,164 71,164
Accumulated
amortization........... (38,498) (38,498)
Investment in Levin
Management............. 76,036 $(76,036) --
------- -------- --------
Total assets.......... $81,836 $108,048 $113,848
======= ======== ========
<CAPTION>
Liabilities and
stockholders' equity
- --------------------
Current liabilities:
- --------------------
<S> <C> <C> <C> <C>
Accrued expenses........ $ 5,795 $ 1,376 $ 7,171
Accrued bonuses......... 10,151 10,151
Income taxes payable.... 251 251
------- -------- --------
Total current
liabilities.......... 5,795 11,778 17,573
------- -------- --------
Accrued rent............ 234 234
Loan payable............ 20,000 20,000
------- -------- --------
Total liabilities..... 5,795 32,012 37,807
------- -------- --------
<CAPTION>
Stockholders' equity:
- ---------------------
<S> <C> <C> <C> <C>
Common stock, $1 par
value, authorized--
60,000,000 shares;
issued and
outstanding--6,504,850
shares................. 6,505 6,505
Additional paid in
capital................ 69,536 55,517 $(76,036) 49,017
Retained earnings....... 20,519 20,519
------- -------- --------
Total stockholders'
equity............... 76,041 76,036 76,041
------- -------- --------
Total liabilities and
stockholders' equity... $81,836 $108,048 $113,848
======= ======== ========
</TABLE>
- --------
(a) To eliminate the investment in LEVCO.

D-4
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME

(amounts in 000, except share data)

<TABLE>
<CAPTION>
Pro forma
Year ended Year ended
December 31, Pro forma December 31,
1998 adjustments 1998
------------ ----------- ------------
Revenues:
- ---------
<S> <C> <C> <C> <C>
Investment advisory fees $35,453 (a) $(1,525) $ 33,928
Incentive fees................... 4,531 -- 4,531
Commission income--net........... 1,395 -- 1,395
------- ----------
Total revenues................. 41,379 39,854
------- ----------
<CAPTION>
Expenses:
- ---------
<S> <C> <C> <C> <C>
Employee compensation and
benefits........................ 21,561 (a) (750) 20,811
Occupancy & equipment rental..... 1,614 -- 1,614
Other operating expenses......... 4,499 (b) 1,408 5,907
------- ----------
Total expenses................. 27,674 28,332
------- ----------
Income before interest, taxes and
amortization.................... 13,705 (2,183) 11,522
Interest income.................. 351 -- 351
Interest expense--BKF............ 6,391 (c) (6,391) --
Interest expense-bank loan....... -- (d) 1,314 1,314
Amortization of intangibles...... -- (e) 12,078 12,078
------- ----------
Income (loss) before taxes....... 7,665 (1,519)
------- ----------
Provision for income taxes....... 3,322 (f) 1,244 4,566
------- ----------
Net income (loss).............. $ 4,343 $ (6,085)
======= ==========
Net (loss) per share:
Basic and diluted.............. $ (0.94)(g)
==========
Weighted average shares
outstanding--basic and diluted.. 6,504,850
==========
</TABLE>
- --------
(a) To adjust the advisory fee for the revenue earned by LEVCO for the
management of the Baker, Fentress & Company ("BKF") public portfolio and
the corresponding reduction in employee bonuses.
(b) To record additional operating expenses to be borne by LEVCO which had
previously been borne by BKF.
(c) To reverse the interest paid to BKF on the loan, assuming that a portion
will be repaid ($20,000) and the remainder will be contributed to LEVCO's
capital ($45,000).
(d) To record the estimated interest expense on the proposed $20,000 bank loan
from a third party lender; BKF has not yet determined whether LEVCO will
borrow such amount.
(e) To record the amortization of the intangible assets which were recorded
under the original acquisition of LEVCO by BKF.
(f) To record additional taxes for the pro forma adjustments.
(g) Basis of calculation assumed that reverse stock split has occurred and the
pro forma number of shares were outstanding for the entire period.

D-5
<PAGE>

APPENDIX E: Examples of Financial and Tax Results

HYPOTHETICAL SHAREHOLDER TAX TREATMENT UNDER THE PLAN*

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Shareholder basis in BKF
stock.................. $ 0.00 $ 2.00 $ 4.00 $ 6.00 $ 8.00 $10.00 $12.00 $14.00 $16.00 $18.00 $20.00 $22.0 0
Total cash and CTO
Shares distributed..... 18.78 18.78 18.78 18.78 18.78 18.78 18.78 18.78 18.78 18.78 18.78 18.78
Total gain/E&P
distributed............ 9.21 9.21 9.21 9.21 9.21 9.21 9.21 9.21 9.21 9.21 9.21 9.21
Excess of distribution
over gain/E&P.......... 9.57 9.57 9.57 9.57 9.57 9.57 9.57 9.57 9.57 9.57 9.57 9.57
Excess of distribution
over basis............. 9.57 7.57 5.57 3.57 1.57 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total tax from
distributions.......... 5.42 4.92 4.42 3.92 3.42 3.03 3.03 3.03 3.03 3.03 3.03 3.03
Basis in BKF stock after
distributions.......... 0.00 0.00 0.00 0.00 0.00 0.43 2.43 4.43 6.43 8.43 10.43 12.43
Gain (loss) upon later
sale................... 2.43 2.43 2.43 2.43 2.43 2.00 (0.00) (2.00) (4.00) (6.00) (8.00) (10.00)
</TABLE>
- ----
* See "Federal Income Tax Consequences" for assumptions on which these
calculations were based and other information.

E-1
<PAGE>

APPENDIX F: Proposed Amendment to the Certificate of Incorporation

CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
BAKER, FENTRESS & COMPANY

Baker, Fentress & Company, a corporation organized and existing under the
laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY:

FIRST: That by unanimous vote of the Board of Directors of the Company,
resolutions were duly adopted setting forth a proposed amendment to the
Restated Certificate of Incorporation of the Company, declaring such
amendment to be advisable and calling a special meeting of the stockholders
of the Company for consideration thereof. The resolutions setting forth the
proposed amendment are as follows:

RESOLVED, that the Board of Directors deems it advisable and in the
best interest of the Company to reduce the number of outstanding shares
of common stock, par value $1.00 per share, of the Company by effecting
a reverse stock split of the Company's outstanding shares of common
stock by reclassifying each six (6) shares of common stock held into
one (1) share of common stock, par value $1.00 per share; and

FURTHER RESOLVED, that the Board of Directors of the Company hereby
declares it advisable that the Restated Certificate of Incorporation of
the Company be amended by the deletion of article fourth and the
insertion of the following in lieu thereof:

"FOURTH: The total number of shares of all stock which the
corporation shall have the authority to issue is 60,000,000 shares of
common stock, $1 par value per share.

Immediately upon effectiveness of this amendment to the Restated
Certificate of Incorporation of the corporation pursuant to the General
Corporation Law of the State of Delaware (the "Effective Date"), each
six shares issued and outstanding immediately prior thereto of the
corporation's Common Stock, par value $1.00 per share ("Old Common
Stock"), shall automatically, without further action on the part of the
corporation or any holder of such Old Common Stock, be reclassified
into and become one issued and outstanding share of the corporation's
Common Stock, par value $1.00 per share ("New Common Stock").

The reclassification of the Old Common Stock into New Common Stock
will be deemed to occur as of the Effective Date, regardless of when
the certificates previously representing such shares of Old Common
Stock are physically surrendered to the corporation in exchange for
certificates representing shares of New Common Stock. From and after
the Effective Date, certificates previously representing shares of Old
Common Stock are hereby canceled and shall, until such certificates are
surrendered to the corporation in exchange for certificates
representing shares of New Common Stock, represent the number and class
of shares of New Common Stock into which such shares of Old Common
Stock shall have been reclassified pursuant to this amendment;
provided, however, that no dividends or distributions shall be received
by a person holding shares of New Common Stock until the certificates
previously representing shares of Old Common Stock have been so
surrendered for exchange.

In any case in which the reclassification of shares of Old Common
Stock into shares of New Common Stock would otherwise result in any
stockholder holding a fractional share, the corporation shall, in lieu
of issuing any such fractional share, pay the stockholder for such
fractional share on the basis of the average closing market price on
the New York Stock Exchange of the New Common Stock for the ten (10)
trading days immediately following the Effective Date."

F-1
<PAGE>

SECOND: That thereafter, pursuant to resolution of its Board of
Directors, a special meeting of the stockholders of the Company was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary
number of shares as required by statute were voted in favor of the
amendment.

THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.

FOURTH: That said amendment shall be effective on the date this
Certificate of Amendment is filed and accepted by the Secretary of State of
the State of Delaware.

IN WITNESS WHEREOF, the Company has caused this certificate to be signed by
James P. Gorter, its Chairman, this day of January 2000.

BAKER, FENTRESS & COMPANY

<TABLE>
<S> <C>
By:
_______________________________________
James P. Gorter, Chairman
</TABLE>

F-2
<PAGE>

EXHIBIT C
---------

The Company's audited Financial Statements at and for the year ended
December 31, 1998, and unaudited financial statements at and for the period
ended June 30, 1999.

<PAGE>

Statement of Assets and Liabilities

<TABLE>
<CAPTION>
December 31, 1998
------------------
<S> <C>
Assets
Investments, at Value:
Portfolio securities:
Unaffiliated issuers (cost $357,239,468).................. $450,717,807
Controlled affiliates (cost $137,176,517)................. 198,663,895
Non-controlled affiliates (cost $1,860,996)............... 57,940,221
Money market securities (cost $24,980,556).................... 24,980,556
------------
Total Investments (cost $521,257,537)................. 732,302,479
Cash and Cash Equivalents..................................... 42,350,502
Receivable for Securities Sold................................ 1,100,292
Dividends and Interest Receivable............................. 811,370
Other Assets.................................................. 680,022
------------
Total Assets.......................................... 777,244,665
------------
Liabilities
Bank Borrowing................................................ 5,000,000
Payable to Affiliate for Investment Management Fee............ 127,000
Accounts Payable and Accrued Liabilities...................... 795,441
------------
Total Liabilities..................................... 5,922,441
------------
Net Assets................................................................ $771,322,224
============
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.. 9,765,810
Other Retained Earnings (a)................................... 48,057,128
Net Unrealized Appreciation of Investments.................... 211,044,942
------------
Net Assets................................................................ $771,322,224
============
Net Asset Value Per Share................................................. $ 19.76
============
</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

14 Baker, Fentress & Company Annual Report 1998
<PAGE>

Statement of Operations

<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Investment Income:
Dividends from:
Unaffiliated issuers................................... $ 8,557,407
Affiliate.............................................. 3,500,000
------------
12,057,407
------------
Interest from:
Unaffiliated issuers................................... 3,546,104
Affiliates, net of write-off of interest receivable.... 5,223,808
------------
8,769,912
------------
Total Income......................................... 20,827,319
------------
Expenses:
Investment management fee................................ 1,508,711
Administration and operations............................ 1,447,660
Interest on bank borrowing............................... 339,521
Investment research...................................... 875,113
Professional fees........................................ 369,758
Directors' fees and expenses............................. 391,499
Rent..................................................... 341,514
Reports to shareholders.................................. 322,771
Custodian and transfer agent fees........................ 149,206
Taxes other than income.................................. 83,173
Other.................................................... 408,522
------------
Total Expenses......................................... 6,237,448
------------
Net Investment Income.............................. 14,589,871
------------
Net Realized and Unrealized Gain:
Net realized gain on sales of investments................ 80,093,075
Change in net unrealized appreciation.................... (20,884,833)
------------
Net Realized and Unrealized Gain.................... 59,208,242
------------
Net Increase in Net Assets Resulting from Operations....... $ 73,798,113
============
</TABLE>

See accompanying Notes to Financial Statements

Baker, Fentress & Company Annual Report 1998 15

<PAGE>

Statements of Cash Flows

<TABLE>
<S> <C> <C>
Year Ended December 31,
1998 1997
------------- -------------
Cash Flows from Operating Activities:

Net increase in net assets resulting from operations........ $ 73,798,113 $ 102,538,211
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......... (59,208,242) (86,401,673)
(Increase) decrease in receivable for securities sold..... 911,430 (1,614,159)
Decrease in deposits for securities sold short............ -- 13,697,890
(Increase) decrease in dividends and interest receivable.. 2,383,008 (1,344,935)
(Increase) decrease in other assets....................... (69,962) 31,154
Increase (decrease) in accounts payable and
accrued liabilities..................................... (1,260,179) 1,456,807
Increase (decrease) in payable for investment
management fee.......................................... (8,000) 15,000
Increase (decrease) in payable for securities purchased... (6,502,179) 6,502,179
Net amortization of discounts............................. (504,621) (216,111)
------------- -------------
Net cash provided by operating activities............... 9,539,368 34,664,363
------------- -------------
Cash Flows from Investing Activities:

Purchases of portfolio securities and closing
of short positions......................................... (421,721,571) (268,551,573)
Proceeds from sales of portfolio securities
and securities sold short.................................. 502,011,542 331,001,639
Proceeds from options written............................... -- 366,138
Cost of options repurchased................................. -- (262,721)
Net realized gain on financial futures transactions......... 324,058 --
(Purchases) and sales/maturities of money
market securities, net..................................... 4,767,157 (9,801,287)
------------- -------------
Net cash provided by investing activities................ 85,381,186 52,752,196
------------- -------------
Cash Flows from Financing Activities:

Repayment of bank borrowing................................. -- (13,000,000)
Dividends and capital gain distributions.................... (86,193,112) (59,967,171)
------------- -------------
Net cash used in financing activities................... (86,193,112) (72,967,171)
------------- -------------
Net Increase in Cash and Cash Equivalents...................... 8,727,442 14,449,388

Cash and Cash Equivalents at the
Beginning of the Year......................................... 33,623,060 19,173,672
------------- -------------
Cash and Cash Equivalents at the End of the Year............... $ 42,350,502 $ 33,623,060
============= =============
Supplemental Disclosure of
Noncash Investing and Financing Activities:

Capital gain distribution reinvestments..................... $ 52,060,630 $ 34,329,668
============= =============
</TABLE>

See accompanying Notes to Financial Statements

16 Baker, Fentress & Company Annual Report 1998
<PAGE>

Statements of Changes in Net Assets

<S> <C> <C>
Year Ended December 31,
1998 1997
------------- ------------
Operations:

Net investment income.......................... $ 14,589,871 $ 16,136,538
Net realized gain.............................. 80,093,075 100,124,026
Change in net unrealized appreciation.......... (20,884,833) (13,722,353)
------------- ------------
Net increase in net assets resulting
from operations.............................. 73,798,113 102,538,211
------------- ------------
Distributions to Shareholders From:
Net investment income.......................... (14,347,947) (15,795,572)
Net realized gain.............................. (123,905,795) (78,501,267)
------------- ------------
Total distributions to shareholders........... (138,253,742) (94,296,839)
------------- ------------
Net increase (decrease) in net assets from
operations after distributions............. (64,455,629) 8,241,372
------------- ------------
Capital Share Transactions-Net Increase.......... 52,060,630 34,329,668
------------- ------------
Total Increase (Decrease) in Net Assets......... (12,394,999) 42,571,040
Net Assets at the Beginning of the Year......... 783,717,223 741,146,183
------------- ------------
Net Assets at the End of the Year............... $ 771,322,224 $783,717,223
============= ============
</TABLE>

See accompanying Notes to Financial Statements

Baker, Fentress & Company Annual Report 1998 17
<PAGE>

Statement of Investments

December 31, 1998

<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS-58.44%
COMMON STOCK -- 52.51%
Basic Materials -- 2.22%
E.I. du Pont de Nemours and Company........ 90,000 $ 4,775,670
Getchell Gold Corporation (b).............. 26,900 733,025
Monsanto Company........................... 244,300 11,604,250
-----------
17,112,945
-----------
Capital Goods -- 6.14%
The Boeing Company......................... 96,436 3,146,225
Cable Design Technologies Corporation (b).. 34,240 633,440
General Electric Company................... 80,000 8,160,000
Lockheed Martin Corporation................ 73,500 6,229,125
Owens-Illinois, Inc. (b)................... 280,000 8,575,000
Sundstrand Corporation..................... 179,695 9,321,678
United Technologies Corporation............ 103,700 11,277,375
-----------
47,342,843
-----------
Communication Services -- 1.85%
Bell Atlantic Corporation.................. 191,000 10,314,000
Loral Space & Communications Ltd. (b)...... 225,775 4,021,730
-----------
14,335,730
-----------
Consumer Cyclical -- 6.90%
The Black & Decker Corporation............. 172,900 9,693,293
J.C. Penney Company, Inc................... 97,700 4,579,687
TRW Inc.................................... 223,500 12,529,969
Tribune Company............................ 400,100 26,406,600
-----------
53,209,549
-----------
Consumer Staples -- 5.76%
Chancellor Media Corporation (b)........... 221,800 10,618,675
Fox Entertainment Group, Inc. (b).......... 87,800 2,205,536
MediaOne Group, Inc. (b)................... 353,000 16,591,000
Nabisco Holdings Corp...................... 146,500 6,079,750
PepsiCo, Inc............................... 35,100 1,434,713
Ralston Purina Company..................... 231,600 7,440,150
-----------
44,369,824
-----------
Energy -- 3.16%
Amerada Hess Corporation................... 66,100 3,288,475
Conoco Inc. (b)............................ 200,200 4,154,150
Sempra Energy.............................. 551,343 13,990,329
Unocal Corporation......................... 99,900 2,915,881
-----------
24,348,835
-----------
</TABLE>

See accompanying Notes to Statement of Investments

18 Baker, Fentress & Company Annual Report 1998
<PAGE>

Statement of Investments

December 31, 1998
<TABLE>
<S> <C> <C>
Shares Value
-------- -----------
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Financials -- 10.11%
Ace Ltd.................................................. 166,500 $ 5,733,927
Aetna Inc................................................ 68,600 5,393,675
BankAmerica Corporation.................................. 60,987 3,666,843
The Bank of New York Company, Inc........................ 299,600 12,058,900
W.R. Berkley Corporation................................. 22,000 749,386
The CIT Group, Class A................................... 10,000 318,130
CRIIMI MAE Inc........................................... 278,700 975,450
EXEL Limited, Class A.................................... 124,916 9,368,696
Fairfax Financial Holdings Ltd. (Stock Purchase Rights).. 78,000 30,716
First Investors Financial Services Group, Inc. (b)....... 292,600 1,444,859
Heller Financial, Inc.................................... 30,000 873,750
Indymac Mortgage......................................... 75,500 797,507
Mellon Bank Corporation.................................. 5,300 364,375
NAC Re Corp.............................................. 24,000 1,126,512
Northern Trust Corporation............................... 41,800 3,649,683
Partner Re Ltd........................................... 117,800 5,389,350
Pxre Corporation......................................... 29,000 726,827
Risk Capital Holdings, Inc. (b).......................... 24,200 526,350
Scottish Annuity & Life Holdings, Ltd. (b)............... 78,450 1,078,688
Security Capital U.S. Realty (b)......................... 983,528 9,736,923
Superior National Insurance Group, Inc. (b).............. 36,800 738,318
TIG Holdings, Inc........................................ 95,050 1,479,263
Terra Nova Holdings Ltd., Class A........................ 24,800 626,200
Tokio Marine and Fire Insurance Company, Limited (ADR)... 125,000 7,593,750
Travelers Property Casualty Corp......................... 19,000 589,000
UICI (b)................................................. 77,600 1,901,200
Vail Banks, Inc. (b)..................................... 26,000 316,888
Vesta Insurance Group, Inc............................... 121,000 726,000
-----------
77,981,166
-----------
Health Care -- 3.07%
Eli Lilly and Company.................................... 101,500 9,020,812
Genentech, Inc. (b)...................................... 97,500 7,769,580
Paracelsus Healthcare Coporation (b)(c)(e)............... 535,443 669,304
Pfizer Inc............................................... 50,000 6,250,000
-----------
23,709,696
-----------
</TABLE>

See accompanying Notes to Statement of Investments

Baker, Fentress & Company Annual Report 1998 19
<PAGE>

Statement of Investments

December 31, 1998
<TABLE>
<CAPTION>
SHARES, CONTRACTS, OR
PRINCIPAL AMOUNT VALUE
--------------------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED)
Technology -- 6.74%
First Data Corporation............................................ 227,700 $ 7,257,938
International Business Machines Corporation....................... 81,900 15,100,312
Koninklijke Philips Electronics N.V............................... 152,000 10,288,576
Texas Instruments Incorporated.................................... 226,200 19,368,375
------------
52,015,201
------------
Utilities -- 6.56%
Duke Energy Corporation........................................... 152,440 9,765,764
KeySpan Energy Corporation........................................ 563,620 17,472,220
Potomac Electric Power Company.................................... 455,100 11,975,046
The Williams Companies, Inc....................................... 363,900 11,349,313
------------
50,562,343
------------
Total common stock (Cost $313,257,238).......................... 404,988,132
------------
Preferred Stock -- 3.22%
Loral Space & Communications Ltd.................................. 63,100 3,336,097
The News Corporation Limited...................................... 308,000 7,603,904
Owens-Illinois, Inc., 4.75%....................................... 148,500 6,311,250
Sealed Air Corporation, $2.00 Series A............................ 145,750 7,560,781
------------
Total preferred stock (Cost $21,971,364)........................ 24,812,032
------------
Convertible Bonds -- 1.83%
Hewlett-Packard Company, Zero Coupon Bond
due 10/14/2017 (f)............................................... 22,785,000 12,502,130
Hewlett-Packard Company, Zero Coupon Bond
due 10/14/2017................................................... 3,000,000 1,646,100
------------
Total convertible bonds (Cost $14,251,713)...................... 14,148,230
------------
Purchased Put Options -- 0.16%
Expiration Date/
Strike Price
---------------
S&P 500 Index..................................... Feb 99/1125 800 1,200,000
------------
Total purchased put options (Cost $2,557,400)................... 1,200,000
------------
Limited Partnerships -- 0.72%
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d)......... 352,138
Penta Japan Domestic Partners, L.P................................ 5,189,251
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d).. 28,024
------------
Total limited partnerships (Cost $5,201,753)................... 5,569,413
------------
Total investments in unaffiliated issuers (Cost $357,239,468)..... 450,717,807
------------
</TABLE>

See accompanying Notes to Statement of Investments

20 Baker, Fentress & Company Annual Report 1998
<PAGE>

Statement of Investments

December 31, 1998

<TABLE>
<CAPTION>
Shares or
Principal Amount Value
---------------- ------------
<S> <C> <C>
INVESTMENTS IN CONTROLLED AFFILIATES--25.75%
WHOLLY-OWNED SUBSIDIARY--15.23%
Levin Management Co., Inc.--investment management
Common Stock (b)(c)(d)............................................................... 1,000 $ 52,500,000
9.75% Notes due 06/28/1999 (c)(d).................................................... $65,000,000 65,000,000
------------
Total wholly-owned subsidiary (Cost $120,645,890)................................... 117,500,000
------------
Publicly Traded--9.15%
Consolidated-Tomoka Land Co., Common Stock
(majority-owned)--development of Florida real estate;
production and sale of citrus fruit (Cost $5,030,627)................................ 5,000,000 70,625,000
------------
Other--1.37%
DuroLite International, Inc.--manufacturer and distributor of
specialized lighting products
Convertible Preferred Stock (b)(c)(d)................................................ 2,500 1,667,250
12% Subordinated Note due 11/03/2004 (c)(d).......................................... $ 8,000,000 7,872,750
DuroLite Europe Holdings, Inc.--subsidiary of DuroLite
International, Inc.
20% 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
------------
Total other (Cost $11,500,000)...................................................... 10,538,895
------------
Total investments in controlled affiliates (Cost $137,176,517)........................ 198,663,895
------------
INVESTMENTS IN NON-CONTROLLED AFFILIATES--7.51%
Publicly Traded
Citadel Communications Corporation--radio broadcasting
Common Stock (b)(c).................................................................. 2,239,236 57,940,221
------------
Total investments in non-controlled affiliates (Cost $1,860,996)...................... 57,940,221

MONEY MARKET SECURITIES--3.24% ------------
U.S. Treasury bills--4.074% due 01/07/1999............................................ $25,000,000 24,980,556
------------
Total investments in money market securities (Cost $24,980,556)....................... 24,980,556
------------
Total Investments--94.94% (Cost $521,257,537)......................................... 732,302,479

Cash and Other Assets, Less Liabilities--5.06%........................................ 39,019,745
------------
NET ASSETS--100.00%................................................................... $771,322,224
============
</TABLE>

Baker, Fentress & Company Annual Report 1998 21

<PAGE>

Notes to Statement of Investments

----------------------
(a) Based on the cost of investments of $472,598,733, for federal income
tax purposes at December 31, 1998, net unrealized appreciation was
$259,703,745, which consisted of gross unrealized appreciation of
$271,716,231 and gross unrealized depreciation of $12,012,486.

(b) Non-income producing security.

(c) The following securities are subject to legal or contractual
restrictions on sale. They are valued at cost on the dates of
acquisition and at a fair value determined in good faith by the board
of directors of the Company as of December 31, 1998, 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 $187,028,582, or
24.2% of net assets, at December 31, 1998, which includes $57,940,221
of securities that may be sold under Rule 144.

<TABLE>
<CAPTION>
No. of Shares or
Security Description Date(s) of Acquisition Principal Amount Cost
- ------------------------------------------------------- ----------------------------- ---------------- -----------
<S> <C> <C> <C>
Citadel Communications Corporation
Common Stock......................................... May 1993 2,239,236 $ 1,860,996

DuroLite International, Inc.
Convertible Preferred Stock.......................... November 1995 2,500 2,627,250
12% Subordinated Note due 11/03/2004................. November 1995 $ 8,000,000 7,872,750

DuroLite Europe Holdings, Inc.
20% Promissory Note due 08/20/1999................... August 1998 $ 498,895 498,895
Stock Purchase Warrant Expiring 08/20/2008........... August 1998 1 1,105

E-Sales, Inc.
Convertible Preferred Stock.......................... June 1998 500,000 500,000

Golder, Thoma, Cressey Fund II Limited Partnership..... June 1984-December 1988 140,551

Levin Management Co., Inc.
Common Stock......................................... June 1996 1,000 55,645,890
10.25% Notes due 06/28/1999.......................... June 1996 $65,000,000 65,000,000

Paracelsus Healthcare Corporation
Common Stock......................................... December 1993-May 1996 535,443 4,068,985

Phillips-Smith Specialty Retail Group Limited
Partnership.......................................... March 1987-September 1987 61,201

</TABLE>

(d) There were no unrestricted securities of the same issue outstanding on
December 31, 1998 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 resale of eligible securities issued in
private placements and other transactions to "Qualified Institutional
Investors."

22 Baker, Fentress & Company Annual Report 1998

<PAGE>

Notes to Statement of Investments

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
primarily for capital appreciation and for income consistent with capital
preservation.

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 amortized cost, which approximates 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 distribution 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

Cash equivalents 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 Annual Report 1998 23

<PAGE>

Notes to Statement of Investments (continued)

NOTE 2. CAPITAL STOCK
Transactions in capital stock for 1998 and 1997
were as follows:

<TABLE>
<CAPTION>
Shares Amount
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions................................ 3,046,020 1,940,900 $ 3,046,020 $ 1,940,900
Increase in
capital surplus.............................. 49,014,610 32,388,768
----------- -----------
Net increase................................. $52,060,630 $34,329,668
----------- -----------
</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 during 1998 or 1997.

NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the year ended December 31, 1998
to officers of the Company amounted to $880,750. Fees of $337,000, excluding
expenses, were incurred during 1998 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 1998,
excluding options written and money market investments, aggregated $391,702,516
and $471,280,917, 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 June 24,
1999. Borrowings outstanding bear interest 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 December 31, 1998 was $5.0 million. The interest
rate is reset periodically under the revolving credit facility and the fair
value of the debt at December 31, 1998 approximates its carrying value. The
maximum borrowing and 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 December 31, 1998 and the weighted average
interest rate during 1998 were 6.1% and 6.2%, respectively.

24 Baker, Fentress & Company Annual Report 1998

<PAGE>

NOTE 8. AGREEMENTS AND TRANSACTIONS
WITH AFFILIATES

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 under management which
was $504,511,948 at December 31, 1998. For the year ended December 31, 1998, the
Company incurred management fees of $1,508,711.

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 year ended
December 31, 1998 follows:
<TABLE>
<CAPTION>
Purchases Realized
(Sales) Gain (Loss) Income
----------- ------------ -----------
<S> <C> <C> <C>
Consolidated-Tomoka
Land Co...................... $ -- $ -- $ 3,500,000
DuroLite International
Note......................... -- -- 960,000
DuroLite Europe Holdings
Note......................... 498,895 -- 36,745
Warrant...................... 1,105 -- --
Levin Management Co., Inc.
Common stock................. -- -- --
Notes due 6/28/1999.......... -- -- 6,391,666
TBN Holdings
Note......................... (8,000,000) (7,999,999) (2,164,603)
Convertible Preferred........ (3,239,000) (3,238,999) --
Warrants..................... (11,000) (10,999) --
E-Sales, Inc.
Convertible Preferred........ 500,000 -- --
----------- ------------ -----------
$10,250,000 $(11,249,997) $ 8,723,808
----------- ------------ -----------
</TABLE>

NOTE 9. YEAR 2000 (Unaudited)

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 Annual Report 1998 25
<PAGE>

Financial Highlights

The following table shows per share operating performance data, total investment
return, ratios, and supplemental data for each year in the five-year period
ended December 31, 1998.

<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year........................... $ 21.78 $ 21.77 $ 21.75 $ 17.47 $ 20.42
-------- -------- -------- -------- --------
Net investment income................................... 0.53 0.72 0.37 0.35 0.35
Net realized gain (loss) and net change in
unrealized appreciation.............................. 1.50 2.26 3.31 5.67 (1.36)
-------- -------- -------- -------- --------
Total investment operations.................................. 2.03 2.98 3.68 6.02 (1.01)
Less distributions:
Dividends from net investment income.................... (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.......................................... (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 year................................. $ 19.76 $ 21.78 $ 21.77 $ 21.75 $ 17.47
======== ======== ======== ======== ========
Per share market price, end of year.......................... $ 15.313 $ 18.25 $ 16.875 $ 16.75 $ 13.75

Total Investment Return-
Shareholder Return........................................ 3.45% 25.17% 15.48% 33.20% (7.51)%

Ratios to Average Net Assets
Expenses................................................ .80% .87% .90%(b) .78% .75%
Expenses before interest expense........................ .76% .74% .77% .78% .75%
Net investment income................................... 1.87% 2.07% 1.53% 1.79% 1.38%

Supplemental Data
Net assets, end of year (000's omitted)................. 771,322 783,717 741,146 599,182 461,931
Portfolio turnover...................................... 53.72% 33.72% 59.78% 35.89% 41.63%
Shares outstanding, end of year
(000's omitted)...................................... 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.

Special Meeting of Shareholders

1. A proposal to approve the Baker, Fentress & Company 1998 Incentive
Compensation Plan was approved with 8,239,905 votes in favor, 1,171,285
votes against, and 19,200 votes abstaining.

2. A proposal to amend the Company's fundamental investment restriction with
respect to making loans was approved with 8,139,712 votes in favor,
1,212,035 votes against, and 78,644 votes abstaining.

3. A proposal to approve a revised Portfolio Management Agreement between
the Company and John A. Levin & Co., Inc. was approved with 8,210,206
votes in favor, 1,115,534 votes against, and 104,651 votes abstaining.

26 Baker, Fentress & Company Annual Report 1998
<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

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

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

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

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.

(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

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

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:

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>

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:

<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>

Exhibit D

RESOLUTIONS OF THE BOARD OF DIRECTORS
OF BAKER, FENTRESS & COMPANY

RESOLVED, that the officers of Baker, Fentress & Company (the "Company")
are authorized and directed to prepare, execute and file, or to cause to be
prepared, executed and filed, with the Securities and Exchange Commission an
application or applications pursuant to Section 8(f) of the Investment Company
Act of 1940, or such other sections thereof or rules thereunder as may be
necessary or appropriate, for an order or orders, or amended order or orders,
and any amendments to such application or applications as may be necessary or
appropriate, in each case to declare that the Company has ceased to be an
investment company.

RESOLVED FURTHER, that any officer of the Company is authorized to take
such further action, and to make such representations on behalf of the Company,
in any matters relating to such application or any amendment thereto as they or
any of them may approve as necessary or desirable.
<PAGE>

Exhibit E

VERIFICATION

The undersigned, being duly sworn, deposes and says that he has duly
executed the foregoing application for and on behalf of BAKER, FENTRESS &
COMPANY; that he is the Chairman of the Board of such Company and that all
actions by the directors and other bodies necessary to authorize deponent to
execute and file such instrument have been taken. Deponent further states that
he is familiar with such instrument and the contents thereof, and that the facts
therein set forth are true to the best of his knowledge, information and belief.

/s/ James P. Gorter
James P. Gorter
Chairman of the Board

Subscribed and sworn to me, the
undersigned Notary Public this 2nd
day of September, 1999

/s/ Roberta Sternback
Notary Public

My Commission expires: July 2, 2001
[Notary Seal]
<PAGE>
EXHIBIT F

SECURITIES AND EXCHANGE COMMISSION
[Ref. No. IC 22937; 811-5517]

Baker, Fentress & Company;

Notice of Application

___________, 1999

Agency: Securities and Exchange Commission ("SEC").

Action: Notice of application for deregistration under section 8(f) of the
Investment Company Act of 1940 (the "1940 Act").

Summary of Application: Applicant seeks an order declaring that it has ceased
to be an investment company.

Filing Dates: The application was filed on _________.

Hearing or Notification of Hearing: An order granting the application will be
issued unless the SEC orders a hearing. Interested persons may request a hearing
by writing to the SEC's Secretary and serving applicant with a copy of the
request, personally or by mail. Hearing requests should be received by the SEC
by 5:30 p.m. on ____________, 1999, and should be accompanied by proof of
service on applicant, in the form of an affidavit or, for lawyers, a certificate
of service. Hearing requests should state the nature of the writer's interest,
the reason for the request, and the issues contested. Persons may request
notification of a hearing by writing to the SEC's Secretary.

Addresses: Secretary, SEC, 450 5th Street, N.W., Washington, DC 20549.
Applicant, 200 West Madison Street, Chicago, IL 60606.

For Further Information Contact:

Supplementary Information: The following is a summary of the application. The
complete application may be obtained for a fee at the SEC's Public Reference
Branch, 450 5th Street, N.W., Washington, DC 20549 (tel. 202-942-8090).

Applicant's Representations:

1. Baker, Fentress & Company (the "Company") is a registered closed-end
management investment company organized as a Delaware corporation.

1
<PAGE>

2. The Company's investment objective is total return with an emphasis on
capital appreciation. The Company also invests for the purpose of controlling
and managing portfolio companies. For internal management purposes, the Company
has divided its investment portfolio into four segments:

. a diversified portfolio of investments in publicly-traded, predominately
large-cap companies with a focus on long-term appreciation and capital
preservation;

. investments in private placement securities generally acquired directly
from issuing companies;

. Levin Management Co., Inc ("Levin Management") and its subsidiaries,
including John A. Levin & Co., Inc. ("Levco"), a registered investment
adviser that manages the Company's public portfolio; and

. a 78.5% interest in Consolidated-Tomoka Land Company.

3. The Company states that it communicated to its shareholders, in a
proxy statement dated July 22, 1999, that it no longer intends to hold itself
out as being engaged in the business of investing, reinvesting, or trading in
securities within the meaning of section 3(a)(1)(A) of the 1940 Act. The Company
states that it communicated to shareholders that the Company's assets would be
better used to manage an operating business that consisted of Levco, the
Company's indirect, wholly-owned subsidiary.

4. On June 17, 1999, the Board of Directors of the Company (the "Board"),
including those directors who are not "interested persons" of the Company under
the 1940 Act, considered and unanimously approved the Plan for Distribution of
Assets of the Company (the "Plan") and authorized the Plan's submission to the
Company's shareholders. The Plan authorizes the Company to: (1) stop investing
in accordance with the Company's current investment objectives, restrictions and
policies, liquidate the securities held in the public portfolio and continue
liquidating the private portfolio; (2) invest the proceeds of the liquidation in
short-term, liquid investments; (3) distribute the proceeds of the liquidation
and the Company's shares of CTO to the Company's shareholders; (4) prepare and
file the documents necessary to deregister the Company as an investment company
and close the Company's Chicago office after the Company has deregistered; and
(5) continue in business as a holding company, the principal remaining asset of
which will be the Levco Companies. The Company sent proxy materials to
shareholders on July 22, 1999. On August 19, 1999, the shareholders of the
Company approved the Plan, and the deregistration of the Company under the 1940
Act.

5. In determining that it was in the best interests of the Company and
its shareholders that the Company cease to be an investment company, the Board
considered the following factors: (a) the Company's common stock historically
has traded at a larger, more persistent discount than the common stock of many
other closed-end equity funds; and (b) the Company will have greater flexibility
and freedom to devote its attention to running its businesses as an operating
company if it no longer is subject to the bookkeeping, recordkeeping and
compliance provisions of the 1940 Act.

2
<PAGE>

6. The Company is not a party to any other litigation or administrative
proceeding.

7. The Company states that it will not in the future operate its business
so as to be an investment company required to be registered under the 1940 Act.
The Company states that it will not in the future hold itself out as being
engaged primarily in the business of investing, reinvesting or trading in
securities.

Applicant's Legal Analysis:

1. After the Plan is completed, the Company asserts that it no longer
will hold itself out as being engaged in the business of investing, reinvesting,
or trading in securities within the meaning of section 3(a)(1)(A) of the 1940
Act. In the Company's proxy statement dated July 22, 1999 seeking approval of
the Plan, the Company stated: "The Plan provides for the sale of the securities
in the public and private portfolios . . . The Company will distribute the net
cash proceeds of the sales of the Company's securities investments to
shareholders on a proportionate basis, based upon the number of shares each
shareholder owns at various record dates that the Company will determine and
announce." Also, in the proxy statement, the Company stated: "The Plan provides
for the eventual cessation of the Company's investment activities and its
deregistration under the Investment Company Act, which requires the SEC to enter
an order declaring that the Company has ceased to be an investment company."

2. Section 3(a)(1)(C) of the 1940 Act defines an investment company as
any issuer which "is engaged in the business of investing, reinvesting, owning,
holding, or trading in securities, and owns or proposes to acquire investment
securities having a value exceeding forty percent of the value of such issuer's
total assets (exclusive of Government securities and cash items) on an
unconsolidated basis."/1/ The Company asserts that after completion of the Plan,
it no longer will meet the definition of an investment company under section
3(a)(1)(C) because it will not own, and will not propose to acquire "investment
securities" having a value exceeding 40% of the value of its total assets.

3. The Company asserts that because Levco is a wholly-owned subsidiary of
the Company, its common stock owned by the Company is not an "investment
security" within the meaning of section 3(a)(2) of the 1940 Act. The Company
states that, by January 7, 2000, its "investment securities" for purposes of
section 3(a)(1)(C), will represent 0% of its total assets, excluding cash and
Government securities.

- --------------------
/1/ Investment securities are defined in section 3(a)(2) of the Act to include
all securities except (A) Government securities, (B) securities issued by
employees' securities companies, and (C) securities issued by majority
owned subsidiaries of the owner which are not investment companies, and are
not relying on the exception from the definition of investment company in
Sections 3(c)(1) or 3(c)(7) of the Act.

3
<PAGE>

4. The Company's total assets at June 30, 1999, totaled $848,960,660. The
Company's accounts payable and accrued liabilities at June 30, 1999 consisted of
accrued compensation, accrued post-retirement healthcare benefits, interest
payable on bank borrowings and other liabilities.

5. The Company states that its income from the date of the completion of
the Plan will consist primarily of income generated by Levco, and none of the
Company's income during the period following completion of the Plan will be
derived from "investment securities." The Company states that it anticipates
receiving income from Levco, the amount of which will be within the Company's
control, but limited by Levco's net income. Levco's 1998 revenues totaled
$41,730,000, resulting in net income of $4,343,000. For the period January 1,
1999 through June 30, 1999, Levco had net income of approximately $2,594,000.
The Company anticipates similar revenues and income for Levco for the coming
year, although there can be no assurance that such levels can be achieved.

6. The Company states that it currently intends to continue to develop
and expand its operating business. Giving effect to the completion of the Plan,
the Company's investment securities would be 0% of the Company's total assets.
The Company states that it has no intention to increase the number of investment
securities it holds. The Company does not expect to invest its net income in
investment securities within the meaning of section 3(a)(2) of the 1940 Act,
except as discussed below. The Company expects that it may invest in short-term
securities as a cash management tool when accumulation of cash is necessary or
appropriate to meet the Company's requirements, including pending payment of
dividends, to make additional investments in the Company's subsidiaries or to
acquire other companies or businesses, or to repay borrowings. In addition, the
Company expects that it may invest in longer-term debt securities to offset
particular Company liabilities. The Company intends to manage its cash and its
investments in such a way as to avoid again coming within the definition of
investment company under the 1940 Act.

For the SEC, by the Division of Investment Management, under delegated
authority.

<PAGE>

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm in Exhibit C and to the use of our
report dated February 12, 1999, included in the Application pursuant to Section
8(f) of the Investment Company Act of 1940 for Order Declaring that Baker,
Fentress & Company Has Ceased to be an Investment Company.

Ernst & Young LLP

New York, New York
September 3, 1999