<PAGE>
Baker, Fentress & Company
[ARTWORK APPEARS HERE]
INVESTING WITH A LONG-TERM PERSPECTIVE
1998 Annual Report
<PAGE>
BAKER FENTRESS AT A GLANCE
Baker, Fentress & Company (BKF), founded in 1891, is a domestic equity closed-
end fund that invests for total return with an emphasis on capital appreciation.
The Company's principal investments include:
. Publicly traded companies with a focus on long-term
appreciation and capital preservation
. John A. Levin & Co., Inc. (Levco), a wholly-owned subsidiary
. A majority interest in Consolidated-Tomoka Land Co.
Levco manages the portfolio of publicly traded securities. The balance of the
portfolio is internally managed by the Company's officers under the supervision
of its board of directors.
The Company has a policy of distributing annually to shareholders amounts equal
to at least 8% of the Company's average net assets.
1998 Performance and Distributions
<TABLE>
<CAPTION>
Total Return
------------
<S> <C> <C>
Portfolio Performance....... 10.9%
Shareholder Return.......... 3.5
S&P 500 Index............... 28.6
=========================================
Ordinary Capital
Income Gain
-------- -------
May 5.............. $0.25 $1.75
December 23........ 0.27 1.50
----- -----
$0.52 $3.25
===== =====
Total Distributions $3.77
=====
</TABLE>
[ARTWORK APPEARS HERE]
About the cover
Baker, Fentress & Company's long history in Chicago is represented in the
background photo of Chicago's financial district around the time when the
Company was established in 1891. The two color photos represent present-day
Chicago and New York, where the Company's primary operations are located.
Top Ten Holdings
Our top ten holdings as a percent of net assets at
December 31, 1998 were:
<TABLE>
<CAPTION>
<S> <C>
Levin Management (with its subsidiaries, including Levco),
Investment advisor........................................... 15.2%
Consolidated-Tomoka, Florida real estate and citrus.......... 9.2
Citadel Communications, Radio broadcasting................... 7.5
Tribune, Publishing and broadcasting......................... 3.4
Texas Instruments, Electronic components and semiconductors.. 2.5
KeySpan Energy, Electric and gas utility..................... 2.3
MediaOne Group, Communication services....................... 2.2
International Business Machines, Computer technology......... 2.0
Hewlett-Packard, Computer technology......................... 1.8
Sempra Energy, Electric and gas utility...................... 1.8
----
Total........................................................ 47.9%
====
</TABLE>
<PAGE>
To Our Fellow Shareholders:
[PHOTO APPEARS HERE]
James P. Gorter
Chairman of the board
[PHOTO APPEARS HERE]
John A. Levin
President and Chief Executive Officer
In last year's report we focused on our plans to bring the publicly traded
investment portfolio generally in line with our large cap value philosophy and
to move out of private placements. These changes are now essentially complete.
Going forward, three basic factors should drive our share price: the
investment performance of the public portfolio, the development of the
investment management business conducted through John A. Levin & Co., Inc.
(Levco), and the value of our investment in Consolidated-Tomoka Land Co. (CTO)
land and citrus operations.
The Company's total net assets at the end of 1998 were $771.3 million,
with 83% in publicly traded securities, including CTO (9% of total assets),
and 15% in Levco, a wholly-owned subsidiary.
The 1998 total return on net asset value was 10.9%. The market value total
return experienced by a BKF shareholder who reinvested all dividends was 3.5%.
Performance results for 1998 were hampered by the fact that our large cap value
style was not in favor, and as discussed below, both Levco and CTO suffered
declines in value. In addition, the difference between net asset value and
market value returns was caused by widening of the discount from 16.2% at the
end of 1997 to 22.5% as of December 31, 1998. Average annual total return for
the most recent three- and five-year periods was 15.3% and 14.9% based on net
asset value, and 14.4% and 13% based on market price.
[CHART APPEARS HERE]
BKF Net Asset Value and Market Value Returns
Annual Total Returns through December 31, 1998
Total Fund 1 Year 3 Year 5 Year
Net Asset Value 10.87% 15.32% 14.85%
Market Value 3.45% 14.35% 13.00%
Baker, Fentress & Company Annual Report 1998 1
<PAGE>
To Our Fellow Shareholders (continued)
Portfolio Highlights
Performance for 1998 of each sector of the Company's portfolio was:
. Public portfolio 14.2%
. Levco (5.9%)
. CTO (20.5%)
. Other investments 74.6%
Public Portfolio: For the year, the returns on the public portfolio reflected
the performance of large cap value stocks in general. In line with our
objectives, the portfolio outperformed the market during the sharp third quarter
decline, but overall performance lagged the 28.6% annual return posted by the
S&P 500 Index.
Levco: Even though revenues and assets under management grew in 1998, Levco's
investments in personnel and infrastructure reduced operating profits from 1997
levels and will impact 1999 earnings as well. In addition, the shock suffered by
the financial services sector in the third quarter led to a general decline in
the valuation of investment management firms. As a result, in November the board
of directors of the Company elected to lower its valuation of Levco.
Consolidated-Tomoka Land Co: CTO had a negative effect on BKF's total return in
1998 as its stock price declined from $18 1/8 per share at the end of 1997 to
$14 1/8 at the end of 1998. Late in the year, CTO announced that an agreement
had been signed to sell its citrus operation, Lake Placid Groves. Various
conditions must be met for the transaction to close. We believe the sale of the
citrus operations should benefit CTO by strengthening its balance sheet and
allowing it to focus on land development.
Other Investments: Over the past two years, many of our private investments have
gone public or were liquidated. By the end of 1998, the non-publicly traded
securities were only 2% of total net assets. We intend to complete the
liquidation of this small position by the end of 1999.
Distributions
Distributions paid in 1998 totaled $138.3 million, or $3.77 per share. This
represents 17.7% of average net assets and 20.9% of average market value for the
12 months ended October 31, 1998. These higher than normal distributions include
a combination of net investment income and realized capital gain, and result
from the final phase of our restructuring program. We anticipate distributions
are likely to return to the traditional 8% level in 1999. The board of directors
will determine the actual amount of future distributions based on the Company's
net investment income and net realized capital gain.
Special Shareholders' Meeting
At a special shareholders' meeting held on December 30, the three proposals
relating to a new equity-based incentive compensation plan were approved by BKF
shareholders. We believe this should aid in the development of our investment
management business by helping us to attract and retain top quality professional
talent, and by aligning their interests with those of our shareholders.
1999 Annual Meeting
The 1999 annual meeting will be held at 10:30 a.m. on April 22, 1999 at the
Chicago Hilton and Towers in Chicago, Illinois. This will be a routine meeting
to elect directors and ratify the selection of our independent auditors for
1999.
/s/ James P. Gorter /s/ John A. Levin
James P. Gorter John A. Levin
Chairman of the Board President and
Chief Executive Officer
2 Baker, Fentress & Company Annual Report 1998
<PAGE>
Review of Portfolio Sectors
[photo appears here]
James Koeneman
Executive Vice President
and Chief Financial Officer
Baker, Fentress & Company
[photo appears here]
(Left to right): Julie
Heironimus, Treasurer;
Kathryn Gallagher,
Shareholder Relations
Specialist
Baker, Fentress & Company
The following sections discuss in more detail the three major portfolio sectors
of the Company the public portfolio, Levco, and CTO. There is also a brief
comment on our remaining private portfolio investments that are in the final
phases of liquidation.
PUBLIC PORTFOLIO
1998 marked the completion of our transition to a large cap, value-oriented
investment strategy. Our diversified portfolio of publicly traded securities
reflects an investment process that seeks to produce total return through
capital appreciation and asset protection. In a year marked by tremendous market
swings, our portfolio held a significant number of securities with more
defensive characteristics, such as convertible bonds, preferred stocks, and
utility stocks. Cash levels were also higher in the latter part of the year as
the result of the completion of the restructuring and the challenge of investing
during a steep market rise. Purchases of put options on the S&P 500 Index
provided protection during the summer decline and generated gains of
approximately $2 million for the year.
The story of the market in 1998 was in many ways a mixed one. On the one
hand, the S&P 500 Index recorded a gain of 28.6%, its fourth consecutive year of
gains in excess of 20% and its eighth consecutive year of growth. On the other
hand, these gains were achieved chiefly as a result of the performance of a
limited number of the largest cap stocks. Performance gains were not distributed
broadly, as seven of the 11 industry sectors underperformed the index by
significant margins. On a fundamental level, it is expected that 1998 operating
earnings will show the smallest increase in seven years, while the average
price/earnings ratio for the index expanded much more significantly. Thus, from
a valuation perspective, the rise
[chart appears here]
S&P 500 Index
Returns by Sector
1998
S&P 500 Index = 29.0%
ENERGY -20.2%
BASIC MATERIALS -9.2%
CAPITAL GOODS -5.6%
TRANSPORTATION -1.6%
UTILITIES 11.7%
CONSUMER CYCLICALS 12.8%
FINANCIALS 13.1%
CONSUMER STAPLES 28.0%
HEALTHCARE 34.3%
TECHNOLOGY 43.4%
COMMUNICATION SERV 49.8%
Baker, Fentress & Company Annual Report 1998 3
<PAGE>
Portfolio Changes Exceeding $2.5 Million
Quarter Ended December 31, 1998
<TABLE>
<CAPTION>
Purchases Cost
- -------------------------------------------------------------
<S> <C>
The Williams Companies, Inc.................... $ 9,956,756
MediaOne Group, Inc............................ 9,810,444
The News Corporation Limited................... 7,336,725
Nabisco Holdings Corp.......................... 5,872,271
Conoco Inc..................................... 4,793,570
Monsanto Company............................... 3,947,485
Owens-Illinois, Inc............................ 3,879,083
Sealed Air Corporation, $2.00 Series A......... 3,584,764
Tribune Company................................ 3,229,224
Loral Space & Communications Ltd............... 3,074,008
Northern Trust Corporation..................... 2,706,371
S&P 500 Index Put Option Nov 98/1100........... 2,705,458
S&P 500 Index Put Option Feb 99/1125........... 2,557,400
-----------
$63,453,559
===========
</TABLE>
<TABLE>
<CAPTION>
Sales Proceeds
- -------------------------------------------------------------
<S> <C>
Duke Energy Corporation........................ $13,652,116
Philip Morris Companies Inc.................... 8,336,022
Unocal Corporation............................. 7,637,542
Keyspan Energy Corporation..................... 6,713,756
Texas Utilities Company........................ 6,574,067
Genentech, Inc................................. 6,428,464
Aon Corporation................................ 6,108,589
First Data Corporation......................... 5,313,766
PepsiCo, Inc................................... 4,451,168
United Technologies Corporation................ 4,313,914
International Business Machines Corporation.... 4,154,352
Getchell Gold Corporation...................... 4,039,763
TIG Holdings, Inc.............................. 3,845,169
Consolidated Edison Company of New York, Inc... 3,463,976
Unitrin, Inc................................... 3,047,707
Sealed Air Corporation......................... 2,639,034
-----------
$90,719,405
===========
</TABLE>
Review of Portfolio Sectors (continued)
of the index was accompanied by an increase in its risk level.
The split nature of the market is illustrated by the large gap between the
performance of "growth" and "value" stocks. While the "growth" stocks in the S&P
500 returned 42.1% for the year, the "value" stocks generated a 14.7% return.
Simply put, investment style played a crucial role in determining performance
relative to the S&P 500 Index.
In the course of our research efforts to uncover value situations in the
large cap area, we often find somewhat smaller companies which we think offer
significant value and appreciation potential. So that these ideas may be used
for the benefit of the Company and, potentially other Levco clients, Levco is
developing a new product which will focus on companies with an average
capitalization in the range of $1.5 billion. Within the BKF public portfolio, we
are allocating up to $20 million to a sub-portfolio of these companies, and
approximately $5 million was invested in this sub-portfolio as of January 1999.
[CHART APPEARS HERE]
1998 S&P 500 Performance
Large Cap Value versus Large Cap Growth
[PLOT POINTS TO COME]
4 Baker, Fentress & Company Annual report 1998
<PAGE>
[PHOTO APPEARS HERE]
Jessica Bibliowicz
President and Chief Operating Officer
LEVCO
In 1998, Levco assets under management grew to $8.3 billion, compared to $7.4
billion at the end of 1997. For the twelve months ended December 31, 1998,
Levco's revenue increased to approximately $41.7 million, a 6.5% increase over
1997. Unaudited operating income (before interest and taxes) was $14.1 million
compared to $16.2 million in the previous year. Levco continues to invest in
both people and infrastructure necessary to position itself for future growth.
As a result of these increased expenses, Levco's operating profits will continue
to be adversely affected in 1999. In view of this, the BKF board of directors
lowered the carrying value of Levco to $117.5 million in November 1998.
On the investment side, Levco's focus continued to be on its large cap value
product. Levco's investment team was bolstered during the course of the year by
the addition of Todd Silva, a senior portfolio manager, and Xenia Colon, a
securities analyst. Scott Smith, who continues to manage the liquidation of the
Company's private placement portfolio, has also become a member of the Levco
team and will focus on smaller cap value stocks.
The year saw several major developments in the client servicing and marketing
area. In June, Jim Kelly joined Levco as Director of Marketing. His group
focuses on serving and attracting institutional clients such as corporations,
pension plans, university endowments, and non-profit foundations. Levco has
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, which tend to maintain more conservative
portfolios and should, we believe, be attracted to a value-oriented investment
style.
[PHOTO APPEARS HERE]
Institutional Marketingand Client Servicing Group
Standing (left to right): Ed Theobald, Steve Symonds, and Jim Kelly. Seated
(left to right): Charles Miller and Bonnie DelValle.
Levco's retail marketing efforts, headed by Joanne Furlong, produced a number
of positive developments. Assets managed in the Merrill Lynch Consults program,
which Levco
[PHOTO APPEARS HERE]
Finance, Operations, and Administration Group
5
<PAGE>
Review of Portfolio Sectors (continued)
[PHOTO APPEARS HERE]
first entered in July 1996, grew to approximately $757 million. Over $320
million in new net assets was raised in 1998 alone. At the end of the year,
Levco gained admission to the Salomon Smith Barney Fiduciary Services Program,
and should begin managing assets raised through this outlet in the first quarter
of 1999. In June of 1998, Levco also began managing the MainStay Research Value
Fund, a newly-formed vehicle that is part of the $18 billion MainStay family of
funds that are distributed through all major brokerage firms.
An area of Levco's business that saw significant growth in 1998 was risk
arbitrage, which saw its assets increase to $245.8 million at December 31, 1998
from $148.3 million at the prior year end. This growth is attributable to both
the performance of this product and an intensified marketing effort.
CONSOLIDATED-TOMOKA LAND CO.
Consolidated-Tomoka Land Co. (CTO) is a Florida-based company listed on the
American Stock Exchange. BKF owns 79.2% of CTO's shares. CTO owns 3,300 acres of
orange groves in Highlands County in Central Florida and 16,000 acres of land in
Volusia County, in and around Daytona Beach. The latter acreage is being
developed by CTO or is being sold to other developers. In 1998, CTO's unaudited
earnings were $1,275,000 or $0.20 per share. Dividends per share were $0.70,
resulting in a payment of $3,500,000 to Baker Fentress.
CTO announced on December 28, 1998, an agreement to sell its citrus
operations, Lake Placid Groves. The inspection period allowed under terms of the
agreement, as modified, ends on February 23, 1999. The buyer is required to make
a $1 million nonrefundable deposit on February 25, 1999, with a closing date set
for March 16, 1999. The citrus sale, if consummated, would allow CTO to focus
entirely on the development of its land holdings in the Daytona Beach area from
a position of financial strength.
A number of milestones were reached during the year at the Ladies
Professional Golf Association (LPGA) project, CTO's major real estate activity.
A new residential area was opened in the first quarter offering a new housing
product, which was well received by the market. The project's second
championship golf course, designed by Arthur Hills, opened for play in October
and has received very good reviews from club members and public customers.
Efforts to attract a destination resort hotel continue and construction of a
permanent clubhouse is scheduled to be completed during 1999.
CTO's present management team has been in place since 1990, and during the
past eight years significant changes have taken place in its business.
Management's principal strategic thrust has been to exit those businesses which
did not appear to offer long-term profit potential and to concentrate on citrus
[PHOTO APPEARS HERE]
Retail Marketing Group Standing (left to right): Joyce Chang, Carlanne Cataldo,
Michael Ackerman, Lisa Stigliano, Ana Pinkerton. Seated (left to right): Andrew
Nam, Sandra Hannon, Joanne Furlong (not pictured).
6 Baker, Fentress & Company Annual Report 1998
<PAGE>
and land development, areas where the company has critical mass. Since 1990, CTO
has successfully sold its homebuilding, resort, and income property businesses.
Most of the assets involved were producing a positive cash flow which allowed
for orderly disposition. The proceeds from these sales dramatically reduced
outstanding debt, creating an improved financial condition for CTO.
An additional 1,350 acres of citrus groves were planted in the 1980s and
early 1990s and are now approaching maturity. Certain citrus acreage that was
better suited for residential development was sold in the mid-90s, and in 1997,
11,000 acres on the western border of the Daytona Beach property were sold to
The St. John's River Water Management District.
CTO management continues to work closely with all appropriate governmental
bodies to ensure that its lands are available for the highest use development.
Two examples of this are the 4,000 acre Ladies Professional Golf Association
development and the new I-95 Interchange, which was completed in 1996 and
provides enhanced access to CTO's properties. CTO's management is committed to
the continuing profitable development and liquidation of its remaining land.
BKF and CTO both believe that CTO's operations and its financial condition
have been significantly improved over the past eight years. Although dividends
have grown 250% since 1990, CTO's share price has actually declined, resulting
in a negative total return for shareholders. This pattern continued in 1998 with
CTO's share price falling from $18 1/8 on January 1 to $14 1/8 at year-end.
[PHOTO APPEARS HERE]
PRIVATE PORTFOLIO
As indicated above, full-year total return for the private portfolio in 1998 was
74.6%, primarily due to the performance of our investment in Citadel
Communications Corporation. Substantial progress was made in liquidating the
private placement portfolio's assets. Three former private placement securities
that are now publicly traded had a total market value of $68.3 million as of
December 31, 1998. These were Citadel Communications Corporation (NASDAQ:CITC),
Paracelsus Healthcare Corporation (NYSE:PLS), and Security Capital U.S. Realty
(NASDAQ:SCUS). Non-publicly traded securities, which totaled $70.3 million at
the end of 1997, were reduced to $10.5 million as of December 31, 1998.
[PHOTO APPEARS HERE]
In the spring, BKF sold all of its Echlin, Inc. (NYSE:ECH) shares following
a February tender offer for ECH by SPX Corporation and prior to ECH's eventual
merger with Dana Corporation in May. In December, BKF disposed of its investment
in TBN Holdings, Inc. That investment had previously been written down to
nominal value based on TBN's poor operating performance and negative outlook.
[PIE CHARTS APPEAR HERE]
Portfolio Mix
June 30, 1996 vs December 31, 1998
Non-public holdings, including Levco, have been reduced to 17.3% of total net
assets as of the end of 1998, down from 26.0% at June 30, 1996. Conversely,
publicly traded securities, including majority-owned CTO, have increased to
82.7% from 74.0% over this same period.
Other 9.0%
Public 61.2%
CTO 12.8%
Levco 17.0%
Other 2.1%
Public 73.5%
CTO 9.2%
Levco 15.2%
Baker, Fentress & Company Annual Report 1998 7
<PAGE>
Levco The Portfolio Managers Speak
Jeff Kinger,
Chief Investment Officer:
Our business is based on fundamental research -- on examining companies from the
bottom up.
[PHOTO APPEARS HERE]
Jeff Kigner
Chief Investment Officer
The firm's investment methodology depends on having a deep and talented group of
investment professionals, and as our business has grown, so has our investment
team. Generally, two or more analysts are involved with each company held by
Levco, and the entire team gathers for weekly research meetings where we discuss
our investment selections and overall portfolio structure.
The following are some of the highlights of a recent discussion among some
members of our portfolio management team.
Jack Murphy,
Senior Portfolio Manager:
One of the most important things that investors need to look at in analyzing
companies is the quality of their earnings.
In today's financial reporting environment, it's not enough just to look at
earnings per share. It is necessary to focus on cash generated by the company
and that cash must be applied to activities that enhance shareholder value. To
find the fundamental value in a company, we examine the numbers, question
management as to how the earnings were generated, and determine whether the
company will put any free cash to good use in the form of acquisitions that can
increase the value or aid the growth of a franchise, through internal
investments that can help the business grow, or by engaging in buybacks or
otherwise distributing the cash back to shareholders.
Standing (left to right): Jack Murphy, Cindy Rizzo, Jeff Kigner, Ping Chen,
Xenia Colon, Bart Ice. Seated (left to right): Joe Austin, Dan Theriault, Scott
Smith.
[PHOTO APPEARS HERE]
8
<PAGE>
Dan Theriault,
Senior Portfolio Manager:
We are value investors, so we care about fundamentals and we care about
valuations. Value investing is about focusing on the downside risks as much as
the upside potential.
In the financial services area, the prospects for a slowing economy in 1999 have
led us to focus on banks that generate a high percentage of fee-based business,
which we believe should help offset a potential deterioration in loan quality.
In the insurance business, we think that an economic environment featuring
disinflationary trends could make Bermuda-based insurers more attractive
investments, as such trends could benefit them on the asset and liability sides
of their balance sheets. Lower interest rates should increase the market value
of the large pools of fixed-income securities supporting their reserve
liabilities. Since investment gains are not taxable in Bermuda, the insurers
should be able, in such an environment, to generate economic returns far
superior to their US counterparts, thereby creating shareholder value. On the
liability side, the trend to lower claim inflation should result in claim
reserve liability redundancy, which would also result in an economic benefit to
shareholders.
Todd Silva,
Senior Portfolio Manager:
The strength of the public equity markets and the persistence of low interest
rates has been conducive to corporate restructuring, and we see restructuring as
an important means of unlocking shareholder value.
Managements, motivated in part by their equity compensation plans to enhance
shareholder value, are focusing on their core businesses and divesting non-core
divisions through spin-offs or initial public offerings. These offerings can
simultaneously help to realize the value of the division and strengthen the
core. Similarly, strong equity markets and low interest rates facilitate the
financing of merger and acquisition activity, which can allow strategic buyers
to acquire undervalued assets.
In this business climate where the trend is towards industry consolidation,
we are also continuing to look for value in those companies with strong and
sustainable franchises that should prove their worth over time. To identify
these companies, we need to speak not only to management, but also to
competitors, suppliers, and other industry participants. The point of the
process is to turn this information into a complex, and hopefully distinctive,
understanding of the business and the company.
Joe Austin,
Senior Portfolio Manager:
Our goal is to achieve a strong risk-adjusted return.
This means that we look at our performance in relation to volatility, and that
we use diversification and price disciplines, among other techniques, in an
effort to reduce volatility. In the market we have had for the past two years,
where a limited number of stocks, primarily growth stocks, have propelled the
S&P 500 index to record heights, value-oriented approaches have not produced the
highest returns. But styles do go in and out of favor, and we are committed to
maintaining style consistency. Over time, we believe that adherence to our
philosophy can allow us to outperform, particularly on a risk-adjusted basis.
That being said, our discipline does not shut us out of growth areas, such
as
[PHOTO APPEARS HERE]
Todd Silva,
Senior Portfolio Manager
Baker, Fentress & Company Annual Report 1998 9
<PAGE>
Levco--The Portfolio Managers Speak
technology and communications. For example, while certain technology and
internet companies have risen strongly and are now trading at high multiples
that fall outside the range for our preferred investments, we are still paying
close attention to developments in the area and will try to take advantage of
opportunities by investing in lower-multiple companies that provide enabling
technology or services, such as transmission lines, and should benefit from the
rapid changes and growth in the industry. What we'll also try to do in this
area, where standards and systems are still evolving, is make investments in
competing technologies--we'll "pair" positions--so as to diversify portfolio
risk. We will participate, but in a way that focuses on risk control from both
the stock selection and portfolio construction perspectives.
Patricia Lea,
Senior Security Analyst:
In the pharmaceuticals industry, potential new products play a major role in
moving stock prices.
[PHOTO APPEARS HERE (Patricia Lea)]
If the products work, they can become major contributors to the bottom line.
Finding value in this area is about understanding these products--their
effectiveness, their potential market--better and earlier than other analysts.
It is about seeing earnings potential that others may be missing, so that in
your model, the stock is trading at a lower multiple than it is in the consensus
model. To arrive at conclusions that differ from the consensus, you need to use
sources that analysts generally may not be researching. In addition to speaking
to companies and industry experts, you need to speak to the doctors, clinicians
and clinical research organizations because they can give you significant
insight into a drug's effectiveness and the potential demand for the drug.
We have been seeing increasing activity in the joint venture area, where
companies have been launching new marketing strategies. Properly understanding
the potential and economics of these sometimes complex arrangements can give you
another opportunity to differ from street consensus and find values that others
may not perceive.
Bart Ice,
Senior Portfolio Manager:
While our large cap value style does not allow us to hold many securities
acquired in initial public offerings, participating in the public offering
markets helps our investment process in a number of ways.
First, it creates opportunities to enhance our relationships with, and access
to, company management teams. Second, researching new companies can get us an
early look at new technologies, products, or services that may become the source
of important competition to larger corporations. Finally, we participate in
secondary offerings and convertible security offerings in large cap companies,
especially when we have an existing investment position.
Scott Smith,
Portfolio Manager:
In the smaller cap end of the equity market, where the firm is developing a new
product, we will be researching companies that may present a somewhat different
look.
Relative to companies found in Levco's core large cap portfolios, these
firms' business franchises may be in niche markets, their share prices may
demonstrate greater volatility, and their shares may be somewhat less liquid.
10 Baker, Fentress & Company Annual Report 1998
<PAGE>
However, the small cap research process will follow disciplines presently in
place to identify companies with solid operating fundamentals and strong
management whose shares can be acquired at prices which combine significant
appreciation potential with acceptable risk levels. Smaller stocks have
underperformed their large cap brethren for an extended period, and the solid
outlook for many smaller companies suggests their shares can be purchased at
attractive valuations. In this effort we will invest with a long-term horizon to
insure ample time is provided for values to be realized.
Frank Rango,
Senior Portfolio Manager:
Our risk arbitrage product is built on the same foundation as our large cap
value product.
At the base is fundamental research. We closely examine companies and their
industries and are selective in the transactions in which we invest. We look for
"value" in a transaction, meaning we look to see whether the transaction makes
good business sense. At the same time, we are focused on preserving capital and
controlling volatility we seek to limit our correlation to the equity markets
and we try to achieve this objective through our portfolio structuring and
trading strategies.
Henry Levin,
Senior Portfolio Manager:
The significant amount of mergers and acquisition activity we have seen in the
past year points to the overall trend towards consolidation that we are seeing
in a large number of industries.
To the extent that these transactions are supported by sound strategic
rationales and are structured and executed in an efficient manner, they should
help realize shareholder value and provide good opportunities for risk arbitrage
investing. In this environment, the challenge is to understand the companies,
the industries and the transactions well enough to determine if any value is
really being captured.
[PHOTO APPEARS HERE]
Risk Arbitrage Group
Standing (left to right): Warren Emprey,
Frank Rango, Rich Lubman.
Seated (left to right): Aracely Kuszel, and Henry Levin.
[PHOTO APPEARS HERE]
Baker, Fentress & Company Annual Report 1998 11
<PAGE>
Baker, Fentress & Company Illustration of $10,000 Investment
Total Return on $10,000 Investment
For 20 Years Ended December 31, 1998
This chart illustrates the annual and cumulative 20-year record of a $10,000
investment made at the beginning of 1978. The results of two measures of past
performance are as follows:
Average Annual
Ending Value Compound Total Return
------------ ---------------------
Shareholder Return $252,007 17.0%
Portfolio Performance 155,428 14.7
Shareholder Return is the actual return a Baker, Fentress & Company
shareholder would have achieved assuming purchase of the shares at the closing
market price on the last day of the previous year and reinvestment of all
distributions at the actual reinvestment price on the payment date. Ten- and
twenty-year returns assume all primary shares were purchased during the
Company's 1993 rights offering at the actual exercise price. For the years when
the Company retained a portion of net realized capital gain and paid taxes due
on behalf of shareholders, the tax credits were treated as reinvested at the
closing market price of the Company's stock on the last day of that year.
Portfolio Performance is the time-weighted total return of the Company's total
net assets.
[GRAPH APPEARS HERE]
[ ] Shareholder Return
[ ] Portfolio Performance
[ ] Value of Rights Offering Shares
Rights Exercised
Shareholder Return
Cost of rights offering shares $20,541
Rights Not Exercised
Portfolio Performance
S&P 500
$300,000
250,000
200,000
150,000
100,000
50,000
$ 10,000
1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
BAKER, FENTRESS 20-YEAR SUMMARY CHART
<TABLE>
SHAREHOLDER SHAREHOLDER
RETURN W/O RETURN WITH PORTFOLIO
RIGHTS OFFERING RIGHTS OFFERING PERFORMANCE S&P 500
<S> <C> <C> <C> <C>
1978 10,000.00 10,000.00 10,000.00 10,000.00
1979 14,479.13 14,479.13 13,922.31 11,850.93
1980 19,256.64 19,256.64 17,133.30 15,716.16
1981 20,133.28 20,133.28 17,070.77 14,942.42
1982 27,074.75 27,074.75 21,488.16 18,182.00
1983 36,146.59 36,146.59 25,815.76 22,258.54
1984 39,220.89 39,220.89 26,855.97 23,654.97
1985 54,682.11 54,682.11 36,346.97 31,159.92
1986 61,378.79 61,378.79 40,952.31 36,975.88
1987 57,808.30 57,808.30 43,320.31 38,917.39
1988 74,545.99 74,545.99 49,731.13 45,380.94
1989 93,905.63 93,905.63 59,623.67 59,760.43
1990 71,533.32 71,533.32 49,439.45 57,905.32
1991 95,879.10 95,879.10 62,632.13 75,546.69
1992 102,120.44 102,120.44 67,002.38 81,308.74
1993 114,289.20 137,147.00 77,768.23 89,496.04
1994 105,700.50 126,840.60 74,387.12 90,678.11
1995 140,798.00 168,957.60 101,340.52 124,752.86
1996 182,590.58 195,108.67 121,741.32 153,396.49
1997 203,484.82 244,181.78 140,798.00 204,574.64
1998 210,005.12 252,007.35 155,428.40 263,039.16
</TABLE>
Past Performance
Average Annual Compound Total Return
Years Ended Shareholder Portfolio S&P 500
December 31, 1998 Return Performance Stock Index
- -----------------------------------------------------------------------
1 year 3.5% 10.9% 28.6%
3 years 14.4 15.3 28.2
5 years 13.0 14.9 24.1
10 years 12.0 12.1 19.2
20 years 17.0 14.7 17.8
12 Baker, Fentress & Company Annual Report 1998
<PAGE>
[Photo Appears Here]
This provides a measure of performance comparable to the total return of general
market indices, such as the S&P 500.
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 gain was retained, but before deduction
of expenses.
The illustrated results are two measures of past performance. They are not
necessarily indicative of future results.
[Photo Appears Here]
How Distributions Influence Total Return
Each distribution you receive from BKF reduces the per share market price by the
exact amount of the distribution on the ex-dividend date. Therefore comparing
the per share price on December 31, 1995 and December 31, 1998 does not give you
a true picture of the Company's total return to shareholders.
This chart shows that over the past three years -- on a pure price
appreciation basis -- the share price has declined by about 9%. The actual total
return experienced by shareholders however, is about 50%. This is due to the
distributions made to shareholders. Shareholders that reinvested their
distributions would have seen the value of the BKF shares increase by about 50%
over the past three years. During this period, distributions were significantly
higher than they had been in prior years as a result of the portfolio
restructuring, which eliminated a large portion of the unrealized gains in the
public portfolio.
Over the past 10 years the total annual per share distributions have
averaged $0.54 from ordinary income sources and $1.85 from long-term capital
gains. More than 77% of the total distributions came from long-term capital gain
sources, which are typically taxed at a lower rate than ordinary income.
BKF Price Appreciation Versus Total Return
Annual Total Returns thru December 31, 1998
[Line Graph Appears Here]
[Plot Points for Graph]
<TABLE>
<CAPTION>
Price Appreciation Total Return
------------------ ------------
<S> <C> <C>
Dec-95 0.00% 0.00%
Jan-96 8.21% 8.21%
Feb-96 -20.15% 9.70%
Mar-96 10.45% 10.45%
Apr-96 14.93% 14.93%
May-96 16.42% 17.59%
Jun-96 14.18% 15.33%
Jul-96 6.72% 7.79%
Aug-96 9.70% 10.81%
Sep-96 14.18% 15.33%
Oct-96 11.19% 12.32%
Nov-96 2.99% 18.04%
Dec-96 0.75% 15.48%
- ----------------------------------------------
Jan-97 5.97% 21.47%
Feb-97 5.97% 21.47%
Mar-97 6.72% 22.32%
Apr-97 7.46% 23.18%
May-97 10.45% 27.93%
Jun-97 17.91% 36.58%
Jul-97 23.88% 43.49%
Aug-97 18.66% 37.44%
Sep-97 24.63% 44.36%
Oct-97 19.78% 38.74%
Nov-97 7.84% 43.06%
Dec-97 8.96% 44.54%
- ----------------------------------------------
Jan-98 8.96% 44.54%
Feb-98 14.21% 52.96%
Mar-98 11.94% 64.20%
Apr-98 10.45% 62.01%
May-98 11.19% 63.11%
Jun-98 9.33% 60.37%
Jul-98 9.70% 60.92%
Aug-98 -1.12% 45.04%
Sep-98 -2.61% 42.86%
Oct-98 2.24% 49.97%
Nov-98 -4.85% 55.62%
Dec-98 -8.58% 49.53%
</TABLE>
BKF Per Share Distribution Summary
Through December 31, 1998
[Bar Graph Appears Here]
[Plot Points for Graph]
<TABLE>
<CAPTION>
Dividends LT Gains Total Payout % Avg NAV
--------- -------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C>
1989 0.74 2.70 3.44 1989 12.84% 26.80
1990 0.70 1.25 1.95 1990 8.25% 23.57
1991 0.58 1.15 1.73 1991 8.44% 20.43
1992 0.39 1.42 1.81 1992 8.38% 21.60
1993 0.48 1.76 2.24 1993 12.51% 17.90
1994 0.35 1.46 1.81 1994 9.04% 20.03
1995 0.35 1.20 1.55 1995 8.03% 19.30
1996 0.78 1.78 2.56 1996 12.36% 20.71
1997 0.54 2.23 2.77 1997 12.16% 22.78
1998 0.52 3.25 3.77 1998 17.49% 21.55
10-Yr Avg 0.54 1.82 2.36 10-Yr Avg 10.95% 21.47
</TABLE>
Baker, Fentress & Company Annual Report 1998 13
<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
<TABLE>
<CAPTION>
<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>
Report of Independent Auditors
To the Board of Directors and Shareholders of
BAKER, FENTRESS & COMPANY:
We have audited the accompanying statement of assets and liabilities of
Baker, Fentress & Company, including the statement of investments, as of
December 31, 1998, and the related statement of operations for the year then
ended, the statements of cash flows and changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits 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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1998, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Baker,
Fentress & Company at December 31, 1998, the results of its operations for the
year then ended, its cash flows and the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
Chicago, Illinois
January 29, 1999
/s/ERNST & YOUNG LLP
Baker, Fentress & Company Annual Report 1998 27
<PAGE>
General and Historical Information
DISTRIBUTION POLICY
Beginning in 1987, the board of directors adopted a policy of distributing to
shareholders during each calendar year an amount (in a combination of ordinary
income dividends and capital gain distributions) equal to at least 8% of the
month-end average net asset value for the 12 months ended October 31 of that
year.
Although this distribution policy is based on a percentage of net asset
value, Baker Fentress shares have traded at market prices less than net asset
values. The annual distribution as a percentage of market price will exceed 8%
so long as the market price is at a discount from net asset value.
Unless specifically amended by the board of directors, this policy will apply
to future years' total distributions. Decisions to realize capital gain will be
based primarily on investment considerations rather than distribution
requirements.
REINVESTMENT AND CASH PURCHASE PLAN
Baker Fentress has two reinvestment plans which provide shareholders convenient
and economical ways of increasing their holdings of the Company's shares.
Dividend reinvestment and cash purchase plan.
The Company's dividend reinvestment and cash purchase plan allows shareholders
to elect to reinvest cash dividends (consisting of distributions of net
investment income and net realized short-term capital gain, if any) on all or a
portion of their Company shares. Reinvested dividends are subject to income tax
to the same extent as if received in cash.
The plan includes a voluntary cash purchase feature that permits shareholders
to purchase additional shares on a monthly basis. Each voluntary cash purchase
must be at least $100 and not more than $10,000.
The Company delivers dividends payable to participating shareholders, in
cash, to Harris Trust and Savings Bank (the "Bank"), as agent for participants
in the plan. The Bank then uses that money to purchase shares for dividend
reinvestment and for voluntary cash purchases in market transactions. The number
of whole and fractional shares allocated to each participant's account is
determined by dividing the dividend payable to the participant by the average
purchase price per share, including brokerage commissions, paid by the Bank.
There are no service charges to shareholders to participate in the plan and
all costs of administration are paid by the Company. A shareholder pays only a
proportionate share of the brokerage commissions paid by the Bank.
All shareholders are eligible to participate in the plan, including those
whose shares are held through a broker or other nominee. However, some brokers
and nominees may not permit a shareholder to participate in the plan without
first transferring the shareholder's Company shares into the shareholder's name.
A shareholder may terminate participation in the plan by writing to the Bank.
On termination, a shareholder may receive a certificate for the whole shares
held in the shareholder's plan account, with a check for the value of fractional
shares. Alternatively, a shareholder may request that the Bank sell the shares
and send the shareholder a check for the proceeds, less any brokerage
commission.
A complete description of the plan and an authorization card to enroll may be
obtained from the Bank, at the address below:
Baker, Fentress & Company
Dividend Reinvestment Plan
c/o Harris Trust and Savings Bank
Dividend Reinvestment
P.O. Box A3309
Chicago, Illinois 60690
1-800-394-5187
Capital gain reinvestment plan. The Company customarily distributes any net
realized long-term capital gain to shareholders at least annually, in the form
of additional Company shares (with cash paid for fractional shares). Those
shares are newly-issued or treasury shares, and are priced at the then current
market price without commissions.
At the time of each capital gain distribution, shareholders have the
opportunity to elect to receive the distribution entirely in cash, or partly in
cash and partly in shares. Such an election is made by returning to the Company
a card that is sent to all shareholders for that purpose. A shareholder need not
join this plan in advance, nor do anything until the shareholder receives a
notice from the Company of a declaration of a capital gain distribution.
There is no cost to the shareholder of reinvesting a capital gain
distribution in additional Company shares. A reinvested distribution is subject
to tax to the same extent as if received in cash.
28 Baker, Fentress & Company Annual Report 1998
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
Business Affiliations
---------------------
<C> <S>
Frederick S. Addy Retired; former executive vice president,
chief financial officer and director of
Amoco Corporation
Bob D. Allen President and chief executive officer of
Consolidated-Tomoka Land Co.
Jessica M. Bibliowicz President and chief operating officer of
John A. Levin & Co., Inc. and Levin
Management Co., Inc.
Eugene V. Fife President, chief executive officer and
co-chairman of Multimedia Medical Systems;
limited partner of Goldman, Sachs & Co.
J. Barton Goodwin* Managing director of BCI Advisors, Inc.
James P. Gorter* Chairman of the board of Baker, Fentress &
Company; limited partner of Goldman,
Sachs & Co.
David D. Grumhaus* President of Casey Travel Corporation
Jeffrey A. Kigner Co-chairman and chief investment officer
of John A. Levin & Co., Inc. and Levin
Management Co., Inc.
John A. Levin* President and chief executive officer of Baker,
Fentress & Company and chairman and chief
executive officer of John A. Levin & Co., Inc.
and Levin Management Co., Inc.
Burton G. Malkiel Professor of Economics, Princeton University
David D. Peterson Retired; former president and chief executive
officer of Baker, Fentress & Company; chairman
of Consolidated-Tomoka Land Co.
William H. Springer Retired; former vice chairman of
Ameritech Corp.
Dean J. Takahashi Senior director of endowment management,
Yale University
*Member of the Executive Committee
OFFICERS
James P. Gorter Chairman of the Board
John A. Levin President and Chief Executive Officer
James P. Koeneman Executive Vice President and Secretary
Scott E. Smith Executive Vice President
Julie A. Heironimus Treasurer and Assistant Secretary
</TABLE>
Corporate Data
Transfer and Dividend
Disbursing Agent
Harris Trust and Savings Bank
Shareholder Communications Team
P.O. Box A3504
Chicago, Illinois 60690-3504
1-800-394-5187 or 312-360-5198
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Independent Auditors
Ernst & Young LLP
Net Asset Value Information
The Company's net asset value
is listed each week in Monday's
edition of The Wall Street Journal,
in other major metropolitan
newspapers, and in Barron's.
Daily net asset value
information can be obtained
by calling 1-800-BKF-1891 and selecting option 1.
Address of Company
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
312-236-9190 or 1-800-BKF-1891
Web Site:
www.bakerfentress.com
[RECYCLED LOGO APPEARS HERE]
As a company with historical ties to the lumber industry, Baker Fentress
recognizes the importance of preserving our precious natural resources. The
Company's 1998 Annual Report is printed on recycled paper. We encourage
recycling and use of recycled products.
<PAGE>
[ARTWORK APPEARS HERE]
Baker, Fentress & Company
Established 1891
SUITE 3510, 200 WEST MADISON STREET
CHICAGO, ILLINOIS 60606
(312) 236-9190 FAX (312) 236-6772
