BAKER FENTRESS & CO, N-30D/A, 2000-03-13

BAKER FENTRESS & CO
N-30D/A, 2000-03-13

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Baker, Fentress & Company

1999 Annual Report Supplement

Financial and Other Information Relating to John A. Levin & Co., Inc. and
Related Companies

March 13, 2000
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SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS
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Some of the statements we have made in this document under the sections
entitled "Business" and "Risk Factors" constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
For those statements, we claim the protection of the safe harbor for forward-
looking statements contained in the Reform Act. These forward-looking
statements are based on our current expectations and are susceptible to a
number of risks, uncertainties and other factors, and our actual results,
performance and achievements may differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include the following: competition; the existence or
absence of adverse publicity; changes in business strategy; quality of
management; availability, terms and deployment of capital; business abilities
and judgment of personnel; availability of qualified personnel; labor and
employee benefit costs; changes in, or failure to comply with, government
regulations; the costs and other effects of legal and administrative
proceedings; and other risks and uncertainties referred to in this document
and in our other current and periodic filings with the Securities and Exchange
Commission, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. We will not undertake and specifically
decline any obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events. In addition, it is our policy
generally not to make any specific projections as to future earnings, and we
do not endorse any projections regarding future performance that may be made
by third parties.

BACKGROUND
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On January 7, 2000, Baker, Fentress & Company ("BKF") made a final
distribution of $12.30 per share under a plan of distribution of assets that
was approved by shareholders on August 19, 1999. This distribution completed
BKF's transformation into an operating company. BKF's business now operates
primarily through its wholly-owned subsidiary, John A. Levin & Co., Inc.,
which we will refer to, together with its related companies excluding BKF, as
"Levco." In conjunction with this distribution of assets, BKF has applied for,
but not yet received, an order from the Securities and Exchange Commission
declaring that it has ceased to be an investment company. Until this order is
received, and we cannot predict when this order will be entered, BKF will not
be eligible to file annual and quarterly reports on the forms typically used
by public operating companies. For this reason, BKF's 1999 annual report was
filed in the format used by investment companies and did not contain detailed
information regarding Levco. To provide investors with further information
regarding BKF's primary asset, we are distributing this supplement to the
annual report, containing audited financial information relating to Levco,
unaudited pro forma financial information for Levco and BKF, a description of
Levco's business and related risk factors, and a discussion and analysis of
Levco's financial results.

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BUSINESS
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Introduction

Levco is an asset management business acquired by BKF in June 1996. As part
of the acquisition, BKF formed Levin Management Co., Inc. to provide
administrative and management services to John A. Levin & Co., Inc. and its
related companies. BKF owns 100% of Levin Management, which owns 100% of John
A. Levin & Co. John A. Levin & Co. owns 100% of Levco GP, Inc., which is the
general partner of several investment partnerships managed by Levco, which we
refer to as the "Levco Partnerships", and LEVCO Securities, Inc., a registered
broker-dealer.

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;
Levco also offers an event-driven, risk arbitrage product and other more
specialized investment programs.

Through its wholly-owned subsidiary, Levco GP, Levco acts as the general
partner of a number of private investment partnerships, and Levco serves
directly as an adviser to private investment vehicles organized outside the
United States. For managing these vehicles, Levco and Levco GP 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 the Merrill Lynch Consults
program. In February 1999, Levco began participating in the Salomon Smith
Barney Fiduciary Services program. In these wrap fee programs, clients pay the
sponsoring broker an asset-based fee that covers brokerage commissions,
advisory services, custodial fees and other reporting and administrative
services. Investors are able to select Levco from among a limited number of
managers participating in the program, and Levco receives a portion of the
wrap fee paid by the clients who select Levco to manage their accounts through
the program.

LEVCO Securities, 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.

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Baker, Fentress & Company
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|
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Levin Management Co., Inc.
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|
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John A. Levin & Co., Inc.
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|
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Levco GP, Inc. LEVCO Securities, Inc.
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Clients

Levco's investment advisory business includes services provided to
institutional and individual accounts, wrap fee accounts, partnership accounts
and subadvisory accounts. As of December 31, 1999, assets under management
were approximately $8.4 billion.

Types of Clients

Institutional 44%
Partnerships 1%
Investment Companies 7%
Arbitrage 8%
Wrap 17%
Individual 23%

Total Assets Under Management--All Clients:
$8,444 million
Data as of 12/31/99. Numbers have been rounded.

Institutional and Individual Accounts. As of December 31, 1999,
institutional accounts represented 44% of Levco's total assets under
management, with a total market value of $3.75 billion. Currently, Levco
serves as investment adviser to more than 130 separate institutional accounts.
The average institutional account value at December 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 December 31, 1999, with a
total market value of $1.9 billion. As of December 31, 1999, Levco's
individual client base represented more than 480 accounts, the average value
of which was approximately $4 million.

As of December 31, 1999, investment companies represented 7% of Levco's
total assets under management, with a total market value of $611 million.
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 Large Company Stock Value Fund in the Charter
Funds(SM) Series of the CIGNA Funds Group.

Wrap Fee Accounts. With approximately $1.45 billion of managed assets as of
December 31, 1999, wrap fee accounts represented 17% of Levco's total assets
under management. As of December 31, 1999, Levco had approximately 6,500 wrap
fee accounts, the average value of which was approximately $222,000.

Arbitrage Accounts. As of December 31, 1999, arbitrage accounts and
partnerships represented 8% of Levco's total assets under management, with a
total market value of $642 million.

Levco Partnerships. As of December 31, 1999, the Levco Partnerships
represented approximately 1% of Levco's total assets under management, with a
total market value of $101 million (excluding the arbitrage partnership).

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

ASSETS UNDER MANAGEMENT
(IN MILLIONS)

<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Advisory Accounts
Institutional and Individual
Accounts........................ $6,252 $6,569 $6,220 $5,627 $5,037 $3,505
BKF Assets Managed by Levco...... --(a) 505 491 470 -- --
Levco Partnerships............... 101 127 158 224 221 190
Arbitrage Accounts............... 642 355 139 123 129 120
Wrap Fee Accounts................ 1,450 757 351 45 0 0
------ ------ ------ ------ ------ ------
TOTAL............................ $8,444 $8,313 $7,359 $6,489 $5,387 $3,815
====== ====== ====== ====== ====== ======
</TABLE>
(a) The BKF portfolio managed by Levco was liquidated during the period
between August 19, 1999 and December 31, 1999.

Levco's assets under management have increased over each of the periods
indicated. This growth has been generated by maintaining a relatively stable
client base, attracting new clients, and entering the wrap fee business, as
well as through market appreciation of assets under management. Levco's wrap
fee business has attracted net "new business" in each year since its inception
in 1996--meaning that the assets under management of new clients and
additional contributions of assets by existing clients have exceeded
withdrawals of assets by clients. In 1997 and 1998, Levco's institutional and
individual separate account business grew overall, although the level of
redemptions from separate account clients was higher than the amount of new
assets Levco obtained. In these years, increases in assets from market
appreciation more than offset the net withdrawals. In 1999, the separate
account business experienced a decline, as increases in assets from market
appreciation could not fully offset net withdrawals.

PORTFOLIO PERFORMANCE INFORMATION

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

<TABLE>
<CAPTION>
Comparison of Annual Returns
---------------------------------------------------------
1999 1998 1997 1996 1995 1994 1993 1992
----- ----- ----- ----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Levco Composite (net)... 16.79% 15.87 % 23.00% 21.02% 32.95% 0.37 % 13.82% 14.08%
Russell 1000 Value
Index.................. 7.35 15.63 35.18 21.64 38.36 (1.98) 18.07 13.58
S&P 500 Index........... 21.04 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> <C>
Levco Composite (net)... 25.36% (3.40)% 29.21% 22.52% 12.88% 15.23 % 770.37%
Russell 1000 Value
Index.................. 24.55 (8.08) 25.19 23.16 0.50 19.98 690.13
S&P 500 Index........... 30.45 (3.14) 31.65 16.57 5.22 18.70 920.27
</TABLE>
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Past performance is not indicative of future results.

The Notes are an integral part hereof.

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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. 1999 performance has not been
examined. For the periods from 1/1/86 through 6/30/96, performance is that of
Levco's predecessor.

The investment performance results have been prepared in compliance with the
Association for Investment Management and Research ("AIMR") Performance
Presentation Standards from January 1, 1993 through December 31, 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. 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.

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 .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.

FINANCIAL INFORMATION

The consolidated revenues of Levin Management consist principally of
investment management fees ("IMF Fees") 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.

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The table below shows Levin Management's consolidated revenues and
operating income for the periods indicated.

Revenues and Operating Income
(in millions) (unaudited)

<TABLE>
<CAPTION>
At December 31,
---------------------------
1999 1998 1997 1996(a)
----- ----- ----- ------
<S> <C> <C> <C> <C>
REVENUES:
Investment Management Fees
(IMF):
Advisory.................. $30.9 $32.3 $33.6 $29.1
Wrap Accounts............. 5.2 3.6 1.2 0.0
Arbitrage................. 2.0 0.3 0.0 0.0
----- ----- ----- -----
Total IMF Fees.......... 38.1 36.2 34.8 29.1
Incentive Fees and
Allocations.............. 10.3 4.3 2.8 4.7
----- ----- ----- -----
Total Fees.............. 48.4 40.5 37.6 33.8
Other..................... 1.5 1.5 1.6 1.3
----- ----- ----- -----
Total Revenues.......... 49.9 42.0 39.2 35.1
EXPENSES:
Salaries and Benefits..... 10.7 9.1 7.1 6.6
Bonuses (incl.
Guaranteed).............. 16.4 13.6 10.4(c) 7.9(b)
----- ----- ----- -----
Total Compensation...... 27.1 22.7 17.5 14.5
Non-Compensation
Expenses................. 7.4 5.6 4.1 4.1
----- ----- ----- -----
Total Expenses.......... 34.5 28.3 21.6 18.6
----- ----- ----- -----
OPERATING INCOME(d)....... $15.4 $13.7 $17.6 $16.5
===== ===== ===== =====
</TABLE>
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Revenue and expense classifications for 1998 and prior years have been changed
to conform to the classifications used for 1999.
(a) The information shown for 1996 includes the period before BKF'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 BKF paid to Levco, which
diminished substantially when BKF began liquidating its portfolio of publicly
traded securities on August 19, 1999 pursuant to a plan to enhance shareholder
value. BKF paid Levco $1.0 million (approximately 2% of Levco's total
revenues) in fees in 1999, $1.5 million (approximately 3.6% of Levco's total
revenues) in 1998, $1.5 million (approximately 3.8% of Levco's total revenues)
in 1997 and $750,000 (approximately 2.1% of Levco's total revenues) for the
six-month period ended December 31, 1996.

For a more detailed discussion of Levco's financial results, please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 10.

CONTRACTUAL ARRANGEMENTS

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

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In connection with Levco's activities as a broker-dealer, Levco 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). The agreement assigns account supervisory
responsibility to Levco and grants the clearing agent the authority to execute
and report securities transactions for Levco's clients.

EMPLOYEES

As of December 31, 1999, Levin Management Co., Inc. employed 82 people,
including 22 investment professionals, of whom 11 were primarily portfolio
managers, 7 were primarily securities analysts and 4 were traders or trading
associates. The 22 investment professionals have more than 304 years of
collective experience in finance, with an average of 14 years in the industry
and 6 years at Levco or its predecessor. The senior investment professionals
have an average of 8 years at Levco or its predecessor.

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. Levco
expanded its space to its current configuration in 1998, and we believe that
its facilities are adequate for its current level of operations.

RISK FACTORS
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In addition to the risks contained in this document, the following risks,
among others, sometimes have affected, and in the future could affect, our
business, financial condition or results of operations. The risks described
below are not the only ones facing our company. Additional risks not presently
known to us or that we currently deem immaterial may also impact our business.

LEVCO IS DEPENDENT ON KEY PERSONNEL

Levco is dependent on the efforts of its senior investment professionals
managing the large cap value strategy and the risk arbitrage product. In
particular, Levco is dependent on the efforts of Mr. John A. Levin, the
chairman and chief executive officer of Baker, Fentress & Company and Levco,
and Mr. Jeffrey A. Kigner, Levco's 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 could have a
material adverse effect on Levco because it could jeopardize its relationships
with its clients and result in the loss of accounts. Similarly, Mr. Frank F.
Rango and Mr. Henry L. Levin are responsible for the management of the event
driven, risk arbitrage product, and the loss of their services could
jeopardize relationships with clients purchasing this product and result in
the loss of assets managed pursuant to the strategy.

Levco's future success depends on its ability to retain and attract
qualified personnel to conduct its investment management business. The market
for qualified portfolio managers is highly competitive and has grown more so
in recent years as the entire industry has experienced growth. To the extent
that Levco further diversifies its products and strategies, we anticipate that
it will be necessary for Levco to add portfolio managers and investment
analysts. We cannot assure you 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 personnel could have a material
adverse effect on Levco's business.

In December 1998, BKF adopted an incentive compensation plan to give Levco
the ability to attract and retain talented professionals with equity-based and
cash compensation. In January 2000,

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grants of restricted stock units and options were made under the plan to
certain investment personnel and key executives. If the price of BKF stock
decreases, we cannot assure you that the equity-based compensation will serve
its purpose to attract and keep talented professionals. In addition, an
increase in the costs of recruiting and retaining qualified personnel could
have a material effect on Levco's earnings.

A DECLINE IN THE PERFORMANCE OF THE SECURITIES MARKETS COULD HAVE AN ADVERSE
EFFECT ON lEVCO'S REVENUES

Levco's operations are affected by many economic factors, including the
performance of the securities markets. 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 into these markets and has contributed to significant market
appreciation. This has led to an increase in Levco's assets under management
and revenues. 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 its revenues. In addition, any continuing
decline in the equity markets, failure of these markets to sustain their prior
rates of growth, or continued volatility in these markets could result in
investors withdrawing from the equity markets or decreasing their rate of
investment, either of which would likely adversely affect Levco. Levco's rates
of growth in assets under management and revenues have varied from year to
year, and there can be no assurance that the growth rates sustained in the
past will continue. Levco is generally a "value" manager, 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. In addition, in recent years value
stocks have underperformed other types of securities and we cannot assure you
that this trend will not continue or worsen. Levco also offers an event-
driven, risk arbitrage product. The failure to effect the risk arbitrage
strategy in an efficient manner could likewise impact Levco's revenues.

ADVERSE INVESTMENT PERFORMANCE COULD AFFECT lEVCO'S FINANCIAL CONDITION

Success in the investment management industry depends largely on investment
performance. Good performance generally stimulates sales of services and
investment products and tends to keep withdrawals and redemptions low. This
generates higher management fees, which are based on the amount of assets
under management and sometimes on investment performance. If Levco experiences
adverse performance, this will likely result in decreased sales, decreased
assets under management and the loss of accounts, with a corresponding
decrease in revenue.

Success in the investment management industry also depends on the ability of
an investment manager, and third parties with whom the investment manager
contracts, to successfully perform administrative, back-office and trade
execution functions. A failure by Levco or a third party contracted by Levco
to perform such functions could adversely impact Levco's revenues.

THE LOSS OF SIGNIFICANT ACCOUNTS COULD ADVERSELY AFFECT lEVCO'S REVENUES

As of December 31, 1999, Levco had approximately 630 accounts (counting each
wrap fee program as a single account), and its ten largest accounts (including
BKF assets managed by Levco) generated approximately $23.4 million of revenues
for Levco in 1999 (including incentive fees from the arbitrage product), or
approximately 46.7% of Levin Management's total revenues. The loss of any of
these accounts could have an adverse effect on Levco's revenues. Effective
February 1, 2000, one of these accounts was terminated with a market value of
approximately $418 million at the time of its termination. This termination
followed a change in the fiduciary responsible for selecting investment
managers for the account. In addition, Levco will not receive any fees for
managing the assets of BKF, which fees generated approximately $1.0 million of
revenues for Levco in 1999 and $1.5 million of revenues for Levco in 1998.
Levco has no knowledge of any further terminations or withdrawals relating to
these accounts.

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A DECREASE IN lEVCO'S MANAGEMENT FEES, THE CANCELLATION OF INVESTMENT
MANAGEMENT AGREEMENTS OR ADVERSE INVESTMENT PERFORMANCE BY THE lEVCO
pARTNERSHIPS COULD ADVERSELY AFFECT LEVCO'S PROFITS

MANAGEMENT FEES

Some segments of the investment management industry have experienced a trend
toward lower management fees. Levco must maintain a level of investment
returns and service that is acceptable to clients given the fees they pay. We
cannot assure you that Levco will be able to maintain its current fee
structure or client base. Reduction of the fees for new or existing clients
could have an adverse impact on Levco's profits.

CANCELLATION OF INVESTMENT MANAGEMENT AGREEMENTS

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

ADVERSE INVESTMENT PERFORMANCE OF THE LEVCO PARTNERSHIPS

Through Levco GP, we also derive revenue from the Levco Partnerships'
incentive allocations. Good performance by the Levco Partnerships generates
higher incentive allocations because those allocations are based on the
performance of the assets under management. On the other hand, relatively
adverse performance will result in lower or no incentive allocations, and will
tend to lead to decreased assets under management and the loss of accounts,
with corresponding decreases in revenue.

LEVCO IS SUBJECT TO COMPETITION IN THE INVESTMENT MANAGEMENT BUSINESS

The investment management business is highly competitive. Levco competes
with a large number of domestic and foreign investment management firms,
commercial banks, insurance companies, broker-dealers and other firms offering
comparable investment services. Many of the financial services companies with
which Levco competes have greater resources and assets under management than
Levco does and offer a broader array of investment products and services.

We believe that the most important factors affecting Levco's ability to
attract and retain clients are the abilities, performance records and
reputations of its portfolio managers, the ability to hire and retain key
investment personnel, the attractiveness of investment strategies to potential
investors and 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. Levco's ability to compete with other investment management firms also
depends, in part, on the relative attractiveness of its investment
philosophies and methods under prevailing market conditions. The absence of
significant barriers to entry by new investment management firms in the
institutional managed accounts business increases competitive pressure.

LEVCO IS DEPENDENT ON INFORMATION SYSTEMS

Levco is highly dependent on information systems and technology and depends,
to a great extent, on third parties who are responsible for managing,
maintaining and updating these systems. We cannot assure you that Levco's
current systems will continue to be able to accommodate its growth or that the
costs of its outsourcing arrangements will not increase. The failure to
accommodate growth or an increase in costs could have an adverse effect on
Levco.

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CONFLICTS OF INTEREST MAY ARISE AND ADVERSELY AFFECT LEVCO

From time to time, Levco's officers, directors and employees may own
securities which one or more of its clients also own. Although Levco maintains
internal policies regarding individual investments by its officers, directors
and employees which require them to report securities transactions and
restrict certain transactions so as to minimize possible conflicts of
interest, possible conflicts of interest may arise that could have adverse
effects on Levco.

GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT LEVCO'S BUSINESS

Virtually all aspects of Levco's business are subject to various federal and
state laws and regulations. Levco is registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940. The Investment
Advisers Act imposes numerous obligations on registered investment advisers,
including fiduciary, recordkeeping, operational and disclosure obligations.
Levco is also registered with the Commodity Futures Trading Commission as a
commodity trading advisor and a commodity pool operator and Levco GP is
registered with that agency as a commodity pool operator. Levco and Levco GP
are members of the National Futures Association. LEVCO Securities is
registered as a broker-dealer under the Securities Exchange Act of 1934, is a
member of the National Association of Securities Dealers, Inc. and is a member
of the Municipal Securities Rulemaking Board. In addition, Levco is subject to
the Employee Retirement Income Security Act of 1974 and its regulations
insofar as it is a "fiduciary" with respect to certain clients.

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

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------

The following analysis and discussion of the results of operations is based
on the audited financial statements of Levin Management Co., Inc. for the
years 1999 and 1998. These financial statements reflect the results of the
operations of Levco and its related companies.

REVENUES

Revenues (excluding interest income and reflecting the reclassification of
commissions paid to employees as compensation expense) increased 19% from 1998
to 1999, to $49.9 million from $42.0 million. Contributing most to the
increase was the rise in incentive fees from our event driven, risk arbitrage
product to $10.2 million from $4.3 million, as significant contributions of
capital, in conjunction with performance based appreciation, raised the assets
under management in this product. The growth in assets under management in
wrap fee programs increased the management fees from assets gathered through
these distribution channels to $5.2 million from $3.6 million.

Management fees from our institutional and individual managed accounts
business declined for the year. This decline was primarily due to a reduction
in revenues from the management of assets in the BKF portfolio, the loss of
one major institutional account, and a major withdrawal from another large
institutional account. Partially offsetting these losses were increases in
fees from existing accounts based on significant additional contributions from
two major institutional accounts and performance based appreciation in other
portfolios. In addition, 1999 saw the inception of a major new institutional
account.

10
<PAGE>

The increase in other revenues is primarily attributable to the increase in
commissions at LEVCO Securities, Inc., Levco's broker-dealer subsidiary.

EXPENSES

From 1998 to 1999, expenses (reflecting the reclassification of commissions
paid to employees as compensation expense) increased to $34.5 million from
$28.3 million, or approximately 22.1%. Non-compensation expenses rose
approximately 32.5% to $7.4 million from $5.6 million. The largest factors in
this rise in non-compensation expenses were Levco's share of the expenses
relating to the implementation of the 1998 Baker, Fentress & Company incentive
compensation plan and the increase in expenses relating to the institutional
marketing effort. Other factors relating to the rise in non-compensation
expenses were the increase in the depreciation expense relating to the office
space taken on the 19th floor of One Rockefeller Plaza, which expense was
calculated for only one quarter of 1998, and the costs associated with the
implementation of a new portfolio management and trading system for accounts
managed through wrap fee programs.

It should be noted that non-compensation expenses for Levin Management Co.,
Inc. are expected to increase again in 2000 as the result of the assumption of
certain expenses previously borne by Baker, Fentress & Company, including
directors' fees, insurance expenses, and other expenses related to being a
public operating company. The pro forma financial statements assume that such
additional expenses will be approximately $1.4 million on an annual basis.

The largest expense of Levin Management Co., Inc. is compensation expense,
which rose approximately 19.5% in 1999, to $27.1 million from $22.7 million. A
major contributor to the rise in the expenses was the increase in the number
of employees from 64 to 80 during 1998. In 1999, a full year of expenses
relating to these employees were incurred for the first time. In 1999, the
number of employees increased to 82.

In 1999, the board of directors of BKF established a target percentage for
the amount of profits (before taxes, compensation and amortization expenses)
that should be allocated to compensation. This target percentage was
established with the goal of creating a structure that would allow Levco to
retain key professionals and took into account the compensation structures at
other investment management businesses. Under the BKF 1998 Incentive
Compensation Plan, certain professionals elected to shift a portion of their
cash compensation into grants of restricted stock units ("RSU") and options.
This shift had the effect of reducing the financial statement compensation
expense for 1999. Those employees electing to receive equity in lieu of cash
forfeited their rights to the cash equivalent portion of their bonus ($1.7
million) in return for the RSU's and non-qualified options received. In
return, these employees received an additional 20% of equity based on the
amount exchanged. The RSU's and options require future services as a condition
to the ultimate receipt of the underlying number of shares of BKF stock. The
Company's policy is to expense the RSU amounts ratably over the required
service period.

LIQUIDITY

BKF's reclassification to the capital of Levin Management Co., Inc. in
December 1999 of $65 million of notes from Levin Management Co., Inc.
significantly enhanced Levco's liquidity and financial condition. Interest
payments on the notes totaled $6,054,000 in 1999. While such interest payments
will not be made in future years, the elimination of such payments will have
the effect of increasing BKF's corporate taxable income. All Levco investment
management fee receivables are current, and current assets increased 34% from
1998 to 1999, to $25.0 million from $18.7 million. The largest component of
this increase is the rise in the incentive fee from the event driven, risk
arbitrage product. The contribution to capital and the increase in
profitability led to an increase in working capital to $58.3 million from
$10.1 million.

11
<PAGE>

EXHIBITS

<TABLE>
<S> <C>
Levin Management Co., Inc. and Subsidiaries Consolidated Financial
Statements for the year ended December 31, 1999 Exhibit A

Levin Management Co., Inc. and Subsidiaries Consolidated Financial
Statements for the year ended December 31, 1998 Exhibit B

Baker, Fentress & Company and Subsidiaries Unaudited Pro Forma
Consolidated Financial Statements Exhibit C
</TABLE>
<PAGE>

EXHIBIT A
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, 1999, and the related
consolidated statements of income, changes in stockholder's equity (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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our 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, 1999, and the
consolidated results of their operations and their cash flows for the year
then ended, in conformity with accounting principles generally accepted in the
United States.

/s/ Ernst & Young LLP

February 4, 2000

A-1
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

DECEMBER 31, 1999

<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents...................................... $ 12,431,000
Investment advisory and incentive fees receivable.............. 12,085,000
Prepaid expenses............................................... 290,000
Receivable from clearing broker................................ 195,000
------------
Total current assets......................................... 25,001,000
------------
Investments in affiliated investment partnerships................ 7,633,000
Fixed assets (net of accumulated depreciation of $1,533,000)..... 3,154,000
Other assets..................................................... 912,000
------------
11,699,000
------------
Total assets................................................. $ 36,700,000
============
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
<S> <C>
Current liabilities:
Accrued expenses and accounts payable.......................... $ 2,036,000
Accrued bonuses................................................ 13,111,000
Income taxes payable........................................... 240,000
------------
Total current liabilities.................................... 15,387,000
Stockholder's equity (deficit):
Common stock, $.01 par value; 1,000 shares authorized, issued
and outstanding............................................... --
Additional paid-in capital..................................... 55,517,000
Accumulated deficit............................................ (34,204,000)
------------
Total stockholder's equity................................... 21,313,000
------------
Total liabilities and stockholder's equity................... $ 36,700,000
============
</TABLE>

See notes to consolidated financial statements.

A-2
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF INCOME

YEAR ENDED DECEMBER 31, 1999

<TABLE>
<S> <C>
REVENUES
Investment advisory fees........................................... $38,019,000
Incentive fees and general partner allocations..................... 10,348,000
Commission income--net............................................. 1,419,000
Increase in equity from investments in limited partnerships........ 161,000
Interest........................................................... 431,000
-----------
Total revenues..................................................... 50,378,000
-----------
EXPENSES
Employee compensation and benefits................................. 27,129,000
Communications and portfolio systems expense....................... 1,071,000
Occupancy and equipment rental..................................... 2,120,000
Professional, legal and accounting fees............................ 1,445,000
Promotional costs.................................................. 1,371,000
Other operating expenses........................................... 1,401,000
-----------
Total expenses..................................................... 34,537,000
-----------
Income before interest and taxes................................... 15,841,000
Interest expense................................................... 6,054,000
-----------
Income before taxes................................................ 9,787,000
Provision for taxes on income, current............................. 4,529,000
-----------
Net income......................................................... $ 5,258,000
===========
</TABLE>

See notes to consolidated financial statements.

A-3
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (DEFICIT)

YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
Total
Additional Stockholder's
Common Paid-in Accumulated Equity
Stock Capital Deficit (Deficit)
------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of
year........................ $-- $ 55,517,000 $(104,462,000) $(48,945,000)
Reclassification of loan
payable to equity........... -- -- 65,000,000 65,000,000
Net income................... -- -- 5,258,000 5,258,000
---- ------------ ------------- ------------
Balance at end of year....... $-- $ 55,517,000 $ (34,204,000) $ 21,313,000
==== ============ ============= ============
</TABLE>

See notes to consolidated financial statements.

A-4
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED DECEMBER 31, 1999

<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 5,258,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 758,000
(Increase) in investment advisory fees receivable.............. (2,789,000)
Decrease in prepaid expense.................................... 212,000
(Increase) in receivable from clearing broker.................. (99,000)
(Increase) in investments in affiliated investment
partnerships.................................................. (2,750,000)
Increase in accrued expenses and accounts payable.............. 426,000
Increase in accrued bonuses.................................... 2,960,000
(Decrease) in income taxes payable............................. (11,000)
-----------
Net cash provided by operating activities........................ 3,965,000
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in other assets......................................... 542,000
Fixed asset additions............................................ (925,000)
-----------
Net cash (used in) investing activities.......................... (383,000)
-----------
Net increase in cash and cash equivalents........................ 3,582,000
Cash and cash equivalents at beginning of year................... 8,849,000
-----------
Cash and cash equivalents at end of year......................... $12,431,000
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest........................................... $ 6,054,000
===========
Cash paid for taxes.............................................. $ 4,912,000
===========
</TABLE>

See notes to consolidated financial statements.

A-5
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1999

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. The Company also participates in Broker
Consults Programs (wrap accounts) with two nationally recognized financial
institutions. 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 six
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 company listed on the New
York Stock Exchange. BKF is registered under the Investment Company Act of
1940 as a non-diversified closed-end management investment company. In August
1999, the Board of Directors and shareholders of BKF adopted and implemented a
Plan for Distribution of Assets (the "Plan"), pursuant to which all of BKF's
investment securities, except the Company, including its subsidiaries, and two
private placements were sold. The net proceeds of sale of BKF's investment
securities and shares of one BKF portfolio security were distributed to BKF's
shareholders in 1999 and January 2000 pursuant to the Plan. BKF has applied to
the Securities and Exchange Commission for an order declaring that it has
ceased to be an investment company. BKF's principal business going forward
will be investment management, conducted through the Company and its
subsidiaries. Upon the SEC's approval of the de-registration process, BKF will
report as a public operating company reflecting the Company as a consolidated
subsidiary.

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. Wrap account fees are calculated quarterly in advance based
upon a percentage of the market value of each account as of the previous
calendar quarter end. Incentive fees, general partner allocations of income
earned from affiliated investment partnerships and incentive fees from other
accounts are calculated and accrued 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.

A-6
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

CASH AND CASH EQUIVALENTS

The Company treats all highly liquid instruments with maturities at
acquisition of three months or less as cash equivalents. At December 31, 1999,
the Company maintained substantially all of its cash and equivalents invested
in interest bearing instruments at two 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. The investment
amount equals the sum of LEVCO GP's capital accounts in the partnerships
obtained from audited financial statements which were prepared in accordance
with accounting principles generally accepted in the United States. LEVCO GP
is entitled to a special allocation of income from each of the affiliated
investment partnerships based on the performance of the respective
partnership.

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, based on an
effective rate of approximately 46% of income before taxes, included in the
consolidated statement of income consists of the following for the year ended
December 31, 1999:

<TABLE>
<S> <C>
Federal........................................................ $2,912,000
State and local................................................ 1,617,000
----------
$4,529,000
==========
</TABLE>

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 $807,000 at
December 31, 1999, 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.

A-7
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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

In June 1996, the Company borrowed $65,000,000 under a term loan agreement
(as amended) with BKF. The loan (as amended) bore interest at 10.25% per annum
during 1999. The loan was originally due on June 28, 1999 and was subsequently
extended to December 15, 1999 with an interest rate of LIBOR plus 3.5%.

On December 15, 1999, the Company's loan due to BKF matured. BKF's Board of
Directors approved the reclassification of the loan to the capital of the
Company. The reclassification is reflected as a reduction of the Company's
accumulated deficit on the Consolidated Balance Sheet. Interest expense
incurred by the Company related exclusively to the loan. On-going, the Company
will not incur such expense on this loan.

INVESTMENT ADVISORY FEES FROM BKF

LEVCO managed the publicly traded portion of BKF's investment portfolio (see
Note 1). Advisory fees earned from this relationship for the year ended
December 31, 1999 were approximately $1,013,000. Because of BKF's Plan for
Distribution of Assets and subsequent liquidation of the public portfolio the
Company managed, which began in August 1999, the investment advisory fees
received by the Company were substantially reduced.

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 $1,221,000 and $5,657,000, respectively, for the year ended
December 31, 1999. Included in investment in affiliated partnerships is
approximately $5.4 million of 1999 incentive allocations that the Company
intends to withdraw in 2000.

LEVCO GP has general partner liability with respect to its interest in each
of the affiliated investment partnerships and has no assets other than its
interest in these partnerships and certain cash and cash equivalents.

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.

A-8
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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>
2000......................................................... $ 1,244,000
2001......................................................... 1,244,000
2002......................................................... 1,264,000
2003......................................................... 1,324,000
2004......................................................... 1,364,000
2005 to 2008................................................. 4,581,000
-----------
Total minimum payments required.............................. $11,021,000
===========
</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, 1999, 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 $299,000 related to
contributions to the plan for the year ended December 31, 1999.

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 $428,000 related to contributions to the plan for the
year ended December 31, 1999.

7. INCENTIVE COMPENSATION PLAN

In December 1998, the shareholders of BKF approved an Incentive Compensation
Plan ("Compensation Plan") that allows BKF and the Company to pay officers and
employees a part of their compensation in restricted stock units ("RSU") and
other forms of equity-based compensation, including stock options. The total
number of shares of BKF common stock that may be issued under the Compensation
Plan is 650,000 shares, giving effect to a reverse stock split by BKF
effectuated in January 2000. In addition, the Compensation Plan permits
employees to borrow amounts from the Company in order to purchase BKF stock or
exercise options.

In early 2000, the Compensation Committee of BKF ("Committee") authorized
the issuance of 76,855 RSU's and 183,718 non-qualified stock options to
purchase BKF shares under the Compensation Plan as a component of the fiscal
1999 year-end bonuses. Those employees electing to receive RSU's and non-
qualified options forfeited their rights to the cash equivalent portion of
their bonus in return for the RSU's and options received. In return, these
employees received an additional 20% of equity based on the amount exchanged.
The RSU's granted in exchange for a portion of the original cash bonus vest
pro-rata over a two-year period beginning on December 31, 2000. The RSU's

A-9
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

require future services as a condition to the ultimate receipt of the
underlying number of shares of BKF common stock. The Company's policy is to
expense these amounts ratably over the required service period. The Committee
granted 183,178 non-qualified stock options to purchase BKF shares at a strike
price of $13.03125 (the average market price on the date of grant). These
options are exercisable in equal annual installments in December 2000 and
December 2001 subject to satisfying employment conditions, with exceptions for
termination due to death, retirement or a change in control of the ownership
of BKF. Once the service requirement have been met, these options will remain
outstanding and exercisable until the tenth anniversary of the date of grant,
subject to earlier expiration upon termination of employment. In January 2000,
the Committee granted an additional 103,098 non-qualified options which will
expire in January 2010. These options have an exercise price of $13.03125 and
vest over one to three years. In 1999, the Company did not incur any
compensation expense related to the Compensation Plan.

8. IMPACT OF YEAR 2000 (UNAUDITED)

In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission
critical information technology and noninformation technology systems and
believes those systems successfully responded to the Year 2000 date change.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems or the services of third parties. The
Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

A-10
<PAGE>

EXHIBIT B

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.

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, 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

B-1
<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.

B-2
<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.

B-3
<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.

B-4
<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.

B-5
<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

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 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

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, 1998, the Company maintained
substantially all of its cash and equivalents at one nationally recognized
financial institution.

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.

B-6
<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

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

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

B-7
<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.

B-8
<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.

B-9
<PAGE>

EXHIBIT C

BAKER, FENTRESS & COMPANY AND SUBSIDIARIES UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS

A. REORGANIZATION

The accompanying unaudited pro forma statements present the Unaudited Pro
Forma Consolidated Statements of Financial Condition of Baker, Fentress &
Company ("BKF" or the "Company") and Levin Management Co., Inc. and
Subsidiaries ("LEVCO"), and the Unaudited Pro Forma Consolidated Statements of
Income of LEVCO, each on a pro forma basis for the fiscal years ended December
31, 1999 and 1998. Pursuant to the BKF Plan for Distribution of Assets
("Plan") approved by BKF shareholders in August 1999, the final distribution
was made on January 7, 2000. As a result, BKF became the holding company for
LEVCO. BKF has no operations other than as a holding company.

The BKF Unaudited Pro Forma Consolidated Statements of Financial Condition
for the years ended December 31, 1999 and 1998 present on a pro forma basis,
the Company adjusted for the liquidation of substantially all of its private
and public portfolios, the distribution of cash and shares of Consolidated-
Tomoka Land Company ("CTO") and the recasting of the June 1996 acquisition of
LEVCO using purchase accounting, taking into account intangible assets. The
equity section has been adjusted to reflect the reclassification to equity of
the $65,000,000 intercompany loan that matured on December 15, 1999, as well
as the 1:6 reverse stock split effectuated on January 7, 2000.

The LEVCO Unaudited Pro Forma Consolidated Statements of Income for the
years ended December 31, 1999 and 1998 present the pro forma results of
operations adjusted for the decreased investment management fee revenue
resulting from the liquidation of the BKF public portfolio, additional
operating expenses which had been previously borne by BKF, reduction in
interest expense for the reclassification of the BKF loan to equity and
adjusted for the amortization expense on intangible assets based on the
recasting of the June 1996 acquisition of LEVCO using purchase accounting.
These statements are presented since they are representative of the Company's
operations after the implementation of the Plan.

The Company expects to de-register with the SEC as a registered investment
company and will become a regular operating company subject to corporate level
income taxes. While this deregistration is still in process, once approved it
is expected to be retroactive to January 1, 2000.

The following 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 Pro Forma Consolidated Statements of Income do not reflect the
non-recurring charge relating to the change in accounting method 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.

C-1
<PAGE>

BAKER, FENTRESS & COMPANY

UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION
(AMOUNTS IN 000, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
Pro forma
December 31, Pro forma December 31,
1999 adjustments 1999
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS:
PORTFOLIO SECURITIES:
Investments (e)...................... $ 1,000 $ 1,000
Investment in LEVCO.................. 92,000 (c) $ (3,695) 88,305
-------- -------
Total investments.................. 93,000 89,305
-------- -------
Cash and cash equivalents............ 481,988 (a) (480,058) 1,930
Receivables and other assets......... 858 858
-------- -------
Total assets....................... $575,846 $92,093
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued
liabilities......................... $ 715 (b) $ (10) $ 705
Accrued severance costs.............. 2,003 2,003
-------- -------
Total liabilities.................. 2,718 2,708
-------- -------
Common stock, $1 par value,
authorized--60,000,000 shares;
issued and outstanding--39,029,101
shares; 6,504,852 shares pro forma.. 39,029 (d) (32,524) 6,505
Capital surplus--additional paid-in
capital............................. 463,426 (a) (422,115) 82,880
(c) (39,018)
(b) 10
(c) (3,695)
(d) 32,524
(a) 51,748
Undistributed net realized gains..... 57,943 (a) (57,943) --
Other retained earnings.............. 51,748 (a) (51,748) --
Unrealized depreciation of
investments......................... (39,018)(c) 39,018 --
-------- -------
Total stockholders' equity......... 573,128 89,385
-------- -------
Total liabilities and
stockholders' equity............ $575,846 $92,093
======== =======
</TABLE>
- --------
(a) To record final distribution made to shareholders on January 7, 2000.
(b) To reflect reversal of advisory fee payable to LEVCO ($10).
(c) To record the retroactive effect of accounting for the LEVCO transaction
under purchase accounting.
(d) To record the reverse stock split (6,504,852 shares are issued and
outstanding after the reverse split).
(e) Represents investments in two private placement securities. The Company
intends to liquidate these positions as appropriate and on reasonable
terms.

C-2
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(AMOUNTS IN 000, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
Pro forma
December 31, Pro forma December 31,
1999 adjustments 1999
------------ ----------- ------------
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents.............. $ 12,431 $ 12,431
Investment advisory fees receivable.... 12,085 (a) $ (10) 12,075
Prepaid expenses and other current
assets................................ 485 485
-------- --------
Total current assets............... 25,001 24,991
-------- --------
Investments in affiliated
partnerships.......................... 7,633 7,633
Fixed assets--net...................... 3,154 3,154
Other assets........................... 912 912
INTANGIBLE ASSETS:
Goodwill............................... (b) 23,363 23,363
Employment contracts................... (b) 23,363 23,363
Investment advisory contracts.......... (b) 70,088 70,088
Accumulated amortization............... (b) (49,812) (49,812)
-------- --------
Total assets....................... $ 36,700 $103,692
======== ========
Liabilities and stockholder's equity:
Current liabilities:
Accrued expenses....................... $ 2,036 $ 2,036
Accrued bonuses........................ 13,111 13,111
Income taxes payable................... 240 240
-------- --------
Total liabilities.................. 15,387 15,387
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value: 1,000
shares authorized
issued and outstanding................
Additional paid-in capital............. 55,517 55,517
Retained earnings (Accumulated
deficit).............................. (34,204)(a) $ (10) 32,788
(b) 67,002
-------- --------
Total stockholder's equity......... 21,313 88,305
-------- --------
Total liabilities and stockholder's
equity................................ $ 36,700 $103,692
======== ========
</TABLE>
- --------
(a) To reverse advisory fee receivable from BKF.
(b) To record the initial acquisition by BKF under purchase accounting.

C-3
<PAGE>

BAKER, FENTRESS & COMPANY AND SUBSIDIARY

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(AMOUNTS IN 000, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
Pro forma
Baker, Fentress Pro forma Levin Pro forma
& Company Management Co., Inc. Intercompany Consolidated
December 31, 1999 December 31, 1999 elimination (a) December 31, 1999
----------------- -------------------- --------------- -----------------
<S> <C> <C> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash
equivalents............ $ 1,930 $ 12,431 $ 14,361
Investment advisory fees
receivable............. 12,075 12,075
Prepaid expenses and
other current assets... 858 485 1,343
------- -------- --------
Total current
assets............. 2,788 24,991 27,779
------- -------- --------
NONCURRENT ASSETS:
Investments in
affiliated
partnerships........... 7,633 7,633
Fixed assets--net....... 3,154 3,154
Other assets............ 912 912
Investments............. 1,000 1,000
Investment in LEVCO..... 88,305 $(88,305) --
INTANGIBLE ASSETS:
Goodwill................ 23,363 23,363
Employment contracts.... 23,363 23,363
Investment advisory
contracts.............. 70,088 70,088
Accumulated
amortization........... (49,812) (49,812)
------- -------- --------
Total assets........ $92,093 $103,692 $107,480
======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accrued expenses........ $ 2,708 $ 2,036 $ 4,744
Accrued bonuses......... 13,111 13,111
Income taxes payable.... 240 240
------- -------- --------
Total liabilities... 2,708 15,387 18,095
------- -------- --------
STOCKHOLDERS' EQUITY:
Common stock, $1 par
value, authorized--
60,000,000 shares;
issued and
outstanding--6,504,852
shares................. 6,505 6,505
Additional paid-in
capital................ 82,880 55,517 $(88,305) 50,092
Retained earnings....... 32,788 32,788
------- -------- --------
Total stockholders'
equity............. 89,385 88,305 89,385
------- -------- --------
Total liabilities and
stockholders' equity... $92,093 $103,692 $107,480
======= ======== ========
</TABLE>
- --------
(a) To eliminate the investment in LEVCO.

C-4
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(AMOUNTS IN 000, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
Year ended Pro forma
December 31, Pro forma Year ended
1999 adjustments December 31, 1999
------------ ----------- -----------------
<S> <C> <C> <C>
REVENUES:
Investment advisory fees ......... $38,019(a) $(1,013) $37,006
Incentive fees and general partner
allocations ..................... 10,509 10,509
Commission income--net ........... 1,419 1,419
------- ---------
Total revenues................ 49,947 48,934
------- ---------
EXPENSES:
Employee compensation and
benefits......................... 27,129(a) (664) 26,465
Occupancy & equipment rental...... 2,120 2,120
Other operating expenses.......... 5,288(b) 1,408 6,696
------- ---------
Total expenses................ 34,537 35,281
------- ---------
Income before interest, taxes and
amortization..................... 15,410 (1,757) 13,653
Interest income................... 431 431
Interest expense-BKF.............. 6,054(c) (6,054) --
Amortization of intangibles....... (d) 11,896 11,896
------- ---------
Income before taxes............... 9,787 2,188
------- ---------
Provision for income taxes........ 4,529(e) 1,833 6,362
------- ---------
Net income (loss)............... $ 5,258 $ (4,174)
======= =========
Net (loss) per share:
Basic and diluted............... $ (0.64)(f)
=========
Weighted average shares
outstanding--basic and diluted... 6,504,852 (f)
=========
</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, which was reclassified to
LEVCO's capital.
(d) To record the amortization of the intangible assets which were recorded
under the original acquisition of LEVCO by BKF.
(e) To record additional taxes for the pro forma adjustments.
(f) Basis of calculation reflects the reverse stock split (which was
effectuated January 7, 2000).

C-5
<PAGE>

BAKER, FENTRESS & COMPANY

UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION

(AMOUNTS IN 000, EXCEPT SHARE AND PER 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) (9,539) $ 1,000
Investment in CTO.................... 70,625 (c) (70,625) --
Investment in LEVCO (f).............. 117,500 (e) (22,674) 94,826
Non-controlled affiliates............ 57,940 (c) (57,940) --
-------- -------
Total investments.................. 707,322 95,826
-------- -------
Cash and cash equivalents............ 67,331 (a) 1,912 1,930
(b) (5,000)
(c) (62,313)
Receivables and other assets......... 2,591 (a) (1,733) 858
-------- -------
Total assets....................... $777,244 $98,614
======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
<S> <C> <C> <C> <C>
Bank borrowing....................... $ 5,000 (b) $ (5,000) $ --
Accounts payable and accrued
liabilities......................... 922 (a) 1,786 2,708
-------- -------
Total liabilities.................. 5,922 2,708
-------- -------
Common stock, $1 par value,
authorized--60,000,000 shares;
issued and outstanding--39,029,101
shares; 6,504,852 shares pro forma.. 39,029 (d) (32,524) 6,505
Capital surplus--additional paid in
capital............................. 463,425 (c) (380,729) 89,401
(d) 32,524
(e) (25,819)
Undistributed net realized gains..... 9,766 (c) (9,766) --
Other retained earnings.............. 48,057 (a) (1,607) --
(c) (46,450)
Unrealized appreciation of
investments......................... 211,045 (c) (214,190) --
(e) 3,145
-------- -------
Total stockholders' equity......... 771,322 95,906
-------- -------
Total liabilities and stockholders'
equity.............................. $777,244 $98,614
======== =======
</TABLE>
- --------
(a) To reflect the collection of receivables, reversal of advisory fee payable
to LEVCO ($127), and record accrual for wind down costs relating to the
Plan for Distribution of assets and partial payment thereof.
(b) To record the repayment of bank borrowing ($5,000).
(c) To record the distribution of the investment in CTO, the sale of
substantially all of the portfolio securities and distribution of the net
proceeds.
(d) To retroactively record the reverse stock split (which was effectuated
January 7, 2000).
(e) To record the retroactive effect of accounting for the LEVCO transaction
under purchase accounting.
(f) The investment in LEVCO reflects the reclassification of the loan to
equity.

C-6
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

(AMOUNTS IN 000, EXCEPT SHARE AND PER 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 $ 8,849

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............................ (c) 23,363 23,363
Employment contracts................ (c) 23,363 23,363
Investment advisory agreements...... (c) 70,088 70,088
Accumulated amortization............ (c) (37,916) (37,916)
--------- --------
Total assets...................... $ 28,067 $106,838
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT):
- ------------------------------------
CURRENT LIABILITIES:
- --------------------
<S> <C> <C> <C> <C>
Accrued expenses.................... $ 1,610 $ 1,610
Accrued bonuses..................... 10,151 10,151
Income taxes payable................ 251 251
Loan Payable-Baker, Fentress &
Company............................ 65,000 (b) $(65,000) --
--------- --------
Total liabilities................. 77,012 12,012
--------- --------
<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) 39,309
(b) 65,000
(c) 78,898
--------- --------
Total stockholder's equity
(deficit)........................ (48,945) 94,826
--------- --------
Total liabilities and stockholder's
equity............................. $ 28,067 $106,838
========= ========
</TABLE>
- --------
(a) To reverse advisory fee receivable from BKF.
(b) To record the reclassification of the loan payable to equity.
(c) To record the initial acquisition by BKF under purchase accounting.

C-7
<PAGE>

BAKER, FENTRESS & COMPANY AND SUBSIDIARY

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

(AMOUNTS IN 000, EXCEPT SHARE AND PER 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............ $ 1,930 $ 8,849 $ 10,779
Investment advisory fees
receivable............. 9,169 9,169
Prepaid expenses and
other current assets... 858 598 1,456
------- -------- --------
Total current assets.. 2,788 18,616 21,404
------- -------- --------
<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
Investments............. 1,000 1,000
Investment in LEVCO..... 94,826 $(94,826) --
<CAPTION>
INTANGIBLE ASSETS:
- ------------------
<S> <C> <C> <C> <C>
Goodwill................ 23,363 23,363
Employment contracts.... 23,363 23,363
Investment advisory
agreements............. 70,088 70,088
Accumulated
amortization........... (37,916) (37,916)
------- -------- --------
Total assets.......... $98,614 $106,838 $110,626
======= ======== ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
- --------------------
CURRENT LIABILITIES:
- --------------------
<S> <C> <C> <C> <C>
Accrued expenses........ $ 2,708 $ 1,610 $ 4,318
Accrued bonuses......... 10,151 10,151
Income taxes payable.... 251 251
------- -------- --------
Total liabilities..... 2,708 12,012 14,720
------- -------- --------
<CAPTION>
STOCKHOLDERS' EQUITY:
- ---------------------
<S> <C> <C> <C> <C>
Common stock, $1 par
value, authorized--
60,000,000 shares;
issued and
outstanding--6,504,852
shares................. 6,505 6,505
Additional paid in
capital................ 89,401 55,517 $(94,826) 50,092
Retained earnings....... 39,309 39,309
------- -------- --------
Total stockholders'
equity............... 95,906 94,826 95,906
------- -------- --------
Total liabilities and
stockholders' equity... $98,614 $106,838 $110,626
======= ======== ========
</TABLE>
- --------
(a) To eliminate the investment in LEVCO.

C-8
<PAGE>

LEVIN MANAGEMENT CO., INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME

(AMOUNTS IN 000, EXCEPT SHARE AND PER 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 and general
partner allocations............. 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........................ 21,984 (a) (750) 21,234
Occupancy & equipment rental..... 1,614 -- 1,614
Other operating expenses......... 4,076 (b) 1,408 5,484
------- ----------
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) --
Amortization of intangibles...... -- (d) 11,896 11,896
------- ----------
Income (loss) before taxes....... 7,665 (23)
------- ----------
Provision for income taxes....... 3,322 (e) 1,928 5,250
------- ----------
Net income (loss).............. $ 4,343 $ (5,273)
======= ==========
Net (loss) per share:
Basic and diluted.............. $ (0.81)(f)
==========
Weighted average shares
outstanding--basic and diluted.. 6,504,852 (f)
==========
</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, which was reclassified to
LEVCO's capital.
(d) To record the amortization of the intangible assets which were recorded
under the original acquisition of LEVCO by BKF.
(e) To record additional taxes for the pro forma adjustments.
(f) Basis of calculation reflects the reverse stock split (which was
effectuated January 7, 2000).

C-9