<PAGE>
Baker, Fentress & Company
A YEAR OF TRANSITION
To Maximize
Shareholder
Value
ANNUAL REPORT 1999
<PAGE>
On The Cover
The graph on the cover depicts the narrowing
of the discount of the BKF market price to
the net asset value over the 12 months ended
December 31, 1999.
OVERVIEW
. Board announced Distribution Plan in May.
. Shareholders approved Plan in August.
. Distributions totaling $18.36 per share declared during 1999.
. One-for-six reverse stock split became effective January 10, 2000, after
payment of final distribution.
. New BKF shares began trading on the NYSE on January 10, 2000.
. Baker Fentress filed request for de-registration as an investment company.
When granted, the company will then become a publicly traded operating company
and will continue to trade on the NYSE.
DISTRIBUTIONS DECLARED in 1999
6/15/99 9/24/99 1/07/00 Total
------- ------- ------- ------
Ordinary Income $ 0.30 $ 1.00 $ 1.49 $ 2.79
Long-term Capital Gain -- 4.76 1.74 6.50
Return of Capital -- -- 9.07 9.07
------- ------- ------- ------
Total $ 0.30 $ 5.76 $ 12.30 $18.36
======= ======= ======= ======
<PAGE>
To Our Shareholders
January 14, 2000
- ----------------------------------------------------------------------------
This report marks the end of a significant chapter in the history of Baker,
Fentress & Company (BKF), which traces its roots back to 1891.
- ----------------------------------------------------------------------------
Since then, the corporate structure of the Company has changed several times.
The last major reorganization occurred in 1971 when all the investment
securities were placed in the Company, which became a publicly traded,
closed-end investment company. At the same time, all the land assets were
segregated within Consolidated-Tomoka Land Co. (CTO) and CTO also became a
publicly traded company, with BKF owning about 80% of its shares.
[PICTURE APPEARS HERE]
James P. Gorter
Chairman of the Board
Our closed-end structure has allowed the Company to make both public and
private long-term investments as well as to own a majority of CTO and to
purchase John A. Levin & Co., Inc. (Levco) in 1996. In this format, the Company
has provided attractive long-term returns to shareholders. Unfortunately, it has
also experienced a typical closed-end fund problem -- the Company's common stock
has traded at a persistent discount from net asset value. Over the years the
discount remained unsatisfactorily high despite efforts by management to narrow
it.
[PICTURE APPEARS HERE]
John A. Levin
President and Chief Executive Officer]
In 1999, the board, working with outside advisors, reviewed several options
to reduce the discount and to increase shareholder value. In May the board
recommended a plan to distribute most of the assets of the Company to its
shareholders. The plan was approved by the shareholders in August 1999 and was
completed with the final distribution paid on January 7, 2000. The accompanying
table shows the distributions made under the plan.
- -------------
DISTRIBUTIONS
- -------------
<TABLE>
<CAPTION>
Per Share Amount
----------------
Ordinary LT Capital Return of
Payment Date Description Income Gain Capital Total
- ------------ ----------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C>
June 15, 1999 Cash Distribution $ 0.30 $ -- $ -- $ 0.30
September 24, 1999 Cash Distribution 1.00 3.00 -- 4.00
September 24, 1999 CTO Share Distribution -- 1.76 -- 1.76
January 7, 2000 Final Cash Distribution 1.49 1.74 9.07 12.30
------ ------- ------- ------
Total $ 2.79 $ 6.50 $ 9.07 $18.36
====== ======= ======= ======
</TABLE>
Baker, Fentress & Company Annual Report 1999 1
<PAGE>
To Our Shareholders (continued)
Tax Implications of Plan Distributions
You should recently have received a Form 1099-DIV that reports the 1999 tax
treatment of the various plan distributions. The letter that accompanied this
tax reporting form explained the 1999 tax information in detail. If you received
all of the 1999 distributions, the per share amounts reportable in 1999 were as
follows:
Ordinary Income $1.3000
LT Capital Gain 6.5008
-------
Total Income $7.8008
Included in the final distributions paid on January 7, 2000 were two
amounts reportable in the Year 2000: $1.4905 per share ordinary income and
$9.0702 return of capital. The $1.4905 per share ordinary income dividend will
be reportable as dividend income on your tax return for the Year 2000. The basis
of your Baker Fentress shares has been reduced by the $9.0702 per share return
of capital distribution received in January. If your basis in your BKF shares
was below this amount, a tax will be due on the gain. As always, for specific
advice, you should consult your tax advisor.
Restructuring of the Company
The Company's significant restructuring and change in asset mix during 1999 is
shown in the pie charts on Page 3. At the end of 1998, the Company had a
diversified portfolio, with investments in publicly-traded, large cap
[A COMPANY HISTORY TIMELINE]
2 Baker, Fentress & Company Annual Report 1999
<PAGE>
value securities, private placements, a majority ownership position in CTO and a
100% equity position in Levco. Today, the Company's assets are narrowly focused
in the investment management industry, with small hold-over private placement
investments in Durolite and Alta Group.
ASSET MIX December 31, 1998 vs. January 10, 2000
74% 15% 9% 2% December 31, 1998
Public Levco CTO Other Total Net Assets
$771.3 Million
99% 1% -------------------
January 10, 2000
Total Net Assets
$93.2 Million
The Company's principal business is now investment management, conducted
through levco and its affiliated companies. We have applied to the SEC for a
formal order declaring that BKF is no longer an investment company.
In August, shareholders approved a reverse stock split that became
effective on January 10, 2000. The reverse stock split had no economic impact on
shareholders. By decreasing the number of shares outstanding, the reverse split
increased the per share market value, which we hope will increase the acceptance
of the Company's stock by investors and the financial community.
To reflect the significant change in the Company's business and structure,
the board plans to propose a change to the Company's name to be voted on at the
annual shareholders' meeting, which is tentatively scheduled for April 18, 2000
in New York City. A new name has not yet been determined. In addition, the
Company will no longer be based in Chicago. The Chicago office will be closed
around the time of the annual meeting this spring.
[A COMPANY HISTORY TIMELINE]
Baker, Fentress & Company Annual Report 1999 3
<PAGE>
To Our Fellow Shareholders (continued)
1999 Performance
For the fiscal year ended December 31, 1999, the Company's net asset value total
return was 5.8%. During the same period, the BKF shareholder total return, as
measured by the market price of the Company's common stock, assuming investment
of all distributions in additional shares of BKF common stock, was 34.1%. These
total returns compare to 21.0% for the S&P 500 over the same 12-month period.
The BKF shareholder total return reflects the significant narrowing of the
Company's discount during 1999.
Total Return on $10,000 Investment
12 months ended December 31, 1999
9,000.00 -------------------------------------
Total Return
- ------------------------------------------------
12/31/98 10,000
- ------------------------------------------------
1/31/99 10,081
- ------------------------------------------------
2/28/99 9,836
- ------------------------------------------------
3/31/99 9,836
- ------------------------------------------------
4/30/99 10,081
- ------------------------------------------------
5/31/99 12,109
- ------------------------------------------------
6/30/99 12,606
- ------------------------------------------------
7/31/99 12,896
- ------------------------------------------------
8/31/99 12,855
- ------------------------------------------------
9/30/99 13,233
- ------------------------------------------------
10/31/99 13,411
- ------------------------------------------------
11/30/99 13,114
- ------------------------------------------------
12/31/99 13,411
- ------------------------------------------------
Line 158
- ------------------------------------------------
Line 159
- ------------------------------------------------
Line 160
The accompanying graph shows that the Company's shareholder total return
increased after the announcement of the plan to distribute most of the assets of
the Company on May 6, 1999. Before the announcement, the Company's market price
had been as much as 28% below net asset value. Since then, the narrowing of the
discount represents an increase in shareholder value of approximately $173
million over this seven-month period.
Portfolio Highlights
After the approval of the plan at the special shareholders' meeting on August
19, 1999, Levco immediately began to liquidate our public portfolio. This
resulted in the majority of our public portfolio assets being converted to cash
and cash equivalents for the balance of the year.
On September 24, 1999, the Company distributed all 5,000,000 shares of CTO
owned by the Company. Each shareholder received 0.128109 share of CTO for each
share of BKF, with cash for fractional shares. This distribution was
characterized as a long-term capital gain. Both the amount of the gain received
and the initial cost basis of the CTO shares received were $13.75 per CTO share.
4 Baker, Fentress & Company Annual Report 1999
<PAGE>
With the exception of Durolite and Alta Group, the remaining private
placement portfolio positions were liquidated during 1999. During September, the
balance of our Citadel Communications Corporation shares was sold, resulting in
a gain of $66 million realized in 1999. The BKF board reduced the carrying value
of Durolite from $8.0 million to $1.0 million and reduced the carrying value of
the Alta Group note to zero. Near the end of the year, the board concluded that
it would not be possible to sell those investments on reasonable terms before
the Company's final distribution. As a result, Durolite and Alta Group were
retained within BKF.
Over the course of 1999, the board also reduced the carrying value of Levco
from $117.5 million at the beginning of the year to $92.0 million on November 4,
1999. The reasons for the reductions included the loss of the management fee on
the Company's public portfolio, which had been managed by Levco, expected
additional costs of public ownership to be paid by Levco beginning in the Year
2000, and comparative valuations of publicly traded investment management
companies. At the end of 1999, Levco's assets under management were $8.5 billion
and preliminary unaudited revenues for the 12 months ended December 31, 1999
were $50 million. You will receive Levco's full financial statements for 1999
and a full report on Levco activities and future plans in a report that we
expect to mail with the proxy statement for the April 2000 annual meeting.
Conclusion
1999 marked a dramatic shift for Baker, Fentress & Company, as we moved from a
closed-end investment company to an investment management firm. We appreciate
the input and support of all of our shareholders through this transition and ask
for your continued support as the Company starts this new chapter in its
distinguished history.
Sincerely,
/s/ James P. Gorter /s/ John A. Levin
James P. Gorter John A. Levin
Chairman of the Board President and Chief Executive Officer
Baker, Fentress & Company Annual Report 1999 5
<PAGE>
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
<S> <C>
December 31, 1999
-----------------
Assets
Investments, at Value:
Portfolio securities:
Controlled affiliates (cost $132,245,890)................. $ 93,000,000
Money market securities (cost $481,147,238)............... 481,375,209
------------
Total Investments (cost $613,393,128)................. 574,375,209
Cash and Cash Equivalents..................................... 612,788
Receivable for Securities Sold................................ 536,021
Interest Receivable........................................... 20,302
Other Assets.................................................. 301,748
-----------
Total Assets.......................................... 575,846,068
-----------
Liabilities
Payable to Affiliate for Investment Management Fee............ 10,000
Accrued Severance Costs....................................... 2,003,399
Accounts Payable and Other Accrued Liabilities................ 705,067
------------
Total Liabilities..................................... 2,718,466
------------
Net Assets.............................................................. $573,127,602
============
Analysis of Net Assets
Common Stock, $1 par value, authorized - 60,000,000 shares;
issued and outstanding - 39,029,101 shares................ $ 39,029,101
Capital Surplus............................................... 463,425,243
Undistributed Net Realized Gain from Investment Transactions.. 57,943,145
Other Retained Earnings (a)................................... 51,748,032
Net Unrealized Depreciation of Investments.................... (39,017,919)
------------
Net Assets.............................................................. $573,127,602
============
Net Asset Value Per Share............................................... $ 14.68
============
</TABLE>
_________________
(a) Prior to January 1, 1970, operating and other non-portfolio
activities were included in other retained earnings.
See accompanying Notes to Financial Statements
6 Baker, Fentress & Company Annual Report 1999
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
-----------------
<S> <C>
Investment Income:
Dividends from:
Unaffiliated issuers................................................. $ 6,190,050
Affiliate............................................................ 1,750,000
-------------
7,940,050
-------------
Interest from:
Unaffiliated issuers................................................. 10,032,648
Affiliates, net of write-off of interest receivable.................. 6,016,651
-------------
16,049,299
-------------
Total Income........................................................ 23,989,349
-------------
Expenses:
Investment management fee.............................................. 1,085,446
Administration and operations.......................................... 3,691,068
Interest on bank borrowing............................................. 258,379
Investment research.................................................... 232,842
Professional fees...................................................... 2,860,262
Directors' fees and expenses........................................... 497,452
Rent................................................................... 247,317
Reports to shareholders................................................ 295,237
Custodian and transfer agent fees...................................... 185,371
Taxes other than income................................................ 106,594
Other.................................................................. 614,750
------------
Total Expenses...................................................... 10,074,718
------------
Net Investment Income.......................................... 13,914,631
------------
Net Realized and Unrealized Gain:
Net realized gain on sales of investments.............................. 274,528,741
Decrease in net unrealized appreciation................................ (250,062,861)
-------------
Net Realized and Unrealized Gain............................... 24,465,880
-------------
Net Increase in Net Assets Resulting from Operations............................... $ 38,380,511
=============
</TABLE>
See accompanying Notes to Financial Statements
Baker, Fentress & Company Annual Report 1999 7
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations................ $ 38,380,511 $ 73,798,113
Adjustments to reconcile net increase in
net assets resulting from operations to net cash
provided by operating activities:
Net realized and unrealized (gain) on investments.................. (24,465,880) (59,208,242)
Decrease in receivable for securities sold......................... 564,271 911,430
Decrease in dividends and interest receivable...................... 791,068 2,383,008
Decrease (increase) in other assets................................ 377,980 (69,962)
Increase (decrease) in accounts payable and accrued liabilities.... 1,913,025 (1,260,179)
Decrease in payable for investment management fee.................. (117,000) (8,000)
Decrease in payable for securities purchased....................... -- (6,502,179)
Net amortization of (discounts).................................... (414,422) (504,621)
------------- -------------
Net cash provided by operating activities........................ 17,029,553 9,539,368
------------- -------------
Cash Flows from Investing Activities:
Purchases of portfolio securities.................................. (247,685,920) (421,721,571)
Proceeds from sales of portfolio securities........................ 887,074,450 502,011,542
Net realized gain on financial futures transactions................ -- 324,058
(Purchases) and sales/maturities of money
market securities, net............................................ (456,580,663) 4,767,157
------------- -------------
Net cash provided by investing activities....................... 182,807,867 85,381,186
------------- -------------
Cash Flows from Financing Activities:
Repayment of bank borrowing........................................ (5,000,000) --
Dividends and capital gain distributions........................... (236,575,134) (86,193,112)
------------- -------------
Net cash used in financing activities............................ (241,575,134) (86,193,112)
------------- -------------
Net (Decrease) Increase in Cash and Cash Equivalents............................... (41,737,714) 8,727,442
------------- -------------
Cash and Cash Equivalents at the
Beginning of the Year............................................................. 42,350,502 33,623,060
------------- -------------
Cash and Cash Equivalents at the
End of the Year................................................................... $ 612,788 $ 42,350,502
============= =============
Supplemental Disclosure of Non-cash Financing Activities:
Capital gain distribution reinvestments............................ $ -- $ 52,060,630
============= =============
</TABLE>
See accompanying Notes to Financial Statements
8 Baker, Fentress & Company Annual Report 1999
<PAGE>
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
------------- -------------
<S> <C> <C>
Operations:
Net investment income.................................. $ 13,914,631 $ 14,589,871
Net realized gain...................................... 274,528,741 80,093,075
Change in net unrealized depreciation.................. (250,062,861) (20,884,833)
------------- -------------
Net increase in net assets resulting from operations.. 38,380,511 73,798,113
------------- -------------
Distributions to shareholders from:
Net investment income.................................. (10,223,728) (14,347,947)
Net realized gain...................................... (226,351,406) (123,905,795)
------------- -------------
Total distributions to shareholders................... (236,575,134) (138,253,742)
------------- -------------
Net decrease in net assets from
operations after distributions...................... (198,194,622) (64,455,629)
------------- -------------
Capital share transactions-Net Increase................. -- 52,060,630
Total Decrease in net assets............................ (198,194,622) (12,394,999)
Net assets at the beginning of the Year................. 771,322,224 783,717,223
------------- -------------
Net assets at the end of the Year....................... $ 573,127,602 $ 771,322,224
============= =============
Undistributed Net Investment Income and
Other Retained Earnings at the End of the Year.......... $ 51,748,032 $ 48,057,128
============= =============
</TABLE>
See accompanying Notes to Financial Statements
Baker, Fentress & Company Annual Report 1999 9
<PAGE>
Statement of Investments
<TABLE>
<CAPTION>
December 31, 1999 Shares or
Principal Amount Value
---------------- ------------
<S> <C> <C>
INVESTMENTS IN CONTROLLED AFFILIATES -- 16.23%
Wholly-Owned Subsidiary -- 16.05%
Levin Management Co., Inc - investment management
Common Stock (b)(c)(d).................................................... 1,000 $ 92,000,000
------------
Total wholly-owned subsidiary (Cost $120,645,890)....................... 92,000,000
------------
Other -- .18%
DuroLite International, Inc. - manufacturer and distributor of
specialized lighting products
Convertible Preferred Stock (b)(c)(d)...................................... 2,500 --
12% Subordinated Note due 11/03/2004 (c)(d)(e)............................. $ 8,000,000 250,000
DuroLite Europe Holdings, Inc. - subsidiary of DuroLite International, Inc.
23% Promissory Note due 08/20/1999 (c)(d)(e)............................... $ 498,895 750,000
Stock Purchase Warrant expiring 08/20/2008 (b)(c)(d)....................... 1 --
Alta Group Ltd. - environmental services
6% Note due 12/31/1999 (c)(d)(e)........................................... $ 600,000 --
------------
Total other (Cost $11,600,000)............................................ 1,000,000
------------
Total investments in controlled affiliates (Cost $132,245,890)............... 93,000,000
------------
MONEY MARKET SECURITIES -- 83.99%
U.S. Treasury bills - 3.561% to 4.840% due 01/06/2000....................... $481,524,000 481,375,209
------------
Total investments in money market securities (Cost $481,147,238)............. 481,375,209
------------
TOTAL INVESTMENTS -- 100.22% (Cost $613,393,128) (a)................................. 574,375,209
------------
Liabilities, Less Cash and Other Assets -- (.22)%.................................... (1,247,607)
------------
NET ASSETS -- 100.00%................................................................ $573,127,602
============
</TABLE>
See accompanying Notes to Statement of Investments
10 Baker, Fentress & Company Annual Report 1999
<PAGE>
Notes to Statement of Investments
_______________
(a) Based on the cost of investments of $562,488,444, for federal income
tax purposes at December 31, 1999, net unrealized appreciation was
$11,886,765, which consisted of gross unrealized appreciation of
$22,737,870 and gross unrealized depreciation of $10,851,105.
(b) Non-income producing security.
(c) The following securities are subject to legal or contractual
restrictions on sale. They are valued at a fair value determined in
good faith by the board of directors of the Company as of December 31,
1999, based upon all factors deemed relevant by the board. The
quantitative and qualitative factors considered by the board of
directors may include, but are not limited to, type of securities,
nature of business, marketability, restrictions on disposition,
comparative valuation of securities of publicly-traded companies in
the same or similar industries, valuation of recent mergers and
acquisitions of similar companies, current financial condition and
operating results, sales and earnings growth, operating revenues,
competitive conditions, and current and prospective conditions in the
overall stock market.
The values determined by the board of directors may not reflect
amounts that could be realized upon immediate sale, nor amounts that
ultimately may be realized. Accordingly, the fair values included in
the statement of investments may differ from the values that would
have been used had a ready market existed for these securities, and
such differences could be significant.
The aggregate value of restricted securities was $93,000,000, or
16.23% of net assets, at December 31, 1999.
<TABLE>
<CAPTION>
No. of Shares
or Principal
Security Description Date(s) of Acquisition Amount Cost
------------------------------------------------------------- ---------------------- ------------- ------------
<S> <C> <C> <C>
DuroLite International, Inc.
Convertible Preferred Stock............................... November 1995 2,500 $ 2,627,250
12% Subordinated Note due 11/03/2004...................... November 1995 $8,000,000 7,872,750
DuroLite Europe Holdings, Inc.
23% Promissory Note due 08/20/1999........................ August 1998* $ 498,895 498,895
Stock Purchase Warrant Expiring 08/20/2008................ August 1998* 1 1,105
Alta Group Ltd.
6% Note due 12/31/1999.................................... September 1999* $ 600,000 600,000
Levin Management Co., Inc.
Common Stock.............................................. June 1996 1,000 120,645,890
</TABLE>
* Represents securities received as a result of the reorganization of
the underlying issuer's securities originally held by the Company.
(d) There were no unrestricted securities of the same issue outstanding on
December 31, 1999 or the dates of acquisition.
(e) The company is currently in default on the payment of interest and
principal on these debt obligations.
See accompanying Notes to Financial Statements
Baker, Fentress & Company Annual Report 1999 11
<PAGE>
Notes to Financial Statements
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The Company is registered under the Investment Company Act of 1940 as a non-
diversified closed-end management investment company. The Company adopted and
implemented a Plan for Distribution of Assets, pursuant to which all of the
Company's investment securities except Levin Management Co., Inc. ("Levin
Management"), including its subsidiaries, two private placements, and the
Company's common stock of Consolidated-Tomoka Land Co. ("CTO") were sold. The
Company's CTO shares and the net proceeds of sale of the Company's investment
securities were distributed to the Company's shareholders in 1999 and January
2000 pursuant to the plan. The Company has applied to the Securities and
Exchange Commission for an order declaring that it has ceased to be an
investment company. Assuming the de-registration proceeds, the Company's
principal business going forward will be investment management, conducted
through Levin Management and its subsidiaries. The operations of the Company
will no longer reflect securities at fair value, financial highlights, or
periodic calculations of net asset value, which are reporting requirements
applicable to a registered investment company. Ongoing, the Company will report
as a public operating company, reflecting Levin Management as a consolidated
subsidiary.
Investment valuation
Investments are stated at "value." Securities traded on securities exchanges or
on the Nasdaq National Market are valued at the last reported sale prices on the
day of valuation; listed and Nasdaq securities for which no sales were reported
on that day, and other securities traded in the over-the-counter market, are
valued at the mean of closing bid and asked prices on that day. Money market
securities are valued at market value. Options traded on an exchange are valued
using the last sale price on the day of valuation or, if the last sale price
falls outside the range of the bid and asked prices, at the bid or asked price
in the case of long options and short options, respectively. Restricted
securities and other securities for which prices are not readily available, or
for which market quotations are considered not to reflect fair value, are valued
at a fair value as determined by the board of directors as explained in Note (c)
in the Notes to Statement of Investments. The values determined by the board of
directors, including the value of the Company's investment in Levin Management,
discussed below, may not reflect amounts that could be realized upon immediate
sale, nor amounts that ultimately may be realized. Accordingly, the fair values
included in the Company's financial statements may differ from the values that
would have been used had a ready market existed for these securities, and such
differences could be significant.
The Company may be considered to be a "controlling person" of Levin Management
within the meaning of the Securities Act of 1933. A public sale of shares of
Levin Management would require registration under the Securities Act.
Investment transactions
Investment transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified cost basis.
Investment income
The Company records dividends on the ex-dividend date. Interest income is
recorded on an accrual basis and includes amortization of premium and discount.
Such income is classified based on the affiliation status of the issuer as of
the date of the financial statements.
Cash equivalents
The Company includes cash balances at its custodian bank in an interest-bearing
demand deposit account.
Federal income taxes, dividends, and distributions to shareholders
In order to qualify as a regulated investment company and avoid being subject to
federal income or excise taxes through December 31, 1999 (but not thereafter),
the Company distributed in 1999 all of its taxable net investment income
(including net realized short-term capital gain, if any) within the time limits
prescribed by the Internal Revenue Code. Accordingly, no provision was made for
federal income or excise tax on such income.
12 Baker, Fentress & Company Annual Report 1999
<PAGE>
The Company does not expect to qualify as a regulated investment company in
2000 or thereafter as a result of its Plan for Distribution of Assets.
Dividends and distributions payable to shareholders are recorded by the
Company on the ex-dividend date.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates.
NOTE 2. CAPITAL STOCK
Transactions in capital stock for 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Shares Amount
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions.... -- 3,046,020 $ -- $ 3,046,020
Increase in
capital surplus.. -- 49,014,610
----------- -----------
Net increase..... $ -- $52,060,630
----------- -----------
</TABLE>
The Company may purchase shares of its own stock in open market or private
transactions from time to time and at such prices and amounts as management may
deem advisable. The Company made no such purchases during 1999 or 1998.
On December 16, 1999, the directors of Baker Fentress authorized a share
buyback program of up to 15% of the Company's outstanding shares in open market
or in privately negotiated transactions. Funds would be provided by cash
internally generated by Levin Management or by a $15 million revolving line of
credit permitting borrowings by John A. Levin & Co., Inc. that is presently
being negotiated. Baker Fentress does not intend to implement this buyback
program until after the Company's application to de-register as an investment
company, now pending with the SEC, takes effect. In August 1999, shareholders
approved a one-for-six reverse stock split effective on January 10, 2000
pursuant to the Plan for Distribution of Assets and concurrent with the final
distribution of those assets. In addition, the board of directors authorized the
elimination of the Company's Automatic Dividend Reinvestment Plan during 1999.
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the year ended December 31, 1999
to officers of the Company amounted to $580,677. Fees of $426,000 excluding
expenses were incurred during 1999 for directors who were not officers of the
Company.
NOTE 4. RESTRUCTURING EXPENSES
As provided by the Company's Plan for Distribution of Assets, the Company
accrued restructuring expenses of approximately $5,000,000. These expenses
consisted of investment banking, legal, audit and other professional fees,
termination compensation, and costs associated with closing the Chicago office.
These costs have been reflected primarily in administration and operations
expense and professional fees in the statement of operations.
Prior to January 1, 2000, the Company also provided certain health care
benefits on a contributory basis for retired employees. Because of the
restructuring, these benefits were terminated and the retirees received cash
payments totaling $339,415, which are included in the total restructuring
expense reflected in the administration and operations expense.
NOTE 5. INVESTMENT TRANSACTIONS
The cost of securities purchased and proceeds from securities sold during 1999,
excluding money market investments, aggregated $243,853,623 and $887,074,450,
respectively.
The proceeds from securities sold reflect the liquidation of assets and the
distribution of CTO shares after the distribution plan was approved by
shareholders in August 1999.
NOTE 6. RETIREMENT PLANS
The Company maintains a non-contributory money purchase pension plan covering
all employees. Company contributions are based on compensation. Total plan
contributions for 1999 were $134,000.
Baker, Fentress & Company Annual Report 1999 13
<PAGE>
Notes to Financial Statements (continued)
NOTE 7. BANK BORROWING AND LINE OF CREDIT
On June 24, 1996, the Company entered into a $40 million revolving credit
agreement with The Northern Trust Company. The facility expired on January 15,
2000. Borrowings outstanding bore interest at the London Interbank Offered Rate
(LIBOR) plus 0.35%. The commitment fee associated with the unused portion of the
revolving credit agreement is 0.08% per annum.
At December 31, 1999, no amounts were outstanding under this agreement. The
interest rate on outstanding borrowings is reset periodically under the
revolving credit facility. The maximum borrowing and the average daily borrowing
balances during the period for which borrowings were outstanding were $5.0
million and $4.2 million, respectively. The weighted average interest rate
during 1999 was 5.4%.
NOTE 8. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Company had an investment advisory contract with John A. Levin & Co., Inc.,
a wholly-owned subsidiary of Levin Management and an indirect wholly-owned
subsidiary of the Company, which provided for payment by the Company of a fee at
an annual rate of 0.30%, based on the value of the public portfolio assets under
management. Because of the Company's Plan for Distribution of Assets and
subsequent liquidation of the public portfolio, which began in August 1999, the
management fees paid to Levco were substantially reduced. For the year ended
December 31, 1999, the Company incurred management fees of $1,085,446. On
December 15, 1999, the Company's investment in Levin Management's $65 million
note matured. The board of directors approved the reclassification of such
amount to the capital of Levin Management.
The Company's remaining investments are managed by the Company's officers
under the supervision of its board of directors.
On September 24, 1999, Baker, Fentress & Company pursuant to its Plan for
Distribution of Assets distributed all of the 5,000,000 shares of Consolidated-
Tomoka Land Co. (CTO) common stock owned by the Company to its shareholders.
Each shareholder received 0.128109 share of CTO for each share of BKF. Such
amount is reflected as a distribution of net realized gains.
A summary of transactions with affiliated companies during the year ended
December 31, 1999 follows:
<TABLE>
<CAPTION>
Realized
Distribution Exchanges Gain (Loss) Income
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Consolidated-Tomoka
Land Co...................................... $(68,750,000) $ -- $ -- $ 1,750,000
Levin Management Co., Inc.
Common stock.............................. -- 65,000,000 -- --
Note due 12/15/1999....................... -- (65,000,000) -- 6,053,396
Alta Group, Ltd. (1)
Note due 12/31/1999....................... -- 600,000 -- (36,745)
E-Sales Inc.
Note due 12/31/1999....................... -- (118,000) (18,000) --
Preferred stock........................... -- (500,000) -- --
------------ ------------- ------------- -------------
$(68,750,000) $ (18,000) $ (18,000) $ 7,766,651
------------ ------------- ------------- -------------
</TABLE>
(1) Net of write -off of interest receivable.
NOTE 9. FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS (UNAUDITED)
In 1999, the Company made long-term capital gain distributions aggregating
$6.5008 per share. Approximately 18.0% of the $1.30 per share of ordinary income
dividends paid during 1999 qualified for the corporate dividends received
deduction, and 16.2% represented income earned on U.S. government obligations.
NOTE 10. YEAR 2000 (UNAUDITED)
The Company has taken steps that it believes are reasonably designed to address
the Year 2000 problem with respect to the computer systems it uses and obtained
satisfactory assurances that comparable steps were taken by each of the
Company's other major service providers. The Company did not incur any
significant costs in order to address the Year 2000 problem.
14 Baker, Fentress & Company Annual Report 1999
<PAGE>
Financial Highlights
The following table shows per share operating performance data, total investment
return, ratios, and supplemental data for each year in the five-year period
ended December 31, 1999.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year........................................ $ 19.76 $ 21.78 $ 21.77 $ 21.75 $ 17.47
-------- -------- -------- -------- --------
Net investment income................................................... 1.40 0.53 0.72 0.37 0.35
Net realized gain (loss) and net change in unrealized appreciation...... (.42) 1.50 2.26 3.31 5.67
-------- -------- -------- -------- --------
Total investment operations............................................... .98 2.03 2.98 3.68 6.02
Less distributions:
Dividends from net investment income.................................... (1.30) (0.52) (0.54) (0.78) (0.35)
Distribution from net realized gain..................................... (4.76) (3.25) (2.23) (1.78) (1.20)
-------- -------- -------- -------- --------
Total distributions....................................................... (6.06) (3.77) (2.77) (2.56) (1.55)
-------- -------- -------- -------- --------
Dilution (a) resulting from:
Shares issued in acquisition of Levin Management Co., Inc............... -- -- -- (0.90) --
Reinvestment of capital gain distribution............................... -- (0.28) (0.20) (0.20) (0.19)
-------- -------- -------- -------- --------
Total dilution............................................................ -- (0.28) (0.20) (1.10) (0.19)
-------- -------- -------- -------- --------
Net asset value, end of year.............................................. $ 14.68 $ 19.76 $ 21.78 $ 21.77 $ 21.75
======== ======== ======== ======== ========
Per share market price, end of year....................................... $ 14.125 $ 15.313 $ 18.25 $ 16.875 $ 16.75
Total Investment Return-Shareholder Return (d)............................ 34.11% 3.45% 25.17% 15.48% 33.20%
Ratios to Average Net Assets Expenses..................................... 1.37%(b) .80% .87% .90% .78%
Expenses before interest expense........................................ 1.34% .76% .74% .77% .78%
Net investment income................................................... 1.90% 1.87% 2.07% 1.53% 1.79%
Supplemental Data
Net assets, end of year (000's omitted)................................. 573,128 771,322 783,717 741,146 599,182
Portfolio turnover...................................................... 47.29% 53.72% 33.72% 59.78% 35.89%
Shares outstanding, end of year (000's omitted)......................... 39,029 39,029 35,983 34,042 27,544
</TABLE>
________________
(a) Effect of the Company's issuance of shares at prices below net asset value.
(b) The expense ratio before termination-related expenses was .69% for 1999.
(c) The expense ratio before severance-related expenses was .82% for 1996.
(d) Based on per share market value, excluding commissions.
Baker, Fentress & Company Annual Report 1999 15
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders of
BAKER, FENTRESS & COMPANY:
We have audited the accompanying statement of assets and liabilities of
Baker, Fentress & Company, including the statement of investments, as of
December 31, 1999, and the related statement of operations for the year then
ended, the statements of cash flows and changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with 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
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
owned as of December 31, 1999, by correspondence with the custodian. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Baker,
Fentress & Company at December 31, 1999, the results of its operations for the
year then ended, its cash flows and the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States.
New York, New York /s/ Ernst & Young LLP
January 21, 2000
16 Baker, Fentress & Company Annual Report 1999
<PAGE>
Directors and Officers Corporate Data
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
Transfer and Dividend
Business Affiliations Disbursing Agent
---------------------
<S> <C> <C>
Frederick S. Addy Retired; former executive vice president, ChaseMellon Shareholder Services
chief financial officer and director of 450 W. 33rd St., 10th floor
Amoco Corporation New York, New York 10001
1(800) 719-9058
Bob D. Allen Chairman, president and chief executive
officer of Consolidated-Tomoka Land Co. Custodian
UMB Bank, N.A.
Eugene V. Fife* President, chief executive officer and
co-chairman of Multimedia Medical Systems Legal Counsel
Bell, Boyd & Lloyd LLC
J. Barton Goodwin* Managing director of BCI Advisors, Inc.
Independent Auditors
James P. Gorter* Chairman of the board of Baker, Fentress & Ernst & Young LLP
Company
Address of Company
David D. Grumhaus* President of Casey Travel Corporation Baker, Fentress & Company
200 West Madison Street
Jeffrey A. Kigner Co-chairman and chief investment officer Suite 590
of John A. Levin & Co., Inc. and Levin Chicago, Illinois 60606
Management Co., Inc. (312) 236-9190 or 1(800) BKF-1891
John A. Levin* President and chief executive officer of Baker, John A. Levin & Co., Inc.
Fentress & Company and chairman and chief One Rockefeller Plaza, 19th Floor
executive officer of John A. Levin & Co., Inc. New York, NY 10020
and Levin Management Co., Inc. (212) 332-8400
Burton G. Malkiel Professor of Economics, Princeton University Web Site:
www.bakerfentress.com
David D. Peterson Retired; former president and chief executive
officer of Baker, Fentress & Company; chairman
of Consolidated-Tomoka Land Co.
William H. Springer Retired; former vice chairman of
Ameritech Corp.
Dean J. Takahashi Senior director of endowment management,
Yale University
</TABLE>
*Member of the Executive Committee
OFFICERS
James P. Gorter Chairman of the Board
John A. Levin President and Chief Executive Officer
James P. Koeneman Executive Vice President and Secretary
Scott E. Smith Executive Vice President
Julie A. Heironimus Treasurer and Assistant Secretary
Beverly J. Friedberg Assistant Treasurer
<PAGE>
Baker, Fentress & Company
Established 1891
SUITE 590, 200 WEST MADISON STREET
CHICAGO, ILLINOIS 60606
(312) 236-9190 FAX (312) 236-6772
