-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fz1ZqKRjSA5HGwBI+2iqo9ztCNI4qxEpHX5200XbrihWPjtVOb/xPX8Pi0xjRQO4 xdp7NP4nypy7irJ05D1tJw== 0000950131-99-004682.txt : 19990809 0000950131-99-004682.hdr.sgml : 19990809 ACCESSION NUMBER: 0000950131-99-004682 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAKER FENTRESS & CO CENTRAL INDEX KEY: 0000009235 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 360767350 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02144 FILM NUMBER: 99679124 BUSINESS ADDRESS: STREET 1: 200 W. MADISON ST. STREET 2: SUITE 3510 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3122369190 FORMER COMPANY: FORMER CONFORMED NAME: BAKER FENTRESS & CO ET AL DATE OF NAME CHANGE: 19940714 N-30D 1 1999 MID-YEAR REPORT Baker, Fentress & Company Report to Shareholders 1999 MIDYEAR REPORT Directors and Officers BOARD OF DIRECTORS Frederick S. Addy Jeffrey A. Kigner Bob D. Allen John A. Levin Eugene V. Fife Burton G. Malkiel J. Barton Goodwin David D. Peterson James P. Gorter William H. Springer David D. Grumhaus Dean J. Takahashi OFFICERS James P. Gorter Chairman of the Board John A. Levin President and Chief Executive Officer James P. Koeneman Executive Vice President and Secretary Scott E. Smith Executive Vice President Julie A. Heironimus Treasurer and Assistant Secretary Beverly J. Friedberg Assistant Treasurer Corporate Data Transfer and Dividend Disbursing Agent ChaseMellon Shareholder Services 1-800-719-9058 Custodian UMB Bank, N.A. Legal Counsel Bell, Boyd & Lloyd Address of Company 200 West Madison Street Suite 590 Chicago, Illinois 60606 312-236-9190 or 800-BKF-1891 Web Site www.bakerfentress.com [RECYCLE LOGO] The Company's Midyear Report is printed on recycled paper. We encourage recycling and use of recycled products. To Our Shareholders In May, BKF's board of directors made a significant announcement concerning a Plan for Distribution of Assets of Baker, Fentress & Company. More information about the board's adoption of the Plan can be found in the box on page three. RESULTS THROUGH JUNE 30, 1999 Baker, Fentress & Company (NYSE: BKF) total net assets at June 30, 1999 were $840.2 million, or $21.53 per share, compared with $771.3 million, or $19.76 per share, at December 31, 1998. Our net asset value total return was 11.0% for the six months ended June 30, 1999, and shareholder return, which is based on market value, was 26.1%. This compares to total returns of 12.4% for the S&P 500 Index and 12.0% for the Russell 1000 Value Index, respectively. The market value of BKF shares increased at a greater rate than net asset value as our discount narrowed from 22.5% at the end of 1998 to 11.7% as of June 30, 1999. The narrowing of the discount occurred after the announcement made by the board on May 6, 1999 concerning the Plan for Distribution of Assets. As of June 30, 1999, the Company's assets were allocated as follows: COST BASIS INFORMATION Portfolio Sector Weightings As of June 30, 1999
Public............. 71.7% Levco.............. 14.3% CTO................ 9.1% Private............ 4.9%
If you need more information to compute the cost basis of your BKF shares, go to the Company web site at www.bakerfentress.com. Information on the web site includes per share ordinary income dividends, capital gain distributions and reinvestment prices. It also provides amounts which can be added to your cost basis for periods in which the Company retained all or a portion of realized capital gains. ADDRESS CHANGE On July 1, 1999, Baker Fentress moved to smaller office space in our present building. Our new address is Suite 590, 200 West Madison Street, Chicago, Illinois 60606. The telephone and fax numbers remain the same. PUBLIC PORTFOLIO COMMENTARY The second quarter witnessed a return to favor of value stocks, as the S&P 500 Index rose 7.1% while the Russell 1000 Value Index rose by 10.8%. For the same period, the BKF public portfolio total return was 13.4%. Comparable total returns for the six months ended June 30, 1999 were as follows: BKF Public Portfolio 14.0% Russell 1000 Value 12.0 S&P 500 Index 12.4 The resurgence of value stocks was highlighted by strength in a number of cyclical groups, such as basic materials and capital goods. At the same time, financials, consumer staples and healthcare stocks went through a period of relative weakness, as interest rate fears drove the market down for the month of May. The market rise was more broadly based than it had been in the recent past and growth stocks trading at very high multiples were not driving the market. Our investment philosophy, with its focus on Baker, Fentress & Company Midyear Report 1999 1 To Our Shareholders (continued) fundamental value, diversification and capital preservation, served us well in this environment. Looking ahead, a number of economic signs bode well for the stock market, including an increase in the rate of growth of corporate profits, high levels of consumer confidence and consumer spending, and the initial stage of the economic recoveries in the Far East and Latin America. On the negative side, wage inflation remains a concern, although competitive pressures and increases in productivity may limit the impact of wage inflation on prices and on margins. With respect to the market itself, while the rebound of value stocks has been encouraging, the market continues to see precariously high relative valuations (although this factor is not in itself a catalyst for a market retreat). In short, even though every environment poses a set of market risks, we believe our stock selection and portfolio construction process is geared to perform well relative to the market in both broadly advancing and declining environments. LEVCO COMMENTARY As of June 30, 1999, total assets under management at John A. Levin & Co., Inc. (Levco) were $8.7 billion, as compared to $8.3 billion at the end of 1998. In a market cycle that until recently has been marked by the historically unprecedented disparity between the performance of value and growth stocks, value managers have been in a challenging environment, as many individuals and institutional committees have re-evaluated their asset allocation strategies. While Levco continues to experience some withdrawals, its institutional marketing efforts have also begun to pay dividends. On the retail side, accounts brought in through the broker consulting area continue at a strong pace, helped in part by solid 1999 performance and the resurgence of value stocks in the second quarter. CTO COMMENTARY Consolidated-Tomoka Land Co. (AMEX:CTO) reported excellent financial results for the second quarter primarily due to the sale of 228 acres of land for approximately $6.6 million. The cash proceeds from the previously reported sale of CTO's citrus division continue to be invested in short-term instruments. CTO's board has announced that they intend to use these and other funds to repurchase up to 25% of CTO's outstanding shares. PRIVATE PLACEMENT PORTFOLIO COMMENTARY Substantial progress was made toward liquidating the remaining private placement portfolio assets in the second quarter. In May, we sold our remaining investment in the Phillips-Smith limited partnership to the general partner. We expect to receive a final distribution from our other partnership investment, Golder Thoma, before year end. In June, Citadel Communications Corporation (CITC) completed a secondary stock offering in which we sold a total of 982,660 CITC shares, recognizing a gain of $26.8 million. Our remaining 830,357 CITC shares will become freely tradable in mid-September and the trading liquidity of CITC stock suggests we can easily sell these securities by year end. Also in June, we sold our entire position in Security Capital US Realty in two privately negotiated transactions for total proceeds of $9.5 million, resulting in a modest loss of $0.5 million. We continue to explore ways to achieve liquidity in our Durolite International investment either through a recapitalization of the company 2 Baker, Fentress & Company Midyear Report 1999 or a negotiated sale of our securities. As Durolite remains a privately held company, our options are somewhat limited over a relatively short time frame. To reflect this fact, we reduced the carrying value of the investment by $2.0 million, to $8.0 million, as of June 30. Overall, we remain encouraged by progress made to date in liquidating private placement portfolio assets and remain focused on completing this task by year end. CLOSING COMMENTS We are pleased with our results for the most recent six months. We also believe that our Plan for Distribution of Assets is in the best interests of our shareholders and will maximize shareholder value. The board urges all shareholders to vote to approve this Plan. /s/ James P. Gorter - ------------------- James P. Gorter Chairman of the Board /s/ John A. Levin - ------------------- John A. Levin President and CEO PROXY STATEMENT INFORMATION SPECIAL SHAREHOLDERS' MEETING If you were a shareholder on June 30, 1999, you should already have received the proxy statement for the special meeting of shareholders that will be held on August 19, 1999. If you did not receive a proxy statement, please call ChaseMellon at (212) 273-8048, or if you hold your shares through a brokerage firm, call your broker. Complete details of the Plan are in the proxy and should be considered carefully before you vote. SUMMARY OF PROXY STATEMENT The proxy statement asks you to vote for the Plan for Distribution of Assets. If the Plan is approved, the Company will sell its public and private portfolio securities and distribute the net proceeds and the Company's CTO shares to shareholders. The Company will de-register as an investment company, but remain in business as a holding company with one principal asset--Levco and its related companies. SPECIAL SHAREHOLDERS' MEETING The special meeting of shareholders will be held in Chicago at the Chicago Hilton and Towers on August 19, 1999 at 10:30 am central daylight time. For interested shareholders on the East Coast, an information meeting will be held in New York City on August 20, 1999 at the Waldorf Astoria at 8:00 am eastern daylight time. All official business and proxy voting will be conducted at the Chicago meeting. DISTRIBUTION PLAN PAYMENT SCHEDULE If shareholders approve the Plan, the board of directors expects to meet after the special shareholders' meeting to finalize the timing of the distribution of assets. Shareholders are likely to receive a capital gain distribution in late September 1999. At the same time, the Company intends to distribute its shares of Consolidated-Tomoka Land Co. to BKF shareholders. Final distributions will follow in late December 1999, and/or in early January 2000. All these dates are tentative and the board may change them. If you have any questions call the Company at 1-800-BKF-1891 or Corporate Investor Communications, Inc. at 1-201-896-1900. Baker, Fentress & Company Midyear Report 1999 3 Statement of Assets and Liabilities
June 30, 1999 (Unaudited) ------------- Assets Investments, at Value: Portfolio securities: Unaffiliated issuers (cost $397,282,153).................. $515,022,363 Controlled affiliates (cost $137,256,517)................. 196,392,500 Non-controlled affiliates (cost $690,097)................. 30,048,529 Money market securities (cost $11,988,933).................... 11,988,750 ------------ Total Investments (cost $547,217,700)................. 753,452,142 Cash and Cash Equivalents..................................... 93,270,450 Receivable for Securities Sold................................ 968,679 Dividends and Interest Receivable............................. 664,169 Other Assets.................................................. 605,220 ------------ Total Assets.......................................... 848,960,660 ------------ LIABILITIES Bank Borrowing................................................ 5,000,000 Payable for Securities Purchased.............................. 2,848,302 Payable to Affiliate for Investment Management Fee............ 130,000 Accounts Payable and Accrued Liabilities...................... 762,592 ------------ Total Liabilities..................................... 8,740,894 ------------ NET ASSETS.............................................................. $840,219,766 ============ ANALYSIS OF NET ASSETS Common Stock, $1 par value, authorized--60,000,000 shares; issued and outstanding--39,029,101 shares................. $ 39,029,101 Capital Surplus............................................... 463,425,243 Undistributed Net Realized Gain from Investment Transactions.. 80,916,439 Other Retained Earnings (a)................................... 50,614,541 Net Unrealized Appreciation of Investments.................... 206,234,442 ------------ NET ASSETS.............................................................. $840,219,766 ============ NET ASSET VALUE PER SHARE............................................... $ 21.53 ============
------------ (a) Prior to January 1, 1970, operating and other non-portfolio activities were included in other retained earnings. See accompanying Notes to Financial Statements 4 Baker, Fentress & Company Midyear Report 1999 Statement of Operations
Six Months Ended June 30, 1999 Year Ended (Unaudited) December 31, 1998 --------------- ----------------- INVESTMENT INCOME: Dividends from: Unaffiliated issuers............................ $ 4,112,771 $ 8,557,407 Affiliate....................................... 1,750,000 3,500,000 ----------- ------------ 5,862,771 12,057,407 ----------- ------------ Interest from: Unaffiliated issuers............................. 1,462,724 3,546,104 Affiliates....................................... 3,599,509 5,223,808 ----------- ------------ 5,062,233 8,769,912 ----------- ------------ Total Income............................... 10,925,004 20,827,319 =========== ============ EXPENSES: Investment management fee.......................... 780,685 1,508,711 Administration and operations...................... 791,663 1,447,660 Interest on bank borrowing......................... 147,799 339,521 Investment research................................ 218,370 875,113 Professional fees.................................. 860,310 369,758 Directors' fees and expenses....................... 243,579 391,499 Rent............................................... 152,809 341,514 Reports to shareholders............................ 141,153 322,771 Custodian and transfer agent fees.................. 77,243 149,206 Taxes other than income............................ 68,572 83,173 Other.............................................. 201,917 408,522 ----------- ------------ Total Expenses............................. 3,684,100 6,237,448 ----------- ------------ Net Investment Income.............. 7,240,904 14,589,871 ----------- ------------ NET REALIZED AND UNREALIZED GAIN: Net realized gain on sales of investments.......... 78,175,867 80,093,075 Change in net unrealized appreciation.............. (4,810,499) (20,884,833) ----------- ------------ Net Realized and Unrealized Gain........... 73,365,368 59,208,242 ----------- ------------ Net Increase in Net Assets Resulting from Operations......... $80,606,272 $ 73,798,113 =========== ============
See accompanying Notes to Financial Statements Baker, Fentress & Company Midyear Report 1999 5 Statements of Cash Flows
Six Months Ended June 30, 1999 Year Ended (Unaudited) December 31, 1998 ---------------- ----------------- Cash Flows from Operating Activities: Net increase in net assets resulting from operations................... $ 80,606,272 $ 73,798,113 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Net realized and unrealized (gain) on investments.................... (73,365,368) (59,208,242) Decrease in receivable for securities sold........................... 131,613 911,430 Decrease in dividends and interest receivable........................ 147,201 2,383,008 (Increase) decrease in other assets.................................. 74,872 (69,962) Increase (decrease) in accounts payable and accrued liabilities...... (32,849) (1,260,179) Increase (decrease) in payable for investment management fee......... 3,000 (8,000) Increase (decrease) in payable for securities purchased.............. 2,848,302 (6,502,179) Net amortization of (discounts)...................................... (304,215) (504,621) ------------- ------------- Net cash provided by operating activities.......................... 10,108,828 9,539,368 ------------- ------------- Cash Flows from Investing Activities: Purchases of portfolio securities and closing of short positions................................................... (208,457,544) (421,721,571) Proceeds from sales of portfolio securities and securities sold short............................................ 247,985,772 502,011,542 Net realized gain on financial futures transactions.................... -- 324,058 (Purchases) and sales/maturities of money market securities, net............................................... 12,991,622 4,767,157 ------------- ------------- Net cash provided by investing activities.......................... 52,519,850 85,381,186 ------------- ------------- Cash Flows from Financing Activities: Dividends and capital gain distributions............................... (11,708,730) (86,193,112) ------------- ------------- Net cash used in financing activities................................ (11,708,730) (86,193,112) ------------- ------------- Net Increase in Cash and Cash Equivalents........................................ 50,919,948 8,727,442 Cash and Cash Equivalents at the Beginning of the Period........................................................ 42,350,502 33,623,060 ------------- ------------- Cash and Cash Equivalents at the End of the Period.............................................................. $ 93,270,450 $ 42,350,502 ============= ============= Supplemental Disclosure of Noncash Financing Activities: Capital gain distribution reinvestments................................ $ -- $ 52,060,630 ============= =============
See accompanying Notes to Financial Statements 6 Baker, Fentress & Company Midyear Report 1999 Statements of Changes in Net Assets
Six Months Ended June 30, 1999 Year Ended (Unaudited) December 31, 1998 ---------------- ----------------- Operations: Net investment income........................................ $ 7,240,904 $ 14,589,871 Net realized gain............................................ 78,175,867 80,093,075 Change in net unrealized appreciation........................ (4,810,499) (20,884,833) ------------ ------------- Net increase in net assets resulting from operations....... 80,606,272 73,798,113 ------------ ------------- Distributions to Shareholders from: Net investment income........................................ (4,683,492) (14,347,947) Net realized gain............................................ (7,025,238) (123,905,795) ------------ ------------- Total distributions to shareholders........................ (11,708,730) (138,253,742) ------------ ------------- Net increase (decrease) in net assets from operations after distributions......................... 68,897,542 (64,455,629) ------------ ------------- Capital Share Transactions-Net Increase................................ -- 52,060,630 ------------ ------------- Total Increase (Decrease) in Net Assets................................ 68,897,542 (12,394,999) Net Assets at the Beginning of the Period.............................. 771,322,224 783,717,223 ------------ ------------- Net Assets at the End of the Period.................................... $840,219,766 $ 771,322,224 ============ ============= Undistributed Net Investment Income at the End of the Period............................................. $ 2,799,336 $ 241,924 ============ =============
See accompanying Notes to Financial Statements Baker, Fentress & Company Midyear Report 1999 7 Statement of Investments
June 30, 1999 - Unaudited Shares Value ------- ----------- INVESTMENTS IN UNAFFILIATED ISSUERS -- 61.30% Common Stock -- 54.39% Basic Materials -- 2.35% E.I. du Pont de Nemours and Company..................................... 65,000 $ 4,440,313 Minerals Technologies Inc............................................... 14,700 820,444 Monsanto Company........................................................ 328,500 12,996,281 Placer Dome Inc......................................................... 65,905 774,384 Solutia Inc............................................................. 34,000 724,625 ----------- 19,756,047 ----------- Capital Goods -- 6.83% The Boeing Company...................................................... 96,436 4,243,184 Cable Design Technologies Corporation (b)............................... 95,940 1,481,074 Cordant Technologies Inc................................................ 17,100 772,706 General Electric Company................................................ 109,000 12,317,000 IDEX Corporation........................................................ 23,000 756,125 Owens-Illinois, Inc. (b)................................................ 280,000 9,152,500 Raychem Corporation..................................................... 23,300 862,100 Tenneco Inc............................................................. 166,600 3,977,575 Tyco International Ltd.................................................. 63,300 5,997,675 United Technologies Corporation......................................... 157,483 11,338,776 Xerox Corporation....................................................... 100,300 5,923,969 York International Corporation.......................................... 14,000 599,340 ----------- 57,422,024 ----------- Communication Services -- 3.71% Bell Atlantic Corporation............................................... 222,000 14,513,250 BellSouth Corporation................................................... 256,500 11,831,063 Loral Space & Communications Ltd. (b)................................... 266,375 4,794,750 ----------- 31,139,063 ----------- Consumer Cyclical -- 4.68% Beazer Homes USA, Inc. (b).............................................. 33,000 763,125 The Black & Decker Corporation.......................................... 202,300 12,770,188 Meredith Corporation.................................................... 20,000 692,500 Tribune Company......................................................... 279,800 24,377,575 Valuevision International, Inc. (b)..................................... 35,000 695,625 ----------- 39,299,013 ----------- Consumer Staples -- 6.09% Chancellor Media Corporation (b)........................................ 188,800 10,407,600 Cumulus Media Inc., Class A (b)......................................... 70,000 1,531,250 The Walt Disney Company................................................. 164,500 5,068,656 Fox Entertainment Group, Inc. (b)....................................... 227,800 6,136,363 Interstate Bakeries Corporation......................................... 31,900 715,756 Loews Cineplex Entertainment Corporation (b)............................ 90,000 978,750 Nabisco Holdings Corp................................................... 269,120 11,572,160 PepsiCo, Inc............................................................ 35,100 1,357,931 Ralston Purina Company.................................................. 441,300 13,432,069 ----------- 51,200,535 -----------
See accompanying Notes to Statement of Investments 8 Baker, Fentress & Company Midyear Report 1999 Statement of Investments
June 30, 1999 - Unaudited Shares Value ------------ ------------ INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED) Energy -- 2.77% Conoco Inc. (b)............................................ 200,200 $ 5,580,575 Schlumberger N.V........................................... 128,400 8,177,475 Unocal Corporation......................................... 239,200 9,478,300 ----------- 23,236,350 ----------- Financials -- 9.30% Ace Ltd.................................................... 216,800 6,124,600 Aetna Life Insurance and Annuity Company................... 68,600 6,135,413 Annuity and Life RE (Holdings), Ltd........................ 32,700 733,706 BankAmerica Corporation.................................... 60,987 4,471,109 The Bank of New York Company, Inc.......................... 268,600 9,854,263 W.R. Berkley Corporation................................... 65,500 1,637,500 Crescent Real Estate Equities Company...................... 35,000 831,250 CRIIMI MAE Inc............................................. 193,600 435,600 Fairfax Financial Holdings Ltd. (Stock Purchase Rights).... 78,000 9,750 Financial Federal Corporation.............................. 36,000 792,000 First Investors Financial Services Group, Inc. (b)......... 292,600 1,755,600 Horace Mann Educators Corporation.......................... 31,000 842,813 Indymac Mortgage Holdings, Inc............................. 147,250 2,356,000 Kennedy-Wilson, Inc. (b)................................... 90,000 804,375 Mellon Bank Corporation.................................... 10,600 385,575 Northern Trust Corporation................................. 41,800 4,054,600 PartnerRe Ltd.............................................. 135,800 5,075,525 Prison Realty Trust, Inc................................... 52,100 511,231 Pxre Corporation........................................... 51,000 924,375 Risk Capital Holdings, Inc. (b)............................ 14,200 191,700 Scottish Annuity & Life Holdings, Ltd. (b)................. 146,550 1,575,413 Superior National Insurance Group, Inc. (b)................ 49,200 1,340,700 Terra Nova Holdings Ltd., Class A.......................... 59,800 1,610,863 Tokio Marine & Fire Insurance Company, Limited (ADR)....... 125,000 7,015,625 UICI (b)................................................... 96,500 2,665,813 Vail Banks, Inc. (b)....................................... 26,000 269,750 XL Capital Ltd., Class A................................... 277,875 15,699,935 ----------- 78,105,084 ----------- Health Care -- 5.11% Carematrix Corporation (b)................................. 45,000 559,688 Haemonetics Corporation (b)................................ 50,000 1,003,125 Johnson & Johnson.......................................... 142,100 13,925,800 McKesson HBOC, Inc......................................... 228,130 7,342,934 Paracelsus Healthcare Corporation (b)(c)(e)................ 535,443 562,225 Pfizer Inc................................................. 64,000 6,976,000 Warner-Lambert Company..................................... 182,200 12,594,575 ----------- 42,964,347 ----------- See accompanying Notes to Statement of Investments Baker, Fentress & Company Midyear Report 1999 9
Statement of Investments
June 30, 1999 - Unaudited Shares, Contracts, or Principal Amount Value ---------------------- ----------- INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED) Technology -- 10.32% Compaq Computer Corporation................................ 99,100 $ 2,347,431 First Data Corporation..................................... 217,700 10,653,694 International Business Machines Corporation................ 151,600 19,594,300 Koninklijke Philips Electronics N.V........................ 139,840 14,106,360 Metamor Worldwide, Inc. (b)................................ 30,000 721,875 Schawk, Inc................................................ 72,100 644,394 Seagate Technology, Inc. (b)............................... 467,400 11,977,125 Symantec Corporation (b)................................... 33,000 841,500 Texas Instruments Incorporated............................. 179,300 25,819,200 ------------- 86,705,879 ------------- Utilities -- 3.23% KeySpan Energy Corporation................................. 563,620 14,865,478 The Williams Companies, Inc................................ 288,900 12,296,306 ------------- 27,161,784 ------------- Total common stock (Cost $348,840,269).................. 456,990,126 ------------- Preferred Stock -- 3.76% Crown Cork & Seal Company, Inc., 4.50%..................... 188,300 5,048,794 Loral Space & Communications Ltd. (b)...................... 63,100 3,178,663 The News Corporation Limited............................... 534,100 16,857,530 Owens-Illinois, Inc., 4.75%................................ 148,500 6,534,000 ------------- Total preferred stock (Cost $28,745,151)................ 31,618,987 ------------- Convertible Bonds -- 2.01% Hewlett-Packard Company, Zero Coupon Bond due 10/14/2017 (f)....................................... $22,785,000 14,895,694 Hewlett-Packard Company, Zero Coupon Bond due 10/14/2017........................................... $ 3,000,000 1,961,250 ------------- Total convertible bonds (Cost $14,555,928)............. 16,856,944 ------------- Limited Partnerships -- 1.14% Golder, Thoma, Cressey Fund II Limited Partnership (c)(d).. 307,326 Penta Japan Domestic Partners, L.P......................... 9,248,980 ------------- Total limited partnerships (Cost $5,140,805)............ 9,556,306 ------------- Total investments in unaffiliated issures (Cost $397,282,153)..................................... 515,022,363 ------------
See accompanying Notes to Statement of Investments 10 Baker, Fentress & Company Midyear Report 1999 Statement of Investments
June 30, 1999 - Unaudited Shares or Principal Amount Value ---------------- ------------ INVESTMENTS IN CONTROLLED AFFILIATES -- 23.37% Wholly-Owned Subsidiary -- 13.69% Levin Management Co., Inc - investment management Common Stock (b)(c)(d)........................................................ 1,000 $ 50,000,000 9.23% Notes due 12/31/1999 (c)(d)............................................. $65,000,000 65,000,000 ------------ Total wholly-owned subsidiary (Cost $120,645,890).......................... 115,000,000 ------------ Publicly Traded -- 8.66% Consolidated-Tomoka Land Co., Common Stock (majority-owned) development of Florida real estate (Cost $5,030,627).......................... 5,000,000 72,812,500 ------------ Other -- 1.02% DuroLite International, Inc. - manufacturer and distributor of specialized lighting products Convertible Preferred Stock (b)(c)(d)......................................... 2,500 -- 12% Subordinated Note due 11/03/2004 (c)(d)................................... $ 8,000,000 7,501,105 DuroLite Europe Holdings, Inc. - subsidiary of DuroLite International, Inc. 23% Promissory Note due 08/20/1999 (c)(d)..................................... $ 498,895 498,895 Stock Purchase Warrant expiring 08/20/2008 (b)(c)(d).......................... 1 -- E-Sales, Inc. - diversified environmental services marketing organization Convertible Preferred Stock (b)(c)(d)......................................... 500,000 500,000 E-Sales, Inc. - diversified environmental services marketing organization 8% Line of Credit due 12/31/1999 (c)(d)....................................... 80,000 80,000 ------------ Total other (Cost $11,580,000)............................................. 8,580,000 ------------ Total investments in controlled affiliates (Cost $137,256,517)................. 196,392,500 ------------ INVESTMENTS IN NON-CONTROLLED AFFILIATES -- 3.58% Publicly Traded Citadel Communications Corporation - radio broadcasting Common Stock (b)(c)........................................................... 830,357 30,048,529 ------------ Total investments in non-controlled affiliates (Cost $690,097)................. 30,048,529 ------------ MONEY MARKET SECURITIES -- 1.43% U.S. Treasury bills - 4.324% due 07/08/1999.................................... $12,000,000 11,988,750 ------------ Total investments in money market securities (Cost $11,988,933)................ 11,988,750 ------------ TOTAL INVESTMENTS -- 89.68% (Cost $547,217,700)........................................... 753,452,142 ------------ Cash and Other Assets, Less Liabilities -- 10.32%......................................... 86,767,624 ------------ NET ASSETS -- 100.00%..................................................................... $840,219,766 ============
See accompanying Notes to Statement of Investments Baker, Fentress & Company Midyear Report 1999 11 Notes to Statement of Investments - ---------------------- (a) Based on the cost of investments of $496,313,018, for federal income tax purposes at June 30, 1999, net unrealized appreciation was $257,139,125, which consisted of gross unrealized appreciation of $273,146,601 and gross unrealized depreciation of $16,007,476. (b) Non-income producing security. (c) Subject to legal or contractual restrictions on sale. They are valued at cost on the dates of acquisition and at a fair value as determined in good faith by the board of directors of the Company as of June 30, 1999, based upon all factors deemed relevant by the board. The quantitative and qualitative factors considered by the board of directors may include, but are not limited to, type of securities, nature of business, marketability, restrictions on disposition, market price of unrestricted securities of the same issue (if any), comparative valuation of securities of publicly-traded companies in the same or similar industries, valuation of recent mergers and acquisitions of similar companies, current financial condition and operating results, sales and earnings growth, operating revenues, competitive conditions, and current and prospective conditions in the overall stock market. The values determined by the board of directors may not reflect amounts that could be realized upon immediate sale, nor amounts that ultimately may be realized. Accordingly, the fair values included in the statement of investments may differ from the values that would have been used had a ready market existed for these securities, and such differences could be significant. The aggregate value of restricted securities was $154,498,080 or 18.4% of net assets, at June 30, 1999. (d) There were no unrestricted securities of the same issue outstanding on June 30, 1999 or the dates of acquisition. (e) Represents 80% of the current market price of unrestricted common stock of Paracelsus Healthcare Corporation. (f) Security exempt from registration requirements under Rule 144A of the Securities Act of 1933 which permits resales of eligible securities issued in private placements and other transactions to "Qualified Institutional Investors." 12 Baker, Fentress & Company Midyear Report 1999 Notes to Financial Statements -- (Unaudited) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The Company is registered under the Investment Company Act of 1940 as a non- diversified closed-end management investment company. The Company invests for total return with an emphasis on capital appreciation. Investment valuation Investments are stated at "value." Securities traded on securities exchanges or on the Nasdaq National Market are valued at the last reported sales prices on the day of valuation; listed and Nasdaq securities for which no sales were reported on that day and other securities traded in the over-the-counter market are valued at the mean of closing bid and asked prices on that day. Money market securities are valued at market value. Options traded on an exchange are valued using the last sale price on the day of valuation or, if the last sale price falls outside the range of the bid and asked prices, at the bid or asked price in the case of long options and short options, respectively. Restricted securities and other securities for which prices are not readily available, or for which market quotations are considered not to reflect fair value, are valued at a fair value as determined by the board of directors as explained in Note (c) in the Notes to Statement of Investments. The values determined by the board of directors, including the values of the Company's investments in Consolidated- Tomoka Land Co. (CTO) and Levin Management Co., Inc. (Levco), discussed below, may not reflect amounts that could be realized upon immediate sale, nor amounts that ultimately may be realized. Accordingly, the fair values included in the Company's financial statements may differ from the values that would have been used had a ready market existed for these securities, and such differences could be significant. The Company may be considered to be a "controlling person" of CTO and Levco within the meaning of the Securities Act of 1933. A public sale of shares of these companies would require registration under the Securities Act. The shares of CTO are valued by the board of directors at the closing price as reported by the American Stock Exchange on the day of valuation. The shares of Levco are not publicly-traded and are valued at a fair value as determined by the board of directors. Investment transactions Investment transactions are accounted for on the trade date. Realized gains and losses on investment transactions are determined on an identified cost basis. Investment income The Company records dividends on the ex-dividend date. Interest income is recorded on an accrual basis and includes amortization of premium and discount. Such income is classified based on the affiliation status of the issuer as of the date of the financial statements. Cash equivalents The Company includes cash balances at its custodian bank in an interest-bearing demand deposit account and other short-term investments. Federal income taxes, dividends, and distributions to shareholders In order to qualify as a regulated investment company and avoid being subject to federal income or excise taxes, the Company intends to distribute substantially all of its taxable net investment income (including net realized short-term capital gain, if any) within the time limits prescribed by the Internal Revenue Code. Accordingly, no provision has been made for federal income or excise tax on such income. Dividends and distributions payable to shareholders are recorded by the Company on the ex-dividend date. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Baker, Fentress & Company Midyear Report 1999 13 Notes to Financial Statements -- (Unaudited) (continued) NOTE 2. CAPITAL STOCK Transactions in capital stock for the first six months of 1999 and for the year ended December 31, 1998 were as follows:
Shares Amount -------------------- -------------------- 1999 1998 1999 1998 --------- --------- -------- ---------- Reinvestment of capital gain distributions......... -- 3,046,020 $ -- $ 3,046,020 Increase in capital surplus....... -- 49,014,610 -------- ---------- Net increase.......... $ -- $52,060,630 -------- ----------
The Company may purchase shares of its own stock in open market or private transactions from time to time and at such prices and amounts as management may deem advisable. Since such purchases are made at prices below net asset value, they increase the net asset value per share of the remaining shares outstanding. The Company made no such purchases for the first six months of 1999 and for the year ended December 31, 1998. NOTE 3. EXPENSES Aggregate compensation paid or accrued during the first six months of 1999 and for the year ended December 31, 1998 to officers of the Company amounted to $269,732 and $880,750, respectively. Fees, excluding expenses, of $206,000 and $337,000 were incurred during the first six months of 1999 and for the year ended December 31, 1998, respectively, for directors who were not officers of the Company. NOTE 4. FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS In December of each year, the Company distributes to its shareholders all or a portion of its net long-term capital gain realized during the year. The capital gain distribution is paid in additional shares of the Company's stock, or in cash if so elected by individual shareholders. In 1998, the Company made a long-term capital gain distribution of $3.25 per share. Approximately 76.0% of the $0.52 per share of ordinary income dividends paid during 1998 qualified for the corporate dividends received deduction, and 7.2% represented income earned on U.S. government obligations. NOTE 5. INVESTMENT TRANSACTIONS The cost of securities purchased and proceeds from securities sold during the first six months of 1999, excluding money market investments, aggregated $204,625,247 and $247,985,772, respectively. NOTE 6. RETIREMENT PLANS AND POST-RETIREMENT HEALTH CARE BENEFITS The Company maintains a non-contributory money purchase pension plan covering all employees. Company contributions are based on compensation. Total plan contributions for 1998 were $140,030. The Company also provides certain health care benefits for retired employees. All of the Company's employees become eligible for these benefits upon retirement and the coverage is provided on a contributory basis. These benefits are subject to deductible and co-payment provisions, medicare supplements and other limitations. The net expense for post-retirement health care benefits for 1998 was $75,270. NOTE 7. BANK BORROWING AND LINE OF CREDIT On June 24, 1996, the Company entered into a $40 million revolving credit agreement with the Northern Trust Company. The facility expires on January 15, 2000. Borrowings outstanding are at the :London Interbank Offered Rate (LIBOR) plus 0.35%. The commitment fee associated with the unused portion of the revolving credit agreement is 0.08% per annum. The amount outstanding at June 30, 1999 was $5.0 million. The interest rate is reset periodically under the revolving credit facility and the fair value of the debt at June 30, 1999 approximates its carrying value. The maximum borrowing and 14 Baker, Fentress & Company Midyear Report 1999 the average daily borrowing balances during the period for which borrowings were outstanding were $5.0 million and $5.0 million, respectively. The interest rate at June 30, 1999 and the weighted average interest rate during the first six months of 1999 were 5.4% and 5.4%, respectively. NOTE 8. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES Agreements: The Company has an investment advisory contract with John A. Levin & Co., Inc., a wholly-owned subsidiary of Levin Management Co., Inc., and an indirect wholly- owned subsidiary of the Company, which provides for payment of a fee at an annual rate of 0.30%, based on the value of the assets of the public portfolio of the Company. For the six months ended June 30, 1999, the Company incurred management fees of $760,685. The Company's investments, other than the public portfolio, are managed by the Company's officers under the supervision of its board of directors. A summary of transactions with affiliated companies during the six months ended June 30, 1999 follows:
Purchases Realized (Sales) Gain (Loss) Income ----------- ----------- ---------- Citadel Communications Corporation Common stock............... $(1,170,899) $37,593,605 $ -- Consolidated-Tomoka Land Co....................... -- -- 1,750,000 DuroLite International Note....................... -- -- 240,000 DuroLite Europe Holdings, Inc. Note....................... -- -- 55,253 Warrant.................... -- -- -- Levin Management Co., Inc. Common stock............... -- -- -- Note due 12/28/1999........ -- 3,303,625 E-Sales Inc. Convertible Preferred...... -- -- -- Line of Credit............. 80,000 -- 631 ----------- ----------- ---------- $(1,090,899) $37,593,605 $5,349,509 =========== =========== ==========
NOTE 9. PLAN FOR DISTRIBUTION OF ASSETS The Company has called a special meeting of shareholders to be held on August 19, 1999 to vote on the Plan for Distribution of Assets. If approved, the Company will sell its public and private portfolio securities and distribute the net proceeds to shareholders. In addition, the Company will distribute the shares of Consolidated-Tomoka Land Co. it owns to shareholders. After the distribution of assets is completed, the Company will de-register as an investment company, but remain in business as a holding company with one principal asset -- Levco and its related companies. The proxy statement for this special shareholders' meeting contains more detailed information. NOTE 10. YEAR 2000 The Company could be adversely affected if the computer systems used by the Company and its service providers, including John A. Levin & Co., Inc., do not properly process and calculate date-related information relating to the Year 2000. The Company is taking steps that it believes are reasonably designed to address the Year 2000 problem with respect to the computer systems it uses and to obtain satisfactory assurances that comparable steps are being taken by each of the Company's other major service providers. The Company does not expect to incur any significant costs in order to address the Year 2000 problem. However, at this time, there can be no assurance that these steps will be sufficient to avoid any adverse impact on the Company. In addition, there can be no assurances that the Year 2000 issue will not have an adverse effect on the companies whose securities are held by the Company or on global markets or economies generally. Baker, Fentress & Company Midyear Report 1999 15 Portfolio Changes Exceeding $2.5 Million
Quarter Ended June 30, 1999 - Unaudited Purchases Cost - --------- ----------- Warner-Lambert Company.......................... $ 11,983,799 McKesson HBOC, Inc.............................. 8,038,936 Seagate Technology, Inc......................... 7,150,323 Xerox Corporation............................... 5,745,898 Tyco International Ltd.......................... 5,534,904 Schlumberger N.V................................ 5,437,100 BellSouth Corporation........................... 5,158,341 Johnson & Johnson............................... 4,685,536 Monsanto Company................................ 3,722,137 Fox Entertainment Group, Inc.................... 3,697,140 Engelhard Corporation........................... 3,196,050 The News Corporation Limited.................... 2,967,231 General Electric Company........................ 2,962,417 Nabisco Holdings Corp........................... 2,667,117 Compaq Computer Corporation..................... 2,600,560 ------------ $ 75,547,489 ============ Sales Proceeds - ----- ------------ Citadel Communications Corporation.............. $ 28,462,491 MediaOne Group, Inc............................. 27,394,547 Potomac Electric Power Company.................. 17,837,095 Sempra Energy................................... 11,829,084 Tribune Company................................ 10,316,146 Security Capital U.S. Realty.................... 9,480,313 Sundstrand Corporation.......................... 9,046,066 Duke Energy Corporation......................... 8,489,100 TRW Inc......................................... 8,193,491 Lockheed Martin Corporation..................... 5,074,779 Engelhard Corporation........................... 3,784,783 United Technologies Corporation................. 3,132,022 ------------ Total................................. $143,039,917 ============
Top Ten Holdings Our top ten holdings as a percent of net assets at June 30, 1999 were:
1. Levin Management (with its subsidiaries, including Levco) Investment advisor........ 13.7% 2. Consolidated-Tomoka, Florida real estate............................................ 8.7 3. Citadel Communications, Radio broadcasting.......................................... 3.6 4. Texas Instruments, Electronic components and semiconductors......................... 3.1 5. Tribune, Publishing and broadcasting................................................ 2.9 6. International Business Machines, Computer technology................................ 2.3 7. The News Corp, Publishing and broadcasting.......................................... 2.0 8. Hewlett-Packard, Computer technology................................................ 2.0 9. XL Capital, Insurance............................................................... 1.9 10. KeySpan Energy, Electric and gas utility............................................ 1.8 ---- Total............................................................... 42.0% ====
16 Baker, Fentress & Company Midyear Report 1999 Financial Highlights The following table shows per share operating performance data, total investment return, ratios and supplemental data for the six months ended June 30, 1999 and for each year in the five-year period ended December 31, 1998.
Six Months Ended June 30, 1999 Year Ended December 31, (Unaudited) 1998 1997 1996 1995 1994 ------------- ---- ---- ---- ---- ---- Per Share Operating Performance Net asset value, beginning of year.. $ 19.76 $ 21.78 $ 21.77 $ 21.75 $ 17.47 $ 20.42 -------- -------- -------- -------- -------- -------- Net investment income.......................... .37 0.53 0.72 0.37 0.35 0.35 Net realized gain (loss) and net change in unrealized appreciation and other changes............................. 1.70 1.50 2.26 3.31 5.67 (1.36) -------- -------- -------- -------- -------- -------- Total investment operations......................... 2.07 2.03 2.98 3.68 6.02 (1.01) Less distributions: Dividends from net investment income........................................ (.30) (0.52) (0.54) (0.78) (0.35) (0.35) Distribution from net realized gain.......................................... -- (3.25) (2.23) (1.78) (1.20) (1.46) -------- -------- -------- -------- -------- -------- Total distributions................................. (.30) (3.77) (2.77) (2.56) (1.55) (1.81) -------- -------- -------- -------- -------- -------- Dilution (a) resulting from: Shares issued in acquisition of Levin Management Co., Inc.................... -- -- -- (0.90) -- -- Reinvestment of capital gain distribution................................. -- (0.28) (0.20) (0.20) (0.19) (0.13) -------- -------- -------- -------- -------- -------- Total dilution...................................... -- (0.28) (0.20) (1.10) (0.19) (0.13) -------- -------- -------- -------- -------- -------- Net asset value, end of period...................... $ 21.53 $ 19.76 $ 21.78 $ 21.77 $ 21.75 $ 17.47 ======== ======== ======== ======== ======== ======== Per share market price, end of period............................................. $ 19.00 $ 15.313 $ 18.25 $ 16.875 $ 16.75 $ 13.75 Total Investment Return- Shareholder Return................................ 26.07% 3.45% 25.17% 15.48% 33.20% (7.51)% Ratios to Average Net Assets Expenses............................................ .94% .80% .87% .90%(b) .78% .75% Expenses before interest expense.................... .90% .76% .74% .77% .78% .75% Net investment income............................... 1.82% 1.87% 2.07% 1.53% 1.79% 1.38% Supplemental Data Net assets, end of period (000's omitted)........................................... 840,220 771,322 783,717 741,146 599,182 461,931 Portfolio turnover.................................. 56.00% 53.72% 33.72% 59.78% 35.89% 41.63% Shares outstanding, end of period (000's omitted)................................... 39,029 39,029 35,983 34,042 27,544 26,442
---------- (a) Effect of the Company's issuance of shares at a price below net asset value. (b) The expense ratio before severance-related expenses was .82% for 1996. Baker, Fentress & Company Midyear Report 1999 17 [INSERT PICTURE] Baker, Fentress & Company Established 1891 SUITE 590, 200 WEST MADISON STREET CHICAGO, ILLINOIS 60606 (312) 236-9190 FAX (312) 236-6772 -----END PRIVACY-ENHANCED MESSAGE-----