<PAGE>
TO OUR SHAREHOLDERS
For the six-months ended June 30, 1993, Baker, Fentress & Company total net
asset value return of 6.02% exceeded the comparable 4.87% total return for the
Standard & Poor's 500 Stock Index. Total net assets of $439.1 million, or $21.78
per share, compare to $419.8 million total net assets, or $20.82 per share, on
the same number of shares outstanding at December 31, 1992.
For purposes of estimating total calendar year 1993 payments to shareholders
based upon the Company's 8% minimum distribution policy, net assets for the
eight-month period ended June 30, 1993 averaged $20.94 per share; 8% of that
amount is approximately $1.68. One semi-annual ordinary income dividend of $0.20
per share was paid on June 7, 1993. If annual average net assets at October 31,
1993 were the same as at June 30, 1993, shareholders could expect additional
total distributions from net investment income and realized capital gain of at
least $1.48 per share. Based upon the 1992 undistributed gain balance of $13.9
million and $23.7 million in long-term gain realized thus far during 1993,
approximately $1.86 for each currently outstanding share, it is probable that
total distributions will exceed 8%.
During the second quarter, public equity markets were modestly positive and
the Baker Fentress portfolio participated fully. Leadership shifted somewhat
away from the more defensive themes of the first quarter and toward industrial
sectors, particularly larger capitalization technology and telecommunications
issues where the portfolio is well represented. Conversely, this was also a
quarter in which many of the strongest consumer product stocks which led the
market during the 1980's, such as Philip Morris, eroded or collapsed due to
falling profit margins. As previously reported, the Company had reduced holdings
in this area. One surprising event of the quarter was an inflation scare which
clipped financial stocks. As this is written, the sector has recovered somewhat.
In addition to our technology and communication related stocks, a cluster of
managed health care stocks added to the portfolio during April performed
extremely well during the quarter. As it became apparent that health care reform
will be a long process, the market took increased interest in companies which
are already accomplishing effective health care cost control.
Although the state of the federal budget debate leaves much to be desired,
the market forces acting to increase savings and investment in the U.S. continue
to be the most important fundamental trends on the domestic economic scene. As
these basic factors assert themselves, we expect the Baker Fentress portfolio
will continue to prosper.
On July 15, 1993, the Board of Directors authorized an offering to
shareholders of non-transferable rights to purchase additional Baker Fentress
common shares at a price below market value. Under planned terms of the
offering, one non-transferable right will be issued for each share of common
stock held. For each five rights shareholders will be entitled to purchase one
share of common stock at a price below the market value on the pricing date.
Shareholders also may subscribe for additional shares available from
shareholders not exercising their rights in the primary subscription. The rights
offering will result in an increase in the Company's total net assets and should
lower expenses as a proportion of total net assets. The offering will be made
only by means of a prospectus, which will be mailed prior to commencement of the
offering to all shareholders of record. Final terms and conditions will be
announced shortly before the commencement of the offering. The offering is
expected to terminate approximately one month after commencement date, and
shares acquired in the rights offering will participate in both the year-end
income dividend and capital gain distribution.
David D. Peterson
President and
Chief Executive Officer
1
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
June 30, 1993
(Unaudited)
-------------
<S> <C>
ASSETS
INVESTMENTS, AT VALUE:
Portfolio securities:
Unaffiliated issuers (cost $234,008,526) ............................ $344,043,383
Non-controlled affiliates (cost $8,518,438) ......................... 8,980,202
Controlled affiliates (cost $29,233,454) ............................ 86,942,395
Call options purchased (cost $6,364,352) ............................ 5,367,074
Money market securities (cost $2,136,531) ............................. 2,136,531
------------
TOTAL INVESTMENTS (COST $280,261,301) ............................. 447,469,585
CASH .................................................................... 313,166
RECEIVABLE FOR SECURITIES SOLD .......................................... 2,966,875
DIVIDENDS AND INTEREST RECEIVABLE ....................................... 1,323,463
OTHER ASSETS ............................................................ 478,619
------------
TOTAL ASSETS ...................................................... 452,551,708
------------
LIABILITIES
COVERED CALL OPTIONS WRITTEN, AT VALUE (PREMIUM RECEIVED $5,995,000) .... 11,016,000
PAYABLE FOR SECURITIES PURCHASED ........................................ 1,836,500
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ................................ 563,408
------------
TOTAL LIABILITIES ................................................. 13,415,908
------------
NET ASSETS ................................................................... $439,135,800
============
ANALYSIS OF NET ASSETS
COMMON STOCK, $1 PAR VALUE, AUTHORIZED -- 40,000,000 SHARES;
ISSUED -- 20,164,869 SHARES ........................................... $ 20,164,869
CAPITAL SURPLUS (A) ..................................................... 62,627,508
ACCUMULATED NET REALIZED GAIN FROM INVESTMENT TRANSACTIONS (B) .......... 144,914,743
OTHER RETAINED EARNINGS (B) ............................................. 49,241,521
UNREALIZED APPRECIATION OF INVESTMENTS .................................. 162,187,159
------------
NET ASSETS ................................................................... $439,135,800
============
NET ASSET VALUE PER SHARE .................................................... $ 21.78
============
</TABLE>
-------------------
(a) Represents the excess of the issue price over the par value of newly
issued stock distributed by the Company to its shareholders under its
reinvestment plan.
(b) Prior to January 1, 1970, operating and other non-portfolio activities
were included in other retained earnings. Accumulated net realized
gain from investment transactions at June 30, 1993 includes $13,916,243
net gain realized during 1992 to be distributed to shareholders in
December 1993.
See accompanying Notes to Financial Statements
2
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1993 Year Ended
(Unaudited) December 31, 1992
---------------- -----------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends from:
Unaffiliated issuers....................................... $ 1,615,431 $ 3,390,004
Controlled affiliate....................................... 750,000 1,000,000
----------- ------------
2,365,431 4,390,004
Interest from:
Unaffiliated issuers....................................... 2,362,040 5,741,076
Non-controlled affiliate................................... 425,000 1,472,333
Controlled affiliates...................................... 428,159 -
----------- ------------
3,215,199 7,213,409
----------- ------------
TOTAL INCOME............................................. 5,580,630 11,603,413
----------- ------------
EXPENSES:
Investment research......................................... 746,938 1,318,376
Administration and operations............................... 455,614 744,759
Rent........................................................ 145,946 278,665
Professional fees........................................... 46,086 199,850
Directors' fees and expenses................................ 80,980 162,279
Reports to shareholders..................................... 112,017 100,982
Custodian and transfer agent fees........................... 31,379 55,052
Taxes other than income..................................... 27,289 46,683
Other....................................................... 160,677 266,397
----------- ------------
TOTAL EXPENSES........................................... 1,806,926 3,173,043
----------- ------------
NET INVESTMENT INCOME.................................... 3,773,704 8,430,370
----------- ------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on sales of investments
in unaffiliated issuers................................... 26,710,058 31,467,296
Net realized gain on sales of investment
in non-controlled affiliate............................... - 4,157,114
Net realized gain (loss) on options transactions............ (260,309) 312,452
Net realized gain (loss) on financial futures transactions.. 165,925 (154,965)
----------- ------------
Net realized gain on sales of investments................... 26,615,674 35,781,897
Net change in unrealized appreciation of investments........ (7,034,623) (19,617,419)
----------- ------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS.......................................... 19,581,051 16,164,478
----------- ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $23,354,755 $ 24,594,848
=========== ============
</TABLE>
See accompanying Notes to Financial Statements
3
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1993 Year Ended
(Unaudited) December 31, 1992
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations........... $ 23,354,755 $ 24,594,848
Adjustments to reconcile increase in net assets from
operations to net cash provided by operating activities:
Net realized and unrealized (gain) on investments........... (19,581,051) (16,164,478)
(Increase) decrease in dividends and interest receivable.... (60,965) 265,189
(Increase) decrease in other assets......................... 79,370 (83,992)
(Increase) in receivable for securities sold................ (2,559,375) (407,500)
Increase in accounts payable and accrued liabilities........ 92,241 236,564
Increase (decrease) in payable for securities purchased..... 256,500 (645,000)
Net amortization of premiums (discounts).................... -- (5,404)
------------ -------------
Net cash provided by operating activities................ 1,581,475 7,790,227
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of portfolio securities.............................. (93,911,472) (127,945,905)
Sales of portfolio securities.................................. 89,458,604 128,842,085
Net realized gain (loss) on options transactions............... (260,309) 312,452
Net realized gain (loss) on financial futures transactions..... 165,800 (154,965)
Sales/maturities of investments in money
market securities, net...................................... 7,279,059 13,320,670
------------ -------------
Net cash provided by investing activities................ 2,731,682 14,374,337
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchases of treasury stock.................................... -- (1,630,480)
Dividends and capital gain distributions....................... (4,032,974) (20,505,030)
------------ -------------
Net cash used in financing activities.................... (4,032,974) (22,135,510)
------------ -------------
NET INCREASE IN CASH..................................................... 280,183 29,054
CASH AT THE BEGINNING OF THE PERIOD...................................... 32,983 3,929
------------ -------------
CASH AT THE END OF THE PERIOD............................................ $ 313,166 $ 32,983
============ =============
SUPPLEMENTAL DISCLOSURE OF
NONCASH FINANCING ACTIVITIES:
Capital gain distribution reinvestments.................. $ -- $ 14,484,494
============ =============
</TABLE>
See accompanying Notes to Financial Statements
4
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1993 Year Ended
(Unaudited) December 31, 1992
---------------- -----------------
<S> <C> <C>
OPERATIONS:
Net investment income.......................................... $ 3,773,704 $ 8,430,370
Net realized gain on investments............................... 26,615,674 35,781,897
Net (decrease) in unrealized appreciation...................... (7,034,623) (19,617,419)
------------ ------------
Net increase in net assets resulting from operations....... 23,354,755 24,594,848
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income.......................................... (4,032,974) (7,539,179)
Net realized gain from investment transactions................. - (27,450,345)
------------ ------------
Total dividends to shareholders............................ (4,032,974) (34,989,524)
------------ ------------
Net increase (decrease) in net assets from
operations after distributions.......................... 19,321,781 (10,394,676)
------------ ------------
CAPITAL SHARE TRANSACTIONS--NET INCREASE....................... - 12,854,014
------------ ------------
TOTAL INCREASE IN NET ASSETS................................... 19,321,781 2,459,338
NET ASSETS AT THE BEGINNING OF THE PERIOD...................... 419,814,019 417,354,681
------------ ------------
NET ASSETS AT THE END OF THE PERIOD............................ $439,135,800 $419,814,019
============ ============
</TABLE>
See accompanying Notes to Financial Statements
5
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
June 30, 1993 - Unaudited
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS--78.34%.. Shares VALUE
-------- -----------
PUBLIC PORTFOLIO-69.77%
HEALTH CARE-4.88%
EMERGING HEALTH GROUP
Chiron Corporation (b).................. 50,000 $ 3,212,500
Copley Pharmaceutical, Inc. (b)......... 127,500 4,653,750
Health Care and Retirement Corporation.. 150,000 3,018,750
HealthSource, Inc. (b).................. 80,000 3,480,000
Medco Containment Services, Inc. (b).... 100,000 3,200,000
United Healthcare Corporation. (b)...... 60,000 3,855,000
----------
21,420,000
----------
CONSUMER PRODUCTS-4.55%
Newell Co................................ 210,000 6,982,500
CONSUMER GROWTH GROUP
Harley-Davidson, Inc.................... 80,000 3,360,000
IHOP Corp. (b).......................... 130,000 3,315,000
Pillowtex Corporation (b)............... 100,000 1,012,500
Sonic Corp. (b)......................... 115,000 2,645,000
Tommy Hilfiger Corporation (b).......... 120,000 2,655,000
----------
19,970,000
----------
SERVICES-0.61%
ENVIRONMENT AND INFRASTRUCTURE GROUP
Granite Construction Incorporated....... 42,500 754,375
Insituform Mid-America, Inc............. 177,500 1,908,125
----------
2,662,500
----------
TECHNOLOGY-13.71%
Hewlett-Packard Company.................. 120,000 9,720,000
Microsoft Corporation (b)................ 105,000 9,240,000
COMPUTER HARDWARE GROUP
Cabletron Systems, Inc. (b)............. 30,000 3,165,000
Cirrus Logic, Inc. (b).................. 210,000 3,648,750
Cisco Systems, Inc. (b)................. 60,000 3,285,000
Intel Corporation....................... 40,000 2,200,000
Scitex Corporation Ltd.................. 75,000 2,878,125
Xilinx, Inc. (b)........................ 95,000 3,681,250
COMPUTER SOFTWARE GROUP
BMC Software, Inc. (b).................. 100,000 5,275,000
Network General Corporation (b)......... 120,000 1,305,000
Novell, Inc. (b)........................ 80,000 2,080,000
PLATINUM Technology, Inc. (b)........... 150,000 1,837,500
Progress Software Corporation (b)....... 35,000 1,592,500
Rainbow Technologies, Inc. (b).......... 50,000 1,431,250
DEVELOPING COMMUNICATION GROUP
Motorola, Inc........................... 35,000 3,058,125
Octel Communications Corporation (b).... 90,000 2,002,500
Verifone, Inc. (b)...................... 130,000 3,802,500
----------
60,202,500
----------
ENERGY-4.33%
MAPCO Inc................................ 200,000 11,200,000
NATURAL GAS GROUP
Moorco International Inc................ 90,000 1,530,000
Noble Affiliates, Inc................... 120,000 2,895,000
Plains Petroleum Company................ 132,200 3,387,625
----------
19,012,625
----------
</TABLE>
See accompanying Notes to Statement of Investments
6
<PAGE>
STATEMENT OF INVESTMENTS
June 30, 1993 - Unaudited
<TABLE>
<CAPTION>
Investments In Unaffiliated Issuers (continued)
Shares or
Principal Amount VALUE
---------------- ------------
<S> <C> <C>
Finance-15.98%
AFLAC Incorporated..................................................... 375,000 $ 10,640,625
Aon Corporation........................................................ 240,000 12,750,000
Barnett Banks, Inc..................................................... 400,000 19,100,000
The Dreyfus Corporation................................................ 300,000 12,225,000
Specialized financial services group
American Re Corporation (b).......................................... 70,500 2,414,625
Hilb, Rogal and Hamilton Company..................................... 100,000 1,350,000
Growth lending institution group
BayBanks, Inc........................................................ 50,000 2,150,000
Crestar Financial Corporation........................................ 70,000 2,922,500
KeyCorp.............................................................. 80,000 3,340,000
Norwest Corporation.................................................. 120,000 3,285,000
------------
70,177,750
------------
Basic industries-10.65%
Great Lakes Chemical Corporation....................................... 180,000 12,397,500
Nucor Corporation...................................................... 133,000 11,354,875
Wausau Paper Mills Company............................................. 334,200 11,655,225
AGRICULTURE GROUP
IMC Fertilizer Group, Inc. (b)......................................... 80,000 2,350,000
Lindsay Manufacturing Co. (b).......................................... 80,000 2,410,000
Pioneer Hi-Bred International, Inc..................................... 240,000 6,630,000
------------
46,797,600
------------
Producer goods-5.35%
Cincinnati Milacron Inc................................................ 300,000 7,312,500
Eaton Corporation...................................................... 180,000 8,077,500
Giddings & Lewis, Inc.................................................. 380,000 8,122,500
------------
23,512,500
------------
Growth transportation-0.54%
Heartland Express, Inc. (b)............................................ 68,166 2,385,810
------------
Utilities-9.17%
MCI Communications Corporation......................................... 700,000 40,250,000
------------
Total public portfolio (Cost: $197,349,180).......................... 306,391,285
------------
Private Placement Portfolio-8.57%
County Seat Holdings, Inc., common stock--specialty retailer (b)(c).... 74,045 1,249,510
County Seat Stores, Inc., 15% Senior Subordinated Note
due 8/31/2000 (c).................................................... 10,000,000 10,000,000
EXCL Communications, Inc.-- radio broadcasting
Convertible Preferred Stock (b)(c)................................... 2,150,000 2,150,000
14% Subordinated Debenture due 6/30/2000 (c)......................... 3,800,000 3,800,000
Seattle Lighting Fixture Co.-- commercial and residential
lighting fixtures
13% Subordinated Note due 11/20/2000 (c)............................. 8,000,000 8,000,000
Series A 15% Senior Subordinated Note due 11/30/95 (c)............... 590,348 590,348
Stock Purchase Warrants Expiring 12/20/2000,
Alliance Northwest Industries, Inc.-- holding company of
Seattle Lighting Fixture Co. (c)..................................... 42,198,535 1,000
Summit Environmental Group, Inc.-- environmental engineering
and consulting
12.5% Senior Subordinated Promissory Note due 6/30/98 (c)............ 10,000,000 10,000,000
Stock Purchase Warrants Expiring 7/1/98 (c).......................... 900,000 900
Golder, Thoma, Cressey Fund II Limited Partnership (c)................. 1,088,025 1,499,011
Phillips-Smith Specialty Retail Group Limited Partnership (c).......... 288,622 361,329
------------
Total private placement portfolio (Cost: $36,659,346)................ 37,652,098
------------
Total investments in unaffiliated issuers (Cost: $234,008,526)......... 344,043,383
------------
</TABLE>
See accompanying Notes to Statement of Investments 7
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
June 30, 1993 - Unaudited
Shares,
Contracts or
INVESTMENTS IN NON-CONTROLLED AFFILIATES--2.05% Principal Amount Value
-------------------------------
<S> <C> <C>
PRIVATE PLACEMENT PORTFOLIO
Complete Health Services, Inc.--health care management
services provider
Series A Convertible Preferred Stock (b)(c)......................... 92,392 $ 4,721,000
20% Subordinated Debenture due 7/1/2001 (c)......................... $ 4,250,000 4,259,202
------------
Total investments in non-controlled affiliates (Cost: $8,518,438)..... 8,980,202
------------
INVESTMENTS IN CONTROLLED AFFILIATES--19.80%
PUBLIC PORTFOLIO-16.08%
Consolidated-Tomoka Land Co., common stock
(majority-owned)-- development of Florida real estate;
production and sale of citrus fruit (Cost: $5,030,627).............. 5,000,000 70,625,000
============
PRIVATE PLACEMENT PORTFOLIO-3.72%
American Electronic Components, Inc.--electronic component
manufacturer
Series A Senior Common Stock (c).................................... 1,968,908 1,500,000
Series B Common Stock (c)........................................... 953,847 620,000
Common Stock (b)(c)................................................. 5,168,056 2,042,316
Stock Purchase Warrants Expiring 1/1/2000 (c)....................... 497,667 72,252
CCC Holdings, Inc.- holding company of
Citadel Communications Corporation
Series A Convertible Preferred Stock (b)(c)......................... 40,500 3,374,865
Series C Convertible Preferred Stock (b)(c)......................... 11,496 957,962
Stock Purchase Warrants Expiring 6/30/2000 (c)...................... 2,250 10,000
Citadel Communications Corporation--radio broadcasting
Class A 12% Subordinated Note due 6/30/2000 (c)..................... $ 7,000,000 7,000,000
Class B-1 12% Subordinated Note due 6/30/2000 (c)................... $ 750,000 740,000
------------
Total private placement portfolio (Cost $24,202,827).............. 16,317,395
------------
Total investments in controlled affiliates (Cost: $29,233,454)........ 86,942,395
------------
MONEY MARKET SECURITIES--0.49%
U.S. Treasury bills--3.08% due 12/2/93................................ $ 1,000,000 986,739
American Express Credit Corporation Commercial Paper--
3.25% due 7/2/93.................................................... $ 1,150,000 1,149,792
------------
Total investments in money market securities (Cost: $2,136,531).... 2,136,531
------------
CALL OPTIONS-1.22%
Oil Basket, November $66, (Cost: $6,364,352)........................ 181,192 5,367,074
------------
Total Investments--101.90% (COST: $280,261,301)..................... 447,469,585
COVERED CALL OPTIONS-(2.51%)
MCI Communications Corporation, November $30
(Premium received: $5,995,000) (d)................................ 4,000 (11,016,000)
OTHER ASSETS LESS LIABILITIES--0.61%................................ 2,682,215
------------
NET ASSETS--100.00%................................................. $439,135,800
============
</TABLE>
-----------
Notes: (a) Based on the cost of investments of $280,261,301, for federal
income tax purposes at June 30, 1993, net unrealized appreciation
was $167,208,284, which consisted of gross unrealized appreciation
of $184,144,246 and gross unrealized depreciation of $16,935,962.
(b) Non-income producing security.
(c) Securities subject to legal or contractual restrictions on sale.
Valued at cost on the dates of acquisition and at a fair value as
determined by the board of directors of the Company as of June 30,
1993. The aggregate value of restricted securities was
$62,949,695, or 14.3% of net assets, at June 30, 1993.
(d) The aggregate market value of stocks held in escrow at June 30,
1993 covering open covered call options written was $23,000,000.
8
<PAGE>
CHANGES IN PORTFOLIO
Quarter Ended June 30, 1993 - Unaudited
<TABLE>
<CAPTION>
Shares or Principal Amount*
----------------------------------------
<S> <C> <C> <C>
Held at
EQUITIES Purchased Sold/Matured June 30, 1993
----------------------------------------
Aldila, Inc.................................................... 10,000 10,000 -
BMC Software, Inc.............................................. 50,000 100,000
CCC Holdings, Inc. Series C Convertible Preferred Stock........ 11,496 11,496
CCC Holdings, Inc. Stock Purchase
Warrants Expiring 6/30/2000................................... 2,250 2,250
Cincinnati Milacron Inc........................................ 300,000 300,000
Cirrus Logic, Inc.............................................. 210,000 210,000
Copley Pharmaceutical, Inc..................................... 85,000 127,500
Eaton Corporation.............................................. 180,000 180,000
Health Care and Retirement Corporation......................... 150,000 150,000
HealthSource, Inc.............................................. 80,000 80,000
Heartland Express, Inc......................................... 68,166 68,166
Medco Containment Services, Inc................................ 100,000 100,000
PLATINUM Technology, Inc....................................... 150,000 150,000
Progress Software Corporation.................................. 35,000 35,000
Sonic Corp..................................................... 115,000 115,000
United Healthcare Corporation.................................. 60,000 60,000
Wausau Paper Mills Company..................................... 2,300 334,200
Adobe Systems Incorporated..................................... 50,000 -
Alza Corporation............................................... 30,000 -
Apache Corporation............................................. 150,000 -
Costco Wholesale Corporation................................... 150,000 -
Genzyme Corporation............................................ 42,500 -
Giddings & Lewis, Inc.......................................... 150,000 380,000
Granite Construction Incorporated.............................. 80,000 42,500
Hewlett-Packard Company........................................ 55,000 120,000
Intel Corporation.............................................. 40,000 40,000
Motorola, Inc.................................................. 35,000 35,000
Newell Co...................................................... 80,000 210,000
Noble Affiliates, Inc.......................................... 50,000 120,000
Porta Systems Corp............................................. 100,000 -
Rollins Environmental Services, Inc............................ 240,200 -
Waste Management, Inc.......................................... 150,000 -
DEBTS
Citadel Communications Corporation
Class B-1 12% Subordinated Note due 6/30/2000................. 750,000 750,000
Class B 12% Subordinated Note due 6/30/2000................... 958,000 -
Seattle Lighting Fixture Co.
Series A 15% Senior Subordinated Note due 11/30/95............ 1,000,000 409,652 590,348
Series B 15% Subordinated Note due 6/25/93.................... 1,000,000 1,000,000 -
--------------------
* Excludes shares acquired as a result of stock dividends, stock splits and stock reorganizations.
</TABLE>
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, 1993 and
the year ended December 31, 1992.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1993
(Unaudited) 1992
---------------- --------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 20.82 $ 21.49
-------- --------
Net investment income................................... .20 .39
Net realized gain (loss) and change in unrealized
appreciation and other changes...................... .96 .75
-------- --------
Total from investment operations............................. 1.16 1.14
Less distributions
Dividends from net investment income.................... (.20) (.39)
Distribution from net realized gain..................... - (1.42)
-------- --------
Total distributions.......................................... (.20) (1.81)
-------- --------
Net asset value, end of period............................... $ 21.78 $ 20.82
======== ========
Per share market price, end of period........................ $ 17.875 $ 17.00
TOTAL INVESTMENT RETURN-SHAREHOLDER RETURN............................ 6.30% 6.51%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's).................... $439,136 $419,814
Ratio of expenses to average net assets................. .84% .76%
Ratio of net investment income to average net assets.... 1.76% 2.01%
Portfolio turnover...................................... 36.46% 28.36%
Number of shares outstanding, end of period (in 000's).. 20,165 20,165
</TABLE>
9
<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.
INVESTMENT VALUATION:
Investments are stated at "value". Securities traded on securities exchanges or
on the NASDAQ National Market System 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 instruments are valued at amortized cost. Financial futures are valued at
the settlement price established each day by the exchange on which they are
traded. Restricted securities and other securities for which prices are not
readily available, or for which market quotations are considered to not reflect
fair value, are valued at a fair value as determined by the board of directors.
The Company may be considered to be a "controlling person" of Consolidated-
Tomoka Land Co. within the meaning of the Securities Act of 1933. A public
distribution of shares of this company therefore would require registration
under the Securities Act, and it would be expected that the principal costs of
any such registration would be borne by the Company. The shares of Consolidated-
Tomoka Land Co. are valued by the board of directors at the closing price as
reported by the American Stock Exchange on the day of valuation.
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 the accrual basis and includes amortization of premium and discount
on securities purchased. Such income is classified based on the affiliation
status of the issuer as of the date of the financial statements.
FEDERAL INCOME TAXES, DIVIDENDS, AND DISTRIBUTIONS
TO SHAREHOLDERS:
The Company intends to qualify each year as a "regulated investment company"
under the provisions of the Internal Revenue Code so that it will not be liable
for federal income tax on net investment income and capital gain distributed 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 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.
For the year ended December 31, 1992, the Company paid out $1.42 per share of
net realized long-term capital gain to shareholders.
Long-term capital gain distributions are taxable as long-term capital gain to
shareholders, irrespective of how long the related shares have been held. Short-
term capital gain distributed to shareholders is taxable as ordinary dividend
income.
Dividends and distributions payable to shareholders are recorded by the
Company on the ex-dividend date.
NOTE 2. CAPITAL STOCK
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.
Transactions in capital stock during the year ended December 31, 1992 were as
follows:
Shares Amount
-------- -----------
Shares
reacquired....... (91,600) $(1,630,480)
Reinvestment of
capital gain
distributions.... 833,640 833,640
Increase in
capital surplus.. 13,650,854
-----------
Net increase..... $12,854,014
===========
Shares reacquired by the Company during 1992 were at an estimated weighted
average discount from net asset value of 20.8%. The Company had no capital stock
transactions during the first six months of 1993.
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the first six months of 1993 and
for the year ended December 31, 1992 to officers of the Company amounted to
$540,101 and $997,340, respectively. Fees, excluding expenses, of $73,150 and
$144,850 were incurred for directors who were not officers of the Company during
the first six months of 1993 and for the year ended December 31, 1992,
respectively.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 4. RETIREMENT PLANS
The Company maintains a non-contributory defined benefit pension plan covering
all of its employees. Benefits under the plan are based on salary and years of
service. The Company's funding policy is to make an annual contribution to the
plan at least equal to the minimum required under ERISA. Total plan
contributions for 1992 were $34,375.
The net pension cost for 1992 of $28,397 was comprised of:
Service cost ............................................... $ 17,209
Interest cost on projected benefit obligation .............. 31,444
Actual return on plan assets ............................... (13,819)
Net amortization and deferral .............................. (6,437)
--------
Net pension cost ........................................... $ 28,397
========
At December 31, 1992, the assumed discount rate and rate of increase in
future compensation levels used in determining the actuarial present value of
the projected benefit obligation were 7% and 5%, respectively. The expected
long-term rate of return on assets was 7%.
The following table sets forth the plan's funded status and amounts
recognized in the statement of assets and liabilities at December 31, 1992:
Actuarial present value of benefit obligations:
Vested ................................................ $ 344,795
Non-vested ............................................ 8,181
---------
Total accumulated benefit obligation .............. 352,976
=========
Projected benefit obligation for services rendered to
date .................................................... (362,540)
Plan assets at fair value ................................. 293,291
---------
Projected benefit obligation in excess of plan assets ..... (69,249)
Effect of change in assumptions reduced by unrecognized
net gains ............................................... 5,544
Unrecognized net obligation at January 1, 1987 being
recognized over 18 years ................................. 71,632
---------
Prepaid pension cost included in other assets ......... $ 7,927
=========
In addition, the Company has a non-contributory money purchase pension plan
covering all employees. The cost of this plan for 1992 was $186,368.
The plans are funded through trusts, and the Company has no beneficial or
reversionary interest in the trust assets, except to the extent of any assets
remaining on termination of the defined benefit pension plan after satisfaction
of all liabilities to all participants under the plan.
NOTE 5. INVESTMENT TRANSACTIONS
The cost of securities purchased and proceeds from securities sold during the
first six months of 1993, other than options and money market investments,
aggregated $82,192,438 and $78,073,373, respectively.
The Company paid brokerage commissions totalling $30,680 and $24,759 for the
six months ended June 30, 1993 and the year ended December 31, 1992,
respectively, to Goldman, Sachs & Co., of which James P. Gorter, chairman of the
board of the Company, is a limited partner.
NOTE 6. FUTURES TRANSACTIONS
In order to increase its exposure to the stock market, the Company periodically
buys Standard & Poor's 500 Stock Index futures contracts. Upon entering into a
futures contract, the Company is required to deposit with its custodian either
cash or eligible securities in an amount set by the relevant futures exchange,
known as "initial margin." Subsequent payments, known as "variation margin,"
are made on a daily basis as the market prices of the underlying futures
contracts fluctuate. For financial statement purposes, such variation margin
is recognized on a daily basis as gain or loss.
The Company had the following S&P 500 futures contracts open as of June 30,
1993:
Contract Number of Expiration Gain (Loss) at
Amount Position Contracts Month June 30, 1993
- ---------- -------- --------- --------------- --------------
$2,255,000 Long 10 September, 1993 ($125)
The aggregate market value of U.S. Treasury bills pledged to cover margin
requirements for the open futures positions at June 30, 1993 was $67,000.
11
<PAGE>
DIRECTORS AND OFFICERS
BAKER, FENTRESS & COMPANY
BOARD OF DIRECTORS
Frederick S. Addy David D. Grumhaus
Bob D. Allen Richard M. Jones
Alger Chaney Burton G. Malkiel
J. Barton Goodwin David D. Peterson
James P. Gorter William H. Springer
OFFICERS
James P. Gorter Chairman of the Board
David D. Peterson President and Chief Executive Officer
Steven C. Carhart Vice President
George V. Carracio, Jr. Vice President
James P. Koeneman Vice President and Secretary
Scott E. Smith Vice President
Janet Sandona Jones Treasurer and Assistant Secretary
CORPORATE DATA
TRANSFER AND DIVIDEND DISBURSING AGENT
Harris Trust and Savings Bank
312/461-6834
CUSTODIAN
United Missouri Bank, N.A.
LEGAL COUNSEL
Bell, Boyd & Lloyd
ADDRESS OF COMPANY
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
312/236-9190
1993
MID-YEAR
REPORT
INVESTING
IN
NEW
ECONOMIC
LEADERSHIP
2
SECOND QUARTER
JUNE 30, 1993
[RECYCLED PAPER LOGO]
The Company's Mid-Year Report is printed on recycled paper.
We encourage recycling and use of recycled products.
