<PAGE>
DIRECTORS AND OFFICERS
BAKER, FENTRESS & COMPANY
BOARD OF DIRECTORS REPORT TO
Frederick S. Addy Jeffrey A. Kigner SHAREHOLDERS
Bob D. Allen John A. Levin
Eugene V. Fife Burton G. Malkiel
J. Barton Goodwin David D. Peterson
James P. Gorter Melody L. Prenner Sarnell
David D. Grumhaus William H. Springer
Richard M. Jones
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
Janet Sandona Jones Vice President, Treasurer
and Assistant Secretary
Lana L. Spence Assistant Treasurer
CORPORATE DATA
Transfer and Dividend Disbursing Agent
Harris Trust and Savings Bank
(312) 461-3309
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Address of Company
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
(312) 236-9190 or
(800) BKF-1891
SECOND QUARTER
JUNE 30, 1996 [ART]
[RECYCLED LOGO]
The Company's Report to Shareholders is printed on recycled paper. We encourage
recycling and use of recycled products.
<PAGE>
TO OUR SHAREHOLDERS:
We are particularly excited about the future of Baker, Fentress & Company
following the acquisition of John A. Levin & Co., Inc., which we refer to as
"the Levco merger." The first six months of 1996 were active for Baker Fentress:
. Net asset value total return for the six months ended June 30, 1996 was
16.8% versus 10.1% for the S&P 500 Index. Shareholder total return for the
period was 15.3%.
. We acquired New York-based investment adviser John A. Levin & Co. (Levco),
after obtaining exemptive relief from the SEC in May and shareholder
approval at the June 27 annual meeting.
. John A. Levin became President and Chief Executive Officer of Baker
Fentress, succeeding David D. Peterson, who retired after 14 years with
your Company. Mr. Levin will also continue as President of Levco.
. Four new directors were elected at the shareholders' meeting. In addition
to Mr. Levin, Eugene V. Fife, a limited partner of Goldman Sachs & Co., and
Jeffrey A. Kigner and Melody L. Prenner Sarnell, Executive Vice Presidents
of Levco, were elected. The following three directors were also reelected:
J. Barton Goodwin, James P. Gorter and Burton G. Malkiel.
. The recapitalization in June of one of our major private placements
resulted in realized gains and increases in valuation totalling
approximately $20 million.
Levco Merger
The Levco merger closed on June 28. Levco was reorganized immediately
following the merger to create separate subsidiaries to operate its investment
advisory, broker-dealer and limited partnership businesses. After the Levco
merger and reorganization, the Company owns 100% of the stock of Levin
Management Co., Inc., which in turn owns 100% of the stock of John A. Levin &
Co., Inc., the investment adviser, and Levco Securities, Inc., the broker-
dealer, and Levco GP, Inc., the limited partnership. All of the Levco companies
are, directly or indirectly, wholly-owned subsidiaries of Baker Fentress. Your
Company paid approximately $38.2 million in cash and issued approximately 4.86
million common shares to Levco shareholders, resulting in an initial value of
the Company's investment in the Levco companies of $131.2 million.
On the Baker Fentress statement of investments the Levco investment is
represented by all outstanding Levin Management shares, which are carried at an
Continued on page 2
1
<PAGE>
TO OUR SHAREHOLDERS: continued
initial value of $66.2 million. In addition, Levin Management issued to Baker
Fentress three-year notes in the aggregate amount of approximately $65 million
bearing interest at 9.75%. The notes are expected to generate interest income to
Baker Fentress of about $6.3 million per year. Since Levin Management is not
publicly-traded, the Baker Fentress board will review the valuation of the Levco
investment on a regular basis.
At June 30, assets under management by Levco totalled $5.8 billion; Levco's
revenues for the first half of 1996 were $17 million. We are excited about
Levco's growth opportunities. Additional discussion of the Levco merger is
included in the annual meeting insert included with this report.
Citadel Recapitalization
On June 28, Citadel Communications Corporation completed a major recapi-
talization as part of a series of acquisitions. Baker Fentress realized total
gains of approximately $13.0 million from redemption of Citadel shares and
increased the valuation of Citadel stock retained to $8.8 million, which is $6.9
million above its original cost.
This transaction increased net assets by a total of $19.9 million, or $0.61
per share, offsetting much of the anticipated dilution from the Levco merger.
The Levco merger, which closed the same day as the Citadel recapitalization, had
a dilutive impact on per share net asset value of $0.90, or 3.6%.
Looking Forward
The Levco merger will result in several changes at Baker Fentress. First,
Levco will manage Baker Fentress' public portfolio. It has begun restructuring
the portfolio in accordance with its overall investment approach, which is
characterized by value-oriented investing in large capitalization issues.
Portfolio turnover will increase to accommodate this shift. Tax factors will be
carefully considered in this restructuring given the substantial unrealized
appreciation in the public portfolio.
In the near future, total distributions may be above the level of recent
years for two reasons. First, the portfolio restructuring may result in larger
capital gains. Second, ordinary income distributions may increase due to higher
dividend yields usually associated with large-cap securities and to increased
interest income resulting from the $65 million notes receivable from Levin
Management.
The More Things Change . . .
While it appears that much has changed at Baker Fentress, our fundamental
goals remain essentially
2
<PAGE>
TO OUR SHAREHOLDERS: continued
the same. We continue to be a closed-end equity fund which invests in both the
public and private markets. From time to time we may hold cash, but we intend to
remain generally fully invested. This is a modest change from our previous
policy of investing excess cash in S&P 500 futures. At present we have more cash
than normal because of the portfolio restructuring and market conditions. Long-
term capital appreciation remains our principal investment objective. We intend
to continue our minimum 8% distribution policy.
Final Comments
In the near future, we will circulate a shareholder survey and we look
forward to your responses on topics of importance to you and your Company. We
wish also to thank shareholders for their past support, especially in light of
the strong turnout at the annual meeting. The results of the voting at the
annual meeting are shown on page 15. We apologize for the length of the proxy
statement, which caused one analyst to wonder if it was a "genealogical salute
to Baker Fentress' original roots in the timber industry."
We want to express sincere thanks to members of our staff who managed the
public portfolio until these responsibilities were assumed by Levco on July 1.
Their past performance speaks for itself.
/s/ James P. Gorter
James P. Gorter
Chairman of the Board
/s/ John A. Levin
John A. Levin
President & Chief Executive Officer
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
June 30, 1996
Assets (Unaudited)
-------------
<S> <C>
Investments, at Value:
Portfolio securities:
Unaffiliated issuers (cost $380,804,067).......................................... $537,947,564
Controlled affiliates (cost $134,368,232)......................................... 245,675,707
Money market securities (cost $9,369,853)........................................... 9,369,853
------------
Total Investments (cost $524,542,152)........................................... 792,993,124
Cash................................................................................. 17,146,099
Dividends and Interest Receivable.................................................... 1,663,866
Other Assets......................................................................... 467,307
------------
Total Assets..................................................................... 812,270,396
------------
Liabilities
Note Payable........................................................................ 38,000,000
Accounts Payable and Accrued Liabilities............................................ 2,691,150
------------
Total Liabilities............................................................... 40,691,150
------------
Net Assets............................................................................................ $771,579,246
============
Analysis of Net Assets
Common stock, $1 par value, authorized -- 60,000,000 shares;
issued and outstanding -- 32,402,520 shares....................................... $ 32,402,520
Capital surplus..................................................................... 354,967,459
Undistributed net realized gain from investment transactions........................ 69,329,667
Other retained earnings (a)......................................................... 46,540,503
Unrealized appreciation of investments.............................................. 268,339,097
------------
Net Assets............................................................................................ $771,579,246
============
Net Asset Value Per Share............................................................................. $23.81
------------
-----------
(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
</TABLE>
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31,
(Unaudited) 1995
---------------- -------------
<S> <C> <C>
Investment Income:
Dividends from:
Unaffiliated issuers........................................... $ 1,632,361 $ 4,467,654
Controlled affiliate........................................... 1,250,000 2,250,000
---------- -----------
2,882,361 6,717,654
---------- -----------
Interest from:
Unaffiliated issuers........................................... 2,470,337 5,982,162
Controlled affiliates.......................................... 420,000 840,000
---------- -----------
2,890,337 6,822,162
---------- -----------
Total Income................................................ 5,772,698 13,539,816
---------- -----------
Expenses:
Investment research............................................. 1,178,883 1,893,802
Administration and operations................................... 633,114 1,029,543
Severance and other non-recurring acquisition-related costs..... 646,918 -
Rent............................................................ 163,637 286,272
Reports to shareholders......................................... 124,169 184,621
Directors' fees and expenses.................................... 94,455 162,750
Professional fees............................................... 49,521 135,810
Custodian and transfer agent fees............................... 36,880 86,990
Taxes other than income......................................... 75,268 65,020
Other........................................................... 209,115 276,495
---------- -----------
Total Expenses.............................................. 3,211,960 4,121,303
---------- -----------
Net Investment Income.................................... 2,560,738 9,418,513
---------- -----------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on sales of investments
in unaffiliated issuers....................................... 45,554,869 41,188,739
Net realized gain on sales of investments
in controlled affiliates...................................... 3,649,756 -
Net realized gain on financial futures transactions............. 2,181,200 1,962,075
---------- -----------
Net realized gain on sales of investments.................... 51,385,825 43,150,814
Net change in unrealized appreciation of investments............ 43,711,624 107,071,485
---------- -----------
Net Realized and Unrealized Gain
on Investments............................................ 95,097,449 150,222,299
---------- -----------
Net Increase in Net Assets Resulting from Operations............. $97,658,187 $159,640,812
========== ===========
</TABLE>
See accompanying Notes to Financial Statements
5
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31,
(Unaudited) 1995
---------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting
from operations............................................ $97,658,187 $159,640,812
Adjustments to reconcile increase in net
assets resulting from operations to net cash
provided by operating activities:
Net realized and unrealized (gain) loss on investments..... (95,209,324) (150,222,299)
(Increase) decrease in receivable for securities sold...... 3,436,360 (1,633,235)
(Increase) decrease in dividends and interest receivable... (568,603) 471,112
(Increase) decrease in other assets........................ 504,838 (538,706)
Increase (decrease) in accounts
payable and accrued liabilities.......................... 2,084,365 (2,212)
Increase (decrease) in payable for securities purchased.... (1,305,000) 1,305,000
---------- -----------
Net cash provided by operating activities............... 6,600,823 9,020,472
---------- -----------
Cash Flows from Investing Activities:
Purchases of portfolio securities............................. (142,827,055) (185,107,763)
Sales of portfolio securities................................. 125,901,017 194,374,056
Net realized gain on financial futures transactions........... 2,181,200 1,962,075
(Purchases) and sales/maturities of money
market securities, net...................................... (7,639,952) 2,564,206
---------- -----------
Net cash provided by (used in) investing activities.... (22,384,790) 13,792,574
---------- -----------
Cash Flows from Financing Activities:
Note payable to bank.......................................... 38,000,000 --
Dividends and capital gain distributions...................... (5,508,728) (22,389,049)
---------- -----------
Net cash provided by (used in) financing activities..... 32,491,272 (22,389,049)
---------- -----------
Net Increase in Cash.................................................... 16,707,305 423,997
Cash at the Beginning of the Period..................................... 438,794 14,797
---------- -----------
Cash at the End of the Period........................................... $17,146,099 $ 438,794
========== ===========
Supplemental Disclosure of
Noncash Investing and Financing Activities:
Issuance of Company stock in exchange for stock of
Levin Management Co., Inc.................................. $80,247,302 $ --
========== ===========
Capital gain distribution reinvestments....................... $ -- $18,595,558
========== ===========
</TABLE>
See accompanying Notes to Financial Statements
6
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1996 December 31,
(Unaudited) 1995
----------------- ------------
<S> <C> <C>
Operations:
Net investment income............................ $ 2,560,738 $ 9,418,513
Net realized gain on sales of investments........ 51,385,825 43,150,814
Net change in unrealized appreciation............ 43,711,624 107,071,485
------------ -----------
Net increase in net assets resulting
from operations............................ 97,658,187 159,640,812
------------ -----------
Distributions to Shareholders from:
Net investment income............................ (5,508,728) (9,058,533)
Net realized gain from investment transactions... -- (31,926,074)
------------ -----------
Total dividends to shareholders.............. (5,508,728) (40,984,607)
------------ -----------
Net increase in net assets from
operations after distributions........ 92,149,459 118,656,205
------------ -----------
Capital Share Transactions--Net increase................... 80,247,302 18,595,558
------------ -----------
Total Increase in Net Assets............................... 172,396,761 137,251,763
Net Assets at the Beginning of the Period.................. 599,182,485 461,930,722
------------ -----------
Net Assets at the End of the Period........................ $ 771,579,246 $599,182,485
============ ===========
</TABLE>
See accompanying Notes to Financial Statements
7
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
June 30, 1996 - Unaudited Shares Value
------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS - 69.72%
Public Portfolio - 60.30%
Health Care - 9.59%
Biogen, Inc. (b).................................................... 150,000 $ 8,231,250
Foundation Health Corporation (b)................................... 200,000 7,175,000
Health Care & Retirement Corporation (b)............................ 450,000 10,743,750
Health Management Associates, Inc., Class A (b)..................... 525,000 10,696,875
Stryker Corporation................................................. 360,000 8,190,000
United HealthCare Corporation....................................... 300,000 15,150,000
Emerging Health Care Group
Housecall Medical Resources, Inc. (b).............................. 220,000 4,207,500
Pediatrix Medical Group, Inc. (b).................................. 80,000 3,880,000
Watson Pharmaceuticals, Inc. (b)................................... 150,000 5,681,250
-----------
73,955,625
Consumer Products and Services - 1.59% -----------
Newell Co........................................................... 400,000 12,250,000
Technology - 19.39% -----------
Atmel Corporation (b)............................................... 400,000 12,050,000
C-Cube Microsystems, Inc. (b)....................................... 200,000 6,600,000
Cascade Communications Corp. (b).................................... 260,000 17,680,000
Cisco Systems, Inc. (b)............................................. 300,000 16,987,500
DSC Communications Corp. (b)........................................ 230,000 6,928,750
EMC Corporation (b)................................................. 500,000 9,250,000
Glenayre Technologies, Inc. (b)..................................... 225,000 11,250,000
KLA Instruments Corporation (b)..................................... 470,000 10,927,500
Solectron Corporation (b)........................................... 280,000 10,605,000
Sybase, Inc. (b).................................................... 235,000 5,551,875
Tellabs, Inc. (b)................................................... 235,000 15,715,625
Ultratech Stepper, Inc. (b)......................................... 550,000 10,312,500
Varian Associates, Inc.............................................. 120,000 6,210,000
Xilinx, Inc. (b).................................................... 300,000 9,525,000
------------
149,593,750
------------
Energy - 5.18%
Chesapeake Energy Corp. (b)......................................... 230,000 20,671,250
PanEnergy Corp...................................................... 350,000 11,506,250
Union Texas Petroleum Holdings, Inc................................. 400,000 7,800,000
------------
39,977,500
Business and Commercial Services - 3.36% ------------
Nextel Communications, Class A (b).................................. 700,000 13,343,750
Viking Office Products, Inc. (b).................................... 400,000 12,550,000
------------
25,893,750
Finance - 6.90% ------------
Aon Corporation..................................................... 170,000 8,627,500
Barnett Banks, Inc.................................................. 200,000 12,200,000
Franklin Resources, Inc............................................. 150,000 9,150,000
General Re Corporation.............................................. 70,000 10,657,500
T. Rowe Price Associates, Inc....................................... 410,000 12,607,500
------------
53,242,500
------------
</TABLE>
8
See accompanying Notes to Statement of Investments
<PAGE>
STATEMENT OF INVESTMENTS
June 30, 1996 - Unaudited
<TABLE>
<CAPTION>
Shares or
Principal Amount Value
INVESTMENTS IN UNAFFILIATED ISSUERS (continued) ---------------- -----
<S> <C> <C>
Basic Industries - 4.13%
Great Lakes Chemical Corporation................................... 150,000 $ 9,337,500
Wausau Paper Mills Company......................................... 711,240 14,046,990
Building Materials Group
Owens-Corning Corporation (b).................................... 100,000 4,300,000
USG Corporation (b).............................................. 150,000 4,181,250
------------
31,865,740
Producer Goods - 7.03%................................................ ------------
The Boeing Company................................................. 117,500 10,237,187
Foster Wheeler Corporation......................................... 200,000 8,950,000
Harnischfeger Industries, Inc...................................... 356,420 11,850,965
York International Corporation..................................... 250,000 12,937,500
Engineering and Construction Group
Jacobs Engineering Group Inc. (b)................................ 200,000 5,275,000
The Manitowoc Company, Inc....................................... 140,000 5,022,500
------------
54,273,152
------------
Transportation - 1.47%
Growth Transportation Group
Heartland Express, Inc. (b)...................................... 231,257 6,186,125
RailTex, Inc. (b)................................................ 201,200 5,180,900
------------
11,367,025
------------
Utilities - 1.66%
MCI Communications Corporation..................................... 500,000 12,812,500
------------
Total public portfolio (Cost: $315,320,759)..................... 465,231,542
------------
Private Placement Portfolio - 9.42%
Champion Healthcare Corporation -- hospital management company
Common Stock (b)(c)(f)........................................... 313,221 2,850,311
Series D Convertible Preferred Stock (b)(c)(d)................... 111,111 1,999,998
11% Subordinated Note due 12/31/2003 (c)(d)...................... $ 8,000,000 8,000,000
County Seat Holdings, Inc. -- specialty retailer
Common stock (b)(c)(d)........................................... 111,067 -
DuroLite International, Inc. - manufacturer and distributor of
specialized lighting products
Convertible Preferred Stock (b)(c)(d)............................ 2,500 2,627,250
12% Subordinated Note due 11/03/2004 (c)(d)...................... $ 8,000,000 7,872,750
Echlin Inc. -- manufacturer of automotive parts and components
Common Stock (c)(e).............................................. 553,162 18,855,910
Home State Holdings, Inc. -- property and casualty insurers
11.50% Subordinated Note due 10/03/2004 (c)(d)................... $10,050,000 9,622,047
Stock Purchase Warrants Expiring 10/03/2004 (c)(d)............... 150,750 472,941
Security Capital U.S. Realty -- real estate investment trust
Common stock (b)(c)(d)........................................... 983,528 10,000,000
TBN Holdings Inc. - hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(g)................... $ 8,000,000 8,000,000
Series C-3 Convertible Preferred Stock (b)(c)(d)................. 1,511,628 -
Stock Purchase Warrants Expiring 12/31/2002 (c)(d)............... 1,100,000 -
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d).......... $ 361,780 2,311,237
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)... $ 60,435 103,578
------------
Total private placement portfolio (Cost: $65,483,308).......... 72,716,022
------------
Total investments in unaffiliated issuers (Cost: $ 380,804,067).... $537,947,564
------------
</TABLE>
See accompanying Notes to Statement of Investments
9
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
June 30, 1996 - Unaudited Shares or
INVESTMENTS IN CONTROLLED AFFILIATES - 31.84% Principal Amount Value
---------------- -----
<S> <C> <C>
Publicly-Traded - 12.80%
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 $ 98,750,000
------------
Private Placement Portfolio - 2.04%
Citadel Communications Corporation -- radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)............... 746,412 8,770,339
Citadel Broadcasting Corporation -- radio broadcasting
12% Class A Subordinated Note due 6/30/2000 (c)(d)........... $ 7,000,000 7,000,000
------------
Total private placement portfolio (Cost: $8,860,996)....... 15,770,339
------------
Wholly-Owned Subsidiary - 17.00%
Levin Management Co., Inc. -- investment management
Common stock (c)(d).......................................... 1,000 66,155,368
9.75% Notes due 6/28/99 (c)(d)............................... $65,000,000 65,000,000
------------
Total wholly-owned subsidiary (Cost: $120,476,609)......... 131,155,368
------------
Total investments in controlled affiliates (Cost: $134,368,232) 245,675,707
------------
MONEY MARKET SECURITIES - 1.21%
Ford Motor Credit Company -- 5.28% to 5.29% due 7/08/96........ $ 8,400,000 8,390,133
U.S. Treasury bill -- 5.07% due 11/21/96....................... $ 1,000,000 979,720
------------
Total investments in money market securities (Cost: $9,369,853) 9,369,853
------------
Total Investments - 102.77% (Cost: $524,542,152)............... 792,993,124
Other Assets Less Liabilities -- (2.77)%....................... (21,413,878)
------------
NET ASSETS - 100.00%........................................... $771,579,246
============
</TABLE>
--------------------
(a) Based on the cost of investments of $473,637,470, for federal income
tax purposes at June 30, 1996, net unrealized appreciation was
$319,355,654, which consisted of gross unrealized appreciation of
$332,036,280 and gross unrealized depreciation of $12,680,626.
(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,
1996. The aggregate value of restricted securities was $219,641,729,
or 28.47% of net assets, at June 30, 1996.
(d) There were no unrestricted securities of the same issue outstanding
on June 30, 1996 or the dates of acquisition.
(e) Represents 90% of the current market price of unrestricted common
stock of Echlin Inc.
(f) Represents 80% of the current market price of unrestricted common
stock of Champion HealthCare Corporation.
(g) Security not current as to payment of interest.
10
<PAGE>
CHANGES IN PORTFOLIO
Quarter Ended June 30, 1996 - Unaudited
<TABLE>
<CAPTION>
Shares or Principal Amount (a)
-------------------------------------------
Held at
Purchased Sold June 30, 1996
--------- ---------- --------------
<S> <C> <C> <C> <C>
PUBLIC C-Cube Microsystems, Inc...................................... 200,000 200,000
PORTFOLIO Housecall Medical Resources, Inc.............................. 220,000 220,000
Bandag, Incorporated.......................................... 170,000 --
Cascade Communications Corp................................... 57,500 260,000
Chesapeake Energy Corp........................................ 20,000 230,000
Pediatrix Medical Group, Inc.................................. 30,600 80,000
StrataCom, Inc................................................ 280,000 --
Thomas Group, Inc............................................. 137,500 --
PRIVATE Security Capital U.S. Realty
PORTFOLIO Common stock................................................. 584,226 983,528
Champion Healthcare Corporation
Common Stock................................................. 240,000 313,221
Stock Purchase Warrants expiring 12/31/2003.................. 240,000 --
Citadel Communications Corporation
Series A Convertible Preferred............................... 972,000 --
Series A Convertible Preferred (b)........................... 746,412 746,412
Series C Convertible Preferred............................... 275,904
Levin Management Co., Inc.
Common Stock................................................. 1,000 1,000
9.75% Notes due 6/28/99...................................... $65,000,000 $65,000,000
-----------
(a) Excludes shares acquired or disposed of as a result of stock dividends, splits, and reorganizations,
or mergers and conversions.
(b) Received in exchange for previously held Series A Convertible Preferred.
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, 1996 and the year ended December 31, 1995.
Six Months Ended Year Ended
June 30, 1996 December 31,
PER SHARE OPERATING PERFORMANCE.................................................. (Unaudited) 1995
---------------- ------------
Net asset value, beginning of period.......................... $ 21.75 $ 17.47
---------------- ------------
Net investment income....................................... .35 .35
Net realized gain and net change in unrealized
appreciation and other changes............................ 2.81 5.67
---------------- ------------
Total investment operations................................... 3.16 6.02
Less distributions:
Dividends from net investment income........................ (.20) (.35)
Distribution from net realized gain......................... -- (1.20)
---------------- ------------
Total distributions........................................... (.20) (1.55)
---------------- ------------
Dilution resulting from:
Shares issued in acquisition of Levin Management Co., Inc... (.90) --
Reinvestment of capital gain distribution................... -- (.19)
---------------- ------------
Total dilution................................................ (.90) (.19)
---------------- ------------
Net asset value, end of period................................ $ 23.81 $ 21.75
================ ============
Per share market price, end of period......................... $ 19.125 $ 16.75
TOTAL INVESTMENT RETURN-SHAREHOLDER RETURN....................................... 15.33% 33.20%
RATIO TO AVERAGE NET ASSETS (ANNUALIZED)
Expenses...................................................... .98% .78%
Expenses before severance and other non-recurring
acquisition-related costs................................... .78% .78%
Net investment income......................................... .78% 1.79%
SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)..................... $ 771,579 $ 599,182
Portfolio turnover rate (annualized).......................... 39.10% 35.89%
Shares outstanding, end of period (000's omitted)............. 32,503 27,544
Average commission rate paid.................................. $ 0.0635 $ --
11
</TABLE>
<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 invests
primarily for 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
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. These
estimated values may not reflect amounts that could be realized upon immediate
sale, nor amounts that ultimately may be realized. Accordingly, the estimated
fair values 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 Consolidated-
Tomoka Land Co. (CTO) and Levin Management Co., Inc. within the meaning of the
Securities Act of 1933. A public distribution of shares of these companies would
require registration under the Securities Act. The shares of CTO are valued by
the board of directors at the closing price as reported by the American Stock
Exchange on the day of valuation. Levin Management Co., Inc. is not publicly-
traded and is 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 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.
Cash:
The Company maintains cash balances at its custodian bank in an interest-bearing
demand deposit account.
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 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.
For the year ended December 31, 1995, the Company distributed $1.20 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.
Reclassifications:
For 1995, the Company reclassified $103,427,516 from "undistributed net realized
gain from investment transactions" to "capital surplus" in the accompanying
Analysis of Net Assets. This reclassification
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
was made to more appropriately reflect previously taxed net realized gain
retained by the Company in prior years. After reclassification, "undistributed
net realized gain from investment transactions" represents amounts that will be
taxable to shareholders when distributed in 1996.
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.
The Company made no such purchases for the first six-months of 1996 and for the
year ended December 31, 1995.
Other transactions in capital stock for the first six-months of 1996 and for
the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Shares Amount
----------------------- ------------------------
1996 1995 1996 1995
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions..... --- 1,101,959 $ --- $ 1,101,959
Acquisition (Note 8).. 4,858,879 --- 4,858,879
Increase in
capital surplus... 75,388,423 17,493,599
----------- ----------
Net increase...... $80,247,302 $18,595,558
----------- -----------
</TABLE>
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the first six months of 1996 and
for the year ended December 31, 1995 to officers of the Company amounted to
$1,340,884 and $1,262,415, respectively. Fees, excluding expenses, of $86,100
and $162,750 were incurred for directors who were not officers of the Company
during the first six months of 1996 and for the year ended December 31, 1995,
respectively.
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 1995, the Company made a long-term capital gain distribution of $1.20 per
share. Approximately 76.8% of the $0.35 per share of ordinary income dividends
paid during 1995 qualified for the corporate dividends received deduction, and
1.4% 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 1996, excluding money market investments, aggregated
$223,074,357 and $125,901,017, respectively.
The Company paid brokerage commissions totalling $6,300 and $25,300 for the
six months ended June 30, 1996 and for the year ended December 31, 1995,
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
At times the Company may buy Standard & Poor's 500 Stock Index futures contracts
in order to maintain a substantially fully invested position in the stock
market. 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,
1996:
<TABLE>
<CAPTION>
Contract Number Expiration (Loss)
Amount Position Contracts Month June 30, 1996
- --------------- -------- --------- -------------- --------------
<S> <C> <C> <C> <C>
$8,460,000 Long 25 September 1996 ($111,875)
</TABLE>
The aggregate value of U.S. Treasury bills pledged to cover margin
requirements for the open futures positions at June 30, 1996 was $350,000.
NOTE 7. RETIREMENT PLANS AND POST-RETIREMENT
HEALTH CARE BENEFITS
The Company maintains a non-contributory defined benefit pension plan covering
all of its
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS continued
employees. Benefits under the plan are based on salary and years of service. The
Company makes annual contributions to the plan in accordance with federal tax
law and ERISA requirements. Total plan contributions for 1995 were $58,683. Net
pension expense for 1995 was $38,160.
In addition, the Company has a non-contributory money purchase pension plan
covering all employees. Company contributions are based on compensation. Total
plan contributions for 1995 were $195,329.
In anticipation of the acquisition of Levin Management Co., Inc. (Note 8), the
Company's board of directors froze the accrual of benefits under the deferred
benefit pension plan, and any further contributions under the money purchase
pension plan, as of December 31, 1995. It is anticipated that the defined
benefit pension plan will be terminated, and the money purchase pension plan
will be merged with a plan maintained by Levco during the second half of the
Company's fiscal year.
The Company also provides certain healthcare 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
1995 was $75,270.
NOTE 8. ACQUISITION AND INVESTMENT IN
JOHN A. LEVIN & CO., INC.
On June 27, 1996, the Company's shareholders approved the acquisition of John A.
Levin & Co., Inc. (Levco), a privately-held New York-based investment advisory
firm, in exchange for $38.2 million in cash and 4.86 million newly-issued Baker
Fentress shares. Shares issued in the acquisition carry certain restrictions on
their sale. The acquisition closed on June 28, 1996.
Levco was merged into a wholly-owned subsidiary of the Company, now named
Levin Management Co., Inc. As a result of reorganizations immediately before and
immediately after the acquisition, the investment advisory, broker-dealer and
limited partnership businesses previously operated by Levco are now operated as
separate subsidiaries of Levin Management Co., Inc. named John A. Levin & Co.,
Inc., Levco Securities, Inc. and Levco GP, Inc. respectively. Levin Management
Co., Inc. and its subsidiaries are collectively referred to as the "Levco
Companies."
The Levco companies operate as wholly-owned direct or indirect subsidiaries of
the Company and are reflected in the Company's financial statements as an
investment in Levin Management Co., Inc.
NOTE 9. AGREEMENTS AND TRANSACTIONS
WITH AFFILIATES
Agreements:
The Company entered into an investment advisory contract (the "Management
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
month-end value of the assets of the Company under management. The Management
Contract covers the publicly-traded portion of the Company's investment
portfolio. The Company continues to manage its private placement and CTO
investments internally.
Transactions:
<TABLE>
<CAPTION>
Purchases (Sales)
---------------------
Shares/ Realized
Par Cost Gain Income
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Consolidated
Tomoka Land Co.
Common stock................ - $ - $ - $ 1,250,000
Citadel Communications
Corporation
Series A Convertible
Preferred.................. (972,000) (1,513,869) 7,962,293 -
Series A Convertible
Preferred(New)............. 746,412 - - -
Series C Convertible
Preferred.................. (275,904) (957,962) 5,038,462 -
12% Note Due
6/30/2000.................. - - - 420,000
Alliance Northwest
Industries, Inc.
Series B, C, D Convertible
Preferred.................. (2,001,500) - (9,350,000) -
Warrants................... (1,687,941) - (999) -
----------- -----------
$ 3,649,756 $ 1,670,000
</TABLE>
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS continued
NOTE 10. NOTE PAYABLE AND LINE OF CREDIT
On June 24, 1996, the Company entered into a $40 million revolving credit
agreement with The Northern Trust Company. The facility expires on June 24,
1999. Borrowings outstanding at June 30, 1996 are at the London Interbank
Offered Rate (LIBOR) plus 0.35%. The commitment fee associated with the unused
portion of revolving credit agreement is 0.08% per annum.
On June 27, 1996, the Company accessed $38 million of the revolving credit
agreement at an interest rate, based on LIBOR, of 6.1312%. This amount was
outstanding at June 30, 1996. The interest rate is reset periodically under the
revolving credit facility and the fair value of the debt approximates its
carrying value.
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders was held on June 27, 1996. The results of
all matters voted on by stockholders were as follows:
A proposal to approve the Merger Agreement between the Company, a wholly-owned
subsidiary of the Company, John A. Levin & Co., Inc. and its shareholders was
approved with 18,464,403 votes for, 1,133,067 votes against, 1,179,264 votes
abstaining and 4,610,956 broker non-votes.
A proposal to approve the Management Contract between the Company and John A.
Levin & Co., Inc. was approved with 19,112,993 votes for, 1,296,657 votes
against, 502,344 votes abstaining and 4,475,695 broker non-votes.
A proposal to approve the Key Employee Incentive Bonus Plan for John A. Levin
& Co., Inc. was approved with 22,173,795 votes for, 1,943,764 votes against,
1,216,168 votes abstaining and 53,962 broker non-votes.
A proposal to approve an amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of Common Stock of the
Company from 40,000,000 shares to 60,000,000 shares was approved with 23,711,055
votes for, 1,292,208 votes against and 384,426 votes abstaining.
A proposal to approve and ratify the selection of Ernst & Young LLP as the
Company's independent auditors for 1996 was approved with 24,905,771 votes for,
138,152 votes against and 343,767 votes abstaining.
In addition, stockholders elected seven directors, as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- ---------- --------
<S> <C> <C>
Fife 24,724,892 662,798
Goodwin 24,754,665 633,025
Gorter 24,796,135 591,556
Kigner 24,747,232 640,459
Levin 24,748,517 639,174
Malkiel 24,756,331 631,360
Sarnell 24,746,804 640,887
</TABLE>
The term of office of the following directors continued after the meeting:
Frederick S. Addy, Bob D. Allen, David D. Grumhaus, Richard M. Jones, David D.
Peterson and William H. Springer.
15
