<PAGE>
TO OUR SHAREHOLDERS:
Total net assets at September 30, 1996 were $759.8 million, or $23.45 per
share, compared to $599.2 million, or $21.75 per share, at December 31, 1995.
The increase in net assets was the result of market appreciation and income
earned on our portfolio, coupled with the acquisition of John A. Levin & Co.,
Inc. ("Levco") during June, which accounted for $90.9 million of the increase.
For the nine months ended September 30, 1996, our net asset value total
return was 15.3%, compared to 13.5% for the S&P 500 Index. Shareholder total
return for the period was 15.3%.
Public Portfolio
On July 1, 1996, Levco started managing our public portfolio. For the nine
months ended September 30, 1996, the public portfolio total return was 12.9%
versus 13.5% for the S&P 500 Index.
Significant progress was made toward restructuring the portfolio during the
third quarter to bring it in line with Levco's overall investment approach,
which is best characterized as value-focused investing in large capitalization
issues. This restructuring will continue over the coming quarters, bearing in
mind tax considerations associated with the substantial unrealized appreciation
in the public portfolio. Options and short sales against the box have been used
by Levco to reduce market exposure and moderate risk during the restructuring,
and to defer the realization of gain on certain public portfolio positions.
These investments are detailed in the Statement of Investments under the
headings "Purchased Put Options," "Written Call Options," and "Securities Sold
Short."
Levco Valuation and Recent Operating Results
The carrying value of the Baker Fentress investment in Levco and the other
Levin companies is determined by the Baker Fentress Board of Directors, using a
valuation methodology similar to that used for other restricted securities in
our portfolio. An explanation of some of the factors used by the Board is
included in Note (h) to the Statement of Investments.
At September 30, 1996, Levco's assets under management totalled $6.44
billion, including the Baker Fentress public portfolio of $478 million. This
compared to $5.14 billion of assets under management a year ago. For the three
months ended September 30, 1996, Levco's operating revenues were $7.74 million,
compared to $6.46 million for the same period last year.
Distribution Policy -- Estimate of Year-end Distribution
Our minimum distribution policy calls for calendar year distributions to
total at least 8% of average net assets for the 12-month period ended October
31. The partial year increases in net assets and shares outstanding attributable
to the Levco acquisition, if included in the calculation, would reduce the 1996
minimum per share distribution target. Therefore, our 1996 minimum distribution
amount will be calculated without considering the Levco
continued on page 2
1
<PAGE>
TO OUR SHAREHOLDERS continued
acquisition. Using this methodology, for the 11 months ended September 30, 1996,
average net asset value was $23.24 per share; 8% of that amount is $1.86. We
expect total distributions for 1996 to exceed this minimum payout amount because
of increased net investment income and realized capital gain.
You will remember that we paid a $0.20 per share mid-year ordinary income
dividend on June 6, 1996. We plan to declare the year-end ordinary income
dividend and the final 1996 capital gain distribution on November 7, 1996, with
a projected payment date of December 5, 1996. As we have done in prior years, we
will notify you of the year-end distribution amounts after they have been
declared.
Partial Payoff of Revolving Credit Line
As described in our recent proxy statement, we funded most of the cash
portion of the Levco purchase price by borrowing $38 million under a revolving
credit line with The Northern Trust Company. In late September 1996 we repaid
$20 million, leaving a balance of $18 million. Our decision to repay part of the
borrowing was based on the availability of cash in the portfolio, and the
interest costs on the borrowing compared to the amount we could earn by
investing the cash in short-term investments.
Private Placement Portfolio
No new private placement acquisitions were completed during the third
quarter. The outlook for new investments continues to be impacted by very
competitive market conditions. We intend to maintain our investment discipline,
pursuing only those opportunities offering potential returns that justify the
risk assumed.
During the quarter, Champion Healthcare Corporation completed its merger
with Paracelsus Healthcare Corporation. Our $8 million Champion debenture was
redeemed at par plus a prepayment premium of 6%, and all Champion equity
securities held by Baker Fentress were converted into a total of 535,443
Paracelsus common shares. Paracelsus shares are listed on the NYSE under the
ticker symbol "PLS". Paracelsus shares declined sharply in early October when it
announced that third quarter results would be lower than previous estimates. The
earnings shortfall was attributed to problems at several hospitals in southern
California operated by Paracelsus prior to the Champion merger.
After its June recapitalization, Citadel Communications Corporation
completed a merger and undertook the first in a series of acquisitions it plans
to complete between now and year-end. Citadel also prepaid $7 million of
debentures held by Baker Fentress with borrowings under a $150 million
syndicated bank credit facility the company obtained in early October. This
redemption included a 6% prepayment premium.
Following this letter is an interview with Scott Smith, who is in charge of
our private placement portfolio. We hope this question and answer session
enhances your understanding of this portfolio sector.
2
<PAGE>
TO OUR SHAREHOLDERS continued
Consolidated-Tomoka Land Co.
Our 80%-owned controlled affiliate, Consolidated-Tomoka Land Co. ("CTO"),
reported profit of $2,134,789, or $0.34 per share, for the nine months ended
September 30, 1996. This compares to a profit of $6,669 for the same period
last year.
Results for the current year were favorably impacted by significantly
improved results from citrus due to a record harvest. In addition, there were
increased closings of real estate sales transactions during 1996, compared to
the first nine months of 1995. Interest in the land surrounding the Interstate
95 interchanges on CTO's property remains strong.
In July 1996, CTO declared a semi-annual dividend of $0.30 per share. This
resulted in total dividends for 1996 of $0.55 per share, compared to $0.45 for
1995.
Comments on U.S. Equity Market
In the third quarter, the stock market recovered from its 1996 lows
established in July, posting particularly strong gains in September. Equities
have benefitted from a confluence of positive fundamental components, including
a favorable economic backdrop, a rise in global demand for goods and services
provided by U.S. companies, and the application of new technologies which have
served either to accelerate revenue growth or to improve the efficiency of
corporate cost structures.
The unbroken nature and magnitude of the current stock market advance has
been remarkable. Significantly, there has not been a 10% correction on a monthly
basis since October 1990, and the market has risen 20 of the previous 22 months.
Historic experience would suggest the possibility of a corrective phase in the
stock market even if earnings and cashflows were to continue their upward trend.
In this environment, we have chosen to operate with a diverse portfolio
emphasizing large capitalization securities and outstanding value based on
current and prospective cashflows. As the stock market has moved ahead, our
search for companies engaged in enhancing shareholder value has led us to
several that have undertaken various actions which we believe could cause share
price appreciation. The steps these companies are taking include: spinning off
valuable divisions, divesting underperforming operations, making acquisitions
that increase earnings and repurchasing their own shares. Because these
initiatives are internally-driven, we believe these companies are well
positioned to sustain and augment their values.
/s/ James P. Gorter
James P. Gorter
Chairman of the Board
/s/ John A. Levin
John A. Levin
President and Chief Executive Officer
3
<PAGE>
INTERVIEW: A Look at Baker Fentress Private Placements
Recently, Scott Smith, our Executive Vice President in charge of private
placements, was asked a series of questions in which shareholders have been
interested. We think the interview will help you better understand this portion
of the Baker Fentress portfolio.
Question: Why does Baker Fentress invest in private placements?
Mr. Smith: Baker Fentress has a long history of investing in private
placements, and our experience is that attractive rates of
return are available from these securities over time. Presently,
about 10% of our net assets are invested in private placements.
We expect this percentage will range between its current level
and as much as 15-20% of net assets.
Question: Do private placements resemble venture capital investments?
Mr. Smith: Our private placements share some traits with venture capital
investments, including limited liquidity and a relatively long
holding period. However, in general, the companies in which we
invest are more mature than a typical venture capital situation.
We do not invest in start-ups or companies with a limited
operating history.
Question: What type of companies are considered for BKF private
placements?
Mr. Smith: We consider companies from a broad range of industries and
economic sectors. We look for businesses which demonstrate both
stable operating histories and the potential for growth.
Question: How do you screen companies for private placement investments?
Mr. Smith: We conduct extensive due diligence on potential portfolio
companies including industry and financial analysis and personal
checks on management. We believe the strong research
capabilities of John A. Levin & Co., Inc. will complement our
current efforts in this area.
Question: How much do you initially invest in a typical private placement?
Mr. Smith: Our initial investment is usually between $6 and $10 million.
4
<PAGE>
INTERVIEW: A Look at Baker Fentress Private Placements continued
Question: What type of securities do you normally acquire in a private
placement?
Mr. Smith: We usually purchase subordinated debentures generating
significant current income accompanied by some type of equity
security. The equity investment may take the form of a direct
purchase of preferred or common stock or an indirect interest in
the form of warrants or a convertibility feature.
Question: What is the usual holding period for an investment?
Mr. Smith: We anticipate an average holding period of three to five years
before an event, such as an initial public offering (IPO), a
sale, or a refinancing of the portfolio company, provides us an
opportunity to gain liquidity on an investment.
Question: What has been the recent performance of the private placement
portfolio?
Mr. Smith: For the one, two, and three-year periods ended September 30,
1996, the private placement portfolio generated total annual
returns of 43.5%, 24.4%, and 27.6%, respectively. This compares
favorably with our targeted returns for private placements.
Question: What's your outlook for private placements?
Mr. Smith: Market conditions have grown more competitive since I joined
Baker Fentress in 1989. Investment returns in the next few years
may be somewhat lower than those experienced in the recent past.
However, we still believe good investment opportunities are
available, and we plan to pursue them with the same discipline
and focus we have in the past.
5
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS
September 30, 1996 - Unaudited Shares Value
------ -----
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS - 66.75%
Public - 58.76%
Common Stock - 57.95%
Basic Industry - 5.13%
Air Products & Chemicals, Inc................... 123,500 $ 7,193,875
Allegheny Teledyne Incorporated (b)............. 200,000 4,525,000
Great Lakes Chemical Corporation................ 150,000 8,550,000
USG Corporation (b)............................. 150,000 4,443,750
W.R. Grace & Co................................. 110,000 8,277,500
Wausau Paper Mills Company...................... 311,840 6,002,920
-----------
38,993,045
-----------
Capital Goods - 9.67%
The Boeing Company.............................. 117,500 11,103,750
Corning Incorporated............................ 106,000 4,134,000
Electronic Data Systems Corporation............. 90,000 5,523,750
Foster Wheeler Corporation...................... 175,000 7,656,250
General Electric Company........................ 40,000 3,640,000
Harnischfeger Industries, Inc................... 346,420 13,077,355
Jacobs Engineering Group Inc. (b)............... 120,000 2,700,000
Litton Industries, Inc. (b)..................... 88,000 4,323,000
Lockheed Martin Corporation..................... 36,000 3,244,500
The Manitowoc Company, Inc...................... 181,000 5,814,625
Molten Metal Technology, Inc. (b)............... 49,000 1,568,000
Viking Office Products, Inc. (b)................ 50,000 1,500,000
York International Corporation.................. 190,000 9,215,000
-----------
73,500,230
-----------
Communication Services - 1.69%
MCI Communications Corporation.................. 500,000 12,812,500
-----------
Consumer Cyclical - 2.73%
Eastman Kodak Company........................... 60,000 4,710,000
General Motors Corporation...................... 100,000 4,800,000
Owens Corning................................... 100,000 3,687,500
Tribune Company................................. 96,000 7,488,000
-----------
20,685,500
-----------
Consumer Noncyclical - 3.85%
Newell Co....................................... 400,000 12,000,000
Time Warner Inc................................. 130,000 5,005,000
Tupperware Corporation.......................... 143,200 7,016,800
U S West Media Group (b)........................ 310,000 5,231,250
-----------
29,253,050
-----------
Energy - 3.96%
Chesapeake Energy Corp. (b)..................... 270,000 16,908,750
Union Texas Petroleum Holdings, Inc............. 420,000 9,082,500
USX-Marathon Group.............................. 189,200 4,091,450
-----------
$30,082,700
-----------
</TABLE>
6
See accompanying Notes to Statement of Investments
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
September 30, 1996 - Unaudited Shares Value
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
<S> <C> <C>
Finance - 10.33%
Aetna Inc.......................................... 115,000 $ 8,093,125
Aon Corporation.................................... 170,000 9,222,500
Barnett Banks, Inc................................. 400,000 13,500,000
The Chase Manhattan Corporation.................... 70,000 5,608,750
Citicorp........................................... 47,500 4,304,688
Franklin Resources, Inc............................ 35,000 2,323,125
General Re Corporation............................. 70,000 9,922,500
TIG Holdings, Inc.................................. 275,000 8,250,000
T. Rowe Price Associates, Inc...................... 375,600 12,207,000
Unitrin, Inc....................................... 102,000 5,023,500
------------
78,455,188
============
Health Care - 4.44%
Baxter International Inc........................... 135,000 6,277,500
Health Management Associates, Inc., Class A (b).... 262,500 6,562,500
Housecall Medical Resources, Inc. (b).............. 111,000 582,750
Pediatrix Medical Group, Inc. (b).................. 29,600 1,483,700
Pharmacia & Upjohn, Inc............................ 154,500 6,373,125
United HealthCare Corporation...................... 300,000 12,487,500
------------
33,767,075
============
Technology - 12.58%
Cascade Communications Corp. (b)................... 260,000 21,190,000
Cisco Systems, Inc. (b)............................ 300,000 18,618,750
General Motors Corporation, Class H................ 90,000 5,197,500
Glenayre Technologies, Inc. (b).................... 55,000 1,265,000
International Business Machines Corporation........ 62,500 7,781,250
Nextel Communications, Class A (b)................. 340,000 6,290,000
Solectron Corporation (b).......................... 280,000 13,720,000
Tellabs, Inc. (b).................................. 195,000 13,771,875
Ultratech Stepper, Inc. (b)........................ 105,000 1,981,875
Varian Associates, Inc............................. 120,000 5,760,000
------------
95,576,250
============
Transportation - 1.26%
Heartland Express, Inc. (b)........................ 98,657 2,787,060
Union Pacific Corporation.......................... 93,000 6,812,250
------------
9,599,310
============
Utilities - 1.59%
PanEnergy Corp..................................... 350,000 12,118,750
------------
Miscellaneous - 0.72%
Hanson PLC ADR..................................... 441,400 5,462,325
------------
Total common stock (Cost $280,712,837)........... 440,305,923
------------
Preferred Stock - 0.24%
Aetna Inc., 6.25% Class C.......................... 25,000 1,821,875
------------
Total preferred stock (Cost $1,625,491)........... 1,821,875
------------
Convertible Bonds - 0.38%
Alza Corporation, 5.00% due 05/01/2006.............3,000,000 2,925,000
------------
Total convertible bonds (Cost $2,883,125)......... $ 2,925,000
------------
</TABLE>
See accompanying Notes to Statement of Investments
7
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS
September 30, 1996 - Unaudited Shares, Principal
Amount
or Contracts Value
----------------- ------------
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Purchased Put Options - 0.19%
Expiration Date/
Strike Price
----------------
<S> <C> <C> <C>
The Boeing Company.............................................. Jan 97/80.00 200 $ 17,500
Cisco Systems, Inc.............................................. Jan 97/45.00 550 34,375
Cisco Systems, Inc.............................................. Jan 97/50.00 150 18,750
Cisco Systems, Inc.............................................. Jan 97/55.00 800 190,000
MCI Communications Corporation.................................. Jan 97/20.00 500 6,250
MCI Communications Corporation.................................. Jan 97/22.50 400 25,000
Solectron Corporation........................................... Jan 97/30.00 250 1,562
Solectron Corporation........................................... Jan 97/35.00 1,600 100,000
Tellabs, Inc.................................................... Dec 96/60.00 800 160,000
United HealthCare Corporation................................... Dec 96/47.50 1,350 860,625
------------
Total purchased put options (Cost $2,860,307)............................... 1,414,062
------------
Total public portfolio (Cost $288,081,760).................................. 446,466,860
------------
Private Placement - 7.99%
County Seat Holdings, Inc. -- speciality 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............................................. $ 8,000,000 7,872,750
Echlin, Inc. -- manufacturer of automotive parts and components
Common stock (c)(e).............................................................. 553,162 15,619,912
Home State Holdings, Inc. -- property and casualty insurers
11.50% Subordinated Note due 10/03/2004.......................................... $10,050,000 9,629,458
Stock Purchase Warrants Expiring 10/03/2004 (c)(d)............................... 150,750 472,941
Paracelsus Healthcare Corporation -- hospital management company
Common stock (b)(c)(f)........................................................... 535,443 4,337,088
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)........................... $ 211,198 2,011,258
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d).................... $ 60,516 103,660
------------
Total private placement portfolio (Cost $57,340,219)......................... 60,674,317
------------
Total investments in unaffiliated issuers (Cost $345,421,979)....................... $507,141,177
------------
</TABLE>
See accompanying Notes to Statement of Investments
8
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
September 30, 1996 - Unaudited Shares, Principal
Amount
or Contracts Value
----------------- ------------
<S> <C> <C>
INVESTMENTS IN CONTROLLED AFFILIATES - 30.53%
Publicly-Traded - 11.10%
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 $ 84,375,000
------------
Private Placement - 2.08%
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 06/30/2000 (c)(d).................. $ 7,000,000 7,000,000
------------
Total private placement portfolio (Cost $8,860,996)................. 15,770,339
------------
Wholly-Owned Subsidiary - 17.35%
Levin Management Co., Inc. -- investment management
Common stock (c)(d)(h)............................................... 1,000 66,155,368
9.75% Notes due 06/28/1999 (c)(d)(h)................................. $65,000,000 65,000,000
9.75% Note due 03/15/1997 (c)(d)(h).................................. $ 645,000 645,000
------------
Total wholly-owned subsidiary (Cost $121,121,609)................... 131,800,368
------------
TOTAL INVESTMENTS IN CONTROLLED AFFILIATES (COST $135,013,232)........ 231,945,707
------------
MONEY MARKET SECURITIES - 5.30%
U.S. Treasury bill -- 5.07% due 11/21/1996............................ $ 1,000,000 992,677
U.S. Treasury bills -- 5.05% to 5.14% due 01/23/1997.................. $40,000,000 39,350,410
------------
TOTAL INVESTMENTS IN MONEY MARKET SECURITIES (COST $40,343,087)....... 40,343,087
------------
TOTAL INVESTMENTS - 102.58% (Cost $520,778,298)....................... 779,429,971
------------
WRITTEN CALL OPTIONS - (0.43%)
Expiration Date/
Strike Price
----------------
Cascade Communications Corp......................... Oct 96/70.00 150 (189,375)
Chesapeake Energy Corp.............................. Dec 96/45.00 75 (142,500)
Chesapeake Energy Corp.............................. Dec 96/55.00 775 (881,563)
Cisco Systems, Inc.................................. Jan 96/65.00 300 (135,000)
Solectron Corporation............................... Jan 96/40.00 300 (348,750)
Solectron Corporation............................... Jan 96/45.00 1,000 (837,500)
Tellabs, Inc........................................ Dec 96/60.00 300 (416,250)
Tellabs, Inc........................................ Dec 96/70.00 450 (320,625)
------------
TOTAL WRITTEN CALL OPTIONS (PREMIUMS RECEIVED $1,364,153)............. $ (3,271,563)
------------
</TABLE>
See accompanying Notes to Statement of Investments
9
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
September 30, 1996 - Unaudited Shares VALUE
-------- ------------
<S> <C> <C>
SECURITIES SOLD SHORT - (2.17%)
Cascade Communications Corp........................................... 90,000 $ (7,335,000)
Chesapeake Energy Corp................................................ 102,500 (6,419,063)
Cisco Systems, Inc.................................................... 10,000 (620,625)
Tellabs, Inc.......................................................... 30,000 (2,118,750)
------------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $14,080,255).................... (16,493,438)
------------
OTHER ASSETS LESS LIABILITIES - 0.02%................................ 142,579
------------
NET ASSETS - 100.00%.................................................. $759,807,549
------------
</TABLE>
(a) Based on the cost of investments of $469,873,616, for federal income
tax purposes at September 30, 1996, net unrealized appreciation was
$309,556,355, which consisted of gross unrealized appreciation of
$318,610,361 and gross unrealized depreciation of $9,054,006.
(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 September
30, 1996. The aggregate value of restricted securities was
$208,245,024, or 27.41% of net assets, at September 30, 1996.
(d) There were no unrestricted securities of the same issue outstanding
on September 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 Paracelsus Healthcare Corporation.
(g) Security not current as to payment of interest.
(h) Securities issued by Levin Management Co., Inc. ("Levco") are valued
at a fair value as determined by the Board of Directors of Baker,
Fentress & Company based upon all factors deemed relevant by the
Board. The estimated carrying 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 quantitative and qualitative factors considered by the Board
of Directors include, but are not limited to, type of securities,
marketability, restrictions on disposition, comparative valuation of
securities of other publicly-traded investment management companies,
valuation of recent mergers and acquisitions of similar companies,
types of assets under management, current financial condition and
operating results of Levco, growth of assets under management and
operating revenues, competitive conditions, and current and
prospective conditions in the overall stock market.
10 See accompanying Notes to Statement of Investments
<PAGE>
PORTFOLIO CHANGES EXCEEDING $2.5 MILLION
Quarter Ended September 30, 1996 - Unaudited
Purchases Cost
- --------- ------------
Aetna Inc..................................... $ 7,864,172
TIG Holdings, Inc............................. 7,858,423
W.R. Grace & Co............................... 7,589,000
Air Products & Chemicals, Inc................. 7,027,339
Tribune Company............................... 6,628,960
Pharmacia & Upjohn, Inc....................... 6,588,213
Union Pacific Corporation..................... 6,553,070
Tupperware Corporation........................ 6,277,579
International Business
Machines Corporation........................ 6,217,653
Baxter International Inc...................... 6,153,859
U S West Media Group.......................... 5,597,323
Hanson PLC ADR................................ 5,551,066
General Motors Corp., Class H................. 5,282,304
General Motors Corp........................... 5,241,210
Time Warner, Inc.............................. 5,047,374
The Chase Manhattan Corporation............... 4,840,950
Unitrin, Inc.................................. 4,681,628
Electronic Data Systems Corp.................. 4,630,952
Eastman Kodak Company......................... 4,340,672
USX Marathon Group............................ 3,926,075
Allegheny Teledyne Incorporated............... 3,914,668
Corning Incorporated.......................... 3,852,049
Citicorp...................................... 3,827,288
Litton Industries, Inc........................ 3,783,921
General Electric Company...................... 3,285,525
Alza Corporation,
5% Conv. Bond, 05/01/2006................... 2,883,125
Lockheed Martin Corporation................... 2,870,752
------------
$142,315,150
============
- -----------
*Private placement
COMPANY DESCRIPTION
Baker, Fentress & Company is a domestic equity closed-end fund listed on the New
York Stock Exchange (Symbol: BKF). It invests primarily for long-term capital
appreciation. The public portfolio portion of the Company is managed by John A.
Levin & Co., Inc., a subsidiary. The balance of the portfolio is internally
managed by the Company's officers under the supervision of its Board of
Directors. The business of the Company was started in 1891. Other features
include:
. Publicly-traded companies with focus on long-term appreciation and capital
protection
. Illiquid private placements and controlled affiliates with higher risks but
greater potential for growth
. Long-term investments which have significant unrealized appreciation
. Minimum 8% annual distribution policy
Sales Proceeds
- ----- ------------
Atmel Corporation......................... $ 12,063,620
Health Care & Retirement Corp............. 10,330,127
KLA Instruments Corporation............... 10,278,428
Xilinx, Inc............................... 9,600,943
EMC Corporation........................... 9,517,542
Champion Healthcare Corp.*................ 8,480,000
Viking Office Products, Inc............... 8,470,015
Stryker Corporation....................... 8,313,129
Biogen, Inc............................... 8,051,880
Wausau Paper Mills Company................ 7,154,680
Ultratech Stepper, Inc.................... 7,120,897
Foundation Health Corporation............. 7,065,016
DSC Communications Corp................... 6,880,626
C-Cube Microsystems, Inc.................. 6,864,380
Glenayre Technologies, Inc................ 6,858,276
Franklin Resources, Inc................... 6,842,962
Nextel Communications, Class A............ 6,236,254
Watson Pharmaceuticals, Inc............... 5,778,120
Health Management Assoc., Inc............. 5,219,739
RailTex, Inc.............................. 4,798,718
Chesapeake Energy Corp.................... 4,465,015
Sybase, Inc............................... 4,122,259
Heartland Express, Inc.................... 3,466,559
York International Corporation............ 2,786,307
------------
$170,765,492
============
SELECTED DATA
As of September 30, 1996
Total net assets.......................... $759,807,549
Shares outstanding........................ 32,402,520
Per Share
Net asset value....................... $ 23.45
Market price.......................... 19.125
11
<PAGE>
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 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
[RECYCLING LOGO]
The Company's Report to Shareholders is printed on recycled paper.
We encourage recycling and use of recycled products.
Baker, Fentress & Company
REPORT TO
SHAREHOLDERS
THIRD QUARTER
September 30, 1996
