<PAGE>
Baker, Fentress & Company ANNUAL REPORT 1995
Growing with the Emerging American Economy
<PAGE>
Baker Fentress At a Glance
Baker, Fentress & Company, a domestic equity closed-end fund listed on the New
York Stock Exchange (Symbol: BKF), invests primarily for long-term capital
appreciation. It is internally managed by its officers under the supervision of
its board of directors. The business of the Company was started in 1891. Other
features include:
. Concentrated portfolio with limited diversification
. Fully invested in U.S. equities and equivalents
. Combination of publicly-traded and illiquid holdings
. Long-term investments which have significant unrealized appreciation
. Minimum 8% distribution policy
====================================
1995 Performance and Distributions
Total Return
------------
Shareholder Return 33.2%
Portfolio Performance 36.2
S&P 500 Index 37.6
====================================
Ordinary Long-Term
Income Capital Gain
-------- ------------
June 7 $0.20 $ --
December 7 0.15 1.20
-------- ------------
$0.35 $1.20
======== ============
Total Distributions $1.55
============
===================================
Top Ten Holdings
% of
Net Assets
----------
Consolidated-Tomoka 14.2%
United HealthCare 3.3
Cisco Systems 3.1
Echlin 3.0
Barnett Banks 3.0
Wausau Paper Mills 2.6
Cascade Communications 2.5
Aon 2.2
MCI Communications 2.2
Stratacom 2.1
-------
Total 38.2%
=======
[PIE CHART APPEARS HERE]
===================================
Average Sector Commitment for 1995*
Public 70.6%
Private 15.6%
Consolidated-Tomoka 13.8%
[GRAPH APPEARS HERE]
===================================================
Portfolio Weightings*
% of Public S&P 500
Total Portfolio Portfolio Weighting
- ---------------------------------------------------
Technology 20.47% 14.40%
Producer Goods 16.11% 4.50%
Finance 14.00% 13.70%
Consumer Products 13.32% 27.00%
Healthcare 8.61% 9.60%
Energy 5.05% 8.50%
Basic Industries 4.43% 8.00%
Utilities 2.20% 12.60%
Transportation 1.48% 1.70%
Consolidated-Tomoka 14.33% na
* Based on percentage of total portfolio market value. Information as of
December 31, 1995 and includes both publicly-traded and illiquid holdings.
[LOGO] Our cover icon represents the origin of Baker Fentress in the early
midwest timber industry and is a symbol for the emerging American
economy--opportunities for vigorous growth from old solid roots.
<PAGE>
TO OUR SHAREHOLDERS:
[LOGO]
At December 31, 1995, Baker Fentress net assets totalled $599.2 million, a
$137.3 million increase from prior year-end. Net asset value total return of
36.2% was the greatest in our history as a closed-end fund. Compared to more
than 700 equity-oriented mutual funds having long-term growth as their primary
investment objective, our performance would have ranked us in the top quartile.
Two of our three portfolio sectors -- publicly-traded securities and
Consolidated-Tomoka Land Co. -- exceeded the extraordinarily strong 37.6% total
return of the Standard & Poor's 500 Stock Index. Although overshadowed by public
equity market strength, the private placements segment continued to achieve its
targeted 20% annual return objective.
Calendar year distributions to shareholders totalled $1.55 per share, equal
to 8.0% of average net asset value and 10.0% of average market value for the
twelve-month period ended October 31, 1995. We expect to continue our minimum
8% distribution into the foreseeable future.
Last year, after disappointing 1994 performance, we noted our expectation
that investment spending and new company formation would continue to have a
major impact on the U.S. economy, and that this would continue as the central
focus of our portfolio. That proved appropriate in 1995 and remains the basic
theme of our present strategy.
The most significant news of the year was our agreement to acquire John A.
Levin & Co., Inc. (Levco), a New York-based investment advisory firm, for
approximately $36 million cash and five million Baker Fentress shares. The
transaction is subject both to regulatory and shareholder approval and, when
approved, John A. Levin will succeed me as Baker Fentress chief executive.
Information about Levco and the status of our proposed acquisition follow this
letter.
It may be appropriate to defer the annual shareholders' meeting this year
beyond its normal late-April date in order to include the Levco transaction as
part of the agenda. Other agenda items will include an increase in the number of
directors, and the election of four additional board members. From Levco, John
A. Levin, Melody P. Sarnell, and Jeffrey A. Kigner will be proposed for
election; Eugene V. Fife, a limited partner of Goldman, Sachs & Co. also will be
a nominee.
David D. Peterson
President and
Chief Executive Officer
NET ASSET VALUE TOTAL RETURN OF 36.2% WAS THE GREATEST IN OUR HISTORY AS A
CLOSED-END FUND.
1
<PAGE>
ACQUISITION OF JOHN A. LEVIN & CO., INC.
[LOGO]
As announced on November 20, 1995,
Baker Fentress directors have unanimously approved an agreement to acquire
privately-held John A. Levin & Co., Inc. (Levco), a New York-based investment
advisory firm, for approximately $36 million cash and five million Baker
Fentress shares (subject to adjustments). The transaction requires both a grant
of exemptive relief by the Securities and Exchange Commission (SEC) from certain
provisions of the Investment Company Act of 1940 and approval by Baker Fentress
shareholders.
The request for exemptive relief was filed in December and is pending. We
will not ask for shareholder approval of the Levco acquisition unless and until
the requested exemptive relief has been granted by the SEC. We hope to be able
to include approval of the Levco acquisition and related items on the agenda for
our annual shareholders' meeting, even if this necessitates some postponement of
the meeting from its customary late-April date. Proxy materials describing the
Levco transaction, together with relevant historical and financial details, will
be mailed to all shareholders together with notice of the meeting date.
Levco specializes in managing equity portfolios, primarily for U.S.-based
taxable and tax-exempt institutions and high net worth individuals. Since its
founding in 1982, assets under management have grown to $5.4 billion, with
approximately 83% from institutions and 17% from individuals. The institutional
account base includes corporations (37%), endowments and foundations (25%), and
joint labor-management and state and local government plans (21%).
Levco's performance from its 1982 founding through 1995 has exceeded the S&P
500 Index, with particular relative strength in down markets. Levco and Baker
Fentress both stress long-term performance, although with some differences in
investment styles. Levco emphasizes large capitalization equities and wide
diversification; Baker Fentress holds more concentrated positions in smaller
capitalization issues, and also invests in private placements. Levco analysis is
based primarily on detailed bottom-up methodology, while Baker Fentress places
greater consideration on economic and industry trends.
As one of a remaining few internally-managed closed-end funds, Baker Fentress
directors and management had long been concerned about our continuing viability
as an independent entity. The closed-end structure, although advantageous for
investing, restricts our ability to grow, and the internal development of an
investment management business for outside clients would be a slow, uncertain
process. The acquisition of Levco provides us a ready-made entry into what we
consider to be a very attractive business, with access to growth opportunities
not currently available to Baker Fentress.
2
<PAGE>
GROWING WITH THE EMERGING AMERICAN ECONOMY
The strong U.S. equity market in 1995 reflected a resumption of the markets'
realization that the American economy today is a phenomenon unique in the world.
Today, the U.S. combines the growth and dynamism of the most rapidly growing
emerging economies with the institutional stability of a mature industrial
nation. The keys to this economic success include a flexible industrial base,
which has been restructured to meet world competition; cutting edge
technological innovation, which enhances productivity; and a fighting chance to
establish sound policies in public finance unique among large industrial
economies.
Continuing Familiar Investment Themes
As reported in the past, we think the U.S. economy today is driven by
investment, savings, and exports - the exact opposite of the consumption,
borrowing, and importing trends which dominated the '80s. Although market
attention to these trends was overshadowed in 1994 by the Federal Reserve's
monetary tightening and fear of recession, the arrival of a "soft landing" for
the economy allowed market attention to revert to these fundamental points of
emphasis.
INVESTMENT continued to be the leading sector of the economy last year,
growing at 13.9% versus 3.0% for Gross Domestic Product (GDP); it is projected
to continue to grow faster than the economy as a whole again in 1996. The rapid
growth of capital expenditures in the U.S. is not an aberration, but the natural
consequence of radically improved profitability. Last year, the return on
investment in physical plant and equipment in the U.S. reached a post-World War
II high.
Years of shedding unprofitable operations and obsolete facilities have been
followed by rapid expenditures on new equipment. These expenditures have grown
spectacularly in advanced decentralized computing and communications equipment,
which greatly increase the efficiency of both manufacturing and service
industries. Penetration of personal computers in the U.S. far outstrips other
nations. The linking of this equipment is proceeding apace, most visibly through
the Internet, but more importantly through the use of office and firm-wide
private networks.
[CHART APPEARS HERE]
[PLOT POINTS TO COME]
Since the current economic expansion began in 1991, investment and export
sectors of the economy have shown growth far in excess of personal consumption
and government.
[CHART APPEARS HERE]
[PLOT POINTS TO COME]
The economic incentive for capital investment is the profitability of U.S.
industry. The return on equity of the S&P 400 (which excludes the regulated
utilities and financial services stocks included in the more widely known
S&P 500) is a good measure of the profitability of investment in physical plant
in the U.S. It reached a post-World War II high last year.
3
<PAGE>
GROWING WITH THE EMERGING AMERICAN ECONOMY (continued)
[GRAPH SHOWING]
Savings continues to increase as a percent of U.S. GDP.
[APPEARS HERE]
1980..7.1% 1983..2.4% 1986..4.2% 1989..4.4% 1992..1.5% 1995..4.4%
[GRAPH SHOWING]
Public sector budget deficit as a percent of GDP
[APPEARS HERE]
Source BCA Foretrends
1995 Estimate
UNITED STATES..1.6% GERMANY..3.1% JAPAN..3.9% UNITED KINGDOM..5% FRANCE..5%
and ITALY..7.4%
SAVINGS -- the basis for financing this accelerated investment -- continued
to increase in 1995. Although the U.S. savings rate has been low by world
standards, it bottomed in 1992 and should continue to increase over the next few
years. Retained corporate earnings have been high. In addition, the weaker
elements of saving -- the government deficit and household savings -- are
improving. The U.S. federal deficit, as a fraction of GDP, is the lowest of any
large developed economy and is declining. Household savings rates should
continue to increase as the baby boom generation ages. Widely discussed
proposals for income tax reform are designed to increase the incentive to save
rather than consume. While we do not base our decisions on specific short-term
results from the political process, our confidence continues to increase that in
the long run changes in the budget and tax code will favor investment and
savings over consumption and debt.
U.S. EXPORTS grew 10.3% in 1995, and should be strong in 1996, particularly
in the form of capital goods exports to developing countries. Our investment
focus has been on domestic manufacturers who will experience volume and revenue
growth even if the dollar strengthens somewhat, as we expect it to in 1996. The
nearby table summarizes the public portfolio's largest generators of overseas
revenues as a percent of total sales. It shows that 24% of public
<TABLE>
<CAPTION>
- ----------------------------------------------------
Top Public Equity Holdings
by Overseas Exposure
Percent
Percent Overseas
Item Portfolio Sales
- -----------------------------------------------------
<S> <C> <C>
Union Texas Petroleum........... 1.8% 77%
KLA Instruments.................. 1.8 69
Boeing.......................... 2.8 57
Great Lakes Chemical............ 2.5 55
Foster Wheeler.................. 2.0 51
Viking Office Products.......... 2.2 51
Varian Associates............... 1.4 49
Stryker......................... 2.2 48
York International.............. 2.7 44
Cisco Systems................... 4.5 42
Stratacom....................... 2.9 42
Harnischfeger................... 2.7 37
All Public Equity Holdings...... 100.0% 24%
- -----------------------------------------------------
</TABLE>
portfolio company revenues come from overseas sales -- roughly twice the
average of the U.S. economy.
Thematic Focus Investments
Major capital investment portfolio concentrations have been made in both
technology and new smaller companies, as represented in the private portfolio.
Technology-related investments include companies producing both computing and
communications technology as well as their components. Various elements of the
technology stock universe have been emphasized in the portfolio at different
times. In the first half of 1995 we de-emphasized semiconductor and software
stocks. From midyear on, we increased our emphasis on communications equipment
stocks, particularly those which produced hardware critical to advanced data
4
<PAGE>
communications and development of the Internet. We intentionally avoided the
highly publicized Internet-related software stocks, which we considered to be
too expensive and to have insufficiently proprietary product positions. The
diagram below highlights some of the portfolio companies which are key suppliers
to the U.S. communications industry which, with recent enactment of
telecommunications legislation, has been further deregulated.
The other enduring portfolio theme is the growth of new or very small
companies. The American economy is unique in creating new companies. Our private
portfolio includes such companies, which typically have $50-100 million in
revenues. This part of the portfolio continued to meet its objectives,
highlighted by the purchase by Echlin of American Electronic Components at a
significant premium. Baker Fentress continues to invest privately in a wide
range of small U.S. companies in industries ranging from healthcare and
broadcasting to waste disposal, lighting equipment and financial services.
The financial services sector continued to benefit from the rising U.S.
savings rate, which supported continued long-term trends toward lower interest
rates and increasing household ownership of financial assets. Flows of household
savings into mutual funds set records this year. Within this industry, the
public portfolio took some profit in our bank stock holdings due to the maturing
of the bank consolidation trend.
At the same time, we increased our holdings in asset managers, which we
believe will be the principal beneficiaries of increased mutual fund investment.
Both T. Rowe Price and Franklin Resources were added to the portfolio. The
planned acquisition of John A. Levin & Co. would represent a further portfolio
concentration in asset management services, although the shares would be a
private holding.
[TELECOMMUNICATIONS INFRASTRUCTURE GRAPHIC APPEARS HERE]
One of the most rapidly growing categories of capital investment is
communications equipment associated with growth of data communications on both
the Internet and within corporate networks. This graphic illustrates various
segments of this market which are served by current portfolio holdings, shown in
red.
5
<PAGE>
GROWING WITH THE EMERGING AMERICAN ECONOMY (continued)
[HARNISCHFEGER INDUSTRIES PICTURE APPEARS HERE]
We anticipate rapid growth of capital equipment exports from the U.S. An
example of such products is this large mining shovel produced by Harnischfeger
Industries.
Exports of U.S. products continued to grow much faster than the economy as a
whole. In addition to high technology-related products (which also have
significant overseas markets), the Baker Fentress portfolio emphasizes
industrial equipment. This type of capital equipment is particularly important
to emerging market economies. Although these economies did not do well in 1995,
we expect growth in these areas to resume, particularly in Asia. Illustrative of
such portfolio holdings are Harnischfeger, for mining and papermaking equipment;
Boeing, for commercial aircraft; York International, for refrigeration and air
conditioning; and Foster Wheeler, for heavy construction such as power stations.
In addition to these holdings, other companies in the technology, healthcare,
and basic industrial sectors have major overseas exposure.
Outlook
The fundamental outlook for 1996 continues to be favorable for the U.S.
economy and stocks. The principal risks, apart from those of individual company
operations, would appear to be of a political nature.
Profitability of U.S. firms continues to be at record levels, and growth in
the economy should continue for the foreseeable future. Valuation by most
measures is not extreme for a low interest rate, low inflation environment, and
is certainly supported by profitability. The political risks could be a failure
to sustain momentum toward a balanced federal budget; failure of the Federal
Reserve to ease sufficiently to prevent a recession; or an unexpected
international event, such as a financial collapse in Japan.
We are also giving increased attention to the risk of earnings disappointment
in individual issues as we enter 1996. Because the U.S. economic expansion has
continued for five years now and operating rates are relatively high, major
earnings growth in the cyclical sectors is unlikely. Indeed, if the Federal
Reserve eases too slowly, or various structural factors such as lack of pent up
demand for consumer goods become significant, consumer and/or cyclical stocks
could suffer serious earnings disappointments this year.
6
<PAGE>
REVIEW OF OPERATIONS
As reported, our 1995 net asset value return of 36.2% was the highest in our
twenty-five year history as a publicly-traded closed-end fund. Two of the three
portfolio sectors, our public portfolio and Consolidated-Tomoka Land Co.,
exceeded the 37.6% total return for the Standard & Poor's 500 Stock Index.
At December 31, 1995, net assets totalled $599.2 million, a $137.3 million
increase from $461.9 million at 1994 year-end. For 1995, the sum of net
investment income, net realized capital gain and increase in portfolio net
unrealized appreciation totalled $159.6 million. About $41 million was
distributed to shareholders from realized gain and net investment income.
Shareholders reinvested about $18.6 million of those distributions into
additional Baker Fentress shares.
Distributions
Since 1987, Baker Fentress has followed the policy of making total calendar
year distributions equal to at least 8% of average net assets over the twelve-
month period ended October 31 of the year. Payments during the year totalled
$1.55 per share, consisting of $0.20 mid-year and $0.15 year-end ordinary income
dividends, and a $1.20 year-end capital gain distribution. This total was
equivalent to 8.0% of average net assets. Because market value of our shares is
less than net asset value, distributions totalled 10.0% of average market value.
Shareholders receiving the capital gain distribution in Baker Fentress stock
rather than cash acquired 1.1 million additional shares at $16.875 per share, a
22% discount to underlying net asset value. The additional shares issued at a
discount reduced net asset value by $0.19 per share, from $21.61 to $21.42.
Net investment income increased by 36% to $9.4 million, enabling us to
distribute $0.35 per share in ordinary income dividends. Because of greater
emphasis on capital gain rather than investment income, the periodic maturity of
high-yielding private placements, and increases in outstanding shares from
reinvestment of capital gain, future per share ordinary income dividends may
decline. We expect, however, to continue our 8% total distribution policy.
. . . Net assets
totalled
$599.2 million,
a $137.3 million
increase. . .
7
<PAGE>
REVIEW OF OPERATIONS (continued)
Portfolio Sectors
By general policy, we are fully invested in equities, equity equivalents, and
equity-enhanced debt securities at all times. Fund assets are allocated among
three separately-managed segments: publicly-traded equities and their
equivalents; private placements, which provide equity appreciation potential as
well as current income; and our majority-owned affiliate, Consolidated-Tomoka
Land Co. The table below lists 1995 performance and average percentage
commitment by portfolio sector, as well as total fund performance compared to
the S&P 500 Index.
<TABLE>
<CAPTION>
Average 1995 Total
Commitment Return
------------- -------
<S> <C> <C>
Public Equities 70.6% 38.2%
Private Placements 15.6 23.9
Consolidated-
Tomoka 13.8 45.2
------ -----
Total Portfolio 100.0% 36.2%
====== =====
S&P 500 37.6%
=====
</TABLE>
Within the public equity portfolio, some of the most dramatic gains were
realized from our investments in producers of frame relay equipment, such as the
Stratacom system shown here.
[STRATACOM SYSTEM PICTURE APPEARS HERE]
Public Portfolio Review
The past year's strong public equity returns of 38.2% were not achieved without
a fair measure of anxiety. The year began with apprehension by participants in
public equity markets. Unexpected economic strength in late 1994 had created the
impression that U.S. economic growth--and potentially inflation--were out of
control, and that further (perhaps severe) monetary tightening would be required
to restore equilibrium. If true, such a development would probably have led to
further pressure on equity prices.
These fears proved unfounded, as indicators of economic stress began easing
almost immediately after the first of the year. The market responded smartly,
appreciating 9.7% through the first quarter. Appreciation was concentrated in
larger capitalization stocks, particularly those with overseas operations or
which were thought to be insensitive to weakness in the U.S. economy. This bias
was heightened by an unexpected collapse in the value of the dollar versus other
senior currencies, a development which accelerated the "flight to safety" within
a generally rising equity market. Our portfolio largely kept pace with the
market in this period.
8
<PAGE>
Late spring brought further deceleration of economic indicators and some
stabilization of the dollar. Within the equity market, investor interest moved
toward more aggressive stocks, with the technology sector posting a very strong
second quarter. Financial services and capital goods stocks also put in a strong
showing.
By summer, the dollar had stabilized further, assisted by currency
interventions and perhaps by the sense that there was surprising progress toward
reforming U.S. fiscal policy. Continued signs of economic softness provided the
Federal Reserve with enough confidence to ease monetary policy slightly in July.
This set off a run of strong performance, paced by technology, financial
services, and capital goods stocks in the portfolio.
In the fall, this optimism flagged. Perceived tight monetary policy, slower
progress on the federal budget, and profit taking in the technology sector
produced a choppy, downward market through October. The market recovered
sharply through November in an environment of surprisingly low inflation,
renewed hope for a budget agreement, and possible monetary ease. In December,
stocks corrected again as the budget talks slowed, but ended the year on a
positive note after the Federal Reserve eased in response to low inflation and
economic weakness.
Private Placement Review
While below the exceptional returns achieved by broad public equity market
indices during 1995, total return on the private placement portfolio of 23.9%
exceeded our long-term target for this activity. On a long-term basis, our goal
for private placement investments is to generate average annual returns of about
20%, approximately twice the historical average return of public equity indices.
[PICTURE APPEARS HERE]
In the Company's tradition of continuity between private and public holdings,
restricted shares of United HealthCare were transferred from the private
portfolio to the public portfolio when restrictions expired in 1995. In this
photo, public portfolio director Steve Carhart (left) and private portfolio
director Scott Smith (right) meet with UNH Chairman, William McGuire at UNH
headquarters.
There was significant activity during 1995, which began with 12 portfolio
investments valued at $75.1 million. New investments totalling $23.3 million
were added to the portfolio while investments valued at $26.2 million, including
1995 gain of $6.4 million, were sold or transferred out of the private
portfolio. Portfolio valuation increased $4.9 million during the year, net of
write-downs. At year end, 12 portfolio investments were valued at $83.4 million.
In December, a portfolio company agreed to be acquired in a transaction which
closed in January, 1996 when a $10.0 million debenture was retired from the
portfolio.
9
<PAGE>
REVIEW OF OPERATIONS (continued)
[PERFORMANCE CHART APPEARS HERE]
1993 1994 1995 1993-95
---- ---- ---- -------
BKF Private Portfolio..... 20.4 19.3 23.9 21.2
S&P 500................... 10.1 1.3 37.6 15.3
Consistent targeted total returns were achieved by our private portfolio over
the last three years. This is contrasted against the highly variable returns of
the public equity market.
As noted in last year's report, an $11.3 million investment was made in
January 1995 in TBN Holdings, Inc., a Cleveland-based resource recovery and
hazardous waste management company.
In March, the $5.0 million carrying value of our investment in Alliance
Northwest Industries, the parent of Seattle Lighting Fixture Company, was
written off given the company's continuing operating difficulties and the
uncertain outlook for any material recovery of our investment.
During 1994, Complete Health Services, Inc. was acquired in a tax-free stock
exchange by United HealthCare Corporation (NYSE symbol: UNH), which redeemed our
$4.25 million Complete Health debenture at a premium in July 1995. After trading
restrictions on UNH shares in the private portfolio were lifted in October, the
liquidity discount on the shares was eliminated and they were transferred to the
public portfolio.
In October, American Electronic Components, Inc. (Nasdaq symbol: AECI) agreed
to merge with Echlin Inc. (NYSE symbol: ECH) in a tax-free exchange of stock.
ECH shares received when the merger closed in December were valued at $18.2
million, net of a 10% liquidity discount, compared to a pre-merger valuation of
AECI shares of $6.8 million.
Also in October, an initial $1.0 million investment was funded under a $10.0
million commitment to Security Capital U.S. Realty, a Luxembourg-based entity
formed to invest in public and private U.S. real estate and Real Estate
Investment Trusts. The company is part of the Security Capital Group of
companies, which includes two NYSE-listed companies with a combined market
capitalization in excess of $2 billion.
In November, an investment of $10.5 million was made in DuroLite
International, Inc., a holding company formed to acquire Duro-Test Corporation
and Litetronics International, Inc. Both companies manufacture and distribute
long-life specialty lighting products.
In December, EXCL Communications, Inc. completed a refinancing, retiring all
EXCL securities we held. A $3.8 million subordinated debenture was redeemed at
par, and two issues of convertible preferred stock with an original cost of
$2.65 million were repurchased for $6.0 million.
Also in December, Champion Healthcare Corporation (AMEX symbol: CHC)
completed a recapitalization in which we received CHC common shares for
terminating certain dividend rights on
10
<PAGE>
previously issued convertible preferred stock. Given limited liquidity of the
new shares, they are valued at a 20% discount to market.
Just before year-end, directors of Earth Technology Corporation (Nasdaq
symbol: ETCO) agreed to its acquisition by Tyco International (NYSE symbol: TYC)
in a cash tender offer. The tender was completed in January 1996 and a $10.0
million ETCO debenture was redeemed at par.
Valuation writedowns totalling $2.5 million were taken against investments in
County Seat Stores and TBN Holdings at year-end. County Seat continues to
struggle in a highly competitive retail apparel market, while TBN has
experienced difficulty absorbing a large acquisition made at the time of our
investment.
The outlook for 1996 suggests increasingly competitive conditions in the
private capital markets given the continued strong flow of funds into the
sector. We will remain focused on the disciplined review of potential new
investments while constantly monitoring opportunities for liquidity in the
existing portfolio.
Consolidated-Tomoka Review
For net asset value purposes, we carry our 79.9% ownership in Consolidated-
Tomoka Land Co. at the last sale price of its shares on the American Stock
Exchange (symbol: CTO). The stock is thinly traded and annual rates of return
- -- positive 45% in 1995 and negative 19% in 1994 -- have not necessarily
reflected operating results.
CTO continues to focus its efforts on two operating businesses -- citrus and
real estate development -- and to implement exit strategies for the remaining
activities, mostly income properties. These properties currently produce
positive cash flow, allowing for more patience in their disposition.
Citrus operations were only modestly profitable in calendar 1995, as neither
volume nor prices for the 1995 crop year ended in August reached expected
levels. Reduced volume did not lower growing costs, which are largely a function
of the number of planted trees, rather than amount of fruit harvested. The
volume shortfall occurred throughout Florida, and was not anticipated by
government citrus crop forecasts.
In sharp contrast to a disappointing 1995, the CTO 1996 crop year may produce
the largest harvest ever. While always subject to subsequent adverse growing
conditions, CTO currently is forecasting a 44% increase in harvested fruit at
generally acceptable prices. The grove expansion, completed five years ago, is
expected to generate annual volume increases for the next decade or more.
CTO CURRENTLY IS
FORECASTING A
44% INCREASE IN HARVESTED FRUIT
AT GENERALLY ACCEPTABLE PRICES.
11
<PAGE>
REVIEW OF OPERATIONS (continued)
[LPGA INTERNATIONAL PICTURE APPEARS HERE]
Pictured above is the entrance to the LPGA International complex just west of
the new I-95 interchange in Daytona Beach. CTO is developing multi-use land
around this area.
Progress continues at the Ladies Professional Golf Association (LPGA)
project, CTO's major real estate activity. The development will occupy 4,500
acres when fully complete; in the near-term it will include two championship
golf courses, a Radisson resort complex, residential housing surrounding the
golf courses, and the LPGA headquarters. The first course is LPGA International,
designed by Rees Jones. Open for play for more than one year, it is the site of
the nationally-televised LPGA Sprint Titleholders Championship. Initial land
clearance has started for the second course, designed by Arthur Hills, with play
scheduled to begin in early 1997. CTO has committed to sell all the residential
land around the first golf course to a subdeveloper in three successive two-year
phases, subject to the purchaser meeting performance criteria for each phase. As
of January 1996, eighteen residences priced from $165,000 to $700,000 were under
construction in three areas within the first phase.
CTO commercial land sales totalled about $12 million in 1995 at prices
ranging from $4,000 to $260,000 per acre. The backlog for future years' sales
continues to grow, primarily due to completion of the Interstate 95 interchange
at LPGA Boulevard and the two new championship golf courses. The real estate
environment in the Daytona Beach area is favorable because of lower interest
rates, a growing economy, and the national disposition of distressed properties,
which removed a major deterrent to new construction.
Real estate sales will continue to be the major element of CTO earnings. The
major expenses for planning, permitting and infrastructure for current projects
are largely complete, reducing future cash investment requirements. CTO will be
increasingly concerned with uses of funds, including future dividend increases.
12
<PAGE>
CHANGES IN PORTFOLIO
<TABLE>
<CAPTION>
Shares or Principal Amount*
----------------------------------------
Quarter Ended December 31, 1995 Held at
Purchased Sold December 31, 1995
--------- ----------------------------
<S> <C> <C> <C>
PUBLIC PORTFOLIO
DSC Communications Corp.................... 70,000 230,000
EMC Corporation............................ 100,000 500,000
Foster Wheeler Corporation................. 100,000 200,000
General Re Corporation..................... 10,000 60,000
Glenayre Technologies, Inc................. 150,000 150,000
StrataCom, Inc............................. 50,000 170,000
Stryker Corporation........................ 180,000 180,000
Tellabs, Inc............................... 60,000 235,000
Viking Office Products, Inc................ 200,000 200,000
Xilinx, Inc................................ 240,000 240,000
York International Corporation............. 50,000 250,000
American Power Conversion Corp............. 425,000 --
Baker Hughes Incorporated.................. 400,000 --
Cooper Industries, Inc..................... 212,587 --
Department 56, Inc......................... 90,000 --
Federated Department Stores, Inc........... 350,000 --
Great Lakes Chemical Corporation........... 30,000 150,000
Lechters, Inc.............................. 287,500 --
MCI Communications Corporation............. 100,000 500,000
Norfolk Southern Corporation............... 125,000 --
Sequent Computer Systems, Inc.............. 220,000 --
United HealthCare Corporation.............. 170,611 300,000
PRIVATE PORTFOLIO
DuroLite International, Inc.
Convertible Preferred Stock............... 2,500 2,500
12% Subordinated Note due 11/03/2004...... 8,000,000 8,000,000
Security Capital U.S. Realty
Common stock.............................. 100,000 100,000
EXCL Communications, Inc.
Convertible Preferred Stock............... 2,150,000 --
Convertible Preferred Stock, Series II.... 510,931 --
14% Subordinated Debenture due 6/30/2000.. 3,800,000 --
</TABLE>
--------------
* Excludes shares acquired or disposed of as a result of stock
dividends, stock splits, stock reorganizations, mergers and
conversions.
13
<PAGE>
BAKER, FENTRESS & COMPANY ILLUSTRATION OF $10,000 INVESTMENT
Total Return on $10,000 Investment
For 20 Years Ended December 31, 1995
This chart and accompanying table illustrate the annual and cumulative 20-year
record of a $10,000 investment made at the beginning of 1976. The results of two
measures of past performance are as follows:
Average Annual
Ending Value Compound Total Return
------------ ---------------------
Shareholder Return $295,687 17.7%
Portfolio Performance 147,582 14.4
SHAREHOLDER RETURN is the actual return a Baker, Fentress & Company
shareholder would have achieved assuming reinvestment of all distributions at
the actual reinvestment price on the payment date. Returns which include 1993
results assume all primary shares were purchased during the Company's rights
offering at the actual exercise price. For the years when the Company retained a
portion of net realized capital gain and paid taxes due on behalf of
shareholders, such tax credits were reinvested at the closing market price of
the Company's stock on the last day of that year. The net asset value of the
shares held as of December 31, 1995, related to the $295,687 ending market
value, was $383,952.
PORTFOLIO PERFORMANCE is the time-weighted total return of the Company's
total net assets. This provides a measure of performance comparable to the total
return of general market indices, such as the S&P 500.
This total return calculation assumes monthly compounding of total net
assets, with purchases and sales of portfolio securities assumed to occur at
mid-month. Dividend income is earned on the ex-date and interest income is
accrued monthly. Calculations reflect adjustments for capital gain
distributions, treasury stock purchases and taxes paid by the Company in years
when a portion of net realized capital gain was retained, but before deduction
of expenses.
The illustrated results are two measures of past performance. They are not
necessarily indicative of future results.
<TABLE>
<CAPTION>
========================================================================================================
TOTAL 20 Years Ended December 31, 1995
RETURN
ON $10,000
INVESTMENT Baker, Fentress & Company
---------------------------------------------
Shareholder Return Portfolio Performance Standard & Poor's 500
-------------------- --------------------- ---------------------
Annual Annual Annual
As of Cumulative Total Cumulative Total Cumulative Total
December 31 Investment Return Investment Return Investment Return
----------- ---------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
1976....... $ 14,537 45.4% $ 12,447 24.5% $ 12,393 23.9%
1977....... 15,399 5.9 12,368 -0.6 11,506 -7.2
1978....... 17,501 13.7 14,563 17.8 12,262 6.6
1979....... 25,339 44.8 20,275 39.2 14,544 18.6
1980....... 33,700 33.0 24,951 23.1 19,271 32.5
-------------------------------------------------------------------------------------
1981....... 35,235 4.6 24,860 -0.4 18,322 -4.9
1982....... 47,383 34.5 31,293 25.9 22,270 21.6
1983....... 63,259 33.5 37,595 20.1 27,293 22.6
1984....... 68,639 8.5 39,110 4.0 29,005 6.3
1985....... 95,662 39.4 52,932 35.3 38,208 31.7
-------------------------------------------------------------------------------------
1986....... 107,417 12.3 59,639 12.7 45,339 18.7
1987....... 101,168 -5.8 63,087 5.8 47,720 5.3
1988....... 130,461 29.0 72,423 14.8 55,645 16.6
1989....... 164,341 26.0 88,830 19.9 73,277 31.7
1990....... 125,188 -23.8 71,998 -17.1 71,003 -3.1
-------------------------------------------------------------------------------------
1991....... 167,795 34.0 91,211 26.7 92,634 30.5
1992....... 178,718 6.5 97,575 7.0 99,697 7.6
1993....... 240,017(1) 14.2 113,253 16.1 109,739 10.1
1994....... 221,980 -7.5 108,329 -4.4 111,188 1.3
1995....... 295,687 33.2 147,582 36.2 152,970 37.6
-------------------------------------------------------------------------------------
</TABLE>
(1) Includes $35,603 additional investment to purchase all primary shares in
the Company's rights offering.
14
<PAGE>
20-YEAR PERFORMANCE SUMMARY
[GRAPH APPEARS HERE]
TOTAL RETURN ON $10,000 INVESTMENT
<TABLE>
<CAPTION>
As of Shareholder Portfolio S&P 500
December 31, Return Performance Stock Index
- ------------ ----------- ----------- -----------
<S> <C> <C> <C>
1975 $10,000 $10,000 $10,000
1976 14,537 12,447 12,393
1977 15,399 12,368 11,506
1978 17,501 14,563 12,262
1979 25,339 20,275 14,544
1980 33,700 24,951 19,271
1981 35,235 24,860 18,322
1982 47,383 31,293 22,270
1983 63,259 37,595 27,293
1984 68,639 39,110 29,005
1985 95,662 52,932 38,208
1986 107,417 59,639 45,339
1987 101,168 63,087 47,720
1988 130,461 72,423 55,645
1989 164,341 86,830 73,277
1990 125,188 71,998 71,003
1991 167,795 91,211 92,634
1992 178,718 97,575 99,697
1993 240,017 113,253 109,739
1994 221,980 108,329 111,188
1995 295,687 147,582 152,970
</TABLE>
<TABLE>
<CAPTION>
PAST PERFORMANCE
Average Annual Compound Total Return
Years Ended Shareholder Portfolio S&P 500
December 31, 1995 Return Performance Stock Index
- ----------------- ----------- ----------- -----------
<S> <C> <C> <C>
1 year......... 33.2% 36.2% 37.6%
3 year......... 13.3 14.8 15.3
5 year......... 15.8 15.4 16.6
10 year......... 10.5 10.8 14.9
20 year......... 17.7 14.4 14.6
</TABLE>
15
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1995
-----------------
<S> <C>
Assets
Investments, at Value:
Portfolio securities:
Unaffiliated issuers (cost $343,020,028)................... $497,029,128
Controlled affiliates (cost $25,714,454)................... 96,332,827
Money market securities (cost $1,789,753)...................... 1,789,753
------------
Total Investments (cost $370,524,235).................. 595,151,708
Cash........................................................... 438,794
Receivable for Securities Sold................................. 3,436,360
Dividends and Interest Receivable.............................. 1,095,263
Other Assets................................................... 972,145
------------
Total Assets........................................... 601,094,270
------------
Liabilities
Payable for Securities Purchased............................... 1,305,000
Accounts Payable and Accrued Liabilities....................... 606,785
------------
Total Liabilities...................................... 1,911,785
------------
Net Assets................................................................ $599,182,485
============
Analysis of Net Assets
Common stock, $1 par value, authorized -- 40,000,000 shares;
issued and outstanding -- 27,543,641 shares................ $ 27,543,641
Capital surplus................................................ 279,579,036
Undistributed net realized gain from investment transactions... 17,943,842
Other retained earnings (a).................................... 49,488,493
Unrealized appreciation of investments......................... 224,627,473
------------
Net Assets................................................................ $599,182,485
============
Net Asset Value Per Share................................................. $ 21.75
============
</TABLE>
----------
(a) Prior to January 1, 1970, operating and other non-portfolio
activities were included in other retained earnings.
See accompanying Notes to Financial Statements
16
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
-----------------
<S> <C>
Investment Income:
Dividends from:
Unaffiliated issuers......................................................... $ 4,467,654
Controlled affiliate......................................................... 2,250,000
------------
6,717,654
------------
Interest from:
Unaffiliated issuers......................................................... 5,982,162
Controlled affiliate......................................................... 840,000
------------
6,822,162
------------
Total Income............................................................... 13,539,816
------------
Expenses:
Investment research............................................................ 1,893,802
Administration and operations.................................................. 1,029,543
Rent........................................................................... 286,272
Directors fees and expenses.................................................... 162,750
Reports to shareholders........................................................ 184,621
Professional fees.............................................................. 135,810
Custodian and transfer agent fees.............................................. 86,990
Taxes other than income........................................................ 65,020
Other.......................................................................... 276,495
------------
Total Expenses............................................................. 4,121,303
------------
Net Investment Income............................................... 9,418,513
------------
Net Realized and Unrealized Gain on Investments:
Net realized gain on sales of investments in unaffiliated issuers............. 41,188,739
Net realized gain on financial futures transactions........................... 1,962,075
------------
Net realized gain on sales of investments.................................. 43,150,814
Net change in unrealized appreciation of investments.......................... 107,071,485
------------
Net Realized and Unrealized Gain on Investments..................... 150,222,299
------------
Net Increase in Net Assets Resulting from Operations................................... $159,640,812
============
</TABLE>
See accompanying Notes to Financial Statements
17
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase (decrease) in net assets resulting
from operations.............................................. $ 159,640,812 $ (25,012,819)
Adjustments to reconcile increase (decrease) in
net assets resulting from operations to net cash
provided by (used in) operating activities:
Net realized and unrealized (gain) loss on investments....... (150,222,299) 31,945,596
(Increase) in receivable for securities sold................. (1,633,235) (1,175,625)
(Increase) decrease in dividends and interest receivable..... 471,112 (973,821)
(Increase) decrease in other assets.......................... (538,706) 58,592
(Decrease) in accounts payable and accrued liabilities....... (2,212) (19,749)
Increase (decrease) in payable for securities purchased...... 1,305,000 (9,063,270)
------------- -------------
Net cash provided by (used in) operating activities....... 9,020,472 (4,241,096)
------------- -------------
Cash Flows from Investing Activities:
Purchases of portfolio securities and options.................. (185,107,763) (217,516,097)
Sales of portfolio securities and options...................... 194,374,056 256,774,059
Proceeds from options written.................................. - 16,026,254
Cost of options repurchased.................................... - (27,106,364)
Net realized gain (loss) on financial futures transactions..... 1,962,075 (2,538,000)
Sales/maturities of money market securities, net............... 2,564,206 8,472,306
------------- -------------
Net cash provided by (used in) investing activities....... 13,792,574 34,112,158
------------- -------------
Cash Flows from Financing Activities:
Dividends and capital gain distributions....................... (22,389,049) (29,960,478)
------------- -------------
Net cash (used in) financing activities.................... (22,389,049) (29,960,478)
------------- -------------
Net Increase (Decrease) in Cash........................................... 423,997 (89,416)
Cash at the Beginning of the Year......................................... 14,797 104,213
------------- -------------
Cash at the End of the Year............................................... $ 438,794 $ 14,797
============= =============
Supplemental Disclosure of
Noncash Financing Activities:
Capital gain distribution reinvestments........................ $ 18,595,558 $ 15,865,885
============= =============
</TABLE>
See accompanying Notes to Financial Statements
18
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994
------------ ------------
<S> <C> <C>
Operations:
Net investment income........................................... $ 9,418,513 $ 6,932,777
Net realized gain on sales of investments....................... 43,150,814 42,728,705
Net change in unrealized appreciation........................... 107,071,485 (74,674,301)
------------ ------------
Net increase (decrease) in net assets resulting
from operations......................................... 159,640,812 (25,012,819)
------------ ------------
Distributions to Shareholders from:
Net investment income........................................... (9,058,533) (7,239,654)
Net realized gain from investment transactions.................. (31,926,074) (38,586,710)
------------ ------------
Total dividends to shareholders............................. (40,984,607) (45,826,364)
------------ ------------
Net increase (decrease) in net assets from
operations after distributions...................... 118,656,205 (70,839,183)
------------ ------------
Capital Share Transactions--Net increase................................... 18,595,558 15,879,895
------------ ------------
Total Increase (Decrease) in Net Assets.................................... 137,251,763 (54,959,288)
Net Assets at the Beginning of the Year.................................... 461,930,722 516,890,010
------------ ------------
Net Assets at the End of the Year.......................................... $599,182,485 $461,930,722
============ ============
</TABLE>
See accompanying Notes to Financial Statements
19
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares Value
----------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS--82.95%
Public Portfolio--70.91%
Health Care--6.80%
Foundation Health Corporation (b)............... 200,000 $ 8,650,000
Pediatrix Medical Group, Inc. (b)............... 110,600 3,041,500
Stryker Corporation............................. 180,000 9,450,000
United HealthCare Corporation................... 300,000 19,612,500
-----------
40,754,000
-----------
Consumer Products and Services--6.13%
Newell Co....................................... 400,000 10,350,000
The Walt Disney Company......................... 190,000 11,186,250
Construction Group
Owens-Corning Fiberglas Corporation (b)....... 100,000 4,487,500
Toll Brothers, Inc. (b)....................... 270,000 6,210,000
USG Corporation (b)........................... 150,000 4,500,000
-----------
36,733,750
-----------
Technology--20.27%
Cascade Communications Corp. (b)................ 175,000 14,918,750
Cisco Systems, Inc. (b)......................... 250,000 18,656,250
DSC Communications Corp. (b).................... 230,000 8,481,250
EMC Corporation (b)............................. 500,000 7,687,500
Glenayre Technologies, Inc. (b)................. 150,000 9,337,500
KLA Instruments Corporation (b)................. 280,000 7,297,500
Solectron Corporation (b)....................... 280,000 12,355,000
StrataCom, Inc. (b)............................. 170,000 12,495,000
Sybase, Inc. (b)................................ 235,000 8,460,000
Tellabs, Inc. (b)............................... 235,000 8,695,000
Varian Associates, Inc.......................... 120,000 5,745,000
Xilinx, Inc. (b)................................ 240,000 7,320,000
-----------
121,448,750
-----------
Energy--5.00%
Chesapeake Energy Corp. (b)..................... 375,000 12,468,750
Panhandle Eastern Corporation................... 350,000 9,756,250
Union Texas Petroleum Holdings, Inc............. 400,000 7,750,000
-----------
29,975,000
-----------
Business and Commercial Services--1.95%
Nextel Communications, Class A (b).............. 160,000 2,360,000
Viking Office Products, Inc. (b)................ 200,000 9,300,000
-----------
11,660,000
-----------
</TABLE>
See accompanying Notes to Statement of Investments
20
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares Value
------------ ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Finance--12.01%
Aon Corporation................................ 270,000 $ 13,466,250
Barnett Banks, Inc............................. 300,000 17,700,000
Franklin Resources, Inc........................ 150,000 7,556,250
General Re Corporation......................... 60,000 9,300,000
T. Rowe Price Associates, Inc.................. 205,000 10,096,250
Growth Lending Institutions Group
Crestar Financial Corporation................ 80,000 4,730,000
UJB Financial Corp........................... 140,000 4,987,500
Union Planters Corporation................... 130,000 4,143,750
------------
71,980,000
------------
Basic Industries--4.39%
Great Lakes Chemical Corporation............... 150,000 10,800,000
Wausau Paper Mills Company..................... 568,992 15,505,032
------------
26,305,032
------------
Producer Goods--10.71%
Bandag, Incorporated........................... 170,000 9,201,250
The Boeing Company............................. 150,000 11,756,250
Foster Wheeler Corporation..................... 200,000 8,500,000
Harnischfeger Industries, Inc.................. 356,420 11,850,965
York International Corporation................. 250,000 11,750,000
Engineering and Construction Group
Jacobs Engineering Group Inc. (b)............ 200,000 5,000,000
The Manitowoc Company, Inc................... 140,000 4,287,500
Thomas Group, Inc. (b)....................... 137,500 1,856,250
------------
64,202,215
------------
Transportation--1.47%
Growth Transportation Group
Heartland Express, Inc. (b).................. 231,257 4,567,332
RailTex, Inc. (b)............................ 201,200 4,225,200
------------
8,792,532
------------
Utilities--2.18%
MCI Communications Corporation................. 500,000 13,062,500
------------
Total public portfolio (Cost: $278,204,437).. 424,913,779
------------
</TABLE>
See accompanying Notes to Statement of Investments
21
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
----------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Private Placement Portfolio--12.04%
Champion Healthcare Corporation--hospital management company
Common stock (b)(c)(f)........................................................ 73,223 $ 311,198
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
Stock Purchase Warrants Expiring 12/31/2003 (c)(d)............................ 240,000 -
County Seat Holdings, Inc.--specialty retailer
Common stock (b)(c)(d)........................................................ 111,067 740,450
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
Earth Technology Corporation--environmental engineering
and consulting
12.5% Senior Subordinated Note due 6/30/98 (c)(d)............................. $10,000,000 10,000,000
Stock Purchase Warrants Expiring 7/01/98 (c)(d)............................... 166,500 -
Echlin Inc.--manufacturer of automotive parts and components
Common stock (c)(e)........................................................... 553,162 18,190,556
Home State Holdings, Inc.--property and casualty insurers
11.50% Subordinated Note due 10/03/2004 (c)(d)................................ 10,050,000 9,607,909
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)(g)..................................................... 100,000 1,000,000
TBN Holdings Inc.--hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(h)................................ $ 8,000,000 8,000,000
Series C-3 Convertible Preferred Stock (b)(c)(d).............................. 1,511,628 1,239,000
Stock Purchase Warrants Expiring 12/31/2002 (c)(d)............................ 1,100,000 11,000
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d)....................... $ 387,835 1,936,512
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)................ $ 59,868 105,785
------------
Total private placement portfolio (Cost: $64,815,591)...................... 72,115,349
------------
Total investments in unaffiliated issuers (Cost: $343,020,028).................. 497,029,128
------------
INVESTMENTS IN CONTROLLED AFFILIATES--16.08%
Publicly-Traded--14.19%
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 85,000,000
------------
Private Placement Portfolio--1.89%
Alliance Northwest Industries, Inc.--commercial and residential
lighting fixtures
Series B Convertible Preferred Stock (b)(c)(d)................................ 2,000,000 -
Series C Convertible Preferred Stock (b)(c)(d)................................ 500 -
Series D Convertible Preferred Stock (b)(c)(d)................................ 1,000 -
Stock Purchase Warrants Expiring 12/20/2000 (b)(c)(d)......................... 1,687,941 -
Citadel Communications Corporation--radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)................................ 972,000 3,374,865
Series C Convertible Preferred Stock (b)(c)(d)................................ 275,904 957,962
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 $20,683,827)....................... 11,332,827
------------
Total investments in controlled affiliates (Cost $25,714,454)................... 96,332,827
------------
</TABLE>
See accompanying Notes to Statement of Investments
22
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1995
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
---------- ------------
<S> <C> <C>
MONEY MARKET SECURITIES--.30%
American Express Credit Corporation--5.00% to 5.75% due 1/03/96............................. $ 800,000 $ 799,635
U.S. Treasury bills--5.31% due 3/07/96...................................................... $1,000,000 990,118
------------
Total investments in money market securities (Cost: $1,789,753)............................. 1,789,753
------------
Total Investments--99.33% (Cost: $370,524,235).............................................. 595,151,708
Other Assets Less Liabilities--0.67%........................................................ 4,030,777
------------
NET ASSETS--100.00%......................................................................... $599,182,485
============
</TABLE>
NOTES TO STATEMENT OF INVESTMENTS
(a) Based on the cost of investments of $370,524,235, for federal income tax
purposes at December 31, 1995, net unrealized appreciation was
$224,627,473, which consisted of gross unrealized appreciation of
$241,643,436 and gross unrealized depreciation of $17,015,963.
(b) Non-income producing security.
(c) The following securities are 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 December 31, 1995. The aggregate value of restricted securities was
$83,448,176 or 13.93% of net assets, at December 31, 1995.
<TABLE>
<CAPTION>
No. of Shares or
Security Description Date(s) of Acquisition Principal Amount Cost
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alliance Northwest Industries, Inc.,
Series B Convertible Preferred Stock........................ January 1995 2,000,000 500,000
Series C Convertible Preferred Stock........................ April 1993-August 1994 500 850,000
Series D Convertible Preferred Stock........................ November 1992 1,000 8,000,000
Stock Purchase Warrants Expiring 12/20/2000................. November 1992 1,687,941 1,000
Champion Healthcare Corporation
Common stock................................................ December 1995 72,223 388,997
Series D Convertible Preferred Stock........................ December 1993-December 1994 111,111 1,999,998
11% Subordinated Note due 12/31/2003........................ December 1993-December 1994 $ 8,000,000 8,000,000
Stock Purchase Warrants Expiring 12/31/2003................. December 1993-December 1994 240,000 -
Citadel Broadcasting Corporation
12% Class A Subordinated Note due 6/30/2000................. July 1992 $ 7,000,000 7,000,000
Citadel Communications Corporation
Series A Convertible Preferred Stock........................ May 1993 972,000 3,374,865
Series C Convertible Preferred Stock........................ May 1993 275,904 957,962
County Seat Holdings, Inc., common stock...................... June 1991 111,067 740,450
DuroLite International, Inc.
Convertible Preferred Stock................................. November 1995 2,500 2,627,250
12% Subordinated Note due 11/03/2004........................ November 1995 $ 8,000,000 7,872,750
Earth Technology Corporation
12.5% Senior Subordinated Note due 6/30/98.................. August 1990 $10,000,000 10,000,000
Stock Purchase Warrants Expiring 7/01/98.................... August 1990 166,500 900
Echlin Inc., common stock..................................... May 1989-March 1992 553,162 10,406,693
Golder, Thoma, Cressey Fund II Limited Partnership............ June 1984-December 1988 $ 387,835 387,835
Home State Holdings, Inc.
11.5% Subordinated Note due 10/03/2004...................... October 1994 $10,050,000 9,607,909
Stock Purchase Warrants Expiring 10/03/2004................. October 1994 150,750 472,941
Phillips-Smith Specialty Retail Group Limited Partnership..... March 1987-September 1987 $ 59,868 59,868
Security Capital U.S. Realty, common stock.................... October 1995 100,000 1,000,000
TBN Holdings Inc.
12% Subordinated Note due 12/31/2002........................ January 1995 $ 8,000,000 8,000,000
Series C-3 Convertible Preferred Stock...................... January 1995 1,511,628 3,239,000
Stock Purchase Warrants Expiring 12/31/2002................. January 1995 1,100,000 11,000
</TABLE>
(d) There were no unrestricted securities of the same issue outstanding on
December 31, 1995 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) The Company has committed to invest an additional $9,000,000 in Security
Capital U.S. Realty.
(h) Security not current as to payment of interest.
23
<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.
Because these investments are expected to have a long-term holding period, their
estimated values may not reflect amounts that could be realized upon immediate
sale, nor amounts that ultimately may be realized.
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 such shares would require registration under the Securities
Act. 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 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 has reclassified $103,427,516 from "undistributed net
realized gain from investment transactions" to "capital surplus" in the
accompanying Analysis of Net Assets. This reclassification 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 during 1995 or 1994.
Other transactions in capital stock during 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Shares Amount
-------------------- ------------------------
1995 1994 1995 1994
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions..... 1,101,959 1,123,249 $ 1,101,959 $ 1,123,249
Increase in
capital surplus... 17,493,599 14,756,646
----------- -----------
Net increase...... $18,595,558 $15,879,895
----------- -----------
</TABLE>
24
<PAGE>
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the year ended December 31, 1995
to officers of the Company amounted to $1,262,415. Fees, excluding expenses, of
$162,750 were incurred during 1995 for directors who were not officers of the
Company.
NOTE 4. FEDERAL INCOME TAX STATUS OF DISTRIBUTIONS
In December of each year, the Company distributes to its shareholders all or a
portion of its net long-term capital gain realized during the year. The capital
gain distribution is paid in additional shares of the Company's stock, or in
cash if so elected by individual shareholders.
In 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 qualifies for the corporate dividends received
deduction, and 1.4% represents income earned on U.S. government obligations.
NOTE 5. INVESTMENT TRANSACTIONS
The cost of securities purchased and proceeds from securities sold during 1995,
excluding money market investments, aggregated $185,107,763 and $194,374,056,
respectively.
The Company paid brokerage commissions totalling $25,300 and $79,457 for
the years ended December 31, 1995 and 1994, 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 maintain a substantially fully invested position in the stock
market, the Company may purchase Standard & Poor's 500 Stock Index (S&P 500)
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 no S&P 500 futures contracts open as of December 31, 1995.
NOTE 7. RETIREMENT PLANS AND POST-RETIREMENT HEALTH CARE BENEFITS
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 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.
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. PENDING ACQUISITION
In November 1995, the Company's board approved an agreement to acquire 100% of
the outstanding common stock of John A. Levin & Co., Inc. (Levco), a privately-
held New York-based investment advisory firm, in exchange for approximately $36
million in cash and five million newly-issued Baker Fentress shares (subject to
adjustments).
Levco will operate as a wholly-owned subsidiary of the Company and be
reflected by the Company as an investment. This new subsidiary will manage all
existing and new advisory accounts of Levco and (if approved by the Company's
shareholders) the publicly-traded sector of the Company's portfolio. The
management of the private placement and Consolidated-Tomoka sectors will
continue as at present.
The acquisition is subject to Securities and Exchange Commission exemptive
relief from certain provisions of the Investment Company Act of 1940 and
shareholder approval. The transaction is expected to close in 1996.
25
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for each year in the five-year period
ended December 31, 1995.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year......................... $ 17.47 $ 20.42 $ 20.82 $ 21.49 $ 18.66
-------- -------- -------- -------- --------
Net investment income................................. .35 0.35 0.48 0.39 0.58
Net realized gain (loss) and net change in
unrealized appreciation and other changes.......... 5.67 (1.36) 2.51 0.90 4.14
-------- -------- -------- -------- --------
Total from investment operations........................... 6.02 (1.01) 2.99 1.29 4.72
Less distributions:
Dividends from net investment income.................. (0.35) (0.35) (0.48) (0.39) (0.58)
Distribution from net realized gain................... (1.20) (1.46) (1.76) (1.42) (1.15)
-------- -------- -------- -------- --------
Total distributions........................................ (1.55) (1.81) (2.24) (1.81) (1.73)
-------- -------- -------- -------- --------
Dilution resulting from:
Reinvestment of capital gain distribution............. (.19) (0.13) (0.16) (0.15) (0.16)
Rights offering (a)................................... - - (0.99) - -
-------- -------- -------- -------- --------
Net asset value, end of year............................... $ 21.75 $ 17.47 $ 20.42 $ 20.82 $ 21.49
======== ======== ======== ======== ========
Per share market price, end of year........................ $ 16.75 $ 13.75 $ 16.75 $ 17.00 $ 17.63
Total Investment Return-
Shareholder Return...................................... 33.20% (7.51)% 14.18%(b) 6.51% 34.03%
Ratios/Supplemental Data
Net assets, end of year (in 000's) $599,182 $461,931 $516,890 $419,814 $417,355
Ratio of expenses to average net assets............... .69% .75% .83% .76% .84%
Ratio of net investment income to average
net assets......................................... 1.57% 1.38% 1.59% 2.01% 2.53%
Portfolio turnover.................................... 35.89% 41.63% 31.63% 28.36% 50.70%
Number of shares outstanding, end
of year (in 000's)................................. 27,544 26,442 25,318 20,165 19,423
- --------------
</TABLE>
(a) Effect of the Company's rights offering of shares at a price below net
asset value.
(b) Assumes shareholder exercised all primary rights in rights offering.
26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
BAKER, FENTRESS & COMPANY:
We have audited the accompanying statement of assets and liabilities of
Baker, Fentress & Company, including the statement of investments, as of
December 31, 1995, and the related statements of operations for the year then
ended, and cash flows and changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Baker, Fentress & Company at December 31, 1995, the results of its operations
for the year then ended, its cash flows and the changes in its net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
February 2, 1996
27
<PAGE>
GENERAL AND HISTORICAL INFORMATION
DISTRIBUTION POLICY
Beginning in 1987, the board of directors adopted a policy of distributing to
shareholders during each calendar year an amount (in a combination of ordinary
income dividends and capital gain distributions) equal to at least 8% of the
month-end average net asset value for the 12 months ended October 31 of that
year.
Although this distribution policy is based on a percentage of net asset
value, Baker Fentress shares have traded at market prices less than net asset
values. The annual distribution as a percentage of market price will exceed 8%
so long as the market price is at a discount from net asset value.
Unless specifically amended by the board of directors, this policy will
apply to future years' total distributions. Decisions to realize capital gain
will be based primarily on investment considerations rather than distribution
requirements.
REINVESTMENT AND CASH PURCHASE PLAN
Baker Fentress has two reinvestment plans which provide shareholders convenient
and economical ways of increasing their holdings of the Company's shares.
Dividend reinvestment and cash purchase plan. The Company's dividend
reinvestment and cash purchase plan allows shareholders to elect to reinvest
cash dividends (consisting of distributions of net investment income and net
realized short-term capital gain, if any) on all or a portion of their Company
shares. Reinvested dividends are subject to income tax to the same extent as if
received in cash.
The plan includes a voluntary cash purchase feature that permits
shareholders to purchase additional shares on a monthly basis. Each voluntary
cash purchase must be at least $100 and not more than $10,000.
The Company delivers dividends payable to participating shareholders, in
cash, to Harris Trust and Savings Bank (the "Bank"), as agent for participants
in the plan. Harris Bank then uses that money to purchase shares for dividend
reinvestment and for voluntary cash purchases in market transactions. The number
of whole and fractional shares allocated to each participant's account is
determined by dividing the dividend payable to the participant by the average
purchase price per share, including brokerage commissions, paid by the Bank.
There are no service charges to shareholders to participate in the plan and
all costs of administration are paid by the Company. A shareholder pays only a
proportionate share of the brokerage commissions paid by the Bank.
All shareholders are eligible to participate in the plan, including those
whose shares are held through a broker or other nominee. However, some brokers
and nominees may not permit a shareholder to participate in the plan without
first transferring the shareholder's Company shares into the shareholder's name.
A shareholder may terminate participation in the plan by writing to the
Bank. On termination, a shareholder may receive a certificate for the whole
shares held in the shareholder's plan account, with a check for the value of
fractional shares. Alternatively, a shareholder may request that the Bank sell
the shares and send the shareholder a check for the proceeds, less any brokerage
commission.
A complete description of the plan and an authorization card to enroll may
be obtained from the Bank, at the address below:
Baker, Fentress & Company
Dividend Reinvestment Plan
c/o Harris Trust and Savings Bank
Dividend Reinvestment
P.O. Box A3309
Chicago, Illinois 60690
Capital gain reinvestment plan. The Company customarily distributes any net
realized long-term capital gain to shareholders at least annually, in the form
of additional Company shares (with cash paid for fractional shares). Those
shares are newly-issued or treasury shares, and are priced at the then current
market price without commissions.
At the time of each capital gain distribution, shareholders have the
opportunity to elect to receive the distribution entirely in cash, or partly in
cash and partly in shares. Such an election is made by returning to the Company
a card that is sent to all shareholders for that purpose. A shareholder need not
join this plan in advance, nor do anything until the shareholder receives a
notice from the Company of a declaration of a capital gain distribution.
There is no cost to the shareholder of reinvesting a capital gain
distribution in additional Company shares. A reinvested distribution is subject
to tax to the same extent as if received in cash.
28
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Business Affiliations
---------------------
Frederick S. Addy Retired; former executive vice president,
chief financial officer and director of Amoco
Corporation
Bob D. Allen President and chief executive officer of
Consolidated-Tomoka Land Co.
J. Barton Goodwin* Managing director of BCI Advisors, Inc.
James P. Gorter* Chairman of the board of Baker, Fentress &
Company; limited partner of Goldman,
Sachs & Co.
David D. Grumhaus President of Casey Travel Corporation
Richard M. Jones Retired; former chairman and chief executive
officer of Guaranty Federal Savings Bank;
former president of Sears, Roebuck and Co.
Burton G. Malkiel Professor of Economics, Princeton University
David D. Peterson* President and chief executive officer of
Baker, Fentress & Company; chairman of
Consolidated-Tomoka Land Co.
William H. Springer Retired; former vice chairman of
Ameritech Corp.
*Member of the Executive Committee
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
Corporate Trust Operations
111 West Monroe Street
Chicago, Illinois 60603
(312) 461-6834
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Independent Auditors
Ernst & Young LLP
Weekly Net Asset Value
Information
The Company's net asset value is listed each week in Monday's edition of The
Wall Street Journal, in Saturday's edition of The New York Times, in other major
metropolitan newspapers, and in Barron's.
Recorded weekly net asset value information can be obtained by calling
(312) 236-9191 and selecting option 2.
Address of Company
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
(312) 236-9190 or 1-800-BKF-1891
[RECYCLING LOGO]
As a company with historical ties to the lumber industry, Baker Fentress
recognizes the importance of preserving our precious natural resources. The
Company's 1995 Annual Report is printed on recycled paper. We encourage
recycling and use of recycled products.
<PAGE>
Baker, Fentress & Company
Established 1891
SUITE 3510, 200 WEST MADISON STREET
CHICAGO, ILLINOIS 60606
(312) 236-9190
