<PAGE>
Baker, Fentress & Company
[BAKER, FENTRESS LOGO]
ANNUAL REPORT 1996
<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 capital appreciation
and for income consistent with capital appreciation. The Company's portfolio of
publicly-traded securities is managed by John A. Levin & Co., Inc., a wholly-
owned subsidiary. The balance of the portfolio is internally managed by its
officers under the supervision of its board of directors. The business of the
Company was started in 1891.
The Company's portfolio includes:
. Publicly-traded companies with focus on long-term
appreciation and capital protection
. Illiquid private placements and controlled affiliates with
higher risk but greater potential for growth
. Long-term investments with significant unrealized
appreciation
The Company has a policy of distributing to shareholders
annually amounts equal to at least 8% of the Company's
average net assets.
1996 Performance and Distributions
===================================================
<TABLE>
<CAPTION>
Total Return
------------
<S> <C>
Portfolio Performance.............. 20.1%
Shareholder Return................. 15.5
S&P 500 Index...................... 23.0
===================================================
<CAPTION>
Ordinary Long-Term
Income Capital Gain
-------- ------------
<S> <C> <C>
June 6................... $0.20 $ --
December 5............... 0.58 1.78
------ -----
$0.78 $1.78
====== =====
Total Distributions $2.56
=====
</TABLE>
Portfolio Sectors*
==================
[PIE CHART APPEARS HERE]
* Based on percentage of total portfolio market value. Information as of
December 31, 1996 and includes both publicly-traded and illiquid holdings.
<PAGE>
TO OUR SHAREHOLDERS:
The past year has been event-filled and marks a major change in
the strategic direction of your Company. This year's annual report
summarizes what happened at Baker Fentress ("BKF") during 1996
and outlines our plans for the future.
Levco Acquisition
In 1996, BKF transformed from an internally-managed closed-end fund into
a partially externally-managed investment management organization when
we acquired John A. Levin & Co., Inc. ("Levco"), an investment advisory
firm located in New York. Our public portfolio is now managed by
Levco, which had about $6.5 billion of assets under management at the end of
1996.
Levco is managing BKF's public portfolio with a "value" investment
strategy, concentrating on large capitalization issues. This contrasts with
BKF's recent focus on mid-cap "growth" stocks. After assuming management of
these assets at midyear, Levco initiated a restructuring of the portfolio to
bring it in line with its approach.
Record Distributions
During 1996, shareholders received the highest distributions in the Company's
history, totaling $82 million, or $2.56 per share, which represented about 12%
of average net assets or 15% of average market value for the year. This was
primarily the result of your Company realizing net capital gains, both short-
and long-term, totaling $70.3 million for the 12 months ended October 31, 1996,
which is the measurement period for determining the amount of capital gain
distributed to shareholders.
In addition, we earned net investment income of $10.7 million for the 12
months ended December 31, 1996, which included over $3 million of interest
income from Levco for the last half of the year.
We anticipate larger-than-normal distributions to shareholders again in
1997. During the last two months of 1996, we realized an additional $31.4
million in net capital gains. These gains will be added to the gains realized
during the first 10 months of 1997 to determine the amount of our 1997 capital
gain distribution.
We also anticipate record 1997 ordinary income dividends to shareholders,
both from interest on our inter-company notes receivable from Levco as well as
from public and private portfolio dividend and interest income. Of course, the
amounts of the Company's 1997 dividends and capital gain distribution depend on
results of 1997 operations.
In 1996, BKF transformed from an internally-managed closed-end fund into a
partially externally-managed investment management organization...
1
<PAGE>
TO OUR SHAREHOLDERS (continued)
Performance Review
Portfolio performance for 1996 was 20.1% compared to a total return on the S&P
500 Index of 23.0%. Performance varied from sector to sector as shown below:
Sector Total Return
----------------------------------
Public Portfolio 21.5%
Levco 11.0 (1)
Private Portfolio 17.6
Consolidated Tomoka 1.7
(1) This is based on the difference between the current carrying value and
the original cost of our investment in Levco, plus $3.2 million of
interest income received from Levco for the six months ended December 31,
1996.
Private Placements
Our private placement staff expanded when Todd Steele joined BKF in November.
Todd came to us with eight years of related experience. The capital committed to
our private portfolio has declined following a series of liquidity events within
this sector in recent years. We plan to make selected new investments as
attractive opportunities are identified.
Levco Operations
Operating results at Levco have moved ahead since we acquired it in June 1996.
At December 31, 1996, assets under management were $6.5 billion, compared to
$5.8 billion a year earlier. For the 12 months ended December 31, 1996,
operating revenue increased to $35.2 million, 15% ahead of 1995 revenues.
Similarly, operating income increased 13% to $16.2 million from that recorded in
1995, after adjustments to make 1995 results comparable.
Levco's assets under management have increased from $20 million in 1982 to
$6.5 billion today. To date, Levco's most widely selected product has been one
focused on a large capitalization value strategy. New account growth has come
primarily as a result of superior performance, consultant recommendations, and
client referrals. Levco's general strategy is to take advantage of the
reputation of its products while developing complementary investment offerings.
Consolidated-Tomoka Land Co.
Consolidated-Tomoka ("CTO") enjoyed another good year of operating results for
1996. Total revenues were up 18% and earnings per share were up 48% from the
prior year. Significant progress was made in citrus and land development
operations.
2
<PAGE>
Final Comments
We are encouraged by the progress that has been made in restructuring our public
portfolio. We believe these changes will lessen the future volatility of this
sector of our portfolio and will enhance its long-term, risk-adjusted returns.
We are pleased with the other less liquid sectors of our portfolio - Levco,
private placements, and CTO. These types of investments have higher risks, but
over time the potential for higher returns than publicly-traded market indices.
We thank our shareholders for their continued investment in and support of
BKF. We also thank employees at both Baker Fentress and Levco for their efforts
on behalf of your Company's long-term success.
We plan to hold our annual shareholders' meeting on Thursday, April 17,
1997, at 10:00 a.m. in Daytona Beach, Florida to give shareholders a better
understanding of our second largest holding, Consolidated-Tomoka. We encourage
you to attend this meeting and plan to bring you up to date on not only the
progress of CTO, but also our entire Company.
/s/ James P. Gorter /s/ John A. Levin
- ---------------------- -----------------------
James P. Gorter John A. Levin
Chairman of the Board President and
Chief Executive Officer
We are encouraged by the progress that has been made in restructuring our public
portfolio. We believe these changes will lessen the future volatility of this
sector of our portfolio and will enhance its long-term risk-adjusted returns.
3
<PAGE>
REVIEW OF OPERATIONS
Performance for 1996
In 1996, portfolio performance as measured by net asset total return was 20.1%.
Over the same period, shareholder total return was 15.5%. These results differ
for the reasons discussed below.
Net asset value total return is a measure of portfolio performance that
conforms to the industry standard methodology prescribed by the Association for
Investment Management and Research (AIMR). It provides a total return that can
be directly compared to the return on the S&P 500.
Shareholder total return is the actual return a shareholder would have
experienced if all distributions had been reinvested during the year. It is
calculated on a per share basis, and therefore reflects dilution of
approximately 3.6% from the midyear Levco acquisition. In addition, expenses are
deducted to arrive at shareholder return, while they are not considered in net
asset return.
For equity investors, 1996 was another very strong year. Most pronounced
gains were achieved in the market capitalization-weighted S&P 500, which
significantly outperformed mid-cap and small-cap indices.
TOTAL RETURN ON 100 SHARE INVESTMENT IN BKF-1996
[GRAPH APPEARS HERE]
The chart on the left shows that a BKF shareholder who bought 100 shares at the
beginning of 1996 at a cost of $1,675, and reinvested all dividends and
distributions, would have had 114.75 shares with a market value of $1,935 at the
end of 1996.
We believe our performance compares favorably to the following indices and
domestic equity fund average total returns:
<TABLE>
<CAPTION>
Total
BKF Total Returns Return
- ---------------------------------------
<S> <C>
Portfolio Performance:
Total Fund 20.1%
Public Portfolio 21.5
Shareholder Total Return 15.5(1)
Market Indexes (2)
- ---------------------------------------
S&P 500 23.0%
S&P 500 MidCap 400 18.0
Russell 2000 12.7
Fund Categories (3)
- ---------------------------------------
Domestic Equity:
Closed-End Funds 18.0%
Mutual Funds:
Large Cap Value 19.8
Medium Cap Growth 15.9
</TABLE>
(1) Reflects 3.6% per share dilution from acquisition of Levco and is after
deduction of expenses.
(2) The S&P 500, S&P Midcap and the Russell 2000 are annualized, broad market-
weighted indexes widely considered representative of large-cap, mid-cap and
small-cap stocks, respectively. All total returns include reinvested
dividends.
(3) Courtesy of Morningstar, Inc.
4
<PAGE>
Review of Public Portfolio
. Levco began managing this sector on July 1, 1996.
. The investment approach is evolving toward large-cap value from mid-cap
growth.
. Portfolio now consists of 65 positions with average market capitalization of
about $14.6 billion.
. Total return was 21.5% for 1996.
During the first half of 1996, our mid-cap growth and technology-oriented stocks
performed very well. While these stocks were appreciating and approaching what
we believed were full valuations, we sold some positions and realized record
capital gains. During the first six months of 1996 we realized $51.4 million, or
$1.58 per share. This was in addition to $17.9 million, or $0.55 per share,
undistributed realized gain from the last two months of 1995 that were to be
distributed in 1996. In total, realized gain stood at $2.13 per share as of June
30, 1996.
The second half of 1996 started out very differently, with technology
stocks undergoing a sharp two-month correction. The restructuring process to
move the public portfolio away from mid-cap growth to large-cap value began at
midyear. However, this process was slowed by our desire to limit the recognition
of additional capital gain, since this would have increased the capital gain
distribution to shareholders and the income tax shareholders would be required
to pay on the distribution.
As a result, Levco's restructuring moves were concentrated in positions
that did not contain significant unrealized appreciation. In addition, Levco
used options and short sales to limit volatility with respect to unrealized
appreciation and to defer realized gain to 1997.
Even though our investment objective remains the same -- long-term capital
appreciation -- the investment approach in our public portfolio is considerably
changed. The public portfolio used to be characterized by concentrated mid-cap
growth positions. Levco is oriented toward a broader based large-cap value
approach, with a constant focus on risk-adjusted returns and a goal of capital
preservation.
The charts on this page portray changes in BKF's public portfolio under
Levco's management by comparing selected characteristics of the portfolio at the
end of 1995 and 1996. As shown, the number of positions in the portfolio and the
average market capitalization of the underlying issues increased substantially
in 1996, with a much higher concentration in large-cap stocks. In addition, the
portfolio's average price/earnings ratio and volatility (as measured by its
average beta) both declined, while its yield increased.
NUMBER OF POSITIONS
[GRAPH APPEARS HERE]
1995 46
1996 65
AVERAGE MARKET CAPITALIZATION
[GRAPH APPEARS HERE]
1995 4.5
1996 14.6
PERCENT OF TOTAL NAV BY MARKET CAP
[GRAPH APPEARS HERE]
Large-Cap Medium-Cap Small-Cap
1995 23.3% 64.0% 12.7%
1996 61.9% 35.9% 2.2%
Above and to the left are comparisons of public portfolio characteristics as of
December 31, 1996 (teal) and a year earlier (purple). This shows how our public
portfolio has changed now that Levco is managing this portfolio sector. Large-,
medium-, and small-cap are defined on page 11.
AVERAGE P/E RATIO
[GRAPH APPEARS HERE]
1995 26.4
1996 18.4
BETA*
[GRAPH APPEARS HERE]
1995 1.15
1996 1.02
YIELD
[GRAPH APPEARS HERE]
1995 0.85%
1996 1.70%
*Beta is a measure of risk. It shows volatility relative to the S&P 500.
5
<PAGE>
REVIEW OF OPERATIONS (continued)
Review of Levco
. Year-end assets under management were $6.5 billion.
. Composite total return for 1996 was 21.1%.
. Levco management of BKF public portfolio commenced on July 1, 1996.
Levco had $6.5 billion of assets under management at the end of 1996 segregated
into the following categories:
. Institutional -- 75%
. Baker Fentress -- 7%
. Non-institutional -- 18%
The accompanying table shows Levco comparative operating results for the
last two years.
Levco's investment philosophy and process stems from the following three
fundamental investment objectives:
. Preservation of capital and the avoidance of major losses.
. Consistent capital augmentation.
. Achievement of above-average risk-adjusted returns.
The approach employed by Levco's investment professionals is as follows:
1. They attempt to identify unrecognized "investment value" opportunities
through fundamental research with the prospective portfolio company's
management, competitors, suppliers, customers, and regulators.
2. They also monitor the changing fundamentals and perceptions of each security
to remain fully informed of any material developments. Levco seeks to construct
portfolios which achieve above-average returns with reduced volatility and risk
through diversification, paired holdings and other risk management strategies.
The Levco organization emphasizes large-capitalization, liquid equities within
four main categories:
Proprietary products or services:
Companies which dominate their market niche due to one of several factors,
including low cost production/supply, technological superiority, dominant
distribution, consumer franchise, etc., that would lead to greater realization
of intrinsic value.
Asset value of cash flow:
Companies which sell at a discount to their asset value or cash flow, especially
where a catalyst can be identified which would narrow or eliminate the valuation
disparity.
New products or developments:
Companies with new, innovative products which can accelerate the growth of
revenues and earnings, or companies undergoing significant internal change which
offers important potential for increased valuation.
Special situation yield:
Convertible securities which offer attractive total return, downside protection,
and the ability to participate in the appreciation of the underlying equity.
While leading indices have advanced unbroken over the past two years,
individual companies and sectors have experienced significant market corrections
reflecting specific business disappointments. Levco views these as investment
opportunities and continues to explore them in this competitive business
environment.
<TABLE>
<CAPTION>
Comparative Operating Results
(unaudited) Years ended December 31
1995 1996
---- ----
<S> <C> <C>
Assets under mgmt. $5,812(a) $6,489
Operating revenue 30.5(a) 35.2
Operating income 14.3(a) 16.5
Client Composition:
Institutional assets 83% 82%
Individual assets 17% 18%
</TABLE>
(a) Adjusted to include BKF assets and management fee income as if the
acquisition of Levco had taken place on January 1, 1995.
6
<PAGE>
Review of Private Placements
. Realized a $13.0 million gain on Citadel in June.
. Two debt issues redeemed at premiums in August and October.
. Carrying value of TBN Holdings reduced in November.
. Todd Steele joined private portfolio staff in November.
. Total return for 1996 was 17.6%.
Our private placement portfolio produced a 17.6% return for the year ended
December 31, 1996. The accompanying chart shows the total returns on this
portfolio sector over the last three years.
Comments on Individual Positions
Below is a synopsis of each investment in our private portfolio, including:
. Business description
. Update on business activity
. Type of securities held by BKF
. Valuation information
Citadel Communications Corporation
Citadel is a radio broadcasting company with several dominant franchises in
small- to medium-growth markets. BKF holds Citadel preferred stock convertible
into 11.2% of the company's fully diluted common equity. In 1996, Citadel
completed a comprehensive recapitalization in which BKF realized a $13.0 million
gain on part of its equity investment and had its Citadel debentures redeemed at
a premium. The remaining Citadel investment is valued at the price received for
shares redeemed in the recapitalization, less a 25% liquidity discount.
Durolite International, Inc.
Durolite is a holding company formed in 1995 to acquire Duro-Test Corporation
and Litetronics International, Inc. Both companies produce specialized lamps and
lighting components for world-wide commercial and industrial markets. BKF's
Durolite investment consists of $8.0 million of 12% subordinated notes and
preferred stock convertible into 31% of the company's fully diluted equity.
During 1996, Durolite restructured operations and strengthened management in
both of its subsidiaries, positioning for improved growth and profitability. BKF
currently values these securities at their original cost.
Echlin Inc.
BKF's Echlin shares (NYSE symbol "ECH") were obtained in 1995 when American
Electronic Components, Inc. (AEC), a manufacturer of automotive switches and
sensors, was acquired by Echlin. BKF originally invested in AEC in 1989. ECH
manufactures automotive and truck parts for both aftermarket and original
equipment customers. ECH shares fell more than 12% in 1996 after several
quarters of poor earnings caused by soft market conditions. In response, the
company trimmed costs and reduced inventories during the year. The tax-free
combination of AEC and ECH restricts BKF's sales of ECH shares for two years and
a 10% liquidity discount is currently applied to the shares.
continued
PRIVATE PORTFOLIO TOTAL RETURN
For Three Years Ended December 31
[GRAPH APPEARS HERE]
1994 19.3%
1995 23.9%
1996 17.6%
7
<PAGE>
REVIEW OF OPERATIONS (continued)
Review of Private Placements (continued)
Home State Holdings
Home State Holdings writes personal and commercial auto insurance in several
eastern and southern states. Its NASDAQ-listed shares trade under the symbol
"HOMS". BKF's HOMS investment consists of $10.05 million of 11.5% subordinated
notes and warrants to purchase common shares. During 1996, HOMS made a major
reserve addition and focused its strategy to concentrate on its personal lines
of business. The company also completed a $10 million equity financing with
Swiss Reinsurance America and Reliance Group to support projected 1997 volume
growth. BKF carries its HOMS investment at a total value of $10.1 million
consisting of the debentures' cost net of the unamortized original issue
discount (currently $9.6 million) plus the cost of the warrants ($0.5 million).
Paracelsus Healthcare Corporation
Paracelsus is a hospital management company whose NYSE-listed shares trade under
the symbol "PLS". BKF acquired its PLS shares in the August 1996 merger of PLS
and Champion Healthcare Corporation, a company in which BKF made a series of
investments between 1993 and 1996. PLS shares declined sharply in October after
the company announced third quarter results would be negatively impacted by
problems at several hospitals operated by PLS prior to the merger. Divestiture
of these properties is being pursued while management moves to restore earnings
growth anticipated at the time of the merger. BKF values its PLS shares at their
market price less a 20% liquidity discount.
Security Capital U.S. Realty
Security Capital is a European-based investment company affiliated with the
Security Capital Group; its shares trade on the Amsterdam Stock Exchange. The
company makes concentrated, strategic investments in selected U.S. real estate
operating companies. BKF owns approximately 1% of the company's outstanding
shares. In 1996, the company increased per share net asset value by over 20% and
completed two successful equity offerings. Its shares closed 1996 at $12.80 (US)
compared to BKF's per share cost of $10.16. BKF values its Security Capital
shares at cost, reflecting an approximate 20% discount for illiquidity.
TBN Holdings, Inc.
TBN is a recycling company focused on the fuel blending and solvent recovery
segments of the hazardous waste industry. BKF's TBN investment includes an $8.0
million 12% subordinated note and convertible preferred stock and common stock
warrants representing 26% of TBN's outstanding shares. The company processed
increased volumes and reduced its disposal costs in 1996, but highly competitive
pricing conditions caused severe margin erosion given the company's heavily
fixed costs. Management is pursuing an acquisition of a company with a network
of complementary facilities. TBN is deferring payment of interest on the
subordinated note. BKF is valuing its entire TBN investment at $4.0 million.
8
<PAGE>
Review of Consolidated-Tomoka
. CTO earnings per share increased 47% from 1995 to 1996.
. Dividend increased 22% to $0.55 per share in 1996.
. Average sale price per acre of CTO's Volusia County land increased from
$34,876 in 1995 to $38,950 in 1996.
. Total boxes of citrus shipped in 1995/96 crop year was a record 1.38 million,
up from .93 million a year ago.
The operations of Consolidated-Tomoka Land Co. ("CTO") are based upon the
utilization and conversion of 35,000 acres of low-cost basis land in central
Florida and full or fractional subsurface mineral rights covering over 500,000
Florida acres. Earnings sources are primarily citrus production and land
development and sales.
For the year ended December 31, 1996, CTO reported fully diluted earnings
per share of $1.05, compared to $0.71 for 1995. Total revenues were $28.0
million for 1996, up 18% from the previous year. CTO sold approximately 108
acres of land to various developers in Volusia County (Daytona Beach, Florida),
recognizing pretax profits of $31,406 per acre. In addition, the company sold
about 480 acres of land in Highlands County (near Lake Placid), which included
lake frontage property, for approximately $5.6 million. CTO citrus operations
produced an all-time record harvest of 1.38 million boxes, which generated $3.65
million in pretax profits.
The accompanying charts portray the historical activity and profitability
within the two major divisions of CTO.
CITRUS DIVISION RESULTS
[GRAPH APPEARS HERE]
The underlying operations of CTO improved during 1996, especially for the
citrus division. As shown on the following chart, the per share market price of
the stock was essentially unchanged for the year.
CONSOLIDATED-TOMOKA TRADING HISTORY-1996
[GRAPH APPEARS HERE]
Per share dividends paid by CTO in 1996 were $0.55. This was up 22% from
the previous year. The dividend increase is a continuation of an established
trend, as shown below:
CTO ANNUAL DIVIDENDS
[GRAPH APPEARS HERE]
LAND SALES--ACRES SOLD*
[GRAPH APPEARS HERE]
LAND SALES--AVERAGE SELLING PRICE PER ACRE*
[GRAPH APPEARS HERE]
* Land sales in Volusia County. Does not include Highlands County land sales.
9
<PAGE>
COMPARATIVE STATISTICS
What makes Baker Fentress different from other domestic equity closed-end funds?
To answer this question, we compared selected portfolio characteristics of our
Company and our public portfolio with the average for the 39 domestic equity
closed-end funds (CEF) included in this category by Morningstar, Inc. The
comparative information in the accompanying charts is as of December 31, 1996.
Each of the 39 funds included in the closed-end fund universe has different
characteristics, including size, investment objectives and strategy, and method
of operation. These characteristics may affect the comparability of the
information presented.
BKF TOTAL -- COMPARED TO CEF AVERAGE
[GRAPHS APPEAR HERE]
TOTAL RETURN
(NET ASSET VALUE)
BKF 20.1%
CEF 18.0%
EXPENSE RATIO
BKF 0.90%
CEF 1.40%
TURNOVER RATIO
BKF 60%
CEF 55%
BKF PUBLIC PORTFOLIO -- COMPARED TO CEF AVERAGE
[GRAPHS APPEAR HERE]
AVERAGE MARKET CAPITALIZATION
(Billions)
BKF 14.6
CEF 7.2
AVERAGE P/E RATIO
BKF 18.4
CEF 23.6
BETA
BKF 1.02
CEF 0.79
YIELD
BKF 1.70%
CEF 0.80%
10
<PAGE>
PORTFOLIO CHANGES EXCEEDING $2.5 MILLION
Quarter Ended December 31, 1996
<TABLE>
<CAPTION>
Purchases Cost
- --------- -----------
<S> <C>
E. I. du Pont de Nemours and Company................ $ 7,616,668
Xerox Corporation................................... 5,469,114
The Black & Decker Corporation...................... 4,695,674
Crown Cork & Seal Company, Inc. .................... 3,699,600
Woolworth Corporation............................... 3,524,053
Electronic Data Systems Corporation................. 3,222,507
Levin Management Co., Inc.,
9.75% Note due 06/30/1997......................... 3,000,000
Owens-Illinois, Inc. ............................... 2,695,481
Prentiss Properties Trust........................... 2,600,000
-----------
$36,523,097
===========
Sales Proceeds
- ----- -----------
Solectron Corporation............................... $15,113,651
Cisco Systems, Inc. ................................ 11,795,063
Cascade Communications Corp. ....................... 8,555,310
Chesapeake Energy Corp. ............................ 7,727,997
Citadel Broadcasting Corporation
12% Class A Subordinated Note due 06/30/2000.. 7,420,000
Tellabs, Inc. ...................................... 7,300,128
USX-Marathon Group.................................. 4,231,677
Fresenius Medical Care AG (ADR)..................... 3,233,815
Heartland Express, Inc. ............................ 3,144,691
Foster Wheeler Corporation.......................... 3,029,649
Wausau Paper Mills Company.......................... 2,935,726
Prentiss Properties Trust........................... 2,673,361
Jacobs Engineering Group Inc. ...................... 2,557,714
-----------
$79,718,780
===========
</TABLE>
TOP TEN HOLDINGS
Another way of providing you a quick idea of our investment style is to review
the top ten holdings in our portfolio as of December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Levin Management, Investment advisor................. 18.1%
Consolidated-Tomoka, Florida real estate and citrus.. 11.3
Barnett Banks, Regional bank (FL & GA)............... 2.2
MCI Communications, Telecommunications............... 2.2
T. Rowe Price, Mutual fund advisor................... 2.2
Echlin, Automotive parts............................. 2.1
PanEnergy, Natural gas transmission.................. 2.1
Harnischfeger, Paper machinery and mining equipment.. 2.1
United HealthCare, HMO............................... 1.8
Newell, Household consumer products.................. 1.7
----
Total................................................ 45.8%
</TABLE>
SEGREGATION OF PORTFOLIO BY MARKET CAPITALIZATION
Below is a listing of the top ten holdings within the large, medium and small
capitalization categories. We anticipate the large-cap weighting to increase as
Levco completes the restructuring of our public portfolio.
LARGE-CAP POSITIONS (37)
<TABLE>
<CAPTION>
Over $5 Billion Percent of NAV
- --------------- --------------
<S> <C>
Barnett Banks............... 2.2%
MCI Communications.......... 2.2
PanEnergy................... 2.1
United HealthCare........... 1.8
Newell...................... 1.7
Boeing...................... 1.7
Aetna....................... 1.5
Aon......................... 1.4
General Re.................. 1.3
IBM......................... 1.3
Other Large-Cap............. 22.5
----
Total.................. 39.7%
MEDIUM-CAP POSITIONS (27)
Over $1 Billion to
Under $5 Billion Percent of NAV
- ---------------- --------------
T. Rowe Price............... 2.2%
Echlin (a).................. 2.1
Harnischfeger............... 2.1
York International.......... 1.4
Security Capital (a)........ 1.3
TIG Holdings................ 1.3
Union Texas Petroleum....... 1.3
Tupperware.................. 1.0
Tribune..................... 1.0
Chesapeake Energy........... 1.0
Other Medium-Cap............ 10.0
----
Total.................. 24.7%
SMALL-CAP POSITIONS (12)
Under $1 Billion Percent of NAV
- ---------------- -------------- <C>
Levin Management (c)................................. 18.1%
Consolidated-Tomoka (b).............................. 11.3
Durolite International (b)........................... 1.4
Homestate Holdings (a)............................... 1.4
Citadel Communications (a)........................... 1.2
Manitowoc............................................ 0.8
TBN Holdings (a)..................................... 0.5
Wausau Paper......................................... 0.4
Golder, Thoma, Cressey (a)........................... 0.2
Paracelsus Healthcare (a)............................ 0.2
Other Small-Cap...................................... 0.1
----
Total........................................... 35.6%
</TABLE>
(a) Private placement portfolio positions
(b) Controlled affiliates
(c) Wholly-owned subsidiary
11
<PAGE>
<TABLE>
<CAPTION>
[LETTERHEAD OF BAKER, FENTRESS & COMPANY] ILLUSTRATION OF $10,000 INVESTMENT
Total Return on $10,000 Investment For 20 Years Ended December 31, 1996
This chart and accompanying table illustrate the annual and cumulative 20-year
record of a $10,000 investment made at the beginning of 1977. The results of two
measures of past performance are as follows:
Average Annual
Ending Value Compound Total Return
------------ ---------------------
<S> <C> <C>
Shareholder Return $234,878 16.5%
Portfolio Performance 142,439 14.2
</TABLE>
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
underlying shares held as of December 31, 1996, related to the $234,878 ending
market value, was $303,010.
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 reflects 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, 1996
RETURN Baker, Fentress & Company
ON $ 10,000 -------------------------
INVESTMENT 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>
1977 $ 10,593 5.9% $ 9,937 -0.6% $ 9,284 -7.2%
1978 12,038 13.7 11,700 17.8 9,894 6.6
1979 17,430 44.8 16,289 39.2 11,736 18.6
1980 23,182 33.0 20,046 23.1 15,550 32.5
1981 24,237 4.6 19,973 -0.4 14,785 -4.9
1982 32,593 34.5 25,141 25.9 17,970 21.6
1983 43,514 33.5 30,205 20.1 22,024 22.6
1984 47,215 8.5 31,422 4.0 23,405 6.3
1985 65,804 39.4 42,526 35.3 30,831 31.7
1986 73,890 12.3 47,915 12.7 36,585 18.7
1987 69,591 -5.8 50,685 5.8 38,506 5.3
1988 89,741 29.0 58,186 14.8 44,902 16.6
1989 113,047 26.0 69,761 19.9 59,129 31.7
1990 86,114 -23.8 57,845 -17.1 57,294 -3.1
1991 115,422 34.0 73,281 26.7 74,749 30.5
1992 122,396 6.5 78,394 7.0 80,448 7.6
1993 165,102(1) 14.2 90,990 16.1 88,551 10.1
1994 152,695 -7.5 87,034 -4.4 89,721 1.3
1995 203,397 33.2 118,570 36.2 123,436 37.6
1996 234,878 15.5 142,439 20.1 151,777 23.0
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Includes $24,728 additional investment to purchase all primary shares in the Company's rights offering.
</TABLE>
12
<PAGE>
20-YEAR PERFORMANCE SUMMARY
[GRAPH APPEARS HERE]
PAST PERFORMANCE
<TABLE>
<CAPTION>
Average Annual Compound Total Return
Years Ended Shareholder Portfolio S&P 500
December 31, 1996 Return Performance Stock Index
<S> <C> <C> <C>
1 year............................. 15.5% 20.1% 23.0%
3 years............................ 12.5 16.1 19.7
5 years............................ 12.7 14.2 15.2
10 years............................ 11.0 11.5 15.3
20 years............................ 16.5 14.2 14.6
</TABLE>
13
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31, 1996
-----------------
Assets
Investments, at Value:
<S> <C>
Portfolio securities:
Unaffiliated issuers (cost $320,260,646).................... $476,802,924
Non-controlled affiliates (cost $13,110,996)................ 12,770,339
Controlled affiliates (cost $139,176,517)................... 228,405,368
Money market securities (cost $19,935,070).................... 19,935,070
------------
Total Investments (cost $492,483,229)...................... 737,913,701
Cash.......................................................... 19,173,672
Receivable for Securities Sold................................ 397,563
Dividends and Interest Receivable............................. 1,849,443
Deposits for Securities Sold Short............................ 13,697,890
Other Assets.................................................. 641,214
------------
Total Assets............................................... 773,673,483
------------
Liabilities
Securities Sold Short, at Value (proceeds $14,030,143)........ 13,808,487
Bank Borrowing................................................ 18,000,000
Payable to Affiliate for Investment Management Fee............ 120,000
Accounts Payable and Accrued Liabilities...................... 598,813
------------
Total Liabilities.......................................... 32,527,300
------------
Net Assets..................................................... $741,146,183
============
Analysis of Net Assets
Common stock, $1 par value, authorized -- 60,000,000 shares;
issued and outstanding -- 34,042,181 shares................. $ 34,042,181
Capital surplus............................................... 382,021,865
Undistributed net realized gain from investment transactions.. 31,955,770
Other retained earnings (a)................................... 47,474,239
Unrealized appreciation of investments........................ 245,652,128
------------
Net Assets..................................................... $741,146,183
============
Net Asset Value Per Share...................................... $ 21.77
============
</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
14
<PAGE>
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Investment Income:
Dividends from:
Unaffiliated issuers.................................................... $ 4,548,003
Controlled affiliate.................................................... 2,750,000
------------
7,298,003
------------
Interest from:
Unaffiliated issuers.................................................... 3,834,762
Non-controlled affiliates............................................... 1,613,173
Controlled affiliates................................................... 4,200,539
------------
9,648,474
------------
Total Income........................................................... 16,946,477
------------
Expenses:
Investment research........................................................ 1,517,410
Administration and operations.............................................. 1,157,586
Interest on bank borrowing................................................. 905,776
Investment management fee.................................................. 714,778
Severance and other non-recurring acquisition-related costs................ 608,661
Rent....................................................................... 308,683
Directors fees and expenses................................................ 210,776
Professional fees.......................................................... 175,275
Reports to shareholders.................................................... 172,126
Taxes other than income.................................................... 109,680
Custodian and transfer agent fees.......................................... 95,602
Other...................................................................... 300,124
------------
Total Expenses......................................................... 6,276,477
------------
Net Investment Income................................................ 10,670,000
------------
Net Realized and Unrealized Gain:
Net realized gain on sales of investments in unaffiliated issuers,
including options purchased and closed short positions................... 78,849,825
Net realized gain on sales of investments in controlled affiliates........ 4,069,756
Net realized loss on covered call options written......................... (1,448,057)
Net realized gain on financial futures transactions....................... 1,834,825
------------
Net realized gain..................................................... 83,306,349
Net change in unrealized appreciation..................................... 21,024,655
------------
Net Realized and Unrealized Gain..................................... 104,331,004
------------
Net Increase in Net Assets Resulting from Operations........................ $115,001,004
============
</TABLE>
See accompanying Notes to Financial Statements
15
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations....................................... $115,001,004 $159,640,812
Adjustments to reconcile increase in
net assets resulting from operations to net cash
provided by (used in) operating activities:
Net realized and unrealized (gain) on investments........................................ (104,331,004) (150,222,299)
(Increase) decrease in receivable for securities sold.................................... 3,038,797 (1,633,235)
(Increase) in deposits for securities sold short......................................... (13,697,890) --
(Increase) decrease in dividends and interest receivable................................. (754,180) 471,112
(Increase) decrease in other assets...................................................... 330,931 (538,706)
(Decrease) in accounts payable and accrued liabilities................................... (7,972) (2,212)
Increase in payable for investment management fee........................................ 120,000 --
Increase (decrease) in payable for securities purchased.................................. (1,305,000) 1,305,000
Net amortization of premiums (discounts)................................................. (33,594) --
------------ ------------
Net cash provided by (used in) operating activities.................................... (1,638,908) 9,020,472
------------ ------------
Cash Flows from Investing Activities:
Purchases of portfolio securities and closing
of short positions........................................................................ (349,765,816) (185,107,763)
Proceeds from sales of portfolio securities
and securities sold short................................................................. 423,235,313 194,374,056
Proceeds from options written.............................................................. 4,950,712 --
Cost of options repurchased................................................................ (6,398,769) --
Net realized gain on financial futures transactions........................................ 1,834,825 1,962,075
(Purchases) and sales/maturities of money
market securities, net.................................................................... (18,197,871) 2,564,206
------------ ------------
Net cash provided by investing activities.............................................. 55,658,394 13,792,574
------------ ------------
Cash Flows from Financing Activities:
Bank borrowing............................................................................. 38,000,000 --
Repayment of bank borrowing................................................................ (20,000,000) --
Dividends and capital gain distributions................................................... (53,284,608) (22,389,049)
------------ ------------
Net cash used in financing activities.................................................. (35,284,608) (22,389,049)
------------ ------------
Net Increase in Cash......................................................................... 18,734,878 423,997
Cash at the Beginning of the Year............................................................ 438,794 14,797
------------ ------------
Cash at the End of the Year.................................................................. $ 19,173,672 $ 438,794
============ ============
Supplemental Disclosure of
Noncash Investing and Financing Activities:
Issuance of Company stock in exchange for stock of
John A. Levin & Co., Inc.................................................................. $ 80,247,302 $ --
============ ============
Capital gain distribution reinvestments.................................................... $ 28,694,067 $ 18,595,558
============ ============
</TABLE>
See accompanying Notes to Financial Statements
16
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
1996 1995
------------ ------------
Operations:
Net investment income................................................................ $ 10,670,000 $ 9,418,513
Net realized gain.................................................................... 83,306,349 43,150,814
Net change in unrealized appreciation................................................ 21,024,655 107,071,485
------------ ------------
Net increase in net assets resulting
from operations.................................................................... 115,001,004 159,640,812
------------ ------------
Distributions to Shareholders from:
Net investment income................................................................ (12,684,254) (9,058,533)
Net realized gain.................................................................... (69,294,421) (31,926,074)
------------ ------------
Total distributions to shareholders................................................. (81,978,675) (40,984,607)
------------ ------------
Net increase in net assets from
operations after distributions................................................... 33,022,329 118,656,205
------------ ------------
Capital Share Transactions--Net increase.............................................. 108,941,369 18,595,558
------------ ------------
Total Increase in Net Assets.......................................................... 141,963,698 137,251,763
Net Assets at the Beginning of the Year............................................... 599,182,485 461,930,722
------------ ------------
Net Assets at the End of the Year..................................................... $741,146,183 $599,182,485
============ ============
</TABLE>
See accompanying Notes to Financial Statements
17
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Shares Value
INVESTMENTS IN UNAFFILIATED ISSUERS--64.33% -------- -------
<S> <C> <C>
Public - 59.05%
Common Stock - 58.16%
Basic Materials - 6.17%
Air Products & Chemicals, Inc............... 123,500 $ 8,536,937
Allegheny Teledyne Incorporated (b)......... 281,000 6,463,000
E.I. du Pont de Nemours and Company......... 82,000 7,718,250
Great Lakes Chemical Corporation............ 150,000 7,012,500
IMC Global Inc.............................. 55,100 2,155,788
USG Corporation (b)......................... 150,000 5,081,250
W.R. Grace & Co............................. 110,000 5,692,500
Wausau Paper Mills Company.................. 167,840 3,105,040
-----------
45,765,265
-----------
Capital Goods - 10.98%
The Boeing Company.......................... 118,218 12,590,217
Corning Incorporated........................ 126,000 5,827,500
Crown Cork & Seal Company, Inc.............. 79,000 4,295,625
Electronic Data Systems Corporation......... 160,500 6,941,625
Foster Wheeler Corporation.................. 90,000 3,341,250
General Electric Company.................... 40,000 3,955,000
Harnischfeger Industries, Inc............... 326,420 15,708,962
Litton Industries, Inc. (b)................. 88,000 4,191,000
Lockheed Martin Corporation................. 36,000 3,294,000
The Manitowoc Company, Inc.................. 148,100 5,998,050
Molten Metal Technology, Inc. (b)........... 35,200 413,600
Owens-Illinois, Inc. (b).................... 163,100 3,710,525
Rockwell International Corporation.......... 17,100 1,040,962
York International Corporation.............. 180,000 10,057,500
-----------
81,365,816
-----------
Communication Services - 2.21%
MCI Communications Corporation.............. 500,000 16,343,750
-----------
Consumer Cyclical - 4.85%
The Black & Decker Corporation.............. 158,400 4,771,800
Eastman Kodak Company....................... 60,000 4,815,000
General Motors Corporation.................. 100,000 5,575,000
Owens Corning............................... 100,000 4,262,500
Tribune Company............................. 96,000 7,572,000
Woolworth Corporation....................... 124,100 2,730,200
Xerox Corporation........................... 118,700 6,246,588
-----------
35,973,088
-----------
Consumer Staples - 4.47%
Kellogg Company............................. 34,600 2,270,625
Newell Co................................... 400,000 12,600,000
Time Warner Inc............................. 130,000 4,875,000
Tupperware Corporation...................... 143,200 7,679,100
U. S. West Media Group (b).................. 310,000 5,696,250
-----------
33,120,975
-----------
Energy - 2.87%
Amoco Corporation........................... 26,700 2,152,688
Chesapeake Energy Corp. (b)................. 134,000 7,453,750
Union Pacific Resources Group Inc........... 78,765 2,284,185
Union Texas Petroleum Holdings, Inc......... 420,000 9,397,500
-----------
21,288,123
-----------
</TABLE>
See accompanying Notes to Statement of Investments
18
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
----------- -------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Financials - 11.99%
Aetna, Inc........................................ 115,000 $ 9,200,000
Aon Corporation................................... 170,000 10,561,250
Barnett Banks, Inc................................ 400,000 16,450,000
The Chase Manhattan Corporation................... 70,000 6,256,250
Citicorp.......................................... 47,500 4,892,500
General Re Corporation............................ 60,000 9,465,000
TIG Holdings, Inc................................. 295,000 9,993,125
T. Rowe Price Associates, Inc..................... 375,600 16,338,600
Unitrin, Inc...................................... 102,000 5,686,500
------------
88,843,225
------------
Health Care - 4.82%
Allegiance Corporation............................ 79,100 2,185,137
Baxter International Inc.......................... 170,000 6,970,000
Health Management Associates, Inc., Class A (b)... 262,500 5,906,250
Pharmacia & Upjohn, Inc........................... 180,900 7,168,163
United HealthCare Corporation..................... 300,000 13,500,000
------------
35,729,550
------------
Technology - 6.38%
Cascade Communications Corp. (b).................. 140,000 7,717,500
Cisco Systems, Inc. (b)........................... 109,500 6,966,938
General Motors Corporation, Class H............... 90,000 5,062,500
Glenayre Technologies, Inc. (b)................... 55,000 1,185,937
International Business Machines Corporation....... 62,500 9,468,750
Nextel Communications, Class A (b)................ 200,000 2,612,500
Tellabs, Inc. (b)................................. 218,000 8,202,250
Varian Associates, Inc............................ 120,000 6,105,000
------------
47,321,375
------------
Transportation - 0.75%
Union Pacific Corporation......................... 93,000 5,591,625
------------
Utilities - 2.13%
PanEnergy Corp.................................... 350,000 15,750,000
------------
Miscellaneous - 0.54%
Hanson PLC (ADR).................................. 591,400 3,991,950
------------
Total common stock (Cost $278,261,507)........... 431,084,742
------------
Preferred Stock - 0.27%
Aetna Inc., 6.25% Class C......................... 25,000 1,981,250
------------
Total preferred stock (Cost $1,625,490).......... 1,981,250
------------
Convertible Bonds - 0.53%
Alza Corporation, 5.00% due 05/01/2006............ $4,000,000 3,920,000
------------
Total convertible bonds (Cost $3,871,270)........ 3,920,000
------------
</TABLE>
See accompanying Notes to Statement of Investments
19
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Shares, Principal
Amount
or Contracts Value
------------------- -------
<S> <C> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Purchased Put Options - 0.09%
Expiration Date/
Strike Price
----------------
The Boeing Company............................ Jan 97/80.00 200 $ -
Cascade Communications Corp................... Jan 97/60.00 350 218,750
Chesapeake Energy Corp........................ Jan 97/50.00 250 34,375
Cisco Systems, Inc............................ Jan 97/45.00 550 3,437
Cisco Systems, Inc............................ Jan 97/50.00 150 1,875
Cisco Systems, Inc............................ Jan 97/55.00 800 15,000
Cisco Systems, Inc............................ Jan 97/65.00 600 168,750
MCI Communications Corporation................ Jan 97/20.00 500 3,125
MCI Communications Corporation................ Jan 97/22.50 400 -
Tellabs, Inc.................................. Jan 97/40.00 600 187,500
-------------
Total purchased put options
(Cost $1,526,280).......................... 632,812
-------------
Total public portfolio (Cost $285,284,547).. 437,618,804
-------------
Private Placement - 5.28%
Echlin Inc. -- manufacturer of automotive parts and components
Common stock (c)(e)................................................ 553,162 15,806,604
Home State Holdings, Inc. -- property and casualty insurers
11.50% Subordinated Note due 10/03/2004............................ $ 10,050,000 9,637,108
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 1,552,785
Security Capital U.S. Realty -- real estate investment trust
Common stock (b)(c)(d)............................................. 983,528 10,000,000
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d)........... $ 329,667 1,610,812
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d).... $ 60,726 103,870
-------------
Total private placement portfolio (Cost $34,976,099).............. 39,184,120
-------------
Total investments in unaffiliated issuers (Cost $320,260,646)....... 476,802,924
-------------
</TABLE>
See accompanying Notes to Statement of Investments
20
<PAGE>
STATEMENT OF INVESTMENTS
December 31, 1996
<TABLE>
<CAPTION>
Shares or
Principal Amount Value
INVESTMENTS IN NON-CONTROLLED AFFILIATES - 1.72% ---------------- -----------
<S> <C> <C>
Private Placement - 1.72%
Citadel Communications Corporation -- radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)....................................... 746,412 $ 8,770,339
TBN Holdings Inc. -- hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(g)....................................... $ 8,000,000 4,000,000
Series C-3 Convertible Preferred Stock (b)(c)(d)..................................... 1,511,628 -
Stock Purchase Warrants Expiring 12/31/2002 (c)(d)................................... 1,100,000 -
------------
Total investments in non-controlled affiliates (Cost $13,110,996)....................... 12,770,339
------------
INVESTMENTS IN CONTROLLED AFFILIATES - 30.82%
Publicly-Traded - 11.30%
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 $ 83,750,000
------------
Private Placement - 1.42%
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
------------
Total private placement portfolio (Cost $10,500,000)............................. 10,500,000
------------
Wholly-Owned Subsidiary - 18.10%
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 06/30/1997 (c)(d)(h).................................................. $ 3,000,000 3,000,000
------------
Total wholly-owned subsidiary (Cost $123,645,890)................................ 134,155,368
------------
Total investments in controlled affiliates (Cost $139,176,517).......................... 228,405,368
------------
MONEY MARKET SECURITIES - 2.69%
U.S. Treasury bills -- 5.05% to 5.14% due 01/23/1997.................................... $ 20,000,000 19,935,070
------------
Total investments in money market
securities (Cost $19,935,070)......................................................... 19,935,070
------------
Total Investments - 99.56% (Cost $492,483,229).......................................... 737,913,701
------------
SECURITIES SOLD SHORT - (1.86)%
Cascade Communications Corp............................................................. 75,000 (4,134,375)
Chesapeake Energy Corp.................................................................. 92,500 (5,145,312)
The Manitowoc Company, Inc.............................................................. 5,600 (226,800)
T. Rowe Price Associates, Inc........................................................... 47,000 (2,044,500)
Tellabs, Inc............................................................................ 60,000 (2,257,500)
------------
Total securities sold short (Proceeds $14,030,143)...................................... (13,808,487)
-----------
Cash and Other Assets Less Liabilities -- 2.30%......................................... 17,040,969
------------
NET ASSETS - 100.00%.................................................................... $741,146,183
============
</TABLE>
See accompanying Notes to Statement of Investments
21
<PAGE>
NOTES TO STATEMENT OF INVESTMENTS
(a) Based on the cost of investments of $441,578,546, for federal income tax
purposes at December 31, 1996, net unrealized appreciation was $296,335,155,
which consisted of gross unrealized appreciation of $312,247,923 and gross
unrealized depreciation of $15,912,768.
(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, 1996.
The aggregate value of restricted securities was $196,609,827 or 26.53% of
net assets, at December 31, 1996.
<TABLE>
<CAPTION>
No. of Shares or
Security Description Date(s) of Acquisition Principal Amount Cost
------------------------------------------------------------ ---------------------- ----------------- ----
<S> <C> <C> <C>
Citadel Communications Corporation
Series A Convertible Preferred Stock....................... May 1993 746,412 1,860,996
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
Echlin Inc., Common Stock................................... May 1989-March 1992 553,162 10,406,672
Golder, Thoma, Cressey Fund II Limited Partnership.......... June 1984-December 1988 $ 329,667 329,667
Home State Holdings, Inc.
11.5% Subordinated Note due 10/03/2004..................... October 1994 $10,050,000 9,637,108
Stock Purchase Warrants Expiring 10/03/2004................ October 1994 150,750 472,941
Levin Management Co., Inc.
Common Stock............................................... June 1996 1,000 55,645,890
9.75% Notes due 6/28/1999.................................. June 1996 $65,000,000 65,000,000
9.75% Note due 6/30/1997................................... December 1996 $ 3,000,000 3,000,000
Paracelsus Healthcare Corporation, Common Stock............. December 1993-May 1996 $ 535,443 4,068,985
Phillips-Smith Specialty Retail Group Limited Partnership... March 1987-September 1987 $ 60,726 60,726
Security Capital U.S. Realty, Common Stock.................. October 1995-April 1996 983,528 10,000,000
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, 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 in good faith by the board of directors of
Baker, Fentress & Company based upon all factors deemed relevant by the
board.
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.
22
<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
securities are valued at amortized cost, which approximates market value.
Options traded on an exchange are valued using the last sale price on the day of
valuation or, if the last sale price falls outside the range of the bid and
asked prices, at the bid or asked price in the case of long options and short
options, respectively. Restricted securities and other securities for which
prices are not readily available, or for which market quotations are considered
to not reflect fair value, are valued at a fair value as determined by the board
of directors. These estimated values may not reflect amounts that could be
realized upon immediate sale, nor amounts that ultimately may be realized.
Accordingly, the estimated fair values may differ from the values that would
have been used had a ready market existed for these securities, and such
differences could be significant.
The Company may be considered to be a "controlling person" of Consolidated-
Tomoka Land Co. (CTO) and Levin Management Co., Inc. within the meaning of the
Securities Act of 1933. A public distribution of shares of these companies would
require registration under the Securities Act. The shares of CTO are valued by
the board of directors at the closing price as reported by the American Stock
Exchange on the day of valuation. Levin Management Co., Inc. is not publicly-
traded and is valued at a fair value as determined by the board of directors.
Investment transactions
Investment transactions are accounted for on the trade date. Realized gains and
losses on investment transactions are determined on an identified
cost basis.
Investment income
The Company records dividends on the ex-dividend date. Interest income is
recorded on the accrual basis and includes amortization of premium and discount
on securities purchased. Such income is classified based on the affiliation
status of the issuer as of the date of the financial statements.
Cash
The Company maintains cash balances at its custodian bank in an interest-bearing
demand deposit account.
Federal income taxes, dividends, and distributions to shareholders
In order to qualify as a regulated investment company and avoid being subject to
federal income or excise taxes, the Company intends to distribute substantially
all of its taxable net investment income (including net realized short-term
capital gain, if any) within the time limits prescribed by the Internal Revenue
Code. Accordingly, no provision has been made for federal income or excise tax
on such income.
Dividends and distributions payable to shareholders are recorded by the
Company on the ex-dividend date.
NOTE 2. CAPITAL STOCK
Transactions in capital stock during 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Shares Amount
----------------- -----------------
1996 1995 1996 1995
----------------- -----------------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions.......... 1,639,661 1,101,959 $ 1,639,661 $ 1,101,959
Acquisition (Note 8).... 4,858,879 -- 4,858,879
Increase in
capital surplus........ 102,442,829 17,493,599
------------ -----------
Net increase........... $108,941,369 $18,595,558
------------ -----------
</TABLE>
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the year ended December 31, 1996
to officers of the Company amounted to $1,144,078. Fees, excluding expenses, of
$183,000 were incurred during 1996 for directors who were not officers of the
Company.
23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
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 1996, the Company made a long-term capital gain distribution of $1.78
per share. Approximately 30.0% of the $0.78 per share of ordinary income
dividends paid during 1996 qualified for the corporate dividends received
deduction, and 3.7% represented income earned on U.S. government obligations.
NOTE 5. INVESTMENT TRANSACTIONS
The cost of securities purchased and proceeds from securities sold during 1996,
excluding options written and money market securities, aggregated $423,789,116
and $406,395,778, respectively.
NOTE 6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET-RISK
Securities sold short
Securities sold short represent obligations by the Company to purchase
securities at a future date at then prevailing market prices. These transactions
usually result in off-balance-sheet risk, as the ultimate obligation may exceed
the amount shown in the financial statements. This off-balance-sheet risk is
offset if the Company owns the underlying securities.
The Company is required to maintain adequate collateral with its broker
based on a specified percentage of the value of all securities sold short. The
Company maintains a cash deposit of $13,697,890 and has segregated $13,808,487
of securities at December 31, 1996. The Company earns interest, based on agreed
upon rates, on cash amounts deposited with the broker.
Options:
The Company may enter into option transactions to limit volatility with respect
to unrealized appreciation and to defer realization of gain. Written options
represent the obligation to receive or deliver the underlying at a specified
price during a specific time period. Written options result in off-balance-sheet
risk, as the ultimate obligation may exceed the amount shown in the financial
statements. This risk is offset to the extent that the Company owns the
underlying securities (i.e., "covered call options"). A summary of activity
relating to written options for the year ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
Contracts Premiums
--------- -----------
<S> <C> <C>
Outstanding at beginning of year..... -- $ --
Options written...................... 10,425 4,950,712
Options repurchased.................. (10,425) (4,950,712)
------- -----------
Options outstanding at end of year... -- $ --
</TABLE>
NOTE 7. RETIREMENT PLANS AND POST-RETIREMENT HEALTH CARE BENEFITS
The Company maintains a non-contributory money purchase pension plan covering
all employees. Company contributions are based on compensation. Total plan
contributions for 1996 were $195,329.
In anticipation of the acquisition of Levin Management Co., Inc. (Note 8),
the Company's board of directors terminated the non-contributory defined benefit
pension plan covering all of its employees, as of December 31, 1995. As a
result, all participants became fully vested and distribution of their accrued
vested benefits under the Plan will take place in 1997.
The Company also provides certain health care benefits for retired
employees. All of the Company's employees become eligible for these benefits
upon retirement and the coverage is provided on a contributory basis. These
benefits are subject to deductible and co-payment provisions, medicare
supplements and other limitations. The net expense for post-retirement health
care benefits for 1996 was $75,270.
NOTE 8. ACQUISITION AND INVESTMENT IN JOHN A. LEVIN & CO., INC.
On June 27, 1996, the Company's shareholders approved the acquisition of John A.
Levin & Co., Inc. (Levco), a privately-held New York-based investment advisory
firm, in exchange for $38.2 million in cash and 4.86 million newly-issued Baker
Fentress shares. Shares issued in the acquisition carry certain restrictions on
their sale. The acquisition closed on June 28, 1996.
24
<PAGE>
Shares issued in the transaction were valued at a market price of $16.5156
per share, the average of the closing market prices of the Company's stock from
November 13, 1995 to November 21, 1995, the three days before and after the
merger announcement date. Appreciation in the value of Levco of $10,509,479 from
November 16, 1995 to June 28, 1996 is included in net unrealized appreciation in
the statement of operations. Since Levco is carried at fair value, there is no
material proforma effect of the transaction on the net increase in net assets
resulting from operations.
Levco was merged into a wholly-owned subsidiary of the Company, now named
Levin Management Co., Inc. As a result of reorganizations immediately before and
immediately after the acquisition, the investment advisory, broker-dealer and
limited partnership businesses previously operated by Levco are now operated as
separate subsidiaries of Levin Management Co., Inc. named John A. Levin & Co.,
Inc., Levco Securities, Inc. and Levco GP, Inc., respectively. Levin Management
Co., Inc. and its subsidiaries are collectively referred to as the "Levco
Companies."
The Levco Companies operate as wholly-owned direct or indirect subsidiaries
of the Company and are reflected in the Company's financial statements as an
investment in Levin Management Co., Inc.
NOTE 9. BANK BORROWING AND LINE OF CREDIT
On June 24, 1996, the Company entered into a $40 million revolving credit
agreement with The Northern Trust Company. The facility expires on June 24,
1999. Borrowings outstanding at December 31, 1996 are at the London Interbank
Offered Rate (LIBOR) plus 0.35%. The commitment fee associated with the unused
portion of revolving credit agreement is 0.08% per annum.
On June 27, 1996, the Company accessed $38.0 million of the revolving
credit agreement at an interest rate of 6.1312%. The amount outstanding at
December 31, 1996 was $18.0 million. The interest rate is reset periodically
under the revolving credit facility and the fair value of the debt at December
31, 1996 approximates its carrying value. The maximum borrowing and the average
daily borrowing balances during the period for which borrowings were outstanding
were $38.0 million and $27.6 million, respectively. The interest rate at
December 31, 1996 and the weighted average interest rate during 1996 was
6.1312%.
NOTE 10. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
Agreements:
The Company entered into an investment advisory contract (the "Management
Contract") with John A. Levin & Co., Inc., a wholly-owned subsidiary of Levin
Management Co., Inc., and an indirect wholly-owned subsidiary of the Company,
which provides for payment of a fee at an annual rate of 0.30%, based on the
month-end value of the assets of the Company under management. The Management
Contract covers the publicly-traded portion of the Company's investment
portfolio. The Company continues to manage its private placement and CTO
investments internally. For the year ended December 31, 1996 the Company
incurred management fees of $714,778.
<TABLE>
<CAPTION>
Transactions:
Purchases Realized Income
Sales Gain (Loss)
--------- ----------- --------
<S> <C> <C> <C>
Consolidated-Tomoka
Land Co................... $ - $ - $2,750,000
Citadel Communications
Corporation
Convertible preferred
stock................. (2,471,831) 13,000,755 -
Notes................... (7,000,000) 420,000 650,543
Durolite Intl.
Note..................... - - 960,000
Levin Management Co., Inc.
Common stock............. 66,155,368 - -
Notes due 6/30/1997
and 6/28/99............ 68,000,000 - 3,222,372
Note Due 3/15/1997....... - - 18,167
TBN Holdings
Note..................... - - 962,630
Alliance Northwest
Industries, Inc.......... - (9,350,999) -
------------ ----------- ----------
$124,683,537 $ 4,069,756 $8,536,712
------------ ----------- ----------
</TABLE>
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, 1996.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year...................... $ 21.75 $ 17.47 $ 20.42 $ 20.82 $ 21.49
-------- -------- -------- -------- --------
Net investment income................................. 0.37 0.35 0.35 0.48 0.39
Net realized gain (loss) and net change in
unrealized appreciation and other changes........... 3.31 5.67 (1.36) 2.51 0.90
-------- -------- -------- -------- --------
Total investment operations............................. 3.68 6.02 (1.01) 2.99 1.29
Less distributions:
Dividends from net investment income.................. (0.78) (0.35) (0.35) (0.48) (0.39)
Distribution from net realized gain................... (1.78) (1.20) (1.46) (1.76) (1.42)
-------- -------- -------- -------- --------
Total distributions..................................... (2.56) (1.55) (1.81) (2.24) (1.81)
-------- -------- -------- -------- --------
Dilution (a) resulting from:
Shares issued in acquisition of
Levin Management Co., Inc........................... (0.90) -- -- -- --
Reinvestment of capital gain distribution............. (0.20) (0.19) (0.13) (0.16) (0.15)
Rights offering....................................... -- -- -- (0.99) --
-------- -------- -------- -------- --------
Total dilution.......................................... (1.10) (0.19) (0.13) (1.15) (0.15)
-------- -------- -------- -------- --------
Net asset value, end of year............................ $ 21.77 $ 21.75 $ 17.47 $ 20.42 $ 20.82
======== ======== ======== ======== ========
Per share market price, end of year..................... $ 16.875 $ 16.75 $ 13.75 $ 16.75 $ 17.00
Total Investment Return - Shareholder Return............ 15.48% 33.20% (7.51)% 14.18%(b) 6.51%
Ratios to Average Net Assets
Expenses.............................................. .90% .78% .75% .83% .76%
Expenses before severance and other
non-recurring acquisition-related costs............. .82% .78% .75% .83% .76%
Net investment income................................. 1.53% 1.79% 1.38% 1.59% 2.01%
Supplemental Data
Net assets, end of period (000's omitted)............. 741,146 599,182 461,931 516,890 419,814
Portfolio turnover.................................... 59.78% 35.89% 41.63% 31.63% 28.36%
Shares outstanding, end of period (000's omitted)..... 34,042 27,544 26,442 25,318 20,165
Average commission rate paid.......................... $ 0.05 -- -- -- --
</TABLE>
- ----------
(a) Effect of the Company's issuance 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, 1996, 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, 1996, 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, 1996, 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 3, 1997
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. The 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.
Eugene V. Fife President, chief executive officer and
co-chairman of Multimedia Medical Systems;
limited partner of Goldman, Sachs & 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.
Jeffrey A. Kigner Executive vice president of
Levin Management Co., Inc.
John A. Levin* President and chief executive officer
of Baker, Fentress & Company and
Levin Management Co., Inc.
Burton G. Malkiel Professor of Economics, Princeton University
David D. Peterson Retired; former president and chief executive
officer of Baker, Fentress & Company; chairman
of Consolidated-Tomoka Land Co.
Melody L. Prenner Executive vice president of
Sarnell Levin Management Co., Inc.
William H. Springer Retired; former vice chairman of
Ameritech Corp.
*Member of the Executive Committee
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
Todd H. Steele Vice President
Lana L. Spence Assistant Treasurer
CORPORATE DATA
Transfer and Dividend Disbursing Agent
Harris Trust and Savings Bank
Shareholder Communications Team
P.O. Box A3504
Chicago, Illinois 60690-3504
1-800-394-5187
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Independent Auditors
Ernst & Young LLP
Net Asset Value Information
The Company's net asset value
is listed each week in Monday's
edition of The Wall Street Journal,
in other major metropolitan
newspapers, and in Barron's.
Daily net asset value information
can be obtained by calling
1-800-BKF-1891 and selecting
option 1.
Address of Company
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
312/236-9190 or 1-800-BKF-1891
[RECYCLED PAPER 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 1996
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
