<PAGE>
Baker, Fentress & Company
[LOGO OF BAKER, FENTRESS & COMPANY]
1997 MIDYEAR REPORT
<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Frederick S. Addy Jeffrey A. Kigner
Bob D. Allen John A. Levin
Jessica M. Bibliowicz Burton G. Malkiel
Eugene V. Fife David D. Peterson
J. Barton Goodwin Melody L. Prenner Sarnell
James P. Gorter William H. Springer
David D. Grumhaus
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
1-800-394-5187
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Address of Company
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
312-236-9190 or 1-800-BKF-1891
[LOGO RECYCLED PRODUCTS]
The Company's Report to Shareholders is printed on recycled paper.
We encourage recycling and use of recycled products.
<PAGE>
TO OUR SHAREHOLDERS:
The first six months of 1997 have been extraordinarily positive for the
stock market.
The favorable economic environment combined with significant corporate earnings
progress and investor optimism has enabled the Dow Jones Industrial Average to
surpass the 8,000 mark, with other market indices at record levels.
As measured by the S&P 500, the advance of the stock market, in addition to
its sustained upward nature, has reflected a particularly tiered structure which
has created a challenging performance standard. For example, the ten most highly
capitalized companies within the S&P 500 have gained 57.8% in the twelve months
ending June 30, 1997, as compared to the remaining 490 securities which have
risen 29.6%.
[BAR CHART APPEARS HERE]
For the first six months of 1997, the corporations comprising the S&P 500
had an average price increase of 15.5% as compared to the capitalization-
weighted index gain of 19.5% (without income). The Baker Fentress portfolio rose
but has lagged the unidirectional strength of the S&P 500 for the reasons
discussed below.
[BAR CHART APPEARS HERE]
BKF Midyear Results
Baker Fentress total net assets at June 30, 1997 were $791.3 million, or $23.25
per share, compared with $741.1 million, or $21.77 per share at December 31,
1996. Our net asset value total return was 8.2% for the six months ended June
30, 1997, and shareholder total return, which is based on market value, was
18.3%, reflecting a decrease in our discount from 22.5% at December 31, 1996 to
15.0% at June 30, 1997. The following chart shows our fund-wide total return and
the returns of our separate portfolio sectors for this six-month period.
As shown in the adjacent chart, the total return of our public portfolio
over the six months ended June 30, 1997, was 11.3%. The portfolio continues to
be burdened by the hedging of selected historic large positions as well as the
performance of certain pre-Levco mid-capitalization holdings. In addition, the
composite of the newly purchased securities did not keep pace with the rapid
rise of the index.
Our net asset value return includes Consolidated-Tomoka, whose market price
was effectively unchanged for the first six months of 1997. Furthermore, since
the development and implementation of our growth and diversification plans for
Levco are not yet
Continued on page 2
1
<PAGE>
TO OUR SHAREHOLDERS (continued)
complete, the BKF Board determined that the fair value of our investment in
Levco should be left unchanged.
The private placement portfolio showed an increase of 12.4% for the six
months ending June 30, 1997, but as discussed below, incurred a $7.7 million
loss in July.
Update on Public Portfolio and Levco
Levco took over management of our public portfolio on July 1, 1996 and has been
restructuring this sector to bring it in line with their large cap value
investment approach. More than half of the restructuring process has been
completed. We decided to spread this restructuring over a period of time because
of the significant imbedded capital gains associated with many of our pre-Levco
positions. This restructuring process should be substantially completed in 1998.
The recently announced targeted distribution policy for 1997 and 1998, which
calls for ordinary income dividends and capital gain distributions totalling 12%
of average net assets in those years, will accelerate this process.
[BAR CHART APPEARS HERE]
The adjacent chart compares the six month results of our public portfolio
to those of other funds with similar investment styles -- large cap value (the
current Levco style) and mid cap growth (the pre-Levco public portfolio style).
As you may recall, Levco's approach is to focus on risk adjusted returns
through selective investments in large cap value stocks. They attempt to
construct an equity portfolio that offers above average rates of return over the
long term while keeping a constant eye on preservation of capital. Levco's long-
term track record shows that they tend to underperform the market during the
strongest market cycles, approximately match or stay ahead of the market during
average market advances and experience positive relative performance during down
or flat markets. The objective is to provide superior returns over an entire
market cycle. This has been the case historically.
The overall operations of Levco continue to progress. Total assets under
management as of June 30, 1997 were $7.8 billion, compared to $6.5 billion at
the end of 1996. Revenues for the six month period were $17.7 million.
Recent Announcements by BKF and Levco
Jessica M. Bibliowicz joined Levco in July as president and chief operating
officer, and also joined the Baker Fentress Board. Concurrent with Ms.
Bibliowicz' appointment, John A. Levin became chairman and chief executive
officer of Levco, and Melody L. Prenner Sarnell and Jeffrey A. Kigner were named
co-chairmen of Levco.
We also recently announced our intention to nominate Dean J. Takahashi,
senior director
2
<PAGE>
of investments of the Yale University Endowment, as a director of Baker Fentress
at our next shareholders meeting.
The registration statement of a new Levco mutual fund became effective in
July. Shares of the Levco Equity Value Fund will be sold only to certain
insurance companies in connection with variable annuity contracts. Its large cap
value investment philosophy is similar to that of the typical Levco portfolio.
Private Placements Update
During the second quarter of 1997, the values of Citadel, Echlin and Security
Capital were increased. These changes were offset by write downs at both Home
State Holdings and TBN Holdings. In early July, the value of our Home State
investment was reduced to zero, resulting in an additional loss of $7.7 million,
following the company's failure in its attempt to find a buyer and the
subsequent placement of its insurance subsidiaries in regulatory receivership.
At June 30, 1997, the value of our private placement portfolio was approximately
$68.4 million, or 9% of our total net assets.
Large Land Sale by CTO
In early June, Consolidated-Tomoka Land Co. (CTO), our 80% owned controlled
affiliate, entered into a contract to sell about 11,000 acres of its land
holdings in the Daytona Beach area for approximately $9.9 million. This land
consists of forest uplands and wetlands on the extreme western side of
Consolidated's property. The St. John's River Water Management District is
purchasing this land for conservation purposes.
Closing Comments
We want to thank you for your continuing support during the changes that have
occurred over the last year. We believe these changes will lead to improved
long-term performance and we are very hopeful about the future of our Company.
Please contact us at (800) BKF-1891 if you would like to discuss any of these
topics.
Respectfully yours,
/s/ James P. Gorter
James P. Gorter
Chairman of the Board
/s/ John A. Levin
John A. Levin
President and Chief Executive Officer
3
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
<S> <C>
June 30, 1997
(Unaudited)
-------------
Assets
Investments, at Value:
Portfolio securities:
Unaffiliated issuers (cost $322,682,313).......................................... $ 520,318,177
Non-controlled affiliates (cost $13,110,996)...................................... 12,442,590
Controlled affiliates (cost $136,176,517)......................................... 224,155,368
Money market securities (cost $19,931,832).......................................... 19,931,832
-------------
Total Investments (cost $491,901,658).......................................... 776,847,967
Cash................................................................................ 23,873,951
Receivable for Securities Sold...................................................... 3,860,854
Dividends and Interest Receivable................................................... 2,609,961
Deposits for Securities Sold Short.................................................. 26,100,962
Other Assets........................................................................ 1,034,092
-------------
Total Assets................................................................... 834,327,787
-------------
Liabilities
Securities Sold Short, at Value (proceeds $26,170,718).............................. 23,535,975
Bank Borrowing...................................................................... 18,000,000
Payable for Securities Purchased.................................................... 710,312
Payable to Affiliate for Investment Management Fee.................................. 120,000
Accounts Payable and Accrued Liabilities............................................ 649,025
-------------
Total Liabilities.............................................................. 43,015,312
-------------
Net Assets.................................................................................... $ 791,312,475
=============
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........................ 39,190,074
Other retained earnings (a)......................................................... 48,477,303
Unrealized appreciation of investments.............................................. 287,581,052
-------------
Net Assets.................................................................................... $ 791,312,475
=============
Net Asset Value Per Share..................................................................... $ 23.25
=============
</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
4
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
Six Months Ended
June 30, 1997 Year Ended
(Unaudited) December 31, 1996
---------------- -------------------
<S> <C> <C>
Investment Income:
Dividends from:
Unaffiliated issuers.................................................... $ 3,334,587 $ 4,548,003
Controlled affiliate.................................................... 1,500,000 2,750,000
------------ -------------
4,834,587 7,298,003
------------ -------------
Interest from:
Unaffiliated issuers.................................................... 1,937,361 3,834,762
Non-controlled affiliates............................................... 476,055 1,613,173
Controlled affiliates................................................... 3,795,000 4,200,539
------------ -------------
6,208,416 9,648,474
------------ -------------
Total Income....................................................... 11,043,003 16,946,477
------------ -------------
Expenses:
Investment research.......................................................... 409,611 1,517,410
Administration and operations................................................ 637,489 1,157,586
Interest on bank borrowing................................................... 537,178 905,776
Investment management fee.................................................... 716,392 714,778
Severance and other non-recurring acquisition-related costs.................. -- 608,661
Rent......................................................................... 150,879 308,683
Directors' fees and expenses................................................. 176,827 210,776
Professional fees............................................................ 179,269 175,275
Reports to shareholders...................................................... 127,923 172,126
Taxes other than income...................................................... 35,240 109,680
Custodian and transfer agent fees............................................ 59,874 95,602
Other........................................................................ 200,820 300,124
------------ -------------
Total Expenses..................................................... 3,231,502 6,276,477
------------ -------------
Net Investment Income...................................... 7,811,501 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..................... 7,234,304 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.................................................. 7,234,304 83,306,349
Net change in unrealized appreciation........................................ 41,928,924 21,024,655
------------ -------------
Net Realized and Unrealized Gain.................................... 49,163,228 104,331,004
------------ -------------
Net Increase in Net Assets Resulting from Operations................................... $ 56,974,729 $ 115,001,004
============ =============
</TABLE>
See accompanying Notes to Financial Statements
5
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997 Year Ended
(Unaudited) December 31,1996
---------------- ----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations.......................... $ 56,974,729 $ 115,001,004
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........................... (49,163,228) (104,331,004)
(Increase) decrease in receivable for securities sold....................... (3,463,291) 3,038,797
(Increase) in deposits for securities sold short............................ (12,403,072) (13,697,890)
(Increase) in dividends and interest receivable............................. (760,518) (754,180)
(Increase) decrease in other assets......................................... (392,878) 330,931
Increase (decrease) in accounts payable and accrued liabilities............. 50,212 (7,972)
Increase in payable for investment management fee........................... -- 120,000
Increase (decrease) in payable for securities purchased..................... 710,312 (1,305,000)
Net amortization of premiums (discounts).................................... (47,314) (33,594)
------------ -------------
Net cash provided by (used in) operating activities...................... (8,495,048) (1,638,908)
------------ -------------
Cash Flows from Investing Activities:
Purchases of portfolio securities and closing
of short positions........................................................... (66,966,586) (349,765,816)
Proceeds from sales of portfolio securities
and securities sold short.................................................... 86,967,112 423,235,313
Proceeds from options written................................................. -- 4,950,712
Cost of options repurchased................................................... -- (6,398,769)
Net realized gain on financial futures transactions........................... -- 1,834,825
(Purchases) and sales/maturities of money
market securities, net....................................................... 3,238 (18,197,871)
------------ -------------
Net cash provided by investing activities................................ 20,003,764 55,658,394
------------ -------------
Cash Flows from Financing Activities:
Bank borrowing................................................................ -- 38,000,000
Repayment of bank borrowing................................................... -- (20,000,000)
Dividends and capital gain distributions...................................... (6,808,437) (53,284,608)
------------ -------------
Net cash used in financing activities.................................... (6,808,437) (35,284,608)
------------ -------------
Net Increase in Cash.................................................................... 4,700,279 18,734,878
Cash at the Beginning of the Period..................................................... 19,173,672 438,794
------------ -------------
Cash at the End of the Period........................................................... $ 23,873,951 $ 19,173,672
============ =============
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
============ =============
</TABLE>
See accompanying Notes to Financial Statements
6
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997 Year Ended
(Unaudited) December 31, 1996
---------------- -----------------
<S> <C> <C>
Operations:
Net investment income.................................................. $ 7,811,501 $ 10,670,000
Net realized gain...................................................... 7,234,304 83,306,349
Net change in unrealized appreciation.................................. 41,928,924 21,024,655
------------ -------------
Net increase in net assets resulting from operations................ 56,974,729 115,001,004
------------ -------------
Distributions to Shareholders from:
Net investment income.................................................. (6,808,437) (12,684,254)
Net realized gain...................................................... - (69,294,421)
------------ -------------
Total distributions to shareholders................................. (6,808,437) (81,978,675)
------------ -------------
Net increase in net assets from operations after distributions.. 50,166,292 33,022,329
Capital Share Transactions -- Net Increase................................. - 108,941,369
------------ -------------
Total Increase in Net Assets............................................... 50,166,292 141,963,698
Net Assets at the Beginning of the Period.................................. 741,146,183 599,182,485
------------ -------------
Net Assets at the End of the Period........................................ $791,312,475 $ 741,146,183
============ =============
</TABLE>
See accompanying Notes to Financial Statements 7
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
June 30, 1997 - Unaudited Shares Value
--------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS-65.75%
PUBLIC -- 60.01%
COMMON STOCK -- 59.06%
Basic Materials -- 6.05%
Air Products & Chemicals, Inc....................... 123,500 $ 10,034,375
Allegheny Teledyne Incorporated..................... 281,000 7,587,000
E.I. du Pont de Nemours and Company................. 164,000 10,311,500
Great Lakes Chemical Corporation.................... 100,000 5,237,500
IMC Global Inc...................................... 90,800 3,178,000
USG Corporation (b)................................. 150,000 5,475,000
W.R. Grace & Co..................................... 110,000 6,063,750
------------
47,887,125
------------
Capital Goods -- 11.04%
The Boeing Company.................................. 236,436 12,545,885
Corning Incorporated................................ 126,000 7,008,750
Crown Cork & Seal Company, Inc...................... 79,000 4,221,563
Electronic Data Systems Corporation................. 119,000 4,901,313
General Electric Company............................ 80,000 5,200,000
Harnischfeger Industries, Inc....................... 243,920 10,122,680
Litton Industries, Inc. (b)......................... 95,000 4,589,687
Lockheed Martin Corporation......................... 68,600 7,104,387
The Manitowoc Company, Inc.......................... 136,700 6,390,725
Molten Metal Technology, Inc. (b)................... 13,400 67,000
Owens-Illinois, Inc. (b)............................ 226,500 7,021,500
Rockwell International Corporation.................. 17,100 1,013,175
Waste Management, Inc............................... 292,120 9,384,355
York International Corporation...................... 170,000 7,820,000
------------
87,391,020
------------
Communication Services -- 2.76%
Bell Atlantic Corporation........................... 35,500 2,693,562
MCI Communications Corporation...................... 500,000 19,140,625
------------
21,834,187
------------
Consumer Cyclical -- 4.23%
The Black & Decker Corporation...................... 111,600 4,150,125
Eastman Kodak Company............................... 70,000 5,372,500
General Motors Corporation.......................... 100,000 5,575,000
Owens Corning....................................... 100,000 4,312,500
Tribune Company..................................... 230,000 11,054,375
Woolworth Corporation (b)........................... 124,100 2,978,400
------------
33,442,900
------------
Consumer Staples -- 4.32%
Kellogg Company..................................... 34,600 2,962,625
Newell Co........................................... 400,000 15,900,000
Time Warner Inc..................................... 130,000 6,272,500
Tupperware Corporation.............................. 76,800 2,784,000
U. S. West Media Group (b).......................... 310,000 6,277,500
------------
34,196,625
------------
Energy -- 1.42%
Chesapeake Energy Corp. (b)......................... 248,000 2,464,500
Union Texas Petroleum Holdings, Inc................. 420,000 8,793,750
------------
11,258,250
</TABLE>
8 See accompanying Notes to Statement of Investments
<PAGE>
STATEMENT OF INVESTMENTS
June 30, 1997 - Unaudited
<TABLE>
<CAPTION>
Shares or
Principal
Amount Value
------ -----
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Financials -- 13.76%
Aetna, Inc.................................................... 83,500 $ 8,548,312
American International Group, Inc............................. 22,000 3,286,250
Aon Corporation............................................... 255,000 13,196,250
Barnett Banks, Inc............................................ 400,000 21,000,000
The Chase Manhattan Corporation............................... 70,000 6,794,375
Citicorp...................................................... 47,500 5,726,719
General Re Corporation........................................ 60,000 10,920,000
TIG Holdings, Inc............................................. 295,000 9,218,750
T. Rowe Price Associates, Inc................................. 308,100 15,905,662
Tokio Marine and Fire Insurance Company (ADR)................. 125,000 8,093,750
Unitrin, Inc.................................................. 102,000 6,222,000
-----------
108,912,068
-----------
Health Care -- 5.74%
Allegiance Corporation........................................ 46,600 1,269,850
Baxter International Inc...................................... 191,100 9,996,919
Genentech, Inc. (b)........................................... 100,000 5,893,750
Pfizer Inc.................................................... 61,100 7,301,450
Pharmacia & Upjohn, Inc....................................... 154,700 5,375,825
United HealthCare Corporation................................. 300,000 15,600,000
-----------
45,437,794
-----------
Technology -- 6.14%
Ascend Communications, Inc. (b)............................... 94,500 3,720,938
Cisco Systems, Inc. (b)....................................... 79,500 5,336,438
General Motors Corporation, Class H........................... 90,000 5,186,250
Glenayre Technologies, Inc. (b)............................... 40,000 655,000
International Business Machines Corporation................... 125,000 11,281,250
Nextel Communications, Class A (b)............................ 150,000 2,840,625
Seagate Technology, Inc. (b).................................. 102,400 3,609,600
Tellabs, Inc. (b)............................................. 168,000 9,387,000
Varian Associates, Inc........................................ 120,000 6,510,000
-----------
48,527,101
-----------
Transportation -- 0.82%
Union Pacific Corporation..................................... 93,000 6,492,562
-----------
Utilities -- 2.78%
Duke Energy Corporation....................................... 365,540 17,523,074
Long Island Lighting Company.................................. 58,900 1,354,700
Texas Utilities Company....................................... 91,300 3,144,144
-----------
22,021,918
-----------
Total common stock (Cost $280,872,284)................... 467,401,550
-----------
Preferred Stock -- 0.30%
Aetna Inc., 6.25% Class C..................................... 25,000 2,343,750
-----------
Total preferred stock (Cost $1,625,491).................. 2,343,750
-----------
Convertible Bonds -- 0.62%
Alza Corporation, Zero Coupon due 07/14/2014.................. $11,150,000 4,906,000
-----------
Total convertible bonds (Cost $4,981,545)................ 4,906,000
-----------
</TABLE>
See accompanying Notes to Statement of Investments
9
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS
June 30, 1997 - Unaudited Shares, Principal
Amount
or contracts
------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED)
PURCHASED PUT OPTIONS -- 0.03%
Expiration Date/
Strike Price
---------------
MCI Communications Corporation..................................... Oct97/$37.50 950
MCI Communications Corporation..................................... Oct97/$40.00 340
Total purchased put options (Cost $270,058)..................
Total public portfolio (Cost $287,749,378)....................
Private Placement -- 5.74%
Echlin Inc. - manufacturer of automotive parts and components
Common Stock............................................................................. 553,162
Home State Holdings, Inc. - property and casualty insurers
11.50% Subordinated Note due 10/03/2004 (c)(d)(f)....................................... $10,050,000
Stock Purchase Warrants Expiring 10/03/2004 (c)(d)....................................... 150,750
Paracelsus Healthcare Corporation - hospital management company
Common Sock (b)(c)(e).................................................................... 535,443
Security Capital U.S. Realty - real estate investment trust
Common Stock (b)......................................................................... 983,528
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d).................................. $ 270,171
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)........................... $ 61,013
Total private placement portfolio (Cost $34,932,935)..................................
Total investments in unaffiliated issuers (Cost $322,682,313)..............................
INVESTMENTS IN NON-CONTROLLED AFFILIATES -- 1.57%
PRIVATE PLACEMENT -- 1.57%
Citadel Communications Corporation - radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)........................................... 746,412
TBN Holdings Inc. - hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(f)........................................... $ 8,000,000
Series C-3 Convertible Preferred Stock (b)(c)(d)......................................... 1,511,628
Stock Purchase Warrants Expiring 12/31/2002 (c)(d)....................................... 1,100,000
Total investments in non-controlled affiliates (Cost $13,110,996)..........................
</TABLE>
<TABLE>
<CAPTION>
Value
INVESTMENTS IN UNAFFILIATED ISSUERS (CONTINUED) -----
PURCHASED PUT OPTIONS -- 0.03%
<S> <C>
MCI Communications Corporation............................................................. $ 166,250
MCI Communications Corporation............................................................. 89,250
-----------
Total purchased put options (Cost $270,058).......................................... 255,500
-----------
Total public portfolio (Cost $287,749,378)............................................ 474,906,800
-----------
Private Placement N 5.74%
Echlin Inc. - manufacturer of automotive parts and components
Common Stock............................................................................. 19,913,832
Home State Holdings, Inc. - property and casualty insurers
11.50% Subordinated Note due 10/03/2004 (c)(d)(f)....................................... 7,720,000
Stock Purchase Warrants Expiring 10/03/2004 (c)(d)....................................... --
Paracelsus Healthcare Corporation - hospital management company
Common Sock (b)(c)(e).................................................................... 2,168,545
Security Capital U.S. Realty - real estate investment trust
Common Stock (b)......................................................................... 14,654,561
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d).................................. 927,055
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)........................... 27,384
-----------
Total private placement portfolio (Cost $34,932,935).................................. 45,411,377
-----------
Total investments in unaffiliated issuers (Cost $322,682,313).............................. 520,318,177
-----------
INVESTMENTS IN NON-CONTROLLED AFFILIATES -- 1.57%
PRIVATE PLACEMENT -- 1.57%
Citadel Communications Corporation - radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)........................................... 11,942,590
TBN Holdings Inc. - hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(f)........................................... 500,000
Series C-3 Convertible Preferred Stock (b)(c)(d)......................................... --
Stock Purchase Warrants Expiring 12/31/2002 (c)(d)....................................... --
-----------
Total investments in non-controlled affiliates (Cost $13,110,996).......................... 12,442,590
-----------
</TABLE>
10 See accompanying Notes to Statement of Investments
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
June 30, 1997 - Unaudited Shares or
Principal
Amount Value
----------- ------------
<S> <C> <C>
INVESTMENTS IN CONTROLLED AFFILIATES--28.33%
Publicly-Traded--10.43%
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 $ 82,500,000
------------
Private Placement--1.33%
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
------------
Total private placement portfolio (Cost $10,500,000)............................ 10,500,000
------------
Wholly-Owned Subsidiary--16.57%
Levin Management Co., Inc.--investment management
Common Stock (c)(d)(g)............................................................ 1,000 66,155,368
9.75% Notes due 06/28/1999 (c)(d)(g).............................................. $65,000,000 65,000,000
------------
Total wholly-owned subsidiary (Cost $120,645,890)............................... 131,155,368
------------
Total investments in controlled affiliates (Cost $136,176,517)..................... 224,155,368
------------
MONEY MARKET SECURITIES--2.52%
U.S. Treasury Bill--5.1125% due 07/24/1997.......................................... $20,000,000 19,931,832
------------
Total investments in money market securities (Cost $19,931,832)..................... 19,931,832
------------
Total Investments--98.17% (Cost $491,901,658)....................................... 776,847,967
------------
SECURITIES SOLD SHORT--(2.97)%
Ascend Communications, Inc.......................................................... 52,500 (2,067,187)
Chesapeake Energy Corp.............................................................. 150,000 (1,490,625)
Cisco Systems, Inc.................................................................. 58,000 (3,893,250)
MCI Communications Corporation...................................................... 50,000 (1,914,063)
The Manitowoc Company, Inc.......................................................... 5,600 (261,800)
T. Rowe Price Associates, Inc....................................................... 57,000 (2,942,625)
Tellabs, Inc........................................................................ 75,000 (4,190,625)
York International Corporation...................................................... 147,300 (6,775,800)
------------
Total securities sold short (Proceeds $26,170,718).................................. (23,535,975)
------------
Cash and Other Assets Less Liabilities--4.80%....................................... 38,000,483
------------
NET ASSETS--100.00%................................................................. $791,312,475
============
</TABLE>
See accompanying Notes to Statement of Investments
11
<PAGE>
NOTES TO STATEMENT OF INVESTMENTS
-----------------------
(a) Based on the cost of investments of $440,996,975, for federal income
tax purposes at June 30, 1997, net unrealized appreciation was
$335,850,992, which consisted of gross unrealized appreciation of
$351,516,100 and gross unrealized depreciation of $15,665,108.
(b) Non-income producing security.
(c) Securities subject to legal or contractual restrictions on sale.
Valued at cost on the dates of acquisition and at a fair value as
determined by the board of directors of the Company as of June 30,
1997. The aggregate value of restricted securities was $160,940,942 or
20.84% of net assets, at June 30, 1997.
(d) There were no unrestricted securities of the same issue outstanding on
June 30, 1997 or the dates of acquisition.
(e) Represents 80% of the current market price of unrestricted common
stock of Paracelsus Healthcare Corporation.
(f) Security not current as to payment of interest.
(g) 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Unaudited)
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 and for income consistent with 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. The shares of Levin Management Co., Inc. are
not publicly-traded and are 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 for the first six months of 1997 and for the year
ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Shares Amount
--------------- -------------------
1997 1996 1997 1996
---- --------- ------ ------------
<S> <C> <C> <C> <C>
Reinvestment of
capital gain
distributions....... -- 1,639,661 $ -- $ 1,639,661
Acquisition (Note 8).. -- 4,858,879 -- 4,858,879
Increase in
capital surplus..... -- 102,442,829
----- ------------
Net increase........ $ -- $108,941,369
----- ------------
</TABLE>
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Unaudited) (continued)
NOTE 3. EXPENSES
Aggregate compensation paid or accrued during the first six months of 1997 and
for the year ended December 31, 1996 to officers of the Company amounted to
$427,515 and $1,144,078, respectively. Fees, excluding expenses, of $146,900 and
$183,000 were incurred during the first six months of 1997 and for the year
ended December 31, 1996, respectively, 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 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 the
first six months of 1997, excluding money market investments, aggregated
$65,691,254 and $73,502,811, 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 $26,100,962 and has segregated securities
with a market value of $23,535,975 at June 30, 1997. 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 security 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"). The Company had
no written options transactions for the six months ended June 30, 1997.
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 $271,077.
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.
14
<PAGE>
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. 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 are at the London Interbank Offered Rate (LIBOR)
plus 0.35%. The commitment fee associated with the unused portion of the
revolving credit agreement is 0.08% per annum.
The amount outstanding at June 30, 1997 was $18.0 million. The interest
rate is reset periodically under the revolving credit facility and the fair
value of the debt at June 30, 1997 approximates its carrying value. The maximum
borrowing and the average daily borrowing balances during the period for which
borrowings were outstanding were $18.0 million and $18.0 million, respectively.
The interest rate at June 30, 1997 and the weighted average interest rate during
the first six months of 1997 were 6.07% and 5.61%, respectively.
NOTE 9. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
Agreements:
The Company entered into an investment advisory contract (the "Management
Contract") with John A. Levin & Co., Inc., a wholly-owned subsidiary of Levin
Management Co., Inc., and an indirect wholly-owned subsidiary of the Company,
which provides for payment of a fee at an annual rate of 0.30%, based on the
month-end value of the assets of the public portfolio of the Company. The
Company continues to manage its private placement and CTO investments
internally. For the six months ended June 30, 1997 the Company incurred
management fees of $716,392.
A summary of transactions with affiliated companies follows:
<TABLE>
<CAPTION>
Purchases Realized
(Sales) Gain (Loss) Income
------------ ----------- ----------
<S> <C> <C> <C>
Consolidated-Tomoka
Land Co...................... $ - $ - $1,500,000
Durolite International
Note......................... $ - - 480,000
Levin Management Co., Inc.
Common stock................. - -
Notes due 6/30/1997
and 6/28/1999............... (3,000,000) - 3,315,000
TBN Holdings
Note......................... - - 476,055
------------ ----------- ----------
$ (3,000,000) $ - $5,771,055
------------ ----------- ----------
</TABLE>
15
<PAGE>
ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Shareholders was held on April 17, 1997. The results of
all matters voted on by shareholders were as follows:
A proposal to approve and ratify the selection of Ernst & Young LLP as the
Company's independent auditors for 1997 was approved with 29,485,084 votes for,
58,492 votes against and 140,988 votes abstaining.
In addition, shareholders elected three directors, as follows:
<TABLE>
<CAPTION>
Nominee For Withheld
------- ---------- --------
<S> <C> <C>
Addy 29,483,457 201,110
Grumhaus 29,496,139 188,428
Kigner 29,495,654 188,912
</TABLE>
The term of office of the following directors continued after the meeting:
Bob D. Allen, Eugene V. Fife, J. Barton Goodwin, James P. Gorter, John A. Levin,
Burton G. Malkiel, David D. Peterson, Melody L. Prenner Sarnell and William H.
Springer.
PORTFOLIO CHANGES EXCEEDING $2.5 MILLION
Quarter Ended June 30, 1997 - Unaudited
<TABLE>
<CAPTION>
Purchases Cost Sales Proceeds
- --------- ----------- ----- -----------
<S> <C> <C> <C>
Pfizer, Inc............................... $ 6,243,609 Health Management Associates, Inc.,
Alza Corporation Conv. Bond, Class A........................... $ 6,405,942
Zero Coupon due 07/14/2014.............. 4,954,781 Waste Management, Inc............... 4,523,400
Texas Utilities Company................... 3,087,879 Alza Corporation Conv. Bond,
Genentech, Inc............................ 2,610,797 5.00% due 05/01/2006.............. 4,035,000
Seagate Technology, Inc................... 3,687,639 Harnischfeger Industries, Inc....... 3,590,555
Budget Group, Inc., Class A......... 2,825,244
Aetna, Inc.......................... 2,717,266
----------- -----------
$20,584,705 $24,097,407
=========== ===========
</TABLE>
16
<PAGE>
FINANCIAL HIGHLIGHTS
The following table shows per share operating performance data, total investment
return, ratios and supplemental data for the six months ended June 30, 1997 and
the year ended December 31, 1996.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31,
(Unaudited) 1996
------------- ------------
<S> <C> <C>
Per Share Operating Performance
Net asset value, beginning of year.................................. $ 21.77 $ 21.75
-------- --------
Net investment income.......................................... 0.22 0.37
Net realized gain (loss) and net change in unrealized
appreciation and other changes............................... 1.46 3.31
-------- --------
Total investment operations......................................... 1.68 3.68
Less distributions:
Dividends from net investment income........................... (0.20) (0.78)
Distribution from net realized gain............................ - (1.78)
-------- --------
Total distributions................................................. (0.20) (2.56)
-------- --------
Dilution resulting from:
Shares issued in acquisition of Levin Management Co., Inc...... - (0.90)
Reinvestment of capital gain distribution...................... - (0.20)
-------- --------
Total dilution...................................................... - (1.10)
-------- --------
Net asset value, end of period...................................... $ 23.25 $ 21.77
======== ========
Per share market price, end of period............................... $ 19.75 $ 16.875
Total Investment Return-Shareholder Return.................................... 18.27% 15.48%
Ratios to Average Net Assets
Expenses............................................................ .85% .90%
Expenses before interest on bank borrowing.......................... .71% .77%
Net investment income............................................... 2.06% 1.53%
Supplemental Data
Net assets, end of period (000's omitted)........................... 791,312 741,146
Portfolio turnover.................................................. 18.06% 59.78%
Shares outstanding, end of period (000's omitted)................... 34,042 34,042
Average commission rate paid per share.............................. $ .0574 0.0499
</TABLE>
17
<PAGE>
Baker, Fentress & Company
Established 1891
SUITE 3510, 200 WEST MADISON STREET
CHICAGO, ILLINOIS 60606
