<PAGE>
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Frederick S. Addy
Bob D. Allen
Eugene V. Fife
J. Barton Goodwin
James P. Gorter
David D. Grumhaus
Richard M. Jones
Jeffrey A. Kigner
John A. Levin
Burton G. Malkiel
David D. Peterson
Melody L. Prenner Sarnell
William H. Springer
OFFICERS
James P. Gorter Chairman of the Board
John A. Levin President and Chief
Executive Officer
James P. Koeneman Executive Vice President
and Secretary
Scott E. Smith Executive Vice President
Janet Sandona Jones Vice President, Treasurer
and Assistant Secretary
Lana L. Spence Assistant Treasurer
CORPORATE DATA
Transfer and Dividend Disbursing Agent
Harris Trust and Savings Bank
(312) 461-3309
Custodian
UMB Bank, N.A.
Legal Counsel
Bell, Boyd & Lloyd
Address of Company
200 West Madison Street
Suite 3510
Chicago, Illinois 60606
(312) 236-9190 or
(800) BKF-1891
The Company's Report to Shareholders is printed on recycled paper. We encourage
recycling and use of recycled products.
Baker, Fentress & Company
- -------------------------
REPORT TO SHAREHOLDERS
FIRST QUARTER
MARCH 31, 1997
1
<PAGE>
TO OUR SHAREHOLDERS:
TOTAL NET ASSETS AT MARCH 31, 1997 WERE $742.3 MILLION, or $21.80 per
share, approximating the $741.1 million, or $21.77 per share at December 31,
1996.
Net asset value total return was 0.4%, compared to 2.7% for the S&P 500
Index for the three months ended March 31, 1997. Shareholder total return was
5.9%. Shareholder total return, which is based on market price, was higher than
net asset value total return because the discount on Baker Fentress' market
price versus net asset value narrowed from December 31, 1996 to March 31, 1997.
The following summarizes some items that impacted our various portfolio
sectors during the first quarter:
. Progress continued on restructuring the public portfolio by John Levin & Co.,
Inc. (Levco), our wholly-owned investment advisor subsidiary.
. Total assets under management by Levco grew to $6.9 billion as of March 31,
1997, compared to $6.5 billion at the end of 1996.
. The carrying value of two private placement investments was increased:
-- Security Capital U.S. Realty's valuation was increased to $12.4 million
from $10.0 million in early March to reflect improved liquidity.
-- Citadel Communication's valuation was increased by $3.2 million to $11.9
million in late March to reflect the company's improved performance and
industry valuations.
. Consolidated-Tomoka Land Co. increased its semi-annual dividend paid in
February to $0.30 per share from $0.25.
COMMENT ON U.S. EQUITY MARKET
The stock market gained in the first quarter despite a decline in March
triggered by Federal Reserve Board action to tighten monetary policy and raise
key lending rates as a preemptive strike against future inflation. The market
has been rising strongly and sharply for an extended period and the amplitude
and duration of the gain has been remarkable. Until the recent actions by the
Federal Reserve Board, equities had benefited from sustained economic growth
accompanied by relatively low interest rates and restrained inflationary
pressures. Persistent mutual fund inflows, major corporate share buybacks, and
significant equity shrinkage through mergers have sustained share values.
The virtually unbroken advance of the stock market's "leading issues" has
been challenging for our investment philosophy which incorporates risk control,
diversification, and security valuation parameters. In accordance with an
emphasis on price discipline, we have chosen not to follow momentum which is
often pronounced in the latter stage of a bull market but can cause losses in an
ensuing decline as exemplified by the market's sudden reversal in March.
As we have continued the process of restructuring, the public portfolio
more closely reflects our investment disciplines. In selecting stocks, we have
chosen to operate with a diversified portfolio emphasizing special factors.
These would include companies which are spinning off valuable divisions,
divesting underperforming operations, securing accretive acquisitions,
developing new products, and/or repurchasing their own shares. From a timing
standpoint, these developments are not necessarily correlated with stock market
fluctuations. The resultant portfolio contains defensive characteristics which,
in our judgement, are appropriate in the present environment.
PROJECTED 1997 DISTRIBUTIONS
Our distribution policy calls for calendar year distributions to total at least
8% of average net assets for the twelve months ended October 31. Based on
average net assets for the first five months of this measurement period ended
March 31, 1997, the 8% minimum distribution amount would be $1.75.
For the three months ended March 31, 1997, net investment income was $4.6
million, or $0.14 per share. Total realized gain was $5.3 million, or $0.16 per
share, for the first three months of 1997. In addition, there was $32.0 million,
or $0.94 per share, of undistributed realized gain from the last two months of
1996 that will be included in our 1997 capital gain distribution, which is
scheduled to be paid in mid-December 1997.
JAMES P. GORTER JOHN A. LEVIN
Chairman of the Board President and Chief
Executive Officer
1
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
March 31, 1997 -- Unaudited Shares Value
------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS -- 63.55%
PUBLIC -- 57.88%
COMMON STOCK -- 56.84%
BASIC MATERIALS -- 5.59%
Air Products & Chemicals, Inc.................... 123,500 $ 8,382,562
Allegheny Teledyne Incorporated.................. 281,000 7,903,125
E.I. du Pont de Nemours and Company.............. 82,000 8,692,000
Great Lakes Chemical Corporation................. 100,000 4,600,000
IMC Global Inc................................... 55,100 1,990,488
USG Corporation (b).............................. 150,000 4,706,250
W.R. Grace & Co.................................. 110,000 5,211,250
-----------
41,485,675
-----------
CAPITAL GOODS -- 11.89%
The Boeing Company............................... 118,218 11,659,250
Corning Incorporated............................. 126,000 5,591,250
Crown Cork & Seal Company, Inc................... 79,000 4,078,375
Electronic Data Systems Corporation.............. 154,500 6,199,312
Foster Wheeler Corporation....................... 60,000 2,122,500
General Electric Company......................... 40,000 3,970,000
Harnischfeger Industries, Inc.................... 326,420 15,178,530
Litton Industries, Inc. (b)...................... 88,000 3,542,000
Lockheed Martin Corporation...................... 51,300 4,309,200
The Manitowoc Company, Inc....................... 136,700 4,938,288
Molten Metal Technology, Inc. (b)................ 35,200 308,000
Owens-Illinois, Inc. (b)......................... 207,000 5,097,375
Rockwell International Corporation............... 17,100 1,109,363
WMX Technologies, Inc............................ 426,400 13,058,500
York International Corporation................... 170,000 7,140,000
-----------
88,301,943
-----------
COMMUNICATION SERVICES -- 2.40%
MCI Communications Corporation................... 500,000 17,812,500
-----------
CONSUMER CYCLICAL -- 4.27%
The Black & Decker Corporation................... 136,600 4,388,275
Colonial Downs Holdings, Inc., Class A (b)....... 25,000 184,375
Eastman Kodak Company............................ 70,000 5,320,000
General Motors Corporation....................... 100,000 5,537,500
Owens Corning.................................... 100,000 4,025,000
Tribune Company.................................. 230,000 9,315,000
Woolworth Corporation (b)........................ 124,100 2,900,837
-----------
31,670,987
-----------
CONSUMER STAPLES -- 4.23%
Kellogg Company.................................. 34,600 2,326,850
Newell Co........................................ 400,000 13,400,000
Time Warner Inc.................................. 130,000 5,622,500
Tupperware Corporation........................... 128,900 4,285,925
U. S. West Media Group (b)....................... 310,000 5,735,000
-----------
31,370,275
-----------
ENERGY -- 2.42%
Amoco Corporation................................ 26,700 2,312,888
Chesapeake Energy Corp. (b)...................... 265,500 5,542,312
Energy Group PLC (ADR) (b)....................... 73,925 2,374,841
Union Texas Petroleum Holdings, Inc.............. 420,000 7,717,500
-----------
17,947,541
-----------
</TABLE>
See accompanying notes to statement of investments
2
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
March 31, 1997 - Unaudited Shares or
Principal
Amount Value
----------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Financials - 12.56%
Aetna, Inc....................................... 115,000 $ 9,875,625
American International Group, Inc................ 22,000 2,582,250
Aon Corporation.................................. 170,000 10,412,500
Barnett Banks, Inc............................... 400,000 18,600,000
The Chase Manhattan Corporation.................. 70,000 6,571,250
Citicorp......................................... 47,500 5,141,875
General Re Corporation........................... 60,000 9,480,000
TIG Holdings, Inc................................ 295,000 9,366,250
T. Rowe Price Associates, Inc.................... 308,100 11,438,212
Tokio Marine and Fire Insurance Company (ADR).... 93,000 4,719,750
Unitrin, Inc..................................... 102,000 5,074,500
------------
93,262,212
------------
Health Care - 5.50%
Allegiance Corporation........................... 79,100 1,750,088
Baxter International Inc......................... 191,100 8,241,188
Covance Inc. (b)................................. 31,500 507,937
Genentech, Inc. (b).............................. 55,000 3,141,875
Health Management Associates, Inc., Class A (b).. 262,500 6,234,375
Pharmacia & Upjohn, Inc.......................... 180,900 6,625,462
United HealthCare Corporation.................... 300,000 14,287,500
------------
40,788,425
------------
Technology - 4.82%
Cascade Communications Corp. (b).................. 135,000 3,560,625
Cisco Systems, Inc. (b)........................... 79,500 3,825,938
General Motors Corporation, Class H............... 90,000 4,882,500
Glenayre Technologies, Inc. (b)................... 45,000 444,375
International Business Machines Corporation....... 62,500 8,578,125
Nextel Communications, Class A (b)................ 150,000 2,006,250
Tellabs, Inc. (b)................................. 168,000 6,069,000
Varian Associates, Inc............................ 120,000 6,420,000
------------
35,786,813
------------
Transportation - 0.71%
Union Pacific Corporation......................... 93,000 5,277,750
------------
Utilities - 2.22%
Long Island Lighting Company...................... 58,900 1,413,600
PanEnergy Corp.................................... 350,000 15,093,750
------------
16,507,350
------------
Miscellaneous - 0.23%
Hanson PLC (ADR).................................. 73,925 1,681,794
------------
Total common stock (Cost $289,289,034).......... 421,893,265
------------
Preferred Stock - 0.28%
Aetna Inc., 6.25% Class C......................... 25,000 2,056,250
------------
Total preferred stock (Cost $1,625,491)......... 2,056,250
------------
Convertible Bonds - 0.68%
Adaptec, Inc., 4.75% due 02/01/2004 (i)........... $ 1,140,000 1,124,325
Alza Corporation, 5.00% due 05/01/2006............ 4,000,000 3,940,000
------------
Total convertible bonds (Cost $5,013,896)....... 5,064,325
------------
See accompanying notes to statement of investments
3
</TABLE>
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
March 31, 1997 -- Unaudited Shares, Principal
Amount
or Contracts VALUE
----------------- ------------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
PURCHASED PUT OPTIONS -- 0.08%
<CAPTION>
Expiration Date/
Strike Price
-----------------
<C>
Cisco Systems, Inc.............................. Apr 97/$60 500 $ 581,250
------------
TOTAL PURCHASED PUT OPTIONS (COST $82,750).... 581,250
------------
TOTAL PUBLIC PORTFOLIO (COST $296,011,171).... 429,595,090
------------
PRIVATE PLACEMENT -- 5.67%
Echlin Inc. -- manufacturer of automotive parts and components
Common stock (c)(e)................................................... 553,162 16,926,757
Home State Holdings, Inc. -- property and casualty insurers
11.50% Subordinated Note due 10/03/2004 (c)(d)........................ $10,050,000 9,645,003
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 1,338,607
Security Capital U.S. Realty -- real estate investment trust
Common stock (b)(c)(g)................................................ 983,528 12,392,448
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d)............... $ 267,089 1,232,339
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)........ $ 60,938 104,082
------------
TOTAL PRIVATE PLACEMENT PORTFOLIO (COST $34,921,628).................. 42,112,177
------------
TOTAL INVESTMENTS IN UNAFFILIATED ISSUERS (COST $330,932,799)........... 471,707,267
------------
INVESTMENTS IN NON-CONTROLLED AFFILIATES -- 2.15%
PRIVATE PLACEMENT -- 2.15%
Citadel Communications Corporation -- radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)........................ 746,412 $ 11,942,590
TBN Holdings Inc. -- hazardous waste recycler
12% Subordinated Note due 12/31/2002 (c)(d)(h)........................ $ 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)....... 15,942,590
------------
</TABLE>
See accompanying notes to statement of investments
4
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
March 31, 1997 -- Unaudited Shares or
Principal
Amount VALUE
----------- ------------
<S> <C> <C>
INVESTMENTS IN CONTROLLED AFFILIATES -- 30.77%
PUBLICLY-TRADED -- 11.28%
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 (c)(d)............ $ 8,000,000 7,872,750
-----------
Total private placement portfolio (Cost $10,500,000). 10,500,000
-----------
WHOLLY-OWNED SUBSIDIARY -- 18.07%
Levin Management Co., Inc. -- investment management
Common stock (c)(d)(k)................................. 1,000 66,155,368
9.75% Notes due 06/28/1999 (c)(d)(k)................... $65,000,000 65,000,000
9.75% Note due 06/30/1997 (c)(d)(k).................... $ 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 -- 2.65%
U.S. Treasury bill -- 5.1125% due 07/24/1997............. $20,000,000 19,673,368
-----------
TOTAL INVESTMENTS IN MONEY MARKET
SECURITIES (COST $19,673,368)........................... 19,673,368
-----------
TOTAL INVESTMENTS -- 99.12% (COST $502,893,680).......... 735,728,593
-----------
SECURITIES SOLD SHORT -- (1.42)%
Cascade Communications Corp.............................. 75,000 (1,978,125)
Chesapeake Energy Corp................................... 150,000 (3,131,250)
Cisco Systems, Inc....................................... 8,000 (385,000)
The Manitowoc Company, Inc............................... 5,600 (202,300)
T. Rowe Price Associates, Inc............................ 57,000 (2,116,125)
Tellabs, Inc............................................. 75,000 (2,709,375)
-----------
TOTAL SECURITIES SOLD SHORT (PROCEEDS $14,496,634)....... (10,522,175)
-----------
CASH AND OTHER ASSETS LESS LIABILITIES -- 2.30%.......... 17,077,795
-----------
NET ASSETS -- 100.00%.................................... $742,284,213
============
</TABLE>
See accompanying notes to statement of investments
5
<PAGE>
NOTES TO STATEMENT OF INVESTMENTS
----------
(a) Based on the cost of investments of $451,988,997, for federal income
tax purposes at March 31, 1997, net unrealized appreciation was
$283,739,596, which consisted of gross unrealized appreciation of
$301,506,275 and gross unrealized depreciation of $17,766,679.
(b) Non-income producing security.
(c) 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 March 31,
1997. The aggregate value of restricted securities was $202,710,135 or
27.31% of net assets, at March 31, 1997.
(d) There were no unrestricted securities of the same issue outstanding on
March 31, 1997 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) Represents 90% of the current market price of unrestricted common
stock of Security Capital U.S. Realty.
(h) Security not current as to payment of interest.
(i) Security exempt from registration requirements under Rule 144A of the
Securities Act of 1993 which permits resales of eligible securities
issued in private placements and other transactions to "Qualified
Institutional Investors".
(j) The aggregate market value of stocks held in escrow at March 31, 1997
to collateralize securities sold short was $10,522,175. In addition
the Company maintains cash deposits of $14,344,129 with brokers to
collateralize securities sold short.
(k) 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.
6
<PAGE>
PORTFOLIO CHANGES EXCEEDING $2.5 MILLION
Quarter Ended March 31, 1997 - Unaudited
<TABLE>
<CAPTION>
Purchases Cost
- --------- -----------
<S> <C>
WMX Technologies, Inc..................... $13,845,568
Tokio Marine & Fire Insurance
Company (ADR)........................... 4,597,545
Genentech, Inc............................ 3,101,423
American International Group, Inc......... 2,474,435
-----------
$24,018,971
===========
</TABLE>
<TABLE>
<CAPTION>
Sales Proceeds
- ----- -----------
<S> <C>
Xerox Corporation......................... $ 6,819,078
Wausau Paper Mills Company................ 3,251,792
T. Rowe Price Associates, Inc............. 3,103,960
-----------
$13,174,830
===========
</TABLE>
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.
SELECTED DATA
<TABLE>
<CAPTION>
As of March 31, 1997
<S> <C>
Total net assets................. $742,284,213
Net investment income (YTD)...... $ 4,633,259
Net realized capital gain (YTD).. $ 5,347,526
Unrealized appreciation.......... $232,834,913
Shares outstanding............... 34,042,181
Per Share
Net asset value................ $ 21.80
Market price................... $ 17.875
</TABLE>
7
