<PAGE>
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 or 312-360-5198
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
Baker, Fentress & Company
Report to Shareholders
[LOGO]
The Company's Report to Shareholders is printed on recycled paper. We encourage
recycling and use of recycled products.
FIRST QUARTER
March 31, 1998 [LOGO]
<PAGE>
TO OUR SHAREHOLDERS
The broad stock market indicies continued their steady climb in
the 1st Quarter of 1998. Company management has not changed its investment
philosophy in reaction to the market. In the public portfolio, Levco seeks to
participate in up markets and out-perform in down markets.
The S&P 500 was up 14.0% for the first three months of 1998, and 48.0% for
the last 12 months. The comparative performance for Baker Fentress was as
follows:
<TABLE>
<CAPTION>
First Last 12
Quarter Months
------- ------
<S> <C> <C>
Net asset value
(Portfolio performance) 8.8% 24.8%
Public portfolio 10.8% 34.5%
Market value
(Shareholder return) 13.6% 34.3%
</TABLE>
The process of restructuring our public portfolio is continuing, as we
implement the Levco value style. This restructuring has generated large capital
gains, and we have maintained a high cash position in order to fund both last
year's distribution and the midyear distributions discussed below. In the
future, to more accurately reflect the performance of our public portfolio, we
plan to hold cash intended for distributions separately from public portfolio
assets. Total performance will not be affected by this change.
PORTFOLIO RESTRUCTURING
AND DISTRIBUTIONS
On May 5, 1998, midyear distributions totaling $2.00 per share ($1.75 capital
gain and $0.25 ordinary income) will be paid to shareholders of record on March
25, 1998. The board decided to make this payment to shareholders due to the
large amount of undistributed gains that have been realized over the five months
ended March 31, 1998. It is only the second time in the history of our Company
that we have paid more than one capital gain distribution in a year.
We also plan to pay out a capital gain distribution and ordinary income
dividend in mid-December. It is anticipated that 1998 calendar year
distributions will be in excess of our previously announced goal of 12% of
average net assets. Beginning in 1999, we intend to return to our minimum
targeted payout of 8%.
After payment of the midyear capital gain distribution, we estimate that
unrealized book appreciation and undistributed realized gain as a percentage of
average net assets will be 30.2%. This is down from 43.6% as of June 30, 1996
as shown in the accompanying chart:
[GRAPH APPEARS HERE]
Unrealized appreciation and undistributed Realized Gain as Percent of Net Assets
June 30, 1996 43.55%
September 30, 1996 39.89%
December 31, 1996 39.93%
March 31, 1997 35.97%
June 30, 1997 42.13%
September 30, 1997 44.36%
December 31, 1997 36.12%
March 31, 1998 30.23%
1
<PAGE>
TO OUR SHAREHOLDERS (continued)
Since Levco took over management of the public portfolio in June of 1996,
our investment approach in the public portfolio has focused on large cap value.
An important aspect of this approach is that portfolio positions are assessed
from a risk/reward viewpoint. We believe this approach will maximize returns
over an entire market cycle.
The composition of our overall portfolio continues to change. Shown below
is the market value of our current portfolio sectors.
Portfolio Sectors
As of March 31, 1998
[PIE CHART APPEARS HERE]
Actual
[ ] Public Portfolio-65.3%
[ ] Levco-16.4%
[ ] Consolidated-Tomoka-12.1%
[ ] Private Placement-6.2%
PUBLIC PORTFOLIO
At the end of the first quarter, the value of the public portfolio totaled
$521.4 million, or 65.3% of the market value of our total portfolio.
This compares to $495.2 million or 62.9% at the end of 1997. The increase was
caused both by appreciation of the underlying securities and the transfer to the
public portfolio of the proceeds from the sale of our interest in Echlin Inc.
Echlin had been part of our private placement portfolio.
PRIVATE PLACEMENT PORTFOLIO
The major event of the first quarter was the Echlin sale, which generated total
proceeds of $28.2 million and a long-term gain of $17.8 million. This sale
reduced the private placement portfolio to about $49.9 million, or 6.2% of the
total. Efforts continue to liquidate this portion of our portfolio, and we
remain confident that this can be largely accomplished over the next 18 to 24
months.
CONSOLIDATED-TOMOKA
LAND CO. (CTO)
CTO was valued at $96.9 million at the end of the first quarter, or 12.1% of the
total portfolio. Real estate and citrus are notoriously fickle, but we are
currently anticipating improving operating results in both major divisions of
CTO this year. The real estate operations are expected to be positively impacted
by the
2
<PAGE>
major development projects underway at the LPGA International Project. In
addition, improved citrus results are expected due to the maturing of the
younger groves planted in the late 1980s and stronger citrus pricing.
LEVCO
Total assets under management at Levco, our wholly-owned subsidiary, grew to
$8.4 billion as of March 31, 1998, compared to $7.4 billion at the end of 1997.
Levco continues to enhance its operations with increased portfolio management,
operations, and marketing capabilities.
NEW CLOSED-END FUND
ASSOCIATION (CEFA)
During the fourth quarter of 1997, BKF became a charter member of CEFA, an
industry association established to focus on closed-end fund issues. CEFA
activities will include public relations, investor education, and industry
studies. We believe CEFA will benefit everyone associated with our industry.
OTHER BUSINESS
Our annual shareholders' meeting is scheduled to be held on Thursday, June 11,
1998 at 10:30 a.m. at The Midland Hotel, Adams Room, 172 West Adams at LaSalle,
Chicago, Illinois 60603. We look forward to seeing you at the meeting.
Effective April 16, 1998, Julie A. Heironimus was promoted to the position
of treasurer. She takes the place of Janet Jones, our treasurer for the last 15
years, who relocated to San Francisco in January 1998.
/s/ James P. Gorter
- ------------------------
James P. Gorter
Chairman of the Board
/s/ John A. Levin
- -------------------------
John A. Levin
President and CEO
3
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
March 31, 1998 - Unaudited Shares Value
------- -----
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS -- 65.89%
Public -- 63.77%
Common Stock -- 61.31%
Basic Materials -- 6.60%
Air Products & Chemicals, Inc............... 83,000 $ 6,878,625
Allegheny Teledyne Incorporated............. 281,000 7,815,453
Carpenter Technology Corporation............ 49,000 2,646,000
E.I. Du Pont de Nemours and Company......... 164,000 11,152,000
Getchell Gold Corporation (b)............... 252,300 5,266,762
Inland Steel Industries, Inc................ 160,500 4,433,813
Monsanto Company............................ 108,000 5,616,000
W.R. Grace & Co............................. 90,000 7,531,875
-----------
51,340,528
-----------
Capital Goods -- 10.05%
The Boeing Company.......................... 96,436 5,026,727
Electronic Data Systems Corporation......... 107,400 4,926,975
General Electric Company.................... 86,000 7,412,168
Harnischfeger Industries, Inc............... 218,920 7,484,437
Lockheed Martin Corporation................. 88,200 9,922,500
Minnesota Mining and Manufacturing Company.. 145,600 13,249,600
Owens-Illinois, Inc. (b).................... 226,500 9,796,125
Rockwell International Corporation.......... 51,300 2,943,337
United Technologies Corporation............. 117,300 10,828,315
York International Corporation.............. 145,000 6,525,000
-----------
78,115,184
-----------
Communication Services -- 1.26%
Bell Atlantic Corporation................... 95,500 9,764,875
-----------
Consumer Cyclical -- 3.61%
The Black & Decker Corporation.............. 172,900 9,174,593
J.C. Penney Company, Inc.................... 35,000 2,649,080
Tribune Company............................. 230,000 16,215,000
-----------
28,038,673
-----------
Consumer Staples -- 3.72%
Fortune Brands, Inc......................... 109,400 4,362,325
General Mills, Inc.......................... 89,800 6,824,800
Philip Morris Companies Inc................. 128,200 5,344,402
Ralston Purina Company...................... 36,800 3,900,800
U.S. West Media Group (b)................... 245,000 8,513,750
-----------
28,946,077
-----------
Energy -- 5.08%
Amerada Hess Corporation.................... 85,900 5,009,087
Pacific Enterprises......................... 248,400 10,137,949
Sunstrand Corporation....................... 30,600 1,851,300
Union Texas Petroleum Holdings, Inc......... 420,000 9,292,500
Unocal Corporation.......................... 341,000 13,192,608
-----------
39,483,444
-----------
</TABLE>
4
See accompanying Notes to Statement of Investments
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS
March 31, 1998 - Unaudited Shares Value
-------- -----------
<S> <C> <C>
INVESTMENTS IN UNAFFILIATED ISSUERS (continued)
Financials -- 13.79%
Ace Ltd.................................................. 154,500 $ 5,822,796
Aetna Inc................................................ 216,500 18,064,327
American Express Company................................. 3,500 321,346
American General Corporation............................. 7,500 485,160
Aon Corporation.......................................... 175,000 11,331,250
BankBoston Corporation................................... 4,800 529,200
The CIT Group, Class A................................... 20,000 652,500
Capital Automotive REIT (b).............................. 25,000 471,875
Citicorp................................................. 42,500 6,035,000
Countrywide Credit Industries, Inc....................... 5,000 265,940
EXEL Limited............................................. 133,000 10,307,500
Erie Indemnity Company, Class A.......................... 10,400 327,600
Fairfax Financial Holdings Ltd. (Stock Purchase Rights).. 78,000 48,360
First Chicago NBD Corporation............................ 6,000 528,750
First Investors Financial Services Group, Inc. (b)....... 177,300 1,241,100
First Sierra Financial, Inc. (b)......................... 40,000 1,040,000
First Union Corporation.................................. 134,750 7,655,483
Fleet Financial Group, Inc............................... 4,500 382,784
INMC Mortgage Holdings, Inc.............................. 17,500 437,500
KeyCorp.................................................. 9,000 340,317
Leucadia National Corporation............................ 11,000 433,125
Mid Ocean Limited (ORD).................................. 18,300 1,418,250
Mutual Risk Management Ltd............................... 14,000 474,250
NationsBank Corporation.................................. 78,187 5,702,803
Partner Re Ltd........................................... 79,000 3,880,875
Penncorp Financial Group, Inc............................ 11,000 317,625
Provident Companies, Inc................................. 7,500 257,348
SLM Holding Corporation.................................. 22,600 985,925
TIG Holdings, Inc........................................ 310,000 8,157,030
Terra Nova Holdings Ltd., Class A........................ 32,800 1,000,400
Tokio Marine and Fire Insurance Company (ADR)............ 125,000 7,000,000
Transamerica Corporation................................. 4,300 500,950
Travelers Group Inc...................................... 14,450 867,000
UICI (b)................................................. 29,000 1,002,327
UNUM Corporation......................................... 6,200 342,166
USF&G Corporation........................................ 10,000 249,380
Unitrin, Inc............................................. 102,000 6,872,250
Waddell & Reed Financial, Inc. (b)....................... 16,300 423,800
Willis Corroon Group (ADR)............................... 82,000 1,096,750
-----------
107,271,042
-----------
</TABLE>
See accompanying Notes to Statement of Investments 5
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF INVESTMENTS Shares or
March 31, 1998 - Unaudited Principal Amount Value
INVESTMENTS IN UNAFFILIATED ISSUERS (continued) ---------------- ------------
<S> <C> <C>
Health Care -- 4.12%
Genentech, Inc. (b).......................... 139,400 $ 9,819,057
Pfizer Inc................................... 151,300 15,082,794
Rhone-Poulenc S.A. (ADR)..................... 66,200 3,334,825
Warner-Lambert Company....................... 22,500 3,832,043
------------
32,068,719
------------
Technology -- 4.57%
First Data Corporation....................... 484,200 15,736,500
General Motors Corporation, Class H.......... 62,700 2,845,012
Hewlett-Packard Company...................... 38,000 2,408,250
International Business Machines Corporation.. 116,200 12,070,275
Texas Instruments Incorporated............... 45,500 2,462,688
------------
35,522,725
------------
Transportation -- 0.67%
Union Pacific Corporation.................... 93,000 5,237,109
------------
Utilities -- 7.84%
Consolidated Edison of New York, Inc......... 65,700 3,071,475
Duke Energy Corporation...................... 365,540 21,772,659
Enova Corporation............................ 169,300 4,729,903
Long Island Lighting Company................. 457,900 14,423,850
Potomac Electric Power Company............... 455,100 11,406,171
Texas Utilities Company...................... 141,100 5,547,064
------------
60,951,122
------------
Total common stock (Cost $352,602,215).... 476,739,498
------------
Preferred Stock -- 0.90%
Union Pacific Capital Trust, 6.25% (h)....... 93,100 4,957,575
Aetna Inc., 6.25% Class C...................... 25,000 2,001,575
------------
Total preferred stock (Cost $6,326,166)..... 6,959,150
------------
Convertible Bonds -- 1.56%
Hewlett-Packard Company, Zero Coupon Bond
due 10/14/2017 (h)........................... $22,785,000 12,133,013
------------
Total convertible bonds (Cost $12,201,951).. 12,133,013
------------
Total public portfolio (Cost $371,130,332).. 495,831,661
------------
</TABLE>
6
See accompanying Notes to Statement of Investments
<PAGE>
STATEMENT OF INVESTMENTS
<TABLE>
<CAPTION>
March 31, 1998 - Unaudited Shares or
Principal Amount Value
INVESTMENTS IN UNAFFILIATED ISSUERS (continued) ---------------- -----------
<S> <C> <C>
Private Placement--2.12%
Paracelsus Healthcare Corporation - hospital management company
Common Stock (b)(c)(d)(f).......................................... 535,443 $ 1,981,139
Security Capital U.S. Realty - real estate investment trust
Common Stock (b)................................................... 983,528 12,982,564
Golder, Thoma, Cressey Fund II Limited Partnership (c)(d)(e)......... $ 209,782 1,477,173
Phillips-Smith Specialty Retail Group Limited Partnership (c)(d)(e).. $ 61,156 27,527
------------
Total private placement portfolio (Cost $14,339,922).............. 16,468,403
------------
Total investments in unaffiliated issuers (Cost $385,470,254)........ 512,300,064
------------
INVESTMENTS IN CONTROLLED AFFILIATES--30.68%
Publicly-Traded--12.46%
Consolidated-Tomoka Land Co., Common Stock
(majority-owned) - development of Florida real estate;
production and sale of citrus fruit (c) (Cost $5,030,627).......... 5,000,000 96,875,000
------------
Private Placement--1.35%
DuroLite International, Inc. - manufacturer and distributor of
specialized lighting products
Convertible Preferred Stock (b)(c)(d)(e)........................... 2,500 2,627,250
12% Subordinated Note due 11/03/2004 (c)(d)(e)..................... $ 8,000,000 7,872,750
------------
Total private placement portfolio (Cost $10,500,000).............. 10,500,000
------------
Wholly-Owned Subsidiary--16.87%
Levin Management Co., Inc - investment management
Common Stock (b)(c)(d)(e)......................................... 1,000 66,155,368
9.75% Notes due 06/28/1999 (c)(d)(e).............................. $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)....... 238,530,368
------------
INVESTMENTS IN NON-CONTROLLED AFFILIATES--2.94%
Private Placement--2.94 %
Citadel Communications Corporation - radio broadcasting
Series A Convertible Preferred Stock (b)(c)(d)(e)................. 746,412 22,392,356
TBN Holdings Inc. - hazardous waste recycler
12% Subordinated Note Due 12/31/2002 (c)(d)(e)(g)................. $ 8,000,000 500,000
Series C-3 Convertible Preferred Stock (b)(c)(d)(e)............... 1,511,628 -
Stock Purchase Warrants Expiring 12/31/2002 (b)(c)(d)(e).......... 1,100,000 -
------------
Total investments in non-controlled affiliates (Cost $13,110,996).... 22,892,356
------------
MONEY MARKET SECURITIES--7.69%
U.S. Treasury bills - 5.240% due 04/16/98............................ $15,000,000 14,965,067
U.S. Treasury bills - 5.325% due 04/30/98............................ $45,000,000 44,800,312
------------
Total investments in money market securities (Cost $59,765,379)...... 59,765,379
------------
Total Investments--107.20% (Cost $594,523,146)....................... 833,488,167
------------
Cash and Other Assets, Less Liabilities--(7.20%)..................... (56,001,909)
------------
NET ASSETS--100.00%.................................................. $777,486,258
============
</TABLE>
See accompanying Notes to Statement of Investments 7
<PAGE>
NOTES TO STATEMENT OF INVESTMENTS
--------------
(a) Based on the cost of investments of $543,751,988, for federal income
tax purposes at March 31, 1998, net unrealized appreciation was
$289,736,179, which consisted of gross unrealized appreciation of
$307,308,133 and gross unrealized depreciation of $17,571,954.
(b) Non-income producing security.
(c) Securities subject to legal or contractual restrictions on sale are
valued at cost on the dates of acquisition and at a fair value
determined in good faith by the board of directors of the Company as of
March 31, 1998, based upon all factors deemed relevant by the board.
The quantitative and qualitative factors considered by the board of
directors may include, but are not limited to, type of securities,
nature of business, marketability, restrictions on disposition, market
price of unrestricted securities of the same issue (if any),
comparative valuation of securities of publicly-traded companies in the
same or similar industries, valuation of recent mergers and
acquisitions of similar companies, current financial condition and
operating results, sales and earnings growth, operating revenues,
competitive conditions, and current and prospective conditions in the
overall stock market.
The values determined by the board of directors may not reflect amounts
that could be realized upon immediate sale, nor amounts that ultimately
may be realized. Accordingly, the fair values included in the statement
of investments may differ from the values that would have been used had
a ready market existed for these securities, and such differences could
be significant.
(d) The aggregate value of restricted securities was $168,033,563, or
21.61% of net assets, at March 31, 1998.
(e) There were no unrestricted securities of the same issue outstanding on
March 31, 1998 or the dates of acquisition.
(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) Security exempt from registration requirements under Rule 144A of the
Securities Act of 1933 which permits resales of eligible securities
issued in private placements and other transactions to "Qualified
Institutional Buyers".
8
<PAGE>
PORTFOLIO CHANGES EXCEEDING $2.5 MILLION
<TABLE>
<CAPTION>
Quarter Ended March 31, 1998 - Unaudited
Purchases Cost
- --------- -----------
<S> <C>
Potomac Electric Power Company.............................. $11,430,000
Pacific Enterprises......................................... 9,435,557
United Technologies Corporation............................. 8,429,673
General Mills, Inc.......................................... 6,462,205
First Union Corporation..................................... 6,394,813
Hewlett-Packard Company, Zero Coupon Bond due 10/14/2017.... 5,784,688
Philip Morris Companies Inc................................. 5,546,014
EXEL Limited................................................ 5,320,274
Union Pacific Capital Trust, 6.25% Preferred................ 4,700,675
Inland Steel Industries, Inc................................ 4,499,654
Enova Corporation........................................... 4,399,082
Ace Ltd..................................................... 4,134,070
Unocal Corporation.......................................... 3,986,648
Ralston Purina Company...................................... 3,440,356
First Data Corporation...................................... 3,023,318
Warner-Lambert Company...................................... 2,804,984
Texas Instruments Incorporated.............................. 2,509,985
-----------
$92,301,996
===========
</TABLE>
<TABLE>
<CAPTION>
Sales Proceeds
- ----- ------------
<S> <C>
Echlin Inc.................................................. $ 28,236,688
Time Warner Inc............................................. 8,729,183
General Re Corporation...................................... 8,311,344
The Chase Manhattan Corporation............................. 7,195,427
The Boeing Company.......................................... 7,089,493
Cendant Corporation......................................... 7,077,268
MCI Communications Corporation.............................. 6,336,539
Baxter International Inc.................................... 6,237,119
Pfizer Inc.................................................. 6,115,761
T. Rowe Price Associates, Inc............................... 5,767,556
Litton Industries, Inc...................................... 5,660,759
General Motors Corporation.................................. 5,542,612
American International Group, Inc........................... 4,206,423
USG Corporation............................................. 3,589,626
Monsanto Company............................................ 3,470,425
Bell Atlantic Corporation................................... 2,658,080
------------
$116,224,303
============
</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 preservation. 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
the Company's 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.
SELECTED DATA
<TABLE>
As of March 31, 1998
<S> <C>
Total net assets....................................... $777,486,258
Net investment income (YTD)............................ $ 4,985,907
Net realized capital gain (YTD)........................ $ 53,714,043
Unrealized appreciation................................ $238,965,021
Shares outstanding..................................... 35,983,081
Per Share
Net asset value.................................... $ 21.61
Market price....................................... $ 18.75
</TABLE>
9
<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 William H. Springer
James P. Gorter Dean J. Takahashi
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
Julie A. Heironimus Treasurer and Assistant Secretary
10
