THE BAUPOST FUND
ANNUAL REPORT
October 31, 1997
This report and the financial statements contained herein are submitted for the
general information of the shareholders of The Baupost Fund. The report is not
authorized for distribution to prospective investors in The Baupost Fund unless
preceded or accompanied by the current prospectus.
THE BAUPOST FUND
ANNUAL REPORT
OCTOBER 31, 1997
<TABLE>
<CAPTION>
Contents:
<S> <C>
Management's Discussion of Performance.........................................1
Report of Independent Auditors.................................................8
Audited Financial Statements:
Statement of Assets and Liabilities as of October 31, 1997.....................9
Statement of Operations for the year ended October 31, 1997...................10
Statement of Changes in Net Assets for the years ended October 31, 1997
and October 31, 1996......................................................11
Schedule of Investments as of October 31, 1997...............................12
Schedule of Forward Foreign Currency Contracts as of October 31, 1997........23
Schedule of Securities Sold Short as of October 31, 1997.....................25
Notes to Financial Statements.................................................26
Financial Highlights..........................................................32
</TABLE>
December 22, 1997
Dear Fund Shareholder,
We are pleased to report strong results for the year ended October 31, 1997. For
the twelve months, the Fund achieved a total return of 27.04% despite holding on
average over 20% of its net assets in cash during the period. Our result was,
however, somewhat below the exceptional return for the S&P 500 of 32.11% over
the same period.
As in the last few years, the Fund benefited from international diversification,
posting significant gains from European and Russian equities, as well as from
U.S. shares. Corporate liquidations and distressed debt holdings also
contributed importantly to results. Market declines in our Korean and Hong Kong
positions had a small dampening effect on overall performance. A breakdown of
the year's largest gains and losses appears in Table 1 below. A chart depicting
the diversification of our holdings at October 31 appears below as Table 2.
Table 1
-------
The Baupost Fund
----------------
Largest Gains and Losses (Realized and Unrealized)
--------------------------------------------------
For the Twelve Months Ended 10/31/97
------------------------------------
($ in millions)
<TABLE>
<CAPTION>
Largest Gains Largest Losses
------------- --------------
<S> <C> <C> <C>
TLC Beatrice equity $ 7.3 Semi-Tech Global equity $ (2.3)
MBO Properties equity 5.2 Various equity and debt market hedges (2.1)
(2.1)
Assurances Generales de France equity 4.2 SK Telecom equity and swaps (1.6)
Lukoil Oil Co. equity 3.0 Playmates Toys equity (.8)
Chargeurs / Pathe / British Sky Broadcasting Philip Morris calls (.7)
equity and options 2.3 NCR Corporation equity (.6)
Yield on Cash and Cash Equivalents 2.2 Kookmin Bank equity and swaps (.5)
C-Tec / RCN / Cable Michigan equity 2.2 Vareganneftegaz equity (.5)
Heritage Media equity 2.0 Northwestern Steel & Wire Co. equity (.4)
Ralcorp Holdings / General Mills equity 1.7 Wang Laboratories equity (.3)
Allmerica Financial equity 1.6
IFIL equity 1.4
Unified Energy Systems equity 1.2
Surgutneftegaz Sponsored equity 1.0
Thomson CSF equity .8
</TABLE>
1
TABLE 2
-------
ASSET TYPE MARKET VALUE % OF NET ASSETS
- ---------- ------------ ---------------
EUROPEAN EQUITIES* $ 47,035,855 30.5%
CASH & CASH EQUIVALENTS* $ 39,280,619 25.5%
U.S. EQUITIES $ 31,322,113 20.3%
EMERGING EUROPEAN EQUITIES $ 12,685,930 8.2%
LIQUIDATIONS $ 10,470,017 6.8%
BANKRUPTCIES & DISTRESSED DEBT $ 8,079,115 5.2%
ASIAN EQUITIES* $ 3,143,531 2.0%
MARKET HEDGES $ 2,091,836 1.4%
TOTAL: $154,109,016 100.00%
*Net of currency hedges
BREAKDOWN OF PORTFOLIO AT OCTOBER 31, 1997
$39,280,619 (25.5%) CASH & CASH EQUIVALENTS
$31,322,113 (20.3%) U.S. EQUITIES
$12,685,930 (8.2%) EMERGING EUROPEAN EQUITIES
$10,470,017 (6.8%) LIQUIDATIONS
$ 8,079,115 (5.2%) BANKRUPTCIES & DISTRESSED DEBT
$ 3,143,531 (2.0%) ASIAN EQUITIES*
$ 2,091,836 (1.4%) MARKET HEDGES
$47,035,855 (30.5%) EUROPEAN EQUITIES*
2
For most of the Fund's fiscal year, the U.S. equity market raced ahead, followed
closely by other world markets. Despite high valuations, investors poured money
into U.S. equity mutual funds at a record pace. The main trouble spot in the
world was in Southeast Asia, which experienced a growing currency crisis as the
year progressed. Stock markets in Thailand, Malaysia, and Indonesia were
decimated over the summer, followed in October by Hong Kong and Korea. This, in
turn, led to sharp selloffs in Japan, as well as Russia, Brazil, and other
emerging markets.
After dramatic nightly Asian losses in late October, the U.S. stock market
plunged 550 points on Monday, October 27. For the first time in quite a while,
fear overtook greed at the forefront of investors' minds. The world's stock
markets were dropping, no one knew how low, and nobody, for a day, wanted to
buy. By the next morning, the U.S. market stabilized and partially recovered,
while emerging markets remained in turmoil.
Value Investing in a Turbulent Environment
- ------------------------------------------
The most favorable position going into a sudden downdraft (if you could
correctly anticipate one) is to hold market hedges and/or cash (or better still,
short positions, but short sellers have been aging in dog years for a long
time). We hold both, although never enough in a downturn, because both are
costly. Hedges, like any insurance, involve paying a premium. Premiums have
skyrocketed in lockstep with the market's surge over the past two years, and
have risen even more in the current volatile environment. Cash provides
protection in a storm and ammunition to take advantage of newly created
opportunities, but holding cash involves the considerable opportunity cost of
foregoing presently attractive investments. Given the choice between holding
mostly cash awaiting the periodic market tumble or finding compelling
investments which earn good returns over time but fluctuate to a certain extent
with the market amidst turbulence, we choose the latter. Obviously, we could not
have earned the returns we have from investing, without investing.
The upside of the recent market episode is that many good bargains have become
even better ones, and numerous attractive new situations have surfaced. We are
selectively deploying cash into what we believe are wonderful, long-term values,
and are also repositioning ourselves, adding to some positions while reducing or
deleting others, to take advantage of the lay of the present landscape. The
opportunity to invest more money at lower prices will certainly be to our
long-term financial benefit.
If the financial markets remain turbulent and retrace some of their decade-long
gains, I believe we will be in a strong position. Despite delivering good
investment performance over the Fund's first seven years of operations, I must
remind you that value investing is not designed to outperform in a bull market.
In a bull market, anyone, with any investment strategy or none at all, can do
well, often better than value investors. It is only in a bear market that the
value investing discipline becomes especially important because value investing,
virtually alone among strategies, gives you exposure to the upside with limited
downside risk. In a stormy market, the value investing discipline becomes
crucial, because it helps you find your bearings when reassuring landmarks are
no longer visible. In a market downturn, momentum investors cannot find
momentum,
3
growth investors worry about a slowdown, and technical analysts don't like their
charts. But the value investing discipline tells you exactly what to analyze,
price versus value, and then what to do, buy at a considerable discount and sell
near full value. And, because you cannot tell what the market is going to do, a
value investment discipline is important because it is the only approach that
produces consistently good investment results over a complete market cycle.
Increased International Focus
- -----------------------------
The most important investment decision we have made over the past several years
is the one to increase our international efforts. This decision resulted in part
from a realization that opportunities in the U.S. were considerably less
attractive than they had been, and that the situation would not necessarily
improve. Our assessment was in part due to much higher valuations as well as to
a perception of increased market efficiency over time, as more and larger
investors have come into existence. It is still possible to find opportunities
in the U.S. equity market, but we believe it will continue to be more difficult
and less profitable than a few decades ago.
Another key component of our decision to look overseas was the identification of
compelling bargains in numerous European markets, one at a time, bottom up. We
believe that we are at the beginning of a period of value realization in a
number of these markets, and Baupost now has the capability to identify and
rigorously analyze and monitor opportunities in foreign countries.
Some prominent U.S. investors have argued rather vociferously against
international investing. The risks and uncertainties are greater, they insist,
the work far more demanding, and the track record perhaps spottier. So I thought
it might be interesting to reflect on the basic underlying principles of value
investing and evaluate possible reasons why they wouldn't work overseas.
The main underlying principle of value investing is that you should invest in
undervalued securities because they alone offer a margin of safety. Over time,
by again and again avoiding loss, you have taken the first step toward achieving
healthy gains. Value investors should buy assets at a discount, not because a
business trading below its obvious liquidation value will actually be
liquidated, but because if you have limited downside risk from your purchase
price, you have what is effectively a free option on the recovery of that
business and/or the restoration of that stock to investor favor. If an
undervalued stock drops after you buy it and you are confident in your analysis,
you simply buy more. All of these points apply equally well regardless of the
market on which a stock trades or where a company does business.
Value investing in the U.S. is driven by fundamental analysis, a rigorous
assessment of underlying value based on an understanding of a particular
business or asset. The same principles that apply here, such as not paying up
for growth, or buying businesses you can understand that are not subject to
rapid technological change or obsolescence, apply internationally as well.
4
One vocal objection I have heard to applying value investing principles overseas
is that foreign companies are not particularly shareholder-value oriented. Of
course, Ben Graham invented value investing when the U.S. was effectively a
foreign country to value investing principles. Certainly, in the 1920's and
1930's, the idea of management running a company for the purpose of maximizing
shareholder value was a totally "foreign" concept, one which didn't really come
into the mainstream until the past decade and, even now, is certainly not an
operative principle at all U.S. firms. Even a few decades ago, U.S. managements
were hardly shareholder value oriented. No one was arguing that you shouldn't be
a value investor then, when Warren Buffett, Max Heine, Tweedy Browne, and Ruane
Cuniff were building their brilliant track records.
I frequently hear the argument that the rules are different overseas: the
accounting murky, the annual reports unreadable, the currencies sometimes
unhedgable. All of these points are fair, but, rather than being arguments to
avoid foreign markets, they are instead arguments to embrace them. After all, as
an investor you never have perfect information, and the biggest profits are
always available (just as they have been in the U.S.) when competition and
information are scarce. The payoff to fundamental analysis rises proportionately
with the difficulty of performing it.
Through this general line of thinking, you might conclude that future returns
will be lowest in expensive markets and greatest in cheap ones; lowest where
information is plentiful and straightforward, and greatest where it is scarce
and hard to interpret; and lowest when markets are priced to reflect
shareholder-oriented management and greatest where managements are currently
indifferent. All of this, I believe, is the case, and the next decade should
prove it.
Conclusion
- ----------
I would be remiss if I did not mention the exemplary performance of Baupost's
analysts and traders in recent months. While they have worked tirelessly and
skillfully all year to produce the strong annual returns the Fund achieved, they
have risen to new heights during the recent market turmoil. To a person (and
like myself), they hate to lose money, even temporarily, for any reason and at
any time. But it is their cool headedness during an emotional period that
deserves special commendation. They have calmly reacted to rapidly changing
conditions, worked as a cohesive team, and challenged their own previous
assumptions to see if they still made sense in a potentially different market
environment.
Baupost's recent recruiting activities continue to bear fruit. Aaron Cowen, a
1994 Wharton graduate, joined Baupost's investment team in October after three
years at Lehman Brothers. Reuben Munger, a 1995 honors graduate of Washington
and Lee, joined Baupost after a two year stint at BT Wolfensohn, an investment
banking firm. We are excited to have these bright and capable analysts on board.
Baupost's administrative staff has performed exceptionally well all year long.
Baupost has benefited from increased depth in each of our departments, and has
been working on a number of valuable projects including the reclaim of foreign
tax credits
5
for the Fund's tax-exempt investors, the change of the Fund's custodian to State
Street Bank, and continuing upgrades to Baupost's accounting and financial
reporting software.
In investing, nothing is certain. The best investments we have ever made, that
in retrospect seem like free money, seemed not at all that way when we made
them. When the markets are dropping hard (as they are right now in Asia) and an
investment you believe is attractive, even compelling, keeps falling in price,
you aren't human if you aren't scared that you have made a gigantic mistake. The
challenge is to perform the fundamental analysis, understand the downside as
well as the upside, remain rational when others become emotional, and don't take
advice from Mr. Market, who again and again is a wonderful creator of
opportunities but whose advice should never, ever be followed.
The markets have remained volatile into November and December, presenting both
challenges and opportunities. We remain focused on risk aversion, seeking to
hold only compelling bargains. Positions that have risen toward full value have
been sold and catalysts have also recently turned a number of the Fund's
holdings into cash. We continue to believe the Fund is positioned to fare well
in any future environment. We remain grateful for your confidence and support,
and are always available for any comments or questions you may have.
Very truly yours,
/s/ Seth A. Klarman
- -------------------
Seth A. Klarman
President
6
================================================================================
AVERAGE ANNUAL TOTAL RETURNS (1) 1 LIFE OF FUND
For Periods Ended 10/31/97 YEAR (SINCE 12/14/90)
THE BAUPOST FUND 27.04% 17.69%
================================================================================
Total return is an historical measure of past performance and is not intended to
indicate future performance. Because investment return and principal value will
fluctuate, the Fund's shares may become worth more or less than their original
cost. During the periods reported above, an expense cap was in place which had
the effect of lowering the Fund's management fee and therefore enhanced the
total return of the Fund.
(1) Assumes reinvestment of all dividends.
GROWTH OF AN ASSUMED $50,000 INVESTMENT
IN THE BAUPOST FUND FROM 12/14/90 THROUGH 10/31/97
FUND S&P
12/14/90 $50,000.00 $50,000.00
10/31/91 $59,787.28 $61,807.01
10/31/92 $65,471.39 $67,963.62
10/31/93 $82,134.71 $78,116.01
10/31/94 $91,217.43 $81,134.73
10/31/95 $98,430.31 $102,587.46
10/31/96 $120,583.20 $127,306.16
10/31/97 $153,193.22 $168,186.49
(1) Assumes reinvestment of all dividends.
7
Report of Independent Auditors
To the Trustees and Shareholders of
The Baupost Fund
We have audited the accompanying statement of assets and liabilities of The
Baupost Fund, including the schedule of investments, schedule of securities sold
short and schedule of forward foreign currency contracts, as of October 31,
1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Baupost Fund at October 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
December 5, 1997
8
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities - at value $ 153,239,227
(Notes A and C) (cost $131,241,269)
Cash 3,648,231
Receivable for investments sold 1,915,565
Purchased interest 432,839
Accrued investment income 425,613
Receivable for investments sold short 148,467
Other assets 13,554
-----------------
Total Assets 159,823,496
LIABILITIES:
Payable for equity swap contracts 2,904,012
Payable for investments purchased 2,134,839
Unrealized depreciation on forward foreign
currency contracts sold 881,617
Payable to The Baupost Group, Inc. (Note B) 482,556
Payable for interest and termination value
on equity swap contracts 265,049
Other payables and accrued expenses 107,594
Payable for securities sold short
(Notes A and C) (proceeds $148,467) 89,513
-----------------
Total Liabilities 6,865,180
-----------------
NET ASSETS $ 152,958,316
=================
COMPOSITION OF NET ASSETS:
Paid in capital $ 113,718,323
Accumulated undistributed net investment
income (Note A) 670,056
Accumulated undistributed net realized
gain on investments and foreign
currency transactions 20,948,534
Net unrealized appreciation on investments
and assets and liabilities in foreign currencies 17,621,403
-----------------
NET ASSETS $ 152,958,316
=================
NET ASSET VALUE:
Offering and redemption price per share
($152,958,316 / 8,948,897) $ 17.09
=================
</TABLE>
See notes to financial statements.
9
THE BAUPOST FUND
STATEMENT OF OPERATIONS
Year Ended October 31, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME:
INCOME:
<S> <C>
Interest $ 3,506,505
Dividends (net of foreign withholding taxes of $131,778) 1,352,384
-----------------
Total Investment Income 4,858,889
EXPENSES:
Investment management fee (Note B) 1,353,786
Equity swap contract interest expense 659,677
Administrative fee (Note B) 338,446
Investment expenses 204,460
Custodian fees 88,667
Legal fees 86,814
Interest expense 70,050
Audit fees 39,500
Registration and filing fees 26,384
Directors' fees 25,500
Miscellaneous 9,262
-----------------
Total Expenses 2,902,546
NET INVESTMENT INCOME 1,956,343
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on:
Investments and equity swap contracts 19,411,857
Foreign currency transactions 4,051,629
Short sales 239,392
-----------------
23,702,878
Change in unrealized appreciation/(depreciation) on:
Investments and equity swap contracts 6,785,447
Short sales (172,353)
Foreign currency transactions (713,525)
-----------------
5,899,569
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 29,602,447
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 31,558,790
=================
</TABLE>
See notes to financial statements.
10
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
------------------ -----------------
INCREASE IN NET ASSETS FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 1,956,343 $ 2,251,486
Net realized gain on investments and foreign
currency transactions 23,702,878 10,367,365
Change in unrealized appreciation of investments
and foreign currency transactions 5,899,569 7,415,969
------------------ -----------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 31,558,790 20,034,820
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,845,958) (1,825,419)
From net realized gain on investments (11,985,697) (4,283,665)
CAPITAL SHARE TRANSACTIONS (NOTE E) 27,443,139 5,422,927
------------------ -----------------
INCREASE IN NET ASSETS 44,170,274 19,348,663
NET ASSETS AT BEGINNING OF PERIOD 108,788,042 89,439,379
------------------ -----------------
NET ASSETS AT END OF PERIOD
(including undistributed net investment income
of $670,056 and distributions in excess of
net investment income of $90,004, respectively) $ 152,958,316 $ 108,788,042
================== =================
</TABLE>
See notes to financial statements.
11
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
COMMON STOCKS - 61.42%
UNITED STATES - 23.60%
WHOLESALE - FOOD - 9.44%
272,500 TLC Beatrice International Holdings $ 14,442,500
LESSORS OF REAL PROPERTY - 4.37%
836,059 MBO Properties, Inc. 6,688,472 *^
COMPUTER HARDWARE - 3.86%
194,700 NCR Corporation 5,901,844 *
ELECTRIC SERVICES - 2.16%
265,150 Northeast Utilities 3,049,225
9,300 Unicom Corporation 260,400
-----------------------
3,309,625
CEREAL BREAKFAST FOOD - 1.56%
128,350 Ralcorp Holdings, Inc. 2,382,497 *
FIRE, MARINE & CASUALTY INSURANCE - 0.76%
37,350 Farm Family Holdings, Inc. 1,157,850 *
FINANCIAL INSTITUTIONS - 0.07%
110 Fidelity Bankshares, Inc. 3,107
198 First Federal Savings Bank of Siouxland 6,385
100 Harbor Florida Bancorp Inc. 6,463
1,949 Mid-Central Financial Corporation 41,904
1,800 Shelby County Bancorp 43,200
---------------------------
101,059
</TABLE>
12
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
MISCELLANEOUS - 1.38%
20,800 Chemfirst Inc. $ 525,200
18,400 GC Companies 791,200 *
3,300 NCH Corporation 221,100
938,000 Regency Equities Corporation 11,725 *
4,900 Showboat Inc. 97,388
1,105 The Homestake Oil & Gas Company 121,550
1,579 The Homestake Royalty Corporation 258,956
1,400 USAA Real Estate Equities Inc. Class A REIT 88,200 +
---------------------------
2,115,319
TOTAL COMMON STOCKS - UNITED STATES $ 36,099,166
===========================
(Total Cost $21,092,751)
FRANCE - 15.12%
FIRE, MARINE & CASUALTY INSURANCE - 5.10%
148,700 Assurances Generales de France $ 7,809,387
DIVERSIFIED HOLDING COMPANIES - 4.29%
1,996 Compagnie Generale D'Industrie et de Participations 649,330
2,269 Financiere et Industrielle Gaz et Eaux 936,419
11,505 Pathe SA 2,060,508
7,183 Societe Eurafrance SA 2,919,686
---------------------------
6,565,943
CONSTRUCTION - 3.78%
17,600 Bouygues 1,644,575
161,600 Societe Generale D'Enterprises SA 4,132,978
---------------------------
5,777,553
TEXTILES - 1.42%
32,435 Chargeurs International SA 2,166,449
DEFENSE ELECTRONICS - 0.53%
29,870 Thomson CSF 810,454
---------------------------
TOTAL COMMON STOCKS - FRANCE $ 23,129,786
===========================
(Total Cost $17,452,300)
</TABLE>
13
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
ITALY - 6.83%
DIVERSIFIED HOLDING COMPANIES - 5.98%
675,500 IFIL Finanziaria di Partecipazioni - Ordinary Shares $ 2,492,988
740,200 IFIL Finanziaria di Partecipazioni - Savings Shares 1,442,374
300 Montedison SPA - ADR 2,419
6,056,600 Montedison SPA - Ordinary Shares 4,913,947
533,100 Montedison SPA - Savings Shares 299,052
---------------------------
9,150,780
INSURANCE CARRIERS - 0.85%
86,600 Societe Assicuratrice Industriale - Ordinary Shares 828,415
129,300 Societe Assicuratrice Industriale - Savings Shares 464,213
---------------------------
1,292,628
---------------------------
TOTAL COMMON STOCKS - ITALY $ 10,443,408
===========================
(Total Cost $9,338,186)
SWITZERLAND - 5.14%
FREIGHT TRANSPORATION - 1.93%
14,740 Danzas Holding AG - Registered Shares $ 2,948,000
COMMERCIAL BANKS - 1.75%
9,000 Banque Cantonale Vandiose 2,680,714
DIVERSIFIED HOLDING COMPANY - 1.46%
10,410 Valora Holding AG 2,230,714
---------------------------
TOTAL COMMON STOCKS - SWITZERLAND $ 7,859,428
===========================
(Total Cost $7,985,570)
RUSSIA - 3.38%
OIL & GAS FIELD EXPLORATION SERVICES - 2.81%
32,300 Lukoil Oil Co. - Sponsored ADR $ 2,793,627
500,000 Vareganneftegaz 1,500,000 *
---------------------------
4,293,627
</TABLE>
14
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
ELECTRIC SERVICES - 0.57%
2,666,500 Unified Energy System of Russia $ 873,279
---------------------------
TOTAL COMMON STOCKS - RUSSIA $ 5,166,906
===========================
(Total Cost $3,017,306)
UNITED KINGDOM - 3.04%
FIRE, MARINE AND CASUALTY INSURANCE - 2.17%
1,590,200 Sedgwick Group $ 3,325,506
LUMBER & OTHER CONSTRUCTION MATERIALS - 0.46%
115,000 Adam & Harvey Group PLC 707,052
MEDIA, SATELLITE BROADCAST - 0.23%
50,200 British Sky Broadcasting Group PLC 355,255
DIVERSIFIED HOLDING COMPANY - 0.18%
167,600 Lonrho PLC 271,983
---------------------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 4,659,796
===========================
(Total Cost $4,252,528)
HONG KONG - 1.62%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 1.19%
5,400 Semi-Tech Global Ltd. - ADR $ 16,200
2,431,665 Semi-Tech Global Ltd. 1,808,806
---------------------------
1,825,006
MANUFACTURING - TOYS & DOLLS - 0.43%
6,369,400 Playmates Toys Holdings Ltd. $ 659,188
---------------------------
TOTAL COMMON STOCKS - HONG KONG $ 2,484,194
===========================
(Total Cost $5,786,846)
</TABLE>
15
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
HOLLAND - 0.92%
TOWING & TUGBOAT SERVICES - 0.92%
44,600 Smit Internationale NV $ 1,401,649
---------------------------
TOTAL COMMON STOCKS - HOLLAND $ 1,401,649
===========================
(Total Cost $1,103,694)
SOUTH KOREA - 0.88%
COMMERCIAL BANKS - 0.57%
57,830 Hana Bank $ 354,937
22,856 Hana Bank - GDR Reg S 129,822
12,850 Housing & Commercial Bank Korea 141,695
700 Housing & Commercial Bank Korea - GDR Reg S 6,090
27,100 Kookmin Bank 219,892
2,800 Kookmin Bank - Reg S 18,760
638 Kookmin Bank - New 5,177
490 Shinhan Bank 3,772
---------------------------
880,145
SECURITY BROKER/DEALERS - 0.17%
12,400 Dongwon Securities - Preferred 43,987
12,470 Dongwon Securities - Common 105,593
24,770 Shinyoung Securities Co. - Preferred 97,916
600 Shinyoung Securities Co. - Common 6,616
---------------------------
254,112
STEEL FOUNDRIES - 0.11%
3,880 Pohang Iron & Steel Co., Ltd. 172,440
CELLULAR TELEPHONE PROVIDER - 0.03%
130 SK Telecom Co., Ltd. 43,524
---------------------------
TOTAL COMMON STOCKS - SOUTH KOREA $ 1,350,221
===========================
(Total Cost $2,172,251)
</TABLE>
16
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
CZECH REPUBLIC - 0.56%
ELECTRIC SERVICES - 0.56%
17,500 CEZ 1 Ceske Energeticke Zavod AS $ 554,299
13,100 CEZ 2 Ceske Energeticke Zavod AS II 305,074
---------------------------
859,373
TOTAL COMMON STOCKS - CZECH REPUBLIC $ 859,373
===========================
(Total Cost $929,818)
HUNGARY - 0.17%
HOTELS AND MOTELS - 0.17%
14,400 Pannonia Hotels $ 252,436 +
---------------------------
TOTAL COMMON STOCKS - HUNGARY $ 252,436
===========================
(Total Cost $211,454)
BAHAMAS - 0.11%
CRUDE PETROLEUM - 0.11%
170,820 Basic Petroleum International Ltd. Unit Trust $ 170,820 *
---------------------------
TOTAL COMMON STOCKS - BAHAMAS $ 170,820
===========================
(Total Cost $175,432)
CANADA - 0.05%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 0.05%
57,100 Semi-Tech Corporation - Class A $ 69,743
---------------------------
TOTAL COMMON STOCKS - CANADA $ 69,743
===========================
(Total Cost $103,346)
TOTAL COMMON STOCKS $ 93,946,926
===========================
(Total Cost $73,621,482)
</TABLE>
17
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
MUNICIPAL BONDS - 3.38%
7,113,000 Pennsylvania Recycling Rev. Series A 9.250% 01/01/22 $ 4,694,580
719,600 Pennsylvania Recycling Rev. Series B 9.500% 01/01/12 474,936
---------------------------
MUNICIPAL BONDS $ 5,169,516
===========================
(Total Cost $5,091,190)
PARTNERSHIPS - 2.40%
Emerging Europe Fund for Sustainable Development L.P. $ 64,286 +
NCH Investors Fund L.P. 979,541 +
New Century Capital Partners II L.P. 903,114 +
Sigma/Ukraine L.P. 703,783 +
Sigma/Ukraine Class C L.P. 404,663 +
Ukrainian Growth Fund II L.P. 612,000 +
---------------------------
TOTAL PARTNERSHIPS $ 3,667,387
===========================
(Total Cost $3,672,326)
OPTIONS - 3.90%
1,496 British Sky Broadcasting Group 5.000 Puts expiring 12/19/97 $ 195,219
1,042 British Sky Broadcasting Group 6.500 Puts expiring 06/19/98 395,721
85 General Motors Class H 50.000 Calls expiring 04/28/98 123,505
569 Gold April 550 Calls expiring 04/05/01 14,213
569 Gold April 550 Calls expiring 04/09/01 14,497
563 Gold July 550 Calls expiring 07/19/01 21,676
398 Japanese Yen 135.980 Puts expiring 03/25/99 42,011
38 Nasdaq 100 Index 656.000 Puts expiring 11/26/97 19
107 Nasdaq 100 Index 840.390 Puts expiring 01/15/98 171,040
102 Nasdaq 100 Index 935.553 Puts expiring 01/16/98 264,960
52 Nasdaq 100 Index 593.440 Puts expiring 03/25/98 5,172
41 Nasdaq 100 Index 632.600 Puts expiring 05/11/98 10,213
64 Nasdaq 100 Index 647.110 Puts expiring 05/20/98 13,335
5,100 Pathe/BSY Spread Calls expiring 08/30/98 208,518
8,100 Pathe/BSY Spread Calls expiring 09/21/98 335,274
113 Philip Morris 50 Calls expiring 04/24/00 57,466
113 Philip Morris 50 Calls expiring 04/25/00 57,579
226 Philip Morris 50 Calls expiring 04/28/00 115,610
113 Philip Morris 50 Calls expiring 04/28/00 57,805
227 Philip Morris 50 Calls expiring 05/26/00 119,977
230 Philip Morris 50 Calls expiring 06/04/00 121,210
170 Philip Morris 50 Calls expiring 06/09/00 90,153
113 Philip Morris 50 Calls expiring 06/19/00 60,329
</TABLE>
18
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
227 Philip Morris 50 Calls expiring 06/23/00 $ 120,884
113 Philip Morris 50 Calls expiring 06/23/00 60,442
114 Philip Morris 50 Calls expiring 06/23/00 60,078
225 Philip Morris 50 Calls expiring 07/21/00 123,750
225 Philip Morris 50 Calls expiring 09/30/00 126,900
114 Philip Morris 50 Calls expiring 04/18/02 85,389
114 Philip Morris 50 Calls expiring 04/18/02 83,228
19,895 RJR Stub 6.103 Calls expiring 03/20/00 23,675
54,690 RJR Stub 6.267 Calls expiring 03/21/00 61,253
11,650 RJR Stub 6.400 Calls expiring 03/27/00 12,815
11,650 RJR Stub 6.540 Calls expiring 03/27/00 12,232
16,776 RJR Stub 6.170 Calls expiring 03/31/00 19,460
58,250 RJR Stub 6.110 Calls expiring 04/03/00 68,735
56,450 RJR Stub 5.800 Calls expiring 04/25/00 73,949
56,450 RJR Stub 5.220 Calls expiring 05/01/00 174,995
16,880 Samsung Preferred Equity Linked Note expiring 02/05/00 305,200
35 South Korean Won 918.000 Puts expiring 01/22/98 491,628
67 S&P 500 Index 678.480 Puts expiring 05/25/98 45,160
63 S&P 500 Index 717.160 Puts expiring 06/18/98 75,015
190 S&P 500 Index 717.400 Puts expiring 06/18/98 225,731
255 S&P 500 Index 711.200 Puts expiring 06/19/98 374,487
257 S&P 500 Index 750.560 Puts expiring 06/29/98 478,768
121 S&P 500 Index 747.108 Puts expiring 07/20/98 239,852
33 S&P 500 Index 719.695 Puts expiring 12/04/98 58,356
23 US 10 Yr. Treasury Note Future 107.000 Puts expiring 02/20/98 5,750
40 US 10 Yr. Treasury Note Future 109.000 Puts expiring 02/20/98 24,375
69 US 30 Yr. Treasury Note Future 107.000 Puts expiring 02/20/98 10,781
60 US 30 Yr. Treasury Note Future 112.000 Puts expiring 02/20/98 38,438
---------------------------
TOTAL OPTIONS $ 5,976,828
===========================
(Total Cost $7,325,701)
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.89%
223,770 Guardian S&L 1990-4A FRN due 06/25/20 $ 129,787
300,475 RTC Series 1991-M2 Class A1 principal only due 09/25/20 255,404
2,066,268 RTC Series 1991-M2 Class A3 principal only due 09/25/20 1,549,701
367 RTC Series 1991-M2 Class X1 interest only due 09/25/20 180,489
364 RTC Series 1991-M2 Class X2 interest only due 09/25/20 17,427
677 RTC Series 1991-M2 Class X3 interest only due 09/25/20 63,899
24,785,937 Structured Asset Sec. 1996-CFL Class X2 due 02/25/28 697,104
---------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 2,893,811
===========================
(Total Cost $2,995,592)
</TABLE>
19
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
CLOSED-END MUTUAL FUNDS - 1.79%
200,000 Kazakhstan Fund Limited $ 790,000
1,200 Komercni Bank Investicni Fond 23,891 *
112,628 NIF I 245,821
53,903 NIF III 149,175
79,749 NIF VIII 172,922
241,446 NIF XIII 702,639
75,000 NIF XIV 209,700
45,200 The Balkan Fund 361,600
6,700 Zivnobanka Investicni Fond 84,078
---------------------------
TOTAL CLOSED-END MUTUAL FUNDS $ 2,739,826
===========================
(Total Cost $3,107,490)
PURCHASED BANK DEBT & TRADE CLAIMS - 1.29%
2,453,801 Maxwell Comm. Bank Debt - Baker Nye $ 270,305 +*
5,000,000 Maxwell Comm. Berlitz Obligations 543,750 +*
167,868 Maxwell Comm. Revolving Bank Debt - First Chicago 18,922 +*
943,496 Maxwell Comm. Revolving Bank Debt - Halcyon 106,700 +*
396,015 Maxwell Comm. Revolving Bank Debt - Halcyon II 44,638 +*
875,543 Maxwell Comm. Revolving Bank Debt - Lazard Freres 98,622 +*
264,059 Maxwell Comm. Revolving Bank Debt - Merrill Lynch 29,764 +*
823,981 Maxwell Comm. Revolving Bank Debt - San Paolo 93,147 +*
1,015,000 Maxwell Comm. Revolving Bank Debt - TCC Associates 114,695 +*
579,133 Maxwell Comm. Term Bank Debt - First Chicago 62,981 +*
1,678,704 Maxwell Comm. Term Bank Debt - Halcyon 182,559 +*
702,221 Maxwell Comm. Term Bank Debt - Halcyon II 76,366 +*
426,846 Maxwell Comm. Term Bank Debt - Lazard Freres 46,420 +*
468,269 Maxwell Comm. Term Bank Debt - Merrill Lynch 50,924 +*
325,093 Maxwell Comm. Term Bank Debt - San Paolo 35,354 +*
1,806,952 Maxwell Comm. Term Bank Debt - TCC Associates 196,506 +*
---------------------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,971,653
===========================
(Total Cost $0)
COMPANIES IN LIQUIDATION - 1.01%
5,682,800 Antonelli Liquidating Trust $ 5,683 +
3,150 EHLCO Liquidating Trust 315 +
</TABLE>
20
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
DEM 15,000,000 Maxwell Comm. Corp. PLC 6.000% due 06/15/93 $ 1,043,660 *
CHF 5,500,000 Maxwell Comm. Corp. PLC 5.000% due 06/16/95 471,429 *
100,550 Timber Realization Liquidating Trust 26,143 +*
---------------------------
TOTAL COMPANIES IN LIQUIDATION $ 1,547,230
===========================
(Total Cost $19)
WARRANTS - 0.43%
140,500 AXA-UAP CTF De Valeur Garant Exp. 07/01/99 $ 363,467
60,000 Five Arrows Chile Inv. Trust Warrants Exp. 05/31/99 12,000
1,109,400 Jardine Strategic Holdings Warrants Exp. 05/02/98 277,350
207,573 Semi-Tech Global Ltd. Warrants Exp. 07/31/98 4,511
---------------------------
TOTAL WARRANTS $ 657,328
===========================
(Total Cost $847,002)
BONDS & NOTES IN REORGANIZATION - 0.07%
90,130 MBL Class 4 Unsecured Claim $ 85,624 +*
526,262 RTC Series 1991- M2 Class B interest only due 09/25/20 15,788
---------------------------
TOTAL BONDS AND NOTES IN REORGANIZATION $ 101,412
===========================
(Total Cost $13,157)
CORPORATE BONDS - 0.00%
11,000 Chartwell Contingent Interest Note 8.000% due 06/30/06 $ 6,219 +
---------------------------
TOTAL CORPORATE BONDS $ 6,219
===========================
(Total Cost $6,219)
TEMPORARY INVESTMENTS - 22.60%
US GOVERNMENT OBLIGATIONS - 6.53%
10,000,000 US Treasury Bill due 11/13/97 $ 9,986,306 ~
CANADIAN GOVERNMENT OBLIGATIONS - 6.50%
CAD 14,100,000 Canadian Treasury Bill due 01/15/98 9,941,391
</TABLE>
21
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
FRENCH GOVERNMENT OBLIGATIONS - 4.85%
FRF 42,560,000 French Treasury Note due 03/12/98 $ 7,417,152
UNITED KINGDOM GOVERNMENT OBLIGATIONS - 4.72%
BPS 4,375,000 United Kingdom Treasury Bill due 01/13/98 7,216,242
---------------------------
TOTAL TEMPORARY INVESTMENTS $ 34,561,091
===========================
(Total Cost $34,561,091)
TOTAL INVESTMENTS - 100.18% $ 153,239,227
===========================
(Total Cost of Investments $131,241,269)
* Non-income producing security.
+ Restricted Securities - securities not registered under the Securities Act of 1933. See
Note D.
~ A portion of the security is serving as collateral or is segregated for securities sold
short.
^ Affiliated company. Cost of share purchases were $7,430 during the year ended October 31,
1997. There were no share sales or dividend income during the year ended October 31,
1997.
Foreign Currency Abbreviations
------------------------------
BPS British Pound Sterling
CAD Canadian Dollars
CHF Swiss Franc
DEM Deutschemark
FRF French Franc
The percentage shown for each investment category is the total value of that category
expressed as a percentage of total net assets of the Fund.
</TABLE>
See notes to financial statements.
22
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------------- ------------------
CONTRACTS TO SELL
<S> <C> <C> <C> <C>
BPS 4,313,975 British Pound Sterling due 11/06/97 $ 7,226,987 $ (15,875)
(Receivable amount $7,211,112 )
BPS 2,003,652 British Pound Sterling due 12/17/97 3,351,809 (129,737)
(Receivable amount $3,222,072 )
BPS 2,051,358 British Pound Sterling due 10/27/98 3,387,612 (83,490)
(Receivable amount $3,304,122 )
CAD 13,997,211 Canadian Dollar due 11/04/97 9,928,156 11,633
(Receivable amount $9,939,789)
CHF 8,847,350 Swiss Franc due 12/29/97 6,301,846 (208,455)
(Receivable amount $6,093,391)
CHF 11,357,140 Swiss Franc due 10/27/98 8,367,204 (331,684)
(Receivable amount $8,035,520)
FRF 44,425,906 French Franc due 11/05/97 7,675,785 (21,161)
(Receivable amount $7,654,624)
FRF 51,545,429 French Franc due 11/28/97 8,918,990 (784,625)
(Receivable amount $8,134,365)
FRF 100,900,878 French Franc due 10/27/98 17,735,481 (437,196)
(Receivable amount $17,298,285)
ITL 18,561,758,400 Italian Lira due 10/27/98 10,935,587 (187,609)
(Receivable amount $10,747,978)
ITL 18,240,361,700 Italian Lira due 11/28/97 10,713,764 (252,576)
(Receivable amount $10,461,188)
KRW 569,796,000 South Korean Won due 01/23/98 517,996 100,004
(Receivable amount $618,000)
KRW 577,044,000 South Korean Won due 07/21/98 497,452 119,048
(Receivable amount $616,500)
KRW 577,954,500 South Korean Won due 08/10/98 493,135 122,365
(Receivable amount $615,500)
KRW 1,201,635,000 South Korean Won due 08/24/98 1,022,668 219,332
(Receivable amount $1,242,000)
KRW 2,479,653,000 South Korean Won due 08/31/98 2,104,969 379,031
(Receivable amount $2,484,000)
</TABLE>
23
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------------- ------------------
<S> <C> <C> <C> <C>
KRW 1,265,664,000 South Korean Won due 10/20/98 1,063,583 172,417
(Receivable amount $1,236,000)
NLG 2,618,020 Dutch Gilder due 12/29/97 1,341,735 (23,829)
(Receivable amount $1,317,906)
NLG 2,787,500 Dutch Gilder due 10/27/98 1,454,885 (30,365)
(Receivable amount $1,424,520)
------------------------- ----------------------
TOTAL CONTRACTS TO SELL $ 103,039,644 (1,382,772)
========================= ----------------------
(Receivable amount $101,656,872)
CONTRACTS TO BUY
BPS 2,003,652 British Pound Sterling due 12/17/97 $ 3,177,892 86,959
(Payable amount $3,264,851)
CHF 360,221 Swiss Franc due 11/03/97 256,420 440
(Payable amount $256,860)
CHF 8,847,350 Swiss Franc due 12/29/97 5,867,824 217,011
(Payable amount $6,084,835)
ITL 18,240,361,700 Italian Lira due 11/28/97 10,364,344 174,710
(Payable amount $10,539,054)
NLG 2,618,020 Dutch Gilder due 12/29/97 1,297,665 22,035
(Payable amount $1,319,700)
------------------------- ----------------------
TOTAL CONTRACTS TO BUY $ 20,964,145 501,155
========================= ----------------------
(Payable amount $21,465,300)
$ (881,617)
======================
</TABLE>
See notes to financial statements.
24
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET
NUMBER OF SHARES VALUE
------------------------------ -----------------------
<S> <C> <C> <C>
COMMON STOCK - 0.06%
6,600 Singer Company NV $ 89,513
-----------------------
TOTAL SECURITIES SOLD SHORT $ 89,513
=======================
(Total Proceeds from Securities Sold Short $148,467)
</TABLE>
The percentage shown for each investment category is the total value of that
category expressed as a percentage of total net assets of the Fund.
See notes to financial statements.
25
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Baupost Fund (the Fund) was established as a Massachusetts business trust
under an Agreement and Declaration of Trust dated June 29, 1990, and is
registered under the Investment Company Act of 1940, as amended, as a no-load,
nondiversified, open-end management investment company.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that may affect the
reported amounts of assets and liabilities. Actual results could differ from
those estimates.
SECURITY VALUATION: Portfolio securities, options and futures contracts for
which market quotations are available and which are traded on an exchange or on
NASDAQ are valued at the last quoted sales price or, if there is no such
reported sale that day, at the closing bid price. Securities, options and
forward contracts traded in the over-the-counter market (other than those traded
on NASDAQ) and other unlisted securities are valued at the most recent bid price
as obtained from one or more dealers that make markets in the securities.
Portfolio securities which are traded both in the over-the-counter market and on
one or more stock exchanges are valued according to the broadest and most
representative market. To the extent the Fund engages in "naked" short sales
(i.e., it does not own the underlying security or a security convertible into
the underlying security without the payment of any further consideration) the
Fund will value such short position as described above, except that the
valuation, where necessary, will be based on the asked price instead of the bid
price.
Assets for which no quotations are readily available are valued at fair value as
determined in good faith in accordance with procedures adopted by the Trustees
of the Fund. Determination of fair value is based upon such factors as are
deemed relevant under the circumstances, including the financial condition and
operating results of the issuer, recent third-party transactions (actual or
proposed) relating to such securities and, in extreme cases, the liquidation
value of the issuer.
Certain investments held by the Fund are restricted as to public sale in
accordance with the Securities Act of 1933. Whenever possible, such assets are
valued based on bid prices obtained from reputable brokers or market makers as
of the valuation date. For assets not priced by brokers or market makers, fair
value is determined by The Baupost Group, Inc. (Baupost) in accordance with
procedures adopted by the Trustees of the Fund.
SHORT SALES: The Fund engages in short-selling which obligates the Fund to
replace the security borrowed by purchasing the security at the then current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates. Until the Fund replaces the borrowed security, the
Fund maintains daily, in a segregated account with its custodian, cash or
securities sufficient to cover its short position. At October 31, 1997, the Fund
had approximately $45,000 of U.S. Treasury bills in a segregated account
relating to its short positions.
26
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Securities sold short at October 31, 1997 and their related market values and
proceeds are set forth in the Schedule of Securities Sold Short.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. The U.S. dollar value of the currencies the Fund
has committed to buy or sell is shown in the Schedule of Forward Foreign
Currency Contracts. Losses may arise from changes in the value of a foreign
currency relative to the U.S. dollar or from the potential inability of the
counterparties to meet the terms of their contracts. The Fund uses forward
foreign currency contracts to hedge the risks associated with holding securities
denominated in foreign currencies. These contracts are adjusted by the daily
exchange rate of the underlying currency, and any gains or losses are recorded
as unrealized until the contract settlement date.
FOREIGN CURRENCY TRANSLATION: The value of foreign securities is translated into
U.S. dollars at the rate of exchange on the day of valuation. Purchases and
sales of foreign securities, as well as income and expenses relating to such
securities, are translated into U.S. dollars at the exchange rate on the dates
of the transactions. The portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign exchange rates is
not separately disclosed.
SWAPS: The Fund has entered into equity swap contracts to gain exposure to
specific foreign equities. A swap is an agreement that obligates two parties to
exchange a series of cash flows at specified intervals based upon or calculated
by reference to changes in specified security prices or interest rates. The
payment flows are usually netted against each other, with the difference being
paid by one party to the other.
Risks may arise as a result of the failure of another party to the swap contract
to comply with the terms of the swap contract. The loss incurred by the failure
of a counterparty is generally limited to the net payment to be received by the
Fund and/or the termination value at the end of the contract. Therefore, the
Fund considers the creditworthiness of each counterparty to a swap contract in
evaluating potential credit risk. Additionally, risks may arise from
unanticipated movements in interest rates or in the value of the underlying
equities.
The Fund records a net receivable or payable for the amount expected to be
received or paid under the contract. The interest component of the equity swap
contracts is recorded as swap interest expense and the fluctuation in the market
value of the underlying security is recorded as unrealized appreciation
(depreciation) on investments. Premium payments made to enter into a swap
contract are capitalized and amortized over the life of the swap contract.
Management of the Fund periodically reviews the value of the unamortized balance
of the premium payment and, based on their evaluation, may accelerate the
amortization.
At October 31, 1997, the Fund had outstanding equity swap contracts with the
following terms:
27
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
<TABLE>
<CAPTION>
SWAP NOTIONAL TERMINATION UNDERLYING
COUNTERPARTY AMOUNT DATE SHARES UNDERLYING EQUITY PAYMENTS MADE BY THE FUND
------------ ------ ---- ------ ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
Bankers Trust $ 400,187 02/11/98 27,606 Housing & Commerical Bank Floating - 3 Mos. USD-LIBOR
Flemings 476,194 05/20/99 35,140 Housing & Commercial Bank Fixed - 12 Mos. USD-LIBOR-BBA
Flemings 123,165 05/20/99 8,640 Housing & Commercial Bank Fixed - 12 Mos. USD-LIBOR-BBA
Bankers Trust 400,264 02/11/98 27,746 Kookmin Bank Floating - 3 Mos. USD-LIBOR-BBA
Flemings 235,375 05/20/99 16,618 Kookmin Bank Fixed - 12 Mos. USD-LIBOR-BBA
Morgan Stanley 226,800 07/02/00 16,121 Kookmin Bank Floating - 6 Mos. USD-LIBOR-BBA
Morgan Stanley 338,100 07/07/00 23,879 Kookmin Bank Floating - 6 Mos. USD-LIBOR-BBA
Bankers Trust 629,956 01/17/00 12,014 Pohang Iron & Steel Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Morgan Stanley 506,798 06/05/98 977 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Bear Stearns 632,863 12/23/98 1,182 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Bankers Trust 634,284 12/28/98 1,211 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Morgan Stanley 630,520 03/04/99 1,130 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Morgan Stanley 1,261,000 01/23/00 2,053 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Flemings 568,908 05/13/00 1,300 SK Telecom Co., Ltd. Fixed - 12 Mos. USD-LIBOR-BBA
Bankers Trust 563,218 06/13/00 1,186 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR
Flemings 294,046 10/17/00 650 SK Telecom Co., Ltd. Fixed - 12 Mos. USD-LIBOR-BBA
</TABLE>
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Gains and losses on securities sold are determined
using the specific identification method. Dividend income is recorded on the
ex-dividend date or, for certain foreign dividends, as soon as the Fund becomes
aware of the dividends. Interest income, including original issue discount,
where applicable, is recorded on an accrual basis, except for bonds in default
for which there is some concern as to whether interest will be received in cash,
in which case interest is recorded when received.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that Baupost has determined are creditworthy. Each repurchase
agreement is recorded at cost. The Fund requires that the securities purchased
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement.
PURCHASED CALL AND PUT OPTIONS: The Fund may enter into purchased call and put
options for both hedging and non-hedging activities. The Fund's exposure to
market risk relating to the securities is affected by a number of factors
including the size and composition of the options held, the time period during
which the options may be exercised, the volatility of the underlying security or
index, and the relationship between the current market price of the underlying
security or index and the strike or exercise price of the option. Baupost
closely monitors the Fund's exposure to risk. In addition, all positions
involving future settlement are collateralized by cash balances or security
deposits at the broker through which the transaction was performed.
FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund is a regulated investment
company, as defined under Subchapter M of the Internal Revenue Code (the Code).
By complying with Code provisions, the Fund is relieved from federal income tax
provided that substantially all of its taxable income is distributed to
shareholders. Therefore, no provision has been made for federal income taxes.
28
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The Fund's income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to different treatment for
certain of the Fund's foreign securities. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits, which result in temporary overdistributions for financial statement
purposes, are classified as distributions in excess of net investment income or
accumulated net realized gains. During the year ended October 31, 1997,
$1,658,676 was reclassified from accumulated undistributed net realized gain on
investments and foreign currency transactions to accumulated undistributed net
investment income, due to differences between book and tax accounting for
foreign currency transactions and passive foreign investment companies (PFICs).
This change had no effect on the net asset value per share.
CONCENTRATION OF CREDIT RISK: Concentrations of credit risk exist if a number of
companies in which the Fund has invested are engaged in similar activities and
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. To mitigate its exposure to concentrations of credit risk, the Fund
invests in a variety of industries located in diverse geographic areas. While
the portfolio is not concentrated in any one industry, securities of distressed
companies, many of which are restricted as to resale and which were purchased at
a significant discount, are an important component of the Fund's investments in
bonds.
NOTE B--INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund retains Baupost as its investment adviser, transfer agent and
administrator. Certain individuals who are officers and trustees of the Fund are
also officers, directors and shareholders of Baupost.
The Fund pays Baupost a quarterly management fee at an annual rate of 1% of
average net assets of the Fund and an administrative fee at an annual rate of
0.25% of average net assets of the Fund, to serve as transfer agent, dividend
disbursing agent and administrator. Baupost has agreed with the Fund to reduce
its management fee by up to 0.75% of the Fund's average net assets until further
notice to the extent that the Fund's total annual expenses (including the
management fee, administrative fee and certain other expenses, but excluding
brokerage commissions, transfer taxes, interest and expenses relating to
preserving the value of the Fund's investments) would otherwise exceed 1.5% of
the Fund's average net assets. For the purpose of determining the applicable
management and administrative fees, average net assets is determined by taking
an average of the determination of such net asset values during each quarter at
the close of business on the last business day of each month during such quarter
before any month-end share purchases or redemptions.
NOTE C--INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the period ended October 31, 1997 aggregated
$133,450,000 and $134,328,500, respectively.
29
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE C--INVESTMENT TRANSACTIONS - CONTINUED
For federal income tax purposes, the identified cost of investments at October
31, 1997 was $132,568,938. Net unrealized appreciation, on a federal income tax
basis, for all securities and securities sold short was as follows:
Gross unrealized appreciation $ 30,125,037
Gross unrealized depreciation (13,181,423)
---------------
Net unrealized appreciation $ 16,943,614
==============
NOTE D--RESTRICTED SECURITIES
At October 31, 1997 the Fund held the following securities which are restricted
as to public sale in accordance with the Securities Act of 1933:
<TABLE>
<CAPTION>
Earliest
Value at Acquisition
Cost October 31, 1997 Date
---- ---------------- ----
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
- -----------------------------------
Maxwell Commubnications Corporate Debt $ 0 $1,971,653 11/22/93
Corporate Bonds:
- ----------------
Chartwell Contingent Interest Note 8.000% due 06/30/06 6,219 6,219 12/21/95
Partnerships:
- -------------
Emerging Europe Fund for Sustainable Development, L.P. 50,482 64,286 02/25/97
NCH Investors Fund, L.P. 919,351 979,541 12/18/95
New Century Capital Partners II, L.P. 995,906 903,114 11/30/95
Sigma Ukraine, L.P. 689,924 703,783 05/14/96
Sigma Ukraine Class C, L.P. 404,663 404,663 11/27/96
Ukrainian Growth Fund II, LP 612,000 612,000 03/31/97
Common Stock:
- -------------
Pannonia Hotels 211,454 252,436 01/28/97
USAA Real Estate Equities Inc. Class A REIT 89,600 88,200 04/22/97
Companies in Liquidation:
- -------------------------
Antonel1i Liquidating Trust 0 5,683 12/02/93
Ehlco Liquidating Trust 19 315 01/30/89
Timber Realization Liquidating Trust 0 26,143 08/03/87
Bonds & Notes in Reorganization:
- --------------------------------
MBL Class 4 Unsecured Claim 0 85,624 06/18/96
----------- ----------
TOTAL RESTRICTED SECURITIES (3.99% of Net Assets) $ 3,979,618 $6,103,660
=========== ==========
</TABLE>
The Fund does not have the right to demand that such securities be registered.
The Fund does not anticipate any significant costs associated with the
disposition of these securities.
30
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE E--CAPITAL SHARE TRANSACTIONS
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 2,137,346 $32,346,659 1,109,681 $15,369,111
Shares issued in
reinvestment of dividends 989,255 14,363,821 454,829 5,799,072
Shares redeemed (1,250,566) (19,267,341) (1,132,555) (15,745,256)
---------------- --------------- --------------- ---------------
NET INCREASE 1,876,035 $27,443,139 431,955 $5,422,927
================ =============== =============== ===============
</TABLE>
31
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
SELECTED PER SHARE DATA 1997 1996 1995 1994 1993 (A)
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period Income $15.38 $13.47 $14.33 $14.77 $12.56
------ ------ ------ ------ ------
from investment operations
Net investment income 0.30 0.41 0.25 0.22 0.28
Net realized and unrealized gain 3.47 2.43 0.71 1.23 2.76
---- ---- ---- ---- ----
Total from investment operations 3.77 2.84 0.96 1.45 3.04
---- ---- ---- ---- ----
Less distributions
From net investment income 0.40 0.28 0.25 0.46 0.22
In excess of net investment income - - 0.08 - -
From net realized gain 1.66 0.65 1.49 1.43 0.61
---- ---- ---- ---- ----
Total distributions 2.06 0.93 1.82 1.89 0.83
---- ---- ---- ---- ----
Net Asset Value, end of period $17.09 $15.38 $13.47 $14.33 $14.77
====== ====== ====== ====== ======
TOTAL RETURN 27.04% 22.51% 7.91% 11.06% 25.45%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $152,958 $108,788 $89,439 $81,787 $75,378
Ratio of net expenses to average net assets 2.14%(c) 1.50% 1.54% 1.53% 1.52%
Ratio of total expenses excluding waiver of
management fee to average net assets 2.14%(c) 1.50% 1.54% 1.55% 1.63%
Ratio of net investment income to average net
assets 1.45% 2.27% 1.60% 1.32% 2.29%
Ratio of net investment income excluding
waiver of management fee to average net assets
1.45% 2.27% 1.60% 1.30% 2.17%
Portfolio turnover rate 140% 120% 106% 161% 183%
Average commission rate paid (b) $0.0203 $0.0271
</TABLE>
(a) All per share amounts reflect the effect of the ten-for-one share split as
of the close of business October 31, 1993.
(b) For fiscal years beginning after Sept. 1, 1995, the fund is required to
disclose its average commission rate paid per share for security trades on which
commissions are charged.
(c) The increase in expense ratios is due to equity swap contract interest
expense.
32
