<PAGE> 1
THE BAUPOST FUND
ANNUAL REPORT
October 31, 1998
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.
<PAGE> 2
THE BAUPOST FUND
ANNUAL REPORT
OCTOBER 31, 1998
CONTENTS:
<TABLE>
<S> <C>
Management's Discussion of Performance .................................. 1
Report of Independent Auditors .......................................... 7
Audited Financial Statements:
Statement of Assets and Liabilities as of October 31, 1998 .............. 8
Statement of Operations for the period ended October 31, 1998 ........... 9
Statement of Changes in Net Assets for the periods ended October 31, 1998
and October 31, 1997 ................................................ 10
Schedule of Investments as of October 31, 1998 .......................... 11
Schedule of Forward Foreign Currency Contracts as of October 31, 1998 ... 19
Schedule of Securities Sold Short as of October 31, 1998 ................ 21
Notes to Financial Statements ........................................... 22
Financial Highlights .................................................... 27
</TABLE>
<PAGE> 3
THE BAUPOST FUND
44 BRATTLE STREET, 5TH FLOOR
P.O. BOX 381288
CAMBRIDGE, MASSACHUSETTS 02238
TEL. (617) 497-6680
FAX (617) 868-3529
December 21, 1998
Dear Fund Shareholder,
We will not soon forget the volatility and financial market mania that
characterized the year ended October 31, our first loss year. In this letter, I
will attempt to identify the reasons for our 1998 result, describe what we have
done to reduce the possibility that the same thing could happen again, and
attempt to assess our prospects for 1999 and beyond.
First the facts. For the year, the Fund posted a market value decline
of 16.3%. To add insult to injury, the large cap U.S. stock market indices
posted substantial gains over the same period. In a year characterized by
extreme divergence in a number of markets and asset classes, market indices of
small cap stocks posted material declines.
Review of 1998
To better understand our loss year, we are providing you a closer look
at our investment results. Table 1 below breaks down our investment performance
for the year by asset class. It is apparent from this breakdown that we posted
losses in U.S. equities, and that we lost further in trying to hedge the
portfolio from market risk. The area of greatest loss, however, was emerging
markets and, most significantly within that area, our exposure to Russian
equities, which could not escape that market's severe collapse during 1998.
Table 1
Baupost Fund Investment Results by Asset Class
For the Year Ended October 31, 1998
(expressed as contribution to total return)
<TABLE>
<S> <C>
Cash and Cash Equivalents 1.0%
U.S. Equities (2.8%)
Western European Equities 0.0%
Emerging Market Investments (10.5%)
Liquidations 0.0%
Market Hedges (2.8%)
Other (1.2%)
------
Total Return (16.3%)
</TABLE>
<PAGE> 4
Although there are many ways to think about our investment performance
in 1998, we believe there were three main contributors to the negative result.
While these exposures might not have been problematic in a more normal market
environment, it is our objective to protect on the downside. In a highly unusual
year where the cheapest market sectors and asset classes became considerably
cheaper while the most expensive areas went to the stratosphere, we did a poor
job protecting capital.
First, it is clear that we took on too much emerging market exposure in
1998. While we were able to identify many outstanding bargains in this area,
emerging markets involve both political risk and macroeconomic risk, and have a
potentially high degree of correlation with one another. These risks make
emerging market investments difficult to hedge. We were simply overexposed to
emerging markets this year.
Second, we had too much of our money in equities and too little cash
during the year. Given our recurrent fear of a severe market correction and
spreading economic weakness, this required us to maintain expensive and
imperfect hedges. A substantial portion of our equity exposure was in small cap
stocks (this is where the bargains were), and our results suffered when that
part of the market became considerably more illiquid than usual.
Third, while we do not believe we were wrong to attempt to hedge our
market exposure (we have been doing this in various ways for years), the
mismatch between our long positions (mostly small cap) and our hedges (mostly
large cap) caused us to lose money on both. It makes logical sense to hedge
inexpensive small cap stocks against very expensive large cap stocks. However,
we might have been better served finding more closely correlated hedges which
acknowledged both the continuing trend toward indexation and the possibility
that investor preference for a small number of very large cap growth stocks
could continue for a protracted period.
Going forward, we will seek to focus on low risk investments while
emphasizing capital preservation. Although emerging markets are bargain priced
by historical standards, we will maintain a much more limited exposure to them
in the future, including, as much as possible, an emphasis on situations with
catalysts for the realization of underlying value. Until the developed stock
markets retreat from record levels of valuation, we expect to have less
portfolio exposure to equities going forward and more exposure to event driven
situations such as liquidations and reorganizations that are not so dependent on
the vicissitudes of the stock market for their investment return. Also, we will
demand more compelling undervaluation than before to incur market risk. In the
absence of appropriate opportunities, we will hold increased levels of cash.
Finally, while we still expect to hedge against extreme conditions, the
aforementioned combination of greater undervaluation, catalysts, potentially
higher cash balances, and hopefully better aligned hedges should result in much
improved performance.
To increase your understanding of our current positioning, Table 2 on
the next page provides a chart showing our October 31 asset allocation. As of
mid-December cash balances have increased further to approximately 35%. The
portion of assets invested in U.S. equities has also increased in recent months
while foreign holdings have been reduced.
<PAGE> 5
Table 2
Baupost Fund Asset Allocation at October 31, 1998
<TABLE>
<S> <C>
Cash and Cash Equivalents 30.3%
U.S. Equities 18.1%
Western European Equities 32.5%
Emerging Market Investments 9.8%
Liquidations 6.7%
Market Hedges 1.5%
Other 1.1%
------
Total Net Assets 100.0%
</TABLE>
The Current Frothy Environment
It is evident that we are in the midst of a stock market mania, with
the usual accoutrements: hot IPO's, a market sector attracting enormous
speculative activity (internet stocks), rising margin debt, and the late 1990's
innovation: at home trading via the internet. Most significantly, the prevailing
bullish arguments focus on momentum, money flows, and inevitability; valuation
underpinnings are not mentioned as part of the bull case.
Just as in the early 1970's, but perhaps even more pronounced, there
has been a stampede to own a "nifty-fifty", several dozen widely admired
companies seeming to promise an investment utopia of safety, stability, steady
growth, and liquidity. Once again, no price is regarded as too high to pay for
these characteristics. An illusion is created that owning these stocks is
prudent, that not owning them is imprudent, and, lately, that owning anything
else is downright irresponsible. Investors are strangely willing to ignore the
moral hazard of their own behavior, rewarding managements which successfully
manipulate quarterly earnings into a steady and predictable uptrend. Valuations
of these large cap stocks are at record levels, even ignoring the beneficial
effect of big bath accounting writeoffs and the unrecorded compensation expense
implied by dilutive management stock option programs.
As of mid-December 1998, nearly all of the S&P's return for the year
can be attributed to its largest 20 constituents. The market-cap-weighted Nasdaq
100 Index (dominated by Microsoft, Intel, Cisco Systems, Dell Computer and MCI
WorldCom) has gained 80% since January 1 even as the Russell 2000 Index (the
2000 stocks below the 1000 largest cap stocks) is down almost 8% year-to-date!
We recently read one analyst's calculation that the current p/e multiples of the
top 20 U.S. growth stocks required those companies to achieve 60% of ALL future
U.S. corporate profit growth, a virtual impossibility. Over the past 30 years,
this group provided only 15% of total profit growth. The author points out,
however, that valuations can become even more absurd before they drop to
reasonable levels.
Part of the reason for the return to a nifty-fifty era has been the
increasing use of indexing by large institutional investors. Pointing to the
difficulty of any one manager outperforming the market and the impossibility of
the entire investment community doing so,
<PAGE> 6
many large institutions and pension funds have focused on cutting the costs of
investment management to enhance net returns. This has fueled more and more
money going into the largest stocks, which have continued to surge while other
parts of the market have slumped. While we sympathize with the difficulty the
largest institutional investors face in achieving superior results, we believe
the concentration of funds in a handful of stocks is in the process of creating
a staggering opportunity amidst the neglected (or even totally ignored)
thousands of smaller stocks.
Shorter-term investors will be skeptical that anything could cause this
phenomenon to change, allowing the abandoned small stocks to outperform.
Investing in a stock is really the purchase of a fractional ownership in a
business, and the value of that business is determined by its fundamentals, not
by the stock market (which, in the words of Ben Graham, is a voting machine, not
a weighing machine.) Ultimately, undervalued stocks appreciate toward their
underlying value; the market eventually recognizes the business fundamentals, or
a catalyst, such as a takeover, forces the valuation gap to close.
Finally, we do not believe the current market mania will end without
the ending of its twin, the mutual fund mania. U.S. equity mutual fund assets
have surged tenfold since 1990, helping to fuel the market boom. Overconfident
individual investors, projecting the stock market's recent performance
indefinitely into the future, have developed a blind faith in the merits of
equity investing, the fundamentals notwithstanding. They have also developed
supreme confidence in their own willingness to remain invested in the face of
unfavorable developments, a confidence reinforced by their successful buying of
the market's dips for the past 16 years. When the tide goes out, as it has in
Japan for the past eight years, money will flow out of the market and out of
mutual funds (as it has in Japan); buying the dips will significantly exacerbate
the pain.
Potential Areas of Future Opportunity
As you know, Baupost has benefited historically from migrating to new
asset classes in order to find the areas of greatest opportunity. At the moment,
we are faced with difficult conditions for bargain hunting, yet we are also
excited by the promise of what we own and the opportunities we expect to develop
in the months and years ahead. It is obvious that the U.S. and Western European
equity markets are extremely expensive in general. Yet below the top few hundred
equities around the world, there are tens of thousands of mid cap and small cap
stocks which have underperformed the large stocks for years, which lost
considerable ground in 1998, and which are increasingly overlooked, ignored or
even hated. While many of them represent good relative value but are not
inexpensive enough for us to like them on an absolute basis, we are continuing
to uncover a number of situations that are absolutely cheap. Further, we expect
that when the current large cap mania comes to an end and reverses, there will
be a staggering opportunity in the small to mid cap area. This market sector is
already under-analyzed by both the buy side and the sell side of Wall Street.
There is little money coming into the sector as mutual fund inflows are mostly
directed toward large cap exposure (the self-fulfilling prophecy still at work.)
We intend to be well prepared for the period when big cap stocks return to earth
and small cap stocks are offered at almost any price to anyone able to supply
fresh capital to the sector.
<PAGE> 7
We believe that another area of future opportunity will be bankrupt and
distressed credits. This area provided us with enormous opportunity a decade
ago, and has been remarkably unattractive in recent years, a combination of too
much capital chasing too few bankruptcies (and most of those that do exist are
of poor quality businesses). Given the record junk bond issuance and leveraged
buyout activity in recent years (there are over $500 billion of junk bonds
outstanding), there is almost certain to be a renewal of opportunity in this
area in the years ahead.
Conclusion
We remain grateful for your support, and are working hard to continue
to merit your confidence. While I am obviously busy, I am never too busy to take
the time to respond to any questions, comments or concerns you may have.
Communicating with you is one of the most important aspects of my job, so please
feel free to e-mail me at [email protected] or call me at the office.
Very truly yours,
/s/ Seth A. Klarman
--------------------------
Seth A. Klarman
President
<PAGE> 8
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Average Annual Total Returns (1) 1 5 Life of Fund
For Periods Ended 10/31/98 Year Year (since 12/14/90)
---- ---- ----------------
<S> <C> <C> <C>
The Baupost Fund -16.30% 9.32% 12.70%
- -----------------------------------------------------------------------------------
</TABLE>
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 be worth more or less than their original cost
when redeemed. During some of 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.
GROWTH OF AN ASSUMED $50,000 INVESTMENT(1)
IN THE BAUPOST FUND FROM 12/14/90 THROUGH 10/31/98
[LINE GRAPH]
<TABLE>
<CAPTION>
The Baupost Fund S&P 500 BF BF S&P S&P
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/14/90 $ 50,000.00 $ 50,000.00 50000 $ 50,000.00 50000 $ 50,000.00
10/31/91 $ 59,787.28 $ 61,807.01 0.195745506 $ 59,787.28 0.236140109 $ 61,807.01
10/31/92 $ 65,471.39 $ 67,963.62 0.309427875 $ 65,471.39 0.359272474 $ 67,963.62
10/31/93 $ 82,134.71 $ 78,116.01 0.642684932 $ 82,134.25 0.562320306 $ 78,116.02
10/31/94 $ 91,217.43 $ 81,134.73 0.82433 $ 91,216.32 0.622694795 $ 81,134.74
10/31/95 $ 98,430.31 $ 102,587.46 0.96858 $ 98,428.79 1.051749198 $ 102,587.46
10/31/96 $ 120,583.20 $ 127,306.16 1.41166 $ 120,583.20 1.546123205 $ 127,306.16
10/31/97 $ 153,193.22 $ 168,186.49 2.06386 $ 153,193.22 2.363729703 $ 168,186.49
10/31/98 $ 128,220.00 $ 205,175.00 1.56440 $ 128,220.00 3.1035 $ 205,175.00
</TABLE>
(1) Assumes reinvestment of all dividends.
<PAGE> 9
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,
1998, 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, 1998, 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, 1998, 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
Boston, Massachusetts
December 4, 1998
<PAGE> 10
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments in securities - at value $ 127,175,446
(cost $136,600,952)
Cash 10,033,281
Foreign cash (cost $25,287) 25,500
Receivable for investments sold 1,784,222
Receivable for investments sold short 1,548,731
Interest and dividends receivable 568,414
Unrealized appreciation on forward foreign
currency contracts 102,622
Other assets 49,272
-------------
Total Assets 141,287,488
LIABILITIES:
Payable for investments purchased 2,381,116
Payable for securities sold short 2,027,212
(proceeds $1,888,813)
Payable for equity swap contracts 1,735,556
Payable to The Baupost Group, L.L.C 424,372
Unrealized depreciation on futures contracts 292,907
Other payables and accrued expenses 278,665
Payable for Fund shares redeemed 72,783
Payable for interest on equity swap contracts 71,974
-------------
Total Liabilities 7,284,585
-------------
NET ASSETS $ 134,002,903
=============
COMPOSITION OF NET ASSETS:
Paid in capital $ 147,727,246
Undistributed net investment income 1,666,008
Accumulated net realized loss on investments
and foreign currency transactions (3,850,498)
Net unrealized depreciation on investments
and assets and liabilities in foreign currencies (11,539,853)
-------------
NET ASSETS $ 134,002,903
=============
NET ASSET VALUE:
Offering and redemption price per share
($134,002,903/11,006,286) $ 12.18
=============
</TABLE>
See notes to financial statements.
<PAGE> 11
THE BAUPOST FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
INCOME:
Dividends (net of foreign withholding taxes of $163,761) $ 5,383,342
Interest 3,199,767
------------
Total Income 8,583,109
EXPENSES:
Investment management fee 1,681,629
Equity swap contract interest expense 566,971
Administrative fee 420,407
Investment expenses 247,959
Interest expense 231,019
Custodian fees 195,155
Legal fees 166,804
Registration and filing fees 50,415
Audit fees 42,431
Directors' fees 34,650
Transfer agent fees 29,678
Miscellaneous 14,561
------------
Total Expenses 3,681,679
Waiver of investment management fee (113,286)
------------
Total Expenses, Net 3,568,393
------------
NET INVESTMENT INCOME 5,014,716
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on:
Investments and equity swap contracts (3,513,065)
Foreign currency transactions (1,573,143)
Short sales 861,454
------------
(4,224,754)
Change in unrealized appreciation/(depreciation) on:
Investments and equity swap contracts (29,895,969)
Foreign currency transactions 932,066
Short sales (197,353)
------------
(29,161,256)
NET REALIZED AND UNREALIZED
LOSS ON INVESTMENTS (33,386,010)
------------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $(28,371,294)
============
</TABLE>
See notes to financial statements.
<PAGE> 12
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
---------------- ----------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 5,014,716 $ 1,956,343
Net realized gain/(loss) on investments and foreign
currency transactions (4,224,754) 23,702,878
Change in unrealized appreciation/(depreciation) on
investments and foreign currency transactions (29,161,256) 5,899,569
------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (28,371,294) 31,558,790
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (5,190,909) (2,845,958)
From net realized gain on investments (18,216,303) (11,985,697)
------------- -------------
Total Distributions (23,407,212) (14,831,655)
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 43,396,229 32,346,659
Reinvestment of dividends 23,195,673 14,363,821
Cost of shares redeemed (33,768,809) (19,267,341)
------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM SHARE TRANSACTIONS 32,823,093 27,443,139
------------- -------------
TOTAL INCREASE/(DECREASE) IN NET ASSETS (18,955,413) 44,170,274
NET ASSETS AT BEGINNING OF PERIOD 152,958,316 108,788,042
------------- -------------
NET ASSETS AT END OF PERIOD
(including undistributed net
investment income of $1,666,008
and $670,056, respectively) $ 134,002,903 $ 152,958,316
============= =============
OTHER INFORMATION:
Shares sold 2,829,353 2,137,346
Shares issued in reinvestment of dividends 1,538,174 989,255
Shares redeemed (2,310,138) (1,250,566)
------------- -------------
Net increase/(decrease) 2,057,389 1,876,035
============= =============
</TABLE>
See notes to financial statements.
<PAGE> 13
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
---------------- --------------
<S> <C> <C> <C>
COMMON STOCKS - 53.63%
UNITED STATES - 17.91%
WHOLESALE - FOOD - 8.74%
272,500 TLC BEATRICE INTERNATIONAL HOLDINGS $ 11,717,500
CHEMICAL PREPARATIONS - 3.44%
238,150 CHEMFIRST INC 4,614,156
MANUFACTURING - OPHTHALMIC GOODS - 2.09%
145,650 SOLA INTERNATIONAL INC 2,794,659 *
BUSINESS SERVICES - 1.20%
295,530 AZTEC TECHNOLOGY PARTNERS 1,606,944 *
TRAVEL AGENCIES - 0.91%
211,422 NAVIGANT INTERNATIONAL INC 1,215,677 *
CARBON & GRAPHITE PRODUCTS - 0.79%
59,300 UCAR INTERNATIONAL INC 1,067,400 *
ELECTRIC HOUSEWARES & FANS - 0.39%
95,700 GLOBAL-TECH APPLIANCES INC 526,350 *
MISCELLANEOUS - 0.35%
110 FIDELITY BANKSHARES INC 2,530
198 FIRST FEDERAL SAVINGS BANK OF SIOUXLAND 3,960
6,250 MFC BANCORP 37,500
1,949 MID-CENTRAL FINANCIAL CORPORATION 46,776
16,400 OMEGA WORLDWIDE 57,400 *
938,000 REGENCY EQUITIES CORPORATION 14,070 *
26,350 VENTAS INC 301,378 *
---------------
463,614
TOTAL COMMON STOCKS - UNITED STATES $ 24,006,300
===============
(Total Cost $22,575,025)
SWEDEN - 10.82%
REAL ESTATE AGENTS & MANAGERS - 5.13%
804,500 ASTICUS AB $ 6,875,185 *
COMMUNICATION SERVICES - 3.53%
428,300 MODERN TIMES GROUP AB - B SHARES 4,733,509 *
</TABLE>
<PAGE> 14
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
HOLDING COMPANIES - 2.16%
449,381 TRUSTOR AB - B SHARES $ 2,887,496 *
---------------
TOTAL COMMON STOCKS - SWEDEN $ 14,496,190
===============
(Total Cost $14,723,781)
UNITED KINGDOM - 10.79%
INSURANCE AGENTS, BROKERS & SERVICES - 5.18%
413,500 JARDINE LLOYD THOMPSON GROUP PLC $ 1,477,501
3,300,000 LAMBERT FENCHURCH GROUP PLC 5,467,684
---------------
6,945,185
FABRICATED TEXTILE PRODUCTS - 2.02%
5,125,100 COATS VIYELLA PLC 2,701,887
HOLDING COMPANIES - 1.16%
2,018,000 TRANSTEC PLC 1,553,579
MANUFACTURING INDUSTRIES - 0.87%
553,100 FKI PLC 1,170,977
OIL & GAS - 0.47%
1,043,072 BURREN ENERGY PLC 625,843 *+
MEDIA, SATELLITE BROADCAST - 0.45%
74,800 BRITISH SKY BROADCASTING GROUP PLC 609,656
ELECTRONIC COMPONENTS - 0.41%
757,300 ASTEC (BSR) PLC 544,993
WHOLESALE - LUMBER & OTHER CONSTRUCTION MATERIALS - 0.23%
115,000 ADAM & HARVEY GROUP PLC 303,133
---------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 14,455,253
===============
(Total Cost $20,632,754)
FRANCE - 5.23%
HOLDING COMPANIES - 5.06%
51,465 CHARGEURS SA $ 2,588,232
13,180 FIN MARC DE LACHARRIERE SA (FIMALAC) 1,377,940
945 PATHE SA 180,732
5,185 SOCIETE EURAFRANCE SA 2,636,567
---------------
6,783,471
</TABLE>
<PAGE> 15
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
MOTION PICTURE PRODUCTION SERVICES - 0.17%
3,568 GAUMONT SA $ 230,247
---------------
TOTAL COMMON STOCKS - FRANCE $ 7,013,718
===============
(Total Cost $6,453,233)
RUSSIA - 2.29%
OIL & GAS - 1.58%
1,606,200 KRASNOYARSKENERGO $ 8,031 *
118,700 LUKOIL OIL COMPANY SPONSORED ADR 1,899,200
7,233,000 SURGUTNEFTEGAZ PREFERRED 91,136
43,160 SURGUTNEFTEGAZ PREFERRED SPONSORED ADR 43,160
31,500 SURGUTNEFTEGAZ SPONSORED ADR 70,875
---------------
2,112,402
ELECTRIC UTILITIES - 0.71%
195,700 IRKUTSKENERGO SPONSORED ADR 345,534
91,400 PERMENERGO 18,280 *
448,510 SAMARAENERGO SPONSORED ADR 134,553 *
152,492 UNIFIED ENERGY SYSTEMS SPONSORED GDR 457,476
---------------
955,843
METAL & MINING SERVICES - 0.00%
28,300 NORILSK NICKEL 11,037 *
---------------
TOTAL COMMON STOCKS - RUSSIA $ 3,079,282
===============
(Total Cost $4,720,140)
SWITZERLAND - 1.52%
HOLDING COMPANIES - 1.52%
7,550 VALORA HOLDING AG $ 2,036,689
---------------
TOTAL COMMON STOCKS - SWITZERLAND $ 2,036,689
===============
(Total Cost $1,558,396)
CZECH REPUBLIC - 1.39%
ELECTRIC UTILITIES - 1.39%
17,600 CEZ 1 CESKE ENERGETICKE ZAVOD AS $ 401,929 *
79,900 CEZ 2 CESKE ENERGETICKE ZAVOD AS II 1,456,300 *
---------------
TOTAL COMMON STOCKS - CZECH REPUBLIC $ 1,858,229
===============
(Total Cost $2,369,623)
</TABLE>
<PAGE> 16
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
THE NETHERLANDS - 1.09%
TOWING & TUGBOAT SERVICES - 1.09%
64,544 SMIT INTERNATIONALE NV $ 1,456,140
---------------
TOTAL COMMON STOCKS - THE NETHERLANDS $ 1,456,140
===============
(Total Cost $1,622,386)
POLAND - 0.80%
CONSTRUCTION - 0.80%
201,672 BUDIMEX SA $ 1,064,664 *
---------------
TOTAL COMMON STOCKS - POLAND $ 1,064,664
===============
(Total Cost $890,253)
HONG KONG - 0.75%
ELECTRONIC & OTHER ELECTRICAL EQUIPMENT - 0.40%
12,379,576 SEMI-TECH GLOBAL LTD $ 535,407
23,760 SEMI-TECH GLOBAL LTD SPONSORED ADR 3,564
---------------
538,971
MANUFACTURING TOYS & DOLLS - 0.30%
6,953,400 PLAYMATES TOYS HOLDINGS LTD 399,476
HOTELS & MOTELS - 0.05%
1,088,000 LAI SUN HOTELS INTERNATIONAL LTD 71,636
---------------
TOTAL COMMON STOCKS - HONG KONG $ 1,010,083
===============
(Total Cost $982,940)
NORWAY - 0.60%
MISCELLANEOUS PUBLISHING - 0.60%
75,800 SCHIBSTED ASA $ 799,315
---------------
TOTAL COMMON STOCKS - NORWAY $ 799,315
===============
(Total Cost $1,162,695)
BRAZIL - 0.26%
TELEPHONE COMMUNICATIONS - 0.26%
1,982,000 TELEMIG CELULAR SA PREFERENCE C $ 18,610 *
6,458,900 TELEPAR CELULAR SA COMMON 151,672 *
</TABLE>
<PAGE> 17
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
858,000 TELEPAR CELULAR SA PREFERENCE B $ 36,326 *
8,468,000 TELERJ CELULAR SA COMMON 138,436 *
---------------
TOTAL COMMON STOCKS - BRAZIL $ 345,044
===============
(Total Cost $749,010)
ROMANIA - 0.13%
CONCRETE PRODUCTS - 0.13%
42,000 ROMCIM BUCHAREST $ 180,118 *
---------------
TOTAL COMMON STOCKS - ROMANIA $ 180,118
===============
(Total Cost $588,230)
BAHAMAS - 0.03%
CRUDE PETROLEUM - 0.03%
170,430 BASIC PETROLEUM INTERNATIONAL LTD UNIT TRUST $ 42,608 *
---------------
TOTAL COMMON STOCKS - BAHAMAS $ 42,608
===============
(Total Cost $175,032)
CANADA - 0.02%
OIL & GAS - 0.02%
13,800 HURRICANE HYDROCARBONS LTD $ 28,463 *
---------------
TOTAL COMMON STOCKS - CANADA $ 28,463
===============
(Total Cost $67,685)
TOTAL COMMON STOCKS $ 71,872,096
===============
(TOTAL COST $79,271,183)
COMPANIES IN LIQUIDATION - 5.56%
3,150 EHLCO LIQUIDATING TRUST $ 394 *+
DEM 15,000,000 MAXWELL COMM. CORP. PLC 6.000% 06/15/93 725,953 *
CHF 5,500,000 MAXWELL COMM. CORP. PLC 5.000% 06/16/95 325,636 *
836,059 MBO PROPERTIES INC 6,395,851 ***
---------------
TOTAL COMPANIES IN LIQUIDATION $ 7,447,834
===============
(Total Cost $16,004)
</TABLE>
<PAGE> 18
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
CLOSED-END MUTUAL FUNDS - 2.78%
45,200 BALKAN FUND $ 101,700
60,000 FIVE ARROWS CHILE INVESTMENT TRUST WARRANTS 3.2617 5/31/1999 1,200
282,000 KAZAKHSTAN FUND LIMITED 705,000
17,200 KOMERCNI BANK IF 273,460 *
194,189 NIF I 199,963 *
27,800 NIF II 26,207 *
165,705 NIF III 175,438 *
9,743 NIF IV 11,304 *
22,695 NIF V 30,941 *
151,615 NIF VI 173,714 *
27,800 NIF VII 26,611 *
219,210 NIF VIII 292,492 *
27,052 NIF IX 37,273 *
52,961 NIF X 72,970 *
300 NIF XI 300 *
27,800 NIF XII 36,287 *
290,338 NIF XIII 429,507 *
108,117 NIF XIV 150,533 *
27,575 NIF XV 26,795 *
17,892 POLISH NATIONAL INVESTMENT FUND (NIF CERTIFICATES) 305,133 *
700 RESTITUCNI INVESTICINI FOND CESKE (RIF) 22,358
44,900 ZIVNOBANKA INVESTICNI FOND 611,212
---------------
TOTAL CLOSED-END MUTUAL FUNDS $ 3,710,398
===============
(Total Cost $7,112,946)
OPTIONS - 2.22%
76 FRANCE OAT 5.25% 04/25/2008 97.00 PUTS 04/23/1999 $ 1,372
76 FRANCE OAT 5.25% 04/25/2008 97.11 PUTS 10/22/1999 16,470
76 FRANCE OAT 5.25% 04/25/2008 96.95 PUTS 10/25/1999 15,097
76 FRANCE OAT 5.25% 04/25/2008 97.04 PUTS 10/25/1999 1,372
143,816 FRF PUTS / DEM 3.4145 CALLS 11/20/1998 0
143,891 FRF PUTS / DEM 3.4148 CALLS 11/20/1998 1,480
147,638 FRF PUTS / DEM 3.3805 CALLS 12/02/1998 2,947
176 GENERAL ELECTRIC 90.00 PUTS 12/28/1998 97,310
569 GOLD 550 CALLS 04/05/2001 17,055
569 GOLD 550 CALLS 04/09/2001 17,624
500 GOLD 550 CALLS 04/19/2001 40,000
563 GOLD 550 CALLS 07/19/2001 22,520
13,742 HONG KONG DOLLAR 7.910 PUTS 02/01/1999 34,891
13,647 HONG KONG DOLLAR 7.965 PUTS 02/04/1999 65,575
387 ITL PUTS / DEM 1043.40 CALLS 11/23/1998 0
299 ITL PUTS / DEM 1016.80 CALLS 12/02/1998 2,690
3,500,000,000 JAPANESE GOVERNMENT BOND 182 101.00 PUTS 12/17/1998 301
3,956,000,000 JAPANESE GOVERNMENT BOND 203 100.00 PUTS 03/10/1999 20,436
1,978,000,000 JAPANESE GOVERNMENT BOND 203 100.00 PUTS 03/10/1999 18,733
1,978,000,000 JAPANESE GOVERNMENT BOND 203 102.00 PUTS 03/10/1999 35,762
989,000,000 JAPANESE GOVERNMENT BOND 203 95.00 PUTS 09/13/1999 12,772
2,967,000,000 JAPANESE GOVERNMENT BOND 203 97.50 PUTS 09/13/1999 120,059
1,483,500,000 JAPANESE GOVERNMENT BOND 203 100.00 PUTS 09/13/1999 88,129
2,405,000,000 JAPANESE GOVERNMENT BOND 203 97.50 PUTS 09/16/1999 97,318
1,683,500,000 JAPANESE GOVERNMENT BOND 203 97.50 PUTS 03/14/2000 81,167
200 MICROSOFT CORPORATION 105.00 PUTS 12/02/1998 83,440
56,450 RJR STUB 5.22 CALLS 5/01/2000 89,756
</TABLE>
<PAGE> 19
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
92 S&P 500 INDEX 1080.000 PUTS 11/09/1998 $ 101,678
33 S&P 500 INDEX 719.695 PUTS 12/04/1998 502
55 S&P 500 INDEX 919.785 PUTS 12/18/1998 39,076
49 S&P 500 INDEX 1103.330 PUTS 12/22/1998 209,720
102 S&P 500 INDEX 1120.000 PUTS 01/11/1999 593,048
53 S&P 500 INDEX 1122.980 PUTS 01/28/1999 336,577
270 S&P 500 INDEX 904.990 PUTS 07/30/1999 714,096
---------------
TOTAL OPTIONS $ 2,978,973
===============
(Total Cost $7,008,354)
PURCHASED BANK DEBT & TRADE CLAIMS - 1.15%
2,453,801 MAXWELL COMM. BANK DEBT - BAKER NYE $ 211,282 *+
5,000,000 MAXWELL COMM. BERLITZ OBLIGATIONS 425,000 *+
167,868 MAXWELL COMM. REVOLVING BANK DEBT - FIRST CHICAGO 14,791 *+
943,496 MAXWELL COMM. REVOLVING BANK DEBT - HALYCON 83,408 *+
396,015 MAXWELL COMM. REVOLVING BANK DEBT - HALYCON II 34,894 *+
875,543 MAXWELL COMM. REVOLVING BANK DEBT - LAZARD FRERES 77,093 *+
264,059 MAXWELL COMM. REVOLVING BANK DEBT - MERRILL LYNCH 23,266 *+
823,981 MAXWELL COMM. REVOLVING BANK DEBT - SAN PAOLO 72,813 *+
1,015,000 MAXWELL COMM. REVOLVING BANK DEBT - TCC ASSOCIATES 89,657 *+
579,133 MAXWELL COMM. TERM BANK DEBT - FIRST CHICAGO 49,226 *+
1,678,704 MAXWELL COMM. TERM BANK DEBT - HALYCON 142,690 *+
702,221 MAXWELL COMM. TERM BANK DEBT - HALYCON II 59,689 *+
426,846 MAXWELL COMM. TERM BANK DEBT - LAZARD FRERES 36,282 *+
468,269 MAXWELL COMM. TERM BANK DEBT - MERRILL LYNCH 39,803 *+
325,093 MAXWELL COMM. TERM BANK DEBT - SAN PAOLO 27,633 *+
1,806,952 MAXWELL COMM. TERM BANK DEBT - TCC ASSOCIATES 153,591 *+
---------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,541,118
===============
(Total Cost $0)
PARTNERSHIPS - 0.96%
EMERGING EUROPE FUND FOR SUSTAINABLE DEVELOPMENT LP $ 160,149 +
NCH INVESTORS FUND LP 187,425 +
NEW CENTURY CAPITAL PARTNERS II LP 414,348 +
SIGMA / UKRAINE LP 175,946 +
SIGMA / UKRAINE CLASS C LP 101,166 +
TEMPLETON EMERGING EUROPE FUND II LP 99,229 +
UKRAINIAN GROWTH FUND II LP 153,000 +
---------------
TOTAL PARTNERSHIPS $ 1,291,263
===============
(Total Cost $4,472,436)
COLLATERALIZED MORTGAGE OBLIGATIONS - 0.41%
509,641 RTC SERIES 1991 M2 CLASS B FRN 9/25/2020 $ 95,558
19,803,269 STRUCTURED ASSET SECURITIES CORP 1996-CFL CLASS X2 2/25/2028 451,762
---------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 547,320
===============
(Total Cost $824,203)
</TABLE>
<PAGE> 20
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
------------------- --------------
<S> <C> <C> <C>
CORPORATE BONDS - 0.00%
11,000 CHARTWELL CONTINGENT INTEREST NOTES 8.00% 6/30/2006 $ 7,212 +
---------------
TOTAL CORPORATE BONDS $ 7,212
===============
(Total Cost $7,212)
TREASURY OBLIGATIONS - 28.19%
U.S. TREASURY OBLIGATIONS - 11.87%
5,000,000 U.S. TREASURY BILLS 11/27/1998 $ 4,988,125 ~
3,000,000 U.S. TREASURY BILLS 12/10/1998 2,987,650 ~
5,000,000 U.S. TREASURY BILLS 12/31/1998 4,966,567 ~
3,000,000 U.S. TREASURY BILLS 02/18/1999 2,962,470
---------------
TOTAL U.S. TREASURY OBLIGATIONS 15,904,812
U.K. TREASURY OBLIGATIONS - 8.90%
ECU 10,110,000 UK TREASURY BILLS 01/14/1999 11,928,461
French Treasury Obligations - 3.71%
FRF 27,801,800 FRENCH DISCOUNT TREASURY BILLS 01/21/1999 4,974,513
BELGIAN TREASURY OBLIGATIONS - 3.71%
BEF 170,802,000 BELGIAN TREASURY BILLS 01/07/1999 4,971,446
---------------
TOTAL TREASURY OBLIGATIONS $ 37,779,232
===============
(Total Cost $37,888,614)
TOTAL INVESTMENTS - 94.90% $ 127,175,446
===============
(Total Cost $136,600,952)
</TABLE>
* Non-income producing security.
+ Restricted securities - securities not registered under the Securities Act
of 1933. See Note C.
~ A portion of the security is serving as collateral or is segregated for
securities sold short.
** Affiliated company.
Foreign Currency Abbreviations
BEF Belgian Franc
CHF Swiss Franc
DEM Deutschemark
ECU European Currency Unit
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.
See notes to financial statements.
<PAGE> 21
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------- -------------
CONTRACTS TO SELL
<S> <C> <C> <C> <C>
BEF 577,044,000 Belgian Franc due 11/06/1998 $ 4,975,203 $ (2,187)
(Receivable amount $4,973,016)
BPS 7,245,456 British Pound Sterling due 01/27/1999 12,080,929 149,401
(Receivable amount $12,230,330)
BRL 1,327,848 Brazilian Real due 11/09/1998 1,107,398 (18,998)
(Receivable amount $1,088,400)
CHF 34,432 Swiss Franc due 11/03/1998 25,482 (9)
(Receivable amount $25,473)
CHF 4,257,900 Swiss Franc due 01/27/1999 3,180,362 21,067
(Receivable amount $3,201,429)
CSK 44,771,000 Czech Koruna due 03/01/1999 1,510,193 2,596
(Receivable amount $1,512,789)
CSK 25,410,000 Czech Koruna due 03/22/1999 853,859 833
(Receivable amount $854,692)
CSK 9,747,000 Czech Koruna due 07/12/1999 321,354 (359)
(Receivable amount $320,995)
ECU 10,031,045 European Currency Unit due 11/06/1998 11,925,910 3,009
(Receivable amount $11,928,919)
FRF 27,690,000 French Franc due 11/05/1998 4,994,444 (306)
(Receivable amount $4,994,138)
FRF 88,837,058 French Franc due 01/27/1999 16,075,178 156,698
(Receivable amount $16,231,876)
NLG 577,954,500 Dutch Guilder due 01/27/1999 1,389,851 14,042
(Receivable amount $1,403,893)
NOK 6,026,100 Norwegian Krone due 06/28/1999 808,216 (12,362)
(Receivable amount $795,854)
</TABLE>
<PAGE> 22
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------- -------------
CONTRACTS TO SELL - CONTINUED
<S> <C> <C> <C> <C>
PLN 2,366,189 Polish Zloty due 12/15/1998 682,194 (63,194)
(Receivable amount $619,000)
PLN 2,365,199 Polish Zloty due 12/17/1998 681,653 (62,653)
(Receivable amount $619,000)
PLN 1,151,484 Polish Zloty due 12/23/1998 331,381 (22,631)
(Receivable amount $308,750)
PLN 2,182,120 Polish Zloty due 03/08/1999 616,192 (64,692)
(Receivable amount $551,500)
SEK 79,568,362 Swedish Krona due 12/09/1998 10,240,182 (64,189)
--------------- -------------
(Receivable amount $10,175,993)
TOTAL CONTRACTS TO SELL $ 71,799,981 36,066
=============== -------------
(Receivable amount $71,836,047)
CONTRACTS TO BUY
BPS 3,594,949 British Pound Sterling due 01/27/1999 $ 5,994,146 (14,092)
(Payable amount $6,008,238)
BRL 656,033 Brazilian Real due 11/09/1998 547,118 2,918
(Payable amount $544,200)
CHF 1,444,650 Swiss Franc due 01/27/1999 1,079,055 1,280
(Payable amount $1,077,775)
FRF 22,814,697 French Franc due 01/27/1999 4,128,349 (37)
(Payable amount $4,128,386)
SEK 20,612,365 Swedish Krona due 12/09/1998 2,652,742 76,487
(Payable amount $2,576,255) --------------- -------------
TOTAL CONTRACTS TO BUY $ 14,401,410 66,556
=============== -------------
(Payable amount $14,334,854)
$ 102,622
=============
</TABLE>
See notes to financial statements.
<PAGE> 23
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1998
<TABLE>
<CAPTION>
MARKET
NUMBER OF SHARES VALUE
---------------- -----
SECURITIES SOLD SHORT - 1.52%
<S> <C> <C>
COMMON STOCK - 1.28%
95,600 British Sky Broadcasting Group PLC $ 779,186
2,186 Essilor International 886,584
75 L'Oreal 42,923
------------------
TOTAL COMMON STOCK 1,708,693
(Total Proceeds $1,519,237)
OPTIONS - 0.24%
270 S&P 500 Index 791.870 Puts expiring 07/30/1999 318,519
------------------
TOTAL OPTIONS 318,519
------------------
(Total Proceeds $369,576)
TOTAL SECURITIES SOLD SHORT $ 2,027,212
===================
(Total Proceeds $1,888,813)
</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.
<PAGE> 24
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
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,
non-diversified, 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 (other than certain foreign
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 sale 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 ask price instead of the bid price. Securities traded in foreign
markets are valued at their current market value, which, depending on local
custom, may or may not be the last quoted sale price (or the closing 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, L.L.C. ("Baupost") in accordance with
procedures adopted by the Trustees of the Fund.
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 results from fluctuations in foreign exchange rates
is not separately disclosed.
<PAGE> 25
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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, except income on certain foreign dividends, where the
ex-dividend date may have passed, is recorded 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.
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 exposure. At October 31, 1998, the Fund
had approximately $3,900,000 of U.S. Treasury bills in a segregated account
relating to its short positions. Securities sold short at October 31, 1998 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.
FUTURES: The Fund may enter into index futures contracts for non-hedging
purposes and in order to hedge against the effects of fluctuations in market
conditions. The potential risk to the Fund is that the change in value of the
futures contracts may not correspond to the change in value of the securities
held by the Fund in those markets. In addition, for non-listed futures
contracts, losses may arise if there is an illiquid secondary market for the
contracts or if the counterparty to the contracts is unable to perform.
Currently, the Fund holds only listed futures contracts. At the time the Fund
enters into a futures contract, it is required to deposit with its broker cash
or U.S. government securities as collateral, calculated on a per contract basis.
Subsequent payments to and from the broker are made on a daily basis as the
market price of the futures contract fluctuates. Daily adjustments arising from
this "mark to market" are recorded by the Fund as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. If a futures
contract is considered a Section 1256 contract for federal income tax purposes,
it will be marked to market at year end with the change in value recorded as 40%
short-term capital gain or loss and 60% long-term capital gain or loss in
accordance with U.S. federal tax law.
<PAGE> 26
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
At October 31, 1998, open positions in futures contracts were as follows:
<TABLE>
<CAPTION>
Unrealized
Expiration Open Contracts Position Appreciation/(Depreciation)
---------- -------------- -------- ---------------------------
<S> <C> <C> <C>
December 18, 1998 71 FTSE 100 Index Futures Short ($292,907)
</TABLE>
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. At the time the Fund enters into an equity swap
contract it may be required to deposit collateral, cash or Treasury bills with
its broker.
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. The loss incurred
by the failure of a counterparty could include the collateral, in certain
circumstances, if there is no required segregation of cash collateral from other
assets. 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
contract is recorded as swap interest income or expense and the fluctuation in
the market value of the underlying security is recorded as unrealized
appreciation or depreciation on investments. Premium payments made to enter into
a swap contract, if any, are capitalized and amortized over the life of the swap
contract.
At October 31, 1998, the Fund had outstanding equity swap contracts with the
following terms:
<TABLE>
<CAPTION>
SWAP NOTIONAL AMT. TERMINATION UNDERLYING PAYMENTS MADE BY OR
COUNTERPARTY LONG/(SHORT) DATE SHARES UNDERLYING EQUITY RECEIPTS TO THE FUND
------------ ------------ ---- ------ ----------------- --------------------
<S> <C> <C> <C> <C> <C>
CS First Boston ($805,642) 01/18/2000 24,700 Assicurazioni Generali Three Month ITL LIBOR
Less 1.95%
SBC Warburg $7,791,417 09/30/1999 2,861,100 Inchcape PLC One Year USD-LIBOR-BBA
Plus .50%
</TABLE>
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. The Fund monitors, on a daily basis, the
value of the collateral to ensure that its value, including accrued interest, is
greater than the amounts owed to the Fund under each such repurchase agreement.
<PAGE> 27
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
OPTIONS: The Fund may either write or purchase call and put options for both
hedging and non-hedging activities. The risk associated with purchasing an
option is that the Fund pays a premium whether or not the option is exercised.
Also, for non-listed options, the Fund bears the risk of loss of premium and
market value should the counterparty not perform under the contract. 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.
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 not subject to 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.
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, 1998, there
were reclassifications between undistributed net investment income, accumulated
net realized gain on investments and paid in capital due to differences between
book and tax accounting for passive foreign investment companies, foreign
currency transactions, and shareholder distributions. This change had no effect
on the net assets or net asset value per share. At October 31, 1998, the Fund,
for federal income tax purposes, had a capital loss carryforward of $3,846,000
which may be applied against any net taxable realized gains of each succeeding
year until the earlier of its utilization or expiration on October 31, 2006. The
Fund utilizes earnings and profits distributed to shareholders upon redemption
of shares as a part of the dividends paid deduction for income tax purposes.
NOTE B - INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
for the period ended October 31, 1998 aggregated $162,536,000 and $166,722,000,
respectively.
For federal income tax purposes, the identified cost of investments at October
31, 1998 was $137,324,903. Unrealized appreciation/(depreciation), on a federal
income tax basis, for all securities was as follows:
<TABLE>
<CAPTION>
Year Ended
October 31, 1998
----------------
<S> <C>
Gross unrealized appreciation $17,285,517
Gross unrealized depreciation (27,434,974)
-------------
Net unrealized depreciation ($10,149,457)
=============
</TABLE>
<PAGE> 28
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1998
NOTE C - RESTRICTED SECURITIES
At October 31, 1998, 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, 1998 Date
---- ---------------- ----
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
Maxwell Communications Corporate Debt $ 0 $1,541,118 11/22/93
Corporate Bonds:
Chartwell Contingent Interest Notes 8.00% due 06/30/2006 7,212 7,212 12/21/95
Partnerships:
Emerging Europe Fund for Sustainable Development, L.P. 119,845 160,149 02/25/97
NCH Investors Fund, L.P. 1,598,618 187,425 12/18/95
New Century Capital Partners II, L.P. 978,292 414,348 11/30/95
Sigma / Ukraine, L.P. 661,184 175,946 05/14/96
Sigma / Ukraine Class C, L.P. 404,663 101,166 11/27/96
Templeton Emerging Europe Fund II, L.P. 113,758 99,229 12/08/97
Ukrainian Growth Fund II, L.P. 596,076 153,000 03/31/97
Common Stock:
Burren Energy PLC 858,852 625,843 04/14/98
Companies in Liquidation:
Ehlco Liquidating Trust 12 394 01/30/89
---------- ----------
TOTAL RESTRICTED SECURITIES (2.59% of Net Assets) $5,338,512 $3,465,830
========== ==========
</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.
NOTE D - INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund retains Baupost as its investment adviser 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 investment adviser 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.
<PAGE> 29
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net Asset Value, beginning of period $ 17.09 $ 15.38 $ 13.47 $ 14.33 $ 14.77
----------- ----------- ----------- ----------- -----------
Income/(loss) from investment operations
Net investment income 0.55 0.30 0.41 0.25 0.22
Net realized and unrealized gain/(loss) (2.83) 3.47 2.43 0.71 1.23
----------- ----------- ----------- ----------- -----------
Total from investment operations (2.28) 3.77 2.84 0.96 1.45
----------- ----------- ----------- ----------- -----------
Less distributions
From net investment income 0.58 0.40 0.28 0.25 0.46
In excess of net investment income -- -- -- 0.08 --
From net realized gain 2.05 1.66 0.65 1.49 1.43
----------- ----------- ----------- ----------- -----------
Total distributions 2.63 2.06 0.93 1.82 1.89
----------- ----------- ----------- ----------- -----------
Net Asset Value, end of period $ 12.18 $ 17.09 $ 15.38 $ 13.47 $ 14.33
=========== =========== =========== =========== ===========
Total Return (16.30%) 27.04% 22.51% 7.91% 11.06%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 134,003 $ 152,958 $ 108,788 $ 89,439 $ 81,787
Ratio of net expenses to average net assets 2.12%(a) 2.14%(a) 1.50% 1.54% 1.53%
Ratio of total expenses excluding waiver of
management fee to average net assets 2.19%(a) 2.14%(a) 1.50% 1.54% 1.55%
Ratio of net investment income to average net
assets 2.98% 1.45% 2.27% 1.60% 1.32%
Ratio of net investment income excluding
waiver of management fee to average net
assets 2.91% 1.45% 2.27% 1.60% 1.30%
Portfolio turnover rate 129% 140% 120% 106% 161%
</TABLE>
(a) The expense ratios include equity swap contract interest expense.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Baupost
Fund's audited financial statements at 10/31/98 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 136,600,952
<INVESTMENTS-AT-VALUE> 127,175,446
<RECEIVABLES> 3,332,953
<ASSETS-OTHER> 10,779,089
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 141,287,488
<PAYABLE-FOR-SECURITIES> 4,408,328
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,876,257
<TOTAL-LIABILITIES> 7,284,585
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 147,727,246
<SHARES-COMMON-STOCK> 11,006,286
<SHARES-COMMON-PRIOR> 11,694,750
<ACCUMULATED-NII-CURRENT> 1,666,008
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,850,498)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (11,539,853)
<NET-ASSETS> 134,002,903
<DIVIDEND-INCOME> 5,383,342
<INTEREST-INCOME> 3,199,767
<OTHER-INCOME> 0
<EXPENSES-NET> 3,568,393
<NET-INVESTMENT-INCOME> 5,014,716
<REALIZED-GAINS-CURRENT> (4,224,754)
<APPREC-INCREASE-CURRENT> (29,161,256)
<NET-CHANGE-FROM-OPS> (28,371,294)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,190,909
<DISTRIBUTIONS-OF-GAINS> 18,216,303
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,829,353
<NUMBER-OF-SHARES-REDEEMED> 2,310,138
<SHARES-REINVESTED> 1,538,174
<NET-CHANGE-IN-ASSETS> (18,955,413)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 11,606,952
<OVERDISTRIB-NII-PRIOR> 2,970,585
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,681,629
<INTEREST-EXPENSE> 797,990
<GROSS-EXPENSE> 3,681,679
<AVERAGE-NET-ASSETS> 167,637,325
<PER-SHARE-NAV-BEGIN> 17.09
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> (2.83)
<PER-SHARE-DIVIDEND> .58
<PER-SHARE-DISTRIBUTIONS> 2.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.18
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
