THE BAUPOST FUND
ANNUAL REPORT
October 31, 1999
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.
[LOGO] ERNST & YOUNG LLP
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THE BAUPOST FUND
ANNUAL REPORT
October 31, 1999
Contents:
Management's Discussion of Performance...................................1
Report of Independent Auditors..........................................12
Statement of Assets and Liabilities as of October 31, 1999..............13
Statement of Operations for the period ended October 31, 1999...........14
Statement of Changes in Net Assets for the periods ended
October 31, 1999 and October 31, 1998...............................15
Schedule of Investments as of October 31, 1999..........................16
Schedule of Forward Foreign Currency Contracts as of October 31, 1999...26
Schedule of Securities Sold Short as of October 31, 1999................27
Notes to Financial Statements...........................................28
Financial Highlights....................................................34
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The Baupost Fund
44 Brattle Street, 5th Floor
P.O. Box 381288
Cambridge, Massachusetts 02238
Tel. (617) 497-6680
Fax (617) 868-3529
December 17, 1999
Dear Baupost Fund Shareholder,
The Baupost Fund completed its year ended October 31, 1999 with a gain
of 8.29%. This result, while profitable, is disappointing to us, especially
coming on the heels of last year's decline. We remain determined in our pursuit
of good absolute returns with limited downside risk. The valuation extremes of
today's market have resulted in opportunities as attractive as any we have come
across in the past decade. We believe the extremely compelling valuation of our
current portfolio holdings augurs well for strong investment results with
limited risk in the months and years ahead. The next several pages will describe
the factors underlying our recent performance and provide more detailed
information regarding our current portfolio holdings.
Simply put, we are navigating through an unprecedented market
environment, where fundamental analysis is thrown out the window and logic is
turned on its head. We underperformed in 1999 not because we abandoned our
strict investment criteria but because we adhered to them, not because we
ignored fundamental analysis but because we practiced it, not because we shunned
value but because we sought it, and not because we speculated but because we
refused to do so. In sum, and very ironically, we got hurt not speculating in
the U.S. stock market.
Occasionally we are asked whether it would make sense to modify our
investment strategy to perform better in today's financial climate. Our answer,
as you might guess, is: No! It would be easy for us to capitulate to the runaway
bull market in growth and technology stocks. And foolhardy. And irresponsible.
And unconscionable. It is always easiest to run with the herd; at times, it can
take a deep reservoir of courage and conviction to stand apart from it. Yet
distancing yourself from the crowd is an essential component of long-term
investment success.
Baupost has employed a value approach to investing because it is, above
all, risk averse, and focused on preserving capital over the long run. This
approach demands both discipline and patience. Discipline is required to buy
only bargains and sell fully-priced holdings, never becoming swept up in the
enthusiasm of the herd. Patience is required to wait for just the right
opportunities, avoiding the pressure to make investments that don't meet the
most stringent criteria of quality and undervaluation, and then to hold on,
allowing an investment sufficient time to come to fruition.
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The stalwart performers of today's stock market trade at higher
valuations than any of the bull market favorites of yesteryear. The major stock
market indices are, by virtually all measures, extremely overvalued. Never
before have companies that have strung together a few years (or quarters) of
earnings (or sales) growth been valued at such high multiples. And never before
has the gap between the in-favor few and the out-of-favor many been so great. A
few hundred in-favor growth stocks lift the market averages, while thousands of
out-of-favor companies trade at bear market valuations. The disparity between
the market favorites and everything else has never been greater.
It is not just our portfolio which has lagged. A recent article in the
Wall Street Journal explained that although the Nasdaq 100 Index is up over 74%
year to date, the average Nasdaq stock is actually down on the year. Just about
every day on the New York Stock Exchange, there are more stocks making new lows
for the year than new highs, usually many times more, even though the major
market indices are all at or near record high levels. Indeed, on Friday,
December 3, by no means an unrepresentative day, the Dow Jones Industrial
Average surged 247 points, the S&P 500 Index jumped 1.7% (to a record level),
and the Nasdaq 100 Index rallied 2% (also to a new high); on that day on the New
York Stock Exchange, 99 stocks made new highs for the year while 200 posted new
yearly lows! On December 10, all three indices again rose sharply; on the New
York Stock Exchange, however, only 85 stocks made new highs while 339 hit new
lows. On December 15, the Dow, S&P and Nasdaq Indices all rose sharply; that
same day, 49 NYSE stocks made new highs while a whopping 455 posted new lows. It
is hard to imagine a worse environment to assess the merits of a value investing
approach (nor, ironically, a more favorable environment in which to practice
it).
The gravitational force of the Internet and technology stock bubble is
exerting a strong pull on the assets of investors. Money is draining from other
sectors of the market into these strongly performing ones, causing share prices
of more mundane companies not merely to underperform but actually to decline.
Like a gambler withdrawing his or her savings for a trip to Las Vegas, investors
are literally dumping their conservative shareholdings at giveaway prices to try
their luck at the technology stock casino. The effect is a wild skewing of
investment performance. From January 1 through December 13, 1999, the
technology-heavy Nasdaq 100 Index rose 74.8%, versus 15.2% for the more balanced
S&P 500 Index.
Several Forces Contribute to Today's Lofty Growth Stock Valuations
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There are several unusual forces at work in the U.S. stock market and
in major stock markets worldwide which are important to understand. First, there
has been a decade-long increase in indexing activity, where more and more money
is either overtly or tacitly invested to mirror the performance of market
indices, especially the S&P 500 Index. The view is that investors on average
cannot beat the market (a tautology, since they are the market) so you shouldn't
bother to try. Moreover, trying will certainly result in transaction costs and
management fees and could result in market underperformance. Many investors have
found these arguments persuasive, especially in combination with the steady
stream of academic arguments trumpeting the merits of stock ownership over the
long-term compared to other asset classes. Finally, there has been a protracted
self-fulfilling prophecy at work, as inflows into the indices lift their
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components at a faster rate than most other stocks, leaving the impression that
an indexing strategy could actually outperform over time. The recent inclusion
of Yahoo, Inc. into the S&P 500 Index caused a 67 point (24%) one-day gain and a
one-week $19.1 billion valuation enhancement to Yahoo's already generous market
capitalization. Later, we describe how the popularity of indexing will almost
certainly be a source of significant opportunity creation for Baupost.
A second factor contributing to today's lofty market valuation is the
cult of growth and momentum investment strategies, a bizarre emphasis on the
trend of a company's results rather than on the absolute level of its
performance. To this way of thinking, no price is too high to pay for a company
that is rapidly growing and there is no price worth paying for a company that is
not. I heard about a recent business school discussion where an entire class of
students expressed a preference to own Microsoft (60 times earnings, 20 times
revenues) rather than General Motors (under 10 times earnings). One student
indicated that he would not choose General Motors at one half or even one fourth
of its current price. The professor asked if there were any price at which the
student might prefer General Motors. The student started to reply in the
negative, hesitated, and then allowed how he might take it were it offered for
free. This so perfectly captures today's investment mentality.
Investors are particularly enamored with companies which are able to
post long records of unflagging earnings growth. Companies which do so achieve
very high stock prices which, in turn, generously reward stock-option-laden
management teams. As a result, there is no shortage of companies which always
"make their numbers". The stakes are enormous, providing tens or even hundreds
of millions of dollars to corporate executives who achieve consistent growth in
reported results, little or nothing to those who do not (whose stocks
consequently plummet and generally fail to recover).
Since businesses simply are not as steady or consistent as Wall Street
number crunchers demand, there is enormous pressure on managements to smooth
their results and pull the occasional rabbit out of a hat to deliver the desired
quarterly outcomes. There are elements of a conspiracy to all this, as
managements and shareholders both benefit from good reported results. A great
many companies meet or exceed estimates only with a great deal of accounting
legerdemain: write-ups and write-downs, changes in accounting procedures,
modifications to actuarial assumptions, one time charges or gains and other
forms of chicanery. There is little incentive for the market cheerleaders on the
sell side of Wall Street to bring the goings-on to light. Such practices render
the stock market even more overvalued than commonly recognized, because many of
today's dubious accounting practices would almost certainly be reversed in an
adverse market environment, with much lower multiples applied to the resultant
lower reported earnings.
The third factor impacting today's stock market is the Internet. While
we have no doubt that this extraordinary technology is changing and will
continue to change our lives in important and unimaginable ways, it has spawned
a gigantic stock market bubble among investors who wish to connect their
investment fortunes to their excitement about this technology. At the root of
all financial bubbles is a good idea carried to excess. The Internet is an
extraordinary idea; how fitting, then, is the magnitude of the excess. Hundreds
upon hundreds of Internet-related companies have come public and achieved
valuations well into the billions of dollars, a great many
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possessing little more than a business plan. Very few of these companies are
currently profitable, and it is our belief that most of them never will be.
The excitement of the Internet, the well publicized successes of
investors who jumped in early on the Internet stock bandwagon, and the greed
element in human nature have combined to create a market culture of day-trading,
a low cost, convenient alternative to casino gambling that has to date, unlike
Las Vegas, delivered a positive sum experience. The level of speculative
activity is at a fevered pitch, and people are changing their lives around to
participate. Some have quit their jobs to day-trade. Venture capitalists are
fighting to throw money at each successive hot deal; many have raised their fees
and taken in gigantic sums of new capital. Business school and college students
are rushing to write business plans that routinely get funded for millions of
dollars. Traditional businesses are being raided for managerial talent by
Internet companies with the lure of vast quantities of stock options as bait.
Stories are everywhere of mere mortals who became multimillionaires overnight
either working at or investing minor sums in Internet companies.
The explosive performance of Internet stocks has infected many
professional investors who are typically judged by their investment performance
relative to their industry peers. Relative performance is a slippery slope, and
when a few investors holding Internet stocks outperform their peers, it becomes
increasingly difficult for everyone else to avoid them. This sustains and even
fuels the bubble despite the absence of investment fundamentals.
Performance-driven hedge funds, relative-performance-oriented mutual funds, and
even some "value investors" have capitulated. One prominent "value investor"
owns among his ten largest holdings big stakes in Microsoft, IBM, Cisco Systems,
America Online and Amazon.com. The first three trade at an average p/e ratio of
over 69. America Online trades at 378 times earnings, while Amazon.com "suffers"
large operating losses which the stock market values highly. Needless to say,
this "value investor" has significantly outperformed his less imaginative peers.
The tendency of investors to follow the market's momentum and bet on
whatever has worked recently is accompanied by antipathy to whatever hasn't.
Underperforming market sectors and asset classes are generally experiencing fund
outflows, exacerbating the downward trend. Historically, out-of-favor
investments have typically performed best in the periods immediately following
their underperformance, while those that have done well almost always follow
their success by lagging badly. Human nature makes it unlikely for most
investors to benefit from these predictive factors; the memory of most investors
only incorporates what recently has been successful. Small and
mid-capitalization stocks, and especially those at the lower end of the
valuation range, have underperformed dreadfully for years, as money has gone
into larger capitalization stocks. Some of this has been due to indexing; some
is explained by momentum. Many institutional investors manage sums so vast that
only the few hundred largest capitalization stocks could possibly absorb a
meaningful portion of their capital. The underperformance of small and
mid-capitalization money managers has caused investors to withdraw funds from
them in search of better relative performance. Client redemptions force these
managers to sell shares to raise cash, regardless of the valuation of what they
are forced to sell. Thus it is that the undervalued become even more so, even as
the overvalued do the same.
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The Opportunity
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We are actually cheered by the current environment (although not by its
impact on our results) because we believe it represents an enormous opportunity
in the making, an opportunity which we are currently in the process of
exploiting. Right now, we are able to purchase high-quality assets and
businesses in the form of small to medium capitalization stocks at their
cheapest valuations in a decade or more. Many are selling at or below fifty
cents on the dollar of underlying value, an extraordinary level of discount.
Significantly, we believe these bargains are upon us precisely because of the
speculative activity surrounding the Internet, which has siphoned enormous sums
of money out of more mundane investments.
It is important to emphasize that we are not describing a portfolio of
cats and dogs, highly competitive or declining businesses, poor quality assets,
or the likely losers in the Internet economy. Rather, our portfolio has been
assembled through rigorous fundamental analysis, one investment at a time,
bottom up. We typically pass on dozens of prospective investments for every one
we make. Most companies in our portfolio, in addition to compelling
undervaluation, have strong market positions, significant barriers to entry,
substantial free cash flow, and catalysts in place to assist in the realization
of underlying value. Almost all have managements who own significant amounts of
stock personally. Even if these smaller stocks never return to investor favor,
we expect to earn good returns from our fractional ownership in the underlying
businesses. Over time, we are confident that the market for these stocks will
recover as overstimulated investors refocus on risk as well as on return. This
should result in a period of strong absolute performance and even better
relative results. As we emphasized in our Semi-Annual Letter to Shareholders,
our goal is to generate good absolute returns with limited downside risk over
time. A portfolio of deeply undervalued, carefully chosen securities, many with
catalysts in place for the realization of underlying value, is the most reliable
way we know of to achieve this goal.
Our search for investment opportunity is always guided by fundamental
analysis and valuation. We employ no rigid formulas, believing that the flexible
pursuit of opportunity improves one's prospects for good returns with limited
risk. We strive to be intellectually honest at all times, maintaining a
willingness to change our minds when we are wrong. Given the competitiveness of
the investment business, we believe it is important in every investment to have
an edge, an advantage over the herd. This edge could be a willingness to take a
long-term perspective in a short-term-oriented market, a tolerance of complexity
when others crave simplicity, or the absence of constraints which either impede
the ability of others to act or force them to act in uneconomic ways. For many
of our holdings today, we believe the market has become increasingly
inefficient, as investors have simply decided not even to look at small
capitalization stocks outside of high technology industries.
Frequently, we attempt to profit by providing liquidity to urgent
sellers. Financial markets act as allocators of capital, but they function much
more efficiently when things are going well than when they are not. When an
industry, asset class, security type, or geographical region is out of favor,
profitable opportunities can be available to those who have cash and the
expertise and willingness to deploy it. These opportunities superficially appear
to be risky, since investing
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where capital is exiting is by definition unpopular. Since most investors derive
comfort from consensus, many would not even identify such areas as rich with
opportunity.
The investment challenge of providing liquidity to out-of-favor asset
classes is more complex than simply identifying areas that others are avoiding.
First, it is important to never be blindly contrarian, betting that whatever is
out of favor will be restored. Often, investments are disfavored for good
reason, and investors must consider the possibility that recovery may not occur.
Second, it is important to gauge the psychology of other investors. How far
along is the current trend, what are the forces driving it, and how much further
may it have to go? Being extremely early is tantamount to being wrong, so
contrarians are well advised to develop an understanding of the psychology of
the sellers. Finally, valuation is extremely important in reducing risk.
Investors must never mistake an investment that is down in price for one that is
bargain-priced; undervaluation is determined only by a security's price compared
to its underlying value.
Despite two consecutive disappointing years, we remain enthusiastic
about our prospects going forward and continue to invest virtually all of our
liquid net worths in various Baupost portfolios. We choose to eat home cooking
not only out of habit, not only because we should, and not so we can tell you
that we do, but because we have a great deal of confidence in our strategy. Our
portfolio contains greater undervaluation and higher quality investments than we
have owned in years. We are continuing to scoop up extraordinary bargains amidst
this crazy market, and we look forward to an upcoming period of profitable value
realization.
We have no mandate other than the risk averse investment of the capital
under our direction. We need not be fully invested, and frequently hold
significant cash balances, waiting for truly great opportunities to come along.
As part of our risk management, we have never leveraged our portfolios. We do
not bet the ranch on any single investment; few positions have exceeded 5% of
assets in recent years. We do not generally engage in the short sale of
overvalued securities, believing that short-selling could effectively increase,
not decrease, portfolio risk in certain kinds of markets.
With so many investors choosing not to think about their investing
(indexing), failing to analyze the fundamentals of their holdings (momentum
investors), and having an extremely short-term time horizon (almost everyone
else), this is a wonderful time to be a long-term value investor. It is
important to keep in mind that stocks are perpetuities, with no maturity date.
While we frequently invest in stocks with a catalyst for value realization in
order to create a portfolio of limited duration, we nevertheless buy only when
we are prepared to hold for the long-term. Very few investors would choose to
hold their current portfolios if they thought the stock market might be closed
for trading for the next five years; since we are investing and not speculating,
we would be comfortable with our portfolio under such conditions.
Our Current Portfolio
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To help you understand how we are positioned at this time, we have
broken down our current portfolio into categories as shown in Table 1 on the
next page. As you can see, we
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continue to hold substantial cash balances. Most of our common stock investments
are in the U.S., where we continue to see a strong flow of opportunities. A
significant percentage of our investments have either partial or full catalysts
in place for the realization of underlying value. The next several paragraphs
will describe some of our major current holdings.
Table 1
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The Baupost Fund
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Breakdown of Portfolio at 10/31/99
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Cash and Cash Equivalents 32.2%
U.S. Equities 41.9%
Western European Equities 11.5%
Emerging Market Investments 5.0%
Liquidations 6.5%
Distressed Debt Investments 2.3%
Market Hedges 0.2%
Other 0.4%
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Total Portfolio 100.0%
Among today's most attractive pockets of opportunity are corporate
spinoffs, which initially come under selling pressure in even the best of
markets. Currently, a number of spinoffs are truly orphaned securities trading
at giveaway prices. For example, we have recently purchased shares of both of
the recently separated subsidiaries of Tenneco, Inc. The larger company, Pactiv
Corporation, manufactures Baggies brand food storage bags and Hefty brand trash
bags, and has leading market shares in a myriad of other plastic packaging
products. Due to indiscriminate post-spinoff selling pressure, the shares have
slumped to around 10 times currently depressed after-tax earnings and about 5.5
times pretax cash flow. The earnings should grow from a combination of cost
reductions, asset redeployments, bolt-on acquisitions, volume growth, and
expected lower raw materials prices. Management recently received significant
stock options as part of a new incentive plan to better align their interests
with those of shareholders. They have also been buying stock personally. It has
been many years since a branded consumer products business fell through the
cracks to trade at such a compelling valuation.
We are also buying shares of the Tenneco Automotive spinoff; this
company manufactures Monroe shock absorbers and Walker mufflers, and is the
market share leader in nearly all of its products and markets. It currently
trades at approximately four times after-tax earnings. It's shares have been
particularly brutalized as a result of its deletion from the S&P 500 Index.
Tenneco pre-spinoff traded at a market capitalization of several billion
dollars; the highly leveraged Tenneco Automotive spinoff, still under extreme
selling pressure, trades at a market capitalization barely above $200 million.
Selling pressure has turned this market leader into a micro-capitalization
stock, forcing many holders to exit because it no longer meets their size
criteria. In effect, there is now a class of shareholders who must sell a stock
simply because it trades at a depressed market valuation.
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Harcourt General recently spun off most of its interest in Neiman
Marcus, allowing it to become a pure play in the publishing and computer-based
learning and training businesses. In the current turbulent market, we believe
investors have failed to focus on the low valuation and high-quality, strongly
growing businesses within Harcourt. Currently, trading at a several year low,
the shares trade for under 12 times cash earnings (earnings plus goodwill
amortization) and for roughly half of our estimate of the company's asset value.
The company is expected to grow earnings 12 - 15% annually, and recently
reported strong quarterly results. Harcourt's management has most of their net
worths invested in the company (which they control) and has committed to take
additional actions as warranted to cause the company's share price to more fully
reflect underlying business value.
Chemfirst, a specialty chemical company, came public several years ago
as a spinoff. Despite the company's strong position in the fast growing
electronics chemicals market, the shares trade at around five times estimated
cash flow. Business results are strong, and the company's management owns a
substantial interest in the company. In addition, the company is actively
repurchasing its shares. We believe the company will eventually be acquired in
the chemical industry's consolidation.
We own several investments in the real estate area including shares in
LNR Corporation, a spinoff a few years ago from a respected homebuilding
company. This company is essentially an opportunistic investor in a variety of
real estate assets, with a bias toward purchasing underperforming or out of
favor properties, turning them around and selling them. They have achieved
consistently strong returns over time, and the underlying value of the company's
assets is close to twice the current market price of the shares. We expect
underlying value to grow at a healthy rate for the foreseeable future.
Management owns approximately 30% of the company's shares, and the company has
been repurchasing substantial amounts of its own stock at the current price.
Octel was spun-off from Great Lakes Chemical Corporation in 1998 and
has not succeeded in attracting investor interest. It is the world's dominant
producer and marketer of worldwide TEL, a fuel additive that makes gasoline
"leaded." This has been called a "sunset industry" because leaded gasoline is
being phased out all over the world. In the meantime, however, it is a high
margin business that requires almost no ongoing investment. Octel has recently
consolidated its position and now controls in excess of 90% of the worldwide TEL
market. The company is currently buying back around 10% of its stock per year.
There are two primary risks - that the phase-out goes much more quickly than the
15-20% annual decline that management anticipates or that the company's abundant
cash flow is squandered on foolish acquisitions rather than being used to pay
down debt and buy back stock. At three times current after-tax earnings,
valuation more than compensates for these risks.
We have recently become more active investors in thrift conversions.
Thrifts at one time had a large dedicated community of investors, but after a
period of overvaluation and poor stock performance, this is no longer true.
While there are generally no short-term catalysts for value realization in this
area, stock repurchases are accretive to shareholder value and industry
consolidation seems likely to continue at a healthy pace. In short, the
opportunity to buy
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significantly overcapitalized, conservatively managed thrifts between 50% and
75% of book value and at reasonable earnings multiples offer a low-risk
investment with significant return potential.
We own shares in Stewart Enterprises, a funeral home and cemetery
company which currently trades at approximately six times after-tax earnings per
share. The death care industry has come under pressure as a result of overpriced
acquisitions, excessive levels of debt, a recent, temporary decline in the death
rate, and increased competition in some regional markets. All of the public
companies in this industry are trading at extremely depressed levels. Stewart
has some of the best properties in the industry; the company has recently
repurchased its stock around current levels, and insiders have added to their
holdings. A new management team is expected to reorient the company to maximize
free cash flow generation.
Ucar is the world's leading manufacturer of graphite electrodes which
are used in steel production. The company came under a cloud a few years ago
when the industry admitted to price fixing. Results were then adversely affected
by the Asian crisis last year. Management announced a sweeping cost cutting
plan, which has been implemented faster than expected. Earnings are expected to
grow strongly over the next few years as a result of lower expense levels,
stronger demand, and possible price increases from currently depressed levels.
The company also has announced a potentially lucrative product development and
supply agreement with Ballard Power Systems, developers of a new fuel cell
technology. Despite the company's excellent prospects and strong market
position, the shares trade at roughly eight times estimated 2000 earnings.
Chargeurs is a French company which processes and trades in wool and
produces fabrics, interlinings, and protective films. It is the market leader in
virtually every segment in which it operates, generating substantial free cash
flow from operations. Management is proactive in taking measures to maximize
shareholder value including a securitization program to reduce volatility and
risk in the trading business and the repurchase of a large number of shares.
Some segments of the business have suffered as a result of the Asian crisis and
are only now beginning to recover. Even on depressed results, however, the
market values the company at approximately seven times earnings. Small
capitalization companies in mundane businesses are out of favor in France, too.
Lambert Fenchurch is a publicly traded insurance broker in the U.K.
Small in scale and in an industry that was out of favor amongst British
investors, the company was unable to get a reasonable valuation from the stock
market. Trading around 80 pence, the shares languished at six times earnings.
Last month, after a long strategic review, the company accepted a takeover offer
at 145 pence per share. The deal went unconditional on December 16.
Saab is a Swedish defense company primarily focused on aircraft, space
and training systems which is valued at about seven times earnings. This
valuation does not take into account growth opportunities available from the
expansion of Saab's fighter aircraft program into the export market; the company
recently received its first export order, validating our investment thesis.
Management is also pursuing value creation through the monetization of the
company's civilian aircraft lease portfolio. Last month, Saab agreed to purchase
Celsius, another Swedish defense contractor, in a deal that enhances value by
about 20% after cost-saving and revenue
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synergies. Although the European defense market is undergoing rapid
consolidation, Saab, as one of the smallest remaining independent players, is
below the radar screen of most investors.
We continue to have exposure to several investments whose outcome is
totally independent of the level of the stock market. One such holding is
Trustor Corporation, which is in liquidation. The company's assets are cash and
legal claims against a former executive who committed embezzlement. Cash on hand
exceeds the share price and a substantial liquidating distribution is expected
shortly. Another such investment is in the debt of Maxwell Communications, which
is also in liquidation. This company continues to make good progress selling off
its assets and resolving legal claims at better-than-expected levels. Another
liquidating distribution from Maxwell is expected in late December.
The last two years have been difficult ones for The Baupost Fund. We
are disappointed but not disillusioned, and remain confident that a
fundamentally-driven, disciplined value investment approach will deliver good
results with limited risk over time. We appreciate your patience and support and
look forward to a period of improved performance.
As always, we are eager to address any questions, comments or
suggestions you may have.
Very truly yours,
/s/ Seth A. Klarman
----------------------
Seth A. Klarman
President
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AVERAGE ANNUAL TOTAL RETURNS (1) 1 5 LIFE OF FUND
For Periods Ended 10/31/99 YEAR YEAR (SINCE 12/14/90)
---- ---- ----------------
THE BAUPOST FUND 8.29% 8.77% 12.20%
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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 10/31/99
[LINE GRAPH]
The Baupost Fund S&P 500
---------------- -------
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
10/31/98 $128,220.00 $205,175.00
10/31/99 $138,847.18 $257,839.45
(1) Assumes reinvestment of all dividends.
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200 Clarendon Street Fax: (617) 266-5843
Boston www.ey.com
Massachusetts 02116-5072
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 forward foreign
currency contracts, and schedule of securities sold short, as of October 31,
1999, 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, 1999, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. 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, 1999, 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.
/s/ Ernst & Young LLP
December 3, 1999
12
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<PAGE>
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1999
ASSETS:
Investments in securities - at value $ 107,263,709
(cost $115,229,930)
Cash 14,262,016
Foreign currency (cost $207) 208
Receivable for investments sold 2,847,104
Receivable for investments sold short 396,175
Interest and dividends receivable 178,310
Unrealized appreciation on swaps 20,737
Other assets 5,663
---------------
Total Assets 124,973,922
LIABILITIES:
Payable for investments purchased 80,933
Payable to The Baupost Group, L.L.C. 401,431
Payable for securities sold short 393,842
(proceeds $396,211)
Other payables and accrued expenses 161,757
Payable for Fund shares redeemed 27,768
Net unrealized depreciation on
forward foreign currency contracts 9,407
---------------
Total Liabilities 1,075,138
---------------
NET ASSETS $ 123,898,784
===============
COMPOSITION OF NET ASSETS:
Paid in capital $ 130,066,014
Undistributed net investment income 2,486,106
Accumulated net realized loss on investments
and foreign currency transactions (720,823)
Net unrealized depreciation on investments
and assets and liabilities in foreign currencies (7,932,513)
---------------
NET ASSETS $ 123,898,784
===============
NET ASSET VALUE:
Offering and redemption price per share
($123,898,784/9,594,146) $ 12.91
===============
See notes to financial statements.
13
<PAGE>
THE BAUPOST FUND a59-k115
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1999
INVESTMENT INCOME:
INCOME:
Interest $ 2,987,087
Dividends (net of foreign withholding taxes of $105,835) 1,073,809
------------
Total Income 4,060,896
EXPENSES:
Investment management fee 1,321,388
Administrative fee 330,349
Interest expense 315,017
Investment expenses 308,145
Custodian fees 107,207
Equity swap contract expense 51,084
Legal fees 41,626
Audit fees 40,000
Registration and filing fees 38,952
Directors' fees 35,280
Transfer agent fees 27,512
Miscellaneous 20,948
------------
Total Expenses 2,637,508
------------
NET INVESTMENT INCOME 1,423,388
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain/(loss) on:
Investments and equity swap contracts 5,144,356
Foreign currency transactions 1,447,508
Short sales (715,632)
------------
5,876,232
Change in unrealized appreciation/(depreciation) on:
Investments and equity swap contracts 3,508,485
Foreign currency transactions (41,913)
Short sales 140,768
------------
3,607,340
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 9,483,572
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 10,906,960
============
See notes to financial statements.
14
<PAGE>
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
------------- -------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,423,388 $ 5,014,716
Net realized gain/(loss) on investments and foreign
currency transactions 5,876,232 (4,224,754)
Change in unrealized appreciation/(depreciation) on
investments and foreign currency transactions 3,607,340 (29,161,256)
------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 10,906,960 (28,371,294)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,901,043) (5,190,909)
From net realized gain on investments -- (18,216,303)
------------- -------------
TOTAL DISTRIBUTIONS (2,901,043) (23,407,212)
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 11,240,554 43,396,229
Reinvestment of dividends 2,801,021 23,195,673
Cost of shares redeemed (32,151,611) (33,768,809)
------------- -------------
NET INCREASE/(DECREASE) IN NET ASSETS
RESULTING FROM SHARE TRANSACTIONS (18,110,036) 32,823,093
------------- -------------
TOTAL DECREASE IN NET ASSETS (10,104,119) (18,955,413)
NET ASSETS AT BEGINNING OF PERIOD 134,002,903 152,958,316
------------- -------------
NET ASSETS AT END OF PERIOD
(including undistributed net
investment income of $2,846,106
and $1,666,008, respectively) $ 123,898,784 $ 134,002,903
============= =============
OTHER INFORMATION:
Shares sold 880,382 2,829,353
Shares issued in reinvestment of dividends 224,441 1,538,174
Shares redeemed (2,516,963) (2,310,138)
------------- -------------
Net increase/(decrease) (1,412,140) 2,057,389
============= =============
</TABLE>
See notes to financial statements.
15
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
COMMON & PREFERRED STOCKS - 54.18%
UNITED STATES - 40.38%
CHEMICALS - 6.83%
238,150 CHEMFIRST INC $ 6,400,281
169,300 OCTEL CORPORATION 2,073,925 *
-------------
8,474,206
SAVINGS INSTITUTIONS - 6.10%
1,300 ALASKA PACIFIC BANCSHARES 13,812
225,800 CAPITOL FEDERAL FINANCIAL 2,258,000
5,700 EMPIRE FEDERAL BANCORP INC 63,413
110 FIDELITY BANKSHARES INC 1,705
347,900 HUDSON CITY BANCORP INC 4,631,419
2,300 LIBERTY BANCORP INC 14,375
1,949 MID-CENTRAL FINANCIAL CORPORATION 62,368
21,700 SOUND FEDERAL BANCORP 195,300
13,700 WEST ESSEX BANCORP INC 133,575
4,400 WILLOW GROVE BANCORP INC 41,525
14,600 WORONOCO BANCORP INC 146,000
-------------
7,561,492
DIVERSIFIED MANUFACTURING OPERATIONS - 5.69%
440,400 TENNECO INC 7,046,400
APARTMENT BUILDING OPERATORS - 4.14%
265,000 LNR PROPERTY CORPORATION 5,134,375
CONSTRUCTION SERVICES - 2.54%
267,400 WALTER INDUSTRIES INCORPORATED 3,141,950
FUNERAL SERVICE & CREMATORY - 2.43%
634,000 STEWART ENTERPRISES INC - CLASS A 3,011,500
CARBON & GRAPHITE PRODUCTS - 2.38%
150,500 UCAR INTERNATIONAL INC 2,944,156 *
</TABLE>
16
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
REAL ESTATE INVESTMENT TRUST - 1.95%
496,850 VENTAS INC $ 2,422,144
MISCELLANEOUS PUBLISHING - 1.42%
45,800 HARCOURT GENERAL INC 1,763,300
MACHINE TOOLS & RELATED PRODUCTS - 1.01%
43,400 APPLIED POWER INC - CLASS A 1,261,312
REAL ESTATE INVESTING - 0.97%
938,000 REGENCY EQUITIES CORPORATION 18,760 *
2,300 SECURITY CAPITAL US REALTY SPONSORED ADR 35,219 *
1,132 SECURITY CAPITAL GROUP - CLASS A 776,552 *
27,350 SECURITY CAPITAL GROUP - CLASS B 376,062 *
-------------
1,206,593
TRAVEL AGENCIES - 0.77%
118,500 NAVIGANT INTERNATIONAL INC 948,000 *
FOREIGN TRADE & INTERNATIONAL BANKS - 0.57%
86,500 MFC BANCORP 702,813 *
BIOPHARMACEUTICAL RESEARCH - 0.57%
43,900 NEUROGEN CORPORATION 702,400 *
HOUSEHOLD APPLIANCES - 0.45%
119,100 GLOBAL-TECH APPLIANCES INC 558,281 *
LIFE INSURANCE - 0.43%
16,700 MONY GROUP INC 526,050
</TABLE>
17
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
FOOTWEAR - NON-ATHLETIC - 0.42%
59,600 MAXWELL SHOE COMPANY INC - CLASS A $ 514,050 *
DIVERSIFIED OPERATIONS/COMMERCIAL SERVICES - 0.41%
56,100 OGDEN CORPORATION 508,406
MISCELLANEOUS - 1.30%
120,600 CALIFORNIA FEDERAL BANK - CONTINGENT LITIGATION
RECOVERY PARTICIPATION INTERESTS 180,900 *
88,900 CALIFORNIA FEDERAL BANK - SECONDARY CONTINGENT 77,787 *
LITIGATION RECOVERY PARTICIPATION INTERESTS
148,100 COAST FEDERAL LITIGATION CONTINGENT PAYMENT 129,587 *
RIGHTS TRUST
28,600 EL PASO ELECTRIC COMPANY 260,975 *
35,900 GENZYME SURGICAL PRODUCTS 192,962
29,700 HOMESTEAD VILLAGE INC 77,963
15,215 NEIMAN MARCUS GROUP INC - CLASS B 326,172 *
28,100 OMEGA WORLDWIDE 108,888 *
52,500 STAGE STORES INC 252,656
100 WYNDHAM INTERNATIONAL INC - CLASS A 288
-------------
1,608,178
-------------
TOTAL COMMON STOCKS - UNITED STATES $ 50,035,606
=============
(Total Cost $50,840,876)
FRANCE - 3.34%
TEXTILES - 2.85%
61,500 CHARGEURS SA $ 3,536,431
HOLDING COMPANIES - 0.49%
1,000 SOCIETE EURAFRANCE SA 605,627
-------------
TOTAL COMMON STOCKS - FRANCE $ 4,142,058
=============
(Total Cost $3,325,110)
</TABLE>
18
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
UNITED KINGDOM - 3.28%
INSURANCE AGENTS, BROKERS & SERVICES - 2.50%
2,350,000 LAMBERT FENCHURCH GROUP PLC $ 3,092,224
OIL & GAS - 0.38%
1,043,072 BURREN ENERGY PLC 469,382 *+
HOLDING COMPANIES - 0.24%
1,851,900 TRANSTEC PLC 304,600
WHOLESALE - LUMBER & CONSTRUCTION MATERIALS - 0.16%
68,000 ADAM & HARVEY GROUP PLC 198,527
-------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 4,064,733
=============
(Total Cost $7,167,111)
THE NETHERLANDS - 1.51%
TOWING & TUGBOAT SERVICES - 1.28%
67,941 SMIT INTERNATIONALE NV $ 1,584,229
MISCELLANEOUS PUBLISHING - 0.23%
15,300 HOLDINGMAATSCHAPPIJ DE TELEGRAAF NV 282,503
-------------
TOTAL COMMON STOCKS - THE NETHERLANDS $ 1,866,732
=============
(Total Cost $1,993,302)
ITALY - 1.46%
TELEPHONE COMMUNICATIONS - 1.46%
367,300 TELECOM ITALIA SPA SAVINGS $ 1,809,804
-------------
TOTAL COMMON STOCKS - ITALY $ 1,809,804
=============
(Total Cost $1,974,909)
</TABLE>
19
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
SWEDEN - 0.94%
AIRCRAFT & AEROSPACE - 0.94%
149,400 SAAB AB - B $ 1,165,367
-------------
TOTAL COMMON STOCKS - SWEDEN $ 1,165,367
=============
(Total Cost $1,160,499)
POLAND - 0.93%
CONSTRUCTION SERVICES - 0.93%
201,672 BUDIMEX SA $ 1,146,950 *
-------------
TOTAL COMMON STOCKS - POLAND $ 1,146,950
=============
(Total Cost $890,253)
RUSSIA - 0.83%
ELECTRIC UTILITIES - 0.52%
80,000 IRKUTSKENERGO SPONSORED ADR $ 260,000
1,606,200 KRASNOYARSKENERGO 25,699 *
358,110 SAMARAENERGO SPONSORED ADR 179,055
32,292 UNIFIED ENERGY SYSTEMS SPONSORED GDR 177,606
-------------
642,360
OIL & GAS - 0.31%
90,800 SURGUTNEFTEGAZ PREFERRED SPONSORED ADR 381,360
-------------
TOTAL COMMON STOCKS - RUSSIA $ 1,023,720
=============
(Total Cost $1,081,017)
GERMANY - 0.57%
CHEMICALS - 0.57%
49,200 K+S AG $ 700,797
-------------
TOTAL COMMON STOCKS - GERMANY $ 700,797
=============
(Total Cost $735,665)
</TABLE>
20
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
NORWAY - 0.39%
HOTELS & MOTELS - 0.39%
207,500 CHOICE HOTELS SCANDINAVIA ASA $ 490,306 *
-------------
TOTAL COMMON STOCKS - NORWAY $ 490,306
=============
(Total Cost $514,297)
HONG KONG - 0.29%
MANUFACTURING - TOYS & DOLLS - 0.29%
6,599,400 PLAYMATES TOYS HOLDINGS LTD $ 356,812
-------------
TOTAL COMMON STOCKS - HONG KONG $ 356,812
=============
(Total Cost $322,965)
BRAZIL - 0.24%
TELEPHONE COMMUNICATIONS - 0.24%
1,982,000 TELEMIG CELULAR SA PREFERENCE C $ 20,440 *
6,458,900 TELEPAR CELULAR SA COMMON 149,128
858,000 TELEPAR CELULAR SA PREFERENCE B 31,278
8,468,000 TELERJ CELULAR SA COMMON 99,930
-------------
TOTAL COMMON STOCKS - BRAZIL $ 300,776
=============
(Total Cost $749,010)
BAHAMAS - 0.02%
CRUDE PETROLEUM - 0.02%
170,430 BASIC PETROLEUM INTERNATIONAL LTD UNIT TRUST $ 21,304 *
-------------
TOTAL COMMON STOCKS - BAHAMAS $ 21,304
=============
(Total Cost $175,032)
TOTAL COMMON STOCK $ 67,124,965
=============
(Total Cost $70,930,046)
</TABLE>
21
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
COMPANIES IN LIQUIDATION - 5.21%
3,150 EHLCO LIQUIDATING TRUST $ 315 *+
DEM 15,000,000 MAXWELL COMM. CORP. PLC 6.00% 6/15/1993 606,894 *
CHF 5,500,000 MAXWELL COMM. CORP. PLC 5.00% 6/16/1995 271,221 *
836,059 MBO PROPERTIES INC 209,015 *^
272,500 TLC-LC INC 1,226,250 *
596,881 TRUSTOR AB - B 4,146,624 *
-------------
TOTAL COMPANIES IN LIQUIDATION $ 6,460,319
=============
(Total Cost $3,798,366)
CORPORATE BONDS - 2.26%
760,000 LOEWEN GROUP INTERNATIONAL INC 7.50% 4/15/2001 $ 361,000 <
1,030,000 LOEWEN GROUP INTERNATIONAL INC 7.75% 10/15/2001 489,250 <
85,000 LOEWEN GROUP INTERNATIONAL INC 8.25% 4/15/2003 40,375 <
1,277,000 LOEWEN GROUP INTERNATIONAL INC 7.20% 6/01/2003 606,575 <
1,965,000 LOEWEN GROUP INTERNATIONAL INC 8.25% 10/15/2003 933,375 <
40,000 LOEWEN GROUP INTERNATIONAL INC 7.60% 6/01/2008 19,000 <
11,000 PIEDMONT MANAGEMENT CONTINGENT INTEREST NOTES 8,377 +
8.00% 6/30/2006
16,636,896 STRUCTURED ASSET SECURITIES CORP 1996-CFL CLASS X2 343,136 *
FRN 2/25/2028
-------------
TOTAL CORPORATE BONDS $ 2,801,088
=============
(Total Cost $3,556,462)
CLOSED-END MUTUAL FUNDS - 1.49%
282,000 KAZAKHSTAN FUND LIMITED $ 141,000 *
212,171 NIF I 149,827 *
45,782 NIF II 25,169 *
183,687 NIF III 127,101 *
27,725 NIF IV 20,564 *
45,782 NIF VII 25,278 *
237,192 NIF VIII 348,481 *
45,034 NIF IX 53,891 *
45,443 NIF X 28,752 *
18,282 NIF XI 12,997 *
45,782 NIF XII 23,867 *
296,557 NIF XIII 205,903 *
</TABLE>
22
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
122,099 NIF XIV $ 124,124 *
33,000 ZIVNOBANKA INVESTICNI FOND 565,497
-------------
TOTAL CLOSED-END MUTUAL FUNDS $ 1,852,451
=============
(Total Cost $4,665,458)
PURCHASED BANK DEBT & TRADE CLAIMS - 1.09%
2,453,801 MAXWELL COMM. BANK DEBT - BAKER NYE $ 186,045 *+
5,000,000 MAXWELL COMM. BERLITZ OBLIGATIONS 375,000 *+
167,868 MAXWELL COMM. REVOLVING DEBT - FIRST CHICAGO 12,979 *+
943,496 MAXWELL COMM. REVOLVING DEBT - HALCYON 73,188 *+
396,015 MAXWELL COMM. REVOLVING DEBT - HALCYON II 30,618 *+
875,543 MAXWELL COMM. REVOLVING DEBT - LAZARD FRERES 67,647 *+
264,059 MAXWELL COMM. REVOLVING DEBT - MERRILL LYNCH 20,416 *+
823,981 MAXWELL COMM. REVOLVING DEBT - SAN PAOLO 63,892 *+
1,015,000 MAXWELL COMM. REVOLVING DEBT - TCC ASSOCIATES 78,672 *+
579,133 MAXWELL COMM. TERM DEBT - FIRST CHICAGO 43,435 *+
1,678,704 MAXWELL COMM. TERM DEBT - HALCYON 125,903 *+
702,221 MAXWELL COMM. TERM DEBT - HALCYON II 52,667 *+
426,846 MAXWELL COMM. TERM DEBT - LAZARD FRERES 32,013 *+
468,269 MAXWELL COMM. TERM DEBT - MERRILL LYNCH 35,120 *+
325,093 MAXWELL COMM. TERM DEBT - SAN PAOLO 24,382 *+
1,806,952 MAXWELL COMM. TERM DEBT - TCC ASSOCIATES 135,521 *+
-------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,357,498
=============
(Total Cost $0)
PARTNERSHIPS - 0.84%
EMERGING EUROPE FUND FOR SUSTAINABLE DEV LP $ 110,739 +
NCH INVESTORS FUND LP 62,475 +
NEW CENTURY CAPITAL PARTNERS II LP 351,233 +
SIGMA/UKRAINE LP 175,946 +
SIGMA/UKRAINE CLASS C LP 101,166 +
TEMPLETON EMERGING EUROPE FUND II LP 85,338 +
UKRAINIAN GROWTH FUND II LP 153,000 +
-------------
TOTAL PARTNERSHIPS $ 1,039,897
=============
(Total Cost $3,030,568)
</TABLE>
23
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
WARRANTS - 0.77%
951,000 GOLDEN STATE BANCORP LITIGATION WARRANTS 12.00 1/01/2010 $ 951,000
-------------
TOTAL WARRANTS $ 951,000
=============
(Total Cost $1,827,185)
OPTIONS - 0.61%
37 BOEING CO 40.00 PUTS 1/22/2000 $ 2,775
26 EBAY INC 100.00 PUTS 11/20/1999 325
12 FRANCE OAT BOND 5.25% 4/25/2008 96.79 PUTS 11/08/1999 0
12 FRANCE OAT BOND 5.25% 4/25/2008 97.20 PUTS 11/09/1999 1,225
12 FRANCE OAT BOND 5.25% 4/25/2008 97.36 PUTS 11/09/1999 1,225
324 GENERAL ELECTRIC 110.00 PUTS 12/18/1999 18,225
9 GENERAL ELECTRIC 120.00 PUTS 1/22/2000 2,025
569 GOLD 550 CALLS 4/05/2001 66,515
569 GOLD 550 CALLS 4/09/2001 67,652
500 GOLD 450 CALLS 4/19/2001 87,500
563 GOLD 550 CALLS 7/19/2001 82,198
JPY 1,632,000,000 JAPANESE GOVERNMENT BOND 203 98.00 PUTS 11/08/1999 1,568
JPY 2,042,500,000 JAPANESE GOVERNMENT BOND 210 100.00 PUTS 11/17/1999 17,657
JPY 1,683,500,000 JAPANESE GOVERNMENT BOND 203 97.50 PUTS 3/14/2000 67,916
JPY 816,000,000 JAPANESE GOVERNMENT BOND 203 96.00 PUTS 5/02/2000 36,054
JPY 408,000,000 JAPANESE GOVERNMENT BOND 210 98.00 PUTS 5/08/2000 30,176
JPY 1,225,500,000 JAPANESE GOVERNMENT BOND 210 96.00 PUTS 5/18/2000 52,970
150 JAPANESE YEN PUTS 136.00 1/26/2000 0
56,450 RJR STUB CALLS 5.22 5/01/2000 3,162
108 S&P 500 INDEX 1281.60 PUTS 11/05/1999 2,967
73 S&P 500 INDEX 1212.96 PUTS 11/19/1999 9,855
107 S&P 500 INDEX 1244.83 PUTS 12/06/1999 65,270
143 S&P 500 INDEX 1245.45 PUTS 12/08/1999 90,090
73 S&P 500 INDEX 1212.96 PUTS 12/17/1999 45,625
-------------
TOTAL OPTIONS $ 752,975
=============
(Total Cost $2,498,168)
</TABLE>
24
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SHARES, UNITS
OR FACE VALUE MARKET VALUE
- ------------- ------------
<S> <C>
TREASURY OBLIGATIONS - 20.12%
$15,000,000 US TREASURY BILLS 11/12/1999 $ 14,974,083
10,000,000 US TREASURY BILLS 12/09/1999 9,949,433 ~
-------------
TOTAL TREASURY OBLIGATIONS $ 24,923,516
=============
(Total Cost $24,923,677)
TOTAL INVESTMENTS - 86.57% $107,263,709
=============
(Total Cost $115,229,930)
* Non-income producing security.
+ Restricted securities - See Note C.
^ Affiliated company.
~ A portion of the security is serving as collateral or is segregated for securities sold short.
< In bankruptcy.
Foreign Currency Abbreviations
------------------------------
CHF Swiss Franc
DEM Deutschemark
JPY Japanese Yen
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.
25
<PAGE>
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
October 31, 1999
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
----------- ----------
CONTRACTS TO SELL
<S> <C> <C> <C> <C>
BPS 2,176,932 BRITISH POUND STERLING DUE 1/31/2000 $ 3,582,795 $ 7,510
(Receivable Amount $3,590,305)
CSK 73,232,000 CZECH KORUNA DUE 12/01/1999 2,102,743 (82,160)
(Receivable Amount $2,020,583)
CSK 24,202,500 CZECH KORUNA DUE 12/22/1999 695,092 (26,884)
(Receivable Amount $668,208)
CSK 9,747,000 CZECH KORUNA DUE 7/12/2000 280,247 (9,572)
(Receivable Amount $270,675)
EUR 6,117,249 EUROPEAN CURRENCY UNIT DUE 1/28/2000 6,489,361 31,382
(Receivable Amount $6,520,743)
NOK 2,832,375 NORWEGIAN KRONE DUE 1/21/2000 361,479 (3,087)
(Receivable Amount $358,392)
PLN 7,719,700 POLISH ZLOTY DUE 4/10/2000 1,755,754 53,409
(Receivable Amount $1,809,163)
SEK 11,177,760 SWEDISH KRONA DUE 12/07/1999 1,365,656 4,211
(Receivable Amount $1,369,867)
SEK 34,022,217 SWEDISH KRONA DUE 1/10/2000 4,165,459 55,136
------------ ------------
(Receivable Amount $4,220,595)
TOTAL CONTRACTS TO SELL $20,798,586 29,945
============ ------------
(Receivable Amount $20,828,531)
CONTRACTS TO BUY
BPS 581,742 BRITISH POUND STERLING DUE 1/31/2000 $ 957,430 2,321
(Payable Amount $955,109)
CSK 62,948,000 CZECH KORUNA DUE 12/01/1999 1,807,454 (38,446)
(Payable Amount $1,845,900)
CSK 24,202,500 CZECH KORUNA DUE 12/22/1999 695,092 (3,227)
(Payable Amount $698,319)
------------ ------------
TOTAL CONTRACTS TO BUY $ 3,459,976 (39,352)
============ ------------
(Payable Amount $3,499,328)
$ (9,407)
============
</TABLE>
See notes to financial statements.
26
<PAGE>
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1999
Number of shares Market Value
---------------- ------------
Common Stock - 0.32%
4,800 ASSICURAZIONI GENERALI $ 154,467
10,000 NEIMAN MARCUS GROUP, INC. - CLASS A 239,375
-------------
Total Securities Sold Short $ 393,842
=============
(Total Proceeds $396,211)
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.
27
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
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 some 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 valuation date. 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. For financial statement purposes, gains and losses
attributable to foreign currency exchange rates on sales of securities are
recorded as net realized gains and losses, and gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded as foreign
currency transaction gains and losses. The portion of both realized and
unrealized gains and losses on investments that results from fluctuations in
foreign exchange rates is not separately disclosed.
28
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
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 which
case interest is recorded when received.
SECURITIES SOLD SHORT: 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.
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. 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. The forward foreign currency exchange
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. On contract settlement date, the gains or losses are recorded as realized
gains or losses on foreign currency transactions.
FUTURES CONTRACTS: 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. 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. At
October 31, 1999, the Fund had no open positions in futures contracts.
EQUITY SWAP CONTRACTS: 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.
29
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. The fluctuation in the
market value of the underlying security is recorded as unrealized appreciation
or depreciation on investments. When the contracts are closed, the Fund
recognizes a gain or loss. 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, 1999, the Fund had outstanding equity swap contracts with the
following terms:
<TABLE>
<CAPTION>
SWAP NOTIONAL AMT. TERMINATION UNDERLYING PAYMENTS BY/
COUNTERPARTY LONG/(SHORT) DATE SHARES UNDERLYING EQUITY RECEIPTS TO THE FUND
------------ ------------ ---- ------ ----------------- --------------------
<S> <C> <C> <C> <C> <C>
Warburg Dillon Read ($332,847) 01/26/2000 2,155 Mannesmann AG One Week LIBID
Less 1.25% on Notional
Warburg Dillon Read $529,331 05/28/2001 22,300 Orange PLC One Week LIBOR
Plus .50% on Notional
</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.
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.
30
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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, 1999, 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, market discount on bonds and shareholder distributions.
This change had no effect on net assets nor on net asset value per share. For
federal income tax purposes, the Fund had a capital loss carryforward of
$582,500 from tax year 1998. The carryforward may be applied against any net
taxable realized gains of the current year and succeeding years 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, 1999 aggregated $123,510,000 and $117,546,000,
respectively.
For federal income tax purposes, the identified cost of investments at October
31, 1999 was $115,770,335. Unrealized appreciation/(depreciation), on a federal
income tax basis, for all securities was as follows:
Year Ended
October 31, 1999
----------------
Gross unrealized appreciation $ 8,378,421
Gross unrealized depreciation ( 16,885,047)
-------------
Net unrealized depreciation ($ 8,506,626)
=============
31
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
NOTE C - RESTRICTED SECURITIES
At October 31, 1999, 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, 1999 Date
---- ---------------- ----
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
Maxwell Communications Corporate Debt $ - $ 1,357,498 11/22/1993
Corporate Bonds:
Piedmont Management Contingent Interest Notes 8.00% due 6/30/2006 8,377 8,377 12/21/1995
Partnerships:
Emerging Europe Fund for Sustainable Development, L.P. 89,570 110,739 02/25/1997
NCH Investors Fund, L.P. 472,801 62,475 12/18/1995
New Century Capital Partners II, L.P. 750,640 351,233 11/30/1995
Sigma / Ukraine, L.P. 633,575 175,946 05/14/1996
Sigma / Ukraine Class C, L.P. 404,663 101,166 11/27/1996
Templeton Emerging Europe Fund II, L.P. 102,492 85,338 12/08/1997
Ukrainian Growth Fund II, L.P. 576,827 153,000 03/31/1997
Common Stock:
Burren Energy PLC 858,852 469,382 04/14/1998
Companies in Liquidation:
Ehlco Liquidating Trust - 315 01/30/1989
------------- -------------
TOTAL RESTRICTED SECURITIES (2.32% of Net Assets) $ 3,897,797 $ 2,875,469
============= =============
</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 members of Baupost.
The Fund pays Baupost a quarterly management fee at an annual rate of 1.00% of
the Fund's average net assets and an administrative fee at an annual rate of
0.25% of the Fund's average net assets 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
32
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1999
investments) would otherwise exceed 1.50% 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 E - YEAR 2000 (UNAUDITED)
Management has assessed all computer systems used by the Fund, including the
computer systems of its major service providers, in anticipation of issues that
may arise on or after January 1, 2000. Like other investment companies and
business organizations around the world, the Fund could be adversely affected if
these computer systems cannot properly process and calculate date-related
information and data from and after January 1, 2000.
Management has taken steps that it believes are reasonable to address the Year
2000 issue with respect to its internal computer systems and has obtained
satisfactory assurances that comparable steps are being taken by its brokers and
other major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any material adverse effect on the
Fund's operations. Management will continue to monitor the status of and its
exposure to this issue. As of October 31, 1999, the Fund has not incurred
significant Year 2000 related expenses, nor does it expect to do so in the
future. Management has established a comprehensive contingency plan to address
recovery from unavoided or unavoidable Year 2000 problems, if any.
33
<PAGE>
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Selected Per Share Data
Net Asset Value, beginning of period $12.18 $17.09 $15.38 $13.47 $14.33
------------ ----------- ----------- ----------- -----------
Income/(loss) from investment operations
Net investment income 0.14 0.55 0.30 0.41 0.25
Net realized and unrealized gain/(loss) 0.86 (2.83) 3.47 2.43 0.71
------------ ----------- ----------- ----------- -----------
Total from investment operations 1.00 (2.28) 3.77 2.84 0.96
------------ ----------- ----------- ----------- -----------
Less distributions
From net investment income 0.27 0.58 0.40 0.28 0.25
In excess of net investment income - - - - 0.08
From net realized gain - 2.05 1.66 0.65 1.49
------------ ----------- ----------- ----------- -----------
Total distributions 0.27 2.63 2.06 0.93 1.82
------------ ----------- ----------- ----------- -----------
Net Asset Value, end of period $12.91 $12.18 $17.09 $15.38 $13.47
============ =========== =========== =========== ===========
Total Return 8.29% (16.30%) 27.04% 22.51% 7.91%
Ratios and Supplemental Data
Net assets, end of period (in thousands) $123,899 $134,003 $152,958 $108,788 $89,439
Ratio of net expenses to average net assets 2.00% (a) 2.12% (a) 2.14% (a) 1.50% 1.54%
Ratio of total expenses excluding waiver of
management fee to average net assets 2.00% (a) 2.19% (a) 2.14% (a) 1.50% 1.54%
Ratio of net investment income to average
net assets 1.08% 2.98% 1.45% 2.27% 1.60%
Ratio of net investment income excluding
waiver of management fee to average net
assets 1.08% 2.91% 1.45% 2.27% 1.60%
Portfolio turnover rate 149% 129% 140% 120% 106%
</TABLE>
(a) The expense ratios include equity swap contract expense.
34
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BAUPOST
FUND'S AUDITED FINANCIAL STATEMENTS AT 10/31/99 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<INVESTMENTS-AT-COST> 115,229,930
<INVESTMENTS-AT-VALUE> 107,263,709
<RECEIVABLES> 3,421,589
<ASSETS-OTHER> 14,288,624
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 124,973,922
<PAYABLE-FOR-SECURITIES> 474,775
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 600,363
<TOTAL-LIABILITIES> 1,075,138
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 130,066,014
<SHARES-COMMON-STOCK> 9,594,146
<SHARES-COMMON-PRIOR> 10,027,255
<ACCUMULATED-NII-CURRENT> 2,486,106
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (720,823)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7,932,513)
<NET-ASSETS> 123,898,784
<DIVIDEND-INCOME> 1,073,809
<INTEREST-INCOME> 2,987,087
<OTHER-INCOME> 0
<EXPENSES-NET> 2,637,508
<NET-INVESTMENT-INCOME> 1,423,388
<REALIZED-GAINS-CURRENT> 5,876,232
<APPREC-INCREASE-CURRENT> 3,607,340
<NET-CHANGE-FROM-OPS> 10,906,960
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,901,043
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 880,382
<NUMBER-OF-SHARES-REDEEMED> 2,516,963
<SHARES-REINVESTED> 224,441
<NET-CHANGE-IN-ASSETS> (10,104,119)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,895,624
<OVERDISTRIB-NII-PRIOR> 440,963
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,321,388
<INTEREST-EXPENSE> 366,101
<GROSS-EXPENSE> 2,637,508
<AVERAGE-NET-ASSETS> 130,448,578
<PER-SHARE-NAV-BEGIN> 12.18
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 0.86
<PER-SHARE-DIVIDEND> 0.27
<PER-SHARE-DISTRIBUTIONS> 0.27
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.91
<EXPENSE-RATIO> 0
</TABLE>
