================================================================================
THE BAUPOST FUND
ANNUAL REPORT
OCTOBER 31, 2000
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>
THE BAUPOST FUND
ANNUAL REPORT
OCTOBER 31, 2000
CONTENTS:
Management's Discussion of Performance....................................1
Report of Independent Auditors............................................7
Statement of Assets and Liabilities as of October 31, 2000................8
Statement of Operations for the period ended October 31, 2000.............9
Statement of Changes in Net Assets for the periods ended
October 31, 2000 and October 31, 1999................................10
Schedule of Investments as of October 31, 2000...........................11
Schedule of Forward Foreign Currency Contracts as of October 31, 2000....20
Schedule of Securities Sold Short as of October 31, 2000.................21
Notes to Financial Statements............................................22
Financial Highlights.....................................................28
<PAGE>
The Baupost Fund
44 Brattle Street, 5th Floor
P.O. Box 381288
Cambridge, Massachusetts 02238
Tel. (617) 497-6680
Fax (617) 868-3529
December 6, 2000
Dear Fund Shareholder,
We are pleased to report a gain of 22.4% for the fiscal year ended
October 31, 2000. This result was achieved amidst a challenging and unusually
turbulent market environment.
Profitable results were achieved across the Fund's portfolio, led by
gains in U.S. and Western European equities and arbitrage activities. Our
returns were reduced by hedging costs of approximately 2.4%. A breakdown of
investment results appears in Table 1 below.
Table 1
-------
The Baupost Fund
----------------
Breakdown of Investment Results for the Year Ended October 31, 2000
-------------------------------------------------------------------
U.S. Public Equities 10.8%
Western Europe Public Equities 4.1%
Arbitrage or Spread Trades 4.2%
Other Public Equities 3.7%
Private Equities and Partnerships 0.4%
Performing and Non-Performing Debt 1.0%
Securities in Liquidation 1.0%
Market Hedges -2.4%
Interest on Cash Equivalents Less Management Fees and Other -0.4%
-----
Total Return 22.4%
=====
Clearly, the Internet bubble has burst. Nearly all publicly traded
Internet stocks have come up snake-eyes, and there is considerable doubt about
whether there is or ever was a "new economy." No longer can you add "dot com" to
a word, sell shares to the public, and join the Forbes 400. No longer can
entrepreneurs count on investors to fund enormous and protracted operating
losses. Although the carnage thus far is extensive, the economic fallout from
the end of this speculative mania has yet to be fully felt.
Many financial excesses remain. A bull market mentality has been
indelibly etched on the American consciousness over the past eighteen years, and
will not be easily erased. The public maintains its lust for equities; the
potential of equities to deliver double-digit returns continues to
1
<PAGE>
attract buyers who fail to accurately assess the shrinking probability of such
an outcome. The prospect of accepting the apparently mediocre, albeit more
certain, return from owning high-grade bonds thus far fails to inspire buyers.
The fantasy of a near-term Dow 36000, of holding stocks for the long
run regardless of valuation, plays well in classrooms, computer models, and
editorials. It fares less well in the real world, where earnings disappointments
are met with share price demolition, and where corporate managements massage and
manipulate results for gullibly compliant investors until the untidy reality
inevitably peeks through. Like a couch potato clicking the remote control,
real-world growth investors are continually switching their capital from areas
of disappointment to areas of perceived opportunity, oddly unaware that all of
the channels are showing reruns. Each alluring new area is the "before" photo,
each broken growth stock "the after," but no amount of adversity seems to
dissuade growth stock investors from the hunt.
Today's investment herd loves a good story. Last year, the story of
rapid growth leading eventually toward profitability topped investors'
bestseller lists. Widely portrayed as non-fiction and sometimes masquerading as
biography, it turned out to be science fiction. Today, a popular tale involves
more elements than growth alone; a good story stock must occupy a compelling and
growing business niche, and possess strong market share, an able management,
present or foreseeable earnings (or at least cash flow), and results that
repeatedly exceed analyst expectations. These factors usually cause a stock to
possess a high valuation multiple and an esteemed position in a major market
index. Then, in a virtuous circle, this stock market success allows the
attraction and retention of able employees through the use of stock options in
compensation. Frequently, bookkeeping strings are pulled to manipulate reported
results into a steadily rising pattern. The net result is that management and
shareholders, for at least a while, become wealthier.
If Paul Harvey's serialized radio program "The Rest of the Story" were
applied to Wall Street, it would describe the sad denouement of many such
"story" stocks. The unraveling of the virtuous circle of growth is not pretty,
with earnings shortfalls, plunging share prices, employees with under-water
options jumping ship, overzealous shareholders receiving margin calls,
accounting chicanery exposed, lawsuits filed, and, to come full circle, the
final insult of deletion from the relevant major market index.
At this time, attractive valuation is not considered a good story. A
slow growth or no growth company trading at one half or one third of its
underlying value attracts no important constituency of investors. I sometimes
joke about the new market valuation rules of thumb: stocks that fail to meet
earnings expectations all seem to trade at 10 times reduced earnings, while
formerly profitable companies that report losses all seem to trade at five
dollars per share. Many investors avoid these stocks precisely because others
are staying away. Why would those kind of stocks ever go up, they wonder. Even
those of us with value investing in our DNA generally prefer situations with
catalysts for the realization of underlying value.
Over time, this will change. At some unknowable future point, the
undervaluation of small capitalization stocks lacking exciting growth
characteristics will become so gaping that investors will once again be
attracted. The point of investing, after all, is not to have a great story to
tell; the point of investing is to make money with limited risk. At some point,
investors will drop their
2
<PAGE>
Pulitzer prize winning story stocks and revisit their attention on the old
classics, stocks that make you money because their undervaluation creates a
compelling imbalance between risk and return.
Value Opportunities in Today's Market
-------------------------------------
Value investors frequently invoke the explanatory device of Mr. Market,
a disembodied character who establishes securities prices in the short run
despite knowing nothing about investing. A manic fellow, Mr. Market will
sometimes become exuberant, other times depressed. Investors who look to Mr.
Market for advice will inevitably do the wrong thing at the wrong time.
Investors who attempt to profit from Mr. Market's manic depressive nature will
be successful over the long run. These days, Mr. Market has run completely
amuck, often manifesting manic and depressive behavior at the same time in
different securities.
How should Mr. Market's increasingly volatile behavior influence
investors? In our view, investors should, more than ever, act on the assumption
that any stock or bond can trade, for a time, at any price. Margin debt (which
we do not utilize) should be considered extremely dangerous; investors should
never enable Mr. Market's mood swings to result in a margin call which could
necessitate forced selling. Investors should prepare themselves for a greater
degree of portfolio volatility, because it is impossible to tell how wild Mr.
Market's mood swings may become. It is of paramount importance that investors
brace themselves for a stern test of their investment will. Avoiding overpriced
speculations and maintaining a strict value discipline are more important than
ever because the overpricings are so egregious and the bargains so pronounced.
Yet the price swings are so severe and swift, and not always in the desired
direction, that investors must be braced for mark to market losses. Those
sufficiently disciplined and unwavering will be generously rewarded.
A great many value investors suffered terribly during the Internet
stock mania of 1999 and early 2000. In a market dominated by money flows, the
stocks of mundane companies were abandoned for those that offered growth, the
more explosive the better. These value managers experienced poor performance,
resulting in investor outflows, which necessitated additional selling. Although
value managers have recently outperformed growth managers, they have only
started to narrow the performance gap of the last several years.
In today's environment, money flows rule, trumping all other factors in
determining security prices. From any starting point, money flowing into one
category and away from another can wreak havoc with accustomed levels of
valuation and can cause egregious mispricings, both too high and too low. Last
March, these valuation disparities reached their apogee, as the Nasdaq Composite
Index surged above 5,000 while value stocks plummeted. In recent months,
outflows from the corporate debt market have resulted in some egregious
mispricings; the equity valuations of a number of companies seem detached from
any comprehension of the yields available on the debt instruments of the same
companies. Money flows, in effect, can render fundamental analysis futile in the
short run, even while creating a compelling longer-term opportunity.
Because Baupost is willing to take a long-term view and to accept, for
a portion of our portfolio, the relative illiquidity of small-capitalization
stocks, we continue to find significant opportunity in today's equity market.
The tremendous undervaluation, extreme volatility and, frequently, limited
investor interest in such stocks renders this opportunity particularly
compelling.
3
<PAGE>
Distressed debt has long been one of our favorite areas for investment,
in that financial distress often serves as its own catalyst for value
realization, usually in the form of a debt restructuring inside or outside of
bankruptcy court. We also appreciate the margin of safety inherent in owning
senior debt securities during a workout process, where equity receives the
residual only after debtholder claims are satisfied.
Although the distressed debt arena can present compelling opportunity,
Baupost hasn't been significantly involved since the early 1990's, when that
era's junk bond collapse and economic downturn created an enormous supply of
distressed securities that, for a time, swamped the demand. Economic recovery
and the reorganization process reduced the supply of distressed securities over
time, even as new funds were being raised to invest in the area. For a number of
years, attractive distressed debt opportunities were quite scarce. Today, we are
again finding opportunities to buy stable, cash-generating assets of
overleveraged companies at very substantial discounts to their underlying value
through the purchase of senior debt securities. At October 31, we owned material
stakes in the debt of 14 different companies, and are in the process of
analyzing numerous others.
As we approach calendar year-end, tax selling and window dressing
remain important market forces, exacerbating the price declines of stocks and
bonds which have already performed poorly. This mindless selling has created a
number of buying opportunities which we are attempting to exploit. Table 2 below
depicts our portfolio allocation at fiscal year end.
Table 2
-------
The Baupost Fund
----------------
Portfolio Allocation at October 31, 2000
----------------------------------------
Cash 15.7%
U.S. Public Equities 46.7%
Western Europe Public Equities 8.9%
Arbitrage or Spread Trades 6.0%
Other Public Equities 1.1%
Private Equities and Partnerships 2.1%
Performing and Non-Performing Debt 16.2%
Securities in Liquidation 2.8%
Market Hedges and Other 0.5%
------
Total 100.0%
======
4
<PAGE>
We believe the values within our current portfolio are extremely
compelling and that we are well-positioned for any market environment. We remain
grateful for your confidence and support during these challenging and volatile
times. Please do not hesitate to contact us if you have any questions or
comments.
Very truly yours,
/s/ Seth A. Klarman
Seth A. Klarman
President
5
<PAGE>
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (1) 1 5 LIFE OF FUND
For Periods Ended 10/31/2000 YEAR YEAR (SINCE 12/14/1990)
---- ---- ------------------
THE BAUPOST FUND 22.43% 11.55% 13.19%
S&P 500 6.09% 21.67% 18.78%
--------------------------------------------------------------------------------
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 10/31/00
--------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
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 $138,845.00 $257,840.00
10/31/00 $169,995.00 $273,545.00
(1) Assumes reinvestment of all dividends.
6
<PAGE>
REPORT OF ERNST & YOUNG 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 (the "Fund"), including the schedule of investments, schedule of
forward foreign currency contracts, and schedule of securities sold short, as of
October 31, 2000, and the related statement of operations for the year then
ended, the statements 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 auditing standards generally accepted
in the United States. 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, 2000, 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, 2000, 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 accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
December 13, 2000
Boston, Massachusetts
7
<PAGE>
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 2000
<TABLE><CAPTION>
<S> <C>
ASSETS:
Investments in securities - at value (cost $113,511,854) $119,299,779
Cash 816,811
Foreign cash (cost $2,214) 2,153
Receivable for investments sold 611,587
Receivable for investments sold short 16,390,783
Interest and dividends receivable 797,020
Net unrealized appreciation on forward foreign currency contracts 252,805
Net unrealized appreciation on swaps 126,301
Other assets 15,864
------------
Total Assets 138,313,103
LIABILITIES:
Payable for investments purchased 982,354
Payable to The Baupost Group, L.L.C 356,994
Other payables and accrued expenses 174,014
Liability for securities sold short (proceeds $16,295,341) 16,343,810
------------
Total Liabilities 17,857,172
------------
NET ASSETS $120,455,931
============
COMPOSITION OF NET ASSETS:
Paid in capital $107,024,380
Undistributed net investment income 3,235,275
Accumulated net realized gain on investments and foreign
currency transactions 4,119,144
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies 6,077,132
------------
NET ASSETS $120,455,931
============
NET ASSET VALUE:
Offering and redemption price per share
($120,455,931 / 7,818,020 shares) $ 15.41
============
</TABLE>
See notes to financial statements.
8
<PAGE>
THE BAUPOST FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000
<TABLE><CAPTION>
<S> <C>
INVESTMENT INCOME:
INCOME:
Interest $ 3,873,328
Dividends (net of foreign withholding taxes of $46,744) 1,184,051
------------
Total Income 5,057,379
EXPENSES:
Investment management fee 1,173,182
Equity swap contract expense 527,134
Interest expense 470,766
Investment expenses 336,880
Administrative fee 293,295
Custodian fees 91,790
Legal fees 74,958
Audit fees 42,000
Trustees' fees 35,280
Transfer agent fees 21,657
Registration and filing fees 21,514
Insurance expense 19,032
Miscellaneous 3,990
------------
Total Expenses 3,111,478
Waiver of investment management fee (16,926)
------------
Total Expenses, Net 3,094,552
------------
NET INVESTMENT INCOME 1,962,827
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized gain on:
Investments and equity swap contracts 5,465,350
Foreign currency transactions 1,751,170
Short sales 35,026
------------
7,251,546
Change in unrealized depreciation on:
Investments and equity swap contracts 13,859,710
Foreign currency transactions 200,773
Short sales (50,838)
------------
14,009,645
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 21,261,191
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 23,224,018
============
</TABLE>
See notes to financial statements.
9
<PAGE>
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE><CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 2000 OCTOBER 31, 1999
---------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,962,827 $ 1,423,388
Net realized gain on investments and foreign
currency transactions 7,251,546 5,876,232
Change in unrealized depreciation on
investments and foreign currency transactions 14,009,645 3,607,340
--------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS 23,224,018 10,906,960
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,952,563) (2,901,043)
--------------- ---------------
TOTAL DISTRIBUTIONS (2,952,563) (2,901,043)
CAPITAL SHARE TRANSACTIONS:
Net proceeds from sales of shares 6,842,771 11,240,554
Reinvestment of dividends 2,769,217 2,801,021
Cost of shares redeemed (33,326,296) (32,151,611)
--------------- ---------------
NET DECREASE IN NET ASSETS
RESULTING FROM SHARE TRANSACTIONS (23,714,308) (18,110,036)
--------------- ---------------
TOTAL DECREASE IN NET ASSETS (3,442,853) (10,104,119)
NET ASSETS AT BEGINNING OF PERIOD 123,898,784 134,002,903
--------------- ---------------
NET ASSETS AT END OF PERIOD
(including undistributed net
investment income of $3,235,275
and $2,486,106, respectively) $ 120,455,931 $ 123,898,784
=============== ===============
OTHER INFORMATION:
Shares sold 496,567 880,382
Shares issued in reinvestment of dividends 215,671 224,441
Shares redeemed (2,488,364) (2,516,963)
--------------- ---------------
Net decrease (1,776,126) (1,412,140)
=============== ===============
</TABLE>
See notes to financial statements.
10
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
COMMON & PREFERRED STOCKS - 63.05%
UNITED STATES - 54.15 %
COMPUTER PERIPHERAL EQUIPMENT - 11.79%
203,300 SEAGATE TECHNOLOGY INC $ 14,205,588 * ~
REAL ESTATE INVESTING - 12.30%
128,300 LNR PROPERTY CORPORATION 2,774,488
938,000 REGENCY EQUITIES CORPORATION 18,760 *
3,784 SECURITY CAPITAL GROUP - CLASS A 3,405,600 *
130,050 SECURITY CAPITAL GROUP - CLASS B 2,479,078 *
57,800 SECURITY CAPITAL US REALTY 1,208,020 *
234,750 SECURITY CAPITAL US REALTY ADR 4,929,750 *
------------------
14,815,696
SAVINGS INSTITUTIONS - 9.34%
58,300 AMERICAN FINANCIAL HOLDINGS 1,042,113
2,500 BERKSHIRE HILLS BANCORP INC 36,719 *
900 CBCT BANCSHARES INC 9,000 *
600 CFS BANCORP INC 6,300
1,500 EMPIRE FEDERAL BANCORP INC 18,375
110 FIDELITY BANKSHARES INC 2,117
900 FIRST FEDERAL OF OLATHE BANCORP INC 14,850 *
472,800 HUDSON CITY BANCORP INC 8,599,050 ~
21,700 KLAMATH FIRST BANCORP INC 257,687
2,300 LIBERTY BANCORP INC 19,550
44,000 PORT FINANCIAL CORPORATION 726,000 *
19,800 SOUND FEDERAL BANCORP 173,250
15,900 WEST ESSEX BANCORP INC 183,844
4,600 WILLOW GROVE BANCORP INC 50,025
9,800 WORONOCO BANCORP INC 113,925
------------------
11,252,805
CHEMICALS - 6.01%
168,100 OCTEL CORPORATION 2,006,694 *
61,100 OMNOVA SOLUTIONS INC 343,688
326,100 SOLUTIA INC 4,157,775
193,300 W R GRACE & CO 736,956 *
------------------
7,245,113
</TABLE>
11
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
TELEPHONE COMMUNICATIONS - 2.59%
113,300 AT&T CORP $ 2,627,144
19,600 AT&T WIRELESS 488,775 *
------------------
3,115,919
REAL ESTATE INVESTMENT TRUST - 2.29%
1,000 NATIONAL HEALTH INVESTORS INC 6,250
400 SENIOR HOUSING PROPERTIES TRUST 3,725
550,450 VENTAS INC 2,752,250
------------------
2,762,225
RETAIL - EATING PLACES - 1.61%
91,800 IHOP CORPORATION 1,939,275 *
ADHESIVES & SEALANTS - 1.39%
49,500 H B FULLER CO 1,673,719
SURETY INSURANCE - 1.05%
109,200 CNA SURETY CORPORATION 1,269,450
RAILROAD EQUIPMENT - 0.89%
105,200 WABTEC CORPORATION 1,065,150
PACKAGING - PAPER & LAMINATED - 0.82%
93,500 PACTIV CORPORATION 981,750 *
SINGLE FAMILY HOUSING CONSTRUCTION - 0.77%
124,400 WALTER INDUSTRIES INC 925,225
GOODWILL CLAIMS - 0.38 %
126,700 CALIFORNIA FEDERAL BANK-CONTINGENT LITIGATION RECOVERY
PARTICIPATION INTERESTS 253,400 *
89,600 CALIFORNIA FEDERAL BANK-SECONDARY CONTINGENT
LITIGATION RECOVERY PARTICIPATION INTERESTS 64,400 *
77,200 COAST FEDERAL LITIGATION CONTINGENT PAYMENT RIGHTS 115,800 *
2,000 LANDMARK LAND COMPANY INC 2,240 *
13,400 MERITOR SAVINGS BANK 23,048 *
------------------
458,888
</TABLE>
12
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
MISCELLANEOUS - 2.92%
79,200 AMCOL INTERNATIONAL CORPORATION $ 584,100
57,800 GENTIVA HEALTH SERVICES INC 682,763 *
3,100 GENZYME SURGICAL PRODUCTS 23,153 *
87,100 GLOBAL-TECH APPLIANCES INC 402,838
3,600 GP STRATEGIES CORPORATION 20,025 *
8,600 HERBALIFE INTERNATIONAL INC - CLASS A 72,562
21,300 HERBALIFE INTERNATIONAL INC - CLASS B 171,066
15,500 HERBALIFE INTERNATIONAL INC - DIVIDEND ENHANCED
CONVERTIBLE STOCK TRUST III 138,531
8,200 HOLLINGER INTERNATIONAL INC 126,587
30,200 IVEX PACKAGING CORPORATION 296,337 *
553 METHODE ELECTRONICS INC 20,807
27,600 OMEGA WORLDWIDE 61,237 *
93,400 RYERSON TULL INC 700,500
471 STRATOS LIGHTWAVE INC 12,452 *
126,300 WYNDHAM INTERNATIONAL INC 205,237 *
------------------
3,518,195
TOTAL COMMON STOCKS - UNITED STATES $ 65,228,998
==================
(Total Cost $58,036,071)
FRANCE - 3.18%
TEXTILES - 2.84%
61,100 CHARGEURS SA $ 3,423,274
HOLDING COMPANIES - 0.34%
687 SOCIETE EURAFRANCE SA 413,193
------------------
TOTAL COMMON STOCKS - FRANCE $ 3,836,467
==================
(Total Cost $3,162,188)
CANADA - 3.00%
COMMUNICATION SERVICES - 3.00%
116,700 AT & T CANADA INC $ 3,610,406 *
------------------
TOTAL COMMON STOCKS - CANADA $ 3,610,406
==================
(Total Cost $3,578,087)
</TABLE>
13
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
SWEDEN - 1.17%
AIRCRAFT - 0.99%
175,100 SAAB AB - B $ 1,191,693
HOLDING COMPANIES - 0.18%
8,300 CUSTOS AB 220,137
------------------
TOTAL COMMON STOCKS - SWEDEN $ 1,411,830
==================
(Total Cost $1,599,773)
GERMANY - 0.57%
CHEMICALS - 0.54%
45,100 K+S AG $ 652,766
INDUSTRIAL MACHINERY - 0.03%
3,163 AGIV AG 29,267
------------------
TOTAL COMMON STOCKS - GERMANY $ 682,033
==================
(Total Cost $678,034)
RUSSIA - 0.40%
ELECTRIC SERVICES - 0.28%
736,200 KRASNOYARSKENERGO $ 23,927 *
358,110 SAMARAENERGO SPONSORED ADR 313,346
------------------
337,273
OIL & GAS - 0.12%
11,200 SURGUTNEFTEGAZ PREFERRED SPONSORED ADR 148,400
------------------
TOTAL COMMON & PREFERRED STOCKS - RUSSIA $ 485,673
==================
(Total Cost $85,399)
UNITED KINGDOM - 0.29%
HOLDING COMPANIES - 0.29%
1,146,308 BURREN ENERGY PLC $ 343,892 * +
------------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 343,892
==================
(Total Cost $905,308)
</TABLE>
14
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
POLAND - 0.18%
PETROLEUM REFINING - 0.18%
27,800 POLSKI KONCERN NAFTO-GDR $ 215,450 *
------------------
TOTAL COMMON STOCKS - POLAND $ 215,450
==================
(Total Cost $259,096)
BRAZIL - 0.07%
TELEPHONE COMMUNICATIONS - 0.07%
1,583,900 TELEPAR CELULAR SA COMMON $ 88,318 *
------------------
TOTAL COMMON STOCKS - BRAZIL $ 88,318
==================
(Total Cost $86,605)
BAHAMAS - 0.04%
CRUDE PETROLEUM - 0.04%
170,430 BASIC PETROLEUM INTERNATIONAL LTD UNIT TRUST $ 42,608
------------------
TOTAL COMMON STOCKS - BAHAMAS $ 42,608
==================
(Total Cost $175,032)
TOTAL COMMON & PREFERRED STOCKS $ 75,945,675
==================
(TOTAL COST $68,565,593)
CORPORATE BONDS - 14.03%
55,870 BURREN ENERGY PLC 15.00% CONVERTIBLE LOAN NOTES $ 55,870 +
7/30/2001
1,520,000 CKE RESTAURANTS INC 9.125% 5/01/2009 866,400
620,000 FINOVA CAPITAL CORPORATION FRN 8/14/2001 415,400
55,000 FINOVA CAPITAL CORPORATION 6.625% 9/15/2001 36,483
1,010,000 FINOVA CAPITAL CORPORATION 5.875% 10/15/2001 666,600
360,000 FINOVA CAPITAL CORPORATION 6.44% 11/06/2001 241,200
115,000 FINOVA CAPITAL CORPORATION 9.125% 2/27/2002 74,367
560,000 FINOVA CAPITAL CORPORATION 6.50% 7/28/2002 358,400
80,000 FINOVA CAPITAL CORPORATION 6.39% 10/08/2002 51,200
470,000 FINOVA CAPITAL CORPORATION 6.25% 11/01/2002 297,667
970,000 FINOVA CAPITAL CORPORATION FRN 11/08/2002 620,800
310,000 FINOVA CAPITAL CORPORATION 6.55% 11/15/2002 199,433
180,000 FINOVA CAPITAL CORPORATION 6.55% 11/18/2002 115,200
</TABLE>
15
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
720,000 FINOVA CAPITAL CORPORATION 6.11% 2/18/2003 $ 446,400
645,000 FINOVA CAPITAL CORPORATION REVOLVER 5/15/2002 417,100
410,000 FINOVA CAPITAL CORPORATION REVOLVER 5/16/2003 254,200
125,000 JDN REALTY CORPORATION 6.80% 8/01/2004 101,250
205,000 JDN REALTY CORPORATION 6.95% 8/01/2007 147,600
300,000 LA QUINTA INNS 7.25% 3/15/2004 237,000
465,000 LA QUINTA INNS 7.40% 9/15/2005 348,750
900,000 LAIDLAW INC 7.875% 4/15/2005 279,000 *
1,340,000 LAIDLAW INC 6.50% 5/01/2005 361,800 *
800,000 LAIDLAW INC 7.65% 5/15/2006 216,000 *
435,000 LAIDLAW INC 6.70% 5/01/2008 117,450 *
155,000 LAIDLAW INC 8.25% 5/15/2023 48,050 *
620,000 LAIDLAW INC 8.75% 4/15/2025 192,200 *
855,000 LAIDLAW INC 6.72% 10/01/2027 PUTABLE 10/01/2007 230,850 *
240,000 MEDITRUST 7.51% 9/26/2003 187,200
55,000 MEDITRUST 7.00% 8/15/2007 39,050
115,000 MEDITRUST 7.82% 9/10/2026 PUTABLE 9/10/2003 94,300
1,215,000 NATIONAL HEALTH INVESTORS INC 7.30% 7/16/2007 753,300
185,000 OMEGA HEALTHCARE INVESTORS 6.95% 6/15/2002 160,950
390,000 OMEGA HEALTHCARE INVESTORS 6.95% 8/01/2007 273,000
11,000 PIEDMONT MANAGEMENT CONTINGENT INTEREST NOTES 8.00% 9,744 +
6/30/2006
1,620,000 RITE AID CORPORATION 10.50% 9/15/2002 988,200
60,000 SERVICE CORPORATION INTERNATIONAL 6.30% 3/15/2003 37,500
740,000 SERVICE CORPORATION INTERNATIONAL 7.375% 4/15/2004 455,100
1,575,000 SERVICE CORPORATION INTERNATIONAL 6.00% 12/15/2005 866,250
2,000,000 SERVICE CORPORATION INTERNATIONAL 7.20% 6/01/2006 1,090,000
45,000 SERVICE CORPORATION INTERNATIONAL 6.875% 10/01/2007 24,075
2,035,000 SERVICE CORPORATION INTERNATIONAL 6.50% 3/15/2008 1,088,725
2,670,000 SERVICE CORPORATION INTERNATIONAL 7.70% 4/15/2009 1,441,800
2,090,000 STEWART ENTERPRISES 6.40% 5/01/2003 1,316,700
9,343,899 STRUCTURED ASSET SECURITIES CORP 1996-CFL CLASS X2 FRN 140,158
2/25/2028
595,000 TENNECO AUTOMOTIVE INC 11.625% 10/15/2009 357,000
430,000 VENCOR OPERATING INC 9.875% 5/01/2005 86,000 * <
135,000 XEROX CORPORATION 6.25% 11/15/2026 91,800
------------------
TOTAL CORPORATE BONDS $ 16,897,522
==================
(TOTAL COST $16,820,562)
COMPANIES IN LIQUIDATION - 1.61%
3,150 EHLCO LIQUIDATING TRUST $ 630 * +
DEM 15,000,000 MAXWELL COMMUNICATIONS CORPORATION PLC 6.00% 6/15/1993 325,464 * +
CHF 5,500,000 MAXWELL COMMUNICATIONS CORPORATION PLC 5.00% 6/16/1995 153,007 * +
836,059 MBOP LIQUIDATING TRUST 209,015 *
</TABLE>
16
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
272,500 TLC-LC INC $ 803,875 *
589,981 TRUSTOR AB - B 442,862 *
------------------
TOTAL COMPANIES IN LIQUIDATION $ 1,934,853
==================
(TOTAL COST $1,039,567)
PARTNERSHIPS - 1.45%
EMERGING EUROPE FUND II LP $ 64,421 +
EMERGING EUROPE FUND FOR SUSTAINABLE DEVELOPMENT LP 435,806 +
NCH INVESTORS FUND LP 62,475 +
NEW CENTURY CAPITAL PARTNERS II LP 351,233 +
SIGMA/UKRAINE CLASS C LP 202,332 +
SIGMA/UKRAINE LP 351,892 +
UKRAINIAN GROWTH FUND II LP 275,400 +
------------------
TOTAL PARTNERSHIPS $ 1,743,559
==================
(TOTAL COST $3,273,054)
CLOSED-END INVESTMENT COMPANIES - 0.29%
45,782 NIF II $ 22,662 *
95,192 NIF VIII 165,943 *
45,782 NIF XII 20,199 *
214,057 NIF XIII 146,037 *
------------------
TOTAL CLOSED-END INVESTMENT COMPANIES $ 354,841
==================
(TOTAL COST $989,341)
OPTIONS - 0.78%
257 AT&T CORP 17.50 CALL 4/21/2001 $ 173,475
257 AT&T CORP 20.00 CALL 4/21/2001 128,500
25,750 AT&T CORP 20.00 CALL 7/20/2001 146,260
448 GENERAL ELECTRIC COMPANY 50.00 PUT 12/16/2000 56,000
500 GOLD 450 CALLS 04/19/2001 0
569 GOLD 550 CALLS 04/05/2001 0
569 GOLD 550 CALLS 04/09/2001 0
563 GOLD 550 CALLS 07/19/2001 0
63 PALM INC 50.00 PUT 11/18/2000 16,538
138 S&P 500 INDEX 1229.6355 PUT 11/29/2000 30,941
54 S&P 500 INDEX 1181.60 PUT 12/04/2000 7,488
48 S&P 500 INDEX 1256.725 PUT 1/10/2001 45,323
74 S&P 500 INDEX 1233.18 PUT 2/05/2001 74,074
</TABLE>
17
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
43 S&P 500 INDEX 1359.72 PUT 3/01/2001 $ 144,415
43 S&P 500 INDEX 1208.72 PUT 8/30/2001 120,855
------------------
TOTAL OPTIONS $ 943,869
==================
(TOTAL COST $1,485,840)
WARRANTS - 1.04%
951,000 GOLDEN STATE BANCORP LITIGATION WARRANTS $ 1,248,188 *
12.00 1/01/2010
55,870 BURREN ENERGY PLC WARRANTS 4/30/2003 0 * +
------------------
TOTAL WARRANTS $ 1,248,188
==================
(TOTAL COST $1,827,438)
PURCHASED BANK DEBT & TRADE CLAIMS - 1.26%
2,453,801 MAXWELL BANK DEBT (BAKER NYE) $ 122,295 * +
5,000,000 MAXWELL COMMUNICATIONS BERLITZ OBLIGATIONS 250,000 * +
167,868 MAXWELL REVOLVER BANK DEBT (FIRST CHICAGO) 8,323 * +
396,015 MAXWELL REVOLVER BANK DEBT (HALCYON II) 19,636 * +
943,496 MAXWELL REVOLVER BANK DEBT (HALCYON) 46,936 * +
875,543 MAXWELL REVOLVER BANK DEBT (LAZARD FRERES/C) 43,382 * +
264,059 MAXWELL REVOLVER BANK DEBT (MERRILL LYNCH) 13,093 * +
823,981 MAXWELL REVOLVER BANK DEBT (SAN PAOLO) 40,974 * +
1,015,000 MAXWELL REVOLVER BANK DEBT (TCC) 50,452 * +
579,133 MAXWELL TERM BANK DEBT (FIRST CHICAGO) 28,957 * +
702,221 MAXWELL TERM BANK DEBT (HALCYON II) 35,111 * +
1,678,704 MAXWELL TERM BANK DEBT (HALCYON) 83,935 * +
426,846 MAXWELL TERM BANK DEBT (LAZARD FRERES/C) 21,342 * +
468,269 MAXWELL TERM BANK DEBT (MERRILL LYNCH) 23,414 * +
325,093 MAXWELL TERM BANK DEBT (SAN PAOLO) 16,255 * +
1,806,952 MAXWELL TERM BANK DEBT (TCC) 90,348 * +
149,216 SAFETY-KLEEN REVOLVER 50,733 * + <
744,934 SAFETY-KLEEN TERM LOAN A 253,277 * + <
516,159 SAFETY-KLEEN TERM LOAN B 160,009 * + <
516,159 SAFETY-KLEEN TERM LOAN C 160,009 * + <
------------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,518,481
==================
(TOTAL COST $795,692)
TREASURY OBLIGATIONS - 11.53%
5,000,000 UNITED STATES TREASURY BILL 11/16/2000 $ 4,986,733
</TABLE>
18
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 2000
<TABLE><CAPTION>
NUMBER OF
SHARES, UNITS OR
FACE VALUE MARKET VALUE
----------------- ------------------
<C> <S> <C>
4,000,000 UNITED STATES TREASURY BILL 12/07/2000 $ 3,974,881
5,000,000 UNITED STATES TREASURY BILL 1/18/2001 4,932,302
------------------
TOTAL TREASURY OBLIGATIONS $ 13,893,916
==================
(TOTAL COST $13,895,892)
INVESTMENTS IN MONEY MARKET FUNDS - 4.00%
4,818,875 GOLDMAN SACHS INSTITUTIONAL LIQUID ASSETS - TREASURY $ 4,818,875
INSTRUMENTS PORTFOLIO
------------------
TOTAL INVESTMENTS IN MONEY MARKET FUNDS $ 4,818,875
==================
(TOTAL COST $4,818,875)
TOTAL INVESTMENTS - 99.04% $ 119,299,779
==================
(TOTAL COST $113,511,854)
* Non-income producing securities.
+ Restricted securities - See note C.
~ 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 German Deutschemark
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.
19
<PAGE>
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 2000
<TABLE><CAPTION>
MARKET UNREALIZED
CONTRACTS TO SELL VALUE GAIN/(LOSS)
---------------- ----------------
<C> <C> <S> <C> <C>
BPS 32,110 BRITISH POUND STERLING DUE 11/22/2000 $ 46,543 $ 1,325
(Receivable Amount $47,868)
CAD 5,108,783 CANADIAN DOLLAR DUE 11/09/2000 3,353,430 92,383
(Receivable Amount $3,445,813)
CHF 165,000 SWISS FRANC DUE 11/22/2000 91,794 4,847
(Receivable Amount $96,641)
EUR 1,032,169 EURO DUE 11/08/2000 877,014 64,923
(Receivable Amount $941,937)
EUR 230,081 EURO DUE 11/22/2000 195,627 14,088
(Receivable Amount $209,715)
EUR 2,865,842 EURO DUE 1/31/2001 2,441,898 (21,121)
(Receivable Amount $2,420,777)
PLN 3,803,523 POLISH ZLOTY DUE 1/10/2001 799,060 34,498
(Receivable Amount $833,558)
SEK 13,395,150 SWEDISH KRONA DUE 12/07/2000 1,343,544 81,380
(Receivable Amount $1,424,924)
SEK 1,537,575 SWEDISH KRONA DUE 1/05/2001 154,485 6,332
(Receivable Amount $160,817)
SEK 4,129,867 SWEDISH KRONA DUE 1/10/2001 415,789 6,725
---------------- ----------------
(Receivable Amount $422,514)
TOTAL CONTRACTS TO SELL $ 9,719,184 $ 285,380
================ ----------------
(Receivable Amount $10,004,564)
CONTRACTS TO BUY
EUR 841,491 EURO DUE 11/08/2000 $ 714,998 $ (19,097)
(Payable Amount $734,095)
PLN 1,853,356 POLISH ZLOTY DUE 1/10/2001 389,360 (14,497)
(Payable Amount $403,857)
SEK 1,488,350 SWEDISH KRONA DUE 12/07/2000 149,283 915
(Payable Amount $148,368)
SEK 188,825 SWEDISH KRONA DUE 1/05/2001 18,972 104
---------------- ----------------
(Payable Amount $18,868)
TOTAL CONTRACTS TO BUY $ 1,272,613 $ (32,575)
================ ----------------
(Payable Amount $1,305,188)
$ 252,805
================
</TABLE>
See notes to financial statements.
20
<PAGE>
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 2000
<TABLE><CAPTION>
PAR VALUE
OR SHARES MARKET VALUE
---------------------- ----------------
<C> <S> <C>
COMMON STOCK - 12.76%
16,400 ARCHSTONE COMMUNITIES TRUST $ 386,425
3,100 ASSICURAZIONI GENERALI 101,974
64,920 AT&T WIRELESS GROUP 1,618,943
17,100 CARRAMERICA REALTY GROUP 505,519
1,301 STRATOS LIGHTWAVE INC 34,395
4,150 SVENSKA CELLULOSA AB (SCA) - CLASS B 85,147
13,938 TELECOM ITALIA SPA ORDINARY 161,506
88,468 VERITAS SOFTWARE CORPORATION 12,475,371
----------------
TOTAL COMMON STOCKS SOLD SHORT $ 15,369,280
================
(Total Proceeds $14,875,495)
CORPORATE BONDS - 0.81%
410,000 DANA CORPORATION 6.50% 3/01/2009 $ 341,530
1,055,000 TENNECO AUTOMOTIVE INC 11.625% 10/15/2009 633,000
----------------
TOTAL CORPORATE BONDS SOLD SHORT $ 974,530
================
(Total Proceeds $1,419,846)
TOTAL SECURITIES SOLD SHORT $ 16,343,810
================
(Total Proceeds $16,295,341)
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.
21
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
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
22
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
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 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.
During fiscal year 2000, the Fund did not enter into any 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
23
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. 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.
At October 31, 2000, the Fund had outstanding equity swap contracts with the
following terms:
<TABLE><CAPTION>
SWAP NOTIONAL AMT. TERMINATION UNDERLYING PAYMENTS BY/
COUNTERPARTY LONG/(SHORT) DATES SHARES UNDERLYING EQUITY (RECEIPTS TO) THE FUND
------------ ------------ ----- ------ ----------------- ----------------------
<S> <C> <C> <C> <C> <C>
Warburg Dillon Read $ 2,944,819 7/13/2001 - 496,840 Telecom Italia SpA One Week LIBOR
8/20/2001 Savings Plus .50% on Notional
Warburg Dillon Read ($ 1,482,208) 12/28/2000 - (112,626) Telecom Italia SpA One Week LIBOR
1/15/2001 Less 1.35% - 1.375% 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
24
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
index and the relationship between the current market price of the underlying
security or index and the strike or exercise price of the option.
STOCK LENDING: The Fund may lend securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund bears the risk of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives a fee for lending its securities
and also continues to earn income on the securities loaned. At October 31, 2000,
the Fund had no securities on loan.
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, 2000, 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. 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, 2000 aggregated $198,256,000 and $216,524,000,
respectively.
For federal income tax purposes, the identified cost of investments at October
31, 2000 was $114,127,887. Unrealized appreciation/(depreciation), on a federal
income tax basis, for all securities was as follows:
25
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
NOTE B - INVESTMENT TRANSACTIONS - CONTINUED
October 31, 2000
----------------
Gross unrealized appreciation $ 14,441,866
Gross unrealized depreciation (9,269,974)
------------
Net unrealized appreciation $ 5,171,892
============
NOTE C - RESTRICTED SECURITIES
At October 31, 2000, the Fund held the following securities which are restricted
as to public sale in accordance with the Securities Act of 1933:
<TABLE><CAPTION>
Value at Acquisition
Cost October 31, 2000 Date
---------- ---------- ----------
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
-----------------------------------
Maxwell Bank Debt $ 0 $ 894,453 11/22/1993
Safety-Kleen Bank Debt 795,692 624,028 04/06/2000
Corporate Bonds:
----------------
Burren Energy PLC 15.00% Convertible Loan Notes due 7/30/2001 55,870 55,870 03/31/2000
Piedmont Management Contingent Interest Notes 8.00% due 6/30/2006 9,744 9,744 12/21/1995
Partnerships:
-------------
Emerging Europe Fund II LP 68,852 64,421 12/08/1997
Emerging Europe Fund for Sustainable Development LP 284,660 435,806 02/25/1997
NCH Investors Fund LP 585,201 62,475 12/18/1995
New Century Capital Partners II LP 744,400 351,233 11/30/1995
Sigma/Ukraine Class C LP 404,663 202,332 11/27/1996
Sigma/Ukraine LP 625,390 351,892 05/14/1996
Ukrainian Growth Fund II LP 559,888 275,400 03/31/1997
Common Stock:
-------------
Burren Energy PLC 905,308 343,892 04/14/1998
Warrants:
---------
Burren Energy PLC Warrants 4/30/2003 0 0 03/31/2000
Companies in Liquidation:
-------------------------
Ehlco Liquidating Trust 0 630 01/30/1989
Maxwell Communications Corporation PLC 6.00% 6/15/1993 0 325,464 09/14/1994
Maxwell Communications Corporation PLC 5.00% 6/16/1995 0 153,007 09/16/1994
---------- ----------
TOTAL RESTRICTED SECURITIES (3.45% of Net Assets) $5,039,668 $4,150,647
========== ==========
</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.
26
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 2000
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 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.
27
<PAGE>
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE><CAPTION>
YEAR ENDED OCTOBER 31
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SELECTED PER SHARE DATA
Net Asset Value, beginning of period $ 12.91 $ 12.18 $ 17.09 $ 15.38 $ 13.47
---------- ---------- ---------- ---------- ----------
Income/(loss) from investment operations
Net investment income 0.26 0.14 0.55 0.30 0.41
Net realized and unrealized gain/(loss) 2.57 0.86 (2.83) 3.47 2.43
---------- ---------- ---------- ---------- ----------
Total from investment operations 2.83 1.00 (2.28) 3.77 2.84
---------- ---------- ---------- ---------- ----------
Less distributions
From net investment income 0.33 0.27 0.58 0.40 0.28
From net realized gain -- -- 2.05 1.66 0.65
---------- ---------- ---------- ---------- ----------
Total distributions 0.33 0.27 2.63 2.06 0.93
---------- ---------- ---------- ---------- ----------
Net Asset Value, end of period $ 15.41 $ 12.91 $ 12.18 $ 17.09 $ 15.38
========== ========== ========== ========== ==========
Total Return 22.43% 8.29% (16.30%) 27.04% 22.51%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 120,456 $ 123,899 $ 134,003 $ 152,958 $ 108,788
Ratio of net expenses to average net assets 2.64%(a) 2.00% 2.12% 2.14%(a) 1.50%
Ratio of total expenses excluding waiver of
management fee to average net assets 2.65%(a) 2.00% 2.19% 2.14%(a) 1.50%
Ratio of net investment income to average
net assets 1.67% 1.08% 2.98% 1.45% 2.27%
Ratio of net investment income excluding
waiver of management fee to average net assets 1.66% 1.08% 2.91% 1.45% 2.27%
Portfolio turnover rate 248% 149% 129% 140% 120%
</TABLE>
(a) The change in expense ratios from the prior year is primarily due to an
increase in equity swap contract expense.
28
