-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kj5IyAABlAJFoS/WZJmEaLfFMqd99kcDlgu+5MqEpcjuJvp8WwkfON84fCSZ4Gw7 dcR7M8nbqsc+uwbTKrGktA== 0000950135-98-004072.txt : 19980630 0000950135-98-004072.hdr.sgml : 19980630 ACCESSION NUMBER: 0000950135-98-004072 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980629 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAUPOST FUND CENTRAL INDEX KEY: 0000865827 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-06138 FILM NUMBER: 98656924 BUSINESS ADDRESS: STREET 1: 44 BRATTLE ST STREET 2: P O BOX 1288 CITY: CAMBRIDGE STATE: MA ZIP: 02238 BUSINESS PHONE: 6174976680 N-30D 1 BAUPOST FORM N-30D 1 THE BAUPOST FUND SEMI-ANNUAL REPORT APRIL 30, 1998 (UNAUDITED) 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. 2 THE BAUPOST FUND SEMI-ANNUAL REPORT APRIL 30, 1998 (UNAUDITED) CONTENTS: Management's Discussion of Performance ..................................... 1 Statement of Assets and Liabilities as of April 30, 1998 ................... 6 Statement of Operations for the period ended April 30, 1998 ................ 7 Statement of Changes in Net Assets for the periods ended April 30, 1998 and October 31, 1997 ................................................... 8 Schedule of Investments as of April 30, 1998 .............................. 9 Schedule of Forward Foreign Currency Contracts as of April 30, 1998 ....... 19 Notes to Financial Statements .............................................. 21 Financial Highlights ....................................................... 27
3 THE BAUPOST FUND 44 BRATTLE STREET, 5TH FLOOR P.O. BOX 381288 CAMBRIDGE, MASSACHUSETTS 02238 TEL. (617) 497-6680 FAX (617) 868-3529 June 25, 1998 Dear Fund Shareholder, Blame it on El Nino or the upcoming Millenium. Call it a new era, if you want. The astonishing reality is that stocks have moved in only one direction (up) for so long that Perma-bull best describes most investors' expectations for the U.S. stock market. From January 1, 1998 through April 30, 1998 the S&P 500 Index has soared 15.1%; it has gained 22.5% since November! While the Fund achieved handsome absolute gains during this period, it has significantly underperformed the U.S. equity market on a relative basis, earning 7.4% and 11.3% for the same four and six month periods, respectively. (Note that market insensitive rate of return investments earning 15 to 20% annual returns are a significant drag on performance amid such a market environment, and cash balances are like cement overshoes. Also note that big cap stocks marched relentlessly ahead of the pack; the Russell 2000 Index gained only 11.0% and 10.2%, respectively, for the same periods.) "Into Thin Air", the title of a recent bestseller about an ill-fated expedition to climb Mt. Everest, could also aptly describe the U.S. stock market, which has only infrequently reached such rarefied heights. Like the Everest climbers, the problem with reaching the summit is that from there every way you go is down. Not wanting to overuse the metaphor, I won't go on to recount the sudden storm which seemed to come out of nowhere that brought peril to a number of the climbers. The U.S. stock market has been propelled by investors falling all over themselves to buy large-capitalization growth stocks like Microsoft, Coca Cola, and even General Electric. At least they are, more or less, good companies. Occasionally, periods of unbelievable excess occur, where near-worthless enterprises are propelled into the stratosphere. Such a period is now upon us. It is bad enough that the shares of small growth companies announcing stock splits surge skyward as if something value enhancing has actually taken place. Now, suddenly, the siren song of the internet has become even more irresistible for hordes of growth investors. Consider the case of K-Tel International, the company best known for selling music CDs and tapes on late night television. After hovering in a narrow trading range around $7 a share (for its 4.1 million outstanding shares) since January, the announcement that K-Tel plans to sell its music on the internet caused its shares to skyrocket from $7 to $45 in just one week and to $80 a week later with daily volume exceeding 100% of the freely tradeable shares outstanding. "You put 'dot com' behind it and they'll buy it", said one analyst commenting on the behavior of internet-obsessed investors. In a similar vein, Market Guide, a provider of financial data, rallied from 3 to 29-1/2 in three trading days after 4 announcing a partnership with America Online. At 29-1/2, the company had a market capitalization of almost $150 million yet it boasts current annual revenue of only $5 million. Watch out below! Almost no one wants this Goldilocks economic environment (neither too hot nor too cold) to end. Not the public, which is willing to forgive their President almost any indiscretion. Not professional investors, who are shrugging off ominous warning signs (Asian economic and stock market collapse, the steadily rising dollar, numerous U.S. corporate earnings disappointments, their own state of euphoria.) Not even hordes of formerly risk averse investors, who have seemingly adopted the Massachusetts State Lottery's slogan (you gotta play to win) for their new investment guidelines. Clearly, the greater perceived risk is no longer that of being in the market but rather remaining on the sidelines, risk being defined not in terms of yield to maturity but rather yield to termination of the money manager. The many wonderful benefits of long-term stock ownership, so well hidden in the U.S. from 1973 to 1982, and well camouflaged in Asia at this very moment, are currently apparent to U.S. investors with extraordinary clarity. What is clear to us, and relatively few others, is how disappointing those long-term returns will actually be from today's market levels. Future returns have increasingly been accelerated into the present and recent past. We have entered greater fool territory, and decent market returns from here, while still a distinct possibility, will depend on an even greater sucker showing up. No one should be surprised if one does; however, no one should base their investment program on his or her existence. You might think that the increasing percentage of investor funds managed by professional ("professional"?) money managers would serve as a check on market excess. If you did, you would be seriously wrong. Very few professional investors are willing to give up the joy ride of a roaring U.S. bull market to stand virtually alone against the crowd, selling overvalued securities without reinvesting the proceeds in something also overvalued. The pressures are to remain fully invested in whatever is working, the comfort of consensus serving as the ultimate life preserver for anyone inclined to worry about the downside. As small comfort as it may be, the fact that almost everyone will get clobbered in a market reversal makes remaining fully invested an easy relative performance decision. Isn't this what always happens at the top of historic bull markets? The answer, of course, is of course. Investors and the financial media, always eager to grasp at straws, however slim and brittle, jumped on the year-end shareholder letter of legendary investor Warren Buffett as fodder for the bull case. The Dow immediately rallied 200 points. What Buffett, Chairman of Berkshire Hathaway, said is that at today's level of interest rates, and assuming prevailing levels of corporate profitability, in his view U.S. equities as a whole are not overvalued (and, just as assuredly, not undervalued.) Virtually no one explored his real message, equally prominent, suggesting that today's unprecedented level of corporate profitability may well be unsustainable; future profits may fall far short of today's lofty expectations. The U.S. stock market is extremely vulnerable to disappointments; nothing short of perfection is built into today's prices. And Buffett confesses that it has become increasingly difficult for him to find bargains in the current market environment. 5 It is also interesting to note that while U.S. stocks are historically quite expensive based on reported earnings, they are considerably more expensive when the effects of "extraordinary" write-offs and management stock options are factored in. Over the entire decade of the 1990's, major U.S. companies have recorded extraordinary write-offs averaging over 10% of reported earnings. These "one-time" write-offs, purported to reflect non-recurring charges related to mergers, plant closings, corporate restructurings and the like, are hardly one-time when they recur year after year. (These write-offs also result in an overstatement of return on equity; high return on equity is another argument used to justify record stock valuations.) Moreover, investors should no more ignore such losses then they should ignore the losing positions in their own investment portfolio. There has been considerable publicity about the dilutive impact of management stock options on shareholder returns. Reported earnings per share are potentially overstated to the extent that additional shares can be issued to management at fixed prices. The magnitude of this dilution is well known among investment professionals; they simply choose to downplay it as fundamentals increasingly take a back seat to adrenaline. Gresham's Law says that the bad money (paper) drives the good money (specie) out of circulation; this accurately describes human behavior when people are confronted with a cost-free choice. I now believe it also describes people's choice of investment philosophies, especially late in a bull market, when the sloppy analysis drives out the disciplined assessment, and when the grab for return overwhelms the desire for capital preservation. Persuading budding analysts to postpone the immediate gratification of a momentum or growth stock career for a long-term value investment philosophy is a formidable challenge indeed. Leaving this extraordinary party early, or contemplating not even going, isn't very appealing if all your friends will be there having a great time while it lasts, which appears to be well into the night. To many, the really bad hangover will have been worth it. At Baupost, we are excited that we continue to identify significant pockets of opportunity. Many of our most promising new ideas are in Western and Eastern European equities. As we started to see in 1996 and 1997, corporate restructuring has accelerated in many Western European countries. We have identified numerous companies in the midst of asset sales, spin-offs, and share repurchases, and others actively exploring such transactions. Because many of these companies are not closely followed by analysts, and because most U.S. event-driven investors have not yet migrated to European situations, we believe this area is compelling and will continue to throw off attractive opportunities for some time to come. Other companies, often of relatively small capitalization and having no immediate catalyst, have fallen through the cracks and trade at single digit price earning multiples where they represent excellent value. Eastern European markets, including but not limited to Russia, Ukraine, Poland, Czech Republic, Hungary and Romania, have recently become even more attractive. Our main competition for investments are a limited number of dedicated regional funds. Because there is still economic and political uncertainty throughout the region, stock prices remain at very depressed levels despite numerous positive developments and compelling undervaluation. 6 The composition of our portfolio has shifted in recent months, as a number of more fully valued positions have been sold and the funds redeployed. The portion of our portfolio with a catalyst for the realization of underlying value has increased, hopefully reducing still further our dependence on the level of the equity markets for future results. We intend to persevere in our search for value, and remain confident that our cash balances (17% of Fund assets at April 30) are likely to be most valuable just as fewer and fewer investors choose to hold any. We also have substantially increased our position in disaster insurance (out of the money U.S. equity market put options, as well as various protections against rising interest rates and fluctuating currencies.) We continue to be willing to give up a portion of our upside to protect against serious downside exposure. Our investment team continues to work diligently to find the kind of opportunities described in this letter. We are pleased to inform you that Tom Blumenthal, Abner Kurtin, Scott Nathan, and Sam Plimpton have been named Managing Directors of BGLLC (along with Paul Gannon, our CFO). In addition, Diane O'Connell, David Morris, and Carolyn Beckedorff have been named Vice Presidents of Baupost and Barbara O'Connor, Scott Stone and Vickie Alekson are now Assistant Vice Presidents. We are pleased to have three summer analysts in-between years at Harvard Business School working with our investment team this summer. They each have a strong interest in the investment business, relevant work experience in investment banking and/or private equity, and the intelligence and personality to fit in well at Baupost. We remain steadfast in our commitment to the risk averse investment of your capital. We are always available to address any questions you may have. Very truly yours, /s/ Seth A. Klarman ------------------------------ Seth A. Klarman President 7
=============================================================================================== AVERAGE ANNUAL TOTAL RETURNS (1) 1 5 LIFE OF FUND For Periods Ended 4/30/98 YEAR YEAR (SINCE 12/14/90) THE BAUPOST FUND 30.04% 17.60% 18.55% ===============================================================================================
Total return is an historical measure of past performance and is not intended to indicate future performance. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. (1) Assumes reinvestment of all dividends. [CHART OMITTED - PLOT POINTS AS FOLLOWS] THE BAUPOST S & P FUND 500 ----------- ---------- 12/14/90 $50,000.00 $50,000.00 04/30/91 $58,158.98 $58,161.73 04/30/92 $63,692.31 $66,325.82 04/30/93 $75,761.04 $72,448.88 04/30/94 $85,933.03 $76,302.11 04/30/95 $92,875.27 $89,627.93 04/30/96 $105,059.48 $116,707.47 04/30/97 $131,063.27 $146,040.47 04/30/98 $170,436.34 $206,014.84 8 THE BAUPOST FUND STATEMENT OF ASSETS AND LIABILITIES APRIL 30, 1998 (UNAUDITED) ASSETS: Investments in securities - at value $ 173,712,025 (Notes A and C) (cost $150,077,897) Cash 12,220,533 Receivable for investments sold 10,278,237 Unrealized appreciation on forward foreign currency contracts sold 2,582,150 Accrued investment income 436,807 Other assets 123,918 ------------- Total Assets 199,353,670 LIABILITIES: Payable for investments purchased 8,638,893 Payable to The Baupost Group, LLC (Note B) 539,567 Payable for equity swap contracts 538,636 Unrealized depreciation on futures contracts 74,550 Payable for interest and termination value on equity swap contracts 29,368 Other payables and accrued expenses 218,132 ------------- Total Liabilities 10,039,146 ------------- NET ASSETS $ 189,314,524 ============= COMPOSITION OF NET ASSETS: Paid in capital $ 155,376,184 Distributions in excess of net investment income (Note A) (2,970,585) Accumulated undistributed net realized gain on investments and foreign currency transactions 11,606,952 Net unrealized appreciation on investments and assets and liabilities in foreign currencies 25,301,973 ------------- NET ASSETS $ 189,314,524 ============= NET ASSET VALUE: Offering and redemption price per share ($189,314,524/11,694,750) $ 16.19 =============
See notes to financial statements. 9 THE BAUPOST FUND STATEMENT OF OPERATIONS SIX MONTHS ENDED APRIL 30, 1998 (UNAUDITED) INVESTMENT INCOME: INCOME: Interest $ 1,642,735 Dividends (net of foreign withholding taxes of $21,876) 1,475,803 ------------ Total Investment Income 3,118,538 EXPENSES: Investment management fee (Note B) 852,873 Equity swap contract interest expense 278,794 Administrative fee (Note B) 213,218 Legal fees 93,392 Custodian fees 72,702 Registration and filing fees 27,941 Audit fees 22,411 Directors' fees 17,010 Miscellaneous 31,045 ------------ Total Expenses 1,609,386 Waiver of investment management fee (Note B) (41,116) ------------ Total Expenses, Net 1,568,270 ------------ NET INVESTMENT INCOME 1,550,268 REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain on: Investments and equity swap contracts 12,700,706 Foreign currency transactions (214,943) Short sales (3,611,041) ------------ 8,874,722 Change in unrealized appreciation/(depreciation) on: Investments and equity swap contracts 4,275,757 Foreign currency transactions 3,463,767 Short sales (58,954) ------------ 7,680,570 NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 16,555,292 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 18,105,560 ============
See notes to financial statements. 10 THE BAUPOST FUND STATEMENT OF CHANGES IN NET ASSETS (UNAUDITED)
SIX MONTHS ENDED YEAR ENDED APRIL 30, 1998 OCTOBER 31, 1997 -------------- ---------------- INCREASE IN NET ASSETS FROM OPERATIONS: Net investment income $ 1,550,268 $ 1,956,343 Net realized gain on investments and foreign currency transactions 8,874,722 23,702,878 Change in unrealized appreciation of investments and foreign currency transactions 7,680,570 5,899,569 ------------- ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 18,105,560 31,558,790 DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (5,190,909) (2,845,958) From net realized gain on investments (18,216,302) (11,985,697) CAPITAL SHARE TRANSACTIONS (NOTE E) 41,657,859 27,443,139 ------------- ------------- INCREASE IN NET ASSETS 36,356,208 44,170,274 NET ASSETS AT BEGINNING OF PERIOD 152,958,316 108,788,042 ------------- ------------- NET ASSETS AT END OF PERIOD (including distributions in excess of net investment income of $2,970,585 and undistributed net income of $670,056, respectively) $ 189,314,524 $ 152,958,316 ============= =============
See notes to financial statements. 11 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ COMMON STOCKS - 68.08% UNITED STATES - 17.11% WHOLESALE FOOD - 7.20% 272,500 TLC BEATRICE INTERNATIONAL HOLDINGS $ 13,625,000 FOOTWARE - 2.83% 192,900 NINE WEST GROUP INC 5,365,031 * CHEMICAL PREPARATIONS - 2.40% 170,350 CHEMFIRST INC 4,535,569 ELECTRIC SERVICES - 1.43% 191,650 NORTHEAST UTILITIES 2,707,056 * OFFICE SUPPLIES - 1.32% 141,600 US OFFICE PRODUCTS COMPANY 2,504,550 * FABRICATED METAL PRODUCTS - 0.93% 75,900 MASCOTECH INC 1,769,419 CEREAL BREAKFAST FOOD - 0.54% 51,000 RALCORP HOLDINGS INC 1,013,625 * MISCELLANEOUS - 0.46% 110 FIDELITY BANKSHARES INC 3,382 198 FIRST FEDERAL SAVINGS BANK OF SIOUXLAND 7,524 109,985 HOMESTAKE OIL & GAS COMPANY 577,421 1,949 MID-CENTRAL FINANCIAL CORPORATION 52,623 1,600 MIDAS INC 30,900 * 938,000 REGENCY EQUITIES CORPORATION 14,070 1,800 SHELBY COUNTY BANCORP 43,200 1,400 USAA REAL ESTATE EQUITIES INC - CLASS A REIT SHARES 140,000 + ------------ 869,120 TOTAL COMMON STOCKS - UNITED STATES $ 32,389,370 ============ (Total Cost $23,675,978)
12 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ UNITED KINGDOM - 16.30% DIVERSIFIED HOLDING COMPANY - 5.43% 1,043,072 BURREN ENERGY PLC $ 858,855 62,400 GLYNWED INTERNATIONAL PLC 319,086 3,300,000 LAMBERT FENCHURCH GROUP PLC 6,424,525 1,039,300 SEDGWICK GROUP 2,674,624 ------------ 10,277,090 CONGLOMERATE - 4.61% 2,345,400 INCHCAPE PLC 8,720,634 FABRICATED TEXTILE PRODUCTS - 3.05% 3,710,700 COATS VIYELLA PLC 5,766,867 MANUFACTURING - ENGINES & TURBINES - 2.54% 1,223,000 VICKERS PLC 4,823,248 WHOLESALE - LUMBER & OTHER CONSTR. MAT'LS - 0.34% 115,000 ADAM & HARVEY GROUP PLC 643,789 INSURANCE AGENTS, BROKERS & SERVICE - 0.33% 215,100 JARDINE LLOYD THOMPSON GROUP 630,839 ------------ TOTAL COMMON STOCKS - UNITED KINGDOM $ 30,862,467 ============ (Total Cost $29,306,569) FRANCE - 13.50% DIVERSIFIED HOLDING COMPANY - 6.23% 51,465 CHARGEURS SA $ 3,507,713 16,800 CIE DES SIGNAUX SA 1,002,610 11,505 PATHE SA 2,501,627 8,513 SOCIETE EURAFRANCE SA 4,783,300 ------------ 11,795,250 HEAVY CONSTRUCTION - 3.33% 161,600 SOCIETE GENERALE D' ENTERPRISES SA (SGE) 6,299,593
13 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ COMMERCIAL BANKS - 2.35% 61,300 NATEXIS $ 4,454,198 DEFENSE ELECTRONICS - 1.42% 68,070 THOMSON CSF 2,693,153 MOTION PICTURE PRODUCTION SERVICES - 0.17% 4,100 GAUMONT SA 316,931 ------------ TOTAL COMMON STOCKS - FRANCE $ 25,559,125 ============ (Total Cost $19,344,556) SWEDEN - 7.42% REAL ESTATE AGENTS & MANAGERS - 3.53% 616,000 ASTICUS AB $ 6,679,662 * COMMUNICATION SERVICES - 2.82% 558,500 MODERN TIMES GROUP AB - B SHARES 5,335,184 * DIVERSIFIED HOLDING COMPANY - 1.07% 303,081 TRUSTOR AB - B SHARES 2,034,495 * ------------ TOTAL COMMON STOCKS - SWEDEN $ 14,049,341 ============ (Total Cost $12,664,597) SWITZERLAND - 4.35% DIVERSIFIED HOLDING COMPANY - 2.28% 16,550 VALORA HOLDING AG $ 4,323,625 FREIGHT TRANSPORTATION - 2.07% 14,590 DANZAS HOLDING AG - REGISTERED SHARES 3,918,540 ------------ TOTAL COMMON STOCKS - SWITZERLAND $ 8,242,165 ============ (Total Cost $6,564,277)
14 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ RUSSIA - 3.92% ELECTRIC SERVICES - 2.69% 5,000,000 IRKUTSKENERGO $ 1,015,000 122,800 IRKUTSKENERGO SPONSORED ADR 1,258,700 4,409,200 UNIFIED ENERGY SYSTEMS 1,451,509 40,000 UNIFIED ENERGY SYSTEMS SPONSORED GDR 1,370,000 ------------ 5,095,209 OIL & GAS FIELD EXPLORATION SERVICES - 1.23% 34,200 LUKOIL OIL COMPANY SPONSORED ADR 2,325,600 ------------ TOTAL COMMON STOCKS - RUSSIA $ 7,420,809 ============ (Total Cost $4,655,223) CZECH REPUBLIC - 1.95% ELECTRIC SERVICES - 1.95% 81,400 CEZ 1 CESKE ENERGETICKE ZAVOD AS $ 2,438,544 * 51,600 CEZ 2 CESKE ENERGETICKE ZAVOD AS II 1,243,845 * ------------ TOTAL COMMON STOCKS - CZECH REPUBLIC $ 3,682,389 ============ (Total Cost $3,679,678) THE NETHERLANDS - 0.97% TOWING & TUGBOAT SERVICES - 0.97% 62,800 SMIT INTERNATIONALE NV $ 1,834,076 ------------ TOTAL COMMON STOCKS - THE NETHERLANDS $ 1,834,076 ============ (Total Cost $1,576,566) HONG KONG - 0.91% ELECTRONIC & OTHER ELECTRICAL EQUIPMENT - 0.49% 10,488,160 SEMI-TECH GLOBAL LTD $ 920,727 21,600 SEMI-TECH GLOBAL LTD SPONSORED ADR 7,344 ------------ 928,071 MANUFACTURING - TOYS & DOLLS - 0.27% 6,917,400 PLAYMATES TOYS HOLDINGS LTD 509,026
15 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ INVESTMENT MANAGEMENT - 0.15% 829,000 REGENT PACIFIC GROUP LTD 288,962 ------------ TOTAL COMMON STOCKS - HONG KONG $ 1,726,059 ============ (Total Cost $6,155,224) GERMANY - 0.56% FURNITURE STORES - 0.56% 14,200 MOEBEL WALTHER AG $ 590,711 10,900 MOEBEL WALTHER AG-VORZUGSAKT (PREFERRED) 463,145 ------------ TOTAL COMMON STOCKS - GERMANY $ 1,053,856 ============ (Total Cost $791,956) POLAND - 0.53% NONRESIDENTIAL CONSTRUCTION - 0.53% 201,672 BUDIMEX SA $ 998,903 * ------------ TOTAL COMMON STOCKS - POLAND $ 998,903 ============ (Total Cost $890,253) ROMANIA - 0.31% CONCRETE PRODUCTS - 0.31% 42,000 ROMCIM BUCHAREST $ 581,227 * ------------ TOTAL COMMON STOCKS - ROMANIA $ 581,227 ============ (Total Cost $582,626) HUNGARY - 0.11% HOTELS & MOTELS - 0.11% 14,400 PANNONIA HOTELS $ 201,327 + ------------ TOTAL COMMON STOCKS - HUNGARY $ 201,327 ============ (Total Cost $211,454)
16 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ BAHAMAS - 0.11% CRUDE PETROLEUM - 0.11% 170,430 BASIC PETROLEUM INTERNATIONAL LTD UNIT TRUST $ 213,038 * ------------ TOTAL COMMON STOCKS - BAHAMAS $ 213,038 ============ (Total Cost $175,032) BELGIUM - 0.02% DIVERSIFIED HOLDING COMPANY - 0.02% 1,000 AUDIOFINA $ 40,816 ------------ TOTAL COMMON STOCKS - BELGIUM $ 40,816 ============ (Total Cost $36,492) CANADA - 0.01% ELECTRONIC & OTHER ELECTRICAL EQUIPMENT - 0.01% 57,100 SEMI-TECH CORPORATION - CLASS A $ 19,964 * ------------ TOTAL COMMON STOCKS - CANADA $ 19,964 ============ (Total Cost $103,346) TOTAL COMMON STOCKS $128,874,932 ============ (Total Cost $110,413,827) COMPANIES IN LIQUIDATION - 4.50% 3,150 EHLCO LIQUIDATING TRUST $ 315 *+ DEM 15,000,000 MAXWELL COMM. CORP. PLC 6.000% 06/15/93 1,044,161 * CHF 5,500,000 MAXWELL COMM. CORP. PLC 5.000% 06/16/95 458,181 * 836,059 MBO PROPERTIES INC 7,022,896 *++ ------------ TOTAL COMPANIES IN LIQUIDATION $ 8,525,553 ============ (Total Cost $16,011)
17 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ CLOSED-END MUTUAL FUNDS - 2.77% 200,000 KAZAKHSTAN FUND LIMITED $ 655,000 17,200 KOMERCNI BANK IF 311,874 * 165,949 NIF I 286,958 * 137,905 NIF III 341,529 * 101,542 NIF VI 172,610 * 175,483 NIF VIII 303,444 * 25,965 NIF X 50,606 * 253,538 NIF XIII 587,031 * 75,000 NIF XIV 202,227 * 42,582 POLISH NATIONAL INVEST FUND (NIF CERTIFICATES) 1,397,768 * 700 RESTITUCNI INVESTICINI FOND CESKE (RIF) 21,480 45,200 THE BALKAN FUND 310,750 44,900 ZIVNOBANKA INVESTICNI FOND 608,560 ------------ TOTAL CLOSED-END MUTUAL FUNDS $ 5,249,837 ============ (Total Cost $6,119,619) PARTNERSHIPS - 2.20% EMERGING EUROPE FUND FOR SUSTAINABLE DEVELOPMENT LP $ 200,186 + NCH INVESTORS FUND LP 1,237,388 + NEW CENTURY CAPITAL PARTNERS II LP 880,899 + SIGMA / UKRAINE LP 703,783 + SIGMA / UKRAINE CLASS C LP 404,663 + TEMPLETON EMERGING EUROPE FUND II LP 116,740 + UKRAINIAN GROWTH FUND II LP 612,000 + ------------ TOTAL PARTNERSHIPS $ 4,155,659 ============ (Total Cost $3,924,966) OPTIONS - 1.87% 143,816 FRF PUTS / DEM 3.4145 CALLS 11/20/1998 $ 0 143,891 FRF PUTS / DEM 3.4148 CALLS 11/20/1998 1,843 147,638 FRF PUTS / DEM 3.3805 CALLS 12/02/1998 7,153 76 FRANCE OAT 5.25% 04/25/2008 97.00 PUTS 04/23/1999 82,272 76 FRANCE OAT 5.25% 04/25/2008 97.11 PUTS 10/22/1999 140,496 76 FRANCE OAT 5.25% 04/25/2008 96.95 PUTS 10/25/1999 135,433 76 FRANCE OAT 5.25% 04/25/2008 97.04 PUTS 10/25/1999 125,307 569 GOLD 550 CALLS 04/05/2001 5,685 569 GOLD 550 CALLS 04/09/2001 5,685 563 GOLD 550 CALLS 07/19/2001 7,319 500 GOLD 450 CALLS 04/19/2001 62,500 387 ITL PUTS / DEM 1043.40 CALLS 11/23/1998 12,863 299 ITL PUTS / DEM 1016.80 CALLS 12/02/1998 7,265 398 JAPANESE YEN AMERICAN STYLE PUTS 135.98 03/25/1999 125,464 41 NASDAQ 100 STOCK INDEX 632.60 PUTS 05/11/1998 0
18 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ 63 NASDAQ 100 STOCK INDEX 647.11 PUTS 05/20/1998 $ 0 636 PATHE BSY SPREAD CALLS 08/30/1998 43,172 8,100 PATHE BSY SPREAD CALLS 09/21/1998 550,314 113 PHILIP MORRIS CO 50 CALLS 04/24/2000 33,281 113 PHILIP MORRIS CO 50 CALLS 04/25/2000 33,331 339 PHILIP MORRIS CO 50 CALLS 04/28/2000 100,567 227 PHILIP MORRIS CO 50 CALLS 05/26/2000 70,866 230 PHILIP MORRIS CO 50 CALLS 06/04/2000 77,280 170 PHILIP MORRIS CO 50 CALLS 06/09/2000 57,664 113 PHILIP MORRIS CO 50 CALLS 06/19/2000 35,946 454 PHILIP MORRIS CO 50 CALLS 06/23/2000 146,636 225 PHILIP MORRIS CO 50 CALLS 07/21/2000 84,150 225 PHILIP MORRIS CO 50 CALLS 09/30/2000 84,150 227 PHILIP MORRIS CO 50 CALLS 04/18/2002 128,367 19,895 RJR STUB 6.103 CALLS 03/20/2000 4,974 54,690 RJR STUB 6.267 CALLS 03/21/2000 13,672 11,650 RJR STUB 6.400 CALLS 03/27/2000 2,913 11,650 RJR STUB 6.540 CALLS 03/27/2000 2,913 16,776 RJR STUB 6.170 CALLS 03/31/2000 4,194 58,250 RJR STUB 6.110 CALLS 04/03/2000 14,563 56,450 RJR STUB 5.800 CALLS 04/25/2000 14,113 56,450 RJR STUB 5.220 CALLS 05/01/2000 39,515 63 S&P 500 INDEX 717.160 PUTS 06/18/1998 825 190 S&P 500 INDEX 717.400 PUTS 06/18/1998 2,494 255 S&P 500 INDEX 711.200 PUTS 06/19/1998 255 115 S&P 500 INDEX 920.710 PUTS 06/19/1998 25,079 114 S&P 500 INDEX 926.990 PUTS 06/19/1998 26,529 121 S&P 500 INDEX 747.108 PUTS 07/20/1998 4,526 108 S&P 500 INDEX 996.390 PUTS 07/24/1998 125,077 160 S&P 500 INDEX 892.380 PUTS 08/26/1998 108,718 128 S&P 500 INDEX 939.888 PUTS 09/22/1998 159,725 160 S&P 500 INDEX 892.380 PUTS 10/23/1998 175,868 228 S&P 500 INDEX 894.991 PUTS 11/06/1998 277,722 33 S&P 500 INDEX 719.695 PUTS 12/04/1998 13,492 166 S&P 500 INDEX 918.986 PUTS 12/18/1998 266,742 55 S&P 500 INDEX 919.785 PUTS 12/18/1998 93,306 ------------ TOTAL OPTIONS $ 3,542,224 ============ (Total Cost $7,598,991) PURCHASED BANK DEBT & TRADE CLAIMS - 1.15% 2,453,801 MAXWELL COMM. BANK DEBT - BAKER NYE $ 298,227 *+ 5,000,000 MAXWELL COMM. BERLITZ OBLIGATIONS 600,000 *+ 167,868 MAXWELL COMM. REVOLVING BANK DEBT - FIRST CHICAGO 20,872 *+ 943,496 MAXWELL COMM. REVOLVING BANK DEBT - HALCYON 117,695 *+ 396,015 MAXWELL COMM. REVOLVING BANK DEBT - HALCYON II 49,238 *+ 875,543 MAXWELL COMM. REVOLVING BANK DEBT - LAZARD FRERES 108,784 *+ 264,059 MAXWELL COMM. REVOLVING BANK DEBT - MERRILL LYNCH 32,831 *+ 823,981 MAXWELL COMM. REVOLVING BANK DEBT - SAN PAOLO 102,746 *+ 1,015,000 MAXWELL COMM. REVOLVING BANK DEBT - TCC ASSOCIATES 126,514 *+ 579,133 MAXWELL COMM. TERM BANK DEBT - FIRST CHICAGO 69,496 *+ 1,678,704 MAXWELL COMM. TERM BANK DEBT - HALCYON 201,445 *+
19 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ 702,221 MAXWELL COMM. TERM BANK DEBT - HALCYON II $ 84,266 *+ 426,846 MAXWELL COMM. TERM BANK DEBT - LAZARD FRERES 51,222 *+ 468,269 MAXWELL COMM. TERM BANK DEBT - MERRILL LYNCH 56,192 *+ 325,093 MAXWELL COMM. TERM BANK DEBT - SAN PAOLO 39,011 *+ 1,806,952 MAXWELL COMM. TERM BANK DEBT - TCC ASSOCIATES 216,834 *+ ------------ TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 2,175,373 ============ (Total Cost $0) COLLATERALIZED MORTGAGE OBLIGATIONS - 0.49% 357 RTC SERIES 1991 M2 CLASS X1 FRN 09/25/2020 $ 239,978 360 RTC SERIES 1991 M2 CLASS X2 FRN 09/25/2020 31,357 624 RTC SERIES 1991 M2 CLASS X3 FRN 09/25/2020 65,773 22,197,731 STRUCTURED ASSET SECURITIES CORP 1996-CFL CLASS X2 589,627 FRN 02/25/2028 ------------ TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 926,735 ============ (Total Cost $1,197,832) BONDS & NOTES IN REORGANIZATION - 0.14% 90,130 MBL CLASS 4 UNSECURED CLAIM $ 90,130 *+ 517,928 RTC SERIES 1991 M2 CLASS B FRN 09/25/2020 174,801 ------------ TOTAL BONDS & NOTES IN REORGANIZATION $ 264,931 ============ (Total Cost $12,861) WARRANTS - 0.03% 163,000 AXA-UAP CTF DE VALEUR GARANT 07/01/1999 $ 55,819 60,000 FIVE ARROWS CHILE INVESTMENT TRUST WARRANTS 3.2617 5/31/1999 3,600 1,109,400 JARDINE STRATEGIC HOLDINGS WARRANTS 3.57 05/02/1998 5,547 207,573 SEMI-TECH GLOBAL LTD WARRANTS 07/31/1998 268 ------------ TOTAL WARRANTS $ 65,234 ============ (Total Cost $867,674) CORPORATE BONDS - 0.00% 11,000 CHARTWELL CONTINGENT INTEREST NOTES 8.00% 06/30/2006 $ 6,703 + ------------ TOTAL CORPORATE BONDS $ 6,703 ============ (Total Cost $6,703)
20 THE BAUPOST FUND SCHEDULE OF INVESTMENTS APRIL 30, 1998 (UNAUDITED)
NUMBER OF SHARES, UNITS OR FACE VALUE MARKET VALUE ------------- ------------ U.S. TREASURY OBLIGATIONS - 10.52% 10,000,000 US TREASURY BILLS 05/21/1998 $ 9,974,611 5,000,000 US TREASURY BILLS 05/28/1998 4,982,300 5,000,000 US TREASURY BILLS 06/18/1998 4,967,933 ------------ TOTAL U.S. TREASURY OBLIGATIONS $ 19,924,844 ============ (Total Cost $19,919,413) TOTAL INVESTMENTS - 91.75% $173,712,025 ============ (Total Cost $150,077,897)
* Non-income producing security. + Restricted Securities - securities not registered under the Securities Act of 1933. See Note D. ++ Affiliated company. There were no share purchases or sales during the period ended April 30, 1998. Foreign Currency Abbreviations CHF Swiss Franc DEM 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. See notes to financial statements. 21 THE BAUPOST FUND SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS APRIL 30, 1998 (UNAUDITED)
MARKET UNREALIZED VALUE GAIN/(LOSS) ------------ ------------ CONTRACTS TO SELL BPS 10,311,990 British Pound Sterling due 10/27/1998 $ 17,115,429 $ (213,306) (Receivable amount $16,902,123) CHF 10,734,172 Swiss Franc due 10/27/1998 7,292,880 464,923 (Receivable amount $7,757,803) CSK 51,215,000 Czech Koruna due 06/16/1998 1,539,887 (151,570) (Receivable amount $1,388,317) CSK 49,155,000 Czech Koruna due 09/04/1998 1,447,769 (64,874) (Receivable amount $1,382,895 ) CSK 25,410,000 Czech Koruna due 12/21/1998 728,884 (32,910) (Receivable amount $695,974) CSK 51,215,000 Czech Koruna due 01/11/1999 1,461,847 (169,844) (Receivable amount $1,292,003) DEM 1,512,800 Deutschemark due 03/31/1999 856,654 (16,811) (Receivable amount $839,843) FRF 177,242,042 French Franc due 10/27/1998 29,714,417 431,486 (Receivable amount $30,145,903) ITL 22,723,860,300 Italian Lira due 10/27/1998 12,876,702 221,680 (Receivable amount $13,098,382) KRW 577,044,000 South Korean Won due 07/21/1998 409,978 206,522 (Receivable amount $616,500) KRW 577,954,500 South Korean Won due 08/10/1998 405,212 210,288 (Receivable amount $615,500) KRW 1,201,635,000 South Korean Won due 08/24/1998 836,234 405,766 (Receivable amount $1,242,000) KRW 2,479,653,000 South Korean Won due 08/31/1998 1,719,259 764,741 (Receivable amount $2,484,000) KRW 1,265,664,000 South Korean Won due 10/20/1998 854,988 381,012 (Receivable amount $1,236,000)
22 THE BAUPOST FUND SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS APRIL 30, 1998 (UNAUDITED)
MARKET UNREALIZED VALUE GAIN/(LOSS) ------------ ------------ CONTRACTS TO SELL - CONTINUED NLG 3,692,640 Dutch Guilder due 10/27/1998 1,843,315 26,564 (Receivable amount $1,869,879) PLN 4,081,455 Polish Zloty due 06/16/1998 1,177,158 (127,158) (Receivable amount $1,050,000) PLN 4,694,679 Polish Zloty due 09/23/1998 1,298,056 (52,056) (Receivable amount $1,246,000) SEK 58,078,502 Swedish Krona due 12/09/1998 7,542,536 (124,166) (Receivable amount $7,418,370) -------------- ------------- TOTAL CONTRACTS TO SELL $ 89,121,205 2,160,287 ============== ------------- (Receivable amount $91,281,492) CONTRACTS TO BUY CSK 51,215,000 Czech Koruna due 06/16/1998 $ 1,539,887 170,136 (Payable amount $1,369,751) ITL 22,723,860,300 Italian Lira due 10/27/1998 12,876,702 103,424 (Payable amount $12,773,278) KRW 577,044,000 South Korean Won due 07/21/1998 409,978 55,963 (Payable amount $354,015) KRW 577,954,500 South Korean Won due 08/10/1998 405,212 19,909 (Payable amount $385,303) KRW 1,201,635,000 South Korean Won due 08/24/1998 836,234 72,431 (Payable amount $763,803) -------------- ------------- TOTAL CONTRACTS TO BUY $ 16,068,013 421,863 ============== ------------- (Payable amount $15,646,150) $ 2,582,150 =============
See notes to financial statements. 23 THE BAUPOST FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES The Baupost Fund (the Fund) was established as a Massachusetts business trust under an Agreement and Declaration of Trust dated June 29, 1990, and is registered under the Investment Company Act of 1940, as amended, as a no-load, nondiversified, open-end management investment company. The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. SECURITY VALUATION: Portfolio securities, options and futures contracts for which market quotations are available and which are traded on an exchange or on NASDAQ are valued at the last quoted sales price or, if there is no such reported sale that day, at the closing bid price. Securities, options and forward contracts traded in the over-the-counter market (other than those traded on NASDAQ) and other unlisted securities are valued at the most recent bid price as obtained from one or more dealers that make markets in the securities. Portfolio securities which are traded both in the over-the-counter market and on one or more stock exchanges are valued according to the broadest and most representative market. To the extent the Fund engages in "naked" short sales (i.e., it does not own the underlying security or a security convertible into the underlying security without the payment of any further consideration) the Fund will value such short position as described above, except that the valuation, where necessary, will be based on the asked price instead of the bid price. Assets for which no quotations are readily available are valued at fair value as determined in good faith in accordance with procedures adopted by the Trustees of the Fund. Determination of fair value is based upon such factors as are deemed relevant under the circumstances, including the financial condition and operating results of the issuer, recent third-party transactions (actual or proposed) relating to such securities and, in extreme cases, the liquidation value of the issuer. Certain investments held by the Fund are restricted as to public sale in accordance with the Securities Act of 1933. Whenever possible, such assets are valued based on bid prices obtained from reputable brokers or market makers as of the valuation date. For assets not priced by brokers or market makers, fair value is determined by The Baupost Group, L.L.C. (Baupost) in accordance with procedures adopted by the Trustees of the Fund. SHORT SALES: The Fund engages in short-selling which obligates the Fund to replace the security borrowed by purchasing the security at the then current market value. The Fund would incur a loss if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund would realize a gain if the price of the security declines between those dates. Until the Fund replaces the borrowed security, the Fund maintains daily, in a segregated account with its custodian, cash or securities sufficient to cover its short position. At April 30, 1998, the Fund had no open short positions. 24 THE BAUPOST FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign currency contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. The U.S. dollar value of the currencies the Fund has committed to buy or sell is shown in the Schedule of Forward Foreign Currency Contracts. Losses may arise from changes in the value of a foreign currency relative to the U.S. dollar or from the potential inability of the counterparties to meet the terms of their contracts. The Fund uses forward foreign currency contracts to hedge the risks associated with holding securities denominated in foreign currencies. These contracts are adjusted by the daily exchange rate of the underlying currency, and any gains or losses are recorded as unrealized until the contract settlement date. FOREIGN CURRENCY TRANSLATION: The value of foreign securities is translated into U.S. dollars at the rate of exchange on the day of valuation. Purchases and sales of foreign securities, as well as income and expenses relating to such securities, are translated into U.S. dollars at the exchange rate on the dates of the transactions. The portion of both realized and unrealized gains and losses on investments that result from fluctuations in foreign exchange rates is not separately disclosed. FUTURES: The Fund may enter into index futures contracts 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, 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. If a futures contract is considered a Section 1256 contract for federal income tax purposes, it will be marked to market at year end with the change in value recorded as 40% short-term capital gain or loss and 60% long-term (20% rate) capital gain or loss in accordance with U.S. federal tax law. The Fund may either purchase or write options or buy and sell futures contracts in order to hedge against changes in the value of portfolio securities. At April 30, 1998, open positions in futures contracts were as follows:
Unrealized Expiration Open Contracts Position Depreciation - ---------- -------------- -------- ------------ June 18, 1998 14 S&P 500 Index Futures Short ($ 74,550)
SWAPS: The Fund has entered into equity swap contracts to gain exposure to specific foreign equities. A swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to changes in specified security prices or interest rates. The payment flows are usually netted against each other, with the difference being paid by one party to the other. 25 THE BAUPOST FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) Risks may arise as a result of the failure of another party to the swap contract to comply with the terms of the swap contract. The loss incurred by the failure of a counterparty is generally limited to the net payment to be received by the Fund and/or the termination value at the end of the contract. Therefore, the Fund considers the creditworthiness of each counterparty to a swap contract in evaluating potential credit risk. Additionally, risks may arise from unanticipated movements in interest rates or in the value of the underlying equities. The Fund records a net receivable or payable for the amount expected to be received or paid under the contract. The interest component of the equity swap contract is recorded as swap interest expense and the fluctuation in the market value of the underlying security is recorded as unrealized appreciation (depreciation) on investments. Premium payments made to enter into a swap contract, if any, are capitalized and amortized over the life of the swap contract. Management of the Fund periodically reviews the value of the unamortized balance of the premium payment and, based on their evaluation, may accelerate the amortization. At April 30, 1998, the Fund had outstanding equity swap contracts with the following terms:
SWAP NOTIONAL TERMINATION UNDERLYING PAYMENTS MADE BY COUNTERPARTY AMOUNT DATE SHARES UNDERLYING EQUITY THE FUND - ------------ ------ ---- ------ ----------------- -------- Bankers Trust $ 634,284 12/28/98 1,247 SK Telecom Co., Ltd. Floating - 3 Mos.USD-LIBOR-BBA Morgan Stanley $ 630,520 03/04/99 1,164 SK Telecom Co., Ltd. Floating - 6 Mos.LIBOR-BBA Morgan Stanley $1,191,049 01/23/00 1,997 SK Telecom Co., Ltd. Floating - 6 Mos.LIBOR-BBA Bankers Trust $ 563,218 06/13/00 1,221 SK Telecom Co., Ltd. Floating - 3 Mos.USD-LIBOR
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are recorded on the trade date. Gains and losses on securities sold are determined using the specific identification method. Dividend income is recorded on the ex-dividend date or, for certain foreign dividends, as soon as the Fund becomes aware of the dividends. Interest income, including original issue discount, where applicable, is recorded on an accrual basis, except for bonds in default for which there is some concern as to whether interest will be received in cash, in which case interest is recorded when received. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with institutions that Baupost has determined are creditworthy. Each repurchase agreement is recorded at cost. The Fund requires that the securities purchased in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the Fund to obtain those securities in the event of a default under the repurchase agreement. PURCHASED CALL AND PUT OPTIONS: The Fund may enter into purchased call and put options for both hedging and non-hedging activities. The Fund's exposure to market risk relating to the securities is affected by a number of factors including the size and composition of the options held, the time period during which the options may be exercised, the volatility of the underlying security or index, and the relationship between the current market price of the underlying security or index and the strike or exercise price of the option. Baupost closely monitors the Fund's exposure to risk. 26 THE BAUPOST FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) 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. CONCENTRATION OF CREDIT RISK: Concentrations of credit risk exist if a number of companies in which the Fund has invested are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. To mitigate its exposure to concentrations of credit risk, the Fund invests in a variety of industries located in diverse geographic areas. While the portfolio is not concentrated in any one industry, securities of distressed companies, many of which are restricted as to resale and which were purchased at a significant discount, are an important component of the Fund's investments in bonds. NOTE B - INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES The Fund retains Baupost as its investment adviser and administrator. Certain individuals who are officers and trustees of the Fund are also officers, directors and shareholders of Baupost. The Fund pays Baupost a quarterly management fee at an annual rate of 1% of average net assets of the Fund and an administrative fee at an annual rate of 0.25% of average net assets of the Fund, to serve as dividend disbursing agent and administrator. Baupost has agreed with the Fund to reduce its management fee by up to 0.75% of the Fund's average net assets until further notice to the extent that the Fund's total annual expenses (including the management fee, administrative fee and certain other expenses, but excluding brokerage commissions, transfer taxes, interest and expenses relating to preserving the value of the Fund's investments) would otherwise exceed 1.5% of the Fund's average net assets. For the purpose of determining the applicable management and administrative fees, average net assets is determined by taking an average of the determination of such net asset values during each quarter at the close of business on the last business day of each month during such quarter before any month-end share purchases or redemptions. NOTE C - INVESTMENT TRANSACTIONS Purchases and proceeds from the sale of investment securities (excluding short-term investments) for the period ended April 30, 1998 aggregated $89,603,000 and $72,908,000, respectively. 27 THE BAUPOST FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) For federal income tax purposes, the identified cost of investments at April 30,1998 was $150,455,718. Net unrealized appreciation, on a federal income tax basis, for all securities and securities sold short was as follows:
Six Months Ended April 30, 1998 -------------- Gross unrealized appreciation $ 38,738,762 Gross unrealized depreciation (13,513,491) --------------- Net unrealized appreciation $ 25,225,271 ==============
NOTE D - RESTRICTED SECURITIES At April 30, 1998 the Fund held the following securities which are restricted as to public sale in accordance with the Securities Act of 1933:
Earliest Value at Acquisition Cost April 30, 1998 Date ---- -------------- ---- Purchased Bank Debt & Trade Claims: Maxwell Communications Corporate Debt $ 0 $2,175,373 11/22/93 Corporate Bonds: Chartwell Contingent Interest Note 8.00% due 06/30/2006 6,703 6,703 12/21/95 Partnerships: Emerging Europe Fund for Sustainable Development, L.P. 186,382 200,186 02/25/97 NCH Investors Fund, L.P. 1,094,351 1,237,388 12/18/95 New Century Capital Partners II, L.P. 820,906 880,899 11/30/95 Sigma Ukraine, LP 689,924 703,783 05/14/96 Sigma Ukraine Class C, L.P. 404,663 404,663 11/27/96 Templeton Emerging Europe Fund II L.P. 116,740 116,740 12/08/97 Ukrainian Growth Fund II, LP 612,000 612,000 03/31/97 Common Stock: Burren Energy PLC 858,852 858,855 04/14/98 Pannonia Hotels 211,454 201,327 01/28/97 USAA Real Estate Equities Inc. Class A REIT 89,600 140,000 04/22/97 Companies in Liquidation: Ehlco Liquidating Trust 19 315 01/30/89 Bonds & Notes in Reorganization: MBL Class 4 Unsecured Claim 0 90,130 06/18/96 ---------- ---------- TOTAL RESTRICTED SECURITIES (4.03% of Net Assets) $5,091,594 $7,628,362 ========== ==========
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. 28 THE BAUPOST FUND NOTES TO FINANCIAL STATEMENTS APRIL 30, 1998 (UNAUDITED) NOTE E - CAPITAL SHARE TRANSACTIONS Transactions in capital shares were as follows:
For the Six Months Ended For the Year Ended April 30, 1998 October 31, 1997 ----------------------------------- ----------------------------------- Shares Amount Shares Amount ---------- ------------ ---------- ------------ Shares sold 2,264,062 $ 34,959,018 2,137,346 $ 32,346,659 Shares issued in reinvestment of dividends 1,538,174 23,195,673 989,255 14,363,821 Shares redeemed (1,056,383) (16,496,832) (1,250,566) (19,267,341) ---------- ------------ ---------- ------------ NET INCREASE 2,745,853 $ 41,657,859 1,876,035 $ 27,443,139 ========== ============ ========== ============
29 THE BAUPOST FUND FINANCIAL HIGHLIGHTS (UNAUDITED)
SIX MONTHS YEAR ENDED OCTOBER 31 ENDED APRIL 30, -------------------------------------------------------------------- SELECTED PER SHARE DATA 1998 1997 1996 1995 1994 1993(a) ----------- ---------- ---------- ---------- --------- ---------- Net Asset Value, beginning of period $ 17.09 $ 15.38 $ 13.47 $ 14.33 $ 14.77 $ 12.56 ----------- ---------- ---------- ---------- --------- ---------- Income from investment operations Net investment income .08 0.30 0.41 0.25 0.22 0.28 Net realized and unrealized gain 1.65 3.47 2.43 0.71 1.23 2.76 ----------- ---------- ---------- ---------- --------- ---------- Total from investment operations 1.73 3.77 2.84 0.96 1.45 3.04 ----------- ---------- ---------- ---------- --------- ---------- Less distributions From net investment income .58 0.40 0.28 0.25 0.46 0.22 In excess of net investment income -- -- -- 0.08 -- -- From net realized gain 2.05 1.66 0.65 1.49 1.43 0.61 ----------- ---------- ---------- ---------- --------- ---------- Total distributions 2.63 2.06 0.93 1.82 1.89 0.83 ----------- ---------- ---------- ---------- --------- ---------- Net Asset Value, end of period $ 16.19 $ 17.09 $ 15.38 $ 13.47 $ 14.33 $ 14.77 =========== ========== ========== ========== ========= ========== TOTAL RETURN 11.26% 27.04% 22.51% 7.91% 11.06% 25.45% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (in $ 189,315 $ 152,958 $ 108,788 $ 89,439 $ 81,787 $ 75,378 thousands) Ratio of net expenses to average net 1.84%(d) 2.14%(c) 1.50% 1.54% 1.53% 1.52% assets Ratio of total expenses excluding waiver of management fee to average 1.89%(d) 2.14%(c) 1.50% 1.54% 1.55% 1.63% net assets Ratio of net investment income to average net assets 1.82%(d) 1.45% 2.27% 1.60% 1.32% 2.29% Ratio of net investment income excluding waiver of management fee to average net assets 1.77%(d) 1.45% 2.27% 1.60% 1.30% 2.17% Portfolio turnover rate 133%(d) 140% 120% 106% 161% 183% Average commission rate paid (b) $ 0.0144 $ 0.0203 $ 0.0271
(a) All per share amounts reflect the effect of the ten-for-one share split as of the close of business October 31, 1993. (b) For fiscal years beginning after Sept. 1, 1995, the Fund is required to disclose its average commission rate paid per share for security trades on which commissions are charged. (c) The increase in expense ratios is primarily due to equity swap contract interest expense. (d) Annualized -----END PRIVACY-ENHANCED MESSAGE-----