As filed with the Securities and Exchange Commission on February 28, 1996
Registration No. 33-35851
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
X
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------
Pre-Effective Amendment No.
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Post-Effective Amendment No. 7 X
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and X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 --------
Amendment No. 9 X
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THE BAUPOST FUND
(Exact Name of Registrant as Specified in Charter)
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
(Address of Principal Executive Offices)
Registrant's Telephone Number: (617) 497-6680
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b).
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X on February 29, 1996 pursuant to paragraph (b).
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60 days after filing pursuant to paragraph (a)(1).
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on (date) pursuant to paragraph (a)(1).
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75 days after filing pursuant to paragraph (a)(2).
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on (date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
this post-effective amendment designates a new
------ effective date for a previously filed post-effective
amendment.
Name and Address of Agent for Service:
Copies to:
Seth A. Klarman Gregory D. Sheehan, Esq.
The Baupost Group, Inc. Ropes & Gray
44 Brattle Street One International Place
Cambridge, MA 02238 Boston, MA 02110-2624
The Registrant has registered an indefinite number or amount of securities
under the Securities Act of 1933 pursuant to Rule 24f-2. A Rule 24f-2 notice for
the fiscal year ended October 31, 1995 was filed on December 27, 1995.
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<PAGE>
THE BAUPOST FUND
CROSS-REFERENCE SHEET
Items Required by Form N-1A
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PART A
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<TABLE>
<CAPTION>
Item No. Item Caption Prospectus Caption
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<S> <C> <C>
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description of THE FUND; PURCHASE OF SHARES;
Registrant REDEMPTION OF SHARES;
DETERMINATION OF NET ASSET VALUE;
DISTRIBUTIONS; TAXES; MANAGEMENT
OF THE FUND; DESCRIPTION OF THE
FUND AND OWNERSIP OF SHARES;
APPENDIX A - OPTIONS, FUTURES AND
FOREIGN CURRENCY EXCHANGE
TRANSACTIONS; APPENDIX B
DESCRIPTION OF RATINGS
5. Management of the Fund MANAGEMENT OF THE FUND; EXPENSE
INFORMATION; BACK COVER PAGE
5A. Management's Discussion (CONTAINED IN THE ANNUAL REPORT
of Fund Performance OF THE REGISTRANT)
6. Capital Stock and Other DISTRIBUTIONS; TAXES; DESCRIPTION
Securities OF THE FUND AND OWNERSHIP OF
SHARES; SHAREHOLDER INQUIRIES
7. Purchase of Securities PURCHASE OF SHARES;
Being Offered DETERMINATION OF NET ASSET VALUE
8. Redemption or Repurchase REDEMPTION OF SHARES
9. Pending Legal Proceedings NOT APPLICABLE
</TABLE>
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<PAGE>
PART B
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<TABLE>
<CAPTION>
Statement of Additional
Item No. Item Caption Information Caption
- -------- ------------ -------------------
<S> <C> <C>
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. General Information and NOT APPLICABLE
History
13. Investment Objectives and INVESTMENT RESTRICTIONS
Policies
14. Management of the Fund MANAGEMENT OF THE FUND;
INVESTMENT ADVISORY AND OTHER
SERVICES
15. Control Persons and OWNERSHIP OF FUND SHARES
Principal Holders of
Securities
16. Investment Advisory and INVESTMENT ADVISORY AND OTHER
Other Services SERVICES
17. Brokerage Allocation and PORTFOLIO TRANSACTIONS
Other Practices
18. Capital Stock and Other SHAREHOLDER VOTING RIGHTS;
Securities LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OFFICERS; TAX STATUS;
DISTRIBUTIONS (PART A); DESCRIPTION
OF THE FUND AND OWNERSHIP OF
FUND SHARES (PART A)
19. Purchase, Redemption and DETERMINATION OF NET ASSET VALUE
Pricing of Securities Being (PART A); DETERMINATION OF NET
Offered ASSET VALUE (PART B)
20. Tax Status TAX STATUS
21. Underwriters NOT APPLICABLE
22. Calculation of Performance STANDARD PERFORMANCE MEASURES
Data
23. Financial Statements REPORT OF INDEPENDENT AUDITORS;
FINANCIAL STATEMENTS
</TABLE>
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<PAGE>
PROSPECTUS
Dated February 29, 1996
THE BAUPOST FUND
44 Brattle Street
Post Office Box 381288
Cambridge, MA 02238
(617) 497-6680
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company. The Fund's principal investment objective is
capital appreciation, and its secondary objective is income. The Fund pursues
these objectives primarily through investments in foreign and domestic
securities, including common stocks, preferred stocks and debt securities, that
the Fund's investment adviser, The Baupost Group, Inc. ("Baupost" or the
"Adviser"), believes are available for purchase at prices less than their
intrinsic value. There is no assurance that the Fund will achieve its
objectives. THE FUND MAY INVEST UP TO 15% OF ITS ASSETS IN SECURITIES WHICH ARE
NOT READILY MARKETABLE; THIS COULD RESULT IN HIGHER TRANSACTION COSTS THAN
INVESTING IN PUBLICLY TRADED SECURITIES AND CAUSE TIME DELAYS AND COSTS AND
POSSIBLE LOSSES IN CONNECTION WITH THE SALE OF SUCH SECURITIES. See "How the
Fund Pursues its Objectives."
THE FUND MAY INVEST PREDOMINANTLY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE
WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. See
"How the Fund Pursues its Objectives."
Shares of the Fund may be purchased in a continuous offering directly
from the Fund at net asset value without a sales charge or underwriting
commission on the last day of each month on which the New York Stock Exchange is
open for business. The minimum initial investment in the Fund is $50,000
($100,000 for California residents); the minimum additional investment is
$1,000. The Fund reserves the right at any time to reject an order to purchase
shares of the Fund. See "Purchase of Shares." Before investing in the Fund,
shareholders will be required to execute an agreement pursuant to which they
will agree not to transfer their shares, except as approved by the Fund.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Fund. Please retain this Prospectus
for future reference. A Statement of Additional Information, dated February 29,
1996, containing additional and more detailed information about the Fund has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Statement of Additional Information can be obtained
without charge by calling the Fund at (617) 497-6680, or writing to the Fund at
the above address.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------
INVESTMENT ADVISER
THE BAUPOST GROUP, INC.
<PAGE>
TABLE OF CONTENTS
Page
EXPENSE INFORMATION 1
FINANCIAL HIGHLIGHTS 2
THE FUND 3
The Fund's Investment Objectives 3
How the Fund Pursues its Objectives 3
Other Investment Practices and Risk Considerations 7
Portfolio Management and Portfolio Turnover 9
Risk Factors 10
Limiting Investment Risk 12
PURCHASE OF SHARES 12
REDEMPTION OF SHARES 13
DETERMINATION OF NET ASSET VALUE 13
DISTRIBUTIONS 14
TAXES 15
MANAGEMENT OF THE FUND 16
HOW THE FUND SHOWS PERFORMANCE 16
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES 17
CUSTODIAN 18
TRANSFER AND DIVIDEND DISBURSING AGENT AND ADMINISTRATOR 18
REPORTS TO SHAREHOLDERS 18
SHAREHOLDER INQUIRIES 18
APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS 19
APPENDIX B - DESCRIPTION OF DEBT RATINGS 32
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<PAGE>
EXPENSE INFORMATION
The expenses of the Fund for the 1995 fiscal year are set forth in the
following table:
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases................................................ NONE
Maximum Sales Load Imposed on
Reinvested Dividends..................................... NONE
Deferred Sales Load...................................... NONE
Redemption Fee........................................... NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee 1.00%
Administrative Fee .25%
Other Expenses .29%
Total Fund Operating Expenses 1.54%
EXAMPLE:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following $16 $49 $84 $183
expenses on a $1,000 investment
assuming (1) 5% annual return
and (2) redemption at the end
of each time period:
</TABLE>
The purpose of the table is to assist you in understanding the various
costs and expenses of the Fund that are borne by shareholders of the Fund. The
Example is based on the Total Fund Operating Expenses for the Fund's last fiscal
year (1.54% of average net assets) and does not represent future expenses;
actual expenses incurred during the periods covered by the Example may be more
or less than shown. Federal regulations require the Example to assume a 5%
annual return, but actual annual return will vary. See "Management of the Fund"
for more information about operating expenses.
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<PAGE>
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
The table below presents selected per share data, total returns, and ratios for
the life of the Fund for each share of beneficial interest. The information in
the table has been audited and reported on by Ernst & Young LLP, the Fund's
independent auditors, whose report appears in the Statement of Additional
Information. The Fund's Annual Report, which contains additional unaudited
performance information, is available upon request.
<TABLE>
<CAPTION>
Period Ended
Year Ended October 31 October 31
------------------------------------------------ ----------
1995 1994 1993 1992 1991(d)
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA (a)
Net Asset Value, beginning of period $14.33 $14.77 $12.56 $11.97 $10.04
----- ------ ------ ------ ------
Income from Investment Operations
Net investment income 0.25 0.22 0.28 0.24 0.47
Net realized and unrealized
gain (loss) 0.71 1.23 2.76 0.88 1.46
---- ---- ------ ------ ------
Total from investment operations 0.96 1.45 3.04 1.12 1.93
---- ---- ------ ------ ------
Less Distributions
From net investment income 0.25 0.46 0.22 0.53 -
In excess of net investment income 0.08 - - - -
From net realized gain 1.49 1.43 0.61 - -
---- ---- ------ ------ ------
Total distributions 1.82 1.89 0.83 0.53 -
------ ------ ------
Net Asset Value, end of period $13.47 $14.33 $14.77 $12.56 $11.97
====== ====== ====== ====== ======
TOTAL RETURN 7.91% 11.06% 25.45% 9.51% 19.21%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period (in thousands) $89,439 $81,787 $75,378 $46,942 $ 35,054
Ratio of expenses to
average net assets 1.54% 1.53% 1.52% 1.50% 1.50%(c)
Total expenses to average
net assets 1.54% 1.55% 1.63% 1.72% 2.01%(c)
Ratio of net investment income
to average net assets 1.60% 1.32% 2.29% 2.07% 5.33%(c)
Ratio of net investment income
excluding waiver of management
fee to average net assets 1.60% 1.30% 2.17% 1.85% 4.82%(c)
Portfolio Turnover rate 106% 161% 183% 137% 144%
</TABLE>
(a) All per share amounts reflect the effect of a ten-for-one share split as
of the close of business October 31, 1993.
(b) Total returns for periods of less than one year are not annualized.
(c) Annualized.
(d) For the period January 1, 1991 - October 31, 1991. For the period from June
29, 1990 (date of organization) to December 31, 1990, net income of $2,993, or
$1.50 per share, was distributed to the Fund's sole shareholder.
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<PAGE>
Such distributions represented the net income of the Fund prior to the date
shares of beneficial interest were issued.
THE FUND
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund was established as a Massachusetts
business trust under an Agreement and Declaration of Trust dated June 29, 1990.
THE FUND'S INVESTMENT OBJECTIVES
The principal investment objective of the Fund is capital appreciation.
Income is a secondary objective. These objectives are not fundamental and the
Trustees of the Fund may change them without shareholder approval. The Fund is
not intended to be a complete investment program, and there is no assurance the
Fund will achieve its objectives.
HOW THE FUND PURSUES ITS OBJECTIVES
BASIC INVESTMENT STRATEGY. The Fund pursues its investment objectives
primarily through investments in common stocks, preferred stocks, debt
securities (such as bonds, debentures, notes, bank debt and claims) and
participations therein, and other securities which, in the opinion of The
Baupost Group, Inc. ("Baupost" or the "Adviser"), are available at prices less
than their intrinsic value, as determined by Baupost after analysis and
research, taking into account, among other factors, the relationship of the
market value of the securities to book value, cash flow, and earnings. These
factors are not applied formulaically, as the Adviser examines each security
separately; the Adviser has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund may invest in common stocks, preferred stocks and debt securities,
whether domestic or foreign, in such proportions as the Adviser deems advisable.
The preferred stocks and debt securities may be convertible. In addition, the
Fund may enter into repurchase agreements, enter into forward commitments,
purchase warrants, engage in options and futures transactions, hold its assets
in cash or in money market instruments, and engage in short sales of securities.
See "Investment Practices" below. The Fund may invest up to 25% of its total
assets in any one industry. The achievement of the Fund's investment objectives
will depend upon the Adviser's analytical and portfolio management skills. In
light of the types of securities in which the Fund may invest, the Fund is not
an appropriate investment for investors seeking short-term profits.
The Fund generally purchases securities for investment purposes and not for
the purpose of influencing or controlling management of the issuer. However, the
Fund may seek to influence or control management by investing in a potential
takeover, leveraged buyout or reorganization or by investing in other entities
that were organized in order to purchase securities for the purpose of
influencing or controlling management, if the Adviser believes that the possible
increase in the value of its investment will outweigh the risks and costs
associated with the investment. The Fund may also seek to influence or control
management by discussing informally with management different operating
strategies, proposing shareholder resolutions,
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<PAGE>
engaging in a proxy contest or serving as part of a creditors' committee
established in connection with a company's insolvency. Neither the Fund nor the
Adviser has any experience in managing the types of companies in which the Fund
will likely invest.
DEBT SECURITIES. The Fund may invest without limit in debt securities,
including obligations of the U.S. Treasury. The values of debt securities
generally fluctuate inversely with changes in interest rates. The Fund has
established no rating criteria for debt securities in which it may invest,
although securities ratings will be a factor in the Adviser's decision to
purchase debt securities. Other factors that may influence the Adviser's
decision include the financial position and credit history of the issuer, the
yield, maturity and liquidity of the particular debt security, and the Adviser's
forecasts of interest rate and market movements. The debt securities purchased
by the Fund may have remaining maturities in excess of 20 years. Some debt
securities in which the Fund may invest may be secured by assets of the debtor.
In order to enforce its rights in the event of a default under such securities,
the Fund may be required to take possession of and manage such assets, which may
increase the Fund's operating expenses and adversely affect the Fund's net asset
value. Neither the Fund nor the Adviser has any experience in managing such
assets. The Fund's intention to qualify as a "regulated investment company" for
federal income tax purposes may limit the extent to which the Fund may exercise
its rights by taking possession of such assets. For a discussion of the risks
associated with the Fund's investments in lower-rated debt securities, see "Risk
Factors--Lower-rated Securities".
The Fund may purchase indebtedness and participations therein of financially
troubled companies, which include companies that are in default under agreements
representing indebtedness, companies that have experienced a material adverse
change in their business or operations, or companies that are insolvent. The
Fund may invest without limit in such indebtedness and may invest in senior and
subordinated indebtedness. Like the purchase of other debt securities, the
purchase of indebtedness of such companies always involves a risk as to the
creditworthiness of the issuer and the possibility that the investment may be
lost, although these risks are heightened when the Fund invests in troubled
companies. While there are established markets for some of this indebtedness,
certain indebtedness will be less liquid than more heavily traded securities.
The Fund will not invest more than 15% of its net assets in illiquid securities.
Participations normally are made available only on a nonrecourse basis by
financial institutions. If an intermediary exists between the Fund and the
borrower, the Fund may only purchase loan participations when such intermediary
is a national or state chartered bank or a foreign bank. The Fund's ability to
receive payments of principal and interest in connection with participations
held by it will depend primarily on the financial condition of the borrowers,
although the Fund may in some cases be required to rely upon the lending
institution from which it purchased the participation to collect and pass on to
the Fund such payments and to enforce the Fund's rights under the loan. When the
Fund is required to rely upon a lending institution to pass on to the Fund
principal and interest, the Fund will evaluate the creditworthiness of such
lending institution. The Fund may have limited rights to enforce the terms of
the underlying loan and the liquidity of loan participations may be limited.
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<PAGE>
The Fund may also purchase claims against companies, including insolvent
companies. These claims are typically unsecured and generally represent money
due a supplier of goods or services to such company. Such claims are subject to
certain risks, such as the risk that the Fund may not be paid by the debtor on a
timely basis, if at all, or if the Fund does receive payment, it may be in an
amount less than the value which the Adviser had placed on the claim.
The Fund may also invest without limit in debt securities issued by states,
municipalities, local governments and their agencies and authorities, the
interest on which is exempt from Federal income taxes. In addition to the risks
associated with other types of debt securities, the prices of tax-exempt
securities may be affected by a variety of financial or political factors, such
as concern as to the fiscal integrity of the issuer, demographics, and pending
litigation or legislation that may affect future revenues of the issuer.
REORGANIZATION TRANSACTIONS. The Fund may invest without limit in the
securities of companies involved in mergers, consolidations, liquidations and
reorganizations or as to which there exist tender or exchange offers
(collectively, "Reorganization Transactions"). Because the expected gain on an
individual investment in a company involved in a Reorganization Transaction is
normally smaller than the possible loss if the transaction is unexpectedly
terminated, Fund assets will not be invested unless the proposed transaction
appears to the Adviser to have a substantial probability of success. The
expected completion of each transaction is also extremely important since the
length of time that the Fund's assets may be invested in securities of a company
involved in a Reorganization Transaction will affect the rate of return realized
by the Fund. The Fund will not invest its assets in a Reorganization Transaction
unless the Adviser determines that the probability of a timely and successful
completion of the transaction offsets any risks associated with possible delays
in its successful completion. The majority of mergers and acquisitions are
consummated in less than six months, while tender offers are normally completed
in less than two months. Liquidations and certain other types of corporate
reorganizations usually require more than six months to complete. The Adviser
may invest the Fund's assets in both negotiated, or "friendly," reorganizations
and non-negotiated, or "hostile," takeover attempts.
There can be no assurance that any Reorganization Transaction proposed at
the time the Fund makes its investment will be consummated or will be
consummated on the terms and within the time period contemplated.
FOREIGN INVESTMENTS. The Fund does not currently anticipate investing more
than 50% of its total assets in foreign securities, including securities issued
by foreign governments. Securities of foreign issuers, particularly
non-governmental issuers, involve risks which are not ordinarily associated with
investing in domestic issuers. Since foreign securities are normally denominated
and traded in foreign currencies, the values of the Fund's assets will be
affected favorably or unfavorably by currency exchange rates and exchange
control regulations (which may include suspension of the ability to transfer
currency from a given country and repatriation of investments) to the extent it
invests in foreign securities. Exchange rates with respect to certain currencies
may be particularly volatile. In addition, investments in foreign countries
could be affected by other factors generally not thought to be present in the
United States, including the unavailability of financial information or the
difficulty of interpreting financial information prepared under foreign
accounting standards (which are generally not comparable to U.S. standards), the
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<PAGE>
possibility of expropriation, nationalization and confiscatory or heavy
taxation, the impact of political, social or diplomatic developments, default in
foreign government securities, limitations on the removal of funds or other
assets of the Fund, difficulties in invoking legal process abroad and enforcing
contractual obligations, and the difficulty of assessing economic trends in
foreign countries. Delays in settlement could result in temporary periods when
assets of the Fund are uninvested and no return is being earned thereon.
Inability to sell a portfolio security due to settlement problems could result
either in a loss to the Fund if the value of the portfolio security subsequently
declined or, if the Fund entered into a contract to sell the security, could
result in possible claims against the Fund. Foreign securities markets may be
less liquid and more volatile than U.S. markets. Foreign brokerage commissions
and other transaction costs and custodian fees are generally higher than in the
United States. The Adviser may engage in foreign currency exchange transactions
in connection with the purchase and sale of foreign securities and to protect
the value of specific portfolio positions. See "Appendix A - Options, Futures
and Foreign Currency Exchange Transactions." Special tax considerations also
apply to investments in foreign securities. See "Taxes."
Some countries in which the Fund may invest may have fixed or managed
currencies that are not free- floating against the U.S. dollar. Further, certain
currencies may not be traded internationally. Certain of these currencies have
experienced a steady devaluation relative to the U.S. dollar. Any devaluations
in the currencies in which the Fund's portfolio securities are denominated may
have a detrimental impact on the Fund. Many countries in which the Fund may
invest have experienced substantial, and in some periods extremely high, rates
of inflation for many years. Inflation and rapid fluctuations in inflation rates
have had and may continue to have negative effects on the economies and
securities markets of certain countries.
There are substantial risks involved in investing in securities issued by
issuers located in underdeveloped or developing countries, which are sometimes
referred to as "emerging markets." These risks are in addition to the usual
risks inherent in foreign investments described above. Because of greater risks
of adverse political developments, the lack of effective legal structures and
difficulties effecting securities transfers and settlements, the Fund risks the
loss of its entire investment when investing in securities issued by issuers
located in certain foreign countries.
INDEXED SECURITIES. The Fund may invest in indexed securities whose value is
linked to currencies, foreign or domestic securities, interest rates,
commodities, indices, or other financial indicators. Most indexed securities are
short to intermediate term fixed-income securities whose values at maturity or
interest rates rise or fall according to the change in one or more specified
underlying instruments. Indexed securities may be positively or negatively
indexed (i.e., their value may increase or decrease if the underlying instrument
appreciates), and may have return characteristics similar to direct investments
in the underlying instrument or to one or more options on the underlying
instrument. Indexed securities may be more volatile than the underlying
instrument itself. Because certain foreign markets may be closed for all
practical purposes to U.S. investors such as the Fund, the Fund may invest
indirectly in such markets through the purchase of indexed securities and would
therefore be subject to the risks described above with respect to investments in
foreign securities as well as being subject to the risk of relying upon the
issuer of the indexed security to fulfill its obligations under the terms of the
security.
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<PAGE>
CASH AND SHORT-TERM OBLIGATIONS. Depending upon market conditions, part or
all of the Fund's assets may be invested in cash (including foreign currencies)
or high quality cash equivalent short-term obligations and unrated cash
equivalent short-term obligations that the Adviser determines as comparable in
quality to that of such rated obligations including, but not limited to,
commercial paper, notes, certificates of deposit, bankers' acceptances and other
obligations of banks, repurchase agreements and short-term obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. It is
impossible to predict when, for how long, or to what extent the Fund will invest
its assets in cash and cash equivalent short-term obligations.
OTHER INVESTMENT COMPANIES. From time to time and subject to applicable law,
certain of the Fund's investments may include investments in other investment
companies, including investment companies not registered under the Investment
Company Act of 1940. When the Fund invests in other investment companies,
shareholders may in effect pay multiple levels of management fees (i.e., the
Fund's management fees and the management fees of the other investment
companies).
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Fund may from time to time engage in the investment practices described
below. In addition, the Fund may buy and sell (i.e., write) call and put options
on individual securities or on securities indices, buy and sell futures
contracts and related options, engage in spread and straddle transactions, and
engage in foreign currency exchange transactions (including buying and selling
options on foreign currencies and engaging in foreign currency futures
transactions and options thereon). Some of the options which the Fund may
purchase or sell may be traded over-the-counter. EACH OF THESE PRACTICES
INVOLVES CERTAIN SPECIAL RISKS. FOR INFORMATION ON OPTIONS AND FUTURES
TRANSACTIONS AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THE RISKS ASSOCIATED WITH THESE PRACTICES, SEE "APPENDIX A -
OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS." Certain provisions
of the Internal Revenue Code may limit the Fund's ability to engage in options,
futures and forward transactions. See "Tax Status" in the Statement of
Additional Information for more information about these limitations. In
addition, because of the investment leverage involved in options and futures
transactions, the Fund's obligations under its options and futures transactions
could require the Fund to deliver or take delivery of investments with a value
equal to or greater than the entire amount of its assets.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. When the Fund makes a short
sale, it must borrow the security sold short and deliver it to the other party
to the transaction. Short sales involve certain expenses and entail risks. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities. The net
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements, until the short position is closed out.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. ALTHOUGH THE FUND'S GAIN IS LIMITED TO
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<PAGE>
THE PRICE AT WHICH IT SOLD THE SECURITY SHORT, ITS POTENTIAL LOSS IS UNLIMITED
IF THE FUND DOES NOT OWN THE SECURITY.
The staff of the Securities and Exchange Commission is of the opinion that a
short sale involves the creation of a senior security and is, therefore, subject
to the limitations of Section 18 of the 1940 Act. The staff has taken the
position that in order to comply with the provisions of Section 18, the Fund
must put in a segregated account (not with the broker) an amount of cash or
United States Government securities equal to the difference between: (a) the
market value of the securities sold short at the time they were sold short, and
(b) any cash or United States Government securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). In addition, until the Fund replaces the borrowed
security, it must daily maintain the segregated account at such a level that the
amount deposited in it plus the amount deposited with the broker as collateral
will equal the current market value of the securities sold short. It is
currently expected that no more than 25% of the Fund's net assets will be used
as collateral or deposited in a segregated account in connection with short
sales.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements on up
to 25% of its total assets with member banks of the Federal Reserve System or
securities dealers in order to earn income. A repurchase agreement is a contract
pursuant to which the Fund agrees to purchase a security and simultaneously
agrees to resell it to such bank or dealer at an agreed-upon time and price,
thereby determining the yield during the Fund's holding period. The Fund will
normally limit its investments in repurchase agreements to those agreements
maturing in seven days or less. Repurchase agreements maturing in more than
seven days, together with any other illiquid assets of the Fund, will not exceed
15% of the value of the Fund's total net assets. The securities underlying
repurchase agreements will be limited to securities in which the Fund could
invest directly pursuant to the Fund's investment policies. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Fund to the bank or dealer involved, with the underlying
securities constituting collateral for the loans. The Adviser will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent the proceeds of the
sale, including accrued interest, are less than the resale price provided in the
agreement, including interest. In addition, if the seller should be involved in
bankruptcy or insolvency proceedings, the Fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Fund is treated as an unsecured creditor and is required to return the
underlying collateral to the seller's estate. The Fund's investments in
repurchase agreements will be limited to transactions with financial
institutions which are determined by the Adviser to present minimal credit
risks. The Adviser will monitor the creditworthiness of such financial
institutions.
FORWARD COMMITMENTS. The Fund may enter into contracts to purchase
securities for a fixed price at a specified future date beyond customary
settlement time ("forward commitments"). If the Fund does so, it will maintain
cash or liquid, high-grade debt obligations in a segregated account having a
value at all times sufficient to meet the purchase price or will enter into
offsetting contracts for the forward sale of other securities it owns. Forward
commitments involve a risk of loss if the value of the security to be purchased
declines prior to the settlement date, which risk is in addition to the risk of
decline in value of
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the Fund's other assets. Although the Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, it may
dispose of a commitment prior to settlement if the Adviser deems it appropriate
to do so. The Fund may realize gains or losses upon the sale of forward
commitments. The Adviser will monitor the creditworthiness of the parties to
such forward commitments. The Fund will not invest more than 25% of its total
assets in forward commitments.
WARRANTS. The Fund may from time to time purchase warrants; however, not
more than 5% of its net assets (at the time of purchase) will be invested in
warrants other than warrants acquired in units or attached to other securities.
Of such 5%, not more than 2% of the Fund's net assets at the time of purchase
may be invested in warrants that are not listed on the New York Stock Exchange
or the American Stock Exchange. Warrants represent the right to purchase
securities of an issuer at a specific price for a specific period of time. They
do not represent ownership of such securities, but only the right to buy them.
Warrants have no voting rights, pay no dividends and have no rights with respect
to the assets of the corporation issuing them. The prices of warrants do not
necessarily correlate with the prices of the underlying securities.
REAL ESTATE AND RELATED SECURITIES. The Fund may invest in real
estate-related securities. These securities include securities that are backed
by, represent interests in or are secured by real estate, as well as securities
issued by companies or limited partnerships that invest in real estate or
interests in real estate. Investments in these securities entail certain risks
due to a variety of factors, including uncertainties surrounding the underlying
real estate ventures. Factors affecting the performance of real estate ventures
may include satisfactory completion of construction, excess supply of real
estate in certain markets, prudent management of insurance risks, sufficient
level of occupancy, adequacy of financing available in capital markets,
competent management, adequate rent to cover operating expenses, local and
regional markets for competing assets, changes in applicable laws and
governmental regulations (including taxes), and social and economic trends.
To the extent permitted by its investment restrictions, the Fund may also
purchase and sell real estate in order to protect its investment in such
securities. Certain real estate-related securities in which the Fund may invest
may not be readily marketable. Investments in real estate and in real
estate-related securities that are not readily marketable entail additional
risks, such as difficulty in pricing the real estate or security for purposes of
determining the Fund's net asset value and the possibility that the Fund would
be unable to sell the real estate or security at a price approximating its
market value when it decides to sell the real estate or security. If the Fund
has rental income or income from the direct disposition of real property, the
receipt of such income may adversely affect its ability to retain its status as
a regulated investment company. See "Taxes."
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER
While it is a policy of the Fund generally not to engage in trading for
short-term gains, portfolio changes will be made without regard to the length of
time a security has been held or whether a sale would result in a profit or
loss, if in the Adviser's judgment such transactions are advisable. A change in
the securities owned by the Fund is known as "portfolio turnover." For purposes
of calculating portfolio
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turnover, all securities whose maturity or expiration date is one year or less
at the time of acquisition are excluded from the calculation. As a result of the
Fund's investment policies, under certain market conditions, the Fund's
portfolio turnover rate may be higher than that of other mutual funds. To the
extent the Fund's portfolio turnover rate equals or exceeds 100%, the Fund will
generally incur high transaction costs. Portfolio turnover may subject the
Fund's shareholders to taxes on realized capital gains. The portfolio turnover
rate for the life of the Fund is shown in the section "Financial Highlights."
The purchase and sale of portfolio securities for the Fund and for the other
investment advisory clients of the Adviser are made by the Adviser with a view
to achieving their respective investment objectives. For example, a particular
security may be bought or sold only for certain clients of the Adviser even
though it could have been bought or sold for other clients at the same time.
Likewise, a particular security may be bought for one or more clients when one
or more other clients are selling the security. In some instances, therefore,
one client may sell indirectly a particular security to another client. It also
happens that two or more clients may simultaneously buy or sell the same
security, in which event purchases or sales are effected pro rata on the basis
of cash available or another equitable basis so as to avoid any one account's
being preferred over any other account.
RISK FACTORS
NON-DIVERSIFICATION. The Fund is a "non-diversified" fund and as such is not
required to meet any diversification requirements under the 1940 Act.
Nevertheless, the Fund must meet certain diversification standards to qualify as
a "regulated investment company" for federal income tax purposes. See "Tax
Status" in the Statement of Additional Information. As a non-diversified fund,
the Fund may invest a relatively high percentage of its assets in the securities
of a relatively few issuers that the Adviser deems to be attractive investments,
rather than invest in the securities of a large number of issuers merely to
satisfy diversification requirements. Such policy will increase the risk of loss
to the Fund should there be a decline in the market value of any security in
which the Fund has invested a large percentage of its assets. Investment in a
non-diversified fund such as the Fund will generally entail greater risks than
investment in a "diversified" fund.
LOWER-RATED SECURITIES. Debt securities in which the Fund invests may or may
not be rated by rating agencies such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's ("S&P"), and, if rated, such rating may range
from the very highest to the very lowest, currently C for Moody's and D for S&P.
Securities rated below investment grade (below Baa if rated by Moody's and below
BBB if rated by S&P) normally provide a yield or yield to maturity that is
significantly higher than that of investment grade issues, but are predominately
speculative with respect to capacity to pay interest and repay principal. The
lower-rated categories include debt securities that are in default and debt
securities of issuers who are insolvent. The rating assigned to a security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
The values of lower-rated securities (including unrated securities of
comparable quality) fluctuate more than those of higher-rated securities,
although they may be less sensitive to interest rate changes. In addition, the
lower rating reflects a greater possibility that the financial condition of the
issuer, or adverse
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changes in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
principal and income. The inability (or perceived inability) of issuers to make
timely payment of interest and principal would likely make the values of
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximating the values the Fund had placed on
such securities. In addition, the market price of lower-rated securities is
likely to be more volatile because: (i) an economic downturn or increased
interest rates may have a significant effect on the yield, price and potential
for default; (ii) the market may at times become less liquid or respond to
adverse publicity or investor perceptions, increasing the difficulty in
disposing of the securities or in valuing them for purposes of determining the
Fund's net asset value; and (iii) past legislation has limited (and future
legislation may further limit) investment by certain institutions in lower-
rated securities or the tax deductibility of the interest by the issuer, which
may adversely affect the value of such securities. The Fund will not necessarily
dispose of a security when its rating is reduced below its rating at the time of
purchase, although the Adviser will monitor the investment to determine whether
continued investment in the security will assist in meeting the Fund's
investment objectives. Because the Fund may invest without limit in such
lower-rated securities, the Fund's achievement of its investment objectives is
more heavily dependent on the Adviser's credit analysis. For a more complete
description of the ratings of debt securities, see "Appendix B - Description of
Debt Ratings."
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other funds and
accounts managed by the Adviser and its affiliates, holds a major portion or all
of such securities. Although the Adviser generally considers such securities to
be liquid because of the availability of an institutional market for such
securities, it is possible that, under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the issuer, the
Fund could find it more difficult to sell such securities when the Adviser
believes it advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value.
Certain securities held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund may not be able
to reinvest the proceeds in securities providing the same investment return as
the securities redeemed.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero- coupon bonds do not pay interest for their entire
lives and are issued at a discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option, to
make current interest payments on the bonds either in cash or in additional
bonds. Such investments may experience greater fluctuation in market value in
response to changes in market interest rates than bonds which pay interest in
cash currently. Both zero-coupon and payment-in-kind bonds allow an issuer to
avoid the need to generate cash to meet current interest payments, but may also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Accordingly, such bonds involve greater credit risk than
bonds paying interest in cash currently. Even though such bonds may not pay
current interest in cash, the Fund is nonetheless required to accrue interest
income on such investments and to
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distribute such amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to satisfy its
distribution requirements.
The amount of information about the financial condition of an issuer of
tax-exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent the
Fund invests in lower-rated tax-exempt securities, the achievement of the Fund's
goals is more dependent on the Adviser's investment analysis than would be the
case if the Fund were investing in higher-rated securities.
During fiscal 1995, the Fund invested 9.2% of its net assets in debt
securities that were in default. The Adviser believes that such securities
provide attractive investment opportunities due in part to the discount from par
at which they are typically purchased. In addition to these securities, the Fund
also invested 2.9% of its net assets in securities rated B by Moody's, 0.2% of
its net assets in securities rated C by Moody's and 3.5% of its net assets in
unrated debt securities which, if rated, the Adviser believes would have been
rated C by Moody's.
LIMITING INVESTMENT RISK
Specific investment restrictions help the Fund attempt to limit investment
risks for its shareholders. See the Statement of Additional Information. Except
for investment restrictions designated as fundamental in the Statement of
Additional Information, the investment policies described in this Prospectus and
in the Statement of Additional Information are not fundamental policies. The
Trustees may change any non- fundamental investment policies without shareholder
approval.
PURCHASE OF SHARES
Shares of the Fund may be purchased in a continuous offering for cash
without a sales charge or underwriting commission directly from the Fund on the
last day of each month on which the New York Stock Exchange is open for business
(a "Purchase Date"). The purchase price of shares of the Fund is the net asset
value as of the close of the Exchange on the relevant Purchase Date. The minimum
initial purchase of Fund shares is $50,000 ($100,000 for California residents).
The minimum purchase for any subsequent investment is $1,000. The Fund may waive
these minimums at its discretion. Investors should call the offices of the Fund
before attempting to place an order for Fund shares. The Fund reserves the right
at any time to reject an order.
Before investing in the Fund, shareholders will be required to execute an
agreement pursuant to which they will agree not to transfer their shares, except
as approved by the Fund. For these purposes, redemptions of Fund shares are not
considered transfers, but pledges of Fund shares are.
Before an order to purchase shares will be accepted, all required forms must
be in proper order and received by Baupost no later than the business day
preceding the Purchase Date, although the Fund requests that orders be sent so
that they are received by Baupost no later than five business days before such
Purchase Date. Unless otherwise approved by the Fund, all payments for purchases
must be made by
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wire transfer to the account designated by the Fund's Custodian. The deadline
for wire transfers is 10:00 a.m., Eastern time on the Purchase Date. When the
consideration is received by the Fund after the deadline, the purchase order
will be rejected and will have to be resubmitted to the Fund on the next
Purchase Date.
Purchases will be made in full and fractional shares of the Fund calculated
to three decimal places. Shareholders will be sent a statement of shares owned
subsequent to each transaction.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed on any day the New York Stock Exchange is
open for business. The redemption price is the net asset value per share next
determined after receipt by Baupost of the redemption request in "good order."
Shares of the Fund will generally be redeemed by a distribution in cash;
however, the Fund reserves the right to redeem shares by a distribution in kind
of securities held by the Fund.
Securities used to redeem Fund shares in kind will be valued in accordance
with the Fund's procedures for valuation described under "Determination of Net
Asset Value." Securities distributed by the Fund in kind will be selected by the
Adviser in light of the Fund's investment objectives and will not generally
represent a pro rata distribution of each security held in the Fund's portfolio.
Shareholders who receive a distribution in kind should expect to incur
transaction costs when converting such securities to cash.
Payment on redemption will be made as promptly as possible and in any event
within seven days after the requested date provided that the request is in "good
order." A redemption request is in "good order" if it includes the exact name in
which shares are registered and the number of shares or the dollar amount of
shares to be redeemed and if it is signed exactly in accordance with the form of
registration. Persons acting in a fiduciary capacity, or on behalf of a
corporation, partnership or trust, must specify, in full, the capacity in which
they are acting. When opening an account with the Fund, shareholders may be
required to designate the account(s) to which funds may be transferred upon
redemption.
The Fund may suspend the right of redemption and may postpone payment for
more than seven days when the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission, during periods when trading on the New York Stock Exchange
is restricted or during an emergency which makes it impracticable for the Fund
to dispose of its securities or to fairly determine the value of its net assets,
or during any other period permitted by the Securities and Exchange Commission
for the protection of investors.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for the Fund as of the close of
trading on the New York Stock Exchange (normally 4:00 p.m. Eastern time) once on
each day on which the Exchange is open (other than a day on which no shares of
the Fund were tendered for redemption and no order to purchase shares was
accepted by the Fund, but at least as frequently as the last business day of
each month). The net asset
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value per share for the Fund is determined by dividing the total value of the
Fund's portfolio investments and other assets, less any liabilities, by the
total outstanding shares of the Fund. 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 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 positions as described above, except that the
valuation, where necessary, will be based on the asked price instead of the bid
price. Other 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 will be 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.
Because of time zone differences, foreign exchanges and securities markets
will usually be closed prior to the time of the closing of the New York Stock
Exchange and values of foreign options and foreign securities will be determined
as of the closing of such exchanges and securities markets. However, events
affecting the values of such foreign securities may occasionally occur between
the closings of such exchanges and securities markets and the time the Fund
determines its net asset value which will not be reflected in the computation of
such net asset value. If an event materially affecting the value of such foreign
securities occurs during such period, then such securities will be valued at
fair value as determined in good faith in accordance with procedures adopted by
the Trustees.
Because foreign securities (including options and futures contracts with
respect to foreign securities and currencies) are quoted in foreign currencies,
fluctuations in the value of such securities in relation to the U.S. dollar will
affect the net asset value of shares of the Fund even though there has not been
any change in the values of such securities measured in terms of the foreign
currencies in which they are denominated. The value of foreign securities is
converted into U.S. dollars at the rate of exchange prevailing at the time of
determination of net asset value.
DISTRIBUTIONS
The Fund intends to pay out as dividends substantially all of its ordinary
income (which principally consists of any dividends and interest it receives
from its investments, less accrued expenses). The Fund also intends to
distribute substantially all of its capital gain net income, if any, after
giving effect to any available capital loss carryover. The Fund's policy is to
declare and pay distributions of its ordinary income annually, generally in
December, although it may do so more frequently as determined by the Trustees of
the Fund. The Fund's policy is to distribute capital gain net income annually,
generally in
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December, although it may do so more frequently as determined by the Trustees of
the Fund and to the extent permitted by applicable regulations.
All dividends and/or distributions will be paid in shares of the Fund at net
asset value unless the shareholder elects to receive cash. Shareholders may make
or change this election by indicating their choice on the Shareholder
Information Sheet provided when an account is opened or by writing to the
Transfer Agent.
TAXES
The Fund intends to qualify as a "regulated investment company" for federal
income tax purposes and to meet all other requirements that are necessary for it
to be relieved of federal taxes on income and gains paid to shareholders in the
form of dividends. In order to accomplish this goal, the Fund must distribute
substantially all of its ordinary income and capital gain net income on a
current basis and maintain a portfolio of investments which satisfies certain
investment and diversification criteria.
All Fund distributions will be taxable to shareholders as ordinary income,
except distributions of any long-term capital gains are currently taxable as
such regardless of how long a shareholder may have owned shares in the Fund.
Distributions will be taxed whether received in cash or in additional shares of
the Fund. For federal income tax purposes, a distribution paid to shareholders
by the Fund in January of a year generally is deemed to have been paid by the
Fund and received by shareholders on December 31 of the preceding year, if the
distribution was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Fund will provide
federal tax information annually, including information about dividends and
other distributions paid during the preceding year.
The Fund may be subject to foreign taxes on income received from foreign
securities. It is unlikely that shareholders will be able to take advantage of
foreign tax credits or deductions with respect to such taxes.
Under the "backup withholding" rules, the Fund may be required to withhold
for the payment of Federal income tax 31% of a non-corporate shareholder's
taxable distributions and redemption proceeds if such shareholder fails to
provide the Fund with a correct taxpayer identification number or to make
required certifications, or if a shareholder has been notified by the Internal
Revenue Service that he is otherwise subject to backup withholding. The taxpayer
identification number of an individual is his social security number.
The foregoing is a general summary of the Federal income tax consequences
for shareholders who are U.S. citizens or residents or U.S. corporations.
Shareholders should consult their own tax advisors about the federal tax
consequences of an investment in the Fund in light of each shareholder's
particular tax situation. Shareholders should also consult their own tax
advisors about consequences under foreign, state, local or other applicable tax
laws. See the Statement of Additional Information for more information about
taxes.
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MANAGEMENT OF THE FUND
The Fund is advised and managed by The Baupost Group, Inc., a Massachusetts
corporation. Seth A. Klarman, President of Baupost and the Fund, owns in excess
of 50% of the outstanding stock of Baupost. Mr. Klarman has also had primary
responsibility for the day-to-day management of the Fund's portfolio since the
Fund's inception in January, 1991. Mr. Klarman has been with Baupost since its
founding in April, 1982. In addition to the Fund, Baupost manages financial
assets for approximately 30 client families. Assets under management totaled
approximately $722 million on December 31, 1995.
Under the Management Contract with the Fund, the Adviser, subject to such
policies as the Trustees may determine, selects and reviews the Fund's
investments and provides executive and other personnel for the management of the
Fund. Subject to the authority of the Trustees, the Adviser also manages the
Fund's other affairs and business. In the event that the Adviser ceases to be
the investment adviser to the Fund, the right of the Fund to use the identifying
name "Baupost" with respect to the Fund may be withdrawn.
The Fund pays the Adviser a quarterly management fee at the annual rate of
1.00% of the Fund's average net assets. Under the Management Contract, for the
purposes of determining the applicable management fee, "average net assets" is
determined at regular intervals throughout the year. The Adviser has agreed with
the Fund to reduce its management fee by up to .75% to the extent that the
Fund's total annual expenses (including the management fee and the
administrative fee (as described below under "Transfer and Dividend Disbursing
Agent and Administrator") 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. The Adviser's fee under the Management Contract for services
rendered to the Fund is higher than that paid by most other mutual funds.
In addition, the Fund will pay all expenses incurred in connection with the
organization and operation of the Fund, including but not limited to brokerage
commissions and transfer taxes in connection with its portfolio transactions,
all applicable taxes and filing fees, the fees and expenses for registration or
qualification of its shares under the federal or state securities laws, the
compensation of certain Trustees, interest charges, charges of custodians,
administrative and transfer agency expenses, auditing and legal expenses,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, insurance
premiums and professional association dues or assessments.
HOW THE FUND SHOWS PERFORMANCE
From time to time the Fund may include in its communications to current or
prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of an amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends
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and distributions. The Fund does not have a sales load or other charges paid by
all shareholders that affect its calculation of total return or average annual
total return. Any quotation of total return or average annual total return for
any period when an expense limitation was in effect will be greater than if the
limitation had not been in effect.
All data is based on the Fund's past investment results and does not predict
future performance. Investment performance, which will vary, is based on many
factors, including market conditions, the composition of the Fund's portfolio,
and the Fund's operating expenses. Investment performance also often reflects
the risks associated with the Fund's investment objectives and policies. These
factors should be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES
The Fund is a no-load, non-diversified open-end registered management
investment company organized as a Massachusetts business trust under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust (the
"Declaration of Trust") dated June 29, 1990.
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest which presently constitute
a single series, the Fund. Each share of the Fund represents an equal
proportionate interest with each other share. The Declaration of Trust also
permits the Trustees, without shareholder approval, to subdivide any series of
shares into two or more classes of shares, with such preferences and other
rights and privileges as the Trustees may designate. The Fund's shares are not
currently divided into classes. The Trustees may also, without shareholder
approval, establish one or more additional separate portfolios for investments
in the Fund or merge two or more existing portfolios. Shareholders' investments
in such a portfolio would be evidenced by a separate series of shares.
Fund shares are entitled to dividends as declared by the Trustees and, in
liquidation of the Fund, are entitled to receive the net assets of the Fund.
Fund shares are entitled to vote at any meetings of shareholders. Although the
Fund is not required to hold annual meetings of shareholders, shareholders have
the right to call a meeting to remove Trustees. See the Statement of Additional
Information.
The Declaration of Trust provides for the perpetual existence of the Fund.
The Fund may, however, be terminated at any time by vote of at least two-thirds
of the outstanding shares of the Fund. The Declaration of Trust further provides
that the Trustees may also terminate the Fund upon written notice to the
shareholders.
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CUSTODIAN
Chase Manhattan Bank, N.A. acts as the Fund's Custodian. The Custodian has
no part in determining the Fund's investment policies or which securities are to
be purchased or sold for the Fund.
TRANSFER AND DIVIDEND
DISBURSING AGENT AND ADMINISTRATOR
Baupost acts as the Fund's transfer and dividend disbursing agent and
administrator under a Transfer Agency and Administrative Services Agreement.
Under the agreement with the Fund, Baupost provides customary transfer agency
services, furnishes pricing and bookkeeping services to the Fund and determines
the net asset value of the Fund's shares. For these services, the Fund pays
Baupost a quarterly fee at the annual rate of .25% of the Fund's average net
asset value.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund will
send to its shareholders a semi-annual report containing unaudited financial
statements and an annual report containing audited financial statements.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to the Fund c/o The Baupost Group, Inc.,
44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
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APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE
TRANSACTIONS
The Fund may engage in options and futures transactions and certain foreign
currency exchange transactions. These investment practices may be used to
attempt to reduce fluctuations in the Fund's net asset value or for other
purposes permitted by applicable law. There can be no assurance that such
practices will be successful. Expenses and losses resulting from these
activities will reduce the Fund's current income and net asset value.
In connection with transactions in futures contracts and related options
written by the Fund, the Fund will be required to deposit with its custodian or
broker as "initial margin" an amount of cash and/or securities. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the values of the futures contracts or options.
Because of the investment leverage involved in these transactions, the Fund's
obligations under its futures contracts or options could require the Fund to
deliver or take delivery of investments with a value equal to or greater than
the entire amount of its assets. Certain provisions of the Internal Revenue Code
may also limit the Fund's ability to engage in these transactions. See "Tax
Status" in the Statement of Additional Information for more information about
these limitations.
OPTIONS ON SECURITIES
Writing Covered Options. The Fund may write covered call options and covered
put options on securities when, in the opinion of the Adviser, such transactions
are consistent with the Fund's investment objectives and policies. Call options
written by the Fund give the purchaser the right to buy the underlying
securities from the Fund at a stated exercise price; put options give the
purchaser the right to sell the underlying securities to the Fund at a stated
price. The aggregate value of the securities underlying put options written by
the Fund may not exceed 50% of the Fund's total assets.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges) or will segregate cash and/or liquid,
high-grade short-term debt obligations equal to the value of the securities to
be delivered if the option were exercised. In the case of put options, the Fund
will segregate cash and/or liquid, high-grade short-term debt obligations equal
to the price to be paid if the option is exercised. In addition, the Fund will
be considered to have covered a put or call option if and to the extent that it
holds an option that offsets some or all of the risk of the option it has
written. For more information about cover and segregation requirements, see
"Regulatory Requirements" below. The Fund may write combinations of covered puts
and calls on the same underlying security. See "Spread and Straddle
Transactions" below.
The Fund will receive a premium from writing a put or call option, which
increases the Fund's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium reflects, among other things,
the relationship between the exercise price and the current market value of
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the underlying security, the volatility of the underlying security, the amount
of time remaining until expiration, current interest rates, and the effect of
supply and demand in the options market and in the market for the underlying
security. By writing a call option, the Fund, to the extent it owns the
underlying security, limits its opportunity to profit from any increase in the
market value of the underlying security above the exercise price of the option
but continues to bear the risk of a decline in the value of the underlying
security. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price higher than
its then-current market value, resulting in a potential capital loss unless the
security subsequently appreciates in value.
The Fund may terminate an option that it has written prior to the expiration
by entering into a closing purchase transaction in which it purchases an
offsetting option. The Fund realizes a profit or loss from a closing transaction
if the cost of the transaction (option premium plus transaction costs) is less
or more than the premium received from writing the option. Because increases in
the market price of a call option generally reflect increases in the market
price of the security underlying the option, any loss resulting from a closing
purchase transaction may be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
In connection with certain options that the Fund may write, the Fund may be
required to deposit cash or securities as "margin," or collateral for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Fund may have to deposit additional margin.
Margin requirements are complex and are fixed by individual brokers, subject to
minimum requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing Put Options. The Fund may purchase put options to protect its
portfolio holdings in an underlying security against a decline in market value.
Such protection is provided during the life of the put option since the Fund, as
holder of the option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market price of the
underlying security must decline sufficiently below the exercise price to cover
the premium and transaction costs. By using put options in this manner, the Fund
will reduce any profit it might otherwise have realized from appreciation of the
underlying security by the premium paid for the put option and by transaction
costs. There is no limit on the amount of the Fund's assets that can be used to
purchase put options.
Purchasing Call Options. The Fund may purchase call options to hedge against
an increase in the price of securities that the Fund wants ultimately to buy.
Such hedge protection is provided during the life of the call option since the
Fund, as holder of the call option, is able to buy the underlying security at
the exercise price regardless of any increase in the underlying security's
market price. In order for a call option to be profitable, the market price of
the underlying security must rise sufficiently above the exercise price to cover
the premium and transaction costs. There is no limit on the amount of the Fund's
assets that can be used to purchase call options.
Spread and Straddle Transactions. In addition to the options strategies
described above, the Fund may engage in "spread" transactions in which it
purchases and writes a put or call option on the same
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underlying security, with the options having different exercise prices and/or
expiration dates. The Fund may also engage in so-called "straddles," in which it
purchases or sells combinations of put and call options on the same security.
When it engages in spread and straddle transactions, the Fund seeks to profit
from differentials in the option premiums paid and received by it and in the
market prices of the related options positions when they are closed out or sold.
Spread and straddle transactions require the Fund to purchase and/or write more
than one option simultaneously. Accordingly, the Fund's ability to enter into
such transactions and to liquidate its positions when necessary or deemed
advisable may be more limited than if the Fund were to purchase or sell a single
option. Similarly, costs incurred by the Fund in connection with these
transactions will in many cases be greater than if the Fund were to purchase or
sell a single option.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Adviser to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Adviser's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When it purchases an option, the Fund runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the Fund
will lose part or all of its investment in the option. This contrasts with an
investment by the Fund in the underlying security, since the Fund will not lose
any of its investment in such security if the price does not change.
The effective use of options also depends on the Fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. There is
no assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, the
Fund could no longer engage in closing transactions. Lack of investor interest
might adversely affect the liquidity of the market for particular options or
series of options. A market may discontinue trading of a particular option or
options generally. In addition, a market could become temporarily unavailable if
unusual events -- such as volume in excess of trading or clearing capability --
were to interrupt its normal operations.
A market may at times find it necessary to impose restrictions on particular
types of options transactions, such as opening transactions. For example, if an
underlying security ceases to meet qualifications imposed by the market or the
Options Clearing Corporation, new series of options on that security will no
longer be opened to replace expiring series, and opening transactions in
existing series may
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be prohibited. If an options market were to become unavailable, the Fund as a
holder of an option would be able to realize profits or limit losses only by
exercising the option, and the Fund, as option writer, would remain obligated
under the option until expiration or exercise.
Disruptions in the markets for the securities underlying options purchased
or sold by the Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with considerable losses if trading in the security reopens
at a substantially different price. In addition, the Options Clearing
Corporation or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If the
Options Clearing Corporation were to determine that the available supply of an
underlying security appears insufficient to permit delivery by the writers of
all outstanding calls in the event of exercise, it may prohibit indefinitely the
exercise of put options. The Fund, as holder of such a put option, could, under
certain circumstances, lose its entire investment.
Special risks are presented by internationally-traded options. Because of
time differences between the United States and the various foreign countries,
and because different holidays are observed in different countries, foreign
options markets may be open for trading during hours or on days when U.S.
markets are closed. As a result, option premiums may not reflect the current
prices of the underlying interest in the United States.
FUTURES CONTRACTS AND RELATED OPTIONS
A financial futures contract sale creates an obligation by the seller to
deliver the type of financial instrument called for in the contract in a
specified delivery month for a stated price. A futures contract purchase creates
an obligation by the purchaser to take delivery of the type of financial
instrument called for in the contract in a specified delivery month at a stated
price. The specific instruments delivered or taken, respectively, at settlement
date are not determined until on or near that date. The determination is made in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made. Futures contracts are traded in the United States only on
commodity exchanges or boards of trade -- known as "contract markets" --
approved for such trading by the Commodity Futures Trading Commission (the
"CFTC"), and must be executed through a futures commission merchant or brokerage
firm which is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of commodities or securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out a futures contract sale is effected by purchasing a futures contract for the
same aggregate amount of the specific type of financial instrument or commodity
with the same delivery date. If the price of the initial sale of the futures
contract exceeds the price of the offsetting purchase, the seller is paid the
difference and realizes a gain. Conversely, if the price of the offsetting
purchase exceeds the price of the initial sale, the seller realizes a loss.
Similarly, the closing out of a futures contract
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purchase is effected by the purchaser's entering into a futures contract sale.
If the offsetting sale price exceeds the purchase price, the purchaser realizes
a gain, and if the purchase price exceeds the offsetting sale price, he realizes
a loss.
Unlike when the Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract. Upon
entering into a contract, the Fund is required to deposit with its custodian in
a segregated account in the name of the futures broker an amount of cash and/or
U.S. Government securities. This amount is known as "initial margin." The nature
of initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds to finance the transactions. Rather, initial margin is
similar to a performance bond or good faith deposit which is returned to the
Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied. Futures contracts also involve brokerage costs.
Subsequent payments, called "variation margin," to and from the broker (or
the custodian) are made on a daily basis as the price of the underlying security
or commodity fluctuates, making the long and short positions in the futures
contract more or less valuable, a process know as "marking to the market." For
example, when the Fund has purchased a futures contract on a security and the
price of the underlying security has risen, that position will have increased in
value and the Fund will receive from the broker a variation margin payment based
on that increase in value. Conversely, when the Fund has purchased a futures
contract on a security and the price of the underlying security has declined,
the position would be less valuable and the Fund would be required to make a
variation margin payment to the broker.
The Fund may elect to close some or all of its futures positions at any time
prior to their expiration in order to reduce or eliminate a position then
currently held by the Fund. The Fund may close its position by taking opposite
positions which will operate to terminate the Fund's position in the futures
contracts. Final determinations of variation margin are then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a
loss or a gain. Such closing transactions involve additional commission costs.
Options On Futures Contracts. The Fund may purchase and write call and put
options on futures contracts it may buy or sell and enter into closing
transactions with respect to such options to terminate existing positions. A put
option on a futures contract gives the Fund the right to assume a short position
in the futures contract until expiration of the option. A call option on a
futures contract gives the Fund the right to assume a long position in the
futures contract until the expiration of the option. The Fund may use options on
futures contracts in lieu of writing or buying options directly on the
underlying securities or purchasing and selling the underlying futures
contracts. For example, to hedge against a possible decrease in the value of its
portfolio securities, the Fund may purchase put options or write call options on
futures contracts rather than selling futures contracts. Similarly, the Fund may
purchase call options or write put options on futures contracts as a substitute
for the purchase of futures contracts to hedge against a possible increase in
the price of securities which the Fund expects to purchase. Such options
generally operate in the same manner as options purchased or written directly on
the underlying investments.
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As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
The Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements similar to those described above.
Risks of Transactions In Futures Contracts and Related Options. Certain
risks arise because of the possibility of imperfect correlation between
movements in the prices of futures contracts and options and movements in the
prices of the underlying stock index, currency or security or of the securities
or currencies that are the subject of the hedge. Successful use of futures
contracts by the Fund is subject to the Adviser's ability to predict movements
in the direction of interest rates and other factors affecting securities and
currency markets. For example, if the Fund has hedged against the possibility of
decline in the values of its investments and the values of its investments
increase instead, the Fund will lose part or all of the benefit of the increase
through payments of daily maintenance margin. The Fund may have to sell
investments at a time when it may be disadvantageous to do so in order to meet
margin requirements.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain market clearing facilities
inadequate, and thereby result in the institution by exchanges of special
procedures which may interfere with the timely execution of customer orders.
To reduce or eliminate a position held by the Fund, the Fund may seek to
close out a position. The ability to establish and close out positions will be
subject to the development and maintenance of a liquid secondary market. It is
not certain that this market will develop or continue to exist for a particular
futures contract or option. Reasons for the absence of a liquid secondary market
on an exchange include the following: (i) there may be insufficient trading
interest in certain contracts or options; (ii) restrictions may be imposed by an
exchange on opening transactions or closing transactions, or both; (iii) trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of contracts or options, or underlying securities;
(iv) unusual or unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing corporation may not at
all times be adequate to handle current trading volume; or (vi) one or more
exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of contracts or options (or a particular
class or series of contracts or options), in which event the secondary market on
that exchange for such contracts or options (or in the class or series of
contracts or options) would cease to exist, although
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outstanding contracts or options on the exchange that had been issued by a
clearing corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
U.S. Treasury Security Futures Contracts and Options. The Fund may purchase
and sell futures contracts and related options on U.S. Treasury securities when,
in the opinion of the Adviser, price movements in Treasury security futures and
related options will correlate closely with price movements in the securities
which are the subject of the hedge. U.S. Treasury security futures contracts
require the seller to deliver, or the purchaser to take delivery of, the type of
U.S. Treasury security called for in the contract at a specified date and price.
Options on U.S. Treasury security futures contracts give the purchaser the right
in return for the premium paid to assume a position in a U.S. Treasury security
futures contract at the specified option exercise price at any time during the
period of the option.
Successful use of U.S. Treasury security futures contracts by the Fund is
subject to the Adviser's ability to predict movements in the direction of
interest rates and other factors affecting markets for debt securities. For
example, if the Fund has sold U.S. Treasury security futures contracts in order
to hedge against the possibility of an increase in interest rates which would
adversely affect securities held in its portfolio, and the prices of the Fund's
securities increase instead as a result of a decline in interest rates, the Fund
will lose part or all of the benefit of the increased value of its securities
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily maintenance margin requirements at
a time when it may be disadvantageous to do so.
There is also a risk that price movements in U.S. Treasury security futures
contracts and related options will not correlate closely with price movements in
markets for the securities that are the subject of the hedge. For example, if
the Fund has hedged against a decline in the values of securities held by it by
selling Treasury security futures and the values of Treasury securities
subsequently increase while the values of its securities decrease, the Fund
would incur losses on both the Treasury security futures contracts written by it
and the securities held in its portfolio.
Index Futures Contracts. An index futures contract is a contract to buy or
sell units of an index at a specified future date at a price agreed upon when
the contract is made. Entering into a contract to buy units of an index is
commonly referred to as buying or purchasing a contract or holding a long
position in the index. Entering into a contract to sell units of an index is
commonly referred to as selling a contract or holding a short position. A unit
is the current value of the index. The Fund may enter into stock index futures
contracts, debt index futures contracts, or other index futures contracts
appropriate to its objectives.
The Fund may also purchase and sell options on index futures contracts.
For example, the Standard & Poor's Composite 500 Stock Price Index ("S&P
500") is composed of 500 selected common stocks, most of which are listed on the
New York Stock Exchange. The S&P 500 assigns relative weightings to the common
stocks included in the Index, and the value fluctuates with changes in the
market values of those common stocks. In the case of the S&P 500, contracts are
to buy or sell 500 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $75,000 (500 units x $150). The stock index futures
contract specifies that no delivery of the actual stocks making up
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the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Fund enters into a futures contract to buy 500
units of the S&P 500 at a specified future date at a contract price of $150 and
the S&P 500 is at $154 on that future date, the Fund will gain $2,000 (500 units
x gain of $4). If the Fund enters into a futures contract to sell 500 units of
the stock index at a specified future date at a contract price of $150 and the
S&P 500 is at $152 on that future date, the Fund will lose $1,000 (500 units x
loss of $2).
There are several risks in connection with the use by the Fund of index
futures. One risk arises because of the imperfect correlation between movements
in the prices of the index futures and movements in the prices of securities
which are the subject of the hedge.
Successful use of index futures by the Fund is also subject to the Adviser's
ability to predict movements in the direction of the market. For example, it is
possible that, where the Fund has sold futures to hedge its portfolio against a
decline in the market, the index on which the futures are written may advance
and the value of securities held in the Fund's portfolio may decline. If this
occurred, the Fund would lose money on the futures and also experience a decline
in value in its portfolio securities. It is also possible that, if the Fund has
hedged against the possibility of a decline in the market adversely affecting
securities held in its portfolio and securities prices increase instead, the
Fund will lose part or all of the benefit of the increased value of those
securities it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements at a
time when it is disadvantageous to do so.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the index futures and the portion
of the portfolio being hedged, the prices of index futures may not correlate
perfectly with movements in the underlying index due to certain market
distortions. Due to the possibility of imperfect correlation between movements
in the index and movements in the prices of index futures, even a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
Options on Stock Index Futures. Options on index futures are similar to
options on securities except that options on index futures give the purchaser
the right, in return for the premium paid, to assume a position in an index
futures contract (a long position if the option is a call and a short position
if the option is a put), at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
index futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the index
future. If an option is exercised on the last trading day prior to its
expiration date, the settlement will be made entirely in cash equal to the
difference between the exercise price of the option and the closing level of the
index on which the future is based on the expiration date. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss of
the premium paid.
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OPTIONS ON INDICES
As an alternative to purchasing and selling call and put options on index
futures, the Fund may purchase and sell call and put options on the underlying
indices themselves. Such options would be used in a manner identical to the use
of options on index futures.
FOREIGN CURRENCY TRANSACTIONS
The Fund may engage in currency exchange transactions to protect against
uncertainty in the level of future currency exchange rates. In addition, the
Fund may write covered call and put options on foreign currencies for the
purpose of increasing its current return.
Generally, the Fund may engage in both "transaction hedging" and "position
hedging." When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables,
generally arising in connection with the purchase or sale of portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging the Fund will attempt to protect itself against
a possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The Fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. The Fund may also
enter into contracts to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts.
For transaction hedging purposes the Fund may also purchase exchange-listed
and over-the-counter call and put options on foreign currency futures contracts
and on foreign currencies. A put option on a futures contract gives the Fund the
right to assume a short position in the futures contract until expiration of the
option. A put option on currency gives the Fund the right to sell a currency at
an exercise price until the expiration of the option. A call option on a futures
contract gives the Fund the right to assume a long position in the futures
contract until the expiration of the option. A call option on currency gives the
Fund the right to purchase a currency at the exercise price until the expiration
of the option.
When it engages in position hedging, the Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the Fund expects to purchase, when
the Fund holds cash or short-term investments). In connection with position
hedging, the Fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy and sell forward contracts and
foreign currency futures contracts. The Fund may also purchase or sell foreign
currency on a spot basis.
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It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and a decision is made to
sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
The Fund may seek to increase its current return or to offset some of the
costs of hedging against fluctuations in current exchange rates by writing
covered call options and covered put options on foreign currencies. The Fund
receives a premium from writing a call or put option, which increases the Fund's
current return if the option expires unexercised or is closed out at a net
profit. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written.
The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. In
addition to the other risks described above, these cross hedging transactions by
the Fund involve the risk of imperfect correlation between changes in the values
of the currencies to which such transactions relate and changes in the value of
the currency or other asset or liability which is the subject of the hedge.
Currency forward and futures contracts. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed by
the parties, at a price set at the time of the contract. In the case of a
cancellable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. The contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the
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date of the contract agreed upon by the parties, rather than a predetermined
date in a given month. Forward contracts may be in any amounts agreed upon by
the parties rather than predetermined amounts. Also, forward foreign exchange
contracts are traded directly between currency traders so that no intermediary
is required. A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either accept
or make delivery of the currency specified in the contract, or at or prior to
maturity enter into a closing transaction involving the purchase or sale of an
offsetting contract. Closing transactions with respect to forward contracts are
usually effected with the currency trader who is a party to the original forward
contract. Closing transactions with respect to futures contracts are effected on
a commodities exchange; a clearing corporation associated with the exchange
assumes responsibility for closing out such contracts.
Positions in the foreign currency futures contracts may be closed out only
on an exchange or board of trade which provides a secondary market in such
contracts. Although the Fund intends to purchase or sell foreign currency
futures contracts only on exchanges or boards of trade where there appears to be
an active secondary market, there is no assurance that a secondary market on an
exchange or board of trade will exist for any particular contract or at any
particular time. In such event, it may not be possible to close a futures
position and, in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. Foreign currency
futures contracts share many of the same risks described above with respect to
other futures contracts.
Foreign currency options. In general, options on foreign currencies operate
similarly to options on securities and are subject to many similar risks.
Foreign currency options are traded primarily in the over-the-counter market,
although options on foreign currencies have recently been listed on several
exchanges. Options are traded not only on the currencies of individual nations,
but also on the European Currency Unit ("ECU"). The ECU is composed of amounts
of a number of currencies, and is the official medium of exchange of the
European Community's European Monetary System.
The Fund will only purchase or write foreign currency options when the
Adviser believes that a liquid secondary market exists for such options. There
can be no assurance that a liquid secondary market will exist for a particular
option at any specific time. Options on foreign currencies are affected by all
of those factors which influence foreign exchange rates and investments
generally.
The value of any currency, including U.S. dollars and foreign currencies,
may be affected by complex political and economic factors applicable to the
issuing country. In addition, the exchange rates of foreign currencies (and
therefore the values of foreign currency options) may be significantly affected,
fixed, or supported directly or indirectly by U.S. and foreign governmental
actions. Government intervention may increase risks involved in purchasing or
selling foreign currency options, since exchange rates may not be free to
fluctuate in response to other market forces.
The value of a foreign currency option reflects the value of an exchange
rate, which in turn reflects the relative values of the relevant currencies.
Because foreign currency transactions occurring in the interbank market involve
substantially larger amounts than those that may be involved in the exercise of
foreign
-29-
<PAGE>
currency options, investors may be disadvantaged by having to deal in an odd-lot
market for the underlying foreign currencies in connection with options at
prices that are less favorable than for round-lots. Foreign governmental
restrictions or taxes could result in adverse changes in the cost of acquiring
or disposing of foreign currencies.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
round-lot transactions in the interbank market and thus may not reflect exchange
rates for smaller odd-lot transactions (less than $1 million) where rates may be
less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that options markets are closed while the
markets for the underlying currencies remain open, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets.
Settlement procedures. Settlement procedures relating to the Fund's
investments in foreign securities and to the Fund's foreign currency exchange
transactions may be more complex than settlements with respect to investments in
debt or equity securities of U.S. issuers, and may involve certain risks not
present in the Fund's domestic investments. For example, settlement of trades of
foreign securities or of foreign currency option exercises may occur within a
foreign country, and the Fund may be required to accept or make delivery of the
underlying securities or foreign currency in conformity with any applicable U.S.
or foreign restrictions or regulations, and may be required to pay any fees,
taxes or charges associated with such delivery. Such investments may also
involve the risk that an entity involved in the settlement may not meet its
obligations.
Foreign currency conversion. Although foreign exchange dealers do not charge
a fee for currency conversion, they do realize a profit based on the difference
(the "spread") between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
OVER-THE-COUNTER OPTIONS
Certain options are traded "over-the-counter" ("OTC") rather than on an
exchange. This means that the Fund will enter into such option contracts with
particular securities dealers who make markets in these options. The Fund's
ability to terminate option positions in the OTC market will be more limited
than for exchange-traded options and may also involve the risk that securities
dealers participating in such transactions would fail to meet their obligations
to the Fund. To the extent required by applicable pronouncements by the Staff of
the Division of Investment Management of the Securities and Exchange Commission,
the Fund may treat OTC options purchased by the Fund and assets held to cover
OTC options written by the Fund as illiquid securities.
-30-
<PAGE>
REGULATORY REQUIREMENTS
Current regulatory requirements impose limitations on how the Fund may
engage in options, futures and forward transactions. To the extent necessary,
the Fund will comply with these regulations when engaging in options, futures
and forward transactions (including options on securities, securities indices
and currencies). In general, these regulations require that the Fund either
"cover" its position or place cash or certain liquid, high grade, short-term
debt obligations in a segregated account in an amount equal to the Fund's
obligation. The methods of cover and the types of securities required to be
segregated may vary depending on the type of financial instrument and the
particular transaction.
FUTURE DEVELOPMENTS
The Fund may take advantage of hedging opportunities and other derivative
strategies which are not presently contemplated for use by the Fund or which are
not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund's investment objectives and
legally permissible for the Fund. Such opportunities, if they arise, may involve
risks which exceed those involved in the activities described above.
-31-
<PAGE>
APPENDIX B - DESCRIPTION OF DEBT RATINGS
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interests and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
-32-
<PAGE>
C - Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Standard & Poor's describes classifications of corporate bonds as follows:
AAA - Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B' rating category is
-33-
<PAGE>
also
used for debt subordinated to senior debt that is assigned an actual or implied
'BB' or 'BB-' rating.
CCC - Debt rated 'CCC' has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The 'CCC' rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied 'B' or 'B-' rating.
CC - The rating 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C - The rating 'C' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC-' rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI - The rating 'CI' is reserved for income bonds on which no interest is
being paid.
D - Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date due, even
if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
PLUS (+) or MINUS (-) Ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
-34-
<PAGE>
THE BAUPOST FUND
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
ADVISER, TRANSFER AND DIVIDEND PAYING
AGENT AND ADMINISTRATOR
The Baupost Group, Inc.
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
CUSTODIAN
Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
New York, NY 10081
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
PROSPECTUS
February 29, 1996
-35-
<PAGE>
THE BAUPOST FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 29, 1996
This Statement of Additional Information contains information which may
be useful to investors but which is not included in the Prospectus of The
Baupost Fund (the "Fund"). This Statement is not a Prospectus and is only
authorized for distribution when accompanied or preceded by the Prospectus of
the Fund dated February 29, 1996. The Statement should be read together with the
Prospectus. Copies of the Prospectus can be obtained without charge by calling
the Fund at (617) 497-6680 or by writing to the Fund, c/o The Baupost Group,
Inc., 44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
TABLE OF CONTENTS
Page
INVESTMENT RESTRICTIONS......................................................B-2
TAX STATUS...................................................................B-4
MANAGEMENT OF THE FUND.......................................................B-5
OWNERSHIP OF FUND SHARES.....................................................B-8
INVESTMENT ADVISORY AND OTHER SERVICES.......................................B-8
PORTFOLIO TRANSACTIONS......................................................B-10
SHAREHOLDER VOTING RIGHTS...................................................B-11
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS ...........................B-12
DETERMINATION OF NET ASSET VALUE ...........................................B-12
STANDARD PERFORMANCE MEASURES...............................................B-12
EXPERTS.....................................................................B-13
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS.....................B-14
<PAGE>
INVESTMENT RESTRICTIONS
As fundamental investment restrictions which may not be changed without
a vote of a majority of the outstanding voting securities of the Fund, the Fund
may not and will not:
(1) Borrow money in excess of 10% of the value (taken at the lower
of cost or current value) of its total assets (not including
the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any investments are
purchased.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets
in excess of 15% of its total assets (taken at current value)
in connection with borrowings permitted by restriction 1
above.
(3) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
(4) Purchase or sell real estate, although it may purchase
securities or limited partnership interests which are secured
by or represent interests in real estate or issued by
companies or limited partnerships which invest in real estate
or interests therein, and it may acquire and dispose of real
estate or interests in real estate acquired in order to
protect its investment in such securities or limited
partnership interests. (For the purposes of this restriction,
investments by the Fund in securities that are not readily
marketable of companies whose assets consist substantially of
real property and interests therein, including mortgages and
other liens, do not constitute an investment in real estate or
in interests in real estate.)
(5) Purchase or sell commodities unless acquired as a result of
ownership of securities or other instruments, except that the
Fund may buy or sell futures contracts and related options,
forward contracts, options on commodities, securities or other
instruments backed by commodities and options on foreign
currencies.
(6) Make loans, except (i) by purchase of debt obligations in
which the Fund may invest consistent with its investment
policies or (ii) by entering into repurchase agreements with
respect to not more than 25% of its total assets (taken at
current value).
(7) Invest 25% or more of the value of its total assets in any one
industry. (U.S. Government Securities, including securities
issued by agencies or instrumentalities of the U.S.
Government, and securities backed by the credit of a U.S.
governmental entity will not be considered to represent an
industry.)
B-2
<PAGE>
(8) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts or any interest in oil, gas or other mineral
exploration or development programs, although it may purchase
securities which are secured by or represent interests in, or
issued by companies which invest in, oil, gas or other mineral
leases, rights or royalty contracts.
(9) Issue senior securities, except as appropriate to evidence
indebtedness that the Fund is permitted to incur consistent
with restriction 1 above .
It is contrary to the Fund's present policy, which may be changed by the
Trustees without shareholder approval, to:
(1) Invest in (a) securities which at the time of such investment
are not readily marketable and (b) repurchase agreements
maturing in more than seven days, if, as a result, more than
15% of the Fund's net assets (taken at current value) would
then be invested in the aggregate in securities described in
(a) and (b) above.
(2) Purchase securities on margin, except that the Fund may obtain
short-term credits as may be necessary for the clearance of
purchases and sales of securities, and except that it may make
margin payments in connection with financial futures contracts
or options.
(3) Invest more than 5% (taken at the lower of cost or market
value) of its net assets in warrants (provided that of this
5%, no more than 2% may be warrants not listed on the New York
Stock Exchange or the American Stock Exchange). For purposes
of this restriction, warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase are
deemed to be without value.
(4) Purchase or sell interests in limited partnerships that have
as their primary business purpose the development or
management of real estate.
--------------------
For the purposes of fundamental investment restriction 7 concerning
investments in any one industry, the Fund will consider all relevant factors in
determining who is the issuer of a loan participation. These factors will
include the credit quality of the borrower, the amount and quality of the
collateral, the terms of the loan agreement and other relevant agreements
(including inter-creditor agreements), the degree to which the credit of any
person interpositioned between the Fund and the borrower was deemed material to
the decision to purchase the participation interest, the interest rate
environment, and general economic conditions applicable to the borrower and such
interpositioned person.
For the purposes of certain diversification criteria imposed by federal
tax laws, the Fund will consider the borrower to be the issuer of a loan
participation. In addition, with respect to loan participations under which the
Fund does not have privity of contract with the borrower or would not have a
direct cause of action against the
B-3
<PAGE>
borrower in the event of its failure to pay scheduled principal or interest, the
Fund will also consider each person interpositioned between the Fund and the
borrower to be an issuer of a loan participation.
Except as otherwise noted, all percentage limitations on investments
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The Investment Company Act of 1940 (the "1940 Act") provides that a
"vote of a majority of the outstanding voting securities" means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or
(2) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
TAX STATUS
The tax status of the Fund and the distributions which it may make are
summarized in the Prospectus under the headings "Taxes" and "Distributions." The
Fund intends to qualify each year as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). In order to qualify as a
regulated investment company which is eligible for special federal income tax
treatment, the Fund must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income from the sale or the other disposition of securities and
certain other assets held less than three months; (c) diversify its holdings so
that, at the close of each quarter of its taxable year, (i) at least 50% of the
value of its total assets consists of cash, cash items, U.S. government
securities, securities of other regulated investment companies, and other
securities limited generally with respect to any one issuer to a value not
greater than 5% of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any issuer (other than U.S.
government securities or securities of other regulated investment companies);
and (d) distribute in or with respect to each taxable year at least 90% of its
dividend, interest and certain other income (including, in general, net
short-term capital gains) for such year. To the extent the Fund qualifies as a
regulated investment company which is eligible for special federal income tax
treatment, the Fund will not be subject to federal income tax on income paid to
its shareholders in the form of dividends or capital gain distributions.
In order to eliminate an excise tax liability imposed on certain
undistributed income, the Fund must distribute prior to each calendar year end
an amount equal to the sum of: (i) 98% of the Fund's capital gain net income, if
any, realized in the one-year period ending on October 31 of such year, (ii) 98%
of the Fund's ordinary income realized in such calendar year and (iii) any
undistributed income from the prior year. The Fund will be treated as having
distributed on December 31 of a given year any dividend of ordinary income or
capital gain net income that is declared and payable to shareholders of record
on a date in October, November or December of such year and paid on or before
January 31 of the next year. The Fund intends to make distributions which are
necessary to eliminate such excise tax liability.
B-4
<PAGE>
Foreign currency exchange gain and loss arising from the Fund's
transactions in foreign currencies, foreign currency-denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts will generally be treated for federal income tax purposes as ordinary
income or loss.
The Fund's transactions, including hedging transactions, in options,
futures contracts, forward contracts, short sales, spreads, straddles and
foreign currencies will be subject to special tax rules (including
mark-to-market, straddle, wash sale and short sale rules), the effect of which
may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities and convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. See "Appendix A - Options, Futures and Foreign Currency Exchange
Transactions" in the Prospectus.
Certain of the Fund's hedging activities, including its transactions in
foreign currencies or foreign currency-denominated instruments, are likely to
produce a difference between its book income and its taxable income. This
difference may require the Fund to make distributions exceeding book income in
order to qualify as a regulated investment company, or cause the Fund's
distributions to exceed the Fund's taxable income. Distributions in excess of
the Fund's earnings and profits will be treated as a non-taxable return of
capital to the extent of the shareholder's tax basis in his shares and
thereafter as capital gain.
Due to the requirement that less than 30% of the Fund's gross income be
derived from gains from the sale of securities and certain other assets
(including options, futures contracts and forward contracts) held or deemed held
under Code rules for less than three months, the Fund will be restricted in its
ability to conduct certain transactions, including, for example, selling
securities short, purchasing or writing options that expire in less than three
months, effecting closing transactions with respect to options purchased or sold
within the preceding three months, engaging in certain transactions in options
and futures contracts, and selling certain securities deliverable under such
options or futures contracts or treated as substantially identical to securities
deliverable under such options or futures contracts.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund and their principal occupations
during the past five years are as follows:
B-5
<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
- ----------------- -------- --------------------
<S> <C> <C>
Seth A. Klarman** Trustee and President The Baupost Group, Inc., President; Baupost
Partners, General Partner (investment adviser).
William J. Poorvu** Trustee, Vice Chairman, The Baupost Group, Inc., Chairman and Director
Clerk and Treasurer Massachusetts Financial Services Company Group
of Funds, Trustee/Director (mutual funds); CBL
Associates Properties, Inc., Director (a public Real
Estate Investment Trust); Harvard University,
Graduate School of Business Administration,
Adjunct Professor; Trammell Crow Real Estate
Investors, Trustee (real estate); Sonesta International
Corp., Director (hotels).
Howard H. Stevenson** Trustee and Chairman The Baupost Group, Inc., Vice Chairman and
Treasurer; Harvard University, Graduate School of
Business Administration, Professor, and from 1991-
1994, Senior Associate Dean and Director of
Financial and Information System; Camp,
Dresser & McKee, Director (engineering
consultants); Passamaquoddy Technologies,
Director (a technology firm); Landmark
Communications Inc., Director (communications);
Sheffield Steel Corp., Director (a steel
manufacturer); Preco Corporation, Director (a paper
manufacturer); Perini Investment Properties,
Director (real estate); African Communications
Group, Director (a communications group); Terry
Hinge & Hardware, Director (a manufacturer); Gulf
States Steel, Director (a steel manufacturer);Quadra
Capital Partners, Director (an investment advisory
marketing firm).
</TABLE>
* The mailing address of each of the officers and Trustees is c/o Baupost, 44
Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238 unless
otherwise indicated.
** Trustees who are "interested persons" (as defined in the 1940 Act) of the
Fund or the Fund's investment adviser, The Baupost Group, Inc. (the "Adviser").
B-6
<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
- ----------------- -------- --------------------
<S> <C> <C>
Samuel Plimpton Trustee Brattle Advisors, L.P., general partner (real estate
Brattle Advisors, L.P. counselors); Perry Dean Rogers and Partners,
44 Brattle Street Director (an architecture firm).
Suite 2
Cambridge, MA 02138
Robert W. Ackerman Trustee President and Chief Executive Officer
Sheffield Steel Corp. of Sheffield Steel Corp. (a steel
220 North Jefferson manufacturer); prior to that,
Sands Springs, OK 74063 President, Lincoln Pulp & Paper
Co., Inc. (a paper manufacturer); Director,
Putnam Nomura Dividend Income Fund; Gulf States
Steel, Director (a steel manufacturer).
David Auerbach Trustee Mr. Auerbach is a private investor.
607 Boylston Street
Boston, MA 02116
Jay Light Trustee Harvard University Graduate School of
Harvard University Graduate Business Administration, Dwight P.
School of Business Administration Robinson, Jr. Professor of Business
Soldiers Field Road Administration and Senior Associate Dean,
Boston, MA 02163 Director of Faculty Planning from 1988 to 1992;
United Asset Management Corporation,
Director (a holding company comprised of
investment management firms); Harvard
Management Company, Director (an
investment adviser to President and
Fellows of Harvard College); The Jeffrey
Company, Director (investments); College
Retirement Equity Fund, Trustee; The
Brigham and Women's Hospital, Trustee and
Chairman of the Investment Committee;
Partners Healthcare System, Chairman of
the Investment Committee.
David C. Abrams Vice President The Baupost Group, Inc., Vice President.
Paul C. Gannon Vice President The Baupost Group, Inc., Chief Financial and
Administrative Officer and Vice President.
</TABLE>
* The mailing address of each of the officers and Trustees is c/o Baupost, 44
Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238 unless
otherwise indicated.
B-7
<PAGE>
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
- ----------------- -------- --------------------
<S> <C> <C>
Jo-An B. Bosworth Assistant The Baupost Group, Inc.,
Clerk Vice President, Clerk and Secretary.
</TABLE>
*The mailing address of each of the officers and Trustees is c/o Baupost, 44
Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238 unless
otherwise indicated.
Except as noted below, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
Until April 15, 1991, Mr. Gannon was Group Financial Officer of the Real Estate
Division of The First National Bank of Boston.
The Fund pays the Trustees, other than Mr. Plimpton and those who are
interested persons of the Adviser, an annual fee of $6,000, in addition to a fee
of $500 for each meeting attended. During fiscal 1995, the Fund paid Trustees'
fees aggregating $24,500, of which $8,500 was paid to Mr. Ackerman, $7,500 was
paid to Mr. Auerbach and $8,500 was paid to Mr. Light. The Fund is the only
investment company advised by Baupost and has no pension or retirement plan for
its Trustees.
OWNERSHIP OF FUND SHARES
At February 1, 1996, the officers and Trustees of the Fund as a group
owned of record or beneficially 20.79% of the outstanding shares of the Fund,
and to the knowledge of the Fund no person owned of record or beneficially 5.0%
or more of the shares of the Fund, except Carol B. Auerbach, 900 Centennial
Road, Narberth, PA 19072 owned of record 1.48% of the shares of the Fund and
beneficially owned 6.39% of the shares of the Fund and William J. Poorvu, 975
Memorial Drive, #710, Cambridge, MA 02138 owned of record 0.71% of the shares of
the Fund and beneficially owned 11.27% of the shares of the Fund. Each of the
foregoing shareholders beneficially owns shares of the Fund individually and as
Trustee for various trusts. The foregoing shareholders may be Trustees for the
same trusts, in which case each person serving as Trustee of such trust is
deemed to be a beneficial owner of the shares.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACT
As disclosed in the Prospectus under the heading "Management of the
Fund," under an investment advisory contract (the "Management Contract") between
the Fund and the Adviser, subject to such policies as the
B-8
<PAGE>
Trustees of the Fund may determine, the Adviser will furnish continuously an
investment program for the Fund and will make investment decisions on behalf of
the Fund and place all orders for the purchase and sale of portfolio securities.
Subject to the control of the Trustees, the Adviser also manages, supervises and
conducts the other affairs and business of the Fund, furnishes office space and
equipment, and pays all salaries, fees and expenses of officers and Trustees of
the Fund who are affiliated with the Adviser. As indicated under "Portfolio
Transactions -- Brokerage and Research Services," the Fund's portfolio
transactions may be placed with broker-dealers that furnish the Adviser, at no
cost, certain research, statistical and quotation services of value to the
Adviser in advising the Fund or its other clients.
As disclosed in the Prospectus, the Adviser will reduce its management
fee by up to .75% to the extent that the Fund's total annual expenses (including
the management fee and the 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. In addition, the Adviser's compensation under
the Management Contract is subject to reduction to the extent that in any year
the expenses of the Fund exceed the limits on investment company expenses
imposed by any statute or regulatory authority of any jurisdiction in which
shares of the Fund are qualified for offer and sale. The term "expenses" is
defined in the statutes or regulations of such jurisdictions and, generally,
excludes brokerage commissions, taxes, interest and extraordinary expenses. The
most restrictive of such limitations as of the date of this Statement of
Additional Information is 2.5% of the first $30 million of average net assets,
2% of the next $70 million of average net assets and 1.5% of any excess over
$100 million.
The Management Contract provides that the Adviser shall not be subject
to any liability to the Fund or to any shareholder of the Fund in connection
with the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The Management Contract will continue in effect for a period of more
than two years from the date of its execution only so long as its continuance is
approved at least annually by (i) vote, cast in person at a meeting called for
that purpose, of a majority (or one, if there is only one) of those Trustees who
are not "interested persons" of the Adviser or the Fund, and by (ii) the
majority vote of either the full Board of Trustees or the vote of a majority of
the outstanding shares of the Fund. The Management Contract automatically
terminates on assignment, and may be terminated by either the Fund or the
Adviser upon not more than 60 days' but not less than 30 days' notice to the
other party.
For its 1993, 1994 and 1995 fiscal years, the Fund paid management fees
of $545,450, $838,925 and $853,905, respectively (reflecting reductions in 1993
and 1994 of $70,579 and $15,549, respectively, pursuant to an expense limitation
in effect during those periods).
TRANSFER AGENCY, DIVIDEND DISBURSING AND ADMINISTRATIVE ARRANGEMENTS
Baupost is the Fund's transfer and dividend disbursing agent and
administrator. Under a Transfer Agency and Administrative Services Agreement
between the Fund and Baupost, Baupost is paid a quarterly fee at the annual rate
of .25% of the Fund's average net assets. Under the agreement, Baupost acts as
the Fund's transfer and dividend disbursing agent and provides bookkeeping and
certain clerical services and will calculate the total net asset value, total
net income, and net asset value per share of the Fund. The agreement provides
that it shall
B-9
<PAGE>
continue indefinitely, but that it may be terminated by either party upon 60
days' notice. The agreement provides that Baupost will only be liable to the
Fund for loss or damage incurred by the Fund resulting from Baupost's lack of
good faith, negligence or willful misconduct and also provides that the Fund
will indemnify Baupost against, among other things, loss or damage incurred by
Baupost on account of any claim, demand, action or suit arising out of, or in
connection with, its duties under the agreement, provided that Baupost has acted
in good faith and without negligence or willful misconduct.
During its 1995 fiscal year, the Fund paid $213,476 to the Adviser
pursuant to the Transfer Agency and Administrative Services Agreement.
CUSTODIAN
Chase Manhattan Bank, N.A. ("Chase Manhattan"), One Chase Manhattan
Plaza, New York, New York 10081, is the Fund's custodian. As such, Chase
Manhattan holds in safekeeping certificated securities and cash belonging to the
Fund and, in such capacity, is the registered owner of securities in book-entry
form belonging to the Fund. Upon instruction, Chase Manhattan receives and
delivers cash and securities of the Fund in connection with Fund transactions
and collects all dividends and other distributions made with respect to Fund
portfolio securities. Chase Manhattan also maintains certain accounts and
records of the Fund. Chase Manhattan has also contracted with certain foreign
banks and depositories to hold portfolio securities outside of the United States
on behalf of the Fund. The contract provides that it shall continue
indefinitely, but that it may be terminated by either party upon 90 days'
notice.
PORTFOLIO TRANSACTIONS
Transactions on stock exchanges and other agency transactions involve
the payment of negotiated brokerage commissions. Such commissions vary among
different brokers. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid for such
securities usually includes an undisclosed dealer commission or mark-up. In
placing orders for the portfolio transactions of the Fund, the Adviser will seek
the best price and execution available, except to the extent it may be permitted
to pay higher brokerage commissions for brokerage and research services as
described below. The determination of what may constitute best price and
execution by a broker-dealer in effecting a securities transaction involves a
number of considerations, including, without limitation, the overall net
economic result to the Fund (involving price paid or received and any
commissions and other costs paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future and the financial strength and stability of
the broker. Because of such factors, a broker-dealer effecting a transaction may
be paid a commission higher than that charged by another broker-dealer.
Over-the-counter transactions often involve dealers acting for their own
account. It is the Adviser's policy to place over-the-counter market orders for
the Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Adviser does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Adviser may receive such services from brokers who handle the Fund's
portfolio transactions. Research services may include a wide variety of
analyses, reviews and reports on
B-10
<PAGE>
such matters as economic and political developments, industries, companies,
securities and portfolio strategy. The Adviser may use such research in
servicing other clients as well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), and subject to such policies as the Trustees of the
Fund may determine, the Adviser may pay an unaffiliated broker or dealer that
provides "brokerage and research services" (as defined in the 1934 Act) to the
Adviser an amount of commission for effecting a portfolio investment transaction
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction.
During its 1993, 1994 and 1995 fiscal years, the Fund paid brokerage
commissions aggregating $142,157, $304,386 and $314,636, respectively. In fiscal
1995, the Adviser, on behalf of the Fund, placed brokerage transactions with
brokers and dealers whose research, statistical and quotation services the
Adviser considered to be particularly useful to it and its affiliates having an
approximate aggregate dollar value of $1,014,643 (on which approximately $2,940
of commissions were paid). However, such transactions were placed with such
brokers and dealers without regard to the furnishing of such services.
SHAREHOLDER VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote in the election of
Trustees and on other matters submitted to the vote of shareholders.
Shareholders will vote by individual series on all matters except (i) when
required by the 1940 Act, shares shall be voted in the aggregate and not by
individual series and (ii) when the Trustees have determined that the matter
affects only the interests of one or more series, then only shareholders of such
series shall be entitled to vote thereon. Shareholders of one series shall not
be entitled to vote on matters exclusively affecting another series, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other series and the
approval of the investment advisory contracts of the other series.
There will normally be no meetings of shareholders for the purpose of
electing Trustees, except that in accordance with the 1940 Act (i) the Fund will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by shareholders
and (ii) if, as a result of a vacancy in the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the shareholders,
that vacancy may only be filled by a vote of the shareholders. The Fund will
also be required by law to hold shareholder meetings for the adoption of any
contract for which shareholder approval is required by the 1940 Act. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with the Fund's
Custodian or by a vote of the holders of two-thirds of the outstanding shares at
a meeting duly called for the purpose, which meeting shall be held upon the
written request of the holders of not less than 10% of the outstanding shares.
Upon written request by ten or more shareholders of record who have been such
for at least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
1% of the outstanding shares, whichever is less, stating that they wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Fund will provide a list of shareholders or disseminate appropriate materials
(at the expense of the requesting shareholders). Except as set forth above, the
Trustees shall continue to hold office and may appoint successor Trustees.
Voting rights are not cumulative.
B-11
<PAGE>
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Fund except (i)
to change the Fund's name or to cure technical problems in the Declaration of
Trust or (ii) to establish, designate or modify new and existing series or
classes of Fund shares or other provisions relating to Fund shares in response
to applicable laws or regulations.
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Fund
or the Trustees. The Declaration of Trust provides for indemnification out of
the property of the Fund for all loss and expense of any shareholder of the Fund
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which the disclaimer
is inoperative and the Fund would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The Declaration of Trust also provides for indemnification by the
Fund of the Trustees and the officers of the Fund against liabilities and
expenses reasonably incurred in connection with litigation in which they may be
involved because of their offices with the Fund, except if it is determined in
the manner specified in the Declaration of Trust that such indemnification would
relieve any officer or Trustee of any liability to the Fund or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
DETERMINATION OF NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund share
is determined as of the close of trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) once on each day which the Exchange is open
(other than a day on which no shares of the Fund were tendered for redemption
and no order to purchase shares was accepted by the Fund). The Fund expects that
the days, other than weekend days, that the New York Stock Exchange will not be
open are Independence Day, Labor Day, Thanksgiving Day, Christmas Day, New
Year's Day, Presidents' Day, Good Friday and Memorial Day.
STANDARD PERFORMANCE MEASURES
From time to time the Fund may include in its communications to current
or prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on the amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of the amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends and distributions. The
Fund does not have a sales load or other charges paid by all shareholders that
affect its calculation of total or average annual total return. Any quotation of
total return for any period when an expense limitation was in effect will be
greater than if the limitation had not been in effect.
B-12
<PAGE>
The Fund's average annual total return since the commencement of its
operations (December 14, 1990) through October 31, 1995 was 14.91%. The Fund's
total return for the one-year period ended October 31, 1995 was 7.91%.
EXPERTS
The statement of assets and liabilities of The Baupost Fund as of
October 31, 1995, including the schedule of investments, schedule of securities
sold short, and schedule of forward foreign currency contracts, the related
statement of operations for the year then ended and the related statement of
changes in net assets for each of the two years in the period then ended
appearing in this Statement of Additional Information, and the Financial
Highlights for each of the four years then ended and for the period from January
1, 1991 to October 31, 1991 appearing in the Prospectus and this Statement of
Additional Information, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
B-13
<PAGE>
Report of Independent Auditors
To the Trustees and Shareholders of
The Baupost Fund
We have audited the accompanying statement of assets and liabilities of The
Baupost Fund, including the schedule of investments, schedule of securities sold
short and schedule of forward foreign currency contracts, as of October 31,
1995, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the four years in the period then
ended and for the period from January 1, 1991 to October 31, 1991. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1995, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Baupost Fund at October 31, 1995, 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 four years in the
period then ended and for the period from January 1, 1991 to October 31, 1991 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
December 1, 1995
6
<PAGE>
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1995
ASSETS:
Investments in securities - at value $ 91,706,510
(Notes A and C) (cost $87,501,913)
Receivable for investments sold 1,271,235
Receivable for investments sold short 1,095,674
Unrealized appreciation on forward foreign
currency contracts sold 74,527
Accrued investment income 61,124
Liquidation payments receivable 1,034,411
Other assets 122,584
-------
Total Assets 95,366,065
LIABILITIES:
Payable for investments purchased 4,346,231
Payable to The Baupost Group, Inc. (Note B) 295,879
Payable for securities sold short 1,070,259
(Notes A and C) (proceeds $1,097,000)
Other payables and accrued expenses 214,317
-------
Total Liabilities 5,926,686
---------
NET ASSETS $ 89,439,379
================
COMPOSITION OF NET ASSETS:
Paid in capital $ 80,852,257
Distributions in excess of net investment
income (Note A) (30,449)
Accumulated undistributed net realized
gain on investments and foreign
currency transactions 4,311,706
Net unrealized appreciation on investments
and assets & liabilities in foreign currency 4,305,865
---------
Net Assets $ 89,439,379
================
NET ASSET VALUE:
Offering and redemption price per share
($89,439,379 / 6,640,905.969) $ 13.47
===============
See notes to financial statements.
7
<PAGE>
THE BAUPOST FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1995
INVESTMENT INCOME:
INCOME:
Interest $ 1,762,944
Dividends (net of foreign withholdings of
$13,769) 901,762
Other income 16,540
------
Total Investment Income 2,681,246
EXPENSES:
Investment management fee (Note B) 853,905
Administrative fee (Note B) 213,476
Legal fees 51,035
Custodian fees 39,455
Amortization of organization costs 36,192
Audit fees 35,000
Directors' fees 24,500
Registration and filing fees 18,736
Miscellaneous 40,860
------
Total Expenses 1,313,159
NET INVESTMENT INCOME 1,368,087
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain (loss) on:
Investments 4,008,576
Short sales 368,738
Foreign currency transactions (201,034)
--------
4,176,280
Change in unrealized appreciation on:
Investments 787,776
Short sales 217,904
Foreign currency transactions 74,527
------
1,080,207
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 5,256,487
---------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 6,624,574
==============
See notes to financial statements.
8
<PAGE>
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1995 OCTOBER 31, 1994
---------------- ----------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 1,368,087 $ 1,129,985
Net realized gain on investments and foreign
currency transactions 4,176,280 8,957,318
Change in unrealized appreciation of investments
and foreign currency transactions 1,080,207 (1,527,049)
--------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 6,624,574 8,560,254
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,430,985) (2,363,632)
In excess of net investment income (432,464) -
From net realized gain on investments (8,459,115) (7,387,771)
CAPITAL SHARE TRANSACTIONS (NOTE E) 11,350,535 7,599,783
---------- ---------
INCREASE IN NET ASSETS 7,652,545 6,408,634
NET ASSETS AT BEGINNING OF PERIOD 81,786,834 75,378,200
---------- ----------
NET ASSETS AT END OF PERIOD
(including distributions in excess of
net investment income of ($30,449)
and undistributed net investment
income of $62,898, respectively) $ 89,439,379 $ 81,786,834
============== =============
</TABLE>
See notes to financial statements.
9
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
COMMON STOCKS - 41.64%
FINANCIAL INSTITUTIONS - 9.42%
68,500 Allmerica Financial Corporation $ 1,721,062 *
100 Charter Bank S.B. 2,200
100 Commonwealth Federal Savings Bank 2,388
100 Fidelity Federal Savings Bank Florida 1,775
26,200 First Federal Bancorp (Minnesota) 353,700 *
100 First Federal Savings Bank of Colorado 3,775
120 First Federal Savings Bank of Siouxland 3,240
220 First Savings Bank of SLA/NJ 3,135
100 Harbor Federal Savings Bank 2,325
1,949 Mid-Central Financial Corporation 26,555
770 Mid-Coast Bancorp Inc. 12,705
99,000 Mississippi View Holding Company 1,138,500 *
1,300 Mutual Bancompany Inc. 22,100 *
167,500 QCF Bancorp Inc. 2,386,875 *
1,800 Shelby County Bancorp 27,000
59,900 Trenton Savings Bank FSB 771,212
550 Valley Federal Savings Bank 14,300
110 Wayne Savings and Loan Company 2,310
175,209 Wells Financial Corporation 1,927,299 *
---------
8,422,456
FOOD - 6.32%
397,000 Carr-Gottstein Foods Company 3,176,000 *
107,800 TLC Beatrice International Holdings 2,479,400 *
---------
5,655,400
ELECTRICAL EQUIPMENT - 5.59%
75,100 Emcor Group Inc. 610,188 *
39,500 Semi-Tech Global Co. - ADR 306,125
2,608,603 Semi-Tech Global Co. Ltd. 4,085,177
---------
5,001,490
TOBACCO - 4.63%
134,700 RJR Nabisco Holdings Corp. 4,142,025
</TABLE>
10
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
LESSORS OF REAL PROPERTY - 2.56%
832,159 MBO Properties, Inc. $ 2,288,437 *
HOUSEHOLD APPLIANCES - 2.29%
50,500 National Presto Industries, Inc. 2,045,250
MALT BEVERAGES - 2.13%
189,000 Kirin Brewery Co., Ltd. 1,907,968
CRUDE PETROLEUM - 1.60%
5,300 Basic Holdings Ltd. 490,594 +
34,100 Basic Petroleum International Ltd. 937,750 *
-------
1,428,344
LUMBER & OTHER CONSTRUCTION MATERIALS - 1.12%
115,000 Adam & Harvey Group PLC 999,919
MANUFACTURING - TOYS & DOLLS - 1.06%
4,803,700 Playmates Toys Holdings Ltd. 945,032
PHARMACEUTICALS - 0.86%
114,500 Therapeutic Discovery 772,875 *
MOTOR VECHICLE PARTS & ACCESSORIES - 0.78%
69,618 Pullman 696,180 *
REAL ESTATE INVESTMENT TRUSTS - 0.67%
33,000 Essex Property Trust, Inc. 602,250
</TABLE>
11
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
DEFENSE - 0.62%
69,500 ESCO Electronics Corp. $ 556,000 *
PUBLISHING - 0.58%
114,500 News International PLC Special Div. 515,888
MISCELLANEOUS - 1.41%
17,000 Asbestos Corporation Ltd. 99,513 *
12,875 Associated Group, Inc. Class A 222,094 *
15,475 Associated Group, Inc. Class B 266,944 *
1,300 Bau Holding AG 67,895
165,000 Partridge Fine Arts PLC 198,244
7,070 Prospect Group, Inc. 64,514 *
938,000 Regency Equities 18,291
10,000 RSI Holdings, Inc. 800 *
1,105 The Homestake Oil & Gas Company 99,450 +
1,579 The Homestake Royalty Corporation 221,060 +
-------
1,258,805
TOTAL COMMON STOCKS $ 37,238,319
==============
(Total Cost $35,203,035)
CORPORATE BONDS - 8.73%
4,392,200 Emcor Group Inc. Series C Notes
11.000% 12/15/01 $ 2,453,065
1,380,000 Envirotest Systems Senior Notes 9.125%
due 03/15/01 1,076,400
451,519 Guardian S&L 1990-4 0.000% due 06/25/20 266,397
1,205,000 Louise's Inc. Senior Notes 10.500%
due 11/18/98 301,250 +
4,500,000 Southland Corp. Senior Sub. 5.000%
due 12/15/03 3,706,875
---------
TOTAL CORPORATE BONDS $ 7,803,987
(Total Cost $8,186,829) ==============
</TABLE>
12
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
BONDS AND NOTES IN REORGANIZATION - 8.55%
$ 2,125,000 Eagle-Picher Industries Inc 9.500%
due 03/01/17 $ 743,750 *
1,260,000 El Paso del Norte Sec Lease OBL 9.950%
due 01/02/98 796,950 *
1,470,000 El Paso del Norte Sec Lease OBL 11.250%
due 01/02/14 929,775 *
8,000,000 El Paso Funding 10.750% due 04/01/13 5,060,000 *
45,000 Mansfield Ohio IDR Eagle-Picher 16,650 *
9.750% due 10/01/00
265,000 Port Development Corp. TX Eagle-Picher 98,050 *
9.750% due 10/01/20 ------
TOTAL BONDS AND NOTES IN REORGANIZATION $ 7,645,175
(Total Cost $6,964,075) ==============
CLOSED-END MUTUAL FUNDS - 6.16%
6,600 Fonciere Financiere et de Participation SA $ 236,612
2,400 Hungarian Investment Company 132,000 *
1,684,527 RIT Capital Partners PLC 5,139,728
---------
TOTAL CLOSED-END MUTUAL FUNDS $ 5,508,340
(Total Cost $4,365,103) ==============
COLLATERALIZED MORTGAGE OBLIGATIONS - 2.75%
2,629,376 RTC Series 1991-M2 Class A3 principal only
due 09/25/20 $ 1,840,563
67,702 RTC Series 1991-M2 Class X1 interest only
due 09/25/20 446,386
60,162 RTC Series 1991-M2 Class X2 interest only
due 09/25/20 58,059
87,256 RTC Series 1991-M2 Class X3 interest only
due 09/25/20 114,171
-------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 2,459,179
(Total Cost $2,432,023) ==============
PARTNERSHIPS - 2.50%
149,200 Falcon Cable Systems Co., L.P. $ 1,492,000
185,579 Russia Partners Company L.P. 185,579 +
556,736 Russia Partners Trust 556,736 +
-------
TOTAL PARTNERSHIPS $ 2,234,315
(Total Cost $1,985,131) ==============
</TABLE>
13
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
OPTIONS - 2.17%
400 Bear Stearns Basket 90.0 Puts expiring 08/16/96 $ 2,000 +
400 Bear Stearns Basket 90.0 Puts expiring 08/28/96 2,800 +
400 Bear Stearns Basket 90.0 Puts expiring 10/11/96 3,600 +
120 E.I. du Pont de Nemours 70 Calls expiring 01/97 45,000
50 Gold April 550 Calls expiring 04/07/97 900 +
50 Gold May 550 Calls expiring 05/12/97 1,400 +
170 Hills Stores Co. 18.15 Calls expiring 08/12/96 0 +
450 Philip Morris 50.00 Puts expiring 05/19/97 6,750 +
360 Philip Morris 50.00 Puts expiring 05/19/97 7,920 +
295 Philip Morris 50.00 Puts expiring 05/23/97 5,310 +
295 Philip Morris 50.00 Puts expiring 05/23/97 4,514 +
330 RJR Nabisco Holdings 25 Calls expiring 11/07/97 270,270 +
330 RJR Nabisco Holdings 25 Calls expiring 11/10/97 249,150 +
400 RJR Nabisco Holdings 25 Calls expiring 11/11/97 312,000 +
330 RJR Nabisco Holdings 25 Calls expiring 11/14/97 249,810 +
177 Russell 2000 Index 263.700 Puts expiring 10/28/96 119,263 +
109 Russell 2000 Index 267.000 Puts expiring 10/28/96 64,634 +
127 Russell 2000 Index 270.675 Puts expiring 10/18/96 99,060 +
122 Russell 2000 Index 277.560 Puts expiring 04/02/96 62,914 +
122 Russell 2000 Index 281.970 Puts expiring 09/23/96 126,575 +
128 S&P 500 Index 482.310 Puts expiring 06/14/96 35,200 +
120 S&P 500 Index 491.085 Puts expiring 07/01/96 39,000 +
119 S&P 500 Index 494.190 Puts expiring 06/27/96 41,650 +
116 S&P 500 Index 505.575 Puts expiring 01/17/97 99,416 +
106 S&P 500 Index 520.020 Puts expiring 10/11/96 90,100 +
------
TOTAL OPTIONS $ 1,939,236
(Total Cost $2,912,379) ==============
PURCHASED BANK DEBT & TRADE CLAIMS - 1.82%
$ 2,453,800 Maxwell Comm. Bank Debt - Baker Nye $ 222,242 *+
5,000,000 Maxwell Comm. Berlitz Obligations 450,000 *+
167,868 Maxwell Comm. Revolving Bank Debt - First Chicago 15,383 *+
943,496 Maxwell Comm. Revolving Bank Debt - Halcyon 86,743 *+
396,015 Maxwell Comm. Revolving Bank Debt - Halcyon II 36,289 *+
875,543 Maxwell Comm. Revolving Bank Debt - Lazard Freres 80,176 *+
264,059 Maxwell Comm. Revolving Bank Debt - Merrill Lynch 24,197 *+
823,981 Maxwell Comm. Revolving Bank Debt - San Paolo 75,725 *+
1,015,000 Maxwell Comm. Revolving Bank Debt - TCC Associates 93,243 *+
579,133 Maxwell Comm. Term Bank Debt - First Chicago 52,122 *+
1,678,704 Maxwell Comm. Term Bank Debt - Halcyon 151,083 *+
</TABLE>
14
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
426,846 Maxwell Comm. Term Bank Debt - Lazard Freres 38,416 *+
468,268 Maxwell Comm. Term Bank Debt - Merrill Lynch $ 42,144 *+
325,093 Maxwell Comm. Term Bank Debt - San Paolo 29,258 *+
1,806,951 Maxwell Comm. Term Bank Debt - TCC Associates 162,626 *+
1,750,000 Wheeling-Pittsburgh Nonrestricted Trade Claims 875 *+
---
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,623,722
(Total Cost $1,281,328) ==============
COMPANIES IN LIQUIDATION - 1.73%
5,682,800 Antonelli Liquidating Trust $ 120,760 *+
3,150 EHLCO Liquidating Trust 315 *+
$ 250,000 Lionel Corp. Subordinated Notes 2,500 *
12.375% due 08/01/96
$ 364,000 Lionel Corp. Subordinated Convertible Debentures 3,640 *
8.000% due 07/15/07
DEM 15,000,000 Maxwell Comm. Corp. PLC 6.000% due 06/15/93 959,079 *
CHF 5,500,000 Maxwell Comm. Corp. PLC 5.000% due 06/16/95 435,893 *
0 MBO Properties Inc. Liquidating Trust 0 *+
100,550 Timber Realization Liquidating Trust 27,149 *+
------
TOTAL COMPANIES IN LIQUIDATION $ 1,549,336
(Total Cost $464,755) ==============
WARRANTS AND RIGHTS - 0.21%
60,000 Five Arrows Chile Inv. Trust Warrants
Exp. 5/31/99 $ 40,200
473,000 Jardine Strategic Holdings Warrants
Exp. 5/02/98 125,345
1,000 Letchworth Indep Bancshares Warrants
Exp. 12/31/97 5,000
14 Louise's Inc. Warrants Exp. 11/18/98 0 +
1,089,430 Tomei International Holdings Ltd Rights 21,146
------
TOTAL WARRANTS AND RIGHTS $ 191,691
(Total Cost $197,468) ==============
</TABLE>
15
<PAGE>
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
TEMPORARY INVESTMENTS - 26.29%
U S GOVERNMENT OBLIGATIONS - 22.22%
$ 5,000,000 U S Treasury Bill due 02/01/96 $ 4,932,760
5,000,000 U S Treasury Bill due 11/02/95 5,000,000
10,000,000 U S Treasury Bill due 12/14/95 9,939,450 ~
---------
19,872,210
REPURCHASE AGREEMENT - 4.07%
3,641,000 Repurchase Agreement with Chase Manhattan Bank
dated 10/31/95; collateralized by U.S. Government
and/or Federal agency securities; rate 5.60%;
matures 11/01/95; repurchase amount $3,641,566 3,641,000
---------
TOTAL TEMPORARY INVESTMENTS $ 23,513,210
(Total Cost $23,509,787) ==============
TOTAL INVESTMENTS - 102.55% $ 91,706,510
(Total Cost of Investments $87,501,913) ==============
* Non-income producing security.
+ Restricted Securities - securities not registered under the Securities Act of 1933.
See Note D in the Notes to Financial Statements.
~ A portion of the $10,000,000 of U.S. Treasury Bills due 12/14/95
($5,300,000) is serving as collateral or is segregated for securities
sold short.
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.
</TABLE>
16
<PAGE>
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1995
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
CONTRACTS TO SELL
<S> <C> <C> <C> <C>
GBP 2,950,000 British Pound Sterling due 11/27/95 $ 4,667,254 $ (2,861)
(Receivable amount $4,664,393)
DEM 1,950,000 Deutschemark due 11/27/95 1,386,099 25,845
(Receivable amount $1,411,944)
FRF 1,400,000 French Franc due 11/27/95 286,524 (489)
(Receivable amount $286,035)
JPY 190,000,000 Japanese Yen due 11/13/95 1,863,900 44,209
(Receivable amount $1,908,109)
CHF 700,000 Swiss Franc due 11/27/95 617,344 7,823
------- -----
(Receivable amount $625,167)
Total Contracts to Sell $ 8,821,121 $ 74,527
(Receivable amount $8,895,648) ============= ===========
</TABLE>
See notes to financial statements.
17
<PAGE>
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1995
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C>
COMMON STOCK - 1.20%
5,975 Liberty Media Group Series A $ 147,134
18,300 News Corp. LTD Preferred Sponsor ADR 333,975
9,200 News Corp. LTD Sponsored ADR 182,850
23,900 Tele-Communications - Class A 406,300
-------
TOTAL SECURITIES SOLD SHORT $ 1,070,259
(Total Proceeds from Securities Sold ================
Short $1,097,000)
</TABLE>
The percentage shown for each investment category is the total value of that
category expressed as a percentage of total net assets of the Fund.
See notes to financial statements.
18
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
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 Fund is the
successor organization to Baupost Limited Partnership 1985 E-1 (the
Partnership).
The Fund had no operations from the date of organization, other than those
relating to organizational matters, until October 1, 1990, when shares of
beneficial interest were issued at value, to an individual who serves as a
Trustee and Vice-Chairman of the Fund. Limited operations ensued from October 1,
1990 until the exchange of Fund shares for Partnership net assets on December
31, 1990. Effective on December 31, 1990, all of the assets and liabilities of
the Partnership were transferred to the Fund in exchange for shares of
beneficial interest of the Fund (the Shares). 1,792,452.890 shares (after the
effect of the stock split on October 31, 1993) were received by the Partnership
in the exchange (the Exchange) and distributed pro rata by the Partnership to
its partners in liquidation of the Partnership, after which the Partnership was
dissolved. As a result of the Exchange, each partner of the Partnership became a
shareholder of the Fund. Significant investment activity commenced in January
1991.
The following summarizes significant accounting policies of the Fund.
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. Other 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
19
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
priced by brokers or market makers, fair value is determined by The Baupost
Group, Inc. (Baupost) in accordance with procedures adopted by the Trustees of
the Fund.
SHORT SALES: The Fund is engaged in short-selling which obligates the Fund to
replace the security borrowed by purchasing the security at 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 U.S.
Government securities sufficient to cover its short position. At October 31,
1995, the Fund has approximately $5.3 million of U. S. Treasury Bills in a
segregated account relating to its short positions. Securities sold short for
which market quotations are available are valued at the last quoted sales price.
If there is no reported sale on the valuation date the closing asked price is
used. Short securities traded in the over-the-counter market are valued at the
most recent asked price as obtained from one or more dealers that make markets
in the securities. Short 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.
Securities sold short at October 31, 1995 and their related market values and
proceeds are set forth in the Schedule of Securities Sold Short.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. The U.S. dollar value of the currencies the Fund
has committed to buy or sell is shown in the schedule of forward foreign
currency contracts. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts' terms.
FOREIGN CURRENCY TRANSLATION: The value of foreign securities, when held by the
Fund, 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.
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
20
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONT.
default for which there is some concern as to whether interest will be received
in cash, in which case interest is recorded when received.
FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund is a regulated investment
company, as defined under Subchapter M of the Internal Revenue Code (the Code).
By complying with Code provisions, the Fund is relieved from federal income tax
provided that substantially all of its taxable income is distributed to
shareholders. Therefore, no provision has been made for federal income taxes.
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, 1995, $402,015
was reclassified from accumulated undistributed net realized gain on investments
and foreign currency transactions to distributions in excess of net investment
income, due to differences between book and tax accounting for foreign currency
transactions and passive foreign investment companies (PFIC's). This change had
no effect on the net asset value per share.
NOTE B--INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund retains Baupost as its investment adviser, transfer agent and
administrator. Certain individuals who are officers and trustees of the Fund are
also officers, directors and shareholders of Baupost.
Effective January 1, 1991, the Fund began to pay Baupost a quarterly management
fee at an annual rate of 1% of average net assets of the Fund and an
administrative fee at an annual rate of 0.25% of average net assets of the Fund,
to serve as transfer agent, dividend disbursing agent and administrator. Baupost
has agreed with the Fund to reduce its management fee by up to 0.75% of the
Fund's average net assets until further notice to the extent that the Fund's
total annual expenses (including the management fee, administrative fee and
certain other expenses, but excluding brokerage commissions, transfer taxes,
interest and expenses relating to preserving the value of the Fund's
investments) would otherwise exceed 1.5% of the Fund's average net assets. For
the purpose of determining the applicable management and administrative fees,
average net assets is determined by taking an average of the determination of
such net asset values during each quarter at the close of business on the last
business day of each month during such quarter before any month-end share
purchases or redemptions.
21
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE B--INVESTMENT MANAGEMENT CONTRACT AND OTHER
TRANSACTIONS WITH AFFILIATES--CONT.
Management and administrative fees for the period November 1, 1994 through
October 31, 1995 amounted to $853,905 and $213,476, respectively.
NOTE C--INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the year ended October 31, 1995 aggregated
$81,216,676 and $66,608,572, respectively.
For federal income tax purposes, the identified cost of investments at October
31, 1995 was $88,829,107. Net unrealized appreciation, on a federal income tax
basis, for all securities and securities sold short was as follows:
Year Ended
October 31, 1995
Gross unrealized appreciation $ 9,479,167
Gross unrealized depreciation (6,575,023)
-----------
Net unrealized appreciation $ 2,904,144
===========
In the normal course of operations, the Fund may enter into various contractual
commitments involving forward settlement including foreign currency contracts,
futures contracts, short sales of securities and the writing of option
contracts. Commitments involving future settlement give rise to off balance
sheet market risk, which represents the potential accounting loss that can be
caused by a change in the market value of a particular investment. The Fund's
exposure to off balance sheet market risk is determined by a number of factors,
including the size, composition and diversification of positions held, market
volatility and relative levels of interest rates and foreign currency exchange
rates, if applicable. For securities such as options, the time period during
which the options may be exercised and the relationship between the current
market price of the underlying instrument and the option's contractual strike or
exercise price may also affect the level of off balance sheet risk.
A significant factor influencing the overall level of off balance sheet market
risk to which the Fund is exposed is its use of hedging strategies to mitigate
such risk which may include the use of purchased index options. The Fund closely
monitors and manages its exposure to risk. In addition, all positions involving
future settlement are collateralized by cash balances or security deposits at
the broker through which the transaction was performed.
22
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE C--INVESTMENT TRANSACTIONS- CONTINUED
The Fund uses forward foreign currency contracts to hedge currency risk (See
Schedule of Forward Foreign Currency Contracts). At October 31, 1995 the Fund
had no open positions in futures contracts which it had written.
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 D--RESTRICTED SECURITIES
At October 31, 1995 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 Earliest Acquisition
Cost October 31, 1995 Date
---- ---------------- ----
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
Maxwell Communications Corporate Debt $1,281,328 $1,622,846 11/22/93
Wheeling-Pittsburgh
Nonrestricted Trade Claims 0 875 05/11/89
Corporate Bonds:
Louise's Inc. 10.50% due 11/18/98 1,202,590 301,250 11/18/93
Options:
Bear Stearns Basket #1 90 Put
Expiring 08/16/96 130,000 2,000 02/16/95
Bear Stearns Basket #2 90 Put
Expiring 08/28/96 142,000 2,800 03/01/95
Bear Stearns Basket #3 90 Put
Expiring 10/11/96 208,000 3,600 04/12/95
Gold 550 Call Expiring 04/07/97 19,000 900 04/06/95
Gold 550 Call Expiring 05/12/97 10,750 1,400 05/11/95
Hills Stores Co. 18.15 Call Expiring 08/12/96 74,357 0 08/11/95
Philip Morris 50 Put Expiring 05/19/97 61,200 6,750 05/19/95
Philip Morris 50 Put Expiring 05/19/97 52,830 7,920 05/19/95
Philip Morris 50 Put Expiring 05/23/97 33,335 5,310 05/24/95
</TABLE>
23
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE D--RESTRICTED SECURITIES--CONTINUED
<TABLE>
<CAPTION>
Options: (continued) Value at Earliest Acquisition
- ------------------- Cost October 31, 1995 Date
---- ---------------- ----
<S> <C> <C> <C>
Philip Morris 50 Put Expiring 05/23/97 35,990 4,514 05/24/95
RJR Nabisco 25 Call Expiring 11/07/97 221,173 270,270 05/08/95
RJR Nabisco 25 Call Expiring 11/10/97 229,680 249,150 05/10/95
RJR Nabisco 25 Call Expiring 11/11/97 298,000 312,000 05/11/95
RJR Nabisco 25 Call Expiring 11/14/97 231,660 249,810 05/17/95
Russell 2000 281.97 Put Expiring 09/23/96 87,913 126,575 09/21/95
Russell 2000 270.675 Put Expiring 10/18/96 105,037 99,060 10/17/95
Russell 2000 277.56 Put Expiring 04/02/96 45,421 62,915 10/02/95
Russell 2000 267.00 Put Expiring 10/28/96 82,884 64,634 10/25/95
Russell 2000 263.70 Put Expiring 10/28/96 135,200 119,263 10/26/95
S & P 500 Index 482.31 Put
Expiring 06/14/96 130,331 35,200 06/13/95
S & P 500 Index 491.085 Put
Expiring 07/01/96 117,860 39,000 06/30/95
S & P 500 Index 494.19 Put
Expiring 06/27/96 118,271 41,650 06/26/95
S & P 500 Index 505.575 Put
Expiring 01/17/97 170,820 99,416 07/17/95
S & P 500 Index 520.02 Put
Expiring 10/11/96 113,307 90,100 10/11/95
Partnerships:
Russia Partners Company, L.P. 157,834 185,579 02/28/95
Russia Partners Trust 556,736 556,736 02/28/95
Common Stock:
Basic Holdings Limited 346,885 490,595 07/06/95
The Homestake Oil & Gas Company 113,815 99,450 02/10/94
The Homestake Royalty Corporation 241,587 221,060 02/10/94
Companies in Liquidation:
Antonelli Liquidating Trust 362,177 120,760 12/02/93
Ehlco Liquidating Trust 1,047 315 01/30/89
MBO Properties Inc. Liquidating Trust 0 0 11/25/92
Timber Realization Liquidating Trust 0 27,148 08/03/87
</TABLE>
24
<PAGE>
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1995
NOTE D--RESTRICTED SECURITIES--CONTINUED
Warrants and Rights:
Louise's Inc. Warrants Expiring 11/18/98 2,410 0 11/18/93
------- ------
TOTAL RESTRICTED SECURITIES $7,121,428 $5,520,851
(6.17% of Net Assets) ========== ==========
The Fund does not have the right to demand that such securities be registered.
The Fund does not anticipate any significant costs associated with the
disposition of these securities.
NOTE E--CAPITAL SHARE TRANSACTIONS
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
October 31, 1995 October 31, 1994
---------------- ----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 1,160,287.242 $14,670,652 1,895,347.378 $25,966,736
Shares issued in
reinvestment of
dividends 798,660.448 9,823,524 746,090.528 9,751,403
Shares redeemed (1,026,796.162) (13,143,641) (2,036,627.325) (28,118,356)
--------------- ------------ --------------- ------------
NET INCREASE 932,151.528 $11,350,535 604,810.581 $7,599,783
=========== =========== =========== ==========
</TABLE>
25
<PAGE>
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31 PERIOD ENDED
--------------------- OCTOBER 31,
SELECTED PER SHARE DATA (A) 1995 1994 1993 1992 1991(d)
---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $14.33 $14.77 $12.56 $11.97 $10.04
------ ------ ------ ------ ------
Income from Investment Operations
Net investment income 0.25 0.22 0.28 0.24 0.47
Net realized and unrealized gain (loss) 0.71 1.23 2.76 0.88 1.46
---- ---- ---- ---- ----
Total from investment operations 0.96 1.45 3.04 1.12 1.93
---- ---- ---- ---- ----
Less Distributions
From net investment income 0.25 0.46 0.22 0.53 -
In excess of net investment income 0.08 - - - -
From net realized gain 1.49 1.43 0.61 - -
---- ---- ---- ---- ----
Total distributions 1.82 1.89 0.83 0.53 -
---- ---- ---- ---- ----
Net Asset Value, end of period $13.47 $14.33 $14.77 $12.56 $11.97
====== ====== ====== ====== ======
TOTAL RETURN 7.91% 11.06% 25.45% 9.51% 19.21%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period (in thousands) 89,439 81,787 75,378 46,942 35,054
Ratio of expenses to average net assets 1.54% 1.53% 1.52% 1.50% 1.50%(c)
Total expenses to average net assets 1.54% 1.55% 1.63% 1.72% 2.01%(c)
Ratio of net investment income to
average net assets 1.60% 1.32% 2.29% 2.07% 5.33%(c)
Ratio of net investment income excluding
waiver of management fee to average
net assets 1.60% 1.30% 2.17% 1.85% 4.82%(c)
Portfolio Turnover rate 106% 161% 183% 137% 144%
</TABLE>
(a) All per share amounts reflect the effect of the ten-for-one share split
as of the close of business October 31, 1993.
(b) Total returns for periods of less than one year are not annualized.
(c) Annualized.
(d) For the period January 1, 1991 - October 31, 1991. For the period from
June 29, 1990 (date of organization) to December 31, 1990, net income of
$2,993, or $1.50 per share, was distributed to the Fund's sole
shareholder. Such distributions represented the net income of the Fund
prior to the date shares of beneficial interest were issued.
26
<PAGE>
THE BAUPOST FUND
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(A) (1) Financial Statements:
Statement of Assets and Liabilities as of October 31, 1995(a)
Statement of Operations for the Year ended October 31, 1995(a)
Statement of Changes in Net Assets for the Years ended October 31,
1995 and October 31, 1994(a)
Schedule of Investments as of October 31, 1995(a)
Schedule of Forward Foreign Currency Contracts as of October 31,
1995(a)
Schedule of Securities Sold Short as of October 31, 1995(a)
Notes to Financial Statements (a)
Financial Highlights -- Years Ended October 31, 1995, 1994, 1993
and 1992 and Period Ended October 31, 1991 (a) and (b)
(2) Supporting Schedules:
Schedules I through IX omitted because the required matter is
included above or is not present.
(a) Included in Part B.
(b) Included in Part A.
(B) Exhibits
1. Agreement and Declaration of Trust.
2. By-laws.
3. None.
4. (a) Portions of Agreement and Declaration of
Trust relating to shareholders' rights.
(b) Portions of By-laws relating to
shareholders' rights.
5. Management Contract dated as of February 1, 1991
between the Trust and The Baupost Group, Inc.
("Baupost").
6. None.
7. None.
<PAGE>
8. (a) Custodian Agreement between the Trust and
United States Trust Company of New York.*
(b) First Amendment to Mutual Fund Custody
Agreement between the Trust and United
States Trust Company of New York.**
9. Transfer Agency and Administrative Services
Agreement between the Trust and Baupost.
10. Opinion and Consent of Ropes & Gray.
11. Consent of Ernst & Young LLP.
12. None.
13. Subscription Agreement.
14. None.
15. None.
16. Schedule for Performance Calculations.
17. Financial Data Schedule.
Power of Attorney.
- --------------------
* Incorporated by reference to Pre-Effective Amendment No. 2 to
Registrant's Registration Statement.
** Incorporated by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement.
-2-
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of January 31, 1996: 425.
Item 27. Indemnification
Article VIII of the Trust's Agreement and Declaration of
Trust (Exhibit 1 hereto and incorporated herein by
reference) provides for indemnification of its Trustees
and officers. The effect of the relevant section of
Article VIII of the Agreement and Declaration of Trust is
to provide indemnification for each of the Trust's
Trustees and officers against liabilities and counsel fees
reasonably incurred in connection with the defense of any
legal proceeding in which such Trustee or officer may be
involved by reason of being or having been a Trustee or
officer, except that no Trustee or officer shall be
indemnified against any liability to the Trust or its
shareholders to which such Trustee or officer otherwise
would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Trustee's or
officer's office.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to
Trustees, officers and controlling persons of the Trust
pursuant to the foregoing provisions, or otherwise, the
Trust has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Trust of expenses incurred or paid by a
Trustee, officer or controlling person of the Trust in the
successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Trust
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
-3-
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
The Baupost Group, Inc. ("Baupost") is the investment
adviser to the Trust and its business is summarized under
the caption "Management of the Fund" in the Prospectus
constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
The business and other connections for the past two fiscal
years of each officer and director of Baupost are listed
below.
Name Business and other connections
Jordan J. Baruch Owner, Jordan Baruch Associates, 1200
Director, Assistant Secretary 18th Street, N.W., Washington, D.C.
20036.
Jo-An B. Bosworth General Partner, Baupost Partners, 44
Vice President, Secretary, Brattle Street, Cambridge, MA 02138;
Clerk General Partner, Baupost Associates, 44
Brattle Street, Cambridge, MA 02138.
Paul C. Gannon Limited Partner, Baupost Associates, 44
Chief Financial Officer, Brattle Street, Cambridge, MA 02138;
Vice President Treasurer/Clerk, Boston Sterling, Inc., 44
Brattle Street, Cambridge, MA 02138.
Seth A. Klarman
Director, President General Partner, Baupost Partners, 44
Brattle Street, Cambridge, MA 02138;
General Partner, Baupost Associates, 44
Brattle Street, Cambridge, MA 02138;
President/Director, Boston Sterling,
Inc., 44 Brattle Street, Cambridge, MA
02138. Formerly, Director, Providential
Corp., 3 Embarcadero Center, Suite 2250,
San Francisco, CA 94111.
-4-
<PAGE>
<PAGE>
Name Business and other connections
- ---- ------------------------------
Thomas A. Knott Limited Partner, Baupost Associates, 44
Vice President Brattle Street, Cambridge, MA 02138
Thomas W. Blumenthal Limited Partner, Baupost Associates, 44
Vice President Brattle Street, Cambridge, MA 02138;
Director, The Oberto Sausage Co., 7060
S. 235th Street, Kent, WA 98035;
Director, Data Documents Holding, Inc.,
4205 S. 96th Street, Omaha, NE 68127;
Director, Richey Electronics, Inc. 7441
Lincoln Way, Garden Grove, CA 92641;
formerly Director, Providential Corp.,
Three Embarcardero Center, Suite 2550,
San Francisco, CA 94111.
William J. Poorvu Trustee/Director, Mass. Financial Services
Director, Chairman Group of Funds, 500 Boylston Street,
Boston, MA 02116; Adjunct Professor,
Harvard University Graduate School of
Business Administration, Boston, MA
02138; Director, CBL Associates
Properties, Inc., One Park Place, 6148
Lee Highway, Chatanooga, TN 37421;
Sole Proprietor, William J. Poorvu, 44
Brattle Street, P.O. Box 380828,
Cambridge, MA 02238; Partner, various
private real estate partnerships.
Howard H. Stevenson Sarofim-Rock Professor, Harvard
Director, Vice Chairman, University Graduate School of Business
Treasurer Administration, Boston, MA 02138;
Director, Landmark Communications,
Inc., 150 W. Brambleton Avenue,
Norfolk, VA; Director, Camp, Dresser &
McKee, One Cambridge Center,
Cambridge, MA, 02142-1403; Director,
Sheffield Steel Corp., 220 North
Jefferson, Spring Sands, OK 74063;
Director, Passamaquoddy Technologies,
178 Middle Street, Portland, ME 04112;
Trustee, various individual trusts.
Formerly: Director, Preco Corp., 100
-5-
<PAGE>
Name Business and other connections
- ---- ------------------------------
University Drive, Amherst, MA 01002;
Senior Associate Dean and Director of
Financial and Information System,
Harvard University Graduate School of
Business (for address see above);
Director, African Communications
Group, 28 Athens Street #1, Cambridge,
MA; Director, Terry Hinge &
Hardware, 14600 Arminta Street, Van
Nuys, CA 91402; Director, Gulf States
Steel, 900 South Street, Waltham, MA
02154; Director, Quadra Capital
Partners, 6 Paige Street, Hingham, MA
02043.
David C. Abrams Vice President/Director, Boston
Vice President Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138; Limited
Partner, Baupost Associates, 44 Brattle
Street, Cambridge, MA 02138;
formerly, Director, Providential Corp., 3
Embarcadero Center, Suite 2250, San
Francisco, CA 94111.
Item 29. Principal Underwriters
Not Applicable.
Item 30. Location of Accounts and Records
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act
of 1940 and the Rules promulgated thereunder are
maintained by The Baupost Group, Inc., 44 Brattle Street,
Cambridge, Massachusetts 02238. Records relating to the
duties of the Registrant's custodian are maintained by
Chase Manhattan Bank, N.A., One Chase Manhattan Plaza, New
York, New York 10081, and records relating to the duties
of the Registrant's transfer agent are maintained by The
Baupost Group, Inc., 44 Brattle Street, Cambridge,
Massachusetts 02238.
-6-
<PAGE>
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) The undersigned Registrant hereby undertakes to
call a meeting of shareholders for the purpose of
voting on the removal of a trustee or trustees
when requested in writing to do so by the holders
of at least 10% of the Registrant's outstanding
voting securities and in connection with such
meeting to comply with the provisions of Section
16(c) of the Investment Company Act of 1940
relating to shareholder communications.
(b) The Registrant hereby undertakes to furnish each
person to whom a prospectus is delivered with a
copy of Registrant's latest Annual Report to
shareholders upon request and without charge.
NOTICE
A copy of the Agreement and Declaration of Trust of The Baupost Fund is
on file with the Secretary of State of The Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the Fund by
an officer of the Fund as an officer and not individually and the obligations of
or arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
the Fund.
-7-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge and The Commonwealth of
Massachusetts, on the 22nd day of February, 1996.
THE BAUPOST FUND
By: /s/ Seth A. Klarman
Seth A. Klarman
Title: President
Pursuant to the Securities Act of 1933, this Amendment has been signed
below by the following persons in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Seth A. Klarman President (Principal February 22, 1996
Seth A. Klarman Executive Officer)
and Trustee
*
- ---------------------
William J. Poorvu Trustee and Treasurer February 22, 1996
(Principal Financial and
Accounting Officer)
*
- ---------------------
Howard H. Stevenson Trustee February 22, 1996
*
- ---------------------
Samuel Plimpton Trustee February 22, 1996
*
- ---------------------
David Auerbach Trustee February 22, 1996
*
- ---------------------
Robert Ackerman Trustee February 22, 1996
*
- ---------------------
Jay Light Trustee February 22, 1996
*By: /s/ Seth A. Klarman February 22, 1996
-------------------
Seth A. Klarman
Attorney-in-fact
-8-
<PAGE>
THE BAUPOST FUND
Index to Exhibits
Sequential
Exhibit No. Description Page No.
1 Agreement and Declaration
of Trust
2 By-laws
4(a) Portions of Agreement and
Declaration of Trust relating
to shareholders' rights.
4(b) Portions of By-laws relating
to shareholders' rights.
5 Management Contract
9 Transfer Agency and
Administrative
Services Agreement
10 Opinion of Ropes & Gray
11 Auditor's Consent
13 Subscription Agreement
16 Schedule of Performance
Calculations
17 Financial Data Schedule
Power of Attorney
-9-
THE BAUPOST FUND
44 Brattle Street
Cambridge, Massachusetts 02138
AGREEMENT AND DECLARATION OF TRUST
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I....................................................................................................... 1
Name and Definitions................................................................................... 1
Section 1. Name.............................................................................. 1
Section 2. Definitions....................................................................... 1
ARTICLE II...................................................................................................... 2
Purpose of Trust....................................................................................... 2
ARTICLE III..................................................................................................... 2
Shares .............................................................................................. 2
Section 1. Division of Beneficial Interest................................................... 2
Section 2. Ownership of Shares............................................................... 3
Section 3. Investments in the Trust.......................................................... 3
Section 4. Status of Shares and Limitation of Personal Liability............................. 3
Section 5. Power of Trustees to Change Provisions Relating to Shares......................... 3
Section 6. Establishment and Designation of Series........................................... 5
Section 7. Indemnification of Shareholders................................................... 7
Section 8. No Preemptive Rights.............................................................. 7
ARTICLE IV...................................................................................................... 7
The Trustees........................................................................................... 7
Section 1. Election and Tenure............................................................... 7
Section 2. Effect of Death, Resignation, etc. of a Trustee................................... 8
Section 3. Powers............................................................................ 8
Section 4. Payment of Expenses by the Trust.................................................. 10
Section 5. Payment of Expenses by Shareholders............................................... 10
Section 6. Ownership of Assets of the Trust.................................................. 11
Section 7. Advisory, Management and Distribution Contracts................................... 11
ARTICLE V....................................................................................................... 12
Shareholders' Voting Powers and Meetings............................................................... 12
Section 1. Voting Powers..................................................................... 12
Section 2. Voting Power and Meetings......................................................... 12
Section 3. Quorum and Required Vote.......................................................... 13
Section 4. Action by Written Consent......................................................... 13
Section 5. Record Dates...................................................................... 14
Section 6. Additional Provisions............................................................. 14
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
ARTICLE VI...................................................................................................... 14
Net Income, Distributions, and Redemptions and Repurchases............................................. 14
Section 1. Distributions of Net Income....................................................... 14
Section 2. Redemptions and Repurchases....................................................... 15
Section 3. Redemptions at the Option of the Trust............................................ 16
ARTICLE VII..................................................................................................... 16
Compensation and Limitation of Liability of Trustees................................................... 16
Section 1. Compensation...................................................................... 16
Section 2. Limitation of Liability........................................................... 16
ARTICLE VIII.................................................................................................... 17
Indemnification........................................................................................ 17
Section 1. Trustees, Officers, etc........................................................... 17
Section 2. Compromise Payment................................................................ 17
Section 3. Indemnification Not Exclusive..................................................... 18
Section 4. Shareholders...................................................................... 18
ARTICLE IX...................................................................................................... 19
Miscellaneous.......................................................................................... 19
Section 1. Trustees, Shareholders, etc. Not Personally Liable; Notice........................ 19
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety.............................................................................. 19
Section 3. Liability of Third Persons Dealing with Trustees.................................. 20
Section 4. Termination of Trust or Series.................................................... 20
Section 5. Merger and Consolidation.......................................................... 20
Section 6. Filing of Copies, References, Headings............................................ 21
Section 7. Applicable Law.................................................................... 21
Section 8. Amendments........................................................................ 21
</TABLE>
-ii-
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
THE BAUPOST FUND
THIS AGREEMENT AND DECLARATION OF TRUST made at Cambridge,
Massachusetts this 29th day of June, 1990 by the Trustees hereunder and the
holders of shares of beneficial interest issued hereunder and to be issued
hereunder as hereinafter provided:
WITNESSETH that
WHEREAS the Trustees have agreed to manage all property coming into
their hands as trustees of a Massachusetts business trust in accordance with the
provisions hereinafter set forth.
NOW, THEREFORE, the Trustees hereby direct that this Agreement and
Declaration of Trust be filed with the Secretary of The Commonwealth of
Massachusetts and with the Clerk of every city or town where such association or
trust has a usual place of business, and do hereby declare that they will hold
all cash, securities and other assets, which they may from time to time acquire
in any manner as Trustees hereunder IN TRUST to manage and dispose of the same
upon the following terms and conditions for the pro rata benefit of the holders
from time to time of Shares in this Trust as hereinafter set forth.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as "The Baupost Fund" and
the Trustees shall conduct the business of the Trust under that name or any
other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
by the context or specifically provided
(a) "Trust" refers to the Massachusetts business trust
established by this Agreement and Declaration of Trust, as amended from time to
time;
(b) "Trustees" refers to the Trustees of the Trust named in
Article IV hereof or elected in accordance with such Article;
(c) "Shares" means the equal proportionate units of interest
into which the beneficial interest in the Trust or in the Trust property
belonging to any Series of the Trust (as the context may require) shall be
divided from time to time;
-1-
<PAGE>
(d) "Shareholder" means a record owner of Shares;
(e) "1940 Act" refers to the Investment Company Act of 1940
and the Rules and Regulations thereunder, all as amended from time to time;
(f) The terms "Commission" and "principal underwriter" shall
have the meanings given them in the 1940 Act;
(g) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(h) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time;
(i) "Series Company" refers to the form of registered open-end
investment company described in Section 18(f)(2) of the 1940 Act or in any
successor statutory provision; and
(j) "Series" refers to Series of Shares established and
designated under or in accordance with the provisions of Article III.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to provide investors a managed investment
primarily in securities (including options), debt instruments, money market
instruments, commodities, commodity contracts and options thereon.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in
the Trust shall at all times be divided into an unlimited number of Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends, when and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Share shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions upon termination of
the Trust or of such Series made pursuant to Article IX, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular Series from the assets belonging to such Series according to the
number of Shares of such Series held of record by such Shareholders on the
record date for any dividend or on the date of termination, as the case may be.
Shareholders shall have no preemptive or other right to subscribe to any
additional Shares or
-2-
<PAGE>
other securities issued by the Trust. The Trustees may from time to time divide
or combine the Shares of any particular Series into a greater or lesser number
of Shares of that Series without thereby changing the proportionate beneficial
interest of the Shares of that Series in the assets belonging to that Series or
in any way affecting the rights of Shares of any other Series.
Section 2. Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the transfer of Shares of each Series and
similar matters. The record books of the Trust as kept by the Trust or any
transfer or similar agent, as the case may be, shall be conclusive as to who are
the Shareholders of each Series and as to the number of Shares of each Series
held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept
investments in the Trust from such persons and on such terms and for such
consideration as they from time to time authorize.
Section 4. Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance of
the Trust shall not operate to terminate the same nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the Shareholder to any title in or to the whole or any
part of the Trust property or right to call for a partition or division of the
same or for an accounting, nor shall the ownership of Shares constitute the
Shareholders partners. Neither the Trust nor the Trustees, nor any officer,
employee or agent of the Trust shall have any power to bind personally any
Shareholders, nor except as specifically provided herein to call upon any
Shareholder for the payment of any sum of money or assessment whatsoever other
than such as the Shareholder may at any time personally agree to pay.
Section 5. Power of Trustees to Change Provisions Relating to Shares.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as provided
elsewhere herein, the Trustees shall have the power to amend this Declaration of
Trust, at any time and from time to time, in such manner as the Trustees may
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust for the purpose of (i) responding
to or complying with any regulations, orders, rulings or interpretations of any
governmental
-3-
<PAGE>
agency or any laws, now or hereafter applicable to the Trust, or (ii)
designating and establishing Series in addition to the Series established in
Section 6 of this Article III; provided that before adopting any such amendment
without Shareholder approval, the Trustees shall determine that it is consistent
with the fair and equitable treatment of all Shareholders. The establishment and
designation of any Series or class of Shares in addition to the Series
established and designated in Section 6 of this Article III shall be effective
upon the execution by a majority of the then Trustees of an amendment to this
Declaration of Trust, taking the form of a complete restatement or otherwise,
setting forth such establishment and designation and the relative rights and
preferences of such Series, or as otherwise provided in such instrument.
Without limiting the generality of the foregoing, the Trustees may, for
the above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or classes of Shares (in
addition to any Series or classes already existing or otherwise) with such
rights and preferences and such eligibility requirements for investment therein
as the Trustees shall determine and reclassify any or all outstanding Shares as
shares of particular Series or classes in accordance with such eligibility
requirements;
(b) amend any of the provisions set forth in paragraphs (a)
through (i) of Section 6 of this Article III;
(c) combine one or more Series or classes of Shares into a
single Series or class on such terms and conditions as the Trustees shall
determine;
(d) change or eliminate any eligibility requirements for
investment in Shares of any Series or class, including without limitation the
power to provide for the issue of Shares of any Series or class in connection
with any merger or consolidation of the Trust with another trust or company or
any acquisition by the Trust of part or all of the assets of another trust or
company;
(e) change the designation of any Series or class of Shares;
(f) change the method of allocating dividends among the
various Series and classes of Shares;
(g) allocate any specific assets or liabilities of the Trust
or any specific items of income or expense of the Trust to one or more Series or
classes of Shares;
(h) specifically allocate assets to any or all Series or
classes of Shares or create one or more additional Series or classes of Shares
which are preferred over all other Series or classes of Shares in respect of
assets specifically allocated thereto or any dividends paid by the
-4-
<PAGE>
Trust with respect to any net income, however determined, earned from the
investment and reinvestment of any assets so allocated or otherwise and provide
for any special voting or other rights with respect to such Series or classes.
Section 6. Establishment and Designation of Series. Without limiting
the authority of the Trustees set forth in Section 5, inter alia, to establish
and designate any further Series or classes or to modify the rights and
preferences of any Series, the "Baupost X Fund," shall be, and is hereby,
established and designated.
Shares of each Series established in this Section 6 shall have the
following relative rights and preferences:
(a) Assets belonging to Series. All consideration received by
the Trust for the issue or sale of Shares of a particular Series, together with
all assets in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof from whatever source derived, including,
without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall irrevocably belong to that
Series for all purposes, subject only to the rights of creditors, and shall be
so recorded upon the books of account of the Trust. Such consideration, assets,
income, earnings, profits and proceeds thereof, from whatever source derived,
including without limitation, any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may be, are herein
referred to as "assets belonging to" that Series. In the event that there are
any assets, income, earnings, profits and proceeds thereof, funds or payments
which are not readily identifiable as belonging to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series established and designated
from time to time in such manner and on such basis as they, in their sole
discretion, deem fair and equitable, and any General Asset so allocated to a
particular Series shall belong to that Series. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of all Series for
all purposes.
(b) Liabilities Belonging to Series. The assets belonging to
each particular Series shall be charged solely with the liabilities of the Trust
in respect to that Series, expenses, costs, charges and reserves attributable to
that Series, and any general liabilities of the Trust which are not readily
identifiable as belonging to any particular Series but which are allocated and
charged by the Trustees to and among any one or more of the Series established
and designated from time to time in a manner and on such basis as the Trustees
in their sole discretion deem fair and equitable. The liabilities, expenses,
costs, charges, and reserves so charged to a Series are herein referred to as
"liabilities belonging to" that Series. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive and
binding upon the holders of all Series for all purposes.
-5-
<PAGE>
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including
without limitation, Article VI, no dividend or distribution (including, without
limitation, any distribution paid upon termination of the Trust or of any
Series) with respect to, nor any redemption or repurchase of, the Shares of any
Series shall be effected by the Trust other than from the assets belonging to
such Series, nor shall any Shareholder of any particular Series otherwise have
any right or claim against the assets belonging to any other Series except to
the extent that such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series.
(d) Voting. Notwithstanding any of the other provisions of
this Declaration of Trust, including, without limitation, Section 1 of Article
V, the Shareholders of any particular Series shall not be entitled to vote on
any matters as to which such Series is not affected. On any matter submitted to
a vote of Shareholders, all Shares of the Trust then entitled to vote shall be
voted by individual Series, unless otherwise required by the 1940 Act or other
applicable law.
(e) Equality. All the Shares of each particular Series shall
represent an equal proportionate interest in the assets belonging to that Series
(subject to the liabilities belonging to that Series), and each Share of any
particular Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
(g) Exchange Privileges. The Trustees shall have the authority
to provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series, unless
otherwise required by applicable law, to combine the assets and liabilities
belonging to any two or more Series into assets and liabilities belonging to a
single series or class.
(i) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series and to rescind the establishment and designation thereof, such amendment
to be effected in the manner provided in Section 5 of this Article III.
Section 7. Indemnification of Shareholders. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of his
or her being or having
-6-
<PAGE>
been a Shareholder of the Trust or of a particular Series and not because of his
or her acts or omissions or for some other reason, the Shareholder or former
Shareholder (or his or her heirs, executors, administrators or other legal
representatives or in the case of a corporation or other entity, its corporate
or other general successor) shall be entitled out of the assets of the Series of
which he or she is a Shareholder or former Shareholder to be held harmless from
and indemnified against all loss and expense arising from such liability.
Section 8. No Preemptive Rights. Shareholders shall have no preemptive
or other right to subscribe to any additional Shares or other securities issued
by the Trust.
ARTICLE IV
The Trustees
Section 1. Election and Tenure. The initial Trustees shall be Seth A.
Klarman, William J. Poorvu and Howard H. Stevenson. Trustees may fix the number
of Trustees, fill vacancies in the Trustees, including vacancies arising from an
increase in the number of Trustees, or remove Trustees with or without cause.
Each Trustee shall serve during the continued lifetime of the Trust until he or
she dies, resigns or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and until the election
and qualification of his or her successor. Any Trustee may resign at any time by
written instrument signed by him or her and delivered to any officer of the
Trust or to a meeting of the Trustees. Such resignation shall be effective upon
receipt unless specified to be effective at some other time. Except to the
extent expressly provided in a written agreement with the Trust, no Trustee
resigning and no Trustee removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal. The Shareholders may fix the number of Trustees and
elect Trustees at any meeting of Shareholders called by the Trustees for that
purpose.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination, resignation, retirement, removal, or incapacity of the Trustees, or
any of them, shall not operate to annul the Trust or to revoke any existing
agency created pursuant to the terms of this Declaration of Trust.
Section 3. Powers. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and they
shall have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and remove such officers and appoint and
terminate such agents as they consider appropriate; they
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may appoint from their own number and terminate one or more committees
consisting of two or more Trustees which may exercise the powers and authority
of the Trustees to the extent that the Trustees determine; they may employ one
or more custodians of the assets of the Trust and may authorize such custodians
to employ subcustodians and to deposit all or any part of such assets in a
system or systems for the central handling of securities or with a Federal
Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both,
provide for the distribution of Shares by the Trust, through one or more
principal underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
(a) To invest and reinvest cash, and to hold cash uninvested;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of
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the expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but not
limited to claims for taxes;
(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property;
(k) To endorse or guarantee the payment of any notes or other
obligations of any person and to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust property
such insurance as they deem necessary or appropriate for the conduct of the
business, including without limitation, insurance policies insuring the assets
of the Trust and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust individually against all claims and
liabilities of every nature arising by reason of holding, being or having held
any such office or position, or by reason of any action alleged to have been
taken or omitted by any such person as Trustee, officer, employee, agent,
investment adviser, principal underwriter, or independent contractor, including
any action taken or omitted that may be determined to constitute negligence,
whether or not the Trust would have the power to indemnify such person against
liability; and
(m) To pay pensions as deemed appropriate by the Trustees and
to adopt, establish and carry out pension, profit-sharing, share bonus, share
purchase, savings, thrift and other retirement, incentive and benefit plans,
trusts and provisions, including the purchasing of life insurance and annuity
contracts as a means of providing such retirement and other benefits, for any or
all of the Trustees, officers, employees and agents of the Trust.
The Trustees shall not in any way be bound or limited by any present or
future law or custom in regard to investments by Trustees. The Trustees shall
not be required to obtain any court order to deal with any assets of the Trust
or take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of principal and partly out of income, as they deem fair,
all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including without limitation, the Trustees' compensation and such expenses and
charges for the services of the Trust's officers, employees, investment adviser
or manager,
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principal underwriter, auditor, counsel, custodian, transfer agent, shareholder
servicing agent, and such other agents or independent contractors and such other
expenses and charges as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, shareholder servicing
or similar agent, an amount fixed from time to time by the Trustees, by setting
off such charges due from such Shareholder from declared but unpaid dividends
owed such Shareholder and/or by reducing the number of Shares in the account of
such Shareholder by that number of full and/or fractional Shares which
represents the outstanding amount of such charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets
of the Trust shall at all times be considered as vested in the Trustees.
Section 7. Advisory, Management and Distribution Contracts. Subject to
such requirements and restrictions as may be set forth in the By-Laws, the
Trustees may, at any time and from time to time, contract for exclusive or
nonexclusive advisory and/or management services for the Trust or for any Series
with The Baupost Group, Inc. or any other partnership, corporation, trust,
association or other organization (the "Manager"); and any such contract may
contain such other terms as the Trustees may determine, including without
limitation, authority for a Manager to determine from time to time without prior
consultation with the Trustees what investments shall be purchased, held, sold
or exchanged and what portion, if any, of the assets of the Trust shall be held
uninvested and to make changes in the Trust's investments. The Trustees may
also, at any time and from time to time, contract with the Manager or any other
partnership, corporation, trust, association or other organization, appointing
it exclusive or nonexclusive distributor or principal underwriter for the
Shares, every such contract to comply with such requirements and restrictions as
may be set forth in the By-Laws; and any such contract may contain such other
terms as the Trustees may determine.
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter, distributor or affiliate or agent of or for any
partnership, corporation, trust, association, or other organization, or of or
for any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may have been or may
hereafter be made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or that
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(ii) any corporation, trust, association or other organization
with which an advisory or management contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract with one or more other
corporations, trusts, associations, or other organizations, or has other
business or interests, shall not affect the validity of any such contract or
disqualify any Shareholder, Trustee or officer of the Trust from voting upon or
executing the same or create any liability or accountability to the Trust or its
Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Article IV, Section 1, (ii)
with respect to any amendment of this Declaration of Trust to the extent and as
provided in Article IX, Section 8, (iii) to the same extent as the stockholders
of a Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, (iv) with
respect to the termination of the Trust or any Series to the extent and as
provided in Article IX, Section 4, and (v) with respect to such additional
matters relating to the Trust as may be required by this Declaration of Trust,
the By-Laws or any registration of the Trust with the Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. At any time when no Shares of a Series
are outstanding, the Trustees may exercise all rights of Shareholders of that
Series with respect to matters affecting that Series and may with respect to
that Series take any action required by law, this Declaration of Trust or the
By-Laws to be taken by the Shareholders.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may
be called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the
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Trustees by mailing such notice at least seven days before such meeting, postage
prepaid, stating the time and place of the meeting, to each Shareholder at the
Shareholder's address as it appears on the records of the Trust. Whenever notice
of a meeting is required to be given to a Shareholder under this Declaration of
Trust or the By-Laws, a written waiver thereof, executed before or after the
meeting by such Shareholder or his or her attorney thereunto authorized and
filed with the records of the meeting, shall be deemed equivalent to such
notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
required by law, by the By-Laws or by this Declaration of Trust, 40% of the
Shares entitled to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series is to vote as a single class separate from any other
Shares which are to vote on the same matters as a separate class or classes, 40%
of the Shares of each such class entitled to vote shall constitute a quorum at a
Shareholder's meeting of that class. Any meeting of Shareholders may be
adjourned from time to time by a majority of the votes properly cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the original meeting
without further notice. When a quorum is present at any meeting, a majority of
the Shares voted shall decide any questions and a plurality shall elect a
Trustee, except when a larger vote is required by any provision of this
Declaration of Trust or the By-Laws or by law. If any question on which the
Shareholders are entitled to vote would adversely affect the rights of any
Series or class of Shares, the vote of a majority (or such larger vote as is
required as aforesaid) of the Shares of such Series or class which are entitled
to vote, voting separately, shall also be required to decide such question.
Section 4. Action by Written Consent. Any action taken by Shareholders
may be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 60 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series having the right to
notice of and to vote at such meeting and any adjournment thereof, and in such
case only Shareholders of record on such record date shall have such right,
notwithstanding any transfer of shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders of any Series who
are entitled to receive payment of any dividend or of any other distribution,
the Trustees may from time to time fix a date, which shall be before the date
for the payment of such dividend or such other payment, as the record
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date for determining the Shareholders of such Series having the right to receive
such dividend or distribution. Without fixing a record date, the Trustees may
for voting and/or distribution purposes close the register or transfer books for
one or more Series for all or any part of the period between a record date and a
meeting of shareholders or the payment of a distribution. Nothing in this
section shall be construed as precluding the Trustees from settling different
record dates for different Series.
Section 6. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Income, Distributions, and Redemptions and Repurchases
Section 1. Distributions of Net Income. The Trustees shall each year,
or more frequently if they so determine in their sole discretion, distribute to
the Shareholders of each Series, in shares of that Series, cash or otherwise, an
amount approximately equal to the net income attributable to the assets
belonging to such Series and may from time to time distribute to the
Shareholders of each Series, in shares of that Series, cash or otherwise, such
additional amounts, but only from the assets belonging to such Series, as they
may authorize. All dividends and distributions on Shares of a particular Series
shall be distributed pro rata to the holders of that Series in proportion to the
number of Shares of that Series held by such holders and recorded on the books
of the Trust at the date and time of record established for that payment of such
dividend or distributions.
The manner of determining net income, income, asset values, capital
gains, expenses, liabilities and reserves of any Series may from time to time be
altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such person
as they may authorize at the times and in the manner provided in the By-Laws.
Determinations of net income of any Series and determination of income, asset
value, capital gains, expenses and liabilities made by the Trustees, or by such
person as they may authorize, in good faith, shall be binding on all parties
concerned. The foregoing sentence shall not be construed to protect any Trustee,
officer or agent of the Trust against any liability to the Trust or its security
holders to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
If, for any reason, the net income of any Series determined at any time
is a negative amount, the pro rata share of such negative amount allocable to
each Shareholder of such Series shall constitute a liability of such Shareholder
to that Series which shall be paid out of such Shareholder's account at such
times and in such manner as the Trustees may from time to time determine (x) out
of the accrued dividend account of such Shareholder, (y) by reducing the number
of Shares of that Series in the account of such Shareholder, or (z) otherwise.
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Section 2. Redemptions and Repurchases. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the presentation
of a proper instrument of transfer together with a request directed to the Trust
or a person designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may from
time to time authorize; and the Trust will pay therefor the net asset value
thereof, as determined in accordance with the By-Laws, the 1940 Act and the
rules of the Commission. Payment for said Shares shall be made by the Trust to
the Shareholder within seven days after the date on which the request is made or
in accordance with such other procedures, consistent with the 1940 Act and the
rules of the Commission, as the Trustees may from time to time authorize. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange is closed for other than
weekends or holidays, or if permitted by the rules of the Commission during
periods when trading on such Exchange is restricted or during any emergency
which makes it impracticable for the Trust to dispose of the investments of the
applicable Series or to determine fairly the value of the net assets belonging
to such Series or during any other period permitted by order of the Commission
for the protection of investors, such obligations may be suspended or postponed
by the Trustees. The Trust may also purchase or repurchase Shares at a price not
exceeding the net asset value of such Shares in effect when the purchase or
repurchase or any contract to purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or partly
in kind if the Trustees determine that such payment is advisable in the interest
of the remaining Shareholders of the Series the Shares of which are being
redeemed. In making any such payment wholly or partly in kind, the Trust shall,
so far as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the Series the
Shares of which are being redeemed. Subject to the foregoing, the fair value,
selection and quantity of securities or other property so paid or delivered as
all or part of the redemption price may be determined by or under authority of
the Trustees. In no case shall the Trust be liable for any delay of any
corporation or other person in transferring securities selected for delivery as
all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have
the right at its option and at any time to redeem Shares of any Shareholder at
the net asset value thereof as described in Section 1 of this Article VI.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust; they may fix the amount of their
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
services and payment for the same by the Trust.
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Section 2. Limitation of Liability. The Trustees shall not be
responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, Manager or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee,
but nothing herein contained shall protect any Trustee against any liability to
which he or she would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office.
Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever issued, executed or done by or on behalf of
the Trust or the Trustees or any of them in connection with the Trust shall be
conclusively deemed to have been issued, executed or done only in or with
respect to their, his or her capacity as Trustees or Trustee, and such Trustees
or Trustee shall not be personally liable thereon.
ARTICLE VIII
Indemnification
Section 1. Trustees, Officers, etc. The Trust shall indemnify each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise) (hereinafter referred to
as a "Covered Person") against all liabilities and expenses, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and counsel fees reasonably incurred by a Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been involved
as a party or otherwise or with which such Covered Person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Covered Person, except with respect to any matter as to which such
Covered Person shall have been finally adjudicated in any such action, suit or
other proceeding to be liable to the Trust or its Shareholders by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties), shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such Covered Person to repay amounts so paid to
the Trust if it is ultimately determined that indemnification of such expenses
is not authorized under this Article; provided, however, that either (a) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (providing that a majority of the disinterested Trustees then in office
act on the matter), or independent legal counsel in a written opinion, shall
have determined, based upon a review of readily available facts (as
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opposed to a full trial type inquiry) that there is reason to believe that such
Covered Person will be found entitled to indemnification under this Article.
Section 2. Compromise Payment. As to any matter disposed of (whether by
a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason or wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. Any approval pursuant to this Section shall not
prevent the recovery from any Covered Person of any amount paid to such Covered
Person in accordance with this Section as indemnification if such Covered Person
is subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.
Section 3. Indemnification Not Exclusive. The right of indemnification
hereby provided shall not be exclusive of or affect any other rights to which
such Covered Person may be entitled. As used in this Article VIII, the term
"Covered Person" shall include such person's heirs, executors and administrators
and a "disinterested Trustee" is a Trustee who is not an "interested person" of
the Trust as defined in Section 2(a)(19) of the 1940 Act, (or who has been
exempted from being an "interested person" by any rule, regulation or order of
the Commission) and against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or has been pending. Nothing contained in this Article shall
affect any rights to indemnification to which personnel of the Trust, other than
Trustees or officers, and other persons may be entitled by contract or otherwise
under law, nor the power of the Trust to purchase and maintain liability
insurance on behalf of any such person; provided, however, that the Trust shall
not purchase or maintain any such liability insurance in contravention of
applicable law, including without limitation, the 1940 Act.
Section 4. Shareholders. In case any Shareholder or former Shareholder
shall be held to be personally liable solely by reason of his or her being or
having been a Shareholder and
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not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or, in the case of a corporation
or other entity, its corporate or other general successor) shall be entitled to
be held harmless from and indemnified against all loss and expense arising from
such liability, but only out of the assets of the particular series of Shares of
which he or she is or was a Shareholder.
ARTICLE IX
Miscellaneous
Section 1. Trustees, Shareholders, etc. Not Personally Liable; Notice.
All persons extending credit to, contracting with or having any claim against
the Trust or any Series shall look only to the assets of the Trust, or, to the
extent that the liability of the Trust may have been expressly limited by
contract to the assets of a particular Series, only to the assets belonging to
the relevant Series, for payment under such credit, contract or claim; and
neither the Shareholders nor the Trustees, nor any of the Trust's officers,
employees or agents, whether past, present or future, shall be personally liable
therefor. Nothing in this Declaration of Trust shall protect any Trustee against
any liability to which such Trustee would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued on behalf of the Trust by the Trustees, by any officers or officer or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts and shall recite that the same
was executed or made by or on behalf of the Trust or by them as Trustee or
Trustees or as officer or officers or otherwise and not individually and that
the obligations of such instrument are not binding upon any of them or the
Shareholders individually but are binding only upon the assets and property of
the Trust or upon the assets belonging to the Series for the benefit of which
the Trustees have caused the note, bond, contract, instrument, certificate or
undertaking to be made or issued, and may contain such further recital as he,
she or they may deem appropriate, but the omission of any such recital shall not
operate to bind any Trustee or Trustees or officer or officers or Shareholders
or any other person individually.
Section 2. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. A Trustee shall be liable for his or
her own willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee, and for nothing
else, and shall not be liable for errors of judgment or mistakes of fact or law.
The Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Declaration of Trust, and shall be under no
liability for any act or omission in accordance with such advice or for failing
to follow such advice. The Trustees shall not be required to give any bond as
such, nor any surety if a bond is required.
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Section 3. Liability of Third Persons Dealing with Trustees. No person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
Section 4. Termination of Trust or Series. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by vote of at least 66-2/3% of the Shares of each
Series entitled to vote and voting separately by Series or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of at least 66-2/3% of the Shares of that Series or by the Trustees by
written notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may be),
after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series (or the applicable Series, as
the case may be), whether due or accrued or anticipated as may be determined by
the Trustees, the Trust shall in accordance with such procedures as the Trustees
consider appropriate reduce the remaining assets belonging, severally, to each
Series (or the applicable Series, as the case may be), to distributable form in
cash or shares or other securities, or any combination thereof, and distribute
the proceeds belonging to each Series (or the applicable Series, as the case may
be), to the Shareholders of that Series, as a Series, ratably according to the
number of Shares of that Series held by the several Shareholders on the date of
termination.
Section 5. Merger and Consolidation. The Trustees may cause the Trust
to be merged into or consolidated with another trust or company or its shares
exchanged under or pursuant to any state or federal statute, if any, or
otherwise to the extent permitted by law, if such merger or consolidation or
share exchange has been authorized by vote of a majority of the outstanding
Shares; provided, however, that in all respects not governed by statute or
applicable law, the Trustees shall have power to prescribe the procedure
necessary or appropriate to accomplish a sale of assets, merger or
consolidation.
Section 6. Filing of Copies, References, Headings. The original or a
copy of this instrument and of each amendment hereto shall be kept at the office
of the Trust where it may be inspected by any Shareholder. A copy of this
instrument and of each amendment hereto shall be filed by the Trust with the
Secretary of The Commonwealth of Massachusetts and with any other governmental
office where such filing may from time to time be required. Anyone dealing with
the Trust may rely on a certificate by an officer of the Trust as to whether or
not any such amendments have been made and as to any matters in connection with
the Trust hereunder; and, with the same effect as if it were the original, may
rely on a copy certified by an officer of the Trust to be a copy of this
instrument or of any such amendments. In this instrument and in any such
amendment, references to this instrument, and all expressions like "herein,"
"hereof" and "hereunder" shall be deemed to refer to this instrument as amended
or affected by any such amendments. Headings are placed herein for convenience
of reference
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<PAGE>
only and shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. This instrument may be executed in
any number of counterparts each of which shall be deemed an original.
Section 7. Applicable Law. This Declaration of Trust is made in The
Commonwealth of Massachusetts, and it is created under and is to be governed by
and construed and administered according to the laws of said Commonwealth. The
Trust shall be of the type commonly called a Massachusetts business trust, and
without limiting the provisions hereof, the Trust may exercise all powers which
are ordinarily exercised by such a trust.
Section 8. Amendments. This Declaration of Trust may be amended at any
time by an instrument in writing signed by a majority of the then Trustees when
authorized to do so by vote of a majority of the Shares entitled to vote, except
that amendments described in Article III, Section 5 hereof or having the purpose
of changing the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision contained herein shall not require authorization by Shareholder vote.
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<PAGE>
IN WITNESS WHEREOF, all of the Trustees as aforesaid do hereto set
their hands this 29th day of June, 1990.
/s/ Seth A. Klarman
-------------------
Seth A. Klarman
6 Hampton Road
Lexington, MA 02173
COMMONWEALTH OF MASSACHUSETTS)
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me Seth A. Klarman who acknowledged the
foregoing instrument to be his free act and deed.
June 29, 1990 /s/ Jo-An B. Bosworth
----------------------
Notary Public
My commission expires: June 13, 1991
/s/ William J. Poorvu
---------------------
William J. Poorvu
975 Memorial Drive
Cambridge, MA 02138
COMMONWEALTH OF MASSACHUSETTS)
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me William J. Poorvu who acknowledged
the foregoing instrument to be his free act and deed.
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<PAGE>
June 29, 1990 /s/ Jo-An B. Bosworth
----------------------
Notary Public
My commission expires: June 13, 1991
/s/ Howard H. Stevenson
-----------------------
Howard H. Stevenson
39 Sears Road
Southboro, MA 01772
COMMONWEALTH OF MASSACHUSETTS)
) ss.
COUNTY OF MIDDLESEX )
Then personally appeared before me Howard H. Stevenson who acknowledged
the foregoing instrument to be his free act and deed.
June 29, 1990 /s/ Jo-An B. Bosworth
---------------------
Notary Public
My commission expires: June 13, 1991
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BY-LAWS
OF
THE BAUPOST FUND
ARTICLE 1
Agreement and Declaration
of Trust and Principal Office
1.1. Agreement and Declaration of Trust. These By-Laws shall be subject
to the Agreement and Declaration of Trust, as from time to time in effect (the
"Declaration of Trust"), of The Baupost Fund (the "Trust"), the Massachusetts
business trust established by the Declaration of Trust.
1.2. Principal Office of the Trust. The principal office of the Trust
shall be located in Cambridge, Massachusetts.
ARTICLE 2
Meetings of Trustees
2.1. Regular Meetings. Regular meetings of the Trustees may be held
without call or notice at such places and at such times as the Trustees may from
time to time determine, provided that notice of the first regular meeting
following any such determination shall be given to absent Trustees.
2.2. Special Meetings. Special meetings of the Trustees may be held, at
any time and at any place designated in the call of the meeting, when called by
the Chairman of the Board, if any, the President or the Treasurer or by two or
more Trustees, sufficient notice thereof being given to each Trustee by the
Clerk or an Assistant Clerk or by the officer or the Trustees calling the
meeting.
2.3. Notice. It shall be sufficient notice to a Trustee of a special
meeting to send notice by mail at least forty-eight hours or by telegram or
telecopy at least twenty-four hours before the meeting addressed to the Trustee
at his or her usual or last known business or residence address or to give
notice to him or her in person or by telephone at least twenty-four hours before
the meeting. Notice of a meeting need not be given to any Trustee if a written
waiver of notice, executed by him or her before or after the meeting, is filed
with the records of the meeting, or to any Trustee who attends the meeting
without protesting prior thereto or at its commencement the lack of notice to
him or her. Neither notice of a meeting nor a waiver of a notice need specify
the purposes of the meeting.
<PAGE>
2.4. Quorum. At any meeting of the Trustees a majority of the Trustees
then in office shall constitute a quorum. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
2.5. Action by Vote. When a quorum is present at any meeting, a
majority of Trustees present may take any action, except when a larger vote is
expressly required by law, by the Declaration of Trust or by these By-Laws.
2.6. Action by Writing. Except as required by law, any action required
or permitted to be taken at any meeting of the Trustees may be taken without a
meeting if a majority of the Trustees (or such larger proportion thereof as
shall be required by any express provision of the Declaration of Trust or these
By-Laws) consent to the action in writing and such written consents are filed
with the records of the meetings of Trustees. Such consent shall be treated for
all purposes as a vote taken at a meeting of Trustees.
2.7. Presence Through Communications Equipment. Except as required by
law, the Trustees may participate in a meeting of Trustees by means of a
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other at the same time, and
participation by such means shall constitute presence in person at a meeting.
ARTICLE 3
Officers
3.1. Enumeration; Qualification. The officers of the Trust shall be a
President, a Treasurer, a Clerk, and such other officers, if any, as the
Trustees from time to time may in their discretion elect. The Trust may also
have such agents as the Trustees from time to time may in their discretion
appoint. If a Chairman of the Board is elected, he or she shall be a Trustee and
may but need not be a Shareholder; and any other officer may be but none need be
a Trustee or Shareholder. Any two or more offices may be held by the same
person.
3.2. Election and Tenure. The President, the Treasurer, the Clerk and
such other officers as the Trustees may in their discretion from time to time
elect shall each be elected by the Trustees to serve until his or her successor
is elected or qualified, or until he or she sooner dies, resigns, is removed or
becomes disqualified. Each officer shall hold office and each agent shall retain
authority at the pleasure of the Trustees.
3.3. Powers. Subject to the other provisions of these By-Laws, in
addition to the duties and powers herein and set forth in the Declaration of
Trust and in addition to such duties and powers as may be determined by the
Trustees, the President shall have such duties and powers with respect to the
Trust as are commonly incident to the president of a Massachusetts business
corporation as if the Trust were organized as a Massachusetts business
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<PAGE>
corporation; each other officer shall have such duties and powers as are
commonly incident to the office occupied by him or her as if the Trust were
organized as a Massachusetts business corporation.
3.4. President and Vice Presidents. The President shall have the duties
and powers specified in these By-laws and shall have such other duties and
powers as may be determined by the Trustees.
Any Vice Presidents shall have such duties and powers as shall be
designated from time to time by the Trustees.
3.5. Chief Executive Officer. The Chief Executive Officer of the Trust
shall be the Chairman of the Board, if any, the President or such other officer
as is designated by the Trustees and shall, subject to the control of the
Trustees, have general charge and supervision of the business of the Trust and,
unless there is a Chairman of the Board, or except as the Trustees (or the
Chairman of the Board if the Trustees do not act) shall otherwise determine,
preside at all meetings of the stockholders and of the Trustees. If no such
designation is made, the President shall be the Chief Executive Officer.
3.6. Chairman of the Board. If a Chairman of the Board of Trustees is
elected, he or she shall have the duties and powers specified in these By-Laws
and shall have such other duties and powers as may be determined by the
Trustees. The Chairman of the Board shall, unless the Trustees (or the Chairman
of the Board if the Trustees do not act) shall otherwise determine, preside at
all meetings of the stockholders and of the Trustees.
3.7. Treasurer. The Treasurer shall be the chief financial and
accounting officer of the Trust, and shall, subject to the provisions of the
Declaration of Trust and to any arrangement made by the Trustees with a
custodian, investment adviser or manager or transfer, shareholder servicing or
similar agent, be in charge of the valuable papers, books of account and
accounting records of the Trust, and shall have such other duties and powers as
may be designated from time to time by the Trustees or by the Chief Executive
Officer.
3.8. Clerk. The Clerk shall record all proceedings of the Shareholders
and the Trustees in books to be kept therefor, which books or a copy thereof
shall be kept at the principal office of the Trust. In the absence of the Clerk
from any meeting of the Shareholders or Trustees, an assistant Clerk, or if
there be none or if he or she is absent, a temporary clerk chosen at such
meeting shall record the proceedings thereof in the aforesaid books.
3.9. Resignations and Removals. Any officer may resign at any time by
written instrument signed by him or her and delivered to the President or the
Clerk or to a meeting of the Trustees. Such resignation shall be effective upon
receipt unless specified to be effective at some other time. The Trustees may
remove any officer with or without cause. Except to
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<PAGE>
the extent expressly provided in a written agreement with the Trust, no officer
resigning and no officer removed shall have any right to any compensation for
any period following his or her resignation or removal, or any right to damages
on account of such removal.
ARTICLE 4
Reports
4.1. General. The Trustees and officers shall render reports at the
time and in the manner required by the Declaration of Trust or any applicable
law. Officers shall render such additional reports as they may deem desirable or
as may from time to time be required by the Trustees.
ARTICLE 5
Fiscal Year
5.1. General. Except as from time to time otherwise provided by the
Trustees, the initial fiscal year of the Trust shall end on such date as is
determined in advance or in arrears by the Treasurer, and subsequent fiscal
years shall end on such date in subsequent years.
ARTICLE 6
Seal
6.1. General. The seal of the Trust shall consist of a flat-faced die
with the word "Massachusetts," together with the name of the Trust and the year
of its organization cut or engraved thereon, but, unless otherwise required by
the Trustees, the seal shall not be necessary to be placed on, and its absence
shall not impair the validity of, any document, instrument or other paper
executed and delivered by or on behalf of the Trust.
ARTICLE 7
Execution of Papers
7.1. General. Except as the Trustees may generally or in particular
cases authorize the execution thereof in some other manner, all checks, notes,
drafts and other obligations and all registration statements and amendments
thereto and all applications and amendments thereto to the Securities and
Exchange Commission shall be signed by the Chairman, if any, the President, any
Vice President or the Treasurer or any of such other officers or agents as shall
be designated for that purpose by a vote of the Trustees.
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<PAGE>
ARTICLE 8
Provisions Relating to the
Conduct of the Trust's Business
8.1. Certain Definitions. When used herein the following words shall
have the following meanings: "Distributor" shall mean any one or more
partnerships, corporations, firms or associations which have distributor's or
principal underwriter's contracts in effect with the Trust providing that
redeemable shares of any class or series issued by the Trust shall be offered
and sold by such Distributor. "Adviser" shall mean any partnership, corporation,
firm or association which may at the time have an advisory or management
contract with the Trust.
8.2. Limitation on Dealings with Officers or Trustees. The Trust will
not lend any of its assets to the Distributor or Adviser or to any officer or
director of the Distributor or Adviser or any officer or Trustee of the Trust
and shall not permit any officer or Trustee or any officer or director of the
Distributor or Adviser, to deal for or on behalf of the Trust with himself as
principal or agent, or with any partnership, association or corporation in which
he or she has a financial interest; provided that the foregoing provisions shall
not prevent (a) officers and Trustees of the Trust or officers and directors of
the Distributor or Adviser from buying, holding or selling shares in the Trust
or from being partners, officers or directors of or otherwise financially
interested in the Distributor or the Adviser; (b) a purchase or sale of
securities or other property if such transaction is permitted by or is exempt or
exempted from the provisions of the Investment Company Act of 1940, as amended
(the "1940 Act"), and does not involve any commission or profit to any
securities dealer who is, or one or more of whose partners, shareholders,
officers or directors is, an officer or Trustee of the Trust or an officer or
director of the Distributor or Adviser; (c) employment of legal counsel,
registrars, transfer agents, shareholder servicing agents, dividend disbursing
agents or custodians who are, or any one of which has a partner, shareholder,
officer or director who is, an officer or Trustee of the Trust or an officer or
director of the Distributor or Adviser if only customary fees are charged for
services to the Trust; or (d) sharing of statistical, research, legal and
management expenses and office hire and expenses with any other investment
company in which an officer or Trustee of the Trust or an officer or director of
the Distributor or Adviser is an officer or director or otherwise financially
interested.
8.3. Limitation on Dealing in Securities of the Trust by Certain
Officers, Trustees, Distributor or Adviser. Neither the Distributor nor Adviser,
nor any officer or Trustee of the Trust or officer, director or partner of the
Distributor or Adviser shall take long or short positions in securities issued
by the Trust; provided, however, that:
(a) The Distributor may purchase from the Trust and otherwise deal in
shares issued by the Trust pursuant to the terms of its contract with the Trust;
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<PAGE>
(b) Any officer or Trustee of the Trust or officer or director or
partner of the Distributor or Adviser or any trustee or fiduciary for the
benefit of any of them may at any time, or from time to time, purchase from the
Trust or from the Distributor shares issued by the Trust at the price available
to the public or to such officer, Trustee, director, partner or fiduciary, no
such purchase to be in contravention of any applicable state or federal
requirement; and
(c) The Distributor or the Adviser may at any time, or from time to
time, purchase for investment shares issued by the Trust.
8.4. Securities and Cash of the Trust to be Held by Custodian Subject
to Certain Terms and Conditions.
(d) All securities and cash owned by the Trust shall, as hereinafter
provided, be held by or deposited with one or more banks or trust companies
having (according to its last published report) not less than $2,000,000
aggregate capital, surplus and undivided profits (any such bank or trust company
being hereby designated as "Custodian"), provided such a Custodian can be found
ready and willing to act. The Trust may, or may permit any Custodian to, deposit
all or any part of the securities owned by any class or series of shares of the
Trust in a system for the central handling of securities established by a
national securities exchange or national securities association registered with
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended (the "1934 Act"), or such other person as may be permitted by
said Commission, including, without limitation, a clearing agency registered
under Section 17A of the 1934 Act, pursuant to which system all securities of
any particular class or series of any issue deposited within the system are
treated as fungible and may be transferred or pledged by bookkeeping entry,
without physical delivery of such securities.
(e) The Trust shall enter into a written contract with each Custodian
regarding the powers, duties and compensation of such Custodian with respect to
the cash and securities of the Trust held by such Custodian. Said contract and
all amendments thereto shall be approved by the Trustees.
(f) The Trust shall upon the resignation or inability to serve of any
Custodian or upon change of any Custodian:
(i) in case of such resignation or inability to serve, use its
best efforts to obtain a successor Custodian;
(ii) require that the cash and securities owned by any class
or series of shares of the Trust and in the possession of the resigning
or disqualified Custodian be delivered directly to the successor
Custodian; and
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<PAGE>
(iii) in the event that no successor Custodian can be found,
submit to the Shareholders, before permitting delivery of the cash and
securities owned by any class or series of shares of the Trust and in
the possession of the resigning or disqualified Custodian otherwise
than to a successor Custodian, the question whether that class or
series shall be liquidated or shall function without a Custodian.
8.5. Determination of Net Asset Value. The Trustees or any officer or
officers or agent or agents of the Trust designated from time to time for this
purpose by the Trustees shall determine at least once daily the net income and
the value of all the assets attributable to any class or series of shares of the
Trust on each day (other than on a day on which no shares of the Trust were
tendered for redemption and no order to purchase shares was received by the
Fund) upon which the New York Stock Exchange is open for unrestricted trading or
at such other times as the Trustees shall, consistent with the 1940 Act and the
rules of the Commission, designate. In determining asset values, all securities
for which representative market quotations are readily available shall be valued
at market value and other securities and assets shall be valued at fair value,
all as determined in good faith by the Trustees or an officer or officers or
agent or agents, as aforesaid, in accordance with accounting principles
generally accepted at the time. Notwithstanding the foregoing, the assets
belonging to any class or series of shares of the Trust may, if so authorized by
the Trustees, be valued in accordance with the amortized cost method, subject to
the power of the Trustees to alter the method for determining asset values. The
value of such assets so determined, less total liabilities belonging to that
class or series of shares (exclusive of capital stock or surplus) shall be the
net asset value, until a new asset value is determined by the Trustees or such
officers or agents. In determining the net asset value, the Trustees or such
officers or agents may include in liabilities such reserves for taxes, estimated
accrued expenses and contingencies in accordance with accounting principles
generally accepted at the time as the Trustees or such officers or agents may in
their best judgment deem fair and reasonable under the circumstances. The manner
of determining net asset value may from time to time be altered as necessary or
desirable in the judgment of the Trustees to conform it to any other method
prescribed or permitted by applicable law or regulation. Determinations of net
asset value made by the Trustees or such officers or agents in good faith shall
be binding on all parties concerned. The foregoing sentence shall not be
construed to protect any Trustee, officer or agent of the Trust against any
liability to the Trust or its security holders to which he or she would
otherwise be subject by reason of wilful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
ARTICLE 9
Amendments to the By-Laws
9.1. General. These By-Laws may be amended or repealed, in whole or in
part, by a majority of the Trustees then in office at any meeting of the
Trustees.
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PORTIONS OF
AGREEMENT AND DECLARATION OF TRUST
RELATING TO SHAREHOLDERS' RIGHTS
<PAGE>
******************************************************************************
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial interest in
the Trust shall at all times be divided into an unlimited number of Shares,
without par value. Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends, when and as
declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Share shall have any priority or preference over any other Share of
the same Series with respect to dividends or distributions upon termination of
the Trust or of such Series made pursuant to Article IX, Section 4 hereof. All
dividends and distributions shall be made ratably among all Shareholders of a
particular Series from the assets belonging to such Series according to the
number of Shares of such Series held of record by such Shareholders on the
record date for any dividend or on the date of termination, as the case may be.
Shareholders shall have no preemptive or other right to subscribe to any
additional Shares or other securities issued by the Trust. The Trustees may from
time to time divide or combine the Shares of any particular Series into a
greater or lesser number of Shares of that Series without thereby changing the
proportionate beneficial interest of the Shares of that Series in the assets
belonging to that Series or in any way affecting the rights of Shares of any
other Series.
Section 2. Ownership of Shares. The ownership of Shares shall be
recorded on the books of the Trust or a transfer or similar agent for the Trust,
which books shall be maintained separately for the Shares of each Series. No
certificates certifying the ownership of Shares shall be issued except as the
Trustees may otherwise determine from time to time. The Trustees may make such
rules as they consider appropriate for the transfer of Shares of each Series and
similar matters. The record books of the Trust as kept by the Trust or any
transfer or similar agent, as the case may be, shall be conclusive as to who are
the Shareholders of each Series and as to the number of Shares of each Series
held from time to time by each.
Section 3. Investments in the Trust. The Trustees shall accept
investments in the Trust from such persons and on such terms and for such
consideration as they from time to time authorize.
Section 4. Status of Shares and Limitation of Personal Liability.
Shares shall be deemed to be personal property giving only the rights provided
in this instrument. Every Shareholder by virtue of having become a Shareholder
shall be held to have expressly assented and agreed to the terms hereof and to
have become a party hereto. The death of a Shareholder during the continuance of
the Trust shall not operate to terminate the same nor entitle the representative
of any deceased Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but entitles such representative
only to the rights of said deceased Shareholder under this Trust. Ownership of
Shares shall not entitle the
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Shareholder to any title in or to the whole or any part of the Trust property or
right to call for a partition or division of the same or for an accounting, nor
shall the ownership of Shares constitute the Shareholders partners. Neither the
Trust nor the Trustees, nor any officer, employee or agent of the Trust shall
have any power to bind personally any Shareholders, nor except as specifically
provided herein to call upon any Shareholder for the payment of any sum of money
or assessment whatsoever other than such as the Shareholder may at any time
personally agree to pay.
Section 5. Power of Trustees to Change Provisions Relating to Shares.
Notwithstanding any other provisions of this Declaration of Trust and without
limiting the power of the Trustees to amend the Declaration of Trust as provided
elsewhere herein, the Trustees shall have the power to amend this Declaration of
Trust, at any time and from time to time, in such manner as the Trustees may
determine in their sole discretion, without the need for Shareholder action, so
as to add to, delete, replace or otherwise modify any provisions relating to the
Shares contained in this Declaration of Trust for the purpose of (i) responding
to or complying with any regulations, orders, rulings or interpretations of any
governmental agency or any laws, now or hereafter applicable to the Trust, or
(ii) designating and establishing Series in addition to the Series established
in Section 6 of this Article III; provided that before adopting any such
amendment without Shareholder approval, the Trustees shall determine that it is
consistent with the fair and equitable treatment of all Shareholders. The
establishment and designation of any Series or class of Shares in addition to
the Series established and designated in Section 6 of this Article III shall be
effective upon the execution by a majority of the then Trustees of an amendment
to this Declaration of Trust, taking the form of a complete restatement or
otherwise, setting forth such establishment and designation and the relative
rights and preferences of such Series, or as otherwise provided in such
instrument.
Without limiting the generality of the foregoing, the Trustees may, for
the above-stated purposes, amend the Declaration of Trust to:
(a) create one or more Series or classes of Shares (in
addition to any Series or classes already existing or otherwise) with such
rights and preferences and such eligibility requirements for investment therein
as the Trustees shall determine and reclassify any or all outstanding Shares as
shares of particular Series or classes in accordance with such eligibility
requirements;
(b) amend any of the provisions set forth in paragraphs (a)
through (i) of Section 6 of this Article III;
(c) combine one or more Series or classes of Shares into a
single Series or class on such terms and conditions as the Trustees shall
determine;
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<PAGE>
(d) change or eliminate any eligibility requirements for
investment in Shares of any Series or class, including without limitation the
power to provide for the issue of Shares of any Series or class in connection
with any merger or consolidation of the Trust with another trust or company or
any acquisition by the Trust of part or all of the assets of another trust or
company;
(e) change the designation of any Series or class of Shares;
(f) change the method of allocating dividends among the
various Series and classes of Shares;
(g) allocate any specific assets or liabilities of the Trust
or any specific items of income or expense of the Trust to one or more Series or
classes of Shares;
(h) specifically allocate assets to any or all Series or
classes of Shares or create one or more additional Series or classes of Shares
which are preferred over all other Series or classes of Shares in respect of
assets specifically allocated thereto or any dividends paid by the Trust with
respect to any net income, however determined, earned from the investment and
reinvestment of any assets so allocated or otherwise and provide for any special
voting or other rights with respect to such Series or classes.
Section 6. Establishment and Designation of Series. Without limiting
the authority of the Trustees set forth in Section 5, inter alia, to establish
and designate any further Series or classes or to modify the rights and
preferences of any Series, the "Baupost X Fund," shall be, and is hereby,
established and designated.
Shares of each Series established in this Section 6 shall have the
following relative rights and preferences:
(a) Assets belonging to Series. All consideration received by
the Trust for the issue or sale of Shares of a particular Series, together with
all assets in which such consideration is invested or reinvested, all income,
earnings, profits, and proceeds thereof from whatever source derived, including,
without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds in whatever form the same may be, shall irrevocably belong to that
Series for all purposes, subject only to the rights of creditors, and shall be
so recorded upon the books of account of the Trust. Such consideration, assets,
income, earnings, profits and proceeds thereof, from whatever source derived,
including without limitation, any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived from any
reinvestment of such proceeds, in whatever form the same may be, are herein
referred to as "assets belonging to" that Series. In the event that there are
any assets, income, earnings, profits and proceeds thereof, funds or payments
which are not readily identifiable as belonging to any particular Series
(collectively "General Assets"), the
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Trustees shall allocate such General Assets to, between or among any one or more
of the Series established and designated from time to time in such manner and on
such basis as they, in their sole discretion, deem fair and equitable, and any
General Asset so allocated to a particular Series shall belong to that Series.
Each such allocation by the Trustees shall be conclusive and binding upon the
Shareholders of all Series for all purposes.
(b) Liabilities Belonging to Series. The assets belonging to
each particular Series shall be charged solely with the liabilities of the Trust
in respect to that Series, expenses, costs, charges and reserves attributable to
that Series, and any general liabilities of the Trust which are not readily
identifiable as belonging to any particular Series but which are allocated and
charged by the Trustees to and among any one or more of the Series established
and designated from time to time in a manner and on such basis as the Trustees
in their sole discretion deem fair and equitable. The liabilities, expenses,
costs, charges, and reserves so charged to a Series are herein referred to as
"liabilities belonging to" that Series. Each allocation of liabilities,
expenses, costs, charges and reserves by the Trustees shall be conclusive and
binding upon the holders of all Series for all purposes.
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including
without limitation, Article VI, no dividend or distribution (including, without
limitation, any distribution paid upon termination of the Trust or of any
Series) with respect to, nor any redemption or repurchase of, the Shares of any
Series shall be effected by the Trust other than from the assets belonging to
such Series, nor shall any Shareholder of any particular Series otherwise have
any right or claim against the assets belonging to any other Series except to
the extent that such Shareholder has such a right or claim hereunder as a
Shareholder of such other Series.
(d) Voting. Notwithstanding any of the other provisions of
this Declaration of Trust, including, without limitation, Section 1 of Article
V, the Shareholders of any particular Series shall not be entitled to vote on
any matters as to which such Series is not affected. On any matter submitted to
a vote of Shareholders, all Shares of the Trust then entitled to vote shall be
voted by individual Series, unless otherwise required by the 1940 Act or other
applicable law.
(e) Equality. All the Shares of each particular Series shall
represent an equal proportionate interest in the assets belonging to that Series
(subject to the liabilities belonging to that Series), and each Share of any
particular Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole share of that Series,
including rights with respect to voting, receipt of dividends and distributions,
redemption of Shares and termination of the Trust.
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<PAGE>
(g) Exchange Privileges. The Trustees shall have the authority
to provide that the holders of Shares of any Series shall have the right to
exchange said Shares for Shares of one or more other Series of Shares in
accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series, unless
otherwise required by applicable law, to combine the assets and liabilities
belonging to any two or more Series into assets and liabilities belonging to a
single series or class.
(i) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series previously established and
designated, the Trustees may amend this Declaration of Trust to abolish that
Series and to rescind the establishment and designation thereof, such amendment
to be effected in the manner provided in Section 5 of this Article III.
Section 7. Indemnification of Shareholders. In case any Shareholder or
former Shareholder shall be held to be personally liable solely by reason of his
or her being or having been a Shareholder of the Trust or of a particular Series
and not because of his or her acts or omissions or for some other reason, the
Shareholder or former Shareholder (or his or her heirs, executors,
administrators or other legal representatives or in the case of a corporation or
other entity, its corporate or other general successor) shall be entitled out of
the assets of the Series of which he or she is a Shareholder or former
Shareholder to be held harmless from and indemnified against all loss and
expense arising from such liability.
Section 8. No Preemptive Rights. Shareholders shall have no preemptive
or other right to subscribe to any additional Shares or other securities issued
by the Trust.
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ARTICLE IV
The Trustees
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Section 3. Powers. Subject to the provisions of this Declaration of
Trust, the business of the Trust shall be managed by the Trustees, and they
shall have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the Trustees may adopt By-Laws not
inconsistent with this Declaration of Trust providing for the regulation and
management of the affairs of the Trust and may amend and repeal them to the
extent that such By-Laws do not reserve that right to the Shareholders; they may
fill vacancies in or remove from their number (including any vacancies created
by an increase in the number of Trustees); they may remove from their number
with or without cause; they may elect and
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<PAGE>
remove such officers and appoint and terminate such agents as they consider
appropriate; they may appoint from their own number and terminate one or more
committees consisting of two or more Trustees which may exercise the powers and
authority of the Trustees to the extent that the Trustees determine; they may
employ one or more custodians of the assets of the Trust and may authorize such
custodians to employ subcustodians and to deposit all or any part of such assets
in a system or systems for the central handling of securities or with a Federal
Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both,
provide for the distribution of Shares by the Trust, through one or more
principal underwriters or otherwise, set record dates for the determination of
Shareholders with respect to various matters, and in general delegate such
authority as they consider desirable to any officer of the Trust, to any
committee of the Trustees and to any agent or employee of the Trust or to any
such custodian or underwriter.
Without limiting the foregoing, the Trustees shall have power and
authority:
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Section 2. Payment of Expenses by Shareholders. The Trustees shall have
the power, as frequently as they may determine, to cause each Shareholder, or
each Shareholder of any particular Series, to pay directly, in advance or
arrears, for charges of the Trust's custodian or transfer, shareholder servicing
or similar agent, an amount fixed from time to time by the Trustees, by setting
off such charges due from such Shareholder from declared but unpaid dividends
owed such Shareholder and/or by reducing the number of Shares in the account of
such Shareholder by that number of full and/or fractional Shares which
represents the outstanding amount of such charges due from such Shareholder.
******************************************************************************
The fact that:
(i) any of the Shareholders, Trustees or officers of the Trust
is a shareholder, director, officer, partner, trustee, employee, manager,
adviser, principal underwriter, distributor or affiliate or agent of or for any
partnership, corporation, trust, association, or other organization, or of or
for any parent or affiliate of any organization, with which an advisory or
management contract, or principal underwriter's or distributor's contract, or
transfer, shareholder servicing or other agency contract may have been or may
hereafter be made, or that any such organization, or any parent or affiliate
thereof, is a Shareholder or has an interest in the Trust, or that
(ii) any corporation, trust, association or other organization
with which an advisory or management contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other agency
contract may have been or may hereafter be made also has an advisory or
management contract, or principal underwriter's or distributor's
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<PAGE>
contract, or transfer, shareholder servicing or other agency contract with one
or more other corporations, trusts, associations, or other organizations, or has
other business or interests, shall not affect the validity of any such contract
or disqualify any Shareholder, Trustee or officer of the Trust from voting upon
or executing the same or create any liability or accountability to the Trust or
its Shareholders.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. The Shareholders shall have power to vote
only (i) for the election of Trustees as provided in Article IV, Section 1, (ii)
with respect to any amendment of this Declaration of Trust to the extent and as
provided in Article IX, Section 8, (iii) to the same extent as the stockholders
of a Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, (iv) with
respect to the termination of the Trust or any Series to the extent and as
provided in Article IX, Section 4, and (v) with respect to such additional
matters relating to the Trust as may be required by this Declaration of Trust,
the By-Laws or any registration of the Trust with the Commission (or any
successor agency) or any state, or as the Trustees may consider necessary or
desirable. Each whole Share shall be entitled to one vote as to any matter on
which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. At any time when no Shares of a Series
are outstanding, the Trustees may exercise all rights of Shareholders of that
Series with respect to matters affecting that Series and may with respect to
that Series take any action required by law, this Declaration of Trust or the
By-Laws to be taken by the Shareholders.
Section 2. Voting Power and Meetings. Meetings of the Shareholders may
be called by the Trustees for the purpose of electing Trustees as provided in
Article IV, Section 1 and for such other purposes as may be prescribed by law,
by this Declaration of Trust or by the By-Laws. Meetings of the Shareholders may
also be called by the Trustees from time to time for the purpose of taking
action upon any other matter deemed by the Trustees to be necessary or
desirable. A meeting of Shareholders may be held at any place designated by the
Trustees. Written notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least seven days before
such meeting, postage prepaid, stating the time and place of the meeting, to
each Shareholder at the Shareholder's address as it appears on the records of
the Trust. Whenever notice of a meeting is required to be given to a Shareholder
under this Declaration of Trust or the By-Laws, a written waiver thereof,
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<PAGE>
executed before or after the meeting by such Shareholder or his or her attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
Section 3. Quorum and Required Vote. Except when a larger quorum is
required by law, by the By-Laws or by this Declaration of Trust, 40% of the
Shares entitled to vote shall constitute a quorum at a Shareholders' meeting.
When any one or more Series is to vote as a single class separate from any other
Shares which are to vote on the same matters as a separate class or classes, 40%
of the Shares of each such class entitled to vote shall constitute a quorum at a
Shareholder's meeting of that class. Any meeting of Shareholders may be
adjourned from time to time by a majority of the votes properly cast upon the
question, whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the original meeting
without further notice. When a quorum is present at any meeting, a majority of
the Shares voted shall decide any questions and a plurality shall elect a
Trustee, except when a larger vote is required by any provision of this
Declaration of Trust or the By-Laws or by law. If any question on which the
Shareholders are entitled to vote would adversely affect the rights of any
Series or class of Shares, the vote of a majority (or such larger vote as is
required as aforesaid) of the Shares of such Series or class which are entitled
to vote, voting separately, shall also be required to decide such question.
Section 4. Action by Written Consent. Any action taken by Shareholders
may be taken without a meeting if Shareholders holding a majority of the Shares
entitled to vote on the matter (or such larger proportion thereof as shall be
required by any express provision of this Declaration of Trust or by the
By-Laws) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series who are entitled to vote or act at any meeting or any
adjournment thereof, the Trustees may from time to time fix a time, which shall
be not more than 60 days before the date of any meeting of Shareholders, as the
record date for determining the Shareholders of such Series having the right to
notice of and to vote at such meeting and any adjournment thereof, and in such
case only Shareholders of record on such record date shall have such right,
notwithstanding any transfer of shares on the books of the Trust after the
record date. For the purpose of determining the Shareholders of any Series who
are entitled to receive payment of any dividend or of any other distribution,
the Trustees may from time to time fix a date, which shall be before the date
for the payment of such dividend or such other payment, as the record date for
determining the Shareholders of such Series having the right to receive such
dividend or distribution. Without fixing a record date, the Trustees may for
voting and/or distribution purposes close the register or transfer books for one
or more Series for all or any part of the period between a record date and a
meeting of shareholders or the payment of a distribution.
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<PAGE>
Nothing in this section shall be construed as precluding the Trustees from
settling different record dates for different Series.
Section 6. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Income, Distributions, and Redemptions and Repurchases
Section 1. Distributions of Net Income. The Trustees shall each year,
or more frequently if they so determine in their sole discretion, distribute to
the Shareholders of each Series, in shares of that Series, cash or otherwise, an
amount approximately equal to the net income attributable to the assets
belonging to such Series and may from time to time distribute to the
Shareholders of each Series, in shares of that Series, cash or otherwise, such
additional amounts, but only from the assets belonging to such Series, as they
may authorize. All dividends and distributions on Shares of a particular Series
shall be distributed pro rata to the holders of that Series in proportion to the
number of Shares of that Series held by such holders and recorded on the books
of the Trust at the date and time of record established for that payment of such
dividend or distributions.
The manner of determining net income, income, asset values, capital
gains, expenses, liabilities and reserves of any Series may from time to time be
altered as necessary or desirable in the judgment of the Trustees to conform
such manner of determination to any other method prescribed or permitted by
applicable law. Net income shall be determined by the Trustees or by such person
as they may authorize at the times and in the manner provided in the By-Laws.
Determinations of net income of any Series and determination of income, asset
value, capital gains, expenses and liabilities made by the Trustees, or by such
person as they may authorize, in good faith, shall be binding on all parties
concerned. The foregoing sentence shall not be construed to protect any Trustee,
officer or agent of the Trust against any liability to the Trust or its security
holders to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
If, for any reason, the net income of any Series determined at any time
is a negative amount, the pro rata share of such negative amount allocable to
each Shareholder of such Series shall constitute a liability of such Shareholder
to that Series which shall be paid out of such Shareholder's account at such
times and in such manner as the Trustees may from time to time determine (x) out
of the accrued dividend account of such Shareholder, (y) by reducing the number
of Shares of that Series in the account of such Shareholder, or (z) otherwise.
Section 2. Redemptions and Repurchases. The Trust shall purchase such
Shares as are offered by any Shareholder for redemption, upon the presentation
of a proper instrument of transfer together with a request directed to the Trust
or a person designated by the Trust that
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<PAGE>
the Trust purchase such Shares or in accordance with such other procedures for
redemption as the Trustees may from time to time authorize; and the Trust will
pay therefor the net asset value thereof, as determined in accordance with the
By-Laws, the 1940 Act and the rules of the Commission. Payment for said Shares
shall be made by the Trust to the Shareholder within seven days after the date
on which the request is made or in accordance with such other procedures,
consistent with the 1940 Act and the rules of the Commission, as the Trustees
may from time to time authorize. The obligation set forth in this Section 2 is
subject to the provision that in the event that any time the New York Stock
Exchange is closed for other than weekends or holidays, or if permitted by the
rules of the Commission during periods when trading on such Exchange is
restricted or during any emergency which makes it impracticable for the Trust to
dispose of the investments of the applicable Series or to determine fairly the
value of the net assets belonging to such Series or during any other period
permitted by order of the Commission for the protection of investors, such
obligations may be suspended or postponed by the Trustees. The Trust may also
purchase or repurchase Shares at a price not exceeding the net asset value of
such Shares in effect when the purchase or repurchase or any contract to
purchase or repurchase is made.
The redemption price may in any case or cases be paid wholly or partly
in kind if the Trustees determine that such payment is advisable in the interest
of the remaining Shareholders of the Series the Shares of which are being
redeemed. In making any such payment wholly or partly in kind, the Trust shall,
so far as may be practicable, deliver assets which approximate the
diversification of all of the assets belonging at the time to the Series the
Shares of which are being redeemed. Subject to the foregoing, the fair value,
selection and quantity of securities or other property so paid or delivered as
all or part of the redemption price may be determined by or under authority of
the Trustees. In no case shall the Trust be liable for any delay of any
corporation or other person in transferring securities selected for delivery as
all or part of any payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust shall have
the right at its option and at any time to redeem Shares of any Shareholder at
the net asset value thereof as described in Section 1 of this Article VI: (i) if
at such time such Shareholder owns Shares of any Series having an aggregate net
asset value of less than an amount determined from time to time by the Trustees;
or (ii) to the extent that such Shareholder owns Shares equal to or in excess of
a percentage determined from time to time by the Trustees of the outstanding
Shares of the Trust or of any Series.
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ARTICLE VIII
Indemnification
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<PAGE>
Section 2. Compromise Payment. As to any matter disposed of (whether by
a compromise payment, pursuant to a consent decree or otherwise) without an
adjudication by a court, or by any other body before which the proceeding was
brought, that such Covered Person is liable to the Trust or its Shareholders by
reason of wilful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office, indemnification
shall be provided if (a) approved, after notice that it involves such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts (as opposed to a full trial type inquiry) that such Covered
Person is not liable to the Trust or its Shareholders by reason or wilful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office, or (b) there has been obtained an
opinion in writing of independent legal counsel, based upon a review of readily
available facts (as opposed to a full trial type inquiry) to the effect that
such indemnification would not protect such Person against any liability to the
Trust to which he would otherwise be subject by reason of wilful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office. Any approval pursuant to this Section shall not
prevent the recovery from any Covered Person of any amount paid to such Covered
Person in accordance with this Section as indemnification if such Covered Person
is subsequently adjudicated by a court of competent jurisdiction to have been
liable to the Trust or its Shareholders by reason of wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of such Covered Person's office.
******************************************************************************
Section 4. Shareholders. In case any Shareholder or former Shareholder
shall be held to be personally liable solely by reason of his or her being or
having been a Shareholder and not because of his or her acts or omissions or for
some other reason, the Shareholder or former Shareholder (or his or her heirs,
executors, administrators or other legal representatives or, in the case of a
corporation or other entity, its corporate or other general successor) shall be
entitled to be held harmless from and indemnified against all loss and expense
arising from such liability, but only out of the assets of the particular series
of Shares of which he or she is or was a Shareholder.
ARTICLE IX
Miscellaneous
Section 1. Trustees, Shareholders, etc. Not Personally Liable; Notice.
All persons extending credit to, contracting with or having any claim against
the Trust or any Series shall look only to the assets of the Trust, or, to the
extent that the liability of the Trust may have
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<PAGE>
been expressly limited by contract to the assets of a particular Series, only to
the assets belonging to the relevant Series, for payment under such credit,
contract or claim; and neither the Shareholders nor the Trustees, nor any of the
Trust's officers, employees or agents, whether past, present or future, shall be
personally liable therefor. Nothing in this Declaration of Trust shall protect
any Trustee against any liability to which such Trustee would otherwise be
subject by reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee.
Every note, bond, contract, instrument, certificate or undertaking made
or issued on behalf of the Trust by the Trustees, by any officers or officer or
otherwise shall give notice that this Declaration of Trust is on file with the
Secretary of The Commonwealth of Massachusetts and shall recite that the same
was executed or made by or on behalf of the Trust or by them as Trustee or
Trustees or as officer or officers or otherwise and not individually and that
the obligations of such instrument are not binding upon any of them or the
Shareholders individually but are binding only upon the assets and property of
the Trust or upon the assets belonging to the Series for the benefit of which
the Trustees have caused the note, bond, contract, instrument, certificate or
undertaking to be made or issued, and may contain such further recital as he,
she or they may deem appropriate, but the omission of any such recital shall not
operate to bind any Trustee or Trustees or officer or officers or Shareholders
or any other person individually.
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Section 4. Termination of Trust or Series. Unless terminated as
provided herein, the Trust shall continue without limitation of time. The Trust
may be terminated at any time by vote of at least 66-2/3% of the Shares of each
Series entitled to vote and voting separately by Series or by the Trustees by
written notice to the Shareholders. Any Series may be terminated at any time by
vote of at least 66-2/3% of the Shares of that Series or by the Trustees by
written notice to the Shareholders of that Series.
Upon termination of the Trust (or any Series, as the case may be),
after paying or otherwise providing for all charges, taxes, expenses and
liabilities belonging, severally, to each Series (or the applicable Series, as
the case may be), whether due or accrued or anticipated as may be determined by
the Trustees, the Trust shall in accordance with such procedures as the Trustees
consider appropriate reduce the remaining assets belonging, severally, to each
Series (or the applicable Series, as the case may be), to distributable form in
cash or shares or other securities, or any combination thereof, and distribute
the proceeds belonging to each Series (or the applicable Series, as the case may
be), to the Shareholders of that Series, as a Series, ratably according to the
number of Shares of that Series held by the several Shareholders on the date of
termination.
Section 5. Merger and Consolidation. The Trustees may cause the Trust
to be merged into or consolidated with another trust or company or its shares
exchanged under or pursuant
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<PAGE>
to any state or federal statute, if any, or otherwise to the extent permitted by
law, if such merger or consolidation or share exchange has been authorized by
vote of a majority of the outstanding Shares; provided, however, that in all
respects not governed by statute or applicable law, the Trustees shall have
power to prescribe the procedure necessary or appropriate to accomplish a sale
of assets, merger or consolidation.
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Section 8. Amendments. This Declaration of Trust may be amended at any
time by an instrument in writing signed by a majority of the then Trustees when
authorized to do so by vote of a majority of the Shares entitled to vote, except
that amendments described in Article III, Section 5 hereof or having the purpose
of changing the name of the Trust or of supplying any omission, curing any
ambiguity or curing, correcting or supplementing any defective or inconsistent
provision contained herein shall not require authorization by Shareholder vote.
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-xiii-
PORTIONS OF
BY-LAWS
RELATING TO SHAREHOLDERS' RIGHTS
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3.5. Chief Executive Officer. The Chief Executive Officer of the Trust
shall be the Chairman of the Board, if any, the President or such other officer
as is designated by the Trustees and shall, subject to the control of the
Trustees, have general charge and supervision of the business of the Trust and,
unless there is a Chairman of the Board, or except as the Trustees (or the
Chairman of the Board if the Trustees do not act) shall otherwise determine,
preside at all meetings of the stockholders and of the Trustees. If no such
designation is made, the President shall be the Chief Executive Officer.
3.6. Chairman of the Board. If a Chairman of the Board of Trustees is
elected, he or she shall have the duties and powers specified in these By-Laws
and shall have such other duties and powers as may be determined by the
Trustees. The Chairman of the Board shall, unless the Trustees (or the Chairman
of the Board if the Trustees do not act) shall otherwise determine, preside at
all meetings of the stockholders and of the Trustees.
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ARTICLE 7
Execution of Papers
7.1. General. Except as the Trustees may generally or in particular
cases authorize the execution thereof in some other manner, all checks, notes,
drafts and other obligations and all registration statements and amendments
thereto and all applications and amendments thereto to the Securities and
Exchange Commission shall be signed by the Chairman, if any, the President, any
Vice President or the Treasurer or any of such other officers or agents as shall
be designated for that purpose by a vote of the Trustees.
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ARTICLE 8
Provisions Relating to the Conduct of the Trust's Business
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8.2. Limitation on Dealings with Officers or Trustees. The Trust will
not lend any of its assets to the Distributor or Adviser or to any officer or
director of the Distributor or
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<PAGE>
Adviser or any officer or Trustee of the Trust and shall not permit any officer
or Trustee or any officer or director of the Distributor or Adviser, to deal for
or on behalf of the Trust with himself as principal or agent, or with any
partnership, association or corporation in which he or she has a financial
interest; provided that the foregoing provisions shall not prevent (a) officers
and Trustees of the Trust or officers and directors of the Distributor or
Adviser from buying, holding or selling shares in the Trust or from being
partners, officers or directors of or otherwise financially interested in the
Distributor or the Adviser; (b) a purchase or sale of securities or other
property if such transaction is permitted by or is exempt or exempted from the
provisions of the Investment Company Act of 1940, as amended (the "1940 Act"),
and does not involve any commission or profit to any securities dealer who is,
or one or more of whose partners, shareholders, officers or directors is, an
officer or Trustee of the Trust or an officer or director of the Distributor or
Adviser; (c) employment of legal counsel, registrars, transfer agents,
shareholder servicing agents, dividend disbursing agents or custodians who are,
or any one of which has a partner, shareholder, officer or director who is, an
officer or Trustee of the Trust or an officer or director of the Distributor or
Adviser if only customary fees are charged for services to the Trust; or (d)
sharing of statistical, research, legal and management expenses and office hire
and expenses with any other investment company in which an officer or Trustee of
the Trust or an officer or director of the Distributor or Adviser is an officer
or director or otherwise financially interested.
8.3. Limitation on Dealing in Securities of the Trust by Certain
Officers, Trustees, Distributor or Adviser. Neither the Distributor nor Adviser,
nor any officer or Trustee of the Trust or officer, director or partner of the
Distributor or Adviser shall take long or short positions in securities issued
by the Trust; provided, however, that:
(a) The Distributor may purchase from the Trust and otherwise deal in
shares issued by the Trust pursuant to the terms of its contract with the Trust;
(b) Any officer or Trustee of the Trust or officer or director or
partner of the Distributor or Adviser or any trustee or fiduciary for the
benefit of any of them may at any time, or from time to time, purchase from the
Trust or from the Distributor shares issued by the Trust at the price available
to the public or to such officer, Trustee, director, partner or fiduciary, no
such purchase to be in contravention of any applicable state or federal
requirement; and
(c) The Distributor or the Adviser may at any time, or from time to
time, purchase for investment shares issued by the Trust.
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8.5. Determination of Net Asset Value. The Trustees or any officer or
officers or agent or agents of the Trust designated from time to time for this
purpose by the Trustees shall determine at least once daily the net income and
the value of all the assets attributable to any
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<PAGE>
class or series of shares of the Trust on each day (other than on a day on which
no shares of the Trust were tendered for redemption and no order to purchase
shares was received by the Fund) upon which the New York Stock Exchange is open
for unrestricted trading or at such other times as the Trustees shall,
consistent with the 1940 Act and the rules of the Commission, designate. In
determining asset values, all securities for which representative market
quotations are readily available shall be valued at market value and other
securities and assets shall be valued at fair value, all as determined in good
faith by the Trustees or an officer or officers or agent or agents, as
aforesaid, in accordance with accounting principles generally accepted at the
time. Notwithstanding the foregoing, the assets belonging to any class or series
of shares of the Trust may, if so authorized by the Trustees, be valued in
accordance with the amortized cost method, subject to the power of the Trustees
to alter the method for determining asset values. The value of such assets so
determined, less total liabilities belonging to that class or series of shares
(exclusive of capital stock or surplus) shall be the net asset value, until a
new asset value is determined by the Trustees or such officers or agents. In
determining the net asset value, the Trustees or such officers or agents may
include in liabilities such reserves for taxes, estimated accrued expenses and
contingencies in accordance with accounting principles generally accepted at the
time as the Trustees or such officers or agents may in their best judgment deem
fair and reasonable under the circumstances. The manner of determining net asset
value may from time to time be altered as necessary or desirable in the judgment
of the Trustees to conform it to any other method prescribed or permitted by
applicable law or regulation. Determinations of net asset value made by the
Trustees or such officers or agents in good faith shall be binding on all
parties concerned. The foregoing sentence shall not be construed to protect any
Trustee, officer or agent of the Trust against any liability to the Trust or its
security holders to which he or she would otherwise be subject by reason of
wilful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
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-3-
MANAGEMENT CONTRACT
Management Contract ("Contract") executed as of February 1, 1991,
between The Baupost Fund, a Massachusetts business trust (the "Fund"), and The
Baupost Group, Inc., a Massachusetts corporation (the "Manager").
Witnesseth:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Fund
and to such policies as the Trustees may determine, the Manager will,
at its expense, (i) furnish continuously an investment program for the
Fund and make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of the Fund's portfolio securities and
(ii) furnish office space and equipment, and pay all salaries, fees and
expenses of officers and Trustees of the Fund who are affiliated with
the Manager. The Manager will not furnish to the Fund under this
Contract the following services: determinations of the net assets, the
net asset value of the Fund and the offering price per share of shares
of the Fund, maintenance of the Fund's accounts, books and records as
required by Section 31(a) of the Investment Company Act of 1940, as
amended, and shareholder accounting. In the performance of its duties,
the Manager will comply with the provisions of the Agreement and
Declaration of Trust and By-laws of the Fund and the Fund's stated
investment objectives, policies and restrictions.
(b) In placing orders for the portfolio transactions of the
Fund, the Manager will seek the best price and execution available,
except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. In
using its best efforts to obtain for the Fund the most favorable price
and execution available, the Manager shall consider all factors it
deems relevant, including, without limitation, the overall net economic
cost to the Fund (including price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all where a large
block is involved, the availability of the broker to stand ready to
execute possibly difficult transactions in the future and the financial
strength and stability of the broker. Subject to such policies as the
Trustees may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Contract or
otherwise solely by reason of its having caused the Fund to pay a
broker or dealer that provides brokerage and research services to the
Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the
Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either
that particular transaction or the Manager's overall responsibilities
with respect to the Fund and to other clients of the Manager as to
which the Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to
pay any expenses of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Fund may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any
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person controlled by or under common control with the Manager, and that the
Manager and any person controlled by or under common control with the Manager
may have an interest in the Fund. It is also understood that the Manager and
persons controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE FUND TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's
services rendered and for the facilities furnished and the expenses borne by the
Manager pursuant to Section 1, a fee, computed and paid quarterly at the annual
rate of 1.00% of the Fund's average net asset value. Such average net asset
value of the Fund shall be determined by taking an average of all of the
determinations of such net asset value during such quarter at the close of
business on the last business day of each month during such quarter while this
Contract is in effect. Such fee shall be payable for each quarter within five
(5) business days after the end of such quarter.
In the event that expenses of the Fund for any fiscal year should
exceed the expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of the Fund
are qualified for offer and sale, the compensation due the Manager for such
fiscal year shall be reduced by the amount of such excess by reduction or refund
thereof. In addition, the Manager will reduce its management fee by up to .75%
to the extent that the Fund's total annual expenses (including all fees payable
by the Fund to the Manager pursuant to this Contract or any other agreement, 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.
If the Manager shall serve for less than the whole of a quarter, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Fund who are not interested persons of the Fund or of the
Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this
Contract by not more than sixty days' but no less than 30 days' written
notice delivered or mailed by registered mail, postage prepaid, to the
other party; or
(b) If (i) the Trustees of the Fund by majority vote or the
shareholders by the affirmative vote of a majority of the outstanding
shares of the Fund, and (ii) a majority of the Trustees of the Fund who
are not interested persons of the Fund or of the Manager, by vote cast
in person at a meeting called for the purpose of voting on such
approval, do not specifically approve at least annually the continuance
of this Contract, then this Contract shall automatically terminate at
the close of business on the second anniversary of its execution, or
upon the expiration of one year from the
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effective date of the last such continuance, whichever is later;
provided, however, that if the continuance of this Contract is
submitted to the shareholders of the Fund for their approval and such
shareholders fail to approve such continuance of this Contract as
provided herein, the Manager may continue to serve hereunder in a
manner consistent with the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder (collectively, the "1940
Act").
Action by the Fund under (a) above may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority
of the outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of the Fund means the affirmative vote, at a duly
called and held meeting of shareholders, (a) of the holders of 67% or more of
the shares of the Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the outstanding shares of the
Fund entitled to vote at such meeting are present in person or by proxy, or (b)
of the holders of more than 50% of the outstanding shares of the Fund entitled
to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the 1940 Act, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under the 1940 Act; and the
phrase "specifically approve at least annually" shall be construed in a manner
consistent with the 1940 Act.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, or to
any shareholder of the Fund, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. THE NAME "BAUPOST".
The Manager owns the right to use the name "Baupost" in connection with
investment-related series or products, and such name may be used by the Fund
only with the consent of the Manager. The Manager consents to the use by the
Fund of the name "The Baupost Fund" or to the use by the Fund of any other name
embodying the name "Baupost", in such forms as the Manager shall in writing
approve, but only on condition and so long as (i) this Contract shall remain in
full force and (ii) the Fund shall fully perform, fulfill and comply with all
provisions of this Contract expressed herein to be performed, fulfilled or
complied with by it. No such name shall be used by the Fund at any time or in
any place or for any purposes or under any condition except as in this section
provided. The foregoing authorization by the Manager to the Fund to use the said
name "Baupost" as part of a business or name is not exclusive of the right of
the Manager itself to use, or to authorize others to use, the same; the Fund
acknowledges and agrees that as between the Manager and the Fund, the Manager
has the exclusive right so to use, or to authorize others to use, said name and
the Fund agrees to take such action as may reasonably be requested by the
Manager to give full effect to the provisions of this section (including,
without limitation, consenting to such use of said name). Without limiting the
generality of the foregoing, the Fund agrees that, upon any termination of this
Contract by either party or upon the violation of any of its provisions by the
Fund, the Fund will, at the request of the Manager made within six months after
the Manager has knowledge of such termination or violation, use its best efforts
to change the name of the Fund so as to eliminate all reference,
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if any, to the name "Baupost" and will not thereafter transact any business in a
name containing the name "Baupost" in any form or combination whatsoever, or
designate itself as the same entity as or successor to an entity of such name,
or otherwise use the name "Baupost" or any other reference to the Manager. Such
covenants on the part of the Fund shall be binding upon it, its Trustees,
officers, stockholders, creditors and all other persons claiming under or
through it.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Fund is on file
with the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Fund as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
IN WITNESS WHEREOF, The Baupost Fund and The Baupost Group, Inc. have
each caused this instrument to be signed in duplicate on its behalf by its duly
authorized representative, all as of the day and year first above written.
THE BAUPOST FUND
By /s/ Seth A. Klarman
------------------------
Title: President
THE BAUPOST GROUP, INC.
By /s/ Jo-An B. Bosworth
--------------------------
Title: Vice President
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TRANSFER AGENCY AND ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made as of the 1st day of February, 1991, by and between The
Baupost Fund, a Massachusetts business trust having its principal office and
place of business at 44 Brattle Street, Cambridge, Massachusetts 02138 (the
"Fund"), and The Baupost Group, Inc. ("Baupost"), a Massachusetts corporation
having its principal office and place of business at 44 Brattle Street,
Cambridge, Massachusetts 02138.
W I T N E S S E T H:
WHEREAS, the Fund desires to appoint Baupost as its transfer agent and
dividend disbursing agent, and Baupost desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1. TERMS OF APPOINTMENT; DUTIES OF BAUPOST
1.01. Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints Baupost to act as, and Baupost agrees to
act as, transfer agent for the Fund's authorized and issued shares of beneficial
interest without par value (the "Shares") and dividend disbursing agent for the
shareholders of the Fund (the "Shareholders").
1.02. Baupost agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and Baupost, Baupost shall
(i) receive for acceptance and processing, orders for the
purchase of Shares, and, when applicable, payment
therefor, and promptly deliver payment and
appropriate documentation therefor to the custodian
of the Fund authorized pursuant to the Fund's
governing documents (the "Custodian");
(ii) pursuant to purchase orders or other appropriate
instructions, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder
account;
(iii) receive for acceptance and processing, redemption
requests and redemption directions, and deliver the
appropriate documentation therefor to the Custodian;
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(iv) pay over or cause to be paid over at the appropriate
time and in the appropriate manner monies with
respect to any redemption request as instructed by
redeeming Shareholders;
(v) effect transfers of Shares by the registered owners
thereof upon receipt of appropriate documentation;
(vi) prepare and transmit payments for dividends and
distributions declared by the Fund; and
(vii) maintain records of account for and advise the Fund
and its Shareholders as to the foregoing.
(b) In addition to and not in lieu of the services set forth in
paragraph (a) above, Baupost shall perform all of the customary services of a
transfer agent and dividend disbursing agent, including but not limited to (i)
maintaining all Shareholder accounts, (ii) preparing Shareholder meeting lists,
(iii) mailing proxies, (iv) receiving and tabulating proxies, (v) mailing
Shareholder reports and prospectuses and, if requested, statements of additional
information, (vi) withholding taxes on U.S. residents and non-resident alien
accounts where applicable, (vii) preparing and filing U.S. Treasury Department
Forms 1099 and other appropriate forms required with respect to dividends and
distributions by federal authorities for all registered Shareholders, (viii)
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, (ix) preparing and mailing activity
statements for Shareholders, (x) providing Shareholder account information, and
(xi) calculating the Fund's total net asset value, total net income, and net
asset value per share. The Fund shall provide Baupost with any information
required in connection with the furnishing of the foregoing services.
(c) Procedures applicable to the services provided under this Agreement
may be established from time to time by agreement between the Fund and Baupost.
(d) In performing its duties hereunder, in addition to the provisions
set forth herein, Baupost shall comply with the terms of the Agreement and
Declaration of Trust, the bylaws and the current Prospectus and Statement of
Additional Information of the Fund, and with the terms of votes adopted from
time to time by the Trustees and shareholders of the Fund, relating to the
subject matters of this Agreement, all as the same may be amended from time to
time. Baupost shall also comply with the provisions of all applicable laws and
regulations and with the requirements of any governmental authority having
jurisdiction over Baupost or the Fund with respect to the duties of Baupost
hereunder.
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ARTICLE 2. FEES
For performance by Baupost pursuant to this Agreement, the Fund agrees
to pay Baupost a quarterly fee at the annual rate of .25% of the Fund's "average
net assets". For the purposes of calculating the foregoing fee, "average net
assets" will be determined by taking an average of the determinations of such
net asset value during each quarter at the close of business on the last
business day of each month during such quarter.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BAUPOST
Baupost represents and warrants to the Fund that:
3.01. It is a corporation duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
3.02. It is duly qualified to carry on its business in all
jurisdictions where such qualification is required.
3.03. It is empowered under applicable laws and by its charter and
bylaws to enter into and perform this Agreement.
3.04. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05. It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to Baupost that:
4.01. It is an unincorporated business trust duly organized and
existing and in good standing under the laws of The Commonwealth of
Massachusetts.
4.02. It is empowered under applicable laws and by its governing
documents to enter into and perform this Agreement.
4.03. All proceedings required by said governing documents have been
taken to authorize it to enter into and perform this Agreement.
4.04. It is an investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
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4.05. A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made with respect
to all Shares of the Fund being offered for sale; information to the contrary
will result in immediate notification to Baupost.
ARTICLE 5. INDEMNIFICATION
5.01. Baupost shall not be responsible for, and the Fund shall
indemnify and hold Baupost harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) all actions of Baupost required to be taken pursuant to this
Agreement, provided that such actions are taken in good faith and without
negligence or willful misconduct;
(b) the Fund's refusal or failure to comply with the terms of this
Agreement, or the Fund's lack of good faith, negligence or willful misconduct,
or the breach of any representation or warranty of the Fund hereunder;
(c) the reliance on or use by Baupost of information, records or
documents which (i) are furnished to it by or on behalf of the Fund, and (ii)
have been prepared and/or maintained by the Fund or any other person or firm
(other than Baupost or an affiliate of Baupost) on behalf of the Fund;
(d) the reliance on, or the carrying out by Baupost of, any
instructions or requests of the Fund's representatives; or
(e) the offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that require that Shares be registered in such state, or in
violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
5.02. Baupost shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to Baupost's refusal or
failure to comply with the terms of this Agreement, or Baupost's lack of good
faith, negligence or willful misconduct, or the breach of any representation or
warranty of Baupost hereunder.
5.03. At any time Baupost may apply to any officer of the Fund
designated by the President of the Fund in a written notice to Baupost for
instructions, and may consult with the Fund's legal counsel with respect to any
matter arising in connection with the services to be performed by Baupost under
this Agreement, and Baupost shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such
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instructions or upon the opinion of such counsel. Baupost shall be protected and
indemnified in acting upon any papers or documents furnished by or on behalf of
the Fund, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instructions, information, data, reports
or documents provided Baupost by the Fund or its agents (other than Baupost or
an affiliate of Baupost) by telephone, in person, or by any other means
authorized by the Fund, and Baupost shall not be held to have notice of any
change of authority of any person until receipt of written notice thereof from
the Fund.
5.04. In the event either party is unable to perform its obligations
under this Agreement because of acts of God, strikes, equipment or transmission
failure or damage reasonably beyond its control, or other causes reasonably
beyond its control, such party shall not be liable to the other for any damages
resulting from such failure to perform or otherwise from such causes.
5.05. Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06. In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim, and, to the extent
it wishes, assume the defense thereof. The party seeking indemnification shall
in no case confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other party's prior
written consent.
ARTICLE 6. COVENANTS OF THE FUND AND BAUPOST
6.01. The Fund shall promptly furnish to Baupost the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of Baupost and the execution and delivery of
this Agreement.
(b) A copy of the Agreement and Declaration of Trust and bylaws of the
Fund and all amendments thereto.
6.02. Baupost shall keep records relating to the services to be
performed hereunder in such form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the rules and regulations
promulgated thereunder, Baupost agrees that all such records prepared or
maintained by Baupost relating to the services to be performed by Baupost
hereunder are the property of the Fund and will be preserved and made available
in accordance
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with such section, rules and regulations, and will be surrendered promptly to
the Fund at its request. Baupost hereby agrees that it will not use or employ,
or permit any other person or entity within its control to use or employ, any
such books, records, information or data for any purpose not authorized by the
Board of Trustees of the Fund. Baupost acknowledges that its services under this
Agreement (including, without limitation, the mailing of any shareholder
communications) are subject to the direction of the Fund and agrees that it will
accept direction only from the President of the Fund, or from other persons
designated in writing by the President of the Fund or authorized by action of
the Board of Trustees.
6.03. Baupost and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
6.04. In case of any requests or demands for the inspection of the
Shareholder records of the Fund, Baupost will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. Baupost reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person, unless
the Fund indemnifies Baupost to its reasonable satisfaction against such
liability. Baupost will make all reasonable efforts to consult with an
authorized officer of the Fund and obtain such indemnification prior to any such
disclosure.
ARTICLE 7. TERMINATION OF AGREEMENT
7.01. This Agreement shall become effective on the date hereof. Unless
terminated as herein provided, this Agreement shall remain in full force and
effect indefinitely.
7.02. This Agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Fund or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the Fund or by
Baupost, on sixty days' written notice to the other party.
ARTICLE 8. AMENDMENT
8.01. This Agreement may be amended or modified by a written agreement
executed by both parties.
ARTICLE 9. MASSACHUSETTS LAW TO APPLY
9.01. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
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ARTICLE 10. MERGER OF AGREEMENT
10.01. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
ARTICLE 11. LIMITATION OF LIABILITY
11.01. A copy of the Agreement and Declaration of Trust of the Fund is
on file with the Secretary of State of The Commonwealth of Massachusetts and
notice is hereby given that this Agreement is executed on behalf of the Trustees
of the Fund as Trustees and not individually and that the obligations of this
Agreement are not binding upon the Trustees or holders of Shares individually
but are binding only upon the assets or property of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
THE BAUPOST FUND THE BAUPOST GROUP, INC.
By: /s/ Seth A. Klarman By: /s/ Seth A. Klarman
________________________ _______________________
Its: President Its: President
Attest: Attest:
/s/ Paul C. Gannon /s/ Paul C. Gannon
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ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
FAX: (617) 951-7050
November 28, 1990
The Baupost Fund
44 Brattle Street
Cambridge, Massachusetts 02238
Ladies and Gentlemen:
We are furnishing this opinion in connection with the Registration
Statement on Form N-1A filed under the Securities Act of 1933, as amended, by
The Baupost Fund (the "Fund") for the registration of an indefinite number of
shares of beneficial interest of the Fund (the "Shares").
We have acted as counsel for the Fund since its organization. We are
familiar with the action taken by its Trustees to authorize the issuance of the
Shares. We have examined its records of Trustee and shareholder action, its
Bylaws, and its Agreement and Declaration of Trust on file at the office of the
Secretary of State of The Commonwealth of Massachusetts. We have examined copies
of such Registration Statement, in the form filed or to be filed with the
Securities and Exchange Commission, and such other documents as we deem as
necessary for the purpose of this opinion.
We assume that upon sale of the Shares the Fund will receive the net
asset value thereof.
Based upon the foregoing, we are of the opinion that the Fund is
authorized to issue an unlimited number of Shares, and that when the Shares are
issued and sold by the Fund, they will be validly issued, fully paid, and
nonassessable by the Fund.
The Fund is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Agreement and Declaration of Trust disclaims shareholder liability
for acts or obligations of the Fund and requires that notice
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ROPES & GRAY
The Baupost Fund
November 28, 1990
Page 2
of such disclaimer be given in each agreement, obligation, or instrument entered
into or executed by the Fund or the Trustees. The Agreement and Declaration of
Trust provides for indemnification out of Fund property for all loss and expense
of any shareholder held personally liable solely by reason of his being or
having been a shareholder. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund itself would be unable to meet its obligations.
We consent to the filing of this opinion as an exhibit to such
Registration Statement and to the filing of this opinion as an exhibit to the
Fund's Registration Statement on Form N-14.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
Consent of Ernst & Young LLP, Independent Auditors
We consent to the references to our firm under the captions "The Baupost Fund
Financial Highlights" in the Prospectus and "Experts" in the Statement of
Additional Information and to the use of our report dated December 1, 1995 with
respect to the financial statements and financial highlights of The Baupost
Fund, in Post-Effective Amendment Number 7 to the Registration Statement (Form
N-1A No. 33-35851) and the related Prospectus and Statement of Additional
Information of The Baupost Fund dated February 29, 1996.
ERNST & YOUNG LLP
Boston, Massachusetts
February 28, 1996
ROPES & GRAY
ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02110-2624
(617) 951-7000
FAX: (617) 951-7050
October 1, 1990
The Baupost Fund
44 Brattle Street
Cambridge, MA 02138
Gentlemen:
In connection with your sale to me today of 1,000 shares of beneficial
interest (the "Shares") in The Baupost Fund (the "Fund"), I understand that: (1)
the Shares have not been registered under the Securities Act of 1933, as amended
(the "Act"); (ii) your sale of the Shares to me is in reliance on the sale's
being exempt under Section 4(2) of the Act as not involving any public offering;
and (iii) in part, your reliance on such exemption is predicated on my
representation, which I hereby confirm, that I am acquiring the Shares for
investment and for my own account as the sole beneficial owner hereof, and not
with a view to or in connection with any resale or distribution of any or all of
the Shares or of any interest therein. I hereby agree that I will not sell,
assign or transfer the Shares or any interest therein except upon repurchase or
redemption by the Fund unless and until the Shares have been registered under
the Act or you have received an opinion of your counsel indicating to your
satisfaction that such sale, assignment or transfer will not violate the
provisions of the Act or any rules and regulations promulgated thereunder.
I further agree, pursuant to the requirements of the Staff of the
Securities and Exchange Commission, that if any of the Shares are redeemed
during the first five years of the Fund's operations by any holder thereof, the
redemption proceeds will be reduced by the amount of the then unamortized
organizational expenses in the same ratio as the number of Shares redeemed bears
to the number of Shares held at the time of redemption.
This letter is intended to take effect as an instrument under seal,
shall be construed under the laws of Massachusetts, and is delivered at
Cambridge, Massachusetts, as of the date above written.
Very truly yours,
/s/ William J. Poorvu
William J. Poorvu
Baupost Fund Total Return Calculation Per SEC Formula
<TABLE>
<CAPTION>
SEC ANNUAL RATE OF RETURN Simple
Cumulative ----------------------- Compound
Orig. Inv./ # of Total LIFE TO ROLLING Rate of Price Per
Date End.Red.Value Periods Return DATE 12 MONTHS Return Share
---- ------------- ------- ------ ---- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Init. Inv. 10/01/90 $0.00 0.0000 N/A N/A N/A N/A $100.00
10/31/90 $0.00 0.0000 N/A N/A N/A N/A $100.60
11/30/90 $0.00 0.0000 N/A N/A N/A N/A $101.34
12/14/90 $1,000.00 0.0000 0.00% N/A N/A N/A $101.60
Dividend 12/30/90 $1,003.05 0.0417 0.31% 7.59% 0.31% 7.32% $101.91
Div. Reinv. 12/31/90 $1,003.05 0.0417 0.31% 7.59% 0.31% 7.32% $100.41
1/31/91 $1,066.98 0.1250 6.70% 67.98% 6.70% 53.59% $106.81
2/28/91 $1,087.26 0.2083 8.73% 49.42% 8.73% 41.89% $108.84
3/31/91 $1,115.43 0.2917 11.54% 45.43% 11.54% 39.58% $111.66
4/30/91 $1,163.18 0.3750 16.32% 49.65% 16.32% 43.52% $116.44
5/31/91 $1,178.57 0.4583 17.86% 43.11% 17.86% 38.96% $117.98
6/30/91 $1,186.66 0.5417 18.67% 37.16% 18.67% 34.46% $118.79
7/31/91 $1,182.66 0.6250 18.27% 30.79% 18.27% 29.23% $118.39
8/31/91 $1,181.66 0.7083 18.17% 26.57% 18.17% 25.65% $118.29
9/30/91 $1,179.97 0.7917 18.00% 23.25% 18.00% 22.73% $118.12
Fiscal Y/E 10/31/91 $1,195.75 0.8750 19.57% 22.67% 19.57% 22.37% $119.70
11/30/91 $1,220.52 0.9583 22.05% 23.11% 22.05% 23.01% $122.18
Dividend 12/30/91 $1,229.71 1.0417 22.97% 21.96% 22.60% 22.05% $123.10
Dividend Reinv.12/31/91 $1,229.71 1.0417 22.97% 21.96% 22.60% 22.05% $117.85
1/31/92 $1,246.62 1.1250 24.66% 21.65% 16.84% 21.92% $119.47
2/28/92 $1,259.14 1.2083 25.91% 21.01% 15.81% 21.45% $120.67
3/31/92 $1,278.23 1.2917 27.82% 20.93% 14.60% 21.54% $122.50
4/30/92 $1,273.85 1.3750 27.39% 19.25% 9.51% 19.92% $122.08
5/31/92 $1,270.41 1.4583 27.04% 17.84% 7.79% 18.54% $121.75
6/30/92 $1,284.08 1.5417 28.41% 17.61% 8.21% 18.43% $123.06
7/31/92 $1,255.59 1.6250 25.56% 15.03% 6.17% 15.73% $120.33
8/31/92 $1,277.09 1.7083 27.71% 15.39% 8.08% 16.22% $122.39
9/30/92 $1,301.19 1.7917 30.12% 15.83% 10.27% 16.81% $124.70
Fiscal Y/E 10/31/92 $1,309.43 1.8750 30.94% 15.46% 9.51% 16.50% $125.49
11/30/92 $1,324.46 1.9583 32.45% 15.43% 8.52% 16.57% $126.93
Dividend 12/30/92 $1,400.11 2.0417 40.01% 17.92% 13.86% 19.60% $134.18
Dividend Reinv.12/31/92 $1,400.11 2.0417 40.01% 17.92% 13.86% 19.60% $125.88
1/29/93 $1,448.16 2.1250 44.82% 19.04% 16.17% 21.09% $130.20
2/26/93 $1,497.66 2.2083 49.77% 20.07% 18.94% 22.54% $134.65
3/31/93 $1,504.55 2.2917 50.46% 19.51% 17.71% 22.02% $135.27
4/30/93 $1,515.23 2.3750 51.52% 19.12% 18.95% 21.69% $136.23
5/28/93 $1,538.70 2.4583 53.87% 19.16% 21.12% 21.91% $138.34
6/30/93 $1,554.16 2.5417 55.42% 18.94% 21.03% 21.80% $139.73
7/30/93 $1,577.29 2.6250 57.73% 18.96% 25.62% 21.99% $141.81
8/31/93 $1,607.32 2.7083 60.73% 19.15% 25.86% 22.42% $144.51
9/30/93 $1,601.10 2.7917 60.11% 18.37% 23.05% 21.53% $143.95
Fiscal Y/E 10/29/93 $1,642.69 2.8750 64.27% 18.84% 25.45% 22.35% $147.69
Stock Split 10/31/93 $1,642.69 2.8750 64.27% 18.84% 25.45% 22.35% $14.769
11/30/93 $1,641.69 2.9583 64.17% 18.24% 23.95% 21.69% $14.76
Dividend 12/30/93 $1,663.94 3.0417 66.39% 18.22% 18.84% 21.83% $14.96
Dividend Reinv.12/31/93 $1,663.94 3.0417 66.39% 18.22% 18.84% 21.83% $13.07
1/31/94 $1,700.86 3.1250 70.09% 18.53% 17.45% 22.43% $13.36
2/28/94 $1,697.04 3.2083 69.70% 17.92% 13.31% 21.73% $13.33
3/31/94 $1,690.67 3.2917 69.07% 17.30% 12.37% 20.98% $13.28
4/29/94 $1,718.68 3.3750 71.87% 17.41% 13.43% 21.29% $13.50
5/31/94 $1,783.61 3.4583 78.36% 18.21% 15.92% 22.66% $14.01
6/30/94 $1,784.88 3.5417 78.49% 17.77% 14.85% 22.16% $14.02
7/29/94 $1,772.15 3.6250 77.22% 17.10% 12.35% 21.30% $13.92
8/31/94 $1,778.52 3.7083 77.85% 16.80% 10.65% 20.99% $13.97
9/30/94 $1,775.97 3.7917 77.60% 16.36% 10.92% 20.47% $13.95
10/31/94 $1,824.35 3.8750 82.43% 16.78% 11.06% 21.27% $14.33
11/30/94 $1,792.52 3.9583 79.25% 15.89% 9.19% 20.02% $14.08
Dividend 12/29/94 $1,797.61 4.0417 79.76% 15.62% 8.03% 19.73% $14.12
Dividend Reinv.12/30/94 $1,797.61 4.0417 79.76% 15.62% 8.03% 19.73% $12.30
1/31/95 $1,812.23 4.1250 81.22% 15.50% 6.55% 19.69% $12.40
2/28/95 $1,821.00 4.2083 82.10% 15.31% 7.30% 19.51% $12.46
3/31/95 $1,829.77 4.2917 82.98% 15.12% 8.23% 19.33% $12.52
4/28/95 $1,857.53 4.3750 85.75% 15.20% 8.08% 19.60% $12.71
5/31/95 $1,875.07 4.4583 87.51% 15.14% 5.13% 19.63% $12.83
6/30/95 $1,872.15 4.5417 87.21% 14.81% 4.89% 19.20% $12.81
7/31/95 $1,891.15 4.6250 89.11% 14.77% 6.71% 19.27% $12.94
8/31/95 $1,915.99 4.7083 91.60% 14.81% 7.73% 19.45% $13.11
9/29/95 $1,990.53 4.7917 99.05% 15.45% 12.08% 20.67% $13.62
10/31/95 $1,968.61 4.8750 96.86% 14.91% 7.91% 19.87% $13.47
</TABLE>
Baupost Fund Total Return Calculation Per SEC Formula (Continued)
<TABLE>
<CAPTION>
Ord. Inc. O/I Div. Cap. Gain C/G Div. Total
Shares Dividend Dollars Dividend Dollars Reinvested Cumulative
Date Purchased Per Share Reinvested Per Share Reinvested Shares Shares
---- --------- --------- ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Init. Inv. 10/01/90 $0.00 $0.00 0.000 0.000
10/31/90 $0.00 $0.00 0.000 0.000
11/30/90 $0.00 $0.00 0.000 0.000
12/14/90 9.843 $0.00 $0.00 0.000 9.843
Dividend 12/30/90 $0.00 $0.00 0.000 9.843
Div. Reinv. 12/31/90 $1.50 $14.76 $0.00 $0.00 0.147 9.990
1/31/91 $0.00 $0.00 0.000 9.990
2/28/91 $0.00 $0.00 0.000 9.990
3/31/91 $0.00 $0.00 0.000 9.990
4/30/91 $0.00 $0.00 0.000 9.990
5/31/91 $0.00 $0.00 0.000 9.990
6/30/91 $0.00 $0.00 0.000 9.990
7/31/91 $0.00 $0.00 0.000 9.990
8/31/91 $0.00 $0.00 0.000 9.990
9/30/91 $0.00 $0.00 0.000 9.990
Fiscal Y/E 10/31/91 $0.00 $0.00 0.000 9.990
11/30/91 $0.00 $0.00 0.000 9.990
Dividend 12/30/91 $0.00 $0.00 0.000 9.990
Dividend Reinv.12/31/91 $5.25 $52.45 $0.00 $0.00 0.445 10.435
1/31/92 $0.00 $0.00 0.000 10.435
2/28/92 $0.00 $0.00 0.000 10.435
3/31/92 $0.00 $0.00 0.000 10.435
4/30/92 $0.00 $0.00 0.000 10.435
5/31/92 $0.00 $0.00 0.000 10.435
6/30/92 $0.00 $0.00 0.000 10.435
7/31/92 $0.00 $0.00 0.000 10.435
8/31/92 $0.00 $0.00 0.000 10.435
9/30/92 $0.00 $0.00 0.000 10.435
Fiscal Y/E 10/31/92 $0.00 $0.00 0.000 10.435
11/30/92 $0.00 $0.00 0.000 10.435
Dividend 12/30/92 $0.00 $0.00 0.000 10.435
Dividend Reinv.12/31/92 $5.325 $55.56 $2.975 $31.04 0.688 11.123
1/29/93 $0.00 $0.00 0.000 11.123
2/26/93 $0.00 $0.00 0.000 11.123
3/31/93 $0.00 $0.00 0.000 11.123
4/30/93 $0.00 $0.00 0.000 11.123
5/28/93 $0.00 $0.00 0.000 11.123
6/30/93 $0.00 $0.00 0.000 11.123
7/30/93 $0.00 $0.00 0.000 11.123
8/31/93 $0.00 $0.00 0.000 11.123
9/30/93 $0.00 $0.00 0.000 11.123
Fiscal Y/E 10/29/93 $0.00 $0.00 0.000 11.123
Stock Split 10/31/93 $0.00 $0.00 0.000 111.226
11/30/93 $0.00 $0.00 0.000 111.226
Dividend 12/30/93 $0.00 $0.00 0.000 111.226
Dividend Reinv.12/31/93 $1.48 $164.61 $0.41 $45.60 16.084 127.310
1/31/94 $0.00 $0.00 0.000 127.310
2/28/94 $0.00 $0.00 0.000 127.310
3/31/94 $0.00 $0.00 0.000 127.310
4/29/94 $0.00 $0.00 0.000 127.310
5/31/94 $0.00 $0.00 0.000 127.310
6/30/94 $0.00 $0.00 0.000 127.310
7/29/94 $0.00 $0.00 0.000 127.310
8/31/94 $0.00 $0.00 0.000 127.310
9/30/94 $0.00 $0.00 0.000 127.310
10/31/94 $0.00 $0.00 0.000 127.310
11/30/94 $0.00 $0.00 0.000 127.310
Dividend 12/29/94 $0.00 $0.00 0.000 127.310
Dividend Reinv.12/30/94 $1.53 $194.78 $0.29 $36.92 18.838 146.147
1/31/95 $0.00 $0.00 0.000 146.147
2/28/95 $0.00 $0.00 0.000 146.147
3/31/95 $0.00 $0.00 0.000 146.147
4/28/95 $0.00 $0.00 0.000 146.147
5/31/95 $0.00 $0.00 0.000 146.147
6/30/95 $0.00 $0.00 0.000 146.147
7/31/95 $0.00 $0.00 0.000 146.147
8/31/95 $0.00 $0.00 0.000 146.147
9/29/95 $0.00 $0.00 0.000 146.147
10/31/95 $0.00 $0.00 0.000 146.147
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Baupost
Fund's audited financial statements, at 10/31/95 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<INVESTMENTS-AT-COST> 87,501,913
<INVESTMENTS-AT-VALUE> 91,706,510
<RECEIVABLES> 2,366,909
<ASSETS-OTHER> 1,292,646
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 95,366,065
<PAYABLE-FOR-SECURITIES> 5,416,490
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 510,196
<TOTAL-LIABILITIES> 5,926,686
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 80,852,257
<SHARES-COMMON-STOCK> 6,640,906
<SHARES-COMMON-PRIOR> 5,708,754
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 30,449
<ACCUMULATED-NET-GAINS> 4,311,706
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,305,865
<NET-ASSETS> 89,439,379
<DIVIDEND-INCOME> 901,762
<INTEREST-INCOME> 1,762,944
<OTHER-INCOME> 16,540
<EXPENSES-NET> 1,313,159
<NET-INVESTMENT-INCOME> 1,368,087
<REALIZED-GAINS-CURRENT> 4,176,280
<APPREC-INCREASE-CURRENT> 1,080,207
<NET-CHANGE-FROM-OPS> 6,624,574
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,863,449
<DISTRIBUTIONS-OF-GAINS> 8,459,115
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,160,287
<NUMBER-OF-SHARES-REDEEMED> 1,026,796
<SHARES-REINVESTED> 798,660
<NET-CHANGE-IN-ASSETS> 7,652,545
<ACCUMULATED-NII-PRIOR> 62,898
<ACCUMULATED-GAINS-PRIOR> 8,996,556
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 853,905
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,313,159
<AVERAGE-NET-ASSETS> 85,110,253
<PER-SHARE-NAV-BEGIN> 14.33
<PER-SHARE-NII> .25
<PER-SHARE-GAIN-APPREC> .71
<PER-SHARE-DIVIDEND> .33
<PER-SHARE-DISTRIBUTIONS> 1.49
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.47
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
POWER OF ATTORNEY
I, the undersigned Trustee or Officer of the Baupost Fund, hereby
severally constitute and appoint Seth A. Klarman, Paul C. Gannon and Howard H.
Stevenson, and each of them singly, my true and lawful attorneys, with full
power to them and each of them, to sign for me, and in my name and in the
capacity or capacities indicated below, the Registration Statement on Form N-1A
of The Baupost Fund and any and all amendments (including post-effective
amendments) to said Registration Statement and to file the same with all
exhibits thereto, and other documents in connection thereunder, with the
Securities and Exchange Commission, granting unto my said attorneys, and each of
them acting alone, full power and authority to do and perform each and every act
and thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he or she might or could do in person, and hereby ratify
and confirm all that said attorneys or any of them may lawfully do or cause to
be done by virtue thereof.
This power of attorney may be signed in one or more counterparts, each
of which shall be deemed an original but all of which taken together shall
constitute the same instrument.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Seth A. Klarman President June 13, 1994
- ------------------------------------ (Principal
Seth A. Klarman Executive
Officer)
and Trustee
/s/ William J. Poorvu Trustee and June 13, 1994
- ------------------------------------ Treasurer
William J. Poorvu (Principal
Financing and
Accounting
Officer)
/s/ Howard H. Stevenson Chairman June 13, 1994
- ------------------------------------ and Trustee
Howard H. Stevenson
/s/ Samuel Plimpton Trustee June 13, 1994
- ------------------------------------
Samuel Plimpton
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ David Auerbach Trustee June 13, 1994
- ------------------------------------
David Auerbach
/s/ Robert Ackerman Trustee June 13, 1994
- ------------------------------------
Robert Ackerman
/s/ Jay Light Trustee June 13, 1994
- ------------------------------------
Jay Light
</TABLE>
-2-
