<PAGE> 1
As filed with the Securities and Exchange Commission on December 30, 1997
Registration No. 33-35851
File No. 811-6138
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 9 X
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 11 X
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THE BAUPOST FUND
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(Exact Name of Registrant as Specified in Charter)
P.O. Box 381288
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44 Brattle Street
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Cambridge, MA 02238
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(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).
---
on (date) pursuant to paragraph (b).
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X 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:
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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.
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THE BAUPOST FUND
CROSS-REFERENCE SHEET
Items Required by Form N-1A
---------------------------
PART A
Item No. Item Caption Prospectus Caption
- - -------- ------------ ------------------
1. Cover Page COVER PAGE
2. Synopsis EXPENSE INFORMATION
3. Condensed Financial FINANCIAL HIGHLIGHTS
Information
4. General Description of THE FUND; PURCHASE OF
Registrant SHARES; 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
of Fund Performance ANNUAL REPORT OF THE
REGISTRANT)
6. Capital Stock and Other DISTRIBUTIONS; TAXES;
Securities DESCRIPTION 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
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PART B
- - ------
Statement of Additional
Item No. Item Caption Information Caption
- - -------- ------------ -----------------------
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
Principal Holders of SHARES
Securities
16. Investment Advisory and INVESTMENT ADVISORY
Other Services AND OTHER SERVICES
17. Brokerage Allocation and PORTFOLIO TRANSACTIONS
Other Practices
18. Capital Stock and Other SHAREHOLDER VOTING
Securities RIGHTS; 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 DETERMINATION OF NET
and Pricing of Securities ASSET VALUE (PART A);
Being Offered DETERMINATION OF NET
ASSET VALUE (PART B)
20. Tax Status TAX STATUS
21. Underwriters NOT APPLICABLE
22. Calculation of Performance STANDARD PERFORMANCE
Data MEASURES
23. Financial Statements REPORT OF INDEPENDENT
AUDITORS; FINANCIAL
STATEMENTS
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<PAGE> 4
PROSPECTUS
Dated February 28, 1998
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, L.L.C. ("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 ILLIQUID SECURITIES;
THIS COULD RESULT IN HIGHER TRANSACTION COSTS THAN INVESTING IN MORE LIQUID
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; 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 28,
1998, 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, L.L.C.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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 8
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER 11
RISK FACTORS 12
LIMITING INVESTMENT RISK 14
PURCHASE OF SHARES 14
REDEMPTION OF SHARES 14
DETERMINATION OF NET ASSET VALUE 15
DISTRIBUTIONS 16
TAXES 17
MANAGEMENT OF THE FUND 18
HOW THE FUND SHOWS PERFORMANCE 19
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES 19
CUSTODIAN 20
ADMINISTRATOR 20
TRANSFER AND DIVIDEND DISBURSING AGENT 20
REPORTS TO SHAREHOLDERS 21
SHAREHOLDER INQUIRIES 21
APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS 22
APPENDIX B - DESCRIPTION OF DEBT RATINGS 35
</TABLE>
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EXPENSE INFORMATION
The expenses of the Fund for the 1997 fiscal year are set forth in the
following table:
<TABLE>
<S> <C>
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 .89%
Total Fund Operating Expenses 2.14%
EXAMPLE:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
You would pay the following ------ ------- ------- --------
expenses on a $1,000 investment $22 $67 $115 $247
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 (2.14% 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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\
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>
Year Ended Period Ended
October 31 October 31
-------------------------------------------------------------------- ----------
1997 1996 1995 1994 1993 1992 1991(d)
-------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA(a)
Net Asset Value, beginning of period $ 15.38 $ 13.47 $ 14.33 $ 14.77 $ 12.56 $ 11.97 $ 10.04
-------- -------- ------- ------- ------- ------- -------
Income from Investment Operations
Net investment income 0.30 0.41 0.25 0.22 0.28 0.24 0.47
Net realized and unrealized gain (loss) 3.47 2.43 0.71 1.23 2.76 0.88 1.46
-------- -------- ------- ------- ------- ------- -------
Total from investment operations 3.77 2.84 0.96 1.45 3.04 1.12 1.93
Less Distributions
From net investment income 0.40 0.28 0.25 0.46 0.22 0.53 --
In excess of net investment income -- -- 0.08 -- -- -- --
From net realized gain 1.66 0.65 1.49 1.43 0.61 -- --
-------- -------- ------- ------- -------
Total distributions 2.06 0.93 1.82 1.89 0.83 0.53 --
-------- -------- ------- ------- ------- -------
Net Asset Value, end of period 17.09 $ 15.38 $ 13.47 $ 14.33 $ 14.77 $ 12.56 $ 11.97
======== ======== ======= ======= ======= ======= =======
TOTAL RETURN 27.04% 22.51% 7.91% 11.06% 25.45% 9.51% 19.21%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period (in thousands) $152,958 $108,788 $89,439 $81,787 $75,378 $46,942 $35,054
Ratio of expenses to average net assets 2.14%(f) 1.50% 1.54% 1.53% 1.52% 1.50% 1.50%(c)
Total expenses to average net assets 2.14%(f) 1.50% 1.54% 1.55% 1.63% 1.72% 2.01%(c)
Ratio of net investment income to average net 1.45% 2.27% 1.60% 1.32% 2.29% 2.07% 5.33%(c)
assets
Ratio of net investment income excluding
waiver of management fee to average
net assets 1.45% 2.27% 1.60% 1.30% 2.17% 1.85% 4.82%(c)
Portfolio Turnover Rate 140% 120% 106% 161% 183% 137% 144%
Average commission rate(e) $ 0.0203 0.0271
</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.
Such distributions represented the net income of the Fund prior to the date
shares of beneficial interest were issued.
(e) For fiscal years beginning after September 1, 1995, the Fund is required to
disclose its average commission rate per share for security trades on which
commissions are charged.
(f) The increase in expense ratios is due to equity swap contract interest
expense.
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<PAGE> 8
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, L.L.C. ("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, make loans of its portfolio
securities, enter into forward commitments, purchase warrants, engage in
options, futures and swap 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 discuss informally with
management different operating strategies, propose shareholder resolutions,
engage in a proxy contest or serve 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.
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<PAGE> 9
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.
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
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<PAGE> 10
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 may invest without limit 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 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
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<PAGE> 11
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, although appropriate hedging transactions may not always be
available or, even if such transactions are available, the Adviser may choose
not to hedge the Fund's foreign currency exposure. 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. The Fund may invest without limit in
emerging markets.
SWAPS, CAPS, FLOORS AND COLLARS. The Fund may enter into swaps, caps, floors
and collars on various securities, securities indexes, interest rates,
prepayment rates, foreign currencies or other financial instruments or indexes,
for both hedging and non-hedging purposes.
Swaps typically involve an exchange of obligations by two parties. For
example, interest rate swaps involve the exchange of respective rights to
receive interest, such as an exchange of fixed rate payments for floating rate
payments. Currency swaps involve the exchange of respective rights to make or
receive payments in specified currencies. In an equity swap, the counterparty
generally agrees to pay the Fund the amount, if any, by which the notional
amount of the equity swap contract would have increased in value had it been
invested in the underlying stock or stocks plus the dividends that would have
been received on those stocks. The Fund agrees to pay to the counterparty a
floating rate of interest (typically based on the London Inter Bank Offered
Rate) on the notional amount of the equity swap contract plus the amount, if
any, by which that notional amount would have decreased in value had it been
invested in such stock or stocks. Therefore, the return to the Fund on any
equity swap contract should be the gain or loss on the
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<PAGE> 12
notional amount plus dividends on the underlying stocks less the interest paid
by the Fund on the notional amount less premium paid, if any. The Fund may also
from time to time enter into the opposite side of equity swap contacts, which
are known as "reverse equity swaps."
Caps, floors and collars are variations on swaps. The purchase of a cap
entitles the purchaser to receive payments from the party selling the cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of an interest rate floor entitles the purchaser to receive
payments from the party selling the floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is a combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates or values. Caps, floors and collars are similar in many
respects to over-the-counter options transactions, and may involve investment
risks that are similar to those associated with options transactions and options
on futures contracts.
Payments under a swap contract may be made at the conclusion of the contract
or periodically during its term. If there is a default by the counterparty to a
swap contract, the Fund will be limited to contractual remedies pursuant to the
agreements related to the transaction. There is no assurance that swap contract
counterparties will be able to meet their obligations pursuant to swap contracts
or that, in the event of default, the Fund will succeed in pursuing contractual
remedies. The Fund thus assumes the risk that it may be delayed in or prevented
from obtaining payments owed to it pursuant to swap contracts. To address this
risk, the Fund will usually enter into swap contracts on a net basis, which
means that the two payment streams (one from the Fund to the counterparty, one
to the Fund from the counterparty) are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments. Interest
rate swaps do not involve the delivery of securities, other underlying assets,
or principal. Accordingly, the risk of loss with respect to interest rate swaps
entered into on a net basis would be limited to the net amount of the interest
payments that the Fund is contractually obligated to make. If the other party to
an interest rate swap defaults, the Fund's risk of loss consists of the net
amount of interest payments that the Fund is contractually entitled to receive.
In contrast, currency swaps and other types of swaps may involve the delivery of
the entire principal value of one designated currency or financial instrument in
exchange for the other designated currency or financial instrument. Therefore,
the entire principal value of such swaps may be subject to the risk that the
other party will default on its contractual delivery obligations.
In addition, because swap contracts are individually negotiated and
ordinarily non-transferable, there also may be circumstances in which it would
be impossible for the Fund to close out its obligations under the swap contract.
Under such circumstances, the Fund might be able to negotiate another swap
contract with a different counterparty to offset the risk associated with the
first swap contract. Unless the Fund is able to negotiate such an offsetting
swap contact, however, the Fund could be subject to continued adverse
developments, even after the Adviser has determined that it would be prudent to
close out or offset the first swap contract.
The use of swaps involves investment techniques and risks different from and
potentially greater than those associated with ordinary portfolio securities
transactions. If the Adviser is incorrect in its expectations of market values,
interest rates, or currency exchange rates, the investment performance of
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the Fund would be less favorable than it would have been if this investment
technique were not used. 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 swap transactions 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 counterparty
of the swap contract to fulfill its obligations.
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.
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 fees (I.E., the Fund's fees
and the 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
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TRANSACTIONS, INCLUDING LIMITATIONS DESIGNED TO REDUCE THE RISKS ASSOCIATED WITH
THESE PRACTICES, SEE "APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY
EXCHANGE TRANSACTIONS." 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 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
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
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 banks 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
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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.
LOANS OF SECURITIES. The Fund may lend its portfolio securities, provided
that cash or equivalent collateral equal to at least 100% of the market value of
the securities loaned is continuously maintained by the borrower with the Fund.
During the time securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividends or interest paid on such securities, and the Fund
may invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower who has delivered
equivalent collateral. These loans are subject to termination at the option of
the Fund or the borrower. The Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. It is not currently anticipated that the Fund will have on loan at any
given time securities totaling more than one-third of its net assets. The Fund
runs the risk that the counterparty to a loan transaction will default on its
obligation and that the value of the collateral received may be insufficient to
cover the securities loaned as a result of an increase in the value of the
securities or decline in the value of the collateral.
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 securities 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
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
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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 and
real estate-related securities. Real estate-related 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.
The Fund may 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 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. Portfolio turnover generally involves some expense, including
brokerage commissions or dealer markups and other transaction costs on the sale
of securities and reinvestment in other securities. These transactions may
result in realization of taxable capital gains. Portfolio turnover rates are
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
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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 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
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<PAGE> 18
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 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 1997, the Fund invested 2.3% 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 1.6% of its net assets in securities rated B by Moody's, 0.1% of
its net assets in securities rated C by
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Moody's and 0.7% 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. 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 wire transfer to the account designated by State Street Bank and
Trust Company. 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
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<PAGE> 20
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 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 (other than certain foreign securities, as described below), 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. Securities traded in foreign markets are valued
at their current
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<PAGE> 21
market value, which, depending on local custom, may or may not be the last
quoted sale price (or the closing 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 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.
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<PAGE> 22
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.
Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"), long-term capital
gains generally are taxed at a maximum tax rate of 28% or 20% depending on the
Fund's holding period in the portfolio investments. 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.
Fund transactions in foreign currencies and hedging activities may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Fund investments in foreign securities may be subject to withholding taxes
at the source on dividend or interest payments. In that case, the Fund's yield
on those securities would be decreased. If at the end of the Fund's taxable year
more than 50% of the value of the Fund's total assets represents stock or
securities of foreign corporations, the Fund intends to make an election
permitted by the Internal Revenue Code of 1986 (the "Code") to treat any
qualified foreign taxes it paid as paid by its shareholders. In this case,
shareholders who are U.S. citizens, U.S. corporations and, in some cases, U.S.
residents generally will be required to include in U.S. taxable income their pro
rata share of such taxes, but may then generally be entitled to claim a foreign
tax credit or deduction (but not both) for their share of such taxes. A
shareholder's ability to claim a foreign tax credit or deduction in respect of
foreign taxes paid by the Fund may be subject to certain limitations imposed by
the Code (including, with respect to a credit, a holding period requirement
imposed pursuant to the 1997 Act), as a result of which a shareholder may not
get a full credit or deduction for the amount of such taxes. Shareholders who do
not itemize on their federal income tax returns may claim a credit (but no
deduction) for such foreign taxes.
Investment in an entity that qualifies as a "passive foreign investment
company" under the Internal Revenue Code could subject the Fund to a U.S.
federal income tax or other charge on certain "excess distributions" with
respect to the investment, and on the gains from disposition of the investment.
This tax,
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however, can be avoided by making an election to mark such investments to market
annually or to treat the passive foreign investment company as a "qualified
electing fund."
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.
MANAGEMENT OF THE FUND
The Fund is advised and managed by Baupost, a Massachusetts limited
liability company. Seth A. Klarman, President of Baupost and of the Fund, owns
in excess of 50% of the outstanding stock of Baupost. SAK Corporation, a
Massachusetts corporation with the principal function of managing and overseeing
Baupost is wholly owned by Mr. Klarman. SAK Corporation is the sole manager of
Baupost, and as such, has sole decision-making authority over the management and
operation of Baupost. Mr. Klarman has 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 The Baupost Group L.L.C. or The Baupost
Group, Inc. since April, 1982. Prior to January [ ], 1998, the Fund was advised
and managed by The Baupost Group, Inc. ("BGI"). On that date, BGI underwent a
corporate restructuring that resulted, among other things, in the transfer of
all of its assets and liabilities to Baupost. Upon consummation of that
transaction, Baupost succeeded to the business operations previously conducted
by BGI. Assets under management totaled approximately $[ ] million on [ ].
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 office space and pays all salaries, fees and expenses
of officers and Trustees of the Fund who are affiliated with the Adviser. 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, the administrative
fee described below and certain other
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<PAGE> 24
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. From time to time,
depending on its investments, expenses incurred by the Fund which are not
subject to the expense limitation may be substantial.
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, financial reports, 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 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
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<PAGE> 25
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.
CUSTODIAN
State Street Bank and Trust Company acts as the Fund's custodian. State
Street has contracted with certain foreign banks and depositories to hold
portfolio securities outside of the United States on behalf of the Fund. The
custodian has no part in determining the Fund's investment policies or which
securities are to be purchased or sold for the Fund.
ADMINISTRATOR
Baupost acts as the Fund's administrator under an Administrative Services
Agreement. Under the agreement with the Fund, Baupost provides, among other
things, bookkeeping and certain clerical services to the Fund and will calculate
the total net asset value, total net income, and net asset value per share of
the Fund. For these services, the Fund pays Baupost a quarterly fee at the
annual rate of .25% of the Fund's average net asset value.
TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company acts as the Fund's transfer agent and
dividend disbursing agent under a Transfer Agency and Service Agreement. Under
the Agreement with the Fund, State Street provides customary transfer agency
services to the Fund.
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<PAGE> 26
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, L.L.C.,
44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
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<PAGE> 27
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.
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 or securities 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 or securities 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 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
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<PAGE> 28
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 for any purpose,
including 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 for any purpose,
including 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 strategies described
above, the Fund may engage in "spread" transactions in which it purchases and
writes a put or call option on the same 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
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<PAGE> 29
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 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.
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<PAGE> 30
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 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.
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<PAGE> 31
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 or
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.
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.
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<PAGE> 32
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 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.
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<PAGE> 33
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 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
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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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<PAGE> 35
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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<PAGE> 36
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
cancelable 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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<PAGE> 37
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
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<PAGE> 38
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.
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<PAGE> 39
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 securities 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.
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<PAGE> 40
APPENDIX B - DESCRIPTION OF DEBT RATINGS
I. MOODY'S INVESTORS SERVICE, INC.
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
a high degree. Such issues are often in default or have other marked
shortcomings.
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<PAGE> 41
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.
II. STANDARD & POOR'S
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 higher 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 in accordance with the terms of the obligation.
'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
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<PAGE> 42
capacity or willingness to pay interest and repay principal. The 'B' rating
category is 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.
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<PAGE> 43
THE BAUPOST FUND
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
ADVISER AND ADMINISTRATOR
The Baupost Group, L.L.C.
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
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 28, 1998
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<PAGE> 44
--------------------------------
THE BAUPOST FUND
STATEMENT OF ADDITIONAL INFORMATION
February 28, 1998
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 28, 1998. 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, L.L.C., 44
Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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-10
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS ........................B-11
DETERMINATION OF NET ASSET VALUE ........................................B-12
STANDARD PERFORMANCE MEASURES............................................B-12
EXPERTS..................................................................B-12
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS..................B-13
</TABLE>
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<PAGE> 45
INVESTMENT RESTRICTIONS
The Fund is restricted by the following fundamental investment restrictions,
which may not be changed without a vote of a majority of its outstanding voting
securities. 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.
(1) The Fund may borrow money to the extent permitted by the 1940 Act, the
rules or regulations thereunder or applicable orders of the Securities
and Exchange Commission, as such statute, rules, regulations or orders
may be amended from time to time.
(2) The Fund may purchase or sell real estate to the extent permitted by
the 1940 Act, the rules or regulations thereunder or applicable orders
or the Securities and Exchange Commission, as such statute, rules,
regulations or orders may be amended from time to time.
(3) The Fund may purchase or sell commodities, commodities contracts,
futures contracts or options to the extent permitted by the 1940 Act,
the rules or regulations thereunder or applicable orders of the
Securities and Exchange Commission, as such statute, rules, regulations
or orders may be amended from time to time.
(4) The Fund may make loans to the extent permitted by the 1940 Act, the
rules or regulations thereunder or applicable orders of the Securities
and Exchange Commission, as such statute, rules, regulations or orders
may be amended from time to time.
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:
(5) 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.
(6) 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.)
(7) Issue senior securities, except as appropriate to evidence indebtedness
that the Fund is permitted to incur consistent with restriction 1
above.
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<PAGE> 46
It is contrary to the Fund's present policy, which may be changed by the
Trustees without shareholder approval, to:
(1) Invest more than 15% of its assets in illiquid securities.
(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) 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
which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes.
(5) 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 the Fund's investment
restrictions.
With respect to fundamental investment restriction 1 concerning borrowing, a
registered investment company like the Fund may borrow up to 33 1/3% of its
total assets under the 1940 Act. With respect to fundamental investment
restrictions 2 and 3, the 1940 Act provides no limits on the applicable
investment activities. With respect to fundamental investment restriction 4
concerning making loans, the 1940 Act permits a fund to make loans if expressly
permitted by a fund's investment policies, but never to persons who control or
are under common control with that fund. Thus, the 1940 Act effectively
prohibits the Fund from making loans to certain persons when conflicts of
interest or undue influence are most likely present.
For the purposes of fundamental investment restriction 6 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
B-3
<PAGE> 47
Fund does not have privity of contract with the borrower or would not have a
direct cause of action against the 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.
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 so qualify
and to qualify for the special tax treatment accorded regulated investment
companies and their shareholders, 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) 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 one issuer (other than
U.S. government securities or securities of other regulated investment
companies); and (c) distribute in or with respect to each taxable year at least
90% of the sum of its taxable net investment income, its net tax-exempt income,
and the excess, if any, of net short-term capital gains over net long-term
capital losses 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.
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 constructive sale,
mark-to-market, straddle, wash sale and short sale rules), the effect of which
may be to accelerate income to
B-4
<PAGE> 48
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.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund and their principal occupations during
the past five years are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------
Name and Address* Position Principal Occupation
- - ----------------- -------- --------------------
- - ---------------------------------------------------------------------------------------------------------------
Seth A. Klarman** Trustee and President The Baupost Group, L.L.C., President and Member of
Advisory Board; The Baupost Group, Inc., President and
Director (formerly, investment adviser to the Fund);
SAK Corporation, President (managing member of The
Baupost Group, L.L.C.)
- - ---------------------------------------------------------------------------------------------------------------
William J. Poorvu** Trustee, Vice Chairman, The Baupost Group, L.L.C., Chairman of Advisory Board;
Clerk and Treasurer The Baupost Group, Inc., Chairman and Director;
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; William
J. Poorvu, Proprietor (real estate investments).
- - ---------------------------------------------------------------------------------------------------------------
* Unless otherwise indicated, the address of each person listed in the table is P.O. Box 381288, 44
Brattle Street, Cambridge, MA 02238.
** Persons who are "interested persons" (as defined in the 1940 Act) of the Fund and The Baupost Group, L.L.C.
</TABLE>
B-5
<PAGE> 49
<TABLE>
<CAPTION>
<S> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------
Name and Address* Position Principal Occupation
- - ----------------- -------- ---------------------
- - ---------------------------------------------------------------------------------------------------------------
Howard H. Stevenson** Trustee and Chairman The Baupost Group, L.L.C., Vice Chairman of Advisory
Board; The Baupost Group, Inc., Vice Chairman, Director
and Treasurer; Harvard University, Graduate School of
Business Administration, Professor, and from 1991-1994,
Senior Associate Dean and Director of Financial and
Information Systems; Camp, Dresser & McKee, Director
(engineering consultants); Landmark Communications
Inc., Director (communications); Sheffield Steel Corp.,
Director (a steel manufacturer); 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); Bessemer Securities Corporation, Director
(investments); Westboro Holdings LP, Director and
Treasurer (investments). Formerly, Director of
Passamaquoddy Technologies (a technology firm) and
Preco Corporation (a paper manufacturer).
- - ---------------------------------------------------------------------------------------------------------------
Samuel Plimpton** Trustee The Baupost Group, L.L.C., [ ]; The Baupost Group,
Brattle Advisors, L.P. Inc., Vice President; Brattle Advisors, L.P., general
44 Brattle Street partner (real estate counselors). Formerly, Director,
Cambridge, MA 02138 Perry Dean Rogers 44 Brattle Street and Partners (an
architecture firm).
- - ---------------------------------------------------------------------------------------------------------------
Robert W. Ackerman Trustee President and Chief Executive Officer of Sheffield
Sheffield Steel Corp. Steel Corp. (a steel manufacturer); Director, Gulf
220 North Jefferson States Steel (a steel manufacturer); formerly,
Sands Springs, OK 74063 President and Chief Executive Officer, Lincoln Pulp &
Paper Co., Inc. (a paper manufacturer);.
- - ---------------------------------------------------------------------------------------------------------------
David Auerbach Trustee Trustee, Dana-Farber Cancer Institute; Member,
607 Boylston Street Executive Committee, Dana-Farber Cancer Institute;
Boston, MA 02116 Chairman, Jimmy Fund Committee, Dana-Farber Cancer
Institute; Overseer, Beth Israel-Deaconess Medical
Center; Director, Boston Latin School Foundation.
- - ---------------------------------------------------------------------------------------------------------------
* Unless otherwise indicated, the address of each person listed in the table is P.O. Box 381288,
44 Brattle Street, Cambridge, MA 02238.
** Persons who are "interested persons" (as defined in the 1940 Act) of the Fund and The Baupost Group, L.L.C.
</TABLE>
B-6
<PAGE> 50
<TABLE>
<CAPTION>
<S> <C> <C>
- - ---------------------------------------------------------------------------------------------------------------
Name and Address* Position Principal Occupation
- - ----------------- -------- --------------------
- - ---------------------------------------------------------------------------------------------------------------
Jay Light Trustee Harvard University Graduate School of Business
Harvard University Administration, Dwight P. Robinson, Jr. Professor of
Graduate Business Administration and Senior Associate Dean,
School of Business Director of Faculty Planning from 1988 to 1992; United
Administration Asset Management Corporation, Director (a holding
Soldiers Field Road company comprised of investment management firms);
Boston, MA 02163 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, formerly, Chairman of
the Investment Committee; Partners Healthcare System,
Chairman of the Investment Committee; GMO Funds,
Trustee (a series of institutional mutual funds).
- - ---------------------------------------------------------------------------------------------------------------
David C. Abrams Vice President The Baupost Group, L.L.C., Member of Advisory Board;
The Baupost Group, Inc., Vice President and Director.
- - ---------------------------------------------------------------------------------------------------------------
Paul C. Gannon Vice President The Baupost Group, L.L.C., [ ]; The Baupost Group,
Inc., Chief Financial and Administrative Officer and
Vice President.
- - ---------------------------------------------------------------------------------------------------------------
Jo-An B. Bosworth Assistant Clerk The Baupost Group, L.L.C., [ ]; The Baupost Group,
Inc., Vice President, Clerk and Secretary.
- - ---------------------------------------------------------------------------------------------------------------
* Unless otherwise indicated, the address of each person listed in the table is P.O. Box 381288,
44 Brattle Street, Cambridge, MA 02238.
** Persons who are "interested persons" (as defined in the 1940 Act) of the Fund and The Baupost Group, L.L.C.
</TABLE>
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.
The Fund pays the Trustees, other than those who are interested persons of
The Baupost Group, L.L.C. ("Baupost" or the "Adviser"), an annual fee of $8,000,
in addition to a fee of $750 for each meeting attended. During fiscal 1997, the
Fund paid Trustees' fees aggregating $25,500, of which $8,500 was paid to Mr.
Ackerman, $8,500 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.
B-7
<PAGE> 51
OWNERSHIP OF FUND SHARES
At [ ], 1998, the officers and Trustees of the Fund as a group owned of
record or beneficially [ ]% 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 William J. Poorvu, 975 Memorial Drive, #710,
Cambridge, MA 02138 owned of record and beneficially [ %] of the shares of the
Fund, and as trustee for various trusts beneficially owned [ %] of the shares
of the Fund.
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 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 provides office space, 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 Fund pays the Adviser a quarterly
management fee at the annual rate of 1.00% of the Fund's average net assets. The
Adviser has agreed to an "expense limitation," whereby 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. From time to time,
depending on its investments, expenses incurred by the Fund which are not
subject to the expense limitation may be substantial.
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.
Prior to January [ ], 1998, under a substantially identical management
contract (the "Old Management Contract") with The Baupost Group, Inc. ("BGI"),
BGI provided services identical to those described above. For these services,
the Fund paid BGI at rates identical to those described above. During its 1995,
1996 and 1997
B-8
<PAGE> 52
fiscal years, the Fund paid management fees of $853,905, $991,872 and $1,353,786
to BGI pursuant to the Old Management Contract; no amount was required to be
waived by BGI with respect to such fiscal years.
ADMINISTRATIVE ARRANGEMENTS
The Adviser serves as the Fund's administrator under an Administrative
Services Agreement (the "Agreement") between the Fund and Baupost dated as of
January [ ], 1998. Pursuant to the Agreement, Baupost is paid a quarterly fee
at the annual rate of .25% of the Fund's average net assets. Under the
Agreement, Baupost provides, among other things, bookkeeping and certain
clerical services to the Fund 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 continue indefinitely, but that it may be terminated by
either party upon 60 days' notice. The Agreement further 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.
Prior to October 31, 1997, under a Transfer Agency and Administrative
Services Agreement with BGI then in effect, BGI provided, in addition to the
services described above, transfer and dividend disbursing agent services. For
services under the Transfer Agency and Administrative Services Agreement, BGI
was paid a quarterly fee at the annual rate of .25% of the Fund's average net
assets. During its 1997 fiscal year, the Fund paid $338,446 to BGI pursuant to
the Transfer Agency and Administrative Services Agreement.
TRANSFER AGENCY AND DIVIDEND DISBURSING ARRANGEMENTS
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110 serves as the Fund's Transfer Agent and Dividend
Disbursing Agent under a Transfer Agency and Service Agreement between the Fund
and State Street dated as of October 31, 1997. Pursuant to the Agreement, State
Street receives orders for the purchase and redemption of shares of the Fund,
issues such shares to the appropriate shareholder account or pays over such
money as is appropriate to the redeeming shareholder and delivers all pertinent
documentation relating to these transactions to the Custodian. Additionally, as
Dividend Disbursing Agent, State Street prepares and transmits payments for
dividends and distributions declared by the Fund. The Agreement provides by its
terms that it may be terminated by either party upon 60 days' notice.
CUSTODIAN
State Street serves as the Fund's custodian pursuant to a Custodian
Agreement between the Fund and State Street dated as of October 31, 1997. As
such, State Street 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, State
Street 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. State Street also maintains certain
accounts and records of the Fund. State Street 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 with State Street provides by
its terms that it shall continue indefinitely, but that it may be terminated by
either party upon 60 days' notice.
B-9
<PAGE> 53
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 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 1995, 1996 and 1997 fiscal years, the Fund paid brokerage
commissions aggregating $314,636, $201,261 and $462,346, respectively. The
aggregate dollar amount of brokerage commissions in fiscal 1997 differed
materially from the previous fiscal year due principally to increased assets
under management which has led to an increase in the total amount of brokerage
commissions paid.
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,
B-10
<PAGE> 54
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 State Street 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.
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.
B-11
<PAGE> 55
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.
The Fund's average annual total return since the commencement of its
operations (December 14, 1990) through October 31, 1997 was 17.69%. The Fund's
total return for the one-year and five-year periods ended October 31, 1997 was
27.04% and 18.53%, respectively.
EXPERTS
The statement of assets and liabilities of The Baupost Fund as of
October 31, 1997, 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 five 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-12
<PAGE> 56
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,
1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997, 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, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
December 5, 1997
B-13
<PAGE> 57
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities - at value $ 153,239,227
(Notes A and C) (cost $131,241,269)
Cash 3,648,231
Receivable for investments sold 1,915,565
Purchased interest 432,839
Accrued investment income 425,613
Receivable for investments sold short 148,467
Other assets 13,554
-----------------
Total Assets 159,823,496
LIABILITIES:
Payable for equity swap contracts 2,904,012
Payable for investments purchased 2,134,839
Unrealized depreciation on forward foreign
currency contracts sold 881,617
Payable to The Baupost Group, Inc. (Note B) 482,556
Payable for interest and termination value
on equity swap contracts 265,049
Other payables and accrued expenses 107,594
Payable for securities sold short
(Notes A and C) (proceeds $148,467) 89,513
-----------------
Total Liabilities 6,865,180
-----------------
NET ASSETS $ 152,958,316
=================
COMPOSITION OF NET ASSETS:
Paid in capital $ 113,718,323
Accumulated undistributed net investment
income (Note A) 670,056
Accumulated undistributed net realized
gain on investments and foreign
currency transactions 20,948,534
Net unrealized appreciation on investments
and assets and liabilities in foreign currencies 17,621,403
-----------------
NET ASSETS $ 152,958,316
=================
NET ASSET VALUE:
Offering and redemption price per share
($152,958,316 / 8,948,897) $ 17.09
=================
</TABLE>
See notes to financial statements.
B-14
<PAGE> 58
THE BAUPOST FUND
STATEMENT OF OPERATIONS
Year Ended October 31, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME:
INCOME:
<S> <C>
Interest $ 3,506,505
Dividends (net of foreign withholding taxes of $131,778) 1,352,384
-----------------
Total Investment Income 4,858,889
EXPENSES:
Investment management fee (Note B) 1,353,786
Equity swap contract interest expense 659,677
Administrative fee (Note B) 338,446
Investment expenses 204,460
Custodian fees 88,667
Legal fees 86,814
Interest expense 70,050
Audit fees 39,500
Registration and filing fees 26,384
Directors' fees 25,500
Miscellaneous 9,262
-----------------
Total Expenses 2,902,546
NET INVESTMENT INCOME 1,956,343
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on:
Investments and equity swap contracts 19,411,857
Foreign currency transactions 4,051,629
Short sales 239,392
-----------------
23,702,878
Change in unrealized appreciation/(depreciation) on:
Investments and equity swap contracts 6,785,447
Short sales (172,353)
Foreign currency transactions (713,525)
-----------------
5,899,569
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 29,602,447
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 31,558,790
=================
</TABLE>
See notes to financial statements.
B-15
<PAGE> 59
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
------------------ -----------------
INCREASE IN NET ASSETS FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 1,956,343 $ 2,251,486
Net realized gain on investments and foreign
currency transactions 23,702,878 10,367,365
Change in unrealized appreciation of investments
and foreign currency transactions 5,899,569 7,415,969
------------------ -----------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 31,558,790 20,034,820
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,845,958) (1,825,419)
From net realized gain on investments (11,985,697) (4,283,665)
CAPITAL SHARE TRANSACTIONS (NOTE E) 27,443,139 5,422,927
------------------ -----------------
INCREASE IN NET ASSETS 44,170,274 19,348,663
NET ASSETS AT BEGINNING OF PERIOD 108,788,042 89,439,379
------------------ -----------------
NET ASSETS AT END OF PERIOD
(including undistributed net investment income
of $670,056 and distributions in excess of
net investment income of $90,004, respectively) $ 152,958,316 $ 108,788,042
================== =================
</TABLE>
See notes to financial statements.
B-16
<PAGE> 60
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
COMMON STOCKS - 61.42%
UNITED STATES - 23.60%
WHOLESALE - FOOD - 9.44%
272,500 TLC Beatrice International Holdings $ 14,442,500
LESSORS OF REAL PROPERTY - 4.37%
836,059 MBO Properties, Inc. 6,688,472 *#
COMPUTER HARDWARE - 3.86%
194,700 NCR Corporation 5,901,844 *
ELECTRIC SERVICES - 2.16%
265,150 Northeast Utilities 3,049,225
9,300 Unicom Corporation 260,400
-----------------------
3,309,625
CEREAL BREAKFAST FOOD - 1.56%
128,350 Ralcorp Holdings, Inc. 2,382,497 *
FIRE, MARINE & CASUALTY INSURANCE - 0.76%
37,350 Farm Family Holdings, Inc. 1,157,850 *
FINANCIAL INSTITUTIONS - 0.07%
110 Fidelity Bankshares, Inc. 3,107
198 First Federal Savings Bank of Siouxland 6,385
100 Harbor Florida Bancorp Inc. 6,463
1,949 Mid-Central Financial Corporation 41,904
1,800 Shelby County Bancorp 43,200
---------------------------
101,059
</TABLE>
B-17
<PAGE> 61
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
MISCELLANEOUS - 1.38%
20,800 Chemfirst Inc. $ 525,200
18,400 GC Companies 791,200 *
3,300 NCH Corporation 221,100
938,000 Regency Equities Corporation 11,725 *
4,900 Showboat Inc. 97,388
1,105 The Homestake Oil & Gas Company 121,550
1,579 The Homestake Royalty Corporation 258,956
1,400 USAA Real Estate Equities Inc. Class A REIT 88,200 +
---------------------------
2,115,319
TOTAL COMMON STOCKS - UNITED STATES $ 36,099,166
===========================
(Total Cost $21,092,751)
FRANCE - 15.12%
FIRE, MARINE & CASUALTY INSURANCE - 5.10%
148,700 Assurances Generales de France $ 7,809,387
DIVERSIFIED HOLDING COMPANIES - 4.29%
1,996 Compagnie Generale D'Industrie et de Participations 649,330
2,269 Financiere et Industrielle Gaz et Eaux 936,419
11,505 Pathe SA 2,060,508
7,183 Societe Eurafrance SA 2,919,686
---------------------------
6,565,943
CONSTRUCTION - 3.78%
17,600 Bouygues 1,644,575
161,600 Societe Generale D'Enterprises SA 4,132,978
---------------------------
5,777,553
TEXTILES - 1.42%
32,435 Chargeurs International SA 2,166,449
DEFENSE ELECTRONICS - 0.53%
29,870 Thomson CSF 810,454
---------------------------
TOTAL COMMON STOCKS - FRANCE $ 23,129,786
===========================
(Total Cost $17,452,300)
</TABLE>
B-18
<PAGE> 62
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
ITALY - 6.83%
DIVERSIFIED HOLDING COMPANIES - 5.98%
675,500 IFIL Finanziaria di Partecipazioni - Ordinary Shares $ 2,492,988
740,200 IFIL Finanziaria di Partecipazioni - Savings Shares 1,442,374
300 Montedison SPA - ADR 2,419
6,056,600 Montedison SPA - Ordinary Shares 4,913,947
533,100 Montedison SPA - Savings Shares 299,052
---------------------------
9,150,780
INSURANCE CARRIERS - 0.85%
86,600 Societe Assicuratrice Industriale - Ordinary Shares 828,415
129,300 Societe Assicuratrice Industriale - Savings Shares 464,213
---------------------------
1,292,628
---------------------------
TOTAL COMMON STOCKS - ITALY $ 10,443,408
===========================
(Total Cost $9,338,186)
SWITZERLAND - 5.14%
FREIGHT TRANSPORATION - 1.93%
14,740 Danzas Holding AG - Registered Shares $ 2,948,000
COMMERCIAL BANKS - 1.75%
9,000 Banque Cantonale Vandiose 2,680,714
DIVERSIFIED HOLDING COMPANY - 1.46%
10,410 Valora Holding AG 2,230,714
---------------------------
TOTAL COMMON STOCKS - SWITZERLAND $ 7,859,428
===========================
(Total Cost $7,985,570)
RUSSIA - 3.38%
OIL & GAS FIELD EXPLORATION SERVICES - 2.81%
32,300 Lukoil Oil Co. - Sponsored ADR $ 2,793,627
500,000 Vareganneftegaz 1,500,000 *
---------------------------
4,293,627
</TABLE>
B-19
<PAGE> 63
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
ELECTRIC SERVICES - 0.57%
2,666,500 Unified Energy System of Russia $ 873,279
---------------------------
TOTAL COMMON STOCKS - RUSSIA $ 5,166,906
===========================
(Total Cost $3,017,306)
UNITED KINGDOM - 3.04%
FIRE, MARINE AND CASUALTY INSURANCE - 2.17%
1,590,200 Sedgwick Group $ 3,325,506
LUMBER & OTHER CONSTRUCTION MATERIALS - 0.46%
115,000 Adam & Harvey Group PLC 707,052
MEDIA, SATELLITE BROADCAST - 0.23%
50,200 British Sky Broadcasting Group PLC 355,255
DIVERSIFIED HOLDING COMPANY - 0.18%
167,600 Lonrho PLC 271,983
---------------------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 4,659,796
===========================
(Total Cost $4,252,528)
HONG KONG - 1.62%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 1.19%
5,400 Semi-Tech Global Ltd. - ADR $ 16,200
2,431,665 Semi-Tech Global Ltd. 1,808,806
---------------------------
1,825,006
MANUFACTURING - TOYS & DOLLS - 0.43%
6,369,400 Playmates Toys Holdings Ltd. $ 659,188
---------------------------
TOTAL COMMON STOCKS - HONG KONG $ 2,484,194
===========================
(Total Cost $5,786,846)
</TABLE>
B-20
<PAGE> 64
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
HOLLAND - 0.92%
TOWING & TUGBOAT SERVICES - 0.92%
44,600 Smit Internationale NV $ 1,401,649
---------------------------
TOTAL COMMON STOCKS - HOLLAND $ 1,401,649
===========================
(Total Cost $1,103,694)
SOUTH KOREA - 0.88%
COMMERCIAL BANKS - 0.57%
57,830 Hana Bank $ 354,937
22,856 Hana Bank - GDR Reg S 129,822
12,850 Housing & Commercial Bank Korea 141,695
700 Housing & Commercial Bank Korea - GDR Reg S 6,090
27,100 Kookmin Bank 219,892
2,800 Kookmin Bank - Reg S 18,760
638 Kookmin Bank - New 5,177
490 Shinhan Bank 3,772
---------------------------
880,145
SECURITY BROKER/DEALERS - 0.17%
12,400 Dongwon Securities - Preferred 43,987
12,470 Dongwon Securities - Common 105,593
24,770 Shinyoung Securities Co. - Preferred 97,916
600 Shinyoung Securities Co. - Common 6,616
---------------------------
254,112
STEEL FOUNDRIES - 0.11%
3,880 Pohang Iron & Steel Co., Ltd. 172,440
CELLULAR TELEPHONE PROVIDER - 0.03%
130 SK Telecom Co., Ltd. 43,524
---------------------------
TOTAL COMMON STOCKS - SOUTH KOREA $ 1,350,221
===========================
(Total Cost $2,172,251)
</TABLE>
B-21
<PAGE> 65
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
CZECH REPUBLIC - 0.56%
ELECTRIC SERVICES - 0.56%
17,500 CEZ 1 Ceske Energeticke Zavod AS $ 554,299
13,100 CEZ 2 Ceske Energeticke Zavod AS II 305,074
---------------------------
859,373
TOTAL COMMON STOCKS - CZECH REPUBLIC $ 859,373
===========================
(Total Cost $929,818)
HUNGARY - 0.17%
HOTELS AND MOTELS - 0.17%
14,400 Pannonia Hotels $ 252,436 +
---------------------------
TOTAL COMMON STOCKS - HUNGARY $ 252,436
===========================
(Total Cost $211,454)
BAHAMAS - 0.11%
CRUDE PETROLEUM - 0.11%
170,820 Basic Petroleum International Ltd. Unit Trust $ 170,820 *
---------------------------
TOTAL COMMON STOCKS - BAHAMAS $ 170,820
===========================
(Total Cost $175,432)
CANADA - 0.05%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 0.05%
57,100 Semi-Tech Corporation - Class A $ 69,743
---------------------------
TOTAL COMMON STOCKS - CANADA $ 69,743
===========================
(Total Cost $103,346)
TOTAL COMMON STOCKS $ 93,946,926
===========================
(Total Cost $73,621,482)
</TABLE>
B-22
<PAGE> 66
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
MUNICIPAL BONDS - 3.38%
7,113,000 Pennsylvania Recycling Rev. Series A 9.250% 01/01/22 $ 4,694,580
719,600 Pennsylvania Recycling Rev. Series B 9.500% 01/01/12 474,936
---------------------------
MUNICIPAL BONDS $ 5,169,516
===========================
(Total Cost $5,091,190)
PARTNERSHIPS - 2.40%
Emerging Europe Fund for Sustainable Development L.P. $ 64,286 +
NCH Investors Fund L.P. 979,541 +
New Century Capital Partners II L.P. 903,114 +
Sigma/Ukraine L.P. 703,783 +
Sigma/Ukraine Class C L.P. 404,663 +
Ukrainian Growth Fund II L.P. 612,000 +
---------------------------
TOTAL PARTNERSHIPS $ 3,667,387
===========================
(Total Cost $3,672,326)
OPTIONS - 3.90%
1,496 British Sky Broadcasting Group 5.000 Puts expiring 12/19/97 $ 195,219
1,042 British Sky Broadcasting Group 6.500 Puts expiring 06/19/98 395,721
85 General Motors Class H 50.000 Calls expiring 04/28/98 123,505
569 Gold April 550 Calls expiring 04/05/01 14,213
569 Gold April 550 Calls expiring 04/09/01 14,497
563 Gold July 550 Calls expiring 07/19/01 21,676
398 Japanese Yen 135.980 Puts expiring 03/25/99 42,011
38 Nasdaq 100 Index 656.000 Puts expiring 11/26/97 19
107 Nasdaq 100 Index 840.390 Puts expiring 01/15/98 171,040
102 Nasdaq 100 Index 935.553 Puts expiring 01/16/98 264,960
52 Nasdaq 100 Index 593.440 Puts expiring 03/25/98 5,172
41 Nasdaq 100 Index 632.600 Puts expiring 05/11/98 10,213
64 Nasdaq 100 Index 647.110 Puts expiring 05/20/98 13,335
5,100 Pathe/BSY Spread Calls expiring 08/30/98 208,518
8,100 Pathe/BSY Spread Calls expiring 09/21/98 335,274
113 Philip Morris 50 Calls expiring 04/24/00 57,466
113 Philip Morris 50 Calls expiring 04/25/00 57,579
226 Philip Morris 50 Calls expiring 04/28/00 115,610
113 Philip Morris 50 Calls expiring 04/28/00 57,805
227 Philip Morris 50 Calls expiring 05/26/00 119,977
230 Philip Morris 50 Calls expiring 06/04/00 121,210
170 Philip Morris 50 Calls expiring 06/09/00 90,153
113 Philip Morris 50 Calls expiring 06/19/00 60,329
</TABLE>
B-23
<PAGE> 67
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
227 Philip Morris 50 Calls expiring 06/23/00 $ 120,884
113 Philip Morris 50 Calls expiring 06/23/00 60,442
114 Philip Morris 50 Calls expiring 06/23/00 60,078
225 Philip Morris 50 Calls expiring 07/21/00 123,750
225 Philip Morris 50 Calls expiring 09/30/00 126,900
114 Philip Morris 50 Calls expiring 04/18/02 85,389
114 Philip Morris 50 Calls expiring 04/18/02 83,228
19,895 RJR Stub 6.103 Calls expiring 03/20/00 23,675
54,690 RJR Stub 6.267 Calls expiring 03/21/00 61,253
11,650 RJR Stub 6.400 Calls expiring 03/27/00 12,815
11,650 RJR Stub 6.540 Calls expiring 03/27/00 12,232
16,776 RJR Stub 6.170 Calls expiring 03/31/00 19,460
58,250 RJR Stub 6.110 Calls expiring 04/03/00 68,735
56,450 RJR Stub 5.800 Calls expiring 04/25/00 73,949
56,450 RJR Stub 5.220 Calls expiring 05/01/00 174,995
16,880 Samsung Preferred Equity Linked Note expiring 02/05/00 305,200
35 South Korean Won 918.000 Puts expiring 01/22/98 491,628
67 S&P 500 Index 678.480 Puts expiring 05/25/98 45,160
63 S&P 500 Index 717.160 Puts expiring 06/18/98 75,015
190 S&P 500 Index 717.400 Puts expiring 06/18/98 225,731
255 S&P 500 Index 711.200 Puts expiring 06/19/98 374,487
257 S&P 500 Index 750.560 Puts expiring 06/29/98 478,768
121 S&P 500 Index 747.108 Puts expiring 07/20/98 239,852
33 S&P 500 Index 719.695 Puts expiring 12/04/98 58,356
23 US 10 Yr. Treasury Note Future 107.000 Puts expiring 02/20/98 5,750
40 US 10 Yr. Treasury Note Future 109.000 Puts expiring 02/20/98 24,375
69 US 30 Yr. Treasury Note Future 107.000 Puts expiring 02/20/98 10,781
60 US 30 Yr. Treasury Note Future 112.000 Puts expiring 02/20/98 38,438
---------------------------
TOTAL OPTIONS $ 5,976,828
===========================
(Total Cost $7,325,701)
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.89%
223,770 Guardian S&L 1990-4A FRN due 06/25/20 $ 129,787
300,475 RTC Series 1991-M2 Class A1 principal only due 09/25/20 255,404
2,066,268 RTC Series 1991-M2 Class A3 principal only due 09/25/20 1,549,701
367 RTC Series 1991-M2 Class X1 interest only due 09/25/20 180,489
364 RTC Series 1991-M2 Class X2 interest only due 09/25/20 17,427
677 RTC Series 1991-M2 Class X3 interest only due 09/25/20 63,899
24,785,937 Structured Asset Sec. 1996-CFL Class X2 due 02/25/28 697,104
---------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 2,893,811
===========================
(Total Cost $2,995,592)
</TABLE>
B-24
<PAGE> 68
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
CLOSED-END MUTUAL FUNDS - 1.79%
200,000 Kazakhstan Fund Limited $ 790,000
1,200 Komercni Bank Investicni Fond 23,891 *
112,628 NIF I 245,821
53,903 NIF III 149,175
79,749 NIF VIII 172,922
241,446 NIF XIII 702,639
75,000 NIF XIV 209,700
45,200 The Balkan Fund 361,600
6,700 Zivnobanka Investicni Fond 84,078
---------------------------
TOTAL CLOSED-END MUTUAL FUNDS $ 2,739,826
===========================
(Total Cost $3,107,490)
PURCHASED BANK DEBT & TRADE CLAIMS - 1.29%
2,453,801 Maxwell Comm. Bank Debt - Baker Nye $ 270,305 +*
5,000,000 Maxwell Comm. Berlitz Obligations 543,750 +*
167,868 Maxwell Comm. Revolving Bank Debt - First Chicago 18,922 +*
943,496 Maxwell Comm. Revolving Bank Debt - Halcyon 106,700 +*
396,015 Maxwell Comm. Revolving Bank Debt - Halcyon II 44,638 +*
875,543 Maxwell Comm. Revolving Bank Debt - Lazard Freres 98,622 +*
264,059 Maxwell Comm. Revolving Bank Debt - Merrill Lynch 29,764 +*
823,981 Maxwell Comm. Revolving Bank Debt - San Paolo 93,147 +*
1,015,000 Maxwell Comm. Revolving Bank Debt - TCC Associates 114,695 +*
579,133 Maxwell Comm. Term Bank Debt - First Chicago 62,981 +*
1,678,704 Maxwell Comm. Term Bank Debt - Halcyon 182,559 +*
702,221 Maxwell Comm. Term Bank Debt - Halcyon II 76,366 +*
426,846 Maxwell Comm. Term Bank Debt - Lazard Freres 46,420 +*
468,269 Maxwell Comm. Term Bank Debt - Merrill Lynch 50,924 +*
325,093 Maxwell Comm. Term Bank Debt - San Paolo 35,354 +*
1,806,952 Maxwell Comm. Term Bank Debt - TCC Associates 196,506 +*
---------------------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,971,653
===========================
(Total Cost $0)
COMPANIES IN LIQUIDATION - 1.01%
5,682,800 Antonelli Liquidating Trust $ 5,683 +
3,150 EHLCO Liquidating Trust 315 +
</TABLE>
B-25
<PAGE> 69
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
DEM 15,000,000 Maxwell Comm. Corp. PLC 6.000% due 06/15/93 $ 1,043,660 *
CHF 5,500,000 Maxwell Comm. Corp. PLC 5.000% due 06/16/95 471,429 *
100,550 Timber Realization Liquidating Trust 26,143 +*
---------------------------
TOTAL COMPANIES IN LIQUIDATION $ 1,547,230
===========================
(Total Cost $19)
WARRANTS - 0.43%
140,500 AXA-UAP CTF De Valeur Garant Exp. 07/01/99 $ 363,467
60,000 Five Arrows Chile Inv. Trust Warrants Exp. 05/31/99 12,000
1,109,400 Jardine Strategic Holdings Warrants Exp. 05/02/98 277,350
207,573 Semi-Tech Global Ltd. Warrants Exp. 07/31/98 4,511
---------------------------
TOTAL WARRANTS $ 657,328
===========================
(Total Cost $847,002)
BONDS & NOTES IN REORGANIZATION - 0.07%
90,130 MBL Class 4 Unsecured Claim $ 85,624 +*
526,262 RTC Series 1991- M2 Class B interest only due 09/25/20 15,788
---------------------------
TOTAL BONDS AND NOTES IN REORGANIZATION $ 101,412
===========================
(Total Cost $13,157)
CORPORATE BONDS - 0.00%
11,000 Chartwell Contingent Interest Note 8.000% due 06/30/06 $ 6,219 +
---------------------------
TOTAL CORPORATE BONDS $ 6,219
===========================
(Total Cost $6,219)
TEMPORARY INVESTMENTS - 22.60%
US GOVERNMENT OBLIGATIONS - 6.53%
10,000,000 US Treasury Bill due 11/13/97 $ 9,986,306 ~
CANADIAN GOVERNMENT OBLIGATIONS - 6.50%
CAD 14,100,000 Canadian Treasury Bill due 01/15/98 9,941,391
</TABLE>
B-26
<PAGE> 70
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
FRENCH GOVERNMENT OBLIGATIONS - 4.85%
FRF 42,560,000 French Treasury Note due 03/12/98 $ 7,417,152
UNITED KINGDOM GOVERNMENT OBLIGATIONS - 4.72%
BPS 4,375,000 United Kingdom Treasury Bill due 01/13/98 7,216,242
---------------------------
TOTAL TEMPORARY INVESTMENTS $ 34,561,091
===========================
(Total Cost $34,561,091)
TOTAL INVESTMENTS - 100.18% $ 153,239,227
===========================
(Total Cost of Investments $131,241,269)
* Non-income producing security.
+ Restricted Securities - securities not registered under the Securities Act of 1933. See
Note D.
~ A portion of the security is serving as collateral or is segregated for securities sold
short.
# Affiliated company. Cost of share purchases were $7,430 during the year ended October 31,
1997. There were no share sales or dividend income during the year ended October 31,
1997.
Foreign Currency Abbreviations
------------------------------
BPS British Pound Sterling
CAD Canadian Dollars
CHF Swiss Franc
DEM Deutschemark
FRF French Franc
The percentage shown for each investment category is the total value of that category
expressed as a percentage of total net assets of the Fund.
</TABLE>
See notes to financial statements.
B-27
<PAGE> 71
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------------- ------------------
CONTRACTS TO SELL
<S> <C> <C> <C> <C>
BPS 4,313,975 British Pound Sterling due 11/06/97 $ 7,226,987 $ (15,875)
(Receivable amount $7,211,112)
BPS 2,003,652 British Pound Sterling due 12/17/97 3,351,809 (129,737)
(Receivable amount $3,222,072)
BPS 2,051,358 British Pound Sterling due 10/27/98 3,387,612 (83,490)
(Receivable amount $3,304,122)
CAD 13,997,211 Canadian Dollar due 11/04/97 9,928,156 11,633
(Receivable amount $9,939,789)
CHF 8,847,350 Swiss Franc due 12/29/97 6,301,846 (208,455)
(Receivable amount $6,093,391)
CHF 11,357,140 Swiss Franc due 10/27/98 8,367,204 (331,684)
(Receivable amount $8,035,520)
FRF 44,425,906 French Franc due 11/05/97 7,675,785 (21,161)
(Receivable amount $7,654,624)
FRF 51,545,429 French Franc due 11/28/97 8,918,990 (784,625)
(Receivable amount $8,134,365)
FRF 100,900,878 French Franc due 10/27/98 17,735,481 (437,196)
(Receivable amount $17,298,285)
ITL 18,561,758,400 Italian Lira due 10/27/98 10,935,587 (187,609)
(Receivable amount $10,747,978)
ITL 18,240,361,700 Italian Lira due 11/28/97 10,713,764 (252,576)
(Receivable amount $10,461,188)
KRW 569,796,000 South Korean Won due 01/23/98 517,996 100,004
(Receivable amount $618,000)
KRW 577,044,000 South Korean Won due 07/21/98 497,452 119,048
(Receivable amount $616,500)
KRW 577,954,500 South Korean Won due 08/10/98 493,135 122,365
(Receivable amount $615,500)
KRW 1,201,635,000 South Korean Won due 08/24/98 1,022,668 219,332
(Receivable amount $1,242,000)
KRW 2,479,653,000 South Korean Won due 08/31/98 2,104,969 379,031
(Receivable amount $2,484,000)
</TABLE>
B-28
<PAGE> 72
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------------- ------------------
<S> <C> <C> <C> <C>
KRW 1,265,664,000 South Korean Won due 10/20/98 1,063,583 172,417
(Receivable amount $1,236,000)
NLG 2,618,020 Dutch Gilder due 12/29/97 1,341,735 (23,829)
(Receivable amount $1,317,906)
NLG 2,787,500 Dutch Gilder due 10/27/98 1,454,885 (30,365)
(Receivable amount $1,424,520)
------------------------- ----------------------
TOTAL CONTRACTS TO SELL $ 103,039,644 (1,382,772)
========================= ----------------------
(Receivable amount $101,656,872)
CONTRACTS TO BUY
BPS 2,003,652 British Pound Sterling due 12/17/97 $ 3,177,892 86,959
(Payable amount $3,264,851)
CHF 360,221 Swiss Franc due 11/03/97 256,420 440
(Payable amount $256,860)
CHF 8,847,350 Swiss Franc due 12/29/97 5,867,824 217,011
(Payable amount $6,084,835)
ITL 18,240,361,700 Italian Lira due 11/28/97 10,364,344 174,710
(Payable amount $10,539,054)
NLG 2,618,020 Dutch Gilder due 12/29/97 1,297,665 22,035
(Payable amount $1,319,700)
------------------------- ----------------------
TOTAL CONTRACTS TO BUY $ 20,964,145 501,155
========================= ----------------------
(Payable amount $21,465,300)
$ (881,617)
======================
</TABLE>
See notes to financial statements.
B-29
<PAGE> 73
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET
NUMBER OF SHARES VALUE
------------------------------ -----------------------
<S> <C> <C> <C>
COMMON STOCK - 0.06%
6,600 Singer Company NV $ 89,513
-----------------------
TOTAL SECURITIES SOLD SHORT $ 89,513
=======================
(Total Proceeds from Securities Sold Short $148,467)
</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.
B-30
<PAGE> 74
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Baupost Fund (the Fund) was established as a Massachusetts business trust
under an Agreement and Declaration of Trust dated June 29, 1990, and is
registered under the Investment Company Act of 1940, as amended, as a no-load,
nondiversified, open-end management investment company.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that may affect the
reported amounts of assets and liabilities. Actual results could differ from
those estimates.
SECURITY VALUATION: Portfolio securities, options and futures contracts for
which market quotations are available and which are traded on an exchange or on
NASDAQ are valued at the last quoted sales price or, if there is no such
reported sale that day, at the closing bid price. Securities, options and
forward contracts traded in the over-the-counter market (other than those traded
on NASDAQ) and other unlisted securities are valued at the most recent bid price
as obtained from one or more dealers that make markets in the securities.
Portfolio securities which are traded both in the over-the-counter market and on
one or more stock exchanges are valued according to the broadest and most
representative market. To the extent the Fund engages in "naked" short sales
(i.e., it does not own the underlying security or a security convertible into
the underlying security without the payment of any further consideration) the
Fund will value such short position as described above, except that the
valuation, where necessary, will be based on the asked price instead of the bid
price.
Assets for which no quotations are readily available are valued at fair value as
determined in good faith in accordance with procedures adopted by the Trustees
of the Fund. Determination of fair value is based upon such factors as are
deemed relevant under the circumstances, including the financial condition and
operating results of the issuer, recent third-party transactions (actual or
proposed) relating to such securities and, in extreme cases, the liquidation
value of the issuer.
Certain investments held by the Fund are restricted as to public sale in
accordance with the Securities Act of 1933. Whenever possible, such assets are
valued based on bid prices obtained from reputable brokers or market makers as
of the valuation date. For assets not priced by brokers or market makers, fair
value is determined by The Baupost Group, Inc. (Baupost) in accordance with
procedures adopted by the Trustees of the Fund.
SHORT SALES: The Fund engages in short-selling which obligates the Fund to
replace the security borrowed by purchasing the security at the then current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates. Until the Fund replaces the borrowed security, the
Fund maintains daily, in a segregated account with its custodian, cash or
securities sufficient to cover its short position. At October 31, 1997, the Fund
had approximately $45,000 of U.S. Treasury bills in a segregated account
relating to its short positions.
B-31
<PAGE> 75
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Securities sold short at October 31, 1997 and their related market values and
proceeds are set forth in the Schedule of Securities Sold Short.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. The U.S. dollar value of the currencies the Fund
has committed to buy or sell is shown in the Schedule of Forward Foreign
Currency Contracts. Losses may arise from changes in the value of a foreign
currency relative to the U.S. dollar or from the potential inability of the
counterparties to meet the terms of their contracts. The Fund uses forward
foreign currency contracts to hedge the risks associated with holding securities
denominated in foreign currencies. These contracts are adjusted by the daily
exchange rate of the underlying currency, and any gains or losses are recorded
as unrealized until the contract settlement date.
FOREIGN CURRENCY TRANSLATION: The value of foreign securities is translated into
U.S. dollars at the rate of exchange on the day of valuation. Purchases and
sales of foreign securities, as well as income and expenses relating to such
securities, are translated into U.S. dollars at the exchange rate on the dates
of the transactions. The portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign exchange rates is
not separately disclosed.
SWAPS: The Fund has entered into equity swap contracts to gain exposure to
specific foreign equities. A swap is an agreement that obligates two parties to
exchange a series of cash flows at specified intervals based upon or calculated
by reference to changes in specified security prices or interest rates. The
payment flows are usually netted against each other, with the difference being
paid by one party to the other.
Risks may arise as a result of the failure of another party to the swap contract
to comply with the terms of the swap contract. The loss incurred by the failure
of a counterparty is generally limited to the net payment to be received by the
Fund and/or the termination value at the end of the contract. Therefore, the
Fund considers the creditworthiness of each counterparty to a swap contract in
evaluating potential credit risk. Additionally, risks may arise from
unanticipated movements in interest rates or in the value of the underlying
equities.
The Fund records a net receivable or payable for the amount expected to be
received or paid under the contract. The interest component of the equity swap
contracts is recorded as swap interest expense and the fluctuation in the market
value of the underlying security is recorded as unrealized appreciation
(depreciation) on investments. Premium payments made to enter into a swap
contract are capitalized and amortized over the life of the swap contract.
Management of the Fund periodically reviews the value of the unamortized balance
of the premium payment and, based on their evaluation, may accelerate the
amortization.
At October 31, 1997, the Fund had outstanding equity swap contracts with the
following terms:
B-32
<PAGE> 76
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
<TABLE>
<CAPTION>
SWAP NOTIONAL TERMINATION UNDERLYING
COUNTERPARTY AMOUNT DATE SHARES UNDERLYING EQUITY PAYMENTS MADE BY THE FUND
------------ ------ ---- ------ ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
Bankers Trust $ 400,187 02/11/98 27,606 Housing & Commerical Bank Floating - 3 Mos. USD-LIBOR
Flemings 476,194 05/20/99 35,140 Housing & Commercial Bank Fixed - 12 Mos. USD-LIBOR-BBA
Flemings 123,165 05/20/99 8,640 Housing & Commercial Bank Fixed - 12 Mos. USD-LIBOR-BBA
Bankers Trust 400,264 02/11/98 27,746 Kookmin Bank Floating - 3 Mos. USD-LIBOR-BBA
Flemings 235,375 05/20/99 16,618 Kookmin Bank Fixed - 12 Mos. USD-LIBOR-BBA
Morgan Stanley 226,800 07/02/00 16,121 Kookmin Bank Floating - 6 Mos. USD-LIBOR-BBA
Morgan Stanley 338,100 07/07/00 23,879 Kookmin Bank Floating - 6 Mos. USD-LIBOR-BBA
Bankers Trust 629,956 01/17/00 12,014 Pohang Iron & Steel Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Morgan Stanley 506,798 06/05/98 977 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Bear Stearns 632,863 12/23/98 1,182 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Bankers Trust 634,284 12/28/98 1,211 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Morgan Stanley 630,520 03/04/99 1,130 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Morgan Stanley 1,261,000 01/23/00 2,053 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Flemings 568,908 05/13/00 1,300 SK Telecom Co., Ltd. Fixed - 12 Mos. USD-LIBOR-BBA
Bankers Trust 563,218 06/13/00 1,186 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR
Flemings 294,046 10/17/00 650 SK Telecom Co., Ltd. Fixed - 12 Mos. USD-LIBOR-BBA
</TABLE>
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Gains and losses on securities sold are determined
using the specific identification method. Dividend income is recorded on the
ex-dividend date or, for certain foreign dividends, as soon as the Fund becomes
aware of the dividends. Interest income, including original issue discount,
where applicable, is recorded on an accrual basis, except for bonds in default
for which there is some concern as to whether interest will be received in cash,
in which case interest is recorded when received.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that Baupost has determined are creditworthy. Each repurchase
agreement is recorded at cost. The Fund requires that the securities purchased
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement.
PURCHASED CALL AND PUT OPTIONS: The Fund may enter into purchased call and put
options for both hedging and non-hedging activities. The Fund's exposure to
market risk relating to the securities is affected by a number of factors
including the size and composition of the options held, the time period during
which the options may be exercised, the volatility of the underlying security or
index, and the relationship between the current market price of the underlying
security or index and the strike or exercise price of the option. Baupost
closely monitors the Fund's exposure to risk. In addition, all positions
involving future settlement are collateralized by cash balances or security
deposits at the broker through which the transaction was performed.
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.
B-33
<PAGE> 77
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
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, 1997,
$1,658,676 was reclassified from accumulated undistributed net realized gain on
investments and foreign currency transactions to accumulated undistributed net
investment income, due to differences between book and tax accounting for
foreign currency transactions and passive foreign investment companies (PFICs).
This change had no effect on the net asset value per share.
CONCENTRATION OF CREDIT RISK: Concentrations of credit risk exist if a number of
companies in which the Fund has invested are engaged in similar activities and
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. To mitigate its exposure to concentrations of credit risk, the Fund
invests in a variety of industries located in diverse geographic areas. While
the portfolio is not concentrated in any one industry, securities of distressed
companies, many of which are restricted as to resale and which were purchased at
a significant discount, are an important component of the Fund's investments in
bonds.
NOTE B--INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund retains Baupost as its investment adviser, transfer agent and
administrator. Certain individuals who are officers and trustees of the Fund are
also officers, directors and shareholders of Baupost.
The Fund pays Baupost a quarterly management fee at an annual rate of 1% of
average net assets of the Fund and an administrative fee at an annual rate of
0.25% of average net assets of the Fund, to serve as 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.
NOTE C--INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the period ended October 31, 1997 aggregated
$133,450,000 and $134,328,500, respectively.
B-34
<PAGE> 78
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE C--INVESTMENT TRANSACTIONS - CONTINUED
For federal income tax purposes, the identified cost of investments at October
31, 1997 was $132,568,938. Net unrealized appreciation, on a federal income tax
basis, for all securities and securities sold short was as follows:
Gross unrealized appreciation $ 30,125,037
Gross unrealized depreciation (13,181,423)
--------------
Net unrealized appreciation $ 16,943,614
==============
NOTE D--RESTRICTED SECURITIES
At October 31, 1997 the Fund held the following securities which are restricted
as to public sale in accordance with the Securities Act of 1933:
<TABLE>
<CAPTION>
Earliest
Value at Acquisition
Cost October 31, 1997 Date
---- ---------------- ----
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
- - -----------------------------------
Maxwell Commubnications Corporate Debt $ 0 $1,971,653 11/22/93
Corporate Bonds:
- - ----------------
Chartwell Contingent Interest Note 8.000% due 06/30/06 6,219 6,219 12/21/95
Partnerships:
- - -------------
Emerging Europe Fund for Sustainable Development, L.P. 50,482 64,286 02/25/97
NCH Investors Fund, L.P. 919,351 979,541 12/18/95
New Century Capital Partners II, L.P. 995,906 903,114 11/30/95
Sigma Ukraine, L.P. 689,924 703,783 05/14/96
Sigma Ukraine Class C, L.P. 404,663 404,663 11/27/96
Ukrainian Growth Fund II, LP 612,000 612,000 03/31/97
Common Stock:
- - -------------
Pannonia Hotels 211,454 252,436 01/28/97
USAA Real Estate Equities Inc. Class A REIT 89,600 88,200 04/22/97
Companies in Liquidation:
- - -------------------------
Antonel1i Liquidating Trust 0 5,683 12/02/93
Ehlco Liquidating Trust 19 315 01/30/89
Timber Realization Liquidating Trust 0 26,143 08/03/87
Bonds & Notes in Reorganization:
- - --------------------------------
MBL Class 4 Unsecured Claim 0 85,624 06/18/96
----------- ----------
TOTAL RESTRICTED SECURITIES (3.99% of Net Assets) $ 3,979,618 $6,103,660
=========== ==========
</TABLE>
The Fund does not have the right to demand that such securities be registered.
The Fund does not anticipate any significant costs associated with the
disposition of these securities.
B-35
<PAGE> 79
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE E--CAPITAL SHARE TRANSACTIONS
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 2,137,346 $32,346,659 1,109,681 $15,369,111
Shares issued in
reinvestment of dividends 989,255 14,363,821 454,829 5,799,072
Shares redeemed (1,250,566) (19,267,341) (1,132,555) (15,745,256)
---------------- --------------- --------------- ---------------
NET INCREASE 1,876,035 $27,443,139 431,955 $5,422,927
================ =============== =============== ===============
</TABLE>
B-36
<PAGE> 80
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
SELECTED PER SHARE DATA 1997 1996 1995 1994 1993 (A)
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period Income $15.38 $13.47 $14.33 $14.77 $12.56
------ ------ ------ ------ ------
from investment operations
Net investment income 0.30 0.41 0.25 0.22 0.28
Net realized and unrealized gain 3.47 2.43 0.71 1.23 2.76
---- ---- ---- ---- ----
Total from investment operations 3.77 2.84 0.96 1.45 3.04
---- ---- ---- ---- ----
Less distributions
From net investment income 0.40 0.28 0.25 0.46 0.22
In excess of net investment income - - 0.08 - -
From net realized gain 1.66 0.65 1.49 1.43 0.61
---- ---- ---- ---- ----
Total distributions 2.06 0.93 1.82 1.89 0.83
---- ---- ---- ---- ----
Net Asset Value, end of period $17.09 $15.38 $13.47 $14.33 $14.77
====== ====== ====== ====== ======
TOTAL RETURN 27.04% 22.51% 7.91% 11.06% 25.45%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $152,958 $108,788 $89,439 $81,787 $75,378
Ratio of net expenses to average net assets 2.14%(c) 1.50% 1.54% 1.53% 1.52%
Ratio of total expenses excluding waiver of
management fee to average net assets 2.14%(c) 1.50% 1.54% 1.55% 1.63%
Ratio of net investment income to average net
assets 1.45% 2.27% 1.60% 1.32% 2.29%
Ratio of net investment income excluding
waiver of management fee to average net assets
1.45% 2.27% 1.60% 1.30% 2.17%
Portfolio turnover rate 140% 120% 106% 161% 183%
Average commission rate paid (b) $0.0203 $0.0271
</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) For fiscal years beginning after Sept. 1, 1995, the Fund is required to
disclose its average commission rate paid per share for security trades on which
commissions are charged.
(c) The increase in expense ratios is due to equity swap contract interest
expense.
B-37
<PAGE> 81
THE BAUPOST FUND
(THE "FUND")
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(A) (1) Financial Statements:
Statement of Assets and Liabilities as of October 31, 1997 (a)
Statement of Operations for the year ended October 31, 1997 (a)
Statement of Changes in Net Assets for the years ended October 31,
1997 and October 31, 1996 (a)
Schedule of Investments as of October 31, 1997 (a)
Schedule of Forward Foreign Currency Contracts as of October 31,
1997 (a)
Schedule of Securities Sold Short as of October 31, 1997 (a)
Notes to Financial Statements (a)
Financial Highlights -- Years Ended October 31, 1997, 1996, 1995,
1994 and 1993 (a) and (b); Year Ended October 31, 1992 and Period
Ended October 31, 1991 (b)
(2) Supporting Schedules:
Schedules I through V 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 of the Fund.
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. Form of Management Contract between the Fund and The Baupost
Group, L.L.C. ("Baupost").
6. None.
<PAGE> 82
7. None.
8. Custodian Agreement between the Fund and State Street Bank and
Trust Company.
9. (a) Transfer Agency and Service Agreement between the Fund and
State Street Bank and Trust Company.
(b) Form of Administrative Services Agreement between the Fund
and The Baupost Group, L.L.C.
10. Opinion and Consent of Ropes & Gray.*
11. Consent of Ernst & Young LLP.
12. None.
13. Subscription Agreement.*
14. None.
15. None.
16. Schedule of Performance Calculations.
17. Financial Data Schedule.
Power of Attorney.*
- - --------------------
* Incorporated by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement.
-2-
<PAGE> 83
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of January 31, 1998: [ ]
Item 27. Indemnification
Article VIII of the Fund'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
Fund'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 Fund 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 Fund pursuant to the
foregoing provisions, or otherwise, the Fund 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 Fund of expenses incurred or paid by a Trustee, officer or
controlling person of the Fund 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 Fund 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> 84
Item 28. Business and Other Connections of Investment Adviser
The Baupost Group, L.L.C. ("Baupost") is the investment adviser to the
Fund 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 of Baupost are listed below.
<TABLE>
<CAPTION>
Name Business and other connections
- - ---- ------------------------------
<S> <C>
Jordan J. Baruch Assistant Secretary, The Baupost Group,
Member of Advisory Board Inc., 44 Brattle Street, Cambridge, MA
02138; Owner, Jordan Baruch Associates,
1200 18th Street, N.W., Washington,
D.C. 20036.
Jo-An B. Bosworth Vice President, Secretary, Clerk, The
[ ] Baupost Group, Inc., 44 Brattle Street,
Cambridge, MA 02138; Limited Partner,
Baupost Partners, 44 Brattle Street,
Cambridge, MA 02138; Limited Partner,
Baupost Associates, 44 Brattle Street,
Cambridge, MA 02138.
Paul C. Gannon Chief Financial and Administrative
[ ] Officer, Vice President, The Baupost
Group, Inc., 44 Brattle Street, Cambridge,
MA 02138; Limited Partner, Baupost
Associates, 44 Brattle Street, Cambridge,
MA 02138; Treasurer/Clerk, Boston
Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138; Assistant Clerk,
SAK Corporation, 44 Brattle Street,
Cambridge, MA 02138.
Seth A. Klarman Director, President, The Baupost Group, Inc.,
President, Member of Advisory Board 44 Brattle Street, Cambridge, MA 02138;
Limited Partner, Baupost Partners, 44 Brattle
Street, Cambridge, MA 02138; Limited Partner,
Baupost Associates, 44 Brattle Street,
Cambridge, MA 02138; President/Director,
Boston Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138;
</TABLE>
-4-
<PAGE> 85
<TABLE>
<S> <C>
President, SAK Corporation, 44 Brattle
Street, Cambridge, MA 02138.
Thomas A. Knott Vice President, The Baupost Group, Inc.,
[ ] 44 Brattle Street, Cambridge, MA 02138;
Limited Partner, Baupost Associates, 44
Brattle Street, Cambridge, 02138.
Thomas Blumenthal Vice President, The Baupost Group, Inc.,
[ ] 44 Brattle Street, Cambridge, MA 02138;
Limited Partner, Baupost Associates, 44
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.
William J. Poorvu Director, Chairman, The Baupost Group, Inc.,
Chairman of Advisory Board 44 Brattle Street, Cambridge, MA 02138;
Trustee/Director, Mass. Financial Services
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, Chattanooga, 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 Director, Vice Chairman, Treasurer, The
Vice Chairman of Advisory Board Baupost Group, Inc., 44 Brattle Street,
Cambridge, MA 02138; Sarofim-Rock Professor,
Harvard University Graduate School of
Business 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,
</TABLE>
-5-
<PAGE> 86
<TABLE>
<S> <C>
OK 74063. Trustee, various individual trusts.
Senior Associate Dean and Director of
Financial and Information Systems, 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, 270 Congress Street,
Boston, MA 02210; Director, Bessemer
Securities Corporation, 600 Fifth Avenue, New
York, NY 10111; Director, Westboro Holdings
LP, P.O. Box 277, Southboro, MA 01772.
David C. Abrams Director, Vice President, The Baupost
Member of Advisory Board Group, Inc., 44 Brattle Street, Cambridge,
MA 02138; Vice President/Director,
Boston Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138; Limited Partner,
Baupost Associates, 44 Brattle Street,
Cambridge, MA 02138.
Samuel Plimpton Vice President, The Baupost Group, Inc.,
[ ] 44 Brattle Street, Cambridge, MA 02138; General
Partner, Brattle Advisors, L.P., 44 Brattle
Street, Cambridge, MA 02138.
</TABLE>
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, L.L.C., 44
Brattle Street, Cambridge, Massachusetts 02138. Records relating to
the duties of the Registrant's custodian and transfer agent are
maintained by State
-6-
<PAGE> 87
Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
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 the 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> 88
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 29th day of December, 1997.
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.
<TABLE>
<CAPTION>
Signatures Title Date
- - ---------- ----- ----
<S> <C> <C>
/s/ Seth A. Klarman President (Principal December 29, 1997
- - ----------------------- Executive Officer)
Seth A. Klarman and Trustee
* Trustee and Treasurer December 29, 1997
- - ----------------------- (Principal Financial and
William J. Poorvu Accounting Officer)
* Trustee December 29, 1997
- - -----------------------
Howard H. Stevenson
* Trustee December 29, 1997
- - -----------------------
Samuel Plimpton
* Trustee December 29, 1997
- - -----------------------
David Auerbach
* Trustee December 29, 1997
- - -----------------------
Robert Ackerman
* Trustee December 29, 1997
- - -----------------------
Jay Light
*By: /s/ Seth A. Klarman December 29, 1997
------------------
Seth A. Klarman
Attorney-in-fact
</TABLE>
-8-
<PAGE> 89
THE BAUPOST FUND
Index to Exhibits
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- - ----------- ----------- ----------
<S> <C> <C>
2 By-laws
4(b) Portions of By-laws relating to Shareholders'
rights
5 Form of Management Contract
8 Custodian Agreement
9(a) Transfer Agency and Service Agreement
(b) Form of Administrative Services Agreement
11 Auditor's Consent
16 Schedule of Performance
Calculations
17 Financial Data Schedule
</TABLE>
-9-
<PAGE> 1
EXHIBIT 2
BY-LAWS
OF
THE BAUPOST FUND
ARTICLE 1
Agreement and Declaration
of Trust and Principal Office
(as amended December 12, 1997)
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
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
corporation;
-2-
<PAGE> 3
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, or otherwise at the request of
the Clerk, 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 the extent expressly
provided in a written agreement with the Trust, no officer resigning and no
-3-
<PAGE> 4
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.
-4-
<PAGE> 5
ARTICLE 8
Determination of Net Asset Value
8.1. General. 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 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 accepted 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. 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.
-5-
<PAGE> 1
EXHIBIT 4(b)
PORTIONS OF
BY-LAWS
RELATING TO SHAREHOLDERS' RIGHTS
**************************************************************************
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.
***************************************************************************
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.
**************************************************************************
ARTICLE 8
Determination of Net Asset Value
8.1. General. 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 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
<PAGE> 2
shares was accepted 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. 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.
-2-
<PAGE> 1
EXHIBIT 5
MANAGEMENT CONTRACT
Management Contract ("Contract") executed as of January [ ], 1998,
between The Baupost Fund, a Massachusetts business trust (the "Fund"), and The
Baupost Group, L.L.C., a Massachusetts limited liability company (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
<PAGE> 2
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
-2-
<PAGE> 3
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,
-3-
<PAGE> 4
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, L.L.C. 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_______________________________
Title:
THE BAUPOST GROUP, L.L.C.
By_______________________________
Title:
-4-
<PAGE> 1
EXHIBIT 8
CUSTODIAN AGREEMENT
This Agreement is made between THE BAUPOST FUND, a Massachusetts
business trust having its principal place of business at 44 Brattle Street,
Cambridge, Massachusetts 02138 (the "FUND"), and STATE STREET BANK AND TRUST
COMPANY, a Massachusetts trust company with its principal place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "CUSTODIAN"), in
consideration of the mutual covenants and agreements hereinafter contained, the
parties hereto agree as follows:
SECTION 1. EMPLOYMENT OF CUSTODIAN AND PROPERTY TO BE HELD BY IT
The Fund hereby employs the Custodian as the custodian of the assets of
the Fund, including securities which the Fund desires to be held in places
within the United States ("DOMESTIC SECURITIES") and securities it desires to be
held outside the United States ("FOREIGN SECURITIES"). The Fund, in its
discretion, may deliver to the Custodian all of the Fund's securities and cash,
and all payments of income, payments of principal or capital distributions
received by it with respect to securities or other property owned by the Fund
from time to time, and cash consideration received by it for new shares of
beneficial interest of the Fund ("SHARES") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of the Fund held
or received by the Fund and not delivered to the Custodian.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in
Section 6 hereof), the Custodian shall on, behalf of the Fund, from time to time
employ one or more sub-custodians located in the United States, but only as
expressly permitted by vote of the Board of Trustees of the Fund (the "BOARD OF
TRUSTEES"), and provided that the Custodian shall have no more or less
responsibility or liability to the Fund on account of any actions or omissions
of any sub-custodian so employed than any such sub-custodian has to the
Custodian. The Custodian may employ as sub-custodian for the Fund's foreign
securities the foreign banking institutions and foreign securities depositories
designated in Schedules A and B hereto but only in accordance with the
applicable provisions of Sections 3 and 4.
SECTION 2. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD BY
THE CUSTODIAN IN THE UNITED STATES
SECTION 2.1 HOLDING SECURITIES. The Custodian shall hold and physically
segregate for the account of the Fund all non-cash property to be held by it in
the United States including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.8 in a clearing
agency which acts as a securities depository or in a book-entry system
authorized by the U.S. Department of the Treasury (each, a "U.S. SECURITIES
SYSTEM") and (b) commercial paper of an issuer for which State Street Bank and
Trust Company acts as issuing and
<PAGE> 2
paying agent ("DIRECT PAPER") which is deposited and/or maintained in the Direct
Paper System of the Custodian (the "DIRECT PAPER SYSTEM") pursuant to Section
2.9
SECTION 2.2 DELIVERY OF SECURITIES. The Custodian shall release and
deliver domestic securities owned by the Fund held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon receipt of
Proper Instructions from the Fund, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a U.S. Securities
System, in accordance with the provisions of Section 2.8
hereof;
4) To the depository agent in connection with tender or other
similar offers for securities held by the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund, the Custodian or any nominee or nominees of
the Fund or Custodian or into the name or nominee name of any
agent appointed pursuant to Section 2.8 or into the name or
nominee name of any sub-custodian appointed pursuant to
Section 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate
face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the Custodian's own
negligence, misfeasance or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or
<PAGE> 3
pursuant to any deposit agreement; provided that, in any such
case, the new securities and cash, if any, are to be delivered
to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral, except as
may arise from the Custodian's own negligence, misfeasance or
willful misconduct;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"EXCHANGE ACT") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange
Act, relating to compliance with the rules of the Commodity
Futures Trading Commission and/or any Contract Market, or any
similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent for the
Fund (the "TRANSFER AGENT") for delivery to such Transfer
Agent or to the holders of Shares in connection with
distributions in kind, as may be described from time to time
in the currently effective prospectus and statement of
additional information of the Fund (the "PROSPECTUS"), in
satisfaction of requests by holders of Shares for repurchase
or redemption; and
15) For any other proper trust purpose, but only upon receipt of,
Proper Instructions specifying the securities of the Fund to
be delivered, setting forth the purpose for
<PAGE> 4
which such delivery is to be made, declaring such purpose to
be a proper trust purpose, and naming the person or persons to
whom delivery of such securities shall be made.
SECTION 2.3 REGISTRATION OF SECURITIES. Domestic securities held by the
Custodian (other than bearer securities) shall be registered in the name of the
Fund or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless the
Fund has authorized in writing the appointment of a nominee to be used in common
with other registered investment companies having the same investment adviser as
the Fund, or in the name or nominee name of any agent appointed pursuant to
Section 2.8 or in the name or nominee name of any sub-custodian appointed
pursuant to Section 1. All securities accepted by the Custodian on behalf of the
Fund under the terms of this Agreement shall be in "street name" or other good
delivery form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its best efforts to
timely collect income due the Fund on such securities and to notify the Fund on
a best efforts basis of relevant corporate actions including, without
limitation, pendency of calls, maturities, tender or exchange offers; provided,
however, that the Custodian shall be responsible for such notice in the event of
its actual knowledge of such corporate actions.
SECTION 2.4 BANK ACCOUNTS. The Custodian shall open and maintain a
separate bank account or accounts in the United States in the name of the Fund,
subject only to draft or order by the Custodian acting pursuant to the terms of
this Agreement, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the Fund,
other than cash maintained by the Fund in a bank account established and used in
accordance with Rule 17f-3 under the Investment Company Act of 1940, as amended.
Funds held by the Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such other banks or
trust companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be qualified to
act as a custodian under the Investment Act of 1940, as amended, and that each
such bank or trust company and the funds to be deposited with each such bank or
trust company shall on behalf of the Fund be approved by vote of a majority of
the Board of Trustees. Such funds shall be deposited by the Custodian in its
capacity as Custodian and shall be withdrawable by the Custodian only in that
capacity.
SECTION 2.5 COLLECTION OF INCOME. Subject to the provisions of Section
2.3, the Custodian shall use its best efforts to collect on a timely basis all
income, dividends and other payments with respect to registered domestic
securities held hereunder to which each Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall use its best efforts to
collect on a timely basis all income, dividends and other payments with respect
to bearer domestic securities if, on the date of payment by the issuer, such
securities are held by the Custodian or its agent thereof and shall credit such
amount, as collected, to the Fund's custodian account. Without limiting the
generality of the foregoing, the Custodian shall detach and present for payment
all coupons and other income items requiring presentation as and when they
become due and shall use its best efforts to collect interest and dividends when
due on securities held hereunder. Income and dividends due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be the
<PAGE> 5
responsibility of the Fund. The Custodian will have no duty or responsibility in
connection therewith, other than to provide the Fund with such information or
data as may be necessary to assist the Fund in arranging for the timely delivery
to the Custodian of the income to which the Fund is properly entitled.
SECTION 2.6 PAYMENT OF FUND MONIES. Upon receipt of Proper Instructions
from the Fund, which may be continuing instructions when deemed appropriate by
the parties, the Custodian shall pay out monies of the Fund in the following
cases only:
1) Upon the purchase of domestic securities, options, futures
contracts, options on futures contracts or other property for
the account of the Fund but only (a) against the delivery of
such securities or evidence of title to such options, futures
contracts, options on futures contracts or other property to
the Custodian (or any bank, banking firm or trust company
doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as
amended, to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the
name of the Fund or in the name of any nominee of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a U.S. Securities System,
in accordance with the conditions set forth in Section 2.8
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.9; (d) in the case of repurchase agreements entered
into between the Fund and the Custodian, or another bank, or a
broker-dealer which is a member of NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by
the Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund or
(e) for transfer to a time deposit account of the Fund in any
bank, whether domestic or foreign;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued as set forth
in Section 5 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
5) For the payment of any dividends on Shares declared pursuant
to the governing documents of the Fund;
<PAGE> 6
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper trust purpose, but only upon receipt of
Proper Instructions specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper trust purpose, and
naming the person or persons to whom such payment is to be
made.
SECTION 2.7 APPOINTMENT OF AGENTS. The Custodian may at any time or
times in its discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Section 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
Custodian of its responsibilities or liabilities hereunder.
SECTION 2.8 DEPOSIT OF FUND ASSETS IN U.S. SECURITIES SYSTEMS. The
Custodian may deposit and/or maintain securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under Section 17A
of the Exchange Act of 1934, as amended (the "Exchange Act"), which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "U.S. SECURITIES SYSTEMS", in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and regulations, if
any, and subject to the following provisions:
1) The Custodian may keep securities of the Fund in a U.S.
Securities System provided that such securities are
represented in an account of the Custodian in a U.S.
Securities System account (the "U.S. SECURITIES SYSTEM
ACCOUNT") which account shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Fund which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the U.S.
Securities System that such securities have been transferred
to the U.S. Securities System Account, and (ii) the making of
an entry on the records of the Custodian to reflect such
payment and transfer for the account of the Fund. The
Custodian shall transfer securities sold for the account of
the Fund upon (i) receipt of advice from the U.S. Securities
System that payment for such securities has been transferred
to the U.S. Securities System Account, and (ii) the making of
an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund. Copies of
all advices from the U.S. Securities System of transfers of
securities for the account of the Fund shall identify the
Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or
<PAGE> 7
from the account of the Fund in the form of a written advice
or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
U.S. Securities System for the account of the Fund;
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for
safeguarding securities deposited in the U.S. Securities
System;
5) The Custodian shall have received from the Fund the initial or
annual certificate, as the case may be, required by Section 15
hereof;
6) Anything to the contrary in this Agreement notwithstanding,
the Custodian shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the U.S. Securities
System by reason of any negligence, misfeasance or willful
misconduct of the Custodian or any of its agents or of any of
its or their employees or from failure of the Custodian or any
such agent to enforce effectively such rights as it may have
against the U.S. Securities System; at the election of the
Fund, it shall be entitled to be subrogated to the rights of
the Custodian with respect to any claim against the U.S.
Securities System or any other person which the Custodian may
have as a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such loss
or damage.
SECTION 2.9 FUND ASSETS HELD IN THE CUSTODIAN'S DIRECT PAPER SYSTEM.
The Custodian may deposit and/or maintain securities owned by the Fund in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions
from the Fund;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in the
Direct Paper System Account, which account shall not include
any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
<PAGE> 8
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting control as the Fund may
reasonably request from time to time.
SECTION 2.10 SEGREGATED ACCOUNT. The Custodian shall upon receipt of
Proper Instructions from the Fund establish and maintain a segregated account or
accounts for and on behalf of the Fund, into which account or accounts may be
transferred cash, securities and/or other property, including securities
maintained in an account by the Custodian pursuant to Section 2.8 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the Custodian
and a broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing Corporation
and of any registered national securities exchange (or the Commodity Futures
Trading Commission or any registered contract market), or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Fund, (ii) for purposes of segregating cash
or government securities in connection with options purchased, sold or written
by the Fund or commodity futures contracts or options thereon purchased or sold
by the Fund, (iii) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of segregated accounts by registered investment
companies and (iv) for other proper trust purposes, but only, in the case of
clause (iv), upon receipt of Proper Instructions from the Fund setting forth the
purpose or purposes of such segregated account and declaring such purpose(s) to
be a proper trust purpose.
SECTION 2.11 OWNERSHIP CERTIFICATES FOR TAX PURPOSES. The Custodian
shall execute ownership and other certificates and affidavits for all federal
and state tax purposes in connection with receipt of income or other payments
with respect to domestic securities of the Fund held by it and in connection
with transfers of securities.
SECTION 2.12 PROXIES. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without indication
of the manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
SECTION 2.13 COMMUNICATION RELATING TO FUND SECURITIES. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the Fund all
written information (including, without limitation, pendency of calls and
maturities of domestic securities and expirations of rights in connection
therewith and notices of exercise of call and put options written by the Fund
<PAGE> 9
and the maturity of futures contracts purchased or sold by the Fund) received by
the Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit promptly to
the Fund all written information received by the Custodian from issuers of the
securities or other property whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If the Fund desires
to take action with respect to any tender offer, exchange offer or any other
similar transaction, the Fund shall notify the Custodian at least three business
days prior to the date on which the Custodian is to take such action, provided;
however, that if such notice is not timely the Custodian will still use
commercially reasonable efforts to take the action desired.
SECTION 3. THE CUSTODIAN AS FOREIGN CUSTODY MANAGER OF THE FUND
SECTION 3.1. DEFINITIONS. The following capitalized terms, as used in
this Agreement, shall have the indicated meanings:
"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including financial institutions such as any Mandatory Securities Depositories
operating in the country); prevailing or developing custody and settlement
practices; and laws and regulations applicable to the safekeeping and recovery
of Foreign Assets held in custody in that country.
"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule
17f-5 promulgated under Section 17(f) of the Investment Company Act of 1940, as
amended (as amended from time to time, "RULE 17F-5"), except that the term does
not include Mandatory Securities Depositories.
"FOREIGN ASSETS" means any of the Fund's investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Fund's
transactions in such investments.
"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule
17f-5.
"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund determines to place Foreign Assets in a country outside the United States
(i) because required by law or regulation; (ii) because securities cannot be
withdrawn from such foreign securities depository or clearing agency; or (iii)
because maintaining or effecting trades in securities outside the foreign
securities depository or clearing agency is not consistent with prevailing or
developing custodial or market practices.
SECTION 3.2. DELEGATION TO THE CUSTODIAN AS FOREIGN CUSTODY MANAGER.
The Fund, by resolution adopted by the Board of Trustees, hereby delegates to
the Custodian subject to
<PAGE> 10
section (b) of Rule 17f-5, the responsibilities as Foreign Custody Manager set
forth in this Section 3 with respect to Foreign Assets held outside the United
States, and the Custodian hereby accepts such delegation as the Fund's Foreign
Custody Manager.
SECTION 3.3. COUNTRIES COVERED. The Foreign Custody Manager shall be
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A of this Contract, which may be amended from time to time by
the Foreign Custody Manager. The Foreign Custody Manager shall list on Schedule
A the Eligible Foreign Custodians selected by the Foreign Custody Manager to
maintain the assets of the Fund. Mandatory Securities Depositories are listed on
Schedule B to this Contract, which Schedule B may be amended from time to time
by the Foreign Custody Manager. The Foreign Custody Manager will provide amended
versions of Schedules A and B in accordance with Section 3.7 hereof.
Upon the receipt by the Foreign Custody Manager of Proper Instructions
to open an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund of the account opening requirements
for the country (if any), the Foreign Custody Manager shall be deemed to have
been appointed by the Board of Trustees as Foreign Custody Manager with respect
to that country and to have accepted the delegation. Following the receipt of
Proper Instructions directing the Foreign Custody Manager to close the account
of the Fund with the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country, the delegation by the Board of Trustees to the
Custodian as Foreign Custody Manager for that country shall be deemed to have
been withdrawn and the Custodian shall immediately cease to be the Foreign
Custody Manager with respect to that country, subject to reappointment as
provided in the preceding sentence.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Ninety days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn;
provided, however, that, in the event the Foreign Custody Manager believes in
its sole discretion that it can no longer hold assets in the country consistent
with Rule 17f-5, the Foreign Custody Manager shall after 30 days have no further
responsibility with respect to the country as to which the Custodian's
acceptance of delegation is withdrawn. The provisions of Section 3.9 hereof
shall govern the termination by the Custodian as Foreign Custody Manager of the
Fund with respect to all countries.
SECTION 3.4. SCOPE OF DELEGATED RESPONSIBILITIES.
3.4.1. Selection of Eligible Foreign Custodians. Subject to the
provisions of this Section 3, the Fund's Foreign Custody Manager may place and
maintain the Foreign Assets in the care of
<PAGE> 11
the Eligible Foreign Custodians selected by the Foreign Custody Manager in each
country listed on Schedule A, as amended from time to time.
In performing its delegated responsibilities as Foreign Custody Manager
to place or maintain the Foreign Assets with an Eligible Foreign Custodian, the
Foreign Custody Manager shall determine that the Foreign Assets will be subject
to reasonable care, based on the standards applicable to custodians in the
relevant market, after considering all factors relevant to the safekeeping of
such assets, including, without limitation:
(i) the Eligible Foreign Custodian's practices, procedures, and
internal controls, including, but not limited to, the physical
protections available for certificated securities (if
applicable), its methods of keeping custodial records, and its
security and data protection practices;
(ii) whether the Eligible Foreign Custodian has the financial
strength to provide reasonable care for Foreign Assets;
(iii) the Eligible Foreign Custodian's general reputation and
standing and, in the case of a foreign securities depository
or clearing agency, the foreign securities depository's or
clearing agency's operating history and the number of
participants in the foreign securities depository or clearing
agency; and
(iv) whether the Fund will have jurisdiction over and be able to
enforce judgments against the Eligible Foreign Custodian, such
as by virtue of the existence of any offices of the Eligible
Foreign Custodian in the United States or the Eligible Foreign
Custodian's consent to service of process in the United
States.
3.4.2. Contracts With Eligible Foreign Custodians. The Foreign Custody
Manager shall determine that the contract (or the rules or established practices
or procedures in the case of an Eligible Foreign Custodian that is a foreign
securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will provide reasonable care for the Foreign Assets held by that
Eligible Foreign Custodian based on the standards applicable to custodians in
the relevant market. Each such contract shall include provisions that provide:
(i) for indemnification or insurance arrangements (or any
combination of the foregoing) such that the Fund will be
adequately protected against the risk of loss of the Foreign
Assets held in accordance with such contract;
(ii) that the Foreign Assets will not be subject to any right,
security interest, or lien or claim of any kind in favor of
the Eligible Foreign Custodian or its creditors except a claim
of payment for their safe custody or administration or, in the
case
<PAGE> 12
of cash deposits, liens or rights in favor of creditors of the
Eligible Foreign Custodian arising under bankruptcy,
insolvency, or similar laws;
(iii) that beneficial ownership of the Foreign Assets will be freely
transferable without the payment of money or value other than
for safe custody or administration;
(iv) that adequate records will be maintained identifying the
Foreign Assets as belonging to the Fund or as being held by a
third party for the benefit of the Fund;
(v) that the independent public accountants for the Fund will be
given access to those records or confirmation of the contents
of those records; and
(vi) that the Fund will receive periodic reports with respect to
the safekeeping of the Foreign Assets, including, but not
limited to, notification of any transfer of the Foreign Assets
to or from the Fund's account or a third party account
containing the Foreign Assets held for the benefit of the
Fund,
or, in lieu of any or all of the provisions set forth in (i) through (vi) above,
such other provisions that the Foreign Custody Manager determines will provide,
in their entirety, the same or greater level of care and protection for the
Foreign Assets as the provisions set forth in (i) through (vi) above, in their
entirety.
3.4.3. Monitoring. In each case in which the Foreign Custody Manager
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system to
monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian, and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian. In the event the Foreign Custody Manager determines that the
custody arrangements with an Eligible Foreign Custodian that it has selected are
no longer consistent with Rule 17f-5, the Foreign Custody Manager shall notify
the Board of Trustees in accordance with Section 3.7 hereunder.
SECTION 3.5. GUIDELINES FOR THE EXERCISE OF DELEGATED AUTHORITY. For
purposes of this Section 3, the Board of Trustees shall be deemed to have
considered and determined to accept such Country Risk as is incurred by placing
and maintaining the Foreign Assets in each country for which the Custodian is
serving as Foreign Custody Manager of the Fund. The Fund and the Custodian each
expressly acknowledge that the Custodian, in its role as Foreign Custody
Manager, shall not be delegated any responsibilities under this Section 3 with
respect to Mandatory Securities Depositories.
<PAGE> 13
SECTION 3.6. STANDARD OF CARE AS FOREIGN CUSTODY MANAGER OF THE FUND.
In performing the responsibilities delegated to it, the Custodian, in its role
as the Foreign Custody Manager agrees to exercise reasonable care, prudence and
diligence such as a person having responsibility for the safekeeping of assets
of management investment companies registered under the Investment Company Act
of 1940, as amended, would exercise.
SECTION 3.7. REPORTING REQUIREMENTS. The Foreign Custody Manager shall
report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian
and the placement of such Foreign Assets with another Eligible Foreign Custodian
by providing to the Board of Trustees amended Schedules A or B at the end of the
calendar quarter in which an amendment to either Schedule has occurred. The
Foreign Custody Manager shall promptly make written reports notifying the Board
of Trustees of any other material change in the foreign custody arrangements of
the Fund described in this Section 3 after the occurrence of such material
change.
The Foreign Custody Manager shall from time to time provide to the Fund
such information with respect to Mandatory Securities Depositories as it
periodically provides to its other custody customers which are investment
companies registered under the Investment Company Act of 1940, as amended.
SECTION 3.8. REPRESENTATIONS WITH RESPECT TO RULE 17f-5. The Foreign
Custody Manager represents to the Fund that it is a U.S. Bank as defined in
section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the
Board of Trustees has determined that it is reasonable for the Board of Trustees
to rely on the Custodian to perform the responsibilities delegated pursuant to
this Agreement to the Custodian as the Foreign Custody Manager of the Fund.
SECTION 3.9. EFFECTIVE DATE AND TERMINATION OF THE CUSTODIAN AS FOREIGN
CUSTODY MANAGER. The Board of Trustees' delegation to the Custodian as Foreign
Custody Manager of the Fund shall be effective as of the date of execution of
this Agreement and shall remain in effect until terminated at any time, without
penalty, by written notice from the terminating party to the non-terminating
party. Termination will become effective at the earlier of (i) ninety days after
receipt by the non-terminating party of such notice or (ii) the effectiveness of
the termination of this Agreement. The provisions of Section 3.3 hereof shall
govern the delegation to and termination of the Custodian as Foreign Custody
Manager of the Fund with respect to designated countries.
SECTION 4. DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY OF THE FUND HELD
OUTSIDE OF THE UNITED STATES
SECTION 4.1 DEFINITIONS. The following terms shall have the following
meanings:
"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository which is listed on Schedule A hereto or a Mandatory Securities
Depository.
<PAGE> 14
"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian or a Permissible Foreign Custodian.
"PERMISSIBLE FOREIGN CUSTODIAN" means any person with whom property of the Fund
may be placed and maintained outside of the United States under (i) section
17(f) or 26(a) of the Investment Company Act of 1940, as amended, without regard
to Rule 17f-5 or (ii) an order of the Securities and Exchange Commission.
SECTION 4.2. HOLDING SECURITIES. The Custodian shall identify on its
books as belonging to the Fund the foreign securities held by each Foreign
Sub-Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Fund, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian for
the benefit of its customers, provided; however, that (i) the records of the
Custodian with respect to foreign securities of the Fund which are maintained in
such account shall identify those securities as belonging to the Fund and (ii)
the Custodian shall require that securities so held by the Foreign Sub-Custodian
be held separately from any assets of such Foreign Sub-Custodian or of other
customers of such Foreign Sub-Custodian.
SECTION 4.3. FOREIGN SECURITIES SYSTEMS. Foreign securities shall be
maintained in a Foreign Securities System in a designated country only through
arrangements implemented by the Foreign Sub-Custodian in such country pursuant
to the terms of this Agreement.
SECTION 4.4. HOLDING OF FOREIGN ASSETS WITH PERMISSIBLE FOREIGN
CUSTODIANS. Subject to the requirements of Sections 17(f) and 26(a) of the
Investment Company Act of 1940, as amended (and any other applicable law or
order), the Custodian may place and maintain Foreign Assets in the care of any
Permissible Foreign Custodian approved by the Board of Trustees pursuant to
Section 1 hereof. Section 3 hereof shall not apply to placement of Foreign
Assets by the Custodian with a Permissible Foreign Custodian.
SECTION 4.5. TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT.
4.5.1. Delivery of Foreign Securities. The Custodian or a Foreign
Sub-Custodian shall release and deliver foreign securities of the Fund held by
such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon
receipt of Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(i) upon sale of such foreign securities for the Fund in
accordance with reasonable market practice in the country
where such foreign securities are held or traded, including,
without limitation: (A) delivery against expectation of
receiving later payment; or (B) in the case of a sale effected
through a Foreign Securities System, in accordance with the
rules governing the operation of the Foreign Securities
System;
(ii) in connection with any repurchase agreement related to foreign
securities;
<PAGE> 15
(iii) to the depository agent in connection with tender or other
similar offers for foreign securities of the Fund;
(iv) to the issuer thereof or its agent when such foreign
securities are called, redeemed, retired or otherwise become
payable;
(v) to the issuer thereof, or its agent, for transfer into the
name of the Custodian (or the name of the respective Foreign
Sub-Custodian) or of any nominee of the Custodian (or such
Foreign Sub-Custodian) or for exchange for a different number
of bonds, certificates or other evidence representing the same
aggregate face amount or number of units;
(vi) to brokers, clearing banks or other clearing agents for
examination or trade execution in accordance with market
custom; provided that in any such case the Foreign
Sub-Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from
the Foreign Sub-Custodian's own negligence, misfeasance or
willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities,
the surrender thereof in the exercise of such warrants, rights
or similar securities or the surrender of interim receipts or
temporary securities for definitive securities;
(ix) for delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper trust purpose, but only upon receipt of
Proper Instructions specifying the foreign securities to be
delivered, setting forth the purpose for which such delivery
is to be made, declaring such purpose to be a proper trust
purpose, and naming the person or persons to whom delivery of
such securities shall be made.
<PAGE> 16
4.5.2. Payment of Fund Monies. Upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the
respective Foreign Securities System to pay out, monies of the Fund in the
following cases only:
(i) upon the purchase of foreign securities for the Fund in
accordance with reasonable market practices in the country
where such foreign securities are held or traded, unless
otherwise directed by Proper Instructions, by (A) delivering
money to the seller thereof or to a dealer therefor (or an
agent for such seller or dealer) against expectation of
receiving later delivery of such foreign securities; or (B) in
the case of a purchase effected through a Foreign Securities
System, in accordance with the rules governing the operation
of such Foreign Securities System;
(ii) in connection with the conversion, exchange or surrender of
foreign securities of the Fund;
(iii) for the payment of any expense or liability of the Fund,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees
under this Agreement, legal fees, accounting fees, and other
operating expenses;
(iv) for the purchase or sale of foreign exchange or foreign
exchange contracts for the Fund, including transactions
executed with or through the Custodian or its Foreign
Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vii) in connection with the borrowing of foreign securities; and
(viii) for any other proper trust purpose, but only upon receipt of
Proper Instructions specifying the amount of such payment,
setting forth the purpose for which such payment is to be
made, declaring such purpose to be a proper trust purpose, and
naming the person or persons to whom such payment is to be
made.
4.5.3. Market Conditions. Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign Assets received
for the account of the Fund and delivery of Foreign Assets maintained for the
account of the Fund may be effected in accordance with the customary established
securities trading or processing practices and procedures in the country or
market in which the transaction occurs, including, without limitation,
delivering Foreign Assets to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) with the expectation of receiving later
payment for such Foreign Assets from such purchaser or dealer.
<PAGE> 17
SECTION 4.6. REGISTRATION OF FOREIGN SECURITIES. The foreign securities
maintained in the custody of a Foreign Custodian (other than bearer securities)
shall be registered in the name of the Fund or in the name of the Custodian or
in the name of any Foreign Sub-Custodian or in the name of any nominee of the
foregoing, and the Fund agrees to hold any such nominee harmless from any
liability as a holder of record of such foreign securities. The Custodian or a
Foreign Sub-Custodian shall not be obligated to accept securities on behalf of
the Fund under the terms of this Agreement unless the form of such securities
and the manner in which they are delivered are in accordance with reasonable
market practice.
SECTION 4.7. BANK ACCOUNTS. A bank account or bank accounts opened and
maintained outside the United States in a Foreign Sub-Custodian shall be subject
only to draft or order by the Custodian or such Foreign Sub-Custodian, acting
pursuant to the terms of this Agreement to hold cash received by or from or for
the account of the Fund.
SECTION 4.8. COLLECTION OF INCOME. The Custodian shall use its best
efforts to collect all income and other payments in due course with respect to
the Foreign Assets held hereunder to which the Fund shall be entitled and shall
credit such income, as collected, to the Fund. In the event that extraordinary
measures are required to collect such income, the Fund and the Custodian shall
consult as to such measures and as to the compensation and expenses of the
Custodian attendant thereto.
SECTION 4.9. PROXIES. The Custodian will generally, with respect to the
foreign securities held under this Section 4, use its best efforts to facilitate
the exercise of voting and other shareholder proxy rights, subject always to the
laws, regulations and practical constraints that may exist in the country where
such securities are issued. The Fund acknowledges that local conditions,
including lack of regulation, onerous procedural obligations, lack of notice and
other factors may have the effect of severely limiting the ability of the Fund
to exercise shareholder rights.
SECTION 4.10. COMMUNICATIONS RELATING TO FOREIGN SECURITIES. The
Custodian shall transmit promptly to the Fund written information (including,
without limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via the
Foreign Sub-Custodians from issuers of the foreign securities being held for the
account of the Fund. With respect to tender or exchange offers, the Custodian
shall transmit promptly to the Fund written information so received by the
Custodian from issuers of the foreign securities whose tender or exchange is
sought or from the party (or its agents) making the tender or exchange offer.
Unless due to the Custodian's own negligence, misfeasance or willful misconduct,
the Custodian shall not be liable for any untimely exercise of any tender,
exchange or other right or power in connection with foreign securities or other
property of the Fund at any time held by it unless (i) the Custodian or the
respective Foreign Sub-Custodian is in actual possession of such foreign
securities or property and (ii) the Custodian receives Proper Instructions with
regard to the exercise of any such right or power, and both (i) and (ii) occur
at least three (3) business days prior to the date on which such right or power
is to be exercised.
<PAGE> 18
SECTION 4.11. LIABILITY OF FOREIGN SUB-CUSTODIANS. Each agreement
pursuant to which the Custodian employs a Foreign Sub-Custodian shall, to the
extent possible, require the Foreign Sub-Custodian to exercise reasonable care
in the performance of its duties and, to the extent possible, to indemnify, and
hold harmless, the Custodian from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the Foreign
Sub-Custodian's performance of such obligations. At the election of the Fund,
the Fund shall be entitled to be subrogated to the rights of the Custodian with
respect to any claims against a Foreign Sub-Custodian as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent that
the Fund has not been made whole for any such loss, damage, cost, expense,
liability or claim.
SECTION 4.12. TAX LAW. The Custodian shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or the
Custodian as custodian of the Fund by the tax law of the United States or of any
state or political subdivision thereof. To the extent that the Fund requires the
assistance of the Custodian with respect to any claim for exemption or refund
under the tax law of any jurisdiction other than the United States or of any
state or subdivision thereof, it shall be the responsibility of the Fund to
notify the Custodian of the obligations imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of countries other than those mentioned in
the above sentence, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with respect to any claim
for exemption or refund under the tax law of jurisdictions for which the Fund
provided such information.
SECTION 4.13. CONFLICT. If the Custodian is delegated the
responsibilities of Foreign Custody Manager pursuant to the terms of Section 3
hereof, in the event of any conflict between the provisions of Sections 3 and 4
hereof, the provisions of Section 3 shall prevail.
SECTION 5. PAYMENTS FOR SALES OR REPURCHASES OR REDEMPTIONS OF SHARES
The Custodian shall receive from the distributor for the Shares or from
the Transfer Agent and deposit into the account of the Fund such payments as are
received for Shares thereof issued or sold from time to time by the Fund. The
Custodian will provide timely notification to the Fund and the Transfer Agent of
any receipt by it of payments for Shares.
From such funds as may be available for the purpose but subject to the
limitations of the Fund's Declaration of Trust, and any applicable votes of the
Board of Trustees pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial bank designated
by the redeeming shareholders. In connection with the redemption or
<PAGE> 19
repurchase of Shares, the Custodian shall honor checks drawn on the Custodian by
a holder of Shares, which checks have been furnished by the Fund to the holder
of Shares, when presented to the Custodian in accordance with such procedures
and controls as are mutually agreed upon from time to time between the Fund and
the Custodian.
SECTION 6. PROPER INSTRUCTIONS
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board of Trustees
shall have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.10.
SECTION 7. ACTIONS PERMITTED WITHOUT EXPRESS AUTHORITY
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Agreement, provided that all such payments
shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in
definitive form;
3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiable instruments; and
4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Board of
Trustees.
<PAGE> 20
SECTION 8. EVIDENCE OF AUTHORITY
The Custodian shall be protected in acting, in good faith, upon any
instructions, notice, request, consent, certificate or other instrument or paper
reasonably believed by it to be genuine and to have been properly executed by or
on behalf of the Fund. The Custodian may receive and accept a copy of a vote of
the Board of Trustees of the Fund certified by the Clerk or an Assistant Clerk
of the Fund (a "CERTIFIED VOTE") as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Trustees pursuant to the Fund's Declaration of Trust
as described in such vote and such vote may be considered as in full force and
effect until receipt by the Custodian of written notice to the contrary.
SECTION 9. DUTIES OF CUSTODIAN WITH RESPECT TO THE BOOKS OF ACCOUNT AND
CALCULATION OF NET ASSET VALUE AND NET INCOME
The Custodian shall cooperate with and supply necessary information to
the entity or entities appointed by the Fund to keep the books of account of the
Fund and/or compute the net asset value per share of the outstanding Shares of
the Fund.
SECTION 10. RECORDS
The Custodian shall create and maintain all records relating to its
activities and obligations under this Agreement in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, as amended,
with particular attention to Section 31 thereof and Rules 31a-1 and 31a-2
thereunder. All such records shall be the property of the Fund and shall at all
times during the regular business hours of the Custodian be open for inspection
by duly authorized officers, employees or agents of the Fund and employees and
agents of the Securities and Exchange Commission. The Custodian shall, at the
Fund's request, supply the Fund with a tabulation of securities owned by the
Fund and held by the Custodian itself or by a banking institution serving as a
sub-custodian and shall, when requested to do so by the Fund and for such
compensation as shall be agreed upon between the Fund and the Custodian, include
certificate numbers in such tabulations.
SECTION 11. OPINION OF FUND'S INDEPENDENT ACCOUNTANT
The Custodian shall take all reasonable action, as the Fund may from
time to time request, to obtain from year to year favorable opinions from the
Fund's independent accountants with respect to its activities hereunder in
connection with the preparation of the Fund's registration statement on Form
N-1A, the Fund's annual report on Form N-SAR or other material required to be
filed with the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
<PAGE> 21
SECTION 12. REPORTS TO FUND BY INDEPENDENT PUBLIC ACCOUNTANTS
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, futures contracts and options on futures contracts, including
securities deposited and/or maintained in a U.S. Securities System or a Foreign
Securities System (collectively referred to herein as the "SECURITIES SYSTEMS"),
relating to the services provided by the Custodian under this Agreement; such
reports, shall be of sufficient scope and in sufficient detail, as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
SECTION 13. COMPENSATION OF CUSTODIAN
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
SECTION 14. RESPONSIBILITY OF CUSTODIAN; INDEMNIFICATION
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Agreement and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument reasonably
believed by it to be genuine and to be signed by the proper party or parties,
including any futures commission merchant acting pursuant to the terms of a
three-party futures or options agreement. The Custodian shall be held to the
exercise of reasonable care in carrying out the provisions of this Agreement,
but shall be kept indemnified by and shall be without liability to the Fund for
any action taken or omitted by it in good faith without negligence, misfeasance
or willful misconduct. The Custodian shall be entitled to rely on and act upon
advice of counsel (who may be counsel for the Fund) and, except as provided in
the next paragraph of this Section 14, shall be without liability for any action
reasonably taken or omitted pursuant to such advice. The Custodian shall be
without liability to the Fund for any loss, liability, claim or expense
resulting from or caused by anything which is (A) part of Country Risk,
including without limitation nationalization, expropriation, currency
restrictions, or acts of war, revolution, riots or terrorism or (B) part of the
"prevailing country risk" of the Fund, as such term is used in Securities and
Exchange Commission Release Nos. IC-22658; IS-1080 (May 12, 1997) or as such
term or other similar terms are now or in the future interpreted by the
Securities and Exchange Commission or by the staff of the Division of Investment
Management thereof.
In any case in which the Fund may be asked to indemnify or hold the
Custodian harmless, the Fund shall be fully and promptly advised of all
pertinent facts concerning the situation in question, and it is further
understood that the Custodian will use all reasonable care to identify and
notify the Fund
<PAGE> 22
promptly concerning any situation which presents or appears likely to present
the probability of such claim for indemnification against the Fund; provided,
however, that the failure to so advise, identify or notify the Fund shall not in
any way limit the Fund's liability for indemnification under this Contract with
respect to any such claim to the extent that the defense thereof is not
materially prejudiced by such failure. If the Fund acknowledges in writing that
the Custodian is entitled to indemnification, the Fund shall have the option to
defend the Custodian against any claim which may be the subject of this
indemnification, and in the event that the Fund so elects, it will so notify the
Custodian, and thereupon the Fund shall take over complete defense of the claim.
In the event the Fund elects to assume the control of the defense of the claim,
the Custodian may participate in such proceeding and retain additional counsel
but shall bear all fees and expenses of such retention of such counsel, unless
(i) the Fund shall have specifically authorized the retention of such counsel,
or (ii) if the Fund and the Custodian agree that the retention of such counsel
is required as a result of a conflict of interest. In the event the Fund assumes
control of any proceeding, the Fund shall keep the Custodian notified of the
progress of such proceeding and, upon request, consult with the Custodian and
counsel. The Fund will, upon request by the Custodian, either pay in the first
instance or reimburse the Custodian for any expenses subject to indemnity
hereunder. The Fund shall not settle or compromise any proceeding without the
prior written consent of the Custodian unless (i) such settlement or compromise
involves no admission of guilt, wrongdoing, or misconduct by the Custodian, (ii)
such settlement or compromise does not impose any obligations or restrictions on
the Custodian other than obligations to pay money that are subject to indemnity
under this Agreement, and (iii) the Fund shall have paid, or made arrangements
satisfactory to the Custodian for payment of amounts payable by the Custodian in
connection with such settlement. The Custodian shall in no case confess any
claim or make any compromise in any case in which the Fund will be asked to
indemnify the Custodian except with the Fund's prior written consent.
Except as may arise from the Custodian's own negligence, misfeasance or
willful misconduct or the negligence, misfeasance or willful misconduct of a
sub-custodian or agent, the Custodian shall be without liability to the Fund for
any loss, liability, claim or expense resulting from or caused by; (i) events or
circumstances beyond the reasonable control of the Custodian or any
sub-custodian or Securities System or any agent or nominee of any of the
foregoing, including, without limitation, the interruption, suspension or
restriction of trading on or the closure of any securities market, power or
other mechanical or technological failures or interruptions, computer viruses or
communications disruptions, work stoppages, natural disasters, or other similar
events or acts; (ii) errors by the Fund or its investment adviser of the Fund in
its instructions to the Custodian, provided such instructions have been in
accordance with this Agreement; (iii) the insolvency of or acts or omissions by
a Securities System; (iv) any delay or failure of any broker, agent or
intermediary, central bank or other commercially prevalent payment or clearing
system to deliver to the Custodian's sub-custodian or agent securities purchased
or in the remittance or payment made in connection with securities sold; (v) any
delay or failure of any company, corporation, or other body in charge of
registering or transferring securities in the name of the Custodian, the Fund,
the Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including
non-receipt of bonus, dividends and rights and other accretions or benefits;
(vi) delays or inability to perform its duties due to any disorder in market
infrastructure with respect to any particular security or Securities System; and
(vii) any change in any provision of any present law
<PAGE> 23
or regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
The Custodian shall be liable for the acts or omissions of a Foreign
Sub-Custodian to the same extent as set forth with respect to sub-custodians
generally in this Agreement.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or
agents, to advance cash or securities for any purpose (including but not limited
to securities settlements, foreign exchange contracts and assumed settlement) or
in the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Agreement that are related directly to the Fund's
securities transactions, except such as may arise from the Custodian's or its
nominee's own negligent action, negligent failure to act, misfeasance or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the
Fund's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
SECTION 15. EFFECTIVE PERIOD, TERMINATION AND AMENDMENT
This Agreement shall become effective as of its execution, shall
continue in full force and effect until terminated as hereinafter provided, may
be amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.8 hereof in the absence
of receipt of an initial certificate of the Clerk or an Assistant Clerk of the
Fund that the Board of Trustees has approved the initial use of a particular
Securities System by the Fund, as required by Rule 17f-4 under the Investment
Company Act of 1940, and that the Custodian shall not act under Section 2.9
hereof in the absence of receipt of an initial certificate of the Clerk or an
Assistant Clerk of the Fund that the Board of Trustees has approved the initial
use of the Direct Paper System by the Fund; provided further, however, that the
Fund shall not amend or terminate this Agreement in contravention of any
applicable federal or state regulations, or any provision of the Fund's
Declaration of Trust, and further provided, that the Fund may at any time by
action of its Board of Trustees (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Agreement in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the
<PAGE> 24
Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Agreement, the Fund shall pay to the Custodian
such compensation as may be due as of the date of such termination.
SECTION 16. SUCCESSOR CUSTODIAN
If a successor custodian for the Fund shall be appointed by the Board
of Trustees, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities and other property of the Fund then held by the
Custodian hereunder and shall transfer to an account of the successor custodian
all of the securities, funds and other property of the Fund held in a Securities
System.
If no such successor custodian shall be appointed, the Custodian shall,
in like manner, upon receipt of a Certified Resolution, deliver at the office of
the Custodian and transfer such securities, funds and other properties in
accordance with such resolution.
In the event that no written order designating a successor custodian or
a Certified Vote shall have been delivered to the Custodian on or before the
date when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined in
the Investment Company Act of 1940, as amended, doing business in Boston,
Massachusetts, or New York, New York, of its own selection, having an aggregate
capital, surplus, and undivided profits, as shown by its last published report,
of not less than $25,000,000, all securities, funds and other properties held by
the Custodian on behalf of the Fund and all instruments held by the Custodian
relative thereto and all other property held by it under this Agreement and to
transfer to an account of such successor custodian all of the securities of the
Fund held in any Securities System. Thereafter, such bank or trust company shall
be the successor of the Custodian under this Agreement.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Vote to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such securities, funds
and other properties and the provisions of this Agreement relating to the duties
and obligations of the Custodian shall remain in full force and effect.
SECTION 17. INTERPRETIVE AND ADDITIONAL PROVISIONS
<PAGE> 25
In connection with the operation of this Agreement, the Custodian and
the Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Agreement as may in their joint opinion be
consistent with the general tenor of this Agreement. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Fund's Declaration of Trust. No interpretive or additional provisions made
as provided in the preceding sentence shall be deemed to be an amendment of this
Agreement.
SECTION 19. MASSACHUSETTS LAW TO APPLY
This Agreement shall be construed and the provisions hereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
SECTION 20. PRIOR AGREEMENTS
This Agreement supersedes and terminates, as of the date hereof, all
prior Agreements between the Fund and the Custodian relating to the custody of
the Fund's assets.
SECTION 21. NOTICES
Any notice, instruction or other instrument required to be given
hereunder may be delivered in person to the offices of the parties as set forth
herein during normal business hours or delivered prepaid registered mail or by
telex, cable or telecopy to the parties at the following addresses or such other
addresses as may be notified by any party from time to time.
To the Fund: THE BAUPOST FUND
44 Brattle Street
P.O. Box 381288
Cambridge, Massachusetts 02138
Attention: Paul Gannon
Chief Financial and
Administrative Officer
Telephone: (617) 497-6680
Telecopy: (617) 868-3529
<PAGE> 26
To the Custodian: STATE STREET BANK AND TRUST COMPANY
1776 Heritage Drive
North Quincy, Massachusetts 02171
Attention: Teresa McGuire
Mail Stop JPB2N
Telephone: (617) 985-4699
Telecopy: (617) 985-5375155
Such notice, instruction or other instrument shall be deemed to have
been served in the case of a registered letter at the expiration of five
business days after posting, in the case of cable twenty-four hours after
dispatch and, in the case of telex, immediately on dispatch and if delivered
outside normal business hours it shall be deemed to have been received at the
next time after delivery when normal business hours commence and in the case of
cable, telex or telecopy on the business day after the receipt thereof. Evidence
that the notice was properly addressed, stamped and put into the post shall be
conclusive evidence of posting.
SECTION 22. REPRODUCTION OF DOCUMENTS
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 23. SHAREHOLDER COMMUNICATIONS ELECTION
Rule 14b-2 under the Exchange Act (the "Rule") requires banks which
hold securities for the account of customers to respond to requests by issuers
of securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the Rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the Rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
<PAGE> 27
YES [ ] The Custodian is authorized to release the Fund's
name, address, and share positions.
NO [X] The Custodian is not authorized to release the
Fund's name, address, and share positions.
SECTION 24. ASSIGNMENT
Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other party.
This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
SECTION 25. LIMITATIONS 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 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 and
are not binding upon any of the Trustees or shareholders of the Fund
individually but are binding only upon the assets and property of the Fund.
<PAGE> 28
IN WITNESS WHEREOF, each of the parties has caused this instrument to
be executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the October 31st, 1997.
ATTEST THE BAUPOST FUND
By /s/ Paul Gannon
-------------------------------
Name: Name: Paul Gannon
Title: Title: CFO
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Thomas M. Lenz By /s/ Ronald E. Logue
-------------------------------
Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
<PAGE> 29
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria ERSTE Bank --
Bahrain The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale Bank --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. --
People's Republic The Hongkong and Shanghai --
of China Banking Corporation Limited,
Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
</TABLE>
<PAGE> 30
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Croatia Privredna banka Zagreb d.d. --
Cyprus Barclays Bank PLC --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansa Bank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A Bank of Greece
Hong Kong Standard Chartered Bank --
</TABLE>
1992
<PAGE> 31
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Hungary Citibank Budapest Rt. --
India Deutsche Bank AG; --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
</TABLE>
<PAGE> 32
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Trust and Merchant Bank --
Japan The Daiwa Bank, Limited; Japan Securities Depository
The Fuji Bank, Limited; Center (JASDEC);
The Sumitomo Trust
& Banking Co., Ltd.
Jordan The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic of Korea Citibank, N.A. --
Lebanon The British Bank of the Middle East Custodian and Clearing Center of Financial
(as delegate of the Hongkong and Instruments for Lebanon (MIDCLEAR) S.A.L.;
Shanghai Banking Corporation Limited)
Malaysia Standard Chartered Bank --
Malaysia Berhad
</TABLE>
1992
<PAGE> 33
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
</TABLE>
<PAGE> 34
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
Netherlands MeesPierson N.V. --
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman The British Bank of the Middle East --
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank Poland S.A. --
Portugal Banco Comercial Portugues --
</TABLE>
1992
<PAGE> 35
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Romania ING Bank, N.V. --
Russia Credit Suisse First Boston, Zurich --
via Credit Suisse First Boston
Limited, Moscow
Singapore The Development Bank --
of Singapore Ltd.
</TABLE>
<PAGE> 36
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Slovak Republic Ceskoslovenska Obchodna --
Banka A.S.
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Barclays Bank of Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland Union Bank of Switzerland --
Taiwan - R.O.C. Central Trust of China --
Thailand Standard Chartered Bank --
Trinidad & Tobago Republic Bank Ltd. --
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
United Kingdom State Street Bank and Trust --
Uruguay Citibank, N.A. --
</TABLE>
1992
<PAGE> 37
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
</TABLE>
<PAGE> 38
STATE STREET SCHEDULE A
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND OPTIONAL DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN OPTIONAL DEPOSITORIES
<S> <C> <C>
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)
Cedel (Cedel Bank, societe anonyme)
INTERSETTLE (for EASDAQ Securities)
</TABLE>
1992
<PAGE> 39
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Argentina -Caja de Valores S.A.;
-CRYL
Australia -Austraclear Limited;
-Reserve Bank Information and
Transfer System (RITS)
Austria -Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium -Caisse Interprofessionnelle de Depots et
de Virements de Titres S.A. (CIK);
-Banque Nationale de Belgique
Brazil -Bolsa de Valores de Sao Paulo (Bovespa)
[CALISPA];
-Bolsa de Valores de Rio de Janeiro (BVRJ)
[CLC] - All SSB clients presently use Calispa
-Central de Custodia e de Liquidacao Financeira
de Titulos (CETIP)
-Banco Central do Brasil,
Systema Especial de Liquidacao e
Custodia (SELIC)
Canada -The Canadian Depository
for Securities Limited (CDS); West Canada
Depository Trust Company [depositories
linked]
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 40
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
People's Republic -Shanghai Securities Central Clearing and
of China Registration Corporation (SSCCRC);
-Shenzhen Securities Central Clearing
Co., Ltd. (SSCC)
Czech Republic --Stredisko cennych papiru(degree)
(SCP);
-Czech National Bank (CNB)
Denmark -Vaerdipapircentralen - The Danish
Securities Center (VP)
Egypt -Misr Company for Clearing, Settlement,
and Central Depository (MCSD)
Finland -The Finnish Central Securities
Depository (CSD)
France -Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM);
-Banque de France,
Saturne System
Germany -The Deutscher Kassenverein AG
Greece -The Central Securities Depository
(Apothetirion Titlon A.E.);
Hong Kong -The Central Clearing and
Settlement System (CCASS);
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 41
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
-The Central Money Markets Unit (CMU)
Hungary -The Central Depository and Clearing
House (Budapest) Ltd. (KELER Ltd.)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
</TABLE>
1992
<PAGE> 42
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Indonesia -Bank of Indonesia
Ireland -The Central Bank of Ireland,
The Gilt Settlement Office (GSO)
Israel -The Clearing House of the
Tel Aviv Stock Exchange;
-Bank of Israel
Italy -Monte Titoli S.p.A.;
-Banca d'Italia
Japan -Bank of Japan Net System
Republic of Korea -Korea Securities Depository (KSD)
Lebanon -The Central Bank of Lebanon
Malaysia -Malaysian Central Depository Sdn.
Bhd. (MCD);
-Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
Systems (SSTS)
Mauritius -The Central Depository & Settlement
System (CDS)
Mexico -S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores);
-Banco de Mexico
</TABLE>
1992
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 43
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Netherlands -Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF);
-De Nederlandsche Bank N.V.
New Zealand -New Zealand Central Securities
Depository Limited (NZCSD)
Norway -Verdipapirsentralen - The Norwegian
Registry of Securities (VPS)
Oman -Muscat Securities Market (MSM)
Peru -Caja de Valores y Liquidaciones
(CAVALI, S.A.)
Philippines -The Philippines Central Depository Inc.(PCD)
-The Book-Entry-System (BES) of Bangko
Sentral ng Pilipinas;
-The Registry of Scripless Securities (ROSS) of the
Bureau of the Treasury
Poland -The National Depository of Securities
(Krajowy Depozyt Papierow Wartosciowych);
-National Bank of Poland
Portugal -Central de Valores Mobiliarios (Central)
Romania -National Securities Clearing,Settlement and
Depository Co. (SNCDD);
-Bucharest Stock Exchange (BSE);
-National Bank of Romania
</TABLE>
1992
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 44
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Singapore -The Central Depository (Pte)
Limited (CDP);
-Monetary Authority of Singapore (MAS)
Slovak Republic -Stredisko Cennych Papierov (SCP);
-National Bank of Slovakia
South Africa -The Central Depository Limited (CD)
Spain -Servicio de Compensacion y
Liquidacion de Valores, S.A. (SCLV);
-Banco de Espana,
Anotaciones en Cuenta
Sri Lanka -Central Depository System
(Pvt) Limited (CDS)
Sweden -Vardepapperscentralen VPC AB -
The Swedish Central Securities Depository
Switzerland -Schweizerische Effekten - Giro AG
(SEGA);
Taiwan - R.O.C. -The Taiwan Securities Central
Depository Company, Ltd. (TSCD)
Thailand -Thailand Securities Depository
Company Limited (TSD)
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 45
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Tunisia -STICODEVAM;
-Central Bank of Tunisia;
-Tunisian Treasury
1992
<PAGE> 46
STATE STREET SCHEDULE B
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
<TABLE>
<CAPTION>
COUNTRY MANDATORY DEPOSITORIES
<S> <C>
Turkey -Takas ve Saklama Bankasi A.S.
(TAKASBANK);
-Central Bank of Turkey
United Kingdom -The Bank of England,
The Central Gilts Office (CGO);
The Central Moneymarkets Office (CMO);
The European Settlements Office (ESO);
-First Chicago Clearing Centre
Uruguay -Central Bank of Uruguay
Zambia -Lusaka Central Depository (LCD)
</TABLE>
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE> 1
EXHIBIT 9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE BAUPOST FUND
and
STATE STREET BANK AND TRUST COMPANY
Domestic/Trust
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Terms of Appointment; Duties of the Bank........................................................1
2. Fees and Expenses...............................................................................3
3. Representations and Warranties of the Bank......................................................3
4. Representations and Warranties of the Fund......................................................4
5. Data Access and Proprietary Information.........................................................4
6. Indemnification.................................................................................6
7. Standard of Care................................................................................7
8. Covenants of the Fund and the Bank..............................................................8
9. Termination of Agreement........................................................................8
10. Assignment......................................................................................9
11. Amendment.......................................................................................9
12. Massachusetts Law to Apply......................................................................9
13. Force Majeure...................................................................................9
14. Consequential Damages..........................................................................10
15. Merger of Agreement............................................................................10
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C>
16. Limitations of Liability of the Trustees
and Shareholders...............................................................................10
17. Counterparts...................................................................................10
18. Reproduction of Documents......................................................................10
</TABLE>
<PAGE> 4
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 31st day of October, 1997, 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
STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company, having its
principal office and place of business at 225 Franklin Street, Boston,
Massachusetts 02110 (the "Bank").
WHEREAS, the Fund desires to appoint the Bank as its transfer agent, dividend
disbursing agent and agent in connection with certain other activities, and the
Bank desires to accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. Terms of Appointment; Duties of the Bank
1.1 Subject to the terms and conditions set forth in this Agreement, the
Fund hereby employs and appoints the Bank to act as, and the Bank
agrees to act as, its transfer agent for the Fund's authorized and
issued shares of its beneficial interests ("Shares"), dividend
disbursing agent, and agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of the Fund
("Shareholders") and set out in the currently effective prospectus and
statement of additional information ("prospectus") of the Fund.
1.2 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to
time by agreement between the Fund and the Bank, the Bank
shall:
(i) Receive orders for the purchase of
Shares by Shareholders from The Baupost Group, Inc.
and promptly deliver payment and appropriate
documentation thereof to the Custodian of the Fund
(the "Custodian");
(ii) Pursuant to purchase orders, issue the
appropriate number of Shares and hold such Shares in
the appropriate Shareholder account;
(iii) Receive redemption requests and
redemption directions by
<PAGE> 5
Shareholders from The Baupost Group, Inc. and deliver
the appropriate documentation thereof to the
Custodian;
(iv) At the appropriate time as and when it
receives monies paid to it by the Custodian with
respect to any redemption, pay over or cause to be
paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders and as
permitted by the prospectus;
(v) Effect transfers of Shares by the
registered owners thereof upon receipt of appropriate
instructions;
(vii) Prepare and transmit payments for
dividends and distributions declared by the Fund;
(ix) Maintain records of account for and
advise the Fund and its Shareholders as to the
foregoing; and
(x) Record the issuance of shares of the
Fund and maintain pursuant to SEC Rule 17Ad-10(e) a
record of the total number of Shares which are
authorized, based upon data provided to it by the
Fund, and issued and outstanding. The Bank shall also
provide the Fund on a regular basis with the total
number of Shares which are authorized and issued and
outstanding and shall have no obligation, when
recording the issuance of Shares to take cognizance
of any laws relating to the issue or sale of such
Shares.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall perform the
following customary services of a transfer agent, dividend disbursing agent,
and, as relevant, agent in connection with accumulation, open-account or similar
plans: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, withholding taxes on U.S. resident and non-resident alien accounts,
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 Shareholders, preparing and mailing to The Baupost Group,
Inc. for forwarding to Shareholders confirmation forms and statements of account
for all purchases and redemptions of Shares and other confirmable transactions
in Shareholder accounts, preparing and mailing to The Baupost Group, Inc. for
forwarding to Shareholders activity statements for Shareholders, and providing
<PAGE> 6
Shareholder account information to The Baupost Group, Inc., which will
communicate directly with Shareholders.
(c) In addition, the Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt
from blue sky reporting for each state and (ii) verify the
establishment of transactions for each state on the system
prior to activation and thereafter monitor the daily activity
for each state. The responsibility of the Bank for the Fund's
blue sky state registration status is solely limited to the
initial establishment of transactions subject to blue sky
compliance by the Fund and the reporting of such transactions
to the Fund as provided above.
(d) Procedures as to who shall provide certain of these
services in Section 1 may be established from time to time by
agreement between the Fund and the Bank per the attached
service responsibility schedule. The Bank may at times perform
only a portion of these services and the Fund or its agent may
perform these services on the Fund's behalf.
(e) The Bank shall provide additional services on behalf of
the Fund (i.e., escheatment services) which may be agreed upon
in writing between the Fund and the Bank.
2. Fees and Expenses
2.1 For the performance by the Bank pursuant to this Agreement, the Fund
agrees to pay the Bank an annual maintenance fee for each Shareholder
account as set out in the initial fee schedule attached hereto. Such
fees and out-of-pocket expenses and advances identified under Section
2.2 below may be changed from time to time subject to mutual written
agreement between the Fund and the Bank.
2.2 In addition to the fee paid under Section 2.1 above, the Fund agrees to
reimburse the Bank for reasonable and documented out-of-pocket
expenses, including but not limited to confirmation production,
postage, forms, telephone, microfilm, microfiche, tabulating proxies,
records storage, or advances incurred by the Bank for the items set out
in the fee schedule attached hereto. In addition, any other expenses
incurred by the Bank at the request or with the consent of the Fund
will be reimbursed by the Fund.
2.3 The Fund agrees to pay all fees and reimbursable expenses within five
days following the
<PAGE> 7
receipt of the respective billing notice. Postage for mailing of
dividends, proxies, Fund reports and other mailings to all shareholder
accounts shall be advanced to the Bank by the Fund at least seven (7)
days prior to the mailing date of such materials.
3. Representations and Warranties of the Bank
The Bank represents and warrants to the Fund that:
3.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
3.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
3.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
3.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement and the performance of its duties
hereunder will not violate the provisions of any other agreement to
which it is bound.
3.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under
this Agreement.
4. Representations and Warranties of the Fund
The Fund represents and warrants to the Bank that:
4.1 It is a business trust duly organized and existing under the laws of
The Commonwealth of Massachusetts.
4.2 It is empowered under applicable laws and by its Agreement and
Declaration of Trust and By-Laws to enter into and perform this
Agreement.
4.3 All corporate proceedings required by said Agreement and Declaration of
Trust and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.4 It is an open-end, non-diversified management investment company
registered under the
<PAGE> 8
Investment Company Act of 1940, as amended.
4.5 A registration statement of the Fund has been filed with the Securities
and Exchange Commission 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 and for Shares
of the Fund sold.
5. Data Access and Proprietary Information
5.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and
documentation manuals furnished to the Fund by the Bank as part of the
Fund's ability to access certain Fund-related data ("Customer Data")
maintained by the Bank on data bases under the control and ownership of
the Bank or a third party, if any, ("Data Access Services") constitute
copyrighted, trade secret, or other proprietary information
(collectively, "Proprietary Information") of substantial value to the
Bank or a third party, if any. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all
Proprietary Information as proprietary to the Bank and further agrees
that it shall not divulge any Proprietary Information to any person or
organization except as may be provided hereunder. Without limiting the
foregoing, the Fund agrees for itself and its employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance
with the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the
Proprietary Information;
(c) to refrain from obtaining unauthorized access to any
portion of the Proprietary Information, and if such access is
inadvertently obtained, to inform in a timely manner of such
fact and dispose of such information in accordance with the
Bank's instructions;
(d) to refrain from causing or allowing the data acquired
hereunder from being retransmitted to any other computer
facility or other location, except with the prior
<PAGE> 9
written consent of the Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties; and
(f) to honor all reasonable written requests made by the Bank
to protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 5. The obligations of this Section shall
survive any earlier termination of this Agreement.
5.2 If the Fund notifies the Bank that any of the Data Access Services do
not operate in material compliance with the most recently issued user
documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may
obtain certain data included in the Data Access Services are solely
responsible for the contents of such data and the Fund agrees to make
no claim against the Bank arising out of the contents of such
third-party data, including, but not limited to, the accuracy thereof.
DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE
SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT
THOSE EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE
IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
5.3 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect
the transfer or movement of cash or Shares or (ii) transmit Shareholder
information or other information, then in such event the Bank shall be
entitled to rely on the reasonable validity and authenticity of such
instruction without undertaking any further inquiry (provided that no
circumstances exist that would make the lack of further inquiry
unreasonable) as long as such instruction is undertaken in conformity
with security procedures established by the Bank from time to time.
6. Indemnification
6.1 The Bank shall not be responsible for, and the Fund shall indemnify and
hold the Bank harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments,
<PAGE> 10
expenses and liability arising out of or attributable to:
(a) All actions of the Bank or its agents or subcontractors
required to be taken pursuant to this Agreement; provided,
that the Bank's actions are taken in good faith and without
negligence, misfeasance, or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful
misconduct.
(c) The reliance on or use by the Bank or its agents or
subcontractors of information, records, documents or services
which (i) are received by the Bank or its agents or
subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other person or firm on behalf of
the Fund including but not limited to any previous transfer
agent or registrar; provided, that the Bank's actions are
taken in good faith and without negligence, misfeasance or
willful misconduct. . (d) The reliance on, or the carrying out
by the Bank or its agents or subcontractors of, any
instructions or requests of the Fund, unless the Bank or its
agent or subcontractors receives clear written later
instructions to the contrary; provided, that the Bank's
actions are taken in good faith and without negligence,
misfeasance or willful misconduct. . (e) The offer or sale of
Shares in violation of federal or state securities laws or
that such Shares be registered or in violation of any stop
order or other determination or ruling by any federal or any
state agency with respect to the offer or sale of such Shares.
(f) The negotiation and processing by the Bank of checks not
made payable to the order of the Bank, the Fund, the Fund's
investment adviser, transfer agent or distributor or the
retirement account custodian or trustee for a plan account
investing in Shares, which checks are tendered to the Bank for
the purchase of Shares (i.e., checks made payable to
prospective or existing Shareholders, such checks are commonly
known as "third party checks") ; provided, that the Bank's
actions are taken in good faith and without negligence,
misfeasance or willful misconduct. .
6.2 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any
matter arising in connection with the services to be
<PAGE> 11
performed by the Bank under this Agreement, and the Bank and its agents
or subcontractors shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reasonable reliance upon
such instructions or upon the opinion of such counsel; provided,
however that such counsel has been selected with reasonable care. The
Bank, its agents and subcontractors shall be protected and indemnified
in acting upon any paper or document furnished 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 instruction, information, data,
records or documents provided the Bank or its agents or subcontractors
by machine readable input, telex, CRT data entry or other similar means
authorized by the Fund, and shall not be held to have notice of any
change of authority of any person, until receipt of written notice
thereof from the Fund. The Bank, its agents and subcontractors shall
also be protected and indemnified in recognizing stock certificates
which are reasonably believed to bear the proper manual or facsimile
signatures of the officers of the Fund, and the proper countersignature
of any former transfer agent or former registrar, or of a co-transfer
agent or co-registrar.
6.3 Upon the assertion of a claim for which the Fund may be required to
indemnify the Bank, the Bank shall promptly notify the Fund of such
assertion, and shall keep the Fund advised with respect to all
developments concerning such claim; provided, however, that the failure
to so advise, identify or notify the Fund shall not in any way limit
the Fund's liability for indemnification under this Agreement with
respect to any such claim to the extent that the defense thereof is not
materially prejudiced by such failure. The Fund shall have the option
to participate with the Bank in the defense of such claim or, upon
acknowledging to the Bank in writing that the claim is such that the
Fund is required to indemnify the Bank, to defend against said claim in
its own name or in the name of the Bank. In the event the Fund assumes
control of any such defense proceeding, the Fund shall keep the Bank
notified of the progress of such proceeding and, upon request, consult
with the Bank and counsel to the Bank. The Fund shall not settle or
compromise any proceeding without the prior written consent of the Bank
unless (i) such settlement or compromise involves no admission or
guilt, wrongdoing, or any obligations or restrictions on the Bank other
than obligations to pay money that are subject to the indemnity under
this Agreement, and (iii) the Fund shall have paid, or made
arrangements satisfactory to the Bank for payment of amounts payable by
the Bank in connection with such settlement. The Bank shall in no case
confess any claim or make any compromise in any case in which the Fund
will be asked to indemnify the Bank except with the Fund's prior
written consent.
7. Standard of Care
<PAGE> 12
The Bank shall at all times act in good faith and agrees to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement, but assumes no responsibility
and shall not be liable for loss or damage due to errors unless said
errors are caused by its negligence, misfeasance, bad faith, or willful
misconduct.
8. Covenants of the Fund and the Bank
8.1 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of
Trustees of the Fund authorizing the appointment of the Bank
and the execution and delivery of this Agreement.
(b) A copy of the Agreement and Declaration of Trust and
By-Laws of the Fund and all amendments thereto.
8.2 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices,
if any; and for the preparation or use, and for keeping account of,
such certificates, forms and devices.
8.3 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the Investment Company Act of 1940, as
amended, and the Rules thereunder, the Bank agrees that all such
records prepared or maintained by the Bank relating to the services to
be performed by the Bank hereunder are the property of the Fund and
will be preserved, maintained and made available in accordance with
such Section and Rules, and will be surrendered promptly to the Fund on
and in accordance with its request.
8.4 The Bank 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.
8.5 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the
Fund and to secure instructions from an authorized officer of the Fund
as to such inspection. The Bank reserves the right, however, to exhibit
the
<PAGE> 13
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.
9. Termination of Agreement
9.1 This Agreement may be terminated by either party upon sixty (60) days
written notice to the other.
9.2 Should the Fund exercise its right to terminate, all reasonable
out-of-pocket expenses associated with the movement of records and
material will be borne by the Fund.
10. Assignment
10.1 Neither this Agreement nor any rights or obligations hereunder may be
assigned by either party without the written consent of the other
party.
10.2 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
10.3 The Bank may, with the consent of the Fund, subcontract for the
performance hereof with (i) Boston Financial Data Services, Inc., a
Massachusetts corporation ("BFDS"), which is duly registered as a
transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange
Act of 1934, as amended ("Section 17A(c)(2)"), (ii) a BFDS subsidiary
duly registered as a transfer agent pursuant to Section 17A(c)(2) or
(iii) a BFDS affiliate; provided, however, that the Bank shall be as
fully responsible to the Fund for the acts and omissions of any
subcontractor as it is for its own acts and omissions.
11. Amendment
This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Fund.
12. Massachusetts Law to Apply
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth
of Massachusetts.
<PAGE> 14
13. Force Majeure
In the event either party is unable to perform its obligations under
the terms of 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 for damages to the other for any damages resulting from such
failure to perform or otherwise from such causes.
14. Consequential Damages
Neither party to this Agreement shall be liable to the other party for
consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act
hereunder.
15. Merger of Agreement
This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
16. Limitations 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 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.
17. Counterparts
This Agreement may be executed by the parties hereto on any number of
counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
18. Reproduction of Documents
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The
parties hereto all/each agree that any such reproduction shall be
<PAGE> 15
admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in existence
and whether or not such reproduction was made by a party in the regular
course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in
evidence.
<PAGE> 16
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
ATTEST: THE BAUPOST FUND
By /s/ Paul Gannon
------------------------------------
Name: Name: Paul Gannon
Title: Title: Vice President
ATTEST: STATE STREET BANK AND TRUST
COMPANY
/s/ Thomas M. Lenz By /s/ Ronald E. Logue
- - --------------------- ------------------------------------
Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
<PAGE> 17
STATE STREET BANK AND TRUST COMPANY
FUND SERVICE RESPONSIBILITIES
Service Performed Responsibility
Bank Fund
1. Receive orders for the purchase NO YES
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts. YES NO
3. Receive redemption requests. NO YES
4. Effect transactions 1-3 above
directly with broker-dealers. N/A N/A
5. Pay over monies to redeeming
Shareholders. YES NO
6. Effect transfers of Shares. YES NO
7. Prepare and transmit dividends
and distributions. YES NO
8. Issue Replacement Certificates. N/A N/A
9. Reporting of abandoned property. N/A N/A
10. Maintain records of account. YES NO
<PAGE> 18
Service Performed
Responsibility
Bank Fund
11. Maintain and keep a current and
accurate control book for each
issue of securities. N/A N/A
12. Mail proxies. NO YES
13. Mail Shareholder reports. NO YES
14. Mail prospectuses to current NO YES
Shareholders.
15. Withhold taxes on U.S. resident
and non-resident alien accounts. YES NO
16. Prepare and file U.S. Treasury
Department forms. YES NO
17. Prepare account and
confirmation statements for
Shareholders. YES NO
18. Mail account and confirmation
statements to Shareholders. NO YES
19. Provide Shareholder account
information to Shareholders. NO YES
20. Blue sky reporting. NO YES
* Such services are more fully described in Section 1.2 (a), (b) and (c)
of the Agreement.
<PAGE> 19
ATTEST: THE BAUPOST FUND
BY: /s/ Paul Gannon
-----------------------------------------
Name: Name: Paul Gannon
Title: Vice President
ATTEST: STATE STREET BANK AND TRUST
COMPANY
/s/ Thomas M. Lenz BY: /s/ Ronald E. Logue
-----------------------------------------
Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
<PAGE> 1
EXHIBIT 9(b)
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made as of the [ ] day of January, 1998, 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, L.L.C. ("Baupost"), a Massachusetts limited
liability company 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 administrator to
assist in the tasks and responsibilities set forth below, 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, administrator for the Fund.
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 orders for the purchase of the Funds' shares
of beneficial interest (the "Shares"), and promptly
forward such orders and all appropriate documentation
to the Fund's transfer agent;
(ii) receive redemption requests and redemption directions
with respect to the Shares, and promptly forward such
requests and directions and all appropriate
documentation to the Fund's transfer agent; and
(iii) receive transfer requests with respect to the Shares,
and promptly forward such requests and all
appropriate documentation to the Fund's transfer
agent.
(b) In addition to and not in lieu of the services set forth in
paragraph (a) above, Baupost shall: (i) prepare shareholder meeting lists, (ii)
mail proxies, (iii) receive and tabulate proxies, (iv) assist in the preparation
of, mail to shareholders, and arrange for filing with the Securities and
Exchange Commission (the "Commission") all shareholder reports and prospectuses
and, if requested, statements of additional information, (v) mail confirmation
<PAGE> 2
forms and statements of account to shareholders for all purchases, transfers and
redemptions of Shares and other confirmable transactions in shareholder
accounts, (vi) mail activity statements for shareholders, (vii) provide
shareholder account information, (viii) calculate the Fund's total net asset
value, total net income, and net asset value per Share, (ix) prepare and arrange
for filing with the Commission the Fund's Form N-SAR and Form 24F-2 and all
other necessary forms and documents, (x) maintain the qualification and
registration of the Shares in all jurisdictions requested by the Fund's
President or other appropriate officer, and (ix) perform the duties and
responsibilities with respect to the custody of the Fund's assets required by
Appendix A hereof. 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.
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. Filing fees payable to the
Commission, any state or any other jurisdiction or party, and any other similar
fees or expenses, in each case relating to the Fund's activities, will be the
responsibility of the Fund.
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.
-2-
<PAGE> 3
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 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").
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 such actions were taken in the absence of willful
misfeasance, bad faith or gross negligence on its part or reckless disregard of
its obligations and duties hereunder and in addition, in the case of actions
required to be taken pursuant to Appendix A hereof, the standard of care set
forth in Section 3.d thereof has been met;
(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;
-3-
<PAGE> 4
(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.
Notwithstanding the foregoing or any other provision of this Agreement,
Baupost shall only be entitled to indemnification hereunder, and shall only be
held free from any liability to the Fund or its shareholders, in the absence of
willful misfeasance, bad faith or gross negligence on its part or reckless
disregard of its obligations and duties hereunder and in addition, in the case
of matters relating to Appendix A hereof, only if the standard of care set forth
in Section 3.d thereof has been met.
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 willful
misfeasance, bad faith or gross negligence or reckless disregard of its
obligations and duties hereunder, 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 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
-4-
<PAGE> 5
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 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.
-5-
<PAGE> 6
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.
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.
-6-
<PAGE> 7
ARTICLE 11. ASSIGNMENT
11.01. Neither party may assign its rights, duties or obligations
hereunder.
ARTICLE 12. LIMITATION OF LIABILITY
12.01. 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, L.L.C.
By: ______________________ By: __________________
Title: Title:
Attest: Attest:
_________________________ __________________
-7-
<PAGE> 8
Appendix A
FOREIGN CUSTODY TERMS AND CONDITIONS
1. Definitions. The following italicized terms when used in this Appendix
shall have the indicated meanings:
a. Board shall mean the Board of Trustees of the Fund.
b. Foreign Assets shall mean any of the Fund's investments
(including foreign currencies) for which the primary market is
outside the United States, and such cash and cash equivalents
as are reasonably necessary to effect the Fund's transactions
in such investments.
c. Foreign Custody Manager shall have the meaning set forth in
subparagraph (a)(2) of the Rule.
d. Foreign Securities Depository shall mean a securities
depository (as defined in subparagraph (a)(6) of the Rule) or
clearing agency used in connection with Foreign Assets and
with respect to which one of the Fund's custodian banks has
not accepted the role of Foreign Custody Manager.
e. Rule shall mean Rule 17f-5 promulgated under Section 17(f) of
the Investment Company Act of 1940, as amended.
2. Delegation.
a. Delegation to the Foreign Custody Manager as Foreign Custody
Manager. The Fund, by resolution adopted by the Board, hereby
delegates to Baupost, subject to paragraph (b) of the Rule,
the responsibilities set forth in this Appendix A as Foreign
Custody Manager with respect to Foreign Securities
Depositories.
b. Acceptance of Delegation. Baupost hereby accepts such
delegation as Foreign Custody Manager with respect to the
Fund.
c. Withdrawal of Acceptance of Delegated Responsibilities.
Baupost may withdraw its acceptance of delegated
responsibilities with respect to a Foreign Securities
Depository upon written notice to the Fund. Thirty days (or
such longer period as to which the parties agree in writing)
after receipt of any such notice by the Fund, Baupost shall
have no further responsibility as Foreign Custody Manager with
respect to the Foreign Securities Depository as to which
Baupost's acceptance of delegation is withdrawn.
<PAGE> 9
3. Scope of Delegated Responsibilities.
a. Selection of Foreign Securities Depository. In performing its
delegated responsibilities as Foreign Custody Manager, Baupost
shall determine that (i) each Foreign Securities Depository is
an "Eligible Foreign Custodian" as defined in subparagraph
(a)(1) of the Rule prior to its use by the Fund and (ii) the
Fund's Foreign Assets will be subject to reasonable care,
based on the standards applicable to custodians in the
relevant market, after considering all factors relevant to the
safekeeping of such assets, including, without limitation,
those factors set forth in clauses (i) through (iv) of
subparagraph (c)(1) of the Rule.
b. Contracts with Foreign Securities Depository. Baupost shall
determine that (i) a written contract governing the applicable
foreign custody arrangement with respect to each Foreign
Securities Depository, (ii) the rules or established practices
or procedures of such Foreign Securities Depository or (iii) a
combination of both (collectively, a "Contract") will provide
reasonable care for the Foreign Assets held by that Foreign
Securities Depository based on the standards specified in
Section 3.a hereof. Each such Contract shall include the
provisions required by clause (i) of subparagraph (c)(2) of
the Rule, or in lieu of any or all of such provisions, the
Contract may contain such other provisions that Baupost
determines will provide, in their entirety, the same or a
greater level of care and protection for the Foreign Assets as
the provisions set forth in such clause, in their entirety.
c. Monitoring. Baupost shall establish a system to monitor (i)
the appropriateness of maintaining the Foreign Assets with
each Foreign Securities Depository and (ii) the Contract with
each Foreign Securities Depository. In the event Baupost
determines that the custody arrangements with a Foreign
Securities Depository no longer meet the requirements of the
Rule or are no longer appropriate, Baupost shall notify the
Board in accordance with Section 3.e hereunder and withdraw
the Fund's Foreign Assets therefrom as soon as reasonably
practicable.
d. Standard of Care as Foreign Custody Manager of the Fund. In
performing the responsibilities delegated to it, Baupost
agrees to exercise reasonable care, prudence and diligence
such as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
1940 Act would exercise.
e. Reporting Requirements. Baupost shall report to the Board in
writing by the next meeting of the Board the placement of the
Fund's Foreign Assets with a particular Foreign Securities
Depository or the occurrence of any material
A-2
<PAGE> 10
change in the foreign custody arrangements of the Fund subject
to this Appendix.
A-3
<PAGE> 1
EXHIBIT 11
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 5, 1997 with
respect to the financial statements and financial highlights of The Baupost
Fund, in Post-Effective Amendment Number 9 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 28, 1998.
/s/ Ernst & Young LLP
-----------------------
ERNST & YOUNG LLP
Boston, Massachusetts
December 29, 1997
<PAGE> 1
Exhibit 16
Baupost Fund Total Return Calculation Per SEC Formula (FN=/comp/fundperf)
Note: To be filed with the 12/97 N-1A
A B=1/12 C=A2/A1-1
<TABLE>
<CAPTION>
SEC ANNUAL RATE OF RETURN
Cumulative -------------------------
Orig. Inv./ # of Total LIFE TO ROLLING ROLLING
Date End.Red.Value Periods Return DATE 12 MONTHS 5 YRS
-------- ------------- ---------- ------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Init. Inv. 10/01/90 $ 0.00 0.0000 N/A N/A N/A
10/31/90 $ 0.00 0.0000 N/A N/A N/A
11/30/90 $ 0.00 0.0000 N/A N/A N/A
12/14/90 $1,000.00 0.0000 0.00% N/A N/A
Dividend 12/30/90 $1,003.05 0.0417 0.31% 7.59% 0.31%
Div. Reinv. 12/31/90 $1,003.05 0.0417 0.30% 7.58% 0.30%
1/31/91 $1,066.98 0.1250 6.70% 67.98% 6.70%
2/28/91 $1,087.26 0.2083 8.73% 49.42% 8.73%
3/31/91 $1,115.43 0.2917 11.54% 45.43% 11.54%
4/30/91 $1,163.18 0.3750 16.32% 49.64% 16.32%
5/31/91 $1,178.56 0.4583 17.86% 43.11% 17.86%
6/30/91 $1,186.66 0.5417 18.67% 37.16% 18.67%
7/31/91 $1,182.66 0.6250 18.27% 30.79% 18.27%
8/31/91 $1,181.66 0.7083 18.17% 26.57% 18.17%
9/30/91 $1,179.96 0.7917 18.00% 23.25% 18.00%
Fiscal Y/E 10/31/91 $1,195.75 0.8750 19.57% 22.67% 19.57%
11/30/91 $1,220.52 0.9583 22.05% 23.11% 22.05%
Dividend 12/30/91 $1,229.71 1.0417 22.97% 21.96% 22.60%
Dividend Reinv. 12/31/91 $1,229.71 1.0417 22.97% 21.96% 22.60%
1/31/92 $1,246.61 1.1250 24.66% 21.65% 16.84%
2/28/92 $1,259.13 1.2083 25.91% 21.01% 15.81%
3/31/92 $1,278.23 1.2917 27.82% 20.93% 14.60%
4/30/92 $1,273.85 1.3750 27.38% 19.25% 9.51%
5/31/92 $1,270.40 1.4583 27.04% 17.83% 7.79%
6/30/92 $1,284.07 1.5417 28.41% 17.61% 8.21%
7/31/92 $1,255.59 1.6250 25.56% 15.03% 6.17%
8/31/92 $1,277.08 1.7083 27.71% 15.39% 8.08%
9/30/92 $1,301.18 1.7917 30.12% 15.83% 10.27%
Fiscal Y/E 10/31/92 $1,309.43 1.8750 30.94% 15.46% 9.51%
11/30/92 $1,324.45 1.9583 32.45% 15.43% 8.52%
Dividend 12/30/92 $1,400.10 2.0417 40.01% 17.92% 13.86%
Dividend Reinv. 12/31/92 $1,400.10 2.0417 40.01% 17.92% 13.86%
1/29/93 $1,448.15 2.1250 44.82% 19.04% 16.17%
2/26/93 $1,497.65 2.2083 49.76% 20.07% 18.94%
3/31/93 $1,504.54 2.2917 50.45% 19.51% 17.71%
4/30/93 $1,515.22 2.3750 51.52% 19.12% 18.95%
5/28/93 $1,538.69 2.4583 53.87% 19.16% 21.12%
6/30/93 $1,554.15 2.5417 55.41% 18.94% 21.03%
7/30/93 $1,577.28 2.6250 57.73% 18.96% 25.62%
8/31/93 $1,607.32 2.7083 60.73% 19.15% 25.86%
9/30/93 $1,601.09 2.7917 60.11% 18.36% 23.05%
Fiscal Y/E 10/29/93 $1,642.68 2.8750 64.27% 18.84% 25.45%
Stock Split 10/31/93 $1,642.68 2.8750 64.27% 18.84% 25.45%
11/30/93 $1,641.68 2.9583 64.17% 18.24% 23.95%
Dividend 12/30/93 $1,663.93 3.0417 66.39% 18.22% 18.84%
Dividend Reinv. 12/31/93 $1,663.92 3.0417 66.39% 18.22% 18.84%
1/31/94 $1,700.84 3.1250 70.08% 18.53% 17.45%
2/28/94 $1,697.02 3.2083 69.70% 17.92% 13.31%
3/31/94 $1,690.65 3.2917 69.07% 17.30% 12.37%
4/29/94 $1,718.66 3.3750 71.87% 17.40% 13.43%
5/31/94 $1,783.59 3.4583 78.36% 18.21% 15.92%
6/30/94 $1,784.86 3.5417 78.49% 17.77% 14.84%
7/29/94 $1,772.13 3.6250 77.21% 17.10% 12.35%
8/31/94 $1,778.50 3.7083 77.85% 16.80% 10.65%
9/30/94 $1,775.95 3.7917 77.59% 16.35% 10.92%
10/31/94 $1,824.33 3.8750 82.43% 16.78% 11.06%
11/30/94 $1,792.50 3.9583 79.25% 15.89% 9.19%
Dividend 12/29/94 $1,797.59 4.0417 79.76% 15.62% 8.03%
Dividend Reinv. 12/30/94 $1,797.59 4.0417 79.76% 15.62% 8.03%
1/31/95 $1,812.20 4.1250 81.22% 15.50% 6.55%
2/28/95 $1,820.97 4.2083 82.10% 15.31% 7.30%
3/31/95 $1,829.74 4.2917 82.97% 15.12% 8.23%
4/28/95 $1,857.51 4.3750 85.75% 15.20% 8.08%
5/31/95 $1,875.04 4.4583 87.50% 15.14% 5.13%
6/30/95 $1,872.12 4.5417 87.21% 14.81% 4.89%
7/31/95 $1,891.12 4.6250 89.11% 14.77% 6.71%
8/31/95 $1,915.96 4.7083 91.60% 14.81% 7.73%
9/29/95 $1,990.50 4.7917 99.05% 15.45% 12.08%
10/31/95 $1,968.58 4.8750 96.86% 14.90% 7.91%
11/30/95 $1,971.50 4.9583 97.15% 14.67% 9.99%
Dividend 12/28/95 $1,999.27 5.0417 99.93% 14.73% 11.22%
Dividend Reinv. 12/29/95 $1,999.27 5.0417 99.93% 14.73% 11.22%
1/31/96 $2,027.49 5.1250 102.75% 14.79% 11.88%
2/29/96 $2,074.53 5.2083 107.45% 15.04% 13.92%
3/29/96 $2,061.99 5.2917 106.20% 14.65% 12.69%
4/30/96 $2,101.19 5.3750 110.12% 14.81% 13.12%
5/31/96 $2,225.07 5.4583 122.51% 15.78% 18.67%
6/28/96 $2,301.90 5.5417 130.19% 16.24% 22.96%
7/31/96 $2,281.52 5.6250 128.15% 15.79% 20.64%
8/30/96 $2,347.37 5.7083 134.74% 16.12% 22.52%
9/30/96 $2,374.03 5.7917 137.40% 16.10% 19.27%
10/31/96 $2,411.66 5.8750 141.17% 16.16% 22.51%
11/29/96 $2,507.32 5.9583 150.73% 16.68% 27.18%
DIVIDEND 12/31/96 $2,546.52 6.0417 154.65% 16.73% 27.37%
DIV REINV 12/31/96 $2,546.52 6.0417 154.65% 16.73% 27.37%
01/31/97 $2,610.59 6.1250 161.06% 16.96% 28.76%
02/28/97 $2,626.60 6.2083 162.66% 16.83% 26.61% 15.84%
03/31/97 $2,646.18 6.2917 164.62% 16.73% 28.33% 15.67%
04/30/97 $2,621.27 6.3750 162.13% 16.32% 24.75% 15.53%
05/30/97 $2,712.02 6.4583 171.20% 16.71% 21.89% 16.38%
06/30/97 $2,868.62 6.5417 186.86% 17.48% 24.62% 17.44%
07/31/97 $2,945.14 6.6250 194.51% 17.71% 29.09% 18.59%
08/29/97 $3,037.68 6.7083 203.77% 18.01% 29.41% 18.92%
DIVIDEND 09/30/97 $3,131.99 6.7917 213.20% 18.31% 31.93% 19.21%
DIV REINV 09/30/97 $3,131.99 6.7917 213.20% 18.31% 31.93% 19.21%
10/31/97 $3,063.86 6.8750 206.39% 17.69% 27.04% 18.53%
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
D=((a2/a1)-1)/b2
E=INPUT F=INPUT G=INPUT H2=G2*L1 I=Input J2=I2*L1 K=(H+J)/E L2=L1+K2
Simple
Compound Ord. Inc. O/I Div. Cap. Gain C/G Div. Total
Rate of Price Per Shares Dividend Dollars Dividend Dollars Reinvested Cumulative
Return Share Purchased Per Share Reinvested Per Share Reinvested Shares Shares
- - -------- --------- --------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
N/A $100.00 $ 0.00 $ 0.00 0.000 0.000
N/A $100.60 $ 0.00 $ 0.00 0.000 0.000
N/A $101.34 $ 0.00 $ 0.00 0.000 0.000
N/A $101.60 9.843 $ 0.00 $ 0.00 0.000 9.843
7.32% $101.91 $ 0.00 $ 0.00 0.000 9.843
7.31% $100.41 $1.50 $ 14.76 $ 0.00 $ 0.00 0.147 9.990
53.59% $106.81 $ 0.00 $ 0.00 0.000 9.990
41.88% $108.84 $ 0.00 $ 0.00 0.000 9.990
39.58% $111.66 $ 0.00 $ 0.00 0.000 9.990
43.51% $116.44 $ 0.00 $ 0.00 0.000 9.990
38.96% $117.98 $ 0.00 $ 0.00 0.000 9.990
34.46% $118.79 $ 0.00 $ 0.00 0.000 9.990
29.23% $118.39 $ 0.00 $ 0.00 0.000 9.990
25.65% $118.29 $ 0.00 $ 0.00 0.000 9.990
22.73% $118.12 $ 0.00 $ 0.00 0.000 9.990
22.37% $119.70 $ 0.00 $ 0.00 0.000 9.990
23.01% $122.18 $ 0.00 $ 0.00 0.000 9.990
22.05% $123.10 $ 0.00 $ 0.00 0.000 9.990
22.05% $117.85 $5.25 $ 52.44 $ 0.00 $ 0.00 0.445 10.435
21.92% $119.47 $ 0.00 $ 0.00 0.000 10.435
21.45% $120.67 $ 0.00 $ 0.00 0.000 10.435
21.54% $122.50 $ 0.00 $ 0.00 0.000 10.435
19.92% $122.08 $ 0.00 $ 0.00 0.000 10.435
18.54% $121.75 $ 0.00 $ 0.00 0.000 10.435
18.43% $123.06 $ 0.00 $ 0.00 0.000 10.435
15.73% $120.33 $ 0.00 $ 0.00 0.000 10.435
16.22% $122.39 $ 0.00 $ 0.00 0.000 10.435
16.81% $124.70 $ 0.00 $ 0.00 0.000 10.435
16.50% $125.49 $ 0.00 $ 0.00 0.000 10.435
16.57% $126.93 $ 0.00 $ 0.00 0.000 10.435
19.60% $134.18 $ 0.00 $ 0.00 0.000 10.435
19.60% $125.88 $5.325 $ 55.56 $2.975 $ 31.04 0.688 11.123
21.09% $130.20 $ 0.00 $ 0.00 0.000 11.123
22.53% $134.65 $ 0.00 $ 0.00 0.000 11.123
22.02% $135.27 $ 0.00 $ 0.00 0.000 11.123
21.69% $136.23 $ 0.00 $ 0.00 0.000 11.123
21.91% $138.34 $ 0.00 $ 0.00 0.000 11.123
21.80% $139.73 $ 0.00 $ 0.00 0.000 11.123
21.99% $141.81 $ 0.00 $ 0.00 0.000 11.123
22.42% $144.51 $ 0.00 $ 0.00 0.000 11.123
21.53% $143.95 $ 0.00 $ 0.00 0.000 11.123
22.35% $147.69 $ 0.00 $ 0.00 0.000 11.123
22.35% $14.769 $ 0.00 $ 0.00 0.000 111.225
21.69% $ 14.76 $ 0.00 $ 0.00 0.000 111.225
21.83% $ 14.96 $ 0.00 $ 0.00 0.000 111.225
21.83% $ 13.07 $1.48 $164.61 $0.41 $ 45.60 16.083 127.308
22.43% $ 13.36 $ 0.00 $ 0.00 0.000 127.308
21.73% $ 13.33 $ 0.00 $ 0.00 0.000 127.308
20.98% $ 13.28 $ 0.00 $ 0.00 0.000 127.308
21.29% $ 13.50 $ 0.00 $ 0.00 0.000 127.308
22.66% $ 14.01 $ 0.00 $ 0.00 0.000 127.308
22.16% $ 14.02 $ 0.00 $ 0.00 0.000 127.308
21.30% $ 13.92 $ 0.00 $ 0.00 0.000 127.308
20.99% $ 13.97 $ 0.00 $ 0.00 0.000 127.308
20.46% $ 13.95 $ 0.00 $ 0.00 0.000 127.308
21.27% $ 14.33 $ 0.00 $ 0.00 0.000 127.308
20.02% $ 14.08 $ 0.00 $ 0.00 0.000 127.308
19.73% $ 14.12 $ 0.00 $ 0.00 0.000 127.308
19.73% $ 12.30 $1.53 $194.78 $0.29 $ 36.92 18.837 146.145
19.69% $ 12.40 $ 0.00 $ 0.00 0.000 146.145
19.51% $ 12.46 $ 0.00 $ 0.00 0.000 146.145
19.33% $ 12.52 $ 0.00 $ 0.00 0.000 146.145
19.60% $ 12.71 $ 0.00 $ 0.00 0.000 146.145
19.63% $ 12.83 $ 0.00 $ 0.00 0.000 146.145
19.20% $ 12.81 $ 0.00 $ 0.00 0.000 146.145
19.27% $ 12.94 $ 0.00 $ 0.00 0.000 146.145
19.45% $ 13.11 $ 0.00 $ 0.00 0.000 146.145
20.67% $ 13.62 $ 0.00 $ 0.00 0.000 146.145
19.87% $ 13.47 $ 0.00 $ 0.00 0.000 146.145
19.59% $ 13.49 $ 0.00 $ 0.00 0.000 146.145
19.82% $ 13.68 $ 0.00 $ 0.00 0.000 146.145
19.82% $ 12.75 0.63 $ 92.07 $0.30 $ 43.84 10.660 156.805
20.05% $ 12.93 $ 0.00 $ 0.00 0.000 156.805
20.63% $ 13.23 $ 0.00 $ 0.00 0.000 156.805
20.07% $ 13.15 $ 0.00 $ 0.00 0.000 156.805
20.49% $ 13.40 $ 0.00 $ 0.00 0.000 156.805
22.44% $ 14.19 $ 0.00 $ 0.00 0.000 156.805
23.49% $ 14.68 $ 0.00 $ 0.00 0.000 156.805
22.78% $ 14.55 $ 0.00 $ 0.00 0.000 156.805
23.60% $ 14.97 $ 0.00 $ 0.00 0.000 156.805
23.72% $ 15.14 $ 0.00 $ 0.00 0.000 156.805
24.03% $ 15.38 $ 0.00 $ 0.00 0.000 156.805
25.30% $ 15.99 $ 0.00 $ 0.00 0.000 156.805
25.60% $ 16.24 $ 0.00 $ 0.00 0.000 156.805
25.60% $ 14.31 1.14 $178.76 $0.79 $123.88 21.149 177.954
26.30% $ 14.67 $ 0.00 $ 0.00 0.000 177.954
26.20% $ 14.76 $ 0.00 $ 0.00 0.000 177.954
26.16% $ 14.87 $ 0.00 $ 0.00 0.000 177.954
25.43% $ 14.73 $ 0.00 $ 0.00 0.000 177.954
26.51% $ 15.24 $ 0.00 $ 0.00 0.000 177.954
28.56% $ 16.12 $ 0.00 $ 0.00 0.000 177.954
29.36% $ 16.55 $ 0.00 $ 0.00 0.000 177.954
30.38% $ 17.07 $ 0.00 $ 0.00 0.000 177.954
31.39% $ 17.60 $ 0.00 $ 0.00 0.000 177.954
31.39% $ 17.47 $ 0.00 $0.13 $ 23.13 1.324 179.278
30.02% $ 17.09 $ 0.00 $ 0.00 0.000 179.278
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the Baupost
Fund's audited financial statements at 10/31/97 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 131,241,269
<INVESTMENTS-AT-VALUE> 153,239,227
<RECEIVABLES> 2,064,032
<ASSETS-OTHER> 4,520,237
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 159,823,496
<PAYABLE-FOR-SECURITIES> 2,224,352
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,640,828
<TOTAL-LIABILITIES> 6,865,180
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 113,718,323
<SHARES-COMMON-STOCK> 8,948,897
<SHARES-COMMON-PRIOR> 8,681,774
<ACCUMULATED-NII-CURRENT> 670,056
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 20,948,534
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,621,403
<NET-ASSETS> 152,958,316
<DIVIDEND-INCOME> 1,352,384
<INTEREST-INCOME> 3,506,505
<OTHER-INCOME> 0
<EXPENSES-NET> 2,902,546
<NET-INVESTMENT-INCOME> 1,956,343
<REALIZED-GAINS-CURRENT> 23,702,878
<APPREC-INCREASE-CURRENT> 5,899,569
<NET-CHANGE-FROM-OPS> 31,558,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,845,958
<DISTRIBUTIONS-OF-GAINS> 11,985,697
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,137,346
<NUMBER-OF-SHARES-REDEEMED> 1,250,566
<SHARES-REINVESTED> 989,255
<NET-CHANGE-IN-ASSETS> 44,170,274
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 13,233,949
<OVERDISTRIB-NII-PRIOR> 2,403,943
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,353,786
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,902,546
<AVERAGE-NET-ASSETS> 134,172,998
<PER-SHARE-NAV-BEGIN> 15.38
<PER-SHARE-NII> .30
<PER-SHARE-GAIN-APPREC> 3.47
<PER-SHARE-DIVIDEND> .40
<PER-SHARE-DISTRIBUTIONS> 1.66
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.09
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
