As filed with the Securities and Exchange Commission on February 28, 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. 8 X
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
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Amendment No. 10 X
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THE BAUPOST FUND
(Exact Name of Registrant as Specified in Charter)
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
(Address of Principal Executive Offices)
Registrant's Telephone Number: (617) 497-6680
It is proposed that this filing will become effective (check appropriate box):
X immediately upon filing pursuant to paragraph (b).
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on (date) pursuant to paragraph (b).
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60 days after filing pursuant to paragraph (a)(1).
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on (date) pursuant to paragraph (a)(1).
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75 days after filing pursuant to paragraph (a)(2).
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on (date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
---- this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Name and Address of Agent for Service:
Copies to:
Seth A. Klarman Gregory D. Sheehan, Esq.
The Baupost Group, Inc. Ropes & Gray
44 Brattle Street One International Place
Cambridge, MA 02238 Boston, MA 02110-2624
The Registrant has registered an indefinite number or amount of
securities under the Securities Act of 1933 pursuant to Rule 24f-2. A Rule 24f-2
notice for the fiscal year ended October 31, 1996 was filed on December 30,
1996.
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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
Information FINANCIAL HIGHLIGHTS
4. General Description of THE FUND; PURCHASE OF SHARES;
Registrant REDEMPTION OF SHARES; DETERMINATION
OF NET ASSET VALUE; DISTRIBUTIONS;
TAXES; MANAGEMENT OF THE FUND;
DESCRIPTION OF THE FUND AND
OWNERSIP OF SHARES; APPENDIX A -
OPTIONS, FUTURES AND FOREIGN
CURRENCY EXCHANGE TRANSACTIONS;
APPENDIX B DESCRIPTION OF RATINGS
5. Management of the Fund MANAGEMENT OF THE FUND; EXPENSE
INFORMATION; BACK COVER PAGE
5A. Management's Discussion of (CONTAINED IN THE ANNUAL REPORT OF
Fund Performance THE REGISTRANT)
6. Capital Stock and Other DISTRIBUTIONS; TAXES; DESCRIPTION
Securities OF THE FUND AND OWNERSHIP OF
SHARES; SHAREHOLDER INQUIRIES
7. Purchase of Securities PURCHASE OF SHARES; DETERMINATION
Being Offered 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 SHARES
Principal Holders of
Securities
16. Investment Advisory and INVESTMENT ADVISORY AND OTHER
Other Services SERVICES
17. Brokerage Allocation and PORTFOLIO TRANSACTIONS
Other Practices
18. Capital Stock and Other SHAREHOLDER VOTING RIGHTS;
Securities LIABILITY OF SHAREHOLDERS, TRUSTEES
AND OFFICERS; TAX STATUS;
DISTRIBUTIONS (PART A); DESCRIPTION
OF THE FUND AND OWNERSHIP OF FUND
SHARES (PART A)
19. Purchase, Redemption and DETERMINATION OF NET ASSET VALUE
Pricing of Securities Being (PART A); DETERMINATION OF NET
Offered ASSET VALUE (PART B)
20. Tax Status TAX STATUS
21. Underwriters NOT APPLICABLE
22. Calculation of Performance STANDARD PERFORMANCE MEASURES
Data
23. Financial Statements REPORT OF INDEPENDENT AUDITORS;
FINANCIAL STATEMENTS
-3-
PROSPECTUS
Dated February 28, 1997
THE BAUPOST FUND
44 Brattle Street
Post Office Box 381288
Cambridge, MA 02238
(617) 497-6680
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company. The Fund's principal investment objective is
capital appreciation, and its secondary objective is income. The Fund pursues
these objectives primarily through investments in foreign and domestic
securities, including common stocks, preferred stocks and debt securities, that
the Fund's investment adviser, The Baupost Group, Inc. ("Baupost" or the
"Adviser"), believes are available for purchase at prices less than their
intrinsic value. There is no assurance that the Fund will achieve its
objectives. THE FUND MAY INVEST UP TO 15% OF ITS ASSETS IN SECURITIES WHICH ARE
NOT READILY MARKETABLE; THIS COULD RESULT IN HIGHER TRANSACTION COSTS THAN
INVESTING IN PUBLICLY TRADED SECURITIES AND CAUSE TIME DELAYS AND COSTS AND
POSSIBLE LOSSES IN CONNECTION WITH THE SALE OF SUCH SECURITIES. See "How the
Fund Pursues its Objectives."
THE FUND MAY INVEST PREDOMINANTLY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE
WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. See
"How the Fund Pursues its Objectives."
Shares of the Fund may be purchased in a continuous offering directly
from the Fund at net asset value without a sales charge or underwriting
commission on the last day of each month on which the New York Stock Exchange is
open for business. The minimum initial investment in the Fund is $50,000; 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,
1997, containing additional and more detailed information about the Fund has
been filed with the Securities and Exchange Commission and is incorporated
herein by reference. The Statement of Additional Information can be obtained
without charge by calling the Fund at (617) 497-6680, or writing to the Fund at
the above address.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
-------------------
Investment Adviser
THE BAUPOST GROUP, INC.
TABLE OF CONTENTS
Page
----
EXPENSE INFORMATION 1
FINANCIAL HIGHLIGHTS 2
THE FUND 3
THE FUND'S INVESTMENT OBJECTIVES 3
HOW THE FUND PURSUES ITS OBJECTIVES 3
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS 8
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER 11
RISK FACTORS 11
LIMITING INVESTMENT RISK 13
PURCHASE OF SHARES 14
REDEMPTION OF SHARES 14
DETERMINATION OF NET ASSET VALUE 15
DISTRIBUTIONS 16
TAXES 16
MANAGEMENT OF THE FUND 17
HOW THE FUND SHOWS PERFORMANCE 18
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES 19
CUSTODIAN 19
TRANSFER AND DIVIDEND DISBURSING AGENT AND ADMINISTRATOR 20
REPORTS TO SHAREHOLDERS 20
SHAREHOLDER INQUIRIES 20
APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS 21
APPENDIX B - DESCRIPTION OF DEBT RATINGS 34
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EXPENSE INFORMATION
The expenses of the Fund for the 1996 fiscal year are set forth in the
following table:
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases................................................ NONE
Maximum Sales Load Imposed on
Reinvested Dividends..................................... NONE
Deferred Sales Load...................................... NONE
Redemption Fee........................................... NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee 1.00%
Administrative Fee .25%
Other Expenses .25%
Total Fund Operating Expenses 1.50%
EXAMPLE:
You would pay the following 1 Year 3 Years 5 Years 10 Years
expenses on a $1,000 investment ------ ------- ------- --------
assuming (1) 5% annual return $15 $47 $82 $179
and (2) redemption at the end
of each time period:
The purpose of the table is to assist you in understanding the various
costs and expenses of the Fund that are borne by shareholders of the Fund. The
Example is based on the Total Fund Operating Expenses for the Fund's last fiscal
year (1.50% 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.
-1-
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
------------------------------------------------------------ ------------
1996 1995 1994 1993 1992 1991(d)
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Selected Per Share Data (a)
Net Asset Value, beginning of period $13.47 $14.33 $14.77 $12.56 $11.97 $10.04
----- ------ ------ ------ ------
Income from Investment Operations
Net investment income 0.41 0.25 0.22 0.28 0.24 0.47
Net realized and unrealized
gain (loss) 2.43 0.71 1.23 2.76 0.88 1.46
---- ---- ---- ------ ------ ------
Total from investment operations 2.84 0.96 1.45 3.04 1.12 1.93
---- ---- ---- ------ ------ ------
Less Distributions
From net investment income 0.28 0.25 0.46 0.22 0.53 -
In excess of net investment income - 0.08 - - - -
From net realized gain 0.65 1.49 1.43 0.61 - -
---- ---- ---- ------ ------ ------
Total distributions 0.93 1.82 1.89 0.83 0.53 -
---- ---- ---- ------ ------ ------
Net Asset Value, end of period $15.38 $13.47 $14.33 $14.77 $12.56 $11.97
====== ====== ====== ====== ====== ======
Total Return 22.51% 7.91% 11.06% 25.45% 9.51% 19.21%(b)
Ratios and Supplemental Data
Net Assets, end of period
(in thousands) $108,788 $89,439 $81,787 $75,378 $46,942 $35,054
Ratio of expenses to
average net assets 1.50% 1.54% 1.53% 1.52% 1.50% 1.50%(c)
Total expenses to average
net assets 1.50% 1.54% 1.55% 1.63% 1.72% 2.01%(c)
Ratio of net investment income
to average net assets 2.27% 1.60% 1.32% 2.29% 2.07% 5.33%(c)
Ratio of net investment income
excluding waiver of management
fee to average net assets 2.27% 1.60% 1.30% 2.17% 1.85% 4.82%(c)
Portfolio Turnover rate 120% 106% 161% 183% 137% 144%
Average commission rate (e) $.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.
-2-
THE FUND
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund was established as a Massachusetts
business trust under an Agreement and Declaration of Trust dated June 29, 1990.
THE FUND'S INVESTMENT OBJECTIVES
The principal investment objective of the Fund is capital appreciation.
Income is a secondary objective. These objectives are not fundamental and the
Trustees of the Fund may change them without shareholder approval. The Fund is
not intended to be a complete investment program, and there is no assurance the
Fund will achieve its objectives.
HOW THE FUND PURSUES ITS OBJECTIVES
BASIC INVESTMENT STRATEGY. The Fund pursues its investment objectives
primarily through investments in common stocks, preferred stocks, debt
securities (such as bonds, debentures, notes, bank debt and claims) and
participations therein, and other securities which, in the opinion of The
Baupost Group, Inc. ("Baupost" or the "Adviser"), are available at prices less
than their intrinsic value, as determined by Baupost after analysis and
research, taking into account, among other factors, the relationship of the
market value of the securities to book value, cash flow, and earnings. These
factors are not applied formulaically, as the Adviser examines each security
separately; the Adviser has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund may invest in common stocks, preferred stocks and debt securities,
whether domestic or foreign, in such proportions as the Adviser deems advisable.
The preferred stocks and debt securities may be convertible. In addition, the
Fund may enter into repurchase agreements, enter into forward commitments,
purchase warrants, engage in options, 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.
-3-
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
-4-
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
-5-
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
-6-
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
-7-
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
-8-
TRANSACTIONS, INCLUDING LIMITATIONS DESIGNED TO REDUCE THE RISKS ASSOCIATED WITH
THESE PRACTICES, SEE "APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY
EXCHANGE TRANSACTIONS." Certain provisions of the Internal Revenue Code may
limit the Fund's ability to engage in options, futures and forward transactions.
See "Tax Status" in the Statement of Additional Information for more information
about these limitations. In addition, because of the investment leverage
involved in options and futures transactions, the Fund's obligations under its
options and futures transactions could require the Fund to deliver or take
delivery of investments with a value equal to or greater than the entire amount
of its assets.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. When the Fund makes a short
sale, it must borrow the security sold short and deliver it to the other party
to the transaction. Short sales involve certain expenses and entail risks. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities. The net
proceeds of the short sale will be retained by the broker to the extent
necessary to meet margin requirements, until the short position is closed out.
If the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a gain. Any gain
will be decreased, and any loss increased, by the transaction costs described
above. ALTHOUGH THE FUND'S GAIN IS LIMITED TO 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
-9-
underlying securities constituting collateral for the loans. The Adviser will
monitor such transactions to ensure that the value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including the interest factor. If the seller defaults, the Fund
could realize a loss on the sale of the underlying security to the extent the
proceeds of the sale, including accrued interest, are less than the resale price
provided in the agreement, including interest. In addition, if the seller should
be involved in bankruptcy or insolvency proceedings, the Fund may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Fund is treated as an unsecured creditor and is required to
return the underlying collateral to the seller's estate. The Fund's investments
in repurchase agreements will be limited to transactions with financial
institutions which are determined by the Adviser to present minimal credit
risks. The Adviser will monitor the creditworthiness of such financial
institutions.
FORWARD COMMITMENTS. The Fund may enter into contracts to purchase
securities for a fixed price at a specified future date beyond customary
settlement time ("forward commitments"). If the Fund does so, it will maintain
cash or 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 corporation issuing them. The prices of warrants do not
necessarily correlate with the prices of the underlying securities.
REAL ESTATE AND RELATED SECURITIES. The Fund may invest in real
estate-related securities. These securities include securities that are backed
by, represent interests in or are secured by real estate, as well as securities
issued by companies or limited partnerships that invest in real estate or
interests in real estate. Investments in these securities entail certain risks
due to a variety of factors, including uncertainties surrounding the underlying
real estate ventures. Factors affecting the performance of real estate ventures
may include satisfactory completion of construction, excess supply of real
estate in certain markets, prudent management of insurance risks, sufficient
level of occupancy, adequacy of financing available in capital markets,
competent management, adequate rent to cover operating expenses, local and
regional
-10-
markets for competing assets, changes in applicable laws and governmental
regulations (including taxes), and social and economic trends.
To the extent permitted by its investment restrictions, the Fund may also
purchase and sell real estate in order to protect its investment in such
securities. Certain real estate-related securities in which the Fund may invest
may not be readily marketable. Investments in real estate and in real
estate-related securities that are not readily marketable entail additional
risks, such as difficulty in pricing the real estate or security for purposes of
determining the Fund's net asset value and the possibility that the Fund would
be unable to sell the real estate or security at a price approximating its
market value when it decides to sell the real estate or security. If the Fund
has rental income or income from the direct disposition of real property, the
receipt of such income may adversely affect its ability to retain its status as
a regulated investment company. See "Taxes."
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER
While it is a policy of the Fund generally not to engage in trading for
short-term gains, portfolio changes will be made without regard to the length of
time a security has been held or whether a sale would result in a profit or
loss, if in the Adviser's judgment such transactions are advisable. A change in
the securities owned by the Fund is known as "portfolio turnover." For purposes
of calculating portfolio 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 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
-11-
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
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,
-12-
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 1996, the Fund invested 2.6% 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 3.0% of its net assets in securities rated B by Moody's, 0.2% of
its net assets in securities rated C by Moody's and 2.2% 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.
-13-
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 Chase Manhattan Bank,
N.A. The deadline for wire transfers is 10:00 a.m. Eastern time on the Purchase
Date. When the consideration is received by the Fund after the deadline, the
purchase order will be rejected and will have to be resubmitted to the Fund on
the next Purchase Date.
Purchases will be made in full and fractional shares of the Fund calculated
to three decimal places. Shareholders will be sent a statement of shares owned
subsequent to each transaction.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed on any day the New York Stock Exchange is
open for business. The redemption price is the net asset value per share next
determined after receipt by Baupost of the redemption request in "good order."
Shares of the Fund will generally be redeemed by a distribution in cash;
however, the Fund reserves the right to redeem shares by a distribution in kind
of securities held by the Fund.
Securities used to redeem Fund shares in kind will be valued in accordance
with the Fund's procedures for valuation described under "Determination of Net
Asset Value." Securities distributed by the Fund in kind will be selected by the
Adviser in light of the Fund's investment objectives and will not generally
represent a pro rata distribution of each security held in the Fund's portfolio.
Shareholders who receive a distribution in kind should expect to incur
transaction costs when converting such securities to cash.
Payment on redemption will be made as promptly as possible and in any event
within seven days after the requested date provided that the request is in "good
order." A redemption request is in "good order" if it includes the exact name in
which shares are registered and the number of shares or the dollar amount of
-14-
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 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
-15-
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.
TAXES
The Fund intends to qualify as a "regulated investment company" for federal
income tax purposes and to meet all other requirements that are necessary for it
to be relieved of federal taxes on income and gains paid to shareholders in the
form of dividends. In order to accomplish this goal, the Fund must distribute
substantially all of its ordinary income and capital gain net income on a
current basis and maintain a portfolio of investments which satisfies certain
investment and diversification criteria.
All Fund distributions will be taxable to shareholders as ordinary income,
except distributions of any long-term capital gains are currently taxable as
such regardless of how long a shareholder may have owned shares in the Fund.
Distributions will be taxed whether received in cash or in additional shares of
the Fund. For federal income tax purposes, a distribution paid to shareholders
by the Fund in January of a year generally is deemed to have been paid by the
Fund and received by shareholders on December 31 of the preceding year, if the
distribution was declared and payable to shareholders of record on a date in
-16-
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 securities of
foreign corporations, the Fund intends to make an election permitted by the
Internal Revenue Code to treat any 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.
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.
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 The Baupost Group, Inc., a Massachusetts
corporation. Seth A. Klarman, President of Baupost and the Fund, owns in excess
of 50% of the outstanding stock of Baupost. Mr. Klarman has also had primary
responsibility for the day-to-day management of the Fund's portfolio since the
Fund's inception in January, 1991. Mr. Klarman has been with Baupost since its
founding in
-17-
April, 1982. In addition to the Fund, Baupost manages financial assets for
approximately 36 client families. Assets under management totaled approximately
$940 million on December 31, 1996.
Under the Management Contract with the Fund, the Adviser, subject to such
policies as the Trustees may determine, selects and reviews the Fund's
investments and provides executive and other personnel for the management of the
Fund. Subject to the authority of the Trustees, the Adviser also manages the
Fund's other affairs and business. In the event that the Adviser ceases to be
the investment adviser to the Fund, the right of the Fund to use the identifying
name "Baupost" with respect to the Fund may be withdrawn.
The Fund pays the Adviser a quarterly management fee at the annual rate of
1.00% of the Fund's average net assets. Under the Management Contract, for the
purposes of determining the applicable management fee, "average net assets" is
determined at regular intervals throughout the year. The Adviser has agreed with
the Fund to reduce its management fee by up to .75% to the extent that the
Fund's total annual expenses (including the management fee and the
administrative fee (as described below under "Transfer and Dividend Disbursing
Agent and Administrator") and certain other expenses, but excluding brokerage
commissions, transfer taxes, interest and expenses relating to preserving the
value of the Fund's investments) would otherwise exceed 1.50% of the Fund's
average net assets. The Adviser's fee under the Management Contract for services
rendered to the Fund is higher than that paid by most other mutual funds.
In addition, the Fund will pay all expenses incurred in connection with the
organization and operation of the Fund, including but not limited to brokerage
commissions and transfer taxes in connection with its portfolio transactions,
all applicable taxes and filing fees, the fees and expenses for registration or
qualification of its shares under the federal or state securities laws, the
compensation of certain Trustees, interest charges, charges of custodians,
administrative and transfer agency expenses, auditing and legal expenses,
expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, proxy statements and proxies to existing shareholders, insurance
premiums and professional association dues or assessments.
HOW THE FUND SHOWS PERFORMANCE
From time to time the Fund may include in its communications to current or
prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of an amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends 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.
-18-
All data is based on the Fund's past investment results and does not predict
future performance. Investment performance, which will vary, is based on many
factors, including market conditions, the composition of the Fund's portfolio,
and the Fund's operating expenses. Investment performance also often reflects
the risks associated with the Fund's investment objectives and policies. These
factors should be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES
The Fund is a no-load, non-diversified open-end registered management
investment company organized as a Massachusetts business trust under the laws of
The Commonwealth of Massachusetts by an Agreement and Declaration of Trust (the
"Declaration of Trust") dated June 29, 1990.
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest which presently constitute
a single series, the Fund. Each share of the Fund represents an equal
proportionate interest with each other share. The Declaration of Trust also
permits the Trustees, without shareholder approval, to subdivide any series of
shares into two or more classes of shares, with such preferences and other
rights and privileges as the Trustees may designate. The Fund's shares are not
currently divided into classes. The Trustees may also, without shareholder
approval, establish one or more additional separate portfolios for investments
in the Fund or merge two or more existing portfolios. Shareholders' investments
in such a portfolio would be evidenced by a separate series of shares.
Fund shares are entitled to dividends as declared by the Trustees and, in
liquidation of the Fund, are entitled to receive the net assets of the Fund.
Fund shares are entitled to vote at any meetings of shareholders. Although the
Fund is not required to hold annual meetings of shareholders, shareholders have
the right to call a meeting to remove Trustees. See the Statement of Additional
Information.
The Declaration of Trust provides for the perpetual existence of the Fund.
The Fund may, however, be terminated at any time by vote of at least two-thirds
of the outstanding shares of the Fund. The Declaration of Trust further provides
that the Trustees may also terminate the Fund upon written notice to the
shareholders.
CUSTODIANS
Chase Manhattan Bank, N.A. ("Chase Manhattan") acts as the Fund's principal
custodian. Chase Manhattan has contracted with certain foreign banks and
depositories to hold portfolio securities outside of the United States on behalf
of the Fund. The Fund has also engaged Credit Suisse First Boston as the Fund's
custodian for its investments in Russia, if any, and The Bank of N.T.
Butterfield & Son Ltd. as the custodian for any investments of the Fund in
Bermuda. The custodians have no part in determining the Fund's investment
policies or which securities are to be purchased or sold for the Fund.
-19-
TRANSFER AND DIVIDEND
DISBURSING AGENT AND ADMINISTRATOR
Baupost acts as the Fund's transfer and dividend disbursing agent and
administrator under a Transfer Agency and Administrative Services Agreement.
Under the agreement with the Fund, Baupost provides customary transfer agency
services, furnishes pricing and bookkeeping services to the Fund and determines
the net asset value of the Fund's shares. For these services, the Fund pays
Baupost a quarterly fee at the annual rate of .25% of the Fund's average net
asset value.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund will
send to its shareholders a semi-annual report containing unaudited financial
statements and an annual report containing audited financial statements.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to the Fund c/o The Baupost Group, Inc.,
44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
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APPENDIX A - OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE
TRANSACTIONS
The Fund may engage in options and futures transactions and certain foreign
currency exchange transactions. These investment practices may be used to
attempt to reduce fluctuations in the Fund's net asset value or for other
purposes permitted by applicable law. There can be no assurance that such
practices will be successful. Expenses and losses resulting from these
activities will reduce the Fund's current income and net asset value.
In connection with transactions in futures contracts and related options
written by the Fund, the Fund will be required to deposit with its custodian or
broker as "initial margin" an amount of cash and/or securities. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the values of the futures contracts or options.
Because of the investment leverage involved in these transactions, the Fund's
obligations under its futures contracts or options could require the Fund to
deliver or take delivery of investments with a value equal to or greater than
the entire amount of its assets. Certain provisions of the Internal Revenue Code
may also limit the Fund's ability to engage in these transactions. See "Tax
Status" in the Statement of Additional Information for more information about
these limitations.
OPTIONS ON SECURITIES
Writing Covered Options. The Fund may write covered call options and covered
put options on securities when, in the opinion of the Adviser, such transactions
are consistent with the Fund's investment objectives and policies. Call options
written by the Fund give the purchaser the right to buy the underlying
securities from the Fund at a stated exercise price; put options give the
purchaser the right to sell the underlying securities to the Fund at a stated
price. The aggregate value of the securities underlying put options written by
the Fund may not exceed 50% of the Fund's total assets.
The Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges) or will segregate cash 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
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market for the underlying security. By writing a call option, the Fund, to the
extent it owns the underlying security, limits its opportunity to profit from
any increase in the market value of the underlying security above the exercise
price of the option but continues to bear the risk of a decline in the value of
the underlying security. By writing a put option, the Fund assumes the risk that
it may be required to purchase the underlying security for an exercise price
higher than its then-current market value, resulting in a potential capital loss
unless the security subsequently appreciates in value.
The Fund may terminate an option that it has written prior to the expiration
by entering into a closing purchase transaction in which it purchases an
offsetting option. The Fund realizes a profit or loss from a closing transaction
if the cost of the transaction (option premium plus transaction costs) is less
or more than the premium received from writing the option. Because increases in
the market price of a call option generally reflect increases in the market
price of the security underlying the option, any loss resulting from a closing
purchase transaction may be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
In connection with certain options that the Fund may write, the Fund may be
required to deposit cash or securities as "margin," or collateral for its
obligation to buy or sell the underlying security. As the value of the
underlying security varies, the Fund may have to deposit additional margin.
Margin requirements are complex and are fixed by individual brokers, subject to
minimum requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing Put Options. The Fund may purchase put options 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
-22-
same security. When it engages in spread and straddle transactions, the Fund
seeks to profit from differentials in the option premiums paid and received by
it and in the market prices of the related options positions when they are
closed out or sold. Spread and straddle transactions require the Fund to
purchase and/or write more than one option simultaneously. Accordingly, the
Fund's ability to enter into such transactions and to liquidate its positions
when necessary or deemed advisable may be more limited than if the Fund were to
purchase or sell a single option. Similarly, costs incurred by the Fund in
connection with these transactions will in many cases be greater than if the
Fund were to purchase or sell a single option.
RISK FACTORS IN OPTIONS TRANSACTIONS
The successful use of the Fund's options strategies depends on the ability
of the Adviser to forecast interest rate and market movements correctly. For
example, if the Fund were to write a call option based on the Adviser's
expectation that the price of the underlying security would fall, but the price
were to rise instead, the Fund could be required to sell the security upon
exercise at a price below the current market price. Similarly, if the Fund were
to write a put option based on the Adviser's expectation that the price of the
underlying security would rise, but the price were to fall instead, the Fund
could be required to purchase the security upon exercise at a price higher than
the current market price.
When it purchases an option, the Fund runs the risk that it will lose its
entire investment in the option in a relatively short period of time, unless the
Fund exercises the option or enters into a closing transaction with respect to
the option during the life of the option. If the price of the underlying
security does not rise (in the case of a call) or fall (in the case of a put) to
an extent sufficient to cover the option premium and transaction costs, the Fund
will lose part or all of its investment in the option. This contrasts with an
investment by the Fund in the underlying security, since the Fund will not lose
any of its investment in such security if the price does not change.
The effective use of options also depends on the Fund's ability to terminate
option positions at times when the Adviser deems it desirable to do so. There is
no assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, the
Fund could no longer engage in closing transactions. Lack of investor interest
might adversely affect the liquidity of the market for particular options or
series of options. A market may discontinue trading of a particular option or
options generally. In addition, a market could become temporarily unavailable if
unusual events -- such as volume in excess of trading or clearing capability --
were to interrupt its normal operations.
A market may at times find it necessary to impose restrictions on particular
types of options transactions, such as opening transactions. For example, if an
underlying security ceases to meet qualifications imposed by the market or the
Options Clearing Corporation, new series of options on that security will no
longer be opened to replace expiring series, and opening transactions in
existing series may 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.
-23-
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.
-24-
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.
-25-
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.
-26-
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
-27-
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.
-28-
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.
-29-
It is impossible to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, it may be necessary for the Fund to purchase additional foreign
currency on the spot market (and bear the expense of such purchase) if the
market value of the security or securities being hedged is less than the amount
of foreign currency the Fund is obligated to deliver and a decision is made to
sell the security or securities and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received upon the sale of the portfolio security or securities if the
market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
The Fund may seek to increase its current return or to offset some of the
costs of hedging against fluctuations in current exchange rates by writing
covered call options and covered put options on foreign currencies. The Fund
receives a premium from writing a call or put option, which increases the Fund's
current return if the option expires unexercised or is closed out at a net
profit. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written.
The Fund's currency hedging transactions may call for the delivery of one
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are then denominated. In
addition to the other risks described above, these cross hedging transactions by
the Fund involve the risk of imperfect correlation between changes in the values
of the currencies to which such transactions relate and changes in the value of
the currency or other asset or liability which is the subject of the hedge.
Currency forward and futures contracts. A forward foreign currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract as agreed by
the parties, at a price set at the time of the contract. In the case of a
cancellable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. The contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract generally has no
deposit requirement, and no commissions are charged at any stage for trades. A
foreign currency futures contract is a standardized contract for the future
delivery of a specified amount of a foreign currency at a future date at a price
set at the time of the contract. Foreign currency futures contracts traded in
the United States are designed by and traded on exchanges regulated by the CFTC,
such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the
-30-
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
-31-
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.
-32-
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.
-33-
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
high degree. Such issues are often in default or have other marked shortcomings.
-34-
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 highest rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. 'BB' indicates the least degree of speculation and
'C' the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair
-35-
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.
-36-
THE BAUPOST FUND
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
ADVISER, TRANSFER AND DIVIDEND PAYING
AGENT AND ADMINISTRATOR
The Baupost Group, Inc.
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
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, 1997
-37-
----------------------------------
THE BAUPOST FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1997
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, 1997. The Statement should be read together with the
Prospectus. Copies of the Prospectus can be obtained without charge by calling
the Fund at (617) 497-6680 or by writing to the Fund, c/o The Baupost Group,
Inc., 44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts 02238.
TABLE OF CONTENTS
Page
----
INVESTMENT RESTRICTIONS....................................................B-2
TAX STATUS.................................................................B-4
MANAGEMENT OF THE FUND.....................................................B-5
OWNERSHIP OF FUND SHARES...................................................B-8
INVESTMENT ADVISORY AND OTHER SERVICES.....................................B-8
PORTFOLIO TRANSACTIONS....................................................B-10
SHAREHOLDER VOTING RIGHTS.................................................B-11
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS .........................B-12
DETERMINATION OF NET ASSET VALUE .........................................B-12
STANDARD PERFORMANCE MEASURES.............................................B-12
EXPERTS...................................................................B-13
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS...................B-14
----------------------------------
INVESTMENT RESTRICTIONS
As fundamental investment restrictions which may not be changed without
a vote of a majority of the outstanding voting securities of the Fund, the Fund
may not and will not:
(1) Borrow money in excess of 10% of the value (taken at the lower
of cost or current value) of its total assets (not including
the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any investments are
purchased.
(2) Pledge, hypothecate, mortgage or otherwise encumber its assets
in excess of 15% of its total assets (taken at current value)
in connection with borrowings permitted by restriction 1
above.
(3) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
(4) Purchase or sell real estate, although it may purchase
securities or limited partnership interests which are secured
by or represent interests in real estate or issued by
companies or limited partnerships which invest in real estate
or interests therein, and it may acquire and dispose of real
estate or interests in real estate acquired in order to
protect its investment in such securities or limited
partnership interests. (For the purposes of this restriction,
investments by the Fund in securities that are not readily
marketable of companies whose assets consist substantially of
real property and interests therein, including mortgages and
other liens, do not constitute an investment in real estate or
in interests in real estate.)
(5) Purchase or sell commodities unless acquired as a result of
ownership of securities or other instruments, except that the
Fund may buy or sell futures contracts and related options,
forward contracts, options on commodities, securities or other
instruments backed by commodities and options on foreign
currencies.
(6) Make loans, except (i) by purchase of debt obligations in
which the Fund may invest consistent with its investment
policies or (ii) by entering into repurchase agreements with
respect to not more than 25% of its total assets (taken at
current value).
(7) Invest 25% or more of the value of its total assets in any one
industry. (U.S. Government Securities, including securities
issued by agencies or instrumentalities of the U.S.
Government, and securities backed by the credit of a U.S.
governmental entity will not be considered to represent an
industry.)
B-2
(8) Buy or sell oil, gas or other mineral leases, rights or
royalty contracts or any interest in oil, gas or other mineral
exploration or development programs, although it may purchase
securities which are secured by or represent interests in, or
issued by companies which invest in, oil, gas or other mineral
leases, rights or royalty contracts.
(9) Issue senior securities, except as appropriate to evidence
indebtedness that the Fund is permitted to incur consistent
with restriction 1 above.
It is contrary to the Fund's present policy, which may be changed by the
Trustees without shareholder approval, to:
(1) Invest in (a) securities which at the time of such investment
are not readily marketable and (b) repurchase agreements
maturing in more than seven days, if, as a result, more than
15% of the Fund's net assets (taken at current value) would
then be invested in the aggregate in securities described in
(a) and (b) above.
(2) Purchase securities on margin, except that the Fund may obtain
short-term credits as may be necessary for the clearance of
purchases and sales of securities, and except that it may make
margin payments in connection with financial futures contracts
or options.
(3) Invest more than 5% (taken at the lower of cost or market
value) of its net assets in warrants (provided that of this
5%, no more than 2% may be warrants not listed on the New York
Stock Exchange or the American Stock Exchange). For purposes
of this restriction, warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase are
deemed to be without value.
(4) Purchase or sell interests in limited partnerships that have
as their primary business purpose the development or
management of real estate.
--------------------
For the purposes of fundamental investment restriction 7 concerning
investments in any one industry, the Fund will consider all relevant factors in
determining who is the issuer of a loan participation. These factors will
include the credit quality of the borrower, the amount and quality of the
collateral, the terms of the loan agreement and other relevant agreements
(including inter-creditor agreements), the degree to which the credit of any
person interpositioned between the Fund and the borrower was deemed material to
the decision to purchase the participation interest, the interest rate
environment, and general economic conditions applicable to the borrower and such
interpositioned person.
For the purposes of certain diversification criteria imposed by federal
tax laws, the Fund will consider the borrower to be the issuer of a loan
participation. In addition, with respect to loan participations under which the
Fund does not have privity of contract with the borrower or would not have a
direct cause of action against the
B-3
borrower in the event of its failure to pay scheduled principal or interest, the
Fund will also consider each person interpositioned between the Fund and the
borrower to be an issuer of a loan participation.
Except as otherwise noted, all percentage limitations on investments
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
The Investment Company Act of 1940 (the "1940 Act") provides that a
"vote of a majority of the outstanding voting securities" means the affirmative
vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or
(2) 67% or more of the shares present at a meeting if more than 50% of the
outstanding shares are represented at the meeting in person or by proxy.
TAX STATUS
The tax status of the Fund and the distributions which it may make are
summarized in the Prospectus under the headings "Taxes" and "Distributions." The
Fund intends to qualify each year as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). In order to qualify as a
regulated investment company which is eligible for special federal income tax
treatment, the Fund must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, gains from the sale or other disposition of stock, securities
or foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income from the sale or other disposition of securities and certain
other assets held less than three months; (c) diversify its holdings so that, at
the close of each quarter of its taxable year, (i) at least 50% of the value of
its total assets consists of cash, cash items, U.S. government securities,
securities of other regulated investment companies, and other securities limited
generally with respect to any one issuer to a value not greater than 5% of the
total assets of the Fund and to not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its assets
is invested in the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies); and (d)
distribute in or with respect to each taxable year at least 90% of its dividend,
interest and certain other income (including, in general, net short-term capital
gains) for such year. To the extent the Fund qualifies as a regulated investment
company which is eligible for special federal income tax treatment, the Fund
will not be subject to federal income tax on income paid to its shareholders in
the form of dividends or capital gain distributions.
In order to eliminate an excise tax liability imposed on certain
undistributed income, the Fund must distribute prior to each calendar year end
an amount equal to the sum of: (i) 98% of the Fund's capital gain net income, if
any, realized in the one-year period ending on October 31 of such year, (ii) 98%
of the Fund's ordinary income realized in such calendar year and (iii) any
undistributed income from the prior year. The Fund will be treated as having
distributed on December 31 of a given year any dividend of ordinary income or
capital gain net income that is declared and payable to shareholders of record
on a date in October, November or December of such year and paid on or before
January 31 of the next year. The Fund intends to make distributions which are
necessary to eliminate such excise tax liability.
B-4
Foreign currency exchange gain and loss arising from the Fund's
transactions in foreign currencies, foreign currency-denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts will generally be treated for federal income tax purposes as ordinary
income or loss.
The Fund's transactions, including hedging transactions, in options,
futures contracts, forward contracts, short sales, spreads, straddles and
foreign currencies will be subject to special tax rules (including
mark-to-market, straddle, wash sale and short sale rules), the effect of which
may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities and convert
short-term capital losses into long-term capital losses. These rules could
therefore affect the amount, timing and character of distributions to
shareholders. See "Appendix A - Options, Futures and Foreign Currency Exchange
Transactions" in the Prospectus.
Certain of the Fund's hedging activities, including its transactions in
foreign currencies or foreign currency-denominated instruments, are likely to
produce a difference between its book income and its taxable income. This
difference may require the Fund to make distributions exceeding book income in
order to qualify as a regulated investment company, or cause the Fund's
distributions to exceed the Fund's taxable income. Distributions in excess of
the Fund's earnings and profits will be treated as a non-taxable return of
capital to the extent of the shareholder's tax basis in his shares and
thereafter as capital gain.
Due to the requirement that less than 30% of the Fund's gross income be
derived from gains from the sale or other disposition of securities and certain
other assets (including options, futures contracts and forward contracts) held
or deemed held under Code rules for less than three months, the Fund will be
restricted in its ability to conduct certain transactions, including, for
example, selling securities short, purchasing or writing options that expire in
less than three months, effecting closing transactions with respect to options
purchased or sold within the preceding three months, engaging in certain
transactions in options and futures contracts, and selling certain securities
deliverable under such options or futures contracts or treated as substantially
identical to securities deliverable under such options or futures contracts.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund and their principal occupations
during the past five years are as follows:
B-5
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
- ----------------- -------- --------------------
<S> <C> <C>
Seth A. Klarman** Trustee and President The Baupost Group, Inc., President and
Director.
William J. Poorvu** Trustee, Vice Chairman,
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).
Formerly, Trustee of Trammell Crow Real
Estate Investors (real estate) and Director
of Sonesta International Corp. (hotels).
Howard H. Stevenson** Trustee and Chairman 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 System; 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).
</TABLE>
* The mailing address of each of the officers and Trustees is c/o The Baupost
Group, Inc., 44 Brattle Street, Post Office Box 381288, Cambridge,
Massachusetts 02238 unless otherwise indicated.
** Trustees who are "interested persons" (as defined in the 1940 Act) of the
Fund or the Fund's investment adviser, The Baupost Group, Inc. (the
"Adviser").
B-6
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
- ----------------- -------- --------------------
<S> <C> <C>
Samuel Plimpton Trustee Brattle Advisors, L.P., general partner (real estate
Brattle Advisors, L.P. counselors); Perry Dean Rogers and Partners,
44 Brattle Street Director (an architecture firm).
Suite 2
Cambridge, MA 02138
Robert W. Ackerman Trustee President and Chief Executive Officer
Sheffield Steel Corp. of Sheffield Steel Corp. (a steel
220 North Jefferson manufacturer); prior to that,
Sands Springs, OK 74063 President, Lincoln Pulp & Paper
Co., Inc. (a paper manufacturer); Director,
Gulf States Steel (a steel manufacturer).
David Auerbach Trustee Mr. Auerbach is a private investor.
607 Boylston Street
Boston, MA 02116
Jay Light Trustee Harvard University Graduate School of Business
Harvard University Graduate Administration, Dwight P. Robinson, Jr. Professor
School of Business Administration of Business Administration and Senior Associate
Soldiers Field Road Dean, Director of Faculty Planning from 1988
Boston, MA 02163 to 1992; United Asset Management
Corporation, Director (a holding company
comprised of investment management firms);
Harvard Management Company, Director (an
investment adviser to President and Fellows
of Harvard College); The Jeffrey Company,
Director (investments); College Retirement
Equity Fund, Trustee; The Brigham and
Women's Hospital, Trustee, and 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, Inc., Vice President and
Director.
</TABLE>
* The mailing address of each of the officers and Trustees is c/o The Baupost
Group, Inc., 44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts
02238 unless otherwise indicated.
B-7
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
- ----------------- -------- --------------------
<S> <C> <C>
Paul C. Gannon Vice President The Baupost Group, Inc., Chief Financial and
Administrative Officer and Vice President.
Jo-An B. Bosworth Assistant The Baupost Group, Inc.,
Clerk Vice President, Clerk and Secretary.
</TABLE>
*The mailing address of each of the officers and Trustees is c/o The Baupost
Group, Inc., 44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts
02238 unless otherwise indicated.
Except as noted below, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
The Fund pays the Trustees, other than Mr. Plimpton and those who are
interested persons of the Adviser, an annual fee of $6,000, in addition to a fee
of $500 for each meeting attended. During fiscal 1996, 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.
OWNERSHIP OF FUND SHARES
At February 1, 1997, the officers and Trustees of the Fund as a group
owned of record or beneficially 21.83% of the outstanding shares of the Fund,
and to the knowledge of the Fund no person owned of record or beneficially 5.0%
or more of the shares of the Fund, except Carol B. Auerbach, 900 Centennial
Road, Narberth, PA 19072 owned of record and beneficially 1.31% of the shares of
the Fund and as Trustee for various trusts beneficially owned 4.23% of the
shares of the Fund and William J. Poorvu, 975 Memorial Drive, #710, Cambridge,
MA 02138 owned of record and beneficially 0.65% of the shares of the Fund and as
Trustee for various trusts beneficially owned 9.77% of the shares of the Fund.
The foregoing shareholders may be Trustees for the same trusts, in which case
each person serving as Trustee of such trust is deemed to be a beneficial owner
of the shares.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACT
As disclosed in the Prospectus under the heading "Management of the
Fund," under an investment advisory contract (the "Management Contract") between
the Fund and the Adviser, subject to such policies as the Trustees of the Fund
may determine, the Adviser will furnish continuously an investment program for
the Fund
B-8
and will make investment decisions on behalf of the Fund and place all orders
for the purchase and sale of portfolio securities. Subject to the control of the
Trustees, the Adviser also manages, supervises and conducts the other affairs
and business of the Fund, furnishes office space and equipment, and pays all
salaries, fees and expenses of officers and Trustees of the Fund who are
affiliated with the Adviser. As indicated under "Portfolio Transactions --
Brokerage and Research Services," the Fund's portfolio transactions may be
placed with broker-dealers that furnish the Adviser, at no cost, certain
research, statistical and quotation services of value to the Adviser in advising
the Fund or its other clients.
As disclosed in the Prospectus, the 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.
The Management Contract provides that the Adviser shall not be subject
to any liability to the Fund or to any shareholder of the Fund in connection
with the performance of its services thereunder in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations and duties.
The Management Contract will continue in effect for a period of more
than two years from the date of its execution only so long as its continuance is
approved at least annually by (i) vote, cast in person at a meeting called for
that purpose, of a majority (or one, if there is only one) of those Trustees who
are not "interested persons" of the Adviser or the Fund, and by (ii) the
majority vote of either the full Board of Trustees or the vote of a majority of
the outstanding shares of the Fund. The Management Contract automatically
terminates on assignment, and may be terminated by either the Fund or the
Adviser upon not more than 60 days' but not less than 30 days' notice to the
other party.
For its 1994, 1995 and 1996 fiscal years, the Fund paid management fees
of $838,925, $853,905 and $991,872, respectively (reflecting a reduction in 1994
of $15,549 pursuant to the application of the expense limitation).
TRANSFER AGENCY, DIVIDEND DISBURSING AND ADMINISTRATIVE ARRANGEMENTS
The Adviser serves as the Fund's transfer and dividend disbursing agent
and administrator. Under a Transfer Agency and Administrative Services Agreement
between the Fund and the Adviser, the Adviser is paid a quarterly fee at the
annual rate of .25% of the Fund's average net assets. Under the agreement, the
Adviser acts as the Fund's transfer and dividend disbursing agent and provides
bookkeeping and certain clerical services and will calculate the total net asset
value, total net income, and net asset value per share of the Fund. The
agreement provides that it shall continue indefinitely, but that it may be
terminated by either party upon 60 days' notice. The agreement provides that the
Adviser will only be liable to the Fund for loss or damage incurred by the Fund
resulting from the Adviser's lack of good faith, negligence or willful
misconduct and also provides that the Fund will indemnify the Adviser against,
among other things, loss or damage incurred by the Adviser on account of any
claim, demand, action or suit arising out of, or in connection with, its duties
under the agreement, provided that the Adviser has acted in good faith and
without negligence or willful misconduct.
B-9
During its 1996 fiscal year, the Fund paid $247,968 to the Adviser
pursuant to the Transfer Agency and Administrative Services Agreement.
Custodians
Chase Manhattan Bank, N.A. ("Chase Manhattan"), One Chase Manhattan
Plaza, New York, New York 10081, is the Fund's primary custodian. As such, Chase
Manhattan holds in safekeeping certificated securities and cash belonging to the
Fund and, in such capacity, is the registered owner of securities in book-entry
form belonging to the Fund. Upon instruction, Chase Manhattan receives and
delivers cash and securities of the Fund in connection with Fund transactions
and collects all dividends and other distributions made with respect to Fund
portfolio securities. Chase Manhattan also maintains certain accounts and
records of the Fund. Chase Manhattan has also contracted with certain foreign
banks and depositories to hold portfolio securities outside of the United States
on behalf of the Fund. The contract with Chase Manhattan provides by its terms
that it shall continue indefinitely, but that it may be terminated by either
party upon 90 days' notice.
The Fund has also directly engaged Credit Suisse First Boston,
Paradeplatz 8, 8001 Zurich, Switzerland, as the Fund's custodian with respect to
its investments in Russia, if any, and The Bank of N.T. Butterfield & Son Ltd.,
11 Bermudiana Road, Pembroke, Hamilton HM GX, Bermuda, as the custodian with
respect to any investments of the Fund in Bermuda.
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.
B-10
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 1994, 1995 and 1996 fiscal years, the Fund paid brokerage
commissions aggregating $304,386, $314,636 and $201,261, respectively.
SHAREHOLDER VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote in the election of
Trustees and on other matters submitted to the vote of shareholders.
Shareholders will vote by individual series on all matters except (i) when
required by the 1940 Act, shares shall be voted in the aggregate and not by
individual series and (ii) when the Trustees have determined that the matter
affects only the interests of one or more series, then only shareholders of such
series shall be entitled to vote thereon. Shareholders of one series shall not
be entitled to vote on matters exclusively affecting another series, such
matters including, without limitation, the adoption of or change in the
investment objectives, policies or restrictions of the other series and the
approval of the investment advisory contracts of the other series.
There will normally be no meetings of shareholders for the purpose of
electing Trustees, except that in accordance with the 1940 Act (i) the Fund will
hold a shareholders' meeting for the election of Trustees at such time as less
than a majority of the Trustees holding office have been elected by shareholders
and (ii) if, as a result of a vacancy in the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the shareholders,
that vacancy may only be filled by a vote of the shareholders. The Fund will
also be required by law to hold shareholder meetings for the adoption of any
contract for which shareholder approval is required by the 1940 Act. In
addition, Trustees may be removed from office by a written consent signed by the
holders of two-thirds of the outstanding shares and filed with Chase Manhattan
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.
B-11
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Fund
or the Trustees. The Declaration of Trust provides for indemnification out of
the property of the Fund for all loss and expense of any shareholder of the Fund
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which the disclaimer
is inoperative and the Fund would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office. The Declaration of Trust also provides for indemnification by the
Fund of the Trustees and the officers of the Fund against liabilities and
expenses reasonably incurred in connection with litigation in which they may be
involved because of their offices with the Fund, except if it is determined in
the manner specified in the Declaration of Trust that such indemnification would
relieve any officer or Trustee of any liability to the Fund or its shareholders
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
DETERMINATION OF NET ASSET VALUE
As indicated in the Prospectus, the net asset value of each Fund share
is determined as of the close of trading on the New York Stock Exchange
(normally 4:00 p.m. Eastern time) once on each day which the Exchange is open
(other than a day on which no shares of the Fund were tendered for redemption
and no order to purchase shares was accepted by the Fund). The Fund expects that
the days, other than weekend days, that the New York Stock Exchange will not be
open are Independence Day, Labor Day, Thanksgiving Day, Christmas Day, New
Year's Day, Presidents' Day, Good Friday and Memorial Day.
STANDARD PERFORMANCE MEASURES
From time to time the Fund may include in its communications to current
or prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on the amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of the amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends and distributions. The
Fund does not have a sales load or other charges paid by all shareholders that
affect its calculation of total or average annual total return. Any quotation of
total return for any period when an expense limitation was in effect will be
greater than if the limitation had not been in effect.
The Fund's average annual total return since the commencement of its
operations (December 14, 1990) through October 31, 1996 was 16.17%. The Fund's
total return for the one-year period ended October 31, 1996 was 22.51%.
B-12
EXPERTS
The statement of assets and liabilities of The Baupost Fund as of
October 31, 1996, 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-13
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,
1996, 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. Our procedures included confirmation of securities owned as of
October 31, 1996, 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, 1996, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
December 4, 1996
B-14
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
ASSETS:
Investments in securities - at value $ 108,955,788
(Notes A and C) (cost $97,297,169)
Cash 147,725
Receivable for investments sold 108,875
Receivable for investments sold short 4,132,636
Accrued investment income 221,189
Other assets 96,813
-------------
Total Assets 113,663,026
LIABILITIES:
Payable for investments purchased 216,075
Payable to The Baupost Group, Inc. (Note B) 339,451
Payable for securities sold short 3,901,329
(Notes A and C) (proceeds $4,132,636)
Unrealized depreciation on forward foreign
currency contracts sold 168,092
Other payables and accrued expenses 250,037
-------------
Total Liabilities 4,874,984
-------------
NET ASSETS $ 108,788,042
=============
COMPOSITION OF NET ASSETS:
Paid in capital $ 86,275,184
Distributions in excess of net investment
income (Note A) (99,004)
Accumulated undistributed net realized
gain on investments and foreign
currency transactions 10,890,028
Net unrealized appreciation on investments
and assets & liabilities in foreign currencies 11,721,834
-------------
NET ASSETS $ 108,788,042
=============
NET ASSET VALUE:
Offering and redemption price per share
($108,788,042 / 7,072,861.728) $ 15.38
=============
See notes to financial statements.
B-15
THE BAUPOST FUND
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1996
INVESTMENT INCOME:
INCOME:
Interest $ 2,195,944
Dividends (net of foreign withholdings of $114,425) 1,532,435
Other income 10,010
-------------
Total Investment Income 3,738,389
EXPENSES:
Investment management fee (Note B) 991,872
Administrative fee (Note B) 247,968
Custodian fees 78,354
Legal fees 57,995
Audit fees 36,000
Registration and filing fees 28,081
Directors' fees 25,500
Amortization of organization costs 6,048
Miscellaneous 15,085
-------------
Total Expenses 1,486,903
NET INVESTMENT INCOME 2,251,486
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain (loss) on:
Investments 12,172,296
Short sales (1,764,472)
Foreign currency transactions (40,459)
-------------
10,367,365
Change in unrealized appreciation/(depreciation) on:
Investments 7,454,022
Short sales 204,566
Foreign currency transactions (242,619)
-------------
7,415,969
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 17,783,334
-------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 20,034,820
=============
See notes to financial statements.
B-16
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1995
------------------ ------------------
<S> <C> <C>
INCREASE IN NET ASSETS FROM OPERATIONS:
Net investment income $ 2,251,486 $ 1,368,087
Net realized gain on investments and foreign
currency transactions 10,367,365 4,176,280
Change in unrealized appreciation of investments
and foreign currency transactions 7,415,969 1,080,207
------------------ ------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 20,034,820 6,624,574
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,825,419) (1,430,985)
In excess of net investment income (432,464)
From net realized gain on investments (4,283,665) (8,459,115)
CAPITAL SHARE TRANSACTIONS (NOTE E) 5,422,927 11,350,535
------------------ ------------------
INCREASE IN NET ASSETS 19,348,663 7,652,545
NET ASSETS AT BEGINNING OF PERIOD 89,439,379 81,786,834
------------------ ------------------
NET ASSETS AT END OF PERIOD
(including distributions in excess of
net investment income of $99,004
and $30,449, respectively)
$ 108,788,042 $ 89,439,379
================== ==================
</TABLE>
See notes to financial statements.
B-17
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C> <C>
COMMON STOCKS - 63.81%
UNITED STATES - 28.71%
FINANCIAL INSTITUTIONS - 7.52%
197,800 Allmerica Financial Corporation $ 6,008,175
110 Fidelity Federal Savings Bank Florida 1,801
132 First Federal Savings Bank of Siouxland 3,300
100 Harbor Federal Savings Bank 3,163
1,949 Mid-Central Financial Corporation 31,184
808 Mid-Coast Bancorp Inc. 14,948
95,000 Mississippi View Holding Company 1,163,750
1,800 Shelby County Bancorp 28,800
65,000 Trenton Savings Bank FSB 926,250
--------------------------
8,181,371
WHOLESALE - FOOD-5.24%
228,200 TLC Beatrice International Holdings 5,705,000
AUTO & HOME SUPPLY - 4.63%
53,000 Dart Group Corporation - Class A 5,035,000 ~
ALUMINUM - 2.78%
72,050 Maxxam, Inc. 3,026,100 *
FIRE, MARINE & CASUALTY INSURANCE - 2.26%
23,800 Farm Family Holdings, Inc. 473,025 *
78,400 Chartwell RE Corporation 1,989,400
--------------------------
2,462,425
LESSORS OF REAL PROPERTY - 1.34%
833,959 MBO Properties, Inc. 1,459,428 *
CEREAL BREAKFAST FOOD - 1.25%
65,000 Ralcorp Holdings, Inc. 1,365,000 *
B-18
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
STEEL WORKS - 1.14%
247,400 Northwestern Steel & Wire Company $ 1,237,000 *
PHARMACEUTICALS - 1.11%
116,200 Therapeutic Discovery 1,205,575
PHOTOGRAPHIC PORTRAIT STUDIOS - 0.93%
53,100 CPI Corporation 1,008,900
MISCELLANEOUS - 0.51%
154,240 Louise's Inc. 1,542 +*
33,700 Noel Group, Inc. 219,050
938,000 Regency Equities 14,070
10,000 RSI Holdings, Inc. 600 *
1,105 The Homestake Oil & Gas Company 99,450 +
1,579 The Homestake Royalty Corporation 205,270 +
1,000 Trak Auto Corporation 16,250 *
--------------------------
556,232
TOTAL COMMON STOCKS - UNITED STATES $ 31,242,031
(Total Cost $27,151,146) ==========================
FRANCE - 14.51%
DIVERSIFIED HOLDING COMPANIES - 8.70%
5,891 Compagnie Generale D'Industrie et de Partcipations $ 1,312,943
2,161 Financiere et Industrielle Gaz et Eaux 908,430
2,100 Fonciere Financiere et de Participation SA 67,213
5,990 Pathe SA 1,612,063 *
1,152 Sidel SA 76,688
5,308 Societe Eurafrance SA 2,315,258
102,000 Thomson CSF 3,175,059
--------------------------
9,467,654
B-19
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
FIRE, MARINE AND CASUALTY INSURANCE - 2.95%
108,900 Assurances Generales de France $ 3,204,941
TEXTILES - 2.86%
71,835 Chargeurs International SA 3,112,289
--------------------------
TOTAL COMMON STOCKS - FRANCE $ 15,784,884
==========================
(Total Cost $14,164,224)
HONG KONG - 7.38%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 5.91%
42,400 Semi-Tech Global Co. - ADR $ 371,000
3,394,887 Semi-Tech Global Co. Ltd. 6,059,319
--------------------------
6,430,319
MANUFACTURING - TOYS & DOLLS - 1.47%
6,288,700 Playmates Toys Holdings Ltd. 1,602,310
--------------------------
TOTAL COMMON STOCKS - HONG KONG $ 8,032,629
(Total Cost $9,028,767) ==========================
RUSSIA - 5.02%
OIL & GAS FIELD EXPLORATION SERVICES - 5.02%
112,500 Chernogorneft - Sponsored ADR $ 1,125,000 *
111,200 Lukoil Oil Co. - Sponsored ADR 4,336,800
--------------------------
TOTAL COMMON STOCKS - RUSSIA $ 5,461,800
(Total Cost $2,676,975) ==========================
ITALY - 2.51%
DIVERSIFIED HOLDING COMPANIES - 2.51%
597,000 IFIL Finanziaria di Partecipazioni ordinary shares $ 1,552,515
733,300 IFIL Finanziaria di Partecipazioni savings shares 1,179,467
--------------------------
TOTAL COMMON STOCKS - ITALY $ 2,731,982
(Total Cost $2,953,751) ==========================
B-20
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
BAHAMAS - 2.45%
CRUDE PETROLEUM - 2.45%
5,300 Basic Holdings Ltd. $ 544,114 +*
69,400 Basic Petroleum International Ltd. 2,116,700 *
--------------------------
TOTAL COMMON STOCKS - BAHAMAS $ 2,660,814
(Total Cost $1,919,525) ==========================
SWEDEN - 2.38%
DIVERSIFIED HOLDING COMPANIES - 2.38%
1,300 Investor AB Series A Shares $ 52,834
62,900 Investor AB Series B Shares 2,532,437
--------------------------
TOTAL COMMON STOCKS - SWEDEN $ 2,585,271
(Total Cost $2,236,144) ==========================
UNITED KINGDOM - 0.85%
CABLE & OTHER PAY TELEVISION SERVICES - 0.32%
6,200 British Sky Broadcasting Group PLC sponsored ADR $ 347,975
LUMBER & OTHER CONSTRUCTION MATERIALS - 0.53%
115,000 Adam & Harvey Group PLC 579,954
--------------------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 927,929
(Total Cost $809,560) ==========================
TOTAL COMMON STOCKS $ 69,427,340
(Total Cost $60,940,092) ==========================
B-21
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
CLOSED-END MUTUAL FUNDS - 5.68%
UNITED KINGDOM - 5.25%
1,463,227 RIT Capital Partners PLC $ 5,712,906
--------------------------
TOTAL CLOSED-END MUTUAL FUNDS - UK 5,712,906
(Total Cost $3,498,956)
CZECHLOSLOVAKIA - 0.43%
1,200 Komercni Bank Investicni Fond 28,952
7,300 Restitucni Investicini Fond 203,532 *
18,700 Sporitelni Privatiz Investicni Fond 211,331
1,300 Zivnobanka Investicni Fond 23,777 *
--------------------------
TOTAL CLOSED-END MUTUAL FUNDS - CZECH 467,592
(Total Cost $534,486) --------------------------
TOTAL CLOSED-END MUTUAL FUNDS $ 6,180,498
(Total Cost $4,033,442) ==========================
COLLATERALIZED MORTGAGE OBLIGATIONS - 4.20%
310,602 Guardian S&L 1990-4A FRN due 06/25/20 $ 181,702
470,102 RTC Series 1991-M2 Class A1 principal only due 09/25/20 305,566
2,402,841 RTC Series 1991-M2 Class A3 principal only due 09/25/20 1,561,847
581,462 RTC Series 1991-M2 Class B principal only due 09/25/20 7,268 *
492 RTC Series 1991-M2 Class X1 interest only due 09/25/20 288,665
507 RTC Series 1991-M2 Class X2 interest only due 09/25/20 32,926
791 RTC Series 1991-M2 Class X3 interest only due 09/25/20 71,275
23,695,286 Structured Asset Sec. 1996-CFL Class X1 due 02/25/28 1,229,193
27,415,718 Structured Asset Sec. 1996-CFL Class X2 due 02/25/28 891,011
--------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 4,569,453
==========================
(Total Cost $4,704,588)
OPTIONS - 3.89%
1,028 British Sky Broadcasting Group 7.707 Puts expiring 10/13/97 $ 324,436 +
1,496 British Sky Broadcasting Group 7.920 Puts expiring 10/15/97 523,244 +
65 Chargeurs/Pathe 1400 Calls expiring 12/17/96 260,051 +
50 Gold April 550 Calls expiring 04/07/97 50 +
50 Gold April 555 Calls expiring 04/07/97 50 +
50 Gold May 555 Calls expiring 05/12/97 50 +
B-22
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
95 Nasdaq 100 Index 534.936 Puts expiring 08/04/97 $ 53,452 +
53 Nasdaq 100 Index 551.816 Puts expiring 06/04/97 28,090 +
90 Nasdaq 100 Index 552.800 Puts expiring 11/22/96 450 +
44 Nasdaq 100 Index 580.910 Puts expiring 03/18/97 22,543 +
88 Nasdaq 100 Index 583.560 Puts expiring 03/18/97 41,205 +
44 Nasdaq 100 Index 584.950 Puts expiring 03/19/97 23,658 +
52 Nasdaq 100 Index 593.440 Puts expiring 03/25/98 93,096 +
85 Nasdaq 100 Index 606.602 Puts expiring 04/24/97 79,236 +
52 Nasdaq 100 Index 629.330 Puts expiring 09/26/97 104,573 +
86 Nasdaq 100 Index 635.205 Puts expiring 10/06/97 173,707 +
51 Nasdaq 100 Index 635.350 Puts expiring 09/29/97 110,000 +
42 Nasdaq 100 Index 642.290 Puts expiring 10/20/97 95,220 +
50 Nasdaq 100 Index 653.820 Puts expiring 10/15/97 128,840 +
5,100 Pathe BSY Spread Calls expiring 08/29/97 355,577 +
4,900 Pathe BSY Spread Calls expiring 09/21/97 262,126 +
450 Philip Morris 50 Puts expiring 05/19/97 450 +
360 Philip Morris 50 Puts expiring 05/19/97 720 +
295 Philip Morris 50 Puts expiring 05/23/97 295 +
295 Philip Morris 50 Puts expiring 05/23/97 295 +
125 Ralcorp Holdings 20 Calls expiring 12/20/96 20,000 +
6 Ralcorp Holdings 20 Calls expiring 12/21/96 900
516 RJR Nabisco Holdings 25 Calls expiring 07/17/97 268,836 +
330 RJR Nabisco Holdings 25 Calls expiring 11/07/97 193,050 +
253 RJR Nabisco Holdings 25 Calls expiring 11/10/97 140,574 +
400 RJR Nabisco Holdings 25 Calls expiring 11/11/97 226,800 +
330 RJR Nabisco Holdings 25 Calls expiring 11/14/97 184,140 +
30 RJR Nabisco Holdings 25 Calls expiring 01/17/98 17,625
280 RJR Nabisco Holdings 30 Calls expiring 10/10/97 80,500 +
375 RJR Nabisco Holdings 30 Calls expiring 10/13/97 114,750 +
187 S&P 500 Index 582.000 Puts expiring 12/31/96 16,345 +
93 S&P 500 Index 616.230 Puts expiring 12/31/96 16,345 +
117 S&P 500 Index 505.575 Puts expiring 01/17/97 2,105 +
104 S&P 500 Index 554.230 Puts expiring 01/06/97 5,632 +
104 S&P 500 Index 556.650 Puts expiring 01/27/97 9,453 +
83 S&P 500 Index 556.750 Puts expiring 01/27/97 8,309 +
104 S&P 500 Index 557.110 Puts expiring 01/27/97 10,380 +
205 S&P 500 Index 581.310 Puts expiring 02/10/97 33,668 +
103 S&P 500 Index 583.990 Puts expiring 03/19/97 25,544 +
102 S&P 500 Index 585.675 Puts expiring 02/10/97 17,408 +
204 S&P 500 Index 585.810 Puts expiring 02/10/97 35,012 +
101 S&P 500 Index 589.500 Puts expiring 02/18/97 21,037 +
94 S&P 500 Index 614.700 Puts expiring 09/19/97 97,141 +
--------------------------
TOTAL OPTIONS $ 4,226,968
(Total Cost $6,217,752) ==========================
B-23
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
GOVERNMENT OBLIGATIONS - 3.74%
GBP 2,500,000 United Kingdom Treasury note due 03/11/99 $ 4,063,746
--------------------------
TOTAL GOVERNMENT OBLIGATIONS $ 4,063,746
(Total Cost $4,003,601) ==========================
PARTNERSHIPS - 1.83%
NCH Investors Fund L.P. $ 625,000 +
New Century Capital Partners II L.P. 649,980 +
Sigma/Ukraine LP 721,000 +
--------------------------
TOTAL PARTNERSHIPS $ 1,995,980
(Total Cost $2,024,316) ==========================
PURCHASED BANK DEBT & TRADE CLAIMS - 1.83%
$ 2,453,801 Maxwell Comm. Bank Debt - Baker Nye $ 272,517 +*
5,000,000 Maxwell Comm. Berlitz Obligations 550,000 +*
167,868 Maxwell Comm. Revolving Bank Debt - First Chicago 18,970 +*
943,496 Maxwell Comm. Revolving Bank Debt - Halcyon 106,970 +*
396,015 Maxwell Comm. Revolving Bank Debt - Halcyon II 44,751 +*
875,543 Maxwell Comm. Revolving Bank Debt - Lazard Freres 98,871 +*
264,059 Maxwell Comm. Revolving Bank Debt - Merrill Lynch 29,839 +*
823,981 Maxwell Comm. Revolving Bank Debt - San Paolo 93,383 +*
1,015,000 Maxwell Comm. Revolving Bank Debt - TCC Associates 114,985 +*
579,133 Maxwell Comm. Term Bank Debt - First Chicago 63,705 +*
1,678,704 Maxwell Comm. Term Bank Debt - Halcyon 184,657 +*
702,221 Maxwell Comm. Term Bank Debt - Halcyon II 77,244 +*
426,846 Maxwell Comm. Term Bank Debt - Lazard Freres 46,953 +*
468,269 Maxwell Comm. Term Bank Debt - Merrill Lynch 51,510 +*
325,093 Maxwell Comm. Term Bank Debt - San Paolo 35,760 +*
1,806,952 Maxwell Comm. Term Bank Debt - TCC Associates 198,765 +*
1,750,000 Wheeling-Pittsburgh Nonrestricted Trade Claims 0 +*
--------------------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,988,880
(Total Cost $44,043) ==========================
COMPANIES IN LIQUIDATION - 1.49%
5,682,800 Antonelli Liquidating Trust $ 22,731 +*
3,150 EHLCO Liquidating Trust 315 +*
B-24
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
$ 250,000 Lionel Corp. Subordinated Notes $ 2,500 *
12.375% due 08/01/96
364,000 Lionel Corp. Subordinated Convertible Debentures 3,640 *
8.000% due 07/15/07
DEM 15,000,000 Maxwell Comm. Corp. PLC 6.000% due 06/15/93 1,086,885 *
SFS 5,500,000 Maxwell Comm. Corp. PLC 5.000% due 06/16/95 477,129 *
1 MBO Properties Inc. Liquidating Trust $ 0 +*
100,550 Timber Realization Liquidating Trust 26,143 +*
--------------------------
TOTAL COMPANIES IN LIQUIDATION $ 1,619,343
(Total Cost $188,452) ==========================
BONDS & NOTES IN REORGANIZATION - 0.91%
$ 3,090,000 Eagle-Picher 9.500% due 03/01/17 $ 896,100 *
45,000 Mansfield Ohio IDR Eagle-Picher 12,150 *
9.750% due 10/01/00
90,130 MBL Class 4 Unsecured Claim 15,322 +*
265,000 Port Development Corp. TX Eagle-Picher 71,550 *
9.750% due 10/01/20
--------------------------
TOTAL BONDS AND NOTES IN REORGANIZATION $ 995,122
(Total Cost $1,311,476) ==========================
WARRANTS - 0.11%
13,900 Alza Corporation Warrants Exp. 12/31/99 $ 1,738
60,000 Five Arrows Chile Inv. Trust Warrants Exp. 5/31/99 31,200
240,300 Jardine Strategic Holdings Warrants Exp. 5/02/98 69,687
800 Letchworth Indep Bancshares Warrants Exp. 12/31/97 5,400
11,500 Scania AB-B Warrants Exp. 06/04/99 10,833
--------------------------
TOTAL WARRANTS $ 118,858
(Total Cost $91,362) ==========================
CORPORATE BONDS - 0.01%
$ 11,000 Chartwell Contingent Interest Note 8.000% due 06/30/06 $ 4,702 +
--------------------------
TOTAL CORPORATE BONDS $ 4,702
(Total Cost $5,372) ==========================
B-25
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
OCTOBER 31, 1996
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
TEMPORARY INVESTMENTS - 12.65%
CANADIAN GOVERNMENT OBLIGATIONS - 4.64%
CAD 6,800,000 Canadian Treasury Bill due 01/23/97 $ 5,047,464
U S GOVERNMENT OBLIGATIONS - 4.58%
$ 3,000,000 U S Treasury Bill due 11/14/96 2,994,800 ~
2,000,000 U S Treasury Bill due 12/12/96 1,988,634 ~
--------------------------
4,983,434
REPURCHASE AGREEMENT - 3.43%
2,340,000 Repurchase Agreement with Chase Manhattan Bank
dated 10/31/96; collateralized by U.S. Government
and/or Federal agency securities; rate 5.32%;
matures 11/01/96; repurchase amount $3,734,552 3,734,000
--------------------------
TOTAL TEMPORARY INVESTMENTS $ 13,764,898
(Total Cost $13,732,673) ==========================
TOTAL INVESTMENTS - 100.15% $ 108,955,788
(Total Cost of Investments $97,297,169) ==========================
</TABLE>
* Non-income producing security.
+ Restricted Securities - securities not registered under the
Securities Act of 1933. See Note D in the Notes to Financial
Statements.
~ A portion of the security is serving as collateral or is segregated
for securities sold short.
Foreign Currency Abbreviations
------------------------------
CAD Canadian Dollar
DEM Deutschemark
GBP British Pounds
SFS Swiss 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.
See notes to financial statements.
B-26
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1996
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
------------------ ------------------
<S> <C> <C> <C> <C>
CONTRACTS TO SELL
GBP 5,609,679 British Pound Sterling due 11/29/96 $ 9,124,255 $ (247,490)
(Receivable amount $8,876,765 )
CAD 6,750,046 Canadian Dollar due 11/29/96 5,050,010 (24,311)
(Receivable amount $5,025,699)
FRF 85,800,000 French Franc due 11/29/96 16,776,260 148,028
(Receivable amount $16,924,288)
ITL 3,839,000,000 Italian Lira due 11/29/96 2,522,171 (4,571)
(Receivable amount $2,517,600)
SEK 17,000,000 Swedish Krona due 12/13/96 2,582,260 (39,748)
(Receivable amount $2,542,512)
------------------ ------------------
TOTAL CONTRACTS TO SELL $ 36,054,956 $ (168,092)
================== ==================
(Receivable amount $35,886,864)
</TABLE>
See notes to financial statements.
B-27
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SHARES, MARKET
UNITS OR FACE VALUE ($) VALUE
----------------------- -----
<S> <C> <C> <C> <C>
COMMON STOCK - 3.59%
21,975 British Sky Broadcasting ADR (United Kingdom) $ 1,233,347
172,450 Kaiser Aluminum Corporation 1,918,506
23,300 RJR Nabisco Holdings Corp. 672,788
1,152 Sidel SA (France) 76,688
--------------------------
TOTAL SECURITIES SOLD SHORT $ 3,901,329
(Total Proceeds from Securities Sold Short $4,132,636) ==========================
</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-28
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Baupost Fund (the Fund) was established as a Massachusetts business trust
under an Agreement and Declaration of Trust dated June 29, 1990, and is
registered under the Investment Company Act of 1940, as amended, as a no-load,
nondiversified, open-end management investment company. The Fund is the
successor organization to Baupost Limited Partnership 1985 E-1 (the
Partnership).
The 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 is engaged in short-selling which obligates the Fund to
replace the security borrowed by purchasing the security at current market
value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates. Until the Fund replaces the borrowed security, the
Fund maintains daily, in a segregated account with its custodian, cash or
securities sufficient to cover its short position. At October 31,1996, the Fund
has approximately $4.5 million of U.S. Treasury bills and $3.7 million of common
stock in a segregated account relating to its short positions.
B-29
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Securities sold short at October 31, 1996 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.
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 aggrement.
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
B-30
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Fund is relieved from federal income tax provided that substantially all of its
taxable income is distributed to shareholders. Therefore, no provision has been
made for federal income taxes.
The Fund's income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to different treatment for
certain of the Fund's foreign securities. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits, which result in temporary overdistributions for financial statement
purposes are classified as distributions in excess of net investment income or
accumulated net realized gains. During the year ended October 31, 1996, $494,622
was reclassified from distributions in excess of net investment income to
accumulated undistributed net realized gain on investments and foreign currency
transactions, 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.
Management and administrative fees for the period November 1, 1995 through
October 31, 1996 amounted to $991,872 and $247,968, respectively.
B-31
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE C--INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the period ended October 31, 1996 aggregated
$106,797,967 and $102,485,242, respectively.
For federal income tax purposes, the identified cost of investments at October
31, 1996 was $99,721,467. Net unrealized appreciation, on a federal income tax
basis, for all securities and securities sold short was as follows:
Year Ended
October 31, 1996
----------------
Gross unrealized appreciation $14,671,154
Gross unrealized depreciation (5,230,845)
-----------
Net unrealized appreciation $ 9,440,309
===========
NOTE D--RESTRICTED SECURITIES
At October 31, 1996 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
Purchased Bank Debt & Trade Claims: Cost October 31, 1996 Date
- ---------------------------------- ---- ---------------- ----
<S> <C> <C> <C>
Maxwell Communications Corporate Debt $ 44,044 $1,988,881 11/22/93
Wheeling-Pittsburgh
Nonrestricted Trade Claims 0 0 05/11/89
Corporate Bonds:
- ----------------
Chartwell Inc. 8.00% due 06/30/06 5,372 4,702 12/21/95
Options:
- --------
British Sky Broadcasting Puts Expiring
10/13/97 - 10/15/97 588,122 847,680 10/11/96
Chargeurs/Pathe Call Expiring 12/17/96 199,402 260,051 09/17/96
Gold Calls Expiring 04/07/97 - 05/12/97 6,275 150 11/06/95
Nasdaq 100 Puts Expiring 11/22/96 - 10/20/97 1,271,424 954,070 05/24/96
Pathe/BSY Spread Calls Expiring 08/29/97 - 09/21/97 787,800 617,703 08/27/96
Philip Morris Puts Expiring 05/19/97 - 05/23/97 183,355 1,760 05/19/95
Ralcorp Holdings, Inc. Call Expiring 12/20/96 45,375 20,000 06/24/96
RJR Nabisco Calls Expiring 07/17/97- 11/14/97 1,583,425 1,208,650 05/08/95
S & P 500 Index Puts Expiring 12/31/96 - 09/19/97 1,529,440 298,379 07/17/95
</TABLE>
B-32
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1996
NOTE D--RESTRICTED SECURITIES -- CONTINUED
<TABLE>
<CAPTION>
Earliest
Value at Acquisition
Cost October 31, 1996 Date
---- ---------------- ----
<S> <C> <C> <C>
Partnerships:
- -------------
NCH Investors Fund, L.P. $ 651,806 $ 625,000 12/18/95
New Century Capital Partners II, L.P. 651,510 649,980 11/30/95
Sigma Ukraine, LP 721,000 721,000 05/14/96
Common Stock:
- -------------
Basic Holdings Limited 346,885 544,114 07/06/95
Louise's, Inc. 0 1,542 07/15/96
The Homestake Oil & Gas Company 113,815 99,450 02/10/94
The Homestake Royalty Corporation 241,587 205,270 02/10/94
Companies in Liquidation:
- -------------------------
Antonelli Liquidating Trust 86,490 22,731 12/02/93
Ehlco Liquidating Trust 431 315 01/30/89
MBO Properties Inc. Liquidating Trust 0 0 11/25/92
Timber Realization Liquidating Trust 0 26,143 08/03/87
Bonds & Notes in Reorganization:
- --------------------------------
MBL Class 4 usecured claim 0 15,322 06/18/96
---------- ----------
TOTAL RESTRICTED SECURITIES $9,057,558 $9,112,893
(8.38% Net Assets) ========== ==========
</TABLE>
The Fund does not have the right to demand that such securities be registered.
The Fund does not anticipate any significant costs associated with the
disposition of these securities.
NOTE E--CAPITAL SHARE TRANSACTIONS
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
October 31, 1996 October 31, 1995
---------------- ----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 1,109,681.050 $15,369,110.78 1,160,287.242 $14,670,652
Shares issued in
reinvestment of
dividends 454,829.173 5,799,072.03 798,660.448 9,823,524
Shares redeemed (1,132,554.464) (15,745,255.86) (1,026,796.162) (13,143,641)
-------------- -------------- -------------- -----------
NET INCREASE 431,955.759 $ 5,422,926.95 932,151.528 $11,350,535
=========== ============== =========== ===========
</TABLE>
B-33
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA (a)
Net Asset Value, beginning of period $13.47 $14.33 $14.77 $12.56 $11.97
------ ------ ------ ------ ------
Income from investment operations
Net Investment income 0.41 0.25 0.22 0.28 0.24
Net realized and unrealized gain 2.43 0.71 1.23 2.76 0.88
---- ---- ---- ---- ----
Total from investment operations 2.84 0.96 1.45 3.04 1.12
---- ---- ---- ---- ----
Less distributions
From net investment income 0.28 0.25 0.46 0.22 0.53
In excess of net investment income - 0.08 - - -
From net realized gain 0.65 1.49 1.43 0.61 -
---- ---- ---- ---- ----
Total distributions 0.93 1.82 1.89 0.83 0.53
---- ---- ---- ---- ----
Net Asset Value, end of period $15.38 $13.47 $14.33 $14.77 $12.56
====== ====== ====== ====== ======
Total Return 22.51% 7.91% 11.06% 25.45% 9.51%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period
(in thousands) $108,788 $89,439 $81,787 $75,378 $46,942
Ratio of expenses to average net assets 1.50% 1.54% 1.53% 1.52% 1.50%
Total expenses to average net assets 1.50% 1.54% 1.55% 1.63% 1.72%
Ratio of net investment income to
average net assets 2.27% 1.60% 1.32% 2.29% 2.07%
Ratio of net investment income
excluding waiver of management
fee to average net assets 2.27% 1.60% 1.30% 2.17% 1.85%
Portfolio turnover rate 120% 106% 161% 183% 137%
Average commission rate (b) $.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 a fund is required to
disclose its average commission rate per share for security trades on which
commissions are charged.
B-34
THE BAUPOST FUND
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(A) (1) Financial Statements:
Statement of Assets and Liabilities as of October 31, 1996(a)
Statement of Operations for the year ended October 31, 1996(a)
Statement of Changes in Net Assets for the years ended October 31,
1996 and October 31, 1995(a)
Schedule of Investments as of October 31, 1996(a)
Schedule of Forward Foreign Currency Contracts as of October 31,
1996(a)
Schedule of Securities Sold Short as of October 31, 1996(a)
Notes to Financial Statements (a)
Financial Highlights -- Years Ended October 31, 1996, 1995, 1994,
1993 and 1992(a) and (b) 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.*
3. None.
4. (a) Portions of Agreement and Declaration of
Trust relating to shareholders' rights.*
(b) Portions of By-laws relating to
shareholders' rights.*
5. Management Contract dated as of February 1, 1991
between the Trust and The Baupost Group, Inc
("Baupost").*
6. None.
7. None.
8. (a) Custodian Agreement between the Trust and
United States Trust Company of New York.
(b) First Amendment to Mutual Fund Custody
Agreement between the Trust and United
States Trust Company of New York.
(c) Custodian Agreement (Russia) between the
Trust and Credit Suisse First Boston.
(d) Custodian Agreement (Bermuda) between the
Trust and The Bank of N.T. Butterfield &
Son Ltd.
9. Transfer Agency and Administrative Services
Agreement between the Trust and Baupost.*
10. Opinion and Consent of Ropes & Gray.*
11. Consent of Ernst & Young LLP.
12. None.
13. Subscription Agreement.*
14. None.
15. None.
16. Schedule 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-
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of January 31, 1997: 468.
Item 27. Indemnification
Article VIII of the Trust's Agreement and Declaration of
Trust (Exhibit 1 hereto and incorporated herein by
reference) provides for indemnification of its Trustees
and officers. The effect of the relevant section of
Article VIII of the Agreement and Declaration of Trust is
to provide indemnification for each of the Trust's
Trustees and officers against liabilities and counsel fees
reasonably incurred in connection with the defense of any
legal proceeding in which such Trustee or officer may be
involved by reason of being or having been a Trustee or
officer, except that no Trustee or officer shall be
indemnified against any liability to the Trust or its
shareholders to which such Trustee or officer otherwise
would be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Trustee's or
officer's office.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to
Trustees, officers and controlling persons of the Trust
pursuant to the foregoing provisions, or otherwise, the
Trust has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the Trust of expenses incurred or paid by a
Trustee, officer or controlling person of the Trust in the
successful defense of any action, suit or proceeding) is
asserted by such Trustee, officer or controlling person in
connection with the securities being registered, the Trust
will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
-3-
Item 28. Business and Other Connections of Investment Adviser
The Baupost Group, Inc. ("Baupost") is the investment
adviser to the Trust and its business is summarized under
the caption "Management of the Fund" in the Prospectus
constituting Part A of this Registration Statement, which
summary is incorporated herein by reference.
The business and other connections for the past two fiscal
years of each officer and director of Baupost are listed
below.
Name Business and other connections
- ---- ------------------------------
Jordan J. Baruch
Director, Assistant Secretary Owner, Jordan Baruch Associates, 1200
18th Street, N.W., Washington, D.C.
20036.
Jo-An B. Bosworth
Vice President, Secretary,
Clerk 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 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 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; President, SAK Corporation, 44
Brattle Street, Cambridge, MA 02138.
-4-
Name Business and other connections
- ---- ------------------------------
Thomas A. Knott
Vice President Limited Partner, Baupost Associates, 44
Brattle Street, Cambridge, MA 02138
Thomas W. Blumenthal
Vice President 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 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, Chatanooga, TN
37421; Sole Proprietor, William J.
Poorvu, 44 Brattle Street, P.O. Box
380828, Cambridge, MA 02238; Partner,
various private real estate
partnerships.
Howard H. Stevenson
Director, Vice Chairman,
Treasurer 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, OK 74063. Formerly: Director,
Passamaquoddy Technologies, 178 Middle
Street, Portland, ME 04112; Trustee,
various individual trusts. Formerly:
Director, Preco Corp., 100 University
Drive, Amherst, MA 01002; Senior
Associate Dean and Director of Financial
and Information System, Harvard
University
-5-
Name Business and other connections
- ---- ------------------------------
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 Vice President/Director, Boston
Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138; Limited Partner,
Baupost Associates, 44 Brattle Street,
Cambridge, MA 02138.
Item 29. Principal Underwriters
Not Applicable.
Item 30. Location of Accounts and Records
Certain accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act
of 1940 and the Rules promulgated thereunder are
maintained by The Baupost Group, Inc., 44 Brattle Street,
Cambridge, Massachusetts 02238. Records relating to the
duties of the Registrant's custodian are maintained by
Chase Manhattan Bank, N.A., One Chase Manhattan Plaza, New
York, New York 10081, and records relating to the duties
of the Registrant's transfer agent are maintained by The
Baupost Group, Inc., 44 Brattle Street, Cambridge,
Massachusetts 02238.
Item 31. Management Services
Not Applicable.
-6-
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-
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment
to its Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cambridge and The Commonwealth of
Massachusetts, on the 27th day of February, 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.
Signatures Title Date
- ---------- ----- ----
/s/ Seth A. Klarman President (Principal February 27, 1997
- ------------------------- Executive Officer
Seth A. Klarman and Trustee)
* Trustee and Treasurer February 27, 1997
- ------------------------- (Principal Financial and
William J. Poorvu Accounting Officer)
* Trustee February 27, 1997
- -------------------------
Howard H. Stevenson
* Trustee February 27, 1997
- -------------------------
Samuel Plimpton
* Trustee February 27, 1997
- -------------------------
David Auerbach
* Trustee February 27, 1997
- -------------------------
Robert Ackerman
* Trustee February 27, 1997
- -------------------------
Jay Light
*By: /s/ Seth A. Klarman February 27, 1997
-------------------------
Seth A. Klarman
Attorney-in-fact
-8-
THE BAUPOST FUND
Index to Exhibits
Sequential
Exhibit No. Description Page No.
- ----------- ----------- --------
8(a) Custodian Agreement
8(b) First Amendment to Custodian Agreement
8(c) Russian Custodian Agreement
8(d) Bermudian Custodian Agreement
11 Auditor's Consent
16 Schedule of Performance
Calculations
17 Financial Data Schedule
-9-
MUTUAL FUND CUSTODY AGREEMENT
-----------------------------
THIS AGREEMENT is made as December 11, 1990 by and between The Baupost
Fund, a Massachusetts business trust (the "Fund"), and UNITED STATES TRUST
COMPANY OF NEW YORK, a New York State chartered bank and trust company ("U.S.
Trust").
WITNESSETH
----------
WHEREAS, the Fund is registered as a open-end non-diversified,
management investment company under the Investment Company Act of 1940, as
amended ("the 1940 Act"); and
WHEREAS, the Fund desires to retain U.S. Trust to serve as the Fund's
custodian and U.S. Trust is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints U.S. Trust to act as custodian
of its portfolio securities, cash and other property on the terms set
forth in this Agreement. U.S. Trust accepts such appointment and agrees
to furnish the services herein set forth in return for the compensation
as provided in Paragraph 21 of this Agreement.
2. Delivery of Documents. The Fund has furnished or will
furnish U.S. Trust with copies properly certified or
authenticated of each of the following:
(a) Resolutions of the Fund's Board of Trustees authorizing
the appointment of U.S. Trust as Custodian of the portfolio
securities, cash and other property of the Fund and approving
this Agreement:
(b) Incumbency and signature certificates identifying and
containing the signatures of the Fund's officers and/or the
persons authorized to sign Written Instructions, as
hereinafter defined, on behalf of the Fund;
(c) The Fund's Agreement and Declaration of Trust filed with
the Secretary of the State of the Commonwealth of
Massachusetts and all amendments thereto (such Agreement and
Declaration of Trust, as currently in effect and from time to
time amended, is herein called the "Declaration of Trust");
(d) The Fund's By-Laws and all amendments thereto (such
By-Laws, as currently in effect and as they shall from time to
time be amended, are herein called the "By-Laws");
(e) Resolutions of the Fund's Board of Trustees appointing the
investment advisor of the Fund and resolutions of the Fund's
Board of Trustees and the Fund's shareholder approving the
proposed Investment Advisory Agreement between the Fund and
the advisor dated as of December 11, 1990 (the "Advisory
Agreement");
(f) The Advisory Agreement;
(g) The Fund's Notification of Registration filed pursuant to
Section 8(a) of the 1940 Act, as filed with the SEC;
(h) The Fund's Registration Statement on Form N-1A under the
1940 Act and the Securities Act of 1933, as amended ("the 1933
Act"), as filed with the SEC; and
(i) The Fund's most recent prospectus including all amendments
and supplements thereto (the "Prospectus").
The Fund will furnish U.S. Trust from time to time with copies of all
amendments of or supplements to the foregoing, if any. The Fund will also
furnish U.S. Trust with a copy of the opinion of counsel for the Fund with
respect to the validity of the Fund's shares of beneficial interest, no par
value ("the Shares"), and the status of such Shares under the 1933 Act, and any
other applicable federal law or regulation.
3. Definitions.
(a) "Authorized Person". As used in this Agreement, the term
"Authorized Person" means the Fund's President, Treasurer and
any other person, whether or not any such person is an officer
or employee of the Fund, duly authorized by the Board of
Trustees of the Fund to give Written Instructions on behalf of
the Fund and listed on Attachment B which may be amended from
time to time.
(b) "Book-Entry System". As used in this Agreement, the term
"Book-Entry System" means the Federal Reserve/Treasury
book-entry system for United States and Federal agency
securities, its successor or successors and its nominee or
nominees.
(c) "Property". The term "Property", as used in this
Agreement, means:
(i) any and all securities and other property of the
Fund which may from time to time deposit, or cause to
be deposited, with U.S. Trust or which U.S. Trust may
from time to time hold for the Fund;
(ii) all income in respect of any other such
securities or other property;
(iii) all proceeds of the sales of any of such
securities or other property; and
(iv) all proceeds of the sale of securities issued by
the Fund, which are received by U.S. Trust from time
to time from or on behalf of the Fund.
(d) "Securities Depository". As used in this Agreement, the
term "Securities Depository" shall mean The Depository Trust
Company, which is a clearing agency registered with the SEC,
or its successor or successors and its nominee or nominees;
and shall also mean any other registered clearing agency, its
successor or successors specifically identified in a certified
copy of a resolution of the Fund's Board of Trustees approving
deposits by U.S. Trust therein.
(e) "Written Instructions". The term "Written Instructions" as
used in this Agreement, means instructions
(i) delivered by mail, tested telegram, cable, telex,
facsimile sending device, and received by U.S. Trust,
signed by two Authorized Persons or by persons
reasonably believed by U.S. Trust to be Authorized
Persons; or
(ii) transmitted electronically through the U.S.
Trust Asset Management System or any similar
electronic instruction system acceptable to U.S.
Trust.
4. Delivery and Registration of the Property. The Fund will deliver or
cause to be delivered to U.S. Trust all securities and all monies owned
by it, including cash received for the issuance of its Shares, at any
time during the period of this Agreement, except for securities and
monies to be delivered to any subcustodian appointed pursuant to
Paragraph 7 hereof. U.S. Trust will not be responsible for such
securities and such monies until actually received by it. All
securities delivered to U.S. Trust or to any such subcustodian (other
than in bearer form) shall be registered in the name of the Fund or in
the name of a nominee of the Fund or in the name of U.S. Trust or any
nominee of U.S. Trust (with or without indication of fiduciary status)
or in the name of any subcustodian or any nominee of such subcustodian
appointed pursuant to Paragraph 7 hereof or shall be properly endorsed
and in form for transfer satisfactory to U.S. Trust.
5. Voting Rights. With respect to all securities, however registered,
it is understood that the voting and other rights and powers shall be
exercised by the Fund. U.S. Trust's only duty shall be to mail to the
Fund any documents received, including proxy statements and offering
circulars, with any proxies for securities registered in a nominee name
executed by such nominee. Where warrants, options, tenders or other
securities have fixed expiration dates, the Fund understands that in
order for U.S. Trust to act, U.S. Trust must receive the Fund's
instructions at its offices in New York, addressed as U.S. Trust may
from time to time request, by no later than noon (NY City time) on the
last scheduled date to act with respect thereto. Absent U.S. Trust's
timely receipt of such instructions, such instruments will expire
without liability to U.S. Trust.
6. Receipt and Disbursement of Money.
(a) U.S. Trust shall open and maintain a custody account for
the Fund, subject only to draft or order by U.S. Trust acting
pursuant to the terms of this Agreement, and shall hold in
such account, subject to the provisions hereof, all cash
received by it from or for the Fund. U.S. Trust shall make
payments of cash to, or for the account of, the Fund from such
cash only (i) for the purchase of securities for the Fund as
provided in Paragraph 12 hereof; (ii) upon receipt of Written
Instructions, for the payment of dividends or other
distributions of shares, or for the payment of interest,
taxes, administration, distribution or advisory fees or
expenses which are to be borne by the Fund under the terms of
this Agreement, any advisory agreement to which the Fund is a
party, or any administration agreement; (iii) upon receipt of
Written Instructions for payments in connection with the
conversion, exchange or surrender of securities owned or
subscribed to by the Fund and held by or to be delivered to
U.S. Trust; (iv) to a subcustodian pursuant to Paragraph 7
hereof; or (v) upon receipt of Written Instructions for other
trust purposes.
(b) U.S. Trust is hereby authorized to endorse and collect all
checks, drafts or other orders for the payment of money
received as custodian for the Fund.
7. Receipt of Securities.
(a) Except as provided by Paragraph 8 hereof, U.S. Trust shall
hold all securities and non-cash property received by it for
the Fund. All such securities and
non-cash property are to be held or disposed of by U.S. Trust
for the Fund pursuant to the terms of this Agreement. In the
absence of Written Instructions accompanied by a certified
resolution authorizing the specific transaction by the Fund's
Board, U.S. Trust shall have no power or authority to
withdraw, deliver, assign, hypothecate, pledge or otherwise
dispose of any such securities and investments, except in
accordance with the express terms provided for in this
Agreement. In no case may any trustee, officer, employee or
agent of the Fund withdraw any securities. In connection with
its duties under this Paragraph 7 and with the approval of the
Fund, U.S. Trust may, at its own expense, enter into
subcustodian agreements with other banks or trust companies
for the receipt of certain securities and cash to be held by
U.S. Trust for the account of the Fund pursuant to this
Agreement; provided that each such bank or trust company has
an aggregate capital, surplus and undivided profits, as shown
by its last published report, of not less than twenty million
dollars ($20,000,000) and that such bank or trust company
agrees with U.S. Trust to comply with all relevant provisions
of the 1940 Act and applicable rules and regulations
thereunder. U.S. Trust will be liable for acts or omissions of
any such subcustodian. (b) Promptly after the close of
business on each day U.S. Trust shall furnish the Fund with
confirmations and a summary of all transfers to or from the
account of the Fund during said day. Where securities are
transferred to the account of the Fund established at a
Securities Depository or the Book Entry System pursuant to
Paragraph 8 hereof, U.S. Trust shall also by book-entry or
otherwise identify as belonging to the Fund the quality of
securities in a fungible bulk of securities registered in the
name of U.S. Trust (or its nominee) or shown in U.S. Trust's
account on the books of a Securities Depository or the
Book-Entry System. At least monthly and from time to time,
U.S. Trust shall furnish the Fund with a detailed statement of
the Property held for the Fund under this Agreement.
8. Use of Securities Depository or the Book-Entry System. The Fund
shall deliver to U.S. Trust a certified resolution of the Board of
Trustees of the Fund approving, authorizing and instructing U.S. Trust
on a continuous and ongoing basis until instructed to the contrary by
Written Instructions actually received by U.S. Trust (i) to deposit in
a Securities Depository or the Book-Entry System all securities of the
Fund eligible for deposit therein and (ii) to utilize a Securities
Depository or the Book-Entry System to the extent possible in
connection with the performance of its duties hereunder, including
without limitation settlements of purchases and sales of securities by
the Fund, and deliveries and returns of securities collateral in
connection with borrowings. Without limiting the generality of such
use, it is agreed that the following provisions shall apply thereto:
(a) Securities and any cash of the Fund deposited in a
Securities Depository or the Book-Entry System will at all
times be segregated from any assets and cash controlled by
U.S. Trust in other than a fiduciary or custodian capacity but
may be commingles with other assets held in such capacities.
U.S. Trust will effect payment for securities and receive and
deliver securities in accordance with
accepted industry practices in the place where the transaction
is settled, unless the Fund has given U.S. Trust Written
Instructions to the contrary.
(b) All books and records maintained by U.S. Trust which
relate to the Fund's participation in a Securities Depository
or the Book-Entry System will at all times during U.S. Trust's
regular business hours be open to the inspection of the Fund's
duly authorized employees or agents, and the Fund will be
furnished with all information in respect of the services
rendered to it as it may require.
(c) U.S. Trust will send to the Fund all reports,
confirmations and records as required by Rule 17f-4 under the
1940 Act.
9. Instructions Consistent With the Declaration of Trust, etc. Unless
otherwise provided in this Agreement, U.S. Trust shall act only upon
Written Instructions. U.S. Trust may assume that any Written
Instructions received hereunder are not in any way inconsistent with
any provision of the Declaration of Trust or By-Laws or any vote or
resolution of the Fund's Board of Trustees, or any committee thereof.
U.S. Trust shall be entitled to rely upon any Written Instructions
actually received by U.S. Trust pursuant to this Agreement. The Fund
agrees that U.S. Trust shall incur no liability in acting upon Written
Instructions given to U.S. Trust. In accord with instructions from the
Fund, as required by accepted industry practice or as U.S. Trust may
elect in effecting the execution of Fund instructions, advances of cash
or other Property made by U.S. Trust, arising from the purchase, sale,
redemption, transfer or other disposition of Property of the Fund, or
in connection with the disbursement of funds to any party, or in
payment of fees, expenses, claims or liabilities owed to U.S. Trust by
the Fund, or to any other party which has secured judgment in a court
of law against the Fund which creates an overdraft in the account of
the Fund or overdelivery of Property shall be deemed a loan by U.S.
Trust to the Fund (but only to the extent permitted by the Fund's
Prospectus and Statement of Additional Information as time to time in
effect) payable on demand, bearing interest at such rate customarily
charged by U.S. Trust for similar loans.
The Fund agrees that test arrangements, authentication methods or to
other security devices to be used with respect to instructions which
the Fund may give by telephone, telex, TWX, facsimile transmission,
bank wire or other teleprocess, or through an electronic instruction
system, shall be processed in accordance with terms and conditions for
the use of such arrangements, methods or devices as U.S. Trust may put
into effect and modify from time to time. The Fund shall safeguard any
test keys, identification codes or other security devices which U.S.
Trust makes available to the Fund and agrees that the Fund shall be
responsible for any loss, liability or damage incurred by U.S. Trust or
by the Fund as a result of U.S. Trust's acting in accordance with
instructions from any unauthorized person using the proper security
device unless such loss, liability or damage was incurred solely as a
result of U.S. Trust's negligence or willful misconduct. U.S. Trust may
electronically record, but shall not be obligated to so record, any
instructions given by telephone and any other telephone discussions
with respect to the Fund's account. In the event that the Fund uses
U.S. Trust's Asset Management System or any successor electronic
communications or information system, the Fund agrees that U.S. Trust
is not responsible for the consequences of the failure of that system
to perform for
any reason, beyond the reasonable control of U.S. Trust, or the failure
of any communications carrier, utility, or communications network. In
the event that that system is inoperable, the Fund agrees that it will
accept the communication of transaction instructions by telephone,
facsimile transmission on equipment compatible to U.S. Trust's
facsimile receiving equipment or by letter, at no additional charge to
the Fund.
10. Transactions Not Requiring Instructions. U.S. Trust is authorized
to take the following action without Written Instructions:
(a) Collection of Income and Other Payments. U.S. Trust shall:
(i) collect and receive for the account of the Fund,
all income and other payments and distributions,
including (without limitation) stock dividends,
rights, warrants and similar items, included or to be
included in the Property of the Fund, and promptly
advise the Fund of such receipt and shall credit such
income, as collected, to the Fund. From time to time,
U.S. Trust may elect to credit, but shall not be so
obligated, the account with interest, dividends or
principal payments on payable or contractual
settlement date, in anticipation of receiving same
from a payor, central depository, broker or other
agent employed by the Fund or U.S. Trust. Any such
crediting and posting shall be at the Fund's sole
risk, and U.S. Trust shall be authorized to reverse
any such advance posting in the event it does not
receive good funds from any such payor, central
depository, broker or agent of the Customer.
(ii) with respect to securities of foreign issue,
effect collection of dividends, interest and other
income, and to notify the Fund of any call for
redemption, offer of exchange, right of subscription,
reorganization, or other proceedings affecting such
securities, or any default in payments due thereon.
It is understood, however, that U.S. Trust shall be
under no responsibility for any failure or delay in
effecting such collections or giving such notice with
respect to securities of foreign issue, regardless of
whether or not the relevant information is published
in any financial service available to it unless such
failure or delay is due to its negligence or willful
misconduct. Collections of income in foreign currency
are, to the extent possible, to be converted into
United States dollars unless U.S. Trust is otherwise
instructed in writing, and in effecting such
conversion U.S. Trust may use such methods or
agencies as it may see fit, including the facilities
of its own foreign division at customary and
competitive rates. All risk and expenses incident to
such collection and conversion are for the account of
the Fund and U.S. Trust shall have no responsibility
for fluctuations in exchange rates affecting any such
conversion.
(iii) endorse and deposit for collection in the name
of the Fund, checks, drafts, or other orders for the
payment of money on the same day as received;
(iv) receive and hold for the account of the Fund all
securities received by the Fund as a result of a
stock dividend, share split-up or reorganization,
recapitalization, readjustment of other rearrangement
or distribution of rights or similar securities
issued with respect to any portfolio securities of
the Fund held by U.S. Trust hereunder;
(v) present for payment and collect the amount
payable upon all securities which may mature or be
called, redeemed or retired, or otherwise become
payable on the date such securities become payable;
(vi) take any action which may be necessary and
proper in connection with the collection and receipt
of such income and other payments and the endorsement
for collection of checks, drafts and other negotiable
instruments;
(vii) with respect to domestic securities, to
exchange securities in temporary form for securities
in definitive form, to effect an exchange of the
shares where the par value of stock is changed, and
to surrender securities at maturity or when advised
of earlier call for redemption, against payment
therefor in accordance with accepted industry
practice. The Fund understands that U.S. Trust
subscribes to one or more nationally recognized
services that provide information with respect to
calls for redemption of bonds or other corporate
actions. U.S. Trust shall not be liable for failure
to redeem any called bond or take other action if
notice of such call or action was not provided by any
service to which it subscribes provided that U.S.
Trust shall have acted in good faith without
negligence and in accordance with "Street Practice".
U.S. Trust shall have no duty to notify the Fund of
any rights, duties, limitations, conditions or other
information set forth in any security (including
mandatory or optional put, call and similar
provisions), but U.S. Trust shall forward to the Fund
any notices or other documents subsequently received
in regard to any such security. When fractional
shares of stock of a declaring corporation are
received as a stock distribution, U.S. Trust is
authorized to sell the fraction received and credit
the Fund's account. Unless specifically instructed to
the contrary in writing, U.S. Trust is authorized to
exchange securities in bearer form for securities in
registered form. If any Property registered in the
name of a nominee of U.S. Trust is called for partial
redemption by the issuer of such Property, U.S. Trust
is authorized to allot the called portion to the
respective beneficial holders of the Property in such
manner deemed to be fair and equitable by U.S. Trust
in its sole discretion.
(b) Miscellaneous Transactions. U.S. Trust is authorized to
deliver or cause to be delivered Property against payment or
other consideration or written receipt therefore in the
following cases:
(i) for examination by a broker selling for the
account of the Fund in accordance with street
delivery custom;
(ii) for the exchange of interim receipts or
temporary securities for definitive securities;
(iii) for transfer of securities into the name of the
Fund or U.S. Trust or a nominee of either, or for
exchange of securities for a different number of
bonds, certificates, or other evidence, representing
the same aggregate face amount or number of units
bearing the same interest rate, maturity date and
call provisions, if any; provided that, in any such
case, the new securities are to be delivered to U.S.
Trust.
11. Transactions Requiring Instructions. Upon receipt of Written
Instructions and not otherwise, U.S. Trust, directly or through the use
of a Securities Depository or the Book-Entry System, shall:
(a) Execute and deliver to such persons as may be designated
in such Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the
authority of the Fund as owner of any securities may be
exercised;
(b) Deliver any securities held for the Fund against receipt
of other securities or cash issued or paid in connection with
the liquidation, reorganization, refinancing, merger,
consolidation or recapitalization of any corporation, or the
exercise of any conversion privilege;
(c) Deliver any securities held for the Fund to any protective
committee, reorganization committee or other person in
connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any
corporation, against receipt of such certificates of deposit,
interim receipts or other instruments or documents as may be
issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Fund
and take such other steps as shall be stated in said
instructions to be for the purpose of effectuating any duly
authorized plan of liquidation, reorganization, merger,
consolidation or recapitalization of the Fund;
(e) Release securities belonging to the Fund to any bank or
trust company for the purpose of pledge or hypothecation to
secure any loan incurred by the Fund; provided, however, that
securities shall be released only upon payment to U.S. Trust
of the monies borrowed, except that in cases where additional
collateral is required to secure a borrowing already made,
subject to proper prior authorization, further securities may
be released for that purpose; and pay such loan upon
redelivery to it of the securities pledged or hypothecated
therefor and upon surrender of the note or notes evidencing
the loan; and
(f) Deliver any securities held for the Fund upon the exercise
of a covered call option written by the Fund on such
securities.
12. Purchase of Securities. Promptly after each purchase of securities
by the investment advisor, the Fund shall deliver to U.S. Trust (as
Custodian) Written Instructions specifying with respect to each such
purchase: (a) the name of the issuer and the title of the securities,
(b) the number of shares or the principal amount purchased and accrued
interest, if any, (c) the dates of purchase and settlement, (d) the
purchase price per unit, (e) the total amount payable upon such
purchase, (f) the name of the person from whom or the broker through
whom the purchase was made and (g) the fund for which the purchase was
made. U.S. Trust shall upon receipt of securities purchased by or for
the Fund pay out of the monies held for the account of the Fund the
total amount payable to the person from whom or the broker through whom
the purchase was made, provided that the same conforms to the total
amount payable as set forth in such Written Instructions.
13. Sales of Securities. Promptly after each sale of securities by the
investment advisor, the Fund shall deliver to U.S. Trust (as Custodian)
Written Instructions, specifying with respect to each such sale: (a)
the name of the issuer and the title of the security, (b) the number of
shares or principal amount sold, and accrued interest, if any, (c) the
date of sale, (d) the sale price per unit, (e) the total amount payable
to the Fund upon such sale, (f) the name of the broker through whom or
the person to whom the sale was made and (g) the fund for which the
sale was made. U.S. Trust shall deliver the securities upon receipt of
the total amount payable to the Fund upon such sale, provided that the
same conforms to the total amount payable as set forth in such Written
Instructions. Subject to the foregoing, U.S. Trust may accept payment
in such form as shall be satisfactory to it, and may deliver securities
and arrange for payment in accordance with the customs prevailing among
dealers in securities.
14. Authorized Shares. The Fund has an unlimited number of Shares of
each class of its securities.
15. Records. The books and records pertaining to the Fund which are in
the possession of U.S. Trust shall be the property of the Fund. Such
books and records shall be prepared and maintained as required by the
1940 Act, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall
have access to such books and records at all times during U.S. Trust's
normal business hours, and such books and records shall be surrendered
to the Fund promptly upon request. Upon reasonable request of the Fund,
copies of any such books and records shall be provided by U.S. Trust to
the Fund or the Fund's authorized representative at the Fund's expense.
16. Cooperation with Accountants. U.S. Trust shall cooperate with the
Fund's independent certified public accountants and shall take all
reasonable action in the performance of its obligations under this
Agreement to assure that the necessary information is made available to
such accountants for the expression of their unqualified opinion,
including but not limited to the opinion included in the Fund's
semi-annual report on Form N-SAR.
17. Confidentiality. U.S. Trust agrees on behalf of itself and its
employees to treat confidentially and as the proprietary information of
the Fund all records and other information relative to the Fund and its
prior, present or potential Shareholders and relative to the Fund's
investment advisor and its prior, present or potential customers, and
not to use such records and information for any purpose other than
performance of its responsibilities and duties hereunder, except after
prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld
where U.S. Trust may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such
information by duly constituted legal authorities, or when so requested
by the Fund. Nothing contained herein, however, shall prohibit U.S.
Trust from advertising or soliciting the public generally with respect
to other products or services, regardless of whether such advertisement
or solicitation may include prior, present or potential Shareholders of
the Fund.
18. Equipment Failures. In the event of equipment failures beyond U.S.
Trust's control, U.S. Trust shall, at no additional expense to the
Fund, take reasonable steps to minimize service interruptions but shall
not have liability with respect thereto. U.S. Trust shall enter into
and shall maintain in effect with appropriate parties one or more
agreements making reasonable provision for back up emergency use of
electronic data processing equipment to the extent appropriate
equipment is available.
19. Right to Receive Advice.
(a) Advice of Fund. If U.S. Trust shall be in doubt as to any
action to be taken or omitted by it, it may request, and shall
receive, from the Fund clarification or advice.
(b) Advice of Counsel. If U.S. Trust shall be in doubt as to
any question of law involved in any action to be taken or
omitted by U.S. Trust, it may request advice at its own cost
from counsel of its own choosing (who may be counsel for the
Fund or U.S. Trust, at the option of U.S. Trust).
(c) Conflicting Advice. In case of conflict between directions
or advice received by U.S. Trust pursuant to subparagraph (a)
of this paragraph and advice received by U.S. Trust pursuant
to subparagraph (b) of this paragraph, U.S. Trust shall be
entitled to rely on and follow the advice received pursuant to
the latter provision alone.
(d) Protection of U.S. Trust. U.S. Trust shall be protected in
any action or inaction which it takes or omits to take in
reliance on any directions or advice received pursuant to
subparagraphs (a) or (b) of this section which U.S. Trust,
after receipt of any such directions or advice, in good faith
believes to be consistent with such directions or advice.
However, nothing in this paragraph shall be construed as
imposing upon U.S. Trust any obligation (i) to seek such
directions or advice, or (ii) to act in accordance with such
directions or advice when received, unless, under the terms of
this Agreement, the same is a condition to U.S. Trust's
properly taking or omitting to take such action. Nothing in
this subparagraph shall excuse U.S. Trust when an action or
omission on the part of U.S. Trust constitutes willful
misfeasance, bad faith, negligence or reckless disregard by
U.S. Trust of its duties under this Agreement.
20. Compliance with Governmental Rules and Regulations. The Fund
assumes full responsibility for insuring that the contents of each
Prospectus of the Fund complies with all applicable requirements of the
1933 Act, the 1940 Act, and any laws, rules and regulations of
governmental authorities having jurisdiction over the Fund.
21. Compensation. As compensation for the services rendered by U.S.
Trust during the term of this Agreement, the Fund will pay to U.S.
Trust, in addition to reimbursement of its out-of-pocket expenses,
monthly fees as outlined in Exhibit A.
22. Indemnification. The Fund, as sole owner of the Property, agrees to
indemnify and hold harmless U.S. Trust and its nominees from all taxes,
charges, expenses, assessments,
claims, and liabilities (including, without limitation, liabilities
arising under the 1933 Act, the Securities Exchange Act of 1934, the
1940 Act, and any state and foreign securities and blue sky laws, all
as amended from time to time) and expenses, including (without
limitation) attorney's fees and disbursements, arising directly or
indirectly (a) from the fact that securities included in the Property
are registered in the name of any such nominee or (b) without limiting
the generality of the foregoing clause (a) from any action or thing
which U.S. Trust takes or does or omits to take or do (i) at the
request or on the direction of or in reliance on the advice of the
Fund, or (ii) upon Written Instructions, provided, that neither U.S.
Trust nor any of its nominees or subcustodians shall be indemnified
against any liability to the Fund or to its Shareholders (or any
expenses incident to such liability) arising out of (x) U.S. Trust's or
such nominee's or subcustodian's own willful misfeasance, bad faith,
negligence or reckless disregard of its duties under this Agreement or
any agreement between U.S. Trust and any nominee or subcustodian or (y)
U.S. Trust's own negligent failure to perform its duties under this
Agreement. In the event of any advance of cash for any purpose made by
U.S. Trust resulting from orders or Written Instructions of the Fund,
or in the event that U.S. Trust or its nominee or subcustodian shall
incur or be assessed any taxes, charges, expenses, assessments, claims
or liabilities in connection with the performance of this Agreement,
except such as may arise from its or its nominee's or subcustodian's
own negligent action, negligent failure to act, willful misconduct, or
reckless disregard, the Fund shall promptly reimburse U.S. Trust, its
nominees or subcustodians for such advance of cash or such taxes,
charges, expenses, assessments, claims or liabilities.
23. Responsibility of U.S. Trust. U.S. Trust shall be under no duty to
take any action on behalf of the Fund except as specifically set forth
herein or as may be specifically agreed to by U.S. Trust in writing. In
the performance of its duties hereunder, U.S. Trust shall be obligated
to exercise care and diligence and to act in good faith and to use its
best efforts within reasonable limits to insure the accuracy of all
services performed under this Agreement. U.S. Trust shall be
responsible for its own negligent failure or that of any subcustodian
it shall appoint to perform its duties under this Agreement but to the
extent that duties, obligations and responsibilities are not expressly
set forth in this Agreement, U.S. Trust shall not be liable for any act
or omission which does not constitute willful misfeasance, bad faith,
or gross negligence on the part of U.S. Trust or reckless disregard of
such duties, obligations and responsibilities. Without limiting the
generality of the foregoing or of any other provision of this
Agreement, U.S. Trust in connection with its duties under this
Agreement shall not be under any duty or obligation to inquire into and
shall not be liable for or in respect of (a) the validity or invalidity
or authority or lack thereof of any advice, direction, notice or other
instrument which conforms to the applicable requirements of this
Agreement, if any, and which U.S. Trust believes to be genuine, (b) the
validity of the issue of any securities purchased or sold by the Fund,
the legality of the purchase or sale thereof or the propriety of the
amount paid or received therefor, (c) the legality of the issue or sale
of any Shares, or the sufficiency of the amount to be received
therefor, (d) the legality of the redemption of any Shares, or the
propriety of the amount to be paid therefor, (e) the legality of the
declaration or payment of any dividend or distribution Shares, or (f)
delays or errors or loss of data occurring by reason
of circumstances beyond U.S. Trust's control, including acts of civil
or military authorities, national emergencies, labor difficulties,
fire, mechanical breakdown (except as provided in Paragraph 18), flood
or catastrophe, acts of God, insurrection, war, riots, or failure of
the mail, transportation, communication or power supply.
24. Collection. All collections of monies or other property in respect,
or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by U.S. Trust) shall be at the sole risk of the
Fund. In any case in which U.S. Trust does not receive any payment due
the Fund within a reasonable time after U.S. Trust has made proper
demands for the same, it shall so notify the Fund in writing, including
copies of all demand letters, any written responses thereto, and
memoranda of all oral responses thereto, and to telephonic demands, and
await instructions from the Fund. U.S. Trust shall not be obliged to
take legal action for collection unless and until reasonably
indemnified to its satisfaction. U.S. Trust shall also notify the Fund
as soon as reasonably practicable whenever income due on securities is
not collected in due course.
25. Duration and Termination. This Agreement shall be effective as of
December 31, 1990, and shall continue in effect for two years from that
date and shall continue in force from year to year thereafter, but only
so long as such continuance is approved by U.S. Trust and the Fund.
This Agreement shall continue in effect until termination by the Fund
or by U.S. Trust on 90 days written notice. Upon any termination of
this Agreement, pending appointment of a successor to U.S. Trust or a
vote of the Shareholders of the Fund to dissolve or to function without
a custodian of its cash, securities or other property, U.S. Trust shall
not deliver cash, securities or other property of the Fund to the Fund,
but may deliver them to a bank or trust company of its own selection,
having aggregate capital, surplus and undivided profits, as shown by
its last published report of not less than twenty million dollars
($20,000,000) as a custodian for the Fund to be held under terms
similar to those of this Agreement; provided, however, that U.S. Trust
shall not be required to make any such delivery or payment until full
payment shall have been made by the Fund of all liabilities
constituting a charge on or against the properties then held by U.S.
Trust or on or against U.S. Trust and until full payment shall have
been made to U.S. Trust of all of its fees, compensation, costs and
expenses, subject to the provisions of Paragraph 21 of this Agreement.
26. Notices. All notices and other communications (collectively
referred to as "Notice" or "Notices" in this paragraph) hereunder shall
be in writing or by confirm in telegram, cable, telex, or facsimile
sending device. Notices shall be addressed (a) if to U.S. Trust, at
U.S. Trust's address, 114 West 47th Street, New York, New York, 10036;
(b) if to the Fund, at the address of the Fund, 44 Brattle Street,
Cambridge, Massachusetts 02238; or (c) if to neither of the foregoing,
at such other address as shall have been notified to the sender of any
such Notice or other communication. If the location of the sender of a
Notice and the address of the addressee thereof are, at the time of
sending, more than 100 miles apart, the Notice may be sent by
first-class mail, in which case it shall be deemed to have been given
three days after it is sent, or if sent by confirming telegram, cable,
telex or facsimile sending device, it shall be deemed to have been
given immediately, and, if the
location of the sender of a Notice and the address of the addressee
thereof are, at the time of sending, not more than 100 miles apart, the
Notice may be sent by first-class mail, in which case it shall be
deemed to have been given two days after it is sent, or if sent by
messenger, it shall be deemed to have been given on the day it is
delivered, if sent by confirming telegram, cable, telex or facsimile
sending device, it shall be deemed to have been given immediately. All
postage, cable, telegram, telex and facsimile sending device charges
arising from the sending of a Notice hereunder shall be paid by the
sender.
27. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the
purposes hereof.
28. Amendments. This Agreement or any part hereof may be changed or
waived only by an instrument in writing signed by the party against
which enforcement of such change or waiver is sought.
29. Miscellaneous. This Agreement embodies the entire Agreement and
understanding between the parties hereto, and supersedes all prior
agreements and understandings relating to the subject matter hereof.
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction effect. This Agreement
shall be deemed to be a contract made in New York and governed by New
York law. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby. This Agreement shall
be binding upon and shall inure to the benefit of the parities hereto
and their respective successors.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
THE BAUPOST FUND
/s/ Jo-An B. Bosworth /s/ Seth A. Klarman
- --------------------------- ---------------------------
Its President
UNITED STATES TRUST COMPANY
OF NEW YORK
/s/ Robert First
- --------------------------- ---------------------------
Its Senior Vice President
Exhibit A
UNITED STATES TRUST COMPANY OF NEW YORK
BAUPOST GROUP
Baupost Fund
Domestic Custody Fee Proposal
February 26, 1997
Domestic Custody:
- -----------------
Administration and Maintenance (annually)
- -----------------------------------------
.02% on first $50 Million
.01% on Excess
Transaction Fees for On-Line Customer*
- --------------------------------------
$10.00 per book entry transaction
$25.00 per physical transaction
$35.00 per future or option wire
$ 8.00 per wire transfer
* Assumes fund inputs trades directly to U.S. Trust system. If U.S. Trust inputs
trades, add a $5.00 per transaction charge.
Out of pocket expenses will be billed at cost.
Subject to review after one year.
This document supercedes any previous fee schedules.
/s/Michael Wilder
----------------------
Michael Wilder
Second Vice President
UNITED STATES TRUST COMPANY OF NEW YORK
STANDARD INTERNATIONAL CUSTODY FEE PROPOSAL
BAUPOST GROUP
DECEMBER 12, 1990
International Custody:
- ----------------------
Safekeeping fees:
0.12% on First $250 Million
0.10% on Excess
Transaction Fees by Country
GROUP I GROUP II
------- --------
Austria Australia
Belgium Canada
Denmark France
Finland Hong Kong
Germany Italy
Japan Netherlands
Norway Singapore/Malaysia
Sweden Spain
Switzerland United Kingdom
CEDEL/Euroclear Eligible Other Fixed Income
Fixed Income
$35.00 per transaction $75.00 per transaction
Out of pocket expenses will be billed at cost.
FIRST AMENDMENT TO MUTUAL FUND CUSTODY AGREEMENT
This First Amendment to Mutual Fund Custody Agreement, dated as of
December __, 1992, is entered into by and between The Baupost Fund, a
Massachusetts business trust (the "Fund"), and United States Trust Company of
New York, a New York State chartered bank and trust company ("U.S. Trust").
WHEREAS, the Fund and U.S. Trust entered into a Mutual Fund Custody
Agreement dated as of December 11, 1990 (the "Agreement"); and
WHEREAS, the Fund and U.S. Trust desire to amend the terms and
conditions of the Agreement as herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Amendment to Section 3.
Section 3(e) of the Agreement shall be deleted and replaced in
its entirety with the follows:
"(e) "Written Instructions". The term "Written Instructions",
as used in this Agreement, means instructions
(i) delivered by mail, tested telegram, cable, telex,
facsimile sending device, and received by U.S. Trust,
signed by one Authorized Person (with respect to
Written Instructions for the purposes of Sections
11(a), 12 and 13 hereof) or signed by two Authorized
Persons (for the purposes of all other sections
hereof ) or, in each case, by persons reasonably
believed by U.S. Trust to be Authorized Persons; or
(ii) transmitted electronically through the U.S.
Trust Asset Management System or any similar
electronic instruction system acceptable to U.S.
Trust."
2. Amendment to Attachment B.
Attachment B to the Agreement shall be deleted in its entirety
and replaced with the revised Attachment B attached to this
First Amendment to Mutual Fund Custody Agreement.
3. Counterparts.
This First Amendment to Mutual Fund Custody Agreement may be
executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have cause this First Amendment
to Mutual Fund Custody Agreement to be executed by the respective officers duly
authorized to do so as of the date first above written.
THE BAUPOST FUND
/s/ Jo-An B. Bosworth /s/ Paul C. Gannon
- ------------------------ -------------------------
Its Vice President
UNITED STATES TRUST COMPANY
OF NEW YORK
/s/ Jacqueline Binder /s/ Peter C. Arrighetti
- ------------------------ -------------------------
Vice President Its Senior Vice President
Attachment B
"Written Instructions" defined in Paragraph 3 (3)(i) of the Mutual Fund
Custody Agreement can be provided by the following individuals. These
individuals have been designated as "Authorized Persons" by the Board of
Trustees for The Baupost Fund at their meeting on December 9, 1992.
Written Instructions as referenced in paragraphs 11(a), 12 or 13 may be
provided by any one of:
David C. Abrams
Seth A. Klarman
Thomas A. Knott
Paul H. Leary
Howard H. Stevenson
Written Instructions as referenced in any other paragraph may be
provided by any two of:
Jo-An B. Bosworth
Paul C. Gannon
Seth A. Klarman
David E. Morris
Howard H. Stevenson
GENERAL TERMS AND CONDITIONS
OF THE CUSTODIANSHIP SERVICE
17F-5
This document sets out the general terms and conditions (the "CUSTODIANSHIP
TERMS") in accordance with which CREDIT SUISSE FIRST BOSTON, whose registered
office is at Uetlibergstrasse 231, 8045 Zurich, Switzerland ("CSFB"), will
provide custodianship services to THE BAUPOST FUND, whose office is at 44
Brattle Street, Cambridge, Massachusetts 02238- 9125 (the "Customer"). Each of
CSFB and the Customer agrees to be bound by these Custodianship Terms.
1. APPOINTMENT OF CUSTODIAN
1.1 The Customer, subject to Rule 17f-5 of the Investment Company Act of
1940, as amended ("1940 ACT"), of the United States, hereby appoints
CSFB as the custodian of the Property (as hereinafter defined) under
the Custodianship Terms. The Custodianship Terms govern the provision
of custodial services only by CSFB and its delegate CREDIT SUISSE FIRST
BOSTON (Moscow) Ltd. ("CSFB MOSCOW") to the Customer. Any brokerage or
other services provided will be governed by a separate agreement.
1.2 Wherever these Custodianship Terms refer to duties, acts, obligations
and the like including the opening of accounts at CSFB, CSFB is allowed
to delegate these duties, acts, obligations and the like to its
subsidiary CSFB Moscow. However, CSFB shall remain fully liable to the
Customer for all acts and omissions of CSFB-Moscow to the same extent
as if CSFB itself had acted or failed to act.
1.3 To the extent that CSFB delegates to CSFB Moscow its duties, acts,
obligations and the like under these Custodianship Terms, CSFB Moscow
shall be subject to all the terms and conditions of the Custodianship
Terms.
1.4 Upon the Customer's written request, CSFB shall open on its books in
the name of the Customer one or more custody accounts ("the CUSTODY
ACCOUNT") recording any shares, stocks, debentures, bonds, securities
or other property (including evidence of securities or title thereto
and all rights in respect thereof) issued by any entity located within
the Russian Federation ("RUSSIA") and deposited or transferred by or on
behalf of the Customer to CSFB, or a Sub-Custodian (as hereinafter
defined), or collected by CSFB or a Sub-Custodian for the account of
the Customer ("THE SECURITIES"). Any cash in any currency received by
CSFB or any Sub-Custodian on behalf of the Customer ("CASH") will be
recorded in the books of CSFB (such records being "THE CASH BALANCE").
The Securities and the Cash together shall be "THE PROPERTY."
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1.5 CSFB may refuse to accept (in whole or in part) any proposed Property,
provided that CSFB shall promptly notify the Customer of such refusal
and the reason therefor.
2. ARRANGEMENTS FOR CUSTODY OF SECURITIES AND CASH PAYMENTS
2.1 The Customer will deliver the Securities to CSFB or as CSFB may direct
at the Customer's expense and risk, in the manner, and accompanied by
such documents, as CSFB may require.
2.2 CSFB and CSFB Moscow will identify in their books that the Property
belongs to the Customer (unless otherwise agreed with the Customer) and
CSFB will require Sub- Custodians to identify in their books that the
Property (together with securities of other customers of CSFB) belongs
to the customers of CSFB.
2.3 The Customer's redelivery or transfer rights with respect to the
Securities are not in specie but rather with respect to securities of
the same number, class, denomination and issue as those originally
deposited or acquired with or by CSFB or a Sub-Custodian. Redelivery or
transfer shall be at the expense of the Customer.
2.4 Beneficial ownership of the Property in the Custody Accounts shall be
freely transferable without payment of money or value to CSFB, the
Sub-Custodian or CSFB Moscow other than for safe custody and
administration and always subject to these Custodianship Terms.
2.5 CSFB shall not exercise any voting rights in respect of Securities held
by it pursuant to these Custodianship Terms, unless specifically
instructed to do so in writing by the Customer.
2.6 The holdings of Securities by CSFB or a Sub-Custodian will be subject
to applicable laws, regulations and practices as the same may change
from time to time ("REGULATIONS"). To the extent that Regulations
conflict with the terms hereof, the former shall prevail. CSFB may take
or omit to take any action it considers in its reasonable discretion
fit in order to seek to ensure compliance with any Regulations and CSFB
shall not be liable in respect thereof except to the extent it would be
liable under Section 8.1.
2.7 Securities shall be registered in the name of CSFB Moscow in nominee,
or in such a name as the Customer may from time to time instruct in
writing.
2.8 No acknowledgments provided by CSFB to the Customer for Property will
constitute documents of title or be transferable or capable of being
pledged or otherwise charged.
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2.9 CSFB at all times reserves the right to reverse any provisional or
erroneous entries to the Custody Account or Cash Balance with effect
back-valued to the date upon which the final or correct entry (or no
entry) should have been made. CSFB shall not be liable for any loss the
Customer might incur from this reversement except to the extent it
would be liable under Section 8.1.
2.10 Payment for any Securities shall not be made by CSFB prior to the
issuance and receipt of the respective "share extract" relating to such
Securities. A "share extract" shall mean an extract of its share
registration books issued by a registration company. Delivery of
Securities may be made in accordance with the customary or established
securities trading or securities processing practices and procedures in
Russia. Delivery of Securities may also be made in any manner
specifically required by Instructions from the Customer acceptable to
CSFB Moscow. The Customer shall promptly supply such transaction and
settlement information as may be requested by CSFB Moscow or CSFB in
connection with particular transactions.
3. USE OF SUB-CUSTODIANS OR AGENTS
3.1 CSFB may from time to time delegate to any other securities depository
or clearing agency ("SUB-CUSTODIANS") any of its duties under the
Custodianship Terms including (without limitation) the safekeeping of
the Property and Sub-Custodians may hold the Property on such terms and
conditions as the Sub-Custodians may require, provided the Customer has
given its prior written approval to such delegation. The Customer has
accepted Vneshtorgbank RF ("VTB") as Sub-Custodian for Russian Ministry
of Finance bonds.
3.2 The rights of CSFB against Sub-Custodians to which it delegates
safekeeping of the Property may consist only of a contractual claim.
The Customer acknowledges that neither CSFB nor CSFB Moscow can be held
liable for acts or omissions of VTB and that VTB is used at the entire
risk of the Customer.
3.3 CSFB Moscow is authorized in its discretion to use agents in connection
with performing nights and obligations under these Custodianship Terms.
Where CSFB Moscow uses an agent to perform share registration and share
confirmation functions, such as the Depository Cleaning Corporation,
CSFB shall be liable for losses, damages or costs to the extent it
would have been liable if it had performed such services itself. CSFB
is not liable for the acts and omissions of the registrar, and cannot
guarantee or otherwise assure that a registrar will perform its duties
or that no loss due to a registrar's conduct will occur.
4. INSTRUCTIONS
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4.1 CSFB may rely on any instructions, commitments, notices or requests
("INSTRUCTIONS") of any person who in the reasonable belief of CSFB is
a person designated or authorized by the Customer to give such
Instructions. CSFB may accept and act without further enquiry upon any
such Instruction which is given, or which in the reasonable belief of
CSFB is given, by or on behalf of the Customer. Instructions must be in
writing and may be given by letter, SWIFT or tested telex (or such
other method as may be agreed by CSFB and the Customer).
4.2 Instructions shall continue in full force and effect until canceled or
superseded.
4.3 If any Instructions are received by CSFB by telephone the Customer
shall confirm such Instructions before the close of business on the
same day by an alternative method of giving Instructions acceptable to
CSFB. CSFB shall be authorized to follow such Instructions
notwithstanding failure so to confirm.
4.4 CSFB may treat any apparent Instructions as new Instructions unless
they are in the reasonable belief of CSFB confirmations of earlier
Instructions.
4.5 The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which CSFB may make
available to the Customer.
4.6 It will be the responsibility of the Customer to assess the degree of
security applicable to Instructions.
4.7 CSFB may in its reasonable discretion (but shall be under no duty to)
refuse to act on Instructions which are not given in the form
customarily used by the Customer and/or which are not in writing.
4.8 If any Instructions are incomplete, unclear, ambiguous, and/or in
conflict with other Instructions CSFB will request clarification from
the Customer and may refuse to act on such Instructions until any
incompleteness, unclarity, ambiguity or conflict has been resolved to
its satisfaction.
4.9 Instructions shall be carried out subject to Regulations and the rules,
operating procedures and market practice of any relevant stock
exchange, clearing house, settlement system, Sub-Custodian or market
("RULES"). CSFB may refuse to carry out Instructions if in CSFB's
reasonable opinion they are contrary to any Rules or any applicable
law, or other regulatory or fiscal requirements and shall be entitled
in its reasonable discretion to amend Instructions so that they comply
with applicable Rules, and such amendments will be confirmed with
Customer prior to execution.
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4.10 Any Instructions (notwithstanding any error in the transmission thereof
or that such Instructions may not be genuine) shall, as against the
Customer and in favour of CSFB, be conclusively deemed to be valid
Instructions from the Customer to CSFB if reasonably believed by CSFB
to be genuine, provided, however, that CSFB may in its discretion
decline to act upon any Instructions where CSFB has reasonable grounds
for concluding that the same have not been accurately transmitted or
are not genuine. The Customer is responsible for any loss, claim or
expense incurred by CSFB for following or attempting to follow
Instructions from it, except to the extent that such loss, claim or
expense is caused by the negligence or malfeasance of CSFB.
4.11 CSFB shall be under no duty to challenge or make any enquiries
concerning valid Instructions unless CSFB should have a reasonable
belief that such Instructions are not valid.
4.12 CSFB may in its absolute discretion record telephone conversations with
the Customer or the Customer's agents. CSFB's records of telephone
conversations with the Customer or its agents shall be evidence of all
instructions, commitments, notices or requests and such records shall
be the sole property of CSFB. The Customer will be given access to such
tapes, if necessary to resolve issues.
5. ACTIONS NOT REQUIRING INSTRUCTIONS
5.1 In the absence of contrary Instructions, CSFB is authorized but not
required by the Customer to carry out the actions specified in this
Clause 5 relating to the Property without Instructions.
5.2 To use reasonable endeavours to collect and receive, for the account of
the Customer, all payments (whether income or capital) and
distributions in respect of the Property, and to take any action
necessary and proper in connection with the same including (without
limitation) the presentation of coupons and other interest items and
the endorsement for collection of cheques, drafts and other negotiable
instruments and the deduction or withholding of any sum on account of
any tax required or which in its view is required to be so deducted or
withheld by law or practice of any relevant revenue authority of any
jurisdiction, subject to the following:
(i) CSFB will not provide tax vouchers or tax reclamation services
unless agreed otherwise in writing with the Customer;
(ii) the Customer shall be responsible for all filings, tax returns
and reports on any transactions undertaken or settled pursuant
to the Custodianship Terms which must be made to any relevant
authority whether governmental or otherwise and for the
payment of all unpaid calls, taxes (including without
limitations any
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value added tax), imposts, levies or duties, or any other
liability or payment arising out of or in connection with the
Property;
(iii) CSFB will pass on to the Customer information in respect of
dividends and other income payments, upon receipt by CSFB of
such information. CSFB shall not be liable for failure to pass
on any information not actually received by it;
(iv) unless instructed otherwise, CSFB shall have no obligation to
convert any monies received into any currency, but may in its
reasonable discretion convert into U.S. Dollars;
(v) the Customer shall bear all expenses and risk incidental to
collection and any currency conversion effected under Clause
5.2 (iv) of the Custodianship Terms.
5.3 To execute in the name of the Customer such ownership and other
certificates as may be required to obtain payment in respect of the
Securities.
5.4 To exchange interim or temporary documents of title to Securities for
definitive ones.
5.5 To accept and open all communications directed to the Customer and at
the address of CSFB or a Sub-Custodian.
5.6 To perform and carry out on the Customer's behalf or otherwise all acts
which, in the opinion of CSFB or a Sub-Custodian, are requisite or
desirable to enable CSFB or a Sub-Custodian to implement any
Instructions or otherwise to perform CSFB's duties under the
Custodianship Terms.
6. SCOPE OF CSFB'S RESPONSIBILITY
6.1 CSFB shall be under no duty to take or omit to take any action with
respect to the Property or otherwise except in accordance with the
Custodianship Terms.
6.2 CSFB will use reasonable care in performing its obligations under the
Custodianship Terms and CSFB will look after the Property with the same
degree of care as that with which it looks after its own assets.
6.3 CSFB shall maintain adequate policies of insurance covering any loss or
damage to the Property while under its possession or control. CSFB will
ensure that CSFB Moscow maintains equivalent insurance. Such insurance
will not, in any event, be less
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comprehensive than such coverage as may be customary for first class
banks engaged in the business of acting as custodian of securities in
Zurich.
6.4 Provided it receives the requisite information, CSFB will notify the
Customer of all calls for redemption, grants or expirations of
conversion rights, grants or expirations of subscription rights,
mergers, offers, consolidations, reorganizations and capitalizations or
such other corporate actions or any other administrative or supervisory
matters affecting the Securities and will inform the Customer of
notices, proxy forms and other documents provided by the issuer upon
receipt by CSFB, and the following provisions shall apply in respect of
such corporate actions:
(i) CSFB will use reasonable efforts to seek and act on
Instructions relating to such corporate actions. In
circumstances where CSFB is not able on that basis to receive
Instructions, no action will be taken. CSFB will not be liable
for any losses incurred in these circumstances;
(ii) notices relating to such corporate actions sent to the
Customer may have been obtained from sources which CSFB does
not control and may have been translated or summarized. CSFB
has no duty to verify the information contained in such
notices nor the accuracy of any translation or summary and
therefore cannot guarantee its accuracy or completeness,
unless CSFB or its agent has translated such information.
6.5 CSFB is not acting under the Custodianship Terms as manager or
investment adviser to the Customer, and responsibility for the
selection, acquisition and disposal of the Property remains with the
Customer at all times.
6.6 CSFB will treat the Customer alone as the Customer for the purposes of
the Custodianship Terms.
7. SECURITIES AND EXCHANGE COMMISSION REQUIREMENTS
7.1 CSFB represents and agrees that the custodian arrangements for Russia
contemplated hereby do and will conform in all material respects to
those described in the response of the Securities and Exchange
Commission's Office of Chief Counsel of the Division of Investment
Management, dated April 18, 1995, in respect of the Templeton Russia
Fund, Inc. (SEC Ref. no. 95-151-CC, File no. 811-8788) providing
"no-action" relief under ss. 17(f) of the 1940 Act and SEC Rule 17f-5
thereunder, in connection with custody of such Templeton Russia Fund,
Inc.'s investments registered in Securities (the "No-Action Letter").
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7.2 CSFB will advise the Customer (and will promptly update such advice
from time to time as changes occur) of those registrar companies
providing share registration services to an issuer of Securities (a
"Registrar Company") with which CSFB Moscow has entered into a contract
(a "Registrar Contract"). CSFB shall cause CSFB Moscow to monitor each
Registrar Company and to promptly advise the Customer when CSFB Moscow
has actual knowledge of the occurrence of any one or more of the events
described in paragraphs (i)-(v) on pps. 8-9 of the No-Action letter
with respect to a Registrar Company that serves in that capacity for
any issuer the shares of which are held by the Customer.
7.3 Where the Customer is considering investing in the Securities of an
issuer as to which CSFB Moscow does not have a Registrar Contract with
the issuer's Registrar Company, the Customer may request that CSFB ask
that CSFB Moscow consider whether it would be willing to attempt to
enter into such a Registrar Contract and to advise the Customer of its
willingness to do so. Where CSFB Moscow has agreed to make such an
attempt, CSFB will advise the Customer of the occurrence of any one or
more of the events described in paragraphs (i)-(iv) on pps. 8-9 of the
No-Action Letter of which CSFB Moscow has actual knowledge.
7.4 Where the Customer is considering investing in the Securities of an
issuer as to which CSFB Moscow has a Registrar Contract with the
issuer's Registrar Company, the Customer may advise CSFB Moscow of its
interest in investing in such issuer and in such event. CFSB will
advise the Customer of the occurrence of any one or more of the events
described in paragraphs (i)-(v) on pps. 8-9 of the No-Action Letter of
which CSFB Moscow has actual knowledge.
7.5 The Customer acknowledges that CSFB Moscow may not be able in given
cases and despite its reasonable efforts, to obtain a Share Extract
from a Registrar Company and CSFB Moscow shall not be liable in any
such event including with respect to any losses resulting from such
failure.
7.6 For at least the first two years following CSFB Moscow's first use of a
Registrar Company, CSFB shall cause CSFB Moscow to conduct share
confirmations on at least a quarterly basis, although thereafter
confirmations may be conducted on a less frequent basis if the
Customer, in consultation with CSFB Moscow, determines it to be
appropriate.
7.7 CFSB shall cause CSFB Moscow to prepare for distribution to the
Customer a quarterly report identifying: (i) any concerns it has
regarding the Russian share registration system that should be brought
to the attention of the Customer, and (ii) the steps CSFB Moscow has
taken during the reporting period to ensure that the Customer's
interests continue to be appropriately recorded.
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8. LIMITATIONS OF LIABILITY
8.1 CSFB shall only be liable to the Customer for any expense, loss or
damage suffered by or occasioned to the Customer to the extent that
CSFB has been negligent in the performance, or is in default, of its
duties under the Custodianship Terms, however, in no event shall CSFB
be liable for any special or consequential damages, even if CSFB has
been advised of the possibility of such damages.
8.2 Subject to section 8.1 hereof, CSFB shall not be liable to the Customer
for any expense, loss or damage suffered by or occasioned to the
Customer by:
(i) reliance by the Customer on any notices sent by CSFB in
accordance with Clause 6.4 hereof; or
(ii) the collection or deposit or crediting to the Custody Account
of invalid, fraudulent or forged securities or any entry in
the Custody Account or Cash Balance which may be made in
connection therewith; or
(iii) delay arising while CSFB obtains clarification of unclear
Instructions in accordance with Clause 4.8 hereof; or
(iv) CSFB acting on what it in good faith believes to be valid
Instructions or in relation to notices, requests, waivers,
consents, receipts, corporate actions or other documents which
CSFB in good faith believes to be genuine; or
(v) effecting delivery or payment against an expectation of
receipt, except where such delivery or payment is contrary to
Instructions or local relevant market practice; or
(vi) acts, decisions, orders and the like of Russian authorities,
ministries or the National Bank.
8.3 Subject to section 8.1, for the avoidance of doubt CSFB accepts no
liability whatsoever for any expense, loss or damage suffered by or
occasioned to the Customer resulting from the general risks of
investment in or the holding of assets in Russia including, but not
limited to, losses arising from nationalization, expropriation or other
governmental actions, regulation of the banking or securities
industries including changes in market rules, currency restrictions,
devaluations or fluctuations, and market conditions affecting the
execution or settlement of transactions or the value of assets or
delays in registration or failure to register securities or delays in
or failures to repatriate income or principal arising from the
Property.
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8.4 CSFB shall not be liable to the Customer for any partial or
non-performance of its obligations hereunder by reason of any cause
beyond CSFB's control, including without limitation, any breakdown or
failure of transmission, communication or computer facilities,
industrial action, acts or regulations of any governmental or
supranational bodies and the failure of any relevant correspondent or
other agent of CSFB, Sub-Custodian (other than CSFB Moscow or any other
affiliate of CSFB), dealer, exchange, clearing house or regulatory or
self-regulatory organization for any reason to perform its obligations.
8.5 CSFB shall not be liable for the acts and defaults or insolvency of any
Sub-Custodian such as VTB, other than CSFB Moscow, nor for any expense,
loss or damage suffered by or occasioned to the Customer in connection
therewith in the absence of negligence or default by CSFB in the
initial selection of any Sub-Custodian.
9. STATEMENTS; AUDITING
9.1 CSFB will prepare and provide to the Customer periodic statements of
account providing details of the Property at such intervals as agreed
with the Customer ("STATEMENTS").
9.2 The Customer will examine each Statement promptly upon receipt and will
promptly notify CSFB of any errors or discrepancies therein. The
Customer agrees with CSFB that, unless the Customer delivers written
objections to any matters contained in any Statement within 30 days
from the date of such Statement, such Statement shall be deemed correct
and the Customer shall be deemed conclusively to have accepted its
contents as true and accurate in all respects.
9.3 CSFB shall permit officers of the Customer or a mutually acceptable
Swiss auditing firm to have access to all books and records kept by
CSFB in connection with the Customer's Property at a time agreed upon
by the parties concerned. The consent of CSFB to a Swiss auditing firm
chosen by the Customer shall not be unreasonably denied.
10. FEES AND EXPENSES
10.1 Without prejudice to any of its liabilities and obligations under the
Custodianship Terms the Customer will pay to CSFB fees for CSFB's
services under the Custodianship Terms and transaction charges together
with all costs, charges and expenses of CSFB incurred in connection
with the Securities, or arising out of the Custodianship Terms or the
performance of CSFB's obligations hereunder, on the basis of a full
(after-tax) indemnity including but not limited to legal fees incurred
with the
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approval of the Customer (together with any Value Added Tax chargeable
in respect thereof) (together "FEES"), at the rates set out in the
Schedule to the Custodianship Terms.
10.2 Fees will become due and payable as agreed between the Parties in
writing.
10.3 The Fees and transaction charges payable hereunder may be varied from
time to time by prior written agreement of CSFB and the Customer.
10.4 The Customer hereby irrevocably and unconditionally agrees on demand to
indemnify, and keep fully and effectively indemnified on an after-tax
basis CSFB for all costs, charges and expenses mentioned in 10.1 and
any tax for which CSFB is or may be liable or accountable in connection
with the Securities, the Custodianship Terms or the performance of
CSFB's obligations hereunder (including without limitation the purchase
and/or sale of securities, the collection and/or realization of
coupons, dividends, interest or other payment, the receipt of or
entitlement to receive any income) PROVIDED THAT this indemnity shall
not extend to tax on or attributable to the Fees. "TAX" for this
purpose means all present and future taxes, levies, imposts or duties
(including without prejudice value added taxes and stamp duties)
whatsoever and wheresoever imposed except such as may arise from its
negligence or default.
This indemnification is always subject to CSFB not having been
negligent in its performance and CSFB not being in default of its
duties.
11. INTEREST, LIABILITY AND PAYMENTS
11.1 Without prejudice to Clause 10 hereof and to the extent permitted by
applicable law, if any sum of money payable to CSFB hereunder is not
paid when due, interest shall accrue upon such unpaid sum as a separate
debt at the rate of 1 per cent per annum over average rates quoted for
an overnight deposit in the London Interbank Market for the currency in
which such sums are due on a 365 day year basis, for the actual number
of days during the period from and including the date on which payment
was due but excluding the date of payment.
11.2 Any indebtedness or liability incurred by the Customer to CSFB shall,
in the absence of express written agreement by CSFB to the contrary, be
due and payable on demand.
11.3 Any payment due from the Customer shall be made promptly in freely
transferable, cleared and immediately available funds without deduction
(whether in respect of set-off, counter-claim, taxation or otherwise).
If the Customer is obliged by any applicable law to make such
deduction, the Customer shall pay to CSFB such amount which after
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deduction shall ensure that the net amount actually received by CSFB
will equal the full amount which would have been received by it had no
such deduction been required.
11.4 The Customer shall bear all costs and risks of payment and delivery by
or to the Customer or its order, whether upon settlement of any
transaction, termination of the Custodianship Terms or otherwise,
including all applicable contract, market, registrar, clearing house or
clearing firm fees or changes with the exception of deliveries of
Securities from the vaults of CSFB Moscow to another person. For these
deliveries CSFB Moscow shall bear the risks.
12. LIEN
12.1 The Securities in the Custody Accounts shall not be subject by virtue
of these Custodianship Terms to any right, charges, security interest,
lien or claim of any kind (collectively "Charges") in favor of CSFB or
any Sub-Custodian or any creditor of CSFB or of the Sub-Custodian
except a claim for payment by CSFB for safe custody or administration
fees in accordance with these Custodianship Terms.
12.2 CSFB's rights under this Clause 12 will not prejudice any other rights
which CSFB may have hereunder, or, apart from the Custodianship Terms,
in respect of any indebtedness or obligations of the Customer to CSFB.
13. REPRESENTATIONS AND WARRANTIES OF THE CUSTOMER
13.1 The Customer hereby represents and warrants to CSFB that:
(i) it is duly incorporated, established or constituted (as the
case may be) and validly existing under the laws of its
country of incorporation, establishment or constitution (as
the case may be);
(ii) the Custodianship Terms constitute its legal, valid and
binding obligation, enforceable in accordance with its terms;
(iii) it has full power and authority to enter into and implement
the Custodianship Terms in respect of any Securities and CSFB
may deal only with the Customer, or its authorized persons if
such authorization has been communicated to CSFB;
(iv) neither the signing, delivery or performance of the
Custodianship Terms nor any Instructions does or will
contravene or constitute a default under, or cause to be
exceeded, any of the following, namely:
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(a) any law by which the Customer or any of its assets is
bound or affected;
(b) rights of any third parties in respect of the
Customer or the Property;
(c) any agreement to which the Customer is a party or by
which any of its assets are bound; and
(v) it has not relied on any representations made by or on behalf
of CSFB, with the exception of the representations made by
CSFB under these Custodianship Terms.
13.2 Without prejudice to the generality of the representations and
warranties given in Clause 13.1, the Customer further represents and
warrants to CSFB that:-
(i) the Customer has read and understood the particular risks
involved in investing in Russian securities arising from the
particular operational problems encountered in securities
markets in Russia and the nature of the custody arrangements
in Russia, as set out in Clause 17;
(ii) the Customer has full power and capacity under its
constitutive documents to agree that Russian securities are to
be held by a custodian in accordance with the Custodianship
Terms;
(iii) the agreement to the holding of Russian securities on behalf
of the Customer and the undertaking and performance of the
obligations relating thereto will not conflict with, or result
in a breach of or default under, any laws or regulations
applying to the Customer or any agreement or instrument to
which it is a party or by which it is bound which could
otherwise limit or restrict the activities of the Customer in
this area including but not limited to any obligations which
may arise under any trust or fiduciary arrangements.
13.3 The representations and warranties set out in Clauses 13.1 and 13.2
shall survive the signing and delivery of the Custodianship Terms.
14. REPRESENTATIONS AND WARRANTIES OF CSFB
CSFB hereby represents and warrants that
- it is a bank duly incorporated and organized under the laws of
Switzerland,
- it is regulated as such by the Swiss Banking Commission, an
agency of the Government of Switzerland,
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- it has shareholders' equity substantially in excess of US
$200'000'000.--,
- CSFB Moscow is a banking institution organized under the laws
of Russia, is regulated as such by the Central Bank of Russia,
an agency of the Government of the Russian Federation and is
the subject of an Exemptive Order issued by the United States
Securities and Exchange Commission with respect to such
shareholder equity requirement under 17 C.F.R. Part 270,
17f-5, (the "Rule").
- these Custodianship Terms have been duly authorized, executed
and delivered on its behalf and constitute the legal, valid
and binding obligation of CSFB, and
- the execution, delivery and performance of this Agreement by
CSFB do not violate Swiss laws or regulations and do not
require the consent of any governmental or other regulatory
body, and the terms of these Custodianship Terms are
consistent with the Rule (including the exemption described
above).
The representations and warranties set out in these Clauses
shall survive the signing and delivery of the Custodianship
Terms.
15. UNDERTAKINGS
The Customer undertakes that during the currency of the Custodianship
Terms:
15.1 the Customer will observe and comply with the terms of all relevant
approvals, authorisations, consents (including without limitation any
exchange control consents), licences and exemptions and will promptly
obtain any other approvals, authorisations, consents, licences and
exceptions which may be or become necessary or desirable to enable the
Customer to comply with any of the provisions of the Custodianship
Terms or to ensure the validity and enforceability of the liabilities
of the Customer or the rights of CSFB under the Custodianship Terms.
15.2 the Customer will promptly notify CSFB of any sale of, or other
transactions in or relating to, the Securities.
16. CONFIDENTIALITY
16.1 Subject as follows, CSFB and the Customer will at all times respect and
protect the confidentiality of the Custodianship Terms and will not
disclose to any other person any information acquired as a result of or
pursuant to the Custodianship Terms unless in each case required to do
so by law, a regulatory authority or an order of court or as authorised
by the other.
-14-
16.2 The Customer and CSFB agree that such information may be disclosed by
either if either is required to do so by any applicable law, statute or
other regulation of or by any court order or similar process
enforceable in any relevant jurisdiction and if required to do so by
any fiscal body or regulatory body or self-regulatory organisation
(whether of a governmental nature or otherwise) in any relevant
jurisdiction or if required to do so by market or registration practice
in any relevant jurisdiction or in the circumstances described in
Clause 19.4. Either party further agrees to provide the other with any
information (concerning itself or its principals or beneficiaries)
needed by the other to comply with any of the above requirements.
16.3 The Customer and CSFB further agree that such information may be
disclosed to the extent necessary to and amongst their associates and
persons otherwise connected with them.
17. RISKS
17.1 Special risks are associated with investment in securities markets in
Russia. These include (but are not limited to) the lack of a developed
legislative or regulatory infrastructure, and a high measure of legal
uncertainty concerning the rights and duties of market participants.
The Customer agrees that before making any such investment it will
independently satisfy itself that it understands those risks and that
such investment is suitable for it. By providing a custodial service in
respect of Russian securities, CSFB does not represent that such
Securities are a suitable investment for the Customer.
17.2 Level of Service. Because of conditions in the markets in Russia, CSFB
is not able to offer the level of service in the safekeeping,
settlement and administration of securities that is customary in more
developed markets. The Customer's particular attention is drawn to the
following points.
17.3 Beneficial Ownership. Although Russian Law recognises the concept of
nominee, it is not entirely clear that nominees will benefit from the
custodial arrangements that the Customer will enter into in respect of
the Russian securities. Therefore there is some risk that, as a matter
of Russian law, the Customer will not be recognises as the owner of
Russian securities CSFB holds on his behalf and which are registered in
the name of a Sub-Custodian.
17.4 Share Settlement. In general under Russian law, a transferee of shares
has no proprietary rights in respect of such shares until its name
appears on the register of members of the issuer, and the short selling
of securities is prohibited. For these reasons, the value date for
shares transferred into the Customer's account with a Sub-
-15-
custodian will be the date on which the Sub-custodian confirms the
registration to the Customer except as otherwise provided herein.
Before the registration date the Customer will not be entitled to sell
such shares, or vote, receive dividends or exercise or enjoy any other
right or entitlement in respect of them.
CSFB will use reasonable efforts in ensuring that registration takes
place on a timely basis. However, law and practice relating to
corporate registration are not well developed in Russia and
registration delays, and even failures to register, can occur. In the
event of nonregistration CSFB will use reasonable efforts to limit the
Customer's losses but will not otherwise be liable to the Customer.
Due registration of securities acquired by the Customer may in certain
circumstances be conditional on disclosure by CSFB to the registrar or
other appropriate person of the ultimate beneficial owner of the
securities. The Customer authorises CSFB to disclose its identity (or
that of its principal, if any) whenever such disclosure is necessary or
convenient in order to effectuate the transfer of Russian securities,
and further agrees to provide such additional information as may be
requested by CSFB for the purpose of settling transactions in Russian
securities for the accounts of the Customer.
17.5 Cash Remittance. The banking system in Russia is not well developed and
considerable delays (beyond the control of CSFB) may occur in the
transfer of funds within Russia, the conversion of roubles into other
currencies and the remittance of monies out of Russia. CSFB will use
its best efforts in collecting dividends, proceeds of sale, redemption
monies and other cash sums associated with the Property ("MONIES") on
the Customer's behalf, and in remitting such monies to the Customer.
However, significant delays may occur (causing currency exchange loss)
and some Monies may not be received by CSFB, unless CSFB has been
negligent or acted in default.
17.6 Forged Securities. A quantity of forged securities are in circulation
in Russian markets. CSFB shall use its best efforts to check whether
Securities which it holds in its own vaults include forged securities,
and shall try to reject them in order to obtain good deliveries. The
risk is borne by the Customer and not by CSFB, unless CSFB has been
negligent in its performance or acted in default of its duties.
17.7 Reconciliations. Because of conditions in securities markets in Russia,
it may be difficult for CSFB to reconcile the Custody Account with the
records of issuers on a reliable and timely basis.
17.8 Taxation Risks. The taxation risks of investing in Russia can be
substantial. There is a risk that effecting transactions in Russian
securities will require registration with the Russian tax authorities
and could subject the investor to liability for imputed Russian income.
In addition, obtaining the benefits of any relevant tax treaties can be
-16-
extremely difficult due to the documentary requirements imposed by the
Russian authorities. Further, the taxation system in Russia is at an
early stage of development and is subject to varying interpretations,
frequent changes and inconsistent enforcement at the federal, regional
and local levels. In certain instances, new taxes have been given
retroactive effect.
18. ASSIGNMENT
The rights and obligations of the parties under the Custodianship Terms
shall not be assigned, charged or otherwise dealt with by either party
without the prior written consent of the other party. Subject to the
foregoing, the Custodianship Terms shall be binding upon and shall
inure to the benefit of the parties and their respective successors and
assigns.
19. TERMINATION
19.1 Either of the parties hereto may terminate the Custodianship Terms on
giving not less than 60 days written notice to the other party.
Termination shall be without prejudice to the completion of
transactions already initiated hereunder and not completed at the time
of termination and to the representations, warranties and indemnities
given by the Customer or CSFB, which shall survive termination.
19.2 Fees will be calculated to the day the Property has been transferred
and will be payable (together with any Value Added Tax) on the day of
such expiry. All remedies hereunder shall survive the termination of
the Agreement.
19.3 Upon termination of CSFB's appointment as custodian and closure of the
Custody Account and the Cash Balance, CSFB shall deliver to the
Customer, as the Customer may direct in writing, the balance of the
Property. PROVIDED THAT, any re- registration of Securities pursuant to
such termination will only be effected by CSFB at the request of the
Customer, and shall be effected by CSFB in each case at the expense and
risk of the Customer, as soon as reasonably practicable after
termination.
19.4 The obligation of CSFB in Clause 19.3 of the Custodianship Terms and in
any other event when the Customer requests a transfer or delivery of
the Securities is subject:
(i) in the case of the Securities to clearance or settlement
requirements under the rules of any exchange and applicable
law, and to reasonable notice having been given to and
received by CSFB; and
(ii) to the rights and remedies of CSFB under Clause 11 of the
Custodianship Terms;
-17-
PROVIDED THAT CSFB may make such arrangements as it deems appropriate
and at the Customer's expense in order that prompt delivery may be
made.
19.5 The Customer shall bear all costs and risks of delivery to it or to its
order, whether upon termination or otherwise subject to Clause 11.4.
20. NOTICES
All notices to be given hereunder shall be in writing in the English
language and shall be delivered personally or sent by air mail or by
tested telex or in the case of notices by telefax, and (unless another
address, telex number, telefax number or contract is specified in
writing by the party to whom such notice is to be given) delivered (as
appropriate) to the address of either party mentioned below using the
following telex number and telefax number, and marked for the attention
of the following contact.
CREDIT SUISSE FIRST BOSTON
Address: P.O. Box 900, 8070 Zurich
Telex number: 812 412 CSFB CH
Telefax number: 41 1 332 92 63
Contact: Mr. Michael G. Pribram, Director, Dept. Xwm
CREDIT SUISSE FIRST BOSTON (MOSCOW) LTD.
Address: 5 Nikitskiy Pereulok, 103009 Moscow
Telex number: 412 326 CSMO RU
Telefax number: 501 967 88 89
Contact: Mr. Bruce Lawrence
THE BAUPOST FUND
Address: 44 Brattle Street, P.O. Box 381288,
Cambridge, MA 02238
-18-
Telex number:
Telefax number: 617 876 0930
Contact: Mr. David Morris
Phone: 617 497 6680
In the absence of evidence of earlier receipt, any notice shall be
deemed to have been duly given:
(a) if delivered personally, when left at the address referred to
above;
(b) if sent by air mail, 7 days after posting;
(c) if sent by tested telex, when the proper answer-back is
received; and
(d) if sent by telefax, on the date the facsimile transmission is
received by a responsible employee of the recipient in legible
form, it being agreed that the burden of proving receipt will
be on the sender and will not be met by a transmission report
generated by the sender's telefax machine.
21. ANNUAL CERTIFICATE
CSFB shall deliver annually upon demand to Customer a certificate dated
the date of delivery, certifying that CSFB has, since the date of these
Custodianship Terms or the date of the last certificate issued,
complied with the terms and conditions of these Custodianship Terms and
that CSFB's representations and warranties in Sections 7 and 14 of
these Custodianship Terms continue to be true and correct.
22. ENTIRE AGREEMENT; AMENDMENT
The Custodianship Terms shall supersede any existing agreements between
the parties relating to the subject matter hereof. The Custodianship
Terms may only be amended by agreement in writing signed by both
parties.
23. HEADINGS
Headings will not affect the construction of the Custodianship Terms.
-19-
24. GOVERNING LAW AND JURISDICTION
The Custodianship Terms shall be governed by and construed in
accordance with the exclusive laws of Switzerland. The parties hereto
hereby irrevocably submit for all purposes of or in connection with the
Custodianship Terms to the exclusive jurisdiction of the Courts of
Zurich.
25. INVALIDITY OF ANY PROVISION
If any of the provisions of the Custodianship Terms become invalid,
illegal or unenforceable in any respect under any law, the validity,
legality and enforceability of the remaining provisions shall not in
any way be affected or impaired.
26. DECLARATION OF TRUST
A copy of the Declaration of Trust of The Baupost Fund is on file with
the Secretary of the Commonwealth of Massachusetts, and notice is
hereby given that the obligations of or arising out of this instrument
are not binding on the Trustees or Beneficiaries individually, but only
upon the assets and property of The Baupost Fund.
THE BAUPOST FUND CREDIT SUISSE FIRST BOSTON
DATE: February 27, 1997 DATE: February 25, 1997
PLACE: Cambridge, MA PLACE: Zurich
/s/ Seth Klarman /s/ Michael Pribram /s/ Susan Brealey
- ----------------------------- ------------------- ------------------
Seth Klarman Michael Pribram Susan Brealey
Director Associate
ANNEXES
- - RISK DISCLOSURE STATEMENT
- - FEE SCHEDULE
-20-
RISK DISCLOSURE STATEMENT
POLITICAL RISK
Russia has over recent years undergone substantial political change from
communist rule to the early stages of pluralist democracy. The relative infancy
of this system renders it more vulnerable in the face of economic hardship,
public unrest or popular dissatisfaction with reform, political or diplomatic
developments, social, ethnic or religious instability or changes in government
policies, which could in turn lead to a reversal of some or all of the
democratic reforms, a backlash against western investment and possibly even a
return to a centralized planned economy and state ownership of assets. This
could involve the compulsory reacquisition, nationalization or expropriation of
foreign-owned assets without adequate compensation, or the restructuring of
particular industry sectors in a way which could adversely affect private
investors in such sectors.
ECONOMIC RISK
The planned economies of the former Soviet Union countries were run with
qualitatively different aims and assumptions from those prevalent in a market
system, and were generally oriented overwhelmingly towards other communist
states, whose needs have now changed. Telecommunications generally are poor, and
banks and other financial systems are not well developed or well regulated.
Russia has a limited supply of domestic savings, and businesses can experience
difficulty in obtaining working capital. It also has considerable external debt,
which affects the proper functioning of its economy with a corresponding adverse
impact on the performance of its market. The lack of a fair and
economically-rational tax regime presents the attendant risk of sudden
imposition of arbitrary or onerous taxes, which could adversely affect foreign
investors. Inter-enterprise indebtedness has become a macro- economic issue, and
organized crime and official corruption have in some cases become a feature of
business life. Businesses in Russia have a limited operating history in market
conditions. Accordingly, when compared to western companies, such businesses are
characterized by a lack of management experienced in the market conditions and a
limited capital base with which to develop their operations. Further,
environmental and toxic waste issues loom large in this part of the world, with
the potential for substantial clean-up costs, resource impairment and financial
liability. Contractual protection against these economic risks may prove
problematic as insurance may be both expensive and difficult to obtain in these
volatile environments.
MARKET RISKS
The securities market of Russian is in the early stages of its development and
generally lacks the levels of transparency, liquidity, efficiency and regulation
characteristic of the more developed western markets. Standard practices, market
customs and usage have yet to evolve and be readily identifiable as such by
market participants. There is limited trust in financial
-21-
institutions and their credit rating may not be high. Government supervision of
securities markets, investment intermediaries and of quoted companies is
considerably less well developed than in many western countries and, in some
cases, effectively non-existent. Where a system of regulation is present, it may
lack any, or any adequate mechanism to enforce compliance by participants. The
general lack of a developed underwriting regime in Russia has impeded the
proliferation of equity offerings, and the valuation of both enterprises and
securities has proved problematic in the absence of efficient secondary markets.
Many regulations are unclear in their scope and effect, and there is a greater
risk than in more developed economies of activities conducted in good faith on
the basis of professional advice subsequently being regarded as not in
compliance with fiscal, currency control, securities, corporate or other
regulatory requirements.
LEGAL RISKS
Russia does not have a mature legal system comparable to those of more developed
western countries. The process of legal reform may not always coincide with
market developments, resulting in ambiguities and anomalies, and ultimately,
increased investment risk. Legislation to safeguard rights of private ownership
and control as well as intellectual property may not yet be in place, and there
is a risk of conflicting local regional and national rules and regulations. Laws
and regulations governing investment in securities markets may not exist or may
be subject to inconsistent or arbitrary interpretation or application. Both the
independence of the judicial systems, and their immunity from economic,
political and nationalistic influences, remain largely untested. Judges and
courts are generally inexperienced in the area of business and corporate law,
and the prevalence of civil law systems means that judicial precedents have no
binding effect on subsequent decisions, leaving companies at the mercy of the
legislatures. There is no guarantee that a foreign investor would obtain
effective redress in the local courts in respect of a breach of local laws or
regulations, or in an ownership dispute (see below).
TAXATION RISKS
The taxation risks of investing in Russia can be substantial. There is a risk
that effecting transactions in Russian securities will require registration with
the Russian tax authorities and could subject the investor to liability for
imputed Russian income. In addition, obtaining the benefits of any relevant tax
treaties can be extremely difficult due to the documentary requirements imposed
by the Russian authorities. A recent instruction of the State Tax Service
mandates full withholding regardless of tax treaty status and requires the
recipient to seek to obtain a refund for withholding in excess of treaty
amounts. Further, the taxation system in Russia is at an early stage of
development and is subject to varying interpretations, frequent changes and
inconsistent enforcement at the federal, regional and local levels. In certain
instances, new taxes have been given retroactive effect.
SHAREHOLDER RISKS
-22-
Rules in Russia regulating ownership and corporate governance of domestic
companies (for example, requiring the disclosure of a significant stock
purchase, or a majority shareholder to make a general offer to other
shareholders) may not exist or may confer little protection on minority
shareholders. Disclosure and reporting requirements in general, from annual and
quarterly reports to prospectus contents and delivery requirements, range from
minimal to non-existent. Anti-fraud and anti-insider trading legislation is
generally rudimentary. There may be no prohibitions or restrictions under local
laws on the ability of management to terminate existing business operations,
sell or otherwise dispose of their company's assets, or otherwise to materially
affect the value of the company without the consent of its shareholders.
Anti-dilution protection may also be very limited. There is generally no concept
of any fiduciary duty on the part of the management or the directors to the
company or the shareholders as a whole. Redress for violations of shareholders
rights may be difficult in the absence of a system of derivative or class action
litigation.
-23-
Annex to the General Terms and Conditions of the Custodianship Service signed
between Credit Suisse First Boston and The Baupost Fund, February 27, 1997.
FEE SCHEDULE
FOR
THE BAUPOST FUND
Credit Suisse First Boston in Zurich serviced by Credit Suisse First Boston
(Moscow) Ltd. for Russian securities
<TABLE>
<CAPTION>
<S> <C>
SAFE CUSTODY AND ADMINISTRATION FEES FOR EQUITIES
25 Basis Points p.a. (USD 2.00 per USD 1'000.--) calculated on the market value at the end of each
month and claimed quarterly.
SAFE CUSTODY AND ADMINISTRATION FEES FOR MIN. FIN. BONDS
20 Basis Points p.a. (USD 2.00 per USD 1'000.--) calculated pro rata on the average nominal
value and claimed quarterly.
TRANSACTION CHARGES FOR EQUITIES
USD 200. -- per transaction to be claimed quarterly.
TRANSACTION CHARGES FOR MIN. FIN. BONDS
USD 100. -- per transaction (inclusive of VTB,
CSFB (Moscow) Ltd. fees & expenses) to be claimed quarterly.
ACCOUNT OPENING FEE
USD 2'000. - per account to be claimed as incurred.
USE OF REGISTRAR AGREEMENTS
USD 2'500. -- one-time only fee for use of any agreement.
MONTHLY STATEMENT
No charge
</TABLE>
OUT OF POCKET EXPENSES
Expenses include, but are not limited to, travel expenses, registration fees for
shares, transportation and insurance costs, communication charges of third
parties and value added tax, and will be charged as incurred.
If Credit Suisse First Boston or its delegate has performed its obligations in
accordance with the Custodianship Terms and with the applicable market practices
in Russia, and has incurred costs and expenses which are not covered by this Fee
Schedule, the Primary Custodian will nevertheless be obligated to reimburse CSFB
for these costs and expenses to their full extent as invoiced.
All fees, charges and expenses herein will be invoiced in US Dollars by Credit
Suisse First Boston in Zurich and shall be paid to Credit Suisse First Boston in
New York in favour of Credit Suisse First Boston, Zurich, Dept. Xwm.
This Fee Schedule will be valid until December 31, 1997.
THE BAUPOST FUND CREDIT SUISSE FIRST BOSTON
PLACE/DATE: PLACE/DATE:
Cambridge, MA February 27, 1997 Zurich February 25, 1997
- -------------------------------- --------------------------
-24-
CUSTODY AGREEMENT
This CUSTODY AGREEMENT sets out the general terms and conditions by
which THE BANK OF N.T. BUTTERFIELD & SON LTD. (the "Bank of Butterfield"), a
banking organization chartered under the laws of Bermuda, will provide custody
services for THE BAUPOST FUND (the "Fund"), a business trust organized under the
laws of The Commonwealth of Massachusetts.
WHEREAS, the Fund desires to be provided with custody in Bermuda of its
shares, bonds, debentures or any other securities (collectively, "Securities")
and its cash and cash equivalents (collectively, "Cash");
WHEREAS, the Fund wishes to utilize the services of Bank of Butterfield
as the Fund's agent within Bermuda for such purposes, and to establish with Bank
of Butterfield a Special Custody Account which Bank of Butterfield understands
and agrees will be used exclusively for Securities, Cash and other assets of the
Fund (the "Account");
NOW, THEREFORE, the services Bank of Butterfield will provide to the
Fund and the manner in which such services will be performed will be as set
forth below.
1. The Account shall be used to hold, acquire, transfer or otherwise care
for, on behalf of the Fund, Securities and such Cash as is transferred
to Bank of Butterfield or as is received in payment of any transfer of
or as payment on, or interest on or dividend from, any such Securities,
and beneficial ownership of the Securities and Cash in the Account
shall be freely transferable without payment of money or value other
than for safe custody and administration. All transactions involving
the Securities and Cash in the Account shall be executed solely in
accordance with the Fund's Instructions as that term is defined in
Section 10, except that until Bank of Butterfield receives Instructions
from the Fund to the contrary, Bank of Butterfield will:
a. present for payment all Securities held in the Account which
are called, redeemed or retired or otherwise become payable
and all coupons and other income items which call for payment
upon presentation and hold the cash received in the Account
pursuant to this Agreement;
b. in respect of Securities held in the Account, execute in the
name of the Fund such ownership and other certificates as may
be required to obtain payments in respect thereof;
c. exchange interim receipts or temporary Securities held in the
Account for definitive Securities; and
d. where any Securities held in any securities depository are
called for a partial redemption by the issuer of such
Securities, allot in Bank of Butterfield's sole discretion the
called portion to the respective holders in any manner deemed
to be fair and equitable in Bank of Butterfield's judgment.
Whenever pursuant to this Agreement or for any purpose relating hereto
anything whatsoever may or is required to be done or given by the Fund,
it shall be done or given, as the case may be, by and for the Fund by
such officer or officers of the Fund or other person or persons as the
governing body of the Fund shall specify from time to time by
resolution certified by the President, Vice President, Secretary, or
Assistant Secretary of the Fund. Bank of Butterfield shall be
conclusively entitled to rely upon the identification of such persons
as the holders of those offices so specified in any such resolution,
absent Instructions to the contrary. The Fund shall furnish to Bank of
Butterfield specimens of the signatures of all such officers and
persons so specified in such resolution received by Bank of Butterfield
in force at the time of the receipt by Bank of Butterfield of such
Instructions, and shall not be charged with any responsibility
respecting the application of monies out in accordance therewith.
Bank of Butterfield shall not be liable for any act or omission in
respect of any Instructions so given except in the case of wilful
default, wilful negligence, fraud, bad faith, misconduct, or disregard
of duties on the part of the Bank of Butterfield. Bank of Butterfield
in executing all Instructions will take relevant action in accordance
with accepted industry practice.
2. The Account shall not be subject to any right, charge, security
interest, lien or claim of any kind (collectively, "Claims") in favor
of Bank of Butterfield or any creditor of Bank of Butterfield,
including a receiver or trustee in bankruptcy, except to the extent of
Bank of Butterfield's right to compensation or reimbursement with
regard to the Account's administration in accordance with the terms of
this Agreement. Bank of Butterfield shall provide the Fund with prompt
notice of any attempt by any party to assert any Claim against the
Account and shall take all actions to protect the Account from such
Claim until the Fund has had a reasonable time to respond to such
notice.
3. The ownership of the assets of the Account, whether Securities, Cash or
both, and whether any such assets are held by Bank of Butterfield or in
a securities depository or clearing agency as hereinafter authorized,
shall be clearly recorded on Bank of Butterfield's books as for the
interest of the Fund, and, to the extent securities are physically held
in the Account, such Securities shall also be physically segregated
from the general assets of Bank of Butterfield and the assets of Bank
of Butterfield's other customers.
In order to facilitate the settlement of transactions, Bank of
Butterfield may, with the approval of the Fund, which shall not be
unreasonably withheld, maintain all or any
-2-
part of the Securities in the Account with a securities depository or
clearing agency which is incorporated or organized under the law of a
country other than the United States of America and is supervised or
regulated by a government agency or regulatory authority in the foreign
jurisdiction having authority over such depositories or agencies, and
which operates the central system for handling of securities or
equivalent book entries, provided, however, that while so maintained
such Securities shall be subject only to the directions of Bank of
Butterfield, and that Bank of Butterfield's duties, obligations and
responsibilities with regard to such Securities shall be the same as if
such Securities were held by Bank of Butterfield.
Securities which are eligible for deposit in a depository may be
maintained with the depository in an account for Bank of Butterfield's
customers. Securities which are not deposited in a depository will be
held in the following forms:
a. Securities issued only in bearer form shall be held in bearer
form.
b. Securities issued only in registered form shall be registered
in the name of Palmar Limited, which name is not used by Bank
of Butterfield for its own Securities, and that such
Securities are identified at all times, by book-entry or
otherwise, as belonging to the Fund and distinguished from
other Securities held for other clients using the same nominee
name, unless alternate instructions are furnished by the Fund.
c. Securities issued in both bearer and registered form which are
freely interchangeable without penalty (i) shall be registered
in the name of Bank of Butterfield, or in the name of Bank of
Butterfield's nominee, if received by Bank of Butterfield in
registered form, provided that such name is not used by Bank
of Butterfield for its own Securities, and that such
Securities are identified at all times, by book-entry or
otherwise, as belonging to the Fund and distinguished from
other Securities held for other clients using the same nominee
name, or (ii) shall be held in bearer form if received by Bank
of Butterfield in bearer form, unless alternate instructions
are furnished by the Fund.
4. Subject to the provisions of Section 8 hereof:
a. Bank of Butterfield shall be responsible for complying with
all provisions of the laws of Bermuda, or any other law
applicable to Bank of Butterfield in connection with its
duties hereunder including (but not limited to) the payment of
all transfer or similar taxes and compliance with any currency
restrictions and securities laws;
-3-
b. All collections of funds or other property paid or distributed
in respect of Securities held in the Account shall be made at
the risk of the Account; and
c. Bank of Butterfield shall have no liability for any loss
occasioned by delay in the actual receipt of notice by its
Custody Division of any payment, redemption or other
transaction regarding Securities held in the Account in
respect of which Bank of Butterfield has agreed to take action
as provided in Section 1 hereof.
5. Subject to applicable law, Bank of Butterfield will permit independent
public accountants for the Fund reasonable access to its books and
records as they pertain to the Account in connection with such
accountants' examination of the books and records of the Account.
6. Bank of Butterfield will either periodically or upon the Fund's request
supply the Fund with such statements regarding the Account as the Fund
may request and Bank of Butterfield is able to supply, including an
identification of, and the location of, any person having physical
possession of the Securities in the Account, and the name and address
of the governmental agency or other regulatory authority that
supervises or regulates Bank of Butterfield. In addition, Bank of
Butterfield will furnish the Fund periodically with advises and/or
notifications of any transfers of such securities.
7. Bank of Butterfield agrees that in the event of any loss of Securities
or Cash in the Account, Bank of Butterfield will use its best efforts
to ascertain the circumstances relating to such loss and promptly
report the same to the Fund.
8. Bank of Butterfield will indemnify the Fund for any loss or liability
to the Fund with respect to the Account (including, but not limited to,
the Fund's reasonable legal fees and expenses and any other reasonable
legal fees and expenses for which the Fund is liable, and any loss or
liability in connection with a claim settled by agreement between the
Fund and a shareholder, which agreement is accepted by Bank of
Butterfield) to the extent that such loss or liability arises from
negligence, fraud, bad faith, misconduct or disregard of duties on the
part of Bank of Butterfield. The Fund will indemnify Bank of
Butterfield for any loss or liability Bank of Butterfield incurs from
any action taken or omitted to be taken by Bank of Butterfield with
respect to the Account, except such losses or liability as results from
the negligence, fraud, bad faith, misconduct or disregard of duties on
the part of Bank of Butterfield.
9. Bank of Butterfield acknowledges that under U.S. regulatory
requirements Bank of Butterfield must be a regulated entity and must
have a certain minimum shareholders' equity in order to be used by the
Fund to provide the services contemplated in this Agreement. Bank of
Butterfield represents and warrants that it (i) is a banking
institution organized under the law of Bermuda, (ii) is regulated as a
banking institution by The Bermuda Monetary Authority, and (iii) on and
after the date hereof or such
-4-
later date as shall be specified in Instructions, has shareholders'
equity in excess of two hundred thirty million U.S. dollars (U.S.
$230,000,000), or such lesser amount as shall be specified in any order
of the United States Securities and Exchange Commission applicable to
Bank of Butterfield. For purposes of this Section, shareholders' equity
of the Bank of Butterfield shall mean such shareholders' equity as
would be shown on any financial statement of the Bank of Butterfield if
such financial statement were prepared according to United States
generally accepted accounting principles. Bank of Butterfield will
immediately notify the Fund in writing or by other authorized means of
any development or occurrence (and the circumstances related thereto)
which could render Bank of Butterfield unable to make the foregoing
representation at any date. Upon such notification the Fund may
terminate this Agreement immediately without prior notice to Bank of
Butterfield.
10. As used in this Agreement, the term "Instructions" means instructions
of the Fund received by Bank of Butterfield via telephone, or in
writing, including but not limited to telex, TWX, facsimile
transmission, Bank of Butterfield wire or other teleprocess or
electronic instruction system which Bank of Butterfield believes in
good faith to have been given by the Fund or which are transmitted with
proper testing or authentication pursuant to terms and conditions which
the Fund may specify. Unless otherwise expressly provided, all
Instructions shall continue in full force and effect until canceled or
superseded. Bank of Butterfield shall safeguard any testkeys,
identification codes or other security devices which the Fund shall
make available to it. Either party may electronically record any
Instructions given by telephone, and any other telephone discussions,
with respect to the Account. Instructions by telephone shall be
confirmed by telex or such other communication as maybe mutually
acceptable.
11. The Fund agrees to pay Bank of Butterfield such compensation, including
reimbursement of reasonable expenses (if not charged to the Account),
as may be mutually agreed upon from time to time between Bank of
Butterfield and the Fund.
12. Either Bank of Butterfield or the Fund may terminate this Agreement by
60 days written notice to the other party, provided that any such
notice, whether given by the Fund or by Bank of Butterfield shall be
followed within 60 days by Instructions specifying the names of the
persons to whom Bank of Butterfield shall deliver the Securities in the
Account and to whom the cash in the Account shall be paid. If within 60
days following the giving of such notice of termination Bank of
Butterfield does not receive such Instructions, Bank of Butterfield
shall continue to hold such Securities and cash subject to this
Agreement until such Instructions are given. The obligations of the
parties under Section 4(a), 8 and 11 of this Agreement shall survive
the termination of this Agreement.
13. Notices with respect to termination, specification of officers and
other persons and terms and conditions for Instructions shall be in
writing, and delivered by mail, postage
-5-
prepaid, to the following addresses (or to such other address as either
party hereto may from time to time designate by notice duly given in
accordance with this paragraph):
To Bank of Butterfield at:
The Bank of Butterfield Executor & Trustee Co. Ltd.
P.O. Box HM 1735
Hamilton HM GX
Bermuda
Facsimile: (441) 292-1258
Telex: 3320 BETCO BA
Attention: The Manager - Trust Services
To the Fund at:
The Baupost Group, Inc.
P.O. Box 389125
44 Brattle Street
2nd Floor
Cambridge, MA 02238-9125
Facsimile: (617) 876-0930
Telex: N/A
Attention: David Morris/Scott Nathan
14. To the extent the rules and conditions of the Bank of Butterfield
regarding accounts generally or custody accounts specifically are
inconsistent with this Agreement, such rules and conditions shall not
apply.
15. This Agreement shall not be assignable and the rights and obligations
hereunder shall not be delegated by either party, but this Agreement
shall bind any successor in interest of the Fund and Bank of
Butterfield, respectively.
16. This Agreement shall be governed by and construed in accordance with
the laws of Bermuda, without regard to principles of conflicts of law.
17. A copy of the Declaration of Trust of the Fund is on file with the
Secretary of The Commonwealth of Massachusetts, and notice is hereby
given that the obligations of or arising out of this instrument are not
binding upon any of the trustees or beneficiaries individually but
binding only upon the assets and property of the Fund.
-6-
IN WITNESS WHEREOF, each party has caused this Custody Agreement to be
executed by its officer thereunto duly authorized as of the date first above
written.
THE BANK OF
N.T. BUTTERFIELD & SON LTD. THE BAUPOST FUND
By: /s/ Austin Caffrey By: /s/ Seth A. Klarman
- --------------------------------- --------------------------------
Name: Austin Caffrey Name: Seth A. Klarman
Title: Manager - Trust Services Title: President
-7-
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 4, 1996 with
respect to the financial statements and financial highlights of The Baupost
Fund, in Post-Effective Amendment Number 8 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, 1997.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 28, 1997
<TABLE>
<CAPTION>
SEC ANNUAL RATE OF RETURN Simple
Cumulative ----------------- Compound Ord. Inc. O/I Div. Cap. Gain
Orig. Inv./ # of Total LIFE TO ROLLING Rate of Price Per Shares Dividend Dollars Dividend
Date End.Red.Value Periods Return DATE 12 MONTHS Return Share Purchased Per Share Reinvested Per Share
----- ------------- ------- ------ ----- --------- ------- ------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Init. Inv. 10/01/90 $0.00 0.0000 N/A N/A N/A N/A $100.00 $0.00
10/31/90 $0.00 0.0000 N/A N/A N/A N/A $100.60 $0.00
11/30/90 $0.00 0.0000 N/A N/A N/A N/A $101.34 $0.00
12/14/90 $1,000.00 0.0000 0.00% N/A N/A N/A $101.60 9.843 $0.00
Dividend 12/30/90 $1,003.05 0.0417 0.31% 7.59% 0.31% 7.32% $101.91 $0.00
Div. Reinv. 12/31/90 $1,003.05 0.0417 0.30% 7.58% 0.30% 7.31% $100.41 $1.50 $14.76 $0.00
1/31/91 $1,066.98 0.1250 6.70% 67.98% 6.70% 53.59% $106.81 $0.00
2/28/91 $1,087.26 0.2083 8.73% 49.42% 8.73% 41.88% $108.84 $0.00
3/31/91 $1,115.43 0.2917 11.54% 45.43% 11.54% 39.58% $111.66 $0.00
4/30/91 $1,163.18 0.3750 16.32% 49.64% 16.32% 43.51% $116.44 $0.00
5/31/91 $1,178.56 0.4583 17.86% 43.11% 17.86% 38.96% $117.98 $0.00
6/30/91 $1,186.66 0.5417 18.67% 37.16% 18.67% 34.46% $118.79 $0.00
7/31/91 $1,182.66 0.6250 18.27% 30.79% 18.27% 29.23% $118.39 $0.00
8/31/91 $1,181.66 0.7083 18.17% 26.57% 18.17% 25.65% $118.29 $0.00
9/30/91 $1,179.96 0.7917 18.00% 23.25% 18.00% 22.73% $118.12 $0.00
Fiscal Y/E 10/31/91 $1,195.75 0.8750 19.57% 22.67% 19.57% 22.37% $119.70 $0.00
11/30/91 $1,220.52 0.9583 22.05% 23.11% 22.05% 23.01% $122.18 $0.00
Dividend 12/30/91 $1,229.71 1.0417 22.97% 21.96% 22.60% 22.05% $123.10 $0.00
Div. Reinv. 12/31/91 $1,229.71 1.0417 22.97% 21.96% 22.60% 22.05% $117.85 $5.25 $52.44 $0.00
1/31/92 $1,246.61 1.1250 24.66% 21.65% 16.84% 21.92% $119.47 $0.00
2/28/92 $1,259.13 1.2083 25.91% 21.01% 15.81% 21.45% $120.67 $0.00
3/31/92 $1,278.23 1.2917 27.82% 20.93% 14.60% 21.54% $122.50 $0.00
4/30/92 $1,273.85 1.3750 27.38% 19.25% 9.51% 19.92% $122.08 $0.00
5/31/92 $1,270.40 1.4583 27.04% 17.83% 7.79% 18.54% $121.75 $0.00
6/30/92 $1,284.07 1.5417 28.41% 17.61% 8.21% 18.43% $123.06 $0.00
7/31/92 $1,255.59 1.6250 25.56% 15.03% 6.17% 15.73% $120.33 $0.00
8/31/92 $1,277.08 1.7083 27.71% 15.39% 8.08% 16.22% $122.39 $0.00
9/30/92 $1,301.18 1.7917 30.12% 15.83% 10.27% 16.81% $124.70 $0.00
Fiscal Y/E 10/31/92 $1,309.43 1.8750 30.94% 15.46% 9.51% 16.50% $125.49 $0.00
11/30/92 $1,324.45 1.9583 32.45% 15.43% 8.52% 16.57% $126.93 $0.00
Dividend 12/30/92 $1,400.10 2.0417 40.01% 17.92% 13.86% 19.60% $134.18 $0.00
Div. Reinv. 12/31/92 $1,400.10 2.0417 40.01% 17.92% 13.86% 19.60% $125.88 $5.325 $55.56 $2.975
1/29/93 $1,448.15 2.1250 44.82% 19.04% 16.17% 21.09% $130.20 $0.00
2/26/93 $1,497.65 2.2083 49.76% 20.07% 18.94% 22.53% $134.65 $0.00
3/31/93 $1,504.54 2.2917 50.45% 19.51% 17.71% 22.02% $135.27 $0.00
4/30/93 $1,515.22 2.3750 51.52% 19.12% 18.95% 21.69% $136.23 $0.00
5/28/93 $1,538.69 2.4583 53.87% 19.16% 21.12% 21.91% $138.34 $0.00
6/30/93 $1,554.15 2.5417 55.41% 18.94% 21.03% 21.80% $139.73 $0.00
7/30/93 $1,577.28 2.6250 57.73% 18.96% 25.62% 21.99% $141.81 $0.00
8/31/93 $1,607.32 2.7083 60.73% 19.15% 25.86% 22.42% $144.51 $0.00
9/30/93 $1,601.09 2.7917 60.11% 18.36% 23.05% 21.53% $143.95 $0.00
Fiscal Y/E 10/29/93 $1,642.68 2.8750 64.27% 18.84% 25.45% 22.35% $147.69 $0.00
Stock Split 10/31/93 $1,642.68 2.8750 64.27% 18.84% 25.45% 22.35% $14.769 $0.00
11/30/93 $1,641.68 2.9583 64.17% 18.24% 23.95% 21.69% $14.76 $0.00
Dividend 12/30/93 $1,663.93 3.0417 66.39% 18.22% 18.84% 21.83% $14.96 $0.00
Div. Reinv. 12/31/93 $1,663.92 3.0417 66.39% 18.22% 18.84% 21.83% $13.07 $1.48 $164.61 $0.41
1/31/94 $1,700.84 3.1250 70.08% 18.53% 17.45% 22.43% $13.36 $0.00
2/28/94 $1,697.02 3.2083 69.70% 17.92% 13.31% 21.73% $13.33 $0.00
3/31/94 $1,690.65 3.2917 69.07% 17.30% 12.37% 20.98% $13.28 $0.00
4/29/94 $1,718.66 3.3750 71.87% 17.40% 13.43% 21.29% $13.50 $0.00
5/31/94 $1,783.59 3.4583 78.36% 18.21% 15.92% 22.66% $14.01 $0.00
6/30/94 $1,784.86 3.5417 78.49% 17.77% 14.84% 22.16% $14.02 $0.00
7/29/94 $1,772.13 3.6250 77.21% 17.10% 12.35% 21.30% $13.92 $0.00
8/31/94 $1,778.50 3.7083 77.85% 16.80% 10.65% 20.99% $13.97 $0.00
9/30/94 $1,775.95 3.7917 77.59% 16.35% 10.92% 20.46% $13.95 $0.00
10/31/94 $1,824.33 3.8750 82.43% 16.78% 11.06% 21.27% $14.33 $0.00
11/30/94 $1,792.50 3.9583 79.25% 15.89% 9.19% 20.02% $14.08 $0.00
Dividend 12/29/94 $1,797.59 4.0417 79.76% 15.62% 8.03% 19.73% $14.12 $0.00
Div. Reinv. 12/30/94 $1,797.59 4.0417 79.76% 15.62% 8.03% 19.73% $12.30 $1.53 $194.78 $0.29
1/31/95 $1,812.20 4.1250 81.22% 15.50% 6.55% 19.69% $12.40 $0.00
2/28/95 $1,820.97 4.2083 82.10% 15.31% 7.30% 19.51% $12.46 $0.00
3/31/95 $1,829.74 4.2917 82.97% 15.12% 8.23% 19.33% $12.52 $0.00
4/28/95 $1,857.51 4.3750 85.75% 15.20% 8.08% 19.60% $12.71 $0.00
5/31/95 $1,875.04 4.4583 87.50% 15.14% 5.13% 19.63% $12.83 $0.00
6/30/95 $1,872.12 4.5417 87.21% 14.81% 4.89% 19.20% $12.81 $0.00
7/31/95 $1,891.12 4.6250 89.11% 14.77% 6.71% 19.27% $12.94 $0.00
8/31/95 $1,915.96 4.7083 91.60% 14.81% 7.73% 19.45% $13.11 $0.00
9/29/95 $1,990.50 4.7917 99.05% 15.45% 12.08% 20.67% $13.62 $0.00
10/31/95 $1,968.58 4.8750 96.86% 14.90% 7.91% 19.87% $13.47 $0.00
11/30/95 $1,971.50 4.9583 97.15% 14.67% 9.99% 19.59% $13.49 $0.00
Dividend 12/28/95 $1,999.27 5.0417 99.93% 14.73% 11.22% 19.82% $13.68 $0.00
Div. Reinv. 12/29/95 $1,999.27 5.0417 99.93% 14.73% 11.22% 19.82% $12.75 0.63 $92.07 $0.30
1/31/96 $2,027.49 5.1250 102.75% 14.79% 11.88% 20.05% $12.93 $0.00
2/29/96 $2,074.53 5.2083 107.45% 15.04% 13.92% 20.63% $13.23 $0.00
3/29/96 $2,061.99 5.2917 106.20% 14.65% 12.69% 20.07% $13.15 $0.00
4/30/96 $2,101.19 5.3750 110.12% 14.81% 13.12% 20.49% $13.40 $0.00
5/31/96 $2,225.07 5.4583 122.51% 15.78% 18.67% 22.44% $14.19 $0.00
6/28/96 $2,301.90 5.5417 130.19% 16.24% 22.96% 23.49% $14.68 $0.00
7/31/96 $2,281.52 5.6250 128.15% 15.79% 20.64% 22.78% $14.55 $0.00
8/30/96 $2,347.37 5.7083 134.74% 16.12% 22.52% 23.60% $14.97 $0.00
9/30/96 $2,374.03 5.7917 137.40% 16.10% 19.27% 23.72% $15.14 $0.00
10/31/96 $2,411.66 5.8750 141.17% 16.16% 22.51% 24.03% $15.38 $0.00
</TABLE>
<TABLE>
<CAPTION>
C/G Div. Total
Dollars Reinvested Cumulative
Reinvested Shares Shares
---------- ---------- ----------
<S> <C> <C>
$0.00 0.000 0.000
$0.00 0.000 0.000
$0.00 0.000 0.000
$0.00 0.000 9.843
$0.00 0.000 9.843
$0.00 0.147 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.000 9.990
$0.00 0.445 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$0.00 0.000 10.435
$31.04 0.688 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 11.123
$0.00 0.000 111.225
$0.00 0.000 111.225
$0.00 0.000 111.225
$45.60 16.083 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$0.00 0.000 127.308
$36.92 18.837 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$0.00 0.000 146.145
$43.84 10.660 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
$0.00 0.000 156.805
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
This schedule contains summary financial information extracted from the
Baupost Fund's audited financial statements at 10/31/96 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 97,297,169
<INVESTMENTS-AT-VALUE> 108,955,788
<RECEIVABLES> 4,241,511
<ASSETS-OTHER> 465,727
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 113,663,026
<PAYABLE-FOR-SECURITIES> 4,117,404
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 757,580
<TOTAL-LIABILITIES> 4,874,984
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 86,275,184
<SHARES-COMMON-STOCK> 7,072,862
<SHARES-COMMON-PRIOR> 6,640,906
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 99,004
<ACCUMULATED-NET-GAINS> 10,890,028
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,721,834
<NET-ASSETS> 108,788,042
<DIVIDEND-INCOME> 1,532,435
<INTEREST-INCOME> 2,195,944
<OTHER-INCOME> 10,010
<EXPENSES-NET> 1,486,903
<NET-INVESTMENT-INCOME> 2,251,486
<REALIZED-GAINS-CURRENT> 10,367,365
<APPREC-INCREASE-CURRENT> 7,415,969
<NET-CHANGE-FROM-OPS> 20,034,820
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,825,419
<DISTRIBUTIONS-OF-GAINS> 4,283,665
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,109,681
<NUMBER-OF-SHARES-REDEEMED> 1,132,554
<SHARES-REINVESTED> 454,829
<NET-CHANGE-IN-ASSETS> 19,348,663
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,311,706
<OVERDISTRIB-NII-PRIOR> 30,449
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 991,872
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,486,903
<AVERAGE-NET-ASSETS> 98,289,342
<PER-SHARE-NAV-BEGIN> 13.47
<PER-SHARE-NII> .41
<PER-SHARE-GAIN-APPREC> 2.43
<PER-SHARE-DIVIDEND> .28
<PER-SHARE-DISTRIBUTIONS> .65
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.38
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
