<PAGE> 1
As filed with the Securities and Exchange Commission on February 27, 1998
Registration No. 33-35851
File No. 811-6138
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----
Pre-Effective Amendment No.
----- -----
Post-Effective Amendment No. 10 X
----- -----
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-----
Amendment No. 12 X
---- -----
THE BAUPOST FUND
----------------
(Exact Name of Registrant as Specified in Charter)
P.O. Box 381288
---------------
44 Brattle Street
-----------------
Cambridge, MA 02238
-------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number: (617) 497-6680
It is proposed that this filing will become effective (check appropriate box):
immediately upon filing pursuant to paragraph (b).
---
X on February 28, 1998 pursuant to paragraph (b).
---
60 days after filing pursuant to paragraph (a)(1).
---
on (date) pursuant to paragraph (a)(1).
---
75 days after filing pursuant to paragraph (a)(2).
---
on (date) pursuant to paragraph (a)(2) of Rule 485.
---
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.
================================================================================
<PAGE> 2
PROSPECTUS
Dated February 28, 1998
THE BAUPOST FUND
44 Brattle Street
Post Office Box 381288
Cambridge, MA 02238
(617) 497-6680
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company. The Fund's principal investment objective is
capital appreciation, and its secondary objective is income. The Fund pursues
these objectives primarily through investments in foreign and domestic
securities, including common stocks, preferred stocks and debt securities, that
the Fund's investment adviser, The Baupost Group, L.L.C. ("Baupost" or the
"Adviser"), believes are available for purchase at prices less than their
intrinsic value. There is no assurance that the Fund will achieve its
objectives. THE FUND MAY INVEST UP TO 15% OF ITS NET ASSETS IN ILLIQUID
SECURITIES; THIS COULD RESULT IN HIGHER TRANSACTION COSTS THAN INVESTING IN
LIQUID SECURITIES AND CAUSE TIME DELAYS AND COSTS AND POSSIBLE LOSSES IN
CONNECTION WITH THE SALE OF SUCH SECURITIES. See "How the Fund Pursues Its
Objectives."
THE FUND MAY INVEST PREDOMINANTLY IN LOWER RATED BONDS, COMMONLY
REFERRED TO AS "JUNK BONDS." BONDS OF THIS TYPE ARE CONSIDERED TO BE SPECULATIVE
WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. PURCHASERS
SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND. See
"How the Fund Pursues Its Objectives."
Shares of the Fund may be purchased in a continuous offering directly
from the Fund at net asset value without a sales charge or underwriting
commission on the last day of each month on which the New York Stock Exchange is
open for business. The minimum initial investment in the Fund is $50,000; the
minimum additional investment is $1,000. The Fund reserves the right at any time
to reject an order to purchase shares of the Fund. See "Purchase of Shares."
Before investing in the Fund, shareholders will be required to execute an
agreement pursuant to which they will agree not to transfer their shares, except
as approved by the Fund.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Fund. Please retain this Prospectus
for future reference. A Statement of Additional Information, dated February 28,
1998, containing additional and more detailed information about the Fund has
been filed with the Securities and Exchange Commission (the "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. The Commission maintains a Web site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and Statement of
Additional Information, and other information regarding registrants that file
electronically with the Commission.
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
<PAGE> 3
THE BAUPOST GROUP, L.L.C.
TABLE OF CONTENTS
<TABLE>
<S> <C>
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 9
PORTFOLIO MANAGEMENT AND PORTFOLIO TURNOVER 11
RISK FACTORS 12
LIMITING INVESTMENT RISK 14
PURCHASE OF SHARES 14
REDEMPTION OF SHARES 15
DETERMINATION OF NET ASSET VALUE 15
DISTRIBUTIONS 16
TAXES 17
MANAGEMENT OF THE FUND 18
HOW THE FUND SHOWS PERFORMANCE 19
DESCRIPTION OF THE FUND AND OWNERSHIP OF SHARES 20
ADMINISTRATOR 20
CUSTODIAN 20
TRANSFER AND DIVIDEND DISBURSING AGENT 21
REPORTS TO SHAREHOLDERS 21
SHAREHOLDER INQUIRIES 21
APPENDIX A -- OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS 22
APPENDIX B -- DESCRIPTION OF DEBT RATINGS 35
</TABLE>
-ii-
<PAGE> 4
EXPENSE INFORMATION
The following table summarizes any applicable transaction costs
associated with investing in the Fund and expenses based on the most recent
fiscal year:
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases................................................ NONE
Maximum Sales Load Imposed on
Reinvested Dividends..................................... NONE
Deferred Sales Load...................................... NONE
Redemption Fee........................................... NONE
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fee 1.00%
Administrative Fee .25%
Other Expenses .89%
Total Fund Operating Expenses 2.14%
EXAMPLE:
You would pay the following 1 Year 3 Years 5 Years 10 Years
expenses on a $1,000 investment $22 $67 $115 $247
assuming (1) 5% annual return
and (2) redemption at the end
of each time period:
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 does not represent past or 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-
<PAGE> 5
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
October 31 October 31
------------------------------------------------------------- ----------
1997 1996 1995 1994 1993 1992 1991(d)
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA (a)
Net Asset Value, beginning of period $ 15.38 $ 13.47 $ 14.33 $ 14.77 $ 12.56 $ 11.97 $ 10.04
------- ------- ------- ------- ------- ------- -------
Income from Investment Operations
Net investment income 0.30 0.41 0.25 0.22 0.28 0.24 0.47
Net realized and unrealized gain (loss) 3.47 2.43 0.71 1.23 2.76 0.88 1.46
------- ------- ------- ------- ------- ------- -------
Total from investment operations 3.77 2.84 0.96 1.45 3.04 1.12 1.93
Less Distributions
From net investment income 0.40 0.28 0.25 0.46 0.22 0.53 --
In excess of net investment income -- -- 0.08 -- -- -- --
From net realized gain 1.66 0.65 1.49 1.43 0.61 -- --
------- ------- ------- ------- ------- ------- -------
Total distributions 2.06 0.93 1.82 1.89 0.83 0.53 --
------- ------- ------- ------- ------- ------- -------
Net Asset Value, end of period $ 17.09 $ 15.38 $ 13.47 $ 14.33 $ 14.77 $ 12.56 $ 11.97
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN 27.04% 22.51% 7.91% 11.06% 25.45% 9.51% 19.21%(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, end of period (in thousands) $152,958 $108,788 $89,439 $81,787 $75,378 $46,942 $35,054
Ratio of expenses to average net assets 2.14%(f) 1.50% 1.54% 1.53% 1.52% 1.50% 1.50%(c)
Total expenses to average net assets 2.14%(f) 1.50% 1.54% 1.55% 1.63% 1.72% 2.01%(c)
Ratio of net investment income to average net assets 1.45% 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 1.45% 2.27% 1.60% 1.30% 2.17% 1.85% 4.82%(c)
Portfolio Turnover Rate 140% 120% 106% 161% 183% 137% 144%
Average commission rate (e) $0.0203 0.0271
</TABLE>
(a) All per share amounts reflect the effect of a ten-for-one share
split as of the close of business October 31, 1993.
(b) Total returns for periods of less than one year are not annualized.
(c) Annualized.
(d) For the period January 1, 1991 - October 31, 1991. For the period
from June 29, 1990 (date of organization) to December 31, 1990, net
income of $2,993, or $1.50 per share, was distributed to the Fund's
sole shareholder. Such distributions represented the net income of the
Fund prior to the date shares of beneficial interest were issued to the
public.
(e) For fiscal years beginning after September 1, 1995, the Fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
(f) The increase in expense ratios is due to equity swap contract
interest expense.
-2-
<PAGE> 6
THE FUND
The Baupost Fund (the "Fund") is a no-load, non-diversified, open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund was established as a Massachusetts
business trust under an Agreement and Declaration of Trust dated June 29, 1990.
THE FUND'S INVESTMENT OBJECTIVES
The principal investment objective of the Fund is capital appreciation.
Income is a secondary objective. These objectives are not fundamental and the
Trustees of the Fund may change them without shareholder approval. The Fund is
not intended to be a complete investment program, and there is no assurance the
Fund will achieve its objectives.
HOW THE FUND PURSUES ITS OBJECTIVES
BASIC INVESTMENT STRATEGY. The Fund pursues its investment objectives
primarily through investments in common stocks, preferred stocks, debt
securities (such as bonds, debentures, notes, bank debt and claims) and
participations therein, and other securities which, in the opinion of The
Baupost Group, L.L.C. ("Baupost" or the "Adviser"), are available at prices less
than their intrinsic value, as determined by Baupost after analysis and
research, taking into account, among other factors, the relationship of the
market value of the securities to book value, cash flow, and earnings. These
factors are not applied formulaically, as the Adviser examines each security
separately; the Adviser has no general criteria as to asset size, earnings or
industry type which would make a security unsuitable for purchase by the Fund.
The Fund may invest in common stocks, preferred stocks and debt securities,
whether domestic or foreign, in such proportions as the Adviser deems advisable.
The preferred stocks and debt securities may be convertible. In addition, the
Fund may enter into repurchase agreements, make loans of its portfolio
securities, enter into forward commitments, purchase warrants, engage in
options, futures and swap transactions, hold its assets in cash or in money
market instruments, and engage in short sales of securities. See "Investment
Practices" below. The Fund may invest up to 25% of its total assets in any one
industry. The achievement of the Fund's investment objectives will depend upon
the Adviser's analytical and portfolio management skills. In light of the types
of securities in which the Fund may invest, the Fund is not an appropriate
investment for investors seeking short-term profits.
The Fund generally purchases securities for investment purposes and not
for the purpose of influencing or controlling management of the issuer. However,
the Fund may seek to influence or control management by investing in a potential
takeover, leveraged buyout or reorganization or by investing in other entities
that were organized in order to purchase securities for the purpose of
influencing or controlling management, if the Adviser believes that the possible
increase in the value of its investment will outweigh the risks and costs
associated with the investment. The Fund may also discuss informally with
management different operating strategies, propose shareholder resolutions,
engage in a proxy contest or serve as part of a creditors' committee established
in connection with a company's insolvency. Neither the Fund nor the Adviser has
any experience in managing the types of companies in which the Fund will likely
invest.
-3-
<PAGE> 7
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 illiquid or 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-
<PAGE> 8
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 or in its failure to be completed. 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-
<PAGE> 9
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 or deflation for many years. Inflation, deflation and rapid
fluctuations in such rates have had, and may continue to have, negative effects
on the economies and securities markets of certain countries, notwithstanding
the efforts of such countries to develop a number of corrective mechanisms to
reduce inflation or deflation or mitigate their effects.
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
-6-
<PAGE> 10
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 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.
-7-
<PAGE> 11
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 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). The increase or decrease in the value of the indexed security may
be a multiple of the percentage change (positive or negative) in the value of
the underlying reference instrument(s). Indexed Securities 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, for
the reasons described above, 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. or foreign governments, their 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).
-8-
<PAGE> 12
OTHER INVESTMENT PRACTICES AND RISK CONSIDERATIONS
The Fund may from time to time engage in the investment practices
described below. In addition, the Fund may buy and sell (i.e., write) call and
put options on individual securities or on securities indices, buy and sell
futures contracts and related options, engage in spread and straddle
transactions, and engage in foreign currency exchange transactions (including
buying and selling options on foreign currencies and engaging in foreign
currency futures transactions and options thereon). Some of the options which
the Fund may purchase or sell may be traded over-the-counter. EACH OF THESE
PRACTICES INVOLVES CERTAIN SPECIAL RISKS. FOR INFORMATION ON OPTIONS AND FUTURES
TRANSACTIONS AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS, INCLUDING LIMITATIONS
DESIGNED TO REDUCE THE RISKS ASSOCIATED WITH THESE PRACTICES, SEE "APPENDIX A --
OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE TRANSACTIONS." 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
-9-
<PAGE> 13
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 at the time of making such investment
exceed 15% of the value of the Fund's total net assets. The securities
underlying repurchase agreements will be limited to securities in which the Fund
could invest directly pursuant to the Fund's investment policies. Repurchase
agreements are considered by the staff of the Securities and Exchange Commission
to be loans by the Fund to the bank or dealer involved, with the underlying
securities constituting collateral for the loans. The Adviser will monitor such
transactions to ensure that the value of the underlying securities will be at
least equal at all times to the total amount of the repurchase obligation,
including the interest factor. If the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent the proceeds of the
sale, including accrued interest, are less than the resale price provided in the
agreement, including interest. In addition, if the seller should be involved in
bankruptcy or insolvency proceedings, the Fund may incur delay and costs in
selling the underlying security or may suffer a loss of principal and interest
if the Fund is treated as an unsecured creditor and is required to return the
underlying collateral to the seller's estate. The Fund's investments in
repurchase agreements will be limited to transactions with financial
institutions which are determined by the Adviser to present minimal credit
risks. The Adviser will monitor the creditworthiness of such financial
institutions.
LOANS OF SECURITIES. The Fund may lend its portfolio securities,
provided that cash or other collateral equal to at least 100% of the market
value of the securities loaned is continuously maintained by the borrower with
the Fund. During the time securities are on loan, the borrower will pay the Fund
an amount equivalent to any dividends or interest paid on such securities, and
the Fund may invest the cash collateral and earn additional income, or it may
receive an agreed-upon amount of interest income from the borrower who has
delivered equivalent collateral. These loans are subject to termination at the
option of the Fund or the borrower. The Fund may pay reasonable administrative
and custodial fees in connection with a loan and may pay a negotiated portion of
the interest earned on the cash or equivalent collateral to the borrower or
placing broker. It is not currently anticipated that the Fund will have on loan
at any given time securities totaling more than one-third of its net assets. The
Fund runs the risk that the counterparty to a loan transaction will default on
its obligation and that the value of the collateral received may be insufficient
to cover the securities loaned as a result of an increase in the value of the
securities or decline in the value of the collateral.
FORWARD COMMITMENTS. The Fund may enter into contracts to purchase
securities for a fixed price at a specified future date beyond customary
settlement time ("forward commitments"). If the Fund does so, it will maintain
cash or securities in a segregated account having a value at all times
sufficient to meet the purchase price or will enter into offsetting contracts
for the forward sale of other securities it owns. Forward commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Fund's other assets. Although the Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, it may
dispose of a commitment prior to settlement if the Adviser deems it appropriate
to do so. The Fund may realize gains or losses upon the sale of forward
commitments. The Adviser will
-10-
<PAGE> 14
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. 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
and real estate-related securities. Real estate-related securities include
securities that are backed by, represent interests in or are secured by real
estate, as well as securities issued by companies or limited partnerships that
invest in real estate or interests in real estate. Investments in these
securities entail certain risks due to a variety of factors, including
uncertainties surrounding the underlying real estate ventures. Factors affecting
the performance of real estate ventures may include satisfactory completion of
construction, excess supply of real estate in certain markets, prudent
management of insurance risks, sufficient level of occupancy, adequacy of
financing available in capital markets, competent management, adequate rent to
cover operating expenses, local and regional markets for competing assets,
changes in applicable laws and governmental regulations (including taxes), and
social and economic trends.
The Fund may purchase and sell real estate in order to protect its
investment in such securities. Certain real estate-related securities in which
the Fund may invest may not be readily marketable; real estate is not 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."
NEW INVESTMENT PRODUCTS. New types of hedging instruments and
derivative instruments (including instruments used for nonhedging purposes) are
developed and marketed from time to time. Consistent with its investment
limitations, the Fund expects to invest in those new types of securities and
instruments that Baupost believes may assist the Fund in achieving its
investment objectives. Such investments may involve risks which exceed those
involved in the activities described above.
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
-11-
<PAGE> 15
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 or losses. 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 systematically preferred over any other account.
RISK FACTORS
NON-DIVERSIFICATION. The Fund is a "non-diversified" fund and as such
is not required to meet any diversification requirements under the 1940 Act.
Nevertheless, the Fund must meet certain diversification standards to qualify as
a "regulated investment company" for federal income tax purposes. See "Tax
Status" in the Statement of Additional Information. As a non-diversified fund,
the Fund may invest a relatively high percentage of its assets in the securities
of a relatively few issuers that the Adviser deems to be attractive investments,
rather than invest in the securities of a large number of issuers merely to
satisfy diversification requirements. Such policy will increase the risk of loss
to the Fund should there be a decline in the market value of any security in
which the Fund has invested a large percentage of its assets. Investment in a
non-diversified fund such as the Fund will generally entail greater risks than
investment in a "diversified" fund.
LOWER-RATED SECURITIES. Debt securities in which the Fund invests may
or may not be rated by rating agencies such as Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's ("S&P"), and, if rated, such rating may range
from the very highest to the very lowest, currently C for Moody's and D for S&P.
Securities rated below investment grade (below Baa if rated by Moody's and below
BBB if rated by S&P) normally provide a yield or yield to maturity that is
significantly higher than that of investment grade issues, but are predominately
speculative with respect to capacity to pay interest and repay principal. The
lower-rated categories include debt securities that are in default and debt
securities of issuers who are insolvent. The rating assigned to a security by
Moody's or S&P does not reflect an assessment of the volatility of the
security's market value or the liquidity of an investment in the security.
The values of lower-rated securities (including unrated securities of
comparable quality) fluctuate more than those of higher-rated securities,
although they may be less sensitive to interest rate changes. In addition, the
lower rating reflects a greater possibility that the financial condition of the
issuer, or adverse
-12-
<PAGE> 16
changes in general economic conditions, or both, or an unanticipated rise in
interest rates, may impair the ability of the issuer to make payments of
principal and income. The inability (or perceived inability) of issuers to make
timely payment of interest and principal would likely make the values of
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximating the values the Fund had placed on
such securities. In addition, the market price of lower-rated securities is
likely to be more volatile because: (i) an economic downturn or increased
interest rates may have a significant effect on the yield, price and potential
for default; (ii) the market may at times become less liquid or respond to
adverse publicity or investor perceptions, increasing the difficulty in
disposing of the securities or in valuing them for purposes of determining the
Fund's net asset value; and (iii) past legislation has limited (and future
legislation may further limit) investment by certain institutions in lower-rated
securities or the tax deductibility of the interest by the issuer, which may
adversely affect the value of such securities. The Fund will not necessarily
dispose of a security when its rating is reduced below its rating at the time of
purchase, although the Adviser will monitor the investment to determine whether
continued investment in the security will assist in meeting the Fund's
investment objectives. Because the Fund may invest without limit in such
lower-rated securities, the Fund's achievement of its investment objectives is
more heavily dependent on the Adviser's credit analysis. For a more complete
description of the ratings of debt securities, see "Appendix B -- Description of
Debt Ratings."
At times, a substantial portion of the Fund's assets may be invested in
securities as to which the Fund, by itself or together with other funds and
accounts managed by the Adviser and its affiliates, holds a major portion or all
of such securities. Although the Adviser generally considers such securities to
be liquid because of the availability of an institutional market for such
securities, it is possible that, under adverse market or economic conditions or
in the event of adverse changes in the financial condition of the issuer, the
Fund could find it more difficult to sell such securities when the Adviser
believes it advisable to do so or may be able to sell such securities only at
prices lower than if such securities were more widely held. Under such
circumstances, it may also be more difficult to determine the fair value of such
securities for purposes of computing the Fund's net asset value.
Certain securities held by the Fund may permit the issuer at its option
to "call," or redeem, its securities. If an issuer were to redeem securities
held by the Fund during a time of declining interest rates, the Fund may not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed.
The Fund may at times invest in so-called "zero-coupon" bonds and
"payment-in-kind" bonds. Zero-coupon bonds do not pay interest for their entire
lives and are issued at a discount from their principal amount in lieu of paying
interest periodically. Payment-in-kind bonds allow the issuer, at its option, to
make current interest payments on the bonds either in cash or in additional
bonds. Such investments may experience greater fluctuation in market value in
response to changes in market interest rates than bonds which pay interest in
cash currently. Both zero-coupon and payment-in-kind bonds allow an issuer to
avoid the need to generate cash to meet current interest payments, but may also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Accordingly, such bonds involve greater credit risk than
bonds paying interest in cash currently. Even though such bonds may not pay
current interest in cash, the Fund is nonetheless required to accrue interest
income on such investments and to
-13-
<PAGE> 17
distribute such amounts at least annually to shareholders. Thus, the Fund could
be required at times to liquidate other investments in order to satisfy its
distribution requirements.
The amount of information about the financial condition of an issuer of
tax-exempt securities may not be as extensive as that which is made available by
corporations whose securities are publicly traded. Therefore, to the extent the
Fund invests in lower-rated tax-exempt securities, the achievement of the Fund's
goals is more dependent on the Adviser's investment analysis than would be the
case if the Fund were investing in higher-rated securities.
During fiscal 1997, the Fund invested 2.3% of its net assets in debt
securities that were in default. The Adviser believes that such securities
provide attractive investment opportunities due in part to the discount from par
at which they are typically purchased. In addition to these securities, the Fund
also invested 1.6% of its net assets in securities rated B by Moody's, 0.1% of
its net assets in securities rated C by Moody's and 0.7% of its net assets in
unrated debt securities which, if rated, the Adviser believes would have been
rated C by Moody's.
LIMITING INVESTMENT RISK
Specific investment restrictions help the Fund attempt to limit
investment risks for its shareholders. See the Statement of Additional
Information. Except for investment restrictions designated as fundamental in the
Statement of Additional Information, the investment policies described in this
Prospectus and in the Statement of Additional Information are not fundamental
policies. The Trustees may change any non-fundamental investment policies
without shareholder approval.
PURCHASE OF SHARES
Shares of the Fund may be purchased in a continuous offering for cash
without a sales charge or underwriting commission directly from the Fund on the
last day of each month on which the New York Stock Exchange (the "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 fully completed and received by the Fund no later than the business day
preceding the Purchase Date, although the Fund requests that orders be sent so
that they are received by the Fund no later than five business days before such
Purchase Date. Unless otherwise approved by the Fund, all payments for
purchases must be made by
-14-
<PAGE> 18
wire transfer to an account designated by State Street Bank and Trust Company.
The deadline for wire transfers is 10:00 a.m. Eastern time on the Purchase Date.
When the consideration is received by the Fund after the deadline, the purchase
order will be rejected and will have to be resubmitted to the Fund on the next
Purchase Date.
Purchases will be made in full and fractional shares of the Fund
calculated to three decimal places. Shareholders will be sent a statement of
shares owned subsequent to each transaction.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed on any day the New York Stock
Exchange is open for business. The redemption price is the net asset value per
share next determined after receipt by the Fund of the redemption request in
"good order." Shares of the Fund will generally be redeemed by a distribution in
cash; however, the Fund reserves the right to redeem shares by a distribution in
kind of securities held by the Fund.
Securities used to redeem Fund shares in kind will be valued in
accordance with the Fund's procedures for valuation described under
"Determination of Net Asset Value." Securities distributed by the Fund in kind
will be selected by the Adviser in light of the Fund's investment objectives and
will not generally represent a pro rata distribution of each security held in
the Fund's portfolio. Shareholders who receive a distribution in kind should
expect to incur transaction costs when converting such securities to cash.
Payment on redemption will be made as promptly as possible and in any
event within seven days after the requested date provided that the request is in
"good order." A redemption request is in "good order" if it includes the exact
name in which shares are registered and the number of shares or the dollar
amount of shares to be redeemed and if it is signed exactly in accordance with
the form of registration. Persons acting in a fiduciary capacity, or on behalf
of a corporation, partnership or trust, must specify, in full, the capacity in
which they are acting. When opening an account with the Fund, shareholders may
be required to designate the account(s) to which funds may be transferred upon
redemption.
The Fund may suspend the right of redemption and may postpone payment
for more than seven days when the New York Stock Exchange is closed for other
than weekends or holidays, or if permitted by the rules of the Securities and
Exchange Commission, during periods when trading on the New York Stock Exchange
is restricted or during an emergency which makes it impracticable for the Fund
to dispose of its securities or to fairly determine the value of its net assets,
or during any other period permitted by the Securities and Exchange Commission
for the protection of investors.
DETERMINATION OF NET ASSET VALUE
The net asset value of a share is determined for the Fund as of the
close of trading on the New York Stock Exchange (normally 4:00 p.m. Eastern
time) once on each day on which the Exchange is open (other than a day on which
no shares of the Fund were tendered for redemption and no order to purchase
shares was accepted by the Fund, but at least as frequently as the last business
day of each month). The net asset
-15-
<PAGE> 19
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 investments will be determined as of the
closing of such exchanges and securities markets. However, events affecting the
values of such foreign investments may occasionally occur between the closings
of such exchanges and securities markets and the time the Fund determines its
net asset value which will not be reflected in the computation of such net asset
value. If an event materially affecting the value of such foreign investments
occurs during such period, then such investments 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 currencies 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
-16-
<PAGE> 20
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. Pursuant to the Taxpayer Relief Act of 1997 (the "1997 Act"),
long-term capital gains generally are taxed at a maximum tax rate of 28% or 20%
depending on the Fund's holding period in the portfolio investments.
Distributions will be taxed whether received in cash or in additional shares of
the Fund. For federal income tax purposes, a distribution paid to shareholders
by the Fund in January of a year generally is deemed to have been paid by the
Fund and received by shareholders on December 31 of the preceding year, if the
distribution was declared and payable to shareholders of record on a date in
October, November or December of that preceding year. The Fund will provide
federal tax information annually, including information about dividends and
other distributions paid during the preceding year.
Fund transactions in foreign currencies and hedging activities may give
rise to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned. In addition, such
activities will likely produce a difference between book income and taxable
income. This difference may cause a portion of the Fund's income distributions
to constitute a return of capital for tax purposes or require the Fund to make
distributions exceeding book income to qualify as a regulated investment company
for tax purposes.
Fund investments in foreign securities may be subject to withholding
taxes at the source on dividend or interest payments. In that case, the Fund's
yield on those securities would be decreased. If at the end of the Fund's
taxable year more than 50% of the value of the Fund's total assets represents
stock or securities of foreign corporations, the Fund intends to make an
election permitted by the Internal Revenue Code of 1986 (the "Code") to treat
any qualified foreign taxes it paid as paid by its shareholders. In this case,
shareholders who are U.S. citizens, U.S. corporations and, in some cases, U.S.
residents generally will be required to include in U.S. taxable income their pro
rata share of such taxes, but may then generally be
-17-
<PAGE> 21
entitled to claim a foreign tax credit or deduction (but not both) for their
share of such taxes. A shareholder's ability to claim a foreign tax credit or
deduction in respect of foreign taxes paid by the Fund may be subject to certain
limitations imposed by the Code (including, with respect to a credit, a holding
period requirement imposed pursuant to the 1997 Act), as a result of which a
shareholder may not get a full credit or deduction for the amount of such taxes.
Shareholders who do not itemize on their federal income tax returns may claim a
credit (but no deduction) for such foreign taxes.
Investment in an entity that qualifies as a "passive foreign investment
company" under the Internal Revenue Code could subject the Fund to a U.S.
federal income tax or other charge on certain "excess distributions" with
respect to the investment, and on the gains from disposition of the investment.
This tax, however, can be avoided by making an election to mark such investments
to market annually or to treat the passive foreign investment company as a
"qualified electing fund."
Under the "backup withholding" rules, the Fund may be required to
withhold for the payment of Federal income tax 31% of a non-corporate
shareholder's taxable distributions and redemption proceeds if such shareholder
fails to provide the Fund with a correct taxpayer identification number or to
make required certifications, or if a shareholder has been notified by the
Internal Revenue Service that he is otherwise subject to backup withholding. The
taxpayer identification number of an individual is his social security number.
The foregoing is a general summary of the Federal income tax
consequences for shareholders who are U.S. citizens or residents or U.S.
corporations. Shareholders should consult their own tax advisors about the
federal tax consequences of an investment in the Fund in light of each
shareholder's particular tax situation. Shareholders should also consult their
own tax advisors about consequences under foreign, state, local or other
applicable tax laws. See the Statement of Additional Information for more
information about taxes.
MANAGEMENT OF THE FUND
The Fund is advised and managed by Baupost, a Massachusetts limited
liability company. Seth A. Klarman, President of Baupost and of the Fund, owns
in excess of 50% of the ownership interest of Baupost. SAK Corporation, a
Massachusetts corporation with the principal function of managing and overseeing
Baupost, is wholly owned by Mr. Klarman. SAK Corporation is the sole manager of
Baupost, and as such, has sole decision-making authority over the management and
operation of Baupost. Mr. Klarman has had primary responsibility for the
day-to-day management of the Fund's portfolio since the Fund's inception in
January, 1991. Mr. Klarman has been with The Baupost Group, L.L.C. or The
Baupost Group, Inc. ("BGI") since April, 1982. Prior to January 2, 1998, the
Fund was advised and managed by BGI. On that date, BGI underwent a corporate
restructuring that resulted, among other things, in the transfer of all of its
assets and liabilities of BGI to Baupost. Upon consummation of that transaction,
Baupost succeeded to the business operations previously conducted by BGI. Assets
under management totaled approximately $1.438 billion on January 31, 1998.
-18-
<PAGE> 22
Under the Management Contract with the Fund, Baupost, subject to such
policies as the Trustees may determine, selects and reviews the Fund's
investments and provides office space for the Fund and pays all salaries, fees
and expenses of officers and Trustees of the Fund who are affiliated with
Baupost. In the event that Baupost 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 Baupost 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. Baupost has agreed with the
Fund to reduce its management fee by up to .75% to the extent that the Fund's
total annual expenses (including the management fee, the administrative fee
described below and certain other expenses, but excluding brokerage commissions,
transfer taxes, interest and expenses relating to preserving the value of the
Fund's investments) would otherwise exceed 1.50% of the Fund's average net
assets.
From time to time, the Fund may engage in certain investment practices
that the Adviser believes to be in the best interests of the Fund and its
shareholders which will cause the Fund to incur expenses not subject to the
expense limitation. For example, the Fund may invest in equity swap contracts
with interest components which will be recorded as swap interest expense, and as
such not subject to the expense limitation. Expenses incurred by the Fund which
are not subject to the expense limitation may at times be substantial. This was
the case during fiscal 1997.
In addition, the Fund will pay all expenses incurred in connection with
the organization and operation of the Fund, including but not limited to
brokerage commissions and transfer taxes in connection with its portfolio
transactions, all applicable taxes and filing fees, the fees and expenses for
registration or qualification of its shares under the federal or state
securities laws, the compensation of certain Trustees, interest charges, charges
of custodians, administrative and transfer agency expenses, auditing and legal
expenses, expenses of meetings of shareholders, expenses of printing and mailing
prospectuses, financial reports, proxy statements and proxies to existing
shareholders, insurance premiums and professional association dues or
assessments.
HOW THE FUND SHOWS PERFORMANCE
From time to time the Fund may include in its communications to current
or prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on an amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of an amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends and distributions. The
Fund does not have a sales load or other charges paid by all shareholders that
affect its calculation of total return or average annual total return. Any
quotation of total return or average annual total return for any period when an
expense limitation was in effect will be greater than if the limitation had not
been in effect.
All data is based on the Fund's past investment results and does not
predict future performance. Investment performance, which will vary, is based on
many factors, including market conditions, the composition of the Fund's
portfolio, and the Fund's operating expenses. Investment performance also often
reflects the risks associated with the Fund's investment objectives and
policies. These factors should be considered when comparing the Fund's
investment results to those of other mutual funds and other investment vehicles.
-19-
<PAGE> 23
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.
ADMINISTRATOR
Baupost acts as the Fund's administrator under an Administrative
Services Agreement. Under the agreement with the Fund, Baupost provides, among
other things, bookkeeping and certain clerical services to the Fund and will
calculate the total net asset value, total net income, and net asset value per
share of the Fund. For these services, the Fund pays Baupost a quarterly fee at
the annual rate of .25% of the Fund's average net asset value.
CUSTODIAN
State Street Bank and Trust Company ("State Street") acts as the Fund's
custodian. State Street has contracted with certain foreign banks and
depositories to hold portfolio securities outside of the United States on behalf
of the Fund. State Street has no part in determining the Fund's investment
policies or which securities are to be purchased or sold for the Fund.
-20-
<PAGE> 24
TRANSFER AND DIVIDEND DISBURSING AGENT
State Street acts as the Fund's transfer agent and dividend disbursing
agent under a Transfer Agency and Service Agreement. Under the Agreement with
the Fund, State Street provides customary transfer agency services to the Fund.
REPORTS TO SHAREHOLDERS
The fiscal year of the Fund ends on October 31 of each year. The Fund
will send to its shareholders a semi-annual report containing unaudited
financial statements and an annual report containing audited financial
statements.
SHAREHOLDER INQUIRIES
Shareholders may direct inquiries to the Fund c/o The Baupost Group,
L.L.C., 44 Brattle Street, Post Office Box 381288, Cambridge, Massachusetts
02238.
-21-
<PAGE> 25
APPENDIX A -- OPTIONS, FUTURES AND FOREIGN CURRENCY EXCHANGE
TRANSACTIONS
Subject to applicable law, and unless otherwise specified in the
prospectus or the Statement of Additional Information, the Fund may engage
without limit in options and futures transactions and certain foreign currency
exchange transactions for hedging and non-hedging purposes. These investment
practices may be used to attempt to reduce fluctuations in the Fund's net asset
value or for other purposes permitted by applicable law. There can be no
assurance that such practices will be successful. Expenses and losses resulting
from these activities will reduce the Fund's current income and net asset value.
In connection with transactions in futures contracts and related
options written by the Fund, the Fund will be required to deposit with its
custodian or broker as "initial margin" an amount of cash and/or securities.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the values of the futures contracts or
options. Because of the investment leverage involved in these transactions, the
Fund's obligations under its futures contracts or options could require the Fund
to deliver or take delivery of investments with a value equal to or greater than
the entire amount of its assets.
OPTIONS ON SECURITIES
WRITING COVERED OPTIONS. The Fund may write covered call options and
covered put options on securities when, in the opinion of the Adviser, such
transactions are consistent with the Fund's investment objectives and policies.
Call options written by the Fund give the purchaser the right to buy the
underlying securities from the Fund at a stated exercise price; put options give
the purchaser the right to sell the underlying securities to the Fund at a
stated price. The aggregate value of the securities underlying put options
written by the Fund may not exceed 50% of the Fund's total assets.
The Fund may write only covered options, which means that, so long as
the Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges) or will segregate cash or securities equal
to the value of the securities to be delivered if the option were exercised. In
the case of put options, the Fund will segregate cash or securities equal to the
price to be paid if the option is exercised. In addition, the Fund will be
considered to have covered a put or call option if and to the extent that it
holds an option that offsets some or all of the risk of the option it has
written. For more information about cover and segregation requirements, see
"Regulatory Requirements" below. The Fund may write combinations of covered puts
and calls on the same underlying security. See "Spread and Straddle
Transactions" below.
The Fund will receive a premium from writing a put or call option,
which increases the Fund's return in the event the option expires unexercised or
is closed out at a profit. The amount of the premium reflects, among other
things, the relationship between the exercise price and the current market value
of the underlying security, the volatility of the underlying security, the
amount of time remaining until expiration, current interest rates, and the
effect of supply and demand in the options market and in the market for the
underlying security. By writing a call option, the Fund, to the extent it owns
the underlying
-22-
<PAGE> 26
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 same security. When it engages in
spread and straddle transactions, the Fund seeks to profit from
-23-
<PAGE> 27
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.
-24-
<PAGE> 28
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. Futures contracts
purchased by the Fund may also be traded outside of the United States.
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.
-25-
<PAGE> 29
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 or directly with a
futures commission merchant 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.
-26-
<PAGE> 30
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.
-27-
<PAGE> 31
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 250 units. Thus, if the value of the S&P 500 were $150, one
contract would be worth $37,500 (250 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 250 units of the
-28-
<PAGE> 32
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 $1,000 (250 units x gain of
$4). If the Fund enters into a futures contract to sell 250 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 $500 (250 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.
-29-
<PAGE> 33
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.
-30-
<PAGE> 34
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security or securities being hedged is less than the
amount of foreign currency the Fund is obligated to deliver and a decision is
made to sell the security or securities and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security or securities
if the market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in value of
such currency.
The Fund may seek to increase its current return or to offset some of
the costs of hedging against fluctuations in current exchange rates by writing
covered call options and covered put options on foreign currencies. The Fund
receives a premium from writing a call or put option, which increases the Fund's
current return if the option expires unexercised or is closed out at a net
profit. The Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written.
The Fund's currency hedging transactions may call for the delivery of
one foreign currency in exchange for another foreign currency and may at times
not involve currencies in which its portfolio securities are then denominated.
In addition to the other risks described above, these cross hedging transactions
by the Fund involve the risk of imperfect correlation between changes in the
values of the currencies to which such transactions relate and changes in the
value of the currency or other asset or liability which is the subject of the
hedge.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the CFTC, such as the New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the
-31-
<PAGE> 35
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
-32-
<PAGE> 36
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.
-33-
<PAGE> 37
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.
-34-
<PAGE> 38
APPENDIX B -- DESCRIPTION OF DEBT RATINGS
I. MOODY'S INVESTORS SERVICE, INC.
Moody's Investors Service, Inc. describes classifications of bonds as
follows:
Aaa - Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interests and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
-35-
<PAGE> 39
C - Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
II. STANDARD & POOR'S
Standard & Poor's describes classifications of corporate bonds as
follows:
AAA - Debt rated 'AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated 'AA' has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small degree.
A - Debt rated 'A' has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated 'BBB' is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
SPECULATIVE GRADE
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
'BB' indicates the least degree of speculation and 'C' the highest. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB - Debt rated 'BB' has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B - Debt rated 'B' has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair
-36-
<PAGE> 40
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.
-37-
<PAGE> 41
THE BAUPOST FUND
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
ADVISER AND ADMINISTRATOR
The Baupost Group, L.L.C.
P.O. Box 381288
44 Brattle Street
Cambridge, MA 02238
TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116-5072
LEGAL COUNSEL
Ropes & Gray
One International Place
Boston, MA 02110-2624
PROSPECTUS
February 28, 1998
-38-
<PAGE> 42
THE BAUPOST FUND
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 28, 1998
This Statement of Additional Information contains information which may
be useful to investors but which is not included in the Prospectus of The
Baupost Fund (the "Fund"). This Statement is not a Prospectus and is only
authorized for distribution when accompanied or preceded by the Prospectus of
the Fund dated February 28, 1998. The Statement should be read together with the
Prospectus. Copies of the Prospectus can be obtained without charge by calling
the Fund at (617) 497-6680 or by writing to the Fund, 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-10
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS ...........................B-11
DETERMINATION OF NET ASSET VALUE ...........................................B-12
STANDARD PERFORMANCE MEASURES...............................................B-12
EXPERTS.....................................................................B-12
REPORT OF INDEPENDENT AUDITORS AND FINANCIAL STATEMENTS.....................B-13
<PAGE> 43
INVESTMENT RESTRICTIONS
The Fund is restricted by the following fundamental investment
restrictions, which may not be changed without a vote of a majority of its
outstanding voting securities. The Investment Company Act of 1940 (the "1940
Act") provides that a "vote of a majority of the outstanding voting securities"
means the affirmative vote of the lesser of (1) more than 50% of the outstanding
shares of the Fund or (2) 67% or more of the shares present at a meeting if more
than 50% of the outstanding shares are represented at the meeting in person or
by proxy. Fundamental investment restrictions (1) - (4) below describe
investment policies in which the Fund may, to the extent permitted, currently
engage; fundamental investment restrictions (5) - (7) describe investment
policies in which the Fund may not engage. The Fund may:
(1) Borrow money to the extent permitted by the 1940 Act, the
rules or regulations thereunder or applicable orders of the
Securities and Exchange Commission, as such statute, rules,
regulations or orders may be amended from time to time.
(2) Purchase or sell real estate to the extent permitted by the
1940 Act, the rules or regulations thereunder or applicable
orders or the Securities and Exchange Commission, as such
statute, rules, regulations or orders may be amended from time
to time.
(3) Purchase or sell commodities, commodities contracts, futures
contracts or options to the extent permitted by the 1940 Act,
the rules or regulations thereunder or applicable orders of
the Securities and Exchange Commission, as such statute,
rules, regulations or orders may be amended from time to time.
(4) Make loans to the extent permitted by the 1940 Act, the rules
or regulations thereunder or applicable orders of the
Securities and Exchange Commission, as such statute, rules,
regulations or orders may be amended from time to time.
The Fund may not and will not:
(5) Underwrite securities issued by other persons except to the
extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
(6) Invest 25% or more of the value of its total assets in any one
industry. (U.S. Government Securities, including securities
issued by agencies or instrumentalities of the U.S.
Government, and securities backed by the credit of a U.S.
governmental entity will not be considered to represent an
industry.)
(7) Issue senior securities, except as appropriate to evidence
indebtedness that the Fund is permitted to incur consistent
with restriction 1 above.
B-2
<PAGE> 44
It is contrary to the Fund's present policy, which may be changed by the
Trustees without shareholder approval, to:
(1) Invest more than 15% of its net assets in illiquid securities.
(2) Purchase securities on margin, except that the Fund may obtain
short-term credits as may be necessary for the clearance of
purchases and sales of securities, and except that it may make
margin payments in connection with financial futures contracts
or options.
(3) Invest more than 5% (taken at the lower of cost or market
value) of its net assets in warrants (provided that of this
5%, no more than 2% may be warrants not listed on the New York
Stock Exchange or the American Stock Exchange). For purposes
of this restriction, warrants acquired by the Fund as part of
a unit or attached to securities at the time of purchase are
deemed to be without value.
(4) Borrow money in excess of 10% of the value (taken at the lower
of cost or current value) of its total assets (not including
the amount borrowed) at the time the borrowing is made, and
then only from banks as a temporary measure to facilitate the
meeting of redemption requests which might otherwise require
the untimely disposition of portfolio investments or for
extraordinary or emergency purposes.
(5) Pledge, hypothecate, mortgage or otherwise encumber its assets
in excess of 15% of its total assets (taken at current value)
in connection with borrowings permitted by the Fund's
investment restrictions.
With respect to fundamental investment restriction 1 concerning
borrowing, a registered investment company like the Fund may borrow up to 33
1/3% of its total assets under the 1940 Act. With respect to fundamental
investment restrictions 2 and 3, the 1940 Act provides no limits on the
applicable investment activities. With respect to fundamental investment
restriction 4 concerning making loans, the 1940 Act permits a fund to make loans
if expressly permitted by a fund's investment policies, but never to persons who
control or are under common control with that fund. Thus, the 1940 Act
effectively prohibits the Fund from making loans to certain persons when
conflicts of interest or undue influence are most likely present.
For the purposes of fundamental investment restriction 6 concerning
investments in any one industry, the Fund will consider all relevant factors in
determining who is the issuer of a loan participation. These factors will
include the credit quality of the borrower, the amount and quality of the
collateral, the terms of the loan agreement and other relevant agreements
(including inter-creditor agreements), the degree to which the credit of any
person interpositioned between the Fund and the borrower was deemed material to
the decision to purchase the participation interest, the interest rate
environment, and general economic conditions applicable to the borrower and such
interpositioned person.
For the purposes of certain diversification criteria imposed by federal
tax laws, the Fund will consider the borrower to be the issuer of a loan
participation. In addition, with respect to loan participations under which the
B-3
<PAGE> 45
Fund does not have privity of contract with the borrower or would not have a
direct cause of action against the borrower in the event of its failure to pay
scheduled principal or interest, the Fund will also consider each person
interpositioned between the Fund and the borrower to be an issuer of a loan
participation.
Except as otherwise noted, all percentage limitations on investments
will apply at the time of the making of an investment and shall not be
considered violated unless an excess or deficiency occurs or exists immediately
after and as a result of such investment.
TAX STATUS
The tax status of the Fund and the distributions which it may make are
summarized in the Prospectus under the headings "Taxes" and "Distributions." The
Fund intends to qualify each year as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"). In order to so qualify
and to qualify for the special tax treatment accorded regulated investment
companies and their shareholders, the Fund must, among other things, (a) derive
at least 90% of its gross income from dividends, interest, payments with respect
to certain securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income (including but not limited to
gains from options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; (b) diversify its
holdings so that, at the close of each quarter of its taxable year, (i) at least
50% of the value of its total assets consists of cash, cash items, U.S.
government securities, securities of other regulated investment companies, and
other securities limited generally with respect to any one issuer to a value not
greater than 5% of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
U.S. government securities or securities of other regulated investment
companies); and (c) distribute in or with respect to each taxable year at least
90% of the sum of its taxable net investment income, its net tax-exempt income,
and the excess, if any, of net short-term capital gains over net long-term
capital losses for such year. To the extent the Fund qualifies as a regulated
investment company which is eligible for special federal income tax treatment,
the Fund will not be subject to federal income tax on income paid to its
shareholders in the form of dividends or capital gain distributions.
In order to eliminate an excise tax liability imposed on certain
undistributed income, the Fund must distribute prior to each calendar year end
an amount equal to the sum of: (i) 98% of the Fund's capital gain net income, if
any, realized in the one-year period ending on October 31 of such year, (ii) 98%
of the Fund's ordinary income realized in such calendar year, and (iii) any
undistributed income from the prior year. The Fund will be treated as having
distributed on December 31 of a given year any dividend of ordinary income or
capital gain net income that is declared and payable to shareholders of record
on a date in October, November or December of such year and paid on or before
January 31 of the next year. The Fund intends to make distributions which are
necessary to eliminate such excise tax liability.
Foreign currency exchange gain and loss arising from the Fund's
transactions in foreign currencies, foreign currency-denominated debt
securities, certain foreign currency options, futures contracts and forward
contracts will generally be treated for federal income tax purposes as ordinary
income or loss.
The Fund's transactions, including hedging transactions, in options,
futures contracts, forward contracts, short sales, spreads, straddles and
foreign currencies will be subject to special tax rules (including constructive
sale, mark-to-market, straddle, wash sale and short sale rules), the effect of
which may be to accelerate income to
B-4
<PAGE> 46
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.
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 or her shares and
thereafter as capital gain.
MANAGEMENT OF THE FUND
The Trustees and officers of the Fund and their principal occupations
during the past five years are as follows:
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
<S> <C> <C>
Seth A. Klarman** Trustee and President The Baupost Group, L.L.C., President and
Member of Advisory Board; The Baupost Group,
Inc., President and Director (formerly,
investment adviser to the Fund); SAK
Corporation, President (managing member of The
Baupost Group, L.L.C.).
William J. Poorvu** Trustee, Vice Chairman, The Baupost Group, L.L.C., Chairman of
Clerk and Treasurer Advisory Board; 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,
Class of 1961 Adjunct Professor in Entrepreneurship;
William J. Poorvu, Proprietor (real estate
investments).
</TABLE>
* Unless otherwise indicated, the address of each person listed in the
table is P.O. Box 381288, 44 Brattle Street, Cambridge, MA 02238.
** Persons who are "interested persons" (as defined in the 1940 Act) of
the Fund and The Baupost Group, L.L.C.
B-5
<PAGE> 47
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
<S> <C> <C>
Howard H. Stevenson** Trustee and Chairman The Baupost Group, L.L.C., Vice Chairman of
Advisory Board; The Baupost Group, Inc., Vice
Chairman, Director and Treasurer; Harvard
University, Graduate School of Business
Administration, Professor, and from 1991-1994,
Senior Associate Dean and Director of Financial
and Information Systems; Camp, Dresser &
McKee, Director (engineering consultants);
Landmark Communications Inc., Director
(communications); Sheffield Steel Corp.,
Director (a steel manufacturer); African
Communications Group, Director (a
communications group); Terry Hinge &
Hardware, Director (a manufacturer); Gulf
States Steel, Director (a steel manufacturer);
Quadra Capital Partners, Director (an investment
advisory marketing firm); Bessemer Securities
Corporation, Director (investments); Westboro
Holdings LP, Director and Treasurer
(investments). Formerly, Director of
Passamaquoddy Technologies (a technology
firm) and Preco Corporation (a paper
manufacturer).
Samuel Plimpton** Trustee The Baupost Group, L.L.C., Vice President;
Brattle Advisors, L.P. The Baupost Group, Inc., Vice President; Brattle
44 Brattle Street Advisors, L.P., General Partner (real estate
Cambridge, MA 02138 counselors). Formerly, Director, Perry Dean
Rogers and Partners (an architecture firm).
Robert W. Ackerman Trustee President and Chief Executive Officer of
Sheffield Steel Corp. Sheffield Steel Corp. (a steel manufacturer);
220 North Jefferson Director, Gulf States Steel (a steel
Sands Springs, OK 74063 manufacturer); Chairman, Steel Manufacturer's
Association. Formerly, President and Chief
Executive Officer, Lincoln Pulp & Paper Co.,
Inc. (a paper manufacturer).
David Auerbach Trustee Trustee, Dana-Farber Cancer Institute; Member,
607 Boylston Street Executive Committee, Dana-Farber Cancer
Boston, MA 02116 Institute; Chairman, Jimmy Fund Committee,
Dana-Farber Cancer Institute; Overseer, Beth
Israel-Deaconess Medical Center; Director,
Boston Latin School Foundation.
</TABLE>
* Unless otherwise indicated, the address of each person listed in the
table is P.O. Box 381288, 44 Brattle Street, Cambridge, MA 02238.
** Persons who are "interested persons" (as defined in the 1940 Act) of
the Fund and The Baupost Group, L.L.C.
B-6
<PAGE> 48
<TABLE>
<CAPTION>
Name and Address* Position Principal Occupation
<S> <C> <C>
Jay Light Trustee Harvard University Graduate School of
Harvard University Business Administration, Dwight P.
Graduate Robinson, Jr. Professor of Business
School of Business Administration and Senior Associate Dean;
Administration United Asset Management Corporation, Director
Soldiers Field Road (a holding company comprised of investment
Boston, MA 02163 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, L.L.C., Member of
Advisory Board; The Baupost Group, Inc., Vice
President and Director.
Paul C. Gannon Vice President The Baupost Group, L.L.C., Chief Financial and
Administrative Officer and Vice President; The
Baupost Group, Inc., Chief Financial and
Administrative Officer and Vice President.
</TABLE>
* Unless otherwise indicated, the address of each person listed in the
table is P.O. Box 381288, 44 Brattle Street, Cambridge, MA 02238.
** Persons who are "interested persons" (as defined in the 1940 Act) of
the Fund and The Baupost Group, L.L.C.
Except as noted below, the principal occupations of the officers and
Trustees for the last five years have been with the employers as shown above,
although in some cases they have held different positions with such employers.
The Fund pays the Trustees, other than those who are interested persons
of The Baupost Group, L.L.C. ("Baupost" or the "Adviser"), an annual fee of
$8,000, in addition to a fee of $750 for each meeting attended. During fiscal
1997, the Fund paid Trustees' fees aggregating $25,500, of which $8,500 was paid
to Mr. Ackerman, $8,500 was paid to Mr. Auerbach and $8,500 was paid to Mr.
Light. The Fund is the only investment company advised by Baupost and has no
pension or retirement plan for its Trustees.
B-7
<PAGE> 49
OWNERSHIP OF FUND SHARES
At January 31, 1998, the officers and Trustees of the Fund as a group
owned of record or beneficially 18.76% of the outstanding shares of the Fund,
and to the knowledge of the Fund, no person owned of record or beneficially 5.0%
or more of the shares of the Fund except William J. Poorvu, 975 Memorial Drive,
#710, Cambridge, MA 02138 owned of record and beneficially 0.59% of the shares
of the Fund, and as trustee for various trusts beneficially owned 7.57% of the
shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
MANAGEMENT CONTRACT
As disclosed in the Prospectus under the heading "Management of the
Fund," under an investment advisory contract (the "Management Contract") between
the Fund and the Adviser, subject to such policies as the Trustees of the Fund
may determine, the Adviser will furnish continuously an investment program for
the Fund and will make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of portfolio securities. Subject to the control
of the Trustees, the Adviser also provides office space, and pays all salaries,
fees and expenses of officers and Trustees of the Fund who are affiliated with
the Adviser. As indicated under "Portfolio Transactions -- Brokerage and
Research Services," the Fund's portfolio transactions may be placed with
broker-dealers that furnish the Adviser, at no cost, certain research,
statistical and quotation services of value to the Adviser in advising the Fund
or its other clients.
As disclosed in the Prospectus, the Fund pays the Adviser a quarterly
management fee at the annual rate of 1.00% of the Fund's average net assets. The
Adviser has agreed to an "expense limitation," whereby the Adviser will reduce
its management fee by up to .75% to the extent that the Fund's total annual
expenses (including the management fee and the administrative fee and certain
other expenses but excluding brokerage commissions, transfer taxes, interest and
expenses relating to preserving the value of the Fund's investments) would
otherwise exceed 1.50% of the Fund's average net assets. From time to time,
depending on its investments, expenses incurred by the Fund which are not
subject to the expense limitation may be substantial. This was the case during
fiscal 1997.
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.
B-8
<PAGE> 50
Prior to January 2, 1998, under a substantially identical management
contract (the "Old Management Contract") with The Baupost Group, Inc. ("BGI"),
BGI provided services identical to those described above. For these services,
the Fund paid BGI at rates identical to those described above. During its 1995,
1996 and 1997 fiscal years, the Fund paid management fees of $853,905, $991,872
and $1,353,786 to BGI pursuant to the Old Management Contract; no amount was
required to be waived by BGI with respect to such fiscal years.
ADMINISTRATIVE ARRANGEMENTS
Baupost serves as the Fund's administrator under an Administrative
Services Agreement (the "Agreement") between the Fund and Baupost dated as of
October 31, 1997. Pursuant to the Agreement, Baupost is paid a quarterly fee at
the annual rate of .25% of the Fund's average net assets. Under the Agreement,
Baupost provides, among other things, bookkeeping and certain clerical services
to the Fund and will calculate the total net asset value, total net income, and
net asset value per share of the Fund. The Agreement provides that it shall
continue indefinitely, but that it may be terminated by either party upon 60
days' notice. The Agreement further provides that Baupost will only be liable to
the Fund for loss or damage incurred by the Fund resulting from Baupost's lack
of good faith, negligence or willful misconduct and also provides that the Fund
will indemnify Baupost against, among other things, loss or damage incurred by
Baupost on account of any claim, demand, action or suit arising out of, or in
connection with, its duties under the Agreement, provided that Baupost has acted
in good faith and without negligence or willful misconduct.
Prior to October 31, 1997, under a Transfer Agency and Administrative
Services Agreement with BGI then in effect, BGI provided, in addition to the
services described above, transfer and dividend disbursing agent services. For
services under the Transfer Agency and Administrative Services Agreement, BGI
was paid a quarterly fee at the annual rate of .25% of the Fund's average net
assets. During its 1997 fiscal year, the Fund paid $338,446 to BGI pursuant to
the Transfer Agency and Administrative Services Agreement.
TRANSFER AGENCY AND DIVIDEND DISBURSING ARRANGEMENTS
State Street Bank and Trust Company ("State Street"), 225 Franklin
Street, Boston, Massachusetts 02110, serves as the Fund's Transfer Agent and
Dividend Disbursing Agent under a Transfer Agency and Service Agreement between
the Fund and State Street dated as of October 31, 1997. Pursuant to the
Agreement, State Street receives orders for the purchase and redemption of
shares of the Fund, issues such shares to the appropriate shareholder account or
pays over such money as is appropriate to the redeeming shareholder and delivers
all pertinent documentation relating to these transactions to the Custodian.
Additionally, as Dividend Disbursing Agent, State Street prepares and transmits
payments for dividends and distributions declared by the Fund. The Agreement
provides by its terms that it may be terminated by either party upon 60 days'
notice.
CUSTODIAN
State Street serves as the Fund's custodian pursuant to a Custodian
Agreement between the Fund and State Street dated as of October 31, 1997. As
such, State Street holds in safekeeping certificated securities and cash
belonging to the Fund and, in such capacity, is the registered owner of
securities in book-entry form belonging to the Fund. Upon instruction, State
Street receives and delivers cash and securities of the Fund in connection with
Fund transactions and collects all dividends and other distributions made with
respect to Fund portfolio securities. State Street also maintains certain
accounts and records of the Fund. State Street has also contracted with certain
foreign banks and depositories to hold portfolio securities outside of the
United States on behalf of the Fund. The
B-9
<PAGE> 51
contract with State Street provides by its terms that it shall continue
indefinitely, but that it may be terminated by either party upon 60 days'
notice.
PORTFOLIO TRANSACTIONS
Transactions on stock exchanges and other agency transactions involve
the payment of negotiated brokerage commissions. Such commissions vary among
different brokers. There is generally no stated commission in the case of
securities traded in the over-the-counter markets, but the price paid for such
securities usually includes an undisclosed dealer commission or mark-up. In
placing orders for the portfolio transactions of the Fund, the Adviser will seek
the best price and execution available, except to the extent it may be permitted
to pay higher brokerage commissions for brokerage and research services as
described below. The determination of what may constitute best price and
execution by a broker-dealer in effecting a securities transaction involves a
number of considerations, including, without limitation, the overall net
economic result to the Fund (involving price paid or received and any
commissions and other costs paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all where a large block is
involved, availability of the broker to stand ready to execute possibly
difficult transactions in the future and the financial strength and stability of
the broker. Because of such factors, a broker-dealer effecting a transaction may
be paid a commission higher than that charged by another broker-dealer.
Over-the-counter transactions often involve dealers acting for their
own account. It is the Adviser's policy to place over-the-counter market orders
for the Fund with primary market makers unless better prices or executions are
available elsewhere.
Although the Adviser does not consider the receipt of research services
as a factor in selecting brokers to effect portfolio transactions for the Fund,
the Adviser may receive such services from brokers who handle the Fund's
portfolio transactions. Research services may include a wide variety of
analyses, reviews and reports on such matters as economic and political
developments, industries, companies, securities and portfolio strategy. The
Adviser may use such research in servicing other clients as well as the Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
as amended (the "1934 Act"), and subject to such policies as the Trustees of the
Fund may determine, the Adviser may pay an unaffiliated broker or dealer that
provides "brokerage and research services" (as defined in the 1934 Act) to the
Adviser an amount of commission for effecting a portfolio investment transaction
in excess of the amount of commission another broker or dealer would have
charged for effecting that transaction.
During its 1995, 1996 and 1997 fiscal years, the Fund paid brokerage
commissions aggregating $314,636, $201,261 and $462,346, respectively. The
aggregate dollar amount of brokerage commissions in fiscal 1997 differed
materially from the previous fiscal year due principally to increased assets
under management which has led to an increase in the total amount of brokerage
commissions paid.
SHAREHOLDER VOTING RIGHTS
Shareholders are entitled to one vote for each full share held (with
fractional votes for fractional shares held) and will vote in the election of
Trustees and on other matters submitted to the vote of shareholders.
Shareholders will vote by individual series on all matters except (i) when
required by the 1940 Act, shares shall be voted in the aggregate and not by
individual series and (ii) when the Trustees have determined that the matter
B-10
<PAGE> 52
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 State Street or
by a vote of the holders of two-thirds of the outstanding shares at a meeting
duly called for the purpose, which meeting shall be held upon the written
request of the holders of not less than 10% of the outstanding shares. Upon
written request by ten or more shareholders of record who have been such for at
least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at least
1% of the outstanding shares, whichever is less, stating that they wish to
communicate with the other shareholders for the purpose of obtaining the
signatures necessary to demand a meeting to consider removal of a Trustee, the
Fund will provide a list of shareholders or disseminate appropriate materials
(at the expense of the requesting shareholders). Except as set forth above, the
Trustees shall continue to hold office and may appoint successor Trustees.
Voting rights are not cumulative.
No amendment may be made to the Declaration of Trust without the
affirmative vote of a majority of the outstanding shares of the Fund except (i)
to change the Fund's name or to cure technical problems in the Declaration of
Trust or (ii) to establish, designate or modify new and existing series or
classes of Fund shares or other provisions relating to Fund shares in response
to applicable laws or regulations.
LIABILITY OF SHAREHOLDERS, TRUSTEES AND OFFICERS
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration of Trust disclaims shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Fund
or the Trustees. The Declaration of Trust provides for indemnification out of
the property of the Fund for all loss and expense of any shareholder of the Fund
held personally liable for the obligations of the Fund. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
considered remote since it is limited to circumstances in which the disclaimer
is inoperative and the Fund would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his or her 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
B-11
<PAGE> 53
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 New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day,.
STANDARD PERFORMANCE MEASURES
From time to time the Fund may include in its communications to current
or prospective shareholders figures reflecting total return over various time
periods. "Total return" is the rate of return on the amount invested in the Fund
from the beginning until the end of the stated period. "Average annual total
return" is the annual compounded percentage change in the value of the amount
invested in the Fund from the beginning until the end of the stated period. Both
rates of return assume the reinvestment of all dividends and distributions. The
Fund does not have a sales load or other charges paid by all shareholders that
affect its calculation of total or average annual total return. Any quotation of
total return for any period when an expense limitation was in effect will be
greater than if the limitation had not been in effect.
The Fund's average annual total return since the commencement of its
operations (December 14, 1990) through October 31, 1997 was 17.69%. The Fund's
average annual total return for the one-year and five-year periods ended October
31, 1997 was 27.04% and 18.53%, respectively.
EXPERTS
The statement of assets and liabilities of The Baupost Fund as of
October 31, 1997, including the schedule of investments, schedule of securities
sold short, and schedule of forward foreign currency contracts, the related
statement of operations for the year then ended and the related statement of
changes in net assets for each of the two years in the period then ended
appearing in this Statement of Additional Information, and the Financial
Highlights for each of the six years then ended and for the period from January
1, 1991 to October 31, 1991 appearing in the Prospectus and for the five years
then ended in this Statement of Additional Information, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
B-12
<PAGE> 54
Report of Independent Auditors
To the Trustees and Shareholders of
The Baupost Fund
We have audited the accompanying statement of assets and liabilities of The
Baupost Fund, including the schedule of investments, schedule of securities sold
short and schedule of forward foreign currency contracts, as of October 31,
1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1997, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Baupost Fund at October 31, 1997, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
December 5, 1997
B-13
<PAGE> 55
THE BAUPOST FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1997
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments in securities - at value $ 153,239,227
(Notes A and C) (cost $131,241,269)
Cash 3,648,231
Receivable for investments sold 1,915,565
Purchased interest 432,839
Accrued investment income 425,613
Receivable for investments sold short 148,467
Other assets 13,554
-----------------
Total Assets 159,823,496
LIABILITIES:
Payable for equity swap contracts 2,904,012
Payable for investments purchased 2,134,839
Unrealized depreciation on forward foreign
currency contracts sold 881,617
Payable to The Baupost Group, Inc. (Note B) 482,556
Payable for interest and termination value
on equity swap contracts 265,049
Other payables and accrued expenses 107,594
Payable for securities sold short
(Notes A and C) (proceeds $148,467) 89,513
-----------------
Total Liabilities 6,865,180
-----------------
NET ASSETS $ 152,958,316
=================
COMPOSITION OF NET ASSETS:
Paid in capital $ 113,718,323
Accumulated undistributed net investment
income (Note A) 670,056
Accumulated undistributed net realized
gain on investments and foreign
currency transactions 20,948,534
Net unrealized appreciation on investments
and assets and liabilities in foreign currencies 17,621,403
-----------------
NET ASSETS $ 152,958,316
=================
NET ASSET VALUE:
Offering and redemption price per share
($152,958,316 / 8,948,897) $ 17.09
=================
</TABLE>
See notes to financial statements.
B-14
<PAGE> 56
THE BAUPOST FUND
STATEMENT OF OPERATIONS
Year Ended October 31, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME:
INCOME:
<S> <C>
Interest $ 3,506,505
Dividends (net of foreign withholding taxes of $131,778) 1,352,384
-----------------
Total Investment Income 4,858,889
EXPENSES:
Investment management fee (Note B) 1,353,786
Equity swap contract interest expense 659,677
Administrative fee (Note B) 338,446
Investment expenses 204,460
Custodian fees 88,667
Legal fees 86,814
Interest expense 70,050
Audit fees 39,500
Registration and filing fees 26,384
Directors' fees 25,500
Miscellaneous 9,262
-----------------
Total Expenses 2,902,546
NET INVESTMENT INCOME 1,956,343
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on:
Investments and equity swap contracts 19,411,857
Foreign currency transactions 4,051,629
Short sales 239,392
-----------------
23,702,878
Change in unrealized appreciation/(depreciation) on:
Investments and equity swap contracts 6,785,447
Short sales (172,353)
Foreign currency transactions (713,525)
-----------------
5,899,569
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 29,602,447
-----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 31,558,790
=================
</TABLE>
See notes to financial statements.
B-15
<PAGE> 57
THE BAUPOST FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
------------------ -----------------
INCREASE IN NET ASSETS FROM OPERATIONS:
<S> <C> <C>
Net investment income $ 1,956,343 $ 2,251,486
Net realized gain on investments and foreign
currency transactions 23,702,878 10,367,365
Change in unrealized appreciation of investments
and foreign currency transactions 5,899,569 7,415,969
------------------ -----------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 31,558,790 20,034,820
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (2,845,958) (1,825,419)
From net realized gain on investments (11,985,697) (4,283,665)
CAPITAL SHARE TRANSACTIONS (NOTE E) 27,443,139 5,422,927
------------------ -----------------
INCREASE IN NET ASSETS 44,170,274 19,348,663
NET ASSETS AT BEGINNING OF PERIOD 108,788,042 89,439,379
------------------ -----------------
NET ASSETS AT END OF PERIOD
(including undistributed net investment income
of $670,056 and distributions in excess of
net investment income of $90,004, respectively) $ 152,958,316 $ 108,788,042
================== =================
</TABLE>
See notes to financial statements.
B-16
<PAGE> 58
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
COMMON STOCKS - 61.42%
UNITED STATES - 23.60%
WHOLESALE - FOOD - 9.44%
272,500 TLC Beatrice International Holdings $ 14,442,500
LESSORS OF REAL PROPERTY - 4.37%
836,059 MBO Properties, Inc. 6,688,472 *#
COMPUTER HARDWARE - 3.86%
194,700 NCR Corporation 5,901,844 *
ELECTRIC SERVICES - 2.16%
265,150 Northeast Utilities 3,049,225
9,300 Unicom Corporation 260,400
-----------------------
3,309,625
CEREAL BREAKFAST FOOD - 1.56%
128,350 Ralcorp Holdings, Inc. 2,382,497 *
FIRE, MARINE & CASUALTY INSURANCE - 0.76%
37,350 Farm Family Holdings, Inc. 1,157,850 *
FINANCIAL INSTITUTIONS - 0.07%
110 Fidelity Bankshares, Inc. 3,107
198 First Federal Savings Bank of Siouxland 6,385
100 Harbor Florida Bancorp Inc. 6,463
1,949 Mid-Central Financial Corporation 41,904
1,800 Shelby County Bancorp 43,200
---------------------------
101,059
</TABLE>
B-17
<PAGE> 59
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
MISCELLANEOUS - 1.38%
20,800 Chemfirst Inc. $ 525,200
18,400 GC Companies 791,200 *
3,300 NCH Corporation 221,100
938,000 Regency Equities Corporation 11,725 *
4,900 Showboat Inc. 97,388
1,105 The Homestake Oil & Gas Company 121,550
1,579 The Homestake Royalty Corporation 258,956
1,400 USAA Real Estate Equities Inc. Class A REIT 88,200 +
---------------------------
2,115,319
TOTAL COMMON STOCKS - UNITED STATES $ 36,099,166
===========================
(Total Cost $21,092,751)
FRANCE - 15.12%
FIRE, MARINE & CASUALTY INSURANCE - 5.10%
148,700 Assurances Generales de France $ 7,809,387
DIVERSIFIED HOLDING COMPANIES - 4.29%
1,996 Compagnie Generale D'Industrie et de Participations 649,330
2,269 Financiere et Industrielle Gaz et Eaux 936,419
11,505 Pathe SA 2,060,508
7,183 Societe Eurafrance SA 2,919,686
---------------------------
6,565,943
CONSTRUCTION - 3.78%
17,600 Bouygues 1,644,575
161,600 Societe Generale D'Enterprises SA 4,132,978
---------------------------
5,777,553
TEXTILES - 1.42%
32,435 Chargeurs International SA 2,166,449
DEFENSE ELECTRONICS - 0.53%
29,870 Thomson CSF 810,454
---------------------------
TOTAL COMMON STOCKS - FRANCE $ 23,129,786
===========================
(Total Cost $17,452,300)
</TABLE>
B-18
<PAGE> 60
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
ITALY - 6.83%
DIVERSIFIED HOLDING COMPANIES - 5.98%
675,500 IFIL Finanziaria di Partecipazioni - Ordinary Shares $ 2,492,988
740,200 IFIL Finanziaria di Partecipazioni - Savings Shares 1,442,374
300 Montedison SPA - ADR 2,419
6,056,600 Montedison SPA - Ordinary Shares 4,913,947
533,100 Montedison SPA - Savings Shares 299,052
---------------------------
9,150,780
INSURANCE CARRIERS - 0.85%
86,600 Societe Assicuratrice Industriale - Ordinary Shares 828,415
129,300 Societe Assicuratrice Industriale - Savings Shares 464,213
---------------------------
1,292,628
---------------------------
TOTAL COMMON STOCKS - ITALY $ 10,443,408
===========================
(Total Cost $9,338,186)
SWITZERLAND - 5.14%
FREIGHT TRANSPORTATION - 1.93%
14,740 Danzas Holding AG - Registered Shares $ 2,948,000
COMMERCIAL BANKS - 1.75%
9,000 Banque Cantonale Vandiose 2,680,714
DIVERSIFIED HOLDING COMPANY - 1.46%
10,410 Valora Holding AG 2,230,714
---------------------------
TOTAL COMMON STOCKS - SWITZERLAND $ 7,859,428
===========================
(Total Cost $7,985,570)
RUSSIA - 3.38%
OIL & GAS FIELD EXPLORATION SERVICES - 2.81%
32,300 Lukoil Oil Co. - Sponsored ADR $ 2,793,627
500,000 Vareganneftegaz 1,500,000 *
---------------------------
4,293,627
</TABLE>
B-19
<PAGE> 61
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
ELECTRIC SERVICES - 0.57%
2,666,500 Unified Energy System of Russia $ 873,279
---------------------------
TOTAL COMMON STOCKS - RUSSIA $ 5,166,906
===========================
(Total Cost $3,017,306)
UNITED KINGDOM - 3.04%
FIRE, MARINE AND CASUALTY INSURANCE - 2.17%
1,590,200 Sedgwick Group $ 3,325,506
LUMBER & OTHER CONSTRUCTION MATERIALS - 0.46%
115,000 Adam & Harvey Group PLC 707,052
MEDIA, SATELLITE BROADCAST - 0.23%
50,200 British Sky Broadcasting Group PLC 355,255
DIVERSIFIED HOLDING COMPANY - 0.18%
167,600 Lonrho PLC 271,983
---------------------------
TOTAL COMMON STOCKS - UNITED KINGDOM $ 4,659,796
===========================
(Total Cost $4,252,528)
HONG KONG - 1.62%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 1.19%
5,400 Semi-Tech Global Ltd. - ADR $ 16,200
2,431,665 Semi-Tech Global Ltd. 1,808,806
---------------------------
1,825,006
MANUFACTURING - TOYS & DOLLS - 0.43%
6,369,400 Playmates Toys Holdings Ltd. $ 659,188
---------------------------
TOTAL COMMON STOCKS - HONG KONG $ 2,484,194
===========================
(Total Cost $5,786,846)
</TABLE>
B-20
<PAGE> 62
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
HOLLAND - 0.92%
TOWING & TUGBOAT SERVICES - 0.92%
44,600 Smit Internationale NV $ 1,401,649
---------------------------
TOTAL COMMON STOCKS - HOLLAND $ 1,401,649
===========================
(Total Cost $1,103,694)
SOUTH KOREA - 0.88%
COMMERCIAL BANKS - 0.57%
57,830 Hana Bank $ 354,937
22,856 Hana Bank - GDR Reg S 129,822
12,850 Housing & Commercial Bank Korea 141,695
700 Housing & Commercial Bank Korea - GDR Reg S 6,090
27,100 Kookmin Bank 219,892
2,800 Kookmin Bank - Reg S 18,760
638 Kookmin Bank - New 5,177
490 Shinhan Bank 3,772
---------------------------
880,145
SECURITY BROKER/DEALERS - 0.17%
12,400 Dongwon Securities - Preferred 43,987
12,470 Dongwon Securities - Common 105,593
24,770 Shinyoung Securities Co. - Preferred 97,916
600 Shinyoung Securities Co. - Common 6,616
---------------------------
254,112
STEEL FOUNDRIES - 0.11%
3,880 Pohang Iron & Steel Co., Ltd. 172,440
CELLULAR TELEPHONE PROVIDER - 0.03%
130 SK Telecom Co., Ltd. 43,524
---------------------------
TOTAL COMMON STOCKS - SOUTH KOREA $ 1,350,221
===========================
(Total Cost $2,172,251)
</TABLE>
B-21
<PAGE> 63
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
CZECH REPUBLIC - 0.56%
ELECTRIC SERVICES - 0.56%
17,500 CEZ 1 Ceske Energeticke Zavod AS $ 554,299
13,100 CEZ 2 Ceske Energeticke Zavod AS II 305,074
---------------------------
859,373
TOTAL COMMON STOCKS - CZECH REPUBLIC $ 859,373
===========================
(Total Cost $929,818)
HUNGARY - 0.17%
HOTELS AND MOTELS - 0.17%
14,400 Pannonia Hotels $ 252,436 +
---------------------------
TOTAL COMMON STOCKS - HUNGARY $ 252,436
===========================
(Total Cost $211,454)
BAHAMAS - 0.11%
CRUDE PETROLEUM - 0.11%
170,820 Basic Petroleum International Ltd. Unit Trust $ 170,820 *
---------------------------
TOTAL COMMON STOCKS - BAHAMAS $ 170,820
===========================
(Total Cost $175,432)
CANADA - 0.05%
ELECTRONIC & OTHER ELECTRICAL EQUIP. - 0.05%
57,100 Semi-Tech Corporation - Class A $ 69,743
---------------------------
TOTAL COMMON STOCKS - CANADA $ 69,743
===========================
(Total Cost $103,346)
TOTAL COMMON STOCKS $ 93,946,926
===========================
(Total Cost $73,621,482)
</TABLE>
B-22
<PAGE> 64
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
MUNICIPAL BONDS - 3.38%
7,113,000 Pennsylvania Recycling Rev. Series A 9.250% 01/01/22 $ 4,694,580
719,600 Pennsylvania Recycling Rev. Series B 9.500% 01/01/12 474,936
---------------------------
MUNICIPAL BONDS $ 5,169,516
===========================
(Total Cost $5,091,190)
PARTNERSHIPS - 2.40%
Emerging Europe Fund for Sustainable Development L.P. $ 64,286 +
NCH Investors Fund L.P. 979,541 +
New Century Capital Partners II L.P. 903,114 +
Sigma/Ukraine L.P. 703,783 +
Sigma/Ukraine Class C L.P. 404,663 +
Ukrainian Growth Fund II L.P. 612,000 +
---------------------------
TOTAL PARTNERSHIPS $ 3,667,387
===========================
(Total Cost $3,672,326)
OPTIONS - 3.90%
1,496 British Sky Broadcasting Group 5.000 Puts expiring 12/19/97 $ 195,219
1,042 British Sky Broadcasting Group 6.500 Puts expiring 06/19/98 395,721
85 General Motors Class H 50.000 Calls expiring 04/28/98 123,505
569 Gold April 550 Calls expiring 04/05/01 14,213
569 Gold April 550 Calls expiring 04/09/01 14,497
563 Gold July 550 Calls expiring 07/19/01 21,676
398 Japanese Yen 135.980 Puts expiring 03/25/99 42,011
38 Nasdaq 100 Index 656.000 Puts expiring 11/26/97 19
107 Nasdaq 100 Index 840.390 Puts expiring 01/15/98 171,040
102 Nasdaq 100 Index 935.553 Puts expiring 01/16/98 264,960
52 Nasdaq 100 Index 593.440 Puts expiring 03/25/98 5,172
41 Nasdaq 100 Index 632.600 Puts expiring 05/11/98 10,213
64 Nasdaq 100 Index 647.110 Puts expiring 05/20/98 13,335
5,100 Pathe/BSY Spread Calls expiring 08/30/98 208,518
8,100 Pathe/BSY Spread Calls expiring 09/21/98 335,274
113 Philip Morris 50 Calls expiring 04/24/00 57,466
113 Philip Morris 50 Calls expiring 04/25/00 57,579
226 Philip Morris 50 Calls expiring 04/28/00 115,610
113 Philip Morris 50 Calls expiring 04/28/00 57,805
227 Philip Morris 50 Calls expiring 05/26/00 119,977
230 Philip Morris 50 Calls expiring 06/04/00 121,210
170 Philip Morris 50 Calls expiring 06/09/00 90,153
113 Philip Morris 50 Calls expiring 06/19/00 60,329
</TABLE>
B-23
<PAGE> 65
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
227 Philip Morris 50 Calls expiring 06/23/00 $ 120,884
113 Philip Morris 50 Calls expiring 06/23/00 60,442
114 Philip Morris 50 Calls expiring 06/23/00 60,078
225 Philip Morris 50 Calls expiring 07/21/00 123,750
225 Philip Morris 50 Calls expiring 09/30/00 126,900
114 Philip Morris 50 Calls expiring 04/18/02 85,389
114 Philip Morris 50 Calls expiring 04/18/02 83,228
19,895 RJR Stub 6.103 Calls expiring 03/20/00 23,675
54,690 RJR Stub 6.267 Calls expiring 03/21/00 61,253
11,650 RJR Stub 6.400 Calls expiring 03/27/00 12,815
11,650 RJR Stub 6.540 Calls expiring 03/27/00 12,232
16,776 RJR Stub 6.170 Calls expiring 03/31/00 19,460
58,250 RJR Stub 6.110 Calls expiring 04/03/00 68,735
56,450 RJR Stub 5.800 Calls expiring 04/25/00 73,949
56,450 RJR Stub 5.220 Calls expiring 05/01/00 174,995
16,880 Samsung Preferred Equity Linked Note expiring 02/05/00 305,200
35 South Korean Won 918.000 Puts expiring 01/22/98 491,628
67 S&P 500 Index 678.480 Puts expiring 05/25/98 45,160
63 S&P 500 Index 717.160 Puts expiring 06/18/98 75,015
190 S&P 500 Index 717.400 Puts expiring 06/18/98 225,731
255 S&P 500 Index 711.200 Puts expiring 06/19/98 374,487
257 S&P 500 Index 750.560 Puts expiring 06/29/98 478,768
121 S&P 500 Index 747.108 Puts expiring 07/20/98 239,852
33 S&P 500 Index 719.695 Puts expiring 12/04/98 58,356
23 US 10 Yr. Treasury Note Future 107.000 Puts expiring 02/20/98 5,750
40 US 10 Yr. Treasury Note Future 109.000 Puts expiring 02/20/98 24,375
69 US 30 Yr. Treasury Note Future 107.000 Puts expiring 02/20/98 10,781
60 US 30 Yr. Treasury Note Future 112.000 Puts expiring 02/20/98 38,438
---------------------------
TOTAL OPTIONS $ 5,976,828
===========================
(Total Cost $7,325,701)
COLLATERALIZED MORTGAGE OBLIGATIONS - 1.89%
223,770 Guardian S&L 1990-4A FRN due 06/25/20 $ 129,787
300,475 RTC Series 1991-M2 Class A1 principal only due 09/25/20 255,404
2,066,268 RTC Series 1991-M2 Class A3 principal only due 09/25/20 1,549,701
367 RTC Series 1991-M2 Class X1 interest only due 09/25/20 180,489
364 RTC Series 1991-M2 Class X2 interest only due 09/25/20 17,427
677 RTC Series 1991-M2 Class X3 interest only due 09/25/20 63,899
24,785,937 Structured Asset Sec. 1996-CFL Class X2 due 02/25/28 697,104
---------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS $ 2,893,811
===========================
(Total Cost $2,995,592)
</TABLE>
B-24
<PAGE> 66
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
CLOSED-END MUTUAL FUNDS - 1.79%
200,000 Kazakhstan Fund Limited $ 790,000
1,200 Komercni Bank Investicni Fond 23,891 *
112,628 NIF I 245,821
53,903 NIF III 149,175
79,749 NIF VIII 172,922
241,446 NIF XIII 702,639
75,000 NIF XIV 209,700
45,200 The Balkan Fund 361,600
6,700 Zivnobanka Investicni Fond 84,078
---------------------------
TOTAL CLOSED-END MUTUAL FUNDS $ 2,739,826
===========================
(Total Cost $3,107,490)
PURCHASED BANK DEBT & TRADE CLAIMS - 1.29%
2,453,801 Maxwell Comm. Bank Debt - Baker Nye $ 270,305 +*
5,000,000 Maxwell Comm. Berlitz Obligations 543,750 +*
167,868 Maxwell Comm. Revolving Bank Debt - First Chicago 18,922 +*
943,496 Maxwell Comm. Revolving Bank Debt - Halcyon 106,700 +*
396,015 Maxwell Comm. Revolving Bank Debt - Halcyon II 44,638 +*
875,543 Maxwell Comm. Revolving Bank Debt - Lazard Freres 98,622 +*
264,059 Maxwell Comm. Revolving Bank Debt - Merrill Lynch 29,764 +*
823,981 Maxwell Comm. Revolving Bank Debt - San Paolo 93,147 +*
1,015,000 Maxwell Comm. Revolving Bank Debt - TCC Associates 114,695 +*
579,133 Maxwell Comm. Term Bank Debt - First Chicago 62,981 +*
1,678,704 Maxwell Comm. Term Bank Debt - Halcyon 182,559 +*
702,221 Maxwell Comm. Term Bank Debt - Halcyon II 76,366 +*
426,846 Maxwell Comm. Term Bank Debt - Lazard Freres 46,420 +*
468,269 Maxwell Comm. Term Bank Debt - Merrill Lynch 50,924 +*
325,093 Maxwell Comm. Term Bank Debt - San Paolo 35,354 +*
1,806,952 Maxwell Comm. Term Bank Debt - TCC Associates 196,506 +*
---------------------------
TOTAL PURCHASED BANK DEBT & TRADE CLAIMS $ 1,971,653
===========================
(Total Cost $0)
COMPANIES IN LIQUIDATION - 1.01%
5,682,800 Antonelli Liquidating Trust $ 5,683 +
3,150 EHLCO Liquidating Trust 315 +
</TABLE>
B-25
<PAGE> 67
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
DEM 15,000,000 Maxwell Comm. Corp. PLC 6.000% due 06/15/93 $ 1,043,660 *
CHF 5,500,000 Maxwell Comm. Corp. PLC 5.000% due 06/16/95 471,429 *
100,550 Timber Realization Liquidating Trust 26,143 +*
---------------------------
TOTAL COMPANIES IN LIQUIDATION $ 1,547,230
===========================
(Total Cost $19)
WARRANTS - 0.43%
140,500 AXA-UAP CTF De Valeur Garant Exp. 07/01/99 $ 363,467
60,000 Five Arrows Chile Inv. Trust Warrants Exp. 05/31/99 12,000
1,109,400 Jardine Strategic Holdings Warrants Exp. 05/02/98 277,350
207,573 Semi-Tech Global Ltd. Warrants Exp. 07/31/98 4,511
---------------------------
TOTAL WARRANTS $ 657,328
===========================
(Total Cost $847,002)
BONDS & NOTES IN REORGANIZATION - 0.07%
90,130 MBL Class 4 Unsecured Claim $ 85,624 +*
526,262 RTC Series 1991- M2 Class B interest only due 09/25/20 15,788
---------------------------
TOTAL BONDS AND NOTES IN REORGANIZATION $ 101,412
===========================
(Total Cost $13,157)
CORPORATE BONDS - 0.00%
11,000 Chartwell Contingent Interest Note 8.000% due 06/30/06 $ 6,219 +
---------------------------
TOTAL CORPORATE BONDS $ 6,219
===========================
(Total Cost $6,219)
TEMPORARY INVESTMENTS - 22.60%
US GOVERNMENT OBLIGATIONS - 6.53%
10,000,000 US Treasury Bill due 11/13/97 $ 9,986,306 ~
CANADIAN GOVERNMENT OBLIGATIONS - 6.50%
CAD 14,100,000 Canadian Treasury Bill due 01/15/98 9,941,391
</TABLE>
B-26
<PAGE> 68
THE BAUPOST FUND
SCHEDULE OF INVESTMENTS
October 31, 1997
<TABLE>
<CAPTION>
Number of shares, Market
units or face value ($) Value
----------------------- -----
<S> <C> <C> <C>
FRENCH GOVERNMENT OBLIGATIONS - 4.85%
FRF 42,560,000 French Treasury Note due 03/12/98 $ 7,417,152
UNITED KINGDOM GOVERNMENT OBLIGATIONS - 4.72%
BPS 4,375,000 United Kingdom Treasury Bill due 01/13/98 7,216,242
---------------------------
TOTAL TEMPORARY INVESTMENTS $ 34,561,091
===========================
(Total Cost $34,561,091)
TOTAL INVESTMENTS - 100.18% $ 153,239,227
===========================
(Total Cost of Investments $131,241,269)
* Non-income producing security.
+ Restricted Securities - securities not registered under the Securities Act of 1933. See
Note D.
~ A portion of the security is serving as collateral or is segregated for securities sold
short.
# Affiliated company. Cost of share purchases were $7,430 during the year ended October 31,
1997. There were no share sales or dividend income during the year ended October 31,
1997.
Foreign Currency Abbreviations
------------------------------
BPS British Pound Sterling
CAD Canadian Dollars
CHF Swiss Franc
DEM Deutschemark
FRF French Franc
The percentage shown for each investment category is the total value of that category
expressed as a percentage of total net assets of the Fund.
</TABLE>
See notes to financial statements.
B-27
<PAGE> 69
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------------- ------------------
CONTRACTS TO SELL
<S> <C> <C> <C> <C>
BPS 4,313,975 British Pound Sterling due 11/06/97 $ 7,226,987 $ (15,875)
(Receivable amount $7,211,112)
BPS 2,003,652 British Pound Sterling due 12/17/97 3,351,809 (129,737)
(Receivable amount $3,222,072)
BPS 2,051,358 British Pound Sterling due 10/27/98 3,387,612 (83,490)
(Receivable amount $3,304,122)
CAD 13,997,211 Canadian Dollar due 11/04/97 9,928,156 11,633
(Receivable amount $9,939,789)
CHF 8,847,350 Swiss Franc due 12/29/97 6,301,846 (208,455)
(Receivable amount $6,093,391)
CHF 11,357,140 Swiss Franc due 10/27/98 8,367,204 (331,684)
(Receivable amount $8,035,520)
FRF 44,425,906 French Franc due 11/05/97 7,675,785 (21,161)
(Receivable amount $7,654,624)
FRF 51,545,429 French Franc due 11/28/97 8,918,990 (784,625)
(Receivable amount $8,134,365)
FRF 100,900,878 French Franc due 10/27/98 17,735,481 (437,196)
(Receivable amount $17,298,285)
ITL 18,561,758,400 Italian Lira due 10/27/98 10,935,587 (187,609)
(Receivable amount $10,747,978)
ITL 18,240,361,700 Italian Lira due 11/28/97 10,713,764 (252,576)
(Receivable amount $10,461,188)
KRW 569,796,000 South Korean Won due 01/23/98 517,996 100,004
(Receivable amount $618,000)
KRW 577,044,000 South Korean Won due 07/21/98 497,452 119,048
(Receivable amount $616,500)
KRW 577,954,500 South Korean Won due 08/10/98 493,135 122,365
(Receivable amount $615,500)
KRW 1,201,635,000 South Korean Won due 08/24/98 1,022,668 219,332
(Receivable amount $1,242,000)
KRW 2,479,653,000 South Korean Won due 08/31/98 2,104,969 379,031
(Receivable amount $2,484,000)
</TABLE>
B-28
<PAGE> 70
THE BAUPOST FUND
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET UNREALIZED
VALUE GAIN/(LOSS)
--------------------- ------------------
<S> <C> <C> <C> <C>
KRW 1,265,664,000 South Korean Won due 10/20/98 1,063,583 172,417
(Receivable amount $1,236,000)
NLG 2,618,020 Dutch Gilder due 12/29/97 1,341,735 (23,829)
(Receivable amount $1,317,906)
NLG 2,787,500 Dutch Gilder due 10/27/98 1,454,885 (30,365)
(Receivable amount $1,424,520)
------------------------- ----------------------
TOTAL CONTRACTS TO SELL $ 103,039,644 (1,382,772)
========================= ----------------------
(Receivable amount $101,656,872)
CONTRACTS TO BUY
BPS 2,003,652 British Pound Sterling due 12/17/97 $ 3,177,892 86,959
(Payable amount $3,264,851)
CHF 360,221 Swiss Franc due 11/03/97 256,420 440
(Payable amount $256,860)
CHF 8,847,350 Swiss Franc due 12/29/97 5,867,824 217,011
(Payable amount $6,084,835)
ITL 18,240,361,700 Italian Lira due 11/28/97 10,364,344 174,710
(Payable amount $10,539,054)
NLG 2,618,020 Dutch Gilder due 12/29/97 1,297,665 22,035
(Payable amount $1,319,700)
------------------------- ----------------------
TOTAL CONTRACTS TO BUY $ 20,964,145 501,155
========================= ----------------------
(Payable amount $21,465,300)
$ (881,617)
======================
</TABLE>
See notes to financial statements.
B-29
<PAGE> 71
THE BAUPOST FUND
SCHEDULE OF SECURITIES SOLD SHORT
OCTOBER 31, 1997
<TABLE>
<CAPTION>
MARKET
NUMBER OF SHARES VALUE
------------------------------ -----------------------
<S> <C> <C> <C>
COMMON STOCK - 0.06%
6,600 Singer Company NV $ 89,513
-----------------------
TOTAL SECURITIES SOLD SHORT $ 89,513
=======================
(Total Proceeds from Securities Sold Short $148,467)
</TABLE>
The percentage shown for each investment category is the total value of that
category expressed as a percentage of total net assets of the Fund.
See notes to financial statements.
B-30
<PAGE> 72
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Baupost Fund (the Fund) was established as a Massachusetts business trust
under an Agreement and Declaration of Trust dated June 29, 1990, and is
registered under the Investment Company Act of 1940, as amended, as a no-load,
nondiversified, open-end management investment company.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that may affect the
reported amounts of assets and liabilities. Actual results could differ from
those estimates.
SECURITY VALUATION: Portfolio securities, options and futures contracts for
which market quotations are available and which are traded on an exchange or on
NASDAQ are valued at the last quoted sales price or, if there is no such
reported sale that day, at the closing bid price. Securities, options and
forward contracts traded in the over-the-counter market (other than those traded
on NASDAQ) and other unlisted securities are valued at the most recent bid price
as obtained from one or more dealers that make markets in the securities.
Portfolio securities which are traded both in the over-the-counter market and on
one or more stock exchanges are valued according to the broadest and most
representative market. To the extent the Fund engages in "naked" short sales
(i.e., it does not own the underlying security or a security convertible into
the underlying security without the payment of any further consideration) the
Fund will value such short position as described above, except that the
valuation, where necessary, will be based on the asked price instead of the bid
price.
Assets for which no quotations are readily available are valued at fair value as
determined in good faith in accordance with procedures adopted by the Trustees
of the Fund. Determination of fair value is based upon such factors as are
deemed relevant under the circumstances, including the financial condition and
operating results of the issuer, recent third-party transactions (actual or
proposed) relating to such securities and, in extreme cases, the liquidation
value of the issuer.
Certain investments held by the Fund are restricted as to public sale in
accordance with the Securities Act of 1933. Whenever possible, such assets are
valued based on bid prices obtained from reputable brokers or market makers as
of the valuation date. For assets not priced by brokers or market makers, fair
value is determined by The Baupost Group, Inc. (Baupost) in accordance with
procedures adopted by the Trustees of the Fund.
SHORT SALES: The Fund engages in short-selling which obligates the Fund to
replace the security borrowed by purchasing the security at the then current
market value. The Fund would incur a loss if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the
borrowed security. The Fund would realize a gain if the price of the security
declines between those dates. Until the Fund replaces the borrowed security, the
Fund maintains daily, in a segregated account with its custodian, cash or
securities sufficient to cover its short position. At October 31, 1997, the Fund
had approximately $45,000 of U.S. Treasury bills in a segregated account
relating to its short positions.
B-31
<PAGE> 73
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
Securities sold short at October 31, 1997 and their related market values and
proceeds are set forth in the Schedule of Securities Sold Short.
FORWARD FOREIGN CURRENCY CONTRACTS: The Fund may enter into forward foreign
currency contracts for the purchase or sale of a specific foreign currency at a
fixed price on a future date. The U.S. dollar value of the currencies the Fund
has committed to buy or sell is shown in the Schedule of Forward Foreign
Currency Contracts. Losses may arise from changes in the value of a foreign
currency relative to the U.S. dollar or from the potential inability of the
counterparties to meet the terms of their contracts. The Fund uses forward
foreign currency contracts to hedge the risks associated with holding securities
denominated in foreign currencies. These contracts are adjusted by the daily
exchange rate of the underlying currency, and any gains or losses are recorded
as unrealized until the contract settlement date.
FOREIGN CURRENCY TRANSLATION: The value of foreign securities is translated into
U.S. dollars at the rate of exchange on the day of valuation. Purchases and
sales of foreign securities, as well as income and expenses relating to such
securities, are translated into U.S. dollars at the exchange rate on the dates
of the transactions. The portion of both realized and unrealized gains and
losses on investments that result from fluctuations in foreign exchange rates is
not separately disclosed.
SWAPS: The Fund has entered into equity swap contracts to gain exposure to
specific foreign equities. A swap is an agreement that obligates two parties to
exchange a series of cash flows at specified intervals based upon or calculated
by reference to changes in specified security prices or interest rates. The
payment flows are usually netted against each other, with the difference being
paid by one party to the other.
Risks may arise as a result of the failure of another party to the swap contract
to comply with the terms of the swap contract. The loss incurred by the failure
of a counterparty is generally limited to the net payment to be received by the
Fund and/or the termination value at the end of the contract. Therefore, the
Fund considers the creditworthiness of each counterparty to a swap contract in
evaluating potential credit risk. Additionally, risks may arise from
unanticipated movements in interest rates or in the value of the underlying
equities.
The Fund records a net receivable or payable for the amount expected to be
received or paid under the contract. The interest component of the equity swap
contracts is recorded as swap interest expense and the fluctuation in the market
value of the underlying security is recorded as unrealized appreciation
(depreciation) on investments. Premium payments made to enter into a swap
contract are capitalized and amortized over the life of the swap contract.
Management of the Fund periodically reviews the value of the unamortized balance
of the premium payment and, based on their evaluation, may accelerate the
amortization.
At October 31, 1997, the Fund had outstanding equity swap contracts with the
following terms:
B-32
<PAGE> 74
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
<TABLE>
<CAPTION>
SWAP NOTIONAL TERMINATION UNDERLYING
COUNTERPARTY AMOUNT DATE SHARES UNDERLYING EQUITY PAYMENTS MADE BY THE FUND
------------ ------ ---- ------ ----------------- -------------------------
<S> <C> <C> <C> <C> <C>
Bankers Trust $ 400,187 02/11/98 27,606 Housing & Commerical Bank Floating - 3 Mos. USD-LIBOR
Flemings 476,194 05/20/99 35,140 Housing & Commercial Bank Fixed - 12 Mos. USD-LIBOR-BBA
Flemings 123,165 05/20/99 8,640 Housing & Commercial Bank Fixed - 12 Mos. USD-LIBOR-BBA
Bankers Trust 400,264 02/11/98 27,746 Kookmin Bank Floating - 3 Mos. USD-LIBOR-BBA
Flemings 235,375 05/20/99 16,618 Kookmin Bank Fixed - 12 Mos. USD-LIBOR-BBA
Morgan Stanley 226,800 07/02/00 16,121 Kookmin Bank Floating - 6 Mos. USD-LIBOR-BBA
Morgan Stanley 338,100 07/07/00 23,879 Kookmin Bank Floating - 6 Mos. USD-LIBOR-BBA
Bankers Trust 629,956 01/17/00 12,014 Pohang Iron & Steel Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Morgan Stanley 506,798 06/05/98 977 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Bear Stearns 632,863 12/23/98 1,182 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Bankers Trust 634,284 12/28/98 1,211 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR-BBA
Morgan Stanley 630,520 03/04/99 1,130 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Morgan Stanley 1,261,000 01/23/00 2,053 SK Telecom Co., Ltd. Floating - 6 Mos. LIBOR-BBA
Flemings 568,908 05/13/00 1,300 SK Telecom Co., Ltd. Fixed - 12 Mos. USD-LIBOR-BBA
Bankers Trust 563,218 06/13/00 1,186 SK Telecom Co., Ltd. Floating - 3 Mos. USD-LIBOR
Flemings 294,046 10/17/00 650 SK Telecom Co., Ltd. Fixed - 12 Mos. USD-LIBOR-BBA
</TABLE>
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Gains and losses on securities sold are determined
using the specific identification method. Dividend income is recorded on the
ex-dividend date or, for certain foreign dividends, as soon as the Fund becomes
aware of the dividends. Interest income, including original issue discount,
where applicable, is recorded on an accrual basis, except for bonds in default
for which there is some concern as to whether interest will be received in cash,
in which case interest is recorded when received.
REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
institutions that Baupost has determined are creditworthy. Each repurchase
agreement is recorded at cost. The Fund requires that the securities purchased
in a repurchase transaction be transferred to the custodian in a manner
sufficient to enable the Fund to obtain those securities in the event of a
default under the repurchase agreement.
PURCHASED CALL AND PUT OPTIONS: The Fund may enter into purchased call and put
options for both hedging and non-hedging activities. The Fund's exposure to
market risk relating to the securities is affected by a number of factors
including the size and composition of the options held, the time period during
which the options may be exercised, the volatility of the underlying security or
index, and the relationship between the current market price of the underlying
security or index and the strike or exercise price of the option. Baupost
closely monitors the Fund's exposure to risk. In addition, all positions
involving future settlement are collateralized by cash balances or security
deposits at the broker through which the transaction was performed.
FEDERAL INCOME TAXES AND DISTRIBUTIONS: The Fund is a regulated investment
company, as defined under Subchapter M of the Internal Revenue Code (the Code).
By complying with Code provisions, the Fund is relieved from federal income tax
provided that substantially all of its taxable income is distributed to
shareholders. Therefore, no provision has been made for federal income taxes.
B-33
<PAGE> 75
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE A--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The Fund's income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to different treatment for
certain of the Fund's foreign securities. Differences in the recognition or
classification of income between the financial statements and tax earnings and
profits, which result in temporary overdistributions for financial statement
purposes, are classified as distributions in excess of net investment income or
accumulated net realized gains. During the year ended October 31, 1997,
$1,658,676 was reclassified from accumulated undistributed net realized gain on
investments and foreign currency transactions to accumulated undistributed net
investment income, due to differences between book and tax accounting for
foreign currency transactions and passive foreign investment companies (PFICs).
This change had no effect on the net asset value per share.
CONCENTRATION OF CREDIT RISK: Concentrations of credit risk exist if a number of
companies in which the Fund has invested are engaged in similar activities and
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions. To mitigate its exposure to concentrations of credit risk, the Fund
invests in a variety of industries located in diverse geographic areas. While
the portfolio is not concentrated in any one industry, securities of distressed
companies, many of which are restricted as to resale and which were purchased at
a significant discount, are an important component of the Fund's investments in
bonds.
NOTE B--INVESTMENT MANAGEMENT CONTRACT AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund retains Baupost as its investment adviser, transfer agent and
administrator. Certain individuals who are officers and trustees of the Fund are
also officers, directors and shareholders of Baupost.
The Fund pays Baupost a quarterly management fee at an annual rate of 1% of
average net assets of the Fund and an administrative fee at an annual rate of
0.25% of average net assets of the Fund, to serve as transfer agent, dividend
disbursing agent and administrator. Baupost has agreed with the Fund to reduce
its management fee by up to 0.75% of the Fund's average net assets until further
notice to the extent that the Fund's total annual expenses (including the
management fee, administrative fee and certain other expenses, but excluding
brokerage commissions, transfer taxes, interest and expenses relating to
preserving the value of the Fund's investments) would otherwise exceed 1.5% of
the Fund's average net assets. For the purpose of determining the applicable
management and administrative fees, average net assets is determined by taking
an average of the determination of such net asset values during each quarter at
the close of business on the last business day of each month during such quarter
before any month-end share purchases or redemptions.
NOTE C--INVESTMENT TRANSACTIONS
Purchases and proceeds from the sale of investment securities (excluding
short-term investments) for the period ended October 31, 1997 aggregated
$133,450,000 and $134,328,500, respectively.
B-34
<PAGE> 76
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE C--INVESTMENT TRANSACTIONS - CONTINUED
For federal income tax purposes, the identified cost of investments at October
31, 1997 was $132,568,938. Net unrealized appreciation, on a federal income tax
basis, for all securities and securities sold short was as follows:
Gross unrealized appreciation $ 30,125,037
Gross unrealized depreciation (13,181,423)
--------------
Net unrealized appreciation $ 16,943,614
==============
NOTE D--RESTRICTED SECURITIES
At October 31, 1997 the Fund held the following securities which are restricted
as to public sale in accordance with the Securities Act of 1933:
<TABLE>
<CAPTION>
Earliest
Value at Acquisition
Cost October 31, 1997 Date
---- ---------------- ----
<S> <C> <C> <C>
Purchased Bank Debt & Trade Claims:
- -----------------------------------
Maxwell Communications Corporate Debt $ 0 $1,971,653 11/22/93
Corporate Bonds:
- ----------------
Chartwell Contingent Interest Note 8.000% due 06/30/06 6,219 6,219 12/21/95
Partnerships:
- -------------
Emerging Europe Fund for Sustainable Development, L.P. 50,482 64,286 02/25/97
NCH Investors Fund, L.P. 919,351 979,541 12/18/95
New Century Capital Partners II, L.P. 995,906 903,114 11/30/95
Sigma Ukraine, L.P. 689,924 703,783 05/14/96
Sigma Ukraine Class C, L.P. 404,663 404,663 11/27/96
Ukrainian Growth Fund II, LP 612,000 612,000 03/31/97
Common Stock:
- -------------
Pannonia Hotels 211,454 252,436 01/28/97
USAA Real Estate Equities Inc. Class A REIT 89,600 88,200 04/22/97
Companies in Liquidation:
- -------------------------
Antonelli Liquidating Trust 0 5,683 12/02/93
Ehlco Liquidating Trust 19 315 01/30/89
Timber Realization Liquidating Trust 0 26,143 08/03/87
Bonds & Notes in Reorganization:
- --------------------------------
MBL Class 4 Unsecured Claim 0 85,624 06/18/96
----------- ----------
TOTAL RESTRICTED SECURITIES (3.99% of Net Assets) $ 3,979,618 $6,103,660
=========== ==========
</TABLE>
The Fund does not have the right to demand that such securities be registered.
The Fund does not anticipate any significant costs associated with the
disposition of these securities.
B-35
<PAGE> 77
THE BAUPOST FUND
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE E--CAPITAL SHARE TRANSACTIONS
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares sold 2,137,346 $32,346,659 1,109,681 $15,369,111
Shares issued in
reinvestment of dividends 989,255 14,363,821 454,829 5,799,072
Shares redeemed (1,250,566) (19,267,341) (1,132,555) (15,745,256)
---------------- --------------- --------------- ---------------
NET INCREASE 1,876,035 $27,443,139 431,955 $5,422,927
================ =============== =============== ===============
</TABLE>
B-36
<PAGE> 78
THE BAUPOST FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
SELECTED PER SHARE DATA 1997 1996 1995 1994 1993 (A)
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period Income $15.38 $13.47 $14.33 $14.77 $12.56
------ ------ ------ ------ ------
from investment operations
Net investment income 0.30 0.41 0.25 0.22 0.28
Net realized and unrealized gain 3.47 2.43 0.71 1.23 2.76
---- ---- ---- ---- ----
Total from investment operations 3.77 2.84 0.96 1.45 3.04
---- ---- ---- ---- ----
Less distributions
From net investment income 0.40 0.28 0.25 0.46 0.22
In excess of net investment income - - 0.08 - -
From net realized gain 1.66 0.65 1.49 1.43 0.61
---- ---- ---- ---- ----
Total distributions 2.06 0.93 1.82 1.89 0.83
---- ---- ---- ---- ----
Net Asset Value, end of period $17.09 $15.38 $13.47 $14.33 $14.77
====== ====== ====== ====== ======
TOTAL RETURN 27.04% 22.51% 7.91% 11.06% 25.45%
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $152,958 $108,788 $89,439 $81,787 $75,378
Ratio of net expenses to average net assets 2.14%(c) 1.50% 1.54% 1.53% 1.52%
Ratio of total expenses excluding waiver of
management fee to average net assets 2.14%(c) 1.50% 1.54% 1.55% 1.63%
Ratio of net investment income to average net
assets 1.45% 2.27% 1.60% 1.32% 2.29%
Ratio of net investment income excluding
waiver of management fee to average net assets
1.45% 2.27% 1.60% 1.30% 2.17%
Portfolio turnover rate 140% 120% 106% 161% 183%
Average commission rate paid (b) $0.0203 $0.0271
</TABLE>
(a) All per share amounts reflect the effect of the ten-for-one share split as
of the close of business October 31, 1993.
(b) For fiscal years beginning after Sept. 1, 1995, the Fund is required to
disclose its average commission rate paid per share for security trades on which
commissions are charged.
(c) The increase in expense ratios is due to equity swap contract interest
expense.
B-37
<PAGE> 79
THE BAUPOST FUND
(THE "FUND")
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(A) (1) Financial Statements:
Statement of Assets and Liabilities as of October 31, 1997 (a)
Statement of Operations for the year ended October 31, 1997 (a)
Statement of Changes in Net Assets for the years ended October 31,
1997 and October 31, 1996 (a)
Schedule of Investments as of October 31, 1997 (a)
Schedule of Forward Foreign Currency Contracts as
of October 31, 1997 (a)
Schedule of Securities Sold Short as of October 31, 1997 (a)
Notes to Financial Statements (a)
Financial Highlights -- Years Ended October 31, 1997, 1996, 1995, 1994
and 1993 (a) and (b); Year Ended October 31, 1992 and Period Ended
October 31, 1991 (b)
(2) Supporting Schedules:
Schedules I through V omitted because the required matter is included
above or is not present.
(a) Included in Part B.
(b) Included in Part A.
(B) Exhibits
1. Agreement and Declaration of Trust.*
2. By-laws of the Fund.**
3. None.
4. (a) Portions of Agreement and Declaration of
Trust relating to shareholders' rights.*
(b) Portions of By-laws relating to
shareholders' rights.**
5. Management Contract dated as of January 2, 1998
between the Fund and The Baupost Group, L.L.C.
("Baupost").
6. None.
7. None.
<PAGE> 80
8. Custodian Agreement between the Fund and State Street
Bank and Trust Company.**
9. (a) Transfer Agency and Service Agreement
between the Fund and State Street Bank and
Trust Company.**
(b) Administrative Services Agreement dated as
of January 2, 1998 between the Fund and The
Baupost Group, L.L.C.
10. Opinion and Consent of Ropes & Gray.*
11. Consent of Ernst & Young LLP.
12. None.
13. Subscription Agreement.*
14. None.
15. None.
16. Schedule of Performance Calculations.**
17. Financial Data Schedule.**
Power of Attorney.*
- --------------------
* Incorporated by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement.
** Incorporated by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement.
-2-
<PAGE> 81
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
As of January 31, 1998: 533
Item 27. Indemnification
Article VIII of the Fund's Agreement and Declaration of Trust
(Exhibit 1 hereto and incorporated herein by reference)
provides for indemnification of its Trustees and officers. The
effect of the relevant section of Article VIII of the
Agreement and Declaration of Trust is to provide
indemnification for each of the Fund's Trustees and officers
against liabilities and counsel fees reasonably incurred in
connection with the defense of any legal proceeding in which
such Trustee or officer may be involved by reason of being or
having been a Trustee or officer, except that no Trustee or
officer shall be indemnified against any liability to the Fund
or its shareholders to which such Trustee or officer otherwise
would be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved
in the conduct of such Trustee's or officer's office.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to
Trustees, officers and controlling persons of the Fund
pursuant to the foregoing provisions, or otherwise, the Fund
has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public
policy as expressed in the Act, and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Fund
of expenses incurred or paid by a Trustee, officer or
controlling person of the Fund in the successful defense of
any action, suit or proceeding) is asserted by such Trustee,
officer or controlling person in connection with the
securities being registered, the Fund will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
-3-
<PAGE> 82
Item 28. Business and Other Connections of Investment Adviser
The Baupost Group, L.L.C. ("Baupost") is the investment adviser to the
Fund and its business is summarized under the caption "Management of
the Fund" in the Prospectus constituting Part A of this Registration
Statement, which summary is incorporated herein by reference.
The business and other connections for the past two fiscal years of
each officer of Baupost are listed below.
Name Business and other connections
Jordan J. Baruch Assistant Secretary, The Baupost
Member of Advisory Board Group, Inc., 44 Brattle Street,
Cambridge, MA 02138; Owner, Jordan
Baruch Associates, 1200 18th
Street, N.W., Washington,
D.C. 20036.
Paul C. Gannon Chief Financial and Administrative
Chief Financial and Administrative Officer, Vice President, The
Officer, Vice President Baupost Group, Inc., 44 Brattle
Street, Cambridge, MA 02138;
Limited Partner, Baupost
Associates, 44 Brattle Street,
Cambridge, MA 02138;
Treasurer/Clerk, Boston Sterling,
Inc., 44 Brattle Street, Cambridge,
MA 02138; Assistant Clerk, SAK
Corporation, 44 Brattle Street,
Cambridge, MA 02138.
Seth A. Klarman Director, President, The Baupost
President, Member of Advisory Board Group, Inc., 44 Brattle Street,
Cambridge, MA 02138; Limited
Partner, Baupost Partners, 44
Brattle Street, Cambridge, MA
02138; Limited Partner, Baupost
Associates, 44 Brattle Street,
Cambridge, MA 02138;
President/Director, Boston
Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138; President, SAK
Corporation, 44 Brattle Street,
Cambridge, MA 02138.
Thomas Blumenthal Vice President, The Baupost Group,
Vice President Inc., 44 Brattle Street, Cambridge,
MA 02138; Limited Partner, Baupost
Associates, 44 Brattle Street,
Cambridge, MA 02138; Director, The
Oberto Sausage Co., 7060 S. 235th
Street, Kent, WA 98035;
-4-
<PAGE> 83
Director, Data Documents Holding,
Inc., 4205 S. 96th Street, Omaha,
NE 68127; Director, Richey
Electronics, Inc., 7441 Lincoln
Way, Garden Grove, CA 92641.
William J. Poorvu Director, Chairman, The Baupost
Chairman of Advisory Board Group, Inc., 44 Brattle Street,
Cambridge, MA 02138;
Trustee/Director, Mass. Financial
Services Group of Funds, 500
Boylston Street, Boston, MA 02116;
Adjunct Professor, Harvard
University Graduate School of
Business Administration, Class of
1961 Adjunct Professor in
Entrepreneurship, Boston, MA 02138;
Director, CBL Associates
Properties, Inc., One Park Place,
6148 Lee Highway, Chattanooga, TN
37421; Sole Proprietor, William J.
Poorvu, 44 Brattle Street, P.O.
Box 380828, Cambridge, MA 02238;
Partner, various private real
estate partnerships.
Howard H. Stevenson Director, Vice Chairman, Treasurer,
Vice Chairman of Advisory The Baupost Group, Inc., 44 Brattle
Board Street, Cambridge, MA 02138;
Sarofim-Rock Professor, Harvard
University Graduate School
of Business Administration, Boston,
MA 02138; Director, Landmark
Communications, Inc., 150 W.
Brambleton Avenue, Norfolk, VA;
Director, Camp, Dresser & McKee,
One Cambridge Center, Cambridge,
MA, 02142-1403; Director, Sheffield
Steel Corp., 220 North Jefferson,
Spring Sands, OK 74063. Trustee,
various individual trusts. Senior
Associate Dean and Director of
Financial and Information Systems,
Harvard University Graduate School
of Business (for address see
above); Director, African
Communications Group, 28 Athens
Street #1, Cambridge, MA;
Director, Terry Hinge & Hardware,
14600 Arminta Street, Van Nuys, CA
91402; Director, Gulf States Steel,
900 South Street, Waltham, MA
02154; Director, Quadra Capital
Partners, 270
-5-
<PAGE> 84
Congress Street, Boston, MA 02210;
Director, Bessemer Securities
Corporation, 600 Fifth Avenue, New
York, NY 10111; Director, Westboro
Holdings LP, P.O. Box 277,
Southboro, MA 01772.
David C. Abrams Director, Vice President, The
Member of Advisory Board Baupost Group, Inc., 44 Brattle
Street, Cambridge, MA 02138; Vice
President/Director, Boston
Sterling, Inc., 44 Brattle Street,
Cambridge, MA 02138; Limited
Partner, Baupost Associates, 44
Brattle Street, Cambridge,
MA 02138.
Samuel Plimpton Vice President, The Baupost Group,
Vice President Inc., 44 Brattle Street, Cambridge,
MA 02138; General Partner, Brattle
Advisors, L.P., 44 Brattle Street,
Cambridge, MA 02138; Partner,
various private real estate
partnerships.
Item 29. Principal Underwriters
Not Applicable.
Item 30. Location of Accounts and Records
Certain accounts, books and other documents required to be maintained
by Section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by The Baupost Group, L.L.C., 44
Brattle Street, Cambridge, Massachusetts 02138. Records relating to the
duties of the Registrant's custodian and transfer agent are maintained
by State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110.
Item 31. Management Services
Not Applicable.
-6-
<PAGE> 85
Item 32. Undertakings
(a) The undersigned Registrant hereby undertakes to call a meeting
of shareholders for the purpose of voting on the removal of a
trustee or trustees when requested in writing to do so by the
holders of at least 10% of the Registrant's outstanding voting
securities and in connection with such meeting to comply with
the provisions of Section 16(c) of the Investment Company Act
of 1940 relating to shareholder communications.
(b) The Registrant hereby undertakes to furnish each person to
whom a prospectus is delivered with a copy of the Registrant's
latest Annual Report to shareholders upon request and without
charge.
NOTICE
A copy of the Agreement and Declaration of Trust of The Baupost Fund is
on file with the Secretary of State of The Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the Fund by
an officer of the Fund as an officer and not individually and the obligations of
or arising out of this instrument are not binding upon any of the Trustees or
shareholders individually but are binding only upon the assets and property of
the Fund.
-7-
<PAGE> 86
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 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, 1998.
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, 1998
- ------------------------ Executive Officer)
Seth A. Klarman and Trustee
* Trustee and Treasurer February 27, 1998
- ------------------------ (Principal Financial and
William J. Poorvu Accounting Officer)
* Trustee February 27, 1998
- ------------------------
Howard H. Stevenson
* Trustee February 27, 1998
- ------------------------
Samuel Plimpton
* Trustee February 27, 1998
- ------------------------
David Auerbach
* Trustee February 27, 1998
- ------------------------
Robert Ackerman
* Trustee February 27, 1998
- ------------------------
Jay Light
*By: /s/ Seth A. Klarman
-----------------------
Seth A. Klarman
Attorney-in-fact
-8-
<PAGE> 87
THE BAUPOST FUND
Index to Exhibits
Sequential
Exhibit No. Description Page No.
5 Management Contract
9(b) Administrative Services Agreement
11 Auditor's Consent
-9-
<PAGE> 1
EXHIBIT 5
MANAGEMENT CONTRACT
Management Contract ("Contract") executed as of January 2, 1998,
between The Baupost Fund, a Massachusetts business trust (the "Fund"), and The
Baupost Group, L.L.C., a Massachusetts limited liability company (the
"Manager").
Witnesseth:
That in consideration of the mutual covenants herein contained, it is
agreed as follows:
1. SERVICES TO BE RENDERED BY MANAGER TO THE TRUST.
(a) Subject always to the control of the Trustees of the Fund
and to such policies as the Trustees may determine, the Manager will,
at its expense, (i) furnish continuously an investment program for the
Fund and make investment decisions on behalf of the Fund and place all
orders for the purchase and sale of the Fund's portfolio securities and
(ii) furnish office space and equipment, and pay all salaries, fees and
expenses of officers and Trustees of the Fund who are affiliated with
the Manager. The Manager will not furnish to the Fund under this
Contract the following services: determinations of the net assets, the
net asset value of the Fund and the offering price per share of shares
of the Fund, maintenance of the Fund's accounts, books and records as
required by Section 31(a) of the Investment Company Act of 1940, as
amended, and shareholder accounting. In the performance of its duties,
the Manager will comply with the provisions of the Agreement and
Declaration of Trust and By-laws of the Fund and the Fund's stated
investment objectives, policies and restrictions.
(b) In placing orders for the portfolio transactions of the
Fund, the Manager will seek the best price and execution available,
except to the extent it may be permitted to pay higher brokerage
commissions for brokerage and research services as described below. In
using its best efforts to obtain for the Fund the most favorable price
and execution available, the Manager shall consider all factors it
deems relevant, including, without limitation, the overall net economic
cost to the Fund (including price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is
effected, the ability to effect the transaction at all where a large
block is involved, the availability of the broker to stand ready to
execute possibly difficult transactions in the future and the financial
strength and stability of the broker. Subject to such policies as the
Trustees may determine, the Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Contract or
otherwise solely by reason of its having caused the Fund to pay a
broker or dealer that provides brokerage and research services to the
Manager an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction, if the
Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either
that particular transaction or the Manager's overall responsibilities
with respect to the Fund and to other clients of the Manager as to
which the Manager exercises investment discretion.
(c) The Manager shall not be obligated under this agreement to
pay any expenses of or for the Fund not expressly assumed by the
Manager pursuant to this Section 1 other than as provided in Section 3.
2. OTHER AGREEMENTS, ETC.
It is understood that any of the shareholders, Trustees, officers and
employees of the Fund may be a partner, shareholder, director, officer or
employee of, or be otherwise interested in, the Manager, and in any
<PAGE> 2
person controlled by or under common control with the Manager, and that the
Manager and any person controlled by or under common control with the Manager
may have an interest in the Fund. It is also understood that the Manager and
persons controlled by or under common control with the Manager have and may have
advisory, management service, distribution or other contracts with other
organizations and persons, and may have other interests and businesses.
3. COMPENSATION TO BE PAID BY THE FUND TO THE MANAGER.
The Fund will pay to the Manager as compensation for the Manager's
services rendered and for the facilities furnished and the expenses borne by the
Manager pursuant to Section 1, a fee, computed and paid quarterly at the annual
rate of 1.00% of the Fund's average net asset value. Such average net asset
value of the Fund shall be determined by taking an average of all of the
determinations of such net asset value during such quarter at the close of
business on the last business day of each month during such quarter while this
Contract is in effect. Such fee shall be payable for each quarter within five
(5) business days after the end of such quarter.
In the event that expenses of the Fund for any fiscal year should
exceed the expense limitation on investment company expenses imposed by any
statute or regulatory authority of any jurisdiction in which shares of the Fund
are qualified for offer and sale, the compensation due the Manager for such
fiscal year shall be reduced by the amount of such excess by reduction or refund
thereof. In addition, the Manager will reduce its management fee by up to .75%
to the extent that the Fund's total annual expenses (including all fees payable
by the Fund to the Manager pursuant to this Contract or any other agreement, but
excluding brokerage commissions, transfer taxes, interest, and expenses relating
to preserving the value of the Fund's investments) would otherwise exceed 1.50%
of the Fund's average net assets.
If the Manager shall serve for less than the whole of a quarter, the
foregoing compensation shall be prorated.
4. ASSIGNMENT TERMINATES THIS CONTRACT; AMENDMENTS OF THIS CONTRACT.
This Contract shall automatically terminate, without the payment of any
penalty, in the event of its assignment; and this Contract shall not be amended
unless such amendment is approved at a meeting by the affirmative vote of a
majority of the outstanding shares of the Fund, and by the vote, cast in person
at a meeting called for the purpose of voting on such approval, of a majority of
the Trustees of the Fund who are not interested persons of the Fund or of the
Manager.
5. EFFECTIVE PERIOD AND TERMINATION OF THIS CONTRACT.
This Contract shall become effective upon its execution, and shall
remain in full force and effect continuously thereafter (unless terminated
automatically as set forth in Section 4) until terminated as follows:
(a) Either party hereto may at any time terminate this
Contract by not more than sixty days' but no less than 30 days' written
notice delivered or mailed by registered mail, postage prepaid, to the
other party; or
(b) If (i) the Trustees of the Fund by majority vote or the
shareholders by the affirmative vote of a majority of the outstanding
shares of the Fund, and (ii) a majority of the Trustees of the Fund who
are not interested persons of the Fund or of the Manager, by vote cast
in person at a meeting called for the purpose of voting on such
approval, do not specifically approve at least annually the continuance
of this Contract, then this Contract shall automatically terminate at
the close of business on the second anniversary of its execution, or
upon the expiration of one year from the
-2-
<PAGE> 3
effective date of the last such continuance, whichever is later;
provided, however, that if the continuance of this Contract is
submitted to the shareholders of the Fund for their approval and such
shareholders fail to approve such continuance of this Contract as
provided herein, the Manager may continue to serve hereunder in a
manner consistent with the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder (collectively, the "1940
Act").
Action by the Fund under (a) above may be taken either (i) by vote of a
majority of its Trustees, or (ii) by the affirmative vote of a majority
of the outstanding shares of the Fund.
Termination of this Contract pursuant to this Section 5 shall be
without the payment of any penalty.
6. CERTAIN DEFINITIONS.
For the purposes of this Contract, the "affirmative vote of a majority
of the outstanding shares" of the Fund means the affirmative vote, at a duly
called and held meeting of shareholders, (a) of the holders of 67% or more of
the shares of the Fund present (in person or by proxy) and entitled to vote at
such meeting, if the holders of more than 50% of the outstanding shares of the
Fund entitled to vote at such meeting are present in person or by proxy, or (b)
of the holders of more than 50% of the outstanding shares of the Fund entitled
to vote at such meeting, whichever is less.
For the purposes of this Contract, the terms "affiliated person",
"control", "interested person" and "assignment" shall have their respective
meanings defined in the 1940 Act, subject, however, to such exemptions as may be
granted by the Securities and Exchange Commission under the 1940 Act; and the
phrase "specifically approve at least annually" shall be construed in a manner
consistent with the 1940 Act.
7. NONLIABILITY OF MANAGER.
In the absence of willful misfeasance, bad faith or gross negligence on
the part of the Manager, or reckless disregard of its obligations and duties
hereunder, the Manager shall not be subject to any liability to the Fund, or to
any shareholder of the Fund, for any act or omission in the course of, or
connected with, rendering services hereunder.
8. THE NAME "BAUPOST".
The Manager owns the right to use the name "Baupost" in connection with
investment-related series or products, and such name may be used by the Fund
only with the consent of the Manager. The Manager consents to the use by the
Fund of the name "The Baupost Fund" or to the use by the Fund of any other name
embodying the name "Baupost", in such forms as the Manager shall in writing
approve, but only on condition and so long as (i) this Contract shall remain in
full force and (ii) the Fund shall fully perform, fulfill and comply with all
provisions of this Contract expressed herein to be performed, fulfilled or
complied with by it. No such name shall be used by the Fund at any time or in
any place or for any purposes or under any condition except as in this section
provided. The foregoing authorization by the Manager to the Fund to use the said
name "Baupost" as part of a business or name is not exclusive of the right of
the Manager itself to use, or to authorize others to use, the same; the Fund
acknowledges and agrees that as between the Manager and the Fund, the Manager
has the exclusive right so to use, or to authorize others to use, said name and
the Fund agrees to take such action as may reasonably be requested by the
Manager to give full effect to the provisions of this section (including,
without limitation, consenting to such use of said name). Without limiting the
generality of the foregoing, the Fund agrees that, upon any termination of this
Contract by either party or upon the violation of any of its provisions by the
Fund, the Fund will, at the request of the Manager made within six months after
the Manager has knowledge of such termination or violation, use its best efforts
to change the name of the Fund so as to eliminate all reference,
-3-
<PAGE> 4
if any, to the name "Baupost" and will not thereafter transact any business in a
name containing the name "Baupost" in any form or combination whatsoever, or
designate itself as the same entity as or successor to an entity of such name,
or otherwise use the name "Baupost" or any other reference to the Manager. Such
covenants on the part of the Fund shall be binding upon it, its Trustees,
officers, stockholders, creditors and all other persons claiming under or
through it.
9. LIMITATION OF LIABILITY OF THE TRUSTEES AND SHAREHOLDERS.
A copy of the Agreement and Declaration of Trust of the Fund is on file
with the Secretary of State of The Commonwealth of Massachusetts, and notice is
hereby given that this instrument is executed on behalf of the Trustees of the
Fund as Trustees and not individually and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders individually
but are binding only upon the assets and property of the Fund.
IN WITNESS WHEREOF, The Baupost Fund and The Baupost Group, L.L.C. have
each caused this instrument to be signed in duplicate on its behalf by its duly
authorized representative, all as of the day and year first above written.
THE BAUPOST FUND
By /s/ Paul Gannon
______________________________
Title: Vice President
THE BAUPOST GROUP, L.L.C.
By /s/ Paul Gannon
______________________________
Title: Chief Financial and
Administrative Officer and
Vice President
-4-
<PAGE> 1
EXHIBIT 9(b)
ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made as of the 2nd day of January, 1998, by and between
The Baupost Fund, a Massachusetts business trust having its principal office and
place of business at 44 Brattle Street, Cambridge, Massachusetts 02138 (the
"Fund"), and The Baupost Group, L.L.C. ("Baupost"), a Massachusetts limited
liability company having its principal office and place of business at 44
Brattle Street, Cambridge, Massachusetts 02138.
W I T N E S S E T H:
WHEREAS, the Fund desires to appoint Baupost as its administrator to
assist in the tasks and responsibilities set forth below, and Baupost desires to
accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1. TERMS OF APPOINTMENT; DUTIES OF BAUPOST
1.01. Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints Baupost to act as, and Baupost agrees to
act as, administrator for the Fund.
1.02. Baupost agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and Baupost, Baupost shall
(i) receive orders for the purchase of the Funds' shares
of beneficial interest (the "Shares"), and promptly
forward such orders and all appropriate documentation
to the Fund's transfer agent;
(ii) receive redemption requests and redemption directions
with respect to the Shares, and promptly forward such
requests and directions and all appropriate
documentation to the Fund's transfer agent; and
(iii) receive transfer requests with respect to the Shares,
and promptly forward such requests and all
appropriate documentation to the Fund's transfer
agent.
(b) In addition to and not in lieu of the services set forth in
paragraph (a) above, Baupost shall: (i) prepare shareholder meeting lists, (ii)
mail proxies, (iii) receive and tabulate proxies, (iv) assist in the preparation
of, mail to shareholders, and arrange for filing with the Securities and
Exchange Commission (the "Commission") all shareholder reports and prospectuses
and, if requested, statements of additional information, (v) mail confirmation
<PAGE> 2
forms and statements of account to shareholders for all purchases, transfers and
redemptions of Shares and other confirmable transactions in shareholder
accounts, (vi) mail activity statements for shareholders, (vii) provide
shareholder account information, (viii) calculate the Fund's total net asset
value, total net income, and net asset value per Share, (ix) prepare and arrange
for filing with the Commission the Fund's Form N-SAR and Form 24F-2 and all
other necessary forms and documents, (x) maintain the qualification and
registration of the Shares in all jurisdictions requested by the Fund's
President or other appropriate officer, and (ix) perform the duties and
responsibilities with respect to the custody of the Fund's assets required by
Appendix A hereof. The Fund shall provide Baupost with any information required
in connection with the furnishing of the foregoing services.
(c) Procedures applicable to the services provided under this Agreement
may be established from time to time by agreement between the Fund and Baupost.
(d) In performing its duties hereunder, in addition to the provisions
set forth herein, Baupost shall comply with the terms of the Agreement and
Declaration of Trust, the bylaws and the current Prospectus and Statement of
Additional Information of the Fund, and with the terms of votes adopted from
time to time by the Trustees and shareholders of the Fund, relating to the
subject matters of this Agreement, all as the same may be amended from time to
time. Baupost shall also comply with the provisions of all applicable laws and
regulations and with the requirements of any governmental authority having
jurisdiction over Baupost or the Fund with respect to the duties of Baupost
hereunder.
ARTICLE 2. FEES
For performance by Baupost pursuant to this Agreement, the Fund agrees
to pay Baupost a quarterly fee at the annual rate of .25% of the Fund's "average
net assets". For the purposes of calculating the foregoing fee, "average net
assets" will be determined by taking an average of the determinations of such
net asset value during each quarter at the close of business on the last
business day of each month during such quarter. Filing fees payable to the
Commission, any state or any other jurisdiction or party, and any other similar
fees or expenses, in each case relating to the Fund's activities, will be the
responsibility of the Fund.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF BAUPOST
Baupost represents and warrants to the Fund that:
3.01. It is a corporation duly organized and existing and in good
standing under the laws of The Commonwealth of Massachusetts.
3.02. It is duly qualified to carry on its business in all
jurisdictions where such qualification is required.
-2-
<PAGE> 3
3.03. It is empowered under applicable laws and by its charter and
bylaws to enter into and perform this Agreement.
3.04. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05. It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to Baupost that:
4.01. It is an unincorporated business trust duly organized and
existing under the laws of The Commonwealth of Massachusetts.
4.02. It is empowered under applicable laws and by its governing
documents to enter into and perform this Agreement.
4.03. All proceedings required by said governing documents have been
taken to authorize it to enter into and perform this Agreement.
4.04. It is an investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act").
ARTICLE 5. INDEMNIFICATION
5.01. Baupost shall not be responsible for, and the Fund shall
indemnify and hold Baupost harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) all actions of Baupost required to be taken pursuant to this
Agreement, provided such actions were taken in the absence of willful
misfeasance, bad faith or gross negligence on its part or reckless disregard of
its obligations and duties hereunder and in addition, in the case of actions
required to be taken pursuant to Appendix A hereof, the standard of care set
forth in Section 3.d thereof has been met;
(b) the Fund's refusal or failure to comply with the terms of this
Agreement, or the Fund's lack of good faith, negligence or willful misconduct,
or the breach of any representation or warranty of the Fund hereunder;
-3-
<PAGE> 4
(c) the reliance on or use by Baupost of information, records or
documents which (i) are furnished to it by or on behalf of the Fund, and (ii)
have been prepared and/or maintained by the Fund or any other person or firm
(other than Baupost or an affiliate of Baupost) on behalf of the Fund;
(d) the reliance on, or the carrying out by Baupost of, any
instructions or requests of the Fund's representatives; or
(e) the offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that require that Shares be registered in such state, or in
violation of any stop order or other determination or ruling by any federal
agency or any state with respect to the offer or sale of such Shares in such
state.
Notwithstanding the foregoing or any other provision of this Agreement,
Baupost shall only be entitled to indemnification hereunder, and shall only be
held free from any liability to the Fund or its shareholders, in the absence of
willful misfeasance, bad faith or gross negligence on its part or reckless
disregard of its obligations and duties hereunder and in addition, in the case
of matters relating to Appendix A hereof, only if the standard of care set forth
in Section 3.d thereof has been met.
5.02. Baupost shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to Baupost's refusal or
failure to comply with the terms of this Agreement, or Baupost's willful
misfeasance, bad faith or gross negligence or reckless disregard of its
obligations and duties hereunder, or the breach of any representation or
warranty of Baupost hereunder.
5.03. At any time Baupost may apply to any officer of the Fund
designated by the President of the Fund in a written notice to Baupost for
instructions, and may consult with the Fund's legal counsel with respect to any
matter arising in connection with the services to be performed by Baupost under
this Agreement, and Baupost shall not be liable and shall be indemnified by the
Fund for any action taken or omitted by it in reliance upon such instructions or
upon the opinion of such counsel. Baupost shall be protected and indemnified in
acting upon any papers or documents furnished by or on behalf of the Fund,
reasonably believed to be genuine and to have been signed by the proper person
or persons, or upon any instructions, information, data, reports or documents
provided Baupost by the Fund or its agents (other than Baupost or an affiliate
of Baupost) by telephone, in person, or by any other means authorized by the
Fund, and Baupost shall not be held to have notice of any change of authority of
any person until receipt of written notice thereof from the Fund.
5.04. In the event either party is unable to perform its obligations
under this Agreement because of acts of God, strikes, equipment or transmission
failure or damage
-4-
<PAGE> 5
reasonably beyond its control, or other causes reasonably beyond its control,
such party shall not be liable to the other for any damages resulting from such
failure to perform or otherwise from such causes.
5.05. Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06. In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim, and, to the extent
it wishes, assume the defense thereof. The party seeking indemnification shall
in no case confess any claim or make any compromise in any case in which the
other party may be required to indemnify it except with the other party's prior
written consent.
ARTICLE 6. COVENANTS OF THE FUND AND BAUPOST
6.01. The Fund shall promptly furnish to Baupost the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of Baupost and the execution and delivery of
this Agreement.
(b) A copy of the Agreement and Declaration of Trust and bylaws of the
Fund and all amendments thereto.
6.02. Baupost shall keep records relating to the services to be
performed hereunder in such form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the rules and regulations
promulgated thereunder, Baupost agrees that all such records prepared or
maintained by Baupost relating to the services to be performed by Baupost
hereunder are the property of the Fund and will be preserved and made available
in accordance with such section, rules and regulations, and will be surrendered
promptly to the Fund at its request. Baupost hereby agrees that it will not use
or employ, or permit any other person or entity within its control to use or
employ, any such books, records, information or data for any purpose not
authorized by the Board of Trustees of the Fund. Baupost acknowledges that its
services under this Agreement (including, without limitation, the mailing of any
shareholder communications) are subject to the direction of the Fund and agrees
that it will accept direction only from the President of the Fund, or from other
persons designated in writing by the President of the Fund or authorized by
action of the Board of Trustees.
-5-
<PAGE> 6
6.03. Baupost and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
6.04. In case of any requests or demands for the inspection of the
shareholder records of the Fund, Baupost will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. Baupost reserves the right, however, to exhibit the shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the shareholder records to such person, unless
the Fund indemnifies Baupost to its reasonable satisfaction against such
liability. Baupost will make all reasonable efforts to consult with an
authorized officer of the Fund and obtain such indemnification prior to any such
disclosure.
ARTICLE 7. TERMINATION OF AGREEMENT
7.01. This Agreement shall become effective on the date hereof. Unless
terminated as herein provided, this Agreement shall remain in full force and
effect indefinitely.
7.02. This Agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Fund or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the Fund or by
Baupost, on sixty days' written notice to the other party.
ARTICLE 8. AMENDMENT
8.01. This Agreement may be amended or modified by a written agreement
executed by both parties.
ARTICLE 9. MASSACHUSETTS LAW TO APPLY
9.01. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
ARTICLE 10. MERGER OF AGREEMENT
10.01. This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
hereof whether oral or written.
-6-
<PAGE> 7
ARTICLE 11. ASSIGNMENT
11.01. Neither party may assign its rights, duties or obligations
hereunder.
ARTICLE 12. LIMITATION OF LIABILITY
12.01. A copy of the Agreement and Declaration of Trust of the Fund is
on file with the Secretary of State of The Commonwealth of Massachusetts and
notice is hereby given that this Agreement is executed on behalf of the Trustees
of the Fund as Trustees and not individually and that the obligations of this
Agreement are not binding upon the Trustees or holders of Shares individually
but are binding only upon the assets or property of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
THE BAUPOST FUND THE BAUPOST GROUP, L.L.C.
By: /s/ Paul Gannon By: /s/ Paul Gannon
________________ __________________
Title: Vice President Title: Chief Financial
and Administrative
Officer and Vice
President
Attest: Attest:
/s/ Scott A. Stone /s/ Scott A. Stone
_________________________ __________________
-7-
<PAGE> 8
Appendix A
FOREIGN CUSTODY TERMS AND CONDITIONS
1. Definitions. The following italicized terms when used in this Appendix
shall have the indicated meanings:
a. Board shall mean the Board of Trustees of the Fund.
b. Foreign Assets shall mean any of the Fund's investments
(including foreign currencies) for which the primary market is
outside the United States, and such cash and cash equivalents
as are reasonably necessary to effect the Fund's transactions
in such investments.
c. Foreign Custody Manager shall have the meaning set forth in
subparagraph (a)(2) of the Rule.
d. Foreign Securities Depository shall mean a securities
depository (as defined in subparagraph (a)(6) of the Rule) or
clearing agency used in connection with Foreign Assets and
with respect to which one of the Fund's custodian banks has
not accepted the role of Foreign Custody Manager.
e. Rule shall mean Rule 17f-5 promulgated under Section 17(f) of
the Investment Company Act of 1940, as amended.
2. Delegation.
a. Delegation to the Foreign Custody Manager as Foreign Custody
Manager. The Fund, by resolution adopted by the Board, hereby
delegates to Baupost, subject to paragraph (b) of the Rule,
the responsibilities set forth in this Appendix A as Foreign
Custody Manager with respect to Foreign Securities
Depositories.
b. Acceptance of Delegation. Baupost hereby accepts such
delegation as Foreign Custody Manager with respect to the
Fund.
c. Withdrawal of Acceptance of Delegated Responsibilities.
Baupost may withdraw its acceptance of delegated
responsibilities with respect to a Foreign Securities
Depository upon written notice to the Fund. Thirty days (or
such longer period as to which the parties agree in writing)
after receipt of any such notice by the Fund, Baupost shall
have no further responsibility as Foreign Custody Manager with
respect to the Foreign Securities Depository as to which
Baupost's acceptance of delegation is withdrawn.
<PAGE> 9
3. Scope of Delegated Responsibilities.
a. Selection of Foreign Securities Depository. In performing its
delegated responsibilities as Foreign Custody Manager, Baupost
shall determine that (i) each Foreign Securities Depository is
an "Eligible Foreign Custodian" as defined in subparagraph
(a)(1) of the Rule prior to its use by the Fund and (ii) the
Fund's Foreign Assets will be subject to reasonable care,
based on the standards applicable to custodians in the
relevant market, after considering all factors relevant to the
safekeeping of such assets, including, without limitation,
those factors set forth in clauses (i) through (iv) of
subparagraph (c)(1) of the Rule.
b. Contracts with Foreign Securities Depository. Baupost shall
determine that (i) a written contract governing the applicable
foreign custody arrangement with respect to each Foreign
Securities Depository, (ii) the rules or established practices
or procedures of such Foreign Securities Depository or (iii) a
combination of both (collectively, a "Contract") will provide
reasonable care for the Foreign Assets held by that Foreign
Securities Depository based on the standards specified in
Section 3.a hereof. Each such Contract shall include the
provisions required by clause (i) of subparagraph (c)(2) of
the Rule, or in lieu of any or all of such provisions, the
Contract may contain such other provisions that Baupost
determines will provide, in their entirety, the same or a
greater level of care and protection for the Foreign Assets as
the provisions set forth in such clause, in their entirety.
c. Monitoring. Baupost shall establish a system to monitor (i)
the appropriateness of maintaining the Foreign Assets with
each Foreign Securities Depository and (ii) the Contract with
each Foreign Securities Depository. In the event Baupost
determines that the custody arrangements with a Foreign
Securities Depository no longer meet the requirements of the
Rule or are no longer appropriate, Baupost shall notify the
Board in accordance with Section 3.e hereunder and withdraw
the Fund's Foreign Assets therefrom as soon as reasonably
practicable.
d. Standard of Care as Foreign Custody Manager of the Fund. In
performing the responsibilities delegated to it, Baupost
agrees to exercise reasonable care, prudence and diligence
such as a person having responsibility for the safekeeping of
assets of management investment companies registered under the
1940 Act would exercise.
e. Reporting Requirements. Baupost shall report to the Board in
writing by the next meeting of the Board the placement of the
Fund's Foreign Assets with a particular Foreign Securities
Depository or the occurrence of any material
A-2
<PAGE> 10
change in the foreign custody arrangements of the Fund subject
to this Appendix.
A-3
<PAGE> 1
EXHIBIT 11
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We Consent to the references to our firm under the captions "The Baupost Fund
Financial Highlights" in the Prospectus and "Experts" in the Statement of
Additional Information and to the use of our report dated December 5, 1997 with
respect to the financial statements and financial highlights of The Baupost
Fund, in Post-Effective Amendment Number 10 to the Registration Statement (Form
N-1A No. 33-35851) and the related Prospectus and Statement of Additional
Information of The Baupost Fund dated February 28, 1998.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 27, 1998
