As filed with the Securities and Exchange Commission on February 20, 1998
1933 ACT FILE NO. 333-32529
1940 ACT FILE NO. 811-8309
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933 [ ]
PRE-EFFECTIVE AMENDMENT NO. 2 [X]
POST-EFFECTIVE AMENDMENT NO. [ ]
AND/OR
REGISTRATION STATEMENT
Under
THE INVESTMENT COMPANY ACT OF 1940 [ ]
AMENDMENT NO. 2 [X]
(Check appropriate box or boxes)
CypressTree Senior Floating Rate Fund, Inc.
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(Exact name of registrant as specified in Charter)
125 High Street
Boston, Massachusetts 02110
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(Address of Principal Executive Officers)
Registrant's telephone number, including area code (617) 946-0600
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Bradford K. Gallagher
President
CypressTree Senior Floating Rate Fund, Inc.
125 High Street
Boston, Massachusetts 02110
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(Name and Address of agent for service)
Approximate date of proposed public: As soon as practicable after the effective
date of this Registration Statement.
Copies to:
Ruth S. Epstein, Esquire
Covington & Burling
1201 Pennsylvania Avenue, N.W.
P.O. Box 7566
Washington, D.C. 20044-7566.
If any of the securities being registered on this Form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [X]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with the provisions of Section
8(a) of the Securities Act of 1933 or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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CypressTree Senior Floating Rate Fund
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-2
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Part A-
Item No. Item Caption Prospectus Caption
<S> <C> <C>
1. Outside Front Cover Cover Page
2. Inside Front and Outside Back Cover Page Cover Page
3. Fee Table and Synopsis Fund Expenses; Summary
4. Financial Highlights Not Applicable
5. Plan of Distribution How to Buy Fund Shares; Management of
the Fund
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant Description of Shares; Repurchase Offers;
Investment Objectives; Investment Policies;
Investments; Risk Factors
9. Management Management of the Fund; Valuing Fund
Shares; How to Buy Fund Shares
10. Capital Stock, Long-Term Debt, and Description of Shares; Valuing Fund
Other Securities Shares; Management of the Fund
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of Table of Contents of the Statement of
Additional Information Additional Information
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<TABLE>
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Part B-
Item No. Item Caption Statement of Additional Information Caption
<S> <C> <C>
14. Cover Page Cover Page
15. Table of Contents Table of Contents
16. General Information and History The Fund
17. Investment Objective and Policies Investment Restrictions and Fundamental
Policies; Repurchase Offer Fundamental
Policy
18. Management Management
19. Control Persons and Principal Holders Management; Outside Back Cover Page
of Securities
20. Investment Advisory and Other Services Advisory, Administration and Distribution
Services; Custodian; Auditors and Financial
Statements
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Taxes
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
Subject to Completion, dated February 20, 1998
[LOGO]
CypressTree Senior Floating Rate Fund, Inc.
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The CypressTree Senior Floating Rate Fund (the "Fund"), a newly organized
closed-end investment company, will seek to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in senior secured floating rate loans. The Fund is engaged in a continuous
public offering of its shares at the next determined net asset value per share
without a sales charge. CypressTree Asset Management Corporation, Inc. ("CAM")
is the Fund's investment adviser. CAM has engaged CypressTree Investment
Management Company, Inc. ("CypressTree") as subadviser to manage the investment
of the Fund's assets.
In order to provide liquidity to shareholders, the Fund will make monthly
Repurchase Offers for a percentage of its outstanding shares, which is
generally expected to be 10%. See "Repurchase Offers" on page .
Shares of the Fund involve investment risks, including the possible loss
of some or all of the principal investment. The Fund may invest all or
substantially all of its assets in securities that are rated below investment
grade by a nationally recognized statistical rating organization, or in
comparable unrated securities. See "Risk Factors" on page . The Fund may
borrow, primarily in connection with the Fund's monthly Repurchase Offers for
its shares. See "Repurchase Offers" on page and "Borrowing by the Fund" on
page .
No market presently exists for the Fund's shares and it is not currently
anticipated that a secondary market will develop for the Fund's shares. Fund
shares may not be considered to be readily marketable.
Shares of the Fund are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
This Prospectus sets forth important information about the Fund that an
investor should know before investing, and should be read and retained for
future reference. The Fund has filed a Statement of Additional Information for
the Fund dated with the Securities and Exchange Commission, which is
incorporated by reference herein. The Table of Contents of the Statement of
Additional Information appears at the end of this Prospectus. The Statement of
Additional Information is available without charge from the Fund or its
Distributor, CypressTree Funds Distributors, Inc., at 286 Congress Street,
Boston, Massachusetts 02210 ((800) 860-5575). The Statement of Additional
Information and other information about the Fund also are available on the
Commission's website (http://www.sec.gov).
The Repurchase Date will be the last business day of each month and
shareholders will be sent notification of each monthly Repurchase Offer 7 to 14
days before the Repurchase Date. The Repurchase Price will be the Fund's net
asset value as determined after the close of business on the Repurchase Date.
The Fund generally will pay repurchase proceeds on the next business day
following the Repurchase Date, and, in any event, within five business days (or
seven calendar days, whichever is shorter) of the Repurchase Date. The first
Repurchase Date will occur within two months of the date of this prospectus.
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.
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PRICE TO PROCEEDS TO
PUBLIC(1) SALES LOAD(2) FUND(3)
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Per Share $ 10.00 None $ 10.00
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Total $ None $
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(1) The shares are offered on a best efforts basis at a price equal to net
asset value, which initially is $10.00 per share.
(2) CypressTree Funds Distributors, Inc. will pay all distribution costs from
its own assets.
(3) Assuming the sale of all shares registered hereby, and exclusion of $
organizational and initial offering expenses payable by the Fund. These
expenses will be amortized over the five year period beginning the date the
Fund commences investment operations, and charged against the Fund's income.
CypressTree Funds Distributors, Inc.
PROSPECTUS DATED
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
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TABLE OF CONTENTS
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Fund Expenses ........................................................ 3
Summary .............................................................. 4
The Fund ............................................................. 6
Investment Objective ................................................. 6
Use of Proceeds ...................................................... 6
Investment Policies .................................................. 6
Investments .......................................................... 6
Risk Factors ......................................................... 10
Repurchase Offers .................................................... 13
Management of the Fund ............................................... 16
Valuing Fund Shares .................................................. 17
Performance Information .............................................. 18
How to Buy Fund Shares ............................................... 18
Shareholder Services ................................................. 19
Distributions ........................................................ 20
Taxes ................................................................ 20
Description of Shares ................................................ 22
Reports to Shareholders .............................................. 23
Appendix A--Description of Ratings ................................... 24
Table of Contents of the Statement of Additional Information ......... 25
2
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FUND EXPENSES
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The following table and Example are designed to help investors understand
the direct and indirect expenses associated with investing in the Fund. Because
the Fund does not yet have an operating history, this information is based on
estimated amounts for the fiscal year ending December 31, 1998 after expense
reimbursement.
SHAREHOLDER TRANSACTION EXPENSES
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Sales Load (as a percentage of offering price) .......... None
Dividend Reinvestment Fees .............................. None
ANNUAL FUND EXPENSES
(as a percentage of average net assets attributable to common shares)*
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Management Fee .......................................... 0.85%**
Interest Payments on Borrowed Funds ..................... 0.00 %
Other Expenses (including administration fee of .40%**)
(after reimbursement) .................................. 0.65%***
Service Fee ............................................. None
Early Withdrawal Charge ................................. None
Total Annual Expenses ................................... 1.50 %
*See "Management of the Fund" for additional information.
**The management fee and administration fee are based on a percentage of the
Fund's average daily gross assets, (gross assets are total assets minus all
liabilities except debt).
***The Fund's investment adviser has agreed to reimburse the Fund's expenses to
the extent necessary so that total annualized Fund expenses do not exceed 1.50%
of average daily gross assets (gross assets are total assets minus all
liabilities except debt). Absent such reimbursement, estimated expenses would
be: management fee of 0.85%, interest payments on borrowed funds of 0.00%,
administration fee of 0.40%, service fee of 0.00%, and other expenses of 0.30%;
and total annual expenses of 1.55%.
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EXAMPLE
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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An investor would pay the following
expenses on a $1,000 investment,
assuming 5% annual return ......... $15 $48 $84 $191
</TABLE>
Federal regulations require the Example to assume a 5% annual return, but
actual return will vary. The Example assumes reinvestment of all dividends and
distributions at net asset value.
The Example should not be considered a representation of past or future
expenses because future expenses may be greater or less than those shown.
3
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SUMMARY
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Investment Objective
The Fund's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in senior secured floating rate loans and other senior secured floating rate
debt obligations ("Loans"). See "Investment Objective" on page .
The Loans
The Fund will invest primarily in Loans, which are generally direct debt
obligations undertaken by U.S. corporations in connection with
recapitalizations, acquisitions, leveraged buy-outs, and refinancings. The
Loans have floating rates of interest that reset periodically and generally are
tied to a rate such as the London Interbank Offered Rate ("LIBOR") for 90-day
dollar deposits. The Loans are secured and generally hold the most senior
position in the borrower's capitalization structure. In selecting Loans, the
Fund will employ credit standards established by CypressTree.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in Loans. Up to 20% of the Fund's total assets may be held in
cash, invested in investment grade short-term debt and medium term obligations,
and invested in unsecured senior floating rate loans. See "Investment Policies"
on page .
Repurchase Offers
The Fund is a closed-end investment company and, as such, does not redeem
its shares. It is not anticipated that a secondary market for Fund shares will
develop. In order to provide shareholders with liquidity and the ability to
receive net asset value on a disposition of shares, the Fund will conduct
monthly offers to repurchase at net asset value a percentage of its outstanding
shares, which is generally expected to be 10%. If a Repurchase Offer is
oversubscribed the Fund will repurchase shares pro rata, and may repurchase up
to an additional 2% of outstanding shares during any three-month period.
The "Repurchase Date" will be the last business day of each month. The
Fund expects to distribute payment on the next business day; in any event, the
Fund will pay repurchase proceeds no later than five business days (or seven
calendar days, whichever period is shorter) after the Repurchase Date (the
"Repurchase Payment Deadline"). Shareholders will be sent notification of each
upcoming Repurchase Offer 7 to 14 days before the next Repurchase Date. See
"Repurchase Offers" on page .
Investment Management
CAM is the Fund's investment adviser. CypressTree, as subadviser to the
Fund, is responsible for managing the investment and reinvestment of the Fund's
assets. See "Management of the Fund" on page .
CypressTree was founded in 1996 by Bradford K. Gallagher and Jeffrey S.
Garner as the nation's first independent investment advisory firm specializing
in the loan asset class. Mr. Garner was, prior to the establishment of
CypressTree, the portfolio manager for the Eaton Vance Senior Debt Portfolio
and its predecessor fund, Eaton Vance Prime Rate Reserves, since its inception
in 1989. CypressTree currently has approximately $ million in assets under
management. See "Management of the Fund--Portfolio Manager."
Risk Factors
The Fund's net asset value is expected to be relatively stable during
normal market conditions because the Fund's assets will consist primarily of
floating rate Loans and short-term instruments. Nevertheless, there are
circumstances that could cause a decline in the Fund's net asset value. The
Fund is not a money market fund and its net asset value will fluctuate. As a
newly organized entity, the Fund has no operating history.
Investments in Loans involve certain risks, including, among others, risks
of nonpayment of principal and interest; collateral impairment;
nondiversification and borrower industry concentration; and lack of full
liquidity, which may impair the Fund's ability to obtain full value for Loans
sold. In addition, shareholders' ability to liquidate their investments will be
subject to the limits on monthly Repurchase Offers. See "Risk Factors" on page
.
The Fund may invest all or substantially all of its assets in Loans or
other securities that are rated below investment grade, or in comparable
unrated securities. Loans made in connection with recapitalizations,
acquisitions, leveraged buy-outs, and refinancings are subject to greater
credit risks than other Loans in which the Fund may invest. It is expected that
the Fund's Loans will consist primarily of such Loans. These credit risks
include the possibility of a default on the Loan or bankruptcy of the Borrower.
The value of these Loans is subject to a greater degree of volatility in
response to interest rate fluctuations and these Loans may be less liquid than
other Loans.
4
<PAGE>
How to Buy Fund Shares
Investors may purchase shares directly by check or by wire by mailing a
completed application to the Fund's Transfer Agent or through Authorized
Intermediaries. Investors may be charged a fee if they effect transactions
through a broker or agent. An initial investment in the Fund must be at least
$5,000, and additional investments must be at least $500. There is a $100
minimum initial and $50 additional investment requirement for purchases in
connection with tax-sheltered retirement accounts. The Fund reserves the right
to waive any minimum investment requirements and to refuse any order for the
purchase of shares. See "How to Buy Fund Shares" on page .
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This Summary is not complete and is qualified in its entirety by reference to
the more detailed information included elsewhere in the Fund's Prospectus and
in the Fund's Statement of Additional Information. Investors should read this
Summary in conjunction with the more detailed information included elsewhere.
5
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THE FUND
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The Fund is a newly organized closed-end, non-diversified management
investment company that continuously offers its shares to the public. The
Fund's principal office is located at 125 High Street, Boston, Massachusetts
02110, and its telephone number is (617) 946-0600
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INVESTMENT OBJECTIVE
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The Fund's investment objective is to provide as high a level of current
income as is consistent with the preservation of capital by investing primarily
in senior secured floating rate loans and other institutionally traded senior
secured floating rate debt obligations ("Loans"). There is no assurance that
the Fund's objective will be achieved.
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USE OF PROCEEDS
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The Fund will invest net proceeds of this offering, after payment of
organizational and offering expenses by the Fund, in accordance with the Fund's
investment objective and policies within approximately six months after the
commencement of this offering. The precise time frame for these investments
will depend on the availability of Loans and other relevant conditions. Pending
such investment, the Fund will invest the net proceeds of this offering in
investment grade short-term or medium-term debt obligations.
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INVESTMENT POLICIES
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Under normal market conditions, the Fund will invest at least 80% of its
total assets in Loans (i.e., senior secured floating rate loans and other
institutionally traded secured floating rate debt obligations). The Fund may
invest up to 20% of the Fund's total assets in cash, in investment grade
short-term and medium-term debt obligations, or in senior unsecured floating
rate loans ("Unsecured Loans").
Loans consist generally of direct obligations of companies (collectively,
"Borrowers"), primarily U.S. companies or their affiliates, undertaken to
finance the growth of the Borrower's business, internally or externally, or to
finance a capital restructuring. Loans in which the Fund will invest are
primarily highly leveraged Loans made in connection with recapitalizations,
acquisitions, leveraged buyouts, and refinancings.
In selecting Loans, the Fund will employ credit standards established by
CypressTree. The Fund will purchase Loans only if, in CypressTree's judgment,
the Borrower can meet debt service on the Loan (except in the case of Discount
Loans as described below). The Fund will acquire Loans that are, in the
judgment of CypressTree, in the category of senior debt of the Borrower and
that generally hold the most senior position in the Borrower's capitalization
structure. A Borrower must also meet other criteria established by CypressTree
and deemed by it to be appropriate to the analysis of the Borrower and the
Loan.
The Fund's primary consideration in selecting Loans for investment by the
Fund is the Borrower's creditworthiness. Some of the Loans in which the Fund
invests are not currently rated by any nationally recognized statistical rating
organization. The Fund has no minimum rating requirement for Loans. The quality
ratings assigned to other debt obligations of a Borrower are generally not a
material factor in evaluating Loans because these rated obligations typically
will be subordinated to the Loans and will be unsecured. Instead, CypressTree
will perform its own independent credit analysis of the Borrower. CypressTree's
analysis will include an evaluation of the Borrower's industry and business,
its management and financial statements, and the particular terms of the Loan
that the Fund may acquire. CypressTree will use information prepared and
supplied by the Agent (as defined below) or other participants in the Loans.
CypressTree will continue to analyze in a similar manner on an ongoing basis
any Loan in which the Fund invests. There can be no assurance that the Fund
will be able to acquire Loans satisfying the Fund's investment criteria at
acceptable prices.
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INVESTMENTS
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Loans
Characteristics of Loans
Each Loan will be secured by collateral that CypressTree believes to have
a market value, at the time of acquiring the Loan, that equals or exceeds the
principal amount of the Loan. The value of the collateral underlying a Loan may
decline after purchase, with the result that the Loan may no longer be fully
secured. The Fund will not necessarily dispose of such a Loan, even if the
collateral impairment would result in the Fund having less than 80% of its
assets in fully secured Loans.
6
<PAGE>
The Loans typically will have a stated term of five to nine years.
However, because the Loans are frequently prepaid, their average credit
exposure is expected to be two to three years. The degree to which Borrowers
prepay Loans, whether as a contractual requirement or at their election, may be
affected by general business conditions, the Borrower's financial condition,
and competitive conditions among lenders. Accordingly, prepayments cannot be
predicted with accuracy. Prepayments generally will not have a material effect
on the Fund's performance because, under normal market conditions, the Fund
should be able to reinvest prepayments in other Loans that have similar or
identical yields, and because receipt of prepayment and facility fees may
mitigate any adverse impact on the Fund's yield.
The rate of interest payable on Loans is the sum of a base lending rate
plus a specified spread. These base lending rates are generally the London
Interbank Offered Rate ("LIBOR") for 90-day dollar deposits, the Certificate of
Deposit ("CD") Rate of a designated U.S. bank, the Prime Rate of a designated
U.S. bank, or another base lending rate used by commercial lenders. A Borrower
usually has the right to select the base lending rate and to change the base
lending rate at specified intervals.
The interest rate on LIBOR-based and CD Rate-based Loans is reset
periodically at intervals ranging from 30 to 180 days, while the interest rate
on Prime Rate-based Loans floats daily as the Prime Rate changes. Investment in
Loans with longer interest rate reset period may increase fluctuations in the
Fund's net asset value as a result of changes in interest rates. The Fund will
attempt to maintain a portfolio of Loans that will have a dollar-weighted
average period to next interest rate adjustment of approximately 90 days or
less.
The yield on a Loan primarily will depend on the terms of the underlying
Loan and the base lending rate chosen by the Borrower initially and on
subsequent dates specified in the applicable loan agreement. The relationship
between LIBOR, the CD Rate, and the Prime Rate will vary as market conditions
change. Borrowers tend to select the base lending rate that results in the
lowest interest cost, and the rate selected may change from time to time.
Agents and Intermediate Participants
Loans are typically originated, negotiated and structured by a U.S. or
foreign commercial bank, insurance company, finance company or other financial
institution (the "Agent") for a lending syndicate of financial institutions.
The Borrower and the lender or lending syndicate enter into a loan agreement
(the "Loan Agreement"). The Agent typically administers and enforces the Loan
on behalf of the other lenders in the syndicate. In addition, an institution,
typically but not always the Agent (the "Collateral Bank"), holds any
collateral on behalf of the lenders. The Collateral Bank must be a qualified
custodian under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund may not act as an Agent, a Collateral Bank, a guarantor or sole
negotiator or structuror with respect to a Loan.
In a typical Loan, the Agent administers the terms of the Loan Agreement
and is responsible for the collection of principal and interest and fee
payments from the Borrower and the apportionment of these payments to the
credit of all lenders that are parties to the Loan Agreement. The Fund
generally will rely on the Agent to collect its portion of the payments on a
Loan. Furthermore, the Fund will rely on the Agent to use appropriate creditor
remedies against the Borrower. Typically, under Loan Agreements, the Agent is
given broad discretion in monitoring the Borrower's performance under the Loan
Agreement and is obligated to use only the same care it would use in the
management of its own property. Upon an event of default, the Agent typically
will act to enforce the Loan Agreement after instruction from lenders holding a
majority of the Loan. The Borrower compensates the Agent for these services.
This compensation may include special fees paid on structuring and funding the
Loan and other fees paid on a continuing basis. The typical practice of an
Agent or a lender in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower.
In the event that an Agent becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, the
Agent's appointment may be terminated, and a successor agent would be
appointed. Assets held by the Agent under the Loan Agreement should remain
available to holders of Loans. However, if assets held by the Agent for the
benefit of the Fund were determined by an appropriate regulatory authority or
court to be subject to the claims of the Agent's general or secured creditors,
the Fund might incur certain costs and delays in realizing payment on a Loan or
suffer a loss of principal and/or interest. Furthermore, in the event of the
Borrower's bankruptcy or insolvency, the Borrower's obligation to repay the
Loan may be subject to certain defenses that the Borrower can assert as a
result of improper conduct by the Agent.
The Fund's investment in a Loan may take the form of a "Participation."
Lenders may sell Loans to third parties called "Participants." Participations
may be acquired from a lender or from other Participants. If the Fund purchases
a Participation either from a lender or a Participant, the Fund will not have
established any direct contractual
7
<PAGE>
relationship with the Borrower. The Fund would be required to rely on the
lender or the Participant that sold the Participation not only for the
enforcement of the Fund's rights against the Borrower but also for the receipt
and processing of payments due to the Fund under the Loan. The Fund is thus
subject to the credit risk of both the Borrower and the entity selling the
Participation. Lenders and Participants interposed between the Fund and a
Borrower are referred to as "Intermediate Participants."
In the case of Participations, because it may be necessary to assert
through an Intermediate Participant such rights as may exist against the
Borrower in the event the Borrower fails to pay principal and interest when
due, the Fund may be subject to delays, expenses and risks that are greater
than those that would be involved if the Fund could enforce its rights directly
against the Borrower. Moreover, under the terms of a Participation, the Fund
may be regarded as a creditor of the Intermediate Participant (rather than of
the Borrower), so that the Fund also may be subject to the risk that the
Intermediate Participant may become insolvent. The agreement between the buyer
and seller may also limit the rights of the holder of the Loan to vote on
certain changes that may be made to the Loan Agreement, such as waiving a
breach of a covenant. However, in almost all cases, the holder of a Loan will
have the right to vote on certain fundamental issues such as changes in
principal amount, payment dates, and interest rate.
CypressTree also analyzes and evaluates the financial condition of the
Agent and, if applicable, the Intermediate Participant. The Fund will invest in
a Loan only if the outstanding debt obligations of the Agent and Intermediate
Participants, if any, are, at the time of investment, investment grade (i.e.,
(a) rated BBB or better by Standard and Poor's Ratings Group ("S&P") or Baa or
better by Moody's Investors Service, Inc. ("Moody's"); or (b) rated A-3 or
better by S&P or P-3 or better by Moody's; or (c) determined by CypressTree to
be of comparable quality).
Although the Fund generally holds only Loans for which the Agent and
Intermediate Participants, if any, are banks, the Fund may acquire Loans from
non-bank financial institutions and Loans originated, negotiated and structured
by non-bank financial institutions, if the Loans conform to the credit
requirements described above. As other types of Loans are developed and offered
to investors, CypressTree will consider making investments in these Loans,
consistent with the Fund's investment objective, policies and quality
standards, and in accordance with applicable custody and other requirements of
the 1940 Act.
Discount Loans
The Fund may from time to time acquire Loans at a discount from their
nominal value or with a facility fee that exceeds the fee traditionally
received in connection with the acquisition of Loans ("Discount Loans"). The
Borrowers with respect to Discount Loans may have experienced, or may be
perceived to be likely to experience, credit problems, including involvement in
or recent emergence from bankruptcy reorganization proceedings or other forms
of credit restructuring. In addition, Discount Loans may become available as a
result of an imbalance in the supply of and demand for certain Loans. The Fund
may acquire Discount Loans in order to realize an enhanced yield when
CypressTree believes that the market has undervalued those Loans due to an
excessively negative assessment of a Borrower's creditworthiness or an
imbalance between supply and demand. The Fund may benefit from any appreciation
in value of a Discount Loan, even if the Fund does not obtain 100% of the
Loan's face value or the Borrower is not wholly successful in resolving its
credit problems.
Other Information About Loans
A Borrower must comply with various restrictive covenants contained in the
applicable Loan Agreement. In addition to requiring the scheduled payment of
interest and principal, these covenants may include restrictions on dividend
payments and other distributions to stockholders, provisions requiring the
Borrower to maintain specific financial ratios, and limits on total debt. The
Loan Agreement may also contain a covenant requiring the Borrower to prepay the
Loan with any free cash flow. Free cash flow generally is defined as net cash
flow after scheduled debt service payments and permitted capital expenditures,
and includes the proceeds from asset dispositions or securities sales. A breach
of a covenant that is not waived by the Agent (or by the lenders directly, as
the case may be) is normally an event of default, which provides the Agent or
the lenders directly the right to call the outstanding Loan.
The Fund may have certain obligations in connection with a Loan, such as,
under a revolving credit facility that is not fully drawn down to fund
additional amounts under the terms of the facility. The Fund will not invest in
Loans that would require the Fund to make any additional investments in
connection with future advances if such commitments would exceed 20% of the
Fund's total assets or would cause the Fund to fail to meet the diversification
requirements described below. The Fund will maintain a segregated account with
its Custodian of liquid, high-grade debt obligations with a value equal to the
amount, if any, of the Loan that the Fund has obligated itself to make to the
Borrower, but that the Borrower has not yet requested.
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The Fund may receive and/or pay certain fees in connection with its
activities in buying, selling and holding Loans. These fees are in addition to
interest payments received, and may include facility fees, commitment fees,
amendment fees, commissions and prepayment penalty fees. When the Fund buys a
Loan, it may receive a facility fee, and when it sells a Loan, it may pay a
facility fee. The Fund may receive a commitment fee based on the undrawn
portion of the underlying line of credit portion of a Loan, or, in certain
circumstances, the Fund may receive a prepayment penalty fee on the prepayment
of a Loan by a Borrower. The Fund may also receive other fees, including
covenant waiver fees and covenant modification fees.
From time to time CypressTree and its affiliates may borrow money from
various banks in connection with their business activities. These banks also
may sell Loans to the Fund or acquire Loans from the Fund, or may be
Intermediate Participants with respect to Loans owned by the Fund. These banks
also may act as Agents for Loans that the Fund owns.
Unsecured Loans and Short-Term and Medium-Term Obligations
Up to 20% of the Fund's total assets may be held in cash or invested in
short-term or medium-term debt obligations or in Unsecured Loans. The Fund will
invest only in Unsecured Loans that CypressTree determines have a credit
quality at least equal to that of the collateralized Loans in which the Fund
primarily invests. With respect to an Unsecured Loan, if the Borrower defaults
on its obligation, there is no specific collateral on which the Fund can
foreclose, although the Borrower typically will have assets that CypressTree
believes exceed the amount of the Unsecured Loan at the time of purchase.
The short-term and medium-term debt obligations in which the Fund may
invest include, but are not limited to, senior Unsecured Loans with a remaining
maturity of one year or less, certificates of deposit, commercial paper, short-
term and medium-term notes, bonds with remaining maturities of less than five
years, obligations issued by the U.S. Government or any of its agencies or
instrumentalities, and repurchase agreements. All of the debt instruments
described in this paragraph, other than Unsecured Loans, will be investment
grade (i.e., rated Baa, P-3 or better by Moody's or BBB, A-3 or better by S&P
or, if unrated, determined by CypressTree to be of comparable quality). For a
definition of the ratings assigned to instruments, see Appendix A. Pending
investment of the proceeds of Fund sales, or when CypressTree believes that
investing for defensive purposes is appropriate, more than 20% (up to 100%) of
the Fund's total assets may be temporarily held in cash or in the short-term
and medium-term debt obligations described in this paragraph.
Foreign Investments
The Fund also may acquire U.S. dollar denominated Loans made to non-U.S.
Borrowers (a) (i) located in any country whose unguaranteed, unsecured and
otherwise unsupported long-term sovereign debt obligations are rated "A3" or
better by Moody's and "A-" or better by S&P or (ii) with significant U.S.
dollar-based revenues or significant U.S.-based operations and (b) located in a
country that does not impose withholding taxes on payment of principal,
interest, fees, or other payments to be made by the Borrower; provided,
however, that any such Borrower meets the credit standards established by
CypressTree for U.S. Borrowers, and no more than 25% of the Fund's net assets
are invested in Loans of non-U.S. Borrowers. Loans to non-U.S. Borrowers may
involve certain special considerations not typically associated with investing
in U.S. Borrowers. Information about a foreign company may differ from that
available with respect to U.S. Borrowers, because foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to U.S.
Borrowers. There may be greater risk in valuing and monitoring the value of
collateral underlying Loans to non-U.S. Borrowers. There generally is less
government supervision and regulation of financial markets and listed companies
in foreign countries than in the United States. The Fund will not invest in
Unsecured Loans of non-U.S. Borrowers.
Repurchase Agreements
The Fund may enter into repurchase agreements with respect to its
permitted investments, but currently intends to do so only with member banks of
the Federal Reserve System or with primary dealers in U.S. Government
securities. Under a repurchase agreement, the Fund buys a security at one price
and simultaneously promises to sell that same security back to the seller at a
higher price. The Fund's repurchase agreements will provide that the value of
the collateral underlying the repurchase agreement always will be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement, and will be marked to market daily. The repurchase date
is usually within seven days of the original purchase date. In all cases,
CypressTree must be satisfied with the creditworthiness of the other party to
the agreement before entering into a repurchase agreement. In the event of the
bankruptcy (or other insolvency proceeding) of the other party to a repurchase
agreement, the Fund might experience delays in recovering its cash. To the
extent that the value of the securities the Fund purchased may have declined in
the meantime, the Fund could experience a loss.
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Other Investments
The Fund may acquire warrants and other equity securities as part of a
unit combining Loans and equity securities of the Borrower or its affiliates,
but only incidentally to the Fund's purchase of a Loan. The Fund also may
acquire equity securities issued in exchange for a Loan or issued in connection
with a Borrower's debt restructuring or reorganization, or if the acquisition,
in CypressTree's judgment, may enhance the value of a Loan or otherwise would
be consistent with the Fund's investment policies.
Fundamental Investment Restrictions And Policies
The Fund has adopted certain fundamental investment restrictions and
policies which may not be changed unless authorized by a shareholder vote.
These are set forth in the Statement of Additional Information. Among these
fundamental restrictions, the Fund may not purchase any security if, as a
result of the purchase, more than 25% of the Fund's total assets (taken at
current value) would be invested in the securities of Borrowers and other
issuers having their principal business activities in the same industry (the
electric, gas, water and telephone utility industries being treated as separate
industries for the purpose of this restriction). There is no limitation on
purchasing securities the issuer of which is deemed to be in the financial
institutions industry, which includes commercial banks, thrift institutions,
insurance companies and finance companies. There is no limitation with respect
to obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities. Except for the fundamental restrictions and
policies set forth as such in the Fund's Statement of Additional Information,
the Fund's investment objective and policies are not fundamental policies and
accordingly may be changed by the Fund's Board of Directors without obtaining
the approval of the Fund's shareholders.
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RISK FACTORS
- --------------------------------------------------------------------------------
CypressTree expects that, because the Fund's assets will consist primarily
of Loans which are floating rate instruments, and short-term instruments, the
Fund's net asset value will be relatively stable during normal market
conditions. The value of the Fund's assets may fluctuate significantly less
with changes in interest rates than a portfolio of fixed-rate obligations.
However, a number of factors may cause a decline in the Fund's net asset value,
including a default in a Loan, a material deterioration of a Borrower's
perceived or actual creditworthiness, or a sudden and extreme increase in
prevailing interest rates. These and other risks of investing in the Fund are
described below. Conversely, a sudden and extreme decline in interest rates
could result in an increase in the Fund's net asset value. As a newly organized
entity, the Fund has no operating history. The Fund is not a money market fund
and its net asset value will fluctuate.
Credit Risk
Under normal conditions, the Fund will invest at least 80% of its assets
in Loans. These investments are primarily dependent upon the creditworthiness
of the Borrower for payment of interest and principal. The nonreceipt of
scheduled interest or principal on a Loan may adversely affect the Fund's
income or the value of its investments, which may in turn reduce the amount of
dividends or the net asset value of the Fund's shares. The Fund's ability to
receive payment of principal of and interest on a Loan also depends on the
creditworthiness of any institution interposed between the Fund and the
Borrower. To reduce credit risk, CypressTree actively manages the Fund as
described above.
Loans made in connection with recapitalizations, acquisitions, leveraged
buy-outs, and refinancings are subject to greater credit risks than other Loans
in which the Fund may invest. It is expected that the Fund's Loans will consist
primarily of such Loans. These credit risks include the possibility of a
default on the Loan or bankruptcy of the Borrower. The value of these Loans is
subject to a greater degree of volatility in response to interest rate
fluctuations and these Loans may be less liquid than other Loans.
Although the Fund generally will invest in Loans holding the most senior
position in a Borrower's capitalization structure, the capitalization of many
Borrowers will include non-investment grade subordinated debt. During periods
of deteriorating economic conditions, a Borrower may experience difficulty in
meeting its payment obligations under its subordinated debt obligations. These
difficulties may detract from the Borrower's perceived creditworthiness or its
ability to obtain financing to cover short-term cash flow needs and may force
the Borrower into bankruptcy or other forms of credit restructuring.
The Fund may acquire Loans designed to provide temporary or "bridge"
financing to a Borrower pending the sale of identified assets or the
arrangement of longer-term loans or the issuance and sale of debt obligations,
or may invest in Loans of Borrowers that have obtained bridge loans from other
parties. A Borrower's use of bridge loans involves a risk that the Borrower may
be unable to locate permanent financing to replace the bridge loan, which may
impair the Borrower's perceived creditworthiness.
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<PAGE>
Collateral Impairment
A Loan will be secured unless (a) the value of the collateral declines
below the amount of the Loan, (b) the Fund's security interest in the
collateral is invalidated for any reason by a court, or (c) the collateral is
partially or fully released under the terms of the Loan Agreement as the
creditworthiness of the Borrower improves. There is no assurance that
liquidation of collateral would satisfy the Borrower's obligation in the event
of nonpayment of scheduled interest or principal, or that collateral could be
readily liquidated. The value of collateral generally will be determined by
reference to the Borrower's financial statements, an independent appraisal
performed at the request of the Agent at the time the Loan was initially made,
the market value of the collateral (e.g., cash or securities) if it is readily
ascertainable, and/or by other customary valuation techniques that CypressTree
considers appropriate. Collateral generally is valued on the basis of the
Borrower's status as a going concern and this valuation may exceed the
collateral's immediate liquidation value.
Collateral may include (a) working capital assets, such as accounts
receivable and inventory, (b) tangible fixed assets, such as real property,
buildings and equipment, (c) intangible assets, such as licenses, trademarks
and patent rights (but excluding goodwill), and (d) security interests in
shares of stock of subsidiaries or affiliates. To the extent that collateral
consists of the stock of the Borrower's subsidiaries or other affiliates, the
Fund will be subject to the risk that this stock will decline in value. Such a
decline, whether as a result of bankruptcy proceedings or otherwise, could
cause the Loan to become undercollateralized or unsecured. Most credit
agreements contain no formal requirement to pledge additional collateral. In
the case of Loans made to non-public companies, the Borrower's shareholders or
owners may provide additional credit support in the form of fully secured
guarantees and/or security interests in assets that they own. The Fund may
invest in Loans (a) guaranteed by such shareholders or owners (provided that
the guarantees are fully secured), or (b) fully secured by assets of such
shareholders or owners; even if the Loans are not otherwise collateralized by
the assets of the Borrower.
If a Borrower becomes involved in bankruptcy proceedings, a court may
invalidate the Fund's security interest in the Loan collateral or may
subordinate the Fund's rights under the Loan to the interests of the Borrower's
unsecured creditors. For example, a court could base this action on a
"fraudulent conveyance" claim to the effect that the Borrower did not receive
fair consideration for granting the security interest in the Loan collateral to
the Fund. For Loans made in connection with a highly leveraged transaction, the
consideration received in exchange for granting a security interest may be
deemed inadequate if the Loan proceeds were not received or retained by the
Borrower, but instead were paid to other persons (such as shareholders of the
Borrower) in an amount that left the Borrower insolvent or without sufficient
working capital. There are also other events, such as the failure to perfect a
security interest due to faulty documentation or faulty official filings, which
could lead to the invalidation of the Fund's security interest in Loan
collateral. If the Fund's security interest in Loan collateral is invalidated
or if the Loan is subordinated to other debt of a Borrower in bankruptcy or
other proceedings, it is unlikely that the Fund would be able to recover the
full amount of the principal and interest due on the Loan.
There may be temporary periods when a Borrower's principal asset is the
stock of a related company, which may not legally be pledged to secure a Loan.
In this event, the Loan will be temporarily unsecured until the stock can be
pledged or is exchanged for or replaced by other assets which will be pledged
as security for the Loan. However, the Borrower's ability to dispose of these
securities, other than in connection with such pledge or replacement, will be
strictly limited for the protection of the holders of Loans.
Investments in Lower Quality Securities
The Fund may invest all or substantially all of its assets in Loans or
other securities that are rated below investment grade by Moody's Investors
Service, comparably rated by another nationally recognized statistical rating
organization, or, if unrated, deemed by CypressTree to be of equivalent
quality. Debt rated Baa or higher by Moody's is considered to be investment
grade. Debt rated Baa by Moody's is considered by Moody's to have speculative
characteristics. Debt rated Ba or B by Moody's is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and to repay principal in accordance with the terms of the obligation. While
lower-quality debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions. Securities rated Ba and lower are the
equivalent of high-yield, high-risk bonds, commonly known as "junk bonds," and
involve a high degree of risk. CypressTree does not expect to invest in any
securities rated lower than B3 at the time of investment. See "Appendix
A--Description of Ratings" for a full description of Moody's long-term debt
ratings. In the event of a downgrade in a Loan, CypressTree will consider
whether to dispose of that Loan.
Ratings of debt securities represent the rating agency's opinion regarding
their quality and are not a guarantee of quality. Rating agencies attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial condition may be better or worse than a rating
indicates.
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<PAGE>
The market values of lower-quality debt securities tend to reflect
individual developments of the issuer to a greater extent than do
higher-quality securities, which react primarily to fluctuations in the general
level of interest rates. In addition, lower-quality debt securities tend to be
more sensitive to economic conditions and generally have more volatile prices
than higher-quality securities. During an economic downturn or a sustained
period of rising interest rates, issuers of lower-quality debt securities may
not have sufficient revenues to meet their interest payment obligations. The
issuer's ability to service its debt obligations may also be adversely affected
by specific developments affecting the issuer, such as the issuer's inability
to meet specific projected business forecasts or the unavailability of
additional financing.
Non-Diversification and Industry Concentration
The Fund is classified as a "non-diversified" investment company within
the meaning of the 1940 Act. Accordingly, the Fund is not limited by the 1940
Act in the proportion of its assets that may be invested in a single issue.
However, the Fund is required to comply with the diversification requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
See "Taxes" in the Statement of Additional Information for a description of
these requirements.
To the extent the Fund invests a relatively high percentage of its assets
in the obligations of a limited number of issuers, the value of the Fund's
investments may be more affected by any single adverse economic, political or
regulatory event than will the value of the investments of a diversified
investment company. It is the Fund's current intention not to invest more than
10% of its total assets in Loans of any single Borrower. The Fund may acquire
Loans made to Borrowers in any industry. The Fund will not concentrate its
investments in any one industry with respect to Borrowers or interpositioned
persons that the Fund determines to be issuers for the purpose of this policy.
See "Investment Restrictions" in the Statement of Additional Information.
However, because the Fund may regard the issuer of a Loan as including the
Agent and any Intermediate Participant as well as the Borrower, the Fund may be
deemed to be concentrated in securities of issuers in the industry group
consisting of financial institutions and their holding companies, including
commercial banks, thrift institutions, insurance companies and finance
companies. As a result, the Fund is subject to certain risks associated with
such institutions.
Banking and thrift institutions are subject to extensive governmental
regulations which may limit both the amounts and types of loans and other
financial commitments which these institutions may make and the interest rates
and fees which these institutions may charge. The profitability of these
institutions is largely dependent on the availability and cost of capital
funds, and has shown significant recent fluctuation as a result of volatile
interest rate levels. In addition, general economic conditions are important to
the operations of these institutions, with exposure to credit losses resulting
from possible financial difficulties of borrowers potentially having an adverse
effect. Insurance companies are also affected by economic and financial
conditions and are subject to extensive government regulation, including rate
regulation. Property and casualty companies may be exposed to material risks,
including reserve inadequacy, latent health exposure and inability to collect
from their reinsurance carriers. The financial services area is currently
undergoing relatively rapid change as existing distinctions between financial
service segments become less clear. In this regard, recent business
combinations have included insurance, finance and securities brokerage under
single ownership. Moreover, the federal laws generally separating commercial
and investment banking are currently being studied by Congress.
Illiquid Instruments
Not all Loans are readily marketable at present. Loans may be subject to
legal and contractual restrictions on resale. Although Loans are traded among
certain financial institutions, some of the Loans that the Fund acquires do not
have the liquidity of conventional investment grade debt securities traded in
the secondary market and may be considered illiquid. The Fund's ability to
dispose of a Loan may be reduced to the extent that there has been a perceived
or actual deterioration in the creditworthiness of an individual Borrower or
the creditworthiness of Borrowers in general, or by events that reduce the
level of confidence in the market for Loans. This may affect the Fund's ability
to realize its net asset value in the event of a voluntary or involuntary
liquidation of its assets. As the market for Loans becomes more seasoned,
liquidity should improve.
The Fund has no limitation on the amount of its investments that cannot be
readily marketable or subject to restrictions on resale, except to the extent
required to allow the Fund to make its monthly Repurchase Offers (generally
expected to be 10% of outstanding shares). The Board of Directors has adopted
written procedures reasonably designed, taking into account current market
conditions and the Fund's investment objectives, to ensure that the Fund's
portfolio assets are sufficiently liquid so that the Fund can comply with the
liquidity requirements for making monthly Repurchase Offers. In the event that
the Fund's assets fail to comply with these requirements, the Board will cause
the Fund to take such action as the Board deems appropriate to ensure
compliance. See "Repurchase Offers."
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Borrowing By The Fund
The Fund may borrow money in amounts up to 33-1/3% of the value of its
total assets to finance Repurchase Offers, for temporary, extraordinary or
emergency purposes, or, while the Fund does not have any current intention of
doing so, for the purpose of financing additional investments. The Fund also
may issue one or more series of preferred shares, although it has no present
intention to do so. The Fund may borrow to finance additional investments or
issue a class of preferred shares only when it believes that the return that
may be earned on investments purchased with the proceeds of such borrowings or
offerings will exceed the associated costs, including debt service and dividend
obligations. However, to the extent such costs exceed the return on the
additional investments, the return realized by the Fund's shareholders will be
adversely affected.
Capital raised through borrowing will be subject to interest costs or
dividend payments which may or may not exceed the interest on the assets
purchased. The Fund may be required to maintain minimum average balances in
connection with borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements will increase the cost of
borrowing over the stated interest rate. The issuance of additional classes of
preferred shares involves offering expenses and other costs and may limit the
Fund's freedom to pay dividends on its common shares or to engage in other
activities. Borrowings and the issuance of a class of preferred stock having
priority over the Fund's common shares create an opportunity for greater income
per common share, but at the same time such borrowing or issuance is a
speculative technique in that it will increase the Fund's exposure to capital
risk. These risks may be reduced through the use of borrowings and preferred
stock that have floating rates of interest. Unless the income and appreciation,
if any, on assets acquired with borrowed funds or offering proceeds exceeds the
costs of borrowing or issuing additional classes of securities, the use of
leverage will diminish the investment performance of the Fund compared with
what it would have been without leverage.
The Fund may enter into an agreement with a financial institution
providing for an unsecured, discretionary credit facility (the "Facility"), the
proceeds of which may be used to finance, in part, Repurchases. The Facility
will provide for the borrowing by the Fund of up to the lesser of $100,000,000
or 33-1/3% of the Fund's total assets, on an unsecured, uncommitted basis.
Loans made under the Facility will bear interest at a floating rate, such as
LIBOR, to be selected at the Fund's option.
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under
the 1940 Act the Fund may not declare any dividend or other distribution upon
any class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. The Fund's inability to
make distributions as a result of these requirements could cause the Fund to
fail to qualify as a regulated investment company and/or subject the Fund to
income or excise taxes. The Fund may be required to dispose of portfolio
investments on unfavorable terms if market fluctuations or other factors reduce
the required asset coverage to less than the prescribed amount.
The Fund's willingness to borrow money for investment purposes, and the
amount it will borrow, will depend on many factors, the most important of which
are investment outlook, market conditions and interest rates. Successful use of
a borrowing strategy depends on CypressTree's ability to predict correctly
interest rates and market movements, and there is no assurance that a borrowing
strategy will be successful during any period in which it is employed.
Any indebtedness issued by the Fund or borrowing by the Fund either (a)
will mature by the next Repurchase Date (as defined below under "Repurchase
Offers") or (b) will provide for its redemption, call, or repayment by the Fund
by the next Repurchase Date without penalty or premium, as necessary to permit
the Fund to repurchase shares in the amount set by the Board of Directors in
compliance with the asset coverage requirements of the 1940 Act.
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REPURCHASE OFFERS
- --------------------------------------------------------------------------------
In order to provide shareholders with liquidity and the ability to receive
net asset value on a disposition of shares, the Fund will make monthly offers
to repurchase a percentage of outstanding shares at net asset value
("Repurchase Offers"). Repurchase Offers will commence within two months of the
date of this prospectus. Because the Fund is a closed-end fund, shareholders
will not be able to redeem their shares on a daily basis.
As explained in more detail below, the "Repurchase Date" will be the last
business day of each month. The Fund will determine the net asset value
applicable to repurchases on that date. The Fund expects to distribute payment
on the next business day, and will distribute payment on or before the
Repurchase Payment Deadline, which
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<PAGE>
is no later than five business days (or seven calendar days, whichever period
is shorter) after the Repurchase Date. Shareholders will be sent notification
of the next Repurchase Offer 7 to 14 days prior to the next Repurchase Date. It
is unlikely that a secondary market for the Fund's shares will develop, and the
Distributor will not engage in any efforts to develop a secondary market.
Repurchase Amount
Each month, the Fund's Board of Directors will determine the percentage of
shares to be repurchased ("Repurchase Amount"). The Repurchase Amount is
expected generally to be 10%, but may vary between 5% and 25%, of shares
outstanding on the Repurchase Date. Currently, the Fund is subject to an
undertaking that the Repurchase Amount will not exceed 10%.
There is no minimum number of shares that must be tendered before the Fund
will honor repurchase requests. In other words, if, in the aggregate, only one
share is tendered in a given month, the Fund must repurchase it. However, there
is a maximum Repurchase Amount, so shareholders should be aware of the risk
that the Fund may not be able to repurchase all shares tendered in any given
month. See "Oversubscribed Repurchase Offers; Pro Rata Allocation."
Repurchase Requests
Shareholders will be sent a Notification of Repurchase Offer
("Notification") 7 to 14 days before the next Repurchase Date. The Notification
will provide information about the Repurchase Offer, including the Repurchase
Amount, the Repurchase Date, and the means by which shareholders may determine
the Fund's net asset value.
A shareholder who wishes to tender shares for repurchase must notify the
Fund or an Authorized Intermediary on or before the Repurchase Date a
"Repurchase Request" in a manner designated by the Fund.
A shareholder may tender all or a portion of his or her holdings (although
the Fund may not be able to repurchase the shareholder's entire tender if
aggregate tenders exceed the Repurchase Amount (as discussed further below)). A
shareholder may withdraw or change a Repurchase Request at any point before the
Repurchase Date, but not after that date.
Determination of Repurchase Price
The Fund will establish the Repurchase Price at a share's net asset value
as determined after the close of business on the Repurchase Date. The Fund will
compute net asset value daily (as described under "Valuing Fund Shares"), and
shareholders may determine daily net asset value by calling 800-860-5575.
The Fund does not presently intend to deduct any repurchase fees from this
amount. However, in the future, the Board of Directors may determine to charge
a repurchase fee payable to the Fund reasonably to compensate it for its
expenses directly related to the repurchase. These fees could be used to
compensate the Fund for, among other things, its costs incurred in disposing of
securities or in borrowing in order to make payment for repurchased shares. Any
repurchase fee will never exceed two percent of the proceeds of the repurchase.
It should be noted that the Board may implement repurchase fees without a
shareholder vote.
Payment
The Fund expects to distribute payment on the next business day; in any
event, the Fund will pay repurchase proceeds no later than the Repurchase
Pricing Deadline, which is five business days (or seven calendar days,
whichever is shorter) of the Repurchase Date. Repurchase proceeds will be paid
by wire transfer or check.
Oversubscribed Repurchase Offers; Pro Rata Allocation
In any given month, shareholders may tender a number of shares that
exceeds the Repurchase Offer Amount (this prospectus refers to this situation
as an "Oversubscribed Repurchase Offer"). In the event of an Oversubscribed
Repurchase Offer, the Fund may repurchase additional shares in excess of 10%
but only up to a maximum aggregate of two percent of the shares outstanding for
any three consecutive Repurchase Offers ("Additional Repurchase Amount").
For example, if in Month 1 the Fund offers to repurchase 10% of shares
then outstanding, and shareholders tender 11%, the Fund could determine to
repurchase the extra 1% of shares then outstanding. In that event, over the
next two repurchase offers, the Fund only would be able to repurchase an
aggregate of 1% of shares outstanding pursuant to an Oversubscribed Repurchase
Offer. If the Fund determines not to repurchase the Additional Repurchase
Amount, or if shareholders tender an amount exceeding the Repurchase Offer
Amount plus the Additional Repurchase Amount, the Fund will repurchase the
shares tendered on a pro rata basis. However, the Fund may determine to alter
these pro rata allocation procedures in two situations:
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<PAGE>
(a) the Fund may accept all shares tendered by persons who own in the
aggregate not more than a specified number of shares (which number will not
exceed 100 shares) before prorating shares tendered by others; or
(b) the Fund may accept by lot shares tendered by shareholders who tender
all shares held by them and who, when tendering, elect to have either all
or none (or at least a minimum amount or none) accepted; however, the Fund
first must accept all shares tendered by shareholders who do not make this
election.
In the event of an Oversubscribed Repurchase Offer, shareholders may be
unable to liquidate some or all of their investment during that monthly
Repurchase Offer. A shareholder may have to wait until a later month to tender
shares that the Fund is unable to repurchase, and would be subject to the risk
of net asset value fluctuations during this time period.
Adoption of Repurchase Policy
The Board has adopted a resolution setting forth the Fund's fundamental
policy to conduct Repurchase Offers ("Repurchase Policy"). The Repurchase
Policy may be changed only by a majority vote of the Fund's outstanding voting
securities. The Repurchase Policy states that the Fund will make monthly
Repurchase Offers, that the Repurchase Date will be the last business day of
the month, and that the Repurchase Price will be determined on that date. Under
the Repurchase Policy, the Repurchase Amount may be from 5% to the 25% of the
Fund's shares outstanding on the Repurchase Date. The Fund's undertaking to
limit the Repurchase Amount to 10% is not part of the Repurchase Policy and may
be changed without a shareholder vote.
Liquidity Requirements
The Fund must maintain liquid assets equal to the Repurchase Offer Amount
from the time that the Notification is sent to shareholders until the
Repurchase Date. The Fund will ensure that a percentage of its net assets equal
to at least 100 percent of the Repurchase Offer Amount consists of assets (a)
that can be sold or disposed of in the ordinary course of business at
approximately the price at which the Fund has valued the investment within the
time period between the Repurchase Date and the Repurchase Payment Deadline; or
(b) that mature by the Repurchase Payment Deadline.
The Board has adopted procedures that are reasonably designed to ensure
that the Fund's assets are sufficiently liquid so that the Fund can comply with
the Repurchase Policy and the liquidity requirements described in the previous
paragraph. If, at any time, the Fund falls out of compliance with these
liquidity requirements, the Board will take whatever action it deems
appropriate to ensure compliance.
The Fund intends to satisfy the liquidity requirements with cash on hand,
cash raised through borrowings, and Loans. There is some risk that the need to
sell Loans to fund Repurchase Offers may affect the market for those Loans. In
turn, this could diminish the Fund's net asset value.
Suspension or Postponement of a Repurchase Offer
The Fund may suspend or postpone a Repurchase Offer in limited
circumstances, and only by vote of a majority of the Board of Directors,
including a majority of the independent Directors. These circumstances are
limited and include the following:
(a) if the Repurchase would cause the Fund to lose its status as a
regulated investment company under Subchapter M of the Internal Revenue
Code;
(b) for any period during which an emergency exists as a result of which it
is not reasonably practicable for the Fund to dispose of securities it owns
or to determine the value of the Fund's net assets;
(c) for any other periods that the Securities and Exchange Commission
permits by order for the protection of shareholders;
(d) if the shares are listed on a national securities exchange or quoted in
an inter-dealer quotation system of a national securities association
(e.g., Nasdaq) and the Repurchase would cause the shares to lose that
status; or
(e) during any period in which any market on which the shares are
principally traded is closed, or during any period in which trading on the
market is restricted.
Consequences of Repurchase Offers
Although the Board believes that Repurchase Offers generally will be
beneficial to the Fund's shareholders, repurchases will decrease the Fund's
total assets and therefore have the possible effect of increasing the Fund's
expense ratio. Furthermore, if the Fund borrows to finance repurchases,
interest on that borrowing may reduce the Fund's net investment income. The
Fund intends to offer new shares continuously, which may alleviate these
potential consequences, although there is no assurance that the Fund will be
able to secure new investments.
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<PAGE>
Repurchase Offers provide shareholders with the opportunity to dispose of
shares at net asset value. The Fund does not anticipate that a secondary market
will develop, but in the event that a secondary market were to develop, it is
possible that shares would trade in that market at a discount to net asset
value. The existence of periodic Repurchase Offers at net asset value may not
alleviate such a discount.
In addition, the repurchase of shares by the Fund will be a taxable event
to Shareholders. See "Distributions and Taxes" for further information.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
The Board of Directors oversees the management of the Fund and elects its
officers. The Fund's officers are responsible for the Fund's day-to-day
operations.
Advisory Arrangements
CAM is the investment adviser for the Fund. CAM was formed in 1996,
together with CypressTree Funds Distributors, Inc. ("Distributors"), to advise
and distribute mutual funds through broker-dealers, banks and other
intermediaries. CAM and Distributors are wholly-owned subsidiaries of
CypressTree Investments, Inc., an affiliate of Cypress Holding Company, Inc.,
which is controlled by its management and Berkshire Fund IV, L.P. The address
of CAM is 125 High Street, Boston, Massachusetts 02110, and the address of
Distributors is 286 Congress Street, Boston, Massachusetts 02210. CAM also
serves as investment adviser to an open-end series fund with 15 separate
investment portfolios managed by ten different subadvisers, with approximately
$950 million in aggregate assets.
Pursuant to its advisory agreement with the Fund (the "Advisory
Agreement"), CAM oversees the administration of certain aspects of the business
and affairs of the Fund, and selects, contracts with and compensates the
subadviser to manage the Fund's assets. CAM monitors the compliance of the
subadviser with the investment objectives and related policies of the Fund,
reviews the performance of the subadviser and reports periodically on such
performance to the Board of Directors. CAM permits its directors, officers and
employees to serve as directors or officers of the Fund, without cost to the
Fund.
As compensation for its services, CAM receives from the Fund a monthly fee
equal to the following percentage of average daily gross assets, depending on
the size of the Fund: 0.85% for the first $1 billion of average daily gross
assets; 0.80% for average daily gross assets of between $1 billion and $2
billion; and 0.75% for average daily gross assets of more than $2 billion. For
purposes of computing the advisory fee, average daily gross assets are
determined by deducting from total assets of the Fund all liabilities except
the principal amount of any indebtedness from money borrowed, including debt
securities issued by the Fund.
CAM has agreed to waive a portion of its advisory fee or reimburse the
Fund in order to prevent the total expenses of the Fund, excluding taxes,
portfolio brokerage commissions, interest, certain litigation and
indemnification expenses, and extraordinary expenses, from exceeding 1.50% of
average daily gross assets. This agreement may be terminated by CAM at any time
after on thirty (30) days' written notice.
CypressTree has been retained by CAM as the subadviser to the Fund to
manage the investment and reinvestment of the Fund's assets. CypressTree was
founded in 1996 as the nation's first independent investment advisory firm
specializing in the loan asset class and currently has $ million in
assets under management. CypressTree is a wholly-owned subsidiary of Cypress
Holding Company, Inc.
Pursuant to a subadvisory agreement between CAM and CypressTree (the
"Subadvisory Agreement"), CypressTree selects the investments made by the Fund
and establishes and applies credit standards applicable to the Fund's
investments in Loans. See "Investment Policies." As compensation for its
services as subadviser, CypressTree receives from CAM a monthly fee equal to
the following percentage of average daily gross assets, based on the size of
the Fund: 0.45% for the first $1 billion of average daily gross assets; 0.40%
for average daily gross assets between $1 billion and $2 billion; and 0.35% for
average daily gross assets of more than $2 billion. Average daily gross assets
are computed as described above. The fee to CypressTree is paid by CAM and is
not an additional charge to the Fund or its shareholders. For further
information, see "Advisory, Administration and Distribution Services" in the
Statement of Additional Information.
Portfolio Manager
Jeffrey S. Garner, age 41, is the Fund's portfolio manager. Mr. Garner has
been employed as CypressTree's Chief Investment Officer since 1996. From 1989
to 1996, Mr. Garner was a Vice President of Eaton Vance Management, where he
served as the portfolio manager for the Senior Debt Portfolio managed by Eaton
Vance (the "master" fund for Eaton Vance Prime Rate Reserves, EV Classic Senior
Floating-Rate Fund, and the EV Medallion Senior Floating-Rate Funds) (the
"Eaton Vance Senior Debt Portfolio").
16
<PAGE>
Administration Agreement
CAM will act as the Fund's Administrator under an Administration Agreement
(the "Administration Agreement"). Under the Administration Agreement, CAM is
responsible for managing the Fund's business affairs, subject to supervision by
the Fund's Board of Directors. CAM reserves the right to delegate all or a part
of its obligations under the Administration Agreement to a third party. Any
delegation of administrative duties will not affect the administration fee paid
by the Fund.
Services provided by the Administrator include recordkeeping, preparation
and filing of documents required to comply with federal and state securities
laws, supervising the activities of the Fund's custodian and transfer agent,
providing assistance in connection with the Directors' and shareholders'
meetings, providing services in connection with Repurchase Offers, and other
administrative services necessary to conduct the Fund's business. In return for
these services, facilities and payments, the Fund pays CAM a monthly fee equal
to 0.40% annually of the average daily gross assets of the Fund as compensation
under the Administration Agreement. In calculating the Fund's average daily
gross assets, all liabilities are deducted from total assets, except the
principal amount of any indebtedness for money borrowed, including debt
securities that the Fund has issued.
Fund Costs and Expenses
The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by CAM under the Advisory Agreement or the
Administration Agreement or by Distributors under its Distribution Agreement.
See "Advisory, Administration and Distribution Services" in the Statement of
Additional Information.
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VALUING FUND SHARES
- --------------------------------------------------------------------------------
The Fund values its shares once on each day the New York Stock Exchange
("NYSE") is open for trading as of close of regular trading on the exchange.
The Fund is informed that, as of the date of this prospectus, the NYSE observes
the following business holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Fund's net asset value per share is determined by State Street Bank &
Trust Company (as agent for the Fund) in the manner authorized by the Fund's
Board of Directors. State Street Bank & Trust Company also serves as Transfer
Agent and Custodian for the Fund and has custody of the Fund's assets. The
Custodian's address is 225 Franklin Street, Boston, Massachusetts 02110.
In determining the net asset value of a share of the Fund, the value of
the securities held by the Fund plus any cash or other assets (including
interest and dividends accumulated but not yet received) minus all liabilities
(including accrued expenses) is divided by the total number of shares of the
Fund outstanding at that time. Expenses, including the fees payable to CAM, are
accrued daily.
Loans will be valued in accordance with guidelines established by the
Board of Directors. Under the Fund's current guidelines, Loans for which an
active secondary market exists to a reliable degree in CypressTree's opinion
and for which CypressTree can obtain at least two quotations from banks or
dealers in Loans will be valued by calculating the mean of the last available
bid and asked prices in the market for such Loans, and then using the mean of
those two means. If only one quote for a particular Loan is available, the Loan
will be valued on the basis of the mean of the last available bid and asked
price in the market.
Loans for which an active secondary market does not exist to a reliable
degree in CypressTree's opinion will be valued at fair value, which is intended
to approximate market value. In valuing a Loan at fair value, CypressTree will
consider, among other factors, (a) the creditworthiness of the Borrower and any
Intermediate Participants, (b) the terms of the Loan, (c) recent prices in the
market for similar Loans, if any, and (d) recent prices in the market for
instruments of similar quality, rate, period until next interest rate reset and
maturity.
Other portfolio securities (other than short-term obligations but
including listed issues) may be valued on the basis of prices furnished by one
or more pricing services that determine prices for normal, institutional-size
trading units of such securities using market information, transactions for
comparable securities and various relationships between securities which are
generally recognized by institutional traders. In certain circumstances, other
portfolio securities are valued at the last sale price on the exchange that is
the primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. Positions in
options are valued at the last sale price on the principal trading market for
the option. Obligations purchased with remaining maturities of 60 days or less
are valued at amortized cost unless this method no longer produces fair
valuation. Repurchase agreements are valued at
17
<PAGE>
cost plus accrued interest. Rights or warrants to acquire stock, or stock
acquired pursuant to the exercise of a right or warrant, may be valued taking
into account various factors such as original cost to the Fund, earnings and
net worth of the issuer, market prices for securities of similar issuers,
assessment of the issuer's future prosperity, or liquidation value or third
party transactions involving the issuer's securities. Securities for which
there exist no price quotations or valuations and all other assets are valued
at fair value as determined in good faith by or on behalf of the Board of
Directors of the Fund.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund seeks to provide an effective yield that is higher than other
short-term instrument alternatives. From time to time, the Fund may include its
current and/or effective yield based on various specific time periods. Yields
will fluctuate from time to time and are not necessarily representative of
future results.
The current yield is calculated by annualizing the most recent monthly
distribution (i.e., multiplying the distribution amount by 365/31 for a 31 day
month) and dividing the product by the current maximum offering price. The
effective yield is calculated by dividing the current yield by 365/31 and
adding 1. The resulting quotient is then taken to the 365/31st power and
reduced by 1. The result is the effective yield.
On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in
the Wall Street Journal, (b) the CD Rate as quoted daily in the Wall Street
Journal as the average of top rates paid by major New York banks on primary new
issues of negotiable CDs, usually on amounts of $1 million or more, (c) the
Prime Rate, quoted daily in The Wall Street Journal as the base rate on
corporate loans at large U.S. money center commercial banks, (d) one or more
averages compiled by Donoghue's Money Fund Report, a widely recognized
independent publication that monitors the performance of money market mutual
funds, (e) the average yield reported by the Bank Rate Monitor National IndexTM
for money market deposit accounts offered by the 100 leading banks and thrift
institutions in the ten largest standard metropolitan statistical areas, (f)
yield data published by Lipper Analytical Services, Inc., (g) the yield on an
investment in 90-day Treasury bills on a rolling basis, assuming quarterly
compounding, or (h) the yield on an index of loan funds comprised of all
continually offered closed-end bank loan funds, as categorized by Lipper (the
"loan fund index"). In addition, the Fund may compare the Prime Rate, the
Donoghue's averages and the other yield data described above to each other.
Yield comparisons should not be considered indicative of the Fund's yield or
relative performance for any future period.
Advertisements and communications to present or prospective shareholders
also may cite a total return for any period. Total return is calculated by
subtracting the net asset value of a single purchase of shares at a given date
from the net asset value of those shares (assuming reinvestment of
distributions) on a later date. The difference divided by the original net
asset value is the total return. The Fund may include information about the
total return on the loan fund index, and compare that to the total return of
the Fund and other indices.
All dividends and distributions are assumed to be reinvested in additional
shares of the Fund at net asset value. Therefore, the calculation of the Fund's
total return and effective yield reflects the effect of compounding. The
calculation of total return, current yield and effective yield does not reflect
the amount of any shareholder income tax liability, which would reduce the
performance quoted. If the Fund's fees or expenses are waived or reimbursed,
the Fund's performance will be higher.
Finally, the Fund may include information on the history of the Fund's net
asset value per share and the net asset value per share of the loan fund index,
including comparisons between them, in advertisements and other material
furnished to present and prospective shareholders. Information about the
performance of the Fund or other investments is not necessarily indicative of
future performance and should not be considered a representation of what an
investor's yield or total return may be in the future.
- --------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
- --------------------------------------------------------------------------------
The Fund engages in a continuous public offering of its shares at net
asset value without an initial sales charge. Shares may be purchased directly,
through CypressTree Funds Distributors ("Distributors"), or from certain
financial services firms that have sales agreements with Distributors
("Authorized Intermediaries"). Investors may be charged a fee if they effect
transactions through a broker or agent. The Fund does not currently intend to
list its shares on any national securities exchange or inter-dealer quotation
system. Shares of the Fund also are available for purchase by retirement plans
and trusts created under the Uniform Gifts to Minors Act.
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<PAGE>
An initial investment in the Fund must be at least $5,000. Once an account
has been established, the shareholder may make additional investments of $500
or more at any time. There is a $100 minimum initial and $50 additional
investment requirement for purchases in connection with tax-sheltered
retirement accounts. The Fund reserves the right to waive any of these minimum
investment requirements. See "Shareholder Services."
From time to time the Fund may suspend the continuous offering of its
shares in response to market conditions or otherwise, and may later resume the
continuous offering. During any such suspension, shareholders who reinvest
their distributions in additional shares will be permitted to continue
reinvestments, and the Fund may permit tax sheltered retirement plans that own
shares to purchase additional shares of the Fund.
The Fund may refuse any order for the purchase of shares.
The Fund is not an appropriate investment for investors who are
market-timers. Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the Fund's shareholders. To
minimize these costs, which reduce the ultimate returns achieved by all
shareholders, the Fund reserves the right to reject any purchase orders from
investors identified as market-timers.
Investors may purchase shares directly by check or by wire. Investors
should complete a Fund Application and mail it to the Fund's Transfer Agent,
State Street Bank & Trust Company. The Transfer Agent's address is Post Office
Box 8360, Boston, Massachusetts 02266-8360. Investors purchasing shares by
check should include a check or money order payable in U.S. dollars, drawn on a
U.S. bank, and made payable to CypressTree Senior Floating Rate Fund, Inc. The
Fund will not accept cash, credit cards, third party checks, or credit card
checks. The Fund reserves the right to cancel any purchase for which a check
does not clear.
Investors also may purchase shares of the Fund by wire. If the Fund is
unable to debit the predesignated bank account on the day of purchase, the Fund
may make additional attempts or may cancel the purchase.
If a purchase is cancelled for any reason, the investor will be
responsible for any losses or fees imposed by its bank and losses that may be
incurred as a result of any decline in the value of the cancelled purchase.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
The Fund offers the following optional services, at no extra charge. Any
of these services may be discontinued without penalty at any time. Investors
may obtain further information and an application for these services from
Authorized Intermediaries or from CypressTree Funds Distributors. The cost of
administering these services is borne by the Fund as an expense to all
shareholders.
Dividend Reinvestment Plan
Dividends and distributions will be automatically reinvested at the net
asset value per share next determined on the payable date of the dividend or
distribution. Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"),
all dividends and other distributions, net of any applicable withholding taxes,
will be automatically reinvested in additional shares, newly issued by the
Fund, unless the shareholder otherwise instructs in writing the Fund's Transfer
Agent, as the Plan agent (the "Plan Agent"). There will be no charge to
participants for reinvesting dividends or other distributions. The Fund will
pay the Plan Agent's fees for the handling of reinvestment of distributions.
A shareholder whose shares are held by a broker-dealer or nominee that
does not provide a dividend reinvestment service may be required to have his or
her shares registered in his or her own name to participate in the Plan.
Similarly, a shareholder may be unable to transfer his or her account to
certain broker-dealers and continue to participate in the Plan. Investors who
own shares registered in street name should contact the broker or nominee for
details concerning participation in the Plan.
The Plan Agent will maintain all participant accounts in the Plan and
furnish written confirmations of all transactions in the accounts, including
information needed for personal and tax records. The Plan Agent may hold shares
in the participants' account in non-certificated form in the name of the Plan
Agent or the Plan Agent's nominee, and each shareholder's proxy will include
those shares purchased pursuant to the Plan. Participants in the Plan may
withdraw from the Plan on written notice to the Plan Agent.
In the case of a shareholder of record, such as a bank, broker-dealer or
nominee, that holds shares for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of shares certified
from time to time by the record shareholder as representing the total amount
registered in the shareholder's name and held for the account of beneficial
owners who participate in the Plan.
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<PAGE>
All registered holders of shares (other than brokers and nominees) will be
mailed information regarding the Plan, including a form with which they may
elect to terminate participation in the Plan and receive further dividends and
other distributions in cash. An election to terminate participation in the Plan
must be made in writing to the Plan Agent and should include the shareholder's
name and address as they appear on the account registration. An election to
terminate will be deemed to be an election by a shareholder to take all
subsequent distributions in cash until the election is changed. An election
will be effective only for distributions declared and having a record date at
least ten days after the date on which the election is received.
Shareholders who do not participate in the Plan will receive all dividends
and other distributions in cash, net of any applicable withholding taxes, paid
in U.S. dollars by check or wire transfer. Shareholders who do not wish to have
dividends and other distributions reinvested automatically should notify the
Plan Agent at Post Office Box 8360, Boston, Massachusetts 02266-8360. Dividends
and other distributions with respect to shares registered in the name of a
broker-dealer or other nominee (i.e., in "street name") will be reinvested
under the Plan unless the broker-dealer does not provide that service, or if
the nominee or the shareholder elects to receive dividends and other
distributions in cash.
The Fund and the Plan Agent reserve the right to terminate the Plan as
applied to any dividend or other distribution paid subsequent to notice of the
termination sent to the participants in the Plan at least 30 days before the
record date for the distribution. The Plan also may be amended by the Fund or
the Plan Agent, but (except when necessary or appropriate to comply with
applicable law, rules or policies of a regulatory authority) only by at least
30 days' written notice to participants in the Plan. Shareholders should direct
all correspondence regarding the Plan to the Plan Agent, at
.
The receipt of dividends and other distributions in shares under the Plan
will not relieve participants of any income tax (including withholding taxes)
that may be payable with respect to the distributions. See "Taxes."
Automated Investment Plan
Shareholders may purchase shares of the Fund through the Fund's Automatic
Investment Plan. Once the $5,000 minimum investment has been made ($100 for
purchases in connection with tax-sheltered retirement accounts), shareholders
may make automatic cash investments of $50 or more each month or quarter from
the shareholder's bank account.
Tax-Sheltered Retirement Accounts
Shares of the Fund are available for purchase in connection with pension
and profit sharing plans, individual retirement account plans, and 403(b)
retirement plans. Detailed information concerning these plans and copies of the
plans are available from Distributors. This information should be read
carefully and consultation with an attorney or tax adviser may be advisable.
This information sets forth the service fee charged for retirement plans and
describes the federal income tax consequences of establishing a plan. Under
each tax-sheltered retirement account, all distributions will be automatically
reinvested in additional shares of the Fund.
- --------------------------------------------------------------------------------
DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund will declare distributions daily and pay distributions monthly.
Substantially all of the Fund's investment income, less Fund expenses, will be
declared daily as a distribution to shareholders of record as recorded by the
Transfer Agent at the time of declaration. Daily distribution crediting will
begin on the day after the Transfer Agent has received funds for the purchase
of Fund shares, even if orders to purchase shares had been placed with
Authorized Intermediaries. The Fund ordinarily will pay investment income
distributions on the last day of each month, whether the shareholder elects to
receive cash or to reinvest in additional shares. The Fund will distribute
realized net capital gains, if any, at least annually, usually in December,
after offset by any capital loss carryovers.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
The Fund intends to satisfy those requirements relating to the sources of
its income, the distribution of its income, and the diversification of its
assets necessary to qualify for the special tax treatment afforded to regulated
investment companies under the Internal Revenue Code (the "Code"). Accordingly,
the Fund will not be liable for federal income or excise taxes to the extent
that it distributes its net investment income and net realized capital gains to
shareholders in accordance with the timing requirements imposed by the Code.
(For a detailed discussion of tax issues pertaining to the Fund, see "Taxes" in
the Statement of Additional Information.)
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<PAGE>
Distributions paid by the Fund from its ordinary income or from an excess
of net short-term capital gain over net long-term capital loss will be treated
as ordinary income in the hands of the shareholders to the extent of the Fund's
earnings and profits. (Any such distributions in excess of the Fund's earnings
and profits first will reduce a shareholder's basis in his or her shares and,
after that basis is reduced to zero, will constitute capital gains to the
shareholder, assuming the shares are held as a capital asset.) Distributions,
if any, from the excess of net long-term capital gain over net short-term
capital loss are taxable to shareholders as long-term capital gain, regardless
of the length of time the shares of the Fund have been held by such
shareholders. Distributions will be taxed as described above, whether received
by the shareholders in cash or in additional shares. It is not expected that
any portion of distributions will be eligible for the corporate
dividends-received deduction.
Not later than 60 days after the close of the calendar year, the Fund will
provide its shareholders with a written notice designating the amounts of any
ordinary income dividends or capital gain dividends. If the Fund pays a
dividend in January that was declared in the previous October, November or
December to shareholders of record on a specified date in one of those months,
then such dividend will be treated for tax purposes as being paid by the Fund
and received by its shareholders on December 31 of the earlier year in which
the dividend was declared.
A holder of Fund shares who, pursuant to a Repurchase Offer, tenders all
of his or her Fund shares (and is not considered to own any other Fund shares
pursuant to attribution rules contained in the Code) may realize a taxable gain
or loss depending upon the shareholder's basis in the shares. Such gain or loss
realized on the disposition of shares (whether pursuant to a Repurchase Offer
or in connection with a sale or other taxable disposition of shares in a
secondary market) generally will be treated as long-term capital gain or loss
if the shares have been held as a capital asset for more than one year and as
short-term capital gain or loss if held as a capital asset for one year or
less. If an individual shareholder has net capital gain in a taxable year and
recognizes long-term capital gains upon the disposition of shares, the tax
rates applicable to these long-term gains will vary based on whether the shares
have been held for more than one year but not more than 18 months, more than 18
months, or, starting in 2001, more than five years, with lower rates applicable
to longer holding periods. If Fund shares are sold at a loss after being held
for six months or less, the loss will be treated as long-term--instead of
short-term--capital loss to the extent of any capital gain distributions
received on those shares. All or a portion of any loss realized on a sale or
exchange of shares of the Fund will be disallowed if the shareholder acquires
other Fund shares within 30 days before or after the disposition. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Different tax consequences may apply to tendering shareholders other than
fully-tendering shareholders described in the previous paragraph and to
non-tendering shareholders in connection with a Repurchase Offer. For example,
if a shareholder tenders fewer than all shares owned by or attributed to him or
her, the proceeds received could be treated as a taxable dividend, a return of
capital, or capital gain depending on the portion of shares tendered, the
Fund's earnings and profits, and the shareholder's basis in the tendered
shares. Moreover, when a shareholder tenders fewer than all shares owned
pursuant to a Repurchase Offer, there is a remote possibility that
non-tendering shareholders may be considered to have received a deemed
distribution that is taxable to them in whole or in part. Shareholders may wish
to consult their tax advisors prior to tendering.
The Fund must withhold 31% from distributions and repurchase payments, if
any, payable to any individuals and certain other noncorporate shareholders who
have not furnished to the fund a correct taxpayer identification number ("TIN")
or a properly completed claim for exemption on Form W-8 or W-9, or who are
otherwise subject to such "backup withholding." When establishing an account,
an investor must certify under penalties of perjury that the investor's TIN
(generally, his or her social security number) is correct and that the investor
is not otherwise subject to backup withholding.
Nonresident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% (or lower treaty rate) on distributions from ordinary income and from
the excess of net short-term capital gain over net long-term capital loss.
Distributions to such shareholders from the excess of net long-term capital
gain over net short-term capital loss and any amount treated as gain from the
sale or other disposition of shares of the Fund generally will not be subject
to U.S. taxation, provided that the shareholder has certified nonresident alien
status. Different U.S. tax consequences may result if the shareholder is
engaged in a trade or business in the United States or is present in the United
States for specified periods of time during a taxable year. Foreign
shareholders should consult their tax advisers regarding the U.S. and foreign
tax consequences of an investment in the Fund.
The discussion contained in this section is a general and abbreviated
summary of certain federal tax considerations affecting the Fund and its
shareholders, and is not intended as tax advice or to address a shareholder's
par-
21
<PAGE>
ticular circumstances. This discussion does not address non-federal tax
consequences, or the special tax rules applicable to certain classes of
investors, such as retirement plans, tax-exempt entities, insurance companies
and financial institutions. For further information, reference should be made
to the pertinent sections of the Code and the regulations promulgated
thereunder, which are subject to change by legislative, judicial, or
administrative action, either prospectively or retroactively. Investors are
urged to consult their tax advisors regarding specific questions as to federal,
state, local, or foreign taxes. The Fund does not provide any guarantee
regarding the tax consequences of investing in the Fund.
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DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund is a corporation organized under Maryland law. The Fund was
incorporated in July 6, 1997. The Fund's Board of Directors is responsible for
the overall management and supervision of its affairs.
The Fund currently has one class of shares of common stock par value $0.01
per share, of which 1,000,000,000 shares have been authorized. Each such share
has equal voting, dividend, distribution and liquidation rights. Fractional
shares may be voted in proportion to the amount of the Fund's net asset value
that they represent. Shares have no preemptive or conversion rights and are
freely transferable. When issued and outstanding, the shares are fully paid and
nonassessable by the Fund. Although there is no current intent to do so, the
Board of Directors has the ability to classify and reclassify unissued shares,
and could authorize issuance of a new class of shares pursuant to this
authority, consistent with the requirements of the 1940 Act. Shares of the Fund
will be issued in uncertificated form.
The Fund's Articles of Incorporation generally may not be amended without
the affirmative vote of a majority of the outstanding shares of the Fund (or
such greater vote as is described below under "Anti-Takeover Provisions"). The
Fund will continue indefinitely.
Anti-Takeover Provisions
The Fund has certain anti-takeover provisions in its Articles of
Incorporation that are intended to limit, and could have the effect of
limiting, the ability of other entities or persons to acquire control of the
Fund, to cause the Fund to engage in certain transactions, or to modify the
Fund's structure.
The affirmative vote or consent of the holders of two-thirds of each
class, voting separately, of the Fund's capital stock outstanding and entitled
to vote on the matter (a greater vote than that required by the 1940 Act), is
required to authorize the conversion of the Fund from a closed-end to an
open-end investment company. However, if two-thirds of the Board of Directors
recommends conversion, the approval by vote of the holders of a majority of the
outstanding shares entitled to vote on the matter will be sufficient. This
provision of the Fund's Articles of Incorporation may not be amended without
the affirmative vote or consent of two-thirds of the Fund's outstanding shares
of capital stock.
The affirmative vote or consent of the holders of at least three-fourths
of each class of the Fund's shares of capital stock outstanding and entitled to
vote on the matter, voting separately, is required to approve any of the
following Fund transactions (the "Transactions"):
(a) merger, consolidation, or statutory share exchange with or into any
person;
(b) issuance of any Fund securities to any person for cash, securities, or
other property having a fair market value of $1,000,000 or more, except for
issuance or transfers of debt securities, sales of securities in connection
with a public offering, issuance of securities pursuant to a dividend
reinvestment plan, issuance of securities on the exercise of any stock
subscription rights distributed by the Fund, and portfolio transactions
effected in the ordinary course of business;
(c) sale, lease, exchange, mortgage, pledge, transfer, or other disposition
by the Fund of any assets having an aggregate fair market value of
$1,000,000 or more, except for portfolio transactions conducted in the
ordinary course of business;
(d) voluntary liquidation or dissolution of the Fund, or an amendment to
the Fund's Articles of Incorporation to terminate the Fund's existence; or
(e) unless federal law requires a lesser vote, any shareholder proposal as
to specific investment decisions made or to be made with respect to the
Fund's assets as to which shareholder approval is required under Maryland
or federal law.
22
<PAGE>
In addition, in the case of a Transaction listed in (a), (b) or (c) above,
the affirmative vote or consent of the holders of at least two-thirds of each
class of the Fund's shares of capital stock outstanding and entitled to vote on
the matter, voting separately, excluding votes entitled to be cast by the
person (or an affiliate of the person) who is a party to the Transaction with
the Fund, is required.
However, the shareholder votes mentioned above will not be required with
respect to any Transaction (other than those set forth in (e) above) approved
by a vote of three-fourths of the Directors who do not have an interest in the
Transaction, including a majority of the Continuing Directors (as defined in
the Articles of Incorporation) who do not have an interest in the Transaction
and who are not "interested Directors," as that term is defined in the 1940
Act. In that case, if Maryland law requires shareholder approval, the
affirmative vote of a majority of the shares of capital stock of the Fund
outstanding and entitled to vote on the matter, voting together as a single
class, is required.
The provisions of the Fund's Articles of Incorporation described in this
section relating to approval of Transactions may not be amended without the
affirmative vote or consent of three-fourths of the Fund's outstanding shares
of capital stock. For the full text of these provisions, see the Articles of
Incorporation on file with the Securities and Exchange Commission.
The provisions described in this section will make it more difficult to
convert the Fund to an open-end investment company and to consummate the
Transactions without the approval of the Board of Directors. These provisions
could have the effect of depriving shareholders of an opportunity to sell their
shares at a premium over prevailing market prices (in the event that a
secondary market for the Fund shares develops) by discouraging a third party
from seeking to obtain control of the Fund in a tender offer or similar
transaction. However, the Board of Directors has considered these anti-takeover
provisions and believes that they are in the shareholders' best interests and
benefit shareholders by providing the advantage of potentially requiring
persons seeking control of the Fund to negotiate with its management regarding
the price to be paid to shareholders.
- --------------------------------------------------------------------------------
REPORTS TO SHAREHOLDERS
- --------------------------------------------------------------------------------
The Fund will send semi-annual and annual reports to its shareholders.
These reports will include financial statements audited by the Fund's
independent certified public accountants. The Fund will provide shareholders
with information necessary to prepare federal and state tax returns shortly
after the end of each calendar year.
The Fund will describe the Repurchase Policy in its annual report to
shareholders. The annual report also will disclose the number of Repurchase
Offers conducted each year, the amount of each Repurchase Offer, the amount
tendered each month, and the extent to which the Fund repurchased shares in an
Oversubscribed Repurchase Offer.
23
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A--DESCRIPTION OF RATINGS
- --------------------------------------------------------------------------------
Moody's Long-Term Debt Ratings
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 edged." 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 risk appear somewhat larger than the 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 some time 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 interest 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. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
short-comings.
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 long-term debt ratings. 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 modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
24
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Fund ................................................... 1
Investment Restrictions and Fundamental Policies ........... 1
Repurchase Offer Fundamental Policy ........................ 2
Management ................................................. 3
Advisory, Administration and Distribution Services ......... 5
Portfolio Transactions ..................................... 6
Custodian .................................................. 7
Transfer Agent ............................................. 7
Liquidity Requirements ..................................... 7
Taxes ...................................................... 8
Performance Information .................................... 8
Indemnification ............................................ 9
Auditors and Financial Statements .......................... 9
Other Information .......................................... 9
25
<PAGE>
CypressTree Senior Floating Rate Fund
PROSPECTUS
[Date]
INVESTMENT ADVISER
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
INVESTMENT SUBADVISER
CypressTree Investment Management Company, Inc.
125 High Street
Boston, Massachusetts 02110
ADMINISTRATOR
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
DISTRIBUTOR
CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, Massachusetts 02210
26
<PAGE>
Subject to Completion, dated February , 1998
STATEMENT OF
ADDITIONAL INFORMATION
[Date]
CypressTree Senior Floating Rate Fund, Inc.
125 High Street
Boston, Massachusetts 02110
617 946-0600
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY THE PROSPECTUS OR CYPRESSTREE SENIOR FLOATING RATE FUND, INC.
(THE "FUND") DATED AS SUPPLEMENTED FROM TIME TO TIME. THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY CONTACTING THE FUND'S
DISTRIBUTOR, CYPRESSTREE FUNDS DISTRIBUTIONS, INC. AT 800-860-5575.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation or offer to buy nor shall there be any sale of these securities in
any State in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such State.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Fund ................................................... 1
Investment Restrictions and Fundamental Policies ........... 1
Repurchase Offer Fundamental Policy ........................ 2
Management ................................................. 3
Advisory, Administration and Distribution Services ......... 5
Portfolio Transactions ..................................... 6
Custodian .................................................. 7
Transfer Agent ............................................. 7
Liquidity Requirements ..................................... 7
Taxes ...................................................... 8
Performance Information .................................... 8
Indemnification ............................................ 9
Auditors and Financial Statements .......................... 9
Other Information .......................................... 9
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
CypressTree Senior Floating Rate Fund, Inc. (the "Fund") is a newly
organized, closed-end, non-diversified management investment company that
continuously offers its shares to the public. The Fund will conduct monthly
repurchase offers for its shares. The Fund's principal office is located at 125
High Street, Boston, Massachusetts 02110. Capitalized terms used in this
Statement of Additional Information and not otherwise defined have the meanings
given them in the Fund's Prospectus.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES
- --------------------------------------------------------------------------------
The following fundamental policies cannot be changed without the approval
of the holders of a majority of the Fund's outstanding voting securities. A
"majority" for this purpose means the lesser of (a) 67% of the shares of the
Fund present or represented by proxy at a meeting if the holders of more than
50% of the shares are present or represented at the meeting, or (b) more than
50% of the shares of the Fund. The Fund may not:
(a) Borrow money or issue senior securities, except as permitted by the
1940 Act;
(b) Invest more than 25% of the Fund's total assets (taken at current
value) in the securities of Borrowers and other issuers having their
principal business activities in the same industry (the electric, gas,
water and telephone industries being treated as separate industries for the
purpose of this restriction); provided that (i) there is no limitation on
purchasing securities the issuer of which is deemed to be in the financial
institutions industry, which includes commercial banks, thrift
institutions, insurance companies and finance companies and (ii) there is
no limitation with respect to obligations issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities;
(c) Make loans to other persons, except that the Fund may (i) acquire
Loans, debt securities and other obligations in which the Fund is
authorized to invest in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities;
(d) Underwrite securities issued by other persons, except insofar as it may
be deemed technically to be an underwriter under the Securities Act of 1933
in selling or disposing of an investment;
(e) Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
securities). The purchase of Loans, securities or other investment assets
with the proceeds of a permitted borrowing or securities offering will not
be deemed to be the purchase of securities on margin;
(f) Purchase or sell real estate, although it may purchase and sell
securities secured by interests in real estate and securities of issuers
that invest or deal in real estate provided that the Fund reserves the
freedom of action to hold and to sell real estate acquired as a result of
the ownership of securities; or
(g) Purchase or sell physical commodities or contracts for the purchase or
sale of physical commodities. Physical commodities do not include futures
contracts with respect to securities, securities indices or other financial
instruments.
The Fund has adopted the following nonfundamental investment policies
which may be changed by the Fund's Board of Directors without shareholder
approval. As a matter of nonfundamental policy, the Fund may not:
(a) make short sales of securities or maintain a short position, unless at
all times when a short position is open the Fund either owns an equal
amount of such securities or owns securities convertible into or
exchangeable for, without payment of any further consideration, securities
of the same issuer as, and equal in amount to, the securities sold short,
and in any event only to the extent that no more than 5% of its net assets
are committed to short sales;
(b) purchase oil, gas or other mineral leases or purchase partnership
interests in oil, gas or other mineral exploration or development programs;
(c) invest more than 10% of its total assets (taken at current value) in
the securities of issuers that, together with any predecessors, have a
record of less than three years continuous operation, except U.S.
Government securities, securities of issuers that are rated at least "A" by
at least one nationally recognized statistical rating organization,
municipal obligations and obligations issued or guaranteed by any foreign
government or its agencies or instrumentalities; or
1
<PAGE>
(d) invest more than 10% of its total assets in Loans of any single
Borrower.
For the purpose of fundamental policies (a) and (e) and nonfundamental
investment policy (a), the Fund's arrangements (including escrow, margin and
collateral arrangements) with respect to transactions in all types of options
and futures contract transactions shall not be considered to be (a) a borrowing
of money or the issuance of securities (including senior securities) by the
Fund, (b) a pledge of the Fund's assets, (c) the purchase of a security on
margin, or (d) a short sale or position.
The Fund has no present intention of engaging in options or futures
transactions or in short sales, or of issuing preferred shares.
For the purpose of fundamental policy (b), the Fund will consider all
relevant factors in determining who is the issuer of the Loan, including the
Borrower's credit quality, 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 an interpositioned person was
deemed material to the decision to purchase the Loan, the interest rate
environment, and general economic conditions applicable to the Borrower and an
interpositioned person.
Notwithstanding the Fund's investment policies and restrictions, the Fund
may invest all or part of its investable assets in a management investment
company with substantially the same investment objective policies and
restrictions as the Fund. This could allow creation of a "master/feeder"
structure in the future, although the Fund has no current intention to
restructure in this manner.
If a percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not
be considered a violation.
- --------------------------------------------------------------------------------
REPURCHASE OFFER FUNDAMENTAL POLICY
- --------------------------------------------------------------------------------
On July 23, 1997, the Board of Directors adopted a resolution setting
forth the Fund's fundamental policy that it will conduct monthly Repurchase
Offers (the "Repurchase Offer Fundamental Policy").
The Repurchase Offer Fundamental Policy sets the interval between each
Repurchase Offer at one month and provides that the Fund shall conduct a
Repurchase Offer each month (unless suspended or postponed in accordance with
regulatory requirements). Each repurchase will occur on the last business day
of the month. The Repurchase Offer Fundamental Policy also provides that the
repurchase pricing shall occur on the Repurchase Date (with pricing to occur
after the close of the New York Stock Exchange on that day).
The Repurchase Offer Fundamental Policy only may be changed by a majority
vote of the Fund's outstanding voting securities. In accordance with the
requirements of the 1940 Act a "majority of the Fund's outstanding voting
securities" means the lesser of either: (a) the vote of 67 percent or more of
the voting securities present at the annual or special meeting of the Fund's
shareholders, if the holders of more than 50 percent of the Fund's outstanding
securities are present or represented by proxy; or (b) the vote of more than 50
percent of the Fund's outstanding voting securities.
2
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Fund's Directors and officers and their business backgrounds are
listed below. Those Directors and officers who, as defined in the 1940 Act, are
"interested persons" of the Fund. CAM, CypressTree, or Cypress by virtue of
their affiliation with any one or more of the Fund, CAM, CypressTree, or
Cypress, are indicated by an asterisk (*) ("Interested Persons").
Directors and Officers of the Fund
<TABLE>
<CAPTION>
Year of
Name and Address Birth Position Held Business Background
- ------------------------ -------- --------------------------- ---------------------------------------------------
<S> <C> <C> <C>
Bradford K. Gallagher* 1944 Director; President President, Cypress Holding Company (10/95-
125 High Street present); President, CypressTree Asset
Boston, MA 02110 Management Corp. (8/96-present);
President, CypressTree Investments, Inc. (12/96-
present); President, CypressTree Investment
Management Co. (8/96-present); President,
CypressTree Funds Distributors, Inc. (3/97-
present); President, Trustee, North American
Funds; (10/97-present) President, Allmerica
Financial Services
(4/90-9/95); Member of Operating Committee
and Founder/President of Fidelity Investments
Institutional Services Co. (1/81-3/90)
William F. Achtmeyer 1955 Director President and Chief Executive Officer, The
200 State Street Parthenon Group (8/91-present); Trustee, North
Boston, MA 02109 American Funds; Director, Bain & Company
(9/77-6/96)
William F. Devin 1938 Director Vice Chairman, Boston Stock Exchange (10/90-
One Boston Place present); Trustee, North American Funds;
Boston, MA 02108 Executive Vice President, Fidelity Capital
Markets Co. (12/66-12/96)
Kenneth J. Lavery 1949 Director Vice President, Massachusetts Capital Resource
420 Boylston Street Company (5/82-present); Trustee, North
Boston, MA 02116 American Funds
Jeffrey S. Garner* 1956 Executive Vice President; Vice President, Cypress Holding Company
125 High Street Portfolio Manager (8/96-present); Executive Vice President and
Boston, MA 02110 Chief Investment Officer, CypressTree
Investment Management Co. (8/96-present);
Vice President, CypressTree Funds Distributors,
Inc. (3/97-present); Vice President, Eaton Vance
Management (1/88-7/96)
Joseph T. Grause, Jr.* 1952 Executive Vice President Vice President, Cypress Holding Company
286 Congress Street (1/96-present); Treasurer, North American Funds
Boston, MA 02210 (10/97-present); Senior Vice President, Sales &
Marketing, First Data Investor Services Group
(5/93-11/95); Senior Vice President, Fidelity
Investments (6/76-5/93)
Peter K. Merrill* 1961 Vice President Vice President, CypressTree Investment
125 High Street Management Co. (6/97- present); Managing
Boston, MA 02110 director, BankBoston Corp. (7/88-5/97)
Philip C. Robbins* 1967 Assistant Vice President Assistant Vice President, CypressTree
125 High Street Investment Management Co. (9/96-present);
Boston, MA 02110 Associate, Eaton Vance Management (9/91-8/96)
3
<PAGE>
<CAPTION>
Year of
Name and Address Birth Position Held Business Background
- ------------------------ -------- --------------------------- ---------------------------------------------------
Joseph A. Germain* 1969 Assistant Vice President Associate, CypressTree Investment Management
125 High Street Co. (2/97-present); Supervisor, Investors Bank
Boston, MA 02110 & Trust Co. (3/94-1/97)
Paul F. Foley* 1963 Treasurer Vice President, Cypress Holding Company
125 High Street (7/96-present); Financial Analyst. Fleet Financial
Boston, MA 02110 Group (6/95-7/96); Financial Analyst, Allmerica
Financial Services (4/87-6/95)
John I. Fitzgerald* 1948 Secretary Secretary and Counsel, Cypress Holding
125 High Street Company (4/97-present); Secretary, North
Boston, MA 02110 American Funds (10/97-present); Executive Vice
President-Legal Affairs. Boston Stock Exchange
(6/93-3/97); Vice President and General Counsel,
Fechtor, Detwiler & Co. (6/91-6/93); Senior Vice
President and Chief Legal Officer, Fidelity
Brokerage Services, Inc. (4/82-3/91)
</TABLE>
Messrs. Devin (Chairman) and Lavery and Achtmeyer are members of the
Administration Committee of the Board of Directors. The Administration
Committee makes recommendations to the Directors regarding the selection of the
independent certified public accountants, and reviews with the accountants and
the Fund Treasurer accounting and auditing practices and procedures, accounting
records, internal accounting controls, and the functions performed by the
Custodian and Transfer Agent.
Executive Compensation
The Fund pays the fees and expenses of those Directors who are not
Interested Persons (the "noninterested Directors"). The Directors who are
Interested Persons receive no compensation from the Fund. Noninterested
Directors receive $750 per quarter for each quarter during which the Director
serves, plus $750 for each meeting attended in person and $200 for each
telephone meeting. For the period from the start of business, -------- , 1998,
to December 31, 1998, it is estimated that the Directors will earn the
following compensation in their capacities as Directors:
TOTAL COMPENSATION
AGGREGATE FROM FUND AND FUND
COMPENSATION COMPLEX PAID TO
NAME FROM FUND DIRECTORS*
- ----------------------- -------------- -------------------
Bradford K. Gallagher $ 0 $ 0
William F. Achtmeyer $4,600 $10,600
William F. Devin $4,600 $10,600
Kenneth J. Lavery $4,600 $10,600
- ------------
*Includes compensation for service as director of the Fund and as trustee of
another investment company also advised by CAM.
Election of Directors
As permitted by Maryland law, there normally will be no meetings of Fund
shareholders for the purpose of electing Directors in any year in which no such
election is required under the 1940 Act. Under the 1940 Act, an annual meeting
to elect Directors only is required when less than a majority of the Directors
holding office have been elected by shareholders. If a meeting is required, the
Directors then in office will call a shareholders' meeting for the election of
Directors. If no meeting is required, the Directors will continue to hold
office and may appoint successor Directors. The shares of the Fund do not
provide for cumulative voting. As a result, the holders of more than 50% of the
shares voting for the election of Directors can elect 100% of the Directors
and, in this event, the holders of the remaining less than 50% of the shares
voting on the matter will not be able to elect any Directors.
Under the Fund's Articles of Incorporation, no person may serve as a
Director if shareholders holding seventy-five percent (75%) of shares entitled
to vote on the matter have removed him or her from office.
Control Persons and Principal Holders of Shares
As of the date of this Prospectus, CypressTree owns 100% of the issued and
outstanding shares of Shares of the Fund and, until the Fund completes the
public offering of its Shares, CypressTree will be deemed to control the Fund
under the 1940 Act. See also "Advisory, Administration and Distribution
Services."
4
<PAGE>
- --------------------------------------------------------------------------------
ADVISORY, ADMINISTRATION AND DISTRIBUTION SERVICES
- --------------------------------------------------------------------------------
CAM is the Fund's investment adviser and administrator under an investment
advisory agreement ("Advisory Agreement") and an administration agreement (the
"Administration Agreement") between CAM and this Fund. CAM is a Delaware
corporation founded in 1996, and is a general investment advisory firm. The
Directors of CAM are Bradford K. Gallagher and J. Christopher Clifford.
CypressTree serves as the Fund's subadviser under an investment
subadvisory agreement (the "Subadvisory Agreement") between CAM and
CypressTree. CypressTree is a Delaware corporation founded in August, 1996, and
is engaged in the business of providing investment advisory and other services
to institutional, offshore, and other clients with respect to portfolios
consisting primarily of Loans. Currently, CypressTree has over $---- million
assets under management. The directors of CypressTree are Bradford K. Gallagher
and J. Christopher Clifford.
CAM is an affiliate of and CypressTree is a wholly-owned subsidiary of
Cypress Holding Company ("Cypress"). Cypress is a Delaware corporation founded
in 1995, and is an integrated investment management firm. The Directors of
Cypress are Bradford K. Gallagher and J. Christopher Clifford. The largest
shareholders of Cypress are Mr. Gallagher (approximately 15%) and Berkshire
Fund IV L.P., an investment partnership (approximately 56%). The remaining
stock of Cypress is owned by Cypress employees.
The Fund will be responsible for all of its costs and expenses not
expressly stated to be payable by CAM under the Advisory Agreement and the
Administration Agreement by CypressTree under the Subadvisory Agreement, or by
Distributors under its Distribution Agreement. These costs and expenses may
include (without limitation): expenses of acquiring, holding and disposing of
securities and other investments, including brokerage commissions; shareholder
servicing expenses; investment advisory and administration fees; custody and
transfer agency fees and expenses, including those incurred for determining net
asset value and keeping accounting books and records; expenses of pricing and
valuation services; expenses of conducting repurchase offers; fees and expenses
of registering under the securities laws, and other governmental fees; expenses
of reports to shareholders and investors, proxy statements and other expenses
of shareholders' or investors' meetings; compensation and expenses of Directors
not affiliated with CAM, CypressTree or Cypress; interest, taxes and corporate
fees; legal and accounting expenses; printing and mailing expenses; insurance
premiums; expenses incurred in connection with litigation in which the Fund is
a party and any legal obligation to indemnify its officers and Directors with
respect to litigation; membership dues in investment company organizations;
communications equipment expenses; and any nonrecurring or extra-ordinary
expenses.
The Advisory Agreement, Subadvisory Agreement, and Administration
Agreement each will remain in effect until ---------- , 199 . The Advisory
Agreement may be continued from year to year after ---------- so long as the
continuance is approved at least annually (a) by the vote of a majority of the
Fund's Directors who are not "interested persons" of the Fund or CAM cast in
person at a meeting specifically called for the purpose of voting on such
approval; and (b) by the vote of a majority of the Board of Directors or by the
vote of a majority of the outstanding Fund shares. The Advisory Agreement will
terminate automatically in the event of its assignment. The Subadvisory
Agreement may be continued from year to year after ---------- so long as the
continuance is approved at least annually (a) by the vote of a majority of the
Fund's Directors who are not "interested persons" of the Fund or CypressTree
cast in person at a meeting specifically called for the purpose of voting on
such approval; and (b) by the vote of a majority of the Board of Directors or
by the vote of a majority of the outstanding Fund shares. The Subadvisory
Agreement will terminate automatically in the event of its assignment. The
Administration Agreement may be continued from year to year after ----------
so long as the continuance is approved annually (a) by the vote of a majority
of the Fund's Directors who are not "interested persons" of the Fund or CAM
cast in person at a meeting specifically called for the purpose of voting or
such approval; and (b) by the vote of a majority of the Board of Directors or
by the vote of a majority of the outstanding Fund shares. Each agreement may be
terminated at any time without penalty on sixty (60) days' notice by the
Directors or CAM or CypressTree, as applicable, or by the vote of the majority
of the outstanding Fund shares. Each agreement provides that, in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of its
obligations or duties to the Fund on the part of CAM or CypressTree, as
applicable, CAM or CypressTree, as applicable, will not be liable to the Fund
for any loss incurred.
CAM will receive fees under the Advisory Agreement and the Administration
Agreement. For a description of the compensation that the Fund pays CAM under
the Advisory Agreement and Administration Agreement, see the Fund's current
Prospectus.
CAM has agreed to reimburse the Fund's expenses to the extent necessary so
that total annualized Fund expenses do not exceed 1.50% of average daily gross
assets. If CAM had not agreed to reimburse these expenses,
5
<PAGE>
estimated Fund expenses would be: management fee of 0.85%, interest payments on
borrowed funds of 0.00%, administration fee of 0.40%, service fee of 0.00%, and
other expenses of 0.30%; and total annual expenses of 1.55%.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Subject to policies established by the Board of Directors of the Fund and
oversight by CAM, CypressTree is primarily responsible for the execution of the
Fund's portfolio transactions. In executing such transactions, CypressTree
seeks to obtain the best results for the Fund, taking into account such factors
as price (including the applicable fee, commission or spread), size of order,
difficulty of execution and operational facilities of the firm involved and the
firm's risk in positioning a block of securities. While CypressTree generally
seeks reasonably competitive fee or commission rates, the Fund does not
necessarily pay the lowest commission or spread available.
The Fund will purchase Loans in individually negotiated transactions with
commercial banks, thrifts, insurance companies, finance companies and other
financial institutions. In determining whether to purchase Loans from these
financial institutions, CypressTree may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. While financial institutions generally are not
required to repurchase Loans which they have sold, they may act as principal or
on an agency basis in connection with the Fund's disposition of Loans. The Fund
has no obligation to deal with any bank, broker or dealer in execution of
transactions in portfolio securities.
Other securities in which the Fund may invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with the
dealers who make markets in the securities involved, except in those
circumstances where better prices and execution are available elsewhere. These
dealers attempt to profit from transactions by buying at the bid price and
selling at the higher asked price in the market for the obligations (the
difference between the bid and asked price customarily is referred to as the
"spread"). The Fund also may purchase fixed-income and other securities from
underwriters, the cost of which may include fees and concessions to the
underwriters.
It is not anticipated that the Fund will pay significant brokerage
commissions. However, on occasion it may be necessary or desirable to purchase
or sell a security through a broker on an agency basis, in which case the Fund
will incur a brokerage commission. In executing all transactions, CypressTree
seeks to obtain the best results for the Fund. For the period from the start of
business, , 1998, to the date of this Statement of Additional
Information, the Fund has paid no brokerage commissions.
Consistent with the interests of the Fund, CypressTree may select brokers
to execute the Fund's portfolio transactions on the basis of the research and
brokerage services they provide to CypressTree for its use in managing the Fund
and its other advisory accounts. Such services may include (a) furnishing
analyses, reports and information concerning issuers, industries, securities,
geographic regions, economic factors and trends, portfolio strategy, and
performance of accounts; and (b) effecting securities transactions and
performing functions incidental to those securities transactions (such as
clearance and settlement). Research and brokerage services received from such
brokers are in addition to, and not in lieu of, the services required to be
performed by CypressTree under the Advisory Agreement. A commission paid to
such brokers may be higher than that which another qualified broker would have
charged for effecting the same transaction, provided that CypressTree
determines in good faith that such commission is reasonable in relation to the
value of the services, in terms either of that particular transaction or the
overall responsibility of CypressTree to the Fund and its other clients. In
reaching this determination, CypressTree will not attempt to place a specific
dollar value on the brokerage and research services provided, or to determine
what portion of the compensation should be related to those services. The
receipt of this research will not reduce CypressTree's normal independent
research activities. However, it enables CypressTree to avoid the additional
expenses that could be incurred if CypressTree tried to develop comparable
information through its own efforts.
The Fund will not purchase securities from its affiliates in principal
transactions.
CypressTree is authorized to use research services provided by and to
place portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the Fund or shares of other Cypress funds to
the extent permitted by law.
CypressTree may allocate brokerage transactions to broker-dealers that
have entered into arrangements with CypressTree under which the broker-dealer
allocates a portion of the commission paid by each fund toward payment of the
fund's expenses, such as transfer agent fees or custodian fees. However, the
transaction quality must be comparable to those of other qualified
broker-dealers.
6
<PAGE>
The frequency of portfolio purchases and sales (known as the "turnover
rate") will vary from year to year. It is anticipated that the Fund's turnover
rate will be between 50% and 100%. The Fund's portfolio turnover rate is not
expected to exceed 100%, but may vary greatly from year to year and will not be
a limiting factor when CypressTree deems portfolio changes appropriate.
Although the Fund generally does not intend to trade for short-term profits,
the securities held by the Fund will be sold whenever CypressTree believes it
is appropriate to do so, without regard to the length of time a particular
security may have been held. Higher portfolio turnover involves corresponding
greater brokerage commissions and other transaction costs that the Fund will
bear directly.
If purchases or sales of securities of the Fund and one or more other
investment companies or clients supervised by CypressTree are considered at or
about the same time, transactions in these securities will be allocated among
the several investment companies and clients in a manner deemed equitable to
all by CypressTree, taking into account the respective sizes of the funds and
the amount of securities to be purchased or sold. In some cases this procedure
would have a detrimental effect on the price or volume of the security so far
as the Fund is concerned. In other cases it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Fund.
- --------------------------------------------------------------------------------
CUSTODIAN
- --------------------------------------------------------------------------------
State Street Bank & Trust Company (the "Custodian"), acts as custodian for
the Fund. Its principal business address is 225 Franklin Street, Boston,
Massachusetts 02110. The Custodian has custody of all the Fund's assets,
maintains the Fund's general ledger, and computes the daily net asset value of
Fund shares. The Custodian attends to details in connection with the sale,
exchange, substitution, transfer or other dealings with the Fund's investments,
receives and disburses all funds, and performs various other ministerial duties
on receipt of proper instructions from the Fund. The Custodian charges custody
fees based on percent of Fund assets. These fees are competitive within the
industry.
CAM, CypressTree, and their affiliates and their officers and employees
from time to time have transactions with various banks, including the Fund's
Custodian. It is the opinion of CAM and CypressTree that the terms and
conditions of these transactions were not and will not be influenced by
existing or potential custodian or other relationships between the Fund and
these banks.
- --------------------------------------------------------------------------------
TRANSFER AGENT
- --------------------------------------------------------------------------------
State Street Bank & Trust Company serves as transfer and dividend paying
agent and as registrar. Its principal business address is Post Office Box 8360,
Boston, Massachusetts 02266-8360.
- --------------------------------------------------------------------------------
LIQUIDITY REQUIREMENTS
- --------------------------------------------------------------------------------
From the time that the Fund sends a Notification to shareholders until the
Repurchase Date, the Fund will maintain a percentage of the Fund's assets equal
to at least 100 percent of the Repurchase Offer Amount either in: (a) assets
that can be sold or disposed of in the ordinary course of business at
approximately the price at which the Fund has valued the investment within a
period equal to the period between the Repurchase Date and the next Repurchase
Payment Deadline; or (b) assets that mature by the next Repurchase Payment
Deadline.
In the event that the Fund's assets fail to comply with the requirements
in the preceding paragraph, the Board shall cause the Fund to take such action
as the Board deems appropriate to ensure compliance.
In supervising the Fund's operations and the actions of CAM and
CypressTree, the Board has adopted written procedures (the "Liquidity
Procedures") reasonably designed, taking into account current market conditions
and the Fund's investment objectives, to ensure that the Fund's assets are
sufficiently liquid so that the Fund can comply with the Repurchase Offer
Fundamental Policy and with the liquidity requirements described above.
From time to time, the Board reviews the Fund's portfolio composition and
makes and approves such changes to the Liquidity Procedures as the Board deems
necessary.
7
<PAGE>
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
For a discussion of federal tax issues affecting shareholders in the Fund
please see "Taxes" in the Prospectus.
The Fund intends to qualify for the special tax treatment afforded
regulated investment companies ("RICs") under Subchapter M of the Internal
Revenue Code (the "Code"). To qualify for that treatment, the Fund must
distribute to its shareholders for each taxable year at least 90% of its
investment company taxable income (consisting generally of net ordinary
investment income, net short-term capital gains, and net gains from certain
foreign currency transactions) and must meet several additional requirements.
Among these requirements are the following: (a) the Fund must derive at least
90% of its gross income each taxable year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of
securities, and certain other related income; and (b) the Fund must diversify
its investments so that at the close of each quarter of its taxable year, (i)
at least 50% of the value of its total assets are represented by cash and cash
items, U.S. Government securities, securities of other regulated investment
companies and other securities limited in respect of any one issuer to not more
than 5% of the value of the Fund's total assets and not more than 10% of that
issuer's voting securities, and (ii) not more than 25% of the value of its
total assets may be invested in securities (other than U.S. Government
securities and securities of other regulated investment companies) of any one
issuer, or of two or more issuers controlled by the Fund and engaged in the
same, similar or related trades or businesses.
Provided that the Fund satisfies the above requirements, it will not be
subject to federal income tax on that part of its investment company taxable
income and the excess of net long-term capital gain over net short-term capital
loss that it distributes to shareholders.
The Fund will be subject to a nondeductible 4% federal excise tax to the
extent that it does not distribute during each calendar year 98% of its
ordinary income, determined on a calendar year basis, and 98% of its capital
gain net income, determined, in general, on an October 31 year end, plus
certain undistributed amounts from previous years. The Fund will be subject to
the excise tax only on the amount by which it does not meet the foregoing
distribution requirements.
The federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received
under such arrangements as ordinary income and to amortize payments under
certain circumstances. The Fund will limit its activity in this regard in order
to enable it to maintain its qualification as a RIC.
Certain Fund investments may bear original issue discount or market
discount for tax purposes. The Fund will be required to include in income each
year a portion of the original issue discount and may elect to include in
income each year a portion of the market discount. The Fund may have to dispose
of investments that it otherwise would have continued to hold in order to
provide cash to satisfy its distribution requirements with respect to such
income.
Gains or losses (a) from the disposition of foreign currencies, (b) on the
disposition of a debt security denominated in a foreign currency that are
attributable to fluctuations in the value of the foreign currency between the
date of acquisition of the security and the date of disposition, and (c) that
are attributable to fluctuations in exchange rates that occur between the time
the Fund accrues interest or other receivables or expenses or other liabilities
denominated in a foreign currency and the time it actually collects the
receivables or pays the liabilities generally are treated as ordinary income or
loss. These gains or losses, referred to under the Code as "section 988" gains
or losses, may increase or decrease the amount of investment company taxable
income available to the Fund for distribution to its shareholders.
The Fund may be subject to foreign withholding or other taxes with respect
to income on certain loans to foreign Borrowers. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes. However, to the extent that foreign taxes are imposed, the taxes would
reduce the yield on the Loans. Because not more than 50% of the value of the
Fund's total assets at the close of any taxable year will consist of Loans to
foreign borrowers, the Fund will not be eligible to pass through to
shareholders their proportionate share of foreign taxes paid by the Fund, with
the result that shareholders will not be entitled to take any foreign tax
credits or deductions for foreign taxes paid by the Fund. However, the Fund may
deduct foreign taxes in calculating its distributable income.
- --------------------------------------------------------------------------------
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund may provide information about CAM, CypressTree, their affiliates
and other related funds in sales material or advertisements provided to
investors or prospective investors. Sales material or advertisements also may
provide information on the use of investment professionals by investors. For
further information, see "Performance Information" in the Fund's Prospectus.
Past performance is not indicative of future results. Investment return
and principal value will fluctuate. When redeemed, shares may be worth more or
less than their original cost.
8
<PAGE>
- --------------------------------------------------------------------------------
INDEMNIFICATION
- --------------------------------------------------------------------------------
The Fund will indemnify each Director and officer of the Fund to the
fullest extent permitted by the Maryland law, subject to the requirements of
the 1940 Act. The Fund will indemnify and advance expenses to its officers to
the same extent as its Directors and to any further extent as is consistent
with law.
To the fullest extent permitted by Maryland law no Director or officer may
be personally liable to the Fund or its shareholders for monetary damages
(subject to the requirements of the 1940 Act). This provision in the Fund's
Articles of Incorporation may not be amended to limit or eliminate the benefits
provided to Directors and officers in connection with any act or omission
occurring before the amendment. This provision applies to events occurring at
the time a person serves as a Director or officer, whether or not that person
is a Director or officer at the time of any proceeding in which liability is
asserted.
Under the Fund's By-Laws, no Director, officer or employee will be
indemnified for any liabilities or expenses arising by reason of "disabling
conduct," whether or not there is an adjudication of liability. "Disabling
conduct" means willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of office. Whether liability
arises from disabling conduct may be determined: (a) by a final decision on the
merits (including, but not limited to, a dismissal for insufficient evidence of
any disabling conduct) by a court or other body that the person to be
indemnified was not eligible for indemnity because the liability arose by
reason of disabling conduct; or (b) in the absence of such a decision, by a
reasonable determination, based on a review of the facts, that the person is
not eligible for indemnity because the liability arose by reason of disabling
conduct (i) by the vote of a majority of a quorum of disinterested Directors;
(ii) by independent legal counsel in a written opinion if a quorum of
disinterested Directors so direct or if such a quorum is not obtainable; (iii)
by majority vote of the Fund's shareholders; or (iv) by any other reasonable
and fair means. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or on a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that any liability or
expense arose by reason of disabling conduct.
No person who is or was a Director shall be indemnified under the Fund's
By-Laws for any liabilities or expenses incurred by reason of service in that
capacity if an act or omission of the Director was material to the matter
giving rise to the threatened or actual claim and that act or omission
constituted disabling conduct. The Fund may pay any liabilities or expenses in
advance of the final disposition of the claim as authorized by the Directors in
the specific case: (a) on receipt of a written affirmation by the indemnitee of
his or her good faith belief that his or her conduct met the standard of
conduct necessary for indemnification; (b) on receipt of a written undertaking
by or on behalf of the indemnitee to repay the advance, unless it is ultimately
determined that that person is entitled to indemnification; and (c) provided
that (i) the indemnitee provides security for that undertaking, or (ii) the
Fund is insured against losses arising by reason of any lawful advances, or
(iii) a majority of a quorum of disinterested Directors, or independent legal
counsel in a written opinion, determines, based on a review of readily
available facts, that there is reason to believe that the indemnitee ultimately
will be found entitled to indemnification. Any such determination will not
prevent the recovery from any indemnitee of any amount advanced to that person
as indemnification if that person is subsequently determined not to be entitled
to indemnification. The indemnification provided by the By-Laws is not
exclusive of any rights to which those seeking indemnification may be entitled
under any law, agreement, vote of shareholders, or otherwise. The By-Laws do
not authorize indemnification inconsistent with the 1940 Act or the 1933 Act.
- --------------------------------------------------------------------------------
AUDITORS AND FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deloitte & Touche LLP are the independent accountants for the Fund,
providing audit services, tax return preparation, and assistance and
consultation with respect to the preparation of filings with the Securities and
Exchange Commission. The auditors' address is .
[financial statements to be filed by amendment]
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
The Fund's Prospectus and Statement of Additional Information do not
contain all of the information set forth in the Registration Statement that the
Fund has filed with the Securities and Exchange Commission. The complete
Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by its rules and regulations. The
complete Registration Statement also is available on the Commission's website
(http:\\www.sec.gov).
9
<PAGE>
CypressTree Senior Floating Rate Fund, Inc.
STATEMENT OF ADDITIONAL INFORMATION
[Date]
INVESTMENT ADVISER
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
INVESTMENT SUBADVISER
CypressTree Investment Management Company, Inc.
125 High Street
Boston, Massachusetts 02110
ADMINISTRATOR
CypressTree Asset Management Corporation, Inc.
125 High Street
Boston, Massachusetts 02110
DISTRIBUTOR
CypressTree Funds Distributors, Inc.
286 Congress Street
Boston, Massachusetts 02210
10
<PAGE>
- --------------------------------------------------------------------------------
PART C
- --------------------------------------------------------------------------------
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) FINANCIAL STATEMENTS:
INCLUDED IN PART A: None.
INCLUDED IN PART B: Report of Independent Accountants*
Statement of Assets and Liabilities*
(2) EXHIBITS:
(a)(1) Amended and Restated Articles of
Incorporation*
(b) By-Laws**
(c) Not applicable
(d) Not applicable
(e) Dividend Reinvestment Plan*
(f) Not applicable
(g)(1) Form of Advisory Agreement**
(g)(2) Form of Sub Advisory Agreement**
(h) Form of Distribution Agreement**
(i) Not applicable
(j) Form of Custodian Agreement*
(k)(1) Form of Administration Agreement**
(k)(2) Form of Transfer Agent Agreement*
(l) Opinion and Consent of Counsel*
(m) Not applicable
(n) Consent of Independent Auditors*
(o) Not applicable
(p) Fund Application*
(q) Model Retirement Plan*
(r) Financial Data Schedule*
(z)(1) Power of Attorney of Bradford K.
Gallagher**
(z)(2) Power of Attorney of William F. Devin**
(z)(3) Power of Attorney of William F.
Achtmeyer**
(z)(4) Power of Attorney of Kenneth J. Lavery**
*To be filed by amendment
**Previously filed
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses incurred in
connection with the offerings of Registrant:
Registration fees ............................................ $ 303.03
National Association of Securities Dealers, Inc. fees ........ *
Printing and engraving expenses .............................. *
Fees and expenses of qualification under state securities
laws (excluding fees of counsel) ........................... *
Accounting fees and expenses ................................. *
Legal fees and expenses ...................................... *
*To be supplied by amendment
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Until such time as the Registrant completes the public offering of its
shares, CypressTree Investment Management Company ("CypressTree") will be a
control person of the Registrant. CypressTree is a wholly-owned subsidiary of
Cypress Holding Company, Inc., a Delaware corporation which is controlled by
its management and by Berkshire Fund IV, L.P. Berkshire Fund IV, L.P., a
Massachusetts Investment Partnership, is sponsored by Berkshire Partners,
L.L.C., a private equity investor based in Boston; the general partner of
Berkshire Fund IV, L.P. is Berkshire Investors, L.L.C. The largest shareholders
of Cypress Holding Company, Inc. are Bradford K. Gallagher (15%) and Berkshire
Fund IV L.P. (56%). The remaining stock of Cypress Holding Company is owned by
Cypress employees.
CypressTree Asset Management Corporation, Inc. ("CAM") and CypressTree
Funds Distributors, each a Delaware corporation, are wholly-owned subsidiaries
of CypressTree Investments, Inc., a Delaware corporation. CypressTree
Investments is an affiliate of Cypress Holding Company. The following is a list
of the ownership interests in CypressTree Investments as of February 17, 1998:
<PAGE>
1. Cypress Holding Company, Inc. ......... 20.26%
2. Berkshire Fund IV, L.P. ............... 56.03%
3. Berkshire Investors, LLC .............. 2.61%
4. Standish, Ayer & Wood, Inc. ........... 20.00%
5. Employees and Management .............. 1.10%
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
TITLE OF CLASS NUMBER OF RECORD HOLDERS
Common Stock 1
ITEM 29. INDEMNIFICATION
The Registrant's Articles of Incorporation and By-Laws contain provisions
limiting the liability, and providing for indemnification, of the Directors and
officers under certain circumstances. Article IX of the Fund's Articles of
Incorporation, filed as Exhibit a to this Registration Statement, and Article
VIII of the Fund's By-Laws, filed as Exhibit b to this Registration Statement,
provide that the Fund shall indemnify its present and past Directors, officers,
employees and agents, and persons who are serving or have served at the Fund's
request in similar capacities for other entities to the maximum extent
permitted by applicable law (including Maryland law and the 1940 Act). Section
2-418(b) of the Maryland General Corporation Law ("Maryland Code") permits the
Fund to indemnify its Directors unless it is established that the act or
omission of the Director was material to the matter giving rise to the
preceding, and (a) the act or omission was committed in bad faith or was the
result of active and deliberate dishonesty; (b) the Director actually received
an improper personal benefit in money, property or services or; or (c) in the
case of any criminal proceeding, the Director had reasonable cause to believe
the act or omission was unlawful. Indemnification may be made against
judgments, penalties, fines, settlements and reasonable expenses incurred by
the Director in connection with a proceeding, in accordance with the Maryland
Code. Pursuant to Section 2-418(j)(1) and Section 2-418(j)(2) of the Maryland
Code, the Fund is permitted to indemnify its officers, employees and agents to
the same extent as its Directors. The provisions set forth above apply insofar
as consistent with Section 17(h) of the 1940 Act, which prohibits
indemnification of any Director or officer of the Fund against any liability to
the Fund or its shareholders to which such director 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 his office.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant 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
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant 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.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
Refer to the information set forth under the captions "Management of the
Fund" in the Prospectus and "Advisory, Administrative and Distribution
Services" in the Statement of Additional Information constituting Parts A and
B, respectively, of this Registration Statement, which summary is incorporated
herein by reference. For information as to the business, profession, vocation
or employment of a substantial nature of each director or officer of the
adviser or subadviser, reference is made to the respective Form ADV, as
amended, filed under the Investment Advisers Act of 1940.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
All applicable accounts, books and documents required to be maintained by
the Registrant by Section 31(a) of the Investment Company Act of 1940 and the
Rules promulgated thereunder will be in the possession and custody of the
Registrant's custodian and transfer agent, State Street Bank & Trust Company,
with the exception of certain corporate documents and portfolio trading
documents which are in the possession and custody of CypressTree, 125 High
Street, Boston, Massachusetts. Registrant is informed that all applicable
accounts, books and documents required to be maintained by registered
investment advisers are in the custody and possession of Cypress Holding
Company and CypressTree.
ITEM 32. MANAGEMENT SERVICES
None.
<PAGE>
ITEM 33. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To suspend the offering of shares until the prospectus is amended if (1)
subsequent to the effective date of its registration statement, the net
asset value declines more than 10% from its net asset value as of the
effective date of the registration statement or (2) the net asset value
increases to an amount greater than its net proceeds as stated in the
prospectus.
(2) (a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(2) To reflect in the prospectus any facts or events after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(3) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(b) that, for the purpose of determining any liability under the 1993 Act,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of those securities at that time shall be deemed to be
the initial bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(3) To send by first class mail or other means designed to ensure equally
prompt delivery, within two business days of receipt of a written or oral
request, any Statement of Additional Information.
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment No. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston and Commonwealth of Massachusetts on the
20th day of February, 1998.
CypressTree Floating Income
Fund, Inc.
By:
/s/ Bradford K. Gallagher*
Bradford K. Gallagher
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------- ------------------------- ------------------
/s/ Bradford K. Gallagher*
- ------------------------- Director;
Bradford K. Gallagher Chief Executive Officer February 20, 1998
/s/ William F. Devin*
- -------------------------
William F. Devin Director February 20, 1998
/s/ William F. Achtmeyer*
- -------------------------
William F. Achtmeyer Director February 20, 1998
/s/ Kenneth J. Lavery*
- -------------------------
Kenneth J. Lavery Director February 20, 1998
/s/ Paul F. Foley*
- ------------------------- Principal Financial and
Paul F. Foley Accounting Officer February 20, 1998
*BY /s/ John I. Fitzgerald, Attorney-in-Fact (pursuant to Power of Attorney
filed as an exhibit to this Registration Statement)
