[LOGO] North American Senior Floating Rate Fund, Inc.
- --------------------------------------------------------------------------------
The North American 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 an initial sales charge, subject to an Early Withdrawal 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, generally expected
to be 10%. See "Repurchase Offers" on page 15.
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 11. The Fund may borrow, primarily in
connection with the Fund's monthly Repurchase Offers for its shares. See
"Repurchase Offers" on page 15, and "Borrowing by the Fund" on page 14.
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 August 6, 1998 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, its
distributor, CypressTree Funds Distributors, Inc., at 286 Congress Street,
Boston, Massachusetts 02210 ((800) 872-8037). 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 Request Date will be the last business day of each month. The
Repurchase Price will be the Fund's net asset value as determined after the
close of business on the Pricing Date, which, under normal circumstances, is
expected to be the Repurchase Request Date. The Fund generally will pay
repurchase proceeds on the next business day following the Pricing Date, and, in
any event, within five business days (or seven calendar days, whichever is
shorter) of the Repurchase Request Date. The first Repurchase Request Date is
expected to be October 31, 1998.
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.
================================================================================
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC(1) SALES LOAD(2) FUND(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Class B Share $ 10.00 None $ 10.00
- --------------------------------------------------------------------------------
Per Class C Share $ 10.00 None $ 10.00
Total $100,000,000 None $100,000,000
================================================================================
</TABLE>
- ------------
(1) The shares are offered on a best efforts basis at a price equal to a net
asset value, which initially is $10.00 per share.
(2) Class B and Class C shares are subject to an Early Withdrawal Charge and
asset-based Distribution and Service Fees.
(3) Assuming the sale of all shares registered hereby, and exclusion of
approximately $272,500 organizational and initial offering expenses payable
by the Fund. These expenses will be amortized over the one year period
beginning the date the Fund commences investment operations, and charged
against the Fund's income.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Fund Expenses ........................................................ 3
Summary .............................................................. 5
The Fund ............................................................. 7
Investment Objective ................................................. 7
Use of Proceeds ...................................................... 7
Investment Policies .................................................. 7
Investments .......................................................... 7
Risk Factors ......................................................... 11
Repurchase Offers .................................................... 15
Management of the Fund ............................................... 17
Valuing Fund Shares .................................................. 18
Performance Information .............................................. 19
Multiple Pricing System .............................................. 20
How to Buy Fund Shares ............................................... 21
Shareholder Services ................................................. 25
Distributions ........................................................ 27
Taxes ................................................................ 27
Description of Shares ................................................ 28
Reports to Shareholders .............................................. 30
Appendix A--Description of Ratings ................................... 31
Table of Contents of the Statement of Additional Information ......... 32
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FUND EXPENSES
- --------------------------------------------------------------------------------
The following table and Example are intended to assist investors in
understanding the direct and indirect expenses applicable to each class of
shares of the Fund. Because the Fund does not yet have an operating history,
this information is based on estimated fees and expenses for the fiscal year
ending December 31, 1998, after expense reimbursement.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES Class B+ Class C+
- --------------------------------------------------------------------------------
<S> <C> <C>
Sales Charge Imposed on Purchases None None
of Shares (as a percentage of offering price)
Sales Charge Imposed on Dividend Reinvestment None None
Early Withdrawal Charges 3% first year 1% first year
(as a percentage of original purchase price 2.5% second year 0% after first year
or repurchase price, whichever is lower) 2% third year
1% fourth year
0% after fourth year
Exchange fee None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets attributable to common shares)(1)
Class B+ Class C+
- --------------------------------------------------------------------------------
<S> <C> <C>
Management Fee(2) 0.85% 0.85%
Interest Payments on Borrowed Funds 0.00% 0.00%
Service Fee 0.25% 0.25%
Distribution Fee (after reimbursement)(3)(4) 0.00% 0.00%
Administration Fee (after reimbursement)(2)(4) 0.00% 0.00%
Other Expenses 0.30% 0.30%
---- ----
Total Fund Operating Expenses (after reimbursement)(4) 1.40% 1.40%
</TABLE>
(1) See "Management of the Fund" for additional information.
(2) 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).
(3) The Fund pays a distribution fee of 0.50% of average daily net assets.
(4) 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
1.40% 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 0.25%, distribution fee
of 0.50%, and other expenses of 0.30%; and total Fund operating expenses of
2.30%. This agreement may be terminated by CAM at any time after December
31, 1999 on thirty (30) days' written notice.
+ The Fund also has Class A Shares, which are not offered to the public. Class
B Shares automatically convert into Class A Shares eight years after
purchase. Class C Shares automatically convert into Class A Shares ten years
after purchase. See "Multiple Pricing System--Conversion Feature." Class A
Shares are not subject to any shareholder transaction expenses. The
estimated annual Fund operating expenses of Class A Shares are: management
fee of 0.85%, interest payments on borrowed funds of 0.00%, administration
fee of 0.40%, service fee of up to 0.25%, and other expenses of 0.30%, and
total annual expenses of 1.40%. This reflects reimbursement of the 0.40%
administration fee pursuant to CAM's agreement to reimburse the Fund's
expenses to the extent necessary so that total annualized Fund expenses do
not exceed 1.40% of average daily gross assets. See note 4, above. Absent
this reimbursement, total Fund operating expenses of Class A shares would be
1.80%.
The amounts set forth under the caption "Shareholder Transaction Expenses" are
the maximum sales charges applicable to purchases of Fund shares. Because a
portion of the service fees payable by each class of shares may be considered an
asset-based sales charge, long-term shareholders in each class of the Fund may
pay more than the economic equivalent of the maximum front-end sales charges
permitted by the National Association of Securities Dealers, Inc. ("NASD"). See
"How to Buy Fund Shares."
3
<PAGE>
EXAMPLE
- --------------------------------------------------------------------------------
An investor would pay the following expenses on a $1,000 investment, assuming a
5% annual return.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class B Shares ......... $45 $67 $82 $179
Class C Shares ......... $25 $47 $82 $179
</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 and repurchase at the end of each period. The
Example assumes that the fee waivers and reimbursements referred to under "Fund
Expenses" are in effect.
The Example should not be considered a representation of past or future
expenses because future expenses may be greater or less than those shown.
Actual expenses may be higher or lower than the amounts shown in the Fee
Table and, consequently, the actual expenses incurred by an investor may be
greater (in the event the expense limitations are removed) or less than the
amounts shown in the Example. Moreover, while the Example assumes a 5% annual
return, performance will vary and may result in a return greater or less than
5%. The Example should not be considered a representation of past or future
expenses because future expenses may be greater or less than those shown.
4
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
- --------------------------------------------------------------------------------
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 7.
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. There is no assurance that the
Fund's objective will be achieved. See "Investment Policies" on page 7.
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 Request Date" will be the last business day of each month.
The Repurchase Price will be the Fund's net asset value as determined after the
close of business on the Pricing Date, which, under normal circumstances, is
expected to be the Repurchase Request Date. 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 Pricing Date (the "Repurchase Payment Deadline").
Shareholders will be sent notification of each upcoming Repurchase Offer 7 to 14
days before the next Repurchase Request Date. See "Repurchase Offers" on page
15.
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 17.
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 $2.12 billion 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
11.
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
5
<PAGE>
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.
How to Buy Fund Shares
Shares are offered continuously for sale through securities dealers and
banks that have executed an agreement (a "Dealer Agreement") with CypressTree
Funds Distributors, Inc. (the "Distributor"), the distributor of the Fund's
shares. Certain states require that purchases of shares of the Fund be made only
through a broker-dealer registered in the state.
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 21.
Classes of Shares
The Fund offers two classes of shares ("Class B" shares and "Class C"
shares) to the general public, with each class having a different sales charge
structure (the "Multiple Pricing System"). Each class has distinct advantages
and disadvantages for different investors, and investors may choose the class
that best suits their circumstances and objectives. See "Multiple Pricing
System."
Class B shares. Class B shares are offered for sale at net asset value
without a front-end sales charge, but are subject to an Early Withdrawal Charge
of 3% during the first year after purchase, and declining to 2.5% after the
first year, 2.0% after the second year, 1.0% after the third year, and 0% after
the fourth year. The applicable percentage is assessed on an amount equal to the
lesser of the original purchase price or the repurchase price of the shares
repurchased. Class B shares are also subject to a service fee of up to 0.25%,
and a distribution fee of up to 0.50% of their respective average annual net
assets.
Class C shares. Class C shares are offered for sale at net asset value
without a front-end sales charge, but are subject to an Early Withdrawal Charge
of 1% during the first year after purchase. The applicable percentage is
assessed on an amount equal to the lesser of the original purchase price or the
repurchase price of shares repurchased. Class C shares are subject to a service
fee of up to 0.25%, and a distribution fee of up to 0.50% of their respective
average annual net assets.
For a discussion of factors to consider in selecting the most beneficial
class of shares for a particular investor, see "Multiple Pricing System--Factors
for Consideration."
Automatic Conversion. The Fund also has Class A Shares, which are not
offered to the public. Class B shares will automatically convert to Class A
Shares of the Fund eight years after purchase. Class C shares will
automatically convert to Class A Shares of the Fund ten years after purchase.
Class A Shares are subject to a service fee of up to 0.25% of average annual
net assets. See "Multiple Pricing System--Conversion Feature."
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.
6
<PAGE>
- --------------------------------------------------------------------------------
THE FUND
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 institutionally traded senior
secured floating rate debt obligations ("Loans"). There is no assurance that
the Fund's objective will be achieved.
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
- --------------------------------------------------------------------------------
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 the judgment of
CypressTree, 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. This 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.
- --------------------------------------------------------------------------------
INVESTMENTS
- --------------------------------------------------------------------------------
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 of a Loan would result in the Fund having less than 80% of
its assets in fully secured Loans.
7
<PAGE>
The Loans typically will have a stated term of five to nine years. However,
because the Loans typically amortize principal over their stated life and 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 enforcing the Loan Agreement and is obligated to use only the same care it
would use in the management of its own property. 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 rela-
8
<PAGE>
tionship 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 a Participant. 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 or potential capital
appreciation 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 loan
additional funds under the terms of the credit 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.
9
<PAGE>
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,
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 or 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 102%
of 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.
10
<PAGE>
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 the
judgment of CypressTree, 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.
- --------------------------------------------------------------------------------
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.
11
<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
12
<PAGE>
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.
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
13
<PAGE>
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."
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 Request Date (as defined below under
"Repurchase Offers") or (b) will provide for its redemption, call, or repayment
by the Fund by the next Repurchase Request 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.
14
<PAGE>
- --------------------------------------------------------------------------------
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"). For this purpose, Class A, Class B, and Class C shares are considered
as a single class. 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 Request Date" will be
the last business day of each month. Under normal circumstances, it is expected
that 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 is
no later than five business days (or seven calendar days, whichever period is
shorter) after the Pricing Date. Shareholders will be sent notification of the
next Repurchase Offer 7 to 14 days prior to the next Repurchase Request 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 Request 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 Request Date. The
Notification will provide information about the Repurchase Offer, including the
Repurchase Amount, the Repurchase Request Date, and the means by which
shareholders may obtain the Fund's net asset value.
Shareholders who wish to tender shares for repurchase must notify the Fund
or their Authorized Intermediary on or before the Repurchase Request Date in a
manner designated by the Fund. THE REPURCHASE REQUEST DATE IS A DEADLINE THAT
WILL BE STRICTLY OBSERVED. Shareholders and Authorized Intermediaries that fail
to submit Repurchase Requests in good order by this deadline will be unable to
liquidate shares until a subsequent repurchase offer.
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 Request 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 Pricing Date. Under normal
circumstances, it is expected that the Pricing Date generally will be the
Repurchase Request Date. In no event will the Pricing Date be more than three
business days after the Repurchase Request Date. The Fund will compute net asset
value daily (as described under "Valuing Fund Shares"), and shareholders may
obtain daily net asset value by calling 800-872-8037.
The Fund does not presently intend to deduct any repurchase fees from this
amount (other than any applicable Early Withdrawal Charge). 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 and will be charged to all repurchased
shares on a pro rata basis. 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 after the
Pricing Date; in any event, the Fund will pay repurchase proceeds no later than
the Repurchase Payment Deadline, which is five business days (or seven calendar
days, whichever is shorter) after the Pricing Date. Repurchase proceeds will be
paid by wire transfer or check.
15
<PAGE>
Early Withdrawal Charge
Class B Shares are subject to an Early Withdrawal Charge of 3% during the
first year after purchase, and declining to 2.5% after the first year, 2.0%
after the second year, 1.0% after the third year, and 0% after the fourth year.
Class C Shares are subject to an Early Withdrawal Charge of 1% during the first
year after purchase.
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.
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 Pricing Date will be no later than three business days after
the Repurchase Request Date. Under the Repurchase Policy, the Repurchase Amount
may be from 5% to the 25% of the Fund's shares outstanding on the Repurchase
Request 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.
The Fund also may offer to repurchase its shares on a discretionary basis, not
pursuant to its fundamental policy, not more frequently than once every two
years.
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 Request 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;
16
<PAGE>
(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.
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., a leveraged
buyout firm. The address of CAM is 125 High Street, Boston, Massachusetts 02110,
and the address of Distributors is 286 Congress Street, Boston, Massachusetts
02210. CAM serves as investment adviser to the North American Funds, an open-end
series fund with 15 separate investment portfolios managed by ten different
subadvisers, with approximately $1 billion in aggregate assets. CAM also serves
as investment adviser to another recently organized closed-end fund investing in
Loans.
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 an annual fee
paid monthly 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 1.40% of average daily
gross assets. This agreement may be terminated by CAM at any time after December
31, 1999 on thirty (30) days' written notice.
17
<PAGE>
CypressTree has been retained by CAM as the subadviser to the Fund to
manage the investment and reinvestment of the Fund's assets. CAM also has
retained CypressTree to serve as investment subadviser to another closed-end
fund investing in Loans with approximately $4.1 million in assets. CypressTree
was founded in 1996 as the nation's first independent investment advisory firm
specializing in the loan asset class and currently has $2.12 billion 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 an annual fee paid monthly
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
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, has been employed as Chief Investment Officer of
CypressTree since 1996, and is an Executive Vice President of the Fund. As Chief
Investment Officer, Mr. Garner is responsible for the overall supervision of
CypressTree's investment management of the Fund. 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").
Peter K. Merrill, age 37, is a Vice President and the Portfolio Manager of
the Fund, and is a Vice President of CypressTree. Mr. Merrill joined CypressTree
in June 1997. Previously, from 1988, Mr. Merrill held a variety of positions
with BankBoston Corporation, specializing in high yield portfolio management and
leveraged bank loans.
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 an annual fee paid
monthly 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.
- --------------------------------------------------------------------------------
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
18
<PAGE>
(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 the opinion of CypressTree 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 the opinion of CypressTree 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 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 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
19
<PAGE>
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.
- --------------------------------------------------------------------------------
MULTIPLE PRICING SYSTEM
- --------------------------------------------------------------------------------
The Fund's Multiple Pricing System permits an investor to choose the method
of purchasing shares that is most beneficial given the amount of the purchase
and the length of time the investor expects to hold the shares.
Class B Shares. Class B shares are offered for sale at net asset value
without a front-end sales charge, but are subject to an Early Withdrawal Charge
of 3% during the first year after purchase, and declining to 2.5% after the
first year, 2.0% after the second year, 1.0% after the third year, and 0% after
the fourth year. See "Multiple Pricing System--Early Withdrawal Charge." In
addition, Class B shares are subject to a service fee of up to 0.25%, and a
distribution fee of up to 0.50% of average annual net assets. See "How to Buy
Fund Shares--Class B Shares" and "--Distribution Expenses." Class B shares will
automatically convert to Class A shares eight years after the end of the
calendar month in which the shareholder's order to purchase was accepted. See
"Multiple Pricing System --Conversion Feature."
Class C Shares. Class C shares are offered for sale at net asset value
without a front-end sales charge, but are subject to an Early Withdrawal Charge
of 1% during the first year after purchase. See "Multiple Pricing System--Early
Withdrawal Charge." Class C shares are subject to a service fee of up to 0.25%,
and a distribution fee of up to 0.50% of average annual net assets. Class C
shares will automatically convert to Class A shares ten years after the end of
the calendar month in which the shareholder's order to purchase was accepted.
See "Multiple Pricing System--Conversion Feature. The higher ongoing
distribution fees payable by Class C shares as a result of the longer time
period to conversion to Class A shares could cause the Class C shares to have an
overall higher expense ratio and to pay lower dividends than Class B shares. See
"How to Buy Fund Shares--Class C Shares" and "--Distribution Expenses."
Class A Shares. Class A shares are available only upon conversion of Class
B and Class C shares. See "Multiple Pricing System--Conversion Feature." Class A
shares are subject to a service fee of up to 0.25% of average annual net assets.
Conversion Feature. Class B shares and Class C shares will automatically
convert to Class A shares eight years and ten years, respectively, after the end
of the calendar month in which the shareholder's order to purchase was accepted
and after that date will no longer be subject to the distribution fee.
Conversion will be on the basis of the relative net asset values per share,
without the imposition of any sales charge, fee or other charge. The purpose of
the conversion feature is to relieve the holders of Class B and Class C shares
from most of the burden of distribution-related expenses at such time as the
shares have been outstanding for a duration sufficient for Distributors to have
been substantially compensated for distribution-related expenses incurred in
connection with those shares.
For purposes of the conversion of Class B and Class C shares to Class A
shares, shares purchased through the reinvestment of dividends and distributions
paid on Class B shares or Class C shares, as the case may be, in a shareholder's
account will be considered to be held in a separate sub-account. Each time any
Class B shares or Class C shares in the shareholder's account (other than those
in the sub-account) convert to Class A shares, a pro rata portion of the Class B
shares or Class C shares, as the case may be, in the sub-account will also
convert to Class A shares.
The conversion of Class B and Class C shares to Class A shares is subject
to the continuing availability of an opinion of counsel to the effect that such
conversion will not constitute a taxable event for federal tax purposes. The
conversion of Class B and Class C shares may be suspended if such an opinion is
no longer available. In that event, no further conversions of Class B or Class C
shares would occur, and those shares might continue to be subject
20
<PAGE>
to the distribution fee for an indefinite period which may extend beyond the
period ending eight years or ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted.
Factors for Consideration. The Fund's Multiple Pricing System is designed
to provide investors with the option of choosing the class of shares best suited
to their individual circumstances and objectives. To assist investors in
evaluating the costs and benefits of purchasing shares of each class, the
information provided above under the captions "Fee Table" and "Example" sets
forth the charges applicable to each class and illustrates an example of a
hypothetical investment in each class of shares of the Fund.
There are important distinctions among the classes of shares that investors
should understand and evaluate in comparing the options offered by the Multiple
Pricing System. Class C shares are subject to the same ongoing distribution and
service fees as Class B shares but are subject to a lower Early Withdrawal
Charge and an Early Withdrawal Charge for a shorter period of time (one year as
opposed to three years) than Class B shares. Class B shares convert to Class A
shares in a shorter time frame than do Class C shares. Class A shares are not
subject to the distribution fee applicable to Class B and Class C shares, and,
accordingly, may pay correspondingly higher dividends per share. However, as
long as the current fee waivers and reimbursements are in effect, all classes
may have the same aggregate expense ratios.
In light of these distinctions among the classes of shares, investors
should weigh such factors as (a) whether, at the time of purchase, they
anticipate being subject to an Early Withdrawal Charge upon repurchase and (b)
the differential in the relative amounts that would be paid during the
anticipated life of investments (which are made at the same time and in the same
amount) in each class that are attributable to the accumulated distribution and
service fees (and any applicable Early Withdrawal Charge) payable with respect
to Class B or Class C shares before their conversion to Class A shares.
Investors should consult their investment representative for assistance in
evaluating the relative benefits of the different classes of shares.
The distribution and shareholder service expenses incurred by Distributors
in connection with the sale of shares will be paid from the ongoing distribution
and service fees and from the proceeds of the Early Withdrawal Charges. Sales
personnel of broker-dealers distributing the Fund's shares and any other persons
entitled to receive compensation for selling or servicing the Fund's shares may
receive different compensation for selling or servicing one class of shares over
another. Investors should understand that Early Withdrawal Charges and ongoing
distribution and service fees are all intended to compensate the Distributor for
distribution services. See "How to Buy Fund Shares--Distribution Expenses."
Dividends paid by the Fund with respect to each class of shares will be
calculated in substantially the same manner at the same time on the same day,
except that distribution and service fees and any other costs specifically
attributable to a particular class of shares will be borne solely by the
applicable class. See "Distributions."
The Directors of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the
Directors of the Fund, pursuant to their fiduciary duties under the 1940 Act and
state laws, will seek to ensure that no such conflict arises.
- --------------------------------------------------------------------------------
HOW TO BUY FUND SHARES
- --------------------------------------------------------------------------------
Introduction
The Fund offers two classes of shares to the general public, sold without a
front-end sales charge, but subject to an Early Withdrawal Charge. See "Multiple
Pricing System" for a discussion of factors to consider in selecting which class
of shares to purchase.
Shares are offered continuously for sale through securities dealers and
banks that have executed an agreement (a "Dealer Agreement") with CypressTree
Funds Distributors, Inc. ("Distributors"). Certain states require that purchases
of shares of the Fund be made only through a broker-dealer registered in the
state.
The initial purchase of any class of shares must be at least $5,000. The
minimum for subsequent investments is $500. There is a $100 minimum initial and
a $50 subsequent investment requirement for purchases made in connection with
tax-sheltered retirement accounts.
When purchasing shares, investors must specify whether the purchase is for
Class B or Class C shares.
General Methods of Purchasing Shares
1. By Mail. To make an initial account purchase, mail a check made payable
in U.S. dollars to "North American Funds" with a completed New Account
Application (copy enclosed with this Prospectus) to:
21
<PAGE>
North American Funds
P.O. Box 8505
Boston, MA 02266-8505
Third party checks payable to an existing shareholder of the Fund who is a
natural person (as opposed to a corporation or partnership) and endorsed over to
the Fund will be accepted.
To make a purchase of shares to an existing North American Funds account,
please note your account number on the check and forward it with an account
investment slip to the above address.
Note: To establish certain tax deferred retirement plan accounts, such as
IRAs, you will be required to complete a separate application which may be
obtained from Distributors or a securities dealer who has a Dealer Agreement
with Distributors. See "Considerations for Retirement Plan Investors."
2. By Federal Funds Wire. Shares may be purchased by wire transfer. To
obtain instructions for Federal Funds Wire purchases, please contact the
Customer Service Department at (800) 872-8037.
3. Through a Securities Dealer. You may purchase shares by contacting a
securities dealer who has a Dealer Agreement with Distributors.
Orders will be assigned the next closing price after receipt of the order.
Exchange Privileges
Shareholders of the Fund are offered certain exchange privileges with
shares of beneficial interest of the Portfolios of the North American Funds, an
open-end management investment company for which CAM serves as the advisor. A
prospectus describing the North American Funds and the various Portfolios can be
obtained from Distributors.
Exchange of Fund Shares for North American Fund Shares
Shareholders of the Fund whose shares are repurchased in a monthly repurchase
offer may exchange those shares for shares of the same class of certain
Portfolios of the North American Funds. Exchanges will be at relative net asset
value, without the imposition of any front end sales charge.
No early withdrawal charge will be imposed on shares of the Fund making such an
exchange. However, Class B and Class C shareholders will be subject to a
contingent deferred sales charge ("CDSC") on any North American Funds shares
acquired equivalent to the Early Withdrawal Charge on the Fund shares exchanged.
Thus shares of the North American Funds may be subject to a CDSC upon a
subsequent redemption from the North American Funds. The time of purchase for
computing the CDSC period will be deemed the time of the initial purchase of
Fund shares. The CDSC or Early Withdrawal Period will be tolled for any period
of time shares are held in the North American Funds Money Market Fund.
Exchange of North American Fund Shares for Fund Shares
Shareholders of the North American Funds will have such privilege of exchanging
their shares for shares of the Fund as is described in the North American Funds
Prospectus. Generally, shareholders of a class of the North American Funds may
exchange their shares for shares of the same class of the Fund, at relative net
asset value and without imposition of any front end sales charge. These
shareholders will become subject to an Early Withdrawal Charge on Fund shares
equivalent to the CDSC applicable to the particular class exchanged, and will be
deemed to have purchased Fund shares at the time of the initial purchase of
North American Fund shares. The CDSC or Early Withdrawal Period will be tolled
for any period of time shares are held in the North American Funds Money Market
Fund.
General Information
Exchanges are generally regarded as sales for federal and state income tax
purposes and could result in a gain or loss, depending on the original cost of
shares exchanged. If the exchanged shares were acquired within the previous 90
days, the gain or loss may have to be computed without regard to any sales
charges incurred on the exchanged shares (except to the extent those sales
charges exceed those sales charges waived in connection with the exchange). See
"Taxation." Exchanges are free and unlimited in number and will occur on the
same day as requested with respect to Exchanges into the Fund, and on the
Repurchase Payment Date with respect to Exchanges out of the Fund. The terms of
the foregoing exchange privilege are subject to change and the privileges may be
terminated at any time. The exchange privilege is only available where the
exchange may be legally made.
By mail--an exchange will be honored by written letter request to the Fund
if signed by all registered owners of the account.
By Telephone--all accounts are eligible for the telephone exchange
privilege.
22
<PAGE>
Share Price
Class B Shares. Class B shares are offered for sale at net asset value
without a front-end sales charge. Class B shares repurchased within three years
of purchase are subject to an Early Withdrawal Charge at the rates set forth in
the table below. See "How to Buy Fund Shares--Early Withdrawal Charge."
<TABLE>
<S> <C>
First Year ................ 3.0%
Second Year ............... 2.5%
Third Year ................ 2.0%
Fourth Year ............... 1.0%
After Fourth Year ......... 0.0%
</TABLE>
The Early Withdrawal Charge may be waived on certain repurchases of
shares. See "How to Buy Fund Shares--Waiver of Early Withdrawal Charge."
Class C Shares. Class C shares are offered for sale at net asset value
without a front-end sales charge. Class C shares are subject to an Early
Withdrawal Charge of 1% during the first year after purchase. See "How to Buy
Fund Shares--Early Withdrawal Charge."
The Early Withdrawal Charge may be waived on certain repurchases of
shares. See "How to Buy Fund Shares--Waiver of Early Withdrawal Charge."
Early Withdrawal Charge
The Early Withdrawal Charge is assessed on an amount equal to the lesser of
the net asset value at repurchase or the initial purchase price of the shares
being repurchased. Solely for purposes of determining the amount of time from
the purchase of shares until repurchase, all orders accepted during a month are
aggregated and deemed to have been made on the last business day of that month.
In determining the amount of the Early Withdrawal Charge that may be
applicable to a repurchase, any shares in the shareholder's account that may be
repurchased without charge will be assumed to be repurchased before those
subject to a charge. In addition, if the Early Withdrawal Charge is determined
to be applicable to repurchased shares, it will be assumed that shares held for
the longest duration are repurchased first. No Early Withdrawal Charge is
imposed on (a) amounts representing increases in the net asset value per share;
or (b) shares acquired through reinvestment of income dividends or capital gains
distributions.
Waiver of Early Withdrawal Charge
Qualified Retirement Plans. The Early Withdrawal Charge may be waived in
connection with repurchases from qualified retirement plans (other than
Individual Retirement Accounts ("IRAs")) in the case of (a) death or disability
(as defined in section 72(m)(7) of the Code, as amended from time to time) of
the participant in the retirement plan, (b) required minimum distributions from
the retirement plan due to attainment of age 70-1/2, (c) tax-free return of an
excess contribution to the retirement plan, (d) retirement of the participant in
the retirement plan, (e) a loan from the retirement plan (repayment of a loan,
however, will constitute a new sale for the purposes of assessing Early
Withdrawal Charge), (f) "financial hardship" of the participant in the
retirement plan, as that term is defined in Treasury Regulation
1.401(k)-1(d)(2), as amended from time to time, (g) termination of employment of
the participant in the plan (excluding, however, a partial or other termination
of the retirement plan), and (h) the plan participant obtaining age 59-1/2.
Other Waivers. The Early Withdrawal Charge may be waived in connection with
(a) repurchases made following the death of a shareholder, (b) repurchases
effected pursuant to the Fund's right to liquidate a shareholder's account if
the aggregate net asset value of the shares held in the account is less than any
applicable minimum account size and (c) a tax-free return of an excess
contribution to any retirement plan.
Distribution Expenses
In addition to the Early Withdrawal Charge that may apply on repurchases of
Class B and Class C shares, each class of shares is authorized under the
Distribution Plan applicable to that class of shares (the "Class B Plan" and the
"Class C Plan," and collectively, the "Plans") to use the assets attributable to
that class of shares of the Fund to finance certain activities relating to the
distribution of shares to investors. The Plans are "compensation" plans
providing for the payment of a fixed percentage of average net assets to finance
distribution expenses. The Plans allow for the payment by each class of shares
of the Fund of a monthly distribution and service fee to Distributors, as
principal underwriter for the Fund. Portions of the fees described below are
used to provide payments
23
<PAGE>
to Distributors, to promotional agents, to brokers, dealers or financial
institutions (collectively, "Selling Agents") and to Service Organizations for
ongoing account services to shareholders and are similar to "service fees" as
defined in Rule 2830(b)(9) of the Rules of Fair Practice of the NASD.
Payments under the Plans are used primarily to compensate Distributors for
distribution services provided by it in connection with the offering and sale of
the applicable class of shares, and related expenses incurred, including
payments by Distributors to compensate or reimburse Selling Agents for sales
support services provided and related expenses incurred by Selling Agents. These
services and expenses may include the development, formulation and
implementation of marketing and promotional activities, the preparation,
printing and distribution of prospectuses and reports to recipients other than
existing shareholders, the preparation, printing and distribution of sales
literature, expenditures for support services such as telephone facilities and
expenses and shareholder services as the Fund may reasonably request, provision
to the Fund of such information, analyses and opinions with respect to marketing
and promotional activities as the Fund may, from time to time, reasonably
request, commissions, incentive compensation or other compensation to, and
expenses of, account executive or other employees of Distributors or Selling
Agents, attributable to distribution of sales support activities respectively,
overhead and other office expenses of distributors or Selling Agents
attributable to distribution of sales support activities, respectively, and any
other costs and expenses relating to distribution or sales support activities.
Distributors may pay directly Selling Agents and may provide directly the
distribution services described above.
Distributors currently pays a trail commission to securities dealers with
respect to accounts that those dealers continue to service as follows: Class B
shares - 0% in the first year, 0.10% in the second year, 0.15% in the third
year, and 0.20% in the fourth year and 0.25% annually each year after the fourth
year; and Class C - 0.75% shares annually. Trail commissions commence the 13th
month after purchase. The trail commission payable following conversion of Class
B and Class C shares to Class A shares will be in the amount of 0.25% annually.
In the case of sales of Class B shares, Distributors will pay each dealer a
fee of 3% of the amount of Class B shares purchased as a commission or
transaction fee. In the case of sales of Class C shares, the Distributor will
pay each securities dealer a fee of 0.75% of the purchase price of Class C
shares purchased through the securities dealer as a commission or transaction
fee.
The distribution and service fees attributable to the Class B and Class C
shares are designed to permit an investor to purchase shares without the
assessment of a front-end sales charge, and, with respect to the Class C shares,
with the assessment of an Early Withdrawal Charge in the first year only, and at
the same time permit Distributors to compensate securities dealers with respect
to those sales.
Distributors is authorized by each Plan to retain any excess of the fees it
receives under the Plan over its payments to selected dealers and its expenses
incurred in connection with providing distribution services. Thus, payments
under a Plan may result in a profit to Distributors. Payments made under the
Plans are subject to quarterly review by the Directors and the Plans are subject
to annual review and approval by the Directors.
In adopting the Plans, the Directors determined that the adoption of the
Plans is in the best interests of the Fund and its shareholders, that there is a
reasonable likelihood that the Plans will benefit the Fund and its shareholders,
and that the Plans are essential to, and an integral part of, the Fund's program
for financing the sale of shares to the public.
Distributors is a broker/dealer registered under the Securities Exchange
Act of 1934, as amended (the "1934 Act") and is a member of the NASD.
Distributors' address is 286 Congress Street, Boston, Massachusetts 02210.
Suspension of Sales
From time to time the Fund may suspend the continuous offering of its
shares in response to market conditions in the securities markets 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.
24
<PAGE>
Considerations for Retirement Plan Investors
Retirement plan investors should be aware of certain features of the Fund
that may affect their decision as to whether the Fund is an appropriate
investment for the retirement plan. Unlike shares of an open-end mutual fund,
Fund shares are not redeemable on each day that the Fund is open for business;
and unlike traditional closed end funds, shares of the Fund do not trade on any
exchange and thus cannot readily be sold. Although the Fund has adopted a policy
of Monthly Repurchase Offers, these Repurchase Offers may not provide
shareholders with the degree of liquidity they desire or may require for tax
purposes. Even during a Repurchase Offer, a shareholder may not be able to have
all of the shares it wishes to tender be repurchased by the Fund. Moreover,
shares repurchased may be subject to the Early Withdrawal Charge.
The features described above could result in a retirement plan paying an
Early Withdrawal Charge and/or not being able to comply with mandatory
distribution requirements. Accordingly, retirement plan investors may wish to
limit the percentage of plan assets that are invested in the Fund.
The Fund does not monitor retirement plan requirements for any investor.
Please consult your legal, tax or retirement plan specialist before choosing a
retirement plan or electing to invest in the Fund through a retirement plan.
Your investment representative or advisor can help you make investment decisions
within your plan.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
Further information on any of the programs described in the following
sections may be obtained from the Fund and eligible securities dealers. For
additional information, shareholders should contact the Fund or eligible
securities dealers.
Automatic Investment Plan
Shareholders who open an account who wish to make subsequent monthly
investments in the Fund may establish an Automatic Investment Plan as part of
the initial Application or subsequently by submitting an Application. Under this
plan, on or abut the tenth day of each month the Transfer Agent will debit the
shareholder's bank account in the amount specified by the shareholder (which
monthly amount may not be less than $50). The proceeds will be invested in
shares of the specified class of the Fund at the applicable offering price
determined on the date of the debit. Participation in the Automatic Investment
Plan may be discontinued on 30 days' written notice to the Transfer Agent, or if
a debit is not honored.
Transfer of Shares
Shareholders may transfer Fund shares to family members and others at any
time without incurring an Early Withdrawal Charge being imposed at that time.
Shareholders should consult their tax adviser concerning transfers.
Telephone Transactions
Shareholders are permitted to request exchanges and/or repurchases by
telephone. The Fund will not be liable for following instructions communicated
by telephone that it reasonably believes to be genuine. The Fund will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine and may only be liable for any losses due to unauthorized or fraudulent
instructions where it fails to employ its procedures properly.
Upon telephoning a request, shareholders will be asked to provide their
account number, and if not available, their social security number. For the
shareholder's and Fund's protection, all conversations with shareholders will be
tape recorded. All telephone transactions will be followed by a confirmation
statement of the transaction.
Payment for shares repurchased will be made by federal wire or by mail as
specified by the shareholder in the Fund Application. Payment will normally be
sent on the business day following the date of receipt of the request. Payment
by wire to the shareholder's bank account must be in amounts of $1,000 or more.
Although the Fund does not assess a charge for wire transfers, banks may assess
charges for the transaction. Payments by mail may only be sent to an account
address of record and may only be payable to the registered owner(s).
Additional Shareholder Privileges
Certain privileges listed in this section may not be offered by the Fund if
a shareholder holds shares with the Fund in the "street name" of a financial
institution, or if the account is networked through National Securities Clearing
Corporation (NSCC).
25
<PAGE>
Automatic Investment Plan. A shareholder who wishes to make subsequent,
periodic investments in the Fund by electronic funds transfer from a bank
account may establish an Automatic Investment Plan on the shareholder's account.
The bank at which the account is maintained must be a member of the Automated
Clearing House. The frequency with which the investments occur is specified by
the shareholder (monthly, every alternate month, quarterly, etc.) with the
exception that no more than one investment will be processed each month. On or
about the tenth of the month, the Fund will debit the shareholder's bank account
in the specified amount (minimum of $50 per draft) and the proceeds will be
invested at the applicable offering price determined on the date of the debit.
Automatic Dividend Reinvestment. 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 Automatic
Dividend Reinvestment ("ADR") Program (the "Program"), 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
Program agent (the "Program Agent"). There will be no charge to participants for
reinvesting dividends or other distributions. The Fund will pay the Program
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 Program.
Similarly, a shareholder may be unable to transfer his or her account to certain
broker-dealers and continue to participate in the Program. Investors who own
shares registered in street name should contact the broker or nominee for
details concerning participation in the Program.
The Program Agent will maintain all participant accounts in the Program and
furnish written confirmations of all transactions in the accounts, including
information needed for personal and tax records. The Program Agent may hold
shares in the participants' account in non-certificated form in the name of the
Program Agent or the Program Agent's nominee, and each shareholder's proxy will
include those shares purchased pursuant to the Program. Participants in the
Program may withdraw from the Program on written notice to the Program 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 Program
Agent will administer the Program 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 Program.
All registered holders of shares (other than brokers and nominees) will be
mailed information regarding the Program, including a form with which they may
elect to terminate participation in the Program and receive further dividends
and other distributions in cash. An election to terminate participation in the
Program must be made in writing to the Program 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 Program 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 Program Agent at P.O. Box 8505, Boston, MA 02266-8505. 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 Program 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 Program Agent reserve the right to terminate the Program
as applied to any dividend or other distribution paid subsequent to notice of
the termination sent to the participants in the Program at least 30 days before
the record date for the distribution. The Program also may be amended by the
Fund or the Program 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 Program. Shareholders
should direct all correspondence regarding the Program to the Program Agent, at
.
The receipt of dividends and other distributions in shares under the
Program will not relieve participants of any income tax (including withholding
taxes) that may be payable with respect to the distributions. See "Taxes."
How to Obtain Investment Information
1. Confirmation of Share Transactions and Dividend Payments. Share
transactions, other than transactions pursuant to a Systematic Withdrawal Plan,
Automatic Investment Plan, and Systematic Investing Plan, will be confirmed
immediately in the form of an account confirmation statement which will be
mailed to the account address of record.
26
<PAGE>
The Fund will confirm all account activity occurring within a calendar
quarter, including the payment of dividend and capital gain distributions and
transactions made as a result of a Systematic Withdrawal Plan, Automatic
Investment Plan, and Systematic Investing Plan, shortly after the end of each
calendar quarter.
The Fund also reserves the right to confirm, with respect to certain tax
qualified plans and certain group plans, purchases and sales of Fund shares on a
quarterly basis.
A copy of all confirmation statements will be sent to the securities dealer
firm listed on the shareholder's account.
2. Shareholder Inquiries. Shareholders should direct any questions or
requests concerning the Fund or your account by writing to North American Funds,
P.O. Box 8505, Boston, Massachusetts 02266-8505, or by calling the Fund Customer
Service Department at 1-800-872-8037.
- --------------------------------------------------------------------------------
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.)
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 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.
27
<PAGE>
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.
The Fund has obtained an opinion of counsel (the "Opinion") (which opinion
is not binding on the Internal Revenue Service) concluding that shareholders
will not recognize gain or loss upon the conversion of Class B or Class C shares
into Class A shares. The Opinion also concludes that a shareholder's basis in
Class A shares received will equal his basis in the shares surrendered, and that
the shareholder's holding period for the shares received will include his
holding period for the shares surrendered.
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
particular 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.
- --------------------------------------------------------------------------------
DESCRIPTION OF SHARES
- --------------------------------------------------------------------------------
The Fund is a corporation organized under Maryland law. The Fund was
incorporated on March 6, 1998. The Fund's Board of Directors is responsible for
the overall management and supervision of its affairs.
The Fund is authorized to issue 1 billion shares of common stock $0.01 par
value per share. These shares are currently divided into three classes of
shares, designated as Class A, Class B and Class C Shares. All shares of common
stock have equal voting rights (except as described below with respect to
matters specifically affecting a class of shares) and have no preemptive or
conversion rights (other than the automatic conversion rights of Class B and
Class C Shares to convert to Class A shares under the Multiple Pricing System.)
The per-share net asset value of each class of shares is calculated separately
and may differ as between classes as a result of the differences in distribution
and service fees payable by the classes and the allocation of certain
incremental class-specific expenses to the appropriate class to which such
expenses apply.
All shares of the Fund have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law, or
where the matter involved affects only one class (for example matters pertaining
to the plan of distribution relating to Class B Shares will only be voted on by
Class B Shares). In accor-
28
<PAGE>
dance with the Fund's Articles of Incorporation, the Board of Directors may
classify and reclassify unissued shares and may authorize the creation of
additional classes of shares with such preferences, privileges, limitations and
voting and dividend rights as the board may determine.
Each share of each class of common stock is equal as to earnings, assets
and voting privileges, except as noted above, and each class bears the expenses
related to the distribution of its shares. In the event of liquidation, each
share of common stock of the Fund is entitled to its portion of all the Fund's
assets after all debts and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of directors is required to be
acted on by shareholders under the Investment Company Act.
The following table sets forth information for each class of the Fund's
authorized securities, as of the date of this Prospectus:
<TABLE>
<CAPTION>
=================================================================================
(1) (2) (3) (4)
Amount
Outstanding
Amount Held by Exclusive of
Registrant or for its Amount Shown
Title of Class Amount Authorized Account Under (3)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 400,000,000 shares None None
- ---------------------------------------------------------------------------------
Class B 300,000,000 shares None 10,000 Shares*
- ---------------------------------------------------------------------------------
Class C 300,000,000 shares None None
=================================================================================
- ------------------
*held by CAM
</TABLE>
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 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
the Fund's shares of capital stock outstanding and entitled to vote on the
matter 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
29
<PAGE>
(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.
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 the
Fund's shares of capital stock outstanding and entitled to vote on the matter,
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 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.
30
<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
shortcomings.
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 the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
31
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS OF
THE STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The Fund ..................................................... 1
Investment Restrictions and Fundamental Policies ............. 1
Repurchase Offer Fundamental Policy .......................... 2
Management ................................................... 2
Advisory, Administration and Distribution Services ........... 5
Portfolio Transactions ....................................... 7
Custodian .................................................... 8
Transfer Agent ............................................... 8
Liquidity Requirements ....................................... 8
Taxes ........................................................ 9
Performance Information ...................................... 10
Indemnification .............................................. 10
Auditors and Financial Statements ............................ 11
Statement of Assets and Liabilities--August 5, 1998 .......... 11
Notes to Financial Statements ................................ 11
Independent Auditors Report .................................. 11
Other Information ............................................ 11
</TABLE>
32
<PAGE>
North American Senior Floating Rate Fund
PROSPECTUS
August 6, 1998
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
33
